<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION
ON OCTOBER 31, 1997
SECURITIES ACT REGISTRATION NO. 2-91216
INVESTMENT COMPANY ACT REGISTRATION NO. 811-4023
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 / /
PRE-EFFECTIVE AMENDMENT NO. / /
POST-EFFECTIVE AMENDMENT NO. 35 /X/
AND/OR
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 / /
AMENDMENT NO. 36 /X/
(Check appropriate box or boxes)
------------------------
PRUDENTIAL MUNICIPAL SERIES FUND
(Exact name of registrant as specified in charter)
GATEWAY CENTER THREE,
100 MULBERRY STREET
NEWARK, NEW JERSEY 07102-4077
(Address of Principal Executive Offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (201) 367-7530
S. JANE ROSE, ESQ.
GATEWAY CENTER THREE
100 MULBERRY STREET
NEWARK, NEW JERSEY 07102-4077
(Name and Address of Agent for Service)
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING:
As soon as practicable after the effective
date of the Registration Statement.
It is proposed that this filing will become effective
(check appropriate box):
/X/ immediately upon filing pursuant to paragraph (b)
/ / on (date) pursuant to paragraph (b)
/ / 60 days after filing pursuant to paragraph (a)(1)
/ / on (date) pursuant to paragraph (a)(1)
/ / 75 days after filing pursuant to paragraph (a)(2)
/ / on (date) pursuant to paragraph (a)(2) of rule 485.
If appropriate, check the following box:
/ / this post-effective amendment designates a new
effective date for a previously filed post-effective
amendment.
Title of Securities Being
Registered... Shares
of Beneficial Interest, $.01 Par Value.
Approximate Date of Proposed Public Offering..................................
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<PAGE>
CROSS REFERENCE SHEET
(AS REQUIRED BY RULE 495)
<TABLE>
<CAPTION>
N-1A ITEM NO. LOCATION
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<S> <C> <C>
PART A
Item 1. Cover Page..................................................... Cover Page
Item 2. Synopsis....................................................... Fund Expenses; Fund Highlights
Item 3. Condensed Financial Information................................ Fund Expenses; Financial Highlights; How the
Fund Calculates Performance
Item 4. General Description of Registrant.............................. Cover Page; Fund Highlights; How the Fund
Invests; General Information
Item 5. Management of the Fund......................................... Financial Highlights; How the Fund is Managed
Item 5A. Management's Discussion of Fund Performance.................... Financial Highlights
Item 6. Capital Stock and Other Securities............................. Taxes, Dividends and Distributions; General
Information
Item 7. Purchase of Securities Being Offered........................... Shareholder Guide; How the Fund Values its
Shares
Item 8. Redemption or Repurchase....................................... Shareholder Guide; How the Fund Values its
Shares; General Information
Item 9. Pending Legal Proceedings...................................... Not Applicable
PART B
Item 10. Cover Page..................................................... Cover Page
Item 11. Table of Contents.............................................. Table of Contents
Item 12. General Information and History................................ Investment Objectives and Policies; Organization
and Capitalization
Item 13. Investment Objectives and Policies............................. Investment Objectives and Policies; Investment
Restrictions
Item 14. Management of the Fund......................................... Trustees and Officers; Manager; Distributor
Item 15. Control Persons and Principal Holders of Securities............ Not Applicable
Item 16. Investment Advisory and Other Services......................... Manager; Distributor; Custodian, Transfer and
Dividend Disbursing Agent and Independent
Accountants
Item 17. Brokerage Allocation and Other Practices....................... Portfolio Transactions and Brokerage
Item 18. Capital Stock and Other Securities............................. Not Applicable
Item 19. Purchase, Redemption and Pricing of Securities Purchase and Redemption of Fund Shares;
Being Offered................................................ Shareholder Investment Account; Net Asset Value
Item 20. Tax Status..................................................... Distributions and Tax Information
Item 21. Underwriters................................................... Distributor
Item 22. Calculation of Performance Data................................ Performance Information
Item 23. Financial Statements........................................... Financial Statements
PART C
Information required to be included in Part C is set forth under the appropriate Item, so numbered, in Part C to this
Post-Effective Amendment to the Registration Statement.
</TABLE>
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
(CONNECTICUT MONEY MARKET SERIES)
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PROSPECTUS DATED OCTOBER 30, 1997
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Prudential Municipal Series Fund (the Fund) (Connecticut Money Market Series)
(the Series) is one of thirteen series of an open-end, management investment
company, or mutual fund. This Series is non-diversified and is designed to
provide the highest level of current income that is exempt from Connecticut
State and federal income taxes consistent with liquidity and the preservation of
capital. The net assets of the Series are invested primarily in short-term, tax-
exempt Connecticut State, municipal and local debt obligations and obligations
of other qualifying issuers. There can be no assurance that the Series'
investment objective will be achieved. See "How the Fund Invests--Investment
Objective and Policies." The Fund's address is Gateway Center Three, 100
Mulberry Street, Newark, New Jersey, 07102-4077, and its telephone number is
(800) 225-1852.
Shares of the Series are sold without a sales charge. The Series is subject to
an annual charge of .125% of its average daily net assets pursuant to the
Distribution and Service Plan. See "How the Fund is Managed--Distributor."
THE SERIES MAY INVEST A SIGNIFICANT PORTION OF ITS ASSETS IN THE OBLIGATIONS OF
A SINGLE ISSUER, AND THEREFORE AN INVESTMENT IN THE SERIES MAY BE MORE RISKY
THAN AN INVESTMENT IN OTHER TYPES OF MONEY MARKET FUNDS.
AN INVESTMENT IN THE SERIES IS NEITHER INSURED NOR GUARANTEED BY THE U.S.
GOVERNMENT AND THERE CAN BE NO ASSURANCE THAT THE SERIES WILL BE ABLE TO
MAINTAIN A STABLE NET ASSET VALUE OF $1.00 PER SHARE. SEE "HOW THE FUND VALUES
ITS SHARES."
This Prospectus sets forth concisely the information about the Fund and the
Connecticut Money Market Series that a prospective investor should know before
investing. Additional information about the Fund has been filed with the
Securities and Exchange Commission in a Statement of Additional Information,
dated October 30, 1997, which information is incorporated herein by reference
(is legally considered a part of this Prospectus) and is available without
charge upon request to Prudential Municipal Series Fund at the address or
telephone number noted above.
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INVESTORS ARE ADVISED TO READ THIS PROSPECTUS AND RETAIN IT FOR FUTURE
REFERENCE.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
<PAGE>
FUND HIGHLIGHTS
The following summary is intended to highlight certain information contained
in this Prospectus and is qualified in its entirety by the more detailed
information appearing elsewhere herein.
WHAT IS PRUDENTIAL MUNICIPAL SERIES FUND?
Prudential Municipal Series Fund is a mutual fund whose shares are offered
in thirteen series, each of which operates as a separate fund. A mutual fund
pools the resources of investors by selling its shares to the public and
investing the proceeds of such sale in a portfolio of securities designed to
achieve its investment objective. Technically, the Fund is an open-end,
management investment company. Only the Connecticut Money Market Series is
offered through this Prospectus.
WHAT IS THE SERIES' INVESTMENT OBJECTIVE?
The Series' investment objective is to provide the highest level of
current income that is exempt from Connecticut State and federal income
taxes consistent with liquidity and the preservation of capital. It seeks to
achieve this objective by investing primarily in short-term Connecticut
State, municipal and local government obligations and obligations of other
qualifying issuers, such as issuers located in Puerto Rico, the Virgin
Islands and Guam, which pay income exempt, in the opinion of counsel, from
Connecticut State and federal income taxes (Connecticut Obligations). There
can be no assurance that the Series' investment objective will be achieved.
See "How the Fund Invests--Investment Objective and Policies" at page 6.
WHAT ARE THE SERIES' RISK FACTORS AND SPECIAL CHARACTERISTICS?
It is anticipated that the net asset value of the Series will remain
constant at $1.00 per share, although this cannot be assured. In order to
maintain such constant net asset value, the Series will value its portfolio
securities at amortized cost. While this method provides certainty in
valuation, it may result in periods during which the value of a security in
the Series' portfolio, as determined by amortized cost, is higher or lower
than the price the Series would receive if it sold such security. See "How
the Fund Values its Shares" at page 13.
In seeking to achieve its investment objective, the Series will invest
primarily in Connecticut Obligations. This degree of investment
concentration makes the Series particularly susceptible to factors adversely
affecting issuers of Connecticut Obligations, and makes an investment in the
Series more risky than an investment in other types of money market funds.
The Series is non-diversified so that more than 5% of its total assets may
be invested in the securities of one or more issuers. Investment in a
non-diversified portfolio involves more risk than investment in a
diversified portfolio. See "How the Fund Invests--Investment Objective and
Policies--Special Considerations" at page 9. As with an investment in any
mutual fund, an investment in this Series can decrease in value and you can
lose money.
WHO MANAGES THE FUND?
Prudential Investments Fund Management LLC (PIFM or the Manager) is the
Manager of the Fund and is compensated for its services at an annual rate of
.50 of 1% of the Series' average daily net assets. As of September 30, 1997,
PIFM served as manager or administrator to 63 investment companies,
including 41 mutual funds, with aggregate assets of approximately $59.9
billion. The Prudential Investment Corporation, which does business under
the name Prudential Investments (PI, the Subadviser or the investment
adviser), furnishes investment advisory services in connection with the
management of the Fund under a Subadvisory Agreement with PIFM. See "How the
Fund is Managed--Manager" at page 11.
2
<PAGE>
WHO DISTRIBUTES THE SERIES' SHARES?
Prudential Securities Incorporated (Prudential Securities, PSI or the
Distributor) acts as the Distributor of the Series' shares. The Fund
reimburses Prudential Securities for expenses related to the distribution of
the Series' shares at an annual rate of up to .125 of 1% of the average
daily net assets of the Series. See "How the Fund is Managed--Distributor"
at page 11.
WHAT IS THE MINIMUM INVESTMENT?
The minimum initial investment is $1,000. The minimum subsequent
investment is $100. There is no minimum investment requirement for certain
employee savings plans. For purchases made through the Automatic Savings
Accumulation Plan, the minimum initial and subsequent investment is $50. See
"Shareholder Guide--How to Buy Shares of the Fund" at page 16 and
"Shareholder Guide--Shareholder Services" at page 24.
HOW DO I PURCHASE SHARES?
You may purchase shares of the Series through Prudential Securities, Pruco
Securities Corporation (Prusec) or directly from the Fund through its
transfer agent, Prudential Mutual Fund Services LLC (PMFS or the Transfer
Agent), at the net asset value per share (NAV) next determined after receipt
of your purchase order by the Transfer Agent or Prudential Securities. See
"How the Fund Values its Shares" at page 13 and "Shareholder Guide--How to
Buy Shares of the Fund" at page 16.
HOW DO I SELL MY SHARES?
You may redeem shares of the Series at any time at the NAV next determined
after Prudential Securities or the Transfer Agent receives your sell order.
See "Shareholder Guide--How to Sell Your Shares" at page 21.
HOW ARE DIVIDENDS AND DISTRIBUTIONS PAID?
The Series expects to declare daily and pay monthly dividends of net
investment income and short-term capital gains. Dividends and distributions
will be automatically reinvested in additional shares of the Series at NAV
unless you request that they be paid to you in cash. See "Taxes, Dividends
and Distributions" at page 13.
3
<PAGE>
FUND EXPENSES
(CONNECTICUT MONEY MARKET SERIES)
<TABLE>
<CAPTION>
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on Purchases................. None
Maximum Deferred Sales Load............................. None
Maximum Sales Load Imposed on Reinvested Dividends...... None
Redemption Fees......................................... None
Exchange Fee............................................ None
</TABLE>
<TABLE>
<CAPTION>
<S> <C>
ANNUAL FUND OPERATING EXPENSES*
(as a percentage of average net assets)
Management Fees......................................... .500%
12b-1 Fees.............................................. .125%
Other Expenses.......................................... .210%
-------
Total Fund Operating Expenses .835%
-------
-------
</TABLE>
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------- -------- -------- --------
<S> <C> <C> <C> <C>
EXAMPLE
You would pay the following expenses on a $1,000 investment,
assuming (1) 5% annual return and (2) redemption at the
end of each time period:.................................. $ 9 $ 27 $ 46 $ 103
</TABLE>
The above example is based on restated data for the Series' fiscal year
ended August 31, 1997. THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION
OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN
THOSE SHOWN.
The purpose of this table is to assist an investor in understanding the
various costs and expenses that an investor in the Series will bear, whether
directly or indirectly. For more complete descriptions of the various costs
and expenses, see "How the Fund is Managed." "Other Expenses" includes
operating expenses of the Series, such as Trustees' and professional fees,
registration fees, reports to shareholders and transfer agency and custodian
fees.
- ------------
* The expense information in the table has been restated to reflect current
fees. Effective September 1, 1997, PIFM eliminated its management fee waiver
(.375 of 1%). See "How the Fund is Managed--Manager--Fee Waivers."
4
<PAGE>
FINANCIAL HIGHLIGHTS
(FOR A SHARE OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT EACH OF THE INDICATED
PERIODS)
The following financial highlights, for the fiscal year ended August 31, 1997,
have been audited by Price Waterhouse LLP, independent accountants, and by
Deloitte and Touche LLP, independent auditors, for the four years ended August
31, 1996. Each of the respective reports by Price Waterhouse LLP and Deloitte &
Touche LLP on such financial statements was unqualified. This information should
be read in conjunction with the financial statements and notes thereto, which
appear in the Statement of Additional Information. The following financial
highlights contain selected data for a share of beneficial interest outstanding,
total return, ratios to average net assets and other supplemental data for the
periods indicated. This information is based on data contained in the financial
statements.
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
--------------------------------------------------------------
1997 1996 1995 1994 1993 1992
-------- -------- -------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.............. $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
Net investment income and net realized gains
(c)............................................. .03 .03 .032 .020 .022 .034
Dividends and distributions to shareholders....... (.03) (.03) (.032) (.020) (.022) (.034)
-------- -------- -------- -------- ------- --------
Net asset value, end of period.................... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- -------- ------- --------
-------- -------- -------- -------- ------- --------
TOTAL RETURN (D):................................. 3.10% 3.17% 3.16% 2.02% 2.20% 3.42%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)................... $ 75,927 $ 77,683 $ 62,867 $ 54,302 $57,794 $ 40,480
Average net assets (000).......................... $ 77,500 $ 74,576 $ 57,103 $ 60,594 $53,152 $ 33,964
Ratios to average net assets (c):
Expenses, including distribution fee............ .46% .47% .581% .542% .387% .125%
Expenses, excluding distribution fee............ .34% .35% .456% .417% .262% .00%
Net investment income........................... 3.06% 3.12% 3.17% 1.99% 2.17% 3.20%
<CAPTION>
AUGUST 5,
1991(A)
THROUGH
AUGUST 31, 1991
----------------
<S> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.............. $ 1.00
Net investment income and net realized gains
(c)............................................. .003
Dividends and distributions to shareholders....... (.003)
-------
Net asset value, end of period.................... $ 1.00
-------
-------
TOTAL RETURN (D):................................. 0.30%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)................... $10,904
Average net assets (000).......................... $6,730
Ratios to average net assets (c):
Expenses, including distribution fee............ .125%(b)
Expenses, excluding distribution fee............ .00%(b)
Net investment income........................... 4.42%(b)
</TABLE>
- ------------
(a) Commencement of investment operations.
(b) Annualized.
(c) Net of expense subsidy and/or management fee waiver.
(d) Total return includes reinvestment of dividends and distributions.
Total returns for periods of less than a full year are not annualized.
5
<PAGE>
CALCULATION OF YIELD
THE SERIES CALCULATES ITS "CURRENT YIELD" based on the net change, exclusive
of realized and unrealized gains or losses, in the value of a hypothetical
account over a seven calendar day base period. THE SERIES CALCULATES ITS
"EFFECTIVE ANNUAL YIELD" ASSUMING DAILY COMPOUNDING. Tax-equivalent yield shows
the taxable yield an investor would have to earn from a fully taxable investment
in order to equal the Series' tax-free yield after taxes and is calculated by
dividing the Series' current or effective yield by the result of one minus the
State tax rate times one minus the federal tax rate. The following is an example
of the yield calculations as of August 31, 1997:
<TABLE>
<S> <C>
Value of hypothetical account at end of period................. $ 1.000621514
Value of hypothetical account at beginning of period........... 1.000000000
-------------
Base period return............................................. $ 0.000621514
-------------
-------------
CURRENT YIELD (1.00621514 X (365/7))+.......................... 3.24%
EFFECTIVE ANNUAL YIELD, assuming daily compounding+............ 3.29%
TAX-EQUIVALENT CURRENT YIELD
3.24 DIVIDED BY [(1-.045)(1-.396)]............................ 5.62%
</TABLE>
- --------------
+After fee waiver. Without fee waiver, the current yield, effective annual
yield, and tax-equivalent yield would have been 2.87%, 2.92% and 4.98%,
respectively. See "Manager" in the Statement of Additional Information.
THE YIELD WILL FLUCTUATE FROM TIME TO TIME AND DOES NOT INDICATE FUTURE
PERFORMANCE.
The weighted average life to maturity of the portfolio of the Series on August
31, 1997 was 66 days.
Yield is computed in accordance with a standardized formula described in the
Statement of Additional Information. In addition, comparative performance
information may be used from time to time in advertising or marketing the
Series' shares, including data from Lipper Analytical Services, Inc.,
Morningstar Publications, Inc., IBC/Donoghue's Money Fund Report, The Bank Rate
Monitor, other industry publications, business periodicals and market indices.
HOW THE FUND INVESTS
INVESTMENT OBJECTIVE AND POLICIES
PRUDENTIAL MUNICIPAL SERIES FUND (THE FUND) IS AN OPEN-END, MANAGEMENT
INVESTMENT COMPANY, OR MUTUAL FUND, CONSISTING OF THIRTEEN SEPARATE SERIES. EACH
OF THESE SERIES IS MANAGED INDEPENDENTLY. THE CONNECTICUT MONEY MARKET SERIES
(THE SERIES) IS NON-DIVERSIFIED AND ITS INVESTMENT OBJECTIVE IS TO PROVIDE THE
HIGHEST LEVEL OF CURRENT INCOME THAT IS EXEMPT FROM CONNECTICUT STATE AND
FEDERAL INCOME TAXES CONSISTENT WITH LIQUIDITY AND THE PRESERVATION OF CAPITAL.
THE SERIES SEEKS TO ACHIEVE ITS INVESTMENT OBJECTIVE BY INVESTING PRIMARILY IN
SHORT-TERM CONNECTICUT STATE, MUNICIPAL AND LOCAL GOVERNMENT OBLIGATIONS AND
OBLIGATIONS OF OTHER QUALIFYING ISSUERS, SUCH AS ISSUERS LOCATED IN PUERTO RICO,
THE VIRGIN ISLANDS AND GUAM, WHICH PAY INCOME EXEMPT, IN THE OPINION OF COUNSEL,
FROM CONNECTICUT STATE AND FEDERAL INCOME TAXES (CONNECTICUT OBLIGATIONS). SEE
"INVESTMENT OBJECTIVES AND POLICIES" IN THE STATEMENT OF ADDITIONAL INFORMATION.
THERE CAN BE NO ASSURANCE THAT THE SERIES WILL BE ABLE TO ACHIEVE ITS INVESTMENT
OBJECTIVE.
As with an investment in any mutual fund, an investment in this Series can
decrease in value and you can lose money.
6
<PAGE>
THE SERIES' INVESTMENT OBJECTIVE IS A FUNDAMENTAL POLICY AND, THEREFORE, MAY
NOT BE CHANGED WITHOUT THE APPROVAL OF THE HOLDERS OF A MAJORITY OF THE SERIES'
OUTSTANDING VOTING SECURITIES AS DEFINED IN THE INVESTMENT COMPANY ACT OF 1940,
AS AMENDED (THE INVESTMENT COMPANY ACT). THE SERIES' POLICIES THAT ARE NOT
FUNDAMENTAL MAY BE MODIFIED BY THE TRUSTEES.
As with an investment in any mutual fund, an investment in this Series can
decrease in value and you can lose money.
Interest on certain municipal obligations may be a preference item for
purposes of the federal alternative minimum tax. The Series may invest without
limit in municipal obligations that are "private activity bonds" (as defined in
the Internal Revenue Code), the interest on which would be a preference item for
purposes of the federal alternative minimum tax. See "Taxes, Dividends and
Distributions." Under Connecticut law, distributions from the Series to
individual shareholders of the Series resident in Connecticut and Connecticut
resident trusts and estates are not subject to taxation pursuant to the
Connecticut Personal Income Tax to the extent that such distributions are
excluded from gross income for federal income tax purposes as exempt-interest
dividends and are derived from interest payments on Connecticut Obligations. It
is likely that capital gain dividends derived from the sale of Connecticut
Obligations also are not subject to taxation pursuant to the Connecticut
Personal Income Tax. Other types of distributions received from the Series,
including distributions of interest on, and capital gain dividends derived from
sales of, obligations issued by other issuers, are subject to the Connecticut
Personal Income Tax. Certain shareholders may also be subject to Connecticut
alternative minimum tax with respect to distributions from the Series. See
"Taxes, Dividends and Distributions." The Connecticut Obligations in which the
Series may invest include certain short-term, tax-exempt notes such as Tax
Anticipation Notes, Revenue Anticipation Notes, Bond Anticipation Notes,
Construction Loan Notes and certain variable and floating rate demand notes. See
"Investment Objectives and Policies--Tax-Exempt Securities--Tax-Exempt Notes" in
the Statement of Additional Information. The Series will maintain a
dollar-weighted average maturity of its portfolio of 90 days or less.
THE SERIES MAY INVEST ITS ASSETS IN FLOATING RATE AND VARIABLE RATE
SECURITIES, INCLUDING PARTICIPATION INTERESTS THEREIN, WHICH CONFORM TO THE
REQUIREMENTS OF THE AMORTIZED COST VALUATION RULE AND OTHER REQUIREMENTS OF THE
SECURITIES AND EXCHANGE COMMISSION (SEC). There is no limit on the amount of
such securities that the Series may purchase. Floating rate securities normally
have a rate of interest which is set as a specific percentage of a designated
base rate, such as the rate on Treasury Bonds or Bills or the prime rate at a
major commercial bank. The interest rate on floating rate securities changes
periodically when there is a change in the designated base interest rate.
Variable rate securities provide for a specified periodic adjustment in the
interest rate based on prevailing market rates and generally would allow the
Series to demand payment of the obligation on short notice at par plus accrued
interest, which amount may be more or less than the amount the Series paid for
them.
ALL CONNECTICUT OBLIGATIONS PURCHASED BY THE SERIES WILL, AT THE TIME OF
PURCHASE, HAVE A REMAINING MATURITY OF THIRTEEN MONTHS OR LESS AND BE (I) RATED
IN ONE OF THE TWO HIGHEST RATING CATEGORIES BY AT LEAST TWO NATIONALLY
RECOGNIZED STATISTICAL RATING ORGANIZATIONS (NRSROS) ASSIGNING A RATING TO THE
SECURITY OR ISSUER (OR, IF ONLY ONE NRSRO ASSIGNED A RATING, BY THAT NRSRO) OR
(II) IF UNRATED, OF COMPARABLE QUALITY AS DETERMINED BY THE INVESTMENT ADVISER
UNDER THE SUPERVISION OF THE TRUSTEES. See "Description of Tax-Exempt Security
Ratings" in the Statement of Additional Information. The investment adviser will
monitor the credit quality of securities purchased for the Series' portfolio and
will limit its investments to those which present minimal credit risks.
In selecting Connecticut Obligations for investment by the Series, the
investment adviser considers ratings assigned by NRSROs, information concerning
the financial history and condition of the issuer and its revenue and expense
prospects and, in the case of revenue bonds, the financial history and condition
of the source of revenue to service the bonds. If a Connecticut Obligation held
by the Series is assigned a lower rating or ceases to be rated, the investment
adviser under the supervision of the Trustees will promptly reassess whether
that security presents minimal credit risks and whether the Series should
continue to hold
7
<PAGE>
the security in its portfolio. If a portfolio security no longer presents
minimal credit risks or is in default, the Series will dispose of the security
as soon as reasonably practicable unless the Trustees determine that to do so is
not in the best interests of the Series and its shareholders.
The Series utilizes the amortized cost method of valuation in accordance with
regulations issued by the SEC. See "How the Fund Values its Shares."
The Series intends to hold portfolio securities to maturity; however, it may
sell any security at any time in order to meet redemption requests or if the
investment adviser believes it advisable, based on an evaluation of the issuer
or of market conditions.
UNDER NORMAL MARKET CONDITIONS, THE SERIES WILL ATTEMPT TO INVEST
SUBSTANTIALLY ALL OF THE VALUE OF ITS ASSETS IN MUNICIPAL OBLIGATIONS WHICH PAY
INCOME EXEMPT FROM FEDERAL INCOME TAXES. As a matter of fundamental policy,
during normal market conditions the Series' assets will be invested so that at
least 80% of its total assets will be invested in municipal securities which pay
income exempt from federal income taxes. These primarily will be Connecticut
Obligations, unless the investment adviser is unable, due to the unavailability
of sufficient or reasonably priced Connecticut Obligations that also meet the
Series' credit quality and average weighted maturity requirements, to purchase
Connecticut Obligations. To the extent the Series invests in obligations other
than Connecticut Obligations, dividends derived therefrom likely will not be
exempt from Connecticut taxes. During abnormal market conditions or to provide
liquidity, the Series may hold cash or taxable cash equivalents such as
certificates of deposit, bankers' acceptances and time deposits or other
short-term taxable investments such as repurchase agreements, or high grade
taxable obligations. When, in the opinion of the investment adviser, abnormal
market conditions require a temporary defensive position, the Series may invest
its assets so that more than 20% of the income is subject to federal income
taxes.
THE SERIES MAY ACQUIRE PUT OPTIONS (PUTS) GIVING THE SERIES THE RIGHT TO SELL
SECURITIES HELD IN THE SERIES' PORTFOLIO AT A SPECIFIED EXERCISE PRICE ON A
SPECIFIED DATE. Such puts may be acquired for the purpose of protecting the
Series from a possible decline in the market value of the security to which the
put applies in the event of interest rate fluctuations or, in the case of
liquidity puts, for the purpose of shortening the effective maturity of the
underlying security. The aggregate value of premiums paid to acquire puts held
in the Series' portfolio (other than liquidity puts) may not exceed 10% of the
net asset value of the Series. The acquisition of a put may involve an
additional cost to the Series by payment of a premium for the put, by payment of
a higher purchase price for securities to which the put is attached or through a
lower effective interest rate.
In addition, there is a credit risk associated with the purchase of puts in
that the issuer of the put may be unable to meet its obligation to purchase the
underlying security. Accordingly, the Series will acquire puts only under the
following circumstances: (1) the put is written by the issuer of the underlying
security and such security is rated (a) in one of the two highest rating
categories by at least two NRSROs assigning a rating to the security or issuer,
or (b) if only one such rating organization assigned a rating, by that rating
organization; or (2) the put is written by a person other than the issuer of the
underlying security and such person has securities outstanding which are rated
within such two highest quality grades; or (3) the put is backed by a letter of
credit or similar financial guarantee issued by a person having securities
outstanding which are rated within the two highest quality grades of such rating
services. The issuer of the put, or another institution, must undertake to
notify promptly the holder of the put if the put feature is substituted with a
put from another issuer.
THE SERIES MAY PURCHASE MUNICIPAL OBLIGATIONS ON A "WHEN-ISSUED" OR "DELAYED
DELIVERY" BASIS, IN EACH CASE WITHOUT LIMIT. When municipal obligations are
offered on a when-issued or delayed delivery basis, the price and coupon rate
are fixed at the time the commitment to purchase is made, but delivery and
payment of the securities take place at a later date. The purchase price for
such securities includes interest accrued during the period between purchase and
settlement, and therefore, no interest accrues to the economic benefit of the
purchaser during such period. In the case of purchases by the Series, the price
that the Series is required to pay on the settlement date may be in excess of
the market value of the municipal obligations on that date. While securities may
be sold prior to the settlement date, the Series intends to purchase these
securities with the purpose of
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actually acquiring them unless a sale would be desirable for investment reasons.
At the time the Series makes the commitment to purchase a municipal obligation
on a when-issued or delayed delivery basis, it will record the transaction and
reflect the value of the obligation each day in determining its net asset value.
This value may fluctuate from day to day in the same manner as values of
municipal obligations otherwise held by the Series. If the seller defaults in
the sale, the Series could fail to realize the appreciation, if any, that had
occurred. The Series will establish a segregated account with its Custodian in
which it will maintain cash, U.S. Government securities, equity securities or
other liquid, unencumbered assets, marked-to-market daily, equal in value to its
commitment for when-issued or delayed delivery securities.
THE SERIES MAY PURCHASE SECONDARY MARKET INSURANCE ON CONNECTICUT OBLIGATIONS
WHICH IT HOLDS OR ACQUIRES. Secondary market insurance would be reflected in the
market value of the municipal obligation purchased and may enable the Series to
dispose of a defaulted obligation at a price similar to that of comparable
municipal obligations which are not in default.
Insurance is not a substitute for the basic credit of an issuer, but
supplements the existing credit and provides additional security therefor. While
insurance coverage for the Connecticut Obligations held by the Series reduces
credit risk by providing that the insurance company will make timely payment of
principal and interest if the issuer defaults on its obligation to make such
payment, it does not afford protection against fluctuation in the price, I.E.,
the market value, of the municipal obligations caused by changes in interest
rates and other factors.
SPECIAL CONSIDERATIONS
BECAUSE THE SERIES WILL INVEST PRIMARILY IN CONNECTICUT OBLIGATIONS AND
BECAUSE IT SEEKS TO MAXIMIZE INCOME DERIVED FROM CONNECTICUT OBLIGATIONS, IT IS
MORE SUSCEPTIBLE TO FACTORS ADVERSELY AFFECTING ISSUERS OF CONNECTICUT
OBLIGATIONS THAN IS A COMPARABLE TAX-EXEMPT MONEY MARKET FUND THAT IS NOT
CONCENTRATED IN SUCH OBLIGATIONS TO THIS DEGREE. An investment in the Series
therefore may involve more risk than an investment in other types of money
market funds. Connecticut's debt ratios are among the highest of the United
States. In fiscal year 1992, Connecticut took a number of actions to raise
revenues, reduce expenditures, and establish a broader revenue base aimed at
reducing the volatility of its budgetary operations. Chief among these were the
implementation of a 4.5% personal income tax and the broadening of the sales tax
base, which was coupled with a decrease in the sales tax rate from 8% to 6% and
a decrease in the Corporation Business Tax from 13.8% in 1991 to 10.5% in 1997
and further decreasing annually to 7.5% in 2000. These actions, along with
conservative revenue projections, allowed the State to achieve modest surpluses
for fiscal years 1992 through 1996. The State Comptroller's General Fund
financial statements released August 1, 1997 estimate on operating surplus for
fiscal years 1996-1997 of $41.2 million. However, defense spending cuts,
problems in the insurance industry and slow employment growth continue to strain
the State's fiscal operations. Although Connecticut still ranks first among the
United States in personal income per capita, the State's more recent rate of
economic growth still lags behind the national average. If either Connecticut or
any of its local governmental entities is unable to meet its financial
obligations, the income derived by the Series, the ability to preserve the
Series' capital and the Series' liquidity could be adversely affected. See
"Investment Objectives and Policies--Special Considerations Regarding
Investments in Tax-Exempt Securities" in the Statement of Additional
Information.
The Series is "non-diversified" so that more than 5% of its total assets may
be invested in the securities of one or more issuers. Investment in a
non-diversified portfolio involves greater risk than investment in a diversified
portfolio because a loss resulting from the default of a single issuer may
represent a greater portion of the total assets of a non-diversified portfolio.
The Series will treat an investment in a municipal bond refunded with escrowed
U.S. Government securities as U.S. Government securities for purposes of the
Investment Company Act's diversification requirements provided certain
conditions are met. See "Investment Objectives and Policies--In General" in the
Statement of Additional Information.
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OTHER INVESTMENTS AND POLICIES
REPURCHASE AGREEMENTS
The Series may enter into repurchase agreements whereby the seller of a
security agrees to repurchase that security from the Series at a mutually
agreed-upon time and price. The period of maturity is usually quite short,
possibly overnight or a few days, although it may extend over a number of
months. The resale price is in excess of the purchase price, reflecting an
agreed-upon rate of return effective for the period of time the Series' money is
invested in the security. The Series' repurchase agreements will at all times be
fully collateralized in an amount at least equal to the resale price. The
instruments held as collateral are valued daily and if the value of the
instruments declines, the Series will require additional collateral. If the
seller defaults and the value of the collateral securing the repurchase
agreement declines, the Series may incur a loss. The Series participates in a
joint repurchase account with other investment companies managed by PIFM
pursuant to an order of the SEC. See "Investment Objectives and
Policies--Repurchase Agreements" in the Statement of Additional Information.
BORROWING
The Series may borrow an amount equal to no more than 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 Series may
pledge up to 33 1/3% of the value of its total assets to secure these
borrowings. The Series will not purchase portfolio securities if its borrowings
exceed 5% of its total assets.
ILLIQUID SECURITIES
The Series may hold up to 10% of its net assets in illiquid securities,
including repurchase agreements which have a maturity of longer than seven days,
securities with legal or contractual restrictions on resale (restricted
securities) and securities that are not readily marketable. Securities that have
a readily available market are not considered illiquid for purposes of this
limitation. See "Investment Restrictions" in the Statement of Additional
Information. The investment adviser will monitor the liquidity of such
restricted securities under the supervision of the Trustees. See "Investment
Objectives and Policies--Illiquid Securities" in the Statement of Additional
Information. Repurchase agreements subject to demand are deemed to have a
maturity equal to the notice period.
INVESTMENT RESTRICTIONS
The Series is subject to certain investment restrictions which, like its
investment objective, constitute fundamental policies. Fundamental policies
cannot be changed without the approval of the holders of a majority of the
Series' outstanding voting securities, as defined in the Investment Company Act.
See "Investment Restrictions" in the Statement of Additional Information.
HOW THE FUND IS MANAGED
THE FUND HAS TRUSTEES WHO, IN ADDITION TO OVERSEEING THE ACTIONS OF THE FUND'S
MANAGER, SUBADVISER AND DISTRIBUTOR, AS SET FORTH BELOW, DECIDE UPON MATTERS OF
GENERAL POLICY. THE FUND'S MANAGER CONDUCTS AND SUPERVISES THE DAILY BUSINESS
OPERATIONS OF THE FUND. THE FUND'S SUBADVISER FURNISHES DAILY INVESTMENT
ADVISORY SERVICES.
For the fiscal year ended August 31, 1997, total expenses of the Series as a
percentage of its average net assets, net of fee waiver, were .46%. See
"Financial Highlights."
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MANAGER
PRUDENTIAL INVESTMENTS FUND MANAGEMENT LLC (PIFM OR THE MANAGER), GATEWAY
CENTER THREE, 100 MULBERRY STREET, NEWARK, NEW JERSEY 07102-4077, IS THE MANAGER
OF THE FUND AND IS COMPENSATED FOR ITS SERVICES AT AN ANNUAL RATE OF .50 OF 1%
OF THE AVERAGE DAILY NET ASSETS OF THE SERIES. PIFM is organized in New York as
a limited liability company. It is the successor to Prudential Mutual Fund
Management, Inc., which transferred its assets to PIFM in September 1996. For
the fiscal year ended August 31, 1997, the Series paid a management fee of .125
of 1% of the Series' average net assets, after taking into account a management
fee waiver. See "Fee Waivers" below and "Manager" in the Statement of Additional
Information.
As of September 30, 1997, PIFM served as the manager to 41 open-end investment
companies, constituting all of the Prudential Mutual Funds, and as manager or
administrator to 22 closed-end investment companies with aggregate assets of
approximately $59.9 billion.
UNDER THE MANAGEMENT AGREEMENT WITH THE FUND, PIFM MANAGES THE INVESTMENT
OPERATIONS OF EACH SERIES OF THE FUND AND ALSO ADMINISTERS THE FUND'S BUSINESS
AFFAIRS. See "Manager" in the Statement of Additional Information.
UNDER A SUBADVISORY AGREEMENT BETWEEN PIFM AND THE PRUDENTIAL INVESTMENT
CORPORATION (PIC), DOING BUSINESS AS PRUDENTIAL INVESTMENTS (PI, THE SUBADVISER
OR THE INVESTMENT ADVISER), PI FURNISHES INVESTMENT ADVISORY SERVICES IN
CONNECTION WITH THE MANAGEMENT OF THE FUND AND IS REIMBURSED BY PIFM FOR ITS
REASONABLE COSTS AND EXPENSES INCURRED IN PROVIDING SUCH SERVICES. Under the
Management Agreement, PIFM continues to have responsibility for all investment
advisory services and supervises PI's performance of such services.
PIFM and PIC are indirect, wholly-owned subsidiaries of The Prudential
Insurance Company of America (Prudential), a major diversified insurance and
financial services company, and are part of Prudential Investments, a business
group of Prudential.
FEE WAIVERS
PIFM may from time to time agree to waive all or a portion of its management
fee and subsidize certain operating expenses of the Series. Fee waivers and
expense subsidies will increase the Series' yield. The Series is not required to
reimburse PIFM for such management fee waiver. Effective September 1, 1997, PIFM
discontinued its waiver of 75% of its management fee. See "Fund Expenses" and
"Calculation of Yield."
DISTRIBUTOR
PRUDENTIAL SECURITIES INCORPORATED (PRUDENTIAL SECURITIES, PSI OR THE
DISTRIBUTOR), ONE SEAPORT PLAZA, NEW YORK, NEW YORK 10292, IS A CORPORATION
ORGANIZED UNDER THE LAWS OF THE STATE OF DELAWARE AND SERVES AS THE DISTRIBUTOR
OF THE SERIES' SHARES. It is an indirect, wholly-owned subsidiary of Prudential.
UNDER A DISTRIBUTION AND SERVICE PLAN (THE PLAN) ADOPTED BY THE SERIES UNDER
RULE 12b-1 UNDER THE INVESTMENT COMPANY ACT AND A DISTRIBUTION AGREEMENT (THE
DISTRIBUTION AGREEMENT), THE DISTRIBUTOR INCURS THE EXPENSES OF DISTRIBUTING THE
SHARES OF THE SERIES. These expenses include account servicing fees paid to, or
on account of, financial advisers of Prudential Securities and representatives
of Pruco Securities Corporation (Prusec), an affiliated broker-dealer, and
account servicing fees paid to, or on account of, other broker-dealers or
financial institutions (other than national banks) which have entered into
agreements with the Distributor, advertising expenses, the cost of printing and
mailing prospectuses to potential investors and indirect and overhead costs of
Prudential Securities and Prusec associated with the sale of Series shares,
including lease, utility, communications and sales promotion expenses.
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UNDER THE PLAN, THE SERIES REIMBURSES THE DISTRIBUTOR FOR ITS
DISTRIBUTION-RELATED EXPENSES AT AN ANNUAL RATE OF UP TO .125 OF 1% OF THE
AVERAGE DAILY NET ASSETS OF THE SERIES. Account servicing fees are paid based on
the average balance of the Series' shares held in the accounts of the customers
of financial advisers. The entire distribution fee may be used to pay account
servicing fees.
For the fiscal year ended August 31, 1997, the Series paid PSI a distribution
fee equal on an annual basis to .125% of the average net assets of the Series.
Amounts paid to the Distributor by the Series will not be used to pay
distribution expenses incurred by any other series of the Fund.
The Plan provides that it shall continue in effect from year to year provided
that each such continuance is approved annually by a majority vote of the
Trustees of the Fund, including a majority of the Trustees who are not
"interested persons" of the Fund (as defined in the Investment Company Act) and
who have no direct or indirect financial interest in the operation of the Plan
or any agreements related to the Plan. The Trustees are provided with and review
quarterly reports of expenditures under the Plan.
In addition to distribution and service fees paid by the Series under the
Plan, the Manager (or one of its affiliates) may make payments out of its own
resources to dealers (including Prudential Securities) and other persons which
distribute shares of the Series. Such payments may be calculated by reference to
the net asset value of shares sold by such persons or otherwise. The Fund
records all payments made under the Plan as expenses in the calculation of its
net investment income.
On October 21, 1993, PSI entered into an omnibus settlement with the SEC,
state securities regulators (with the exception of the Texas Securities
Commissioner who joined the settlement on January 18, 1994) and the National
Association of Securities Dealers, Inc. (the NASD) to resolve allegations that
from 1980 through 1990 PSI sold certain limited partnership interests in
violation of securities laws to persons for whom such securities were not
suitable and misrepresented the safety, potential returns and liquidity of these
investments. Without admitting or denying the allegations asserted against it,
PSI consented to the entry of an SEC Administrative Order which stated that
PSI's conduct violated the federal securities laws, directed PSI to cease and
desist from violating the federal securities laws, pay civil penalties, and
adopt certain remedial measures to address the violations.
Pursuant to the terms of the SEC settlement, PSI agreed to the imposition of a
$10,000,000 civil penalty, established a settlement fund in the amount of
$330,000,000 and procedures to resolve legitimate claims for compensatory
damages by purchasers of the partnership interests. PSI has agreed to provide
additional funds, if necessary, for the purpose of the settlement fund. PSI's
settlement with the state securities regulators included an agreement to pay a
penalty of $500,000 per jurisdiction. PSI consented to a censure and to the
payment of a $5,000,000 fine in settling the NASD action.
In October 1994, a criminal complaint was filed with the United States
Magistrate for the Southern District of New York alleging that PSI committed
fraud in connection with the sale of certain limited partnership interests in
violation of federal securities laws. An agreement was simultaneously filed to
defer prosecution of these charges for a period of three years from the signing
of the agreement, provided that PSI complies with the terms of the agreement.
If, upon completion of the three year period, PSI has complied with the terms of
the agreement, no prosecution will be instituted by the United States for the
offenses charged in the complaint. If on the other hand, during the course of
the three year period, PSI violates the terms of the agreement, the U.S.
Attorney can then elect to pursue these charges. Under the terms of the
agreement, PSI agreed, among other things, to pay an additional $330,000,000
into the fund established by the SEC to pay restitution to investors who
purchased certain PSI limited partnership interests.
For more detailed information concerning the foregoing matters, see
"Distributor" in the Statement of Additional Information, a copy of which may be
obtained at no cost by calling (800) 225-1852.
The Fund is not affected by PSI's financial condition and is an entirely
separate legal entity from PSI, which has no beneficial ownership therein and
the Fund's assets which are held by State Street Bank and Trust Company, an
independent custodian, are separate and distinct from PSI.
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PORTFOLIO TRANSACTIONS
Prudential Securities may act as a broker for the Fund, provided that the
commissions, fees or other remuneration it receives are fair and reasonable. See
"Portfolio Transactions and Brokerage" in the Statement of Additional
Information.
CUSTODIAN AND TRANSFER AND DIVIDEND DISBURSING AGENT
State Street Bank and Trust Company, One Heritage Drive, North Quincy,
Massachusetts 02171, serves as Custodian for the portfolio securities of the
Series and cash and, in that capacity, maintains certain financial and
accounting books and records pursuant to an agreement with the Fund. Its mailing
address is P.O. Box 1713, Boston, Massachusetts 02105.
Prudential Mutual Fund Services LLC (PMFS), Raritan Plaza One, Edison, New
Jersey 08837, serves as Transfer Agent and Dividend Disbursing Agent and, in
those capacities, maintains certain books and records for the Fund. PMFS is a
wholly-owned subsidiary of PIFM. Its mailing address is P.O. Box 15005, New
Brunswick, New Jersey 08906-5005.
HOW THE FUND VALUES ITS SHARES
THE SERIES' NET ASSET VALUE PER SHARE OR NAV IS DETERMINED BY SUBTRACTING ITS
LIABILITIES FROM THE VALUE OF ITS ASSETS AND DIVIDING THE REMAINDER BY THE
NUMBER OF OUTSTANDING SHARES. THE TRUSTEES HAVE FIXED THE SPECIFIC TIME OF DAY
FOR THE COMPUTATION OF THE NET ASSET VALUE OF THE SERIES TO BE AS OF 4:30 P.M.,
NEW YORK TIME, IMMEDIATELY AFTER THE DECLARATION OF DIVIDENDS.
The Series will compute its NAV once daily on days that the New York Stock
Exchange is open for trading except on days in which no orders to purchase, sell
or redeem shares have been received by the Series or days on which changes in
the value of the Series' portfolio securities do not materially affect the NAV.
The Series determines the value of its portfolio securities by the amortized
cost method. This method involves valuing an instrument at its cost and
thereafter assuming a constant amortization to maturity of any discount or
premium regardless of the impact of fluctuating interest rates on the market
value of the instrument. While this method provides certainty in valuation, it
may result in periods during which value, as determined by amortized cost, is
higher or lower than the price the Series would receive if it sold the
instrument. During these periods, the yield to a shareholder may differ somewhat
from that which could be obtained from a similar fund which marks its portfolio
securities to the market each day. For example, during periods of declining
interest rates, if the use of the amortized cost method resulted in a lower
value of the Series' portfolio on a given day, a prospective investor in the
Series would be able to obtain a somewhat higher yield and existing shareholders
would receive correspondingly less income. The converse would apply during
periods of rising interest rates. The Trustees have established procedures
designed to stabilize, to the extent reasonably possible, the NAV of the shares
of the Series at $1.00 per share. See "Net Asset Value" in the Statement of
Additional Information.
TAXES, DIVIDENDS AND DISTRIBUTIONS
TAXATION OF THE FUND
THE SERIES HAS ELECTED TO QUALIFY AND INTENDS TO REMAIN QUALIFIED AS A
REGULATED INVESTMENT COMPANY UNDER THE INTERNAL REVENUE CODE. ACCORDINGLY, THE
SERIES WILL NOT BE SUBJECT TO FEDERAL INCOME TAXES ON ITS NET INVESTMENT INCOME
AND NET CAPITAL GAINS, IF ANY, THAT IT DISTRIBUTES TO ITS SHAREHOLDERS. TO THE
EXTENT NOT DISTRIBUTED BY THE SERIES, NET TAXABLE INVESTMENT INCOME AND CAPITAL
GAINS AND LOSSES ARE TAXABLE TO THE SERIES.
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To the extent the Series invests in taxable obligations, it will earn taxable
investment income. Gain or loss realized by the Series from the sale of
securities generally will be treated as capital gain or loss; however, gain from
the sale of certain securities (including municipal obligations) will be treated
as ordinary income to the extent of any "market discount." Market discount
generally is the difference, if any, between the price paid by the Series for
the security and the principal amount of the security (or, in the case of a
security issued at an original issue discount, the revised issue price of the
security). The market discount rule does not apply to any security that was
acquired by the Series at its original issue. See "Distributions and Tax
Information" in the Statement of Additional Information.
TAXATION OF SHAREHOLDERS
In general, the character of tax-exempt interest distributed by the Series
will flow through as tax-exempt interest to its shareholders provided that 50%
or more of the value of its assets at the end of each quarter of its taxable
year is invested in state, municipal and other obligations, the interest on
which is excluded from gross income for federal income tax purposes. During
normal market conditions, at least 80% of the Series' total assets will be
invested in such obligations. See "How the Fund Invests--Investment Objective
and Policies."
Any dividends out of net taxable investment income, together with
distributions of net short-term gains (I.E., the excess of net short-term
capital gains over net long-term capital losses) distributed to shareholders,
will be taxable as ordinary income to the shareholder whether or not reinvested.
Any net capital gains (I.E., the excess of net capital gains from the sale of
assets held for more than 12 months over net short-term capital losses)
distributed to shareholders will be taxable as capital gains to the
shareholders, whether or not reinvested and regardless of the length of time a
shareholder has owned his or her shares. The maximum capital gains rate for
individuals is 28% with respect to assets held for more than 12 months, but not
more than 18 months, and 20% with respect to assets held for more than 18
months. The maximum capital gains rate for corporate shareholders currently is
the same as the maximum tax rate for ordinary income. The Series does not expect
to have capital gains from the sale of assets held for more than 12 months.
CERTAIN INVESTORS MAY INCUR FEDERAL ALTERNATIVE MINIMUM TAX LIABILITY AS A
RESULT OF THEIR INVESTMENT IN THE FUND. Tax-exempt interest from certain
municipal obligations (I.E., certain private activity bonds issued after August
7, 1986) will be treated as an item of tax preference for purposes of the
alternative minimum tax. The Fund anticipates that, under regulations to be
promulgated, items of tax preference incurred by the Series will be attributed
to the Series' shareholders, although some portion of such items could be
allocated to the Series itself. Depending upon each shareholder's individual
circumstances, the attribution of items of tax preference incurred by the Series
could result in liability for the shareholder for the alternative minimum tax.
Similarly, the Series could be liable for the alternative minimum tax for items
of tax preference attributed to it. The Series is permitted to invest in
municipal obligations of the type that will produce items of tax preference.
Corporate shareholders in the Series also will have to take into account the
adjustment for current earnings for alternative minimum tax purposes. Corporate
shareholders should consult with their tax advisers with respect to this
potential adjustment.
Under Connecticut law, distributions from the Series to individual
shareholders of the Series resident in Connecticut and Connecticut resident
trusts and estates are not subject to taxation pursuant to the Connecticut
Personal Income Tax to the extent that such distributions are excluded from
gross income for federal income tax purposes as exempt-interest dividends and
are derived from interest payments on Connecticut Obligations. It is likely that
capital gain dividends derived from the sale of Connecticut Obligations also are
not subject to taxation pursuant to the Connecticut Personal Income Tax. Other
types of distributions received from the Series, including distributions of
interest on, and capital gain dividends derived from sales of, obligations
issued by other issuers, are subject to the Connecticut Personal Income Tax.
Individual shareholders and estates and trusts also may be subject to
alternative minimum tax for Connecticut tax purposes with respect to certain
distributions (other than exempt-interest dividends derived from Connecticut
Obligations) from the Series.
Distributions from the Series to corporate shareholders (other than S
Corporations) that are exempt-interest dividends, whether or not derived from
interest payments on Connecticut Obligations, are subject to the Connecticut
Corporation Business Tax. Thirty
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percent of distributions to corporate shareholders (other than S Corporations)
that are treated as dividends for federal income tax purposes (not including
exempt-interest dividends) is generally subject to taxation pursuant to the
Connecticut Corporation Business Tax; the remaining 70% is excluded.
Distributions from the Series to shareholders that are S Corporations are not
subject to the Connecticut Corporation Business Tax to the extent such
distributions are exempt-interest dividends and separately stated items for
federal income tax purposes.
Shareholders are advised to consult their own tax advisers regarding specific
questions as to federal, state or local taxes. See "Distributions and Tax
Information" in the Statement of Additional Information.
WITHHOLDING TAXES
Under the Internal Revenue Code, the Series is required to withhold and remit
to the U.S. Treasury 31% of redemption proceeds on the accounts of certain
shareholders who fail to furnish their tax identification numbers on IRS Form
W-9 (or IRS Form W-8 in the case of certain foreign shareholders) with the
required certifications regarding the shareholder's status under the federal
income tax law. Such withholding is also required on taxable dividends and
capital gain distributions made by the Series unless it is reasonably expected
that at least 95% of the distributions of the Series are comprised of tax-exempt
dividends.
Dividends of net taxable investment income and distributions of net short-term
capital gains paid to a shareholder (including a shareholder acting as a nominee
or fiduciary) who is a nonresident alien individual, a foreign corporation or a
foreign partnership (foreign shareholder) are subject to a 30% (or lower treaty
rate) withholding tax upon the gross amount of the dividends unless the
dividends are effectively connected with a U.S. trade or business conducted by
the foreign shareholder. Capital gain dividends paid to a foreign shareholder
are generally not subject to withholding tax. A foreign shareholder will,
however, be required to pay U.S. income tax on any dividends and capital gain
distributions which are effectively connected with a U.S. trade or business of
the foreign shareholder.
DIVIDENDS AND DISTRIBUTIONS
THE SERIES EXPECTS TO DECLARE DAILY AND PAY MONTHLY DIVIDENDS OF NET
INVESTMENT INCOME AND SHORT-TERM CAPITAL GAINS.
A shareholder generally begins to earn dividends on the first business day
after his or her order is placed with the Series, as described above, and
continues to earn dividends through the day on which his or her shares are
redeemed. In the case of certain redemptions, however, Prudential Securities
clients will not be entitled to dividends declared on the date of redemption.
See "Shareholders Guide--How to Sell Your Shares--Redemption of Shares Purchased
through Prudential Securities."
DIVIDENDS AND DISTRIBUTIONS WILL BE PAID IN ADDITIONAL SHARES OF THE SERIES
BASED ON THE NET ASSET VALUE OF SERIES' SHARES ON THE PAYMENT DATE OR SUCH OTHER
DATE AS THE TRUSTEES MAY DETERMINE, UNLESS THE SHAREHOLDER ELECTS IN WRITING NOT
LESS THAN FIVE BUSINESS DAYS PRIOR TO THE RECORD DATE TO RECEIVE SUCH DIVIDENDS
AND DISTRIBUTIONS IN CASH. Such election should be submitted to Prudential
Mutual Fund Services LLC, Attention: Account Maintenance, P.O. Box 15015, New
Brunswick, New Jersey 08906-5015. If you hold shares through Prudential
Securities, you should contact your financial adviser to elect to receive
dividends and distributions in cash.The Fund will notify each shareholder after
the close of the Fund's taxable year of both the dollar amount and the taxable
status of that year's dividends and distributions.
GENERAL INFORMATION
DESCRIPTION OF SHARES
THE FUND WAS ESTABLISHED AS A MASSACHUSETTS BUSINESS TRUST ON MAY 18, 1984, BY
A DECLARATION OF TRUST. The Fund's activities are supervised by its Trustees.
The Declaration of Trust permits the Trustees to issue an unlimited number of
full
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and fractional shares in separate series, currently designated as the
Connecticut Money Market Series, Florida Series, Maryland Series, Massachusetts
Money Market Series, Massachusetts Series, Michigan Series, New Jersey Money
Market Series, New Jersey Series, New York Money Market Series, New York Series,
North Carolina Series, Ohio Series and Pennsylvania Series. Currently, all
series of the Fund, except for the Connecticut Money Market Series, the Florida
Series, the Massachusetts Series, the Massachusetts Money Market Series, the New
Jersey Money Market Series, the New Jersey Series, the New York Money Market
Series and the New York Series offer three classes, designated Class A, Class B
and Class C shares. The Florida Series, the Massachusetts Series, the New Jersey
Series and the New York Series offer four classes, designated Class A, Class B,
Class C and Class Z shares. The Connecticut Money Market Series, the
Massachusetts Money Market Series, the New Jersey Money Market Series and the
New York Money Market Series offer only one class of shares. In accordance with
the Fund's Declaration of Trust, the Trustees may authorize the creation of
additional series and classes within such series, with such preferences,
privileges, limitations and voting and dividend rights as the Trustees may
determine.
Shares of the Fund, when issued, are fully paid, nonassessable, fully
transferable and redeemable at the option of the holder. Shares are also
redeemable at the option of the Fund under certain circumstances as described
under "Shareholder Guide--How to Sell Your Shares." Each share of the Series is
equal as to earnings, assets and voting privileges, and each class bears the
expenses related to the distribution of its shares. There are no conversion,
preemptive or other subscription rights. In the event of liquidation, each share
of beneficial interest of each series is entitled to its portion of all of the
Fund's assets after all debt and expenses of the Fund have been paid. The Fund's
shares do not have cumulative voting rights for the election of Trustees.
THE FUND DOES NOT INTEND TO HOLD ANNUAL MEETINGS OF SHAREHOLDERS UNLESS
OTHERWISE REQUIRED BY LAW. THE FUND WILL NOT BE REQUIRED TO HOLD MEETINGS OF
SHAREHOLDERS UNLESS, FOR EXAMPLE, THE ELECTION OF TRUSTEES IS REQUIRED TO BE
ACTED UPON BY SHAREHOLDERS UNDER THE INVESTMENT COMPANY ACT. SHAREHOLDERS HAVE
CERTAIN RIGHTS, INCLUDING THE RIGHT TO CALL A MEETING UPON A VOTE OF 10% OF THE
FUND'S OUTSTANDING SHARES FOR THE PURPOSE OF VOTING ON THE REMOVAL OF ONE OR
MORE TRUSTEES OR TO TRANSACT ANY OTHER BUSINESS.
The Declaration of Trust and the By-Laws of the Fund are designed to make the
Fund similar in certain respects to a Massachusetts business corporation. The
principal distinction between a Massachusetts business corporation and a
Massachusetts business trust relates to shareholder liability. Under
Massachusetts law, shareholders of a business trust may, under certain
circumstances, be held personally liable as partners for the obligations of the
fund, which is not the case with a corporation. The Declaration of Trust of the
Fund provides that shareholders shall not be subject to any personal liability
for the acts or obligations of the Fund and that every written obligation,
contract, instrument or undertaking made by the Fund shall contain a provision
to the effect that the shareholders are not individually bound thereunder.
ADDITIONAL INFORMATION
This Prospectus, including the Statement of Additional Information which has
been incorporated by reference herein, does not contain all the information set
forth in the Registration Statement filed by the Fund with the SEC under the
Securities Act of 1933, as amended. Copies of the Registration Statement may be
obtained at a reasonable charge from the SEC or may be examined, without charge,
at the office of the SEC in Washington, D.C.
SHAREHOLDER GUIDE
HOW TO BUY SHARES OF THE FUND
YOU MAY PURCHASE SHARES OF THE SERIES THROUGH PRUDENTIAL SECURITIES, PRUSEC OR
DIRECTLY FROM THE FUND, THROUGH ITS TRANSFER AGENT, PRUDENTIAL MUTUAL FUND
SERVICES LLC (PMFS OR THE TRANSFER AGENT), ATTENTION: INVESTMENT SERVICES, P.O.
BOX 15020, NEW BRUNSWISK, NEW JERSEY 08906-5020. The minimum initial investment
is $1,000. The minimum subsequent investment is $100. All minimum investment
requirements are waived for the Command Account program (if the
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<PAGE>
Series is designated as your primary fund) and certain employee savings and
retirement plans. For purchases made through the Automatic Savings Accumulation
Plan, the minimum initial and subsequent investment is $50. See "Shareholder
Services" below.
For automatic purchases made through Prudential Securities, the minimum
investment requirement is $1,000 and there is no minimum subsequent investment
requirement.
An investment in the Series may not be appropriate for tax-exempt or
tax-deferred investors. Such investors should consult with their own tax
advisers.
SHARES OF THE SERIES ARE SOLD THROUGH THE TRANSFER AGENT, WITHOUT A SALES
CHARGE, AT THE NAV PER SHARE NEXT DETERMINED FOLLOWING RECEIPT AND ACCEPTANCE BY
THE TRANSFER AGENT OR PRUDENTIAL SECURITIES OF AN ORDER IN PROPER FORM (I.E.,
CHECK OR FEDERAL FUNDS WIRED TO STATE STREET BANK AND TRUST COMPANY (STATE
STREET), THE FUND'S CUSTODIAN). See "How the Fund Values its Shares." When
payment is received by PMFS prior to 4:30 P.M., New York time, in proper form, a
share purchase order will be entered at the price determined as of 4:30 P.M.,
New York time, on that day, and dividends on the shares purchased will begin on
the business day following such investment. See "Taxes, Dividends and
Distributions." If your purchase is made through an account at Prudential
Securities or through Prusec or another dealer, your dealer will forward a
purchase order and payment to the Fund.
Investors who purchase their shares through a dealer other than Prudential
Securities or Prusec, which dealer has a clearinghouse arrangement with respect
to shares of the Series, may be able to participate in the automatic sweep
feature described below under "Purchases through Prudential
Securities--Automatic Investment (Autosweep)" and "How to Sell Your
Shares--Redemptions of Shares Purchased through Prudential Securities." For
further information, contact your dealer.
Application forms for Prusec and direct accounts with the Transfer Agent (E.G.
non-Prudential Securities accounts ) can be obtained from PMFS, Prudential
Securities or Prusec. If a share certificate is desired, it must be requested in
writing for each transaction. Certificates are issued only for full shares.
Shareholders who hold their shares through Prudential Securities will not
receive share certificates. Shareholders cannot utilize Expedited Redemption or
Check Redemption or have a Systematic Withdrawal Plan if they have been issued
certificates.
The Fund reserves the right in its sole discretion to reject any purchase
order (including an exchange into the Series) or to suspend or modify the
continuous offering of its shares. See "How to Sell Your Shares" below.
Your dealer is responsible for forwarding payment promptly to the Fund. The
Distributor reserves the right to cancel any purchase order for which payment
has not been received by the third business day following the investment.
Transactions in shares of the Series may be subject to postage and other
charges imposed by the dealer.
PURCHASES THROUGH PRUDENTIAL SECURITIES
If you have an account with Prudential Securities (or open such an account),
you may ask Prudential Securities to purchase shares of the Series on your
behalf. On the business day following confirmation that a free credit balance
(I.E., immediately available funds) exists in your account, Prudential
Securities will effect a purchase order for shares of the Series in an amount up
to the balance of the NAV determined on that day. Funds held by Prudential
Securities on behalf of its clients in the form of free credit balances are
delivered to the Fund by Prudential Securities and begin earning dividends the
second business day after receipt of the order by Prudential Securities.
Accordingly, Prudential Securities will have the use of such free credit
balances during this period.
Shares of the Series purchased by Prudential Securities on behalf of its
clients will be held by Prudential Securities as record holder. Prudential
Securities will therefore receive statements and dividends directly from the
Fund and will in turn provide investors with Prudential Securities account
statements reflecting purchases, redemptions and dividend payments. Although
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Prudential Securities clients who purchase shares of the Series through
Prudential Securities may not redeem shares of the Series by check, Prudential
Securities provides its clients with alternative forms of immediate access to
monies invested in shares of the Series.
Prudential Securities clients wishing additional information concerning
investment in shares of the Series made through Prudential Securities should
call their Prudential Securities financial adviser.
AUTOMATIC INVESTMENT (AUTOSWEEP)(FOR NON-COMMAND ACCOUNTS) Prudential
Securities has advised the Fund that it has automatic investment procedures
(Autosweep) pursuant to which it will make automatic investments of free credit
cash balances (Eligible Credit Balances) held in a client's brokerage account in
shares of the Series, if the Series is your Primary Money Sweep Fund. You may
designate the Series (or certain other Prudential money market funds) as your
Primary Money Sweep Fund. If the Series is your Primary Money Sweep Fund you can
purchase shares of the Series only through the automatic investment procedures
described below; no manual purchase orders will be accepted. You may change your
Primary Money Sweep Fund at any time by notifying your Prudential Securities
financial adviser. Under certain circumstances, you may elect not to have a
money market sweep feature for your account when you open your account.
For accounts other than IRAs and Benefit Plans, as defined below, shares of
the Series will be purchased by Prudential Securities as follows: in the case of
Eligible Credit Balances of $1,000 or more resulting from the proceeds of a
securities sale, maturity of a bond or call and Eligible Credit Balances of
$10,000 or more resulting from a non-trade related credit (E.G., receipt of a
dividend or interest payment or a cash payment into the securities account),
orders to purchase shares will be placed on the business day after such Eligible
Credit Balances become available in your account. For Eligible Credit Balances
of $1.00 or more not otherwise described above, orders to purchase shares will
be placed monthly on the last business day of the month. For IRAs and Benefit
Plans, having Eligible Credit Balances of $1.00 or more, orders to purchase
shares of the Series will be placed by Prudential Securities (i) on the
settlement date of the securities sale, in the case of Eligible Credit Balances
resulting from the proceeds of a securities sale, and (ii) on the business day
after receipt by Prudential Securities of the non-trade related credit
(including the maturity of a bond or a call), in the case of Eligible Credit
Balances resulting from a non-trade related credit. Each time an order resulting
from the settlement of a securities sale is placed, any non-trade related credit
in the client's account will also be invested.
The following chart shows the frequency and amount of the sweep for accounts
other than IRAs and Benefit Plans.
<TABLE>
<CAPTION>
DAILY MONTHLY
<S> <C> <C>
Eligible Credit Balances resulting from the proceeds of
a securities sale, maturity of a bond or call $1,000 or more
Eligible Credit Balances resulting from a non-trade
related credit $10,000 or more
Remaining Eligible Credit Balances $1.00 or more
</TABLE>
All shares purchased pursuant to these automatic investment procedures will be
issued at the NAV computed on the business day the order is entered and will
begin earning dividends on the following business day. Purchases through
Autosweep are subject to the Series' minimum initial investment requirement of
$1,000, which is waived for certain retirement and employee savings plans and
custodial accounts for the benefit of minors. Prudential Securities will have
the use of, and will retain the benefits of, Eligible Credit Balances in the
client's brokerage account until monies are delivered to the Fund. (Prudential
Securities delivers Federal Funds on the business day after settlement).
Eligible Credit Balances for purposes of Autosweep are measured as of the close
of business on the previous business day.
For the purposes of Autosweep, "Benefit Plans" include (i) employee benefit
plans as defined in Section 3(3) of the Employee Retirement Income Security Act
of 1974 (ERISA) other than governmental plans as defined in Section 3(32) of
ERISA and church
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<PAGE>
plans as defined in Section 3(33) of ERISA, (ii) pension, profit-sharing or
other employee benefit plans qualified under Section 401 of the Internal Revenue
Code and (iii) deferred compensation and annuity plans under Section 457 or
403(b)(7) of the Internal Revenue Code. "IRAs" are Individual Retirement
Accounts as defined in Section 408(a) of the Internal Revenue Code.
SELF-DIRECTED INVESTMENT. Prudential Securities clients not electing Autosweep
may continue to place orders for the purchase of shares of the Series through
Prudential Securities, subject to the minimum initial and subsequent investment
requirements described above.
A Prudential Securities client who has not elected Autosweep (Automatic
Investment) and who does not place a purchase order promptly after funds are
credited to his or her Prudential Securities account will have a free credit
balance with Prudential Securities and will not begin earning dividends on
shares of the Series until the second business day after receipt of the order by
Prudential Securities from the client. Accordingly, Prudential Securities will
have the use of such free credit balances during this period.
MANUAL INVESTMENT. Prudential Securities will accept manual purchase orders
for shares of the Series only for those clients (i) who are purchasing shares of
a Prudential money market fund which is not their Primary Money Sweep Fund or
(ii) who do not have a money market sweep feature in their account, as described
above under "Automatic Investment."
Prudential Securities clients eligible to make manual purchases, as described
above, are subject to the minimum initial investment of $1,000 the minimum
subsequent investment of $100, except that all minimum investment requirements
are waived for certain retirement and employee savings plans and custodial
accounts for the benefit of minors. On the business day after the purchase order
is received, Prudential Securities will place the order for shares of the Series
for settlement that day. Shares will be issued at the NAV determined on that day
and will begin earning dividends the next business day, which is the second
business day after receipt of the purchase order by Prudential Securities.
Prudential Securities will have the use of, and will retain the benefits of,
Eligible Credit Balances in the client's brokerage account until monies are
delivered to the Fund. (Prudential Securities delivers Federal Funds on the
business day after settlement).
PURCHASES THROUGH PRUSEC
You may purchase shares of the Series by placing an order with your Prusec
representative accompanied by payment for the purchase price of such shares and,
in the case of a new account, a completed application form. You should also
submit an IRS Form W-9. The Prusec representative will then forward these items
to the Transfer Agent. See "Purchase by Mail" below.
PURCHASE BY WIRE
For an initial purchase of shares of the Series by wire, you must first
telephone PMFS at (800) 225-1852 (toll-free) to receive an account number. The
following information will be requested: your name, address, tax identification
number, dividend distribution election, amount being wired and wiring bank.
Instructions should then be given by you to your bank to transfer funds by wire
to State Street Bank and Trust Company (State Street), Boston, Massachusetts,
Custody and Shareholder Services Division, Attention: Prudential Municipal
Series Fund, Connecticut Money Market Series, specifying on the wire the account
number assigned by PMFS and your name.
If you arrange for receipt by State Street of Federal Funds prior to the
calculation of NAV (4:30 P.M., New York time), on a business day, you may
purchase shares of the Series as of that day and receive dividends commencing on
the next business day. See "Net Asset Value" in the Statement of Additional
Information.
In making a subsequent purchase order by wire, you should wire State Street
directly, and should be sure that the wire specifies Prudential Municipal Series
Fund (Connecticut Money Market Series) and your name and individual account
number. It is not necessary to call PMFS to make subsequent purchase orders
utilizing Federal Funds. The minimum amount which may be invested by wire is
$1,000.
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<PAGE>
PURCHASE BY MAIL
Purchase orders for which remittance is to be made by check or money order may
be submitted directly by mail to Prudential Mutual Fund Services LLC, Attention:
Investment Services, P.O. Box 15020, New Brunswick, New Jersey 08906-5020,
together with payment for the purchase price of such shares and, in the case of
a new account, a completed application form. You should also submit an IRS Form
W-9. If PMFS receives an order to purchase shares of the Series and payment in
proper form prior to 4:30 P.M., New York time, the purchase order will be
effective that day and the investor will be entitled to dividends the following
business day. See "Taxes, Dividends and Distributions." Checks should be made
payable to Prudential Municipal Series Fund, Connecticut Money Market Series.
Certified checks are not necessary, but checks must be drawn on a bank located
in the United States. There are restrictions on the redemption of shares
purchased by check while the funds are being collected. See "How to Sell Your
Shares" below. The minimum initial investment by check is $1,000 and the minimum
subsequent investment by check is $100.
THE PRUDENTIAL ADVANTAGE ACCOUNT PROGRAM
Shares of the Series are offered to participants in the Prudential Advantage
Account Program (the Advantage Account Program), a financial services program
available to clients of Pruco Securities Corporation. Investors participating in
the Advantage Account Program may select the Series as their primary investment
vehicle. Such investors will have free credit cash balances of $1.00 or more in
their Securities Account (Available Cash) (a component of the Advantage Account
Program carried through Prudential Securities) automatically invested in shares
of the Series. Specifically, an order to purchase shares of the Series is placed
(i) in the case of Available Cash resulting from the proceeds of securities
sales, on the settlement date of the securities sale, and (ii) in the case of
Available Cash resulting from non-trade related credits (I.E., receipt of
dividends and interest payments, or a cash payment by the participant into his
or her Securities Account), on the business day after receipt by Prudential
Securities of the non-trade related credit.
All shares purchased pursuant to these automatic purchase procedures will
begin earning dividends on the business day after the order is placed.
Prudential Securities will arrange for investment in shares of the Series at
4:30 P.M. on the day the order is placed and cause payment to be made in Federal
Funds for the shares prior to 4:30 P.M. on the next business day. Prudential
Securities will have the use of free credit cash balances until delivery to the
Fund.
Redemptions will be automatically effected by Prudential Securities to satisfy
debit balances in a Securities Account created by activity therein or existing
under the Advantage Account Program, such as those incurred by use of the
Visa-Registered Trademark- Account, including Visa purchases, cash advances and
Visa Account checks. Each Advantage Account Program Securities Account will be
automatically scanned for debits each business day as of the close of business
on that day and after application of any free credit cash balances in the
account to such debits, a sufficient number of shares of the Series (if selected
as the primary fund) and, if necessary, shares of other Advantage Account funds
owned by the Advantage Account Program participant which have not been selected
as his or her primary fund or shares of a participant's money market funds
managed by PIFM which are not primary Advantage Account funds will be redeemed
as of that business day to satisfy any remaining debits in the Securities
Account. Shares may not be purchased until all debits, overdrafts and other
requirements in the Securities Account are satisfied.
Advantage Account Program charges and expenses are not reflected in the table
of Fund expenses. See "Fund Expenses."
For information on participation in the Advantage Account Program, you should
telephone (800) 235-7637 (toll-free).
COMMAND ACCOUNT PROGRAM
Shares of the Series are offered to participants in the Prudential Securities
COMMAND Account program, an integrated financial services program of Prudential
Securities. Investors having a COMMAND Account may select the Series as their
primary fund. Such investors will have free credit cash balances of $1.00 or
more in their Securities Account (Available Cash) (a component of the Command
Account program) automatically invested in shares of the Series as described
below. Specifically, an
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<PAGE>
order to purchase shares of the Series is placed (i) in the case of Available
Cash resulting from the proceeds of securities sales, on the settlement date of
the securities sale, and (ii) in the case of Available Cash resulting from
non-trade related credits (I.E., receipt of dividends and interest payments,
maturity of a bond or a cash payment by the participant into his or her
Securities Account), on the business day after receipt by Prudential Securities
of the non-trade related credit. These automatic purchase procedures are also
applicable for Corporate COMMAND Accounts.
All shares purchased pursuant to these automatic purchase procedures will
begin earning dividends on the business day after the order is placed.
Prudential Securities will arrange for investment in shares of the Series at
4:30 P.M., New York time, on the business day the order is placed and cause
payment to be made in Federal Funds for the shares prior to 4:30 P.M., New York
time, on the next business day. Prudential Securities will have the use of free
credit cash balances until delivery to the Fund. There are no minimum investment
requirements for participants in the COMMAND Account program.
Redemptions will be automatically effected by Prudential Securities to satisfy
debit balances in a Securities Account created by activity therein or existing
under the COMMAND program, such as those incurred by use of the
Visa-Registered Trademark- Gold Account, including Visa purchases, cash advances
and Visa Account checks. Each COMMAND program Securities Account will be
automatically scanned for debits monthly for all Visa purchases incurred during
that month and each business day as of the close of business on that day for all
cash advances and check charges as incurred and after application of any free
credit cash balances in the account to such debits, a sufficient number of
shares of the Series and, if necessary, shares of other COMMAND funds owned by
the COMMAND program participant which have not been selected as his or her
primary fund or shares of a participant's money market funds managed by PIFM
which are not primary COMMAND funds will be redeemed as of that business day to
satisfy any remaining debits in the Securities Account. The single monthly debit
for Visa purchases will be made on the twenty-fifth day of each month, or the
prior business day if the twenty-fifth falls on a weekend or holiday. Margin
loans will be utilized to satisfy debits remaining after the liquidation of all
shares of the Series in a Securities Account, and shares may not be purchased
until all debits, margin loans and other requirements in the Securities Account
are satisfied. COMMAND Account participants will not be entitled to dividends
declared on the date of redemption.
For information on participation in the COMMAND Account program, you should
telephone (800) 222-4321 (toll-free).
HOW TO SELL YOUR SHARES
YOU CAN REDEEM YOUR SHARES OF THE SERIES AT ANY TIME FOR CASH AT THE NAV NEXT
DETERMINED AFTER THE REDEMPTION REQUEST IS RECEIVED IN PROPER FORM BY THE
TRANSFER AGENT OR PRUDENTIAL SECURITIES. SEE "HOW THE FUND VALUES ITS SHARES."
Shares for which a redemption request is received by PMFS prior to 4:30 P.M.,
New York time, are entitled to a dividend on the day on which the request is
received. By pre-authorizing Expedited Redemption, you may arrange to have
payment for redeemed shares made in Federal Funds wired to your bank, normally
on the next bank business day following the date of receipt of the redemption
instructions. Should you redeem all of your shares, you will receive the amount
of all dividends declared for the month-to-date on those shares. See "Taxes,
Dividends and Distributions."
If redemption is requested by a corporation, partnership, trust or fiduciary,
written evidence of authority acceptable to the Transfer Agent must be submitted
before such request will be accepted. All correspondence and documents
concerning redemptions should be sent to the Fund in care of its Transfer Agent,
Prudential Mutual Fund Services LLC, Attention: Redemption Services, P.O. Box
15010, New Brunswick, New Jersey 08906-5010.
If the proceeds of the redemption (a) exceed $50,000, (b) are to be paid to a
person other than the record owner, (c) are to be sent to an address other than
the address on the Transfer Agent's records or (d) are to be paid to a
corporation, partnership, trust or fiduciary, the signature(s) on the redemption
request and on certificates, if any, or stock power must be guaranteed by an
"eligible guarantor institution." An "eligible guarantor institution" includes
any bank, broker, dealer or credit union. The Transfer Agent
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<PAGE>
reserves the right to request additional information from, and make reasonable
inquiries of, any eligible guarantor institution. For clients of Prusec, a
signature guarantee may be obtained from the agency or office manager of most
Prudential Insurance and Financial Services or Preferred Services offices.
NORMALLY, THE FUND MAKES PAYMENT ON THE NEXT BUSINESS DAY FOR ALL SHARES OF
THE SERIES REDEEMED, BUT IN ANY EVENT, PAYMENT IS MADE WITHIN SEVEN DAYS AFTER
RECEIPT BY PMFS OF SHARE CERTIFICATES AND/OR OF A REDEMPTION REQUEST IN PROPER
FORM. However, the Fund may suspend the right of redemption or postpone the date
of payment (a) for any periods during which the New York Stock Exchange is
closed (other than for customary weekend or holiday closings), (b) for any
periods when trading in the markets which the Fund normally utilizes is closed
or restricted or an emergency exists as determined by the SEC so that disposal
of the Series' investments or determination of its NAV is not reasonably
practicable or (c) for such other periods as the SEC may permit for protection
of the Series' shareholders.
PAYMENT FOR REDEMPTION OF RECENTLY PURCHASED SHARES WILL BE DELAYED UNTIL THE
FUND OR ITS TRANSFER AGENT HAS BEEN ADVISED THAT THE PURCHASE CHECK HAS BEEN
HONORED, UP TO 10 CALENDAR DAYS FROM THE TIME OF RECEIPT OF THE PURCHASE CHECK
BY THE TRANSFER AGENT. SUCH DELAY MAY BE AVOIDED BY PURCHASING SHARES BY WIRE OR
BY CERTIFIED OR CASHIER'S CHECK. THE FUND MAKES NO CHARGE FOR REDEMPTION.
REDEMPTION OF SHARES PURCHASED THROUGH PRUDENTIAL SECURITIES
Prudential Securities clients for whom Prudential Securities has purchased
shares of the Series may have these shares redeemed only by instructing their
Prudential Securities financial adviser orally or in writing.
Prudential Securities has advised the Fund that it has established procedures
pursuant to which shares of the Series held by a Prudential Securities client
having a deficiency in his or her Prudential Securities account will be redeemed
automatically to the extent of that deficiency to the nearest highest dollar
unless the client notifies Prudential Securities to the contrary. The amount of
the redemption will be the lesser of (a) the total net asset value of the
Series' shares held in the client's Prudential Securities account or (b) the
deficiency in the client's Prudential Securities account at the close of
business on the date such deficiency is due. Accordingly, a Prudential
Securities client who wishes to pay for a securities transaction or satisfy any
other debit balance in his or her account other than through this automatic
redemption procedure must do so prior to the day of settlement for such
securities transaction or the date the debit balance is incurred. In the case of
certain automatic redemptions, where Prudential Securities cannot anticipate
debits in the brokerage account (E.G., checks written against the account),
Prudential Securities clients will not be entitled to dividends declared on the
date of redemption; such dividends will not be retained by Prudential
Securities.
REDEMPTION OF SHARES PURCHASED THROUGH PMFS
If you purchase shares of the Series through PMFS, you may use Regular
Redemption, Expedited Redemption or Check Redemption. Prudential Securities
clients for whom Prudential Securities has purchased shares may not use such
services.
REGULAR REDEMPTION. You may redeem your shares by sending a written request,
accompanied by duly endorsed share certificates, if issued, to PMFS, Attention:
Redemption Services, P.O. Box 15010, New Brunswick, New Jersey 08906-5010. In
this case, all share certificates and certain written requests for redemption
must be endorsed by you with signature guaranteed, as described above. Regular
redemption is made by check sent to your address.
EXPEDITED REDEMPTION. By pre-authorizing Expedited Redemption, you may arrange
to have payment for redeemed shares made in Federal Funds wired to your bank,
normally on the next business day following redemption. In order to use
Expedited Redemption, you may so designate at the time the initial application
form is made or at a later date. Once the Expedited Redemption authorization
form has been completed, the signature on the authorization form guaranteed as
set forth above and the form returned to Prudential Mutual Fund Services LLC,
Attention: Account Maintenance, P.O. Box 15015, New Brunswick, New Jersey
08906-5015, requests for redemption may be made by telegraph, letter or
telephone. To request Expedited Redemption by
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<PAGE>
telephone, you should call PMFS at (800) 225-1852. Calls must be received by
PMFS before 4:30 P.M., New York time, to permit redemption as of such date.
Requests by letter should be addressed to Prudential Mutual Fund Services LLC,
at the address set forth above.
A signature guarantee is not required under Expedited Redemption once the
authorization form is properly completed and returned. The Expedited Redemption
privilege may be used only to redeem shares in an amount of $200 or more, except
that, if an account for which Expedited Redemption is requested has a net asset
value of less than $200, the entire account must be redeemed. The proceeds of
redeemed shares in the amount of $1,000 or more are transmitted by wire to your
account at a domestic commercial bank which is a member of the Federal Reserve
System. Proceeds of less than $1,000 are forwarded by check to your designated
bank account.
DURING PERIODS OF SEVERE MARKET OR ECONOMIC CONDITIONS, EXPEDITED REDEMPTION
MAY BE DIFFICULT TO IMPLEMENT AND YOU SHOULD REDEEM SHARES BY MAIL AS DESCRIBED
AS ABOVE.
CHECK REDEMPTION. At your request, State Street will establish a personal
checking account for you. Checks drawn on this account can be made payable to
the order of any person in any amount greater than $500. When such check is
presented to State Street for payment, State Street presents the check to the
Fund as authority to redeem a sufficient number of shares of the Series in the
shareholder's account to cover the amount of the check. If insufficient shares
are in the account, or if the purchase was made by check within 10 calendar
days, the check will be returned marked "insufficient funds." Checks in an
amount less than $500 will not be honored. Shares for which certificates have
been issued cannot be redeemed by check. There is a service charge of $5.00
payable to PMFS to establish a checking account and order checks.
INVOLUNTARY REDEMPTION. Because of the relatively high cost of maintaining an
account, the Fund reserves the right to redeem, upon 60 days' written notice, an
account which is reduced by a shareholder to a net asset value of $500 or less
due to redemption. You may avoid such redemption by increasing the net asset
value of your account to an amount in excess of $500.
REDEMPTION IN KIND. If the Trustees determine that it would be detrimental to
the best interests of the remaining shareholders of the Series to make payment
wholly or partly in cash, the Fund may pay the redemption price in whole or in
part by a distribution in kind of securities from the portfolio of the Series,
in lieu of cash, in conformity with the applicable rules of the SEC. Securities
will be readily marketable and will be valued in the same manner as in a regular
redemption. See "How the Fund Values its Shares." If your shares are redeemed in
kind, you will incur brokerage costs in converting the assets into cash. The
Fund has elected to be governed by Rule 18f-1 under the Investment Company Act
under which the Fund is obligated to redeem shares solely in cash up to the
lesser of $250,000 or one percent of the net asset value of the Fund during any
90-day period for any one shareholder.
CLASS B AND CLASS C PURCHASE PRIVILEGE. You may direct that the proceeds of a
redemption of Series shares be invested in Class B or Class C shares of any
Prudential Mutual Fund by calling your Prudential Securities financial adviser
or the Transfer Agent at (800) 225-1852. The transaction will be effected on the
basis of the relative NAV.
HOW TO EXCHANGE YOUR SHARES
AS A SHAREHOLDER OF THE SERIES, YOU HAVE AN EXCHANGE PRIVILEGE WITH OTHER
SERIES OF THE FUND AND CERTAIN OTHER PRUDENTIAL MUTUAL FUNDS (THE EXCHANGE
PRIVILEGE), INCLUDING ONE OR MORE SPECIFIED MONEY MARKET FUNDS AND FUNDS SOLD
WITH AN INITIAL SALES CHARGE, SUBJECT TO THE MINIMUM INVESTMENT REQUIREMENTS OF
SUCH FUNDS. You may exchange your shares for Class A shares of the other series
of the Fund or Class A shares of the Prudential Mutual Funds on the basis of the
relative NAV per share plus the applicable sales charge. No additional sales
charge is imposed in connection with subsequent exchanges. You may not exchange
your shares for Class B shares of the Prudential Mutual Funds, except that
shares acquired prior to January 22, 1990 subject to a contingent deferred sales
charge can be exchanged for Class B shares. See "Class B and Class C
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<PAGE>
Purchase Privilege" above and "Shareholder Investment Account--Exchange
Privilege" in the Statement of Additional Information. An exchange will be
treated as a redemption and purchase for tax purposes. You may not exchange your
shares for Class C or Class Z shares of other series of the Fund or Class C or
Class Z shares of the Prudential Mutual Funds.
IN ORDER TO EXCHANGE SHARES BY TELEPHONE, YOU MUST AUTHORIZE THE TELEPHONE
EXCHANGE PRIVILEGE ON YOUR INITIAL APPLICATION FORM OR BY WRITTEN NOTICE TO THE
TRANSFER AGENT AND HOLD SHARES IN NON-CERTIFICATE FORM. Thereafter, you may call
the Fund at (800) 225-1852 to execute a telephone exchange of shares, weekdays,
except holidays, between the hours of 8:00 A.M. and 6:00 P.M., New York time.
For your protection and to prevent fraudulent exchanges, your telephone call
will be recorded and you will be asked to provide your personal indentification
number. A written confirmation of the exchange transaction will be sent to you.
NEITHER THE FUND NOR ITS AGENTS WILL BE LIABLE FOR ANY LOSS, LIABILITY OR COST
WHICH RESULTS FROM ACTING UPON INSTRUCTIONS REASONABLY BELIEVED TO BE GENUINE
UNDER THE FOREGOING PROCEDURES. All exchanges will be made on the basis of the
relative NAV of the two funds (or series) next determined after the request is
received in good order. The Exchange Privilege is available only in states where
the exchange may legally be made.
IF YOU HOLD SHARES THROUGH PRUDENTIAL SECURITIES, YOU MUST EXCHANGE YOUR
SHARES BY CONTACTING YOUR PRUDENTIAL SECURITIES FINANCIAL ADVISER.
IF YOU HOLD CERTIFICATES, THE CERTIFICATES, SIGNED IN THE NAME(S) SHOWN ON THE
FACE OF THE CERTIFICATES, MUST BE RETURNED IN ORDER FOR THE SHARES TO BE
EXCHANGED. SEE "HOW TO SELL YOUR SHARES" ABOVE.
You may also exchange shares by mail by writing to Prudential Mutual Fund
Services LLC, Attention: Exchange Processing, P.O. Box 15010, New Brunswick, New
Jersey 08906-5010.
IN PERIODS OF SEVERE MARKET OR ECONOMIC CONDITIONS, THE TELEPHONE EXCHANGE OF
SHARES MAY BE DIFFICULT TO IMPLEMENT AND YOU SHOULD MAKE EXCHANGES BY MAIL BY
WRITING TO PRUDENTIAL MUTUAL FUND SERVICES LLC, AT THE ADDRESS NOTED ABOVE.
The Exchange Privilege is not a right and may be suspended, terminated or
modified on 60 days' notice to shareholders.
FREQUENT TRADING. The Fund and the other Prudential Mutual Funds are not
intended to serve as vehicles for frequent trading in response to short-term
fluctuations in the market. Due to the disruptive effect that market timing
investment strategies and excessive trading can have on efficient portfolio
management, each Prudential Mutual Fund and the Fund reserves the right to
refuse purchase orders and exchanges by any person, group or commonly controlled
accounts, if, in the Manager's sole judgment, such person, group or accounts
were following a market timing strategy or were otherwise engaging in excessive
trading (Market Timers).
To implement this authority to protect the Fund and its shareholders from
excessive trading, the Fund will reject all exchanges and purchases from a
Market Timer unless the Market Timer has entered into a written agreement with
the Fund or its affiliates pursuant to which the Market Timer has agreed to
abide by certain procedures, which include a daily dollar limit on trading. The
Fund may notify the Market Timer of rejection of an exchange or purchase order
subsequent to the day on which the order was placed.
SHAREHOLDER SERVICES
In addition to the Exchange Privilege, you can take advantage of the following
services and privileges:
- AUTOMATIC REINVESTMENT OF DIVIDENDS AND/OR DISTRIBUTIONS. For your
convenience, all dividends and distributions are automatically reinvested in
full and fractional shares of the Series at NAV. You may direct the Transfer
Agent in writing not less than 5 full business days prior to the record date to
have subsequent dividends and/or distributions sent in cash rather than
reinvested. If you hold shares through Prudential Securities, you should contact
your financial adviser.
24
<PAGE>
- AUTOMATIC SAVINGS ACCUMULATION PLAN (ASAP). Under ASAP you may make regular
purchases of the Series' shares in amounts as little as $50 via an automatic
charge to a bank account or Prudential Securities account (including a Command
Account). For additional information about this service, you may contact your
Prudential Securities financial adviser, Prusec representative or the Transfer
Agent directly.
- SYSTEMATIC WITHDRAWAL PLAN. A systematic withdrawal plan is available for
shareholders which provides for monthly or quarterly checks. See "How to Sell
Your Shares."
- MULTIPLE ACCOUNTS. Special procedures have been designed for banks and other
institutions that wish to open multiple accounts. An institution may open a
single master account by filing an application form with the Transfer Agent,
Attention: Customer Service, P.O. Box 15005, New Brunswick, New Jersey 08906,
signed by personnel authorized to act for the institution. Individual
sub-accounts may be opened at the time the master account is opened by listing
them, or they may be added at a later date by written advice or by filing forms
supplied by the Fund. Procedures are available to identify sub-accounts by name
and number within the master account name. The investment minimums set forth
above are applicable to the aggregate amounts invested by a group and not to the
amount credited to each sub-account.
- REPORTS TO SHAREHOLDERS. The Fund will send you annual and semi-annual
reports. The financial statements appearing in annual reports are audited by
independent accountants. In order to reduce duplicate mailing and printing
expenses, the Fund will provide one annual and semi-annual shareholder report
and annual prospectus per household. You may request additional copies of such
reports by calling (800) 225-1852 or by writing to the Fund at Gateway Center
Three, 100 Mulberry Street, Newark, New Jersey 07102-4077. In addition, monthly
unaudited financial data is available upon request from the Fund.
- SHAREHOLDER INQUIRIES. Inquiries should be addressed to the Fund at Gateway
Center Three, 100 Mulberry Street, Newark, New Jersey 07102-4077, or by
telephone, at (800) 225-1852 (toll-free) or, from outside the U.S.A., at (908)
417-7555 (collect).
For additional information regarding the services and privileges described
above, see "Shareholder Investment Account" in the Statement of Additional
Information.
25
<PAGE>
THE PRUDENTIAL MUTUAL FUND FAMILY
Prudential Investments Fund Management offers a broad range of mutual funds
designed to meet your individual needs. We welcome you to review the investment
options available through our family of funds. For more information on the
Prudential Mutual Funds, including charges and expenses, contact your Prudential
Securities financial adviser or Prusec representative or telephone the Fund at
(800) 225-1852 for a free prospectus. Read the prospectus carefully before you
invest or send money.
TAXABLE BOND FUNDS
--------------------------
Prudential Diversified Bond Fund, Inc.
Prudential Government Income Fund, Inc.
Prudential Government Securities Trust
Short-Intermediate Term Series
Prudential High Yield Fund, Inc.
Prudential Mortgage Income Fund, Inc.
Prudential Structured Maturity Fund, Inc.
Income Portfolio
The BlackRock Government Income Trust
TAX-EXEMPT BOND FUNDS
-----------------------------
Prudential California Municipal Fund
California Series
California Income Series
Prudential Municipal Bond Fund
High Yield Series
Insured Series
Intermediate Series
Prudential Municipal Series Fund
Florida Series
Maryland Series
Massachusetts Series
Michigan Series
New Jersey Series
New York Series
North Carolina Series
Ohio Series
Pennsylvania Series
Prudential National Municipals Fund, Inc.
GLOBAL FUNDS
--------------------
Prudential Europe Growth Fund, Inc.
Prudential Global Genesis Fund, Inc.
Prudential Global Limited Maturity Fund, Inc.
Limited Maturity Portfolio
Prudential Intermediate Global Income Fund, Inc.
Prudential International Bond Fund, Inc.
Prudential Natural Resources Fund, Inc.
Prudential Pacific Growth Fund, Inc.
Prudential World Fund, Inc.
Global Series
International Stock Series
The Global Government Plus Fund, Inc.
The Global Total Return Fund, Inc.
Global Utility Fund, Inc.
EQUITY FUNDS
--------------------
Prudential Balanced Fund
Prudential Distressed Securities Fund, Inc.
Prudential Dryden Fund
Prudential Active Balanced Fund
Prudential Stock Index Fund
Prudential Small-Cap Index Fund
Prudential Bond Market Index Fund
Prudential Pacific Index Fund
Prudential Europe Index Fund
Prudential Emerging Growth Fund, Inc.
Prudential Equity Fund, Inc.
Prudential Equity Income Fund
Prudential Jennison Series Fund, Inc.
Prudential Jennison Growth Fund
Prudential Jennison Growth & Income Fund
Prudential Multi-Sector Fund, Inc.
Prudential Small Cap Quantum Fund, Inc.
Prudential Small Company Value Fund, Inc.
Prudential Utility Fund, Inc.
Nicholas-Applegate Fund, Inc.
Nicholas-Applegate Growth Equity Fund
MONEY MARKET FUNDS
--------------------------
- - TAXABLE MONEY MARKET FUNDS
Prudential Government Securities Trust
Money Market Series
U.S. Treasury Money Market Series
Prudential Special Money Market Fund, Inc.
Money Market Series
Prudential MoneyMart Assets, Inc.
- - TAX-FREE MONEY MARKET FUNDS
Prudential Tax-Free Money Fund, Inc.
Prudential California Municipal Fund
California Money Market Series
Prudential Municipal Series Fund
Connecticut Money Market Series
Massachusetts Money Market Series
New Jersey Money Market Series
New York Money Market Series
- - COMMAND FUNDS
Command Money Fund
Command Government Fund
Command Tax-Free Fund
- - INSTITUTIONAL MONEY MARKET FUNDS
Prudential Institutional Liquidity Portfolio, Inc.
Institutional Money Market Series
A-1
<PAGE>
No dealer, sales representative or any other person has been authorized to give
any information or to make any representations, other than those contained in
this Prospectus, in connection with the offer contained in this Prospectus, and,
if given or made, such other information or representations must not be relied
upon as having been authorized by the Fund or the Distributor. This Prospectus
does not constitute an offer by the Fund or by the Distributor to sell or a
solicitation of any offer to buy any of the securities offered hereby in any
jurisdiction to any person to whom it is unlawful to make such offer in such
jurisdiction.
-------------------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---
<S> <C>
FUND HIGHLIGHTS................................. 2
What are the Series' Risk Factors and Special
Characteristics?............................. 2
FUND EXPENSES................................... 4
FINANCIAL HIGHLIGHTS............................ 5
CALCULATION OF YIELD............................ 6
HOW THE FUND INVESTS............................ 6
Investment Objective and Policies............. 6
Other Investments and Policies................ 10
Investment Restrictions....................... 10
HOW THE FUND IS MANAGED......................... 10
Manager....................................... 11
Distributor................................... 11
Portfolio Transactions........................ 13
Custodian and Transfer and Dividend Disbursing
Agent........................................ 13
HOW THE FUND VALUES ITS SHARES.................. 13
TAXES, DIVIDENDS AND DISTRIBUTIONS.............. 13
GENERAL INFORMATION............................. 15
Description of Shares......................... 15
Additional Information........................ 16
SHAREHOLDER GUIDE............................... 16
How to Buy Shares of the Fund................. 16
How to Sell Your Shares....................... 21
How to Exchange Your Shares................... 23
Shareholder Services.......................... 24
THE PRUDENTIAL MUTUAL FUND FAMILY............... A-1
</TABLE>
- -------------------------------------------
MF154A 444575T
CUSIP No: 74435M-64-8
PRUDENTIAL
MUNICIPAL
SERIES FUND
----------------------------------------
CONNECTICUT MONEY
MARKET SERIES
PROSPECTUS
October 30, 1997
www.prudential.com
[LOGO] Prudential
Investments
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
(FLORIDA SERIES)
- --------------------------------------------------------------------------------
PROSPECTUS DATED OCTOBER 30, 1997
- ----------------------------------------------------------------
Prudential Municipal Series Fund (the Fund) (Florida Series) (the Series) is one
of thirteen series of an open-end, management investment company, or mutual
fund. This Series is non-diversified and seeks to provide the maximum amount of
income that is exempt from federal income taxes consistent with the preservation
of capital and to invest in securities which will enable its shares to be exempt
from the Florida intangibles tax and, in conjunction therewith, the Series may
invest in debt securities with the potential for capital gain. The net assets of
the Series will be invested primarily in obligations within the four highest
ratings of Moody's Investors Service, Standard & Poor's Ratings Group or another
nationally recognized statistical rating organization or in unrated securities
which, in the opinion of the Fund's investment adviser, are of comparable
quality. The Series may, however, 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. Subject to
the limitations described herein, the Series may utilize derivatives, including
buying and selling futures contracts and options thereon for the purpose of
hedging its portfolio securities. There can be no assurance that the Series'
investment objective will be achieved. See "How the Fund Invests--Investment
Objective and Policies." The Fund's address is Gateway Center Three, 100
Mulberry Street, Newark, New Jersey 07102-4077, and its telephone number is
(800) 225-1852.
This Prospectus sets forth concisely the information about the Fund and the
Florida Series that a prospective investor should know before investing.
Additional information about the Fund has been filed with the Securities and
Exchange Commission in a Statement of Additional Information dated October 30,
1997, which information is incorporated herein by reference (is legally
considered a part of this Prospectus) and is available without charge upon
request to the Fund at the address or telephone number noted above.
- --------------------------------------------------------------------------------
INVESTORS ARE ADVISED TO READ THIS PROSPECTUS AND RETAIN IT FOR FUTURE
REFERENCE.
- --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
<PAGE>
FUND HIGHLIGHTS
The following summary is intended to highlight certain information contained
in this Prospectus and is qualified in its entirety by the more detailed
information appearing elsewhere herein.
WHAT IS PRUDENTIAL MUNICIPAL SERIES FUND?
Prudential Municipal Series Fund is a mutual fund whose shares are offered
in thirteen series, each of which operates as a separate fund. A mutual fund
pools the resources of investors by selling its shares to the public and
investing the proceeds of such sale in a portfolio of securities designed to
achieve its investment objective. Technically, the Fund is an open-end,
management investment company. Only the Florida Series is offered through
this Prospectus.
WHAT IS THE SERIES' INVESTMENT OBJECTIVE?
The Series' investment objective is to maximize current income that is
exempt from federal income taxes consistent with the preservation of capital
and to invest in securities which will enable its shares to be exempt from
the Florida intangibles tax. It seeks to achieve this objective by investing
primarily in Florida State, municipal and local government obligations and
obligations of other qualifying issuers, such as issuers located in Puerto
Rico, the Virgin Islands and Guam, which, in the opinion of counsel, are
exempt from the Florida intangibles tax and which pay income exempt from
federal income tax (Florida Obligations). There can be no assurance that the
Series' investment objective will be achieved. See "How the Fund
Invests--Investment Objective and Policies" at page 9.
WHAT ARE THE SERIES' RISK FACTORS AND SPECIAL CHARACTERISTICS?
In seeking to achieve its investment objective, the Series will invest at
least 80% of the value of its total assets in Florida Obligations. This
degree of investment concentration makes the Series particularly susceptible
to factors adversely affecting issuers of Florida Obligations. The Series
may invest up to 30% of its total assets in high yield securities, commonly
known as "junk bonds," which may be considered speculative and are subject
to the risk of an issuer's inability to meet principal and interest payments
on the obligations as well as price volatility. See "How the Fund Invests--
Investment Objective and Policies--Risk Factors Relating to Investing in
High Yield Municipal Obligations" at page 12. To hedge against changes in
interest rates, the Series may also purchase put options and engage in
transactions involving derivatives, including financial futures contracts
and options thereon. See "How the Fund Invests--Investment Objective and
Policies--Futures Contracts and Options Thereon" at page 13. As with an
investment in any mutual fund, an investment in this Series can decrease and
you can lose money.
The Series is non-diversified so that more than 5% of its total assets may
be invested in the securities of one or more issuers. Investment in a
non-diversified portfolio involves more risk than investment in a
diversified portfolio. See "How the Fund Invests--Investment Objective and
Policies--Special Considerations" at page 14.
WHO MANAGES THE FUND?
Prudential Investments Fund Management LLC (PIFM or the Manager) is the
Manager of the Fund and is compensated for its services at an annual rate of
.50 of 1% of the Series' average daily net assets. As of September 30, 1997,
PIFM served as manager or administrator to 63 investment companies,
including 41 mutual funds, with aggregate assets of approximately $59.9
billion. The Prudential Investment Corporation, which does business under
the name Prudential Investments (PI, the Subadviser or the investment
adviser) furnishes investment advisory services in connection with the
management of the Fund under a Subadvisory Agreement with PIFM. See "How the
Fund is Managed--Manager" at page 16.
WHO DISTRIBUTES THE SERIES' SHARES?
Prudential Securities Incorporated (Prudential Securities, PSI or the
Distributor), a major securities underwriter and securities and commodities
broker, acts as the Distributor of the Series' Class A, Class B, Class C and
Class Z shares and is paid a distribution and service fee with respect to
Class A shares which is currently being charged at the annual rate of .10 of
1% of the average daily net assets of the Class A shares and is paid a
distribution and service fee with respect to Class B shares at the annual
rate of .50 of 1% of the average daily net assets of the Class B shares and
is paid an annual distribution and service fee with respect to Class C
shares at the rate of .75 of 1% of the average daily net assets of the
2
<PAGE>
Class C shares. Prudential Securities incurs the expense of distributing the
Series' Class Z shares under a Distribution Agreement with the Fund, none of
which is reimbursed or paid for by the Fund.
See "How the Fund is Managed--Distributor" at page 17.
WHAT IS THE MINIMUM INVESTMENT?
The minimum initial investment is $1,000 for Class A and Class B shares
and $5,000 for Class C shares. The minimum subsequent investment is $100 for
Class A, Class B and Class C shares. Class Z shares are not subject to any
minimum investment requirements. There is no minimum investment requirement
for certain employee savings plans. For purchases made through the Automatic
Savings Accumulation Plan, the minimum initial and subsequent investment is
$50. See "Shareholder Guide--How to Buy Shares of the Fund" at page 24 and
"Shareholder Guide--Shareholder Services" at page 33.
HOW DO I PURCHASE SHARES?
You may purchase shares of the Series through Prudential Securities, Pruco
Securities Corporation (Prusec) or directly from the Fund through its
transfer agent, Prudential Mutual Fund Services LLC (PMFS or the Transfer
Agent), at the net asset value per share (NAV) next determined after receipt
of your purchase order by the Transfer Agent or Prudential Securities plus a
sales charge which may be imposed either (i) at the time of purchase (Class
A shares) or (ii) on a deferred basis (Class B or Class C shares). Class Z
shares are offered to a limited group of investors at net asset value
without any sales charge. See "How the Fund Values its Shares" at page 19
and "Shareholder Guide--How to Buy Shares of the Fund" at page 24.
WHAT ARE MY PURCHASE ALTERNATIVES?
The Series offers four classes of shares:
- Class A Shares:
Sold with an initial sales charge of up to 3% of the
offering price.
- Class B Shares:
Sold without an initial sales charge but are subject to
a contingent deferred sales charge or CDSC (declining
from 5% to zero of the lower of the amount invested or
the redemption proceeds) which will be imposed on
certain redemptions made within six years of purchase.
Although Class B shares are subject to higher ongoing
distribution-related expenses than Class A shares, Class
B shares will automatically convert to Class A shares
(which are subject to lower ongoing distribution-related
expenses) approximately seven years after purchase.
- Class C Shares:
Sold without an initial sales charge and, for one year
after purchase, are subject to a 1% CDSC on redemptions.
Like Class B shares, Class C shares are subject to
higher ongoing distribution-related expenses than Class
A shares but do not convert to another class.
- Class Z Shares:
Sold without either an initial or contingent deferred
sales charge to a limited group of investors. Class Z
shares are not subject to any ongoing service or
distribution expenses.
See "Shareholder Guide--Alternative Purchase Plan" at page 25.
HOW DO I SELL MY SHARES?
You may redeem your shares at any time at the NAV next determined after
Prudential Securities or the Transfer Agent receives your sell order.
However, the proceeds of redemptions of Class B and Class C shares may be
subject to a CDSC. See "Shareholder Guide--How to Sell Your Shares" at page
28.
HOW ARE DIVIDENDS AND DISTRIBUTIONS PAID?
The Series expects to declare daily and pay monthly dividends of net
investment income, if any, and make distributions of any net capital gains
at least annually. Dividends and distributions will be automatically
reinvested in additional shares of the Series at NAV without a sales charge
unless you request that they be paid to you in cash. See "Taxes, Dividends
and Distributions" at page 20.
3
<PAGE>
FUND EXPENSES
(FLORIDA SERIES)
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES CLASS C SHARES CLASS Z SHARES
-------------- ------------------------------ --------------------------- --------------
<S> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES+
Maximum Sales Load Imposed
on Purchases
(as a percentage of
offering price)............ 3% None None None
Maximum Deferred Sales Load
(as a percentage of
original purchase price or
redemption proceeds,
whichever is lower)........ None 5% during the first year, 1% on redemptions made None
decreasing by 1% annually to within one year of purchase
1% in the fifth and sixth
years and 0% the seventh year*
Maximum Sales Load Imposed
on Reinvested
Dividends.................. None None None None
Redemption Fees............. None None None None
Exchange Fee................ None None None None
</TABLE>
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES CLASS C SHARES CLASS Z SHARES
-------------- -------------- -------------- ---------------
<S> <C> <C> <C> <C>
ANNUAL FUND OPERATING EXPENSES**
(as a percentage of average net assets)
Management Fees..................... .50% .50% .50% .50%
12b-1 Fees (After Reduction)........ .10%++ .50% .75% None
Other Expenses...................... .17% .17% .17% .17%
--
--- --- ---
Total Fund Operating Expenses (After
Reduction)......................... .77% 1.17% 1.42% .67%
--
--
--- --- ---
--- --- ---
</TABLE>
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
EXAMPLE
You would pay the following expenses on
a $1,000 investment, assuming
(1) 5% annual return and (2)
redemption at the end of each time
period:
Class A............................. $38 $54 $ 72 $123
Class B............................. $62 $67 $ 74 $126
Class C............................. $24 $45 $ 78 $170
Class Z............................. $ 7 $22 $ 38 $ 84
You would pay the following expenses on
the same investment, assuming
no redemption:
Class A............................. $38 $54 $ 72 $123
Class B............................. $12 $37 $164 $126
Class C............................. $14 $45 $ 78 $170
Class Z............................. $ 7 $22 $ 38 $ 84
</TABLE>
The above examples are based on restated data for the Series' fiscal year
ended August 31, 1997. THE EXAMPLES SHOULD NOT BE CONSIDERED A
REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER
OR LESS THAN THOSE SHOWN.
The purpose of this table is to assist investors in understanding the
various costs and expenses that an investor in the Series will bear,
whether directly or indirectly. For more complete descriptions of the
various costs and expenses, see "How the Fund is Managed." "Other
Expenses" includes operating expenses of the Series, such as Trustees' and
professional fees, registration fees, reports to shareholders and transfer
agency and custodian fees.
- ---------------
* Class B shares will automatically convert to Class A shares approximately
seven years after purchase. See "Shareholder Guide--Conversion Feature--
Class B Shares."
** The expense information in the table has been restated to reflect current
fees. Effective September 1, 1997, PIFM eliminated the management fee
waiver (.20 of 1%). See "How the Fund is Managed--Manager--Fee Waivers
and Subsidy."
+ Pursuant to rules of the National Association of Securities Dealers, Inc.,
the aggregate initial sales charges, deferred sales charges and
asset-based sales charges on shares of the Series may not exceed 6.25% of
total gross sales, subject to certain exclusions. This 6.25% limitation
is imposed on each class of the Series rather than on a per shareholder
basis. Therefore, long-term shareholders of the Series may pay more in
total sales charges than the economic equivalent of 6.25% of such
shareholders' investment in such shares. See "How the Fund is
Managed--Distributor."
++ Although the Class A Distribution and Service Plan provides that the Fund
may pay a distribution fee of up to .30 of 1% per annum of the average
daily net assets of the Class A shares of the Series, the Distributor has
agreed to limit its distribution fees with respect to the Class A shares
of the Series to no more than .10 of 1% of the average daily net asset
value of the Class A shares of the Series for the fiscal year ending
August 31, 1998. Total Fund Operating Expenses (Before Waiver and
Subsidy) of the Class A shares without such limitation would be .97%. See
"How the Fund is Managed-- Distributor."
4
<PAGE>
FINANCIAL HIGHLIGHTS
(FOR A SHARE OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT EACH OF THE INDICATED
PERIODS)
(CLASS A SHARES)
The following financial highlights, for the fiscal year ended August 31, 1997,
have been audited by Price Waterhouse LLP, independent accountants, and by
Deloitte and Touche LLP, independent auditors, for the four years ended August
31, 1996. Each of the respective reports by Price Waterhouse LLP and Deloitte &
Touche LLP on such financial statements was unqualified. This information should
be read in conjunction with the financial statements and notes thereto, which
appear in the Statement of Additional Information. The following financial
highlights contain selected data for a Class A share of beneficial interest
outstanding, total return, ratios to average net assets and other supplemental
data for the periods indicated. This information is based on data contained in
the financial statements. Further performance information is contained in the
annual report, which may be obtained without charge. See "Shareholder Guide--
Shareholder Services--Reports to Shareholders."
<TABLE>
<CAPTION>
CLASS A
-------------------------------------------------------------------------------
DECEMBER 28,
1990 (a)
YEAR ENDED AUGUST 31, THROUGH
--------------------------------------------------------------- AUGUST 31,
1997 1996 1995 1994 1993 1992 1991
-------- -------- -------- -------- -------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.... $ 10.11 $ 10.06 $ 9.91 $ 10.87 $ 10.27 $ 9.76 $ 9.55
-------- -------- -------- -------- -------- -------- -------------
INCOME FROM INVESTMENT OPERATIONS
Net investment income (c)............... .54 .57 .59 .59 .57 .65 .44
Net realized and unrealized gain (loss)
on investment transactions............ .31 .05 .15 (.76) .73 .51 .21
-------- -------- -------- -------- -------- -------- -------------
Total from investment operations........ .85 .62 .74 (.17) 1.30 1.16 .65
-------- -------- -------- -------- -------- -------- -------------
LESS DISTRIBUTIONS
Dividends from net investment income.... (.54) (.57) (.59) (.59) (.57) (.65) (.44)
Distribution in excess of net investment
income................................ (.01) -- -- -- -- -- --
Distributions from net realized gains... -- -- -- (.20) (.13) -- --
-------- -------- -------- -------- -------- -------- -------------
Total distributions..................... (.55) (.57) (.59) (.79) (.70) (.65) (.44)
-------- -------- -------- -------- -------- -------- -------------
Net asset value, end of year............ $ 10.41 $ 10.11 $ 10.06 $ 9.91 $ 10.87 $ 10.27 $ 9.76
-------- -------- -------- -------- -------- -------- -------------
-------- -------- -------- -------- -------- -------- -------------
TOTAL RETURN (d):....................... 8.65% 6.20% 7.85% (1.69)% 13.78% 12.26% 6.90%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)........... $ 92,579 $101,999 $120,963 $134,849 $148,900 $104,335 $63,929
Average net assets (000)................ $ 97,700 $112,266 $124,259 $146,489 $123,820 $ 82,893 $41,528
Ratios to average net assets (c):
Expenses, including distribution
fees................................. .57% .37% .24% .20% .20% .09% 0
Expenses, excluding distribution
fees................................. .47% .27% .17% .20% .20% .09% 0
Net investment income................. 5.32% 5.56% 6.04% 5.67% 5.94% 6.41% 6.68%(b)
Portfolio turnover rate................. 22% 68% 65% 75% 68% 56% 39%
</TABLE>
- ---------------
(a) Commencement of offering of Class A shares.
(b) Annualized.
(c) Net of expense subsidy and management fee waiver.
(d) Total return does not consider the effects of sales loads. Total
return is calculated assuming a purchase of shares on the first day
and a sale on the last day of each period reported and includes
reinvestment of dividends and distributions. Total returns for
periods of less than a full year are not annualized.
5
<PAGE>
FINANCIAL HIGHLIGHTS
(FOR A SHARE OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT EACH OF THE INDICATED
PERIODS)
(CLASS B SHARES)
The following financial highlights, for the fiscal year ended August 31, 1997,
have been audited by Price Waterhouse LLP, independent accountants, and by
Deloitte and Touche LLP, independent auditors, for the four years ended August
31, 1996. Each of the respective reports by Price Waterhouse LLP and Deloitte &
Touche LLP on such financial statements was unqualified. This information should
be read in conjunction with the financial statements and the notes thereto,
which appear in the Statement of Additional Information. The following financial
highlights contain selected data for a Class B share of beneficial interest
outstanding, total return, ratios to average net assets and other supplemental
data for the periods indicated. This information is based on data contained in
the financial statements. Further performance information is contained in the
annual report, which may be obtained without charge. See "Shareholder
Guide--Shareholder Services--Reports to Shareholders."
<TABLE>
<CAPTION>
CLASS B
-----------------------------------------------
AUGUST 1,
1994 (a)
YEAR ENDED AUGUST 31, THROUGH
------------------------------ AUGUST 31,
1997 1996 1995 1994
-------- -------- -------- --------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year..... $ 10.11 $ 10.06 $ 9.91 $ 9.95
-------- -------- -------- -----
INCOME FROM INVESTMENT OPERATIONS
Net investment income (c).............. .50 .53 .55 .04
Net realized and unrealized gain (loss)
on investment transactions........... .31 .05 .15 (.04)
-------- -------- -------- -----
Total from investment operations....... .81 .58 .70 --
-------- -------- -------- -----
LESS DISTRIBUTIONS
Dividends from net investment income... (.50) (.53) (.55) (.04)
Distributions in excess of net
investment income.................... (.01) -- -- --
-------- -------- -------- -----
Total distributions.................... (.51) (.53) (.55) (.04)
-------- -------- -------- -----
Net asset value, end of period......... $ 10.41 $ 10.11 $ 10.06 $ 9.91
-------- -------- -------- -----
-------- -------- -------- -----
TOTAL RETURN (d):...................... 8.22% 5.79% 7.39% (0.05)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000).......... $ 18,820 $ 14,699 $ 8,326 $ 582
Average net assets (000)............... $ 17,565 $ 12,570 $ 4,699 $ 118
Ratios to average net assets (c):
Expenses, including distribution
fee................................. .97% .77% .67% .70%(b)
Expenses, excluding distribution
fee................................. .47% .27% .17% .20%(b)
Net investment income................ 4.92% 5.16% 5.56% 6.21%(b)
Portfolio turnover rate................ 22% 68% 65% 75%
</TABLE>
- ------------
(a) Commencement of offering of Class B shares.
(b) Annualized.
(c) Net of expense subsidy and management fee waiver.
(d) Total return does not consider the effects of sales loads. Total return
is calculated assuming a purchase of shares on the first day and a
sale on the last day of each period reported and includes reinvestment
of dividends and distributions. Total returns for periods of less than
a full year are not annualized.
6
<PAGE>
FINANCIAL HIGHLIGHTS
(FOR A SHARE OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT EACH OF THE INDICATED
PERIODS)
(CLASS C SHARES)
The following financial highlights, for the fiscal year ended August 31, 1997,
have been audited by Price Waterhouse LLP, independent accountants, and by
Deloitte and Touche LLP, independent auditors, for the three years ended August
31, 1996 and for the period from July 26, 1993 through August 31, 1993. Each of
the respective reports by Price Waterhouse LLP and Deloitte & Touche LLP on such
financial statements was unqualified. This information should be read in
conjunction with the financial statements and the notes thereto, which appear in
the Statement of Additional Information. The following financial highlights
contain selected data for a Class C share of beneficial interest outstanding,
total return, ratios to average net assets and other supplemental data for the
periods indicated. This information is based on data contained in the financial
statements. Further performance information is contained in the annual report,
which may be obtained without charge. See "Shareholder Guide-- Shareholder
Services--Reports to Shareholders."
<TABLE>
<CAPTION>
CLASS C
---------------------------------------------------------
JULY 26,
1993 (a)
YEAR ENDED AUGUST 31, THROUGH
----------------------------------------- AUGUST 31,
1997 1996 1995 1994 1993
------- ------- ------- ----------- -------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year..... $ 10.11 $ 10.06 $ 9.91 $ 10.87 $ 10.58
------- ------- ------- ----------- ------
INCOME FROM INVESTMENT OPERATIONS
Net investment income (c).............. .48 .50 .53 .48 .03
Net realized and unrealized gain (loss)
on investment transactions........... .31 .05 .15 (.76) .29
------- ------- ------- ----------- ------
Total from investment operations....... .79 .55 .68 (.28) .32
------- ------- ------- ----------- ------
LESS DISTRIBUTIONS
Dividends from net investment income... (.48) (.50) (.53) (.48) (.03)
Distribution in excess of net
investment income.................... (.01) -- -- -- --
Distributions from net realized
gains................................ -- -- -- (.20) --
------- ------- ------- ----------- ------
Total distributions.................... (.49) (.50) (.53) (.68) (.03)
------- ------- ------- ----------- ------
Net asset value, end of year........... $ 10.41 $ 10.11 $ 10.06 $ 9.91 $ 10.87
------- ------- ------- ----------- ------
------- ------- ------- ----------- ------
TOTAL RETURN (d):...................... 7.95% 5.52% 7.12% (2.40)% 3.14%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000).......... $ 7,336 $ 7,792 $ 9,028 $ 11,185 $ 3,132
Average net assets (000)............... $ 7,575 $ 8,293 $10,265 $ 9,280 $ 1,038
Ratios to average net assets (c):
Expenses, including distribution
fee................................. 1.22% 1.02% .92% .95% .95%(b)
Expenses, excluding distribution
fee................................. .47% .27% .17% .20% .20%(b)
Net investment income................ 4.67% 4.91% 5.35% 4.99% 5.19%(b)
Portfolio turnover rate................ 22% 68% 65% 75% 68%
</TABLE>
- ---------------
(a) Commencement of offering of Class C shares. Prior to August 1, 1994,
Class C Shares were called Class D Shares.
(b) Annualized.
(c) Net of expense subsidy and management fee waiver.
(d) Total return does not consider the effects of sales loads. Total
return is calculated assuming a purchase of shares on the first day
and a sale on the last day of each period reported and includes
reinvestment of dividends and distributions. Total returns for
periods of less than a full year are not annualized.
7
<PAGE>
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD INDICATED)
(CLASS Z SHARES)
The following financial highlights for the Class Z shares for the period from
December 6, 1996 through August 31, 1997 have been audited by Price Waterhouse
LLP, independent accountants, whose report thereon was unqualified. This
information should be read in conjunction with the financial statements and the
notes thereto, which appear in the Statement of Additional Information. The
financial highlights contain selected data for a Class Z share of common stock
outstanding, total return, ratios to average net assets and other supplemental
data for the period indicated. This information has been determined based on
data contained in the financial statements. Further performance information is
contained in the annual report, which may be obtained without charge. See
"Shareholder Guide--Shareholder Services--Reports to Shareholders."
<TABLE>
<CAPTION>
CLASS Z
------------------
DECEMBER 6,
1996(a)
THROUGH
AUGUST 31, 1997
------------------
<S> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year..... $ 10.36
------
INCOME FROM INVESTMENT OPERATIONS
Net investment income (d).............. .41
Net realized and unrealized gain on
investment transactions................ .06
------
Total from investment operations....... .47
------
LESS DISTRIBUTIONS
Dividends from net investment income... .41
------
Net asset value, end of year........... $ 10.41
------
------
TOTAL RETURN (b):...................... 4.5%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000).......... $ 94
Average net assets (000)............... $ 36
Ratios to average net assets (c)/(d):
Expenses............................. .47%
Net investment income................ 5.48%
Portfolio turnover rate................ 2.2%
</TABLE>
- ------------
(a) Commencement of offering of Class Z shares.
(b) 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) Net of expense subsidy and fee waiver.
8
<PAGE>
HOW THE FUND INVESTS
INVESTMENT OBJECTIVE AND POLICIES
PRUDENTIAL MUNICIPAL SERIES FUND (THE FUND) IS AN OPEN-END, MANAGEMENT
INVESTMENT COMPANY, OR MUTUAL FUND, CONSISTING OF THIRTEEN SEPARATE SERIES. EACH
SERIES OF THE FUND IS MANAGED INDEPENDENTLY. THE FLORIDA SERIES (THE SERIES) IS
NON-DIVERSIFIED AND ITS INVESTMENT OBJECTIVE IS TO MAXIMIZE CURRENT INCOME THAT
IS EXEMPT FROM FEDERAL INCOME TAXES CONSISTENT WITH THE PRESERVATION OF CAPITAL
AND TO INVEST IN SECURITIES WHICH WILL ENABLE ITS SHARES TO BE EXEMPT FROM THE
FLORIDA INTANGIBLES TAX AND, IN CONJUNCTION THEREWITH, THE SERIES MAY ALSO
INVEST IN DEBT SECURITIES WITH THE POTENTIAL FOR CAPITAL GAIN. See "Investment
Objectives and Policies" in the Statement of Additional Information.
THE SERIES' INVESTMENT OBJECTIVE IS A FUNDAMENTAL POLICY AND, THEREFORE, MAY
NOT BE CHANGED WITHOUT THE APPROVAL OF THE HOLDERS OF A MAJORITY OF THE SERIES'
OUTSTANDING VOTING SECURITIES AS DEFINED IN THE INVESTMENT COMPANY ACT OF 1940,
AS AMENDED (THE INVESTMENT COMPANY ACT). THE SERIES' POLICIES THAT ARE NOT
FUNDAMENTAL MAY BE MODIFIED BY THE TRUSTEES.
THE SERIES WILL INVEST PRIMARILY IN FLORIDA STATE, MUNICIPAL AND LOCAL
GOVERNMENT OBLIGATIONS AND OBLIGATIONS OF OTHER QUALIFYING ISSUERS, SUCH AS
ISSUERS LOCATED IN PUERTO RICO, THE VIRGIN ISLANDS AND GUAM, WHICH, IN THE
OPINION OF COUNSEL, ARE EXEMPT FROM THE FLORIDA INTANGIBLES TAX AND WHICH PAY
INCOME EXEMPT FROM FEDERAL INCOME TAX (FLORIDA OBLIGATIONS). THERE CAN BE NO
ASSURANCE THAT THE SERIES WILL BE ABLE TO ACHIEVE ITS INVESTMENT OBJECTIVE.
As with an investment in any mutual fund, an investment in this Series can
decrease and you can lose money.
Florida Obligations and certain types of U.S. Government securities and other
assets are exempt from the Florida intangibles tax. The Fund has obtained a
ruling from Florida authorities that, if on January 1 of any year the Series'
portfolio of assets consists solely of such exempt investments, then the Series'
shares will be exempt from the Florida intangibles tax payable in that year.
Interest on certain municipal obligations may be a preference item for
purposes of the federal alternative minimum tax. The Series may invest without
limit in municipal obligations that are "private activity bonds" (as defined in
the Internal Revenue Code) the interest on which would be a preference item for
purposes of the federal alternative minimum tax. See "Taxes, Dividends and
Distributions." Florida Obligations could include general obligation bonds of
the State, counties, cities, towns, etc., revenue bonds of utility systems,
highways, bridges, port and airport facilities, colleges, hospitals, etc., and
industrial development and pollution control bonds. The Series will invest in
long-term Florida Obligations, and the dollar-weighted average maturity of the
Series' portfolio will generally range between 10-20 years. The Series may also
invest in certain short-term, tax-exempt notes such as Tax Anticipation Notes,
Revenue Anticipation Notes, Bond Anticipation Notes, Construction Loan Notes and
variable and floating rate demand notes.
Generally, municipal obligations with longer maturities produce higher yields
and are subject to greater price fluctuations as a result of changes in interest
rates (market risk) than municipal obligations with shorter maturities. The
prices of municipal obligations vary inversely with interest rates. Interest
rates are currently much lower than in recent years. As a general matter, bond
prices and the Series' net asset value will vary inversely with interest rate
fluctuations. If rates were to rise sharply, the prices of bonds in the Series'
portfolio might be adversely affected.
THE SERIES MAY INVEST ITS ASSETS IN FLOATING RATE AND VARIABLE RATE
SECURITIES, INCLUDING PARTICIPATION INTERESTS THEREIN AND INVERSE FLOATERS.
There is no limit on the amount of such securities that the Series may purchase.
Floating rate securities normally have a rate of interest which is set as a
specific percentage of a designated base rate, such as the rate on Treasury
bonds or bills or the prime rate at a major commercial bank. The interest rate
on floating rate securities changes periodically when there is a change in the
designated base interest rate. Variable rate securities provide for a specified
periodic
9
<PAGE>
adjustment in the interest rate based on prevailing market rates and generally
would allow the Series to demand payment of the obligation on short notice at
par plus accrued interest, which amount may be more or less than the amount the
Series paid for them. An inverse floater is a debt instrument with a floating or
variable interest rate that moves in the opposite direction of the interest rate
on another security or the value of an index. Changes in the interest rate on
the other security or index inversely affect the residual interest rate paid on
the inverse floater, with the result that the inverse floater's price will be
considerably more volatile than that of a fixed rate bond. The market for
inverse floaters is relatively new.
THE SERIES MAY ALSO INVEST IN MUNICIPAL LEASE OBLIGATIONS. A MUNICIPAL LEASE
OBLIGATION IS A MUNICIPAL SECURITY THE INTEREST ON AND PRINCIPAL OF WHICH IS
PAYABLE OUT OF LEASE PAYMENTS MADE BY THE PARTY LEASING THE FACILITIES FINANCED
BY THE ISSUE. Typically, municipal lease obligations are issued by a state or
municipal financing authority to provide funds for the construction of
facilities (E.G., schools, dormitories, office buildings or prisons) or the
acquisition of equipment. The facilities are typically used by the state or
municipality pursuant to a lease with a financing authority. Certain municipal
lease obligations may trade infrequently. Accordingly, the investment adviser
will monitor the liquidity of municipal lease obligations under the supervision
of the Trustees. Municipal lease obligations will not be considered illiquid for
purposes of the Series' 15% limitation on illiquid securities provided the
investment adviser determines that there is a readily available market for such
securities. See "Other Investments and Policies--Illiquid Securities" below.
THE SERIES WILL INVEST AT LEAST 70% OF ITS TOTAL ASSETS IN FLORIDA OBLIGATIONS
WHICH, AT THE TIME OF PURCHASE, ARE RATED WITHIN THE FOUR HIGHEST QUALITY GRADES
AS DETERMINED BY 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), 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 ANOTHER NATIONALLY
RECOGNIZED STATISTICAL RATING ORGANIZATION (NRSRO) OR, IF UNRATED, WILL POSSESS
CREDITWORTHINESS, IN THE OPINION OF THE INVESTMENT ADVISER, COMPARABLE TO SUCH
"INVESTMENT GRADE" RATED SECURITIES.
THE SERIES MAY ALSO INVEST UP TO 30% OF ITS TOTAL ASSETS IN FLORIDA
OBLIGATIONS RATED BELOW Baa BY MOODY'S OR BELOW BBB BY S&P OR A COMPARABLE
RATING OF ANOTHER NRSRO OR, IF NON-RATED, OF COMPARABLE QUALITY, IN THE OPINION
OF THE FUND'S INVESTMENT ADVISER, BASED ON ITS CREDIT ANALYSIS. Securities rated
Baa by Moody's and BBB by S&P are described as being investment grade but are
also characterized as having speculative characteristics. Securities rated below
Baa by Moody's and below BBB by S&P are considered speculative. See "Description
of Security Ratings" in the Appendix. Such lower-rated high yield securities are
commonly referred to as "junk bonds." Such securities generally offer a higher
current yield than those in the higher rating categories but may also involve
greater price volatility and risk of loss of principal and income. The
investment adviser will attempt to manage risk and enhance yield through credit
analysis and careful security selection. See "Risk Factors Relating to Investing
in High Yield Municipal Obligations" below. Subsequent to its purchase by the
Series, a municipal obligation may be assigned a lower rating or cease to be
rated. Such an event would not require the elimination of the issue from the
portfolio, but the investment adviser will consider such an event in determining
whether the Series should continue to hold the security in its portfolio. Many
issuers of lower-quality bonds choose not to have their obligations rated and
the Series may invest in such unrated securities. Investors should carefully
consider the relative risks associated with investments in securities which
carry lower ratings and in comparable non-rated securities.
10
<PAGE>
During the year ended August 31, 1997, the monthly dollar weighted average
ratings of the debt obligations held by the Series, expressed as a percentage of
the Series' total assets, were as follows:
<TABLE>
<CAPTION>
PERCENTAGE OF
RATINGS TOTAL INVESTMENTS
------------------------------ -------------------------
<S> <C>
AAA/Aaa 56.61 %
AA/Aa 14.61 %
A/A 4.44 %
BBB/Baa 18.99 %
BB/Ba 0.28 %
Unrated
AAA/Aaa 1.40 %
AA/Aa 0.00 %
A/A 0.00 %
BBB/Baa 3.67 %
</TABLE>
From time to time, the Series may own the majority of a municipal issue. Such
majority-owned holdings may present market and credit risks.
The Series may purchase Florida Obligations which, in the opinion of the
investment adviser, offer the opportunity for capital appreciation. This may
occur, for example, when the investment adviser believes that the issuer of a
particular Florida Obligation might receive an upgraded credit standing, thereby
increasing the market value of the bonds it has issued or when the investment
adviser believes that interest rates might decline.
UNDER NORMAL MARKET CONDITIONS, THE SERIES WILL ATTEMPT TO INVEST
SUBSTANTIALLY ALL OF THE VALUE OF ITS ASSETS IN FLORIDA OBLIGATIONS. As a matter
of fundamental policy, during normal market conditions the Series' assets will
be invested so that the Series will have at least 80% of its total assets
invested in Florida Obligations. During abnormal market conditions or to provide
liquidity, the Series may hold cash or cash equivalents or investment grade
taxable obligations, including obligations that are exempt from federal, but not
state, taxation. The Series may invest in tax-free cash equivalents, such as
floating rate demand notes, tax-exempt commercial paper and general obligation
and revenue notes or in taxable cash equivalents, such as certificates of
deposit, bankers acceptances and time deposits or other short-term taxable
investments such as repurchase agreements. When, in the opinion of the
investment adviser, abnormal market conditions require a temporary defensive
position, the Series may invest more than 20% of the value of its assets in debt
securities other than Florida Obligations or may invest its assets so that more
than 20% of the income is subject to federal income taxes.
THE SERIES MAY ACQUIRE PUT OPTIONS (PUTS) GIVING THE SERIES THE RIGHT TO SELL
SECURITIES HELD IN THE SERIES' PORTFOLIO AT A SPECIFIED EXERCISE PRICE ON A
SPECIFIED DATE. Such puts may be acquired for the purpose of protecting the
Series from a possible decline in the market value of the security to which the
put applies in the event of interest rate fluctuations or, in the case of
liquidity puts, for the purpose of shortening the effective maturity of the
underlying security. The aggregate value of premiums paid to acquire puts held
in the Series' portfolio (other than liquidity puts) may not exceed 10% of the
net asset value of the Series. The acquisition of a put may involve an
additional cost to the Series by payment of a premium for the put, by payment of
a higher purchase price for securities to which the put is attached or through a
lower effective interest rate.
In addition, there is a credit risk associated with the purchase of puts in
that the issuer of the put may be unable to meet its obligation to purchase the
underlying security. Accordingly, the Series will acquire puts only under the
following circumstances: (1) the put is written by the issuer of the underlying
security and such security is rated within the four highest quality grades as
determined by an NRSRO; or (2) the put is written by a person other than the
issuer of the underlying security and such person has
11
<PAGE>
securities outstanding which are rated within such four highest quality grades;
or (3) the put is backed by a letter of credit or similar financial guarantee
issued by a person having securities outstanding which are rated within the two
highest quality grades of an NRSRO.
THE SERIES MAY PURCHASE MUNICIPAL OBLIGATIONS ON A "WHEN-ISSUED" OR "DELAYED
DELIVERY" BASIS, IN EACH CASE WITHOUT LIMIT. When municipal obligations are
offered on a when-issued or delayed delivery basis, the price and coupon rate
are fixed at the time the commitment to purchase is made, but delivery and
payment for the securities take place at a later date. The purchase price for
such securities includes interest accrued during the period between purchase and
settlement and, therefore, no interest accrues to the economic benefit of the
purchaser during such period. In the case of purchases by the Series, the price
that the Series is required to pay on the settlement date may be in excess of
the market value of the municipal obligations on that date. While securities may
be sold prior to the settlement date, the Series intends to purchase these
securities with the purpose of actually acquiring them unless a sale would be
desirable for investment reasons. At the time the Series makes the commitment to
purchase a municipal obligation on a when-issued or delayed delivery basis, it
will record the transaction and reflect the value of the obligation each day in
determining its net asset value. This value may fluctuate from day to day in the
same manner as values of municipal obligations otherwise held by the Series. If
the seller defaults in the sale, the Series could fail to realize the
appreciation, if any, that had occurred. The Series will establish a segregated
account with its Custodian in which it will maintain cash, U.S. Government
securities, equity securities or other liquid, unencumbered assets,
marked-to-market daily, equal in value to its commitments for when-issued or
delayed delivery securities.
THE SERIES MAY ALSO PURCHASE MUNICIPAL FORWARD CONTRACTS. A municipal forward
contract is a municipal security which is purchased on a when-issued basis with
delivery taking place up to five years from the date of purchase. No interest
will accrue on the security prior to the delivery date. The investment adviser
will monitor the liquidity, value, credit quality and delivery of the security
under the supervision of the Trustees. The Fund has obtained a ruling from
Florida authorities that such municipal forward contracts qualify as assets
exempt from the Florida intangibles tax.
THE SERIES MAY PURCHASE SECONDARY MARKET INSURANCE ON FLORIDA OBLIGATIONS
WHICH IT HOLDS OR ACQUIRES. Secondary market insurance would be reflected in the
market value of the municipal obligation purchased and may enable the Series to
dispose of a defaulted obligation at a price similar to that of comparable
municipal obligations which are not in default.
Insurance is not a substitute for the basic credit of an issuer, but
supplements the existing credit and provides additional security therefor. While
insurance coverage for the Florida Obligations held by the Series reduces credit
risk by providing that the insurance company will make timely payment of
principal and interest if the issuer defaults on its obligation to make such
payment, it does not afford protection against fluctuation in the price, I.E.,
the market value, of the municipal obligations caused by changes in interest
rates and other factors, nor in turn against fluctuations in the net asset value
of the shares of the Series.
RISK FACTORS RELATING TO INVESTING IN HIGH YIELD MUNICIPAL
OBLIGATIONS. FIXED-INCOME SECURITIES ARE SUBJECT TO THE RISK OF AN ISSUER'S
INABILITY TO MEET PRINCIPAL AND INTEREST PAYMENTS ON THE OBLIGATIONS (CREDIT
RISK) AND MAY ALSO BE SUBJECT TO PRICE VOLATILITY DUE TO SUCH FACTORS AS
INTEREST RATE SENSITIVITY, MARKET PERCEPTIONS OF THE CREDITWORTHINESS OF THE
ISSUER AND GENERAL MARKET LIQUIDITY (MARKET RISK). Lower-rated or unrated (I.E.,
high yield) securities, commonly known as "junk bonds," are more likely to react
to developments affecting market and credit risk than are more highly rated
securities, which react primarily to movements in the general level of interest
rates. The investment adviser will perform its own investment analysis and will
not rely principally on the ratings assigned by the rating services, although
such ratings will be considered by the investment adviser. The investment
adviser will consider, among other things, credit risk and market risk, as well
as the financial history and condition, the prospects and the management of an
issuer in selecting securities for the Series' portfolio. The achievement of the
Series' investment objective may be more dependent on the investment adviser's
credit analysis than is the case when investing in only higher quality bonds.
Investors should carefully consider the relative risks of investing in high
yield municipal obligations and understand that such securities are not
generally meant for short-term investing and that yields on junk bonds will
fluctuate over time.
12
<PAGE>
The amount of high yield securities outstanding has proliferated recently in
conjunction with the decline in creditworthiness of many obligors on municipal
debt, particularly health care providers and certain governmental bodies. An
economic downturn could severely affect the ability of highly leveraged issuers
to service their debt obligations or to repay their obligations upon maturity.
In addition, the secondary market for high yield securities, which is
concentrated in relatively few market makers, may not be as liquid as the
secondary market for more highly rated securities and, from time to time, it may
be more difficult to value high yield securities than more highly rated
securities, and the judgment of the Board of Trustees and investment adviser may
play a greater role in valuation because there is less reliable objective data
available. Under adverse market or economic conditions, the secondary market for
high yield securities could contract further, independent of any specific
adverse changes in the condition of a particular issuer. As a result, the
investment adviser could find it more difficult to sell these securities or may
be able to sell the securities only at prices lower than if such securities were
widely traded. Prices realized upon the sale of such lower rated or unrated
securities, under these circumstances, may be less than the prices used in
calculating the Series' net asset value. If the investment adviser becomes
involved in activities such as reorganizations of obligors of troubled
investments held by the Series, this may prevent the Series from disposing of
the securities, due to its possession of material, non-public information
concerning the obligor.
LOWER-RATED OR UNRATED DEBT OBLIGATIONS ALSO PRESENT RISKS BASED ON PAYMENT
EXPECTATIONS. If an issuer calls the obligation for redemption, the Series may
have to replace the security with a lower-yielding security, resulting in a
decreased return for investors. If the Series experiences unexpected net
redemptions, it may be forced to sell higher quality securities, resulting in a
decline in the overall credit quality of the Series' portfolio and increasing
the exposure of the Series to the risks of high yield securities.
FUTURES CONTRACTS AND OPTIONS THEREON
THE SERIES IS AUTHORIZED TO PURCHASE AND SELL CERTAIN DERIVATIVES, INCLUDING
FINANCIAL FUTURES CONTRACTS (FUTURES CONTRACTS) AND OPTIONS THEREON FOR THE
PURPOSE OF HEDGING ITS PORTFOLIO SECURITIES AGAINST FLUCTUATIONS IN VALUE CAUSED
BY CHANGES IN PREVAILING MARKET INTEREST RATES AND HEDGING AGAINST INCREASES IN
THE COST OF SECURITIES THE SERIES INTENDS TO PURCHASE. THE SUCCESSFUL USE OF
FUTURES CONTRACTS AND OPTIONS THEREON BY THE SERIES INVOLVES ADDITIONAL
TRANSACTION COSTS AND IS SUBJECT TO VARIOUS RISKS AND DEPENDS UPON THE
INVESTMENT ADVISER'S ABILITY TO PREDICT THE DIRECTION OF THE MARKET (INCLUDING
INTEREST RATES). THE SERIES, AND THUS INVESTORS, MAY LOSE MONEY THROUGH ANY
UNSUCCESSFUL USE OF THESE STRATEGIES.
A FUTURES CONTRACT OBLIGATES THE SELLER OF THE CONTRACT TO DELIVER TO THE
PURCHASER OF THE CONTRACT CASH EQUAL TO A SPECIFIC DOLLAR AMOUNT TIMES THE
DIFFERENCE BETWEEN THE VALUE OF A SPECIFIC FIXED-INCOME SECURITY OR INDEX AT THE
CLOSE OF THE LAST TRADING DAY OF THE CONTRACT AND THE PRICE AT WHICH THE
AGREEMENT IS MADE. No physical delivery of the underlying securities is made.
The Series will engage in transactions in only those futures contracts and
options thereon that are traded on a commodities exchange or a board of trade.
The Series intends to engage in futures contracts and options thereon as a
hedge against changes, resulting from market conditions, in the value of
securities which are held in the Series' portfolio or which the Series intends
to purchase, in accordance with the rules and regulations of the Commodity
Futures Trading Commission (the CFTC). The Series also intends to engage in such
transactions when they are economically appropriate for the reduction of risks
inherent in the ongoing management of the Series.
THE SERIES MAY NOT PURCHASE OR SELL FUTURES CONTRACTS OR OPTIONS THEREON IF,
IMMEDIATELY THEREAFTER, (I) THE SUM OF INITIAL AND NET CUMULATIVE VARIATION
MARGIN ON OUTSTANDING FUTURES CONTRACTS, TOGETHER WITH PREMIUMS PAID ON OPTIONS
THEREON, WOULD EXCEED 20% OF THE TOTAL ASSETS OF THE SERIES, OR (II) IN THE CASE
OF RISK MANAGEMENT TRANSACTIONS, THE SUM OF THE AMOUNT OF INITIAL MARGIN
DEPOSITS ON THE SERIES' FUTURES POSITIONS AND PREMIUMS PAID FOR OPTIONS THEREON
WOULD EXCEED 5% OF THE LIQUIDATION VALUE OF THE SERIES' TOTAL ASSETS. There are
no limitations on the percentage of the
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portfolio which may be hedged and no limitations on the use of the Series'
assets to cover futures contracts and options thereon, except that the aggregate
value of the obligations underlying put options will not exceed 50% of the
Series' assets. Certain requirements for qualification as a regulated investment
company under the Internal Revenue Code may limit the Series' ability to engage
in futures contracts and options thereon. See "Distributions and Tax
Information--Federal Taxation" in the Statement of Additional Information.
Currently, futures contracts are available on several types of fixed-income
securities, including U.S. Treasury bonds and notes, three-month U.S. Treasury
bills and Eurodollars. Futures contracts are also available on a municipal bond
index, based on THE BOND BUYER Municipal Bond Index, an index of 40 actively
traded municipal bonds. The Series may also engage in transactions in other
futures contracts that become available, from time to time, in other
fixed-income securities or municipal bond indices and in other options on such
contracts if the investment adviser believes such contracts and options would be
appropriate for hedging the Series' portfolio.
THERE CAN BE NO ASSURANCE THAT VIABLE MARKETS WILL CONTINUE OR THAT A LIQUID
SECONDARY MARKET WILL EXIST TO TERMINATE ANY PARTICULAR FUTURES CONTRACT AT ANY
SPECIFIC TIME. If it is not possible to close a futures position entered into by
the Series, the Series will continue to be required to make daily cash payments
of variation margin in the event of adverse price movements. In such a
situation, if the Series had insufficient cash, it might have to sell portfolio
securities to meet daily variation margin requirements at a time when it might
be disadvantageous to do so. The inability to close futures positions also could
have an adverse impact on the ability of the Series to hedge effectively. There
is also a risk of loss by the Series of margin deposits in the event of
bankruptcy of a broker with whom the Series has an open position in a futures
contract.
THE SUCCESSFUL USE OF FUTURES CONTRACTS AND OPTIONS THEREON BY THE SERIES IS
SUBJECT TO VARIOUS ADDITIONAL RISKS. Any use of futures transactions involves
the risk of imperfect correlation in movements in the price of futures contracts
and movements in interest rates and, in turn, the prices of the securities that
are the subject of the hedge. If the price of the futures contract moves more or
less than the price of the security that is the subject of the hedge, the Series
will experience a gain or loss that will not be completely offset by movements
in the price of the security. The risk of imperfect correlation is greater where
the securities underlying futures contracts are taxable securities (rather than
municipal securities), are issued by companies in different market sectors or
have different maturities, ratings or geographic mixes than the security being
hedged. In addition, the correlation may be affected by additions to or
deletions from the index which serves as the basis for a futures contract.
Finally, if the price of the security that is subject to the hedge were to move
in a favorable direction, the advantage to the Series would be partially offset
by the loss incurred on the futures contract.
SPECIAL CONSIDERATIONS
BECAUSE THE SERIES WILL INVEST AT LEAST 80% OF THE VALUE OF ITS TOTAL ASSETS
IN FLORIDA OBLIGATIONS, IT IS MORE SUSCEPTIBLE TO FACTORS ADVERSELY AFFECTING
ISSUERS OF SUCH OBLIGATIONS THAN IS A COMPARABLE MUNICIPAL BOND MUTUAL FUND THAT
IS NOT CONCENTRATED IN SUCH OBLIGATIONS TO THIS DEGREE. Under the State
Constitution and applicable statutes, the State budget as a whole, and each
separate fund within the State budget, must be kept in balance from currently
available revenues during each State fiscal year. Estimated General Revenue plus
Working Capital and Budget Stabilization funds available total $16,617.4 million
for 1996-1997, an increase of 6.7% over revenues for 1995-1996. Estimated
Revenue of $15,568.7 million for fiscal 1996-1997 represents an increase of 6.3%
over 1995-1996. If the issuers of any of the Florida Obligations are unable to
meet their financial obligations because of natural disasters or for other
reasons, the income derived by the Series, the ability to preserve or realize
appreciation of the Series' capital and the Series' liquidity could be adversely
affected. See "Investment Objectives and Policies--Special Considerations
Regarding Investments in Tax-Exempt Securities" in the Statement of Additional
Information.
The Series is "non-diversified" so that more than 5% of its total assets may
be invested in the securities of one or more issuers. Investment in a
non-diversified portfolio involves greater risk than investment in a diversified
portfolio because a loss
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resulting from the default of a single issuer may represent a greater portion of
the total assets of a non-diversified portfolio. The Series will treat an
investment in a municipal bond refunded with escrowed U.S. Government securities
as U.S. Government securities for purposes of the Investment Company Act's
diversification requirements provided certain conditions are met. See
"Investment Objectives and Policies--In General" in the Statement of Additional
Information.
OTHER INVESTMENTS AND POLICIES
REPURCHASE AGREEMENTS
The Series may on occasion enter into repurchase agreements whereby the seller
of a security agrees to repurchase that security from the Series at a mutually
agreed-upon time and price. The period of maturity is usually quite short,
possibly overnight or a few days, although it may extend over a number of
months. The resale price is in excess of the purchase price, reflecting an
agreed-upon rate of return effective for the period of time the Series' money is
invested in the security. The Series' repurchase agreements will at all times be
fully collateralized in an amount at least equal to the resale price. The
instruments held as collateral are valued daily and if the value of the
instruments declines, the Series will require additional collateral. If the
seller defaults and the value of the collateral securing the repurchase
agreement declines, the Series may incur a loss. The Series participates in a
joint repurchase account with other investment companies managed by Prudential
Investments Fund Management LLC pursuant to an order of the Securities and
Exchange Commission (SEC).
BORROWING
The Series may borrow an amount equal to no more than 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 Series may
pledge up to 33 1/3% of the value of its total assets to secure these
borrowings. The Series will not purchase portfolio securities if its borrowings
exceed 5% of its total assets.
PORTFOLIO TURNOVER
The Series does not expect to trade in securities for short-term gain. It is
anticipated that the annual portfolio turnover rate will not exceed 150%. The
portfolio turnover rate is calculated by dividing the lesser of sales or
purchases of portfolio securities by the average monthly value of the portfolio
securities, excluding securities having a maturity at the date of purchase of
one year or less.
ILLIQUID SECURITIES
The Series may hold up to 15% of its net assets in illiquid securities
including repurchase agreements which have a maturity of longer than seven days,
securities with legal or contractual restrictions on resale (restricted
securities) and securities that are not readily marketable. Restricted
securities eligible for resale pursuant to Rule 144A under the Securities Act of
1933, as amended (the Securities Act), privately placed commercial paper and
municipal lease obligations that have a readily available market are not
considered illiquid for purposes of this limitation. The investment adviser will
monitor the liquidity of such restricted securities under the supervision of the
Trustees. The Series' investment in Rule 144A securities could have the effect
of increasing illiquidity to the extent that qualified institutional buyers
become, for a limited time, uninterested in purchasing Rule 144A securities. See
"Investment Objectives and Policies--Illiquid Securities" and "Investment
Restrictions" in the Statement of Additional Information. Repurchase agreements
subject to demand are deemed to have a maturity equal to the notice period.
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INVESTMENT RESTRICTIONS
The Series is subject to certain investment restrictions which, like its
investment objective, constitute fundamental policies. Fundamental policies
cannot be changed without the approval of the holders of a majority of the
Series' outstanding voting securities, as defined in the Investment Company Act.
See "Investment Restrictions" in the Statement of Additional Information.
HOW THE FUND IS MANAGED
THE FUND HAS TRUSTEES WHO, IN ADDITION TO OVERSEEING THE ACTIONS OF THE FUND'S
MANAGER, SUBADVISER AND DISTRIBUTOR, AS SET FORTH BELOW, DECIDE UPON MATTERS OF
GENERAL POLICY. THE FUND'S MANAGER CONDUCTS AND SUPERVISES THE DAILY BUSINESS
OPERATIONS OF THE FUND. THE FUND'S SUBADVISER FURNISHES DAILY INVESTMENT
ADVISORY SERVICES.
For the fiscal year ended August 31, 1997, total expenses of the Series as a
percentage of average net assets, net of expense subsidy and fee waivers, were
.57%, .97% and 1.22% for the Series' Class A, Class B and Class C shares,
respectively. For the period from December 6, 1996 (commencement of the offering
of Class Z shares) through August 31, 1997, total expenses of the Series as a
percentage of average net assets, net of fee waivers were .47% (annualized) for
the Series' Class Z shares. See "Financial Highlights."
MANAGER
PRUDENTIAL INVESTMENTS FUND MANAGEMENT LLC (PIFM OR THE MANAGER), GATEWAY
CENTER THREE, 100 MULBERRY STREET, NEWARK, NEW JERSEY 07102-4077, IS THE MANAGER
OF THE FUND AND IS COMPENSATED FOR ITS SERVICES AT AN ANNUAL RATE OF .50 OF 1%
OF THE AVERAGE DAILY NET ASSETS OF THE SERIES. PIFM is organized in New York as
a limited liability company. It is the successor to Prudential Mutual Fund
Management, Inc., which transferred its assets to PIFM in September 1996. For
the fiscal year ended August 31, 1997, the Series paid PIFM a management fee of
.30 of 1% of the Series' average net assets, after taking into account a
management fee waiver. See "Fee Waivers and Subsidy" below and "Manager" in the
Statement of Additional Information.
As of September 30, 1997, PIFM served as the manager to 41 open-end investment
companies, constituting all of the Prudential Mutual Funds, and as manager or
administrator to 22 closed-end investment companies with aggregate assets of
approximately $59.9 billion.
UNDER THE MANAGEMENT AGREEMENT WITH THE FUND, PIFM MANAGES THE INVESTMENT
OPERATIONS OF EACH SERIES OF THE FUND AND ALSO ADMINISTERS THE FUND'S BUSINESS
AFFAIRS. See "Manager" in the Statement of Additional Information.
UNDER A SUBADVISORY AGREEMENT BETWEEN PIFM AND THE PRUDENTIAL INVESTMENT
CORPORATION (PIC), DOING BUSINESS AS PRUDENTIAL INVESTMENTS (PI, THE SUBADVISER
OR THE INVESTMENT ADVISER), PI FURNISHES INVESTMENT ADVISORY SERVICES IN
CONNECTION WITH THE MANAGEMENT OF THE FUND AND IS REIMBURSED BY PIFM FOR ITS
REASONABLE COSTS AND EXPENSES INCURRED IN PROVIDING SUCH SERVICES. Under the
Management Agreement, PIFM continues to have responsibility for all investment
advisory services and supervises PI's performance of such services.
The current portfolio managers of the Series are Peter Allegrini and Scott
Diamond, who share responsibility for the day-to-day management of each Series'
portfolio. They have managed the portfolios since October 1997. From 1982 to
1986, Mr. Allegrini was employed by Fidelity Investments as a senior bond
analyst and, from 1986 to 1994, he was portfolio manager, most recently of
Fidelity Advisor High Income Municipal Fund and has been employed by PIC in
various capacities since 1993. Scott Diamond has been employed by PIC in various
capacities since 1993.
PIFM and PIC are indirect, wholly-owned subsidiaries of The Prudential
Insurance Company of America (Prudential), a major diversified insurance and
financial services company, and are part of Prudential Investments, a business
group of Prudential.
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FEE WAIVERS AND SUBSIDY
PIFM may from time to time waive its management fee or a portion thereof and
subsidize certain operating expenses of the Series. Fee waivers and expense
subsidies will increase the Series' yield and total return. The Series is not
required to reimburse PIFM for such fee waivers and expense subsidy. Effective
September 1, 1997 PIFM discontinued its waiver of 40% of its management fee. See
"Fund Expenses."
DISTRIBUTOR
PRUDENTIAL SECURITIES INCORPORATED (PRUDENTIAL SECURITIES, PSI OR THE
DISTRIBUTOR), ONE SEAPORT PLAZA, NEW YORK, NEW YORK 10292, IS A CORPORATION
ORGANIZED UNDER THE LAWS OF THE STATE OF DELAWARE AND SERVES AS THE DISTRIBUTOR
OF THE CLASS A, CLASS B, CLASS C AND CLASS Z SHARES OF THE SERIES. It is an
indirect, wholly-owned subsidiary of Prudential.
UNDER SEPARATE DISTRIBUTION AND SERVICE PLANS (THE CLASS A PLAN, THE CLASS B
PLAN AND THE CLASS C PLAN, COLLECTIVELY, THE PLANS) ADOPTED BY THE FUND UNDER
RULE 12B-1 UNDER THE INVESTMENT COMPANY ACT AND A DISTRIBUTION AGREEMENT (THE
DISTRIBUTION AGREEMENT), PRUDENTIAL SECURITIES (THE DISTRIBUTOR) INCURS THE
EXPENSES OF DISTRIBUTING THE CLASS A, CLASS B AND CLASS C SHARES OF THE SERIES.
PRUDENTIAL SECURITIES ALSO INCURS THE EXPENSE OF DISTRIBUTING THE SERIES' CLASS
Z SHARES UNDER THE DISTRIBUTION AGREEMENT WITH THE FUND, NONE OF WHICH IS
REIMBURSED OR PAID FOR BY THE FUND. These expenses include commissions and
account servicing fees paid to, or on account of, financial advisers of
Prudential Securities and representatives of Pruco Securities Corporation
(Prusec), affiliated broker-dealers, commissions and account servicing fees paid
to, or on account of, other broker-dealers or financial institutions (other than
national banks) which have entered into agreements with the Distributor,
advertising expenses, the cost of printing and mailing prospectuses to potential
investors and indirect and overhead costs of Prudential Securities and Prusec
associated with the sale of Series shares, including lease, utility,
communications and sales promotion expenses.
Under the Plans, the Series is obligated to pay distribution and/or service
fees to the Distributor as compensation for its distribution and service
activities, not as reimbursement for specific expenses incurred. If the
Distributor's expenses exceed its distribution and service fees, the Series will
not be obligated to pay any additional expenses. If the Distributor's expenses
are less than such distribution and service fees, it will retain its full fees
and realize a profit.
UNDER THE CLASS A PLAN, THE SERIES MAY PAY PRUDENTIAL SECURITIES FOR ITS
DISTRIBUTION-RELATED ACTIVITIES WITH RESPECT TO CLASS A SHARES AT AN ANNUAL RATE
OF UP TO .30 OF 1% OF THE AVERAGE DAILY NET ASSETS OF THE CLASS A SHARES OF THE
SERIES. The Class A Plan provides that (i) up to .25 of 1% of the average daily
net assets of the Class A shares may be used to pay for personal service and/or
the maintenance of shareholder accounts (service fee) and (ii) total
distribution fees (including the service fee of .25 of 1%) may not exceed .30 of
1% of the average daily net assets of the Class A shares. Prudential Securities
has agreed to limit its distribution-related fees payable under the Class A Plan
to .10 of 1% of the average daily net assets of the Class A shares for the
fiscal year ending August 31, 1998.
UNDER THE CLASS B AND CLASS C PLANS, THE SERIES MAY PAY PRUDENTIAL SECURITIES
FOR ITS DISTRIBUTION-RELATED ACTIVITIES WITH RESPECT TO CLASS B AND CLASS C
SHARES AT AN ANNUAL RATE OF UP TO .50 OF 1% AND .75 OF 1% OF THE AVERAGE DAILY
NET ASSETS OF THE CLASS B AND CLASS C SHARES, RESPECTIVELY. The Class B Plan
provides for the payment to Prudential Securities of (i) an asset-based sales
charge of up to .50 of 1% of the average daily net assets of the Class B shares,
and (ii) a service fee at a rate of up to .25 of 1% of the average daily net
assets of the Class B shares; provided that the total distribution-related fee
does not exceed .50 of 1%. The Class C Plan provides for the payment to
Prudential Securities of (i) an asset-based sales charge of .50 of 1% of the
average daily net assets of the Class C shares, and (ii) a service fee of .25 of
1% of the average daily net assets of the Class C shares; provided that the
total distribution-related fee does not exceed .75 of 1%. The service fee is
used to pay for personal service and/or the maintenance of shareholder accounts.
Prudential Securities also receives contingent deferred sales charges from
certain redeeming shareholders. See "Shareholder Guide--How to Sell Your
Shares--Contingent Deferred Sales Charges."
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For the fiscal year ended August 31, 1997, the Series paid distribution
expenses of .10 of 1%, .50 of 1% and .75 of 1% of the average daily net assets
of the Class A, Class B and Class C shares, respectively. The Series records all
payments made under the Plans as expenses in the calculation of net investment
income. See "Distributor" in the Statement of Additional Information.
Distribution expenses attributable to the sale of Class A, Class B and Class C
shares of the Series will be allocated to each such class based upon the ratio
of sales of each such class to the sales of Class A, Class B and Class C shares
of the Series other than expenses allocable to a particular class. The
distribution fee and sales charge of one class will not be used to subsidize the
sale of another class.
Each Plan provides that it shall continue in effect from year to year provided
that a majority of the Trustees of the Fund, including a majority of the
Trustees who are not "interested persons" of the Fund (as defined in the
Investment Company Act) and who have no direct or indirect financial interest in
the operation of the Plan or any agreement related to the Plan (the Rule 12b-1
Trustees), vote annually to continue the Plan. Each Plan may be terminated with
respect to the Series at any time by vote of a majority of the Rule 12b-1
Trustees or of a majority of the outstanding shares of the applicable class of
the Series. The Series will not be obligated to pay distribution and service
fees incurred under any Plan if it is terminated or not continued.
In addition to distribution and service fees paid by the Series under the
Class A, Class B and Class C Plans, the Manager (or one of its affiliates) may
make payments out of its own resources to dealers (including Prudential
Securities) and other persons who distribute shares of the Series (including
Class Z shares). Such payments may be calculated by reference to the net asset
value of shares sold by such persons or otherwise.
The Distributor is subject to the rules of the National Association of
Securities Dealers, Inc. (the NASD) governing maximum sales charges. See
"Distributor" in the Statement of Additional Information.
On October 21, 1993, PSI entered into an omnibus settlement with the SEC,
state securities regulators (with the exception of the Texas Securities
Commissioner who joined the settlement on January 18, 1994) and the NASD to
resolve allegations that from 1980 through 1990 PSI sold certain limited
partnership interests in violation of securities laws to persons for whom such
securities were not suitable and misrepresented the safety, potential returns
and liquidity of these investments. Without admitting or denying the allegations
asserted against it, PSI consented to the entry of an SEC Administrative Order
which stated that PSI's conduct violated the federal securities laws, directed
PSI to cease and desist from violating the federal securities laws, pay civil
penalties, and adopt remedial measures to address the violations.
Pursuant to the terms of the SEC settlement, PSI agreed to the imposition of a
$10,000,000 civil penalty, established a settlement fund in the amount of
$330,000,000 and procedures to resolve legitimate claims for compensatory
damages by purchasers of the partnership interests. PSI has agreed to provide
additional funds, if necessary, for the purpose of the settlement fund. PSI's
settlement with the state securities regulators included an agreement to pay a
penalty of $500,000 per jurisdiction. PSI consented to a censure and to the
payment of a $5,000,000 fine in settling the NASD action.
In October 1994, a criminal complaint was filed with the United States
Magistrate for the Southern District of New York alleging that PSI committed
fraud in connection with the sale of certain limited partnership interests in
violation of federal securities laws. An agreement was simultaneously filed to
defer prosecution of these charges for a period of three years from the signing
of the agreement, provided that PSI complies with the terms of the agreement.
If, upon completion of the three year period, PSI has complied with the terms of
the agreement, no prosecution will be instituted by the United States for the
offenses charged in the complaint. If on the other hand, during the course of
the three year period, PSI violates the terms of the agreement, the U.S.
Attorney can then elect to pursue these charges. Under the terms of the
agreement, PSI agreed, among other things, to pay an additional $330,000,000
into the fund established by the SEC to pay restitution to investors who
purchased certain PSI limited partnership interests.
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For more detailed information concerning the foregoing matters, see
"Distributor" in the Statement of Additional Information, a copy of which may be
obtained at no cost by calling (800) 225-1852.
The Fund is not affected by PSI's financial condition and is an entirely
separate legal entity from PSI, which has no beneficial ownership therein and
the Fund's assets which are held by State Street Bank and Trust Company, an
independent custodian, are separate and distinct from PSI.
PORTFOLIO TRANSACTIONS
Prudential Securities may act as a broker or futures commission merchant for
the Fund, provided that the commissions, fees or other remuneration it receives
are fair and reasonable. See "Portfolio Transactions and Brokerage" in the
Statement of Additional Information.
CUSTODIAN AND TRANSFER AND DIVIDEND DISBURSING AGENT
State Street Bank and Trust Company, One Heritage Drive, North Quincy,
Massachusetts 02171, serves as Custodian for the portfolio securities of the
Series and cash and, in that capacity, maintains certain financial and
accounting books and records pursuant to an agreement with the Fund. Its mailing
address is P.O. Box 1713, Boston, Massachusetts 02105.
Prudential Mutual Fund Services LLC (PMFS), Raritan Plaza One, Edison, New
Jersey 08837, serves as Transfer Agent and Dividend Disbursing Agent and, in
those capacities, maintains certain books and records for the Fund. PMFS is a
wholly-owned subsidiary of PIFM. Its mailing address is P.O. Box 15005, New
Brunswick, New Jersey 08906-5005.
HOW THE FUND VALUES ITS SHARES
THE SERIES' NET ASSET VALUE PER SHARE OR NAV IS DETERMINED BY SUBTRACTING ITS
LIABILITIES FROM THE VALUE OF ITS ASSETS AND DIVIDING THE REMAINDER BY THE
NUMBER OF OUTSTANDING SHARES. NAV IS CALCULATED SEPARATELY FOR EACH CLASS. THE
TRUSTEES HAVE FIXED THE SPECIFIC TIME OF DAY FOR THE COMPUTATION OF THE NET
ASSET VALUE OF THE SERIES TO BE AS OF 4:15 P.M., NEW YORK TIME.
Portfolio securities are valued based on market quotations or, if not readily
available, at fair value as determined in good faith under procedures
established by the Trustees. Securities may also be valued based on values
provided by a pricing service. See "Net Asset Value" in the Statement of
Additional Information.
The Series will compute its NAV once daily on days that the New York Stock
Exchange is open for trading except on days on which no orders to purchase, sell
or redeem shares have been received by the Series or days on which changes in
the value of the Series' portfolio securities do not materially affect the NAV.
Although the legal rights of each class of shares are substantially identical,
the different expenses borne by each class will result in different dividends.
As long as the Series declares dividends daily, the NAV of the Class A, Class B,
Class C and Class Z shares will generally be the same. It is expected, however,
that the Series' dividends will differ by approximately the amount of any
distribution and/or service fee expense accrual differential among the classes.
HOW THE FUND CALCULATES PERFORMANCE
FROM TIME TO TIME THE FUND MAY ADVERTISE THE YIELD, TAX EQUIVALENT YIELD AND
AVERAGE ANNUAL TOTAL RETURN AND AGGREGATE TOTAL RETURN OF THE SERIES IN
ADVERTISEMENTS OR SALES LITERATURE. YIELD, TAX EQUIVALENT YIELD AND TOTAL RETURN
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ARE CALCULATED SEPARATELY FOR CLASS A, CLASS B, CLASS C AND CLASS Z SHARES.
THESE FIGURES ARE BASED ON HISTORICAL EARNINGS AND ARE NOT INTENDED TO INDICATE
FUTURE PERFORMANCE. The yield refers to the income generated by an investment in
the Series over a one-month or 30-day period. This income is then annualized;
that is, the amount of income generated by the investment during that 30-day
period is assumed to be generated each 30-day period for twelve periods and is
shown as a percentage of the investment. The income earned on the investment is
also assumed to be reinvested at the end of the sixth 30-day period. The tax
equivalent yield is calculated similarly to the yield, except that the yield is
increased using a stated income tax rate to demonstrate the taxable yield
necessary to produce an after-tax yield equivalent to the Series. The total
return shows how much an investment in the Series would have increased
(decreased) over a specified period of time (I.E., one, five or ten years or
since inception of the Series) assuming that all distributions and dividends by
the Series were reinvested on the reinvestment dates during the period and less
all recurring fees. The aggregate total return reflects actual performance over
a stated period of time. Average annual total return is a hypothetical rate of
return that, if achieved annually, would have produced the same aggregate total
return if performance had been constant over the entire period. Average annual
total return smooths out variations in performance and takes into account any
applicable initial or contingent deferred sales charges. Neither "average
annual" total return nor aggregate total return takes into account any federal
or state income taxes which may be payable upon redemption. The Fund also may
include comparative performance information in advertising or marketing the
shares of the Series. Such performance information may include data from Lipper
Analytical Services, Inc., Morningstar Publications, Inc., other industry
publications, business periodicals and market indices. See "Performance
Information" in the Statement of Additional Information. Further performance
information is contained in the Series' annual and semi-annual reports to
shareholders, which may be obtained without charge. See "Shareholder
Guide--Shareholder Services--Reports to Shareholders."
TAXES, DIVIDENDS AND DISTRIBUTIONS
TAXATION OF THE FUND
THE SERIES HAS ELECTED TO QUALIFY AND INTENDS TO REMAIN QUALIFIED AS A
REGULATED INVESTMENT COMPANY UNDER THE INTERNAL REVENUE CODE. ACCORDINGLY, THE
SERIES WILL NOT BE SUBJECT TO FEDERAL INCOME TAXES ON ITS NET INVESTMENT INCOME
AND NET CAPITAL GAINS, IF ANY, THAT IT DISTRIBUTES TO ITS SHAREHOLDERS. TO THE
EXTENT NOT DISTRIBUTED BY THE SERIES, NET TAXABLE INVESTMENT INCOME AND CAPITAL
GAINS AND LOSSES ARE TAXABLE TO THE SERIES.
To the extent the Series invests in taxable obligations, it will earn taxable
investment income. Also, to the extent the Series engages in hedging
transactions in futures contracts and options thereon, it may earn both
short-term and long-term capital gain or loss. Under the Internal Revenue Code,
special rules apply to the treatment of certain options and futures contracts
(Section 1256 contracts). At the end of each year, such investments held by the
Series will be required to be "marked to market" for federal income tax
purposes, that is, treated as having been sold at market value. Sixty percent of
any gain or loss recognized on these "deemed sales" and on actual dispositions
will be treated as long-term capital gain or loss, and the remainder will be
treated as short-term capital gain or loss. See "Distributions and Tax
Information" in the Statement of Additional Information.
Gain or loss realized by the Series from the sale of securities generally will
be treated as capital gain or loss; however, gain from the sale of certain
securities (including municipal obligations) will be treated as ordinary income
to the extent of any "market discount." Market discount generally is the
difference, if any, between the price paid by the Series for the security and
the principal amount of the security (or, in the case of a security issued at an
original issue discount, the revised issue price of the security). The market
discount rule does not apply to any security that was acquired by the Series at
its original issue. See "Distributions and Tax Information" in the Statement of
Additional Information.
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TAXATION OF SHAREHOLDERS
In general, the character of tax-exempt interest distributed by the Series
will flow through as tax-exempt interest to its shareholders provided that 50%
or more of the value of its assets at the end of each quarter of its taxable
year is invested in state, municipal and other obligations, the interest on
which is excluded from gross income for federal income tax purposes. During
normal market conditions, at least 80% of the Series' total assets will be
invested in such obligations. See "How the Fund Invests--Investment Objective
and Policies."
Any dividends out of net taxable investment income, together with
distributions of net short-term gains (I.E., the excess of net short-term
capital gains over net long-term capital losses) distributed to shareholders,
will be taxable as ordinary income to the shareholder whether or not reinvested.
Any net capital gains (I.E., the excess of net capital gains from the sale of
assets held for more than 12 months over net short-term capital losses)
distributed to shareholders will be taxable as capital gains to the
shareholders, whether or not reinvested and regardless of the length of time a
shareholder has owned his or her shares. The maximum capital gains rate for
individuals is 28% with respect to assets held for more than 12 months; but not
more than 18 months, and 20% with respect to assets held for more than 18
months. The maximum capital gains rate for corporate shareholders currently is
the same as the maximum tax rate for ordinary income.
Any gain or loss realized upon a sale or redemption of Series shares by a
shareholder who is not a dealer in securities will be treated as capital gain or
loss. In the case of an individual, any such capital gain will be treated as
short-term capital loss if the shares were held for not more than 12 months,
mid-term gain, taxable at the maximum rate of 28%, if such shares were held for
more than 12, but not more than 18 months, and long-term capital gain, taxable
at the maximum rate of 20%, if such shares were held for more than 18 months. In
the case of a corporation, any such capital gain will be treated as long-term
capital gain, taxable at the same rates as ordinary income, if such shares were
held for more than 12 months. Any such capital loss will be treated as long-term
capital loss if the shares have been held more than one year and otherwise as
short-term capital loss. Any such loss with respect to shares that are held for
six months or less, however, will be treated as long-term capital loss to the
extent of any capital gain distributions received by the shareholder. In
addition, any short-term capital loss will be disallowed to the extent of any
tax-exempt dividends received by the shareholder on shares that are held for six
months or less.
The Fund has obtained opinions of counsel to the effect that neither (i) the
conversion of Class B shares into Class A shares nor (ii) the exchange of any
class of the Series' shares for any other class of its shares constitutes a
taxable event for federal income tax purposes. However, such opinions are not
binding on the Internal Revenue Service.
CERTAIN INVESTORS MAY INCUR FEDERAL ALTERNATIVE MINIMUM TAX LIABILITY AS A
RESULT OF THEIR INVESTMENT IN THE FUND. Tax-exempt interest from certain
municipal obligations (I.E., certain private activity bonds issued after August
7, 1986) will be treated as an item of tax preference for purposes of the
alternative minimum tax. The Fund anticipates that, under regulations to be
promulgated, items of tax preference incurred by the Series will be attributed
to the Series' shareholders, although some portion of such items could be
allocated to the Series itself. Depending upon each shareholder's individual
circumstances, the attribution of items of tax preference incurred by the Series
could result in liability for the shareholder for the alternative minimum tax.
Similarly, the Series could be liable for the alternative minimum tax for items
of tax preference attributed to it. The Series is permitted to invest in
municipal obligations of the type that will produce items of tax preference.
Corporate shareholders in the Series also will have to take into account the
adjustment for current earnings for alternative minimum tax purposes. Corporate
shareholders should consult with their tax advisers with respect to this
potential adjustment.
Florida does not currently impose an income tax on individuals. Thus,
individual shareholders of the Series will not be subject to any Florida state
income tax on distributions received from the Series. However, distributions are
likely to be taxable in whole or in part to corporate shareholders (which
include limited liability companies) which are subject to Florida corporate
income tax.
Florida currently imposes an "intangibles tax" on certain securities and other
intangible assets owned by Florida residents. Florida Obligations and certain
types of U.S. Government securities and other assets are exempt from this
intangibles tax. The
21
<PAGE>
Fund has obtained a ruling from Florida authorities that, if on January 1 of any
year the Series' portfolio of assets consists solely of such exempt investments,
then the Series' shares will be exempt from the Florida intangibles tax payable
in that year. If the Series holds any other type of assets on that date, then
the entire value of the Series shares (except for that portion of the value of
the shares attributable to U.S. government obligations) will be subject to the
Florida intangibles tax.
Interest on indebtedness incurred or continued to purchase or carry shares of
the Series will not be deductible for federal or Florida purposes.
Shareholders are advised to consult their own tax advisers regarding specific
questions as to federal, state or local taxes. See "Distributions and Tax
Information" in the Statement of Additional Information.
WITHHOLDING TAXES
Under the Internal Revenue Code, the Series is required to withhold and remit
to the U.S. Treasury 31% of redemption proceeds on the accounts of certain
shareholders who fail to furnish their tax identification numbers on IRS Form
W-9 (or IRS Form W-8 in the case of certain foreign shareholders) with the
required certifications regarding the shareholder's status under the federal
income tax law. Such withholding also is required on taxable dividends and
capital gain distributions made by the Series unless it is reasonably expected
that at least 95% of the distributions of the Series are comprised of tax-exempt
dividends.
Dividends of net taxable investment income and distributions of net short-term
capital gains paid to a shareholder (including a shareholder acting as a nominee
or fiduciary) who is a nonresident alien individual, a foreign corporation or a
foreign partnership (foreign shareholder) are subject to a 30% (or lower treaty
rate) withholding tax upon the gross amount of the dividends unless the
dividends are effectively connected with a U.S. trade or business conducted by
the foreign shareholder. Capital gain dividends paid to a foreign shareholder
are generally not subject to withholding tax. A foreign shareholder will,
however, be required to pay U.S. income tax on any dividends and capital gain
distributions which are effectively connected with a U.S. trade or business of
the foreign shareholder.
DIVIDENDS AND DISTRIBUTIONS
THE SERIES EXPECTS TO DECLARE DAILY AND PAY MONTHLY DIVIDENDS OF NET
INVESTMENT INCOME, IF ANY, AND MAKE DISTRIBUTIONS AT LEAST ANNUALLY OF ANY
CAPITAL GAINS IN EXCESS OF CAPITAL LOSSES. The Series has a capital loss
carryforward of $1,592,600, of which $1,460,000 expires in 2003 and $132,600 in
2005. Accordingly, no capital gains distributions are expected to be paid to
shareholders until net gains have been realized in excess of such amount.
Dividends paid by the Series with respect to each class of shares, to the extent
any dividends are paid, will be calculated in the same manner, at the same time,
on the same day and will be in the same amount except that each such class
(other than Class Z) will bear its own distribution charges, generally resulting
in lower dividends for Class B and Class C shares in relation to Class A and
Class Z shares and lower dividends for Class A shares in relation to Class Z
shares. Distributions of net capital gains, if any, will be paid in the same
amount for each class of shares. See "How the Fund Values its Shares."
DIVIDENDS AND DISTRIBUTIONS WILL BE PAID IN ADDITIONAL SHARES OF THE SERIES
BASED ON THE NAV OF EACH CLASS OF THE SERIES ON THE PAYMENT DATE AND RECORD
DATE, RESPECTIVELY, OR SUCH OTHER DATE AS THE TRUSTEES MAY DETERMINE, UNLESS THE
SHAREHOLDER ELECTS IN WRITING NOT LESS THAN FIVE BUSINESS DAYS PRIOR TO THE
RECORD DATE TO RECEIVE SUCH DIVIDENDS AND DISTRIBUTIONS IN CASH. Such election
should be submitted to Prudential Mutual Fund Services LLC, Attn: Account
Maintenance, P.O. Box 15015, New Brunswick, New Jersey 08906-5015. If you hold
shares through Prudential Securities, you should contact your financial adviser
to elect to receive dividends and distributions in cash. The Fund will notify
each shareholder after the close of the Fund's taxable year of both the dollar
amount and the taxable status of that year's dividends and distributions on a
per share basis.
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<PAGE>
GENERAL INFORMATION
DESCRIPTION OF SHARES
THE FUND WAS ESTABLISHED AS A MASSACHUSETTS BUSINESS TRUST ON MAY 18, 1984, BY
A DECLARATION OF TRUST. The Fund's activities are supervised by its Trustees.
The Declaration of Trust permits the Trustees to issue an unlimited number of
full and fractional shares in separate series, currently designated as the
Connecticut Money Market Series, Florida Series, Maryland Series, Massachusetts
Series, Massachusetts Money Market Series, Michigan Series, New Jersey Series,
New Jersey Money Market Series, New York Series, New York Money Market Series,
North Carolina Series, Ohio Series and Pennsylvania Series. The Series is
authorized to issue an unlimited number of shares, divided into four classes,
designated Class A, Class B, Class C and Class Z. Each class of shares
represents an interest in the same assets of the Series and is identical in all
respects except that (i) each class 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 "How the Fund is Managed--Distributor." In
accordance with the Fund's Declaration of Trust, the Trustees may authorize the
creation of additional series and classes within such series, with such
preferences, privileges, limitations and voting and dividend rights as the
Trustees may determine.
Shares of the Fund, when issued, are fully paid, nonassessable, fully
transferable and redeemable at the option of the holder. Shares are also
redeemable at the option of the Fund under certain circumstances as described
under "Shareholder Guide--How to Sell Your Shares." Each share of each class of
the Series is equal as to earnings, assets and voting privileges, except as
noted above, and each class (with the exception of Class Z shares, which are not
subject to any distribution or service fees) bears the expenses related to the
distribution of its shares. Except for the conversion feature applicable to the
Class B shares, there are no conversion, preemptive or other subscription
rights. In the event of liquidation, each share of beneficial interest in each
series is entitled to its portion of all of the Fund's assets after all debt and
expenses of the Fund have been paid. Since Class B and Class C shares generally
bear higher distribution expenses than Class A shares, the liquidation proceeds
to shareholders of those classes are likely to be lower than to Class A
shareholders and to Class Z shareholders, whose shares are not subject to any
distribution and/or service fees. The Fund's shares do not have cumulative
voting rights for the election of Trustees.
THE FUND DOES NOT INTEND TO HOLD ANNUAL MEETINGS OF SHAREHOLDERS UNLESS
OTHERWISE REQUIRED BY LAW. THE FUND WILL NOT BE REQUIRED TO HOLD MEETINGS OF
SHAREHOLDERS UNLESS, FOR EXAMPLE, THE ELECTION OF TRUSTEES IS REQUIRED TO BE
ACTED UPON BY SHAREHOLDERS UNDER THE INVESTMENT COMPANY ACT. SHAREHOLDERS HAVE
CERTAIN RIGHTS, INCLUDING THE RIGHT TO CALL A MEETING UPON A VOTE OF 10% OF THE
FUND'S OUTSTANDING SHARES FOR THE PURPOSE OF VOTING ON THE REMOVAL OF ONE OR
MORE TRUSTEES OR TO TRANSACT ANY OTHER BUSINESS.
The Declaration of Trust and the By-Laws of the Fund are designed to make the
Fund similar in certain respects to a Massachusetts business corporation. The
principal distinction between a Massachusetts business corporation and a
Massachusetts business trust relates to shareholder liability. Under
Massachusetts law, shareholders of a business trust may, under certain
circumstances, be held personally liable as partners for the obligations of the
fund, which is not the case with a corporation. The Declaration of Trust of the
Fund provides that shareholders shall not be subject to any personal liability
for the acts or obligations of the Fund and that every written obligation,
contract, instrument or undertaking made by the Fund shall contain a provision
to the effect that the shareholders are not individually bound thereunder.
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<PAGE>
ADDITIONAL INFORMATION
This Prospectus, including the Statement of Additional Information which has
been incorporated by reference herein, does not contain all the information set
forth in the Registration Statement filed by the Fund with the SEC under the
Securities Act. Copies of the Registration Statement may be obtained at a
reasonable charge from the SEC or may be examined, without charge, at the office
of the SEC in Washington, D.C.
SHAREHOLDER GUIDE
HOW TO BUY SHARES OF THE FUND
YOU MAY PURCHASE SHARES OF THE SERIES THROUGH PRUDENTIAL SECURITIES, PRUSEC OR
DIRECTLY FROM THE FUND, THROUGH ITS TRANSFER AGENT, PRUDENTIAL MUTUAL FUND
SERVICES LLC (PMFS OR THE TRANSFER AGENT), ATTENTION: INVESTMENT SERVICES, P.O.
BOX 15020, NEW BRUNSWICK, NEW JERSEY 08906-5020. Participants in programs
sponsored by Prudential Retirement Services should contact their client
representative for more information about Class Z shares. The purchase price is
the NAV next determined following receipt of an order in proper form by the
Transfer Agent or Prudential Securities plus a sales charge which, at your
option, may be imposed either (i) at the time of purchase (Class A shares) or
(ii) on a deferred basis (Class B or Class C shares). Class Z shares are offered
to a limited group of investors at net asset value without any sales charge.
Payment may be made by wire, check or through your brokerage account. See
"Alternative Purchase Plan" below. See also "How the Fund Values its Shares."
An investment in the Series may not be appropriate for tax-exempt or
tax-deferred investors. Such investors should consult their own tax advisers.
The minimum initial investment is $1,000 for Class A and Class B shares and
$5,000 for Class C shares, except that the minimum initial investment for Class
C shares may be waived from time to time. The minimum subsequent investment is
$100 for Class A, Class B and Class C shares. Class Z shares are not subject to
any minimum investment requirements. All minimum investment requirements are
waived for certain employee savings plans. For purchases made through the
Automatic Savings Accumulation Plan, the minimum initial and subsequent
investment is $50. See "Shareholder Services" below.
Application forms can be obtained from PMFS, Prudential Securities or Prusec.
If a share certificate is desired, it must be requested in writing for each
transaction. Certificates are issued only for full shares. Shareholders who hold
their shares through Prudential Securities will not receive share certificates.
The Fund reserves the right to reject any purchase order (including an
exchange into the Series) or to suspend or modify the continuous offering of its
shares. See "How to Sell Your Shares" below.
Your dealer is responsible for forwarding payment promptly to the Fund. The
Distributor reserves the right to cancel any purchase order for which payment
has not been received by the third business day following the investment.
Transactions in shares of the Series may be subject to postage and handling
charges imposed by your dealer.
PURCHASE BY WIRE. For an initial purchase of shares of the Series by wire, you
must first telephone PMFS at (800) 225-1852 (toll-free) to receive an account
number. The following information will be requested: your name, address, tax
identification number, class election, dividend distribution election, amount
being wired and wiring bank. Instructions should then be given by you to your
bank to transfer funds by wire to State Street Bank and Trust Company (State
Street), Boston, Massachusetts, Custody and Shareholder Services Division,
Attention: Prudential Municipal Series Fund (Florida Series), specifying on the
wire the account number assigned by PMFS and your name and identifying the class
in which you are eligible to invest (Class A, Class B, Class C or Class Z
shares).
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<PAGE>
If you arrange for receipt by State Street of Federal Funds prior to the
calculation of NAV (4:15 P.M., New York time), on a business day, you may
purchase shares of the Series as of that day. See "Net Asset Value" in the
Statement of Additional Information.
In making a subsequent purchase order by wire, you should wire State Street
directly and should be sure that the wire specifies Prudential Municipal Series
Fund (Florida Series), Class A, Class B, Class C or Class Z shares and your name
and individual account number. It is not necessary to call PMFS to make
subsequent purchase orders utilizing Federal Funds. The minimum amount which may
be invested by wire is $1,000.
ALTERNATIVE PURCHASE PLAN
THE FUND OFFERS FOUR CLASSES OF SHARES (CLASS A, CLASS B, CLASS C AND CLASS Z
SHARES) WHICH ALLOWS YOU TO CHOOSE THE MOST BENEFICIAL SALES CHARGE STRUCTURE
FOR YOUR INDIVIDUAL CIRCUMSTANCES GIVEN THE AMOUNT OF THE PURCHASE, THE LENGTH
OF TIME YOU EXPECT TO HOLD THE SHARES AND OTHER RELEVANT CIRCUMSTANCES
(ALTERNATIVE PURCHASE PLAN).
<TABLE>
<CAPTION>
ANNUAL 12B-1 FEES
(AS A % OF AVERAGE
SALES CHARGE DAILY NET ASSETS) OTHER INFORMATION
----------------------------------- ----------------------------------- -----------------------------------
<S> <C> <C> <C>
CLASS A Maximum initial sales charge of 3% .30 of 1% (currently being charged Initial sales charge waived or
of the public offering price at a rate of .10 of 1%) reduced for certain purchases
CLASS B Maximum contingent deferred sales .50 of 1% Shares convert to Class A shares
charge or CDSC of 5% of the lesser approximately seven years after
of the amount invested or the purchase
redemption proceeds; declines to
zero after six years
CLASS C Maximum CDSC of 1% of the lesser of .75 of 1% Shares do not convert to another
the amount invested or the
redemption proceeds on redemptions
made within one year of purchase
CLASS Z None None Sold to a limited group of
investors
</TABLE>
The four classes of shares represent an interest in the same portfolio of
investments of the Series and have the same rights, except that (i) each class
(with the exception of Class Z shares, which are not subject to any distribution
or service fees) bears the separate expenses of its Rule 12b-1 distribution and
service plan, (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, and (iii)
only Class B shares have a conversion feature. The four classes also have
separate exchange privileges. See "How to Exchange Your Shares" below. The
income attributable to each class and the dividends payable on the shares of
each class will be reduced by the amount of the distribution fee, if any, of
each class. Class B and Class C shares bear the expenses of a higher
distribution fee which will generally cause them to have higher expense ratios
and to pay lower dividends than the Class A and Class Z shares.
Financial advisers and other sales agents who sell shares of the Series will
receive different compensation for selling Class A, Class B, Class C and Class Z
shares and will generally receive more compensation initially for selling Class
A and Class B shares than for selling Class C or Class Z shares.
IN SELECTING A PURCHASE ALTERNATIVE, YOU SHOULD CONSIDER, AMONG OTHER THINGS,
(1) the length of time you expect to hold your investment, (2) the amount of any
applicable sales charge (whether imposed at the time of purchase or redemption)
and
25
<PAGE>
distribution-related fees, as noted above, (3) whether you qualify for any
reduction or waiver of any applicable sales charge, (4) the various exchange
privileges among the different classes of shares (see "How to Exchange Your
Shares" below) and (5) the fact that Class B shares automatically convert to
Class A shares approximately seven years after purchase (see "Conversion
Feature--Class B Shares" below).
The following is provided to assist you in determining which method of
purchase best suits your individual circumstances and is based on current fees
and expenses charged to the Series:
If you intend to hold your investment in the Series for less than 5 years and
do not qualify for a reduced sales charge on Class A shares, since Class A
shares are subject to a maximum initial sales charge of 3% and Class B shares
are subject to a CDSC of 5% which declines to zero over a 6 year period, you
should consider purchasing Class C shares over either Class A or Class B shares.
If you intend to hold your investment for 5 years or more and do not qualify
for a reduced sales charge on Class A shares, since Class B shares convert to
Class A shares approximately 7 years after purchase and because all of your
money would be invested initially in the case of Class B shares, you should
consider purchasing Class B shares over either Class A or Class C shares.
If you qualify for a reduced sales charge on Class A shares, it may be more
advantageous for you to purchase Class A shares over either Class B or Class C
shares regardless of how long you intend to hold your investment. However,
unlike Class B and Class C shares, you would not have all of your money invested
initially because the sales charge on Class A shares is deducted at the time of
purchase.
If you do not qualify for a reduced sales charge on Class A shares and you
purchase Class C shares, you would have to hold your investment for more than 4
years for the higher cumulative annual distribution-related fee on those shares
to exceed the initial sales charge plus cumulative annual distribution-related
fee on Class A shares. This does not take into account the time value of money,
which further reduces the impact of the higher Class C distribution-related fee
on the investment, fluctuations in net asset value, the effect of the return on
the investment over this period of time or redemptions when the CDSC is
applicable.
ALL PURCHASES OF $1 MILLION OR MORE, EITHER AS PART OF A SINGLE INVESTMENT OR
UNDER RIGHTS OF ACCUMULATION OR LETTERS OF INTENT, MUST BE FOR CLASS A SHARES
UNLESS THE PURCHASER IS ELIGIBLE TO PURCHASE CLASS Z SHARES. See "Reduction and
Waiver of Initial Sales Charges" and "Class Z Shares" below.
CLASS A SHARES
The offering price of Class A shares for investors choosing the initial sales
charge alternative is the next determined NAV plus a sales charge (expressed as
a percentage of the offering price and of the amount invested) as shown in the
following table:
<TABLE>
<CAPTION>
SALES CHARGE AS
SALES CHARGE AS PERCENTAGE OF DEALER CONCESSION
PERCENTAGE OF NET AMOUNT AS PERCENTAGE OF
AMOUNT OF PURCHASE OFFERING PRICE INVESTED OFFERING PRICE
------------------------ --------------- --------------- -----------------
<S> <C> <C> <C>
Less than $99,999 3.00% 3.09% 3.00%
$100,000 to $249,999 2.50 2.56 2.50
$250,000 to $499,999 1.50 1.52 1.50
$500,000 to $999,999 1.00 1.01 1.00
$1,000,000 and above None None None
</TABLE>
The Distributor may reallow the entire initial sales charge to dealers.
Selling dealers may be deemed to be underwriters, as that term is defined in the
Securities Act.
In connection with the sale of Class A shares at NAV (without payment of an
initial sales charge), the Manager, the Distributor or one of their affiliates
will pay dealers, financial advisers and other persons which distribute shares a
finders' fee from its own resources based on a percentage of the net asset value
of shares sold by such persons.
26
<PAGE>
REDUCTION AND WAIVER OF INITIAL SALES CHARGES. Reduced sales charges are
available through Rights of Accumulation and Letters of Intent. Shares of the
Fund and shares of other Prudential Mutual Funds (excluding money market funds
other than those acquired pursuant to the exchange privilege) may be aggregated
to determine the applicable reduction. See "Purchase and Redemption of Fund
Shares--Reduction and Waiver of Initial Sales Charges--Class A Shares" in the
Statement of Additional Information.
PRUARRAY SAVINGS PROGRAM. Class A shares are also offered at net asset value
to employees of companies that enter into a written agreement with Prudential
Retirement Services to participate in the PruArray Savings Program. Under this
Program, a limited number of Prudential Mutual Funds are available for purchase
at net asset value by Savings Accumulation Plans of the company's employees. The
Program is available only to employees who open a Savings Accumulation Plan
account with the Transfer Agent. The program is offered to companies that have
at least 250 eligible employees.
SPECIAL RULES APPLICABLE TO RETIREMENT PLANS. After a PruArray Plan qualifies
to purchase Class A shares at NAV, all subsequent purchases will be made at NAV.
OTHER WAIVERS. Class A shares may be purchased at NAV, through Prudential
Securities or the Transfer Agent, by the following persons: (a) officers and
current and former Directors/Trustees of the Prudential Mutual Funds (including
the Fund), (b) employees of Prudential Securities and PMF and their subsidiaries
and members of the families of such persons who maintain an "employee related"
account at Prudential Securities or the Transfer Agent, (c) employees of
subadvisers of the Prudential Mutual Funds provided that the purchases at NAV
are permitted by such person's employer, (d) Prudential employees and special
agents of Prudential and its subsidiaries and all persons who have retired
directly from active service with Prudential or one of its subsidiaries, (e)
registered representatives and employees of dealers who have entered into a
selected dealer agreement with Prudential Securities provided that purchases at
NAV are permitted by such person's employer and (f) investors who have a
business relationship with a financial adviser who joined Prudential Securities
from another investment firm, provided that (i) the purchase is made within 180
days of the commencement of the financial adviser's employment at Prudential
Securities or within one year in the case of benefit plans, (ii) the purchase is
made with proceeds of a redemption of shares of any open-end non-money market
fund sponsored by the financial adviser's previous employer (other than a fund
or other no-load fund which imposes a distribution or service fee of .25 of 1%
or less) and (iii) the financial adviser served as the client's broker on the
previous purchase.
You must notify the Transfer Agent either directly or through Prudential
Securities or Prusec that you are entitled to the reduction or waiver of the
sales charge. The reduction or waiver will be granted subject to confirmation of
your entitlement. No initial sales charges are imposed upon Class A shares
acquired upon the reinvestment of dividends and distributions. See "Purchase and
Redemption of Fund Shares--Reduction and Waiver of Initial Sales Charges--Class
A Shares" in the Statement of Additional Information.
CLASS B AND CLASS C SHARES
The offering price of Class B and Class C shares for investors choosing one of
the deferred sales charge alternatives is the NAV next determined following
receipt of an order by the Transfer Agent or Prudential Securities. Although
there is no sales charge imposed at the time of purchase, redemptions of Class B
and Class C shares may be subject to a CDSC. See "How to Sell Your
Shares--Contingent Deferred Sales Charges" below. The Distributor will pay sales
commissions of up to 4% of the purchase price of Class B shares to dealers,
financial advisers and other persons who sell Class B shares at the time of sale
from its own resources. This facilitates the ability of the Fund to sell the
Class B shares without an initial sales charge being deducted at the time of
purchase. The Distributor anticipates that it will recoup its advancement of
sales commissions from the combination of the CDSC and the distribution fee. See
"How the Fund is Managed--Distributor." In connection with the sale of Class C
shares, the Distributor will pay dealers, financial advisers and other persons
which distribute Class C shares a sales commission of up to 1% of the purchase
price at the time of the sale.
27
<PAGE>
CLASS Z SHARES
Class Z shares of the Series are available for purchase by participants in any
fee-based program sponsored by Prudential Securities or its affiliates which
includes mutual funds as investment options and for which the Fund is an
available option.
In connection with the sale of Class Z shares, the Manager, the Distributor or
one of their affiliates may pay dealers, financial advisers and other persons
which distribute shares a finders' fee based on a percentage of the net asset
value of shares sold by such persons.
HOW TO SELL YOUR SHARES
YOU CAN REDEEM YOUR SHARES OF THE SERIES AT ANY TIME FOR CASH AT THE NAV NEXT
DETERMINED AFTER THE REDEMPTION REQUEST IS RECEIVED IN PROPER FORM BY THE
TRANSFER AGENT OR PRUDENTIAL SECURITIES. SEE "HOW THE FUND VALUES ITS SHARES."
In certain cases, however, redemption proceeds will be reduced by the amount of
any applicable contingent deferred sales charge, as described below. See
"Contingent Deferred Sales Charges" below.
IF YOU HOLD SHARES OF THE SERIES THROUGH PRUDENTIAL SECURITIES, YOU MUST
REDEEM SHARES THROUGH PRUDENTIAL SECURITIES. PLEASE CONTACT YOUR PRUDENTIAL
SECURITIES FINANCIAL ADVISER.
IF YOU HOLD SHARES IN NON-CERTIFICATE FORM, A WRITTEN REQUEST FOR REDEMPTION
SIGNED BY YOU EXACTLY AS THE ACCOUNT IS REGISTERED IS REQUIRED. IF YOU HOLD
CERTIFICATES, THE CERTIFICATES, SIGNED IN THE NAME(S) SHOWN ON THE FACE OF THE
CERTIFICATES, MUST BE RECEIVED BY THE TRANSFER AGENT IN ORDER FOR THE REDEMPTION
REQUEST TO BE PROCESSED. IF REDEMPTION IS REQUESTED BY A CORPORATION,
PARTNERSHIP, TRUST OR FIDUCIARY, WRITTEN EVIDENCE OF AUTHORITY ACCEPTABLE TO THE
TRANSFER AGENT MUST BE SUBMITTED BEFORE SUCH REQUEST WILL BE ACCEPTED. All
correspondence and documents concerning redemptions should be sent to the Fund
in care of its Transfer Agent, Prudential Mutual Fund Services LLC, Attention:
Redemption Services, P.O. Box 15010, New Brunswick, New Jersey 08906-5010.
If the proceeds of the redemption (a) exceed $50,000, (b) are to be paid to a
person other than the record owner, (c) are to be sent to an address other than
the address on the Transfer Agent's records, or (d) are to be paid to a
corporation, partnership, trust or fiduciary, the signature(s) on the redemption
request and on the certificates, if any, or stock power must be guaranteed by an
"eligible guarantor institution." An "eligible guarantor institution" includes
any bank, broker, dealer or credit union. The Transfer Agent reserves the right
to request additional information from, and make reasonable inquiries of, any
eligible guarantor institution. For clients of Prusec, a signature guarantee may
be obtained from the agency or office manager of most Prudential Insurance and
Financial Services or Preferred Services offices.
PAYMENT FOR SHARES PRESENTED FOR REDEMPTION WILL BE MADE BY CHECK WITHIN SEVEN
DAYS AFTER RECEIPT BY THE TRANSFER AGENT OF THE CERTIFICATE AND/OR WRITTEN
REQUEST EXCEPT AS INDICATED BELOW. IF YOU HOLD SHARES THROUGH PRUDENTIAL
SECURITIES, PAYMENT FOR SHARES PRESENTED FOR REDEMPTION WILL BE CREDITED TO YOUR
PRUDENTIAL SECURITIES ACCOUNT, UNLESS YOU INDICATE OTHERWISE. Such payment may
be postponed or the right of redemption suspended at times (a) when the New York
Stock Exchange is closed for other than customary weekends and holidays, (b)
when trading on such Exchange is restricted, (c) when an emergency exists as a
result of which disposal by the Series of securities owned by it is not
reasonably practicable or it is not reasonably practicable for the Series fairly
to determine the value of its net assets, or (d) during any other period when
the SEC, by order, so permits; provided that applicable rules and regulations of
the SEC shall govern as to whether the conditions prescribed in (b), (c) or (d)
exist.
PAYMENT FOR REDEMPTION OF RECENTLY PURCHASED SHARES WILL BE DELAYED UNTIL THE
FUND OR ITS TRANSFER AGENT HAS BEEN ADVISED THAT THE PURCHASE CHECK HAS BEEN
HONORED, UP TO 10 CALENDAR DAYS FROM THE TIME OF RECEIPT OF THE PURCHASE CHECK
BY THE TRANSFER AGENT. SUCH DELAY MAY BE AVOIDED BY PURCHASING SHARES BY WIRE OR
BY CERTIFIED OR CASHIER'S CHECK.
28
<PAGE>
REDEMPTION IN KIND. If the Trustees determine that it would be detrimental to
the best interests of the remaining shareholders of the Fund to make payment
wholly or partly in cash, the Fund may pay the redemption price in whole or in
part by a distribution in kind of securities from the investment portfolio of
the Series of the Fund, in lieu of cash, in conformity with applicable rules of
the SEC. Securities will be readily marketable and will be valued in the same
manner as in a regular redemption. See "How the Fund Values its Shares." If your
shares are redeemed in kind, you will incur transaction costs in converting the
assets into cash. The Fund, however, has elected to be governed by Rule 18f-1
under the Investment Company Act, under which the Fund is obligated to redeem
shares solely in cash up to the lesser of $250,000 or 1% of the net asset value
of the Fund during any 90-day period for any one shareholder.
INVOLUNTARY REDEMPTION. In order to reduce expenses of the Fund, the Trustees
may redeem all of the shares of any shareholder, other than a shareholder which
is an IRA or other tax-deferred retirement plan, whose account has a net asset
value of less than $500 due to a redemption. The Fund will give such
shareholders 60 days' prior written notice in which to purchase sufficient
additional shares to avoid such redemption. No contingent deferred sales charge
will be imposed on any such involuntary redemption.
90-DAY REPURCHASE PRIVILEGE. If you redeem your shares and have not previously
exercised the repurchase privilege, you may reinvest any portion or all of the
proceeds of such redemption in shares of the Series at the NAV next determined
after the order is received, which must be within 90 days after the date of the
redemption. Any CDSC paid in connection with such redemption will be credited
(in shares) to your account. (If less than a full repurchase is made, the credit
will be on a pro rata basis.) You must notify the Fund's Transfer Agent, either
directly or through Prudential Securities, at the time the repurchase privilege
is exercised to adjust your account for the CDSC you previously paid.
Thereafter, any redemptions will be subject to the CDSC applicable at the time
of the redemption. See "Contingent Deferred Sales Charges" below. Exercise of
the repurchase privilege may affect the federal tax treatment of any gain
realized upon redemption. See "Distributions and Tax Information" in the
Statement of Additional Information.
CONTINGENT DEFERRED SALES CHARGES
Redemptions of Class B shares will be subject to a contingent deferred sales
charge or CDSC declining from 5% to zero over a six-year period. Class C shares
redeemed within one year of purchase will be subject to a 1% CDSC. The CDSC will
be deducted from the redemption proceeds and reduce the amount paid to you. A
CDSC will be applied on the lesser of the original purchase price or the current
value of the shares being redeemed. Increases in the value of your shares or
shares acquired through reinvestment of dividends or distributions are not
subject to a CDSC. The amount of any contingent deferred sales charge will be
paid to and retained by the Distributor. See "How the Fund is
Managed--Distributor" and "Waiver of the Contingent Deferred Sales
Charges--Class B Shares" below.
The amount of the CDSC, if any, will vary depending on the number of years
from the time of payment for the purchase of shares until the time of redemption
of such shares. Solely for purposes of determining the number of years from the
time of any payment for the purchase of shares, all payments during a month will
be aggregated and deemed to have been made on the last day of the month. The
CDSC will be calculated from the first day of the month after the initial
purchase, excluding the time shares were held in a money market fund. See "How
to Exchange Your Shares" below.
29
<PAGE>
The following table sets forth the rates of the CDSC applicable to redemptions
of Class B shares:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED
SALES
CHARGE AS A PERCENTAGE
YEAR SINCE PURCHASE OF DOLLARS INVESTED OR
PAYMENT MADE REDEMPTION PROCEEDS
- -------------------------------------------------- ----------------------
<S> <C>
First............................................. 5.0%
Second............................................ 4.0
Third............................................. 3.0
Fourth............................................ 2.0
Fifth............................................. 1.0
Sixth............................................. 1.0
Seventh........................................... None
</TABLE>
In determining whether a CDSC is applicable to a redemption, the calculation
will be made in a manner that results in the lowest possible rate. It will be
assumed that the redemption is made first of amounts representing shares
acquired pursuant to the reinvestment of dividends and distributions; then of
amounts representing the increase in net asset value above the total amount of
payments for the purchase of shares made during the preceding six years; then of
amounts representing the cost of shares held beyond the applicable CDSC period;
and finally, of amounts representing the cost of shares held for the longest
period of time within the applicable CDSC period.
For example, assume you purchased 100 Class B shares at $10 per share for a
cost of $1,000. Subsequently, you acquired 5 additional Class B shares through
dividend reinvestment. During the second year after purchase you decided to
redeem $500 of your investment. Assuming at the time of the redemption the NAV
had appreciated to $12 per share, the value of your Class B shares would be
$1,260 (105 shares at $12 per share). The CDSC would not be applied to the value
of the reinvested dividend shares and the amount which represents appreciation
($260). Therefore, $240 of the $500 redemption proceeds ($500 minus $260) would
be charged at a rate of 4% (the applicable rate in the second year after
purchase) for a total CDSC of $9.60.
For federal income tax purposes, the amount of the CDSC will reduce the gain
or increase the loss, as the case may be, on the amount recognized on the
redemption of shares.
WAIVER OF THE CONTINGENT DEFERRED SALES CHARGES--CLASS B SHARES. The CDSC will
be waived in the case of a redemption following the death or disability of a
shareholder or, in the case of a trust account, following the death or
disability of the grantor. The waiver is available for total or partial
redemptions of shares owned by a person, either individually or in joint tenancy
(with rights of survivorship), at the time of death or initial determination of
disability, provided that the shares were purchased prior to death or
disability. In addition, the CDSC will be waived on redemptions of shares held
by a Trustee of the Fund.
SYSTEMATIC WITHDRAWAL PLAN. The CDSC will be waived (or reduced) on certain
redemptions from a Systematic Withdrawal Plan. On an annual basis, up to 12% of
the total dollar amount subject to the CDSC may be redeemed without charge. The
Transfer Agent will calculate the total amount available for this waiver
annually on the anniversary of your purchase or, for shares purchased prior to
March 1, 1997, on March 1 of the current year. The CDSC will be waived (or
reduced) on redemptions until this threshold 12% amount is reached.
You must notify the Fund's Transfer Agent either directly or through
Prudential Securities or Prusec, at the time of redemption, that you are
entitled to waiver of the CDSC and provide the Transfer Agent with such
supporting documentation as it may deem appropriate. The waiver will be granted
subject to confirmation of your entitlement. See "Purchase and Redemption of
Fund Shares--Waiver of the Contingent Deferred Sales Charge--Class B Shares" in
the Statement of Additional Information.
30
<PAGE>
CONVERSION FEATURE--CLASS B SHARES
Class B shares will automatically convert to Class A shares on a quarterly
basis approximately seven years after purchase. Conversions will be effected at
relative net asset value without the imposition of any additional sales charge.
Since the Fund tracks amounts paid rather than the number of shares bought on
each purchase of Class B shares, the number of Class B shares eligible to
convert to Class A shares (excluding shares acquired through the automatic
reinvestment of dividends and other distributions) (the Eligible Shares) will be
determined on each conversion date in accordance with the following formula: (i)
the ratio of (a) the amounts paid for Class B shares purchased at least seven
years prior to the conversion date to (b) the total amount paid for all Class B
shares purchased and then held in your account (ii) multiplied by the total
number of Class B shares purchased and then held in your account. Each time any
Eligible Shares in your account convert to Class A shares, all shares or amounts
representing Class B shares then in your account that were acquired through the
automatic reinvestment of dividends and other distributions will convert to
Class A shares.
For purposes of determining the number of Eligible Shares, if the Class B
shares in your account on any conversion date are the result of multiple
purchases at different net asset values per share, the number of Eligible Shares
calculated as described above will generally be either more or less than the
number of shares actually purchased approximately seven years before such
conversion date. For example, if 100 shares were initially purchased at $10 per
share (for a total of $1,000) and a second purchase of 100 shares was
subsequently made at $11 per share (for a total of $1,100), 95.24 shares would
convert approximately seven years from the initial purchase (I.E., $1,000
divided by $2,100 (47.62%) multiplied by 200 shares equals 95.24 shares). The
Manager reserves the right to modify the formula for determining the number of
Eligible Shares in the future as it deems appropriate on notice to shareholders.
Since annual distribution-related fees are lower for Class A shares than Class
B shares, the per share net asset value of the Class A shares may be higher than
that of the Class B shares at the time of conversion. Thus, although the
aggregate dollar value will be the same, you may receive fewer Class A shares
than Class B shares converted. See "How the Fund Values its Shares."
For purposes of calculating the applicable holding period for conversions, all
payments for Class B shares during a month will be deemed to have been made on
the last day of the month, or for Class B shares acquired through exchange, or a
series of exchanges, on the last day of the month in which the original payment
for purchases of such Class B shares was made. For Class B shares previously
exchanged for shares of a money market fund, the time period during which such
shares were held in the money market fund will be excluded. For example, Class B
shares held in a money market fund for one year will not convert to Class A
shares until approximately eight years from purchase. For purposes of measuring
the time period during which shares are held in a money market fund, exchanges
will be deemed to have been made on the last day of the month. Class B shares
acquired through exchange will convert to Class A shares after expiration of the
conversion period applicable to the original purchase of such shares.
The conversion feature may be subject to the continuing availability of
opinions of counsel or rulings of the Internal Revenue Service (i) that the
dividends and other distributions paid on Class A, Class B, Class C and Class Z
shares will not constitute "preferential dividends" under the Internal Revenue
Code and (ii) that the conversion of shares does not constitute a taxable event.
The conversion of Class B shares into Class A shares may be suspended if such
opinions or rulings are no longer available. If conversions are suspended, Class
B shares of the Series will continue to be subject, possibly indefinitely, to
their higher annual distribution and service fee.
HOW TO EXCHANGE YOUR SHARES
AS A SHAREHOLDER OF THE SERIES, YOU HAVE AN EXCHANGE PRIVILEGE WITH THE OTHER
SERIES OF THE FUND AND CERTAIN OTHER PRUDENTIAL MUTUAL FUNDS (THE EXCHANGE
PRIVILEGE), INCLUDING ONE OR MORE SPECIFIED MONEY MARKET FUNDS, SUBJECT TO THE
MINIMUM INVESTMENT REQUIREMENTS OF SUCH FUNDS. CLASS A, CLASS B, CLASS C AND
CLASS Z SHARES OF THE SERIES MAY BE EXCHANGED FOR CLASS A, CLASS B, CLASS C AND
CLASS Z SHARES, RESPECTIVELY, OF THE OTHER SERIES OF THE FUND OR ANOTHER
31
<PAGE>
FUND ON THE BASIS OF THE RELATIVE NAV. No sales charge will be imposed at the
time of the exchange. Any applicable CDSC payable upon the redemption of shares
exchanged will be calculated from the first day of the month after the initial
purchase, excluding the time shares were held in a money market fund. Class B
and Class C shares may not be exchanged into money market funds other than
Prudential Special Money Market Fund, Inc. For purposes of calculating the
holding period applicable to the Class B conversion feature, the time period
during which Class B shares were held in a money market fund will be excluded.
See "Conversion Feature--Class B Shares" above. An exchange will be treated as a
redemption and purchase for tax purposes. See "Shareholder Investment
Account--Exchange Privilege" in the Statement of Additional Information.
IN ORDER TO EXCHANGE SHARES BY TELEPHONE, YOU MUST AUTHORIZE TELEPHONE
EXCHANGES ON YOUR INITIAL APPLICATION FORM OR BY WRITTEN NOTICE TO THE TRANSFER
AGENT AND HOLD SHARES IN NON-CERTIFICATE FORM. Thereafter, you may call the Fund
at (800) 225-1852 to execute a telephone exchange of shares, weekdays, except
holidays, between the hours of 8:00 A.M. and 6:00 P.M., New York time. For your
protection and to prevent fraudulent exchanges, your telephone call will be
recorded and you will be asked to provide your personal identification number. A
written confirmation of the exchange transaction will be sent to you. NEITHER
THE FUND NOR ITS AGENTS WILL BE LIABLE FOR ANY LOSS, LIABILITY OR COST WHICH
RESULTS FROM ACTING UPON INSTRUCTIONS REASONABLY BELIEVED TO BE GENUINE UNDER
THE FOREGOING PROCEDURES. All exchanges will be made on the basis of the
relative NAV of the two funds (or series) next determined after the request is
received in good order. The Exchange Privilege is available only in states where
the exchange may legally be made.
IF YOU HOLD SHARES THROUGH PRUDENTIAL SECURITIES, YOU MUST EXCHANGE YOUR
SHARES BY CONTACTING YOUR PRUDENTIAL SECURITIES FINANCIAL ADVISER.
IF YOU HOLD CERTIFICATES, THE CERTIFICATES, SIGNED IN THE NAME(S) SHOWN ON THE
FACE OF THE CERTIFICATES, MUST BE RETURNED IN ORDER FOR THE SHARES TO BE
EXCHANGED. SEE "HOW TO SELL YOUR SHARES" ABOVE.
You may also exchange shares by mail by writing to Prudential Mutual Fund
Services LLC, Attention: Exchange Processing, P.O. Box 15010, New Brunswick, New
Jersey 08906-5010.
IN PERIODS OF SEVERE MARKET OR ECONOMIC CONDITIONS, THE TELEPHONE EXCHANGE OF
SHARES MAY BE DIFFICULT TO IMPLEMENT AND YOU SHOULD MAKE EXCHANGES BY MAIL BY
WRITING TO PRUDENTIAL MUTUAL FUND SERVICES LLC, AT THE ADDRESS NOTED ABOVE.
SPECIAL EXCHANGE PRIVILEGES. A special exchange privilege is available for
shareholders who qualify to purchase Class A shares at NAV (see "Alternative
Purchase Plan--Class A Shares--Reduction and Waiver of Initial Sales Charges"
above) and for shareholders who qualify to purchase Class Z shares (see
"Alternative Purchase Plan--Class Z Shares" above). Under this exchange
privilege, amounts representing any Class B and Class C shares (which are not
subject to a CDSC) held in such a shareholder's account will be automatically
exchanged for Class A shares for shareholders who qualify to purchase Class A
shares at NAV on a quarterly basis, unless the shareholder elects otherwise.
Similarly, shareholders who qualify to purchase Class Z shares will have their
Class B and Class C shares which are not subject to a CDSC and their Class A
shares exchanged for Class Z shares on a quarterly basis. Eligibility for this
exchange privilege will be calculated on the business day prior to the date of
the exchange. Amounts representing Class B or Class C shares which are not
subject to a CDSC include the following: (1) amounts representing Class B or
Class C shares acquired pursuant to the automatic reinvestment of dividends and
distributions, (2) amounts representing the increase in the net asset value
above the total amount of payments for the purchase of Class B or Class C shares
and (3) amounts representing Class B or Class C shares held beyond the
applicable CDSC period. Class B and Class C shareholders must notify the
Transfer Agent either directly or through Prudential Securities or Prusec that
they are eligible for this special exchange privilege.
Participants in any fee-based program for which the Fund is an available
option will have their Class A shares, if any, exchanged for Class Z shares when
they elect to have those assets become a part of the fee-based program. Upon
leaving the program (whether voluntarily or not), such Class Z shares (and, to
the extent provided for in the program, Class Z shares acquired through
participation in the program) will be exchanged for Class A shares at net asset
value.
32
<PAGE>
The Exchange Privilege is not a right and may be suspended, terminated or
modified on 60 days' notice to shareholders.
FREQUENT TRADING. The Fund and the other Prudential Mutual Funds are not
intended to serve as vehicles for frequent trading in response to short-term
fluctuations in the market. Due to the disruptive effect that market timing
investment strategies and excessive trading can have on efficient portfolio
management, each Prudential Mutual Fund and the Fund reserves the right to
refuse purchase orders and exchanges by any person, group or commonly controlled
accounts, if, in the Manager's sole judgment, such person, group or accounts
were following a market timing strategy or were otherwise engaging in excessive
trading (Market Timers).
To implement this authority to protect the Fund and its shareholders from
excessive trading, the Fund will reject all exchanges and purchases from a
Market Timer unless the Market Timer has entered into a written agreement with
the Fund or its affiliates pursuant to which the Market Timer has agreed to
abide by certain procedures, which include a daily dollar limit on trading. The
Fund may notify the Market Timer of rejection of an exchange or purchase order
subsequent to the day on which the order was placed.
SHAREHOLDER SERVICES
In addition to the Exchange Privilege, as a shareholder in the Series, you can
take advantage of the following services and privileges:
- AUTOMATIC REINVESTMENT OF DIVIDENDS AND/OR DISTRIBUTIONS WITHOUT A SALES
CHARGE. For your convenience, all dividends and distributions are automatically
reinvested in full and fractional shares of the Series at NAV without a sales
charge. You may direct the Transfer Agent in writing not less than 5 full
business days prior to the record date to have subsequent dividends and/or
distributions sent in cash rather than reinvested. If you hold shares through
Prudential Securities, you should contact your financial adviser.
- AUTOMATIC SAVINGS ACCUMULATION PLAN (ASAP). Under ASAP you may make regular
purchases of the Series' shares in amounts as little as $50 via an automatic
debit to a bank account or Prudential Securities account (including a Command
Account). For additional information about this service, you may contact your
Prudential Securities financial adviser, Prusec representative or the Transfer
Agent directly.
- SYSTEMATIC WITHDRAWAL PLAN. A systematic withdrawal plan is available to
shareholders which provides for monthly or quarterly checks. Withdrawals of
Class B and Class C shares may be subject to a CDSC. See "How to Sell Your
Shares-- Contingent Deferred Sales Charges" above.
- REPORTS TO SHAREHOLDERS. The Fund will send you annual and semi-annual
reports. The financial statements appearing in annual reports are audited by
independent accountants. In order to reduce duplicate mailing and printing
expenses, the Fund will provide one annual and semi-annual shareholder report
and annual prospectus per household. You may request additional copies of such
reports by calling (800) 225-1852 or by writing to the Fund at Gateway Center
Three, 100 Mulberry Street, Newark, New Jersey 07102-4077. In addition, monthly
unaudited financial data is available upon request from the Fund.
- SHAREHOLDER INQUIRIES. Inquiries should be addressed to the Fund at Gateway
Center Three, 100 Mulberry Street, Newark, New Jersey 07102-4077, or by
telephone, at (800) 225-1852 (toll-free) or, from outside the U.S.A., at (908)
417-7555 (collect).
For additional information regarding the services and privileges described
above, see "Shareholder Investment Account" in the Statement of Additional
Information.
33
<PAGE>
DESCRIPTION OF SECURITY RATINGS
MOODY'S INVESTORS SERVICE
BOND RATINGS
Aaa: Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edged." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group, they comprise what are generally known
as high grade bonds. They are rated lower than 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
which make the long-term risks appear somewhat larger than the Aaa securities.
A: Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper-medium-grade obligations. Factors giving security
to principal and interest are considered adequate but elements may be present
which suggest a susceptibility to impairment sometime in the future.
Baa: Bonds which are rated Baa are considered as medium grade obligations,
I.E., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present, but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba: Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate, and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Bonds rated within the Aa, A, Baa, Ba and B categories which Moody's believes
possess the strongest credit attributes within those categories are designated
by the symbols Aa1, A1, Baa1, Ba1 and B1.
Caa: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca: Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
C: Bonds which are rated C are the lowest-rated class of bonds, and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
SHORT-TERM RATINGS
Moody's ratings for tax-exempt notes and other short-term loans are designated
Moody's Investment Grade (MIG). This distinction is in recognition of the
differences between short-term and long-term credit risk.
MIG 1: Loans bearing the designation MIG 1 are of the best quality, enjoying
strong protection by established cash flows, superior liquidity support or
demonstrated broad-based access to the market for refinancing.
A-1
<PAGE>
MIG 2: Loans bearing the designation MIG 2 are of high quality, with margins
of protection ample although not so large as in the preceding group.
MIG 3: Loans bearing the designation MIG 3 are of favorable quality, with all
security elements accounted for but lacking the strength of the preceding
grades.
MIG 4: Loans bearing the designation MIG 4 are of adequate quality.
Protection commonly regarded and required of an investment security is present
and although not distinctly or predominantly speculative, there is specific
risk.
SHORT-TERM DEBT RATINGS
Moody's Short-Term Debt Ratings are opinions of the ability of issuers to
repay punctually senior debt obligations which have an original maturity not
exceeding one year.
Prime-1: Issuers rated 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.
Prime-3: Issuers rated Prime-3 (or supporting institutions) have an
acceptable ability for repayment of senior short-term debt obligations.
Not Prime: Issuers rated Not Prime do not fall within any of the Prime rating
categories.
STANDARD & POOR'S RATINGS GROUP
BOND RATINGS
AAA: Debt rated AAA has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.
AA: Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the highest-rated issues only in small degree.
A: Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB: Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher-rated categories.
BB, B, CCC, CC and C: Debt rated BB, B, CCC, CC or C is regarded as having
predominantly speculative characteristics with respect to capacity to pay
interest and repay principal. BB indicates the least degree of speculation and C
the highest. While such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
D: Debt rated D is in payment default. This rating is used when interest
payments or principal payments are not made on the date due even if the
applicable grace period has not expired, unless S&P believes that such payments
will be made during such grace period.
COMMERCIAL PAPER RATINGS
An S&P Commercial Paper rating is a current assessment of the likelihood of
timely payment of debt considered short-term in the relevant market.
A-2
<PAGE>
A-1: The A-1 designation indicates that the degree of safety regarding timely
payment is strong. Those issues determined to possess extremely strong safety
characteristics are denoted with a plus sign (+) designation.
A-2: Capacity for timely payment on issues with the designation A-2 is
satisfactory. However, the relative degree of safety is not as high as for
issues designated A-1.
A-3: Issues carrying this designation have adequate capacity for timely
payment. They are, however, more vulnerable to the adverse effects of changes in
circumstances than obligations carrying the higher designations.
MUNICIPAL NOTES
A municipal note rating reflects the liquidity concerns and market access
risks unique to municipal notes. Municipal notes due in three years or less will
likely receive a municipal note rating, while notes maturing beyond three years
will most likely receive a long-term debt rating. Municipal notes are rated
SP-1, SP-2 or SP-3. The designation SP-1 indicates a very strong capacity to pay
principal and interest. Those issues determined to possess extremely strong
safety characteristics are denoted with a plus sign (+) designation. An SP-2
designation indicates a satisfactory capacity to pay principal and interest. An
SP-3 designation indicates speculative capacity to pay principal and interest.
A-3
<PAGE>
THE PRUDENTIAL MUTUAL FUND FAMILY
Prudential Investments Fund Management offers a broad range of mutual funds
designed to meet your individual needs. We welcome you to review the investment
options available through our family of funds. For more information on the
Prudential Mutual Funds, including charges and expenses, contact your Prudential
Securities financial adviser or Prusec representative or telephone the Funds at
(800) 225-1852 for a free prospectus. Read the prospectus carefully before you
invest or send money.
TAXABLE BOND FUNDS
--------------------------
Prudential Diversified Bond Fund, Inc.
Prudential Government Income Fund, Inc.
Prudential Government Securities Trust
Short-Intermediate Term Series
Prudential High Yield Fund, Inc.
Prudential Mortgage Income Fund, Inc.
Prudential Structured Maturity Fund, Inc.
Income Portfolio
The BlackRock Government Income Trust
TAX-EXEMPT BOND FUNDS
-----------------------------
Prudential California Municipal Fund
California Series
California Income Series
Prudential Municipal Bond Fund
High Yield Series
Insured Series
Intermediate Series
Prudential Municipal Series Fund
Florida Series
Maryland Series
Massachusetts Series
Michigan Series
New Jersey Series
New York Series
North Carolina Series
Ohio Series
Pennsylvania Series
Prudential National Municipals Fund, Inc.
GLOBAL FUNDS
--------------------
Prudential Europe Growth Fund, Inc.
Prudential Global Genesis Fund, Inc.
Prudential Global Limited Maturity Fund, Inc.
Limited Maturity Portfolio
Prudential Intermediate Global Income Fund, Inc.
Prudential International Bond Fund, Inc.
Prudential Natural Resources Fund, Inc.
Prudential Pacific Growth Fund, Inc.
Prudential World Fund, Inc.
Global Series
International Stock Series
The Global Total Return Fund, Inc.
Global Utility Fund, Inc.
EQUITY FUNDS
--------------------
Prudential Balanced Fund
Prudential Distressed Securities Fund, Inc.
Prudential Dryden Fund
Prudential Active Balanced Fund
Prudential Stock Index Fund
Prudential Small-Cap Index Fund
Prudential Bond Market Index Fund
Prudential Pacific Index Fund
Prudential Europe Index Fund
Prudential Emerging Growth Fund, Inc.
Prudential Equity Fund, Inc.
Prudential Equity Income Fund
Prudential Jennison Series Fund, Inc.
Prudential Jennison Growth Fund
Prudential Jennison Growth & Income Fund
Prudential Multi-Sector Fund, Inc.
Prudential Small-Cap Quantum Fund, Inc.
Prudential Small Company Value Fund, Inc.
Prudential Utility Fund, Inc.
Nicholas-Applegate Fund, Inc.
Nicholas-Applegate Growth Equity Fund
MONEY MARKET FUNDS
--------------------------
- - TAXABLE MONEY MARKET FUNDS
Prudential Government Securities Trust
Money Market Series
U.S. Treasury Money Market Series
Prudential Special Money Market Fund, Inc.
Money Market Series
Prudential MoneyMart Assets, Inc.
- - TAX-FREE MONEY MARKET FUNDS
Prudential Tax-Free Money Fund, Inc.
Prudential California Municipal Fund
California Money Market Series
Prudential Municipal Series Fund
Connecticut Money Market Series
Massachusetts Money Market Series
New Jersey Money Market Series
New York Money Market Series
- - COMMAND FUNDS
Command Money Fund
Command Government Fund
Command Tax-Free Fund
- - INSTITUTIONAL MONEY MARKET FUNDS
Prudential Institutional Liquidity Portfolio, Inc.
Institutional Money Market Series
B-1
<PAGE>
No dealer, sales representative or any other person has been authorized to give
any information or to make any representations, other than those contained in
this Prospectus, in connection with the offer contained herein, and, if given or
made, such other information or representations must not be relied upon as
having been authorized by the Fund or the Distributor. This Prospectus does not
constitute an offer by the Fund or by the Distributor to sell or a solicitation
of any offer to buy any of the securities offered hereby in any jurisdiction to
any person to whom it is unlawful to make such offer in such jurisdiction.
-------------------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---
<S> <C>
FUND HIGHLIGHTS................................. 2
What are the Series' Risk Factors and Special
Characteristics?............................. 2
FUND EXPENSES................................... 4
FINANCIAL HIGHLIGHTS............................ 5
HOW THE FUND INVESTS............................ 9
Investment Objective and Policies............. 9
Other Investments and Policies................ 15
Investment Restrictions....................... 16
HOW THE FUND IS MANAGED......................... 16
Manager....................................... 16
Distributor................................... 17
Portfolio Transactions........................ 19
Custodian and Transfer and Dividend Disbursing
Agent........................................ 19
HOW THE FUND VALUES ITS SHARES.................. 19
HOW THE FUND CALCULATES PERFORMANCE............. 19
TAXES, DIVIDENDS AND DISTRIBUTIONS.............. 20
GENERAL INFORMATION............................. 23
Description of Shares......................... 23
Additional Information........................ 24
SHAREHOLDER GUIDE............................... 24
How to Buy Shares of the Fund................. 24
Alternative Purchase Plan..................... 25
How to Sell Your Shares....................... 28
Conversion Feature--Class B Shares............ 31
How to Exchange Your Shares................... 31
Shareholder Services.......................... 33
DESCRIPTION OF SECURITY RATINGS................. A-1
THE PRUDENTIAL MUTUAL FUND FAMILY............... B-1
</TABLE>
- -------------------------------------------
MF148A 4443351
CUSIP Nos.: Class A: 74435M-50-7
Class B: 74435M-60-6
Class C: 74435M-61-4
Class Z: 74435M-42-4
PRUDENTIAL
MUNICIPAL
SERIES FUND
----------------------------------------------------------------
FLORIDA SERIES
PROSPECTUS
October 30, 1997
www.prudential.com
[LOGO] Prudential
Investments
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
(MARYLAND SERIES)
- --------------------------------------------------------------------------------
PROSPECTUS DATED OCTOBER 30, 1997
- ----------------------------------------------------------------
Prudential Municipal Series Fund (the Fund) (Maryland Series) (the Series) is
one of thirteen series of an open-end, management investment company, or mutual
fund. This Series is diversified and is designed to provide the maximum amount
of income that is exempt from Maryland State and federal income taxes consistent
with the preservation of capital and, in conjunction therewith, the Series may
invest in debt securities with the potential for capital gain. The net assets of
the Series are invested primarily in obligations within the four highest ratings
of Moody's Investors Service, Standard & Poor's Ratings Group or another
nationally recognized statistical rating organization or in unrated obligations
which, in the opinion of the Fund's investment adviser, are of comparable
quality. The Series may, however, 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. Subject to
the limitations described herein, the Series may utilize derivatives, including
buying and selling futures contracts and options thereon for the purpose of
hedging its portfolio securities. There can be no assurance that the Series'
investment objective will be achieved. See "How the Fund Invests--Investment
Objective and Policies." The Fund's address is Gateway Center Three, 100
Mulberry Street, Newark, New Jersey 07102-4077, and its telephone number is
(800) 225-1852.
This Prospectus sets forth concisely the information about the Fund and the
Maryland Series that a prospective investor should know before investing.
Additional information about the Fund has been filed with the Securities and
Exchange Commission in a Statement of Additional Information dated October 30,
1997, which information is incorporated herein by reference (is legally
considered a part of this Prospectus) and is available without charge upon
request to the Fund at the address or telephone number noted above.
- --------------------------------------------------------------------------------
INVESTORS ARE ADVISED TO READ THIS PROSPECTUS AND RETAIN IT FOR FUTURE
REFERENCE.
- --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
<PAGE>
FUND HIGHLIGHTS
The following summary is intended to highlight certain information contained
in this Prospectus and is qualified in its entirety by the more detailed
information appearing elsewhere herein.
WHAT IS PRUDENTIAL MUNICIPAL SERIES FUND?
Prudential Municipal Series Fund is a mutual fund whose shares are offered
in thirteen series, each of which operates as a separate fund. A mutual fund
pools the resources of investors by selling its shares to the public and
investing the proceeds of such sale in a portfolio of securities designed to
achieve its investment objective. Technically, the Fund is an open-end,
management investment company. Only the Maryland Series is offered through
this Prospectus.
WHAT IS THE SERIES' INVESTMENT OBJECTIVE?
The Series' investment objective is to maximize current income that is
exempt from Maryland State and federal income taxes consistent with the
preservation of capital. It seeks to achieve this objective by investing
primarily in Maryland State, municipal and local government obligations and
obligations of other qualifying issuers, such as issuers located in Puerto
Rico, the Virgin Islands and Guam, which pay income exempt, in the opinion
of counsel, from Maryland State and federal income taxes (Maryland
Obligations). There can be no assurance that the Series' investment
objective will be achieved. See "How the Fund Invests--Investment Objective
and Policies" at page 8.
WHAT ARE THE SERIES' RISK FACTORS AND SPECIAL CHARACTERISTICS?
In seeking to achieve its investment objective, the Series will invest at
least 80% of the value of its total assets in Maryland Obligations. This
degree of investment concentration makes the Series particularly susceptible
to factors adversely affecting issuers of Maryland Obligations. See "How the
Fund Invests--Investment Objective and Policies--Special Considerations" at
page 13. The Series may invest up to 30% of its total assets in high yield
securities, commonly known as "junk bonds," which may be considered
speculative and are subject to the risk of an issuer's inability to meet
principal and interest payments on the obligations as well as price
volatility. See "How the Fund Invests--Investment Objective and
Policies--Risk Factors Relating to Investing in High Yield Municipal
Obligations" at page 11. To hedge against changes in interest rates, the
Series may also purchase put options and engage in transactions involving
derivatives, including financial futures contracts and options thereon. See
"How the Fund Invests--Investment Objective and Policies--Futures Contracts
and Options Thereon" at page 12. As with an investment in any mutual fund,
an investment in this Series can decrease in value and you can lose money.
WHO MANAGES THE FUND?
Prudential Investments Fund Management LLC (PIFM or the Manager) is the
Manager of the Fund and is compensated for its services at an annual rate of
.50 of 1% of the Series' average daily net assets. As of September 30, 1997,
PIFM served as manager or administrator to 63 investment companies,
including 41 mutual funds, with aggregate assets of approximately $59.9
billion. The Prudential Investment Corporation, which does business under
the name Prudential Investments (PI the Subadviser or the investment
adviser) furnishes investment advisory services in connection with the
management of the Fund under a Subadvisory Agreement with PIFM. See "How the
Fund is Managed--Manager" at page 15.
WHO DISTRIBUTES THE SERIES' SHARES?
Prudential Securities Incorporated (Prudential Securities, PSI or the
Distributor), a major securities underwriter and securities and commodities
broker, acts as the Distributor of the Series' Class A, Class B and Class C
shares and is paid a distribution and service fee with respect to Class A
shares which is currently being charged at the rate of .10 of 1% of the
average daily net assets of the Class A shares and is paid a distribution
and service fee with respect to Class B shares at the annual rate of .50 of
1% of the average daily net assets of the Class B shares and is paid an
annual distribution and service fee with respect to Class C shares which is
currently being charged at the rate of .75 of 1% of the average daily net
assets of the Class C shares. See "How the Fund is Managed--Distributor" at
page 16.
2
<PAGE>
WHAT IS THE MINIMUM INVESTMENT?
The minimum initial investment is $1,000 for Class A and Class B shares
and $5,000 for Class C shares. The minimum subsequent investment is $100 for
Class A, Class B and Class C shares. There is no minimum investment
requirement for certain employee savings plans. For purchases made through
the Automatic Savings Accumulation Plan, the minimum initial and subsequent
investment is $50. See "Shareholder Guide--How to Buy Shares of the Fund" at
page 22 and "Shareholder Guide--Shareholder Services" at page 31.
HOW DO I PURCHASE SHARES?
You may purchase shares of the Series through Prudential Securities, Pruco
Securities Corporation (Prusec) or directly from the Fund through its
transfer agent, Prudential Mutual Fund Services LLC (PMFS or the Transfer
Agent), at the net asset value per share (NAV) next determined after receipt
of your purchase order by the Transfer Agent or Prudential Securities plus a
sales charge which may be imposed either (i) at the time of the purchase
(Class A shares) or (ii) on a deferred basis (Class B or Class C shares).
See "How the Fund Values its Shares" at page 18 and "Shareholder Guide-- How
to Buy Shares of the Fund" at page 22.
WHAT ARE MY PURCHASE ALTERNATIVES?
The Series offers three classes of shares:
- Class A Shares:
Sold with an initial sales charge of up to 3% of the
offering price.
- Class B Shares:
Sold without an initial sales charge but are subject to
a contingent deferred sales charge or CDSC (declining
from 5% to zero of the lower of the amount invested or
the redemption proceeds) which will be imposed on
certain redemptions made within six years of purchase.
Although Class B shares are subject to higher ongoing
distribution-related expenses than Class A shares, Class
B shares will automatically convert to Class A shares
(which are subject to lower ongoing distribution-related
expenses) approximately seven years after purchase.
- Class C Shares:
Sold without an initial sales charge and, for one year
after purchase, are subject to a 1% CDSC on redemptions.
Like Class B shares, Class C shares are subject to
higher ongoing distribution-related expenses than Class
A shares but do not convert to another class.
See "Shareholder Guide--Alternative Purchase Plan" at page 23.
HOW DO I SELL MY SHARES?
You may redeem your shares at any time at the NAV next determined after
Prudential Securities or the Transfer Agent receives your sell order.
However, the proceeds of redemptions of Class B and Class C shares may be
subject to a CDSC. See "Shareholder Guide--How to Sell Your Shares" at page
26.
HOW ARE DIVIDENDS AND DISTRIBUTIONS PAID?
The Series expects to declare daily and pay monthly dividends of net
investment income, if any, and make distributions of any net capital gains
at least annually. Dividends and distributions will be automatically
reinvested in additional shares of the Series at NAV without a sales charge
unless you request that they be paid to you in cash. See "Taxes, Dividends
and Distributions" at page 19.
3
<PAGE>
FUND EXPENSES
(MARYLAND SERIES)
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES CLASS C SHARES
----------------- ---------------------- -----------------
<S> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES+
Maximum Sales Load Imposed on Purchases (as a
percentage of offering price)......................... 3% None None
Maximum Deferred Sales Load (as a percentage of
original purchase price or redemption proceeds,
whichever is lower)................................... None 5% during the first 1% on redemptions
year, decreasing by 1% made within one
annually to 1% in the year of purchase
fifth and sixth years
and 0% the seventh
year*
Maximum Sales Load Imposed on Reinvested Dividends..... None None None
Redemption Fees........................................ None None None
Exchange Fee........................................... None None None
</TABLE>
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES CLASS C SHARES
-------------- -------------- --------------
<S> <C> <C> <C>
ANNUAL FUND OPERATING EXPENSES**
(as a percentage of average net assets)
Management Fees........................................ .50% .50% .50%
12b-1 Fees (After Reduction)........................... .10%++ .50% .75%++
Other Expenses......................................... .57% .57% .57%
--- --- ---
Total Fund Operating Expenses (After Reduction)........ 1.17% 1.57% 1.82%
--- --- ---
--- --- ---
</TABLE>
<TABLE>
<CAPTION>
1 3 5 10
YEAR YEARS YEARS YEARS
---- ----- ----- -----
<S> <C> <C> <C> <C>
EXAMPLE
You would pay the following expenses on a $1,000
investment, assuming (1) 5% annual return and (2)
redemption at the end of each time period:
Class A................................................ $42 $ 66 $ 92 $168
Class B................................................ $66 $ 80 $ 96 $171
Class C................................................ $28 $ 57 $ 99 $214
You would pay the following expenses on the same
investment, assuming no redemption:
Class A................................................ $42 $ 66 $ 92 $168
Class B................................................ $16 $ 50 $ 86 $171
Class C................................................ $18 $ 57 $ 99 $214
</TABLE>
The above examples are based on restated data for the Series' fiscal year
ended August 31, 1997. THE EXAMPLES SHOULD NOT BE CONSIDERED A
REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER
OR LESS THAN THOSE SHOWN.
The purpose of this table is to assist investors in understanding the
various costs and expenses that an investor in the Series will bear,
whether directly or indirectly. For more complete descriptions of the
various costs and expenses, see "How the Fund is Managed." "Other
Expenses" includes operating expenses of the Series, such as Trustees' and
professional fees, registration fees, reports to shareholders and transfer
agency and custodian fees.
- ---------------
* Class B shares will automatically convert to Class A shares approximately
seven years after purchase. See "Shareholder Guide--Conversion Feature--
Class B Shares."
** The expense information in the table has been restated to reflect current
fees. Effective September 1, 1997, PIFM eliminated its management fee
waiver (.05 of 1%). See "How the Fund is Managed--Manager--Fee Waivers."
+ Pursuant to rules of the National Association of Securities Dealers,
Inc., the aggregate initial sales charges, deferred sales charges and
asset-based sales charges on shares of the Series may not exceed 6.25% of
total gross sales, subject to certain exclusions. This 6.25% limitation
is on each class of the Series rather than on a per shareholder basis.
Therefore, long-term shareholders of the Series may pay more in total
sales charges than the economic equivalent of 6.25% of such shareholders'
investment in such shares. See "How the Fund is Managed--Distributor."
++ Although the Class A and Class C Distribution and Service Plans provide
that the Fund may pay a distribution fee of up to .30 of 1% and 1% per
annum of the average daily net assets of the Class A and Class C shares,
respectively, the Distributor has agreed to limit its distribution fees
with respect to the Class A and Class C shares of the Series to no more
than .10 of 1% and .75 of 1% of the average daily net asset value of the
Class A shares and Class C shares, respectively, for the fiscal year
ending August 31, 1998. Total Fund Operating Expenses (Before Waiver) of
the Class A and Class C shares without such limitations would be 1.37%
and 2.07%, respectively. See "How the Fund is Managed--Distributor."
4
<PAGE>
FINANCIAL HIGHLIGHTS
(FOR A SHARE OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT EACH OF THE INDICATED
PERIODS)
(CLASS A SHARES)
The following financial highlights, for the fiscal year ended August 31, 1997,
have been audited by Price Waterhouse LLP, independent accountants, and by
Deloitte and Touche LLP, independent auditors, for the four years ended August
31, 1996. Each of the respective reports by Price Waterhouse LLP and Deloitte &
Touche LLP on such financial statements was unqualified. This information should
be read in conjunction with the financial statements and the notes thereto,
which appear in the Statement of Additional Information. The following financial
highlights contain selected data for a Class A share of beneficial interest
outstanding, total return, ratios to average net assets and other supplemental
data for the periods indicated. This information is based on data contained in
the financial statements. Further performance information is contained in the
annual report, which may be obtained without charge. See "Shareholder
Guide--Shareholder Services--Reports to Shareholders."
<TABLE>
<CAPTION>
CLASS A
-------------------------------------------------------------------------------------------
JANUARY 22,
1990 (a)
YEAR ENDED AUGUST 31, THROUGH
---------------------------------------------------------------------------- AUGUST 31,
1997 1996 1995 1994 1993 1992 1991 1990
------- ------- ------- ------- ------ ------ ------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning of
period...................... $ 10.74 $ 10.66 $ 10.66 $ 11.64 $11.11 $10.67 $10.23 $10.44
------- ------- ------- ------- ------ ------ ------ -----------
INCOME FROM INVESTMENT
OPERATIONS
Net investment income......... .49(d) .51(d) .53(d) .57 .62 .63 .67 .40
Net realized and unrealized
gain (loss) on investment
transactions................ .39 .08 .10 (.77) .65 .44 .44 (.21)
------- ------- ------- ------- ------ ------ ------ -----------
Total from investment
operations.................. .88 .59 .63 (.20) 1.27 1.07 1.11 .19
------- ------- ------- ------- ------ ------ ------ -----------
LESS DISTRIBUTIONS
Dividends from net investment
income...................... (.49) (.51) (.53) (.57) (.62) (.63) (.67) (.40)
Distributions paid in excess
of net investment income.... (.01) -- -- -- -- -- -- --
Distributions from net
realized gains.............. (.13) -- (.10) (.21) (.12) -- -- --
------- ------- ------- ------- ------ ------ ------ -----------
Total distributions........... (.63) (.51) (.63) (.78) (.74) (.63) (.67) (.40)
------- ------- ------- ------- ------ ------ ------ -----------
Net asset value, end of
period...................... $ 10.99 $ 10.74 $ 10.66 $ 10.66 $11.64 $11.11 $10.67 $10.23
------- ------- ------- ------- ------ ------ ------ -----------
------- ------- ------- ------- ------ ------ ------ -----------
TOTAL RETURN (c):............. 8.38% 5.58% 6.32% (1.75)% 11.89% 10.35% 10.84% 1.71%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(000)....................... $18,558 $18,339 $17,726 $ 2,709 $2,930 $1,335 $ 804 $ 349
Average net assets (000)...... $18,970 $18,484 $11,341 $ 2,877 $2,068 $1,080 $ 518 $ 141
Ratios to average net assets:
Expenses, including
distribution fees.......... 1.12%(d) 1.10%(d) 1.30%(d) .95% .96% .96% 1.10% 1.01%(b)
Expenses, excluding
distribution fees.......... 1.02%(d) 1.00%(d) 1.20%(d) .85% .86% .86% 1.00% .91%(b)
Net investment income....... 4.52%(d) 4.69%(d) 4.96%(d) 5.18% 5.51% 5.80% 6.07% 6.31%(b)
Portfolio turnover rate....... 30% 42% 49% 40% 41% 34% 18% 46%
</TABLE>
- ---------------
(a) Commencement of offering of Class A shares.
(b) Annualized.
(c) Total return does not consider the effects of sales loads. Total
return is calculated assuming a purchase of shares on the first day
and a sale on the last day of each period reported and includes
reinvestment of dividends and distributions. Total returns for
periods of less than a full year are not annualized.
(d) Net of management fee waiver.
5
<PAGE>
FINANCIAL HIGHLIGHTS
(FOR A SHARE OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT EACH OF THE INDICATED
PERIODS)
(CLASS B SHARES)
The following financial highlights, for the fiscal year ended August 31, 1997,
have been audited by Price Waterhouse LLP, independent accountants, and by
Deloitte and Touche LLP, independent auditors, for the four years ended August
31, 1996. Each of the respective reports by Price Waterhouse LLP and Deloitte &
Touche LLP on such financial statements was unqualified. This information should
be read in conjunction with the financial statements and notes thereto, which
appear in the Statement of Additional Information. The following financial
highlights contain selected data for a Class B share of beneficial interest
outstanding, total return, ratios to average net assets and other supplemental
data for the periods indicated. The information is based on data contained in
the financial statements. Further performance information is contained in the
annual report, which may be obtained without charge. See "Shareholder Guide--
Shareholder Services--Reports to Shareholders."
<TABLE>
<CAPTION>
CLASS B
-----------------------------------------------------------------------------------------------------
YEAR ENDED AUGUST 31,
-----------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993 1992 1991 1990 1989 (b) 1988
--------- ------- ------- ------- ------- ------- ------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of year... $ 10.75 $ 10.67 $ 10.67 $ 11.65 $ 11.12 $ 10.68 $ 10.23 $ 10.48 $ 10.23 $ 10.29
--------- ------- ------- ------- ------- ------- ------- ------- -------- -------
INCOME FROM INVESTMENT
OPERATIONS
Net investment
income.............. .45(d) .47(d) .49(d) .53 .58 .59 .63 .62 .65 .69(a)
Net realized and
unrealized gain
(loss) on investment
transactions........ .39 .08 .10 (.77) .65 .44 .45 (.25) .25 (.06)
--------- ------- ------- ------- ------- ------- ------- ------- -------- -------
Total from investment
operations.......... .84 .55 .59 (.24) 1.23 1.03 1.08 .37 .90 .63
--------- ------- ------- ------- ------- ------- ------- ------- -------- -------
LESS DISTRIBUTIONS
Dividends from net
investment income... (.45) (.47) (.49) (.53) (.58) (.59) (.63) (.62) (.65) (.69)
Distribution paid in
excess of net
investment.......... (.01) -- -- -- -- -- -- -- -- --
Distributions from net
realized gains...... (.13) -- (.10) (.21) (.12) -- -- -- -- --
--------- ------- ------- ------- ------- ------- ------- ------- -------- -------
Total distributions... (.59) (.47) (.59) (.74) (.70) (.59) (.63) (.62) (.65) (.69)
--------- ------- ------- ------- ------- ------- ------- ------- -------- -------
Net asset value, end
of year............. $ 11.00 $ 10.75 $ 10.67 $ 10.67 $ 11.65 $ 11.12 $ 10.68 $ 10.23 $ 10.48 $ 10.23
--------- ------- ------- ------- ------- ------- ------- ------- -------- -------
--------- ------- ------- ------- ------- ------- ------- ------- -------- -------
TOTAL RETURN (c):..... 7.94% 5.16% 5.88% (2.13)% 11.43% 9.90% 10.49% 3.58% 9.17% 6.38%
RATIOS/SUPPLEMENTAL
DATA:
Net assets, end of
year (000).......... $ 14,412 $18,512 $21,414 $51,198 $57,598 $51,313 $51,110 $48,226 $47,409 $39,154
Average net assets
(000)............... $ 16,113 $19,898 $33,497 $55,223 $53,780 $50,970 $48,422 $48,573 $44,243 $35,675
Ratios to average net
assets:
Expenses, including
distribution
fees............... 1.52%(d) 1.50%(d) 1.55%(d) 1.35% 1.36% 1.37% 1.49% 1.40% 1.37% 1.24%(a)
Expenses, excluding
distribution
fees............... 1.02%(d) 1.00%(d) 1.05%(d) .85% .86% .87% .99% .92% .90% .75%(a)
Net investment
income............. 4.12%(d) 4.30%(d) 4.84%(d) 4.77% 5.11% 5.42% 5.70% 5.95% 6.26% 6.67%(a)
Portfolio turnover
rate................ 30% 42% 49% 40% 41% 34% 18% 46% 47% 46%
</TABLE>
- -----------------
(a) Net of expense subsidy.
(b) On December 31, 1988, Prudential Mutual Fund Management, Inc.
succeeded The Prudential Insurance Company of America as manager of
the Fund.
(c) Total return does not consider the effects of sales loads. Total
return is calculated assuming a purchase of shares on the first day
and a sale on the last day of each period reported and includes
reinvestment of dividends and distributions.
(d) Net of management fee waiver.
6
<PAGE>
FINANCIAL HIGHLIGHTS
(FOR A SHARE OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT EACH OF THE INDICATED
PERIODS)
(CLASS C SHARES)
The following financial highlights, for the fiscal year ended August 31, 1997,
have been audited by Price Waterhouse LLP, independent accountants, and by
Deloitte and Touche LLP, independent auditors, for the two years ended August
31, 1996 and for the period from August 1, 1994 through August 31, 1994. Each of
the respective reports by Price Waterhouse LLP and Deloitte & Touche LLP on such
financial statements was unqualified. This information should be read in
conjunction with the financial statements and notes thereto, which appear in the
Statement of Additional Information. The following financial highlights contain
selected data for a Class C share of beneficial interest outstanding, total
return, ratios to average net assets and other supplemental data for the periods
indicated. This information is based on data contained in the financial
statements. Further performance information is contained in the annual report,
which may be obtained without charge. See "Shareholder Guide-- Shareholder
Services--Reports to Shareholders."
<TABLE>
<CAPTION>
CLASS C
-----------------------------------------------
AUGUST 1,
1994 (a)
YEAR ENDED AUGUST 31, THROUGH
------------------------------- AUGUST 31,
1997 1996 1995 1994
-------- ------ ------ ----------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period...... $ 10.75 $10.67 $10.67 $10.70
-------- ------ ------ ----------
INCOME FROM INVESTMENT OPERATIONS
Net investment income..................... .42(d) .44(d) .47(d) .05
Net realized and unrealized gain (loss) on
investment transactions................. .39 .08 .10 (.03)
-------- ------ ------ ----------
Total from investment operations.......... .81 .52 .57 .02
-------- ------ ------ ----------
LESS DISTRIBUTIONS
Dividends from net investment income...... (.42) (.44) (.47) (.05)
Distribution paid in excess of net
investment income....................... (.01) -- -- --
Distributions from net realized gains..... (.13) -- (.10) --
-------- ------ ------ ----------
Total distributions....................... (.56) (.44) (.57) (.05)
-------- ------ ------ ----------
Net asset value, end of period............ $ 11.00 $10.75 $10.67 $10.67
-------- ------ ------ ----------
-------- ------ ------ ----------
TOTAL RETURN (c):......................... 7.68% 4.90% 5.62% .07%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)........... $ 68 $ 47 $ 52 $ 102
Average net assets (000).................. $ 49 $ 43 $ 58 $ 31
Ratios to average net assets:
Expenses, including distribution fees... 1.77%(d) 1.75%(d) 1.82%(d) 2.21%(b)
Expenses, excluding distribution fees... 1.02%(d) 1.00%(d) 1.07%(d) 1.47%(b)
Net investment income................... 3.72%(d) 4.05%(d) 4.55%(d) 4.75%(b)
Portfolio turnover rate................... 30% 42% 49% 40%
</TABLE>
- -------------
(a) Commencement of offering of Class C shares.
(b) Annualized.
(c) Total return does not consider the effects of sales loads. Total return
is calculated assuming a purchase of shares on the first day and a
sale on the last day of each period reported and includes reinvestment
of dividends and distributions. Total returns for periods of less than
a full year are not annualized.
(d) Net of management fee waiver.
7
<PAGE>
HOW THE FUND INVESTS
INVESTMENT OBJECTIVE AND POLICIES
PRUDENTIAL MUNICIPAL SERIES FUND (THE FUND) IS AN OPEN-END, MANAGEMENT
INVESTMENT COMPANY, OR MUTUAL FUND, CONSISTING OF THIRTEEN SEPARATE SERIES. EACH
OF THESE SERIES IS MANAGED INDEPENDENTLY. THE MARYLAND SERIES (THE SERIES) IS
DIVERSIFIED AND ITS INVESTMENT OBJECTIVE IS TO MAXIMIZE CURRENT INCOME THAT IS
EXEMPT FROM MARYLAND STATE AND FEDERAL INCOME TAXES CONSISTENT WITH THE
PRESERVATION OF CAPITAL AND, IN CONJUNCTION THEREWITH, THE SERIES MAY INVEST IN
DEBT SECURITIES WITH THE POTENTIAL FOR CAPITAL GAIN. See "Investment Objectives
and Policies" in the Statement of Additional Information.
THE SERIES' INVESTMENT OBJECTIVE IS A FUNDAMENTAL POLICY AND, THEREFORE, MAY
NOT BE CHANGED WITHOUT THE APPROVAL OF THE HOLDERS OF A MAJORITY OF THE SERIES'
OUTSTANDING VOTING SECURITIES AS DEFINED IN THE INVESTMENT COMPANY ACT OF 1940,
AS AMENDED (THE INVESTMENT COMPANY ACT). THE SERIES' POLICIES THAT ARE NOT
FUNDAMENTAL MAY BE MODIFIED BY THE TRUSTEES.
THE SERIES WILL INVEST PRIMARILY IN MARYLAND STATE, MUNICIPAL AND LOCAL
GOVERNMENT OBLIGATIONS AND OBLIGATIONS OF OTHER QUALIFYING ISSUERS, SUCH AS
ISSUERS LOCATED IN PUERTO RICO, THE VIRGIN ISLANDS AND GUAM, WHICH PAY INCOME
EXEMPT, IN THE OPINION OF COUNSEL, FROM MARYLAND STATE AND FEDERAL INCOME TAXES
(MARYLAND OBLIGATIONS). THERE CAN BE NO ASSURANCE THAT THE SERIES WILL BE ABLE
TO ACHIEVE ITS INVESTMENT OBJECTIVE.
As with an investment in any mutual fund, an investment in this Series can
decrease and you can lose money.
Interest on certain municipal obligations may be a preference item for
purposes of the federal alternative minimum tax. The Series may invest without
limit in municipal obligations that are "private activity bonds" (as defined in
the Internal Revenue Code) the interest on which would be a preference item for
purposes of the federal alternative minimum tax (AMT bonds). See "Taxes,
Dividends and Distributions." Under Maryland law, dividends paid by the Series
are exempt from Maryland personal income tax for resident individuals to the
extent they are derived from interest payments on and, in some cases, gain from
the sale of Maryland Obligations, provided, however, that up to 50% of dividends
attributable to interest received by the Series on AMT bonds could be subject to
Maryland individual income tax. Maryland Obligations could include general
obligation bonds of the State, counties, cities, towns, etc., revenue bonds of
utility systems, highways, bridges, port and airport facilities, colleges,
hospitals, etc., and industrial development and pollution control bonds. The
Series will invest in long-term obligations, and the dollar-weighted average
maturity of the Series' portfolio will generally range between 10-20 years. The
Series also may invest in certain short-term, tax-exempt notes such as Tax
Anticipation Notes, Revenue Anticipation Notes, Bond Anticipation Notes,
Construction Loan Notes and variable and floating rate demand notes.
Generally, municipal obligations with longer maturities produce higher yields
and are subject to greater price fluctuations as a result of changes in interest
rates (market risk) than municipal obligations with shorter maturities. The
prices of municipal obligations vary inversely with interest rates. Interest
rates are currently much lower than in recent years. As a general matter, bond
prices and the Series' net asset value will vary inversely with interest rate
fluctuations. If rates were to rise sharply, the prices of bonds in the Series'
portfolio might be adversely affected.
THE SERIES MAY INVEST ITS ASSETS IN FLOATING RATE AND VARIABLE RATE
SECURITIES, INCLUDING PARTICIPATION INTERESTS THEREIN AND INVERSE FLOATERS.There
is no limit on the amount of such securities that the Series may purchase.
Floating rate securities normally have a rate of interest which is set as a
specific percentage of a designated base rate, such as the rate on Treasury
bonds or bills or the prime rate at a major commercial bank. The interest rate
on floating rate securities changes periodically when there is a change in the
designated base interest rate. Variable rate securities provide for a specified
periodic adjustment in the interest rate based on prevailing market rates and
generally would allow the Series to demand payment of the obligation on short
notice at par plus accrued interest, which amount may be more or less than the
amount the Series paid for
8
<PAGE>
them. An inverse floater is a debt instrument with a floating or variable
interest rate that moves in the opposite direction of the interest rate on
another security or the value of an index. Changes in the interest rate on the
other security or index inversely affect the residual interest rate paid on the
inverse floater, with the result that the inverse floater's price will be
considerably more volatile than that of a fixed rate bond. The market for
inverse floaters is relatively new.
THE SERIES MAY ALSO INVEST IN MUNICIPAL LEASE OBLIGATIONS. A MUNICIPAL LEASE
OBLIGATION IS A MUNICIPAL SECURITY THE INTEREST ON AND PRINCIPAL OF WHICH IS
PAYABLE OUT OF LEASE PAYMENTS MADE BY THE PARTY LEASING THE FACILITIES FINANCED
BY THE ISSUE. Typically, municipal lease obligations are issued by a state or
municipal financing authority to provide funds for the construction of
facilities (E.G., schools, dormitories, office buildings or prisons) or the
acquisition of equipment. The facilities are typically used by the state or
municipality pursuant to a lease with a financing authority. Certain municipal
lease obligations may trade infrequently. Accordingly, the investment adviser
will monitor the liquidity of municipal lease obligations under the supervision
of the Trustees. Municipal lease obligations will not be considered illiquid for
purposes of the Series' 15% limitation on illiquid securities provided the
investment adviser determines that there is a readily available market for such
securities. See "Other Investments and Policies--Illiquid Securities" below.
THE SERIES WILL INVEST AT LEAST 70% OF ITS TOTAL ASSETS IN MARYLAND
OBLIGATIONS WHICH, AT THE TIME OF PURCHASE, ARE RATED WITHIN THE FOUR HIGHEST
QUALITY GRADES AS DETERMINED BY 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), 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 ANOTHER
NATIONALLY RECOGNIZED STATISTICAL RATING ORGANIZATION (NRSRO) OR, IF UNRATED,
WILL POSSESS CREDITWORTHINESS, IN THE OPINION OF THE INVESTMENT ADVISER,
COMPARABLE TO SUCH "INVESTMENT GRADE" RATED SECURITIES.
THE SERIES MAY ALSO INVEST UP TO 30% OF ITS TOTAL ASSETS IN MARYLAND
OBLIGATIONS RATED BELOW Baa BY MOODY'S OR BELOW BBB BY S&P, OR A COMPARABLE
RATING OF ANOTHER NRSRO OR, IF NON-RATED, OF COMPARABLE QUALITY, IN THE OPINION
OF THE FUND'S INVESTMENT ADVISER, BASED ON ITS CREDIT ANALYSIS. Securities rated
Baa by Moody's and BBB by S&P are described as being investment grade but are
also characterized as having speculative characteristics. Securities rated below
Baa by Moody's and below BBB by S&P are considered speculative. See "Description
of Security Ratings" in the Appendix. Such lower-rated high yield securities are
commonly referred to as "junk bonds." Such securities generally offer a higher
current yield than those in the higher rating categories but may also involve
greater price volatility and risk of loss of principal and income. The
investment adviser will attempt to manage risk and enhance yield through credit
analysis and careful security selection. See "Risk Factors Relating to Investing
in High Yield Municipal Obligations" below. Subsequent to its purchase by the
Series, a municipal obligation may be assigned a lower rating or cease to be
rated. Such an event would not require the elimination of the issue from the
portfolio, but the investment adviser will consider such an event in determining
whether the Series should continue to hold the security in its portfolio. Many
issuers of lower-quality bonds choose not to have their obligations rated and
the Series may invest in such unrated securities. Investors should carefully
consider the relative risks associated with investments in securities which
carry lower ratings and in comparable non-rated securities.
9
<PAGE>
During the year ended August 31, 1997, the monthly dollar weighted average
ratings of the debt obligations held by the Series, expressed as a percentage of
the Series' total assets, were as follows:
<TABLE>
<CAPTION>
PERCENTAGE OF
RATINGS TOTAL INVESTMENTS
- ----------------------------------------------------------------------------- -----------------
<S> <C>
AAA/Aaa...................................................................... 53.19%
AA/Aa........................................................................ 22.70%
A/A.......................................................................... 8.47%
BBB/Baa...................................................................... 12.96%
Unrated
AAA/Aaa.................................................................... 0.00%
AA/Aa...................................................................... 0.00%
A/A........................................................................ 0.00%
BBB/Baa.................................................................... 2.68%
</TABLE>
From time to time, the Series may own the majority of a municipal issue. Such
majority-owned holdings may present market and credit risks.
The Series may purchase Maryland Obligations which, in the opinion of the
investment adviser, offer the opportunity for capital appreciation. This may
occur, for example, when the investment adviser believes that the issuer of a
particular Maryland Obligation might receive an upgraded credit standing,
thereby increasing the market value of the bonds it has issued or when the
investment adviser believes that interest rates might decline.
UNDER NORMAL MARKET CONDITIONS, THE SERIES WILL ATTEMPT TO INVEST
SUBSTANTIALLY ALL OF THE VALUE OF ITS ASSETS IN MARYLAND OBLIGATIONS. As a
matter of fundamental policy, during normal market conditions the Series' assets
will be invested so that at least 80% of the income will be exempt from Maryland
State and federal income taxes or the Series will have at least 80% of its total
assets invested in Maryland Obligations. During abnormal market conditions or to
provide liquidity, the Series may hold cash or cash equivalents or investment
grade taxable obligations, including obligations that are exempt from federal,
but not state, taxation and the Series may invest in tax-free cash equivalents,
such as floating rate demand notes, tax-exempt commercial paper and general
obligation and revenue notes or in taxable cash equivalents, such as
certificates of deposit, bankers acceptances and time deposits or other
short-term taxable investments such as repurchase agreements. When, in the
opinion of the investment adviser, abnormal market conditions require a
temporary defensive position, the Series may invest more than 20% of the value
of its assets in debt securities other than Maryland Obligations or may invest
its assets so that more than 20% of the income is subject to Maryland State or
federal income taxes. The Series will treat an investment in a municipal bond
refunded with escrowed U.S. Government securities as U.S. Government securities
for purposes of the Investment Company Act's diversification requirements
provided certain conditions are met. See "Investment Objectives and Policies--In
General" in the Statement of Additional Information.
THE SERIES MAY ACQUIRE PUT OPTIONS (PUTS) GIVING THE SERIES THE RIGHT TO SELL
SECURITIES HELD IN THE SERIES' PORTFOLIO AT A SPECIFIED EXERCISE PRICE ON A
SPECIFIED DATE. Such puts may be acquired for the purpose of protecting the
Series from a possible decline in the market value of the security to which the
put applies in the event of interest rate fluctuations or, in the case of
liquidity puts, for the purpose of shortening the effective maturity of the
underlying security. The aggregate value of premiums paid to acquire puts held
in the Series' portfolio (other than liquidity puts) may not exceed 10% of the
net asset value of the Series. The acquisition of a put may involve an
additional cost to the Series by payment of a premium for the put, by payment of
a higher purchase price for securities to which the put is attached or through a
lower effective interest rate.
In addition, there is a credit risk associated with the purchase of puts in
that the issuer of the put may be unable to meet its obligation to purchase the
underlying security. Accordingly, the Series will acquire puts only under the
following circumstances: (1) the put is written by the issuer of the underlying
security and such security is rated within the four highest quality grades as
determined by an NRSRO; or (2) the put is written by a person other than the
issuer of the underlying security and such person has
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<PAGE>
securities outstanding which are rated within such four highest quality grades;
or (3) the put is backed by a letter of credit or similar financial guarantee
issued by a person having securities outstanding which are rated within the two
highest quality grades of an NRSRO.
THE SERIES MAY PURCHASE MUNICIPAL OBLIGATIONS ON A "WHEN-ISSUED" OR "DELAYED
DELIVERY" BASIS, IN EACH CASE WITHOUT LIMIT. When municipal obligations are
offered on a when-issued or delayed delivery basis, the price and coupon rate
are fixed at the time the commitment to purchase is made, but delivery and
payment for the securities take place at a later date. The purchase price for
such securities includes interest accrued during the period between purchase and
settlement and, therefore, no interest accrues to the economic benefit of the
purchaser during such period. In the case of purchases by the Series, the price
that the Series is required to pay on the settlement date may be in excess of
the market value of the municipal obligations on that date. While securities may
be sold prior to the settlement date, the Series intends to purchase these
securities with the purpose of actually acquiring them unless a sale would be
desirable for investment reasons. At the time the Series makes the commitment to
purchase a municipal obligation on a when-issued or delayed delivery basis, it
will record the transaction and reflect the value of the obligation each day in
determining its net asset value. This value may fluctuate from day to day in the
same manner as values of municipal obligations otherwise held by the Series. If
the seller defaults in the sale, the Series could fail to realize the
appreciation, if any, that had occurred. The Series will establish a segregated
account with its Custodian in which it will maintain cash, U.S. Government
securities, equity securities or other liquid, unencumbered assets,
marked-to-market daily, equal in value to its commitments for when-issued or
delayed delivery securities.
THE SERIES MAY ALSO PURCHASE MUNICIPAL FORWARD CONTRACTS. A municipal forward
contract is a municipal security which is purchased on a when-issued basis with
delivery taking place up to five years from the date of purchase. No interest
will accrue on the security prior to the delivery date. The investment adviser
will monitor the liquidity, value, credit quality and delivery of the security
under the supervision of the Trustees.
THE SERIES MAY PURCHASE SECONDARY MARKET INSURANCE ON MARYLAND OBLIGATIONS
WHICH IT HOLDS OR ACQUIRES. Secondary market insurance would be reflected in the
market value of the municipal obligation purchased and may enable the Series to
dispose of a defaulted obligation at a price similar to that of comparable
municipal obligations which are not in default.
Insurance is not a substitute for the basic credit of an issuer, but
supplements the existing credit and provides additional security therefor. While
insurance coverage for the Maryland Obligations held by the Series reduces
credit risk by providing that the insurance company will make timely payment of
principal and interest if the issuer defaults on its obligation to make such
payment, it does not afford protection against fluctuation in the price, I.E.,
the market value, of the municipal obligations caused by changes in interest
rates and other factors, nor in turn against fluctuations in the net asset value
of the shares of the Series.
RISK FACTORS RELATING TO INVESTING IN HIGH YIELD MUNICIPAL
OBLIGATIONS. FIXED-INCOME SECURITIES ARE SUBJECT TO THE RISK OF AN ISSUER'S
INABILITY TO MEET PRINCIPAL AND INTEREST PAYMENTS ON THE OBLIGATIONS (CREDIT
RISK) AND MAY ALSO BE SUBJECT TO PRICE VOLATILITY DUE TO SUCH FACTORS AS
INTEREST RATE SENSITIVITY, MARKET PERCEPTION OF THE CREDITWORTHINESS OF THE
ISSUER AND GENERAL MARKET LIQUIDITY (MARKET RISK). Lower-rated or unrated (I.E.,
high yield) securities, commonly known as "junk bonds," are more likely to react
to developments affecting market and credit risk than are more highly rated
securities, which react primarily to movements in the general level of interest
rates. The investment adviser will perform its own investment analysis and will
not rely principally on the ratings assigned by the rating services, although
such ratings will be considered by the investment adviser. The investment
adviser will consider, among other things, credit risk and market risk, as well
as the financial history and condition, the prospects and the management of an
issuer in selecting securities for the Series' portfolio. The achievement of the
Series' investment objective may be more dependent on the investment adviser's
credit analysis than is the case when investing in only higher quality bonds.
Investors should carefully consider the relative risks of investing in high
yield municipal obligations and understand that such securities are not
generally meant for short-term investing and that yields on junk bonds will
fluctuate over time.
The amount of high yield securities outstanding has proliferated recently in
conjunction with the decline in creditworthiness of many obligors on municipal
debt, particularly health care providers and certain governmental bodies. An
economic downturn
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<PAGE>
could severely affect the ability of highly leveraged issuers to service their
debt obligations or to repay their obligations upon maturity. In addition, the
secondary market for high yield securities, which is concentrated in relatively
few market makers, may not be as liquid as the secondary market for more highly
rated securities and, from time to time, it may be more difficult to value high
yield securities than more highly rated securities, and the judgment of the
Board of Trustees and investment adviser may play a greater role in valuation
because there is less reliable objective data available. Under adverse market or
economic conditions, the secondary market for high yield securities could
contract further, independent of any specific adverse changes in the condition
of a particular issuer. As a result, the investment adviser could find it more
difficult to sell these securities or may be able to sell the securities only at
prices lower than if such securities were widely traded. Prices realized upon
the sale of such lower rated or unrated securities, under these circumstances,
may be less than the prices used in calculating the Series' net asset value. If
the investment adviser becomes involved in activities such as reorganizations of
obligors of troubled investments held by the Series, this may prevent the Series
from disposing of the securities, due to its possession of material, non-public
information concerning the obligor.
LOWER-RATED OR UNRATED DEBT OBLIGATIONS ALSO PRESENT RISKS BASED ON PAYMENT
EXPECTATIONS. If an issuer calls the obligation for redemption, the Series may
have to replace the security with a lower-yielding security, resulting in a
decreased return for investors. If the Series experiences unexpected net
redemptions, it may be forced to sell its higher quality securities, resulting
in a decline in the overall credit quality of the Series' portfolio and
increasing the exposure of the Series to the risks of high yield securities.
FUTURES CONTRACTS AND OPTIONS THEREON
THE SERIES IS AUTHORIZED TO PURCHASE AND SELL CERTAIN DERIVATIVES, INCLUDING
FINANCIAL FUTURES CONTRACTS (FUTURES CONTRACTS) AND OPTIONS THEREON FOR THE
PURPOSE OF HEDGING ITS PORTFOLIO SECURITIES AGAINST FLUCTUATIONS IN VALUE CAUSED
BY CHANGES IN PREVAILING MARKET INTEREST RATES AND HEDGING AGAINST INCREASES IN
THE COST OF SECURITIES THE SERIES INTENDS TO PURCHASE. THE SUCCESSFUL USE OF
FUTURES CONTRACTS AND OPTIONS THEREON BY THE SERIES INVOLVES ADDITIONAL
TRANSACTION COSTS AND IS SUBJECT TO VARIOUS RISKS AND DEPENDS UPON THE
INVESTMENT ADVISER'S ABILITY TO PREDICT THE DIRECTION OF THE MARKET (INCLUDING
INTEREST RATES). THE SERIES, AND THUS INVESTORS, MAY LOSE MONEY THROUGH ANY
UNSUCCESSFUL USE OF THESE STRATEGIES.
A FUTURES CONTRACT OBLIGATES THE SELLER OF THE CONTRACT TO DELIVER TO THE
PURCHASER OF THE CONTRACT CASH EQUAL TO A SPECIFIC DOLLAR AMOUNT TIMES THE
DIFFERENCE BETWEEN THE VALUE OF A SPECIFIC FIXED-INCOME SECURITY OR INDEX AT THE
CLOSE OF THE LAST TRADING DAY OF THE CONTRACT AND THE PRICE AT WHICH THE
AGREEMENT IS MADE. No physical delivery of the underlying securities is made.
The Series will engage in transactions in only those futures contracts and
options thereon that are traded on a commodities exchange or a board of trade.
The Series intends to engage in futures contracts and options thereon as a
hedge against changes, resulting from market conditions, in the value of
securities which are held in the Series' portfolio or which the Series intends
to purchase, in accordance with the rules and regulations of the Commodity
Futures Trading Commission (the CFTC). The Series also intends to engage in such
transactions when they are economically appropriate for the reduction of risks
inherent in the ongoing management of the Series.
THE SERIES MAY NOT PURCHASE OR SELL FUTURES CONTRACTS OR OPTIONS THEREON IF,
IMMEDIATELY THEREAFTER, (I) THE SUM OF INITIAL AND NET CUMULATIVE VARIATION
MARGIN ON OUTSTANDING FUTURES CONTRACTS, TOGETHER WITH PREMIUMS PAID FOR OPTIONS
THEREON, WOULD EXCEED 20% OF THE TOTAL ASSETS OF THE SERIES, OR (II) IN THE CASE
OF RISK MANAGEMENT TRANSACTIONS, THE SUM OF THE AMOUNT OF INITIAL MARGIN
DEPOSITS ON THE SERIES' FUTURES POSITIONS AND PREMIUMS PAID FOR OPTIONS THEREON
WOULD EXCEED 5% OF THE LIQUIDATION VALUE OF THE SERIES' TOTAL ASSETS. There are
no limitations on the percentage of the portfolio which may be hedged and no
limitations on the use of the Series' assets to cover futures contracts and
options thereon, except that the aggregate value of the obligations underlying
put options will not exceed 50% of the Series' assets. Certain
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<PAGE>
requirements for qualification as a regulated investment company under the
Internal Revenue Code may limit the Series' ability to engage in futures
contracts and options thereon. See "Distributions and Tax Information--Federal
Taxation" in the Statement of Additional Information.
Currently, futures contracts are available on several types of fixed-income
securities, including U.S. Treasury bonds and notes, three-month U.S. Treasury
bills and Eurodollars. Futures contracts are also available on a municipal bond
index, based on THE BOND BUYER Municipal Bond Index, an index of 40 actively
traded municipal bonds. The Series may also engage in transactions in other
futures contracts that become available, from time to time, in other
fixed-income securities or municipal bond indices and in other options on such
contracts if the investment adviser believes such contracts and options would be
appropriate for hedging the Series' portfolio.
THERE CAN BE NO ASSURANCE THAT VIABLE MARKETS WILL CONTINUE OR THAT A LIQUID
SECONDARY MARKET WILL EXIST TO TERMINATE ANY PARTICULAR FUTURES CONTRACT AT ANY
SPECIFIC TIME. If it is not possible to close a futures position entered into by
the Series, the Series will continue to be required to make daily cash payments
of variation margin in the event of adverse price movements. In such a
situation, if the Series had insufficient cash, it might have to sell portfolio
securities to meet daily variation margin requirements at a time when it might
be disadvantageous to do so. The inability to close futures positions also could
have an adverse impact on the ability of the Series to hedge effectively. There
is also a risk of loss by the Series of margin deposits in the event of
bankruptcy of a broker with whom the Series has an open position in a futures
contract.
THE SUCCESSFUL USE OF FUTURES CONTRACTS AND OPTIONS THEREON BY THE SERIES IS
SUBJECT TO VARIOUS ADDITIONAL RISKS. Any use of futures transactions involves
the risk of imperfect correlation in movements in the price of futures contracts
and movements in interest rates and, in turn, the prices of the securities that
are the subject of the hedge. If the price of the futures contract moves more or
less than the price of the security that is the subject of the hedge, the Series
will experience a gain or loss that will not be completely offset by movements
in the price of the security. The risk of imperfect correlation is greater where
the securities underlying futures contracts are taxable securities (rather than
municipal securities), are issued by companies in different market sectors or
have different maturities, ratings or geographic mixes than the security being
hedged. In addition, the correlation may be affected by additions to or
deletions from the index which serves as the basis for a futures contract.
Finally, if the price of the security that is subject to the hedge were to move
in a favorable direction, the advantage to the Series would be partially offset
by the loss incurred on the futures contract.
SPECIAL CONSIDERATIONS
BECAUSE THE SERIES WILL INVEST AT LEAST 80% OF THE VALUE OF ITS TOTAL ASSETS
IN MARYLAND OBLIGATIONS AND BECAUSE IT SEEKS TO MAXIMIZE INCOME DERIVED FROM
MARYLAND OBLIGATIONS, IT IS MORE SUSCEPTIBLE TO FACTORS ADVERSELY AFFECTING
ISSUERS OF MARYLAND OBLIGATIONS THAN IS A COMPARABLE MUNICIPAL BOND MUTUAL FUND
THAT IS NOT CONCENTRATED IN SUCH OBLIGATIONS TO THIS DEGREE. During the three
fiscal years from 1991 through 1993, the State's finances were severely affected
by the national recession. Nevertheless, the State closed fiscal year 1993 with
a $10.5 million operating surplus on a budgetary basis and closed fiscal year
1994 with a $60 million operating surplus on a budgetary basis. On a GAAP basis,
the State's General Fund moved from a deficit of $121.7 million as of June 30,
1993 to a positive balance of $113.9 million on June 30, 1994. Financial
operations continued to improve in fiscal year 1995, with revenues exceeding
estimates by $217 million and expenditures at $184 million above budget.
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 $461.2 million in the Revenue Stabilization Account of the
State Reserve Fund. The State currently projects a General Fund balance for
fiscal 1997 on a budgetary basis of $144.5 million and $490.4 million in the
Revenue Stabilization Account of the State Reserve Fund. The enacted 1997 budget
held 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.
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<PAGE>
In April 1997 the General Assembly approved a $15.4 billion 1998 fiscal year
budget. This budget (i) includes funds sufficient to meet all specific statutory
funding requirements; (ii) incorporates the first year of a five-year phase-in
of a 10% reduction in personal income taxes (estimated to reduce revenues by
$38.5 million in fiscal year 1998 and $450 million when fully phased in) and
certain reductions in sales taxes on certain manufacturing equipment (estimated
to reduce revenues by $38.6 million when the reductions are fully phased in
fiscal year 2001); and (iii) includes the first year's $30 million funding under
an agreement to provide additional funds totaling $230 million over a five-year
period to schools in the City of Baltimore and related grants to other
subdivisions totaling $32 million.
Other issuers of Maryland Obligations are subject to various risks and
uncertainties, and the credit quality of the securities issued by them may vary
considerably from the credit quality of obligations issued by the State. If
either the State or any of its local governmental entities is unable to meet its
financial obligations, the income derived by the Series, the ability to preserve
or realize appreciation of the Series' capital and the Series' liquidity could
be adversely affected. See "Investment Objectives and Policies--Special
Considerations Regarding Investments in Tax-Exempt Securities" in the Statement
of Additional Information.
OTHER INVESTMENTS AND POLICIES
REPURCHASE AGREEMENTS
The Series may on occasion enter into repurchase agreements whereby the seller
of a security agrees to repurchase that security from the Series at a mutually
agreed-upon time and price. The period of maturity is usually quite short,
possibly overnight or a few days, although it may extend over a number of
months. The resale price is in excess of the purchase price, reflecting an
agreed-upon rate of return effective for the period of time the Series' money is
invested in the security. The Series' repurchase agreements will at all times be
fully collateralized in an amount at least equal to the resale price. The
instruments held as collateral are valued daily and if the value of the
instruments declines, the Series will require additional collateral. If the
seller defaults and the value of the collateral securing the repurchase
agreement declines, the Series may incur a loss. The Series participates in a
joint repurchase account with other investment companies managed by Prudential
Investments Fund Management LLC pursuant to an order of the Securities and
Exchange Commission (SEC).
BORROWING
The Series may borrow an amount equal to no more than 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 Series may
pledge up to 33 1/3% of the value of its total assets to secure these
borrowings. The Series will not purchase portfolio securities if its borrowings
exceed 5% of its total assets.
PORTFOLIO TURNOVER
The Series does not expect to trade in securities for short-term gain. It is
anticipated that the annual portfolio turnover rate will not exceed 150%. The
portfolio turnover rate is calculated by dividing the lesser of sales or
purchases of portfolio securities by the average monthly value of the portfolio
securities, excluding securities having a maturity at the date of purchase of
one year or less.
ILLIQUID SECURITIES
The Series may hold up to 15% of its net assets in illiquid securities
including repurchase agreements which have a maturity of longer than seven days,
securities with legal or contractual restrictions on resale (restricted
securities) and securities that are not readily marketable. Restricted
securities eligible for resale pursuant to Rule 144A under the Securities Act of
1933, as amended (the Securities Act), privately placed commercial paper and
municipal lease obligations that have a readily available market are not
considered illiquid for the purposes of this limitation. The investment adviser
will monitor the liquidity of such restricted securities under the supervision
of the Trustees. The Series' investment in Rule 144A securities could have the
effect of increasing
14
<PAGE>
illiquidity to the extent that qualified institutional buyers become, for a
limited time, uninterested in purchasing Rule 144A securities. See "Investment
Objectives and Policies--Illiquid Securities" and "Investment Restrictions" in
the Statement of Additional Information. Repurchase agreements subject to demand
are deemed to have a maturity equal to the notice period.
INVESTMENT RESTRICTIONS
The Series is subject to certain investment restrictions which, like its
investment objective, constitute fundamental policies. Fundamental policies
cannot be changed without the approval of the holders of a majority of the
Series' outstanding voting securities, as defined in the Investment Company Act.
See "Investment Restrictions" in the Statement of Additional Information.
HOW THE FUND IS MANAGED
THE FUND HAS TRUSTEES WHO, IN ADDITION TO OVERSEEING THE ACTIONS OF THE FUND'S
MANAGER, SUBADVISER AND DISTRIBUTOR, AS SET FORTH BELOW, DECIDE UPON MATTERS OF
GENERAL POLICY. THE FUND'S MANAGER CONDUCTS AND SUPERVISES THE DAILY BUSINESS
OPERATIONS OF THE FUND. THE FUND'S SUBADVISER FURNISHES DAILY INVESTMENT
ADVISORY SERVICES.
For the fiscal year ended August 31, 1997, total expenses of the Series as a
percentage of average net assets, net of fee waivers, were 1.12%, 1.52% and
1.77% for the Series' Class A, Class B and Class C shares, respectively. See
"Financial Highlights."
MANAGER
PRUDENTIAL INVESTMENTS FUND MANAGEMENT LLC (PIFM OR THE MANAGER), GATEWAY
CENTER THREE, 100 MULBERRY STREET, NEWARK, NEW JERSEY 07102-4077, IS THE MANAGER
OF THE FUND AND IS COMPENSATED FOR ITS SERVICES AT AN ANNUAL RATE OF .50 OF 1%
OF THE AVERAGE DAILY NET ASSETS OF THE SERIES. PIFM is organized in New York as
a limited liability company. It is the successor to Prudential Mutual Fund
Management, Inc., which transferred its assets to PIFM in September 1996. For
the fiscal year ended August 31, 1997, the Series paid PIFM a management fee of
.45 of 1% of the Series' average net assets, after taking into account a
management fee waiver. See "Fee Waivers" below and "Manager" in Statement of
Additional Information.
As of September 30, 1997, PIFM served as the manager to 41 open-end investment
companies, constituting all of the Prudential Mutual Funds, and as manager or
administrator to 22 closed-end investment companies with aggregate assets of
approximately $59.9 billion.
UNDER THE MANAGEMENT AGREEMENT WITH THE FUND, PIFM MANAGES THE INVESTMENT
OPERATIONS OF EACH SERIES OF THE FUND AND ALSO ADMINISTERS THE FUND'S BUSINESS
AFFAIRS. See "Manager" in the Statement of Additional Information.
UNDER A SUBADVISORY AGREEMENT BETWEEN PIFM AND THE PRUDENTIAL INVESTMENT
CORPORATION (PIC), DOING BUSINESS AS PRUDENTIAL INVESTMENTS (PI, THE SUBADVISER
OR THE INVESTMENT ADVISER), PI FURNISHES INVESTMENT ADVISORY SERVICES IN
CONNECTION WITH THE MANAGEMENT OF THE FUND AND IS REIMBURSED BY PIFM FOR ITS
REASONABLE COSTS AND EXPENSES INCURRED IN PROVIDING SUCH SERVICE. Under the
Management Agreement, PIFM continues to have responsibility for all investment
advisory services and supervises PI's performance of such services.
The current portfolio manager of the Series is James M. Murphy. Mr. Murphy has
responsibility for the day-to-day management of the portfolio. He has managed
the portfolio since January 1997 and has been employed by PIC in various
capacities since 1989.
PIFM and PIC are indirect, wholly-owned subsidiaries of The Prudential
Insurance Company of America (Prudential), a major diversified insurance and
financial services company, and are part of Prudential Investments, a business
group of Prudential.
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FEE WAIVERS
PIFM may from time to time agree to waive all or a portion of its management
fee and subsidize certain operating expenses of the Series. Fee waivers and
expense subsidies will increase the Series' yield and total return. The Series
is not required to reimburse PIFM for such management fee waiver. Effective
September 1, 1997, PIFM discontinued its waiver of 10% of its management fee.
See "Fund Expenses."
DISTRIBUTOR
PRUDENTIAL SECURITIES INCORPORATED (PRUDENTIAL SECURITIES, PSI OR THE
DISTRIBUTOR), ONE SEAPORT PLAZA, NEW YORK, NEW YORK 10292, IS A CORPORATION
ORGANIZED UNDER THE LAWS OF THE STATE OF DELAWARE AND SERVES AS THE DISTRIBUTOR
OF THE CLASS A, CLASS B AND CLASS C SHARES OF THE SERIES. It is an indirect,
wholly-owned subsidiary of Prudential.
UNDER SEPARATE DISTRIBUTION AND SERVICE PLANS (THE CLASS A PLAN, THE CLASS B
PLAN AND THE CLASS C PLAN, COLLECTIVELY, THE PLANS) ADOPTED BY THE FUND UNDER
RULE 12B-1 UNDER THE INVESTMENT COMPANY ACT AND A DISTRIBUTION AGREEMENT (THE
DISTRIBUTION AGREEMENT), PRUDENTIAL SECURITIES (THE DISTRIBUTOR) INCURS THE
EXPENSES OF DISTRIBUTING THE CLASS A, CLASS B AND CLASS C SHARES OF THE
SERIES.These expenses include commissions and account servicing fees paid to, or
on account of, financial advisers of Prudential Securities and representatives
of Pruco Securities Corporation (Prusec), an affiliated broker-dealer,
commissions and account servicing fees paid to, or on account of, other
broker-dealers or financial institutions (other than national banks) which have
entered into agreements with the Distributor, advertising expenses, the cost of
printing and mailing prospectuses to potential investors and indirect and
overhead costs of Prudential Securities and Prusec associated with the sale of
Series shares, including lease, utility, communications and sales promotion
expenses.
Under the Plans, the Series is obligated to pay distribution and/or service
fees to the Distributor as compensation for its distribution and service
activities, not as reimbursement for specific expenses incurred. If the
Distributor's expenses exceed its distribution and service fees, the Series will
not be obligated to pay any additional expenses. If the Distributor's expenses
are less than such distribution and service fees, it will retain its full fees
and realize a profit.
UNDER THE CLASS A PLAN, THE SERIES MAY PAY PRUDENTIAL SECURITIES FOR ITS
DISTRIBUTION-RELATED ACTIVITIES WITH RESPECT TO CLASS A SHARES AT AN ANNUAL RATE
OF UP TO .30 OF 1% OF THE AVERAGE DAILY NET ASSETS OF THE CLASS A SHARES OF THE
SERIES. The Class A Plan provides that (i) up to .25 of 1% of the average daily
net assets of the Class A shares may be used to pay for personal service and/or
the maintenance of shareholder accounts (service fee) and (ii) total
distribution fees (including the service fee of .25 of 1%) may not exceed .30 of
1% of the average daily net assets of the Class A shares. Prudential Securities
has agreed to limit its distribution-related fees payable under the Class A Plan
to .10 of 1% of the average daily net assets of the Class A shares for the
fiscal year ending August 31, 1998.
UNDER THE CLASS B AND CLASS C PLANS, THE SERIES MAY PAY PRUDENTIAL SECURITIES
FOR ITS DISTRIBUTION-RELATED ACTIVITIES WITH RESPECT TO CLASS B AND CLASS C
SHARES AT AN ANNUAL RATE OF UP TO .50 OF 1% AND UP TO 1% OF THE AVERAGE DAILY
NET ASSETS OF THE CLASS B AND CLASS C SHARES, RESPECTIVELY. The Class B Plan
provides for the payment to Prudential Securities of (i) an asset-based sales
charge of up to .50 of 1% of the average daily net assets of the Class B shares,
and (ii) a service fee of up to .25 of 1% of the average daily net assets of the
Class B shares; provided that the total distribution-related fee does not exceed
.50 of 1%. The Class C Plan provides for the payment to Prudential Securities of
(i) an asset-based sales charge of up to .75 of 1% of the average daily net
assets of the Class C shares, and (ii) a service fee of up to .25 of 1% of the
average daily net assets of the Class C shares. The service fee is used to pay
for personal service and/or the maintenance of shareholder accounts. Prudential
Securities has agreed to limit its distribution-related fees payable under the
Class C Plan to .75 of 1% of the average daily net assets of the Class C shares
for the fiscal year ending August 31, 1998. Prudential Securities also receives
contingent deferred sales charges from certain redeeming shareholders. See
"Shareholder Guide--How to Sell Your Shares--Contingent Deferred Sales Charges."
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For the fiscal year ended August 31, 1997, the Series paid distribution
expenses of .10 of 1%, .50 of 1% and .75 of 1% of the average daily net assets
of the Class A, Class B and Class C shares, respectively. The Series records all
payments made under the Plans as expenses in the calculation of net investment
income. See "Distributor" in the Statement of Additional Information.
Distribution expenses attributable to the sale of Class A, Class B and Class C
shares of the Series will be allocated to each such class based upon the ratio
of sales of each such class to the sales of Class A, Class B and Class C shares
of the Series other than expenses allocable to a particular class. The
distribution fee and sales charge of one class will not be used to subsidize the
sale of another class.
Each Plan provides that it shall continue in effect from year to year provided
that a majority of the Trustees of the Fund, including a majority of the
Trustees who are not "interested persons" of the Fund (as defined in the
Investment Company Act) and who have no direct or indirect financial interest in
the operation of the Plan or any agreement related to the Plan (the Rule 12b-1
Trustees), vote annually to continue the Plan. Each Plan may be terminated with
respect to the Series at any time by vote of a majority of the Rule 12b-1
Trustees or of a majority of the outstanding shares of the applicable class of
the Series. The Series will not be obligated to pay distribution and service
fees incurred under any Plan if it is terminated or not continued.
In addition to distribution and service fees paid by the Series under the
Class A, Class B and Class C Plans, the Manager (or one of its affiliates) may
make payments out of its own resources to dealers (including Prudential
Securities) and other persons who distribute shares of the Series. Such payments
may be calculated by reference to the net asset value of shares sold by such
persons or otherwise.
The Distributor is subject to the rules of the National Association of
Securities Dealers, Inc. (the NASD) governing maximum sales charges. See
"Distributor" in the Statement of Additional Information.
On October 21, 1993, PSI entered into an omnibus settlement with the SEC,
state securities regulators (with the exception of the Texas Securities
Commissioner who joined the settlement on January 18, 1994) and the NASD to
resolve allegations that from 1980 through 1990 PSI sold certain limited
partnership interests in violation of securities laws to persons for whom such
securities were not suitable and misrepresented the safety, potential returns
and liquidity of these investments. Without admitting or denying the allegations
asserted against it, PSI consented to the entry of an SEC Administrative Order
which stated that PSI's conduct violated the federal securities laws, directed
PSI to cease and desist from violating the federal securities laws, pay civil
penalties, and adopt certain remedial measures to address the violations.
Pursuant to the terms of the SEC settlement, PSI agreed to the imposition of a
$10,000,000 civil penalty, established a settlement fund in the amount of
$330,000,000 and procedures to resolve legitimate claims for compensatory
damages by purchasers of the partnership interests. PSI has agreed to provide
additional funds, if necessary, for the purpose of the settlement fund. PSI's
settlement with the state securities regulators included an agreement to pay a
penalty of $500,000 per jurisdiction. PSI consented to a censure and to the
payment of a $5,000,000 fine in settling the NASD action.
In October 1994, a criminal complaint was filed with the United States
Magistrate for the Southern District of New York alleging that PSI committed
fraud in connection with the sale of certain limited partnership interests in
violation of federal securities laws. An agreement was simultaneously filed to
defer prosecution of these charges for a period of three years from the signing
of the agreement, provided that PSI complies with the terms of the agreement.
If, upon completion of the three year period, PSI has complied with the terms of
the agreement, no prosecution will be instituted by the United States for the
offenses charged in the complaint. If on the other hand, during the course of
the three year period, PSI violates the terms of the agreement, the U.S.
Attorney can then elect to pursue these charges. Under the terms of the
agreement, PSI agreed, among other things, to pay an additional $330,000,000
into the fund established by the SEC to pay restitution to investors who
purchased certain PSI limited partnership interests.
For more detailed information concerning the foregoing matters, see
"Distributor" in the Statement of Additional Information, a copy of which may be
obtained at no cost by calling (800) 225-1852.
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The Fund is not affected by PSI's financial condition and is an entirely
separate legal entity from PSI, which has no beneficial ownership therein and
the Fund's assets which are held by State Street Bank and Trust Company, an
independent custodian, are separate and distinct from PSI.
PORTFOLIO TRANSACTIONS
Prudential Securities may act as a broker or futures commission merchant for
the Fund, provided that the commissions, fees or other remuneration it receives
are fair and reasonable. See "Portfolio Transactions and Brokerage" in the
Statement of Additional Information.
CUSTODIAN AND TRANSFER AND DIVIDEND DISBURSING AGENT
State Street Bank and Trust Company, One Heritage Drive, North Quincy,
Massachusetts 02171, serves as Custodian for the portfolio securities of the
Series and cash and, in that capacity, maintains certain financial and
accounting books and records pursuant to an agreement with the Fund. Its mailing
address is P.O. Box 1713, Boston, Massachusetts 02105.
Prudential Mutual Fund Services LLC (PMFS), Raritan Plaza One, Edison, New
Jersey 08837, serves as Transfer Agent and Dividend Disbursing Agent and, in
those capacities, maintains certain books and records for the Fund. PMFS is a
wholly-owned subsidiary of PIFM. Its mailing address is P.O. Box 15005, New
Brunswick, New Jersey 08906-5005.
HOW THE FUND VALUES ITS SHARES
THE SERIES' NET ASSET VALUE PER SHARE OR NAV IS DETERMINED BY SUBTRACTING ITS
LIABILITIES FROM THE VALUE OF ITS ASSETS AND DIVIDING THE REMAINDER BY THE
NUMBER OF OUTSTANDING SHARES. NAV IS CALCULATED SEPARATELY FOR EACH CLASS. THE
TRUSTEES HAVE FIXED THE SPECIFIC TIME OF DAY FOR THE COMPUTATION OF THE NET
ASSET VALUE OF THE SERIES TO BE AS OF 4:15 P.M., NEW YORK TIME.
Portfolio securities are valued based on market quotations or, if not readily
available, at fair value as determined in good faith under procedures
established by the Trustees. Securities may also be valued based on values
provided by a pricing service. See "Net Asset Value" in the Statement of
Additional Information.
The Series will compute its NAV once daily on days that the New York Stock
Exchange is open for trading except on days on which no orders to purchase, sell
or redeem shares have been received by the Series or days on which changes in
the value of the Series' portfolio securities do not materially affect the NAV.
Although the legal rights of each class of shares are substantially identical,
the different expenses borne by each class will result in different dividends.
As long as the Series declares dividends daily, the NAV of the Class A, Class B
and Class C shares will generally be the same. It is expected, however, that the
Series' dividends will differ by approximately the amount of any distribution
and/or service fee expense accrual differential among the classes.
HOW THE FUND CALCULATES PERFORMANCE
FROM TIME TO TIME THE FUND MAY ADVERTISE THE YIELD, TAX EQUIVALENT YIELD AND
AVERAGE ANNUAL TOTAL RETURN AND AGGREGATE TOTAL RETURN OF THE SERIES IN
ADVERTISEMENTS OR SALES LITERATURE. YIELD, TAX EQUIVALENT YIELD AND TOTAL RETURN
ARE CALCULATED SEPARATELY FOR CLASS A, CLASS B AND CLASS C SHARES. THESE FIGURES
ARE BASED ON HISTORICAL EARNINGS AND ARE NOT INTENDED TO INDICATE FUTURE
PERFORMANCE. The yield refers to the income generated by an investment in the
Series over a one-month or 30-day period. This income is then annualized; that
is, the amount of income generated by the investment during that 30-day period
is assumed to be generated each 30-day period for twelve periods and is shown as
a percentage of the investment.
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The income earned on the investment is also assumed to be reinvested at the end
of the sixth 30-day period. The tax equivalent yield is calculated similarly to
the yield, except that the yield is increased using a stated income tax rate to
demonstrate the taxable yield necessary to produce an after-tax yield equivalent
to the Series. The total return shows how much an investment in the Series would
have increased (decreased) over a specified period of time (I.E., one, five or
ten years or since inception of the Series) assuming that all distributions and
dividends by the Series were reinvested on the reinvestment dates during the
period and less all recurring fees. The aggregate total return reflects actual
performance over a stated period of time. Average annual total return is a
hypothetical rate of return that, if achieved annually, would have produced the
same aggregate total return if performance had been constant over the entire
period. Average annual total return smooths out variations in performance and
takes into account any applicable initial or contingent deferred sales charges.
Neither average annual total return nor aggregate total return takes into
account any federal or state income taxes which may be payable upon redemption.
The Fund also may include comparative performance information in advertising or
marketing the shares of the Series. Such performance information may include
data from Lipper Analytical Services, Inc., Morningstar Publications, Inc.,
other industry publications, business periodicals and market indices. See
"Performance Information" in the Statement of Additional Information. Further
performance information is contained in the Series' annual and semi-annual
reports to shareholders, which may be obtained without charge. See "Shareholder
Guide--Shareholder Services--Reports to Shareholders."
TAXES, DIVIDENDS AND DISTRIBUTIONS
TAXATION OF THE FUND
THE SERIES HAS ELECTED TO QUALIFY AND INTENDS TO REMAIN QUALIFIED AS A
REGULATED INVESTMENT COMPANY UNDER THE INTERNAL REVENUE CODE. ACCORDINGLY, THE
SERIES WILL NOT BE SUBJECT TO FEDERAL INCOME TAXES ON ITS NET INVESTMENT INCOME
AND NET CAPITAL GAINS, IF ANY, THAT IT DISTRIBUTES TO ITS SHAREHOLDERS. TO THE
EXTENT NOT DISTRIBUTED BY THE SERIES, NET TAXABLE INVESTMENT INCOME AND CAPITAL
GAINS AND LOSSES ARE TAXABLE TO THE SERIES.
To the extent the Series invests in taxable obligations, it will earn taxable
investment income. Also, to the extent the Series engages in hedging
transactions in futures contracts and options thereon, it may earn both
short-term and long-term capital gain or loss. Under the Internal Revenue Code,
special rules apply to the treatment of certain options and futures contracts
(Section 1256 contracts). At the end of each year, such investments held by the
Series will be required to be "marked to market" for federal income tax
purposes; that is, treated as having been sold at market value. Sixty percent of
any gain or loss recognized on these "deemed sales" and on actual dispositions
will be treated as long-term capital gain or loss, and the remainder will be
treated as short-term capital gain or loss. See "Distributions and Tax
Information" in the Statement of Additional Information.
Gain or loss realized by the Series from the sale of securities generally will
be treated as capital gain or loss; however, gain from the sale of certain
securities (including municipal obligations) will be treated as ordinary income
to the extent of any "market discount." Market discount generally is the
difference, if any, between the price paid by the Series for the security and
the principal amount of the security (or, in the case of a security issued at an
original issue discount, the revised issue price of the security). The market
discount rule does not apply to any security that was acquired by the Series at
its original issue. See "Distributions and Tax Information" in the Statement of
Additional Information.
TAXATION OF SHAREHOLDERS
In general, the character of tax-exempt interest distributed by the Series
will flow through as tax-exempt interest to its shareholders provided that 50%
or more of the value of its assets at the end of each quarter of its taxable
year is invested in state, municipal and other obligations, the interest on
which is excluded from gross income for federal income tax purposes. During
normal market conditions, at least 80% of the Series' total assets will be
invested in such obligations. See "How the Fund Invests--Investment Objective
and Policies."
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Any dividends out of net investment income, together with distributions of net
short-term gains (I.E., the excess of net short-term capital gains over net
long-term capital losses) distributed to shareholders, will be taxable as
ordinary income to the shareholder whether or not reinvested. Any net capital
gains (I.E., the excess of net capital gains from the sale of assets held for
more than 12 months over net short-term capital losses) distributed to
shareholders will be taxable as capital gains to the shareholders, whether or
not reinvested and regardless of the length of time a shareholder has owned his
or her shares. The maximum capital gains rate for individuals is 28% with
respect to assets held for more than 12 months, but not more than 18 months, and
20% with respect to assets held for more than 18 months. The maximum capital
gains rate for corporate shareholders currently is the same as the maximum tax
rate for ordinary income.
Any gain or loss realized upon a sale or redemption of Series shares by a
shareholder who is not a dealer in securities will be treated as capital gain or
loss. In the case of an individual, any such capital gain will be treated as
short-term capital loss if the shares were held for not more than 12 months,
mid-term gain, taxable at the maximum rate of 28%, if such shares were held for
more than 12, but not more than 18 months, and long-term capital gain, taxable
at the maximum rate of 20%, if such shares were held for more than 18 months. In
the case of a corporation, any such capital gain will be treated as long-term
capital gain, taxable at the same rates as ordinary income, if such shares were
held for more than 12 months. Any such capital loss will be treated as long-term
capital loss if the shares have been held more than one year and otherwise as
short-term capital loss. Any such loss with respect to shares that are held for
six months or less, however, will be treated as long-term capital loss to the
extent of any capital gain distributions received by the shareholder. In
addition, any short-term capital loss will be disallowed to the extent of any
tax-exempt dividends received by the shareholder on shares that are held for six
months or less.
The Fund has obtained opinions of counsel to the effect that neither (i) the
conversion of Class B shares into Class A shares nor (ii) the exchange of Class
B or Class C shares for Class A shares constitutes a taxable event for federal
income tax purposes. However, such opinions are not binding on the Internal
Revenue Service.
CERTAIN INVESTORS MAY INCUR FEDERAL ALTERNATIVE MINIMUM TAX LIABILITY AS A
RESULT OF THEIR INVESTMENT IN THE FUND. Tax-exempt interest from certain
municipal obligations (I.E., certain private activity bonds issued after August
7, 1986) will be treated as an item of tax preference for purposes of the
alternative minimum tax. The Fund anticipates that, under regulations to be
promulgated, items of tax preference incurred by the Series will be attributed
to the Series' shareholders, although some portion of such items could be
allocated to the Series itself. Depending upon each shareholder's individual
circumstances, the attribution of items of tax preference incurred by the Series
could result in liability for the shareholder for the alternative minimum tax.
Similarly, the Series could be liable for the alternative minimum tax for items
of tax preference attributed to it. The Series is permitted to invest in
municipal obligations of the type that will produce items of tax preference.
Corporate shareholders in the Series also will have to take into account the
adjustment for current earnings for alternative minimum tax purposes. Corporate
shareholders should consult with their tax advisers with respect to this
potential adjustment.
Under Maryland law, dividends paid by the Series are exempt from Maryland
personal income tax for individuals who reside in Maryland to the extent such
dividends are exempt from federal income tax and are derived from interest
payments on Maryland Obligations, provided, however, that up to 50% of dividends
attributable to interest received by the Series on certain private activity
bonds which are not issued by the State of Maryland or its political
subdivisions could be subject to Maryland individual income tax. In addition,
distributions attributable (i) to gain realized by the Series on the disposition
of those Maryland Obligations issued by the State of Maryland or its political
subdivisions and (ii) to interest received by the Series on U.S. Government
obligations are exempt from Maryland personal income tax.
Distributions other than those described as exempt in the preceding paragraph
will be subject to Maryland personal income tax.
Shareholders are advised to consult their own tax advisers regarding specific
questions as to federal, state or local taxes. See "Distributions and Tax
Information" in the Statement of Additional Information.
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WITHHOLDING TAXES
Under the Internal Revenue Code, the Series is required to withhold and remit
to the U.S. Treasury 31% of redemption proceeds on the accounts of certain
shareholders who fail to furnish their tax identification numbers on IRS Form
W-9 (or IRS Form W-8 in the case of certain foreign shareholders) with the
required certifications regarding the shareholder's status under the federal
income tax law. Such withholding also is required on taxable dividends and
capital gain distributions made by the Series unless it is reasonably expected
that at least 95% of the distributions of the Series are comprised of tax-exempt
dividends.
Dividends of net taxable investment income and distributions of net short-term
capital gains paid to a shareholder (including a shareholder acting as a nominee
or fiduciary) who is a nonresident alien individual, a foreign corporation or a
foreign partnership (foreign shareholder) are subject to a 30% (or lower treaty
rate) withholding tax upon the gross amount of the dividends unless the
dividends are effectively connected with a U.S. trade or business conducted by
the foreign shareholder. Capital gain dividends paid to a foreign shareholder
are generally not subject to withholding tax. A foreign shareholder will,
however, be required to pay U.S. income tax on any dividends and capital gain
distributions which are effectively connected with a U.S. trade or business of
the foreign shareholder.
DIVIDENDS AND DISTRIBUTIONS
THE SERIES EXPECTS TO DECLARE DAILY AND PAY MONTHLY DIVIDENDS OF NET
INVESTMENT INCOME, IF ANY, AND MAKE DISTRIBUTIONS AT LEAST ANNUALLY OF ANY
CAPITAL GAINS IN EXCESS OF CAPITAL LOSSES. Dividends paid by the Series with
respect to each class of shares, to the extent any dividends are paid, will be
calculated in the same manner, at the same time, on the same day and will be in
the same amount except that each class will bear its own distribution charges,
generally resulting in lower dividends for Class B and Class C shares.
Distributions of net capital gains, if any, will be paid in the same amount for
each class of shares. See "How the Fund Values its Shares."
DIVIDENDS AND DISTRIBUTIONS WILL BE PAID IN ADDITIONAL SHARES OF THE SERIES
BASED ON THE NAV OF EACH CLASS OF THE SERIES ON THE PAYMENT DATE AND RECORD
DATE, RESPECTIVELY, OR SUCH OTHER DATE AS THE TRUSTEES MAY DETERMINE, UNLESS THE
SHAREHOLDER ELECTS IN WRITING NOT LESS THAN FIVE BUSINESS DAYS PRIOR TO THE
RECORD DATE TO RECEIVE SUCH DIVIDENDS AND DISTRIBUTIONS IN CASH. Such election
should be submitted to Prudential Mutual Fund Services LLC, Attention: Account
Maintenance P.O. Box 15015, New Brunswick, New Jersey 08906-5015. If you hold
shares through Prudential Securities, you should contact your financial adviser
to elect to receive dividends and distributions in cash. The Fund will notify
each shareholder after the close of the Fund's taxable year of both the dollar
amount and the taxable status of that year's dividends and distributions on a
per share basis.
GENERAL INFORMATION
DESCRIPTION OF SHARES
THE FUND WAS ESTABLISHED AS A MASSACHUSETTS BUSINESS TRUST ON MAY 18, 1984, BY
A DECLARATION OF TRUST. The Fund's activities are supervised by its Trustees.
The Declaration of Trust permits the Trustees to issue an unlimited number of
full and fractional shares in separate series, currently designated as the
Connecticut Money Market Series, Florida Series, Maryland Series, Massachusetts
Series, Massachusetts Money Market Series, Michigan Series, New Jersey Series,
New Jersey Money Market Series, New York Series, New York Money Market Series,
North Carolina Series, Ohio Series and Pennsylvania Series. The Series is
authorized to issue an unlimited number of shares, divided into three classes,
designated Class A, Class B and Class C. Each class of shares represents an
interest in the same assets of the Series and are identical in all respects
except that (i) each class is subject to different 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)
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each class has a different exchange privilege and (iv) only Class B shares have
a conversion feature. See "How the Fund is Managed--Distributor." In accordance
with the Fund's Declaration of Trust, the Trustees may authorize the creation of
additional series and classes within such series, with such preferences,
privileges, limitations and voting and dividend rights as the Trustees may
determine.
Shares of the Fund, when issued, are fully paid, nonassessable, fully
transferable and redeemable at the option of the holder. Shares are also
redeemable at the option of the Fund under certain circumstances as described
under "Shareholder Guide--How to Sell Your Shares." Each share of each class of
the Series is equal as to earnings, assets and voting privileges, except as
noted above, and each class bears the expenses related to the distribution of
its shares. Except for the conversion feature applicable to the Class B shares,
there are no conversion, preemptive or other subscription rights. In the event
of liquidation, each share of beneficial interest of each series is entitled to
its portion of all of the Fund's assets after all debt and expenses of the Fund
have been paid. Since Class B and Class C shares generally bear higher
distribution expenses than Class A shares, the liquidation proceeds to
shareholders of those classes are likely to be lower than to Class A
shareholders. The Fund's shares do not have cumulative voting rights for the
election of Trustees.
THE FUND DOES NOT INTEND TO HOLD ANNUAL MEETINGS OF SHAREHOLDERS UNLESS
OTHERWISE REQUIRED BY LAW. THE FUND WILL NOT BE REQUIRED TO HOLD MEETINGS OF
SHAREHOLDERS UNLESS, FOR EXAMPLE, THE ELECTION OF TRUSTEES IS REQUIRED TO BE
ACTED UPON BY SHAREHOLDERS UNDER THE INVESTMENT COMPANY ACT. SHAREHOLDERS HAVE
CERTAIN RIGHTS, INCLUDING THE RIGHT TO CALL A MEETING UPON A VOTE OF 10% OF THE
FUND'S OUTSTANDING SHARES FOR THE PURPOSE OF VOTING ON THE REMOVAL OF ONE OR
MORE TRUSTEES OR TO TRANSACT ANY OTHER BUSINESS.
The Declaration of Trust and the By-Laws of the Fund are designed to make the
Fund similar in certain respects to a Massachusetts business corporation. The
principal distinction between a Massachusetts business corporation and a
Massachusetts business trust relates to shareholder liability. Under
Massachusetts law, shareholders of a business trust may, under certain
circumstances, be held personally liable as partners for the obligations of the
fund, which is not the case with a corporation. The Declaration of Trust of the
Fund provides that shareholders shall not be subject to any personal liability
for the acts or obligations of the Fund and that every written obligation,
contract, instrument or undertaking made by the Fund shall contain a provision
to the effect that the shareholders are not individually bound thereunder.
ADDITIONAL INFORMATION
This Prospectus, including the Statement of Additional Information which has
been incorporated by reference herein, does not contain all the information set
forth in the Registration Statement filed by the Fund with the SEC under the
Securities Act. Copies of the Registration Statement may be obtained at a
reasonable charge from the SEC or may be examined, without charge, at the office
of the SEC in Washington, D.C.
SHAREHOLDER GUIDE
HOW TO BUY SHARES OF THE FUND
YOU MAY PURCHASE SHARES OF THE SERIES THROUGH PRUDENTIAL SECURITIES, PRUSEC OR
DIRECTLY FROM THE FUND, THROUGH ITS TRANSFER AGENT, PRUDENTIAL MUTUAL FUND
SERVICES LLC (PMFS OR THE TRANSFER AGENT), ATTENTION: INVESTMENT SERVICES, P.O.
BOX 15020, NEW BRUNSWICK, NEW JERSEY 08906-5020. The purchase price is the NAV
next determined following receipt of an order in proper form by the Transfer
Agent or Prudential Securities plus a sales charge which, at your option, may be
imposed either (i) at the time of purchase (Class A shares) or (ii) on a
deferred basis (Class B or Class C shares). Payment may be made by wire, check
or through your brokerage account. See "Alternative Purchase Plan" below. See
also "How the Fund Values its Shares."
22
<PAGE>
An investment in the Series may not be appropriate for tax-exempt or
tax-deferred investors. Such investors should consult their own tax advisers.
The minimum initial investment is $1,000 for Class A and Class B shares and
$5,000 for Class C shares. The minimum subsequent investment is $100 for all
classes. All minimum investment requirements are waived for certain employee
savings plans. For purchases made through the Automatic Savings Accumulation
Plan, the minimum initial and subsequent investment is $50. See "Shareholder
Services" below.
Application forms can be obtained from PMFS, Prudential Securities or Prusec.
If a share certificate is desired, it must be requested in writing for each
transaction. Certificates are issued only for full shares. Shareholders who hold
their shares through Prudential Securities will not receive share certificates.
The Fund reserves the right to reject any purchase order (including an
exchange into the Series) or to suspend or modify the continuous offering of its
shares. See "How to Sell Your Shares" below.
Your dealer is responsible for forwarding payment promptly to the Fund. The
Distributor reserves the right to cancel any purchase order for which payment
has not been received by the third business day following the investment.
Transactions in shares of the Series may be subject to postage and handling
charges imposed by your dealer.
PURCHASE BY WIRE. For an initial purchase of shares of the Series by wire, you
must first telephone PMFS at (800) 225-1852 (toll-free) to receive an account
number. The following information will be requested: your name, address, tax
identification number, class election, dividend distribution election, amount
being wired and wiring bank. Instructions should then be given by you to your
bank to transfer funds by wire to State Street Bank and Trust Company (State
Street), Boston, Massachusetts, Custody and Shareholder Services Division,
Attention: Prudential Municipal Series Fund (Maryland Series), specifying on the
wire the account number assigned by PMFS and your name and identifying the class
in which you are eligible to invest (Class A, Class B or Class C shares).
If you arrange for receipt by State Street of Federal Funds prior to the
calculation of NAV (4:15 P.M., New York time), on a business day, you may
purchase shares of the Series as of that day. See "Net Asset Value" in the
Statement of Additional Information.
In making a subsequent purchase order by wire, you should wire State Street
directly and should be sure that the wire specifies Prudential Municipal Series
Fund, the name of the Series, Class A, Class B or Class C shares and your name
and individual account number. It is not necessary to call PMFS to make
subsequent purchase orders utilizing Federal Funds. The minimum amount which may
be invested by wire is $1,000.
ALTERNATIVE PURCHASE PLAN
THE SERIES OFFERS THROUGH THIS PROSPECTUS THREE CLASSES OF SHARES (CLASS A,
CLASS B AND CLASS C SHARES) WHICH ALLOWS YOU TO CHOOSE THE MOST BENEFICIAL SALES
CHARGE STRUCTURE FOR YOUR INDIVIDUAL CIRCUMSTANCES GIVEN THE AMOUNT OF THE
PURCHASE, THE LENGTH OF TIME YOU EXPECT TO HOLD THE SHARES AND OTHER RELEVANT
CIRCUMSTANCES (ALTERNATIVE PURCHASE PLAN).
23
<PAGE>
<TABLE>
<CAPTION>
ANNUAL 12b-1 FEES
(AS A % OF AVERAGE
SALES CHARGE DAILY NET ASSETS) OTHER INFORMATION
----------------------------------- ----------------------------------- -----------------------------------
<S> <C> <C> <C>
CLASS A Maximum initial sales charge of 3% .30 of 1% (currently being charged Initial sales charge waived or
of the public offering price at a rate of .10 of 1%) reduced for certain purchases
CLASS B Maximum contingent deferred sales .50 of 1% Shares convert to Class A shares
charge or CDSC of 5% of the lesser approximately seven years after
of the amount invested or the purchase
redemption proceeds; declines to
zero after six years
CLASS C Maximum CDSC of 1% of the lesser of 1% (currently being charged at a Shares do not convert to another
the amount invested or the rate of .75 of 1%) class
redemption proceeds on redemptions
made within one year of purchase
</TABLE>
The three classes of shares represent an interest in the same portfolio of
investments of the Series and have the same rights, except that (i) each class
bears the separate expenses of its Rule 12b-1 distribution and service plan,
(ii) each class has exclusive voting rights 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, and (iii) only Class B
shares have a conversion feature. The three classes also have separate exchange
privileges. See "How to Exchange Your Shares" below. The income attributable to
each class and the dividends payable on the shares of each class will be reduced
by the amount of the distribution fee of each class. Class B and Class C shares
bear the expenses of a higher distribution fee which will generally cause them
to have higher expense ratios and to pay lower dividends than the Class A
shares.
Financial advisers and other sales agents who sell shares of the Series will
receive different compensation for selling Class A, Class B and Class C shares
and will generally receive more compensation initially for selling Class A and
Class B shares than for selling Class C shares.
IN SELECTING A PURCHASE ALTERNATIVE, YOU SHOULD CONSIDER, AMONG OTHER
THINGS,(1) the length of time you expect to hold your investment, (2) the amount
of any applicable sales charge (whether imposed at the time of purchase or
redemption) and distribution-related fees, as noted above, (3) whether you
qualify for any reduction or waiver of any applicable sales charge, (4) the
various exchange privileges among the different classes of shares (see "How to
Exchange Your Shares" below) and (5) the fact that Class B shares automatically
convert to Class A shares approximately seven years after purchase (see
"Conversion Feature--Class B Shares" below).
The following is provided to assist you in determining which method of
purchase best suits your individual circumstances and is based on current fees
and expenses being charged to the Series:
If you intend to hold your investment in the Series for less than 5 years and
do not qualify for a reduced sales charge on Class A shares, since Class A
shares are subject to a maximum initial sales charge of 3% and Class B shares
are subject to a CDSC of 5% which declines to zero over a 6 year period, you
should consider purchasing Class C shares over either Class A or Class B shares.
If you intend to hold your investment for 5 years or more and do not qualify
for a reduced sales charge on Class A shares, since Class B shares convert to
Class A shares approximately 7 years after purchase and because all of your
money would be invested initially in the case of Class B shares, you should
consider purchasing Class B shares over either Class A or Class C shares.
If you qualify for a reduced sales charge on Class A shares, if may be more
advantageous for you to purchase Class A shares over either Class B or Class C
shares regardless of how long you intend to hold your investment. However,
unlike Class B and Class C shares, you would not have all of your money invested
initially because the sales charge on Class A shares is deducted at the time of
purchase.
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<PAGE>
If you do not qualify for a reduced sales charge on Class A shares and you
purchase Class C shares, you would have to hold your investment for more than 4
years for the higher cumulative annual distribution-related fee on those shares
to exceed the initial sales charge plus cumulative annual distribution-related
fee on Class A shares. This does not take into account the time value of money,
which further reduces the impact of the higher Class C distribution-related fee
on the investment, fluctuations in net asset value, the effect of the return on
the investment over this period of time or redemptions when the CDSC is
applicable.
ALL PURCHASES OF $1 MILLION OR MORE, EITHER AS PART OF A SINGLE INVESTMENT OR
UNDER RIGHTS OF ACCUMULATION OR LETTERS OF INTENT, MUST BE FOR CLASS A SHARES.
See "Reduction and Waiver of Initial Sales Charges" below.
CLASS A SHARES
The offering price of Class A shares for investors choosing the initial sales
charge alternative is the next determined NAV plus a sales charge (expressed as
a percentage of the offering price and of the amount invested) as shown in the
following table:
<TABLE>
<CAPTION>
SALES CHARGE AS SALES CHARGE AS DEALER CONCESSION
PERCENTAGE OF PERCENTAGE OF AS PERCENTAGE OF
AMOUNT OF PURCHASE OFFERING PRICE AMOUNT INVESTED OFFERING PRICE
------------------------ --------------- --------------- -----------------
<S> <C> <C> <C>
Less than $99,999 3.00% 3.09% 3.00%
$100,000 to $249,999 2.50 2.56 2.50
$250,000 to $499,999 1.50 1.52 1.50
$500,000 to $999,999 1.00 1.01 1.00
$1,000,000 and above None None None
</TABLE>
The Distributor may reallow the entire initial sales charge to dealers.
Selling dealers may be deemed to be underwriters, as that term is defined in the
Securities Act.
In connection with the sale of Class A shares at NAV (without payment of an
initial sales charge), the Manager, the Distributor or one of their affiliates
will pay dealers, financial advisers and other persons which distribute shares a
finders' fee from its own resources based on a percentage of the net asset value
of shares sold by such persons.
REDUCTION AND WAIVER OF INITIAL SALES CHARGES. Reduced sales charges are
available through Rights of Accumulation and Letters of Intent. Shares of the
Fund and shares of other Prudential Mutual Funds (excluding money market funds
other than those acquired pursuant to the exchange privilege) may be aggregated
to determine the applicable reduction. See "Purchase and Redemption of Fund
Shares--Reduction and Waiver of Initial Sales Charges--Class A Shares" in the
Statement of Additional Information.
PRUARRAY SAVINGS PROGRAM. Class A shares are also offered at net asset value
to employees of companies that enter into a written agreement with Prudential
Retirement Services to participate in the PruArray Savings Program. Under this
Program, a limited number of Prudential Mutual Funds are available for purchase
at net asset value by Savings Accumulation Plans of the company's employees. The
Program is available only to employees who open a Savings Accumulation Plan
account with the Transfer Agent. The program is offered to companies that have
at least 250 eligible employees.
SPECIAL RULES APPLICABLE TO RETIREMENT PLANS. After a PruArray Plan qualifies
to purchase Class A shares at NAV, all subsequent purchases will be made at NAV.
OTHER WAIVERS. Class A shares may be purchased at NAV, through Prudential
Securities or the Transfer Agent, by the following persons: (a) officers and
current and former Directors/Trustees of Prudential Mutual Funds (including the
Fund), (b) employees of Prudential Securities and PIFM and their subsidiaries
and members of the families of such persons who maintain an "employee related"
account at Prudential Securities or the Transfer Agent, (c) employees of
subadvisers of the Prudential Mutual Funds provided that the purchases at NAV
are permitted by such person's employer, (d) Prudential employees and special
agents of Prudential and its subsidiaries and all persons who have retired
directly from active service with Prudential or one of its subsidiaries, (e)
registered representatives and employees of dealers who have entered into a
selected dealer agreement with
25
<PAGE>
Prudential Securities provided that purchases at NAV are permitted by such
person's employer and (f) investors who have a business relationship with a
financial adviser who joined Prudential Securities from another investment firm,
provided that (i) the purchase is made within 180 days of the commencement of
the financial adviser's employment at Prudential Securities or within one year
in the case of benefit plans, (ii) the purchase is made with proceeds of a
redemption of shares of any open-end non-money market fund sponsored by the
financial adviser's previous employer (other than a fund which imposes a
distribution or service fee of .25 of 1% or less) and (iii) the financial
adviser served as the client's broker on the previous purchases.
You must notify the Transfer Agent either directly or through Prudential
Securities or Prusec that you are entitled to the reduction or waiver of the
sales charge. The reduction or waiver will be granted subject to confirmation of
your entitlement. No initial sales charges are imposed upon Class A shares
acquired upon the reinvestment of dividends and distributions. See "Purchase and
Redemption of Fund Shares--Reduction and Waiver of Initial Sales Charges--Class
A Shares" in the Statement of Additional Information.
CLASS B AND CLASS C SHARES
The offering price of Class B and Class C shares for investors choosing one of
the deferred sales charge alternatives is the NAV next determined following
receipt of an order by the Transfer Agent or Prudential Securities. Although
there is no sales charge imposed at the time of purchase, redemptions of Class B
and Class C shares may be subject to a CDSC. See "How to Sell Your
Shares--Contingent Deferred Sales Charges" below. The Distributor will pay sales
commissions of up to 4% of the purchase price of Class B shares to dealers,
financial advisers and other persons who sell Class B shares at the time of sale
from its own resources. This facilitates the ability of the Fund to sell the
Class B shares without an initial sales charge being deducted at the time of
purchase. The Distributor anticipates that it will recoup its advancement of
sales commissions from the combination of the CDSC and the distribution fee. See
"How the Fund is Managed--Distributor." In connection with the sale of Class C
shares, the Distributor will pay dealers, financial advisers and other persons
which distribute Class C shares a sales commission of up to 1% of the purchase
price at the time of the sale.
HOW TO SELL YOUR SHARES
YOU CAN REDEEM YOUR SHARES OF THE SERIES AT ANY TIME FOR CASH AT THE NAV NEXT
DETERMINED AFTER THE REDEMPTION REQUEST IS RECEIVED IN PROPER FORM BY THE
TRANSFER AGENT OR PRUDENTIAL SECURITIES. SEE "HOW THE FUND VALUES ITS SHARES."
In certain cases, however, redemption proceeds will be reduced by the amount of
any applicable contingent deferred sales charge, as described below. See
"Contingent Deferred Sales Charges" below.
IF YOU HOLD SHARES OF THE SERIES THROUGH PRUDENTIAL SECURITIES, YOU MUST
REDEEM SHARES THROUGH PRUDENTIAL SECURITIES. PLEASE CONTACT YOUR PRUDENTIAL
SECURITIES FINANCIAL ADVISER.
IF YOU HOLD SHARES IN NON-CERTIFICATE FORM, A WRITTEN REQUEST FOR REDEMPTION
SIGNED BY YOU EXACTLY AS THE ACCOUNT IS REGISTERED IS REQUIRED. IF YOU HOLD
CERTIFICATES, THE CERTIFICATES, SIGNED IN THE NAME(S) SHOWN ON THE FACE OF THE
CERTIFICATES, MUST BE RECEIVED BY THE TRANSFER AGENT IN ORDER FOR THE REDEMPTION
REQUEST TO BE PROCESSED. IF REDEMPTION IS REQUESTED BY A CORPORATION,
PARTNERSHIP, TRUST OR FIDUCIARY, WRITTEN EVIDENCE OF AUTHORITY ACCEPTABLE TO THE
TRANSFER AGENT MUST BE SUBMITTED BEFORE SUCH REQUEST WILL BE ACCEPTED. All
correspondence and documents concerning redemptions should be sent to the Fund
in care of its Transfer Agent, Prudential Mutual Fund Services LLC, Attention:
Redemption Services, P.O. Box 15010, New Brunswick, New Jersey 08906-5010.
If the proceeds of the redemption (a) exceed $50,000, (b) are to be paid to a
person other than the record owner, (c) are to be sent to an address other than
the address on the Transfer Agent's records, or (d) are to be paid to a
corporation, partnership, trust or fiduciary, the signature(s) on the redemption
request and on the certificates, if any, or stock power must be guaranteed by an
"eligible guarantor institution." An "eligible guarantor institution" includes
any bank, broker, dealer or credit union. The Transfer Agent reserves the right
to request additional information from, and make reasonable inquiries of, any
eligible guarantor institution. For clients of Prusec, a signature guarantee may
be obtained from the agency or office manager of most Prudential Insurance and
Financial Services or Preferred Services offices.
26
<PAGE>
PAYMENT FOR SHARES PRESENTED FOR REDEMPTION WILL BE MADE BY CHECK WITHIN SEVEN
DAYS AFTER RECEIPT BY THE TRANSFER AGENT OF THE CERTIFICATE AND/OR WRITTEN
REQUEST EXCEPT AS INDICATED BELOW. IF YOU HOLD SHARES THROUGH PRUDENTIAL
SECURITIES, PAYMENT FOR SHARES PRESENTED FOR REDEMPTION WILL BE CREDITED TO YOUR
PRUDENTIAL SECURITIES ACCOUNT, UNLESS YOU INDICATE OTHERWISE. Such payment may
be postponed or the right of redemption suspended at times (a) when the New York
Stock Exchange is closed for other than customary weekends and holidays, (b)
when trading on such Exchange is restricted, (c) when an emergency exists as a
result of which disposal by the Series of securities owned by it is not
reasonably practicable or it is not reasonably practicable for the Series fairly
to determine the value of its net assets, or (d) during any other period when
the SEC, by order, so permits: provided that applicable rules and regulations of
the SEC shall govern as to whether the conditions prescribed in (b), (c) or (d)
exist.
PAYMENT FOR REDEMPTION OF RECENTLY PURCHASED SHARES WILL BE DELAYED UNTIL THE
FUND OR ITS TRANSFER AGENT HAS BEEN ADVISED THAT THE PURCHASE CHECK HAS BEEN
HONORED, UP TO 10 CALENDAR DAYS FROM THE TIME OF RECEIPT OF THE PURCHASE CHECK
BY THE TRANSFER AGENT. SUCH DELAY MAY BE AVOIDED BY PURCHASING SHARES BY WIRE OR
BY CERTIFIED OR CASHIER'S CHECK.
REDEMPTION IN KIND. If the Trustees determine that it would be detrimental to
the best interests of the remaining shareholders of the Fund to make payment
wholly or partly in cash, the Fund may pay the redemption price in whole or in
part by a distribution in kind of securities from the investment portfolio of
the Series of the Fund, in lieu of cash, in conformity with applicable rules of
the SEC. Securities will be readily marketable and will be valued in the same
manner as in a regular redemption. See "How the Fund Values its Shares." If your
shares are redeemed in kind, you will incur transaction costs in converting the
assets into cash. The Fund, however, has elected to be governed by Rule 18f-1
under the Investment Company Act, under which the Fund is obligated to redeem
shares solely in cash up to the lesser of $250,000 or 1% of the net asset value
of the Fund during any 90-day period for any one shareholder.
INVOLUNTARY REDEMPTION. In order to reduce expenses of the Fund, the Trustees
may redeem all of the shares of any shareholder, other than a shareholder which
is an IRA or other tax-deferred retirement plan, whose account has a net asset
value of less than $500 due to a redemption. The Fund will give such
shareholders 60 days' prior written notice in which to purchase sufficient
additional shares to avoid such redemption. No contingent deferred sales charge
will be imposed on any such involuntary redemption.
90-DAY REPURCHASE PRIVILEGE. If you redeem your shares and have not previously
exercised the repurchase privilege, you may reinvest any portion or all of the
proceeds of such redemption in shares of the Series at the NAV next determined
after the order is received, which must be within 90 days after the date of the
redemption. Any CDSC paid in connection with such redemption will be credited
(in shares) to your account. If less than a full repurchase is made, the credit
will be on a PRO RATA basis. You must notify the Fund's Transfer Agent, either
directly or through Prudential Securities, at the time the repurchase privilege
is exercised to adjust your account for the CDSC you previously paid.
Thereafter, any redemptions will be subject to the CDSC applicable at the time
of the redemption. See "Contingent Deferred Sales Charges" below. Exercise of
the repurchase privilege may affect the federal tax treatment of any gain
realized upon redemption. See "Distributions and Tax Information" in the
Statement of Additional Information.
CONTINGENT DEFERRED SALES CHARGES
Redemptions of Class B shares will be subject to a contingent deferred sales
charge or CDSC declining from 5% to zero over a six-year period. Class C shares
redeemed within one year of purchase will be subject to a 1% CDSC. The CDSC will
be deducted from the redemption proceeds and reduce the amount paid to you. The
CDSC will be imposed on any redemption by you which reduces the current value of
your Class B or Class C shares to an amount which is lower than the amount of
all payments by you for shares during the preceding six years, in the case of
Class B shares, and one year, in the case of Class C shares. A CDSC will be
applied on the lesser of the original purchase price or the current value of the
shares being redeemed. Increases in the value of
27
<PAGE>
your shares or shares acquired through reinvestment of dividends or
distributions are not subject to a CDSC. The amount of any contingent deferred
sales charge will be paid to and retained by the Distributor. See "How the Fund
is Managed--Distributor" and "Waiver of the Contingent Deferred Sales
Charges--Class B Shares" below.
The amount of the CDSC, if any, will vary depending on the number of years
from the time of payment for the purchase of shares until the time of redemption
of such shares. Solely for purposes of determining the number of years from the
time of any payment for the purchase of shares, all payments during a month will
be aggregated and deemed to have been made on the last day of the month. The
CDSC will be calculated from the first day of the month after the initial
purchase, excluding the time shares were held in a money market fund. See "How
to Exchange Your Shares" below.
The following table sets forth the rates of the CDSC applicable to redemptions
of Class B shares:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED SALES
CHARGE AS A PERCENTAGE
YEAR SINCE PURCHASE OF DOLLARS INVESTED OR
PAYMENT MADE REDEMPTION PROCEEDS
------------------------------ -------------------------
<S> <C>
First......................... 5.0%
Second........................ 4.0
Third......................... 3.0
Fourth........................ 2.0
Fifth......................... 1.0
Sixth......................... 1.0
Seventh....................... None
</TABLE>
In determining whether a CDSC is applicable to a redemption, the calculation
will be made in a manner that results in the lowest possible rate. It will be
assumed that the redemption is made first of amounts representing shares
acquired pursuant to the reinvestment of dividends and distributions; then of
amounts representing the increase in net asset value above the total amount of
payments for the purchase of Series shares made during the preceding six years
(five years for Class B shares purchased prior to January 22, 1990); then of
amounts representing the cost of shares held beyond the applicable CDSC period;
and finally, of amounts representing the cost of shares held for the longest
period of time within the applicable CDSC period.
For example, assume you purchased 100 Class B shares at $10 per share for a
cost of $1,000. Subsequently, you acquired 5 additional Class B shares through
dividend reinvestment. During the second year after the purchase you decided to
redeem $500 of your investment. Assuming at the time of the redemption the NAV
had appreciated to $12 per share, the value of your Class B shares would be
$1,260 (105 shares at $12 per share). The CDSC would not be applied to the value
of the reinvested dividend shares and the amount which represents appreciation
($260). Therefore, $240 of the $500 redemption proceeds ($500 minus $260) would
be charged at a rate of 4% (the applicable rate in the second year after
purchase) for a total CDSC of $9.60.
For federal income tax purposes, the amount of the CDSC will reduce the gain
or increase the loss, as the case may be, on the amount recognized on the
redemption of shares.
WAIVER OF THE CONTINGENT DEFERRED SALES CHARGES--CLASS B SHARES. The CDSC will
be waived in the case of a redemption following the death or disability of a
shareholder or, in the case of a trust account, following the death or
disability of the grantor. The waiver is available for total or partial
redemptions of shares owned by a person, either individually or in joint tenancy
(with rights of survivorship), at the time of death or initial determination of
disability, provided that the shares were purchased prior to death or
disability. In addition, the CDSC will be waived on redemptions of shares held
by a Trustee of the Fund.
SYSTEMATIC WITHDRAWAL PLAN. The CDSC will be waived (or reduced) on certain
redemptions from a Systematic Withdrawal Plan. On an annual basis, up to 12% of
the total dollar amount subject to the CDSC may be redeemed without charge. The
Transfer Agent will calculate the total amount available for this waiver
annually on the anniversary of your purchase or, for shares purchased prior to
March 1, 1997, on March 1 of the current year. The CDSC will be waived (or
reduced) on redemptions until this threshold 12% amount is reached.
28
<PAGE>
You must notify the Fund's Transfer Agent either directly or through
Prudential Securities or Prusec, at the time of redemption, that you are
entitled to waiver of the CDSC and provide the Transfer Agent with such
supporting documentation as it may deem appropriate. The waiver will be granted
subject to confirmation of your entitlement. See "Purchase and Redemption of
Fund Shares--Waiver of the Contingent Deferred Sales Charge--Class B Shares" in
the Statement of Additional Information.
A quantity discount may apply to redemptions of Class B shares purchased prior
to August 1, 1994. See "Purchase and Redemption of Fund Shares--Quantity
Discount--Class B Shares Pruchased Prior to August 1, 1994" in the Statement of
Additional Information.
CONVERSION FEATURE--CLASS B SHARES
Class B shares will automatically convert to Class A shares on a quarterly
basis approximately seven years after purchase. Conversions will be effected at
relative net asset value without the imposition of any additional sales charge.
Since the Fund tracks amounts paid rather than the number of shares bought on
each purchase of Class B shares, the number of Class B shares eligible to
convert to Class A shares (excluding shares acquired through the automatic
reinvestment of dividends and other distributions) (the Eligible Shares) will be
determined on each conversion date in accordance with the following formula: (i)
the ratio of (a) the amounts paid for Class B shares purchased at least seven
years prior to the conversion date to (b) the total amount paid for all Class B
shares purchased and then held in your account (ii) multiplied by the total
number of Class B shares purchased and then held in your account. Each time any
Eligible Shares in your account convert to Class A shares, all shares or amounts
representing Class B shares then in your account that were acquired through the
automatic reinvestment of dividends and other distributions will convert to
Class A shares.
For purposes of determining the number of Eligible Shares, if the Class B
shares in your account on any conversion date are the result of multiple
purchases at different net asset values per share, the number of Eligible Shares
calculated as described above will generally be either more or less than the
number of shares actually purchased approximately seven years before such
conversion date. For example, if 100 shares were initially purchased at $10 per
share (for a total of $1,000) and a second purchase of 100 shares was
subsequently made at $11 per share (for a total of $1,100), 95.24 shares would
convert approximately seven years from the initial purchase (I.E., $1,000
divided by $2,100 (47.62%), multiplied by 200 shares equals 95.24 shares). The
Manager reserves the right to modify the formula for determining the number of
Eligible Shares in the future as it deems appropriate on notice to shareholders.
Since annual distribution-related fees are lower for Class A shares than Class
B shares, the per share net asset value of the Class A shares may be higher than
that of the Class B shares at the time of conversion. Thus, although the
aggregate dollar value will be the same, you may receive fewer Class A shares
than Class B shares converted. See "How the Fund Values its Shares."
For purposes of calculating the applicable holding period for conversions, all
payments for Class B shares during a month will be deemed to have been made on
the last day of the month, or for Class B shares acquired through exchange or a
series of exchanges, on the last day of the month in which the original payment
for purchases of such Class B shares was made. For Class B shares previously
exchanged for shares of a money market fund, the time period during which such
shares were held in the money market fund will be excluded. For example, Class B
shares held in a money market fund for one year will not convert to Class A
shares until approximately eight years from purchase. For purposes of measuring
the time period during which shares are held in a money market fund, exchanges
will be deemed to have been made on the last day of the month. Class B shares
acquired through exchange will convert to Class A shares after expiration of the
conversion period applicable to the original purchase of such shares.
The conversion feature may be subject to the continuing availability of
opinions of counsel or rulings of the Internal Revenue Service (i) that the
dividends and other distributions paid on Class A, Class B and Class C shares
will not constitute "preferential dividends" under the Internal Revenue Code and
(ii) that the conversion of shares does not constitute a taxable event. The
29
<PAGE>
conversion of Class B shares into Class A shares may be suspended if such
opinions or rulings are no longer available. If conversions are suspended, Class
B shares of the Series will continue to be subject, possibly indefinitely, to
their higher annual distribution and service fee.
HOW TO EXCHANGE YOUR SHARES
AS A SHAREHOLDER OF THE SERIES, YOU HAVE AN EXCHANGE PRIVILEGE WITH THE OTHER
SERIES OF THE FUND AND CERTAIN OTHER PRUDENTIAL MUTUAL FUNDS (THE EXCHANGE
PRIVILEGE), INCLUDING ONE OR MORE SPECIFIED MONEY MARKET FUNDS, SUBJECT TO THE
MINIMUM INVESTMENT REQUIREMENTS OF SUCH FUNDS. CLASS A, CLASS B AND CLASS C
SHARES OF THE SERIES MAY BE EXCHANGED FOR CLASS A, CLASS B AND CLASS C SHARES,
RESPECTIVELY, OF THE OTHER SERIES OF THE FUND OR ANOTHER FUND ON THE BASIS OF
THE RELATIVE NAV. No sales charge will be imposed at the time of the exchange.
Any applicable CDSC payable upon the redemption of shares exchanged will be
calculated from the first day of the month after the initial purchase, excluding
the time shares were held in a money market fund. Class B and Class C shares may
not be exchanged into money market funds other than Prudential Special Money
Market Fund, Inc. For purposes of calculating the holding period applicable to
the Class B conversion feature, the time period during which Class B shares were
held in a money market fund will be excluded. See " Conversion Feature--Class B
Shares" above. An exchange will be treated as a redemption and purchase for tax
purposes. See "Shareholder Investment Account--Exchange Privilege" in the
Statement of Additional Information.
IN ORDER TO EXCHANGE SHARES BY TELEPHONE, YOU MUST AUTHORIZE TELEPHONE
EXCHANGES ON YOUR INITIAL APPLICATION FORM OR BY WRITTEN NOTICE TO THE TRANSFER
AGENT AND HOLD SHARES IN NON-CERTIFICATE FORM. Thereafter, you may call the Fund
at (800) 225-1852 to execute a telephone exchange of shares, weekdays, except
holidays, between the hours of 8:00 A.M. and 6:00 P.M., New York time. For your
protection and to prevent fraudulent exchanges, your telephone call will be
recorded and you will be asked to provide your personal identification number. A
written confirmation of the exchange transaction will be sent to you. NEITHER
THE FUND NOR ITS AGENTS WILL BE LIABLE FOR ANY LOSS, LIABILITY OR COST WHICH
RESULTS FROM ACTING UPON INSTRUCTIONS REASONABLY BELIEVED TO BE GENUINE UNDER
THE FOREGOING PROCEDURES. All exchanges will be made on the basis of the
relative NAV of the two funds (or series) next determined after the request is
received in good order. The Exchange Privilege is available only in states where
the exchange may legally be made.
IF YOU HOLD SHARES THROUGH PRUDENTIAL SECURITIES, YOU MUST EXCHANGE YOUR
SHARES BY CONTACTING YOUR PRUDENTIAL SECURITIES FINANCIAL ADVISER.
IF YOU HOLD CERTIFICATES, THE CERTIFICATES, SIGNED IN THE NAME(S) SHOWN ON THE
FACE OF THE CERTIFICATES, MUST BE RETURNED IN ORDER FOR THE SHARES TO BE
EXCHANGED. SEE "HOW TO SELL YOUR SHARES" ABOVE.
You may also exchange shares by mail by writing to Prudential Mutual Fund
Services LLC, Attention: Exchange Processing, P.O. Box 15010, New Brunswick, New
Jersey 08906-5010.
IN PERIODS OF SEVERE MARKET OR ECONOMIC CONDITIONS, THE TELEPHONE EXCHANGE OF
SHARES MAY BE DIFFICULT TO IMPLEMENT AND YOU SHOULD MAKE EXCHANGES BY MAIL BY
WRITING TO PRUDENTIAL MUTUAL FUND SERVICES LLC, AT THE ADDRESS NOTED ABOVE.
SPECIAL EXCHANGE PRIVILEGE. A special exchange privilege is available for
shareholders who qualify to purchase Class A shares at NAV (see "Alternative
Purchase Plan--Class A Shares--Reduction and Waiver of Initial Sales Charges"
above). Under this exchange privilege, amounts representing any Class B and
Class C shares (which are not subject to a CDSC) held in such a shareholder's
account will be automatically exchanged for Class A shares on a quarterly basis,
unless the shareholder elects otherwise. Eligibility for this exchange privilege
will be calculated on the business day prior to the date of the exchange.
Amounts representing Class B or Class C shares which are not subject to a CDSC
include the following: (1) amounts representing Class B or Class C shares
acquired pursuant to the automatic reinvestment of dividends and distributions,
(2) amounts representing the increase in the net asset value above the total
30
<PAGE>
amount of payments for the purchase of Class B or Class C shares and (3) amounts
representing ClassB or Class C shares held beyond the applicable CDSC period.
Class B and Class C shareholders must notify the Transfer Agent either directly
or through Prudential Securities or Prusec that they are eligible for this
special exchange privilege.
The Exchange Privilege is not a right and may be suspended, terminated or
modified on 60 days' notice to shareholders.
FREQUENT TRADING. The Fund and the other Prudential Mutual Funds are not
intended to serve as vehicles for frequent trading in response to short-term
fluctuations in the market. Due to the disruptive effect that market timing
investment strategies and excessive trading can have on efficient portfolio
management, each Prudential Mutual Fund and the Fund reserves the right to
refuse purchase orders and exchanges by any person, group or commonly controlled
accounts, if, in the Manager's sole judgment, such person, group or accounts
were following a market timing strategy or were otherwise engaging in excessive
trading (Market Timers).
To implement this authority to protect the Fund and its shareholders from
excessive trading, the Fund will reject all exchanges and purchases from a
Market Timer unless the Market Timer has entered into a written agreement with
the Fund or its affiliates pursuant to which the Market Timer has agreed to
abide by certain procedures, which include a daily dollar limit on trading. The
Fund may notify the Market Timer of rejection of an exchange or purchase order
subsequent to the day on which the order was placed.
SHAREHOLDER SERVICES
In addition to the Exchange Privilege, as a shareholder in the Series, you can
take advantage of the following services and privileges:
- AUTOMATIC REINVESTMENT OF DIVIDENDS AND/OR DISTRIBUTIONS WITHOUT A SALES
CHARGE. For your convenience, all dividends and distributions are automatically
reinvested in full and fractional shares of the Series at NAV without a sales
charge. You may direct the Transfer Agent in writing not less than 5 full
business days prior to the record date to have subsequent dividends and/or
distributions sent in cash rather than reinvested. If you hold shares through
Prudential Securities, you should contact your financial adviser.
- AUTOMATIC SAVINGS ACCUMULATION PLAN (ASAP). Under ASAP you may make regular
purchases of the Series' shares in amounts as little as $50 via an automatic
charge to a bank account or Prudential Securities account (including a Command
Account). For additional information about this service, you may contact your
Prudential Securities financial adviser, Prusec representative or the Transfer
Agent directly.
- SYSTEMATIC WITHDRAWAL PLAN. A systematic withdrawal plan is available to
shareholders which provides for monthly or quarterly checks. Withdrawals of
Class B and Class C shares may be subject to a CDSC. See "How to Sell Your
Shares-- Contingent Deferred Sales Charges" above.
- REPORTS TO SHAREHOLDERS. The Fund will send you annual and semi-annual
reports. The financial statements appearing in annual reports are audited by
independent accountants. In order to reduce duplicate mailing and printing
expenses, the Fund will provide one annual and semi-annual shareholder report
and annual prospectus per household. You may request additional copies of such
reports by calling (800) 225-1852 or by writing to the Fund at Gateway Center
Three, 100 Mulberry Street, Newark, New Jersey 07102-4077. In addition, monthly
unaudited financial data is available upon request from the Fund.
- SHAREHOLDER INQUIRIES. Inquiries should be addressed to the Fund at Gateway
Center Three, 100 Mulberry Street, Newark, New Jersey 07102-4077, or by
telephone, at (800) 225-1852 (toll-free) or, from outside the U.S.A., at (908)
417-7555 (collect).
For additional information regarding the services and privileges described
above, see "Shareholder Investment Account" in the Statement of Additional
Information.
31
<PAGE>
DESCRIPTION OF SECURITY RATINGS
MOODY'S INVESTORS SERVICE
BOND RATINGS
Aaa: Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edged." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group, they comprise what are generally known
as high grade bonds. They are rated lower than 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
which make the long-term risks appear somewhat larger than the Aaa securities.
A: Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper-medium-grade obligations. Factors giving security
to principal and interest are considered adequate but elements may be present
which suggest a susceptibility to impairment sometime in the future.
Baa: Bonds which are rated Baa are considered as medium grade obligations,
I.E., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present, but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba: Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate, and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Bonds rated within the Aa, A, Baa, Ba and B categories which Moody's believes
possess the strongest credit attributes within those categories are designated
by the symbols Aa1, A1, Baa1, Ba1 and B1.
Caa: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca: Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
C: Bonds which are rated C are the lowest-rated class of bonds, and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
SHORT-TERM RATINGS
Moody's ratings for tax-exempt notes and other short-term loans are designated
Moody's Investment Grade (MIG). This distinction is in recognition of the
differences between short-term and long-term credit risk.
MIG 1: Loans bearing the designation MIG 1 are of the best quality, enjoying
strong protection by established cash flows, superior liquidity support or
demonstrated broad-based access to the market for refinancing.
A-1
<PAGE>
MIG 2: Loans bearing the designation MIG 2 are of high quality, with margins
of protection ample although not so large as in the preceding group.
MIG 3: Loans bearing the designation MIG 3 are of favorable quality, with all
security elements accounted for but lacking the strength of the preceding
grades.
MIG 4: Loans bearing the designation MIG 4 are of adequate quality.
Protection commonly regarded and required of an investment security is present
and although not distinctly or predominantly speculative, there is specific
risk.
SHORT-TERM DEBT RATINGS
Moody's Short-Term Debt Ratings are opinions of the ability of issuers to
repay punctually senior debt obligations which have an original maturity not
exceeding one year.
Prime-1: Issuers rated 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.
Prime-3: Issuers rated Prime-3 (or supporting institutions) have an
acceptable ability for repayment of senior short-term debt obligations.
Not Prime: Issuers rated Not Prime do not fall within any of the Prime rating
categories.
STANDARD & POOR'S RATINGS GROUP
BOND RATINGS
AAA: Debt rated AAA has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.
AA: Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the highest-rated issues only in small degree.
A: Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB: Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher-rated categories.
BB, B, CCC, CC and C: Debt rated BB, B, CCC, CC or C is regarded as having
predominantly speculative characteristics with respect to capacity to pay
interest and repay principal. BB indicates the least degree of speculation and C
the highest. While such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
D: Debt rated D is in payment default. This rating is used when interest
payments or principal payments are not made on the date due even if the
applicable grace period has not expired, unless S&P believes that such payments
will be made during such grace period.
COMMERCIAL PAPER RATINGS
An S&P Commercial Paper rating is a current assessment of the likelihood of
timely payment of debt considered short-term in the relevant market.
A-2
<PAGE>
A-1: The A-1 designation indicates that the degree of safety regarding timely
payment is strong. Those issues determined to possess extremely strong safety
characteristics are denoted with a plus sign (+) designation.
A-2: Capacity for timely payment on issues with the designation A-2 is
satisfactory. However, the relative degree of safety is not as high as for
issues designated A-1.
A-3: Issues carrying this designation have adequate capacity for timely
payment. They are, however, more vulnerable to the adverse effects of changes in
circumstances than obligations carrying the higher designations.
MUNICIPAL NOTES
A municipal note rating reflects the liquidity concerns and market access
risks unique to municipal notes. Municipal notes due in three years or less will
likely receive a municipal note rating, while notes maturing beyond three years
will most likely receive a long-term debt rating. Municipal notes are rated
SP-1, SP-2 or SP-3. The designation SP-1 indicates a very strong capacity to pay
principal and interest. Those issues determined to possess extremely strong
safety characteristics are denoted with a plus sign (+) designation. An SP-2
designation indicates a satisfactory capacity to pay principal and interest. An
SP-3 designation indicates speculative capacity to pay principal and interest.
A-3
<PAGE>
THE PRUDENTIAL MUTUAL FUND FAMILY
Prudential Investments Fund Management offers a broad range of mutual funds
designed to meet your individual needs. We welcome you to review the investment
options available through our family of funds. For more information on the
Prudential Mutual Funds, including charges and expenses, contact your Prudential
Securities financial adviser or Prusec representative or telephone the Funds at
(800) 225-1852 for a free prospectus. Read the prospectus carefully before you
invest or send money.
TAXABLE BOND FUNDS
--------------------------
Prudential Diversified Bond Fund, Inc.
Prudential Government Income Fund, Inc.
Prudential Government Securities Trust
Short-Intermediate Term Series
Prudential High Yield Fund, Inc.
Prudential Mortgage Income Fund, Inc.
Prudential Structured Maturity Fund, Inc.
Income Portfolio
The BlackRock Government Income Trust
TAX-EXEMPT BOND FUNDS
-----------------------------
Prudential California Municipal Fund
California Series
California Income Series
Prudential Municipal Bond Fund
High Yield Series
Insured Series
Intermediate Series
Prudential Municipal Series Fund
Florida Series
Maryland Series
Massachusetts Series
Michigan Series
New Jersey Series
New York Series
North Carolina Series
Ohio Series
Pennsylvania Series
Prudential National Municipals Fund, Inc.
GLOBAL FUNDS
--------------------
Prudential Europe Growth Fund, Inc.
Prudential Global Genesis Fund, Inc.
Prudential Global Limited Maturity Fund, Inc.
Limited Maturity Portfolio
Prudential Intermediate Global Income Fund, Inc.
Prudential International Bond Fund, Inc.
Prudential Natural Resources Fund, Inc.
Prudential Pacific Growth Fund, Inc.
Prudential World Fund, Inc.
Global Series
International Stock Series
The Global Total Return Fund, Inc.
Global Utility Fund, Inc.
EQUITY FUNDS
--------------------
Prudential Balanced Fund
Prudential Distressed Securities Fund, Inc.
Prudential Dryden Fund
Prudential Active Balanced Fund
Prudential Stock Index Fund
Prudential Small-Cap Index Fund
Prudential Bond Market Index Fund
Prudential Pacific Index Fund
Prudential Europe Index Fund
Prudential Emerging Growth Fund, Inc.
Prudential Equity Fund, Inc.
Prudential Equity Income Fund
Prudential Jennison Series Fund, Inc.
Prudential Jennison Growth Fund
Prudential Jennison Growth & Income Fund
Prudential Multi-Sector Fund, Inc.
Prudential Small-Cap Quantum Fund, Inc.
Prudential Small Company Value Fund, Inc.
Prudential Utility Fund, Inc.
Nicholas-Applegate Fund, Inc.
Nicholas-Applegate Growth Equity Fund
MONEY MARKET FUNDS
--------------------------
- - TAXABLE MONEY MARKET FUNDS
Prudential Government Securities Trust
Money Market Series
U.S. Treasury Money Market Series
Prudential Special Money Market Fund, Inc.
Money Market Series
Prudential MoneyMart Assets, Inc.
- - TAX-FREE MONEY MARKET FUNDS
Prudential Tax-Free Money Fund, Inc.
Prudential California Municipal Fund
California Money Market Series
Prudential Municipal Series Fund
Connecticut Money Market Series
Massachusetts Money Market Series
New Jersey Money Market Series
New York Money Market Series
- - COMMAND FUNDS
Command Money Fund
Command Government Fund
Command Tax-Free Fund
- - INSTITUTIONAL MONEY MARKET FUNDS
Prudential Institutional Liquidity Portfolio, Inc.
Institutional Money Market Series
B-1
<PAGE>
No dealer, sales representative or any other person has been authorized to give
any information or to make any representations, other than those contained in
this Prospectus, in connection with the offer contained herein, and, if given or
made, such other information or representations must not be relied upon as
having been authorized by the Fund or the Distributor. This Prospectus does not
constitute an offer by the Fund or by the Distributor to sell or a solicitation
of any offer to buy any of the securities offered hereby in any jurisdiction to
any person to whom it is unlawful to make such offer in such jurisdiction.
-------------------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---
<S> <C>
FUND HIGHLIGHTS................................. 2
What are the Series' Risk Factors and Special
Characteristics?............................. 2
FUND EXPENSES................................... 4
FINANCIAL HIGHLIGHTS............................ 5
HOW THE FUND INVESTS............................ 8
Investment Objective and Policies............. 8
Other Investments and Policies................ 14
Investment Restrictions....................... 15
HOW THE FUND IS MANAGED......................... 15
Manager....................................... 15
Distributor................................... 16
Portfolio Transactions........................ 18
Custodian and Transfer and Dividend Disbursing
Agent........................................ 18
HOW THE FUND VALUES ITS SHARES.................. 18
HOW THE FUND CALCULATES PERFORMANCE............. 18
TAXES, DIVIDENDS AND DISTRIBUTIONS.............. 19
GENERAL INFORMATION............................. 21
Description of Shares......................... 21
Additional Information........................ 22
SHAREHOLDER GUIDE............................... 22
How to Buy Shares of the Fund................. 22
Alternative Purchase Plan..................... 23
How to Sell Your Shares....................... 26
Conversion Feature--Class B Shares............ 29
How to Exchange Your Shares................... 30
Shareholder Services.......................... 31
DESCRIPTION OF SECURITY RATINGS................. A-1
THE PRUDENTIAL MUTUAL FUND FAMILY............... B-1
</TABLE>
- -------------------------------------------
MF125A 44404BU
Class A: 74435M-70-5
CUSIP Nos.: Class B: 74435M-80-4
Class C: 74435M-57-2
PRUDENTIAL
MUNICIPAL
SERIES FUND
-------------------------------------------------
MARYLAND SERIES
PROSPECTUS
OCTOBER 30, 1997
WWW.PRUDENTIAL.COM
[LOGO] PRUDENTIAL INVESTMENTS LOGO
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
(MASSACHUSETTS SERIES)
- --------------------------------------------------------------------------------
PROSPECTUS DATED OCTOBER 30, 1997
- ----------------------------------------------------------------
Prudential Municipal Series Fund (the Fund) (Massachusetts Series) (the Series)
is one of thirteen series of an open-end, management investment company, or
mutual fund. This Series is diversified and is designed to provide the maximum
amount of income that is exempt from Massachusetts state and federal income
taxes consistent with the preservation of capital and, in conjunction therewith,
the Series may invest in debt securities with the potential for capital gain.
The net assets of the Series are invested primarily in obligations within the
four highest ratings of Moody's Investors Service, Standard & Poor's Ratings
Group or another nationally recognized statistical rating organization or in
unrated obligations which, in the opinion of the Fund's investment adviser, are
of comparable quality. The Series may, however, 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.
Subject to the limitations described herein, the Series may utilize derivatives,
including buying and selling futures contracts and options thereon for the
purpose of hedging its portfolio securities. There can be no assurance that the
Series' investment objective will be achieved. See "How the Fund
Invests--Investment Objective and Policies." The Fund's address is Gateway
Center Three, 100 Mulberry Street, Newark, New Jersey 07102-4077, and its
telephone number is (800) 225-1852.
This Prospectus sets forth concisely the information about the Fund and the
Massachusetts Series that a prospective investor should know before investing.
Additional information about the Fund has been filed with the Securities and
Exchange Commission in a Statement of Additional Information dated October 30,
1997, which information is incorporated herein by reference (is legally
considered a part of this Prospectus) and is available without charge upon
request to the Fund at the address or telephone number noted above.
- --------------------------------------------------------------------------------
INVESTORS ARE ADVISED TO READ THIS PROSPECTUS AND RETAIN IT FOR FUTURE
REFERENCE.
- --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
<PAGE>
FUND HIGHLIGHTS
The following summary is intended to highlight certain information contained
in this Prospectus and is qualified in its entirety by the more detailed
information appearing elsewhere herein.
WHAT IS PRUDENTIAL MUNICIPAL SERIES FUND?
Prudential Municipal Series Fund is a mutual fund whose shares are offered
in thirteen series, each of which operates as a separate fund. A mutual fund
pools the resources of investors by selling its shares to the public and
investing the proceeds of such sale in a portfolio of securities designed to
achieve its investment objective. Technically, the Fund is an open-end,
management investment company. Only the Massachusetts Series is offered
through this Prospectus.
WHAT IS THE SERIES' INVESTMENT OBJECTIVE?
The Series' investment objective is to maximize current income that is
exempt from Massachusetts state and federal income taxes consistent with the
preservation of capital. It seeks to achieve this objective by investing
primarily in Massachusetts state, municipal and local government obligations
and obligations of other qualifying issuers, such as issuers located in
Puerto Rico, the Virgin Islands and Guam, which pay income exempt, in the
opinion of counsel, from Massachusetts state and federal income taxes
(Massachusetts Obligations). There can be no assurance that the Series'
investment objective will be achieved. See "How the Fund Invests--Investment
Objective and Policies" at page 9.
WHAT ARE THE SERIES' RISK FACTORS AND SPECIAL CHARACTERISTICS?
In seeking to achieve its investment objective, the Series will invest at
least 80% of the value of its total assets in Massachusetts Obligations.
This degree of investment concentration makes the Series particularly
susceptible to factors adversely affecting issuers of Massachusetts
Obligations. See "How the Fund Invests--Investment Objective and
Policies--Special Considerations" at page 14. The Series may invest up to
30% of its total assets in high yield securities, commonly known as "junk
bonds," which may be considered speculative and are subject to the risk of
an issuer's inability to meet principal and interest payments on the
obligations as well as price volatility. See "How the Fund Invests--
Investment Objective and Policies--Risk Factors Relating to Investing in
High Yield Municipal Obligations" at page 12. To hedge against changes in
interest rates, the Series may also purchase put options and engage in
transactions involving derivatives, including financial futures contracts
and options thereon. See "How the Fund Invests--Investment Objective and
Policies--Futures Contracts and Options Thereon" at page 13. As with an
investment in any mutual fund, an investment in this Series can decrease in
value and you can lose money.
WHO MANAGES THE FUND?
Prudential Investments Fund Management LLC (PIFM or the Manager) is the
Manager of the Fund and is compensated for its services at an annual rate of
.50 of 1% of the Series' average daily net assets. As of September 30, 1997,
PIFM served as manager or administrator to 63 investment companies,
including 41 mutual funds, with aggregate assets of approximately $59.9
billion. The Prudential Investment Corporation, which does business under
the name Prudential Investments (PI, the Subadviser or the investment
adviser) furnishes investment advisory services in connection with the
management of the Fund under a Subadvisory Agreement with PIFM. See "How the
Fund is Managed--Manager" at page 16.
WHO DISTRIBUTES THE SERIES' SHARES?
Prudential Securities Incorporated (Prudential Securities, PSI or the
Distributor), a major securities underwriter and securities and commodities
broker, acts as the Distributor of the Series' Class A, Class B, Class C and
Class Z shares and is paid a distribution and service fee with respect to
Class A shares which is currently being charged at the annual rate of .10 of
1% of the average daily net assets of the Class A shares and is paid a
distribution and service fee with respect to Class B shares at the annual
rate of .50 of 1% of the average daily net assets of the Class B shares and
is paid an annual distribution and service fee with respect to Class C
shares which is currently being charged at the rate of .75 of 1% of the
average daily net assets of the Class C shares. Prudential Securities incurs
the expense of distributing the Series' Class Z shares under a Distribution
Agreement with the Fund, none of which is reimbursed or paid for by the
Fund. See "How the Fund is Managed--Distributor" at page 16.
2
<PAGE>
WHAT IS THE MINIMUM INVESTMENT?
The minimum initial investment is $1,000 for Class A and Class B shares
and $5,000 for Class C shares. The minimum subsequent investment is $100 for
Class A, Class B and Class C shares. Class Z shares are not subject to any
minimum investment requirements. There is no minimum investment requirement
for certain employee savings plans. For purchases made through the Automatic
Savings Accumulation Plan, the minimum initial and subsequent investment is
$50. See "Shareholder Guide--How to Buy Shares of the Fund" at page 23 and
"Shareholder Guide--Shareholder Services" at page 32.
HOW DO I PURCHASE SHARES?
You may purchase shares of the Series through Prudential Securities, Pruco
Securities Corporation (Prusec) or directly from the Fund through its
transfer agent, Prudential Mutual Fund Services LLC (PMFS or the Transfer
Agent), at the net asset value per share (NAV) next determined after receipt
of your purchase order by the Transfer Agent or Prudential Securities plus a
sales charge which may be imposed either (i) at the time of purchase (Class
A shares) or (ii) on a deferred basis (Class B or Class C shares). Class Z
shares are offered to a limited group of investors at net asset value
without any sales charge. See "How the Fund Values its Shares" at page 19
and "Shareholder Guide--How to Buy Shares of the Fund" at page 23.
WHAT ARE MY PURCHASE ALTERNATIVES?
The Series offers four classes of shares:
- Class A Shares:
Sold with an initial sales charge of up to 3% of the
offering price.
- Class B Shares:
Sold without an initial sales charge but are subject to
a contingent deferred sales charge or CDSC (declining
from 5% to zero of the lower of the amount invested or
the redemption proceeds) which will be imposed on
certain redemptions made within six years of purchase.
Although Class B shares are subject to higher ongoing
distribution-related expenses than Class A shares, Class
B shares will automatically convert to Class A shares
(which are subject to lower ongoing distribution-related
expenses) approximately seven years after purchase.
- Class C Shares:
Sold without an initial sales charge and, for one year
after purchase, are subject to a 1% CDSC on redemptions.
Like Class B shares, Class C shares are subject to
higher ongoing distribution expenses than Class A shares
but do not convert to another class.
- Class Z Shares:
Sold without either an initial or contingent deferred
sales charge to a limited group of investors. Class Z
shares are not subject to any ongoing service or
distribution-related expenses.
See "Shareholder Guide--Alternative Purchase Plan" at page 24.
HOW DO I SELL MY SHARES?
You may redeem your shares at any time at the NAV next determined after
Prudential Securities or the Transfer Agent receives your sell order.
However, the proceeds of redemptions of Class B and Class C shares may be
subject to a CDSC. See "Shareholder Guide--How to Sell Your Shares" at page
27.
HOW ARE DIVIDENDS AND DISTRIBUTIONS PAID?
The Series expects to declare daily and pay monthly dividends of net
investment income, if any, and make distributions of any net capital gains
at least annually. Dividends and distributions will be automatically
reinvested in additional shares of the Series at NAV without a sales charge
unless you request that they be paid to you in cash. See "Taxes, Dividends
and Distributions" at page 20.
3
<PAGE>
FUND EXPENSES
(MASSACHUSETTS SERIES)
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES CLASS C SHARES CLASS Z SHARES
---------------- --------------------- --------------------- ----------------
<S> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES+
Maximum Sales Load Imposed
on Purchases (as a
percentage of offering
price)..................... 3% None None None
Maximum Deferred Sales Load
(as a percentage of
original purchase price or
redemption proceeds,
whichever is lower)........ None 5% during the first 1% on redemptions None
year, decreasing by made within one year
1% annually to 1% in of purchase
the fifth and sixth
years and 0% the
seventh year*
Maximum Sales Load Imposed
on Reinvested Dividends.... None None None None
Redemption Fees............. None None None None
Exchange Fee................ None None None None
</TABLE>
<TABLE>
<CAPTION>
CLASS Z
CLASS A SHARES CLASS B SHARES CLASS C SHARES SHARES***
---------------- --------------------- --------------------- ----------------
<S> <C> <C> <C> <C>
ANNUAL FUND OPERATING EXPENSES**
(as a percentage of average net assets)
Management Fees............. .50% .50% .50% .50%
12b-1 Fees (After
Reduction)................. .10%++ .50% .75%++ None
Other Expenses.............. .45% .45% .45% .45%
--- --- ---
--
Total Fund Operating
Expenses (After
Reduction)................. 1.05% 1.45% 1.70%
.95%
--- --- ---
--- --- ---
--
--
</TABLE>
<TABLE>
<CAPTION>
1 3 5 10
YEAR YEARS YEARS YEARS
------- ------- ------- --------
<S> <C> <C> <C> <C>
EXAMPLE
You would pay the following expenses on
a $1,000 investment, assuming (1) 5%
annual return and (2) redemption at
the end of each time period:
Class A............................ $ 40 $ 62 $ 86 $ 154
Class B............................ $ 65 $ 76 $ 89 $ 158
Class C............................ $ 27 $ 54 $ 92 $ 201
Class Z***......................... $ 10 $ 30 $ 53 $ 117
You would pay the following expenses on
the same investment, assuming no
redemption:
Class A............................ $ 40 $ 62 $ 86 $ 154
Class B............................ $ 15 $ 46 $ 79 $ 158
Class C............................ $ 17 $ 54 $ 92 $ 201
Class Z***......................... $ 10 $ 30 $ 53 $ 117
</TABLE>
The above examples are based on restated data for the Series' fiscal year
ended August 31, 1997. THE EXAMPLES SHOULD NOT BE CONSIDERED A
REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER
OR LESS THAN THOSE SHOWN.
The purpose of this table is to assist investors in understanding the
various costs and expenses that an investor in the Series will bear,
whether directly or indirectly. For more complete descriptions of the
various costs and expenses, see "How the Fund is Managed." "Other
Expenses" includes operating expenses of the Series, such as Trustees' and
professional fees, registration fees, reports to shareholders and transfer
agency and custodian fees.
- ---------------
* Class B shares will automatically convert to Class A shares approximately
seven years after purchase. See "Shareholder Guide--Conversion Feature--
Class B Shares."
** The expense information in the table has been restated to reflect current
fees. Effective September 1, 1997, PIFM eliminated its management fee
waiver (.05 of 1%). See "How the Fund is Managed--Manager--Fee Waivers."
*** Based on expenses expected to have been incurred if Class Z shares had been
in existence throughout the fiscal year ended August 31, 1997.
+ Pursuant to rules of the National Association of Securities Dealers, Inc.,
the aggregate initial sales charges, deferred sales charges and
asset-based sales charges on shares of the Series may not exceed 6.25% of
total gross sales, subject to certain exclusions. This 6.25% limitation
is imposed on each class of the Series rather than on a per shareholder
basis. Therefore, long-term shareholders of the Series may pay more in
total sales charges than the economic equivalent of 6.25% of such
shareholders' investment in such shares. See "How the Fund is Managed--
Distributor."
++ Although the Class A and Class C Distribution and Service Plans provide that
the Fund may pay a distribution fee of up to .30 of 1% and 1% per annum
of the average daily net assets of the Class A and Class C shares,
respectively, the Distributor has agreed to limit its distribution fees
with respect to the Class A and Class C shares of the Series to no more
than .10 of 1% and .75 of 1% of the average daily net asset value of the
Class A shares and Class C shares, respectively, for the fiscal year
ending August 31, 1998. Total Fund Operating Expenses (Before Waiver) of
the Class A and Class C shares without such limitations would be 1.25%
and 1.95%, respectively. See "How the Fund is Managed--Distributor."
4
<PAGE>
FINANCIAL HIGHLIGHTS
(FOR A SHARE OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT EACH OF THE INDICATED
PERIODS)
(CLASS A SHARES)
The following financial highlights, for the fiscal year ended August 31, 1997,
have been audited by Price Waterhouse LLP, independent accountants, and by
Deloitte and Touche LLP, independent auditors, for the four years ended August
31, 1996. Each of the respective reports by Price Waterhouse LLP and Deloitte &
Touche LLP on such financial statements was unqualified. This information should
be read in conjunction with the financial statements and the notes thereto,
which appear in the Statement of Additional Information. The following financial
highlights contain selected data for a Class A share of beneficial interest
outstanding, total return, ratios to average net assets and other supplemental
data for the periods indicated. This information is based on data contained in
the financial statements. Further performance information is contained in the
annual report, which may be obtained without charge. See "Shareholder
Guide--Shareholder Services--Reports to Shareholders."
<TABLE>
<CAPTION>
CLASS A
----------------------------------------------------------------------------------------------------
JANUARY 22,
YEAR ENDED 1990 (a)
AUGUST 31, THROUGH
------------------------------------------------------------------------------- AUGUST 31,
1997 1996 1995 1994 1993 1992 1991 1990
------- ------- ------- ------- ------- ------- ------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value,
beginning of period... $ 11.54 $ 11.63 $ 11.37 $ 12.17 $ 11.50 $ 10.94 $ 10.44 $ 10.70
------- ------- ------- ------- ------- ------- ------- ------
INCOME FROM INVESTMENT
OPERATIONS
Net investment income... .58(d) .59(d) .65(d) .67 .68 .69 .70 .41
Net realized and
unrealized gain (loss)
on investment
transactions.......... .33 (.02) .26 (.73) .67 .56 .50 (.26)
------- ------- ------- ------- ------- ------- ------- ------
Total from investment
operations............ .91 .57 .91 (.06) 1.35 1.25 1.20 .15
------- ------- ------- ------- ------- ------- ------- ------
LESS DISTRIBUTIONS
Dividends from net
investment income..... (.58) (.59) (.65) (.67) (.68) (.69) (.70) (.41)
Distributions from net
realized gains........ (.18) (.07) -- (.07) -- -- -- --
------- ------- ------- ------- ------- ------- ------- ------
Total distributions..... (.76) (.66) (.65) (.74) (.68) (.69) (.70) (.41)
------- ------- ------- ------- ------- ------- ------- ------
Net asset value, end of
period................ $ 11.69 $ 11.54 $ 11.63 $ 11.37 $ 12.17 $ 11.50 $ 10.94 $ 10.44
------- ------- ------- ------- ------- ------- ------- ------
------- ------- ------- ------- ------- ------- ------- ------
TOTAL RETURN (C):....... 8.10% 4.93% 8.33% (.58)% 12.10% 11.76% 11.81% 1.41%
RATIOS/SUPPLEMENTAL
DATA:
Net assets, end of
period (000).......... $28,890 $28,058 $27,525 $ 2,293 $ 2,325 $ 903 $ 665 $ 257
Average net assets
(000)................. $29,096 $28,091 $15,837 $ 2,578 $ 1,336 $ 770 $ 344 $ 127
Ratios to average net
assets:
Expenses, including
distribution fee..... 1.00%(d) 1.06%(d) .97%(d) .87% .95% .99% 1.05% 1.04%(b)
Expenses, excluding
distribution fee..... .90%(d) .96%(d) .87%(d) .77% .85% .89% .95% .95%(b)
Net investment
income............... 5.00%(d) 5.06%(d) 5.59%(d) 5.60% 5.79% 6.14% 6.53% 6.60%(b)
Portfolio turnover
rate.................. 22% 18% 36% 33% 56% 32% 34% 33%
</TABLE>
- ---------------
(a) Commencement of offering of Class A shares.
(b) Annualized.
(c) Total return does not consider the effects of sales loads. Total
return is calculated assuming a purchase of shares on the first day
and a sale on the last day of each period reported and includes
reinvestment of dividends and distributions. Total returns for
periods of less than a full year are not annualized.
(d) Net of management fee waiver.
5
<PAGE>
FINANCIAL HIGHLIGHTS
(FOR A SHARE OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT EACH OF THE INDICATED
PERIODS)
(CLASS B SHARES)
The following financial highlights, for the fiscal year ended August 31, 1997,
have been audited by Price Waterhouse LLP, independent accountants, and by
Deloitte and Touche LLP, independent auditors, for the four years ended August
31, 1996. Each of the respective reports by Price Waterhouse LLP and Deloitte &
Touche LLP on such financial statements was unqualified. This information should
be read in conjunction with the financial statements and the notes thereto,
which appear in the Statement of Additional Information. The following financial
highlights contain selected data for a Class B share of beneficial interest
outstanding, total return, ratios to average net assets and other supplemental
data for the periods indicated. This information is based on data contained in
the financial statements. Further performance information is contained in the
annual report, which may be obtained without charge. See "Shareholder
Guide--Shareholder Services--Reports to Shareholders."
<TABLE>
<CAPTION>
CLASS B
----------------------------------------------------------------------------------------------------------
YEAR ENDED AUGUST 31,
----------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993 1992 1991 1990 1989 (b) 1988
------- ------- ------- ------- ------- ------- ------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of
period............ $ 11.53 $ 11.62 $ 11.36 $ 12.17 $ 11.49 $ 10.94 $ 10.44 $ 10.74 $ 10.53 $ 10.58
------- ------- ------- ------- ------- ------- ------- ------- -------- -------
INCOME FROM
INVESTMENT
OPERATIONS
Net investment
income............ .53(d) .54(d) .60(d) .61 .63 .64 .65 .65 .68 .71(a)
Net realized and
unrealized gain
(loss) on
investment
transactions...... .33 (.02) .26 (.74) .68 .55 .50 (.30) .21 (.05)
------- ------- ------- ------- ------- ------- ------- ------- -------- -------
Total from
investment
operations........ .86 .52 .86 (.13) 1.31 1.19 1.15 .35 .89 .66
------- ------- ------- ------- ------- ------- ------- ------- -------- -------
LESS DISTRIBUTIONS
Dividends from net
investment
income............ (.53) (.54) (.60) (.61) (.63) (.64) (.65) (.65) (.68) (.71)
Distributions from
net realized
gains............. (.18) (.07) -- (.07) -- -- -- -- -- --
------- ------- ------- ------- ------- ------- ------- ------- -------- -------
Total
distributions..... (.71) (.61) (.60) (.68) (.63) (.64) (.65) (.65) (.68) (.71)
------- ------- ------- ------- ------- ------- ------- ------- -------- -------
Net asset value, end
of period......... $ 11.68 $ 11.53 $ 11.62 $ 11.36 $ 12.17 $ 11.49 $ 10.94 $ 10.44 $ 10.74 $ 10.53
------- ------- ------- ------- ------- ------- ------- ------- -------- -------
------- ------- ------- ------- ------- ------- ------- ------- -------- -------
TOTAL RETURN (C):... 7.67% 4.51% 7.90% (1.15)% 11.77% 11.23% 11.38% 3.40% 8.67% 6.54%
RATIOS/SUPPLEMENTAL
DATA:
Net assets, end of
period (000)...... $18,247 $22,758 $28,367 $55,420 $61,121 $53,449 $49,641 $50,575 $52,754 $45,278
Average net assets
(000)............. $20,301 $25,751 $39,455 $59,544 $55,965 $50,607 $49,083 $52,974 $49,841 $41,357
Ratios to average
net assets:
Expenses,
including
distribution
fee.............. 1.40%(d) 1.46%(d) 1.34%(d) 1.27% 1.35% 1.39% 1.45% 1.37% 1.34% 1.22%(a)
Expenses,
excluding
distribution
fee.............. .90%(d) .96%(d) .84%(d) .77% .85% .89% .95% .90% .87% .72%(a)
Net investment
income........... 4.60%(d) 4.66%(d) 5.37%(d) 5.20% 5.39% 5.74% 6.13% 6.21% 6.24% 6.76%(a)
Portfolio turnover
rate.............. 22% 18% 36% 33% 56% 32% 34% 33% 23% 41%
</TABLE>
- ---------------
(a) Net of expense subsidy.
(b) On December 31, 1988, Prudential Mutual Fund Management, Inc.
succeeded The Prudential Insurance Company of America as manager of
the Fund.
(c) Total return does not consider the effects of sales loads. Total
return is calculated assuming a purchase of shares on the first day
and a sale on the last day of each period reported and includes
reinvestment of dividends and distributions.
(d) Net of management fee waiver.
6
<PAGE>
FINANCIAL HIGHLIGHTS
(FOR A SHARE OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT EACH OF THE INDICATED
PERIODS)
(CLASS C SHARES)
The following financial highlights, for the fiscal year ended August 31, 1997,
have been audited by Price Waterhouse LLP, independent accountants, and by
Deloitte and Touche LLP, independent auditors, for the two years ended August
31, 1996 and for the period from August 1, 1994 through August 31, 1994. Each of
the respective reports by Price Waterhouse LLP and Deloitte & Touche LLP on such
financial statements was unqualified. This information should be read in
conjunction with the financial statements and the notes thereto, which appear in
the Statement of Additional Information. The following financial highlights
contain selected data for a Class C share of beneficial interest outstanding,
total return, ratios to average net assets and other supplemental data for the
periods indicated. This information is based on data contained in the financial
statements. Further performance information is contained in the annual report,
which may be obtained without charge. See "Shareholder Guide-- Shareholder
Services--Reports to Shareholders."
<TABLE>
<CAPTION>
CLASS C
-------------------------------------------------------
AUGUST 1,
YEAR ENDED 1994 (a)
AUGUST 31, THROUGH
---------------------------------- AUGUST 31,
1997 1996 1995 1994
-------- -------- -------- ----------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.............. $ 11.53 $ 11.62 $ 11.36 $ 11.41
-------- -------- -------- ------
INCOME FROM INVESTMENT OPERATIONS
Net investment income............................. .50(d) .51(d) .57(d) .04
Net realized and unrealized gain (loss) on
investment transactions......................... .33 (.02) .26 (.05)
-------- -------- -------- ------
Total from investment operations.................. .83 .49 .83 (.01)
-------- -------- -------- ------
LESS DISTRIBUTIONS
Dividends from net investment income.............. (.50) (.51) (.57) (.04)
Distributions from net realized gains............. (.18) (.07) -- --
-------- -------- -------- ------
Total distributions............................... (.68) (.58) (.57) (.04)
-------- -------- -------- ------
Net asset value, end of period.................... $ 11.68 $ 11.53 $ 11.62 $ 11.36
-------- -------- -------- ------
-------- -------- -------- ------
TOTAL RETURN (C):................................. 7.41% 4.26% 7.60% (.27)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)................... $ 78 $ 45 $ 14 $ 216(e)
Average net assets (000).......................... $ 48 $ 41 $ 14 $ 15(e)
Ratios to average net assets:
Expenses, including distribution fee............ 1.65%(d) 1.72%(d) 1.60%(d) 1.57%(b)
Expenses, excluding distribution fee............ .90%(d) .97%(d) .85%(d) .82%(b)
Net investment income........................... 4.36%(d) 4.39%(d) 5.07%(d) 5.06%(b)
Portfolio turnover rate........................... 22% 18% 36% 33%
</TABLE>
- ------------
(a) Commencement of offering of Class C shares.
(b) Annualized.
(c) Total return does not consider the effects of sales loads. Total return
is calculated assuming a purchase of shares on the first day and a
sale on the last day of each period reported and includes reinvestment
of dividends and distributions. Total returns for periods of less than
a full year are not annualized.
(d) Net of management fee waiver.
(e) Amounts are actual and not rounded to the nearest thousand.
7
<PAGE>
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD INDICATED)
(CLASS Z SHARES)
The following financial highlights for the Class Z shares for the period from
December 6, 1996 through August 31, 1997 have been audited by Price Waterhouse
LLP, independent accountants, whose report thereon was unqualified. This
information should be read in conjunction with the financial statements and the
notes thereto, which appear in the Statement of Additional Information. The
financial highlights contain selected data for a Class Z share of common stock
outstanding, total return, ratios to average net assets and other supplemental
data for the period indicated. This information has been determined based on
data contained in the financial statements. Further performance information is
contained in the annual report, which may be obtained without charge. See
"Shareholder Guide--Shareholder Services--Reports to Shareholders."
<TABLE>
<CAPTION>
CLASS Z
-----------------
DECEMBER 6,
1996(a)
THROUGH
AUGUST 31, 1997
-----------------
<S> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period........................ $ 11.80
-------
INCOME FROM INVESTMENT OPERATIONS
Net investment income (d)................................... .47(d)
Net realized and unrealized gain (loss) on investment
transactions............................................... .06
-------
Total from investment operations............................ .53
-------
LESS DISTRIBUTIONS
Dividends from net investment income........................ (.47)
Distributions from net realized gains....................... (.18)
-------
Total Distributions......................................... (.65)
-------
Net asset value, end of period.............................. $ 11.68
-------
-------
TOTAL RETURN(b):............................................ 4.54%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)............................. $ 204(e)
Average net assets (000).................................... $ 200(e)
Ratios to average net assets:(c)/(d)
Expenses................................................ .90%
Net investment income................................... 5.55%
Portfolio turnover rate..................................... 22%
- ------------
(a) Commencement of offering of Class Z shares.
(b) Total return is calculated assuming a purchase of shares on the first day
and a sale on the last day of the period reported and includes reinvestment
of dividends and distributions. Total returns for periods of less than a
full year are not annualized.
(c) Annualized.
(d) Net of management fee waiver.
(e) Amounts are actual and are not rounded to the nearest thousand.
</TABLE>
8
<PAGE>
HOW THE FUND INVESTS
INVESTMENT OBJECTIVE AND POLICIES
PRUDENTIAL MUNICIPAL SERIES FUND (THE FUND) IS AN OPEN-END, MANAGEMENT
INVESTMENT COMPANY, OR MUTUAL FUND, CONSISTING OF THIRTEEN SEPARATE SERIES. EACH
OF THESE SERIES IS MANAGED INDEPENDENTLY. THE MASSACHUSETTS SERIES (THE SERIES)
IS DIVERSIFIED AND ITS INVESTMENT OBJECTIVE IS TO MAXIMIZE CURRENT INCOME THAT
IS EXEMPT FROM MASSACHUSETTS STATE AND FEDERAL INCOME TAXES CONSISTENT WITH THE
PRESERVATION OF CAPITAL AND, IN CONJUNCTION THEREWITH, THE SERIES MAY INVEST IN
DEBT SECURITIES WITH THE POTENTIAL FOR CAPITAL GAIN. The investment adviser will
attempt to manage risk and enhance yield through credit analysis and careful
security selection. See "Investment Objectives and Policies" in the Statement of
Additional Information.
THE SERIES' INVESTMENT OBJECTIVE IS A FUNDAMENTAL POLICY AND, THEREFORE, MAY
NOT BE CHANGED WITHOUT THE APPROVAL OF THE HOLDERS OF A MAJORITY OF THE SERIES'
OUTSTANDING VOTING SECURITIES AS DEFINED IN THE INVESTMENT COMPANY ACT OF 1940,
AS AMENDED (THE INVESTMENT COMPANY ACT). THE SERIES' POLICIES THAT ARE NOT
FUNDAMENTAL MAY BE MODIFIED BY THE TRUSTEES.
THE SERIES WILL INVEST PRIMARILY IN MASSACHUSETTS STATE, MUNICIPAL AND LOCAL
GOVERNMENT OBLIGATIONS AND OBLIGATIONS OF OTHER QUALIFYING ISSUERS, SUCH AS
ISSUERS LOCATED IN PUERTO RICO, THE VIRGIN ISLANDS AND GUAM, WHICH PAY INCOME
EXEMPT, IN THE OPINION OF COUNSEL, FROM MASSACHUSETTS STATE AND FEDERAL INCOME
TAXES (MASSACHUSETTS OBLIGATIONS). THERE CAN BE NO ASSURANCE THAT THE SERIES
WILL BE ABLE TO ACHIEVE ITS INVESTMENT OBJECTIVE.
As with an investment in any mutual fund, an investment in this Series can
decrease and you can lose money.
Interest on certain municipal obligations may be a preference item for
purposes of the federal alternative minimum tax. The Series may invest without
limit in municipal obligations that are "private activity bonds" (as defined in
the Internal Revenue Code) the interest on which would be a preference item for
purposes of the federal alternative minimum tax. See "Taxes, Dividends and
Distributions." Under Massachusetts law, dividends paid by the Series are exempt
from Massachusetts personal income tax for resident individuals and other
resident noncorporate shareholders to the extent they are derived from interest
payments on Massachusetts Obligations or from long-term capital gains on certain
Massachusetts Obligations. Massachusetts Obligations could include general
obligation bonds of the Commonwealth, counties, cities, towns, etc., revenue
bonds of utility systems, highways, bridges, port and airport facilities,
colleges, hospitals, etc., and industrial development and pollution control
bonds. The Series will invest in long-term obligations, and the dollar-weighted
average maturity of the Series' portfolio will generally range between 10-20
years. The Series also may invest in certain short-term, tax-exempt notes such
as Tax Anticipation Notes, Revenue Anticipation Notes, Bond Anticipation Notes,
Construction Loan Notes and variable and floating rate demand notes.
Generally, municipal obligations with longer maturities produce higher yields
and are subject to greater price fluctuations as a result of changes in interest
rates (market risk) than municipal obligations with shorter maturities. The
prices of municipal obligations vary inversely with interest rates. Interest
rates are currently much lower than in recent years. As a general matter, bond
prices and the Series' net asset value will vary inversely with interest rate
fluctuations. If rates were to rise sharply, the prices of bonds in the Series'
portfolio might be adversely affected.
THE SERIES MAY INVEST ITS ASSETS IN FLOATING RATE AND VARIABLE RATE
SECURITIES, INCLUDING PARTICIPATION INTERESTS THEREIN AND INVERSE FLOATERS.
There is no limit on the amount of such securities that the Series may purchase.
Floating rate securities normally have a rate of interest which is set as a
specific percentage of a designated base rate, such as the rate on Treasury
bonds or bills or the prime rate at a major commercial bank. The interest rate
on floating rate securities changes periodically when there is a change in the
designated base interest rate. Variable rate securities provide for a specified
periodic adjustment in the interest rate based on prevailing market rates and
generally allow the Series to demand payment of the obligation on short notice
at par plus accrued interest, which amount may be more or less than the amount
the Series paid for
9
<PAGE>
them. An inverse floater is a debt instrument with a floating or variable
interest rate that moves in the opposite direction of the interest rate on
another security or the value of an index. Changes in the interest rate on the
other security or index inversely affect the residual interest rate paid on the
inverse floater, with the result that the inverse floater's price will be
considerably more volatile than that of a fixed rate bond. The market for
inverse floaters is relatively new.
THE SERIES MAY ALSO INVEST IN MUNICIPAL LEASE OBLIGATIONS. A MUNICIPAL LEASE
OBLIGATION IS A MUNICIPAL SECURITY THE INTEREST ON AND PRINCIPAL OF WHICH IS
PAYABLE OUT OF LEASE PAYMENTS MADE BY THE PARTY LEASING THE FACILITIES FINANCED
BY THE ISSUE. Typically, municipal lease obligations are issued by a state or
municipal financing authority to provide funds for the construction of
facilities (E.G., schools, dormitories, office buildings or prisons) or the
acquisition of equipment. The facilities are typically used by the state or
municipality pursuant to a lease with a financing authority. Certain municipal
lease obligations may trade infrequently. Accordingly, the investment adviser
will monitor the liquidity of municipal lease obligations under the supervision
of the Trustees. Municipal lease obligations will not be considered illiquid for
purposes of the Series' 15% limitation on illiquid securities provided the
investment adviser determines that there is a readily available market for such
securities. See "Other Investments and Policies--Illiquid Securities" below.
THE SERIES WILL INVEST AT LEAST 70% OF ITS TOTAL ASSETS IN MASSACHUSETTS
OBLIGATIONS WHICH, AT THE TIME OF PURCHASE, ARE RATED WITHIN THE FOUR HIGHEST
QUALITY GRADES AS DETERMINED BY 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), 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 ANOTHER
NATIONALLY RECOGNIZED STATISTICAL RATING ORGANIZATION (NRSRO) OR, IF UNRATED,
WILL POSSESS CREDITWORTHINESS, IN THE OPINION OF THE INVESTMENT ADVISER,
COMPARABLE TO SUCH "INVESTMENT GRADE" RATED SECURITIES.
THE SERIES MAY ALSO INVEST UP TO 30% OF ITS TOTAL ASSETS IN MASSACHUSETTS
OBLIGATIONS RATED BELOW Baa BY MOODY'S OR BELOW BBB BY S&P OR A COMPARABLE
RATING OF ANOTHER NRSRO OR, IF NON-RATED, OF COMPARABLE QUALITY, IN THE OPINION
OF THE FUND'S INVESTMENT ADVISER, BASED ON ITS CREDIT ANALYSIS. Securities rated
Baa by Moody's and BBB by S&P are described as being investment grade but are
also characterized as having speculative characteristics. Securities rated below
Baa by Moody's and below BBB by S&P are considered speculative. See "Description
of Security Ratings" in the Appendix. Such lower-rated high yield securities by
S&P are commonly referred to as "junk bonds." Such securities generally offer a
higher current yield than those in the higher rating categories but also involve
greater price volatility and risk of loss of principal and income. The
investment adviser will attempt to manage risk and enhance yield through credit
analysis and careful security selection. See "Risk Factors Relating to Investing
in High Yield Municipal Obligations" below. Subsequent to its purchase by the
Series, a municipal obligation may be assigned a lower rating or cease to be
rated. Such an event would not require the elimination of the issue from the
portfolio, but the investment adviser will consider such an event in determining
whether the Series should continue to hold the security in its portfolio. Many
issuers of lower-quality bonds choose not to have their obligations rated and
the Series may invest in such unrated securities. Investors should carefully
consider the relative risks associated with investments in securities which
carry lower ratings and in comparable non-rated securities.
During the year ended August 31, 1997, the monthly dollar weighted average
ratings of the debt obligations held by the Series, expressed as a percentage of
the Series' total assets, were as follows:
<TABLE>
<CAPTION>
PERCENTAGE OF
RATINGS TOTAL INVESTMENTS
------------------------------ -------------------------
<S> <C>
AAA/Aaa 60.67 %
AA/Aa 13.07 %
A/A 14.76 %
BBB/Baa 11.50 %
</TABLE>
From time to time, the Series may own the majority of a municipal issue. Such
majority-owned holdings may present market and credit risks.
10
<PAGE>
The Series may purchase Massachusetts Obligations which, in the opinion of the
investment adviser, offer the opportunity for capital appreciation. This may
occur, for example, when the investment adviser believes that the issuer of a
particular Massachusetts Obligation might receive an upgraded credit standing,
thereby increasing the market value of the bonds it has issued or when the
investment adviser believes that interest rates might decline.
UNDER NORMAL MARKET CONDITIONS, THE SERIES WILL ATTEMPT TO INVEST
SUBSTANTIALLY ALL OF THE VALUE OF ITS ASSETS IN MASSACHUSETTS OBLIGATIONS. As a
matter of fundamental policy, during normal market conditions the Series' assets
will be invested so that at least 80% of the income will be exempt from
Massachusetts and federal income taxes or the Series will have at least 80% of
its total assets invested in Massachusetts Obligations. During abnormal market
conditions or to provide liquidity, the Series may hold cash or cash equivalents
or investment grade taxable obligations, including obligations that are exempt
from federal, but not state, taxation and the Series may invest in tax-free cash
equivalents, such as floating rate demand notes, tax-exempt commercial paper and
general obligation and revenue notes or in taxable cash equivalents, such as
certificates of deposit, bankers acceptances and time deposits or other
short-term taxable investments such as repurchase agreements. When, in the
opinion of the investment adviser, abnormal market conditions require a
temporary defensive position, the Series may invest more than 20% of the value
of its assets in debt securities other than Massachusetts Obligations or may
invest its assets so that more than 20% of the income is subject to
Massachusetts state or federal income taxes. The Series will treat an investment
in a municipal bond refunded with escrowed U.S. Government securities as U.S.
Government securities for purposes of the Investment Company Act's
diversification requirements provided certain conditions are met. See
"Investment Objectives and Policies--In General" in the Statement of Additional
Information.
THE SERIES MAY ACQUIRE PUT OPTIONS (PUTS) GIVING THE SERIES THE RIGHT TO SELL
SECURITIES HELD IN THE SERIES' PORTFOLIO AT A SPECIFIED EXERCISE PRICE ON A
SPECIFIED DATE. Such puts may be acquired for the purpose of protecting the
Series from a possible decline in the market value of the security to which the
put applies in the event of interest rate fluctuations or, in the case of
liquidity puts, for the purpose of shortening the effective maturity of the
underlying security. The aggregate value of premiums paid to acquire puts held
in the Series' portfolio (other than liquidity puts) may not exceed 10% of the
net asset value of the Series. The acquisition of a put may involve an
additional cost to the Series by payment of a premium for the put, by payment of
a higher purchase price for securities to which the put is attached or through a
lower effective interest rate.
In addition, there is a credit risk associated with the purchase of puts in
that the issuer of the put may be unable to meet its obligation to purchase the
underlying security. Accordingly, the Series will acquire puts only under the
following circumstances: (1) the put is written by the issuer of the underlying
security and such security is rated within the four highest quality grades as
determined by 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 highest quality grades; or (3) the put is
backed by a letter of credit or similar financial guarantee issued by a person
having securities outstanding which are rated within the two highest quality
grades of an NRSRO.
THE SERIES MAY PURCHASE MUNICIPAL OBLIGATIONS ON A "WHEN-ISSUED" OR "DELAYED
DELIVERY" BASIS, IN EACH CASE WITHOUT LIMIT. When municipal obligations are
offered on a when-issued or delayed delivery basis, the price and coupon rate
are fixed at the time the commitment to purchase is made, but delivery and
payment for the securities take place at a later date. The purchase price for
such securities includes interest accrued during the period between purchase and
settlement and, therefore, no interest accrues to the economic benefit of the
purchaser during such period. In the case of purchases by the Series, the price
that the Series is required to pay on the settlement date may be in excess of
the market value of the municipal obligations on that date. While securities may
be sold prior to the settlement date, the Series intends to purchase these
securities with the purpose of actually acquiring them unless a sale would be
desirable for investment reasons. At the time the Series makes the commitment to
purchase a municipal obligation on a when-issued or delayed delivery basis, it
will record the transaction and reflect the value of the obligation each day in
determining its net asset value. This value may fluctuate from day to day in the
same manner as values of municipal obligations otherwise held by the Series. If
the seller defaults in the sale, the Series could fail to realize the
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appreciation, if any, that had occurred. The Series will establish a segregated
account with its Custodian in which it will maintain cash, U.S. Government
securities, equity securities or other liquid, unencumbered assets,
marked-to-market daily, equal in value to its commitments for when-issued or
delayed delivery securities.
THE SERIES MAY ALSO PURCHASE MUNICIPAL FORWARD CONTRACTS. A municipal forward
contract is a municipal security which is purchased on a when-issued basis with
delivery taking place up to five years from the date of purchase. No interest
will accrue on the security prior to the delivery date. The investment adviser
will monitor the liquidity, value, credit quality and delivery of the security
under the supervision of the Trustees.
THE SERIES MAY PURCHASE SECONDARY MARKET INSURANCE ON MASSACHUSETTS
OBLIGATIONS WHICH IT HOLDS OR ACQUIRES. Secondary market insurance would be
reflected in the market value of the municipal obligation purchased and may
enable the Series to dispose of a defaulted obligation at a price similar to
that of comparable municipal obligations which are not in default.
Insurance is not a substitute for the basic credit of an issuer, but
supplements the existing credit and provides additional security therefor. While
insurance coverage for the Massachusetts Obligations held by the Series reduces
credit risk by providing that the insurance company will make timely payment of
principal and interest if the issuer defaults on its obligation to make such
payment, it does not afford protection against fluctuation in the price, I.E.,
the market value, of the municipal obligations caused by changes in interest
rates and other factors, nor in turn against fluctuations in the net asset value
of the shares of the Series.
RISK FACTORS RELATING TO INVESTING IN HIGH YIELD MUNICIPAL OBLIGATIONS. FIXED
INCOME SECURITIES ARE SUBJECT TO THE RISK OF AN ISSUER'S INABILITY TO MEET
PRINCIPAL AND INTEREST PAYMENTS ON THE OBLIGATIONS (CREDIT RISK) AND MAY ALSO BE
SUBJECT TO PRICE VOLATILITY DUE TO SUCH FACTORS AS INTEREST RATE SENSITIVITY,
MARKET PERCEPTION OF THE CREDITWORTHINESS OF THE ISSUER AND GENERAL MARKET
LIQUIDITY (MARKET RISK). Lower-rated or unrated (I.E., high yield) securities,
commonly known as "junk bonds," are more likely to react to developments
affecting market and credit risk than are more highly rated securities, which
react primarily to movements in the general level of interest rates. The
investment adviser will perform its own investment analysis and will not rely
principally on the ratings assigned by the rating services, although such
ratings will be considered by the investment adviser. The investment adviser
will consider, among other things, credit risk and market risk, as well as the
financial history and condition, the prospects and the management of an issuer
in selecting securities for the Series' portfolio. The achievement of the
Series' investment objective may be more dependent on the investment adviser's
credit analysis than is the case when investing in only higher quality bonds.
Investors should carefully consider the relative risks of investing in high
yield municipal obligations and understand that such securities are not
generally meant for short-term investing and that yields on junk bonds will
fluctuate over time.
The amount of high yield securities outstanding has proliferated recently in
conjunction with the decline in creditworthiness of many obligors on municipal
debt, particularly health care providers and certain government bodies. An
economic downturn could severely affect the ability of highly leveraged issuers
to service their debt obligations or to repay their obligations upon maturity.
In addition, the secondary market for high yield securities, which is
concentrated in relatively few market makers, may not be as liquid as the
secondary market for more highly rated securities and, from time to time, it may
be more difficult to value high yield securities than more highly rated
securities, and the judgment of the Board of Trustees and investment adviser may
play a greater role in valuation because there is less reliable objective data
available. Under adverse market or economic conditions, the secondary market for
high yield securities could contract further, independent of any specific
adverse changes in the condition of a particular issuer. As a result, the
investment adviser could find it more difficult to sell these securities or may
be able to sell the securities only at prices lower than if such securities were
widely traded. Prices realized upon the sale of such lower rated or unrated
securities, under these circumstances, may be less than the prices used in
calculating the Series' net asset value. If the investment adviser becomes
involved in activities such as reorganizations of obligors of troubled
investments held by the Series, this may prevent the Series from disposing of
the securities, due to its possession of material, non-public information
concerning the obligor.
LOWER-RATED OR UNRATED DEBT OBLIGATIONS ALSO PRESENT RISKS BASED ON PAYMENT
EXPECTATIONS. If an issuer calls the obligation for redemption, the Series may
have to replace the security with a lower-yielding security, resulting in a
decreased
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return for investors. If the Series experiences unexpected net redemptions, it
may be forced to sell its higher quality securities, resulting in a decline in
the overall credit quality of the Series' portfolio and increasing the exposure
of the Series to the risks of high yield securities.
FUTURES CONTRACTS AND OPTIONS THEREON
THE SERIES IS AUTHORIZED TO PURCHASE AND SELL CERTAIN DERIVATIVES, INCLUDING
FINANCIAL FUTURES CONTRACTS (FUTURES CONTRACTS) AND OPTIONS THEREON FOR THE
PURPOSE OF HEDGING ITS PORTFOLIO SECURITIES AGAINST FLUCTUATIONS IN VALUE CAUSED
BY CHANGES IN PREVAILING MARKET INTEREST RATES AND HEDGING AGAINST INCREASES IN
THE COST OF SECURITIES THE SERIES INTENDS TO PURCHASE. THE SUCCESSFUL USE OF
FUTURES CONTRACTS AND OPTIONS THEREON BY THE SERIES INVOLVES ADDITIONAL
TRANSACTION COSTS AND IS SUBJECT TO VARIOUS RISKS AND DEPENDS UPON THE
INVESTMENT ADVISER'S ABILITY TO PREDICT THE DIRECTION OF THE MARKET (INCLUDING
INTEREST RATES). THE SERIES, AND THUS INVESTORS, MAY LOSE MONEY THROUGH THE
UNSUCCESSFUL USE OF THESE STRATEGIES.
A FUTURES CONTRACT OBLIGATES THE SELLER OF THE CONTRACT TO DELIVER TO THE
PURCHASER OF THE CONTRACT CASH EQUAL TO A SPECIFIC DOLLAR AMOUNT TIMES THE
DIFFERENCE BETWEEN THE VALUE OF A SPECIFIC FIXED-INCOME SECURITY OR INDEX AT THE
CLOSE OF THE LAST TRADING DAY OF THE CONTRACT AND THE PRICE AT WHICH THE
AGREEMENT IS MADE. No physical delivery of the underlying securities is made.
The Series will engage in transactions in only those futures contracts and
options thereon that are traded on a commodities exchange or a board of trade.
The Series intends to engage in futures contracts and options thereon as a
hedge against changes, resulting from market conditions, in the value of
securities which are held in the Series' portfolio or which the Series intends
to purchase, in accordance with the rules and regulations of the Commodity
Futures Trading Commission (the CFTC). The Series also intends to engage in such
transactions when they are economically appropriate for the reduction of risks
inherent in the ongoing management of the Series.
THE SERIES MAY NOT PURCHASE OR SELL FUTURES CONTRACTS OR OPTIONS THEREON IF,
IMMEDIATELY THEREAFTER, (I) THE SUM OF INITIAL AND NET CUMULATIVE VARIATION
MARGIN ON OUTSTANDING FUTURES CONTRACTS, TOGETHER WITH PREMIUMS PAID FOR OPTIONS
THEREON, WOULD EXCEED 20% OF THE TOTAL ASSETS OF THE SERIES, OR (II) IN THE CASE
OF RISK MANAGEMENT TRANSACTIONS, THE SUM OF THE AMOUNT OF INITIAL MARGIN
DEPOSITS ON THE SERIES' FUTURES POSITIONS AND PREMIUMS PAID FOR OPTIONS THEREON
WOULD EXCEED 5% OF THE LIQUIDATION VALUE OF THE SERIES' TOTAL ASSETS. There are
no limitations on the percentage of the portfolio which may be hedged and no
limitations on the use of the Series' assets to cover futures contracts and
options thereon, except that the aggregate value of the obligations underlying
put options will not exceed 50% of the Series' assets. Certain requirements for
qualification as a regulated investment company under the Internal Revenue Code
may limit the Series' ability to engage in futures contracts and options
thereon. See "Distributions and Tax Information--Federal Taxation" in the
Statement of Additional Information.
Currently, futures contracts are available on several types of fixed-income
securities, including U.S. Treasury bonds and notes, three-month U.S. Treasury
bills and Eurodollars. Futures contracts are also available on a municipal bond
index, based on THE BOND BUYER Municipal Bond Index, an index of 40 actively
traded municipal bonds. The Series may also engage in transactions in other
futures contracts that become available, from time to time, in other
fixed-income securities or municipal bond indices and in other options on such
contracts if the investment adviser believes such contracts and options would be
appropriate for hedging the Series' portfolio.
THERE CAN BE NO ASSURANCE THAT VIABLE MARKETS WILL CONTINUE OR THAT A LIQUID
SECONDARY MARKET WILL EXIST TO TERMINATE ANY PARTICULAR FUTURES CONTRACT AT ANY
SPECIFIC TIME. If it is not possible to close a futures position entered into by
the Series, the Series will continue to be required to make daily cash payments
of variation margin in the event of adverse price movements. In such a
situation, if the Series had insufficient cash, it might have to sell portfolio
securities to meet daily variation
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margin requirements at a time when it might be disadvantageous to do so. The
inability to close futures positions also could have an adverse impact on the
ability of the Series to hedge effectively. There is also a risk of loss by the
Series of margin deposits in the event of bankruptcy of a broker with whom the
Series has an open position in a futures contract.
THE SUCCESSFUL USE OF FUTURES CONTRACTS AND OPTIONS THEREON BY THE SERIES IS
SUBJECT TO VARIOUS ADDITIONAL RISKS. Any use of futures transactions involves
the risk of imperfect correlation in movements in the price of futures contracts
and movements in interest rates and, in turn, the prices of the securities that
are the subject of the hedge. If the price of the futures contract moves more or
less than the price of the security that is the subject of the hedge, the Series
will experience a gain or loss that will not be completely offset by movements
in the price of the security. The risk of imperfect correlation is greater where
the securities underlying futures contracts are taxable securities (rather than
municipal securities), are issued by companies in different market sectors or
have different maturities, ratings or geographic mixes than the security being
hedged. In addition, the correlation may be affected by additions to or
deletions from the index which serves as the basis for a futures contract.
Finally, if the price of the security that is subject to the hedge were to move
in a favorable direction, the advantage to the Series would be partially offset
by the loss incurred on the futures contract.
SPECIAL CONSIDERATIONS
BECAUSE THE SERIES WILL INVEST AT LEAST 80% OF THE VALUE OF ITS TOTAL ASSETS
IN MASSACHUSETTS OBLIGATIONS AND BECAUSE IT SEEKS TO MAXIMIZE INCOME DERIVED
FROM MASSACHUSETTS OBLIGATIONS, IT IS MORE SUSCEPTIBLE TO FACTORS ADVERSELY
AFFECTING ISSUERS OF MASSACHUSETTS OBLIGATIONS THAN IS A COMPARABLE MUNICIPAL
BOND MUTUAL FUND THAT IS NOT CONCENTRATED IN SUCH OBLIGATIONS TO THIS DEGREE.
The 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. However, since that time, Massachusetts has adopted
more conservative revenue forecasting procedures and has moderated spending
growth resulting in the achievement of budget surpluses each year from 1992
through 1996. Massachusetts is currently rated A-1 by Moody's Investors Service.
Fiscal year 1997 tax revenue collections totaled $12.861 billion, which exceeded
estimates by $354 million and exceeded fiscal 1996 tax revenues by $812 million.
The Budgeted Operating Funds of the Commonwealth ended fiscal 1997 with a
surplus of revenues and other sources over expenditures and other uses of $183
million resulting in aggregate ending fund balances in the Budgeted Operating
Funds of the Commonwealth of approximately $1.626 billion. The Commonwealth
estimates total spending in fiscal 1998 to be approximately $18.4 billion,
including $235.5 million in continuing appropriations from fiscal 1997. Fiscal
1998 total revenues are estimated to be approximately $17.918 billion, including
approximately $12.861 billion in tax revenues. The tax revenue estimate amounts
to an increase of approximately $812 million, or 6.7%, over same period last
year. Inflexibility dictated by a heavy debt load and other substantial fixed
costs, particularly pension contributions and transit subsidies, pose
significant obstacles to continued progress. If either Massachusetts or any of
its local government entities is unable to meet its financial obligations, the
income derived by the Series, the ability to preserve or realize appreciation of
the Series' capital and the Series' liquidity could be adversely affected. See
"Investment Objectives and Policies--Special Considerations Regarding
Investments in Tax-Exempt Securities" in the Statement of Additional
Information.
OTHER INVESTMENTS AND POLICIES
REPURCHASE AGREEMENTS
The Series may on occasion enter into repurchase agreements whereby the seller
of a security agrees to repurchase that security from the Series at a mutually
agreed-upon time and price. The period of maturity is usually quite short,
possibly overnight or a few days, although it may extend over a number of
months. The resale price is in excess of the purchase price, reflecting an
agreed-upon rate of return effective for the period of time the Series' money is
invested in the security. The Series' repurchase agreements will at all times be
fully collateralized in an amount at least equal to the resale price. The
instruments held as collateral are valued daily and if the value of the
instruments declines, the Series will require additional collateral. If the
seller
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defaults and the value of the collateral securing the repurchase agreement
declines, the Series may incur a loss. The Series participates in a joint
repurchase account with other investment companies managed by Prudential
Investments Fund Management LLC pursuant to an order of the Securities and
Exchange Commission (SEC).
BORROWING
The Series may borrow an amount equal to no more than 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 Series may
pledge up to 33 1/3% of the value of its total assets to secure these
borrowings. The Series will not purchase portfolio securities if its borrowings
exceed 5% of its total assets.
PORTFOLIO TURNOVER
The Series does not expect to trade in securities for short-term gain. It is
anticipated that the annual portfolio turnover rate will not exceed 150%. The
portfolio turnover rate is calculated by dividing the lesser of sales or
purchases of portfolio securities by the average monthly value of the portfolio
securities, excluding securities having a maturity at the date of purchase of
one year or less.
ILLIQUID SECURITIES
The Series may hold up to 15% of its net assets in illiquid securities
including repurchase agreements which have a maturity of longer than seven days,
securities with legal or contractual restrictions on resale (restricted
securities) and securities that are not readily marketable. Restricted
securities eligible for resale pursuant to Rule 144A under the Securities Act of
1933, as amended (the Securities Act), privately placed commercial paper and
municipal lease obligations that have a readily available market are not
considered illiquid for the purposes of this limitation. The investment adviser
will monitor the liquidity of such restricted securities under the supervision
of the Trustees. The Series' investment in Rule 144A securities could have the
effect of increasing illiquidity to the extent that qualified institutional
buyers become, for a limited time, uninterested in purchasing Rule 144A
securities. See "Investment Objectives and Policies--Illiquid Securities" and
"Investment Restrictions" in the Statement of Additional Information. Repurchase
agreements subject to demand are deemed to have a maturity equal to the notice
period.
INVESTMENT RESTRICTIONS
The Series is subject to certain investment restrictions which, like its
investment objective, constitute fundamental policies. Fundamental policies
cannot be changed without the approval of the holders of a majority of the
Series' outstanding voting securities, as defined in the Investment Company Act.
See "Investment Restrictions" in the Statement of Additional Information.
HOW THE FUND IS MANAGED
THE FUND HAS TRUSTEES WHO, IN ADDITION TO OVERSEEING THE ACTIONS OF THE FUND'S
MANAGER, SUBADVISOR AND DISTRIBUTOR, AS SET FORTH BELOW, DECIDE UPON MATTERS OF
GENERAL POLICY. THE FUND'S MANAGER CONDUCTS AND SUPERVISES THE DAILY BUSINESS
OPERATIONS OF THE FUND. THE FUND'S SUBADVISER FURNISHES DAILY INVESTMENT
ADVISORY SERVICES.
For the fiscal year ended August 31, 1997, total expenses of the Series as a
percentage of average net assets, net of fee waivers, were 1.00%, 1.40% and
1.65% for the Series' Class A, Class B and Class C shares, respectively. For the
period from December 6, 1996 (commencement of the offering of Class Z shares)
through August 31, 1997, total expenses of the Series as a percentage of average
net assets, net of fee waivers, were .90%% (annualized) for the Series' Class Z
shares. See "Financial Highlights."
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MANAGER
PRUDENTIAL INVESTMENTS FUND MANAGEMENT LLC (PIFM OR THE MANAGER), GATEWAY
CENTER THREE, 100 MULBERRY STREET, NEWARK, NEW JERSEY 07102-4077, IS THE MANAGER
OF THE FUND AND IS COMPENSATED FOR ITS SERVICES AT AN ANNUAL RATE OF .50 OF 1%
OF THE AVERAGE NET ASSETS OF THE SERIES. PIFM is organized in New York as a
limited liability company. It is the successor to Prudential Mutual Fund
Management, Inc., which transferred its assets to PIFM in September 1996. For
the fiscal year ended August 31, 1997, the Series paid PIFM a management fee of
.45 of 1% of the Series' average net assets, after taking into account a
management fee waiver. See "Fee Waivers" below and "Manager" in the Statement of
Additional Information.
As of September 30, 1997, PIFM served as the manager to 41 open-end investment
companies, constituting all of the Prudential Mutual Funds, and as manager or
administrator to 22 closed-end investment companies with aggregate assets of
approximately $59.9 billion.
UNDER THE MANAGEMENT AGREEMENT WITH THE FUND, PIFM MANAGES THE INVESTMENT
OPERATIONS OF EACH SERIES OF THE FUND AND ALSO ADMINISTERS THE FUND'S BUSINESS
AFFAIRS. See "Manager" in the Statement of Additional Information.
UNDER A SUBADVISORY AGREEMENT BETWEEN PIFM AND THE PRUDENTIAL INVESTMENT
CORPORATION (PIC), DOING BUSINESS AS PRUDENTIAL INVESTMENTS (PI, THE SUBADVISER
OR THE INVESTMENT ADVISER), PI FURNISHES INVESTMENT ADVISORY SERVICES IN
CONNECTION WITH THE MANAGEMENT OF THE FUND AND IS REIMBURSED BY PIFM FOR ITS
REASONABLE COSTS AND EXPENSES INCURRED IN PROVIDING SUCH SERVICES. Under the
Management Agreement, PIFM continues to have responsibility for all investment
advisory services and supervises PI's performance of such services.
The current portfolio manager of the Series is James M. Murphy. Mr. Murphy has
responsibility for the day-to-day management of the portfolio. He has managed
the portfolio since January 1997 and has been employed by PIC in various
capacities since 1989.
PIFM and PIC are indirect, wholly-owned subsidiaries of The Prudential
Insurance Company of America (Prudential), a major diversified insurance and
financial services company, and are part of Prudential Investments, a business
group of Prudential.
FEE WAIVERS
PIFM may from time to time agree to waive all or a portion of its management
fee and subsidize certain operating expenses of the Series. Fee waivers and
expense subsidies will increase the Series' yield and total return. The Series
is not required to reimburse PIFM for such management fee waiver. Effective
September 1, 1997, PIFM discontinued its waiver of 10% of its management fee.
See "Fund Expenses."
DISTRIBUTOR
PRUDENTIAL SECURITIES INCORPORATED (PRUDENTIAL SECURITIES, PSI OR THE
DISTRIBUTOR), ONE SEAPORT PLAZA, NEW YORK, NEW YORK 10292, IS A CORPORATION
ORGANIZED UNDER THE LAWS OF THE STATE OF DELAWARE AND SERVES AS THE DISTRIBUTOR
OF THE CLASS A, CLASS B AND CLASS C SHARES OF THE SERIES. It is an indirect,
wholly-owned subsidiary of Prudential.
UNDER SEPARATE DISTRIBUTION AND SERVICE PLANS (THE CLASS A PLAN, THE CLASS B
PLAN AND THE CLASS C PLAN, COLLECTIVELY, THE PLANS) ADOPTED BY THE FUND UNDER
RULE 12b-1 UNDER THE INVESTMENT COMPANY ACT AND A DISTRIBUTION AGREEMENT (THE
DISTRIBUTION AGREEMENT), PRUDENTIAL SECURITIES (THE DISTRIBUTOR) INCURS THE
EXPENSES OF DISTRIBUTING THE CLASS A, CLASS B AND CLASS C SHARES OF THE SERIES.
Prudential Securities also incurs the expense of distributing the Series' Class
Z shares under the Distribution Agreement with the Fund, none of which is
reimbursed or paid for by the Fund. These expenses include commissions and
account servicing fees paid to, or on account of, financial advisers of
Prudential Securities and representatives of Pruco Securities Corporation
(Prusec), an affiliated broker-dealer, commissions and account servicing fees
paid to, or on account of, other broker-dealers or financial institutions (other
than national banks) which have entered into
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agreements with the Distributor, advertising expenses, the cost of printing and
mailing prospectuses to potential investors and indirect and overhead costs of
Prudential Securities and Prusec associated with the sale of Series shares,
including lease, utility, communications and sales promotion expenses.
Under the Plans, the Series is obligated to pay distribution and/or service
fees to the Distributor as compensation for its distribution and service
activities, not as reimbursement for specific expenses incurred. If the
Distributor's expenses exceed its distribution and service fees, the Series will
not be obligated to pay any additional expenses. If the Distributor's expenses
are less than such distribution and service fees, it will retain its full fees
and realize a profit.
UNDER THE CLASS A PLAN, THE SERIES MAY PAY PRUDENTIAL SECURITIES FOR ITS
DISTRIBUTION-RELATED ACTIVITIES WITH RESPECT TO CLASS A SHARES AT AN ANNUAL RATE
OF UP TO .30 OF 1% OF THE AVERAGE DAILY NET ASSETS OF THE CLASS A SHARES OF THE
SERIES. The Class A Plan provides that (i) up to .25 of 1% of the average daily
net assets of the Class A shares may be used to pay for personal service and/or
the maintenance of shareholder accounts (service fee) and (ii) total
distribution fees (including the service fee of .25 of 1%) may not exceed .30 of
1% of the average daily net assets of the Class A shares. Prudential Securities
has agreed to limit its distribution-related fees payable under the Class A Plan
to .10 of 1% of the average daily net assets of the Class A shares for the
fiscal year ending August 31, 1998.
UNDER THE CLASS B AND CLASS C PLANS, THE SERIES MAY PAY PRUDENTIAL SECURITIES
FOR ITS DISTRIBUTION-RELATED ACTIVITIES WITH RESPECT TO CLASS B AND CLASS C
SHARES AT AN ANNUAL RATE OF UP TO .50 OF 1% AND UP TO 1% OF THE AVERAGE DAILY
NET ASSETS OF THE CLASS B AND CLASS C SHARES, RESPECTIVELY. The Class B Plan
provides for the payment to Prudential Securities of (i) an asset-based sales
charge of up to .50 of 1% of the average daily net assets of the Class B shares,
and (ii) a service fee of up to .25 of 1% of the average daily net assets of the
Class B shares; provided that the total distribution-related fee does not exceed
.50 of 1%. The Class C Plan provides for the payment to Prudential Securities of
(i) an asset-based sales charge of up to .75 of 1% of the average daily net
assets of the Class C shares, and (ii) a service fee of up to .25 of 1% of the
average daily net assets of the Class C shares. The service fee is used to pay
for personal service and/or the maintenance of shareholder accounts. Prudential
Securities has agreed to limit its distribution-related fees payable under the
Class C Plan to .75 of 1% of the average daily net assets of the Class C shares
for the fiscal year ending August 31, 1998. Prudential Securities also receives
contingent deferred sales charges from certain redeeming shareholders. See
"Shareholder Guide--How to Sell Your Shares--Contingent Deferred Sales Charges."
For the fiscal year ended August 31, 1997, the Series paid distribution
expenses of .10 of 1%, .50 of 1% and .75 of 1% of the average daily net assets
of the Class A, Class B and Class C shares, respectively. The Series records all
payments made under the Plans as expenses in the calculation of net investment
income. See "Distributor" in the Statement of Additional Information.
Distribution expenses attributable to the sale of Class A, Class B and Class C
shares of the Series will be allocated to each such class based upon the ratio
of sales of each such class to the sales of Class A, Class B and Class C shares
of the Series other than expenses allocable to a particular class. The
distribution fee and sales charge of one class will not be used to subsidize the
sale of another class.
Each Plan provides that it shall continue in effect from year to year provided
that a majority of the Trustees of the Fund, including a majority of the
Trustees who are not "interested persons" of the Fund (as defined in the
Investment Company Act) and who have no direct or indirect financial interest in
the operation of the Plan or any agreement related to the Plan (the Rule 12b-1
Trustees), vote annually to continue the Plan. Each Plan may be terminated with
respect to the Series at any time by vote of a majority of the Rule 12b-1
Trustees or of a majority of the outstanding shares of the applicable class of
the Series. The Series will not be obligated to pay distribution and service
fees incurred under any Plan if it is terminated or not continued.
In addition to distribution and service fees paid by the Series under the
Class A, Class B and Class C Plans, the Manager (or one of its affiliates) may
make payments out of its own resources to dealers (including Prudential
Securities) and other persons who distribute shares of the Series (including
Class Z shares). Such payments may be calculated by reference to the net asset
value of shares sold by such persons or otherwise.
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The Distributor is subject to the rules of the National Association of
Securities Dealers, Inc. (the NASD) governing maximum sales charges. See
"Distributor" in the Statement of Additional Information.
On October 21, 1993, PSI entered into an omnibus settlement with the SEC,
state securities regulators (with the exception of the Texas Securities
Commissioner who joined the settlement on January 18, 1994) and the NASD to
resolve allegations that from 1980 through 1990 PSI sold certain limited
partnership interests in violation of securities laws to persons for whom such
securities were not suitable and misrepresented the safety, potential returns
and liquidity of these investments. Without admitting or denying the allegations
asserted against it, PSI consented to the entry of an SEC Administrative Order
which stated that PSI's conduct violated the federal securities laws, directed
PSI to cease and desist from violating the federal securities laws, pay civil
penalties, and adopt certain remedial measures to address the violations.
Pursuant to the terms of the SEC settlement, PSI agreed to the imposition of a
$10,000,000 civil penalty, established a settlement fund in the amount of
$330,000,000 and procedures to resolve legitimate claims for compensatory
damages by purchasers of the partnership interests. PSI has agreed to provide
additional funds, if necessary, for the purpose of the settlement fund. PSI's
settlement with the state securities regulators included an agreement to pay a
penalty of $500,000 per jurisdiction. PSI consented to a censure and to the
payment of a $5,000,000 fine in settling the NASD action.
In October 1994, a criminal complaint was filed with the United States
Magistrate for the Southern District of New York alleging that PSI committed
fraud in connection with the sale of certain limited partnership interests in
violation of federal securities laws. An agreement was simultaneously filed to
defer prosecution of these charges for a period of three years from the signing
of the agreement, provided that PSI complies with the terms of the agreement.
If, upon completion of the three year period, PSI has complied with the terms of
the agreement, no prosecution will be instituted by the United States for the
offenses charged in the complaint. If on the other hand, during the course of
the three year period, PSI violates the terms of the agreement, the U.S.
Attorney can then elect to pursue these charges. Under the terms of the
agreement, PSI agreed, among other things, to pay an additional $330,000,000
into the fund established by the SEC to pay restitution to investors who
purchased certain PSI limited partnership interests.
For more detailed information concerning the foregoing matters, see
"Distributor" in the Statement of Additional Information, a copy of which may be
obtained at no cost by calling (800) 225-1852.
The Fund is not affected by PSI's financial condition and is an entirely
separate legal entity from PSI, which has no beneficial ownership therein and
the Fund's assets which are held by State Street Bank and Trust Company, an
independent custodian, are separate and distinct from PSI.
PORTFOLIO TRANSACTIONS
Prudential Securities may act as a broker or futures commission merchant for
the Fund, provided that the commissions, fees or other remuneration it receives
are fair and reasonable. See "Portfolio Transactions and Brokerage" in the
Statement of Additional Information.
CUSTODIAN AND TRANSFER AND DIVIDEND DISBURSING AGENT
State Street Bank and Trust Company, One Heritage Drive, North Quincy,
Massachusetts 02171, serves as Custodian for the portfolio securities of the
Series and cash and, in that capacity, maintains certain financial and
accounting books and records pursuant to an agreement with the Fund. Its mailing
address is P.O. Box 1713, Boston, Massachusetts 02105.
Prudential Mutual Fund Services LLC (PMFS), Raritan Plaza One, Edison, New
Jersey 08837, serves as Transfer Agent and Dividend Disbursing Agent and, in
those capacities, maintains certain books and records for the Fund. PMFS is a
wholly-owned subsidiary of PIFM. Its mailing address is P.O. Box 15005, New
Brunswick, New Jersey 08906-5005.
18
<PAGE>
HOW THE FUND VALUES ITS SHARES
THE SERIES' NET ASSET VALUE PER SHARE OR NAV IS DETERMINED BY SUBTRACTING ITS
LIABILITIES FROM THE VALUE OF ITS ASSETS AND DIVIDING THE REMAINDER BY THE
NUMBER OF OUTSTANDING SHARES. NAV IS CALCULATED SEPARATELY FOR EACH CLASS. THE
TRUSTEES HAVE FIXED THE SPECIFIC TIME OF DAY FOR THE COMPUTATION OF THE NET
ASSET VALUE OF THE SERIES TO BE AS OF 4:15 P.M., NEW YORK TIME.
Portfolio securities are valued based on market quotations or, if not readily
available, at fair value as determined in good faith under procedures
established by the Trustees. Securities may also be valued based on values
provided by a pricing service. See "Net Asset Value" in the Statement of
Additional Information.
The Series will compute its NAV once daily on days that the New York Stock
Exchange is open for trading except on days on which no orders to purchase, sell
or redeem shares have been received by the Series or days on which changes in
value of the Series' portfolio securities do not materially affect the NAV.
Although the legal rights of each class of shares are substantially identical,
the different expenses borne by each class will result in different dividends.
As long as the Series declares dividends daily, the NAV of the Class A, Class B,
Class C and Class Z shares will generally be the same. It is expected, however,
that the Series' dividends will differ by approximately the amount of any
distribution and/or service fee expense accrual differential among the classes.
HOW THE FUND CALCULATES PERFORMANCE
FROM TIME TO TIME THE FUND MAY ADVERTISE THE YIELD, TAX EQUIVALENT YIELD AND
AVERAGE ANNUAL TOTAL RETURN AND AGGREGATE TOTAL RETURN OF THE SERIES IN
ADVERTISEMENTS OR SALES LITERATURE. YIELD, TAX EQUIVALENT YIELD AND TOTAL RETURN
ARE CALCULATED SEPARATELY FOR CLASS A, CLASS B, CLASS C AND CLASS Z SHARES.
THESE FIGURES ARE BASED ON HISTORICAL EARNINGS AND ARE NOT INTENDED TO INDICATE
FUTURE PERFORMANCE. The yield refers to the income generated by an investment in
the Series over a one-month or 30-day period. This income is then annualized;
that is, the amount of income generated by the investment during that 30-day
period is assumed to be generated each 30-day period for twelve periods and is
shown as a percentage of the investment. The income earned on the investment is
also assumed to be reinvested at the end of the sixth 30-day period. The tax
equivalent yield is calculated similarly to the yield, except that the yield is
increased using a stated income tax rate to demonstrate the taxable yield
necessary to produce an after-tax yield equivalent to the Series. The total
return shows how much an investment in the Series would have increased
(decreased) over a specified period of time (I.E., one, five or ten years or
since inception of the Series) assuming that all distributions and dividends by
the Series were reinvested on the reinvestment dates during the period and less
all recurring fees. The aggregate total return reflects actual performance over
a stated period of time. Average annual total return is a hypothetical rate of
return that, if achieved annually, would have produced the same aggregate total
return if performance had been constant over the entire period. Average annual
total return smooths out variations in performance and takes into account any
applicable initial or contingent deferred sales charges. Neither average annual
total return nor aggregate total return takes into account any federal or state
income taxes which may be payable upon redemption. The Fund also may include
comparative performance information in advertising or marketing the shares of
the Series. Such performance information may include data from Lipper Analytical
Services, Inc., Morningstar Publications, Inc., other industry publications,
business periodicals and market indices. See "Performance Information" in the
Statement of Additional Information. Further performance information is
contained in the Series' annual and semi-annual reports to shareholders, which
may be obtained without charge. See "Shareholder Guide--Shareholder
Services--Reports to Shareholders."
19
<PAGE>
TAXES, DIVIDENDS AND DISTRIBUTIONS
TAXATION OF THE FUND
THE SERIES HAS ELECTED TO QUALIFY AND INTENDS TO REMAIN QUALIFIED AS A
REGULATED INVESTMENT COMPANY UNDER THE INTERNAL REVENUE CODE. ACCORDINGLY, THE
SERIES WILL NOT BE SUBJECT TO FEDERAL INCOME TAXES ON ITS NET INVESTMENT INCOME
AND NET CAPITAL GAINS, IF ANY, THAT IT DISTRIBUTES TO ITS SHAREHOLDERS. TO THE
EXTENT NOT DISTRIBUTED BY THE SERIES, NET TAXABLE INVESTMENT INCOME AND CAPITAL
GAINS AND LOSSES ARE TAXABLE TO THE SERIES.
To the extent the Series invests in taxable obligations, it will earn taxable
investment income. Also, to the extent the Series engages in hedging
transactions in futures contracts and options thereon, it may earn both
short-term and long-term capital gain or loss. Under the Internal Revenue Code,
special rules apply to the treatment of certain options and futures contracts
(Section 1256 contracts). At the end of each year, such investments held by the
Series will be required to be "marked to market" for federal income tax
purposes; that is, treated as having been sold at market value. Sixty percent of
any gain or loss recognized on these "deemed sales" and on actual dispositions
will be treated as long-term capital gain or loss, and the remainder will be
treated as short-term capital gain or loss. See "Distributions and Tax
Information" in the Statement of Additional Information.
Gain or loss realized by the Series from the sale of securities generally will
be treated as capital gain or loss; however, gain from the sale of certain
securities (including municipal obligations) will be treated as ordinary income
to the extent of any "market discount." Market discount generally is the
difference, if any, between the price paid by the Series for the security and
the principal amount of the security (or, in the case of a security issued at an
original issue discount, the revised issue price of the security). The market
discount rule does not apply to any security that was acquired by the Series at
its original issue. See "Distributions and Tax Information" in the Statement of
Additional Information.
TAXATION OF SHAREHOLDERS
In general, the character of tax-exempt interest distributed by the Series
will flow through as tax-exempt interest to its shareholders provided that 50%
or more of the value of its assets at the end of each quarter of its taxable
year is invested in state, municipal and other obligations, the interest on
which is excluded from gross income for federal income tax purposes. During
normal market conditions, at least 80% of the Series' total assets will be
invested in such obligations. See "How the Fund Invests--Investment Objective
and Policies."
Any dividends out of net taxable investment income, together with
distributions of net short-term gains (I.E., the excess of net short-term
capital gains over net long-term capital losses) distributed to shareholders,
will be taxable as ordinary income to the shareholder whether or not reinvested.
Any net capital gains (I.E., the excess of net capital gains from the sale of
assets held for more than 12 months over net short-term capital losses)
distributed to shareholders will be taxable as capital gains to the
shareholders, whether or not reinvested and regardless of the length of time a
shareholder has owned his or her shares. The maximum capital gains rate for
individuals is 28% with respect to assets held for more than 12 months, but not
more than 18 months, and 20% with respect to assets held for more than 18
months. The maximum capital gains rate for corporate shareholders currently is
the same as the maximum tax rate for ordinary income.
Any gain or loss realized upon a sale or redemption of Series shares by a
shareholder who is not a dealer in securities will be treated as capital gain or
loss. In the case of an individual, any such capital gain will be treated as
short-term capital loss if the shares were held for not more than 12 months,
mid-term gain, taxable at the maximum rate of 28%, if such shares were held for
more than 12, but not more than 18 months, and long-term capital gain, taxable
at the maximum rate of 20%, if such shares were held for more than 18 months. In
the case of a corporation, any such capital gain will be treated as long-term
capital gain, taxable at the same rates as ordinary income, if such shares were
held for more than 12 months. Any such capital loss will be treated as long-term
capital loss if the shares have been held more than one year and otherwise as
short-term capital loss. Any such loss
20
<PAGE>
with respect to shares that are held for six months or less, however, will be
treated as long-term capital loss to the extent of any capital gain
distributions received by the shareholder. In addition, any short-term capital
loss will be disallowed to the extent of any tax-exempt dividends received by
the shareholder on shares that are held for six months or less.
The Fund has obtained opinions of counsel to the effect that neither (i) the
conversion of Class B shares into Class A shares nor (ii) the exchange of Class
B or Class C shares for Class A shares constitutes a taxable event for federal
income tax purposes. However, such opinions are not binding on the Internal
Revenue Service.
CERTAIN INVESTORS MAY INCUR FEDERAL ALTERNATIVE MINIMUM TAX LIABILITY AS A
RESULT OF THEIR INVESTMENT IN THE FUND. Tax-exempt interest from certain
municipal obligations (I.E., certain private activity bonds issued after August
7, 1986) will be treated as an item of tax preference for purposes of the
alternative minimum tax. The Fund anticipates that, under regulations to be
promulgated, items of tax preference incurred by the Series will be attributed
to the Series' shareholders, although some portion of such items could be
allocated to the Series itself. Depending upon each shareholder's individual
circumstances, the attribution of items of tax preference incurred by the Series
could result in liability for the shareholder for the alternative minimum tax.
Similarly, the Series could be liable for the alternative minimum tax for items
of tax preference attributed to it. The Series is permitted to invest in
municipal obligations of the type that will produce items of tax preference.
Corporate shareholders in the Series also will have to take into account the
adjustment for current earnings for alternative minimum tax purposes. Corporate
shareholders should consult with their tax advisers with respect to this
potential adjustment.
Under Massachusetts law, dividends paid by the Series are exempt from
Massachusetts personal income tax for individuals and other noncorporate
shareholders resident in Massachusetts to the extent such dividends are excluded
from gross income for federal income tax purposes and are derived from interest
payments on Massachusetts Obligations or are capital gain dividends for federal
income tax purposes and are derived from long-term capital gains on certain
Massachusetts Obligations.
Shareholders are advised to consult their own tax advisers regarding specific
questions as to federal, state or local taxes. See "Distributions and Tax
Information" in the Statement of Additional Information.
WITHHOLDING TAXES
Under the Internal Revenue Code, the Series is required to withhold and remit
to the U.S. Treasury 31% of redemption proceeds on the accounts of certain
shareholders who fail to furnish their tax identification numbers on IRS Form
W-9 (or IRS Form W-8 in the case of certain foreign shareholders) with the
required certifications regarding the shareholder's status under the federal
income tax law. Such withholding is also required on taxable dividends and
capital gain distributions made by the Series unless it is reasonably expected
that at least 95% of the distributions of the Series are comprised of tax-exempt
dividends.
Dividends of net taxable investment income and distributions of net short-term
capital gains paid to a shareholder (including a shareholder acting as a nominee
or fiduciary) who is a nonresident alien individual, a foreign corporation or a
foreign partnership (foreign shareholder) are subject to a 30% (or lower treaty
rate) withholding tax upon the gross amount of the dividends unless the
dividends are effectively connected with a U.S. trade or business conducted by
the foreign shareholder. Capital gain dividends paid to a foreign shareholder
are generally not subject to withholding tax. A foreign shareholder will,
however, be required to pay U.S. income tax on any dividends and capital gain
distributions which are effectively connected with a U.S. trade or business of
the foreign shareholder.
DIVIDENDS AND DISTRIBUTIONS
THE SERIES EXPECTS TO DECLARE DAILY AND PAY MONTHLY DIVIDENDS OF NET
INVESTMENT INCOME, IF ANY, AND MAKE DISTRIBUTIONS AT LEAST ANNUALLY OF ANY
CAPITAL GAINS IN EXCESS OF CAPITAL LOSSES. Dividends paid by the Series with
respect to each class of shares, to the extent any dividends are paid, will be
calculated in the same manner, at the same time, on the same day and will be in
the same amount except that each class other than Class Z will bear its own
distribution charges, generally
21
<PAGE>
resulting in lower dividends for Class B and Class C shares in relation to Class
A and Class Z shares and lower dividends for Class A shares in relation to Class
Z shares. Distributions of net capital gains, if any, will be paid in the same
amount for each class of shares. See "How the Fund Values its Shares."
DIVIDENDS AND DISTRIBUTIONS WILL BE PAID IN ADDITIONAL SHARES OF THE SERIES
BASED ON THE NAV OF EACH CLASS OF THE SERIES ON THE PAYMENT DATE AND RECORD
DATE, RESPECTIVELY, OR SUCH OTHER DATE AS THE TRUSTEES MAY DETERMINE, UNLESS THE
SHAREHOLDER ELECTS IN WRITING NOT LESS THAN FIVE BUSINESS DAYS PRIOR TO THE
RECORD DATE TO RECEIVE SUCH DIVIDENDS AND DISTRIBUTIONS IN CASH. Such election
should be submitted to Prudential Mutual Fund Services LLC, Attention: Account
Maintenance, P.O. Box 15015, New Brunswick, New Jersey 08906-5015. If you hold
shares through Prudential Securities, you should contact your financial adviser
to elect to receive dividends and distributions in cash. The Fund will notify
each shareholder after the close of the Fund's taxable year of both the dollar
amount and the taxable status of that year's dividends and distributions on a
per share basis.
GENERAL INFORMATION
DESCRIPTION OF SHARES
THE FUND WAS ESTABLISHED AS A MASSACHUSETTS BUSINESS TRUST ON MAY 18, 1984, BY
A DECLARATION OF TRUST. The Fund's activities are supervised by its Trustees.
The Declaration of Trust permits the Trustees to issue an unlimited number of
full and fractional shares in separate series, currently designated as the
Connecticut Money Market Series, Florida Series, Maryland Series, Massachusetts
Series, Massachusetts Money Market Series, Michigan Series, New Jersey Series,
New Jersey Money Market Series, New York Series, New York Money Market Series,
North Carolina Series, Ohio Series and Pennsylvania Series. The Series is
authorized to issue an unlimited number of shares, divided into four classes,
designated Class A, Class B, Class C and Class Z. Each class of shares
represents an interest in the same assets of the Series, and is identical in all
respects except that (i) each class 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 "How the Fund is Managed--Distributor." In
accordance with the Fund's Declaration of Trust, the Trustees may authorize the
creation of additional series and classes within such series, with such
preferences, privileges, limitations and voting and dividend rights as the
Trustees may determine.
Shares of the Fund, when issued, are fully paid, nonassessable, fully
transferable and redeemable at the option of the holder. Shares are also
redeemable at the option of the Fund under certain circumstances as described
under "Shareholder Guide--How to Sell Your Shares." Each share of each class of
the Series is equal as to earnings, assets and voting privileges, except as
noted above, and each class (with the exception of Class Z shares, which are not
subject to any distribution or service fees) bears the expenses related to the
distribution of its shares. Except for the conversion feature applicable to the
Class B shares, there are no conversion, preemptive or other subscription
rights. In the event of liquidation, each share of beneficial interest of each
series is entitled to its portion of all of the Fund's assets after all debt and
expenses of the Fund have been paid. Since Class B and Class C shares generally
bear higher distribution expenses than Class A shares, the liquidation proceeds
to shareholders of those classes are likely to be lower than to Class A
shareholders and to Class Z shareholders, whose shares are not subject to any
distribution and/or service fees. The Fund's shares do not have cumulative
voting rights for the election of Trustees.
THE FUND DOES NOT INTEND TO HOLD ANNUAL MEETINGS OF SHAREHOLDERS UNLESS
OTHERWISE REQUIRED BY LAW. THE FUND WILL NOT BE REQUIRED TO HOLD MEETINGS OF
SHAREHOLDERS UNLESS, FOR EXAMPLE, THE ELECTION OF TRUSTEES IS REQUIRED TO BE
ACTED
22
<PAGE>
UPON BY SHAREHOLDERS UNDER THE INVESTMENT COMPANY ACT. SHAREHOLDERS HAVE CERTAIN
RIGHTS, INCLUDING THE RIGHT TO CALL A MEETING UPON A VOTE OF 10% OF THE FUND'S
OUTSTANDING SHARES FOR THE PURPOSE OF VOTING ON THE REMOVAL OF ONE OR MORE
TRUSTEES OR TO TRANSACT ANY OTHER BUSINESS.
The Declaration of Trust and the By-Laws of the Fund are designed to make the
Fund similar in certain respects to a Massachusetts business corporation. The
principal distinction between a Massachusetts business corporation and a
Massachusetts business trust relates to shareholder liability. Under
Massachusetts law, shareholders of a business trust may, under certain
circumstances, be held personally liable as partners for the obligations of the
fund, which is not the case with a corporation. The Declaration of Trust of the
Fund provides that shareholders shall not be subject to any personal liability
for the acts or obligations of the Fund and that every written obligation,
contract, instrument or undertaking made by the Fund shall contain a provision
to the effect that the shareholders are not individually bound thereunder.
ADDITIONAL INFORMATION
This Prospectus, including the Statement of Additional Information which has
been incorporated by reference herein, does not contain all the information set
forth in the Registration Statement filed by the Fund with the SEC under the
Securities Act. Copies of the Registration Statement may be obtained at a
reasonable charge from the SEC or may be examined, without charge, at the office
of the SEC in Washington, D.C.
SHAREHOLDER GUIDE
HOW TO BUY SHARES OF THE FUND
YOU MAY PURCHASE SHARES OF THE SERIES THROUGH PRUDENTIAL SECURITIES, PRUSEC OR
DIRECTLY FROM THE FUND, THROUGH ITS TRANSFER AGENT, PRUDENTIAL MUTUAL FUND
SERVICES LLC (PMFS OR THE TRANSFER AGENT), ATTENTION: INVESTMENT SERVICES, P.O.
BOX 15020, NEW BRUNSWICK, NEW JERSEY 08906-5020. Participants in programs
sponsored by Prudential Retirement Services should contact their client
representative for more information about Class Z shares. The purchase price is
the NAV next determined following receipt of an order in proper form by the
Transfer Agent or Prudential Securities plus a sales charge which, at your
option, may be imposed either (i) at the time of purchase (Class A shares) or
(ii) on a deferred basis (Class B or Class C shares). Class Z shares are offered
to a limited group of investors at net asset value without any sales charge.
Payment may be made by wire, check or through your brokerage account. See
"Alternative Purchase Plan" below. See also "How the Fund Values its Shares."
An investment in the Series may not be appropriate for tax-exempt or
tax-deferred investors. Such investors should consult their own tax advisers.
The minimum initial investment is $1,000 for Class A and Class B shares and
$5,000 for Class C shares except that the minimum investment for Class C shares
may be waived from time to time. The minimum subsequent investment is $100 for
Class A, Class B and Class C shares. Class Z shares are not subject to any
minimum investment requirements. All minimum investment requirements are waived
for certain employee savings plans. For purchases made through the Automatic
Savings Accumulation Plan, the minimum initial and subsequent investment is $50.
See "Shareholder Services" below.
Application forms can be obtained from PMFS, Prudential Securities or Prusec.
If a share certificate is desired, it must be requested in writing for each
transaction. Certificates are issued only for full shares. Shareholders who hold
their shares through Prudential Securities will not receive share certificates.
The Fund reserves the right to reject any purchase order (including an
exchange into the Series) or to suspend or modify the continuous offering of its
shares. See "How to Sell Your Shares" below.
23
<PAGE>
Your dealer is responsible for forwarding payment promptly to the Fund. The
Distributor reserves the right to cancel any purchase order for which payment
has not been received by the third business day following the investment.
Transactions in shares of the Series may be subject to postage and handling
charges imposed by your dealer.
PURCHASE BY WIRE. For an initial purchase of shares of the Series by wire, you
must first telephone PMFS at (800) 225-1852 (toll-free) to receive an account
number. The following information will be requested: your name, address, tax
identification number, class election, dividend distribution election, amount
being wired and wiring bank. Instructions should then be given by you to your
bank to transfer funds by wire to State Street Bank and Trust Company (State
Street), Boston, Massachusetts, Custody and Shareholder Services Division,
Attention: Prudential Municipal Series Fund (Massachusetts Series), specifying
on the wire the account number assigned by PMFS and your name and identifying
the class in which you are eligible to invest (Class A, Class B, Class C or
Class Z shares).
If you arrange for receipt by State Street of Federal Funds prior to the
calculation of NAV (4:15 P.M., New York time), on a business day, you may
purchase shares of the Series as of that day. See "Net Asset Value" in the
Statement of Additional Information.
In making a subsequent purchase order by wire, you should wire State Street
directly and should be sure that the wire specifies Prudential Municipal Series
Fund (Massachusetts Series), Class A, Class B, Class C or Class Z shares and
your name and individual account number. It is not necessary to call PMFS to
make subsequent purchase orders utilizing Federal Funds. The minimum amount
which may be invested by wire is $1,000.
ALTERNATIVE PURCHASE PLAN
THE SERIES OFFERS THROUGH THIS PROSPECTUS FOUR CLASSES OF SHARES (CLASS A,
CLASS B, CLASS C AND CLASS Z SHARES) WHICH ALLOWS YOU TO CHOOSE THE MOST
BENEFICIAL SALES CHARGE STRUCTURE FOR YOUR INDIVIDUAL CIRCUMSTANCES, GIVEN THE
AMOUNT OF THE PURCHASE, THE LENGTH OF TIME YOU EXPECT TO HOLD THE SHARES AND
OTHER RELEVANT CIRCUMSTANCES (ALTERNATIVE PURCHASE PLAN).
<TABLE>
<CAPTION>
ANNUAL 12b-1 FEES
(AS A % OF AVERAGE
SALES CHARGE DAILY NET ASSETS) OTHER INFORMATION
----------------------------------- ----------------------------------- -----------------------------------
<S> <C> <C> <C>
CLASS A Maximum initial sales charge of 3% .30 of 1% (currently being charged Initial sales charge waived or
of the public offering price at a rate of .10 of 1%) reduced for certain purchases
CLASS B Maximum contingent deferred sales .50 of 1% Shares convert to Class A shares
charge or CDSC of 5% of the lesser approximately seven years after
of the amount invested or the purchase
redemption proceeds; declines to
zero after six years
CLASS C Maximum CDSC of 1% of the lesser of 1% (currently being charged at a Shares do not convert to another
the amount invested or the rate of .75 of 1%) class
redemption proceeds on redemptions
made within one year of purchase
CLASS Z None None Sold to a limited group of
investors
</TABLE>
The four classes of shares represent an interest in the same portfolio of
investments of the Series and have the same rights, except that (i) each class
(with the exception of Class Z shares, which are not subject to any distribution
or service fees) bears the separate expenses of its Rule 12b-1 distribution and
service plan, (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, and (iii)
only Class B shares have a
24
<PAGE>
conversion feature. The four classes also have separate exchange privileges. See
"How to Exchange Your Shares" below. The income attributable to each class and
the dividends payable on the shares of each class will be reduced by the amount
of the distribution fee, if any, of each class. Class B and Class C shares bear
the expenses of a higher distribution fee which will generally cause them to
have higher expense ratios and to pay lower dividends than the Class A and Class
Z shares.
Financial advisers and other sales agents who sell shares of the Series will
receive different compensation for selling Class A, Class B and Class C shares
and will generally receive more compensation initially for selling Class A and
Class B shares than for selling Class C shares.
IN SELECTING A PURCHASE ALTERNATIVE, YOU SHOULD CONSIDER, AMONG OTHER THINGS,
(1) the length of time you expect to hold your investment, (2) the amount of any
applicable sales charge (whether imposed at the time of purchase or redemption)
and distribution-related fees, as noted above, (3) whether you qualify for any
reduction or waiver of any applicable sales charge, (4) the various exchange
privileges among the different classes of shares (see "How to Exchange Your
Shares" below) and (5) the fact that Class B shares automatically convert to
Class A shares approximately seven years after purchase (see "Conversion
Feature--Class B Shares" below).
The following is provided to assist you in determining which method of
purchase best suits your individual circumstances and is based on current fees
and expenses being charged to the Series:
If you intend to hold your investment in the Series for less than 5 years and
do not qualify for a reduced sales charge on Class A shares, since Class A
shares are subject to a maximum initial sales charge of 3% and Class B shares
are subject to a CDSC of 5% which declines to zero over a 6 year period, you
should consider purchasing Class C shares over either Class A or Class B shares.
If you intend to hold your investment for 5 years or more and do not qualify
for a reduced sales charge on Class A shares, since Class B shares convert to
Class A shares approximately 7 years after purchase and because all of your
money would be invested initially in the case of Class B shares, you should
consider purchasing Class B shares over either Class A or Class C shares.
If you qualify for a reduced sales charge on Class A shares, it may be more
advantageous for you to purchase Class A shares over either Class B or Class C
shares regardless of how long you intend to hold your investment. However,
unlike Class B and Class C shares, you would not have all of your money invested
initially because the sales charge on Class A shares is deducted at the time of
purchase.
If you do not qualify for a reduced sales charge on Class A shares and you
purchase Class C shares, you would have to hold your investment for more than 4
years for the higher cumulative annual distribution-related fee on those shares
to exceed the initial sales charge plus cumulative annual distribution-related
fee on Class A shares. This does not take into account the time value of money,
which further reduces the impact of the higher Class C distribution-related fee
on the investment, fluctuations in net asset value, the effect of the return on
investment over this period of time or redemptions when the CDSC is applicable.
ALL PURCHASES OF $1 MILLION OR MORE, EITHER AS PART OF A SINGLE INVESTMENT OR
UNDER RIGHTS OF ACCUMULATION OR LETTERS OF INTENT, MUST BE FOR CLASS A SHARES
UNLESS THE PURCHASER IS ELIGIBLE TO PURCHASE CLASS Z SHARES. See "Reduction and
Waiver of Initial Sales Charges" and "Class Z Shares" below.
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<PAGE>
CLASS A SHARES
The offering price of Class A shares for investors choosing the initial sales
charge alternative is the next determined NAV plus a sales charge (expressed as
a percentage of the offering price and of the amount invested) as shown in the
following table:
<TABLE>
<CAPTION>
SALES CHARGE AS SALES CHARGE AS DEALER CONCESSION
PERCENTAGE OF PERCENTAGE OF AS PERCENTAGE OF
AMOUNT OF PURCHASE OFFERING PRICE AMOUNT INVESTED OFFERING PRICE
- --------------------------------------- --------------- --------------- -----------------
<S> <C> <C> <C>
Less than $99,999 3.00% 3.09% 3.00%
$100,000 to $249,999 2.50 2.56 2.50
$250,000 to $499,999 1.50 1.52 1.50
$500,000 to $999,999 1.00 1.01 1.00
$1,000,000 and above None None None
</TABLE>
The Distributor may reallow the entire initial sales charge to dealers.
Selling dealers may be deemed to be underwriters, as that term is defined in the
Securities Act.
In connection with the sale of Class A shares at NAV (without payment of an
initial sales charge), the Manager, the Distributor or one of their affiliates
will pay dealers, financial advisers and other persons which distribute shares a
finders' fee from its own resources based on a percentage of the net asset value
of shares sold by such persons.
REDUCTION AND WAIVER OF INITIAL SALES CHARGES. Reduced sales charges are
available through Rights of Accumulation and Letters of Intent. Shares of the
Fund and shares of other Prudential Mutual Funds (excluding money market funds
other than those acquired pursuant to the exchange privilege) may be aggregated
to determine the applicable reduction. See "Purchase and Redemption of Fund
Shares--Reduction and Waiver of Initial Sales Charges--Class A Shares" in the
Statement of Additional Information.
PRUARRAY SAVINGS PROGRAM. Class A shares are also offered at net asset value
to employees of companies that enter into a written agreement with Prudential
Retirement Services to participate in the PruArray Savings Program. Under this
Program, a limited number of Prudential Mutual Funds are available for purchase
at net asset value by Savings Accumulation Plans of the company's employees. The
Program is available only to employees who open a Savings Accumulation Plan
account with the Transfer Agent. The program is offered to companies that have
at least 250 eligible employees.
SPECIAL RULES APPLICABLE TO RETIREMENT PLANS. After a PruArray Plan qualifies
to purchase Class A shares at NAV, all subsequent purchases will be made at NAV.
OTHER WAIVERS. Class A shares may be purchased at NAV, through Prudential
Securities or the Transfer Agent, by the following persons: (a) officers and
current and former Directors/Trustees of the Prudential Mutual Funds (including
the Fund), (b) employees of Prudential Securities and PIFM and their
subsidiaries and members of the families of such persons who maintain an
"employee related" account at Prudential Securities or the Transfer Agent, (c)
employees of subadvisers of the Prudential Mutual Funds provided that the
purchases at NAV are permitted by such person's employer, (d) Prudential
employees and special agents of Prudential and its subsidiaries and all persons
who have retired directly from active service with Prudential or one of its
subsidiaries, (e) registered representatives and employees of dealers who have
entered into a selected dealer agreement with Prudential Securities provided
that purchases at NAV are permitted by such person's employer and (f) investors
who have a business relationship with a financial adviser who joined Prudential
Securities from another investment firm, provided that (i) the purchase is made
within 180 days of the commencement of the financial adviser's employment at
Prudential Securities or within one year in the case of benefit plans, (ii) the
purchase is made with proceeds of a redemption of shares of any open-end
non-money market fund sponsored by the financial adviser's previous employer
(other than a fund which imposes a distribution or service fee of .25 of 1% or
less) and (iii) the financial adviser served as the client's broker on the
previous purchases.
You must notify the Transfer Agent either directly or through Prudential
Securities or Prusec that you are entitled to the reduction or waiver of the
sales charge. The reduction or waiver will be granted subject to confirmation of
your entitlement. No
26
<PAGE>
initial sales charges are imposed upon Class A shares acquired upon the
reinvestment of dividends and distributions. See "Purchase and Redemption of
Fund Shares--Reduction and Waiver of Initial Sales Charges--Class A Shares" in
the Statement of Additional Information.
CLASS B AND CLASS C SHARES
The offering price of Class B and Class C shares for investors choosing one of
the deferred sales charge alternatives is the NAV next determined following
receipt of an order by the Transfer Agent or Prudential Securities. Although
there is no sales charge imposed at the time of purchase, redemptions of Class B
and Class C shares may be subject to a CDSC. See "How to Sell Your
Shares--Contingent Deferred Sales Charges" below. The Distributor will pay sales
commissions of up to 4% of the purchase price of Class B shares to dealers,
financial advisers and other persons who sell Class B shares at the time of sale
from its own resources. This facilitates the ability of the Fund to sell the
Class B shares without an initial sales charge being deducted at the time of
purchase. The Distributor anticipates that it will recoup its advancement of
sales commissions from the combination of the CDSC and the distribution fee. See
"How the Fund is Managed--Distributor." In connection with the sale of Class C
shares, the Distributor will pay dealers, financial advisers and other persons
which distribute Class C shares a sales commission of up to 1% of the purchase
price at the time of the sale.
CLASS Z SHARES
Class Z shares of the Fund are available for purchase by the following
categories of investors:
(i) participants in any fee-based program or trust program sponsored by
Prudential Securities, The Prudential Savings Bank F.S.B. (or any affiliate)
which includes mutual funds as investment options and for which the Fund is an
available option; (ii) current and former Directors/Trustees of the Prudental
Mutual Funds (including the Fund); and (iii) employees of Prudential and/or
Prudential Securities who participate in a Prudential-sponsored employee saving
plan.
In connection with the sale of Class Z shares, the Manager, the Distributor or
one of their affiliates may pay dealers, financial advisers and other persons
which distribute shares a finders' fee based on a percentage of the net asset
value of shares sold by such persons.
HOW TO SELL YOUR SHARES
YOU CAN REDEEM YOUR SHARES OF THE SERIES AT ANY TIME FOR CASH AT THE NAV NEXT
DETERMINED AFTER THE REDEMPTION REQUEST IS RECEIVED IN PROPER FORM BY THE
TRANSFER AGENT OR PRUDENTIAL SECURITIES. SEE "HOW THE FUND VALUES ITS SHARES."
In certain cases, however, redemption proceeds will be reduced by the amount of
any applicable contingent deferred sales charge, as described below. See
"Contingent Deferred Sales Charges" below.
IF YOU HOLD SHARES OF THE SERIES THROUGH PRUDENTIAL SECURITIES, YOU MUST
REDEEM SHARES THROUGH PRUDENTIAL SECURITIES. PLEASE CONTACT YOUR PRUDENTIAL
SECURITIES FINANCIAL ADVISER.
If you hold shares in non-certificate form, a written request for redemption
signed by you exactly as the account is registered is required. If you hold
certificates, the certificates, signed in the name(s) shown on the face of the
certificates, must be received by the Transfer Agent in order for the redemption
request to be processed. If redemption is requested by a corporation,
partnership, trust or fiduciary, written evidence of authority acceptable to the
Transfer Agent must be submitted before such request will be accepted. All
correspondence and documents concerning redemptions should be sent to the Fund
in care of its Transfer Agent, Prudential Mutual Fund Services LLC, Attention:
Redemption Services, P.O. Box 15010, New Brunswick, New Jersey 08906-5010.
If the proceeds of the redemption (a) exceed $50,000, (b) are to be paid to a
person other than the record owner, (c) are to be sent to an address other than
the address on the Transfer Agent's records, or (d) are to be paid to a
corporation, partnership, trust or fiduciary, the signature(s) on the redemption
request and on the certificates, if any, or stock power must be guaranteed by an
"eligible guarantor institution." An "eligible guarantor institution" includes
any bank, broker, dealer or credit union. The Transfer
27
<PAGE>
Agent reserves the right to request additional information from, and make
reasonable inquiries of, any eligible guarantor institution. For clients of
Prusec, a signature guarantee may be obtained from the agency or office manager
of most Prudential Insurance and Financial Services or Preferred Services
offices.
PAYMENT FOR SHARES PRESENTED FOR REDEMPTION WILL BE MADE BY CHECK WITHIN SEVEN
DAYS AFTER RECEIPT BY THE TRANSFER AGENT OF THE CERTIFICATE AND/OR WRITTEN
REQUEST EXCEPT AS INDICATED BELOW. IF YOU HOLD SHARES THROUGH PRUDENTIAL
SECURITIES, PAYMENT FOR SHARES PRESENTED FOR REDEMPTION WILL BE CREDITED TO YOUR
PRUDENTIAL SECURITIES ACCOUNT, UNLESS YOU INDICATE OTHERWISE. Such payment may
be postponed or the right of redemption suspended at times (a) when the New York
Stock Exchange is closed for other than customary weekends and holidays, (b)
when trading on such Exchange is restricted, (c) when an emergency exists as a
result of which disposal by the Series of securities owned by it is not
reasonably practicable or it is not reasonably practicable for the Series fairly
to determine the value of its net assets, or (d) during any other period when
the SEC, by order, so permits; provided that applicable rules and regulations of
the SEC shall govern as to whether the conditions prescribed in (b), (c) or (d)
exist.
PAYMENT FOR REDEMPTION OF RECENTLY PURCHASED SHARES WILL BE DELAYED UNTIL THE
FUND OR ITS TRANSFER AGENT HAS BEEN ADVISED THAT THE PURCHASE CHECK HAS BEEN
HONORED, UP TO 10 CALENDAR DAYS FROM THE TIME OF RECEIPT OF THE PURCHASE CHECK
BY THE TRANSFER AGENT. SUCH DELAY MAY BE AVOIDED BY PURCHASING SHARES BY WIRE OR
BY CERTIFIED OR CASHIER'S CHECK.
REDEMPTION IN KIND. If the Trustees determine that it would be detrimental to
the best interests of the remaining shareholders of the Fund to make payment
wholly or partly in cash, the Fund may pay the redemption price in whole or in
part by a distribution in kind of securities from the investment portfolio of
the Series of the Fund, in lieu of cash, in conformity with applicable rules of
the SEC. Securities will be readily marketable and will be valued in the same
manner as in a regular redemption. See "How the Fund Values its Shares." If your
shares are redeemed in kind, you will incur transaction costs in converting the
assets into cash. The Fund, however, has elected to be governed by Rule 18f-1
under the Investment Company Act, under which the Fund is obligated to redeem
shares solely in cash up to the lesser of $250,000 or 1% of the net asset value
of the Fund during any 90-day period for any one shareholder.
INVOLUNTARY REDEMPTION. In order to reduce expenses of the Fund, the Trustees
may redeem all of the shares of any shareholder, other than a shareholder which
is an IRA or other tax-deferred retirement plan, whose account has a net asset
value of less than $500 due to a redemption. The Fund will give such
shareholders 60 days' prior written notice in which to purchase sufficient
additional shares to avoid such redemption. No contingent deferred sales charge
will be imposed on any such involuntary redemption.
90-DAY REPURCHASE PRIVILEGE. If you redeem your shares and have not previously
exercised the repurchase privilege, you may reinvest any portion or all of the
proceeds of such redemption in shares of the Series at the NAV next determined
after the order is received, which must be within 90 days after the date of the
redemption. Any CDSC paid in connection with such redemption will be credited
(in shares) to your account. (If less than a full repurchase is made, the credit
will be on a PRO RATA basis.) You must notify the Fund's Transfer Agent, either
directly or through Prudential Securities, at the time the repurchase privilege
is exercised to adjust your account for the CDSC you previously paid.
Thereafter, any redemptions will be subject to the CDSC applicable at the time
of the redemption. See "Contingent Deferred Sales Charges" below. Exercise of
the repurchase privilege may affect the federal tax treatment of any gain
realized upon redemption. See "Distributions and Tax Information" in the
Statement of Additional Information.
CONTINGENT DEFERRED SALES CHARGES
Redemptions of Class B shares will be subject to a contingent deferred sales
charge or CDSC declining from 5% to zero over a six-year period. Class C shares
redeemed within one year of purchase will be subject to a 1% CDSC. The CDSC will
be deducted from the redemption proceeds and reduce the amount paid to you. The
CDSC will be imposed on any redemption by you which reduces the current value of
your Class B or Class C shares of the Series to an amount which is lower than
the amount of all
28
<PAGE>
payments by you for shares during the preceding six years, in the case of Class
B shares, and one year, in the case of Class C shares. A CDSC will be applied on
the lesser of the original purchase price or the current value of the shares
being redeemed. Increases in the value of your shares or shares acquired through
reinvestment of dividends or distributions are not subject to a CDSC. The amount
of any contingent deferred sales charge will be paid to and retained by the
Distributor. See "How the Fund is Managed--Distributor" and "Waiver of the
Contingent Deferred Sales Charges--Class B Shares" below.
The amount of the CDSC, if any, will vary depending on the number of years
from the time of payment for the purchase of shares until the time of redemption
of such shares. Solely for purposes of determining the number of years from the
time of any payment for the purchase of shares, all payments during a month will
be aggregated and deemed to have been made on the last day of the month. The
CDSC will be calculated from the first day of the month after the initial
purchase, excluding the time shares were held in a money market fund. See "How
to Exchange Your Shares" below.
The following table sets forth the rates of the CDSC applicable to redemptions
of Class B shares:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED SALES
CHARGE AS A PERCENTAGE
YEAR SINCE PURCHASE OF DOLLARS INVESTED OR
PAYMENT MADE REDEMPTION PROCEEDS
- --------------------------------------- -------------------------
<S> <C>
First.................................. 5.0%
Second................................. 4.0
Third.................................. 3.0
Fourth................................. 2.0
Fifth.................................. 1.0
Sixth.................................. 1.0
Seventh................................ None
</TABLE>
In determining whether a CDSC is applicable to a redemption, the calculation
will be made in a manner that results in the lowest possible rate. It will be
assumed that the redemption is made first of amounts representing shares
acquired pursuant to the reinvestment of dividends and distributions; then of
amounts representing the increase in net asset value above the total amount of
payments for the purchase of Series shares made during the preceding six years
(five years for Class B shares purchased prior to January 22, 1990); then of
amounts representing the cost of shares held beyond the applicable CDSC period;
and finally, of amounts representing the cost of shares held for the longest
period of time within the applicable CDSC period.
For example, assume you purchased 100 Class B shares at $10 per share for a
cost of $1,000. Subsequently, you acquired 5 additional Class B shares through
dividend reinvestment. During the second year after the purchase you decided to
redeem $500 of your investment. Assuming at the time of the redemption the NAV
had appreciated to $12 per share, the value of your Class B shares would be
$1,260 (105 shares at $12 per share). The CDSC would not be applied to the value
of the reinvested dividend shares and the amount which represents appreciation
($260). Therefore, $240 of the $500 redemption proceeds ($500 minus $260) would
be charged at a rate of 4% (the applicable rate in the second year after
purchase) for a total CDSC of $9.60.
For federal income tax purposes, the amount of the CDSC will reduce the gain
or increase the loss, as the case may be, on the amount recognized on the
redemption of shares.
WAIVER OF THE CONTINGENT DEFERRED SALES CHARGES--CLASS B SHARES. The CDSC will
be waived in the case of a redemption following the death or disability of a
shareholder or, in the case of a trust account, following the death or
disability of the grantor. The waiver is available for total or partial
redemptions of shares owned by a person, either individually or in joint tenancy
(with rights of survivorship), at the time of death or initial determination of
disability, provided that the shares were purchased prior to death or
disability. In addition, the CDSC will be waived on redemptions of shares held
by a Trustee of the Fund.
SYSTEMATIC WITHDRAWAL PLAN. The CDSC will be waived (or reduced) on certain
redemptions from a Systematic Withdrawal Plan. On an annual basis, up to 12% of
the total dollar amount subject to the CDSC may be redeemed without charge. The
Transfer
29
<PAGE>
Agent will calculate the total amount available for this waiver annually on the
anniversary of your purchase or, for shares purchased prior to March 1, 1997, on
March 1 of the current year. The CDSC will be waived (or reduced) on redemptions
until this threshold 12% amount is reached.
You must notify the Fund's Transfer Agent either directly or through
Prudential Securities or Prusec, at the time of redemption, that you are
entitled to waiver of the CDSC and provide the Transfer Agent with such
supporting documentation as it may deem appropriate. The waiver will be granted
subject to confirmation of your entitlement. See "Purchase and Redemption of
Fund Shares--Waiver of the Contingent Deferred Sales Charge--Class B Shares" in
the Statement of Additional Information.
A quantity discount may apply to redemptions of Class B shares purchased prior
to August 1, 1994. See "Purchase and Redemption of Fund Shares--Quantity
Discount--Class B Shares Purchased Prior to August 1, 1994" in the Statement of
Additional Information.
CONVERSION FEATURE--CLASS B SHARES
Class B shares will automatically convert to Class A shares on a quarterly
basis approximately seven years after purchase. Conversions will be effected at
relative net asset value without the imposition of any additional sales charge.
Since the Fund tracks amounts paid rather than the number of shares bought on
each purchase of Class B shares, the number of Class B shares eligible to
convert to Class A shares (excluding shares acquired through the automatic
reinvestment of dividends and other distributions) (the Eligible Shares) will be
determined on each conversion date in accordance with the following formula: (i)
the ratio of (a) the amounts paid for Class B shares purchased at least seven
years prior to the conversion date to (b) the total amount paid for all Class B
shares purchased and then held in your account (ii) multiplied by the total
number of Class B shares purchased and then held in your account. Each time any
Eligible Shares in your account convert to Class A shares, all shares or amounts
representing Class B shares then in your account that were acquired through the
automatic reinvestment of dividends and other distributions will convert to
Class A shares.
For purposes of determining the number of Eligible Shares, if the Class B
shares in your account on any conversion date are the result of multiple
purchases at different net asset values per share, the number of Eligible Shares
calculated as described above will generally be either more or less than the
number of shares actually purchased approximately seven years before such
conversion date. For example, if 100 shares were initially purchased at $10 per
share (for a total of $1,000) and a second purchase of 100 shares was
subsequently made at $11 per share (for a total of $1,100), 95.24 shares would
convert approximately seven years from the initial purchase (i.e., $1,000
divided by $2,100 (47.62%) multiplied by 200 shares equals 95.24 shares). The
Manager reserves the right to modify the formula for determining the number of
Eligible Shares in the future as it deems appropriate on notice to shareholders.
Since annual distribution-related fees are lower for Class A shares than Class
B shares, the per share net asset value of the Class A shares may be higher than
that of the Class B shares at the time of conversion. Thus, although the
aggregate dollar value will be the same, you may receive fewer Class A shares
than Class B shares converted. See "How the Fund Values its Shares."
For purposes of calculating the applicable holding period for conversions, all
payments for Class B shares during a month will be deemed to have been made on
the last day of the month, or for Class B shares acquired through exchange or a
series of exchanges, on the last day of the month in which the original payment
for purchases of such Class B shares was made. For Class B shares previously
exchanged for shares of a money market fund, the time period during which such
shares were held in the money market fund will be excluded. For example, Class B
shares held in a money market fund for one year will not convert to Class A
shares until approximately eight years from purchase. For purposes of measuring
the time period during which shares are held in a money market fund, exchanges
will be deemed to have been made on the last day of the month. Class B shares
acquired through exchange will convert to Class A shares after expiration of the
conversion period applicable to the original purchase of such shares.
The conversion feature may be subject to the continuing availability of
opinions of counsel or rulings of the Internal Revenue Service (i) that the
dividends and other distributions paid on Class A, Class B, Class C and Class Z
shares will not constitute
30
<PAGE>
"preferential dividends" under the Internal Revenue Code and (ii) that the
conversion of shares does not constitute a taxable event. The conversion of
Class B shares into Class A shares may be suspended if such opinions or rulings
are no longer available. If conversions are suspended, Class B shares of the
Series will continue to be subject, possibly indefinitely, to their higher
annual distribution and service fee.
HOW TO EXCHANGE YOUR SHARES
AS A SHAREHOLDER OF THE SERIES, YOU HAVE AN EXCHANGE PRIVILEGE WITH THE OTHER
SERIES OF THE FUND AND CERTAIN OTHER PRUDENTIAL MUTUAL FUNDS (THE EXCHANGE
PRIVILEGE), INCLUDING ONE OR MORE SPECIFIED MONEY MARKET FUNDS, SUBJECT TO THE
MINIMUM INVESTMENT REQUIREMENTS OF SUCH FUNDS. CLASS A, CLASS B, CLASS C AND
CLASS Z SHARES OF THE SERIES MAY BE EXCHANGED FOR CLASS A, CLASS B, CLASS C AND
CLASS Z SHARES, RESPECTIVELY, OF THE OTHER SERIES OF THE FUND OR ANOTHER FUND ON
THE BASIS OF THE RELATIVE NAV. No sales charge will be imposed at the time of
the exchange. Any applicable CDSC payable upon the redemption of shares
exchanged will be calculated from the first day of the month after the initial
purchase, excluding the time shares were held in a money market fund. Class B
and Class C shares may not be exchanged into money market funds other than
Prudential Special Money Market Fund, Inc. For purposes of calculating the
holding period applicable to the Class B conversion feature, the time period
during which Class B shares were held in a money market fund will be excluded.
See "Conversion Feature--Class B Shares" above. An exchange will be treated as a
redemption and purchase for tax purposes. See "Shareholder Investment
Account--Exchange Privilege" in the Statement of Additional Information.
IN ORDER TO EXCHANGE SHARES BY TELEPHONE, YOU MUST AUTHORIZE TELEPHONE
EXCHANGES ON YOUR INITIAL APPLICATION FORM OR BY WRITTEN NOTICE TO THE TRANSFER
AGENT AND HOLD SHARES IN NON-CERTIFICATE FORM. Thereafter, you may call the Fund
at (800) 225-1852 to execute a telephone exchange of shares, weekdays, except
holidays, between the hours of 8:00 A.M. and 6:00 P.M., New York time. For your
protection and to prevent fraudulent exchanges, your telephone call will be
recorded and you will be asked to provide your personal identification number. A
written confirmation of the exchange transaction will be sent to you. NEITHER
THE FUND NOR ITS AGENTS WILL BE LIABLE FOR ANY LOSS, LIABILITY OR COST WHICH
RESULTS FROM ACTING UPON INSTRUCTIONS REASONABLY BELIEVED TO BE GENUINE UNDER
THE FOREGOING PROCEDURES. All exchanges will be made on the basis of the
relative NAV of the two funds (or series) next determined after the request is
received in good order. The Exchange Privilege is available only in states where
the exchange may legally be made.
IF YOU HOLD SHARES THROUGH PRUDENTIAL SECURITIES, YOU MUST EXCHANGE YOUR
SHARES BY CONTACTING YOUR PRUDENTIAL SECURITIES FINANCIAL ADVISER.
IF YOU HOLD THE CERTIFICATES, THE CERTIFICATES, SIGNED IN THE NAME(S) SHOWN ON
THE FACE OF THE CERTIFICATES, MUST BE RETURNED IN ORDER FOR THE SHARES TO BE
EXCHANGED. SEE "HOW TO SELL YOUR SHARES" ABOVE.
You may also exchange shares by mail by writing to Prudential Mutual Fund
Services LLC, Attention: Exchange Processing, P.O. Box 15010, New Brunswick, New
Jersey 08906-5010.
IN PERIODS OF SEVERE MARKET OR ECONOMIC CONDITIONS, THE TELEPHONE EXCHANGE OF
SHARES MAY BE DIFFICULT TO IMPLEMENT AND YOU SHOULD MAKE EXCHANGES BY MAIL BY
WRITING TO PRUDENTIAL MUTUAL FUND SERVICES LLC, AT THE ADDRESS NOTED ABOVE.
SPECIAL EXCHANGE PRIVILEGE. A special exchange privilege is available for
shareholders who qualify to purchase Class A shares at NAV (see "Alternative
Purchase Plan--Class A Shares--Reduction and Waiver of Initial Sales Charges"
above) and for shareholders who qualify to purchase Class Z shares (see
"Alternative Purchase Plan--Class Z Shares" above). Under this exchange
privilege, amounts representing any Class B and Class C shares (which are not
subject to a CDSC) held in such a shareholder's account will be automatically
exchanged for Class A shares for shareholders who qualify to purchase Class A
Shares at NAV on a quarterly basis, unless the shareholder elects otherwise.
Similarly, shareholders who qualify to purchase Class Z shares will have their
Class B and Class C shares which are not subject to a CDSC and their Class A
shares exchanged for Class Z shares on a quarterly basis. Eligibility for this
exchange privilege will be calculated on the business day prior to the date of
the exchange. Amounts representing Class B or Class C shares which are not
subject to a CDSC include the following: (1)
31
<PAGE>
amounts representing Class B or Class C shares acquired pursuant to the
automatic reinvestment of dividends and distributions, (2) amounts representing
the increase in the net asset value above the total amount of payments for the
purchase of Class B or Class C shares and (3) amounts representing Class B or
Class C shares held beyond the applicable CDSC period. Class B and Class C
shareholders must notify the Transfer Agent either directly or through
Prudential Securities or Prusec that they are eligible for this special exchange
privilege.
Participants in any fee-based program for which the Fund is an available
option will have their Class A shares, if any, exchanged for Class Z shares when
they elect to have those assets become a part of the fee-based program. Upon
leaving the program (whether voluntarily or not), such Class Z shares (and, to
the extent provided for in the program, Class Z shares acquired through
participation in the program) will be exchanged for Class A shares at net asset
value.
The Exchange Privilege is not a right and may be suspended, modified or
terminated on 60 days' notice to shareholders.
FREQUENT TRADING. The Fund and the other Prudential Mutual Funds are not
intended to serve as vehicles for frequent trading in response to short-term
fluctuations in the market. Due to the disruptive effect that market timing
investment strategies and excessive trading can have on efficient portfolio
management, each Prudential Mutual Fund and the Fund reserves the right to
refuse purchase orders and exchanges by any person, group or commonly controlled
accounts, if, in the Manager's sole judgment, such person, group or accounts
were following a market timing strategy or were otherwise engaging in excessive
trading (Market Timers).
To implement this authority to protect the Fund and its shareholders from
excessive trading, the Fund will reject all exchanges and purchases from a
Market Timer unless the Market Timer has entered into a written agreement with
the Fund or its affiliates pursuant to which the Market Timer has agreed to
abide by certain procedures, which include a daily dollar limit on trading. The
Fund may notify the Market Timer of rejection of an exchange or purchase order
subsequent to the day on which the order was placed.
SHAREHOLDER SERVICES
In addition to the Exchange Privilege, as a shareholder in the Series, you can
take advantage of the following services and privileges:
- AUTOMATIC REINVESTMENT OF DIVIDENDS AND/OR DISTRIBUTIONS WITHOUT A SALES
CHARGE. For your convenience, all dividends and distributions are automatically
reinvested in full and fractional shares of the Series at NAV without a sales
charge. You may direct the Transfer Agent in writing not less than 5 full
business days prior to the record date to have subsequent dividends and/or
distributions sent in cash rather than reinvested. If you hold shares through
Prudential Securities, you should contact your financial adviser.
- AUTOMATIC SAVINGS ACCUMULATION PLAN (ASAP). Under ASAP you may make regular
purchases of the Series' shares in amounts as little as $50 via an automatic
debit to a bank account or Prudential Securities account (including a Command
Account). For additional information about this service, you may contact your
Prudential Securities financial adviser, Prusec representative or the Transfer
Agent directly.
- SYSTEMATIC WITHDRAWAL PLAN. A systematic withdrawal plan is available to
shareholders which provides for monthly or quarterly checks. Withdrawals of
Class B and Class C shares may be subject to a CDSC. See "How to Sell Your
Shares-- Contingent Deferred Sales Charges" above.
- REPORTS TO SHAREHOLDERS. The Fund will send you annual and semi-annual
reports. The financial statements appearing in annual reports are audited by
independent accountants. In order to reduce duplicate mailing and printing
expenses, the Fund will provide one annual and semi-annual shareholder report
and annual prospectus per household. You may request additional copies of such
reports by calling (800) 225-1852 or by writing to the Fund at Gateway Center
Three, 100 Mulberry Street, Newark, New Jersey 07102-4077. In addition, monthly
unaudited financial data is available upon request from the Fund.
32
<PAGE>
- SHAREHOLDER INQUIRIES. Inquiries should be addressed to the Fund at Gateway
Center Three, 100 Mulberry Street, Newark, New Jersey 07102-4077, or by
telephone, at (800) 225-1852 (toll-free) or, from outside the U.S.A., at (908)
417-7555 (collect).
For additional information regarding the services and privileges described
above, see "Shareholder Investment Account" in the Statement of Additional
Information.
33
<PAGE>
DESCRIPTION OF SECURITY RATINGS
MOODY'S INVESTORS SERVICE
BOND RATINGS
Aaa: Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edged." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group, they comprise what are generally known
as high grade bonds. They are rated lower than 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
which make the long-term risks appear somewhat larger than the Aaa securities.
A: Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper-medium-grade obligations. Factors giving security
to principal and interest are considered adequate but elements may be present
which suggest a susceptibility to impairment sometime in the future.
Baa: Bonds which are rated Baa are considered as medium grade obligations,
I.E., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present, but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba: Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate, and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Bonds rated within the Aa, A, Baa, Ba and B categories which Moody's believes
possess the strongest credit attributes within those categories are designated
by the symbols Aa1, A1, Baa1, Ba1 and B1.
Caa: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca: Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
C: Bonds which are rated C are the lowest-rated class of bonds, and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
SHORT-TERM RATINGS
Moody's ratings for tax-exempt notes and other short-term loans are designated
Moody's Investment Grade (MIG). This distinction is in recognition of the
differences between short-term and long-term credit risk.
MIG 1: Loans bearing the designation MIG 1 are of the best quality, enjoying
strong protection by established cash flows, superior liquidity support or
demonstrated broad-based access to the market for refinancing.
A-1
<PAGE>
MIG 2: Loans bearing the designation MIG 2 are of high quality, with margins
of protection ample although not so large as in the preceding group.
MIG 3: Loans bearing the designation MIG 3 are of favorable quality, with all
security elements accounted for but lacking the strength of the preceding
grades.
MIG 4: Loans bearing the designation MIG 4 are of adequate quality.
Protection commonly regarded and required of an investment security is present
and although not distinctly or predominantly speculative, there is specific
risk.
SHORT-TERM DEBT RATINGS
Moody's Short-Term Debt Ratings are opinions of the ability of issuers to
repay punctually senior debt obligations which have an original maturity not
exceeding one year.
Prime-1: Issuers rated 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.
Prime-3: Issuers rated Prime-3 (or supporting institutions) have an
acceptable ability for repayment of senior short-term debt obligations.
Not Prime: Issuers rated Not Prime do not fall within any of the Prime rating
categories.
STANDARD & POOR'S RATINGS GROUP
BOND RATINGS
AAA: Debt rated AAA has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.
AA: Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the highest-rated issues only in small degree.
A: Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB: Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher-rated categories.
BB, B, CCC, CC and C: Debt rated BB, B, CCC, CC or C is regarded as having
predominantly speculative characteristics with respect to capacity to pay
interest and repay principal. BB indicates the least degree of speculation and C
the highest. While such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
D: Debt rated D is in payment default. This rating is used when interest
payments or principal payments are not made on the date due even if the
applicable grace period has not expired, unless S&P believes that such payments
will be made during such grace period.
COMMERCIAL PAPER RATINGS
An S&P Commercial Paper rating is a current assessment of the likelihood of
timely payment of debt considered short-term in the relevant market.
A-2
<PAGE>
A-1: The A-1 designation indicates that the degree of safety regarding timely
payment is strong. Those issues determined to possess extremely strong safety
characteristics are denoted with a plus sign (+) designation.
A-2: Capacity for timely payment on issues with the designation A-2 is
satisfactory. However, the relative degree of safety is not as high as for
issues designated A-1.
A-3: Issues carrying this designation have adequate capacity for timely
payment. They are, however, more vulnerable to the adverse effects of changes in
circumstances than obligations carrying the higher designations.
MUNICIPAL NOTES
A municipal note rating reflects the liquidity concerns and market access
risks unique to municipal notes. Municipal notes due in three years or less will
likely receive a municipal note rating, while notes maturing beyond three years
will most likely receive a long-term debt rating. Municipal notes are rated
SP-1, SP-2 or SP-3. The designation SP-1 indicates a very strong capacity to pay
principal and interest. Those issues determined to possess extremely strong
safety characteristics are denoted with a plus sign (+) designation. An SP-2
designation indicates a satisfactory capacity to pay principal and interest. An
SP-3 designation indicates speculative capacity to pay principal and interest.
A-3
<PAGE>
THE PRUDENTIAL MUTUAL FUND FAMILY
Prudential Investments Fund Management offers a broad range of mutual funds
designed to meet your individual needs. We welcome you to review the investment
options available through our family of funds. For more information on the
Prudential Mutual Funds, including charges and expenses, contact your Prudential
Securities financial adviser or Prusec representative or telephone the Funds at
(800) 225-1852 for a free prospectus. Read the prospectus carefully before you
invest or send money.
TAXABLE BOND FUNDS
--------------------------
Prudential Diversified Bond Fund, Inc.
Prudential Government Income Fund, Inc.
Prudential Government Securities Trust
Short-Intermediate Term Series
Prudential High Yield Fund, Inc.
Prudential Mortgage Income Fund, Inc.
Prudential Structured Maturity Fund, Inc.
Income Portfolio
The BlackRock Government Income Trust
TAX-EXEMPT BOND FUNDS
-----------------------------
Prudential California Municipal Fund
California Series
California Income Series
Prudential Municipal Bond Fund
High Yield Series
Insured Series
Intermediate Series
Prudential Municipal Series Fund
Florida Series
Maryland Series
Massachusetts Series
Michigan Series
New Jersey Series
New York Series
North Carolina Series
Ohio Series
Pennsylvania Series
Prudential National Municipals Fund, Inc.
GLOBAL FUNDS
--------------------
Prudential Europe Growth Fund, Inc.
Prudential Global Genesis Fund, Inc.
Prudential Global Limited Maturity Fund, Inc.
Limited Maturity Portfolio
Prudential Intermediate Global Income Fund, Inc.
Prudential International Bond Fund, Inc.
Prudential Natural Resources Fund, Inc.
Prudential Pacific Growth Fund, Inc.
Prudential World Fund, Inc.
Global Series
International Stock Series
The Global Total Return Fund, Inc.
Global Utility Fund, Inc.
EQUITY FUNDS
--------------------
Prudential Balanced Fund
Prudential Distressed Securities Fund, Inc.
Prudential Dryden Fund
Prudential Active Balanced Fund
Prudential Stock Index Fund
Prudential Small-Cap Index Fund
Prudential Bond Market Index Fund
Prudential Pacific Index Fund
Prudential Europe Index Fund
Prudential Emerging Growth Fund, Inc.
Prudential Equity Fund, Inc.
Prudential Equity Income Fund
Prudential Jennison Fund, Inc.
Prudential Jennison Growth Fund
Prudential Jennison Growth & Income Fund
Prudential Multi-Sector Fund, Inc.
Prudential Small-Cap Quantum Fund, Inc.
Prudential Small Company Value Fund, Inc.
Prudential Utility Fund, Inc.
Nicholas-Applegate Fund, Inc.
Nicholas-Applegate Growth Equity Fund
MONEY MARKET FUNDS
--------------------------
- - TAXABLE MONEY MARKET FUNDS
Prudential Government Securities Trust
Money Market Series
U.S. Treasury Money Market Series
Prudential Special Money Market Fund, Inc.
Money Market Series
Prudential MoneyMart Assets, Inc.
- - TAX-FREE MONEY MARKET FUNDS
Prudential Tax-Free Money Fund, Inc.
Prudential California Municipal Fund
California Money Market Series
Prudential Municipal Series Fund
Connecticut Money Market Series
Massachusetts Money Market Series
New Jersey Money Market Series
New York Money Market Series
- - COMMAND FUNDS
Command Money Fund
Command Government Fund
Command Tax-Free Fund
- - INSTITUTIONAL MONEY MARKET FUNDS
Prudential Institutional Liquidity Portfolio, Inc.
Institutional Money Market Series
B-1
<PAGE>
No dealer, sales representative or any other person has been authorized to give
any information or to make any representations, other than those contained in
this Prospectus, in connection with the offer contained herein, and, if given or
made, such other information or representations must not be relied upon as
having been authorized by the Fund or the Distributor. This Prospectus does not
constitute an offer by the Fund or by the Distributor to sell or a solicitation
of any offer to buy any of the securities offered hereby in any jurisdiction to
any person to whom it is unlawful to make such offer in such jurisdiction.
-------------------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---
<S> <C>
FUND HIGHLIGHTS................................. 2
What are the Series' Risk Factors and Special
Characteristics?............................. 2
FUND EXPENSES................................... 4
FINANCIAL HIGHLIGHTS............................ 5
HOW THE FUND INVESTS............................ 9
Investment Objective and Policies............. 9
Other Investments and Policies................ 14
Investment Restrictions....................... 15
HOW THE FUND IS MANAGED......................... 15
Manager....................................... 16
Distributor................................... 16
Portfolio Transactions........................ 18
Custodian and Transfer and Dividend Disbursing
Agent........................................ 18
HOW THE FUND VALUES ITS SHARES.................. 19
HOW THE FUND CALCULATES PERFORMANCE............. 19
TAXES, DIVIDENDS AND DISTRIBUTIONS.............. 20
GENERAL INFORMATION............................. 22
Description of Shares......................... 22
Additional Information........................ 23
SHAREHOLDER GUIDE............................... 23
How to Buy Shares of the Fund................. 23
Alternative Purchase Plan..................... 24
How to Sell Your Shares....................... 27
Conversion Feature--Class B Shares............ 30
How to Exchange Your Shares................... 31
Shareholder Services.......................... 32
DESCRIPTION OF SECURITY RATINGS................. A-1
THE PRUDENTIAL MUTUAL FUND FAMILY............... B-1
</TABLE>
- -------------------------------------------
MF119A 44404AW
Class A: 74435M-65-5
Class B: 74435M-66-3
CUSIP Nos.: Class C: 74435M-56-4
Class Z: 74435M-41-6
PRUDENTIAL
MUNICIPAL
SERIES FUND
----------------------------------------
MASSACHUSETTS SERIES
PROSPECTUS
October 30, 1997
www.prudential.com
[LOGO] Prudential
Investments
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
(MASSACHUSETTS MONEY MARKET SERIES)
- --------------------------------------------------------------------------------
PROSPECTUS DATED OCTOBER 30, 1997
- ----------------------------------------------------------------
Prudential Municipal Series Fund (the Fund) (Massachusetts Money Market Series)
(the Series) is one of thirteen series of an open-end, management investment
company, or mutual fund. This Series is non-diversified and is designed to
provide the highest level of current income that is exempt from Massachusetts
state and federal income taxes consistent with liquidity and the preservation of
capital. The net assets of the Series are invested primarily in short-term,
tax-exempt Massachusetts state, municipal and local debt obligations and
obligations of other qualifying issuers. There can be no assurance that the
Series' investment objective will be achieved. See "How the Fund
Invests--Investment Objective and Policies." The Fund's address is Gateway
Center Three, 100 Mulberry Street, Newark, New Jersey 07102-4077, and its
telephone number is (800) 225-1852.
Shares of the Series are sold without a sales charge. The Series is subject to
an annual charge of .125% of its average daily net assets pursuant to the
Distribution and Service Plan. See "How the Fund is Managed--Distributor."
THE SERIES MAY INVEST A SIGNIFICANT PORTION OF ITS ASSETS IN THE OBLIGATIONS OF
A SINGLE ISSUER, AND THEREFORE AN INVESTMENT IN THE SERIES MAY BE MORE RISKY
THAN AN INVESTMENT IN OTHER TYPES OF MONEY MARKET FUNDS.
AN INVESTMENT IN THE SERIES IS NEITHER INSURED NOR GUARANTEED BY THE U.S.
GOVERNMENT AND THERE CAN BE NO ASSURANCE THAT THE SERIES WILL BE ABLE TO
MAINTAIN A STABLE NET ASSET VALUE OF $1.00 PER SHARE. SEE "HOW THE FUND VALUES
ITS SHARES."
This Prospectus sets forth concisely the information about the Fund and the
Massachusetts Money Market Series that a prospective investor should know before
investing. Additional information about the Fund has been filed with the
Securities and Exchange Commission in a Statement of Additional Information,
dated October 30, 1997, which information is incorporated herein by reference
(is legally considered a part of this Prospectus) and is available without
charge upon request to Prudential Municipal Series Fund at the address or
telephone number noted above.
- --------------------------------------------------------------------------------
INVESTORS ARE ADVISED TO READ THIS PROSPECTUS AND RETAIN IT FOR FUTURE
REFERENCE.
- --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
<PAGE>
FUND HIGHLIGHTS
The following summary is intended to highlight certain information contained
in this Prospectus and is qualified in its entirety by the more detailed
information appearing elsewhere herein.
WHAT IS PRUDENTIAL MUNICIPAL SERIES FUND?
Prudential Municipal Series Fund is a mutual fund whose shares are offered
in thirteen series, each of which operates as a separate fund. A mutual fund
pools the resources of investors by selling its shares to the public and
investing the proceeds of such sale in a portfolio of securities designed to
achieve its investment objective. Technically, the Fund is an open-end,
management investment company. Only the Massachusetts Money Market Series is
offered through this Prospectus.
WHAT IS THE SERIES' INVESTMENT OBJECTIVE?
The Series' investment objective is to provide the highest level of
current income that is exempt from Massachusetts state and federal income
taxes consistent with liquidity and the preservation of capital. It seeks to
achieve this objective by investing primarily in short-term Massachusetts
state, municipal and local government obligations and obligations of other
qualifying issuers, such as issuers located in Puerto Rico, the Virgin
Islands and Guam, which pay income exempt, in the opinion of counsel, from
Massachusetts state and federal income taxes (Massachusetts Obligations).
There can be no assurance that the Series' investment objective will be
achieved. See "How the Fund Invests--Investment Objective and Policies" at
page 6.
WHAT ARE THE SERIES' RISK FACTORS AND SPECIAL CHARACTERISTICS?
It is anticipated that the net asset value of the Series will remain
constant at $1.00 per share, although this cannot be assured. In order to
maintain such constant net asset value, the Series will value its portfolio
securities at amortized cost. While this method provides certainty in
valuation, it may result in periods during which the value of a security in
the Series' portfolio, as determined by amortized cost, is higher or lower
than the price the Series would receive if it sold such security. See "How
the Fund Values its Shares" at page 13.
In seeking to achieve its investment objective, the Series will invest
primarily in Massachusetts Obligations. This degree of investment
concentration makes the Series particularly susceptible to factors adversely
affecting issuers of Massachusetts Obligations, and makes an investment in
the Series more risky than an investment in other types of money market
funds. The Series is non-diversified so that more than 5% of its total
assets may be invested in the securities of one or more issuers. Investment
in a non-diversified portfolio involves more risk than investment in a
diversified portfolio. See "How the Fund Invests--Investment Objective and
Policies--Special Considerations" at page 9. As with an investment in any
mutual fund, an investment in this Series can decrease in value and you can
lose money.
WHO MANAGES THE FUND?
Prudential Investments Fund Management LLC (PIFM or the Manager) is the
Manager of the Fund and is compensated for its services at an annual rate of
.50 of 1% of the Series' average daily net assets. As of September 30, 1997,
PIFM served as manager or administrator to 63 investment companies,
including 41 mutual funds, with aggregate assets of approximately $59.9
billion. The Prudential Investment Corporation, which does business under
the name Prudential Investments (PI, the Subadviser or the investment
adviser), furnishes investment advisory services in connection with the
management of the Fund under a Subadvisory Agreement with PIFM. See "How the
Fund is Managed--Manager" at page 10.
2
<PAGE>
WHO DISTRIBUTES THE SERIES' SHARES?
Prudential Securities Incorporated (Prudential Securities, PSI or the
Distributor) acts as the Distributor of the Series' shares. The Series
reimburses Prudential Securities for expenses related to the distribution of
the Series' shares at an annual rate of up to .125 of 1% of the average
daily net assets of the Series. See "How the Fund is Managed--Distributor"
at page 11.
WHAT IS THE MINIMUM INVESTMENT?
The minimum initial investment is $1,000. The minimum subsequent
investment is $100. There is no minimum investment requirement for certain
employee savings plans. For purchases made through the Automatic Savings
Accumulation Plan, the minimum initial and subsequent investment is $50. See
"Shareholder Guide--How to Buy Shares of the Fund" at page 16 and
"Shareholder Guide--Shareholder Services" at page 24.
HOW DO I PURCHASE SHARES?
You may purchase shares of the Series through Prudential Securities, Pruco
Securities Corporation (Prusec) or directly from the Fund through its
transfer agent, Prudential Mutual Fund Services LLC (PMFS or the Transfer
Agent), at the net asset value per share (NAV) next determined after receipt
of your purchase order by the Transfer Agent or Prudential Securities. See
"How the Fund Values its Shares" at page 13 and "Shareholder Guide--How to
Buy Shares of the Fund" at page 16.
HOW DO I SELL MY SHARES?
You may redeem shares of the Series at any time at the NAV next determined
after Prudential Securities or the Transfer Agent receives your sell order.
See "Shareholder Guide--How to Sell Your Shares" at page 20.
HOW ARE DIVIDENDS AND DISTRIBUTIONS PAID?
The Series expects to declare daily and pay monthly dividends of net
investment income and short-term capital gains. Dividends and distributions
will be automatically reinvested in additional shares of the Series at NAV
unless you request that they be paid to you in cash. See "Taxes, Dividends
and Distributions" at page 13.
3
<PAGE>
FUND EXPENSES
(MASSACHUSETTS MONEY MARKET SERIES)
<TABLE>
<CAPTION>
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on Purchases................. None
Maximum Deferred Sales Load............................. None
Maximum Sales Load Imposed on Reinvested Dividends...... None
Redemption Fees......................................... None
Exchange Fee............................................ None
ANNUAL FUND OPERATING EXPENSES*
(as a percentage of average net assets)
Management Fees......................................... .500%
12b-1 Fees.............................................. .125%
Other Expenses.......................................... .290%
-------
Total Fund Operating Expenses........................... .915%
-------
-------
</TABLE>
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------- ------- ------- ---------
<S> <C> <C> <C> <C>
EXAMPLE
You would pay the following expenses on a $1,000 investment,
assuming
(1) 5% annual return and (2) redemption at the end of each
time period: $ 9 $ 29 $ 51 $ 113
</TABLE>
The above example is based on restated data for the Series' fiscal year
ended August 31, 1997. THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION
OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN
THOSE SHOWN.
The purpose of this table is to assist an investor in understanding the
various costs and expenses that an investor in the Series will bear, whether
directly or indirectly. For more complete descriptions of the various costs
and expenses, see "How the Fund is Managed." "Other Expenses" includes
operating expenses of the Series, such as Trustees' and professional fees,
registration fees, reports to shareholders and transfer agency and custodian
fees.
- ---------------
* The expense information in the table has been restated to reflect current
fees. Effective September 1, 1997, PIFM eliminated its management fee
waiver (.375 of 1%). See "How the Fund is Managed--Manager--Fee Waivers."
4
<PAGE>
FINANCIAL HIGHLIGHTS
(FOR A SHARE OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT EACH OF THE INDICATED
PERIODS)
The following financial highlights, for the fiscal year ended August 31, 1997,
have been audited by Price Waterhouse LLP, independent accountants, and by
Deloitte and Touche LLP, independent auditors, for the four years ended August
31, 1996. Each of the respective reports by Price Waterhouse LLP and Deloitte &
Touche LLP on such financial statements was unqualified. This information should
be read in conjunction with the financial statements and the notes thereto,
which appear in the Statement of Additional Information. The following financial
highlights contain selected data for a share of beneficial interest outstanding,
total return, ratios to average net assets and other supplemental data for the
periods indicated. This information is based on data contained in the financial
statements.
<TABLE>
<CAPTION>
AUGUST 5,
1991 (a)
YEAR ENDED AUGUST 31, THROUGH
--------------------------------------------------------------- AUGUST 31,
1997 1996 1995 1994 1993 1992 1991
-------- -------- -------- -------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
Net investment income and net realized
gains (c)............................ .03 .03 .03 .02 .02 .03 .003
Dividends and distributions to
shareholders......................... (.03) (.03) (.03) (.02) (.02) (.03) (.003)
-------- -------- -------- -------- -------- -------- ----------
Net asset value, end of period......... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- -------- -------- -------- ----------
-------- -------- -------- -------- -------- -------- ----------
TOTAL RETURN (d):...................... 3.08% 3.12% 3.10% 1.89% 2.17% 3.44% 0.29%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)........ $ 53,441 $ 50,511 $ 56,822 $ 37,278 $ 36,608 $ 18,019 $6,365
Average net assets (000)............... $ 53,078 $ 54,689 $ 42,919 $ 42,427 $ 32,246 $ 15,477 $3,200
Ratios to average net assets (c):
Expenses, including distribution
fee................................. .540% .554% .627% .620% .365% .125% .125%(b)
Expenses, excluding distribution
fee................................. .415% .429% .502% .495% .240% .00% .00%(b)
Net investment income................ 3.04% 3.08% 3.14% 1.86% 2.11% 3.20% 4.46%(b)
</TABLE>
- ---------------
(a) Commencement of investment operations.
(b) Annualized.
(c) Net of expense subsidy and/or management fee waiver.
(d) Total return includes reinvestment of dividends and distributions.
Total returns for periods of less than a full year are not
annualized.
5
<PAGE>
CALCULATION OF YIELD
THE SERIES CALCULATES ITS "CURRENT YIELD" based on the net change, exclusive
of realized and unrealized gains or losses, in the value of a hypothetical
account over a seven calendar day base period. THE SERIES CALCULATES ITS
"EFFECTIVE ANNUAL YIELD" ASSUMING DAILY COMPOUNDING. Tax-equivalent yield shows
the taxable yield an investor would have to earn from a fully taxable investment
in order to equal the Series' tax-free yield after taxes and is calculated by
dividing the Series' current or effective yield by the result of one minus the
State tax rate times one minus the federal tax rate. The following is an example
of the yield calculations as of August 31, 1997:
<TABLE>
<S> <C>
Value of hypothetical account at end of period................. $1.000551820
Value of hypothetical account at beginning of period........... 1.000000000
------------
Base period return............................................. $1.000551820
------------
------------
CURRENT YIELD (0.000551820 X (365/7))+......................... 2.88%
EFFECTIVE ANNUAL YIELD, assuming daily compounding+............ 2.92%
TAX-EQUIVALENT CURRENT YIELD
(2.88% DIVIDED BY [(1-.396)(1-.12)]+.......................... 5.42%
</TABLE>
- --------------
+ After fee waiver. Without fee waiver, the current yield, effective annual
yield, and tax-equivalent yield would have been 2.51%, 2.55% and 4.72%,
respectively. See "Manager" in the Statement of Additional Information.
THE YIELD WILL FLUCTUATE FROM TIME TO TIME AND DOES NOT INDICATE FUTURE
PERFORMANCE.
The weighted average life to maturity of the portfolio of the Series on August
31, 1997 was 56 days.
Yield is computed in accordance with a standardized formula described in the
Statement of Additional Information. In addition, comparative performance
information may be used from time to time in advertising or marketing the
Series' shares, including data from Lipper Analytical Services, Inc.,
Morningstar Publications, Inc., IBC/Donoghue's Money Fund Report, The Bank Rate
Monitor, other industry publications, business periodicals and market indices.
HOW THE FUND INVESTS
INVESTMENT OBJECTIVE AND POLICIES
PRUDENTIAL MUNICIPAL SERIES FUND (THE FUND) IS AN OPEN-END, MANAGEMENT
INVESTMENT COMPANY, OR MUTUAL FUND, CONSISTING OF THIRTEEN SEPARATE SERIES. EACH
OF THESE SERIES IS MANAGED INDEPENDENTLY. THE MASSACHUSETTS MONEY MARKET SERIES
(THE SERIES) IS NON-DIVERSIFIED AND ITS INVESTMENT OBJECTIVE IS TO PROVIDE THE
HIGHEST LEVEL OF CURRENT INCOME THAT IS EXEMPT FROM MASSACHUSETTS STATE AND
FEDERAL INCOME TAXES CONSISTENT WITH LIQUIDITY AND THE PRESERVATION OF CAPITAL.
THE SERIES SEEKS TO ACHIEVE ITS INVESTMENT OBJECTIVE BY INVESTING PRIMARILY IN
SHORT-TERM MASSACHUSETTS STATE, MUNICIPAL AND LOCAL GOVERNMENT OBLIGATIONS AND
OBLIGATIONS OF OTHER QUALIFYING ISSUERS, SUCH AS ISSUERS LOCATED IN PUERTO RICO,
THE VIRGIN ISLANDS AND GUAM, WHICH PAY INCOME EXEMPT, IN THE OPINION OF COUNSEL,
FROM MASSACHUSETTS STATE AND FEDERAL INCOME TAXES (MASSACHUSETTS OBLIGATIONS).
SEE "INVESTMENT OBJECTIVES AND POLICIES" IN THE STATEMENT OF ADDITIONAL
INFORMATION. THERE CAN BE NO ASSURANCE THAT THE SERIES WILL BE ABLE TO ACHIEVE
ITS INVESTMENT OBJECTIVE.
6
<PAGE>
THE SERIES' INVESTMENT OBJECTIVE IS A FUNDAMENTAL POLICY AND, THEREFORE, MAY
NOT BE CHANGED WITHOUT THE APPROVAL OF THE HOLDERS OF A MAJORITY OF THE SERIES'
OUTSTANDING VOTING SECURITIES AS DEFINED IN THE INVESTMENT COMPANY ACT OF 1940,
AS AMENDED (THE INVESTMENT COMPANY ACT). THE SERIES' POLICIES THAT ARE NOT
FUNDAMENTAL MAY BE MODIFIED BY THE TRUSTEES.
As with an investment in any mutual fund, an investment in this Series can
decrease in value and you can lose money.
Interest on certain municipal obligations may be a preference item for
purposes of the federal alternative minimum tax. The Series may invest without
limit in municipal obligations that are "private activity bonds" (as defined in
the Internal Revenue Code), the interest on which would be a preference item for
purposes of the federal alternative minimum tax. See "Taxes, Dividends and
Distributions." Under Massachusetts law, dividends paid by the Series are exempt
from Massachusetts personal income tax for resident individuals and other
resident noncorporate shareholders to the extent they are excluded from gross
income for federal income tax purposes and are derived from interest payments on
Massachusetts Obligations or are capital gain dividends for federal income tax
purposes and are derived from long-term capital gains on certain Massachusetts
Obligations. The Massachusetts Obligations in which the Series may invest
include certain short-term, tax-exempt notes such as Tax Anticipation Notes,
Revenue Anticipation Notes, Bond Anticipation Notes, Construction Loan Notes and
certain variable and floating rate demand notes. See "Investment Objectives and
Policies--Tax-Exempt Securities--Tax-Exempt Notes" in the Statement of
Additional Information. The Series will maintain a dollar-weighted average
maturity of its portfolio of 90 days or less.
THE SERIES MAY INVEST ITS ASSETS IN FLOATING RATE AND VARIABLE RATE
SECURITIES, INCLUDING PARTICIPATION INTERESTS THEREIN, WHICH CONFORM TO THE
REQUIREMENTS OF THE AMORTIZED COST VALUATION RULE AND OTHER REQUIREMENTS OF THE
SECURITIES AND EXCHANGE COMMISSION (SEC). There is no limit on the amount of
such securities that the Series may purchase. Floating rate securities normally
have a rate of interest which is set as a specific percentage of a designated
base rate, such as the rate on Treasury Bonds or Bills or the prime rate at a
major commercial bank. The interest rate on floating rate securities changes
periodically when there is a change in the designated base interest rate.
Variable rate securities provide for a specified periodic adjustment in the
interest rate based on prevailing market rates and generally would allow the
Series to demand payment of the obligation on short notice at par plus accrued
interest, which amount may be more or less than the amount the Series paid for
them.
ALL MASSACHUSETTS OBLIGATIONS PURCHASED BY THE SERIES WILL, AT THE TIME OF
PURCHASE, HAVE A REMAINING MATURITY OF THIRTEEN MONTHS OR LESS AND BE (i) RATED
IN ONE OF THE TWO HIGHEST RATING CATEGORIES BY AT LEAST TWO NATIONALLY
RECOGNIZED STATISTICAL RATING ORGANIZATIONS (NRSROS) ASSIGNING A RATING TO THE
SECURITY OR ISSUER (OR, IF ONLY ONE NRSRO ASSIGNED A RATING, BY THAT NRSRO) OR
(ii) IF UNRATED, OF COMPARABLE QUALITY AS DETERMINED BY THE INVESTMENT ADVISER
UNDER THE SUPERVISION OF THE TRUSTEES. See "Description of Tax-Exempt Security
Ratings" in the Statement of Additional Information. The investment adviser will
monitor the credit quality of securities purchased for the Series' portfolio and
will limit its investments to those which present minimal credit risks.
In selecting Massachusetts Obligations for investment by the Series, the
investment adviser considers ratings assigned by NRSROs, information concerning
the financial history and condition of the issuer and its revenue and expense
prospects and, in the case of revenue bonds, the financial history and condition
of the source of revenue to service the bonds. If a Massachusetts Obligation
held by the Series is assigned a lower rating or ceases to be rated, the
investment adviser under the supervision of the Trustees will promptly reassess
whether that security presents minimal credit risks and whether the Series
should continue to hold the security in its portfolio. If a portfolio security
no longer presents minimal credit risks or is in default, the Series will
dispose of the security as soon as reasonably practicable unless the Trustees
determine that to do so is not in the best interests of the Series and its
shareholders.
The Series utilizes the amortized cost method of valuation in accordance with
regulations issued by the SEC. See "How the Fund Values its Shares."
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The Series intends to hold portfolio securities to maturity; however, it may
sell any security at any time in order to meet redemption requests or if the
investment adviser believes it advisable, based on an evaluation of the issuer
or of market conditions.
UNDER NORMAL MARKET CONDITIONS, THE SERIES WILL ATTEMPT TO INVEST
SUBSTANTIALLY ALL OF THE VALUE OF ITS ASSETS IN MUNICIPAL OBLIGATIONS WHICH PAY
INCOME EXEMPT FROM FEDERAL INCOME TAXES. As a matter of fundamental policy,
during normal market conditions the Series' assets will be invested so that at
least 80% of its total assets will be invested in municipal securities which pay
income exempt from federal income taxes. These primarily will be Massachusetts
Obligations, unless the investment adviser is unable, due to the unavailability
of sufficient or reasonably priced Massachusetts Obligations that also meet the
Series' credit quality and average weighted maturity requirements, to purchase
Massachusetts Obligations. To the extent the Series invests in obligations other
than Massachusetts Obligations, dividends derived therefrom likely will not be
exempt from Massachusetts income taxes. During abnormal market conditions or to
provide liquidity, the Series may hold cash or taxable cash equivalents such as
certificates of deposit, bankers' acceptances and time deposits or other
short-term taxable investments such as repurchase agreements, or high grade
taxable obligations, including obligations that are exempt from federal, but not
state, taxation. When, in the opinion of the investment adviser, abnormal market
conditions require a temporary defensive position, the Series may invest its
assets so that more than 20% of the income is subject to federal income taxes.
THE SERIES ALSO MAY ACQUIRE PUT OPTIONS (PUTS) GIVING THE SERIES THE RIGHT TO
SELL SECURITIES HELD IN THE SERIES' PORTFOLIO AT A SPECIFIED EXERCISE PRICE ON A
SPECIFIED DATE. Such puts may be acquired for the purpose of protecting the
Series from a possible decline in the market value of the security to which the
put applies in the event of interest rate fluctuations or, in the case of
liquidity puts, for the purpose of shortening the effective maturity of the
underlying security. The aggregate value of premiums paid to acquire puts held
in the Series' portfolio (other than liquidity puts) may not exceed 10% of the
net asset value of the Series. The acquisition of a put may involve an
additional cost to the Series by payment of a premium for the put, by payment of
a higher purchase price for securities to which the put is attached or through a
lower effective interest rate.
In addition, there is a credit risk associated with the purchase of puts in
that the issuer of the put may be unable to meet its obligation to purchase the
underlying security. Accordingly, the Series will acquire puts only under the
following circumstances: (1) the put is written by the issuer of the underlying
security and such security is rated (a) in one of the two highest rating
categories by at least two NRSROs assigning a rating to the security or issuer,
or (b) if only one such rating organization assigned a rating, by that rating
organization; or (2) the put is written by a person other than the issuer of the
underlying security and such person has securities outstanding which are rated
within such two highest quality grades; or (3) the put is backed by a letter of
credit or similar financial guarantee issued by a person having securities
outstanding which are rated within the two highest quality grades of such rating
services. The issuer of the put, or another institution, must undertake to
notify promptly the holder of the put if the put feature is substituted with a
put from another issuer.
THE SERIES MAY PURCHASE MUNICIPAL OBLIGATIONS ON A "WHEN-ISSUED" OR "DELAYED
DELIVERY" BASIS, IN EACH CASE WITHOUT LIMIT. When municipal obligations are
offered on a when-issued or delayed delivery basis, the price and coupon rate
are fixed at the time the commitment to purchase is made, but delivery and
payment for the securities take place at a later date. The purchase price for
such securities includes interest accrued during the period between purchase and
settlement, and, therefore, no interest accrues to the economic benefit of the
purchaser during such period. In the case of purchases by the Series, the price
that the Series is required to pay on the settlement date may be in excess of
the market value of the municipal obligations on that date. While securities may
be sold prior to the settlement date, the Series intends to purchase these
securities with the purpose of actually acquiring them unless a sale would be
desirable for investment reasons. At the time the Series makes the commitment to
purchase a municipal obligation on a when-issued or delayed delivery basis, it
will record the transaction and reflect the value of the obligation each day in
determining its net asset value. This value may fluctuate from day to day in the
same manner as values of municipal obligations otherwise held by the Series. If
the seller defaults in the sale, the Series could fail to realize the
appreciation, if any, that had occurred. The Series will establish a segregated
account with its Custodian in which it will maintain cash, U.S. Government
securities, equity securities or other liquid, unencumbered assets,
marked-to-market daily, equal in value to its commitments for when-issued or
delayed delivery securities.
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THE SERIES MAY PURCHASE SECONDARY MARKET INSURANCE ON MASSACHUSETTS
OBLIGATIONS WHICH IT HOLDS OR ACQUIRES. Secondary market insurance would be
reflected in the market value of the municipal obligation purchased and may
enable the Series to dispose of a defaulted obligation at a price similar to
that of comparable municipal obligations which are not in default.
Insurance is not a substitute for the basic credit of an issuer, but
supplements the existing credit and provides additional security therefor. While
insurance coverage for the Massachusetts Obligations held by the Series reduces
credit risk by providing that the insurance company will make timely payment of
principal and interest if the issuer defaults on its obligation to make such
payment, it does not afford protection against fluctuation in the price, I.E.,
the market value, of the municipal obligations caused by changes in interest
rates and other factors.
SPECIAL CONSIDERATIONS
BECAUSE THE SERIES WILL INVEST PRIMARILY IN MASSACHUSETTS OBLIGATIONS AND
BECAUSE IT SEEKS TO MAXIMIZE INCOME DERIVED FROM MASSACHUSETTS OBLIGATIONS, IT
IS MORE SUSCEPTIBLE TO FACTORS ADVERSELY AFFECTING ISSUERS OF MASSACHUSETTS
OBLIGATIONS THAN IS A COMPARABLE TAX-EXEMPT MONEY MARKET FUND THAT IS NOT
CONCENTRATED IN SUCH OBLIGATIONS TO THIS DEGREE. An investment in the Series
therefore may involve more risk than an investment in other types of money
market funds. The 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. However, since that time,
Massachusetts has adopted more conservative revenue forecasting procedures and
has moderated spending growth resulting in the achievement of budget surpluses
each year from 1992 through 1996. Massachusetts is currently rated A-1 by
Moody's Investors Service. Fiscal year 1997 tax revenue collections totaled
$12.861 billion, which exceeded estimates by $354 million and exceeded fiscal
1996 tax revenues by $812 million. The Budgeted Operating Funds of the
Commonwealth ended fiscal 1997 with a surplus of revenues and other sources over
expenditures and other uses of $183 million resulting in aggregate ending fund
balances in the Budgeted Operating Funds of the Commonwealth of approximately
$1.626 billion. The Commonwealth estimates total spending in fiscal 1998 to be
approximately $18.4 billion, including $235.5 million in continuing
appropriations from fiscal 1997. Fiscal 1998 total revenues are estimated to be
approximately $17.918 billion, including approximately $12.861 billion in tax
revenues. The tax revenue estimate amounts to an increase of approximately $812
million, or 6.7%, over same period last year. Inflexibility dictated by a heavy
debt load and other substantial fixed costs, particularly pension contributions
and transit subsidies, pose significant obstacles to continued progress. If
either Massachusetts or any of its local government entities is unable to meet
its financial obligations, the income derived by the Series, the ability to
preserve or realize appreciation of the Series' capital and the Series'
liquidity could be adversely affected. See "Investment Objectives and
Policies--Special Considerations Regarding Investments in Tax-Exempt Securities"
in the Statement of Additional Information.
The Series is "non-diversified" so that more than 5% of its total assets may
be invested in the securities of one or more issuers. Investment in a
non-diversified portfolio involves greater risk than investment in a diversified
portfolio because a loss resulting from the default of a single issuer may
represent a greater portion of the total assets of a non-diversified portfolio.
The Series will treat an investment in a municipal bond refunded with escrowed
U.S. Government securities as U.S. Government securities for purposes of the
Investment Company Act's diversification requirements provided certain
conditions are met. See "Investment Objectives and Policies--In General" in the
Statement of Additional Information.
OTHER INVESTMENTS AND POLICIES
REPURCHASE AGREEMENTS
The Series may enter into repurchase agreements whereby the seller of a
security agrees to repurchase that security from the Series at a mutually
agreed-upon time and price. The period of maturity is usually quite short,
possibly overnight or a few days, although it may extend over a number of
months. The resale price is in excess of the purchase price, reflecting an
agreed-upon rate of return effective for the period of time the Series' money is
invested in the security. The Series' repurchase agreements will at all times be
fully collateralized in an amount at least equal to the resale price. The
instruments held as collateral are valued daily
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and if the value of the instruments declines, the Series will require additional
collateral. If the seller defaults and the value of the collateral securing the
repurchase agreement declines, the Series may incur a loss. The Series
participates in a joint repurchase account with other investment companies
managed by PIFM pursuant to an order of the SEC. See "Investment Objectives and
Policies--Repurchase Agreements" in the Statement of Additional Information.
BORROWING
The Series may borrow an amount equal to no more than 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 Series may
pledge up to 33 1/3% of the value of its total assets to secure these
borrowings. The Series will not purchase portfolio securities if its borrowings
exceed 5% of its total assets.
ILLIQUID SECURITIES
The Series may hold up to 10% of its net assets in illiquid securities,
including repurchase agreements which have a maturity of longer than seven days,
securities with legal or contractual restrictions on resale (restricted
securities) and securities that are not readily marketable. Securities that have
a readily available market are not considered illiquid for purposes of this
limitation. See "Investment Restrictions" in the Statement of Additional
Information. The investment adviser will monitor the liquidity of such
restricted securities under the supervision of the Trustees. See "Investment
Objectives and Policies--Illiquid Securities" in the Statement of Additional
Information. Repurchase agreements subject to demand are deemed to have a
maturity equal to the notice period.
INVESTMENT RESTRICTIONS
The Series is subject to certain investment restrictions which, like its
investment objective, constitute fundamental policies. Fundamental policies
cannot be changed without the approval of the holders of a majority of the
Series' outstanding voting securities, as defined in the Investment Company Act.
See "Investment Restrictions" in the Statement of Additional Information.
HOW THE FUND IS MANAGED
THE FUND HAS TRUSTEES WHO, IN ADDITION TO OVERSEEING THE ACTIONS OF THE FUND'S
MANAGER, SUBADVISER AND DISTRIBUTOR, AS SET FORTH BELOW, DECIDE UPON MATTERS OF
GENERAL POLICY. THE FUND'S MANAGER CONDUCTS AND SUPERVISES THE DAILY BUSINESS
OPERATIONS OF THE FUND. THE FUND'S SUBADVISER FURNISHES DAILY INVESTMENT
ADVISORY SERVICES.
For the fiscal year ended August 31, 1997, total expenses of the Series as a
percentage of its average net assets, net of fee waiver, were .54%. See
"Financial Highlights."
MANAGER
PRUDENTIAL INVESTMENTS FUND MANAGEMENT LLC (PIFM OR THE MANAGER), GATEWAY
CENTER THREE, 100 MULBERRY STREET, NEWARK, NEW JERSEY 07102-4077, IS THE MANAGER
OF THE FUND AND IS COMPENSATED FOR ITS SERVICES AT AN ANNUAL RATE OF .50 OF 1%
OF THE AVERAGE DAILY NET ASSETS OF THE SERIES. PIFM is organized in New York as
a limited liability company. It is the successor to Prudential Mutual Fund
Management, Inc., which transferred its assets to PIFM in September 1996. For
the fiscal year ended August 31, 1997, the Series paid a management fee of .125
of 1% of the Series' average net assets, after taking into account a management
fee waiver. See "Fee Waivers" below and "Manager" in the Statement of Additional
Information.
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As of September 30, 1997, PIFM served as the manager to 41 open-end investment
companies, constituting all of the Prudential Mutual Funds, and as manager or
administrator to 22 closed-end investment companies with aggregate assets of
approximately $59.9 billion.
UNDER THE MANAGEMENT AGREEMENT WITH THE FUND, PIFM MANAGES THE INVESTMENT
OPERATIONS OF EACH SERIES OF THE FUND AND ALSO ADMINISTERS THE FUND'S BUSINESS
AFFAIRS. See "Manager" in the Statement of Additional Information.
UNDER A SUBADVISORY AGREEMENT BETWEEN PIFM AND THE PRUDENTIAL INVESTMENT
CORPORATION (PIC), DOING BUSINESS AS PRUDENTIAL INVESTMENTS (PI, THE SUBADVISER
OR THE INVESTMENT ADVISER), PI FURNISHES INVESTMENT ADVISORY SERVICES IN
CONNECTION WITH THE MANAGEMENT OF THE FUND AND IS REIMBURSED BY PIFM FOR ITS
REASONABLE COSTS AND EXPENSES INCURRED IN PROVIDING SUCH SERVICES. Under the
Management Agreement, PIFM continues to have responsibility for all investment
advisory services and supervises PI's performance of such services.
PIFM and PIC are indirect, wholly-owned subsidiaries of The Prudential
Insurance Company of America (Prudential), a major diversified insurance and
financial services company, and are part of Prudential Investments, a business
group of Prudential.
FEE WAIVERS
PIFM may from time to time agree to waive all or a portion of its management
fee and subsidize certain operating expenses of the Series. Fee waivers and
expense subsidies will increase the Series' yield. The Series is not required to
reimburse PIFM for such management fee waiver. Effective September 1, 1997, PIFM
discontinued its waiver of 75% of its management fee. See "Fund Expenses" and
"Calculation of Yield."
DISTRIBUTOR
PRUDENTIAL SECURITIES INCORPORATED (PRUDENTIAL SECURITIES, PSI OR THE
DISTRIBUTOR), ONE SEAPORT PLAZA, NEW YORK, NEW YORK 10292, IS A CORPORATION
ORGANIZED UNDER THE LAWS OF THE STATE OF DELAWARE AND SERVES AS THE DISTRIBUTOR
OF THE SERIES' SHARES. It is an indirect, wholly-owned subsidiary of Prudential.
UNDER A DISTRIBUTION AND SERVICE PLAN (THE PLAN) ADOPTED BY THE SERIES UNDER
RULE 12b-1 UNDER THE INVESTMENT COMPANY ACT AND A DISTRIBUTION AGREEMENT (THE
DISTRIBUTION AGREEMENT), THE DISTRIBUTOR INCURS THE EXPENSES OF DISTRIBUTING THE
SHARES OF THE SERIES. These expenses include account servicing fees paid to, or
on account of, financial advisers of Prudential Securities and representatives
of Pruco Securities Corporation (Prusec), an affiliated broker-dealer, account
servicing fees paid to, or on account of, other broker-dealers or financial
institutions (other than national banks) which have entered into agreements with
the Distributor, advertising expenses, the cost of printing and mailing
prospectuses to potential investors and indirect and overhead costs of
Prudential Securities and Prusec associated with the sale of Series shares,
including lease, utility, communications and sales promotion expenses.
UNDER THE PLAN, THE SERIES REIMBURSES THE DISTRIBUTOR FOR ITS
DISTRIBUTION-RELATED EXPENSES AT AN ANNUAL RATE OF UP TO .125 OF 1% OF THE
AVERAGE DAILY NET ASSETS OF THE SERIES. Account servicing fees are paid based on
the average balance of the Series' shares held in the accounts of the customers
of financial advisers. The entire distribution fee may be used to pay account
servicing fees.
For the fiscal year ended August 31, 1997, the Series paid PSI a distribution
fee equal on an annual basis to .125% of the average net assets of the Series.
Amounts paid to the Distributor by the Series will not be used to pay
distribution expenses incurred by any other series of the Fund.
The Plan provides that it shall continue in effect from year to year provided
that each such continuance is approved annually by a majority vote of the
Trustees of the Fund, including a majority of the Trustees who are not
"interested persons" of the Fund (as defined in the Investment Company Act) and
who have no direct or indirect financial interest in the operation of the Plan
or any agreements related to the Plan. The Trustees are provided with and review
quarterly reports of expenditures under the Plan.
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In addition to distribution and service fees paid by the Series under the
Plan, the Manager (or one of its affiliates) may make payments out of its own
resources to dealers (including Prudential Securities) and other persons which
distribute shares of the Series. Such payments may be calculated by reference to
the net asset value of shares sold by such persons or otherwise. The Fund
records all payments made under the Plan as expenses in the calculation of its
net investment income.
On October 21, 1993, PSI entered into an omnibus settlement with the SEC,
state securities regulators (with the exception of the Texas Securities
Commissioner who joined the settlement on January 18, 1994) and the National
Association of Securities Dealers, Inc. (the NASD) to resolve allegations that
from 1980 through 1990 PSI sold certain limited partnership interests in
violation of securities laws to persons for whom such securities were not
suitable and misrepresented the safety, potential returns and liquidity of these
investments. Without admitting or denying the allegations asserted against it,
PSI consented to the entry of an SEC Administrative Order which stated that
PSI's conduct violated the federal securities laws, directed PSI to cease and
desist from violating the federal securities laws, pay civil penalties, and
adopt certain remedial measures to address the violations.
Pursuant to the terms of the SEC settlement, PSI agreed to the imposition of a
$10,000,000 civil penalty, established a settlement fund in the amount of
$330,000,000 and procedures to resolve legitimate claims for compensatory
damages by purchasers of the partnership interests. PSI has agreed to provide
additional funds, if necessary, for the purpose of the settlement fund. PSI's
settlement with the state securities regulators included an agreement to pay a
penalty of $500,000 per jurisdiction. PSI consented to a censure and to the
payment of a $5,000,000 fine in settling the NASD action.
In October 1994, a criminal complaint was filed with the United States
Magistrate for the Southern District of New York alleging that PSI committed
fraud in connection with the sale of certain limited partnership interests in
violation of federal securities laws. An agreement was simultaneously filed to
defer prosecution of these charges for a period of three years from the signing
of the agreement, provided that PSI complies with the terms of the agreement.
If, upon completion of the three year period, PSI has complied with the terms of
the agreement, no prosecution will be instituted by the United States for the
offenses charged in the complaint. If on the other hand, during the course of
the three year period, PSI violates the terms of the agreement, the U.S.
Attorney can then elect to pursue these charges. Under the terms of the
agreement, PSI agreed, among other things, to pay an additional $330,000,000
into the fund established by the SEC to pay restitution to investors who
purchased certain PSI limited partnership interests.
For more detailed information concerning the foregoing matters, see
"Distributor" in the Statement of Additional Information, a copy of which may be
obtained at no cost by calling (800) 225-1852.
The Fund is not affected by PSI's financial condition and is an entirely
separate legal entity from PSI, which has no beneficial ownership therein and
the Fund's assets which are held by State Street Bank and Trust Company, an
independent custodian, are separate and distinct from PSI.
PORTFOLIO TRANSACTIONS
Prudential Securities may act as a broker for the Fund, provided that the
commissions, fees or other remuneration it receives are fair and reasonable. See
"Portfolio Transactions and Brokerage" in the Statement of Additional
Information.
CUSTODIAN AND TRANSFER AND DIVIDEND DISBURSING AGENT
State Street Bank and Trust Company, One Heritage Drive, North Quincy,
Massachusetts, 02171 serves as Custodian for the portfolio securities of the
Series and cash and, in that capacity, maintains certain financial and
accounting books and records pursuant to an agreement with the Fund. Its mailing
address is P.O. Box 1713, Boston, Massachusetts 02105.
Prudential Mutual Fund Services LLC (PMFS), Raritan Plaza One, Edison, New
Jersey 08837, serves as Transfer Agent and Dividend Disbursing Agent and, in
those capacities, maintains certain books and records for the Fund. PMFS is a
wholly-owned subsidiary of PIFM. Its mailing address is P.O. Box 15005, New
Brunswick, New Jersey 08906-5005.
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HOW THE FUND VALUES ITS SHARES
THE SERIES' NET ASSET VALUE PER SHARE OR NAV IS DETERMINED BY SUBTRACTING ITS
LIABILITIES FROM THE VALUE OF ITS ASSETS AND DIVIDING THE REMAINDER BY THE
NUMBER OF OUTSTANDING SHARES. THE TRUSTEES HAVE FIXED THE SPECIFIC TIME OF DAY
FOR THE COMPUTATION OF THE NET ASSET VALUE OF THE SERIES TO BE AS OF 4:30 P.M.,
NEW YORK TIME, IMMEDIATELY AFTER THE DECLARATION OF DIVIDENDS.
The Series will compute its NAV once daily on days that the New York Stock
Exchange is open for trading except on days on which no orders to purchase, sell
or redeem shares have been received by the Series or days on which changes in
the value of the Series' portfolio securities do not materially affect the NAV.
The Series determines the value of its portfolio securities by the amortized
cost method. This method involves valuing an instrument at its cost and
thereafter assuming a constant amortization to maturity of any discount or
premium regardless of the impact of fluctuating interest rates on the market
value of the instrument. While this method provides certainty in valuation, it
may result in periods during which value, as determined by amortized cost, is
higher or lower than the price the Series would receive if it sold the
instrument. During these periods, the yield to a shareholder may differ somewhat
from that which could be obtained from a similar fund which marks its portfolio
securities to the market each day. For example, during periods of declining
interest rates, if the use of the amortized cost method resulted in a lower
value of the Series' portfolio on a given day, a prospective investor in the
Series would be able to obtain a somewhat higher yield and existing shareholders
would receive correspondingly less income. The converse would apply during
periods of rising interest rates. The Trustees have established procedures
designed to stabilize, to the extent reasonably possible, the NAV of the shares
of the Series at $1.00 per share. See "Net Asset Value" in the Statement of
Additional Information.
TAXES, DIVIDENDS AND DISTRIBUTIONS
TAXATION OF THE FUND
THE SERIES HAS ELECTED TO QUALIFY AND INTENDS TO REMAIN QUALIFIED AS A
REGULATED INVESTMENT COMPANY UNDER THE INTERNAL REVENUE CODE. ACCORDINGLY, THE
SERIES WILL NOT BE SUBJECT TO FEDERAL INCOME TAXES ON ITS NET INVESTMENT INCOME
AND NET CAPITAL GAINS, IF ANY, THAT IT DISTRIBUTES TO ITS SHAREHOLDERS. TO THE
EXTENT NOT DISTRIBUTED BY THE SERIES, NET TAXABLE INVESTMENT INCOME AND CAPITAL
GAINS AND LOSSES ARE TAXABLE TO THE SERIES.
To the extent the Series invests in taxable obligations, it will earn taxable
investment income. Gain or loss realized by the Series from the sale of
securities generally will be treated as capital gain or loss; however, gain from
the sale of certain securities (including municipal obligations) will be treated
as ordinary income to the extent of any "market discount." Market discount
generally is the difference, if any, between the price paid by the Series for
the security and the principal amount of the security (or, in the case of a
security issued at an original issue discount, the revised issue price of the
security). The market discount rule does not apply to any security that was
acquired by the Series at its original issue. See "Distributions and Tax
Information" in the Statement of Additional Information.
TAXATION OF SHAREHOLDERS
In general, the character of tax-exempt interest distributed by the Series
will flow through as tax-exempt interest to its shareholders provided that 50%
or more of the value of its assets at the end of each quarter of its taxable
year is invested in state, municipal and other obligations, the interest on
which is excluded from gross income for federal income tax purposes. During
normal market conditions, at least 80% of the Series' total assets will be
invested in such obligations. See "How the Fund Invests--Investment Objective
and Policies."
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Any dividends out of net taxable investment income, together with
distributions of net short-term gains (I.E., the excess of net short-term
capital gains over net long-term capital losses) distributed to shareholders,
will be taxable as ordinary income to the shareholder whether or not reinvested.
Any net capital gains (I.E., the excess of net capital gains from the sale of
assets held for more than 12 months over net short-term capital losses)
distributed to shareholders will be taxable as capital gains to the
shareholders, whether or not reinvested and regardless of the length of time a
shareholder has owned his or her shares. The maximum capital gains rate for
individuals is 28% with respect to assets held for more than 12 months, but not
more than 18 months, and 20% with respect to assets held for more than 18
months. The maximum capital gains rate for corporate shareholders currently is
the same as the maximum tax rate for ordinary income. The Series does not expect
to have capital gains from the sale of assets held for more than 12 months.
CERTAIN INVESTORS MAY INCUR FEDERAL ALTERNATIVE MINIMUM TAX LIABILITY AS A
RESULT OF THEIR INVESTMENT IN THE FUND. Tax-exempt interest from certain
municipal obligations (I.E., certain private activity bonds issued after August
7, 1986) will be treated as an item of tax preference for purposes of the
alternative minimum tax. The Fund anticipates that, under regulations to be
promulgated, items of tax preference incurred by the Series will be attributed
to the Series' shareholders, although some portion of such items could be
allocated to the Series itself. Depending upon each shareholder's individual
circumstances, the attribution of items of tax preference incurred by the Series
could result in liability for the shareholder for the alternative minimum tax.
Similarly, the Series could be liable for the alternative minimum tax for items
of tax preference attributed to it. The Series is permitted to invest in
municipal obligations of the type that will produce items of tax preference.
Corporate shareholders in the Series also will have to take into account the
adjustment for current earnings for alternative minimum tax purposes. Corporate
shareholders should consult with their tax advisers with respect to this
potential adjustment.
Under Massachusetts law, dividends paid by the Series are exempt from
Massachusetts personal income tax for individuals and other noncorporate
shareholders resident in Massachusetts to the extent such dividends are excluded
from gross income for federal income tax purposes and are derived from interest
payments on Massachusetts Obligations or are capital gain dividends for federal
income tax purposes and are derived from long-term capital gains on certain
Massachusetts Obligations.
Shareholders are advised to consult their own tax advisers regarding specific
questions as to federal, state or local taxes. See "Distributions and Tax
Information" in the Statement of Additional Information.
WITHHOLDING TAXES
Under the Internal Revenue Code, the Series is required to withhold and remit
to the U.S. Treasury 31% of redemption proceeds on the accounts of certain
shareholders who fail to furnish their tax identification numbers on IRS Form
W-9 (or IRS Form W-8 in the case of certain foreign shareholders) with the
required certifications regarding the shareholder's status under the federal
income tax law. Such withholding is also required on taxable dividends and
capital gain distributions made by the Series unless it is reasonably expected
that at least 95% of the distributions of the Series are comprised of tax-exempt
dividends.
Dividends of net taxable investment income and distributions of net short-term
capital gains paid to a shareholder (including a shareholder acting as a nominee
or fiduciary) who is a nonresident alien individual, a foreign corporation or a
foreign partnership (foreign shareholder) are subject to a 30% (or lower treaty
rate) withholding tax upon the gross amount of the dividends unless the
dividends are effectively connected with a U.S. trade or business conducted by
the foreign shareholder. Capital gain dividends paid to a foreign shareholder
are generally not subject to withholding tax. A foreign shareholder will,
however, be required to pay U.S. income tax on any dividends and capital gain
distributions which are effectively connected with a U.S. trade or business of
the foreign shareholder.
DIVIDENDS AND DISTRIBUTIONS
THE SERIES EXPECTS TO DECLARE DAILY AND PAY MONTHLY DIVIDENDS OF NET
INVESTMENT INCOME AND SHORT-TERM CAPITAL GAINS.
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A shareholder generally begins to earn dividends on the first business day
after his or her order is placed with the Series, as described above, and
continues to earn dividends through the day on which his or her shares are
redeemed. In the case of certain redemptions, however, Prudential Securities
clients will not be entitled to dividends declared on the date of redemption.
See "Shareholder Guide--How to Sell Your Shares--Redemption of Shares Purchased
through Prudential Securities."
DIVIDENDS AND DISTRIBUTIONS WILL BE PAID IN ADDITIONAL SHARES OF THE SERIES
BASED ON THE NET ASSET VALUE OF SERIES' SHARES ON THE PAYMENT DATE, OR SUCH
OTHER DATE AS THE TRUSTEES MAY DETERMINE, UNLESS THE SHAREHOLDER ELECTS IN
WRITING NOT LESS THAN FIVE BUSINESS DAYS PRIOR TO THE RECORD DATE TO RECEIVE
SUCH DIVIDENDS AND DISTRIBUTIONS IN CASH. Such election should be submitted to
Prudential Mutual Fund Services LLC, Attention: Account Maintenance, P.O. Box
15015, New Brunswick, New Jersey 08906-5015. If you hold shares through
Prudential Securities, you should contact your financial adviser to elect to
receive dividends and distributions in cash. The Fund will notify each
shareholder after the close of the Fund's taxable year of both the dollar amount
and the taxable status of that year's dividends and distributions.
GENERAL INFORMATION
DESCRIPTION OF SHARES
THE FUND WAS ESTABLISHED AS A MASSACHUSETTS BUSINESS TRUST ON MAY 18, 1984, BY
A DECLARATION OF TRUST. The Fund's activities are supervised by its Trustees.
The Declaration of Trust permits the Trustees to issue an unlimited number of
full and fractional shares in separate series, currently designated as the
Connecticut Money Market Series, Florida Series, Maryland Series, Massachusetts
Money Market Series, Massachusetts Series, Michigan Series, New Jersey Money
Market Series, New Jersey Series, New York Money Market Series, New York Series,
North Carolina Series, Ohio Series and Pennsylvania Series. Currently, all
series of the Fund, except for the Connecticut Money Market Series, the Florida
Series, the Massachusetts Series, the Massachusetts Money Market Series, the New
Jersey Money Market Series, the New Jersey Series, the New York Money Market
Series and the New York Series offer three classes, designated Class A, Class B
and Class C shares. The Florida Series, the Massachusetts Series, the New Jersey
Series and the New York Series offer four classes of shares, designated Class A,
Class B, Class C and Class Z shares. The Connecticut Money Market Series, the
Massachusetts Money Market Series, the New Jersey Money Market Series and the
New York Money Market Series offer only one class of shares. In accordance with
the Fund's Declaration of Trust, the Trustees may authorize the creation of
additional series and classes within such series, with such preferences,
privileges, limitations and voting and dividend rights as the Trustees may
determine.
Shares of the Fund, when issued, are fully paid, nonassessable, fully
transferable and redeemable at the option of the holder. Shares are also
redeemable at the option of the Fund under certain circumstances as described
under "Shareholder Guide--How to Sell Your Shares." Each share of the Series is
equal as to earnings, assets and voting privileges, and each class bears the
expenses related to the distribution of its shares. There are no conversion,
preemptive or other subscription rights. In the event of liquidation, each share
of beneficial interest of each series is entitled to its portion of all of the
Fund's assets after all debt and expenses of the Fund have been paid. The Fund's
shares do not have cumulative voting rights for the election of Trustees.
THE FUND DOES NOT INTEND TO HOLD ANNUAL MEETINGS OF SHAREHOLDERS UNLESS
OTHERWISE REQUIRED BY LAW. THE FUND WILL NOT BE REQUIRED TO HOLD MEETINGS OF
SHAREHOLDERS UNLESS, FOR EXAMPLE, THE ELECTION OF TRUSTEES IS REQUIRED TO BE
ACTED UPON BY SHAREHOLDERS UNDER THE INVESTMENT COMPANY ACT. SHAREHOLDERS HAVE
CERTAIN RIGHTS, INCLUDING THE RIGHT TO CALL A MEETING UPON A VOTE OF 10% OF THE
FUND'S OUTSTANDING SHARES FOR THE PURPOSE OF VOTING ON THE REMOVAL OF ONE OR
MORE TRUSTEES OR TO TRANSACT ANY OTHER BUSINESS.
The Declaration of Trust and the By-Laws of the Fund are designed to make the
Fund similar in certain respects to a Massachusetts business corporation. The
principal distinction between a Massachusetts business corporation and a
Massachusetts business trust relates to shareholder liability. Under
Massachusetts law, shareholders of a business trust may, under certain
circumstances, be held personally liable as partners for the obligations of the
fund, which is not the case with a corporation. The
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<PAGE>
Declaration of Trust of the Fund provides that shareholders shall not be subject
to any personal liability for the acts or obligations of the Fund and that every
written obligation, contract, instrument or undertaking made by the Fund shall
contain a provision to the effect that the shareholders are not individually
bound thereunder.
ADDITIONAL INFORMATION
This Prospectus, including the Statement of Additional Information which has
been incorporated by reference herein, does not contain all the information set
forth in the Registration Statement filed by the Fund with the SEC under the
Securities Act of 1933, as amended. Copies of the Registration Statement may be
obtained at a reasonable charge from the SEC or may be examined, without charge,
at the office of the SEC in Washington, D.C.
SHAREHOLDER GUIDE
HOW TO BUY SHARES OF THE FUND
YOU MAY PURCHASE SHARES OF THE SERIES THROUGH PRUDENTIAL SECURITIES, PRUCO
SECURITIES CORPORATION (PRUSEC) OR DIRECTLY FROM THE FUND, THROUGH ITS TRANSFER
AGENT, PRUDENTIAL MUTUAL FUND SERVICES LLC (PMFS OR THE TRANSFER AGENT),
ATTENTION: INVESTMENT SERVICES, P.O. BOX 15020, NEW BRUNSWICK, NEW JERSEY
08906-5020. The minimum initial investment is $1,000. The minimum subsequent
investment is $100. All minimum investment requirements are waived for the
Command Account program (if the Series is designated as your primary fund) and
certain retirement and employee savings plans. For purchases made through the
Automatic Savings Accumulation Plan, the minimum initial and subsequent
investment is $50. See "Shareholder Services" below. For automatic purchases
made through Prudential Securities, the minimum investment requirement is $1,000
and there is no minimum subsequent investment requirement.
An investment in the Series may not be appropriate for tax-exempt or
tax-deferred investors. Such investors should consult with their own tax
advisers.
SHARES OF THE SERIES ARE SOLD THROUGH THE TRANSFER AGENT, WITHOUT A SALES
CHARGE, AT THE NAV PER SHARE NEXT DETERMINED FOLLOWING RECEIPT AND ACCEPTANCE BY
THE TRANSFER AGENT OR PRUDENTIAL SECURITIES OF AN ORDER IN PROPER FORM (I.E.,
CHECK OR FEDERAL FUNDS WIRED TO STATE STREET BANK AND TRUST COMPANY (STATE
STREET), THE FUND'S CUSTODIAN). See "How the Fund Values its Shares." When
payment is received by PMFS prior to 4:30 P.M., New York time, in proper form, a
share purchase order will be entered at the price determined as of 4:30 P.M.,
New York time, on that day, and dividends on the shares purchased will begin on
the business day following such investment. See "Taxes, Dividends and
Distributions." If your purchase is made through an account at Prudential
Securities or through Prusec or another dealer, your dealer will forward a
purchase order and payment to the Fund.
Investors who purchase their shares through a dealer other than Prudential
Securities or Prusec, which dealer has a clearing arrangement with respect to
shares of the Series, may be able to participate in the automatic sweep feature
described below under "Purchases through Prudential Securities--Automatic
Investment (Autosweep)" and "How to Sell Your Shares--Redemptions of Shares
Purchased through Prudential Securities." For further information, contact your
dealer.
Application forms for Prusec and direct accounts with the Transfer Agent
(E.G., non-Prudential Securities account) can be obtained from PMFS or Prusec.
If a share certificate is desired, it must be requested in writing for each
transaction. Certificates are issued only for full shares. Shareholders who hold
their shares through Prudential Securities will not receive share certificates.
Shareholders cannot utilize Expedited Redemption or Check Redemption or have a
Systematic Withdrawal Plan if they have been issued certificates.
The Fund reserves the right in its sole discretion to reject any purchase
order (including an exchange into the Series) or to suspend or modify the
continuous offering of its shares. See "How to Sell Your Shares" below.
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<PAGE>
Your dealer is responsible for forwarding payment promptly to the Fund. The
Distributor reserves the right to cancel any purchase order for which payment
has not been received by the third business day following the investment.
Transactions in shares of the Series may be subject to postage and other
charges imposed by the dealer.
PURCHASES THROUGH PRUDENTIAL SECURITIES
If you have an account with Prudential Securities (or open such an account),
you may ask Prudential Securities to purchase shares of the Series on your
behalf. On the business day following confirmation that a free credit balance
(I.E., immediately available funds) exists in your account, Prudential
Securities will effect a purchase order for shares of the Series in an amount up
to the balance of the NAV determined on that day. Funds held by Prudential
Securities on behalf of its clients in the form of free credit balances are
delivered to the Fund by Prudential Securities and begin earning dividends the
second business day after receipt of the order by Prudential Securities.
Accordingly, Prudential Securities will have the use of such free credit
balances during this period.
Shares of the Series purchased by Prudential Securities on behalf of its
clients will be held by Prudential Securities as record holder. Prudential
Securities will therefore receive statements and dividends directly from the
Fund and will in turn provide investors with Prudential Securities account
statements reflecting purchases, redemptions and dividend payments. Although
Prudential Securities clients who purchase shares of the Series through
Prudential Securities may not redeem shares of the Series by check, Prudential
Securities provides its clients with alternative forms of immediate access to
monies invested in shares of the Series.
Prudential Securities clients wishing additional information concerning
investment in shares of the Series made through Prudential Securities should
call their Prudential Securities financial adviser.
AUTOMATIC INVESTMENT (AUTOSWEEP) (FOR NON-COMMAND ACCOUNTS). Prudential
Securities has advised the Fund that it has automatic investment procedures
(Autosweep) pursuant to which it will make automatic investments of free credit
cash balances (Eligible Credit Balances) held in a client's brokerage account in
shares of the Series, if the Series is your Primary Money Sweep Fund. You may
designate the Series (or certain other Prudential money market funds) as your
Primary Money Sweep Fund. If the Series is your Primary Money Sweep Fund you can
purchase shares of the Series only through the automatic investment procedures
described below; no manual purchase orders will be accepted. You may change your
Primary Money Sweep Fund at any time by notifying your Prudential Securities
financial adviser. Under certain circumstances, you may elect not to have a
money market sweep feature for your account when you open your account.
For accounts other than IRAs and Benefit Plans, as defined below, shares of
the Series will be purchased by Prudential Securities as follows: in the case of
Eligible Credit Balances of $1,000 or more resulting from the proceeds of a
securities sale, maturity of a bond or call and Eligible Credit Balances of
$10,000 or more resulting from a non-trade related credit (E.G., receipt of a
dividend or interest payment or a cash payment into the securities account),
orders to purchase shares will be placed on the business day after such Eligible
Credit Balances become available in your account. For Eligible Credit Balances
of $1.00 or more not otherwise described above, orders to purchase shares will
be placed monthly on the last business day of the month. For IRAs and Benefit
Plans, having Eligible Credit Balances of $1.00 or more, orders to purchase
shares of the Series will be placed by Prudential Securities (i) on the
settlement date of the securities sale, in the case of Eligible Credit Balances
resulting from the proceeds of a securities sale, and (ii) on the business day
after receipt by Prudential Securities of the non-trade related credit
(including the maturity of a bond or a call), in the case of Eligible Credit
Balances resulting from a non-trade related credit. Each time an order resulting
from the settlement of a securities sale is placed, any non-trade related credit
in the client's account will also be invested.
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<PAGE>
The following chart shows the frequency and amount of the sweep for accounts
other than IRAs and Benefit Plans.
<TABLE>
<CAPTION>
DAILY MONTHLY
<S> <C> <C>
Eligible Credit Balances resulting from the proceeds of
a securities sale, maturity of a bond or call $1,000 or more
Eligible Credit Balances resulting from a non-trade
related credit $10,000 or more
Remaining Eligible Credit Balances $1.00 or more
</TABLE>
All shares purchased pursuant to these automatic investment procedures will be
issued at the NAV computed on the business day the order is entered and will
begin earning dividends on the following business day. Purchases through
Autosweep are subject to the Series' minimum initial investment requirement of
$1,000, which is waived for certain retirement and employee savings plans and
custodial accounts for the benefit of minors. Prudential Securities will have
the use of, and will retain the benefits of, Eligible Credit Balances in a
client's brokerage account until monies are delivered to the Fund. (Prudential
Securities delivers Federal Funds on the business day after settlement).
Eligible Credit Balances for the purposes of Autosweep are measured as of the
close of business on the previous business day.
For the purposes of Autosweep, "Benefit Plans" include (i) employee benefit
plans as defined in Section 3(3) of the Employee Retirement Income Security Act
of 1974 (ERISA) other than governmental plans as defined in Section 3(32) of
ERISA and church plans as defined in Section 3(33) of ERISA, (ii) pension,
profit-sharing or other employee benefit plans qualified under Section 401 of
the Internal Revenue Code and (iii) deferred compensation and annuity plans
under Section 457 or 403(b)(7) of the Internal Revenue Code. "IRAs" are
Individual Retirement Accounts as defined in Section 408(a) of the Internal
Revenue Code.
SELF-DIRECTED INVESTMENT. Prudential Securities clients not electing Autosweep
may continue to place orders for the purchase of shares of the Series through
Prudential Securities, subject to the minimum initial and subsequent investment
requirements described above.
A Prudential Securities client who has not elected Autosweep (Automatic
Investment) and who does not place a purchase order promptly after funds are
credited to his or her Prudential Securities account will have a free credit
balance with Prudential Securities and will not begin earning dividends on
shares of the Series until the second business day after receipt of the order by
Prudential Securities from the client. Accordingly, Prudential Securities will
have the use of such free credit balances during this period.
MANUAL INVESTMENT. Prudential Securities will accept manual purchase orders
for shares of the Series only for those clients (i) who are purchasing shares of
a Prudential money market fund which is not their Primary Money Sweep Fund or
(ii) who do not have a money market sweep feature in their account, as described
above under "Automatic Investment."
Prudential Securities clients eligible to make manual purchases, as described
above, are subject to the minimum initial investment of $1,000 and the minimum
subsequent investment of $100, except that all minimum investment requirements
are waived for certain retirement and employee savings plans and custodial
accounts for the benefit of minors. On the business day after the purchase order
is received, Prudential Securities will place the order for shares of the Series
for settlement that day. Shares will be issued at the NAV determined on that day
and will begin earning dividends the next business day, which is the second
business day after receipt of the purchase order by Prudential Securities.
Prudential Securities will have the use of, and will retain the benefits of,
Eligible Credit Balances in the client's brokerage account until monies are
delivered to the Fund. (Prudential Securities delivers Federal Funds on the
business day after settlement.)
PURCHASES THROUGH PRUSEC
You may purchase shares of the Series by placing an order with your Prusec
representative accompanied by payment for the purchase price of such shares and,
in the case of a new account, a completed application form. You should also
submit an IRS Form W-9. The Prusec representative will then forward these items
to the Transfer Agent. See "Purchase by Mail" below.
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<PAGE>
PURCHASE BY WIRE.
For an initial purchase of shares of the Series by wire, you must first
telephone PMFS at (800) 225-1852 (toll-free) to receive an account number. The
following information will be requested: your name, address, tax identification
number, dividend distribution election, amount being wired and wiring bank.
Instructions should then be given by you to your bank to transfer funds by wire
to State Street Bank and Trust Company (State Street), Boston, Massachusetts,
Custody and Shareholder Services Division, Attention: Prudential Municipal
Series Fund, Massachusetts Money Market Series, specifying on the wire the
account number assigned by PMFS and your name.
If you arrange for receipt by State Street of Federal Funds prior to the
calculation of NAV (4:30 P. M., New York time), on a business day, you may
purchase shares of the Series as of that day and receive dividends commencing on
the next business day. See "Net Asset Value" in the Statement of Additional
Information.
In making a subsequent purchase order by wire, you should wire State Street
directly, and should be sure that the wire specifies Prudential Municipal Series
Fund (Massachusetts Money Market Series) and your name and individual account
number. It is not necessary to call PMFS to make subsequent purchase orders
utilizing Federal Funds. The minimum amount which may be invested by wire is
$1,000.
PURCHASE BY MAIL.
Purchase orders for which remittance is to be made by check or money order may
be submitted directly by mail to Prudential Mutual Fund Services LLC, Attention:
Investment Services, P.O. Box 15020, New Brunswick, New Jersey 08906-5020,
together with payment for the purchase price of such shares and, in the case of
a new account, a completed application form. You should also submit an IRS Form
W-9. If PMFS receives an order to purchase shares of the Series and payment in
proper form prior to 4:30 P.M., New York time, the purchase order will be
effective that day and you will begin earning dividends the following business
day. See "Taxes, Dividends and Distributions." Checks should be made payable to
Prudential Municipal Series Fund, Massachusetts Money Market Series. Certified
checks are not necessary, but checks must be drawn on a bank located in the
United States. There are restrictions on the redemption of shares purchased by
check while the funds are being collected. See "How to Sell Your Shares" below.
The minimum initial investment by check is $1,000 and the minimum subsequent
investment by check is $100.
THE PRUDENTIAL ADVANTAGE ACCOUNT PROGRAM
Shares of the Series are offered to participants in the Prudential Advantage
Account Program (the Advantage Account Program), a financial services program
available to clients of Pruco Securities Corporation. Investors participating in
the Advantage Account Program may select the Series as their primary investment
vehicle. Such investors will have free credit cash balances of $1.00 or more in
their Securities Account (Available Cash) (a component of the Advantage Account
Program carried through Prudential Securities) automatically invested in shares
of the Series. Specifically, an order to purchase shares of the Series is placed
(i) in the case of Available Cash resulting from the proceeds of securities
sales, on the settlement date of the securities sale, and (ii) in the case of
Available Cash resulting from non-trade related credits (I.E., receipt of
dividends and interest payments, or a cash payment by the participant into his
or her Securities Account), on the business day after receipt by Prudential
Securities of the non-trade related credit.
All shares purchased pursuant to these automatic purchase procedures will
begin earning dividends on the business day after the order is placed.
Prudential Securities will arrange for investment in shares of the Series at
4:30 P.M. on the day the order is placed and cause payment to be made in Federal
Funds for the shares prior to 4:30 P.M. on the next business day. Prudential
Securities will have the use of free credit cash balances until delivery to the
Fund.
Redemptions will be automatically effected by Prudential Securities to satisfy
debit balances in a Securities Account created by activity therein or arising
under the Advantage Account Program, such as those incurred by use of the
Visa-Registered Trademark- Account, including Visa purchases, cash advances and
Visa Account checks. Each Advantage Account Program Securities Account will be
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<PAGE>
automatically scanned for debits each business day as of the close of business
on that day and after application of any free credit cash balances in the
account to such debits, a sufficient number of shares of the Series (if selected
as the primary fund) and, if necessary, shares of other Advantage Account funds
owned by the Advantage Account Program participant which have not been selected
as his or her primary fund or shares of a participant's money market funds
managed by PMF which are not primary Advantage Account funds will be redeemed as
of that business day to satisfy any remaining debits in the Securities Account.
Shares may not be purchased until all debits, overdrafts and other requirements
in the Securities Account are satisfied.
Advantage Account Program charges and expenses are not reflected in the table
of Fund expenses. See "Fund Expenses."
For information on participation in the Advantage Account Program, you should
telephone (800) 235-7637 (toll-free).
COMMAND-SM- ACCOUNT PROGRAM
Shares of the Series are offered to participants in the Prudential Securities
COMMAND Account program, an integrated financial services program of Prudential
Securities. Investors having a COMMAND Account may select the Series as their
primary fund. Such investors will have the free credit cash balances of $1.00 or
more in their Securities Account (Available Cash) (a component of the COMMAND
Account program) automatically invested in shares of the Series as described
below. Specifically, an order to purchase shares of the Series is placed (i) in
the case of Available Cash resulting from the proceeds of securities sales, on
the settlement date of the securities sale, and (ii) in the case of Available
Cash resulting from non-trade related credits (I.E., receipt of dividends and
interest payments, maturity of a bond or a cash payment by the participant into
his or her Securities Account), on the business day after receipt by Prudential
Securities of the non-trade related credit. These automatic purchase procedures
are also applicable for Corporate COMMAND Accounts.
All shares purchased pursuant to these automatic purchase procedures will
begin earning dividends on the business day after the order is placed.
Prudential Securities will arrange for investment in shares of the Series at
4:30 P.M., New York time, on the business day the order is placed and cause
payment to be made in Federal Funds for the shares prior to 4:30 P.M., New York
time, on the next business day. Prudential Securities will have the use of free
credit cash balances until delivery to the Fund. There are no minimum investment
requirements for participants in the COMMAND Account program.
Redemptions will be automatically effected by Prudential Securities to satisfy
debit balances in a Securities Account created by activity therein or arising
under the COMMAND Program, such as those incurred by use of the
Visa-Registered Trademark- Gold Account, including Visa purchases, cash advances
and Visa Account checks. Each COMMAND program Securities Account will be
automatically scanned for debits monthly for all Visa purchases incurred during
that month and each business day as of the close of business on that day for all
cash advances and check charges as incurred and after application of any free
credit cash balances in the account to such debits; a sufficient number of
shares of the Series and, if necessary, shares of other COMMAND funds owned by
the COMMAND program participant which have not been selected as his or her
primary fund or shares of a participant's money market funds managed by PIFM
which are not primary COMMAND funds will be redeemed as of that business day to
satisfy any remaining debits in the Securities Account. The single monthly debit
for Visa purchases will be made on the twenty-fifth day of each month, or the
prior business day if the twenty-fifth falls on a weekend or holiday. Margin
loans will be utilized to satisfy debits remaining after the liquidation of all
shares of the Series in a Securities Account, and shares may not be purchased
until all debits, margin loans and other requirements in the Securities Account
are satisfied. COMMAND Account participants will not be entitled to dividends
declared on the date of redemption.
For information on participation in the COMMAND Account program, you should
telephone (800) 222-4321 (toll-free).
HOW TO SELL YOUR SHARES
YOU CAN REDEEM YOUR SHARES OF THE SERIES AT ANY TIME FOR CASH AT THE NAV NEXT
DETERMINED AFTER THE REDEMPTION REQUEST IS RECEIVED IN PROPER FORM BY THE
TRANSFER AGENT OR PRUDENTIAL SECURITIES. SEE "HOW THE FUND VALUES ITS SHARES."
20
<PAGE>
Shares for which a redemption request is received by PMFS prior to 4:30 P.M.,
New York time, are entitled to a dividend on the day on which the request is
received. By pre-authorizing Expedited Redemption, you may arrange to have
payment for redeemed shares made in Federal Funds wired to your bank, normally
on the next bank business day following the date of receipt of the redemption
instructions. Should you redeem all of your shares, you will receive the amount
of all dividends declared for the month-to-date on those shares. See "Taxes,
Dividends and Distributions."
If redemption is requested by a corporation, partnership, trust or fiduciary,
written evidence of authority acceptable to the Transfer Agent must be submitted
before such request will be accepted. All correspondence and documents
concerning redemptions should be sent to the Fund in care of its Transfer Agent,
Prudential Mutual Fund Services LLC, Attention: Redemption Services, P.O. Box
15010, New Brunswick, New Jersey 08906-5010.
If the proceeds of the redemption (a) exceed $50,000, (b) are to be paid to a
person other than the record owner, (c) are to be sent to an address other than
the address on the Transfer Agent's records or (d) are to be paid to a
corporation, partnership, trust or fiduciary, the signature(s) on the redemption
request and on certificates, if any, or stock power must be guaranteed by an
"eligible guarantor institution." An "eligible guarantor institution" includes
any bank, broker, dealer or credit union. The Transfer Agent reserves the right
to request additional information from, and make reasonable inquiries of, any
eligible guarantor institution. For clients of Prusec, a signature guarantee may
be obtained from the agency or office manager of most Prudential Insurance and
Financial Services or Preferred Services offices.
NORMALLY, THE FUND MAKES PAYMENT ON THE NEXT BUSINESS DAY FOR ALL SHARES OF
THE SERIES REDEEMED, BUT IN ANY EVENT, PAYMENT IS MADE WITHIN SEVEN DAYS AFTER
RECEIPT BY PMFS OF SHARE CERTIFICATES AND/OR OF A REDEMPTION REQUEST IN PROPER
FORM. However, the Fund may suspend the right of redemption or postpone the date
of payment (a) for any periods during which the New York Stock Exchange is
closed (other than for customary weekend or holiday closings), (b) for any
periods when trading in the markets which the Fund normally utilizes is closed
or restricted or an emergency exists as determined by the SEC so that disposal
of the Series' investments or determination of its NAV is not reasonably
practicable or (c) for such other periods as the SEC may permit for protection
of the Series' shareholders.
PAYMENT FOR REDEMPTION OF RECENTLY PURCHASED SHARES WILL BE DELAYED UNTIL THE
FUND OR ITS TRANSFER AGENT HAS BEEN ADVISED THAT THE PURCHASE CHECK HAS BEEN
HONORED, UP TO 10 CALENDAR DAYS FROM THE TIME OF RECEIPT OF THE PURCHASE CHECK
BY THE TRANSFER AGENT. SUCH DELAY MAY BE AVOIDED BY PURCHASING SHARES BY WIRE OR
BY CERTIFIED OR CASHIER'S CHECK. THE FUND MAKES NO CHARGE FOR REDEMPTION.
REDEMPTION OF SHARES PURCHASED THROUGH PRUDENTIAL SECURITIES
Prudential Securities clients for whom Prudential Securities has purchased
shares of the Series may have these shares redeemed only by instructing their
Prudential Securities financial adviser orally or in writing.
Prudential Securities has advised the Fund that it has established procedures
pursuant to which shares of the Series held by a Prudential Securities client
having a deficiency in his or her Prudential Securities account will be redeemed
automatically to the extent of that deficiency to the nearest highest dollar.
The amount of the redemption will be the lesser of (a) the total net asset value
of the Series' shares held in the client's Prudential Securities account or (b)
the deficiency in the client's Prudential Securities account at the close of
business on the date such deficiency is due. Accordingly, a Prudential
Securities client who wishes to pay for a securities transaction or satisfy any
other debit balance in his or her account other than through this automatic
redemption procedure must do so prior to the day of settlement for such
securities transaction or the date the debit balance is incurred. In the case of
certain automatic redemptions, where Prudential Securities cannot anticipate
debits in the brokerage account (E.G., checks written against the account),
Prudential Securities clients will not be entitled to dividends declared on the
date of redemption; such redemptions will be retained by Prudential Securities.
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<PAGE>
REDEMPTION OF SHARES PURCHASED THROUGH PMFS
If you purchase shares of the Series through PMFS, you may use Regular
Redemption, Expedited Redemption or Check Redemption. Prudential Securities
clients for whom Prudential Securities has purchased shares may not use such
services.
REGULAR REDEMPTION. You may redeem your shares by sending a written request,
accompanied by duly endorsed share certificates, if issued, to PMFS, Attention:
Redemption Services, P.O. Box 15010, New Brunswick, New Jersey 08906-5010. In
this case, all share certificates and certain written requests for redemption
must be endorsed by you with signature guaranteed, as described above. Regular
redemption is made by check sent to your address.
EXPEDITED REDEMPTION. By pre-authorizing Expedited Redemption, you may arrange
to have payment for redeemed shares made in Federal Funds wired to your bank,
normally on the next business day following redemption. In order to use
Expedited Redemption, you may so designate at the time the initial application
form is made or at a later date. Once the Expedited Redemption authorization
form has been completed, the signature on the authorization form guaranteed as
set forth above and the form returned to Prudential Mutual Fund Services LLC,
Attention: Account Maintenance, P.O. Box 15015, New Brunswick, New Jersey
08906-5015, requests for redemption may be made by telegraph, letter or
telephone. To request Expedited Redemption by telephone, you should call PMFS at
(800) 225-1852. Calls must be received by PMFS before 4:30 P.M., New York time,
to permit redemption as of such date. Requests by letter should be addressed to
Prudential Mutual Fund Services LLC, at the address set forth above.
A signature guarantee is not required under Expedited Redemption once the
authorization form is properly completed and returned. The Expedited Redemption
privilege may be used only to redeem shares in an amount of $200 or more, except
that, if an account for which Expedited Redemption is requested has a net asset
value of less than $200, the entire account must be redeemed. The proceeds of
redeemed shares in the amount of $1,000 or more are transmitted by wire to your
account at a domestic commercial bank which is a member of the Federal Reserve
System. Proceeds of less than $1,000 are forwarded by check to your designated
bank account.
DURING PERIODS OF SEVERE MARKET OR ECONOMIC CONDITIONS, EXPEDITED REDEMPTION
MAY BE DIFFICULT TO IMPLEMENT AND YOU SHOULD REDEEM SHARES BY MAIL AS DESCRIBED
ABOVE.
CHECK REDEMPTION. At your request, State Street will establish a personal
checking account for you. Checks drawn on this account can be made payable to
the order of any person in any amount greater than $500. When such check is
presented to State Street for payment, State Street presents the check to the
Fund as authority to redeem a sufficient number of shares of the Series in the
shareholder's account to cover the amount of the check. If insufficient shares
are in the account, or if the purchase was made by check within 10 calendar
days, the check will be returned marked "insufficient funds." Checks in an
amount less than $500 will not be honored. Shares for which certificates have
been issued cannot be redeemed by check. There is a service charge of $5.00
payable to PMFS to establish a checking account and order checks.
INVOLUNTARY REDEMPTION. Because of the relatively high cost of maintaining an
account, the Fund reserves the right to redeem, upon 60 days' written notice, an
account which is reduced by a shareholder to a net asset value of $500 or less
due to redemption. You may avoid such redemption by increasing the net asset
value of your account to an amount in excess of $500.
REDEMPTION IN KIND. If the Trustees determine that it would be detrimental to
the best interests of the remaining shareholders of the Series to make payment
wholly or partly in cash, the Fund may pay the redemption price in whole or in
part by a distribution in kind of securities from the portfolio of the Series,
in lieu of cash, in conformity with the applicable rules of the SEC. Securities
will be readily marketable and will be valued in the same manner as in a regular
redemption. See "How the Fund Values its Shares." If your shares are redeemed in
kind, you will incur brokerage costs in converting the assets into cash. The
Fund has elected to be governed by Rule 18f-1 under the Investment Company Act
under which the Fund is obligated to redeem shares solely in cash up to the
lesser of $250,000 or one percent of the net asset value of the Fund during any
90-day period for any one shareholder.
22
<PAGE>
CLASS B AND CLASS C PURCHASE PRIVILEGE. You may direct that the proceeds of a
redemption of Series shares be invested in Class B or Class C shares of any
Prudential Mutual Fund by calling your Prudential Securities financial adviser
or the Transfer Agent at (800) 225-1852. The transaction will be effected on the
basis of the relative NAV.
HOW TO EXCHANGE YOUR SHARES
AS A SHAREHOLDER OF THE SERIES, YOU HAVE AN EXCHANGE PRIVILEGE WITH OTHER
SERIES OF THE FUND AND CERTAIN OTHER PRUDENTIAL MUTUAL FUNDS (THE EXCHANGE
PRIVILEGE), INCLUDING ONE OR MORE SPECIFIED MONEY MARKET FUNDS AND FUNDS SOLD
WITH AN INITIAL SALES CHARGE, SUBJECT TO THE MINIMUM INVESTMENT REQUIREMENTS OF
SUCH FUNDS. You may exchange your shares for Class A shares of the other series
of the Fund or Class A shares of the Prudential Mutual Funds on the basis of the
relative NAV per share plus the applicable sales charge. No additional sales
charge is imposed in connection with subsequent exchanges. You may not exchange
your shares for Class B shares of the Prudential Mutual Funds, except that
shares acquired prior to January 22, 1990 subject to a contingent deferred sales
charge can be exchanged for Class B shares. See "Class B and Class C Purchase
Privilege" above and "Shareholder Investment Account--Exchange Privilege" in the
Statement of Additional Information. An exchange will be treated as a redemption
and purchase for tax purposes. You may not exchange your shares for Class C or
Class Z shares of other series of the Fund or Class C or Class Z shares of the
Prudential Mutual Funds.
IN ORDER TO EXCHANGE SHARES BY TELEPHONE, YOU MUST AUTHORIZE THE TELEPHONE
EXCHANGE PRIVILEGE ON YOUR INITIAL APPLICATION FORM OR BY WRITTEN NOTICE TO THE
TRANSFER AGENT AND HOLD SHARES IN NON-CERTIFICATE FORM. Thereafter, you may call
the Fund at (800) 225-1852 to execute a telephone exchange of shares, weekdays,
except holidays, between the hours of 8:00 A.M. and 6:00 P.M., New York time.
For your protection and to prevent fraudulent exchanges, your telephone call
will be recorded and you will be asked to provide your personal identification
number. A written confirmation of the exchange transaction will be sent to you.
NEITHER THE FUND NOR ITS AGENTS WILL BE LIABLE FOR ANY LOSS, LIABILITY OR COST
WHICH RESULTS FROM ACTING UPON INSTRUCTIONS REASONABLY BELIEVED TO BE GENUINE
UNDER THE FOREGOING PROCEDURES. All exchanges will be made on the basis of the
relative NAV of the two funds (or series) next determined after the request is
received in good order. The Exchange Privilege is made available only in states
where the exchange may legally be made.
IF YOU HOLD SHARES THROUGH PRUDENTIAL SECURITIES, YOU MUST EXCHANGE YOUR
SHARES BY CONTACTING YOUR PRUDENTIAL SECURITIES FINANCIAL ADVISER.
IF YOU HOLD CERTIFICATES, THE CERTIFICATES, SIGNED IN THE NAME(S) SHOWN ON THE
FACE OF THE CERTIFICATES, MUST BE RETURNED IN ORDER FOR THE SHARES TO BE
EXCHANGED. SEE "HOW TO SELL YOUR SHARES" ABOVE.
You may also exchange shares by mail by writing to Prudential Mutual Fund
Services LLC, Attention: Exchange Processing, P.O. Box 15010, New Brunswick, New
Jersey 08906-5010.
IN PERIODS OF SEVERE MARKET OR ECONOMIC CONDITIONS, THE TELEPHONE EXCHANGE OF
SHARES MAY BE DIFFICULT TO IMPLEMENT AND YOU SHOULD MAKE EXCHANGES BY MAIL BY
WRITING TO PRUDENTIAL MUTUAL FUND SERVICES LLC, AT THE ADDRESS NOTED ABOVE.
The Exchange Privilege is not a right and may be suspended, terminated or
modified on 60 days' notice to shareholders.
FREQUENT TRADING
The Fund and the other Prudential Mutual Funds are not intended to serve as
vehicles for frequent trading in response to short-term fluctuations in the
market. Due to the disruptive effect that market timing investment strategies
and excessive trading can have on efficient portfolio management, each
Prudential Mutual Fund and the Fund reserves the right to refuse purchase orders
and exchanges by any person, group or commonly controlled accounts, if, in the
Manager's sole judgment, such person, group or accounts were following a market
timing strategy or were otherwise engaging in excessive trading (Market Timers).
To implement this authority to protect the Fund and its shareholders from
excessive trading, the Fund will reject all exchanges and purchases from a
Market Timer unless the Market Timer has entered into a written agreement with
the Fund or its affiliates
23
<PAGE>
pursuant to which the Market Timer has agreed to abide by certain procedures,
which include a daily dollar limit on trading. The Fund may notify the Market
Timer of rejection of an exchange or purchase order subsequent to the day on
which the order was placed.
SHAREHOLDER SERVICES
In addition to the Exchange Privilege, you can take advantage of the following
services and privileges:
- AUTOMATIC REINVESTMENT OF DIVIDENDS AND/OR DISTRIBUTIONS. For your
convenience, all dividends and distributions are automatically reinvested in
full and fractional shares of the Series at NAV. You may direct the Transfer
Agent in writing not less than 5 full business days prior to the record date to
have subsequent dividends and/or distributions sent in cash rather than
reinvested. If you hold shares through Prudential Securities, you should contact
your financial adviser.
- AUTOMATIC SAVINGS ACCUMULATION PLAN (ASAP). Under ASAP you may make regular
purchases of the Series' shares in amounts as little as $50 via an automatic
charge to a bank account or Prudential Securities account (including a Command
Account). For additional information about this service, you may contact your
Prudential Securities financial adviser, Prusec representative or the Transfer
Agent directly.
- SYSTEMATIC WITHDRAWAL PLAN. A systematic withdrawal plan is available for
shareholders which provides for monthly or quarterly checks. See "How to Sell
Your Shares."
- MULTIPLE ACCOUNTS. Special procedures have been designed for banks and other
institutions that wish to open multiple accounts. An institution may open a
single master account by filing an application form with the Transfer Agent.
Attention: Customer Service, P.O. Box 15005, New Brunswick, New Jersey 08906,
signed by personnel authorized to act for the institution. Individual
sub-accounts may be opened at the time the master account is opened by listing
them, or they may be added at a later date by written advice or by filing forms
supplied by the Fund. Procedures are available to identify sub-accounts by name
and number within the master account name. The investment minimums set forth
above are applicable to the aggregate amounts invested by a group and not to the
amount credited to each sub-account.
- REPORTS TO SHAREHOLDERS. The Fund will send you annual and semi-annual
reports. The financial statements appearing in annual reports are audited by
independent accountants. In order to reduce duplicate mailing and printing
expenses, the Fund will provide one annual and semi-annual shareholder report
and annual prospectus per household. You may request additional copies of such
reports by calling (800) 225-1852 or by writing to the Fund at Gateway Center
Three, 100 Mulberry Street, Newark, New Jersey 07102-4077. In addition, monthly
unaudited financial data is available upon request from the Fund.
- SHAREHOLDER INQUIRIES. Inquiries should be addressed to the Fund at Gateway
Center Three, 100 Mulberry Street, Newark, New Jersey 07102-4077, or by
telephone, at (800) 225-1852 (toll-free) or, from outside the U.S.A., at (908)
417-7555 (collect).
For additional information regarding the services and privileges described
above, see "Shareholder Investment Account" in the Statement of Additional
Information.
24
<PAGE>
THE PRUDENTIAL MUTUAL FUND FAMILY
Prudential Investments Fund Management offers a broad range of mutual funds
designed to meet your individual needs. We welcome you to review the investment
options available through our family of funds. For more information on the
Prudential Mutual Funds, including charges and expenses, contact your Prudential
Securities financial adviser or Prusec representative or telephone the Fund at
(800) 225-1852 for a free prospectus. Read the prospectus carefully before you
invest or send money.
TAXABLE BOND FUNDS
--------------------------
Prudential Diversified Bond Fund, Inc.
Prudential Government Income Fund, Inc.
Prudential Government Securities Trust
Short-Intermediate Term Series
Prudential High Yield Fund, Inc.
Prudential Mortgage Income Fund, Inc.
Prudential Structured Maturity Fund, Inc.
Income Portfolio
The BlackRock Government Income Trust
TAX-EXEMPT BOND FUNDS
-----------------------------
Prudential California Municipal Fund
California Series
California Income Series
Prudential Municipal Bond Fund
High Yield Series
Insured Series
Intermediate Series
Prudential Municipal Series Fund
Florida Series
Maryland Series
Massachusetts Series
Michigan Series
New Jersey Series
New York Series
North Carolina Series
Ohio Series
Pennsylvania Series
Prudential National Municipals Fund, Inc.
GLOBAL FUNDS
--------------------
Prudential Europe Growth Fund, Inc.
Prudential Global Genesis Fund, Inc.
Prudential Global Limited Maturity Fund, Inc.
Limited Maturity Portfolio
Prudential Intermediate Global Income Fund, Inc.
Prudential International Bond Fund, Inc.
Prudential Natural Resources Fund, Inc.
Prudential Pacific Growth Fund, Inc.
Prudential World Fund, Inc.
Global Series
International Stock Series
The Global Total Return Fund, Inc.
Global Utility Fund, Inc.
EQUITY FUNDS
--------------------
Prudential Balanced Fund
Prudential Distressed Securities Fund, Inc.
Prudential Dryden Fund
Prudential Active Balanced Fund
Prudential Stock Index Fund
Prudential Small-Cap Index Fund
Prudential Bond Market Index Fund
Prudential Pacific Index Fund
Prudential Europe Index Fund
Prudential Emerging Growth Fund, Inc.
Prudential Equity Fund, Inc.
Prudential Equity Income Fund
Prudential Jennison Series Fund, Inc.
Prudential Jennison Growth Fund
Prudential Jennison Growth & Income Fund
Prudential Multi-Sector Fund, Inc.
Prudential Small-Cap Quantum Fund, Inc.
Prudential Small Company Value Fund, Inc.
Prudential Utility Fund, Inc.
Nicholas-Applegate Fund, Inc.
Nicholas-Applegate Growth Equity Fund
MONEY MARKET FUNDS
--------------------------
- - TAXABLE MONEY MARKET FUNDS
Prudential Government Securities Trust
Money Market Series
U.S. Treasury Money Market Series
Prudential Special Money Market Fund, Inc.
Money Market Series
Prudential MoneyMart Assets, Inc.
- - TAX-FREE MONEY MARKET FUNDS
Prudential Tax-Free Money Fund, Inc.
Prudential California Municipal Fund
California Money Market Series
Prudential Municipal Series Fund
Connecticut Money Market Series
Massachusetts Money Market Series
New Jersey Money Market Series
New York Money Market Series
- - COMMAND FUNDS
Command Money Fund
Command Government Fund
Command Tax-Free Fund
- - INSTITUTIONAL MONEY MARKET FUNDS
Prudential Institutional Liquidity Portfolio, Inc.
Institutional Money Market Series
A-1
<PAGE>
No dealer, sales representative or any other person has been authorized to give
any information or to make any representations, other than those contained in
this Prospectus, in connection with the offer contained in this Prospectus, and,
if given or made, such other information or representations must not be relied
upon as having been authorized by the Fund or the Distributor. This Prospectus
does not constitute an offer by the Fund or by the Distributor to sell or a
solicitation of any offer to buy any of the securities offered hereby in any
jurisdiction to any person to whom it is unlawful to make such offer in such
jurisdiction.
-------------------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---
<S> <C>
FUND HIGHLIGHTS................................. 2
What are the Series' Risk Factors and Special
Characteristics?............................. 2
FUND EXPENSES................................... 4
FINANCIAL HIGHLIGHTS............................ 5
CALCULATION OF YIELD............................ 6
HOW THE FUND INVESTS............................ 6
Investment Objective and Policies............. 6
Other Investments and Policies................ 9
Investment Restrictions....................... 10
HOW THE FUND IS MANAGED......................... 10
Manager....................................... 10
Distributor................................... 11
Portfolio Transactions........................ 12
Custodian and Transfer and Dividend Disbursing
Agent........................................ 12
HOW THE FUND VALUES ITS SHARES.................. 13
TAXES, DIVIDENDS AND DISTRIBUTIONS.............. 13
GENERAL INFORMATION............................. 15
Description of Shares......................... 15
Additional Information........................ 16
SHAREHOLDER GUIDE............................... 16
How to Buy Shares of the Fund................. 16
How to Sell Your Shares....................... 20
How to Exchange Your Shares................... 23
Shareholder Services.......................... 24
THE PRUDENTIAL MUTUAL FUND FAMILY............... A-1
</TABLE>
- -------------------------------------------
MF153A 444565U
CUSIP No: 74435M-63-0
PRUDENTIAL
MUNICIPAL
SERIES FUND
----------------------------------------
MASSACHUSETTS MONEY
MARKET SERIES
PROSPECTUS
October 30, 1997
www.prudential.com
[LOGO] Prudential
Investments
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
(MICHIGAN SERIES)
- --------------------------------------------------------------------------------
PROSPECTUS DATED OCTOBER 30, 1997
- ----------------------------------------------------------------
Prudential Municipal Series Fund (the Fund) (Michigan Series) (the Series) is
one of thirteen series of an open-end, management investment company, or mutual
fund. This Series is diversified and is designed to provide the maximum amount
of income that is exempt from Michigan State and federal income taxes consistent
with the preservation of capital and, in conjunction therewith, the Series may
invest in debt securities with the potential for capital gain. The net assets of
the Series are invested primarily in obligations within the four highest ratings
of Moody's Investors Service, Standard & Poor's Ratings Group or another
nationally recognized statistical rating organization or in unrated obligations
which, in the opinion of the Fund's investment adviser, are of comparable
quality. The Series may, however, 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. Subject to
the limitations described herein, the Series may utilize derivatives, including
buying and selling futures contracts and options thereon for the purpose of
hedging its portfolio securities. There can be no assurance that the Series'
investment objective will be achieved. See "How the Fund Invests--Investment
Objective and Policies." The Fund's address is Gateway Center Three, 100
Mulberry Street, Newark, New Jersey 07102-4077, and its telephone number is
(800) 225-1852.
This Prospectus sets forth concisely the information about the Fund and the
Michigan Series that a prospective investor should know before investing.
Additional information about the Fund has been filed with the Securities and
Exchange Commission in a Statement of Additional Information dated October 30,
1997, which information is incorporated herein by reference (is legally
considered a part of this Prospectus) and is available without charge upon
request to the Fund at the address or telephone number noted above.
- --------------------------------------------------------------------------------
INVESTORS ARE ADVISED TO READ THIS PROSPECTUS AND RETAIN IT FOR FUTURE
REFERENCE.
- --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
<PAGE>
FUND HIGHLIGHTS
The following summary is intended to highlight certain information contained
in this Prospectus and is qualified in its entirety by the more detailed
information appearing elsewhere herein.
WHAT IS PRUDENTIAL MUNICIPAL SERIES FUND?
Prudential Municipal Series Fund is a mutual fund whose shares are offered
in thirteen series, each of which operates as a separate fund. A mutual fund
pools the resources of investors by selling its shares to the public and
investing the proceeds of such sale in a portfolio of securities designed to
achieve its investment objective. Technically, the Fund is an open-end,
management investment company. Only the Michigan Series is offered through
this Prospectus.
WHAT IS THE SERIES' INVESTMENT OBJECTIVE?
The Series' investment objective is to maximize current income that is
exempt from Michigan State and federal income taxes consistent with the
preservation of capital. It seeks to achieve this objective by investing
primarily in Michigan State, municipal and local government obligations and
obligations of other qualifying issuers, such as issuers located in Puerto
Rico, the Virgin Islands and Guam, which pay income exempt, in the opinion
of counsel, from Michigan State and federal income taxes (Michigan
Obligations). There can be no assurance that the Series' investment
objective will be achieved. See "How the Fund Invests--Investment Objective
and Policies" at page 8.
WHAT ARE THE SERIES' RISK FACTORS AND SPECIAL CHARACTERISTICS?
In seeking to achieve its investment objective, the Series will invest at
least 80% of the value of its total assets in Michigan Obligations. This
degree of investment concentration makes the Series particularly susceptible
to factors adversely affecting issuers of Michigan Obligations. See "How the
Fund Invests--Investment Objective and Policies-- Special Considerations" at
page 13. The Series may invest up to 30% of its total assets in high yield
securities, commonly known as "junk bonds," which may be considered
speculative and are subject to the risk of an issuer's inability to meet
principal and interest payments on the obligations as well as price
volatility. See "How the Fund Invests--Investment Objective and
Policies--Risk Factors Relating to Investing in High Yield Municipal
Obligations" at page 11. To hedge against changes in interest rates, the
Series may also purchase put options and engage in transactions involving
derivatives, including financial futures contracts and options thereon. See
"How the Fund Invests--Investment Objective and Policies--Futures Contracts
and Options Thereon" at page 12. As with an investment in any mutual fund,
an investment in this Series can decrease in value and you can lose money.
WHO MANAGES THE FUND?
Prudential Investments Fund Management LLC (PIFM or the Manager) is the
Manager of the Fund and is compensated for its services at an annual rate of
.50 of 1% of the Series' average daily net assets. As of September 30, 1997,
PIFM served as manager or administrator to 63 investment companies,
including 41 mutual funds, with aggregate assets of approximately $59.9
billion. The Prudential Investment Corporation, which does business under
the name Prudential Investments (PI, the Subadviser or the investment
adviser), furnishes investment advisory services in connection with the
management of the Fund under a Subadvisory Agreement with PIFM. See "How the
Fund is Managed--Manager" at page 15.
WHO DISTRIBUTES THE SERIES' SHARES?
Prudential Securities Incorporated (Prudential Securities, PSI or the
Distributor), a major securities underwriter and securities and commodities
broker, acts as the Distributor of the Series' Class A, Class B and Class C
shares and is paid a distribution and service fee with respect to Class A
shares which is currently being charged at the annual rate of .10 of 1% of
the average daily net assets of the Class A shares and is paid a
distribution and service fee with respect to Class B shares at the annual
rate of .50 of 1% of the average daily net assets of the Class B shares and
is paid an annual distribution and service fee with respect to Class C
shares which is currently being charged at the rate of .75 of 1% of the
average daily net assets of the Class C shares. See "How the Fund is
Managed--Distributor" at page 16.
2
<PAGE>
WHAT IS THE MINIMUM INVESTMENT?
The minimum initial investment is $1,000 for Class A and Class B shares
and $5,000 for Class C shares. The minimum subsequent investment is $100 for
Class A, Class B and Class C shares. There is no minimum investment
requirement for certain employee savings plans. For purchases made through
the Automatic Savings Accumulation Plan, the minimum initial and subsequent
investment is $50. See "Shareholder Guide--How to Buy Shares of the Fund" at
page 22 and "Shareholder Guide--Shareholder Services" at page 31.
HOW DO I PURCHASE SHARES?
You may purchase shares of the Series through Prudential Securities, Pruco
Securities Corporation (Prusec) or directly from the Fund through its
transfer agent, Prudential Mutual Fund Services LLC. (PMFS or the Transfer
Agent), at the net asset value per share (NAV) next determined after receipt
of your purchase order by the Transfer Agent or Prudential Securities plus a
sales charge which may be imposed either (i) at the time of purchase (Class
A shares) or (ii) on a deferred basis (Class B or Class C shares). See "How
the Fund Values its Shares" at page 18 and "Shareholder Guide--How to Buy
Shares of the Fund" at page 22.
WHAT ARE MY PURCHASE ALTERNATIVES?
The Series offers three classes of shares:
- Class A Shares:
Sold with an initial sales charge of up to 3% of the
offering price.
- Class B Shares:
Sold without an initial sales charge but are subject to
a contingent deferred sales charge or CDSC (declining
from 5% to zero of the lower of the amount invested or
the redemption proceeds) which will be imposed on
certain redemptions made within six years of purchase.
Although Class B shares are subject to higher ongoing
distribution-related expenses than Class A shares, Class
B shares will automatically convert to Class A shares
(which are subject to lower ongoing distribution-related
expenses) approximately seven years after purchase.
- Class C Shares:
Sold without an initial sales charge and, for one year
after purchase, are subject to a 1% CDSC on redemptions.
Like Class B shares, Class C shares are subject to
higher ongoing distribution-related expenses than Class
A shares but do not convert to another class.
See "Shareholder Guide--Alternative Purchase Plan" at page 23.
HOW DO I SELL MY SHARES?
You may redeem your shares at any time at the NAV next determined after
Prudential Securities or the Transfer Agent receives your sell order.
However, the proceeds of redemptions of Class B and Class C shares may be
subject to a CDSC. See "Shareholder Guide--How to Sell Your Shares" at page
26.
HOW ARE DIVIDENDS AND DISTRIBUTIONS PAID?
The Series expects to declare daily and pay monthly dividends of net
investment income, if any, and make distributions of any net capital gains
at least annually. Dividends and distributions will be automatically
reinvested in additional shares of the Series at NAV without a sales charge
unless you request that they be paid to you in cash. See "Taxes, Dividends
and Distributions" at page 19.
3
<PAGE>
FUND EXPENSES
(MICHIGAN SERIES)
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES CLASS C SHARES
-------------- -------------- --------------
<S> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES+
Maximum Sales Load Imposed on
Purchases (as a percentage of
offering price)................... 3% None None
Maximum Deferred Sales Load (as a
percentage of original purchase
price or redemption proceeds,
whichever is lower)............... None 5% during the 1% on
first year, redemptions
decreasing by made within
1% annually to one year of
1% in the purchase
fifth and
sixth years
and 0% the
seventh year*
Maximum Sales Load Imposed on
Reinvested Dividends.............. None None None
Redemption Fees.................... None None None
Exchange Fee....................... None None None
</TABLE>
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES CLASS C SHARES
--------------- --------------- ---------------
<S> <C> <C> <C>
ANNUAL FUND OPERATING EXPENSES**
(as a percentage of average net assets)
Management Fees.................... .50% .50% .50%
12b-1 Fees (After Reduction)....... .10%++ .50% .75%++
Other Expenses..................... .36% .36% .36%
------- ------- -------
Total Fund Operating Expenses
(After Reduction)................. .96% 1.36% 1.61%
------- ------- -------
------- ------- -------
</TABLE>
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
EXAMPLE
You would pay the following expenses on
a $1,000 investment, assuming (1) 5%
annual return and (2) redemption at
the end of each time period:
Class A............................ $ 40 $ 60 $ 81 $ 144
Class B............................ $ 64 $ 73 $ 84 $ 147
Class C............................ $ 26 $ 51 $ 88 $ 191
You would pay the following expenses on
the same investment, assuming no
redemption:
Class A............................ $ 40 $ 60 $ 81 $ 144
Class B............................ $ 14 $ 43 $ 74 $ 147
Class C............................ $ 16 $ 51 $ 88 $ 191
</TABLE>
The above examples are based on restated data for the Series' fiscal year
ended August 31, 1997. THE EXAMPLES SHOULD NOT BE CONSIDERED A
REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER
OR LESS THAN THOSE SHOWN.
The purpose of this table is to assist investors in understanding the
various costs and expenses that an investor in the Series will bear,
whether directly or indirectly. For more complete descriptions of the
various costs and expenses, see "How the Fund is Managed." "Other
Expenses" includes operating expenses of the Series, such as Trustees' and
professional fees, registration fees, reports to shareholders and transfer
agency and custodian fees.
- ---------------
* Class B shares will automatically convert to Class A shares approximately
seven years after purchase. See "Shareholder Guide--Conversion Feature--
Class B Shares."
** The expense information in the table has been restated to reflect current
fees. Effective September 1, 1997, PIFM eliminated its management fee
waiver (.05 of 1%). See "How the Fund is Managed--Manager--Fee Waivers."
+ Pursuant to rules of the National Association of Securities Dealers, Inc.,
the aggregate initial sales charges, deferred sales charges and
asset-based sales charges on shares of the Series may not exceed 6.25% of
total gross sales, subject to certain exclusions. This 6.25% limitation
is imposed on each class of the Series rather than on a per shareholder
basis. Therefore, long-term shareholders of the Series may pay more in
total sales charges than the economic equivalent of 6.25% of such
shareholders' investment in such shares. See "How the Fund is
Managed--Distributor."
++ Although the Class A and Class C Distribution and Service Plans provide that
the Fund may pay a distribution fee of up to .30 of 1% and 1% per annum
of the average daily net assets of the Class A and Class C shares,
respectively, the Distributor has agreed to limit its distribution fees
with respect to the Class A and Class C shares of the Series to no more
than .10 of 1% and .75 of 1% of the average daily net asset value of the
Class A shares and Class C shares, respectively, for the fiscal year
ending August 31, 1998. Total Fund Operating Expenses (Before Waiver) of
the Class A and Class C shares without such limitations would be 1.16%
and 1.86%, respectively. See "How the Fund is Managed--Distributor."
4
<PAGE>
FINANCIAL HIGHLIGHTS
(FOR A SHARE OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT EACH OF THE INDICATED
PERIODS)
(CLASS A SHARES)
The following financial highlights, for the fiscal year ended August 31, 1997,
have been audited by Price Waterhouse LLP, independent accountants, and by
Deloitte and Touche LLP, independent auditors, for the four years ended August
31, 1996. Each of the respective reports by Price Waterhouse LLP and Deloitte &
Touche LLP on such financial statements was unqualified. This information should
be read in conjunction with the financial statements and the notes thereto,
which appear in the Statement of Additional Information. The following financial
highlights contain selected data for a Class A share of beneficial interest
outstanding, total return, ratios to average net assets and other supplemental
data for the periods indicated. This information is based on data contained in
the financial statements. Further performance information is contained in the
annual report, which may be obtained without charge. See "Shareholder
Guide--Shareholder Services--Reports to Shareholders."
<TABLE>
<CAPTION>
CLASS A
--------------------------------------------------------------------------------------------------
JANUARY 22,
1990 (a)
YEAR ENDED AUGUST 31, THROUGH
------------------------------------------------------------------------------- AUGUST 31,
1997 1996 1995 1994 1993 1992 1991 1990
------- ------- ------- ------- ------- ------- ------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning
of period................. $ 11.72 $ 11.89 $ 11.75 $ 12.51 $ 11.90 $ 11.30 $ 10.81 $ 11.02
------- ------- ------- ------- ------- ------- ------- ------
INCOME FROM INVESTMENT
OPERATIONS
Net investment income....... .61(e) .62(e) .64(e) .64 .67 .68 .67 .41
Net realized and unrealized
gain (loss) on investment
transactions.............. .33 (.02) .17 (.69) .71 .60 .49 (.21)
------- ------- ------- ------- ------- ------- ------- ------
Total from investment
operations................ .94 .60 .81 (.05) 1.38 1.28 1.16 .20
------- ------- ------- ------- ------- ------- ------- ------
LESS DISTRIBUTIONS
Dividends from net
investment income......... (.61) (.62) (.64) (.64) (.67) (.68) (.67) (.41)
Distributions in excess of
net
investment income......... --(f) -- -- -- -- -- -- --
Distributions from net
realized gains............ (.04) (.15) (.03) (.07) (.10) -- -- --
------- ------- ------- ------- ------- ------- ------- ------
Total distributions......... (.65) (.77) (.67) (.71) (.77) (.68) (.67) (.41)
------- ------- ------- ------- ------- ------- ------- ------
Net asset value, end of
period.................... $ 12.01 $ 11.72 $ 11.89 $ 11.75 $ 12.51 $ 11.90 $ 11.30 $ 10.81
------- ------- ------- ------- ------- ------- ------- ------
------- ------- ------- ------- ------- ------- ------- ------
TOTAL RETURN (c):........... 8.18% 5.07% 7.13% (0.38)% 11.95% 11.63% 11.04% 1.82%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(000)..................... $29,772 $28,730 $27,024 $ 4,706 $ 3,814 $ 1,618 $ 835 $ 501
Average net assets (000).... $29,737 $27,978 $16,932 $ 4,505 $ 2,285 $ 1,235 $ 694 $ 365
Ratios to average net
assets:
Expenses, including
distribution fee......... .91%(e) .91%(e) 1.02%(e) .91% .96%(d) .98% 1.09% 1.09%(b)
Expenses, excluding
distribution fee......... .81%(e) .81%(e) .92%(e) .81% .86%(d) .88% .99% .99%(b)
Net investment income..... 5.08%(e) 5.18%(e) 5.31%(e) 5.27% 5.51%(d) 5.82% 6.09% 6.25%(b)
Portfolio turnover rate..... 20% 36% 33% 12% 14% 30% 62% 55%
</TABLE>
- ---------------
(a) Commencement of offering of Class A shares.
(b) Annualized.
(c) Total return does not consider the effects of sales loads. Total
return is calculated assuming a purchase of shares on the first day
and a sale on the last day of each period reported and includes
reinvestment of dividends and distributions. Total returns for
periods of less than a full year are not annualized.
(d) Restated.
(e) Net of management fee waiver.
(f) Less than $.005 per share.
5
<PAGE>
FINANCIAL HIGHLIGHTS
(FOR A SHARE OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT EACH OF THE INDICATED
PERIODS)
(CLASS B SHARES)
The following financial highlights, for the fiscal year ended August 31, 1997,
have been audited by Price Waterhouse LLP, independent accountants, and by
Deloitte and Touche LLP, independent auditors, for the four years ended August
31, 1996. Each of the respective reports by Price Waterhouse LLP and Deloitte &
Touche LLP on such financial statements was unqualified. This information should
be read in conjunction with the financial statements and the notes thereto,
which appear in the Statement of Additional Information. The following financial
highlights contain selected data for a Class B share of beneficial interest
outstanding, total return, ratios to average net assets and other supplemental
data for the periods indicated. This information is based on data contained in
the financial statements. Further performance information is contained in the
annual report, which may be obtained without charge. See "Shareholder Guide--
Shareholder Services--Reports to Shareholders."
<TABLE>
<CAPTION>
CLASS B
------------------------------------------------------------------------------------------------------------
YEAR ENDED AUGUST 31,
------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993 1992 1991 1990 1989 (b) 1988
------- ------- ------- ------- ------- ------- ------- ------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of
year............. $ 11.71 $ 11.88 $ 11.75 $ 12.51 $ 11.90 $ 11.30 $ 10.81 $ 11.03 $10.57 $ 10.85
------- ------- ------- ------- ------- ------- ------- ------- ------- ------------
INCOME FROM
INVESTMENT
OPERATIONS
Net investment
income........... .56(e) .57(e) .59(e) .59 .62 .63 .63 .65 .68 .72(a)
Net realized and
unrealized gain
(loss) on
investment
transactions..... .33 (.02) .16 (.69) .71 .60 .49 (.22) .46 (.28)
------- ------- ------- ------- ------- ------- ------- ------- ------- ------------
Total from
investment
operations....... .89 .55 .75 (.10) 1.33 1.23 1.12 .43 1.14 .44
------- ------- ------- ------- ------- ------- ------- ------- ------- ------------
LESS DISTRIBUTIONS
Dividends from net
investment
income........... (.56) (.57) (.59) (.59) (.62) (.63) (.63) (.65) (.68) (.72)
Distributions in
excess of net
investment
income........... --(f) -- -- -- -- -- -- -- -- --
Distributions from
net realized
gains............ (.04) (.15) (.03) (.07) (.10) -- -- -- -- --
------- ------- ------- ------- ------- ------- ------- ------- ------- ------------
Total
distributions.... (.60) (.72) (.62) (.66) (.72) (.63) (.63) (.65) (.68) (.72)
------- ------- ------- ------- ------- ------- ------- ------- ------- ------------
Net asset value,
end of year...... $ 12.00 $ 11.71 $ 11.88 $ 11.75 $ 12.51 $ 11.90 $ 11.30 $ 10.81 $11.03 $ 10.57
------- ------- ------- ------- ------- ------- ------- ------- ------- ------------
------- ------- ------- ------- ------- ------- ------- ------- ------- ------------
TOTAL RETURN
(c):............. 7.76% 4.66% 6.60% (0.78)% 11.51% 11.18% 10.60% 4.02% 11.08% 4.34%
RATIOS/SUPPLEMENTAL
DATA:
Net assets, end of
year (000)....... $27,796 $34,971 $41,459 $70,112 $70,302 $56,095 $59,400 $49,923 $47,025 $ 40,489
Average net assets
(000)............ $31,302 $39,052 $52,216 $72,095 $61,548 $52,137 $50,809 $48,694 $43,957 $ 39,246
Ratios to average
net assets:
Expenses,
including
distribution
fee............. 1.31%(e) 1.31%(e) 1.37%(e) 1.31% 1.36%(d) 1.38% 1.49% 1.44% 1.35% 1.20%(a)
Expenses,
excluding
distribution
fee............. .81%(e) .81%(e) .87%(e) .81% .86%(d) .88% .99% .97% .96% .72%(a)
Net investment
income.......... 4.68%(e) 4.77%(e) 5.04%(e) 4.87% 5.11%(d) 5.42% 5.66% 5.95% 6.20% 6.85%(a)
Portfolio turnover
rate............. 20% 36% 33% 12% 14% 30% 62% 55% 36% 156%
</TABLE>
- ---------------
(a) Net of expense subsidy.
(b) On December 31, 1988, Prudential Mutual Fund Management, Inc.
succeeded The Prudential Insurance Company of America as manager of
the Fund.
(c) Total return does not consider the effects of sales loads. Total
return is calculated assuming a purchase of shares on the first day
and a sale on the last day of each year reported and includes
reinvestment of dividends and distributions.
(d) Restated.
(e) Net of management fee waiver.
(f) Less than $.005 per share.
6
<PAGE>
FINANCIAL HIGHLIGHTS
(FOR A SHARE OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT EACH OF THE INDICATED
PERIODS)
(CLASS C SHARES)
The following financial highlights, for the fiscal year ended August 31, 1997,
have been audited by Price Waterhouse LLP, independent accountants, and by
Deloitte and Touche LLP, independent auditors, for the two years ended August
31, 1996 and for the period from August 1, 1994 through August 31, 1994. Each of
the respective reports by Price Waterhouse LLP and Deloitte & Touche LLP on such
financial statements was unqualified. This information should be read in
conjunction with the financial statements and the notes thereto, which appear in
the Statement of Additional Information. The following financial highlights
contain selected data for a Class C share of beneficial interest outstanding,
total return, ratios to average net assets and other supplemental data for the
periods indicated. This information is based on data contained in the financial
statements. Further performance information is contained in the annual report,
which may be obtained without charge. See "Shareholder Guide-- Shareholder
Services--Reports to Shareholders."
<TABLE>
<CAPTION>
CLASS C
----------------------------------------------
AUGUST 1,
YEAR ENDED 1994 (a)
AUGUST 31, THROUGH
------------------------------ AUGUST 31,
1997 1996 1995 1994
------ ------ ------ ----------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.... $11.71 $11.88 $11.75 $11.78
------ ------ ------ ----------
INCOME FROM INVESTMENT OPERATIONS
Net investment income................... .53(d) .54(d) .56(d) .04
Net realized and unrealized gain (loss)
on investment transactions............ .33 (.02) .16 (.03)
------ ------ ------ ----------
Total from investment operations........ .86 .52 .72 .01
------ ------ ------ ----------
LESS DISTRIBUTIONS
Dividends from net investment income.... (.53) (.54) (.56) (.04)
Distributions in excess of net
investment income..................... --(f) -- -- --
Distributions from net realized gains... (.04) (.15) (.03) --
------ ------ ------ ----------
Total distributions..................... (.57) (.69) (.59) (.04)
------ ------ ------ ----------
Net asset value, end of period.......... $12.00 $11.71 $11.88 $11.75
------ ------ ------ ----------
------ ------ ------ ----------
TOTAL RETURN (c):....................... 7.49% 4.39% 6.29% 0.06%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)......... $ 315 $ 112 $ 100 $ 200(e)
Average net assets (000)................ $ 161 $ 95 $ 61 $ 199(e)
Ratios to average net assets:
Expenses, including distribution
fee.................................. 1.56%(d) 1.56%(d) 1.68%(d) 2.15%(b)
Expenses, excluding distribution
fee.................................. .81%(d) .81%(d) .93%(d) 1.39%(b)
Net investment income................. 4.43%(d) 4.53%(d) 4.66%(d) 4.56%(b)
Portfolio turnover rate................. 20% 36% 33% 12%
</TABLE>
- ---------------
(a) Commencement of offering of Class C shares.
(b) Annualized.
(c) Total return does not consider the effects of sales loads. Total
return is calculated assuming a purchase of shares on the first day
and a sale on the last day of each period reported and includes
reinvestment of dividends and distributions. Total returns for
periods of less than a full year are not annualized.
(d) Net of management fee waiver.
(e) Figures are actual and not rounded to the nearest thousand.
(f) Less than $.005 per share.
7
<PAGE>
HOW THE FUND INVESTS
INVESTMENT OBJECTIVE AND POLICIES
PRUDENTIAL MUNICIPAL SERIES FUND (THE FUND) IS AN OPEN-END, MANAGEMENT
INVESTMENT COMPANY, OR MUTUAL FUND, CONSISTING OF THIRTEEN SEPARATE SERIES. EACH
OF THESE SERIES IS MANAGED INDEPENDENTLY. THE MICHIGAN SERIES (THE SERIES) IS
DIVERSIFIED AND ITS INVESTMENT OBJECTIVE IS TO MAXIMIZE CURRENT INCOME THAT IS
EXEMPT FROM MICHIGAN STATE AND FEDERAL INCOME TAXES CONSISTENT WITH THE
PRESERVATION OF CAPITAL AND, IN CONJUNCTION THEREWITH, THE SERIES MAY INVEST IN
DEBT SECURITIES WITH THE POTENTIAL FOR CAPITAL GAIN. See "Investment Objectives
and Policies" in the Statement of Additional Information.
THE SERIES' INVESTMENT OBJECTIVE IS A FUNDAMENTAL POLICY AND, THEREFORE, MAY
NOT BE CHANGED WITHOUT THE APPROVAL OF THE HOLDERS OF A MAJORITY OF THE SERIES'
OUTSTANDING VOTING SECURITIES AS DEFINED IN THE INVESTMENT COMPANY ACT OF 1940,
AS AMENDED (THE INVESTMENT COMPANY ACT). THE SERIES' POLICIES THAT ARE NOT
FUNDAMENTAL MAY BE MODIFIED BY THE TRUSTEES.
THE SERIES WILL INVEST PRIMARILY IN MICHIGAN STATE, MUNICIPAL AND LOCAL
GOVERNMENT OBLIGATIONS AND OBLIGATIONS OF OTHER QUALIFYING ISSUERS, SUCH AS
ISSUERS LOCATED IN PUERTO RICO, THE VIRGIN ISLANDS AND GUAM, WHICH PAY INCOME
EXEMPT, IN THE OPINION OF COUNSEL, FROM MICHIGAN STATE AND FEDERAL INCOME TAXES
(MICHIGAN OBLIGATIONS). THERE CAN BE NO ASSURANCE THAT THE SERIES WILL BE ABLE
TO ACHIEVE ITS INVESTMENT OBJECTIVE.
As with an investment in any mutual fund, an investment in this Series can
decrease and you can lose money.
Interest on certain municipal obligations may be a preference item for
purposes of the federal alternative minimum tax. The Series may invest without
limit in municipal obligations that are "private activity bonds" (as defined in
the Internal Revenue Code) the interest on which would be a preference item for
purposes of the federal alternative minimum tax. See "Taxes, Dividends and
Distributions." Under Michigan law, dividends paid by the Series are exempt from
Michigan income tax and single business tax for resident individuals and
corporations to the extent they are derived from interest payments on Michigan
Obligations. Michigan Obligations could include general obligation bonds of the
State, counties, cities, towns, etc., revenue bonds of utility systems,
highways, bridges, port and airport facilities, colleges, hospitals, etc., and
industrial development and pollution control bonds. The Series will invest in
long-term obligations, and the dollar-weighted average maturity of the Series'
portfolio will generally range between 10-20 years. The Series also may invest
in certain short-term, tax-exempt notes such as Tax Anticipation Notes, Revenue
Anticipation Notes, Bond Anticipation Notes, Construction Loan Notes and
variable and floating rate demand notes.
Generally, municipal obligations with longer maturities produce higher yields
and are subject to greater price fluctuations as a result of changes in interest
rates (market risk) than municipal obligations with shorter maturities. The
prices of municipal obligations vary inversely with interest rates. Interest
rates are currently much lower than in recent years. As a general matter, bond
prices and the Series' net asset value will vary inversely with interest rate
fluctuations. If rates were to rise sharply, the prices of bonds in the Series'
portfolio might be adversely affected.
THE SERIES MAY INVEST ITS ASSETS IN FLOATING RATE AND VARIABLE RATE
SECURITIES, INCLUDING PARTICIPATION INTERESTS THEREIN AND INVERSE FLOATERS.
There is no limit on the amount of such securities that the Series may purchase.
Floating rate securities normally have a rate of interest which is set as a
specific percentage of a designated base rate, such as the rate on Treasury
bonds or bills or the prime rate at a major commercial bank. The interest rate
on floating rate securities changes periodically when there is a change in the
designated base interest rate. Variable rate securities provide for a specified
periodic adjustment in the interest rate based on prevailing market rates and
generally would allow the Series to demand payment of the obligation on short
notice at par plus accrued interest, which amount may be more or less than the
amount the Series paid for them. An inverse floater is a debt instrument with a
floating or variable interest rate that moves in the opposite direction of the
8
<PAGE>
interest rate on another security or the value of an index. Changes in the
interest rate on the other security or index inversely affect the residual
interest rate paid on the inverse floater, with the result that the inverse
floater's price will be considerably more volatile than that of a fixed rate
bond. The market for the inverse floaters is relatively new.
THE SERIES MAY ALSO INVEST IN MUNICIPAL LEASE OBLIGATIONS. A MUNICIPAL LEASE
OBLIGATION IS A MUNICIPAL SECURITY THE INTEREST ON AND PRINCIPAL OF WHICH IS
PAYABLE OUT OF LEASE PAYMENTS MADE BY THE PARTY LEASING THE FACILITIES FINANCED
BY THE ISSUE. Typically, municipal lease obligations are issued by a state or
municipal financing authority to provide funds for the construction of
facilities (E.G., schools, dormitories, office buildings or prisons) or the
acquisition of equipment. The facilities are typically used by the state or
municipality pursuant to a lease with a financing authority. Certain municipal
lease obligations may trade infrequently. Accordingly, the investment adviser
will monitor the liquidity of municipal lease obligations under the supervision
of the Trustees. Municipal lease obligations will not be considered illiquid for
purposes of the Series' 15% limitation on illiquid securities provided the
investment adviser determines that there is a readily available market for such
securities. See "Other Investments and Policies--Illiquid Securities" below.
THE SERIES WILL INVEST AT LEAST 70% OF ITS TOTAL ASSETS IN MICHIGAN
OBLIGATIONS WHICH, AT THE TIME OF PURCHASE, ARE RATED WITHIN THE FOUR HIGHEST
QUALITY GRADES AS DETERMINED BY 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), 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 ANOTHER
NATIONALLY RECOGNIZED STATISTICAL RATING ORGANIZATION (NRSRO) OR, IF UNRATED,
WILL POSSESS CREDITWORTHINESS, IN THE OPINION OF THE INVESTMENT ADVISER,
COMPARABLE TO SUCH "INVESTMENT GRADE" RATED SECURITIES.
THE SERIES MAY ALSO INVEST UP TO 30% OF ITS TOTAL ASSETS IN MICHIGAN
OBLIGATIONS RATED BELOW Baa BY MOODY'S OR BELOW BBB BY S&P, OR A COMPARABLE
RATING OF ANOTHER NRSRO OR, IF NON-RATED, OF COMPARABLE QUALITY, IN THE OPINION
OF THE FUND'S INVESTMENT ADVISER, BASED ON ITS CREDIT ANALYSIS. Securities rated
Baa by Moody's and BBB by S&P are described as being investment grade but are
also characterized as having speculative characteristics. Securities rated below
Baa by Moody's and below BBB by S&P are considered speculative. See "Description
of Security Ratings" in the Appendix. Such lower-rated high yield securities are
commonly referred to as "junk bonds." Such securities generally offer a higher
current yield than those in the higher rating categories but may also involve
greater price volatility and risk of loss of principal and income. The
investment adviser will attempt to manage risk and enhance yield through credit
analysis and careful security selection. See "Risk Factors Relating to Investing
in High Yield Municipal Obligations" below. Subsequent to its purchase by the
Series, a municipal obligation may be assigned a lower rating or cease to be
rated. Such an event would not require the elimination of the issue from the
portfolio, but the investment adviser will consider such an event in determining
whether the Series should continue to hold the security in its portfolio. Many
issuers of lower-quality bonds choose not to have their obligations rated and
the Series may invest in such unrated securities. Investors should carefully
consider the relative risks associated with investments in securities which
carry lower ratings and in comparable non-rated securities.
9
<PAGE>
During the year ended August 31, 1997, the monthly dollar weighted average
ratings of the debt obligations held by the Series, expressed as a percentage of
the Series' total assets, were as follows:
<TABLE>
<CAPTION>
PERCENTAGE OF
RATINGS TOTAL INVESTMENTS
------------------------------ -------------------------
<S> <C>
AAA/Aaa....................... 72.05 %
AA/Aa......................... 3.83 %
A/A........................... 10.35 %
BBB/Baa....................... 12.43 %
Unrated....................... 0.00 %
AAA/Aaa..................... 0.00 %
AA/Aa....................... 0.00 %
A/A......................... 0.00 %
BBB/Baa..................... 0.88 %
BB/Ba....................... 0.46 %
</TABLE>
From time to time, the Series may own the majority of a municipal issue. Such
majority-owned holdings may present market and credit risks.
The Series may purchase Michigan Obligations which, in the opinion of the
investment adviser, offer the opportunity for capital appreciation. This may
occur, for example, when the investment adviser believes that the issuer of a
particular Michigan Obligation might receive an upgraded credit standing,
thereby increasing the market value of the bonds it has issued or when the
investment adviser believes that interest rates might decline.
UNDER NORMAL MARKET CONDITIONS, THE SERIES WILL ATTEMPT TO INVEST
SUBSTANTIALLY ALL OF THE VALUE OF ITS ASSETS IN MICHIGAN OBLIGATIONS. As a
matter of fundamental policy, during normal market conditions the Series' assets
will be invested so that at least 80% of the income will be exempt from Michigan
State and federal income taxes or the Series will have at least 80% of its total
assets invested in Michigan Obligations. During abnormal market conditions or to
provide liquidity, the Series may hold cash or cash equivalents or investment
grade taxable obligations, including obligations that are exempt from federal,
but not state, taxation and the Series may invest in tax-free cash equivalents,
such as floating rate demand notes, tax-exempt commercial paper and general
obligation and revenue notes or in taxable cash equivalents, such as
certificates of deposit, bankers acceptances, time deposits or other short-term
taxable investments such as repurchase agreements. When, in the opinion of the
investment adviser, abnormal market conditions require a temporary defensive
position, the Series may invest more than 20% of the value of its assets in debt
securities other than Michigan Obligations or may invest its assets so that more
than 20% of the income is subject to Michigan State or federal income taxes. The
Series will treat an investment in a municipal bond refunded with escrowed U.S.
Government securities as U.S. Government securities for purposes of the
Investment Company Act's diversification requirements provided certain
conditions are met. See "Investment Objectives and Policies--In General" in the
Statement of Additional Information.
THE SERIES MAY ACQUIRE PUT OPTIONS (PUTS) GIVING THE SERIES THE RIGHT TO SELL
SECURITIES HELD IN THE SERIES' PORTFOLIO AT A SPECIFIED EXERCISE PRICE ON A
SPECIFIED DATE. Such puts may be acquired for the purpose of protecting the
Series from a possible decline in the market value of the security to which the
put applies in the event of interest rate fluctuations or, in the case of
liquidity puts, for the purpose of shortening the effective maturity of the
underlying security. The aggregate value of premiums paid to acquire puts held
in the Series' portfolio (other than liquidity puts) may not exceed 10% of the
net asset value of the Series. The acquisition of a put may involve an
additional cost to the Series by payment of a premium for the put, by payment of
a higher purchase price for securities to which the put is attached or through a
lower effective interest rate.
In addition, there is a credit risk associated with the purchase of puts in
that the issuer of the put may be unable to meet its obligation to purchase the
underlying security. Accordingly, the Series will acquire puts only under the
following circumstances: (1) the put is written by the issuer of the underlying
security and such security is rated within the four highest quality grades as
10
<PAGE>
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 highest quality grades; or (3) the put is
backed by a letter of credit or similar financial guarantee issued by a person
having securities outstanding which are rated within the two highest quality
grades of an NRSRO.
THE SERIES MAY PURCHASE MUNICIPAL OBLIGATIONS ON A "WHEN-ISSUED" OR "DELAYED
DELIVERY" BASIS, IN EACH CASE WITHOUT LIMIT. When municipal obligations are
offered on a when-issued or delayed delivery basis, the price and coupon rate
are fixed at the time the commitment to purchase is made, but delivery and
payment for the securities take place at a later date. The purchase price for
such securities includes interest accrued during the period between purchase and
settlement and, therefore, no interest accrues to the economic benefit of the
purchaser during such period. In the case of purchases by the Series, the price
that the Series is required to pay on the settlement date may be in excess of
the market value of the municipal obligations on that date. While securities may
be sold prior to the settlement date, the Series intends to purchase these
securities with the purpose of actually acquiring them unless a sale would be
desirable for investment reasons. At the time the Series makes the commitment to
purchase a municipal obligation on a when-issued or delayed delivery basis, it
will record the transaction and reflect the value of the obligation each day in
determining its net asset value. This value may fluctuate from day to day in the
same manner as values of municipal obligations otherwise held by the Series. If
the seller defaults in the sale, the Series could fail to realize the
appreciation, if any, that had occurred. The Series will establish a segregated
account with its Custodian in which it will maintain cash, U.S. Government
securities, equity securities or other liquid, unencumbered assets,
marked-to-market daily, equal in value to its commitments for when-issued or
delayed delivery securities.
THE SERIES MAY ALSO PURCHASE MUNICIPAL FORWARD CONTRACTS. A municipal forward
contract is a municipal security which is purchased on a when-issued basis with
delivery taking place up to five years from the date of purchase. No interest
will accrue on the security prior to the delivery date. The investment adviser
will monitor the liquidity, value, credit quality and delivery of the security
under the supervision of the Trustees.
THE SERIES MAY PURCHASE SECONDARY MARKET INSURANCE ON MICHIGAN OBLIGATIONS
WHICH IT HOLDS OR ACQUIRES. Secondary market insurance would be reflected in the
market value of the municipal obligation purchased and may enable the Series to
dispose of a defaulted obligation at a price similar to that of comparable
municipal obligations which are not in default.
Insurance is not a substitute for the basic credit of an issuer, but
supplements the existing credit and provides additional security therefor. While
insurance coverage for the Michigan Obligations held by the Series reduces
credit risk by providing that the insurance company will make timely payment of
principal and interest if the issuer defaults on its obligation to make such
payment, it does not afford protection against fluctuation in the price, I.E.,
the market value, of the municipal obligations caused by changes in interest
rates and other factors, nor in turn against fluctuations in the net asset value
of the shares of the Series.
RISK FACTORS RELATING TO INVESTING IN HIGH YIELD MUNICIPAL OBLIGATIONS.
FIXED-INCOME SECURITIES ARE SUBJECT TO THE RISK OF AN ISSUER'S INABILITY TO MEET
PRINCIPAL AND INTEREST PAYMENTS ON THE OBLIGATIONS (CREDIT RISK) AND MAY ALSO BE
SUBJECT TO PRICE VOLATILITY DUE TO SUCH FACTORS AS INTEREST RATE SENSITIVITY,
MARKET PERCEPTION OF THE CREDITWORTHINESS OF THE ISSUER AND GENERAL MARKET
LIQUIDITY (MARKET RISK). Lower-rated or unrated (I.E., high yield) securities,
commonly known as "junk bonds," are more likely to react to developments
affecting market and credit risk than are more highly rated securities, which
react primarily to movements in the general level of interest rates. The
investment adviser will perform its own investment analysis and will not rely
principally on the ratings assigned by the rating services, although such
ratings will be considered by the investment adviser. The investment adviser
will consider, among other things, credit risk and market risk, as well as the
financial history and condition, the prospects and the management of an issuer
in selecting securities for the Series' portfolio. The achievement of the
Series' investment objective may be more dependent on the investment adviser's
credit analysis than is the case when investing in only higher quality bonds.
Investors should carefully consider the relative risks of investing in high
yield municipal obligations and understand that such securities are not
generally meant for short-term investing and that yields on junk bonds will
fluctuate over time.
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The amount of high yield securities outstanding has proliferated recently in
conjunction with the decline in creditworthiness of many obligors on municipal
debt, particularly health care providers and certain governmental bodies. An
economic downturn could severely affect the ability of highly leveraged issuers
to service their debt obligations or to repay their obligations upon maturity.
In addition, the secondary market for high yield securities, which is
concentrated in relatively few market makers, may not be as liquid as the
secondary market for more highly rated securities and, from time to time, it may
be more difficult to value high yield securities than more highly rated
securities, and the judgment of the Board of Trustees and the investment adviser
may play a greater role in valuation because there is less reliable objective
data available. Under adverse market or economic conditions, the secondary
market for high yield securities could contract further, independent of any
specific adverse changes in the condition of a particular issuer. As a result,
the investment adviser could find it more difficult to sell these securities or
may be able to sell the securities only at prices lower than if such securities
were widely traded. Prices realized upon the sale of such lower rated or unrated
securities, under these circumstances, may be less than the prices used in
calculating the Series' net asset value. If the investment adviser becomes
involved in activities such as reorganizations of obligors of troubled
investments held by the Series, this may prevent the Series from disposing of
the securities, due to its possession of material, non-public information
concerning the obligor.
LOWER-RATED OR UNRATED DEBT OBLIGATIONS ALSO PRESENT RISKS BASED ON PAYMENT
EXPECTATIONS. If an issuer calls the obligation for redemption, the Series may
have to replace the security with a lower-yielding security, resulting in a
decreased return for investors. If the Series experiences unexpected net
redemptions, it may be forced to sell its higher quality securities, resulting
in a decline in the overall credit quality of the Series' portfolio and
increasing the exposure of the Series to the risks of high yield securities.
FUTURES CONTRACTS AND OPTIONS THEREON
THE SERIES IS AUTHORIZED TO PURCHASE AND SELL CERTAIN DERIVATIVES, INCLUDING
FINANCIAL FUTURES CONTRACTS (FUTURES CONTRACTS) AND OPTIONS THEREON FOR THE
PURPOSE OF HEDGING ITS PORTFOLIO SECURITIES AGAINST FLUCTUATIONS IN VALUE CAUSED
BY CHANGES IN PREVAILING MARKET INTEREST RATES AND HEDGING AGAINST INCREASES IN
THE COST OF SECURITIES THE SERIES INTENDS TO PURCHASE. THE SUCCESSFUL USE OF
FUTURES CONTRACTS AND OPTIONS THEREON BY THE SERIES INVOLVES ADDITIONAL
TRANSACTION COSTS AND IS SUBJECT TO VARIOUS RISKS AND DEPENDS UPON THE
INVESTMENT ADVISER'S ABILITY TO PREDICT THE DIRECTION OF THE MARKET (INCLUDING
INTEREST RATES). THE SERIES, AND THUS INVESTORS, MAY LOSE MONEY THROUGH ANY
UNSUCCESSFUL USE OF THESE STRATEGIES.
A FUTURES CONTRACT OBLIGATES THE SELLER OF THE CONTRACT TO DELIVER TO THE
PURCHASER OF THE CONTRACT CASH EQUAL TO A SPECIFIC DOLLAR AMOUNT TIMES THE
DIFFERENCE BETWEEN THE VALUE OF A SPECIFIC FIXED-INCOME SECURITY OR INDEX AT THE
CLOSE OF THE LAST TRADING DAY OF THE CONTRACT AND THE PRICE AT WHICH THE
AGREEMENT IS MADE. No physical delivery of the underlying securities is made.
The Series will engage in transactions in only those futures contracts and
options thereon that are traded on a commodities exchange or a board of trade.
The Series intends to engage in futures contracts and options thereon as a
hedge against changes, resulting from market conditions, in the value of
securities which are held in the Series' portfolio or which the Series intends
to purchase, in accordance with the rules and regulations of the Commodity
Futures Trading Commission (the CFTC). The Series also intends to engage in such
transactions when they are economically appropriate for the reduction of risks
inherent in the ongoing management of the Series.
THE SERIES MAY NOT PURCHASE OR SELL FUTURES CONTRACTS OR OPTIONS THEREON IF,
IMMEDIATELY THEREAFTER, (I) THE SUM OF INITIAL AND NET CUMULATIVE VARIATION
MARGIN ON OUTSTANDING FUTURES CONTRACTS, TOGETHER WITH PREMIUMS PAID FOR OPTIONS
THEREON, WOULD EXCEED 20% OF THE TOTAL ASSETS OF THE SERIES, OR (II) IN THE CASE
OF RISK MANAGEMENT TRANSACTIONS, THE SUM OF THE AMOUNT OF INITIAL MARGIN
DEPOSITS ON THE SERIES' FUTURES POSITIONS AND PREMIUMS PAID FOR OPTIONS THEREON
WOULD EXCEED 5% OF THE LIQUIDATION VALUE OF THE SERIES' TOTAL ASSETS. There are
no limitations on the percentage of the portfolio which may be hedged and no
limitations on the use of the Series' assets to cover futures contracts and
options thereon,
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except that the aggregate value of the obligations underlying put options will
not exceed 50% of the Series' assets. Certain requirements for qualification as
a regulated investment company under the Internal Revenue Code may limit the
Series' ability to engage in futures contracts and options thereon. See
"Distributions and Tax Information--Federal Taxation" in the Statement of
Additional Information.
Currently, futures contracts are available on several types of fixed-income
securities, including U.S. Treasury bonds and notes, three-month U.S. Treasury
bills and Eurodollars. Futures contracts are also available on a municipal bond
index, based on THE BOND BUYER Municipal Bond Index, an index of 40 actively
traded municipal bonds. The Series may also engage in transactions in other
futures contracts that become available, from time to time, in other
fixed-income securities or municipal bond indices and in other options on such
contracts if the investment adviser believes such contracts and options would be
appropriate for hedging the Series' portfolio.
THERE CAN BE NO ASSURANCE THAT VIABLE MARKETS WILL CONTINUE OR THAT A LIQUID
SECONDARY MARKET WILL EXIST TO TERMINATE ANY PARTICULAR FUTURES CONTRACT AT ANY
SPECIFIC TIME. If it is not possible to close a futures position entered into by
the Series, the Series will continue to be required to make daily cash payments
of variation margin in the event of adverse price movements. In such a
situation, if the Series had insufficient cash, it might have to sell portfolio
securities to meet daily variation margin requirements at a time when it might
be disadvantageous to do so. The inability to close futures positions also could
have an adverse impact on the ability of the Series to hedge effectively. There
is also a risk of loss by the Series of margin deposits in the event of
bankruptcy of a broker with whom the Series has an open position in a futures
contract.
THE SUCCESSFUL USE OF FUTURES CONTRACTS AND OPTIONS THEREON BY THE SERIES IS
SUBJECT TO VARIOUS ADDITIONAL RISKS. Any use of futures transactions involves
the risk of imperfect correlation in movements in the price of futures contracts
and movements in interest rates and, in turn, the prices of the securities that
are the subject of the hedge. If the price of the futures contract moves more or
less than the price of the security that is the subject of the hedge, the Series
will experience a gain or loss that will not be completely offset by movements
in the price of the security. The risk of imperfect correlation is greater where
the securities underlying futures contracts are taxable securities (rather than
municipal securities), are issued by companies in different market sectors or
have different maturities, ratings or geographic mixes than the security being
hedged. In addition, the correlation may be affected by additions to or
deletions from the index which serves as the basis for a futures contract.
Finally, if the price of the security that is subject to the hedge were to move
in a favorable direction, the advantage to the Series would be partially offset
by the loss incurred on the futures contract.
SPECIAL CONSIDERATIONS
BECAUSE THE SERIES WILL INVEST AT LEAST 80% OF THE VALUE OF ITS TOTAL ASSETS
IN MICHIGAN OBLIGATIONS AND BECAUSE IT SEEKS TO MAXIMIZE INCOME DERIVED FROM
MICHIGAN OBLIGATIONS, IT IS MORE SUSCEPTIBLE TO FACTORS ADVERSELY AFFECTING
ISSUERS OF MICHIGAN OBLIGATIONS THAN IS A COMPARABLE MUNICIPAL BOND MUTUAL FUND
THAT IS NOT CONCENTRATED IN SUCH OBLIGATIONS TO THIS DEGREE. Michigan
encountered financial difficulties during the late 1980's, largely as a result
of poor conditions in the automotive industry. Recovery, however, has proved to
be robust in Michigan as employment levels reached an all-time high in 1996.
Michigan's economy is among the most cyclical of all the states and remains
dependent on domestic auto production and durable goods consumption. For fiscal
1994, 1995 and 1996 the State achieved budget surpluses of $383 million, $82
million and $197 million, respectively. Fiscal 1997 General Fund revenues and
expenditures are expected to be $8,348 million and $8,360 million, respectively.
Current projections are that the State's Budget Stabilization Fund will be $1.2
billion at the end of fiscal year 1997 and $1.3 billion by the end of fiscal
year 1998.
The market value and the marketability of Michigan Obligations may be affected
adversely by the same factors that affect Michigan's economy generally. If
either Michigan or any of its local governmental entities is unable to meet its
financial obligations, the income derived by the Series, the ability to preserve
or realize appreciation of the Series' capital and the Series' liquidity could
be adversely affected. See "Investment Objectives and Policies--Special
Considerations Regarding Investments in Tax-Exempt Securities" in the Statement
of Additional Information.
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OTHER INVESTMENTS AND POLICIES
REPURCHASE AGREEMENTS
The Series may on occasion enter into repurchase agreements whereby the seller
of a security agrees to repurchase that security from the Series at a mutually
agreed-upon time and price. The period of maturity is usually quite short,
possibly overnight or a few days, although it may extend over a number of
months. The resale price is in excess of the purchase price, reflecting an
agreed-upon rate of return effective for the period of time the Series' money is
invested in the security. The Series' repurchase agreements will at all times be
fully collateralized in an amount at least equal to the resale price. The
instruments held as collateral are valued daily and if the value of the
instruments declines, the Series will require additional collateral. If the
seller defaults and the value of the collateral securing the repurchase
agreement declines, the Series may incur a loss. The Series participates in a
joint repurchase account with other investment companies managed by Prudential
Investments Fund Management LLC pursuant to an order of the Securities and
Exchange Commission (SEC).
BORROWING
The Series may borrow an amount equal to no more than 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 Series may
pledge up to 33 1/3% of the value of its total assets to secure these
borrowings. The Series will not purchase portfolio securities if its borrowings
exceed 5% of its total assets.
PORTFOLIO TURNOVER
The Series does not expect to trade in securities for short-term gain. It is
anticipated that the annual portfolio turnover rate will not exceed 150%. The
portfolio turnover rate is calculated by dividing the lesser of sales or
purchases of portfolio securities by the average monthly value of the portfolio
securities, excluding securities having a maturity at the date of purchase of
one year or less.
ILLIQUID SECURITIES
The Series may hold up to 15% of its net assets in illiquid securities
including repurchase agreements which have a maturity of longer than seven days,
securities with legal or contractual restrictions on resale (restricted
securities) and securities that are not readily marketable. Restricted
securities eligible for resale pursuant to Rule 144A under the Securities Act of
1933, as amended (the Securities Act), privately placed commercial paper and
municipal lease obligations that have a readily available market are not
considered illiquid for the purposes of this limitation. The investment adviser
will monitor the liquidity of such restricted securities under the supervision
of the Trustees. The Series' investment in Rule 144A securities could have the
effect of increasing illiquidity to the extent that qualified institutional
buyers become, for a limited time, uninterested in purchasing Rule 144A
securities. See "Investment Objectives and Policies--Illiquid Securities" and
"Investment Restrictions" in the Statement of Additional Information. Repurchase
agreements subject to demand are deemed to have a maturity equal to the notice
period.
INVESTMENT RESTRICTIONS
The Series is subject to certain investment restrictions which, like its
investment objective, constitute fundamental policies. Fundamental policies
cannot be changed without the approval of the holders of a majority of the
Series' outstanding voting securities, as defined in the Investment Company Act.
See "Investment Restrictions" in the Statement of Additional Information.
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HOW THE FUND IS MANAGED
THE FUND HAS TRUSTEES WHO, IN ADDITION TO OVERSEEING THE ACTIONS OF THE FUND'S
MANAGER, SUBADVISER AND DISTRIBUTOR, AS SET FORTH BELOW, DECIDE UPON MATTERS OF
GENERAL POLICY. THE FUND'S MANAGER CONDUCTS AND SUPERVISES THE DAILY BUSINESS
OPERATIONS OF THE FUND. THE FUND'S SUBADVISER FURNISHES DAILY INVESTMENT
ADVISORY SERVICES.
For the fiscal year ended August 31, 1997, total expenses of the Series as a
percentage of average net assets, net of fee waiver, were .91%, 1.31% and 1.56%
for the Series' Class A, Class B and Class C shares, respectively. See
"Financial Highlights."
MANAGER
PRUDENTIAL INVESTMENTS FUND MANAGEMENT LLC (PIFM OR THE MANAGER), GATEWAY
CENTER THREE, 100 MULBERRY STREET, NEWARK, NEW JERSEY 07102-4077, IS THE MANAGER
OF THE FUND AND IS COMPENSATED FOR ITS SERVICES AT AN ANNUAL RATE OF .50 OF 1%
OF THE AVERAGE DAILY NET ASSETS OF THE SERIES. PIFM is organized in New York as
a limited liability company. It is the successor to Prudential Mutual Fund
Management, Inc., which transferred its assets to PIFM in September 1996. For
the fiscal year ended August 31, 1997, the Series paid PIFM a management fee of
.45 of 1% of the Series' average net assets, after taking into account a
management fee waiver. See "Fee Waivers" below and "Manager" in the Statement of
Additional Information.
As of September 30, 1997, PIFM served as the manager to 41 open-end investment
companies, constituting all of the Prudential Mutual Funds, and as manager or
administrator to 22 closed-end investment companies with aggregate assets of
approximately $59.9 billion.
UNDER THE MANAGEMENT AGREEMENT WITH THE FUND, PIFM MANAGES THE INVESTMENT
OPERATIONS OF EACH SERIES OF THE FUND AND ALSO ADMINISTERS THE FUND'S BUSINESS
AFFAIRS. See "Manager" in the Statement of Additional Information.
UNDER A SUBADVISORY AGREEMENT BETWEEN PIFM AND THE PRUDENTIAL INVESTMENT
CORPORATION (PIC), DOING BUSINESS AS PRUDENTIAL INVESTMENTS (PI, THE SUBADVISER
OR THE INVESTMENT ADVISER), PI FURNISHES INVESTMENT ADVISORY SERVICES IN
CONNECTION WITH THE MANAGEMENT OF THE FUND AND IS REIMBURSED BY PIFM FOR ITS
REASONABLE COSTS AND EXPENSES INCURRED IN PROVIDING SUCH SERVICES. Under the
Management Agreement, PIFM continues to have responsibility for all investment
advisory services and supervises PI's performance of such services.
The current portfolio manager of the Series is James M. Murphy, Mr. Murphy has
responsibility for the day-to-day management of the portfolio. He has managed
the portfolio since January 1997 and has been employed by PIC in various
capacities since 1989.
PIFM and PIC are indirect, wholly-owned subsidiaries of The Prudential
Insurance Company of America (Prudential), a major diversified insurance and
financial services company, and are part of Prudential Investments, a business
group of Prudential.
FEE WAIVERS
PIFM may from time to time agree to waive all or a portion of its management
fee and subsidize certain operating expenses of the Series. Fee waivers and
expense subsidies will increase the Series' yield and total return. The Series
is not required to reimburse PIFM for such management fee waiver. Effective
September 1, 1997, PIFM discontinued its waiver of 10% of its management fee.
See "Fund Expenses."
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DISTRIBUTOR
PRUDENTIAL SECURITIES INCORPORATED (PRUDENTIAL SECURITIES, OR PSI OR THE
DISTRIBUTOR), ONE SEAPORT PLAZA, NEW YORK, NEW YORK 10292, IS A CORPORATION
ORGANIZED UNDER THE LAWS OF THE STATE OF DELAWARE AND SERVES AS THE DISTRIBUTOR
OF THE CLASS A, CLASS B AND CLASS C SHARES OF THE SERIES. It is an indirect,
wholly-owned subsidiary of Prudential.
UNDER SEPARATE DISTRIBUTION AND SERVICE PLANS (THE CLASS A PLAN, THE CLASS B
PLAN AND THE CLASS C PLAN, COLLECTIVELY, THE PLANS) ADOPTED BY THE FUND UNDER
RULE 12b-1 UNDER THE INVESTMENT COMPANY ACT AND A DISTRIBUTION AGREEMENT (THE
DISTRIBUTION AGREEMENT), PRUDENTIAL SECURITIES (THE DISTRIBUTOR) INCURS THE
EXPENSES OF DISTRIBUTING THE CLASS A, CLASS B AND CLASS C SHARES OF THE SERIES.
These expenses include commissions and account servicing fees paid to, or on
account of, financial advisers of Prudential Securities and representatives of
Pruco Securities Corporation (Prusec), an affiliated broker-dealer, commissions
and account servicing fees paid to, or on account of, other broker-dealers or
financial institutions (other than national banks) which have entered into
agreements with the Distributor, advertising expenses, the cost of printing and
mailing prospectuses to potential investors and indirect and overhead costs of
Prudential Securities and Prusec associated with the sale of Series shares,
including lease, utility, communications and sales promotion expenses.
Under the Plans, the Series is obligated to pay distribution and/or service
fees to the Distributor as compensation for its distribution and service
activities, not as reimbursement for specific expenses incurred. If the
Distributor's expenses exceed its distribution and service fees, the Series will
not be obligated to pay any additional expenses. If the Distributor's expenses
are less than such distribution and service fees, it will retain its full fees
and realize a profit.
UNDER THE CLASS A PLAN, THE SERIES MAY PAY PRUDENTIAL SECURITIES FOR ITS
DISTRIBUTION-RELATED ACTIVITIES WITH RESPECT TO CLASS A SHARES AT AN ANNUAL RATE
OF UP TO .30 OF 1% OF THE AVERAGE DAILY NET ASSETS OF THE CLASS A SHARES OF THE
SERIES. The Class A Plan provides that (i) up to .25 of 1% of the average daily
net assets of the Class A shares may be used to pay for personal service and/or
the maintenance of shareholder accounts (service fee) and (ii) total
distribution fees (including the service fee of .25 of 1%) may not exceed .30 of
1% of the average daily net assets of the Class A shares. Prudential Securities
has agreed to limit its distribution-related fees payable under the Class A Plan
to .10 of 1% of the average daily net assets of the Class A shares for the
fiscal year ending August 31, 1998.
UNDER THE CLASS B AND CLASS C PLANS, THE SERIES MAY PAY PRUDENTIAL SECURITIES
FOR ITS DISTRIBUTION-RELATED ACTIVITIES WITH RESPECT TO CLASS B AND CLASS C
SHARES AT AN ANNUAL RATE OF UP TO .50 OF 1% AND UP TO 1% OF THE AVERAGE DAILY
NET ASSETS OF THE CLASS B AND CLASS C SHARES, RESPECTIVELY. The Class B Plan
provides for the payment to Prudential Securities of (i) an asset-based sales
charge of up to .50 of 1% of the average daily net assets of the Class B shares,
and (ii) a service fee of up to .25 of 1% of the average daily net assets of the
Class B shares; provided that the total distribution-related fee does not exceed
.50 of 1%. The Class C Plan provides for the payment to Prudential Securities of
(i) an asset-based sales charge of up to .75 of 1% of the average daily net
assets of the Class C shares, and (ii) a service fee of up to .25 of 1% of the
average daily net assets of the Class C shares. The service fee is used to pay
for personal service and/or the maintenance of shareholder accounts. Prudential
Securities has agreed to limit its distribution-related fees payable under the
Class C Plan to .75 of 1% of the average daily net assets of the Class C shares
for the fiscal year ending August 31, 1998. Prudential Securities also receives
contingent deferred sales charges from certain redeeming shareholders. See
"Shareholder Guide--How to Sell Your Shares--Contingent Deferred Sales Charges."
For the fiscal year ended August 31, 1997, the Series paid distribution
expenses of .10 of 1%, .50 of 1% and .75 of 1% of the average daily net assets
of the Class A, Class B and Class C shares, respectively. The Series records all
payments made under the Plans as expenses in the calculation of net investment
income. See "Distributor" in the Statement of Additional Information.
Distribution expenses attributable to the sale of Class A, Class B and Class C
shares of the Series will be allocated to each such class based upon the ratio
of sales of each such class to the sales of Class A, Class B and Class C shares
of the Series other than expenses allocable to a particular class. The
distribution fee and sales charge of one class will not be used to subsidize the
sale of another class.
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Each Plan provides that it shall continue in effect from year to year provided
that a majority of the Trustees of the Fund, including a majority of the
Trustees who are not "interested persons" of the Fund (as defined in the
Investment Company Act) and who have no direct or indirect financial interest in
the operation of the Plan or any agreement related to the Plan (the Rule 12b-1
Trustees), vote annually to continue the Plan. Each Plan may be terminated with
respect to the Series at any time by vote of a majority of the Rule 12b-1
Trustees or of a majority of the outstanding shares of the applicable class of
the Series. The Series will not be obligated to pay distribution and service
fees incurred under any Plan if it is terminated or not continued.
In addition to distribution and service fees paid by the Series under the
Class A, Class B and Class C Plans, the Manager (or one of its affiliates) may
make payments out of its own resources to dealers (including Prudential
Securities) and other persons who distribute shares of the Series. Such payments
may be calculated by reference to the net asset value of shares sold by such
persons or otherwise.
The Distributor is subject to the rules of the National Association of
Securities Dealers, Inc. (the NASD) governing maximum sales charges. See
"Distributor" in the Statement of Additional Information.
On October 21, 1993, PSI entered into an omnibus settlement with the SEC,
state securities regulators (with the exception of the Texas Securities
Commissioner who joined the settlement on January 18, 1994) and the NASD to
resolve allegations that from 1980 through 1990 PSI sold certain limited
partnership interests in violation of securities laws to persons for whom such
securities were not suitable and misrepresented the safety, potential returns
and liquidity of these investments. Without admitting or denying the allegations
asserted against it, PSI consented to the entry of an SEC Administrative Order
which stated that PSI's conduct violated the federal securities laws, directed
PSI to cease and desist from violating the federal securities laws, pay civil
penalties, and adopt certain remedial measures to address the violations.
Pursuant to the terms of the SEC settlement, PSI agreed to the imposition of a
$10,000,000 civil penalty, established a settlement fund in the amount of
$330,000,000 and procedures to resolve legitimate claims for compensatory
damages by purchasers of the partnership interests. PSI has agreed to provide
additional funds, if necessary, for the purpose of the settlement fund. PSI's
settlement with the state securities regulators included an agreement to pay a
penalty of $500,000 per jurisdiction. PSI consented to a censure and to the
payment of a $5,000,000 fine in settling the NASD action.
In October 1994, a criminal complaint was filed with the United States
Magistrate for the Southern District of New York alleging that PSI committed
fraud in connection with the sale of certain limited partnership interests in
violation of federal securities laws. An agreement was simultaneously filed to
defer prosecution of these charges for a period of three years from the signing
of the agreement, provided that PSI complies with the terms of the agreement.
If, upon completion of the three year period, PSI has complied with the terms of
the agreement, no prosecution will be instituted by the United States for the
offenses charged in the complaint. If on the other hand, during the course of
the three year period, PSI violates the terms of the agreement, the U.S.
Attorney can then elect to pursue these charges. Under the terms of the
agreement, PSI agreed, among other things, to pay an additional $330,000,000
into the fund established by the SEC to pay restitution to investors who
purchased certain PSI limited partnership interests.
For more detailed information concerning the foregoing matters, see
"Distributor" in the Statement of Additional Information, a copy of which may be
obtained at no cost by calling (800) 225-1852.
The Fund is not affected by PSI's financial condition and is an entirely
separate legal entity from PSI, which has no beneficial ownership therein and
the Fund's assets which are held by State Street Bank and Trust Company, an
independent custodian, are separate and distinct from PSI.
PORTFOLIO TRANSACTIONS
Prudential Securities may act as a broker or futures commission merchant for
the Fund, provided that the commissions, fees or other remuneration it receives
are fair and reasonable. See "Portfolio Transactions and Brokerage" in the
Statement of Additional Information.
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CUSTODIAN AND TRANSFER AND DIVIDEND DISBURSING AGENT
State Street Bank and Trust Company, One Heritage Drive, North Quincy,
Massachusetts 02171, serves as Custodian for the portfolio securities of the
Series and cash and, in that capacity, maintains certain financial and
accounting books and records pursuant to an agreement with the Fund. Its mailing
address is P.O. Box 1713, Boston, Massachusetts 02105.
Prudential Mutual Fund Services LLC (PMFS), Raritan Plaza One, Edison, New
Jersey 08837, serves as Transfer Agent and Dividend Disbursing Agent and, in
those capacities, maintains certain books and records for the Fund. PMFS is a
wholly-owned subsidiary of PIFM. Its mailing address is P.O. Box 15005, New
Brunswick, New Jersey 08906-5005.
HOW THE FUND VALUES ITS SHARES
THE SERIES' NET ASSET VALUE PER SHARE OR NAV IS DETERMINED BY SUBTRACTING ITS
LIABILITIES FROM THE VALUE OF ITS ASSETS AND DIVIDING THE REMAINDER BY THE
NUMBER OF OUTSTANDING SHARES. NAV IS CALCULATED SEPARATELY FOR EACH CLASS. THE
TRUSTEES HAVE FIXED THE SPECIFIC TIME OF DAY FOR THE COMPUTATION OF THE NET
ASSET VALUE OF THE SERIES TO BE AS OF 4:15 P.M., NEW YORK TIME.
Portfolio securities are valued based on market quotations or, if not readily
available, at fair value as determined in good faith under procedures
established by the Trustees. Securities may also be valued based on values
provided by a pricing service. See "Net Asset Value" in the Statement of
Additional Information.
The Series will compute its NAV once daily on days that the New York Stock
Exchange is open for trading except on days on which no orders to purchase, sell
or redeem shares have been received by the Series or days on which changes in
the value of the Series' portfolio securities do not materially affect the NAV.
Although the legal rights of each class of shares are substantially identical,
the different expenses borne by each class will result in different dividends.
As long as the Series declares dividends daily, the NAV of the Class A, Class B
and Class C shares will generally be the same. It is expected, however, that the
Series' dividends will differ by approximately the amount of any distribution
and/or service fee expense accrual differential among the classes.
HOW THE FUND CALCULATES PERFORMANCE
FROM TIME TO TIME THE FUND MAY ADVERTISE THE YIELD, TAX EQUIVALENT YIELD AND
AVERAGE ANNUAL TOTAL RETURN AND AGGREGATE TOTAL RETURN OF THE SERIES IN
ADVERTISEMENTS OR SALES LITERATURE. YIELD, TAX EQUIVALENT YIELD AND TOTAL RETURN
ARE CALCULATED SEPARATELY FOR CLASS A, CLASS B AND CLASS C SHARES. THESE FIGURES
ARE BASED ON HISTORICAL EARNINGS AND ARE NOT INTENDED TO INDICATE FUTURE
PERFORMANCE. The yield refers to the income generated by an investment in the
Series over a one-month or 30-day period. This income is then annualized; that
is, the amount of income generated by the investment during that 30-day period
is assumed to be generated each 30-day period for twelve periods and is shown as
a percentage of the investment. The income earned on the investment is also
assumed to be reinvested at the end of the sixth 30-day period. The tax
equivalent yield is calculated similarly to the yield, except that the yield is
increased using a stated income tax rate to demonstrate the taxable yield
necessary to produce an after-tax yield equivalent to the Series. The total
return shows how much an investment in the Series would have increased
(decreased) over a specified period of time (I.E., one, five or ten years or
since inception of the Series) assuming that all distributions and dividends by
the Series were reinvested on the reinvestment dates during the period and less
all recurring fees. The aggregate total return reflects actual performance over
a stated period of time. Average annual total return is a hypothetical rate of
return that, if achieved annually, would have produced the same aggregate total
return if performance had been constant over the entire period. Average annual
total return smooths out variations in performance and takes into account any
applicable initial or contingent deferred sales charges. Neither average annual
total return nor aggregate
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total return takes into account any federal or state income taxes which may be
payable upon redemption. The Fund also may include comparative performance
information in advertising or marketing the shares of the Series. Such
performance information may include data from Lipper Analytical Services, Inc.,
Morningstar Publications, Inc., other industry publications, business
periodicals and market indices. See "Performance Information" in the Statement
of Additional Information. Further performance information is contained in the
Series' annual and semi-annual reports to shareholders, which may be obtained
without charge. See "Shareholder Guide--Shareholder Services--Reports to
Shareholders."
TAXES, DIVIDENDS AND DISTRIBUTIONS
TAXATION OF THE FUND
THE SERIES HAS ELECTED TO QUALIFY AND INTENDS TO REMAIN QUALIFIED AS A
REGULATED INVESTMENT COMPANY UNDER THE INTERNAL REVENUE CODE. ACCORDINGLY, THE
SERIES WILL NOT BE SUBJECT TO FEDERAL INCOME TAXES ON ITS NET INVESTMENT INCOME
AND NET CAPITAL GAINS, IF ANY, THAT IT DISTRIBUTES TO ITS SHAREHOLDERS. TO THE
EXTENT NOT DISTRIBUTED BY THE SERIES, NET TAXABLE INVESTMENT INCOME AND CAPITAL
GAINS AND LOSSES ARE TAXABLE TO THE SERIES.
To the extent the Series invests in taxable obligations, it will earn taxable
investment income. Also, to the extent the Series engages in hedging
transactions in futures contracts and options thereon, it may earn both
short-term and long-term capital gain or loss. Under the Internal Revenue Code,
special rules apply to the treatment of certain options and futures contracts
(Section 1256 contracts). At the end of each year, such investments held by the
Series will be required to be "marked to market" for federal income tax
purposes; that is, treated as having been sold at market value. Sixty percent of
any gain or loss recognized on these "deemed sales" and on actual dispositions
will be treated as long-term capital gain or loss, and the remainder will be
treated as short-term capital gain or loss. See "Distributions and Tax
Information" in the Statement of Additional Information.
Gain or loss realized by the Series from the sale of securities generally will
be treated as capital gain or loss; however, gain from the sale of certain
securities (including municipal obligations) will be treated as ordinary income
to the extent of any "market discount." Market discount generally is the
difference, if any, between the price paid by the Series for the security and
the principal amount of the security (or, in the case of a security issued at an
original issue discount, the revised issue price of the security). The market
discount rule does not apply to any security that was acquired by the Series at
its original issue. See "Distributions and Tax Information" in the Statement of
Additional Information.
TAXATION OF SHAREHOLDERS
In general, the character of tax-exempt interest distributed by the Series
will flow through as tax-exempt interest to its shareholders provided that 50%
or more of the value of its assets at the end of each quarter of its taxable
year is invested in state, municipal and other obligations, the interest on
which is excluded from gross income for federal income tax purposes. During
normal market conditions, at least 80% of the Series' total assets will be
invested in such obligations. See "How the Fund Invests--Investment Objective
and Policies."
Any dividends out of net taxable investment income, together with
distributions of net short-term gains (I.E., the excess of net short-term
capital gains over net long-term capital losses) distributed to shareholders,
will be taxable as ordinary income to the shareholder whether or not reinvested.
Any net capital gains (I.E., the excess of net capital gains from the sale of
assets held for more than 12 months over net short-term capital losses)
distributed to shareholders will be taxable as capital gains to the
shareholders, whether or not reinvested and regardless of the length of time a
shareholder has owned his or her shares. The maximum capital gains rate for
individuals is 28% with respect to assets held for more than 12 months, but not
more than 18 months, and 20% with respect to assets held for more than 18
months. The maximum capital gains rate for corporate shareholders currently is
the same as the maximum tax rate for ordinary income.
19
<PAGE>
Any gain or loss realized upon a sale or redemption of Series shares by a
shareholder who is not a dealer in securities will be treated as capital gain or
loss. In the case of an individual, any such capital gain will be treated as
short-term capital loss if the shares were held for not more than 12 months,
mid-term gain, taxable at the maximum rate of 28%, if such shares were held for
more than 12, but not more than 18 months, and long-term capital gain, taxable
at the maximum rate of 20%, if such shares were held for more than 18 months. In
the case of a corporation, any such capital gain will be treated as long-term
capital gain, taxable at the same rates as ordinary income, if such shares were
held for more than 12 months. Any such capital loss will be treated as long-term
capital loss if the shares have been held more than one year and otherwise as
short-term capital loss. Any such loss with respect to shares that are held for
six months or less, however, will be treated as long-term capital loss to the
extent of any capital gain distributions received by the shareholder. In
addition, any short-term capital loss will be disallowed to the extent of any
tax-exempt dividends received by the shareholder on shares that are held for six
months or less.
The Fund has obtained opinions of counsel to the effect that neither (i) the
conversion of Class B shares into Class A shares nor (ii) the exchange of Class
B or Class C shares for Class A shares constitutes a taxable event for federal
income tax purposes. However, such opinions are not binding on the Internal
Revenue Service.
CERTAIN INVESTORS MAY INCUR FEDERAL ALTERNATIVE MINIMUM TAX LIABILITY AS A
RESULT OF THEIR INVESTMENT IN THE FUND. Tax-exempt interest from certain
municipal obligations (I.E., certain private activity bonds issued after August
7, 1986) will be treated as an item of tax preference for purposes of the
alternative minimum tax. The Fund anticipates that, under regulations to be
promulgated, items of tax preference incurred by the Series will be attributed
to the Series' shareholders, although some portion of such items could be
allocated to the Series itself. Depending upon each shareholder's individual
circumstances, the attribution of items of tax preference incurred by the Series
could result in liability for the shareholder for the alternative minimum tax.
Similarly, the Series could be liable for the alternative minimum tax for items
of tax preference attributed to it. The Series is permitted to invest in
municipal obligations of the type that will produce items of tax preference.
Corporate shareholders in the Series also will have to take into account the
adjustment for current earnings for alternative minimum tax purposes. Corporate
shareholders should consult with their tax advisers with respect to this
potential adjustment.
Under Michigan law, dividends paid by the Series that are derived from
interest payments attributable to Michigan Obligations are exempt from Michigan
income tax and any income taxes imposed by cities in Michigan for individuals
who reside in Michigan and from the Michigan single business tax for
corporations that are subject to such tax to the extent such dividends are
exempt from federal income tax (except for possible application of the
alternative minimum tax). An investment in the Series, to the extent
attributable to interest on Michigan Obligations, will also be excluded from the
Michigan intangibles tax.
Shareholders are advised to consult their own tax advisers regarding specific
questions as to federal, state or local taxes. See "Distributions and Tax
Information" in the Statement of Additional Information.
WITHHOLDING TAXES
Under the Internal Revenue Code, the Series is required to withhold and remit
to the U.S. Treasury 31% of redemption proceeds on the accounts of certain
shareholders who fail to furnish their tax identification numbers on IRS Form
W-9 (or IRS Form W-8 in the case of certain foreign shareholders) with the
required certifications regarding the shareholder's status under the federal
income tax law. Such withholding is also required on taxable dividends and
capital gain distributions made by the Series unless it is reasonably expected
that at least 95% of the distributions of the Series are comprised of tax-exempt
dividends.
Dividends of net taxable investment income and distributions of net short-term
capital gains paid to a shareholder (including a shareholder acting as a nominee
or fiduciary) who is a nonresident alien individual, a foreign corporation or a
foreign partnership (foreign shareholder) are subject to a 30% (or lower treaty
rate) withholding tax upon the gross amount of the dividends unless the
dividends are effectively connected with a U.S. trade or business conducted by
the foreign shareholder. Capital gain dividends
20
<PAGE>
paid to a foreign shareholder are generally not subject to withholding tax. A
foreign shareholder will, however, be required to pay U.S. income tax on any
dividends and capital gain distributions which are effectively connected with a
U.S. trade or business of the foreign shareholder.
DIVIDENDS AND DISTRIBUTIONS
THE SERIES EXPECTS TO DECLARE DAILY AND PAY MONTHLY DIVIDENDS OF NET
INVESTMENT INCOME, IF ANY, AND MAKE DISTRIBUTIONS AT LEAST ANNUALLY OF ANY
CAPITAL GAINS IN EXCESS OF CAPITAL LOSSES. Dividends paid by the Series with
respect to each class of shares, to the extent any dividends are paid, will be
calculated in the same manner, at the same time, on the same day and will be in
the same amount except that each class will bear its own distribution charges,
generally resulting in lower dividends for Class B and Class C shares.
Distributions of net capital gains, if any, will be paid in the same amount for
each class of shares. See "How the Fund Values its Shares."
DIVIDENDS AND DISTRIBUTIONS WILL BE PAID IN ADDITIONAL SHARES OF THE SERIES
BASED ON THE NAV OF EACH CLASS OF THE SERIES ON THE PAYMENT DATE AND RECORD
DATE, RESPECTIVELY, OR SUCH OTHER DATE AS THE TRUSTEES MAY DETERMINE, UNLESS THE
SHAREHOLDER ELECTS IN WRITING NOT LESS THAN FIVE BUSINESS DAYS PRIOR TO THE
RECORD DATE TO RECEIVE SUCH DIVIDENDS AND DISTRIBUTIONS IN CASH. Such election
should be submitted to Prudential Mutual Fund Services LLC, Attention: Account
Maintenance, P.O. Box 15015, New Brunswick, New Jersey 08906-5015. If you hold
shares through Prudential Securities, you should contact your financial adviser
to elect to receive dividends and distributions in cash. The Fund will notify
each shareholder after the close of the Fund's taxable year of both the dollar
amount and the taxable status of that year's dividends and distributions on a
per share basis.
GENERAL INFORMATION
DESCRIPTION OF SHARES
THE FUND WAS ESTABLISHED AS A MASSACHUSETTS BUSINESS TRUST ON MAY 18, 1984, BY
A DECLARATION OF TRUST. The Fund's activities are supervised by its Trustees.
The Declaration of Trust permits the Trustees to issue an unlimited number of
full and fractional shares in separate series, currently designated as the
Connecticut Money Market Series, Florida Series, Maryland Series, Massachusetts
Series, Massachusetts Money Market Series, Michigan Series, New Jersey Series,
New Jersey Money Market Series, New York Series, New York Money Market Series,
North Carolina Series, Ohio Series and Pennsylvania Series. The Series is
authorized to issue an unlimited number of shares, divided into three classes,
designated Class A, Class B and Class C. Each class of shares represents an
interest in the same assets of the Series and are identical in all respects
except that (i) each class is subject to different 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 and (iv)
only Class B shares have a conversion feature. See "How the Fund is
Managed--Distributor." In accordance with the Fund's Declaration of Trust, the
Trustees may authorize the creation of additional series and classes within such
series, with such preferences, privileges, limitations and voting and dividend
rights as the Trustees may determine.
Shares of the Fund, when issued, are fully paid, nonassessable, fully
transferable and redeemable at the option of the holder. Shares are also
redeemable at the option of the Fund under certain circumstances as described
under "Shareholder Guide--How to Sell Your Shares." Each share of each class of
the Series is equal as to earnings, assets and voting privileges, except as
noted above, and each class bears the expenses related to the distribution of
its shares. Except for the conversion feature applicable to the Class B shares,
there are no conversion, preemptive or other subscription rights. In the event
of liquidation, each share of beneficial interest of each series is entitled to
its portion of all of the Fund's assets after all debt and expenses of the Fund
have
21
<PAGE>
been paid. Since Class B and Class C shares generally bear higher distribution
expenses than Class A shares, the liquidation proceeds to shareholders of those
classes are likely to be lower than to Class A shareholders. The Fund's shares
do not have cumulative voting rights for the election of Trustees.
THE FUND DOES NOT INTEND TO HOLD ANNUAL MEETINGS OF SHAREHOLDERS UNLESS
OTHERWISE REQUIRED BY LAW. THE FUND WILL NOT BE REQUIRED TO HOLD MEETINGS OF
SHAREHOLDERS UNLESS, FOR EXAMPLE, THE ELECTION OF TRUSTEES IS REQUIRED TO BE
ACTED UPON BY SHAREHOLDERS UNDER THE INVESTMENT COMPANY ACT. SHAREHOLDERS HAVE
CERTAIN RIGHTS, INCLUDING THE RIGHT TO CALL A MEETING UPON A VOTE OF 10% OF THE
FUND'S OUTSTANDING SHARES FOR THE PURPOSE OF VOTING ON THE REMOVAL OF ONE OR
MORE TRUSTEES OR TO TRANSACT ANY OTHER BUSINESS.
The Declaration of Trust and the By-Laws of the Fund are designed to make the
Fund similar in certain respects to a Massachusetts business corporation. The
principal distinction between a Massachusetts business corporation and a
Massachusetts business trust relates to shareholder liability. Under
Massachusetts law, shareholders of a business trust may, under certain
circumstances, be held personally liable as partners for the obligations of the
fund, which is not the case with a corporation. The Declaration of Trust of the
Fund provides that shareholders shall not be subject to any personal liability
for the acts or obligations of the Fund and that every written obligation,
contract, instrument or undertaking made by the Fund shall contain a provision
to the effect that the shareholders are not individually bound thereunder.
ADDITIONAL INFORMATION
This Prospectus, including the Statement of Additional Information which has
been incorporated by reference herein, does not contain all the information set
forth in the Registration Statement filed by the Fund with the SEC under the
Securities Act. Copies of the Registration Statement may be obtained at a
reasonable charge from the SEC or may be examined, without charge, at the office
of the SEC in Washington, D.C.
SHAREHOLDER GUIDE
HOW TO BUY SHARES OF THE FUND
YOU MAY PURCHASE SHARES OF THE SERIES THROUGH PRUDENTIAL SECURITIES, PRUSEC OR
DIRECTLY FROM THE FUND, THROUGH ITS TRANSFER AGENT, PRUDENTIAL MUTUAL FUND
SERVICES LLC (PMFS OR THE TRANSFER AGENT), ATTENTION: INVESTMENT SERVICES, P.O.
BOX 15020, NEW BRUNSWICK, NEW JERSEY 08906-5020. The purchase price is the NAV
next determined following receipt of an order in proper form by the Transfer
Agent or Prudential Securities plus a sales charge which, at your option, may be
imposed either (i) at the time of purchase (Class A shares) or (ii) on a
deferred basis (Class B or Class C shares). Payment may be made by wire, check
or through your brokerage account. See "Alternative Purchase Plan" below. See
also "How the Fund Values its Shares."
An investment in the Series may not be appropriate for tax-exempt or
tax-deferred investors. Such investors should consult their own tax advisers.
The minimum initial investment is $1,000 for Class A and Class B shares and
$5,000 for Class C shares. The minimum subsequent investment is $100 for all
classes. All minimum investment requirements are waived for certain employee
savings plans. For purchases made through the Automatic Savings Accumulation
Plan, the minimum initial and subsequent investment is $50. See "Shareholder
Services" below.
Application forms can be obtained from PMFS, Prudential Securities or Prusec.
If a share certificate is desired, it must be requested in writing for each
transaction. Certificates are issued only for full shares. Shareholders who hold
their shares through Prudential Securities will not receive share certificates.
The Fund reserves the right to reject any purchase order (including an
exchange into the Series) or to suspend or modify the continuous offering of its
shares. See "How to Sell Your Shares" below.
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<PAGE>
Your dealer is responsible for forwarding payment promptly to the Fund. The
Distributor reserves the right to cancel any purchase order for which payment
has not been received by the third business day following the investment.
Transactions in shares of the Series may be subject to postage and handling
charges imposed by your dealer.
PURCHASE BY WIRE. For an initial purchase of shares of the Series by wire, you
must first telephone PMFS at (800) 225-1852 (toll-free) to receive an account
number. The following information will be requested: your name, address, tax
identification number, class election, dividend distribution election, amount
being wired and wiring bank. Instructions should then be given by you to your
bank to transfer funds by wire to State Street Bank and Trust Company (State
Street), Boston, Massachusetts, Custody and Shareholder Services Division,
Attention: Prudential Municipal Series Fund (Michigan Series), specifying on the
wire the account number assigned by PMFS and your name and identifying the class
in which you are eligible to invest (Class A, Class B or Class C shares) and the
name of the Series.
If you arrange for receipt by State Street of Federal Funds prior to the
calculation of NAV (4:15 P.M., New York time), on a business day, you may
purchase shares of the Series as of that day. See "Net Asset Value" in the
Statement of Additional Information.
In making a subsequent purchase order by wire, you should wire State Street
directly and should be sure that the wire specifies Prudential Municipal Series
Fund, (Michigan Series), Class A, Class B or Class C shares and your name and
individual account number. It is not necessary to call PMFS to make subsequent
purchase orders utilizing Federal Funds. The minimum amount which may be
invested by wire is $1,000.
ALTERNATIVE PURCHASE PLAN
THE FUND OFFERS THROUGH THIS PROSPECTUS THREE CLASSES OF SHARES (CLASS A,
CLASS B AND CLASS C SHARES) WHICH ALLOWS YOU TO CHOOSE THE MOST BENEFICIAL SALES
CHARGE STRUCTURE FOR YOUR INDIVIDUAL CIRCUMSTANCES GIVEN THE AMOUNT OF THE
PURCHASE, THE LENGTH OF TIME YOU EXPECT TO HOLD THE SHARES AND OTHER RELEVANT
CIRCUMSTANCES (ALTERNATIVE PURCHASE PLAN).
<TABLE>
<CAPTION>
ANNUAL 12b-1 FEES
(AS A % OF AVERAGE
SALES CHARGE DAILY NET ASSETS) OTHER INFORMATION
----------------------------------- ----------------------------------- -----------------------------------
<S> <C> <C> <C>
CLASS A Maximum initial sales charge of 3% .30 of 1% (currently being charged Initial sales charge waived or
of the public offering price at a rate of .10 of 1%) reduced for certain purchases
CLASS B Maximum contingent deferred sales .50 of 1% Shares convert to Class A shares
charge or CDSC of 5% of the lesser approximately seven years after
of the amount invested or the purchase
redemption proceeds; declines to
zero after six years
CLASS C Maximum CDSC of 1% of the lesser of 1% (currently being charged at a Shares do not convert to another
the amount invested or the rate of .75 of 1%) class
redemption proceeds on redemptions
made within one year of purchase
</TABLE>
23
<PAGE>
The three classes of shares represent an interest in the same portfolio of
investments of the Series and have the same rights, except that (i) each class
bears the separate expenses of its Rule 12b-1 distribution and service plan,
(ii) each class has exclusive voting rights 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, and (iii) only Class B
shares have a conversion feature. The three classes also have separate exchange
privileges. See "How to Exchange Your Shares" below. The income attributable to
each class and the dividends payable on the shares of each class will be reduced
by the amount of the distribution fee of each class. Class B and Class C shares
bear the expenses of a higher distribution fee which will generally cause them
to have higher expense ratios and to pay lower dividends than the Class A
shares.
Financial advisers and other sales agents who sell shares of the Series will
receive different compensation for selling Class A, Class B and Class C shares
and will generally receive more compensation initially for selling Class A and
Class B shares than for selling Class C shares.
IN SELECTING A PURCHASE ALTERNATIVE, YOU SHOULD CONSIDER, AMONG OTHER THINGS,
(1) the length of time you expect to hold your investment, (2) the amount of any
applicable sales charge (whether imposed at the time of purchase or redemption)
and distribution-related fees, as noted above, (3) whether you qualify for any
reduction or waiver of any applicable sales charge, (4) the various exchange
privileges among the different classes of shares (see "How to Exchange Your
Shares" below) and (5) the fact that Class B shares automatically convert to
Class A shares approximately seven years after purchase (see "Conversion
Feature--Class B Shares" below).
The following is provided to assist you in determining which method of
purchase best suits your individual circumstances and is based on current fees
and expenses being charged to the Series:
If you intend to hold your investment in the Series for less than 5 years and
do not qualify for a reduced sales charge on Class A shares, since Class A
shares are subject to a maximum initial sales charge of 3% and Class B shares
are subject to a CDSC of 5% which declines to zero over a 6 year period, you
should consider purchasing Class C shares over either Class A or Class B shares.
If you intend to hold your investment for 5 years or more and do not qualify
for a reduced sales charge on Class A shares, since Class B shares convert to
Class A shares approximately 7 years after purchase and because all of your
money would be invested initially in the case of Class B shares, you should
consider purchasing Class B shares over either Class A or Class C shares.
If you qualify for a reduced sales charge on Class A shares, it may be more
advantageous for you to purchase Class A shares over either Class B or Class C
shares regardless of how long you intend to hold your investment. However,
unlike Class B and Class C shares, you would not have all of your money invested
initially because the sales charge on Class A shares is deducted at the time of
purchase.
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<PAGE>
If you do not qualify for a reduced sales charge on Class A shares and you
purchase Class C shares, you would have to hold your investment for more than 4
years for the higher cumulative annual distribution-related fee on those shares
to exceed the initial sales charge plus cumulative annual distribution-related
fee on Class A shares. This does not take into account the time value of money,
which further reduces the impact of the higher Class C distribution-related fee
on the investment, fluctuations in net asset value, the effect of the return on
the investment over this period of time or redemptions when the CDSC is
applicable.
ALL PURCHASES OF $1 MILLION OR MORE, EITHER AS PART OF A SINGLE INVESTMENT OR
UNDER RIGHTS OF ACCUMULATION OR LETTERS OF INTENT, MUST BE FOR CLASS A SHARES.
See "Reduction and Waiver of Initial Sales Charges" below.
CLASS A SHARES
The offering price of Class A shares for investors choosing the initial sales
charge alternative is the next determined NAV plus a sales charge (expressed as
a percentage of the offering price and of the amount invested) as shown in the
following table:
<TABLE>
<CAPTION>
SALES CHARGE AS SALES CHARGE AS DEALER CONCESSION
PERCENTAGE OF PERCENTAGE OF AS PERCENTAGE OF
AMOUNT OF PURCHASE OFFERING PRICE AMOUNT INVESTED OFFERING PRICE
------------------------ --------------- --------------- -----------------
<S> <C> <C> <C>
Less than $99,999 3.00% 3.09% 3.00%
$100,000 to $249,999 2.50 2.56 2.50
$250,000 to $499,999 1.50 1.52 1.50
$500,000 to $999,999 1.00 1.01 1.00
$1,000,000 and above None None None
</TABLE>
The Distributor may reallow the entire initial sales charge to dealers.
Selling dealers may be deemed to be underwriters, as that term is defined in the
Securities Act.
In connection with the sale of Class A shares at NAV (without payment of an
initial sales charge), the Manager, the Distributor or one of their affiliates
will pay dealers, financial advisers and other persons which distribute shares a
finders' fee from its own resources based on a percentage of the net asset value
of shares sold by such persons.
REDUCTION AND WAIVER OF INITIAL SALES CHARGES. Reduced sales charges are
available through Rights of Accumulation and Letters of Intent. Shares of the
Fund and shares of other Prudential Mutual Funds (excluding money market funds
other than those acquired pursuant to the exchange privilege) may be aggregated
to determine the applicable reduction. See "Purchase and Redemption of Fund
Shares--Reduction and Waiver of Initial Sales Charges--Class A Shares" in the
Statement of Additional Information.
PRUARRAY SAVINGS PROGRAM. Class A shares are also offered at net asset value
to employees of companies that enter into a written agreement with Prudential
Retirement Services to participate in the PruArray Savings Program. Under this
Program, a limited number of Prudential Mutual Funds are available for purchase
at net asset value by Savings Accumulation Plans of the company's employees. The
Program is available only to employees who open a Savings Accumulation Plan
account with the Transfer Agent. The program is offered to companies that have
at least 250 eligible employees.
SPECIAL RULES APPLICABLE TO RETIREMENT PLANS. After a PruArray Plan qualifies
to purchase Class A shares at NAV, all subsequent purchases will be made at NAV.
OTHER WAIVERS. Class A shares may be purchased at NAV, through Prudential
Securities or the Transfer Agent, by the following persons: (a) officers and
current and former Directors/Trustees of the Prudential Mutual Funds (including
the Fund), (b) employees of Prudential Securities and PIFM and their
subsidiaries and members of the families of such persons who maintain an
"employee related" account at Prudential Securities or the Transfer Agent, (c)
employees of subadvisers of the Prudential Mutual Funds provided that the
purchases at NAV are permitted by such person's employer, (d) Prudential
employees and special agents of Prudential and its subsidiaries and all persons
who have retired directly from active service with Prudential
25
<PAGE>
or one of its subsidiaries, (e) registered representatives and employees of
dealers who have entered into a selected dealer agreement with Prudential
Securities provided that purchases at NAV are permitted by such person's
employer and (f) investors who have a business relationship with a financial
adviser who joined Prudential Securities from another investment firm, provided
that (i) the purchase is made within 180 days of the commencement of the
financial adviser's employment at Prudential Securities or within one year in
the case of benefit plans, (ii) the purchase is made with proceeds of a
redemption of shares of any open-end non-money market fund sponsored by the
financial adviser's previous employer (other than a fund which imposes a
distribution or service fee of .25 of 1% or less) and (iii) the financial
adviser served as the client's broker on the previous purchases.
You must notify the Transfer Agent either directly or through Prudential
Securities or Prusec that you are entitled to the reduction or waiver of the
sales charge. The reduction or waiver will be granted subject to confirmation of
your entitlement. No initial sales charges are imposed upon Class A shares
acquired upon the reinvestment of dividends and distributions. See "Purchase and
Redemption of Fund Shares--Reduction and Waiver of Initial Sales Charges--Class
A Shares" in the Statement of Additional Information.
CLASS B AND CLASS C SHARES
The offering price of Class B and Class C shares for investors choosing one of
the deferred sales charge alternatives is the NAV next determined following
receipt of an order by the Transfer Agent or Prudential Securities. Although
there is no sales charge imposed at the time of purchase, redemptions of Class B
and Class C shares may be subject to a CDSC. See "How to Sell Your
Shares--Contingent Deferred Sales Charges" below. The Distributor will pay sales
commissions of up to 4% of the purchase price of Class B shares to dealers,
financial advisers and other persons who sell Class B shares at the time of sale
from its own resources. This facilitates the ability of the Fund to sell the
Class B shares without an initial sales charge being deducted at the time of
purchase. The Distributor anticipates that it will recoup its advancement of
sales commissions from the combination of the CDSC and the distribution fee. See
"How the Fund is Managed--Distributor." In connection with the sale of Class C
shares, the Distributor will pay dealers, financial advisers and other persons
which distribute Class C shares a sales commission of up to 1% of the purchase
price at the time of the sale.
HOW TO SELL YOUR SHARES
YOU CAN REDEEM YOUR SHARES OF THE SERIES AT ANY TIME FOR CASH AT THE NAV NEXT
DETERMINED AFTER THE REDEMPTION REQUEST IS RECEIVED IN PROPER FORM BY THE
TRANSFER AGENT OR PRUDENTIAL SECURITIES. SEE "HOW THE FUND VALUES ITS SHARES."
In certain cases, however, redemption proceeds will be reduced by the amount of
any applicable contingent deferred sales charge, as described below. See
"Contingent Deferred Sales Charges" below.
IF YOU HOLD SHARES OF THE SERIES THROUGH PRUDENTIAL SECURITIES, YOU MUST
REDEEM SHARES THROUGH PRUDENTIAL SECURITIES. PLEASE CONTACT YOUR PRUDENTIAL
SECURITIES FINANCIAL ADVISER.
IF YOU HOLD SHARES IN NON-CERTIFICATE FORM, A WRITTEN REQUEST FOR REDEMPTION
SIGNED BY YOU EXACTLY AS THE ACCOUNT IS REGISTERED IS REQUIRED. IF YOU HOLD
CERTIFICATES, THE CERTIFICATES, SIGNED IN THE NAME(S) SHOWN ON THE FACE OF THE
CERTIFICATES, MUST BE RECEIVED BY THE TRANSFER AGENT IN ORDER FOR THE REDEMPTION
REQUEST TO BE PROCESSED. IF REDEMPTION IS REQUESTED BY A CORPORATION,
PARTNERSHIP, TRUST OR FIDUCIARY, WRITTEN EVIDENCE OF AUTHORITY ACCEPTABLE TO THE
TRANSFER AGENT MUST BE SUBMITTED BEFORE SUCH REQUEST WILL BE ACCEPTED. All
correspondence and documents concerning redemptions should be sent to the Fund
in care of its Transfer Agent, Prudential Mutual Fund Services LLC, Attention:
Redemption Services, P.O. Box 15010, New Brunswick, New Jersey 08906-5010.
If the proceeds of the redemption (a) exceed $50,000, (b) are to be paid to a
person other than the record owner, (c) are to be sent to an address other than
the address on the Transfer Agent's records, or (d) are to be paid to a
corporation, partnership, trust or fiduciary, the signature(s) on the redemption
request and on the certificates, if any, or stock power must be guaranteed by an
"eligible guarantor institution." An "eligible guarantor institution" includes
any bank, broker, dealer or credit union. The Transfer
26
<PAGE>
Agent reserves the right to request additional information from, and make
reasonable inquiries of, any eligible guarantor institution. For clients of
Prusec, a signature guarantee may be obtained from the agency or office manager
of most Prudential Insurance and Financial Services or Preferred Services
offices.
PAYMENT FOR SHARES PRESENTED FOR REDEMPTION WILL BE MADE BY CHECK WITHIN SEVEN
DAYS AFTER RECEIPT BY THE TRANSFER AGENT OF THE CERTIFICATE AND/OR WRITTEN
REQUEST EXCEPT AS INDICATED BELOW. IF YOU HOLD SHARES THROUGH PRUDENTIAL
SECURITIES, PAYMENT FOR SHARES PRESENTED FOR REDEMPTION WILL BE CREDITED TO YOUR
PRUDENTIAL SECURITIES ACCOUNT, UNLESS YOU INDICATE OTHERWISE. Such payment may
be postponed or the right of redemption suspended at times (a) when the New York
Stock Exchange is closed for other than customary weekends and holidays, (b)
when trading on such Exchange is restricted, (c) when an emergency exists as a
result of which disposal by the Series of securities owned by it is not
reasonably practicable or it is not reasonably practicable for the Series fairly
to determine the value of its net assets, or (d) during any other period when
the SEC, by order, so permits; provided that applicable rules and regulations of
the SEC shall govern as to whether the conditions prescribed in (b), (c) or (d)
exist.
PAYMENT FOR REDEMPTION OF RECENTLY PURCHASED SHARES WILL BE DELAYED UNTIL THE
FUND OR ITS TRANSFER AGENT HAS BEEN ADVISED THAT THE PURCHASE CHECK HAS BEEN
HONORED, UP TO 10 CALENDAR DAYS FROM THE TIME OF RECEIPT OF THE PURCHASE CHECK
BY THE TRANSFER AGENT. SUCH DELAY MAY BE AVOIDED BY PURCHASING SHARES BY WIRE OR
BY CERTIFIED OR CASHIER'S CHECK.
REDEMPTION IN KIND. If the Trustees determine that it would be detrimental to
the best interests of the remaining shareholders of the Fund to make payment
wholly or partly in cash, the Fund may pay the redemption price in whole or in
part by a distribution in kind of securities from the investment portfolio of
the Series of the Fund, in lieu of cash, in conformity with applicable rules of
the SEC. Securities will be readily marketable and will be valued in the same
manner as in a regular redemption. See "How the Fund Values its Shares." If your
shares are redeemed in kind, you will incur transaction costs in converting the
assets into cash. The Fund, however, has elected to be governed by Rule 18f-1
under the Investment Company Act, under which the Fund is obligated to redeem
shares solely in cash up to the lesser of $250,000 or 1% of the net asset value
of the Fund during any 90-day period for any one shareholder.
INVOLUNTARY REDEMPTION. In order to reduce expenses of the Fund, the Trustees
may redeem all of the shares of any shareholder, other than a shareholder which
is an IRA or other tax-deferred retirement plan, whose account has a net asset
value of less than $500 due to a redemption. The Fund will give such
shareholders 60 days' prior written notice in which to purchase sufficient
additional shares to avoid such redemption. No contingent deferred sales charge
will be imposed on any such involuntary redemption.
90-DAY REPURCHASE PRIVILEGE. If you redeem your shares and have not previously
exercised the repurchase privilege, you may reinvest any portion or all of the
proceeds of such redemption in shares of the Series at the NAV next determined
after the order is received, which must be within 90 days after the date of the
redemption. Any CDSC paid in connection with such redemption will be credited
(in shares) to your account. (If less than a full repurchase is made, the credit
will be on a PRO RATA basis.) You must notify the Fund's Transfer Agent, either
directly or through Prudential Securities, at the time the repurchase privilege
is exercised to adjust your account for the CDSC you previously paid.
Thereafter, any redemptions will be subject to the CDSC applicable at the time
of the redemption. See "Contingent Deferred Sales Charges" below. Exercise of
the repurchase privilege may affect the federal tax treatment of any gain
realized upon redemption. See "Distributions and Tax Information" in the
Statement of Additional Information.
CONTINGENT DEFERRED SALES CHARGES
Redemptions of Class B shares will be subject to a contingent deferred sales
charge or CDSC declining from 5% to zero over a six-year period. Class C shares
redeemed within one year of purchase will be subject to a 1% CDSC. The CDSC will
be deducted from the redemption proceeds and reduce the amount paid to you. The
CDSC will be imposed on any redemption by you which reduces the current value of
your Class B or Class C shares to an amount which is lower than the amount of
all payments by you
27
<PAGE>
for shares during the preceding six years, in the case of Class B shares, and
one year, in the case of Class C shares. A CDSC will be applied on the lesser of
the original purchase price or the current value of the shares being redeemed.
Increases in the value of your shares or shares acquired through reinvestment of
dividends or distributions are not subject to a CDSC. The amount of any
contingent deferred sales charge will be paid to and retained by the
Distributor. See "How the Fund is Managed--Distributor" and "Waiver of the
Contingent Deferred Sales Charges--Class B Shares" below.
The amount of the CDSC, if any, will vary depending on the number of years
from the time of payment for the purchase of shares until the time of redemption
of such shares. Solely for purposes of determining the number of years from the
time of any payment for the purchase of shares, all payments during a month will
be aggregated and deemed to have been made on the last day of the month. The
CDSC will be calculated from the first day of the month after the initial
purchase, excluding the time shares were held in a money market fund. See "How
to Exchange Your Shares" below.
The following table sets forth the rates of the CDSC applicable to redemptions
of Class B shares:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED SALES
CHARGE AS A PERCENTAGE
YEAR SINCE PURCHASE OF THE DOLLARS INVESTED OR
PAYMENT MADE REDEMPTION PROCEEDS
------------------------------ ------------------------------
<S> <C>
First......................... 5.0%
Second........................ 4.0
Third......................... 3.0
Fourth........................ 2.0
Fifth......................... 1.0
Sixth......................... 1.0
Seventh....................... None
</TABLE>
In determining whether a CDSC is applicable to a redemption, the calculation
will be made in a manner that results in the lowest possible rate. It will be
assumed that the redemption is made first of amounts representing shares
acquired pursuant to the reinvestment of dividends and distributions; then of
amounts representing the increase in net asset value above the total amount of
payments for the purchase of Series shares made during the preceding six years
(five years for Class B shares purchased prior to January 22, 1990); then of
amounts representing the cost of shares held beyond the applicable CDSC period;
and finally, of amounts representing the cost of shares held for the longest
period of time within the applicable CDSC period.
For example, assume you purchased 100 Class B shares at $10 per share for a
cost of $1,000. Subsequently, you acquired 5 additional Class B shares through
dividend reinvestment. During the second year after the purchase you decided to
redeem $500 of your investment. Assuming at the time of the redemption the NAV
had appreciated to $12 per share, the value of your Class B shares would be
$1,260 (105 shares at $12 per share). The CDSC would not be applied to the value
of the reinvested dividend shares and the amount which represents appreciation
($260). Therefore, $240 of the $500 redemption proceeds ($500 minus $260) would
be charged at a rate of 4% (the applicable rate in the second year after
purchase) for a total CDSC of $9.60.
For federal income tax purposes, the amount of the CDSC will reduce the gain
or increase the loss, as the case may be, on the amount recognized on the
redemption of shares.
WAIVER OF THE CONTINGENT DEFERRED SALES CHARGES--CLASS B SHARES. The CDSC will
be waived in the case of a redemption following the death or disability of a
shareholder or, in the case of a trust account, following the death or
disability of the grantor. The waiver is available for total or partial
redemptions of shares owned by a person, either individually or in joint tenancy
(with rights of survivorship), at the time of death or initial determination of
disability, provided that the shares were purchased prior to death or
disability. In addition, the CDSC will be waived on redemptions of shares held
by a Trustee of the Fund.
SYSTEMATIC WITHDRAWAL PLAN. The CDSC will be waived (or reduced) on certain
redemptions from a Systematic Withdrawal Plan. On an annual basis, up to 12% of
the total dollar amount subject to the CDSC may be redeemed without charge. The
Transfer
28
<PAGE>
Agent will calculate the total amount available for this waiver annually on the
anniversary of your purchase or, for shares purchased prior to March 1, 1997, on
March 1 of the current year. The CDSC will be waived (or reduced) on redemptions
until this threshold 12% amount is reached.
You must notify the Fund's Transfer Agent either directly or through
Prudential Securities or Prusec, at the time of redemption, that you are
entitled to waiver of the CDSC and provide the Transfer Agent with such
supporting documentation as it may deem appropriate. The waiver will be granted
subject to confirmation of your entitlement. See "Purchase and Redemption of
Fund Shares--Waiver of the Contingent Deferred Sales Charge--Class B Shares" in
the Statement of Additional Information.
A quantity discount may apply to redemptions of Class B shares purchased prior
to August 1, 1994. See "Purchase and Redemption of Fund Shares--Quantity
Discount--Class B Shares Purchased Prior to August 1, 1994" in the Statement of
Additional Information.
CONVERSION FEATURE--CLASS B SHARES
Class B shares will automatically convert to Class A shares on a quarterly
basis approximately seven years after purchase. Conversions will be effected at
relative net asset value without the imposition of any additional sales charge.
Since the Fund tracks amounts paid rather than the number of shares bought on
each purchase of Class B shares, the number of Class B shares eligible to
convert to Class A shares (excluding shares acquired through the automatic
reinvestment of dividends and other distributions) (the Eligible Shares) will be
determined on each conversion date in accordance with the following formula: (i)
the ratio of (a) the amounts paid for Class B shares purchased at least seven
years prior to the conversion date to (b) the total amount paid for all Class B
shares purchased and then held in your account (ii) multiplied by the total
number of Class B shares purchased and then held in your account. Each time any
Eligible Shares in your account convert to Class A shares, all shares or amounts
representing Class B shares then in your account that were acquired through the
automatic reinvestment of dividends and other distributions will convert to
Class A shares.
For purposes of determining the number of Eligible Shares, if the Class B
shares in your account on any conversion date are the result of multiple
purchases at different net asset values per share, the number of Eligible Shares
calculated as described above will generally be either more or less than the
number of shares actually purchased approximately seven years before such
conversion date. For example, if 100 shares were initially purchased at $10 per
share (for a total of $1,000) and a second purchase of 100 shares was
subsequently made at $11 per share (for a total of $1,100), 95.24 shares would
convert approximately seven years from the initial purchase (i.e., $1,000
divided by $2,100 (47.62%) multiplied by 200 shares equals 95.24 shares). The
Manager reserves the right to modify the formula for determining the number of
Eligible Shares in the future as it deems appropriate on notice to shareholders.
Since annual distribution-related fees are lower for Class A shares than Class
B shares, the per share net asset value of the Class A shares may be higher than
that of the Class B shares at the time of conversion. Thus, although the
aggregate dollar value will be the same, you may receive fewer Class A shares
than Class B shares converted. See "How the Fund Values its Shares."
For purposes of calculating the applicable holding period for conversions, all
payments for Class B shares during a month will be deemed to have been made on
the last day of the month, or for Class B shares acquired through exchange or a
series of exchanges, on the last day of the month in which the original payment
for purchases of such Class B shares was made. For Class B shares previously
exchanged for shares of a money market fund, the time period during which such
shares were held in the money market fund will be excluded. For example, Class B
shares held in a money market fund for one year will not convert to Class A
shares until approximately eight years from purchase. For purposes of measuring
the time period during which shares are held in a money market fund, exchanges
will be deemed to have been made on the last day of the month. Class B shares
acquired through exchange will convert to Class A shares after expiration of the
conversion period applicable to the original purchase of such shares.
29
<PAGE>
The conversion feature may be subject to the continuing availability of
opinions of counsel or rulings of the Internal Revenue Service (i) that the
dividends and other distributions paid on Class A, Class B and Class C shares
will not constitute "preferential dividends" under the Internal Revenue Code and
(ii) that the conversion of shares does not constitute a taxable event. The
conversion of Class B shares into Class A shares may be suspended if such
opinions or rulings are no longer available. If conversions are suspended, Class
B shares of the Series will continue to be subject, possibly indefinitely, to
their higher annual distribution and service fee.
HOW TO EXCHANGE YOUR SHARES
AS A SHAREHOLDER OF THE SERIES, YOU HAVE AN EXCHANGE PRIVILEGE WITH THE OTHER
SERIES OF THE FUND AND CERTAIN OTHER PRUDENTIAL MUTUAL FUNDS (THE EXCHANGE
PRIVILEGE), INCLUDING ONE OR MORE SPECIFIED MONEY MARKET FUNDS, SUBJECT TO THE
MINIMUM INVESTMENT REQUIREMENTS OF SUCH FUNDS. CLASS A, CLASS B AND CLASS C
SHARES OF THE SERIES MAY BE EXCHANGED FOR CLASS A, CLASS B AND CLASS C SHARES,
RESPECTIVELY, OF THE OTHER SERIES OF THE FUND OR ANOTHER FUND ON THE BASIS OF
THE RELATIVE NAV. No sales charge will be imposed at the time of exchange. Any
applicable CDSC payable upon the redemption of shares exchanged will be
calculated from the first day of the month after the initial purchase, excluding
the time shares were held in a money market fund. Class B and Class C shares may
not be exchanged into money market funds other than Prudential Special Money
Market Fund, Inc. For purposes of calculating the holding period applicable to
the Class B conversion feature, the time period during which Class B shares were
held in a money market fund will be excluded. See "Conversion Feature--Class B
Shares" above. An exchange will be treated as a redemption and purchase for tax
purposes. See "Shareholder Investment Account--Exchange Privilege" in the
Statement of Additional Information.
IN ORDER TO EXCHANGE SHARES BY TELEPHONE, YOU MUST AUTHORIZE TELEPHONE
EXCHANGES ON YOUR INITIAL APPLICATION FORM OR BY WRITTEN NOTICE TO THE TRANSFER
AGENT AND HOLD SHARES IN NON-CERTIFICATE FORM. Thereafter, you may call the Fund
at (800) 225-1852 to execute a telephone exchange of shares, weekdays, except
holidays, between the hours of 8:00 A.M. and 6:00 P.M., New York time. For your
protection and to prevent fraudulent exchanges, your telephone call will be
recorded and you will be asked to provide your personal identification number. A
written confirmation of the exchange transaction will be sent to you. NEITHER
THE FUND NOR ITS AGENTS WILL BE LIABLE FOR ANY LOSS, LIABILITY OR COST WHICH
RESULTS FROM ACTING UPON INSTRUCTIONS REASONABLY BELIEVED TO BE GENUINE UNDER
THE FOREGOING PROCEDURES. All exchanges will be made on the basis of the
relative NAV of the two funds (or series) next determined after the request is
received in good order. The Exchange Privilege is available only in states where
the exchange may legally be made.
IF YOU HOLD SHARES THROUGH PRUDENTIAL SECURITIES, YOU MUST EXCHANGE YOUR
SHARES BY CONTACTING YOUR PRUDENTIAL SECURITIES FINANCIAL ADVISER.
IF YOU HOLD CERTIFICATES, THE CERTIFICATES, SIGNED IN THE NAME(S) SHOWN ON THE
FACE OF THE CERTIFICATES, MUST BE RETURNED IN ORDER FOR THE SHARES TO BE
EXCHANGED. SEE "HOW TO SELL YOUR SHARES" ABOVE.
You may also exchange shares by mail by writing to Prudential Mutual Fund
Services LLC, Attention: Exchange Processing, P.O. Box 15010, New Brunswick, New
Jersey 08906-5010.
IN PERIODS OF SEVERE MARKET OR ECONOMIC CONDITIONS, THE TELEPHONE EXCHANGE OF
SHARES MAY BE DIFFICULT TO IMPLEMENT AND YOU SHOULD MAKE EXCHANGES BY MAIL BY
WRITING TO PRUDENTIAL MUTUAL FUND SERVICES LLC, AT THE ADDRESS NOTED ABOVE.
SPECIAL EXCHANGE PRIVILEGE. A special exchange privilege is available for
shareholders who qualify to purchase Class A shares at NAV (see "Alternative
Purchase Plan--Class A Shares--Reduction and Waiver of Initial Sales Charges"
above). Under this exchange privilege, amounts representing any Class B and
Class C shares (which are not subject to a CDSC) held in such a shareholder's
account will be automatically exchanged for Class A shares on a quarterly basis,
unless the shareholder elects otherwise. Eligibility for this exchange privilege
will be calculated on the business day prior to the date of the exchange.
Amounts representing Class B or Class C shares which are not subject to a CDSC
include the following: (1) amounts representing Class B
30
<PAGE>
or Class C shares acquired pursuant to the automatic reinvestment of dividends
and distributions, (2) amounts representing the increase in the net asset value
above the total amount of payments for the purchase of Class B or Class C shares
and (3) amounts representing Class B or Class C shares held beyond the
applicable CDSC period. Class B and Class C shareholders must notify the
Transfer Agent either directly or through Prudential Securities or Prusec that
they are eligible for this special exchange privilege.
The Exchange Privilege is not a right and may be suspended, terminated or
modified on 60 days' notice to shareholders.
FREQUENT TRADING. The Fund and the other Prudential Mutual Funds are not
intended to serve as vehicles for frequent trading in response to short-term
fluctuations in the market. Due to the disruptive effect that market timing
investment strategies and excessive trading can have on efficient portfolio
management, each Prudential Mutual Fund and the Fund reserves the right to
refuse purchase orders and exchanges by any person, group or commonly controlled
accounts, if, in the Manager's sole judgment, such person, group or accounts
were following a market timing strategy or were otherwise engaging in excessive
trading (Market Timers).
To implement this authority to protect the Fund and its shareholders from
excessive trading, the Fund will reject all exchanges and purchases from a
Market Timer unless the Market Timer has entered into a written agreement with
the Fund or its affiliates pursuant to which the Market Timer has agreed to
abide by certain procedures, which include a daily dollar limit on trading. The
Fund may notify the Market Timer of rejection of an exchange or purchase order
subsequent to the day on which the order was placed.
SHAREHOLDER SERVICES
In addition to the Exchange Privilege, as a shareholder in the Series, you can
take advantage of the following services and privileges:
- AUTOMATIC REINVESTMENT OF DIVIDENDS AND/OR DISTRIBUTIONS WITHOUT A SALES
CHARGE. For your convenience, all dividends and distributions are automatically
reinvested in full and fractional shares of the Series at NAV without a sales
charge. You may direct the Transfer Agent in writing not less than 5 full
business days prior to the record date to have subsequent dividends and/or
distributions sent in cash rather than reinvested. If you hold shares through
Prudential Securities, you should contact your financial adviser.
- AUTOMATIC SAVINGS ACCUMULATION PLAN (ASAP). Under ASAP you may make regular
purchases of the Series' shares in amounts as little as $50 via an automatic
debit to a bank account or Prudential Securities account (including a Command
Account). For additional information about this service, you may contact your
Prudential Securities financial adviser, Prusec representative or the Transfer
Agent directly.
- SYSTEMATIC WITHDRAWAL PLAN. A systematic withdrawal plan is available to
shareholders which provides for monthly or quarterly checks. Withdrawals of
Class B and Class C shares may be subject to a CDSC. See "How to Sell Your
Shares-- Contingent Deferred Sales Charges" above.
- REPORTS TO SHAREHOLDERS. The Fund will send you annual and semi-annual
reports. The financial statements appearing in annual reports are audited by
independent accountants. In order to reduce duplicate mailing and printing
expenses, the Fund will provide one annual and semi-annual shareholder report
and annual prospectus per household. You may request additional copies of such
reports by calling (800) 225-1852 or by writing to the Fund at Gateway Center
Three, 100 Mulberry Street, Newark, New Jersey 07102-4077. In addition, monthly
unaudited financial data is available upon request from the Fund.
- SHAREHOLDER INQUIRIES. Inquiries should be addressed to the Fund at Gateway
Center Three, 100 Mulberry Street, Newark, New Jersey 07102-4077, or by
telephone, at (800) 225-1852 (toll-free) or, from outside the U.S.A., at (908)
417-7555 (collect).
For additional information regarding the services and privileges described
above, see "Shareholder Investment Account" in the Statement of Additional
Information.
31
<PAGE>
DESCRIPTION OF SECURITY RATINGS
MOODY'S INVESTORS SERVICE
BOND RATINGS
Aaa: Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edged." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group, they comprise what are generally known
as high grade bonds. They are rated lower than 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
which make the long-term risks appear somewhat larger than the Aaa securities.
A: Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper-medium-grade obligations. Factors giving security
to principal and interest are considered adequate but elements may be present
which suggest a susceptibility to impairment sometime in the future.
Baa: Bonds which are rated Baa are considered as medium grade obligations,
I.E., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present, but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba: Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate, and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Bonds rated within the Aa, A, Baa, Ba and B categories which Moody's believes
possess the strongest credit attributes within those categories are designated
by the symbols Aa1, A1, Baa1, Ba1 and B1.
Caa: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca: Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
C: Bonds which are rated C are the lowest-rated class of bonds, and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
SHORT-TERM RATINGS
Moody's ratings for tax-exempt notes and other short-term loans are designated
Moody's Investment Grade (MIG). This distinction is in recognition of the
differences between short-term and long-term credit risk.
MIG 1: Loans bearing the designation MIG 1 are of the best quality, enjoying
strong protection by established cash flows, superior liquidity support or
demonstrated broad-based access to the market for refinancing.
A-1
<PAGE>
MIG 2: Loans bearing the designation MIG 2 are of high quality, with margins
of protection ample although not so large as in the preceding group.
MIG 3: Loans bearing the designation MIG 3 are of favorable quality, with all
security elements accounted for but lacking the strength of the preceding
grades.
MIG 4: Loans bearing the designation MIG 4 are of adequate quality.
Protection commonly regarded and required of an investment security is present
and although not distinctly or predominantly speculative, there is specific
risk.
SHORT-TERM DEBT RATINGS
Moody's Short-Term Debt Ratings are opinions of the ability of issuers to
repay punctually senior debt obligations which have an original maturity not
exceeding one year.
Prime-1: Issuers rated 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.
Prime-3: Issuers rated Prime-3 (or supporting institutions) have an
acceptable ability for repayment of senior short-term debt obligations.
Not Prime: Issuers rated Not Prime do not fall within any of the Prime rating
categories.
STANDARD & POOR'S RATINGS GROUP
BOND RATINGS
AAA: Debt rated AAA has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.
AA: Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the highest-rated issues only in small degree.
A: Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB: Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher-rated categories.
BB, B, CCC, CC and C: Debt rated BB, B, CCC, CC or C is regarded as having
predominantly speculative characteristics with respect to capacity to pay
interest and repay principal. BB indicates the least degree of speculation and C
the highest. While such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
D: Debt rated D is in payment default. This rating is used when interest
payments or principal payments are not made on the date due even if the
applicable grace period has not expired, unless S&P believes that such payments
will be made during such grace period.
COMMERCIAL PAPER RATINGS
An S&P Commercial Paper rating is a current assessment of the likelihood of
timely payment of debt considered short-term in the relevant market.
A-2
<PAGE>
A-1: The A-1 designation indicates that the degree of safety regarding timely
payment is strong. Those issues determined to possess extremely strong safety
characteristics are denoted with a plus sign (+) designation.
A-2: Capacity for timely payment on issues with the designation A-2 is
satisfactory. However, the relative degree of safety is not as high as for
issues designated A-1.
A-3: Issues carrying this designation have adequate capacity for timely
payment. They are, however, more vulnerable to the adverse effects of changes in
circumstances than obligations carrying the higher designations.
MUNICIPAL NOTES
A municipal note rating reflects the liquidity concerns and market access
risks unique to municipal notes. Municipal notes due in three years or less will
likely receive a municipal note rating, while notes maturing beyond three years
will most likely receive a long-term debt rating. Municipal notes are rated
SP-1, SP-2 or SP-3. The designation SP-1 indicates a very strong capacity to pay
principal and interest. Those issues determined to possess extremely strong
safety characteristics are denoted with a plus sign (+) designation. An SP-2
designation indicates a satisfactory capacity to pay principal and interest. An
SP-3 designation indicates speculative capacity to pay principal and interest.
A-3
<PAGE>
THE PRUDENTIAL MUTUAL FUND FAMILY
Prudential Investments Fund Management offers a broad range of mutual funds
designed to meet your individual needs. We welcome you to review the investment
options available through our family of funds. For more information on the
Prudential Mutual Funds, including charges and expenses, contact your Prudential
Securities financial adviser or Prusec representative or telephone the Funds at
(800) 225-1852 for a free prospectus. Read the prospectus carefully before you
invest or send money.
TAXABLE BOND FUNDS
--------------------------
Prudential Diversified Bond Fund, Inc.
Prudential Government Income Fund, Inc.
Prudential Government Securities Trust
Short-Intermediate Term Series
Prudential High Yield Fund, Inc.
Prudential Mortgage Income Fund, Inc.
Prudential Structured Maturity Fund, Inc.
Income Portfolio
The BlackRock Government Income Trust
TAX-EXEMPT BOND FUNDS
-----------------------------
Prudential California Municipal Fund
California Series
California Income Series
Prudential Municipal Bond Fund
High Yield Series
Insured Series
Intermediate Series
Prudential Municipal Series Fund
Florida Series
Maryland Series
Massachusetts Series
Michigan Series
New Jersey Series
New York Series
North Carolina Series
Ohio Series
Pennsylvania Series
Prudential National Municipals Fund, Inc.
GLOBAL FUNDS
--------------------
Prudential Europe Growth Fund, Inc.
Prudential Global Genesis Fund, Inc.
Prudential Global Limited Maturity Fund, Inc.
Limited Maturity Portfolio
Prudential Intermediate Global Income Fund, Inc.
Prudential International Bond Fund, Inc.
Prudential Natural Resources Fund, Inc.
Prudential Pacific Growth Fund, Inc.
Prudential World Fund, Inc.
Global Series
International Stock Series
The Global Total Return Fund, Inc.
Global Utility Fund, Inc.
EQUITY FUNDS
--------------------
Prudential Balanced Fund
Prudential Distressed Securities Fund, Inc.
Prudential Dryden Fund
Prudential Active Balanced Fund
Prudential Stock Index Fund
Prudential Small-Cap Index Fund
Prudential Bond Market Index Fund
Prudential Pacific Index Fund
Prudential Europe Index Fund
Prudential Emerging Growth Fund, Inc.
Prudential Equity Fund, Inc.
Prudential Equity Income Fund
Prudential Jennison Series Fund, Inc.
Prudential Jennison Growth Fund
Prudential Jennison Growth & Income Fund
Prudential Multi-Sector Fund, Inc.
Prudential Small-Cap Quantum Fund, Inc.
Prudential Small Company Value Fund, Inc.
Prudential Utility Fund, Inc.
Nicholas-Applegate Fund, Inc.
Nicholas-Applegate Growth Equity Fund
MONEY MARKET FUNDS
--------------------------
- - TAXABLE MONEY MARKET FUNDS
Prudential Government Securities Trust
Money Market Series
U.S. Treasury Money Market Series
Prudential Special Money Market Fund, Inc.
Money Market Series
Prudential MoneyMart Assets, Inc.
- - TAX-FREE MONEY MARKET FUNDS
Prudential Tax-Free Money Fund, Inc.
Prudential California Municipal Fund
California Money Market Series
Prudential Municipal Series Fund
Connecticut Money Market Series
Massachusetts Money Market Series
New Jersey Money Market Series
New York Money Market Series
- - COMMAND FUNDS
Command Money Fund
Command Government Fund
Command Tax-Free Fund
- - INSTITUTIONAL MONEY MARKET FUNDS
Prudential Institutional Liquidity Portfolio, Inc.
Institutional Money Market Series
B-1
<PAGE>
No dealer, sales representative or any other person has been authorized to give
any information or to make any representations, other than those contained in
this Prospectus, in connection with the offer contained herein, and, if given or
made, such other information or representations must not be relied upon as
having been authorized by the Fund or the Distributor. This Prospectus does not
constitute an offer by the Fund or by the Distributor to sell or a solicitation
of any offer to buy any of the securities offered hereby in any jurisdiction to
any person to whom it is unlawful to make such offer in such jurisdiction.
-------------------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---
<S> <C>
FUND HIGHLIGHTS................................. 2
What are the Series' Risk Factors and Special
Characteristics?............................. 2
FUND EXPENSES................................... 4
FINANCIAL HIGHLIGHTS............................ 5
HOW THE FUND INVESTS............................ 8
Investment Objective and Policies............. 8
Other Investments and Policies................ 14
Investment Restrictions....................... 14
HOW THE FUND IS MANAGED......................... 15
Manager....................................... 15
Distributor................................... 16
Portfolio Transactions........................ 17
Custodian and Transfer and Dividend Disbursing
Agent........................................ 18
HOW THE FUND VALUES ITS SHARES.................. 18
HOW THE FUND CALCULATES PERFORMANCE............. 18
TAXES, DIVIDENDS AND DISTRIBUTIONS.............. 19
GENERAL INFORMATION............................. 21
Description of Shares......................... 21
Additional Information........................ 22
SHAREHOLDER GUIDE............................... 22
How to Buy Shares of the Fund................. 22
Alternative Purchase Plan..................... 23
How to Sell Your Shares....................... 26
Conversion Feature--Class B Shares............ 29
How to Exchange Your Shares................... 30
Shareholder Services.......................... 31
DESCRIPTION OF SECURITY RATINGS................. A-1
THE PRUDENTIAL MUTUAL FUND FAMILY............... B-1
</TABLE>
- -------------------------------------------
MF120A 44404CS
Class A: 74435M-67-1
CUSIP Nos.: Class B: 74435M-68-9
Class C: 74435M-55-6
PRUDENTIAL
MUNICIPAL
SERIES FUND
----------------------------------------
MICHIGAN SERIES
PROSPECTUS
October 30, 1997
www.prudential.com
[LOGO] Prudential
Investments
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
(NEW JERSEY SERIES)
- --------------------------------------------------------------------------------
PROSPECTUS DATED OCTOBER 30, 1997
- ----------------------------------------------------------------
Prudential Municipal Series Fund (the Fund) (New Jersey Series) (the Series) is
one of thirteen series of an open-end, management investment company, or mutual
fund. This Series is diversified and is designed to provide the maximum amount
of income that is exempt from New Jersey State income tax and federal income tax
consistent with the preservation of capital and, in conjunction therewith, the
Series may invest in debt securities with the potential for capital gain. The
net assets of the Series are invested primarily in obligations within the four
highest ratings of Moody's Investors Service, Standard & Poor's Ratings Group or
another nationally recognized statistical rating organization or in unrated
obligations which, in the opinion of the Fund's investment adviser, are of
comparable quality. The Series may, however, 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. Subject to
the limitations described herein, the Series may utilize derivatives, including
buying and selling futures contracts and options thereon for the purpose of
hedging its portfolio securities. There can be no assurance that the Series'
investment objective will be achieved. See "How the Fund Invests--Investment
Objective and Policies." The Fund's address is Gateway Center Three, 100
Mulberry Street, Newark, New Jersey 07102-4077, and its telephone number is
(800) 225-1852.
This Prospectus sets forth concisely the information about the Fund and the New
Jersey Series that a prospective investor should know before investing.
Additional information about the Fund has been filed with the Securities and
Exchange Commission in a Statement of Additional Information dated October 30,
1997, which information is incorporated herein by reference (is legally
considered a part of this Prospectus) and is available without charge upon
request to the Fund at the address or telephone number noted above.
- --------------------------------------------------------------------------------
INVESTORS ARE ADVISED TO READ THIS PROSPECTUS AND RETAIN IT FOR FUTURE
REFERENCE.
- --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
<PAGE>
FUND HIGHLIGHTS
The following summary is intended to highlight certain information contained
in this Prospectus and is qualified in its entirety by the more detailed
information appearing elsewhere herein.
WHAT IS PRUDENTIAL MUNICIPAL SERIES FUND?
Prudential Municipal Series Fund is a mutual fund whose shares are offered
in thirteen series, each of which operates as a separate fund. A mutual fund
pools the resources of investors by selling its shares to the public and
investing the proceeds of such sale in a portfolio of securities designed to
achieve its investment objective. Technically, the Fund is an open-end,
management investment company. Only the New Jersey Series is offered through
this Prospectus.
WHAT IS THE SERIES' INVESTMENT OBJECTIVE?
The Series' investment objective is to maximize current income that is
exempt from New Jersey State and federal income taxes consistent with the
preservation of capital. It seeks to achieve this objective by investing
primarily in New Jersey State, municipal and local government obligations
and obligations of other qualifying issuers, such as issuers located in
Puerto Rico, the Virgin Islands and Guam, which pay income exempt, in the
opinion of counsel, from New Jersey State and federal income taxes (New
Jersey Obligations). There can be no assurance that the Series' investment
objective will be achieved. See "How the Fund Invests--Investment Objective
and Policies" at page 9.
WHAT ARE THE SERIES' RISK FACTORS AND SPECIAL CHARACTERISTICS?
In seeking to achieve its investment objective, the Series will invest at
least 80% of the value of its total assets in New Jersey Obligations. This
degree of investment concentration makes the Series particularly susceptible
to factors adversely affecting issuers of New Jersey Obligations. See "How
the Fund Invests--Investment Objective and Policies--Special Considerations"
at page 14. The Series may invest up to 30% of its total assets in high
yield securities, commonly known as "junk bonds," which may be considered
speculative and are subject to the risk of an issuer's inability to meet
principal and interest payments on the obligations as well as price
volatility. See "How the Fund Invests--Investment Objective and
Policies--Risk Factors Relating to Investing in High Yield Municipal
Obligations" at page 12. To hedge against changes in interest rates, the
Series may also purchase put options and engage in transactions involving
derivatives, including financial futures contracts and options thereon. See
"How the Fund Invests--Investment Objective and Policies--Futures Contracts
and Options Thereon" at page 13. As with an investment in any mutual fund,
an investment in this Series can decrease in value and you can lose money.
WHO MANAGES THE FUND?
Prudential Investments Fund Management LLC (PIFM or the Manager) is the
Manager of the Fund and is compensated for its services at an annual rate of
.50 of 1% of the Series' average daily net assets. As of September 30, 1997,
PIFM served as manager or administrator to 63 investment companies,
including 41 mutual funds, with aggregate assets of approximately $59.9
billion. The Prudential Investment Corporation, which does business under
the name Prudential Investments (PI, the Subadviser or the investment
adviser) furnishes investment advisory services in connection with the
management of the Fund under a Subadvisory Agreement with PIFM. See "How the
Fund is Managed--Manager" at page 16.
WHO DISTRIBUTES THE SERIES' SHARES?
Prudential Securities Incorporated (Prudential Securities, PSI or the
Distributor), a major securities underwriter and securities and commodities
broker, acts as the Distributor of the Series' Class A, Class B, Class C and
Class Z shares and is paid a distribution and service fee with respect to
Class A shares which is currently being charged at the annual rate of .10 of
1% of the average daily net assets of the Class A shares and is paid a
distribution and service fee with respect to Class B shares at the annual
rate of .50 of 1% of the average daily net assets of the Class B shares and
is paid an annual distribution and service fee with respect to Class C
shares which is currently being charged at the rate of .75 of 1% of the
2
<PAGE>
average daily net assets of the Class C shares. Prudential Securities incurs
the expense of distributing the Series' Class Z shares under a Distribution
Agreement with the Fund, none of which is reimbursed or paid for by the
Fund. See "How the Fund is Managed--Distributor" at page 17.
WHAT IS THE MINIMUM INVESTMENT?
The minimum initial investment is $1,000 for Class A and Class B shares
and $5,000 for Class C shares. The minimum subsequent investment is $100 for
Class A, Class B and Class C shares. Class Z shares are not subject to any
minimum investment requirements. There is no minimum investment requirement
for certain employee savings plans. For purchases made through the Automatic
Savings Accumulation Plan, the minimum initial and subsequent investment is
$50. See "Shareholder Guide--How to Buy Shares of the Fund" at page 24 and
"Shareholder Guide--Shareholder Services" at page 33.
HOW DO I PURCHASE SHARES?
You may purchase shares of the Series through Prudential Securities, Pruco
Securities Corporation (Prusec) or directly from the Fund through its
transfer agent, Prudential Mutual Fund Services LLC (PMFS or the Transfer
Agent), at the net asset value per share (NAV) next determined after receipt
of your purchase order by the Transfer Agent or Prudential Securities plus a
sales charge which may be imposed either (i) at the time of purchase (Class
A shares) or (ii) on a deferred basis (Class B or Class C shares). Class Z
shares are offered to a limited group of investors at net asset value
without any sales charge. See "How the Fund Values its Shares" at page 19
and "Shareholder Guide--How to Buy Shares of the Fund" at page 24.
WHAT ARE MY PURCHASE ALTERNATIVES?
The Series offers four classes of shares:
- Class A Shares: Sold with an initial sales charge of up to 3% of the
offering price.
- Class B Shares: Sold without an initial sales charge but are subject
to a contingent deferred sales charge or CDSC
(declining from 5% to zero of the lower of the
amount invested or the redemption proceeds) which
will be imposed on certain redemptions made within
six years of purchase. Although Class B shares are
subject to higher ongoing distribution-related
expenses than Class A shares, Class B shares will
automatically convert to Class A shares (which are
subject to lower ongoing distribution-related
expenses) approximately seven years after purchase.
- Class C Shares: Sold without an initial sales charge and, for one
year after purchase, are subject to a 1% CDSC on
redemptions. Like Class B shares, Class C shares are
subject to higher ongoing distribution-related
expenses than Class A shares but do not convert to
another class.
- Class Z Shares: Sold without either an initial or contingent
deferred sales charge to a limited group of
investors. Class Z shares are not subject to any
ongoing service or distribution-related expenses.
See "Shareholder Guide--Alternative Purchase Plan" at page 25.
HOW DO I SELL MY SHARES?
You may redeem your shares at any time at the NAV next determined after
Prudential Securities or the Transfer Agent receives your sell order.
However, the proceeds of redemptions of Class B and Class C shares may be
subject to a CDSC. See "Shareholder Guide--How to Sell Your Shares" at page
28.
HOW ARE DIVIDENDS AND DISTRIBUTIONS PAID?
The Series expects to declare daily and pay monthly dividends of net
investment income, if any, and make distributions of any net capital gains
at least annually. Dividends and distributions will be automatically
reinvested in additional shares of the Series at NAV without a sales charge
unless you request that they be paid to you in cash. See "Taxes, Dividends
and Distributions" at page 20.
3
<PAGE>
FUND EXPENSES
(NEW JERSEY SERIES)
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES CLASS C SHARES CLASS Z SHARES
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES+
Maximum Sales Load Imposed on Purchases....... 3% None None None
Maximum Deferred Sales Load (as a percentage
of original purchase price or redemption
proceeds, whichever is lower)................ None 5% during the 1% on None
first year, redemptions
decreasing by made within
1% annually to one year of
1% in the purchase
fifth and
sixth years
and 0% the
seventh year*
Maximum Sales Load Imposed on Reinvested
Dividends.................................... None None None None
Redemption Fees............................... None None None None
Exchange Fee.................................. None None None None
</TABLE>
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES CLASS C SHARES CLASS Z SHARES
-------------- -------------- -------------- -----------------
<S> <C> <C> <C> <C>
ANNUAL FUND OPERATING EXPENSES**
(as a percentage of average net assets)
Management Fees............................... .50% .50% .50% .50%
12b-1 Fees (After Reduction).................. .10%++ .50% .75%++ None
Other Expenses................................ .10% .10% .10% .10%
--
--- --- ---
Total Fund Operating Expenses (After
Reduction)................................... .70% 1.10% 1.35% .60%
--
--
--- --- ---
--- --- ---
</TABLE>
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
-------- -------- -------- --------
<S> <C> <C> <C> <C>
EXAMPLE
You would pay the following expenses on a $1,000
investment, assuming (1) 5% annual return and
(2) redemption at the end of each time period:
Class A....................................... $ 37 $ 52 $ 68 $ 114
Class B....................................... $ 61 $ 65 $ 71 $ 118
Class C....................................... $ 24 $ 43 $ 74 $ 162
Class Z***.................................... $ 6 $ 19 $ 33 $ 75
You would pay the following expenses on the same
investment, assuming no redemption:
Class A....................................... $ 37 $ 52 $ 68 $ 114
Class B....................................... $ 11 $ 35 $ 61 $ 118
Class C....................................... $ 14 $ 43 $ 74 $ 162
Class Z***.................................... $ 6 $ 19 $ 33 $ 75
</TABLE>
The above examples are based on restated data for the Series' fiscal year
ended August 31, 1997. THE EXAMPLES SHOULD NOT BE CONSIDERED A
REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER
OR LESS THAN THOSE SHOWN.
The purpose of this table is to assist investors in understanding the
various costs and expenses that an investor in the Series will bear,
whether directly or indirectly. For more complete descriptions of the
various costs and expenses, see "How the Fund is Managed." "Other
Expenses" includes operating expenses of the Series, such as Trustees' and
professional fees, registration fees, reports to shareholders and transfer
agency and custodian fees.
- ---------------
* Class B shares will automatically convert to Class A shares approximately
seven years after purchase. See "Shareholder Guide--Conversion Feature--
Class B Shares."
** The expense information in the table has been restated to reflect current
fees. Effective September 1, 1997, PIFM eliminated its management fee
waiver (.05 of 1%). See "How the Fund is Managed--Manager--Fee Waivers."
*** Based on expenses expected to have been incurred if Class Z shares had been
in existence throughout the fiscal year ended August 31, 1997.
+ Pursuant to rules of the National Association of Securities Dealers, Inc.,
the aggregate initial sales charges, deferred sales charges and
asset-based sales charges on shares of the Series may not exceed 6.25% of
total gross sales, subject to certain exclusions. This 6.25% limitation
is imposed on each class of the Series rather than on a per shareholder
basis. Therefore, long-term shareholders of the Series may pay more in
total sales charges than the economic equivalent of 6.25% of such
shareholders' investment in such shares. See "How the Fund is
Managed--Distributor."
++ Although the Class A and Class C Distribution and Service Plans provide that
the Fund may pay a distribution fee of up to .30 of 1% and 1% per annum
of the average daily net assets of the Class A and Class C shares,
respectively, the Distributor has agreed to limit its distribution fees
with respect to the Class A and Class C shares of the Series to no more
than .10 of 1% and .75 of 1% of the average daily net asset value of the
Class A shares and Class C shares, respectively, for the fiscal year
ending August 31, 1998. Total Fund Operating Expenses (Before Waiver) of
the Class A and Class C shares without such limitations would be .90% and
1.60%, respectively. See "How the Fund is Managed--Distributor."
4
<PAGE>
FINANCIAL HIGHLIGHTS
(FOR A SHARE OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT EACH OF THE INDICATED
PERIODS)
(CLASS A SHARES)
The following financial highlights, for the fiscal year ended August 31, 1997,
have been audited by Price Waterhouse LLP, independent accountants, and by
Deloitte and Touche LLP, independent auditors, for the four years ended August
31, 1996. Each of the respective reports by Price Waterhouse LLP and Deloitte &
Touche LLP on such financial statements was unqualified. This information should
be read in conjunction with the financial statements and the notes thereto,
which appear in the Statement of Additional Information. The following financial
highlights contain selected data for a Class A share of beneficial interest
outstanding, total return, ratios to average net assets and other supplemental
data for the periods indicated. This information is based on data contained in
the financial statements. Further performance information is contained in the
annual report, which may be obtained without charge. See "Shareholder
Guide--Shareholder Services--Reports to Shareholders."
<TABLE>
<CAPTION>
CLASS A
---------------------------------------------------------------------------------------
JANUARY 22,
YEAR ENDED AUGUST 31, 1990 (a)
------------------------------------------------------------------- THROUGH
1997 1996 1995 1994 1993 1992 1991 AUGUST 31, 1990
------- ------- ------- ------- ------- ------- ------- -----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period... $ 10.87 $ 10.98 $ 10.81 $ 11.74 $ 11.15 $ 10.73 $ 10.16 $ 10.30
------- ------- ------- ------- ------- ------- ------- ------
INCOME FROM INVESTMENT OPERATIONS
Net investment income (c).............. .55 .57 .61 .61 .64 .67 .69 .41
Net realized and unrealized gain (loss)
on investment transactions........... .29 (.07) .17 (.75) .71 .51 .59 (.14)
------- ------- ------- ------- ------- ------- ------- ------
Total from investment operations....... .84 .50 .78 (.14) 1.35 1.18 1.28 .27
------- ------- ------- ------- ------- ------- ------- ------
LESS DISTRIBUTIONS
Dividends from net investment income... (.55) (.57) (.61) (.61) (.64) (.67) (.69) (.41)
Distributions from net realized
gains................................ (.19) (.04) -- (.18) (.12) (.09) (.02) --
------- ------- ------- ------- ------- ------- ------- ------
Total distributions.................... (.74) (.61) (.61) (.79) (.76) (.76) (.71) (.41)
------- ------- ------- ------- ------- ------- ------- ------
Net asset value, end of period......... $ 10.97 $ 10.87 $ 10.98 $ 10.81 $ 11.74 $ 11.15 $ 10.73 $ 10.16
------- ------- ------- ------- ------- ------- ------- ------
------- ------- ------- ------- ------- ------- ------- ------
TOTAL RETURN (d):...................... 7.979% 4.63% 7.55% (1.27)% 12.57% 11.35% 12.96% 2.70%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)........ $95,729 $74,492 $49,666 $14,774 $15,501 $11,941 $ 8,041 $ 3,616
Average net assets (000)............... $89,280 $61,837 $30,290 $15,334 $13,444 $ 9,759 $ 5,637 $ 1,902
Ratios to average net assets: (c)
Expenses, including distribution
fees................................ .70% .67% .55% .58% .61% .48% .29% .20%(b)
Expenses, excluding distribution
fees................................ .60% .57% .45% .48% .51% .38% .19% .10%(b)
Net investment income................ 5.03% 5.19% 5.65% 5.42% 5.63% 6.14% 6.58% 6.79%(b)
Portfolio turnover rate................ 25% 62% 37% 34% 32% 38% 116% 87%
</TABLE>
- ---------------
(a) Commencement of offering of Class A shares.
(b) Annualized.
(c) Net of management and/or distribution fee waiver.
(d) Total return does not consider the effects of sales loads. Total
return is calculated assuming a purchase of shares on the first day
and a sale on the last day of each period reported and includes
reinvestment of dividends and distributions. Total returns for
periods of less than a full year are not annualized.
5
<PAGE>
FINANCIAL HIGHLIGHTS
(FOR A SHARE OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT EACH OF THE INDICATED
PERIODS)
(CLASS B SHARES)
The following financial highlights, for the fiscal year ended August 31, 1997,
have been audited by Price Waterhouse LLP, independent accountants, and by
Deloitte and Touche LLP, independent auditors, for the four years ended August
31, 1996. Each of the respective reports by Price Waterhouse LLP and Deloitte &
Touche LLP on such financial statements was unqualified. This information should
be read in conjunction with the financial statements and the notes thereto,
which appear in the Statement of Additional Information. The following financial
highlights contain selected data for a Class B share of beneficial interest
outstanding, total return, ratios to average net assets and other supplemental
data for the periods indicated. This information is based on data contained in
the financial statements. Further performance information is contained in the
annual report, which may be obtained without charge. See "Shareholder
Guide--Shareholder Services--Reports to Shareholders."
<TABLE>
<CAPTION>
CLASS B
------------------------------------------------------------------------------------------------------
MARCH 4,
1988 (a)
YEAR ENDED AUGUST 31, THROUGH
---------------------------------------------------------------------------------------- AUGUST 31,
1997 1996 1995 1994 1993 1992 1991 1990 1989 (d) 1988
-------- -------- -------- -------- -------- -------- -------- -------- -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning
of period............... $ 10.87 $ 10.98 $ 10.81 $ 11.74 $ 11.15 $ 10.73 $ 10.16 $ 10.33 $ 9.95 $ 10.00
-------- -------- -------- -------- -------- -------- -------- -------- -------- ------------
INCOME FROM INVESTMENT
OPERATIONS
Net investment income
(c)..................... .50 .53 .57 .56 .59 .63 .65 .67 .73 .36
Net realized and
unrealized gain (loss)
on investment
transactions............ .29 (.07) .17 (.75) .71 .51 .59 (.14) .38 (.05)
-------- -------- -------- -------- -------- -------- -------- -------- -------- ------------
Total from investment
operations.............. .79 .46 .74 (.19) 1.30 1.14 1.24 .53 1.11 .31
-------- -------- -------- -------- -------- -------- -------- -------- -------- ------------
LESS DISTRIBUTIONS
Dividends from net
investment income....... (.50) (.53) (.57) (.56) (.59) (.63) (.65) (.67) (.73) (.36)
Distributions from net
realized gains.......... (.19) (.04) -- (.18) (.12) (.09) (.02) (.03) -- --
-------- -------- -------- -------- -------- -------- -------- -------- -------- ------------
Total distributions....... (.69) (.57) (.57) (.74) (.71) (.72) (.67) (.70) (.73) (.36)
-------- -------- -------- -------- -------- -------- -------- -------- -------- ------------
Net asset value, end of
period.................. $ 10.97 $ 10.87 $ 10.98 $ 10.81 $ 11.74 $ 11.15 $ 10.73 $ 10.16 $ 10.33 $ 9.95
-------- -------- -------- -------- -------- -------- -------- -------- -------- ------------
-------- -------- -------- -------- -------- -------- -------- -------- -------- ------------
TOTAL RETURN (e):......... 7.54% 4.22% 7.12% (1.67)% 12.12% 10.93% 12.52% 5.28% 11.48% 3.03%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(000)................... $144,992 $188,315 $246,202 $323,077 $351,878 $295,781 $244,322 $180,636 $125,650 $ 28,815
Average net assets
(000)................... $162,330 $222,235 $274,995 $343,941 $316,372 $269,318 $208,893 $155,162 $ 79,269 $ 19,806
Ratios to average net
assets: (c)
Expenses, including
distribution fees...... 1.10% 1.07% .95% .98% 1.01% .88% .69% .50% .20% 0%
Expenses, excluding
distribution fees...... .60% .57% .45% .48% .51% .38% .19% .10% .14% 0%
Net investment income... 4.64% 4.80% 5.30% 5.02% 5.23% 5.74% 6.18% 6.50% 6.55% 6.27%(b)
Portfolio turnover rate... 25% 62% 37% 34% 32% 38% 116% 87% 20% 96%
</TABLE>
- ---------------
(a) Commencement of offering of Class B shares.
(b) Annualized.
(c) Net of expense subsidy and management and/or distribution fee waiver.
(d) On December 31, 1988, Prudential Mutual Fund Management, Inc.
succeeded The Prudential Insurance Company of America as manager of
the Fund.
(e) Total return does not consider the effects of sales loads. Total
return is calculated assuming a purchase of shares on the first day
and a sale on the last day of each period reported and includes
reinvestment of dividends and distributions. Total returns for
periods of less than a full year are not annualized.
6
<PAGE>
FINANCIAL HIGHLIGHTS
(FOR A SHARE OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT EACH OF THE INDICATED
PERIODS)
(CLASS C SHARES)
The following financial highlights, for the fiscal year ended August 31, 1997,
have been audited by Price Waterhouse LLP, independent accountants, and by
Deloitte and Touche LLP, independent auditors, for the two years ended August
31, 1996 and for the period from August 1, 1994 through August 31, 1994. Each of
the respective reports by Price Waterhouse LLP and Deloitte & Touche LLP on such
financial statements was unqualified. This information should be read in
conjunction with the financial statements and the notes thereto, which appear in
the Statement of Additional Information. The following financial highlights
contain selected data for a Class C share of beneficial interest outstanding,
total return, ratios to average net assets and other supplemental data for the
periods indicated. This information is based on data contained in the financial
statements. Further performance information is contained in the annual report,
which may be obtained without charge. See "Shareholder Guide-- Shareholder
Services--Reports to Shareholders."
<TABLE>
<CAPTION>
CLASS C
-----------------------------------------
AUGUST 1,
1994 (a)
YEAR ENDED AUGUST 31, THROUGH
--------------------------- AUGUST 31,
1997 1996 1995 1994
------- ------- ------- -----------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period...... $ 10.87 $ 10.98 $ 10.81 $ 10.83
------- ------- ------- -----------
INCOME FROM INVESTMENT OPERATIONS
Net investment income (c)................. .48 .50 .54 .04
Net realized and unrealized gain (loss) on
investment transactions................. .29 (.07) .17 (.02)
------- ------- ------- -----------
Total from investment operations.......... .77 .43 .71 .02
------- ------- ------- -----------
LESS DISTRIBUTIONS
Dividends from net investment income...... (.48) (.50) (.54) (.04)
Distributions from net realized gains..... (.19) (.04) -- --
------- ------- ------- -----------
Total distributions....................... (.67) (.54) (.54) (.04)
------- ------- ------- -----------
Net asset value, end of period............ $ 10.97 $ 10.87 $ 10.98 $ 10.81
------- ------- ------- -----------
------- ------- ------- -----------
TOTAL RETURN (d):......................... 7.27% 3.96% 6.86% 0.14%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)........... $ 1,637 $ 1,961 $ 1,502 $ 240
Average net assets (000).................. $ 1,894 $ 1,735 $ 790 $ 11
Ratios to average net assets (c):
Expenses, including distribution fee.... 1.35% 1.32% 1.20% 1.29%(b)
Expenses, excluding distribution fee.... .60% .57% .45% .54%(b)
Net investment income................... 4.39% 4.54% 4.99% 5.06%(b)
Portfolio turnover rate................... 25% 62% 37% 34%
</TABLE>
- ------------
(a) Commencement of offering of Class C shares.
(b) Annualized.
(c) Net of management fee waiver.
(d) Total return does not consider the effects of sales loads. Total return
is calculated assuming a purchase of shares on the first day and a
sale on the last day of each period reported and includes reinvestment
of dividends and distributions. Total returns for periods of less than
a full year are not annualized.
7
<PAGE>
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD INDICATED)
(CLASS Z SHARES)
The following financial highlights for the Class Z shares for the period from
December 6, 1996 through August 31, 1997 have been audited by Price Waterhouse
LLP, independent accountants, whose report thereon was unqualified. This
information should be read in conjunction with the financial statements and the
notes thereto, which appear in the Statement of Additional Information. The
financial highlights contain selected data for a Class Z share of common stock
outstanding, total return, ratios to average net assets and other supplemental
data for the period indicated. This information has been determined based on
data contained in the financial statements. Further performance information is
contained in the annual report, which may be obtained without charge. See
"Shareholder Guide--Shareholder Services--Reports to Shareholders."
<TABLE>
<CAPTION>
CLASS Z
------------------
DECEMBER 6,
1996 (a)
THROUGH
AUGUST 31, 1997
------------------
<S> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period... $ 11.10
------
INCOME FROM INVESTMENT OPERATIONS
Net investment income (d).............. .42
Net realized and unrealized gain (loss)
on investment transactions............. .07
------
Total from investment operations....... .49
------
LESS DISTRIBUTIONS
Dividends from net investment income... (.42)
Distributions from net realized gains
on investment transactions........... (.19)
------
Total distributions.................... (.61)
------
Net asset value, end of period......... $ 10.98
------
------
TOTAL RETURN (B):...................... 6.76%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)........ $15
Average net assets (000)............... $10
Ratios to average net assets (c)/(d):
Expenses............................. .60%
Net investment income................ 2.69%
Portfolio turnover rate................ 25%
</TABLE>
- ------------
(a) Commencement of offering of Class Z shares.
(b) Total return is calculated assuming a purchase of shares on the first
day and a sale on the last day of the period reported and includes
reinvestment of dividends and distributions. Total returns for periods
of less than a full year are not annualized.
(c) Annualized.
(d) Net of management fee waiver.
8
<PAGE>
HOW THE FUND INVESTS
INVESTMENT OBJECTIVE AND POLICIES
PRUDENTIAL MUNICIPAL SERIES FUND (THE FUND) IS AN OPEN-END, MANAGEMENT
INVESTMENT COMPANY, OR MUTUAL FUND, CONSISTING OF THIRTEEN SEPARATE SERIES. EACH
OF THESE SERIES IS MANAGED INDEPENDENTLY. THE NEW JERSEY SERIES (THE SERIES) IS
DIVERSIFIED AND ITS INVESTMENT OBJECTIVE IS TO MAXIMIZE CURRENT INCOME THAT IS
EXEMPT FROM NEW JERSEY STATE INCOME TAX AND FEDERAL INCOME TAX CONSISTENT WITH
THE PRESERVATION OF CAPITAL AND, IN CONJUNCTION THEREWITH, THE SERIES MAY INVEST
IN DEBT SECURITIES WITH THE POTENTIAL FOR CAPITAL GAIN. See "Investment
Objectives and Policies" in the Statement of Additional Information.
THE SERIES' INVESTMENT OBJECTIVE IS A FUNDAMENTAL POLICY AND, THEREFORE, MAY
NOT BE CHANGED WITHOUT THE APPROVAL OF THE HOLDERS OF A MAJORITY OF THE SERIES'
OUTSTANDING VOTING SECURITIES AS DEFINED IN THE INVESTMENT COMPANY ACT OF 1940,
AS AMENDED (THE INVESTMENT COMPANY ACT). THE SERIES' POLICIES THAT ARE NOT
FUNDAMENTAL MAY BE MODIFIED BY THE TRUSTEES.
THE SERIES WILL INVEST PRIMARILY IN NEW JERSEY STATE, MUNICIPAL AND LOCAL
GOVERNMENT OBLIGATIONS AND OBLIGATIONS OF OTHER QUALIFYING ISSUERS, SUCH AS
ISSUERS LOCATED IN PUERTO RICO, THE VIRGIN ISLANDS AND GUAM, WHICH PAY INCOME
EXEMPT, IN THE OPINION OF COUNSEL, FROM NEW JERSEY STATE INCOME TAX AND FEDERAL
INCOME TAX (NEW JERSEY OBLIGATIONS). THERE CAN BE NO ASSURANCE THAT THE SERIES
WILL BE ABLE TO ACHIEVE ITS INVESTMENT OBJECTIVE.
As with an investment in any mutual fund, an investment in this Series can
decrease and you can lose money.
Interest on certain municipal obligations may be a preference item for
purposes of the federal alternative minimum tax. The Series may invest without
limit in municipal obligations that are "private activity bonds" (as defined in
the Internal Revenue Code) the interest on which would be a preference item for
purposes of the federal alternative minimum tax. See "Taxes, Dividends and
Distributions." Under New Jersey law, as long as the Series qualifies as a
"qualified investment fund," dividends paid by the Series are exempt from New
Jersey income tax for resident individuals and New Jersey trusts and estates to
the extent such dividends are derived from interest payments on and gain
realized from the sale or exchange of New Jersey Obligations and other
obligations exempt from State and local taxation by the laws of New Jersey or
the United States. New Jersey Obligations could include general obligation bonds
of the State, counties, cities, towns, etc., revenue bonds of utility systems,
highways, bridges, port and airport facilities, colleges, hospitals, etc., and
industrial development and pollution control bonds. The Series will invest in
long-term obligations, and the dollar-weighted average maturity of the Series'
portfolio will generally range between 10-20 years. The Series also may invest
in certain short-term, tax-exempt notes such as Tax Anticipation Notes, Revenue
Anticipation Notes, Bond Anticipation Notes, Construction Loan Notes and
variable and floating rate demand notes.
Generally, municipal obligations with longer maturities produce higher yields
and are subject to greater price fluctuations as a result of changes in interest
rates (market risk) than municipal obligations with shorter maturities. The
prices of municipal obligations vary inversely with interest rates. Interest
rates are currently much lower than in recent years. As a general matter, bond
prices and the Series' net asset value will vary inversely with interest rate
fluctuations. If rates were to rise sharply, the prices of bonds in the Series'
portfolio might be adversely affected.
THE SERIES MAY INVEST ITS ASSETS IN FLOATING RATE AND VARIABLE RATE
SECURITIES, INCLUDING PARTICIPATION INTERESTS THEREIN AND INVERSE FLOATERS.
There is no limit on the amount of such securities that the Series may purchase.
Floating rate securities normally have a rate of interest which is set as a
specific percentage of a designated base rate, such as the rate on Treasury
bonds or bills or the prime rate at a major commercial bank. The interest rate
on floating rate securities changes periodically when there is a change in the
designated base interest rate. Variable rate securities provide for a specified
periodic adjustment in the interest rate based on prevailing market rates and
generally would allow the Series to demand payment of the
9
<PAGE>
obligation on short notice at par plus accrued interest, which amount may be
more or less than the amount the Series paid for them. An inverse floater is a
debt instrument with a floating or variable interest rate that moves in the
opposite direction of the interest rate on another security or the value of an
index. Changes in the interest rate on the other security or index inversely
affect the residual interest rate paid on the inverse floater, with the result
that the inverse floater's price will be considerably more volatile than that of
a fixed rate bond. The market for inverse floaters is relatively new.
THE SERIES MAY ALSO INVEST IN MUNICIPAL LEASE OBLIGATIONS. A MUNICIPAL LEASE
OBLIGATION IS A MUNICIPAL SECURITY THE INTEREST ON AND PRINCIPAL OF WHICH IS
PAYABLE OUT OF LEASE PAYMENTS MADE BY THE PARTY LEASING THE FACILITIES FINANCED
BY THE ISSUE. Typically, municipal lease obligations are issued by a state or
municipal financing authority to provide funds for the construction of
facilities (E.G., schools, dormitories, office buildings or prisons) or the
acquisition of equipment. The facilities are typically used by the state or
municipality pursuant to a lease with a financing authority. Certain municipal
lease obligations may trade infrequently. Accordingly, the investment adviser
will monitor the liquidity of municipal lease obligations under the supervision
of the Trustees. Municipal lease obligations will not be considered illiquid for
purposes of the Series' 15% limitation on illiquid securities provided the
investment adviser determines that there is a readily available market for such
securities. See "Other Investments and Policies--Illiquid Securities" below.
THE SERIES WILL INVEST AT LEAST 70% OF ITS TOTAL ASSETS IN NEW JERSEY
OBLIGATIONS WHICH, AT THE TIME OF PURCHASE, ARE RATED WITHIN THE FOUR HIGHEST
QUALITY GRADES AS DETERMINED BY 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), 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 ANOTHER
NATIONALLY RECOGNIZED STATISTICAL RATING ORGANIZATION (NRSRO) OR, IF UNRATED,
WILL POSSESS CREDITWORTHINESS, IN THE OPINION OF THE INVESTMENT ADVISER,
COMPARABLE TO SUCH "INVESTMENT GRADE" RATED SECURITIES.
THE SERIES MAY ALSO INVEST UP TO 30% OF ITS TOTAL ASSETS IN NEW JERSEY
OBLIGATIONS RATED BELOW Baa BY MOODY'S OR BELOW BBB BY S&P OR A COMPARABLE
RATING OF ANOTHER NRSRO OR, IF NON-RATED, OF COMPARABLE QUALITY, IN THE OPINION
OF THE FUND'S INVESTMENT ADVISER, BASED ON ITS CREDIT ANALYSIS. Securities rated
Baa by Moody's and BBB by S&P are described as being investment grade but are
also characterized as having speculative characteristics. Securities rated below
Baa by Moody's and below BBB by S&P are considered speculative. See "Description
of Security Ratings" in the Appendix. Such lower-rated high yield securities are
commonly referred to as "junk bonds." Such securities generally offer a higher
current yield than those in the higher rating categories but may also involve
greater price volatility and risk of loss of principal and income. The
investment advisor will attempt to manage risk and enhance yield through credit
analysis and careful security selection. See "Risk Factors Relating to Investing
in High Yield Municipal Obligations" below. Subsequent to its purchase by the
Series, a municipal obligation may be assigned a lower rating or cease to be
rated. Such an event would not require the elimination of the issue from the
portfolio, but the investment adviser will consider such an event in determining
whether the Series should continue to hold the security in its portfolio. Many
issuers of lower-quality bonds choose not to have their obligations rated and
the Series may invest in such unrated securities. Investors should carefully
consider the relative risks associated with investments in securities which
carry lower ratings and in comparable non-rated securities.
10
<PAGE>
During the year ended August 31, 1997, the monthly dollar weighted average
ratings of the debt obligations held by the Series, expressed as a percentage of
the Series' total assets, were as follows:
<TABLE>
<CAPTION>
PERCENTAGE OF
RATINGS TOTAL INVESTMENTS
------------------------------ -------------------------
<S> <C>
AAA/Aaa 71.29 %
AA/Aa 9.88 %
A/A 5.88 %
BBB/Baa 7.24 %
BB/Ba 1.68 %
Unrated
AAA/Aaa 2.44 %
AA/Aa 0.00 %
A/A 0.00 %
BBB/Baa 1.59 %
</TABLE>
From time to time, the Series may own the majority of a municipal issue. Such
majority-owned holdings may present market and credit risks.
The Series may purchase New Jersey Obligations which, in the opinion of the
investment adviser, offer the opportunity for capital appreciation. This may
occur, for example, when the investment adviser believes that the issuer of a
particular New Jersey Obligation might receive an upgraded credit standing,
thereby increasing the market value of the bonds it has issued or when the
investment adviser believes that interest rates might decline.
UNDER NORMAL MARKET CONDITIONS, THE SERIES WILL ATTEMPT TO INVEST
SUBSTANTIALLY ALL OF THE VALUE OF ITS ASSETS IN NEW JERSEY OBLIGATIONS. As a
matter of fundamental policy, during normal market conditions the Series' assets
will be invested so that at least 80% of its total assets will be invested in
New Jersey Obligations. During abnormal market conditions or to provide
liquidity, the Series may hold cash or cash equivalents or investment grade
taxable obligations, including obligations that are exempt from federal, but not
state, taxation and the Series may invest in tax-free cash equivalents, such as
floating rate demand notes, tax-exempt commercial paper and general obligation
and revenue notes, or in taxable cash equivalents, such as certificates of
deposit, bankers acceptances and time deposits or other short-term taxable
investments such as repurchase agreements. When, in the opinion of the
investment adviser, abnormal market conditions require a temporary defensive
position, the Series may invest more than 20% of the value of its assets in debt
securities other than New Jersey Obligations or may invest its assets so that
more than 20% of the income is subject to New Jersey or federal income taxes.
However, the Series must invest at least 80% of the aggregate principal amount
of all its investments (excluding cash, cash items and receivables, and
financial options, futures, forward contracts, or other similar financial
instruments related to interest-bearing obligations, obligations issued at a
discount or bond indices related thereto that are related to the Series'
business of investing in securities (Related Financial Instruments)) in
obligations exempt from New Jersey personal income tax in order for its
distributions to remain exempt from such tax. The Series will treat an
investment in a municipal bond refunded with escrowed U.S. Government securities
as U.S. Government securities for purposes of the Investment Company Act's
diversification requirements provided certain conditions are met. See
"Investment Objectives and Policies--In General" in the Statement of Additional
Information.
If the Series fails to qualify as a "qualified investment fund" under New
Jersey law, distributions to its shareholders will be subject to New Jersey
income tax. To meet the requirements for a "qualified investment fund," the
Series must have 100% of its investments in interest bearing obligations,
obligations issued at a discount, cash and cash items, including receivables,
and Related Financial Instruments.
THE SERIES IS AUTHORIZED TO ACQUIRE PUT OPTIONS (PUTS) GIVING THE SERIES THE
RIGHT TO SELL SECURITIES HELD IN THE SERIES' PORTFOLIO AT A SPECIFIED EXERCISE
PRICE ON A SPECIFIED DATE. The Series may acquire puts on securities in its
portfolio for the
11
<PAGE>
purpose of protecting the Series from a possible decline in the market value of
the security to which the put applies in the event of interest rate fluctuations
or, in the case of liquidity puts, for the purpose of shortening the effective
maturity of the underlying security. The aggregate value of premiums paid to
acquire puts held in the Series' portfolio (other than liquidity puts) may not
exceed 10% of the net asset value of the Series. The acquisition of a put may
involve an additional cost to the Series by payment of a premium for the put, by
payment of a higher purchase price for securities to which the put is attached
or through a lower effective interest rate.
In addition, there is a credit risk associated with the purchase of puts in
that the issuer of the put may be unable to meet its obligation to purchase the
underlying securities. Accordingly, the Series will acquire puts only under the
following circumstances: (1) the put is written by the issuer of the underlying
security and such security is rated within the four highest quality grades as
determined by 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 highest quality grades; or (3) the put is
backed by a letter of credit or similar financial guarantee issued by a person
having securities outstanding which are rated within the two highest quality
grades of an NRSRO.
THE SERIES MAY PURCHASE MUNICIPAL OBLIGATIONS ON A "WHEN-ISSUED" OR "DELAYED
DELIVERY" BASIS, IN EACH CASE WITHOUT LIMIT. When municipal obligations are
offered on a when-issued or delayed delivery basis, the price and coupon rate
are fixed at the time the commitment to purchase is made, but delivery and
payment for the securities take place at a later date. The purchase price for
such securities includes interest accrued during the period between purchase and
settlement and, therefore, no interest accrues to the economic benefit of the
purchaser during such period. In the case of purchases by the Series, the price
that the Series is required to pay on the settlement date may be in excess of
the market value of the municipal obligations on that date. While securities may
be sold prior to the settlement date, the Series intends to purchase these
securities with the purpose of actually acquiring them unless a sale would be
desirable for investment reasons. At the time the Series makes the commitment to
purchase a municipal obligation on a when-issued or delayed delivery basis, it
will record the transaction and reflect the value of the obligation each day in
determining its net asset value. This value may fluctuate from day to day in the
same manner as values of municipal obligations otherwise held by the Series. If
the seller defaults in the sale, the Series could fail to realize the
appreciation, if any, that had occurred. The Series will establish a segregated
account with its Custodian in which it will maintain cash, U.S. Government
securities, equity securities and other liquid, unencumbered assets,
marked-to-market daily, equal in value to its commitments for when-issued or
delayed delivery securities.
THE SERIES MAY ALSO PURCHASE MUNICIPAL FORWARD CONTRACTS. A municipal forward
contract is a municipal security which is purchased on a when-issued basis with
delivery taking place up to five years from the date of purchase. No interest
will accrue on the security prior to the delivery date. The investment adviser
will monitor the liquidity, value, credit quality and delivery of the security
under the supervision of the Trustees.
THE SERIES MAY PURCHASE SECONDARY MARKET INSURANCE ON NEW JERSEY OBLIGATIONS
WHICH IT HOLDS OR ACQUIRES. Secondary market insurance would be reflected in the
market value of the municipal obligation purchased and may enable the Series to
dispose of a defaulted obligation at a price similar to that of comparable
municipal obligations which are not in default.
Insurance is not a substitute for the basic credit of an issuer, but
supplements the existing credit and provides additional security therefor. While
insurance coverage for the New Jersey Obligations held by the Series reduces
credit risk by providing that the insurance company will make timely payment of
principal and interest if the issuer defaults on its obligation to make such
payment, it does not afford protection against fluctuation in the price, I.E.,
the market value, of the municipal obligations caused by changes in interest
rates and other factors, nor in turn against fluctuations in the net asset value
of the shares of the Series.
RISK FACTORS RELATING TO INVESTING IN HIGH YIELD MUNICIPAL OBLIGATIONS.
FIXED-INCOME SECURITIES ARE SUBJECT TO THE RISK OF AN ISSUER'S INABILITY TO MEET
PRINCIPAL AND INTEREST PAYMENTS ON THE OBLIGATIONS (CREDIT RISK) AND MAY ALSO BE
SUBJECT TO PRICE VOLATILITY DUE TO SUCH FACTORS AS INTEREST RATE SENSITIVITY,
MARKET PERCEPTION OF THE CREDITWORTHINESS OF THE ISSUER AND GENERAL MARKET
LIQUIDITY (MARKET RISK). Lower-rated or unrated (I.E., high yield) securities,
commonly known
12
<PAGE>
as "junk bonds," are more likely to react to developments affecting market and
credit risk than are more highly rated securities, which react primarily to
movements in the general level of interest rates. The investment adviser will
perform its own investment analysis and will not rely principally on the ratings
assigned by the rating services, although such ratings will be considered by the
investment adviser. The investment adviser will consider, among other things,
credit risk and market risk, as well as the financial history and condition, the
prospects and the management of an issuer in selecting securities for the
Series' portfolio. The achievement of the Series' investment objective may be
more dependent on the investment adviser's credit analysis than is the case when
investing in only higher quality bonds. Investors should carefully consider the
relative risks of investing in high yield municipal obligations and understand
that such securities are not generally meant for short-term investing and that
yields on junk bonds will fluctuate over time.
The amount of high yield securities outstanding has proliferated recently in
conjunction with the decline in creditworthiness of many obligors on municipal
debt, particularly health care providers and certain governmental bodies. An
economic downturn could severely affect the ability of highly leveraged issuers
to service their debt obligations or to repay their obligations upon maturity.
In addition, the secondary market for high yield securities, which is
concentrated in relatively few market makers, may not be as liquid as the
secondary market for more highly rated securities and, from time to time, it may
be more difficult to value high yield securities than more highly rated
securities, and the judgment of the Board of Trustees and the investment adviser
may play a greater role in valuation because there is less reliable objective
data available. Under adverse market or economic conditions, the secondary
market for high yield securities could contract further, independent of any
specific adverse changes in the condition of a particular issuer. As a result,
the investment adviser could find it more difficult to sell these securities or
may be able to sell the securities only at prices lower than if such securities
were widely traded. Prices realized upon the sale of such lower rated or unrated
securities, under these circumstances, may be less than the prices used in
calculating the Series' net asset value. If the investment adviser becomes
involved in activities such as reorganizations of obligors of troubled
investments held by the Series, this may prevent the Series from disposing of
the securities, due to its possession of material, non-public information
concerning the obligor.
LOWER-RATED OR UNRATED DEBT OBLIGATIONS ALSO PRESENT RISKS BASED ON PAYMENT
EXPECTATIONS. If an issuer calls the obligation for redemption, the Series may
have to replace the security with a lower-yielding security, resulting in a
decreased return for investors. If the Series experiences unexpected net
redemptions, it may be forced to sell its higher quality securities, resulting
in a decline in the overall credit quality of the Series' portfolio and
increasing the exposure of the Series to the risks of high yield securities.
FUTURES CONTRACTS AND OPTIONS THEREON
THE SERIES IS AUTHORIZED TO PURCHASE AND SELL CERTAIN DERIVATIVES, INCLUDING
FINANCIAL FUTURES CONTRACTS (FUTURES CONTRACTS) AND OPTIONS THEREON. THE SERIES
MAY PURCHASE AND SELL FUTURES CONTRACTS AND OPTIONS THEREON TO THE EXTENT THEY
ARE RELATED FINANCIAL INSTRUMENTS FOR THE PURPOSE OF HEDGING ITS PORTFOLIO
SECURITIES AGAINST FLUCTUATIONS IN VALUE CAUSED BY CHANGES IN PREVAILING MARKET
INTEREST RATES AND HEDGING AGAINST INCREASES IN THE COST OF SECURITIES THE
SERIES INTENDS TO PURCHASE. THE SUCCESSFUL USE OF FUTURES CONTRACTS AND OPTIONS
THEREON BY THE SERIES INVOLVES ADDITIONAL TRANSACTION COSTS AND IS SUBJECT TO
VARIOUS RISKS AND DEPENDS UPON THE INVESTMENT ADVISER'S ABILITY TO PREDICT THE
DIRECTION OF THE MARKET (INCLUDING INTEREST RATES). THE SERIES, AND THUS
INVESTORS, MAY LOSE MONEY THROUGH ANY UNSUCCESSFUL USE OF THESE STRATEGIES.
A FUTURES CONTRACT OBLIGATES THE SELLER OF THE CONTRACT TO DELIVER TO THE
PURCHASER OF THE CONTRACT CASH EQUAL TO A SPECIFIC DOLLAR AMOUNT TIMES THE
DIFFERENCE BETWEEN THE VALUE OF A SPECIFIC FIXED-INCOME SECURITY OR INDEX AT THE
CLOSE OF THE LAST TRADING DAY OF THE CONTRACT AND THE PRICE AT WHICH THE
AGREEMENT IS MADE. No physical delivery of the underlying securities is made.
The Series will engage in transactions in only those futures contracts and
options thereon that are traded on a commodities exchange or a board of trade.
13
<PAGE>
The Series intends to engage in futures contracts and options thereon as a
hedge against changes, resulting from market conditions, in the value of
securities which are held in the Series' portfolio or which the Series intends
to purchase, in accordance with the rules and regulations of the Commodity
Futures Trading Commission (the CFTC). The Series also intends to engage in such
transactions when they are economically appropriate for the reduction of risks
inherent in the ongoing management of the Series.
THE SERIES MAY NOT PURCHASE OR SELL FUTURES CONTRACTS OR OPTIONS THEREON IF,
IMMEDIATELY THEREAFTER, (I) THE SUM OF INITIAL AND NET CUMULATIVE VARIATION
MARGIN ON OUTSTANDING FUTURES CONTRACTS, TOGETHER WITH PREMIUMS PAID FOR OPTIONS
THEREON, WOULD EXCEED 20% OF THE TOTAL ASSETS OF THE SERIES, OR (II) IN THE CASE
OF RISK MANAGEMENT TRANSACTIONS, THE SUM OF THE AMOUNT OF INITIAL MARGIN
DEPOSITS ON THE SERIES' FUTURES POSITIONS AND PREMIUMS PAID FOR OPTIONS THEREON
WOULD EXCEED 5% OF THE LIQUIDATION VALUE OF THE SERIES' TOTAL ASSETS. There are
no limitations on the percentage of the portfolio which may be hedged and no
limitations on the use of the Series' assets to cover futures contracts and
options thereon, except that the aggregate value of the obligations underlying
put options will not exceed 50% of the Series' assets. Certain requirements for
qualification as a regulated investment company under the Internal Revenue Code
may limit the Series' ability to engage in futures contracts and options
thereon. See "Distributions and Tax Information--Federal Taxation" in the
Statement of Additional Information.
Currently, futures contracts are available on several types of fixed-income
securities, including U.S. Treasury bonds and notes, three-month U.S. Treasury
bills and Eurodollars. Futures contracts are also available on a municipal bond
index, based on THE BOND BUYER Municipal Bond Index, an index of 40 actively
traded municipal bonds. The Series may also engage in transactions in other
futures contracts that become available, from time to time, in other
fixed-income securities or municipal bond indices and in other options on such
contracts if the investment adviser believes such contracts and options would be
appropriate for hedging the Series' portfolio.
THERE CAN BE NO ASSURANCE THAT VIABLE MARKETS WILL CONTINUE OR THAT A LIQUID
SECONDARY MARKET WILL EXIST TO TERMINATE ANY PARTICULAR FUTURES CONTRACT AT ANY
SPECIFIC TIME. If it is not possible to close a futures position entered into by
the Series, the Series will continue to be required to make daily cash payments
of variation margin in the event of adverse price movements. In such a
situation, if the Series had insufficient cash, it might have to sell portfolio
securities to meet daily variation margin requirements at a time when it might
be disadvantageous to do so. The inability to close futures positions also could
have an adverse impact on the ability of the Series to hedge effectively. There
is also a risk of loss by the Series of margin deposits in the event of
bankruptcy of a broker with whom the Series has an open position in a futures
contract.
THE SUCCESSFUL USE OF FUTURES CONTRACTS AND OPTIONS THEREON BY THE SERIES IS
SUBJECT TO VARIOUS ADDITIONAL RISKS. Any use of futures transactions involves
the risk of imperfect correlation in movements in the price of futures contracts
and movements in interest rates and, in turn, the prices of the securities that
are the subject of the hedge. If the price of the futures contract moves more or
less than the price of the security that is the subject of the hedge, the Series
will experience a gain or loss that will not be completely offset by movements
in the price of the security. The risk of imperfect correlation is greater where
the securities underlying futures contracts are taxable securities (rather than
municipal securities), are issued by companies in different market sectors or
have different maturities, ratings or geographic mixes than the security being
hedged. In addition, the correlation may be affected by additions to or
deletions from the index which serves as the basis for a futures contract.
Finally, if the price of the security that is subject to the hedge were to move
in a favorable direction, the advantage to the Series would be partially offset
by the loss incurred on the futures contract.
SPECIAL CONSIDERATIONS
BECAUSE THE SERIES WILL INVEST AT LEAST 80% OF THE VALUE OF ITS TOTAL ASSETS
IN NEW JERSEY OBLIGATIONS AND BECAUSE IT SEEKS TO MAXIMIZE INCOME DERIVED FROM
NEW JERSEY OBLIGATIONS, IT IS MORE SUSCEPTIBLE TO FACTORS ADVERSELY AFFECTING
ISSUERS OF NEW JERSEY OBLIGATIONS THAN IS A COMPARABLE MUNICIPAL BOND MUTUAL
FUND THAT IS NOT CONCENTRATED IN SUCH
14
<PAGE>
OBLIGATIONS TO THIS DEGREE. The economic slowdown which began in 1989 translated
into revenue shortfalls and operating deficits in fiscal 1989, 1990 and 1991. To
balance the budget for the last five years, the State has utilized nonrecurring
revenues and serious spending cuts. The fiscal 1997 ending balance was $700
million, approximately $200 million more than the anticipated surplus. The 1998
budget includes appropriations totaling $16.8 billion, up $800 million or 5%
from fiscal year 1997. New Jersey was forced to increase expenditures in large
part by a 1997 ruling by the State Supreme Court, ordering the expenditure of an
additional $250 million to eliminate inequalities in the State school system
between wealthy and poor districts. Plans to cut costs by further privatization
of State services were put on hold to achieve a budget compromise and
legislative approval of an extraordinary $2.8 billion bond issue in 1997. The
bond issue allowed the State to eliminate the annual $590 million contribution
for the next few years, and balance the budget despite increased spending.
The major bond rating services have initially expressed concern that the 1997
bond issue increased the State's long-term debt to a point where its bond rating
would be downgraded. Both services have retreated from that position at this
time. However, budget pressures will likely continue from the cost of debt
service. Additionally, New Jersey will likely be adversely impacted by the
block-grant formula adopted in new federal welfare reform legislation. If either
New Jersey or any of its local governmental entities is unable to meet its
financial obligations, the income derived by the Series, the ability to preserve
or realize appreciation of the Series' capital and the Series' liquidity could
be adversely affected. See "Investment Objectives and Policies--Special
Considerations Regarding Investments in Tax-Exempt Securities" in the Statement
of Additional Information.
OTHER INVESTMENTS AND POLICIES
REPURCHASE AGREEMENTS
The Series may on occasion enter into repurchase agreements whereby the seller
of a security agrees to repurchase that security from the Series at a mutually
agreed-upon time and price. The period of maturity is usually quite short,
possibly overnight or a few days, although it may extend over a number of
months. The resale price is in excess of the purchase price, reflecting an
agreed-upon rate of return effective for the period of time the Series' money is
invested in the security. The Series' repurchase agreements will at all times be
fully collateralized in an amount at least equal to the resale price. The
instruments held as collateral are valued daily and if the value of the
instruments declines, the Series will require additional collateral. If the
seller defaults and the value of the collateral securing the repurchase
agreement declines, the Series may incur a loss. The Series participates in a
joint repurchase account with other investment companies managed by Prudential
Investments Fund Management LLC pursuant to an order of the Securities and
Exchange Commission (SEC).
BORROWING
The Series may borrow an amount equal to no more than 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 Series may
pledge up to 33 1/3% of the value of its total assets to secure these
borrowings. The Series will not purchase portfolio securities if its borrowings
exceed 5% of its total assets.
PORTFOLIO TURNOVER
The Series does not expect to trade in securities for short-term gain. It is
anticipated that the annual portfolio turnover rate will not exceed 150%. The
portfolio turnover rate is calculated by dividing the lesser of sales or
purchases of portfolio securities by the average monthly value of the portfolio
securities, excluding securities having a maturity at the date of purchase of
one year or less.
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ILLIQUID SECURITIES
The Series may hold up to 15% of its net assets in illiquid securities
including repurchase agreements which have a maturity of longer than seven days,
securities with legal or contractual restrictions on resale (restricted
securities) and securities that are not readily marketable. Restricted
securities eligible for resale pursuant to Rule 144A under the Securities Act of
1933, as amended (the Securities Act), privately placed commercial paper and
municipal lease obligations that have a readily available market are not
considered illiquid for purposes of this limitation. The investment adviser will
monitor the liquidity of such restricted securities under the supervision of the
Trustees. The Series' investment in Rule 144A securities could have the effect
of increasing illiquidity to the extent that qualified institutional buyers
become, for a limited time, uninterested in purchasing Rule 144A securities. See
"Investment Objectives and Policies--Illiquid Securities" and "Investment
Restrictions" in the Statement of Additional Information. Repurchase agreements
subject to demand are deemed to have a maturity equal to the notice period.
INVESTMENT RESTRICTIONS
The Series is subject to certain investment restrictions which, like its
investment objective, constitute fundamental policies. Fundamental policies
cannot be changed without the approval of the holders of a majority of the
Series' outstanding voting securities, as defined in the Investment Company Act.
See "Investment Restrictions" in the Statement of Additional Information.
HOW THE FUND IS MANAGED
THE FUND HAS TRUSTEES WHO, IN ADDITION TO OVERSEEING THE ACTIONS OF THE FUND'S
MANAGER, SUBADVISER AND DISTRIBUTOR, AS SET FORTH BELOW, DECIDE UPON MATTERS OF
GENERAL POLICY. THE FUND'S MANAGER CONDUCTS AND SUPERVISES THE DAILY BUSINESS
OPERATIONS OF THE FUND. THE FUND'S SUBADVISER FURNISHES DAILY INVESTMENT
ADVISORY SERVICES.
For the year ended August 31, 1997, total expenses of the Series as a
percentage of average net assets, net of management fee waivers, were .70%,
1.10% and 1.35% for the Series' Class A, Class B and Class C shares,
respectively. For the period from December 6, 1996 (commencement of the offering
of Class Z shares) through August 31, 1997, total expenses of the Series as a
percentage of average net assets, net of fee waivers were .60% (annualized) for
the Series' Class Z shares. See "Financial Highlights."
MANAGER
PRUDENTIAL INVESTMENTS FUND MANAGEMENT LLC (PIFM OR THE MANAGER), GATEWAY
CENTER THREE, 100 MULBERRY STREET, NEWARK, NEW JERSEY 07102-4077, IS THE MANAGER
OF THE FUND AND IS COMPENSATED FOR ITS SERVICES AT AN ANNUAL RATE OF .50 OF 1%
OF THE AVERAGE DAILY NET ASSETS OF THE SERIES. PIFM is organized in New York as
a limited liability company. It is the successor to Prudential Mutual Fund
Management, Inc., which transferred its assets to PIFM in September 1996. For
the fiscal year ended August 31, 1997, the Series paid PIFM a management fee of
.45 of 1% of the Series' average net assets, after taking into account a
management fee waiver. See "Fee Waivers" below and "Manager" in the Statement of
Additional Information.
As of September 30, 1997, PIFM served as the manager to 41 open-end investment
companies, constituting all of the Prudential Mutual Funds, and as manager or
administrator to 22 closed-end investment companies with aggregate assets of
approximately $59.9 billion.
UNDER THE MANAGEMENT AGREEMENT WITH THE FUND, PIFM MANAGES THE INVESTMENT
OPERATIONS OF EACH SERIES OF THE FUND AND ALSO ADMINISTERS THE FUND'S BUSINESS
AFFAIRS. See "Manager" in the Statement of Additional Information.
UNDER A SUBADVISORY AGREEMENT BETWEEN PIFM AND THE PRUDENTIAL INVESTMENT
CORPORATION (PIC), DOING BUSINESS AS PRUDENTIAL INVESTMENTS (PI, THE SUBADVISER
OR THE INVESTMENT ADVISER), PI FURNISHES INVESTMENT ADVISORY SERVICES
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IN CONNECTION WITH THE MANAGEMENT OF THE FUND AND IS REIMBURSED BY PIFM FOR ITS
REASONABLE COSTS AND EXPENSES INCURRED IN PROVIDING SUCH SERVICES. Under the
Management Agreement, PIFM continues to have responsibility for all investment
advisory services and supervises PI's performance of such services.
The current portfolio managers of the Series are Peter Allegrini and Scott
Diamond, who share responsibility for the day-to-day management of each Series'
portfolio. They have managed the portfolios since October 1997. From 1982 to
1986, Mr. Allegrini was employed by Fidelity Investments as a senior bond
analyst and, from 1986 to 1994, he was a portfolio manager, most recently of
Fidelity Advisor High Income Municipal Fund and has been employed by PIC in
various capacities since 1993. Scott Diamond has been employed by PIC in various
capacities since 1993.
PIFM and PIC are indirect, wholly-owned subsidiaries of The Prudential
Insurance Company of America (Prudential), a major diversified insurance and
financial services company, and are part of Prudential Investments, a business
group of Prudential.
FEE WAIVERS
PIFM may from time to time waive its management fee or a portion thereof and
subsidize certain operating expenses of the Series. Fee waivers and expense
subsidies will increase the Series' yield and total return. The Series is not
required to reimburse PIFM for such management fee waiver or expense subsidy.
Effective September 1, 1997, PIFM discontinued its waiver of 10% of its
management fee. See "Fund Expenses."
DISTRIBUTOR
PRUDENTIAL SECURITIES INCORPORATED (PRUDENTIAL SECURITIES, PSI OR THE
DISTRIBUTOR), ONE SEAPORT PLAZA, NEW YORK, NEW YORK 10292, IS A CORPORATION
ORGANIZED UNDER THE LAWS OF THE STATE OF DELAWARE AND SERVES AS THE DISTRIBUTOR
OF THE CLASS A, CLASS B, CLASS C AND CLASS Z SHARES OF THE SERIES. It is an
indirect, wholly-owned subsidiary of Prudential.
UNDER SEPARATE DISTRIBUTION AND SERVICE PLANS (THE CLASS A PLAN, THE CLASS B
PLAN AND THE CLASS C PLAN, COLLECTIVELY, THE PLANS) ADOPTED BY THE FUND UNDER
RULE 12b-1 UNDER THE INVESTMENT COMPANY ACT AND A DISTRIBUTION AGREEMENT (THE
DISTRIBUTION AGREEMENT), PRUDENTIAL SECURITIES (THE DISTRIBUTOR) INCURS THE
EXPENSES OF DISTRIBUTING THE CLASS A, CLASS B AND CLASS C SHARES OF THE SERIES.
PRUDENTIAL SECURITIES ALSO INCURS THE EXPENSE OF DISTRIBUTING THE SERIES' CLASS
Z SHARES UNDER THE DISTRIBUTION AGREEMENT WITH THE FUND, NONE OF WHICH IS
REIMBURSED OR PAID FOR BY THE FUND. These expenses include commissions and
account servicing fees paid to, or on account of, financial advisers of
Prudential Securities and representatives of Pruco Securities Corporation
(Prusec), an affiliated broker-dealer, commissions and account servicing fees
paid to, or on account of, other broker-dealers or financial institutions (other
than national banks) which have entered into agreements with the Distributor,
advertising expenses, the cost of printing and mailing prospectuses to potential
investors and indirect and overhead costs of Prudential Securities and Prusec
associated with the sale of Series shares, including lease, utility,
communications and sales promotion expenses.
Under the Plans, the Series is obligated to pay distribution and/or service
fees to the Distributor as compensation for its distribution and service
activities, not as reimbursement for specific expenses incurred. If the
Distributor's expenses exceed its distribution and service fees, the Series will
not be obligated to pay any additional expenses. If the Distributor's expenses
are less than such distribution and service fees, it will retain its full fees
and realize a profit.
UNDER THE CLASS A PLAN, THE SERIES MAY PAY PRUDENTIAL SECURITIES FOR ITS
DISTRIBUTION-RELATED ACTIVITIES WITH RESPECT TO CLASS A SHARES AT AN ANNUAL RATE
OF UP TO .30 OF 1% OF THE AVERAGE DAILY NET ASSETS OF THE CLASS A SHARES OF THE
SERIES. The Class A Plan provides that (i) up to .25 of 1% of the average daily
net assets of the Class A shares may be used to pay for personal service and/or
the maintenance of shareholder accounts (service fee) and (ii) total
distribution fees (including the
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service fee of .25 of 1%) may not exceed .30 of 1% of the average daily net
assets of the Class A shares. Prudential Securities has agreed to limit its
distribution-related fees payable under the Class A Plan to .10 of 1% of the
average daily net assets of the Class A shares for the fiscal year ending August
31, 1998.
UNDER THE CLASS B AND CLASS C PLANS, THE SERIES MAY PAY PRUDENTIAL SECURITIES
FOR ITS DISTRIBUTION-RELATED ACTIVITIES WITH RESPECT TO CLASS B AND CLASS C
SHARES AT AN ANNUAL RATE OF UP TO .50 OF 1% AND UP TO 1% OF THE AVERAGE DAILY
NET ASSETS OF THE CLASS B AND CLASS C SHARES, RESPECTIVELY. The Class B Plan
provides for the payment to Prudential Securities of (i) an asset-based sales
charge of up to .50 of 1% of the average daily net assets of the Class B shares,
and (ii) a service fee of up to .25 of 1% of the average daily net assets of the
Class B shares; provided that the total distribution-related fee does not exceed
.50 of 1%. The Class C Plan provides for the payment to Prudential Securities of
(i) an asset-based sales charge of up to .75 of 1% of the average daily net
assets of the Class C shares, and (ii) a service fee of up to .25 of 1% of the
average daily net assets of the Class C shares. The service fee is used to pay
for personal service and/or the maintenance of shareholder accounts. Prudential
Securities has agreed to limit its distribution-related fees payable under the
Class C Plan to .75 of 1% of the average daily net assets of the Class C shares
for the fiscal year ending August 31, 1998. Prudential Securities also receives
contingent deferred sales charges from certain redeeming shareholders. See
"Shareholder Guide--How to Sell Your Shares--Contingent Deferred Sales Charges."
For the fiscal year ended August 31, 1997, the Series paid distribution
expenses of .10 of 1%, .50 of 1% and .75 of 1% of the average daily net assets
of the Class A, Class B and Class C shares, respectively. The Series records all
payments made under the Plans as expenses in the calculation of net investment
income. See "Distributor" in the Statement of Additional Information.
Distribution expenses attributable to the sale of Class A, Class B and Class C
shares of the Series will be allocated to each such class based upon the ratio
of sales of each such class to the sales of Class A, Class B and Class C shares
of the Series other than expenses allocable to a particular class. The
distribution fee and sales charge of one class will not be used to subsidize the
sale of another class.
Each Plan provides that it shall continue in effect from year to year provided
that a majority of the Trustees of the Fund, including a majority of the
Trustees who are not "interested persons" of the Fund (as defined in the
Investment Company Act) and who have no direct or indirect financial interest in
the operation of the Plan or any agreement related to the Plan (the Rule 12b-1
Trustees), vote annually to continue the Plan. Each Plan may be terminated with
respect to the Series at any time by vote of a majority of the Rule 12b-1
Trustees or of a majority of the outstanding shares of the applicable class of
the Series. The Series will not be obligated to pay distribution and service
fees incurred under any Plan if it is terminated or not continued.
In addition to distribution and service fees paid by the Series under the
Class A, Class B and Class C Plans, the Manager (or one of its affiliates) may
make payments out of its own resources to dealers (including Prudential
Securities) and other persons who distribute shares of the Series (including
Class Z shares). Such payments may be calculated by reference to the net asset
value of shares sold by such persons or otherwise.
The Distributor is subject to the rules of the National Association of
Securities Dealers, Inc. (the NASD) governing maximum sales charges. See
"Distributor" in the Statement of Additional Information.
On October 21, 1993, PSI entered into an omnibus settlement with the SEC,
state securities regulators (with the exception of the Texas Securities
Commissioner who joined the settlement on January 18, 1994) and the NASD to
resolve allegations that from 1980 through 1990 PSI sold certain limited
partnership interests in violation of securities laws to persons for whom such
securities were not suitable and misrepresented the safety, potential returns
and liquidity of these investments. Without admitting or denying the allegations
asserted against it, PSI consented to the entry of an SEC Administrative Order
which stated that PSI's conduct violated the federal securities laws, directed
PSI to cease and desist from violating the federal securities laws, pay civil
penalties, and adopt certain remedial measures to address the violations.
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Pursuant to the terms of the SEC settlement, PSI agreed to the imposition of a
$10,000,000 civil penalty, established a settlement fund in the amount of
$330,000,000 and procedures to resolve legitimate claims for compensatory
damages by purchasers of the partnership interests. PSI has agreed to provide
additional funds, if necessary, for the purpose of the settlement fund. PSI's
settlement with the state securities regulators included an agreement to pay a
penalty of $500,000 per jurisdiction. PSI consented to a censure and to the
payment of a $5,000,000 fine in settling the NASD action.
In October 1994, a criminal complaint was filed with the United States
Magistrate for the Southern District of New York alleging that PSI committed
fraud in connection with the sale of certain limited partnership interests in
violation of federal securities laws. An agreement was simultaneously filed to
defer prosecution of these charges for a period of three years from the signing
of the agreement, provided that PSI complies with the terms of the agreement.
If, upon completion of the three year period, PSI has complied with the terms of
the agreement, no prosecution will be instituted by the United States for the
offenses charged in the complaint. If on the other hand, during the course of
the three year period, PSI violates the terms of the agreement, the U.S.
Attorney can then elect to pursue these charges. Under the terms of the
agreement, PSI agreed, among other things, to pay an additional $330,000,000
into the fund established by the SEC to pay restitution to investors who
purchased certain PSI limited partnership interests.
For more detailed information concerning the foregoing matters, see
"Distributor" in the Statement of Additional Information, a copy of which may be
obtained at no cost by calling (800) 225-1852.
The Fund is not affected by PSI's financial condition and is an entirely
separate legal entity from PSI, which has no beneficial ownership therein and
the Fund's assets which are held by State Street Bank and Trust Company, an
independent custodian, are separate and distinct from PSI.
PORTFOLIO TRANSACTIONS
Prudential Securities may act as a broker or futures commission merchant for
the Fund, provided that the commissions, fees or other remuneration it receives
are fair and reasonable. See "Portfolio Transactions and Brokerage" in the
Statement of Additional Information.
CUSTODIAN AND TRANSFER AND DIVIDEND DISBURSING AGENT
State Street Bank and Trust Company, One Heritage Drive, North Quincy,
Massachusetts 02171, serves as Custodian for the portfolio securities of the
Series and cash and, in that capacity, maintains certain financial and
accounting books and records pursuant to an agreement with the Fund. Its mailing
address is P.O. Box 1713, Boston, Massachusetts 02105.
Prudential Mutual Fund Services LLC (PMFS), Raritan Plaza One, Edison, New
Jersey 08837, serves as Transfer Agent and Dividend Disbursing Agent and, in
those capacities, maintains certain books and records for the Fund. PMFS is a
wholly-owned subsidiary of PIFM. Its mailing address is P.O. Box 15005, New
Brunswick, New Jersey 08906-5005.
HOW THE FUND VALUES ITS SHARES
THE SERIES' NET ASSET VALUE PER SHARE OR NAV IS DETERMINED BY SUBTRACTING ITS
LIABILITIES FROM THE VALUE OF ITS ASSETS AND DIVIDING THE REMAINDER BY THE
NUMBER OF OUTSTANDING SHARES. NAV IS CALCULATED SEPARATELY FOR EACH CLASS. THE
TRUSTEES HAVE FIXED THE SPECIFIC TIME OF DAY FOR THE COMPUTATION OF THE NET
ASSET VALUE OF THE SERIES TO BE AS OF 4:15 P.M., NEW YORK TIME.
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Portfolio securities are valued based on market quotations or, if not readily
available, at fair value as determined in good faith under procedures
established by the Trustees. Securities may also be valued based on values
provided by a pricing service. See "Net Asset Value" in the Statement of
Additional Information.
The Series will compute its NAV once daily on days that the New York Stock
Exchange is open for trading except on days on which no orders to purchase, sell
or redeem shares have been received by the Series or days on which changes in
the value of the Series' portfolio securities do not materially affect the NAV.
Although the legal rights of each class of shares are substantially identical,
the different expenses borne by each class will result in different dividends.
As long as the Series declares dividends daily, the NAV of the Class A, Class B,
Class C and Class Z shares will generally be the same. It is expected, however,
that the Series' dividends will differ by approximately the amount of any
distribution and/or service fee expense accrual differential among the classes.
HOW THE FUND CALCULATES PERFORMANCE
FROM TIME TO TIME THE FUND MAY ADVERTISE THE YIELD, TAX EQUIVALENT YIELD AND
AVERAGE ANNUAL TOTAL RETURN AND AGGREGATE TOTAL RETURN) OF THE SERIES IN
ADVERTISEMENTS OR SALES LITERATURE. YIELD, TAX EQUIVALENT YIELD AND TOTAL RETURN
ARE CALCULATED SEPARATELY FOR CLASS A, CLASS B, CLASS C AND CLASS Z SHARES.
THESE FIGURES ARE BASED ON HISTORICAL EARNINGS AND ARE NOT INTENDED TO INDICATE
FUTURE PERFORMANCE. The yield refers to the income generated by an investment in
the Series over a one-month or 30-day period. This income is then annualized;
that is, the amount of income generated by the investment during that 30-day
period is assumed to be generated each 30-day period for twelve periods and is
shown as a percentage of the investment. The income earned on the investment is
also assumed to be reinvested at the end of the sixth 30-day period. The tax
equivalent yield is calculated similarly to the yield, except that the yield is
increased using a stated income tax rate to demonstrate the taxable yield
necessary to produce an after-tax yield equivalent to the Series. The total
return shows how much an investment in the Series would have increased
(decreased) over a specified period of time (I.E., one, five or ten years or
since inception of the Series) assuming that all distributions and dividends by
the Series were reinvested on the reinvestment dates during the period and less
all recurring fees. The aggregate total return reflects actual performance over
a stated period of time. Average annual total return is a hypothetical rate of
return that, if achieved annually, would have produced the same aggregate total
return if performance had been constant over the entire period. Average annual
total return smooths out variations in performance and takes into account any
applicable initial or contingent deferred sales charges. Neither average annual
total return nor aggregate total return takes into account any federal or state
income taxes which may be payable upon redemption. The Fund also may include
comparative performance information in advertising or marketing the shares of
the Series. Such performance information may include data from Lipper Analytical
Services, Inc., Morningstar Publications, Inc., other industry publications,
business periodicals and market indices. See "Performance Information" in the
Statement of Additional Information. Further performance information is
contained in the Series' annual and semi-annual reports to shareholders, which
may be obtained without charge. See "Shareholder Guide--Shareholder
Services--Reports to Shareholders."
TAXES, DIVIDENDS AND DISTRIBUTIONS
TAXATION OF THE FUND
THE SERIES HAS ELECTED TO QUALIFY AND INTENDS TO REMAIN QUALIFIED AS A
REGULATED INVESTMENT COMPANY UNDER THE INTERNAL REVENUE CODE. ACCORDINGLY, THE
SERIES WILL NOT BE SUBJECT TO FEDERAL INCOME TAXES ON ITS NET INVESTMENT INCOME
AND NET CAPITAL GAINS, IF ANY, THAT IT DISTRIBUTES TO ITS SHAREHOLDERS. TO THE
EXTENT NOT DISTRIBUTED BY THE SERIES, NET TAXABLE INVESTMENT INCOME AND CAPITAL
GAINS AND LOSSES ARE TAXABLE TO THE SERIES.
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To the extent the Series invests in taxable obligations, it will earn taxable
investment income. Also, to the extent the Series engages in hedging
transactions in futures contracts and options thereon, it may earn both
short-term and long-term capital gain or loss. Under the Internal Revenue Code,
special rules apply to the treatment of certain options and futures contracts
(Section 1256 contracts). At the end of each year, such investments held by the
Series will be required to be "marked to market" for federal income tax
purposes; that is, treated as having been sold at market value. Sixty percent of
any gain or loss recognized on these "deemed sales" and on actual dispositions
will be treated as long-term capital gain or loss, and the remainder will be
treated as short-term capital gain or loss. See "Distributions and Tax
Information" in the Statement of Additional Information.
Gain or loss realized by the Series from the sale of securities generally will
be treated as capital gain or loss; however, gain from the sale of certain
securities (including municipal obligations) will be treated as ordinary income
to the extent of any "market discount." Market discount generally is the
difference, if any, between the price paid by the Series for the security and
the principal amount of the security (or, in the case of a security issued at an
original issue discount, the revised issue price of the security). The market
discount rule does not apply to any security that was acquired by the Series at
its original issue. See "Distributions and Tax Information" in the Statement of
Additional Information.
TAXATION OF SHAREHOLDERS
In general, the character of tax-exempt interest distributed by the Series
will flow through as tax-exempt interest to its shareholders provided that 50%
or more of the value of its assets at the end of each quarter of its taxable
year is invested in state, municipal and other obligations, the interest on
which is excluded from gross income for federal income tax purposes. During
normal market conditions, at least 80% of the Series' total assets will be
invested in such obligations. See "How the Fund Invests--Investment Objective
and Policies."
Any dividends out of net taxable investment income, together with
distributions of net short-term gains (I.E., the excess of net short-term
capital gains over net long-term capital losses) distributed to shareholders,
will be taxable as ordinary income to the shareholder whether or not reinvested.
Any net capital gains (I.E., the excess of net capital gains from the sale of
assets held for more than 12 months over net short-term capital losses)
distributed to shareholders will be taxable as capital gains to the
shareholders, whether or not reinvested and regardless of the length of time a
shareholder has owned his or her shares. The maximum capital gains rate for
individuals is 28% with respect to assets held for more than 12 months, but not
more than 18 months, and 20% with respect to assets held for more than 18
months. The maximum capital gains rate for corporate shareholders currently is
the same as the maximum tax rate for ordinary income.
Any gain or loss realized upon a sale or redemption of Series shares by a
shareholder who is not a dealer in securities will be treated as capital gain or
loss. In the case of an individual, any such capital gain will be treated as
short-term capital loss if the shares were held for not more than 12 months,
mid-term gain, taxable at the maximum rate of 28%, if such shares were held for
more than 12, but not more than 18 months, and long-term capital gain, taxable
at the maximum rate of 20%, if such shares were held for more than 18 months. In
the case of a corporation, any such capital gain will be treated as long-term
capital gain, taxable at the same rates as ordinary income, if such shares were
held for more than 12 months. Any such capital loss will be treated as long-term
capital loss if the shares have been held more than one year and otherwise as
short-term capital loss. Any such loss with respect to shares that are held for
six months or less, however, will be treated as long-term capital loss to the
extent of any capital gain distributions received by the shareholder. In
addition, any short-term capital loss will be disallowed to the extent of any
tax-exempt dividends received by the shareholder on shares that are held for six
months or less.
The Fund has obtained opinions of counsel to the effect that neither (i) the
conversion of Class B shares into Class A shares nor (ii) the exchange of any
class of the Series' shares for any other class of its shares constitutes a
taxable event for federal income tax purposes. However, such opinions are not
binding on the Internal Revenue Service.
CERTAIN INVESTORS MAY INCUR FEDERAL ALTERNATIVE MINIMUM TAX LIABILITY AS A
RESULT OF THEIR INVESTMENT IN THE FUND. Tax-exempt interest from certain
municipal obligations (I.E., certain private activity bonds issued after August
7, 1986) will be
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treated as an item of tax preference for purposes of the alternative minimum
tax. The Fund anticipates that, under regulations to be promulgated, items of
tax preference incurred by the Series will be attributed to the Series'
shareholders, although some portion of such items could be allocated to the
Series itself. Depending upon each shareholder's individual circumstances, the
attribution of items of tax preference incurred by the Series could result in
liability for the shareholder for the alternative minimum tax. Similarly, the
Series could be liable for the alternative minimum tax for items of tax
preference attributed to it. The Series is permitted to invest in municipal
obligations of the type that will produce items of tax preference.
Corporate shareholders in the Series also will have to take into account the
adjustment for current earnings for alternative minimum tax purposes. Corporate
shareholders should consult with their tax advisers with respect to this
potential adjustment.
Under New Jersey law, as long as the Series qualifies as a "qualified
investment fund," dividends paid by the Series are exempt from New Jersey income
tax for resident individuals and New Jersey trusts and estates to the extent
such dividends are derived from interest payments on, and gain realized from the
sale or exchange of, New Jersey Obligations and other obligations exempt from
state and local taxation by the laws of New Jersey and the United States.
Dividends paid to corporate shareholders will be subject to the New Jersey
Corporation Business tax or corporation income tax and may increase liability
under the federal alternative minimum tax.
Shareholders are advised to consult their own tax advisers regarding specific
questions as to federal, state or local taxes. See "Distributions and Tax
Information" in the Statement of Additional Information.
WITHHOLDING TAXES
Under the Internal Revenue Code, the Series is required to withhold and remit
to the U.S. Treasury 31% of redemption proceeds on the accounts of certain
shareholders who fail to furnish their tax identification numbers on IRS Form
W-9 (or IRS Form W-8 in the case of certain foreign shareholders) with the
required certifications regarding the shareholder's status under the federal
income tax law. Such withholding is also required on taxable dividends and
capital gain distributions made by the Series unless it is reasonably expected
that at least 95% of the distributions of the Series are comprised of tax-exempt
dividends.
Dividends of net taxable investment income and distributions of net short-term
capital gains paid to a shareholder (including a shareholder acting as a nominee
or fiduciary) who is a nonresident alien individual, a foreign corporation or a
foreign partnership (foreign shareholder) are subject to a 30% (or lower treaty
rate) withholding tax upon the gross amount of the dividends unless the
dividends are effectively connected with a U.S. trade or business conducted by
the foreign shareholder. Capital gain dividends paid to a foreign shareholder
are generally not subject to withholding tax. A foreign shareholder will,
however, be required to pay U.S. income tax on any dividends and capital gain
distributions which are effectively connected with a U.S. trade or business of
the foreign shareholder.
DIVIDENDS AND DISTRIBUTIONS
THE SERIES EXPECTS TO DECLARE DAILY AND PAY MONTHLY DIVIDENDS OF NET
INVESTMENT INCOME, IF ANY, AND MAKE DISTRIBUTIONS AT LEAST ANNUALLY OF ANY
CAPITAL GAINS IN EXCESS OF CAPITAL LOSSES. Dividends paid by the Series with
respect to each class of shares, to the extent any distributions are paid, will
be calculated in the same manner, at the same time, on the same day and will be
in the same amount except that each class other than Class Z will bear its own
distribution charges, generally resulting in lower dividends for Class B and
Class C shares in relation to Class A and Class Z shares and lower dividends for
Class A shares in relation to Class Z shares. Distributions of net capital
gains, if any, will be paid in the same amount for each class of shares. See
"How the Fund Values its Shares."
DIVIDENDS AND DISTRIBUTIONS WILL BE PAID IN ADDITIONAL SHARES OF THE SERIES
BASED ON THE NAV OF EACH CLASS OF THE SERIES ON THE PAYMENT DATE AND RECORD
DATE, RESPECTIVELY, OR SUCH OTHER DATE AS THE TRUSTEES MAY DETERMINE, UNLESS THE
SHAREHOLDER ELECTS IN WRITING NOT LESS THAN FIVE BUSINESS DAYS PRIOR TO THE
RECORD DATE TO RECEIVE SUCH DIVIDENDS AND DISTRIBUTIONS IN CASH. Such election
should be submitted to Prudential Mutual Fund Services LLC, Attention: Account
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Maintenance, P.O. Box 15015, New Brunswick, New Jersey 08906-5015. If you hold
shares through Prudential Securities, you should contact your financial adviser
to elect to receive dividends and distributions in cash. The Fund will notify
each shareholder after the close of the Fund's taxable year of both the dollar
amount and the taxable status of that year's dividends and distributions on a
per share basis.
GENERAL INFORMATION
DESCRIPTION OF SHARES
THE FUND WAS ESTABLISHED AS A MASSACHUSETTS BUSINESS TRUST ON MAY 18, 1984, BY
A DECLARATION OF TRUST. The Fund's activities are supervised by its Trustees.
The Declaration of Trust permits the Trustees to issue an unlimited number of
full and fractional shares in separate series, currently designated as the
Connecticut Money Market Series, Florida Series, Maryland Series, Massachusetts
Series, Massachusetts Money Market Series, Michigan Series, New Jersey Series,
New Jersey Money Market Series, New York Series, New York Money Market Series,
North Carolina Series, Ohio Series and Pennsylvania Series. The Series is
authorized to issue an unlimited number of shares, divided into four classes,
designated Class A, Class B, Class C and Class Z. Each class of shares
represents an interest in the same assets of the Series and is identical in all
respects except that (i) each class 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 "How the Fund is Managed--Distributor." In
accordance with the Fund's Declaration of Trust, the Trustees may authorize the
creation of additional series and classes within such series, with such
preferences, privileges, limitations and voting and dividend rights as the
Trustees may determine.
Shares of the Fund, when issued, are fully paid, nonassessable, fully
transferable and redeemable at the option of the holder. Shares are also
redeemable at the option of the Fund under certain circumstances as described
under "Shareholder Guide--How to Sell Your Shares." Each share of each class of
the Series is equal as to earnings, assets and voting privileges, except as
noted above, and each class (with the exception of Class Z shares, which are not
subject to any distribution or service fees) bears the expenses related to the
distribution of its shares. Except for the conversion feature applicable to the
Class B shares, there are no conversion, preemptive or other subscription
rights. In the event of liquidation, each share of beneficial interest of each
series is entitled to its portion of all of the Fund's assets after all debt and
expenses of the Fund have been paid. Since Class B and Class C shares generally
bear higher distribution expenses than Class A shares, the liquidation proceeds
to shareholders of those classes are likely to be lower than to Class A
shareholders and to Class Z shareholders, whose shares are not subject to any
distribution and/or service fees. The Fund's shares do not have cumulative
voting rights for the election of Trustees.
THE FUND DOES NOT INTEND TO HOLD ANNUAL MEETINGS OF SHAREHOLDERS UNLESS
OTHERWISE REQUIRED BY LAW. THE FUND WILL NOT BE REQUIRED TO HOLD MEETINGS OF
SHAREHOLDERS UNLESS, FOR EXAMPLE, THE ELECTION OF TRUSTEES IS REQUIRED TO BE
ACTED UPON BY SHAREHOLDERS UNDER THE INVESTMENT COMPANY ACT. SHAREHOLDERS HAVE
CERTAIN RIGHTS, INCLUDING THE RIGHT TO CALL A MEETING UPON A VOTE OF 10% OF THE
FUND'S OUTSTANDING SHARES FOR THE PURPOSE OF VOTING ON THE REMOVAL OF ONE OR
MORE TRUSTEES OR TO TRANSACT ANY OTHER BUSINESS.
The Declaration of Trust and the By-Laws of the Fund are designed to make the
Fund similar in certain respects to a Massachusetts business corporation. The
principal distinction between a Massachusetts business corporation and a
Massachusetts business trust relates to shareholder liability. Under
Massachusetts law, shareholders of a business trust may, under certain
circumstances, be held personally liable as partners for the obligations of the
fund, which is not the case with a corporation. The
23
<PAGE>
Declaration of Trust of the Fund provides that shareholders shall not be subject
to any personal liability for the acts or obligations of the Fund and that every
written obligation, contract, instrument or undertaking made by the Fund shall
contain a provision to the effect that the shareholders are not individually
bound thereunder.
ADDITIONAL INFORMATION
This Prospectus, including the Statement of Additional Information which has
been incorporated by reference herein, does not contain all the information set
forth in the Registration Statement filed by the Fund with the SEC under the
Securities Act. Copies of the Registration Statement may be obtained at a
reasonable charge from the SEC or may be examined, without charge, at the office
of the SEC in Washington, D.C.
SHAREHOLDER GUIDE
HOW TO BUY SHARES OF THE FUND
YOU MAY PURCHASE SHARES OF THE SERIES THROUGH PRUDENTIAL SECURITIES, PRUSEC OR
DIRECTLY FROM THE FUND, THROUGH ITS TRANSFER AGENT, PRUDENTIAL MUTUAL FUND
SERVICES LLC (PMFS OR THE TRANSFER AGENT), ATTENTION: INVESTMENT SERVICES, P.O.
BOX 15020, NEW BRUNSWICK, NEW JERSEY 08906-5020. Participants in programs
sponsored by Prudential Retirement Services should contact their client
representative for more information about Class Z shares. The purchase price is
the NAV next determined following receipt of an order in paper form by the
Transfer Agent or Prudential Securities plus a sales charge which, at your
option, may be imposed either (i) at the time of purchase (Class A shares) or
(ii) on a deferred basis (Class B or Class C shares). Class Z shares are offered
to a limited group of investors at net asset value without any sales charge.
Payment may be made by wire, check or through your brokerage account. See
"Alternative Purchase Plan" below. See also "How the Fund Values its Shares."
An investment in the Series may not be appropriate for tax-exempt or
tax-deferred investors. Such investors should consult their own tax advisers.
The minimum initial investment is $1,000 for Class A and Class B shares and
$5,000 for Class C shares, except that the minimum initial investment for Class
C shares may be waived from time to time. The minimum subsequent investment is
$100 for Class A, Class B and Class C shares. Class Z shares are not subject to
any minimum investment requirements. All minimum investment requirements are
waived for certain employee savings plans. For purchases made through the
Automatic Savings Accumulation Plan, the minimum initial and subsequent
investment is $50. See "Shareholder Services" below.
Application forms can be obtained from PMFS, Prudential Securities or Prusec.
If a share certificate is desired, it must be requested in writing for each
transaction. Certificates are issued only for full shares. Shareholders who hold
their shares through Prudential Securities will not receive share certificates.
The Fund reserves the right to reject any purchase order (including an
exchange into the Series) or to suspend or modify the continuous offering of its
shares. See "How to Sell Your Shares" below.
Your dealer is responsible for forwarding payment promptly to the Fund. The
Distributor reserves the right to cancel any purchase order for which payment
has not been received by the third business day following the investment.
Transactions in shares of the Series may be subject to postage and handling
charges imposed by your dealer.
PURCHASE BY WIRE. For an initial purchase of shares of the Series by wire, you
must first telephone PMFS at (800) 225-1852 (toll-free) to receive an account
number. The following information will be requested: your name, address, tax
identification number, class election, dividend distribution election, amount
being wired and wiring bank. Instructions should then be given by
24
<PAGE>
you to your bank to transfer funds by wire to State Street Bank and Trust
Company (State Street), Boston, Massachusetts, Custody and Shareholder Services
Division, Attention: Prudential Municipal Series Fund (New Jersey Series),
specifying on the wire the account number assigned by PMFS and your name and
identifying the class in which you are eligible to invest (Class A, Class B,
Class C or Class Z shares).
If you arrange for receipt by State Street of Federal Funds prior to the
calculation of NAV (4:15 P.M., New York time), on a business day, you may
purchase shares of the Series as of that day. See "Net Asset Value" in the
Statement of Additional Information.
In making a subsequent purchase order by wire, you should wire State Street
directly and should be sure that the wire specifies Prudential Municipal Series
Fund (New Jersey Series), Class A, Class B, Class C or Class Z shares and your
name and individual account number. It is not necessary to call PMFS to make
subsequent purchase orders utilizing Federal Funds. The minimum amount which may
be invested by wire is $1,000.
ALTERNATIVE PURCHASE PLAN
THE FUND OFFERS FOUR CLASSES OF SHARES (CLASS A, CLASS B, CLASS C AND CLASS Z
SHARES) WHICH ALLOWS YOU TO CHOOSE THE MOST BENEFICIAL SALES CHARGE STRUCTURE
FOR YOUR INDIVIDUAL CIRCUMSTANCES GIVEN THE AMOUNT OF THE PURCHASE, THE LENGTH
OF TIME YOU EXPECT TO HOLD THE SHARES AND OTHER RELEVANT CIRCUMSTANCES
(ALTERNATIVE PURCHASE PLAN).
<TABLE>
<CAPTION>
ANNUAL 12b-1 FEES
(AS A % OF AVERAGE
SALES CHARGE DAILY NET ASSETS) OTHER INFORMATION
--------------------------------------- --------------------- ---------------------------------------
<S> <C> <C> <C>
CLASS A Maximum initial sales charge of 3% of .30 of 1% (currently Initial sales charge waived or reduced
the public offering price being charged at a for certain purchases
rate of .10 of 1%)
CLASS B Maximum contingent deferred sales .50 of 1% Shares convert to Class A shares
charge or CDSC of 5% of the lesser of approximately seven years after
the amount invested or the redemption purchase
proceeds; declines to zero after six
years
CLASS C Maximum CDSC of 1% of the lesser of the 1% (currently being Shares do not convert to another class
amount invested or the redemption charged at a rate of
proceeds on redemptions made within one .75 of 1%)
year of purchase
CLASS Z None None Sold to a limited group of investors
</TABLE>
The four classes of shares represent an interest in the same portfolio of
investments of the Series and have the same rights, except that (i) each class
(with the exception of Class Z shares, which are not subject to any distribution
or service fees) bears the separate expenses of its Rule 12b-1 distribution and
service plan, (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 and (iii)
only Class B shares have a conversion feature. The four classes also have
separate exchange privileges. See "How to Exchange Your Shares" below. The
income attributable to each class and the dividends payable on the shares of
each class will be reduced by the amount of the distribution fee, if any, of
each class. Class B and Class C shares bear the expenses of a higher
distribution fee which will generally cause them to have higher expense ratios
and to pay lower dividends than the Class A and Class Z shares.
25
<PAGE>
Financial advisers and other sales agents who sell shares of the Series will
receive different compensation for selling Class A, Class B, Class C and Class Z
shares and will generally receive more compensation initially for selling Class
A and Class B shares than for selling Class C or Class Z shares.
IN SELECTING A PURCHASE ALTERNATIVE, YOU SHOULD CONSIDER, AMONG OTHER THINGS,
(1) the length of time you expect to hold your investment, (2) the amount of any
applicable sales charge (whether imposed at the time of purchase or redemption)
and distribution-related fees, as noted above, (3) whether you qualify for any
reduction or waiver of any applicable sales charge, (4) the various exchange
privileges among the different classes of shares (see "How to Exchange Your
Shares" below) and (5) the fact that Class B shares automatically convert to
Class A shares approximately seven years after purchase (see "Conversion
Feature--Class B Shares" below).
The following is provided to assist you in determining which method of
purchase best suits your individual circumstances and is based on current fees
and expenses being charged to the Series:
If you intend to hold your investment in the Series for less than 5 years and
do not qualify for a reduced sales charge on Class A shares, since Class A
shares are subject to a maximum initial sales charge of 3% and Class B shares
are subject to a CDSC of 5% which declines to zero over a 6 year period, you
should consider purchasing Class C shares over either Class A or Class B shares.
If you intend to hold your investment for 5 years or more and do not qualify
for a reduced sales charge on Class A shares, since Class B shares convert to
Class A shares approximately 7 years after purchase and because all of your
money would be invested initially in the case of Class B shares, you should
consider purchasing Class B shares over either Class A or Class C shares.
If you qualify for a reduced sales charge on Class A shares, it may be more
advantageous for you to purchase Class A shares over either Class B or Class C
shares regardless of how long you intend to hold your investment. However,
unlike Class B and Class C shares, you would not have all of your money invested
initially because the sales charge on Class A shares is deducted at the time of
purchase.
If you do not qualify for a reduced sales charge on Class A shares and you
purchase Class C shares, you would have to hold your investment for more than 4
years for the higher cumulative annual distribution-related fee on those shares
to exceed the initial sales charge plus cumulative annual distribution-related
fee on Class A shares. This does not take into account the time value of money,
which further reduces the impact of the higher Class C distribution-related fee
on the investment, fluctuations in net asset value, the effect of the return on
the investment over this period of time or redemptions when the CDSC is
applicable.
ALL PURCHASES OF $1 MILLION OR MORE, EITHER AS PART OF A SINGLE INVESTMENT OR
UNDER RIGHTS OF ACCUMULATION OR LETTERS OF INTENT, MUST BE FOR CLASS A SHARES
UNLESS THE PURCHASER IS ELIGIBLE TO PURCHASE CLASS Z SHARES. See "Reduction and
Waiver of Initial Sales Charges" and "Class Z Shares" below.
CLASS A SHARES
The offering price of Class A shares for investors choosing the initial sales
charge alternative is the next determined NAV plus a sales charge (expressed as
a percentage of the offering price and of the amount invested) as shown in the
following table:
<TABLE>
<CAPTION>
SALES CHARGE AS SALES CHARGE AS DEALER CONCESSION
PERCENTAGE OF PERCENTAGE OF AS PERCENTAGE OF
AMOUNT OF PURCHASE OFFERING PRICE AMOUNT INVESTED OFFERING PRICE
- ------------------------- ----------------- ----------------- -------------------
<S> <C> <C> <C>
Less than $99,999 3.00% 3.09% 3.00%
$100,000 to $249,999 2.50 2.56 2.50
$250,000 to $499,999 1.50 1.52 1.50
$500,000 to $999,999 1.00 1.01 1.00
$1,000,000 and above None None None
</TABLE>
26
<PAGE>
The Distributor may reallow the entire initial sales charge to dealers.
Selling dealers may be deemed to be underwriters, as that term is defined in the
Securities Act.
In connection with the sale of Class A shares at NAV (without payment of an
initial sales charge), the Manager, the Distributor or one of their affiliates
will pay dealers, financial advisers and other persons which distribute shares a
finders' fee from its own resources based on a percentage of the net asset value
of shares sold by such persons.
REDUCTION AND WAIVER OF INITIAL SALES CHARGES. Reduced sales charges are
available through Rights of Accumulation and Letters of Intent. Shares of the
Fund and shares of other Prudential Mutual Funds (excluding money market funds
other than those acquired pursuant to the exchange privilege) may be aggregated
to determine the applicable reduction. See "Purchase and Redemption of Fund
Shares--Reduction and Waiver of Initial Sales Charges--Class A Shares" in the
Statement of Additional Information.
PRUARRAY SAVINGS PROGRAM. Class A shares are also offered at net asset value
to employees of companies that enter into a written agreement with Prudential
Retirement Services to participate in the PruArray Savings Program. Under this
Program, a limited number of Prudential Mutual Funds are available for purchase
at net asset value by Savings Accumulation Plans of the company's employees. The
Program is available only to employees who open a Savings Accumulation Plan
account with the Transfer Agent. The program is offered to companies that have
at least 250 eligible employees.
SPECIAL RULES APPLICABLE TO RETIREMENT PLANS. After a PruArray Plan qualifies
to purchase Class A shares at NAV, all subsequent purchases will be made at NAV.
OTHER WAIVERS. Class A shares may be purchased at NAV, through Prudential
Securities or the Transfer Agent, by the following persons: (a) officers and
current and former Directors/Trustees of the Prudential Mutual Funds (including
the Fund), (b) employees of Prudential Securities and PIFM and their
subsidiaries and members of the families of such persons who maintain an
"employee related" account at Prudential Securities or the Transfer Agent, (c)
employees of subadvisers of the Prudential Mutual Funds provided that the
purchases at NAV are permitted by such person's employer, (d) Prudential
employees and special agents of Prudential and its subsidiaries and all persons
who have retired directly from active service with Prudential or one of its
subsidiaries, (e) registered representatives and employees of dealers who have
entered into a selected dealer agreement with Prudential Securities provided
that purchases at NAV are permitted by such person's employer and (f) investors
who have a business relationship with a financial adviser who joined Prudential
Securities from another investment firm, provided that (i) the purchase is made
within 180 days of the commencement of the financial adviser's employment at
Prudential Securities or within one year in the case of benefit plans, (ii) the
purchase is made with proceeds of a redemption of shares of any open-end
non-money market fund sponsored by the financial adviser's previous employer
(other than a fund which imposes a distribution or service fee of .25 of 1% or
less) and (iii) the financial adviser served as the client's broker on the
previous purchases.
You must notify the Transfer Agent either directly or through Prudential
Securities or Prusec that you are entitled to the reduction or waiver of the
sales charge. The reduction or waiver will be granted subject to confirmation of
your entitlement. No initial sales charges are imposed upon Class A shares
acquired upon the reinvestment of dividends and distributions. See "Purchase and
Redemption of Fund Shares--Reduction and Waiver of Initial Sales Charges--Class
A Shares" in the Statement of Additional Information.
CLASS B AND CLASS C SHARES
The offering price of Class B and Class C shares for investors choosing one of
the deferred sales charge alternatives is the NAV next determined following
receipt of an order by the Transfer Agent or Prudential Securities. Although
there is no sales charge imposed at the time of purchase, redemptions of Class B
and Class C shares may be subject to a CDSC. See "How to Sell Your
Shares--Contingent Deferred Sales Charges" below. The Distributor will pay sales
commissions of up to 4% of the purchase price of Class B shares to dealers,
financial advisers and other persons who sell Class B shares at the time of sale
from its own
27
<PAGE>
resources. This facilitates the ability of the Fund to sell the Class B shares
without an initial sales charge being deducted at the time of purchase. The
Distributor anticipates that it will recoup its advancement of sales commissions
from the combination of the CDSC and the distribution fee. See "How the Fund is
Managed--Distributor." In connection with the sale of Class C shares, the
Distributor will pay dealers, financial advisers and other persons which
distribute Class C shares a sales commission of up to 1% of the purchase price
at the time of the sale.
CLASS Z SHARES
Class Z shares of the Fund are available for purchase by the following
categories of investors:
(i) participants in any fee-based program or trust program sponsored by
Prudential Securities, The Prudential Savings Bank, F.S.B. (or any affiliate)
which includes mutual funds as investment options and for which the Fund is an
available option; (ii) current and former Directors/Trustees of the Prudential
Mutual Funds (including the Fund); and (iii) employees of Prudential and/or
Prudential Securities who participate in a Prudential-sponsored employee saving
plan.
In connection with the sale of Class Z shares, the Manager, the Distributor or
one of their affiliates may pay dealers, financial advisers and other persons
which distribute shares a finders' fee based on a percentage of the net asset
value of shares sold by such persons.
HOW TO SELL YOUR SHARES
YOU CAN REDEEM YOUR SHARES OF THE SERIES AT ANY TIME FOR CASH AT THE NAV NEXT
DETERMINED AFTER THE REDEMPTION REQUEST IS RECEIVED IN PROPER FORM BY THE
TRANSFER AGENT OR PRUDENTIAL SECURITIES. SEE "HOW THE FUND VALUES ITS SHARES."
In certain cases, however, redemption proceeds will be reduced by the amount of
any applicable contingent deferred sales charge, as described below. See
"Contingent Deferred Sales Charges" below.
IF YOU HOLD SHARES OF THE SERIES THROUGH PRUDENTIAL SECURITIES, YOU MUST
REDEEM SHARES THROUGH PRUDENTIAL SECURITIES. PLEASE CONTACT YOUR PRUDENTIAL
SECURITIES FINANCIAL ADVISER.
IF YOU HOLD SHARES IN NON-CERTIFICATE FORM, A WRITTEN REQUEST FOR REDEMPTION
SIGNED BY YOU EXACTLY AS THE ACCOUNT IS REGISTERED IS REQUIRED. IF YOU HOLD
CERTIFICATES, THE CERTIFICATES, SIGNED IN THE NAME(S) SHOWN ON THE FACE OF THE
CERTIFICATES, MUST BE RECEIVED BY THE TRANSFER AGENT IN ORDER FOR THE REDEMPTION
REQUEST TO BE PROCESSED. IF REDEMPTION IS REQUESTED BY A CORPORATION,
PARTNERSHIP, TRUST OR FIDUCIARY, WRITTEN EVIDENCE OF AUTHORITY ACCEPTABLE TO THE
TRANSFER AGENT MUST BE SUBMITTED BEFORE SUCH REQUEST WILL BE ACCEPTED. All
correspondence and documents concerning redemptions should be sent to the Fund
in care of its Transfer Agent, Prudential Mutual Fund Services LLC, Attention:
Redemption Services, P.O. Box 15010, New Brunswick, New Jersey 08906-5010.
If the proceeds of the redemption (a) exceed $50,000, (b) are to be paid to a
person other than the record owner, (c) are to be sent to an address other than
the address on the Transfer Agent's records, or (d) are to be paid to a
corporation, partnership, trust or fiduciary, the signature(s) on the redemption
request and on the certificates, if any, or stock power must be guaranteed by an
"eligible guarantor institution." An "eligible guarantor institution" includes
any bank, broker, dealer or credit union. The Transfer Agent reserves the right
to request additional information from, and make reasonable inquiries of, any
eligible guarantor institution. For clients of Prusec, a signature guarantee may
be obtained from the agency or office manager of most Prudential Insurance and
Financial Services or Preferred Services offices.
PAYMENT FOR SHARES PRESENTED FOR REDEMPTION WILL BE MADE BY CHECK WITHIN SEVEN
DAYS AFTER RECEIPT BY THE TRANSFER AGENT OF THE CERTIFICATE AND/OR WRITTEN
REQUEST EXCEPT AS INDICATED BELOW. IF YOU HOLD SHARES THROUGH PRUDENTIAL
SECURITIES, PAYMENT FOR SHARES PRESENTED FOR REDEMPTION WILL BE CREDITED TO YOUR
PRUDENTIAL SECURITIES ACCOUNT, UNLESS YOU INDICATE OTHERWISE. Such payment may
be postponed or the right of redemption suspended at times (a) when the New York
Stock Exchange is closed for other than customary weekends and holidays, (b)
when trading on such
28
<PAGE>
Exchange is restricted, (c) when an emergency exists as a result of which
disposal by the Series of securities owned by it is not reasonably practicable
or it is not reasonably practicable for the Series fairly to determine the value
of its net assets, or (d) during any other period when the SEC, by order, so
permits; provided that applicable rules and regulations of the SEC shall govern
as to whether the conditions prescribed in (b), (c) or (d) exist.
PAYMENT FOR REDEMPTION OF RECENTLY PURCHASED SHARES WILL BE DELAYED UNTIL THE
FUND OR ITS TRANSFER AGENT HAS BEEN ADVISED THAT THE PURCHASE CHECK HAS BEEN
HONORED, UP TO 10 CALENDAR DAYS FROM THE TIME OF RECEIPT OF THE PURCHASE CHECK
BY THE TRANSFER AGENT. SUCH DELAY MAY BE AVOIDED BY PURCHASING SHARES BY WIRE OR
BY CERTIFIED OR CASHIER'S CHECK.
REDEMPTION IN KIND. If the Trustees determine that it would be detrimental to
the best interests of the remaining shareholders of the Fund to make payment
wholly or partly in cash, the Fund may pay the redemption price in whole or in
part by a distribution in kind of securities from the investment portfolio of
the Series of the Fund, in lieu of cash, in conformity with applicable rules of
the SEC. Securities will be readily marketable and will be valued in the same
manner as in a regular redemption. See "How the Fund Values its Shares." If your
shares are redeemed in kind, you will incur transaction costs in converting the
assets into cash. The Fund, however, has elected to be governed by Rule 18f-1
under the Investment Company Act, under which the Fund is obligated to redeem
shares solely in cash up to the lesser of $250,000 or 1% of the net asset value
of the Fund during any 90-day period for any one shareholder.
INVOLUNTARY REDEMPTION. In order to reduce expenses of the Fund, the Trustees
may redeem all of the shares of any shareholder, other than a shareholder which
is an IRA or other tax-deferred retirement plan, whose account has a net asset
value of less than $500 due to a redemption. The Fund will give such
shareholders 60 days' prior written notice in which to purchase sufficient
additional shares to avoid such redemption. No contingent deferred sales charge
will be imposed on any such involuntary redemption.
90-DAY REPURCHASE PRIVILEGE. If you redeem your shares and have not previously
exercised the repurchase privilege, you may reinvest any portion or all of the
proceeds of such redemption in shares of the Series at the NAV next determined
after the order is received, which must be within 90 days after the date of the
redemption. Any CDSC paid in connection with such redemption will be credited
(in shares) to your account. (If less than a full repurchase is made, the credit
will be on a PRO RATA basis.) You must notify the Fund's Transfer Agent, either
directly or through Prudential Securities, at the time the repurchase privilege
is exercised to adjust your account for the CDSC you previously paid.
Thereafter, any redemptions will be subject to the CDSC applicable at the time
of the redemption. See "Contingent Deferred Sales Charges" below. Exercise of
the repurchase privilege may affect the federal tax treatment of any gain
realized upon redemption. See "Distributions and Tax Information" in the
Statement of Additional Information.
CONTINGENT DEFERRED SALES CHARGES
Redemptions of Class B shares will be subject to a contingent deferred sales
charge or CDSC declining from 5% to zero over a six-year period. Class C shares
redeemed within one year of purchase will be subject to a 1% CDSC. The CDSC will
be deducted from the redemption proceeds and reduce the amount paid to you. The
CDSC will be imposed on any redemption by you which reduces the current value of
your Class B or Class C shares of the Series to an amount which is lower than
the amount of all payments by you for shares during the preceding six years, in
the case of Class B shares, and one year, in the case of Class C shares. A CDSC
will be applied on the lesser of the original purchase price or the current
value of the shares being redeemed. Increases in the value of your shares or
shares acquired through reinvestment of dividends or distributions are not
subject to a CDSC. The amount of any contingent deferred sales charge will be
paid to and retained by the Distributor. See "How the Fund is
Managed--Distributor" and "Waiver of the Contingent Deferred Sales
Charges--Class B Shares" below.
The amount of the CDSC, if any, will vary depending on the number of years
from the time of payment for the purchase of shares until the time of redemption
of such shares. Solely for purposes of determining the number of years from the
time of any
29
<PAGE>
payment for the purchase of shares, all payments during a month will be
aggregated and deemed to have been made on the last day of the month. The CDSC
will be calculated from the first day of the month after the initial purchase,
excluding the time shares were held in a money market fund. See "How to Exchange
Your Shares" below.
The following table sets forth the rates of the CDSC applicable to redemptions
of Class B shares:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED
SALES
CHARGE AS A PERCENTAGE
YEAR SINCE PURCHASE OF DOLLARS INVESTED OR
PAYMENT MADE REDEMPTION PROCEEDS
----------------------------------------- ----------------------
<S> <C>
First.................................... 5.0%
Second................................... 4.0
Third.................................... 3.0
Fourth................................... 2.0
Fifth.................................... 1.0
Sixth.................................... 1.0
Seventh.................................. None
</TABLE>
In determining whether a CDSC is applicable to a redemption, the calculation
will be made in a manner that results in the lowest possible rate. It will be
assumed that the redemption is made first of amounts representing shares
acquired pursuant to the reinvestment of dividends and distributions; then of
amounts representing the increase in net asset value above the total amount of
payments for the purchase of Series shares made during the preceding six years
(five years for Class B shares purchased prior to January 22, 1990); then of
amounts representing the cost of shares held beyond the applicable CDSC period;
and finally, of amounts representing the cost of shares held for the longest
period of time within the applicable CDSC period.
For example, assume you purchased 100 Class B shares at $10 per share for a
cost of $1,000. Subsequently, you acquired 5 additional Class B shares through
dividend reinvestment. During the second year after the purchase you decided to
redeem $500 of your investment. Assuming at the time of the redemption the NAV
had appreciated to $12 per share, the value of your Class B shares would be
$1,260 (105 shares at $12 per share). The CDSC would not be applied to the value
of the reinvested dividend shares and the amount which represents appreciation
($260). Therefore, $240 of the $500 redemption proceeds ($500 minus $260) would
be charged at a rate of 4% (the applicable rate in the second year after
purchase) for a total CDSC of $9.60.
For federal income tax purposes, the amount of the CDSC will reduce the gain
or increase the loss, as the case may be, on the amount recognized on the
redemption of shares.
WAIVER OF THE CONTINGENT DEFERRED SALES CHARGES--CLASS B SHARES. The CDSC will
be waived in the case of a redemption following the death or disability of a
shareholder or, in the case of a trust account, following the death or
disability of the grantor. The waiver is available for total or partial
redemptions of shares owned by a person, either individually or in joint tenancy
(with rights of survivorship), at the time of death or initial determination of
disability, provided that the shares were purchased prior to death or
disability. In addition, the CDSC will be waived on redemptions of shares held
by a Trustee of the Fund.
SYSTEMATIC WITHDRAWAL PLAN. The CDSC will be waived (or reduced) on certain
redemptions from a Systematic Withdrawal Plan. On an annual basis, up to 12% of
the total dollar amount subject to the CDSC may be redeemed without charge. The
Transfer Agent will calculate the total amount available for this waiver
annually on the anniversary of your purchase or, for shares purchased prior to
March 1, 1997, on March 1 of the current year. The CDSC will be waived (or
reduced) on redemptions until this threshold 12% amount is reached.
30
<PAGE>
You must notify the Fund's Transfer Agent either directly or through
Prudential Securities or Prusec, at the time of redemption, that you are
entitled to waiver of the CDSC and provide the Transfer Agent with such
supporting documentation as it may deem appropriate. The waiver will be granted
subject to confirmation of your entitlement. See "Purchase and Redemption of
Fund Shares--Waiver of the Contingent Deferred Sales Charge--Class B Shares" in
the Statement of Additional Information.
A quantity discount may apply to redemptions of Class B shares purchased prior
to August 1, 1994. See "Purchase and Redemption of Fund Shares--Quantity
Discount--Class B Shares Purchased Prior to August 1, 1994" in the Statement of
Additional Information.
CONVERSION FEATURE--CLASS B SHARES
Class B shares will automatically convert to Class A shares on a quarterly
basis approximately seven years after purchase. Conversions will be effected at
relative net asset value without the imposition of any additional sales charge.
Since the Fund tracks amounts paid rather than the number of shares bought on
each purchase of Class B shares, the number of Class B shares eligible to
convert to Class A shares (excluding shares acquired through the automatic
reinvestment of dividends and other distributions) (the Eligible Shares) will be
determined on each conversion date in accordance with the following formula: (i)
the ratio of (a) the amounts paid for Class B shares purchased at least seven
years prior to the conversion date to (b) the total amount paid for all Class B
shares purchased and then held in your account (ii) multiplied by the total
number of Class B shares purchased and then held in your account. Each time any
Eligible Shares in your account convert to Class A shares, all shares or amounts
representing Class B shares then in your account that were acquired through the
automatic reinvestment of dividends and other distributions will convert to
Class A shares.
For purposes of determining the number of Eligible Shares, if the Class B
shares in your account on any conversion date are the result of multiple
purchases at different net asset values per share, the number of Eligible Shares
calculated as described above will generally be either more or less than the
number of shares actually purchased approximately seven years before such
conversion date. For example, if 100 shares were initially purchased at $10 per
share (for a total of $1,000) and a second purchase of 100 shares was
subsequently made at $11 per share (for a total of $1,100), 95.24 shares would
convert approximately seven years from the initial purchase (I.E., $1,000
divided by $2,100 (47.62%) multiplied by 200 shares equals 95.24 shares). The
Manager reserves the right to modify the formula for determining the number of
Eligible Shares in the future as it deems appropriate on notice to shareholders.
Since annual distribution-related fees are lower for Class A shares than Class
B shares, the per share net asset value of the Class A shares may be higher than
that of the Class B shares at the time of conversion. Thus, although the
aggregate dollar value will be the same, you may receive fewer Class A shares
than Class B shares converted. See "How the Fund Values its Shares."
For purposes of calculating the applicable holding period for conversions, all
payments for Class B shares during a month will be deemed to have been made on
the last day of the month, or for Class B shares acquired through exchange or a
series of exchanges, on the last day of the month in which the original payment
for purchases of such Class B shares was made. For Class B shares previously
exchanged for shares of a money market fund, the time period during which such
shares were held in the money market fund will be excluded. For example, Class B
shares held in a money market fund for one year will not convert to Class A
shares until approximately eight years from purchase. For purposes of measuring
the time period during which shares are held in a money market fund, exchanges
will be deemed to have been made on the last day of the month. Class B shares
acquired through exchange will convert to Class A shares after expiration of the
conversion period applicable to the original purchase of such shares.
The conversion feature may be subject to the continuing availability of
opinions of counsel or rulings of the Internal Revenue Service (i) that the
dividends and other distributions paid on Class A, Class B, Class C and Class Z
shares will not constitute "preferential dividends" under the Internal Revenue
Code and (ii) that the conversion of shares does not constitute a taxable
31
<PAGE>
event. The conversion of Class B shares into Class A shares may be suspended if
such opinions or rulings are no longer available. If conversions are suspended,
Class B shares of the Series will continue to be subject, possibly indefinitely,
to their higher annual distribution and service fee.
HOW TO EXCHANGE YOUR SHARES
AS A SHAREHOLDER OF THE SERIES, YOU HAVE AN EXCHANGE PRIVILEGE WITH THE OTHER
SERIES OF THE FUND AND CERTAIN OTHER PRUDENTIAL MUTUAL FUNDS (THE EXCHANGE
PRIVILEGE), INCLUDING ONE OR MORE SPECIFIED MONEY MARKET FUNDS, SUBJECT TO THE
MINIMUM INVESTMENT REQUIREMENTS OF SUCH FUNDS. CLASS A, CLASS B, CLASS C AND
CLASS Z SHARES OF THE SERIES MAY BE EXCHANGED FOR CLASS A, CLASS B, CLASS C AND
CLASS Z SHARES, RESPECTIVELY, OF THE OTHER SERIES OF THE FUND OR ANOTHER FUND ON
THE BASIS OF THE RELATIVE NAV. No sales charge will be imposed at the time of
the exchange. Any applicable CDSC payable upon the redemption of shares
exchanged will be calculated from the first day of the month after the initial
purchase, excluding the time shares were held in a money market fund. Class B
and Class C shares may not be exchanged into money market funds other than
Prudential Special Money Market Fund, Inc. For purposes of calculating the
holding period applicable to the Class B conversion feature, the time period
during which Class B shares were held in a money market fund will be excluded.
See "Conversion Feature--Class B Shares" above. An exchange will be treated as a
redemption and purchase for tax purposes. See "Shareholder Investment
Account--Exchange Privilege" in the Statement of Additional Information.
IN ORDER TO EXCHANGE SHARES BY TELEPHONE, YOU MUST AUTHORIZE TELEPHONE
EXCHANGES ON YOUR INITIAL APPLICATION FORM OR BY WRITTEN NOTICE TO THE TRANSFER
AGENT AND HOLD SHARES IN NON-CERTIFICATE FORM. Thereafter, you may call the Fund
at (800) 225-1852 to execute a telephone exchange of shares, weekdays, except
holidays, between the hours of 8:00 A.M. and 6:00 P.M., New York time. For your
protection and to prevent fraudulent exchanges, your telephone call will be
recorded and you will be asked to provide your personal identification number. A
written confirmation of the exchange transaction will be sent to you. NEITHER
THE FUND NOR ITS AGENTS WILL BE LIABLE FOR ANY LOSS, LIABILITY OR COST WHICH
RESULTS FROM ACTING UPON INSTRUCTIONS REASONABLY BELIEVED TO BE GENUINE UNDER
THE FOREGOING PROCEDURES. All exchanges will be made on the basis of the
relative NAV of the two funds (or series) next determined after the request is
received in good order. The Exchange Privilege is available only in states where
the exchange may legally be made.
IF YOU HOLD SHARES THROUGH PRUDENTIAL SECURITIES, YOU MUST EXCHANGE YOUR
SHARES BY CONTACTING YOUR PRUDENTIAL SECURITIES FINANCIAL ADVISER.
IF YOU HOLD CERTIFICATES, THE CERTIFICATES, SIGNED IN THE NAME(S) SHOWN ON THE
FACE OF THE CERTIFICATES, MUST BE RETURNED IN ORDER FOR THE SHARES TO BE
EXCHANGED. SEE "HOW TO SELL YOUR SHARES" ABOVE.
You may also exchange shares by mail by writing to Prudential Mutual Fund
Services LLC, Attention: Exchange Processing, P.O. Box 15010, New Brunswick, New
Jersey 08906-5010.
IN PERIODS OF SEVERE MARKET OR ECONOMIC CONDITIONS, THE TELEPHONE EXCHANGE OF
SHARES MAY BE DIFFICULT TO IMPLEMENT AND YOU SHOULD MAKE EXCHANGES BY MAIL BY
WRITING TO PRUDENTIAL MUTUAL FUND SERVICES LLC, AT THE ADDRESS NOTED ABOVE.
SPECIAL EXCHANGE PRIVILEGES. A special exchange privilege is available for
shareholders who qualify to purchase Class A shares at NAV (see "Alternative
Purchase Plan--Class A Shares--Reduction and Waiver of Initial Sales Charges"
above) and for shareholders who qualify to purchase Class Z shares (see
"Alternative Purchase Plan--Class Z Shares" above). Under this exchange
privilege, amounts representing any Class B and Class C shares (which are not
subject to a CDSC) held in such a shareholder's account will be automatically
exchanged for Class A shares for shareholders who qualify to purchase Class A
shares at NAV on a quarterly basis, unless the shareholder elects otherwise.
Similarly, shareholders who qualify to purchase Class Z shares will have their
Class B and Class C shares which are not subject to a CDSC and their Class A
shares exchanged for Class Z shares on a quarterly basis. Eligibility for this
exchange privilege will be calculated on the business day prior to the date of
the
32
<PAGE>
exchange. Amounts representing Class B or Class C shares which are not subject
to a CDSC include the following: (1) amounts representing Class B or Class C
shares acquired pursuant to the automatic reinvestment of dividends and
distributions, (2) amounts representing the increase in the net asset value
above the total amount of payments for the purchase of Class B or Class C shares
and (3) amounts representing Class B or Class C shares held beyond the
applicable CDSC period. Class B and Class C shareholders must notify the
Transfer Agent either directly or through Prudential Securities or Prusec that
they are eligible for this special exchange privilege.
Participants in any fee-based program for which the Fund is an available
option will have their Class A shares, if any, exchanged for Class Z shares when
they elect to have those assets become a part of the fee-based program. Upon
leaving the program (whether voluntarily or not), such Class Z shares (and, to
the extent provided for in the program, Class Z shares acquired through
participation in the program) will be exchanged for Class A shares at net asset
value.
The Exchange Privilege is not a right and may be suspended, terminated or
modified on 60 days' notice to shareholders.
FREQUENT TRADING. The Fund and the other Prudential Mutual Funds are not
intended to serve as vehicles for frequent trading in response to short-term
fluctuations in the market. Due to the disruptive effect that market timing
investment strategies and excessive trading can have on efficient portfolio
management, each Prudential Mutual Fund and the Fund reserves the right to
refuse purchase orders and exchanges by any person, group or commonly controlled
accounts, if, in the Manager's sole judgment, such person, group or accounts
were following a market timing strategy or were otherwise engaging in excessive
trading (Market Timers).
To implement this authority to protect the Fund and its shareholders from
excessive trading, the Fund will reject all exchanges and purchases from a
Market Timer unless the Market Timer has entered into a written agreement with
the Fund or its affiliates pursuant to which the Market Timer has agreed to
abide by certain procedures, which include a daily dollar limit on trading. The
Fund may notify the Market Timer of rejection of an exchange or purchase order
subsequent to the day on which the order was placed.
SHAREHOLDER SERVICES
In addition to the Exchange Privilege, as a shareholder in the Series, you can
take advantage of the following services and privileges:
- AUTOMATIC REINVESTMENT OF DIVIDENDS AND/OR DISTRIBUTIONS WITHOUT A SALES
CHARGE. For your convenience, all dividends and distributions are automatically
reinvested in full and fractional shares of the Series at NAV without a sales
charge. You may direct the Transfer Agent in writing not less than 5 full
business days prior to the record date to have subsequent dividends and/or
distributions sent in cash rather than reinvested. If you hold shares through
Prudential Securities, you should contact your financial adviser.
- AUTOMATIC SAVINGS ACCUMULATION PLAN (ASAP). Under ASAP you may make regular
purchases of the Series' shares in amounts as little as $50 via an automatic
debit to a bank account or Prudential Securities account (including a Command
Account). For additional information about this service, you may contact your
Prudential Securities financial adviser, Prusec representative or the Transfer
Agent directly.
- SYSTEMATIC WITHDRAWAL PLAN. A systematic withdrawal plan is available to
shareholders which provides for monthly or quarterly checks. Withdrawals of
Class B and Class C shares may be subject to a CDSC. See "How to Sell Your
Shares-- Contingent Deferred Sales Charges" above.
- REPORTS TO SHAREHOLDERS. The Fund will send you annual and semi-annual
reports. The financial statements appearing in annual reports are audited by
independent accountants. In order to reduce duplicate mailing and printing
expenses, the Fund will
33
<PAGE>
provide one annual and semi-annual shareholder report and annual prospectus per
household. You may request additional copies of such reports by calling (800)
225-1852 or by writing to the Fund at Gateway Center Three, 100 Mulberry Street,
Newark, New Jersey 07102-4077. In addition, monthly unaudited financial data is
available upon request from the Fund.
- SHAREHOLDER INQUIRIES. Inquiries should be addressed to the Fund at Gateway
Center Three, 100 Mulberry Street, Newark, New Jersey 07102-4077, or by
telephone, at (800) 225-1852 (toll-free) or, from outside the U.S.A., at (908)
417-7555 (collect).
For additional information regarding the services and privileges described
above, see "Shareholder Investment Account" in the Statement of Additional
Information.
34
<PAGE>
DESCRIPTION OF SECURITY RATINGS
MOODY'S INVESTORS SERVICE
BOND RATINGS
Aaa: Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edged." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group, they comprise what are generally known
as high grade bonds. They are rated lower than 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
which make the long-term risks appear somewhat larger than the Aaa securities.
A: Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper-medium-grade obligations. Factors giving security
to principal and interest are considered adequate but elements may be present
which suggest a susceptibility to impairment sometime in the future.
Baa: Bonds which are rated Baa are considered as medium grade obligations,
I.E., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present, but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba: Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate, and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Bonds rated within the Aa, A, Baa, Ba and B categories which Moody's believes
possess the strongest credit attributes within those categories are designated
by the symbols Aa1, A1, Baa1, Ba1 and B1.
Caa: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca: Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
C: Bonds which are rated C are the lowest-rated class of bonds, and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
SHORT-TERM RATINGS
Moody's ratings for tax-exempt notes and other short-term loans are designated
Moody's Investment Grade (MIG). This distinction is in recognition of the
differences between short-term and long-term credit risk.
MIG 1: Loans bearing the designation MIG 1 are of the best quality, enjoying
strong protection by established cash flows, superior liquidity support or
demonstrated broad-based access to the market for refinancing.
A-1
<PAGE>
MIG 2: Loans bearing the designation MIG 2 are of high quality, with margins
of protection ample although not so large as in the preceding group.
MIG 3: Loans bearing the designation MIG 3 are of favorable quality, with all
security elements accounted for but lacking the strength of the preceding
grades.
MIG 4: Loans bearing the designation MIG 4 are of adequate quality.
Protection commonly regarded and required of an investment security is present
and although not distinctly or predominantly speculative, there is specific
risk.
SHORT-TERM DEBT RATINGS
Moody's Short-Term Debt Ratings are opinions of the ability of issuers to
repay punctually senior debt obligations which have an original maturity not
exceeding one year.
Prime-1: Issuers rated 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.
Prime-3: Issuers rated Prime-3 (or supporting institutions) have an
acceptable ability for repayment of senior short-term debt obligations.
Not Prime: Issuers rated Not Prime do not fall within any of the Prime rating
categories.
STANDARD & POOR'S RATINGS GROUP
BOND RATINGS
AAA: Debt rated AAA has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.
AA: Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the highest-rated issues only in small degree.
A: Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB: Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher-rated categories.
BB, B, CCC, CC and C: Debt rated BB, B, CCC, CC or C is regarded as having
predominantly speculative characteristics with respect to capacity to pay
interest and repay principal. BB indicates the least degree of speculation and C
the highest. While such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
D: Debt rated D is in payment default. This rating is used when interest
payments or principal payments are not made on the date due even if the
applicable grace period has not expired, unless S&P believes that such payments
will be made during such grace period.
COMMERCIAL PAPER RATINGS
An S&P Commercial Paper rating is a current assessment of the likelihood of
timely payment of debt considered short-term in the relevant market.
A-2
<PAGE>
A-1: The A-1 designation indicates that the degree of safety regarding timely
payment is strong. Those issues determined to possess extremely strong safety
characteristics are denoted with a plus sign (+) designation.
A-2: Capacity for timely payment on issues with the designation A-2 is
satisfactory. However, the relative degree of safety is not as high as for
issues designated A-1.
A-3: Issues carrying this designation have adequate capacity for timely
payment. They are, however, more vulnerable to the adverse effects of changes in
circumstances than obligations carrying the higher designations.
MUNICIPAL NOTES
A municipal note rating reflects the liquidity concerns and market access
risks unique to municipal notes. Municipal notes due in three years or less will
likely receive a municipal note rating, while notes maturing beyond three years
will most likely receive a long-term debt rating. Municipal notes are rated
SP-1, SP-2 or SP-3. The designation SP-1 indicates a very strong capacity to pay
principal and interest. Those issues determined to possess extremely strong
safety characteristics are denoted with a plus sign (+) designation. An SP-2
designation indicates a satisfactory capacity to pay principal and interest. An
SP-3 designation indicates speculative capacity to pay principal and interest.
A-3
<PAGE>
THE PRUDENTIAL MUTUAL FUND FAMILY
Prudential Investments Fund Management offers a broad range of mutual funds
designed to meet your individual needs. We welcome you to review the investment
options available through our family of funds. For more information on the
Prudential Mutual Funds, including charges and expenses, contact your Prudential
Securities financial adviser or Prusec representative or telephone the Funds at
(800) 225-1852 for a free prospectus. Read the prospectus carefully before you
invest or send money.
TAXABLE BOND FUNDS
--------------------------
Prudential Diversified Bond Fund, Inc.
Prudential Government Income Fund, Inc.
Prudential Government Securities Trust
Short-Intermediate Term Series
Prudential High Yield Fund, Inc.
Prudential Mortgage Income Fund, Inc.
Prudential Structured Maturity Fund, Inc.
Income Portfolio
The BlackRock Government Income Trust
TAX-EXEMPT BOND FUNDS
-----------------------------
Prudential California Municipal Fund
California Series
California Income Series
Prudential Municipal Bond Fund
High Yield Series
Insured Series
Intermediate Series
Prudential Municipal Series Fund
Florida Series
Maryland Series
Massachusetts Series
Michigan Series
New Jersey Series
New York Series
North Carolina Series
Ohio Series
Pennsylvania Series
Prudential National Municipals Fund, Inc.
GLOBAL FUNDS
--------------------
Prudential Europe Growth Fund, Inc.
Prudential Global Genesis Fund, Inc.
Prudential Global Limited Maturity Fund, Inc.
Limited Maturity Portfolio
Prudential Intermediate Global Income Fund, Inc.
Prudential International Bond Fund, Inc.
Prudential Natural Resources Fund, Inc.
Prudential Pacific Growth Fund, Inc.
Prudential World Fund, Inc.
Global Series
International Stock Series
The Global Total Return Fund, Inc.
Global Utility Fund, Inc.
EQUITY FUNDS
--------------------
Prudential Balanced Fund
Prudential Distressed Securities Fund, Inc.
Prudential Dryden Fund
Prudential Active Balanced Fund
Prudential Stock Index Fund
Prudential Small-Cap Index Fund
Prudential Bond Market Index Fund
Prudential Pacific Index Fund
Prudential Europe Index Fund
Prudential Emerging Growth Fund, Inc.
Prudential Equity Fund, Inc.
Prudential Equity Income Fund
Prudential Jennison Series Fund, Inc.
Prudential Jennison Growth Fund
Prudential Jennison Growth & Income Fund
Prudential Multi-Sector Fund, Inc.
Prudential Small-Cap Quantum Fund, Inc.
Prudential Small Company Value Fund, Inc.
Prudential Utility Fund, Inc.
Nicholas-Applegate Fund, Inc.
Nicholas-Applegate Growth Equity Fund
MONEY MARKET FUNDS
--------------------------
- - TAXABLE MONEY MARKET FUNDS
Prudential Government Securities Trust
Money Market Series
U.S. Treasury Money Market Series
Prudential Special Money Market Fund, Inc.
Money Market Series
Prudential MoneyMart Assets, Inc.
- - TAX-FREE MONEY MARKET FUNDS
Prudential Tax-Free Money Fund, Inc.
Prudential California Municipal Fund
California Money Market Series
Prudential Municipal Series Fund
Connecticut Money Market Series
Massachusetts Money Market Series
New Jersey Money Market Series
New York Money Market Series
- - COMMAND FUNDS
Command Money Fund
Command Government Fund
Command Tax-Free Fund
- - INSTITUTIONAL MONEY MARKET FUNDS
Prudential Institutional Liquidity Portfolio, Inc.
Institutional Money Market Series
B-1
<PAGE>
No dealer, sales representative or any other person has been authorized to give
any information or to make any representations, other than those contained in
this Prospectus, in connection with the offer contained herein, and, if given or
made, such other information or representations must not be relied upon as
having been authorized by the Fund or the Distributor. This Prospectus does not
constitute an offer by the Fund or by the Distributor to sell or a solicitation
of any offer to buy any of the securities offered hereby in any jurisdiction to
any person to whom it is unlawful to make such offer in such jurisdiction.
-------------------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---
<S> <C>
FUND HIGHLIGHTS................................. 2
What are the Series' Risk Factors
and Special Characteristics?................. 2
FUND EXPENSES................................... 4
FINANCIAL HIGHLIGHTS............................ 5
HOW THE FUND INVESTS............................ 9
Investment Objective and Policies............. 9
Other Investments and Policies................ 15
Investment Restrictions....................... 16
HOW THE FUND IS MANAGED......................... 16
Manager....................................... 16
Distributor................................... 17
Portfolio Transactions........................ 19
Custodian and Transfer and Dividend
Disbursing Agent............................. 19
HOW THE FUND VALUES ITS SHARES.................. 19
HOW THE FUND CALCULATES PERFORMANCE............. 20
TAXES, DIVIDENDS AND DISTRIBUTIONS.............. 20
GENERAL INFORMATION............................. 23
Description of Shares......................... 23
Additional Information........................ 24
SHAREHOLDER GUIDE............................... 24
How to Buy Shares of the Fund................. 24
Alternative Purchase Plan..................... 25
How to Sell Your Shares....................... 28
Conversion Feature--Class B Shares............ 31
How to Exchange Your Shares................... 32
Shareholder Services.......................... 33
DESCRIPTION OF SECURITY RATINGS................. A-1
THE PRUDENTIAL MUTUAL FUND FAMILY............... B-1
</TABLE>
- -------------------------------------------
MF138A 642873R
Class A: 74435M-78-8
Class B: 74435M-79-6
CUSIP Nos.: Class C: 74435M-53-1
Class Z: 74435M-43-2
PRUDENTIAL
MUNICIPAL
SERIES FUND
------------------------------------------------------
NEW JERSEY SERIES
PROSPECTUS
October 30, 1997
www.prudential.com
[LOGO] Prudential
Investments
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
(NEW JERSEY MONEY MARKET SERIES)
- --------------------------------------------------------------------------------
PROSPECTUS DATED OCTOBER 30, 1997
- ----------------------------------------------------------------
Prudential Municipal Series Fund (the Fund) (New Jersey Money Market Series)
(the Series) is one of thirteen series of an open-end, management investment
company, or mutual fund. This Series is non-diversified and is designed to
provide the highest level of current income that is exempt from New Jersey State
and federal income taxes consistent with liquidity and the preservation of
capital. The net assets of the Series are invested primarily in short-term, tax-
exempt New Jersey State, municipal and local debt obligations and obligations of
other qualifying issuers. There can be no assurance that the Series' investment
objective will be achieved. See "How the Fund Invests--Investment Objective and
Policies." The Fund's address is Gateway Center Three, 100 Mulberry Street,
Newark, New Jersey 07102-4077, and its telephone number is (800) 225-1852.
Shares of the Series are sold without a sales charge. The Series is subject to
an annual charge of .125% of its average daily net assets pursuant to the
Distribution and Service Plan. See "How the Fund is Managed--Distributor."
THE SERIES MAY INVEST A SIGNIFICANT PORTION OF ITS ASSETS IN THE OBLIGATIONS OF
A SINGLE ISSUER, AND THEREFORE AN INVESTMENT IN THE SERIES MAY BE MORE RISKY
THAN AN INVESTMENT IN OTHER TYPES OF MONEY MARKET FUNDS.
AN INVESTMENT IN THE SERIES IS NEITHER INSURED NOR GUARANTEED BY THE U.S.
GOVERNMENT AND THERE CAN BE NO ASSURANCE THAT THE SERIES WILL BE ABLE TO
MAINTAIN A STABLE NET ASSET VALUE OF $1.00 PER SHARE. SEE "HOW THE FUND VALUES
ITS SHARES."
This Prospectus sets forth concisely the information about the Fund and the New
Jersey Money Market Series that a prospective investor should know before
investing. Additional information about the Fund has been filed with the
Securities and Exchange Commission in a Statement of Additional Information,
dated October 30, 1997, which information is incorporated herein by reference
(is legally considered a part of this Prospectus) and is available without
charge upon request to Prudential Municipal Series Fund at the address or
telephone number noted above.
- --------------------------------------------------------------------------------
INVESTORS ARE ADVISED TO READ THIS PROSPECTUS AND RETAIN IT FOR FUTURE
REFERENCE.
- --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
<PAGE>
FUND HIGHLIGHTS
The following summary is intended to highlight certain information contained
in this Prospectus and is qualified in its entirety by the more detailed
information appearing elsewhere herein.
WHAT IS PRUDENTIAL MUNICIPAL SERIES FUND?
Prudential Municipal Series Fund is a mutual fund whose shares are offered
in thirteen series, each of which operates as a separate fund. A mutual fund
pools the resources of investors by selling its shares to the public and
investing the proceeds of such sale in a portfolio of securities designed to
achieve its investment objective. Technically, the Fund is an open-end,
management investment company. Only the New Jersey Money Market Series is
offered through this Prospectus.
WHAT IS THE SERIES' INVESTMENT OBJECTIVE?
The Series' investment objective is to provide the highest level of
current income that is exempt from New Jersey State and federal income taxes
consistent with liquidity and the preservation of capital. It seeks to
achieve this objective by investing primarily in short-term New Jersey
State, municipal and local government obligations and obligations of other
qualifying issuers, such as issuers located in Puerto Rico, the Virgin
Islands and Guam, which pay income exempt, in the opinion of counsel, from
New Jersey State and federal income taxes (New Jersey Obligations). There
can be no assurance that the Series' investment objective will be achieved.
See "How the Fund Invests--Investment Objective and Policies" at page 6.
WHAT ARE THE SERIES' RISK FACTORS AND SPECIAL CHARACTERISTICS?
It is anticipated that the net asset value of the Series will remain
constant at $1.00 per share, although this cannot be assured. In order to
maintain such constant net asset value, the Series will value its portfolio
securities at amortized cost. While this method provides certainty in
valuation, it may result in periods during which the value of a security in
the Series' portfolio, as determined by amortized cost, is higher or lower
than the price the Series would receive if it sold such security. See "How
the Fund Values its Shares" at page 12.
In seeking to achieve its investment objective, the Series will invest
more than 80% of the value of its total assets in New Jersey Obligations.
This degree of investment concentration makes the Series particularly
susceptible to factors adversely affecting issuers of New Jersey
Obligations, and makes an investment in the Series more risky than an
investment in other types of money market funds. The Series is
non-diversified so that more than 5% of its total assets may be invested in
the securities of one or more issuers. Investment in a non-diversified
portfolio involves more risk than investment in a diversified portfolio. See
"How the Fund Invests--Investment Objective and Policies--Special
Considerations" at page 9. As with an investment in any mutual fund, an
investment in this Series can decrease in value and you can lose money.
WHO MANAGES THE FUND?
Prudential Investments Fund Management LLC (PIFM or the Manager) is the
Manager of the Fund and is compensated for its services at an annual rate of
.50 of 1% of the Series' average daily net assets. As of September 30, 1997,
PIFM served as manager or administrator to 63 investment companies,
including 41 mutual funds, with aggregate assets of approximately $59.9
billion. The Prudential Investment Corporation, which does business under
the name Prudential Investments (PI, the Subadviser or the investment
adviser), furnishes investment advisory services in connection with the
management of the Fund under a Subadvisory Agreement with PIFM. See "How the
Fund is Managed--Manager" at page 10.
2
<PAGE>
WHO DISTRIBUTES THE SERIES' SHARES?
Prudential Securities Incorporated (Prudential Securities, PSI or the
Distributor) acts as the Distributor of the Series' shares. The Series
reimburses Prudential Securities for expenses related to the distribution of
the Series' shares at an annual rate of up to .125 of 1% of the average
daily net assets of the Series. See "How the Fund is Managed--Distributor"
at page 11.
WHAT IS THE MINIMUM INVESTMENT?
The minimum initial investment is $1,000. The minimum subsequent
investment is $100. There is no minimum investment requirement for certain
employee savings plans. For purchases made through the Automatic Savings
Accumulation Plan, the minimum initial and subsequent investment is $50. See
"Shareholder Guide--How to Buy Shares of the Fund" at page 16 and
"Shareholder Guide--Shareholder Services" at page 24.
HOW DO I PURCHASE SHARES?
You may purchase shares of the Series through Prudential Securities, Pruco
Securities Corporation (Prusec) or directly from the Fund through its
transfer agent, Prudential Mutual Fund Services LLC (PMFS or the Transfer
Agent), at the net asset value per share (NAV) next determined after receipt
of your purchase order by the Transfer Agent or Prudential Securities. See
"How the Fund Values its Shares" at page 12 and "Shareholder Guide--How to
Buy Shares of the Fund" at page 16.
HOW DO I SELL MY SHARES?
You may redeem shares of the Series at any time at the NAV next determined
after Prudential Securities or the Transfer Agent receives your sell order.
See "Shareholder Guide--How to Sell Your Shares" at page 20.
HOW ARE DIVIDENDS AND DISTRIBUTIONS PAID?
The Series expects to declare daily and pay monthly dividends of net
investment income and short-term capital gains. Dividends and distributions
will be automatically reinvested in additional shares of the Series at NAV
unless you request that they be paid to you in cash. See "Taxes, Dividends
and Distributions" at page 13.
3
<PAGE>
FUND EXPENSES
(NEW JERSEY MONEY MARKET SERIES)
<TABLE>
<CAPTION>
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on Purchases................. None
Maximum Deferred Sales Load............................. None
Maximum Sales Load Imposed on Reinvested Dividends...... None
Redemption Fees......................................... None
Exchange Fee............................................ None
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management Fees......................................... .500%
12b-1 Fees.............................................. .125%
Other Expenses.......................................... .105%
------
Total Fund Operating Expenses........................... .730%
------
------
</TABLE>
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------- ------- ------- --------
<S> <C> <C> <C> <C>
EXAMPLE
You would pay the following expenses on a $1,000 investment,
assuming (1) 5% annual return and (2) redemption at the
end of each time period:.................................. $ 7 $ 23 $ 41 $ 91
</TABLE>
The above example is based on restated data for the Series' fiscal year
ended August 31, 1997. THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION
OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN
THOSE SHOWN.
The purpose of this table is to assist an investor in understanding the
various costs and expenses that an investor in the Series will bear, whether
directly or indirectly. For more complete descriptions of the various costs
and expenses, see "How the Fund is Managed." "Other Expenses" includes
operating expenses of the Series, such as Trustees' and professional fees,
registration fees, reports to shareholders and transfer agency and custodian
fees.
4
<PAGE>
FINANCIAL HIGHLIGHTS
(FOR A SHARE OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT EACH OF THE INDICATED
PERIODS)
The following financial highlights, for the fiscal year ended August 31, 1997,
have been audited by Price Waterhouse LLP, independent accountants, and by
Deloitte and Touche LLP, independent auditors, for the four years ended August
31, 1996. Each of the respective reports by Price Waterhouse LLP and Deloitte &
Touche LLP on such financial statements was unqualified. This information should
be read in conjunction with the financial statements and the notes thereto,
which appear in the Statement of Additional Information. The following financial
highlights contain selected data for a share of beneficial interest outstanding,
total return, ratios to average net assets and other supplemental data for the
periods indicated. This information is based on data contained in the financial
statements.
<TABLE>
<CAPTION>
DECEMBER 3,
1990 (a)
YEAR ENDED AUGUST 31, THROUGH
------------------------------------------------------------------------- AUGUST 31,
1997 1996 1995 1994 1993 1992 1991
-------- -------- -------- -------- -------- -------- -------------------
<S> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning of
period...................... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
Net investment income and net
realized gains (c).......... .03 .03 .03 .02 .02 .04 .03
Dividends and distributions to
shareholders................ (.03) (.03) (.03) (.02) (.02) (.04) (.03)
-------- -------- -------- -------- -------- -------- --------
Net asset value, end of
period...................... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- --------
TOTAL RETURN (D):............. 2.82% 2.92% 3.15% 1.90% 2.31% 3.48% 3.55%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(000)....................... $199,472 $181,396 $182,453 $158,280 $163,087 $164,092 $ 117,460
Average net assets (000)...... $196,223 $192,617 $171,223 $169,123 $170,103 $155,915 $ 89,273
Ratios to average net assets
(c):
Expenses, including
distribution fee........... .73% .70% .64% .68% .64% .32% .13%(b)
Expenses, excluding
distribution fee........... .60% .57% .51% .55% .51% .19% .00%(b)
Net investment income....... 2.78% 2.89% 3.11% 1.87% 2.02% 3.33% 4.48%(b)
</TABLE>
- ---------------
(a) Commencement of investment operations.
(b) Annualized.
(c) Net of expense subsidy and/or management fee waiver.
(d) Total return includes reinvestment of dividends and distributions.
Total returns for periods of less than a full year are not
annualized.
5
<PAGE>
CALCULATION OF YIELD
THE SERIES CALCULATES ITS "CURRENT YIELD" based on the net change, exclusive
of realized and unrealized gains or losses, in the value of a hypothetical
account over a seven calendar day base period. THE SERIES CALCULATES ITS
"EFFECTIVE ANNUAL YIELD" ASSUMING DAILY COMPOUNDING. Tax-equivalent yield shows
the taxable yield an investor would have to earn from a fully taxable investment
in order to equal the Series' tax-free yield after taxes and is calculated by
dividing the Series' current or effective yield by the result of one minus the
State tax rate times one minus the federal tax rate. The following is an example
of the yield calculations as of August 31, 1997:
<TABLE>
<CAPTION>
<S> <C>
Value of hypothetical account at end of period.............. $ 1.000499592
Value of hypothetical account at beginning of period........ 1.000000000
-------------
Base period return.......................................... $ .000499592
-------------
-------------
CURRENT YIELD (.000499592 x (365/7))........................ 2.61%
EFFECTIVE ANNUAL YIELD, assuming weekly compounding......... 2.64%
TAX-EQUIVALENT CURRENT YIELD 2.61% DIVIDED BY
[(1-.0637)(1-.396)]....................................... 4.62%
</TABLE>
THE YIELD WILL FLUCTUATE FROM TIME TO TIME AND DOES NOT INDICATE FUTURE
PERFORMANCE.
The weighted average maturity of the Series' portfolio on August 31, 1997 was
67 days.
Yield is computed in accordance with a standardized formula described in the
Statement of Additional Information. In addition, comparative performance
information may be used from time to time in advertising or marketing the
Series' shares, including data from Lipper Analytical Services, Inc.,
Morningstar Publications, Inc., IBC/Donoghue's Money Fund Report, The Bank Rate
Monitor, other industry publications, business periodicals and market indices.
HOW THE FUND INVESTS
INVESTMENT OBJECTIVE AND POLICIES
PRUDENTIAL MUNICIPAL SERIES FUND (THE FUND) IS AN OPEN-END, MANAGEMENT
INVESTMENT COMPANY, OR MUTUAL FUND, CONSISTING OF THIRTEEN SEPARATE SERIES. EACH
OF THESE SERIES IS MANAGED INDEPENDENTLY. THE NEW JERSEY MONEY MARKET SERIES
(THE SERIES) IS NON-DIVERSIFIED AND ITS INVESTMENT OBJECTIVE IS TO PROVIDE THE
HIGHEST LEVEL OF CURRENT INCOME THAT IS EXEMPT FROM NEW JERSEY STATE AND FEDERAL
INCOME TAXES CONSISTENT WITH LIQUIDITY AND THE PRESERVATION OF CAPITAL. THE
SERIES SEEKS TO ACHIEVE ITS INVESTMENT OBJECTIVE BY INVESTING PRIMARILY IN
SHORT-TERM NEW JERSEY STATE, MUNICIPAL AND LOCAL GOVERNMENT OBLIGATIONS AND
OBLIGATIONS OF OTHER QUALIFYING ISSUERS, SUCH AS ISSUERS LOCATED IN PUERTO RICO,
THE VIRGIN ISLANDS AND GUAM, WHICH PAY INCOME EXEMPT, IN THE OPINION OF COUNSEL,
FROM NEW JERSEY STATE AND FEDERAL INCOME TAXES (NEW JERSEY OBLIGATIONS). See
"Investment Objectives and Policies" in the Statement of Additional Information.
THERE CAN BE NO ASSURANCE THAT THE SERIES WILL BE ABLE TO ACHIEVE ITS INVESTMENT
OBJECTIVE.
THE SERIES' INVESTMENT OBJECTIVE IS A FUNDAMENTAL POLICY AND, THEREFORE, MAY
NOT BE CHANGED WITHOUT THE APPROVAL OF THE HOLDERS OF A MAJORITY OF THE SERIES'
OUTSTANDING VOTING SECURITIES AS DEFINED IN THE INVESTMENT COMPANY ACT OF 1940,
AS AMENDED (THE INVESTMENT COMPANY ACT). THE SERIES' POLICIES THAT ARE NOT
FUNDAMENTAL MAY BE MODIFIED BY THE TRUSTEES.
As with an investment in any mutual fund, an investment in this Series can
decrease in value and you can lose money.
6
<PAGE>
Interest on certain municipal obligations may be a preference item for
purposes of the federal alternative minimum tax. The Series may invest without
limit in municipal obligations that are "private activity bonds" (as defined in
the Internal Revenue Code), the interest on which would be a preference item for
purposes of the federal alternative minimum tax. See "Taxes, Dividends and
Distributions." Under New Jersey law, as long as the Series qualifies as a
"qualified investment fund," dividends paid by the Series are exempt from New
Jersey income tax for resident individuals and New Jersey trusts and estates to
the extent such dividends are derived from interest payments on and gain
realized from the sale or exchange of New Jersey Obligations and other
obligations exempt from state and local taxation by the laws of New Jersey or
the United States. The New Jersey Obligations in which the Series may invest
include certain short-term, tax-exempt notes such as Tax Anticipation Notes,
Revenue Anticipation Notes, Bond Anticipation Notes, Construction Loan Notes and
certain variable and floating rate demand notes. See "Investment Objectives and
Policies--Tax-Exempt Securities--Tax-Exempt Notes" in the Statement of
Additional Information. The Series will maintain a dollar-weighted average
maturity of its portfolio of 90 days or less.
THE SERIES MAY INVEST ITS ASSETS IN FLOATING RATE AND VARIABLE RATE
SECURITIES, INCLUDING PARTICIPATION INTERESTS THEREIN, WHICH CONFORM TO THE
REQUIREMENTS OF THE AMORTIZED COST VALUATION RULE AND OTHER REQUIREMENTS OF THE
SECURITIES AND EXCHANGE COMMISSION (SEC). There is no limit on the amount of
such securities that the Series may purchase. Floating rate securities normally
have a rate of interest which is set as a specific percentage of a designated
base rate, such as the rate on Treasury Bonds or Bills or the prime rate at a
major commercial bank. The interest rate on floating rate securities changes
periodically when there is a change in the designated base interest rate.
Variable rate securities provide for a specified periodic adjustment in the
interest rate based on prevailing market rates and generally would allow the
Series to demand payment of the obligation on short notice at par plus accrued
interest, which amount may be more or less than the amount the Series paid for
them.
ALL NEW JERSEY OBLIGATIONS PURCHASED BY THE SERIES WILL, AT THE TIME OF
PURCHASE, HAVE A REMAINING MATURITY OF THIRTEEN MONTHS OR LESS AND BE (I) RATED
IN ONE OF THE TWO HIGHEST RATING CATEGORIES BY AT LEAST TWO NATIONALLY
RECOGNIZED STATISTICAL RATING ORGANIZATIONS (NRSROS) ASSIGNING A RATING TO THE
SECURITY OR ISSUER (OR, IF ONLY ONE NRSRO ASSIGNED A RATING, BY THAT NRSRO) OR
(II) IF UNRATED, OF COMPARABLE QUALITY AS DETERMINED BY THE INVESTMENT ADVISER
UNDER THE SUPERVISION OF THE TRUSTEES. See "Description of Tax-Exempt Security
Ratings" in the Statement of Additional Information. The investment adviser will
monitor the credit quality of securities purchased for the Series' portfolio and
will limit its investments to those which present minimal credit risks.
In selecting New Jersey Obligations for investment by the Series, the
investment adviser considers ratings assigned by NRSROs, information concerning
the financial history and condition of the issuer and its revenue and expense
prospects and, in the case of revenue bonds, the financial history and condition
of the source of revenue to service the bonds. If a New Jersey Obligation held
by the Series is assigned a lower rating or ceases to be rated, the investment
adviser under the supervision of the Trustees will promptly reassess whether
that security presents minimal credit risks and whether the Series should
continue to hold the security in its portfolio. If a portfolio security no
longer presents minimal credit risks or is in default, the Series will dispose
of the security as soon as reasonably practicable unless the Trustees determine
that to do so is not in the best interests of the Series and its shareholders.
The Series utilizes the amortized cost method of valuation in accordance with
regulations issued by the SEC. See "How the Fund Values its Shares."
The Series intends to hold portfolio securities to maturity; however, it may
sell any security at any time in order to meet redemption requests or if the
investment adviser believes it advisable, based on an evaluation of the issuer
or of market conditions.
UNDER NORMAL MARKET CONDITIONS, THE SERIES WILL ATTEMPT TO INVEST
SUBSTANTIALLY ALL OF THE VALUE OF ITS ASSETS IN NEW JERSEY OBLIGATIONS. As a
matter of fundamental policy, during normal market conditions the Series' assets
will be invested so that at least 80% of its total assets will be invested in
New Jersey Obligations. During abnormal market conditions or to provide
liquidity, the Series may hold cash or taxable cash equivalents such as
certificates of deposit, bankers' acceptances and time
7
<PAGE>
deposits or other short-term taxable investments such as repurchase agreements,
or high grade taxable obligations, including obligations that are exempt from
federal, but not state, taxation. When, in the opinion of the investment
adviser, abnormal market conditions require a temporary defensive position, the
Series may invest more than 20% of the value of its assets in short-term debt
securities other than New Jersey Obligations or may invest its assets so that
more than 20% of the income is subject to New Jersey or federal income taxes.
However, the Series must invest at least 80% of the aggregate principal amount
of all of its investments (excluding cash, cash items and receivables, and
financial options, futures, forward contracts, or other similar financial
instruments related to interest-bearing obligations, obligations issued at a
discount or bond indexes related thereto that are related to the Series'
business of investing in securities (Related Financial Instruments)) in
obligations exempt from New Jersey personal income tax in order for its
distributions to remain exempt from such tax.
If the Series fails to qualify as a "qualified investment fund" under New
Jersey law, distributions to its shareholders will be subject to New Jersey
income tax. To meet the requirements for a "qualified investment fund," the
Series must have 100% of its investments in interest bearing obligations,
obligations issued at a discount, cash and cash items, including receivables,
and Related Financial Instruments.
THE SERIES IS AUTHORIZED TO ACQUIRE PUT OPTIONS (PUTS) GIVING THE SERIES THE
RIGHT TO SELL SECURITIES HELD IN THE SERIES' PORTFOLIO AT A SPECIFIED EXERCISE
PRICE ON A SPECIFIED DATE. The Series may acquire puts on securities in its
portfolio for the purpose of protecting the Series from a possible decline in
the market value of the security to which the put applies in the event of
interest rate fluctuations or, in the case of liquidity puts, for the purpose of
shortening the effective maturity of the underlying security. The aggregate
value of premiums paid to acquire puts held in the Series' portfolio (other than
liquidity puts) may not exceed 10% of the net asset value of the Series. The
acquisition of a put may involve an additional cost to the Series by payment of
a premium for the put, by payment of a higher purchase price for securities to
which the put is attached or through a lower effective interest rate.
In addition, there is a credit risk associated with the purchase of puts in
that the issuer of the put may be unable to meet its obligation to purchase the
underlying security. Accordingly, the Series will acquire puts only under the
following circumstances: (1) the put is written by the issuer of the underlying
security and such security is rated (a) in one of the two highest rating
categories by at least two NRSROs assigning a rating to the security or issuer,
or (b) if only one such rating organization assigned a rating, by that rating
organization; or (2) the put is written by a person other than the issuer of the
underlying security and such person has securities outstanding which are rated
within such two highest quality grades; or (3) the put is backed by a letter of
credit or similar financial guarantee issued by a person having securities
outstanding which are rated within the two highest quality grades of such rating
services. The issuer of the put, or another institution, must undertake to
notify promptly the holder of the put if the put feature is substituted with a
put from another issuer.
THE SERIES MAY PURCHASE MUNICIPAL OBLIGATIONS ON A "WHEN-ISSUED" OR "DELAYED
DELIVERY" BASIS, IN EACH CASE WITHOUT LIMIT. When municipal obligations are
offered on a when-issued or delayed delivery basis, the price and coupon rate
are fixed at the time the commitment to purchase is made, but delivery and
payment for the securities take place at a later date. The purchase price for
such securities includes interest accrued during the period between purchase and
settlement, and, therefore, no interest accrues to the economic benefit of the
purchaser during such period. In the case of purchases by the Series, the price
that the Series is required to pay on the settlement date may be in excess of
the market value of the municipal obligations on that date. While securities may
be sold prior to the settlement date, the Series intends to purchase these
securities with the purpose of actually acquiring them unless a sale would be
desirable for investment reasons. At the time the Series makes the commitment to
purchase a municipal obligation on a when-issued or delayed delivery basis, it
will record the transaction and reflect the value of the obligation each day in
determining its net asset value. This value may fluctuate from day to day in the
same manner as values of municipal obligations otherwise held by the Series. If
the seller defaults in the sale, the Series could fail to realize the
appreciation, if any, that had occurred. The Series will establish a segregated
account with its Custodian in which it will maintain cash, U.S. Government
securities, equity securities or other liquid, unencumbered assets,
marked-to-market daily, equal in value to its commitments for when-issued or
delayed delivery securities.
8
<PAGE>
THE SERIES MAY PURCHASE SECONDARY MARKET INSURANCE ON NEW JERSEY OBLIGATIONS
WHICH IT HOLDS OR ACQUIRES. Secondary market insurance would be reflected in the
market value of the municipal obligation purchased and may enable the Series to
dispose of a defaulted obligation at a price similar to that of comparable
municipal obligations which are not in default.
Insurance is not a substitute for the basic credit of an issuer, but
supplements the existing credit and provides additional security therefor. While
insurance coverage for the New Jersey Obligations held by the Series reduces
credit risk by providing that the insurance company will make timely payment of
principal and interest if the issuer defaults on its obligation to make such
payment, it does not afford protection against fluctuation in the price, i.e.,
the market value, of the municipal obligations caused by changes in interest
rates and other factors.
SPECIAL CONSIDERATIONS
BECAUSE THE SERIES WILL INVEST PRIMARILY IN NEW JERSEY OBLIGATIONS AND BECAUSE
IT SEEKS TO MAXIMIZE INCOME DERIVED FROM NEW JERSEY OBLIGATIONS, IT IS MORE
SUSCEPTIBLE TO FACTORS ADVERSELY AFFECTING ISSUERS OF NEW JERSEY OBLIGATIONS
THAN IS A COMPARABLE TAX-EXEMPT MONEY MARKET FUND THAT IS NOT CONCENTRATED IN
SUCH OBLIGATIONS TO THIS DEGREE. An investment in the Series therefore may
involve more risk than an investment in other types of money market funds. The
economic slowdown which began in 1989 translated into revenue shortfalls and
operating deficits in fiscal 1989, 1990 and 1991. To balance the budget for the
last five years, the State has utilized nonrecurring revenues and serious
spending cuts. The fiscal 1997 ending balance was $700 million, approximately
$200 million more than the anticipated surplus. The 1998 budget includes
appropriations totaling $16.8 billion, up $800 million or 5% from fiscal year
1997. New Jersey was forced to increase expenditures in large part by a 1997
ruling by the State Supreme Court, ordering the expenditure of an additional
$250 million to eliminate inequities in the State school system between wealthy
and poor districts. Plans to cut costs by further privatization of State
services were put on hold to achieve a budget compromise and legislative
approval of an extraordinary $2.8 billion bond issue in 1997. The bond issue
allowed the State to eliminate the annual $590 million contribution for the next
few years, and balance the budget despite increased spending.
Two major bond rating services had initially expressed concern that the 1997
bond issue increased the State's long-term debt to a point where its bond
ratings would be downgraded. Both services have retreated from that position at
this time. However, budget pressures will likely continue from the cost of debt
service. Additionally, New Jersey will likely be adversely impacted by the
block-grant formula adopted in new federal welfare reform legislation. If either
New Jersey or any of its local governmental entities is unable to meet its
financial obligations, the income derived by the Series, the ability to preserve
or realize appreciation of the Series' capital and the Series' liquidity could
be adversely affected. See "Investment Objectives and Policies--Special
Considerations Regarding Investments in Tax-Exempt Securities" in the Statement
of Additional Information.
The Series is "non-diversified" so that more than 5% of its total assets may
be invested in the securities of one or more issuers. Investment in a
non-diversified portfolio involves greater risk than investment in a diversified
portfolio because a loss resulting from the default of a single issuer may
represent a greater portion of the total assets of a non-diversified portfolio.
The Series will treat an investment in a municipal bond refunded with escrowed
U.S. Government securities as U.S. Government securities for purposes of the
Investment Company Act's diversification requirements provided certain
conditions are met. See "Investment Objectives and Policies--In General" in the
Statement of Additional Information.
OTHER INVESTMENTS AND POLICIES
REPURCHASE AGREEMENTS
The Series may enter into repurchase agreements whereby the seller of a
security agrees to repurchase that security from the Series at a mutually
agreed-upon time and price. The period of maturity is usually quite short,
possibly overnight or a few days, although it might extend over a number of
months. The resale price is in excess of the purchase price, reflecting an
agreed-upon rate of return effective for the period of time the Series' money is
invested in the security. The Series' repurchase agreements will
9
<PAGE>
at all times be fully collateralized in an amount at least equal to the resale
price. The instruments held as collateral are valued daily and if the value of
the instruments declines, the Series will require additional collateral. If the
seller defaults and the value of the collateral securing the repurchase
agreement declines, the Series may incur a loss. The Series participates in a
joint repurchase account with other investment companies managed by PIFM
pursuant to an order of the SEC. See "Investment Objectives and
Policies--Repurchase Agreements" in the Statement of Additional Information.
BORROWING
The Series may borrow an amount equal to no more than 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 Series may
pledge up to 33 1/3% of the value of its total assets to secure these
borrowings. The Series will not purchase portfolio securities if its borrowings
exceed 5% of its total assets.
ILLIQUID SECURITIES
The Series may hold up to 10% of its net assets in illiquid securities,
including repurchase agreements which have a maturity of longer than seven days,
securities with legal or contractual restrictions on resale (restricted
securities) and securities that are not readily marketable. Securities that have
a readily available market are not considered illiquid for purposes of this
limitation. See "Investment Restrictions" in the Statement of Additional
Information. The investment adviser will monitor the liquidity of such
restricted securities under the supervision of the Trustees. See "Investment
Objectives and Policies--Illiquid Securities" in the Statement of Additional
Information. Repurchase agreements subject to demand are deemed to have a
maturity equal to the notice period.
INVESTMENT RESTRICTIONS
The Series is subject to certain investment restrictions which, like its
investment objective, constitute fundamental policies. Fundamental policies
cannot be changed without the approval of the holders of a majority of the
Series' outstanding voting securities, as defined in the Investment Company Act.
See "Investment Restrictions" in the Statement of Additional Information.
HOW THE FUND IS MANAGED
THE FUND HAS TRUSTEES WHO, IN ADDITION TO OVERSEEING THE ACTIONS OF THE FUND'S
MANAGER, SUBADVISER AND DISTRIBUTOR, AS SET FORTH BELOW, DECIDE UPON MATTERS OF
GENERAL POLICY. THE FUND'S MANAGER CONDUCTS AND SUPERVISES THE DAILY BUSINESS
OPERATIONS OF THE FUND. THE FUND'S SUBADVISER FURNISHES DAILY INVESTMENT
ADVISORY SERVICES.
For the fiscal year ended August 31, 1997, total expenses of the Series as a
percentage of its average net assets, net of fee waiver, were .73%. See
"Financial Highlights."
MANAGER
PRUDENTIAL INVESTMENTS FUND MANAGEMENT LLC (PIFM OR THE MANAGER), GATEWAY
CENTER THREE, 100 MULBERRY STREET, NEWARK, NEW JERSEY 07102-4077, IS THE MANAGER
OF THE FUND AND IS COMPENSATED FOR ITS SERVICES AT AN ANNUAL RATE OF .50 OF 1%
OF THE AVERAGE DAILY NET ASSETS OF THE SERIES. PIFM is organized in New York as
a limited liability company. It is the successor to Prudential Mutual Fund
Management, Inc., which transferred its assets to PIFM in September 1996. For
the fiscal year ended August 31, 1997, the Series paid a management fee of .50
of 1% of the Series' average net assets. See "Fee Waivers" below and "Manager"
in the Statement of Additional Information.
As of September 30, 1997, PMF served as the manager to 41 open-end investment
companies, constituting all of the Prudential Mutual Funds, and as manager or
administrator to 22 closed-end investment companies with aggregate assets of
approximately $59.9 billion.
10
<PAGE>
UNDER THE MANAGEMENT AGREEMENT WITH THE FUND, PIFM MANAGES THE INVESTMENT
OPERATIONS OF EACH SERIES OF THE FUND AND ALSO ADMINISTERS THE FUND'S BUSINESS
AFFAIRS. See "Manager" in the Statement of Additional Information.
UNDER A SUBADVISORY AGREEMENT BETWEEN PIFM AND THE PRUDENTIAL INVESTMENT
CORPORATION (PIC), DOING BUSINESS AS PRUDENTIAL INVESTMENTS (PI, THE SUBADVISER
OR THE INVESTMENT ADVISER), PI FURNISHES INVESTMENT ADVISORY SERVICES IN
CONNECTION WITH THE MANAGEMENT OF THE FUND AND IS REIMBURSED BY PIFM FOR ITS
REASONABLE COSTS AND EXPENSES INCURRED IN PROVIDING SUCH SERVICES. Under the
Management Agreement, PIFM continues to have responsibility for all investment
advisory services and supervises PI's performance of such services.
PIFM and PI are indirect wholly-owned subsidiaries of The Prudential Insurance
Company of America (Prudential), a major diversified insurance and financial
services company, and are part of Prudential Investments, a business group of
Prudential.
FEE WAIVERS
PIFM may from time to time waive all or a portion of its management fee and
subsidize certain operating expenses of the Series. Fee waivers and expense
subsidies will increase the Series' yield. The Series is not required to
reimburse PIFM for such management fee waiver. See "Calculation of Yield" and
"Fund Expenses."
DISTRIBUTOR
PRUDENTIAL SECURITIES INCORPORATED (PRUDENTIAL SECURITIES, PSI OR THE
DISTRIBUTOR), ONE SEAPORT PLAZA, NEW YORK, NEW YORK 10292, IS A CORPORATION
ORGANIZED UNDER THE LAWS OF THE STATE OF DELAWARE AND SERVES AS THE DISTRIBUTOR
OF THE SERIES' SHARES. It is an indirect, wholly-owned subsidiary of Prudential.
UNDER A DISTRIBUTION AND SERVICE PLAN (THE PLAN) ADOPTED BY THE SERIES UNDER
RULE 12b-1 UNDER THE INVESTMENT COMPANY ACT AND A DISTRIBUTION AGREEMENT (THE
DISTRIBUTION AGREEMENT), THE DISTRIBUTOR INCURS THE EXPENSES OF DISTRIBUTING THE
SHARES OF THE SERIES. These expenses include account servicing fees paid to, or
on account of, financial advisers of Prudential Securities and representatives
of Pruco Securities Corporation (Prusec), an affiliated broker-dealer, account
servicing fees paid to, or on account of, other broker-dealers or financial
institutions (other than national banks) which have entered into agreements with
the Distributor, advertising expenses, the cost of printing and mailing
prospectuses to potential investors and indirect and overhead costs of
Prudential Securities and Prusec associated with the sale of Series shares,
including lease, utility, communications and sales promotion expenses.
UNDER THE PLAN, THE SERIES REIMBURSES THE DISTRIBUTOR FOR ITS
DISTRIBUTION-RELATED EXPENSES AT AN ANNUAL RATE OF UP TO .125 OF 1% OF THE
AVERAGE DAILY NET ASSETS OF THE SERIES. Account servicing fees are paid based on
the average balance of the Series' shares held in the accounts of the customers
of financial advisers. The entire distribution fee may be used to pay account
servicing fees.
For the year ended August 31, 1997, the Series paid PSI a distribution fee
equal on an annual basis to .125% of the average net assets of the Series.
Amounts paid to the Distributor by the Series will not be used to pay
distribution expenses incurred by any other series of the Fund.
The Plan provides that it shall continue in effect from year to year provided
that each such continuance is approved annually by a majority vote of the
Trustees of the Fund, including a majority of the Trustees who are not
"interested persons" of the Fund (as defined in the Investment Company Act) and
who have no direct or indirect financial interest in the operation of the Plan
or any agreements related to the Plan. The Trustees are provided with and review
quarterly reports of expenditures under the Plan.
In addition to distribution and service fees paid by the Series under the
Plan, the Manager (or one of its affiliates) may make payments out of its own
resources to dealers (including Prudential Securities) and other persons which
distribute shares of the Series. Such payments may be calculated by reference to
the net asset value of shares sold by such persons or otherwise. The Fund
records all payments made under the Plan as expenses in the calculation of its
net investment income.
11
<PAGE>
On October 21, 1993, PSI entered into an omnibus settlement with the SEC,
state securities regulators (with the exception of the Texas Securities
Commissioner who joined the settlement on January 18, 1994) and the National
Association of Securities Dealers, Inc. (the NASD) to resolve allegations that
from 1980 through 1990 PSI sold certain limited partnership interests in
violation of securities laws to persons for whom such securities were not
suitable and misrepresented the safety, potential returns and liquidity of these
investments. Without admitting or denying the allegations asserted against it,
PSI consented to the entry of an SEC Administrative Order which stated that
PSI's conduct violated the federal securities laws, directed PSI to cease and
desist from violating the federal securities laws, pay civil penalties, and
adopt certain remedial measures to address the violations.
Pursuant to the terms of the SEC settlement, PSI agreed to the imposition of a
$10,000,000 civil penalty, established a settlement fund in the amount of
$330,000,000 and procedures to resolve legitimate claims for compensatory
damages by purchasers of the partnership interests. PSI has agreed to provide
additional funds, if necessary, for the purpose of the settlement fund. PSI's
settlement with the state securities regulators included an agreement to pay a
penalty of $500,000 per jurisdiction. PSI consented to a censure and to the
payment of a $5,000,000 fine in settling the NASD action.
In October 1994, a criminal complaint was filed with the United States
Magistrate for the Southern District of New York alleging that PSI committed
fraud in connection with the sale of certain limited partnership interests in
violation of federal securities laws. An agreement was simultaneously filed to
defer prosecution of these charges for a period of three years from the signing
of the agreement, provided that PSI complies with the terms of the agreement.
If, upon completion of the three year period, PSI has complied with the terms of
the agreement, no prosecution will be instituted by the United States for the
offenses charged in the complaint. If on the other hand, during the course of
the three year period, PSI violates the terms of the agreement, the U.S.
Attorney can then elect to pursue these charges. Under the terms of the
agreement, PSI agreed, among other things, to pay an additional $330,000,000
into the fund established by the SEC to pay restitution to investors who
purchased certain PSI limited partnership interests.
For more detailed information concerning the foregoing matters, see
"Distributor" in the Statement of Additional Information, a copy of which may be
obtained at no cost by calling (800) 225-1852.
The Fund is not affected by PSI's financial condition and is an entirely
separate legal entity from PSI, which has no beneficial ownership therein and
the Fund's assets which are held by State Street Bank and Trust Company, an
independent custodian, are separate and distinct from PSI.
PORTFOLIO TRANSACTIONS
Prudential Securities may act as a broker for the Fund, provided that the
commissions, fees or other remuneration it receives are fair and reasonable. See
"Portfolio Transactions and Brokerage" in the Statement of Additional
Information.
CUSTODIAN AND TRANSFER AND DIVIDEND DISBURSING AGENT
State Street Bank and Trust Company, One Heritage Drive, North Quincy,
Massachusetts 02171, serves as Custodian for the portfolio securities of the
Series and cash and, in that capacity, maintains certain financial and
accounting books and records pursuant to an agreement with the Fund. Its mailing
address is P.O. Box 1713, Boston, Massachusetts 02105.
Prudential Mutual Fund Services LLC (PMFS), Raritan Plaza One, Edison, New
Jersey 08837, serves as Transfer Agent and Dividend Disbursing Agent and, in
those capacities, maintains certain books and records for the Fund. PMFS is a
wholly-owned subsidiary of PIFM. Its mailing address is P.O. Box 15005, New
Brunswick, New Jersey 08906-5005.
HOW THE FUND VALUES ITS SHARES
THE SERIES' NET ASSET VALUE PER SHARE OR NAV IS DETERMINED BY SUBTRACTING ITS
LIABILITIES FROM THE VALUE OF ITS ASSETS AND DIVIDING THE REMAINDER BY THE
NUMBER OF OUTSTANDING SHARES. THE TRUSTEES HAVE FIXED THE SPECIFIC TIME OF DAY
FOR THE COMPUTATION OF THE NET ASSET VALUE OF THE SERIES TO BE AS OF 4:30 P.M.,
NEW YORK TIME, IMMEDIATELY AFTER THE DECLARATION OF DIVIDENDS.
The Series will compute its NAV once daily on days that the New York Stock
Exchange is open for trading except on days which no orders to purchase, sell or
redeem shares have been received by the Series or days on which changes in the
value of the Series portfolio securities do not materially affect the NAV.
12
<PAGE>
The Series determines the value of its portfolio securities by the amortized
cost method. This method involves valuing an instrument at its cost and
thereafter assuming a constant amortization to maturity of any discount or
premium regardless of the impact of fluctuating interest rates on the market
value of the instrument. While this method provides certainty in valuation, it
may result in periods during which value, as determined by amortized cost, is
higher or lower than the price the Series would receive if it sold the
instrument. During these periods, the yield to a shareholder may differ somewhat
from that which could be obtained from a similar fund which marks its portfolio
securities to the market each day. For example, during periods of declining
interest rates, if the use of the amortized cost method resulted in a lower
value of the Series' portfolio on a given day, a prospective investor in the
Series would be able to obtain a somewhat higher yield and existing shareholders
would receive correspondingly less income. The converse would apply during
periods of rising interest rates. The Trustees have established procedures
designed to stabilize, to the extent reasonably possible, the NAV of the shares
of the Series at $1.00 per share. See "Net Asset Value" in the Statement of
Additional Information.
TAXES, DIVIDENDS AND DISTRIBUTIONS
TAXATION OF THE FUND
THE SERIES HAS ELECTED TO QUALIFY AND INTENDS TO REMAIN QUALIFIED AS A
REGULATED INVESTMENT COMPANY UNDER THE INTERNAL REVENUE CODE. ACCORDINGLY, THE
SERIES WILL NOT BE SUBJECT TO FEDERAL INCOME TAXES ON ITS NET INVESTMENT INCOME
AND NET CAPITAL GAINS, IF ANY, THAT IT DISTRIBUTES TO ITS SHAREHOLDERS. TO THE
EXTENT NOT DISTRIBUTED BY THE SERIES, NET TAXABLE INVESTMENT INCOME AND CAPITAL
GAINS AND LOSSES ARE TAXABLE TO THE SERIES.
To the extent the Series invests in taxable obligations, it will earn taxable
investment income. Gain or loss realized by the Series from the sale of
securities generally will be treated as capital gain or loss; however, gain from
the sale of certain securities (including municipal obligations) will be treated
as ordinary income to the extent of any "market discount." Market discount
generally is the difference, if any, between the price paid by the Series for
the security and the principal amount of the security (or, in the case of a
security issued at an original issue discount, the revised issue price of the
security). The market discount rule does not apply to any security that was
acquired by the Series at its original issue. See "Distributions and Tax
Information" in the Statement of Additional Information.
TAXATION OF SHAREHOLDERS
In general, the character of tax-exempt interest distributed by the Series
will flow through as tax-exempt interest to its shareholders provided that 50%
or more of the value of its assets at the end of each quarter of its taxable
year is invested in state, municipal and other obligations, the interest on
which is excluded from gross income for federal income tax purposes. During
normal market conditions, at least 80% of the Series' total assets will be
invested in such obligations. See "How the Fund Invests--Investment Objective
and Policies."
Any dividends out of net taxable investment income, together with
distributions of net short-term gains (I.E., the excess of net short-term
capital gains over net long-term capital losses) distributed to shareholders,
will be taxable as ordinary income to the shareholder whether or not reinvested.
Any net capital gains (I.E., the excess of net capital gains from the sale of
assets held for more than 12 months over net short-term capital losses)
distributed to shareholders will be taxable as capital gains to the
shareholders, whether or not reinvested and regardless of the length of time a
shareholder has owned his or her shares. The maximum capital gains rate for
individuals is 28% with respect to assets held for more than 12 months, but not
more than 18 months, and 20% with respect to assets held for more than 18
months. The maximum capital gains rate for corporate shareholders currently is
the same as the maximum tax rate for ordinary income. The Series does not expect
to have capital gains from the sale of assets held for more than 12 months.
13
<PAGE>
CERTAIN INVESTORS MAY INCUR FEDERAL ALTERNATIVE MINIMUM TAX LIABILITY AS A
RESULT OF THEIR INVESTMENT IN THE FUND. Tax-exempt interest from certain
municipal obligations (I.E., certain private activity bonds issued after August
7, 1986) will be treated as an item of tax preference for purposes of the
alternative minimum tax. The Fund anticipates that, under regulations to be
promulgated, items of tax preference incurred by the Series will be attributed
to the Series' shareholders, although some portion of such items could be
allocated to the Series itself. Depending upon each shareholder's individual
circumstances, the attribution of items of tax preference incurred by the Series
could result in liability for the shareholder for the alternative minimum tax.
Similarly, the Series could be liable for the alternative minimum tax for items
of tax preference attributed to it. The Series is permitted to invest in
municipal obligations of the type that will produce items of tax preference.
Corporate shareholders in the Series also will have to take into account the
adjustment for current earnings for alternative minimum tax purposes. Corporate
shareholders should consult with their tax advisers with respect to this
potential adjustment.
Under New Jersey law, as long as the Series qualifies as a "qualified
investment fund," dividends paid by the Series are exempt from New Jersey income
tax for resident individuals and New Jersey trusts and estates to the extent
such dividends are derived from interest payments on, and gain realized from the
sale or exchange of, New Jersey Obligations and other obligations exempt from
state and local taxation by the laws of New Jersey and the United States.
Dividends paid to corporate shareholders will be subject to the New Jersey
Corporation Business tax or corporation income tax and may increase liability
under the federal alternative minimum tax.
Shareholders are advised to consult their own tax advisers regarding specific
questions as to federal, state or local taxes. See "Distributions and Tax
Information" in the Statement of Additional Information.
WITHHOLDING TAXES
Under the Internal Revenue Code, the Series is required to withhold and remit
to the U.S. Treasury 31% of redemption proceeds on the accounts of certain
shareholders who fail to furnish their tax identification numbers on IRS Form
W-9 (or IRS Form W-8 in the case of certain foreign shareholders) with the
required certifications regarding the shareholder's status under the federal
income tax law. Such withholding is also required on taxable dividends and
capital gain distributions made by the Series unless it is reasonably expected
that at least 95% of the distributions of the Series are comprised of tax-exempt
dividends.
Dividends of net taxable investment income and distributions of net short-term
capital gains paid to a shareholder (including a shareholder acting as a nominee
or fiduciary) who is a nonresident alien individual, a foreign corporation or a
foreign partnership (foreign shareholder) are subject to a 30% (or lower treaty
rate) withholding tax upon the gross amount of the dividends unless the
dividends are effectively connected with a U.S. trade or business conducted by
the foreign shareholder. Capital gain dividends paid to a foreign shareholder
are generally not subject to withholding tax. A foreign shareholder will,
however, be required to pay U.S. income tax on any dividends and capital gain
distributions which are effectively connected with a U.S. trade or business of
the foreign shareholder.
DIVIDENDS AND DISTRIBUTIONS
THE SERIES EXPECTS TO DECLARE DAILY AND PAY MONTHLY DIVIDENDS OF NET
INVESTMENT INCOME AND SHORT-TERM CAPITAL GAINS.
A shareholder generally begins to earn dividends on the first business day
after his or her order is placed with the Series, as described above, and
continues to earn dividends through the day on which his or her shares are
redeemed. In the case of certain redemptions, however, Prudential Securities
clients will not be entitled to dividends declared on the date of redemption.
See "Shareholder Guide -- How to Sell Your Shares--Redemption of Shares
Purchased through Prudential Securities."
DIVIDENDS AND DISTRIBUTIONS WILL BE PAID IN ADDITIONAL SHARES OF THE SERIES
BASED ON THE NET ASSET VALUE OF SERIES' SHARES ON THE PAYMENT DATE OR SUCH OTHER
DATE AS THE TRUSTEES MAY DETERMINE, UNLESS THE SHAREHOLDER ELECTS IN WRITING NOT
LESS THAN FIVE BUSINESS DAYS PRIOR TO THE RECORD DATE TO RECEIVE SUCH DIVIDENDS
AND DISTRIBUTIONS IN CASH.
14
<PAGE>
Such election should be submitted to Prudential Mutual Fund Services LLC,
Attention: Account Maintenance, P.O. Box 15015, New Brunswick, New Jersey
08906-5015. If you hold shares through Prudential Securities, you should contact
your financial adviser to elect to receive dividends and distributions in cash.
The Fund will notify each shareholder after the close of the Fund's taxable year
of both the dollar amount and the taxable status of the year's dividends and
distributions.
GENERAL INFORMATION
DESCRIPTION OF SHARES
THE FUND WAS ESTABLISHED AS A MASSACHUSETTS BUSINESS TRUST ON MAY 18, 1984, BY
A DECLARATION OF TRUST. The Fund's activities are supervised by its Trustees.
The Declaration of Trust permits the Trustees to issue an unlimited number of
full and fractional shares in separate series, currently designated as the
Connecticut Money Market Series, Florida Series, Maryland Series, Massachusetts
Series, Massachusetts Money Market Series, Michigan Series, New Jersey Series,
New Jersey Money Market Series, New York Series, New York Money Market Series,
North Carolina Series, Ohio Series and Pennsylvania Series. Currently, all
series of the Fund, except for the Connecticut Money Market Series, the Florida
Series, the Massachusetts Series, the Massachusetts Money Market Series, the New
Jersey Money Market Series, the New Jersey Series, the New York Income Series,
the New York Money Market Series and the New York Series, offer three classes,
designated Class A, Class B and Class C shares. The Florida Series, the
Massachusetts Series, the New Jersey Series and the New York Series offer four
classes, designated Class A, Class B, Class C and Class Z shares. The
Connecticut Money Market Series, the Massachusetts Money Market Series, the New
Jersey Money Market Series and the New York Money Market Series offer only one
class of shares. In accordance with the Fund's Declaration of Trust, the
Trustees may authorize the creation of additional series and classes within such
series, with such preferences, privileges, limitations and voting and dividend
rights as the Trustees may determine.
Shares of the Fund, when issued, are fully paid, nonassessable, fully
transferable and redeemable at the option of the holder. Shares are also
redeemable at the option of the Fund under certain circumstances as described
under "Shareholder Guide--How to Sell Your Shares." Each share of the Series is
equal as to earnings, assets and voting privileges, and each class bears the
expenses related to the distribution of its shares. There are no conversion,
preemptive or other subscription rights. In the event of liquidation, each share
of beneficial interest of each series is entitled to its portion of all of the
Fund's assets after all debt and expenses of the Fund have been paid. The Fund's
shares do not have cumulative voting rights for the election of Trustees.
THE FUND DOES NOT INTEND TO HOLD ANNUAL MEETINGS OF SHAREHOLDERS UNLESS
OTHERWISE REQUIRED BY LAW. THE FUND WILL NOT BE REQUIRED TO HOLD MEETINGS OF
SHAREHOLDERS UNLESS, FOR EXAMPLE, THE ELECTION OF TRUSTEES IS REQUIRED TO BE
ACTED UPON BY SHAREHOLDERS UNDER THE INVESTMENT COMPANY ACT. SHAREHOLDERS HAVE
CERTAIN RIGHTS, INCLUDING THE RIGHT TO CALL A MEETING UPON A VOTE OF 10% OF THE
FUND'S OUTSTANDING SHARES FOR THE PURPOSE OF VOTING ON THE REMOVAL OF ONE OR
MORE TRUSTEES OR TO TRANSACT ANY OTHER BUSINESS.
The Declaration of Trust and the By-Laws of the Fund are designed to make the
Fund similar in certain respects to a Massachusetts business corporation. The
principal distinction between a Massachusetts business corporation and a
Massachusetts business trust relates to shareholder liability. Under
Massachusetts law, shareholders of a business trust may, under certain
circumstances, be held personally liable as partners for the obligations of the
fund, which is not the case with a corporation. The Declaration of Trust of the
Fund provides that shareholders shall not be subject to any personal liability
for the acts or obligations of the Fund and that every written obligation,
contract, instrument or undertaking made by the Fund shall contain a provision
to the effect that the shareholders are not individually bound thereunder.
15
<PAGE>
ADDITIONAL INFORMATION
This Prospectus, including the Statement of Additional Information which has
been incorporated by reference herein, does not contain all the information set
forth in the Registration Statement filed by the Fund with the SEC under the
Securities Act of 1933, as amended. Copies of the Registration Statement may be
obtained at a reasonable charge from the SEC or may be examined, without charge,
at the office of the SEC in Washington, D.C.
SHAREHOLDER GUIDE
HOW TO BUY SHARES OF THE FUND
YOU MAY PURCHASE SHARES OF THE SERIES THROUGH PRUDENTIAL SECURITIES, PRUSEC OR
DIRECTLY FROM THE FUND, THROUGH ITS TRANSFER AGENT, PRUDENTIAL MUTUAL FUND
SERVICES LLC (PMFS OR THE TRANSFER AGENT), ATTENTION: INVESTMENT SERVICES, P.O.
BOX 15020, NEW BRUNSWICK, NEW JERSEY 08906-5020. The minimum initial investment
is $1,000. The minimum subsequent investment is $100. All minimum investment
requirements are waived for the Command Account program (if the Series is
designated as your primary fund) and certain employee and retirement savings
plans. For purchases made through the Automatic Savings Accumulation Plan, the
minimum initial and subsequent investment if $50. See "Shareholder Services"
below. For automatic purchases made through Prudential Securities, the minimum
investment requirement is $1,000 and there is no minimum subsequent investment
requirement.
An investment in the Series may not be appropriate for tax-exempt or
tax-deferred investors. Such investors should consult with their own tax
advisers.
SHARES OF THE SERIES ARE SOLD THROUGH THE TRANSFER AGENT, WITHOUT A SALES
CHARGE, AT THE NAV PER SHARE NEXT DETERMINED FOLLOWING RECEIPT AND ACCEPTANCE BY
THE TRANSFER AGENT OR PRUDENTIAL SECURITIES OF AN ORDER IN PROPER FORM (I.E.,
CHECK OR FEDERAL FUNDS WIRED TO STATE STREET BANK AND TRUST COMPANY (STATE
STREET), THE FUND'S CUSTODIAN). See "How the Fund Values its Shares." When
payment is received by PMFS prior to 4:30 P.M., New York time, in proper form, a
share purchase order will be entered at the price determined as of 4:30 P.M.,
New York time, on that day, and dividends on the shares purchased will begin on
the business day following such investment. See "Taxes, Dividends and
Distributions." If your purchase is made through an account at Prudential
Securities or through Prusec or another dealer, your dealer will forward a
purchase order and payment to the Fund.
Investors who purchase their shares through a dealer other than Prudential
Securities or Prusec, which dealer has a clearinghouse arrangement with respect
to shares of the Series, may be able to participate in the automatic sweep
feature described below under "Purchases through Prudential
Securities--Automatic Investment (Autosweep)" and "How to Sell Your
Shares--Redemptions of Shares Purchased through Prudential Securities." For
further information, contact your dealer.
Application forms for Prusec and direct accounts with the Transfer Agent
(E.G., non-Prudential Securities) can be obtained from PMFS or Prusec. If a
share certificate is desired, it must be requested in writing for each
transaction. Certificates are issued only for full shares. Shareholders who hold
their shares through Prudential Securities will not receive share certificates.
Shareholders cannot utilize Expedited Redemption or Check Redemption or have a
Systematic Withdrawal Plan if they have been issued share certificates.
The Fund reserves the right in its sole discretion to reject any purchase
order (including an exchange into the Series) or to suspend or modify the
continuous offering of its shares. See "How to Sell Your Shares" below.
Your dealer is responsible for forwarding payment promptly to the Fund. The
Distributor reserves the right to cancel any purchase order for which payment
has not been received by the third business day following the investment.
Transactions in shares of the Series may be subject to postage and other
charges imposed by the dealer.
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<PAGE>
PURCHASES THROUGH PRUDENTIAL SECURITIES
If you have an account with Prudential Securities (or open such an account),
you may ask Prudential Securities to purchase shares of the Series on your
behalf. On the business day following confirmation that a free credit balance
(I.E., immediately available funds) exists in your account, Prudential
Securities will effect a purchase order for shares of the Series in an amount up
to the balance of the NAV determined on that day. Funds held by Prudential
Securities on behalf of its clients in the form of free credit balances are
delivered to the Fund by Prudential Securities and begin earning dividends the
second business day after receipt of the order by Prudential Securities.
Accordingly, Prudential Securities will have the use of such free credit
balances during this period.
Shares of the Series purchased by Prudential Securities on behalf of its
clients will be held by Prudential Securities as record holder. Prudential
Securities will therefore receive statements and dividends directly from the
Fund and will in turn provide investors with Prudential Securities account
statements reflecting purchases, redemptions and dividend payments. Although
Prudential Securities clients who purchase shares of the Series through
Prudential Securities may not redeem shares of the Series by check, Prudential
Securities provides its clients with alternative forms of immediate access to
monies invested in shares of the Series.
Prudential Securities clients wishing additional information concerning
investment in shares of the Series made through Prudential Securities should
call their Prudential Securities financial adviser.
AUTOMATIC INVESTMENT (AUTOSWEEP) (FOR NON-COMMAND ACCOUNTS)
Prudential Securities has advised the Fund that it has automatic investment
procedures (Autosweep) pursuant to which it will make automatic investments of
free credit cash balances (Eligible Credit Balances) held in a client's
brokerage account in shares of the Series, if the Series is your Primary Money
Sweep Fund. You may designate the Series (or certain other Prudential money
market funds) as your Primary Money Sweep Fund. If the Series is your Primary
Money Sweep Fund you can purchase shares of the Series only through the
automatic investment procedures described below; no manual purchase orders will
be accepted. You may change your Primary Money Sweep Fund at any time by
notifying your Prudential Securities financial adviser. Under certain
circumstances, you may elect not to have a money market sweep feature for your
account when you open your account.
For accounts other than IRAs and Benefit Plans, as defined below, shares of
the Series will be purchased by Prudential Securities as follows: in the case of
Eligible Credit Balances of $1,000 or more resulting from the proceeds of a
securities sale, maturity of a bond or call and Eligible Credit Balances of
$10,000 or more resulting from a non-trade related credit (E.G., receipt of a
dividend or interest payment or a cash payment into the securities account),
orders to purchase shares will be placed on the business day after such Eligible
Credit Balances become available in your account. For Eligible Credit Balances
of $1.00 or more not otherwise described above, orders to purchase shares will
be placed monthly on the last business day of the month. For IRAs and Benefit
Plans, having Eligible Credit Balances of $1.00 or more, orders to purchase
shares of the Series will be placed by Prudential Securities (i) on the
settlement date of the securities sale, in the case of Eligible Credit Balances
resulting from the proceeds of a securities sale, and (ii) on the business day
after receipt by Prudential Securities of the non-trade related credit
(including the maturity of a bond or a call), in the case of Eligible Credit
Balances resulting from a non-trade related credit. Each time an order resulting
from the settlement of a securities sale is placed, any non-trade related credit
in the client's account will also be invested.
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<PAGE>
The following chart shows the frequency and amount of the sweep for accounts
other than IRAs and Benefit Plans.
<TABLE>
<CAPTION>
DAILY MONTHLY
<S> <C> <C>
Eligible Credit Balances resulting from the proceeds of
a securities sale, maturity of a bond or call $1,000 or more
Eligible Credit Balances resulting from a non-trade
related credit $10,000 or more
Remaining Eligible Credit Balances $1.00 or more
</TABLE>
All shares purchased pursuant to these automatic investment procedures will be
issued at the NAV computed on the business day the order is entered and will
begin earning dividends on the following business day. Purchases through
Autosweep are subject to the Series' minimum initial investment requirement of
$1,000, which is waived for certain retirement and employee savings plans and
custodial accounts for the benefit of minors. Prudential Securities will have
the use of, and will retain the benefits of, Eligible Credit Balances in a
client's brokerage account until monies are delivered to the Fund. (Prudential
Securities delivers Federal Funds on the business day after settlement).
Eligible Credit Balances for purposes of Autosweep are measured as of the close
of business on the previous business day.
For the purposes of Autosweep, "Benefit Plans" include (i) employee benefit
plans as defined in Section 3(3) of the Employee Retirement Income Security Act
of 1974 (ERISA) other than governmental plans as defined in Section 3(32) of
ERISA and church plans as defined in Section 3(33) of ERISA, (ii) pension,
profit-sharing or other employee benefit plans qualified under Section 401 of
the Internal Revenue Code and (iii) deferred compensation and annuity plans
under Section 457 or 403(b)(7) of the Internal Revenue Code. "IRAs" are
Individual Retirement Accounts as defined in Section 408(a) of the Internal
Revenue Code.
SELF-DIRECTED INVESTMENT. Prudential Securities clients not electing Autosweep
may continue to place orders for the purchase of shares of the Series through
Prudential Securities, subject to the minimum initial and subsequent investment
requirements described above.
A Prudential Securities client who has not elected Autosweep (Automatic
Investment) and who does not place a purchase order promptly after funds are
credited to his or her Prudential Securities account will have a free credit
balance with Prudential Securities and will not begin earning dividends on
shares of the Series until the second business day after receipt of the order by
Prudential Securities from the client. Accordingly, Prudential Securities will
have the use of such free credit balances during this period.
MANUAL INVESTMENT. Prudential Securities will accept manual purchase orders
for shares of the Series only for those clients (i) who are purchasing shares of
a Prudential money market fund which is not their Primary Money Sweep Fund or
(ii) who do not have a money market sweep feature in their account, as described
above under "Automatic Investment."
Prudential Securities clients eligible to make manual purchases, as described
above, are subject to the minimum initial investment of $1,000 and the minimum
subsequent investment of $100, except that all minimum investment requirements
are waived for certain retirement and employee savings plans and custodial
accounts for the benefit of minors. On the business day after the purchase order
is received, Prudential Securities will place the order for shares of the Series
for settlement that day. Shares will be issued at the NAV determined on that day
and will begin earning dividends the next business day, which is the second
business day after receipt of the purchase order by Prudential Securities.
Prudential Securities will have the use of, and will retain the benefits of,
Eligible Credit Balances in the client's brokerage account until monies are
delivered to the Fund. (Prudential Securities delivers Federal Funds on the
business day after settlement).
PURCHASES THROUGH PRUSEC
You may purchase shares of the Series by placing an order with your Prusec
representative accompanied by payment for the purchase price of such shares and,
in the case of a new account, a completed application form. You should also
submit an IRS Form W-9. The Prusec representative will then forward these items
to the Transfer Agent. See "Purchase by Mail" below.
18
<PAGE>
PURCHASE BY WIRE
For an initial purchase of shares of the Series by wire, you must first
telephone PMFS at (800) 225-1852 (toll-free) to receive an account number. The
following information will be requested: your name, address, tax identification
number, dividend distribution election, amount being wired and wiring bank.
Instructions should then be given by you to your bank to transfer funds by wire
to State Street Bank and Trust Company (State Street), Boston, Massachusetts,
Custody and Shareholder Services Division, Attention: Prudential Municipal
Series Fund, New Jersey Money Market Series, specifying on the wire the account
number assigned by PMFS and your name.
If you arrange for receipt by State Street of Federal Funds prior to the
calculation of NAV (4:30 P.M., New York time), on a business day, you may
purchase shares of the Series as of that day and receive dividends commencing on
the next business day. See "Net Asset Value" in the Statement of Additional
Information.
In making a subsequent purchase order by wire, you should wire State Street
directly, and should be sure that the wire specifies Prudential Municipal Series
Fund (New Jersey Money Market Series) and your name and individual account
number. It is not necessary to call PMFS to make subsequent purchase orders
utilizing Federal Funds. The minimum amount which may be invested by wire is
$1,000.
PURCHASE BY MAIL
Purchase orders for which remittance is to be made by check or money order may
be submitted directly by mail to Prudential Mutual Fund Services LLC, Attention:
Investment Services, P.O. Box 15020, New Brunswick, New Jersey 08906-5020,
together with payment for the purchase price of such shares and, in the case of
a new account, a completed application form. You should also submit an IRS Form
W-9. If PMFS receives an order to purchase shares of the Series and payment in
proper form prior to 4:30 P.M., New York time, the purchase order will be
effective that day and the investor will be entitled to dividends the following
business day. See "Taxes, Dividends and Distributions." Checks should be made
payable to Prudential Municipal Series Fund, New Jersey Money Market Series.
Certified checks are not necessary, but checks must be drawn on a bank located
in the United States. There are restrictions on the redemption of shares
purchased by check while the funds are being collected. See "How to Sell Your
Shares" below. The minimum initial investment by check is $1,000 and the minimum
subsequent investment by check is $100.
THE PRUDENTIAL ADVANTAGE ACCOUNT PROGRAM
Shares of the Series are offered to participants in the Prudential Advantage
Account Program (the Advantage Account Program), a financial services program
available to clients of Pruco Securities Corporation. Investors participating in
the Advantage Account Program may select the Series as their primary investment
vehicle. Such investors will have free credit cash balances of $1.00 or more in
their Securities Account (Available Cash) (a component of the Advantage Account
Program carried through Prudential Securities) automatically invested in shares
of the Series. Specifically, an order to purchase shares of the Series is placed
(i) in the case of Available Cash resulting from the proceeds of securities
sales, on the settlement date of the securities sale, and (ii) in the case of
Available Cash resulting from non-trade related credits (I.E., receipt of
dividends and interest payments, or a cash payment by the participant into his
or her Securities Account), on the business day after receipt by Prudential
Securities of the non-trade related credit.
All shares purchased pursuant to these automatic purchase procedures will
begin earning dividends on the business day after the order is placed.
Prudential Securities will arrange for investment in shares of the Series at
4:30 P.M. on the day the order is placed and cause payment to be made in Federal
Funds for the shares prior to 4:30 P.M. on the next business day. Prudential
Securities will have the use of free credit cash balances until delivery to the
Fund.
Redemptions will be automatically effected by Prudential Securities to satisfy
debit balances in a Securities Account created by activity therein or arising
under the Advantage Account Program, such as those incurred by use of the
Visa-Registered Trademark- Account, including Visa purchases, cash advances and
Visa Account checks. Each Advantage Account Program Securities Account will be
19
<PAGE>
automatically scanned for debits each business day as of the close of business
on that day and after application of any free credit cash balances in the
account to such debits, a sufficient number of shares of the Series (if selected
as the primary fund) and, if necessary, shares of other Advantage Account funds
owned by the Advantage Account Program participant which have not been selected
as his or her primary fund or shares of a participant's money market funds
managed by PMF which are not primary Advantage Account funds will be redeemed as
of that business day to satisfy any remaining debits in the Securities Account.
Shares may not be purchased until all debits, overdrafts and other requirements
in the Securities Account are satisfied.
Advantage Account Program charges and expenses are not reflected in the table
of Fund expenses. See "Fund Expenses."
For information on participation in the Advantage Account Program, you should
telephone (800) 235-7637 (toll-free).
COMMAND-SM- ACCOUNT PROGRAM
Shares of the Series are offered to participants in the Prudential Securities
COMMAND Account program, an integrated financial services program of Prudential
Securities. Investors having a COMMAND Account may select the Series as their
primary fund. Such investors will have free credit cash balances of $1.00 or
more in their Securities Account (Available Cash) (a component of the COMMAND
Account program) automatically invested in shares of the Series as described
below. Specifically, an order to purchase shares of the Series is placed (i) in
the case of Available Cash resulting from the proceeds of securities sales, on
the settlement date of the securities sale, and (ii) in the case of Available
Cash resulting from non-trade related credits (I.E., receipt of dividends and
interest payments, maturity of a bond or a cash payment by the participant into
his or her Securities Account), on the business day after receipt by Prudential
Securities of the non-trade related credit. These automatic purchase procedures
are also applicable for Corporate COMMAND Accounts.
All shares purchased pursuant to these automatic purchase procedures will
begin earning dividends on the business day after the order is placed.
Prudential Securities will arrange for investment in shares of the Series at
4:30 P.M., New York time, on the business day the order is placed and cause
payment to be made in Federal Funds for the shares prior to 4:30 P.M., New York
time, on the next business day. Prudential Securities will have the use of free
credit cash balances until delivery to the Fund. There are no minimum investment
requirements for participants in the COMMAND Account program.
Redemptions will be automatically effected by Prudential Securities to satisfy
debit balances in a Securities Account created by activity therein or arising
under the COMMAND program, such as those incurred by use of the
Visa-Registered Trademark- Gold Account, including Visa purchases, cash advances
and Visa Account checks. Each COMMAND program Securities Account will be
automatically scanned for debits monthly for all Visa purchases incurred during
that month and each business day as of the close of business on that day for all
cash advances and check charges as incurred and after application of any free
credit cash balances in the account to such debits, a sufficient number of
shares of the Series and, if necessary, shares of other COMMAND funds owned by
the COMMAND program participant which have not been selected as his or her
primary fund or shares of a participant's money market funds managed by PIFM
which are not primary COMMAND funds will be redeemed as of that business day to
satisfy any remaining debits in the Securities Account. The single monthly debit
for Visa purchases will be made on the twenty-fifth day of each month, or the
prior business day if the twenty-fifth falls on a weekend or holiday. Margin
loans will be utilized to satisfy debits remaining after the liquidation of all
shares of the Series in a Securities Account, and shares may not be purchased
until all debits, margin loans and other requirements in the Securities Account
are satisfied. COMMAND Account participants will not be entitled to dividends
declared on the date of redemption.
For information on participation in the COMMAND Account program, you should
telephone (800) 222-4321 (toll-free).
HOW TO SELL YOUR SHARES
YOU CAN REDEEM YOUR SHARES OF THE SERIES AT ANY TIME FOR CASH AT THE NAV NEXT
DETERMINED AFTER THE REDEMPTION REQUEST IS RECEIVED IN PROPER FORM BY THE
TRANSFER AGENT OR PRUDENTIAL SECURITIES. SEE "HOW THE FUND VALUES ITS SHARES."
20
<PAGE>
Shares for which a redemption request is received by PMFS prior to 4:30 P.M.,
New York time, are entitled to a dividend on the day on which the request is
received. By pre-authorizing Expedited Redemption, you may arrange to have
payment for redeemed shares made in Federal Funds wired to your bank, normally
on the next bank business day following the date of receipt of the redemption
instructions. Should you redeem all of your shares, you will receive the amount
of all dividends declared for the month-to-date on those shares. See "Taxes,
Dividends and Distributions."
If redemption is requested by a corporation, partnership, trust or fiduciary,
written evidence of authority acceptable to the Transfer Agent must be submitted
before such request will be accepted. All correspondence and documents
concerning redemptions should be sent to the Fund in care of its Transfer Agent,
Prudential Mutual Fund Services LLC, Attention: Redemption Services, P.O. Box
15010, New Brunswick, New Jersey 08906-5010.
If the proceeds of the redemption (a) exceed $50,000, (b) are to be paid to a
person other than the record owner, (c) are to be sent to an address other than
the address on the Transfer Agent's records or (d) are to be paid to a
corporation, partnership, trust or fiduciary, the signature(s) on the redemption
request and on certificates, if any, or stock power must be guaranteed by an
"eligible guarantor institution." An "eligible guarantor institution" includes
any bank, broker, dealer or credit union. The Transfer Agent reserves the right
to request additional information from, and make reasonable inquiries of, any
eligible guarantor institution. For clients of Prusec, a signature guarantee may
be obtained from the agency or office manager of most Prudential Insurance and
Financial Services or Preferred Services offices.
NORMALLY, THE FUND MAKES PAYMENT ON THE NEXT BUSINESS DAY FOR ALL SHARES OF
THE SERIES REDEEMED, BUT IN ANY EVENT, PAYMENT IS MADE WITHIN SEVEN DAYS AFTER
RECEIPT BY PMFS OF SHARE CERTIFICATES AND/OR OF A REDEMPTION REQUEST IN PROPER
FORM. However, the Fund may suspend the right of redemption or postpone the date
of payment (a) for any periods during which the New York Stock Exchange is
closed (other than for customary weekend or holiday closings), (b) for any
periods when trading in the markets which the Fund normally utilizes is closed
or restricted or an emergency exists as determined by the SEC so that disposal
of the Series' investments or determination of its NAV is not reasonably
practicable or (c) for such other periods as the SEC may permit for protection
of the Series' shareholders.
PAYMENT FOR REDEMPTION OF RECENTLY PURCHASED SHARES WILL BE DELAYED UNTIL THE
FUND OR ITS TRANSFER AGENT HAS BEEN ADVISED THAT THE PURCHASE CHECK HAS BEEN
HONORED, UP TO 10 CALENDAR DAYS FROM THE TIME OF RECEIPT OF THE PURCHASE CHECK
BY THE TRANSFER AGENT. SUCH DELAY MAY BE AVOIDED BY PURCHASING SHARES BY WIRE OR
BY CERTIFIED OR CASHIER'S CHECK. THE FUND MAKES NO CHARGE FOR REDEMPTION.
REDEMPTION OF SHARES PURCHASED THROUGH PRUDENTIAL SECURITIES
Prudential Securities clients for whom Prudential Securities has purchased
shares of the Series may have these shares redeemed only by instructing their
Prudential Securities financial adviser orally or in writing.
Prudential Securities has advised the Fund that it has established procedures
pursuant to which shares of the Series held by a Prudential Securities client
having a deficiency in his or her Prudential Securities account will be redeemed
automatically to the extent of that deficiency to the nearest highest dollar.
The amount of the redemption will be the lesser of (a) the total net asset value
of the Series' shares held in the client's Prudential Securities account or (b)
the deficiency in the client's Prudential Securities account at the close of
business on the date such deficiency is due. Accordingly, a Prudential
Securities client who wishes to pay for a securities transaction or satisfy any
other debit balance in his or her account other than through this automatic
redemption procedure must do so prior to the day of settlement for such
securities transaction or the date the debit balance is incurred. In the case of
certain automatic redemptions, where Prudential Securities cannot anticipate
debits in the brokerage account (E.G., checks written against the account),
Prudential Securities clients will not be entitled to dividends declared on the
date of redemption; such dividends will be retained by Prudential Securities.
21
<PAGE>
REDEMPTION OF SHARES PURCHASED THROUGH PMFS
If you purchase shares of the Series through PMFS, you may use Regular
Redemption, Expedited Redemption or Check Redemption. Prudential Securities
clients for whom Prudential Securities has purchased shares may not use such
services.
REGULAR REDEMPTION. You may redeem your shares by sending a written request,
accompanied by duly endorsed share certificates, if issued, to PMFS, Attention:
Redemption Services, P.O. Box 15010, New Brunswick, New Jersey 08906-5010. In
this case, all share certificates and certain written requests for redemption
must be endorsed by you with signature guaranteed, as described above. Regular
redemption is made by check sent to your address.
EXPEDITED REDEMPTION. By pre-authorizing Expedited Redemption, you may arrange
to have payment for redeemed shares made in Federal Funds wired to your bank,
normally on the next business day following redemption. In order to use
Expedited Redemption, you may so designate at the time the initial application
form is made or at a later date. Once the Expedited Redemption authorization
form has been completed, the signature on the authorization form guaranteed as
set forth above and the form returned to Prudential Mutual Fund Services LLC,
Attention: Account Maintenance, P.O. Box 15015, New Brunswick, New Jersey
08906-5015, requests for redemption may be made by telegraph, letter or
telephone. To request Expedited Redemption by telephone, you should call PMFS at
(800) 225-1852. Calls must be received by PMFS before 4:30 P.M., New York time,
to permit redemption as of such date. Requests by letter should be addressed to
Prudential Mutual Fund Services LLC at the address set forth above.
A signature guarantee is not required under Expedited Redemption once the
authorization form is properly completed and returned. The Expedited Redemption
privilege may be used only to redeem shares in an amount of $200 or more, except
that, if an account for which Expedited Redemption is requested has a net asset
value of less than $200, the entire account must be redeemed. The proceeds of
redeemed shares in the amount of $1,000 or more are transmitted by wire to your
account at a domestic commercial bank which is a member of the Federal Reserve
System. Proceeds of less than $1,000 are forwarded by check to your designated
bank account.
DURING PERIODS OF SEVERE MARKET OR ECONOMIC CONDITIONS, EXPEDITED REDEMPTION
MAY BE DIFFICULT TO IMPLEMENT AND YOU SHOULD REDEEM SHARES BY MAIL AS DESCRIBED
ABOVE.
CHECK REDEMPTION. At your request, State Street will establish a personal
checking account for you. Checks drawn on this account can be made payable to
the order of any person in any amount greater than $500. When such check is
presented to State Street for payment, State Street presents the check to the
Fund as authority to redeem a sufficient number of shares of the Series in the
shareholder's account to cover the amount of the check. If insufficient shares
are in the account, or if the purchase was made by check within 10 calendar
days, the check will be returned marked "insufficient funds." Checks in an
amount less than $500 will not be honored. Shares for which certificates have
been issued cannot be redeemed by check. There is a service charge of $5.00
payable to PMFS to establish a checking account and order checks.
INVOLUNTARY REDEMPTION. Because of the relatively high cost of maintaining an
account, the Fund reserves the right to redeem, upon 60 days' written notice, an
account which is reduced by a shareholder to a net asset value of $500 or less
due to redemption. You may avoid such redemption by increasing the net asset
value of your account to an amount in excess of $500.
REDEMPTION IN KIND. If the Trustees determine that it would be detrimental to
the best interests of the remaining shareholders of the Series to make payment
wholly or partly in cash, the Fund may pay the redemption price in whole or in
part by a distribution in kind of securities from the portfolio of the Series,
in lieu of cash, in conformity with the applicable rules of the SEC. Securities
will be readily marketable and will be valued in the same manner as in a regular
redemption. See "How the Fund Values its Shares." If your shares are redeemed in
kind, you will incur brokerage costs in converting the assets into cash. The
Fund has elected to be governed by Rule 18f-1 under the Investment Company Act
under which the Fund is obligated to redeem shares solely in cash up to the
lesser of $250,000 or one percent of the net asset value of the Fund during any
90-day period for any one shareholder.
22
<PAGE>
CLASS B AND CLASS C PURCHASE PRIVILEGE. You may direct that the proceeds of a
redemption of Series' shares be invested in Class B or Class C shares of any
Prudential Mutual Fund by calling your Prudential Securities financial adviser
or the Transfer Agent at (800) 225-1852. The transaction will be effected on the
basis of the relative NAV.
HOW TO EXCHANGE YOUR SHARES
AS A SHAREHOLDER OF THE SERIES, YOU HAVE AN EXCHANGE PRIVILEGE WITH OTHER
SERIES OF THE FUND AND CERTAIN OTHER PRUDENTIAL MUTUAL FUNDS (THE EXCHANGE
PRIVILEGE), INCLUDING ONE OR MORE SPECIFIED MONEY MARKET FUNDS AND FUNDS SOLD
WITH AN INITIAL SALES CHARGE, SUBJECT TO THE MINIMUM INVESTMENT REQUIREMENTS OF
SUCH FUNDS. You may exchange your shares for Class A shares of the other series
of the Fund or Class A shares of the Prudential Mutual Funds on the basis of the
relative NAV per share plus the applicable sales charge. No additional sales
charge is imposed in connection with subsequent exchanges. You may not exchange
your shares for Class B shares of the Prudential Mutual Funds, except that
shares acquired prior to January 22, 1990 subject to a contingent deferred sales
charge can be exchanged for Class B shares. See "Class B and Class C Purchase
Privilege" above and "Shareholder Investment Account--Exchange Privilege" in the
Statement of Additional Information. An exchange will be treated as a redemption
and purchase for tax purposes. You may not exchange your shares for Class C or
Class Z shares of other series of the Fund or Class C or Class Z shares of the
Prudential Mutual Funds.
IN ORDER TO EXCHANGE SHARES BY TELEPHONE, YOU MUST AUTHORIZE THE TELEPHONE
EXCHANGE PRIVILEGE ON YOUR INITIAL APPLICATION FORM OR BY WRITTEN NOTICE TO THE
TRANSFER AGENT AND HOLD SHARES IN NON-CERTIFICATE FORM. Thereafter, you may call
the Fund at (800) 225-1852 to execute a telephone exchange of shares, weekdays,
except holidays, between the hours of 8:00 A.M. and 6:00 P.M., New York time.
For your protection and to prevent fraudulent exchanges, your telephone call
will be recorded and you will be asked to provide your personal identification
number. A written confirmation of the exchange transaction will be sent to you.
NEITHER THE FUND NOR ITS AGENTS WILL BE LIABLE FOR ANY LOSS, LIABILITY OR COST
WHICH RESULTS FROM ACTING UPON INSTRUCTIONS REASONABLY BELIEVED TO BE GENUINE
UNDER THE FOREGOING PROCEDURES. All exchanges will be made on the basis of the
relative NAV of the two funds (or series) next determined after the request is
received in good order. The Exchange Privilege is available only in states where
the exchange may legally be made.
IF YOU HOLD SHARES THROUGH PRUDENTIAL SECURITIES, YOU MUST EXCHANGE YOUR
SHARES BY CONTACTING YOUR PRUDENTIAL SECURITIES FINANCIAL ADVISER.
IF YOU HOLD CERTIFICATES, THE CERTIFICATES, SIGNED IN THE NAME(S) SHOWN ON THE
FACE OF THE CERTIFICATES, MUST BE RETURNED IN ORDER FOR THE SHARES TO BE
EXCHANGED. SEE "HOW TO SELL YOUR SHARES" ABOVE.
You may also exchange shares by mail by writing to Prudential Mutual Fund
Services LLC, Attention: Exchange Processing, P.O. Box 15010, New Brunswick, New
Jersey 08906-5010.
IN PERIODS OF SEVERE MARKET OR ECONOMIC CONDITIONS, THE TELEPHONE EXCHANGE OF
SHARES MAY BE DIFFICULT TO IMPLEMENT AND YOU SHOULD MAKE EXCHANGES BY MAIL BY
WRITING TO PRUDENTIAL MUTUAL FUND SERVICES LLC, AT THE ADDRESS NOTED ABOVE.
23
<PAGE>
The Exchange Privilege is not a right and may be suspended, terminated or
modified on 60 days' notice to shareholders.
FREQUENT TRADING. The Fund and the other Prudential Mutual Funds are not
intended to serve as vehicles for frequent trading in response to short-term
fluctuations in the market. Due to the disruptive effect that market timing
investment strategies and excessive trading can have on efficient portfolio
management, each Prudential Mutual Fund and the Fund reserves the right to
refuse purchase orders and exchanges by any person, group or commonly controlled
accounts, if, in the Manager's sole judgment, such person, group or accounts
were following a market timing strategy or were otherwise engaging in excessive
trading (Market Timers).
To implement this authority to protect the Fund and its shareholders from
excessive trading, the Fund will reject all exchanges and purchases from a
Market Timer unless the Market Timer has entered into a written agreement with
the Fund or its affiliates pursuant to which the Market Timer has agreed to
abide by certain procedures, which include a daily dollar limit on trading. The
Fund may notify the Market Timer of rejection of an exchange or purchase order
subsequent to the day on which the order was placed.
SHAREHOLDER SERVICES
In addition to the Exchange Privilege, you can take advantage of the following
services and privileges:
- AUTOMATIC REINVESTMENT OF DIVIDENDS AND/OR DISTRIBUTIONS. For your
convenience, all dividends and distributions are automatically reinvested in
full and fractional shares of the Series at NAV. You may direct the Transfer
Agent in writing not less than 5 full business days prior to the record date to
have subsequent dividends and/or distributions sent in cash rather than
reinvested. If you hold shares through Prudential Securities, you should contact
your financial adviser.
- AUTOMATIC SAVINGS ACCUMULATION PLAN (ASAP). Under ASAP you may make regular
purchases of the Series' shares in amounts as little as $50 via an automatic
charge to a bank account or Prudential Securities account (including a Command
Account). For additional information about this service, you may contact your
Prudential Securities financial adviser, Prusec representative or the Transfer
Agent directly.
- SYSTEMATIC WITHDRAWAL PLAN. A systematic withdrawal plan is available for
shareholders which provides for monthly or quarterly checks. See "How to Sell
Your Shares."
- MULTIPLE ACCOUNTS. Special procedures have been designed for banks and other
institutions that wish to open multiple accounts. An institution may open a
single master account by filing an application form with the Transfer Agent,
Attention: Customer Service, P.O. Box 15005, New Brunswick, New Jersey 08906,
signed by personnel authorized to act for the institution. Individual
sub-accounts may be opened at the time the master account is opened by listing
them, or they may be added at a later date by written advice or by filing forms
supplied by the Fund. Procedures are available to identify sub-accounts by name
and number within the master account name. The investment minimums set forth
above are applicable to the aggregate amounts invested by a group and not to the
amount credited to each sub-account.
- REPORTS TO SHAREHOLDERS. The Fund will send you annual and semi-annual
reports. The financial statements appearing in annual reports are audited by
independent accountants. In order to reduce duplicate mailing and printing
expenses, the Fund will provide one annual and semi-annual shareholder report
and annual prospectus per household. You may request additional copies of such
reports by calling (800) 225-1852 or by writing to the Fund at Gateway Center
Three, 100 Mulberry Street, Newark, New Jersey 07102-4077. In addition, monthly
unaudited financial data is available from the Fund.
- SHAREHOLDER INQUIRIES. Inquiries should be addressed to the Fund at Gateway
Center Three, 100 Mulberry Street, Newark, New Jersey 07102-4077, or by
telephone, at (800) 225-1852 (toll-free) or, from outside the U.S.A., at (908)
417-7555 (collect).
For additional information regarding the services and privileges described
above, see "Shareholder Investment Account" in the Statement of Additional
Information.
24
<PAGE>
THE PRUDENTIAL MUTUAL FUND FAMILY
Prudential Investments Fund Management offers a broad range of mutual funds
designed to meet your individual needs. We welcome you to review the investment
options available through our family of funds. For more information on the
Prudential Mutual Funds, including charges and expenses, contact your Prudential
Securities financial adviser or Prusec representative or telephone the Fund at
(800) 225-1852 for a free prospectus. Read the prospectus carefully before you
invest or send money.
TAXABLE BOND FUNDS
--------------------------
Prudential Diversified Bond Fund, Inc.
Prudential Government Income Fund, Inc.
Prudential Government Securities Trust
Short-Intermediate Term Series
Prudential High Yield Fund, Inc.
Prudential Mortgage Income Fund, Inc.
Prudential Structured Maturity Fund, Inc.
Income Portfolio
The BlackRock Government Income Trust
TAX-EXEMPT BOND FUNDS
-----------------------------
Prudential California Municipal Fund
California Series
California Income Series
Prudential Municipal Bond Fund
High Yield Series
Insured Series
Intermediate Series
Prudential Municipal Series Fund
Florida Series
Maryland Series
Massachusetts Series
Michigan Series
New Jersey Series
New York Series
North Carolina Series
Ohio Series
Pennsylvania Series
Prudential National Municipals Fund, Inc.
GLOBAL FUNDS
--------------------
Prudential Europe Growth Fund, Inc.
Prudential Global Genesis Fund, Inc.
Prudential Global Limited Maturity Fund, Inc.
Limited Maturity Portfolio
Prudential Intermediate Global Income Fund, Inc.
Prudential International Bond Fund, Inc.
Prudential Natural Resources Fund, Inc.
Prudential Pacific Growth Fund, Inc.
Prudential World Fund, Inc.
Global Series
International Stock Series
The Global Total Return Fund, Inc.
Global Utility Fund, Inc.
EQUITY FUNDS
--------------------
Prudential Balanced Fund
Prudential Distressed Securities Fund, Inc.
Prudential Dryden Fund
Prudential Active Balanced Fund
Prudential Stock Index Fund
Prudential Small-Cap Index Fund
Prudential Bond Market Index Fund
Prudential Pacific Index Fund
Prudential Europe Index Fund
Prudential Emerging Growth Fund, Inc.
Prudential Equity Fund, Inc.
Prudential Equity Income Fund
Prudential Jennison Series Fund, Inc.
Prudential Jennison Growth Fund
Prudential Jennison Growth & Income Fund
Prudential Multi-Sector Fund, Inc.
Prudential Small-Cap Quantum Fund, Inc.
Prudential Small Company Value Fund, Inc.
Prudential Utility Fund, Inc.
Nicholas-Applegate Fund, Inc.
Nicholas-Applegate Growth Equity Fund
MONEY MARKET FUNDS
--------------------------
- - TAXABLE MONEY MARKET FUNDS
Prudential Government Securities Trust
Money Market Series
U.S. Treasury Money Market Series
Prudential Special Money Market Fund, Inc.
Money Market Series
Prudential MoneyMart Assets, Inc.
- - TAX-FREE MONEY MARKET FUNDS
Prudential Tax-Free Money Fund, Inc.
Prudential California Municipal Fund
California Money Market Series
Prudential Municipal Series Fund
Connecticut Money Market Series
Massachusetts Money Market Series
New Jersey Money Market Series
New York Money Market Series
- - COMMAND FUNDS
Command Money Fund
Command Government Fund
Command Tax-Free Fund
- - INSTITUTIONAL MONEY MARKET FUNDS
Prudential Institutional Liquidity Portfolio, Inc.
Institutional Money Market Series
A-1
<PAGE>
No dealer, sales representative or any other person has been authorized to give
any information or to make any representations, other than those contained in
this Prospectus, in connection with the offer contained in this Prospectus, and,
if given or made, such other information or representations must not be relied
upon as having been authorized by the Fund or the Distributor. This Prospectus
does not constitute an offer by the Fund or by the Distributor to sell or a
solicitation of any offer to buy any of the securities offered hereby in any
jurisdiction to any person to whom it is unlawful to make such offer in such
jurisdiction.
-------------------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
FUND HIGHLIGHTS................................. 2
What are the Series' Risk Factors and Special
Characteristics?............................. 2
FUND EXPENSES................................... 4
FINANCIAL HIGHLIGHTS............................ 5
CALCULATION OF YIELD............................ 6
HOW THE FUND INVESTS............................ 6
Investment Objective and Policies............. 6
Other Investments and Policies................ 9
Investment Restrictions....................... 10
HOW THE FUND IS MANAGED......................... 10
Manager....................................... 10
Distributor................................... 11
Portfolio Transactions........................ 12
Custodian and Transfer and Dividend Disbursing
Agent........................................ 12
HOW THE FUND VALUES ITS SHARES.................. 12
TAXES, DIVIDENDS AND DISTRIBUTIONS.............. 13
GENERAL INFORMATION............................. 15
Description of Shares......................... 15
Additional Information........................ 16
SHAREHOLDER GUIDE............................... 16
How to Buy Shares of the Fund................. 16
How to Sell Your Shares....................... 20
How to Exchange Your Shares................... 23
Shareholder Services.......................... 24
THE PRUDENTIAL MUTUAL FUND FAMILY............... A-1
</TABLE>
- -------------------------------------------
MF147A 4441264
CUSIP No: 74435M-76-2
PRUDENTIAL
MUNICIPAL
SERIES FUND
----------------------------------------
NEW JERSEY
MONEY MARKET SERIES
PROSPECTUS
October 30, 1997
www.prudential.com
[LOGO] Prudential
Investments
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
(NEW YORK SERIES)
- --------------------------------------------------------------------------------
PROSPECTUS DATED OCTOBER 30, 1997
- ----------------------------------------------------------------
Prudential Municipal Series Fund (the Fund) (New York Series) (the Series) is
one of thirteen series of an open-end, management investment company, or mutual
fund. This Series is diversified and is designed to provide the maximum amount
of income that is exempt from New York State, New York City and federal income
taxes consistent with the preservation of capital and, in conjunction therewith,
the Series may invest in debt securities with the potential for capital gain.
The net assets of the Series are invested primarily in obligations within the
four highest ratings of Moody's Investors Service, Standard & Poor's Ratings
Group or another nationally recognized statistical rating organization or in
unrated obligations which, in the opinion of the Fund's investment adviser, are
of comparable quality. The Series may, however, 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.
Subject to the limitations described herein, the Series may utilize derivatives,
including buying and selling futures contracts and options thereon for the
purpose of hedging its portfolio securities. There can be no assurance that the
Series' investment objective will be achieved. See "How the Fund
Invests--Investment Objective and Policies." The Fund's address is Gateway
Center Three, 100 Mulberry Street, Newark, New Jersey 07102-4077 and its
telephone number is (800) 225-1852.
This Prospectus sets forth concisely the information about the Fund and the New
York Series that a prospective investor should know before investing. Additional
information about the Fund has been filed with the Securities and Exchange
Commission in a Statement of Additional Information dated October 30, 1997,
which information is incorporated herein by reference (is legally considered a
part of this Prospectus) and is available without charge upon request to the
Fund at the address or telephone number noted above.
- --------------------------------------------------------------------------------
INVESTORS ARE ADVISED TO READ THIS PROSPECTUS AND RETAIN IT FOR FUTURE
REFERENCE.
- --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
<PAGE>
FUND HIGHLIGHTS
The following summary is intended to highlight certain information contained
in this Prospectus and is qualified in its entirety by the more detailed
information appearing elsewhere herein.
WHAT IS PRUDENTIAL MUNICIPAL SERIES FUND?
Prudential Municipal Series Fund is a mutual fund whose shares are offered
in thirteen series, each of which operates as a separate fund. A mutual fund
pools the resources of investors by selling its shares to the public and
investing the proceeds of such sale in a portfolio of securities designed to
achieve its investment objective. Technically, the Fund is an open-end,
management investment company. Only the New York Series is offered through
this Prospectus.
WHAT IS THE SERIES' INVESTMENT OBJECTIVE?
The Series' investment objective is to maximize current income that is
exempt from New York State, New York City and federal income taxes
consistent with the preservation of capital. It seeks to achieve this
objective by investing primarily in New York State, municipal and local
government obligations and obligations of other qualifying issuers, such as
issuers located in Puerto Rico, the Virgin Islands and Guam, which pay
income exempt, in the opinion of counsel, from New York State, New York City
and federal income taxes (New York Obligations). There can be no assurance
that the Series' investment objective will be achieved. See "How the Fund
Invests--Investment Objective and Policies" at page 9.
WHAT ARE THE SERIES' RISK FACTORS AND SPECIAL CHARACTERISTICS?
In seeking to achieve its investment objective, the Series will invest at
least 80% of the value of its total assets in New York Obligations. This
degree of investment concentration makes the Series particularly susceptible
to factors adversely affecting issuers of New York Obligations. See "How the
Fund Invests--Investment Objective and Policies--Special Considerations" at
page 14. The Series may invest up to 30% of its total assets in high yield
securities, commonly known as "junk bonds," which may be considered
speculative and are subject to the risk of an issuer's inability to meet
principal and interest payments on the obligations as well as price
volatility. See "How the Fund Invests--Investment Objective and
Policies--Risk Factors Relating to Investing in High Yield Municipal
Obligations" at page 12. To hedge against changes in interest rates, the
Series may also purchase put options and engage in transactions involving
derivatives, including financial futures contracts and options thereon. See
"How the Fund Invests--Investment Objective and Policies--Futures Contracts
and Options Thereon" at page 13. As with an investment in any mutual fund,
an investment in this Series can decrease in value and you can lose money.
WHO MANAGES THE FUND?
Prudential Investments Fund Management LLC (PIFM or the Manager) is the
Manager of the Fund and is compensated for its services at an annual rate of
.50 of 1% of the Series' average daily net assets. As of September 30, 1997,
PIFM served as manager or administrator to 63 investment companies,
including 41 mutual funds, with aggregate assets of approximately $59.9
billion. The Prudential Investment Corporation, which does business under
the name Prudential Investments (PI, the Subadviser or the investment
adviser) furnishes investment advisory services in connection with the
management of the Fund under a Subadvisory Agreement with PIFM. See "How the
Fund is Managed--Manager" at page 15.
WHO DISTRIBUTES THE SERIES' SHARES?
Prudential Securities Incorporated (Prudential Securities, PSI or the
Distributor), a major securities underwriter and securities and commodities
broker, acts as the Distributor of the Series' Class A, Class B, Class C and
Class Z shares and is paid a distribution and service fee with respect to
Class A shares which is currently being charged at the annual rate of .10 of
1% of the average daily net assets of the Class A shares and is paid a
distribution and service fee with respect to Class B shares at the annual
rate of .50 of 1% of the average daily net assets of the Class B shares and
is paid an annual distribution and service fee with respect to Class C
shares which is currently being charged at the rate of .75 of 1% of the
2
<PAGE>
average daily net assets of the Class C shares. Prudential Securities incurs
the expense of distributing the Series' Class Z shares under a Distribution
Agreement with the Fund, none of which is reimbursed or paid for by the
Fund. See "How the Fund is Managed--Distributor" at page 16.
WHAT IS THE MINIMUM INVESTMENT?
The minimum initial investment is $1,000 for Class A and Class B shares
and $5,000 for Class C shares. The minimum subsequent investment is $100 for
Class A, Class B and Class C shares. Class Z shares are not subject to any
minimum investment requirements. There is no minimum investment requirement
for certain employee savings plans. For purchases made through the Automatic
Savings Accumulation Plan, the minimum initial and subsequent investment is
$50. See "Shareholder Guide--How to Buy Shares of the Fund" at page 23 and
"Shareholder Guide--Shareholder Services" at page 32.
HOW DO I PURCHASE SHARES?
You may purchase shares of the Series through Prudential Securities, Pruco
Securities Corporation (Prusec) or directly from the Fund through its
transfer agent, Prudential Mutual Fund Services LLC (PMFS or the Transfer
Agent), at the net asset value per share (NAV) next determined after receipt
of your purchase order by the Transfer Agent or Prudential Securities plus a
sales charge which may be imposed either (i) at the time of purchase (Class
A shares) or (ii) on a deferred basis (Class B or Class C shares). Class Z
shares are offered to a limited group of investors at net asset value
without any sales charge. See "How the Fund Values its Shares" at page 19
and "Shareholder Guide--How to Buy Shares of the Fund" at page 23.
WHAT ARE MY PURCHASE ALTERNATIVES?
The Series offers four classes of shares:
- Class A Shares:
Sold with an initial sales charge of up to 3% of the
offering price.
- Class B Shares:
Sold without an initial sales charge but are subject to
a contingent deferred sales charge or CDSC (declining
from 5% to zero of the lower of the amount invested or
the redemption proceeds) which will be imposed on
certain redemptions made within six years of purchase.
Although Class B shares are subject to higher ongoing
distribution-related expenses than Class A shares, Class
B shares will automatically convert to Class A shares
(which are subject to lower ongoing distribution-related
expenses) approximately seven years after purchase.
- Class C Shares:
Sold without an initial sales charge and, for one year
after purchase, are subject to a 1% CDSC on redemptions.
Like Class B shares, Class C shares are subject to
higher ongoing distribution-related expenses than Class
A shares but do not convert to another class.
- Class Z Shares:
Sold without either an initial or contingent deferred
sales charge to a limited group of investors. Class Z
shares are not subject to any ongoing service or
distribution expenses.
See "Shareholder Guide--Alternative Purchase Plan" at page 24.
HOW DO I SELL MY SHARES?
You may redeem your shares at any time at the NAV next determined after
Prudential Securities or the Transfer Agent receives your sell order.
However, the proceeds of redemptions of Class B and Class C shares may be
subject to a CDSC. See "Shareholder Guide--How to Sell Your Shares" at page
27.
HOW ARE DIVIDENDS AND DISTRIBUTIONS PAID?
The Series expects to declare daily and pay monthly dividends of net
investment income, if any, and make distributions of any net capital gains
at least annually. Dividends and distributions will be automatically
reinvested in additional shares of the Series at NAV without a sales charge
unless you request that they be paid to you in cash. See "Taxes, Dividends
and Distributions" at page 20.
3
<PAGE>
FUND EXPENSES
(NEW YORK SERIES)
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES CLASS C SHARES CLASS Z SHARES
--------------- ------------------------------- ---------------------------- ---------------
<S> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES+
Maximum Sales Load Imposed
on Purchases (as a
percentage of offering
price)..................... 3% None None None
Maximum Deferred Sales Load
(as a percentage of
original purchase price or
redemption proceeds,
whichever is lower)........ None 5% during the first year, 1% on redemptions made
decreasing by 1% annually to 1% within one year of purchase
in the fifth and sixth years
and 0% the seventh year*
Maximum Sales Load Imposed
on Reinvested Dividends.... None None None None
Redemption Fees............. None None None None
Exchange Fee................ None None None None
</TABLE>
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES CLASS C SHARES CLASS Z SHARES
---------------- -------------- --------------- ----------------
<S> <C> <C> <C> <C>
ANNUAL FUND OPERATING EXPENSES**
(as a percentage of average net assets)
Management Fees............. .50% .50% .50% .50%
12b-1 Fees (After
Reduction)................. .10%++ .50% .75%++ None
Other Expenses.............. .13% .13% .13% .13%
--
--- --- ---
Total Fund Operating
Expenses (After
Reduction)................. .73% 1.13% 1.38% .63%
--
--
--- --- ---
--- --- ---
</TABLE>
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ -------- ------- --------
<S> <C> <C> <C> <C>
EXAMPLE
You would pay the following
expenses on a $1,000
investment, assuming (1) 5%
annual return and (2)
redemption at the end of each
time period:
Class A..................... $37 $53 $ 69 $118
Class B..................... $62 $66 $ 72 $121
Class C..................... $24 $44 $ 76 $166
Class Z..................... $ 6 $20 $ 35 $ 79
You would pay the following
expenses on the same
investment, assuming no
redemption:
Class A..................... $37 $53 $ 69 $118
Class B..................... $12 $36 $ 62 $121
Class C..................... $14 $44 $ 76 $166
Class Z..................... $ 6 $20 $ 35 $ 79
</TABLE>
The above examples are based on restated data for the Series' fiscal year
ended August 31, 1997. THE EXAMPLES SHOULD NOT BE CONSIDERED A
REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER
OR LESS THAN THOSE SHOWN.
The purpose of this table is to assist investors in understanding the
various costs and expenses that an investor in the Series will bear,
whether directly or indirectly. For more complete descriptions of the
various costs and expenses, see "How the Fund is Managed." "Other
Expenses" includes operating expenses of the Series, such as Trustees' and
professional fees, registration fees, reports to shareholders and transfer
agency and custodian fees.
- -----------------
* Class B shares will automatically convert to Class A shares approximately
seven years after purchase. See "Shareholder Guide--Conversion
Feature--Class B Shares."
** The expense information in the table has been restated to reflect current
fees. Effective September 1, 1997, PIFM eliminated its management fee waiver
(.05 of 1%). See "How the Fund is Managed--Manager--Fee Waivers."
+ Pursuant to rules of the National Association of Securities Dealers, Inc.,
the aggregate initial sales charges, deferred sales charges and asset-based
sales charges on shares of the Series may not exceed 6.25% of total gross
sales, subject to certain exclusions. This 6.25% limitation is imposed on
each class of the Series rather than on a per shareholder basis. Therefore,
long-term shareholders of the Series may pay more in total sales charges
than the economic equivalent of 6.25% of such shareholders' investment in
such shares. See "How the Fund is Managed--Distributor."
++ Although the Class A and Class C Distribution and Service Plans provide that
the Fund may pay a distribution fee of up to .30 of 1% and 1% per annum of
the average daily net assets of the Class A and Class C shares,
respectively, the Distributor has agreed to limit its distribution fees with
respect to the Class A and Class C shares of the Series to no more than .10
of 1% and .75 of 1% of the average daily net asset value of the Class A
shares and Class C shares, respectively, for the fiscal year ending August
31, 1998. Total Fund Operating Expenses (Before Waiver) of the Class A and
Class C shares without such limitations would be .93% and 1.63%,
respectively. See "How the Fund is Managed--Distributor."
4
<PAGE>
FINANCIAL HIGHLIGHTS
(FOR A SHARE OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT EACH OF THE INDICATED
PERIODS)
(CLASS A SHARES)
The following financial highlights, for the fiscal year ended August 31, 1997,
have been audited by Price Waterhouse LLP, independent accountants, and by
Deloitte and Touche LLP, independent auditors, for the four years ended August
31, 1996. Each of the respective reports by Price Waterhouse LLP and Deloitte &
Touche LLP on such financial statements was unqualified. This information should
be read in conjunction with the financial statements and the notes thereto,
which appear in the Statement of Additional Information. The following financial
highlights contain selected data for a Class A share of beneficial interest
outstanding, total return, ratios to average net assets and other supplemental
data for the periods indicated. This information is based on data contained in
the financial statements. Further performance information is contained in the
annual report, which may be obtained without charge. See "Shareholder
Guide--Shareholder Services--Reports to Shareholders."
<TABLE>
<CAPTION>
CLASS A
-----------------------------------------------------------------------------------------
YEAR ENDED AUGUST 31,
-----------------------------------------------------------------------------------------
1997 1996 1995 1994 1993 1992 1991
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning of
period...................... $ 11.77 $ 11.91 $ 11.71 $ 12.54 $ 11.75 $ 11.08 $ 10.62
--------- --------- --------- --------- --------- --------- ---------
INCOME FROM INVESTMENT
OPERATIONS
Net investment income......... .61(d) .63(d) .66(d) .67 .70 .71 .72
Net realized and unrealized
gain (loss) on investment
transactions................ .43 (.09) .20 (.83) .79 .67 .46
--------- --------- --------- --------- --------- --------- ---------
Total from investment
operations.................. 1.04 .54 .86 (.16) 1.49 1.38 1.18
--------- --------- --------- --------- --------- --------- ---------
LESS DISTRIBUTIONS
Dividends from net investment
income...................... (.61) (.63) (.66) (.67) (.70) (.71) (.72)
Distributions in excess of net
investment income........... --(e) -- -- -- -- -- --
Distributions from net
realized gains.............. (.26) (.05) -- -- -- -- --
--------- --------- --------- --------- --------- --------- ---------
Total distributions........... (.87) (.68) (.66) (.67) (.70) (.71) (.72)
--------- --------- --------- --------- --------- --------- ---------
Net asset value, end of
period...................... $ 11.94 $ 11.77 $ 11.91 $ 11.71 $ 12.54 $ 11.75 $ 11.08
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
TOTAL RETURN (c):............. 9.19% 4.53% 7.70% (1.38)% 13.06% 12.73% 11.49%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(000)....................... $ 172,471 $ 168,037 $ 163,025 $ 13,661 $ 11,821 $ 6,057 $ 2,729
Average net assets (000)...... $ 173,963 $ 168,291 $ 95,024 $ 13,454 $ 8,755 $ 4,024 $ 1,579
Ratios to average net assets:
Expenses, including
distribution fee........... .68%(d) .68%(d) .69%(d) .74% .74% .74% .71%
Expenses, excluding
distribution fee........... .58%(d) .58%(d) .59%(d) .64% .64% .64% .61%
Net investment income....... 5.15%(d) 5.24%(d) 5.65%(d) 5.46% 5.78% 6.19% 6.61%
Portfolio turnover rate....... 43% 92% 57% 49% 44% 45% 78%
<CAPTION>
JANUARY 22,
1990 (a)
THROUGH
AUGUST 31,
1990
-------------
<S> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning of
period...................... $10.81
------
INCOME FROM INVESTMENT
OPERATIONS
Net investment income......... .42
Net realized and unrealized
gain (loss) on investment
transactions................ (.19)
------
Total from investment
operations.................. .23
------
LESS DISTRIBUTIONS
Dividends from net investment
income...................... (.42)
Distributions in excess of net
investment income........... --
Distributions from net
realized gains.............. --
------
Total distributions........... (.42)
------
Net asset value, end of
period...................... $10.62
------
------
TOTAL RETURN (c):............. 2.03%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(000)....................... $1,174
Average net assets (000)...... $ 588
Ratios to average net assets:
Expenses, including
distribution fee........... .78%(b)
Expenses, excluding
distribution fee........... .68%(b)
Net investment income....... 6.41%(b)
Portfolio turnover rate....... 127%
</TABLE>
- ---------------
(a) Commencement of offering of Class A shares.
(b) Annualized.
(c) Total return does not consider the effects of sales loads. Total
return is calculated assuming a purchase of shares on the first day
and a sale on the last day of each period reported and includes
reinvestment of dividends. Total returns for periods of less than a
full year are not annualized.
(d) Net of management fee waiver.
(e) Less than $.005 per share.
5
<PAGE>
FINANCIAL HIGHLIGHTS
(FOR A SHARE OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT EACH OF THE INDICATED
PERIODS)
(CLASS B SHARES)
The following financial highlights, for the fiscal year ended August 31, 1997,
have been audited by Price Waterhouse LLP, independent accountants, and by
Deloitte and Touche LLP, independent auditors, for the four years ended August
31, 1996. Each of the respective reports by Price Waterhouse LLP and Deloitte &
Touche LLP on such financial statements was unqualified. This information should
be read in conjunction with the financial statements and the notes thereto,
which appear in the Statement of Additional Information. The following financial
highlights contain selected data for a Class B share of beneficial interest
outstanding, total return, ratios to average net assets and other supplemental
data for the periods indicated. This information is based on data contained in
the financial statements. Further performance information is contained in the
annual report, which may be obtained without charge. See "Shareholder
Guide--Shareholder Services--Reports to Shareholders."
<TABLE>
<CAPTION>
CLASS B
---------------------------------------------------------------------------------------------------------
YEAR ENDED AUGUST 31,
---------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993 1992 1991 1990 1989 (a)
--------- --------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of year.... $ 11.77 $ 11.91 $ 11.71 $ 12.54 $ 11.75 $ 11.08 $ 10.62 $ 10.88 $ 10.59
--------- --------- --------- --------- --------- --------- --------- --------- ---------
INCOME FROM INVESTMENT
OPERATIONS
Net investment
income............... .56(b) .58(b) .61(b) .62 .65 .66 .67 .65 .65
Net realized and
unrealized gain
(loss) on investment
transactions......... .43 (.09) .20 (.83) .79 .67 .46 (.26) .29
--------- --------- --------- --------- --------- --------- --------- --------- ---------
Total from investment
operations........... .99 .49 .81 (.21) 1.44 1.33 1.13 .39 .94
--------- --------- --------- --------- --------- --------- --------- --------- ---------
LESS DISTRIBUTIONS
Dividends from net
investment income.... (.56) (.58) (.61) (.62) (.65) (.66) (.67) (.65) (.65)
Distributions in excess
of net investment
income............... --(d) -- -- -- -- -- -- -- --
Distributions from net
realized gains....... (.26) (.05) -- -- -- -- -- -- --
--------- --------- --------- --------- --------- --------- --------- --------- ---------
Total distributions.... (.82) (.63) (.61) (.62) (.65) (.66) (.67) (.65) (.65)
--------- --------- --------- --------- --------- --------- --------- --------- ---------
Net asset value, end of
year................. $ 11.94 $ 11.77 $ 11.91 $ 11.71 $ 12.54 $ 11.75 $ 11.08 $ 10.62 $ 10.88
--------- --------- --------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- --------- --------- ---------
TOTAL RETURN (c):...... 8.76% 4.12% 7.26% (1.77)% 12.61% 12.32% 10.96% 3.73% 9.33%
RATIOS/SUPPLEMENTAL
DATA:
Net assets, end of year
(000)................ $ 112,658 $ 135,764 $ 163,013 $ 331,982 $ 358,607 $ 316,472 $ 293,942 $ 313,606 $ 340,728
Average net assets
(000)................ $ 122,744 $ 152,656 $ 230,033 $ 350,564 $ 330,823 $ 303,016 $ 295,285 $ 332,580 $ 353,225
Ratios to average net
assets:
Expenses, including
distribution fee.... 1.08%(b) 1.08%(b) 1.11%(b) 1.14% 1.14% 1.14% 1.11% 1.17% 1.05%
Expenses, excluding
distribution fee.... .58%(b) .58%(b) .61%(b) .64% .64% .64% .61% .67% .64%
Net investment
income.............. 4.75%(b) 4.84%(b) 5.30%(b) 5.06% 5.38% 5.79% 6.21% 6.10% 5.77%
Portfolio turnover
rate................. 43% 92% 57% 49% 44% 45% 78% 127% 96%
<CAPTION>
1988
---------
<S> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of year.... $ 10.79
---------
INCOME FROM INVESTMENT
OPERATIONS
Net investment
income............... .71
Net realized and
unrealized gain
(loss) on investment
transactions......... (.20)
---------
Total from investment
operations........... .51
---------
LESS DISTRIBUTIONS
Dividends from net
investment income.... (.71)
Distributions in excess
of net investment
income............... --
Distributions from net
realized gains....... --
---------
Total distributions.... (.71)
---------
Net asset value, end of
year................. $ 10.59
---------
---------
TOTAL RETURN (c):...... 4.93%
RATIOS/SUPPLEMENTAL
DATA:
Net assets, end of year
(000)................ $ 307,458
Average net assets
(000)................ $ 298,290
Ratios to average net
assets:
Expenses, including
distribution fee.... 1.10%
Expenses, excluding
distribution fee.... .62%
Net investment
income.............. 6.72%
Portfolio turnover
rate................. 91%
</TABLE>
- ---------------
(a) On December 31, 1988, Prudential Mutual Fund Management, Inc.
succeeded The Prudential Insurance Company of America as manager of
the Fund.
(b) Net of management fee waiver.
(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 year reported and includes
reinvestment of dividends and distributions.
(d) Less than $.005 per share.
6
<PAGE>
FINANCIAL HIGHLIGHTS
(FOR A SHARE OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT EACH OF THE INDICATED
PERIODS)
(CLASS C SHARES)
The following financial highlights, for the fiscal year ended August 31, 1997,
have been audited by Price Waterhouse LLP, independent accountants, and by
Deloitte and Touche LLP, independent auditors, for the two years ended August
31, 1996 and for the period from August 1, 1994 through August 31, 1994. Each of
the respective reports by Price Waterhouse LLP and Deloitte & Touche LLP on such
financial statements was unqualified. This information should be read in
conjunction with the financial statements and the notes thereto, which appear in
the Statement of Additional Information. The following financial highlights
contain selected data for a Class C share of beneficial interest outstanding,
total return, ratios to average net assets and other supplemental data for the
periods indicated. This information is based on data contained in the financial
statements. Further performance information is contained in the annual report,
which may be obtained without charge. See "Shareholder Guide-- Shareholder
Services--Reports to Shareholders."
<TABLE>
<CAPTION>
CLASS C
-----------------------------------------------
AUGUST 1,
1994 (a)
YEAR ENDED AUGUST 31, THROUGH
---------------------------- AUGUST 31,
1997 1996 1995 1994
---- ------- ------- --------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period......... $11.77 $ 11.91 $ 11.71 $ 11.74
---- ------- ------- ------
INCOME FROM INVESTMENT OPERATIONS
Net investment income........................ .53(b) .55(b) .58(b) .04
Net realized and unrealized gain (loss)
investment transactions.................... .43 (.09) .20 (.03)
---- ------- ------- ------
Total from investment operations............. .96 .46 .78 (.01)
---- ------- ------- ------
LESS DISTRIBUTIONS
Dividends from net investment income......... (.53) (.55) (.58) (.04)
Distributions in excess of net investment
income..................................... --(e) -- -- --
Distributions from net realized gains........ (.26) (.05) -- --
---- ------- ------- ------
Total distributions.......................... (.79) (.60) (.58) (.04)
---- ------- ------- ------
Net asset value, end of period............... $11.94 $ 11.77 $ 11.91 $ 11.71
---- ------- ------- ------
---- ------- ------- ------
TOTAL RETURN (d):............................ 8.49% 3.86% 7.00% 0.06%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000).............. $780 $ 876 $ 529 $ 142
Average net assets (000)..................... $798 $ 659 $ 325 $ 42
Ratios to average net assets:
Expenses, including distribution fee....... 1.33%(b) 1.33%(b) 1.36%(b) 1.62%(c)
Expenses, excluding distribution fee....... .58%(b) .58%(b) .61%(b) .87%(c)
Net investment income...................... 4.50%(b) 4.59%(b) 5.05%(b) 5.17%(c)
Portfolio turnover rate...................... 43% 92% 57% 49%
</TABLE>
- ---------------
(a) Commencement of offering of Class C shares.
(b) Net of management fee waiver.
(c) Annualized.
(d) Total return does not consider the effects of sales loads. Total
return is calculated assuming a purchase of shares on the first day
and a sale on the last day of each period reported and includes
reinvestment of dividends. Total returns for periods of less than a
full year are not annualized.
(e) Less than $.005 per share.
7
<PAGE>
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD INDICATED)
(CLASS Z SHARES)
The following financial highlights for the Class Z shares for the period from
December 6, 1996 through August 31, 1997 have been audited by Price Waterhouse
LLP, independent accountants, whose report thereon was unqualified. This
information should be read in conjunction with the financial statements and the
notes thereto, which appear in the Statement of Additional Information. The
financial highlights contain selected data for a Class Z share of common stock
outstanding, total return, ratios to average net assets and other supplemental
data for the period indicated. This information has been determined based on
data contained in the financial statements. Further performance information is
contained in the annual report, which may be obtained without charge. See
"Shareholder Guide--Shareholder Services--Reports to Shareholders."
<TABLE>
<CAPTION>
CLASS Z
--------------
DECEMBER 6,
1996 (a)
THROUGH
AUGUST 31,
1997
--------------
<S> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period........................ $ 12.09
------
INCOME FROM INVESTMENT OPERATIONS
Net investment income (d)................................... .46(d)
Net realized and unrealized gain (loss) on investment
transactions................................................ .12
------
Total from investment operations............................ .58
------
LESS DISTRIBUTIONS
Dividends from net investment income........................ (.46)
Distributions in excess of net investment income............ --(e)
Distributions from net realized gains....................... (.26)
------
Total distributions......................................... (.72)
------
Net asset value, end of period.............................. $ 11.95
------
------
TOTAL RETURN (b):........................................... 5.02%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)............................. $ 28
Average net assets (000).................................... $ 11
Ratios to average net assets:(c)/(d)
Expenses.................................................. .58%
Net investment income..................................... 5.25%
Portfolio turnover rate..................................... 43%
</TABLE>
- ------------
(a) Commencement of offering of Class Z shares.
(b) Total return is calculated assuming a purchase of shares on the first
day and a sale on the last day of the period reported and includes
reinvestment of dividends and distributions. Total returns for periods
of less than a full year are not annualized.
(c) Annualized.
(d) Net of management fee waiver.
(e) Less than $.005 per share.
8
<PAGE>
HOW THE FUND INVESTS
INVESTMENT OBJECTIVE AND POLICIES
PRUDENTIAL MUNICIPAL SERIES FUND (THE FUND) IS AN OPEN-END, MANAGEMENT
INVESTMENT COMPANY, OR MUTUAL FUND, CONSISTING OF THIRTEEN SEPARATE SERIES. EACH
OF THESE SERIES IS MANAGED INDEPENDENTLY. THE NEW YORK SERIES (THE SERIES) IS
DIVERSIFIED AND ITS INVESTMENT OBJECTIVE IS TO MAXIMIZE CURRENT INCOME THAT IS
EXEMPT FROM NEW YORK STATE, NEW YORK CITY AND FEDERAL INCOME TAXES CONSISTENT
WITH THE PRESERVATION OF CAPITAL AND, IN CONJUNCTION THEREWITH, THE SERIES MAY
INVEST IN DEBT SECURITIES WITH THE POTENTIAL FOR CAPITAL GAIN. See "Investment
Objectives and Policies" in the Statement of Additional Information.
THE SERIES' INVESTMENT OBJECTIVE IS A FUNDAMENTAL POLICY AND, THEREFORE, MAY
NOT BE CHANGED WITHOUT THE APPROVAL OF THE HOLDERS OF A MAJORITY OF THE SERIES'
OUTSTANDING VOTING SECURITIES AS DEFINED IN THE INVESTMENT COMPANY ACT OF 1940,
AS AMENDED (THE INVESTMENT COMPANY ACT). THE SERIES' POLICIES THAT ARE NOT
FUNDAMENTAL MAY BE MODIFIED BY THE TRUSTEES.
THE SERIES WILL INVEST PRIMARILY IN NEW YORK STATE, MUNICIPAL AND LOCAL
GOVERNMENT OBLIGATIONS AND OBLIGATIONS OF OTHER QUALIFYING ISSUERS, SUCH AS
ISSUERS LOCATED IN PUERTO RICO, THE VIRGIN ISLANDS AND GUAM, WHICH PAY INCOME
EXEMPT, IN THE OPINION OF COUNSEL, FROM NEW YORK STATE, NEW YORK CITY AND
FEDERAL INCOME TAXES (NEW YORK OBLIGATIONS). THERE CAN BE NO ASSURANCE THAT THE
SERIES WILL BE ABLE TO ACHIEVE ITS INVESTMENT OBJECTIVE.
As with an investment in any mutual fund, an investment in this Series can
decrease and you can lose money.
Interest on certain municipal obligations may be a preference item for
purposes of the federal alternative minimum tax. The Series may invest without
limit in municipal obligations that are "private activity bonds" (as defined in
the Internal Revenue Code) the interest on which would be a preference item for
purposes of the federal alternative minimum tax. See "Taxes, Dividends and
Distributions." Under New York law, dividends paid by the Series are exempt from
New York State and New York City income tax for resident individuals to the
extent they are derived from interest payments on New York Obligations. New York
Obligations could include general obligation bonds of the State, counties,
cities, towns, etc., revenue bonds of utility systems, highways, bridges, port
and airport facilities, colleges, hospitals, etc., and industrial development
and pollution control bonds. The Series will invest in long-term obligations,
and the dollar-weighted average maturity of the Series' portfolio will generally
range between 10-20 years. The Series also may invest in certain short-term,
tax-exempt notes such as Tax Anticipation Notes, Revenue Anticipation Notes,
Bond Anticipation Notes, Construction Loan Notes and variable and floating rate
demand notes.
Generally, municipal obligations with longer maturities produce higher yields
and are subject to greater price fluctuations as a result of changes in interest
rates (market risk) than municipal obligations with shorter maturities. The
prices of municipal obligations vary inversely with interest rates. Interest
rates are currently much lower than in recent years. As a general matter, bond
prices and the Series' net asset value will vary inversely with interest rate
fluctuations. If rates were to rise sharply, the prices of bonds in the Series'
portfolio might be adversely affected.
THE SERIES MAY INVEST ITS ASSETS IN FLOATING RATE AND VARIABLE RATE
SECURITIES, INCLUDING PARTICIPATION INTERESTS THEREIN AND INVERSE FLOATERS.
There is no limit on the amount of such securities that the Series may purchase.
Floating rate securities normally have a rate of interest which is set as a
specific percentage of a designated base rate, such as the rate on Treasury
bonds or bills or the prime rate at a major commercial bank. The interest rate
on floating rate securities changes periodically when there is a change in the
designated base interest rate. Variable rate securities provide for a specified
periodic adjustment in the interest rate based on prevailing market rates and
generally would allow the Series to demand payment of the obligation on short
notice at par plus accrued interest, which amount may be more or less than the
amount the Series paid for them. An inverse floater is a debt instrument with a
floating or variable interest rate that moves in the opposite direction of the
9
<PAGE>
interest rate on another security or the value of an index. Changes in the
interest rate on the other security or index inversely affect the residual
interest rate paid on the inverse floater, with the result that the inverse
floater's price will be considerably more volatile than that of a fixed rate
bond. The market for inverse floaters is relatively new.
THE SERIES MAY ALSO INVEST IN MUNICIPAL LEASE OBLIGATIONS. A MUNICIPAL LEASE
OBLIGATION IS A MUNICIPAL SECURITY THE INTEREST ON AND PRINCIPAL OF WHICH IS
PAYABLE OUT OF LEASE PAYMENTS MADE BY THE PARTY LEASING THE FACILITIES FINANCED
BY THE ISSUE. Typically, municipal lease obligations are issued by a state or
municipal financing authority to provide funds for the construction of
facilities (E.G., schools, dormitories, office buildings or prisons) or the
acquisition of equipment. The facilities are typically used by the state or
municipality pursuant to a lease with a financing authority. Certain municipal
lease obligations may trade infrequently. Accordingly, the investment adviser
will monitor the liquidity of municipal lease obligations under the supervision
of the Trustees. Municipal lease obligations will not be considered illiquid for
purposes of the Series' 15% limitation on illiquid securities provided the
investment adviser determines that there is a readily available market for such
securities. See "Other Investments and Policies--Illiquid Securities" below.
THE SERIES WILL INVEST AT LEAST 70% OF ITS TOTAL ASSETS IN NEW YORK
OBLIGATIONS WHICH, AT THE TIME OF PURCHASE, ARE RATED WITHIN THE FOUR HIGHEST
QUALITY GRADES AS DETERMINED BY 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), 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 ANOTHER
NATIONALLY RECOGNIZED STATISTICAL RATING ORGANIZATION (NRSRO) OR, IF UNRATED,
WILL POSSESS CREDITWORTHINESS, IN THE OPINION OF THE INVESTMENT ADVISER,
COMPARABLE TO SUCH "INVESTMENT GRADE" RATED SECURITIES.
THE SERIES MAY ALSO INVEST UP TO 30% OF ITS TOTAL ASSETS IN NEW YORK
OBLIGATIONS RATED BELOW Baa BY MOODY'S OR BELOW BBB BY S&P OR A COMPARABLE
RATING OF ANOTHER NRSRO OR, IF NON-RATED, OF COMPARABLE QUALITY, IN THE OPINION
OF THE FUND'S INVESTMENT ADVISER, BASED ON ITS CREDIT ANALYSIS. Securities rated
Baa by Moody's and BBB by S&P are described as being investment grade but are
also characterized as having speculative characteristics. Securities rated below
Baa by Moody's and below BBB by S&P are considered speculative. See "Description
of Security Ratings" in the Appendix. Such lower-rated high yield securities are
commonly referred to as "junk bonds." Such securities generally offer a higher
current yield than those in the high rating categories but may also involve
greater price volatility and risk of loss of principal and income. The
investment adviser will attempt to manage risk and enhance yield through credit
analysis and careful security selection. See "Risk Factors Relating to Investing
in High Yield Municipal Obligations" below. Subsequent to its purchase by the
Series, a municipal obligation may be assigned a lower rating or cease to be
rated. Such an event would not require the elimination of the issue from the
portfolio, but the investment adviser will consider such an event in determining
whether the Series should continue to hold the security in its portfolio. Many
issuers of lower-quality bonds choose not to have their obligations rated and
the Series may invest in such unrated securities. Investors should carefully
consider the relative risks associated with investments in securities which
carry lower ratings and in comparable non-rated securities.
During the year ended August 31, 1997, the monthly dollar weighted average
ratings of the debt obligations held by the Series, expressed as a percentage of
the Series' total assets, were as follows:
<TABLE>
<CAPTION>
PERCENTAGE OF
RATINGS TOTAL INVESTMENTS
------------------------------ -------------------------
<S> <C>
AAA/Aaa 46.65 %
AA/Aa 8.20 %
A/A 17.20 %
BBB/Baa 27.83 %
BB/Ba
</TABLE>
From time to time, the Series may own the majority of a municipal issue. Such
majority-owned holdings may present market and credit risks.
10
<PAGE>
The Series may purchase New York Obligations which, in the opinion of the
investment adviser, offer the opportunity for capital appreciation. This may
occur, for example, when the investment adviser believes that the issuer of a
particular New York Obligation might receive an upgraded credit standing,
thereby increasing the market value of the bonds it has issued or when the
investment adviser believes that interest rates might decline.
UNDER NORMAL MARKET CONDITIONS, THE SERIES WILL ATTEMPT TO INVEST
SUBSTANTIALLY ALL OF THE VALUE OF ITS ASSETS IN NEW YORK OBLIGATIONS. As a
matter of fundamental policy, during normal market conditions the Series' assets
will be invested so that at least 80% of the income will be exempt from New York
State, New York City and federal income taxes or the Series will have at least
80% of its total assets invested in New York Obligations. During abnormal market
conditions or to provide liquidity, the Series may hold cash or cash equivalents
or investment grade taxable obligations, including obligations that are exempt
from federal, but not New York City or New York State, taxation and the Series
may invest in tax-free cash equivalents, such as floating rate demand notes,
tax-exempt commercial paper and general obligation and revenue notes, or in
taxable cash equivalents, such as certificates of deposit, bankers acceptances
and time deposits or other short-term taxable investments such as repurchase
agreements. When, in the opinion of the investment adviser, abnormal market
conditions require a temporary defensive position, the Series may invest more
than 20% of the value of its assets in debt securities other than New York
Obligations or may invest its assets so that more than 20% of the income is
subject to New York State, New York City or federal income taxes. The Series
will treat an investment in a municipal bond refunded with escrowed U.S.
Government securities as U.S. Government securities for purposes of the
Investment Company Act's diversification requirements provided certain
conditions are met. See "Investment Objectives and Policies--In General" in the
Statement of Additional Information.
THE SERIES MAY ACQUIRE PUT OPTIONS (PUTS) GIVING THE SERIES THE RIGHT TO SELL
SECURITIES HELD IN THE SERIES' PORTFOLIO AT A SPECIFIED EXERCISE PRICE ON A
SPECIFIED DATE. Such puts may be acquired for the purpose of protecting the
Series from a possible decline in the market value of the security to which the
put applies in the event of interest rate fluctuations or, in the case of
liquidity puts, for the purpose of shortening the effective maturity of the
underlying security. The aggregate value of premiums paid to acquire puts held
in the Series' portfolio (other than liquidity puts) may not exceed 10% of the
net asset value of the Series. The acquisition of a put may involve an
additional cost to the Series by payment of a premium for the put, by payment of
a higher purchase price for securities to which the put is attached or through a
lower effective interest rate.
In addition, there is a credit risk associated with the purchase of puts in
that the issuer of the put may be unable to meet its obligation to purchase the
underlying security. Accordingly, the Series will acquire puts only under the
following circumstances: (1) the put is written by the issuer of the underlying
security and such security is rated within the four highest quality grades as
determined by 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 highest quality grades; or (3) the put is
backed by a letter of credit or similar financial guarantee issued by a person
having securities outstanding which are rated within the two highest quality
grades of an NRSRO.
THE SERIES MAY PURCHASE MUNICIPAL OBLIGATIONS ON A "WHEN-ISSUED" OR "DELAYED
DELIVERY" BASIS, IN EACH CASE WITHOUT LIMIT. When municipal obligations are
offered on a when-issued or delayed delivery basis, the price and coupon rate
are fixed at the time the commitment to purchase is made, but delivery and
payment for the securities take place at a later date. The purchase price for
such securities includes interest accrued during the period between purchase and
settlement and, therefore, no interest accrues to the economic benefit of the
purchaser during such period. In the case of purchases by the Series, the price
that the Series is required to pay on the settlement date may be in excess of
the market value of the municipal obligations on that date. While securities may
be sold prior to the settlement date, the Series intends to purchase these
securities with the purpose of actually acquiring them unless a sale would be
desirable for investment reasons. At the time the Series makes the commitment to
purchase a municipal obligation on a when-issued or delayed delivery basis, it
will record the transaction and reflect the value of the obligation each day in
determining its net asset value. This value may fluctuate from day to day in the
same manner as values of municipal obligations otherwise held by the Series. If
the seller defaults in the sale, the Series could fail to realize the
11
<PAGE>
appreciation, if any, that had occurred. The Series will establish a segregated
account with its Custodian in which it will maintain cash, U.S. Government
securities, equity securities or other liquid, unencumbered assets,
marked-to-market daily, equal in value to its commitments for when-issued or
delayed delivery securities.
THE SERIES MAY ALSO PURCHASE MUNICIPAL FORWARD CONTRACTS. A municipal forward
contract is a municipal security which is purchased on a when-issued basis with
delivery taking place up to five years from the date of purchase. No interest
will accrue on the security prior to the delivery date. The investment adviser
will monitor the liquidity, value, credit quality and delivery of the security
under the supervision of the Trustees.
THE SERIES MAY PURCHASE SECONDARY MARKET INSURANCE ON NEW YORK OBLIGATIONS
WHICH IT HOLDS OR ACQUIRES. Secondary market insurance would be reflected in the
market value of the municipal obligation purchased and may enable the Series to
dispose of a defaulted obligation at a price similar to that of comparable
municipal obligations which are not in default.
Insurance is not a substitute for the basic credit of an issuer, but
supplements the existing credit and provides additional security therefor. While
insurance coverage for the New York Obligations held by the Series reduces
credit risk by providing that the insurance company will make timely payment of
principal and interest if the issuer defaults on its obligation to make such
payment, it does not afford protection against fluctuation in the price, I.E.,
the market value, of the municipal obligations caused by changes in interest
rates and other factors, nor in turn against fluctuations in the net asset value
of the shares of the Series.
RISK FACTORS RELATING TO INVESTING IN HIGH YIELD MUNICIPAL
OBLIGATIONS. FIXED-INCOME SECURITIES ARE SUBJECT TO THE RISK OF AN ISSUER'S
INABILITY TO MEET PRINCIPAL AND INTEREST PAYMENTS ON THE OBLIGATIONS (CREDIT
RISK) AND MAY ALSO BE SUBJECT TO PRICE VOLATILITY DUE TO SUCH FACTORS AS
INTEREST RATE SENSITIVITY, MARKET PERCEPTIONS OF THE CREDITWORTHINESS OF THE
ISSUER AND GENERAL MARKET LIQUIDITY (MARKET RISK). Lower-rated or unrated (I.E.,
high yield) securities, commonly known as "junk bonds," are more likely to react
to developments affecting market and credit risk than are more highly rated
securities, which react primarily to movements in the general level of interest
rates. The investment adviser will perform its own investment analysis and will
not rely principally on the ratings assigned by the rating services, although
such ratings will be considered by the investment adivser. The investment
adviser will consider, among other things, credit risk and market risk, as well
as the financial history and condition, the prospects and the management of an
issuer in selecting securities for the Series' portfolio. The achievement of the
Series' investment objective may be more dependent on the investment adviser's
credit analysis than is the case when investing in only higher quality bonds.
Investors should carefully consider the relative risks of investing in high
yield municipal obligations and understand that such securities are not
generally meant for short-term investing and that yields on junk bonds will
fluctuate over time.
The amount of high yield securities outstanding has proliferated recently in
conjunction with the decline in creditworthiness of many obligors of municipal
debt, particularly health care providers and certain governmental bodies. An
economic downturn could severely affect the ability of highly leveraged issuers
to service their debt obligations or to repay their obligations upon maturity.
In addition, the secondary market for high yield securities, which is
concentrated in relatively few market makers, may not be as liquid as the
secondary market for more highly rated securities and, from time to time, it may
be more difficult to value high yield securities than more highly rated
securities, and the judgment of the Board of Trustees and investment adviser may
play a greater role in valuation because there is less reliable objective data
available. Under adverse market or economic conditions, the secondary market for
high yield securities could contract further, independent of any specific
adverse changes in the condition of a particular issuer. As a result, the
investment adviser could find it more difficult to sell these securities or may
be able to sell the securities only at prices lower than if such securities were
widely traded. Prices realized upon the sale of such lower rated or unrated
securities, under these circumstances, may be less than the prices used in
calculating the Series' net asset value. If the investment adviser becomes
involved in activities such as reorganizations of obligors of troubled
investments held by the Series, this may prevent the Series from disposing of
the securities, due to its possession of material, non-public information
concerning the obligor.
LOWER-RATED OR UNRATED DEBT OBLIGATIONS ALSO PRESENT RISKS BASED ON PAYMENT
EXPECTATIONS. If an issuer calls the obligation for redemption, the Series may
have to replace the security with a lower-yielding security, resulting in a
decreased
12
<PAGE>
return for investors. If the Series experiences unexpected net redemptions, it
may be forced to sell its higher quality securities, resulting in a decline in
the overall credit quality of the Series' portfolio and increasing the exposure
of the Series to the risks of high yield securities.
FUTURES CONTRACTS AND OPTIONS THEREON
THE SERIES IS AUTHORIZED TO PURCHASE AND SELL CERTAIN DERIVATIVES, INCLUDING
FINANCIAL FUTURES CONTRACTS (FUTURES CONTRACTS) AND OPTIONS THEREON FOR THE
PURPOSE OF HEDGING ITS PORTFOLIO SECURITIES AGAINST FLUCTUATIONS IN VALUE CAUSED
BY CHANGES IN PREVAILING MARKET INTEREST RATES AND HEDGING AGAINST INCREASES IN
THE COST OF SECURITIES THE SERIES INTENDS TO PURCHASE. THE SUCCESSFUL USE OF
FUTURES CONTRACTS AND OPTIONS THEREON BY THE SERIES INVOLVES ADDITIONAL
TRANSACTION COSTS AND IS SUBJECT TO VARIOUS RISKS AND DEPENDS UPON THE
INVESTMENT ADVISER'S ABILITY TO PREDICT THE DIRECTION OF THE MARKET (INCLUDING
INTEREST RATES). THE SERIES, AND THUS INVESTORS, MAY LOSE MONEY THROUGH ANY
UNSUCCESSFUL USE OF THESE STRATEGIES.
A FUTURES CONTRACT OBLIGATES THE SELLER OF THE CONTRACT TO DELIVER TO THE
PURCHASER OF THE CONTRACT CASH EQUAL TO A SPECIFIC DOLLAR AMOUNT TIMES THE
DIFFERENCE BETWEEN THE VALUE OF A SPECIFIC FIXED-INCOME SECURITY OR INDEX AT THE
CLOSE OF THE LAST TRADING DAY OF THE CONTRACT AND THE PRICE AT WHICH THE
AGREEMENT IS MADE. No physical delivery of the underlying securities is made.
The Series will engage in transactions in only those futures contracts and
options thereon that are traded on a commodities exchange or a board of trade.
The Series intends to engage in futures contracts and options thereon as a
hedge against changes, resulting from market conditions, in the value of
securities which are held in the Series' portfolio or which the Series intends
to purchase, in accordance with the rules and regulations of the Commodity
Futures Trading Commission (the CFTC). The Series also intends to engage in such
transactions when they are economically appropriate for the reduction of risks
inherent in the ongoing management of the Series.
THE SERIES MAY NOT PURCHASE OR SELL FUTURES CONTRACTS OR OPTIONS THEREON IF,
IMMEDIATELY THEREAFTER, (I) THE SUM OF INITIAL AND NET CUMULATIVE VARIATION
MARGIN ON OUTSTANDING FUTURES CONTRACTS, TOGETHER WITH PREMIUMS PAID FOR OPTIONS
THEREON, WOULD EXCEED 20% OF THE TOTAL ASSETS OF THE SERIES, OR (II) IN THE CASE
OF RISK MANAGEMENT TRANSACTIONS, THE SUM OF THE AMOUNT OF INITIAL MARGIN
DEPOSITS ON THE SERIES' FUTURES POSITIONS AND PREMIUMS PAID FOR OPTIONS THEREON
WOULD EXCEED 5% OF THE LIQUIDATION VALUE OF THE SERIES' TOTAL ASSETS. There are
no limitations on the percentage of the portfolio which may be hedged and no
limitations on the use of the Series' assets to cover futures contracts and
options thereon, except that the aggregate value of the obligations underlying
put options will not exceed 50% of the Series' assets. Certain requirements for
qualification as a regulated investment company under the Internal Revenue Code
may limit the Series' ability to engage in futures contracts and options
thereon. See "Distributions and Tax Information--Federal Taxation" in the
Statement of Additional Information.
Currently, futures contracts are available on several types of fixed-income
securities, including U.S. Treasury bonds and notes, three-month U.S. Treasury
bills and Eurodollars. Futures contracts are also available on a municipal bond
index, based on THE BOND BUYER Municipal Bond Index, an index of 40 actively
traded municipal bonds. The Series may also engage in transactions in other
futures contracts that become available, from time to time, in other
fixed-income securities or municipal bond indices and in other options on such
contracts if the investment adviser believes such contracts and options would be
appropriate for hedging the Series' portfolio.
THERE CAN BE NO ASSURANCE THAT VIABLE MARKETS WILL CONTINUE OR THAT A LIQUID
SECONDARY MARKET WILL EXIST TO TERMINATE ANY PARTICULAR FUTURES CONTRACT AT ANY
SPECIFIC TIME. If it is not possible to close a futures position entered into by
the Series, the Series will continue to be required to make daily cash payments
of variation margin in the event of adverse price movements. In such a
situation, if the Series had insufficient cash, it might have to sell portfolio
securities to meet daily variation
13
<PAGE>
margin requirements at a time when it might be disadvantageous to do so. The
inability to close futures positions also could have an adverse impact on the
ability of the Series to hedge effectively. There is also a risk of loss by the
Series of margin deposits in the event of bankruptcy of a broker with whom the
Series has an open position in a futures contract.
THE SUCCESSFUL USE OF FUTURES CONTRACTS AND OPTIONS THEREON BY THE SERIES IS
SUBJECT TO VARIOUS ADDITIONAL RISKS. Any use of futures transactions involves
the risk of imperfect correlation in movements in the price of futures contracts
and movements in interest rates and, in turn, the prices of the securities that
are the subject of the hedge. If the price of the futures contract moves more or
less than the price of the security that is the subject of the hedge, the Series
will experience a gain or loss that will not be completely offset by movements
in the price of the security. The risk of imperfect correlation is greater where
the securities underlying futures contracts are taxable securities (rather than
municipal securities), are issued by companies in different market sectors or
have different maturities, ratings or geographic mixes than the security being
hedged. In addition, the correlation may be affected by additions to or
deletions from the index which serves as the basis for a futures contract.
Finally, if the price of the security that is subject to the hedge were to move
in a favorable direction, the advantage to the Series would be partially offset
by the loss incurred on the futures contract.
SPECIAL CONSIDERATIONS
BECAUSE THE SERIES WILL INVEST AT LEAST 80% OF THE VALUE OF ITS TOTAL ASSETS
IN NEW YORK OBLIGATIONS AND BECAUSE IT SEEKS TO MAXIMIZE INCOME DERIVED FROM NEW
YORK OBLIGATIONS, IT IS MORE SUSCEPTIBLE TO FACTORS ADVERSELY AFFECTING ISSUERS
OF NEW YORK OBLIGATIONS THAN IS A COMPARABLE MUNICIPAL BOND MUTUAL FUND THAT IS
NOT CONCENTRATED IN SUCH OBLIGATIONS TO THIS DEGREE. The State General Fund
reported a $1.9 billion GAAP basis operating surplus for the fiscal year ended
March 31, 1997, resulting in a reduction of the General Fund accumulated deficit
to $995 million as of the fiscal year end. The General Fund accumulated deficit
for the fiscal years ended March 31, 1993, 1994, 1995 and 1996 was $2.6 billion,
$1.8 billion, $3.3 billion and $2.9 billion, respectively. According to the
Comptroller, an operating surplus is projected for the fiscal year 1997-1998,
notwithstanding a projected increase in General Fund spending of 5.2%. The
enacted budget includes a significantly expanded program of tax reductions, most
of which do not take effect until the fiscal year 1999-2000. There can be no
assurances that the State will not face substantial potential budget gaps in
this and future years resulting from a significant disparity between tax
revenues projected from a lower recurring receipts base and the spending
required to maintain State programs at current levels. To address any potential
budgetary imbalance, the State may need to take significant actions to align
recurring receipts and disbursements in future fiscal years. If either New York
State or any of its local governmental entities is unable to meet its financial
obligations, the income derived by the Series, the ability to preserve or
realize appreciation of the Series' capital and the Series' liquidity could be
adversely affected. See "Investment Objectives and Policies--Special
Considerations Regarding Investments in Tax-Exempt Securities" in the Statement
of Additional Information.
OTHER INVESTMENTS AND POLICIES
REPURCHASE AGREEMENTS
The Series may on occasion enter into repurchase agreements whereby the seller
of a security agrees to repurchase that security from the Series at a mutually
agreed-upon time and price. The period of maturity is usually quite short,
possibly overnight or a few days, although it may extend over a number of
months. The resale price is in excess of the purchase price, reflecting an
agreed-upon rate of return effective for the period of time the Series' money is
invested in the security. The Series' repurchase agreements will at all times be
fully collateralized in an amount at least equal to the resale price. The
instruments held as collateral are valued daily and if the value of the
instruments declines, the Series will require additional collateral. If the
seller defaults and the value of the collateral securing the repurchase
agreement declines, the Series may incur a loss. The Series participates in a
joint repurchase account with other investment companies managed by Prudential
Investments Fund Management LLC pursuant to an order of the Securities and
Exchange Commission (SEC).
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BORROWING
The Series may borrow an amount equal to no more than 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 Series may
pledge up to 33 1/3% of the value of its total assets to secure these
borrowings. The Series will not purchase portfolio securities if its borrowings
exceed 5% of its total assets.
PORTFOLIO TURNOVER
The Series does not expect to trade in securities for short-term gain. It is
anticipated that the annual portfolio turnover rate will not exceed 150%. The
portfolio turnover rate is calculated by dividing the lesser of sales or
purchases of portfolio securities by the average monthly value of the portfolio
securities, excluding securities having a maturity at the date of purchase of
one year or less.
ILLIQUID SECURITIES
The Series may hold up to 15% of its net assets in illiquid securities
including repurchase agreements which have a maturity of longer than seven days,
securities with legal or contractual restrictions on resale (restricted
securities) and securities that are not readily marketable. Restricted
securities eligible for resale pursuant to Rule 144A under the Securities Act of
1933, as amended (the Securities Act), privately placed commercial paper and
municipal lease obligations that have a readily available market are not
considered illiquid for purposes of this limitation. The investment adviser will
monitor the liquidity of such restricted securities under the supervision of the
Trustees. The Series' investment in Rule 144A securities could have the effect
of increasing illiquidity to the extent that qualified institutional buyers
become, for a limited time, uninterested in purchasing Rule 144A securities. See
"Investment Objectives and Policies--Illiquid Securities" and "Investment
Restrictions" in the Statement of Additional Information. Repurchase agreements
subject to demand are deemed to have a maturity equal to the notice period.
INVESTMENT RESTRICTIONS
The Series is subject to certain investment restrictions which, like its
investment objective, constitute fundamental policies. Fundamental policies
cannot be changed without the approval of the holders of a majority of the
Series' outstanding voting securities, as defined in the Investment Company Act.
See "Investment Restrictions" in the Statement of Additional Information.
HOW THE FUND IS MANAGED
THE FUND HAS TRUSTEES WHO, IN ADDITION TO OVERSEEING THE ACTIONS OF THE FUND'S
MANAGER, SUBADVISER AND DISTRIBUTOR, AS SET FORTH BELOW, DECIDE UPON MATTERS OF
GENERAL POLICY. THE FUND'S MANAGER CONDUCTS AND SUPERVISES THE DAILY BUSINESS
OPERATIONS OF THE FUND. THE FUND'S SUBADVISER FURNISHES DAILY INVESTMENT
ADVISORY SERVICES.
For the fiscal year ended August 31, 1997, total expenses of the Series as a
percentage of average net assets, net of fee waivers, were .68%, 1.08% and 1.33%
for the Series' Class A, Class B and Class C shares, respectively. For the
period from December 6, 1996 (commencement of the offering of Class Z shares)
through August 31, 1997, total expenses of the Series as a percentage of average
net assets, net of fee waivers were .58% (annualized) for the Series' Class Z
shares. See "Financial Highlights."
MANAGER
PRUDENTIAL INVESTMENTS MUTUAL FUND MANAGEMENT LLC (PIFM OR THE MANAGER),
GATEWAY CENTER THREE, 100 MULBERRY STREET, NEWARK, NEW JERSEY 07102-4077, IS THE
MANAGER OF THE FUND AND IS COMPENSATED FOR ITS SERVICES AT AN ANNUAL RATE OF .50
OF 1% OF THE AVERAGE DAILY NET ASSETS OF THE SERIES. PIFM is organized in New
York as a limited
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liability company. It is the successor to Prudential Mutual Fund Management,
Inc., which transferred its assets to PIFM in September 1996. For the fiscal
year ended August 31, 1997, the Series paid PIFM a management fee of .45 of 1%
of the Series' average net assets, after taking into account a management fee
waiver. See "Fee Waivers" below and "Manager" in the Statement of Additional
Information.
As of September 30, 1997, PIFM served as the manager to 41 open-end investment
companies, constituting all of the Prudential Mutual Funds, and as manager or
administrator to 22 closed-end investment companies with aggregate assets of
approximately $59.9 billion.
UNDER THE MANAGEMENT AGREEMENT WITH THE FUND, PIFM MANAGES THE INVESTMENT
OPERATIONS OF EACH SERIES OF THE FUND AND ALSO ADMINISTERS THE FUND'S BUSINESS
AFFAIRS. See "Manager" in the Statement of Additional Information.
UNDER A SUBADVISORY AGREEMENT BETWEEN PIFM AND THE PRUDENTIAL INVESTMENT
CORPORATION (PIC), DOING BUSINESS AS PRUDENTIAL (PI, THE SUBADVISER OR THE
INVESTMENT ADVISER), PI FURNISHES INVESTMENT ADVISORY SERVICES IN CONNECTION
WITH THE MANAGEMENT OF THE FUND AND IS REIMBURSED BY PIFM FOR ITS REASONABLE
COSTS AND EXPENSES INCURRED IN PROVIDING SUCH SERVICES. Under the Management
Agreement, PIFM continues to have responsibility for all investment advisory
services and supervises PI's performance of such services.
The current portfolio manager of the Series is Christian Smith, a Vice
President of Prudential Investments. Mr. Smith has responsibility for the
day-to-day management of the portfolio. He has managed the portfolio since April
1996 and has been employed by PIC in various capacities since 1988.
PIFM and PIC are indirect, wholly-owned subsidiaries of The Prudential
Insurance Company of America (Prudential), a major diversified insurance and
financial services company, and are part of Prudential Investments, a business
group of Prudential.
FEE WAIVERS
PIFM may from time to time agree to waive all or a portion of its management
fee and subsidize certain operating expenses of the Series. Fee waivers and
expense subsidies will increase the Series' yield and total return. The Series
is not required to reimburse PIFM for such management fee waiver. Effective
September 1, 1997, PIFM discontinued its waiver of 10% of its management fee.
See "Fund Expenses."
DISTRIBUTOR
PRUDENTIAL SECURITIES INCORPORATED (PRUDENTIAL SECURITIES, PSI OR THE
DISTRIBUTOR), ONE SEAPORT PLAZA, NEW YORK, NEW YORK 10292, IS A CORPORATION
ORGANIZED UNDER THE LAWS OF THE STATE OF DELAWARE AND SERVES AS THE DISTRIBUTOR
OF THE CLASS A, CLASS B, CLASS C AND CLASS Z SHARES OF THE SERIES. It is an
indirect, wholly-owned subsidiary of Prudential.
UNDER SEPARATE DISTRIBUTION AND SERVICE PLANS (THE CLASS A PLAN, THE CLASS B
PLAN AND THE CLASS C PLAN, COLLECTIVELY, THE PLANS) ADOPTED BY THE FUND UNDER
RULE 12b-1 UNDER THE INVESTMENT COMPANY ACT AND A DISTRIBUTION AGREEMENT (THE
DISTRIBUTION AGREEMENT), PRUDENTIAL SECURITIES (THE DISTRIBUTOR) INCURS THE
EXPENSES OF DISTRIBUTING THE CLASS A, CLASS B AND CLASS C SHARES OF THE SERIES.
PRUDENTIAL SECURITIES ALSO INCURS THE EXPENSE OF DISTRIBUTING THE SERIES' CLASS
Z SHARES UNDER THE DISTRIBUTION AGREEMENT WITH THE FUND, NONE OF WHICH IS
REIMBURSED OR PAID FOR BY THE FUND. These expenses include commissions and
account servicing fees paid to, or on account of, financial advisers of
Prudential Securities and representatives of Pruco Securities Corporation
(Prusec), an affiliated broker-dealer, commissions and account servicing fees
paid to, or on account of, other broker-dealers or financial institutions (other
than national banks) which have entered into agreements with the Distributor,
advertising expenses, the cost of printing and mailing prospectuses to potential
investors and indirect and overhead costs of Prudential Securities and Prusec
associated with the sale of Series shares, including lease, utility,
communications and sales promotion expenses.
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Under the Plans, the Series is obligated to pay distribution and/or service
fees to the Distributor as compensation for its distribution and service
activities, not as reimbursement for specific expenses incurred. If the
Distributor's expenses exceed its distribution and service fees, the Series will
not be obligated to pay any additional expenses. If the Distributor's expenses
are less than such distribution and service fees, it will retain its full fees
and realize a profit.
UNDER THE CLASS A PLAN, THE SERIES MAY PAY PRUDENTIAL SECURITIES FOR ITS
DISTRIBUTION-RELATED ACTIVITIES WITH RESPECT TO CLASS A SHARES AT AN ANNUAL RATE
OF UP TO .30 OF 1% OF THE AVERAGE DAILY NET ASSETS OF THE CLASS A SHARES OF THE
SERIES. The Class A Plan provides that (i) up to .25 of 1% of the average daily
net assets of the Class A shares may be used to pay for personal service and/or
the maintenance of shareholder accounts (service fee) and (ii) total
distribution fees (including the service fee of .25 of 1%) may not exceed .30 of
1% of the average daily net assets of the Class A shares. Prudential Securities
has agreed to limit its distribution-related fees payable under the Class A Plan
to .10 of 1% of the average daily net assets of the Class A shares for the
fiscal year ending August 31, 1998.
UNDER THE CLASS B AND CLASS C PLANS, THE SERIES MAY PAY PRUDENTIAL SECURITIES
FOR ITS DISTRIBUTION-RELATED ACTIVITIES WITH RESPECT TO CLASS B AND CLASS C
SHARES AT AN ANNUAL RATE OF UP TO .50 OF 1% AND UP TO 1% OF THE AVERAGE DAILY
NET ASSETS OF THE CLASS B AND CLASS C SHARES, RESPECTIVELY. The Class B Plan
provides for the payment to Prudential Securities of (i) an asset-based sales
charge of up to .50 of 1% of the average daily net assets of the Class B shares,
and (ii) a service fee of up to .25 of 1% of the average daily net assets of the
Class B shares; provided that the total distribution-related fee does not exceed
.50 of 1%. The Class C Plan provides for the payment to Prudential Securities of
(i) an asset-based sales charge of up to .75 of 1% of the average daily net
assets of the Class C shares, and (ii) a service fee of up to .25 of 1% of the
average daily net assets of the Class C shares. The service fee is used to pay
for personal service and/or the maintenance of shareholder accounts. Prudential
Securities has agreed to limit its distribution-related fees payable under the
Class C Plan to .75 of 1% of the average daily net assets of the Class C shares
for the fiscal year ending August 31, 1998. Prudential Securities also receives
contingent deferred sales charges from certain redeeming shareholders. See
"Shareholder Guide--How to Sell Your Shares--Contingent Deferred Sales Charges."
For the fiscal year ended August 31, 1997, the Series paid distribution
expenses of .10 of 1%, .50 of 1% and .75 of 1% of the average daily net assets
of the Class A, Class B and Class C shares, respectively. The Series records all
payments made under the Plans as expenses in the calculation of net investment
income. See "Distributor" in the Statement of Additional Information.
Distribution expenses attributable to the sale of Class A, Class B and Class C
shares of the Series will be allocated to each such class based upon the ratio
of sales of each such class to the sales of Class A, Class B and Class C shares
of the Series other than expenses allocable to a particular class. The
distribution fee and sales charge of one class will not be used to subsidize the
sale of another class.
Each Plan provides that it shall continue in effect from year to year provided
that a majority of the Trustees of the Fund, including a majority of the
Trustees who are not "interested persons" of the Fund (as defined in the
Investment Company Act) and who have no direct or indirect financial interest in
the operation of the Plan or any agreement related to the Plan (the Rule 12b-1
Trustees), vote annually to continue the Plan. Each Plan may be terminated with
respect to the Series at any time by vote of a majority of the Rule 12b-1
Trustees or of a majority of the outstanding shares of the applicable class of
the Series. The Series will not be obligated to pay distribution and service
fees incurred under any Plan if it is terminated or not continued.
In addition to distribution and service fees paid by the Series under the
Class A, Class B and Class C Plans, the Manager (or one of its affiliates) may
make payments out of its own resources to dealers (including Prudential
Securities) and other persons who distribute shares of the Series (including
Class Z shares). Such payments may be calculated by reference to the net asset
value of shares sold by such persons or otherwise.
The Distributor is subject to the rules of the National Association of
Securities Dealers, Inc. (the NASD) governing maximum sales charges. See
"Distributor" in the Statement of Additional Information.
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On October 21, 1993, PSI entered into an omnibus settlement with the SEC,
state securities regulators (with the exception of the Texas Securities
Commissioner who joined the settlement on January 18, 1994) and the NASD to
resolve allegations that from 1980 through 1990 PSI sold certain limited
partnership interests in violation of securities laws to persons for whom such
securities were not suitable and misrepresented the safety, potential returns
and liquidity of these investments. Without admitting or denying the allegations
asserted against it, PSI consented to the entry of an SEC Administrative Order
which stated that PSI's conduct violated the federal securities laws, directed
PSI to cease and desist from violating the federal securities laws, pay civil
penalties, and adopt certain remedial measures to address the violations.
Pursuant to the terms of the SEC settlement, PSI agreed to the imposition of a
$10,000,000 civil penalty, established a settlement fund in the amount of
$330,000,000 and procedures to resolve legitimate claims for compensatory
damages by purchasers of the partnership interests. PSI has agreed to provide
additional funds, if necessary, for the purpose of the settlement fund. PSI's
settlement with the state securities regulators included an agreement to pay a
penalty of $500,000 per jurisdiction. PSI consented to a censure and to the
payment of a $5,000,000 fine in settling the NASD action.
In October 1994, a criminal complaint was filed with the United States
Magistrate for the Southern District of New York alleging that PSI committed
fraud in connection with the sale of certain limited partnership interests in
violation of federal securities laws. An agreement was simultaneously filed to
defer prosecution of these charges for a period of three years from the signing
of the agreement, provided that PSI complies with the terms of the agreement.
If, upon completion of the three year period, PSI has complied with the terms of
the agreement, no prosecution will be instituted by the United States for the
offenses charged in the complaint. If on the other hand, during the course of
the three year period, PSI violates the terms of the agreement, the U.S.
Attorney can then elect to pursue these charges. Under the terms of the
agreement, PSI agreed, among other things, to pay an additional $330,000,000
into the fund established by the SEC to pay restitution to investors who
purchased certain PSI limited partnership interests.
For more detailed information concerning the foregoing matters, see
"Distributor" in the Statement of Additional Information, a copy of which may be
obtained at no cost by calling (800) 225-1852.
The Fund is not affected by PSI's financial condition and is an entirely
separate legal entity from PSI, which has no beneficial ownership therein and
the Fund's assets which are held by State Street Bank and Trust Company, an
independent custodian, are separate and distinct from PSI.
PORTFOLIO TRANSACTIONS
Prudential Securities may act as a broker or futures commission merchant for
the Fund, provided that the commissions, fees or other remuneration it receives
are fair and reasonable. See "Portfolio Transactions and Brokerage" in the
Statement of Additional Information.
CUSTODIAN AND TRANSFER AND DIVIDEND DISBURSING AGENT
State Street Bank and Trust Company, One Heritage Drive, North Quincy,
Massachusetts 02171, serves as Custodian for the portfolio securities of the
Series and cash and, in that capacity, maintains certain financial and
accounting books and records pursuant to an agreement with the Fund. Its mailing
address is P.O. Box 1713, Boston, Massachusetts 02105.
Prudential Mutual Fund Services LLC (PMFS), Raritan Plaza One, Edison, New
Jersey 08837, serves as Transfer Agent and Dividend Disbursing Agent and, in
those capacities, maintains certain books and records for the Fund. PMFS is a
wholly-owned subsidiary of PIFM. Its mailing address is P.O. Box 15005, New
Brunswick, New Jersey 08906-5005.
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HOW THE FUND VALUES ITS SHARES
THE SERIES' NET ASSET VALUE PER SHARE OR NAV IS DETERMINED BY SUBTRACTING ITS
LIABILITIES FROM THE VALUE OF ITS ASSETS AND DIVIDING THE REMAINDER BY THE
NUMBER OF OUTSTANDING SHARES. NAV IS CALCULATED SEPARATELY FOR EACH CLASS. THE
TRUSTEES HAVE FIXED THE SPECIFIC TIME OF DAY FOR THE COMPUTATION OF THE NET
ASSET VALUE OF THE SERIES TO BE AS OF 4:15 P.M., NEW YORK TIME.
Portfolio securities are valued based on market quotations or, if not readily
available, at fair value as determined in good faith under procedures
established by the Trustees. Securities may also be valued based on values
provided by a pricing service. See "Net Asset Value" in the Statement of
Additional Information.
The Series will compute its NAV once daily on days that the New York Stock
Exchange is open for trading except on days on which no orders to purchase, sell
or redeem shares have been received by the Series or days on which changes in
the value of the Series' portfolio securities do not materially affect the NAV.
Although the legal rights of each class of shares are substantially identical,
the different expenses borne by each class will result in different dividends.
As long as the Series declares dividends daily, the NAV of the Class A, Class B,
Class C and Class Z shares will generally be the same. It is expected, however,
that the Series' dividends will differ by approximately the amount of any
distribution and/or service fee expense accrual differential among the classes.
HOW THE FUND CALCULATES PERFORMANCE
FROM TIME TO TIME THE FUND MAY ADVERTISE THE YIELD, TAX EQUIVALENT YIELD AND
AVERAGE ANNUAL TOTAL RETURN AND AGGREGATE TOTAL RETURN OF THE SERIES IN
ADVERTISEMENTS OR SALES LITERATURE. YIELD, TAX EQUIVALENT YIELD AND TOTAL RETURN
ARE CALCULATED SEPARATELY FOR CLASS A, CLASS B, CLASS C AND CLASS Z SHARES.
THESE FIGURES ARE BASED ON HISTORICAL EARNINGS AND ARE NOT INTENDED TO INDICATE
FUTURE PERFORMANCE. The yield refers to the income generated by an investment in
the Series over a one-month or 30-day period. This income is then annualized;
that is, the amount of income generated by the investment during that 30-day
period is assumed to be generated each 30-day period for twelve periods and is
shown as a percentage of the investment. The income earned on the investment is
also assumed to be reinvested at the end of the sixth 30-day period. The tax
equivalent yield is calculated similarly to the yield, except that the yield is
increased using a stated income tax rate to demonstrate the taxable yield
necessary to produce an after-tax yield equivalent to the Series. The total
return shows how much an investment in the Series would have increased
(decreased) over a specified period of time (I.E., one, five or ten years or
since inception of the Series) assuming that all distributions and dividends by
the Series were reinvested on the reinvestment dates during the period and less
all recurring fees. The aggregate total return reflects actual performance over
a stated period of time. Average annual total return is a hypothetical rate of
return that, if achieved annually, would have produced the same aggregate total
return if performance had been constant over the entire period. Average annual
total return smooths out variations in performance and takes into account any
applicable initial or contingent deferred sales charges. Neither average annual
total return nor aggregate total return takes into account any federal or state
income taxes which may be payable upon redemption. The Fund also may include
comparative performance information in advertising or marketing the shares of
the Series. Such performance information may include data from Lipper Analytical
Services, Inc., Morningstar Publications, Inc., other industry publications,
business periodicals, and market indices. See "Performance Information" in the
Statement of Additional Information. Further performance information is
contained in the Series' annual and semi-annual reports to shareholders, which
may be obtained without charge. See "Shareholder Guide--Shareholder
Services--Reports to Shareholders."
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TAXES, DIVIDENDS AND DISTRIBUTIONS
TAXATION OF THE FUND
THE SERIES HAS ELECTED TO QUALIFY AND INTENDS TO REMAIN QUALIFIED AS A
REGULATED INVESTMENT COMPANY UNDER THE INTERNAL REVENUE CODE. ACCORDINGLY, THE
SERIES WILL NOT BE SUBJECT TO FEDERAL INCOME TAXES ON ITS NET INVESTMENT INCOME
AND NET CAPITAL GAINS, IF ANY, THAT IT DISTRIBUTES TO ITS SHAREHOLDERS. TO THE
EXTENT NOT DISTRIBUTED BY THE SERIES, NET TAXABLE INVESTMENT INCOME AND CAPITAL
GAINS AND LOSSES ARE TAXABLE TO THE SERIES.
To the extent the Series invests in taxable obligations, it will earn taxable
investment income. Also, to the extent the Series engages in hedging
transactions in futures contracts and options thereon, it may earn both
short-term and long-term capital gain or loss. Under the Internal Revenue Code,
special rules apply to the treatment of certain options and futures contracts
(Section 1256 contracts). At the end of each year, such investments held by the
Series will be required to be "marked to market" for federal income tax
purposes; that is, treated as having been sold at market value. Sixty percent of
any gain or loss recognized on these "deemed sales" and on actual dispositions
will be treated as long-term capital gain or loss, and the remainder will be
treated as short-term capital gain or loss. See "Distributions and Tax
Information" in the Statement of Additional Information.
Gain or loss realized by the Series from the sale of securities generally will
be treated as capital gain or loss; however, gain from the sale of certain
securities (including municipal obligations) will be treated as ordinary income
to the extent of any "market discount." Market discount generally is the
difference, if any, between the price paid by the Series for the security and
the principal amount of the security (or, in the case of a security issued at an
original issue discount, the revised issue price of the security). The market
discount rule does not apply to any security that was acquired by the Series at
its original issue. See "Distributions and Tax Information" in the Statement of
Additional Information.
TAXATION OF SHAREHOLDERS
In general, the character of tax-exempt interest distributed by the Series
will flow through as tax-exempt interest to its shareholders provided that 50%
or more of the value of its assets at the end of each quarter of its taxable
year is invested in state, municipal and other obligations, the interest on
which is excluded from gross income for federal income tax purposes. During
normal market conditions, at least 80% of the Series' total assets will be
invested in such obligations. See "How the Fund Invests--Investment Objective
and Policies."
Any dividends out of net taxable investment income, together with
distributions of net short-term gains (I.E., the excess of net short-term
capital gains over net long-term capital losses) distributed to shareholders,
will be taxable as ordinary income to the shareholder whether or not reinvested.
Any net capital gains (I.E., the excess of net capital gains from the sale of
assets held for more than 12 months over net short-term capital losses)
distributed to shareholders will be taxable as capital gains to the
shareholders, whether or not reinvested and regardless of the length of time a
shareholder has owned his or her shares. The maximum capital gains rate for
individuals is 28% with respect to assets held for more than 12 months, but not
more than 18 months, and 20% with respect to assets held for more than 18
months. The maximum capital gains rate for corporate shareholders currently is
the same as the maximum tax rate for ordinary income.
Any gain or loss realized upon a sale or redemption of Series shares by a
shareholder who is not a dealer in securities will be treated as capital gain or
loss. In the case of an individual, any such capital gain will be treated as
short-term capital loss if the shares were held for not more than 12 months,
mid-term gain, taxable at the maximum rate of 28%, if such shares were held for
more than 12, but not more than 18 months, and long-term capital gain, taxable
at the maximum rate of 20%, if such shares were held for more than 18 months. In
the case of a corporation, any such capital gain will be treated as long-term
capital gain, taxable at the same rates as ordinary income, if such shares were
held for more than 12 months. Any such capital loss will be treated as long-term
capital loss if the shares have been held more than one year and otherwise as
short-term capital loss. Any such loss
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with respect to shares that are held for six months or less, however, will be
treated as long-term capital loss to the extent of any capital gain
distributions received by the shareholder. In addition, any short-term capital
loss will be disallowed to the extent of any tax-exempt dividends received by
the shareholder on shares that are held for six months or less.
The Fund has obtained opinions of counsel to the effect that neither (i) the
conversion of Class B shares into Class A shares nor (ii) exchanges of any class
of the Series' shares for any other class of its shares constitutes a taxable
event for federal income tax purposes. However, such opinions are not binding on
the Internal Revenue Service.
CERTAIN INVESTORS MAY INCUR FEDERAL ALTERNATIVE MINIMUM TAX LIABILITY AS A
RESULT OF THEIR INVESTMENT IN THE FUND. Tax-exempt interest from certain
municipal obligations (I.E., certain private activity bonds issued after August
7, 1986) will be treated as an item of tax preference for purposes of the
alternative minimum tax. The Fund anticipates that, under regulations to be
promulgated, items of tax preference incurred by the Series will be attributed
to the Series' shareholders, although some portion of such items could be
allocated to the Series itself. Depending upon each shareholder's individual
circumstances, the attribution of items of tax preference incurred by the Series
could result in liability for the shareholder for the alternative minimum tax.
Similarly, the Series could be liable for the alternative minimum tax for items
of tax preference attributed to it. The Series is permitted to invest in
municipal obligations of the type that will produce items of tax preference.
Corporate shareholders in the Series also will have to take into account the
adjustment for current earnings for alternative minimum tax purposes. Corporate
shareholders should consult with their tax advisers with respect to this
potential adjustment.
Under New York law, dividends paid by the Series are exempt from New York
State and New York City income taxes for resident individuals to the extent such
dividends are excluded from gross income for federal income tax purposes and are
derived from interest payments on New York Obligations.
Shareholders are advised to consult their own tax advisers regarding specific
questions as to federal, state or local taxes. See "Distributions and Tax
Information" in the Statement of Additional Information.
WITHHOLDING TAXES
Under the Internal Revenue Code, the Series is required to withhold and remit
to the U.S. Treasury 31% of redemption proceeds on the accounts of certain
shareholders who fail to furnish their tax identification numbers on IRS Form
W-9 (or IRS Form W-8 in the case of certain foreign shareholders) with the
required certifications regarding the shareholder's status under the federal
income tax law. Such withholding also is required on taxable dividends and
capital gain distributions made by the Series unless it is reasonably expected
that at least 95% of the distributions of the Series are comprised of tax-exempt
dividends.
Dividends of net taxable investment income and distributions of net short-term
capital gains paid to a shareholder (including a shareholder acting as a nominee
or fiduciary) who is a nonresident alien individual, a foreign corporation or a
foreign partnership (foreign shareholder) are subject to a 30% (or lower treaty
rate) withholding tax upon the gross amount of the dividends unless the
dividends are effectively connected with a U.S. trade or business conducted by
the foreign shareholder. Capital gain dividends paid to a foreign shareholder
are generally not subject to withholding tax. A foreign shareholder will,
however, be required to pay U.S. income tax on any dividends and capital gain
distributions which are effectively connected with a U.S. trade or business of
the foreign shareholder.
DIVIDENDS AND DISTRIBUTIONS
THE SERIES EXPECTS TO DECLARE DAILY AND PAY MONTHLY DIVIDENDS OF NET
INVESTMENT INCOME, IF ANY, AND MAKE DISTRIBUTIONS AT LEAST ANNUALLY OF ANY
CAPITAL GAINS IN EXCESS OF CAPITAL LOSSES. Dividends paid by the Series with
respect to each class of shares, to the extent any dividends are paid, will be
calculated in the same manner, at the same time, on the same day and will be in
the same amount except that each class (other than Class Z) will bear its own
distribution charges, generally
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resulting in lower dividends for Class B and Class C shares in relation to Class
A and Class Z shares and lower dividends for Class A shares in relation to Class
Z shares. Distributions of net capital gains, if any, will be paid in the same
amount for each class of shares. See "How the Fund Values its Shares."
DIVIDENDS AND DISTRIBUTIONS WILL BE PAID IN ADDITIONAL SHARES OF THE SERIES
BASED ON THE NAV OF EACH CLASS OF THE SERIES ON THE PAYMENT DATE AND RECORD
DATE, RESPECTIVELY, OR SUCH OTHER DATE AS THE TRUSTEES MAY DETERMINE, UNLESS THE
SHAREHOLDER ELECTS IN WRITING NOT LESS THAN FIVE BUSINESS DAYS PRIOR TO THE
RECORD DATE TO RECEIVE SUCH DIVIDENDS AND DISTRIBUTIONS IN CASH. Such election
should be submitted to Prudential Mutual Fund Services LLC, Attention: Account
Maintenance, P.O. Box 15015, New Brunswick, New Jersey 08906-5015. If you hold
shares through Prudential Securities, you should contact your financial adviser
to elect to receive dividends and distributions in cash. The Fund will notify
each shareholder after the close of the Fund's taxable year of both the dollar
amount and the taxable status of that year's dividends and distributions on a
per share basis.
GENERAL INFORMATION
DESCRIPTION OF SHARES
THE FUND WAS ESTABLISHED AS A MASSACHUSETTS BUSINESS TRUST ON MAY 18, 1984, BY
A DECLARATION OF TRUST. The Fund's activities are supervised by its Trustees.
The Declaration of Trust permits the Trustees to issue an unlimited number of
full and fractional shares in separate series, currently designated as the
Connecticut Money Market Series, Florida Series, Maryland Series, Massachusetts
Series, Massachusetts Money Market Series, Michigan Series, New Jersey Series,
New Jersey Money Market Series, New York Series, New York Money Market Series,
North Carolina Series, Ohio Series and Pennsylvania Series. The Series is
authorized to issue an unlimited number of shares, divided into four classes,
designated Class A, Class B, Class C and Class Z. Each class of shares
represents an interest in the same assets of the Series and is identical in all
respects except that (i) each class 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 "How the Fund is Managed--Distributor." In
accordance with the Fund's Declaration of Trust, the Trustees may authorize the
creation of additional series and classes within such series, with such
preferences, privileges, limitations and voting and dividend rights as the
Trustees may determine.
Shares of the Fund, when issued, are fully paid, nonassessable, fully
transferable and redeemable at the option of the holder. Shares are also
redeemable at the option of the Fund under certain circumstances as described
under "Shareholder Guide--How to Sell Your Shares." Each share of each class of
the Series is equal as to earnings, assets and voting privileges, except as
noted above, and each class (with the exception of Class Z shares, which are not
subject to any distribution or service fees) bears the expenses related to the
distribution of its shares. Except for the conversion feature applicable to the
Class B shares, there are no conversion, preemptive or other subscription
rights. In the event of liquidation, each share of beneficial interest of each
series is entitled to its portion of all of the Fund's assets after all debt and
expenses of the Fund have been paid. Since Class B and Class C shares generally
bear higher distribution expenses than Class A shares, the liquidation proceeds
to shareholders of those classes are likely to be lower than to Class A
shareholders and to Class Z shareholders, whose shares are not subject to any
distribution and/or service fees. The Fund's shares do not have cumulative
voting rights for the election of Trustees.
THE FUND DOES NOT INTEND TO HOLD ANNUAL MEETINGS OF SHAREHOLDERS UNLESS
OTHERWISE REQUIRED BY LAW. THE FUND WILL NOT BE REQUIRED TO HOLD MEETINGS OF
SHAREHOLDERS UNLESS, FOR EXAMPLE, THE ELECTION OF TRUSTEES IS REQUIRED TO BE
ACTED
22
<PAGE>
UPON BY SHAREHOLDERS UNDER THE INVESTMENT COMPANY ACT. SHAREHOLDERS HAVE CERTAIN
RIGHTS, INCLUDING THE RIGHT TO CALL A MEETING UPON A VOTE OF 10% OF THE FUND'S
OUTSTANDING SHARES FOR THE PURPOSE OF VOTING ON THE REMOVAL OF ONE OR MORE
TRUSTEES OR TO TRANSACT ANY OTHER BUSINESS.
The Declaration of Trust and the By-Laws of the Fund are designed to make the
Fund similar in certain respects to a Massachusetts business corporation. The
principal distinction between a Massachusetts business corporation and a
Massachusetts business trust relates to shareholder liability. Under
Massachusetts law, shareholders of a business trust may, under certain
circumstances, be held personally liable as partners for the obligations of the
fund, which is not the case with a corporation. The Declaration of Trust of the
Fund provides that shareholders shall be subject to any personal liability for
the acts or obligations of the Fund and that every written obligation, contract,
instrument or undertaking made by the Fund shall contain a provision to the
effect that the shareholders are not individually bound thereunder.
ADDITIONAL INFORMATION
This Prospectus, including the Statement of Additional Information which has
been incorporated by reference herein, does not contain all the information set
forth in the Registration Statement filed by the Fund with the SEC under the
Securities Act. Copies of the Registration Statement may be obtained at a
reasonable charge from the SEC or may be examined, without charge, at the office
of the SEC in Washington, D.C.
SHAREHOLDER GUIDE
HOW TO BUY SHARES OF THE FUND
YOU MAY PURCHASE SHARES OF THE SERIES THROUGH PRUDENTIAL SECURITIES, PRUSEC OR
DIRECTLY FROM THE FUND, THROUGH ITS TRANSFER AGENT, PRUDENTIAL MUTUAL FUND
SERVICES LLC (PMFS OR THE TRANSFER AGENT), ATTENTION: INVESTMENT SERVICES, P.O.
BOX 15020, NEW BRUNSWICK, NEW JERSEY 08906-5020. Participants in programs
sponsored by Prudential Retirement Services should contact their client
representative for more information about Class Z shares. The purchase price is
the NAV next determined following receipt of an order in proper form by the
Transfer Agent or Prudential Securities plus a sales charge which, at your
option, may be imposed either (i) at the time of purchase (Class A shares) or
(ii) on a deferred basis (Class B or Class C shares). Class Z shares are offered
to a limited group of investors at net asset value without any sales charge. See
"Alternative Purchase Plan" below. Payment may be made by wire, check or through
your brokerage account. See also "How the Fund Values its Shares."
An investment in the Series may not be appropriate for tax-exempt or
tax-deferred investors. Such investors should consult their own tax advisers.
The minimum initial investment is $1,000 for Class A and Class B shares and
$5,000 for Class C shares, except that the minimum initial investment for Class
C shares may be waived from time to time. The minimum subsequent investment is
$100 for Class A, Class B and Class C shares. Class Z shares are not subject to
any minimum investment requirements. All minimum investment requirements are
waived for certain employee savings plans. For purchases made through the
Automatic Savings Accumulation Plan, the minimum initial and subsequent
investment is $50. See "Shareholder Services" below.
Application forms can be obtained from PMFS, Prudential Securities or Prusec.
If a share certificate is desired, it must be requested in writing for each
transaction. Certificates are issued only for full shares. Shareholders who hold
their shares through Prudential Securities will not receive share certificates.
The Fund reserves the right to reject any purchase order (including an
exchange into the Series) or to suspend or modify the continuous offering of its
shares. See "How to Sell Your Shares" below.
23
<PAGE>
Your dealer is responsible for forwarding payment promptly to the Fund. The
Distributor reserves the right to cancel any purchase order for which payment
has not been received by the third business day following the investment.
Transactions in shares of the Series may be subject to postage and handling
charges imposed by your dealer.
PURCHASE BY WIRE. For an initial purchase of shares of the Series by wire, you
must first telephone PMFS at (800) 225-1852 (toll-free) to receive an account
number. The following information will be requested: your name, address, tax
identification number, class election, dividend distribution election, amount
being wired and wiring bank. Instructions should then be given by you to your
bank to transfer funds by wire to State Street Bank and Trust Company (State
Street), Boston, Massachusetts, Custody and Shareholder Services Division,
Attention: Prudential Municipal Series Fund (New York Series), specifying on the
wire the account number assigned by PMFS and your name and identifying the class
in which you are eligible to invest (Class A, Class B, Class C or Class Z
shares).
If you arrange for receipt by State Street of Federal Funds prior to the
caculation of NAV (4:15 P.M., New York time), on a business day, you may
purchase shares of the Series as of that day. See "Net Asset Value" in the
Statement of Additional Information.
In making a subsequent purchase order by wire, you should wire State Street
directly and should be sure that the wire specifies Prudential Municipal Series
Fund (New York Series), the name of the Series, Class A, Class B, Class C or
Class Z shares and your name and individual account number. It is not necessary
to call PMFS to make subsequent purchase orders utilizing Federal Funds. The
minimum amount which may be invested by wire is $1,000.
ALTERNATIVE PURCHASE PLAN
THE SERIES OFFERS FOUR CLASSES OF SHARES (CLASS A, CLASS B, CLASS C AND CLASS
Z SHARES) WHICH ALLOWS YOU TO CHOOSE THE MOST BENEFICIAL SALES CHARGE STRUCTURE
FOR YOUR INDIVIDUAL CIRCUMSTANCES GIVEN THE AMOUNT OF THE PURCHASE, THE LENGTH
OF TIME YOU EXPECT TO HOLD THE SHARES AND OTHER RELEVANT CIRCUMSTANCES
(ALTERNATIVE PURCHASE PLAN).
<TABLE>
<CAPTION>
ANNUAL 12b-1 FEES
(AS A % OF AVERAGE
SALES CHARGE DAILY NET ASSETS) OTHER INFORMATION
----------------------------------- ----------------------------------- -----------------------------------
<S> <C> <C> <C>
CLASS A Maximum initial sales charge of 3% .30 of 1% (currently being charged Initial sales charge waived or
of the public offering price at a rate of .10 of 1%) reduced for certain purchases
CLASS B Maximum contingent deferred sales .50 of 1% Shares convert to Class A shares
charge or CDSC of 5% of the lesser approximately seven years after
of the amount invested or the purchase
redemption proceeds; declines to
zero after six years
CLASS C Maximum CDSC of 1% of the lesser of 1% (currently being charged at a Shares do not convert to another
the amount invested or the rate of .75 of 1%) class
redemption proceeds on redemptions
made within one year of purchase
CLASS Z None None Sold to a limited group of
investors
</TABLE>
The four classes of shares represent an interest in the same portfolio of
investments of the Series and have the same rights, except that (i) each class
(with the exception of Class Z shares, which are not subject to any distribution
or service fees) bears the separate expenses of its Rule 12b-1 distribution and
service plan, (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, and (iii)
only Class B shares have a
24
<PAGE>
conversion feature. The four classes also have separate exchange privileges. See
"How to Exchange Your Shares" below. The income attributable to each class and
the dividends payable on the shares of each class will be reduced by the amount
of the distribution fee, if any, of each class. Class B and Class C shares bear
the expenses of a higher distribution fee which will generally cause them to
have higher expense ratios and to pay lower dividends than the Class A and Class
Z shares.
Financial advisers and other sales agents who sell shares of the Series will
receive different compensation for selling Class A, Class B, Class C and Class Z
shares and will generally receive more compensation initially for selling Class
A and Class B shares than for selling Class C or Class Z shares.
IN SELECTING A PURCHASE ALTERNATIVE, YOU SHOULD CONSIDER, AMONG OTHER THINGS,
(1) the length of time you expect to hold your investment, (2) the amount of any
applicable sales charge (whether imposed at the time of purchase or redemption)
and distribution-related fees, as noted above, (3) whether you qualify for any
reduction or waiver of any applicable sales charge, (4) the various exchange
privileges among the different classes of shares (see "How to Exchange Your
Shares" below) and (5) the fact that Class B shares automatically convert to
Class A shares approximately seven years after purchase (see "Conversion
Feature--Class B Shares" below).
The following is provided to assist you in determining which method of
purchase best suits your individual circumstances and is based on current fees
and expenses being charged to the Series:
If you intend to hold your investment in the Series for less than 5 years and
do not qualify for a reduced sales charge on Class A shares, since Class A
shares are subject to a maximum initial sales charge of 3% and Class B shares
are subject to a CDSC of 5% which declines to zero over a 6 year period, you
should consider purchasing Class C shares over either Class A or Class B shares.
If you intend to hold your investment for 5 years or more and do not qualify
for a reduced sales charge on Class A shares, since Class B shares convert to
Class A shares approximately 7 years after purchase and because all of your
money would be invested initially in the case of Class B shares, you should
consider purchasing Class B shares over either Class A or Class C shares.
If you qualify for a reduced sales charge on Class A shares, it may be more
advantageous for you to purchase Class A shares over either Class B or Class C
shares regardless of how long you intend to hold your investment. However,
unlike Class B and Class C shares, you would not have all of your money invested
initially because the sales charge on Class A shares is deducted at the time of
purchase.
If you do not qualify for a reduced sales charge on Class A shares and you
purchase Class C shares, you would have to hold your investment for more than 4
years for the higher cumulative annual distribution-related fee on those shares
to exceed the initial sales charge plus cumulative annual distribution-related
fee on Class A shares. This does not take into account the time value of money,
which further reduces the impact of the higher Class C distribution-related fee
on the investment, fluctuations in net asset value, the effect of the return on
the investment over this period of time or redemptions when the CDSC is
applicable.
ALL PURCHASES OF $1 MILLION OR MORE, EITHER AS PART OF A SINGLE INVESTMENT OR
UNDER RIGHTS OF ACCUMULATION OR LETTERS OF INTENT, MUST BE FOR CLASS A SHARES
UNLESS THE PURCHASER IS ELIGIBLE TO PURCHASE CLASS Z SHARES. See "Reduction and
Waiver of Initial Sales Charges" and "Class Z Shares" below.
25
<PAGE>
CLASS A SHARES
The offering price of Class A shares for investors choosing the initial sales
charge alternative is the next determined NAV plus a sales charge (expressed as
a percentage of the offering price and of the amount invested) as shown in the
following table:
<TABLE>
<CAPTION>
SALES CHARGE AS SALES CHARGE AS DEALER CONCESSION
PERCENTAGE OF PERCENTAGE OF AS PERCENTAGE OF
AMOUNT OF PURCHASE OFFERING PRICE AMOUNT INVESTED OFFERING PRICE
------------------------ --------------- --------------- -----------------
<S> <C> <C> <C>
Less than $99,999 3.00% 3.09% 3.00%
$100,000 to $249,999 2.50 2.56 2.50
$250,000 to $499,999 1.50 1.52 1.50
$500,000 to $999,999 1.00 1.01 1.00
$1,000,000 and above None None None
</TABLE>
The Distributor may reallow the entire initial sales charge to dealers.
Selling dealers may be deemed to be underwriters, as that term is defined in the
Securities Act.
In connection with the sale of Class A shares at NAV (without payment of an
initial sales charge), the Manager, the Distributor or one of their affiliates
will pay dealers, financial advisers and other persons which distribute shares a
finders' fee from its own resources based on a percentage of the net asset value
of shares sold by such persons.
REDUCTION AND WAIVER OF INITIAL SALES CHARGES. Reduced sales charges are
available through Rights of Accumulation and Letters of Intent. Shares of the
Fund and shares of other Prudential Mutual Funds (excluding money market funds
other than those acquired pursuant to the exchange privilege) may be aggregated
to determine the applicable reduction. See "Purchase and Redemption of Fund
Shares--Reduction and Waiver of Initial Sales Charges--Class A Shares" in the
Statement of Additional Information.
PRUARRAY SAVINGS PROGRAM. Class A shares are also offered at net asset value
to employees of companies that enter into a written agreement with Prudential
Retirement Services to participate in the PruArray Savings Program. Under this
Program, a limited number of Prudential Mutual Funds are available for purchase
at net asset value by Savings Accumulation Plans of the company's employees. The
Program is available only to employees who open a Savings Accumulation Plan
account with the Transfer Agent. The program is offered to companies that have
at least 250 eligible employees.
SPECIAL RULES APPLICABLE TO RETIREMENT PLANS. After a PruArray Plan qualifies
to purchase Class A shares at NAV, all subsequent purchases will be made at NAV.
OTHER WAIVERS. Class A shares may be purchased at NAV, through Prudential
Securities or the Transfer Agent, by the following persons: (a) officers and
current and former Directors/Trustees of the Prudential Mutual Funds (including
the Fund), (b) employees of Prudential Securities and PIFM and their
subsidiaries and members of the families of such persons who maintain an
"employee related" account at Prudential Securities or the Transfer Agent, (c)
employees of subadvisers of the Prudential Mutual Funds provided that the
purchases at NAV are permitted by such person's employer, (d) Prudential
employees and special agents of Prudential and its subsidiaries and all persons
who have retired directly from active service with Prudential or one of its
subsidiaries, (e) registered representatives and employees of dealers who have
entered into a selected dealer agreement with Prudential Securities provided
that purchases at NAV are permitted by such person's employer and (f) investors
who have a business relationship with a financial adviser who joined Prudential
Securities from another investment firm, provided that (i) the purchase is made
within 180 days of the commencement of the financial adviser's employment at
Prudential Securities or within one year in the case of benefit plans, (ii) the
purchase is made with proceeds of a redemption of shares of any open-end
non-money market fund sponsored by the financial adviser's previous employer
(other than a fund which imposes a distribution or service fee of .25 of 1% or
less) and (iii) the financial adviser served as the client's broker on the
previous purchases.
26
<PAGE>
You must notify the Transfer Agent either directly or through Prudential
Securities or Prusec that you are entitled to the reduction or waiver of the
sales charge. The reduction or waiver will be granted subject to confirmation of
your entitlement. No initial sales charges are imposed upon Class A shares
acquired upon the reinvestment of dividends and distributions. See "Purchase and
Redemption of Fund Shares--Reduction and Waiver of Initial Sales Charges--Class
A Shares" in the Statement of Additional Information.
CLASS B AND CLASS C SHARES
The offering price of Class B and Class C shares for investors choosing one of
the deferred sales charge alternatives is the NAV next determined following
receipt of an order by the Transfer Agent or Prudential Securities. Although
there is no sales charge imposed at the time of purchase, redemptions of Class B
and Class C shares may be subject to a CDSC. See "How to Sell Your
Shares--Contingent Deferred Sales Charges" below. The Distributor will pay sales
commissions of up to 4% of the purchase price of Class B shares to dealers,
financial advisers and other persons who sell Class B shares at the time of sale
from its own resources. This facilitates the ability of the Fund to sell the
Class B shares without an initial sales charge being deducted at the time of
purchase. The Distributor anticipates that it will recoup its advancement of
sales commissions from the combination of the CDSC and the distribution fee. See
"How the Fund is Managed--Distributor." In connection with the sale of Class C
shares, the Distributor will pay dealers, financial advisers and other persons
which distribute Class C shares a sales commission of up to 1% of the purchase
price at the time of the sale.
CLASS Z SHARES
Class Z shares of the Fund are available for purchase by the following
categories of investors:
(i) participants in any fee-based program or trust program sponsored by
Prudential Securities, The Prudential Savings Bank, F.S.B. (or any affiliate)
which includes mutual funds as investment options and for which the Fund is an
available option; (ii) current and former Directors/Trustees of the Prudential
Mutual Funds (including the Fund); and (iii) employees of Prudential and/or
Prudential Securities who participate in a Prudential-sponsored employee saving
plan.
In connection with the sale of Class Z shares, the Manager, the Distributor or
one of their affiliates may pay dealers, financial advisers and other persons
which distribute shares a finders' fee based on a percentage of the net asset
value of shares sold by such persons.
HOW TO SELL YOUR SHARES
YOU CAN REDEEM YOUR SHARES OF THE SERIES AT ANY TIME FOR CASH AT THE NAV NEXT
DETERMINED AFTER THE REDEMPTION REQUEST IS RECEIVED IN PROPER FORM BY THE
TRANSFER AGENT OR PRUDENTIAL SECURITIES. SEE "HOW THE FUND VALUES ITS SHARES."
In certain cases, however, redemption proceeds will be reduced by the amount of
any applicable contingent deferred sales charge, as described below. See
"Contingent Deferred Sales Charges" below.
IF YOU HOLD SHARES OF THE SERIES THROUGH PRUDENTIAL SECURITIES, YOU MUST
REDEEM SHARES THROUGH PRUDENTIAL SECURITIES. PLEASE CONTACT YOUR PRUDENTIAL
SECURITIES FINANCIAL ADVISER.
IF YOU HOLD SHARES IN NON-CERTIFICATE FORM, A WRITTEN REQUEST FOR REDEMPTION
SIGNED BY YOU EXACTLY AS THE ACCOUNT IS REGISTERED IS REQUIRED. IF YOU HOLD
CERTIFICATES, THE CERTIFICATES, SIGNED IN THE NAME(S) SHOWN ON THE FACE OF THE
CERTIFICATES, MUST BE RECEIVED BY THE TRANSFER AGENT IN ORDER FOR THE REDEMPTION
REQUEST TO BE PROCESSED. IF REDEMPTION IS REQUESTED BY A CORPORATION,
PARTNERSHIP, TRUST OR FIDUCIARY, WRITTEN EVIDENCE OF AUTHORITY ACCEPTABLE TO THE
TRANSFER AGENT MUST BE SUBMITTED BEFORE SUCH REQUEST WILL BE ACCEPTED. All
correspondence and documents concerning redemptions should be sent to the Fund
in care of its Transfer Agent, Prudential Mutual Fund Services LLC, Attention:
Redemption Services, P .O. Box 15010, New Brunswick, New Jersey 08906-5010.
27
<PAGE>
If the proceeds of the redemption (a) exceed $50,000, (b) are to be paid to a
person other than the record owner, (c) are to be sent to an address other than
the address on the Transfer Agent's records, or (d) are to be paid to a
corporation, partnership, trust or fiduciary, the signature(s) on the redemption
request and on the certificates, if any, or stock power must be guaranteed by an
"eligible guarantor institution." An "eligible guarantor institution" includes
any bank, broker, dealer or credit union. The Transfer Agent reserves the right
to request additional information from, and make reasonable inquiries of, any
eligible guarantor institution. For clients of Prusec, a signature guarantee may
be obtained from the agency or office manager of most Prudential Insurance and
Financial Services or Preferred Services offices.
PAYMENT FOR SHARES PRESENTED FOR REDEMPTION WILL BE MADE BY CHECK WITHIN SEVEN
DAYS AFTER RECEIPT BY THE TRANSFER AGENT OF THE CERTIFICATE AND/OR WRITTEN
REQUEST EXCEPT AS INDICATED BELOW. IF YOU HOLD SHARES THROUGH PRUDENTIAL
SECURITIES, PAYMENT FOR SHARES PRESENTED FOR REDEMPTION WILL BE CREDITED TO YOUR
PRUDENTIAL SECURITIES ACCOUNT, UNLESS YOU INDICATE OTHERWISE. Such payment may
be postponed or the right of redemption suspended at times (a) when the New York
Stock Exchange is closed for other than customary weekends and holidays, (b)
when trading on such Exchange is restricted, (c) when an emergency exists as a
result of which disposal by the Series of securities owned by it is not
reasonably practicable or it is not reasonably practicable for the Series fairly
to determine the value of its net assets, or (d) during any other period when
the SEC, by order, so permits; provided that applicable rules and regulations of
the SEC shall govern as to whether the conditions prescribed in (b), (c) or (d)
exist.
PAYMENT FOR REDEMPTION OF RECENTLY PURCHASED SHARES WILL BE DELAYED UNTIL THE
FUND OR ITS TRANSFER AGENT HAS BEEN ADVISED THAT THE PURCHASE CHECK HAS BEEN
HONORED, UP TO 10 CALENDAR DAYS FROM THE TIME OF RECEIPT OF THE PURCHASE CHECK
BY THE TRANSFER AGENT. SUCH DELAY MAY BE AVOIDED BY PURCHASING SHARES BY WIRE OR
BY CERTIFIED OR CASHIER'S CHECK.
REDEMPTION IN KIND. If the Trustees determine that it would be detrimental to
the best interests of the remaining shareholders of the Fund to make payment
wholly or partly in cash, the Fund may pay the redemption price in whole or in
part by a distribution in kind of securities from the investment portfolio of
the Series of the Fund, in lieu of cash, in conformity with applicable rules of
the SEC. Securities will be readily marketable and will be valued in the same
manner as in a regular redemption. See "How the Fund Values its Shares." If your
shares are redeemed in kind, you will incur transaction costs in converting the
assets into cash. The Fund, however, has elected to be governed by Rule 18f-1
under the Investment Company Act, under which the Fund is obligated to redeem
shares solely in cash up to the lesser of $250,000 or 1% of the net asset value
of the Fund during any 90-day period for any one shareholder.
INVOLUNTARY REDEMPTION. In order to reduce expenses of the Fund, the Trustees
may redeem all of the shares of any shareholder, other than a shareholder which
is an IRA or other tax-deferred retirement plan, whose account has a net asset
value of less than $500 due to a redemption. The Fund will give such
shareholders 60 days' prior written notice in which to purchase sufficient
additional shares to avoid such redemption. No contingent deferred sales charge
will be imposed on any such involuntary redemption.
90-DAY REPURCHASE PRIVILEGE. If you redeem your shares and have not previously
exercised the repurchase privilege, you may reinvest any portion or all of the
proceeds of such redemption in shares of the Series at the NAV next determined
after the order is received, which must be within 90 days after the date of the
redemption. Any CDSC paid in connection with such redemption will be credited
(in shares) to your account. (If less than a full repurchase is made, the credit
will be on a PRO RATA basis.) You must notify the Fund's Transfer Agent, either
directly or through Prudential Securities, at the time the repurchase privilege
is exercised to adjust your account for the CDSC you previously paid.
Thereafter, any redemptions will be subject to the CDSC applicable at the time
of the redemption. See "Contingent Deferred Sales Charges" below. Exercise of
the repurchase privilege may affect the federal tax treatment of any gain
realized upon redemption. See "Distributions and Tax Information" in the
Statement of Additional Information.
28
<PAGE>
CONTINGENT DEFERRED SALES CHARGES
Redemptions of Class B shares will be subject to a contingent deferred sales
charge or CDSC declining from 5% to zero over a six-year period. Class C shares
redeemed within one year of purchase will be subject to a 1% CDSC. The CDSC will
be deducted from the redemption proceeds and reduce the amount paid to you. The
CDSC will be imposed on any redemption by you which reduces the current value of
your Class B or Class C shares to an amount which is lower than the amount of
all payments by you for shares during the preceding six years, in the case of
Class B shares, and one year, in the case of Class C shares. A CDSC will be
applied on the lesser of the original purchase price or the current value of the
shares being redeemed. Increases in the value of your shares or shares acquired
through reinvestment of dividends or distributions are not subject to a CDSC.
The amount of any contingent deferred sales charge will be paid to and retained
by the Distributor. See "How the Fund is Managed--Distributor" and "Waiver of
the Contingent Deferred Sales Charges--Class B Shares" below.
The amount of the CDSC, if any, will vary depending on the number of years
from the time of payment for the purchase of shares until the time of redemption
of such shares. Solely for purposes of determining the number of years from the
time of any payment for the purchase of shares, all payments during a month will
be aggregated and deemed to have been made on the last day of the month. The
CDSC will be calculated from the first day of the month after the initial
purchase, excluding the time shares were held in a money market fund. See "How
to Exchange Your Shares" below.
The following table sets forth the rates of the CDSC applicable to redemptions
of Class B shares:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED SALES
CHARGE AS A PERCENTAGE
YEAR SINCE PURCHASE OF DOLLARS INVESTED OR
PAYMENT MADE REDEMPTION PROCEEDS
- ---------------------------------------------------------------------- -------------------------
<S> <C>
First................................................................. 5.0%
Second................................................................ 4.0
Third................................................................. 3.0
Fourth................................................................ 2.0
Fifth................................................................. 1.0
Sixth................................................................. 1.0
Seventh............................................................... None
</TABLE>
In determining whether a CDSC is applicable to a redemption, the calculation
will be made in a manner that results in the lowest possible rate. It will be
assumed that the redemption is made first of amounts representing shares
acquired pursuant to the reinvestment of dividends and distributions; then of
amounts representing the increase in net asset value above the total amount of
payments for the purchase of Series shares made during the preceding six years
(five years for Class B shares purchased prior to January 22, 1990); then of
amounts representing the cost of shares held beyond the applicable CDSC period;
and finally, of amounts representing the cost of shares held for the longest
period of time within the applicable CDSC period.
For example, assume you purchased 100 Class B shares at $10 per share for a
cost of $1,000. Subsequently, you acquired 5 additional Class B shares through
dividend reinvestment. During the second year after the purchase you decided to
redeem $500 of your investment. Assuming at the time of the redemption the NAV
had appreciated to $12 per share, the value of your Class B shares would be
$1,260 (105 shares at $12 per share). The CDSC would not be applied to the value
of the reinvested dividend shares and the amount which represents appreciation
($260). Therefore, $240 of the $500 redemption proceeds ($500 minus $260) would
be charged at a rate of 4% (the applicable rate in the second year after
purchase) for a total CDSC of $9.60.
For federal income tax purposes, the amount of the CDSC will reduce the gain
or increase the loss, as the case may be, on the amount recognized on the
redemption of shares.
WAIVER OF THE CONTINGENT DEFERRED SALES CHARGES--CLASS B SHARES. The CDSC will
be waived in the case of a redemption following the death or disability of a
shareholder or, in the case of a trust account, following the death or
disability of
29
<PAGE>
the grantor. The waiver is available for total or partial redemptions of shares
owned by a person, either individually or in joint tenancy (with rights of
survivorship), at the time of death or initial determination of disability,
provided that the shares were purchased prior to death or disability. In
addition, the CDSC will be waived on redemptions of shares held by a Trustee of
the Fund.
You must notify the Fund's Transfer Agent either directly or through
Prudential Securities or Prusec, at the time of redemption, that you are
entitled to waiver of the CDSC and provide the Transfer Agent with such
supporting documentation as it may deem appropriate. The waiver will be granted
subject to confirmation of your entitlement. See "Purchase and Redemption of
Fund Shares--Waiver of the Contingent Deferred Sales Charge--Class B Shares" in
the Statement of Additional Information.
A quantity discount may apply to redemptions of Class B shares purchased prior
to August 1, 1994. See "Purchase and Redemption of Fund Shares--Quantity
Discount--Class B Shares Purchased Prior to August 1, 1994" in the Statement of
Additional Information.
SYSTEMATIC WITHDRAWAL PLAN. The CDSC will be waived (or reduced) on certain
redemptions from a Systematic Withdrawal Plan. On an annual basis, up to 12% of
the total dollar amount subject to the CDSC may be redeemed without charge. The
Transfer Agent will calculate the total amount available for this waiver
annually on the anniversary of your purchase or, for shares purchased prior to
March 1, 1997, on March 1 of the current year. The CDSC will be waived (or
reduced) on redemptions until this threshold 12% amount is reached.
CONVERSION FEATURE--CLASS B SHARES
Class B shares will automatically convert to Class A shares on a quarterly
basis approximately seven years after purchase. Conversions will be effected at
relative net asset value without the imposition of any additional sales charge.
Since the Fund tracks amounts paid rather than the number of shares bought on
each purchase of Class B shares, the number of Class B shares eligible to
convert to Class A shares (excluding shares acquired through the automatic
reinvestment of dividends and other distributions) (the Eligible Shares) will be
determined on each conversion date in accordance with the following formula: (i)
the ratio of (a) the amounts paid for Class B shares purchased at least seven
years prior to the conversion date to (b) the total amount paid for all Class B
shares purchased and then held in your account (ii) multiplied by the total
number of Class B shares purchased and then held in your account. Each time any
Eligible Shares in your account convert to Class A shares, all shares or amounts
representing Class B shares then in your account that were acquired through the
automatic reinvestment of dividends and other distributions will convert to
Class A shares.
For purposes of determining the number of Eligible Shares, if the Class B
shares in your account on any conversion date are the result of multiple
purchases at different net asset values per share, the number of Eligible Shares
calculated as described above will generally be either more or less than the
number of shares actually purchased approximately seven years before such
conversion date. For example, if 100 shares were initially purchased at $10 per
share (for a total of $1,000) and a second purchase of 100 shares was
subsequently made at $11 per share (for a total of $1,100), 95.24 shares would
convert approximately seven years from the initial purchase (I.E., $1,000
divided by $2,100 (47.62%) multiplied by 200 shares equals 95.24 shares). The
Manager reserves the right to modify the formula for determining the number of
Eligible Shares in the future as it deems appropriate on notice to shareholders.
Since annual distribution-related fees are lower for Class A shares than Class
B shares, the per share net asset value of the Class A shares may be higher than
that of the Class B shares at the time of conversion. Thus, although the
aggregate dollar value will be the same, you may receive fewer Class A shares
than Class B shares converted. See "How the Fund Values its Shares."
For purposes of calculating the applicable holding period for conversions, all
payments for Class B shares during a month will be deemed to have been made on
the last day of the month, or for Class B shares acquired through exchange or a
series of exchanges, on the last day of the month in which the original payment
for purchases of such Class B shares was made. For Class B shares previously
exchanged for shares of a money market fund, the time period during which such
shares were held in the money market fund will be excluded. For example, Class B
shares held in a money market fund for one year will not convert to
30
<PAGE>
Class A shares until approximately eight years from purchase. For purposes of
measuring the time period during which shares are held in a money market fund,
exchanges will be deemed to have been made on the last day of the month. Class B
shares acquired through exchange will convert to Class A shares after expiration
of the conversion period applicable to the original purchase of such shares.
The conversion feature may be subject to the continuing availability of
opinions of counsel or rulings of the Internal Revenue Service (i) that the
dividends and other distributions paid on Class A, Class B, Class C and Class Z
shares will not constitute "preferential dividends" under the Internal Revenue
Code and (ii) that the conversion of shares does not constitute a taxable event.
The conversion of Class B shares into Class A shares may be suspended if such
opinions or rulings are no longer available. If conversions are suspended, Class
B shares of the Series will continue to be subject, possibly indefinitely, to
their higher annual distribution and service fee.
HOW TO EXCHANGE YOUR SHARES
AS A SHAREHOLDER OF THE SERIES, YOU HAVE AN EXCHANGE PRIVILEGE WITH THE OTHER
SERIES OF THE FUND AND CERTAIN OTHER PRUDENTIAL MUTUAL FUNDS (THE EXCHANGE
PRIVILEGE), INCLUDING ONE OR MORE SPECIFIED MONEY MARKET FUNDS, SUBJECT TO THE
MINIMUM INVESTMENT REQUIREMENTS OF SUCH FUNDS. CLASS A, CLASS B, CLASS C AND
CLASS Z SHARES OF THE SERIES MAY BE EXCHANGED FOR CLASS A, CLASS B, CLASS C AND
CLASS Z SHARES, RESPECTIVELY, OF THE OTHER SERIES OF THE FUND OR ANOTHER FUND ON
THE BASIS OF THE RELATIVE NAV. No sales charge will be imposed at the time of
the exchange. Any applicable CDSC payable upon the redemption of shares
exchanged will be calculated from the first day of the month after the initial
purchase, excluding the time shares were held in a money market fund. Class B
and Class C shares may not be exchanged into money market funds other than
Prudential Special Money Market Fund, Inc. For purposes of calculating the
holding period applicable to the Class B conversion feature, the time period
during which Class B shares were held in a money market fund will be excluded.
See "Conversion Feature--Class B Shares" above. An exchange will be treated as a
redemption and purchase for tax purposes. See "Shareholder Investment
Account--Exchange Privilege" in the Statement of Additional Information.
IN ORDER TO EXCHANGE SHARES BY TELEPHONE, YOU MUST AUTHORIZE TELEPHONE
EXCHANGES ON YOUR INITIAL APPLICATION FORM OR BY WRITTEN NOTICE TO THE TRANSFER
AGENT AND HOLD SHARES IN NON-CERTIFICATE FORM. Thereafter, you may call the Fund
at (800) 225-1852 to execute a telephone exchange of shares, weekdays, except
holidays, between the hours of 8:00 A.M. and 6:00 P.M., New York time. For your
protection and to prevent fraudulent exchanges, your telephone call will be
recorded and you will be asked to provide your personal identification number. A
written confirmation of the exchange transaction will be sent to you. NEITHER
THE FUND NOR ITS AGENTS WILL BE LIABLE FOR ANY LOSS, LIABILITY OR COST WHICH
RESULTS FROM ACTING UPON INSTRUCTIONS REASONABLY BELIEVED TO BE GENUINE UNDER
THE FOREGOING PROCEDURES. All exchanges will be made on the basis of the
relative NAV of the two funds (or series) next determined after the request is
received in good order. The Exchange Privilege is available only in states where
the exchange may legally be made.
IF YOU HOLD SHARES THROUGH PRUDENTIAL SECURITIES, YOU MUST EXCHANGE YOUR
SHARES BY CONTACTING YOUR PRUDENTIAL SECURITIES FINANCIAL ADVISER.
IF YOU HOLD CERTIFICATES, THE CERTIFICATES, SIGNED IN THE NAME(S) SHOWN ON THE
FACE OF THE CERTIFICATES, MUST BE RETURNED IN ORDER FOR THE SHARES TO BE
EXCHANGED. SEE "HOW TO SELL YOUR SHARES" ABOVE.
You may also exchange shares by mail by writing to Prudential Mutual Fund
Services LLC, Attention: Exchange Processing, P.O. Box 15010, New Brunswick, New
Jersey 08906-5010.
IN PERIODS OF SEVERE MARKET OR ECONOMIC CONDITIONS, THE TELEPHONE EXCHANGE OF
SHARES MAY BE DIFFICULT TO IMPLEMENT AND YOU SHOULD MAKE EXCHANGES BY MAIL BY
WRITING TO PRUDENTIAL MUTUAL FUND SERVICES LLC, AT THE ADDRESS NOTED ABOVE.
SPECIAL EXCHANGE PRIVILEGES. A special exchange privilege is available for
shareholders who qualify to purchase Class A shares at NAV (see "Alternative
Purchase Plan--Class A Shares--Reduction and Waiver of Initial Sales Charges"
above) and for
31
<PAGE>
shareholders who qualify to purchase Class Z shares (see "Alternative Purchase
Plan--Class Z Shares" above). Under this exchange privilege, amounts
representing any Class B and Class C shares (which are not subject to a CDSC)
held in such a shareholder's account will be automatically exchanged for Class A
shares for shareholders who qualify to purchase Class A shares at NAV on a
quarterly basis, unless the shareholder elects otherwise. Similarly,
shareholders who qualify to purchase Class Z shares will have their Class B and
Class C shares which are not subject to a CDSC and their Class A shares
exchanged for Class Z shares on a quarterly basis. Eligibility for this exchange
privilege will be calculated on the business day prior to the date of the
exchange. Amounts representing Class B or Class C shares which are not subject
to a CDSC include the following: (1) amounts representing Class B or Class C
shares acquired pursuant to the automatic reinvestment of dividends and
distributions, (2) amounts representing the increase in the net asset value
above the total amount of payments for the purchase of Class B or Class C shares
and (3) amounts representing Class B or Class C shares held beyond the
applicable CDSC period. Class B and Class C shareholders must notify the
Transfer Agent either directly or through Prudential Securities or Prusec that
they are eligible for this special exchange privilege.
Participants in any fee-based program for which the Fund is an available
option will have their Class A shares, if any, exchanged for Class Z shares when
they elect to have those assets become a part of the fee-based program. Upon
leaving the program (whether voluntarily or not), such Class Z shares (and, to
the extent provided for in the program, Class Z shares acquired through
participation in the program) will be exchanged for Class A shares at net asset
value.
The Exchange Privilege is not a right and may be suspended, terminated or
modified on 60 days' notice to shareholders.
FREQUENT TRADING. The Fund and the other Prudential Mutual Funds are not
intended to serve as vehicles for frequent trading in response to short-term
fluctuations in the market. Due to the disruptive effect that market timing
investment strategies and excessive trading can have on efficient portfolio
management, each Prudential Mutual Fund and the Fund reserves the right to
refuse purchase orders and exchanges by any person, group or commonly controlled
accounts, if, in the Manager's sole judgment, such person, group or accounts
were following a market timing strategy or were otherwise engaging in excessive
trading (Market Timers).
To implement this authority to protect the Fund and its shareholders from
excessive trading, the Fund will reject all exchanges and purchases from a
Market Timer unless the Market Timer has entered into a written agreement with
the Fund or its affiliates pursuant to which the Market Timer has agreed to
abide by certain procedures, which include a daily dollar limit on trading. The
Fund may notify the Market Timer of rejection of an exchange or purchase order
subsequent to the day on which the order was placed.
SHAREHOLDER SERVICES
In addition to the Exchange Privilege, as a shareholder in the Series, you can
take advantage of the following services and privileges:
- AUTOMATIC REINVESTMENT OF DIVIDENDS AND/OR DISTRIBUTIONS WITHOUT A SALES
CHARGE. For your convenience, all dividends and distributions are automatically
reinvested in full and fractional shares of the Series at NAV without a sales
charge. You may direct the Transfer Agent in writing not less than 5 full
business days prior to the record date to have subsequent dividends and/or
distributions sent in cash rather than reinvested. If you hold shares through
Prudential Securities, you should contact your financial adviser.
- AUTOMATIC SAVINGS ACCUMULATION PLAN (ASAP). Under ASAP you may make regular
purchases of the Series' shares in amounts as little as $50 via an automatic
debit to a bank account or Prudential Securities account (including a Command
Account). For additional information about this service, you may contact your
Prudential Securities financial adviser, Prusec representative or the Transfer
Agent directly.
32
<PAGE>
- SYSTEMATIC WITHDRAWAL PLAN. A systematic withdrawal plan is available to
shareholders which provides for monthly or quarterly checks. Withdrawals of
Class B and Class C shares may be subject to a CDSC. See "How to Sell Your
Shares-- Contingent Deferred Sales Charges" above.
- REPORTS TO SHAREHOLDERS. The Fund will send you annual and semi-annual
reports. The financial statements appearing in annual reports are audited by
independent accountants. In order to reduce duplicate mailing and printing
expenses, the Fund will provide one annual and semi-annual shareholder report
and annual prospectus per household. You may request additional copies of such
reports by calling (800) 225-1852 or by writing to the Fund at Gateway Center
Three, 100 Mulberry Street, Newark, New Jersey 07102-4077. In addition, monthly
unaudited financial data is available upon request from the Fund.
- SHAREHOLDER INQUIRIES. Inquiries should be addressed to the Fund at Gateway
Center Three, 100 Mulberry Street, Newark, New Jersey 07102-4077, or by
telephone, at (800) 225-1852 (toll-free) or, from outside the U.S.A., at (908)
417-7555 (collect).
For additional information regarding the services and privileges described
above, see "Shareholder Investment Account" in the Statement of Additional
Information.
33
<PAGE>
DESCRIPTION OF SECURITY RATINGS
MOODY'S INVESTORS SERVICE
BOND RATINGS
Aaa: Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edged." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group, they comprise what are generally known
as high grade bonds. They are rated lower than 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
which make the long-term risks appear somewhat larger than the Aaa securities.
A: Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper-medium-grade obligations. Factors giving security
to principal and interest are considered adequate but elements may be present
which suggest a susceptibility to impairment sometime in the future.
Baa: Bonds which are rated Baa are considered as medium grade obligations,
I.E., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present, but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba: Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate, and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Bonds rated within the Aa, A, Baa, Ba and B categories which Moody's believes
possess the strongest credit attributes within those categories are designated
by the symbols Aa1, A1, Baa1, Ba1 and B1.
Caa: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca: Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
C: Bonds which are rated C are the lowest-rated class of bonds, and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
SHORT-TERM RATINGS
Moody's ratings for tax-exempt notes and other short-term loans are designated
Moody's Investment Grade (MIG). This distinction is in recognition of the
differences between short-term and long-term credit risk.
MIG 1: Loans bearing the designation MIG 1 are of the best quality, enjoying
strong protection by established cash flows, superior liquidity support or
demonstrated broad-based access to the market for refinancing.
A-1
<PAGE>
MIG 2: Loans bearing the designation MIG 2 are of high quality, with margins
of protection ample although not so large as in the preceding group.
MIG 3: Loans bearing the designation MIG 3 are of favorable quality, with all
security elements accounted for but lacking the strength of the preceding
grades.
MIG 4: Loans bearing the designation MIG 4 are of adequate quality.
Protection commonly regarded and required of an investment security is present
and although not distinctly or predominantly speculative, there is specific
risk.
SHORT-TERM DEBT RATINGS
Moody's Short-Term Debt Ratings are opinions of the ability of issuers to
repay punctually senior debt obligations which have an original maturity not
exceeding one year.
Prime-1: Issuers rated 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.
Prime-3: Issuers rated Prime-3 (or supporting institutions) have an
acceptable ability for repayment of senior short-term debt obligations.
Not Prime: Issuers rated Not Prime do not fall within any of the Prime rating
categories.
STANDARD & POOR'S RATINGS GROUP
BOND RATINGS
AAA: Debt rated AAA has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.
AA: Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the highest-rated issues only in small degree.
A: Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB: Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher-rated categories.
BB, B, CCC, CC and C: Debt rated BB, B, CCC, CC or C is regarded as having
predominantly speculative characteristics with respect to capacity to pay
interest and repay principal. BB indicates the least degree of speculation and C
the highest. While such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
D: Debt rated D is in payment default. This rating is used when interest
payments or principal payments are not made on the date due even if the
applicable grace period has not expired, unless S&P believes that such payments
will be made during such grace period.
COMMERCIAL PAPER RATINGS
An S&P Commercial Paper rating is a current assessment of the likelihood of
timely payment of debt considered short-term in the relevant market.
A-2
<PAGE>
A-1: The A-1 designation indicates that the degree of safety regarding timely
payment is strong. Those issues determined to possess extremely strong safety
characteristics are denoted with a plus sign (+) designation.
A-2: Capacity for timely payment on issues with the designation A-2 is
satisfactory. However, the relative degree of safety is not as high as for
issues designated A-1.
A-3: Issues carrying this designation have adequate capacity for timely
payment. They are, however, more vulnerable to the adverse effects of changes in
circumstances than obligations carrying the higher designations.
MUNICIPAL NOTES
A municipal note rating reflects the liquidity concerns and market access
risks unique to municipal notes. Municipal notes due in three years or less will
likely receive a municipal note rating, while notes maturing beyond three years
will most likely receive a long-term debt rating. Municipal notes are rated
SP-1, SP-2 or SP-3. The designation SP-1 indicates a very strong capacity to pay
principal and interest. Those issues determined to possess extremely strong
safety characteristics are denoted with a plus sign (+) designation. An SP-2
designation indicates a satisfactory capacity to pay principal and interest. An
SP-3 designation indicates speculative capacity to pay principal and interest.
A-3
<PAGE>
THE PRUDENTIAL MUTUAL FUND FAMILY
Prudential Investments Fund Management offers a broad range of mutual funds
designed to meet your individual needs. We welcome you to review the investment
options available through our family of funds. For more information on the
Prudential Mutual Funds, including charges and expenses, contact your Prudential
Securities financial adviser or Prusec representative or telephone the Funds at
(800) 225-1852 for a free prospectus. Read the prospectus carefully before you
invest or send money.
TAXABLE BOND FUNDS
--------------------------
Prudential Diversified Bond Fund, Inc.
Prudential Government Income Fund, Inc.
Prudential Government Securities Trust
Short-Intermediate Term Series
Prudential High Yield Fund, Inc.
Prudential Mortgage Income Fund, Inc.
Prudential Structured Maturity Fund, Inc.
Income Portfolio
The BlackRock Government Income Trust
TAX-EXEMPT BOND FUNDS
-----------------------------
Prudential California Municipal Fund
California Series
California Income Series
Prudential Municipal Bond Fund
High Yield Series
Insured Series
Intermediate Series
Prudential Municipal Series Fund
Florida Series
Maryland Series
Massachusetts Series
Michigan Series
New Jersey Series
New York Series
North Carolina Series
Ohio Series
Pennsylvania Series
Prudential National Municipals Fund, Inc.
GLOBAL FUNDS
--------------------
Prudential Europe Growth Fund, Inc.
Prudential Global Genesis Fund, Inc.
Prudential Global Limited Maturity Fund, Inc.
Limited Maturity Portfolio
Prudential Intermediate Global Income Fund, Inc.
Prudential International Bond Fund, Inc.
Prudential Natural Resources Fund, Inc.
Prudential Pacific Growth Fund, Inc.
Purdential World Fund, Inc.
Global Series
International Stock Series
The Global Total Return Fund, Inc.
Global Utility Fund, Inc.
EQUITY FUNDS
--------------------
Prudential Balanced Fund
Prudential Distressed Securities Fund, Inc.
Prudential Dryden Fund
Prudential Active Balanced Fund
Prudential Stock Index Fund
Prudential Small-Cap Index Fund
Prudential Bond Market Index Fund
Prudential Pacific Index Fund
Prudential Europe Index Fund
Prudential Emerging Growth Fund Inc.
Prudential Equity Fund, Inc.
Prudential Equity Income Fund
Prudential Jennison Series Fund, Inc.
Prudential Jennison Growth Fund
Prudential Jennison Growth & Income Fund
Prudential Multi-Sector Fund, Inc.
Prudential Small Company Value Fund, Inc.
Prudential Small-Cap Quantum Fund, Inc.
Prudential Utility Fund, Inc.
Nicholas-Applegate Fund, Inc.
Nicholas-Applegate Growth Equity Fund
MONEY MARKET FUNDS
--------------------------
- - TAXABLE MONEY MARKET FUNDS
Prudential Government Securities Trust
Money Market Series
U.S. Treasury Money Market Series
Prudential Special Money Market Fund, Inc.
Money Market Series
Prudential MoneyMart Assets, Inc.
- - TAX-FREE MONEY MARKET FUNDS
Prudential Tax-Free Money Fund, Inc.
Prudential California Municipal Fund
California Money Market Series
Prudential Municipal Series Fund
Connecticut Money Market Series
Massachusetts Money Market Series
New Jersey Money Market Series
New York Money Market Series
- - COMMAND FUNDS
Command Money Fund
Command Government Fund
Command Tax-Free Fund
- - INSTITUTIONAL MONEY MARKET FUNDS
Prudential Institutional Liquidity Portfolio, Inc.
Institutional Money Market Series
B-1
<PAGE>
No dealer, sales representative or any other person has been authorized to give
any information or to make any representations, other than those contained in
this Prospectus, in connection with the offer contained herein, and, if given or
made, such other information or representations must not be relied upon as
having been authorized by the Fund or the Distributor. This Prospectus does not
constitute an offer by the Fund or by the Distributor to sell or a solicitation
of any offer to buy any of the securities offered hereby in any jurisdiction to
any person to whom it is unlawful to make such offer in such jurisdiction.
-------------------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---
<S> <C>
FUND HIGHLIGHTS................................. 2
What are the Series' Risk Factors and Special
Characteristics?............................. 2
FUND EXPENSES................................... 4
FINANCIAL HIGHLIGHTS............................ 5
HOW THE FUND INVESTS............................ 9
Investment Objective and Policies............. 9
Other Investments and Policies................ 14
Investment Restrictions....................... 15
HOW THE FUND IS MANAGED......................... 15
Manager....................................... 15
Distributor................................... 16
Portfolio Transactions........................ 18
Custodian and Transfer and Dividend Disbursing
Agent........................................ 18
HOW THE FUND VALUES ITS SHARES.................. 19
HOW THE FUND CALCULATES PERFORMANCE............. 19
TAXES, DIVIDENDS AND DISTRIBUTIONS.............. 20
GENERAL INFORMATION............................. 22
Description of Shares......................... 22
Additional Information........................ 23
SHAREHOLDER GUIDE............................... 23
How to Buy Shares of the Fund................. 23
Alternative Purchase Plan..................... 24
How to Sell Your Shares....................... 27
Conversion Feature--Class B Shares............ 30
How to Exchange Your Shares................... 31
Shareholder Services.......................... 32
DESCRIPTION OF SECURITY RATINGS................. A-1
THE PRUDENTIAL MUTUAL FUND FAMILY............... B-1
</TABLE>
- -------------------------------------------
MF122A 44404EO
Class A: 74435M-74-7
CUSIP Nos.: Class B: 74435M-75-4
Class C: 74435M-52-3
Class Z: 74435M-44-0
PRUDENTIAL
MUNICIPAL
SERIES FUND
----------------------------------------------------------------
NEW YORK SERIES
PROSPECTUS
October 30, 1997
www.prudential.com
[LOGO] Prudential
Investments
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
(NEW YORK MONEY MARKET SERIES)
- --------------------------------------------------------------------------------
PROSPECTUS DATED OCTOBER 30, 1997
- ----------------------------------------------------------------
Prudential Municipal Series Fund (the Fund) (New York Money Market Series) (the
Series) is one of thirteen series of an open-end, management investment company,
or mutual fund. This Series is diversified and is designed to provide the
highest level of current income that is exempt from New York State, New York
City and federal income taxes consistent with liquidity and the preservation of
capital. The net assets of the Series are invested primarily in short-term, tax-
exempt New York State, municipal and local debt obligations and obligations of
other qualifying issuers. There can be no assurance that the Series' investment
objective will be achieved. See "How the Fund Invests--Investment Objective and
Policies." The Fund's address is Gateway Center Three, 100 Mulberry Street,
Newark, New Jersey 07102-4077, and its telephone number is (800) 225-1852.
Shares of the Series are sold without a sales charge. The Series is subject to
an annual charge of .125% of its average daily net assets pursuant to the
Distribution and Service Plan. See "How the Fund is Managed--Distributor."
THE SERIES MAY INVEST A SIGNIFICANT PORTION OF ITS ASSETS IN THE OBLIGATIONS OF
A SINGLE ISSUER, AND THEREFORE AN INVESTMENT IN THE SERIES MAY BE MORE RISKY
THAN AN INVESTMENT IN OTHER TYPES OF MONEY MARKET FUNDS.
AN INVESTMENT IN THE SERIES IS NEITHER INSURED NOR GUARANTEED BY THE U.S.
GOVERNMENT AND THERE CAN BE NO ASSURANCE THAT THE SERIES WILL BE ABLE TO
MAINTAIN A STABLE NET ASSET VALUE OF $1.00 PER SHARE. SEE "HOW THE FUND VALUES
ITS SHARES."
This Prospectus sets forth concisely the information about the Fund and the New
York Money Market Series that a prospective investor should know before
investing. Additional information about the Fund has been filed with the
Securities and Exchange Commission in a Statement of Additional Information
dated October 30, 1997, which information is incorporated herein by reference
(is legally considered a part of this Prospectus) and is available without
charge upon request to Prudential Municipal Series Fund at the address or
telephone number noted above.
- --------------------------------------------------------------------------------
INVESTORS ARE ADVISED TO READ THIS PROSPECTUS AND RETAIN IT FOR FUTURE
REFERENCE.
- --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
<PAGE>
FUND HIGHLIGHTS
The following summary is intended to highlight certain information contained
in this Prospectus and is qualified in its entirety by the more detailed
information appearing elsewhere herein.
WHAT IS PRUDENTIAL MUNICIPAL SERIES FUND?
Prudential Municipal Series Fund is a mutual fund whose shares are offered
in thirteen series, each of which operates as a separate fund. A mutual fund
pools the resources of investors by selling its shares to the public and
investing the proceeds of such sale in a portfolio of securities designed to
achieve its investment objective. Technically, the Fund is an open-end,
management investment company. Only the New York Money Market Series is
offered through this Prospectus.
WHAT IS THE SERIES' INVESTMENT OBJECTIVE?
The Series' investment objective is to provide the highest level of
current income that is exempt from New York State, New York City and federal
income taxes consistent with liquidity and the preservation of capital. It
seeks to achieve this objective by investing primarily in short-term New
York State, municipal and local government obligations and obligations of
other qualifying issuers, such as issuers located in Puerto Rico, the Virgin
Islands and Guam, which pay income exempt, in the opinion of counsel, from
New York State, New York City and federal income taxes (New York
Obligations). There can be no assurance that the Series' investment
objective will be achieved. See "How the Fund Invests--Investment Objective
and Policies" at page 6.
WHAT ARE THE SERIES' RISK FACTORS AND SPECIAL CHARACTERISTICS?
It is anticipated that the net asset value of the Series will remain
constant at $1.00 per share, although this cannot be assured. In order to
maintain such constant net asset value, the Series will value its portfolio
securities at amortized cost. While this method provides certainty in
valuation, it may result in periods during which the value of a security in
the Series' portfolio, as determined by amortized cost, is higher or lower
than the price the Series would receive if it sold such security. See "How
the Fund Values its Shares" at page 12.
In seeking to achieve its investment objective, the Series will invest at
least 80% of the value of its total assets in New York Obligations. This
degree of investment concentration makes the Series particularly susceptible
to factors adversely affecting issuers of New York Obligations, and makes an
investment in the Series more risky than an investment in other types of
money market funds. See "How the Fund Invests--Investment Objective and
Policies--Special Considerations" at page 9. As with an investment in any
mutual fund, an investment in this Series can decrease in value and you can
lose money.
WHO MANAGES THE FUND?
Prudential Investments Fund Management LLC (PIFM or the Manager) is the
Manager of the Fund and is compensated for its services at an annual rate of
.50 of 1% of the Series' average daily net assets. As of September 30, 1997,
PIFM served as manager or administrator to 63 investment companies,
including 41 mutual funds, with aggregate assets of approximately $59.9
billion. The Prudential Investment Corporation, which does business under
the name Prudential Investments (PI, the Subadviser or the investment
adviser), furnishes investment advisory services in connection with the
management of the Fund under a Subadvisory Agreement with PIFM. See "How the
Fund is Managed--Manager" at page 10.
2
<PAGE>
WHO DISTRIBUTES THE SERIES' SHARES?
Prudential Securities Incorporated (Prudential Securities, PSI or the
Distributor) acts as the Distributor of the Series' shares. The Series
reimburses Prudential Securities for expenses related to the distribution of
the Series' shares at an annual rate of up to .125 of 1% of the average
daily net assets of the Series. See "How the Fund is Managed--Distributor"
at page 11.
WHAT IS THE MINIMUM INVESTMENT?
The minimum initial investment is $1,000. The minimum subsequent
investment is $100. There is no minimum investment requirement for certain
employee savings plans. For purchases made through the Automatic Savings
Accumulation Plan, the minimum initial and subsequent investment is $50. See
"Shareholder Guide--How to Buy Shares of the Fund" at page 16 and
"Shareholder Guide-- Shareholder Services" at page 24.
HOW DO I PURCHASE SHARES?
You may purchase shares of the Series through Prudential Securities, Pruco
Securities Corporation (Prusec) or directly from the Fund through its
transfer agent, Prudential Mutual Fund Services LLC (PMFS or the Transfer
Agent), at the net asset value per share (NAV) next determined after receipt
of your purchase order by the Transfer Agent or Prudential Securities. See
"How the Fund Values its Shares" at page 12 and "Shareholder Guide--How to
Buy Shares of the Fund" at page 16.
HOW DO I SELL MY SHARES?
You may redeem shares of the Series at any time at the NAV next determined
after Prudential Securities or the Transfer Agent receives your sell order.
See "Shareholder Guide--How to Sell Your Shares" at page 20.
HOW ARE DIVIDENDS AND DISTRIBUTIONS PAID?
The Series expects to declare daily and pay monthly dividends of net
investment income and short-term capital gains. Dividends and distributions
will be automatically reinvested in additional shares of the Series at NAV
unless you request that they be paid to you in cash. See "Taxes, Dividends
and Distributions" at page 13.
3
<PAGE>
FUND EXPENSES
(NEW YORK MONEY MARKET SERIES)
<TABLE>
<CAPTION>
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on Purchases................. None
Maximum Deferred Sales Loads............................ None
Maximum Sales Load Imposed on Reinvested Dividends...... None
Redemption Fees......................................... None
Exchange Fee............................................ None
</TABLE>
<TABLE>
<CAPTION>
<S> <C>
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management Fees......................................... .500%
12b-1 Fees.............................................. .125%
Other Expenses.......................................... .085%
------
Total Fund Operating Expenses........................... .710%
------
------
</TABLE>
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------- -------- -------- ---------
<S> <C> <C> <C> <C>
EXAMPLE
You would pay the following expenses on a $1,000
investment, assuming (1) 5% annual return and (2)
redemption at the end of each time period:............. $ 7 $ 23 $ 40 $ 88
</TABLE>
The above example is based on data for the Series' fiscal year ended August
31, 1997. THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
The purpose of this table is to assist an investor in understanding the
various costs and expenses that an investor in the Series will bear, whether
directly or indirectly. For more complete descriptions of the various costs
and expenses, see "How the Fund is Managed." "Other Expenses" includes
operating expenses of the Series, such as Trustees' and professional fees,
registration fees, reports to shareholders and transfer agency and custodian
fees.
4
<PAGE>
FINANCIAL HIGHLIGHTS
(FOR A SHARE OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT EACH OF THE INDICATED
PERIODS)
The following financial highlights, for the fiscal year ended August 31, 1997,
have been audited by Price Waterhouse LLP, independent accountants, and by
Deloitte and Touche LLP, independent auditors, for the four years ended August
31, 1996. Each of the respective reports by Price Waterhouse LLP and Deloitte &
Touche LLP on such financial statements was unqualified. This information should
be read in conjunction with the financial statements and the notes thereto,
which appear in the Statement of Additional Information. The following financial
highlights contain selected data for a share of beneficial interest outstanding,
total return, ratios to average net assets and other supplemental data for the
periods indicated. This information is based on data contained in the financial
statements.
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
-----------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993 1992 1991 1990 1989 (a) 1988
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of
year.............. $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
Net investment
income and net
realized gains.... .03 .03 .03 .02 .02 .03 .04 .05 .05 .04
Dividends and
distributions to
shareholders...... (.03) (.03) (.03) (.02) (.02) (.03) (.04) (.05) (.05) (.04)
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Net asset value, end
of year........... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
TOTAL RETURN (B):... 2.91% 2.97% 3.06% 1.80% 1.80% 2.93% 4.37% 5.14% 5.14% 4.14%
RATIOS/SUPPLEMENTAL
DATA:
Net assets, end of
year (000)........ $358,291 $349,470 $324,698 $269,073 $286,304 $249,785 $236,361 $226,758 $184,615 $168,391
Average net assets
(000)............. $326,092 $336,427 $292,763 $280,492 $275,640 $248,557 $245,494 $218,423 $173,661 $154,746
Ratios to average
net assets:
Expenses,
including
distribution
fee.............. .71% .72% .73% .77% .75% .76% .79% .75% .79% .72%
Expenses,
excluding
distribution
fee.............. .58% .60% .61% .64% .63% .63% .66% .62% .67% .60%
Net investment
income......... 2.87% 2.91% 3.02% 1.78% 1.75% 2.83% 4.23% 4.99% 5.01% 4.18%
</TABLE>
- ---------------
(a) On December 31, 1988, Prudential Mutual Fund Management, Inc.
succeeded The Prudential Insurance Company of America as investment
adviser and since then has acted as manager of the Fund.
(b) Total return includes reinvestment of dividends and distributions.
5
<PAGE>
CALCULATION OF YIELD
THE SERIES CALCULATES ITS "CURRENT YIELD" based on the net change, exclusive
of realized and unrealized gains or losses, in the value of a hypothetical
account over a seven calendar day base period. THE SERIES CALCULATES ITS
"EFFECTIVE ANNUAL YIELD" ASSUMING DAILY COMPOUNDING. Tax-equivalent yield shows
the taxable yield an investor would have to earn from a fully taxable investment
in order to equal the Series' tax-free yield after taxes and is calculated by
dividing the Series' current or effective yield by the result of one minus the
State tax rate times one minus the federal tax rate. The following is an example
of the yield calculations as of August 31, 1997:
<TABLE>
<S> <C>
Value of hypothetical account at end of period......... $1.000536323
Value of hypothetical account at beginning of period... 1.000000000
------------
Base period return..................................... $0.000536323
------------
------------
CURRENT YIELD (.000536323 X (365/7))................... 2.80%
EFFECTIVE ANNUAL YIELD, assuming daily compounding..... 2.84%
TAX-EQUIVALENT CURRENT YIELD (2.80% DIVIDED BY
[(1-.0685)(1-.396)]................................... 4.98%
</TABLE>
THE YIELD WILL FLUCTUATE FROM TIME TO TIME AND DOES NOT INDICATE FUTURE
PERFORMANCE.
The weighted average life to maturity of the portfolio of the Series on August
31, 1997 was 51 days.
Yield is computed in accordance with a standardized formula described in the
Statement of Additional Information. In addition, comparative performance
information may be used from time to time in advertising or marketing the
Series' shares, including data from Lipper Analytical Services, Inc.,
Morningstar Publications, Inc., IBC/Donoghue's Money Fund Report, The Bank Rate
Monitor, other industry publications, business periodicals and market indices.
HOW THE FUND INVESTS
INVESTMENT OBJECTIVE AND POLICIES
PRUDENTIAL MUNICIPAL SERIES FUND (THE FUND) IS AN OPEN-END, MANAGEMENT
INVESTMENT COMPANY, OR MUTUAL FUND, CONSISTING OF THIRTEEN SEPARATE SERIES. EACH
OF THESE SERIES IS MANAGED INDEPENDENTLY. THE NEW YORK MONEY MARKET SERIES (THE
SERIES) IS DIVERSIFIED AND ITS INVESTMENT OBJECTIVE IS TO PROVIDE THE HIGHEST
LEVEL OF CURRENT INCOME THAT IS EXEMPT FROM NEW YORK STATE, NEW YORK CITY AND
FEDERAL INCOME TAXES CONSISTENT WITH LIQUIDITY AND THE PRESERVATION OF CAPITAL.
THE SERIES SEEKS TO ACHIEVE ITS INVESTMENT OBJECTIVE BY INVESTING PRIMARILY IN
SHORT-TERM NEW YORK STATE, MUNICIPAL AND LOCAL GOVERNMENT OBLIGATIONS AND
OBLIGATIONS OF OTHER QUALIFYING ISSUERS, SUCH AS ISSUERS LOCATED IN PUERTO RICO,
THE VIRGIN ISLANDS AND GUAM, WHICH PAY INCOME EXEMPT, IN THE OPINION OF COUNSEL,
FROM NEW YORK STATE, NEW YORK CITY AND FEDERAL INCOME TAXES (NEW YORK
OBLIGATIONS). SEE "INVESTMENT OBJECTIVES AND POLICIES" IN THE STATEMENT OF
ADDITIONAL INFORMATION. THERE CAN BE NO ASSURANCE THAT THE SERIES WILL BE ABLE
TO ACHIEVE ITS INVESTMENT OBJECTIVE.
THE SERIES' INVESTMENT OBJECTIVE IS A FUNDAMENTAL POLICY AND, THEREFORE, MAY
NOT BE CHANGED WITHOUT THE APPROVAL OF THE HOLDERS OF A MAJORITY OF THE SERIES'
OUTSTANDING VOTING SECURITIES AS DEFINED IN THE INVESTMENT COMPANY ACT OF 1940,
AS AMENDED (THE INVESTMENT COMPANY ACT). THE SERIES' POLICIES THAT ARE NOT
FUNDAMENTAL MAY BE MODIFIED BY THE TRUSTEES.
As with an investment in any mutual fund, an investment in this Series can
decrease in value and you can lose money.
6
<PAGE>
Interest on certain municipal obligations may be a preference item for
purposes of the federal alternative minimum tax. The Series may invest without
limit in municipal obligations that are "private activity bonds" (as defined in
the Internal Revenue Code) the interest on which would be a preference item for
purposes of the federal alternative minimum tax. See "Taxes, Dividends and
Distributions." Under New York law, dividends paid by the Series are exempt from
New York State and New York City income tax for resident individuals to the
extent they are derived from interest payments on New York Obligations. The New
York Obligations in which the Series may invest include certain short-term,
tax-exempt notes such as Tax Anticipation Notes, Revenue Anticipation Notes,
Bond Anticipation Notes, Construction Loan Notes and certain variable and
floating rate demand notes. See "Investment Objectives and Policies--Tax-Exempt
Securities--Tax-Exempt Notes" in the Statement of Additional Information. The
Series will maintain a dollar-weighted average maturity of its portfolio of 90
days or less.
THE SERIES MAY INVEST ITS ASSETS IN FLOATING RATE AND VARIABLE RATE
SECURITIES, INCLUDING PARTICIPATION INTERESTS THEREIN, WHICH CONFORM TO THE
REQUIREMENTS OF THE AMORTIZED COST VALUATION RULE AND OTHER REQUIREMENTS OF THE
SECURITIES AND EXCHANGE COMMISSION (SEC). There is no limit on the amount of
such securities that the Series may purchase. Floating rate securities normally
have a rate of interest which is set as a specific percentage of a designated
base rate, such as the rate on Treasury Bonds or Bills or the prime rate at a
major commercial bank. The interest rate on floating rate securities changes
periodically when there is a change in the designated base interest rate.
Variable rate securities provide for a specified periodic adjustment in the
interest rate based on prevailing market rates and generally would allow the
Series to demand payment of the obligation on short notice at par plus accrued
interest, which amount may be more or less than the amount the Series paid for
them.
ALL NEW YORK OBLIGATIONS PURCHASED BY THE SERIES WILL, AT THE TIME OF
PURCHASE, HAVE A REMAINING MATURITY OF THIRTEEN MONTHS OR LESS AND BE (I) RATED
IN ONE OF THE TWO HIGHEST RATING CATEGORIES BY AT LEAST TWO NATIONALLY
RECOGNIZED STATISTICAL RATING ORGANIZATIONS (NRSROS) ASSIGNING A RATING TO THE
SECURITY OR ISSUER (OR, IF ONLY ONE NRSRO ASSIGNED A RATING, BY THAT NRSRO) OR
(II), IF UNRATED, OF COMPARABLE QUALITY AS DETERMINED BY THE INVESTMENT ADVISER
UNDER THE SUPERVISION OF THE TRUSTEES. See "Description of Tax-Exempt Security
Ratings" in the Statement of Additional Information. The investment adviser will
monitor the credit quality of securities purchased for the Series' portfolio and
will limit its investments to those which present minimal credit risks.
In selecting New York Obligations for investment by the Series, the investment
adviser considers ratings assigned by NRSROs, information concerning the
financial history and condition of the issuer and its revenue and expense
prospects and, in the case of revenue bonds, the financial history and condition
of the source of revenue to service the bonds. If a New York Obligation held by
the Series is assigned a lower rating or ceases to be rated, the investment
adviser under the supervision of the Trustees will promptly reassess whether
that security presents minimal credit risks and whether the Series should
continue to hold the security in its portfolio. If a portfolio security no
longer presents minimal credit risks or is in default, the Series will dispose
of the security as soon as reasonably practicable unless the Trustees determine
that to do so is not in the best interests of the Series and its shareholders.
The Series utilizes the amortized cost method of valuation in accordance with
regulations issued by the SEC. See "How the Fund Values its Shares."
The Series intends to hold portfolio securities to maturity; however, it may
sell any security at any time in order to meet redemption requests or if the
investment adviser believes it advisable, based on an evaluation of the issuer
or of market conditions.
UNDER NORMAL MARKET CONDITIONS, THE SERIES WILL ATTEMPT TO INVEST
SUBSTANTIALLY ALL OF THE VALUE OF ITS ASSETS IN NEW YORK OBLIGATIONS. As a
matter of fundamental policy, during normal market conditions the Series' assets
will be invested so that at least 80% of the income will be exempt from New York
State, New York City and federal income taxes or the Series will have at least
80% of its total assets invested in New York Obligations. During abnormal market
conditions or to provide liquidity, the Series may hold cash or taxable cash
equivalents such as certificates of deposit, bankers acceptances and time
deposits or other
7
<PAGE>
short-term taxable investments such as repurchase agreements, or high grade
taxable obligations, including obligations that are exempt from federal, but not
New York City or New York State, taxation. When, in the opinion of the
investment adviser, abnormal market conditions require a temporary defensive
position, the Series may invest more than 20% of the value of its assets in
short-term debt securities other than New York Obligations or may invest its
assets so that more than 20% of the income is subject to New York State, New
York City or federal income taxes. The Series will treat an investment in a
municipal bond refunded with escrowed U.S. Government securities as U.S.
Government securities for purposes of the Investment Company Act's
diversification requirements provided certain conditions are met. See
"Investment Objectives and Policies--In General" in the Statement of Additional
Information.
THE SERIES MAY ACQUIRE PUT OPTIONS (PUTS) GIVING THE SERIES THE RIGHT TO SELL
SECURITIES HELD IN THE SERIES' PORTFOLIO AT A SPECIFIED EXERCISE PRICE ON A
SPECIFIED DATE. Such puts may be acquired for the purpose of protecting the
Series from a possible decline in the market value of the security to which the
put applies in the event of interest rate fluctuations or, in the case of
liquidity puts, for the purpose of shortening the effective maturity of the
underlying security. The aggregate value of premiums paid to acquire puts held
in the Series' portfolio (other than liquidity puts) may not exceed 10% of the
net asset value of the Series. The acquisition of a put may involve an
additional cost to the Series by payment of a premium for the put, by payment of
a higher purchase price for securities to which the put is attached or through a
lower effective interest rate.
In addition, there is a credit risk associated with the purchase of puts in
that the issuer of the put may be unable to meet its obligation to purchase the
underlying security. Accordingly, the Series will acquire puts only under the
following circumstances: (1) the put is written by the issuer of the underlying
security and such security is rated (a) in one of the two highest rating
categories by at least two NRSROs assigning a rating to the security or issuer,
or (b) if only one such rating organization assigned a rating, by that rating
organization; or (2) the put is written by a person other than the issuer of the
underlying security and such person has securities outstanding which are rated
within such two highest quality grades; or (3) the put is backed by a letter of
credit or similar financial guarantee issued by a person having securities
outstanding which are rated within the two highest quality grades of such rating
services. The issuer of the put, or another institution, must undertake to
notify promptly the holder of the put if the put feature is substituted with a
put from another issuer.
THE SERIES MAY PURCHASE MUNICIPAL OBLIGATIONS ON A "WHEN-ISSUED" OR "DELAYED
DELIVERY" BASIS, IN EACH CASE WITHOUT LIMIT. When municipal obligations are
offered on a when-issued or delayed delivery basis, the price and coupon rate
are fixed at the time the commitment to purchase is made, but delivery and
payment for the securities take place at a later date. The purchase price for
such securities includes interest accrued during the period between purchase and
settlement and, therefore, no interest accrues to the economic benefit of the
purchaser during such period. In the case of purchases by the Series, the price
that the Series is required to pay on the settlement date may be in excess of
the market value of the municipal obligations on that date. While securities may
be sold prior to the settlement date, the Series intends to purchase these
securities with the purpose of actually acquiring them unless a sale would be
desirable for investment reasons. At the time the Series makes the commitment to
purchase a municipal obligation on a when-issued or delayed delivery basis, it
will record the transaction and reflect the value of the obligation each day in
determining its net asset value. This value may fluctuate from day to day in the
same manner as values of municipal obligations otherwise held by the Series. If
the seller defaults in the sale, the Series could fail to realize the
appreciation, if any, that had occurred. The Series will establish a segregated
account with its Custodian in which it will maintain cash, U.S. Government
securities, equity securities or other liquid, unencumbered assets,
marked-to-market daily, equal in value to its commitments for when-issued or
delayed delivery securities.
THE SERIES MAY PURCHASE SECONDARY MARKET INSURANCE ON NEW YORK OBLIGATIONS
WHICH IT HOLDS OR ACQUIRES. Secondary market insurance would be reflected in the
market value of the municipal obligation purchased and may enable the Series to
dispose of a defaulted obligation at a price similar to that of comparable
municipal obligations which are not in default.
Insurance is not a substitute for the basic credit of an issuer, but
supplements the existing credit and provides additional security therefor. While
insurance coverage for the New York Obligations held by the Series reduces
credit risk by providing that
8
<PAGE>
the insurance company will make timely payment of principal and interest if the
issuer defaults on its obligation to make such payment, it does not afford
protection against fluctuation in the price, I.E., the market value, of the
municipal obligations caused by changes in interest rates and other factors, nor
in turn against fluctuations in the net asset value of the shares of the Series.
SPECIAL CONSIDERATIONS
BECAUSE THE SERIES WILL INVEST PRIMARILY IN NEW YORK OBLIGATIONS AND BECAUSE
IT SEEKS TO MAXIMIZE INCOME DERIVED FROM NEW YORK OBLIGATIONS, IT IS MORE
SUSCEPTIBLE TO FACTORS ADVERSELY AFFECTING ISSUERS OF NEW YORK OBLIGATIONS THAN
IS A COMPARABLE TAX-EXEMPT MONEY MARKET FUND THAT IS NOT CONCENTRATED IN SUCH
OBLIGATIONS TO THIS DEGREE. An investment in the Series therefore may involve
more risk than an investment in other types of money market funds. The State
General Fund reported a $1.9 billion GAAP basis operating surplus for the fiscal
year ended March 31, 1997, resulting in a reduction of the General Fund
accumulated deficit to $995 million as of the fiscal year end. The General Fund
accumulated deficit for the fiscal years ended March 31, 1993, 1994, 1995 and
1996 was $2.6 billion, $1.8 billion, $3.3 billion and $2.9 billion,
respectively. According to the Comptroller, an operating surplus is projected
for the fiscal year 1997-1998, notwithstanding a projected increase in General
Fund spending of 5.2%. The enacted budget includes a significantly expanded
program of tax reductions, most of which do not take effect until the fiscal
year 1999-2000. There can be no assurances that the State will not face
substantial potential budget gaps this and in future years resulting from a
significant disparity between tax revenues projected from a lower recurring
receipts base and the spending required to maintain State programs at current
levels. To address any potential budgetary imbalance, the State may need to take
significant actions to align recurring receipts and disbursements in future
fiscal years. If either New York State or any of its local governmental entities
is unable to meet its financial obligations, the income derived by the Series,
the ability to preserve or realize appreciation of the Series' capital and the
Series' liquidity could be adversely affected. See "Investment Objectives and
Policies--Special Considerations Regarding Investments in Tax-Exempt Securities"
in the Statement of Additional Information.
OTHER INVESTMENTS AND POLICIES
REPURCHASE AGREEMENTS
The Series may on occasion enter into repurchase agreements whereby the seller
of a security agrees to repurchase that security from the Series at a mutually
agreed-upon time and price. The period of maturity is usually quite short,
possibly overnight or a few days, although it may extend over a number of
months. The resale price is in excess of the purchase price, reflecting an
agreed-upon rate of return effective for the period of time the Series' money is
invested in the security. The Series' repurchase agreements will at all times be
fully collateralized in an amount at least equal to the resale price. The
instruments held as collateral are valued daily and if the value of the
instruments declines, the Series will require additional collateral. If the
seller defaults and the value of the collateral securing the repurchase
agreement declines, the Series may incur a loss. The Series participates in a
joint repurchase account with other investment companies managed by PIFM
pursuant to an order of the SEC. See "Investment Objectives and
Policies--Repurchase Agreements" in the Statement of Additional Information.
BORROWING
The Series may borrow an amount equal to no more than 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 Series may
pledge up to 33 1/3% of the value of its total assets to secure these
borrowings. The Series will not purchase portfolio securities if its borrowings
exceed 5% of its total assets.
9
<PAGE>
ILLIQUID SECURITIES
The Series may hold up to 10% of its net assets in illiquid securities,
including repurchase agreements which have a maturity of longer than seven days,
securities with legal or contractual restrictions on resale (restricted
securities) and securities that are not readily marketable. Securities that have
a readily available market are not considered illiquid for purposes of this
limitation. See "Investment Restrictions" in the Statement of Additional
Information. The investment adviser will monitor the liquidity of such
restricted securities under the supervision of the Trustees. See "Investment
Objectives and Policies--Illiquid Securities" in the Statement of Additional
Information. Repurchase agreements subject to demand are deemed to have a
maturity equal to the notice period.
INVESTMENT RESTRICTIONS
The Series is subject to certain investment restrictions which, like its
investment objective, constitute fundamental policies. Fundamental policies
cannot be changed without the approval of the holders of a majority of the
Series' outstanding voting securities, as defined in the Investment Company Act.
See "Investment Restrictions" in the Statement of Additional Information.
HOW THE FUND IS MANAGED
THE FUND HAS TRUSTEES WHO, IN ADDITION TO OVERSEEING THE ACTIONS OF THE FUND'S
MANAGER, SUBADVISER AND DISTRIBUTOR, AS SET FORTH BELOW, DECIDE UPON MATTERS OF
GENERAL POLICY. THE FUND'S MANAGER CONDUCTS AND SUPERVISES THE DAILY BUSINESS
OPERATIONS OF THE FUND. THE FUND'S SUBADVISER FURNISHES DAILY INVESTMENT
ADVISORY SERVICES.
For the fiscal year ended August 31, 1997, total expenses of the Series as a
percentage of its average net assets were .71%. See "Financial Highlights."
MANAGER
PRUDENTIAL INVESTMENTS FUND MANAGEMENT LLC (PIFM OR THE MANAGER), GATEWAY
CENTER THREE, 100 MULBERRY STREET, NEWARK, NEW JERSEY 07102-4077, IS THE MANAGER
OF THE FUND AND IS COMPENSATED FOR ITS SERVICES AT AN ANNUAL RATE OF .50 OF 1%
OF THE AVERAGE DAILY NET ASSETS OF THE SERIES. PIFM is organized in New York as
a limited liability company. It is the successor to Prudential Mutual Fund
Management, Inc., which transferred its assets to PIFM in September 1996. For
the fiscal year ended August 31, 1997, the Series paid a management fee of .50
of 1% of the Series' average net assets. See "Manager" in the Statement of
Additional Information.
As of September 30, 1997, PIFM served as the manager to 41 open-end investment
companies, constituting all of the Prudential Mutual Funds, and as manager or
administrator to 22 closed-end investment companies with aggregate assets of
approximately $59.9 billion.
UNDER THE MANAGEMENT AGREEMENT WITH THE FUND, PIFM MANAGES THE INVESTMENT
OPERATIONS OF EACH SERIES OF THE FUND AND ALSO ADMINISTERS THE FUND'S BUSINESS
AFFAIRS. See "Manager" in the Statement of Additional Information.
UNDER A SUBADVISORY AGREEMENT BETWEEN PIFM AND THE PRUDENTIAL INVESTMENT
CORPORATION (PIC), DOING BUSINESS AS PRUDENTIAL INVESTMENTS (PI, THE SUBADVISER
OR THE INVESTMENT ADVISER), PI FURNISHES INVESTMENT ADVISORY SERVICES IN
CONNECTION WITH THE MANAGEMENT OF THE FUND AND IS REIMBURSED BY PIFM FOR ITS
REASONABLE COSTS AND EXPENSES INCURRED IN PROVIDING SUCH SERVICES. Under the
Management Agreement, PIFM continues to have responsibility for all investment
advisory services and supervises PI's performance of such services.
PIFM and PIC are indirect, wholly-owned subsidiaries of The Prudential
Insurance Company of America (Prudential), a major diversified insurance and
financial services company, and are part of Prudential Investments, a business
group of Prudential.
10
<PAGE>
PIFM MAY FROM TIME TO TIME AGREE TO WAIVE ALL OR A PORTION OF ITS MANAGEMENT
FEE AND SUBSIDIZE CERTAIN OPERATING EXPENSES OF THE SERIES. The Series is not
required to reimburse PIFM for such management fee waiver or expense subsidy.
See "Fund Expenses" and "Calculation of Yield."
DISTRIBUTOR
PRUDENTIAL SECURITIES INCORPORATED (PRUDENTIAL SECURITIES, PSI OR THE
DISTRIBUTOR), ONE SEAPORT PLAZA, NEW YORK, NEW YORK 10292, IS A CORPORATION
ORGANIZED UNDER THE LAWS OF THE STATE OF DELAWARE AND SERVES AS THE DISTRIBUTOR
OF THE SERIES' SHARES. It is an indirect, wholly-owned subsidiary of Prudential.
UNDER A DISTRIBUTION AND SERVICE PLAN (THE PLAN) ADOPTED BY THE SERIES UNDER
RULE 12b-1 UNDER THE INVESTMENT COMPANY ACT AND A DISTRIBUTION AGREEMENT (THE
DISTRIBUTION AGREEMENT), THE DISTRIBUTOR INCURS THE EXPENSES OF DISTRIBUTING THE
SHARES OF THE SERIES. These expenses include account servicing fees paid to, or
on account of, financial advisers of Prudential Securities and representatives
of Pruco Securities Corporation (Prusec), an affiliated broker-dealer, account
servicing fees paid to, or on account of, other broker-dealers or financial
institutions (other than national banks) which have entered into agreements with
the Distributor, advertising expenses, the cost of printing and mailing
prospectuses to potential investors and indirect and overhead costs of
Prudential Securities and Prusec associated with the sale of Series shares,
including lease, utility, communications and sales promotion expenses.
UNDER THE PLAN, THE SERIES REIMBURSES THE DISTRIBUTOR FOR ITS
DISTRIBUTION-RELATED EXPENSES AT AN ANNUAL RATE OF .125 OF 1% OF THE AVERAGE
DAILY NET ASSETS OF THE SERIES. Account servicing fees are paid based on the
average balance of the Series' shares held in the accounts of the customers of
financial advisers. The entire distribution fee may be used to pay account
servicing fees.
For the fiscal year ended August 31, 1997, the Series paid PSI a distribution
fee equal on an annual basis to .125% of the average net assets of the Series.
Amounts paid to the Distributor by the Series will not be used to pay
distribution expenses incurred by any other series of the Fund.
The Plan provides that it shall continue in effect from year to year provided
that each such continuance is approved annually by a majority vote of the
Trustees of the Fund, including a majority of the Trustees who are not
"interested persons" of the Fund (as defined in the Investment Company Act) and
who have no direct or indirect financial interest in the operation of the Plan
or any agreements related to the Plan. The Trustees are provided with and review
quarterly reports of expenditures under the Plan.
In addition to distribution and service fees paid by the Series under the
Plan, the Manager (or one of its affiliates) may make payments out of its own
resources to dealers (including Prudential Securities) and other persons which
distribute shares of the Series. Such payments may be calculated by reference to
the net asset value of shares sold by such persons or otherwise. The Fund
records all payments made under the Plan as expenses in the calculation of its
net investment income.
On October 21, 1993, PSI entered into an omnibus settlement with the SEC,
state securities regulators (with the exception of the Texas Securities
Commissioner who joined the settlement on January 18, 1994) and the National
Association of Securities Dealers, Inc. (the NASD) to resolve allegations that
from 1980 through 1990 PSI sold certain limited partnership interests in
violation of securities laws to persons for whom such securities were not
suitable and misrepresented the safety, potential returns and liquidity of these
investments. Without admitting or denying the allegations asserted against it,
PSI consented to the entry of an SEC Administrative Order which stated that
PSI's conduct violated the federal securities laws, directed PSI to cease and
desist from violating the federal securities laws, pay civil penalties, and
adopt certain remedial measures to address the violations.
Pursuant to the terms of the SEC settlement, PSI agreed to the imposition of a
$10,000,000 civil penalty, established a settlement fund in the amount of
$330,000,000 and procedures to resolve legitimate claims for compensatory
damages by
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<PAGE>
purchasers of the partnership interests. PSI has agreed to provide additional
funds, if necessary, for the purpose of the settlement fund. PSI's settlement
with the state securities regulators included an agreement to pay a penalty of
$500,000 per jurisdiction. PSI consented to a censure and to the payment of a
$5,000,000 fine in settling the NASD action.
In October 1994, a criminal complaint was filed with the United States
Magistrate for the Southern District of New York alleging that PSI committed
fraud in connection with the sale of certain limited partnership interests in
violation of federal securities laws. An agreement was simultaneously filed to
defer prosecution of these charges for a period of three years from the signing
of the agreement, provided that PSI complies with the terms of the agreement.
If, upon completion of the three year period, PSI has complied with the terms of
the agreement, no prosecution will be instituted by the United States for the
offenses charged in the complaint. If on the other hand, during the course of
the three year period, PSI violates the terms of the agreement, the U.S.
Attorney can then elect to pursue these charges. Under the terms of the
agreement, PSI agreed, among other things, to pay an additional $330,000,000
into the fund established by the SEC to pay restitution to investors who
purchased certain PSI limited partnership interests.
For more detailed information concerning the foregoing matters, see
"Distributor" in the Statement of Additional Information, a copy of which may be
obtained at no cost by calling (800) 225-1852.
The Fund is not affected by PSI's financial condition and is an entirely
separate legal entity from PSI, which has no beneficial ownership therein and
the Fund's assets which are held by State Street Bank and Trust Company, an
independent custodian, are separate and distinct from PSI.
PORTFOLIO TRANSACTIONS
Prudential Securities may act as a broker for the Fund, provided that the
commissions, fees or other remuneration it receives are fair and reasonable. See
"Portfolio Transactions and Brokerage" in the Statement of Additional
Information.
CUSTODIAN AND TRANSFER AND DIVIDEND DISBURSING AGENT
State Street Bank and Trust Company, One Heritage Drive, North Quincy,
Massachusetts 02171, serves as Custodian for the portfolio securities of the
Series and cash and, in that capacity, maintains certain financial and
accounting books and records pursuant to an agreement with the Fund. Its mailing
address is P.O. Box 1713, Boston, Massachusetts 02105.
Prudential Mutual Fund Services LLC (PMFS), Raritan Plaza One, Edison, New
Jersey 08837, serves as Transfer Agent and Dividend Disbursing Agent and, in
those capacities, maintains certain books and records for the Fund. PMFS is a
wholly-owned subsidiary of PIFM. Its mailing address is P.O. Box 15005, New
Brunswick, New Jersey 08906-5005.
HOW THE FUND VALUES ITS SHARES
THE SERIES' NET ASSET VALUE PER SHARE OR NAV IS DETERMINED BY SUBTRACTING ITS
LIABILITIES FROM THE VALUE OF ITS ASSETS AND DIVIDING THE REMAINDER BY THE
NUMBER OF OUTSTANDING SHARES. THE TRUSTEES HAVE FIXED THE SPECIFIC TIME OF DAY
FOR THE COMPUTATION OF THE NET ASSET VALUE OF THE SERIES TO BE AS OF 4:30 P.M.,
NEW YORK TIME, IMMEDIATELY AFTER THE DECLARATION OF DIVIDENDS.
The Series will compute its NAV once daily on days the New York Stock Exchange
is open for trading, except on days on which no orders to purchase, sell or
redeem shares have been received by the Series or days on which changes in the
value of the Series' portfolio securities do not materially affect the NAV.
The Series determines the value of its portfolio securities by the amortized
cost method. This method involves valuing an instrument at its cost and
thereafter assuming a constant amortization to maturity of any discount or
premium regardless of the
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<PAGE>
impact of fluctuating interest rates on the market value of the instrument.
While this method provides certainty in valuation, it may result in periods
during which value, as determined by amortized cost, is higher or lower than the
price the Series would receive if it sold the instrument. During these periods,
the yield to a shareholder may differ somewhat from that which could be obtained
from a similar fund which marks its portfolio securities to the market each day.
For example, during periods of declining interest rates, if the use of the
amortized cost method resulted in a lower value of the Series' portfolio on a
given day, a prospective investor in the Series would be able to obtain a
somewhat higher yield and existing shareholders would receive correspondingly
less income. The converse would apply during periods of rising interest rates.
The Trustees have established procedures designed to stabilize, to the extent
reasonably possible, the NAV of the shares of the Series at $1.00 per share. See
"Net Asset Value" in the Statement of Additional Information.
TAXES, DIVIDENDS AND DISTRIBUTIONS
TAXATION OF THE FUND
THE SERIES HAS ELECTED TO QUALIFY AND INTENDS TO REMAIN QUALIFIED AS A
REGULATED INVESTMENT COMPANY UNDER THE INTERNAL REVENUE CODE. ACCORDINGLY, THE
SERIES WILL NOT BE SUBJECT TO FEDERAL INCOME TAXES ON ITS NET INVESTMENT INCOME
AND NET CAPITAL GAINS, IF ANY, THAT IT DISTRIBUTES TO ITS SHAREHOLDERS. TO THE
EXTENT NOT DISTRIBUTED BY THE SERIES, NET TAXABLE INVESTMENT INCOME AND CAPITAL
GAINS AND LOSSES ARE TAXABLE TO THE SERIES.
To the extent the Series invests in taxable obligations, it will earn taxable
investment income. Gain or loss realized by the Series from the sale of
securities generally will be treated as capital gain or loss; however, gain from
the sale of certain securities (including municipal obligations) will be treated
as ordinary income to the extent of any "market discount." Market discount
generally is the difference, if any, between the price paid by the Series for
the security and the principal amount of the security (or, in the case of a
security issued at an original issue discount, the revised issue price of the
security). The market discount rule does not apply to any security that was
acquired by the Series at its original issue. See "Distributions and Tax
Information" in the Statement of Additional Information.
TAXATION OF SHAREHOLDERS
In general, the character of tax-exempt interest distributed by the Series
will flow through as tax-exempt interest to its shareholders provided that 50%
or more of the value of its assets at the end of each quarter of its taxable
year is invested in state, municipal and other obligations, the interest on
which is excluded from gross income for federal income tax purposes. During
normal market conditions, at least 80% of the Series' total assets will be
invested in such obligations. See "How the Fund Invests--Investment Objective
and Policies."
Any dividends out of net taxable investment income, together with
distributions of net short-term gains (I.E., the excess of net short-term
capital gains over net long-term capital losses) distributed to shareholders,
will be taxable as ordinary income to the shareholder whether or not reinvested.
Any net capital gains (I.E., the excess of net capital gains from the sale of
assets held for more than 12 months over net short-term capital losses)
distributed to shareholders will be taxable as capital gains to the
shareholders, whether or not reinvested and regardless of the length of time a
shareholder has owned his or her shares. The maximum capital gains rate for
individuals is 28% with respect to assets held for more than 12 months, but not
more than 18 months, and 20% with respect to assets held for more than 18
months. The maximum capital gains rate for corporate shareholders currently is
the same as the maximum tax rate for ordinary income. The Series does not expect
to have capital gains from the sale of assets held for more than 12 months.
CERTAIN INVESTORS MAY INCUR FEDERAL ALTERNATIVE MINIMUM TAX LIABILITY AS A
RESULT OF THEIR INVESTMENT IN THE FUND. Tax-exempt interest from certain
municipal obligations (I.E., certain private activity bonds issued after August
7, 1986) will be
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<PAGE>
treated as an item of tax preference for purposes of the alternative minimum
tax. The Fund anticipates that, under regulations to be promulgated, items of
tax preference incurred by the Series will be attributed to the Series'
shareholders, although some portion of such items could be allocated to the
Series itself. Depending upon each shareholder's individual circumstances, the
attribution of items of tax preference incurred by the Series could result in
liability for the shareholder for the alternative minimum tax. Similarly, the
Series could be liable for the alternative minimum tax for items of tax
preference attributed to it. The Series is permitted to invest in municipal
obligations of the type that will produce items of tax preference.
Corporate shareholders in the Series also will have to take into account the
adjustment for current earnings for alternative minimum tax purposes. Corporate
shareholders should consult with their tax advisers with respect to this
potential adjustment.
Under New York law, dividends paid by the Series are exempt from New York
State and New York City income taxes for resident individuals to the extent such
dividends are excluded from gross income for federal income tax purposes and are
derived from interest payments on New York Obligations.
Shareholders are advised to consult their own tax advisers regarding specific
questions as to federal state or local taxes. See "Distributions and Tax
Information" in the Statement of Additional Information.
WITHHOLDING TAXES
Under the Internal Revenue Code, the Series is required to withhold and remit
to the U.S. Treasury 31% of redemption proceeds on the accounts of certain
shareholders who fail to furnish their tax identification numbers on IRS Form
W-9 (or IRS Form W-8 in the case of certain foreign shareholders) with the
required certifications regarding the shareholder's status under the federal
income tax law. Such withholding is also required on taxable dividends and
capital gain distributions made by the Series unless it is reasonably expected
that at least 95% of the distributions of the Series are comprised of tax-exempt
dividends.
Dividends of net taxable income and distributions of net short-term capital
gains paid to a shareholder (including a shareholder acting as a nominee or
fiduciary) who is a nonresident alien individual, a foreign corporation or a
foreign partnership (foreign shareholder) are subject to a 30% (or lower treaty
rate) withholding tax upon the gross amount of the dividends unless the
dividends are affectively connected with a U.S. trade or business conducted by
the foreign shareholder. Capital gain dividends paid to a foreign shareholder
are generally not subject to withholding tax. A foreign shareholder will,
however, be required to pay U.S. Income tax on any dividends and capital gain
distributions which are effectively connected with a U.S. trade or business of
the foreign shareholder.
DIVIDENDS AND DISTRIBUTIONS
THE SERIES EXPECTS TO DECLARE DAILY AND PAY MONTHLY DIVIDENDS OF NET
INVESTMENT INCOME AND SHORT-TERM CAPITAL GAINS.
A shareholder generally begins to earn dividends on the first business day
after his or her order is placed with the Series, as described above, and
continues to earn dividends through the day on which his or her shares are
redeemed. In the case of certain redemptions, however, Prudential Securities
clients will not be entitled to dividends declared on the date of redemption.
See "Shareholder Guide--How to Sell Your Shares--Redemption of Shares Purchased
through Prudential Securities."
DIVIDENDS AND DISTRIBUTIONS WILL BE PAID IN ADDITIONAL SHARES OF THE SERIES
BASED ON THE NET ASSET VALUE OF SERIES' SHARES ON THE PAYMENT DATE OR SUCH OTHER
DATE AS THE TRUSTEES MAY DETERMINE, UNLESS THE SHAREHOLDER ELECTS IN WRITING NOT
LESS THAN FIVE BUSINESS DAYS PRIOR TO THE RECORD DATE TO RECEIVE SUCH DIVIDENDS
AND DISTRIBUTIONS IN CASH. Such election should be submitted to Prudential
Mutual Fund Services LLC, Attention: Account Maintenance, P.O. Box 15015, New
Brunswick, New Jersey 08906-5015. If you hold shares through Prudential
Securities, you should contact your financial adviser to elect to receive
dividends and distributions in cash. The Fund will notify each shareholder after
the close of the Fund's taxable year of both the dollar amount and the taxable
status of that year's dividends and distributions.
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<PAGE>
GENERAL INFORMATION
DESCRIPTION OF SHARES
THE FUND WAS ESTABLISHED AS A MASSACHUSETTS BUSINESS TRUST ON MAY 18, 1984 BY
A DECLARATION OF TRUST. The Fund's activities are supervised by its Trustees.
The Declaration of Trust permits the Trustees to issue an unlimited number of
full and fractional shares in separate series, currently designated as the
Connecticut Money Market Series, Florida Series, Maryland Series, Massachusetts
Series, Massachusetts Money Market Series, Michigan Series, New Jersey Series,
New Jersey Money Market Series, New York Series, New York Money Market Series,
North Carolina Series, Ohio Series and Pennsylvania Series. Currently, all
series of the Fund, except for the Connecticut Money Market Series, the Florida
Series, the Massachusetts Series, the Massachusetts Money Market Series, the New
Jersey Money Market Series, the New Jersey Series, the New York Money Market
Series and the New York Series, offer three classes, designated Class A, Class B
and Class C shares. The Florida Series, the Massachusetts Series, the New Jersey
Series and the New York Series offer four classes, designated Class A, Class B,
Class C and Class Z shares. The Connecticut Money Market Series, the
Massachusetts Money Market Series, the New Jersey Money Market Series and the
New York Money Market Series offer only one class of shares. Pursuant to the
Fund's Declaration of Trust, the Trustees may authorize the creation of
additional series and classes within such series, with such preferences,
privileges, limitations and voting and dividend rights as the Trustees may
determine.
Shares of the Fund, when issued, are fully paid, nonassessable, fully
transferable and redeemable at the option of the holder. Shares are also
redeemable at the option of the Fund under certain circumstances as described
under "Shareholder Guide--How to Sell Your Shares." Each share of the Series is
equal as to earnings, assets and voting privileges, and each class bears the
expenses related to the distribution of its shares. There are no conversion,
preemptive or other subscription rights. In the event of liquidation, each share
of beneficial interest of each series is entitled to its portion of all of the
Fund's assets after all debt and expenses of the Fund have been paid. The Fund's
shares do not have cumulative voting rights for the election of Trustees.
THE FUND DOES NOT INTEND TO HOLD ANNUAL MEETINGS OF SHAREHOLDERS UNLESS
OTHERWISE REQUIRED BY LAW. THE FUND WILL NOT BE REQUIRED TO HOLD MEETINGS OF
SHAREHOLDERS UNLESS, FOR EXAMPLE, THE ELECTION OF TRUSTEES IS REQUIRED TO BE
ACTED UPON BY SHAREHOLDERS UNDER THE INVESTMENT COMPANY ACT. SHAREHOLDERS HAVE
CERTAIN RIGHTS, INCLUDING THE RIGHT TO CALL A MEETING UPON A VOTE OF 10% OF THE
FUND'S OUTSTANDING SHARES FOR THE PURPOSE OF VOTING ON THE REMOVAL OF ONE OR
MORE TRUSTEES OR TO TRANSACT ANY OTHER BUSINESS.
The Declaration of Trust and the By-Laws of the Fund are designed to make the
Fund similar in certain respects to a Massachusetts business corporation. The
principal distinction between a Massachusetts business corporation and a
Massachusetts business trust relates to shareholder liability. Under
Massachusetts law, shareholders of a business trust may, under certain
circumstances, be held personally liable as partners for the obligations of the
fund, which is not the case with a corporation. The Declaration of Trust of the
Fund provides that shareholders shall not be subject to any personal liability
for the acts or obligations of the Fund and that every written obligation,
contract, instrument or undertaking made by the Fund shall contain a provision
to the effect that the shareholders are not individually bound thereunder.
ADDITIONAL INFORMATION
This Prospectus, including the Statement of Additional Information which has
been incorporated by reference herein, does not contain all the information set
forth in the Registration Statement filed by the Fund with the SEC under the
Securities Act of 1933, as amended. Copies of the Registration Statement may be
obtained at a reasonable charge from the SEC or may be examined, without charge,
at the office of the SEC in Washington, D.C.
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<PAGE>
SHAREHOLDER GUIDE
HOW TO BUY SHARES OF THE FUND
YOU MAY PURCHASE SHARES OF THE SERIES THROUGH PRUDENTIAL SECURITIES, PRUSEC OR
DIRECTLY FROM THE FUND, THROUGH ITS TRANSFER AGENT, PRUDENTIAL MUTUAL FUND
SERVICES LLC (PMFS OR THE TRANSFER AGENT), ATTENTION: INVESTMENT SERVICES, P.O.
BOX 15020, NEW BRUNSWICK, NEW JERSEY 08906-5020. The minimum initial investment
is $1,000. The minimum subsequent investment is $100. All minimum investment
requirements are waived for the Command Account program (if the Series is
designated as your primary fund) and certain employee savings and retirement
plans. For purchases made through the Automatic Savings Accumulation Plan, the
minimum initial and subsequent investment is $50. See "Shareholder Services"
below. For automatic purchases made through Prudential Securities, the minimum
investment requirment is $1,000 and there is no minimum subsequent investment
requirement.
An investment in the Series may not be appropriate for tax-exempt or
tax-deferred investors. Such investors should consult with their own tax
advisers.
SHARES OF THE SERIES ARE SOLD THROUGH THE TRANSFER AGENT, WITHOUT A SALES
CHARGE, AT THE NAV PER SHARE NEXT DETERMINED FOLLOWING RECEIPT AND ACCEPTANCE BY
THE TRANSFER AGENT OR PRUDENTIAL SECURITIES OF AN ORDER IN PROPER FORM (I.E.,
CHECK OR FEDERAL FUNDS WIRED TO STATE STREET BANK AND TRUST COMPANY (STATE
STREET), THE FUND'S CUSTODIAN). See "How the Fund Values its Shares." When
payment is received by PMFS prior to 4:30 P.M., New York time, in proper form, a
share purchase order will be entered at the price determined as of 4:30 P.M.,
New York time, on that day, and dividends on the shares purchased will begin on
the business day following such investment. See "Taxes, Dividends and
Distributions." If your purchase is made through an account at Prudential
Securities or through Prusec or another dealer, your dealer will forward a
purchase order and payment to the Fund.
Investors who purchase their shares through a dealer other than Prudential
Securities or Prusec, which dealer has a clearinghouse arrangement with respect
to Shares of the Series, may be able to participate in the automatic sweep
feature described below under "Purchase through Prudential Securities--Automatic
Investment (Autosweep)" and "How to Sell Your Shares--Redemption of Shares
Purchased through Prudential Securities." For further information, contact your
dealer.
Application forms for Prusec and direct accounts with the Transfer Agent
(E.G., non-Prudential Securities accounts) can be obtained from PMFS, Prudential
Securities or Prusec. If a share certificate is desired, it must be requested in
writing for each transaction. Certificates are issued only for full shares.
Shareholders who hold their shares through Prudential Securities will not
receive share certificates. Shareholders cannot utilize Expedited Redemption or
Check Redemption or have a Systematic Withdrawal Plan if they have been issued
certificates.
The Fund reserves the right in its sole discretion to reject any purchase
order (including an exchange into the Series) or to suspend or modify the
continuous offering of its shares. See "How to Sell Your Shares" below.
Your dealer is responsible for forwarding payment promptly to the Fund. The
Distributor reserves the right to cancel any purchase order for which payment
has not been received by the third business day following the investment.
Transactions in shares of the Series may be subject to postage and other
charges imposed by the dealer.
PURCHASES THROUGH PRUDENTIAL SECURITIES
If you have an account with Prudential Securities (or open such an account),
you may ask Prudential Securities to purchase shares of the Series on your
behalf. On the business day following confirmation that a free credit balance
(I.E., immediately available funds) exists in your account, Prudential
Securities will effect a purchase order for shares of the Series in an amount up
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to the balance of the NAV determined on that day. Funds held by Prudential
Securities on behalf of its clients in the form of free credit balances are
delivered to the Fund by Prudential Securities and begin earning dividends the
second business day after receipt of the order by Prudential Securities.
Accordingly, Prudential Securities will have the use of such free credit
balances during this period.
Shares of the Series purchased by Prudential Securities on behalf of its
clients will be held by Prudential Securities as record holder. Prudential
Securities will therefore receive statements and dividends directly from the
Fund and will in turn provide investors with Prudential Securities account
statements reflecting purchases, redemptions and dividend payments. Although
Prudential Securities clients who purchase shares of the Series through
Prudential Securities may not redeem shares of the Series by check, Prudential
Securities provides its clients with alternative forms of immediate access to
monies invested in shares of the Series.
Prudential Securities clients wishing additional information concerning
investment in shares of the Series made through Prudential Securities should
call their Prudential Securities financial adviser.
AUTOMATIC INVESTMENT (AUTOSWEEP) (FOR NON-COMMAND ACCOUNTS)
Prudential Securities has advised the Fund that it has automatic investment
procedures (Autosweep) pursuant to which it will make automatic investments of
free credit cash balances (Eligible Credit Balances) held in a client's
brokerage account in shares of the Series, if the Series is your Primary Money
Sweep Fund. You may designate the Series (or certain other Prudential money
market funds) as your Primary Money Sweep Fund. If the Series is your Primary
Money Sweep Fund you can purchase shares of the Series only through the
automatic investment procedures described below; no manual purchase orders will
be accepted. You may charge your Primary Money Sweep Fund at any time by
notifying your Prudential Securities financial adviser. Under certain
circumstances, you may elect not to have a money market sweep feature for your
account when you open your account.
For accounts other than IRAs and Benefit Plans, as defined below, shares of
the Series will be purchased by Prudential Securities as follows: in the case of
Eligible Credit Balances of $1,000 or more resulting from the proceeds of a
securities sale, maturity of a bond or call and Eligible Credit Balances of
$10,000 or more resulting from a non-trade related credit (E.G., receipt of a
dividend or interest payment or a cash payment into the securities account),
orders to purchase shares will be placed on the business day after such Eligible
Credit Balances become available in your account. For Eligible Credit Balances
of $1.00 or more not otherwise described above, orders to purchase shares will
be placed monthly on the last business day of the month. For IRAs and Benefit
Plans, having Eligible Credit Balances of $1.00 or more, orders to purchase
shares of the Series will be placed by Prudential Securities (i) on the
settlement date of the securities sale, in the case of Eligible Credit Balances
resulting from the proceeds of a securities sale, and (ii) on the business day
after receipt by Prudential Securities of the non-trade related credit
(including the maturity of a bond or a call), in the case of Eligible Credit
Balances resulting from a non-trade related credit. Each time an order resulting
from the settlement of a securities sale is placed, any non-trade related credit
in the client's account will also be invested.
The following chart shows the frequency and amount of the sweep for accounts
other than IRAs and Benefit Plans.
<TABLE>
<CAPTION>
DAILY MONTHLY
<S> <C> <C>
Eligible Credit Balances resulting from the proceeds of
a securities sale, maturity of a bond or call $1,000 or more
Eligible Credit Balances resulting from a non-trade
related credit $10,000 or more
Remaining Eligible Credit Balances $1.00 or more
</TABLE>
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<PAGE>
All shares purchased pursuant to these automatic investment procedures will be
issued at the NAV computed on the business day the order is entered and will
begin earning dividends on the following business day. Purchases through
Autosweep are subject to the Series' minimum initial investment requirement of
$1,000, which is waived for certain retirement and employee savings plans and
custodial accounts for the benefit of minors. Prudential Securities will have
the use of, and will retain the benefits of, Eligible Credit Balances in a
client's brokerage account until the monies are delivered to the Fund.
(Prudential Securities delivers Federal Funds on the business day after
settlement). Eligible Credit Balances for purposes of Autosweep are measured as
of the close of business on the previous business day.
For the purposes of Autosweep, "Benefit Plans" include (i) employee benefit
plans as defined in Section 3(3) of the Employee Retirement Income Security Act
of 1974 (ERISA) other than governmental plans as defined in Section 3(32) of
ERISA and church plans as defined in Section 3(33) of ERISA, (ii) pension,
profit-sharing or other employee benefit plans qualified under Section 401 of
the Internal Revenue Code and (iii) deferred compensation and annuity plans
under Section 457 or 403(b)(7) of the Internal Revenue Code. "IRAs" are
Individual Retirement Accounts as defined in Section 408(a) of the Internal
Revenue Code.
SELF-DIRECTED INVESTMENT. Prudential Securities clients not electing Autosweep
may continue to place orders for the purchase of shares of the Series through
Prudential Securities, subject to the minimum initial and subsequent investment
requirements described above.
A Prudential Securities client who has not elected Autosweep (Automatic
Investment) and who does not place a purchase order promptly after funds are
credited to his or her Prudential Securities account will have a free credit
balance with Prudential Securities and will not begin earning dividends on
shares of the Series until the second business day after receipt of the order by
Prudential Securities from the client. Accordingly, Prudential Securities will
have the use of such free credit balances during this period.
MANUAL INVESTMENT
Prudential Securities will accept manual purchase orders for shares of the
Series only for those clients (i) who are purchasing shares of a Prudential
money market fund which is not their Primary Money Sweep Fund or (ii) who do not
have a money market sweep feature in their account, as described above under
"Automatic Investment."
Prudential Securities clients eligible to make manual purchases, as described
above, are subject to the minimum initial investment of $1,000 and the minimum
subsequent investment of $100, except that all minimum investment requirements
are waived for certain retirement and employee savings plans and custodial
accounts for the benefit of minors. On the business day after the purchase order
is received, Prudential Securities will place the order for shares of the Series
for settlement that day. Shares will be issued at the NAV determined on that day
and will begin earning dividends the next business day, which is the second
business day after receipt of the purchase order by Prudential Securities.
Prudential Securities will have the use of, and will retain the benefits of,
Eligible Credit Balances in the client's brokerage account until monies are
delivered to the Fund. (Prudential Securities delivers Federal Funds on the
business day after settlement).
PURCHASES THROUGH PRUSEC
You may purchase shares of the Series by placing an order with your Prusec
representative accompanied by payment for the purchase price of such shares and,
in the case of a new account, a completed application form. You should also
submit an IRS Form W-9. The Prusec representative will then forward these items
to the Transfer Agent. See "Purchase by Mail" below.
PURCHASE BY WIRE
For an initial purchase of shares of the Series by wire, you must first
telephone PMFS at (800) 225-1852 (toll-free) to receive an account number. The
following information will be requested: your name, address, tax identification
number, dividend
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<PAGE>
distribution election, amount being wired and wiring bank. Instructions should
then be given by you to your bank to transfer funds by wire to State Street Bank
and Trust Company (State Street), Boston, Massachusetts, Custody and Shareholder
Services Division, Attention: Prudential Municipal Series Fund, New York Money
Market Series, specifying on the wire the account number assigned by PMFS and
your name.
If you arrange for receipt by State Street of Federal Funds prior to the
calculation of NAV (4:30 P.M., New York time), on a business day, you may
purchase shares of the Series as of that day and receive dividends commencing on
the next business day. See "Net Asset Value" in the Statement of Additional
Information.
In making a subsequent purchase order by wire, you should wire State Street
directly, and should be sure that the wire specifies Prudential Municipal Series
Fund (New York Money Market Series) and your name and individual account number.
It is not necessary to call PMFS to make subsequent purchase orders utilizing
Federal Funds. The minimum amount which may be invested by wire is $1,000.
PURCHASE BY MAIL
Purchase orders for which remittance is to be made by check or money order may
be submitted directly by mail to Prudential Mutual Fund Services LLC, Attention:
Investment Services, P.O. Box 15020, New Brunswick, New Jersey 08906-5020,
together with payment for the purchase price of such shares and, in the case of
a new account, a completed application form. You should also submit an IRS Form
W-9. If PMFS receives an order to purchase shares of the Series and payment in
proper form prior to 4:30 P.M., New York time, the purchase order will be
effective that day and you will begin earning dividends the following business
day. See "Taxes, Dividends and Distributions." Checks should be made payable to
Prudential Municipal Series Fund, New York Money Market Series. Certified checks
are not necessary, but checks must be drawn on a bank located in the United
States. There are restrictions on the redemption of shares purchased by check
while the funds are being collected. See "How to Sell Your Shares" below. The
minimum initial investment by check is $1,000 and the minimum subsequent
investment by check is $100.
THE PRUDENTIAL ADVANTAGE ACCOUNT PROGRAM
Shares of the Series are offered to participants in the Prudential Advantage
Account Program (the Advantage Account Program), a financial services program
available to clients of Pruco Securities Corporation. Investors participating in
the Advantage Account Program may select the Series as their primary investment
vehicle. Such investors will have free credit cash balances of $1.00 or more in
their Securities Account (Available Cash) (a component of the Advantage Account
Program carried through Prudential Securities) automatically invested in shares
of the Series. Specifically, an order to purchase shares of the Series is placed
(i) in the case of Available Cash resulting from the proceeds of securities
sales, on the settlement date of the securities sale, and (ii) in the case of
Available Cash resulting from non-trade related credits (I.E., receipt of
dividends and interest payments, or a cash payment by the participant into his
or her Securities Account), on the business day after receipt by Prudential
Securities of the non-trade related credit.
All shares purchased pursuant to these automatic purchase procedures will
begin earning dividends on the business day after the order is placed.
Prudential Securities will arrange for investment in shares of the Series at
4:30 P.M. on the day the order is placed and cause payment to be made in Federal
Funds for the shares prior to 4:30 P.M. on the next business day. Prudential
Securities will have the use of free credit cash balances until delivery to the
Fund.
Redemptions will be automatically effected by Prudential Securities to satisfy
debit balances in a Securities Account created by activity therein or arising
under the Advantage Account Program, such as those incurred by use of the
Visa-Registered Trademark- Account, including Visa purchases, cash advances and
Visa Account checks. Each Advantage Account Program Securities Account will be
automatically scanned for debits each business day as of the close of business
on that day and after application of any free credit cash balances in the
account to such debits, a sufficient number of shares of the Series (if selected
as the primary fund) and, if
19
<PAGE>
necessary, shares of other Advantage Account funds owned by the Advantage
Account Program participant which have not been selected as his or her primary
fund or shares of a participant's money market funds managed by PMF which are
not primary Advantage Account funds will be redeemed as of that business day to
satisfy any remaining debits in the Securities Account. Shares may not be
purchased until all debits, overdrafts and other requirements in the Securities
Account are satisfied.
Advantage Account Program charges and expenses are not reflected in the table
of Fund expenses. See "Fund Expenses."
For information on participation in the Advantage Account Program, you should
telephone (800) 235-7637 (toll-free).
COMMAND-SM- ACCOUNT PROGRAM
Shares of the Series are offered to participants in the Prudential Securities
COMMAND Account program, an integrated financial services program of Prudential
Securities. Investors having a COMMAND Account may select the Series as their
primary fund. Such investors will have free credit cash balances of $1.00 or
more in their Securities Account (Available Cash) (a component of the COMMAND
Account program) automatically invested in shares of the Series as described
below. Specifically, an order to purchase shares of the Series is placed (i) in
the case of Available Cash resulting from the proceeds of securities sales, on
the settlement date of the securities sale, and (ii) in the case of Available
Cash resulting from non-trade related credits (I.E., receipt of dividends and
interest payments, maturity of a bond or a cash payment by the participant into
his or her Securities Account), on the business day after receipt by Prudential
Securities of the non-trade related credit. These automatic purchase procedures
are also applicable for Corporate COMMAND Accounts.
All shares purchased pursuant to these automatic purchase procedures will
begin earning dividends on the business day after the order is placed.
Prudential Securities will arrange for investment in shares of the Series at
4:30 P.M., New York time, on the business day the order is placed and cause
payment to be made in Federal Funds for the shares prior to 4:30 P.M., New York
time, on the next business day. Prudential Securities will have the use of free
credit cash balances until delivery to the Fund. There are no minimum investment
requirements for participants in the COMMAND Account program.
Redemptions will be automatically effected by Prudential Securities to satisfy
debit balances in a Securities Account created by activity therein or arising
under the COMMAND program, such as those incurred by use of the
Visa-Registered Trademark- Gold Account, including Visa purchases, cash advances
and Visa Account checks. Each COMMAND program Securities Account will be
automatically scanned for debits monthly for all Visa purchases incurred during
that month and each business day as of the close of business on that day for all
cash advances and check charges as incurred and after application of any free
credit cash balances in the account to such debits, a sufficient number of
shares of the Series and, if necessary, shares of other COMMAND funds owned by
the COMMAND program participant which have not been selected as his or her
primary fund or shares of a participant's money market funds managed by PIFM
which are not primary COMMAND funds will be redeemed as of that business day to
satisfy any remaining debits in the Securities Account. The single monthly debit
for Visa purchases will be made on the twenty-fifth day of each month, or the
prior business day if the twenty-fifth falls on a weekend or holiday. Margin
loans will be utilized to satisfy debits remaining after the liquidation of all
shares of the Series in a Securities Account, and shares may not be purchased
until all debits, margin loans and other requirements in the Securities Account
are satisfied. COMMAND Account participants will not be entitled to dividends
declared on the date of redemption.
For information on participation in the COMMAND Account program, you should
telephone (800) 222-4321 (toll-free).
HOW TO SELL YOUR SHARES
YOU CAN REDEEM YOUR SHARES OF THE SERIES AT ANY TIME FOR CASH AT THE NAV NEXT
DETERMINED AFTER THE REDEMPTION REQUEST IS RECEIVED IN PROPER FORM BY THE
TRANSFER AGENT OR PRUDENTIAL SECURITIES. SEE "HOW THE FUND VALUES ITS SHARES."
20
<PAGE>
Shares for which a redemption request is received by PMFS prior to 4:30 P.M.,
New York time, are entitled to a dividend on the day on which the request is
received. By pre-authorizing Expedited Redemption, you may arrange to have
payment for redeemed shares made in Federal Funds wired to your bank, normally
on the next business day following the date of receipt of the redemption
instructions. Should you redeem all of your shares, you will receive the amount
of all dividends declared for the month-to-date on those shares. See "Taxes,
Dividends and Distributions."
If redemption is requested by a corporation, partnership, trust or fiduciary,
written evidence of authority acceptable to the Transfer Agent must be submitted
before such request will be accepted. All correspondence and documents
concerning redemptions should be sent to the Fund in care of its Transfer Agent,
Prudential Mutual Fund Services LLC, Attention: Redemption Services, P.O. Box
15010, New Brunswick, New Jersey 08906-5010.
If the proceeds of the redemption (a) exceed $50,000, (b) are to be paid to a
person other than the record owner, (c) are to be sent to an address other than
the address on the Transfer Agent's records or (d) are to be paid to a
corporation, partnership, trust or fiduciary, the signature(s) on the redemption
request and on certificates, if any, or stock power must be guaranteed by an
"eligible guarantor institution". An "eligible guarantor institution" includes
any bank, broker, dealer or credit union. The Transfer Agent reserves the right
to request additional information from, and make reasonable inquiries of, any
eligible guarantor institution. For clients of Prusec, a signature guarantee may
be obtained from the agency or office manager of most Prudential Insurance and
Financial Services or Preferred Services offices.
NORMALLY, THE FUND MAKES PAYMENT ON THE NEXT BUSINESS DAY FOR ALL SHARES OF
THE SERIES REDEEMED, BUT IN ANY EVENT, PAYMENT IS MADE WITHIN SEVEN DAYS AFTER
RECEIPT BY PMFS OF SHARE CERTIFICATES AND/OR OF A REDEMPTION REQUEST IN PROPER
FORM. However, the Fund may suspend the right of redemption or postpone the date
of payment (a) for any periods during which the New York Stock Exchange is
closed (other than for customary weekends or holiday closings), (b) for any
periods when trading in the markets which the Fund normally utilizes is closed
or restricted or an emergency exists as determined by the SEC so that disposal
of the Series' investments or determination of its NAV is not reasonably
practicable or (c) for such other periods as the SEC may permit for protection
of the Series' shareholders.
PAYMENT FOR REDEMPTION OF RECENTLY PURCHASED SHARES WILL BE DELAYED UNTIL THE
FUND OR ITS TRANSFER AGENT HAS BEEN ADVISED THAT THE PURCHASE CHECK HAS BEEN
HONORED, UP TO 10 CALENDAR DAYS FROM THE TIME OF RECEIPT OF THE PURCHASE CHECK
BY THE TRANSFER AGENT. SUCH DELAY MAY BE AVOIDED BY PURCHASING SHARES BY WIRE OR
BY CERTIFIED OR CASHIER'S CHECK. THE FUND MAKES NO CHARGE FOR REDEMPTION.
REDEMPTION OF SHARES PURCHASED THROUGH PRUDENTIAL SECURITIES
Prudential Securities clients for whom Prudential Securities has purchased
shares of the Series may have these shares redeemed only by instructing their
Prudential Securities financial adviser orally or in writing.
Prudential Securities has advised the Fund that it has established procedures
pursuant to which shares of the Series held by a Prudential Securities client
having a deficiency in his or her Prudential Securities account will be redeemed
automatically to the extent of that deficiency to the nearest highest dollar.
The amount of the redemption will be the lesser of (a) the total net asset value
of the Series' shares held in the client's Prudential Securities account or (b)
the deficiency in the client's Prudential Securities account at the close of
business on the date such deficiency is due. Accordingly, a Prudential
Securities client who wishes to pay for a securities transaction or satisfy any
other debit balance in his or her account other than through this automatic
redemption procedure must do so prior to the day of settlement for such
securities transaction or the date the debit balance is incurred. In the case of
certain automatic redemptions, where Prudential Securities cannot anticipate
debits in the brokerage account (E.G., checks written against the account),
Prudential Securities clients will not be entitled to dividends declared on the
date of redemption; such dividends will be retained by Prudential Securities.
21
<PAGE>
REDEMPTION OF SHARES PURCHASED THROUGH PMFS
If you purchase shares of the Series through PMFS, you may use Regular
Redemption, Expedited Redemption or Check Redemption. Prudential Securities
clients for whom Prudential Securities has purchased shares may not use such
services.
REGULAR REDEMPTION. You may redeem your shares by sending a written request,
accompanied by duly endorsed share certificates, if issued, to PMFS, Attention:
Redemption Services, P.O. Box 15010, New Brunswick, New Jersey 08906-5010. In
this case, all share certificates and certain written requests for redemption
must be endorsed by you with signature guaranteed, as described above. Regular
redemption is made by check sent to your address.
EXPEDITED REDEMPTION. By pre-authorizing Expedited Redemption, you may arrange
to have payment for redeemed shares made in Federal Funds wired to your bank,
normally on the next business day following redemption. In order to use
Expedited Redemption, you may so designate at the time the initial application
form is made or at a later date. Once the Expedited Redemption authorization
form has been completed, the signature on the authorization form guaranteed as
set forth below and the form returned to Prudential Mutual Fund Services LLC,
Attention: Account Maintenance, P.O. Box 15015, New Brunswick, New Jersey
08906-5015, requests for redemption may be made by telegraph, letter or
telephone. To request Expedited Redemption by telephone, you should call PMFS at
(800) 225-1852. Calls must be received by PMFS before 4:30 P.M., New York time
to permit redemption as of such date. Requests by letter should be addressed to
Prudential Mutual Fund Services LLC at the address set forth above.
A signature guarantee is not required under Expedited Redemption once the
authorization form is properly completed and returned. The Expedited Redemption
privilege may be used only to redeem shares in an amount of $200 or more, except
that, if an account for which Expedited Redemption is requested has a net asset
value of less than $200, the entire account must be redeemed. The proceeds of
redeemed shares in the amount of $1,000 or more are transmitted by wire to your
account at a domestic commercial bank which is a member of the Federal Reserve
System. Proceeds of less than $1,000 are forwarded by check to your designated
bank account.
DURING PERIODS OF SEVERE MARKET OR ECONOMIC CONDITIONS, EXPEDITED REDEMPTION
MAY BE DIFFICULT TO IMPLEMENT AND YOU SHOULD REDEEM SHARES BY MAIL AS DESCRIBED
ABOVE.
CHECK REDEMPTION. At your request, State Street will establish a personal
checking account for you. Checks drawn on this account can be made payable to
the order of any person in any amount greater than $500. When such check is
presented to State Street for payment, State Street presents the check to the
Fund as authority to redeem a sufficient number of shares of the Series in the
shareholder's account to cover the amount of the check. If insufficient shares
are in the account, or if the purchase was made by check within 10 calendar
days, the check will be returned marked "insufficient funds." Checks in an
amount less than $500 will not be honored. Shares for which certificates have
been issued cannot be redeemed by check. There is a service charge of $5.00
payable to PMFS to establish a checking account and order checks.
INVOLUNTARY REDEMPTION. Because of the relatively high cost of maintaining an
account, the Fund reserves the right to redeem, upon 60 days' written notice, an
account which is reduced by a shareholder to a net asset value of $500 or less
due to redemption. You may avoid such redemption by increasing the net asset
value of your account to an amount in excess of $500.
REDEMPTION IN KIND. If the Trustees determine that it would be detrimental to
the best interests of the remaining shareholders of the Series to make payment
wholly or partly in cash, the Fund may pay the redemption price in whole or in
part by a distribution in kind of securities from the portfolio of the Series,
in lieu of cash, in conformity with the applicable rules of the SEC. Securities
will be readily marketable and will be valued in the same manner as in a regular
redemption. See "How the Fund Values its Shares." If your shares are redeemed in
kind, you will incur brokerage costs in converting the assets into cash. The
Fund has elected to be governed by Rule 18f-1 under the Investment Company Act
under which the Fund is obligated to redeem shares solely in cash up to the
lesser of $250,000 or one percent of the net asset value of the Fund during any
90-day period for any one shareholder.
22
<PAGE>
CLASS B AND CLASS C PURCHASE PRIVILEGE. You may direct that the proceeds of a
redemption of Series shares be invested in Class B or Class C shares of any
Prudential Mutual Fund by calling your Prudential Securities financial adviser
or the Transfer Agent at (800) 225-1852. The transaction will be effected on the
basis of the relative NAV.
HOW TO EXCHANGE YOUR SHARES
AS A SHAREHOLDER OF THE SERIES, YOU HAVE AN EXCHANGE PRIVILEGE WITH OTHER
SERIES OF THE FUND AND CERTAIN OTHER PRUDENTIAL MUTUAL FUNDS (THE EXCHANGE
PRIVILEGE), INCLUDING ONE OR MORE SPECIFIED MONEY MARKET FUNDS AND FUNDS SOLD
WITH AN INITIAL SALES CHARGE, SUBJECT TO THE MINIMUM INVESTMENT REQUIREMENTS OF
SUCH FUNDS. You may exchange your shares for Class A shares of the other series
of the Fund or Class A shares of the Prudential Mutual Funds on the basis of the
relative NAV per share plus the applicable sales charge. No additional sales
charge is imposed in connection with subsequent exchanges. You may not exchange
your shares for Class B shares of the Prudential Mutual Funds, except that
shares acquired prior to January 22, 1990 subject to a contingent deferred sales
charge can be exchanged for Class B shares. See "Class B and Class C Purchase
Privilege" above and "Shareholder Investment Account--Exchange Privilege" in the
Statement of Additional Information. An exchange will be treated as a redemption
and purchase for tax purposes. You may not exchange your shares for Class C or
Class Z shares of other series of the Fund or Class C or Class Z shares of the
Prudential Mutual Funds.
IN ORDER TO EXCHANGE SHARES BY TELEPHONE, YOU MUST AUTHORIZE THE TELEPHONE
EXCHANGE PRIVILEGE ON YOUR INITIAL APPLICATION FORM OR BY WRITTEN NOTICE TO THE
TRANSFER AGENT AND HOLD SHARES IN NON-CERTIFICATE FORM. Thereafter, you may call
the Fund at (800) 225-1852 to execute a telephone exchange of shares, weekdays,
except holidays, between the hours of 8:00 A.M. and 6:00 P.M., New York time.
For your protection and to prevent fraudulent exchanges, your telephone call
will be recorded and you will be asked to provide your personal indentification
number. A written confirmation of the exchange transaction will be sent to you.
NEITHER THE FUND NOR ITS AGENTS WILL BE LIABLE FOR ANY LOSS, LIABILITY OR COST
WHICH RESULTS FROM ACTING UPON INSTRUCTIONS REASONABLY BELIEVED TO BE GENUINE
UNDER THE FOREGOING PROCEDURES. All exchanges will be made on the basis of the
relative NAV of the two funds (or series) next determined after the request is
received in good order. The Exchange Privilege is available only in states where
the exchange may legally be made.
IF YOU HOLD SHARES THROUGH PRUDENTIAL SECURITIES, YOU MUST EXCHANGE YOUR
SHARES BY CONTACTING YOUR PRUDENTIAL SECURITIES FINANCIAL ADVISER.
IF YOU HOLD CERTIFICATES, THE CERTIFICATES, SIGNED IN THE NAME(S) SHOWN ON THE
FACE OF THE CERTIFICATES, MUST BE RETURNED IN ORDER FOR THE SHARES TO BE
EXCHANGED. SEE "HOW TO SELL YOUR SHARES" ABOVE.
You may also exchange shares by mail by writing to Prudential Mutual Fund
Services LLC, Attention: Exchange Processing, P.O. Box 15010, New Brunswick, New
Jersey 08906-5010.
IN PERIODS OF SEVERE MARKET OR ECONOMIC CONDITIONS, THE TELEPHONE EXCHANGE OF
SHARES MAY BE DIFFICULT TO IMPLEMENT AND SHAREHOLDERS SHOULD MAKE EXCHANGES BY
MAIL BY WRITING TO PRUDENTIAL MUTUAL FUND SERVICES LLC, AT THE ADDRESS NOTED
ABOVE.
The Exchange Privilege is not a right and may be suspended, terminated or
modified on 60 days' notice to shareholders.
FREQUENT TRADING. The Fund and the other Prudential Mutual Funds are not
intended to serve as vehicles for frequent trading in response to short-term
fluctuations in the market. Due to the disruptive effect that market timing
investment strategies and excessive trading can have on efficient portfolio
management, each Prudential Mutual Fund and the Fund reserves the right to
refuse purchase orders and exchanges by any person, group or commonly controlled
accounts, if, in the Manager's sole judgment, such person, group or accounts
were following a market timing strategy or were otherwise engaging in excessive
trading (Market Timers).
23
<PAGE>
To implement this authority to protect the Fund and its shareholders from
excessive trading, the Fund will reject all exchanges and purchases from a
Market Timer unless the Market Timer has entered into a written agreement with
the Fund or its affiliates pursuant to which the Market Timer has agreed to
abide by certain procedures, which include a daily dollar amount on trading. The
Fund may notify the Market Timer of rejection of an exchange or purchase order
subsequent to the day on which the order was placed.
SHAREHOLDER SERVICES
In addition to the Exchange Privilege, you can take advantage of the following
services and privileges:
- AUTOMATIC REINVESTMENT OF DIVIDENDS AND/OR DISTRIBUTIONS. For your
convenience, all dividends and distributions are automatically reinvested in
full and fractional shares of the Series at NAV. You may direct the Transfer
Agent in writing not less than 5 full business days prior to the record date to
have subsequent dividends and/or distributions sent in cash rather than
reinvested. If you hold shares through Prudential Securities, you should contact
your financial adviser.
- AUTOMATIC SAVINGS ACCUMULATION PLAN (ASAP). Under ASAP, you may make regular
purchases of the Series' shares in amounts as little as $50 via an automatic
charge to a bank account or Prudential Securities account (including a Command
Account). For additional information about this service, you may contact your
Prudential Securities financial adviser, Prusec representative or the Transfer
Agent directly.
- SYSTEMATIC WITHDRAWAL PLAN. A systematic withdrawal plan is available for
shareholders which provides for monthly or quarterly checks. See "How to Sell
Your Shares."
- MULTIPLE ACCOUNTS. Special procedures have been designed for banks and other
institutions that wish to open multiple accounts. An institution may open a
single master account by filing an application form with the Transfer Agent.
Attention: Customer Service, P.O. Box 15005, New Brunswick, New Jersey 08906,
signed by personnel authorized to act for the institution. Individual
sub-accounts may be opened at the time the master account is opened by listing
them, or they may be added at a later date by written advice or by filing forms
supplied by the Fund. Procedures are available to identify sub-accounts by name
and number within the master account name. The investment minimums set forth
above are applicable to the aggregate amounts invested by a group and not to the
amount credited to each sub-account.
- REPORTS TO SHAREHOLDERS. The Fund will send you annual and semi-annual
reports. The financial statements appearing in annual reports are audited by
independent accountants. In order to reduce duplicate mailing and printing
expenses, the Fund will provide one annual and semi-annual shareholder report
and annual prospectus per household. You may request additional copies of such
reports by calling (800) 225-1852 or by writing to the Fund at Gateway Center
Three, 100 Mulberry Street, Newark, New Jersey 07102-4077. In addition, monthly
unaudited financial data is available upon request from the Fund.
- SHAREHOLDER INQUIRIES. Inquiries should be addressed to the Fund at Gateway
Center Three, 100 Mulberry Street, Newark, New Jersey 07102-4077, or by
telephone, at (800) 225-1852 (toll-free) or, from outside the U.S.A., at (908)
417-7555 (collect).
For additional information regarding the services and privileges described
above, see "Shareholder Investment Account" in the Statement of Additional
Information.
24
<PAGE>
- --------------------------------------------------------------------------------
THE PRUDENTIAL MUTUAL FUND FAMILY
- --------------------------------------------------------------------------------
Prudential Investments Fund Management offers a broad range of mutual funds
designed to meet your individual needs. We welcome you to review the investment
options available through our family of funds. For more information on the
Prudential Mutual Funds, including charges and expenses, contact your Prudential
Securities financial adviser or Prusec representative or telephone the Fund at
(800) 225-1852 for a free prospectus. Read the prospectus carefully before you
invest or send money.
- ------------------------
TAXABLE BOND FUNDS
- ---------------------------------------------------
Prudential Diversified Bond Fund, Inc.
Prudential Government Income Fund, Inc.
Prudential Government Securities Trust
Short-Intermediate Term Series
Prudential High Yield Fund, Inc.
Prudential Mortgage Income Fund, Inc.
Prudential Structured Maturity Fund, Inc.
Income Portfolio
The BlackRock Government Income Trust
- -----------------------
TAX-EXEMPT BOND FUNDS
- ---------------------------------------------------
Prudential California Municipal Fund
California Series
California Income Series
Prudential Municipal Bond Fund
High Yield Series
Insured Series
Intermediate Series
Prudential Municipal Series Fund
Florida Series
Maryland Series
Massachusetts Series
Michigan Series
New Jersey Series
New York Series
North Carolina Series
Ohio Series
Pennsylvania Series
Prudential National Municipals Fund, Inc.
- ---------------
GLOBAL FUNDS
- ---------------------------------------------------
Prudential Europe Growth Fund, Inc.
Prudential Global Genesis Fund, Inc.
Prudential Global Limited Maturity Fund, Inc.
Limited Maturity Portfolio
Prudential Intermediate Global Income Fund, Inc.
Prudential International Bond Fund, Inc.
Prudential Natural Resources Fund, Inc.
Prudential Pacific Growth Fund, Inc.
Prudential World Fund, Inc.
Global Series
International Stock Series
The Global Total Return Fund, Inc.
Global Utility Fund, Inc.
- ---------------
EQUITY FUNDS
- ---------------------------------------------------
Prudential Balanced Fund
Prudential Distressed Securities Fund, Inc.
Prudential Dryden Fund
Prudential Active Balanced Fund
Prudential Stock Index Fund
Prudential Small Cap Index Fund
Prudential Bond Market Index Fund
Prudential Pacific Index Fund
Prudential Europe Index Fund
Prudential Emerging Growth Fund, Inc.
Prudential Equity Fund, Inc.
Prudential Equity Income Fund
Prudential Jennison Series Fund, Inc.
Prudential Jennison Growth Fund
Prudential Jennison Growth & Income Fund
Prudential Multi-Sector Fund, Inc.
Prudential Small-Cap Quantum Fund, Inc.
Prudential Small Company Value Fund, Inc.
Prudential Utility Fund, Inc.
Nicholas-Applegate Fund, Inc.
Nicholas-Applegate Growth Equity Fund
- ---------------------
MONEY MARKET FUNDS
- ---------------------------------------------------
- - TAXABLE MONEY MARKET FUNDS
Prudential Government Securities Trust
Money Market Series
U.S. Treasury Money Market Series
Prudential Special Money Market Fund, Inc.
Money Market Series
Prudential MoneyMart Assets, Inc.
- - TAX-FREE MONEY MARKET FUNDS
Prudential Tax-Free Money Fund, Inc.
Prudential California Municipal Fund
California Money Market Series
Prudential Municipal Series Fund
Connecticut Money Market Series
Massachusetts Money Market Series
New Jersey Money Market Series
New York Money Market Series
- - COMMAND FUNDS
Command Money Fund
Command Government Fund
Command Tax-Free Fund
- - INSTITUTIONAL MONEY MARKET FUNDS
Prudential Institutional Liquidity Portfolio, Inc.
Institutional Money Market Series
A-1
<PAGE>
No dealer, sales representative or any other person has been authorized to give
any information or to make any representations, other than those contained in
this Prospectus, in connection with the offer contained in this Prospectus, and,
if given or made, such other information or representations must not be relied
upon as having been authorized by the Fund or the Distributor. This Prospectus
does not constitute an offer by the Fund or by the Distributor to sell or a
solicitation of any offer to buy any of the securities offered hereby in any
jurisdiction to any person to whom it is unlawful to make such offer in such
jurisdiction.
-------------------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
FUND HIGHLIGHTS................................ 2
What are the Series' Risk Factors and Special
Characteristics............................. 2
FUND EXPENSES.................................. 4
FINANCIAL HIGHLIGHTS........................... 5
CALCULATION OF YIELD........................... 6
HOW THE FUND INVESTS........................... 6
Investment Objective and Policies............ 6
Other Investments and Policies............... 9
Investment Restrictions...................... 10
HOW THE FUND IS MANAGED........................ 10
Manager...................................... 10
Distributor.................................. 11
Portfolio Transactions....................... 12
Custodian and Transfer and Dividend
Disbursing Agent............................ 12
HOW THE FUND VALUES ITS SHARES................. 12
TAXES, DIVIDENDS AND DISTRIBUTIONS............. 13
GENERAL INFORMATION............................ 15
Description of Shares........................ 15
Additional Information....................... 15
SHAREHOLDER GUIDE.............................. 16
How to Buy Shares of the Fund................ 16
How to Sell Your Shares...................... 20
How to Exchange Your Shares.................. 23
Shareholder Services......................... 24
THE PRUDENTIAL MUTUAL FUND FAMILY.............. A-1
</TABLE>
-------------------------------------------
MF127A 444005A
CUSIP No: 74435M-72-1
PRUDENTIAL
MUNICIPAL
SERIES FUND
----------------------------------------
NEW YORK MONEY MARKET SERIES
PROSPECTUS
OCTOBER 30, 1997
www.prudential.com
[LOGO]
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
(NORTH CAROLINA SERIES)
- --------------------------------------------------------------------------------
PROSPECTUS DATED OCTOBER 30, 1997
- ----------------------------------------------------------------
Prudential Municipal Series Fund (the Fund) (North Carolina Series) (the Series)
is one of thirteen series of an open-end, management investment company, or
mutual fund. This Series is diversified and is designed to provide the maximum
amount of income that is exempt from North Carolina State and federal income
taxes consistent with the preservation of capital and, in conjunction therewith,
the Series may invest in debt securities with the potential for capital gain.
The net assets of the Series are invested primarily in obligations within the
four highest ratings of Moody's Investors Service, Standard & Poor's Ratings
Group or another nationally recognized statistical rating organization or in
unrated obligations which, in the opinion of the Fund's investment adviser, are
of comparable quality. The Series may, however, 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.
Subject to the limitations described herein, the Series may utilize derivatives,
including buying and selling futures contracts and options thereon for the
purpose of hedging its portfolio securities. There can be no assurance that the
Series' investment objective will be achieved. See "How the Fund
Invests--Investment Objective and Policies." The Fund's address is Gateway
Center Three, 100 Mulberry Street, Newark, New Jersey 07102-4077, and its
telephone number is (800) 225-1852.
This Prospectus sets forth concisely the information about the Fund and the
North Carolina Series that a prospective investor should know before investing.
Additional information about the Fund has been filed with the Securities and
Exchange Commission in a Statement of Additional Information dated October 30,
1997, which information is incorporated herein by reference (is legally
considered a part of this Prospectus) and is available without charge upon
request to the Fund at the address or telephone number noted above.
- --------------------------------------------------------------------------------
INVESTORS ARE ADVISED TO READ THIS PROSPECTUS AND RETAIN IT FOR FUTURE
REFERENCE.
- --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
<PAGE>
FUND HIGHLIGHTS
The following summary is intended to highlight certain information contained
in this Prospectus and is qualified in its entirety by the more detailed
information appearing elsewhere herein.
WHAT IS PRUDENTIAL MUNICIPAL SERIES FUND?
Prudential Municipal Series Fund is a mutual fund whose shares are offered
in thirteen series, each of which operates as a separate fund. A mutual fund
pools the resources of investors by selling its shares to the public and
investing the proceeds of such sale in a portfolio of securities designed to
achieve its investment objective. Technically, the Fund is an open-end,
management investment company. Only the North Carolina Series is offered
through this Prospectus.
WHAT IS THE SERIES' INVESTMENT OBJECTIVE?
The Series' investment objective is to maximize current income that is
exempt from North Carolina State and federal income taxes consistent with
the preservation of capital. It seeks to achieve this objective by investing
primarily in North Carolina State, municipal and local government
obligations and obligations of other qualifying issuers, such as issuers
located in Puerto Rico, the Virgin Islands and Guam, which pay income
exempt, in the opinion of counsel, from North Carolina State and federal
income taxes (North Carolina Obligations). There can be no assurance that
the Series' investment objective will be achieved. See "How the Fund
Invests--Investment Objective and Policies" at page 8.
WHAT ARE THE SERIES' RISK FACTORS AND SPECIAL CHARACTERISTICS?
In seeking to achieve its investment objective, the Series will invest at
least 80% of the value of its total assets in North Carolina Obligations.
This degree of investment concentration makes the Series particularly
susceptible to factors adversely affecting issuers of North Carolina
Obligations. See "How the Fund Invests--Investment Objective and
Policies--Special Considerations" at page 13. The Series may invest up to
30% of its total assets in high yield securities, commonly known as "junk
bonds," which may be considered speculative and are subject to the risk of
an issuer's inability to meet principal and interest payments on the
obligations as well as price volatility. See "How the Fund Invests--
Investment Objectives and Policies--Risk Factors Relating to Investing in
High Yield Municipal Obligations" at page 11. To hedge against changes in
interest rates, the Series may also purchase put options and engage in
transactions involving derivatives, including financial futures contracts
and options thereon. See "How the Fund Invests--Investment Objective and
Policies--Futures Contracts and Options Thereon" at page 12. As with an
investment in any mutual fund, an investment in this Series can decrease in
value and you can lose money.
WHO MANAGES THE FUND?
Prudential Investments Fund Management LLC (PIFM or the Manager) is the
Manager of the Fund and is compensated for its services at an annual rate of
.50 of 1% of the Series' average daily net assets. As of September 30, 1997,
PIFM served as manager or administrator to 63 investment companies,
including 41 mutual funds, with aggregate assets of approximately $59.9
billion. The Prudential Investment Corporation, which does business under
the name Prudential Investments (PI, the Subadviser or the investment
adviser), furnishes investment advisory services in connection with the
management of the Fund under a Subadvisory Agreement with PIFM. See "How the
Fund is Managed--Manager" at page 15.
WHO DISTRIBUTES THE SERIES' SHARES?
Prudential Securities Incorporated (Prudential Securities, PSI or the
Distributor), a major securities underwriter and securities and commodities
broker, acts as the Distributor of the Series' Class A, Class B and Class C
shares and is paid a distribution and service fee with respect to Class A
shares which is currently being charged at the annual rate of .10 of 1% of
the average daily net assets of the Class A shares and is paid a
distribution and service fee with respect to Class B shares at the annual
rate of .50 of 1% of the average daily net assets of the Class B shares and
is paid an annual distribution and service fee with respect to Class C
shares which is currently being charged at the rate of .75 of 1% of the
average daily net assets of the Class C shares. See "How the Fund is
Managed--Distributor" at page 16.
2
<PAGE>
WHAT IS THE MINIMUM INVESTMENT?
The minimum initial investment is $1,000 for Class A and Class B shares
and $5,000 for Class C shares. The minimum subsequent investment is $100 for
Class A, Class B and Class C shares. There is no minimum investment
requirement for certain employee savings plans. For purchases made through
the Automatic Savings Accumulation Plan, the minimum initial and subsequent
investment is $50. See "Shareholder Guide--How to Buy Shares of the Fund" at
page 22 and "Shareholder Guide--Shareholder Services" at page 31.
HOW DO I PURCHASE SHARES?
You may purchase shares of the Series through Prudential Securities, Pruco
Securities Corporation (Prusec) or directly from the Fund through its
transfer agent, Prudential Mutual Fund Services LLC (PMFS or the Transfer
Agent), at the net asset value per share (NAV) next determined after receipt
of your purchase order by the Transfer Agent or Prudential Securities plus a
sales charge which may be imposed either (i) at the time of purchase (Class
A shares) or (ii) on a deferred basis (Class B or Class C shares). See "How
the Fund Values its Shares" at page 18 and "Shareholder Guide--How to Buy
Shares of the Fund" at page 22.
WHAT ARE MY PURCHASE ALTERNATIVES?
The Series offers three classes of shares:
- Class A Shares:
Sold with an initial sales charge of up to 3% of the
offering price.
- Class B Shares:
Sold without an initial sales charge but are subject to
a contingent deferred sales charge or CDSC (declining
from 5% to zero of the lower of the amount invested or
the redemption proceeds) which will be imposed on
certain redemptions made within six years of purchase.
Although Class B shares are subject to higher ongoing
distribution-related expenses than Class A shares, Class
B shares will automatically convert to Class A shares
(which are subject to lower ongoing distribution-related
expenses) approximately seven years after purchase.
- Class C Shares:
Sold without an initial sales charge and, for one year
after purchase, are subject to a 1% CDSC on redemptions.
Like Class B shares, Class C shares are subject to
higher ongoing distribution-related expenses than Class
A shares but do not convert to another class.
See "Shareholder Guide--Alternative Purchase Plan" at page 23.
HOW DO I SELL MY SHARES?
You may redeem your shares at any time at the NAV next determined after
Prudential Securities or the Transfer Agent receives your sell order.
However, the proceeds of redemptions of Class B and Class C shares may be
subject to a CDSC. See "Shareholder Guide--How to Sell Your Shares" at page
26.
HOW ARE DIVIDENDS AND DISTRIBUTIONS PAID?
The Series expects to declare daily and pay monthly dividends of net
investment income, if any, and make distributions of any net capital gains
at least annually. Dividends and distributions will be automatically
reinvested in additional shares of the Series at NAV without a sales charge
unless you request that they be paid to you in cash. See "Taxes, Dividends
and Distributions" at page 19.
3
<PAGE>
FUND EXPENSES
(NORTH CAROLINA SERIES)
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES CLASS C SHARES
--------------- ------------------------------- ----------------------------
<S> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES+
Maximum Sales Load Imposed on
Purchases.......................... 3% None None
Maximum Deferred Sales Load (as a
percentage of original purchase
price or redemption proceeds,
whichever is lower)................ None 5% during the first year, 1% on redemptions made
decreasing by 1% annually to 1% within one year of purchase
in the fifth and sixth years
and 0% the seventh year*
Maximum Sales Load Imposed on
Reinvested Dividends............... None None None
Redemption Fees..................... None None None
Exchange Fee........................ None None None
</TABLE>
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES CLASS C SHARES
-------------- -------------- --------------
<S> <C> <C> <C>
ANNUAL FUND OPERATING EXPENSES**
(as a percentage of average net assets)
Management Fees..................... .50% .50% .50%
12b-1 Fees (After Reduction)........ .10%++ .50% .75%++
Other Expenses...................... .38% .38% .38%
--- --- ---
Total Fund Operating Expenses (After
Reduction)......................... .98% 1.38% 1.63%
--- --- ---
--- --- ---
</TABLE>
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
EXAMPLE
You would pay the following expenses on
a $1,000 investment, assuming (1) 5%
annual return and (2) redemption at
the end of each time period:
Class A............................. $ 40 $ 60 $ 83 $ 147
Class B............................. $ 64 $ 74 $ 86 $ 150
Class C............................. $ 27 $ 51 $ 89 $ 193
You would pay the following expenses on
the same investment, assuming no
redemption:
Class A............................. $ 40 $ 60 $ 83 $ 147
Class B............................. $ 14 $ 44 $ 76 $ 150
Class C............................. $ 17 $ 51 $ 89 $ 193
</TABLE>
The above examples are based on restated data for the Series' fiscal year
ended August 31, 1997. THE EXAMPLES SHOULD NOT BE CONSIDERED A
REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER
OR LESS THAN THOSE SHOWN.
The purpose of this table is to assist investors in understanding the
various costs and expenses that an investor in the Series will bear,
whether directly or indirectly. For more complete descriptions of the
various costs and expenses, see "How the Fund is Managed." "Other
Expenses" includes operating expenses of the Series, such as Trustees' and
professional fees, registration fees, reports to shareholders and transfer
agency and custodian fees.
- ---------------
* Class B shares will automatically convert to Class A shares approximately
seven years after purchase. See "Shareholder Guide--Conversion Feature--
Class B Shares."
** The expense information in the table has been restated to reflect current
fees. Effective September 1, 1997, PIFM eliminated its management fee
waiver (.05 of 1%). See "How the Fund is Managed--Manager--Fee Waivers."
+ Pursuant to rules of the National Association of Securities Dealers, Inc.,
the aggregate initial sales charges, deferred sales charges and
asset-based sales charges on shares of the Series may not exceed 6.25% of
total gross sales, subject to certain exclusions. This 6.25% limitation
is imposed on each class of the Series rather than on a per shareholder
basis. Therefore, long-term shareholders of the Series may pay more in
total sales charges than the economic equivalent of 6.25% of such
shareholders' investment in such shares. See "How the Fund is
Managed--Distributor."
++ Although the Class A and Class C Distribution and Service Plans provide that
the Fund may pay a distribution fee of up to .30 of 1% and 1% per annum
of the average daily net assets of the Class A and Class C shares,
respectively, the Distributor has agreed to limit its distribution fees
with respect to the Class A and Class C shares of the Series to no more
than .10 of 1% and .75 of 1% of the average daily net asset value of the
Class A shares and Class C shares, respectively, for the fiscal year
ending August 31, 1998. Total Fund Operating Expenses (Before Waiver) of
the Class A and Class C shares without such limitations would be 1.18%
and 1.88%, respectively. See "How the Fund is Managed--Distributor."
4
<PAGE>
FINANCIAL HIGHLIGHTS
(FOR A SHARE OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT EACH OF THE INDICATED
PERIODS)
(CLASS A SHARES)
The following financial highlights, for the fiscal year ended August 31, 1997,
have been audited by Price Waterhouse LLP, independent accountants, and by
Deloitte and Touche LLP, independent auditors, for the four years ended August
31, 1996. Each of the respective reports by Price Waterhouse LLP and Deloitte &
Touche LLP on such financial statements was unqualified. This information should
be read in conjunction with the financial statements and the notes thereto,
which appear in the Statement of Additional Information. The following financial
highlights contain selected data for a Class A share of beneficial interest
outstanding, total return, ratios to average net assets and other supplemental
data for the periods indicated. This information is based on data contained in
the financial statements. Further performance information is contained in the
annual report, which may be obtained without charge. See "Shareholder
Guide--Shareholder Services--Reports to Shareholders."
<TABLE>
<CAPTION>
CLASS A
-----------------------------------------------------------------------------------------------
JANUARY 22,
1990 (a)
YEAR ENDED AUGUST 31, THROUGH
------------------------------------------------------------------------------- AUGUST 31,
1997 1996 1995 1994 1993 1992 1991 1990
------- ------- ------- ------- ------- ------- ------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning
of period................. $ 11.06 $ 11.19 $ 11.06 $ 12.04 $ 11.37 $ 10.86 $ 10.45 $10.63
------- ------- ------- ------- ------- ------- ------- -----------
INCOME FROM INVESTMENT
OPERATIONS
Net investment income....... .54(d) .53(d) .60(d) .61 .65 .67 .67 .41
Net realized and unrealized
gain (loss) on investment
transactions.............. .38 (.01) .13 (.76) .67 .51 .41 (.18)
------- ------- ------- ------- ------- ------- ------- -----------
Total from investment
operations................ .92 .52 .73 (.15) 1.32 1.18 1.08 .23
------- ------- ------- ------- ------- ------- ------- -----------
LESS DISTRIBUTIONS
Dividends from net
investment income......... (.54) (.53) (.60) (.61) (.65) (.67) (.67) (.41)
Distributions from net
realized gains............ (.16) (.12) -- (.22) -- -- -- --
------- ------- ------- ------- ------- ------- ------- -----------
Total distributions......... (.70) (.65) (.60) (.83) (.65) (.67) (.67) (.41)
------- ------- ------- ------- ------- ------- ------- -----------
Net asset value, end of
period.................... $ 11.28 $ 11.06 $ 11.19 $ 11.06 $ 12.04 $ 11.37 $ 10.86 $10.45
------- ------- ------- ------- ------- ------- ------- -----------
------- ------- ------- ------- ------- ------- ------- -----------
TOTAL RETURN (C):........... 8.58% 4.70% 6.86% (1.35)% 11.99% 11.12% 10.63% 2.09%
RATIOS/SUPPLEMENTAL DATA:
Net asset, end of period
(000)..................... $29,350 $28,089 $26,519 $ 2,256 $ 1,777 $ 917 $ 362 $ 58
Average net assets (000).... $29,055 $27,628 $15,244 $ 2,067 $ 1,316 $ 612 $ 246 $ 32
Ratios to average net
assets:
Expenses, including
distribution fee......... .93%(d) 1.03%(d) .98%(d) .88% .87% .91% .99% 1.00%(b)
Expenses, excluding
distribution fee......... .83%(d) .93%(d) .88%(d) .78% .77% .81% .89% .90%(b)
Net investment income..... 4.87%(d) 4.78%(d) 5.25%(d) 5.31% 5.55% 5.90% 6.24% 6.24%(b)
Portfolio turnover rate..... 35% 23% 28% 17% 38% 36% 27% 24%
</TABLE>
- ---------------
(a) Commencement of offering of Class A shares.
(b) Annualized.
(c) Total return does not consider the effects of sales loads. Total
return is calculated assuming a purchase of shares on the first day
and a sale on the last day of each period reported and includes
reinvestment of dividends and distributions. Total returns for
periods of less than a full year are not annualized.
(d) Net of management fee waiver.
5
<PAGE>
FINANCIAL HIGHLIGHTS
(FOR A SHARE OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT EACH OF THE INDICATED
PERIODS)
(CLASS B SHARES)
The following financial highlights, for the fiscal year ended August 31, 1997,
have been audited by Price Waterhouse LLP, independent accountants, and by
Deloitte and Touche LLP, independent auditors, for the four years ended August
31, 1996. Each of the respective reports by Price Waterhouse LLP and Deloitte &
Touche LLP on such financial statements was unqualified. This information should
be read in conjunction with the financial statements and the notes thereto,
which appear in the Statement of Additional Information. The following financial
highlights contain selected data for a Class B share of beneficial interest
outstanding, total return, ratios to average net assets and other supplemental
data for the periods indicated. This information is based on data contained in
the financial statements. Further performance information is contained in the
annual report, which may be obtained without charge. See "Shareholder
Guide--Shareholder Services--Reports to Shareholders."
<TABLE>
<CAPTION>
CLASS B
-----------------------------------------------------------------------------------------------------------
YEAR ENDED AUGUST 31,
-----------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993 1992 1991 1990 1989 (b) 1988
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE
OPERATING
PERFORMANCE:
Net asset value,
beginning of
year.......... $ 11.06 $ 11.19 $ 11.06 $ 12.05 $ 11.37 $ 10.86 $ 10.45 $ 10.65 $ 10.35 $ 10.59
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
INCOME FROM
INVESTMENT
OPERATIONS
Net investment
income........ .50(d) .49(d) .55(d) .56 .60 .62 .63 .64 .65 .69(a)
Net realized and
unrealized
gain (loss) on
investment
transactions... .39 (.01) .13 (.77) .68 .51 .41 (.20) .30 (.24)
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Total from
investment
operations.... .89 .48 .68 (.21) 1.28 1.13 1.04 .44 .95 .45
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
LESS
DISTRIBUTIONS
Dividends from
net investment
income........ (.50) (.49) (.55) (.56) (.60) (.62) (.63) (.64) (.65) (.69)
Distributions
from net
realized
gains......... (.16) (.12) -- (.22) -- -- -- -- -- --
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Total
distributions... (.66) (.61) (.55) (.78) (.60) (.62) (.63) (.64) (.65) (.69)
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Net asset value,
end of year... $ 11.29 $ 11.06 $ 11.19 $ 11.06 $ 12.05 $ 11.37 $ 10.86 $ 10.45 $ 10.65 $ 10.35
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- -------- -------- -------- --------
TOTAL RETURN
(C):.......... 8.25% 4.28% 6.44% (1.82)% 11.62% 10.64% 10.17% 4.28% 9.39% 4.47%
RATIOS/SUPPLEMENTAL
DATA:
Net asset, end
of year
(000)......... $ 24,952 $ 31,029 $ 40,119 $ 69,448 $ 75,515 $ 63,573 $ 59,875 $ 57,429 $34,222 $ 44,076
Average net
assets
(000)......... $ 27,703 $ 35,605 $ 51,963 $ 73,606 $ 67,997 $ 60,751 $ 59,071 $ 56,745 $49,868 $ 40,442
Ratios to
average net
assets:
Expenses,
including
distribution
fee.......... 1.33%(d) 1.43%(d) 1.34%(d) 1.28% 1.27% 1.31% 1.39% 1.38% 1.39% 1.13%(a)
Expenses,
excluding
distribution
fee.......... .83%(d) .93%(d) .84%(d) .78% .77% .81% .89% .89% .89% .64%(a)
Net investment
income....... 4.47%(d) 4.37%(d) 5.10%(d) 4.89% 5.18% 5.58% 5.88% 5.96% 6.06% 6.58%(a)
Portfolio
turnover
rate.......... 35% 23% 28% 17% 38% 36% 27% 24% 47% 66%
</TABLE>
- -----------------
(a) Net of expense subsidy.
(b) On December 31, 1988, Prudential Mutual Fund Management, Inc.
succeeded The Prudential Insurance Company of America as manager of
the Fund.
(c) Total return does not consider the effects of sales loads. Total
return is calculated assuming a purchase of shares on the first day
and a sale on the last day of each period reported and includes
reinvestment of dividends and distributions.
(d) Net of management fee waiver.
6
<PAGE>
FINANCIAL HIGHLIGHTS
(FOR A SHARE OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT EACH OF THE INDICATED
PERIODS)
(CLASS C SHARES)
The following financial highlights, for the fiscal year ended August 31, 1997,
have been audited by Price Waterhouse LLP, independent accountants, and by
Deloitte and Touche LLP, independent auditors, for the two years ended August
31, 1996 and for the period from August 1, 1994 through August 31, 1994. Each of
the respective reports by Price Waterhouse LLP and Deloitte & Touche LLP on such
financial statements was unqualified. This information should be read in
conjunction with the financial statements and the notes thereto, which appear in
the Statement of Additional Information. The following financial highlights
contain selected data for a Class C share of beneficial interest outstanding,
total return, ratios to average net assets and other supplemental data for the
periods indicated. This information is based on data contained in the financial
statements. Further performance information is contained in the annual report,
which may be obtained without charge. See "Shareholder Guide-- Shareholder
Services--Reports to Shareholders."
<TABLE>
<CAPTION>
CLASS C
-------------------------------------------------------
AUGUST 1,
1994 (a)
YEAR ENDED AUGUST 31, THROUGH
---------------------------------------- AUGUST 31,
1997 1996 1995 1994
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.............. $ 11.06 $ 11.19 $ 11.06 $ 11.09
---------- ---------- ---------- ----------
INCOME FROM INVESTMENT OPERATIONS
Net investment income............................. .47(d) .46(d) .52(d) .04
Net realized and unrealized gain (loss) on
investment transactions......................... .39 (.01) .13 (.03)
---------- ---------- ---------- ----------
Total from investment operations.................. .86 .45 .65 .01
---------- ---------- ---------- ----------
LESS DISTRIBUTIONS
Dividends from net investment income.............. (.47) (.46) (.52) (.04)
Distributions from net realized gains............. (.16) (.12) -- --
---------- ---------- ---------- ----------
Total distributions............................... (.63) (.58) (.52) (.04)
---------- ---------- ---------- ----------
Net asset value, end of period.................... $ 11.29 $ 11.06 $ 11.19 $ 11.06
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
TOTAL RETURN (C):................................. 7.98% 4.03% 6.17% .02%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)................... $ 62 $ 72 $ 53 $ 10
Average net assets (000).......................... $ 68 $ 69 $ 32 $ 5
Ratios to average net assets:
Expenses, including distribution fee............ 1.58%(d) 1.68%(d) 1.63%(d) 1.67%(b)
Expenses, excluding distribution fee............ .83%(d) .93%(d) .88%(d) .92%(b)
Net investment income........................... 4.22%(d) 4.14%(d) 4.59%(d) 5.06%(b)
Portfolio turnover rate........................... 35% 23% 28% 17%
</TABLE>
- ------------
(a) Commencement of offering of Class C shares.
(b) Annualized.
(c) Total return does not consider the effects of sales loads. Total return
is calculated assuming a purchase of shares on the first day and a
sale on the last day of each period reported and includes reinvestment
of dividends and distributions. Total returns for periods of less than
a full year are not annualized.
(d) Net of management fee waiver.
7
<PAGE>
HOW THE FUND INVESTS
INVESTMENT OBJECTIVE AND POLICIES
PRUDENTIAL MUNICIPAL SERIES FUND (THE FUND) IS AN OPEN-END, MANAGEMENT
INVESTMENT COMPANY, OR MUTUAL FUND, CONSISTING OF THIRTEEN SEPARATE SERIES. EACH
OF THESE SERIES IS MANAGED INDEPENDENTLY. THE NORTH CAROLINA SERIES (THE SERIES)
IS DIVERSIFIED AND ITS INVESTMENT OBJECTIVE IS TO MAXIMIZE CURRENT INCOME THAT
IS EXEMPT FROM NORTH CAROLINA STATE AND FEDERAL INCOME TAXES CONSISTENT WITH THE
PRESERVATION OF CAPITAL AND, IN CONJUNCTION THEREWITH, THE SERIES MAY INVEST IN
DEBT SECURITIES WITH THE POTENTIAL FOR CAPITAL GAIN. See "Investment Objectives
and Policies" in the Statement of Additional Information.
THE SERIES' INVESTMENT OBJECTIVE IS A FUNDAMENTAL POLICY AND, THEREFORE, MAY
NOT BE CHANGED WITHOUT THE APPROVAL OF THE HOLDERS OF A MAJORITY OF THE SERIES'
OUTSTANDING VOTING SECURITIES AS DEFINED IN THE INVESTMENT COMPANY ACT OF 1940,
AS AMENDED (THE INVESTMENT COMPANY ACT). THE SERIES' POLICIES THAT ARE NOT
FUNDAMENTAL MAY BE MODIFIED BY THE TRUSTEES.
THE SERIES WILL INVEST PRIMARILY IN NORTH CAROLINA STATE, MUNICIPAL AND LOCAL
GOVERNMENTAL OBLIGATIONS AND OBLIGATIONS OF OTHER QUALIFYING ISSUERS, SUCH AS
ISSUERS LOCATED IN PUERTO RICO, THE VIRGIN ISLANDS AND GUAM, WHICH PAY INCOME
EXEMPT, IN THE OPINION OF COUNSEL, FROM NORTH CAROLINA STATE AND FEDERAL INCOME
TAXES (NORTH CAROLINA OBLIGATIONS). THERE CAN BE NO ASSURANCE THAT THE SERIES
WILL BE ABLE TO ACHIEVE ITS INVESTMENT OBJECTIVE.
As with an investment in any mutual fund, an investment in this Series can
decrease and you can lose money.
Interest on certain municipal obligations may be a preference item for
purposes of the federal alternative minimum tax. The Series may invest without
limit in municipal obligations that are "private activity bonds" (as defined in
the Internal Revenue Code) the interest on which would be a preference item for
purposes of the federal alternative minimum tax. See "Taxes, Dividends and
Distributions." Under North Carolina law, dividends distributed by the Series
and attributable to interest on obligations issued by North Carolina and its
political subdivisions are exempt from North Carolina individual, trust and
estate income taxes. See "Taxes, Dividends and Distributions." North Carolina
Obligations could include general obligation bonds of the State, counties,
cities, towns, etc., revenue bonds of utility systems, highways, bridges, port
and airport facilities, colleges, hospitals, etc., and industrial development
and pollution control bonds. The Series will invest in long-term obligations,
and the dollar-weighted average maturity of the Series' portfolio will generally
range between 10-20 years. The Series also may invest in certain short-term,
tax-exempt notes such as Tax Anticipation Notes, Revenue Anticipation Notes,
Bond Anticipation Notes, Construction Loan Notes and variable and floating rate
demand notes.
Generally, municipal obligations with longer maturities produce higher yields
and are subject to greater price fluctuations as a result of changes in interest
rates (market risk) than municipal obligations with shorter maturities. The
prices of municipal obligations vary inversely with interest rates. Interest
rates are currently much lower than in recent years. As a general matter, bond
prices and the Series' net asset value will vary inversely with interest rate
fluctuations. If rates were to rise sharply, the prices of bonds in the Series'
portfolio might be adversely affected.
THE SERIES MAY INVEST ITS ASSETS IN FLOATING RATE AND VARIABLE RATE
SECURITIES, INCLUDING PARTICIPATION INTERESTS THEREIN AND INVERSE FLOATERS.
There is no limit on the amount of such securities that the Series may purchase.
Floating rate securities normally have a rate of interest which is set as a
specific percentage of a designated base rate, such as the rate on Treasury
bonds or bills or the prime rate at a major commercial bank. The interest rate
on floating rate securities changes periodically when there is a change in the
designated base interest rate. Variable rate securities provide for a specified
periodic adjustment in the interest rate based on prevailing market rates and
generally allow the Series to demand payment of the obligation on short notice
at par plus accrued interest, which amount may be more or less than the amount
the Series paid for
8
<PAGE>
them. An inverse floater is a debt instrument with a floating or variable
interest rate that moves in the opposite direction of the interest rate on
another security or the value of an index. Changes in the interest rate on the
other security or index inversely affect the residual interest rate paid on the
inverse floater, with the result that the inverse floater's price will be
considerably more volatile than that of a fixed rate bond. The market for
inverse floaters is relatively new.
THE SERIES MAY ALSO INVEST IN MUNICIPAL LEASE OBLIGATIONS. A MUNICIPAL LEASE
OBLIGATION IS A MUNICIPAL SECURITY THE INTEREST ON AND PRINCIPAL OF WHICH IS
PAYABLE OUT OF LEASE PAYMENTS MADE BY THE PARTY LEASING THE FACILITIES FINANCED
BY THE ISSUE. Typically, municipal lease obligations are issued by a state or
municipal financing authority to provide funds for the construction of
facilities (E.G., schools, dormitories, office buildings or prisons) or the
acquisition of equipment. The facilities are typically used by the state or
municipality pursuant to a lease with a financing authority. Certain municipal
lease obligations may trade infrequently. Accordingly, the investment adviser
will monitor the liquidity of municipal lease obligations under the supervision
of the Trustees. Municipal lease obligations will not be considered illiquid for
purposes of the Series' 15% limitation on illiquid securities, provided the
investment adviser determines that there is a readily available market for such
securities. See "Other Investments and Policies--Illiquid Securities" below.
THE SERIES WILL INVEST AT LEAST 70% OF ITS TOTAL ASSETS IN NORTH CAROLINA
OBLIGATIONS WHICH, AT THE TIME OF PURCHASE, ARE RATED WITHIN THE FOUR HIGHEST
QUALITY GRADES AS DETERMINED BY MOODY'S INVESTORS SERVICE (MOODY'S)(CURRENTLY
Aaa, Aa, A, Baa FOR BONDS, MIG 1, MIG 2, MIG 3, MIG 4 FOR SALES AND PRIME-1 FOR
COMMERCIAL PAPER), 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 ANOTHER
NATIONALLY RECOGNIZED STATISTICAL RATING ORGANIZATION (NRSRO) OR, IF UNRATED,
WILL POSSESS CREDITWORTHINESS, IN THE OPINION OF THE INVESTMENT ADVISER,
COMPARABLE IN SUCH "INVESTMENT GRADE" RATED SECURITIES.
THE SERIES MAY ALSO INVEST UP TO 30% OF ITS TOTAL ASSETS IN NORTH CAROLINA
OBLIGATIONS RATED BELOW Baa BY MOODY'S OR BELOW BBB BY S&P, OR A COMPARABLE
RATING OF ANOTHER NRSRO OR, IF NON-RATED, OF COMPARABLE QUALITY, IN THE OPINION
OF THE FUND'S INVESTMENT ADVISER, BASED ON ITS CREDIT ANALYSIS. Securities rated
Baa by Moody's and BBB by S&P are described as being investment grade but are
also characterized as having speculative characteristics. Securities rated below
Baa by Moody's and below BBB by S&P are considered speculative. See "Description
of Security Ratings" in the Appendix. Such lower-rated high yield securities are
commonly referred to as "junk bonds." Such securities generally offer a higher
current yield than those in the high rating categories but also involve greater
price volatility and risk of loss of principal and income. The investment
adviser will attempt to manage risk and enhance yield through credit analysis
and careful security selection. See "Risk Factors Relating to Investing in High
Yield Municipal Obligations" below. Subsequent to its purchase by the Series, a
municipal obligation may be assigned a lower rating or cease to be rated. Such
an event would not require the elimination of the issue from the portfolio, but
the investment adviser will consider such an event in determining whether the
Series should continue to hold the security in its portfolio. Many issuers of
lower-quality bonds choose not to have their obligations rated and the Series
may invest in such unrated securities. Investors should carefully consider the
relative risks associated with investments in securities which carry lower
ratings and in comparable non-rated securities.
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<PAGE>
During the year ended August 31, 1997, the monthly dollar weighted average
ratings of the debt obligations held by the Series, expressed as a percentage of
the Series' total assets, were as follows:
<TABLE>
<CAPTION>
PERCENTAGE OF
RATINGS TOTAL INVESTMENTS
------------------------------ -----------------
<S> <C>
AAA/Aaa 63.22%
AA/Aa 15.25%
A/A 8.58%
BBB/Baa 12.19%
Unrated
AAA/Aaa 0.00%
AA/Aa 0.00%
A/A 0.00%
BBB/Baa 0.76%
</TABLE>
From time to time, the Series may own the majority of a municipal issue. Such
majority-owned holdings may present market and credit risks.
The Series may purchase North Carolina Obligations which, in the opinion of
the investment adviser, offer the opportunity for capital appreciation. This may
occur, for example, when the investment adviser believes that the issuer of a
particular North Carolina Obligation might receive an upgraded credit standing,
thereby increasing the market value of the bonds it has issued or when the
investment adviser believes that interest rates might decline.
UNDER NORMAL MARKET CONDITIONS, THE SERIES WILL ATTEMPT TO INVEST
SUBSTANTIALLY ALL OF THE VALUE OF ITS ASSETS IN NORTH CAROLINA OBLIGATIONS. As a
matter of fundamental policy, during normal market conditions the Series' assets
will be invested so that at least 80% of the income will be exempt from North
Carolina and federal income taxes or the Series will have at least 80% of its
total assets invested in North Carolina Obligations. During abnormal market
conditions or to provide liquidity, the Series may hold cash or cash equivalents
or investment grade taxable obligations, including obligations that are exempt
from federal, but not state, taxation and the Series may invest in tax-free cash
equivalents, such as floating rate demand notes, tax-exempt commercial paper and
general obligation and revenue notes, or in taxable cash equivalents, such as
certificates of deposit, bankers acceptances and time deposits or other
short-term taxable investments such as repurchase agreements. When, in the
opinion of the investment adviser, abnormal market conditions require a
temporary defensive position, the Series may invest more than 20% of the value
of its assets in debt securities other than North Carolina Obligations or may
invest its assets so that more than 20% of the income is subject to North
Carolina State or federal income taxes. The Series will treat an investment in a
municipal bond refunded with escrowed U.S. Government securities as U.S.
Government securities for purposes of the Investment Company Act's
diversification requirements provided certain conditions are met. See
"Investment Objectives and Policies--In General" in the Statement of Additional
Information.
THE SERIES MAY ACQUIRE PUT OPTIONS (PUTS) GIVING THE SERIES THE RIGHT TO SELL
SECURITIES HELD IN THE SERIES' PORTFOLIO AT A SPECIFIED EXERCISE PRICE ON A
SPECIFIED DATE. Such puts may be acquired for the purpose of protecting the
Series from a possible decline in the market value of the security to which the
put applies in the event of interest rate fluctuations or, in the case of
liquidity puts, for the purpose of shortening the effective maturity of the
underlying security. The aggregate value of premiums paid to acquire puts held
in the Series' portfolio (other than liquidity puts) may not exceed 10% of the
net asset value of the Series. The acquisition of a put may involve an
additional cost to the Series by payment of a premium for the put, by payment of
a higher purchase price for securities to which the put is attached or through a
lower effective interest rate.
In addition, there is a credit risk associated with the purchase of puts in
that the issuer of the put may be unable to meet its obligation to purchase the
underlying security. Accordingly, the Series will acquire puts only under the
following circumstances: (1) the put is written by the issuer of the underlying
security and such security is rated within the four highest quality grades as
determined by an NRSRO; or (2) the put is written by a person other than the
issuer of the underlying security and such person has
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<PAGE>
securities outstanding which are rated within such four highest quality grades;
or (3) the put is backed by a letter of credit or similar financial guarantee
issued by a person having securities outstanding which are rated within the two
highest quality grades of an NRSRO.
THE SERIES MAY PURCHASE MUNICIPAL OBLIGATIONS ON A "WHEN-ISSUED" OR "DELAYED
DELIVERY" BASIS, IN EACH CASE WITHOUT LIMIT. When municipal obligations are
offered on a when-issued or delayed delivery basis, the price and coupon rate
are fixed at the time the commitment to purchase is made, but delivery and
payment for the securities take place at a later date. The purchase price for
such securities includes interest accrued during the period between purchase and
settlement and, therefore, no interest accrues to the economic benefit of the
purchaser during such period. In the case of purchases by the Series, the price
that the Series is required to pay on the settlement date may be in excess of
the market value of the municipal obligations on that date. While securities may
be sold prior to the settlement date, the Series intends to purchase these
securities with the purpose of actually acquiring them unless a sale would be
desirable for investment reasons. At the time the Series makes the commitment to
purchase a municipal obligation on a when-issued or delayed delivery basis, it
will record the transaction and reflect the value of the obligation each day in
determining its net asset value. This value may fluctuate from day to day in the
same manner as values of municipal obligations otherwise held by the Series. If
the seller defaults in the sale, the Series could fail to realize the
appreciation, if any, that had occurred. The Series will establish a segregated
account with its Custodian in which it will maintain cash, U.S. Government
securities, equity securities or other liquid, unencumbered assets,
marked-to-market daily, equal in value to its commitments for when-issued or
delayed delivery securities.
THE SERIES MAY ALSO PURCHASE MUNICIPAL FORWARD CONTRACTS. A municipal forward
contract is a municipal security which is purchased on a when-issued basis with
delivery taking place up to five years from the date of purchase. No interest
will accrue on the security prior to the delivery date. The investment adviser
will monitor the liquidity, value, credit quality and delivery of the security
under the supervision of the Trustees.
THE SERIES MAY PURCHASE SECONDARY MARKET INSURANCE ON NORTH CAROLINA
OBLIGATIONS WHICH IT HOLDS OR ACQUIRES. Secondary market insurance would be
reflected in the market value of the municipal obligation purchased and may
enable the Series to dispose of a defaulted obligation at a price similar to
that of comparable municipal obligations which are not in default.
Insurance is not a substitute for the basic credit of an issuer, but
supplements the existing credit and provides additional security therefor. While
insurance coverage for the North Carolina Obligations held by the Series reduces
credit risk by providing that the insurance company will make timely payment of
principal and interest if the issuer defaults on its obligation to make such
payment, it does not afford protection against fluctuation in the price, I.E.,
the market value, of the municipal obligations caused by changes in interest
rates and other factors, nor in turn against fluctuations in the net asset value
of the shares of the Series.
RISK FACTORS RELATING TO INVESTING IN HIGH YIELD MUNICIPAL OBLIGATIONS.
FIXED-INCOME SECURITIES ARE SUBJECT TO THE RISK OF AN ISSUER'S INABILITY TO MEET
PRINCIPAL AND INTEREST PAYMENTS ON THE OBLIGATION (CREDIT RISK) AND MAY ALSO BE
SUBJECT TO PRICE VOLATILITY DUE TO SUCH FACTORS AS INTEREST RATE SENSITIVITY,
MARKET PERCEPTION OF THE CREDITWORTHINESS OF THE ISSUER AND GENERAL MARKET
LIQUIDITY (MARKET RISK). Lower-rated or unrated (I.E., high yield) securities,
commonly known as "junk bonds," are more likely to react to developments
affecting market and credit risk than are more highly rated securities, which
react primarily to movements in the general level of interest rates. The
investment adviser will perform its own investment analysis and will not rely
principally on the ratings assigned by the rating services, although such
ratings will be considered by the investment adviser. The investment adviser
will consider, among other things, credit risk and market risk, as well as the
financial history and condition, the prospects and the management of an issuer
in selecting securities for the Series' portfolio. The achievement of the
Series' investment objective may be more dependent on the investment adviser's
credit analysis than is the case when investing in only higher quality bonds.
Investors should carefully consider the relative risks of investing in high
yield municipal obligations and understand that such securities are not
generally meant for short term investing and that yields on junk bonds will
fluctuate over time.
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<PAGE>
The amount of high yield securities outstanding has proliferated recently in
conjunction with the decline in creditworthiness of many obligors on municipal
debt, particularly health care providers and certain governmental bodies. An
economic downturn could severely affect the ability of highly leveraged issuers
to service their debt obligations or to repay their obligations upon maturity.
In addition, the secondary market for high yield securities, which is
concentrated in relatively few market makers, may not be as liquid as the
secondary market for more highly rated securities and, from time to time, it may
be more difficult to value high yield securities than more highly rated
securities, and the judgment of the Board of Trustees and investment adviser may
play a greater role in valuation because there is less reliable objective data
available. Under adverse market or economic conditions, the secondary market for
high yield securities could contract further, independent of any specific
adverse changes in the condition of a particular issuer. As a result, the
investment adviser could find it more difficult to sell these securities or may
be able to sell the securities only at prices lower than if such securities were
widely traded. Prices realized upon the sale of such lower rated or unrated
securities, under these circumstances, may be less than the prices used in
calculating the Series' net asset value. If the investment adviser becomes
involved in activities such as reorganizations of obligors of troubled
investments held by the Series, this may prevent the Series from disposing of
the securities, due to its possession of material, non-public information
concerning the obligor.
LOWER-RATED OR UNRATED OBLIGATIONS ALSO PRESENT RISKS BASED ON PAYMENT
EXPECTATIONS. If an issuer calls the obligation for redemption, the Series may
have to replace the security with a lower-yielding security, resulting in a
decreased return for investors. If the Series experiences unexpected net
redemptions, it may be forced to sell its higher quality securities, resulting
in a decline in the overall credit quality of the Series' portfolio and
increasing the exposure of the Series to the risks of high yield securities.
FUTURES CONTRACTS AND OPTIONS THEREON
THE SERIES IS AUTHORIZED TO PURCHASE AND SELL CERTAIN DERIVATIVES, INCLUDING
FINANCIAL FUTURES CONTRACTS (FUTURES CONTRACTS) AND OPTIONS THEREON FOR THE
PURPOSE OF HEDGING ITS PORTFOLIO SECURITIES AGAINST FLUCTUATIONS IN VALUE CAUSED
BY CHANGES IN PREVAILING MARKET INTEREST RATES AND HEDGING AGAINST INCREASES IN
THE COST OF SECURITIES THE SERIES INTENDS TO PURCHASE. THE SUCCESSFUL USE OF
FUTURES CONTRACTS AND OPTIONS THEREON BY THE SERIES INVOLVES ADDITIONAL
TRANSACTION COSTS AND IS SUBJECT TO VARIOUS RISKS AND DEPENDS UPON THE
INVESTMENT ADVISER'S ABILITY TO PREDICT THE DIRECTION OF THE MARKET (INCLUDING
INTEREST RATES). THE SERIES, AND THUS INVESTORS, MAY LOSE MONEY THROUGH ANY
UNSUCCESSFUL USE OF THESE STRATEGIES.
A FUTURES CONTRACT OBLIGATES THE SELLER OF THE CONTRACT TO DELIVER TO THE
PURCHASER OF THE CONTRACT CASH EQUAL TO A SPECIFIC DOLLAR AMOUNT TIMES THE
DIFFERENCE BETWEEN THE VALUE OF A SPECIFIC FIXED-INCOME SECURITY OR INDEX AT THE
CLOSE OF THE LAST TRADING DAY OF THE CONTRACT AND THE PRICE AT WHICH THE
AGREEMENT IS MADE. No physical delivery of the underlying securities is made.
The Series will engage in transactions in only those futures contracts and
options thereon that are traded on a commodities exchange or a board of trade.
The Series intends to engage in futures contracts and options thereon as a
hedge against changes, resulting from market conditions, in the value of
securities which are held in the Series' portfolio or which the Series intends
to purchase, in accordance with the rules and regulations of the Commodity
Futures Trading Commission (the CFTC). The Series also intends to engage in such
transactions when they are economically appropriate for the reduction of risks
inherent in the ongoing management of the Series.
THE SERIES MAY NOT PURCHASE OR SELL FUTURES CONTRACTS OR OPTIONS THEREON IF,
IMMEDIATELY THEREAFTER, (I) THE SUM OF INITIAL AND NET CUMULATIVE VARIATION
MARGIN ON OUTSTANDING FUTURES CONTRACTS, TOGETHER WITH PREMIUMS PAID FOR OPTIONS
THEREON, WOULD EXCEED 20% OF THE TOTAL ASSETS OF THE SERIES, OR (II) IN THE CASE
OF RISK MANAGEMENT TRANSACTIONS, THE SUM OF THE AMOUNT OF INITIAL MARGIN
DEPOSITS ON THE SERIES' FUTURES POSITIONS AND PREMIUMS PAID FOR OPTIONS THEREON
WOULD EXCEED 5% OF THE LIQUIDATION VALUE OF THE SERIES' TOTAL ASSETS. There are
no limitations on the percentage of the
12
<PAGE>
portfolio which may be hedged and no limitations on the use of the Series'
assets to cover futures contracts and options thereon, except that the aggregate
value of the obligations underlying put options will not exceed 50% of the
Series' assets. Certain requirements for qualification as a regulated investment
company under the Internal Revenue Code may limit the Series' ability to engage
in futures contracts and options thereon. See "Distributions and Tax
Information--Federal Taxation" in the Statement of Additional Information.
Finally, the Series must eliminate all of its positions in futures contracts and
options thereon by December 31 of each year in order to comply with requirements
for exemption from the North Carolina intangibles tax.
Currently, futures contracts are available on several types of fixed-income
securities, including U.S. Treasury bonds and notes, three-month U.S. Treasury
bills and Eurodollars. Futures contracts are also available on a municipal bond
index, based on THE BOND BUYER Municipal Bond Index, an index of 40 actively
traded municipal bonds. The Series may also engage in transactions in other
futures contracts that become available, from time to time, in other
fixed-income securities or municipal bond indices and in other options on such
contracts if the investment adviser believes such contracts and options would be
appropriate for hedging the Series' portfolio.
THERE CAN BE NO ASSURANCE THAT VIABLE MARKETS WILL CONTINUE OR THAT A LIQUID
SECONDARY MARKET WILL EXIST TO TERMINATE ANY PARTICULAR FUTURES CONTRACT AT ANY
SPECIFIC TIME. If it is not possible to close a futures position entered into by
the Series, the Series will continue to be required to make daily cash payments
of variation margin in the event of adverse price movements. In such a
situation, if the Series had insufficient cash, it might have to sell portfolio
securities to meet daily variation margin requirements at a time when it might
be disadvantageous to do so. The inability to close futures positions also could
have an adverse impact on the ability of the Series to hedge effectively. There
is also a risk of loss by the Series of margin deposits in the event of
bankruptcy of a broker with whom the Series has an open position in a futures
contract.
THE SUCCESSFUL USE OF FUTURES CONTRACTS AND OPTIONS THEREON BY THE SERIES IS
SUBJECT TO VARIOUS ADDITIONAL RISKS. Any use of futures transactions involves
the risk of imperfect correlation in movements in the price of futures contracts
and movements in interest rates and, in turn, the prices of the securities that
are the subject of the hedge. If the price of the futures contract moves more or
less than the price of the security that is the subject of the hedge, the Series
will experience a gain or loss that will not be completely offset by movements
in the price of the security. The risk of imperfect correlation is greater where
the securities underlying futures contracts are taxable securities (rather than
municipal securities), are issued by companies in different market sectors or
have different maturities, ratings or geographic mixes than the security being
hedged. In addition, the correlation may be affected by additions to or
deletions from the index which serves as the basis for a futures contract.
Finally, if the price of the security that is subject to the hedge were to move
in a favorable direction, the advantage to the Series would be partially offset
by the loss incurred on the futures contract.
SPECIAL CONSIDERATIONS
BECAUSE THE SERIES WILL INVEST AT LEAST 80% OF THE VALUE OF ITS TOTAL ASSETS
IN NORTH CAROLINA OBLIGATIONS AND BECAUSE IT SEEKS TO MAXIMIZE INCOME DERIVED
FROM NORTH CAROLINA OBLIGATIONS, IT IS MORE SUSCEPTIBLE TO FACTORS ADVERSELY
AFFECTING ISSUERS OF NORTH CAROLINA OBLIGATIONS THAN IS A COMPARABLE MUNICIPAL
BOND MUTUAL FUND THAT IS NOT CONCENTRATED IN SUCH OBLIGATIONS TO THIS DEGREE.
Despite stressful periods during the latest recession that depleted fund
reserves and ended with General Fund deficits, since 1994, the State has had a
budget surplus, in part as a result of new taxes and fees and spending
reductions put into place in the early 1990s. In addition, the State, like the
nation, has experienced economic recovery during the 1990s. The State budget is
based upon estimated revenues and a multitude of existing and assumed State and
non-state factors, including state and national economic conditions,
international activity and federal government policies and legislation. At June
30, 1996, the end of the 1995-1996 fiscal year, the unreserved balance of the
General Fund grew to approximately $406 million and the reserved balance of the
General Fund was approximately $765 million. In the 1996-97 Budget prepared by
the Office of State Budget and Mangaement, it is projected that General Fund net
revenues will increase 3% over 1995-96, despite a tax reduction package ennacted
during the 1996 legislative session. A preliminary report for 1996-97 net
revenues indicates that the actual revenue growth over 1995-96 was approximately
8%. However, if either North Carolina or any of
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<PAGE>
its local governmental entities is unable to meet its financial obligations, the
income derived by the Series, the ability to preserve or realize appreciation of
the Series' capital and the Series' liquidity could be adversely affected. See
"Investment Objectives and Policies--Special Considerations Regarding
Investments in Tax-Exempt Securities" in the Statement of Additional
Information.
OTHER INVESTMENTS AND POLICIES
REPURCHASE AGREEMENTS
The Series may on occasion enter into repurchase agreements whereby the seller
of a security agrees to repurchase that security from the Series at a mutually
agreed-upon time and price. The period of maturity is usually quite short,
possibly overnight or a few days, although it may extend over a number of
months. The resale price is in excess of the purchase price, reflecting an
agreed-upon rate of return effective for the period of time the Series' money is
invested in the security. The Series' repurchase agreements will at all times be
fully collateralized in an amount at least equal to the resale price. The
instruments held as collateral are valued daily and if the value of the
instruments declines, the Series will require additional collateral. If the
seller defaults and the value of the collateral securing the repurchase
agreement declines, the Series may incur a loss. The Series participates in a
joint repurchase account with other investment companies managed by Prudential
Investments Fund Management LLC pursuant to an order of the Securities and
Exchange Commission (SEC).
BORROWING
The Series may borrow an amount equal to no more than 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 Series may
pledge up to 33 1/3% of the value of its total assets to secure these
borrowings. The Series will not purchase portfolio securities if its borrowings
exceed 5% of its total assets.
PORTFOLIO TURNOVER
The Series does not expect to trade in securities for short-term gain. It is
anticipated that the annual portfolio turnover rate will not exceed 150%. The
portfolio turnover rate is calculated by dividing the lesser of sales or
purchases of portfolio securities by the average monthly value of the portfolio
securities, excluding securities having a maturity at the date of purchase of
one year or less.
ILLIQUID SECURITIES
The Series may hold up to 15% of its net assets in illiquid securities
including repurchase agreements which have a maturity of longer than seven days,
securities with legal or contractual restrictions on resale (restricted
securities) and securities that are not readily marketable. Restricted
securities eligible for resale pursuant to Rule 144A under the Securities Act of
1933, as amended (the Securities Act), privately placed commercial paper and
municipal lease obligations that have a readily available market are not
considered illiquid for the purposes of this limitation. The investment adviser
will monitor the liquidity of such restricted securities under the supervision
of the Trustees. The Series' investment in Rule 144A securities could have the
effect of increasing illiquidity to the extent that qualified institutional
buyers become, for a limited time, uninterested in purchasing Rule 144A
securities. See "Investment Objectives and Policies--Illiquid Securities" and
"Investment Restrictions" in the Statement of Additional Information. Repurchase
agreements subject to demand are deemed to have a maturity equal to the notice
period.
INVESTMENT RESTRICTIONS
The Series is subject to certain investment restrictions which, like its
investment objective, constitute fundamental policies. Fundamental policies
cannot be changed without the approval of the holders of a majority of the
Series' outstanding voting securities, as defined in the Investment Company Act.
See "Investment Restrictions" in the Statement of Additional Information.
14
<PAGE>
HOW THE FUND IS MANAGED
THE FUND HAS TRUSTEES WHO, IN ADDITION TO OVERSEEING THE ACTIONS OF THE FUND'S
MANAGER, SUBADVISER AND DISTRIBUTOR, AS SET FORTH BELOW, DECIDE UPON MATTERS OF
GENERAL POLICY. THE FUND'S MANAGER CONDUCTS AND SUPERVISES THE DAILY BUSINESS
OPERATIONS OF THE FUND. THE FUND'S SUBADVISER FURNISHES DAILY INVESTMENT
ADVISORY SERVICES.
For the fiscal year ended August 31, 1997, total expenses of the Series as a
percentage of average net assets, net of fee waivers, were .93%, 1.33% and 1.58%
for the Series' Class A, Class B and Class C shares, respectively. See
"Financial Highlights."
MANAGER
PRUDENTIAL INVESTMENTS FUND MANAGEMENT LLC (PIFM OR THE MANAGER), GATEWAY
CENTER THREE, 100 MULBERRY STREET, NEWARK, NEW JERSEY 07102-4077, IS THE MANAGER
OF THE FUND AND IS COMPENSATED FOR ITS SERVICES AT AN ANNUAL RATE OF .50 OF 1%
OF THE AVERAGE DAILY NET ASSETS OF THE SERIES. PIFM is organized in New York as
a limited liability company. It is the successor to Prudential Mutual Fund
Management, Inc., which transferred its assets to PIFM in September 1996. For
the fiscal year ended August 31, 1997, the Series paid PIFM a management fee of
.45 of 1% of the Series' average net assets, after taking into account a
management fee waiver. See "Fee Waivers" below and "Manager" in the Statement of
Additional Information.
As of September 30, 1997, PIFM served as the manager to 41 open-end investment
companies, constituting all of the Prudential Mutual Funds, and as manager or
administrator to 22 closed-end investment companies with aggregate assets of
approximately $59.9 billion.
UNDER THE MANAGEMENT AGREEMENT WITH THE FUND, PIFM MANAGES THE INVESTMENT
OPERATIONS OF EACH SERIES OF THE FUND AND ALSO ADMINISTERS THE FUND'S BUSINESS
AFFAIRS. See "Manager" in the Statement of Additional Information.
UNDER A SUBADVISORY AGREEMENT BETWEEN PIFM AND THE PRUDENTIAL INVESTMENT
CORPORATION (PIC), DOING BUSINESS AS PRUDENTIAL INVESTMENTS (PI, THE SUBADVISER
OR THE INVESTMENT ADVISER), PI FURNISHES INVESTMENT ADVISORY SERVICES IN
CONNECTION WITH THE MANAGEMENT OF THE FUND AND IS REIMBURSED BY PIFM FOR ITS
REASONABLE COSTS AND EXPENSES INCURRED IN PROVIDING SUCH SERVICES. Under the
Management Agreement, PIFM continues to have responsibility for all investment
advisory services and supervises PI's performance of such services.
The current portfolio manager of the Series is James M. Murphy. Mr. Murphy has
responsibility for the day-to-day management of the portfolio. He has managed
the portfolio since January 1997 and has been employed by PIC in various
capacities since 1989.
PIFM and PIC are indirect, wholly-owned subsidiaries of The Prudential
Insurance Company of America (Prudential), a major diversified insurance and
financial services company, and are part of Prudential Investments, a business
group of Prudential.
FEE WAIVERS
PIFM may from time to time agree to waive all or a portion of its management
fee and subsidize certain operating expenses of the Series. Fee waivers and
expense subsidies will increase the Series' yield and total return. The Series
is not required to reimburse PIFM for such management fee waiver. Effective
September 1, 1997, PIFM discontinued its waiver of 10% of its management fee.
See "Fund Expenses."
15
<PAGE>
DISTRIBUTOR
PRUDENTIAL SECURITIES INCORPORATED (PRUDENTIAL SECURITIES, PSI OR THE
DISTRIBUTOR), ONE SEAPORT PLAZA, NEW YORK, NEW YORK 10292, IS A CORPORATION
ORGANIZED UNDER THE LAWS OF THE STATE OF DELAWARE AND SERVES AS THE DISTRIBUTOR
OF THE CLASS A, CLASS B AND CLASS C SHARES OF THE SERIES. It is an indirect,
wholly-owned subsidiary of Prudential.
UNDER SEPARATE DISTRIBUTION AND SERVICE PLANS (THE CLASS A PLAN, THE CLASS B
PLAN AND THE CLASS C PLAN, COLLECTIVELY, THE PLANS) ADOPTED BY THE FUND UNDER
RULE 12b-1 UNDER THE INVESTMENT COMPANY ACT AND A DISTRIBUTION AGREEMENT (THE
DISTRIBUTION AGREEMENT), PRUDENTIAL SECURITIES (THE DISTRIBUTOR) INCURS THE
EXPENSES OF DISTRIBUTING THE CLASS A, CLASS B AND CLASS C SHARES OF THE SERIES.
These expenses include commissions and account servicing fees paid to, or on
account of, financial advisers of Prudential Securities and representatives of
Pruco Securities Corporation (Prusec), an affiliated broker-dealer, commissions
and account servicing fees paid to, or on account of, other broker-dealers or
financial institutions (other than national banks) which have entered into
agreements with the Distributor, advertising expenses, the cost of printing and
mailing prospectuses to potential investors and indirect and overhead costs of
Prudential Securities and Prusec associated with the sale of Series shares,
including lease, utility, communications and sales promotion expenses.
Under the Plans, the Series is obligated to pay distribution and/or service
fees to the Distributor as compensation for its distribution and service
activities, not as reimbursement for specific expenses incurred. If the
Distributor's expenses exceed its distribution and service fees, the Series will
not be obligated to pay any additional expenses. If the Distributor's expenses
are less than such distribution and service fees, it will retain its full fees
and realize a profit.
UNDER THE CLASS A PLAN, THE SERIES MAY PAY PRUDENTIAL SECURITIES FOR ITS
DISTRIBUTION-RELATED ACTIVITIES WITH RESPECT TO CLASS A SHARES AT AN ANNUAL RATE
OF UP TO .30 OF 1% OF THE AVERAGE DAILY NET ASSETS OF THE CLASS A SHARES OF THE
SERIES. The Class A Plan provides that (i) up to .25 of 1% of the average daily
net assets of the Class A shares may be used to pay for personal service and/or
the maintenance of shareholder accounts (service fee) and (ii) total
distribution fees (including the service fee of .25 of 1%) may not exceed .30 of
1% of the average daily net assets of the Class A shares. Prudential Securities
has agreed to limit its distribution-related fees payable under the Class A Plan
to .10 of 1% of the average daily net assets of the Class A shares for the
fiscal year ending August 31, 1998.
UNDER THE CLASS B AND CLASS C PLANS, THE SERIES MAY PAY PRUDENTIAL SECURITIES
FOR ITS DISTRIBUTION-RELATED ACTIVITIES WITH RESPECT TO CLASS B AND CLASS C
SHARES AT AN ANNUAL RATE OF UP TO .50 OF 1% AND UP TO 1% OF THE AVERAGE DAILY
NET ASSETS OF THE CLASS B AND CLASS C SHARES, RESPECTIVELY. The Class B Plan
provides for the payment to Prudential Securities of (i) an asset-based sales
charge of up to .50 of 1% of the average daily net assets of the Class B shares,
and (ii) a service fee of up to .25 of 1% of the average daily net assets of the
Class B shares; provided that the total distribution-related fee does not exceed
.50 of 1%. The Class C Plan provides for the payment to Prudential Securities of
(i) an asset-based sales charge of up to .75 of 1% of the average daily net
assets of the Class C shares, and (ii) a service fee of up to .25 of 1% of the
average daily net assets of the Class C shares. The service fee is used to pay
for personal service and/or the maintenance of shareholder accounts. Prudential
Securities has agreed to limit its distribution-related fees payable under the
Class C Plan to .75 of 1% of the average daily net assets of the Class C shares
for the fiscal year ending August 31, 1998. Prudential Securities also receives
contingent deferred sales charges from certain redeeming shareholders. See
"Shareholder Guide--How to Sell Your Shares--Contingent Deferred Sales Charges."
For the fiscal year ended August 31, 1997, the Series paid distribution
expenses of .10 of 1%, .50 of 1% and .75 of 1% of the average daily net assets
of the Class A, Class B and Class C shares, respectively. The Series records all
payments made under the Plans as expenses in the calculation of net investment
income. See "Distributor" in the Statement of Additional Information.
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<PAGE>
Distribution expenses attributable to the sale of Class A, Class B and Class C
shares of the Series will be allocated to each such class based upon the ratio
of sales of each such class to the sales of Class A, Class B and Class C shares
of the Series other than expenses allocable to a particular class. The
distribution fee and sales charge of one class will not be used to subsidize the
sale of another class.
Each Plan provides that it shall continue in effect from year to year provided
that a majority of the Trustees of the Fund, including a majority of the
Trustees who are not "interested persons" of the Fund (as defined in the
Investment Company Act) and who have no direct or indirect financial interest in
the operation of the Plan or any agreement related to the Plan (the Rule 12b-1
Trustees), vote annually to continue the Plan. Each Plan may be terminated with
respect to the Series at any time by vote of a majority of the Rule 12b-1
Trustees or of a majority of the outstanding shares of the applicable class of
the Series. The Series will not be obligated to pay distribution and service
fees incurred under any Plan if it is terminated or not continued.
In addition to distribution and service fees paid by the Series under the
Class A, Class B and Class C Plans, the Manager (or one of its affiliates) may
make payments out of its own resources to dealers (including Prudential
Securities) and other persons who distribute shares of the Series. Such payments
may be calculated by reference to the net asset value of shares sold by such
persons or otherwise.
The Distributor is subject to the rules of the National Association of
Securities Dealers, Inc. (the NASD) governing maximum sales charges. See
"Distributor" in the Statement of Additional Information.
On October 21, 1993, PSI entered into an omnibus settlement with the SEC,
state securities regulators (with the exception of the Texas Securities
Commissioner who joined the settlement on January 18, 1994) and the NASD to
resolve allegations that from 1980 through 1990 PSI sold certain limited
partnership interests in violation of securities laws to persons for whom such
securities were not suitable and misrepresented the safety, potential returns
and liquidity of these investments. Without admitting or denying the allegations
asserted against it, PSI consented to the entry of an SEC Administrative Order
which stated that PSI's conduct violated the federal securities laws, directed
PSI to cease and desist from violating the federal securities laws, pay civil
penalties, and adopt certain remedial measures to address the violations.
Pursuant to the terms of the SEC settlement, PSI agreed to the imposition of a
$10,000,000 civil penalty, established a settlement fund in the amount of
$330,000,000 and procedures to resolve legitimate claims for compensatory
damages by purchasers of the partnership interests. PSI has agreed to provide
additional funds, if necessary, for the purpose of the settlement fund. PSI's
settlement with the state securities regulators included an agreement to pay a
penalty of $500,000 per jurisdiction. PSI consented to a censure and to the
payment of a $5,000,000 fine in settling the NASD action.
In October 1994, a criminal complaint was filed with the United States
Magistrate for the Southern District of New York alleging that PSI committed
fraud in connection with the sale of certain limited partnership interests in
violation of federal securities laws. An agreement was simultaneously filed to
defer prosecution of these charges for a period of three years from the signing
of the agreement, provided that PSI complies with the terms of the agreement.
If, upon completion of the three year period, PSI has complied with the terms of
the agreement, no prosecution will be instituted by the United States for the
offenses charged in the complaint. If on the other hand, during the course of
the three year period, PSI violates the terms of the agreement, the U.S.
Attorney can then elect to pursue these charges. Under the terms of the
agreement, PSI agreed, among other things, to pay an additional $330,000,000
into the fund established by the SEC to pay restitution to investors who
purchased certain PSI limited partnership interests.
For more detailed information concerning the foregoing matters, see
"Distributor" in the Statement of Additional Information, a copy of which may be
obtained at no cost by calling (800) 225-1852.
The Fund is not affected by PSI's financial condition and is an entirely
separate legal entity from PSI, which has no beneficial ownership therein and
the Fund's assets which are held by State Street Bank and Trust Company, an
independent custodian, are separate and distinct from PSI.
17
<PAGE>
PORTFOLIO TRANSACTIONS
Prudential Securities may act as a broker or futures commission merchant for
the Fund, provided that the commissions, fees or other remuneration it receives
are fair and reasonable. See "Portfolio Transactions and Brokerage" in the
Statement of Additional Information.
CUSTODIAN AND TRANSFER AND DIVIDEND DISBURSING AGENT
State Street Bank and Trust Company, One Heritage Drive, North Quincy,
Massachusetts 02171 serves as Custodian for the portfolio securities of the
Series and cash and, in that capacity, maintains certain financial and
accounting books and records pursuant to an agreement with the Fund. Its mailing
address is P.O. Box 1713, Boston, Massachusetts 02105.
Prudential Mutual Fund Services LLC (PMFS), Raritan Plaza One, Edison, New
Jersey 08837, serves as Transfer Agent and Dividend Disbursing Agent and, in
those capacities, maintains certain books and records for the Fund. PMFS is a
wholly-owned subsidiary of PIFM. Its mailing address is P.O. Box 15005, New
Brunswick, New Jersey 08906-5005.
HOW THE FUND VALUES ITS SHARES
THE SERIES' NET ASSET VALUE PER SHARE OR NAV IS DETERMINED BY SUBTRACTING ITS
LIABILITIES FROM THE VALUE OF ITS ASSETS AND DIVIDING THE REMAINDER BY THE
NUMBER OF OUTSTANDING SHARES. NAV IS CALCULATED SEPARATELY FOR EACH CLASS. THE
TRUSTEES HAVE FIXED THE SPECIFIC TIME OF DAY FOR THE COMPUTATION OF THE NET
ASSET VALUE OF THE SERIES TO BE AS OF 4:15 P.M., NEW YORK TIME.
Portfolio securities are valued based on market quotations or, if not readily
available, at fair value as determined in good faith under procedures
established by the Trustees. Securities may also be valued based on values
provided by a pricing service. See "Net Asset Value" in the Statement of
Additional Information.
The Series will compute its NAV once daily on days that the New York Stock
Exchange is open for trading except on days on which no orders to purchase, sell
or redeem shares have been received by the Series or days on which changes in
the value of the Series' portfolio securities do not materially affect the NAV.
Although the legal rights of each class of shares are substantially identical,
the different expenses borne by each class will result in different dividends.
As long as the Series declares dividends daily, the NAV of the Class A, Class B
and Class C shares will generally be the same. It is expected, however, that the
Series' dividends will differ by approximately the amount of any distribution
and/or service fee expense accrual differential among the classes.
HOW THE FUND CALCULATES PERFORMANCE
FROM TIME TO TIME THE FUND MAY ADVERTISE THE YIELD, TAX EQUIVALENT YIELD AND
AVERAGE ANNUAL TOTAL RETURN AND AGGREGATE TOTAL RETURN OF THE SERIES IN
ADVERTISEMENTS OR SALES LITERATURE. YIELD, TAX EQUIVALENT YIELD AND TOTAL RETURN
ARE CALCULATED SEPARATELY FOR CLASS A, CLASS B AND CLASS C SHARES. THESE FIGURES
ARE BASED ON HISTORICAL EARNINGS AND ARE NOT INTENDED TO INDICATE FUTURE
PERFORMANCE. The yield refers to the income generated by an investment in the
Series over a one-month or 30-day period. This income is then annualized; that
is, the amount of income generated by the investment during that 30-day period
is assumed to be generated each 30-day period for twelve periods and is shown as
a percentage of the investment. The income earned on the investment is also
assumed to be reinvested at the end of the sixth 30-day period. The tax
equivalent yield is calculated similarly to the yield, except that the yield is
increased using a stated income tax rate to demonstrate the taxable yield
necessary to produce an after-tax yield equivalent to the Series. The total
return shows how much an investment in
18
<PAGE>
the Series would have increased (decreased) over a specified period of time
(I.E., one, five or ten years or since inception of the Series) assuming that
all distributions and dividends by the Series were reinvested on the
reinvestment dates during the period and less all recurring fees. The aggregate
total return reflects actual performance over a stated period of time. Average
annual total return is a hypothetical rate of return that, if achieved annually,
would have produced the same aggregate total return if performance had been
constant over the entire period. Average annual total return smooths out
variations in performance and takes into account any applicable initial or
contingent deferred sales charges. Neither average annual total return nor
aggregate total return takes into account any federal or state income taxes
which may be payable upon redemption. The Fund also may include comparative
performance information in advertising or marketing the shares of the Series.
Such performance information may include data from Lipper Analytical Services,
Inc., Morningstar Publications, Inc., other industry publications, business
periodicals and market indices. See "Performance Information" in the Statement
of Additional Information. Further performance information is contained in the
Series' annual and semi-annual reports to shareholders, which may be obtained
without charge. See "Shareholder Guide--Shareholder Services--Reports to
Shareholders."
TAXES, DIVIDENDS AND DISTRIBUTIONS
TAXATION OF THE FUND
THE SERIES HAS ELECTED TO QUALIFY AND INTENDS TO REMAIN QUALIFIED AS A
REGULATED INVESTMENT COMPANY UNDER THE INTERNAL REVENUE CODE. ACCORDINGLY, THE
SERIES WILL NOT BE SUBJECT TO FEDERAL INCOME TAXES ON ITS NET INVESTMENT INCOME
AND NET CAPITAL GAINS, IF ANY, THAT IT DISTRIBUTES TO ITS SHAREHOLDERS. TO THE
EXTENT NOT DISTRIBUTED BY THE SERIES, NET TAXABLE INVESTMENT INCOME AND CAPITAL
GAINS AND LOSSES ARE TAXABLE TO THE SERIES.
To the extent the Series invests in taxable obligations, it will earn taxable
investment income. Also, to the extent the Series engages in hedging
transactions in futures contracts and options thereon, it may earn both
short-term and long-term capital gain or loss. Under the Internal Revenue Code,
special rules apply to the treatment of certain options and futures contracts
(Section 1256 contracts). At the end of each year, such investments held by the
Series will be required to be "marked to market" for federal income tax
purposes; that is, treated as having been sold at market value. Sixty percent of
any gain or loss recognized on these "deemed sales" and on actual dispositions
will be treated as long-term capital gain or loss, and the remainder will be
treated as short-term capital gain or loss. See "Distributions and Tax
Information" in the Statement of Additional Information.
Gain or loss realized by the Series from the sale of securities generally will
be treated as capital gain or loss; however, gain from the sale of certain
securities (including municipal obligations) will be treated as ordinary income
to the extent of any "market discount." Market discount generally is the
difference, if any, between the price paid by the Series for the security and
the principal amount of the security (or, in the case of a security issued at an
original issue discount, the revised issue price of the security). The market
discount rule does not apply to any security that was acquired by the Series at
its original issue. See "Distributions and Tax Information" in the Statement of
Additional Information.
TAXATION OF SHAREHOLDERS
In general, the character of tax-exempt interest distributed by the Series
will flow through as tax-exempt interest to its shareholders provided that 50%
or more of the value of its assets at the end of each quarter of its taxable
year is invested in state, municipal and other obligations, the interest on
which is excluded from gross income for federal income tax purposes. During
normal market conditions, at least 80% of the Series' total assets will be
invested in such obligations. See "How the Fund Invests--Investment Objective
and Policies."
Any dividends out of net taxable investment income, together with
distributions of net short-term gains (I.E., the excess of net short-term
capital gains over net long-term capital losses) distributed to shareholders,
will be taxable as ordinary income to the
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<PAGE>
shareholder whether or not reinvested. Any net capital gains (I.E., the excess
of capital gains from the sale of assets held for more than 12 months over net
short-term capital losses) distributed to shareholders will be taxable as
capital gains to the shareholders, whether or not reinvested and regardless of
the length of time a shareholder has owned his or her shares. The maximum
capital gains rate for individuals is 28% with respect to assets held for more
than 12 months, but not more than 18 months, and 20% with respect to assets held
for more than 18 months. The maximum capital gains rate for corporate
shareholders currently is the same as the maximum tax rate for ordinary income.
Any gain or loss realized upon a sale or redemption of Series shares by a
shareholder who is not a dealer in securities will be treated as capital gain or
loss. In the case of an individual, any such capital gain will be treated as
short-term capital loss if the shares were held for not more than 12 months,
mid-term gain, taxable at the maximum rate of 28%, if such shares were held for
more than 12, but not more than 18 months, and long-term capital gain, taxable
at the maximum rate of 20%, if such shares were held for more than 18 months. In
the case of a corporation, any such capital gain will be treated as long-term
capital gain, taxable at the same rates as ordinary income, if such shares were
held for more than 12 months. Any such capital loss will be treated as long-term
capital loss if the shares have been held more than one year and otherwise as
short-term capital loss. Any such loss with respect to shares that are held for
six months or less, however, will be treated as long-term capital loss to the
extent of any capital gain distributions received by the shareholder. In
addition, any short-term capital loss will be disallowed to the extent of any
tax-exempt dividends received by the shareholder on shares that are held for six
months or less.
The Fund has obtained opinions of counsel to the effect that neither (i) the
conversion of Class B shares into Class A shares nor (ii) the exchange of Class
B or Class C shares for Class A shares constitutes a taxable event for federal
income tax purposes. However, such opinions are not binding on the Internal
Revenue Service.
CERTAIN INVESTORS MAY INCUR FEDERAL ALTERNATIVE MINIMUM TAX LIABILITY AS A
RESULT OF THEIR INVESTMENT IN THE FUND. Tax-exempt interest from certain
municipal obligations (I.E., certain private activity bonds issued after August
7, 1986) will be treated as an item of tax preference for purposes of the
alternative minimum tax. The Fund anticipates that, under regulations to be
promulgated, items of tax preference incurred by the Series will be attributed
to the Series' shareholders, although some portion of such items could be
allocated to the Series itself. Depending upon each shareholder's individual
circumstances, the attribution of items of tax preference incurred by the Series
could result in liability for the shareholder for the alternative minimum tax.
Similarly, the Series could be liable for the alternative minimum tax for items
of tax preference attributed to it. The Series is permitted to invest in
municipal obligations of the type that will produce items of tax preference.
Corporate shareholders in the Series also will have to take into account the
adjustment for current earnings for alternative minimum tax purposes. Corporate
shareholders should consult with their tax advisers with respect to this
potential adjustment.
In the opinion of North Carolina tax counsel, distributions will not be
subject to North Carolina income tax if made to individual shareholders resident
in North Carolina or to trusts or estates subject to North Carolina income tax
to the extent such distributions are either (i) exempt from federal income tax
and attributable to interest on obligations of North Carolina or its political
subdivisions; nonprofit educational institutions organized or chartered under
the laws of North Carolina; or Guam, Puerto Rico or the United States Virgin
Islands including the governments thereof and their agencies, instrumentalities,
and authorities or (ii) attributable to interest on direct obligations of the
United States.
Shareholders are advised to consult their own tax advisers regarding specific
questions as to federal, state or local taxes. See "Distributions and Tax
Information" in the Statement of Additional Information.
WITHHOLDING TAXES
Under the Internal Revenue Code, the Series is required to withhold and remit
to the U.S. Treasury 31% of redemption proceeds on the accounts of certain
shareholders who fail to furnish their tax identification numbers on IRS Form
W-9 (or IRS Form W-8 in
20
<PAGE>
the case of certain foreign shareholders) with the required certifications
regarding the shareholder's status under the federal income tax law. Such
withholding also is required on taxable dividends and capital gain distributions
made by the Series unless it is reasonably expected that at least 95% of the
distributions of the Series are comprised of tax-exempt dividends.
Dividends of net taxable investment income and distributions of net short-term
capital gains paid to a shareholder (including a shareholder acting as a nominee
or fiduciary) who is a nonresident alien individual, a foreign corporation or a
foreign partnership (foreign shareholder) are subject to a 30% (or lower treaty
rate) withholding tax upon the gross amount of the dividends unless the
dividends are effectively connected with a U.S. trade or business conducted by
the foreign shareholder. Capital gain dividends paid to a foreign shareholder
are generally not subject to withholding tax. A foreign shareholder will,
however, be required to pay U.S. income tax on any dividends and capital gain
distributions which are effectively connected with a U.S. trade or business of
the foreign shareholder.
DIVIDENDS AND DISTRIBUTIONS
THE SERIES EXPECTS TO DECLARE DAILY AND PAY MONTHLY DIVIDENDS OF NET
INVESTMENT INCOME, IF ANY, AND MAKE DISTRIBUTIONS AT LEAST ANNUALLY OF ANY
CAPITAL GAINS IN EXCESS OF CAPITAL LOSSES. For federal income tax purposes, the
Series had a capital loss carryforward as of August 31, 1997 of approximately
$174,500, which expires in 2005. Accordingly, no capital gains distribution is
expected to be paid to shareholders until net gains have been realized in excess
of such carryforward. Dividends paid by the Series with respect to each class of
shares, to the extent any distributions are paid, will be calculated in the same
manner, at the same time, on the same day and will be in the same amount except
that each class will bear its own distribution charges, generally resulting in
lower dividends for Class B and Class C shares. Distributions of net capital
gains, if any, will be paid in the same amount for each class of shares. See
"How the Fund Values its Shares."
DIVIDENDS AND DISTRIBUTIONS WILL BE PAID IN ADDITIONAL SHARES OF THE SERIES
BASED ON THE NAV OF EACH CLASS OF THE SERIES ON THE PAYMENT DATE AND RECORD
DATE, RESPECTIVELY, OR SUCH OTHER DATE AS THE TRUSTEES MAY DETERMINE, UNLESS THE
SHAREHOLDER ELECTS IN WRITING NOT LESS THAN FIVE BUSINESS DAYS PRIOR TO THE
RECORD DATE TO RECEIVE SUCH DIVIDENDS AND DISTRIBUTIONS IN CASH. Such election
should be submitted to Prudential Mutual Fund Services LLC, Attention: Account
Maintenance, P.O. Box 15015, New Brunswick, New Jersey 08906-5015. If you hold
shares through Prudential Securities, you should contact your financial adviser
to elect to receive dividends and distributions in cash. The Fund will notify
each shareholder after the close of the Fund's taxable year of both the dollar
amount and the taxable status of that year's dividends and distributions on a
per share basis.
GENERAL INFORMATION
DESCRIPTION OF SHARES
THE FUND WAS ESTABLISHED AS A MASSACHUSETTS BUSINESS TRUST ON MAY 18, 1984, BY
A DECLARATION OF TRUST. The Fund's activities are supervised by its Trustees.
The Declaration of Trust permits the Trustees to issue an unlimited number of
full and fractional shares in separate series, currently designated as the
Connecticut Money Market Series, Florida Series, Maryland Series, Massachusetts
Series, Massachusetts Money Market Series, Michigan Series, New Jersey Series,
New Jersey Money Market Series, New York Series, New York Money Market Series,
North Carolina Series, Ohio Series and Pennsylvania Series. The Series is
authorized to issue an unlimited number of shares, divided into three classes,
designated Class A, Class B and Class C. Each class of shares represents an
interest in the same assets of the Series and is identical in all respects
except that (i) each class is subject to different 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)
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<PAGE>
each class has a different exchange privilege and (iv) only Class B shares have
a conversion feature. See "How the Fund is Managed--Distributor." In accordance
with the Fund's Declaration of Trust, the Trustees may authorize the creation of
additional series and classes within such series, with such preferences,
privileges, limitations and voting and dividend rights as the Trustees may
determine.
Shares of the Fund, when issued, are fully paid, nonassessable, fully
transferable and redeemable at the option of the holder. Shares are also
redeemable at the option of the Fund under certain circumstances as described
under "Shareholder Guide--How to Sell Your Shares." Each share of each class of
the Series is equal as to earnings, assets and voting privileges, except as
noted above, and each class bears the expenses related to the distribution of
its shares. Except for the conversion feature applicable to Class B shares,
there are no conversion, preemptive or other subscription rights. In the event
of liquidation, each share of beneficial interest of each series is entitled to
its portion of all of the Fund's assets after all debt and expenses of the Fund
have been paid. Since Class B and Class C shares generally bear higher
distribution expenses than Class A shares, the liquidation proceeds to
shareholders of those classes are likely to be lower than to Class A
shareholders. The Fund's shares do not have cumulative voting rights for the
election of Trustees.
THE FUND DOES NOT INTEND TO HOLD ANNUAL MEETINGS OF SHAREHOLDERS UNLESS
OTHERWISE REQUIRED BY LAW. THE FUND WILL NOT BE REQUIRED TO HOLD MEETINGS OF
SHAREHOLDERS UNLESS, FOR EXAMPLE, THE ELECTION OF TRUSTEES IS REQUIRED TO BE
ACTED UPON BY SHAREHOLDERS UNDER THE INVESTMENT COMPANY ACT. SHAREHOLDERS HAVE
CERTAIN RIGHTS, INCLUDING THE RIGHT TO CALL A MEETING UPON A VOTE OF 10% OF THE
FUND'S OUTSTANDING SHARES FOR THE PURPOSE OF VOTING ON THE REMOVAL OF ONE OR
MORE TRUSTEES OR TO TRANSACT ANY OTHER BUSINESS.
The Declaration of Trust and the By-Laws of the Fund are designed to make the
Fund similar in certain respects to a Massachusetts business corporation. The
principal distinction between a Massachusetts business corporation and a
Massachusetts business trust relates to shareholder liability. Under
Massachusetts law, shareholders of a business trust may, under certain
circumstances, be held personally liable as partners for the obligations of the
fund, which is not the case with a corporation. The Declaration of Trust of the
Fund provides that shareholders shall not be subject to any personal liability
for the acts or obligations of the Fund and that every written obligation,
contract, instrument or undertaking made by the Fund shall contain a provision
to the effect that the shareholders are not individually bound thereunder.
ADDITIONAL INFORMATION
This Prospectus, including the Statement of Additional Information which has
been incorporated by reference herein, does not contain all the information set
forth in the Registration Statement filed by the Fund with the SEC under the
Securities Act. Copies of the Registration Statement may be obtained at a
reasonable charge from the SEC or may be examined, without charge, at the office
of the SEC in Washington, D.C.
SHAREHOLDER GUIDE
HOW TO BUY SHARES OF THE FUND
YOU MAY PURCHASE SHARES OF THE SERIES THROUGH PRUDENTIAL SECURITIES, PRUSEC OR
DIRECTLY FROM THE FUND, THROUGH ITS TRANSFER AGENT, PRUDENTIAL MUTUAL FUND
SERVICES LLC (PMFS OR THE TRANSFER AGENT), ATTENTION: INVESTMENT SERVICES, P.O.
BOX 15020, NEW BRUNSWICK, NEW JERSEY 08906-5020. The purchase price is the NAV
next determined following receipt of an order in proper form by the Transfer
Agent or Prudential Securities plus a sales charge which, at your option, may be
imposed either (i) at the time of purchase (Class A shares) or (ii) on a
deferred basis (Class B or Class C shares). Payment may be made by wire, check
or through your brokerage account. See "Alternative Purchase Plan" below. See
also "How the Fund Values its Shares."
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<PAGE>
An investment in the Series may not be appropriate for tax-exempt or
tax-deferred investors. Such investors should consult their own tax advisers.
The minimum initial investment is $1,000 for Class A and Class B shares and
$5,000 for Class C shares. The minimum subsequent investment is $100 for all
classes. All minimum investment requirements are waived for certain employee
savings plans. For purchases made through the Automatic Savings Accumulation
Plan, the minimum initial and subsequent investment is $50. See "Shareholder
Services" below.
Application forms can be obtained from PMFS, Prudential Securities or Prusec.
If a share certificate is desired, it must be requested in writing for each
transaction. Certificates are issued only for full shares. Shareholders who hold
their shares through Prudential Securities will not receive share certificates.
The Fund reserves the right to reject any purchase order (including an
exchange into the Series) or to suspend or modify the continuous offering of its
shares. See "How to Sell Your Shares" below.
Your dealer is responsible for forwarding payment promptly to the Fund. The
Distributor reserves the right to cancel any purchase order for which payment
has not been received by the third business day following the investment.
Transactions in shares of the Series may be subject to postage and handling
charges imposed by your dealer.
PURCHASE BY WIRE. For an initial purchase of shares of the Series by wire, you
must first telephone PMFS at (800) 225-1852 (toll-free) to receive an account
number. The following information will be requested: your name, address, tax
identification number, class election, dividend distribution election, amount
being wired and wiring bank. Instructions should then be given by you to your
bank to transfer funds by wire to State Street Bank and Trust Company (State
Street), Boston, Massachusetts, Custody and Shareholder Services Division,
Attention: Prudential Municipal Series Fund (North Carolina Series), specifying
on the wire the account number assigned by PMFS and your name and identifying
the class in which you are eligible to invest (Class A, Class B or Class C
shares).
If you arrange for receipt by State Street of Federal Funds prior to the
calculation of NAV (4:15 P.M., New York time), on a business day, you may
purchase shares of the Series as of that day. See "Net Asset Value" in the
Statement of Additional Information.
In making a subsequent purchase order by wire, you should wire State Street
directly and should be sure that the wire specifies Prudential Municipal Series
Fund (North Carolina Series) Class A, Class B or Class C shares and your name
and individual account number. It is not necessary to call PMFS to make
subsequent purchase orders utilizing Federal Funds. The minimum amount which may
be invested by wire is $1,000.
ALTERNATIVE PURCHASE PLAN
THE SERIES OFFERS THROUGH THIS PROSPECTUS THREE CLASSES OF SHARES (CLASS A,
CLASS B AND CLASS C SHARES) WHICH ALLOWS YOU TO CHOOSE THE MOST BENEFICIAL SALES
CHARGE STRUCTURE FOR YOUR INDIVIDUAL CIRCUMSTANCES GIVEN THE AMOUNT OF THE
PURCHASE, THE LENGTH OF TIME YOU EXPECT TO HOLD THE SHARES AND OTHER RELEVANT
CIRCUMSTANCES (ALTERNATIVE PURCHASE PLAN).
<TABLE>
<CAPTION>
ANNUAL 12b-1 FEES
(AS A % OF AVERAGE
SALES CHARGE DAILY NET ASSETS) OTHER INFORMATION
----------------------------------- ----------------------------------- -----------------------------------
<S> <C> <C> <C>
CLASS A Maximum initial sales charge of 3% .30 of 1% (currently being charged Initial sales charge waived or
of the public offering price at a rate of .10 of 1%) reduced for certain purchases
</TABLE>
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<TABLE>
<CAPTION>
ANNUAL 12b-1 FEES
(AS A % OF AVERAGE
SALES CHARGE DAILY NET ASSETS) OTHER INFORMATION
----------------------------------- ----------------------------------- -----------------------------------
<S> <C> <C> <C>
CLASS B Maximum contingent deferred sales .50 of 1% Shares convert to Class A shares
charge or CDSC of 5% of the lesser approximately seven years after
of the amount invested or the purchase
redemption proceeds; declines to
zero after six years
CLASS C Maximum CDSC of 1% of the lesser of 1% (currently being charged at a Shares do not convert to another
the amount invested or the rate of .75 of 1%) class
redemption proceeds on redemptions
made within one year of purchase
</TABLE>
The three classes of shares represent an interest in the same portfolio of
investments of the Series and have the same rights, except that (i) each class
bears the separate expenses of its Rule 12b-1 distribution and service plan,
(ii) each class has exclusive voting rights 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, and (iii) only Class B
shares have a conversion feature. The three classes also have separate exchange
privileges. See "How to Exchange Your Shares" below. The income attributable to
each class and the dividends payable on the shares of each class will be reduced
by the amount of the distribution fee of each class. Class B and Class C shares
bear the expenses of a higher distribution fee which will generally cause them
to have higher expense ratios and to pay lower dividends than the Class A
shares.
Financial advisers and other sales agents who sell shares of the Series will
receive different compensation for selling Class A, Class B and Class C shares
and will generally receive more compensation initially for selling Class A and
Class B shares than for selling Class C shares.
IN SELECTING A PURCHASE ALTERNATIVE, YOU SHOULD CONSIDER, AMONG OTHER THINGS,
(1) the length of time you expect to hold your investment, (2) the amount of any
applicable sales charge (whether imposed at the time of purchase or redemption)
and distribution-related fees, as noted above, (3) whether you qualify for any
reduction or waiver of any applicable sales charge, (4) the various exchange
privileges among the different classes of shares (see "How to Exchange Your
Shares" below) and (5) the fact that Class B shares automatically convert to
Class A shares approximately seven years after purchase (see "Conversion
Feature--Class B Shares" below).
The following is provided to assist you in determining which method of
purchase best suits your individual circumstances and is based on current fees
and expenses being charged to the Series:
If you intend to hold your investment in the Series for less than 5 years and
do not qualify for a reduced sales charge on Class A shares, since Class A
shares are subject to a maximum initial sales charge of 3% and Class B shares
are subject to a CDSC of 5% which declines to zero over a 6 year period, you
should consider purchasing Class C shares over either Class A or Class B shares.
If you intend to hold your investment for 5 years or more and do not qualify
for a reduced sales charge on Class A shares, since Class B shares convert to
Class A shares approximately 7 years after purchase and because all of your
money would be invested initially in the case of Class B shares, you should
consider purchasing Class B shares over either Class A or Class C shares.
If you qualify for a reduced sales charge on Class A shares, it may be more
advantageous for you to purchase Class A shares over either Class B or Class C
shares regardless of how long you intend to hold your investment. However,
unlike Class B and Class C shares, you would not have all of your money invested
initially because the sales charge on Class A shares is deducted at the time of
purchase.
If you do not qualify for a reduced sales charge on Class A shares and you
purchase Class C shares, you would have to hold your investment for more than 4
years for the higher cumulative annual distribution-related fee on those shares
to exceed the
24
<PAGE>
initial sales charge plus cumulative annual distribution-related fee on Class A
shares. This does not take into account the time value of money, which further
reduces the impact of the higher Class C distribution-related fee on the
investment, fluctuations in net asset value, the effect of the return on the
investment over this period of time or redemptions when the CDSC is applicable.
ALL PURCHASES OF $1 MILLION OR MORE, EITHER AS PART OF A SINGLE INVESTMENT OR
UNDER RIGHTS OF ACCUMULATION OR LETTERS OF INTENT, MUST BE FOR CLASS A SHARES.
See "Reduction and Waiver of Initial Sales Charges" below.
CLASS A SHARES
The offering price of Class A shares for investors choosing the initial sales
charge alternative is the next determined NAV plus a sales charge (expressed as
a percentage of the offering price and of the amount invested) as shown in the
following table:
<TABLE>
<CAPTION>
SALES CHARGE AS SALES CHARGE AS DEALER CONCESSION
PERCENTAGE OF PERCENTAGE OF AS PERCENTAGE OF
AMOUNT OF PURCHASE OFFERING PRICE AMOUNT INVESTED OFFERING PRICE
------------------------ --------------- --------------- -----------------
<S> <C> <C> <C>
Less than $99,999 3.00% 3.09% 3.00%
$100,000 to $249,999 2.50 2.56 2.50
$250,000 to $499,999 1.50 1.52 1.50
$500,000 to $999,999 1.00 1.01 1.00
$1,000,000 and above None None None
</TABLE>
The Distributor may reallow the entire initial sales charge to dealers.
Selling dealers may be deemed to be underwriters, as that term is defined in the
Securities Act.
In connection with the sale of Class A shares at NAV (without payment of an
initial sales charge), the Manager, the Distributor or one of their affiliates
will pay dealers, financial advisers and other persons which distribute shares a
finders' fee from its own resources based on a percentage of the net asset value
of shares sold by such persons.
REDUCTION AND WAIVER OF INITIAL SALES CHARGES. Reduced sales charges are
available through Rights of Accumulation and Letters of Intent. Shares of the
Fund and shares of other Prudential Mutual Funds (excluding money market funds
other than those acquired pursuant to the exchange privilege) may be aggregated
to determine the applicable reduction. See "Purchase and Redemption of Fund
Shares--Reduction and Waiver of Initial Sales Charges--Class A Shares" in the
Statement of Additional Information.
PRUARRAY SAVINGS PROGRAM. Class A shares are also offered at net asset value
to employees of companies that enter into a written agreement with Prudential
Retirement Services to participate in the PruArray Savings Program. Under this
Program, a limited number of Prudential Mutual Funds are available for purchase
at net asset value by Savings Accumulation Plans of the company's employees. The
Program is available only to employees who open a Savings Accumulation Plan
account with the Transfer Agent. The program is offered to companies that have
at least 250 eligible employees.
SPECIAL RULES APPLICABLE TO RETIREMENT PLANS. After a PruArray Plan qualifies
to purchase Class A shares at NAV, all subsequent purchases will be made at NAV.
OTHER WAIVERS. Class A shares may be purchased at NAV, through Prudential
Securities or the Transfer Agent, by the following persons: (a) officers and
current and former Directors/Trustees of the Prudential Mutual Funds (including
the Fund), (b) employees of Prudential Securities and PIFM and their
subsidiaries and members of the families of such persons who maintain an
"employee related" account at Prudential Securities or the Transfer Agent, (c)
employees of subadvisers of the Prudential Mutual Funds provided that the
purchases at NAV are permitted by such person's employer, (d) Prudential
employees and special agents of Prudential and its subsidiaries and all persons
who have retired directly from active service with Prudential or one of its
subsidiaries, (e) registered representatives and employees of dealers who have
entered into a selected dealer
25
<PAGE>
agreement with Prudential Securities provided that purchases at NAV are
permitted by such person's employer and (f) investors who have a business
relationship with a financial adviser who joined Prudential Securities from
another investment firm, provided that (i) the purchase is made within 180 days
of the commencement of the financial adviser's employment at Prudential
Securities or within one year in the case of benefit plans, (ii) the purchase is
made with proceeds of a redemption of shares of any open-end non-money market
fund sponsored by the financial adviser's previous employer (other than a fund
which imposes a distribution or service fee of .25 of 1% or less) and (iii) the
financial adviser served as the client's broker on the previous purchases.
You must notify the Transfer Agent either directly or through Prudential
Securities or Prusec that you are entitled to the reduction or waiver of the
sales charge. The reduction or waiver will be granted subject to confirmation of
your entitlement. No initial sales charges are imposed upon Class A shares
acquired upon the reinvestment of dividends and distributions. See "Purchase and
Redemption of Fund Shares--Reduction and Waiver of Initial Sales Charges--Class
A Shares" in the Statement of Additional Information.
CLASS B AND CLASS C SHARES
The offering price of Class B and Class C shares for investors choosing one of
the deferred sales charge alternatives is the NAV next determined following
receipt of an order by the Transfer Agent or Prudential Securities. Although
there is no sales charge imposed at the time of purchase, redemptions of Class B
and Class C shares may be subject to a CDSC. See "How to Sell Your
Shares--Contingent Deferred Sales Charges" below. The Distributor will pay sales
commissions of up to 4% of the purchase price of Class B shares to dealers,
financial advisers and other persons who sell Class B shares at the time of sale
from its own resources. This facilitates the ability of the Fund to sell the
Class B shares without an initial sales charge being deducted at the time of
purchase. The Distributor anticipates that it will recoup its advancement of
sales commissions from the combination of the CDSC and the distribution fee. See
"How the Fund is Managed--Distributor." In connection with the sale of Class C
shares, the Distributor will pay dealers, financial advisers and other persons
which distribute Class C shares a sales commission of up to 1% of the purchase
price at the time of the sale.
HOW TO SELL YOUR SHARES
YOU CAN REDEEM YOUR SHARES OF THE SERIES AT ANY TIME FOR CASH AT THE NAV NEXT
DETERMINED AFTER THE REDEMPTION REQUEST IS RECEIVED IN PROPER FORM BY THE
TRANSFER AGENT OR PRUDENTIAL SECURITIES. See "How the Fund Values its Shares."
In certain cases, however, redemption proceeds will be reduced by the amount of
any applicable contingent deferred sales charge, as described below. See
"Contingent Deferred Sales Charges" below.
IF YOU HOLD SHARES OF THE SERIES THROUGH PRUDENTIAL SECURITIES, YOU MUST
REDEEM SHARES THROUGH PRUDENTIAL SECURITIES. PLEASE CONTACT YOUR PRUDENTIAL
SECURITIES FINANCIAL ADVISER.
IF YOU HOLD SHARES IN NON-CERTIFICATE FORM, A WRITTEN REQUEST FOR REDEMPTION
SIGNED BY YOU EXACTLY AS THE ACCOUNT IS REGISTERED IS REQUIRED. IF YOU HOLD
CERTIFICATES, THE CERTIFICATES, SIGNED IN THE NAME(S) SHOWN ON THE FACE OF THE
CERTIFICATES, MUST BE RECEIVED BY THE TRANSFER AGENT IN ORDER FOR THE REDEMPTION
REQUEST TO BE PROCESSED. IF REDEMPTION IS REQUESTED BY A CORPORATION,
PARTNERSHIP, TRUST OR FIDUCIARY, WRITTEN EVIDENCE OF AUTHORITY ACCEPTABLE TO THE
TRANSFER AGENT MUST BE SUBMITTED BEFORE SUCH REQUEST WILL BE ACCEPTED. All
correspondence and documents concerning redemptions should be sent to the Fund
in care of its Transfer Agent, Prudential Mutual Fund Services LLC, Attention:
Redemption Services, P.O. Box 15010, New Brunswick, New Jersey 08906-5010.
If the proceeds of the redemption (a) exceed $50,000, (b) are to be paid to a
person other than the record owner, (c) are to be sent to an address other than
the address on the Transfer Agent's records, or (d) are to be paid to a
corporation, partnership, trust or fiduciary, the signature(s) on the redemption
request and on the certificates, if any, or stock power must be guaranteed by an
"eligible guarantor institution." An "eligible guarantor institution" includes
any bank, broker, dealer or credit union. The Transfer
26
<PAGE>
Agent reserves the right to request additional information from, and make
reasonable inquiries of, any eligible guarantor institution. For clients of
Prusec, a signature guarantee may be obtained from the agency, or office manager
of most Prudential Insurance and Financial Services or Preferred Services
offices.
PAYMENT FOR SHARES PRESENTED FOR REDEMPTION WILL BE MADE BY CHECK WITHIN SEVEN
DAYS AFTER RECEIPT BY THE TRANSFER AGENT OF THE CERTIFICATE AND/OR WRITTEN
REQUEST, EXCEPT AS INDICATED BELOW. IF YOU HOLD SHARES THROUGH PRUDENTIAL
SECURITIES, PAYMENT FOR SHARES PRESENTED FOR REDEMPTION WILL BE CREDITED TO YOUR
PRUDENTIAL SECURITIES ACCOUNT, UNLESS YOU INDICATE OTHERWISE. Such payment may
be postponed or the right of redemption suspended at times (a) when the New York
Stock Exchange is closed for other than customary weekends and holidays, (b)
when trading on such Exchange is restricted, (c) when an emergency exists as a
result of which disposal by the Series of securities owned by it is not
reasonably practicable or it is not reasonably practicable for the Series fairly
to determine the value of its net assets, or (d) during any other period when
the SEC, by order, so permits; provided that applicable rules and regulations of
the SEC shall govern as to whether the conditions prescribed in (b), (c) or (d)
exist.
PAYMENT FOR REDEMPTION OF RECENTLY PURCHASED SHARES WILL BE DELAYED UNTIL THE
FUND OR ITS TRANSFER AGENT HAS BEEN ADVISED THAT THE PURCHASE CHECK HAS BEEN
HONORED, UP TO 10 CALENDAR DAYS FROM THE TIME OF RECEIPT OF THE PURCHASE CHECK
BY THE TRANSFER AGENT. SUCH DELAY MAY BE AVOIDED BY PURCHASING SHARES BY WIRE OR
BY CERTIFIED OR CASHIER'S CHECK.
REDEMPTION IN KIND. If the Trustees determine that it would be detrimental to
the best interests of the remaining shareholders of the Fund to make payment
wholly or partly in cash, the Fund may pay the redemption price in whole or in
part by a distribution in kind of securities from the investment portfolio of
the Series of the Fund, in lieu of cash, in conformity with applicable rules of
the SEC. Securities will be readily marketable and will be valued in the same
manner as in a regular redemption. See "How the Fund Values its Shares." If your
shares are redeemed in kind, you will incur transaction costs in converting the
assets into cash. The Fund, however, has elected to be governed by Rule 18f-1
under the Investment Company Act, under which the Fund is obligated to redeem
shares solely in cash up to the lesser of $250,000 or 1% of the net asset value
of the Fund during any 90-day period for any one shareholder.
INVOLUNTARY REDEMPTION. In order to reduce expenses of the Fund, the Trustees
may redeem all of the shares of any shareholder, other than a shareholder which
is an IRA or other tax-deferred retirement plan, whose account has a net asset
value of less than $500 due to a redemption. The Fund will give such
shareholders 60 days' prior written notice in which to purchase sufficient
additional shares to avoid such redemption. No contingent deferred sales charge
will be imposed on any such involuntary redemption.
90-DAY REPURCHASE PRIVILEGE. If you redeem your shares and have not previously
exercised the repurchase privilege, you may reinvest any portion or all of the
proceeds of such redemption in shares of the Series at the NAV next determined
after the order is received, which must be within 90 days after the date of the
redemption. Any CDSC paid in connection with such redemption will be credited
(in shares) to your account. (If less than a full repurchase is made, the credit
will be on a PRO RATA basis.) You must notify the Fund's Transfer Agent, either
directly or through Prudential Securities, at the time the repurchase privilege
is exercised to adjust your account for the CDSC you previously paid.
Thereafter, any redemptions will be subject to the CDSC applicable at the time
of the redemption. See "Contingent Deferred Sales Charges" below. Exercise of
the repurchase privilege may affect the federal tax treatment of any gain
realized upon redemption. See "Distributions and Tax Information" in the
Statement of Additional Information.
CONTINGENT DEFERRED SALES CHARGES
Redemptions of Class B shares will be subject to a contingent deferred sales
charge or CDSC declining from 5% to zero over a six-year period. Class C shares
redeemed within one year of purchase will be subject to a 1% CDSC. The CDSC will
be deducted from the redemption proceeds and reduce the amount paid to you. The
CDSC will be imposed on any redemption by you which
27
<PAGE>
reduces the current value of your Class B or Class C shares to an amount which
is lower than the amount of all payments by you for shares during the preceding
six years, in the case of Class B shares, and one year, in the case of Class C
shares. A CDSC will be applied on the lesser of the original purchase price or
the current value of the shares being redeemed. Increases in the value of your
shares or shares acquired through reinvestment of dividends or distributions are
not subject to a CDSC. The amount of any contingent deferred sales charge will
be paid to and retained by the Distributor. See "How the Fund is
Managed--Distributor" and "Waiver of the Contingent Deferred Sales
Charges--Class B Shares" below.
The amount of the CDSC, if any, will vary depending on the number of years
from the time of payment for the purchase of shares until the time of redemption
of such shares. Solely for purposes of determining the number of years from the
time of any payment for the purchase of shares, all payments during a month will
be aggregated and deemed to have been made on the last day of the month. The
CDSC will be calculated from the first day of the month after the initial
purchase, excluding the time shares were held in a money market fund. See "How
to Exchange Your Shares" below.
The following table sets forth the rates of the CDSC applicable to redemptions
of Class B shares:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED SALES
CHARGE AS A PERCENTAGE
YEAR SINCE PURCHASE OF DOLLARS INVESTED OR
PAYMENT MADE REDEMPTION PROCEEDS
------------------------------ --------------------------
<S> <C>
First......................... 5.0%
Second........................ 4.0
Third......................... 3.0
Fourth........................ 2.0
Fifth......................... 1.0
Sixth......................... 1.0
Seventh....................... None
</TABLE>
In determining whether a CDSC is applicable to a redemption, the calculation
will be made in a manner that results in the lowest possible rate. It will be
assumed that the redemption is made first of amounts representing shares
acquired pursuant to the reinvestment of dividends and distributions; then of
amounts representing the increase in net asset value above the total amount of
payments for the purchase of Series shares made during the preceding six years
(five years for Class B shares purchased prior to January 22, 1990); then of
amounts representing the cost of shares held beyond the applicable CDSC period;
and finally, of amounts representing the cost of shares held for the longest
period of time within the applicable CDSC period.
For example, assume you purchased 100 Class B shares at $10 per share for a
cost of $1,000. Subsequently, you acquired 5 additional Class B shares through
dividend reinvestment. During the second year after the purchase you decided to
redeem $500 of your investment. Assuming at the time of the redemption the NAV
had appreciated to $12 per share, the value of your Class B shares would be
$1,260 (105 shares at $12 per share). The CDSC would not be applied to the value
of the reinvested dividend shares and the amount which represents appreciation
($260). Therefore, $240 of the $500 redemption proceeds ($500 minus $260) would
be charged at a rate of 4% (the applicable rate in the second year after
purchase) for a total CDSC of $9.60.
For federal income tax purposes, the amount of the CDSC will reduce the gain
or increase the loss, as the case may be, on the amount recognized on the
redemption of shares.
WAIVER OF THE CONTINGENT DEFERRED SALES CHARGES--CLASS B SHARES. The CDSC will
be waived in the case of a redemption following the death or disability of a
shareholder or, in the case of a trust account, following the death or
disability of the grantor. The waiver is available for total or partial
redemptions of shares owned by a person, either individually or in joint tenancy
(with rights of survivorship), at the time of death or initial determination of
disability, provided that the shares were purchased prior to death or
disability. In addition, the CDSC will be waived on redemptions of shares held
by a Trustee of the Fund.
28
<PAGE>
SYSTEMATIC WITHDRAWAL PLAN. The CDSC will be waived (or reduced) on certain
redemptions from a Systematic Withdrawal Plan. On an annual basis, up to 12% of
the total dollar amount subject to the CDSC may be redeemed without charge. The
Transfer Agent will calculate the total amount available for this waiver
annually on the anniversary of your purchase or, for shares purchased prior to
March 1, 1997, on March 1 of the current year. The CDSC will be waived (or
reduced) on redemptions until this threshold 12% amount is reached.
You must notify the Fund's Transfer Agent either directly or through
Prudential Securities or Prusec, at the time of redemption, that you are
entitled to waiver of the CDSC and provide the Transfer Agent with such
supporting documentation as it may deem appropriate. The waiver will be granted
subject to confirmation of your entitlement. See "Purchase and Redemption of
Fund Shares--Waiver of the Contingent Deferred Sales Charge--Class B Shares" in
the Statement of Additional Information.
A quantity discount may apply to redemptions of Class B shares purchased prior
to August 1, 1994. See "Purchase and Redemption of Fund Shares--Quantity
Discount--Class B Shares Purchased Prior to August 1, 1994" in the Statement of
Additional Information.
CONVERSION FEATURE--CLASS B SHARES
Class B shares will automatically convert to Class A shares on a quarterly
basis approximately seven years after purchase. Conversions will be effected at
relative net asset value without the imposition of any additional sales charge.
Since the Fund tracks amounts paid rather than the number of shares bought on
each purchase of Class B shares, the number of Class B shares eligible to
convert to Class A shares (excluding shares acquired through the automatic
reinvestment of dividends and other distributions) (the Eligible Shares) will be
determined on each conversion date in accordance with the following formula: (i)
the ratio of (a) the amounts paid for Class B shares purchased at least seven
years prior to the conversion date to (b) the total amount paid for all Class B
shares purchased and then held in your account (ii) multiplied by the total
number of Class B shares purchased and then held in your account. Each time any
Eligible Shares in your account convert to Class A shares, all shares or amounts
representing Class B shares then in your account that were acquired through the
automatic reinvestment of dividends and other distributions will convert to
Class A shares.
For purposes of determining the number of Eligible Shares, if the Class B
shares in your account on any conversion date are the result of multiple
purchases at different net asset values per share, the number of Eligible Shares
calculated as described above will generally be either more or less than the
number of shares actually purchased approximately seven years before such
conversion date. For example, if 100 shares were initially purchased at $10 per
share (for a total of $1,000) and a second purchase of 100 shares was
subsequently made at $11 per share (for a total of $1,100), 95.24 shares would
convert approximately seven years from the initial purchase (I.E., $1,000
divided by $2,100 (47.62%), multiplied by 200 shares equals 95.24 shares). The
Manager reserves the right to modify the formula for determining the number of
Eligible Shares in the future as it deems appropriate on notice to shareholders.
Since annual distribution-related fees are lower for Class A shares than Class
B shares, the per share net asset value of the Class A shares may be higher than
that of the Class B shares at the time of conversion. Thus, although the
aggregate dollar value will be the same, you may receive fewer Class A shares
than Class B shares converted. See "How the Fund Values its Shares."
For purposes of calculating the applicable holding period for conversions, all
payments for Class B shares during a month will be deemed to have been made on
the last day of the month, or for Class B shares acquired through exchange or a
series of exchanges, on the last day of the month in which the original payment
for purchases of such Class B shares was made. For Class B shares previously
exchanged for shares of a money market fund, the time period during which such
shares were held in the money market fund will be excluded. For example, Class B
shares held in a money market fund for one year will not convert to Class A
shares until approximately eight years from purchase. For purposes of measuring
the time period during which shares are
29
<PAGE>
held in a money market fund, exchanges will be deemed to have been made on the
last day of the month. Class B shares acquired through exchange will convert to
Class A shares after expiration of the conversion period applicable to the
original purchase of such shares.
The conversion feature may be subject to the continuing availability of
opinions of counsel or rulings of the Internal Revenue Service (i) that the
dividends and other distributions paid on Class A, Class B and Class C shares
will not constitute "preferential dividends" under the Internal Revenue Code and
(ii) that the conversion of shares does not constitute a taxable event. The
conversion of Class B shares into Class A shares may be suspended if such
opinions or rulings are no longer available. If conversions are suspended, Class
B shares of the Series will continue to be subject, possibly indefinitely, to
their higher annual distribution and service fee.
HOW TO EXCHANGE YOUR SHARES
AS A SHAREHOLDER OF THE SERIES, YOU HAVE AN EXCHANGE PRIVILEGE WITH THE OTHER
SERIES OF THE FUND AND CERTAIN OTHER PRUDENTIAL MUTUAL FUNDS (THE EXCHANGE
PRIVILEGE), INCLUDING ONE OR MORE SPECIFIED MONEY MARKET FUNDS, SUBJECT TO THE
MINIMUM INVESTMENT REQUIREMENTS OF SUCH FUNDS. CLASS A, CLASS B AND CLASS C
SHARES OF THE SERIES MAY BE EXCHANGED FOR CLASS A, CLASS B AND CLASS C SHARES,
RESPECTIVELY, OF THE OTHER SERIES OF THE FUND OR ANOTHER FUND ON THE BASIS OF
THE RELATIVE NAV. No sales charge will be imposed at the time of the exchange.
Any applicable CDSC payable upon the redemption of shares exchanged will be
calculated from the first day of the month after the initial purchase, excluding
the time shares were held in a money market fund. Class B and Class C shares may
not be exchanged into money market funds other than Prudential Special Money
Market Fund, Inc. For purposes of calculating the holding period applicable to
the Class B conversion feature, the time period during which Class B shares were
held in a money market fund will be excluded. See "Conversion Feature--Class B
Shares" above. An exchange will be treated as a redemption and purchase for tax
purposes. See "Shareholder Investment Account--Exchange Privilege" in the
Statement of Additional Information.
IN ORDER TO EXCHANGE SHARES BY TELEPHONE, YOU MUST AUTHORIZE TELEPHONE
EXCHANGES ON YOUR INITIAL APPLICATION FORM OR BY WRITTEN NOTICE TO THE TRANSFER
AGENT AND HOLD SHARES IN NON-CERTIFICATE FORM. Thereafter, you may call the Fund
at (800) 225-1852 to execute a telephone exchange of shares, weekdays, except
holidays, between the hours of 8:00 A.M. and 6:00 P.M., New York time. For your
protection and to prevent fraudulent exchanges, your telephone call will be
recorded and you will be asked to provide your personal identification number. A
written confirmation of the exchange transaction will be sent to you. NEITHER
THE FUND NOR ITS AGENTS WILL BE LIABLE FOR ANY LOSS, LIABILITY OR COST WHICH
RESULTS FROM ACTING UPON INSTRUCTIONS REASONABLY BELIEVED TO BE GENUINE UNDER
THE FOREGOING PROCEDURES. All exchanges will be made on the basis of the
relative NAV of the two funds (or series) next determined after the request is
received in good order. The Exchange Privilege is available only in states where
the exchange may legally be made.
IF YOU HOLD SHARES THROUGH PRUDENTIAL SECURITIES, YOU MUST EXCHANGE YOUR
SHARES BY CONTACTING YOUR PRUDENTIAL SECURITIES FINANCIAL ADVISER.
IF YOU HOLD CERTIFICATES, THE CERTIFICATES, SIGNED IN THE NAME(S) SHOWN ON THE
FACE OF THE CERTIFICATES, MUST BE RETURNED IN ORDER FOR THE SHARES TO BE
EXCHANGED. SEE "HOW TO SELL YOUR SHARES" ABOVE.
You may also exchange shares by mail by writing to Prudential Mutual Fund
Services LLC, Attention: Exchange Processing, P.O. Box 15010, New Brunswick, New
Jersey 08906-5010.
IN PERIODS OF SEVERE MARKET OR ECONOMIC CONDITIONS, THE TELEPHONE EXCHANGE OF
SHARES MAY BE DIFFICULT TO IMPLEMENT AND YOU SHOULD MAKE EXCHANGES BY MAIL BY
WRITING TO PRUDENTIAL MUTUAL FUND SERVICES LLC, AT THE ADDRESS NOTED ABOVE.
SPECIAL EXCHANGE PRIVILEGE. A special exchange privilege is available for
shareholders who qualify to purchase Class A shares at NAV (see "Alternative
Purchase Plan--Class A Shares--Reduction and Waiver of Initial Sales Charges"
above). Under this exchange privilege, amounts representing any Class B and
Class C shares (which are not subject to a CDSC) held in such a
30
<PAGE>
shareholder's account will be automatically exchanged for Class A shares on a
quarterly basis, unless the shareholder elects otherwise. Eligibility for this
exchange privilege will be calculated on the business day prior to the date of
the exchange. Amounts representing Class B or Class C shares which are not
subject to a CDSC include the following: (1) amounts representing Class B or
Class C shares acquired pursuant to the automatic reinvestment of dividends and
distributions, (2) amounts representing the increase in the net asset value
above the total amount of payments for the purchase of Class B or Class C shares
and (3) amounts representing Class B and Class C shares held beyond the
applicable CDSC period. Class B and Class C shareholders must notify the
Transfer Agent either directly or through Prudential Securities or Prusec that
they are eligible for this special exchange privilege.
The Exchange Privilege is not a right and may be suspended, terminated or
modified on 60 days' notice to shareholders.
FREQUENT TRADING. The Fund and the other Prudential Mutual Funds are not
intended to serve as vehicles for frequent trading in response to short-term
fluctuations in the market. Due to the disruptive effect that market timing
investment strategies and excessive trading can have on efficient portfolio
management, each Prudential Mutual Fund and the Fund reserves the right to
refuse purchase orders and exchanges by any person, group or commonly controlled
accounts, if, in the Manager's sole judgment, such person, group or accounts
were following a market timing strategy or were otherwise engaging in excessive
trading (Market Timers).
To implement this authority to protect the Fund and its shareholders from
excessive trading, the Fund will reject all exchanges and purchases from a
Market Timer unless the Market Timer has entered into a written agreement with
the Fund or its affiliates pursuant to which the Market Timer has agreed to
abide by certain procedures, which include a daily dollar limit on trading. The
Fund may notify the Market Timer of rejection of an exchange or purchase order
subsequent to the day on which the order was placed.
SHAREHOLDER SERVICES
In addition to the Exchange Privilege, as a shareholder in the Series, you can
take advantage of the following services and privileges:
- AUTOMATIC REINVESTMENT OF DIVIDENDS AND/OR DISTRIBUTIONS WITHOUT A SALES
CHARGE. For your convenience, all dividends and distributions are automatically
reinvested in full and fractional shares of the Series at NAV without a sales
charge. You may direct the Transfer Agent in writing not less than 5 full
business days prior to the record date to have subsequent dividends and/or
distributions sent in cash rather than reinvested. If you hold shares through
Prudential Securities, you should contact your financial adviser.
- AUTOMATIC SAVINGS ACCUMULATION PLAN (ASAP). Under ASAP you may make regular
purchases of the Series' shares in amounts as little as $50 via an automatic
debit to a bank account or Prudential Securities account (including a Command
Account). For additional information about this service, you may contact your
Prudential Securities financial adviser, Prusec representative or the Transfer
Agent directly.
- SYSTEMATIC WITHDRAWAL PLAN. A systematic withdrawal plan is available to
shareholders which provides for monthly or quarterly checks in any amount.
Withdrawals of Class B and Class C shares may be subject to a CDSC. See "How to
Sell Your Shares--Contingent Deferred Sales Charges."
- REPORTS TO SHAREHOLDERS. The Fund will send you annual and semi-annual
reports. The financial statements appearing in annual reports are audited by
independent accountants. In order to reduce duplicate mailing and printing
expenses, the Fund will provide one annual and semi-annual shareholder report
and annual prospectus per household. You may request additional copies of such
reports by calling (800) 225-1852 or by writing to the Fund at Gateway Center
Three, 100 Mulberry Street, Newark, New Jersey 07102-4077. In addition, monthly
unaudited financial data is available upon request from the Fund.
- SHAREHOLDER INQUIRIES. Inquiries should be addressed to the Fund at Gateway
Center Three, 100 Mulberry Street, Newark, New Jersey 07102-4077, or by
telephone, at (800) 225-1852 (toll-free) or, from outside the U.S.A., at (908)
417-7555 (collect).
For additional information regarding the services and privileges described
above, see "Shareholder Investment Account" in the Statement of Additional
Information.
31
<PAGE>
DESCRIPTION OF SECURITY RATINGS
MOODY'S INVESTORS SERVICE
BOND RATINGS
Aaa: Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edged." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group, they comprise what are generally known
as high grade bonds. They are rated lower than 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
which make the long-term risks appear somewhat larger than the Aaa securities.
A: Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper-medium-grade obligations. Factors giving security
to principal and interest are considered adequate but elements may be present
which suggest a susceptibility to impairment sometime in the future.
Baa: Bonds which are rated Baa are considered as medium grade obligations,
I.E., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present, but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba: Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate, and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Bonds rated within the Aa, A, Baa, Ba and B categories which Moody's believes
possess the strongest credit attributes within those categories are designated
by the symbols Aa1, A1, Baa1, Ba1 and B1.
Caa: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca: Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
C: Bonds which are rated C are the lowest-rated class of bonds, and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
SHORT-TERM RATINGS
Moody's ratings for tax-exempt notes and other short-term loans are designated
Moody's Investment Grade (MIG). This distinction is in recognition of the
differences between short-term and long-term credit risk.
MIG 1: Loans bearing the designation MIG 1 are of the best quality, enjoying
strong protection by established cash flows, superior liquidity support or
demonstrated broad-based access to the market for refinancing.
A-1
<PAGE>
MIG 2: Loans bearing the designation MIG 2 are of high quality, with margins
of protection ample although not so large as in the preceding group.
MIG 3: Loans bearing the designation MIG 3 are of favorable quality, with all
security elements accounted for but lacking the strength of the preceding
grades.
MIG 4: Loans bearing the designation MIG 4 are of adequate quality.
Protection commonly regarded and required of an investment security is present
and although not distinctly or predominantly speculative, there is specific
risk.
SHORT-TERM DEBT RATINGS
Moody's Short-Term Debt Ratings are opinions of the ability of issuers to
repay punctually senior debt obligations which have an original maturity not
exceeding one year.
Prime-1: Issuers rated 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.
Prime-3: Issuers rated Prime-3 (or supporting institutions) have an
acceptable ability for repayment of senior short-term debt obligations.
Not Prime: Issuers rated Not Prime do not fall within any of the Prime rating
categories.
STANDARD & POOR'S RATINGS GROUP
BOND RATINGS
AAA: Debt rated AAA has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.
AA: Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the highest-rated issues only in small degree.
A: Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB: Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher-rated categories.
BB, B, CCC, CC and C: Debt rated BB, B, CCC, CC or C is regarded as having
predominantly speculative characteristics with respect to capacity to pay
interest and repay principal. BB indicates the least degree of speculation and C
the highest. While such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
D: Debt rated D is in payment default. This rating is used when interest
payments or principal payments are not made on the date due even if the
applicable grace period has not expired, unless S&P believes that such payments
will be made during such grace period.
COMMERCIAL PAPER RATINGS
An S&P Commercial Paper rating is a current assessment of the likelihood of
timely payment of debt considered short-term in the relevant market.
A-2
<PAGE>
A-1: The A-1 designation indicates that the degree of safety regarding timely
payment is strong. Those issues determined to possess extremely strong safety
characteristics are denoted with a plus sign (+) designation.
A-2: Capacity for timely payment on issues with the designation A-2 is
satisfactory. However, the relative degree of safety is not as high as for
issues designated A-1.
A-3: Issues carrying this designation have adequate capacity for timely
payment. They are, however, more vulnerable to the adverse effects of changes in
circumstances than obligations carrying the higher designations.
MUNICIPAL NOTES
A municipal note rating reflects the liquidity concerns and market access
risks unique to municipal notes. Municipal notes due in three years or less will
likely receive a municipal note rating, while notes maturing beyond three years
will most likely receive a long-term debt rating. Municipal notes are rated
SP-1, SP-2 or SP-3. The designation SP-1 indicates a very strong capacity to pay
principal and interest. Those issues determined to possess extremely strong
safety characteristics are denoted with a plus sign (+) designation. An SP-2
designation indicates a satisfactory capacity to pay principal and interest. An
SP-3 designation indicates speculative capacity to pay principal and interest.
A-3
<PAGE>
THE PRUDENTIAL MUTUAL FUND FAMILY
Prudential Investments Fund Management offers a broad range of mutual funds
designed to meet your individual needs. We welcome you to review the investment
options available through our family of funds. For more information on the
Prudential Mutual Funds, including charges and expenses, contact your Prudential
Securities financial adviser or Prusec representative or telephone the Funds at
(800) 225-1852 for a free prospectus. Read the prospectus carefully before you
invest or send money.
TAXABLE BOND FUNDS
--------------------------
Prudential Diversified Bond Fund, Inc.
Prudential Government Income Fund, Inc.
Prudential Government Securities Trust
Short-Intermediate Term Series
Prudential High Yield Fund, Inc.
Prudential Mortgage Income Fund, Inc.
Prudential Structured Maturity Fund, Inc.
Income Portfolio
The BlackRock Government Income Trust
TAX-EXEMPT BOND FUNDS
-----------------------------
Prudential California Municipal Fund
California Series
California Income Series
Prudential Municipal Bond Fund
High Yield Series
Insured Series
Intermediate Series
Prudential Municipal Series Fund
Florida Series
Maryland Series
Massachusetts Series
Michigan Series
New Jersey Series
New York Series
North Carolina Series
Ohio Series
Pennsylvania Series
Prudential National Municipals Fund, Inc.
GLOBAL FUNDS
--------------------
Prudential Europe Growth Fund, Inc.
Prudential Global Genesis Fund, Inc.
Prudential Global Limited Maturity Fund, Inc.
Limited Maturity Portfolio
Prudential Intermediate Global Income Fund, Inc.
Prudential International Bond Fund, Inc.
Prudential Natural Resources Fund, Inc.
Prudential Pacific Growth Fund, Inc.
Prudential World Fund, Inc.
Global Series
International Stock Series
The Global Total Return Fund, Inc.
Global Utility Fund, Inc.
EQUITY FUNDS
--------------------
Prudential Balanced Fund
Prudential Distressed Securities Fund, Inc.
Prudential Dryden Fund
Prudential Active Balanced Fund
Prudential Stock Index Fund
Prudential Small-Cap Index Fund
Prudential Bond Market Index Fund
Prudential Pacific Index Fund
Prudential Europe Index Fund
Prudential Emerging Growth Fund, Inc.
Prudential Equity Fund, Inc.
Prudential Equity Income Fund
Prudential Jennison Series Fund, Inc.
Prudential Jennison Growth Fund
Prudential Jennison Growth & Income Fund
Prudential Multi-Sector Fund, Inc.
Prudential Small-Cap Quantum Fund, Inc.
Prudential Small Company Value Fund, Inc.
Prudential Utility Fund, Inc.
Nicholas-Applegate Fund, Inc.
Nicholas-Applegate Growth Equity Fund
MONEY MARKET FUNDS
--------------------------
- - TAXABLE MONEY MARKET FUNDS
Prudential Government Securities Trust
Money Market Series
U.S. Treasury Money Market Series
Prudential Special Money Market Fund, Inc.
Money Market Series
Prudential MoneyMart Assets, Inc.
- - TAX-FREE MONEY MARKET FUNDS
Prudential Tax-Free Money Fund, Inc.
Prudential California Municipal Fund
California Money Market Series
Prudential Municipal Series Fund
Connecticut Money Market Series
Massachusetts Money Market Series
New Jersey Money Market Series
New York Money Market Series
- - COMMAND FUNDS
Command Money Fund
Command Government Fund
Command Tax-Free Fund
- - INSTITUTIONAL MONEY MARKET FUNDS
Prudential Institutional Liquidity Portfolio, Inc.
Institutional Money Market Series
B-1
<PAGE>
No dealer, sales representative or any other person has been authorized to give
any information or to make any representations, other than those contained in
this Prospectus, in connection with the offer contained herein, and, if given or
made, such other information or representations must not be relied upon as
having been authorized by the Fund or the Distributor. This Prospectus does not
constitute an offer by the Fund or by the Distributor to sell or a solicitation
of any offer to buy any of the securities offered hereby in any jurisdiction to
any person to whom it is unlawful to make such offer in such jurisdiction.
-------------------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---
<S> <C>
FUND HIGHLIGHTS................................. 2
What are the Series' Risk Factors and Special
Characteristics?............................. 2
FUND EXPENSES................................... 4
FINANCIAL HIGHLIGHTS............................ 5
HOW THE FUND INVESTS............................ 8
Investment Objective and Policies............. 8
Other Investments and Policies................ 14
Investment Restrictions....................... 14
HOW THE FUND IS MANAGED......................... 15
Manager....................................... 15
Distributor................................... 16
Portfolio Transactions........................ 18
Custodian and Transfer and Dividend Disbursing
Agent........................................ 18
HOW THE FUND VALUES ITS SHARES.................. 18
HOW THE FUND CALCULATES PERFORMANCE............. 18
TAXES, DIVIDENDS AND DISTRIBUTIONS.............. 19
GENERAL INFORMATION............................. 21
Description of Shares......................... 21
Additional Information........................ 22
SHAREHOLDER GUIDE............................... 22
How to Buy Shares of the Fund................. 22
Alternative Purchase Plan..................... 23
How to Sell Your Shares....................... 26
Conversion Feature--Class B Shares............ 29
How to Exchange Your Shares................... 30
Shareholder Services.......................... 31
DESCRIPTION OF SECURITY RATINGS................. A-1
THE PRUDENTIAL MUTUAL FUND FAMILY............... B-1
</TABLE>
- -------------------------------------------
MF126A 44404HI
Class A: 74435M-81-2
Class B: 74435M-82-0
CUSIP Nos.: Class C: 74435M-51-5
PRUDENTIAL
MUNICIPAL
SERIES FUND
----------------------------------------
NORTH CAROLINA SERIES
PROSPECTUS
October 30, 1997
www.prudential.com
[LOGO] Prudential
Investments
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
(OHIO SERIES)
- --------------------------------------------------------------------------------
PROSPECTUS DATED OCTOBER 30, 1997
- ----------------------------------------------------------------
Prudential Municipal Series Fund (the Fund) (Ohio Series) (the Series) is one of
thirteen series of an open-end, management investment company, or mutual fund.
This Series is diversified and is designed to provide the maximum amount of
income that is exempt from Ohio State and federal income taxes consistent with
the preservation of capital and, in conjunction therewith, the Series may invest
in debt securities with the potential for capital gain. The net assets of the
Series are invested primarily in obligations within the four highest ratings of
Moody's Investors Service, Standard & Poor's Ratings Group or another nationally
recognized statistical rating organization or in unrated obligations which, in
the opinion of the Fund's investment adviser, are of comparable quality. The
Series may, however, 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. Subject to the limitations
described herein, the Series may utilize derivatives, including buying and
selling futures contracts and options thereon for the purpose of hedging its
portfolio securities. There can be no assurance that the Series' investment
objective will be achieved. See "How the Fund Invests--Investment Objective and
Policies." The Fund's address is Gateway Center Three, 100 Mulberry Street,
Newark, New Jersey 07102-4077, and its telephone number is (800) 225-1852.
This Prospectus sets forth concisely the information about the Fund and the Ohio
Series that a prospective investor should know before investing. Additional
information about the Fund has been filed with the Securities and Exchange
Commission in a Statement of Additional Information dated October 30, 1997,
which information is incorporated herein by reference (is legally considered a
part of this Prospectus) and is available without charge upon request to the
Fund at the address or telephone number noted above.
- --------------------------------------------------------------------------------
INVESTORS ARE ADVISED TO READ THIS PROSPECTUS AND RETAIN IT FOR FUTURE
REFERENCE.
- --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
<PAGE>
FUND HIGHLIGHTS
The following summary is intended to highlight certain information contained
in this Prospectus and is qualified in its entirety by the more detailed
information appearing elsewhere herein.
WHAT IS PRUDENTIAL MUNICIPAL SERIES FUND?
Prudential Municipal Series Fund is a mutual fund whose shares are offered
in thirteen series, each of which operates as a separate fund. A mutual fund
pools the resources of investors by selling its shares to the public and
investing the proceeds of such sale in a portfolio of securities designed to
achieve its investment objective. Technically, the Fund is an open-end,
management investment company. Only the Ohio Series is offered through this
Prospectus.
WHAT IS THE SERIES' INVESTMENT OBJECTIVE?
The Series' investment objective is to maximize current income that is
exempt from Ohio State and federal income taxes consistent with the
preservation of capital. It seeks to achieve this objective by investing
primarily in Ohio State, municipal and local government obligations and
obligations of other qualifying issuers, such as issuers located in Puerto
Rico, the Virgin Islands and Guam, which pay income exempt, in the opinion
of counsel, from Ohio State and federal income taxes (Ohio Obligations).
There can be no assurance that the Series' investment objective will be
achieved. See "How the Fund Invests--Investment Objective and Policies" at
page 8.
WHAT ARE THE SERIES' RISK FACTORS AND SPECIAL CHARACTERISTICS?
In seeking to achieve its investment objective, the Series will invest at
least 80% of the value of its total assets in Ohio Obligations. This degree
of investment concentration makes the Series particularly susceptible to
factors adversely affecting issuers of Ohio Obligations. See "How the Fund
Invests--Investment Objective and Policies--Special Considerations" at page
13. The Series may invest up to 30% of its total assets in high yield
securities, commonly known as "junk bonds," which may be considered
speculative and are subject to the risk of an issuer's inability to meet
principal and interest payments on the obligations as well as price
volatility. See "How the Fund Invests--Investment Objective and
Policies--Risk Factors Relating to Investing in High Yield Municipal
Obligations" at page 11. To hedge against changes in interest rates, the
Series may also purchase put options and engage in transactions involving
derivatives, including financial futures contracts and options thereon. See
"How the Fund Invests--Investment Objective and Policies--Futures Contracts
and Options Thereon" at page 12. As with an investment in any mutual fund,
an investment in this series can decrease in value and you can lose money.
WHO MANAGES THE FUND?
Prudential Investments Fund Management LLC (PIFM or the Manager) is the
Manager of the Fund and is compensated for its services at an annual rate of
.50 of 1% of the Series' average daily net assets. As of September 30, 1997,
PIFM served as manager or administrator to 63 investment companies,
including 41 mutual funds, with aggregate assets of approximately $59.9
billion. The Prudential Investment Corporation, which does business under
the name Prudential Investments (PI, the Subadviser or the investment
adviser) furnishes investment advisory services in connection with the
management of the Fund under a Subadvisory Agreement with PIFM. See "How the
Fund is Managed--Manager" at page 14.
WHO DISTRIBUTES THE SERIES' SHARES?
Prudential Securities Incorporated (Prudential Securities, PSI or the
Distributor), a major securities underwriter and securities and commodities
broker, acts as the Distributor of the Series' Class A, Class B and Class C
shares and is paid a distribution and service fee with respect to Class A
shares which is currently being charged at the annual rate of .10 of 1% of
the average daily net assets of the Class A shares and is paid a
distribution and service fee with respect to Class B shares at the annual
rate of .50 of 1% of the average daily net assets of the Class B shares and
is paid an annual distribution and service fee with respect to Class C
shares which is currently being charged at the rate of .75 of 1% of the
average daily net assets of the Class C shares. See "How the Fund is
Managed--Distributor" at page 15.
2
<PAGE>
WHAT IS THE MINIMUM INVESTMENT?
The minimum initial investment is $1,000 for Class A and Class B shares
and $5,000 for Class C shares. The minimum subsequent investment is $100 for
Class A, Class B and Class C shares. There is no minimum investment
requirement for certain employee savings plans. For purchases made through
the Automatic Savings Accumulation Plan, the minimum initial and subsequent
investment is $50. See "Shareholder Guide--How to Buy Shares of the Fund" at
page 21 and "Shareholder Guide--Shareholder Services" at page 30.
HOW DO I PURCHASE SHARES?
You may purchase shares of the Series through Prudential Securities, Pruco
Securities Corporation (Prusec) or directly from the Fund through its
transfer agent, Prudential Mutual Fund Services LLC. (PMFS or the Transfer
Agent), at the net asset value per share (NAV) next determined after receipt
of your purchase order by the Transfer Agent or Prudential Securities plus a
sales charge which may be imposed either (i) at the time of purchase (Class
A shares) or (ii) on a deferred basis (Class B or Class C shares). See "How
the Fund Values its Shares" at page 17 and "Shareholder Guide--How to Buy
Shares of the Fund" at page 21.
WHAT ARE MY PURCHASE ALTERNATIVES?
The Series offers three classes of shares:
- Class A Shares: Sold with an initial sales charge of up to 3% of
the offering price.
- Class B Shares: Sold without an initial sales charge but are
subject to a contingent deferred sales charge or
CDSC (declining from 5% to zero of the lower of the
amount invested or the redemption proceeds) which
will be imposed on certain redemptions made within
six years of purchase. Although Class B shares are
subject to higher ongoing distribution-related
expenses than Class A shares, Class B shares will
automatically convert to Class A shares (which are
subject to lower ongoing distribution-related
expenses) approximately seven years after purchase.
- Class C Shares: Sold without an initial sales charge and, for one
year after purchase, are subject to a 1% CDSC on
redemptions. Like Class B shares, Class C shares are
subject to higher ongoing distribution-related
expenses than Class A shares but do not convert to
another class.
See "Shareholder Guide--Alternative Purchase Plan" at page 22.
HOW DO I SELL MY SHARES?
You may redeem your shares at any time at the NAV next determined after
Prudential Securities or the Transfer Agent receives your sell order.
However, the proceeds of redemptions of Class B and Class C shares may be
subject to a CDSC. See "Shareholder Guide--How to Sell Your Shares" at page
25.
HOW ARE DIVIDENDS AND DISTRIBUTIONS PAID?
The Series expects to declare daily and pay monthly dividends of net
investment income, if any, and make distributions of any net capital gains
at least annually. Dividends and distributions will be automatically
reinvested in additional shares of the Series at NAV without a sales charge
unless you request that they be paid to you in cash. See "Taxes, Dividends
and Distributions" at page 18.
3
<PAGE>
FUND EXPENSES
(OHIO SERIES)
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES CLASS C SHARES
---------------- ------------------- -------------------
<S> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES+
Maximum Sales Load Imposed on
Purchases (as a percentage of
offering price)...................... 3% None None
Maximum Deferred Sales Load (as a
percentage of original purchase price
or redemption proceeds, whichever is
lower)............................... None 5% during the first 1% on redemptions
year, decreasing by made within one
1% annually to 1% year of purchase
in the fifth and
sixth years and 0%
the seventh year*
Maximum Sales Load Imposed on
Reinvested Dividends................. None None None
Redemption Fees....................... None None None
Exchange Fee.......................... None None None
</TABLE>
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES CLASS C SHARES
---------------- ------------------- -------------------
<S> <C> <C> <C>
ANNUAL FUND OPERATING EXPENSES**
(as a percentage of average net assets)
Management Fees....................... .50% .50% .50%
12b-1 Fees (After Reduction).......... .10%++ .50% .75%++
Other Expenses........................ .25% .25% .25%
--- --- ---
Total Fund Operating Expenses (After
Reduction)........................... .85% 1.25% 1.50%
--- --- ---
--- --- ---
</TABLE>
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
-------- -------- -------- ----------
<S> <C> <C> <C> <C>
EXAMPLE
You would pay the following expenses on a $1,000 investment, assuming (1)
5% annual return and (2) redemption at the end of each time period:
Class A............................................................... $ 38 $ 56 $ 76 $132
Class B............................................................... $ 63 $ 70 $ 79 $135
Class C............................................................... $ 25 $ 47 $ 82 $179
You would pay the following expenses on the same investment, assuming no
redemption:
Class A............................................................... $ 38 $ 56 $ 76 $132
Class B............................................................... $ 13 $ 40 $ 69 $135
Class C............................................................... $ 15 $ 47 $ 82 $179
</TABLE>
The above examples are based on restated data for the Series' fiscal year
ended August 31, 1997. THE EXAMPLES SHOULD NOT BE CONSIDERED A
REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER
OR LESS THAN THOSE SHOWN.
The purpose of this table is to assist investors in understanding the
various costs and expenses that an investor in the Series will bear,
whether directly or indirectly. For more complete descriptions of the
various costs and expenses, see "How the Fund is Managed." "Other
Expenses" includes operating expenses of the Series, such as Trustees' and
professional fees, registration fees, reports to shareholders and transfer
agency and custodian fees.
- ---------------
* Class B shares will automatically convert to Class A shares approximately
seven years after purchase. See "Shareholder Guide--Conversion
Feature--Class B Shares."
** The expense information in the table has been restated to reflect current
fees. Effective September 1, 1997, PIFM eliminated its management fee
waiver (.05 of 1%). See "How the Fund is Managed--Manager--Fee Waivers."
+ Pursuant to rules of the National Association of Securities Dealers, Inc.,
the aggregate initial sales charges, deferred sales charges and asset-based
sales charges on shares of the Series may not exceed 6.25% of total gross
sales, subject to certain exclusions. This 6.25% limitation is imposed on
each class of the Series rather than on a per shareholder basis. Therefore,
long-term shareholders of the Series may pay more in total sales charges
than the economic equivalent of 6.25% of such shareholders' investment in
such shares. See "How the Fund is Managed--Distributor."
++ Although the Class A and Class C Distribution and Service Plans provide that
the Fund may pay a distribution fee of up to .30 of 1% and 1% per annum of
the average daily net assets of the Class A and Class C shares,
respectively, the Distributor has agreed to limit its distribution fees
with respect to the Class A and Class C shares of the Series to no more
than .10 of 1% and .75 of 1% of the average daily net asset value of the
Class A shares and Class C shares, respectively, for the fiscal year ending
August 31, 1998. Total Fund Operating Expenses (Before Waiver) of the Class
A and Class C shares without such limitations would be 1.05% and 1.75%,
respectively. See "How the Fund is Managed--Distributor."
4
<PAGE>
FINANCIAL HIGHLIGHTS
(FOR A SHARE OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT EACH OF THE INDICATED
PERIODS)
(CLASS A SHARES)
The following financial highlights, for the fiscal year ended August 31, 1997,
have been audited by Price Waterhouse LLP, independent accountants, and by
Deloitte and Touche LLP, independent auditors, for the four years ended August
31, 1996. Each of the respective reports by Price Waterhouse LLP and Deloitte &
Touche LLP on such financial statements was unqualified. This information should
be read in conjunction with the financial statements and the notes thereto,
which appear in the Statement of Additional Information. The following financial
highlights contain selected data for a Class A share of beneficial interest
outstanding, total return, ratios to average net assets and other supplemental
data for the periods indicated. This information is based on data contained in
the financial statements. Further performance information is contained in the
annual report, which may be obtained without charge. See "Shareholder
Guide--Shareholder Services--Reports to Shareholders."
<TABLE>
<CAPTION>
CLASS A
--------------------------------------------------------------------------------------------
JANUARY 22,
1990 (a)
YEAR ENDED AUGUST 31, THROUGH
------------------------------------------------------------------------- AUGUST 31,
1997 1996 1995 1994 1993 1992 1991 1990
------- ------- ------- ------- ------- ------- ------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning of
period...................... $ 11.70 $ 11.92 $ 11.72 $ 12.38 $ 11.69 $ 11.17 $ 10.71 $ 10.85
------- ------- ------- ------- ------- ------- ------- ------
INCOME FROM INVESTMENT
OPERATIONS
Net investment income......... .63(b) .63(b) .65(b) .66 .69 .70 .70 .47
Net realized and unrealized
gain (loss) on
investment transactions..... .27 (.15) .20 (.66) .69 .52 .46 (.14)
------- ------- ------- ------- ------- ------- ------- ------
Total from investment
operations.................. .90 .48 .85 -- 1.38 1.22 1.16 .33
------- ------- ------- ------- ------- ------- ------- ------
LESS DISTRIBUTIONS
Dividends from net investment
income...................... (.63) (.63) (.65) (.66) (.69) (.70) (.70) (.47)
Distributions in excess of net
investment income........... --(e) -- -- -- -- -- -- --
Distributions from net
realized gains.............. (.02) (.07) -- -- -- -- -- --
------- ------- ------- ------- ------- ------- ------- ------
Total distributions........... (.65) (.70) (.65) (.66) (.69) (.70) (.70) (.47)
------- ------- ------- ------- ------- ------- ------- ------
Net asset value, end of
period...................... $ 11.95 $ 11.70 $ 11.92 $ 11.72 $ 12.38 $ 11.69 $ 11.17 $ 10.71
------- ------- ------- ------- ------- ------- ------- ------
------- ------- ------- ------- ------- ------- ------- ------
TOTAL RETURN(d):.............. 7.92% 4.02% 7.59% (0.01)% 12.12% 11.26% 11.06% 2.58%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(000)....................... $50,977 $49,851 $51,132 $ 4,749 $ 4,647 $ 2,095 $ 923 $ 462
Average net assets (000)...... $51,641 $51,205 $29,904 $ 4,733 $ 2,904 $ 1,289 $ 615 $ 289
Ratios to average net assets:
Expenses, including
distribution fee........... .80%(b) .80%(b) .83%(b) .84% .84% .81% .93% .96%(c)
Expenses, excluding
distribution fee........... .70%(b) .70%(b) .73%(b) .74% .74% .71% .83% .86%(c)
Net investment income....... 5.37%(b) 5.27%(b) 5.50%(b) 5.45% 5.73% 6.34% 6.34% 6.51%(c)
Portfolio turnover rate....... 22% 35% 38% 20% 28% 37% 37% 24%
</TABLE>
- ---------------
(a) Commencement of offering of Class A shares.
(b) Net of management fee waiver.
(c) Annualized.
(d) Total return does not consider the effects of sales loads. Total
return is calculated assuming a purchase of shares on the first day
and a sale on the last day of each period reported and includes
reinvestment of dividends. Total returns for periods of less than a
full year are not annualized.
(e) Less than $.005 per share.
5
<PAGE>
FINANCIAL HIGHLIGHTS
(FOR A SHARE OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT EACH OF THE INDICATED
PERIODS)
(CLASS B SHARES)
The following financial highlights, for the fiscal year ended August 31, 1997,
have been audited by Price Waterhouse LLP, independent accountants, and by
Deloitte and Touche LLP, independent auditors, for the four years ended August
31, 1996. Each of the respective reports by Price Waterhouse LLP and Deloitte &
Touche LLP on such financial statements was unqualified. This information should
be read in conjunction with the financial statements and the notes thereto,
which appear in the Statement of Additional Information. The following financial
highlights contain selected data for a Class B share of beneficial interest
outstanding, total return, ratios to average net assets and other supplemental
data for the periods indicated. This information is based on data contained in
the financial statements. Further performance information is contained in the
annual report, which may be obtained without charge. See "Shareholder
Guide--Shareholder Services--Reports to Shareholders."
<TABLE>
<CAPTION>
CLASS B
-------------------------------------------------------------------------------------------------------
YEAR ENDED AUGUST 31,
-------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993 1992 1991 1990 1989 (b) 1988
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of
year.............. $ 11.71 $ 11.93 $ 11.73 $ 12.38 $ 11.70 $ 11.18 $ 10.71 $ 10.85 $10.53 $ 10.89
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
INCOME FROM
INVESTMENT
OPERATIONS
Net investment
income............ .59(a) .58(a) .60(a) .61 .65 .65 .65 .66 .67 .71
Net realized and
unrealized gain
(loss) on
investment
transactions...... .27 (.15) .20 (.65) .68 .52 .47 (.14) .32 (.36)
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total from
investment
operations........ .86 .43 .80 (.04) 1.33 1.17 1.12 .52 .99 .35
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
LESS DISTRIBUTIONS
Dividends from net
investment
income............ (.59) (.58) (.60) (.61) (.65) (.65) (.65) (.66) (.67) (.71)
Distributions in
excess of net
investment
income............ --(d) -- -- -- -- -- -- -- -- --
Distributions from
net realized
gains............. (.02) (.07) -- -- -- -- -- -- -- --
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total
distributions..... (.61) (.65) (.60) (.61) (.65) (.65) (.65) (.66) (.67) (.71)
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Net asset value, end
of year........... $ 11.96 $ 11.71 $ 11.93 $ 11.73 $ 12.38 $ 11.70 $ 11.18 $ 10.71 $10.85 $ 10.53
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
TOTAL RETURN(c):.... 7.49% 3.61% 7.16% (0.33)% 11.58% 10.79% 10.74% 4.87% 9.68% 3.52%
RATIOS/SUPPLEMENTAL
DATA:
Net assets, end of
year (000)........ $40,770 $50,998 $62,805 $118,270 $121,937 $102,199 $92,572 $89,183 $87,426 $73,972
Average net assets
(000)............. $45,503 $57,909 $85,410 $121,365 $110,053 $96,178 $90,437 $89,302 $81,613 $72,333
Ratios to average
net assets:
Expenses,
including
distribution
fee.............. 1.20%(a) 1.20%(a) 1.22%(a) 1.24% 1.24% 1.21% 1.33% 1.32% 1.32% 1.24%
Expenses,
excluding
distribution
fee.............. .70%(a) .70%(a) .72%(a) .74% .74% .71% .83% .84% .84% .75%
Net investment
income........... 4.97%(a) 4.87%(a) 5.27%(a) 5.05% 5.33% 5.73% 5.94% 6.08% 6.17% 6.79%
Portfolio turnover
rate.............. 22% 35% 38% 20% 28% 37% 37% 24% 41% 127%
</TABLE>
- -----------------
(a) Net of management fee waiver.
(b) On December 31, 1988, Prudential Mutual Fund Management, Inc.
succeeded The Prudential Insurance Company of America as manager of
the Fund.
(c) Total return does not consider the effects of sales loads. Total
return is calculated assuming a purchase of shares on the first day
and a sale on the last day of each year reported and includes
reinvestment of dividends and distributions.
(d) Less than $.005 per share.
6
<PAGE>
FINANCIAL HIGHLIGHTS
(FOR A SHARE OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT EACH OF THE INDICATED
PERIODS)
(CLASS C SHARES)
The following financial highlights, for the fiscal year ended August 31, 1997,
have been audited by Price Waterhouse LLP, independent accountants, and by
Deloitte and Touche LLP, independent auditors, for the two years ended August
31, 1996 and for the period from August 1, 1994 through August 31, 1994. Each of
the respective reports by Price Waterhouse LLP and Deloitte & Touche LLP on such
financial statements was unqualified. This information should be read in
conjunction with the financial statements and the notes thereto, which appear in
the Statement of Additional Information. The following financial highlights
contain selected data for a Class C share of beneficial interest outstanding,
total return, ratios to average net assets and other supplemental data for the
periods indicated. This information is based on data contained in the financial
statements. Further performance information is contained in the annual report,
which may be obtained without charge. See "Shareholder Guide-- Shareholder
Services--Reports to Shareholders."
<TABLE>
<CAPTION>
CLASS C
------------------------------------------------------------
AUGUST 1,
YEAR ENDED 1994 (a)
AUGUST 31, THROUGH
----------------------------------- AUGUST 31,
1997 1996 1995 1994
------- ------- ------- ------------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period........................ $ 11.71 $ 11.93 $ 11.73 $ 11.75
------- ------- ------- ------
INCOME FROM INVESTMENT OPERATIONS
Net investment income....................................... .56(b) .55(b) .57(b) .05
Net realized and unrealized gain (loss) on investment
transactions.............................................. .27 (.15) .20 (.02)
------- ------- ------- ------
Total from investment operations............................ .83 .40 .77 .03
------- ------- ------- ------
LESS DISTRIBUTIONS
Dividends from net investment income........................ (.56) (.55) (.57) (.05)
Distributions in excess of net investment income............ --(e) -- -- --
Distributions from net realized gains....................... (.02) (.07) -- --
------- ------- ------- ------
Total distributions......................................... (.58) (.62) (.57) (.05)
------- ------- ------- ------
Net asset value, end of period.............................. $ 11.96 $ 11.71 $ 11.93 $ 11.73
------- ------- ------- ------
------- ------- ------- ------
TOTAL RETURN(d):............................................ 7.22% 3.36% 6.89% 0.18%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)............................. $ 71 $ 44 $ 126 $ 5
Average net assets (000).................................... $ 57 $ 97 $ 61 $ 2
Ratios to average net assets:
Expenses, including distribution fee...................... 1.45%(b) 1.45%(b) 1.49%(b) 2.28%(c)
Expenses, excluding distribution fee...................... .70%(b) .70%(b) .74%(b) 1.53%(c)
Net investment income..................................... 4.72%(b) 4.62%(b) 4.76%(b) 4.73%(c)
Portfolio turnover rate..................................... 22% 35% 38% 20%
</TABLE>
- ------------
(a) Commencement of offering of Class C shares.
(b) Net of management fee waiver.
(c) Annualized.
(d) Total return does not consider the effects of sales loads. Total return
is calculated assuming a purchase of shares on the first day and a
sale on the last day of each period reported and includes reinvestment
of dividends. Total returns for periods of less than a full year are
not annualized.
(e) Less than $.005 per share.
7
<PAGE>
HOW THE FUND INVESTS
INVESTMENT OBJECTIVE AND POLICIES
PRUDENTIAL MUNICIPAL SERIES FUND (THE FUND) IS AN OPEN-END, MANAGEMENT
INVESTMENT COMPANY, OR MUTUAL FUND, CONSISTING OF THIRTEEN SEPARATE SERIES. EACH
OF THESE SERIES IS MANAGED INDEPENDENTLY. THE OHIO SERIES (THE SERIES) IS
DIVERSIFIED AND ITS INVESTMENT OBJECTIVE IS TO MAXIMIZE CURRENT INCOME THAT IS
EXEMPT FROM OHIO STATE AND FEDERAL INCOME TAXES CONSISTENT WITH THE PRESERVATION
OF CAPITAL AND, IN CONJUNCTION THEREWITH, THE SERIES MAY INVEST IN DEBT
SECURITIES WITH THE POTENTIAL FOR CAPITAL GAIN. See "Investment Objectives and
Policies" in the Statement of Additional Information.
THE SERIES' INVESTMENT OBJECTIVE IS A FUNDAMENTAL POLICY AND, THEREFORE, MAY
NOT BE CHANGED WITHOUT THE APPROVAL OF THE HOLDERS OF A MAJORITY OF THE SERIES'
OUTSTANDING VOTING SECURITIES AS DEFINED IN THE INVESTMENT COMPANY ACT OF 1940,
AS AMENDED (THE INVESTMENT COMPANY ACT). THE SERIES' POLICIES THAT ARE NOT
FUNDAMENTAL MAY BE MODIFIED BY THE TRUSTEES.
THE SERIES WILL INVEST PRIMARILY IN OHIO STATE, MUNICIPAL AND LOCAL GOVERNMENT
OBLIGATIONS AND OBLIGATIONS OF OTHER QUALIFYING ISSUERS, SUCH AS ISSUERS LOCATED
IN PUERTO RICO, THE VIRGIN ISLANDS AND GUAM, WHICH PAY INCOME EXEMPT, IN THE
OPINION OF COUNSEL, FROM OHIO STATE AND FEDERAL INCOME TAXES (OHIO OBLIGATIONS).
THERE CAN BE NO ASSURANCE THAT THE SERIES WILL BE ABLE TO ACHIEVE ITS INVESTMENT
OBJECTIVE.
As with an investment in any mutual fund, an investment in this Series can
decrease and you can lose money.
Interest on certain municipal obligations may be a preference item for
purposes of the federal alternative minimum tax. The Series may invest without
limit in municipal obligations that are "private activity bonds" (as defined in
the Internal Revenue Code) the interest on which would be a preference item for
purposes of the federal alternative minimum tax. See "Taxes, Dividends and
Distributions." Under Ohio law, dividends paid by the Series are exempt from
Ohio personal income tax and municipal and school district income taxes in Ohio
for resident individuals to the extent they are properly attributable to
interest payments on Ohio Obligations. Ohio Obligations could include general
obligation bonds of the State, counties, cities, towns, etc., revenue bonds of
utility systems, highways, bridges, port and airport facilities, colleges,
hospitals, etc., and industrial development and pollution control bonds. The
Series will invest in long-term obligations, and the dollar-weighted average
maturity of the Series' portfolio will generally range between 10-20 years. The
Series also may invest in certain short-term, tax-exempt notes such as Tax
Anticipation Notes, Revenue Anticipation Notes, Bond Anticipation Notes,
Construction Loan Notes and variable and floating rate demand notes.
Generally, municipal obligations with longer maturities produce higher yields
and are subject to greater price fluctuations as a result of changes in interest
rates (market risk) than municipal obligations with shorter maturities. The
prices of municipal obligations vary inversely with interest rates. Interest
rates are currently much lower than in recent years. As a general matter, bond
prices and the Series' net asset value will vary inversely with interest rate
fluctuations. If rates were to rise sharply, the prices of bonds in the Series'
portfolio might be adversely affected.
THE SERIES MAY INVEST ITS ASSETS IN FLOATING RATE AND VARIABLE RATE
SECURITIES, INCLUDING PARTICIPATION INTERESTS THEREIN AND INVERSE FLOATERS.
There is no limit on the amount of such securities that the Series may purchase.
Floating rate securities normally have a rate of interest which is set as a
specific percentage of a designated base rate, such as the rate on Treasury
bonds or bills or the prime rate at a major commercial bank. The interest rate
on floating rate securities changes periodically when there is a change in the
designated base interest rate. Variable rate securities provide for a specified
periodic adjustment in the interest rate based on prevailing market rates and
generally allow the Series to demand payment of the obligation on short notice
at par plus accrued interest, which amount may be more or less than the amount
the Series paid for them. An inverse floater is a debt instrument with a
floating or variable interest rate that moves in the opposite direction of the
interest rate on another security or the value of an index. Changes in the
interest rate on the other security or index inversely affect the residual
interest rate paid on the inverse floater, with the result that the inverse
floater's price will be considerably more volatile than that of a fixed rate
bond. The market for inverse floaters is relatively new.
8
<PAGE>
THE SERIES MAY ALSO INVEST IN MUNICIPAL LEASE OBLIGATIONS. A MUNICIPAL LEASE
OBLIGATION IS A MUNICIPAL SECURITY THE INTEREST ON AND PRINCIPAL OF WHICH IS
PAYABLE OUT OF LEASE PAYMENTS MADE BY THE PARTY LEASING THE FACILITIES FINANCED
BY THE ISSUE. Typically, municipal lease obligations are issued by a state or
municipal financing authority to provide funds for the construction of
facilities (E.G., schools, dormitories, office buildings or prisons) or the
acquisition of equipment. The facilities are typically used by the state or
municipality pursuant to a lease with a financing authority. Certain municipal
lease obligations may trade infrequently. Accordingly, the investment adviser
will monitor the liquidity of municipal lease obligations under the supervision
of the Trustees. Municipal lease obligations will not be considered illiquid for
purposes of the Series' 15% limitation on illiquid securities provided the
investment adviser determines that there is a readily available market for such
securities. See "Other Investments and Policies--Illiquid Securities" below.
THE SERIES WILL INVEST AT LEAST 70% OF ITS TOTAL ASSETS IN OHIO OBLIGATIONS
WHICH, AT THE TIME OF PURCHASE, ARE RATED WITHIN THE FOUR HIGHEST QUALITY GRADES
AS DETERMINED BY 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), 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 ANOTHER NATIONALLY
RECOGNIZED STATISTICAL RATING ORGANIZATION (NRSRO) OR, IF UNRATED, WILL POSSESS
CREDITWORTHINESS, IN THE OPINION OF THE INVESTMENT ADVISER, COMPARABLE TO SUCH
"INVESTMENT GRADE" RATED SECURITIES.
THE SERIES MAY ALSO INVEST UP TO 30% OF ITS TOTAL ASSETS IN OHIO OBLIGATIONS
RATED BELOW Baa BY MOODY'S OR BELOW BBB BY S&P OR A COMPARABLE RATING OF ANOTHER
NRSRO OR, IF NON-RATED, OF COMPARABLE QUALITY, IN THE OPINION OF THE FUND'S
INVESTMENT ADVISER, BASED ON ITS CREDIT ANALYSIS. Securities rated Baa by
Moody's and BBB by S&P are described as being investment grade but are also
characterized as having speculative characteristics. Securities rated below Baa
by Moody's and below BBB by S&P are considered speculative. See "Description of
Security Ratings" in the Appendix. Such lower-rated high yield securities are
commonly referred to as "junk bonds." Such securities generally offer a higher
current yield than those in the higher rating categories but also involve
greater price volatility and risk of loss of principal and income. The
investment adviser will attempt to manage risk and enhance yield through credit
analysis and careful security selection. See "Risk Factors Relating to Investing
in High Yield Municipal Obligations" below. Subsequent to its purchase by the
Series, a municipal obligation may be assigned a lower rating or cease to be
rated. Such an event would not require the elimination of the issue from the
portfolio, but the investment adviser will consider such an event in determining
whether the Series should continue to hold the security in its portfolio. Many
issuers of lower-quality bonds choose not to have their obligations rated and
the Series may invest in such unrated securities. Investors should carefully
consider the relative risks associated with investments in securities which
carry lower ratings and in comparable non-rated securities.
During the year ended August 31, 1997, the monthly dollar weighted average
ratings of the debt obligations held by the Series, expressed as a percentage of
the Series' total assets, were as follows:
<TABLE>
<CAPTION>
PERCENTAGE OF
RATINGS TOTAL INVESTMENTS
- --------------- -----------------
<S> <C>
AAA/Aaa 62.93%
AA/Aa 10.46%
A/A 9.62%
BBB/Baa 8.30%
BB/Ba 0.09%
Unrated
AAA/Aaa 1.14%
AA/Aa 0.00%
A/A 0.76%
BBB/Baa 6.49%
BB/Ba 0.12%
B/B 0.09%
</TABLE>
From time to time, the Series may own the majority of a municipal issue. Such
majority-owned holdings may present market and credit risks.
9
<PAGE>
The Series may purchase Ohio Obligations which, in the opinion of the
investment adviser, offer the opportunity for capital appreciation. This may
occur, for example, when the investment adviser believes that the issuer of a
particular Ohio Obligation might receive an upgraded credit standing, thereby
increasing the market value of the bonds it has issued or when the investment
adviser believes that interest rates might decline.
UNDER NORMAL MARKET CONDITIONS, THE SERIES WILL ATTEMPT TO INVEST
SUBSTANTIALLY ALL OF THE VALUE OF ITS ASSETS IN OHIO OBLIGATIONS. As a matter of
fundamental policy, during normal market conditions the Series' assets will be
invested so that at least 80% of the income will be exempt from Ohio State and
federal income taxes or the Series will have at least 80% of its total assets
invested in Ohio Obligations. During abnormal market conditions or to provide
liquidity, the Series may hold cash or cash equivalents or investment grade
taxable obligations, including obligations that are exempt from federal, but not
state, taxation and the Series may invest in tax-free cash equivalents, such as
floating rate demand notes, tax-exempt commercial paper and general obligation
and revenue notes or in taxable cash equivalents, such as certificates of
deposit, bankers acceptances and time deposits or other short-term taxable
investments such as repurchase agreements. When, in the opinion of the
investment adviser, abnormal market conditions require a temporary defensive
position, the Series may invest more than 20% of the value of its assets in debt
securities other than Ohio Obligations or may invest its assets so that more
than 20% of the income is subject to Ohio State or federal income taxes. The
Series will treat an investment in a municipal bond refunded with escrowed U.S.
Government securities as U.S. Government securities for purposes of the
Investment Company Act's diversification requirements provided certain
conditions are met. See "Investment Objectives and Policies--In General" in the
Statement of Additional Information.
THE SERIES MAY ACQUIRE PUT OPTIONS (PUTS) GIVING THE SERIES THE RIGHT TO SELL
SECURITIES HELD IN THE SERIES' PORTFOLIO AT A SPECIFIED EXERCISE PRICE ON A
SPECIFIED DATE. Such puts may be acquired for the purpose of protecting the
Series from a possible decline in the market value of the security to which the
put applies in the event of interest rate fluctuations or, in the case of
liquidity puts, for the purpose of shortening the effective maturity of the
underlying security. The aggregate value of premiums paid to acquire puts held
in the Series' portfolio (other than liquidity puts) may not exceed 10% of the
net asset value of the Series. The acquisition of a put may involve an
additional cost to the Series by payment of a premium for the put, by payment of
a higher purchase price for securities to which the put is attached or through a
lower effective interest rate.
In addition, there is a credit risk associated with the purchase of puts in
that the issuer of the put may be unable to meet its obligation to purchase the
underlying security. Accordingly, the Series will acquire puts only under the
following circumstances: (1) the put is written by the issuer of the underlying
security and such security is rated within the four highest quality grades as
determined by 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 highest quality grades; or (3) the put is
backed by a letter of credit or similar financial guarantee issued by a person
having securities outstanding which are rated within the two highest quality
grades of an NRSRO.
THE SERIES MAY PURCHASE MUNICIPAL OBLIGATIONS ON A "WHEN-ISSUED" OR "DELAYED
DELIVERY" BASIS, IN EACH CASE WITHOUT LIMIT. When municipal obligations are
offered on a when-issued or delayed delivery basis, the price and coupon rate
are fixed at the time the commitment to purchase is made, but delivery and
payment for the securities take place at a later date. The purchase price for
such securities includes interest accrued during the period between purchase and
settlement and, therefore, no interest accrues to the economic benefit of the
purchaser during such period. In the case of purchases by the Series, the price
that the Series is required to pay on the settlement date may be in excess of
the market value of the municipal obligations on that date. While securities may
be sold prior to the settlement date, the Series intends to purchase these
securities with the purpose of actually acquiring them unless a sale would be
desirable for investment reasons. At the time the Series makes the commitment to
purchase a municipal obligation on a when-issued or delayed delivery basis, it
will record the transaction and reflect the value of the obligation each day in
determining its net asset value. This value may fluctuate from day to day in the
same manner as values of municipal obligations otherwise held by the Series. If
the seller defaults in the sale, the Series could fail to realize the
appreciation, if any, that had occurred. The Series will establish a segregated
account with its Custodian in which it will maintain cash, U.S. Government
securities, equity securities or other liquid, unencumbered assets,
marked-to-market daily, equal in value to its commitments for when-issued or
delayed delivery securities.
10
<PAGE>
THE SERIES MAY ALSO PURCHASE MUNICIPAL FORWARD CONTRACTS. A municipal forward
contract is a municipal security which is purchased on a when-issued basis with
delivery taking place up to five years from the date of purchase. No interest
will accrue on the security prior to the delivery date. The investment adviser
will monitor the liquidity, value, credit quality and delivery of the security
under the supervision of the Trustees.
THE SERIES MAY PURCHASE SECONDARY MARKET INSURANCE ON OHIO OBLIGATIONS WHICH
IT HOLDS OR ACQUIRES. Secondary market insurance would be reflected in the
market value of the municipal obligation purchased and may enable the Series to
dispose of a defaulted obligation at a price similar to that of comparable
municipal obligations which are not in default.
Insurance is not a substitute for the basic credit of an issuer, but
supplements the existing credit and provides additional security therefor. While
insurance coverage for the Ohio Obligations held by the Series reduces credit
risk by providing that the insurance company will make timely payment of
principal and interest if the issuer defaults on its obligation to make such
payment, it does not afford protection against fluctuation in the price, I.E.,
the market value, of the municipal obligations caused by changes in interest
rates and other factors, nor in turn against fluctuations in the net asset value
of the shares of the Series.
RISK FACTORS RELATING TO INVESTING IN HIGH YIELD MUNICIPAL OBLIGATIONS.
FIXED-INCOME SECURITIES ARE SUBJECT TO THE RISK OF AN ISSUER'S INABILITY TO MEET
PRINCIPAL AND INTEREST PAYMENTS ON THE OBLIGATIONS (CREDIT RISK) AND MAY ALSO BE
SUBJECT TO PRICE VOLATILITY DUE TO SUCH FACTORS AS INTEREST RATE SENSITIVITY,
MARKET PERCEPTION OF THE CREDITWORTHINESS OF THE ISSUER AND GENERAL MARKET
LIQUIDITY (MARKET RISK). Lower-rated or unrated (I.E., high yield) securities,
commonly known as "junk bonds," are more likely to react to developments
affecting market and credit risk than are more highly rated securities, which
react primarily to movements in the general level of interest rates. The
investment adviser will perform its own investment analysis and will not rely
principally on the ratings assigned by the rating services, although such
ratings will be considered by the investment adviser. The investment adviser
will consider, among other things, credit risk and market risk, as well as the
financial history and condition, the prospects and the management of an issuer
in selecting securities for the Series' portfolio. The achievement of the
Series' investment objective may be more dependent on the investment adviser's
credit analysis than is the case when investing in only higher quality bonds.
Investors should carefully consider the relative risks of investing in high
yield municipal obligations and understand that such securities are not
generally meant for short-term investing and that yields on junk bonds will
fluctuate over time.
The amount of high yield securities outstanding has proliferated recently in
conjunction with the decline in creditworthiness of many obligors on municipal
debt, particularly health care providers and certain governmental bodies. An
economic downturn could severely affect the ability of highly leveraged issuers
to service their debt obligations or to repay their obligations upon maturity.
In addition, the secondary market for high yield securities, which is
concentrated in relatively few market makers, may not be as liquid as the
secondary market for more highly rated securities and, from time to time, it may
be more difficult to value high yield securities than more highly rated
securities, and the judgment of the Board of Trustees and the investment adviser
may play a greater role in valuation because there is less reliable objective
data available. Under adverse market or economic conditions, the secondary
market for high yield securities could contract further, independent of any
specific adverse changes in the condition of a particular issuer. As a result,
the investment adviser could find it more difficult to sell these securities or
may be able to sell the securities only at prices lower than if such securities
were widely traded. Prices realized upon the sale of such lower rated or unrated
securities, under these circumstances, may be less than the prices used in
calculating the Series' net asset value. If the investment adviser becomes
involved in activities such as reorganizations of obligors of troubled
investments held by the Series, this may prevent the Series from disposing of
the securities, due to its possession of material, non-public information
concerning the obligor.
LOWER-RATED OR UNRATED DEBT OBLIGATIONS ALSO PRESENT RISKS BASED ON PAYMENT
EXPECTATIONS. If an issuer calls the obligation for redemption, the Series may
have to replace the security with a lower-yielding security, resulting in a
decreased return for investors. If the Series experiences unexpected net
redemptions, it may be forced to sell its higher quality securities, resulting
in a decline in the overall credit quality of the Series' portfolio and
increasing the exposure of the Series to the risks of high yield securities.
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FUTURES CONTRACTS AND OPTIONS THEREON
THE SERIES IS AUTHORIZED TO PURCHASE AND SELL CERTAIN DERIVATIVES, INCLUDING
FINANCIAL FUTURES CONTRACTS (FUTURES CONTRACTS) AND OPTIONS THEREON FOR THE
PURPOSE OF HEDGING ITS PORTFOLIO SECURITIES AGAINST FLUCTUATIONS IN VALUE CAUSED
BY CHANGES IN PREVAILING MARKET INTEREST RATES AND HEDGING AGAINST INCREASES IN
THE COST OF SECURITIES THE SERIES INTENDS TO PURCHASE. THE SUCCESSFUL USE OF
FUTURES CONTRACTS AND OPTIONS THEREON BY THE SERIES INVOLVES ADDITIONAL
TRANSACTION COSTS AND IS SUBJECT TO VARIOUS RISKS AND DEPENDS UPON THE
INVESTMENT ADVISER'S ABILITY TO PREDICT THE DIRECTION OF THE MARKET (INCLUDING
INTEREST RATES). THE SERIES, AND THUS INVESTORS, MAY LOSE MONEY THROUGH ANY
UNSUCCESSFUL USE OF THESE STRATEGIES.
A FUTURES CONTRACT OBLIGATES THE SELLER OF THE CONTRACT TO DELIVER TO THE
PURCHASER OF THE CONTRACT CASH EQUAL TO A SPECIFIC DOLLAR AMOUNT TIMES THE
DIFFERENCE BETWEEN THE VALUE OF A SPECIFIC FIXED-INCOME SECURITY OR INDEX AT THE
CLOSE OF THE LAST TRADING DAY OF THE CONTRACT AND THE PRICE AT WHICH THE
AGREEMENT IS MADE. No physical delivery of the underlying securities is made.
The Series will engage in transactions in only those futures contracts and
options thereon that are traded on a commodities exchange or a board of trade.
The Series intends to engage in futures contracts and options thereon as a
hedge against changes, resulting from market conditions, in the value of
securities which are held in the Series' portfolio or which the Series intends
to purchase, in accordance with the rules and regulations of the Commodity
Futures Trading Commission (the CFTC). The Series also intends to engage in such
transactions when they are economically appropriate for the reduction of risks
inherent in the ongoing management of the Series.
THE SERIES MAY NOT PURCHASE OR SELL FUTURES CONTRACTS OR OPTIONS THEREON IF,
IMMEDIATELY THEREAFTER, (i) THE SUM OF INITIAL AND NET CUMULATIVE VARIATION
MARGIN ON OUTSTANDING FUTURES CONTRACTS, TOGETHER WITH PREMIUMS PAID FOR OPTIONS
THEREON, WOULD EXCEED 20% OF THE TOTAL ASSETS OF THE SERIES, OR (ii) IN THE CASE
OF RISK MANAGEMENT TRANSACTIONS, THE SUM OF THE AMOUNT OF INITIAL MARGIN
DEPOSITS ON THE SERIES' FUTURES POSITIONS AND PREMIUMS PAID FOR OPTIONS THEREON
WOULD EXCEED 5% OF THE LIQUIDATION VALUE OF THE SERIES' TOTAL ASSETS. There are
no limitations on the percentage of the portfolio which may be hedged and no
limitations on the use of the Series' assets to cover futures contracts and
options thereon, except that the aggregate value of the obligations underlying
put options will not exceed 50% of the Series' assets. Certain requirements for
qualification as a regulated investment company under the Internal Revenue Code
may limit the Series' ability to engage in futures contracts and options
thereon. See "Distributions and Tax Information--Federal Taxation" in the
Statement of Additional Information.
Currently, futures contracts are available on several types of fixed-income
securities, including U.S. Treasury bonds and notes, three-month U.S. Treasury
bills and Eurodollars. Futures contracts are also available on a municipal bond
index, based on THE BOND BUYER Municipal Bond Index, an index of 40 actively
traded municipal bonds. The Series may also engage in transactions in other
futures contracts that become available, from time to time, in other
fixed-income securities or municipal bond indices and in other options on such
contracts if the investment adviser believes such contracts and options would be
appropriate for hedging the Series' portfolio.
THERE CAN BE NO ASSURANCE THAT VIABLE MARKETS WILL CONTINUE OR THAT A LIQUID
SECONDARY MARKET WILL EXIST TO TERMINATE ANY PARTICULAR FUTURES CONTRACT AT ANY
SPECIFIC TIME. If it is not possible to close a futures position entered into by
the Series, the Series will continue to be required to make daily cash payments
of variation margin in the event of adverse price movements. In such a
situation, if the Series had insufficient cash, it might have to sell portfolio
securities to meet daily variation margin requirements at a time when it might
be disadvantageous to do so. The inability to close futures positions also could
have an adverse impact on the ability of the Series to hedge effectively. There
is also a risk of loss by the Series of margin deposits in the event of
bankruptcy of a broker with whom the Series has an open position in a futures
contract.
THE SUCCESSFUL USE OF FUTURES CONTRACTS AND OPTIONS THEREON BY THE SERIES IS
SUBJECT TO VARIOUS ADDITIONAL RISKS. Any use of futures transactions involves
the risk of imperfect correlation in movements in the price of futures contracts
and movements
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in interest rates and, in turn, the prices of the securities that are the
subject of the hedge. If the price of the futures contract moves more or less
than the price of the security that is the subject of the hedge, the Series will
experience a gain or loss that will not be completely offset by movements in the
price of the security. The risk of imperfect correlation is greater where the
securities underlying futures contracts are taxable securities (rather than
municipal securities), are issued by companies in different market sectors or
have different maturities, ratings or geographic mixes than the security being
hedged. In addition, the correlation may be affected by additions to or
deletions from the index which serves as the basis for a futures contract.
Finally, if the price of the security that is subject to the hedge were to move
in a favorable direction, the advantage to the Series would be partially offset
by the loss incurred on the futures contract.
SPECIAL CONSIDERATIONS
BECAUSE THE SERIES WILL INVEST AT LEAST 80% OF THE VALUE OF ITS TOTAL ASSETS
IN OHIO OBLIGATIONS AND BECAUSE IT SEEKS TO MAXIMIZE INCOME DERIVED FROM OHIO
OBLIGATIONS, IT IS MORE SUSCEPTIBLE TO FACTORS ADVERSELY AFFECTING ISSUERS OF
OHIO OBLIGATIONS THAN IS A COMPARABLE MUNICIPAL BOND MUTUAL FUND THAT IS NOT
CONCENTRATED IN SUCH OBLIGATIONS TO THIS DEGREE. Ohio has encountered financial
difficulties over some prior years. While Ohio has faced revenue shortfalls, the
State has acted promptly in addressing budgetary shortfalls with spending
reductions and by tax adjustments. The State's 1994-95 biennium ended June 30,
1995 with a General Revenue Fund (GRF) ending balance of $928 million, of which
$535.2 million was transferred into the State's Budget Stabilization Fund (BSF),
a cash and budgetary management fund (which had a September 26, 1997 balance of
over $862 million). In accordance with the GRF Appropriations Act for the
1996-97 biennium passed on June 28, 1995 and promptly signed (after selective
vetoes) by the Governor, the significant June 30, 1995 GRF balance, after
leaving in the GRF an unreserved and undesignated balance of $70 million, was
transferred to other funds, including the BSF, school assistance funds and, in
anticipation of possible federal program changes, a human services stabilization
fund. All necessary GRF appropriations for State debt service and lease rental
payments then projected for the 1996-97 biennium were included in that
appropriations act. Fiscal years 1996 and 1997 proved to be another biennium of
positive results for the GRF, with a biennium-end fund balance of $862 million.
If either Ohio or any of its local governmental entities is unable to meet its
financial obligations, the income derived by the Series, the ability to preserve
or realize appreciation of the Series' capital and the Series' liquidity could
be adversely affected. See "Investment Objectives and Policies--Special
Considerations Regarding Investments in Tax-Exempt Securities" in the Statement
of Additional Information.
OTHER INVESTMENTS AND POLICIES
REPURCHASE AGREEMENTS
The Series may on occasion enter into repurchase agreements whereby the seller
of a security agrees to repurchase that security from the Series at a mutually
agreed-upon time and price. The period of maturity is usually quite short,
possibly overnight or a few days, although it may extend over a number of
months. The resale price is in excess of the purchase price, reflecting an
agreed-upon rate of return effective for the period of time the Series' money is
invested in the security. The Series' repurchase agreements will at all times be
fully collateralized in an amount at least equal to the resale price. The
instruments held as collateral are valued daily and if the value of the
instruments declines, the Series will require additional collateral. If the
seller defaults and the value of the collateral securing the repurchase
agreement declines, the Series may incur a loss. The Series participates in a
joint repurchase account with other investment companies managed by Prudential
Investments Fund Management LLC pursuant to an order of the Securities and
Exchange Commission (SEC).
BORROWING
The Series may borrow an amount equal to no more than 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 Series may
pledge up to 33 1/3% of the value of its total assets to secure these
borrowings. The Series will not purchase portfolio securities if its borrowings
exceed 5% of its total assets.
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PORTFOLIO TURNOVER
The Series does not expect to trade in securities for short-term gain. It is
anticipated that the annual portfolio turnover rate will not exceed 150%. The
portfolio turnover rate is calculated by dividing the lesser of sales or
purchases of portfolio securities by the average monthly value of the portfolio
securities, excluding securities having a maturity at the date of purchase of
one year or less.
ILLIQUID SECURITIES
The Series may hold up to 15% of its net assets in illiquid securities
including repurchase agreements which have a maturity of longer than seven days,
securities with legal or contractual restrictions on resale (restricted
securities) and securities that are not readily marketable. Restricted
securities eligible for resale pursuant to Rule 144A under the Securities Act of
1933, as amended (the Securities Act), privately placed commercial paper and
municipal lease obligations that have a readily available market are not
considered illiquid for the purposes of this limitation. The investment adviser
will monitor the liquidity of such restricted securities under the supervision
of the Trustees. The Series' investment in Rule 144A securities could have the
effect of increasing illiquidity to the extent that qualified institutional
buyers become, for a limited time, uninterested in purchasing Rule 144A
securities. See "Investment Objectives and Policies--Illiquid Securities" and
"Investment Restrictions" in the Statement of Additional Information. Repurchase
agreements subject to demand are deemed to have a maturity equal to the notice
period.
INVESTMENT RESTRICTIONS
The Series is subject to certain investment restrictions which, like its
investment objective, constitute fundamental policies. Fundamental policies
cannot be changed without the approval of the holders of a majority of the
Series' outstanding voting securities, as defined in the Investment Company Act.
See "Investment Restrictions" in the Statement of Additional Information.
HOW THE FUND IS MANAGED
THE FUND HAS TRUSTEES WHO, IN ADDITION TO OVERSEEING THE ACTIONS OF THE FUND'S
MANAGER, SUBADVISER AND DISTRIBUTOR, AS SET FORTH BELOW, DECIDE UPON MATTERS OF
GENERAL POLICY. THE FUND'S MANAGER CONDUCTS AND SUPERVISES THE DAILY BUSINESS
OPERATIONS OF THE FUND. THE FUND'S SUBADVISER FURNISHES DAILY INVESTMENT
ADVISORY SERVICES.
For the fiscal year ended August 31, 1997, total expenses of the Series as a
percentage of average net assets, net of fee waivers, were .80%, 1.20% and 1.45%
for the Series' Class A, Class B and Class C shares, respectively. See
"Financial Highlights."
MANAGER
PRUDENTIAL INVESTMENTS FUND MANAGEMENT LLC (PIFM OR THE MANAGER), GATEWAY
CENTER THREE, 100 MULBERRY STREET, NEWARK, NEW JERSEY 07102-4077, IS THE MANAGER
OF THE FUND AND IS COMPENSATED FOR ITS SERVICES AT AN ANNUAL RATE OF .50 OF 1%
OF THE AVERAGE DAILY NET ASSETS OF THE SERIES. PIFM is organized in New York as
a limited liability company. It is the successor to Prudential Mutual Fund
Management, Inc., which transferred its assets to PIFM in September 1996. For
the fiscal year ended August 31, 1997, the Series paid PIFM a management fee of
.45 of 1% of the Series' average net assets, after taking into account a
management fee waiver. See "Fee Waivers" below and "Manager" in the Statement of
Additional Information.
As of September 30, 1997, PIFM served as the manager to 41 open-end investment
companies, constituting all of the Prudential Mutual Funds, and as manager or
administrator to 22 closed-end investment companies with aggregate assets of
approximately $59.9 billion.
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UNDER THE MANAGEMENT AGREEMENT WITH THE FUND, PIFM MANAGES THE INVESTMENT
OPERATIONS OF EACH SERIES OF THE FUND AND ALSO ADMINISTERS THE FUND'S BUSINESS
AFFAIRS. See "Manager" in the Statement of Additional Information.
UNDER A SUBADVISORY AGREEMENT BETWEEN PIFM AND THE PRUDENTIAL INVESTMENT
CORPORATION (PIC), DOING BUSINESS AS PRUDENTIAL INVESTMENTS (PI, THE SUBADVISER
OR THE INVESTMENT ADVISER), PI FURNISHES INVESTMENT ADVISORY SERVICES IN
CONNECTION WITH THE MANAGEMENT OF THE FUND AND IS REIMBURSED BY PIFM FOR ITS
REASONABLE COSTS AND EXPENSES INCURRED IN PROVIDING SUCH SERVICES. Under the
Management Agreement, PIFM continues to have responsibility for all investment
advisory services and supervises PI's performance of such services.
The current portfolio manager of the Series is Christian Smith, a Vice
President of Prudential Investments. Mr. Smith has responsibility for the
day-to-day management of the portfolio. Mr. Smith has managed the portfolio
since 1991 and has been employed by PIC in various capacities since 1988.
PIFM and PIC are indirect, wholly-owned subsidiaries of The Prudential
Insurance Company of America (Prudential), a major diversified insurance and
financial services company, and are part of Prudential Investments, a business
group of Prudential.
FEE WAIVERS
PIFM may from time to time agree to waive all or a portion of its management
fee and subsidize certain operating expenses of the Series. Fee waivers and
expense subsidies will increase the Series' yield and total return. The Series
is not required to reimburse PIFM for such management fee waiver. Effective
September 1, 1997, PIFM discontinued its waiver of 10% of its management fee.
See "Fund Expenses."
DISTRIBUTOR
PRUDENTIAL SECURITIES INCORPORATED (PRUDENTIAL SECURITIES, PSI OR THE
DISTRIBUTOR), ONE SEAPORT PLAZA, NEW YORK, NEW YORK 10292, IS A CORPORATION
ORGANIZED UNDER THE LAWS OF THE STATE OF DELAWARE AND SERVES AS THE DISTRIBUTOR
OF THE CLASS A, CLASS B AND CLASS C SHARES OF THE SERIES. It is an indirect,
wholly-owned subsidiary of Prudential.
UNDER SEPARATE DISTRIBUTION AND SERVICE PLANS (THE CLASS A PLAN, THE CLASS B
PLAN AND THE CLASS C PLAN, COLLECTIVELY, THE PLANS) ADOPTED BY THE FUND UNDER
RULE 12b-1 UNDER THE INVESTMENT COMPANY ACT AND A DISTRIBUTION AGREEMENT (THE
DISTRIBUTION AGREEMENT), PRUDENTIAL SECURITIES (THE DISTRIBUTOR) INCURS THE
EXPENSES OF DISTRIBUTING THE CLASS A, CLASS B AND CLASS C SHARES OF THE SERIES.
These expenses include commissions and account servicing fees paid to, or on
account of, financial advisers of Prudential Securities and representatives of
Pruco Securities Corporation (Prusec), an affiliated broker-dealer, commissions
and account servicing fees paid to, or on account of, other broker-dealers or
financial institutions (other than national banks) which have entered into
agreements with the Distributor, advertising expenses, the cost of printing and
mailing prospectuses to potential investors and indirect and overhead costs of
Prudential Securities and Prusec associated with the sale of Series shares,
including lease, utility, communications and sales promotion expenses.
Under the Plans, the Series is obligated to pay distribution and/or service
fees to the Distributor as compensation for its distribution and service
activities, not as reimbursement for specific expenses incurred. If the
Distributor's expenses exceed its distribution and service fees, the Series will
not be obligated to pay any additional expenses. If the Distributor's expenses
are less than such distribution and service fees, it will retain its full fees
and realize a profit.
UNDER THE CLASS A PLAN, THE SERIES MAY PAY PRUDENTIAL SECURITIES FOR ITS
DISTRIBUTION-RELATED ACTIVITIES WITH RESPECT TO CLASS A SHARES AT AN ANNUAL RATE
OF UP TO .30 OF 1% OF THE AVERAGE DAILY NET ASSETS OF THE CLASS A SHARES OF THE
SERIES. The Class A Plan provides that (i) up to .25 of 1% of the average daily
net assets of the Class A shares may be used to pay for personal service and/or
the maintenance of shareholder accounts (service fee) and (ii) total
distribution fees (including the service fee of .25 of 1%) may not exceed .30 of
1% of the average daily net assets of the Class A shares. Prudential Securities
has agreed to limit its distribution-related fees payable under the Class A Plan
to .10 of 1% of the average daily net assets of the Class A shares for the
fiscal year ending August 31, 1998.
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UNDER THE CLASS B AND CLASS C PLANS, THE SERIES MAY PAY PRUDENTIAL SECURITIES
FOR ITS DISTRIBUTION-RELATED ACTIVITIES WITH RESPECT TO CLASS B AND CLASS C
SHARES AT AN ANNUAL RATE OF UP TO .50 OF 1% AND UP TO 1% OF THE AVERAGE DAILY
NET ASSETS OF THE CLASS B AND CLASS C SHARES, RESPECTIVELY. The Class B Plan
provides for the payment to Prudential Securities of (i) an asset-based sales
charge of up to .50 of 1% of the average daily net assets of the Class B shares,
and (ii) a service fee of up to .25 of 1% of the average daily net assets of the
Class B shares; provided that the total distribution-related fee does not exceed
.50 of 1%. The Class C Plan provides for the payment to Prudential Securities of
(i) an asset-based sales charge of up to .75 of 1% of the average daily net
assets of the Class C shares, and (ii) a service fee of up to .25 of 1% of the
average daily net assets of the Class C shares. The service fee is used to pay
for personal service and/or the maintenance of shareholder accounts. Prudential
Securities has agreed to limit its distribution-related fees payable under the
Class C Plan to .75 of 1% of the average daily net assets of the Class C shares
for the fiscal year ending August 31, 1998. Prudential Securities also receives
contingent deferred sales charges from certain redeeming shareholders. See
"Shareholder Guide--How to Sell Your Shares--Contingent Deferred Sales Charges."
For the fiscal year ended August 31, 1997, the Series paid distribution
expenses of .10 of 1%, .50 of 1% and .75 of 1% of the average daily net assets
of the Class A, Class B and Class C shares, respectively. The Series records all
payments made under the Plans as expenses in the calculation of net investment
income. See "Distributor" in the Statement of Additional Information.
Distribution expenses attributable to the sale of Class A, Class B and Class C
shares of the Series will be allocated to each such class based upon the ratio
of sales of each such class to the sales of Class A, Class B and Class C shares
of the Series other than expenses allocable to a particular class. The
distribution fee and sales charge of one class will not be used to subsidize the
sale of another class.
Each Plan provides that it shall continue in effect from year to year provided
that a majority of the Trustees of the Fund, including a majority of the
Trustees who are not "interested persons" of the Fund (as defined in the
Investment Company Act) and who have no direct or indirect financial interest in
the operation of the Plan or any agreement related to the Plan (the Rule 12b-1
Trustees), vote annually to continue the Plan. Each Plan may be terminated with
respect to the Series at any time by vote of a majority of the Rule 12b-1
Trustees or of a majority of the outstanding shares of the applicable class of
the Series. The Series will not be obligated to pay distribution and service
fees incurred under any Plan if it is terminated or not continued.
In addition to distribution and service fees paid by the Series under the
Class A, Class B and Class C Plans, the Manager (or one of its affiliates) may
make payments out of its own resources to dealers (including Prudential
Securities) and other persons who distribute shares of the Series. Such payments
may be calculated by reference to the net asset value of shares sold by such
persons or otherwise.
The Distributor is subject to the rules of the National Association of
Securities Dealers, Inc. (the NASD) governing maximum sales charges. See
"Distributor" in the Statement of Additional Information.
On October 21, 1993, PSI entered into an omnibus settlement with the SEC,
state securities regulators (with the exception of the Texas Securities
Commissioner who joined the settlement on January 18, 1994) and the NASD to
resolve allegations that from 1980 through 1990 PSI sold certain limited
partnership interests in violation of securities laws to persons for whom such
securities were not suitable and misrepresented the safety, potential returns
and liquidity of these investments. Without admitting or denying the allegations
asserted against it, PSI consented to the entry of an SEC Administrative Order
which stated that PSI's conduct violated the federal securities laws, directed
PSI to cease and desist from violating the federal securities laws, pay civil
penalties, and adopt certain remedial measures to address the violations.
Pursuant to the terms of the SEC settlement, PSI agreed to the imposition of a
$10,000,000 civil penalty, established a settlement fund in the amount of
$330,000,000 and procedures to resolve legitimate claims for compensatory
damages by purchasers of the partnership interests. PSI has agreed to provide
additional funds, if necessary, for the purpose of the settlement fund. PSI's
settlement with the state securities regulators included an agreement to pay a
penalty of $500,000 per jurisdiction. PSI consented to a censure and to the
payment of a $5,000,000 fine in settling the NASD action.
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In October 1994, a criminal complaint was filed with the United States
Magistrate for the Southern District of New York alleging that PSI committed
fraud in connection with the sale of certain limited partnership interests in
violation of federal securities laws. An agreement was simultaneously filed to
defer prosecution of these charges for a period of three years from the signing
of the agreement, provided that PSI complies with the terms of the agreement.
If, upon completion of the three year period, PSI has complied with the terms of
the agreement, no prosecution will be instituted by the United States for the
offenses charged in the complaint. If on the other hand, during the course of
the three year period, PSI violates the terms of the agreement, the U.S.
Attorney can then elect to pursue these charges. Under the terms of the
agreement, PSI agreed, among other things, to pay an additional $330,000,000
into the fund established by the SEC to pay restitution to investors who
purchased certain PSI limited partnership interests.
For more detailed information concerning the foregoing matters, see
"Distributor" in the Statement of Additional Information, a copy of which may be
obtained at no cost by calling (800) 225-1852.
The Fund is not affected by PSI's financial condition and is an entirely
separate legal entity from PSI, which has no beneficial ownership therein and
the Fund's assets which are held by State Street Bank and Trust Company, an
independent custodian, are separate and distinct from PSI.
PORTFOLIO TRANSACTIONS
Prudential Securities may act as a broker or futures commission merchant for
the Fund, provided that the commissions, fees or other remuneration it receives
are fair and reasonable. See "Portfolio Transactions and Brokerage" in the
Statement of Additional Information.
CUSTODIAN AND TRANSFER AND DIVIDEND DISBURSING AGENT
State Street Bank and Trust Company, One Heritage Drive, North Quincy,
Massachusetts 02171, serves as Custodian for the portfolio securities of the
Series and cash and, in that capacity, maintains certain financial and
accounting books and records pursuant to an agreement with the Fund. Its mailing
address is P.O. Box 1713, Boston, Massachusetts 02105.
Prudential Mutual Fund Services LLC (PMFS), Raritan Plaza One, Edison, New
Jersey 08837, serves as Transfer Agent and Dividend Disbursing Agent and, in
those capacities, maintains certain books and records for the Fund. PMFS is a
wholly-owned subsidiary of PIFM. Its mailing address is P.O. Box 15005, New
Brunswick, New Jersey 08906-5005.
HOW THE FUND VALUES ITS SHARES
THE SERIES' NET ASSET VALUE PER SHARE OR NAV IS DETERMINED BY SUBTRACTING ITS
LIABILITIES FROM THE VALUE OF ITS ASSETS AND DIVIDING THE REMAINDER BY THE
NUMBER OF OUTSTANDING SHARES. NAV IS CALCULATED SEPARATELY FOR EACH CLASS. THE
TRUSTEES HAVE FIXED THE SPECIFIC TIME OF DAY FOR THE COMPUTATION OF THE NET
ASSET VALUE OF THE SERIES TO BE AS OF 4:15 P.M., NEW YORK TIME.
Portfolio securities are valued based on market quotations or, if not readily
available, at fair value as determined in good faith under procedures
established by the Trustees. Securities may also be valued based on values
provided by a pricing service. See "Net Asset Value" in the Statement of
Additional Information.
The Series will compute its NAV once daily on days that the New York Stock
Exchange is open for trading except on days on which no orders to purchase, sell
or redeem shares have been received by the Series or days on which changes in
the value of the Series' portfolio securities do not materially affect the NAV.
Although the legal rights of each class of shares are substantially identical,
the different expenses borne by each class will result in different dividends.
As long as the Series declares dividends daily, the NAV of the Class A, Class B
and Class C shares will generally be the same. It is expected, however, that the
Series' dividends will differ by approximately the amount of any distribution
and/or service fee expense accrual differential among the classes.
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HOW THE FUND CALCULATES PERFORMANCE
FROM TIME TO TIME THE FUND MAY ADVERTISE THE YIELD, TAX EQUIVALENT YIELD AND
AVERAGE ANNUAL TOTAL RETURN AND AGGREGATE TOTAL RETURN OF THE SERIES IN
ADVERTISEMENTS OR SALES LITERATURE. YIELD, TAX EQUIVALENT YIELD AND TOTAL RETURN
ARE CALCULATED SEPARATELY FOR CLASS A, CLASS B AND CLASS C SHARES. THESE FIGURES
ARE BASED ON HISTORICAL EARNINGS AND ARE NOT INTENDED TO INDICATE FUTURE
PERFORMANCE. The yield refers to the income generated by an investment in the
Series over a one-month or 30-day period. This income is then annualized; that
is, the amount of income generated by the investment during that 30-day period
is assumed to be generated each 30-day period for twelve periods and is shown as
a percentage of the investment. The income earned on the investment is also
assumed to be reinvested at the end of the sixth 30-day period. The tax
equivalent yield is calculated similarly to the yield, except that the yield is
increased using a stated income tax rate to demonstrate the taxable yield
necessary to produce an after-tax yield equivalent to the Series. The total
return shows how much an investment in the Series would have increased
(decreased) over a specified period of time (I.E., one, five or ten years or
since inception of the Series) assuming that all distributions and dividends by
the Series were reinvested on the reinvestment dates during the period and less
all recurring fees. The aggregate total return reflects actual performance over
a stated period of time. Average annual total return is a hypothetical rate of
return that, if achieved annually, would have produced the same aggregate total
return if performance had been constant over the entire period. Average annual
total return smooths out variations in performance and takes into account any
applicable initial or contingent deferred sales charges. Neither average annual
total return nor aggregate total return takes into account any federal or state
income taxes which may be payable upon redemption. The Fund also may include
comparative performance information in advertising or marketing the shares of
the Series. Such performance information may include data from Lipper Analytical
Services, Inc., Morningstar Publications, Inc., other industry publications,
business periodicals and market indices. See "Performance Information" in the
Statement of Additional Information. Further performance information is
contained in the Series' annual and semi-annual reports to shareholders, which
may be obtained without charge. See "Shareholder Guide--Shareholder
Services--Reports to Shareholders."
TAXES, DIVIDENDS AND DISTRIBUTIONS
TAXATION OF THE FUND
THE SERIES HAS ELECTED TO QUALIFY AND INTENDS TO REMAIN QUALIFIED AS A
REGULATED INVESTMENT COMPANY UNDER THE INTERNAL REVENUE CODE. ACCORDINGLY, THE
SERIES WILL NOT BE SUBJECT TO FEDERAL INCOME TAXES ON ITS NET INVESTMENT INCOME
AND NET CAPITAL GAINS, IF ANY, THAT IT DISTRIBUTES TO ITS SHAREHOLDERS. TO THE
EXTENT NOT DISTRIBUTED BY THE SERIES, NET TAXABLE INVESTMENT INCOME AND CAPITAL
GAINS AND LOSSES ARE TAXABLE TO THE SERIES.
To the extent the Series invests in taxable obligations, it will earn taxable
investment income. Also, to the extent the Series engages in hedging
transactions in futures contracts and options thereon, it may earn both
short-term and long-term capital gain or loss. Under the Internal Revenue Code,
special rules apply to the treatment of certain options and futures contracts
(Section 1256 contracts). At the end of each year, such investments held by the
Series will be required to be "marked to market" for federal income tax
purposes; that is, treated as having been sold at market value. Sixty percent of
any gain or loss recognized on these "deemed sales" and on actual dispositions
will be treated as long-term capital gain or loss, and the remainder will be
treated as short-term capital gain or loss. See "Distributions and Tax
Information" in the Statement of Additional Information.
Gain or loss realized by the Series from the sale of securities generally will
be treated as capital gain or loss; however, gain from the sale of certain
securities (including municipal obligations) will be treated as ordinary income
to the extent of any "market discount." Market discount generally is the
difference, if any, between the price paid by the Series for the security and
the principal amount of the security (or, in the case of a security issued at an
original issue discount, the revised issue price of the security). The market
discount rule does not apply to any security that was acquired by the Series at
its original issue. See "Distributions and Tax Information" in the Statement of
Additional Information.
18
<PAGE>
TAXATION OF SHAREHOLDERS
In general, the character of tax-exempt interest distributed by the Series
will flow through as tax-exempt interest to its shareholders provided that 50%
or more of the value of its assets at the end of each quarter of its taxable
year is invested in state, municipal and other obligations, the interest on
which is excluded from gross income for federal income tax purposes. During
normal market conditions, at least 80% of the Series' total assets will be
invested in such obligations. See "How the Fund Invests--Investment Objective
and Policies."
Any dividends of net taxable investment income, together with distributions of
net short-term gains (I.E., the excess of net short-term capital gains over net
long-term capital losses) distributed to shareholders, will be taxable as
ordinary income to the shareholder whether or not reinvested. Any net capital
gains (I.E., the excess of net capital gains from the sale of assets held for
more than 12 months over net short-term capital losses) distributed to
shareholders will be taxable as capital gains to the shareholders, whether or
not reinvested and regardless of the length of time a shareholder has owned his
or her shares. The maximum capital gains rate for individuals is 28% with
respect to assets held for more than 12 months, but not more than 18 months, and
20% with respect to assets held for more than 18 months. The maximum capital
gains rate for corporate shareholders currently is the same as the maximum tax
rate for ordinary income.
Any gain or loss realized upon a sale or redemption of Series shares by a
shareholder who is not a dealer in securities will be treated as capital gain or
loss. In the case of an individual, any such capital gain will be treated as
short-term capital loss if the shares were held for not more than 12 months,
mid-term gain, taxable at the maximum rate of 28%, if such shares were held for
more than 12, but not more than 18 months, and long-term capital gain, taxable
at the maximum rate of 20%, if such shares were held for more than 18 months. In
the case of a corporation, any such capital gain will be treated as long-term
capital gain, taxable at the same rates as ordinary income, if such shares were
held for more than 12 months. Any such capital loss will be treated as long-term
capital loss if the shares have been held more than one year and otherwise as
short-term capital loss. Any such loss with respect to shares that are held for
six months or less, however, will be treated as long-term capital loss to the
extent of any capital gain distributions received by the shareholder. In
addition, any short-term capital loss will be disallowed to the extent of any
tax-exempt dividends received by the shareholder on shares that are held for six
months or less.
The Fund has obtained opinions of counsel to the effect that neither (i) the
conversion of Class B shares into Class A shares nor (ii) the exchange of Class
B or Class C shares for Class A shares constitutes a taxable event for federal
income tax purposes. However, such opinions are not binding on the Internal
Revenue Service.
CERTAIN INVESTORS MAY INCUR FEDERAL ALTERNATIVE MINIMUM TAX LIABILITY AS A
RESULT OF THEIR INVESTMENT IN THE FUND. Tax-exempt interest from certain
municipal obligations (I.E., certain private activity bonds issued after August
7, 1986) will be treated as an item of tax preference for purposes of the
alternative minimum tax. The Fund anticipates that, under regulations to be
promulgated, items of tax preference incurred by the Series will be attributed
to the Series' shareholders, although some portion of such items could be
allocated to the Series itself. Depending upon each shareholder's individual
circumstances, the attribution of items of tax preference incurred by the Series
could result in liability for the shareholder for the alternative minimum tax.
Similarly, the Series could be liable for the alternative minimum tax for items
of tax preference attributed to it. The Series is permitted to invest in
municipal obligations of the type that will produce items of tax preference.
Corporate shareholders in the Series also will have to take into account the
adjustment for current earnings for alternative minimum tax purposes. Corporate
shareholders should consult with their tax advisers with respect to this
potential adjustment.
Under Ohio law, dividends paid by the Series are exempt from the Ohio personal
income tax and municipal and school district income taxes in Ohio to the extent
such dividends are properly attributable to interest payments on Ohio
Obligations, provided that the Series continues to qualify as a regulated
investment company for federal income tax purposes and that at all times at
least 50% of the value of the total assets of the Series consists of obligations
issued by or on behalf of the State of Ohio, political subdivisions thereof and
agencies and instrumentalities of the State or its political subdivisions, or
similar obligations of other
19
<PAGE>
states or their subdivisions. Subject to the same regulated investment company
and 50% requirements, dividends paid by the Series are also excluded from the
net income base of the Ohio corporation franchise tax to the extent such
dividends are either excluded from gross income for federal income tax purposes
or are properly attributable to interest payments on Ohio Obligations.
Shareholders are advised to consult their own tax advisers regarding specific
questions as to federal, state and local taxes. See "Distributions and Tax
Information" in the Statement of Additional Information.
WITHHOLDING TAXES
Under the Internal Revenue Code, the Series is required to withhold and remit
to the U.S. Treasury 31% of redemption proceeds on the accounts of certain
shareholders who fail to furnish their tax identification numbers on IRS Form
W-9 (or IRS Form W-8 in the case of certain foreign shareholders) with the
required certifications regarding the shareholder's status under the federal
income tax law. Such withholding also is required on taxable dividends and
capital gain distributions made by the Series unless it is reasonably expected
that at least 95% of the distributions of the Series are comprised of tax-exempt
dividends.
Dividends of net taxable investment income and distributions of net short-term
capital gains paid to a shareholder (including a shareholder acting as a nominee
or fiduciary) who is a nonresident alien individual, a foreign corporation or a
foreign partnership (foreign shareholder) are subject to a 30% (or lower treaty
rate) withholding tax upon the gross amount of the dividends unless the
dividends are effectively connected with a U.S. trade or business conducted by
the foreign shareholder. Capital gain dividends paid to a foreign shareholder
are generally not subject to withholding tax. A foreign shareholder will,
however, be required to pay U.S. income tax on any dividends and capital gain
distributions which are effectively connected with a U.S. trade or business of
the foreign shareholder.
DIVIDENDS AND DISTRIBUTIONS
THE SERIES EXPECTS TO DECLARE DAILY AND PAY MONTHLY DIVIDENDS OF NET
INVESTMENT INCOME, IF ANY, AND MAKE DISTRIBUTIONS AT LEAST ANNUALLY OF ANY
CAPITAL GAINS IN EXCESS OF CAPITAL LOSSES. Dividends paid by the Series with
respect to each class of shares, to the extent any dividends are paid, will be
calculated in the same manner, at the same time, on the same day and will be in
the same amount except that each such class will bear its own distribution
charges, generally resulting in lower dividends for the Class B and Class C
shares. Distributions of net capital gains, if any, will be paid in the same
amount for each class of shares. See "How the Fund Values its Shares."
DIVIDENDS AND DISTRIBUTIONS WILL BE PAID IN ADDITIONAL SHARES OF THE SERIES
BASED ON THE NAV OF EACH CLASS OF THE SERIES ON THE PAYMENT DATE AND RECORD
DATE, RESPECTIVELY, OR SUCH OTHER DATE AS THE TRUSTEES MAY DETERMINE, UNLESS THE
SHAREHOLDER ELECTS IN WRITING NOT LESS THAN FIVE BUSINESS DAYS PRIOR TO THE
RECORD DATE TO RECEIVE SUCH DIVIDENDS AND DISTRIBUTIONS IN CASH. Such election
should be submitted to Prudential Mutual Fund Services LLC, Attention: Account
Maintenance, P.O. Box 15015, New Brunswick, New Jersey 08906-5015. If you hold
shares through Prudential Securities, you should contact your financial adviser
to elect to receive dividends and distributions in cash. The Fund will notify
each shareholder after the close of the Fund's taxable year of both the dollar
amount and the taxable status of that year's dividends and distributions on a
per share basis.
GENERAL INFORMATION
DESCRIPTION OF SHARES
THE FUND WAS ESTABLISHED AS A MASSACHUSETTS BUSINESS TRUST ON MAY 18, 1984, BY
A DECLARATION OF TRUST. The Fund's activities are supervised by its Trustees.
The Declaration of Trust permits the Trustees to issue an unlimited number of
full and fractional shares in separate series, currently designated as the
Connecticut Money Market Series, Florida Series, Maryland Series, Massachusetts
Series, Massachusetts Money Market Series, Michigan Series, New Jersey Series,
New Jersey Money Market Series, New York Series, New York Money Market Series,
North Carolina Series, Ohio Series and Pennsylvania Series. The
20
<PAGE>
Series is authorized to issue an unlimited number of shares, divided into three
classes, designated Class A, Class B and Class C. Each class of shares
represents an interest in the same assets of the Series and is identical in all
respects except that (i) each class is subject to different 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 and (iv)
only Class B shares have a conversion feature. See "How the Fund is
Managed--Distributor." In accordance with the Fund's Declaration of Trust, the
Trustees may authorize the creation of additional series and classes within such
series, with such preferences, privileges, limitations and voting and dividend
rights as the Trustees may determine.
Shares of the Fund, when issued, are fully paid, nonassessable, fully
transferable and redeemable at the option of the holder. Shares are also
redeemable at the option of the Fund under certain circumstances as described
under "Shareholder Guide--How to Sell Your Shares." Each share of each class of
the Series is equal as to earnings, assets and voting privileges, except as
noted above, and each class bears the expenses related to the distribution of
its shares. Except for the conversion feature applicable to the Class B shares,
there are no conversion, preemptive or other subscription rights. In the event
of liquidation, each share of beneficial interest in each series is entitled to
its portion of all of the Fund's assets after all debt and expenses of the Fund
have been paid. Since Class B and Class C shares generally bear higher
distribution expenses than Class A shares, the liquidation proceeds to
shareholders of those classes are likely to be lower than to Class A
shareholders. The Fund's shares do not have cumulative voting rights for the
election of Trustees.
THE FUND DOES NOT INTEND TO HOLD ANNUAL MEETINGS OF SHAREHOLDERS UNLESS
OTHERWISE REQUIRED BY LAW. THE FUND WILL NOT BE REQUIRED TO HOLD MEETINGS OF
SHAREHOLDERS UNLESS, FOR EXAMPLE, THE ELECTION OF TRUSTEES IS REQUIRED TO BE
ACTED UPON BY SHAREHOLDERS UNDER THE INVESTMENT COMPANY ACT. SHAREHOLDERS HAVE
CERTAIN RIGHTS, INCLUDING THE RIGHT TO CALL A MEETING UPON A VOTE OF 10% OF THE
FUND'S OUTSTANDING SHARES FOR THE PURPOSE OF VOTING ON THE REMOVAL OF ONE OR
MORE TRUSTEES OR TO TRANSACT ANY OTHER BUSINESS.
The Declaration of Trust and the By-Laws of the Fund are designed to make the
Fund similar in certain respects to a Massachusetts business corporation. The
principal distinction between a Massachusetts business corporation and a
Massachusetts business trust relates to shareholder liability. Under
Massachusetts law, shareholders of a business trust may, under certain
circumstances, be held personally liable as partners for the obligations of the
Fund, which is not the case with a corporation. The Declaration of Trust of the
Fund provides that shareholders shall not be subject to any personal liability
for the acts or obligations of the Fund and that every written obligation,
contract, instrument or undertaking made by the Fund shall contain a provision
to the effect that the shareholders are not individually bound thereunder.
ADDITIONAL INFORMATION
This Prospectus, including the Statement of Additional Information which has
been incorporated by reference herein, does not contain all the information set
forth in the Registration Statement filed by the Fund with the SEC under the
Securities Act. Copies of the Registration Statement may be obtained at a
reasonable charge from the SEC or may be examined, without charge, at the office
of the SEC in Washington, D.C.
SHAREHOLDER GUIDE
HOW TO BUY SHARES OF THE FUND
YOU MAY PURCHASE SHARES OF THE SERIES THROUGH PRUDENTIAL SECURITIES, PRUSEC OR
DIRECTLY FROM THE FUND, THROUGH ITS TRANSFER AGENT, PRUDENTIAL MUTUAL FUND
SERVICES LLC (PMFS OR THE TRANSFER AGENT), ATTENTION: INVESTMENT SERVICES,
21
<PAGE>
P.O. BOX 15020, NEW BRUNSWICK, NEW JERSEY 08906-5020. The purchase price is the
NAV next determined following receipt of an order in proper form by the Transfer
Agent or Prudential Securities plus a sales charge which, at your option, may be
imposed either (i) at the time of purchase (Class A shares) or (ii) on a
deferred basis (Class B or Class C shares). Payment may be made by wire, check
or through your brokerage account. See "Alternative Purchase Plan" below. See
also "How the Fund Values its Shares."
An investment in the Series may not be appropriate for tax-exempt or
tax-deferred investors. Such investors should consult their own tax advisers.
The minimum initial investment is $1,000 for Class A and Class B shares and
$5,000 for Class C shares. The minimum subsequent investment is $100 for all
classes. All minimum investment requirements are waived for certain employee
savings plans. For purchases made through the Automatic Savings Accumulation
Plan, the minimum initial and subsequent investment is $50. See "Shareholder
Services" below.
Application forms can be obtained from PMFS, Prudential Securities or Prusec.
If a share certificate is desired, it must be requested in writing for each
transaction. Certificates are issued only for full shares. Shareholders who hold
their shares through Prudential Securities will not receive share certificates.
The Fund reserves the right to reject any purchase order (including an
exchange into the Series) or to suspend or modify the continuous offering of its
shares. See "How to Sell Your Shares" below.
Your dealer is responsible for forwarding payment promptly to the Fund. The
Distributor reserves the right to cancel any purchase order for which payment
has not been received by the third business day following the investment.
Transactions in shares of the Series may be subject to postage and handling
charges imposed by your dealer.
PURCHASE BY WIRE. For an initial purchase of shares of the Series by wire, you
must first telephone PMFS at (800) 225-1852 (toll-free) to receive an account
number. The following information will be requested: your name, address, tax
identification number, class election, dividend distribution election, amount
being wired and wiring bank. Instructions should then be given by you to your
bank to transfer funds by wire to State Street Bank and Trust Company (State
Street), Boston, Massachusetts, Custody and Shareholder Services Division,
Attention: Prudential Municipal Series Fund, specifying on the wire the account
number assigned by PMFS and your name and identifying the class in which you are
eligible to invest (Class A, Class B or Class C shares).
If you arrange for receipt by State Street of Federal Funds prior to the
calculation of NAV (4:15 P.M., New York time), on a business day, you may
purchase shares of the Series as of that day. See "Net Asset Value" in the
Statement of Additional Information.
In making a subsequent purchase order by wire, you should wire State Street
directly and should be sure that the wire specifies Prudential Municipal Series
Fund (Ohio Series), Class A, Class B or Class C shares and your name and
individual account number. It is not necessary to call PMFS to make subsequent
purchase orders utilizing Federal Funds. The minimum amount which may be
invested by wire is $1,000.
ALTERNATIVE PURCHASE PLAN
THE SERIES OFFERS THROUGH THIS PROSPECTUS THREE CLASSES OF SHARES (CLASS A,
CLASS B AND CLASS C SHARES) WHICH ALLOWS YOU TO CHOOSE THE MOST BENEFICIAL SALES
CHARGE STRUCTURE FOR YOUR INDIVIDUAL CIRCUMSTANCES GIVEN THE AMOUNT OF THE
PURCHASE, THE LENGTH OF TIME YOU EXPECT TO HOLD THE SHARES AND OTHER RELEVANT
CIRCUMSTANCES (ALTERNATIVE PURCHASE PLAN).
22
<PAGE>
<TABLE>
<CAPTION>
ANNUAL 12b-1 FEES
(AS A % OF AVERAGE
SALES CHARGE DAILY NET ASSETS) OTHER INFORMATION
--------------------------------------- --------------------- ---------------------------------------
<S> <C> <C> <C>
CLASS A.. Maximum initial sales charge of 3% of .30 of 1% (currently Initial sales charge waived or reduced
the public offering price being charged at a for certain purchases
rate of .10 of 1%)
CLASS B.. Maximum contingent deferred sales .50 of 1% Shares convert to Class A shares
charge or CDSC of 5% of the lesser of approximately seven years after
the amount invested or the redemption purchase
proceeds; declines to zero after six
years
CLASS C Maximum CDSC of 1% of the lesser of the 1% (currently being Shares do not convert to another class
amount invested or the redemption charged at a rate of
proceeds on redemptions made within one .75 of 1%)
year of purchase
</TABLE>
The three classes of shares represent an interest in the same portfolio of
investments of the Series and have the same rights, except that (i) each class
bears the separate expenses of its Rule 12b-1 distribution and service plan,
(ii) each class has exclusive voting rights 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, and (iii) only Class B
shares have a conversion feature. The three classes also have separate exchange
privileges. See "How to Exchange Your Shares" below. The income attributable to
each class and the dividends payable on the shares of each class will be reduced
by the amount of the distribution fee of each class. Class B and Class C shares
bear the expenses of a higher distribution fee which will generally cause them
to have higher expense ratios and to pay lower dividends than the Class A
shares.
Financial advisers and other sales agents who sell shares of the Series will
receive different compensation for selling Class A, Class B and Class C shares
and will generally receive more compensation initially for selling Class A and
Class B shares than for selling Class C shares.
IN SELECTING A PURCHASE ALTERNATIVE, YOU SHOULD CONSIDER, AMONG OTHER THINGS,
(1) the length of time you expect to hold your investment, (2) the amount of any
applicable sales charge (whether imposed at the time of purchase or redemption)
and distribution-related fees, as noted above, (3) whether you qualify for any
reduction or waiver of any applicable sales charge, (4) the various exchange
privileges among the different classes of shares (see "How to Exchange Your
Shares" below) and (5) the fact that Class B shares automatically convert to
Class A shares approximately seven years after purchase (see "Conversion
Feature--Class B Shares" below).
The following is provided to assist you in determining which method of
purchase best suits your individual circumstances and is based on current fees
and expenses being charged to the Series:
If you intend to hold your investment in the Series for less than 5 years and
do not qualify for a reduced sales charge on Class A shares, since Class A
shares are subject to a maximum initial sales charge of 3% and Class B shares
are subject to a CDSC of 5% which declines to zero over a 6 year period, you
should consider purchasing Class C shares over either Class A or Class B shares.
If you intend to hold your investment for 5 years or more and do not qualify
for a reduced sales charge on Class A shares, since Class B shares convert to
Class A shares approximately 7 years after purchase and because all of your
money would be invested initially in the case of Class B shares, you should
consider purchasing Class B shares over either Class A or Class C shares.
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<PAGE>
If you qualify for a reduced sales charge on Class A shares, it may be more
advantageous for you to purchase Class A shares over either Class B or Class C
shares regardless of how long you intend to hold your investment. However,
unlike Class B and Class C shares, you would not have all of your money invested
initially because the sales charge on Class A shares is deducted at the time of
purchase.
If you do not qualify for a reduced sales charge on Class A shares and you
purchase Class C shares, you would have to hold your investment for more than 4
years for the higher cumulative annual distribution-related fee on those shares
to exceed the initial sales charge plus cumulative annual distribution-related
fee on Class A shares. This does not take into account the time value of money,
which further reduces the impact of the higher Class C distribution-related fee
on the investment, fluctuations in net asset value, the effect of the return on
the investment over this period of time or redemptions when the CDSC is
applicable.
ALL PURCHASES OF $1 MILLION OR MORE, EITHER AS PART OF A SINGLE INVESTMENT OR
UNDER RIGHTS OF ACCUMULATION OR LETTERS OF INTENT, MUST BE FOR CLASS A SHARES.
See "Reduction and Waiver of Initial Sales Charges" below.
CLASS A SHARES
The offering price of Class A shares for investors choosing the initial sales
charge alternative is the next determined NAV plus a sales charge (expressed as
a percentage of the offering price and of the amount invested) as shown in the
following table:
<TABLE>
<CAPTION>
DEALER
SALES CHARGE AS SALES CHARGE AS CONCESSION AS
PERCENTAGE OF PERCENTAGE OF PERCENTAGE OF
AMOUNT OF PURCHASE OFFERING PRICE AMOUNT INVESTED OFFERING PRICE
- ------------------------- ---------------- ---------------- ----------------
<S> <C> <C> <C>
Less than $99,999 3.00% 3.09% 3.00%
$100,000 to $249,999 2.50 2.56 2.50
$250,000 to $499,999 1.50 1.52 1.50
$500,000 to $999,999 1.00 1.01 1.00
$1,000,000 and above None None None
</TABLE>
The Distributor may reallow the entire initial sales charge to dealers.
Selling dealers may be deemed to be underwriters, as that term is defined in the
Securities Act.
In connection with the sale of Class A shares at NAV (without payment of an
initial sales charge), the Manager, the Distributor or one of their affiliates
will pay dealers, financial advisers and other persons which distribute shares a
finders' fee from its own resources based on a percentage of the net asset value
of shares sold by such persons.
REDUCTION AND WAIVER OF INITIAL SALES CHARGES. Reduced sales charges are
available through Rights of Accumulation and Letters of Intent. Shares of the
Fund and shares of other Prudential Mutual Funds (excluding money market funds
other than those acquired pursuant to the exchange privilege) may be aggregated
to determine the applicable reduction. See "Purchase and Redemption of Fund
Shares--Reduction and Waiver of Initial Sales Charges--Class A Shares" in the
Statement of Additional Information.
PRUARRAY SAVINGS PROGRAM. Class A shares are also offered at net asset value
to employees of companies that enter into a written agreement with Prudential
Retirement Services to participate in the PruArray Savings Program. Under this
Program, a limited number of Prudential Mutual Funds are available for purchase
at net asset value by Savings Accumulation Plans of the company's employees. The
Program is available only to employees who open a Savings Accumulation Plan
account with the Transfer Agent. The program is offered to companies that have
at least 250 eligible employees.
SPECIAL RULES APPLICABLE TO RETIREMENT PLANS. After a PruArray Plan qualifies
to purchase Class A shares at NAV, all subsequent purchases will be made at NAV.
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<PAGE>
OTHER WAIVERS. Class A shares may be purchased at NAV, through Prudential
Securities or the Transfer Agent, by the following persons: (a) officers and
current and former Directors/Trustees of the Prudential Mutual Funds (including
the Fund), (b) employees of Prudential Securities and PIFM and their
subsidiaries and members of the families of such persons who maintain an
"employee related" account at Prudential Securities or the Transfer Agent, (c)
employees of subadvisers of the Prudential Mutual Funds provided that the
purchases at NAV are permitted by such person's employer, (d) Prudential
employees and special agents of Prudential and its subsidiaries and all persons
who have retired directly from active service with Prudential or one of its
subsidiaries, (e) registered representatives and employees of dealers who have
entered into a selected dealer agreement with Prudential Securities provided
that purchases at NAV are permitted by such person's employer and (f) investors
who have a business relationship with a financial adviser who joined Prudential
Securities from another investment firm, provided that (i) the purchase is made
within 180 days of the commencement of the financial adviser's employment at
Prudential Securities or within one year in the case of benefit plans, (ii) the
purchase is made with proceeds of a redemption of shares of any open-end
non-money market fund sponsored by the financial adviser's previous employer
(other than a fund which imposes a distribution or service fee of .25 of 1% or
less) and (iii) the financial adviser served as the client's broker on the
previous purchases.
You must notify the Transfer Agent either directly or through Prudential
Securities or Prusec that you are entitled to the reduction or waiver of the
sales charge. The reduction or waiver will be granted subject to confirmation of
your entitlement. No initial sales charges are imposed upon Class A shares
acquired upon the reinvestment of dividends and distributions. See "Purchase and
Redemption of Fund Shares--Reduction and Waiver of Initial Sales Charges--Class
A Shares" in the Statement of Additional Information.
CLASS B AND CLASS C SHARES
The offering price of Class B and Class C shares for investors choosing one of
the deferred sales charge alternatives is the NAV next determined following
receipt of an order by the Transfer Agent or Prudential Securities. Although
there is no sales charge imposed at the time of purchase, redemptions of Class B
and Class C shares may be subject to a CDSC. See "How to Sell Your
Shares--Contingent Deferred Sales Charges" below. The Distributor will pay sales
commissions of up to 4% of the purchase price of Class B shares to dealers,
financial advisers and other persons who sell Class B shares at the time of sale
from its own resources. This facilitates the ability of the Fund to sell the
Class B shares without an initial sales charge being deducted at the time of
purchase. The Distributor anticipates that it will recoup its advancement of
sales commissions from the combination of the CDSC and the distribution fee. See
"How the Fund is Managed--Distributor." In connection with the sale of Class C
shares, the Distributor will pay dealers, financial advisers and other persons
which distribute Class C shares a sales commission of up to 1% of the purchase
price at the time of the sale.
HOW TO SELL YOUR SHARES
YOU CAN REDEEM YOUR SHARES OF THE SERIES ANY TIME FOR CASH AT THE NAV NEXT
DETERMINED AFTER THE REDEMPTION REQUEST IS RECEIVED IN PROPER FORM BY THE
TRANSFER AGENT OR PRUDENTIAL SECURITIES. SEE "HOW THE FUND VALUES ITS SHARES."
In certain cases, however, redemption proceeds will be reduced by the amount of
any applicable contingent deferred sales charge, as described below. See
"Contingent Deferred Sales Charges" below.
IF YOU HOLD SHARES OF THE SERIES THROUGH PRUDENTIAL SECURITIES, YOU MUST
REDEEM SHARES THROUGH PRUDENTIAL SECURITIES. PLEASE CONTACT YOUR PRUDENTIAL
SECURITIES FINANCIAL ADVISER.
IF YOU HOLD SHARES IN NON-CERTIFICATE FORM, A WRITTEN REQUEST FOR REDEMPTION
SIGNED BY YOU EXACTLY AS THE ACCOUNT IS REGISTERED IS REQUIRED. IF YOU HOLD
CERTIFICATES, THE CERTIFICATES, SIGNED IN THE NAME(S) SHOWN ON THE FACE OF THE
CERTIFICATES, MUST BE RECEIVED BY THE TRANSFER AGENT IN ORDER FOR THE REDEMPTION
REQUEST TO BE PROCESSED. IF REDEMPTION IS REQUESTED BY A CORPORATION,
PARTNERSHIP, TRUST OR FIDUCIARY, WRITTEN EVIDENCE OF AUTHORITY ACCEPTABLE TO
25
<PAGE>
THE TRANSFER AGENT MUST BE SUBMITTED BEFORE SUCH REQUEST WILL BE ACCEPTED. All
correspondence and documents concerning redemptions should be sent to the Fund
in care of its Transfer Agent, Prudential Mutual Fund Services LLC, Attention:
Redemption Services, P.O. Box 15010, New Brunswick, New Jersey 08906-5010.
If the proceeds of the redemption (a) exceed $50,000, (b) are to be paid to a
person other than the record owner, (c) are to be sent to an address other than
the address on the Transfer Agent's records, or (d) are to be paid to a
corporation, partnership, trust or fiduciary, the signature(s) on the redemption
request and on the certificates, if any, or stock power must be guaranteed by an
"eligible guarantor institution." An "eligible guarantor institution" includes
any bank, broker, dealer or credit union. The Transfer Agent reserves the right
to request additional information from, and make reasonable inquiries of, any
eligible guarantor institution. For clients of Prusec, a signature guarantee may
be obtained from the agency or office manager of most Prudential Insurance and
Financial Services or Preferred Services offices.
PAYMENT FOR SHARES PRESENTED FOR REDEMPTION WILL BE MADE BY CHECK WITHIN SEVEN
DAYS AFTER RECEIPT BY THE TRANSFER AGENT OF THE CERTIFICATE AND/OR WRITTEN
REQUEST EXCEPT AS INDICATED BELOW. IF YOU HOLD SHARES THROUGH PRUDENTIAL
SECURITIES, PAYMENT FOR SHARES PRESENTED FOR REDEMPTION WILL BE CREDITED TO YOUR
PRUDENTIAL SECURITIES ACCOUNT, UNLESS YOU INDICATE OTHERWISE. Such payment may
be postponed or the right of redemption suspended at times (a) when the New York
Stock Exchange is closed for other than customary weekends and holidays, (b)
when trading on such Exchange is restricted, (c) when an emergency exists as a
result of which disposal by the Series of securities owned by it is not
reasonably practicable or it is not reasonably practicable for the Series fairly
to determine the value of its net assets, or (d) during any other period when
the SEC, by order, so permits; provided that applicable rules and regulations of
the SEC shall govern as to whether the conditions prescribed in (b), (c) or (d)
exist.
PAYMENT FOR REDEMPTION OF RECENTLY PURCHASED SHARES WILL BE DELAYED UNTIL THE
FUND OR ITS TRANSFER AGENT HAS BEEN ADVISED THAT THE PURCHASE CHECK HAS BEEN
HONORED, UP TO 10 CALENDAR DAYS FROM THE TIME OF RECEIPT OF THE PURCHASE CHECK
BY THE TRANSFER AGENT. SUCH DELAY MAY BE AVOIDED BY PURCHASING SHARES BY WIRE OR
BY CERTIFIED OR CASHIER'S CHECK.
REDEMPTION IN KIND. If the Trustees determine that it would be detrimental to
the best interests of the remaining shareholders of the Fund to make payment
wholly or partly in cash, the Fund may pay the redemption price in whole or in
part by a distribution in kind of securities from the investment portfolio of
the Series of the Fund, in lieu of cash, in conformity with applicable rules of
the SEC. Securities will be readily marketable and will be valued in the same
manner as in a regular redemption. See "How the Fund Values its Shares" If your
shares are redeemed in kind, you will incur transaction costs in converting the
assets into cash. The Fund, however, has elected to be governed by Rule 18f-1
under the Investment Company Act, under which the Fund is obligated to redeem
shares solely in cash up to the lesser of $250,000 or 1% of the net asset value
of the Fund during any 90-day period for any one shareholder.
INVOLUNTARY REDEMPTION. In order to reduce expenses of the Fund, the Trustees
may redeem all of the shares of any shareholder, other than a shareholder which
is an IRA or other tax-deferred retirement plan, whose account has a net asset
value of less than $500 due to a redemption. The Fund will give such
shareholders 60 days' prior written notice in which to purchase sufficient
additional shares to avoid such redemption. No contingent deferred sales charge
will be imposed on any such involuntary redemption.
90-DAY REPURCHASE PRIVILEGE. If you redeem your shares and have not previously
exercised the repurchase privilege, you may reinvest any portion or all of the
proceeds of such redemption in shares of the Series at the NAV next determined
after the order is received, which must be within 90 days after the date of the
redemption. Any CDSC paid in connection with such redemption will be credited
(in shares) to your account. (If less than a full repurchase is made, the credit
will be on a PRO RATA basis.) You must notify the Fund's Transfer Agent, either
directly or through Prudential Securities, at the time the repurchase privilege
is exercised to adjust your account for the CDSC you previously paid.
Thereafter, any redemptions will be subject to the
26
<PAGE>
CDSC applicable at the time of the redemption. See "Contingent Deferred Sales
Charges" below. Exercise of the repurchase privilege may affect the federal tax
treatment of any gain realized upon redemption. See "Distributions and Tax
Information" in the Statement of Additional Information.
CONTINGENT DEFERRED SALES CHARGES
Redemptions of Class B shares will be subject to a contingent deferred sales
charge or CDSC declining from 5% to zero over a six-year period. Class C shares
redeemed within one year of purchase will be subject to a 1% CDSC. The CDSC will
be deducted from the redemption proceeds and reduce the amount paid to you. The
CDSC will be imposed on any redemption by you which reduces the current value of
your Class B or Class C shares to an amount which is lower than the amount of
all payments by you for shares during the preceding six years, in the case of
Class B shares, and one year, in the case of Class C shares. A CDSC will be
applied on the lesser of the original purchase price or the current value of the
shares being redeemed. Increases in the value of your shares or shares acquired
through reinvestment of dividends or distributions are not subject to a CDSC.
The amount of any contingent deferred sales charge will be paid to and retained
by the Distributor. See "How the Fund is Managed--Distributor" and "Waiver of
the Contingent Deferred Sales Charges--Class B Shares" below.
The amount of the CDSC, if any, will vary depending on the number of years
from the time of payment for the purchase of shares until the time of redemption
of such shares. Solely for purposes of determining the number of years from the
time of any payment for the purchase of shares, all payments during a month will
be aggregated and deemed to have been made on the last day of the month. The
CDSC will be calculated from the first day of the month after the initial
purchase, excluding the time shares were held in a money market fund. See "How
to Exchange Your Shares" below.
The following table sets forth the rates of the CDSC applicable to redemptions
of Class B shares:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED SALES
CHARGE AS A PERCENTAGE
YEAR SINCE PURCHASE OF DOLLARS INVESTED OR
PAYMENT MADE REDEMPTION PROCEEDS
------------------------------ -------------------------
<S> <C>
First......................... 5.0 %
Second........................ 4.0
Third......................... 3.0
Fourth........................ 2.0
Fifth......................... 1.0
Sixth......................... 1.0
Seventh....................... None
</TABLE>
In determining whether a CDSC is applicable to a redemption, the calculation
will be made in a manner that results in the lowest possible rate. It will be
assumed that the redemption is made first of amounts representing shares
acquired pursuant to the reinvestment of dividends and distributions; then of
amounts representing the increase in net asset value above the total amount of
payments for the purchase of Series shares made during the preceding six years
(five years for Class B shares purchased prior to January 22, 1990); then of
amounts representing the cost of shares held beyond the applicable CDSC period;
and finally, of amounts representing the cost of shares held for the longest
period of time within the applicable CDSC period.
For example, assume you purchased 100 Class B shares at $10 per share for a
cost of $1,000. Subsequently, you acquired 5 additional Class B shares through
dividend reinvestment. During the second year after the purchase you decided to
redeem $500 of your investment. Assuming at the time of the redemption the net
asset value had appreciated to $12 per share, the value of your Class B shares
would be $1,260 (105 shares at $12 per share). The CDSC would not be applied to
the value of the reinvested dividend shares and the amount which represents
appreciation ($260). Therefore, $240 of the $500 redemption proceeds ($500 minus
$260) would be charged at a rate of 4% (the applicable rate in the second year
after purchase) for a total CDSC of $9.60.
27
<PAGE>
For federal income tax purposes, the amount of the CDSC will reduce the gain
or increase the loss, as the case may be, on the amount recognized on the
redemption of shares.
WAIVER OF THE CONTINGENT DEFERRED SALES CHARGES--CLASS B SHARES. The CDSC will
be waived in the case of a redemption following the death or disability of a
shareholder or, in the case of a trust account, following the death or
disability of the grantor. The waiver is available for total or partial
redemptions of shares owned by a person, either individually or in joint tenancy
(with rights of survivorship), at the time of death or initial determination of
disability, provided that the shares were purchased prior to death or
disability. In addition, the CDSC will be waived on redemptions of shares held
by a Trustee of the Fund.
SYSTEMATIC WITHDRAWAL PLAN. The CDSC will be waived (or reduced) on certain
redemptions from a Systematic Withdrawal Plan. On an annual basis, up to 12% of
the total dollar amount subject to the CDSC may be redeemed without charge. The
Transfer Agent will calculate the total amount available for this waiver
annually on the anniversary of your purchase or, for shares purchased prior to
March 1, 1997, on March 1 of the current year. The CDSC will be waived (or
reduced) on redemptions until this threshold 12% amount is reached.
You must notify the Fund's Transfer Agent either directly or through
Prudential Securities or Prusec, at the time of redemption, that you are
entitled to waiver of the CDSC and provide the Transfer Agent with such
supporting documentation as it may deem appropriate. The waiver will be granted
subject to confirmation of your entitlement. See "Purchase and Redemption of
Fund Shares--Waiver of the Contingent Deferred Sales Charge--Class B Shares" in
the Statement of Additional Information.
A quantity discount may apply to redemptions of Class B shares purchased prior
to August 1, 1994. See "Purchase and Redemption of Fund Shares--Quantity
Discount--Class B Shares Purchased Prior to August 1, 1994" in the Statement of
Additional Information.
CONVERSION FEATURE--CLASS B SHARES
Class B shares will automatically convert to Class A shares on a quarterly
basis approximately seven years after purchase. Conversions will be effected at
relative net asset value without the imposition of any additional sales charge.
Since the Fund tracks amounts paid rather than the number of shares bought on
each purchase of Class B shares, the number of Class B shares eligible to
convert to Class A shares (excluding shares acquired through the automatic
reinvestment of dividends and other distributions) (the Eligible Shares) will be
determined on each conversion date in accordance with the following formula: (i)
the ratio of (a) the amounts paid for Class B shares purchased at least seven
years prior to the conversion date to (b) the total amount paid for all Class B
shares purchased and then held in your account (ii) multiplied by the total
number of Class B shares purchased and then held in your account. Each time any
Eligible Shares in your account convert to Class A shares, all shares or amounts
representing Class B shares then in your account that were acquired through the
automatic reinvestment of dividends and other distributions will convert to
Class A shares.
For purposes of determining the number of Eligible Shares, if the Class B
shares in your account on any conversion date are the result of multiple
purchases at different net asset values per share, the number of Eligible Shares
calculated as described above will generally be either more or less than the
number of shares actually purchased approximately seven years before such
conversion date. For example, if 100 shares were initially purchased to $10 per
share (for a total of $1,000) and a second purchase of 100 shares was
subsequently made at $11 per share (for a total of $1,100), 95.24 shares would
convert approximately seven years from the initial purchase (I.E., $1,000
divided by $2,100 (47.62%) multiplied by 200 shares equals 95.24 shares). The
Manager reserves the right to modify the formula for determining the number of
Eligible Shares in the future as it deems appropriate on notice to shareholders.
Since annual distribution-related fees are lower for Class A shares than Class
B shares, the per share net asset value of the Class A shares may be higher than
that of the Class B shares at the time of conversion. Thus, although the
aggregate dollar value will be the same, you may receive fewer Class A shares
than Class B shares converted. See "How the Fund Values its Shares."
28
<PAGE>
For purposes of calculating the applicable holding period for conversions, all
payments for Class B shares during a month will be deemed to have been made on
the last day of the month, or for Class B shares acquired through exchange, or a
series of exchanges, on the last day of the month in which the original payment
for purchases of such Class B shares was made. For Class B shares previously
exchanged for shares of a money market fund, the time period during which such
shares were held in the money market fund will be excluded. For example, Class B
shares held in a money market fund for one year will not convert to Class A
shares until approximately eight years from purchase. For purposes of measuring
the time period during which shares are held in a money market fund, exchanges
will be deemed to have been made on the last day of the month. Class B shares
acquired through exchange will convert to Class A shares after expiration of the
conversion period applicable to the original purchase of such shares.
The conversion feature may be subject to the continuing availability of
opinions of counsel or rulings of the Internal Revenue Service (i) that the
dividends and other distributions paid on Class A, Class B and Class C shares
will not constitute "preferential dividends" under the Internal Revenue Code and
(ii) that the conversion of shares does not constitute a taxable event. The
conversion of Class B shares into Class A shares may be suspended if such
opinions or rulings are no longer available. If conversions are suspended, Class
B shares of the Series will continue to be subject, possibly indefinitely, to
their higher annual distribution and service fee.
HOW TO EXCHANGE YOUR SHARES
AS A SHAREHOLDER OF THE SERIES, YOU HAVE AN EXCHANGE PRIVILEGE WITH THE OTHER
SERIES OF THE FUND AND CERTAIN OTHER PRUDENTIAL MUTUAL FUNDS (THE EXCHANGE
PRIVILEGE), INCLUDING ONE OR MORE SPECIFIED MONEY MARKET FUNDS, SUBJECT TO THE
MINIMUM INVESTMENT REQUIREMENTS OF SUCH FUNDS. CLASS A, CLASS B AND CLASS C
SHARES OF THE SERIES MAY BE EXCHANGED FOR CLASS A, CLASS B AND CLASS C SHARES,
RESPECTIVELY, OF THE OTHER SERIES OF THE FUND OR ANOTHER FUND ON THE BASIS OF
THE RELATIVE NAV. No sales charge will be imposed at the time of the exchange.
Any applicable CDSC payable upon the redemption of shares exchanged will be
calculated from the first day of the month after the initial purchase, excluding
the time shares were held in a money market fund. Class B and Class C shares may
not be exchanged into money market funds other than Prudential Special Money
Market Fund, Inc. For purposes of calculating the holding period applicable to
the Class B conversion feature, the time period during which Class B shares were
held in a money market fund will be excluded. See "Conversion Feature--Class B
Shares" above. An exchange will be treated as a redemption and purchase for tax
purposes. See "Shareholder Investment Account--Exchange Privilege" in the
Statement of Additional Information.
IN ORDER TO EXCHANGE SHARES BY TELEPHONE, YOU MUST AUTHORIZE TELEPHONE
EXCHANGES ON YOUR INITIAL APPLICATION FORM OR BY WRITTEN NOTICE TO THE TRANSFER
AGENT AND HOLD SHARES IN NON-CERTIFICATE FORM. Thereafter, you may call the Fund
at (800) 225-1852 to execute a telephone exchange of shares, weekdays, except
holidays, between the hours of 8:00 A.M. and 6:00 P.M., New York time. For your
protection and to prevent fraudulent exchanges, your telephone call will be
recorded and you will be asked to provide your personal identification number. A
written confirmation of the exchange transaction will be sent to you. NEITHER
THE FUND NOR ITS AGENTS WILL BE LIABLE FOR ANY LOSS, LIABILITY OR COST WHICH
RESULTS FROM ACTING UPON INSTRUCTIONS REASONABLY BELIEVED TO BE GENUINE UNDER
THE FOREGOING PROCEDURES. All exchanges will be made on the basis of the
relative NAV of the two funds (or series) next determined after the request is
received in good order. The Exchange Privilege is available only in states where
the exchange may legally be made.
IF YOU HOLD SHARES THROUGH PRUDENTIAL SECURITIES, YOU MUST EXCHANGE YOUR
SHARES BY CONTACTING YOUR PRUDENTIAL SECURITIES FINANCIAL ADVISER.
IF YOU HOLD CERTIFICATES, THE CERTIFICATES, SIGNED IN THE NAME(S) SHOWN ON THE
FACE OF THE CERTIFICATES, MUST BE RETURNED IN ORDER FOR THE SHARES TO BE
EXCHANGED. SEE "HOW TO SELL YOUR SHARES" ABOVE.
You may also exchange shares by mail by writing to Prudential Mutual Fund
Services LLC, Attention: Exchange Processing, P.O. Box 15010, New Brunswick, New
Jersey 08906-5010.
29
<PAGE>
IN PERIODS OF SEVERE MARKET OR ECONOMIC CONDITIONS, THE TELEPHONE EXCHANGE OF
SHARES MAY BE DIFFICULT TO IMPLEMENT AND YOU SHOULD MAKE EXCHANGES BY MAIL BY
WRITING TO PRUDENTIAL MUTUAL FUND SERVICES LLC, AT THE ADDRESS NOTED ABOVE.
SPECIAL EXCHANGE PRIVILEGE. A special exchange privilege is available for
shareholders who qualify to purchase Class A shares at NAV (see "Alternative
Purchase Plan--Class A Shares--Reduction and Waiver of Initial Sales Charges"
above). Under this exchange privilege, amounts representing any Class B and
Class C shares (which are not subject to a CDSC) held in such a shareholder's
account will be automatically exchanged for Class A shares on a quarterly basis,
unless the shareholder elects otherwise. Eligibility for this exchange privilege
will be calculated on the business day prior to the date of the exchange.
Amounts representing Class B or Class C shares which are not subject to a CDSC
include the following: (1) amounts representing Class B or Class C shares
acquired pursuant to the automatic reinvestment of dividends and distribtutions,
(2) amounts representing the increase in the net asset value above the total
amount of payments for the purchase of Class B or Class C shares and (3) amounts
representing Class B or Class C shares held beyond the applicable CDSC period.
Class B and Class C shareholders must notify the Transfer Agent either directly
or through Prudential Securities or Prusec that they are eligible for this
special exchange privilege.
The Exchange Privilege is not a right and may be suspended, terminated or
modified on 60 days' notice to shareholders.
FREQUENT TRADING. The Fund and the other Prudential Mutual Funds are not
intended to serve as vehicles for frequent trading in response to short-term
fluctuations in the market. Due to the disruptive effect that market timing
investment strategies and excessive trading can have on efficient portfolio
management, each Prudential Mutual Fund and the Fund reserves the right to
refuse purchase orders and exchanges by any person, group or commonly controlled
accounts, if, in the Manager's sole judgment, such person, group or accounts
were following a market timing strategy or were otherwise engaging in excessive
trading (Market Timers).
To implement this authority to protect the Fund and its shareholders from
excessive trading, the Fund will reject all exchanges and purchases from a
Market Timer unless the Market Timer has entered into a written agreement with
the Fund or its affiliates pursuant to which the Market Timer has agreed to
abide by certain procedures, which include a daily dollar limit on trading. The
Fund may notify the Market Timer of rejection of an exchange or purchase order
subsequent to the day on which the order was placed.
SHAREHOLDER SERVICES
In addition to the Exchange Privilege, as a shareholder in the Series, you can
take advantage of the following services and privileges:
- AUTOMATIC REINVESTMENT OF DIVIDENDS AND/OR DISTRIBUTIONS WITHOUT A SALES
CHARGE. For your convenience, all dividends and distributions are automatically
reinvested in full and fractional shares of the Series at NAV without a sales
charge. You may direct the Transfer Agent in writing not less than 5 full
business days prior to the record date to have subsequent dividends and/or
distributions sent in cash rather than reinvested. If you hold shares through
Prudential Securities, you should contact your financial adviser.
- AUTOMATIC SAVINGS ACCUMULATION PLAN (ASAP). Under ASAP you may make regular
purchases of the Series' shares in amounts as little as $50 via an automatic
debit to a bank account or Prudential Securities account (including a Command
Account). For additional information about this service, you may contact your
Prudential Securities financial adviser, Prusec representative or the Transfer
Agent directly.
- SYSTEMATIC WITHDRAWAL PLAN. A systematic withdrawal plan is available to
shareholders which provides for monthly or quarterly checks. Withdrawals of
Class B and Class C shares may be subject to a CDSC. See "How to Sell Your
Shares-- Contingent Deferred Sales Charges" above.
30
<PAGE>
- REPORTS TO SHAREHOLDERS. The Fund will send you annual and semi-annual
reports. The financial statements appearing in annual reports are audited by
independent accountants. In order to reduce duplicate mailing and printing
expenses, the Fund will provide one annual and semi-annual shareholder report
and annual prospectus per household. You may request additional copies of such
reports by calling (800) 225-1852 or by writing to the Fund at Gateway Center
Three, 100 Mulberry Street, Newark, New Jersey 07102-4077. In addition, monthly
unaudited financial data is available upon request from the Fund.
- SHAREHOLDER INQUIRIES. Inquiries should be addressed to the Fund at Gateway
Center Three, 100 Mulberry Street, Newark, New Jersey 07102-4077, or by
telephone, at (800) 225-1852 (toll-free) or, from outside the U.S.A., at (908)
417-7555 (collect).
For additional information regarding the services and privileges described
above, see "Shareholder Investment Account" in the Statement of Additional
Information.
31
<PAGE>
DESCRIPTION OF SECURITY RATINGS
MOODY'S INVESTORS SERVICE
BOND RATINGS
Aaa: Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edged." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group, they comprise what are generally known
as high grade bonds. They are rated lower than 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
which make the long-term risks appear somewhat larger than the Aaa securities.
A: Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper-medium-grade obligations. Factors giving security
to principal and interest are considered adequate but elements may be present
which suggest a susceptibility to impairment sometime in the future.
Baa: Bonds which are rated Baa are considered as medium grade obligations,
I.E., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present, but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba: Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate, and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Bonds rated within the Aa, A, Baa, Ba and B categories which Moody's believes
possess the strongest credit attributes within those categories are designated
by the symbols Aa1, A1, Baa1, Ba1 and B1.
Caa: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca: Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
C: Bonds which are rated C are the lowest-rated class of bonds, and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
SHORT-TERM RATINGS
Moody's ratings for tax-exempt notes and other short-term loans are designated
Moody's Investment Grade (MIG). This distinction is in recognition of the
differences between short-term and long-term credit risk.
MIG 1: Loans bearing the designation MIG 1 are of the best quality, enjoying
strong protection by established cash flows, superior liquidity support or
demonstrated broad-based access to the market for refinancing.
A-1
<PAGE>
MIG 2: Loans bearing the designation MIG 2 are of high quality, with margins
of protection ample although not so large as in the preceding group.
MIG 3: Loans bearing the designation MIG 3 are of favorable quality, with all
security elements accounted for but lacking the strength of the preceding
grades.
MIG 4: Loans bearing the designation MIG 4 are of adequate quality.
Protection commonly regarded and required of an investment security is present
and although not distinctly or predominantly speculative, there is specific
risk.
SHORT-TERM DEBT RATINGS
Moody's Short-Term Debt Ratings are opinions of the ability of issuers to
repay punctually senior debt obligations which have an original maturity not
exceeding one year.
Prime-1: Issuers rated 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.
Prime-3: Issuers rated Prime-3 (or supporting institutions) have an
acceptable ability for repayment of senior short-term debt obligations.
Not Prime: Issuers rated Not Prime do not fall within any of the Prime rating
categories.
STANDARD & POOR'S RATINGS GROUP
BOND RATINGS
AAA: Debt rated AAA has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.
AA: Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the highest-rated issues only in small degree.
A: Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB: Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher-rated categories.
BB, B, CCC, CC and C: Debt rated BB, B, CCC, CC or C is regarded as having
predominantly speculative characteristics with respect to capacity to pay
interest and repay principal. BB indicates the least degree of speculation and C
the highest. While such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
D: Debt rated D is in payment default. This rating is used when interest
payments or principal payments are not made on the date due even if the
applicable grace period has not expired, unless S&P believes that such payments
will be made during such grace period.
COMMERCIAL PAPER RATINGS
An S&P Commercial Paper rating is a current assessment of the likelihood of
timely payment of debt considered short-term in the relevant market.
A-2
<PAGE>
A-1: The A-1 designation indicates that the degree of safety regarding timely
payment is strong. Those issues determined to possess extremely strong safety
characteristics are denoted with a plus sign (+) designation.
A-2: Capacity for timely payment on issues with the designation A-2 is
satisfactory. However, the relative degree of safety is not as high as for
issues designated A-1.
A-3: Issues carrying this designation have adequate capacity for timely
payment. They are, however, more vulnerable to the adverse effects of changes in
circumstances than obligations carrying the higher designations.
MUNICIPAL NOTES
A municipal note rating reflects the liquidity concerns and market access
risks unique to municipal notes. Municipal notes due in three years or less will
likely receive a municipal note rating, while notes maturing beyond three years
will most likely receive a long-term debt rating. Municipal notes are rated
SP-1, SP-2 or SP-3. The designation SP-1 indicates a very strong capacity to pay
principal and interest. Those issues determined to possess extremely strong
safety characteristics are denoted with a plus sign (+) designation. An SP-2
designation indicates a satisfactory capacity to pay principal and interest. An
SP-3 designation indicates speculative capacity to pay principal and interest.
A-3
<PAGE>
THE PRUDENTIAL MUTUAL FUND FAMILY
Prudential Investments Fund Management offers a broad range of mutual funds
designed to meet your individual needs. We welcome you to review the investment
options available through our family of funds. For more information on the
Prudential Mutual Funds, including charges and expenses, contact your Prudential
Securities financial adviser or Prusec representative or telephone the Funds at
(800) 225-1852 for a free prospectus. Read the prospectus carefully before you
invest or send money.
TAXABLE BOND FUNDS
--------------------------
Prudential Diversified Bond Fund, Inc.
Prudential Government Income Fund, Inc.
Prudential Government Securities Trust
Short-Intermediate Term Series
Prudential High Yield Fund, Inc.
Prudential Mortgage Income Fund, Inc.
Prudential Structured Maturity Fund, Inc.
Income Portfolio
The BlackRock Government Income Trust
TAX-EXEMPT BOND FUNDS
-----------------------------
Prudential California Municipal Fund
California Series
California Income Series
Prudential Municipal Bond Fund
High Yield Series
Insured Series
Intermediate Series
Prudential Municipal Series Fund
Florida Series
Maryland Series
Massachusetts Series
Michigan Series
New Jersey Series
New York Series
North Carolina Series
Ohio Series
Pennsylvania Series
Prudential National Municipals Fund, Inc.
GLOBAL FUNDS
--------------------
Prudential Europe Growth Fund, Inc.
Prudential Global Genesis Fund, Inc.
Prudential Global Limited Maturity Fund, Inc.
Limited Maturity Portfolio
Prudential Intermediate Global Income Fund, Inc.
Prudential International Bond Fund, Inc.
Prudential Natural Resources Fund, Inc.
Prudential Pacific Growth Fund, Inc.
Prudential World Fund, Inc.
Global Series
International Stock Series
The Global Total Return Fund, Inc.
Global Utility Fund, Inc.
EQUITY FUNDS
--------------------
Prudential Balanced Fund
Prudential Distressed Securities Fund, Inc.
Prudential Dryden Fund
Prudential Active Balanced Fund
Prudential Stock Index Fund
Prudential Small-Cap Index Fund
Prudential Bond Market Index Fund
Prudential Pacific Index Fund
Prudential Europe Index Fund
Prudential Emerging Growth Fund, Inc.
Prudential Equity Fund, Inc.
Prudential Equity Income Fund
Prudential Jennison Series Fund, Inc.
Prudential Jennison Growth Fund
Prudential Jennison Growth & Income Fund
Prudential Multi-Sector Fund, Inc.
Prudential Small-Cap Quantum Fund, Inc.
Prudential Small Company Value Fund, Inc.
Prudential Utility Fund, Inc.
Nicholas-Applegate Fund, Inc.
Nicholas-Applegate Growth Equity Fund
MONEY MARKET FUNDS
--------------------------
- - TAXABLE MONEY MARKET FUNDS
Prudential Government Securities Trust
Money Market Series
U.S. Treasury Money Market Series
Prudential Special Money Market Fund, Inc.
Money Market Series
Prudential MoneyMart Assets, Inc.
- - TAX-FREE MONEY MARKET FUNDS
Prudential Tax-Free Money Fund, Inc.
Prudential California Municipal Fund
California Money Market Series
Prudential Municipal Series Fund
Connecticut Money Market Series
Massachusetts Money Market Series
New Jersey Money Market Series
New York Money Market Series
- - COMMAND FUNDS
Command Money Fund
Command Government Fund
Command Tax-Free Fund
- - INSTITUTIONAL MONEY MARKET FUNDS
Prudential Institutional Liquidity Portfolio, Inc.
Institutional Money Market Series
B-1
<PAGE>
No dealer, sales representative or any other person has been authorized to give
any information or to make any representations, other than those contained in
this Prospectus, in connection with the offer contained herein, and, if given or
made, such other information or representations must not be relied upon as
having been authorized by the Fund or the Distributor. This Prospectus does not
constitute an offer by the Fund or by the Distributor to sell or a solicitation
of any offer to buy any of the securities offered hereby in any jurisdiction to
any person to whom it is unlawful to make such offer in such jurisdiction.
-------------------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
FUND HIGHLIGHTS......................... 2
What are the Series' Risk Factors and
Special Characteristics?............. 2
FUND EXPENSES........................... 4
FINANCIAL HIGHLIGHTS.................... 5
HOW THE FUND INVESTS.................... 8
Investment Objective and Policies..... 8
Other Investments and Policies........ 13
Investment Restrictions............... 14
HOW THE FUND IS MANAGED................. 14
Manager............................... 14
Distributor........................... 15
Portfolio Transactions................ 17
Custodian and Transfer and Dividend
Disbursing Agent..................... 17
HOW THE FUND VALUES ITS SHARES.......... 17
HOW THE FUND CALCULATES PERFORMANCE..... 18
TAXES, DIVIDENDS AND DISTRIBUTIONS...... 18
GENERAL INFORMATION..................... 20
Description of Shares................. 20
Additional Information................ 21
SHAREHOLDER GUIDE....................... 21
How to Buy Shares of the Fund......... 21
Alternative Purchase Plan............. 22
How to Sell Your Shares............... 25
Conversion Feature--Class B Shares.... 28
How to Exchange Your Shares........... 29
Shareholder Services.................. 30
DESCRIPTION OF SECURITY RATINGS......... A-1
THE PRUDENTIAL MUTUAL FUND FAMILY....... B-1
</TABLE>
- -------------------------------------------
MF123A 44404FM
Class A: 74435M-83-8
CUSIP Nos.: Class B: 74435M-84-6
Class C: 74435M-49-9
PRUDENTIAL
MUNICIPAL
SERIES FUND
----------------------------------------
OHIO SERIES
PROSPECTUS
October 30, 1997
www.prudential.com
[LOGO] Prudential
Investments
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
(PENNSYLVANIA SERIES)
- --------------------------------------------------------------------------------
PROSPECTUS DATED OCTOBER 30, 1997
- ----------------------------------------------------------------
Prudential Municipal Series Fund (the Fund) (Pennsylvania Series) (the Series)
is one of thirteen series of an open-end, management investment company, or
mutual fund. This Series is diversified and is designed to provide the maximum
amount of income that is exempt from Pennsylvania personal income tax and
federal income tax consistent with the preservation of capital and, in
conjunction therewith, the Series may invest in debt securities with the
potential for capital gain. The net assets of the Series are invested primarily
in obligations within the four highest ratings of Moody's Investors Service,
Standard & Poor's Ratings Group or another nationally recognized statistical
rating organization or in unrated obligations which, in the opinion of the
Fund's investment adviser, are of comparable quality. The Series, may, however,
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. Subject to the limitations described herein, the Series
may utilize derivatives, including buying and selling futures contracts and
options thereon for the purpose of hedging its portfolio securities. There can
be no assurance that the Series' investment objective will be achieved. See "How
the Fund Invests--Investment Objective and Policies." The Fund's address is
Gateway Center Three, 100 Mulberry Street, Newark, New Jersey 07102-4077, and
its telephone number is (800) 225-1852.
This Prospectus sets forth concisely the information about the Fund and the
Pennsylvania Series that a prospective investor should know before investing.
Additional information about the Fund has been filed with the Securities and
Exchange Commission in a Statement of Additional Information dated October 30,
1997, which information is incorporated herein by reference (is legally
considered a part of this Prospectus) and is available without charge upon
request to the Fund at the address or telephone number noted above.
- --------------------------------------------------------------------------------
INVESTORS ARE ADVISED TO READ THIS PROSPECTUS AND RETAIN IT FOR FUTURE
REFERENCE.
- --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
<PAGE>
FUND HIGHLIGHTS
The following summary is intended to highlight certain information contained
in this Prospectus and is qualified in its entirety by the more detailed
information appearing elsewhere herein.
WHAT IS PRUDENTIAL MUNICIPAL SERIES FUND?
Prudential Municipal Series Fund is a mutual fund whose shares are offered
in thirteen series, each of which operates as a separate fund. A mutual fund
pools the resources of investors by selling its shares to the public and
investing the proceeds of such sale in a portfolio of securities designed to
achieve its investment objective. Technically, the Fund is an open-end,
management investment company. Only the Pennsylvania Series is offered
through this Prospectus.
WHAT IS THE SERIES' INVESTMENT OBJECTIVE?
The Series' investment objective is to maximize current income that is
exempt from Commonwealth of Pennsylvania personal income tax and federal
income tax consistent with the preservation of capital. It seeks to achieve
this objective by investing primarily in Pennsylvania municipal and local
government obligations and obligations of other qualifying issuers, such as
issuers located in Puerto Rico, the Virgin Islands and Guam, which pay
income exempt, in the opinion of counsel, from Commonwealth of Pennsylvania
personal income tax and federal income tax (Pennsylvania Obligations). There
can be no assurance that the Series' investment objective will be achieved.
See "How the Fund Invests--Investment Objective and Policies" at page 8.
WHAT ARE THE SERIES' RISK FACTORS AND SPECIAL CHARACTERISTICS?
In seeking to achieve its investment objective, the Series will invest at
least 80% of the value of its total assets in Pennsylvania Obligations. This
degree of investment concentration makes the Series particularly susceptible
to factors adversely affecting issuers of Pennsylvania Obligations. See "How
the Fund Invests--Investment Objective and Policies-- Special
Considerations" at page 13. The Series may invest up to 30% of its total
assets in high yield securities, commonly known as "junk bonds," which may
be considered speculative and are subject to the risk of an issuer's
inability to meet principal and interest payments on the obligations as well
as price volatility. See "How the Fund Invests--Investment Objective and
Policies--Risk Factors Relating to Investing in High Yield Municipal
Obligations" at Page 11. To hedge against changes in interest rates, the
Series may also purchase put options and engage in transactions involving
derivatives, including financial futures contracts and options thereon. See
"How the Fund Invests--Investment Objective and Policies--Futures Contracts
and Options Thereon" at page 12. As with an investment in any mutual fund,
an investment in this Series can decrease in value and you can lose money.
WHO MANAGES THE FUND?
Prudential Investments Fund Management LLC (PIFM or the Manager) is the
Manager of the Fund and is compensated for its services at an annual rate of
.50 of 1% of the Series' average daily net assets. As of September 30, 1997,
PIFM served as manager or administrator to 63 investment companies,
including 41 mutual funds, with aggregate assets of approximately $59.9
billion. The Prudential Investment Corporation, which does business under
the name Prudential Investments (PI, the Subadviser or the investment
adviser), furnishes investment advisory services in connection with the
management of the Fund under a Subadvisory Agreement with PIFM. See "How the
Fund is Managed--Manager" at page 15.
WHO DISTRIBUTES THE SERIES' SHARES?
Prudential Securities Incorporated (Prudential Securities, PSI or the
Distributor), a major securities underwriter and securities and commodities
broker, acts as the Distributor of the Series' Class A, Class B and Class C
shares and is paid a distribution and service fee with respect to Class A
shares which is currently being charged at the annual rate of .10 of 1% of
the average daily net assets of the Class A shares and is paid a
distribution and service fee with respect to Class B shares
2
<PAGE>
at the annual rate of .50 of 1% of the average daily net assets of the Class
B shares and is paid an annual distribution and service fee with respect to
Class C shares which is currently being charged at the rate of .75 of 1% of
the average daily net assets of the Class C shares. See "How the Fund is
Managed--Distributor" at page 16.
WHAT IS THE MINIMUM INVESTMENT?
The minimum initial investment is $1,000 for Class A and Class B shares
and $5,000 for Class C shares. The minimum subsequent investment is $100 for
Class A, Class B and Class C shares. There is no minimum investment
requirement for certain employee savings plans. For purchases made through
the Automatic Savings Accumulation Plan, the minimum initial and subsequent
investment is $50. See "Shareholder Guide--How to Buy Shares of the Fund" at
page 23 and "Shareholder Guide--Shareholder Services" at page 31.
HOW DO I PURCHASE SHARES?
You may purchase shares of the Series through Prudential Securities, Pruco
Securities Corporation (Prusec) or directly from the Fund through its
transfer agent, Prudential Mutual Fund Services LLC (PMFS or the Transfer
Agent), at the net asset value per share (NAV) next determined after receipt
of your purchase order by the Transfer Agent or Prudential Securities plus a
sales charge which may be imposed either (i) at the time of purchase (Class
A shares) or (ii) on a deferred basis (Class B or Class C shares). See "How
the Fund Values its Shares" at page 18 and "Shareholder Guide--How to Buy
Shares of the Fund" at page 23.
WHAT ARE MY PURCHASE ALTERNATIVES?
The Series offers three classes of shares:
- Class A Shares:
Sold with an initial sales charge of up to 3% of the
offering price.
- Class B Shares:
Sold without an initial sales charge but are subject to
a contingent deferred sales charge or CDSC (declining
from 5% to zero of the lower of the amount invested or
the redemption proceeds) which will be imposed on
certain redemptions made within six years of purchase.
Although Class B shares are subject to higher ongoing
distribution-related expenses than Class A shares, Class
B shares will automatically convert to Class A shares
(which are subject to lower ongoing distribution-related
expenses) approximately seven years after purchase.
- Class C Shares:
Sold without an initial sales charge and, for one year
after purchase, are subject to a 1% CDSC on redemptions.
Like Class B shares, Class C shares are subject to
higher ongoing distribution-related expenses than Class
A shares but do not convert to another class.
See "Shareholder Guide--Alternative Purchase Plan" at page 24.
HOW DO I SELL MY SHARES?
You may redeem your shares at any time at the NAV next determined after
Prudential Securities or the Transfer Agent receives your sell order.
However, the proceeds of redemptions of Class B and Class C shares may be
subject to a CDSC. See "Shareholder Guide-- How to Sell Your Shares" at page
26.
HOW ARE DIVIDENDS AND DISTRIBUTIONS PAID?
The Series expects to declare daily and pay monthly dividends of net
investment income, if any, and make distributions of any net capital gains
at least annually. Dividends and distributions will be automatically
reinvested in additional shares of the Series at NAV without a sales charge
unless you request that they be paid to you in cash. See "Taxes, Dividends
and Distributions" at page 19.
3
<PAGE>
FUND EXPENSES
(PENNSYLVANIA SERIES)
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES CLASS C SHARES
----------------- ----------------- -----------------
<S> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES+
Maximum Sales Load Imposed on
Purchases (as a percentage of
offering price)................... 3% None None
Maximum Deferred Sales Load (as a
percentage of original purchase
price or redemption proceeds,
whichever is lower)............... None 5% during the 1% on redemptions
first year, made within one
decreasing by 1% year of purchase
annually to 1% in
the fifth and
sixth years and
0% the seventh
year*
Maximum Sales Load Imposed on
Reinvested Dividends.............. None None None
Redemption Fees.................... None None None
Exchange Fee....................... None None None
</TABLE>
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES CLASS C SHARES
----------------- ----------------- -----------------
<S> <C> <C> <C>
ANNUAL FUND OPERATING EXPENSES**
(as a percentage of average net assets)
Management Fees.................... .50% .50% .50%
12b-1 Fees (After Reduction)....... .10++ .50 .75++
Other Expenses..................... .17 .17 .17
----- ------ ------
Total Fund Operating Expenses (and
After Reduction).................. .77 1.17 1.42
----- ------ ------
----- ------ ------
</TABLE>
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
EXAMPLE
You would pay the following expenses on a $1,000
investment, assuming (1) 5% annual return and (2)
redemption at the end of each time period:
Class A................................................ 38 54 72 123
Class B................................................ 62 67 74 126
Class C................................................ 24 45 78 170
You would pay the following expenses on the same
investment, assuming no redemption:
Class A................................................ 38 54 72 123
Class B................................................ 12 37 64 126
Class C................................................ 14 45 78 170
</TABLE>
The above examples are based on restated data for the Series' fiscal year
ended August 31, 1997. THE EXAMPLES SHOULD NOT BE CONSIDERED A
REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER
OR LESS THAN THOSE SHOWN.
The purpose of this table is to assist investors in understanding the
various costs and expenses that an investor in the Series will bear,
whether directly or indirectly. For more complete descriptions of the
various costs and expenses, see "How the Fund is Managed." "Other
Expenses" includes operating expenses of the Series, such as Trustees' and
professional fees, registration fees, reports to shareholders and transfer
agency and custodian fees.
- ---------------
* Class B shares will automatically convert to Class A shares approximately
seven years after purchase. See "Shareholder Guide--Conversion Feature--
Class B Shares."
** The expense information in the table has been restated to reflect current
fees. Effective September 1, 1997, PIFM eliminated its management fee
waiver (.05 of 1%). See "How the Fund is Managed--Manger--Fee Waivers."
+ Pursuant to rules of the National Association of Securities Dealers, Inc.,
the aggregate initial sales charges, deferred sales charges and
asset-based sales charges on shares of the Series may not exceed 6.25% of
total gross sales, subject to certain exclusions. This 6.25% limitation
is imposed on each class of the Series rather than on a per shareholder
basis. Therefore, long-term shareholders of the Series may pay more in
total sales charges than the economic equivalent of 6.25% of such
shareholders' investment in such shares. See "How the Fund is
Managed--Distributor."
++ Although the Class A and Class C Distribution and Service Plans provide that
the Fund may pay a distribution fee of up to .30 of 1% and 1% per annum
of the average daily net assets of the Class A and Class C shares,
respectively, the Distributor has agreed to limit its distribution fees
with respect to the Class A and Class C shares of the Series to no more
than .10 of 1% and .75 of 1% of the average daily net asset value of the
Class A shares and Class C shares, respectively, for the fiscal year
ending August 31, 1998. Total Fund Operating Expenses (Before Waiver) of
the Class A and Class C shares without such limitations would be .92% and
1.62%, respectively. See "How the Fund is Managed--Distributor."
4
<PAGE>
FINANCIAL HIGHLIGHTS
(FOR A SHARE OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT EACH OF THE INDICATED
PERIODS)
(CLASS A SHARES)
The following financial highlights, for the fiscal year ended August 31, 1997,
have been audited by Price Waterhouse LLP, independent accountants, and by
Deloitte and Touche LLP, independent auditors, for the four years ended August
31, 1996. Each of the respective reports by Price Waterhouse LLP and Deloitte &
Touche LLP on such financial statements was unqualified. This information should
be read in conjunction with the financial statements and the notes thereto,
which appear in the Statement of Additional Information. The following financial
highlights contain selected data for a Class A share of beneficial interest
outstanding, total return, ratios to average net assets and other supplemental
data for the periods indicated. This information is based on data contained in
the financial statements. Further performance information is contained in the
annual report, which may be obtained without charge. See "Shareholder
Guide--Shareholder Services--Reports to Shareholders."
<TABLE>
<CAPTION>
CLASS A
------------------------------------------------------------------------------------------
JANUARY 22,
1990 (a)
YEAR ENDED AUGUST 31, THROUGH
------------------------------------------------------------------------- AUGUST 31,
1997 1996 1995 1994 1993 1992 1991 1990
------- ------- ------- ------- ------- ------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning of
period...................... $ 10.49 $ 10.55 $ 10.42 $ 11.21 $ 10.55 $ 9.96 $ 9.60 $ 9.83
------- ------- ------- ------- ------- ------- ------- ------
INCOME FROM INVESTMENT
OPERATIONS
Net investment income......... .59 .59(c) .60(c) .59 .62 .62 .62(c) .38(c)
Net realized and unrealized
gain (loss) on investment
transactions................ .33 (.06) .13 (.68) .70 .59 .39 (.23)
------- ------- ------- ------- ------- ------- ------- ------
Total from investment
operations.................. .92 .53 .73 (.09) 1.32 1.21 1.01 .15
------- ------- ------- ------- ------- ------- ------- ------
LESS DISTRIBUTIONS
Dividends from net investment
income...................... (.59) (.59) (.60) (.59) (.62) (.62) (.62) (.38)
Distribution in excess of net
investment income........... --(e) -- -- -- -- -- -- --
Distributions from net
realized gains.............. (.09) -- -- (.11) (.04) -- (.03) --
------- ------- ------- ------- ------- ------- ------- ------
Total distributions........... (.68) (.59) (.60) (.70) (.66) (.62) (.65) (.38)
------- ------- ------- ------- ------- ------- ------- ------
Net asset value, end of
period...................... $ 10.73 $ 10.49 $ 10.55 $ 10.42 $ 11.21 $ 10.55 $ 9.96 $ 9.60
------- ------- ------- ------- ------- ------- ------- ------
------- ------- ------- ------- ------- ------- ------- ------
TOTAL RETURN (d):............. 9.01% 5.08% 7.35% (.82)% 12.86% 12.44% 10.82% 1.43%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(000)....................... $89,604 $69,659 $50,696 $10,651 $ 9,342 $ 5,908 $ 3,521 $1,823
Average net assets (000)...... $83,552 $59,995 $30,092 $10,315 $ 7,354 $ 4,439 $ 2,366 $ 977
Ratios to average net assets:
Expenses, including
distribution fee........... .72%(c) .75%(c) .80%(c) .75% .78% .81% .83%(c) .78%(b)(c)
Expenses, excluding
distribution fee........... .62%(c) .65%(c) .70%(c) .65% .68% .71% .74%(c) .68%(b)(c)
Net investment income....... 5.60%(c) 5.56%(c) 5.76%(c) 5.52% 5.69% 5.99% 6.32%(c) 6.51%(b)(c)
Portfolio turnover rate....... 21% 26% 19% 22% 13% 25% 62% 37%
</TABLE>
- ---------------
(a) Commencement of offering of Class A shares.
(b) Annualized.
(c) Net of expense subsidy/management fee waiver.
(d) Total return does not consider the effects of sales loads. Total
return is calculated assuming a purchase of shares on the first day
and a sale on the last day of each period reported and includes
reinvestment of dividends and distributions. Total returns for
periods of less than a full year are not annualized.
(e) Less than $.005 per share.
5
<PAGE>
FINANCIAL HIGHLIGHTS
(FOR A SHARE OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT EACH OF THE INDICATED
PERIODS)
(CLASS B SHARES)
The following financial highlights, for the fiscal year ended August 31, 1997,
have been audited by Price Waterhouse LLP, independent accountants, and by
Deloitte and Touche LLP, independent auditors, for the four years ended August
31, 1996. Each of the respective reports by Price Waterhouse LLP and Deloitte &
Touche LLP on such financial statements was unqualified. This information should
be read in conjunction with the financial statements and the notes thereto,
which appear in the Statement of Additional Information. The following financial
highlights contain selected data for a Class B share of beneficial interest
outstanding, total return, ratios to average net assets and other supplemental
data for the periods indicated. This information is based on data contained in
the financial statements. Further performance information is contained in the
annual report, which may be obtained without charge. See "Shareholder
Guide--Shareholder Services--Reports to Shareholders."
<TABLE>
<CAPTION>
CLASS B
--------------------------------------------------------------------------------------
YEAR ENDED AUGUST 31,
--------------------------------------------------------------------------------------
1997 1996 1995 1994 1993 1992 1991
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of
period........................ $ 10.49 $ 10.55 $ 10.42 $ 11.21 $ 10.54 $ 9.96 $ 9.60
-------- -------- -------- -------- -------- -------- --------
INCOME FROM INVESTMENT
OPERATIONS
Net investment income........... .55(a) .55(a) .56(a) .55 .57 .58 .58(a)
Net realized and unrealized gain
(loss) on investment
transactions.................. .32 (.06) .13 (.68) .71 .58 .39
-------- -------- -------- -------- -------- -------- --------
Total from investment
operations................. .87 .49 .69 (.13) 1.28 1.16 .97
-------- -------- -------- -------- -------- -------- --------
LESS DISTRIBUTIONS
Dividends from net investment
income........................ (.55) (.55) (.56) (.55) (.57) (.58) (.58)
Distributions in excess of net
investment income............. --(f) -- -- -- -- -- --
Distributions from net realized
gains......................... (.09) -- -- (.11) (.04) -- (.03)
-------- -------- -------- -------- -------- -------- --------
Total distributions......... (.64) (.55) (.56) (.66) (.61) (.58) (.61)
-------- -------- -------- -------- -------- -------- --------
Net asset value, end of
period........................ $ 10.72 $ 10.49 $ 10.55 $ 10.42 $ 11.21 $ 10.54 $ 9.96
-------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- --------
TOTAL RETURN (c):............... 8.58% 4.66% 6.92% (1.22)% 12.54% 11.92% 10.39%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(000)......................... $135,275 $167,809 $202,633 $257,732 $263,752 $206,028 $170,162
Average net assets (000)........ $148,394 $189,902 $223,082 $266,594 $229,955 $186,113 $146,591
Ratios to average net assets:
Expenses, including
distribution fee............. 1.12%(a) 1.15%(a) 1.17%(a) 1.15% 1.18% 1.21% 1.23%(a)
Expenses, excluding
distribution fee............. .62%(a) .65%(a) .67%(a) .65% .68% .71% .74%(a)
Net investment income......... 5.20%(a) 5.16%(a) 5.44%(a) 5.11% 5.29% 5.59% 5.94%(a)
Portfolio turnover rate......... 21% 26% 19% 22% 13% 25% 62%
<CAPTION>
CLASS B
-------------------------------------- APRIL 3,
1987(d)
YEAR ENDED AUGUST 31, THROUGH
-------------------------------------- AUGUST 31,
1990 1989 (b) 1988 1987
--------- --------- -------- ----------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of
period........................ $ 9.81 $ 9.47 $ 9.73 $ 10.00
--------- --------- -------- ----------
INCOME FROM INVESTMENT
OPERATIONS
Net investment income........... .61(a) .65(a) .67(a) .26(a)
Net realized and unrealized gain
(loss) on investment
transactions.................. (.21) .34 (.26) (.27)
--------- --------- -------- ----------
Total from investment
operations................. .40 .99 .41 (.01)
--------- --------- -------- ----------
LESS DISTRIBUTIONS
Dividends from net investment
income........................ (.61) (.65) (.67) (.26)
Distributions in excess of net
investment income............. -- -- -- --
Distributions from net realized
gains......................... -- -- -- --
--------- --------- -------- ----------
Total distributions......... (.61) (.65) (.67) (.26)
--------- --------- -------- ----------
Net asset value, end of
period........................ $ 9.60 $ 9.81 $ 9.47 $ 9.73
--------- --------- -------- ----------
--------- --------- -------- ----------
TOTAL RETURN (c):............... 4.08% 10.75% 4.53% (0.15)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(000)......................... $ 150,824 $118,280 $ 52,503 $16,340
Average net assets (000)........ $ 141,183 $ 86,496 $ 35,700 $ 4,403
Ratios to average net assets:
Expenses, including
distribution fee............. 1.02%(a) .77%(a) .53%(a) 0%(a)(e)
Expenses, excluding
distribution fee............. .53%(a) .29%(a) .06%(a) 0%(a)(e)
Net investment income......... 6.05%(a) 6.27%(a) 6.66%(a) 5.54%(a)(e)
Portfolio turnover rate......... 37% 11% 137% 42%
</TABLE>
- --------------------
(a) Net of expense subsidy/management fee waiver.
(b) On December 31, 1988, Prudential Mutual Fund Management, Inc.
succeeded The Prudential Insurance Company of America as manager of
the Fund.
(c) Total return does not consider the effects of sales loads. Total
return is calculated assuming a purchase of shares on the first day
and a sale on the last day of each period reported and includes
reinvestment of dividends and distributions. Total returns for
periods of less than a full year are not annualized.
(d) Commencement of offering of Class B shares.
(e) Annualized.
(f) Less than $.005 per share.
6
<PAGE>
FINANCIAL HIGHLIGHTS
(FOR A SHARE OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT EACH OF THE INDICATED
PERIODS)
(CLASS C SHARES)
The following financial highlights, for the fiscal year ended August 31, 1997,
have been audited by Price Waterhouse LLP, independent accountants, and by
Deloitte and Touche LLP, independent auditors, for the two years ended August
31, 1996 and for the period from August 1, 1994 through August 31, 1994. Each of
the respective reports by Price Waterhouse LLP and Deloitte & Touche LLP on such
financial statements was unqualified. This information should be read in
conjunction with the financial statements and the notes thereto, which appear in
the Statement of Additional Information. The following financial highlights
contain selected data for a Class C share of beneficial interest outstanding,
total return, ratios to average net assets and other supplemental data for the
periods indicated. This information is based on data contained in the financial
statements. Further performance information is contained in the annual report,
which may be obtained without charge. See "Shareholder Guide-- Shareholder
Services--Reports to Shareholders."
<TABLE>
<CAPTION>
CLASS C
-------------------------------------------
AUGUST 1,
1994 (a)
YEAR ENDED AUGUST 31, THROUGH
---------------------------- AUGUST 31,
1997 1996 1995 1994
------ ------ ------ ----------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period......... $10.49 $10.55 $10.42 $10.44
------ ------ ------ ----------
INCOME FROM INVESTMENT OPERATIONS
Net investment income........................ .52(d) .52(d) .53(d) .04
Net realized and unrealized gain (loss) on
investment transactions.................... .32 (.06) .13 (.02)
------ ------ ------ ----------
Total from investment operations......... .84 .46 .66 .02
------ ------ ------ ----------
LESS DISTRIBUTIONS
Dividends from net investment income......... (.52) (.52) (.53) (.04)
Distributions in excess of net investment
income..................................... --(e) -- -- --
Distributions from net realized gains........ (.09) -- -- --
------ ------ ------ ----------
Total distributions...................... (.61) (.52) (.53) (.04)
------ ------ ------ ----------
Net asset value, end of period............... $10.72 $10.49 $10.55 $10.42
------ ------ ------ ----------
------ ------ ------ ----------
TOTAL RETURN (c):............................ 8.31% 4.41% 6.65% .14%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000).............. $ 471 $ 829 $ 336 $ 90
Average net assets (000)..................... $ 678 $ 704 $ 223 $ 1
Ratios to average net assets:
Expenses, including distribution fee....... 1.37%(d) 1.40%(d) 1.44%(d) 2.00%(b)
Expenses, excluding distribution fee....... .62%(d) .65%(d) .69%(d) 1.25%(b)
Net investment income...................... 4.95%(d) 4.91%(d) 5.14%(d) 8.51%(b)
Portfolio turnover rate...................... 21% 26% 19% 22%
</TABLE>
- ---------------
(a) Commencement of offering of Class C shares.
(b) Annualized.
(c) Total return does not consider the effects of sales loads. Total
return is calculated assuming a purchase of shares on the first
day and a sale on the last day of each period reported and
includes reinvestment of dividends and distributions. Total
returns for periods less than a full year are not annualized.
(d) Net of management fee waiver.
(e) Less than $.005 per share.
7
<PAGE>
HOW THE FUND INVESTS
INVESTMENT OBJECTIVE AND POLICIES
PRUDENTIAL MUNICIPAL SERIES FUND (THE FUND) IS AN OPEN-END, MANAGEMENT
INVESTMENT COMPANY, OR MUTUAL FUND, CONSISTING OF THIRTEEN SEPARATE SERIES. EACH
OF THESE SERIES IS MANAGED INDEPENDENTLY. THE PENNSYLVANIA SERIES (THE SERIES)
IS DIVERSIFIED AND ITS INVESTMENT OBJECTIVE IS TO MAXIMIZE CURRENT INCOME THAT
IS EXEMPT FROM COMMONWEALTH OF PENNSYLVANIA PERSONAL INCOME TAX AND FEDERAL
INCOME TAX CONSISTENT WITH THE PRESERVATION OF CAPITAL AND, IN CONJUNCTION
THEREWITH, THE SERIES MAY INVEST IN DEBT SECURITIES WITH THE POTENTIAL FOR
CAPITAL GAIN. See "Investment Objectives and Policies" in the Statement of
Additional Information.
THE SERIES' INVESTMENT OBJECTIVE IS A FUNDAMENTAL POLICY AND, THEREFORE, MAY
NOT BE CHANGED WITHOUT THE APPROVAL OF THE HOLDERS OF A MAJORITY OF THE SERIES'
OUTSTANDING VOTING SECURITIES AS DEFINED IN THE INVESTMENT COMPANY ACT OF 1940,
AS AMENDED (THE INVESTMENT COMPANY ACT). THE SERIES' POLICIES THAT ARE NOT
FUNDAMENTAL MAY BE MODIFIED BY THE TRUSTEES.
THE SERIES WILL INVEST PRIMARILY IN PENNSYLVANIA, MUNICIPAL AND LOCAL
GOVERNMENT OBLIGATIONS AND OBLIGATIONS OF OTHER QUALIFYING ISSUERS, SUCH AS
ISSUERS LOCATED IN PUERTO RICO, THE VIRGIN ISLANDS OR GUAM, WHICH PAY INCOME
EXEMPT, IN THE OPINION OF COUNSEL, FROM COMMONWEALTH OF PENNSYLVANIA PERSONAL
INCOME TAX AND FEDERAL INCOME TAX (PENNSYLVANIA OBLIGATIONS). THERE CAN BE NO
ASSURANCE THAT THE SERIES WILL BE ABLE TO ACHIEVE ITS INVESTMENT OBJECTIVE.
As with an investment in any mutual fund, an investment in this Series can
decrease and you can lose money.
Interest on certain municipal obligations may be a preference item for
purposes of the federal alternative minimum tax. The Series may invest without
limit in municipal obligations that are "private activity bonds" (as defined in
the Internal Revenue Code) the interest on which would be a preference item for
purposes of the federal alternative minimum tax. See "Taxes, Dividends and
Distributions." Under Pennsylvania law, dividends paid by the Series are exempt
from Pennsylvania personal income tax for resident individuals to the extent
they are derived from interest payments on Pennsylvania Obligations.
Pennsylvania Obligations could include general obligation bonds of the
Commonwealth, counties, cities, towns, etc., revenue bonds of utility systems,
highways, bridges, port and airport facilities, colleges, hospitals, etc., and
industrial development and pollution control bonds, the interest on which is
exempt, in the opinion of bond counsel to the issuer, from Pennsylvania personal
income taxes. The Series will invest in long-term obligations, and the
dollar-weighted average maturity of the Series' portfolio will generally range
between 10-20 years. The Series also may invest in certain short-term,
tax-exempt notes such as Tax Anticipation Notes, Revenue Anticipation Notes,
Bond Anticipation Notes, Construction Loan Notes and variable and floating rate
demand notes.
Generally, municipal obligations with longer maturities produce higher yields
and are subject to greater price fluctuations as a result of changes in interest
rates (market risk) than municipal obligations with shorter maturities. The
prices of municipal obligations vary inversely with interest rates. Interest
rates are currently much lower than in recent years. As a general matter bond
prices and the Series' net asset value will vary inversely with interest rate
fluctuations. If rates were to rise sharply, the prices of bonds in the Series'
portfolio might be adversely affected.
THE SERIES MAY INVEST ITS ASSETS IN FLOATING RATE AND VARIABLE RATE
SECURITIES, INCLUDING PARTICIPATION INTERESTS THEREIN AND INVERSE FLOATERS.
There is no limit on the amount of such securities that the Series may purchase.
Floating rate securities normally have a rate of interest which is set as a
specific percentage of a designated base rate, such as the rate on Treasury
bonds or bills or the prime rate at a major commercial bank. The interest rate
on floating rate securities changes periodically when there is a change in the
designated base interest rate. Variable rate securities provide for a specified
periodic adjustment in the interest rate based on prevailing market rates and
generally would allow the Series to demand payment of the
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obligation on short notice at par plus accrued interest, which amount may be
more or less than the amount the Series paid for them. An inverse floater is a
debt instrument with a floating or variable interest rate that moves in the
opposite direction of the interest rate on another security or the value of an
index. Changes in the interest rate on the other security or index inversely
affect the residual interest rate paid on the inverse floater, with the result
that the inverse floater's price will be considerably more volatile than that of
a fixed rate bond. The market for inverse floaters is relatively new.
THE SERIES MAY ALSO INVEST IN MUNICIPAL LEASE OBLIGATIONS. A MUNICIPAL LEASE
OBLIGATION IS A MUNICIPAL SECURITY THE INTEREST ON AND PRINCIPAL OF WHICH IS
PAYABLE OUT OF LEASE PAYMENTS MADE BY THE PARTY LEASING THE FACILITIES FINANCED
BY THE ISSUE. Typically, municipal lease obligations are issued by a state or
municipal financing authority to provide funds for the construction of
facilities (E.G., schools, dormitories, office buildings or prisons) or the
acquisition of equipment. The facilities are typically used by the state or
municipality pursuant to a lease with a financing authority. Certain municipal
lease obligations may trade infrequently. Accordingly, the investment adviser
will monitor the liquidity of municipal lease obligations under the supervision
of the Trustees. Municipal lease obligations will not be considered illiquid for
purposes of the Series' 15% limitation on illiquid securities provided the
investment adviser determines that there is a readily available market for such
securities. See "Other Investments and Policies--Illiquid Securities" below.
THE SERIES WILL INVEST AT LEAST 70% OF ITS TOTAL ASSETS IN PENNSYLVANIA
OBLIGATIONS WHICH, AT THE TIME OF PURCHASE, ARE RATED WITHIN THE FOUR HIGHEST
QUALITY GRADES AS DETERMINED BY 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), 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 ANOTHER
NATIONALLY RECOGNIZED STATISTICAL RATING ORGANIZATION (NRSRO) OR, IF UNRATED,
WILL POSSESS CREDITWORTHINESS, IN THE OPINION OF THE INVESTMENT ADVISER,
COMPARABLE TO SUCH "INVESTMENT GRADE" RATED SECURITIES.
THE SERIES MAY ALSO INVEST UP TO 30% OF ITS TOTAL ASSETS IN PENNSYLVANIA
OBLIGATIONS RATED BELOW Baa BY MOODY'S OR BELOW BBB BY S&P OR A COMPARABLE
RATING OF ANOTHER NRSRO OR, IF NON-RATED, OF COMPARABLE QUALITY, IN THE OPINION
OF THE FUND'S INVESTMENT ADVISER, BASED ON ITS CREDIT ANALYSIS. Securities rated
Baa by Moody's and BBB by S&P are described as being investment grade but are
also characterized as having speculative characteristics. Securities rated below
Baa by Moody's and below BBB by S&P are considered speculative. See "Description
of Security Ratings" in the Appendix. Such lower-rated high yield securities are
commonly referred to as "junk bonds." Such securities generally offer a higher
current yield than those in the high rating categories but also involve greater
price volatility and risk of loss of principal and income. The investment
adviser will attempt to manage risk and enhance yield through credit analysis
and careful security selection. See "Risk Factors Relating to Investing in High
Yield Municipal Obligations" below. Subsequent to its purchase by the Series, a
municipal obligation may be assigned a lower rating or cease to be rated. Such
an event would not require the elimination of the issue from the portfolio, but
the investment adviser will consider such an event in determining whether the
Series should continue to hold the security in its portfolio. Many issuers of
lower-quality bonds choose not to have their obligations rated and the Series
may invest in such unrated securities. Investors should carefully consider the
relative risks associated with investments in securities which carry lower
ratings and in comparable non-rated securities.
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During the year ended August 31, 1997, the monthly dollar weighted average
ratings of the debt obligations held by the Series, expressed as a percentage of
the Series' total assets, were as follows:
<TABLE>
<CAPTION>
PERCENTAGE OF
RATINGS TOTAL INVESTMENTS
- --------------- -----------------
<S> <C>
AAA/Aaa 48.14
AA/Aa 7.92
A/A 15.36
BBB/Baa 18.24
BB/Ba 0.43
B/B 0.00
Unrated
AAA/Aaa 2.23
AA/Aa 0.00
A/A 0.95
BBB/Baa 5.49
BB/Ba 1.24
B/B 0.00
</TABLE>
From time to time, the Series may own the majority of a municipal issue. Such
majority-owned holdings may present market and credit risks.
The Series may purchase Pennsylvania Obligations which, in the opinion of the
investment adviser, offer the opportunity for capital appreciation. This may
occur, for example, when the investment adviser believes that the issuer of a
particular Pennsylvania Obligation might receive an upgraded credit standing,
thereby increasing the market value of the bonds it has issued or when the
investment adviser believes that interest rates might decline.
UNDER NORMAL MARKET CONDITIONS, THE SERIES WILL ATTEMPT TO INVEST
SUBSTANTIALLY ALL OF THE VALUE OF ITS ASSETS IN PENNSYLVANIA OBLIGATIONS. As a
matter of fundamental policy, during normal market conditions the Series' assets
will be invested so that at least 80% of the income will be exempt from
Pennsylvania personal income taxes and federal income taxes or the Series will
have at least 80% of its total assets invested in Pennsylvania Obligations.
During abnormal market conditions or to provide liquidity, the Series may hold
cash or cash equivalents or investment grade taxable obligations, including
obligations that are exempt from federal, but not state, taxation and the Series
may invest in tax-free cash equivalents, such as floating rate demand notes,
tax-exempt commercial paper and general obligation and revenue notes, or in
taxable cash equivalents, such as certificates of deposit, bankers acceptances
and time deposits or other short-term taxable investments such as repurchase
agreements. When, in the opinion of the investment adviser, abnormal market
conditions require a temporary defensive position or when there is a scarcity of
bonds exempt from Pennsylvania tax, the Series may invest more than 20% of the
value of its assets in debt securities other than Pennsylvania Obligations or
may invest its assets so that more than 20% of the income is subject to
Pennsylvania or federal income taxes. The Series will treat an investment in a
municipal bond refunded with escrowed U.S. Government securities as U.S.
Government securities for purposes of the Investment Company Act's
diversification requirements provided certain conditions are met. See
"Investment Objectives and Policies--In General" in the Statement of Additional
Information.
THE SERIES MAY ACQUIRE PUT OPTIONS (PUTS) GIVING THE SERIES THE RIGHT TO SELL
SECURITIES HELD IN THE SERIES' PORTFOLIO AT A SPECIFIED EXERCISE PRICE ON A
SPECIFIED DATE. Such puts may be acquired for the purpose of protecting the
Series from a possible decline in the market value of the security to which the
put applies in the event of interest rate fluctuations or, in the case of
liquidity puts, for the purpose of shortening the effective maturity of the
underlying security. The aggregate value of premiums
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paid to acquire puts held in the Series' portfolio (other than liquidity puts)
may not exceed 10% of the net asset value of the Series. The acquisition of a
put may involve an additional cost to the Series by payment of a premium for the
put, by payment of a higher purchase price for securities to which the put is
attached or through a lower effective interest rate.
In addition, there is a credit risk associated with the purchase of puts in
that the issuer of the put may be unable to meet its obligation to purchase the
underlying security. Accordingly, the Series will acquire puts only under the
following circumstances: (1) the put is written by the issuer of the underlying
security and such security is rated within the four highest quality grades as
determined by 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 highest quality grades; or (3) the put is
backed by a letter of credit or similar financial guarantee issued by a person
having securities outstanding which are rated within the two highest quality
grades of an NRSRO.
THE SERIES MAY PURCHASE MUNICIPAL OBLIGATIONS ON A "WHEN-ISSUED" OR "DELAYED
DELIVERY" BASIS, IN EACH CASE WITHOUT LIMIT. When municipal obligations are
offered on a when-issued or delayed delivery basis, the price and coupon rate
are fixed at the time the commitment to purchase is made, but delivery and
payment for the securities take place at a later date. The purchase price for
such securities includes interest accrued during the period between purchase and
settlement and, therefore, no interest accrues to the economic benefit of the
purchaser during such period. In the case of purchases by the Series, the price
that the Series is required to pay on the settlement date may be in excess of
the market value of the municipal obligations on that date. While securities may
be sold prior to the settlement date, the Series intends to purchase these
securities with the purpose of actually acquiring them unless a sale would be
desirable for investment reasons. At the time the Series makes the commitment to
purchase a municipal obligation on a when-issued or delayed delivery basis, it
will record the transaction and reflect the value of the obligation each day in
determining its net asset value. This value may fluctuate from day to day in the
same manner as values of municipal obligations otherwise held by the Series. If
the seller defaults in the sale, the Series could fail to realize the
appreciation, if any, that had occurred. The Series will establish a segregated
account with its Custodian in which it will maintain cash, U.S. Government
securities, equity securities or other liquid, unencumbered assets,
marked-to-market daily, equal in value to its commitments for when-issued or
delayed delivery securities.
THE SERIES MAY ALSO PURCHASE MUNICIPAL FORWARD CONTRACTS. A municipal forward
contract is a municipal security which is purchased on a when-issued basis with
delivery taking place up to five years from the date of purchase. No interest
will accrue on the security prior to the delivery date. The investment adviser
will monitor the liquidity, value, credit quality and delivery of the security
under the supervision of the Trustees.
THE SERIES MAY PURCHASE SECONDARY MARKET INSURANCE ON PENNSYLVANIA OBLIGATIONS
WHICH IT HOLDS OR ACQUIRES. Secondary market insurance would be reflected in the
market value of the municipal obligation purchased and may enable the Series to
dispose of a defaulted obligation at a price similar to that of comparable
municipal obligations which are not in default.
Insurance is not a substitute for the basic credit of an issuer, but
supplements the existing credit and provides additional security therefor. While
insurance coverage for the Pennsylvania Obligations held by the Series reduces
credit risk by providing that the insurance company will make timely payment of
principal and interest if the issuer defaults on its obligation to make such
payment, it does not afford protection against fluctuation in the price, I.E.,
the market value, of the municipal obligations caused by changes in interest
rates and other factors, nor in turn against fluctuations in the net asset value
of the shares of the Series.
RISK FACTORS RELATING TO INVESTING IN HIGH YIELD MUNICIPAL OBLIGATIONS.
FIXED-INCOME SECURITIES ARE SUBJECT TO THE RISK OF AN ISSUER'S INABILITY TO MEET
PRINCIPAL AND INTEREST PAYMENTS ON THE OBLIGATIONS (CREDIT RISK) AND MAY ALSO BE
SUBJECT TO PRICE VOLATILITY DUE TO SUCH FACTORS AS INTEREST RATE SENSITIVITY,
MARKET PERCEPTION OF THE CREDITWORTHINESS OF THE ISSUER AND GENERAL MARKET
LIQUIDITY (MARKET RISK). Lower-rated or unrated (I.E., high yield) securities,
commonly known as "junk bonds," are more likely to react to developments
affecting market and credit risk than are more highly rated securities, which
react primarily to movements in the general level of interest rates. The
investment adviser will perform its own analysis and will not rely principally
on the ratings assigned by the rating services, although such ratings will be
considered by the investment
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adviser. The investment adviser will consider, among other things, credit risk
and market risk, as well as the financial history and condition, the prospects
and the management of an issuer in selecting securities for the Series'
portfolio. The achievement of the Series' investment objective may be more
dependent on the investment adviser's credit analysis than is the case when
investing in only higher quality bonds. Investors should carefully consider the
relative risks of investing in high yield municipal obligations and understand
that such securities are not generally meant for short-term investing and that
yields on junk bonds will fluctuate over time.
The amount of high yield securities outstanding has proliferated recently in
conjunction with the decline in creditworthiness of many obligors on municipal
debt, particularly health care providers and certain governmental bodies. An
economic downturn could severely affect the ability of highly leveraged issuers
to service their debt obligations or to repay their obligations upon maturity.
In addition, the secondary market for high yield securities, which is
concentrated in relatively few market makers, may not be as liquid as the
secondary market for more highly rated securities and, from time to time, it may
be more difficult to value high yield securities than more highly rated
securities, and the judgment of the Board of Trustees and the investment adviser
may play a greater role in valuation because there is less reliable objective
data available. Under adverse market or economic conditions, the secondary
market for high yield securities could contract further, independent of any
specific adverse changes in the condition of a particular issuer. As a result,
the investment adviser could find it more difficult to sell these securities or
may be able to sell the securities only at prices lower than if such securities
were widely traded. Prices realized upon the sale of such lower rated or unrated
securities, under these circumstances, may be less than the prices used in
calculating the Series' net asset value. If the investment adviser becomes
involved in activities such as reorganizations of obligors of troubled
investments held by the Series, this may prevent the Series from disposing of
the securities, due to its possession of material, non-public information
concerning the obligor.
LOWER-RATED OR UNRATED DEBT OBLIGATIONS ALSO PRESENT RISKS BASED ON PAYMENT
EXPECTATIONS. If an issuer calls the obligation for redemption, the Series may
have to replace the security with a lower-yielding security, resulting in a
decreased return for investors. If the Series experiences unexpected net
redemptions, it may be forced to sell its higher quality securities, resulting
in a decline in the overall credit quality of the Series' portfolio and
increasing the exposure of the Series to the risks of high yield securities.
FUTURES CONTRACTS AND OPTIONS THEREON
THE SERIES IS AUTHORIZED TO PURCHASE AND SELL CERTAIN DERIVATIVES, INCLUDING
FINANCIAL FUTURES CONTRACTS (FUTURES CONTRACTS) AND OPTIONS THEREON FOR THE
PURPOSE OF HEDGING ITS PORTFOLIO SECURITIES AGAINST FLUCTUATIONS IN VALUE CAUSED
BY CHANGES IN PREVAILING MARKET INTEREST RATES AND HEDGING AGAINST INCREASES IN
THE COST OF SECURITIES THE SERIES INTENDS TO PURCHASE. THE SUCCESSFUL USE OF
FUTURES CONTRACTS AND OPTIONS THEREON BY THE SERIES INVOLVES ADDITIONAL
TRANSACTION COSTS AND IS SUBJECT TO VARIOUS RISKS AND DEPENDS UPON THE
INVESTMENT ADVISER'S ABILITY TO PREDICT THE DIRECTION OF THE MARKET (INCLUDING
INTEREST RATES). THE SERIES, AND THUS INVESTORS, MAY LOSE MONEY THROUGH ANY
UNSUCCESSFUL USE OF THESE STRATEGIES.
A FUTURES CONTRACT OBLIGATES THE SELLER OF THE CONTRACT TO DELIVER TO THE
PURCHASER OF THE CONTRACT CASH EQUAL TO A SPECIFIC DOLLAR AMOUNT TIMES THE
DIFFERENCE BETWEEN THE VALUE OF A SPECIFIC FIXED-INCOME SECURITY OR INDEX AT THE
CLOSE OF THE LAST TRADING DAY OF THE CONTRACT AND THE PRICE AT WHICH THE
AGREEMENT IS MADE. No physical delivery of the underlying securities is made.
The Series will engage in transactions in only those futures contracts and
options thereon that are traded on a commodities exchange or a board of trade.
The Series intends to engage in futures contracts and options thereon as a
hedge against changes, resulting from market conditions, in the value of
securities which are held in the Series' portfolio or which the Series intends
to purchase, in accordance
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with the rules and regulations of the Commodity Futures Trading Commission (the
CFTC). The Series also intends to engage in such transactions when they are
economically appropriate for the reduction of risks inherent in the ongoing
management of the Series.
THE SERIES MAY NOT PURCHASE OR SELL FUTURES CONTRACTS OR OPTIONS THEREON IF,
IMMEDIATELY THEREAFTER, (I) THE SUM OF INITIAL AND NET CUMULATIVE VARIATION
MARGIN ON OUTSTANDING FUTURES CONTRACTS, TOGETHER WITH PREMIUMS PAID FOR OPTIONS
THEREON, WOULD EXCEED 20% OF THE TOTAL ASSETS OF THE SERIES, OR (II) IN THE CASE
OF RISK MANAGEMENT TRANSACTIONS, THE SUM OF THE AMOUNT OF INITIAL MARGIN
DEPOSITS ON THE SERIES' FUTURES POSITIONS AND PREMIUMS PAID FOR OPTIONS THEREON
WOULD EXCEED 5% OF THE LIQUIDATION VALUE OF THE SERIES' TOTAL ASSETS. There are
no limitations on the percentage of the portfolio which may be hedged and no
limitations on the use of the Series' assets to cover futures contracts and
options thereon, except that the aggregate value of the obligations underlying
put options will not exceed 50% of the Series' assets. Certain requirements for
qualification as a regulated investment company under the Internal Revenue Code
may limit the Series' ability to engage in futures contracts and options
thereon. See "Distributions and Tax Information--Federal Taxation" in the
Statement of Additional Information.
Currently, futures contracts are available on several types of fixed-income
securities, including U.S. Treasury bonds and notes, three-month U.S. Treasury
bills and Eurodollars. Futures contracts are also available on a municipal bond
index, based on THE BOND BUYER Municipal Bond Index, an index of 40 actively
traded municipal bonds. The Series may also engage in transactions in other
futures contracts that become available, from time to time, in other
fixed-income securities or municipal bond indices and in other options on such
contracts if the investment adviser believes such contracts and options would be
appropriate for hedging the Series' portfolio.
THERE CAN BE NO ASSURANCE THAT VIABLE MARKETS WILL CONTINUE OR THAT A LIQUID
SECONDARY MARKET WILL EXIST TO TERMINATE ANY PARTICULAR FUTURES CONTRACT AT ANY
SPECIFIC TIME. If it is not possible to close a futures position entered into by
the Series, the Series will continue to be required to make daily cash payments
of variation margin in the event of adverse price movements. In such a
situation, if the Series had insufficient cash, it might have to sell portfolio
securities to meet daily variation margin requirements at a time when it might
be disadvantageous to do so. The inability to close futures positions also could
have an adverse impact on the ability of the Series to hedge effectively. There
is also a risk of loss by the Series of margin deposits in the event of
bankruptcy of a broker with whom the Series has an open position in a futures
contract.
THE SUCCESSFUL USE OF FUTURES CONTRACTS AND OPTIONS THEREON BY THE SERIES IS
SUBJECT TO VARIOUS ADDITIONAL RISKS. Any use of futures transactions involves
the risk of imperfect correlation in movements in the price of futures contracts
and movements in interest rates and, in turn, the prices of the securities that
are the subject of the hedge. If the price of the futures contract moves more or
less than the price of the security that is the subject of the hedge, the Series
will experience a gain or loss that will not be completely offset by movements
in the price of the security. The risk of imperfect correlation is greater where
the securities underlying futures contracts are taxable securities (rather than
municipal securities), are issued by companies in different market sectors or
have different maturities, ratings or geographic mixes than the security being
hedged. In addition, the correlation may be affected by additions to or
deletions from the index which serves as the basis for a futures contract.
Finally, if the price of the security that is subject to the hedge were to move
in a favorable direction, the advantage to the Series would be partially offset
by the loss incurred on the futures contract.
SPECIAL CONSIDERATIONS
BECAUSE THE SERIES WILL INVEST AT LEAST 80% OF THE VALUE OF ITS TOTAL ASSETS
IN PENNSYLVANIA OBLIGATIONS AND BECAUSE IT SEEKS TO MAXIMIZE INCOME DERIVED FROM
PENNSYLVANIA OBLIGATIONS, IT IS MORE SUSCEPTIBLE TO FACTORS ADVERSELY
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AFFECTING ISSUERS OF PENNSYLVANIA OBLIGATIONS THAN IS A COMPARABLE MUNICIPAL
BOND MUTUAL FUND THAT IS NOT CONCENTRATED IN THESE ISSUERS TO THIS DEGREE. The
Commonwealth of Pennsylvania was not immune to the problems of the Northeast as
the national recession of the early 1990s reduced tax revenue growth
contributing to budget shortfalls and reduced cash balances.
For the five year period from fiscal 1992 through fiscal 1996, revenues and
other sources, (determined on a "GAAP" basis) increased by an average annual
rate of 4.6%. Intergovernmental revenues increased by an average annual rate of
13.2% due, in part, to an accounting change. Tax revenues during this period
increased an average of 2.5% as modest economic growth, low inflation rates and
several tax rate reductions and other tax reduction measures constrained growth
of tax revenues. The tax reduction measures followed a $2.7 billion tax increase
adopted for the 1992 fiscal year.
Expenditures and other uses during the fiscal 1992 through fiscal 1996 period
rose at an average annual rate of 6.0% led by increases of 14.2% for protection
of persons and property program costs. The costs of a prison expansion program
and other correctional program expenses are responsible for the large percentage
increase. Efforts to control costs for various social welfare programs and the
presence of favorable economic conditions have led to a modest 5.6% increase for
public health and welfare costs for the five year period.
Fiscal 1996 expenditures exceeded revenues and lapses by $253.2 million.
Commonwealth revenues during fiscal 1997 (prior to tax refunds) totaled
$17,320.6 million. Expenditures for Commonwealth revenues (excluding pooled
financing expenditures) during fiscal 1997 totaled $16,347.7 million, $3.6%
totaling a surplus of $314 million. The enacted fiscal 1998 budget provides for
expenditures from Commonwealth revenues (excluding pooled financing
expenditures) of $17,166.4 million, an increase of 0.6% over appropriated
amounts from Commonwealth revenues for fiscal 1997. Pennsylvania's general
obligation bonds are currently rated Aa3 by Moody's Investors Services. If
either Pennsylvania or any of its local government entities is unable to meet
its financial obligations, the income derived by the Series, the ability to
preserve or realize appreciation of the Series' capital and the Series'
liquidity could be adversely affected. See "Investment Objectives and
Policies--Special Considerations Regarding Investments in Tax-Exempt Securities"
in the Statement of Additional Information.
OTHER INVESTMENTS AND POLICIES
REPURCHASE AGREEMENTS
The Series may on occasion enter into repurchase agreements whereby the seller
of a security agrees to repurchase that security from the Series at a mutually
agreed-upon time and price. The period of maturity is usually quite short,
possibly overnight or a few days, although it may extend over a number of
months. The resale price is in excess of the purchase price, reflecting an
agreed-upon rate of return effective for the period of time the Series' money is
invested in the security. The Series' repurchase agreements will at all times be
fully collateralized in an amount at least equal to the resale price. The
instruments held as collateral are valued daily and if the value of the
instruments declines, the Series will require additional collateral. If the
seller defaults and the value of the collateral securing the repurchase
agreement declines, the Series may incur a loss. The Series participates in a
joint repurchase account with other investment companies managed by Prudential
Investments Fund Management LLC pursuant to an order of the Securities and
Exchange Commission (SEC).
BORROWING
The Series may borrow an amount equal to no more than 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 Series may
pledge up to 33 1/3% of the value of its total assets to secure these
borrowings. The Series will not purchase portfolio securities if its borrowings
exceed 5% of its total assets.
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PORTFOLIO TURNOVER
The Series does not expect to trade in securities for short-term gain. It is
anticipated that the annual portfolio turnover rate will not exceed 150%. The
portfolio turnover rate is calculated by dividing the lesser of sales or
purchases of portfolio securities by the average monthly value of the portfolio
securities, excluding securities having a maturity at the date of purchase of
one year or less.
ILLIQUID SECURITIES
The Series may hold up to 15% of its net assets in illiquid securities
including repurchase agreements which have a maturity of longer than seven days,
securities with legal or contractual restrictions on resale (restricted
securities) and securities that are not readily marketable. Restricted
securities eligible for resale pursuant to Rule 144A under the Securities Act of
1933, as amended (the Securities Act), privately placed commercial paper and
municipal lease obligations that have a readily available market are not
considered illiquid for the purposes of this limitation. The investment adviser
will monitor the liquidity of such restricted securities under the supervision
of the Trustees. The Series' investment in Rule 144A securities could have the
effect of increasing illiquidity to the extent that qualified institutional
buyers become, for a limited time, uninterested in purchasing Rule 144A
securities. See "Investment Objectives and Policies--Illiquid Securities" and
"Investment Restrictions" in the Statement of Additional Information. Repurchase
agreements subject to demand are deemed to have a maturity equal to the notice
period.
INVESTMENT RESTRICTIONS
The Series is subject to certain investment restrictions which, like its
investment objective, constitute fundamental policies. Fundamental policies
cannot be changed without the approval of the holders of a majority of the
Series' outstanding voting securities, as defined in the Investment Company Act.
See "Investment Restrictions" in the Statement of Additional Information.
HOW THE FUND IS MANAGED
THE FUND HAS TRUSTEES WHO, IN ADDITION TO OVERSEEING THE ACTIONS OF THE FUND'S
MANAGER, SUBADVISER AND DISTRIBUTOR, AS SET FORTH BELOW, DECIDE UPON MATTERS OF
GENERAL POLICY. THE FUND'S MANAGER CONDUCTS AND SUPERVISES THE DAILY BUSINESS
OPERATIONS OF THE FUND. THE FUND'S SUBADVISER FURNISHES DAILY INVESTMENT
ADVISORY SERVICES.
For the fiscal year ended August 31, 1997, total expenses of the Series as a
percentage of average net assets, net of fee waivers, were .72%, 1.12% and 1.37%
for the Series' Class A, Class B and Class C shares, respectively. See
"Financial Highlights."
MANAGER
PRUDENTIAL INVESTMENTS FUND MANAGEMENT LLC (PIFM OR THE MANAGER), GATEWAY
CENTER THREE, 100 MULBERRY STREET, NEWARK, NEW JERSEY 07102-4077, IS THE MANAGER
OF THE FUND AND IS COMPENSATED FOR ITS SERVICES AT AN ANNUAL RATE OF .50 OF 1%
OF THE AVERAGE DAILY NET ASSETS OF THE SERIES. PIFM is organized in New York as
limited liability company. It is the successor to Prudential Investments Fund
Management LLC, which transferred its assets to PIFM in September 1996. For the
fiscal year ended August 31, 1997, the Series paid PIFM a management fee of .45
of 1% of the Series' average net assets, after taking into account a management
fee waiver. See "Fee Waivers" below and "Manager" in the Statement of Additional
Information.
As of September 30, 1997, PIFM served as the manager to 41 open-end investment
companies, constituting all of the Prudential Mutual Funds, and as manager or
administrator to 22 closed-end investment companies with aggregate assets of
approximately $59.9 billion.
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UNDER THE MANAGEMENT AGREEMENT WITH THE FUND, PIFM MANAGES THE INVESTMENT
OPERATIONS OF EACH SERIES OF THE FUND AND ALSO ADMINISTERS THE FUND'S BUSINESS
AFFAIRS. See "Manager" in the Statement of Additional Information.
UNDER A SUBADVISORY AGREEMENT BETWEEN PIFM AND THE PRUDENTIAL INVESTMENT
CORPORATION (PIC), DOING BUSINESS AS PRUDENTIAL INVESTMENTS (PI, THE SUBADVISER
OR THE INVESTMENT ADVISER), PI FURNISHES INVESTMENT ADVISORY SERVICES IN
CONNECTION WITH THE MANAGEMENT OF THE FUND AND IS REIMBURSED BY PIFM FOR ITS
REASONABLE COSTS AND EXPENSES INCURRED IN PROVIDING SUCH SERVICES. Under the
Management Agreement, PIFM continues to have responsibility for all investment
advisory services and supervises PI's performance of such services.
The current portfolio manager of the Series is Christian Smith, a Vice
President of Prudential Investments. Mr. Smith has responsibility for the
day-to-day management of the portfolio. He has managed the portfolio since
January 1997 and has been employed by PIC in various capacities since 1988.
PIFM and PIC are indirect, wholly-owned subsidiaries of The Prudential
Insurance Company of America (Prudential), a major diversified insurance and
financial services company, and are part of Prudential Investments, a business
group of Prudential.
FEE WAIVERS
PIFM may from time to time agree to waive all or a portion of its management
fee and subsidize certain operating expenses of the Series. Fee waivers and
expense subsidies will increase the Series' yield and total return. The Series
is not required to reimburse PIFM for such management fee waiver. Effective
September 1, 1997, PIFM discontinued its waiver of 10% of its management fee.
See "Fund Expenses."
DISTRIBUTOR
PRUDENTIAL SECURITIES INCORPORATED (PRUDENTIAL SECURITIES, PSI OR THE
DISTRIBUTOR), ONE SEAPORT PLAZA, NEW YORK, NEW YORK 10292, IS A CORPORATION
ORGANIZED UNDER THE LAWS OF THE STATE OF DELAWARE AND SERVES AS THE DISTRIBUTOR
OF THE CLASS A, CLASS B AND CLASS C SHARES OF THE SERIES. It is an indirect,
wholly-owned subsidiary of Prudential.
UNDER SEPARATE DISTRIBUTION AND SERVICE PLANS (THE CLASS A PLAN, THE CLASS B
PLAN AND THE CLASS C PLAN, COLLECTIVELY, THE PLANS) ADOPTED BY THE FUND UNDER
RULE 12b-1 UNDER THE INVESTMENT COMPANY ACT AND A DISTRIBUTION AGREEMENT (THE
DISTRIBUTION AGREEMENT), PRUDENTIAL SECURITIES (THE DISTRIBUTOR) INCURS THE
EXPENSES OF DISTRIBUTING THE CLASS A, CLASS B AND CLASS C SHARES OF THE SERIES.
These expenses include commissions and account servicing fees paid to, or on
account of, financial advisers of Prudential Securities and representatives of
Pruco Securities Corporation (Prusec), an affiliated broker-dealer, commissions
and account servicing fees paid to, or on account of, other broker-dealers or
financial institutions (other than national banks) which have entered into
agreements with the Distributor, advertising expenses, the cost of printing and
mailing prospectuses to potential investors and indirect and overhead costs of
Prudential Securities and Prusec associated with the sale of Series shares,
including lease, utility, communications and sales promotion expenses.
Under the Plans, the Series is obligated to pay distribution and/or service
fees to the Distributor as compensation for its distribution and service
activities, not as reimbursement for specific expenses incurred. If the
Distributor's expenses exceed its distribution and service fees, the Series will
not be obligated to pay any additional expenses. If the Distributor's expenses
are less than such distribution and service fees, it will retain its full fees
and realize a profit.
UNDER THE CLASS A PLAN, THE SERIES MAY PAY PRUDENTIAL SECURITIES FOR ITS
DISTRIBUTION-RELATED ACTIVITIES WITH RESPECT TO CLASS A SHARES AT AN ANNUAL RATE
OF UP TO .30 OF 1% OF THE AVERAGE DAILY NET ASSETS OF THE CLASS A SHARES OF THE
SERIES. The Class A Plan provides that (i) up to .25 of 1% of the average daily
net assets of the Class A shares may be used to pay for personal service and/or
the maintenance of shareholder accounts (service fee) and (ii) total
distribution fees (including the
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service fee of .25 of 1%) may not exceed .30 of 1% of the average daily net
assets of the Class A shares. Prudential Securities has agreed to limit its
distribution-related fees payable under the Class A Plan to .10 of 1% of the
average daily net asset value of the Class A shares for the fiscal year ending
August 31, 1998.
UNDER THE CLASS B AND CLASS C PLANS, THE SERIES MAY PAY PRUDENTIAL SECURITIES
FOR ITS DISTRIBUTION-RELATED ACTIVITIES WITH RESPECT TO CLASS B AND CLASS C
SHARES AT AN ANNUAL RATE OF UP TO .50 OF 1% AND UP TO 1% OF THE AVERAGE DAILY
NET ASSETS OF THE CLASS B AND CLASS C SHARES, RESPECTIVELY. The Class B Plan
provides for the payment to Prudential Securities of (i) an asset-based sales
charge of up to .50 of 1% of the average daily net assets of the Class B shares,
and (ii) a service fee of up to .25 of 1% of the average daily net assets of the
Class B shares; provided that the total distribution-related fee does not exceed
.50 of 1%. The Class C Plan provides for the payment to Prudential Securities of
(i) an asset-based sales charge of up to .75 of 1% of the average daily net
assets of the Class C shares, and (ii) a service fee of up to .25 of 1% of the
average daily net assets of the Class C shares. The service fee is used to pay
for personal service and/or the maintenance of shareholder accounts. Prudential
Securities has agreed to limit its distribution-related fees payable under the
Class C Plan to .75 of 1% of the average daily net assets of the Class C shares
for the fiscal year ending August 31, 1998. Prudential Securities also receives
contingent deferred sales charges from certain redeeming shareholders. See
"Shareholder Guide--How to Sell Your Shares--Contingent Deferred Sales Charges."
For the fiscal year ended August 31, 1997, the Series paid distribution
expenses of .10 of 1%, .50 of 1% and .75 of 1% of the average daily net assets
of the Class A, Class B and Class C shares, respectively. The Series records all
payments made under the Plans as expenses in the calculation of net investment
income. See "Distributor" in the Statement of Additional Information.
Distribution expenses attributable to the sale of Class A, Class B and Class C
shares of the Series will be allocated to each such class based upon the ratio
of sales of each such class to the sales of Class A, Class B and Class C shares
of the Series other than expenses allocable to a particular class. The
distribution fee and sales charge of one class will not be used to subsidize the
sale of another class.
Each Plan provides that it shall continue in effect from year to year provided
that a majority of the Trustees of the Fund, including a majority of the
Trustees who are not "interested persons" of the Fund (as defined in the
Investment Company Act) and who have no direct or indirect financial interest in
the operation of the Plan or any agreement related to the Plan (the Rule 12b-1
Trustees), vote annually to continue the Plan. Each Plan may be terminated with
respect to the Series at any time by vote of a majority of the Rule 12b-1
Trustees or of a majority of the outstanding shares of the applicable class of
the Series. The Series will not be obligated to pay distribution and service
fees incurred under any Plan if it is terminated or not continued.
In addition to distribution and service fees paid by the Series under the
Class A, Class B and Class C Plans, the Manager (or one of its affiliates) may
make payments out of its own resources to dealers (including Prudential
Securities) and other persons who distribute shares of the Series. Such payments
may be calculated by reference to the net asset value of shares sold by such
persons or otherwise.
The Distributor is subject to the rules of the National Association of
Securities Dealers, Inc. (the NASD) governing maximum sales charges. See
"Distributor" in the Statement of Additional Information.
On October 21, 1993, PSI entered into an omnibus settlement with the SEC,
state securities regulators (with the exception of the Texas Securities
Commissioner who joined the settlement on January 18, 1994) and the NASD to
resolve allegations that from 1980 through 1990 PSI sold certain limited
partnership interests in violation of securities laws to persons for whom such
securities were not suitable and misrepresented the safety, potential returns
and liquidity of these investments. Without admitting or denying the allegations
asserted against it, PSI consented to the entry of an SEC Administrative Order
which stated that PSI's conduct violated the federal securities laws, directed
PSI to cease and desist from violating the federal securities laws, pay civil
penalties, and adopt certain remedial measures to address the violations.
Pursuant to the terms of the SEC settlement, PSI agreed to the imposition of a
$10,000,000 civil penalty, established a settlement fund in the amount of
$330,000,000 and procedures to resolve legitimate claims for compensatory
damages by
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purchasers of the partnership interests. PSI has agreed to provide additional
funds, if necessary, for the purpose of the settlement fund. PSI's settlement
with the state securities regulators included an agreement to pay a penalty of
$500,000 per jurisdiction. PSI consented to a censure and to the payment of a
$5,000,000 fine in settling the NASD action.
In October 1994, a criminal complaint was filed with the United States
Magistrate for the Southern District of New York alleging that PSI committed
fraud in connection with the sale of certain limited partnership interests in
violation of federal securities laws. An agreement was simultaneously filed to
defer prosecution of these charges for a period of three years from the signing
of the agreement, provided that PSI complies with the terms of the agreement.
If, upon completion of the three year period, PSI has complied with the terms of
the agreement, no prosecution will be instituted by the United States for the
offenses charged in the complaint. If on the other hand, during the course of
the three year period, PSI violates the terms of the agreement, the U.S.
Attorney can then elect to pursue these charges. Under the terms of the
agreement, PSI agreed, among other things, to pay an additional $330,000,000
into the fund established by the SEC to pay restitution to investors who
purchased certain PSI limited partnership interests.
For more detailed information concerning the foregoing matters, see
"Distributor" in the Statement of Additional Information, a copy of which may be
obtained at no cost by calling (800) 225-1852.
The Fund is not affected by PSI's financial condition and is an entirely
separate legal entity from PSI, which has no beneficial ownership therein and
the Fund's assets which are held by State Street Bank and Trust Company, an
independent custodian, are separate and distinct from PSI.
PORTFOLIO TRANSACTIONS
Prudential Securities may act as a broker or futures commission merchant for
the Fund, provided that the commissions, fees or other remuneration it receives
are fair and reasonable. See "Portfolio Transactions and Brokerage" in the
Statement of Additional Information.
CUSTODIAN AND TRANSFER AND DIVIDEND DISBURSING AGENT
State Street Bank and Trust Company, One Heritage Drive, North Quincy,
Massachusetts 02171, serves as Custodian for the portfolio securities of the
Series and cash and, in that capacity, maintains certain financial and
accounting books and records pursuant to an agreement with the Fund. Its mailing
address is P.O. Box 1713, Boston, Massachusetts 02105.
Prudential Mutual Fund Services LLC (PMFS), Raritan Plaza One, Edison, New
Jersey 08837, serves as Transfer Agent and Dividend Disbursing Agent and, in
those capacities, maintains certain books and records for the Fund. PMFS is a
wholly-owned subsidiary of PIFM. Its mailing address is P.O. Box 15005, New
Brunswick, New Jersey 08906-5005.
HOW THE FUND VALUES ITS SHARES
THE SERIES' NET ASSET VALUE PER SHARE OR NAV IS DETERMINED BY SUBTRACTING ITS
LIABILITIES FROM THE VALUE OF ITS ASSETS AND DIVIDING THE REMAINDER BY THE
NUMBER OF OUTSTANDING SHARES. NAV IS CALCULATED SEPARATELY FOR EACH CLASS. THE
TRUSTEES HAVE FIXED THE SPECIFIC TIME OF DAY FOR THE COMPUTATION OF THE NET
ASSET VALUE OF THE SERIES TO BE AS OF 4:15 P.M., NEW YORK TIME.
Portfolio securities are valued based on market quotations or, if not readily
available, at fair value as determined in good faith under procedures
established by the Trustees. Securities may also be valued based on values
provided by a pricing service. See "Net Asset Value" in the Statement of
Additional Information.
The Series will compute its NAV once daily on days that the New York Stock
Exchange is open for trading except on days on which no orders to purchase, sell
or redeem shares have been received by the Series or days on which changes in
the value of the Series' portfolio securities do not materially affect the NAV.
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Although the legal rights of each class of shares are substantially identical,
the different expenses borne by each class will result in different dividends.
As long as the Series declares dividends daily, the NAV of the Class A, Class B
and Class C shares will generally be the same. It is expected, however, that the
Series' dividends will differ by approximately the amount of any distribution
and/or service fee expense accrual differential among the classes.
HOW THE FUND CALCULATES PERFORMANCE
FROM TIME TO TIME THE FUND MAY ADVERTISE THE YIELD, TAX EQUIVALENT YIELD AND
AVERAGE ANNUAL TOTAL RETURN AND AGGREGATE TOTAL RETURN OF THE SERIES IN
ADVERTISEMENTS OR SALES LITERATURE. YIELD, TAX EQUIVALENT YIELD AND TOTAL RETURN
ARE CALCULATED SEPARATELY FOR CLASS A, CLASS B AND CLASS C SHARES. THESE FIGURES
ARE BASED ON HISTORICAL EARNINGS AND ARE NOT INTENDED TO INDICATE FUTURE
PERFORMANCE. The yield refers to the income generated by an investment in the
Series over a one-month or 30-day period. This income is then annualized; that
is, the amount of income generated by the investment during that 30-day period
is assumed to be generated each 30-day period for twelve periods and is shown as
a percentage of the investment. The income earned on the investment is also
assumed to be reinvested at the end of the sixth 30-day period. The tax
equivalent yield is calculated similarly to the yield, except that the yield is
increased using a stated income tax rate to demonstrate the taxable yield
necessary to produce an after-tax yield equivalent to the Series. The total
return shows how much an investment in the Series would have increased
(decreased) over a specified period of time (I.E., one, five or ten years or
since inception of the Series) assuming that all distributions and dividends by
the Series were reinvested on the reinvestment dates during the period and less
all recurring fees. The aggregate total return reflects actual performance over
a stated period of time. Average annual total return is a hypothetical rate of
return that, if achieved annually, would have produced the same aggregate total
return if performance had been constant over the entire period. Average annual
total return smooths out variations in performance and takes into account any
applicable initial or contingent deferred sales charges. Neither average annual
total return nor aggregate total return takes into account any federal or state
income taxes which may be payable upon redemption. The Fund also may include
comparative performance information in advertising or marketing the shares of
the Series. Such performance information may include data from Lipper Analytical
Services, Inc., Morningstar Publications, Inc., other industry publications,
business periodicals and market indices. See "Performance Information" in the
Statement of Additional Information. Further performance information is
contained in the Series' annual and semi-annual reports to shareholders, which
may be obtained without charge. See "Shareholder Guide--Shareholder
Services--Reports to Shareholders."
TAXES, DIVIDENDS AND DISTRIBUTIONS
TAXATION OF THE FUND
THE SERIES HAS ELECTED TO QUALIFY AND INTENDS TO REMAIN QUALIFIED AS A
REGULATED INVESTMENT COMPANY UNDER THE INTERNAL REVENUE CODE. ACCORDINGLY, THE
SERIES WILL NOT BE SUBJECT TO FEDERAL INCOME TAXES ON ITS NET INVESTMENT INCOME
AND NET CAPITAL GAINS, IF ANY, THAT IT DISTRIBUTES TO ITS SHAREHOLDERS. TO THE
EXTENT NOT DISTRIBUTED BY THE SERIES, NET TAXABLE INVESTMENT INCOME AND CAPITAL
GAINS AND LOSSES ARE TAXABLE TO THE SERIES.
To the extent the Series invests in taxable obligations, it will earn taxable
investment income. Also, to the extent the Series engages in hedging
transactions in futures contracts and options thereon, it may earn both
short-term and long-term capital gain or loss. Under the Internal Revenue Code,
special rules apply to the treatment of certain options and futures contracts
(Section 1256 contracts). At the end of each year, such investments held by the
Series will be required to be "marked to market" for federal income tax
purposes; that is, treated as having been sold at market value. Sixty percent of
any gain or loss recognized on these "deemed sales" and on actual dispositions
will be treated as long-term capital gain or loss, and the remainder will be
treated as short-term capital gain or loss. See "Distributions and Tax
Information" in the Statement of Additional Information.
Gain or loss realized by the Series from the sale of securities generally will
be treated as capital gain or loss; however, gain from the sale of certain
securities (including municipal obligations) will be treated as ordinary income
to the extent of any "market discount." Market discount generally is the
difference, if any, between the price paid by the Series for the security and
the
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principal amount of the security (or, in the case of a security issued at an
original issue discount, the revised issue price of the security). The market
discount rule does not apply to any security that was acquired by the Series at
its original issue. See "Distributions and Tax Information" in the Statement of
Additional Information.
TAXATION OF SHAREHOLDERS
In general, the character of tax-exempt interest distributed by the Series
will flow through as tax-exempt interest to its shareholders for federal income
tax purposes provided that 50% or more of the value of its assets at the end of
each quarter of its taxable year is invested in state, municipal and other
obligations, the interest on which is excluded from gross income for federal
income tax purposes. During normal market conditions, at least 80% of the
Series' total assets will be invested in such obligations. See "How the Fund
Invests--Investment Objective and Policies."
Any dividends out of net taxable investment income, together with
distributions of net short-term gains (I.E., the excess of net short-term
capital gains over net long-term capital losses) distributed to shareholders,
will be taxable as ordinary income to the shareholder whether or not reinvested.
Any net capital gains (I.E., the excess of net capital gains from the sale of
assets held for more than 12 months over net short-term capital losses)
distributed to shareholders will be taxable as capital gains to the
shareholders, whether or not reinvested and regardless of the length of time a
shareholder has owned his or her shares. The maximum capital gains rate for
individuals is 28% with respect to assets held for more than 12 months, but not
more than 18 months, and 20% with respect to assets held for more than 18
months. The maximum capital gains rate for corporate shareholders currently is
the same as the maximum tax rate for ordinary income.
Any gain or loss realized upon a sale or redemption of Series shares by a
shareholder who is not a dealer in securities will be treated as capital gain or
loss. In the case of any individual, any such capital gain will be treated as
short-term capital loss if the shares were held for not more than 12 months,
mid-term gain, taxable at the maximum rate of 28%, if such shares were held for
more than 12, but not more than 18 months, and long-term capital gain, taxable
at the maximum rate of 20%, if such shares were held for more than 18 months. In
the case of a corporation, any such capital gain will be treated as long-term
capital gain, taxable at the same rates as ordinary income, if such shares were
held for more than 12 months. Any such capital loss will be treated as long-term
capital loss if the shares have been held more than one year and otherwise as
short-term capital loss. Any such loss with respect to shares that are held for
six months or less, however, will be treated as long-term capital loss to the
extent of any capital gain distributions received by the shareholder. In
addition, any short-term capital loss will be disallowed to the extent of any
tax-exempt dividends received by the shareholder on shares that are held for six
months or less.
The Fund has obtained opinions of counsel to the effect that neither (i) the
conversion of Class B shares into Class A shares nor (ii) the exchange of Class
B or Class C shares for Class A shares constitutes a taxable event for federal
income tax purposes. However, such opinions are not binding on the Internal
Revenue Service. Shareholders should consult their own tax advisers regarding
the taxability of such conversions and exchanges for State and local tax
purposes.
CERTAIN INVESTORS MAY INCUR FEDERAL ALTERNATIVE MINIMUM TAX LIABILITY AS A
RESULT OF THEIR INVESTMENT IN THE FUND. Tax-exempt interest from certain
municipal obligations (I.E., certain private activity bonds issued after August
7, 1986) will be treated as an item of tax preference for purposes of the
alternative minimum tax. The Fund anticipates that, under regulations to be
promulgated, items of tax preference incurred by the Series will be attributed
to the Series' shareholders, although some portion of such items could be
allocated to the Series itself. Depending upon each shareholder's individual
circumstances, the attribution of items of tax preference incurred by the Series
could result in liability for the shareholder for the alternative minimum tax.
Similarly, the Series could be liable for the alternative minimum tax for items
of tax preference attributed to it. The Series is permitted to invest in
municipal obligations of the type that will produce items of tax preference.
Corporate shareholders in the Series also will have to take into account the
adjustment for current earnings for alternative minimum tax purposes. Corporate
shareholders should consult with their tax advisers with respect to this
potential adjustment.
Under Pennsylvania law, dividends paid by the Series are exempt from
Pennsylvania income tax for individuals who are subject to Pennsylvania personal
income tax to the extent such dividends are derived from interest payments on
Pennsylvania Obligations.
Dividends paid by the Series are also exempt from the Philadelphia School
District investment net income tax for individuals who are residents of the City
of Philadelphia to the extent such dividends are derived from interest payments
on Pennsylvania Obligations or to the extent such dividends are designated as
capital gain dividends for federal income tax purposes.
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Shares of the Series will be exempt from Pennsylvania county personal property
taxes to the extent the Series' portfolio securities consist of Pennsylvania
Obligations on the annual assessment date.
Shareholders are advised to consult their own tax advisers regarding specific
questions as to federal, state or local taxes. See "Distributions and Tax
Information" in the Statement of Additional Information.
WITHHOLDING TAXES
Under the Internal Revenue Code, the Series is required to withhold and remit
to the U.S. Treasury 31% of redemption proceeds on the accounts of certain
shareholders who fail to furnish their tax identification numbers on IRS Form
W-9 (or IRS Form W-8 in the case of certain foreign shareholders) with the
required certifications regarding the shareholder's status under the federal
income tax law. Such withholding is also required on taxable dividends and
capital gain distributions made by the Series unless it is reasonably expected
that at least 95% of the distributions of the Series are comprised of tax-exempt
dividends.
Dividends of net taxable investment income and distributions of net short-term
capital gains paid to a shareholder (including a shareholder acting as a nominee
or fiduciary) who is a nonresident alien individual, a foreign corporation or a
foreign partnership (foreign shareholder) are subject to a 30% (or lower treaty
rate) withholding tax upon the gross amount of the dividends unless the
dividends are effectively connected with a U.S. trade or business conducted by
the foreign shareholder. Capital gain dividends paid to a foreign shareholder
are generally not subject to withholding tax. A foreign shareholder will,
however, be required to pay U.S. income tax on any dividends and capital gain
distributions which are effectively connected with a U.S. trade or business of
the foreign shareholder.
DIVIDENDS AND DISTRIBUTIONS
THE SERIES EXPECTS TO DECLARE DAILY AND PAY MONTHLY DIVIDENDS OF NET
INVESTMENT INCOME, IF ANY, AND MAKE DISTRIBUTIONS AT LEAST ANNUALLY OF ANY
CAPITAL GAINS IN EXCESS OF CAPITAL LOSSES. Dividends paid by the Series with
respect to each class of shares, to the extent any dividends are paid, will be
calculated in the same manner, at the same time, on the same day and will be in
the same amount except that each class will bear its own distribution charges,
generally resulting in lower dividends for the Class B and Class C shares.
Distributions of net capital gains, if any, will be paid in the same amount for
each class of shares. See "How the Fund Values its Shares."
DIVIDENDS AND DISTRIBUTIONS WILL BE PAID IN ADDITIONAL SHARES OF THE SERIES
BASED ON THE NAV OF EACH CLASS OF THE SERIES ON THE PAYMENT DATE AND RECORD
DATE, RESPECTIVELY, OR SUCH OTHER DATE AS THE TRUSTEES MAY DETERMINE, UNLESS THE
SHAREHOLDER ELECTS IN WRITING NOT LESS THAN FIVE BUSINESS DAYS PRIOR TO THE
RECORD DATE TO RECEIVE SUCH DIVIDENDS AND DISTRIBUTIONS IN CASH. Such election
should be submitted to Prudential Mutual Fund Services LLC, Attention: Account
Maintenance, P.O. Box 15015, New Brunswick, New Jersey 08906-5015. If you hold
shares through Prudential Securities, you should contact your financial adviser
to elect to receive dividends and distributions in cash. The Fund will notify
each shareholder after the close of the Fund's taxable year of both the dollar
amount and the taxable status of that year's dividends and distributions on a
per share basis.
GENERAL INFORMATION
DESCRIPTION OF SHARES
THE FUND WAS ESTABLISHED AS A MASSACHUSETTS BUSINESS TRUST ON MAY 18, 1984, BY
A DECLARATION OF TRUST. The Fund's activities are supervised by its Trustees.
The Declaration of Trust permits the Trustees to issue an unlimited number of
full and fractional shares in separate series, currently designated as the
Connecticut Money Market Series, Florida Series, Maryland Series, Massachusetts
Series, Massachusetts Money Market Series, Michigan Series, New Jersey Series,
New Jersey Money
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Market Series, New York Series, New York Money Market Series, North Carolina
Series, Ohio Series and Pennsylvania Series. The Series is authorized to issue
an unlimited number of shares, divided into three classes, designated Class A,
Class B and Class C. Each class of shares represents an interest in the same
assets of the Series and is identical in all respects except that (i) each class
is subject to different 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 and (iv) only Class B shares have a
conversion feature. See "How the Fund is Managed--Distributor." In accordance
with the Fund's Declaration of Trust, the Trustees may authorize the creation of
additional series and classes within such series, with such preferences,
privileges, limitations and voting and dividend rights as the Trustees may
determine.
Shares of the Fund, when issued, are fully paid, nonassessable, fully
transferable and redeemable at the option of the holder. Shares are also
redeemable at the option of the Fund under certain circumstances as described
under "Shareholder Guide--How to Sell Your Shares." Each share of each class of
the Series is equal as to earnings, assets and voting privileges, except as
noted above, and each class bears the expenses related to the distribution of
its shares. Except for the conversion feature applicable to the Class B shares,
there are no conversion, preemptive or other subscription rights. In the event
of liquidation, each share of beneficial interest in each series is entitled to
its portion of all of the Fund's assets after all debt and expenses of the Fund
have been paid. Since Class B and Class C shares generally bear higher
distribution expenses than Class A shares, the liquidation proceeds to
shareholders of those classes are likely to be lower than to Class A
shareholders. The Fund's shares do not have cumulative voting rights for the
election of Trustees.
THE FUND DOES NOT INTEND TO HOLD ANNUAL MEETINGS OF SHAREHOLDERS UNLESS
OTHERWISE REQUIRED BY LAW. THE FUND WILL NOT BE REQUIRED TO HOLD MEETINGS OF
SHAREHOLDERS UNLESS, FOR EXAMPLE, THE ELECTION OF TRUSTEES IS REQUIRED TO BE
ACTED UPON BY SHAREHOLDERS UNDER THE INVESTMENT COMPANY ACT. SHAREHOLDERS HAVE
CERTAIN RIGHTS, INCLUDING THE RIGHT TO CALL A MEETING UPON A VOTE OF 10% OF THE
FUND'S OUTSTANDING SHARES FOR THE PURPOSE OF VOTING ON THE REMOVAL OF ONE OR
MORE TRUSTEES OR TO TRANSACT ANY OTHER BUSINESS.
The Declaration of Trust and the By-Laws of the Fund are designed to make the
Fund similar in certain respects to a Massachusetts business corporation. The
principal distinction between a Massachusetts business corporation and a
Massachusetts business trust relates to shareholder liability. Under
Massachusetts law, shareholders of a business trust may, under certain
circumstances, be held personally liable as partners for the obligations of the
fund, which is not the case with a corporation. The Declaration of Trust of the
Fund provides that shareholders shall not be subject to any personal liability
for the acts or obligations of the Fund and that every written obligation,
contract, instrument or undertaking made by the Fund shall contain a provision
to the effect that the shareholders are not individually bound thereunder.
ADDITIONAL INFORMATION
This Prospectus, including the Statement of Additional Information which has
been incorporated by reference herein, does not contain all the information set
forth in the Registration Statement filed by the Fund with the SEC under the
Securities Act. Copies of the Registration Statement may be obtained at a
reasonable charge from the SEC or may be examined, without charge, at the office
of the SEC in Washington, D.C.
22
<PAGE>
SHAREHOLDER GUIDE
HOW TO BUY SHARES OF THE FUND
YOU MAY PURCHASE SHARES OF THE SERIES THROUGH PRUDENTIAL SECURITIES, PRUSEC OR
DIRECTLY FROM THE FUND, THROUGH ITS TRANSFER AGENT, PRUDENTIAL MUTUAL FUND
SERVICES LLC (PMFS OR THE TRANSFER AGENT), ATTENTION: INVESTMENT SERVICES, P.O.
BOX 15020, NEW BRUNSWICK, NEW JERSEY 08906-5020. The purchase price is the NAV
next determined following receipt of an order in proper form by the Transfer
Agent or Prudential Securities plus a sales charge which, at your option, may be
imposed either (i) at the time of purchase (Class A shares) or (ii) on a
deferred basis (Class B or Class C shares). Payment may be made by wire, check
or through your brokerage account. See "Alternative Purchase Plan" below. See
also "How the Fund Values its Shares."
An investment in the Series may not be appropriate for tax-exempt or
tax-deferred investors. Such investors should consult their own tax advisers.
The minimum initial investment is $1,000 for Class A and Class B shares and
$5,000 for Class C shares. The minimum subsequent investment is $100 for all
classes. All minimum investment requirements are waived for certain employee
savings plans. For purchases made through the Automatic Savings Accumulation
Plan, the minimum initial and subsequent investment is $50. See "Shareholder
Services" below.
Application forms can be obtained from PMFS, Prudential Securities or Prusec.
If a share certificate is desired, it must be requested in writing for each
transaction. Certificates are issued only for full shares. Shareholders who hold
their shares through Prudential Securities will not receive share certificates.
The Fund reserves the right to reject any purchase order (including an
exchange into the Series) or to suspend or modify the continuous offering of its
shares. See "How to Sell Your Shares" below.
Your dealer is responsible for forwarding payment promptly to the Fund. The
Distributor reserves the right to cancel any purchase order for which payment
has not been received by the third business day following the investment.
Transactions in shares of the Series may be subject to postage and handling
charges imposed by your dealer.
PURCHASE BY WIRE. For an initial purchase of shares of the Series by wire, you
must first telephone PMFS at (800) 225-1852 (toll-free) to receive an account
number. The following information will be requested: your name, address, tax
identification number, class election, dividend distribution election, amount
being wired and wiring bank. Instructions should then be given by you to your
bank to transfer funds by wire to State Street Bank and Trust Company (State
Street), Boston, Massachusetts, Custody and Shareholder Services Division,
Attention: Prudential Municipal Series Fund (Pennsylvania Series), specifying on
the wire the account number assigned by PMFS and your name and identifying the
class in which you are eligible to invest (Class A, Class B or Class C shares).
If you arrange for receipt by State Street of Federal Funds prior to the
calculation of NAV (4:15 P.M., New York time), on a business day, you may
purchase shares of the Series as of that day. See "Net Asset Value" in the
Statement of Additional Information.
In making a subsequent purchase order by wire, you should wire State Street
directly and should be sure that the wire specifies Prudential Municipal Series
Fund (Pennsylvania Series), Class A, Class B or Class C shares and your name and
individual account number. It is not necessary to call PMFS to make subsequent
purchase orders utilizing Federal Funds. The minimum amount which may be
invested by wire is $1,000.
23
<PAGE>
ALTERNATIVE PURCHASE PLAN
THE SERIES OFFERS THROUGH THIS PROSPECTUS THREE CLASSES OF SHARES (CLASS A,
CLASS B AND CLASS C SHARES) WHICH ALLOWS YOU TO CHOOSE THE MOST BENEFICIAL SALES
CHARGE STRUCTURE FOR YOUR INDIVIDUAL CIRCUMSTANCES GIVEN THE AMOUNT OF THE
PURCHASE, THE LENGTH OF TIME YOU EXPECT TO HOLD THE SHARES AND OTHER RELEVANT
CIRCUMSTANCES (ALTERNATIVE PURCHASE PLAN).
<TABLE>
<CAPTION>
ANNUAL 12b-1 FEES
(AS A % OF AVERAGE DAILY
SALES CHARGE NET ASSETS) OTHER INFORMATION
----------------------------------- ----------------------------------- -----------------------------------
<S> <C> <C> <C>
CLASS A Maximum initial sales charge of 3% .30 of 1% (currently being charged Initial sales charge waived or
of the public offering price at a rate of .10 of 1%) reduced for certain purchases
CLASS B Maximum contingent deferred sales .50 of 1% Shares convert to Class A shares
charge or CDSC of 5% of the lesser approximately seven years after
of the amount invested or the purchase
redemption proceeds; declines to
zero after six years
CLASS C Maximum CDSC of 1% the lesser of 1% (currently being charged at a Shares do not convert to another
the amount invested or the rate of .75 of 1%) class
redemption proceeds on redemptions
made within one year of purchase
</TABLE>
The three classes of shares represent an interest in the same portfolio of
investments of the Series and have the same rights, except that (i) each class
bears the separate expenses of its Rule 12b-1 distribution and service plan,
(ii) each class has exclusive voting rights 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, and (iii) only Class B
shares have a conversion feature. The three classes also have separate exchange
privileges. See "How to Exchange Your Shares" below. The income attributable to
each class and the dividends payable on the shares of each class will be reduced
by the amount of the distribution fee of each class. Class B and Class C shares
bear the expenses of a higher distribution fee which will generally cause them
to have higher expense ratios and to pay lower dividends than the Class A
shares.
Financial advisers and other sales agents who sell shares of the Series will
receive different compensation for selling Class A, Class B and Class C shares
and will generally receive more compensation initially for selling Class A and
Class B shares than for selling Class C shares.
IN SELECTING A PURCHASE ALTERNATIVE, YOU SHOULD CONSIDER, AMONG OTHER THINGS,
(1) the length of time you expect to hold your investment, (2) the amount of any
applicable sales charge (whether imposed at the time of purchase or redemption)
and distribution-related fees, as noted above, (3) whether you qualify for any
reduction or waiver of any applicable sales charge, (4) the various exchange
privileges among the different classes of shares (see "How to Exchange Your
Shares" below) and (5) the fact that Class B shares automatically convert to
Class A shares approximately seven years after purchase (see "Conversion
Feature--Class B Shares" below).
The following is provided to assist you in determining which method of
purchase best suits your individual circumstances and is based on current fees
and expenses being charged to the Series:
If you intend to hold your investment in the Series for less than 5 years and
do not qualify for a reduced sales charge on Class A shares, since Class A
shares are subject to a maximum initial sales charge of 3% and Class B shares
are subject to a CDSC of 5% which declines to zero over a 6 year period, you
should consider purchasing Class C shares over either Class A or Class B shares.
24
<PAGE>
If you intend to hold your investment for 5 years or more and do not qualify
for a reduced sales charge on Class A shares, since Class B shares convert to
Class A shares approximately 7 years after purchase and because all of your
money would be invested initially in the case of Class B shares, you should
consider purchasing Class B shares over either Class A or Class C shares.
If you qualify for a reduced sales charge on Class A shares, it may be more
advantageous for you to purchase Class A shares over either Class B or Class C
shares regardless of how long you intend to hold your investment. However,
unlike Class B and Class C shares, you would not have all of your money invested
initially because the sales charge on Class A shares is deducted at the time of
purchase.
If you do not qualify for a reduced sales charge on Class A shares and you
purchase Class C shares, you would have to hold your investment for more than 4
years for the higher cumulative annual distribution-related fee on those shares
to exceed the initial sales charge plus cumulative annual distribution-related
fee on Class A shares. This does not take into account the time value of money,
which further reduces the impact of the higher Class C distribution-related fee
on the investment, fluctuations in net asset value, the effect of the return on
the investment over this period of time or redemptions when the CDSC is
applicable.
ALL PURCHASES OF $1 MILLION OR MORE, EITHER AS PART OF A SINGLE INVESTMENT OR
UNDER RIGHTS OF ACCUMULATION OR LETTERS OF INTENT, MUST BE FOR CLASS A SHARES.
See "Reduction and Waiver of Initial Sales Charges" below.
CLASS A SHARES
The offering price of Class A shares for investors choosing the initial sales
charge alternative is the next determined NAV plus a sales charge (expressed as
a percentage of the offering price and of the amount invested) as shown in the
following table:
<TABLE>
<CAPTION>
SALES CHARGE AS SALES CHARGE AS DEALER CONCESSION
PERCENTAGE OF PERCENTAGE OF AS PERCENTAGE OF
AMOUNT OF PURCHASE OFFERING PRICE AMOUNT INVESTED OFFERING PRICE
------------------------ --------------- --------------- -----------------
<S> <C> <C> <C>
Less than $99,999 3.00% 3.09% 3.00%
$100,000 to $249,999 2.50 2.56 2.50%
$250,000 to $499,999 1.50 1.52 1.50%
$500,000 to $999,999 1.00 1.01 1.00%
$1,000,000 and above None None None
</TABLE>
The Distributor may reallow the entire initial sales charge to dealers.
Selling dealers may be deemed to be underwriters, as that term is defined in the
Securities Act.
In connection with the sale of Class A shares at NAV (without payment of an
initial sales charge), the Manager, the Distributor or one of their affiliates
will pay dealers, financial advisers and other persons which distribute shares a
finders' fee from its own resources based on a percentage of the net asset value
of shares sold by such persons.
REDUCTION AND WAIVER OF INITIAL SALES CHARGES. Reduced sales charges are
available through Rights of Accumulation and Letters of Intent. Shares of the
Fund and shares of other Prudential Mutual Funds (excluding money market funds
other than those acquired pursuant to the exchange privilege) may be aggregated
to determine the applicable reduction. See "Purchase and Redemption of Fund
Shares--Reduction and Waiver of Initial Sales Charges--Class A Shares" in the
Statement of Additional Information.
PRUARRAY SAVINGS PROGRAM. Class A shares are also offered at net asset value
to employees of companies that enter into a written agreement with Prudential
Retirement Services to participate in the PruArray Savings Program. Under this
Program, a limited number of Prudential Mutual Funds are available for purchase
at net asset value by Savings Accumulation Plans of the company's employees. The
Program is available only to employees who open a Savings Accumulation Plan
account with the Transfer Agent. The program is offered to companies that have
at least 250 eligible employees.
25
<PAGE>
SPECIAL RULES APPLICABLE TO RETIREMENT PLANS. After a PruArray Plan qualifies
to purchase Class A shares at NAV, all subsequent purchases will be made at NAV.
OTHER WAIVERS. Class A shares may be purchased at NAV, through Prudential
Securities or the Transfer Agent, by the following persons: (a) officers and
current and former Directors/Trustees of the Prudential Mutual Funds (including
the Fund), (b) employees of Prudential Securities and PIFM and their
subsidiaries and members of the families of such persons who maintain an
"employee related" account at Prudential Securities or the Transfer Agent, (c)
employees of subadvisers of the Prudential Mutual Funds provided that the
purchases at NAV are permitted by such person's employer, (d) Prudential
employees and special agents of Prudential and its subsidiaries and all persons
who have retired directly from active service with Prudential or one of its
subsidiaries, (e) registered representatives and employees of dealers who have
entered into a selected dealer agreement with Prudential Securities provided
that purchases at NAV are permitted by such person's employer and (f) investors
who have a business relationship with a financial adviser who joined Prudential
Securities from another investment firm, provided that (i) the purchase is made
within 180 days of the commencement of the financial adviser's employment at
Prudential Securities or within one year in the case of benefit plans, (ii) the
purchase is made with proceeds of a redemption of shares of any open-end
non-money market fund sponsored by the financial adviser's previous employer
(other than a fund which imposes a distribution or service fee of .25 of 1% or
less) and (iii) the financial adviser served as the client's broker on the
previous purchases.
You must notify the Transfer Agent either directly or through Prudential
Securities or Prusec that you are entitled to the reduction or waiver of the
sales charge. The reduction or waiver will be granted subject to confirmation of
your entitlement. No initial sales charges are imposed upon Class A shares
acquired upon the reinvestment of dividends and distributions. See "Purchase and
Redemption of Fund Shares--Reduction and Waiver of Initial Sales Charges--Class
A Shares" in the Statement of Additional Information.
CLASS B AND CLASS C SHARES
The offering price of Class B and Class C shares for investors choosing one of
the deferred sales charge alternatives is the NAV next determined following
receipt of an order by the Transfer Agent or Prudential Securities. Although
there is no sales charge imposed at the time of purchase, redemptions of Class B
and Class C shares may be subject to a CDSC. See "How to Sell Your
Shares--Contingent Deferred Sales Charges" below. The Distributor will pay sales
commissions of up to 4% of the purchase price of Class B shares to dealers,
financial advisers and other persons who sell Class B shares at the time of sale
from its own resources. This facilitates the ability of the Fund to sell the
Class B shares without an initial sales charge being deducted at the time of
purchase. The Distributor anticipates that it will recoup its advancement of
sales commissions from the combination of the CDSC and the distribution fee. See
"How the Fund is Managed--Distributor." In connection with the sale of Class C
shares, the Distributor will pay dealers, financial advisers and other persons
which distribute Class C shares a sales commission of up to 1% of the purchase
price at the time of the sale.
HOW TO SELL YOUR SHARES
YOU CAN REDEEM YOUR SHARES OF THE SERIES AT ANY TIME FOR CASH AT THE NAV NEXT
DETERMINED AFTER THE REDEMPTION REQUEST IS RECEIVED IN PROPER FORM BY THE
TRANSFER AGENT OR PRUDENTIAL SECURITIES. SEE "HOW THE FUND VALUES ITS SHARES."
In certain cases, however, redemption proceeds will be reduced by the amount of
any applicable contingent deferred sales charge, as described below. See
"Contingent Deferred Sales Charges" below.
IF YOU HOLD SHARES OF THE SERIES THROUGH PRUDENTIAL SECURITIES, YOU MUST
REDEEM SHARES THROUGH PRUDENTIAL SECURITIES. PLEASE CONTACT YOUR PRUDENTIAL
SECURITIES FINANCIAL ADVISER.
IF YOU HOLD SHARES IN NON-CERTIFICATE FORM, A WRITTEN REQUEST FOR REDEMPTION
SIGNED BY YOU EXACTLY AS THE ACCOUNT IS REGISTERED IS REQUIRED. IF YOU HOLD
CERTIFICATES, THE CERTIFICATES, SIGNED IN THE NAME(S) SHOWN ON THE FACE OF THE
CERTIFICATES, MUST BE RECEIVED BY THE TRANSFER AGENT IN ORDER FOR THE REDEMPTION
REQUEST TO BE PROCESSED. IF
26
<PAGE>
REDEMPTION IS REQUESTED BY A CORPORATION, PARTNERSHIP, TRUST OR FIDUCIARY,
WRITTEN EVIDENCE OF AUTHORITY ACCEPTABLE TO THE TRANSFER AGENT MUST BE SUBMITTED
BEFORE SUCH REQUEST WILL BE ACCEPTED. All correspondence and documents
concerning redemptions should be sent to the Fund in care of its Transfer Agent,
Prudential Mutual Fund Services LLC, Attention: Redemption Services, P.O. Box
15010, New Brunswick, New Jersey 08906-5010.
If the proceeds of the redemption (a) exceed $50,000, (b) are to be paid to a
person other than the record owner, (c) are to be sent to an address other than
the address on the Transfer Agent's records, or (d) are to be paid to a
corporation, partnership, trust or fiduciary, the signature(s) on the redemption
request and on the certificates, if any, or stock power must be guaranteed by an
"eligible guarantor institution." An "eligible guarantor institution" includes
any bank, broker, dealer or credit union. The Transfer Agent reserves the right
to request additional information from, and make reasonable inquiries of, any
eligible guarantor institution. For clients of Prusec, a signature guarantee may
be obtained from the agency or office manager of most Prudential Insurance and
Financial Services or Preferred Services offices.
PAYMENT FOR SHARES PRESENTED FOR REDEMPTION WILL BE MADE BY CHECK WITHIN SEVEN
DAYS AFTER RECEIPT BY THE TRANSFER AGENT OF THE CERTIFICATE AND/OR WRITTEN
REQUEST EXCEPT AS INDICATED BELOW. IF YOU HOLD SHARES THROUGH PRUDENTIAL
SECURITIES, PAYMENT FOR SHARES PRESENTED FOR REDEMPTION WILL BE CREDITED TO YOUR
PRUDENTIAL SECURITIES ACCOUNT, UNLESS YOU INDICATE OTHERWISE. Such payment may
be postponed or the right of redemption suspended at times (a) when the New York
Stock Exchange is closed for other than customary weekends and holidays, (b)
when trading on such Exchange is restricted, (c) when an emergency exists as a
result of which disposal by the Series of securities owned by it is not
reasonably practicable or it is not reasonably practicable for the Series fairly
to determine the value of its net assets, or (d) during any other period when
the SEC, by order, so permits; provided that applicable rules and regulations of
the SEC shall govern as to whether the conditions prescribed in (b), (c) or (d)
exist.
PAYMENT FOR REDEMPTION OF RECENTLY PURCHASED SHARES WILL BE DELAYED UNTIL THE
FUND OR ITS TRANSFER AGENT HAS BEEN ADVISED THAT THE PURCHASE CHECK HAS BEEN
HONORED, UP TO 10 CALENDAR DAYS FROM THE TIME OF RECEIPT OF THE PURCHASE CHECK
BY THE TRANSFER AGENT. SUCH DELAY MAY BE AVOIDED BY PURCHASING SHARES BY WIRE OR
BY CERTIFIED OR CASHIER'S CHECK.
REDEMPTION IN KIND. If the Trustees determine that it would be detrimental to
the best interests of the remaining shareholders of the Fund to make payment
wholly or partly in cash, the Fund may pay the redemption price in whole or in
part by a distribution in kind of securities from the investment portfolio of
the Series of the Fund, in lieu of cash, in conformity with applicable rules of
the SEC. Securities will be readily marketable and will be valued in the same
manner as in a regular redemption. See "How the Fund Values its Shares." If your
shares are redeemed in kind, you will incur transaction costs in converting the
assets into cash. The Fund, however, has elected to be governed by Rule 18f-1
under the Investment Company Act, under which the Fund is obligated to redeem
shares solely in cash up to the lesser of $250,000 or 1% of the net asset value
of the Fund during any 90-day period for any one shareholder.
INVOLUNTARY REDEMPTION. In order to reduce expenses of the Fund, the Trustees
may redeem all of the shares of any shareholder, other than a shareholder which
is an IRA or other tax-deferred retirement plan, whose account has a net asset
value of less than $500 due to a redemption. The Fund will give such
shareholders 60 days' prior written notice in which to purchase sufficient
additional shares to avoid such redemption. No contingent deferred sales charge
will be imposed on any such involuntary redemption.
90-DAY REPURCHASE PRIVILEGE. If you redeem your shares and have not previously
exercised the repurchase privilege, you may reinvest any portion or all of the
proceeds of such redemption in shares of the Series at the NAV next determined
after the order is received, which must be within 90 days after the date of the
redemption. Any CDSC paid in connection with such redemption will be credited
(in shares) to your account. (If less than a full repurchase is made, the credit
will be on a PRO RATA basis.) You must notify the Fund's Transfer Agent, either
directly or through Prudential Securities, at the time the repurchase privilege
is exercised to adjust your account for the CDSC you previously paid.
Thereafter, any redemptions will be subject to the
27
<PAGE>
CDSC applicable at the time of the redemption. See "Contingent Deferred Sales
Charges" below. Exercise of the repurchase privilege may affect the federal tax
treatment of any gain realized upon redemption. See "Distributions and Tax
Information" in the Statement of Additional Information.
CONTINGENT DEFERRED SALES CHARGES
Redemptions of Class B shares will be subject to a contingent deferred sales
charge or CDSC declining from 5% to zero over a six-year period. Class C shares
redeemed within one year of purchase will be subject to a 1% CDSC. The CDSC will
be deducted from the redemption proceeds and reduce the amount paid to you. The
CDSC will be imposed on any redemption by you which reduces the current value of
your Class B or Class C shares to an amount which is lower than the amount of
all payments by you for shares during the preceding six years, in the case of
Class B shares, and one year, in the case of Class C shares. A CDSC will be
applied on the lesser of the original purchase price or the current value of the
shares being redeemed. Increases in the value of your shares or shares acquired
through reinvestment of dividends or distributions are not subject to a CDSC.
The amount of any contingent deferred sales charge will be paid to and retained
by the Distributor. See "How the Fund is Managed--Distributor" and "Waiver of
the Contingent Deferred Sales Charges--Class B Shares" below.
The amount of the CDSC, if any, will vary depending on the number of years
from the time of payment for the purchase of shares until the time of redemption
of such shares. Solely for purposes of determining the number of years from the
time of any payment for the purchase of shares, all payments during a month will
be aggregated and deemed to have been made on the last day of the month. The
CDSC will be calculated from the first day of the month after the initial
purchase, excluding the time shares were held in a money market fund. See "How
to Exchange Your Shares" below.
The following table sets forth the rates of the CDSC applicable to redemptions
of Class B shares:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED SALES
CHARGE AS A PERCENTAGE
OF THE DOLLARS INVESTED
YEAR SINCE PURCHASE OR
PAYMENT MADE REDEMPTION PROCEEDS
------------------------------ -------------------------
<S> <C>
First......................... 5.0%
Second........................ 4.0%
Third......................... 3.0%
Fourth........................ 2.0%
Fifth......................... 1.0%
Sixth......................... 1.0%
Seventh....................... None
</TABLE>
In determining whether a CDSC is applicable to a redemption, the calculation
will be made in a manner that results in the lowest possible rate. It will be
assumed that the redemption is made first of amounts representing shares
acquired pursuant to the reinvestment of dividends and distributions; then of
amounts representing the increase in net asset value above the total amount of
payments for the purchase of Series shares made during the preceding six years
(five years for Class B shares purchased prior to January 22, 1990); then of
amounts representing the cost of shares held beyond the applicable CDSC period;
and finally, of amounts representing the cost of shares held for the longest
period of time within the applicable CDSC period.
For example, assume you purchased 100 Class B shares at $10 per share for a
cost of $1,000. Subsequently, you acquired 5 additional Class B shares through
dividend reinvestment. During the second year after the purchase you decided to
redeem $500 of your investment. Assuming at the time of the redemption the NAV
had appreciated to $12 per share, the value of your Class B shares would be
$1,260 (105 shares at $12 per share). The CDSC would not be applied to the value
of the reinvested dividend shares and the amount which represents appreciation
($260). Therefore, $240 of the $500 redemption proceeds ($500 minus $260) would
be charged at a rate of 4% (the applicable rate in the second year after
purchase) for a total CDSC of $9.60.
28
<PAGE>
For federal income tax purposes, the amount of the CDSC will reduce the gain
or increase the loss, as the case may be, on the amount recognized on the
redemption of shares.
WAIVER OF THE CONTINGENT DEFERRED SALES CHARGES--CLASS B SHARES. The CDSC will
be waived in the case of a redemption following the death or disability of a
shareholder or, in the case of a trust account, following the death or
disability of the grantor. The waiver is available for total or partial
redemptions of shares owned by a person, either individually or in joint tenancy
(with rights of survivorship), at the time of death or initial determination of
disability, provided that the shares were purchased on or prior to death or
disability. In addition, the CDSC will be waived on redemptions of shares held
by a Trustee of the Fund.
SYSTEMATIC WITHDRAWAL PLAN. The CDSC will be waived (or reduced) on certain
redemptions from a Systematic Withdrawal Plan. On an annual basis, up to 12% of
the total dollar amount subject to the CDSC may be redeemed without charge. The
Transfer Agent will calculate the total amount available for this waiver
annually on the anniversary of your purchase or, for shares purchased prior to
March 1, 1997, on March 1 of the current year. The CDSC will be waived (or
reduced) on redemptions until this threshold 12% amount is reached.
You must notify the Fund's Transfer Agent either directly or through
Prudential Securities or Prusec, at the time of redemption, that you are
entitled to waiver of the CDSC and provide the Transfer Agent with such
supporting documentation as it may deem appropriate. The waiver will be granted
subject to confirmation of your entitlement. See "Purchase and Redemption of
Fund Shares--Waiver of the Contingent Deferred Sales Charge--Class B Shares" in
the Statement of Additional Information.
A quantity discount may apply to redemptions of Class B shares purchased prior
to August 1, 1994. See "Purchase and Redemption of Fund Shares--Quantity
Discount--Class B Shares Purchased Prior to August 1, 1994" in the Statement of
Additional Information.
CONVERSION FEATURE--CLASS B SHARES
Class B shares will automatically convert to Class A shares on a quarterly
basis approximately seven years after purchase. Conversions will be effected at
relative net asset value without the imposition of any additional sales charge.
Since the Fund tracks amounts paid rather than the number of shares bought on
each purchase of Class B shares, the number of Class B shares eligible to
convert to Class A shares (excluding shares acquired through the automatic
reinvestment of dividends and other distributions) (the Eligible Shares) will be
determined on each conversion date in accordance with the following formula: (i)
the ratio of (a) the amounts paid for Class B shares purchased at least seven
years prior to the conversion date to (b) the total amount paid for all Class B
shares purchased and then held in your account (ii) multiplied by the total
number of Class B shares purchased and then held in your account. Each time any
Eligible Shares in your account convert to Class A shares, all shares or amounts
representing Class B shares then in your account that were acquired through the
automatic reinvestment of dividends and other distributions will convert to
Class A shares.
For purposes of determining the number of Eligible Shares, if the Class B
shares in your account on any conversion date are the result of multiple
purchases at different net asset values per share, the number of Eligible Shares
calculated as described above will generally be either more or less than the
number of shares actually purchased approximately seven years before such
conversion date. For example, if 100 shares were initially purchased at $10 per
share (for a total of $1,000) and a second purchase of 100 shares was
subsequently made at $11 per share (for a total of $1,100), 95.24 shares would
convert approximately seven years from the initial purchase (I.E., $1,000
divided by $2,100 (47.62%) multiplied by 200 shares equals 95.24 shares). The
Manager reserves the right to modify the formula for determining the number of
Eligible Shares in the future as it deems appropriate on notice to shareholders.
Since annual distribution-related fees are lower for Class A shares than Class
B shares, the per share net asset value of the Class A shares may be higher than
that of the Class B shares at the time of conversion. Thus, although the
aggregate dollar value will be the same, you may receive fewer Class A shares
than Class B shares converted. See "How the Fund Values its Shares."
29
<PAGE>
For purposes of calculating the applicable holding period for conversions, all
payments for Class B shares during a month will be deemed to have been made on
the last day of the month, or for Class B shares acquired through exchange, or a
series of exchanges, on the last day of the month in which the original payment
for purchases of such Class B shares was made. For Class B shares previously
exchanged for shares of a money market fund, the time period during which such
shares were held in the money market fund will be excluded. For example, Class B
shares held in a money market fund for one year will not convert to Class A
shares until approximately eight years from purchase. For purposes of measuring
the time period during which shares are held in a money market fund, exchanges
will be deemed to have been made on the last day of the month. Class B shares
acquired through exchange will convert to Class A shares after expiration of the
conversion period applicable to the original purchase of such shares.
The conversion feature may be subject to the continuing availability of
opinions of counsel or rulings of the Internal Revenue Service (i) that the
dividends and other distributions paid on Class A, Class B and Class C shares
will not constitute "preferential dividends" under the Internal Revenue Code and
(ii) that the conversion of shares does not constitute a taxable event. The
conversion of Class B shares into Class A shares may be suspended if such
opinions or rulings are no longer available. If conversions are suspended, Class
B shares of the Series will continue to be subject, possibly indefinitely, to
their higher annual distribution and service fee.
HOW TO EXCHANGE YOUR SHARES
AS A SHAREHOLDER OF THE SERIES, YOU HAVE AN EXCHANGE PRIVILEGE WITH THE OTHER
SERIES OF THE FUND AND CERTAIN OTHER PRUDENTIAL MUTUAL FUNDS (THE EXCHANGE
PRIVILEGE), INCLUDING ONE OR MORE SPECIFIED MONEY MARKET FUNDS, SUBJECT TO THE
MINIMUM INVESTMENT REQUIREMENTS OF SUCH FUNDS. CLASS A, CLASS B AND CLASS C
SHARES OF THE SERIES MAY BE EXCHANGED FOR CLASS A, CLASS B AND CLASS C SHARES,
RESPECTIVELY, OF THE OTHER SERIES OF THE FUND OR ANOTHER FUND ON THE BASIS OF
THE RELATIVE NAV. No sales charge will be imposed at the time of exchange. Any
applicable CDSC payable upon the redemption of shares exchanged will be
calculated from the first day of the month after the initial purchase, excluding
the time shares were held in a money market fund. Class B and Class C shares may
not be exchanged into money market funds other than Prudential Special Money
Market Fund, Inc. For purposes of calculating the holding period applicable to
the Class B conversion feature, the time period during which Class B shares were
held in a money market fund will be excluded. See "Conversion Feature--Class B
Shares" above. An exchange will be treated as a redemption and purchase for tax
purposes. See "Shareholder Investment Account--Exchange Privilege" in the
Statement of Additional Information.
IN ORDER TO EXCHANGE SHARES BY TELEPHONE, YOU MUST AUTHORIZE TELEPHONE
EXCHANGES ON YOUR INITIAL APPLICATION FORM OR BY WRITTEN NOTICE TO THE TRANSFER
AGENT AND HOLD SHARES IN NON-CERTIFICATE FORM. Thereafter, you may call the Fund
at (800) 225-1852 to execute a telephone exchange of shares, weekdays, except
holidays, between the hours of 8:00 A.M. and 6:00 P.M., New York time. For your
protection and to prevent fraudulent exchanges, your telephone call will be
recorded and you will be asked to provide your personal identification number. A
written confirmation of the exchange transaction will be sent to you. NEITHER
THE FUND NOR ITS AGENTS WILL BE LIABLE FOR ANY LOSS, LIABILITY OR COST WHICH
RESULTS FROM ACTING UPON INSTRUCTIONS REASONABLY BELIEVED TO BE GENUINE UNDER
THE FOREGOING PROCEDURES. All exchanges will be made on the basis of the
relative NAV of the two funds (or series) next determined after the request is
received in good order. The Exchange Privilege is available only in states where
the exchange may legally be made.
IF YOU HOLD SHARES THROUGH PRUDENTIAL SECURITIES, YOU MUST EXCHANGE YOUR
SHARES BY CONTACTING YOUR PRUDENTIAL SECURITIES FINANCIAL ADVISER.
IF YOU HOLD CERTIFICATES, THE CERTIFICATES, SIGNED IN THE NAME(S) SHOWN ON THE
FACE OF THE CERTIFICATES, MUST BE RETURNED IN ORDER FOR THE SHARES TO BE
EXCHANGED. SEE "HOW TO SELL YOUR SHARES" ABOVE.
You may also exchange shares by mail by writing to Prudential Mutual Fund
Services LLC, Attention: Exchange Processing, P.O. Box 15010, New Brunswick, New
Jersey 08906-5010.
30
<PAGE>
IN PERIODS OF SEVERE MARKET OR ECONOMIC CONDITIONS, THE TELEPHONE EXCHANGE OF
SHARES MAY BE DIFFICULT TO IMPLEMENT AND YOU SHOULD MAKE EXCHANGES BY MAIL BY
WRITING TO PRUDENTIAL MUTUAL FUND SERVICES LLC, AT THE ADDRESS NOTED ABOVE.
SPECIAL EXCHANGE PRIVILEGE. A special exchange privilege is available for
shareholders who qualify to purchase Class A shares at NAV (see "Alternative
Purchase Plan--Class A Shares--Reduction and Waiver of Initial Sales Charges"
above). Under this exchange privilege, amounts representing any Class B and
Class C shares (which are not subject to a CDSC) held in such a shareholder's
account will be automatically exchanged for Class A shares on a quarterly basis,
unless the shareholder elects otherwise. Eligibility for this exchange privilege
will be calculated on the business day prior to the date of the exchange.
Amounts representing Class B or Class C shares which are not subject to a CDSC
include the following: (1) amounts representing Class B or Class C shares
acquired pursuant to the automatic reinvestment of dividends and distributions,
(2) amounts representing the increase in the net asset value above the total
amount of payments for the purchase of Class B or Class C shares and (3) amounts
representing Class B or Class C shares held beyond the applicable CDSC period.
Class B and Class C shareholders must notify the Transfer Agent either directly
or through Prudential Securities or Prusec that they are eligible for this
special exchange privilege.
The Exchange Privilege is not a right and may be suspended, terminated or
modified on 60 days' notice to shareholders.
FREQUENT TRADING. The Fund and the other Prudential Mutual Funds are not
intended to serve as vehicles for frequent trading in response to short-term
fluctuations in the market. Due to the disruptive effect that market timing
investment strategies and excessive trading can have on efficient portfolio
management, each Prudential Mutual Fund and the Fund reserves the right to
refuse purchase orders and exchanges by any person, group or commonly controlled
accounts, if, in the Manager's sole judgment, such person, group or accounts
were following a market timing strategy or were otherwise engaging in excessive
trading (Market Timers).
To implement this authority to protect the Fund and its shareholders from
excessive trading, the Fund will reject all exchanges and purchases from a
Market Timer unless the Market Timer has entered into a written agreement with
the Fund or its affiliates pursuant to which the Market Timer has agreed to
abide by certain procedures, which include a daily dollar limit on trading. The
Fund may notify the Market Timer of rejection of an exchange or purchase order
subsequent to the day on which the order was placed.
SHAREHOLDER SERVICES
In addition to the Exchange Privilege, as a shareholder in the Series, you can
take advantage of the following services and privileges:
- AUTOMATIC REINVESTMENT OF DIVIDENDS AND/OR DISTRIBUTIONS WITHOUT A SALES
CHARGE. For your convenience, all dividends and distributions are automatically
reinvested in full and fractional shares of the Series at NAV without a sales
charge. You may direct the Transfer Agent in writing not less than 5 full
business days prior to the record date to have subsequent dividends and/or
distributions sent in cash rather than reinvested. If you hold shares through
Prudential Securities, you should contact your financial adviser.
- AUTOMATIC SAVINGS ACCUMULATION PLAN (ASAP). Under ASAP you may make regular
purchases of the Series' shares in amounts as little as $50 via an automatic
debit to a bank account or Prudential Securities account (including a Command
Account). For additional information about this service, you may contact your
Prudential Securities financial adviser, Prusec representative or the Transfer
Agent directly.
- SYSTEMATIC WITHDRAWAL PLAN. A systematic withdrawal plan is available to
shareholders which provides for monthly or quarterly checks. Withdrawals of
Class B and Class C shares may be subject to a CDSC. See "How to Sell Your
Shares-- Contingent Deferred Sales Charges" above.
31
<PAGE>
- REPORTS TO SHAREHOLDERS. The Fund will send you annual and semi-annual
reports. The financial statements appearing in annual reports are audited by
independent accountants. In order to reduce duplicate mailing and printing
expenses, the Fund will provide one annual and semi-annual shareholder report
and annual prospectus per household. You may request additional copies of such
reports by calling (800) 225-1852 or by writing to the Fund at Gateway Center
Three, 100 Mulberry Street, Newark, New Jersey 07102-4077. In addition, monthly
unaudited financial data is available upon request from the Fund.
- SHAREHOLDER INQUIRIES. Inquiries should be addressed to the Fund at Gateway
Center Three, 100 Mulberry Street, Newark, New Jersey 07102-4077, or by
telephone, at (800) 225-1852 (toll-free) or, from outside the U.S.A., at (908)
417-7555 (collect).
For additional information regarding the services and privileges described
above, see "Shareholder Investment Account" in the Statement of Additional
Information.
32
<PAGE>
DESCRIPTION OF SECURITY RATINGS
MOODY'S INVESTORS SERVICE
BOND RATINGS
Aaa: Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edged." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group, they comprise what are generally known
as high grade bonds. They are rated lower than 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
which make the long-term risks appear somewhat larger than the Aaa securities.
A: Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper-medium-grade obligations. Factors giving security
to principal and interest are considered adequate but elements may be present
which suggest a susceptibility to impairment sometime in the future.
Baa: Bonds which are rated Baa are considered as medium grade obligations,
I.E., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present, but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba: Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate, and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Bonds rated within the Aa, A, Baa, Ba and B categories which Moody's believes
possess the strongest credit attributes within those categories are designated
by the symbols Aa1, A1, Baa1, Ba1 and B1.
Caa: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca: Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
C: Bonds which are rated C are the lowest-rated class of bonds, and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
SHORT-TERM RATINGS
Moody's ratings for tax-exempt notes and other short-term loans are designated
Moody's Investment Grade (MIG). This distinction is in recognition of the
differences between short-term and long-term credit risk.
MIG 1: Loans bearing the designation MIG 1 are of the best quality, enjoying
strong protection by established cash flows, superior liquidity support or
demonstrated broad-based access to the market for refinancing.
A-1
<PAGE>
MIG 2: Loans bearing the designation MIG 2 are of high quality, with margins
of protection ample although not so large as in the preceding group.
MIG 3: Loans bearing the designation MIG 3 are of favorable quality, with all
security elements accounted for but lacking the strength of the preceding
grades.
MIG 4: Loans bearing the designation MIG 4 are of adequate quality.
Protection commonly regarded and required of an investment security is present
and although not distinctly or predominantly speculative, there is specific
risk.
SHORT-TERM DEBT RATINGS
Moody's Short-Term Debt Ratings are opinions of the ability of issuers to
repay punctually senior debt obligations which have an original maturity not
exceeding one year.
Prime-1: Issuers rated 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.
Prime-3: Issuers rated Prime-3 (or supporting institutions) have an
acceptable ability for repayment of senior short-term debt obligations.
Not Prime: Issuers rated Not Prime do not fall within any of the Prime rating
categories.
STANDARD & POOR'S RATINGS GROUP
BOND RATINGS
AAA: Debt rated AAA has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.
AA: Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the highest-rated issues only in small degree.
A: Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB: Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher-rated categories.
BB, B, CCC, CC and C: Debt rated BB, B, CCC, CC or C is regarded as having
predominantly speculative characteristics with respect to capacity to pay
interest and repay principal. BB indicates the least degree of speculation and C
the highest. While such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
D: Debt rated D is in payment default. This rating is used when interest
payments or principal payments are not made on the date due even if the
applicable grace period has not expired, unless S&P believes that such payments
will be made during such grace period.
COMMERCIAL PAPER RATINGS
An S&P Commercial Paper rating is a current assessment of the likelihood of
timely payment of debt considered short-term in the relevant market.
A-2
<PAGE>
A-1: The A-1 designation indicates that the degree of safety regarding timely
payment is strong. Those issues determined to possess extremely strong safety
characteristics are denoted with a plus sign (+) designation.
A-2: Capacity for timely payment on issues with the designation A-2 is
satisfactory. However, the relative degree of safety is not as high as for
issues designated A-1.
A-3: Issues carrying this designation have adequate capacity for timely
payment. They are, however, more vulnerable to the adverse effects of changes in
circumstances than obligations carrying the higher designations.
MUNICIPAL NOTES
A municipal note rating reflects the liquidity concerns and market access
risks unique to municipal notes. Municipal notes due in three years or less will
likely receive a municipal note rating, while notes maturing beyond three years
will most likely receive a long-term debt rating. Municipal notes are rated
SP-1, SP-2 or SP-3. The designation SP-1 indicates a very strong capacity to pay
principal and interest. Those issues determined to possess extremely strong
safety characteristics are denoted with a plus sign (+) designation. An SP-2
designation indicates a satisfactory capacity to pay principal and interest. An
SP-3 designation indicates speculative capacity to pay principal and interest.
A-3
<PAGE>
THE PRUDENTIAL MUTUAL FUND FAMILY
Prudential Investments Fund Management offers a broad range of mutual funds
designed to meet your individual needs. We welcome you to review the investment
options available through our family of funds. For more information on the
Prudential Mutual Funds, including charges and expenses, contact your Prudential
Securities financial adviser or Prusec representative or telephone the Funds at
(800) 225-1852 for a free prospectus. Read the prospectus carefully before you
invest or send money.
TAXABLE BOND FUNDS
--------------------------
Prudential Diversified Bond Fund, Inc.
Prudential Government Income Fund, Inc.
Prudential Government Securities Trust
Short-Intermediate Term Series
Prudential High Yield Fund, Inc.
Prudential Mortgage Income Fund, Inc.
Prudential Structured Maturity Fund, Inc.
Income Portfolio
The BlackRock Government Income Trust
TAX-EXEMPT BOND FUNDS
-----------------------------
Prudential California Municipal Fund
California Series
California Income Series
Prudential Municipal Bond Fund
High Yield Series
Insured Series
Intermediate Series
Prudential Municipal Series Fund
Florida Series
Maryland Series
Massachusetts Series
Michigan Series
New Jersey Series
New York Series
North Carolina Series
Ohio Series
Pennsylvania Series
Prudential National Municipals Fund, Inc.
GLOBAL FUNDS
--------------------
Prudential Europe Growth Fund, Inc.
Prudential Global Genesis Fund, Inc.
Prudential Global Limited Maturity Fund, Inc.
Limited Maturity Portfolio
Prudential Intermediate Global Income Fund, Inc.
Prudential International Bond Fund, Inc.
Prudential Natural Resources Fund, Inc.
Prudential Pacific Growth Fund, Inc.
Prudential World Fund, Inc.
Global Series
International Stock Series
The Global Total Return Fund, Inc.
Global Utility Fund, Inc.
EQUITY FUNDS
--------------------
Prudential Balanced Fund
Prudential Distressed Securities Fund, Inc.
Prudential Dryden Fund
Prudential Active Balanced Fund
Prudential Stock Index Fund
Prudential Small-Cap Index Fund
Prudential Bond Market Index Fund
Prudential Pacific Index Fund
Prudential Europe Index Fund
Prudential Emerging Growth Fund, Inc.
Prudential Equity Fund, Inc.
Prudential Equity Income Fund
Prudential Jennison Series Fund, Inc.
Prudential Jennison Growth Fund
Prudential Jennison Growth & Income
Fund
Prudential Multi-Sector Fund, Inc.
Prudential Small-Cap Quantum Fund, Inc.
Prudential Small Company Value Fund, Inc.
Prudential Utility Fund, Inc.
Nicholas-Applegate Fund, Inc.
Nicholas-Applegate Growth Equity Fund
MONEY MARKET FUNDS
--------------------------
- - TAXABLE MONEY MARKET FUNDS
Prudential Government Securities Trust
Money Market Series
U.S. Treasury Money Market Series
Prudential Special Money Market Fund, Inc.
Money Market Series
Prudential MoneyMart Assets, Inc.
- - TAX-FREE MONEY MARKET FUNDS
Prudential Tax-Free Money Fund, Inc.
Prudential California Municipal Fund
California Money Market Series
Prudential Municipal Series Fund
Connecticut Money Market Series
Massachusetts Money Market Series
New Jersey Money Market Series
New York Money Market Series
- - COMMAND FUNDS
Command Money Fund
Command Government Fund
Command Tax-Free Fund
- - INSTITUTIONAL MONEY MARKET FUNDS
Prudential Institutional Liquidity Portfolio, Inc.
Institutional Money Market Series
B-1
<PAGE>
No dealer, sales representative or any other person has been authorized to give
any information or to make any representations, other than those contained in
this Prospectus, in connection with the offer contained herein, and, if given or
made, such other information or representations must not be relied upon as
having been authorized by the Fund or the Distributor. This Prospectus does not
constitute an offer by the Fund or by the Distributor to sell or a solicitation
of any offer to buy any of the securities offered hereby in any jurisdiction to
any person to whom it is unlawful to make such offer in such jurisdiction.
-------------------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---
<S> <C>
FUND HIGHLIGHTS................................. 2
What are the Series' Risk Factors and Special
Characteristics?............................. 2
FUND EXPENSES................................... 4
FINANCIAL HIGHLIGHTS............................ 5
HOW THE FUND INVESTS............................ 8
Investment Objective and Policies............. 8
Other Investments and Policies................ 14
Investment Restrictions....................... 15
HOW THE FUND IS MANAGED......................... 15
Manager....................................... 15
Distributor................................... 16
Portfolio Transactions........................ 18
Custodian and Transfer and Dividend Disbursing
Agent........................................ 18
HOW THE FUND VALUES ITS SHARES.................. 18
HOW THE FUND CALCULATES PERFORMANCE............. 19
TAXES, DIVIDENDS AND DISTRIBUTIONS.............. 19
GENERAL INFORMATION............................. 21
Description of Shares......................... 21
Additional Information........................ 22
SHAREHOLDER GUIDE............................... 23
How to Buy Shares of the Fund................. 23
Alternative Purchase Plan..................... 24
How to Sell Your Shares....................... 26
Conversion Feature--Class B Shares............ 29
How to Exchange Your Shares................... 30
Shareholder Services.......................... 31
DESCRIPTION OF SECURITY RATINGS................. A-1
THE PRUDENTIAL MUTUAL FUND FAMILY............... B-1
</TABLE>
- -------------------------------------------
MF132A 4440349
Class A: 74435M-87-9
CUSIP Nos.: Class B: 74435M-88-7
Class C: 74435M-48-1
PRUDENTIAL MUNICIPAL SERIES FUND
(PENNSYLVANIA SERIES)
PROSPECTUS
OCTOBER 30, 1997
WWW.PRUDENTIAL.COM
[LOGO]
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
- ------------------------------------------
STATEMENT OF ADDITIONAL INFORMATION
DATED OCTOBER 30, 1997
- ----------------------------------------------------------------
Prudential Municipal Series Fund (the Fund) is an open-end, management
investment company, or mutual fund, consisting of thirteen series--the
Connecticut Money Market Series, the Florida 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. 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, 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 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, 100 Mulberry Street, Newark, New
Jersey 07102-4077, 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 October
30, 1997, copies of which may be obtained from the Fund upon request.
- --------------------------------------------------------------------------------
MF117B
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
CROSS-REFERENCES TO PAGES IN SERIES PROSPECTUSES
-----------------------------------------------------------------
CONNECTICUT MASSACHUSETTS
MONEY MONEY
PAGE MARKET FLORIDA MARYLAND MASSACHUSETTS MARKET MICHIGAN
---- ----------- ------- -------- ------------- ------------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Investment Objectives and
Policies..................... B-1 6 9 8 9 6 8
In General.................. B-1 -- -- -- -- -- --
Tax-Exempt Securities....... B-3 6 9 8 9 6 8
Special Considerations
Regarding Investments in
Tax-Exempt Securities...... B-4 9 14 13 14 9 13
Additional Issuers.......... B-14 -- -- -- -- -- --
Floating Rate and Variable
Rate Securities............ B-16 7 9 8 9 7 8
Put Options................. B-17 8 11 10 11 8 10
Financial Futures Contracts
and Options Thereon........ B-17 -- 13 12 13 -- 12
When-Issued and Delayed
Delivery Securities........ B-19 8 12 11 11 8 11
Segregated Accounts......... B-20 -- -- -- -- -- --
Portfolio Turnover.......... B-20 -- 15 14 15 -- 14
Illiquid Securities......... B-21 10 15 14 15 10 14
Repurchase Agreements....... B-21 10 15 14 14 9 14
Investment Restrictions....... B-22 10 16 15 15 10 14
Trustees and Officers......... B-23 10 16 15 15 10 15
Manager....................... B-28 11 16 15 16 10 15
Distributor................... B-30 11 17 16 16 11 16
Portfolio Transactions and
Brokerage.................... B-35 13 19 18 18 12 17
Purchase and Redemption of
Fund Shares.................. B-36 16 24 22 23 16 22
Specimen Price Make-Up...... B-37 -- -- -- -- -- --
Reduction and Waiver of
Initial Sales
Charges--Class A Shares.... B-37 -- 27 25 26 -- 25
Waiver of the Contingent
Deferred Sales
Charge--Class B Shares..... B-39 -- 30 28 30 -- 28
Quantity Discount--Class B
Shares Purchased Prior to
August 1, 1994............. B-39 -- -- 29 30 -- 29
Shareholder Investment
Account...................... B-39 24 33 31 32 24 31
Automatic Reinvestment of
Dividends and/or
Distributions.............. B-40 24 33 31 32 24 31
Exchange Privilege.......... B-40 23 32 30 31 23 30
Dollar Cost Averaging....... B-41 -- -- -- -- -- --
Automatic Savings
Accumulation Plan (ASAP)... B-42 25 33 31 32 24 31
Systematic Withdrawal
Plan....................... B-42 25 33 31 32 24 31
How to Redeem Shares of the
Money Market Series........ B-43 21 -- -- -- 20 --
Mutual Fund Programs........ B-44 -- -- -- -- -- --
Net Asset Value............... B-44 13 19 18 19 13 18
Performance Information....... B-45 6 19 18 19 6 18
Distributions and Tax
Information.................. B-49 13 20 19 20 13 19
Distributions............... B-49 15 22 21 21 14 21
Federal Taxation............ B-50 13 20 19 20 13 19
State Taxation.............. B-52 14 21 20 21 14 20
Organization and
Capitalization............... B-59 15 23 21 22 15 21
Custodian, Transfer and
Dividend Disbursing Agent and
Independent Accountants...... B-60 13 19 18 18 12 18
Description of Tax-Exempt
Security Ratings............. B-61 -- A-1 A-1 A-1 -- A-1
Financial Statements.......... B-63 5 5 5 5 5 5
Report of Independent
Accountants.................. B-69 -- -- -- -- -- --
Appendix I.................... I-1 -- -- -- -- -- --
Appendix II................... II-1 -- -- -- -- -- --
Appendix III.................. III-1 -- -- -- -- -- --
Appendix IV................... IV-1 -- -- -- -- -- --
</TABLE>
<PAGE>
TABLE OF CONTENTS (CONTINUED)
<TABLE>
<CAPTION>
CROSS-REFERENCES TO PAGES IN SERIES PROSPECTUSES
--------------------------------------------------------------
NEW JERSEY NEW YORK
NEW MONEY MONEY NORTH
PAGE JERSEY MARKET NEW YORK MARKET CAROLINA OHIO PENNSYLVANIA
---- ------ ---------- -------- -------- -------- ---- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Investment Objectives and Policies...... B-1 9 6 9 6 8 8 8
In General............................ B-1 -- -- -- -- -- -- --
Tax-Exempt Securities................. B-3 9 6 9 6 8 8 8
Special Considerations Regarding
Investments in Tax-Exempt
Securities........................... B-4 14 9 14 9 13 13 13
Additional Issuers.................... B-14 -- -- -- -- -- -- --
Floating Rate and Variable Rate
Securities........................... B-16 9 7 9 7 8 8 8
Put Options........................... B-17 11 8 11 8 10 10 10
Financial Futures Contracts and
Options Thereon...................... B-17 13 -- 13 -- 12 12 12
When-Issued and Delayed Delivery
Securities........................... B-19 12 8 12 8 11 10 11
Segregated Accounts................... B-20 -- -- -- -- -- --
Portfolio Turnover.................... B-20 15 -- 15 -- 14 14 15
Illiquid Securities................... B-21 16 10 15 10 14 14 15
Repurchase Agreements................. B-21 15 9 14 9 14 13 14
Investment Restrictions................. B-22 16 10 15 10 14 14 15
Trustees and Officers................... B-23 16 10 15 10 15 14 15
Manager................................. B-28 16 10 15 10 15 14 15
Distributor............................. B-30 17 11 16 11 16 15 16
Portfolio Transactions and Brokerage.... B-35 19 12 18 12 18 17 18
Purchase and Redemption of Fund
Shares................................. B-36 24 16 23 16 22 21 23
Specimen Price Make-Up................ B-37 -- -- -- -- -- -- --
Reduction and Waiver of Initial Sales
Charges--Class A Shares.............. B-37 27 -- 26 -- 25 24 25
Waiver of the Contingent Deferred
Sales Charge--Class B Shares......... B-39 30 -- 29 -- 28 28 29
Quantity Discount--Class B Shares
Purchased Prior to August 1, 1994.... B-39 31 -- 30 -- 29 28 29
Shareholder Investment Account.......... B-39 33 24 32 16 31 30 31
Automatic Reinvestment of Dividends
and/or Distributions................. B-40 33 24 32 24 31 30 31
Exchange Privilege.................... B-40 32 23 31 23 30 29 30
Dollar Cost Averaging................. B-41 -- -- -- -- -- -- --
Automatic Savings Accumulation Plan
(ASAP)............................... B-42 33 24 33 24 31 30 31
Systematic Withdrawal Plan............ B-42 33 24 33 24 31 30 31
How to Redeem Shares of the Money
Market Series........................ B-43 -- 20 -- 21 -- -- --
Mutual Fund Programs.................. B-44 -- -- -- -- -- -- --
Net Asset Value......................... B-44 19 12 19 12 18 17 18
Performance Information................. B-45 20 6 19 6 18 18 19
Distributions and Tax Information....... B-49 20 13 20 13 19 19 19
Distributions......................... B-49 22 14 21 14 21 20 21
Federal Taxation...................... B-50 20 13 20 13 19 18 19
State Taxation........................ B-52 22 14 21 14 20 19 20
Organization and Capitalization......... B-59 23 15 22 15 21 20 21
Custodian, Transfer and Dividend
Disbursing Agent and Independent
Accountants............................ B-60 19 12 18 12 18 17 18
Description of Tax-Exempt Security
Ratings................................ B-61 A-1 -- A-1 -- A-1 A-1 A-1
Financial Statements.................... B- 5 5 5 5 5 5 5
Report of Independent Accountants....... B- -- -- -- -- -- -- --
Appendix I.............................. I-1 -- -- -- -- -- -- --
Appendix II............................. II-1 -- -- -- -- -- -- --
Appendix III............................ III-1 -- -- -- -- -- -- --
Appendix IV............................. IV-1 -- -- -- -- -- -- --
</TABLE>
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INVESTMENT OBJECTIVES AND POLICIES
IN GENERAL
Prudential Municipal Series Fund (the Fund), organized on May 18, 1984, is
an open-end, management investment company consisting of thirteen separate
series: the Connecticut Money Market Series, the Florida 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 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, 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 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 at
least 70% of its total assets 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 Florida Series, Maryland
Series, Massachusetts Series, Michigan Series, New Jersey Series, New York
Series, North Carolina Series, Ohio Series and Pennsylvania Series each may
invest up to 30% of its total assets in municipal 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. 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
headings "Description of Security Ratings" in each series' prospectus (other
than the money market series) and "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 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.
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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 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 and the money market series, other than
the New York Money Market Series.
Since securities issued or guaranteed by states or municipalities are not
voting securities, there is no limitation on the percentage of a single issuer's
securities which a series may own so long as, with respect to 75% of the assets
of each series other than the Florida Series 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
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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 and the money market series, other than the New York Money
Market Series, the series will not invest more than 25% of its total assets in
pre-refunded bonds of the same municipal issuer.
TAX-EXEMPT SECURITIES
Tax-exempt securities include notes and bonds issued by or on behalf of
states, territories and possessions of the United States and their political
subdivisions, agencies and instrumentalities and the District of Columbia, the
interest on which is exempt from federal income tax (except for possible
application of the alternative minimum tax) and, in certain instances,
applicable state or local income and personal property taxes. Such securities
are traded primarily in the over-the-counter market.
For purposes of diversification and concentration under the Investment
Company Act, the identification of the issuer of tax-exempt bonds or notes
depends on the terms and conditions of the obligation. If the assets and
revenues of an agency, authority, instrumentality or other political subdivision
are separate from those of the government creating the subdivision and the
obligation is backed only by the assets and revenues of the subdivision, such
subdivision is regarded as the sole issuer. Similarly, in the case of an
industrial development revenue bond or pollution control revenue bond, if the
bond is backed only by the assets and revenues of the 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,
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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.
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
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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 with one of the highest per capita income
levels in the country. 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 a 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 at approximately 5.0%.
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 1996. 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 1, 1997, only $157,055 of principal remained
outstanding on the Economic Recovery Notes.
The adopted budget for fiscal 1996-97 anticipates unrestricted General Fund
revenues of $9,049.7 million and General Fund expenditures of $9,049.4 million,
resulting in a projected surplus of $0.3 million. The State Comptroller's
General Fund financial statements released August 1, 1997, however, estimate an
operating surplus for fiscal year 1996-97 of $41.2 million.
The adopted budget reflects implementation of significant tax changes aimed
at increasing overall disposable income and encouraging economic expansion in
the State. An additional phase down in the personal income tax rate was enacted
in 1997, pursuant to which the tax rate on the first $15,000 of taxable income
for joint filers is dropped 33% from 4.5% to 3% for the income year commencing
January 1, 1998. 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.
The adopted 1996-1997 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, 1996, Florida ranked fourth in the nation, with an estimated
population of 14.4 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 high value-added sectors, such as
electrical and electronic equipment, as well as printing and publishing. Since
1987, the job creation rate for the State is almost twice the nation's rate;
however, in the
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nineties the trend was reversed until 1995 and 1996 when Florida's unemployment
rate again tracked below the national average. The average rate of unemployment
for Florida since 1987 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 affected 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 $16,617.4 million for 1996-1997, an increase of 6.7% over revenues for
1995-1996. Estimated Revenue of $16,321.6 million for fiscal 1997-1998
represents an increase of 4.8% over 1996-1997.
Pursuant to a constitutional amendment which was ratified by the voters on
November 8, 1994, and became effective in fiscal year 1995-96, the rate of
growth in state revenues in a given fiscal year is limited to no more than the
average annual growth rate in Florida personal income over the previous five
years. Revenues collected in excess of the limitation are to be deposited into
the Budget Stabilization Fund unless 2/3 of the members of both houses of the
Legislature vote to raise the limit. The revenue limit is determined by
multiplying the average annual growth rate in Florida personal income over the
previous five years by the maximum amount of revenue permitted under the cap for
the previous year. State revenues are defined as taxes, licenses, fees and
charges for services imposed by the Legislature as well as revenue from the sale
of lottery tickets. 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 of which are not within the control of the State
or local government, could affect or adversely impact on the State's financial
condition.
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 $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
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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
$461.2 million in the Revenue Stabilization Account of the State Reserve Fund.
The enacted 1997 budget held overall appropriations to slightly over 1996
levels, reflecting slowed revenue growth and absence of an appropriation to the
now fully funded Revenue Stabilization Account of the State Reserve Fund. The
State projects ending its fiscal year 1997 with a General Fund balance on a
budgetary basis of $144.5 million and $490.4 million in the Revenue
Stabilization Account of the State Reserve Fund.
In April 1997 the General Assembly approved a $15.4 billion 1998 fiscal year
budget. This budget (i) includes funds sufficient to meet all specific statutory
funding requirements; (ii) incorporates the first year of a five-year phase-in
of a 10% reduction in personal income taxes (estimated to reduce revenues by
$38.5 million in fiscal year 1998 and $450 million when fully phased in) and
certain reductions in sales taxes on certain manufacturing equipment (estimated
to reduce revenues by $38.6 million when the reductions are fully phased in
fiscal year 2001); and (iii) includes the first year's $30 million funding under
an agreement to provide additional funds totaling $230 million over a five-year
period to schools in the City of Baltimore and related grants to other
subdivisions totaling $32 million.
The State and its various political subdivisions issue a number of different
kinds of municipal obligations, including general obligation bonds supported by
tax collections, revenue bonds payable from certain identified tax levies or
revenue streams, conduit revenue bonds payable from the repayment of certain
loans to authorized entities such as hospitals, universities and other private
entities, and certificates of participation in tax-exempt municipal leases.
These obligations are subject to various economic risks and uncertainties, and
the credit quality of the securities issued by them varies with the financial
strengths of the respective borrowers.
There can be no assurance that future statewide or regional economic
difficulties, and the resulting impact on the financial condition of Maryland
issuers generally, will not adversely affect the market value of Maryland
Obligations held by the Maryland Series or the ability of particular obligors to
make timely payments of debt service on (or relating to) those obligations.
MASSACHUSETTS
Massachusetts is an urban, densely populated, and wealthy state with a fully
developed industrial economy. Massachusetts' industrial economy has experienced
a significant evolution in the last decade, shifting from textiles, leather
products and heavy manufacturing into high technology and defense-related
sectors, with concomitant growth in services, trade, mutual funds and
communications related industries. 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. In May 1997, however, the unemployment
rate was 4.0%, the lowest rate since June 1989 and below the national rate of
4.8%.
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 budget surpluses
each year from 1992-1996. Through June, fiscal 1997 tax collections totaled
approximately $12.861 billion, an increase of approximately $812 million, or
6.7%, over fiscal 1996 and approximately $354 million higher than the most
recent official estimates released by the Secretary of Administration and
Finance on May 20, 1997. The fiscal 1998 budget provides for total
appropriations of approximately $18.46 billion, a 3.8% increase over estimated
fiscal 1997 expenditures.
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
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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. 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 1997 and 1998 projects continued modest growth with a low and
stable level of inflation. Personal income is projected to grow 5.1% in calendar
1997 and 4.9% in calendar 1998. Nationally, car and light truck sales are
expected to remain unchanged in 1997 and 1998 from the 1996 level of 15.1
million units. The forecast assumes an inflation rate of 2.2% in 1997 and 2.6%
in 1998, accompanied by steady interest rates.
The State's forecast for the Michigan economy reflects the national outlook.
Total wage and salary employment is projected to grow 1.6% in 1997 and 1.5% in
1998. This slight growth reflects the ongoing diversification of the Michigan
economy. The unemployment rate is projected to be 5.0% in 1997 and 5.1% in 1998,
placing Michigan below the national forecasted unemployment rate of 5.4%.
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 1993 fiscal year 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 $81.9
million in fiscal 1995 and $196.5 million in fiscal 1996. 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 $8,807.4 million, an increase over fiscal 1995-1996 of 5.6%.
The State's forecasts and budget are 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.
Since 1994, Michigan has financed the principal portion of the costs of
local public school operations as a State budget item, and has shifted the
responsibility for financing such costs away from local school units. To provide
funding for these additional State budget obligations, the Legislature has
enacted a series of taxes and tax increases, and has exempted all property in
the State from millages levied for local and intermediate school district
operating purposes, other than millages levied for community colleges. These
additional State revenues are included within the State's constitutional revenue
limitations and may impact the State's ability to raise additional revenues in
the future.
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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. Although the early 1990s recession affected the New Jersey
economy, the State's per capita income remains the second highest in the United
States. The State's unemployment rate as of September 1997 was 5.4%, down from
6.2% during the same period last year, but still higher than the 4.9% national
rate.
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.
For the last five 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 in 1995.
In an extraordinary fiscal move, the State Legislature approved the issuance
of a $2.8 billion dollar bond issue in June, 1997, to correct the deficit in the
state pension plan, and pre-pay the State's contributions for the next few
years.
Two major bond rating services, Moody's and Standard & Poor's, initially
warned that the bond issue could threaten the State's bond rating; however, both
services rescinded that opinion before the bond issue was approved. Moody's
Investors service reports that New Jersey's tax-supported debt has increased by
92% since 1994.
The fiscal 1995 and 1996 ending balances were $966 million and $500 million,
respectively. The State ended fiscal year 1997 with estimated undesignated
balances of $700 million. The 1998 budget includes appropriations totaling $16.8
billion, up $800 million or 5% from fiscal year 1997.
Pressures to increase spending arose from several sources. Plans to further
privatize State services were put on hold to achieve a budget compromise. Most
importantly, the State Supreme Court directed that an additional $250 million be
appropriated for the public school system, to correct inequities which had
arisen between wealthy and poor school districts.
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. According to a
consensus report of economic projections, in 1996, personal
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income, wages and employment increased over the prior year by approximately
5.3%, 6.4% and 0.6%, respectively, and forecasts include continued increases of
approximately 5.4%, 6.0% and 0.8%, respectively, in 1997. Although personal
income and wages continue to exceed national averages, the State's rate of job
growth from 1992 to 1997 ranked 48th in the United States and the State's
unemployment rate was above the national average for each of the years during
the same period.
According to a report by the State Comptroller, the State General Fund
reported a $1.9 billion GAAP basis operating surplus for the fiscal year ended
March 31, 1997, resulting in a reduction of the General Fund accumulated deficit
to $995 million as of the fiscal year end. (The State's General Fund includes
most tax receipts and supports most major categories of spending.) The General
Fund accumulated deficit for the fiscal years ended March 31, 1993, 1994, 1995
and 1996 was $2.6 billion, $1.8 billion, $3.3 billion and $2.9 billion,
respectively. According to the Comptroller, an operating surplus is projected
for the fiscal year 1997-1998, notwithstanding a projected increase in General
Fund spending of 5.2%. The enacted budget includes a significantly expanded
program of tax reductions, most of which do not take effect until the fiscal
year 1999-2000. 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 5,895,195 to 6,656,810 as reported by the 1990
federal census and the State rose from twelfth to tenth in population. The
State's estimate of population as of June 30, 1996 is 7,322,317. The labor force
has undergone significant change during recent years as the State has moved from
an agricultural to a service and goods producing economy. As of December 1996,
the State was reported to rank eleventh among the States in non-agricultural
employment and eight in manufacturing employment. From 1980 to 1996, the State
labor force increased by approximately 30% (from 2,855,200 to 3,718,000) and
during the period 1985-1995, per capita income grew from $11,870 to $21,103, an
increase of 77.8%. The seasonally adjusted unemployment rate in December 1996
was estimated to be 3.8% of the labor force, as compared with 5.3% nationwide.
The North Carolina State Constitution requires that the total expenditures
of the State for the fiscal period covered by each budget not exceed the total
of receipts during the fiscal period and the surplus remaining in the State
Treasury at the beginning of the period. In November 1996, the voters of the
State approved a constitutional amendment giving the Governor the power to veto
certain legislative matters, including budgetary matters.
Since 1994, the State has had a budget surplus, in part as a result of new
taxes and fees and spending reductions put into place in the early 1990s. In
addition, the State, like the nation, has experienced economic recovery during
the 1990s. The State budget is based upon estimated revenues and a multitude of
existing and assumed State and non-State factors, including State and national
economic conditions, international activity and federal government policies and
legislation. The unreserved General Fund balance at June 30, 1996, the end of
the 1995-96 fiscal year, was approximately $406 million, and the reserved
balance of the General Fund was approximately $765 million.
In 1995, the North Carolina General Assembly repealed, effective for taxable
years beginning January 1, 1995, the tax levied on various forms of intangible
personal property. The legislature provided specific appropriations to counties
and municipalities from state revenues to replace the revenues those political
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subdivisions previously received from intangibles tax revenue. In addition, in
the 1996 session the legislature reduced the corporate income tax rate from
7.75% to 6.9% (phased in over four years), reduced the food tax from 4% to 3%,
and eliminated most privilege license taxes as of January 1, 1997. As a result
of the comprehensive tax reductions, General Fund tax collections for 1995-96
grew by only 1.0% over 1994-95, as opposed to the 6.4% growth that would have
occurred if such measures had not been taken.
In the 1996-97 Budget prepared by the Office of State Budget and Management,
it is projected that General Fund net revenues will increase 3% over 1995-96.
This increase is expected to result primarily from growth in the North Carolina
economy, despite a tax reduction package enacted by the Legislature during the
1996 legislative session. A preliminary report for 1996-97 net revenues
indicates that the actual revenue growth over 1995-96 was approximately 8%.
It is unclear what effect these developments at the State level may have on
the value of the obligations in the North Carolina Series.
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.
OHIO
Generally, the creditworthiness of Ohio Obligations of local issuers is
unrelated to that of obligations of the State itself, and the State has no
responsibility to make payments on those local obligations.
There may be specific factors that at particular times apply in connection
with investment in particular Ohio Obligations or in those obligations of
particular Ohio issuers. It is possible that the investment may be in particular
Ohio Obligations, or in those of particular issuers, as to which those factors
apply. However, the information below is intended only as a general summary, and
is not intended as a discussion of any specific factors that may affect any
particular obligation or issuer.
While diversifying more into the service and other non-manufacturing areas,
the Ohio economy continues to rely in part on durable goods manufacturing
largely concentrated in motor vehicles and equipment, steel, rubber products and
household appliances. As a result, general economic activity, as in many other
industrially-developed states, tends to be more cyclical than in some other
states and in the nation as a whole. Agriculture is an important segment of the
economy, with over half the State's area devoted to farming and approximately
16% of total employment in agribusiness.
In prior years, the State's overall unemployment rate was commonly somewhat
higher than the national figure. For example, the reported 1990 average monthly
State rate was 5.7%, compared to the 5.5% national figure. However, for the last
six years the State rates were below the national rates (4.9% versus 5.4% in
1996). The unemployment rate and its effects vary among geographic areas of the
State.
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 (FY) or fiscal biennium in a deficit position. Most State operations
are financed through the General Revenue Fund (GRF), for which the personal
income and sales-use taxes are the major sources. Growth and depletion of GRF
ending fund balances show a consistent pattern related to national economic
conditions, with the ending FY balance reduced during less favorable and
increased during more favorable economic periods. The State has well-established
procedures for, and has timely taken, necessary actions to ensure
resource/expenditure balances during less favorable economic periods. Those
procedures included general and selected reductions in appropriations spending.
The GRF appropriations act for the 1997-98 biennium was passed on June 25,
1997 and promptly signed (after selective vetoes) by the Governor. All necessary
GRF appropriations for State debt service and lease rental payments then
projected for the biennium were included in that act.
The State's incurrence or assumption of debt without a vote of the people
is, with limited exceptions, prohibited by current State constitutional
provisions. The State may incur debt, limited in amount to $750,000,
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to cover casual deficits or failures in revenues or to meet expenses not
otherwise provided for. The Constitution expressly precludes the State from
assuming the debts of any local government or corporation. ( An exception is
made in both cases for any debt incurred to repel invasion, suppress
insurrection or defend the State in war.)
By fourteen constitutional amendments approved from 1921 to date (the latest
adopted in 1995) Ohio voters authorized the incurrence of State debt and the
pledge of taxes or excises to its payment. At September 26, 1997, $952 million
(excluding certain highway bonds payable primarily from highway use receipts) of
this debt was outstanding. The only such State debt at that date still
authorized to be incurred were portions of the highway bonds, and the following:
(a) up to $100 million of obligations for coal research and development may be
outstanding at any one time ($30.9 million outstanding); (b) $240 million of
obligations previously authorized for local infrastructure improvements, no more
than $120 million of which may be issued in any calendar year ($826.8 million
outstanding); and (c) up to $200 million in general obligation bonds for parks,
recreation and natural resource purposes which may be outstanding at any one
time ($94.2 million outstanding, with no more than $50 million to be issued in
any one year).
State and local agencies issue obligations that are payable from revenues
from or relating to certain facilities (but not from taxes). By judicial
interpretation, these obligations are not "debt" within constitutional
provisions. In general, payment obligations under lease-purchase agreements of
Ohio public agencies (in which certificates of participation may be issued) are
limited in duration to the agency's fiscal period, and are renewable only upon
appropriations being made available for the subsequent fiscal period.
Local school districts in Ohio receive a major portion (state-wide aggregate
approximately 44% in recent years) of their operating moneys from State
subsidies, but are dependent on local property taxes, and in 119 districts from
voter-authorized income taxes, for significant portions of their budgets.
Litigation, similar to that in other states, has been pending questioning the
constitutionality of Ohio's system of school funding. The Ohio Supreme Court has
recently concluded that aspects of the system (including basic operating
assistance and the loan program referred to below) are unconstitutional, and
ordered the State to provide for and fund a system complying with the Ohio
Constitution, staying its order for a year (to March 1998) to permit time for
responsive corrective actions. A small number of the State's 612 local school
districts have in any year required special assistance to avoid year-end
deficits. A program has provided for school district cash need borrowing
directly from commercial lenders, with diversion of State subsidy distributions
to repayment if needed. Recent borrowings under this program totalled $41.1
million for 28 districts in FY 1994, $71.1 million for 29 districts in FY 1995
(including $29.5 million for one district), $87.2 million for 20 districts in FY
1996 (including $42.1 million for one district), and $113.2 million for 12
districts in 1997 (including $90 million to one district for restructuring its
prior loans).
For those few municipalities and school districts that on occasion have
faced significant financial problems, there are statutory procedures for a joint
State/local commission to monitor the fiscal affairs and for development of a
financial plan to eliminate deficits and cure any defaults. (Similar procedures
have recently been extended to counties and townships.) Since inception for
municipalities in 1979, these "fiscal emergency" procedures have been applied to
24 cities and villages; for 18 of them the fiscal situation was resolved and the
procedures terminated. As of September 26, 1997, the 1996 school district
"fiscal emergency" provision had been applied to five districts, and seven
districts were on preliminary "fiscal watch" status.
At present the State itself does not levy ad valorem taxes on real or
tangible personal property. Those taxes are levied by political subdivisions and
other local taxing districts. The Constitution has since 1934 limited to 1% of
true value in money the amount of the aggregate levy (including a levy for
unvoted general obligations) of property taxes by all overlapping subdivisions,
without a vote of the electors or a municipal charter provision, and statutes
limit the amount of that aggregate levy to 10 mills per $1 of assessed valuation
(commonly referred to as the "ten-mill limitation"). Voted general obligations
of subdivisions are payable from property taxes that are unlimited as to amount
or rate.
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 has been historically identified as a heavy industry state,
although, due to the decline of the steel, coal and railroad industries over the
last thirty years, the Commonwealth's business environment has readjusted to
reflect a more diversified industrial base. Currently, the major sources of
growth in Pennsylvania are in the service sector, which includes trade, medical,
and health services, education and financial institutions.
The General Fund, the Commonwealth's largest fund, receives all tax
revenues, non-tax revenues and federal grants and entitlements that are not
specified by law to be deposited elsewhere. The majority of the Commonwealth's
operating and administrative expenses are payable from the General Fund. Debt
service on all bonded indebtedness of the Commonwealth, except that issued for
highway purposes or for the benefit of other special revenue funds, is payable
from the General Fund.
For the five year period from fiscal 1992 through fiscal 1996, revenues and
other sources, (determined on a "GAAP" basis) increased by an average annual
rate of 4.6%. Intergovernmental revenues increased by an average annual rate of
13.2% due, in part, to an accounting change. Tax revenues during this period
increased an average of 2.5% as modest economic growth, low inflation rates and
several tax rate reductions and other tax reduction measures constrained growth
of tax revenues. The tax reduction measures followed a $2.7 billion tax increase
adopted for the 1992 fiscal year.
Expenditures and other uses during the fiscal 1992 through fiscal 1996
period rose at an average annual rate of 6.0% led by increases of 14.2% for
protection of persons and property program costs. Efforts to control costs for
various social welfare programs and the presence of favorable economic
conditions have led to a modest 5.6% increase for public health and welfare
costs for the five year period.
The Fund balance as of June 30, 1996 totalled $635.2 million, a $547.7
million increase from the balance of $87.5 million on June 30, 1992.
The fiscal 1996 unappropriated surplus (prior to transfer to the Tax
Stabilization Reserve Fund) was $183.8 million, $65.5 million above estimate.
Expenditures from revenues, including $113 million of supplemental
appropriations (but excluding pooled financing expenditures) totalled $16,074.7
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 0.7%). 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.
For GAAP purposes, the fiscal 1996 fund balance was drawn down $53.1 million
to $635.2 million. A planned drawdown of the budgetary unappropriated surplus
during the fiscal year contributed to expenditures and other uses exceeding
revenues and other sources by $28.0 million. As a result, the unreserved fund
balance declined by $61.1 million, reducing the balance to $381.8 million at the
end of fiscal 1996. Expenditures and other uses increased by 8.6% for fiscal
1996. The unappropriated balance of Commonwealth revenues increased during the
1997 fiscal year by $432.9 million to $591.4 million (prior to reserves for
transfer to the Tax
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Stabilization Reserve Fund) due mostly to the higher than estimated revenues and
slightly lower expenditures than budgeted. Commonwealth revenues (prior to tax
refunds) during the fiscal year totaled $17,320.6 million, $576.1 (3.4 percent)
above the estimate made at the time the budget was enacted.
Expenditures from Commonwealth revenues (excluding pooled financing
expenditures) during fiscal 1997 totaled $16,347.7 million and were close to the
estimate made in February 1997 with the presentation of the Governor's fiscal
1998 budget request. Lapses of appropriation authority during the fiscal year
totaled $200.6 million, some of which was used to support an additional $79.8
million in fiscal 1997 supplemental appropriations over the February 1997
estimate. Supplemental appropriations for fiscal 1997 totaled $169.3 million.
The enacted fiscal 1998 budget reflects a 0.7 percent increase in revenues
over actual fiscal 1997 revenues. Fiscal 1998 estimates for Commonwealth
revenues are based on an economic forecast for national economic growth to slow
through the remainder of calendar year 1997. A growth rate of just above 1.0
percent is anticipated to be maintained for the last two quarters of the fiscal
year and result in a 1.2 percent growth rate in real gross domestic product for
the second calendar quarter of 1998 over the second quarter of 1997. This
anticipated rate of economic growth is a result of anticipated slowing of gains
in consumer spending, business investment and residential housing. Inflation is
projected to remain modest and the unemployment rate is expected to reach 6.0
percent by the second calendar quarter of 1998.
The rate of anticipated growth of Commonwealth revenues is also affected by
the enactment of tax reductions (estimated at $170.6 million) and tax revenue
dedications effective for the 1998 fiscal year.
Appropriations enacted for fiscal 1998 are 3.7 percent ($618 million) above
appropriations enacted for fiscal 1997 (including supplemental appropriations).
Based on current expectations and the adopted budget for fiscal 1998 and
excluding any estimate for appropriation lapses during the fiscal year, the
unappropriated surplus is projected to decline from $402.7 million at the
beginning of the fiscal year to $16.7 million at fiscal year-end (prior to
transfers to the Tax Stabilization Reserve Fund).
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, 1997, the Commonwealth had $4,795.1 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. As of the 1990 U.S. Census, the Territory's
population was 133,152. The Government preliminary estimate of the population as
of June 1997 is 155,600.
According to the Current Employment Report of the Department of Labor of
Guam, dated June 1997, as of that date, there were 18,260 employees in the
public sector, including 2,100 employed by the federal government and 13,130
employed by the territorial government. The economy in Guam is heavily
influenced by the significant U.S. military presence on the island. Of the
approximately 5,350 civilians employed in Guam on the island by the federal
government in March 1997, approximately 85% were employed by the Department of
Defense and approximately 15% by other Federal departments. Between December
1996 and June 1997, there were 210 permanent employment reductions in the
federal government sector due to continuing implementation of the 1995 BRAC base
realignment and closure recommendations for Guam. Government of Guam
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employment totals declined for the year ending June 1997, although this decline
was primarily seasonal and comparable to the seasonal decline in June 1996 due
to payroll reductions in educational institutions that were somewhat offset by
temporary summer youth employment.
Total private sector employment was 47,930 jobs as of June 1997. This figure
shows a loss of 340 jobs from June 1996. The average compound growth rate of
civilian (government and private) employment since 1994 is 1.32%, primarily in
the sectors of service, trade, finance, insurance and retail. Tourism is a
significant industry as well, with most visitors coming from Japan. Visitor
arrivals rose to over 1 million in 1994 for the first time, according to the
Guam Visitors Bureau, and increased in 1995 and 1996 as well. Although the
increases have been more modest over the past few years, Guam has maintained its
competitiveness despite fluctuations in the yen during 1996 and 1997.
The total reduction is 950 jobs from June 1996-June 1997 in all sectors in
Guam. From 1997 to 1996, civilian employment increased by approximately 1.3%,
public sector employment decreased by approximately 0.3%, and overall employment
increased by approximately 1.5%
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. According to a report by the Puerto Rico
Department of Treasury, from fiscal year 1985 (year ended June 30, 1985) through
1996, personal income, both aggregate and per capita, has increased each year.
Gross product has increased each year from the fiscal year 1992 through 1996.
Although the rate of unemployment decreased from 16.5% in fiscal year 1992 to
13.8% in fiscal year 1996, it remains above the rate of unemployment in the
United States.
The Puerto Rico Planning Board's Economic Activity Index, a composite index
of thirteen economic indicators, increased 1.4% for fiscal year 1996, compared
to fiscal year 1995, and 2.5% for fiscal year 1995, compared to fiscal year
1994. During the first three months of fiscal year 1997, the Index decreased
0.9% compared to the same period in fiscal year 1996, for which period it had
registered an increase of 1.7% over the same period of fiscal year 1995.
According to the Puerto Rico Department of Treasury, this decline in the index
was principally due to the short-term negative impact of Hurricane Hortense,
which struck the island on September 9, 1996. It is expected, however, that this
decline will be fully offset in the future, and that the reconstruction process
after Hurricane Hortense will have a positive effect on economic activity.
Amendments incorporated in the Small Business Job Protection Act of 1996
enacted by the United States Congress and signed into law by President Clinton
on August 20, 1996 are now phasing out a special tax credit that was available
under Section 936 of the Code for United States companies operating in Puerto
Rico. The credit provided a federal tax exemption for certain operating and
qualifying investment income from Puerto Rico sources. According to the Puerto
Rico Department of Treasury's Comprehensive Annual Financial Report for the
fiscal year 1996, it is not possible at this time to determine the long-term
effect on the Puerto Rico economy of the enactment of the 1996 Amendments. The
Government of Puerto Rico does not believe there will be short-term or
medium-term material adverse effects on Puerto Rico's economy as a result of the
enactment of the 1996 Amendments. The Government of Puerto Rico further believes
that during the phase-out period sufficient time exists to implement additional
incentive programs to safeguard Puerto Rico's competitive position.
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. As of June 30, 1993, the Commonwealth's
B-15
<PAGE>
General Fund (the primary operating fund of the Commonwealth) experienced a
deficit of approximately $47 million. As of June 30, 1994, 1995 and 1996, the
General Fund had a positive balance of $514 million, $608 million and $397
million, respectively.
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 were granted a
measure of self-government by the Organic Act, as revised in 1954. The
Territorial Government 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.
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.
According to the USVI Bureau of Economic Research, cruise ship passenger
arrivals to the USVI during calendar 1996 rose 12.4% compared with the previous
year. Nonetheless, the economy has struggled in recent years largely due to the
impact of Hurricane Marilyn in 1995. Between January 1994 and June 1996, there
was a 15.5% drop in private sector jobs and a 9% drop overall. The governor has
recently designated Christiansted and Frederiksted, St. Croix to be "enterprise
zones" in order to booster their faltering economies. Various tax incentive
plans have also been proposed to encourage tourism and boost the economy.
FLOATING RATE AND VARIABLE RATE SECURITIES
Each series may invest more than 5% of its assets in floating rate and
variable rate securities, including participation interests therein and (for
series other than money market series) inverse floaters. Floating rate
securities normally have a rate of interest which is set as a specific
percentage of a designated base rate, such as the rate on Treasury Bonds or
Bills or the prime rate at a major commercial bank. The interest rate on
floating rate securities changes whenever there is a change in the designated
base interest rate. Variable rate securities provide for a specific periodic
adjustment in the interest rate based on prevailing market rates and generally
would allow the series to demand payment of the obligation on short notice at
par plus accrued interest, which amount may be more or less than the amount the
series paid for them. An inverse floater is a debt instrument with a floating or
variable interest rate that moves in the opposite direction of the interest rate
on another security or the value of an index. Changes in the interest rate on
the other security or interest inversely affect the residual interest rate paid
on the inverse floater, with the result that the inverse floater's price will be
considerably more volatile than that of a fixed rate bond. The market for
inverse floaters is relatively new.
Each series may invest in participation interests in variable rate
tax-exempt securities (such as certain IDBs) owned by banks. A participation
interest gives the series an undivided interest in the tax-exempt security in
the proportion that the series' participation interest bears to the total
principal amount of the tax-exempt security and generally provides that the
holder may demand repurchase within one to seven days. Participation interests
frequently are backed by an irrevocable letter of credit or guarantee of a bank
that the investment adviser under the supervision of the Trustees has determined
meets the prescribed quality standards for the series. A series generally has
the right to sell the instrument back to the bank and draw on the letter of
credit on demand, on seven days' notice, for all or any part of the series'
participation interest in the par value of the tax-exempt security, plus accrued
interest. Each series intends to exercise the demand under the letter of credit
only (1) upon a default under the terms of the documents of the tax-exempt
security, (2) as needed to provide liquidity in order to meet redemptions or (3)
to maintain a high quality investment portfolio. Banks will retain a service and
letter of credit fee and a fee for issuing repurchase commitments in an amount
equal to the excess of the interest paid by the issuer on the tax-exempt
securities over the negotiated yield at which the instruments were purchased
from the bank by a series. The investment adviser will monitor the pricing,
quality and liquidity of the variable rate demand instruments held by each
series, including the IDBs supported by bank letters of credit or guarantees, on
the basis of published financial information, reports of rating agencies and
other bank analytical services to which the investment adviser may subscribe.
Participation interests will be purchased only if, in the opinion of counsel,
interest income on such interests will be tax-exempt when distributed as
dividends to shareholders.
B-16
<PAGE>
PUT OPTIONS
Each series may acquire put options (puts) giving the series the right to
sell securities held in the series' portfolio at a specified exercise price on a
specified date. Such puts may be acquired for the purpose of protecting the
series from a possible decline in the market value of the securities to which
the put applies in the event of interest rate fluctuations and, in the case of
liquidity puts, to shorten the effective maturity of the underlying security.
The aggregate value of the premiums paid to acquire puts held in a series'
portfolio (other than liquidity puts) may not exceed 10% of the net asset value
of such series. The acquisition of a put may involve an additional cost to the
series by payment of a premium for the put, by payment of a higher purchase
price for securities to which the put is attached or through a lower effective
interest rate.
In addition, there is a credit risk associated with the purchase of puts in
that the issuer of the put may be unable to meet its obligation to purchase the
underlying security. Accordingly, the series will acquire puts only under the
following circumstances: (1) the put is written by the issuer of the underlying
security and such security is rated within the four highest quality grades (two
highest grades for the money market series) as determined by 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.
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 or other liquid 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.
B-17
<PAGE>
OPTIONS ON FINANCIAL FUTURES. Each series (other than the money market
series) may purchase call options and write put and call options on futures
contracts and enter into closing transactions with respect to such options to
terminate an existing position. Each series will use options on futures in
connection with hedging strategies.
An option on a futures contract gives the purchaser the right, in return for
the premium paid, to assume a position in a futures contract (a long position if
the option is a call and a short position if the option is a put) at a specified
exercise price at any time during the period of the option. Upon exercise of the
option, the delivery of the futures position by the writer of the option to the
holder of the option will be accompanied by delivery of the accumulated balance
in the writer's futures margin account which represents the amount by which the
market price of the futures contract, at exercise, exceeds, in the case of a
call, or is less than, in the case of a put, the exercise price of the option on
the futures contract. If an option is exercised on the last trading day prior to
the expiration date of the option, the settlement will be made entirely in cash
equal to the difference between the exercise price of the option and the closing
price of the futures contract on the expiration date. Currently, options can be
purchased or written with respect to futures contracts on U.S. Treasury Bonds,
among other fixed-income securities, and on municipal bond indices on the
Chicago Board of Trade. As with options on debt securities, the holder or writer
of an option may terminate his or her position by selling or purchasing an
option of the same series. There is no guaranty that such closing transactions
can be effected.
When a series hedges its portfolio by purchasing a put option, or writing a
call option, on a futures contract, it will own a long futures position or an
amount of debt securities corresponding to the open option position. When a
series writes a put option on a futures contract, it may, rather than establish
a segregated account, sell the futures contract underlying the put option or
purchase a similar put option.
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 or other liquid 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.
B-18
<PAGE>
The hours of trading of interest rate futures may not conform to the hours
during which the series may trade municipal securities. To the extent that the
futures markets close before the municipal securities market, significant price
and rate movements can take place that cannot be reflected in the futures
markets on a day-to-day basis.
RISKS OF TRANSACTIONS IN OPTIONS ON FINANCIAL FUTURES. In addition to the
risks which apply to all options transactions, there are several special risks
relating to options on futures. The ability to establish and close out positions
on such options will be subject to the maintenance of a liquid secondary market.
Compared to the sale of financial futures, the purchase of put options on
financial futures involves less potential risk to a series because the maximum
amount at risk is the premium paid for the options (plus transaction costs).
However, there may be circumstances when the purchase of a put option on a
financial future would result in a loss to a series when the sale of a financial
future would not, such as when there is no movement in the price of debt
securities.
An option position may be closed out only on an exchange which provides a
secondary market for an option of the same series. Although a series generally
will purchase only those options for which there appears to be an active
secondary market, there is no assurance that a liquid secondary market on an
exchange will exist for any particular option, or at any particular time, and
for some options, no secondary market on an exchange may exist. In such event,
it might not be possible to effect closing transactions in particular options,
with the result that a series would have to exercise its options in order to
realize any profit and would incur transaction costs upon the sale of underlying
securities pursuant to the exercise of put options.
Reasons for the absence of a liquid secondary market on an exchange include
the following: (i) there may be insufficient trading interest in certain
options, (ii) restrictions may be imposed by an exchange on opening transactions
or closing transactions or both, (iii) trading halts, suspensions or other
restrictions may be imposed with respect to particular classes or series of
options or underlying securities, (iv) unusual or unforeseen circumstances may
interrupt normal operations on an exchange, (v) the facilities of an exchange
may not at all times be adequate to handle current trading volume or (vi) one or
more exchanges could, for economic or other reasons, decide or be compelled at
some future date to discontinue the trading of options (or a particular class or
series of options), in which event the secondary market on that exchange (or in
that class or series of options) would cease to exist, although outstanding
options on that exchange could continue to be exercisable in accordance with
their terms.
There is no assurance that higher than anticipated trading activity or other
unforeseen events might not, at times, render certain clearing facilities
inadequate, and thereby result in the institution by an exchange of special
procedures which may interfere with the timely execution of customers' orders.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES
Each series may purchase tax-exempt securities on a when-issued or delayed
delivery basis. 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.
B-19
<PAGE>
A segregated account of each series consisting of cash or other liquid
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.
SEGREGATED ACCOUNTS
When each series is required to segregate assets in connection with certain
hedging transactions, it will maintain cash or liquid assets in a segregated
account with the Fund's Custodian. "Liquid assets" means cash, U.S. Government
securities, equity securities, debt obligations or other liquid, unencumbered
assets, marked-to-market daily.
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, 1997, 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...................................................................... 22%
Maryland..................................................................... 30%
Massachusetts................................................................ 22%
Michigan..................................................................... 20%
New Jersey................................................................... 25%
New York..................................................................... 43%
North Carolina............................................................... 35%
Ohio......................................................................... 22%
Pennsylvania................................................................. 21%
</TABLE>
B-20
<PAGE>
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 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 Investments Fund Management LLC (PIFM) pursuant
to an order of the SEC. On a daily basis, any uninvested cash balances of the
series may be aggregated with those of such investment companies and invested in
one or more repurchase agreements. Each fund or series participates in the
income earned or accrued in the joint account based on the percentage of its
investment.
Except as described above and under "Investment Restrictions," the foregoing
investment policies are not fundamental and may be changed by the Trustees of
the Fund without the vote of a majority of its outstanding voting securities (as
defined above).
B-21
<PAGE>
INVESTMENT RESTRICTIONS
The following restrictions are fundamental policies. Fundamental policies
are those which cannot be changed without the approval of the holders of a
majority of the outstanding voting securities of a series. A "majority of the
outstanding voting securities" of a series, when used in this Statement of
Additional Information, means the lesser of (i) 67% of the voting shares
represented at a meeting at which more than 50% of the outstanding voting shares
are present in person or represented by proxy or (ii) more than 50% of the
outstanding voting shares.
The Fund may not:
1. Purchase securities on margin, but the Fund may obtain such
short-term credits as may be necessary for the clearance of transactions.
For the purpose of this restriction, the deposit or payment by the Fund
(except with respect to the Connecticut Money Market Series, the
Massachusetts Money Market Series, the New York Money Market Series and the
New Jersey Money Market Series) of initial or maintenance margin in
connection with futures contracts or related options transactions is not
considered the purchase of a security on margin.
2. Make short sales of securities or maintain a short position.
3. Issue senior securities, borrow money or pledge its assets, except
that the Fund may on behalf of a series borrow up to 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 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 Massachusetts Money Market Series and the
New Jersey Money Market 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 (72).............. Trustee President and Director of BMC Fund, Inc., a
c/o Prudential Investments 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;
Director of The High Yield Income Fund,
Inc.
Eugene C. Dorsey (70)............. Trustee Retired President, Chief Executive Officer
c/o Prudential Investments 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 (59)......... Trustee Marketing and Management Consultant, Director
c/o Prudential Investments Fund of The High Yield Income Fund, Inc.
Management LCC
Gateway Center Three
Newark, NJ
*Robert F. Gunia (50).............. Trustee Comptroller (since May 1996) of Prudential
Gateway Center Three Investments, Executive Vice President and
Newark, NJ Treasurer (since December 1996) of
Prudential Investments Fund Management LLC
(PIFM), formerly Chief Administrative
Officer (July 1990-September 1996),
Director (January 1989-September 1996),
Executive Vice President, Treasurer and
Chief Financial Officer (June
1987-September 1996) of Prudential Mutual
Fund Management, Inc.; Vice President and
Director of The Asia Pacific Fund, Inc.
(since May 1989); Senior Vice President of
Prudential Securities Incorporated
(Prudential Securities) (since March 1987);
Director of The High Yield Income Fund.
*Harry A. Jacobs, Jr. (76)......... Trustee Senior Director of Prudential Securities
One New York Plaza (since January 1986); 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., The First Australia Prime Income
Fund, Inc. and The High Yield Income Fund;
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 (78)............. Trustee Chairman (since February 1990) and Director
c/o Prudential Investments Fund (since April 1989) of International Imaging
Management LLC Materials, Inc.; Retired Chairman, Chief
Gateway Center Three Executive Officer and Director of Schlegel
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 CFA (36)......... 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); Director of The
High Yield Income Fund, Inc.
Thomas T. Mooney (55)............. Trustee President of the Greater Rochester Metro
c/o Prudential Investments 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, The Business Counsel of New York
State, First Financial Fund, Inc., The High
Yield Plus Fund, Inc. and The High Yield
Income Fund, Inc.
Thomas H. O'Brien (72)............ Trustee President of O'Brien Associates (Financial
c/o Prudential Investments 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 and The High Yield
Income Fund, Inc.; Trustee of Hofstra
University.
*Richard A. Redeker (54)........... President and Employee of Prudential Investments; formerly
751 Broad Street 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 (January
1994-September 1996); prior thereto, 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 (67)............. Trustee Economist; formerly Vice President and Chief
c/o Prudential Investments 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), First
Financial Fund, Inc., and The High Yield
Income Fund, Inc.
Louis A. Weil, III (56)........... Trustee Publisher and Chief Executive Officer (since
c/o Prudential Investments Fund January 1996) and Director (since September
Management LLC 1991) of Central Newspapers, Inc.; Chairman
Gateway Center Three of the Board (since January 1986),
Newark, NJ Publisher and Chief Executive Officer
(August 1991-December 1995) of Phoenix
Newspapers, Inc.; prior thereto, Publisher
of Time Magazine and Chief Executive
Officer of The Detroit News (February
1986-August 1989); formerly member of the
Advisory Board, Chase Manhattan
Bank-Westchester; Director of The High
Yield Income Fund, Inc.
Thomas A. Early (42).............. Vice President Vice President and General Counsel (since
Gateway Center Three March 1997), PMF&A; Executive Vice President,
Newark, NJ Secretary and General Counsel (since
December 1996), PIFM; formerly Vice
President and General Counsel (March
1994-March 1997), Prudential Retirement
Services and Associate General Counsel and
Chief Financial Services Officer
(1988-1994), Frank Russell Company.
S. Jane Rose (51)................. Secretary Senior Vice President (since December 1996),
Gateway Center Three PIFM, Senior Vice President and Senior
Newark, NJ Counsel (since July 1992) of Prudential
Securities; Senior Vice President (January
1991-September 1996) and Senior Counsel
(June 1987-September 1996) of Prudential
Mutual Fund Management, Inc..
Grace Torres (38)................. Treasurer and First Vice President (since December 1996) of
Gateway Center Three Principal PIFM; First Vice President (since March 1994)
Newark, NJ Financial and of Prudential Securities; formerly First
Accounting Vice President (March 1994-September 1996),
Officer Prudential Mutual Fund Management, Inc. and
Vice President (July 1989-March 1996) of
Bankers Trust.
Stephen M. Ungerman (44).......... Assistant Tax Director (since March 1996) of Prudential
Gateway Center Three Treasurer Investments and the Private Asset Group of
Newark, NJ the Prudential Insurance Company of America
(Prudential); formerly First Vice President
of Prudential Mutual Fund Management, Inc.
(February 1993-September 1996); prior
thereto, Senior Tax Manager of Price
Waterhouse LLP (1981-January 1993).
</TABLE>
B-25
<PAGE>
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION
NAME, ADDRESS AND AGE POSITION WITH FUND DURING PAST 5 YEARS
- ----------------------------------- ------------------ ---------------------------------------------
<S> <C> <C>
Deborah A. Docs (39).............. Assistant Vice President and Associate General Counsel
Gateway Center Three Secretary (since December 1996) of PIFM; Vice President
Newark, NJ and Associate General Counsel of Prudential
Securities; formerly Vice President and
Associate General Counsel (January
1993-September 1996) of Prudential 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>
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, 1997 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 PIFM (Fund Complex) for the calendar year ended December 31, 1996.
B-26
<PAGE>
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........... $7,333 None N/A $166,000(21/39)*
Eugene C. Dorsey, Trustee**........ $7,333 None N/A $ 98,583(12/36)*
Delayne Dedrick Gold, Trustee...... $7,333 None N/A $175,308(21/42)*
Robert F. Gunia, Trustee+.......... -- None N/A --
Harry A. Jacobs, Jr., Trustee+..... -- None N/A --
Donald D. Lennox, Trustee.......... $4,333 None N/A $ 90,000(10/22)*
Mendel A. Melzer, Trustee+......... -- None N/A --
Thomas T. Mooney, Trustee**........ $7,333 None N/A $135,375(18/36)*
Thomas H. O'Brien, Trustee......... $7,333 None N/A $ 32,250(5/20)*
Richard A. Redeker, Trustee+....... -- None N/A --
Nancy H. Teeters, Trustee.......... $7,333 None N/A $103,583(11/28)*
Louis A. Weil, III, Trustee........ $4,333 None N/A $ 91,250(13/18)*
</TABLE>
- ------------------------
@ Effective January 1997, the annual compensation paid to Trustees was reduced
to $6,500 in addition to certain out-of-pocket expenses.
* Indicates number of funds/portfolios in Fund Complex (including the Fund) to
which aggregate compensation relates.
+ Robert F. Gunia, Harry A. Jacobs, Jr., Mendel A. Melzer and Richard A.
Redeker, who are each interested Trustees, do not receive compensation from
the Fund or any fund in the Fund Complex.
** Total compensation from all of the Funds in the Fund Complex for the calendar
year ended December 31, 1996, includes amounts deferred at the election of
Trustees under the Fund's deferred compensation plans. Including accrued
interest, total compensation amounted to $111,535 and $139,869 for Eugene C.
Dorsey and Thomas T. Mooney, respectively.
As of October 3, 1997, 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 3, 1997, 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 3, 1997, 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 CLASS Z
------------------------- ---------------------- ---------------------- -------------------- --------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Florida.................. 6,789,175 (77%) 1,623,168 (87%) 620,010 (88%) 15,855 (99%)
Maryland................. 873,958 (51%) 688,574 (53%) 5,348 (86%) N/A
Massachusetts............ 1,403,335 (56%) 728,821 (48%) 5,063 (63%) 0 (0%)
Michigan................. 1,148,189 (46%) 921,272 (41%) 21,053 (67%) N/A
New Jersey............... 7,365,554 (79%) 9,400,779 (75%) 104,513 (79%) 1,380 (98%)
New York................. 8,777,936 (60%) 5,882,612 (65%) 55,550 (85%) 3,146 (99%)
North Carolina........... 1,755,051 (67%) 1,608,112 (74%) 2,293 (41%) N/A
Ohio..................... 2,136,021 (50%) 1,451,865 (44%) 3,031 (46%) N/A
Pennsylvania............. 4,268,448 (49%) 4,664,222 (39%) 15,824 (36%) N/A
</TABLE>
As of October 3, 1997, Prudential Securities was the record holder for other
beneficial owners of 78,513,440 shares (or 99% of those outstanding) of the
Connecticut Money Market Series, 52,804,920 shares (or 99% of those outstanding)
of the Massachusetts Money Market Series, 193,477,890 shares (or 99% of those
B-27
<PAGE>
outstanding) of the New Jersey Money Market Series and 354,009,295 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 Investments Fund Management LLC (PIFM
or the Manager), Gateway Center Three, 100 Mulberry Street, Newark, New Jersey
07102-4077. PIFM 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, 1997, PIFM managed and/or administered open-end and
closed-end management investment companies with assets of approximately $59.9
billion. According to the Investment Company Institute, as of August 31, 1997,
the Prudential Mutual Funds were the 15th largest family of mutual funds in the
United States.
PIFM is a subsidiary of Prudential Securities and Prudential. Prudential
Mutual Fund Services LLC (PMFS or the Transfer Agent), a wholly-owned subsidiary
of PIFM, 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), PIFM, 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, PIFM is obligated to keep certain books and records of the
Fund. PIFM 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 PIFM for the Fund are not exclusive under the terms of the Management
Agreement and PIFM is free to, and does, render management services to others.
For its services, PIFM receives, pursuant to the Management Agreement, a fee
at an annual rate of .50 of 1% of the average daily net assets of each series.
The fee is computed daily and payable monthly. The Management Agreement also
provides that, in the event the expenses of the Fund (including the fees of
PIFM, 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 PIFM will be
reduced by the amount of such excess. Reductions in excess of the total
compensation payable to PIFM will be paid by PIFM to the Fund. No such
reductions were required during the fiscal year ended August 31, 1997.
In connection with its management of the business affairs of the Fund, PIFM
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 PIFM or the
Fund's investment adviser;
(b) all expenses incurred by PIFM 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,
doing business as Prudential Investments (PI, the Subadviser or the investment
adviser), pursuant to the subadvisory agreement between PIFM and PI (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
B-28
<PAGE>
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 and the states 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 PIFM 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 22, 1997 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.
The amount of the management fee paid by each series of the Fund to PIFM for
the fiscal years ended August 31, 1995, 1996 and 1997 was as follows:
<TABLE>
<CAPTION>
1995 1996 1997
--------------------- --------------------- ---------------------
MANAGEMENT FEES MANAGEMENT FEES MANAGEMENT FEES
--------------------- --------------------- ---------------------
PAID WAIVED PAID WAIVED PAID WAIVED
---------- --------- ---------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Municipal Series Fund:
Connecticut Money Market Series.................. $ 71,379 $ 214,138 $ 93,220 $ 279,660 $ 96,876 $ 290,624
Florida Series................................... 231,778 464,337 247,835 417,808 368,602 245,735
Maryland Series.................................. 210,311 14,170 172,913 19,213 158,091 17,566
Massachusetts Series............................. 258,040 18,492 242,474 26,941 222,502 24,722
Massachusetts Money Market Series................ 53,649 160,946 68,361 205,083 66,348 199,044
Michigan Series.................................. 323,133 22,911 302,058 33,562 275,401 30,600
New Jersey Series................................ 1,047,300 483,073 1,162,663 266,868 1,140,799 126,755
New Jersey Money Market Series................... 642,087 214,029 877,965 85,123 981,113 --
New York Series.................................. 1,518,552 108,361 1,447,226 160,803 1,338,809 148,756
New York Money Market Series..................... 1,463,815 -- 1,682,136 -- 1,630,461 --
North Carolina Series............................ 313,847 22,350 284,859 31,651 255,716 28,413
Ohio Series...................................... 538,657 38,218 491,452 54,606 437,408 46,601
Pennsylvania Series.............................. 1,182,799 84,187 1,127,704 125,300 1,046,806 116,312
</TABLE>
PIFM discontinued its management fee waiver with respect to each applicable
Series effective September 1, 1997.
PIFM has entered into the Subadvisory Agreement with PI (the Subadviser).
The Subadvisory Agreement provides that PI will furnish investment advisory
services in connection with the management of the Fund. In connection therewith,
PI is obligated to keep certain books and records of the Fund. PIFM continues to
have responsibility for all investment advisory services pursuant to the
Management Agreement and supervises PI's performance of such services. PI is
reimbursed by PIFM for the reasonable costs and expenses incurred by PI in
furnishing those services.
B-29
<PAGE>
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. He has been in the investment business since 1978.
The Subadvisory Agreement was last approved by the Trustees, including a
majority of the Trustees who are not parties to the contract or interested
persons of any such party as defined in the Investment Company Act, on May 22,
1997, 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.
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, PIFM or PI 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 Incorporated (Prudential Securities, PSI or the
Distributor), One Seaport Plaza, New York, New York 10292, acts as the
distributor of the shares of the Fund.
Under separate Distribution and Service Plans (the Class A Plan, the Class B
Plan and the Class C Plan, collectively, the Plans) adopted by the Fund under
Rule 12b-1 under the Investment Company Act and separate distribution agreements
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
B-30
<PAGE>
Class B Plans and Distribution Agreements to conform them with recent amendments
to the National Association of Securities Dealers, Inc. (NASD) maximum sales
charge rule described below. As so modified, the Class A Plan provides that (i)
up to .25 of 1% of the average daily net assets of the Class A shares may be
used to pay for personal service and/or the maintenance of shareholder accounts
(service fee) and (ii) total distribution fees (including the service fee of .25
of 1%) may not exceed .30 of 1%. As so modified, the Class B Plan provides that
(i) up to .25 of 1% of the average daily net assets of the Class B shares may be
paid as a service fee and (ii) up to .50 of 1% (including the service fee) of
the average daily net assets of the Class B shares (asset-based sales charge)
may be used as reimbursement for distribution-related expenses with respect to
the Class B shares. Total distribution fees (including the service fee of .25 of
1%) may not exceed .50 of 1%. On May 6, 1993, the Trustees, including a majority
of the Rule 12b-1 Trustees, at a meeting called for the purpose of voting on the
Plans, adopted a plan of distribution for the Class C shares and approved
further amendments to the plans of distribution for the Fund's Class A and Class
B shares changing them from reimbursement type plans to compensation type plans.
Also on May 6, 1993, the Trustees, including a majority of the Rule 12b-1
Trustees, approved a plan of distribution (the Florida Series' Class C Plan) for
the Florida Series' Class C shares. The Plans were last approved by the
Trustees, including a majority of the Rule 12b-1 Trustees, on May 22, 1997. 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 and of the other series
having Class C shares on August 1, 1994.
CLASS A PLAN. For the fiscal year ended August 31, 1997, Prudential
Securities received the following payments under the Class A Plan:
<TABLE>
<CAPTION>
SERIES
- --------------------------------------------------------------------------------
<S> <C>
Florida......................................................................... $ 97,700
Maryland........................................................................ 18,970
Massachusetts................................................................... 29,096
Michigan........................................................................ 29,737
New Jersey...................................................................... 89,280
New York........................................................................ 173,963
North Carolina.................................................................. 29,055
Ohio............................................................................ 51,641
Pennsylvania.................................................................... 83,552
</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, 1997, 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........................................................................... $ 60,000
Maryland.......................................................................... 4,800
Massachusetts..................................................................... 3,300
Michigan.......................................................................... 2,800
New Jersey........................................................................ 7,000
New York.......................................................................... 19,000
North Carolina.................................................................... 4,800
Ohio.............................................................................. 5,700
Pennsylvania...................................................................... 18,700
</TABLE>
B-31
<PAGE>
CLASS B PLAN. For the fiscal year ended August 31, 1997, 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
AMOUNT OF DEFERRED
SERIES FEE SALES CHARGES
- ----------------------------------------------------------------- ----------- -------------
<S> <C> <C>
Florida.......................................................... $ 87,827 $ 63,800
Maryland......................................................... 80,564 30,500
Massachusetts.................................................... 101,504 35,000
Michigan......................................................... 156,510 56,000
New Jersey....................................................... 811,649 216,500
New York......................................................... 613,721 228,000
North Carolina................................................... 138,514 31,300
Ohio............................................................. 227,516 90,100
Pennsylvania..................................................... 741,968 213,700
</TABLE>
For the fiscal year ended August 31, 1997, 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............. $ 200 $ 120,000 $ 160,600 $ 5,700 $ 286,500
Maryland............ 1,500 22,100 6,000 9,700 39,300
Massachusetts....... 1,500 33,100 19,900 13,500 68,000
Michigan............ 800 43,500 17,100 16,900 78,300
New Jersey.......... 2,200 207,400 251,700 31,100 492,400
New York............ 1,500 215,900 144,500 63,500 425,400
North Carolina...... 1,000 41,500 18,400 3,200 64,100
Ohio................ 1,200 66,900 31,400 42,200 141,700
Pennsylvania........ 1,800 195,400 113,400 94,000 404,600
</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, 1997, 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....................................................... $ 56,812 $ 200
Maryland...................................................... 367 100
Massachusetts................................................. 358 --
Michigan...................................................... 1,209 --
New Jersey.................................................... 14,205 300
New York...................................................... 5,987 800
North Carolina................................................ 508 --
Ohio.......................................................... 429 --
Pennsylvania.................................................. 5,088 200
</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 22, 1997.
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 22, 1997. 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 22, 1997. 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,
Prudential Securities incurred distribution expenses with respect to the money
market series, all of which were recovered by Prudential Securities through the
distribution fee paid by the series, as follows:
<TABLE>
<CAPTION>
DISTRIBUTION
SERIES EXPENSES
- ----------------------------------------------------------------------------------------- ------------
<S> <C>
Connecticut Money Market................................................................. $ 96,875
Massachusetts Money Market............................................................... 66,348
New Jersey Money Market.................................................................. 245,278
New York Money Market.................................................................... 407,615
</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 serves as an independent "ombudsman" whom PSI employees
can call anonymously with complaints about ethics and compliance. Prudential
Securities reports any allegations or instances of criminal conduct and material
improprieties to the new director. The new director submits compliance reports
which identify all such allegations or instances of criminal conduct and
material improprieties every three months and will continue to do so 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, 1997, 1996 and 1995, 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 1997 1996 1995
- ---------------------------------------------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
Connecticut Money Market.................................................... 0 0 0
Florida..................................................................... $ 8,890 $ 7,438 $ 10,973
Maryland.................................................................... 2,678 3,413 5,513
Massachusetts............................................................... 2,205 3,413 1,820
Massachusetts Money Market.................................................. 0 0 0
Michigan.................................................................... 3,167 4,498 4,550
New Jersey.................................................................. 23,539 15,839 17,098
New Jersey Money Market..................................................... 0 0 0
New York.................................................................... 23,240 22,540 13,581
New York Money Market....................................................... 0 0 0
North Carolina.............................................................. 5,058 6,651 20,213
Ohio........................................................................ 4,620 9,468 15,698
Pennsylvania................................................................ 20,991 20,685 22,033
</TABLE>
PURCHASE AND REDEMPTION OF FUND SHARES
Shares of each series of the Fund, other than the money market series, may
be purchased at a price equal to the next determined net asset value per share
plus a sales charge which, at the election of the investor, may be imposed
either (i) at the time of purchase (Class A shares) or (ii) on a deferred basis
(Class B or Class C shares)
B-36
<PAGE>
Class Z shares of the Florida Series, the Massachusetts 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, 1997 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 MD MA MI NJ NY NC OH PA
- ---------------------------------------- ------ ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value and redemption price per
Class A share.......................... $10.41 $10.99 $11.69 $12.01 $10.97 $11.94 $11.28 $11.95 $10.73
Maximum sales charge (3% of offering
price)................................. .32 .34 .36 .37 .34 .37 .35 .37 .33
------ ------ ------ ------ ------ ------ ------ ------ ------
Offering price to public................ $10.73 $11.33 $12.05 $12.38 $11.31 $12.31 $11.63 $12.32 $11.06
------ ------ ------ ------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------ ------ ------ ------
<CAPTION>
CLASS B FL MD MA MI NJ NY NC OH PA
- ---------------------------------------- ------ ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, redemption price and
offering price to public per Class B
share*................................. $10.41 $11.00 $11.68 $12.00 $10.97 $11.94 $11.29 $11.96 $10.72
------ ------ ------ ------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------ ------ ------ ------
<CAPTION>
CLASS C FL MD MA MI NJ NY NC OH PA
- ---------------------------------------- ------ ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, redemption price and
offering price to public per Class C
share*................................. $10.41 $11.00 $11.68 $12.00 $10.97 $11.94 $11.29 $11.96 $10.72
------ ------ ------ ------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------ ------ ------ ------
<CAPTION>
CLASS Z FL MA NJ NY
- ---------------------------------------- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, redemption price and
offering price to public per Class Z
share.................................. $10.41 $11.68 $10.98 $11.95
------ ------ ------ ------
------ ------ ------ ------
</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.
REDUCTION AND WAIVER OF INITIAL SALES CHARGES--CLASS A SHARES
COMBINED PURCHASE AND CUMULATIVE PURCHASE PRIVILEGE. If an investor or
eligible group of related investors purchases Class A shares of the Fund
concurrently with Class A shares of other series of the Fund or other Prudential
Mutual Funds, the purchases may be combined to take advantage of the reduced
sales charges applicable to larger purchases. See the table of breakpoints under
"Shareholder Guide--Alternative Purchase Plan" in the applicable Prospectus.
An eligible group of related Fund investors includes any combination of the
following:
(a) an individual;
B-37
<PAGE>
(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 name of the
purchaser. The effective date of a Letter of Intent may be back-dated up to 90
days, in order that any investments made during this 90-day period, valued at
the purchaser's cost, can be applied to the fulfillment of the Letter of Intent
goal.
The Letter of Intent does not obligate the investor to purchase, nor the
Fund to sell, the indicated amount. In the event the Letter of Intent goal is
not achieved within the thirteen-month period, the purchaser is required to pay
the difference between the sales charge otherwise applicable to the purchases
made during this period
B-38
<PAGE>
and the sales charge actually paid. Such payment may be made directly to the
Distributor or, if not paid, the Distributor will liquidate sufficient escrowed
shares to obtain such difference. Investors electing to purchase Class A shares
of the Fund pursuant to a Letter of Intent should carefully read such Letter of
Intent.
WAIVER OF THE CONTINGENT DEFERRED SALES CHARGE--CLASS B SHARES
The contingent deferred sales charge is waived under circumstances described
in the applicable Prospectuses. See "Shareholder Guide--How to Sell Your
Shares--Waiver of the Contingent Deferred Sales Charges-- Class B Shares" in the
Prospectus of each applicable series. In connection with these waivers, the
Transfer Agent will require you to submit the supporting documentation set forth
below.
<TABLE>
<S> <C>
CATEGORY OF WAIVER REQUIRED DOCUMENTATION
Death A copy of the shareholder's death certificate
or, in the case of a trust, a copy of the
grantor's death certificate, plus a copy of the
trust agreement identifying the grantor.
Disability--An individual will be considered A copy of the Social Security Administration
disabled if he or she is unable to engage in any award letter or a letter from a physician on the
substantial gainful activity by reason of any physician's letterhead stating that the
medically determinable physical or mental shareholder (or, in the case of a trust, the
impairment which can be expected to result in grantor) is permanently disabled. The letter
death or to be of long-continued and indefinite must also indicate the date of disability.
duration.
</TABLE>
The Transfer Agent reserves the right to request such additional documents as it
may deem appropriate.
QUANTITY DISCOUNT--CLASS B SHARES PURCHASED PRIOR TO AUGUST 1, 1994
The CDSC is reduced on redemptions of Class B shares of a series of the Fund
purchased prior to August 1, 1994 if immediately after a purchase of such
shares, the aggregate cost of all Class B shares of a series of the Fund owned
by you in a single account exceeded $500,000. For example, if you purchased
$100,000 of Class B shares of a series of the Fund and the following year
purchase an additional $450,000 of Class B shares with the result that the
aggregate cost of your Class B shares of a series of the Fund following the
second purchase was $550,000, the quantity discount would be available for the
second purchase of $450,000 but not for the first purchase of $100,000. The
quantity discount will be imposed at the following rates depending on whether
the aggregate value exceeded $500,000 or $1 million:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED SALES CHARGE
AS A PERCENTAGE OF DOLLARS INVESTED
OR REDEMPTION PROCEEDS
YEAR SINCE PURCHASE -----------------------------------------
PAYMENT MADE $500,001 TO $1 MILLION OVER $1 MILLION
- ------------------------- ----------------------- ---------------
<S> <C> <C>
First.................... 3.0% 2.0%
Second................... 2.0% 1.0%
Third.................... 1.0% 0%
Fourth and thereafter.... 0% 0%
</TABLE>
You must notify the Fund's Transfer Agent either directly or through
Prudential Securities or Prusec, at the time of redemption, that you are
entitled to the reduced CDSC. The reduced CDSC will be granted subject to
confirmation of your holdings.
SHAREHOLDER INVESTMENT ACCOUNT
Upon the initial purchase of Fund shares, a Shareholder Investment Account
is established for each investor under which the shares are held for the
investor by the Transfer Agent. If a share certificate is desired, it must be
requested in writing for each transaction. Certificates are issued only for full
shares and may be redeposited in the Account at any time. There is no charge to
the investor for issuance of a certificate. The Fund makes available to its
shareholders the following privileges and plans.
B-39
<PAGE>
AUTOMATIC REINVESTMENT OF DIVIDENDS AND/OR DISTRIBUTIONS
For the convenience of investors, all dividends and distributions are
automatically reinvested in full and fractional shares of a series. An investor
may direct the Transfer Agent in writing by the first business day of the month
to have subsequent dividends and/or distributions sent in cash rather than
reinvested. In the case of recently purchased shares for which registration
instructions have not been received on the record date, cash payment will be
made directly to the dealer. Any shareholder who receives a cash payment
representing a dividend or distribution may reinvest such dividend or
distribution at net asset value (without a sales charge) by returning the check
or the proceeds to the Transfer Agent within 30 days after the payment date. The
investment will be made at the net asset value per share next determined after
receipt of the check or proceeds by the Transfer Agent. Such shareholder will
receive credit for any contingent deferred sales charge paid in connection with
the amount of proceeds being reinvested.
EXCHANGE PRIVILEGE
Each series makes available to its shareholders the privilege of exchanging
their shares of a series for shares of other series of the Fund and certain
other Prudential Mutual Funds, including one or more specified money market
funds, subject in each case to the minimum investment requirements of such
funds. Shares of such other Prudential Mutual Funds may also be exchanged for
shares of the Fund. All exchanges are made on the basis of relative net asset
value next determined after receipt of an order in proper form. An exchange will
be treated as a redemption and purchase for tax purposes. Shares may be
exchanged for shares of another fund only if shares of such fund may legally be
sold under applicable state laws.
It is contemplated that the Exchange Privilege may be applicable to new
mutual funds whose shares may be distributed by the Distributor.
CLASS A. Shareholders of the Fund may exchange their Class A shares for
Class A shares of other series of the Fund or certain other Prudential Mutual
Funds, shares of Prudential Government Securities Trust (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.
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. 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.
B-40
<PAGE>
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 LLC (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 LLC, 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
LLC, 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 LLC, 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 Series 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 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. In the event the New York Stock Exchange closes early on
any business day, the net asset value of the Fund's shares shall be determined
at a time between such closing and 4:15 P.M., New York time (with respect to
shares of the non-money market series of the Fund) and between such closing and
4:30 P.M., New York time (with respect to the money market series of the Fund).
Portfolio securities for which market quotations are readily available are
valued at their bid quotations. Securities for which market quotations are not
readily available are valued at fair value in accordance with procedures adopted
by the Trustees. Under these procedures the Fund values municipal securities on
the basis of valuations provided by a pricing service which uses information
with respect to transactions in bonds, quotations from bond dealers, market
transactions in comparable securities and various relationships between
securities in determining value. The Trustees believe that reliable market
quotations are generally not readily available for purposes of valuing
tax-exempt securities. As a result, depending on the particular tax-exempt
securities owned by the Fund, it is likely that most of the valuations for such
securities will be based upon fair value determined under the foregoing
procedures. Short-term investments which mature in less than 60 days
B-44
<PAGE>
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 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,
1997 and the yield without the management subsidies and waivers were as follows:
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS Z
--------------------------- --------------------------- --------------------------- -------
YIELD SUBSIDY/ YIELD SUBSIDY/ YIELD SUBSIDY/
SERIES YIELD WAIVER ADJUSTED YIELD WAIVER ADJUSTED YIELD WAIVER ADJUSTED YIELD
- -------------------- ------- ----------------- ------- ----------------- ------- ----------------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Florida............. 4.48% 4.28% 4.22% 4.02% 3.97% 3.77% 4.72%
Maryland............ 3.87 3.82 3.59 3.54 3.34 3.29 N/A
Massachusetts....... 4.00 3.95 3.72 3.67 3.47 3.42 5.06%
Michigan............ 4.11 4.06 3.83 3.78 3.58 3.53 N/A
New Jersey.......... 4.19 4.14 3.92 3.87 3.67 3.62 4.44%
New York............ 4.24 4.19 3.97 3.92 3.72 3.67 4.47%
North Carolina...... 4.40 4.35 4.13 4.08 3.88 3.83 N/A
Ohio................ 4.23 4.18 3.96 3.91 3.71 3.66 N/A
Pennsylvania........ 4.37 4.32 4.10 4.05 3.85 3.80 N/A
<CAPTION>
YIELD SUBSIDY/
SERIES WAIVER ADJUSTED
- -------------------- -----------------
<S> <C>
Florida............. 4.52%
Maryland............ N/A
Massachusetts....... 5.01%
Michigan............ N/A
New Jersey.......... 4.39%
New York............ 4.42%
North Carolina...... N/A
Ohio................ N/A
Pennsylvania........ N/A
</TABLE>
B-45
<PAGE>
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, 1997, 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......... 7.00% 6.69% 6.59% 6.28% 6.20% 5.89%
Maryland........ 6.37 6.28 5.90 5.82 5.49 5.41
Massachusetts... 7.10 7.01 6.61 6.52 6.16 6.07
Michigan........ 6.72 6.64 6.26 6.18 5.85 5.77
New Jersey...... 6.99 6.91 6.54 6.46 6.12 6.04
New York........ 7.11 7.03 6.66 6.58 6.24 6.16
North
Carolina....... 7.45 7.37 7.00 6.91 6.57 6.49
Ohio............ 7.11 7.02 6.65 6.57 6.23 6.15
Pennsylvania.... 7.02 6.94 6.59 6.51 6.19 6.11
<CAPTION>
CLASS Z
----------------------------------
TAX EQUIVALENT
TAX EQUIVALENT YIELD SUBSIDY/
SERIES YIELD WAIVER ADJUSTED
- ---------------- ---------------- ---------------
<S> <C> <C>
Florida......... 7.38% 7.06%
Maryland........ N/A N/A
Massachusetts... 8.98% 8.90%
Michigan........ N/A N/A
New Jersey...... 7.41% 7.33%
New York........ 7.50% 7.42%
North
Carolina....... N/A N/A
Ohio............ N/A N/A
Pennsylvania.... N/A N/A
</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.
Average annual total return is computed according to the following formula:
P(1+T)to the power of n = ERV
Where: P = a hypothetical initial payment of $1000.
T = average annual total return.
n = number of years.
ERV = Ending Redeemable Value at the end of the 1, 5 or 10 year
periods (or fractional portion thereof) of a hypothetical
$1000 payment made at the beginning of the 1, 5 or 10 year
periods.
Average annual total return takes into account any applicable initial or
contingent deferred sales charges but does not take into account any federal or
state income taxes that may be payable upon redemption.
B-46
<PAGE>
The average annual total return and subsidy/waiver adjusted average annual
total return for the series (other than the money market series) for the periods
ended August 31, 1997 were as follows:
<TABLE>
<CAPTION>
CLASS B
---------------------------------------------------
CLASS A SUBSIDY/WAIVER
--------------------------------------------------- ADJUSTED
SUBSIDY/WAIVER ------------------------
ADJUSTED TEN TEN
------------------------ YEARS YEARS
ONE FIVE SINCE ONE FIVE SINCE ONE FIVE OR SINCE ONE FIVE OR SINCE
SERIES YEAR YEARS INCEPTION YEAR YEARS INCEPTION YEAR YEARS INCEPTION YEAR YEARS INCEPTION
- --------------- ---- ----- --------- ---- ----- --------- ---- ----- --------- ---- ----- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Florida........ 5.39% 6.19% 7.50% 5.19% 5.55% 6.84% 3.22% N/A 6.34% 3.01% N/A 5.84%
Maryland....... 5.13 5.34 6.49 5.03 5.30 6.47 2.94 5.40% 6.72 2.85 5.36% 6.66
Massachusetts.. 4.85 5.85 7.09 4.76 5.81 7.06 2.67 5.89 7.12 2.58 5.86 7.07
Michigan....... 4.94 5.68 6.92 4.85 5.65 6.89 2.76 5.72 7.03 2.67 5.69 6.98
New Jersey..... 4.73 5.55 7.16 4.64 5.40 6.92 2.54 5.62 7.56 2.44 5.46 7.30
New York....... 5.91 5.86 7.27 5.82 5.83 7.25 3.76 5.93 7.14 3.66 5.89 7.12
North
Carolina...... 5.32 5.42 6.67 5.23 5.38 6.64 3.25 5.50 6.70 3.15 5.46 6.64
Ohio........... 4.68 5.61 6.93 4.59 5.57 6.91 2.49 5.67 6.85 2.40 5.63 6.83
Pennsylvania... 5.74 5.95 7.12 5.64 5.93 7.08 3.58 6.04 7.24 3.48 6.02 7.15
<CAPTION>
CLASS C
-----------------------------------
SUBSIDY/
WAIVER
ADJUSTED
----------------
ONE SINCE ONE SINCE
SERIES YEAR INCEPTION YEAR INCEPTION
- --------------- ---- --------- ---- ---------
<S> <C> <C> <C> <C>
Florida........ 6.95% 5.14% 6.74% 4.55%
Maryland....... 6.68 5.91 6.58 5.84
Massachusetts.. 6.41 6.19 6.32 6.13
Michigan....... 6.49 5.92 6.40 5.86
New Jersey..... 6.27 5.91 6.18 5.79
New York....... 7.49 6.28 7.39 6.22
North
Carolina...... 6.98 5.89 6.88 5.83
Ohio........... 6.22 5.71 6.13 5.65
Pennsylvania... 7.31 6.31 7.21 6.28
</TABLE>
Due to the fact that Class Z shares of the Florida, Massachusetts, New
Jersey and New York Series have not been in operation for more than one full
year, no average annual total return is provided.
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.
The aggregate total return for each series for the one year, five year and
ten year (or since inception) periods ended August 31, 1997 for the Class A,
Class B, Class C and Class Z shares were as follows:
<TABLE>
<CAPTION>
CLASS B
------------------------------------------
CLASS A
------------------------------------------
AGGREGATE TOTAL
AGGREGATE TOTAL RETURN
RETURN -------------------------
------------------------- 10 YR. OR
SINCE SINCE
SERIES 1 YR. 5 YR. INCEPTION INCEPTION DATE 1 YR. 5 YR. INCEPTION INCEPTION DATE
- -------------------- ----- ----- --------- -------------- ----- ----- --------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Florida............. 8.65% 39.21% 67.04% 12/28/90 8.22% N/A 22.88% 8/1/94
Maryland............ 8.38 33.71 66.37 1/22/90 7.94 31.07% 136.38 1/22/85
Massachusetts....... 8.10 36.97 73.55 1/22/90 7.67 34.15 164.45 9/25/84
Michigan............ 8.18 35.89 71.46 1/22/90 7.76 33.06 179.03 9/22/84
New Jersey.......... 7.97 35.07 74.46 1/22/90 7.54 32,42 99.80 3/4/88
New York............ 9.19 37.07 75.82 1/22/90 8.76 34.37 99.31 9/13/84
North Carolina...... 8.58 34.22 68.42 1/22/90 8.25 31.67 91.18 2/13/85
Ohio................ 7.92 35.41 71.62 1/22/90 7.49 32.74 93.91 9/20/84
Pennsylvania........ 9.01 37.66 73.98 1/22/90 8.58 35.08 101.15 4/3/87
<CAPTION>
CLASS C
----------------------------------
CLASS Z
--------------------------
AGGREGATE TOTAL
AGGREGATE TOTAL
RETURN RETURN
----------------- --------------------------
SINCE SINCE
SERIES 1 YR. INCEPTION INCEPTION DATE INCEPTION INCEPTION DATE
- -------------------- ----- --------- -------------- --------- --------------
<S> <C> <C> <C> <C> <C>
Florida............. 7.95% 22.81% 7/26/93 4.57% 12/6/96
Maryland............ 7.68 19.35 8/1/94 N/A N/A
Massachusetts....... 7.41 20.35 8/1/94 4.54% 12/6/96
Michigan............ 7.49 19.38 8/1/94 N/A N/A
New Jersey.......... 7.27 19.37 8/1/94 4.49% 12/6/96
New York............ 8.49 20.64 8/1/94 5.02% 12/6/96
North Carolina...... 7.98 19.30 8/1/94 N/A N/A
Ohio................ 7.22 18.68 8/1/94 N/A N/A
Pennsylvania........ 8.31 20.77 8/1/94 N/A N/A
</TABLE>
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, 1997 for the Class A,
Class B, Class C and Class Z shares, without the management subsidies and
waivers, were as follows:
<TABLE>
<CAPTION>
CLASS B CLASS C
------------------------- -----------------
CLASS A CLASS Z
------------------------- AGGREGATE TOTAL --------------------------
AGGREGATE TOTAL RETURN
AGGREGATE TOTAL RETURN SUBSIDY/WAIVER AGGREGATE TOTAL
RETURN SUBSIDY/WAIVER ADJUSTED RETURN
SUBSIDY/WAIVER ADJUSTED ------------------------- ADJUSTED SUBSIDY/WAIVER ADJUSTED
------------------------- 10 YR. OR ----------------- --------------------------
SINCE SINCE SINCE SINCE
SERIES 1 YR. 5 YR. INCEPTION 1 YR. 5 YR. INCEPTION 1 YR. INCEPTION INCEPTION INCEPTION DATE
- -------------------- ----- ----- --------- ----- ----- --------- ----- --------- --------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Florida............. 8.44% 35.07% 60.30% 8.01% N/A 21.11% 7.74% 19.98% 4.37% 12/6/96
Maryland............ 8.28 33.46 66.07 7.85 30.83% 90.53 7.58 19.14 N/A N/A
Massachusetts....... 8.00 36.73 73.26 7.58 33.92 97.92 7.32 20.14 4.54% 12/6/96
Michigan............ 8.09 35.66 71.17 7.67 32.84 96.39 7.40 19.18 N/A N/A
New Jersey.......... 7.87 34.09 71.44 7.44 31.45 95.25 7.18 18.93 4.49% 12/6/96
New York............ 9.10 36.84 75.53 8.66 34.14 98.97 8.39 20.44 5.02% 12/6/96
North Carolina...... 8.49 33.98 68.12 8.15 31.44 90.16 7.88 19.09 N/A N/A
Ohio................ 7.83 35.19 71.33 7.40 32.52 93.59 7.13 18.48 N/A N/A
Pennsylvania........ 8.91 37.53 73.49 8.48 34.95 99.46 8.21 20.66 N/A N/A
</TABLE>
THE CONNECTICUT MONEY MARKET SERIES, THE MASSACHUSETTS MONEY MARKET SERIES, THE
NEW JERSEY MONEY MARKET SERIES AND THE NEW YORK MONEY MARKET SERIES
The money market series will prepare a current quotation of yield from time
to time. The yield quoted will be the simple annualized yield for an identified
seven calendar day period. The yield calculation will be based on a hypothetical
account having a balance of exactly one share at the beginning of the seven-day
period. The base period return will be the change in the value of the
hypothetical account during the seven-day period, including dividends declared
on any shares purchased with dividends on the shares but excluding any capital
changes. The yield will vary as interest rates and other conditions affecting
money market instruments change. Yield also depends on the quality, length of
maturity and type of instruments in the money market series' portfolio and its
operating expenses. The money market series may also prepare an effective annual
yield computed by compounding the unannualized seven-day period return as
follows: by adding 1 to the unannualized seven-day period return, raising the
sum to a power equal to 365 divided by 7, and subtracting 1 from the result.
The money market series may also calculate the tax equivalent yield over a
7-day period. The tax equivalent yield will be determined by first computing the
current yield as discussed above. The Series will then determine what portion of
that yield is attributable to securities, the income on which is exempt for
federal income tax purposes. This portion of the yield will then be divided by
one minus the state tax rate times one minus the federal tax rate and then added
to the portion of the yield that is attributable to other securities. The
Connecticut Money Market Series, Massachusetts Money Market Series, New Jersey
Money Market Series and New York Money Market Series' 7-day tax equivalent yield
(assuming a federal tax rate of 39.6%) as of August 31, 1997 was 5.62%, 5.42%,
4.62% and 4.98%, respectively.
Comparative performance information may be used from time to time in
advertising or marketing the money market series' shares, including data from
Lipper Analytical Services, Inc., IBC/Donoghue's Money Fund Report or other
industry publications.
The money market series' yield fluctuates, and an annualized yield quotation
is not a representation by the money market series as to what an investment in
the money market series will actually yield for any given period. Actual yields
will depend upon not only changes in interest rates generally during the period
in which the investment in the money market series is held, but also on any
realized or unrealized gains and losses and changes in the money market series'
expenses.
B-48
<PAGE>
From time to time, the performance of the series may be measured against
various indices. Set forth below is a chart which compares the performance of
different types of investments over the long-term and the rate of inflation.(1)
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--1997
Yearbook" (annually updates the work of Roger G. Ibbotson and Rex A.
Sinquefield). 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 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 dividends on Class A shares will be lower than the
per share dividends on Class Z shares, since Class Z shares bear no
distribution-related fee. The per share distributions of net capital gains, if
any, will be paid in the same amount for Class A, Class B, Class C and Class Z
shares. See "Net Asset Value."
B-49
<PAGE>
Annually, the Fund will mail to shareholders information regarding the tax
status of dividends and distributions made by the Fund in the calendar year. The
Fund intends to report the proportion of all distributions that were tax-exempt
for that calendar year. The percentage of income designated as tax-exempt for
the calendar year may be substantially different from the percentage of the
Fund's income that was tax-exempt for a particular period.
FEDERAL TAXATION
Under the Internal Revenue Code, each series of the Fund is 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 generally 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)
with respect to tax years beginning on or before August 5, 1997, 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, including net short-term
gains (I.E., the excess of net short-term capital gains over net long-term
capital losses), and 90% of its net tax-exempt interest income 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 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. Newly-enacted Code Section 1259 will require the recognition of gain
(but not loss) if a Series makes a "constructive sale" of an appreciated
financial position. A Series generally will be considered to make a constructive
sale of an appreciated financial position if it sells the same or substantially
identical property short, enters into a futures or forward contract to deliver
the same or substantially identical property, or enters into certain other
similar transactions.
B-50
<PAGE>
Each series' hedging activities may be affected by the requirement under the
Internal Revenue Code (which is applicable solely to tax years beginning on or
before August 5, 1997) 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, mid-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 capital gains from the sale of assets held for more than 12
months 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 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 alternative minimum tax on individuals and the 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.
Any net capital gains (I.E., the excess of net capital gains from the sale
of assets held for more than 12 months over net short-term capital losses)
distributed to shareholders will be taxable as capital gains to the
shareholders, whether or not reinvested and regardless of the length of time a
shareholder has owned his or her shares. The maximum capital gains rate for
individuals is 28% with respect to assets held for more than 12 months, but not
more than 18 months, and 20% with respect to assets held for more than 18
months. The maximum capital gains rate for corporate shareholders currently is
the same as the maximum tax rate for ordinary income.
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
B-51
<PAGE>
upon the redemption of shares within six months from the date of purchase of
such shares and following receipt of a capital gains distribution will be
treated as long-term capital loss to the extent of such capital gains
distribution.
Any loss realized on a sale, redemption or exchange of shares of a Series 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 a Series 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. Distributions of taxable
investment income, including short-term capital gains, to foreign shareholders
generally will be subject to a withholding tax at the rate of 30% (or lower
treaty rate).
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.
B-52
<PAGE>
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.
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
B-53
<PAGE>
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.
MARYLAND. In the opinion of Maryland tax counsel, individual shareholders
of the Maryland Series resident in Maryland, corporate shareholders (other than
financial institutions such as banks) of the Maryland Series and shareholders of
the Maryland Series that are trusts or estates will not be subject to Maryland
State or local income taxes on distributions received from the Maryland Series
to the extent that such distributions are attributable to interest on tax-exempt
obligations of the State of Maryland or its political subdivisions and
authorities, or obligations issued by the Governments of Puerto Rico, the Virgin
Islands and Guam, provided that the Maryland Series qualifies as a regulated
investment company and complies with the requirements of the Internal Revenue
Code necessary to pay exempt-interest dividends including the requirement that
at least 50% of the value of its assets at the close of each quarter of its
taxable year be invested in state, municipal or other obligations, the interest
on which is exempt from federal income tax under Section 103(a) of the Internal
Revenue Code. Up to 50 percent of dividends attributable to exempt-interest
income received by the Maryland Series from obligations that are (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.
B-54
<PAGE>
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 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
B-55
<PAGE>
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. Individual shareholders of the New York Series and the New York
Money Market 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 and the New York Money Market
Series, including those related to market discount and 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 New York resident individuals and
corporations who are shareholders of the New York Series and the New York Money
Market Series. Shareholders of the New York Series and the New York Money Market
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
B-56
<PAGE>
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 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 the interest on which 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, provided such interest is excluded from gross income
for federal income tax purposes, 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
B-57
<PAGE>
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 Series will invest predominantly in obligations of the
Commonwealth and its political subdivisions and authorities, which obligations
are not subject to personal property taxation in Pennsylvania, only a small
fraction, if any, of the value of the shares of the Pennsylvania Series would be
subject to such tax.
Shareholders of the Pennsylvania Series should consult their tax advisers
about other state and local tax consequences of their investments in the
Pennsylvania Series.
B-58
<PAGE>
ORGANIZATION AND CAPITALIZATION
The Fund is a Massachusetts business trust established under a Declaration
of Trust dated May 18, 1984, as amended. The Declaration of Trust and the
By-Laws of the Fund are designed to make the Fund similar in most respects to a
Massachusetts business corporation. The principal distinction between the two
forms relates to shareholder liability; under Massachusetts law, shareholders of
a business trust may, in certain circumstances, be held personally liable as
partners for the obligations of the Fund, which is not the case with a
corporation. The Declaration of Trust of the Fund provides that shareholders
shall not be subject to any personal liability for the acts or obligations of
the Fund and that every written obligation, contract, instrument or undertaking
made by the Fund shall contain a provision to the effect that the shareholders
are not individually bound thereunder.
Massachusetts counsel for the Fund has 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
allocated in proportion to the asset value of the respective series except where
allocations of direct expenses can otherwise be fairly made. The officers of the
Fund, subject to the general supervision of the Trustees, have the power to
determine which liabilities are allocable to a given series or which are general
or allocable to two or more series. Upon redemption of shares of a series of the
Fund, the shareholder will receive proceeds solely of the assets of such series.
In the event of the dissolution or liquidation of the Fund, the holders of the
shares of any series are entitled to receive as a class the underlying assets of
such series available for distribution to shareholders.
B-59
<PAGE>
Shares of the Fund entitle their holders to one vote per share. However, on
any matter submitted to a vote of the shareholders, all shares then entitled to
vote will be voted by individual series, unless otherwise required by the
Investment Company Act (in which case all shares will be voted in the
aggregate). For example, a change in investment policy for a series would be
voted upon only by shareholders of the series involved. Additionally, approval
of the investment advisory agreement is a matter to be determined separately by
each series. Approval by the shareholders of one series is effective as to that
series whether or not enough votes are received from the shareholders of the
other series to approve the proposal as to those series.
The Fund does not intend to hold annual meetings of shareholders.
Pursuant to the Declaration of Trust, the Trustees may authorize the
creation of additional series of shares (the proceeds of which would be invested
in separate, independently managed portfolios with distinct investment
objectives and policies and share purchase, redemption and net asset valuation
procedures) and additional classes of shares within any series (which would be
used to distinguish among the rights of different categories of shareholders, as
might be required by future regulations or other unforeseen circumstances) with
such preferences, privileges, limitations and voting and dividend rights as the
Trustees may determine. All consideration received by the Fund for shares of any
additional series or class, and all assets in which such consideration is
invested, would belong to that series or class (subject only to the rights of
creditors of such series or class) and would be subject to the liabilities
related thereto. Pursuant to the Investment Company Act, shareholders of any
additional series or class of shares would normally have to approve the adoption
of any advisory contract relating to such series or class and of any changes in
the investment policies related thereto.
The Trustees themselves have the power to alter the number and the terms of
office of the Trustees, and they may at any time lengthen their own terms or
make their terms of unlimited duration (subject to removal upon the action of
two-thirds of the outstanding shares of beneficial interest) and appoint their
own successors, provided that always at least a majority of the Trustees have
been elected by the shareholders of the Fund. The voting rights of shareholders
are not cumulative, so that holders of more than 50 percent of the shares voting
can, if they choose, elect all Trustees being selected, while the holders of the
remaining shares would be unable to elect any Trustees.
CUSTODIAN, TRANSFER AND DIVIDEND DISBURSING AGENT
AND INDEPENDENT ACCOUNTANTS
State Street Bank and Trust Company, One Heritage Drive, North Quincy,
Massachusetts 02171, serves as Custodian for the Fund's portfolio securities and
cash and in that capacity maintains cash and certain financial and accounting
books and records pursuant to an agreement with the Fund. See "How the Fund is
Managed-- Custodian and Transfer and Dividend Disbursing Agent" in the
Prospectus of each series.
Prudential Mutual Fund Services LLC (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 PIFM. 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 of $13.00 per shareholder account, in
addition to a new set up fee of $2.00 for each manually established account and
a monthly inactive zero balance account fee of $20.00 per shareholder account.
PMFS is also reimbursed for its out-of-pocket expenses,
B-60
<PAGE>
including but not limited to postage, stationery, printing, allocable
communication and other costs. For the fiscal year ended August 31, 1997, 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............................ $ 30,600
Florida............................................. 34,200
Maryland............................................ 23,200
Massachusetts....................................... 24,000
Massachusetts Money Market.......................... 21,800
Michigan............................................ 34,000
New Jersey.......................................... 87,300
New Jersey Money Market............................. 75,300
New York............................................ 119,000
New York Money Market............................... 117,300
North Carolina...................................... 24,600
Ohio................................................ 47,000
Pennsylvania........................................ 115,000
</TABLE>
Price Waterhouse LLP, 1177 Avenue of the Americas, New York, New York 10036,
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 edged." 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.
SHORT-TERM RATINGS
Moody's ratings for tax-exempt notes and other short-term loans are
designated Moody's Investment Grade (MIG). This distinction is in recognition of
the differences between short-term and long-term credit risk.
MIG 1: Loans bearing the designation MIG 1 are of the best quality,
enjoying strong protection by established cash flows, superior liquidity support
or demonstrated broad-based access to the market for refinancing.
B-61
<PAGE>
MIG 2: Loans bearing the designation MIG 2 are of high quality, with
margins of protection ample although not so large as in the preceding group.
MIG 3: Loans bearing the designation MIG 3 are of favorable quality, with
all security elements accounted for but lacking the strength of the preceding
grades.
MIG 4: Loans bearing the designation MIG 4 are of adequate quality.
Protection commonly regarded as 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 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. 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.
COMMERCIAL PAPER RATINGS
An S&P Commercial Paper rating is a current assessment of the likelihood of
timely payment of debt considered short-term in the relevant market.
A-1: 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.
MUNICIPAL NOTES
A municipal note rating reflects the liquidity concerns and market access
risks unique to municipal notes. Municipal notes maturing in three years or less
will likely receive a municipal note rating, while notes maturing beyond three
years will most likely receive a long-term debt rating. The designation SP-1
indicates a strong capacity to pay principal and interest. Those issues
determined to possess very strong safety characteristics are given a plus sign
(+) designation. An SP-2 designation indicates a satisfactory capacity to pay
principal and interest, with some vulnerability to adverse financial and
economic changes over the term of the notes.
B-62
<PAGE>
Portfolio of Investments PRUDENTIAL MUNICIPAL SERIES FUND
as of August 31, 1997 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>
- ------------------------------------------------------------------------------------------------------------------------------
Avon Connecticut, Ser. 96, B.A.N. NR 3.75% 9/15/97 $ 3,500 $ 3,500,458
Connecticut St. Dev. Auth.,
Bradley Airport Hotel Ser. 97A, F.R.W.D. VMIG1 3.25 9/04/97 1,000 1,000,000
Bradley Airport Hotel Ser. 97B, F.R.W.D. VMIG1 3.25 9/04/97 3,000 3,000,000
Bradley Airport Hotel Ser. 97C, F.R.W.D. VMIG1 3.25 9/04/97 1,500 1,500,000
Conco Proj., Ser. 85, F.R.W.D. P-1 3.25 9/04/97 1,700 1,700,000
Hlth. Care Rev. Living Proj., Ser. 90, F.R.W.D. VMIG1 3.10 9/03/97 2,460 2,460,000
Ind. Dev., Shelton Inn L.P., Ser. 86, F.R.M.D., A.M.T. P-1 4.10 9/02/97 1,000 1,000,000
Lt. & Pwr. Co. Proj., Ser. 93B, F.R.W.D., A.M.T. VMIG1 3.30 9/03/97 3,500 3,500,000
Poll. Ctrl. Rev., Conn. Lt. & Pwr. Co., Proj. A, Ser.
96A, F.R.W.D., A.M.B.A.C., A.M.T. P-1 3.25 9/04/97 2,200 2,200,000
Poll. Ctrl. Rev., W. Mass. Elec. Co., Ser. 93A,
F.R.W.D., A.M.T. VMIG1 3.15 9/03/97 2,500 2,500,000
Rand Whitney Container Bd., Ser. 93, F.R.W.D., A.M.T. P-1 2.90 9/03/97 2,500 2,500,000
SHW Inc. Proj., Ser. 90, F.R.W.D., A.M.T. CPS1 3.40 9/03/97 4,400 4,400,000
Connecticut St. Hlth. & Edl. Facs. Auth. Rev.,
Charlotte-Hungerford, Ser. B, F.R.W.D. VMIG1 3.00 9/04/97 1,600 1,600,000
Pomfret School Issue, Ser. A, F.R.W.D. VMIG1 3.10 9/03/97 1,000 1,000,000
Yale University, Ser. S, T.E.C.P. VMIG1 3.60 10/09/97 3,800 3,800,000
Connecticut St. Mun. Elec. Engy., Pwr. Supply Sys. Rev.,
Ser. 95A, T.E.C.P. P-1 3.50 10/10/97 1,600 1,600,000
Connecticut St. Spec. Assmt., Unemployment Comp., Ser. 93C,
A.N.N.M.T., F.G.I.C. VMIG1 3.90 7/01/98 7,085 7,085,000
Connecticut St. Spec. Tax Oblig., Trans. Infrastructure
Rev., Ser. 90I, F.R.W.D. VMIG1 3.10 9/03/97 4,100 4,100,000
District of Columbia.,
Gen. Oblig., Ser. 92A-1, F.R.D.D. VMIG1 3.80 9/02/97 700 700,000
Gen. Oblig., Ser. 92A-2, F.R.D.D. VMIG1 3.80 9/02/97 200 200,000
Hamden Connecticut, Gen. Oblig., B.A.N. NR 4.00 8/14/98 2,000 2,003,661
Hartford Connecticut, Redev. Agcy. Underwood Twrs. Proj.,
Ser. 90, F.R.W.D., F.S.A. A-1+(c) 3.05 9/04/97 6,645 6,645,000
King George Cnty. Virginia, Indl. Dev. Auth., Exempt Fac.
Rev., A.M.T. A-1+(c) 3.85 9/02/97 200 200,000
Milford Connecticut, Ser. 96, B.A.N. NR 3.75 11/13/97 2,000 2,000,461
New Fairfield Connecticut, Gen. Oblig., B.A.N. NR 4.00 5/14/98 2,550 2,554,448
Puerto Rico Commwlth., Gov't. Dev. Bank, Ser. 95, T.E.C.P. A1+(c) 3.40 9/03/97 1,300 1,300,000
Gov't. Dev. Bank, Ser. 85, F.R.W.D. VMIG1 2.90 9/03/97 300 300,000
Hwy. & Trans. Auth. Rev., Ser. 85, F.R.W.D. VMIG1 2.90 9/03/97 200 200,000
Puerto Rico Hsg. Fin. Corp., Multi-family Mtge. Rev., Port.
A,
Ser. 90I, M.O.T., A.M.B.A.C. Aaa 3.60 9/15/97 2,455 2,455,000
Puerto Rico Ind. Med. & Environ. Poll. Ctrl. Fac. Fin.
Auth. Rev., Ser. 83A, A.O.T. NR 3.75 12/01/97 2,500 2,500,000
South Windsor Connecticut, Gen. Oblig., B.A.N. NR 3.80 3/24/98 650 650,175
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-63
<PAGE>
Portfolio of Investments PRUDENTIAL MUNICIPAL SERIES FUND
as of August 31, 1997 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>
- ------------------------------------------------------------------------------------------------------------------------------
Stamford Connecticut, Hsg. Auth. Rev., Morgan Street Proj.,
Ser. 94, F.R.W.D., A.M.T. VMIG1 3.30% 9/03/97 $ 1,500 $ 1,500,000
University of Puerto Rico, Ser. J Aaa 6.50 6/01/98 1,095(d) 1,115,946
West Baton Rouge Parish Ind. Louisiana Dist. 3 Rev.,
Dow Chemical Co. Proj., Ser. 93, F.R.D.D., A.M.T. P-1 3.90 9/02/97 1,000 1,000,000
Dow Chemical Co. Proj., Ser. 95, F.R.D.D., A.M.T. P-1 3.90 9/02/97 600 600,000
-----------
Total Investments--97.9%
(amortized cost $74,370,149; (e)) 74,370,149
Other assets in excess of liabilities--2.1% 1,556,657
-----------
Net Assets--100% $75,926,806
-----------
-----------
</TABLE>
- ---------------
(a) The following abbreviations are used in portfolio descriptions:
A.M.B.A.C.--American Municipal Bond Assurance Corporation.
A.M.T.--Alternative Minimum Tax.
A.N.N.M.T.--Annual Mandatory Tender.
A.O.T.--Annual Optional Tender.
B.A.N.--Bond Anticipation Note.
F.G.I.C.--Financial Guaranty Insurance Company.
F.R.D.D.--Floating Rate (Daily) Demand Note (b).
F.R.M.D.--Floating Rate (Monthly) Demand Note (b).
F.R.W.D.--Floating Rate (Weekly) Demand Note (b).
F.S.A.--Financial Security Assurance.
L.P.--Limited Partnership.
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) 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-64
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Statement of Assets and Liabilities CONNECTICUT MONEY MARKET SERIES
- --------------------------------------------------------------------------------
<TABLE>
Assets August 31, 1997
<S> <C>
Investments, at amortized cost which approximates market value............................................. $ 74,370,149
Cash....................................................................................................... 68,285
Receivable for Series shares sold.......................................................................... 2,004,183
Interest receivable........................................................................................ 467,165
Other assets............................................................................................... 2,013
---------------
Total assets............................................................................................ 76,911,795
---------------
Liabilities
Payable for Series shares reacquired....................................................................... 880,850
Accrued expenses........................................................................................... 46,630
Dividends payable.......................................................................................... 41,826
Management fee payable..................................................................................... 8,232
Distribution fee payable................................................................................... 4,184
Deferred trustee's fees.................................................................................... 3,267
---------------
Total liabilities....................................................................................... 984,989
---------------
Net Assets................................................................................................. $ 75,926,806
---------------
---------------
Net assets were comprised of:
Shares of beneficial interest, at $.01 par value........................................................ $ 759,268
Paid-in capital in excess of par........................................................................ 75,167,538
---------------
Net assets, August 31, 1997................................................................................ $ 75,926,806
---------------
---------------
Net asset value, offering price and redemption price per share ($75,926,806 / 75,926,806 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, 1997
<S> <C>
Income
Interest and discount earned............. $ 2,725,584
---------------
Expenses
Management fee........................... 387,500
Distribution fee......................... 96,875
Custodian's fees and expenses............ 64,000
Reports to shareholders.................. 33,000
Transfer agent's fees and expenses....... 32,000
Registration fees........................ 14,000
Audit fee................................ 8,000
Trustees' fees and expenses.............. 4,000
Legal fees and expenses.................. 4,000
Miscellaneous............................ 3,162
---------------
Total expenses........................ 646,537
Less: Management fee waiver (Note 2)..... (290,624)
Custodian fee credit................. (3,805)
---------------
Net expenses.......................... 352,108
---------------
Net investment income....................... 2,373,476
Realized Gain on Investments
Net realized gain on investments............ 52
---------------
Net Increase in Net Assets
Resulting from Operations................... $ 2,373,528
---------------
---------------
</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 1997 1996
<S> <C> <C>
Operations
Net investment income........ $ 2,373,476 $ 2,326,036
Net realized gain (loss) on
investment transactions... 52 (911)
--------------- ---------------
Net increase in net assets
resulting from
operations................ 2,373,528 2,325,125
--------------- ---------------
Dividends and distributions
(Note 1)..................... (2,373,528) (2,325,125)
--------------- ---------------
Series share transactions
(at $1 per share)
Net proceeds from shares
sold...................... 251,461,796 288,309,868
Net asset value of shares
issued in reinvestment of
dividends and
distributions............. 2,303,863 2,252,473
Cost of shares reacquired.... (255,521,446) (275,746,533)
--------------- ---------------
Net increase (decrease) in
net assets from Series
share transactions........ (1,755,787) 14,815,808
--------------- ---------------
Total increase (decrease)....... (1,755,787) 14,815,808
Net Assets
Beginning of year............... 77,682,593 62,866,785
--------------- ---------------
End of year..................... $ 75,926,806 $ 77,682,593
--------------- ---------------
--------------- ---------------
</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 thirteen
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, 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 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 Investments Fund Management
LLC ('PIFM'). Pursuant to this agreement, PIFM has responsibility for all
investment advisory services and supervises the subadviser's performance of such
services. PIFM 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. PIFM 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 PIFM is computed daily and payable monthly, at an annual
rate of .50 of 1% of the average daily net assets of the Series. Prior to
September 1, 1997, PIFM agreed to waive a portion (.375 of 1% of the Series'
average daily net assets) of its management fee which amounted to $290,624
($.004 per share; for the year ended August 31, 1997). The Series is not
required to reimburse PIFM for such waiver. Effective September 1, 1997 PIFM
eliminated its management fee waiver.
The Fund has a distribution agreement with Prudential Securities Incorporated
('PSI'), which acts as the distributor of the Fund. The Series reimburses 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.
PSI, PIFM and PIC are indirect, wholly-owned subsidiaries of The Prudential
Insurance Company of America.
- ------------------------------------------------------------
Note 3. Other Transactions with Affiliates
Prudential Mutual Fund Services LLC ('PMFS'), a wholly-owned subsidiary of PIFM,
serves as the Fund's transfer agent. During the year ended August 31, 1997, the
Series incurred fees of approximately $30,600 for the services of PMFS. As of
August 31, 1997, approximately $2,300 of such fees were due to PMFS. Transfer
agent fees and expenses in the Statement of Operations also include certain
out-of-pocket expenses paid to non-affiliates.
- --------------------------------------------------------------------------------
B-67
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Financial Highlights CONNECTICUT MONEY MARKET SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended August 31,
-------------------------------------------------------
1997 1996 1995 1994 1993
------- ------- ------- ------- -------
<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)......... .03 .03 .03 .02 .02
Dividends and distributions to shareholders......... (.03) (.03) (.03) (.02) (.02)
------- ------- ------- ------- -------
Net asset value, end of year........................ $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
------- ------- ------- ------- -------
------- ------- ------- ------- -------
TOTAL RETURN(b):.................................... 3.10% 3.17% 3.16% 2.02% 2.20%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)....................... $75,927 $77,683 $62,867 $54,302 $57,794
Average net assets (000)............................ $77,500 $74,576 $57,103 $60,594 $53,152
Ratios to average net assets(a):
Expenses, including distribution fee.............. .46% .47% .58% .54% .39%
Expenses, excluding distribution fee.............. .34% .35% .46% .42% .26%
Net investment income............................. 3.06% 3.12% 3.17% 1.99% 2.17%
</TABLE>
- ---------------
(a) Net of management fee waiver.
(b) Total return includes reinvestment of dividends and distributions.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-68
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Report of Independent Accountants CONNECTICUT MONEY MARKET SERIES
- --------------------------------------------------------------------------------
To the Shareholders and Board of Trustees of
Prudential Municipal Series Fund, Connecticut Money Market Series:
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Prudential Municipal Series Fund,
Connecticut Money Market Series (the 'Fund', one of the portfolios constituting
Prudential Municipal Series Fund) at August 31, 1997, and the results of its
operations, the changes in its net assets and the financial highlights for the
year then ended, in conformity with generally accepted accounting principles.
These financial statements and financial highlights (hereafter referred to as
'financial statements') are the responsibility of the Fund's management; our
responsibility is to express an opinion on these financial statements based on
our audit. We conducted our audit of these financial statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audit, which included confirmation of securities at August
31, 1997 by correspondence with the custodian, provides a reasonable basis for
the opinion expressed above. The accompanying statement of changes in net assets
for the year ended August 31, 1996 and the financial highlights for each of the
four periods in the period ended August 31, 1996 were audited by other
independent accountants, whose opinion dated October 14, 1996 was unqualified.
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York
October 20, 1997
- --------------------------------------------------------------------------------
B-69
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Change of Auditors CONNECTICUT MONEY MARKET SERIES
- --------------------------------------------------------------------------------
Effective March 1, 1997, Deloitte & Touche LLP was terminated as the Fund's
auditors. For the years ended August 31, 1993 through August 31, 1996, Deloitte
& Touche LLP expressed an unqualified opinion on the Series' financial
statements. There were no disagreements between Fund management and Deloitte &
Touche LLP prior to their termination. The Board of Trustees approved the
termination of Deloitte & Touche LLP and the appointment of Price Waterhouse LLP
as the Fund's independent accountants.
- --------------------------------------------------------------------------------
B-70
<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-71
<PAGE>
Portfolio of Investments PRUDENTIAL MUNICIPAL SERIES FUND
as of August 31, 1997 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--97.4%
- ------------------------------------------------------------------------------------------------------------------------------
Alachua Cnty. Hlth. Facs. Auth. Rev., Santa Fe
Healthcare Facs. Proj. AAA(c) 7.60% 11/15/13 $ 1,750 (f) $ 1,956,903
Alachua Cnty. Ind. Dev. Auth. Rev., H.B. Fuller Co.
Proj., A.M.T. NR 7.75 11/01/16 3,000 3,159,690
Brevard Cnty. Edl. Facs. Auth. Rev. Ref., Florida Inst.
of Tech. BBB(c) 6.875 11/01/22 1,500 1,591,560
Brevard Cnty. Sch. Brd. Ctfs. of Part., Ser. A,
A.M.B.A.C. Aaa 6.50 7/01/12 3,500 (f) 3,875,270
Broward Cnty. Edl. Facs. Auth. Rev., Nova Univ. Dorm.
Proj., Ser. A NR 7.50 4/01/17 1,500 (f) 1,680,690
Broward Cnty. Hlth. Facs. Auth., North Beach Hosp.,
M.B.I.A. Aaa 6.75 8/15/06 1,000 1,093,730
Broward Cnty. Prof. Sports Facs. Rev., Civic Arena
Proj., Ser. A, M.B.I.A. Aaa 5.625 9/01/28 2,685 2,714,669
Clay Cnty. Hsg. Fin. Auth. Rev., Sngl. Fam. Mtge., Ser.
A, A.M.T., G.N.M.A. Aaa 7.45 9/01/23 375 395,621
Coral Springs Impvt. Dist., Wtr. & Swr. Ref., M.B.I.A. Aaa 6.00 6/01/10 1,000 1,097,350
Dade Cnty. Aviation Dept. Rev.,
Ser. B, A.M.T., M.B.I.A. Aaa 6.00 10/01/24 1,500 1,542,180
Ser. E, A.M.B.A.C. Aaa 5.50 10/01/10 1,000 1,035,180
Dade Cnty. Edl. Facs. Auth. Rev. Ref., Univ. of Miami.,
Ser. A, M.B.I.A. Aaa 5.625 4/01/06 2,015 2,138,076
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 (e) 555,665
Dade Cnty. Hsg. Fin. Auth. Rev.,
Sngl. Fam. Mtge., Ser. B, A.M.T., G.N.M.A Aaa 7.25 9/01/23 360 379,656
Sngl. Fam. Mtge., Ser. C, A.M.T., G.N.M.A. Aaa 7.75 9/01/22 765 807,427
Dade Cnty. Pub. Facs. Ref., Jackson Mem. Hosp., Ser. A,
M.B.I.A. Aaa 4.875 6/01/15 2,500 2,310,775
Dade Cnty. Sch. Dist., Gen. Oblig., M.B.I.A. Aaa 6.00 7/15/06 3,500 3,832,255
Dade Cnty. Spl. Oblig.,
Ser. B, A.M.B.A.C. Aaa 5.00 10/01/35 2,500 2,316,325
Metro Dade Fire & Rescue Svc., F.G.I.C. Aaa 6.00 4/01/05 2,800 3,039,260
Dade Cnty.,
Pub. Impvt. J & K Seaport, M.B.I.A. Aaa 6.50 10/01/07 1,220 1,391,605
Pub. Impvt. J & K Seaport, M.B.I.A. Aaa 6.50 10/01/10 1,555 1,780,226
Duval Cnty. Hsg. Fin. Auth. Rev., Sngl. Fam. Mtge.,
A.M.T., G.N.M.A. AAA(c) 8.375 12/01/14 385 (e) 414,622
Escambia Cnty. Hlth. Facs. Auth. Rev., Baptist Hosp.
Inc., Ser. A BBB+(c) 8.70 10/01/14 1,830 1,945,565
Escambia Cnty. Poll. Ctrl. Rev., Champion Int'l. Corp.
Proj., A.M.T. Baa1 6.90 8/01/22 3,500 3,854,515
Florida St. Brd. of Ed. Cap. Outlay,
Ser. A, F.G.I.C. Aaa 5.00 1/01/15 1,000 965,080
Ref. Pub. Ed., Ser. D A2 4.75 6/01/22 4,985 (e) 4,482,263
Florida St. Mun. Pwr. Agcy. Ref., Stanton II Proj.,
A.M.B.A.C. Aaa 4.50 10/01/27 2,000 1,696,980
Hillsborough Cnty. Ind. Dev. Auth. Poll. Ctrl. Rev.,
Tampa Elec. Proj., Ser. 92 Aa3 8.00 5/01/22 1,750 2,022,177
Hillsborough Cnty.,
Cnty. Ctr. Proj., Ser. B, M.B.I.A. Aaa 5.00 7/01/15 1,560 1,504,573
Ref. Cnty. Ctr. Proj., Ser. B, M.B.I.A. Aaa 6.00 7/01/06 1,605 1,756,817
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-72
<PAGE>
Portfolio of Investments PRUDENTIAL MUNICIPAL SERIES FUND
as of August 31, 1997 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>
- ------------------------------------------------------------------------------------------------------------------------------
Jacksonville Elec. Auth. Rev., St. Johns Rvr. Pwr. Park
Issue 2, Ser. 7 Aa1 Zero 10/01/10 $ 3,000 $ 1,524,390
Jacksonville Hlth. Facs. Auth. Hosp. Rev.,
Nat'l. Ben. Assoc. Baa1 7.00% 12/01/22 1,825 1,960,981
St. Lukes Hosp. Assoc. Proj. AA+(c) 7.125 11/15/20 1,000 1,099,950
Jacksonville Swr. & Sld. Wste. Disp. Facs. Rev.,
Anheuser Busch Proj. A1 5.875 2/01/36 1,000 1,009,640
Jacksonville Wtr. & Swr. Dev. Rev.,
Suburban Utils., A.M.T. A3 6.75 6/01/22 1,000 1,075,480
United Wtr. Proj., A.M.T., A.M.B.A.C. Aaa 6.35 8/01/25 1,500 1,602,330
Lake Cnty. Res. Rec. Ind. Dev. Rev., NRG Recovery Grp.,
Ser. A, A.M.T. Baa 5.95 10/01/13 1,035 1,049,780
Lakeland Elec. & Wtr. Rev. Aa 5.50 10/01/26 2,000 1,982,680
Lakeland Elec. & Wtr. Rev. Aa 5.625 10/01/36 5,000 5,018,150
Largo Cnty. Hosp. Rev., Sun Coast Hlth. Sys. BB+(c) 6.30 3/01/20 2,000 1,985,500
Leon Cnty. Hsg. Fin. Auth. Rev., Sngl. Fam. Mtge., Ser.
A., A.M.T., G.N.M.A. Aaa 7.30 4/01/21 360 379,037
Martin Cnty. Ind. Dev. Auth. Rev., Indiantown Cogen.
Proj.,
Ser. A, A.M.T. Baa3 7.875 12/15/25 1,200 1,383,564
Miami Hlth. Facs. Auth. Rev. Ref., Mercy Hosp. A3 8.125 8/01/11 1,000 1,052,090
Miami Spec. Oblig.,
Admn. Bldg. Acquis. Proj., F.G.I.C. Aaa 6.00 2/01/16 1,500 1,587,255
Admn. Bldg. Acquis. Proj., F.G.I.C. Aaa 6.00 2/01/25 500 526,715
Miramar Wstwtr. Impvt. Assmt., F.G.I.C. Aaa 6.75 10/01/16 2,500 2,793,350
Okaloosa Cnty. Cap. Impvt. Rev., M.B.I.A. Aaa Zero 12/01/06 450 287,753
Orange Cnty. Hsg. Fin. Auth. Mtge. Rev., Ser. A, A.M.T.,
G.N.M.A. AAA(c) 7.375 9/01/24 420 445,780
Orange Cnty. Hsg. Fin. Auth. Rev.,
MultiFam. Ashley Point Apts., Ser. A, A.M.T. BBB+(c) 6.85 10/01/16 1,200 1,237,200
MultiFam. Ashley Point Apts., Ser. A, A.M.T. BBB+(c) 7.10 10/01/24 855 882,069
Orlando Util. Comm., Wtr. & Elec. Rev., Ser. D Aa 6.75 10/01/17 2,200 2,600,400
Palm Beach Cnty. Hlth. Facs. Auth. Rev., Good Samaritan
Hlth. Sys. A+(c) 6.30 10/01/22 1,000 1,050,280
Palm Beach Cnty. Sld. Wste. Auth. Rev., Ser. A,
A.M.B.A.C. Aaa 6.00 10/01/09 1,500 1,649,100
Pensacola Hlth. Facs. Auth., Daughters of Charity,
M.B.I.A. Aaa 5.25 1/01/11 1,600 1,604,704
Polk Cnty. Ind. Dev. Auth., Sld. Wste. Disp. Fac. Rev.,
Tampa Elec. Co. Proj., A.M.T. Aa2 5.85 12/01/30 1,500 1,519,725
Puerto Rico Comnwlth.,
Gen. Oblig. Baa1 6.45 7/01/17 1,400 1,534,638
Gen. Oblig. Baa1 6.50 7/01/23 650 714,376
Puerto Rico Elec. Pwr. Auth. Rev., Ser. R Baa1 6.25 7/01/17 5,000 5,284,550
Puerto Rico Tel. Auth. Rev., Ser. I, M.B.I.A. Aaa 6.966(d) 1/16/15 2,250 2,252,812
Sarasota Wtr. & Swr. Util. Ref., Ser. C, F.G.I.C. Aaa 4.50 10/01/16 1,000 885,920
St. Petersburg Hlth. Facs. Auth. Rev., Allegheny Hlth.
Proj., M.B.I.A. Aaa 7.00 12/01/15 1,000 1,107,370
Tampa Gtd. Entitlement Rev., A.M.B.A.C. Aaa 7.05 10/01/07 2,000 2,214,640
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-73
<PAGE>
Portfolio of Investments PRUDENTIAL MUNICIPAL SERIES FUND
as of August 31, 1997 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>
- ------------------------------------------------------------------------------------------------------------------------------
Tampa Sports Auth. Rev., Loc. Option Sales Tax Stad.
Proj., M.B.I.A. Aaa 5.25% 1/01/27 $ 1,455 $ 1,404,264
Tampa Sports Auth. Rev., Tampa Bay Arena Proj., M.B.I.A. Aaa 5.75 10/01/20 1,000 1,055,350
Virgin Islands Terr., Hugo Ins. Claims Fund Proj., Ser.
91 NR 7.75 10/01/06 1,185 1,297,148
Volusia Cnty. Edl. Fac. Auth. Rev., Embry Riddle Univ. AAA(c) 6.625 10/15/22 1,000 1,080,590
Volusia Cnty. Hlth. Facs. Auth. Rev., Mem. Hlth. Sys.
Proj. BBB+(c) 8.25 6/01/20 2,000 (f) 2,236,540
------------
Total long-term investments (cost $109,874,195) 115,712,806
------------
SHORT-TERM INVESTMENTS--1.1%
Dade Cnty. Ind. Dev. Auth., Exempt Fac. Rev., Florida
Pwr. & Lt., Ser. 93, F.R.D.D. VMIG1 3.75 9/02/97 100 100,000
Hillsborough Cnty. Ind. Dev. Auth., Poll. Ctrl. Rev.,
Tampa Elec. Co., Ser. 93, F.R.D.D. VMIG1 3.85 9/02/97 1,200 1,200,000
------------
Total short-term investments (cost $1,300,000) 1,300,000
------------
Expiration
OUTSTANDING CALL OPTION PURCHASED Date Contracts(g)
--------- ---------
U. S. Treasury Bond Futures, @ $120.00
(cost $60,768) NR -- 11/15/97 70 7,656
------------
Total Investments--98.5%
(cost $ 111,234,963; Note 4) 117,020,462
Other assets in excess of liabilities--1.5% 1,808,222
------------
Net Assets--100% $118,828,684
------------
------------
</TABLE>
- ---------------
(a) The following abbreviations are used in portfolio descriptions:
A.M.B.A.C.--American Municipal Bond Assurance Corporation.
A.M.T.--Alternative Minimum Tax.
E.T.M.--Escrowed to maturity.
F.G.I.C.--Financial Guaranty Insurance Company.
F.R.D.D.--Floating Rate (Daily) Demand Note (b).
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) Inverse floating rate bond. The coupon is inversely indexed to a floating
interest rate. The rate shown is the rate at period end.
(e) Securities segragated as collateral for options on futures.
(f) Prerefunded issues are secured by escrowed cash and 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-74
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Statement of Assets and Liabilities FLORIDA SERIES
- --------------------------------------------------------------------------------
<TABLE>
Assets August 31, 1997
<S> <C>
Investments, at value (cost $111,234,963)................................................................. $ 117,020,462
Cash...................................................................................................... 80,915
Interest receivable....................................................................................... 2,057,379
Receivable for Series shares sold......................................................................... 26,795
Receivable for investments sold........................................................................... 25,314
Other assets.............................................................................................. 3,333
---------------
Total assets........................................................................................... 119,214,198
---------------
Liabilities
Payable for Series shares reacquired...................................................................... 187,351
Dividends payable......................................................................................... 97,486
Accrued expenses.......................................................................................... 46,133
Management fee payable.................................................................................... 30,581
Distribution fee payable.................................................................................. 20,696
Deferred trustee's fees................................................................................... 3,267
---------------
Total liabilities...................................................................................... 385,514
---------------
Net Assets................................................................................................ $ 118,828,684
---------------
---------------
Net assets were comprised of:
Shares of beneficial interest, at par.................................................................. $ 114,131
Paid-in capital in excess of par....................................................................... 114,469,789
---------------
114,583,920
Accumulated net realized loss on investments........................................................... (1,540,735)
Net unrealized appreciation on investments............................................................. 5,785,499
---------------
Net assets, August 31, 1997............................................................................... $ 118,828,684
---------------
---------------
Class A:
Net asset value and redemption price per share
($92,579,346 / 8,892,079 shares of beneficial interest issued and outstanding)...................... $10.41
Maximum sales charge (3% of offering price)............................................................ .32
---------------
Maximum offering price to public....................................................................... $10.73
---------------
---------------
Class B:
Net asset value, offering price and redemption price per share
($18,819,585 / 1,807,440 shares of beneficial interest issued and outstanding)...................... $10.41
---------------
---------------
Class C:
Net asset value, offering price and redemption price per share
($7,335,675 / 704,530 shares of beneficial interest issued and outstanding)......................... $10.41
---------------
---------------
Class Z:
Net asset value, offering price and redemption price per share
($94,078 / 9,037 shares of beneficial interest issued and outstanding).............................. $10.41
---------------
---------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-75
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
FLORIDA SERIES
Statement of Operations
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended
Net Investment Income August 31, 1997
<S> <C>
Income
Interest................................. $ 7,244,553
---------------
Expenses
Management fee........................... 614,337
Distribution fee--Class A................ 97,700
Distribution fee--Class B................ 87,827
Distribution fee--Class C................ 56,812
Custodian's fees and expenses............ 66,000
Transfer agent's fees and expenses....... 44,000
Reports to shareholders.................. 44,000
Registration fees........................ 33,000
Audit fees............................... 10,000
Legal fees and expenses.................. 9,000
Miscellaneous............................ 6,133
Trustees' fees and expenses.............. 4,000
---------------
Total expenses........................ 1,072,809
Less: Management fee waiver (Note 2)..... (245,735)
Custodian fee credit (Note 1)......... (3,021)
---------------
Net expenses.......................... 824,053
---------------
Net investment income....................... 6,420,500
---------------
Realized and Unrealized
Gain (Loss) on Investments
Net realized gain (loss) on:
Investment transactions.................. 623,090
Financial futures transactions........... (702,537)
---------------
(79,447)
---------------
Net change in unrealized appreciation
(depreciation) on:
Investments.............................. 3,713,700
---------------
Net gain on investments..................... 3,634,253
---------------
Net Increase in Net Assets
Resulting from Operations................... $10,054,753
---------------
---------------
</TABLE>
PRUDENTIAL MUNICIPAL SERIES FUND
FLORIDA SERIES
Statement of Changes in Net Assets
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Increase (Decrease) Year Ended August 31,
in Net Assets 1997 1996
<S> <C> <C>
Operations
Net investment income....... $ 6,420,500 $ 7,299,648
Net realized gain (loss) on
investment
transactions............. (79,447) 3,421,861
Net change in unrealized
appreciation/depreciation
of investments........... 3,713,700 (2,644,962)
--------------- ------------
Net increase in net assets
resulting from
operations............... 10,054,753 8,076,547
--------------- ------------
Dividends and distributions (Note 1):
Dividends from net
investment income
Class A.................. (5,200,369) (6,244,938)
Class B.................. (864,744) (647,226)
Class C.................. (353,934) (407,484)
Class Z.................. (1,453) --
--------------- ------------
(6,420,500) (7,299,648)
--------------- ------------
Distributions in excess of
net investment income
Class A.................. (57,916) --
Class B.................. (4,473) --
Class C.................. (10,023) --
--------------- ------------
(72,412) --
--------------- ------------
Series share transactions (net
of share conversions) (Note
5):
Net proceeds from shares
sold..................... 13,962,419 15,332,603
Net asset value of shares
issued in reinvestment of
dividends and
distributions............ 2,752,296 3,085,406
Cost of shares reacquired... (25,937,462) (33,022,261)
--------------- ------------
Net decrease in net assets
from Series share
transactions............. (9,222,747) (14,604,252)
--------------- ------------
Total decrease................. (5,660,906) (13,827,353)
Net Assets
Beginning of year.............. 124,489,590 138,316,943
--------------- ------------
End of year.................... $ 118,828,684 $124,489,590
--------------- ------------
--------------- ------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-76
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Notes to Financial Statements FLORIDA SERIES
- --------------------------------------------------------------------------------
Prudential Municipal Series Fund, (the 'Fund') is registered under the
Investment Company Act of 1940, as an open-end investment company. The Fund was
organized as a Massachusetts business trust on May 18, 1984 and consists of
thirteen 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.
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
- --------------------------------------------------------------------------------
B-77
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Notes to Financial Statements FLORIDA SERIES
- --------------------------------------------------------------------------------
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.
Reclassification of Capital Accounts: The Fund accounts for and reports
distributions to shareholders in accordance with American Institute of Certified
Public Accountants (AICPA) Statement of Position 93-2: Determination,
Disclosure, and Financial Statement Presentation of Income, Capital Gain, and
Return of Capital Distributions by Investment Companies. The effect of applying
this statement was to increase undistributed net investment income by $72,412,
increase accumulated realized losses by $64,356 and decrease paid-in capital in
excess of par by $8,056. The current year effect of applying the Statement of
Position was due to the sale of securities purchased with market discount. Net
investment income, net realized gains and net assets were not affected by these
changes.
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 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 Investments Fund Management
LLC ('PIFM'). Pursuant to this agreement, PIFM has responsibility for all
investment advisory services and supervises the subadviser's performance of such
services. PIFM 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. PIFM pays for the cost of the
subadviser's services, the compensation of officers and employees 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 PIFM is computed daily and payable monthly, at an annual
rate of .50 of 1% of the average daily net assets of the Series. Prior to
September 1, 1997 PIFM agreed to waive a portion (.20 o f 1% of the Series'
average daily net assets) of its management fee, which amounted to $245,735
($0.02 per share; .20% of average net assets) for the year ended August 31,
1997. The Series is not required to reimburse PIFM for such waiver. Effective
September 1, 1997, PIFM eliminated its management fee waiver.
The Fund has a distribution agreement with Prudential Securities Incorporated
('PSI'), which acts as the distributor of the Class A, Class B, Class C and
Class Z shares of the Fund. The Fund compensates 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.
No distribution or service fees are paid to PSI as distributor for Class Z
shares of the Fund.
Pursuant to the Class A, B and C Plans, the Fund compensates PSI 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 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, 1997.
PSI has advised the Series that they have received approximately $60,000 in
front-end sales charges resulting from sales of Class A shares during the year
ended August 31, 1997. From these fees, 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 year ended August 31, 1997, it received
approximately $63,800 and $150 in contingent deferred sales charges imposed upon
certain redemptions by Class B and C shareholders, respectively.
PIFM, PIC and PSI are indirect, wholly-owned subsidiaries of The Prudential
Insurance Company of America.
The Series, along with other affiliated registered investment companies (the
'Funds'), entered into a credit agreement (the 'Agreement') on
- --------------------------------------------------------------------------------
B-78
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Notes to Financial Statements FLORIDA SERIES
- --------------------------------------------------------------------------------
December 31, 1996 with an unaffiliated lender. The maximum commitment under the
Agreement is $200,000,000. The Agreement expires on December 30, 1997. Interest
on any such borrowings outstanding will be at market rates. The purpose of the
Agreement is to serve as an alternative source of funding for capital share
redemptions. The Series has not borrowed any amounts pursuant to the Agreement
as of August 31, 1997. The Funds pay a commitment fee at an annual rate of .055
of 1% on the unused portion of the credit facility. The commitment fee is
accrued and paid quarterly on a pro-rata basis by the Funds.
- ------------------------------------------------------------
Note 3. Other Transactions with Affiliates
Prudential Mutual Fund Services LLC ('PMFS'), a wholly owned subsidiary of PIFM,
serves as the Fund's transfer agent. During the year ended August 31, 1997, the
Series incurred fees of approximately $34,200 for the services of PMFS. As of
August 31, 1997, approximately $2,400 of such fees were due to PMFS. Transfer
agent fees and expenses in the Statement of Operations include certain
out-of-pocket expenses paid to non-affiliates.
- ------------------------------------------------------------
Note 4. Portfolio Securities
Purchases and sales of portfolio securities of the Series, excluding short-term
investments, for the year ended August 31, 1997 were $26,662,670 and
$37,230,341, respectively.
The federal income tax basis of the Series' investments at August 31, 1997 was
$111,183,101 and, accordingly, net unrealized appreciation was $5,837,361 (gross
unrealized appreciation--$6,080,133 gross unrealized depreciation--$242,772).
The Series has a capital loss carryforward as of August 31, 1997 of
approximately $1,592,600 of which $1,460,000 expires in 2003 and $132,600
expires in 2005. Accordingly, no capital gains distribution is expected to be
paid until net gains have been realized in excess of the carryforward.
- ------------------------------------------------------------
Note 5. Capital
The Series offers Class A, Class B, Class C and Class Z 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, 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. Special
exchange privileges are also available for shareholders who qualify to purchase
Class A shares at net asset value. Effective December 6, 1996 the Series
commenced offering Class Z shares. Class Z shares are not subject to any sales
or redemption charge and are offered exclusively for sale to a limited group of
investors.
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, 1997 and August 31, 1996 were as
follows:
<TABLE>
<CAPTION>
Class A Shares Amount
- ------------------------------------ ---------- ------------
<S> <C> <C>
Year ended August 31, 1997:
Shares sold......................... 494,435 $ 5,074,068
Shares issued in reinvestment of
dividends......................... 213,918 2,200,461
Shares reacquired................... (1,988,937) (20,452,223)
---------- ------------
Net decrease in shares outstanding
before conversion................. (1,280,584) (13,177,694)
Shares issued upon conversion from
Class B........................... 87,091 891,335
---------- ------------
Net decrease in shares
outstanding....................... (1,193,493) $(12,286,359)
---------- ------------
---------- ------------
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)
---------- ------------
---------- ------------
<CAPTION>
Class B
- ------------------------------------
Year ended August 31, 1997:
Shares sold......................... 793,985 $ 8,170,066
Shares issued in reinvestment of
dividends ........................ 34,104 350,919
Shares reacquired................... (386,783) (3,982,887)
---------- ------------
Net increase in shares outstanding
before conversion................. 441,306 4,538,098
Shares reacquired upon conversion
into Class A...................... (87,091) (891,335)
---------- ------------
Net increase in shares
outstanding....................... 354,215 $ 3,646,763
---------- ------------
---------- ------------
</TABLE>
- --------------------------------------------------------------------------------
B-79
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Notes to Financial Statements FLORIDA SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class B Shares Amount
- ------------------------------------ ---------- ------------
<S> <C> <C>
Year ended August 31, 1996:
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
---------- ------------
---------- ------------
<CAPTION>
Class C
- ------------------------------------
Year ended August 31, 1997:
Shares sold......................... 60,503 $ 624,420
Shares issued in reinvestment of
dividends......................... 19,401 199,548
Shares reacquired................... (145,733) (1,501,101)
---------- ------------
Net decrease in shares
outstanding....................... (65,829) $ (677,133)
---------- ------------
---------- ------------
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)
---------- ------------
---------- ------------
<CAPTION>
Class Z
- ------------------------------------
December 6, 1996 *through
August 31, 1997:
Shares sold......................... 9,024 $ 93,865
Shares issued in reinvestment of
dividends......................... 132 1,368
Shares reacquired................... (119) (1,251)
---------- ------------
Net increase in shares
outstanding....................... 9,037 $ 93,982
---------- ------------
---------- ------------
</TABLE>
- ------------------
* Commencement of offering of Class Z shares.
- --------------------------------------------------------------------------------
B-80
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Financial Highlights FLORIDA SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A
-----------------------------------------------------------
Year Ended August 31,
-----------------------------------------------------------
1997 1996 1995 1994 1993
------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year.................. $ 10.11 $ 10.06 $ 9.91 $ 10.87 $ 10.27
------- -------- -------- -------- --------
Income from investment operations
Net investment income(a)............................ .54 .57 .59 .59 .57
Net realized and unrealized gain (loss) on
investment transactions.......................... .31 .05 .15 (.76) .73
------- -------- -------- -------- --------
Total from investment operations................. .85 .62 .74 (.17) 1.30
------- -------- -------- -------- --------
Less distributions
Dividends from net investment income................ (.54) (.57) (.59) (.59) (.57)
Distributions in excess of net investment income.... (.01) -- -- -- --
Distributions from net realized gains............... -- -- -- (.20) (.13)
------- -------- -------- -------- --------
Total distributions.............................. (.55) (.57) (.59) (.79) (.70)
------- -------- -------- -------- --------
Net asset value, end of year........................ $ 10.41 $ 10.11 $ 10.06 $ 9.91 $ 10.87
------- -------- -------- -------- --------
------- -------- -------- -------- --------
TOTAL RETURN(b):.................................... 8.65% 6.20% 7.85% (1.69)% 13.78%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)....................... $92,579 $101,999 $120,963 $134,849 $148,900
Average net assets (000)............................ $97,700 $112,266 $124,259 $146,489 $123,820
Ratios to average net assets(a):
Expenses, including distribution fees............ .57% .37% .24% .20% .20%
Expenses, excluding distribution fees............ .47% .27% .17% .20% .20%
Net investment income............................ 5.32% 5.56% 6.04% 5.67% 5.94%
For Class A, B, C and Z shares:
Portfolio turnover rate.......................... 22% 68% 65% 75% 68%
</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-81
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Financial Highlights FLORIDA SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class B
---------------------------------------------
August 1,
1994(c)
Year Ended August 31, through
------------------------------ August 31,
1997 1996 1995 1994
------- ------- ------ ----------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year.................. $ 10.11 $ 10.06 $ 9.91 $ 9.95
------- ------- ------ -----
Income from investment operations
Net investment income(a)............................ .50 .53 .55 .04
Net realized and unrealized gain (loss) on
investment transactions.......................... .31 .05 .15 (.04)
------- ------- ------ -----
Total from investment operations................. .81 .58 .70 --
------- ------- ------ -----
Less distributions
Dividends from net investment income................ (.50) (.53) (.55) (.04)
Distributions in excess of net investment income.... (.01) -- -- --
------- ------- ------ -----
Total distributions.............................. (.51) (.53) (.55) (.04)
------- ------- ------ -----
Net asset value, end of year........................ $ 10.41 $ 10.11 $10.06 $ 9.91
------- ------- ------ -----
------- ------- ------ -----
TOTAL RETURN(b):.................................... 8.22% 5.79% 7.39% (0.05)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)....................... $18,820 $14,699 $8,326 $582
Average net assets (000)............................ $17,565 $12,570 $4,699 $118
Ratios to average net assets(a):
Expenses, including distribution fees............ .97% .77% .67% .70%(d)
Expenses, excluding distribution fees............ .47% .27% .17% .20%(d)
Net investment income............................ 4.92% 5.16% 5.56% 6.21%(d)
</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) Commencement of offering of Class B shares.
(d) Annualized.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-82
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Financial Highlights FLORIDA SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class C Class Z
-------------------------------------------------------- ------------
July 26, December 6,
1993(d) 1996(e)
Year Ended August 31, through through
----------------------------------------- August 31, August 31,
1997 1996 1995 1994 1993 1997
------ ------ ------- ------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year.................. $10.11 $10.06 $ 9.91 $ 10.87 $ 10.58 $ 10.36
------ ------ ------- ------- ---------- ------
Income from investment operations
Net investment income(a)............................ .48 .50 .53 .48 .03 .41
Net realized and unrealized gain (loss) on
investment transactions.......................... .31 .05 .15 (.76) .29 .06
------ ------ ------- ------- ---------- ------
Total from investment operations................. .79 .55 .68 (.28) .32 .47
------ ------ ------- ------- ---------- ------
Less distributions
Dividends from net investment income................ (.48) (.50) (.53) (.48) (.03) (.41)
Distributions in excess of net investment income.... (.01) -- -- -- -- (.01)
Distributions from net realized gains............... -- -- -- (.20) -- --
------ ------ ------- ------- ---------- ------
Total distributions.............................. (.49) (.50) (.53) (.68) (.03) (.42)
------ ------ ------- ------- ---------- ------
Net asset value, end of year........................ $10.41 $10.11 $ 10.06 $ 9.91 $ 10.87 $ 10.41
------ ------ ------- ------- ---------- ------
------ ------ ------- ------- ---------- ------
TOTAL RETURN(b):.................................... 7.95% 5.52% 7.12% (2.40)% 3.14% 4.57%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)....................... $7,336 $7,792 $ 9,028 $11,185 $3,132 $94
Average net assets (000)............................ $7,575 $8,293 $10,265 $ 9,280 $1,038 $36
Ratios to average net assets(a):
Expenses, including distribution fees............ 1.22% 1.02% .92% .95% .95%(c) .47%(c)
Expenses, excluding distribution fees............ .47% .27% .17% .20% .20%(c) .47%(c)
Net investment income............................ 4.67% 4.91% 5.35% 4.99% 5.19%(c) 5.48%(c)
</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. Total returns for periods of less than a full year are not
annualized.
(c) Annualized.
(d) Commencement of offering of Class C shares. Prior to August 1, 1994, Class C
shares were called Class D shares.
(e) Commencement of offering of Class Z shares.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-83
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Report of Independent Accountants FLORIDA SERIES
- --------------------------------------------------------------------------------
To the Shareholders and Board of Trustees of
Prudential Municipal Series Fund, Florida Series
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Prudential Municipal Series Fund,
Florida Series (the 'Fund', one of the portfolios constituting Prudential
Municipal Series Fund) at August 31, 1997, and the results of its operations,
the changes in its net assets and the financial highlights for the year then
ended, in conformity with generally accepted accounting principles. These
financial statements and financial highlights (hereafter referred to as
'financial statements') are the responsibility of the Fund's management; our
responsibility is to express an opinion on these financial statements based on
our audit. We conducted our audit of these financial statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audit, which included confirmation of securities at August
31, 1997 by correspondence with the custodian and brokers, provides a reasonable
basis for the opinion expressed above. The accompanying statement of changes in
net assets for the year ended August 31, 1996 and the financial highlights for
each of the four periods in the period ended August 31, 1996 were audited by
other independent accountants, whose opinion dated October 14, 1996 was
unqualified.
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York
October 20, 1997
- --------------------------------------------------------------------------------
B-84
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Change of Auditors FLORIDA SERIES
- --------------------------------------------------------------------------------
Effective March 1, 1997, Deloitte & Touche LLP was terminated as the Fund's
auditors. For the years ended August 31, 1993 through the year ended August 31,
1996, Deloitte & Touche LLP expressed an unqualified opinion on the Series
financial statements. There were no disagreements between Fund management and
Deloitte & Touche LLP prior to their termination. The Board of Trustees approved
the termination of Deloitte & Touche LLP and the appointment of Price Waterhouse
LLP as the Fund's independent accountants.
B-85
<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-86
<PAGE>
Portfolio of Investments PRUDENTIAL MUNICIPAL SERIES FUND
as of August 31, 1997 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--96.5%
- ------------------------------------------------------------------------------------------------------------------------------
Baltimore, Maryland
Conv. Ctr. Rev., F.G.I.C. Aaa 5.75% 9/01/08 $ 1,075 $ 1,131,233
Econ. Dev. Lease Rev., Armistead Partnership BBB+(c) 7.00 8/01/11 1,000 1,094,980
Gen. Oblig., Cons. Pub. Impt., Ser. A, F.G.I.C. Aaa 7.25 10/15/05 1,000 1,173,870
Calvert Cnty. Poll. Cntrl. Rev., Baltimore Gas & Elec Co.
Proj. A2 5.55 7/15/14 1,000 1,009,560
Charles Cnty. Gen. Oblig. Aa 5.50 3/01/05 665 702,193
Charles Cnty. Gen. Oblig. Aa 5.50 3/01/06 695 735,609
Harford Cnty. Gen. Oblig. Aa 5.50 3/01/06 1,500 1,587,645
Kent Cnty. Coll. Rev., Washington Coll. Proj. Baa 7.70 7/01/18 500 537,565
Maryland St. & Local Facs., First Ser. Aaa 5.00 3/01/07 750 768,240
Maryland St. Hlth. & Higher Edl. Facs. Auth. Rev.,
Doctor's Comn. Hosp. Baa2 5.50 7/01/24 1,000 947,000
Howard Cnty. Gen. Hosp. Baa1 5.50 7/01/21 1,000 954,110
Mercy Medical Center, F.S.A. Aaa 5.75 7/01/26 1,000 1,020,120
Pickersgill, Ser. A A-(c) 5.85 1/01/10 600 624,588
Maryland St. Hsg. & Cmnty. Dev. Admin.,
Sngl. Fam. Mtge. Rev. Prog., Sixth Ser., A.M.T. Aa 7.125 4/01/14 695 723,926
Sngl. Fam. Mtge. Rev. Prog., Third Ser. Aa 8.00 4/01/18 750 761,032
Maryland St. Ind. Dev. Fin. Auth. Rev., Amer. Ctr. for
Physics BBB(c) 6.625 1/01/17 1,000 1,072,320
Maryland St. Trans. Auth., Baltimore-Washington Int'l.
Arpt., A.M.T., F.G.I.C. Aaa 6.25 7/01/14 1,750 1,863,435
Maryland Wtr. Qual. Fin. Admin., Revolving Loan Fund
Rev., Ser. A Aa 5.90 9/01/04 565 610,319
Montgomery Cnty.,
Gen. Oblig., Cons. Pub. Impvt. Aaa 9.75 6/01/01 450 533,273
Gen. Oblig., Cons. Pub. Impvt., Ser. A Aaa 5.75 10/01/07 1,300 1,401,764
Sngl. Fam. Mtge. Rev., Ser. B, A.M.T. Aa2 6.05 7/01/27 1,250 1,275,837
Northeast Maryland Waste Disp. Auth., Solid Waste Rev.,
Baltimore City Sludge Proj. NR 7.25 7/01/07 847 917,614
Montgomery Cnty. Res. Rec. Proj. A 6.00 7/01/07 1,000 1,064,890
Prince Georges Cnty.,
Gen. Oblig., Cons. Pub. Impvt. A1 5.25 10/01/11 1,000 1,018,930
Hosp. Rev., Dimensions Hlth. Corp. A3 5.375 7/01/14 1,000 980,400
Hosp. Rev., Dimensions Hlth. Corp. A 5.30 7/01/24 500 477,920
Hsg. Auth. Mtge. Rev., Langley Gardens Apts. Proj.,
A.M.T., G.N.M.A. AAA(c) 5.75 8/20/29 500 496,375
Poll. Cntrl. Rev., Ref., Potomac Elec. Proj., M.B.I.A. Aaa 5.75 3/15/10 1,100 1,179,354
Stormwater Mgmt. Aa 6.50 3/15/03 1,140 1,252,507
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-87
<PAGE>
Portfolio of Investments PRUDENTIAL MUNICIPAL SERIES FUND
as of August 31, 1997 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 Elec. Pwr. Auth. Rev., Ser. AA Aaa 5.25% 7/01/16 $ 750 $ 739,358
Puerto Rico Tel. Auth. Rev., Ser. I, M.B.I.A. Aaa 6.966 1/16/15 1,000(d) 1,001,250
Takoma Park Hosp. Facs. Rev., Washington Adventist Hosp.,
F.S.A. Aaa 6.50 9/01/12 1,000 1,142,170
Washington D.C., Metro. Area Transit Auth. Rev., F.G.I.C. Aaa 6.00 7/01/08 1,000 1,095,980
-----------
Total long-term investments (cost $30,252,311) 31,895,367
-----------
SHORT-TERM INVESTMENTS--1.5%
Maryland Natl. Cap. Pk. & Planning Comn. A1+(c) 3.75 9/02/97 200 200,000
Puerto Rico Comnwlth., Hwy. & Trans. Auth. Rev., F.R.W.D. VMIG1 2.90 9/03/97 300 300,000
-----------
Total short-term investments (cost $500,000) 500,000
-----------
Total Investments--98.0%
(cost $30,752,311; Note 4) 32,395,367
Other assets in excess of liabilities--2.0% 642,628
-----------
Net Assets--100% $33,037,995
-----------
-----------
</TABLE>
- ---------------
(a) The following abbreviations are used in portfolio descriptions:
A.M.T.--Alternative Minimum Tax.
F.G.I.C.--Financial Guaranty Insurance Company.
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 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-88
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Statement of Assets and Liabilities MARYLAND SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Assets August 31, 1997
---------------
<S> <C>
Investments, at value (cost $30,752,311).................................................................. $32,395,367
Cash...................................................................................................... 29,138
Interest receivable....................................................................................... 549,312
Receivable for investments sold........................................................................... 254,749
Other assets.............................................................................................. 989
Receivable for Series shares sold......................................................................... 50
---------------
Total assets........................................................................................... 33,229,605
---------------
Liabilities
Accrued expenses.......................................................................................... 112,838
Payable for Series shares reacquired...................................................................... 31,793
Dividends payable......................................................................................... 23,203
Management fee payable.................................................................................... 12,713
Distribution fee payable.................................................................................. 7,796
Deferred trustee's fees................................................................................... 3,267
---------------
Total liabilities...................................................................................... 191,610
---------------
Net Assets................................................................................................ $33,037,995
---------------
---------------
Net assets were comprised of:
Shares of beneficial interest, at par.................................................................. $ 30,055
Paid-in capital in excess of par....................................................................... 31,321,920
---------------
31,351,975
Accumulated net realized gain on investments........................................................... 42,964
Net unrealized appreciation on investments............................................................. 1,643,056
---------------
Net assets, August 31, 1997............................................................................... $33,037,995
---------------
---------------
Class A:
Net asset value and redemption price per share
($18,558,080 / 1,689,196 shares of beneficial interest issued and outstanding)...................... $10.99
Maximum sales charge (3% of offering price)............................................................ .34
---------------
Maximum offering price to public....................................................................... $11.33
---------------
---------------
Class B:
Net asset value, offering price and redemption price per share
($14,411,765 / 1,310,122 shares of beneficial interest issued and outstanding)...................... $11.00
---------------
---------------
Class C:
Net asset value, offering price and redemption price per share
($68,150 / 6,195 shares of beneficial interest issued and outstanding).............................. $11.00
---------------
---------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-89
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
MARYLAND SERIES
Statement of Operations
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended
Net Investment Income August 31, 1997
<S> <C>
Income
Interest................................... $ 1,980,854
---------------
Expenses
Management fee............................. 175,657
Distribution fee--Class A.................. 18,970
Distribution fee--Class B.................. 80,564
Distribution fee--Class C.................. 367
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.................................. 10,000
Legal fees and expenses.................... 9,000
Trustees' fees and expenses................ 4,000
Miscellaneous.............................. 9,160
---------------
Total expenses.......................... 483,718
Less: Management fee waiver (Note 2)....... (17,566)
Custodian fee credit (Note 1).......... (7,720)
---------------
Net expenses............................ 458,432
---------------
Net investment income......................... 1,522,422
---------------
Realized and Unrealized
Gain (Loss) on Investments
Net realized gain (loss) on:
Investment transactions.................... 307,115
Financial futures contract transactions.... (228,802)
---------------
78,313
---------------
Net change in unrealized appreciation (depreciation) of:
Investments................................ 1,152,180
---------------
Net gain on investments....................... 1,230,493
---------------
Net Increase in Net Assets
Resulting from Operations..................... $ 2,752,915
---------------
---------------
</TABLE>
PRUDENTIAL MUNICIPAL SERIES FUND
MARYLAND SERIES
Statement of Changes in Net Assets
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Increase (Decrease) Year Ended August 31,
in Net Assets 1997 1996
<S> <C> <C>
Operations
Net investment income........ $ 1,522,422 $ 1,725,293
Net realized gain on
investment transactions... 78,313 992,267
Net change in unrealized
appreciation
(depreciation) of
investments............... 1,152,180 (673,563)
-------------- -------------
Net increase in net assets
resulting from
operations................ 2,752,915 2,043,997
-------------- -------------
Dividends and distributions
(Note 1):
Dividends from net investment
income
Class A................... (856,637) (867,743)
Class B................... (663,966) (855,800)
Class C................... (1,819) (1,750)
-------------- -------------
(1,522,422) (1,725,293)
-------------- -------------
Distributions in excess of
net investment income
Class A................... (10,676) --
Class B................... (9,184) --
Class C................... (28) --
-------------- -------------
(19,888) --
-------------- -------------
Distributions from net
realized gains
Class A................... (229,545) --
Class B................... (197,458) --
Class C................... (597) --
-------------- -------------
(427,600) --
-------------- -------------
Series share transactions (net
of share conversions) (Note
5):
Net proceeds from shares
sold...................... 767,369 2,762,194
Net asset value of shares
issued in reinvestment of
dividends and
distributions............. 1,326,652 1,114,649
Cost of shares reacquired.... (6,736,831) (6,489,419)
-------------- -------------
Net decrease in net assets
from Series share
transactions.............. (4,642,810) (2,612,576)
-------------- -------------
Total decrease.................. (3,859,805) (2,293,872)
Net Assets
Beginning of year............... 36,897,800 39,191,672
-------------- -------------
End of year..................... $ 33,037,995 $ 36,897,800
-------------- -------------
-------------- -------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-90
<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 thirteen
series. The monies of each series are invested in separate, independently
managed portfolios. The Maryland Series (the 'Series') commenced investment
operations on January 22, 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.
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 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.
Securities Transactions and Investment Income: Securities transactions are
recorded on the trade date. Realized gains and losses on sales of securities are
calculated on the identified cost basis. Interest income is recorded on the
accrual basis. The Series amortizes premiums and original issue discount paid on
purchases of portfolio securities as adjustments to interest income. Expenses
are recorded on the accrual basis which may require the use of certain estimates
by management.
- --------------------------------------------------------------------------------
B-91
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Notes to Financial Statements MARYLAND 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.
Reclassification of Capital Accounts: The Fund accounts and reports for
distributions to shareholders in accordance with Statement of Position 93-2:
Determination, Disclosure, and Financial Statement Presentation of Income,
Capital Gain, and Return of Capital Distributions by Investment Companies. The
effect of applying this statement was to increase undistributed net investment
income by $19,888, decrease accumulated net realized gains by $41,305 and
increase paid-in capital in excess of par by $21,417. The current year effect of
applying the Statement of Position was due to the sale of securities purchased
with market discount. Net investment income, net realized gains and net assets
were not affected by this change.
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 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 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 Investments Fund Management
LLC ('PIFM'). Pursuant to this agreement, PIFM has responsibility for all
investment advisory services and supervises the subadviser's performance of such
services. PIFM 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. PIFM pays for the cost of the
subadviser's service, 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 PIFM is computed daily and payable monthly, at an annual
rate of .50 of 1% of the average daily net assets of the Series. Prior to
September 1, 1997, PIFM agreed to waive a portion (.05 of 1% of the Series'
average daily net assets) of its management fee, which amounted to $17,566
($0.006 per share; .05% of average net assets) for the year ended August 31,
1997. The Series is not required to reimburse PIFM for such waiver. Effective
September 1, 1997, PIFM eliminated its management fee waiver.
The Fund has a distribution agreement with Prudential Securities Incorporated
('PSI'), which acts as the distributor of the Class A, Class B and Class C
shares of the Fund. The Fund compensates 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 PSI.
The distribution fees are accrued daily and payable monthly.
Pursuant to the Class A, B and C Plans, the Fund compensates PSI 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, 1997.
PSI has advised the Series that it has received approximately $4,800 in
front-end sales charges resulting from sales of Class A shares during the year
ended August 31, 1997. From these fees, 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 year ended August 31, 1997, it received
approximately $30,500 and $100 in contingent deferred sales charges imposed upon
certain redemptions by Class B and Class C shareholders, respectively.
PIFM, PIC and PSI are indirect, wholly-owned subsidiaries of The Prudential
Insurance Company of America.
The Series, along with other affiliated registered investment companies (the
'Funds'), entered into a credit agreement (the 'Agreement') on December 31, 1996
with an unaffiliated lender. The maximum commitment under the Agreement is
$200,000,000. The Agreement expires on December 30, 1997. Interest on any such
borrowings outstanding will be
- --------------------------------------------------------------------------------
B-92
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Notes to Financial Statements MARYLAND SERIES
- --------------------------------------------------------------------------------
at market rates. The purpose of the Agreement is to serve as an alternative
source of funding for capital share redemptions. The Series has not borrowed any
amounts pursuant to the Agreement as of August 31, 1997. The Funds pay a
commitment fee at an annual rate of .055 of 1% on the unused portion of the
credit facility. The commitment fee is accrued and paid quarterly on a pro-rata
basis by the Funds.
- ------------------------------------------------------------
Note 3. Other Transactions With Affiliates
Prudential Mutual Fund Services LLC ('PMFS'), a wholly-owned subsidiary of PIFM,
serves as the Fund's transfer agent. During the year ended August 31, 1997, the
Series incurred fees of approximately $23,200 for the services of PMFS. As of
August 31, 1997, approximately $1,700 of such fees were due to PMFS. Transfer
agent fees and expenses in the Statement of Operations include certain
out-of-pocket expenses paid to non-affiliates.
- ------------------------------------------------------------
Note 4. Portfolio Securities
Purchases and sales of portfolio securities of the Series, excluding short-term
investments, for the year ended August 31, 1997 were $10,307,748 and
$15,075,696, respectively.
The cost basis of investments for federal income tax purposes at August 31, 1997
was substantially the same as for financial reporting purposes and, accordingly
net unrealized appreciation of investments for federal income tax purposes was
$1,643,056 (gross unrealized appreciation--$1,657,700; gross unrealized
depreciation $14,644).
- ------------------------------------------------------------
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 years ended August 31,
1997 and August 31, 1996 were as follows:
<TABLE>
<CAPTION>
Class A Shares Amount
- ----------------------------------- ---------- ------------
<S> <C> <C>
Year ended August 31, 1997
Shares sold........................ 20,673 $ 224,724
Shares issued in reinvestment of
dividends........................ 69,189 749,136
Shares reacquired.................. (344,495) (3,737,905)
---------- ------------
Net decrease in shares outstanding
before conversion................ (254,633) (2,764,045)
Shares issued upon conversion from
Class B.......................... 236,576 2,564,070
---------- ------------
Net decrease in shares
outstanding...................... (18,057) $ (199,975)
---------- ------------
---------- ------------
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 B
- -----------------------------------
Year ended August 31, 1997:
Shares sold........................ 47,087 $ 508,644
Shares issued in reinvestment of
dividends........................ 53,118 575,850
Shares reacquired.................. (275,123) (2,982,939)
---------- ------------
Net decrease in shares outstanding
before conversion................ (174,918) (1,898,445)
Shares reacquired upon conversion
into Class A..................... (236,258) (2,564,070)
---------- ------------
Net decrease in shares
outstanding...................... (411,176) $ (4,462,515)
---------- ------------
---------- ------------
Year ended August 31, 1996:
Shares sold........................ 192,644 $ 2,088,999
Shares issued in reinvestment of
dividends and distributions...... 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)
---------- ------------
---------- ------------
</TABLE>
- --------------------------------------------------------------------------------
B-93
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Notes to Financial Statements MARYLAND SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class C Shares Amount
- ----------------------------------- ---------- ------------
<S> <C> <C>
Year ended August 31, 1997:
Shares sold........................ 3,134 $ 34,001
Shares issued in reinvestment of
dividends........................ 153 1,666
Shares reacquired.................. (1,479) (15,987)
---------- ------------
Net increase in shares
outstanding...................... 1,808 $ 19,680
---------- ------------
---------- ------------
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)
---------- ------------
---------- ------------
</TABLE>
- --------------------------------------------------------------------------------
B-94
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Financial Highlights MARYLAND SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A
------------------------------------------------------
Year Ended August 31,
------------------------------------------------------
1997 1996 1995 1994 1993
------- ------- ------- ------- ------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year.................. $ 10.74 $ 10.66 $ 10.66 $ 11.64 $11.11
------- ------- ------- ------- ------
Income from investment operations
Net investment income............................... .49(a) .51(a) .53(a) .57 .62
Net realized and unrealized gain (loss) on
investment transactions.......................... .39 .08 .10 (.77) .65
------- ------- ------- ------- ------
Total from investment operations................. .88 .59 .63 (.20) 1.27
------- ------- ------- ------- ------
Less distributions
Dividends from net investment income................ (.49) (.51) (.53) (.57) (.62)
Distributions paid in excess of net investment
income........................................... (.01) -- -- -- --
Distributions from net realized gains............... (.13) -- (.10) (.21) (.12)
------- ------- ------- ------- ------
Total distributions.............................. (.63) (.51) (.63) (.78) (.74)
------- ------- ------- ------- ------
Net asset value, end of year........................ $ 10.99 $ 10.74 $ 10.66 $ 10.66 $11.64
------- ------- ------- ------- ------
------- ------- ------- ------- ------
TOTAL RETURN(b):.................................... 8.38% 5.58% 6.32% (1.75)% 11.89%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)....................... $18,558 $18,339 $17,726 $ 2,709 $2,930
Average net assets (000)............................ $18,970 $18,484 $11,341 $ 2,877 $2,068
Ratios to average net assets:
Expenses, including distribution fees............ 1.12%(a) 1.10%(a) 1.30%(a) .95% .96%
Expenses, excluding distribution fees............ 1.02%(a) 1.00%(a) 1.20%(a) .85% .86%
Net investment income............................ 4.52%(a) 4.69%(a) 4.96%(a) 5.18% 5.51%
For Class A, B and C shares:
Portfolio turnover rate.......................... 30% 42% 49% 40% 41%
</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-95
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Financial Highlights MARYLAND SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class B
--------------------------------------------------------
Year Ended August 31,
--------------------------------------------------------
1997 1996 1995 1994 1993
-------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year.................. $ 10.75 $ 10.67 $ 10.67 $ 11.65 $ 11.12
-------- ------- ------- ------- -------
Income from investment operations
Net investment income............................... .45(a) .47(a) .49(a) .53 .58
Net realized and unrealized gain (loss) on
investment transactions.......................... .39 .08 .10 (.77) .65
-------- ------- ------- ------- -------
Total from investment operations................. .84 .55 .59 (.24) 1.23
-------- ------- ------- ------- -------
Less distributions
Dividends from net investment income................ (.45) (.47) (.49) (.53) (.58)
Distributions paid in excess of net investment
income........................................... (.01) -- -- -- --
Distributions from net realized gains............... (.13) -- (.10) (.21) (.12)
-------- ------- ------- ------- -------
Total distributions.............................. (.59) (.47) (.59) (.74) (.70)
-------- ------- ------- ------- -------
Net asset value, end of year........................ $ 11.00 $ 10.75 $ 10.67 $ 10.67 $ 11.65
-------- ------- ------- ------- -------
-------- ------- ------- ------- -------
TOTAL RETURN(b):.................................... 7.94% 5.16% 5.88% (2.13)% 11.43%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)....................... $ 14,412 $18,512 $21,414 $51,198 $57,598
Average net assets (000)............................ $ 16,113 $19,898 $33,497 $55,223 $53,780
Ratios to average net assets:
Expenses, including distribution fees............ 1.52%(a) 1.50%(a) 1.55%(a) 1.35% 1.36%
Expenses, excluding distribution fees............ 1.02%(a) 1.00%(a) 1.05%(a) .85% .86%
Net investment income............................ 4.12%(a) 4.30%(a) 4.84%(a) 4.77% 5.11%
</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-96
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Financial Highlights MARYLAND SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class C
--------------------------------------------------------
Year Ended August 31,
--------------------------------------------------------
1997 1996 1995
-------- ------------ ------------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year.................. $ 10.75 $10.67 $ 10.67
-------- ----- ------
Income from investment operations
Net investment income............................... .42(a) .44(a) .47(a)
Net realized and unrealized gain (loss) on
investment transactions.......................... .39 .08 .10
-------- ----- ------
Total from investment operations................. .81 .52 .57
-------- ----- ------
Less distributions
Dividends from net investment income................ (.42) (.44) (.47)
Distributions paid in excess of net investment
income........................................... (.01) -- --
Distributions from net realized gains............... (.13) -- (.10)
-------- ----- ------
Total distributions.............................. (.56) (.44) (.57)
-------- ----- ------
Net asset value, end of year........................ $ 11.00 $10.75 $ 10.67
-------- ----- ------
-------- ----- ------
TOTAL RETURN(c):.................................... 7.68% 4.90% 5.62%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)....................... $ 68 $ 47 $ 52
Average net assets (000)............................ $ 49 $ 43 $ 58
Ratios to average net assets:
Expenses, including distribution fees............ 1.77%(a) 1.75%(a) 1.82%(a)
Expenses, excluding distribution fees............ 1.02%(a) 1.00%(a) 1.07%(a)
Net investment income............................ 3.72%(a) 4.05%(a) 4.55%(a)
<CAPTION>
August 1,
1994(d)
through
August 31,
1994
----------
<S> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year.................. $ 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 paid in excess of net investment
income........................................... --
Distributions from net realized gains............... --
----------
Total distributions.............................. (.05)
----------
Net asset value, end of year........................ $ 10.67
----------
----------
TOTAL RETURN(c):.................................... .07%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)....................... $ 102
Average net assets (000)............................ $ 31
Ratios to average net assets:
Expenses, including distribution fees............ 2.21%(b)
Expenses, excluding distribution fees............ 1.47%(b)
Net investment income............................ 4.75%(b)
</TABLE>
- ---------------
(a) Net of management fee waiver.
(b) Annualized.
(c) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each year reported and includes reinvestment of dividends and
distributions. Total returns for periods of less than a full year are not
annualized.
(d) Commencement of offering of Class C shares.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-97
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Report of Independent Accountants MARYLAND SERIES
- --------------------------------------------------------------------------------
To the Shareholders and Board of Trustees of
Prudential Municipal Series Fund, Maryland Series
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Prudential Municipal Series Fund,
Maryland Series (the 'Fund', one of the portfolios constituting Prudential
Municipal Series Fund) at August 31, 1997, and the results of its operations,
the changes in its net assets and the financial highlights for the year then
ended, in conformity with generally accepted accounting principles. These
financial statements and financial highlights (hereafter referred to as
'financial statements') are the responsibility of the Fund's management; our
responsibility is to express an opinion on these financial statements based on
our audit. We conducted our audit of these financial statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audit, which included confirmation of securities at August
31, 1997 by correspondence with the custodian, provides a reasonable basis for
the opinion expressed above. The accompanying statement of changes in net assets
for the year ended August 31, 1996 and the financial highlights for each of the
four periods in the period ended August 31, 1996 were audited by other
independent accountants, whose opinion dated October 14, 1996 was unqualified.
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York
October 20, 1997
- --------------------------------------------------------------------------------
B-98
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Change of Auditors MARYLAND SERIES
- --------------------------------------------------------------------------------
Effective March 1, 1997, Deloitte & Touche LLP was terminated as the Fund's
auditors. For the year ended August 31, 1993 through the year ended August 31,
1996, Deloitte & Touche LLP expressed an unqualified opinion on the Series'
financial statements. There were no disagreements between Fund management and
Deloitte & Touche LLP prior to their termination. The Board of Trustees approved
the termination of Deloitte & Touche LLP and the appointment of Price Waterhouse
LLP as the Fund's independent accountants.
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 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, Maryland 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-100
<PAGE>
Portfolio of Investments PRUDENTIAL MUNICIPAL SERIES FUND
as of August 31, 1997 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--97.9%
Attleboro Massachusetts, Gen. Oblig., A.M.B.A.C. Aaa 5.125% 12/01/15 $ 1,000(e) $ 971,520
Boston Massachusetts Ind. Dev. Fin. Auth., Swr. Fac. Rev.,
Harbor Elec. Energy Co. Proj., A.M.T. Baa1 7.375 5/15/15 1,500 1,630,530
Boston Massachusetts, Gen. Oblig., Ser. A, F.G.I.C. Aaa 5.00 11/01/13 1,000 971,840
Brockton Massachusetts, Gen. Oblig. A-(c) 6.125 6/15/18 1,030 1,072,910
Holyoke Massachusetts, Gen. Oblig., School Proj., M.B.I.A. Aaa 8.10 6/15/05 700(f) 826,392
Lowell Massachusetts, Gen. Oblig. Aaa 7.625 2/15/10 750(f) 848,857
Lynn Mass. Wtr. & Swr. Comn., Gen. Rev., Ser. A, M.B.I.A. Aaa 7.25 12/01/10 2,100(f)(e) 2,326,779
Mass. Bay Trans. Auth., Ser. C A1 5.00 3/01/24 1,250 1,163,337
Mass. St. Gen. Oblig.,
Ser. A Aaa 5.75 8/01/10 2,000 2,143,400
Ser. A, A.M.B.A.C. Aaa 5.00 7/01/12 1,000 988,590
Ser. C, F.G.I.C. Aaa 6.00 8/01/09 1,500 1,646,160
Mass. St. Hlth. & Edl. Facs. Auth. Rev.,
Beth Israel Hospital, A.M.B.A.C. Aaa 8.471(d) 7/01/25 1,500(e) 1,608,750
Dana Farber Cancer Proj., Ser. G-1 A1 6.25 12/01/22 625 657,300
Faulkner Hospital, Ser. C Baa1 6.00 7/01/23 1,500 1,508,610
Holyoke Hospital, Ser. B Baa3 6.50 7/01/15 1,250 1,281,925
Jordan Hospital, Ser. C A-(c) 6.875 10/01/22 1,350 1,451,817
Med. Academic & Scientific A A-(c) 6.625 1/01/15 1,000 1,079,890
Newton-Wellesley Hospital, Ser. E, M.B.I.A. Aaa 5.875 7/01/15 1,000 1,037,350
Valley Regional Hlth. Sys. AAA(c) 7.00 7/01/10 825 977,287
Valley Regional Hlth. Sys., Ser. B Aaa 8.00 7/01/18 1,000(f) 1,116,670
Winchester Hospital, Ser. D AAA(c) 5.75 7/01/24 1,000 1,013,040
Mass. St. Hsg. Fin. Agcy. Hsg. Rev., Sngl. Fam. Mtge., Ser.
6 Aa 8.10 12/01/14 1,755 1,806,860
Mass. St. Ind. Fin. Agcy. Rev.,
Brooks School A3 5.95 7/01/23 640 649,946
Cape Cod Hlth. Sys. Aaa 8.50 11/15/20 2,000(f)(e) 2,285,740
Merrimack College, M.B.I.A. Aaa 5.00 7/01/27 500 464,205
Phillips Academy Aa1 5.375 9/01/23 1,000(e) 978,750
Worcester Polytech. Inst., M.B.I.A. Aaa 5.125 9/01/27 1,000 948,010
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 1,442,100
Mass. St. Port Auth. Rev.,
Ser. B, A.M.T. Aa 5.00 7/01/18 1,000 933,660
Bosfuel Proj., A.M.T. Aaa 5.50 7/01/18 500 491,440
Mass. St. Water Poll. Abatement Trust Rev.,
Ser. 3 Aaa 5.625 2/01/16 1,000 1,027,530
Ser. A Aa 6.00 8/01/05 1,000 1,081,690
Ser. A Aa 6.375 2/01/15 1,000 1,079,500
Mass. St. Water Res. Auth. Rev., Ser. B, M.B.I.A. Aaa 6.25 12/01/11 1,000 1,124,070
Palmer Massachusetts, Gen. Oblig., Ser. F, A.M.B.A.C. Aaa 7.30 3/01/10 500(f) 545,435
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-101
<PAGE>
Portfolio of Investments PRUDENTIAL MUNICIPAL SERIES FUND
as of August 31, 1997 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>
- ------------------------------------------------------------------------------------------------------------------------------
Plymouth County Corr. Facs. Proj., Cert. of Part., Ser. A A-(c) 7.00% 4/01/22 $ 500 $ 557,695
Puerto Rico Commonwealth,
Aqueduct & Swr. Auth. Rev., M.B.I.A. Aaa 6.00 7/01/07 1,000 1,098,920
Gen. Oblig., A.M.B.A.C. Aaa 7.00 7/01/10 1,000 1,196,160
Puerto Rico Electric Pwr. Auth. Rev., Ser. T Baa1 6.375 7/01/24 1,000 1,088,140
Quabbin Mass. Reg. School Dist., Jr.- Sr. High Sch. Proj.,
M.B.I.A. Aaa 5.50 6/15/06 1,045 1,099,194
-----------
Total long-term investments (cost $42,696,842) 46,221,999
-----------
SHORT-TERM INVESTMENTS--1.3%
Mass. St. Hlth. & Edl. Facs. Auth. Rev.,
Cap. Asset Prog., Ser. 85B, F.R.D.D., M.B.I.A. VMIG1 3.70 9/02/97 100 100,000
Cap. Asset Prog., Ser. 85C, F.R.D.D., M.B.I.A. VMIG1 3.70 9/02/97 500 500,000
-----------
Total short-term investments (cost $600,000) 600,000
-----------
Expiration
OUTSTANDING CALL OPTION PURCHASED Date Contracts(g)
---------- ---------
U. S. Treasury Bond Futures, @ $118.00
(cost $30,262) NR -- 11/15/97 30 8,438
Total Investments--99.2%
(cost $43,327,104; Note 4) 46,830,437
Other assets in excess of liabilities--0.8% 384,874
-----------
Net Assets--100% $47,215,311
-----------
-----------
</TABLE>
- ---------------
(a) The following abbreviations are used in portfolio descriptions:
A.M.B.A.C.--American Municipal Bond Assurance Corporation.
A.M.T.--Alternative Minimum Tax.
F.G.I.C.--Financial Guaranty Insurance Company.
F.R.D.D.--Floating Rate (Daily) Demand Note (b).
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 period end.
(e) Securities segregated as collateral for options on futures.
(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-102
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Statement of Assets and Liabilities MASSACHUSETTS SERIES
- --------------------------------------------------------------------------------
<TABLE>
Assets August 31, 1997
<S> <C>
Investments, at value (cost $43,327,104).................................................................. $46,830,437
Cash...................................................................................................... 37,931
Interest receivable....................................................................................... 569,955
Receivable for investments sold........................................................................... 494,927
Other assets.............................................................................................. 1,293
Receivable for Series shares sold......................................................................... 277
---------------
Total assets........................................................................................... 47,934,820
---------------
Liabilities
Payable for Series shares reacquired...................................................................... 562,099
Accrued expenses.......................................................................................... 88,985
Dividends payable......................................................................................... 36,352
Management fee payable.................................................................................... 18,427
Distribution fee payable.................................................................................. 10,379
Deferred trustee's fees................................................................................... 3,267
---------------
Total liabilities...................................................................................... 719,509
---------------
Net Assets................................................................................................ $47,215,311
---------------
---------------
Net assets were comprised of:
Shares of beneficial interest, at par.................................................................. $ 40,411
Paid-in capital in excess of par....................................................................... 43,268,178
---------------
43,308,589
Accumulated net realized gain on investments........................................................... 403,389
Net unrealized appreciation on investments............................................................. 3,503,333
---------------
Net assets, August 31, 1997............................................................................... $47,215,311
---------------
---------------
Class A:
Net asset value and redemption price per share
($28,889,701 / 2,472,094 shares of beneficial interest issued and outstanding)...................... $11.69
Maximum sales charge (3% of offering price)............................................................ .36
---------------
Maximum offering price to public....................................................................... $12.05
---------------
---------------
Class B:
Net asset value, offering price and redemption price per share
($18,247,250 / 1,562,305 shares of beneficial interest issued and outstanding)...................... $11.68
---------------
---------------
Class C:
Net asset value, offering price and redemption price per share
($78,156 / 6,692 shares of beneficial interest issued and outstanding).............................. $11.68
---------------
---------------
Class Z:
Net asset value, offering price and redemption price per share
($204.31 / 17,485 shares of beneficial interest issued and outstanding)............................. $11.68
---------------
---------------
</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, 1997
<S> <C>
Income
Interest................................... $ 2,965,145
---------------
Expenses
Management fee............................. 247,224
Distribution fee--Class A.................. 29,096
Distribution fee--Class B.................. 101,504
Distribution fee--Class C.................. 358
Custodian's fees and expenses.............. 73,000
Report to shareholders..................... 50,000
Registration fees.......................... 39,000
Transfer agent's fees and expenses......... 34,000
Audit fees................................. 10,000
Legal fees and expenses.................... 9,000
Trustees' fees and expenses................ 4,000
Miscellaneous.............................. 3,968
---------------
Total expenses.......................... 601,150
Less: Management fee waiver (Note 2)....... (24,722)
Custodian fee credit.................... (1,144)
---------------
Net expenses............................ 575,284
---------------
Net investment income......................... 2,389,861
---------------
Realized and Unrealized
Gain (Loss) on Investments
Net realized gain (loss) on:
Investment transactions.................... 819,926
Financial futures transactions............. (203,630)
---------------
616,296
---------------
Net change in unrealized appreciation (depreciation) on:
Investments................................ 767,106
---------------
Net gain on investments....................... 1,383,402
---------------
Net Increase in Net Assets
Resulting from Operations..................... $ 3,773,263
---------------
---------------
</TABLE>
PRUDENTIAL MUNICIPAL SERIES FUND
MASSACHUSETTS SERIES
Statement of Changes in Net Assets
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Increase (Decrease) Year Ended August 31,
in Net Assets 1997 1996
<S> <C> <C>
Operations
Net investment income.......... $ 2,389,861 $ 2,623,076
Net realized gain on investment
transactions................ 616,296 1,014,811
Net change in unrealized
appreciation/depreciation of
investments................. 767,106 (1,098,536)
-------------- ------------
Net increase in net assets
resulting from operations... 3,773,263 2,539,351
-------------- ------------
Dividends and distributions (Note
1):
Dividends from net investment
income
Class A..................... (1,453,832) (1,420,826)
Class B..................... (933,942) (1,200,467)
Class C..................... (2,079) (1,783)
Class Z..................... (8) --
-------------- ------------
(2,389,861) (2,623,076)
-------------- ------------
Distributions from net realized gains
Class A..................... (438,140) (162,429)
Class B..................... (318,452) (151,088)
Class C..................... (708) (242)
Class Z..................... (3) --
-------------- ------------
(757,303) (313,759)
-------------- ------------
Series share transactions (net of
share conversions) (Note 5):
Net proceeds from shares
sold........................ 1,727,524 2,218,216
Net asset value of shares
issued in reinvestment of
dividends................... 1,848,518 1,723,072
Cost of shares reacquired...... (7,848,716) (8,587,851)
-------------- ------------
Net decrease in net assets from
Series share transactions... (4,272,674) (4,646,563)
-------------- ------------
Total decrease.................... (3,646,575) (5,044,047)
Net Assets
Beginning of year................. 50,861,886 55,905,933
-------------- ------------
End of year....................... $ 47,215,311 $ 50,861,886
-------------- ------------
-------------- ------------
</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 thirteen
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 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.
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
- --------------------------------------------------------------------------------
B-105
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Notes to Financial Statements MASSACHUSETTS SERIES
- --------------------------------------------------------------------------------
upon the relative proportion of net assets of each class at the beginning of the
day.
Reclassification of Capital Accounts: The Fund accounts and reports for
distributions to shareholders in accordance with Statement of Position 93-2:
Determination, Disclosure, and Financial Statement Presentation of Income,
Capital Gain, and Return of Capital Distributions by Investment Companies. The
effect of applying this statement was to decrease accumulated realized gains and
increase paid-in capital in excess of par by $27,121. The current year effect of
applying the Statement of Position was due to the sale of securities purchased
with market discount. Net investment income, net realized gains and net assets
were not affected by this change.
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 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 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 Investments Fund Management
LLC ('PIFM'). Pursuant to this agreement, PIFM has responsibility for all
investment advisory services and supervises the subadviser's performance of such
services. PIFM 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. PIFM 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 PIFM is computed daily and payable monthly, at an annual
rate of .50 of 1% of the average daily net assets of the Series. Prior to
September 1, 1997, PIFM agreed to waive a portion (.05 of 1% of the Series'
average daily net assets) of its management fee, which amounted to $24,722
($0.01 per share .05% of average net assets) for the year ended August 31, 1997.
The Series is not required to reimburse PIFM for such waiver. Effective
September 1, 1997, PIFM eliminated its management fee waiver.
The Fund has a distribution agreement with Prudential Securities Incorporated
('PSI'), which acts as the distributor of the Class A, Class B, Class C and
Class Z shares of the Fund. The Fund compensates 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 PSI. The distribution fees are accrued daily and payable monthly. No
distribution or service fees are paid to PSI as distributor for the Class Z
shares of the Fund.
Pursuant to the Class A, B and C Plans, the Fund compensates PSI 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, 1997.
PSI has advised the Series that it has received approximately $3,300 in
front-end sales charges resulting from sales of Class A shares for the year
ended August 31, 1997. From these fees, PSI paid such sales charges to
affiliated broker-dealers, which in turn paid commissions to salespersons and
incurred other distribution costs.
PSI advised the Series that for the year ended August 31, 1997, it received
approximately $35,038 in contingent deferred sales charges imposed upon certain
redemptions by Class B shareholders.
PSI, PIFM and PIC are indirect, wholly-owned subsidiaries of The Prudential
Insurance Company of America.
The Series, along with other affiliated registered investment companies (the
'Funds'), entered into a credit agreement (the 'Agreement') on December 31, 1996
with an unaffiliated lender. The maximum commitment under the Agreement is
$200,000,000. The Agreement expires on December 30, 1997. Interest on any such
borrowings outstanding will be at market rates. The purpose of the Agreement is
to serve as an alternative source of funding for capital share redemptions. The
Series has not borrowed any amounts pursuant to the Agreement as of August 31,
1997.
- --------------------------------------------------------------------------------
B-106
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Notes to Financial Statements MASSACHUSETTS SERIES
- --------------------------------------------------------------------------------
The Funds pay a commitment fee at an annual rate of .055 of 1% on the unused
portion of the credit facility. The commitment fee is accrued and paid quarterly
on a pro-rata basis by the Funds.
- ------------------------------------------------------------
Note 3. Other Transactions With Affiliates
Prudential Mutual Fund Services LLC ('PMFS'), a wholly-owned subsidiary of PIFM,
serves as the Fund's transfer agent and during the year ended August 31, 1997,
the Series incurred fees of approximately $24,000 for the services of PMFS. As
of August 31, 1997, approximately $2,000 of such fees were due to PMFS. Transfer
agent fees and expenses in the Statement of Operations include certain
out-of-pocket expenses paid to non-affiliates.
- ------------------------------------------------------------
Note 4. Portfolio Securities
Purchases and sales of portfolio securities of the Series, excluding short-term
investments, for the year ended August 31, 1997, were $10,240,093 and
$15,095,534, respectively.
The cost basis of investments for federal income tax purposes at August 31, 1997
was $43,414,109 and accordingly, net realized appreciation of investments for
federal income tax purposes was $3,416,328 (gross unrealized
appreciation--$3,443,334, gross unrealized depreciation--$27,006).
- ------------------------------------------------------------
Note 5. Capital
The Series offers Class A, Class B, Class C and Class Z 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.
Effective December 6, 1996 the Series commenced offering Class Z shares. Class Z
shares are not subject to any sales or redemption charge and are offered
exclusively for sale to a limited group of investors.
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,
1997 and August 31, 1996 were as follows:
<TABLE>
<CAPTION>
Class A Shares Amount
- ------------------------------------- ---------- -----------
<S> <C> <C>
Year ended August 31, 1997:
Shares sold.......................... 29,208 $ 340,810
Shares issued in reinvestment of
dividends and distributions........ 99,365 1,152,062
Shares reacquired.................... (366,281) (4,252,429)
---------- -----------
Net decrease in shares outstanding
before conversion.................. (237,708) (2,759,557)
Shares issued upon conversion from
Class B............................ 277,806 3,225,709
---------- -----------
Net increase in shares outstanding... 40,098 $ 466,152
---------- -----------
---------- -----------
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
---------- -----------
---------- -----------
<CAPTION>
Class B
- -------------------------------------
Year ended August 31, 1997:
Shares sold.......................... 115,658 $ 1,343,826
Shares issued in reinvestment of
dividends and distributions........ 59,887 693,710
Shares reacquired.................... (309,225) (3,583,222)
---------- -----------
Net decrease in shares outstanding
before conversion.................. (133,680) (1,545,686)
Shares issued upon conversion from
Class B............................ (277,895) (3,225,709)
---------- -----------
Net decrease in shares outstanding... (411,575) $(4,771,395)
---------- -----------
---------- -----------
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)
---------- -----------
---------- -----------
</TABLE>
- --------------------------------------------------------------------------------
B-107
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Notes to Financial Statements MASSACHUSETTS SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class C Shares Amount
- ------------------------------------- ---------- -----------
<S> <C> <C>
Year ended August 31, 1997:
Shares sold.......................... 3,642 $ 42,688
Shares issued in reinvestment of
dividends and distributions........ 236 2,740
Shares reacquired.................... (1,127) (13,065)
---------- -----------
Net increase in shares outstanding... 2,751 $ 32,363
---------- -----------
---------- -----------
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
---------- -----------
---------- -----------
<CAPTION>
Class Z
- -------------------------------------
December 6, 1996(a) through
year ended August 31, 1997:
Shares sold.......................... 17 $ 200
Shares issued in reinvestment of
distributions...................... 1 6
Shares reacquired.................... -- --
---------- -----------
Net increase in shares outstanding... 18 $ 206
---------- -----------
---------- -----------
</TABLE>
- ------------
(a) Commencement of offering of Class Z shares.
- --------------------------------------------------------------------------------
B-108
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Financial Highlights MASSACHUSETTS SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A
-----------------------------------------------------
Year Ended August 31,
-----------------------------------------------------
1997 1996 1995 1994 1993
------- ------- ------- ------ ------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year.................. $ 11.54 $ 11.63 $ 11.37 $12.17 $11.50
------- ------- ------- ------ ------
Income from investment operations
Net investment income............................... .58(a) .59(a) .65(a) .67 .68
Net realized and unrealized gain (loss) on
investment transactions.......................... .33 (.02) .26 (.73) .67
------- ------- ------- ------ ------
Total from investment operations................. .91 .57 .91 (.06) 1.35
------- ------- ------- ------ ------
Less distributions
Dividends from net investment income................ (.58) (.59) (.65) (.67) (.68)
Distributions from net realized gains............... (.18) (.07) -- (.07) --
------- ------- ------- ------ ------
Total distributions.............................. (.76) (.66) (.65) (.74) (.68)
------- ------- ------- ------ ------
Net asset value, end of year........................ $ 11.69 $ 11.54 $ 11.63 $11.37 $12.17
------- ------- ------- ------ ------
------- ------- ------- ------ ------
TOTAL RETURN(b):.................................... 8.10% 4.93% 8.33% (.58)% 12.10%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)....................... $28,890 $28,058 $27,525 $2,293 $2,325
Average net assets (000)............................ $29,096 $28,091 $15,837 $2,578 $1,336
Ratios to average net assets:
Expenses, including distribution fees............ 1.00%(a) 1.06%(a) .97%(a) .87% .95%
Expenses, excluding distribution fees............ .90%(a) .96%(a) .87%(a) .77% .85%
Net investment income............................ 5.00%(a) 5.06%(a) 5.59%(a) 5.60% 5.79%
For Class A, B, C and Z shares:
Portfolio turnover rate.......................... 22% 18% 36% 33% 56%
</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
-------------------------------------------------------
Year Ended August 31,
-------------------------------------------------------
1997 1996 1995 1994 1993
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year.................. $ 11.53 $ 11.62 $ 11.36 $ 12.17 $ 11.49
------- ------- ------- ------- -------
Income from investment operations
Net investment income............................... .53(a) .54(a) .60(a) .61 .63
Net realized and unrealized gain (loss) on
investment transactions.......................... .33 (.02) .26 (.74) .68
------- ------- ------- ------- -------
Total from investment operations................. .86 .52 .86 (.13) 1.31
------- ------- ------- ------- -------
Less distributions
Dividends from net investment income................ (.53) (.54) (.60) (.61) (.63)
Distributions from net realized gains............... (.18) (.07) -- (.07) --
------- ------- ------- ------- -------
Total distributions.............................. (.71) (.61) (.60) (.68) (.63)
------- ------- ------- ------- -------
Net asset value, end of year........................ $ 11.68 $ 11.53 $ 11.62 $ 11.36 $ 12.17
------- ------- ------- ------- -------
------- ------- ------- ------- -------
TOTAL RETURN(b):.................................... 7.67% 4.51% 7.90% (1.15)% 11.77%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)....................... $18,247 $22,758 $28,367 $55,420 $61,121
Average net assets (000)............................ $20,301 $25,751 $39,455 $59,544 $55,965
Ratios to average net assets:
Expenses, including distribution fees............ 1.40%(a) 1.46%(a) 1.34%(a) 1.27% 1.35%
Expenses, excluding distribution fees............ .90%(a) .96%(a) .84%(a) .77% .85%
Net investment income............................ 4.60%(a) 4.66%(a) 5.37%(a) 5.20% 5.39%
</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-110
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Financial Highlights MASSACHUSETTS SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class C Class Z
--------------------------------------------------- ------------
August 1, December 6,
1994(d) 1996(e)
Year Ended August 31, through through
------------------------------------ August 31, August 31,
1997 1996 1995 1994 1997
------ ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year.................. $11.53 $11.62 $11.36 $11.41 $11.80
------ ----- ----- ----- -----
Income from investment operations
Net investment income............................... .50(a) .51(a) .57(a) .04 .47(a)
Net realized and unrealized gain (loss) on
investment transactions.......................... .33 (.02) .26 (.05) .06
------ ----- ----- ----- -----
Total from investment operations................. .83 .49 .83 (.01) .53
------ ----- ----- ----- -----
Less distributions
Dividends from net investment income................ (.50) (.51) (.57) (.04) (.47)
Distributions from net realized gains............... (.18) (.07) -- -- (.18)
------ ----- ----- ----- -----
Total distributions.............................. (.68) (.58) (.57) (.04) (.65)
------ ----- ----- ----- -----
Net asset value, end of year........................ $11.68 $11.53 $11.62 $11.36 $11.68
------ ----- ----- ----- -----
------ ----- ----- ----- -----
TOTAL RETURN(b):.................................... 7.41% 4.26% 7.60% (0.27)% 4.54%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)....................... $ 78 $ 45 $ 14 $ 216(f) $ 204(f)
Average net assets (000)............................ $ 48 $ 41 $ 14 $ 15(f) $ 200(f)
Ratios to average net assets:
Expenses, including distribution fees............ 1.65%(a) 1.72%(a) 1.60%(a) 1.57%(c) .90%(ac)
Expenses, excluding distribution fees............ .90%(a) .97%(a) .85%(a) .82%(c) .90%(ac)
Net investment income............................ 4.36%(a) 4.39%(a) 5.07%(a) 5.06%(c) 5.55%(ac)
</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) Commencement of offering of Class Z shares.
(f) Amounts are actual and not rounded to the nearest thousand.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-111
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Report of Independent Accountants MASSACHUSETTS SERIES
- --------------------------------------------------------------------------------
To the Shareholders and Board of Trustees of
Prudential Municipal Series Fund, Massachusetts Series
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Prudential Municipal Series Fund,
Massachusetts Series (the 'Fund', one of the portfolios constituting Prudential
Municipal Series Fund) at August 31, 1997, and the results of its operations,
the changes in its net assets and the financial highlights for the year then
ended, in conformity with generally accepted accounting principles. These
financial statements and financial highlights (hereafter referred to as
'financial statements') are the responsibility of the Fund's management; our
responsibility is to express an opinion on these financial statements based on
our audit. We conducted our audit of these financial statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audit, which included confirmation of securities at August
31, 1997 by correspondence with the custodian and broker, provides a reasonable
basis for the opinion expressed above. The accompanying statement of changes in
net assets for the year ended August 31, 1996, and the financial highlights for
each of the four periods in the period ended August 31, 1996 were audited by
other independent accountants, whose opinion dated October 14, 1996 was
unqualified.
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York
October 20, 1997
- --------------------------------------------------------------------------------
B-112
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Change of Auditors MASSACHUSETTS SERIES
- --------------------------------------------------------------------------------
Effective March 1, 1997, Deloitte & Touche LLP was terminated as the Fund's
auditors. For the year ended August 31, 1993 through the year ended August 31,
1996, Deloitte & Touche LLP expressed an unqualified opinion on the Series'
financial statements. There were no disagreements between Fund management and
Deloitte & Touche LLP prior to their termination. The Board of Trustees approved
the termination of Deloitte & Touche LLP and the appointment of Price Waterhouse
LLP as the Fund's independent accountants.
B-113
<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 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-114
<PAGE>
Portfolio of Investments PRUDENTIAL MUNICIPAL SERIES FUND
as of August 31, 1997 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., Gen. Rev., Ser. 94A, F.R.W.D. VMIG1 3.15% 9/04/97 $ 2,600 $ 2,600,000
City of Haverhill, Gen. Oblig., F.G.I.C. Aaa 4.50 6/15/98 1,110 1,115,484
Holyoke Poll. Ctrl. Rev., Ser. 88, F.R.W.D. A-1+(c) 3.10 9/03/97 1,700 1,700,000
Mansfield, Gen. Oblig., Ser. 97, F.G.I.C. NR 5.50 8/15/98 700 710,694
Mass. Bay Trans. Auth., Ser. 97A MIG2 4.25 2/27/98 1,000 1,001,051
Mass. Comnwlth., Ded. Inc. Tax, F.R.D.D.
Ser. 90B VMIG1 3.65 9/02/97 200 200,000
Ser. 90E VMIG1 3.65 9/02/97 100 100,000
Mass. Mun. Whsl. Elec. Co. Pwr. Supply Sys. Rev., Ser. 94C,
F.R.W.D. VMIG1 3.20 9/03/97 2,500 2,500,000
Mass. St. Hlth. & Edl. Facs. Auth. Rev.,
Boston Univ., Ser. 85H, T.E.C.P. VMIG1 3.80 1/21/98 1,500 1,500,000
Cap. Asset Prog., Ser. 85B, F.R.D.D., M.B.I.A. VMIG1 3.70 9/02/97 200 200,000
Cap. Asset Prog., Ser. 85C, F.R.D.D., M.B.I.A. VMIG1 3.70 9/02/97 800 800,000
Harvard Univ., Ser. 89L, T.E.C.P. VMIG1 3.60 10/24/97 1,000 1,000,000
Harvard Univ., Ser. 89L, T.E.C.P. VMIG1 3.70 11/21/97 1,000 1,000,000
Partners Hlth. Care, F.R.W.D., F.S.A. VMIG1 3.20 9/03/97 2,000 2,000,000
William College, Ser. E, F.R.W.D. A-1+(c) 3.10 9/03/97 1,465 1,465,000
Mass. St. Hsg. Fin. Agcy. Rev.,
Long Option Period, Ser. 11, A.N.N.O.T., A.M.B.A.C., A.M.T. Aaa 3.95 9/01/98 1,220 1,220,000
Multi-family Rev., Harbor Point, F.R.W.D. A-1+(c) 3.25 9/03/97 1,000 1,000,000
Mass. St. Ind. Fin. Agcy. Ind. Rev.,
Edgewood Retirement Ctr., Ser. 95C, F.R.W.D. VMIG1 3.25 9/03/97 640 640,000
Goddard House, Ser. 95, F.R.W.D. A-1(c) 3.15 9/04/97 2,000 2,000,000
Governor Dummer Academy, Ser. 96, F.R.W.D. A-1+(c) 3.20 9/04/97 1,500 1,500,000
Hazen Paper Co., Ser. 95, F.R.W.D.S., A.M.T.
(cost $1,800,000; purchased 11/26/96) A-1(c) 3.40 9/04/97 1,800 (f) 1,800,000
Heritage At Dartmouth, Ser. 96, F.R.W.D., A.M.T. VMIG1 3.20 9/04/97 1,500 1,500,000
Heritage At Hingham, Ser. 97, F.R.W.D. VMIG1 3.20 9/04/97 1,500 1,500,000
Prevention Cruelty, Ser. 97, F.R.W.D. A-1(c) 3.25 9/04/97 1,000 1,000,000
Ocean Spray Cranberry Inc. Proj., Ser. 84, A.N.N.O.T. A+(c) 3.85 10/15/97 1,100 1,100,000
Ogden Haverhill Proj., Ser. 86B, F.R.W.D., A.M.T. VMIG1 3.15 9/03/97 2,000 2,000,000
Riverdale Mills Corp., Ser. 95, F.R.W.D.S., A.M.T.
(cost $1,200,000; purchased 6/23/95) A-1(c) 3.40 9/04/97 1,200 (f) 1,200,000
United Med. Corp. Issue, Ser. 92, F.R.W.D., A.M.T. P-1 3.20 9/03/97 700 700,000
Mass. St. Ind. Fin. Agcy. Poll. Ctrl.,
New England Pwr. Co. Proj., Ser. 92, F.R.D.D. VMIG1 3.65 9/02/97 1,600 1,600,000
New England Pwr. Co. Proj., Ser. 93A, T.E.C.P. VMIG1 3.80 10/15/97 1,000 1,000,000
Mass. St. Ind. Fin. Auth. Hlth. Care Fac. Rev., Jewish Geriatic
Svcs. Inc., Ser 97A, F.R.W.D. A-1(c) 3.40 9/03/97 2,000 2,000,000
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-115
<PAGE>
Portfolio of Investments PRUDENTIAL MUNICIPAL SERIES FUND
as of August 31, 1997 MASSACHUSETTS MONEY MARKET SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
Mass. St. Port. Auth.,
Ser. 96, T.E.C.P. P-1 3.80% 10/07/97 $ 2,000 $ 2,000,000
Multi Modal Rev. Ref., Ser. 95B, F.R.D.D., A.M.T. P-1 3.70 9/02/97 2,500 2,500,000
Mass. St. Wtr. Poll., Abatement Trust, Ser. 3 Aaa 4.50 2/01/98 1,000 1,002,690
Methuen, Gen. Oblig., Ser.97, B.A.N. VMIG1 4.25 12/18/97 1,500 1,502,144
North Andover, Gen. Oblig., F.G.I.C. Aaa 6.00 1/15/98 678 683,649
Puerto Rico Comnwlth., Aqueduct & Swr. Auth. Rev., Ser. A Aaa 7.875 7/01/98 1,000 (d) 1,052,255
Puerto Rico Ind. Med. & Environ. Poll. Ctrl. Fac. Fin. Auth.
Rev., Schering-Plough Corp., Ser. 83A, A.N.N.O.T. AAA(c) 3.75 12/01/97 2,000 2,000,000
Revere Hsg. Auth. Multi-family Mtge. Rev., Waters Edge Apts.
Proj.,
Ser. 91C, F.R.W.D., F.S.A. A1 3.65 9/05/97 1,990 1,990,000
Woburn Mass., Gen. Oblig., M.B.I.A. Aaa 6.00 2/15/98 560 565,839
-----------
Total Investments--99.1%
(cost $52,948,806; (e)) 52,948,806
Other assets in excess of liabilities--0.9% 491,715
-----------
Net Assets--100% $53,440,521
-----------
-----------
</TABLE>
- ---------------
(a) The following abbreviations are used in portfolio descriptions:
A.M.B.A.C.--American Municipal Bond Assurance Corporation.
A.M.T.--Alternative Minimum Tax.
A.O.T.--Annual Option Tender.
B.A.N.--Bond Anticipation Note.
F.G.I.C.--Financial Guaranty Insurance Company.
F.R.D.D.--Floating Rate (Daily) Demand Note (b).
F.R.W.D.--Floating Rate (Weekly) Demand Note (b).
F.R.W.D.S.--Floating Rate (Weekly) Demand Synthetic Notes (b).
F.S.A.--Financial Security Assurance.
M.B.I.A.--Municipal Bond Insurance Associations.
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.
(f) Indicates a restricted security: the aggregate cost of such securities is
$3,000,000. The aggregate value ($3,000,000) is approximately 5.6% of net
assets.
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-116
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Statement of Assets and Liabilities MASSACHUSETTS MONEY MARKET SERIES
- --------------------------------------------------------------------------------
<TABLE>
Assets August 31, 1997
<S> <C>
Investments, at amortized cost which approximates market value............................................ $ 52,948,806
Cash...................................................................................................... 53,065
Receivable for investments sold........................................................................... 1,400,288
Receivable for Series shares sold......................................................................... 497,615
Interest receivable....................................................................................... 264,710
Other assets.............................................................................................. 1,363
---------------
Total assets........................................................................................... 55,165,847
---------------
Liabilities
Payable for Series shares reacquired...................................................................... 1,626,107
Accrued expenses.......................................................................................... 59,887
Dividends payable......................................................................................... 26,873
Management fee payable.................................................................................... 5,814
Distribution fee payable.................................................................................. 3,378
Deferred trustee's fees................................................................................... 3,267
---------------
Total liabilities...................................................................................... 1,725,326
---------------
Net Assets................................................................................................ $ 53,440,521
---------------
---------------
Net assets were comprised of:
Shares of beneficial interest, at $.01 par value....................................................... $ 534,405
Paid-in capital in excess of par....................................................................... 52,906,116
---------------
Net assets, August 31, 1997............................................................................... $ 53,440,521
---------------
---------------
Net asset value, offering price and redemption price per share ($53,440,521 / 53,440,521 shares of
beneficial interest issued and outstanding; unlimited number of shares authorized)..................... $1.00
---------------
---------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-117
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
MASSACHUSETTS MONEY MARKET SERIES
Statement of Operations
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended
Net Investment Income August 31, 1997
<S> <C>
Income
Interest and discount earned............... $ 1,898,136
---------------
Expenses
Management fee............................. 265,392
Distribution fee........................... 66,348
Custodian's fees and expenses.............. 69,000
Reports to shareholders.................... 26,000
Transfer agent's fees and expenses......... 24,000
Registration fees.......................... 17,000
Audit fee.................................. 8,000
Trustees' fees and expenses................ 4,000
Legal fees and expenses.................... 4,000
Insurance expense.......................... 900
Miscellaneous.............................. 2,525
---------------
Total expenses.......................... 487,165
Less: Management fee waiver (Note 2)....... (199,044)
Custodian fee credit................... (1,731)
---------------
Net expenses............................ 286,390
---------------
Net investment income......................... 1,611,746
---------------
Net Increase in Net Assets
Resulting from Operations..................... $ 1,611,746
---------------
---------------
</TABLE>
PRUDENTIAL MUNICIPAL SERIES FUND
MASSACHUSETTS MONEY MARKET SERIES
Statement of Changes in Net Assets
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Increase (Decrease) Year Ended August 31,
in Net Assets 1997 1996
<S> <C> <C>
Operations
Net investment income........ $ 1,611,746 1,682,042
Net realized loss on
investment transactions... -- (130)
-------------- -------------
Net increase in net assets
resulting from
operations................ 1,611,746 1,681,912
-------------- -------------
Dividends and distributions
(Note 1)..................... (1,611,746) (1,681,912)
-------------- -------------
Series share transactions
(at $1 per share)
Net proceeds from shares
sold......................... 204,476,371 264,188,977
Net asset value of shares
issued in reinvestment of
dividends................. 1,572,134 1,637,636
Cost of shares reacquired.... (203,119,396) (272,137,014)
-------------- -------------
Net increase (decrease) in
net assets from Series
share transactions........ 2,929,109 (6,310,401)
-------------- -------------
Total increase (decrease)....... 2,929,109 (6,310,401)
Net Assets
Beginning of year............... 50,511,412 56,821,813
-------------- -------------
End of year..................... $ 53,440,521 $ 50,511,412
-------------- -------------
-------------- -------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-118
<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 thirteen
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.
The Series may hold up to 10% of its net assets in illiquid securities,
including those which are restricted as to disposition under securities law
('restricted securities'). Restricted securities held by the Fund at August 31,
1997 do not include rights with regard to registration. Restricted securities
are valued pursuant to the valuation procedures noted above.
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.
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 Investments Fund Management
LLC ('PIFM'). Pursuant to this agreement, PIFM has responsibility for all
investment advisory services and supervises the subadviser's performance of such
services. PIFM 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. PIFM 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 PIFM is computed daily and payable monthly, at an annual
rate of .50 of 1% of the average daily net assets of the Series. Prior to
September 1, 1997, PIFM agreed to waive a portion (.375 of 1% of the Series'
average daily net assets) of its management fee amounted to $199,044 ($.004 per
share for the year ended August 31, 1997). The Series is not required to
reimburse PIFM for such waiver. Effective September 1, 1997, PIFM eliminated its
management fee waiver.
The Fund has a distribution agreement with Prudential Securities Incorporated
('PSI'), which acts as the distributor of the Fund. The Series reimburses 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 fees are accrued daily and payable monthly.
PSI, PIFM and PIC are indirect wholly-owned subsidiaries of The Prudential
Insurance Company of America.
- --------------------------------------------------------------------------------
B-119
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Notes to Financial Statements MASSACHUSETTS MONEY MARKET SERIES
- --------------------------------------------------------------------------------
Note 3. Other Transactions with Affiliates
Prudential Mutual Fund Services LLC ('PMFS'), a wholly-owned subsidiary of PIFM,
serves as the Fund's transfer agent. During the year ended August 31, 1997, the
Series incurred fees of approximately $21,800 for the services of PMFS. As of
August 31, 1997, approximately $1,700 of such fees were due to PMFS. Transfer
agent fees and expenses in the Statement of Operations include certain
out-of-pocket expenses paid to non-affiliates.
- --------------------------------------------------------------------------------
B-120
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Financial Highlights MASSACHUSETTS MONEY MARKET SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended August 31,
-------------------------------------------------------
1997 1996 1995 1994 1993
------- ------- ------- ------- -------
<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)........................ .03 .03 .03 .02 .02
Dividends and distributions to shareholders........................ (.03) (.03) (.03) (.02) (.02)
------- ------- ------- ------- -------
Net asset value, end of year....................................... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
------- ------- ------- ------- -------
------- ------- ------- ------- -------
TOTAL RETURN(b):................................................... 3.08% 3.12% 3.10% 1.89% 2.17%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)...................................... $53,441 $50,511 $56,822 $37,278 $36,608
Average net assets (000)........................................... $53,078 $54,689 $42,919 $42,427 $32,246
Ratios to average net assets:(a)
Expenses, including distribution fees........................... .54% .55% .63% .62% .37%
Expenses, excluding distribution fees........................... .42% .43% .50% .50% .24%
Net investment income........................................... 3.04% 3.08% 3.14% 1.86% 2.11%
</TABLE>
- ---------------
(a) Net of management fee waiver.
(b) Total return includes reinvestment of dividends and distributions.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-121
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Report of Independent Accountants MASSACHUSETTS MONEY MARKET SERIES
- --------------------------------------------------------------------------------
To the Shareholders and Board of Trustees of
Prudential Municipal Series Fund, Massachusetts Money Market Series
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Prudential Municipal Series Fund,
Massachusetts Money Market Series (the 'Fund', one of the portfolios
constituting Prudential Municipal Series Fund) at August 31, 1997, and the
results of its operations, the changes in its net assets and the financial
highlights for the year then ended, in conformity with generally accepted
accounting principles. These financial statements and financial highlights
(hereafter referred to as 'financial statements') are the responsibility of the
Fund's management; our responsibility is to express an opinion on these
financial statements based on our audit. We conducted our audit of these
financial statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit, which included
confirmation of securities at August 31, 1997 by correspondence with the
custodian, provides a reasonable basis for the opinion expressed above. The
accompanying statement of changes in net assets for the year ended August 31,
1996 and the financial highlights for each of the four periods in the period
ended August 31, 1996 were audited by other independent accountants, whose
opinion dated October 14, 1996 was unqualified.
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York
October 20, 1997
- --------------------------------------------------------------------------------
B-122
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Change of Auditors MASSACHUSETTS MONEY MARKET SERIES
- --------------------------------------------------------------------------------
Effective March 1, 1997, Deloitte & Touche LLP was terminated as the Fund's
auditors. For the year ended August 31, 1993 through August 31, 1996, Deloitte &
Touche LLP expressed an unqualified opinion on the Series financial statements.
There were no disagreements between Fund management and Deloitte & Touche LLP
prior to their termination. The Board of Trustees approved the termination of
Deloitte & Touche LLP and the appointment of Price Waterhouse LLP as the Fund's
independent accountants.
B-123
<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 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-124
<PAGE>
Portfolio of Investments PRUDENTIAL MUNICIPAL SERIES FUND
as of August 31, 1997 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--96.9%
- ------------------------------------------------------------------------------------------------------------------------------
Anchor Bay Sch. Dist., Gen. Oblig., M.B.I.A. Aaa 5.50% 5/01/26 $ 1,915 $ 1,903,893
Avondale Sch. Dist., A.M.B.A.C.,
Oakland Cnty., Gen. Oblig. Aaa 5.75 5/01/14 665 686,346
Oakland Cnty., Gen. Oblig. Aaa 5.80 5/01/15 525 541,816
Oakland Cnty., Gen. Oblig. Aaa 5.80 5/01/16 550 567,617
Brandon Sch. Dist. Gen. Oblig., F.G.I.C.,
Oakland & Lapeer Cnty. Aaa 5.70 5/01/12 1,155 1,196,765
Oakland & Lapeer Cnty. Aaa 5.875 5/01/26 1,310 1,347,348
Breitung Twnshp. Sch. Dist. Rev., Gen. Oblig., M.B.I.A. Aaa 6.30 5/01/15 250 270,060
Central Michigan Univ. Rev. A3 7.00 10/01/10 700 766,577
Detroit Econ. Dev. Corp., Res. Rec. Rev., Ser. 1991-A,
F.S.A., A.M.T. Aaa 6.875 5/01/09 1,000 1,084,480
Detroit Sewage Disp. Rev., Ser. 1993-A, F.G.I.C. Aaa 7.466 7/01/23 1,000 (d) 1,008,750
Detroit Wtr. Supply Sys. Rev., Ser. B, M.B.I.A. Aaa 5.55 7/01/12 1,000 1,043,180
Dickinson Cnty. Mem. Hosp. Sys. Rev. Ba1 8.00 11/01/14 1,000 1,111,420
East Detroit Sch. Dist. Rfdg., F.G.I.C. Aaa 6.625 5/01/07 1,600 1,806,512
Ferris St. College, Gen. Rev., A.M.B.A.C. Aaa 5.80 10/01/05 440 471,500
Flat Rock Cmty. Sch. Dist., Gen. Oblig., M.B.I.A. Aaa 5.25 5/01/18 1,090 1,057,812
Grand Rapids San. Swr. Sys. Impt. & Rev. A1 7.00 1/01/16 500 538,050
Guam Pwr. Auth. Rev., Ser. A BBB(c) 6.625 10/01/14 1,000 1,077,630
Holland Sch. Dist., Gen. Oblig., A.M.B.A.C. Aaa Zero 5/01/15 2,400 912,120
Huron Valley Sch. Dist., Gen. Oblig., F.G.I.C. Aaa Zero 5/01/10 3,500 (g) 1,806,000
Kalamazoo Econ. Dev. Corp. Rev., Friendship Village, Ltd.
Oblig. BBB(c) 6.125 5/15/17 1,000 1,020,850
Kent Hosp. Fac. Fin. Auth. Rev., Blodgette Mem. Med. Ctr.,
Ser. A A 7.25 7/01/05 500 529,815
Lanse Creuse Pub. Schs., Gen. Oblig., F.G.I.C. Aaa 5.25 5/01/16 1,500 1,465,005
Lincoln Park Sch. Dist.,
F.G.I.C. Aaa 7.00 5/01/20 1,500 1,718,655
F.G.I.C. Aaa 5.90 5/01/26 750 774,517
Michigan Higher Ed. Student Loan Auth. Rev., Ser. XIII-A,
M.B.I.A., A.M.T. Aaa 7.55 10/01/08 345 365,114
Michigan Pub. Pwr. Agcy. Rev., Belle River Proj. Ref., Ser.
A A1 5.00 1/01/19 1,000 930,460
Michigan St. Hosp. Fin. Auth. Rev.,
Bay Med. Ctr., Ser. A A3 8.25 7/01/12 2,000 2,223,200
Hosp. Genesys Hlth. Sys. Baa2 8.125 10/01/21 1,000 1,162,350
Hosp. Genesys Hlht. Sys. Baa2 7.50 10/01/27 500 556,615
Presbyterian Village NR 6.375 1/01/25 800 816,096
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-125
<PAGE>
Portfolio of Investments PRUDENTIAL MUNICIPAL SERIES FUND
as of August 31, 1997 MICHIGAN SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
Michigan St. Hsg. Dev. Auth. Rev.,
Multi-family Mtge. Insured Hsg., Ser. A, A.M.T. A+(c) 7.15 % 4/01/10 $ 685 $ 727,114
Multi-family Mtge. Insured Hsg., Ser. A, A.M.T. A+(c) 7.70 4/01/23 500 537,310
Sngl. Fam. Mtge., Ser. A AA+(c) 7.70 12/01/16 370 377,947
Michigan St. Strategic Fund Ltd. Obligated Rev.,
Waste Mgmt. Inc. Proj., A.M.T. A1 6.625 12/01/12 2,000 2,175,360
Michigan St. Trunk Line Hwy., A.M.B.A.C.,
Ser. A Aaa Zero 10/01/05 2,600 1,758,952
Ser. A Aaa Zero 10/01/06 1,250 802,200
Michigan St. Underground Storage Tank, Fin. Assurance Auth.
Rev., A.M.B.A.C. Aaa 6.00 5/01/06 2,000 (g) 2,174,380
Michigan St. Univ., Gen. Rev., Ser. A, A.M.B.A.C. Aaa 5.125 2/15/16 1,000 (g) 965,830
Monroe Cnty. Poll. Ctrl. Rev., Detroit Edison Co. Proj. 1,
F.G.I.C., A.M.T. Aaa 7.65 9/01/20 2,000 (g) 2,191,740
Mt. Pleasant Wtr. Rev., Wtr. & Swr.,
M.B.I.A Aaa 5.00 2/01/22 520 485,929
M.B.I.A Aaa 4.00 2/01/23 550 432,685
M.B.I.A Aaa 4.00 2/01/24 585 458,026
Oak Park, A.M.B.A.C.,
Gen. Oblig. Aaa 7.00 5/01/11 375 421,688
Gen. Oblig. Aaa 7.00 5/01/12 400 449,800
Posen Cons. Sch. Dist., Sch. Dist. No. 9, M.B.I.A. Aaa 6.75 5/01/22 1,000 (g) 1,128,470
Puerto Rico Commonwlth. Hwy. Auth. Rev., Ser. Q AAA(c) 7.75 7/01/16 1,500(e)/(g)1,672,365
Puerto Rico Elec. Pwr. Auth. Rev., Ser. N Baa1 7.125 7/01/14 920 982,569
Rochester Cmnty. Sch. Dist., Gen. Oblig., M.B.I.A. Aaa 5.00 5/01/19 1,500 1,429,305
Romulus Cmnty. Sch. Dist., Gen. Oblig., F.G.I.C Aaa Zero 5/01/21 1,880 501,246
St. Clair Cnty., Wtr. Supply Sys. No. VII, IRA Township,
A.M.B.A.C. Aaa 5.25 7/01/15 1,000 981,760
Univ. of Michigan, Rev. Pkg. Sys. Rfdg. Aa1 5.00 6/01/15 500 480,060
Virgin Islands Wtr. & Pwr. Auth., Elec. Sys. Rev., Ser. A NR 7.40 7/01/11 480 517,363
Wayne Cnty. Bldg. Auth., Ser. A Baa2 8.00 3/01/17 1,250 1,447,637
Wyandotte Elec. Rev., M.B.I.A. Aaa 6.25 10/01/08 2,000 2,237,860
-----------
Total long-term investments (cost $51,971,250) 56,098,149
-----------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-126
<PAGE>
Portfolio of Investments PRUDENTIAL MUNICIPAL SERIES FUND
as of August 31, 1997 MICHIGAN SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
SHORT-TERM INVESTMENTS--1.1%
Michigan St. Strategic Fund Poll. Ctrl. Rev., Consumers
Pwr. Proj., Ser. 88A, F.R.D.D. (cost $600,000) P1 3.70% 9/02/97 $ 600 $ 600,000
-----------
Expiration
OUTSTANDING CALL OPTION PURCHASED Date Contracts(f)
---------- ---------
U. S. Treasury Bond Futures @$118.00
(cost $50,438) NR -- 11/15/97 50 14,063
-----------
Total Investments--98.0%
(cost $52,621,688; Note 4) 56,712,212
Other assets in excess of liabilities--2.0% 1,171,061
-----------
Net Assets--100% $57,883,273
-----------
-----------
</TABLE>
- ---------------
(a) The following abbreviations are used in portfolio descriptions:
A.M.B.A.C.--American Municipal Bond Assurance Corporation.
A.M.T.--Alternative Minimum Tax.
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) Prerefunded issues are secured by escrowed cash and/or direct U.S.
guaranteed obligations.
(f) One contract equals $1,000 face value.
(g) Securities segregated for options on futures.
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-127
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Statement of Assets and Liabilities MICHIGAN SERIES
- --------------------------------------------------------------------------------
<TABLE>
Assets August 31, 1997
<S> <C>
Investments, at value (cost $52,621,688)................................................................... $56,712,212
Cash....................................................................................................... 407,802
Interest receivable........................................................................................ 902,698
Receivable for Series shares sold.......................................................................... 79,925
Other assets............................................................................................... 1,661
---------------
Total assets............................................................................................ 58,104,298
---------------
Liabilities
Accrued expenses........................................................................................... 84,989
Payable for Series shares reacquired....................................................................... 49,936
Dividends payable.......................................................................................... 45,741
Management fee payable..................................................................................... 22,397
Distribution fee payable................................................................................... 14,695
Deferred trustee's fees.................................................................................... 3,267
---------------
Total liabilities....................................................................................... 221,025
---------------
Net Assets................................................................................................. $57,883,273
---------------
---------------
Net assets were comprised of:
Shares of beneficial interest, at par................................................................... $ 48,214
Paid-in capital in excess of par........................................................................ 53,586,999
---------------
53,635,213
Accumulated net realized gain on investments............................................................ 157,536
Net unrealized appreciation on investments.............................................................. 4,090,524
---------------
Net assets, August 31, 1997................................................................................ $57,883,273
---------------
---------------
Class A:
Net asset value and redemption price per share
($29,772,330 / 2,479,122 shares of beneficial interest issued and outstanding)....................... $12.01
Maximum sales charge (3% of offering price)............................................................. .37
---------------
Maximum offering price to public........................................................................ $12.38
---------------
---------------
Class B:
Net asset value, offering price and redemption price per share
($27,795,576 / 2,316,045 shares of beneficial interest issued and outstanding)....................... $12.00
---------------
---------------
Class C:
Net asset value, offering price and redemption price per share
($315,367 / 26,278 shares of beneficial interest issued and outstanding)............................. $12.00
---------------
---------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-128
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
MICHIGAN SERIES
Statement of Operations
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended
Net Investment Income August 31, 1997
<S> <C>
Income
Interest................................. $ 3,668,952
---------------
Expenses
Management fee........................... 306,001
Distribution fee--Class A................ 29,737
Distribution fee--Class B................ 156,510
Distribution fee--Class C................ 1,209
Custodian's fees and expenses............ 77,000
Transfer agent's fees and expenses....... 48,000
Registration fees........................ 35,000
Reports to shareholders.................. 35,000
Audit fee................................ 10,000
Legal fees and expenses.................. 9,000
Trustees' fees and expenses.............. 4,000
Insurance expense........................ 1,000
Miscellaneous............................ 5,804
---------------
Total expenses........................ 718,261
Less: Management fee waiver (Note 2)..... (30,600)
Custodian fee credit.................. (1,905)
---------------
Net expenses.......................... 685,756
---------------
Net investment income....................... 2,983,196
---------------
Realized and Unrealized
Gain (Loss) on Investments
Net realized gain (loss) on:
Investment transactions.................. 452,455
Financial futures contract
transactions.......................... (106,855)
---------------
345,600
---------------
Net change in unrealized appreciation (depreciation) on:
Investments.............................. 1,419,407
Financial futures contracts.............. (32,938)
---------------
1,386,469
---------------
Net gain on investments..................... 1,732,069
---------------
Net Increase in Net Assets
Resulting from Operations................... $ 4,715,265
---------------
---------------
</TABLE>
PRUDENTIAL MUNICIPAL SERIES FUND
MICHIGAN SERIES
Statement of Changes in Net Assets
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Increase (Decrease) Year Ended August 31
in Net Assets 1997 1996
<S> <C> <C>
Operations
Net investment income......... $ 2,983,196 $ 3,317,225
Net realized gain on
investment transactions.... 345,600 298,735
Net change in unrealized
appreciation (depreciation)
of investments............. 1,386,469 (391,222)
--------------- ---------------
Net increase in net assets
resulting from
operations................. 4,715,265 3,224,738
--------------- ---------------
Dividends and distributions (Note
1):
Dividends from net investment
income
Class A.................... (1,511,057) (1,448,506)
Class B.................... (1,464,990) (1,864,426)
Class C.................... (7,149) (4,293)
--------------- ---------------
(2,983,196) (3,317,225)
--------------- ---------------
Distributions in excess of net
investment income
Class A.................... (5,093) --
Class B.................... (5,425) --
Class C.................... (19) --
--------------- ---------------
(10,537) --
--------------- ---------------
Distributions from net
realized gains
Class A.................... (101,868) (352,642)
Class B.................... (108,497) (514,059)
Class C.................... (387) (412)
--------------- ---------------
(210,752) (867,113)
--------------- ---------------
Series share transactions (net of
share conversions) (Note 5):
Net proceeds from shares
sold....................... 1,545,990 2,574,979
Net asset value of shares
issued in reinvestment of
dividends and
distributions.............. 1,945,329 2,652,668
Cost of shares reacquired..... (10,932,206) (9,038,280)
--------------- ---------------
Net decrease in net assets
from Series share
transactions............... (7,440,887) (3,810,633)
--------------- ---------------
Total decrease................... (5,930,107) (4,770,233)
Net Assets
Beginning of year................ 63,813,380 68,583,613
--------------- ---------------
End of year...................... $ 57,883,273 $63,813,380
--------------- ---------------
--------------- ---------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-129
<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 thirteen
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 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 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.
Reclassification of Capital Accounts: The Fund accounts and reports for
distributions to shareholders in accordance with Statement of Position 93-2:
Determination, Disclosure, and Financial Statement Presentation of Income,
Capital Gain, and Return of Capital Distributions by Investment Companies. The
effect of applying this statement for the year ended August 31, 1997 was to
increase undistributed net investment income by $10,537, decrease accumulated
net realized gain by $7,764 and decrease paid-in capital in excess of par by
$2,773, due to the sale of securities purchased with market discount. Net
investment income, net realized gains and net assets were not affected by this
change.
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, no federal income tax provision is required.
Dividends and Distributions: The Series declares daily dividends from net
investment income. Payment of dividends is made monthly. Distributions of net
capital gains, if any, are made annually.
- --------------------------------------------------------------------------------
B-130
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Notes to Financial Statements MICHIGAN SERIES
- --------------------------------------------------------------------------------
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 Investments Fund Management
LLC ('PIFM'). Pursuant to this agreement, PIFM has responsibility for all
investment advisory services and supervises the subadviser's performance of such
services. PIFM 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. PIFM 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 PIFM is computed daily and payable monthly, at an annual
rate of .50 of 1% of the average daily net assets of the Series. Prior to
September 1, 1997, PIFM agreed to waive a portion (.05 of 1% of the Series'
average daily net assets) of its management fee, which amounted to $30,600
($0.006 per share) for the year ended August 31, 1997. The Series is not
required to reimburse PIFM for such waiver. Effective September 1, 1997, PIFM
eliminated its management fee waiver.
The Fund has a distribution agreement with Prudential Securities Incorporated
('PSI'), which acts as the distributor of the Class A, Class B and Class C
shares of the Fund. The Fund compensates 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 PSI.
The distribution fees are accrued daily and payable monthly.
Pursuant to the Class A, B and C Plans, the Fund compensates PSI 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, 1997.
PSI has advised the Series that it has received approximately $2,800 in
front-end sales charges resulting from sales of Class A shares during the year
ended August 31, 1997. From these fees, 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 year ended August 31, 1997, it received
approximately $56,000 in contingent deferred sales charges imposed upon certain
redemptions by Class B and Class C shareholders.
PSI, PIFM and PIC are indirect, wholly-owned subsidiaries of The Prudential
Insurance Company of America.
The Series, along with other affiliated registered investment companies (the
'Funds'), entered into a credit agreement (the 'Agreement') on December 31, 1996
with an unaffiliated lender. The maximum commitment under the Agreement is
$200,000,000. The Agreement expires on December 30, 1997. Interest on any such
borrowings outstanding will be at market rates. The purpose of the Agreement is
to serve as an alternative source of funding for capital share redemptions. The
Series has not borrowed any amounts pursuant to the Agreement as of August 31,
1997. The Funds pay a commitment fee at an annual rate of .055 of 1% on the
unused portion of the credit facility. The commitment fee is accrued and paid
quarterly on a pro-rata basis by the Funds.
- ------------------------------------------------------------
Note 3. Other Transactions with Affiliates
Prudential Mutual Fund Services LLC ('PMFS'), a wholly-owned subsidiary of PIFM,
serves as the Fund's transfer agent. During the year ended August 31, 1997, the
Series incurred fees of approximately $34,000 for the services of PMFS. As of
August 31, 1997, approximately $2,500 of such fees were due to PMFS. Transfer
agent fees and expenses in the Statement of Operations include certain
out-of-pocket expenses paid to non-affiliates.
- ------------------------------------------------------------
Note 4. Portfolio Securities
Purchases and sales of portfolio securities of the Series, excluding short-term
investments, for the year ended August 31, 1997 were $12,190,157 and
$19,532,377, respectively.
The cost basis of investments for federal income tax purposes at August 31, 1997
was substantially the same as for financial reporting purposes and accordingly,
net unrealized appreciation for federal income tax purposes was $4,126,899
(gross unrealized appreciation--$4,153,906; gross unrealized
depreciation--$27,007).
- --------------------------------------------------------------------------------
B-131
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Notes to Financial Statements MICHIGAN 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 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, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
Class A Shares Amount
- ------------------------------------ ---------- ------------
<S> <C> <C>
Year ended August 31, 1997:
Shares sold......................... 10,493 $ 124,433
Shares issued in reinvestment of
dividends
and distributions................. 85,984 1,021,115
Shares reacquired................... (444,372) (5,272,879)
---------- ------------
Net decrease in shares outstanding
before conversion................. (347,895) (4,127,331)
Shares issued upon conversion from
Class B........................... 375,039 4,454,862
---------- ------------
Net increase in shares
outstanding....................... 27,144 $ 327,531
---------- ------------
---------- ------------
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 B Shares Amount
- ------------------------------------ ---------- ------------
<S> <C> <C>
Year ended August 31, 1997
Shares sold......................... 102,845 $ 1,219,555
Shares issued in reinvestment of
dividends
and distributions................. 77,395 918,312
Shares reacquired................... (475,575) (5,648,809)
---------- ------------
Net decrease in shares outstanding
before conversion................. (295,335) (3,510,942)
Shares reacquired upon conversion
into Class A...................... (375,355) (4,454,862)
---------- ------------
Net decrease in shares
outstanding....................... (670,690) $ (7,965,804)
---------- ------------
---------- ------------
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)
---------- ------------
---------- ------------
<CAPTION>
Class C
- ------------------------------------
Year ended August 31, 1997
Shares sold......................... 17,060 $ 202,002
Shares issued in reinvestment of
dividends
and distributions................. 496 5,902
Shares reacquired................... (880) (10,518)
---------- ------------
Net increase in shares
outstanding....................... 16,676 $ 197,386
---------- ------------
---------- ------------
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
---------- ------------
---------- ------------
</TABLE>
- --------------------------------------------------------------------------------
B-132
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Financial Highlights MICHIGAN SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A
-----------------------------------------------------
Year Ended August 31,
-----------------------------------------------------
1997 1996 1995 1994 1993
------- ------- ------- ------ ------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year.................. $ 11.72 $ 11.89 $ 11.75 $12.51 $11.90
------- ------- ------- ------ ------
Income from investment operations
Net investment income............................... .61(a) .62(a) .64(a) .64 .67
Net realized and unrealized gain (loss) on
investment transactions.......................... .33 (.02) .17 (.69) .71
------- ------- ------- ------ ------
Total from investment operations................. .94 .60 .81 (.05) 1.38
------- ------- ------- ------ ------
Less distributions
Dividends from net investment income................ (.61) (.62) (.64) (.64) (.67)
Distributions in excess of net investment income.... --(c) -- -- -- --
Distributions from net realized gains............... (.04) (.15) (.03) (.07) (.10)
------- ------- ------- ------ ------
Total distributions.............................. (.65) (.77) (.67) (.71) (.77)
------- ------- ------- ------ ------
Net asset value, end of year........................ $ 12.01 $ 11.72 $ 11.89 $11.75 $12.51
------- ------- ------- ------ ------
------- ------- ------- ------ ------
TOTAL RETURN(b):.................................... 8.18% 5.07% 7.13% (0.38)% 11.95%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)....................... $29,772 $28,730 $27,024 $4,706 $3,814
Average net assets (000)............................ $29,737 $27,978 $16,932 $4,505 $2,285
Ratios to average net assets:
Expenses, including distribution fees............ .91%(a) .91%(a) 1.02%(a) .91% .96%
Expenses, excluding distribution fees............ .81%(a) .81%(a) .92%(a) .81% .86%
Net investment income............................ 5.08%(a) 5.18%(a) 5.31%(a) 5.27% 5.51%
For Class A, B and C shares:
Portfolio turnover rate.......................... 20% 36% 33% 12% 14%
</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.
(c) Less than $.005 per share.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-133
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Financial Highlights MICHIGAN SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class B
-------------------------------------------------------
Year Ended August 31,
-------------------------------------------------------
1997 1996 1995 1994 1993
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year.................. $ 11.71 $ 11.88 $ 11.75 $ 12.51 $ 11.90
------- ------- ------- ------- -------
Income from investment operations
Net investment income............................... .56(a) .57(a) .59(a) .59 .62
Net realized and unrealized gain (loss) on
investment transactions.......................... .33 (.02) .16 (.69) .71
------- ------- ------- ------- -------
Total from investment operations................. .89 .55 .75 (.10) 1.33
------- ------- ------- ------- -------
Less distributions
Dividends from net investment income................ (.56) (.57) (.59) (.59) (.62)
Distributions in excess of net investment income.... --(c) -- -- -- --
Distributions from net realized gains............... (.04) (.15) (.03) (.07) (.10)
------- ------- ------- ------- -------
Total distributions.............................. (.60) (.72) (.62) (.66) (.72)
------- ------- ------- ------- -------
Net asset value, end of year........................ $ 12.00 $ 11.71 $ 11.88 $ 11.75 $ 12.51
------- ------- ------- ------- -------
------- ------- ------- ------- -------
TOTAL RETURN(b):.................................... 7.76% 4.66% 6.60% (0.78)% 11.51%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)....................... $27,796 $34,971 $41,459 $70,112 $70,302
Average net assets (000)............................ $31,302 $39,052 $52,216 $72,095 $61,548
Ratios to average net assets:
Expenses, including distribution fees............ 1.31%(a) 1.31%(a) 1.37%(a) 1.31% 1.36%
Expenses, excluding distribution fees............ .81%(a) .81%(a) .87%(a) .81% .86%
Net investment income............................ 4.68%(a) 4.77%(a) 5.04%(a) 4.87% 5.11%
</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.
(c) Less than $.005 per share.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-134
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Financial Highlights MICHIGAN SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class C
-----------------------------------------------------
August 1,
1994(d)
Year Ended August 31, Through
-------------------------------------- August 31,
1997 1996 1995 1994
------ ------------ ---------- ----------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period................ $11.71 $11.88 $11.75 $11.78
------ ----- ----- -----
Income from investment operations
Net investment income............................... .53(a) .54(a) .56(a) .04
Net realized and unrealized gain (loss) on
investment transactions.......................... .33 (.02) .16 (.03)
------ ----- ----- -----
Total from investment operations................. .86 .52 .72 .01
------ ----- ----- -----
Less distributions
Dividends from net investment income................ (.53) (.54) (.56) (.04)
Distributions in excess of net investment income.... --(f) -- -- --
Distributions from net realized gains............... (.04) (.15) (.03) --
------ ----- ----- -----
Total distributions.............................. (.57) (.69) (.59) (.04)
------ ----- ----- -----
Net asset value, end of period...................... $12.00 $11.71 $11.88 $11.75
------ ----- ----- -----
------ ----- ----- -----
TOTAL RETURN(b):.................................... 7.49% 4.39% 6.29% 0.06%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)..................... $315 $112 $100 $200(e)
Average net assets (000)............................ $161 $95 $61 $199(e)
Ratios to average net assets:
Expenses, including distribution fees............ 1.56%(a) 1.56%(a) 1.68%(a) 2.15%(c)
Expenses, excluding distribution fees............ .81%(a) .81%(a) .93%(a) 1.39%(c)
Net investment income............................ 4.43%(a) 4.53%(a) 4.66%(a) 4.56%(c)
</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.
(f) Less than $.005 per share.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-135
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Report of Independent Accountants MICHIGAN SERIES
- --------------------------------------------------------------------------------
To the Shareholders and Board of Trustees of
Prudential Municipal Series Fund, Michigan Series
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Prudential Municipal Series Fund,
Michigan Series (the 'Fund', one of the portfolios constituting Prudential
Municipal Series Fund) at August 31, 1997, and the results of its operations,
the changes in its net assets and the financial highlights for the year then
ended, in conformity with generally accepted accounting principles. These
financial statements and financial highlights (hereafter referred to as
'financial statements') are the responsibility of the Fund's management; our
responsibility is to express an opinion on these financial statements based on
our audit. We conducted our audit of these financial statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audit, which included confirmation of securities at August
31, 1997 by correspondence with the custodian and brokers, provides a reasonable
basis for the opinion expressed above. The accompanying statement of changes in
net assets for the year ended August 31, 1996, and the financial highlights for
each of the four periods in the period ended August 31, 1996 were audited by
other independent accountants, whose opinion dated October 14, 1996 was
unqualified.
PRICE WATERHOUSE LLP
1177 Avenue of Americas
New York, New York
October 20, 1997
- --------------------------------------------------------------------------------
B-136
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Change of Auditors MICHIGAN SERIES
- --------------------------------------------------------------------------------
Effective March 1, 1997, Deloitte & Touche LLP was terminated as the Fund's
auditors. For the years ended August 31, 1993 through August 31, 1996, Deloitte
& Touche LLP expressed an unqualified opinion on the Series' financial
statements. There were no disagreements between Fund management and Deloitte &
Touche LLP prior to their termination. The Board of Trustees approved the
termination of Deloitte & Touche LLP and the appointment of Price Waterhouse LLP
as the Fund's independent accountants.
B-137
<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 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-138
<PAGE>
Portfolio of Investments PRUDENTIAL MUNICIPAL SERIES FUND
as of August 31, 1997 NEW JERSEY SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
LONG-TERM INVESTMENTS--98.4%
- ------------------------------------------------------------------------------------------------------------------------------
Atlantic City Mun. Utils. Auth. Rev., Wtr. Sys. A-(c) 7.75% 5/01/17 $ 2,000 (e) $ 2,209,560
Bayshore Regl. Sewage Auth. Rev., M.B.I.A. Aaa 5.50 4/01/12 3,000 3,079,800
Bergen Cnty., Utils. Auth., Wtr. Poll. Ctrl. Rev., Ser. B,
F.G.I.C. Aaa 5.75 12/15/05 1,000 1,072,780
Brick Twnshp., Mun. Util. Auth. Rev., F.G.I.C. Aaa 5.50 12/01/03 1,000 1,052,810
Camden Cnty. Mun. Utility Auth. Ref., F.G.I.C. Aaa 6.00 7/15/06 2,500 2,725,950
Cape May Cnty. Ind. Poll. Ctrl., Fin. Auth. Rev.,
Atlantic Cnty. Elec. Co., M.B.I.A. Aaa 6.80 3/01/21 2,615 3,118,832
Edison Twnshp., Gen. Oblig., A.M.B.A.C. Aaa 6.00 1/01/08 5,390 5,902,697
Egg Harbor Twnshp. Sch. Dist., Cert. of Part., M.B.I.A. Aaa 7.40 4/01/02 1,000 (e) 1,070,090
Egg Harbor Twnshp. Sch. Dist., F.S.A. Aaa 4.75 2/15/09 1,010 986,426
Essex Cnty. Ref., Ser. A-1, A.M.B.A.C. Aaa 5.375 9/01/10 2,500 2,551,375
Evesham Mun. Utils. Auth. Rev., Ser. B, M.B.I.A. Aaa 7.00 7/01/10 2,000 2,135,000
Hammonton, Gen. Oblig., A.M.B.A.C. Aaa 6.85 8/15/03 500 563,050
Hammonton, Gen. Oblig., A.M.B.A.C. Aaa 6.85 8/15/04 500 568,905
Hammonton, Gen. Oblig., A.M.B.A.C. Aaa 6.85 8/15/05 500 574,275
Hudson Cnty. Impvt. Auth., Solid Waste Sys. Rev. BBB-(c) 7.10 1/01/20 2,050 2,089,421
Hudson Cnty. Impvt. Auth., Solid Waste Sys. Rev. A+(c) 6.10 7/01/20 1,500 1,541,070
Jackson Twnshp. Sch. Dist., F.G.I.C. Aaa 6.60 6/01/04 1,020 1,138,473
Jackson Twnshp. Sch. Dist., F.G.I.C. Aaa 6.60 6/01/05 940 1,057,472
Jackson Twnshp. Sch. Dist., F.G.I.C. Aaa 6.60 6/01/10 1,600 1,845,696
Jackson Twnshp. Sch. Dist., F.G.I.C. Aaa 6.60 6/01/11 1,600 1,850,544
Jersey City,
Gen. Oblig., A.M.B.A.C. Aaa 6.00 10/01/09 2,000 2,198,800
Gen. Oblig., A.M.B.A.C. Aaa 6.00 10/01/10 2,760 3,028,217
Gen. Oblig., Ser. A, F.S.A. Aaa 9.25 5/15/04 4,310 5,430,729
Lakewood Twnshp., Gen. Oblig., F.G.I.C. Aaa 6.60 12/01/04 450 507,312
Lakewood Twnshp., Gen. Oblig., F.G.I.C. Aaa 6.60 12/01/05 445 505,520
Lenape Regl. High Sch. Dist., Gen. Oblig., M.B.I.A. Aaa 7.625 1/01/12 400 503,684
Mercer Cnty. Impvt. Auth. Rev. Aa1 Zero 4/01/06 2,500 1,657,875
Middle Twnshp. Sch. Dist., F.G.I.C. Aaa 7.00 7/15/05 1,200 1,383,300
Middlesex Cnty. Utils. Auth. Sewer Rev. Ref., Ser. A, F.G.I.C. Aaa 5.375 9/15/15 1,500 1,504,005
Middletown Twnshp.,
Brd. of Ed., M.B.I.A. Aaa 5.70 8/01/04 1,450 1,543,583
Brd. of Ed., M.B.I.A. Aaa 5.70 8/01/05 1,530 1,632,250
Millburn Twnshp. Sch. Dist., Brd. of Ed. Aaa 5.35 7/15/13 1,140 1,171,692
Millburn Twnshp. Sch. Dist., Brd. of Ed. Aaa 5.35 7/15/14 1,135 1,161,355
Millburn Twnshp. Sch. Dist., Brd. of Ed. Aaa 5.35 7/15/16 1,150 1,166,077
Millburn Twnshp. Sch. Dist., Brd. of Ed. Aaa 5.35 7/15/17 1,150 1,168,285
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-139
<PAGE>
Portfolio of Investments PRUDENTIAL MUNICIPAL SERIES FUND
as of August 31, 1997 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 $ 1,958,691
Howell Twnshp. Brd. of Ed. AAA(c) 6.50 7/15/04 765 849,823
Howell Twnshp. Brd. of Ed. AAA(c) 6.50 7/15/05 820 917,334
Howell Twnshp. Brd. of Ed. AAA(c) 6.50 7/15/06 875 986,160
Howell Twnshp. Brd. of Ed. AAA(c) 6.50 7/15/07 930 1,053,932
Howell Twnshp. Brd. of Ed. AA(c) 6.55 7/01/12 4,065 4,433,248
Wtr. Treatment Fac., M.B.I.A. Aaa 6.875 8/01/12 750 817,448
Morris Cnty. Gen'l. Impt. & Park Aaa 5.00 7/15/14 3,180 3,115,923
Morris Cnty. Gen'l. Impt. & Park Aaa 5.00 7/15/15 3,180 3,095,539
New Jersey Econ. Dev. Auth., Wtr. Facs. Rev., F.G.I.C.,
A.M.T., American Co. Inc. Proj., Ser 94-B NR 8.10 11/01/29 5,000 (d) 5,162,500
New Jersey Econ. Dev. Auth. Rev.,
Ed. Testing Service, Ser. A, M.B.I.A. Aaa 5.90 5/15/15 2,000 2,085,360
Nat'l. Assoc. of Accountants NR 7.50 7/01/01 870 916,667
Nat'l. Assoc. of Accountants NR 7.65 7/01/09 950 1,013,821
Natural Gas Facs., M.B.I.A., A.M.T. Aaa 5.70 6/01/32 3,000 3,012,450
New Jersey Performing Arts Ctr. Proj., Ser. C, A.M.B.A.C. Aaa 5.00 6/15/16 3,485 3,345,252
St. Barnabas, Ser. A, M.B.I.A. Aaa 5.00 7/01/07 2,695 2,730,358
New Jersey Econ. Dist. Heating & Cool., Trigen Trenton Proj. BBB-(c) 6.20 12/01/10 600 622,674
New Jersey Edl. Facs. Auth. Rev.,
Princeton Theological, Ser. B Aaa 5.90 7/01/26 4,500 4,700,340
Seton Hall Univ. Proj., Ser. D Baa1 7.00 7/01/21 2,000 2,125,540
Univ. of Medicine & Dentistry, Ser. B, A.M.B.A.C. Aaa 5.25 12/01/15 1,500 1,484,250
New Jersey Hlth. Care Facs. Fin. Auth. Rev.,
Atlantic City Med. Ctr., Ser. C. A3 6.80 7/01/11 2,500 2,732,700
East Orange Gen. Hosp., Ser. B BBB+(c) 7.75 7/01/20 2,250 2,404,687
Helene Fuld Med. Ctr., Ser. C A(c) 8.00 7/01/08 1,300 1,359,657
Helene Fuld Med. Ctr., Ser. C A(c) 8.125 7/01/13 500 523,495
Intercare Hlth. Systems-JFK Ctr. A 7.50 7/01/07 1,000 1,042,760
Intercare Hlth. Systems-JFK Ctr. A 7.625 7/01/18 945 986,287
Jersey Shore Med. Ctr., A.M.B.A.C. Aaa 6.00 7/01/09 1,465 1,571,769
Jersey Shore Med. Ctr., A.M.B.A.C. Aaa 6.25 7/01/21 1,500 1,609,245
Kensington Cmnty. Med. Ctr., M.B.I.A. Aaa 7.00 7/01/20 3,450 3,736,074
Rahway Hospital, Ser. B Baa1 7.75 7/01/14 4,740 4,922,111
St. Joseph's Hosp. Med. Ctr., Ser. A AAA(c) 5.70 7/01/11 4,375 4,532,894
Warren Hosp. AA(c) 5.25 7/01/14 2,985 2,948,643
New Jersey St. Hsg. & Mtge. Fin. Agcy.,
Ser. D, M.B.I.A., A.M.T. Aaa 7.70 10/01/29 2,935 (e) 3,072,622
Rental Housing, Ser. B, A.M.T. A+(c) 6.75 11/01/11 2,190 2,335,679
New Jersey St. Hwy. Auth., Garden St. Pkwy. Gen. Rev. A1 5.20 1/01/08 3,450 3,554,397
New Jersey St. Hwy. Auth., Garden St. Pkwy. Gen. Rev. A1 6.20 1/01/10 3,035 3,378,987
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-140
<PAGE>
Portfolio of Investments PRUDENTIAL MUNICIPAL SERIES FUND
as of August 31, 1997 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. Tpke. Auth. Rev., Ser. C, M.B.I.A. Aaa 6.50% 1/01/16 $ 835 $ 956,877
New Jersey St. Tpke. Auth. Rev., Ser. C, M.B.I.A. Aaa 6.50 1/01/09 1,000 1,139,720
New Jersey St. Trans. Trust Fund Auth. Trans. Sys., Ser. A,
M.B.I.A. Aaa 6.00 12/15/06 5,000 5,472,700
New Jersey St. Trans. Trust Fund Auth. Trans. Sys., Ser. B,
M.B.I.A. Aaa 6.50 6/15/11 5,000 (e) 5,735,150
New Jersey St. Trans. Trust Fund Auth. Trans. Sys., Ser. B,
M.B.I.A. Aaa 5.75 6/15/14 3,500 3,624,215
North Brunswick Twnshp.,
Brd. of Ed., Gen. Oblig. AA(c) 6.80 6/15/06 350 404,054
Brd. of Ed., Gen. Oblig. AA(c) 6.80 6/15/07 350 407,134
Gen. Oblig. Aa1 6.40 5/15/10 545 591,009
Northfield Brd. of Ed., F.S.A. Aaa 5.375 7/15/14 1,390 1,399,591
Northfield Brd. of Ed., F.S.A. Aaa 5.375 7/15/15 1,470 1,474,101
Ocean Cnty. Utils. Auth., Wastewater Rev. Aa2 6.00 1/01/07 5,000 5,454,800
Paterson Cnty., F.S.A. Aaa 6.50 2/15/05 2,000 2,169,660
Port Auth. New York & New Jersey, Ser. 94 A1 5.80 12/01/13 2,500 2,597,475
Port Auth. New York & New Jersey, Ser. 96, F.G.I.C., A.M.T. Aaa 6.60 10/01/23 2,750 3,005,035
Puerto Rico Commonwealth Hwy. Auth. Rev., Ser. R Baa1 6.75 7/01/05 1,000 1,088,370
Puerto Rico Commonwealth Hwy. Auth. Rev., Ser. S Baa1 6.50 7/01/22 750 830,842
Puerto Rico Commonwealth, M.B.I.A. Aaa 5.375 7/01/25 1,500 1,477,515
Puerto Rico Elec. Pwr. Auth. Rev.,
Ser. R Baa1 6.25 7/01/17 2,800 2,959,348
Ser. S, M.B.I.A. Aaa 6.125 7/01/08 2,300 2,563,281
Ser. X, M.B.I.A. Aaa 6.00 7/01/12 3,295 3,516,655
Puerto Rico Tel. Auth. Rev., Ser. I, M.B.I.A., R.I.B.S. Aaa 6.616 1/25/07 7,875(e)/(e) 8,327,812
Rutgers St. Univ. Rev., Ser. A A1 6.40 5/01/13 2,000 (e) 2,268,780
Salem Cnty. Indus. Poll. Ref., PSE & G Co., M.B.I.A. Aaa 6.20 8/01/30 5,000 5,367,850
South Brunswick Twnshp., Wtr. & Swr. Utils., Gen. Impvt. AA(c) 6.90 8/01/05 850 (e) 924,562
South Brunswick Twnshp., Wtr. & Swr. Utils., Gen. Impvt. AA(c) 6.90 8/01/06 850 (e) 924,562
South River Sch. Dist., F.G.I.C. Aaa 5.00 12/01/13 1,300 1,280,006
South River Sch. Dist., F.G.I.C. Aaa 5.00 12/01/14 1,300 1,271,959
South River Sch. Dist., F.G.I.C. Aaa 5.00 12/01/15 1,230 1,195,474
Sparta Twnshp. Brd. of Ed., M.B.I.A. Aaa 5.75 9/01/14 1,000 1,036,240
Union City Sch. Impvt., F.S.A. Aaa 6.375 11/01/08 1,545 1,750,547
Union Cnty. Impvt. Auth. Rev.,
Plainfield Brd. of Ed., F.G.I.C. Aaa 6.25 8/01/14 1,175 1,270,657
Plainfield Brd. of Ed., F.G.I.C. Aaa 6.25 8/01/15 1,250 1,346,375
Plainfield Brd. of Ed., F.G.I.C. Aaa 6.25 8/01/16 1,330 1,429,111
Plainfield Brd. of Ed., F.G.I.C. Aaa 6.25 8/01/17 1,415 1,519,243
Union Cnty. Utils. Auth., Solid Waste Rev., Ser. A, A.M.T. BB(c) 7.20 6/15/14 2,850 2,870,520
Virgin Islands Terr., Hugo Ins. Claims Fund Proj., Ser. 91 NR 7.75 10/01/06 1,750 1,915,620
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-141
<PAGE>
Portfolio of Investments PRUDENTIAL MUNICIPAL SERIES FUND
as of August 31, 1997 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 Morris Regl. High Sch. Dist., Cert. of Part., B.I.G. Aaa 7.50% 3/15/09 $ 1,500 $ 1,559,400
West New York & New Jersey Mun. Util. Auth. Swr. Rev.,
F.G.I.C. Aaa 5.125 12/15/17 2,050 1,961,358
West Windsor Regional Sch. Dist., F.G.I.C. Aaa 5.25 12/01/05 1,000 1,039,980
West Windsor Regional Sch. Dist., F.G.I.C. Aaa 5.50 12/01/13 2,600 2,654,938
West Windsor Regional Sch. Dist., F.G.I.C. Aaa 5.50 12/01/14 2,700 2,746,332
------------
Total long-term investments
(cost $226,438,902) 238,365,085
------------
SHORT-TERM INVESTMENTS--0.7%
Port Auth. New York & New Jersey, Ser. 3, F.R.D.D.
(cost $1,700,000) VMIG1 3.60 9/02/97 1,700 1,700,000
------------
Expiration
OUTSTANDING CALL OPTION PURCHASED(f)--0.0% Date Contracts(g)
---------- ---------
U.S. Treasury Bond Futures, expiring Nov. '97 @$120.00
(cost $112,857) NR -- 11/22/97 130 14,219
------------
Total Investments--99.1%
(cost $228,251,759; Note 4) 240,079,304
Other assets in excess of liabilities--0.9% 2,293,469
------------
Net Assets--100% $242,372,773
------------
------------
</TABLE>
- ---------------
(a) The following abbreviations are used in portfolio descriptions:
A.M.B.A.C.--American Municipal Bond Assurance Corporation.
A.M.T.--Alternative Minimum Tax.
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.
R.I.B.S.--Residual Interest Bonds.
(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) Segregated as collateral for outstanding call option purchased.
(f) One contract equals $1,000 face value.
(g) Non-income producing 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-142
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Statement of Assets and Liabilities NEW JERSEY SERIES
- --------------------------------------------------------------------------------
<TABLE>
Assets August 31, 1997
<S> <C>
Investments, at value (cost $228,251,759)................................................................. $ 240,079,304
Cash...................................................................................................... 39,361
Interest receivable....................................................................................... 3,159,212
Receivable for Series shares sold......................................................................... 69,041
Deferred expenses and other assets........................................................................ 7,051
---------------
Total assets........................................................................................... 243,353,969
---------------
Liabilities
Payable for Series shares reacquired...................................................................... 516,291
Dividends payable......................................................................................... 185,313
Accrued expenses.......................................................................................... 111,543
Management fee payable.................................................................................... 93,431
Distribution fee payable.................................................................................. 71,351
Deferred trustee's fees................................................................................... 3,267
---------------
Total liabilities...................................................................................... 981,196
---------------
Net Assets................................................................................................ $ 242,372,773
---------------
---------------
Net assets were comprised of:
Shares of beneficial interest, at par.................................................................. $ 220,965
Paid-in capital in excess of par....................................................................... 230,395,856
---------------
230,616,821
Accumulated net realized loss on investments........................................................... (71,593)
Net unrealized appreciation on investments............................................................. 11,827,545
---------------
Net assets, August 31, 1997............................................................................... $ 242,372,773
---------------
---------------
Class A:
Net asset value and redemption price per share
($95,728,826 / 8,728,587 shares of beneficial interest issued and outstanding)...................... $10.97
Maximum sales charge (3% of offering price)............................................................ .34
---------------
Maximum offering price to public....................................................................... $11.31
---------------
---------------
Class B:
Net asset value, offering price and redemption price per share
($144,992,053 / 13,217,454 shares of beneficial interest issued and outstanding).................... $10.97
---------------
---------------
Class C:
Net asset value, offering price and redemption price per share
($1,636,595 / 149,193 shares of beneficial interest issued and outstanding)......................... $10.97
---------------
---------------
Class Z:
Net asset value, offering price and redemption price per share
($15,299 / 1,393 shares of beneficial interest issued and outstanding).............................. $10.98
---------------
---------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-143
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
NEW JERSEY SERIES
Statement of Operations
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended
Net Investment Income August 31, 1997
<S> <C>
Income
Interest and discount earned............... $14,543,673
---------------
Expenses
Management fee............................. 1,267,554
Distribution fee--Class A.................. 89,280
Distribution fee--Class B.................. 811,649
Distribution fee--Class C.................. 14,205
Custodian's fees and expenses.............. 126,000
Transfer agent's fees and expenses......... 117,000
Reports to shareholders.................... 70,000
Registration fees.......................... 39,500
Audit fees................................. 10,000
Legal fees and expenses.................... 9,000
Trustees' fees and expenses................ 4,000
Miscellaneous.............................. 21,190
---------------
Total expenses.......................... 2,579,378
Less: Management fee waiver (Note 2)....... (126,755)
Custodian fee credit................... (10,126)
---------------
Net expenses............................ 2,442,497
---------------
Net investment income......................... 12,101,176
---------------
Realized and Unrealized
Gain (Loss) on Investments
Net realized gain (loss) on:
Investment transactions.................... 1,636,226
Financial futures contracts................ (1,652,457)
---------------
(16,231)
---------------
Net change in unrealized appreciation (depreciation) on:
Investments................................ 6,768,682
---------------
Net gain on investments....................... 6,752,451
---------------
Net Increase in Net Assets
Resulting from Operations..................... $18,853,627
---------------
---------------
</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 1997 1996
<S> <C> <C>
Operations
Net investment income.......... $ 12,101,176 $ 13,949,332
Net realized gain (loss) on
investment transactions..... (16,231) 7,196,617
Net change in unrealized
appreciation (depreciation)
of investments.............. 6,768,682 (8,712,631)
-------------- ------------
Net increase in net assets
resulting from operations... 18,853,627 12,433,318
-------------- ------------
Dividends and distributions (Note 1):
Dividends from net investment
income
Class A..................... (4,494,423) (3,208,681)
Class B..................... (7,523,352) (10,661,812)
Class C..................... (83,049) (78,839)
Class Z..................... (352) --
-------------- ------------
(12,101,176) (13,949,332)
-------------- ------------
Distributions in excess of net
investment income
Class A..................... (16,287) --
Class B..................... (30,435) --
Class C..................... (359) --
Class Z..................... -- --
-------------- ------------
(47,081) --
-------------- ------------
Distributions from net realized
gains
Class A..................... (1,530,960) (241,413)
Class B..................... (2,860,896) (912,215)
Class C..................... (33,726) (5,692)
Class Z..................... (3) --
-------------- ------------
(4,425,585) (1,159,320)
-------------- ------------
Series share transactions (net of
share conversions) (Note 5):
Net proceeds from shares
sold........................ 9,836,460 12,763,152
Net asset value of shares
issued in reinvestment of
dividends and
distributions............... 9,926,237 9,004,603
Cost of shares reacquired...... (44,438,627) (51,693,450)
-------------- ------------
Net decrease in net assets from
Series share transactions... (24,675,930) (29,925,695)
-------------- ------------
Total decrease.................... (22,396,145) (32,601,029)
Net Assets
Beginning of year................. 264,768,918 297,369,947
-------------- ------------
End of year....................... $ 242,372,773 $264,768,918
-------------- ------------
-------------- ------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-144
<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 thirteen
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 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.
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-145
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Notes to Financial Statements NEW JERSEY 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 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 Series has an arrangement with its custodian bank,
whereby uninvested monies earn credits which reduce the fees charged by the
custodian.
Reclassification of Capital Accounts: The Fund accounts and reports for
distributions to shareholders in accordance with Statement of Position 93-2:
Determination, Disclosure, and Financial Statement Presentation of Income,
Capital Gain, and Return of Capital Distributions by Investment Companies. The
effect of applying this statement was to increase undistributed net investment
income by $47,081, decrease accumulated net realized loss by $80,028 and
decrease paid-in capital in excess of par by $127,109, due to the sale of
securities purchased with market discount. Net investment income, net realized
gains and net assets were not affected by this change.
- ------------------------------------------------------------
Note 2. Agreements
The Fund has a management agreement with Prudential Investments Fund Management
LLC ('PIFM'). Pursuant to this agreement, PIFM has responsibility for all
investment advisory services and supervises the subadviser's performance of such
services. PIFM 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. PIFM 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 PIFM is computed daily and payable monthly, at an annual
rate of .50 of 1% of the average daily net assets of the Series. Prior to
September 1, 1997, PIFM agreed to waive a portion (.05 of 1% of the Series'
average daily net assets) of its management fee, which amounted to $126,755
($0.003 per share) for the year ended August 31, 1997. Effective September 1,
1997, PIFM eliminated its management fee waiver.
The Series has a distribution agreement with Prudential Securities Incorporated
('PSI'), which acts as the distributor of the Class A, Class B, Class C and
Class Z shares of the Fund. The Series compensates PSI for distributing and
servicing the Series' 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 PSI. The distribution fees are accrued daily and payable monthly. No
distribution or service fees are paid to PSI as distributor for the Class Z
shares of the Series.
Pursuant to the Class A, B and C Plans, the Series compensates PSI 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, 1997.
PSI has advised the Series that they have received approximately $6,900 in
front-end sales charges resulting from sales of Class A shares during the year
ended August 31, 1997. From these fees, 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 during the year ended August 31, 1997, it
received approximately $216,000 and $300 in contingent deferred sales charges
imposed upon certain redemptions by Class B and Class C shareholders,
respectively.
PSI, PIFM and PIC are indirect, wholly-owned subsidiaries of The Prudential
Insurance Company of America.
The Series, along with other affiliated registered investment companies (the
'Funds'), entered into a credit agreement (the 'Agreement') on December 31, 1996
with an unaffiliated lender. The maximum commitment under the Agreement is
$200,000,000. The Agreement expires on December 30, 1997. Interest on any such
borrowings outstanding will be
- --------------------------------------------------------------------------------
B-146
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Notes to Financial Statements NEW JERSEY SERIES
- --------------------------------------------------------------------------------
at market rates. The purpose of the Agreement is to serve as an alternative
source of funding for capital share redemptions. The Series has not borrowed any
amounts pursuant to the Agreement as of August 31, 1997. The Funds pay a
commitment fee at an annual rate of .055 of 1% on the unused portion of the
credit facility. The commitment fee is accrued and paid quarterly on a pro-rata
basis by the Funds.
- ------------------------------------------------------------
Note 3. Other Transactions with Affiliates
Prudential Mutual Fund Services LLC ('PMFS'), a wholly-owned subsidiary of PIFM,
serves as the Fund's transfer agent. During the year ended August 31, 1997, the
Series incurred fees of approximately $93,900 for the services of PMFS. As of
August 31, 1997, approximately $6,600 of such fees were due to PMFS. Transfer
agent fees and expenses in the Statement of Operations include certain
out-of-pocket expenses paid to non-affiliates.
- ------------------------------------------------------------
Note 4. Portfolio Securities
Purchases and sales of portfolio securities of the Series, excluding short-term
investments, for the year ended August 31, 1997, were $59,693,002 and
$86,656,355, respectively.
The cost basis of investments for federal income tax purposes at August 31,
1997, was $228,165,271 and accordingly, net unrealized appreciation of
investments for federal income tax purposes was $11,914,033 (gross unrealized
appreciation--$12,133,971; gross unrealized depreciation--$219,938).
For federal income tax purposes, the Series has a capital loss carryforward as
of August 31, 1997 of approximately $144,100 which will expire in 2005.
Accordingly, no capital gains distribution is expected to be paid to
shareholders until future net gains have been realized in excess of such
carryforward.
- ------------------------------------------------------------
Note 5. Capital
The Series offers Class A, Class B, Class C and Class Z 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.
Effective December 6, 1996 the Series commenced offering Class Z shares. Class Z
shares are not subject to any sales or redemption charge and are offered
exclusively for sale to a limited group of investors.
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, 1997
and fiscal year ended August 31, 1996 were as follows:
<TABLE>
<CAPTION>
Class A Shares Amount
- ------------------------------------ ---------- ------------
<S> <C> <C>
Year ended August 31, 1997:
Shares sold......................... 143,690 $ 1,552,731
Shares issued in reinvestment
of dividends and distributions.... 335,467 3,654,167
Shares reacquired................... (1,514,074) (16,497,510)
---------- ------------
Net decrease in shares outstanding
before conversion................. (1,034,917) (11,290,612)
Shares issued upon conversion from
Class B........................... 2,909,349 31,805,116
---------- ------------
Net increase in shares
outstanding....................... 1,874,432 $ 20,514,504
---------- ------------
---------- ------------
Year ended August 31, 1996:
Shares sold......................... 148,515 $ 1,647,737
Shares issued in reinvestment
of dividends...................... 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
---------- ------------
---------- ------------
<CAPTION>
Class B
- ------------------------------------
Year ended August 31, 1997:
Shares sold......................... 744,603 $ 8,104,569
Shares issued in reinvestment
of dividends and distributions.... 566,434 6,171,161
Shares reacquired................... (2,507,193) (27,336,208)
---------- ------------
Net decrease in shares outstanding
before conversion................. (1,196,156) (13,060,478)
Shares reacquired upon conversion
into Class A...................... (2,909,887) (31,805,116)
---------- ------------
Net decrease in shares
outstanding....................... (4,106,043) $(44,865,594)
---------- ------------
---------- ------------
</TABLE>
- --------------------------------------------------------------------------------
B-147
<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, 1996:
Shares sold......................... 917,780 $ 10,139,469
Shares issued in reinvestment
of dividends...................... 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)
---------- ------------
---------- ------------
<CAPTION>
Class C
- ------------------------------------
Year ended August 31, 1997:
Shares sold......................... 11,292 $ 123,466
Shares issued in reinvestment
of dividends and distributions.... 9,232 100,567
Shares reacquired................... (51,758) (564,034)
---------- ------------
Net decrease in shares
outstanding....................... (31,234) $ (340,001)
---------- ------------
---------- ------------
Year ended August 31, 1996:
Shares sold......................... 88,262 $ 975,946
Shares issued in reinvestment
of dividends...................... 6,369 70,317
Shares reacquired................... (51,020) (559,370)
---------- ------------
Net increase in shares
outstanding....................... 43,611 $ 486,893
---------- ------------
---------- ------------
<CAPTION>
Class Z
- ------------------------------------
December 6, 1996(a) through
August 31, 1997:
Shares sold......................... 5,113 $ 55,694
Shares issued in reinvestment
of dividends...................... 31 342
Shares reacquired................... (3,751) (40,875)
---------- ------------
Net increase in shares
outstanding....................... 1,393 $ 15,161
---------- ------------
---------- ------------
- ---------------
(a) Commencement of offering of Class Z shares.
</TABLE>
- --------------------------------------------------------------------------------
B-148
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Financial Highlights NEW JERSEY SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A
-------------------------------------------------------
Year Ended August 31,
-------------------------------------------------------
1997 1996 1995 1994 1993
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period................... $ 10.87 $ 10.98 $ 10.81 $ 11.74 $ 11.15
------- ------- ------- ------- -------
Income from investment operations
Net investment income(a)............................... .55 .57 .61 .61 .64
Net realized and unrealized gain (loss) on investment
transactions........................................ .29 (.07) .17 (.75) .71
------- ------- ------- ------- -------
Total from investment operations.................... .84 .50 .78 (.14) 1.35
------- ------- ------- ------- -------
Less distributions
Dividends from net investment income................... (.55) (.57) (.61) (.61) (.64)
Distributions in excess of net investment income....... --(c) -- -- -- --
Distributions from net realized gains on investment
transactions........................................ (.19) (.04) -- (.18) (.12)
------- ------- ------- ------- -------
Total distributions................................. (.74) (.61) (.61) (.79) (.76)
------- ------- ------- ------- -------
Net asset value, end of period......................... $ 10.97 $ 10.87 $ 10.98 $ 10.81 $ 11.74
------- ------- ------- ------- -------
------- ------- ------- ------- -------
TOTAL RETURN(b):....................................... 7.97% 4.63% 7.55% (1.27)% 12.57%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)........................ $95,729 $74,492 $49,666 $14,774 $15,501
Average net assets (000)............................... $89,280 $61,837 $30,290 $15,334 $13,444
Ratios to average net assets:(a)
Expenses, including distribution fees............... .70% .67% .55% .58% .61%
Expenses, excluding distribution fees............... .60% .57% .45% .48% .51%
Net investment income............................... 5.03% 5.19% 5.65% 5.42% 5.63%
For Class A, B, C and Z shares:
Portfolio turnover rate............................. 25% 62% 37% 34% 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 year reported and includes reinvestment of dividends and
distributions. Total returns for periods of less than a full year are not
annualized.
(c) Less than $.005 per share.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-149
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Financial Highlights NEW JERSEY SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class B
------------------------------------------------------------
Year Ended August 31,
------------------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period................... $ 10.87 $ 10.98 $ 10.81 $ 11.74 $ 11.15
-------- -------- -------- -------- --------
Income from investment operations
Net investment income(a)............................... .50 .53 .57 .56 .59
Net realized and unrealized gain (loss) on investment
transactions........................................ .29 (.07) .17 (.75) .71
-------- -------- -------- -------- --------
Total from investment operations.................... .79 .46 .74 (.19) 1.30
-------- -------- -------- -------- --------
Less distributions
Dividends from net investment income................... (.50) (.53) (.57) (.56) (.59)
Distributions in excess of net investment income....... --(c) -- -- -- --
Distributions from net realized gains on investment
transactions........................................ (.19) (.04) -- (.18) (.12)
-------- -------- -------- -------- --------
Total distributions................................. (.69) (.57) (.57) (.74) (.71)
-------- -------- -------- -------- --------
Net asset value, end of period......................... $ 10.97 $ 10.87 $ 10.98 $ 10.81 $ 11.74
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
TOTAL RETURN(b):....................................... 7.54% 4.22% 7.12% (1.67)% 12.12%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)........................ $144,992 $188,315 $246,202 $323,077 $351,878
Average net assets (000)............................... $162,330 $222,235 $274,995 $343,941 $316,372
Ratios to average net assets:(a)
Expenses, including distribution fees............... 1.10% 1.07% .95% .98% 1.01%
Expenses, excluding distribution fees............... .60% .57% .45% .48% .51%
Net investment income............................... 4.63% 4.80% 5.30% 5.02% 5.23%
</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. Total returns for periods of less than a full year are not
annualized.
(c) Less than $.005 per share.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-150
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Financial Highlights NEW JERSEY SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class C Class Z
----------------------------------------------- ------------
August 1, December 6,
1994(d) 1996(e)
Year Ended August 31, Through Through
-------------------------------- August 31, August 31,
1997 1996 1995 1994 1997
------ -------- -------- ---------- ------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period................... $10.87 $ 10.98 $ 10.81 $10.83 $ 11.10
------ -------- -------- ----- ------
Income from investment operations
Net investment income(b)............................... .48 .50 .54 .04 .41
Net realized and unrealized gain (loss) on investment
transactions........................................ .29 (.07) .17 (.02) .07
------ -------- -------- ----- ------
Total from investment operations.................... .77 .43 .71 .02 .48
------ -------- -------- ----- ------
Less distributions
Dividends from net investment income................... (.48) (.50) (.54) (.04) (.41)
Distributions in excess of net investment income....... --(c) -- -- -- --(c)
Distributions from net realized gains on investment
transactions........................................ (.19) (.04) -- -- (.19)
------ -------- -------- ----- ------
Total distributions................................. (.67) (.54) (.54) (.04) (.60)
------ -------- -------- ----- ------
Net asset value, end of period......................... $10.97 $ 10.87 $ 10.98 $10.81 $ 10.98
------ -------- -------- ----- ------
------ -------- -------- ----- ------
TOTAL RETURN(c):....................................... 7.27% 3.96% 6.86% 0.14% 4.49%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)........................ $1,637 $ 1,961 $ 1,502 $ 240 $ 15
Average net assets (000)............................... $1,894 $ 1,735 $ 790 $ 11 $ 10
Ratios to average net assets:(b)
Expenses, including distribution fees............... 1.35% 1.32% 1.20% 1.29%(a) .60%(a)
Expenses, excluding distribution fees............... .60% .57% .45% .54%(a) .60%(a)
Net investment income............................... 4.38% 4.54% 4.99% 5.06%(a) 5.13%(a)
</TABLE>
- ---------------
(a) Annualized.
(b) Net of management fee waiver.
(c) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each period reported and includes reinvestment of dividends and
distributions. Total returns for periods of less than a full year are not
annualized.
(d) Commencement of offering of Class C shares.
(e) Commencement of offering of Class Z shares.
(f) Less than $.005 per share.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-151
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Report of Independent Accountants NEW JERSEY SERIES
- --------------------------------------------------------------------------------
To the Shareholders and Board of Trustees of
Prudential Municipal Series Fund, New Jersey Series
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Prudential Municipal Series Fund,
New Jersey Series (the 'Fund', one of the portfolios constituting Prudential
Municipal Series Fund) at August 31, 1997, and the results of its operations,
the changes in its net assets and the financial highlights for the year then
ended, in conformity with generally accepted accounting principles. These
financial statements and financial highlights (hereafter referred to as
'financial statements') are the responsibility of the Fund's management; our
responsibility is to express an opinion on these financial statements based on
our audit. We conducted our audit of these financial statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audit, which included confirmation of securities at August
31, 1997 by correspondence with the custodian and broker, provides a reasonable
basis for the opinion expressed above. The accompanying statement of changes in
net assets for the year ended August 31, 1996 and the financial highlights for
each of the four periods in the period ended August 31, 1996 were audited by
other independent accountants, whose opinion dated October 14, 1996 was
unqualified.
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York
October 20, 1997
- --------------------------------------------------------------------------------
B-152
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Change of Auditors NEW JERSEY SERIES
- --------------------------------------------------------------------------------
Effective March 1, 1997, Deloitte & Touche LLP was terminated as the Fund's
auditors. For the years ended August 31, 1983 through August 31, 1996, Deloitte
& Touche LLP expressed an unqualified opinion on the Series' financial
statements. There were no disagreements between Fund management and Deloitte &
Touche LLP prior to their termination. The Board of Trustees approved the
termination of Deloitte & Touche LLP and the appointment of Price Waterhouse LLP
as the Fund's independent accountants.
- --------------------------------------------------------------------------------
B-153
<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 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 Jersey 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-154
<PAGE>
Portfolio of Investments as of PRUDENTIAL MUNICIPAL SERIES FUND
August 31, 1997 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 3.00% 9/03/97 $ 1,300 $ 1,300,000
Bernards Twnshp., Ser. 96, B.A.N. NR 4.25 5/22/98 5,261 5,274,836
Burlington Cnty.,
Ser. 96, G.O. Aa 5.20 10/01/97 2,760 2,763,191
Ser. 97, B.A.N. NR 4.00 3/12/98 3,000 3,005,317
G.O., B.A.N. NR 4.25 4/23/98 3,000 3,006,461
Cherry Hill Twnshp., Ser. 96A, B.A.N. NR 4.25 10/15/97 5,000 5,002,901
Decatur AL Ind. Dev., Amoco Corp., Ser. 95, F.R.D.D.,
A.M.T. P1 3.80 9/02/97 300 300,000
Denville Twnshp., G.O., B.A.N. NR 4.25 6/16/98 1,500 1,504,546
Dist. of Columbia.,
Gen. Oblig., Ser. 92A-1, F.R.D.D. VMIG1 3.80 9/02/97 800 800,000
Gen. Oblig., Ser. 92A-2, F.R.D.D. VMIG1 3.80 9/02/97 1,400 1,400,000
Essex Cnty. Impvt. Auth. Rev., F.R.W.D. VMIG1 2.90 9/03/97 3,000 3,000,000
Farmington Pub. Serv. Proj., Ser. 94C, F.R.D.D., A.M.T. P1 3.80 9/02/97 4,700 4,700,000
Gulf Coast TX, Ind. Dev. Auth., Amoco Oil, Ser. 97,
F.R.D.D. P1 3.80 9/02/97 3,400 3,400,000
Hudson Cnty. Impvt. Auth. Rev., Ser. 86, F.R.W.D. A1+(c) 3.25 9/04/97 2,945 2,945,000
Iowa Fin. Auth., Cedar Riv. Paper Co., Ser. 94A, F.R.D.D.,
A.M.T. A1+(c) 3.80 9/02/97 500 500,000
Marlboro Twnshp., Ser. 96, B.A.N. NR 4.00 12/18/97 3,145 3,148,559
New Jersey Hsg. & Mtg. Fin. Agcy.
Eagle Tax Exempt, Ser 94C, F.R.W.D.S. A-1+(c) 3.41 9/04/97 3,600 3,600,000
Home Buyer, Ser. 96S, F.R.W.D., A.M.T. A1+(c) 3.45 9/04/97 6,000 6,000,000
New Jersey Sports & Expo. Auth., Ser. 92C, F.R.W.D. VMIG1 3.15 9/04/97 4,300 4,300,000
New Jersey St. Econ. Dev. Auth.,
Brach Jersey Ave., F.R.W.D. A-1+(c) 3.795 9/03/97 1,500 1,500,000
Catholic Cmnty. Svcs. Proj., Ser. 93, F.R.W.D. VMIG1 3.15 9/04/97 5,795 5,795,000
Catholic Cmnty. Svcs. Proj., Ser. 95, F.R.W.D. VMIG1 3.15 9/04/97 2,500 2,500,000
Chambers Cogen. Proj., Ser. 91, T.E.C.P., A.M.T. VMIG1 3.10 9/03/97 3,000 3,000,000
Dow Chemical, Ser. 84A, F.R.D.D. P1 3.00 9/02/97 6,700 6,700,000
Dow Chemical, Ser. 84B, F.R.D.D. P1 3.00 9/02/97 300 300,000
East Meadow Corp., Ser. 86A, F.R.W.D. VMIG1 3.60 9/03/97 2,675 2,675,000
Econ. Growth Bds., Ser. 94B, F.R.W.D. A-1(c) 3.25 9/04/97 1,575 1,575,000
Elizabeth Twn. Wtr. Co., Ser. B, F.R.W.D., A.M.T. A-1+(c) 2.75 9/03/97 5,500 5,500,000
Franciscan Oaks Proj., Ser. 92B, F.R.W.D., A.M.T. A-1(c) 3.25 9/03/97 1,600 1,600,000
Kent Place, Ser. 92L, F.R.W.D. VMIG1 3.25 9/04/97 1,855 1,855,000
Michael Shalit Proj., Ser. 93, F.R.D.D. CPS1 3.70 9/02/97 1,585 1,585,000
North Plainfield Hldg., Ser. 92, A.O.T. VMIG1 3.90 9/01/98 3,380 3,380,000
Ocean Spray Cranberry Inc. Proj., Ser. 87, A.O.T. CPS1 4.00 7/01/98 2,500 2,500,000
Office Court Assoc. Proj., F.R.W.D., A.M.T. A1+(c) 3.20 9/03/97 1,700 1,700,000
Peddie Sch. Proj., Ser. 94B, F.R.W.D. A-1(c) 3.25 9/04/97 3,000 3,000,000
RJB Associates Ltd., F.R.W.D. CPS1 3.40 9/04/97 1,402 1,402,000
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-155
<PAGE>
Portfolio of Investments as of PRUDENTIAL MUNICIPAL SERIES FUND
August 31, 1997 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>
- ------------------------------------------------------------------------------------------------------------------------------
Russ Berrie & Co., Ser. 83, F.R.W.D. A1+(c) 3.10% 9/03/97 $ 5,800 $ 5,800,000
United Water of NJ Proj., Ser. 96A, F.R.D.D. VMIG1 3.00 9/02/97 4,200 4,200,000
Volvo America Corp., Ser. 86, F.R.W.D. CPS1 3.20 9/03/97 2,100 2,100,000
New Jersey St. Higher Educ. Asst. Auth.,
Stud. Loan Rev., Ser. 97B, A.O.T. A-1+(c) 3.90 6/01/98 1,800 1,800,000
New Jersey St. Tpke. Auth. Rev., Ser. 91D, F.R.W.D. VMIG1 2.65 9/03/97 10,600 10,600,000
Newark Healthcare Facs. Rev., Ser. 95A, F.R.W.D. A-1(c) 3.50 9/04/97 2,955 2,955,000
Passaic Cnty., Util. Auth., Solid Wst. Sys. Proj. Nts.,
Ser. 97B MIG1 3.90 8/04/98 1,800 1,800,000
Plaquemines Parish LA Environ. Rev., Brit. Petrol. Co.,
Explor. & Oil Proj., Ser. 94, F.R.D.D., A.M.T. P1 3.85 9/02/97 3,400 3,400,000
Port Auth. of New York & New Jersey,
Ser. 5, F.R.D.D. VMIG1 3.60 9/02/97 1,700 1,700,000
Ser. 93-1, F.R.W.D. CPS1 3.448(e) 9/02/97 8,000 (f) 8,000,000
Ser. 3, F.R.D.D. VMIG1 3.60 9/02/97 2,900 2,900,000
Port Corpus Christi, TX, Ind. Dev. Corp. Swg. &
Sol. Wst. Disp. Rev., A.M.T. VMIG1 3.90 9/02/97 200 200,000
Puerto Rico Comnwlth.,
Gov't. Dev. Bank, Ser. 85, F.R.W.D. VMIG1 2.90 9/03/97 3,300 3,300,000
Gov't. Dev. Bank, Ser. 85, F.R.W.D. VMIG1 2.90 9/03/97 1,200 1,200,000
Gov't. Dev. Bank, Ser. 95, T.E.C.P. NR 3.40 9/03/97 7,000 7,000,000
Randolph Twnshp. Sch. Dist., B.A.N. NR 4.00 4/15/98 5,000 5,005,925
Rutgers St. Univ. Aaa 8.00 5/01/98 3,255 3,404,169
Salem Cnty., Ind. Poll. Ctrl. Rev.,
Philadelphia Elec. Co., Ser. 93A, T.E.C.P., A.M.T. VMIG1 3.65 10/07/97 8,000 8,000,000
Union Cnty. Ind. Poll. Ctrl. Fin. Auth. Rev.,
Exxon Corp., Ser. 94, F.R.D.D. P1 2.90 9/02/97 3,700 3,700,000
Washoe Cnty., N.V., Sierra Pacific Pwr. Proj., Ser. 90,
F.R.D.D., A.M.T. P1 3.80 9/02/97 3,800 3,800,000
West Orange Twnshp., B.A.N. NR 4.25 6/24/98 3,119 3,128,905
West Windsor Plainsboro Reg. Sch. Dist., Ser. 97, B.A.N. NR 4.00 2/10/98 5,000 5,007,415
Willingboro Twnshp., Ser.97, B.A.N. NR 3.87 6/26/98 6,168 6,168,957
------------
Total Investments--99.1%
(Amortized cost $197,688,182; Note (d)) 197,688,182
Other assets in excess of liabilities--0.9% 1,783,553
------------
Net Assets--100% $199,471,735
------------
------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-156
<PAGE>
Portfolio of Investments as of PRUDENTIAL MUNICIPAL SERIES FUND
August 31, 1997 NEW JERSEY MONEY MARKET SERIES
- --------------------------------------------------------------------------------
(a) The following abbreviations are used in portfolio descriptions:
A.M.B.A.C.--American Municipal Bond Assurance Corporation.
A.M.T.--Alternative Minimum Tax.
A.O.T.--Annual Optional Tender.
B.A.N--Bond Anticipation Note.
F.G.I.C.--Financial Guaranty Insurance Company.
F.H.A.--Federal Housing Administration.
F.R.D.D.--Floating Rate (Daily) Demand Note (b).
F.R.W.D.--Floating Rate (Weekly) Demand Note (b).
F.S.A.--Financial Security Assurance.
G.O.--General Obligation.
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) The cost of securities for federal income tax purposes is substantially the
same as for financial statement purposes.
(e) Rate shown reflects rate as of August 31, 1997 for variable instruments.
(f) Indicates a restricted security: the aggregate cost of such securities is
$8,000,000. The aggregate value ($8,000,000) is approximately 4.0% of net
assets.
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-157
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Statement of Assets and Liabilities NEW JERSEY MONEY MARKET SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
August 31, 1997
Assets --------------
<S> <C>
Investments, at amortized cost which approximates market value............................................ $197,688,182
Receivable for Series shares sold......................................................................... 1,949,774
Interest receivable....................................................................................... 1,485,099
Receivable for investments sold........................................................................... 255,000
Deferred expenses and other assets........................................................................ 4,916
---------------
Total assets........................................................................................... 201,382,971
---------------
Liabilities
Bank overdraft............................................................................................ 6,540
Payable for Series shares reacquired...................................................................... 1,701,377
Dividends payable......................................................................................... 87,669
Management fee payable.................................................................................... 85,341
Accrued expenses and other liabilities.................................................................... 17,524
Distribution fee payable.................................................................................. 9,518
Deferred trustee's fee.................................................................................... 3,267
---------------
Total liabilities...................................................................................... 1,911,236
---------------
Net Assets................................................................................................ $ 199,471,735
---------------
---------------
Net assets were comprised of:
Shares of beneficial interest, at $.01 par value....................................................... $ 1,994,717
Paid-in capital in excess of par....................................................................... 197,477,018
---------------
Net assets, August 31, 1997............................................................................... $ 199,471,735
---------------
---------------
Net asset value, offering price and redemption price per share ($199,471,735 / 199,471,735 shares of
beneficial interest issued and outstanding; unlimited number of shares authorized)..................... $1.00
---------------
---------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-158
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
NEW JERSEY MONEY MARKET SERIES
Statement of Operations
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended
Net Investment Income August 31, 1997
<S> <C>
Income
Interest and discount earned............... $ 6,897,534
---------------
Expenses
Management fee............................. 981,113
Distribution fee........................... 245,278
Transfer agent's fees and expenses......... 81,000
Custodian's fees and expenses.............. 77,000
Registration fees.......................... 21,000
Reports to shareholders.................... 18,500
Audit fee.................................. 8,000
Legal fees and expenses.................... 4,000
Trustees' fees and expenses................ 4,000
Miscellaneous.............................. 14,688
---------------
Total expenses.......................... 1,454,579
Less: Custodian fee credit (Note 1)........ (16,684)
---------------
Net expenses............................ 1,437,895
---------------
Net investment income......................... 5,459,639
---------------
Net Increase in Net Assets
Resulting from Operations..................... $ 5,459,639
---------------
---------------
</TABLE>
PRUDENTIAL MUNICIPAL SERIES FUND
NEW JERSEY MONEY MARKET SERIES
Statement of Changes in Net Assets
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Increase (Decrease) Year Ended August 31,
in Net Assets 1997 1996
<S> <C> <C>
Operations
Net investment income.......... $ 5,459,639 $ 5,571,957
-------------- ------------
Net increase in net assets
resulting from operations... 5,459,639 5,571,957
-------------- ------------
Dividends and distributions to
shareholders (Note 1).......... (5,459,639) (5,571,957)
-------------- ------------
Series share transactions
(at $1 per share)
Net proceeds from shares
subscribed ................. 640,701,796 686,158,251
Net asset value of shares
issued in reinvestment of
dividends................... 5,343,670 5,403,204
Cost of shares reacquired...... (627,970,024) (692,617,954)
-------------- ------------
Net increase (decrease) in net
assets from Series share
transactions................ 18,075,442 (1,056,499)
-------------- ------------
Total increase (decrease)......... 18,075,442 (1,056,499)
Net Assets
Beginning of year................. 181,396,293 182,452,792
-------------- ------------
End of year....................... $ 199,471,735 $181,396,293
-------------- ------------
-------------- ------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-159
<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 thirteen 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.
The Series' may hold up to 10% of its net assets in illiquid securities
including those which are restricted as to disposition under securities law
('restricted securities'). Restricted securities held by the Series at August
31, 1997 do not include rights with regard to registration. Restricted
securities are valued pursuant to the valuation procedures noted above.
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, 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 Investments Fund Management
LLC ('PIFM'). Pursuant to this agreement, PIFM has responsibility for all
investment advisory services and supervises the subadviser's performance of such
services. PIFM 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. PIFM 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 PIFM is computed daily and payable monthly, at an
annual rate of .50 of 1% of the average daily net assets of the Series.
The Series has a distribution agreement with Prudential Securities Incorporated
('PSI'), which acts as the distributor of the Series. The Series reimbursed 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.
PSI, PIFM and PIC are (indirect) wholly-owned subsidiaries of The Prudential
Insurance Company of America.
- ------------------------------------------------------------
Note 3. Other Transactions with Affiliates
Prudential Mutual Fund Services LLC ('PMFS'), a wholly-owned subsidiary of PIFM,
serves as the Fund's transfer agent. During the year ended August 31, 1997, the
Series incurred fees of approximately $75,300 for the services of PMFS. As of
August 31, 1997, approximately $6,700 of such fees were due to PMFS. Transfer
agent fees and expenses in the Statement of Operations include certain
out-of-pocket expenses paid to non-affiliates.
- --------------------------------------------------------------------------------
B-160
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Financial Highlights NEW JERSEY MONEY MARKET SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended August 31,
---------------------------------------------------
1997 1996 1995 1994
------------ -------- -------- --------
<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(a).................... .03 .03 .03 .02
Dividends and distributions........................................ (.03) (.03) (.03) (.02)
------------ -------- -------- --------
Net asset value, end of year....................................... $ 1.00 $ 1.00 $ 1.00 $ 1.00
------------ -------- -------- --------
------------ -------- -------- --------
TOTAL RETURN(b):................................................... 2.82% 2.92% 3.15% 1.90%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)...................................... $199,472 $181,396 $182,453 $158,280
Average net assets (000)........................................... $196,223 $192,617 $171,223 $169,123
Ratios to average net assets(a):
Expenses, including distribution fee............................ .73% .70% .64% .68%
Expenses, excluding distribution fee............................ .60% .57% .51% .55%
Net investment income........................................... 2.78% 2.89% 3.11% 1.87%
<CAPTION>
1993
--------
<S> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year................................. $ 1.00
Net investment income and net realized gains(a).................... .02
Dividends and distributions........................................ (.02)
--------
Net asset value, end of year....................................... $ 1.00
--------
--------
TOTAL RETURN(b):................................................... 2.31%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)...................................... $163,087
Average net assets (000)........................................... $170,103
Ratios to average net assets(a):
Expenses, including distribution fee............................ .64%
Expenses, excluding distribution fee............................ .51%
Net investment income........................................... 2.02%
</TABLE>
- ---------------
(a) Net of custodian fee credit.
(b) Total return includes reinvestment of dividends and distributions.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-161
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Report of Independent Accountants NEW JERSEY MONEY MARKET SERIES
- --------------------------------------------------------------------------------
To the Shareholders and Board of Trustees of
Prudential Municipal Series Fund, New Jersey Money Market Series
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Prudential Municipal Series Fund,
New Jersey Money Market Series (the 'Fund', one of the portfolios constituting
Prudential Municipal Series Fund) at August 31, 1997, and the results of its
operations, the changes in its net assets and the financial highlights for the
year then ended, in conformity with generally accepted accounting principles.
These financial statements and financial highlights (hereafter referred to as
'financial statements') are the responsibility of the Fund's management; our
responsibility is to express an opinion on these financial statements based on
our audit. We conducted our audit of these financial statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audit, which included confirmation of securities at August
31, 1997 by correspondence with the custodian, provides a reasonable basis for
the opinion expressed above. The accompanying statement of changes in net assets
for the year ended August 31, 1996 and the financial highlights for each of the
four years in the period ended August 31, 1996 were audited by other independent
accountants, whose opinion dated October 14, 1996 was unqualified.
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York
October 20, 1997
- --------------------------------------------------------------------------------
B-162
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Change of Auditors NEW JERSEY MONEY MARKET SERIES
- --------------------------------------------------------------------------------
Effective March 1, 1997, Deloitte & Touche LLP was terminated as the Fund's
auditors. For the years ended August 31, 1993 through August 31, 1996, Deloitte
& Touche LLP expressed an unqualified opinion on the Series' financial
statements. There were no disagreements between Fund management and Deloitte &
Touche LLP prior to their termination. The Board of Trustees approved the
termination of Deloitte & Touche LLP and the appointment of Price Waterhouse LLP
as the Fund's independent accountants.
- --------------------------------------------------------------------------------
B-163
<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
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 Jersey 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-164
<PAGE>
Portfolio of Investments as of PRUDENTIAL MUNICIPAL SERIES FUND
August 31, 1997 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--98.2%
- ------------------------------------------------------------------------------------------------------------------------------
City of Elmira, Wtr. Impvt., Ser. B, A.M.B.A.C. Aaa 5.95% 3/01/16 $ 5,395 $ 5,625,582
City of New Rochelle Ind. Dev. Agcy.,
Coll. of New Rochelle Baa2 6.625 7/01/12 500 533,015
Coll. of New Rochelle Baa2 6.75 7/01/22 2,000 2,133,760
Dutchess Cnty. Res. Rec. Agcy. Rev., Solid Waste Mgmt.,
Ser. A, F.G.I.C. Aaa 7.50 1/01/09 1,150 1,246,830
Islip Res. Rec., Ser. B, A.M.B.A.C., A.M.T. Aaa 7.20 7/01/10 1,745 2,081,488
Jefferson Cnty. Ind. Dev. Agcy., Solid Waste Disp. Rev.,
A.M.T. Baa1 7.20 12/01/20 1,500 1,642,050
Met. Trans. Auth. Facs. Rev.,
Cap. Apprec., Ser. N, F.G.I.C. Aaa Zero 7/01/13 4,000 1,746,760
Commuter Facs., Ser. A, F.G.I.C. Aaa 5.60 7/01/09 500 524,235
Commuter Facs., Ser. A, F.G.I.C. Aaa 5.70 7/01/10 1,000 1,049,580
Trans. Facs. Rev., Ser. A, F.S.A. Aaa 5.60 7/01/09 2,900 3,040,563
Trans. Facs. Rev., Ser. A, F.S.A. Aaa 5.70 7/01/10 4,600 4,828,068
Trans. Facs. Rev., Ser. N, F.G.I.C. Aaa Zero 7/01/12 5,575 2,583,901
Met. Trans. Auth., New York Svc. Contract,
Cap. Apprec., Ser. 7, M.B.I.A. Aaa Zero 7/01/08 7,185 4,233,618
Commuter Facs., Ser. O Baa1 5.50 7/01/17 2,500 2,511,825
Trans. Facs. Rev., Ser. O Baa1 5.75 7/01/13 1,975 2,049,931
Mun. Assist. Corp. for New York City, Ser. E Aa 6.00 7/01/06 3,000 3,270,150
New York City Ind. Dev. Agcy., Spec. Facs. Rev.,
U.S.T.A. National Tennis Center Proj., F.S.A. Aaa 6.375 11/15/14 1,000 1,092,480
Y.M.C.A. Of Greater N.Y. Proj. Aaa 8.00 8/01/16 1,350 (b) 1,550,772
New York City Mun. Wtr. Fin. Auth., Wtr. & Swr. Sys. Rev.,
Ser. A A2 5.50 6/15/24 11,500 11,324,625
Ser. B A2 5.875 6/15/26 2,000 2,054,500
New York City Trust, Cultural Res., American Museum of
Natl. History, Ser. A, M.B.I.A. Aaa 5.65 4/01/22 2,500 2,527,400
New York City, Gen. Oblig.,
Ser. A Aaa 7.75 3/15/03 3,330 (b) 3,660,969
Ser. B Aaa 8.00 6/01/99 890 (b) 949,692
Ser. B Baa1 8.00 6/01/99 130 137,991
Ser. B Baa1 7.50 2/01/01 4,000 4,361,920
Ser. D Aaa 8.00 8/01/03 1,055 (b) 1,208,260
Ser. D Baa1 8.00 8/01/03 1,445 1,622,027
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-165
<PAGE>
Portfolio of Investments as of PRUDENTIAL MUNICIPAL SERIES FUND
August 31, 1997 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 City, Gen. Oblig. (cont'd)
Ser. D Aaa 7.70% 2/01/09 $ 2,795 (b) $ 3,197,647
Ser. D Baa1 7.70 2/01/09 245 276,392
Ser. F Aaa 8.20 11/15/03 515 (b) 598,106
Ser. F Baa1 8.20 11/15/03 2,485 2,825,768
Ser. G Baa1 5.75 10/15/12 7,085 7,195,810
Ser. G Baa1 5.875 10/15/14 2,500 2,548,700
Ser. H Baa1 6.00 8/01/17 2,400 2,467,824
Ser. I Baa1 6.25 4/15/27 6,000 6,299,100
Ser. I Baa1 6.10 4/15/10 2,000 2,109,700
New York St. Dorm. Auth. Rev.,
City Univ. Refunding Bonds Baa1 6.00 7/01/14 6,500 6,964,555
City Univ. Sys. Cons., Ser. D Baa1 7.00 7/01/09 1,880 2,151,077
City Univ., Ser. A Baa1 8.125 7/01/07 890 (b) 938,336
City Univ., Ser. A Baa1 8.125 7/01/07 2,545 2,677,594
Coll. & Univ. Ed., M.B.I.A., A.M.T. Aaa Zero 7/01/04 2,255 1,636,837
Episcopal Hlth. Svcs., G.N.M.A. AAA(c) 7.55 8/01/29 3,000 3,216,300
Long Island Med. Ctr., Ser. A, F.H.A. Aa 7.625 8/15/08 2,545 2,633,388
Long Island Med. Ctr., Ser. A, F.H.A. Aa 7.75 8/15/27 4,100 4,234,152
Mental Hlth. Svcs. Facs. Impvt., Ser. B Baa1 6.50 8/15/11 3,000 3,342,480
Mental Hlth. Svcs. Facs. Impvt., Ser. B Baa1 5.625 2/15/21 2,000 1,980,660
Spec. Act. Sch. Districts, F.G.I.C. Aaa 7.00 7/01/13 3,050 3,309,708
St. Univ. Edl. Facs., Ser. A Baa1 5.25 5/15/15 8,600 8,395,922
New York St. Energy Resch. & Dev. Auth. Rev.,
Brooklyn Union Gas Co., Ser. B, M.B.I.A., A.M.T. Aaa 6.75 2/01/24 2,000 2,177,360
Con. Edison Co., A.M.T. A1 7.50 7/01/25 6,735 7,121,454
Con. Edison Co., Ser. A, A.M.T. A1 7.50 1/01/26 4,775 5,101,276
New York St. Environ. Facs. Corp., Poll. Ctrl. Rev.,
Ser. C Aaa 5.35 7/15/07 2,000 2,091,700
Ser. C Aaa 5.45 7/15/08 3,090 3,233,438
Ser. C Aaa 5.55 7/15/09 1,375 1,439,309
St. Wtr. Revolving Fund, Ser. B Aa2 7.50 3/15/11 1,300 1,380,990
St. Wtr. Revolving Fund, Ser. E Aa2 6.50 6/15/14 1,000 1,080,750
New York St. Hsg. Fin. Agcy. Rev., Ser. A,
Multifamily Hsg. Aa 7.05 8/15/24 1,000 1,063,350
St. Univ. Constr. Aa 8.00 5/01/11 3,600 (b) 4,508,748
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-166
<PAGE>
Portfolio of Investments as of PRUDENTIAL MUNICIPAL SERIES FUND
August 31, 1997 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. Local Gov't. Assist. Corp.,
Ser. C A3 Zero 4/01/14 $11,882 $ 4,869,719
Ser. E A3 6.00% 4/01/14 6,135 6,618,806
New York St. Med. Care Facs. Fin. Agcy. Rev.,
Mental Hlth. Svcs., Ser. A Aaa 7.50 8/15/07 505 (b) 565,716
Mental Hlth. Svcs., Ser. A Baa1 7.50 8/15/07 310 344,175
New York Hosp., Ser. A, A.M.B.A.C., F.H.A. Aaa 6.50 8/15/29 3,000 3,295,140
St. Francis Hosp., Proj. A, F.G.I.C. Aaa 7.60 11/01/08 2,350 2,485,571
New York St. Mtge. Agcy. Rev.,
Homeowner Mtge., Ser. A, A.M.T. Aa 8.05 10/01/21 1,320 1,383,650
Homeowner Mtge., Ser. 55 Aa 5.95 10/01/17 2,000 2,066,520
Homeowner Mtge., Ser. 60, A.M.T. Aa2 6.00 10/01/22 8,000 8,211,120
New York St. Mun. Bond Bank Agcy., Spec. Proj. Rev., Ser.
A A+(c) 6.75 3/15/11 3,000 3,256,410
New York St. Thrwy. Auth.,
Highway & Bridge Trust Fund, Ser. B, F.G.I.C. Aaa 6.00 4/01/14 2,220 2,330,667
Svc. Contract Rev., Local Highway & Bridge Baa1 6.45 4/01/15 1,000 1,089,070
New York St. Urban Dev. Corp. Rev.,
Correctional Cap. Facs., A.M.B.A.C. Aaa Zero 1/01/08 10,000 6,037,900
Correctional Cap. Facs., Ser. 5, A.M.B.A.C. Aaa 6.00 1/01/04 4,415 4,748,686
St. Facs. Baa1 5.75 4/01/11 5,000 5,250,400
St. Facs. Baa1 5.75 4/01/12 5,750 6,004,322
St. Facs. Baa1 5.60 4/01/15 2,000 2,033,560
Subordinated Lien Corp. A 5.50 7/01/16 10,000 9,952,800
Subordinated Lien Corp. A 5.50 7/01/22 5,000 4,906,650
Port Auth. of New York & New Jersey, Ser. 70, A.M.T. A1 7.25 8/01/25 1,000 1,074,710
Puerto Rico Commonwealth,
Gen. Oblig., A.M.B.A.C. Aaa 7.00 7/01/10 6,500 7,775,040
Hwy. & Trans. Auth. Rev., Ser. W, M.B.I.A. Aaa 5.50 7/01/13 11,000 11,497,750
Pub. Impvt. Rfdg., M.B.I.A. Aaa 7.00 7/01/10 1,250 1,495,200
Puerto Rico Elec. Pwr. Auth. Rev., Pub. Impvt. Ref.,
M.B.I.A. Aaa Zero 7/01/04 8,845 6,502,402
Puerto Rico Ind. Tourist Educ. Med. & Envr. Ctrl. Facs.
Fin. Auth., Hosp. Rev Aaa 5.50 7/01/26 3,000 2,978,310
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 2,303,216
Rockland Cnty. Solid Waste Mgmt. Auth., Ser. B,
A.M.B.A.C., A.M.T. Aaa 5.625 12/15/14 1,585 1,609,361
Triborough Bridge & Tunl. Auth. Rev., Ser. A, M.B.I.A. Aaa 6.00 1/01/10 2,000 2,190,100
------------
Total long-term investments (cost $262,936,328) 280,667,394
------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-167
<PAGE>
Portfolio of Investments as of PRUDENTIAL MUNICIPAL SERIES FUND
August 31, 1997 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--0.9%
New York St. Energy Resch. & Dev. Auth.,
Niagara Mohawk Pwr. Corp., Ser. 85B, F.R.D.D. P1 3.70% 9/02/97 $ 2,300 $ 2,300,000
Niagara Mohawk Pwr. Corp., Ser. 86A, F.R.D.D. P1 3.75 9/02/97 200 200,000
Port Auth. of New York & New Jersey, Spec. Oblig. Rev.,
Ser. 2, F.R.D.D. VMIG1 3.65 9/02/97 200 200,000
------------
Total short-term investments (cost $2,700,000) 2,700,000
------------
Total Investments--99.1%
(cost $265,636,328; Note 4) 283,367,394
Other assets in excess of liabilities--0.9% 2,570,094
------------
Net Assets--100% $285,937,488
------------
------------
</TABLE>
- ---------------
(a) The following abbreviations are used in portfolio descriptions:
A.M.B.A.C.--American Municipal Bond Assurance Corporation.
A.M.T.--Alternative Minimum Tax.
F.G.I.C.--Financial Guaranty Insurance Company.
F.H.A.--Federal Housing Administration.
F.R.D.D.--Floating Rate (Daily) Demand Note (d).
F.S.A.--Financial Security Assurance.
G.N.M.A.--Government National Mortgage Association.
M.B.I.A.--Municipal Bond Insurance Association.
(b) Prerefunded issues are secured by escrowed cash and/or direct U.S.
guaranteed obligations.
(c) Standard & Poor's Rating.
(d) For purposes of amortized cost valuation, the maturity date of Floating Rate
Demand Notes is considered to be the later of the next date on which the
security can be redeemed at par, or the next date on which the rate of
interest is adjusted.
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-168
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Statement of Assets and Liabilities NEW YORK SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Assets August 31, 1997
<S> <C>
Investments, at value (cost $265,636,328)................................................................. $ 283,367,394
Cash...................................................................................................... 29,406
Interest receivable....................................................................................... 3,643,539
Receivable for Series shares sold......................................................................... 73,653
Other assets.............................................................................................. 8,055
---------------
Total assets........................................................................................... 287,122,047
---------------
Liabilities
Payable for Series shares reacquired...................................................................... 694,757
Dividends payable......................................................................................... 228,511
Management fee payable.................................................................................... 110,581
Accrued expenses.......................................................................................... 83,911
Distribution fee payable.................................................................................. 63,532
Deferred trustee's fees................................................................................... 3,267
---------------
Total liabilities...................................................................................... 1,184,559
---------------
Net Assets................................................................................................ $ 285,937,488
---------------
---------------
Net assets were comprised of:
Shares of beneficial interest, at par.................................................................. $ 239,435
Paid-in capital in excess of par....................................................................... 266,948,519
---------------
267,187,954
Accumulated net realized gain on investments........................................................... 1,018,468
Net unrealized appreciation on investments............................................................. 17,731,066
---------------
Net assets, August 31, 1997............................................................................... $ 285,937,488
---------------
---------------
Class A:
Net asset value and redemption price per share
($172,471,353 / 14,443,796 shares of beneficial interest issued and outstanding).................... $11.94
Maximum sales charge (3% of offering price)............................................................ .37
---------------
Maximum offering price to public....................................................................... $12.31
---------------
---------------
Class B:
Net asset value, offering price and redemption price per share
($112,658,114 / 9,432,027 shares of beneficial interest issued and outstanding)..................... $11.94
---------------
---------------
Class C:
Net asset value, offering price and redemption price per share
($779,879 / 65,293 shares of beneficial interest issued and outstanding)............................ $11.94
---------------
---------------
Class Z:
Net asset value, offering price and redemption price per share
($28,142 / 2,355 shares of beneficial interest issued and outstanding).............................. $11.95
---------------
---------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-169
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
NEW YORK SERIES
Statement of Operations
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended
Net Investment Income August 31, 1997
<S> <C>
Income
Interest................................... $17,337,551
---------------
Expenses
Management fee............................. 1,487,565
Distribution fee--Class A.................. 173,963
Distribution fee--Class B.................. 613,721
Distribution fee--Class C.................. 5,987
Transfer agent's fees and expenses......... 145,000
Custodian's fees and expenses.............. 100,000
Reports to shareholders.................... 60,000
Registration fees.......................... 40,000
Audit fees................................. 10,000
Legal fees and expenses.................... 9,000
Trustees' fees and expenses................ 4,000
Miscellaneous.............................. 20,475
---------------
Total expenses.......................... 2,669,711
Less: Management fee waiver (Note 2)....... (148,756)
Custodian fee credit.................... (7,705)
---------------
Net expenses............................ 2,513,250
---------------
Net investment income......................... 14,824,301
---------------
Realized and Unrealized Gain (Loss)
on Investments
Net realized gain (loss) on:
Investment transactions.................... 2,070,926
Financial futures transactions............. (934,521)
---------------
1,136,405
---------------
Net change in unrealized appreciation on:
Investments................................ 9,868,697
Financial futures contracts................ (77,625)
---------------
9,791,072
---------------
Net gain on investments....................... 10,927,477
---------------
Net Increase in Net Assets Resulting from
Operations.................................... $25,751,778
---------------
---------------
</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 1997 1996
Operations
Net investment income.......... $ 14,824,301 $ 16,230,346
Net realized gain on investment
transactions................ 1,136,405 9,002,172
Net change in unrealized
appreciation of
investments................. 9,791,072 (11,302,364)
-------------- ------------
Net increase in net assets
resulting from operations... 25,751,778 13,930,154
-------------- ------------
Dividends and distributions (Note
1):
Dividends from net investment income
Class A..................... (8,959,583) (8,811,465)
Class B..................... (5,828,376) (7,388,688)
Class C..................... (35,922) (30,193)
Class Z..................... (420) --
-------------- ------------
(14,824,301) (16,230,346)
-------------- ------------
Distributions in excess of net
investment income
Class A..................... (59,069) --
Class B..................... (42,280) --
Class C..................... (262) --
-------------- ------------
(101,611) --
-------------- ------------
Distributions from net realized gains
Class A..................... (3,839,493) (701,061)
Class B..................... (2,748,185) (645,835)
Class C..................... (17,035) (2,246)
Class Z..................... (4) --
-------------- ------------
(6,604,717) (1,349,142)
-------------- ------------
Series share transactions (net of
share conversions) (Note 5):
Net proceeds from shares
sold........................ 11,515,705 18,427,055
Net asset value of shares
issued in reinvestment of
dividends and
distributions............... 13,270,052 10,492,197
Cost of shares reacquired...... (47,746,814) (47,159,422)
-------------- ------------
Net decrease in net assets from
Series share transactions... (22,961,057) (18,240,170)
-------------- ------------
Total decrease.................... (18,739,908) (21,889,504)
Net Assets
Beginning of year................. 304,677,396 326,566,900
-------------- ------------
End of year....................... $ 285,937,488 $304,677,396
-------------- ------------
-------------- ------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-170
<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 thirteen 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, 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.
Reclassification of Capital Accounts: The Fund accounts and reports for
distributions to shareholders in accordance with the American Institute
- --------------------------------------------------------------------------------
B-171
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Notes to Financial Statements NEW YORK SERIES
- --------------------------------------------------------------------------------
of Certified Public Accountants' Statement of Position 93-2: Determination,
Disclosure, and Financial Statement Presentation of Income, Capital Gain, and
Return of Capital Distributions by Investment Companies. The effect of applying
this statement was to increase undistributed net investment income by $101,611,
increase paid-in capital by $66,986 and decrease accumulated net realized gain
by $168,597, due to the sale of securities purchased with market discount. Net
investment income, net realized gains and net assets were not affected by this
change.
- ------------------------------------------------------------
Note 2. Agreements
The Fund has a management agreement with Prudential Investments Fund Management
LLC ('PIFM'). Pursuant to this agreement, PIFM has responsibility for all
investment advisory services and supervises the subadviser's performance of such
services. PIFM 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. PIFM pays for the cost of the
subadviser's services, the compensation of officers and employees 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 PIFM is computed daily and payable monthly, at an annual
rate of .50 of 1% of the average daily net assets of the Series. Prior to
September 1, 1997, PIFM agreed to waive a portion (.05 of 1% of the Series'
average daily net assets) of its management fee, which amounted to $148,756
($0.006 per share) for the fiscal year ended August 31, 1997. The Series is not
required to reimburse PIFM for such waiver. Effective September 1, 1997, PIFM
eliminated its management fee waiver.
The Fund has a distribution agreement with Prudential Securities Incorporated
('PSI'), which acts as the distributor of the Class A, Class B, Class C and
Class Z shares of the Fund. The Fund compensates 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 PSI. The distribution fees are accrued daily and payable monthly. No
distribution or service fees are paid to PSI as distributor of the Class Z
shares of the Fund.
Pursuant to the Class A, B and C Plans, the Fund compensates PSI 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, 1997.
PSI has advised the Series that it has received approximately $19,000 in
front-end sales charges resulting from sales of Class A shares during the fiscal
year ended August 31, 1997. From these fees, 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, 1997, it
received approximately $229,000 and $800 in contingent deferred sales charges
imposed upon certain redemptions by Class B and Class C shareholders,
respectively.
PSI, PIFM and PIC are indirect, wholly-owned subsidiaries of The Prudential
Insurance Company of America.
The Series, along with other affiliated registered investment companies (the
'Funds'), entered into a credit agreement (the 'Agreement') on December 31, 1996
with an unaffiliated lender. The maximum commitment under the Agreement is
$200,000,000. The Agreement expires on December 30, 1997. Interest on any such
borrowings outstanding will be at market rates. The purpose of the Agreement is
to serve as an alternative source of funding for capital share redemptions. The
Series has not borrowed any amounts pursuant to the Agreement as of August 31,
1997. The Funds pay a commitment fee at an annual rate of .055 of 1% on the
unused portion of the credit facility. The commitment fee is accrued and paid
quarterly on a pro-rata basis by the Funds.
- ------------------------------------------------------------
Note 3. Other Transactions with Affiliates
Prudential Mutual Fund Services LLC ('PMFS'), a wholly-owned subsidiary of PIFM,
serves as the Fund's transfer agent. During the fiscal year ended August 31,
1997, the Series incurred fees of approximately $119,000 for the services of
PMFS. As of August 31, 1997, approximately $8,600 of such fees were due to PMFS.
Transfer agent fees and expenses in the Statement of Operations include certain
out-of-pocket expenses paid to non-affiliates.
- ------------------------------------------------------------
Note 4. Portfolio Securities
Purchases and sales of portfolio securities of the Series, excluding short-term
investments, for the fiscal year ended August 31, 1997 were $123,433,264 and
$145,365,837, respectively.
The cost basis of investments for federal income tax purposes at August 31, 1997
was substantially the same as for financial reporting purposes and accordingly,
net and gross unrealized appreciation on investments for federal income tax
purposes was $17,731,066.
- --------------------------------------------------------------------------------
B-172
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Notes to Financial Statements NEW YORK SERIES
- --------------------------------------------------------------------------------
Note 5. Capital
The Series offers Class A, Class B, Class C and Class Z 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 qualify to purchase Class A shares at net asset value.
Effective December 6, 1996, the Fund commenced offering Class Z shares. Class Z
shares are not subject to any sales or redemption charge and are offered
exclusively for sale to a limited group of investors.
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 fiscal years ended August 31,
1997 and 1996 were as follows:
<TABLE>
<CAPTION>
Class A Shares Amount
- ---------------------------------- ----------- -------------
<S> <C> <C>
Year ended August 31, 1997:
Shares sold....................... 176,414 $ 2,082,840
Shares issued in reinvestment of
dividends and distributions..... 679,483 8,017,121
Shares reacquired................. (2,306,824) (27,255,272)
----------- -------------
Net decrease in shares outstanding
before conversion............... (1,450,927) (17,155,311)
Shares issued upon conversion from
Class B......................... 1,615,708 19,137,484
----------- -------------
Net increase in shares
outstanding..................... 164,781 $ 1,982,173
----------- -------------
----------- -------------
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
----------- -------------
----------- -------------
<CAPTION>
Class B Shares Amount
- ---------------------------------- ----------- -------------
<S> <C> <C>
Year ended August 31, 1997:
Shares sold....................... 773,889 $ 9,162,180
Shares issued in reinvestment of
dividends and distributions..... 441,202 5,205,278
Shares reacquired................. (1,701,083) (20,093,682)
----------- -------------
Net decrease in shares outstanding
before conversion............... (485,992) (5,726,224)
Shares reacquired upon conversion
into
Class A......................... (1,615,362) (19,137,484)
----------- -------------
Net decrease in shares
outstanding..................... (2,101,354) $ (24,863,708)
----------- -------------
----------- -------------
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)
----------- -------------
----------- -------------
<CAPTION>
Class C
- ----------------------------------
<S> <C> <C>
Year ended August 31, 1997:
Shares sold....................... 20,539 $ 243,216
Shares issued in reinvestment of
dividends and distributions..... 4,006 47,258
Shares reacquired................. (33,707) (397,860)
----------- -------------
Net decrease in shares
outstanding..................... (9,162) $ (107,386)
----------- -------------
----------- -------------
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
----------- -------------
----------- -------------
<CAPTION>
Class Z
- ----------------------------------
<S> <C> <C>
December 6, 1996 (a) through
August 31, 1997:
Shares sold....................... 2,322 $ 27,469
Shares issued in reinvestment of
dividends and distributions..... 33 395
----------- -------------
Net increase in shares
outstanding..................... 2,355 $ 27,864
----------- -------------
----------- -------------
</TABLE>
- ---------------
(a) Commencement of offering of Class Z shares.
- --------------------------------------------------------------------------------
B-173
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Financial Highlights NEW YORK SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A
----------------------------------------------------------
Year Ended August 31,
----------------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- ------- -------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year..................... $ 11.77 $ 11.91 $ 11.71 $ 12.54 $ 11.75
-------- -------- -------- ------- -------
Income from investment operations
Net investment income.................................. .61(a) .63(a) .66(a) .67 .70
Net realized and unrealized gain (loss) on investment
transactions........................................ .43 (.09) .20 (.83) .79
-------- -------- -------- ------- -------
Total from investment operations.................... 1.04 .54 .86 (.16) 1.49
-------- -------- -------- ------- -------
Less distributions
Dividends from net investment income................... (.61) (.63) (.66) (.67) (.70)
Distributions in excess of net investment income....... --(c) -- -- -- --
Distributions from net realized gains.................. (.26) (.05) -- -- --
-------- -------- -------- ------- -------
Total distributions................................. (.87) (.68) (.66) (.67) (.70)
-------- -------- -------- ------- -------
Net asset value, end of year........................... $ 11.94 $ 11.77 $ 11.91 $ 11.71 $ 12.54
-------- -------- -------- ------- -------
-------- -------- -------- ------- -------
TOTAL RETURN(b):....................................... 9.19% 4.53% 7.70% (1.38)% 13.06%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000).......................... $172,471 $168,037 $163,025 $13,661 $11,821
Average net assets (000)............................... $173,963 $168,291 $ 95,024 $13,454 $ 8,755
Ratios to average net assets:
Expenses, including distribution fees............... .68%(a) .68%(a) .69%(a) .74% .74%
Expenses, excluding distribution fees............... .58%(a) .58%(a) .59%(a) .64% .64%
Net investment income............................... 5.15%(a) 5.24%(a) 5.65%(a) 5.46% 5.78%
For Class A, B, C and Z shares:
Portfolio turnover rate............................. 43% 92% 57% 49% 44%
</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.
(c) Less than $.005 per share.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-174
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Financial Highlights NEW YORK SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class B
------------------------------------------------------------
Year Ended August 31,
------------------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year..................... $ 11.77 $ 11.91 $ 11.71 $ 12.54 $ 11.75
-------- -------- -------- -------- --------
Income from investment operations
Net investment income.................................. .56(a) .58(a) .61(a) .62 .65
Net realized and unrealized gain (loss) on investment
transactions........................................ .43 (.09) .20 (.83) .79
-------- -------- -------- -------- --------
Total from investment operations.................... .99 .49 .81 (.21) 1.44
-------- -------- -------- -------- --------
Less distributions
Dividends from net investment income................... (.56) (.58) (.61) (.62) (.65)
Distributions in excess of net investment income....... --(c) -- -- -- --
Distributions from net realized gains.................. (.26) (.05) -- -- --
-------- -------- -------- -------- --------
Total distributions................................. (.82) (.63) (.61) (.62) (.65)
-------- -------- -------- -------- --------
Net asset value, end of year........................... $ 11.94 $ 11.77 $ 11.91 $ 11.71 $ 12.54
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
TOTAL RETURN(b):....................................... 8.76% 4.12% 7.27% (1.77)% 12.61%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000).......................... $112,658 $135,764 $163,013 $331,982 $358,607
Average net assets (000)............................... $122,744 $152,656 $230,033 $350,564 $330,823
Ratios to average net assets:
Expenses, including distribution fees............... 1.08%(a) 1.08%(a) 1.11%(a) 1.14% 1.14%
Expenses, excluding distribution fees............... .58%(a) .58%(a) .61%(a) .64% .64%
Net investment income............................... 4.75%(a) 4.84%(a) 5.30%(a) 5.06% 5.38%
</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.
(c) Less than $.005 per share.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-175
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Financial Highlights NEW YORK SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class C Class Z
--------------------------------------------------- ------------
August 1, December 6,
1994(d) 1996(e)
Year Ended August 31, Through Through
------------------------------------ August 31, August 31,
1997 1996 1995 1994 1997
------ ----- ----- ----- ------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period................... $11.77 $11.91 $11.71 $11.74 $ 12.09
------ ----- ----- ----- ------------
Income from investment operations
Net investment income.................................. .53(a) .55(a) .58(a) .04 .46(a)
Net realized and unrealized gain (loss) on investment
transactions........................................ .43 (.09) .20 (.03) .12
------ ----- ----- ----- ------------
Total from investment operations.................... .96 .46 .78 .01 .58
------ ----- ----- ----- ------------
Less distributions
Dividends from net investment income................... (.53) (.55) (.58) (.04) (.46)
Distributions in excess of net investment income....... --(f) -- -- -- --(f)
Distributions from net realized gains.................. (.26) (.05) -- -- (.26)
------ ----- ----- ----- ------------
Total distributions................................. (.79) (.60) (.58) (.04) (.72)
------ ----- ----- ----- ------------
Net asset value, end of period......................... $11.94 $11.77 $11.91 $11.71 $ 11.95
------ ----- ----- ----- ------------
------ ----- ----- ----- ------------
TOTAL RETURN(b):....................................... 8.49% 3.86% 7.01% 0.06% 5.02%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)........................ $ 780 $ 876 $ 529 $ 142 $ 28
Average net assets (000)............................... $ 798 $ 659 $ 325 $ 42 $ 11
Ratios to average net assets:
Expenses, including distribution fees............... 1.33%(a) 1.33%(a) 1.36%(a) 1.62%(c) .58%(c)
Expenses, excluding distribution fees............... .58%(a) .58%(a) .61%(a) .87%(c) .58%(c)
Net investment income............................... 4.50%(a) 4.59%(a) 5.05%(a) 5.17%(c) 5.25%(c)
</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) Commencement of offering of Class Z shares.
(f) Less than $.005 per share.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-176
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Report of Independent Accountants NEW YORK SERIES
- --------------------------------------------------------------------------------
To the Shareholders and Board of Trustees of
Prudential Municipal Series Fund, New York Series
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Prudential Municipal Series Fund,
New York Series (the 'Fund', one of the portfolios constituting Prudential
Municipal Series Fund) at August 31, 1997, and the results of its operations,
the changes in its net assets and the financial highlights for the year then
ended, in conformity with generally accepted accounting principles. These
financial statements and financial highlights (hereafter referred to as
'financial statements') are the responsibility of the Fund's management; our
responsibility is to express an opinion on these financial statements based on
our audit. We conducted our audit of these financial statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audit, which included confirmation of securities at August
31, 1997 by correspondence with the custodian, provides a reasonable basis for
the opinion expressed above. The accompanying statement of changes in net assets
for the year ended August 31, 1996 and the financial highlights for each of the
four periods in the period ended August 31, 1996 were audited by other
independent accountants, whose opinion dated October 14, 1996 was unqualified.
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York
October 20, 1997
- --------------------------------------------------------------------------------
B-177
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Change of Auditors NEW YORK SERIES
- --------------------------------------------------------------------------------
Effective March 1, 1997, Deloitte & Touche LLP was terminated as the Fund's
auditors. For the years ended August 31, 1993 through August 31, 1996, Deloitte
& Touche LLP expressed an unqualified opinion on the Series' financial
statements. There were no disagreements between Fund management and Deloitte &
Touche LLP prior to their termination. The Board of Trustees approved the
termination of Deloitte & Touche LLP and the appointment of Price Waterhouse LLP
as the Fund's independent accountants.
B-178
<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 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-179
<PAGE>
Portfolio of Investments as of PRUDENTIAL MUNICIPAL SERIES FUND
August 31, 1997 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>
- ------------------------------------------------------------------------------------------------------------------------------
Brentwood Union Free Sch. Dist., Ser. 97, T.A.N. MIG1 4.50% 6/30/98 $ 5,000 $ 5,013,526
Buffalo, Gen. Impvt., Ser. 97A Aaa 4.00 2/01/98 2,802 2,806,546
Clinton Cnty. Ind. Dev. Agcy. Rev., Ser. 96A, F.R.W.D.,
A.M.T. A-1(c) 3.30 9/04/97 3,200 3,200,000
Erie Cnty., Ser. 97A, R.A.N. MIG1 4.50 6/24/98 2,500 2,513,699
Harrison Central School Dist., Ser. 97, B.A.N. NR 4.00 3/19/98 5,400 5,407,151
Levittown Union Free School Dist., Ser. 97, T.A.N. NR 4.50 6/24/98 6,100 6,130,939
Monroe Cnty. Ind. Dev. Agcy. Rev., Gen. Accident Ins. Co.,
Ser. 84, S.E.M.O.T. A-1+(c) 3.60 9/01/97 7,000 7,000,000
Nassau Cnty., General Obligation,
General Impvt., Ser. 96T Aaa 5.125 9/01/97 8,180 8,180,000
Nassau Cnty., Ind. Dev. Agcy. Rev., Cold Spring Harbor,
Ser. 89, F.R.D.D. A-1+(c) 3.70 9/02/97 1,100 1,100,000
New York City Hlth. and Hosp. Corp. Rev., Health Sys., Ser
97D, F.R.W.D. VMIG1 3.20 9/03/97 3,000 3,000,000
New York City Hsg. Dev. Corp.,
250 West 50th St., Ser. 97A, A.M.T. VMIG1 3.30 9/03/97 4,000 4,000,000
400 West 59th St. Proj., Ser. 95A-1, F.R.W.D., A.M.T. A-1(c) 3.30 9/03/97 11,900 11,900,000
400 West 59th St. Proj., Ser. 95A-2, F.R.W.D., A.M.T. A-1(c) 3.30 9/03/97 5,000 5,000,000
E.17th St. Property, Ser. 93A, F.R.D.D. A-1(c) 3.75 9/02/97 12,300 12,300,000
James Tower Proj., Ser. 94A, F.R.W.D. A-1(c) 3.20 9/03/97 6,400 6,400,000
New York City Ind. Dev. Agcy. Rev.,
Brooklyn Navy Yard Cogen., Ser. 95A, F.R.W.D. P-1 3.30 9/03/97 30,700 30,700,000
Korean Airlines, Ser. 97B, F.R.W.D., A.M.T. VMIG1 3.30 9/03/97 2,200 2,200,000
Nat'l Audubon Society, Ser. 89, F.R.D.D. A-1+(c) 3.65 9/02/97 3,000 3,000,000
New York City Mun. Water Fin. Auth.,
Ser. 5, T.E.C.P. P-1 3.65 9/12/97 7,000 7,000,000
Water & Sewer Auth., Ser. 93C, F.R.D.D. VMIG1 3.70 9/02/97 3,900 3,900,000
Water & Sewer Auth., Ser. 9-3, T.E.C.P. P-1 3.80 10/09/97 10,000 10,000,000
Water & Sewer Sys. Rev., Ser. C, F.R.D.D. VMIG1 3.70 9/02/97 2,600 2,600,000
New York City Trust Cultural Res. Rev.,
Carnegie Hall, Ser. 85, F.R.W.D. VMIG1 3.20 9/03/97 2,475 2,475,000
Carnegie Hall, Ser. 90, F.R.W.D. VMIG1 3.20 9/03/97 2,000 2,000,000
Soloman R. Guggenheim Proj., Ser. 90B, F.R.D.D. VMIG1 3.65 9/02/97 4,400 4,400,000
New York City, Gen. Oblig., T.E.C.P.,
Ser. 94-H2 VMIG1 3.75 11/20/97 4,500 4,500,000
Ser. 94-H3 VMIG1 3.80 11/14/97 3,100 3,100,000
Ser. H6 VMIG1 3.80 12/19/97 4,200 4,200,000
Ser. J2 VMIG1 3.80 9/12/97 5,000 5,000,000
Ser. J2 VMIG1 3.75 11/04/97 7,000 7,000,000
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-180
<PAGE>
Portfolio of Investments as of PRUDENTIAL MUNICIPAL SERIES FUND
August 31, 1997 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. Dorm. Auth. Rev.,
Cornell Univ., Ser. 90B, F.R.D.D. VMIG1 3.65% 9/02/97 $ 6,700 $ 6,700,000
Mem. Sloan Kettering, Ser. 89A, T.E.C.P. VMIG1 3.80 9/12/97 8,000 8,000,000
Rockefeller Univ., Ser. 97-C3201, F.R.W.D.S.
(cost $13,200,000; purchased 1/27/97) A-1+(c) 3.41 9/04/97 13,200 (f) 13,200,000
New York St. Energy Res. & Dev. Auth.,
Long Island Ltg. Co. Proj., Ser. 85A, A.N.N.M.T. VMIG1 3.60 9/01/97 5,000 5,000,000
Long Island Ltg. Co. Proj., Ser. 95A, F.R.W.D., A.M.T. VMIG1 3.25 9/03/97 5,000 5,000,000
Niagara Mohawk Pwr. Corp., Ser. 85A, F.R.D.D. A-1+(c) 3.70 9/02/97 3,900 3,900,000
Niagara Mohawk Pwr. Corp., Ser. 85B, F.R.D.D. P-1 3.70 9/02/97 1,200 1,200,000
Niagara Mohawk Pwr. Corp., Ser. 86A, F.R.D.D., A.M.T. P-1 3.75 9/02/97 12,600 12,600,000
New York St. Environ. Facs. Corp., General Electric Corp.,
Ser. 92A, T.E.C.P., A.M.T. P-1 3.70 9/10/97 5,600 5,600,000
New York St. Hsg. Fin. Agcy. Rev., F.R.W.D.,
Liberty View Apts., Ser. 85A VMIG1 3.35 9/03/97 11,500 11,500,000
Normandie Ct. I Proj., Ser. 91A VMIG1 3.15 9/03/97 5,000 5,000,000
Union Square So. Hsg., Ser. 96A, A.M.T. MIG1 3.25 9/03/97 5,000 5,000,000
New York St. Job Dev. Auth., F.R.M.D.,
Ser. 84D VMIG1 3.95 9/02/97 1,270 1,270,000
Ser. 84E VMIG1 3.95 9/02/97 2,960 2,960,000
Ser. 84F VMIG1 3.95 9/02/97 1,135 1,135,000
Ser. 86C, A.M.T. VMIG1 4.05 9/02/97 1,000 1,000,000
New York St. Local Gov't Assistance Corp., F.R.W.D.,
Ser. 95B VMIG1 3.20 9/03/97 5,000 5,000,000
Ser. 95E VMIG1 3.20 9/03/97 5,000 5,000,000
New York St. Med. Care Facs. Fin. Agcy. Rev.,
Hosp. & Nursing Home Proj., Ser. 88B Aaa 8.10 2/15/98 6,175 (e) 6,417,176
Huntington Hosp., Ser. 87A Aaa 8.125 11/01/97 3,900 (e) 4,005,667
Niagara Cnty. Ind. Dev. Agcy. Rev., Gen. Abrasive
Treibacher,
Ser. 91, F.R.W.D., A.M.T. P-1 3.45 9/03/97 4,600 4,600,000
Onondaga Cnty. Ind. Dev. Agcy. Rev., Syracuse Research
Corp.,
Ser. 97A, F.R.W.D.S. A-1(c) 3.25 9/04/97 3,200 3,200,000
Oswego Cnty. Ind. Dev. Agcy. Rev., Phillip Morris Co.,
Ser. 92, F.R.W.D. P-1 3.40 9/03/97 10,000 10,000,000
Port Auth. of New York & New Jersey,
Ser. 1R, F.R.D.D. VMIG1 3.70 9/02/97 800 800,000
Ser. 2, F.R.D.D. VMIG1 3.65 9/02/97 1,600 1,600,000
Ser. 3, F.R.D.D. VMIG1 3.60 9/02/97 1,300 1,300,000
Ser. 5, F.R.D.D. VMIG1 3.60 9/02/97 1,100 1,100,000
Ser. 93-1, F.R.W.D.
(cost $12,000,000; purchased 4/13/93) NR 3.475 9/02/97 12,000 (f) 12,000,000
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-181
<PAGE>
Portfolio of Investments as of PRUDENTIAL MUNICIPAL SERIES FUND
August 31, 1997 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>
- ------------------------------------------------------------------------------------------------------------------------------
Puerto Rico Commwlth., Gov't. Dev. Bank, Ser. 95, T.E.C.P. A-1+(c) 3.40% 9/03/97 $ 7,000 $ 7,000,000
Sachem Central School Dist., Ser. 97-98, T.A.N. MIG1 4.25 6/25/98 7,250 7,271,594
Shenedehowa Central School Dist., Ser. 97, B.A.N. NR 4.50 5/06/98 7,315 7,339,012
Smithtown Central School Dist., Ser. 97-98, T.A.N. NR 4.25 6/29/98 4,850 4,861,932
Triborough Bridge & Tunnel Auth. Rev.,
Ser. 94, F.R.W.D. VMIG1 3.15 9/03/97 2,200 2,200,000
Ser. N Aaa 7.875 1/01/98 3,445 (e) 3,544,710
Yates Cnty. Ind. Dev. Agcy. Rev., Clearplass Containers
Inc.,
Ser. 92A, F.R.W.D. A-1(c) 3.30 9/04/97 1,190 1,190,000
------------
Total Investments--98.7%
(cost $353,521,952; Note (d)) 353,521,952
Other assets in excess of liabilities--1.3% 4,769,300
------------
Net Assets--100% $358,291,252
------------
------------
</TABLE>
- ---------------
(a) The following abbreviations are used in portfolio descriptions:
A.M.T.--Alternative Minimum Tax.
A.N.N.M.T.--Annual Mandatory 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 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) 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.
(f) Indicates a restricted security; the aggregate cost of such securities is
$25,200,000. The aggregate value of $25,200,000 is approximately 7.0% of net
assets.
NR--Not Rated by Moody's or Standard & Poor's.
The Fund's current Statement of Additional Information contains a description of
Moody's and Standard & Poor's ratings.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-182
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Statement of Assets and Liabilities NEW YORK MONEY MARKET SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Assets August 31, 1997
<S> <C>
Investments, at amortized cost which approximates market value............................................ $ 353,521,952
Cash...................................................................................................... 16,313
Receivable for Series shares sold......................................................................... 6,313,637
Interest receivable....................................................................................... 1,993,410
Other assets.............................................................................................. 8,598
---------------
Total assets........................................................................................... 361,853,910
---------------
Liabilities
Payable for Series shares reacquired...................................................................... 3,149,218
Dividends payable......................................................................................... 168,894
Management fee payable.................................................................................... 150,617
Accrued expenses.......................................................................................... 69,714
Distribution fee payable.................................................................................. 20,948
Deferred trustee's fee.................................................................................... 3,267
---------------
Total liabilities...................................................................................... 3,562,658
---------------
Net Assets................................................................................................ $ 358,291,252
---------------
---------------
Net assets were comprised of:
Shares of beneficial interest, at $.01 par value....................................................... $ 3,582,912
Paid-in capital in excess of par....................................................................... 354,708,340
---------------
Net assets, August 31, 1997............................................................................... $ 358,291,252
---------------
---------------
Net asset value, offering price and redemption price per share ($358,291,252 / 358,291,252 shares
of beneficial interest issued and outstanding; unlimited number of shares authorized).................. $1.00
---------------
---------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-183
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
NEW YORK MONEY MARKET SERIES
Statement of Operations
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended
Net Investment Income August 31, 1997
<S> <C>
Income
Interest and discount earned............... $11,653,909
---------------
Expenses
Management fee............................. 1,630,461
Distribution fee........................... 407,615
Transfer agent's fees and expenses......... 129,000
Custodian's fees and expenses.............. 60,000
Reports to shareholders.................... 40,000
Registration fees.......................... 21,000
Audit fee.................................. 8,000
Legal fees and expenses.................... 4,000
Trustees' fees and expenses................ 4,000
Miscellaneous.............................. 1,282
---------------
Total expenses.......................... 2,305,358
Less: custodian fee credit (Note 1).... (18,035)
---------------
Net expenses............................ 2,287,323
---------------
Net investment income......................... 9,366,586
---------------
Net Increase in Net Assets
Resulting from Operations..................... $ 9,366,586
---------------
---------------
</TABLE>
PRUDENTIAL MUNICIPAL SERIES FUND
NEW YORK MONEY MARKET SERIES
Statement of Changes in Net Assets
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Increase (Decrease) Year Ended August 31,
<S> <C> <C>
in Net Assets 1997 1996
Operations
Net investment income..... $ 9,366,586 $ 9,800,252
Net realized gain on
investment
transactions........... -- 1,956
--------------- ---------------
Net increase in net assets
resulting from
operations............. 9,366,586 9,802,208
--------------- ---------------
Dividends and distributions
(Note 1).................. (9,366,586) (9,802,208)
--------------- ---------------
Series share transactions
(at $1 per share)
Net proceeds from shares
sold................... 1,086,099,180 1,133,204,969
Net asset value of shares
issued in reinvestment
of dividends and
distributions ......... 9,107,958 9,471,692
Cost of shares
reacquired............. (1,086,385,693) (1,117,904,471)
--------------- ---------------
Net increase in net assets
from Series share
transactions........... 8,821,445 24,772,190
--------------- ---------------
Total increase............... 8,821,445 24,772,190
Net Assets
Beginning of year............ 349,469,807 324,697,617
--------------- ---------------
End of year.................. $ 358,291,252 $ 349,469,807
--------------- ---------------
--------------- ---------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-184
<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 thirteen 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.
The Series may hold up to 10% of its net assets in illiquid securities,
including those which are restricted as to disposition under securities law
('restricted securities'). Restricted securities held by the Series at August
31, 1997 do not include rights with regard to registration. Restricted
securities are valued pursuant to the valuation procedures noted above.
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, 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 Investments Fund Management
LLC. ('PIFM'). Pursuant to this agreement, PIFM has responsibility for all
investment advisory services and supervises the subadviser's performance of such
services. PIFM 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. PIFM 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 to PIFM is computed daily and payable monthly, at an
annual rate of .50 of 1% of the average daily net assets of the Series.
The Fund has a distribution agreement with Prudential Securities Incorporated
('PSI') which acts as the distributor of the Fund. The Series reimburses 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.
PSI, PIFM and PIC are indirect wholly-owned subsidiaries of The Prudential
Insurance Company of America.
- ------------------------------------------------------------
Note 3. Other Transactions with Affiliates
Prudential Mutual Fund Services LLC ('PMFS'), a wholly-owned subsidiary of PIFM,
serves as the Fund's transfer agent. During the year ended August 31, 1997, the
Series incurred fees of approximately $117,300 for the services of PMFS. As of
August 31, 1997, approximately $8,600 of such fees were due to PMFS. Transfer
agent fees and expenses in the Statement of Operations include certain
out-of-pocket expenses paid to non-affiliates.
- --------------------------------------------------------------------------------
B-185
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Financial Highlights NEW YORK MONEY MARKET SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended August 31,
-----------------------------------------------------
1997 1996 1995 1994
------------ -------- -------- --------
<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 .03 .02
Dividends and distributions to shareholders.............................. (.03) (.03) (.03) (.02)
------------ -------- -------- --------
Net asset value, end of year............................................. $ 1.00 $ 1.00 $ 1.00 $ 1.00
------------ -------- -------- --------
------------ -------- -------- --------
TOTAL RETURN(a):......................................................... 2.91% 2.97% 3.06% 1.80%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)............................................ $358,291 $349,470 $324,698 $269,073
Average net assets (000)................................................. $326,092 $336,427 $292,763 $280,492
Ratios to average net assets:
Expenses, including distribution fee.................................. .71% .72% .73% .77%
Expenses, excluding distribution fee.................................. .58% .60% .61% .64%
Net investment income................................................. 2.87% 2.91% 3.02% 1.78%
<CAPTION>
1993
--------
<S> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year....................................... $ 1.00
Net investment income and net realized gains............................. .02
Dividends and distributions to shareholders.............................. (.02)
--------
Net asset value, end of year............................................. $ 1.00
--------
--------
TOTAL RETURN(a):......................................................... 1.80%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)............................................ $286,304
Average net assets (000)................................................. $275,640
Ratios to average net assets:
Expenses, including distribution fee.................................. .75%
Expenses, excluding distribution fee.................................. .63%
Net investment income................................................. 1.75%
</TABLE>
- ---------------
(a) Total return includes reinvestment of dividends and distributions.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-186
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Report of Independent Accountants NEW YORK MONEY MARKET SERIES
- --------------------------------------------------------------------------------
To the Shareholders and Board of Trustees of
Prudential Municipal Series Fund, New York Money Market Series
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Prudential Municipal Series Fund,
New York Money Market Series (the 'Fund', one of the portfolios constituting
Prudential Municipal Series Fund) at August 31, 1997, and the results of its
operations, the changes in its net assets and the financial highlights for the
year then ended, in conformity with generally accepted accounting principles.
These financial statements and financial highlights (hereafter referred to as
'financial statements') are the responsibility of the Fund's management; our
responsibility is to express an opinion on these financial statements based on
our audit. We conducted our audit of these financial statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audit, which included confirmation of securities at August
31, 1997 by correspondence with the custodian, provides a reasonable basis for
the opinion expressed above. The accompanying statement of changes in net assets
for the year ended August 31, 1996 and the financial highlights for each of the
four years in the period ended August 31, 1996 were audited by other independent
accountants, whose opinion dated October 14, 1996 was unqualified.
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York
October 20, 1997
- --------------------------------------------------------------------------------
B-187
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Change of Auditors NEW YORK MONEY MARKET SERIES
- --------------------------------------------------------------------------------
Effective March 1, 1997, Deloitte & Touche LLP was terminated as the Fund's
auditors. For the years ended August 31, 1993 through August 31, 1996, Deloitte
& Touche LLP expressed an unqualified opinion on the Series' financial
statements. There were no disagreements between Fund management and Deloitte &
Touche LLP prior to their termination. The Board of Trustees approved the
termination of Deloitte & Touche LLP and the appointment of Price Waterhouse LLP
as the Fund's independent accountants.
B-188
<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 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-189
<PAGE>
Portfolio of Investments as of PRUDENTIAL MUNICIPAL SERIES FUND
August 31, 1997 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--97.8%
- ------------------------------------------------------------------------------------------------------------------------------
Buncombe Cnty., Pub. Impvt. Bonds Aa 6.90% 3/01/09 $ 1,000(e) $ 1,059,850
Cary Sanitary Sewer Aa1 5.20 4/01/09 500 512,945
Charlotte Mecklenberg Hosp., Hlth. Care Sys. Rev. Aa3 6.25 1/01/20 750 781,320
Charlotte Mecklenberg Hosp., Hlth. Care Sys. Rev. Aa3 5.875 1/15/26 1,000 1,031,680
Charlotte Wtr. & Swr. Aaa 6.20 6/01/17 1,500(e) 1,641,030
Charlotte Wtr. & Swr. Aaa 5.90 2/01/19 1,000(g) 1,046,550
City of Greensboro, Enterprise Sys. Rev., Ser. A A1 5.30 6/01/15 1,000 994,230
Columbus Ind. Fac. & Poll. Fin. Auth., Intl. Paper Co.
Proj. A3 6.15 4/01/21 1,000 1,037,980
Concord Util. Sys. Rev., M.B.I.A. Aaa 5.50 12/01/14 1,000(g) 1,017,950
Dare Cnty., Util. Sys. Rev., M.B.I.A. Aaa 5.75 6/01/14 500 515,550
Durham Cnty., Pub. Impvt. Aaa 4.60 5/01/04 2,000(g) 2,017,040
Durham, Cert. of Part. Aa3 5.375 6/01/17 500 494,855
Durham, Gen. Oblig. Aa1 5.10 2/01/15 1,000 985,210
Fayetteville, Cert. of Part., San. Swr. & Pub. Impvt.,
A.M.B.A.C. Aaa 6.875 12/01/08 1,750(e) 1,888,162
Guam Airport Auth. Rev., Ser. B BBB(c) 6.60 10/01/10 1,000 1,068,290
Guam Pwr. Auth. Rev., Ser. 1994 BBB(c) 6.625 10/01/14 250 269,407
Guam Pwr. Auth. Rev., Ser. A BBB(c) 6.75 10/01/24 525 566,349
Haywood Cnty., Ind. Facs. & Poll. Ctrl.,
Fin. Auth. Env. Impvt. Rev., Champion Intl. Corp. Proj. Baa1 6.25 9/01/25 750 782,865
Fin. Auth. Env. Impvt. Rev., Champion Intl. Corp. Proj.,
Ser. A Baa1 5.75 12/01/25 1,500 1,503,540
Lenoir Hsg. Auth. Mtge. Rev., Caldwell Garden Apt. Proj.,
Ser. A, G.N.M.A. AAA(c) 5.70 8/20/24 1,000 1,002,560
Lincoln Cnty. Gen., Oblig., Ref., F.G.I.C. Aaa 5.10 6/01/09 1,170 1,183,642
Martin Cnty. Ind. Facs. & Poll. Ctrl. Fin. Auth. Rev.,
Weyerhaueser Co. Proj. A2 8.50 6/15/99 200 214,886
Mecklenburg Cnty., Pub. Impvt. Aaa 4.80 3/01/06 500 506,620
No. Carolina Eastn. Mun. Pwr. Agcy.,
Pwr. E.T.M., Ser. A Aaa 6.50 1/01/18 1,995(e) 2,301,532
Pwr. Sys. Rev., Ser. A, M.B.I.A. Aaa 6.50 1/01/18 1,005 1,148,474
Pwr. Sys. Rev., Ser. A Baa1 6.40 1/01/21 1,000 1,040,190
Pwr. Sys. Rev., Ser. B Aaa 6.00 1/01/26 650(e) 710,632
Pwr. Sys. Rev., A.M.B.A.C. Aaa 6.00 1/01/18 1,000 1,081,190
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-190
<PAGE>
Portfolio of Investments as of PRUDENTIAL MUNICIPAL SERIES FUND
August 31, 1997 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 $ 565 $ 582,272
Sngl. Fam. Mtge. Rev., Ser. H Aa2 6.20 3/01/18 1,000 1,035,110
No. Carolina Med. Care Comn.,
Hlth. Care Facs. Rev., Stanley Mem. Hosp. Proj. Baa1 7.80 10/01/19 650(e) 710,275
Hosp. Rev., Annie Pen Mem. Hosp. Proj. Baa3 7.50 8/15/21 1,000 1,083,710
Hosp. Rev., Rex Hosp. Proj. A1 6.25 6/01/17 1,750 1,854,422
No. Carolina Mun. Pwr. Agcy.,
No. 1 Catawba Elec. Rev., A.M.B.A.C. Aaa 5.25 1/01/09 1,000 1,030,980
No. 1 Catawba Elec. Rev., M.B.I.A. Aaa 6.00 1/01/10 1,250 1,367,600
No. 1 Catawba Elec. Rev., M.B.I.A. Aaa 6.82(d) 1/01/12 2,000 2,017,500
No. Carolina Univ. at Raleigh Centennial Campus, M.B.I.A. Aaa 5.125 12/15/16 1,000 970,590
Northern Hosp. Dist., Surry Cnty. Hlth. Care Facs. Rev. Ba1 7.875 10/01/21 1,500 1,610,520
Pitt Cnty.,
Cert. of Part., Pub. Facs., Ser. A, M.B.I.A. Aaa 5.55 4/01/12 1,500 1,534,440
Cert. of Part., Pub. Facs., Ser. B, M.B.I.A. Aaa 5.40 4/01/08 700 729,792
Mem. Hosp. Rev. Aa3 5.25 12/01/21 1,500 1,444,140
Puerto Rico Comnwlth., Gen. Oblig., Ser. A, M.B.I.A. Aaa 6.25 7/01/10 1,240 1,337,080
Puerto Rico Comnwlth., Gen. Oblig. Baa1 6.45 7/01/17 500 548,085
Puerto Rico Elec. Pwr. Auth., Pwr. Rev., Ser. S, M.B.I.A. Aaa 6.125 7/01/09 1,000 1,115,650
Puerto Rico Ind. Med. & Environ. Poll. Ctrl. Facs., Upjohn
Co. Auth. Rev. A1 7.50 12/01/23 500 536,465
Puerto Rico Tel. Auth. Rev., Ser. I, M.B.I.A. Aaa 6.616(d) 1/25/07 1,000 1,057,500
Union Cnty. Wtr. & Swr., Solid Waste Rev. A1 6.50 4/01/07 850 (e) 927,707
University of No. Carolina Chapel Hill Hosp. Rev. Aa3 5.25 2/15/26 1,000 964,220
Virgin Islands Terr., Hugo Ins. Claims Fund Proj., Ser. 91 NR 7.75 10/01/06 390 426,910
Wake Cnty. Hosp. Rev., E.T.M., M.B.I.A. Aaa 5.125 10/01/26 500 482,690
Winston Salem, Sngl. Fam. Mtge. Rev., A.M.T. A1 8.00 9/01/07 365 380,374
Winston Salem, Wtr. & Swr. Sys. Rev., Ser. B Aa 5.70 6/01/17 1,000 1,018,630
-----------
Total long-term investments (cost $50,289,465) 53,171,191
-----------
SHORT-TERM INVESTMENTS--0.8%
No. Carolina Med. Care Comm. Hosp. Rev., Pooled Fin. Proj.,
Ser. 96A, F.R.D.D. (cost $400,000) VMIG1 3.75 9/02/97 400 400,000
-----------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-191
<PAGE>
Portfolio of Investments as of PRUDENTIAL MUNICIPAL SERIES FUND
August 31, 1997 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>
- ------------------------------------------------------------------------------------------------------------------------------
OUTSTANDING CALL OPTION PURCHASED
U. S. Treasury Bond Futures @ $118.00 (cost $35,306) 11/15/97 35 $ 9,844
-----------
Total short-term investments (cost $435,306) 409,844
-----------
Total Investments--98.6%
(cost $50,724,771; Note 4) 53,581,035
Other assets in excess of liabilities--1.4% 783,000
-----------
Net Assets--100% $54,364,035
-----------
-----------
</TABLE>
(a) The following abbreviations are used in portfolio descriptions:
A.M.B.A.C.--American Municipal Bond Assurance Corporation.
A.M.T.--Alternative Minimum Tax.
E.T.M.--Escrowed to Maturity.
F.G.I.C.--Financial Guaranty Insurance Company.
F.R.D.D.--Floating Rate (Daily) Demand Note (b).
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) Prerefunded issues are secured by escrowed cash and/or direct U.S.
guaranteed obligations.
(f) One contract equals $1,000 face value.
(g) Segregated as collateral for outstanding call option purchased.
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-192
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Statement of Assets and Liabilities NORTH CAROLINA SERIES
- --------------------------------------------------------------------------------
<TABLE>
Assets August 31, 1997
<S> <C>
Investments, at value (cost $50,724,771).................................................................. $53,581,035
Cash...................................................................................................... 198,592
Interest receivable....................................................................................... 804,255
Receivable for investments sold........................................................................... 65,000
Receivable for Series shares sold......................................................................... 440
Other assets.............................................................................................. 1,597
---------------
Total assets........................................................................................... 54,650,919
---------------
Liabilities
Accrued expenses.......................................................................................... 154,851
Payable for Series shares reacquired...................................................................... 48,959
Dividends payable......................................................................................... 45,468
Management fee payable.................................................................................... 21,063
Distribution fee payable.................................................................................. 13,276
Deferred trustee's fees................................................................................... 3,267
---------------
Total liabilities...................................................................................... 286,884
---------------
Net Assets................................................................................................ $54,364,035
---------------
---------------
Net assets were comprised of:
Shares of beneficial interest, at par.................................................................. $ 48,170
Paid-in capital in excess of par....................................................................... 51,707,932
---------------
51,756,102
Accumulated net realized loss on investments........................................................... (248,331)
Net unrealized appreciation on investments............................................................. 2,856,264
---------------
Net assets, August 31, 1997............................................................................... $54,364,035
---------------
---------------
Class A:
Net asset value and redemption price per share
($29,350,228 / 2,601,092 shares of beneficial interest issued and outstanding)...................... $11.28
Maximum sales charge (3% of offering price)............................................................ .35
---------------
Maximum offering price to public....................................................................... $11.63
---------------
---------------
Class B:
Net asset value, offering price and redemption price per share
($24,952,220 / 2,210,467 shares of beneficial interest issued and outstanding)...................... $11.29
---------------
---------------
Class C:
Net asset value, offering price and redemption price per share
($61,587 / 5,456 shares of beneficial interest issued and outstanding).............................. $11.29
---------------
---------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-193
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
NORTH CAROLINA SERIES
Statement of Operations
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended
Net Investment Income August 31, 1997
<S> <C>
Income
Interest................................... $ 3,292,879
---------------
Expenses
Management fee............................. 284,129
Distribution fee--Class A.................. 29,055
Distribution fee--Class B.................. 138,514
Distribution fee--Class C.................. 508
Custodian's fees and expenses.............. 65,000
Reports to shareholders.................... 45,000
Registration fees.......................... 35,000
Transfer agent's fees and expenses......... 32,000
Audit fee.................................. 10,000
Legal fees and expenses.................... 9,000
Trustees' fees and expenses................ 4,000
Miscellaneous.............................. 15,647
---------------
Total expenses.......................... 667,853
Less: Management fee waiver (Note 2)....... (28,413)
Custodian fee credit................... (3,336)
---------------
Net expenses............................ 636,104
---------------
Net investment income......................... 2,656,775
---------------
Realized and Unrealized
Gain (Loss) on Investments
Net realized gain (loss) on:
Investment transactions.................... 104,260
Financial futures contracts................ (346,839)
---------------
(242,579)
---------------
Net change in unrealized appreciation on
investments................................ 2,214,384
---------------
Net gain on investments....................... 1,971,805
---------------
Net Increase in Net Assets
Resulting from Operations..................... $ 4,628,580
---------------
---------------
</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 1997 1996
<S> <C> <C>
Operations
Net investment income.......... $ 2,656,775 $ 2,879,480
Net realized gain (loss) on
investment transactions..... (242,579) 970,425
Net change in unrealized
appreciation on
investments................. 2,214,384 (1,009,916)
-------------- ------------
Net increase in net assets
resulting from operations... 4,628,580 2,839,989
-------------- ------------
Dividends and distributions (Note
1):
Dividends from net investment
income
Class A..................... (1,416,471) (1,319,689)
Class B..................... (1,237,447) (1,556,956)
Class C..................... (2,857) (2,835)
-------------- ------------
(2,656,775) (2,879,480)
-------------- ------------
Distributions from net realized gains
Class A..................... (415,499) (283,246)
Class B..................... (402,215) (369,288)
Class C..................... (1,043) (674)
-------------- ------------
(818,757) (653,208)
-------------- ------------
Series share transactions (net of
share conversions) (Note 5):
Net proceeds from shares
sold........................ 1,147,633 2,409,691
Net asset value of shares
issued in reinvestment of
dividends and
distributions............... 1,824,425 1,901,502
Cost of shares reacquired...... (8,951,218) (11,119,778)
-------------- ------------
Net decrease in net assets from
Series share transactions... (5,979,160) (6,808,585)
-------------- ------------
Total decrease.................... (4,826,112) (7,501,284)
Net Assets
Beginning of year................. 59,190,147 66,691,431
-------------- ------------
End of year....................... $ 54,364,035 $ 59,190,147
-------------- ------------
-------------- ------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-194
<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 thirteen
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 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 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 with respect to securities 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. There were no written
options outstanding at August 31, 1997.
The Series as writer of an option, has 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.
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.
- --------------------------------------------------------------------------------
B-195
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Notes to Financial Statements NORTH CAROLINA 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, 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 Series has an arrangement with its custodian bank,
whereby uninvested monies earn credits which reduce the fees charged by the
custodian.
Reclassification of Capital Accounts: The Fund accounts and reports for
distributions to shareholders in accordance with the American Institute of
Certified Public Accountants' Statement of Position 93-2: Determination,
Disclosure, and Financial Statement Presentation of Income, Capital Gain and
Return of Capital Distributions by Investment Companies. The effect of applying
this statement was to increase paid-in capital in excess of par by $2,067 and
increase accumulated net realized loss by $2,067, due to the sale of securities
purchased with market discount. Net investment income, net realized gains and
net assets were not affected by this change.
- ------------------------------------------------------------
Note 2. Agreements
The Fund has a management agreement with Prudential Investments Fund Management
LLC ('PIFM'). Pursuant to this agreement, PIFM has responsibility for all
investment advisory services and supervises the subadviser's performance of such
services. PIFM 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. PIFM 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 to PIFM is computed daily and payable monthly, at an
annual rate of .50 of 1% of the average daily net assets of the Series. Prior to
September 1, 1997, PIFM agreed to waive a portion (.05 of 1% of the Series'
average daily net assets) of its management fee, which amounted to $28,413
($0.006 per share) for the year ended August 31, 1997. The Series is not
required to reimburse PIFM for such waiver. Effective September 1, 1997, PIFM
eliminated its management fee waiver.
The Fund has a distribution agreement with Prudential Securities Incorporated
('PSI'), which acts as the distributor of the Class A, Class B and Class C
shares of the Fund. The Fund compensates 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 PSI.
The distribution fees are accrued daily and payable monthly.
Pursuant to the Class A, B and C Plans, the Fund compensates PSI 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, 1997.
PSI has advised the Series that it has received approximately $4,800 in
front-end sales charges resulting from sales of Class A shares during the year
ended August 31, 1997. From these fees, 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 during the year ended August 31, 1997, it
received approximately $31,400 in contingent deferred sales charges imposed upon
certain redemptions by Class B and C shareholders.
PSI, PIFM and PIC are indirect, wholly-owned subsidiaries of The Prudential
Insurance Company of America.
The Series, along with other affiliated registered investment companies (the
'Funds'), entered into a credit agreement (the 'Agreement') on December 31, 1996
with an unaffiliated lender. The maximum commitment under the Agreement is
$200,000,000. The Agreement expires on December 30, 1997. Interest on any such
borrowings outstanding will be at market rates. The purpose of the Agreement is
to serve as an alternative source of funding for capital share redemptions. The
Series has not borrowed any amounts pursuant to the Agreement as of August 31,
1997. The Funds pay a commitment fee at an annual rate of .055 of 1% on the
unused portion of the credit facility. The commitment fee is accrued and paid
quarterly on a pro-rata basis by the Funds.
- --------------------------------------------------------------------------------
B-196
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Notes to Financial Statements NORTH CAROLINA SERIES
- --------------------------------------------------------------------------------
Note 3. Other Transactions with Affiliates
Prudential Mutual Fund Services LLC ('PMFS'), a wholly-owned subsidiary of PIFM,
serves as the Fund's transfer agent. During the year ended August 31, 1997, the
Series incurred fees of approximately $24,600 for the services of PMFS. As of
August 31, 1997, 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, 1997 were $19,603,362 and
$25,908,776, respectively.
The cost basis of investments for federal income tax purposes at August 31, 1997
was $50,699,309 and accordingly, net unrealized appreciation of investments for
federal income tax purposes was $2,881,726 (gross unrealized
appreciation--$2,890,574; gross unrealized depreciation--$8,848).
For federal income tax purposes, the Series has a capital loss carryforward as
of August 31, 1997 of approximately $174,500 which will expire in 2005.
Accordingly, no capital gains distribution is expected to be paid to
shareholders until future net gains have been realized in excess of such
carryforward.
The Series will elect to treat net capital losses of approximately $104,300
incurred in the fiscal year ended August 31, 1997 as having been incurred in the
fiscal year ended August 31, 1998.
- ------------------------------------------------------------
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 years ended August 31,
1997 and 1996, were as follows:
<TABLE>
<CAPTION>
Class A Shares Amount
- ------------------------------------ ---------- ------------
<S> <C> <C>
Year ended August 31, 1997:
Shares sold......................... 25,285 $ 280,617
Shares issued in reinvestment of
dividends and distributions....... 85,714 955,648
Shares reacquired................... (401,703) (4,475,363)
---------- ------------
Net decrease in shares outstanding
before conversion................. (290,704) (3,239,098)
Shares issued upon conversion from
Class B........................... 351,056 3,922,799
---------- ------------
Net increase in shares
outstanding....................... 60,352 $ 683,701
---------- ------------
---------- ------------
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 B
- ------------------------------------
<S> <C> <C>
Year ended August 31, 1997:
Shares sold......................... 77,563 $ 866,566
Shares issued in reinvestment of
dividends and distributions....... 77,680 866,195
Shares reacquired................... (399,433) (4,460,630)
---------- ------------
Net decrease in shares outstanding
before conversion................. (244,190) (2,727,869)
Shares issued upon conversion from
Class B........................... (350,818) (3,922,799)
---------- ------------
Net decrease in shares
outstanding....................... (595,008) $ (6,650,668)
---------- ------------
---------- ------------
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 reacquired upon conversion
into Class A...................... (437,963) (4,936,059)
---------- ------------
Net decrease in shares
outstanding....................... (779,583) $ (8,757,662)
---------- ------------
---------- ------------
<CAPTION>
Class C
- ------------------------------------
<S> <C> <C>
Year ended August 31, 1997:
Shares sold......................... 40 $ 450
Shares issued in reinvestment of
dividends
and distributions................. 232 2,582
Shares reacquired................... (1,372) (15,225)
---------- ------------
Net decrease in shares
outstanding....................... (1,100) $ (12,193)
---------- ------------
---------- ------------
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
---------- ------------
---------- ------------
</TABLE>
- --------------------------------------------------------------------------------
B-197
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Financial Highlights NORTH CAROLINA SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A
-----------------------------------------------------
Year Ended August 31,
-----------------------------------------------------
1997 1996 1995 1994 1993
------- ------- ------- ------ ------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year........................... $ 11.06 $ 11.19 $ 11.06 $12.04 $11.37
------- ------- ------- ------ ------
Income from investment operations
Net investment income........................................ .54(a) .53 .60(a) .61 .65
Net realized and unrealized gain (loss) on investment
transactions.............................................. .38 (.01) .13 (.76) .67
------- ------- ------- ------ ------
Total from investment operations.......................... .92 .52 .73 (.15) 1.32
------- ------- ------- ------ ------
Less distributions
Dividends from net investment income......................... (.54) (.53) (.60) (.61) (.65)
Distributions from net realized gains........................ (.16) (.12) -- (.22) --
------- ------- ------- ------ ------
Total distributions....................................... (.70) (.65) (.60) (.83) (.65)
------- ------- ------- ------ ------
Net asset value, end of year................................. $ 11.28 $ 11.06 $ 11.19 $11.06 $12.04
------- ------- ------- ------ ------
------- ------- ------- ------ ------
TOTAL RETURN(b):............................................. 8.58% 4.70% 6.86% (1.35)% 11.99%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)................................ $29,350 $28,089 $26,519 $2,256 $1,777
Average net assets (000)..................................... $29,055 $27,628 $15,244 $2,067 $1,316
Ratios to average net assets:
Expenses, including distribution fees..................... .93%(a) 1.03%(a) .98%(a) .88% .87%
Expenses, excluding distribution fees..................... .83%(a) .93%(a) .88%(a) .78% .77%
Net investment income..................................... 4.87%(a) 4.78%(a) 5.25%(a) 5.31% 5.55%
For Class A, B and C shares:
Portfolio turnover rate................................... 35% 23% 28% 17% 38%
</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-198
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Financial Highlights NORTH CAROLINA SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class B
-------------------------------------------------------
Year Ended August 31,
-------------------------------------------------------
1997 1996 1995 1994 1993
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year........................... $ 11.06 $ 11.19 $ 11.06 $ 12.05 $ 11.37
------- ------- ------- ------- -------
Income from investment operations
Net investment income........................................ .50(a) .49(a) .55(a) .56 .60
Net realized and unrealized gain (loss) on investment
transactions.............................................. .39 (.01) .13 (.77) .68
------- ------- ------- ------- -------
Total from investment operations.......................... .89 .48 .68 (.21) 1.28
------- ------- ------- ------- -------
Less distributions
Dividends from net investment income......................... (.50) (.49) (.55) (.56) (.60)
Distributions from net realized gains........................ (.16) (.12) -- (.22) --
------- ------- ------- ------- -------
Total distributions....................................... (.66) (.61) (.55) (.78) (.60)
------- ------- ------- ------- -------
Net asset value, end of year................................. $ 11.29 $ 11.06 $ 11.19 $ 11.06 $ 12.05
------- ------- ------- ------- -------
------- ------- ------- ------- -------
TOTAL RETURN(b):............................................. 8.25% 4.28% 6.44% (1.82)% 11.62%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)................................ $24,952 $31,029 $40,119 $69,448 $75,515
Average net assets (000)..................................... $27,703 $35,605 $51,963 $73,606 $67,997
Ratios to average net assets:
Expenses, including distribution fees..................... 1.33%(a) 1.43%(a) 1.34%(a) 1.28% 1.27%
Expenses, excluding distribution fees..................... .83%(a) .93%(a) .84%(a) .78% .77%
Net investment income..................................... 4.47%(a) 4.37%(a) 5.10%(a) 4.89% 5.18%
</TABLE>
- ---------------
(a) Net of management fee waiver.
(b) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each year reported and includes reinvestment of dividends and
distributions.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-199
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Financial Highlights NORTH CAROLINA SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class C
---------------------------------------------------------
August 1,
1994(d)
Year Ended August 31, through
------------------------------------------ August 31,
1997 1996 1995 1994
----- ----- ----- -----
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period......................... $11.06 $11.19 $11.06 $11.09
----- ----- ----- -----
Income from investment operations
Net investment income........................................ .47(b) .46 .52(b) .04
Net realized and unrealized gain (loss) on investment
transactions.............................................. .39 (.01) .13 (.03)
----- ----- ----- -----
Total from investment operations.......................... .86 .45 .65 .01
----- ----- ----- -----
Less distributions
Dividends from net investment income......................... (.47) (.46) (.52) (.04)
Distributions from net realized gains........................ (.16) (.12) -- --
----- ----- ----- -----
Total distributions....................................... (.63) (.58) (.52) (.04)
----- ----- ----- -----
Net asset value, end of period............................... $11.29 $11.06 $11.19 $11.06
----- ----- ----- -----
----- ----- ----- -----
TOTAL RETURN(c):............................................. 7.98% 4.03% 6.17% .02%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000).............................. $ 62 $ 72 $ 53 $ 10
Average net assets (000)..................................... $ 68 $ 69 $ 32 $ 5
Ratios to average net assets:
Expenses, including distribution fees..................... 1.58%(b) 1.68%(b) 1.63%(b) 1.67%(a)
Expenses, excluding distribution fees..................... .83%(b) .93%(b) .88%(b) .92%(a)
Net investment income..................................... 4.22%(b) 4.14%(b) 4.59%(b) 5.06%(a)
</TABLE>
- ---------------
(a) Annualized.
(b) Net of management fee waiver.
(c) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each period reported and includes reinvestment of dividends and
distributions. Total returns for periods of less than a full year are not
annualized.
(d) Commencement of offering of Class C Shares.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-200
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Report of Independent Accountants NORTH CAROLINA SERIES
- --------------------------------------------------------------------------------
To the Shareholders and Board of Trustees of
Prudential Municipal Series Fund, North Carolina Series
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Prudential Municipal Series Fund,
North Carolina Series (the 'Fund', one of the portfolios constituting Prudential
Municipal Series Fund) at August 31, 1997, and the results of its operations,
the changes in its net assets and the financial highlights for the year then
ended, in conformity with generally accepted accounting principles. These
financial statements and financial highlights (hereafter referred to as
'financial statements') are the responsibility of the Fund's management; our
responsibility is to express an opinion on these financial statements based on
our audit. We conducted our audit of these financial statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audit, which included confirmation of securities at August
31, 1997 by correspondence with the custodian and broker, provides a reasonable
basis for the opinion expressed above. The accompanying statement of changes in
net assets for the year ended August 31, 1996, and the financial highlights for
each of the four periods in the period ended August 31, 1996 were audited by
other independent accountants, whose opinion dated October 14, 1996 was
unqualified.
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York
October 20, 1997
- --------------------------------------------------------------------------------
B-201
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Change of Auditors NORTH CAROLINA SERIES
- --------------------------------------------------------------------------------
Effective March 1, 1997, Deloitte & Touche LLP was terminated as the Fund's
auditors. For the years ended August 31, 1993 through August 31, 1996, Deloitte
& Touche LLP expressed an unqualified opinion on the Series' financial
statements. There were no disagreements between Fund management and Deloitte &
Touche LLP prior to their termination. The Board of Trustees approved the
termination of Deloitte & Touche LLP and the appointment of Price Waterhouse LLP
as the Fund's independent accountants.
- --------------------------------------------------------------------------------
B-202
<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 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, North Carolina 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-203
<PAGE>
Portfolio of Investments as of PRUDENTIAL MUNICIPAL SERIES FUND
August 31, 1997 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--98.7%
- ------------------------------------------------------------------------------------------------------------------------------
Akron, Bath & Copley Twnshps., Hosp. Dist. Rev., Summa
Health, Systems Proj., Ser. A A2 5.75% 11/15/08 $ 4,015 $ 4,155,284
Akron, Gen. Oblig. A 10.50 12/01/04 200 270,886
Akron, Gen. Oblig., F.S.A. Aaa 4.50 12/01/12 645 587,640
Allen Cnty. Wtr. & Swr. Dist., A.M.B.A.C. Aaa 7.80 12/01/08 1,000 (c) 1,065,710
Brecksville Broadview Heights City Sch. Dist., F.G.I.C. Aaa 6.50 12/01/16 1,000 1,120,250
Canton Water Works Sys., Gen. Oblig., A.M.B.A.C. Aaa 5.85 12/01/15 700 730,653
Carroll Cnty. Econ. Dev. Rev., Great Trail Lake Ctr.,
F.H.A. NR 11.75 8/01/14 640 721,734
Clear Fork Valley Loc. Sch. Dist., Richland Cnty. AA-(b) Zero 12/01/24 845 185,511
Cleveland City Sch. Dist., Gen. Oblig.,
Sch. Impvt., Ser. B, F.G.I.C. Aaa Zero 6/01/05 490 338,154
Sch. Impvt., Ser. B, F.G.I.C. Aaa Zero 6/01/06 400 262,032
Sch. Impvt., Ser. B, F.G.I.C. Aaa Zero 6/01/07 315 195,684
Sch. Impvt., Ser. B, F.G.I.C. Aaa Zero 12/01/08 550 314,089
Columbus Citation Hsg. Dev. Corp., Mtge. Rev., F.H.A. AA(b) 7.625 1/01/22 1,885 (c) 2,261,058
Columbus, Gen. Oblig., Mun. Arpt. No. 32, A.M.T. Aaa 7.15 7/15/06 435 471,866
Cuyahoga Cnty. Hosp. Rev., Meridia Health Sys. A1 6.25 8/15/24 1,500 1,570,125
Dayton, Gen. Oblig., M.B.I.A. Aaa 7.00 12/01/07 480 567,259
Dover Mun. Elec. Sys. Rev., F.G.I.C. Aaa 5.95 12/01/14 1,000 1,051,450
Dublin City Sch. Dist.,
Franklin, Delaware & Union Co., A.M.B.A.C Aaa Zero 12/01/05 1,000 673,810
Ref., M.B.I.A. Aaa 5.00 12/01/19 4,000 3,775,600
Fairfield City Sch. Dist., Cap. Apprec., Ref., Sch. Impvt. A1 Zero 12/01/09 515 274,845
Franklin Cnty. Hosp. Rev., Holy Cross Hlth. Sys., Ser. B,
A.M.B.A.C. Aaa 7.65 6/01/10 2,500 (c) 2,763,800
Gahanna Jefferson City Sch. Dist., Gen. Oblig., A.M.B.A.C. Aaa Zero 12/01/09 445 238,912
Greene Cnty. Cap Apprec.,
Swr. Sys. Rev., A.M.B.A.C. Aaa Zero 12/01/08 450 256,982
Wtr. Sys. Rev., Ser. A, F.G.I.C. Aaa 6.125 12/01/21 1,000 1,075,440
Guam Pwr. Auth. Rev., Ser. A BBB(b) 6.75 10/01/24 3,110 3,354,944
Hamilton Cnty. Gas Sys. Rev., Ser. A, M.B.I.A. Aaa 4.75 10/15/23 3,250 2,897,505
Hilliard City Sch. Dist., Cap. Apprec. Impvt.,
Ser. A, F.G.I.C. Aaa Zero 12/01/09 2,855 1,532,792
Ser. A, F.G.I.C. Aaa Zero 12/01/10 2,855 1,438,235
Logan Hocking Local Sch. Dist., Hocking, Perry & Vinton
Co., Gen. Oblig., A.M.B.A.C. Aaa Zero 12/01/09 650 348,972
Lorain Cnty. Hosp. Rev., Ref. Mtge., Elyria United
Methodist Village NR 6.875 6/01/22 2,500 2,636,750
Lucas Cnty. Hlth. Fac. Rev., Ref., Ohio Presbyterian
Retirement Svcs. NR 6.625 7/01/14 1,750 1,814,225
Lucas Cnty. Hosp. Rev., Promedica Healthcare Oblig., Ser.
96, M.B.I.A. Aaa 5.75 11/15/09 3,000 3,191,070
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-204
<PAGE>
Portfolio of Investments as of PRUDENTIAL MUNICIPAL SERIES FUND
August 31, 1997 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>
- ------------------------------------------------------------------------------------------------------------------------------
Marion Cnty. Hosp. Impvt. Rev., Ref., Comn. Hosp., Ser. 96 BBB+(b) 6.375% 5/15/11 $ 2,000 $ 2,079,400
Marysville Village Sch. Dist., Gen. Oblig., Sch. Impvt.,
M.B.I.A. Aaa Zero 12/01/15 865 321,252
Miami Cnty. Hosp. Fac. Rev., Ref. & Impvt., Upper Valley
Med. Ctr. Baa 6.375 5/15/26 1,000 1,035,360
Montgomery Cnty. Swr. Sys. Rev.,
Greater Moraine, Beaver Creek, F.G.I.C. Aaa Zero 9/01/05 1,000 681,910
Greater Moraine, Beaver Creek, F.G.I.C. Aaa Zero 9/01/07 500 306,845
Mount Vernon City Sch. Dist., Gen. Oblig., F.G.I.C. Aaa 7.50 12/01/14 500 582,375
Newark, Ltd. Tax Gen. Oblig., Wtr. Impvt., A.M.B.A.C. Aaa Zero 12/01/06 805 514,757
Ohio Hsg. Fin. Agy. Mtg. Rev., G.N.M.A., A.M.T. AAA(b) 6.05 9/01/17 1,000 1,025,750
Ohio St. Air Quality Dev. Auth. Rev., Poll. Ctrl.,
Cleveland Elec. Ref., A.M.T. Ba1 6.10 8/01/20 1,000 1,003,720
Cleveland Elec. Co. Proj., F.G.I.C. Aaa 8.00 12/01/13 2,500 2,893,925
Edison Proj., Ser. A, F.G.I.C Aaa 7.45 3/01/16 3,750 4,071,412
Ohio St. Bldg. Auth.,
Columbus St. Bldg. Proj., Ser. A A 7.75 10/01/07 750 (c) 795,023
Ref., St. Correctional Fac. Ser. A Aa3 6.00 10/01/08 615 675,079
Workers Comp. - W. Green Bldg. - A A2 4.75 4/01/14 2,740 2,529,349
Ohio St. Higher Edl. Fac. Comn. Rev.,
Case Western Resv. Univ., Ser. B Aa3 7.70 10/01/18 35 35,817
Case Western Resv. Univ., Ser. B Aa3 6.50 10/01/20 750 870,120
Oberlin Coll. NR 7.375 10/01/14 1,000 (c) 1,081,360
Ohio St. Solid Waste Rev., A.M.T. NR 8.50 8/01/22 1,000 1,001,440
Ohio St. Wtr. Dev. Auth. Rev., Pure Wtr. Ser. I Aaa 7.50 12/01/08 1,200 (c) 1,256,064
Ottawa Cnty. San. Swr. Sys. Rev., Danbury Proj., A.M.B.A.C. Aaa 7.375 10/01/14 1,000 (c) 1,083,460
Pickerington Local Sch. Dist.,
Gen. Oblig., A.M.B.A.C. Aaa Zero 12/01/08 890 508,252
Gen. Oblig., A.M.B.A.C. Aaa Zero 12/01/09 935 501,983
Gen. Oblig., A.M.B.A.C. Aaa Zero 12/01/13 525 220,794
Puerto Rico Aqueduct & Swr. Auth. Rev., Ser. A AAA(b) 7.875 7/01/17 1,000 (c) 1,053,610
Puerto Rico Elec. Pwr. Auth. Rev., Ser. O Baa1 5.00 7/01/12 1,720 1,660,471
Puerto Rico Hwy. & Trans. Auth. Rev., M.B.I.A. Aaa 5.50 7/01/15 5,000 5,184,450
Puerto Rico Ind. Tour. Edl. Med. & Env. Ctl. Fac., Auxilio
Mutuo Hosp. Rev., Ser. A, M.B.I.A. Aaa 5.50 7/01/26 1,000 992,770
Puerto Rico Pub. Bldgs. Auth. Rev., Gtd. Pub. Ed. & Hlth.
Facs., Ser. J Baa1 Zero 7/01/06 3,000 1,991,430
Reynoldsburg City Sch. Dist., Cap. Apprec. Ref., F.G.I.C. Aaa Zero 12/01/12 1,465 654,694
Rural Lorain Cnty. Wtr. Auth. Res. Rev., A.M.B.A.C. Aaa 7.70 10/01/08 2,000 (c) 2,118,560
Sugarcreek Local Sch. Dist., Cap. Apprec., F.G.I.C. Aaa Zero 12/01/08 500 285,535
Summit Cnty. Ind. Dev. Rev., Century Products, Gerber Foods Aa1 7.75 11/01/05 3,250 3,328,682
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-205
<PAGE>
Portfolio of Investments as of PRUDENTIAL MUNICIPAL SERIES FUND
August 31, 1997 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>
- ------------------------------------------------------------------------------------------------------------------------------
Trumbull Cnty., Correctional Fac.,
Cap. Apprec., A.M.B.A.C. Aaa Zero 12/01/08 $ 1,250 $ 713,838
Cap. Apprec., A.M.B.A.C. Aaa Zero 12/01/09 1,250 671,100
Univ. of Puerto Rico Rev., Cap. Apprec. Ref., Ser. N,
M.B.I.A. Aaa Zero 6/01/13 4,245 1,876,205
Virgin Islands Pub. Fin. Auth. Rev., Ref., Matching Loan
Notes, Ser. A NR 7.25% 10/01/18 1,000 1,112,150
Virgin Islands Terr., Hugo Ins. Claims Fund Proj., Ser. 91 NR 7.75 10/01/06 390 426,910
Virgin Islands Wtr. & Pwr. Auth., Elec. Sys. Rev., Ser. A NR 7.40 7/01/11 960 1,034,726
Woodmore Indpt. Sch. Dist., Gen. Oblig., A.M.B.A.C. Aaa Zero 12/01/06 480 306,936
-----------
Total long-term investments (cost $84,044,819) 90,630,781
-----------
SHORT-TERM INVESTMENT--0.3%
East Cleveland Rev., Loc. Gov't. Fund Nts. (cost $310,000) NR 7.90 12/01/97 310 312,489
-----------
Total Investments--99.0%
(cost $84,354,819; Note 4) 90,943,270
Other assets in excess of liabilities--1.0% 874,555
-----------
Net Assets--100% $91,817,825
-----------
-----------
</TABLE>
- ---------------
(a) The following abbreviations are used in portfolio descriptions:
A.M.B.A.C.--American Municipal Bond Assurance Corporation.
A.M.T.--Alternative Minimum Tax.
F.G.I.C.--Financial Guaranty Insurance Company.
F.H.A.--Federal Housing Administration.
F.S.A.--Financial Security Assurance.
G.N.M.A.--Government National Mortgage Association.
M.B.I.A.--Municipal Bond Insurance Association.
(b) Standard & Poor's Rating.
(c) Prerefunded issues are secured by escrowed cash and/or direct U.S.
guaranteed obligations.
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-206
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Statement of Assets and Liabilities OHIO SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Assets August 31, 1997
<S> <C>
Investments, at value (cost $84,354,819).................................................................. $ 90,943,270
Interest receivable....................................................................................... 1,302,897
Receivable for investments sold........................................................................... 1,147,412
Receivable for Series shares sold......................................................................... 56,693
Other assets.............................................................................................. 2,660
---------------
Total assets........................................................................................... 93,452,932
---------------
Liabilities
Payable for investments purchased......................................................................... 1,025,055
Bank overdraft............................................................................................ 302,571
Payable for Series shares reacquired...................................................................... 99,983
Dividends payable......................................................................................... 83,656
Accrued expenses.......................................................................................... 62,800
Management fee payable.................................................................................... 35,690
Distribution fee payable.................................................................................. 22,085
Deferred trustee's fees................................................................................... 3,267
---------------
Total liabilities...................................................................................... 1,635,107
---------------
Net Assets................................................................................................ $ 91,817,825
---------------
---------------
Net assets were comprised of:
Shares of beneficial interest, at par.................................................................. $ 76,779
Paid-in capital in excess of par....................................................................... 84,746,079
---------------
84,822,858
Accumulated net realized gain on investments........................................................... 406,516
Net unrealized appreciation on investments............................................................. 6,588,451
---------------
Net assets, August 31, 1997............................................................................... $ 91,817,825
---------------
---------------
Class A:
Net asset value and redemption price per share
($50,977,012 / 4,264,133 shares of beneficial interest issued and outstanding)...................... $11.95
Maximum sales charge (3% of offering price)............................................................ .37
---------------
Maximum offering price to public....................................................................... $12.32
---------------
---------------
Class B:
Net asset value, offering price and redemption price per share
($40,769,850 / 3,407,873 shares of beneficial interest issued and outstanding)...................... $11.96
---------------
---------------
Class C:
Net asset value, offering price and redemption price per share
($70,963 / 5,932 shares of beneficial interest issued and outstanding).............................. $11.96
---------------
---------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-207
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
OHIO SERIES
Statement of Operations
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended
Net Investment Income August 31, 1997
<S> <C>
Income
Interest................................. $ 5,989,053
---------------
Expenses
Management fee........................... 486,009
Distribution fee--Class A................ 51,641
Distribution fee--Class B................ 227,516
Distribution fee--Class C................ 429
Custodian's fees and expenses............ 88,000
Transfer agent's fees and expenses....... 70,000
Registration fees........................ 40,000
Reports to shareholders.................. 20,000
Audit fee................................ 10,000
Legal fees and expenses.................. 9,000
Trustees' fees and expenses.............. 4,000
Miscellaneous............................ 3,123
---------------
Total expenses........................ 1,009,718
Less: Management fee waiver (Note 2)..... (48,601)
Custodian fee credit.................. (7,435)
---------------
Net expenses.......................... 953,682
---------------
Net investment income....................... 5,035,371
---------------
Realized and Unrealized Gain
(Loss) on Investments
Net realized gain (loss) on:
Investment transactions.................. 750,014
Financial futures transactions........... (34,377)
---------------
715,637
---------------
Net change in unrealized appreciation on
Investments.............................. 1,564,511
---------------
Net gain on investments..................... 2,280,148
---------------
Net Increase in Net Assets
Resulting from Operations................... $ 7,315,519
---------------
---------------
</TABLE>
PRUDENTIAL MUNICIPAL SERIES FUND
OHIO SERIES
Statement of Changes in Net Assets
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Increase (Decrease) Year Ended August 31,
in Net Assets 1997 1996
<S> <C> <C>
Operations
Net investment income......... $ 5,035,371 $ 5,518,931
Net realized gain on
investment
transactions............... 715,637 174,866
Net change in unrealized
appreciation of
investments................ 1,564,511 (1,555,506)
--------------- ---------------
Net increase in net assets
resulting from
operations................. 7,315,519 4,138,291
--------------- ---------------
Dividends and distributions (Note
1):
Dividends from net investment
income
Class A.................... (2,772,904) (2,697,227)
Class B.................... (2,259,774) (2,817,228)
Class C.................... (2,693) (4,476)
--------------- ---------------
(5,035,371) (5,518,931)
--------------- ---------------
Distributions in excess of net
investment income
Class A.................... (8,880) --
Class B.................... (7,822) --
Class C.................... (16) --
--------------- ---------------
(16,718) --
--------------- ---------------
Distributions from net
realized gains
Class A.................... (75,480) (301,130)
Class B.................... (66,491) (344,409)
Class C.................... (134) (787)
--------------- ---------------
(142,105) (646,326)
--------------- ---------------
Series share transactions (net of
share conversions) (Note 5):
Net proceeds from shares
sold....................... 3,739,237 4,188,171
Net asset value of shares
issued in reinvestment of
dividends and
distributions.............. 3,073,341 3,659,786
Cost of shares reacquired..... (18,009,150) (18,991,116)
--------------- ---------------
Net decrease in net assets
from Series share
transactions............... (11,196,572) (11,143,159)
--------------- ---------------
Total decrease................... (9,075,247) (13,170,125)
Net Assets
Beginning of year................ 100,893,072 114,063,197
--------------- ---------------
End of year...................... $ 91,817,825 $ 100,893,072
--------------- ---------------
--------------- ---------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-208
<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 thirteen
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.
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 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, 1997.
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, 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.
Reclassification of Capital Accounts: The Fund accounts and reports for
distributions to shareholders in accordance with the American Institute
- --------------------------------------------------------------------------------
B-209
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Notes to Financial Statements OHIO SERIES
- --------------------------------------------------------------------------------
of Certified Public Accountants' Statement of Position 93-2: Determination,
Disclosure, and Financial Statement Presentation of Income, Capital Gain, and
Return of Capital Distributions by Investment Companies. The effect of applying
this statement was to increase paid-in capital in excess of par by $8,385,
increase undistributed net investment income by $16,718 and decrease accumulated
net realized gain by $25,103, due to the sale of securities purchased with
market discount. Net investment income, net realized gains and net assets were
not affected by this change.
- ------------------------------------------------------------
Note 2. Agreements
The Fund has a management agreement with Prudential Investments Fund Management
LLC ('PIFM'). Pursuant to this agreement, PIFM has responsibility for all
investment advisory services and supervises the subadviser's performance of such
services. PIFM 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. PIFM pays for the cost of the
subadviser's services, the compensation of officers and employees 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 PIFM is computed daily and payable monthly, at an annual
rate of .50 of 1% of the average daily net assets of the Series. Prior to
September 1, 1997 PIFM agreed to waive a portion (.05 of 1% of the Series'
average daily net assets) of its management fee, which amounted to $48,601
($.006 per share) for the fiscal year ended August 31, 1997. The Series is not
required to reimburse PIFM for such waiver. Effective September 1, 1997, PIFM
eliminated its management fee waiver.
The Fund has a distribution agreement with Prudential Securities Incorporated
('PSI') which acts as the distributor of the Class A, Class B and Class C shares
of the Fund. The Fund compensates 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 PSI. The
distribution fees are accrued daily and payable monthly.
Pursuant to the Class A, B and C Plans, the Fund compensates PSI 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, 1997.
PSI has advised the Series that it has received approximately $5,700 in
front-end sales charges resulting from sales of Class A shares during the fiscal
year ended August 31, 1997. From these fees, 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, 1997, it
received approximately $90,100 in contingent deferred sales charges imposed upon
certain redemptions by Class B shareholders.
PSI, PIFM, and PIC are indirect, wholly-owned subsidiaries of The Prudential
Insurance Company of America.
The Series, along with other affiliated registered investment companies (the
'Funds'), entered into a credit agreement (the 'Agreement') on December 31, 1996
with an unaffiliated lender. The maximum commitment under the Agreement is
$200,000,000. The agreement expires on December 30, 1997. Interest on any such
borrowings outstanding will be at market rates. The purpose of the Agreement is
to serve as an alternative source of funding for capital share redemptions. The
Series has not borrowed any amounts pursuant to the Agreement as of August 31,
1997. The Funds pay a commitment fee at an annual rate of .055 of 1% on the
unused portion of the credit facility. The commitment fee is accrued and paid
quarterly on a pro-rata basis by the Funds.
- ------------------------------------------------------------
Note 3. Other Transactions with Affiliates
Prudential Mutual Fund Services LLC ('PMFS'), a wholly-owned subsidiary of PIFM,
serves as the Fund's transfer agent. During the fiscal year ended August 31,
1997, the Series incurred fees of approximately $47,000 for the services of
PMFS. As of August 31, 1997, approximately $3,400 of such fees were due to PMFS.
Transfer agent fees and expenses in the Statement of Operations include certain
out-of-pocket expenses paid to non-affiliates.
- ------------------------------------------------------------
Note 4. Portfolio Securities
Purchases and sales of portfolio securities of the Series, excluding short-term
investments, for the fiscal year ended August 31, 1997 were $20,672,299 and
$32,291,963, respectively.
The cost basis of investments for federal income tax purposes at August 31, 1997
was substantially the same as for financial reporting purposes and accordingly,
net unrealized appreciation of investments for federal income tax purposes was
$6,588,451 (gross unrealized appreciation--$6,712,762; gross unrealized
depreciation--$124,311).
- --------------------------------------------------------------------------------
B-210
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Notes to Financial Statements OHIO 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
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, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
Class A Shares Amount
- -------------------------------------- -------- ------------
<S> <C> <C>
Year ended August 31, 1997:
Shares sold........................... 49,987 $ 593,763
Shares issued in reinvestment of
dividends
and distributions................... 144,889 1,718,951
Shares reacquired..................... (775,729) (9,195,686)
-------- ------------
Net decrease in shares outstanding
before conversion................... (580,853) (6,882,972)
Shares issued upon conversion from
Class B............................. 583,271 6,914,521
-------- ------------
Net increase in shares outstanding.... 2,418 $ 31,549
-------- ------------
-------- ------------
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)
-------- ------------
-------- ------------
<CAPTION>
Class B Shares Amount
- -------------------------------------- -------- ------------
<S> <C> <C>
Year ended August 31, 1997:
Shares sold........................... 260,769 $ 3,098,896
Shares issued in reinvestment of
dividends
and distributions................... 113,885 1,351,814
Shares reacquired..................... (740,541) (8,791,868)
-------- ------------
Net decrease in shares outstanding
before conversion................... (365,887) (4,341,158)
Shares reacquired upon conversion into
Class A............................. (582,780) (6,914,521)
-------- ------------
Net decrease in shares outstanding.... (948,667) $(11,255,679)
-------- ------------
-------- ------------
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)
-------- ------------
-------- ------------
<CAPTION>
Class C
- --------------------------------------
<S> <C> <C>
Year ended August 31, 1997:
Shares sold........................... 3,802 $ 46,578
Shares issued in reinvestment of
dividends
and distributions................... 217 2,576
Shares reacquired..................... (1,828) (21,596)
-------- ------------
Net increase in shares outstanding.... 2,191 $ 27,558
-------- ------------
-------- ------------
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)
-------- ------------
-------- ------------
</TABLE>
- --------------------------------------------------------------------------------
B-211
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Financial Highlights OHIO SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A
-----------------------------------------------------
Year Ended August 31,
-----------------------------------------------------
1997 1996 1995 1994 1993
------- ------- ------- ------ ------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year.................. $ 11.70 $ 11.92 $ 11.72 $12.38 $11.69
------- ------- ------- ------ ------
Income from investment operations
Net investment income............................... .63(a) .63(a) .65(a) .66 .69
Net realized and unrealized gain (loss) on
investment transactions.......................... .27 (.15) .20 (.66) .69
------- ------- ------- ------ ------
Total from investment operations................. .90 .48 .85 -- 1.38
------- ------- ------- ------ ------
Less distributions
Dividends from net investment income................ (.63) (.63) (.65) (.66) (.69)
Distributions in excess of net investment income.... --(c) -- -- -- --
Distributions from net realized gains............... (.02) (.07) -- -- --
------- ------- ------- ------ ------
Total distributions.............................. (.65) (.70) (.65) (.66) (.69)
------- ------- ------- ------ ------
Net asset value, end of year........................ $ 11.95 $ 11.70 $ 11.92 $11.72 $12.38
------- ------- ------- ------ ------
------- ------- ------- ------ ------
TOTAL RETURN(b):.................................... 7.92% 4.02% 7.59% (0.01)% 12.12%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)....................... $50,977 $49,851 $51,132 $4,749 $4,647
Average net assets (000)............................ $51,641 $51,205 $29,904 $4,733 $2,904
Ratios to average net assets:
Expenses, including distribution fees............ .80%(a) .80%(a) .83%(a) .84% .84%
Expenses, excluding distribution fees............ .70%(a) .70%(a) .73%(a) .74% .74%
Net investment income............................ 5.37%(a) 5.27%(a) 5.50%(a) 5.45% 5.73%
For Class A, B and C shares:
Portfolio turnover rate.......................... 22% 35% 38% 20% 28%
</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.
(c) Less than $.005 per share.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-212
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Financial Highlights OHIO SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class B
---------------------------------------------------------
Year Ended August 31,
---------------------------------------------------------
1997 1996 1995 1994 1993
------- ------- ------- -------- --------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year.................. $ 11.71 $ 11.93 $ 11.73 $ 12.38 $ 11.70
------- ------- ------- -------- --------
Income from investment operations
Net investment income............................... .59(a) .58(a) .60(a) .61 .65
Net realized and unrealized gain (loss) on
investment transactions.......................... .27 (.15) .20 (.65) .68
------- ------- ------- -------- --------
Total from investment operations................. .86 .43 .80 (.04) 1.33
------- ------- ------- -------- --------
Less distributions
Dividends from net investment income................ (.59) (.58) (.60) (.61) (.65)
Distributions in excess of net investment income.... --(c) -- -- -- --
Distributions from net realized gains............... (.02) (.07) -- -- --
------- ------- ------- -------- --------
Total distributions.............................. (.61) (.65) (.60) (.61) (.65)
------- ------- ------- -------- --------
Net asset value, end of year........................ $ 11.96 $ 11.71 $ 11.93 $ 11.73 $ 12.38
------- ------- ------- -------- --------
------- ------- ------- -------- --------
TOTAL RETURN(b):.................................... 7.49% 3.61% 7.16% (0.33)% 11.58%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)....................... $40,770 $50,998 $62,805 $118,270 $121,937
Average net assets (000)............................ $45,503 $57,909 $85,410 $121,365 $110,053
Ratios to average net assets:
Expenses, including distribution fees............ 1.20%(a) 1.20%(a) 1.22%(a) 1.24% 1.24%
Expenses, excluding distribution fees............ .70%(a) .70%(a) .72%(a) .74% .74%
Net investment income............................ 4.97%(a) 4.87%(a) 5.27%(a) 5.05% 5.33%
</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 year period reported and includes reinvestment of dividends and
distributions.
(c) Less than $.005 per share.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-213
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Financial Highlights OHIO SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class C
-----------------------------------------------------------
August 1,
1994(d)
Year Ended August 31, Through
-------------------------------------------- August 31,
1997 1996 1995 1994
------------ ------------ ---------- ----------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period................ $11.71 $11.93 $11.73 $11.75
----- ----- ----- -----
Income from investment operations
Net investment income............................... .56(a) .55(a) .57(a) .05
Net realized and unrealized gain (loss) on
investment transactions.......................... .27 (.15) .20 (.02)
----- ----- ----- -----
Total from investment operations................. .83 .40 .77 .03
----- ----- ----- -----
Less distributions
Dividends from net investment income................ (.56) (.55) (.57) (.05)
Distributions in excess of net investment income.... --(c) -- -- --
Distributions from net realized gains............... (.02) (.07) -- --
----- ----- ----- -----
Total distributions.............................. (.58) (.62) (.57) (.05)
----- ----- ----- -----
Net asset value, end of period...................... $11.96 $11.71 $11.93 $11.73
----- ----- ----- -----
----- ----- ----- -----
TOTAL RETURN(b):.................................... 7.22% 3.36% 6.89% 0.18%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)..................... $71 $44 $126 $5
Average net assets (000)............................ $57 $97 $ 61 $2
Ratios to average net assets:
Expenses, including distribution fees............ 1.45%(a) 1.45%(a) 1.49%(a) 2.28%(c)
Expenses, excluding distribution fees............ .70%(a) .70%(a) .74%(a) 1.53%(c)
Net investment income............................ 4.72%(a) 4.62%(a) 4.76%(a) 4.73%(c)
</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) Less than $.005 per share.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-214
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Report of Independent Accountants OHIO SERIES
- --------------------------------------------------------------------------------
To the Shareholders and Board of Trustees of
Prudential Municipal Series Fund, Ohio Series
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Prudential Municipal Series Fund,
Ohio Series (the 'Fund', one of the portfolios constituting Prudential Municipal
Series Fund) at August 31, 1997, and the results of its operations, the changes
in its net assets and the financial highlights for the year then ended, in
conformity with generally accepted accounting principles. These financial
statements and financial highlights (hereafter referred to as 'financial
statements') are the responsibility of the Fund's management; our responsibility
is to express an opinion on these financial statements based on our audit. We
conducted our audit of these financial statements in accordance with generally
accepted auditing standards which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit, which included confirmation of securities at August 31, 1997 by
correspondence with the custodian and the application of alternative auditing
procedures where securities purchased had not been received, provides a
reasonable basis for the opinion expressed above. The accompanying statement of
changes in net assets for the year ended August 31, 1996 and the financial
highlights for each of the four periods in the period ended August 31, 1996 were
audited by other independent accountants, whose opinion dated October 14, 1996
was unqualified.
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York
October 20, 1997
- --------------------------------------------------------------------------------
B-215
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Change of Auditors OHIO SERIES
- --------------------------------------------------------------------------------
Effective March 1, 1997, Deloitte & Touche LLP was terminated as the Fund's
auditors. For the years ended August 31, 1993 through August 31, 1996, Deloitte
& Touche LLP expressed an unqualified opinion on the Series' financial
statements. There were no disagreements between Fund management and Deloitte &
Touche LLP prior to their termination. The Board of Trustees approved the
termination of Deloitte & Touche LLP and the appointment of Price Waterhouse LLP
as the Fund's independent accountants.
B-216
<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 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, Ohio 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-217
<PAGE>
Portfolio of Investments as of PRUDENTIAL MUNICIPAL SERIES FUND
August 31, 1997 PENNSYLVANIA SERIES
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
LONG-TERM INVESTMENTS--99.5%
- ------------------------------------------------------------------------------------------------------------------------------
Allegheny Cnty. Arpt. Rev.,
Greater Pittsburgh Int'l. Arpt., Ser. A, A.M.T., F.S.A. Aaa 6.60% 1/01/04 $ 1,000 $ 1,087,590
Pittsburgh Int'l. Arpt., A.M.T., M.B.I.A. Aaa 5.75 1/01/14 2,435 (f) 2,529,234
Allegheny Cnty. Higher Ed. Bldg. Auth. Rev.,
Robert Morris Coll., M.B.I.A. Aaa 7.00 6/15/08 1,000 (e) 1,071,930
Univ. Rev., Duquesne Univ. Proj., A.M.B.A.C. Aaa 5.00 3/01/21 4,180 (g) 3,921,843
Allegheny Cnty. Hosp. Dev. Auth. Rev.,
Allegheny Gen. Hosp. Proj., Ser. A, M.B.I.A. Aaa 6.25 9/01/20 1,750 (g) 1,873,602
Magee-Womens Hosp., F.G.I.C. Aaa Zero 10/01/14 2,000 791,320
Magee-Womens Hosp., F.G.I.C. Aaa Zero 10/01/16 2,000 702,080
Magee-Womens Hosp., F.G.I.C. Aaa Zero 10/01/18 2,000 622,720
Magee-Womens Hosp., F.G.I.C. Aaa Zero 10/01/19 4,000 1,178,400
Presbyterian Univ. Hosp., Ser. C, M.B.I.A. Aaa 7.625 7/01/15 1,100 1,152,074
West Penn. Hosp. Hlth. Ctr. NR 8.50 1/01/20 2,000 2,171,560
Allegheny Cnty. Ind. Dev. Auth. Rev., USX Proj., Ser. A Baa3 6.70 12/01/20 4,500 4,818,465
Allegheny Cnty. Residential Fin. Auth., Mtge. Rev.,
G.N.M.A.,
Ser. F Aaa 9.00 6/01/17 375 384,698
Ser. Q, A.M.T. Aaa 7.40 12/01/22 900 952,983
Allegheny Cnty., Ser. C-37, M.B.I.A. Aaa 7.30 12/01/10 1,500 (e)(g) 1,638,075
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 1,242,782
Berks Cnty. Gen. Oblig., Cap. Appreciation F.G.I.C. Aaa Zero 5/15/16 2,900 1,039,331
Berks Cnty. Ind. Dev. Auth. Rev., Lutheran Home Proj. NR 6.875 1/01/23 1,500 1,559,730
Berks Cnty. Mun. Auth. Hosp. Rev., Reading Hosp. Med. Ctr.
Proj., M.B.I.A. Aaa 5.70 10/01/14 1,250 1,314,325
Bucks Cnty. Wtr. & Swr. Auth. Rev., Neshaminy Interceptor
Swr. Sys., F.G.I.C. Aaa Zero 12/01/15 2,175 800,639
Butler Cnty. Hosp. Auth. Rev., North Hills Passavant
Hosp., Ser. A, F.S.A. Aaa 7.00 6/01/22 1,000 (e) 1,107,460
Central Greene Sch. Dist., Ser. AA, A.M.B.A.C. Aaa 5.25 2/15/24 1,000 965,340
Chartiers Valley Ind., Ref.-Friendship Vlg./South Hills NR 6.75 8/15/18 2,225 2,305,278
Chester Upland Sch. Auth., Sch. Rev., A(b) 6.375 9/01/21 1,000 1,081,340
Cumberland Cnty. Mun. Auth. Rev., Presbyterian Homes Inc.
Proj. BBB+(b) 6.00 12/01/26 3,000 3,022,950
Dauphin Cnty. Gen. Auth. Rev., B.I.G. Aaa 7.40 1/01/06 70 71,540
Delaware Cnty. Auth. Hosp. Rev., Crozer-Chester Med. Ctr.,
M.B.I.A. Aaa 7.15 12/15/05 2,550 (e) 2,818,464
Delaware Cnty. Hlth. Facs. Auth. Rev., Mercy Hlth. Corp.
Proj. BBB+(b) 6.00 12/15/26 3,000 3,042,690
Delaware Cnty. Ind. Dev. Auth. Rev., Res. Rec. Facs., Ser.
A Baa1 6.10 7/01/13 6,500 6,854,445
Doylestown Hosp. Auth. Rev., Pine Run Retirement, Ser. A NR 7.20 7/01/23 3,180 3,386,891
Emmaus Gen. Auth. Rev., Local Gov't Bond, B.I.G.,
Ser. B Aaa 8.00 5/15/18 1,000 (d) 1,040,190
Ser. C Aaa 7.90 5/15/18 1,250 (g) 1,315,750
Ser. E Aaa 7.90 5/15/18 2,000 (g) 2,105,200
Ser. F Aaa 7.90 5/15/18 1,600 (g) 1,684,160
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-218
<PAGE>
Portfolio of Investments as of PRUDENTIAL MUNICIPAL SERIES FUND
August 31, 1997 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>
- ------------------------------------------------------------------------------------------------------------------------------
Greencastle Antrim Sch. Dist., M.B.I.A.,
Cap. Appreciation, Ser. B Aaa Zero 1/01/12 $ 1,000 $ 465,780
Cap. Appreciation, Ser. B Aaa Zero 1/01/13 1,000 438,330
Harrisburg Auth. Rev., Pooled Bond Prog., Ser. I,
M.B.I.A., Aaa 5.625% 4/01/15 2,000 2,035,820
Hazleton Hlth. Svc. Auth. Hosp. Rev., St. Joseph Med. Ctr. Baa3 6.20 7/01/26 2,355 2,424,472
Lancaster Cnty. Solid Waste Mgmt. Auth. Rev.,
Res. Rec. Sys. Landfill Rev. Baa2 7.75 12/15/04 750 776,280
Res. Rec. Sys. Landfill Rev. Baa2 7.875 12/15/09 500 518,275
Res. Rec. Sys. Rev., Ser. A Baa2 8.375 12/15/04 1,000 1,039,420
Langhorne Manor Boro. Higher Ed. & Hlth. Auth Rev., Lower
Bucks Hosp. Ba3 7.35 7/01/22 1,000 1,044,410
Latrobe Ind. Dev. Auth. Coll. Rev.,
St. Vincent Coll. Proj. Baa1 6.75 5/01/14 1,800 1,936,566
St. Vincent Coll. Proj. Baa1 6.75 5/01/24 1,500 1,609,455
Lehigh Cnty. Gen. Purpose Auth. Revs., Horizon Hlth. Sys.
Inc., Ser. A NR 8.25 7/01/13 500 535,735
Lower Pottsgrove Twnshp. Auth. Swr. Rev., Montgomery
Cnty., A.M.B.A.C.,
Ser. A Aaa Zero 11/01/13 1,155 484,084
Ser. A Aaa Zero 11/01/15 1,185 438,201
Luzerne Cnty. Ind. Dev. Auth., Rev., Gas & Water, Ser. B,
A.M.T. A3 7.125 12/01/22 6,000 6,537,960
Lycoming Cnty., M.B.I.A., Aaa 5.75 11/15/17 2,500 2,573,700
Montgomery Cnty. Higher Ed. & Hlth. Auth. Hosp. Rev.,
Jeanes Hlth. Sys. Proj. NR 8.625 7/01/07 4,000 (e) 4,516,840
Montgomery Cnty. Ind. Dev. Auth. Rev., Poll Ctrl.,
Philadelphia Elec. Co., Ser. A, A.M.T. Baa2 7.60 4/01/21 1,000 1,086,840
Res. Recovery A-(b) 7.50 1/01/12 2,000 2,189,740
Montgomery Cnty. Redev. Auth., Multifamily Hsg., Ser. A NR 6.50 7/01/25 1,400 1,404,102
Northampton Cnty. Higher Ed. Auth. Rev.,
Lehigh Univ., M.B.I.A. Aaa 7.10 11/15/09 1,500 1,613,535
Moravian Coll. AAA(b) 8.20 6/01/11 2,095 (e) 2,407,428
Moravian Coll., A.M.B.A.C. Aaa 6.25 7/01/11 2,195 2,461,824
Northeastern Hosp. & Ed. Auth. Coll. Rev., Kings Coll.
Proj., Ser. B BBB(b) 6.00 7/15/18 3,235 3,256,901
Northumberland Cnty. Ind. Dev. Auth. Rev., Roaring Creek
Wtr., A.M.T. NR 6.375 10/15/23 1,000 1,010,000
Penn Hills Twnshp., Gen. Oblig., Ser A, A.M.B.A.C. Aaa Zero 6/01/10 1,535 788,622
Penn Hills, Ser. B, A.M.B.A.C. Aaa Zero 12/01/18 1,360 419,560
Pennsylvania Convention Ctr. Auth. Rev., Ser. A, F.G.I.C. Aaa 6.00 9/01/19 5,445 5,863,394
Pennsylvania Econ. Dev. Auth.,
Macmillan Ltd. Partnership Proj., A.M.T. Baa2 7.60 12/01/20 3,000 3,452,610
Wst. Wtr. Treatment Rev., Sun Co. R & M Proj., Ser. A,
A.M.T. Baa3 7.60 12/01/24 4,500 5,163,930
Pennsylvania Hsg. Fin. Agcy.,
Sngl. Fam. Mtge., A.M.T. Aa 7.80 10/01/20 2,930 (g) 3,086,257
Sngl. Fam. Mtge., A.M.T., R.I.B.S., S.F.M.R. Aa 8.009(c) 4/01/25 2,100 2,197,125
Sngl. Fam. Mtge., Ser. 53A, A.M.T. Aa 6.15 10/01/24 2,000 2,048,320
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-219
<PAGE>
Portfolio of Investments as of PRUDENTIAL MUNICIPAL SERIES FUND
August 31, 1997 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>
- ------------------------------------------------------------------------------------------------------------------------------
Pennsylvania Infrastructure Invt. Auth. Rev., M.B.I.A. Aaa 5.625% 9/01/14 $ 1,500 $ 1,533,975
Pennsylvania St. Cert. of Part., Ser. A, F.S.A. Aaa 6.25 11/01/06 1,900 2,036,306
Pennsylvania St. Higher Edl. Facs. Auth. Rev.,
Allegheny Coll., Ser. B BBB+(b) 6.00 11/01/22 2,000 2,013,920
Hahnemann Univ. Proj., M.B.I.A. Aaa 7.20 7/01/09 1,500(e) 1,610,400
Hlth. Svs. Rev., M.B.I.A. Aaa 5.70 11/15/11 2,000(g) 2,124,260
Ursinus College BBB+(b) 5.90 1/01/27 1,925 1,943,846
Philadelphia Gas Wks. Rev.,
13th Ser. Baa1 7.20 6/15/98 500 512,020
13th Ser. Baa1 7.30 6/15/99 625 655,444
13th Ser. Baa1 7.70 6/15/11 215 242,847
13th Ser. Aaa 7.70 6/15/21 3,430(e) 3,887,150
Philadelphia Gen. Oblig., M.B.I.A. Aaa 5.00 5/15/15 3,000(g) 2,864,010
Philadelphia Hosps. & Higher Ed. Fac. Auth. Rev.,
Childrens' Seashore House A-(b) 7.00 8/15/12 500 536,960
Childrens' Seashore House, Ser. A A-(b) 7.00 8/15/12 1,000 1,084,600
Childrens' Seashore House, Ser. A A-(b) 7.00 8/15/17 1,000 1,084,600
Grad. Hlth. Systems Ba 7.25 7/01/18 5,000 5,389,450
Philadelphia Ind. Dev. Auth. Rev.,
Inst. For Cancer Res. Proj., Ser. B AA-(b) 7.25 7/01/10 5,770 6,248,275
Nat'l. Brd. of Med. Examiners Proj. A+(b) 6.75 5/01/12 5,000(g) 5,455,500
Philadelphia Pkg. Auth. Rev., Arpt. Pkg., A.M.B.A.C. Aaa 7.375 9/01/18 2,200(e) 2,318,514
Philadelphia Redev. Auth. Rev., Home Impvt. Loan, Ser. A,
F.H.A. A1 7.40 6/01/08 295 312,317
Philadelphia Wtr. & Swr. Rev., 15th Ser., M.B.I.A. Aaa 6.875 10/01/06 700 747,838
Pittsburgh Urban Redev. Auth., Mtge. Rev.,
Ser. 87B Aa2 8.30 4/01/17 795 820,074
Ser. C, A.M.T. Aa2 6.55 4/01/28 1,635 1,708,526
Ser A, A.M.T. Aa2 6.25 10/01/28 1,250 1,291,575
Pittsburgh Wtr. & Swr. Auth., Wtr. & Swr. Sys. Rev.,
F.G.I.C. Aaa 6.50 9/01/13 5,000(g) 5,729,850
Puerto Rico Comnwlth.,
Gen. Oblig., A.M.B.A.C. Aaa 7.00 7/01/10 4,030(g) 4,820,525
Hwy. & Trans. Auth. Rev., Ser. Y Baa1 6.25 7/01/14 1,000 1,106,050
Pub. Impvt. AAA(b) 7.70 7/01/20 5,250(e)(g) 5,846,295
Pub. Impvt. Rfdg., M.B.I.A. Aaa 7.00 7/01/10 720 861,235
Puerto Rico Port Auth. Rev., Spl. Facs. Amer. Airlines,
Ser. A., A.M.T. Baa3 6.25 6/01/26 1,475 1,563,765
Sayre Hlth. Care Facs. Auth. Rev., A.M.B.A.C.,
Cap. Asset Fin. Prog. C Aaa 7.70 12/01/13 500 535,505
Cap. Asset Fin. Prog. C Aaa 7.625 12/01/15 1,000 1,095,400
Schuylkill Cnty. Ind. Dev. Auth., Res. Rec. Rev.,
Schuykill Engy., A.M.T. NR 6.50 1/01/10 3,800 3,840,470
Scranton-Lackawanna Hlth. & Welfare Auth. Rev.,
Moses Taylor Hosp. Proj. BBB-(b) 6.25 7/01/20 4,200 4,240,866
Univ. of Scranton Proj., Ser. C A-(b) 7.50 6/15/06 1,000(e) 1,099,960
Univ. of Scranton Proj., Ser. C A-(b) 6.50 3/01/15 2,250(e) 2,469,465
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-220
<PAGE>
Portfolio of Investments as of PRUDENTIAL MUNICIPAL SERIES FUND
August 31, 1997 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>
- ------------------------------------------------------------------------------------------------------------------------------
Unity Twnshp. Mun. Auth., Gtd. Swr. Rev., A.M.B.A.C.,
Cap. Appreciation Aaa Zero 11/01/11 $ 1,035 $ 489,752
Cap. Appreciation Aaa Zero 11/01/12 1,035 461,144
Cap. Appreciation Aaa Zero 11/01/13 1,035 433,789
University Pittsburgh Higher Ed. Ref. Ser B, M.B.I.A. Aaa 5.00% 6/01/21 1,000 937,840
Virgin Islands Pub. Fin. Auth. Rev.,
Hwy. Trans. Trust Fund BBB(b) 7.70 10/01/04 1,000 1,066,780
Ref. Matching Loan Notes, Ser. A NR 7.25 10/01/18 1,950 2,168,692
Virgin Islands Terr., Hugo Ins. Claims Fund Proj., Ser. 91 NR 7.75 10/01/06 940 1,028,962
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 (e) 3,218,362
Washington Cnty. Hosp. Auth. Rev., Monongahela Valley
Hosp. A3 6.75 12/01/08 2,750 2,947,395
West Mifflin San. Swr. Mun. Auth. Rev., F.G.I.C. Aaa 6.25 8/01/10 1,555 1,743,046
Westmoreland Cnty., Cap. Appreciation, F.G.I.C. AAA(b) Zero 12/01/19 5,750 1,678,425
York Cnty. Solid Waste & Refuse Auth., Ind. Dev. Rev.,
Res. Rec. Proj., Ser. C A 8.20 12/01/14 1,000 1,037,480
------------
Total Investments--99.5%
(cost $207,694,080; Note 4) 224,324,055
Other assets in excess of liabilities--0.5% 1,026,524
------------
Net Assets--100% $225,350,579
------------
------------
</TABLE>
(a) The following abbreviations are used in portfolio descriptions:
A.M.T.--Alternative Minimum Tax.
A.M.B.A.C.--American Municipal Bond Assurance Corporation.
B.I.G.--Bond Investors Guaranty Insurance Company.
F.G.I.C.--Financial Guaranty Insurance Company.
F.H.A.--Federal Housing Administration.
F.S.A.--Financial Security Assurance.
G.N.M.A.--Government National Mortgage Association.
M.B.I.A.--Municipal Bond Insurance Association.
R.I.B.S.--Residual Interest Bonds.
S.F.M.R.--Single Family Mortgage Revenue.
(b) Standard & Poor's Rating.
(c) Inverse floating rate bond. The coupon is inversely indexed to a floating
interest rate. The rate shown is the rate at period end.
(d) Pledged as initial margin on financial futures contracts.
(e) Prerefunded issues are secured by escrowed cash and/or direct U.S.
guaranteed obligations.
(f) Represents extended settlement security.
(g) Securities segregated as collateral for futures contracts and extended
settlement 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-221
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Statement of Assets and Liabilities PENNSYLVANIA SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Assets August 31, 1997
<S> <C>
Investments, at value (cost $207,694,080)................................................................. $ 224,324,055
Interest receivable....................................................................................... 3,768,112
Receivable for investments sold........................................................................... 1,578,327
Receivable for Series shares sold......................................................................... 157,886
Other assets.............................................................................................. 6,276
---------------
Total assets........................................................................................... 229,834,656
---------------
Liabilities
Payable for investments purchased......................................................................... 2,560,448
Bank overdraft............................................................................................ 865,783
Payable for Series shares reacquired...................................................................... 483,364
Dividends payable......................................................................................... 193,411
Accrued expenses.......................................................................................... 180,407
Management fee payable.................................................................................... 86,904
Distribution fee payable.................................................................................. 65,868
Due to broker-variation margin............................................................................ 44,625
Deferred trustee's fees................................................................................... 3,267
---------------
Total liabilities...................................................................................... 4,484,077
---------------
Net Assets................................................................................................ $ 225,350,579
---------------
---------------
Net assets were comprised of:
Shares of beneficial interest, at par.................................................................. $ 210,143
Paid-in capital in excess of par....................................................................... 208,509,620
---------------
208,719,763
Accumulated net realized gain on investments........................................................... 145,216
Net unrealized appreciation on investments............................................................. 16,485,600
---------------
Net assets, August 31, 1997............................................................................... $ 225,350,579
---------------
---------------
Class A:
Net asset value and redemption price per share
($89,604,386 / 8,354,718 shares of beneficial interest issued and outstanding)...................... $10.73
Maximum sales charge (3% of offering price)............................................................ .33
Maximum offering price to public....................................................................... $11.06
Class B:
Net asset value, offering price and redemption price per share
($135,275,254 / 12,615,688 shares of beneficial interest issued and outstanding).................... $10.72
Class C:
Net asset value, offering price and redemption price per share
($470,939 / 43,920 shares of beneficial interest issued and outstanding)............................ $10.72
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-222
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
PENNSYLVANIA SERIES
Statement of Operations
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended
Net Investment Income August 31, 1997
<S> <C>
Income
Interest................................... $14,695,771
---------------
Expenses
Management fee............................. 1,163,118
Distribution fee--Class A.................. 83,552
Distribution fee--Class B.................. 741,968
Distribution fee--Class C.................. 5,088
Transfer agent's fees and expenses......... 163,000
Custodian's fees and expenses.............. 109,000
Registration fees.......................... 48,000
Reports to shareholders.................... 51,000
Audit fee.................................. 10,000
Legal fees and expenses.................... 9,000
Trustees' fees and expenses................ 4,000
Miscellaneous.............................. 3,837
---------------
Total expenses.......................... 2,391,563
Less: Management fee waiver (Note 2)....... (116,312)
Custodian fee credit................... (12,588)
---------------
Net expenses............................ 2,262,663
---------------
Net investment income......................... 12,433,108
---------------
Realized and Unrealized
Gain (Loss) on Investments
Net realized gain (loss) on:
Investment transactions.................... 1,487,734
Financial futures contract................. (554,574)
---------------
933,160
---------------
Net change in unrealized appreciation on:
Investments................................ 6,048,471
Financial futures contracts................ 245,469
---------------
6,293,940
---------------
Net gain on investments....................... 7,227,100
---------------
Net Increase in Net Assets
Resulting from Operations..................... $19,660,208
---------------
---------------
</TABLE>
PRUDENTIAL MUNICIPAL SERIES FUND
PENNSYLVANIA SERIES
Statement of Changes in Net Assets
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Increase (Decrease) Year Ended August 31,
in Net Assets 1997 1996
<S> <C> <C>
Operations
Net investment income.......... $ 12,433,108 $ 13,187,276
Net realized gain on investment
transactions................ 933,160 3,106,670
Net change in unrealized
appreciation (depreciation)
of investments.............. 6,293,940 (4,390,967)
-------------- ------------
Net increase in net assets
resulting from operations... 19,660,208 11,902,979
-------------- ------------
Dividends and distributions (Note
1):
Dividends from net investment
income
Class A..................... (4,680,534) (3,346,434)
Class B..................... (7,719,049) (9,806,020)
Class C..................... (33,525) (34,822)
-------------- ------------
(12,433,108) (13,187,276)
-------------- ------------
Distributions in excess of net
investment income
Class A..................... (15,732) --
Class B..................... (28,644) --
Class C..................... (156) --
-------------- ------------
(44,532) --
-------------- ------------
Distributions from net realized
gains
Class A..................... (715,794) --
Class B..................... (1,303,296) --
Class C..................... (7,128) --
-------------- ------------
(2,026,218) --
-------------- ------------
Series share transactions (net of
share conversions) (Note 5):
Net proceeds from shares
sold........................ 9,187,094 14,511,819
Net asset value of shares
issued in reinvestment of
dividends and
distributions............... 8,124,772 7,333,818
Cost of shares reacquired...... (35,414,489) (35,929,977)
-------------- ------------
Net decrease in net assets from
Series share transactions... (18,102,623) (14,084,340)
-------------- ------------
Total decrease.................... (12,946,273) (15,368,637)
Net Assets
Beginning of year................. 238,296,852 253,665,489
-------------- ------------
End of year....................... $ 225,350,579 $238,296,852
-------------- ------------
-------------- ------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-223
<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 thirteen series.
The monies of each series are invested in separate, independently managed
portfolios. The Pennsylvania Series (the 'Series') commenced investment
operations on April 3, 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 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 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. There were no written options outstanding at August
31, 1997.
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
- --------------------------------------------------------------------------------
B-224
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Notes to Financial Statements PENNSYLVANIA SERIES
- --------------------------------------------------------------------------------
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.
Reclassification of Capital Accounts: The Fund accounts and reports for
distributions to shareholders in accordance with Statement of Position 93-2:
Determination, Disclosure, and Financial Statement Presentation of Income,
Capital Gain, and Return of Capital Distributions by Investment Companies. The
effect of applying this statement was to increase undistributed net investment
income by $44,532, decrease accumulated realized gains by $76,208 and increase
paid-in capital in excess of par by $31,676. The current year effect of applying
the Statement of Position was due to the sale of securities purchased with
market discount. Net investment income, net realized gains and net assets were
not affected by this change.
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 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 Investments Fund Management
LLC ('PIFM'). Pursuant to this agreement, PIFM has responsibility for all
investment advisory services and supervises the subadviser's performance of such
services. PIFM 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. PIFM 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 PIFM is computed daily and payable monthly, at an annual
rate of .50 of 1% of the average daily net assets of the Series. Prior to
September 1, 1997, PIFM agreed to waive a portion (.05 of 1% of the Series'
average daily net assets) of its management fee, which amounted to $116,312
($.006 per share) for the year ended August 31, 1997. The Series is not required
to reimburse PIFM for such waiver. Effective September 1, 1997, PIFM eliminated
its management fee waiver.
The Fund has a distribution agreement with Prudential Securities Incorporated
('PSI') which acts as the distributor of the Class A, Class B and Class C
shares. The Fund compensates 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 PSI. The
distribution fees are accrued daily and payable monthly.
Pursuant to the Class A, B and C Plans, the Fund compensates PSI 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, 1997.
PSI has advised the Series that it has received approximately $18,700 in
front-end sales charges resulting from sales of Class A shares during the year
ended August 31, 1997. From these fees, 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 year ended August 31, 1997, it received
approximately $213,700 and $100 in contingent deferred sales charges imposed
upon certain redemptions by Class B and Class C shareholders, respectively.
PSI, PIFM and PIC are indirect, wholly-owned subsidiaries of The Prudential
Insurance Company of America.
The Series, along with other affiliated registered investment companies (the
'Funds'), entered into a credit agreement (the 'Agreement') on December 31, 1996
with an unaffiliated lender. The maximum commitment under the Agreement is
$200,000,000. The Agreement expires on December 30, 1997. Interest on any such
borrowings outstanding will be
- --------------------------------------------------------------------------------
B-225
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Notes to Financial Statements PENNSYLVANIA SERIES
- --------------------------------------------------------------------------------
at market rates. The purpose of the Agreement is to serve as an alternative
source of funding for capital share redemptions. The Series has not borrowed any
amounts pursuant to the Agreement as of August 31, 1997. The Funds pay a
commitment fee at an annual rate of .055 of 1% on the unused portion of the
credit facility. The commitment fee is accrued and paid quarterly on a pro-rata
basis by the Funds.
- ------------------------------------------------------------
Note 3. Other Transactions with Affiliates
Prudential Mutual Fund Services LLC ('PMFS'), a wholly-owned subsidiary of PIFM,
serves as the Fund's transfer agent. During the year ended August 31, 1997, the
Series incurred fees of approximately $115,000 for the services of PMFS. As of
August 31, 1997, approximately $8,500 of such fees were due to PMFS. Transfer
agent fees and expenses in the Statement of Operations includes certain
out-of-pocket expenses paid to non-affiliates.
- ------------------------------------------------------------
Note 4. Portfolio Securities
Purchases and sales of portfolio securities of the Series, excluding short-term
investments, for the year ended August 31, 1997 were $48,690,885 and
$65,309,259, respectively.
The cost basis of investments for federal income tax purposes at August 31, 1997
was substantially the same as for financial reporting purposes and accordingly,
net unrealized appreciation of investments for federal income tax purposes was
$16,629,975 (gross unrealized appreciation--$16,680,204; gross unrealized
depreciation--$50,229).
At August 31, 1997 the Series purchased 84 financial futures contracts on the
Municipal Bond Index expiring September 1997. The value at acquisition of such
contracts was $9,646,875. The value of such contracts on August 31, 1997 was
$9,502,500 thereby resulting in an unrealized loss of $144,375.
- ------------------------------------------------------------
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 year ended August 31, 1997 and August 31, 1996 were as follows:
<TABLE>
<CAPTION>
Class A Shares Amount
- ----------------------------------- ---------- ------------
<S> <C> <C>
Year ended August 31, 1997:
Shares sold........................ 167,322 $ 1,775,448
Shares issued in reinvestment of
dividends........................ 285,955 3,031,398
Shares reacquired.................. (1,233,370) (13,076,827)
---------- ------------
Net decrease in shares outstanding
before conversion................ (780,093) (8,269,981)
Shares issued upon conversion from
Class B.......................... 2,492,966 26,425,708
---------- ------------
Net increase in shares
outstanding...................... 1,712,873 $ 18,155,727
---------- ------------
---------- ------------
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
---------- ------------
---------- ------------
<CAPTION>
Class B
- -----------------------------------
<S> <C> <C>
Year ended August 31, 1997:
Shares sold........................ 681,050 $ 7,225,041
Shares issued in reinvestment of
dividends........................ 479,073 5,075,287
Shares reacquired.................. (2,053,546) (21,766,442)
---------- ------------
Net decrease in shares outstanding
before conversion................ (893,423) (9,466,114)
Shares reacquired upon conversion
into Class A..................... (2,493,991) (26,425,708)
---------- ------------
Net decrease in shares
outstanding...................... (3,387,414) $(35,891,822)
---------- ------------
---------- ------------
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-226
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Notes to Financial Statements PENNSYLVANIA SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class C Shares Amount
- ----------------------------------- ---------- ------------
Year ended August 31, 1997:
<S> <C> <C>
Shares sold........................ 17,452 $ 186,605
Shares issued in reinvestment of
dividends........................ 1,707 18,087
Shares reacquired.................. (54,291) (571,220)
---------- ------------
Net decrease in shares
outstanding...................... (35,132) $ (366,528)
---------- ------------
---------- ------------
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
---------- ------------
---------- ------------
</TABLE>
- --------------------------------------------------------------------------------
B-227
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Financial Highlights PENNSYLVANIA SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A
------------------------------------------------------
Year Ended August 31,
------------------------------------------------------
1997 1996 1995 1994 1993
------- ------- ------- ------- ------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year................................. $ 10.49 $ 10.55 $ 10.42 $ 11.21 $10.55
------- ------- ------- ------- ------
Income from investment operations
Net investment income.............................................. .59(a) .59(a) .60(a) .59 .62
Net realized and unrealized gain (loss) on investment
transactions.................................................... .33 (.06) .13 (.68) .70
------- ------- ------- ------- ------
Total from investment operations................................ .92 .53 .73 (.09) 1.32
------- ------- ------- ------- ------
Less distributions
Dividends from net investment income............................... (.59) (.59) (.60) (.59) (.62)
Distributions in excess of net investment income................... --(c) -- -- -- --
Distributions from net realized gains.............................. (.09) -- -- (.11) (.04)
------- ------- ------- ------- ------
Total distributions............................................. (.68) (.59) (.60) (.70) (.66)
------- ------- ------- ------- ------
Net asset value, end of year....................................... $ 10.73 $ 10.49 $ 10.55 $ 10.42 $11.21
------- ------- ------- ------- ------
------- ------- ------- ------- ------
TOTAL RETURN(b):................................................... 9.01% 5.08% 7.35% (.82)% 12.86%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)...................................... $89,604 $69,659 $50,696 $10,651 $9,342
Average net assets (000)........................................... $83,552 $59,995 $30,092 $10,315 $7,354
Ratios to average net assets:
Expenses, including distribution fees........................... .72%(a) .75%(a) .80%(a) .75% .78%
Expenses, excluding distribution fees........................... .62%(a) .65%(a) .70%(a) .65% .68%
Net investment income........................................... 5.60%(a) 5.56%(a) 5.76%(a) 5.52% 5.69%
For Class A, B and C shares:
Portfolio turnover rate......................................... 21% 26% 19% 22% 13%
</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.
(c) Less than $.005 per share.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-228
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Financial Highlights PENNSYLVANIA SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class B
------------------------------------------------------------
Year Ended August 31,
------------------------------------------------------------
1997 1996 1995 1994 1993
<CAPTION>
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year................................. $ 10.49 $ 10.55 $ 10.42 $ 11.21 $ 10.54
-------- -------- -------- -------- --------
Income from investment operations
Net investment income.............................................. .55(a) .55(a) .56(a) .55 .57
Net realized and unrealized gain (loss) on investment
transactions.................................................... .32 (.06) .13 (.68) .71
-------- -------- -------- -------- --------
Total from investment operations................................ .87 .49 .69 (.13) 1.28
-------- -------- -------- -------- --------
Less distributions
Dividends from net investment income............................... (.55) (.55) (.56) (.55) (.57)
Distributions in excess of net investment income................... --(c) -- -- -- --
Distributions from net realized gains.............................. (.09) -- -- (.11) (.04)
-------- -------- -------- -------- --------
Total distributions............................................. (.64) (.55) (.56) (.66) (.61)
-------- -------- -------- -------- --------
Net asset value, end of year....................................... $ 10.72 $ 10.49 $ 10.55 $ 10.42 $ 11.21
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
TOTAL RETURN(b):................................................... 8.58% 4.66% 6.92% (1.22)% 12.54%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)...................................... $135,275 $167,809 $202,633 $257,732 $263,752
Average net assets (000)........................................... $148,394 $189,902 $223,082 $266,594 $229,955
Ratios to average net assets:
Expenses, including distribution fees........................... 1.12%(a) 1.15%(a) 1.17%(a) 1.15% 1.18%
Expenses, excluding distribution fees........................... .62%(a) .65%(a) .67%(a) .65% .68%
Net investment income........................................... 5.20%(a) 5.16%(a) 5.44%(a) 5.11% 5.29%
</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.
(c) Less than $.005 per share.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-229
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Financial Highlights PENNSYLVANIA SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class C
-------------------------------------------
August 1,
1994(d)
Year Ended August 31, Through
---------------------------- August 31,
1997 1996 1995 1994
------ ------ ------ -----
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period............................... $10.49 $10.55 $10.42 $10.44
------ ------ ------ -----
Income from investment operations
Net investment income.............................................. .52(a) .52(a) .53(a) .04
Net realized and unrealized gain (loss) on investment
transactions.................................................... .32 (.06) .13 (.02)
------ ------ ------ -----
Total from investment operations................................ .84 .46 .66 .02
------ ------ ------ -----
Less distributions
Dividends from net investment income............................... (.52) (.52) (.53) (.04)
Distributions in excess of net investment income................... --(c) -- -- --
Distributions from net realized gains.............................. (.09) -- -- --
------ ------ ------ -----
Total distributions............................................. (.61) (.52) (.53) (.04)
------ ------ ------ -----
Net asset value, end of period..................................... $10.72 $10.49 $10.55 $10.42
------ ------ ------ -----
------ ------ ------ -----
TOTAL RETURN(b):................................................... 8.31% 4.41% 6.65% .14%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000).................................... $ 471 $ 829 $ 336 $ 90
Average net assets (000)........................................... $ 678 $ 704 $ 223 $ 1
Ratios to average net assets:
Expenses, including distribution fees........................... 1.37%(a) 1.40%(a) 1.44%(a) 2.00%(e)
Expenses, excluding distribution fees........................... .62%(a) .65%(a) .69%(a) 1.25%(e)
Net investment income........................................... 4.95%(a) 4.91%(a) 5.14%(a) 8.51%(e)
</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) Less than $.005 per share.
(d) Commencement of offering of Class C shares.
(e) Annualized.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-230
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Report of Independent Accountants PENNSYLVANIA SERIES
- --------------------------------------------------------------------------------
To the Shareholders and Board of Trustees of
Prudential Municipal Series Fund, Pennsylvania Series
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Prudential Municipal Series Fund,
Pennsylvania Series (the 'Fund', one of the portfolios constituting Prudential
Municipal Series Fund) at August 31, 1997, and the results of its operations,
the changes in its net assets and the financial highlights for the year then
ended, in conformity with generally accepted accounting principles. These
financial statements and financial highlights (hereafter referred to as
'financial statements') are the responsibility of the Fund's management; our
responsibility is to express an opinion on these financial statements based on
our audit. We conducted our audit of these financial statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audit, which included confirmation of securities at August
31, 1997 by correspondence with the custodian and brokers and the application of
alternative auditing procedures where securities purchased had not been
received, provides a reasonable basis for the opinion expressed above. The
accompanying statement of changes in net assets for the year ended August 31,
1996 and the financial highlights for each of the four periods in the period
ended August 31, 1996 were audited by other independent accountants, whose
opinion dated October 14, 1996 was unqualified.
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York
October 20, 1997
- --------------------------------------------------------------------------------
B-231
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Change of Auditors PENNSYLVANIA SERIES
- --------------------------------------------------------------------------------
Effective March 1, 1997, Deloitte & Touche LLP was terminated as the Fund's
auditors. For the year ended August 31, 1993 through August 31, 1996, Deloitte &
Touche LLP expressed an unqualified opinion on the Series' financial statements.
There were no disagreements between Fund management and Deloitte & Touche LLP
prior to their termination. The Board of Trustees approved the termination of
Deloitte & Touche LLP and the appointment of Price Waterhouse LLP as the Fund's
independent accountants.
- --------------------------------------------------------------------------------
B-232
<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 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, Pennsylvania 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-233
<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 and 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: Stocks, Bonds, Bills and Inflation 1997 Yearbook, Ibbotson Associates,
Chicago, Illinois (annually updates work by Roger G. Ibbotson and Rex A.
Sinquefield. Used with permission. 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 due to capital appreciation and the reinvestment of
any gains. Bond returns are due mainly to reinvesting interest. 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 measured using a constant one-bond
portfolio with a maturity of roughly 20 years. 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 '94
- ------------------------------------------- --------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <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% -3.4%
Mortgage Securities 4.3% 8.7% 15.4% 10.7% 15.7% 7.0% 6.8% -1.6%
U.S. Corporate Bonds 2.6% 9.2% 14.1% 7.1% 18.5% 8.7% 12.2% -3.9%
U.S. High Yield Corporate Bonds 5.0% 12.5% 0.8% -9.6% 46.2% 15.8% 17.1% -1.0%
World Government Bonds 35.2% 2.3% -3.4% 15.3% 16.2% 4.8% 15.1% 6.0%
Difference between highest and lowest
return in percent 33.2 10.2 18.8 24.9 30.9 11.0 10.3 9.9
<CAPTION>
Year '95
- ------------------------------------------- ---------
<S> <C>
U.S. Treasury Bonds 18.4%
Mortgage Securities 16.8%
U.S. Corporate Bonds 22.3%
U.S. High Yield Corporate Bonds 19.2%
World Government Bonds 19.6%
Difference between highest and lowest
return in percent 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 (1926-1996)
[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 "How the Fund is Managed--Manager" in each
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,
1996 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,
1996. Principal products and services include life and health insurance, other
healthcare products, property and casualty insurance, securities brokerage,
asset management, investment advisory services and real estate brokerage.
Prudential (together with its subsidiaries) employs almost 81,000 persons
worldwide, and maintains a sales force of approximately 11,500 agents and nearly
6,400 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 nearly 50 million people
worldwide. Long one of the largest issuers of individual life insurance, the
Prudential has 22 million life insurance policies in force today with a face
value of $1 trillion. Prudential has the largest capital base ($12.1 billion) of
any life insurance company in the United States. Prudential provides auto
insurance for approximately 1.6 million cars and insures approximately 1.2
million homes.
MONEY MANAGEMENT. 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. As of
December 31, 1996, Prudential had more than $332 billion in assets under
management. Prudential Investments, a business group of Prudential (of which
Prudential Mutual Funds is a key part) manages over $190 billion in assets of
institutions and individuals. In the PENSIONS & INVESTMENTS dated May 12, 1997,
Prudential was ranked third in terms of total assets under management.
REAL ESTATE. The Prudential Real Estate Affiliates, the fourth largest real
estate brokerage network in the United States, has more than 37,000 brokers and
agents across the United States.(2)
HEALTHCARE. Over two decades ago, the Prudential introduced the first
federally-funded, for-profit HMO in the country. Today, approximately 4.6
million Americans receive healthcare from a Prudential managed care membership.
FINANCIAL SERVICES. The Prudential Bank, a wholly-owned subsidiary of
Prudential, has over $1 billion in assets and serves nearly 1.5 million
customers across 50 states.
INFORMATION ABOUT THE PRUDENTIAL MUTUAL FUNDS
As of June 30, 1997 Prudential Investments Fund Management is the fifteenth
largest mutual fund company 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) Prudential Investments, a business group of 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 the subadviser to
Nicholas-Applegate Fund, Inc., Jennison Associates Capital Corp. as the
subadviser to Prudential Jennison Series Fund, Inc. and Prudential Active
Balanced Fund, a portfolio of Prudential Dryden Fund, Mercator Asset
Management LP as the Subadviser to International Stock Series, a portfolio
of Prudential World 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, 1996.
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 LLC, 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-U.S. 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 3, 1997, 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 % OWNERSHIP
- --------------------------------------------------- -------------------------------------- ----------- ----------------
<S> <C> <C> <C>
Florida Series (Class C) Randall E L Falck 56,038 7.9%
TTEE Randall E L Falck
REV TR UA DTD 12/03/91
FBO Randall E L Falck
8049 Whisper Lake Ln W
Ponte Vedra FL 32082-3115
Florida Series (Class C) Mr Joseph R Rainwater TTEE 45,991 6.5%
Brown V Rainwater
LVG Trust #1
UA DTD 06/21/86
PO Box 10875
Pensacola FL 32524-0875
Florida Series (Class Z) Chester G Baumgartner III 1,391 8.7%
Joanne M Baumgartner JT TEN
14901 Feather Cove Rd
Clearwater FL 33762-3073
Florida Series (Class Z) Mrs Eleanor C Larochelle 3,523 22.2%
TTEE Eleanor C Larochelle
Trust UA DTD 11/21/96
FBO Eleanor C Larochelle ET AL
35 Redbay Ct
Homosassa FL 34446-5121
Florida Series (Class Z) Robert Rosenthal MD 4,014 25.3%
Janet M Rosenthal JT TEN
3850 Devon Ct N
Boca Raton FL 33496-2701
Florida Series (Class Z) Mrs Peggy Jean Jewell 6,252 39.4%
TTEE Peggy Jean Jewell
Grantor TR UA DTD 04/24/92
665 Barcelona Ct
Satellite Bch Fl 32937-3907
Maryland Series (Class C) Julien J Lavoie 750 12.1%
Marjorie G Lavoie JT TEN
13405 Beall Creek Ct
Potomac MD 20854-1119
Maryland Series (Class C) Henry Nathan II 1,416 22.8%
Elaine T Nathan JT TEN
6222 Roblynn Road
Laurel MD 20707-2635
Maryland Series (Class C) Betty Greenberg 2,318 37.3%
8200 Wisconsin Ave #1211
Bethesda MD 20814-3113
Maryland Series (Class C) Erma N Ruble 1,120 18.0%
Mary D Grybos JT TEN
539 46th St
Baltimore MD 21224-3107
</TABLE>
IV-1
<PAGE>
<TABLE>
<CAPTION>
SERIES AND CLASS NAME REGISTRATION SHARES % OWNERSHIP
- --------------------------------------------------- -------------------------------------- ----------- ----------------
<S> <C> <C> <C>
Maryland Series (Class C) Thomas D Enright 494 7.9%
Donna J Enright JT TEN
1129 Neptune Pl
Annapolis MD 21401-4784
Massachusetts Series (Class C) Mr Leonard Frydman 1,284 16.1%
Mrs Nurit Sheinberg JT TEN
22 Fairview Ave
Watertown MA 02172-1222
Massachusetts Series (Class C) Mrs Lillian R Jirard 1,838 23.0%
Ms Stephanie Jirard JT TEN
107 Wessagussett RD
N Weymouth MA 02191-1557
Massachusetts Series (Class C) Kelly St Vrain 443 5.5%
13 Chadwich St
Acton MA 01720-4306
Massachusetts Series (Class C) Richard E Gray 597 7.5%
Dorothy E Gray JT TEN
234 Spring St
Medford MA 02155-2852
Massachusetts Series (Class C) Mr Robert C Dyer 855 10.7%
237 Pond St
Braintree MA 02184-5344
Massachusetts Series (Class C) Bear Stearns Securities Corp 2,222 27.8%
FBO 052-67688-17
1 Metrotech Center North
Brooklyn NY 11201-3870
Massachusetts Series (Class C) Arthur M Whish 433 5.4%
5 Leonard St
Hingham MA 02043-4725
Massachusetts Series (Class Z) Prudential Mutual 17,533 100%
Fund Services
PMFS Audit Account
PO Box 15025
New Brunswick NJ 08906-5025
Michigan Series (Class C) Richard Coleman 3,368 10.7%
PO Box 243
Glenn MI 49416-0243
Michigan Series (Class C) Ann P Franklin 2,019 6.4%
Don F Franklin JT TEN
707 Byron
Milford MI 48381
Michigan Series (Class C) Lorretta J Bonsall TTEE 2,576 8.2%
Lorretta J Bonsall Trust
UA DTD 05/19/95
FBO Lorretta J Bonsall
2280 Seminole Rd
Muskegon MI 49441-4229
</TABLE>
IV-2
<PAGE>
<TABLE>
<CAPTION>
SERIES AND CLASS NAME REGISTRATION SHARES % OWNERSHIP
- --------------------------------------------------- -------------------------------------- ----------- ----------------
<S> <C> <C> <C>
Michigan Series (Class C) Mr David Bonsall 2,576 8.2%
3741 S 220th Ave
Patterson Rd
Reed City MI 49677-9619
Michigan Series (Class C) Lester L Fall Jr 2,354 7.5%
Cynthia D Fall JT TEN
12460 Lincoln
Burt MI 48417-9746
Michigan Series (Class C) Rudolf K Breiling 5,899 18.8%
Sharon A Breiling JT TEN
45260 Fairchild
Macomb MI 48042-5416
Michigan Series (Class C) Mrs Helen L Jamieson 4,036 12.9%
TTEE Helen L Jamieson
Trust UA DTD 02/10/93
315 E Church Ave
Reed City MI 49677-9703
Michigan Series (Class C) Helen L Jamieson 4,980 15.9%
Karen Akom SUCC CO-TTEES
Bryce B Jamieson Trust
UA DTD 02/10/93
315 E Church Street
Reed City MI 49677-9703
Michigan Series (Class C) Hans J Pinagel 1,836 5.9%
Jack Lukens JT TEN
12768 Marilyn Dr
Leroy MI 49655-9747
New Jersery Series (Class C) Linda Abrams 11,118 8.5%
209 Pipers Landing Ct
Holmdel NJ 07733-2519
New Jersery Series (Class C) Martin Abrams 17,294 13.2%
209 Pipers Landing Ct
Holmdel NJ 07733-2519
New Jersery Series (Class C) Richard A Sperling MD 8,726 6.7%
25 Sparrowbush Road
Upper Saddle NJ 07458-1411
New Jersery Series (Class C) Dolores Truex 10,530 8.1%
126 Mayetta Landing Rd
West Creek NJ 08092-3100
New Jersery Series (Class Z) Ms Marilyn Sapiro 169 12.1%
688 Village Dr S
N Brunswick NJ 08902-2823
New Jersery Series (Class Z) Estelle Switzer 1,211 86.6%
122 Waverly Place
South Plainfield NJ 07080-5031
New York Series (Class C) Michael F Scheitel 5,515 8.4%
Dorothy E Scheitel JT TEN
38 King Ave
Selden NY 11784-2338
</TABLE>
IV-3
<PAGE>
<TABLE>
<CAPTION>
SERIES AND CLASS NAME REGISTRATION SHARES % OWNERSHIP
- --------------------------------------------------- -------------------------------------- ----------- ----------------
<S> <C> <C> <C>
New York Series (Class C) Henry Hocker & 16,045 24.4%
Gloria Hocker JT TEN
15 West Suffolk Ave
Central Islip NY 11722-2142
New York Series (Class C) Lawrence R Caponegro 9,873 15.0%
Caponegro Family Revocable TR
UA DTD 06/29/92
47 Woodbury Road
Hauppauge NY 11788-4729
New York Series (Class Z) Mr Michael Angelastro 835 26.4%
Mrs Joanne Angelastro JT TEN
22 Bethesda Ln
Sayville NY 11782-1502
New York Series (Class Z) Mr Neil Presser 498 15.7%
Mrs Rosemarie Presser JT TEN
9 Fieldcrest Dr
New City NY 10956-5439
New York Series (Class Z) Miss Judith Johnson 174 5.5%
101 Eagle Bay Dr
Ossining NY 10562-2348
New York Series (Class Z) Michael Talaska & 334 10.5%
Yvonne Talaska JT TEN
PO Box 663
Harriman NY 10926-0663
New York Series (Class Z) Daniel D Benjamin MD & 405 12.7%
Beth Landau Benjamin JT TEN
68 Arbor Ln
Roslyn Heights NY 11577-2826
New York Series (Class Z) Mr Tommy M Gracin & 187 5.9%
Mrs Noelle Gracin JT TEN
303 Knollwood Ave
Douglaston Manor NY 11363-1021
New York Series (Class Z) Beth Landau-Benjamin Cust 355 11.2%
Joshua Ian Benjamin
UNIF Gift Min Act NY
68 Arbor Lane
Roslyn Hts NY 11577-2826
New York Series (Class Z) Mrs Rosemarie Presser Cust 208 6.6%
Mr Jonathan Presser
UNIF Trans Min Act NY
9 Fieldcrest Dr
New City NY 10956-5439
North Carolina Series (Class C) Steven J Sybert 3,115 56.9%
Rosalie B Sybert JT TEN
3213 Springs Farm Ln
Charlotte NC 28226-0912
North Carolina Series (Class C) Howard G Hochman 1,063 19.4%
1200 Dwire Pl
Durham NC 27706-2515
</TABLE>
IV-4
<PAGE>
<TABLE>
<CAPTION>
SERIES AND CLASS NAME REGISTRATION SHARES % OWNERSHIP
- --------------------------------------------------- -------------------------------------- ----------- ----------------
<S> <C> <C> <C>
North Carolina Series (Class C) S J Black and Son Inc 1,031 18.8%
PO Box 1105
Monroe NC 28111-1105
Ohio Series (Class C) Robert M Beck 528 8.2%
339 Walnut Creek Pike
Circleville Oh 43113-1051
Ohio Series (Class C) Bobby G Gresham 847 13.1%
Mildred V Gresham JT TEN
1309 Fowler Dr
Columbus OH 43224-1143
Ohio Series (Class C) Cynthia L Weaver 459 7.1%
9813 Camelot St NW
Pickerington OH 43147-8579
Ohio Series (Class C) Orvilla J Wangler 2,075 32.2%
Sibject to STA TOD rules - NJ
182 ST Francos Ave room 108
Tifflin OH 44883-3456
Ohio Series (Class C) Betty J Kiser 878 13.6%
3618 St Rt 127
Greenville OH 45331-9716
Ohio Series (Class C) Neal W Toth 460 7.1%
Ann D Toth JT TEN
108 Bayberry Dr
Northfield OH 44067-2622
Ohio Series (Class C) Pauline R Morgan Levion 497 7.7%
1162 Rankin Dr
Zanesville OH 43701-1457
Ohio Series (Class C) Charles E Cartwright 686 10.6%
Janet L Cartwright JT TEN
700 Swayne Dr
Coshocton OH 43812-1051
Pennsylvania Series (Class C) Barry L Joel & 4,514 14.9%
Tammy L Joel JT TEN
7386 Beacon Hill Dr
Pittsburgh PA 15221-2569
Pennsylvania Series (Class C) Betty J Falvo 8,647 19.8%
1317 Clifton Rd
Washington PA 15301-6237
Pennsylvania Series (Class C) Virginia W Long 2,793 6.4%
504 Lombard St
Tamaqua PA 18252-1006
Pennsylvania Series (Class C) Local 229 IBEW 4,699 10.7%
Federal Credit Union
300 Hudson Street
York PA 17403
Pennsylvania Series (Class C) Robert J Niehaus & 4,071 9.3%
Jacqueline Niehaus JT TEN
5960 NE 28th Ave
Ft Lauderdale Fl 33308-2701
</TABLE>
IV-5
<PAGE>
<TABLE>
<CAPTION>
SERIES AND CLASS NAME REGISTRATION SHARES % OWNERSHIP
- --------------------------------------------------- -------------------------------------- ----------- ----------------
<S> <C> <C> <C>
Massachusetts Money Market Series (Direct) Ernest E Denby 2,789,857 5.3%
Mrs Diane L Denby JT TEN
520 Hall Hill Rd
Somers CT 06071-1032
</TABLE>
IV-6
<PAGE>
PART C
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS.
(A) FINANCIAL STATEMENTS:
(1) Financial statements included in the Prospectuses constituting Part
A of this Registration Statement:
Financial Highlights.
(2) Financial statements included in the Statement of Additional
Information constituting Part B of this Registration Statement:
Portfolio of Investments at August 31, 1997.
Statement of Assets and Liabilities at August 31, 1997.
Statement of Operations for the year ended August 31, 1997.
Statement of Changes in Net Assets for the years ended
August 31, 1997 and 1996.
Notes to Financial Statements.
Financial Highlights.
Independent Auditors' Reports.
(B) EXHIBITS:
1. (a) Amended and Restated Declaration of Trust of the Registrant,
incorporated by reference to Exhibit No. 1(a) to Post-Effective
Amendment No. 30 to the Registration Statement on Form N-1A filed via
EDGAR on December 28, 1994 (File No. 2-91216).
(b) Amended Certificate of Designation, incorporated by reference to
Exhibit No.1(b) to Post-Effective Amendment No. 34 to the Registration
Statement filed via EDGAR on November 22, 1996. (File No. 2-91216).
2. Restated By-Laws, incorporated by reference to Exhibit No. 2 to
Post-Effective Amendment No. 27 to the Registration Statement on Form
N-1A filed via EDGAR on May 12, 1994 (File No. 2-91216).
4. (a) Specimen receipt for shares of beneficial interest, $.01 par
value, of Connecticut Money Market Series (for Class A shares).*
(b) Specimen receipt for shares of beneficial interest, $.01 par
value, of Florida Series (for Class A shares).*
(c) Specimen receipt for shares of beneficial interest, $.01 par
value, of Maryland Series (for Class A shares).*
(d) Specimen receipt for shares of beneficial interest, $.01 par
value, of Massachusetts Series (for Class A shares).*
(e) Specimen receipt for shares of beneficial interest, $.01 par
value, of Massachusetts Money Market Series (for Class A shares).*
(f) Specimen receipt for shares of beneficial interest, $.01 par
value, of Michigan Series (for Class A shares).*
(g) Specimen receipt for shares of beneficial interest, $.01 par
value, of New Jersey Series (for Class A shares).*
(h) Specimen receipt for shares of beneficial interest, $.01 par
value, of New Jersey Money Market Series (for Class A shares).*
(i) Specimen receipt for shares of beneficial interest, $.01 par
value, of New York Series (for Class A shares).*
(j) Specimen receipt for shares of beneficial interest, $.01 par
value, of New York Money Market Series.*
(k) Specimen receipt for shares of beneficial interest, $.01 par
value, of North Carolina Series (for Class A shares).*
(l) Specimen receipt for shares of beneficial interest, $.01 par
value, of Ohio Series (for Class A shares).*
(m) Specimen receipt for shares of beneficial interest, $.01 par
value, of Pennsylvania Series (for Class A shares).*
C-1
<PAGE>
5. (a) Management Agreement between the Registrant and Prudential
Mutual Fund Management, Inc.*
(b) Subadvisory Agreement between Prudential Mutual Fund Management,
Inc. and The Prudential Investment Corporation.*
6. (a) Amended and Restated Distribution Agreement between the
Registrant (Connecticut Money Market Series, Massachusetts Money
Market Series, New Jersey Money Market Series, New York Money Market
Series) and Prudential Mutual Fund Distributors, Inc, incorporated by
reference to Exhibit No. 6(a) to Post-Effective Amendment No. 33 to
the Registration Statement on Form N-1A filed via EDGAR on October 31,
1996 (File No. 2-91216).
(b) Amendment to Distribution Agreements, incorporated by reference to
Exhibit No. 6(b) to Post-Effective Amendment No. 33 to the
Registration Statement on Form N-1A filed via EDGAR on October 31,
1996 (File No. 2-91216).
(c) Amended and Restated Distribution Agreement, incorporated by
reference to Exhibit No. 6(c) to Post-Effective Amendment No. 33 to
the Registration Statement on Form N-1A filed via EDGAR on October 31,
1996 (File No. 2-91216).
8. Custodian Contract between the Registrant and State Street Bank and
Trust Company.*
9. Transfer Agency and Service Agreement between the Registrant and
Prudential Mutual Fund Services, Inc.*
11. (a) Consent of Price Waterhouse LLP.*
(b) Consent of Deloitte & Touche LLP.*
15. (a) Distribution and Service Plan between the Registrant (Class D
shares) and Prudential Securities Incorporated, incorporated by
reference to Exhibit No. 15(g) to Post-Effective Amendment No. 26 to
the Registration Statement on Form N-1A filed via EDGAR on November 1,
1993 (File No. 2-91216).
(b) Distribution and Service Plan between the Registrant (Connecticut
Money Market Series, Massachusetts Money Market Series, New Jersey
Money Market Series, New York Money Market Series) and Prudential
Mutual Fund Distributors, Inc., incorporated by reference to Exhibit
No. 15(j) to Post-Effective Amendment No. 26 to the Registration
Statement on Form N-1A filed via EDGAR on November 1, 1993 (File No.
2-91216).
(c) Distribution and Service Plan for Class A shares, incorporated by
reference to Exhibit No. 15(c) to Post-Effective Amendment No. 30 to
the Registration Statement on Form N-1A filed via EDGAR on December
28, 1994 (File No. 2-91216).
(d) Distribution and Service Plan for Class B shares, incorporated by
reference to Exhibit No. 15(d) to Post-Effective Amendment No. 30 to
the Registration Statement on Form N-1A filed via EDGAR on December
28, 1994 (File No. 2-91216).
(e) Distribution and Service Plan for Class C shares, incorporated by
reference to Exhibit No. 15(e) to Post-Effective Amendment No. 30 to
the Registration Statement on Form N-1A filed via EDGAR on December
28, 1994 (File No. 2-91216).
16. (a) Schedule of Computation of Performance Information of Class A,
Class B, Class C and Class Z shares.*
(b) Schedule of Computation of Performance Information of Money Market
Series.*
18. Rule 18f-3 Plan, incorporated by reference to Exhibit No. 18 to
Post-Effective Amendment No. 33 to the Registration Statement on Form
N-1A filed via EDGAR on October 31, 1996 (File No. 2-91216).
27. Financial Data Schedules.*
- ------------------------
*Filed herewith.
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
None.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES.
As of October 3, 1997, each series of the Fund had the following number of
record holders of shares of beneficial interest, $.01 par value per share:
Connecticut Money Market Series, 1,767 record holders; Florida Series, 2,044
record holders of Class A
C-2
<PAGE>
shares, 420 record holders of Class B shares and 165 record holders of Class C
shares and 7 record holders of Class Z shares; Maryland Series, 861 record
holders of Class A shares, 637 record holders of Class B shares and 8 record
holders of Class C shares; Massachusetts Series, 876 record holders of Class A
shares, 939 record holders of Class B shares and 11 record holders of Class C
shares and 2 record holders of Class Z shares; Massachusetts Money Market
Series, 1,186 record holders; Michigan Series, 1,290 record holders of Class A
shares, 1,196 record holders of Class B shares and 14 record holders of Class C
shares; New Jersey Series, 3,436 record holders of Class A shares, 4,717 record
holders of Class B shares and 49 record holders of Class C shares and 4 record
holders of Class Z shares; New Jersey Money Market Series, 4,686 record holders;
New York Money Market Series, 7,707 record holders; New York Series, 5,728
record holders of Class A shares, 4,472 record holders of Class B shares and 34
record holders of Class C shares and 12 record holders of Class Z shares; North
Carolina Series, 902 record holders of Class A shares, 885 record holders of
Class B shares and 7 record holders of Class C shares; Ohio Series, 1,932 record
holders of Class A shares, 1,716 record holders of Class B shares and 10 record
holders of Class C shares; and Pennsylvania Series, 3,943 record holders of
Class A shares, 6,060 record holders of Class B shares and 31 record holders of
Class C shares.
ITEM 27. INDEMNIFICATION.
Article V, Section 5.1 of the Registrant's Declaration of Trust provides
that neither shareholders nor Trustees, officers, employees or agents shall be
subject to personal liability to any other person, except (with respect to
Trustees, officers, employees or agents) liability arising from bad faith,
willful misfeasance, gross negligence or reckless disregard of his of her
duties. Section 5.1 also provides that the Registrant will indemnify and hold
harmless each shareholder against all claims and all expenses reasonably related
thereto.
As permitted by Sections 17(h) and (i) of the Investment Company Act of
1940, as amended (the 1940 Act) and pursuant to Article VI of the Fund's By-Laws
(Exhibit 2 to the Registration Statement), officers, Trustees, employees and
agents of the Registrant will not be liable to the Registrant, any shareholder,
officer, Trustee, employee, agent or other person for any action or failure to
act, except for bad faith, willful misfeasance, gross negligence or reckless
disregard of duties, and those individuals may be indemnified against
liabilities in connection with the Registrant, subject to the same exceptions.
As permitted by Section 17(i) of the 1940 Act, pursuant to Section 9 or 10 of
each Distribution Agreement (Exhibit 6 to the Registration Statement), the
Distributor of the Registrant may be indemnified against liabilities which it
may incur, except liabilities arising from bad faith, gross negligence, willful
misfeasance or reckless disregard of duties.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended (Securities Act) may be permitted to Trustees, officers and
controlling persons of the Registrant pursuant to the foregoing provisions or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the 1940 Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by a Trustee, officer or controlling
person of the Registrant in connection with the successful defense of any
action, suit or proceeding) is asserted against the Registrant by such Trustee,
officer or controlling person in connection with the shares being registered,
the Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the 1940 Act and will be governed by the final adjudication of such
issue.
The Registrant has purchased an insurance policy insuring its officers and
Trustees against liabilities, and certain costs of defending claims against such
officers and Trustees, to the extent such officers and Trustees are not found to
have committed conduct constituting willful misfeasance, bad faith, gross
negligence or reckless disregard in the performance of their duties. The
insurance policy also insures the Registrant against the cost of indemnification
payments to officers and Trustees under certain circumstances.
Section 9 of the Management Agreement (Exhibit 5(a) to the Registration
Statement) and Section 4 of the Subadvisory Agreement (Exhibit 5(b) to the
Registration Statement) limit the liability of Prudential Investments Fund
Management LLC (PIFM) and The Prudential Investment Corporation (PIC),
respectively, to liabilities arising from willful misfeasance, bad faith or
gross negligence in the performance of their respective obligations and duties
under the agreements.
The Registrant hereby undertakes that it will apply the indemnification
provisions of its By-Laws and each Distribution Agreement in a manner consistent
with Release No. 11330 of the Securities and Exchange Commission under the 1940
Act so long as the interpretations of Sections 17(h) and 17(i) of such Act
remain in effect and are consistently applied.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
(a) Prudential Investments Fund Management LLC
C-3
<PAGE>
See "How the Fund is Managed--Manager" in the Prospectuses constituting Part
A of this Registration Statement and "Manager" in the Statement of Additional
Information constituting Part B of this Registration Statement.
The business and other connections of the officers of PIFM are listed in
Schedules A and D of Form ADV of PIFM as currently on file with the Securities
and Exchange Commission, the text of which is hereby incorporated by reference
(File No. 801-31104).
The business and other connections of PIFM's directors and principal
executive officers are set forth below. Except as otherwise indicated, the
address of each person is Gateway Center Three, Newark, NJ 07102.
<TABLE>
<CAPTION>
NAME AND ADDRESS POSITION WITH PIFM PRINCIPAL OCCUPATIONS
- ----------------------------- ------------------------- -----------------------------------------------------------------
<S> <C> <C>
Brian Storms Officer-in-Charge, President, Prudential Mutual Funds & Annuities (PMF&A); Officer-
President, Chief in-Charge, President, Chief Executive Officer and Chief
Executive Officer and Operating Officer, PIFM
Chief Operating Officer
Thomas A. Early Executive Vice President, Vice President and General Counsel, PMF&A; Executive Vice
Secretary and General President, Secretary and General Counsel, PIFM
Counsel
Robert F. Gunia Executive Vice President Comptroller, Prudential Investments; Executive Vice President and
and Treasurer Treasurer, PIFM; Senior Vice President, Prudential Securities
Neil A. McGuinness Executive Vice President Executive Vice President and Director of Marketing, PMF&A;
Executive Vice President, PIFM
Robert J. Sullivan Executive Vice President Executive Vice President, PMF&A; Executive Vice President, PIFM
</TABLE>
(b) The Prudential Investment Corporation (PIC)
See "How the Fund is Managed--Manager" in the Prospectus constituting Part A
of this Registration Statement and "Manager" in the Statement of Additional
Information constituting Part B of this Registration Statement.
The business and other connections of PIC's directors and executive officers
are as set forth below. Except as otherwise indicated, the address of each
person is Prudential Plaza, Newark, NJ 07102.
<TABLE>
<CAPTION>
NAME AND ADDRESS POSITION WITH PIC PRINCIPAL OCCUPATIONS
- ----------------------------- ------------------------- -----------------------------------------------------------------
<S> <C> <C>
E. Michael Caulfield Chairman of the Board, Chief Executive Officer, Prudential Investments of The Prudential
President, Chief Insurance Company of America (Prudential)
Executive Officer and
Director
Jonathan M. Greene Senior Vice President and President -- Investment Management of Prudential Investments of
Director Prudential; Senior Vice President and Director, PIC
John R. Strangfeld Vice President and President of Private Asset Management Group of Prudential; Senior
Director Vice President, Prudential Vice President and Director, PIC
</TABLE>
ITEM 29. PRINCIPAL UNDERWRITERS
(a) Prudential Securities Incorporated
Prudential Securities Incorporated is distributor for The BlackRock
Government Income Trust, Command Money Fund, Command Government Fund, Command
Tax-Free Fund, The Global Total Return Fund, Inc., Global Utility Fund, Inc.,
Nicholas-Applegate Fund, Inc. (Nicholas-Applegate Equity Fund), Prudential
Balanced Fund, Prudential California Municipal Fund, Prudential Distressed
Securities Fund, Inc., Prudential Diversified Bond Fund, Inc., Prudential Dryden
Fund, Prudential Emerging Growth Fund, Inc., Prudential Equity Fund, Inc.,
Prudential Equity Income Fund, Prudential Europe Growth Fund, Inc., Prudential
Global Genesis Fund, Inc., Prudential Global Limited Maturity Fund, Inc.,
Prudential Government Income Fund, Inc., Prudential Government Securities Trust,
Prudential High Yield Fund, Inc., Prudential International Bond Fund, Inc.,
Prudential Institutional Liquidity Portfolio, Inc., Prudential Intermediate
Global Income Fund, Inc., Prudential Jennison Series Fund, Inc., Prudential
MoneyMart Assets, Inc., Prudential Mortgage Income Fund, Inc., Prudential
Multi-Sector Fund, Inc., Prudential Municipal Bond Fund, Prudential Municipal
Series Fund, Prudential National Municipals Fund, Inc., Prudential Natural
Resources Fund, Inc., Prudential Pacific Growth Fund,
C-4
<PAGE>
Inc., Prudential Small Company Value Fund, Inc., Prudential Special Money Market
Fund, Inc., Prudential Structured Maturity Fund, Inc., Prudential Tax-Free Money
Fund, Inc., Prudential Utility Fund, Inc., Prudential World Fund, Inc. and The
Target Portfolio Trust. Prudential Securities is also a depositor for the
following unit investment trusts:
Corporate Investment Trust Fund
Prudential Equity Trust Shares
National Equity Trust
Prudential Unit Trust
Government Securities Equity Trust
National Municipal Trust
(b) Information concerning the officers and directors of Prudential
Securities Incorporated is set forth below.
<TABLE>
<CAPTION>
POSITIONS AND POSITIONS AND
OFFICES WITH OFFICES WITH
NAME(1) UNDERWRITER REGISTRANT
- ------------------------------------ ----------------------------------------------------------------- -----------------
<S> <C> <C>
Alan D. Hogan....................... Executive Vice President and Director None
George A. Murray.................... Executive Vice President and Director None
Leland B. Paton..................... Executive Vice President and Director None
One New York Plaza
New York, NY 10292
Martin Pfinsgraff................... Executive Vice President, Chief Financial Officer and Director None
Vincent T. Pica, II................. Executive Vice President and Director None
One New York Plaza
New York, NY 10292
Hardwick Simmons.................... Chief Executive Officer, President and Director None
Lee B. Spencer, Jr.................. Executive Vice President, Secretary, General Counsel and Director None
Brian Storms........................ Director None
Gateway Center Three
100 Mulberry Street
Newark, NJ 07102
</TABLE>
- ------------------------
(1) The address of each person named is One Seaport Plaza, New York, NY 10292
unless otherwise indicated.
(c) Registrant has no principal underwriter who is not an affiliated person
of the Registrant.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
All accounts, books and other documents required to be maintained by Section
31(a) of the 1940 Act and the Rules thereunder are maintained at the offices of
State Street Bank and Trust Company, One Heritage Drive, North Quincy,
Massachusetts 02171. The Prudential Investment Corporation, Prudential Plaza,
751 Broad Street, Newark, New Jersey 07102, the Registrant, Gateway Center
Three, Newark, New Jersey 07102, and Prudential Mutual Fund Services LLC Raritan
Plaza One, Edison, New Jersey 08837. Documents required by Rules 31a-1(b)(5),
(6), (7), (9), (10) and (11) and 31a-1(f) will be kept at Two Gateway Center,
documents required by Rules 31a-1(b)(4) and (11) and 31a-1(d) at Gateway Center
Three, Newark, New Jersey 07102 and the remaining accounts, books and other
documents required by such other pertinent provisions of Section 31(a) and the
Rules promulgated thereunder will be kept by State Street Bank and Trust Company
and Prudential Mutual Fund Services LLC
ITEM 31. MANAGEMENT SERVICES
Other than as set forth under the captions "How the Fund is
Managed--Manager" and "How the Fund is Managed-- Distributor" in the
Prospectuses and under the captions "Manager" and "Distributor" in the Statement
of Additional Information, constituting Part A and Part B, respectively, of this
Post-Effective Amendment to the Registration Statement, Registrant is not a
party to any management-related service contract.
ITEM 32. UNDERTAKINGS
(a) The Registrant hereby undertakes to furnish each person to whom a
Prospectus is delivered with a copy of the Registrant's latest annual report to
shareholders, upon request and without charge.
C-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all of
the requirements for effectiveness of this Post-Effective Amendment to the
Registration Statement pursuant to Rule 485(b) under the Securities Act of 1933
and has duly caused this Post-Effective Amendment to the Registration Statement
to be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Newark, and State of New Jersey, on this 31st day of October, 1997.
PRUDENTIAL MUNICIPAL SERIES FUND
By: /s/ RICHARD A. REDEKER
-------------------------------
Richard A. Redeker, President
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment to the Registration Statement has been signed below by
the following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
- ------------------------------------------------------ -------------------------------------------- --------------------
<C> <S> <C>
/s/ EDWARD D. BEACH
- ------------------------------------------- Trustee October 31, 1997
Edward D. Beach
/s/ EUGENE C. DORSEY
- ------------------------------------------- Trustee October 31, 1997
Eugene C. Dorsey
/s/ DELAYNE D. GOLD
- ------------------------------------------- Trustee October 31, 1997
Delayne D. Gold
/s/ ROBERT F. GUNIA
- ------------------------------------------- Vice President and Trustee October 31, 1997
Robert F. Gunia
/s/ HARRY A. JACOBS, JR.
- ------------------------------------------- Trustee October 31, 1997
Harry A. Jacobs, Jr.
- ------------------------------------------- Trustee
Donald D. Lennox
/s/ MENDEL A. MELZER
- ------------------------------------------- Trustee October 31, 1997
Mendel A. Melzer
/s/ THOMAS T. MOONEY
- ------------------------------------------- Trustee October 31, 1997
Thomas T. Mooney
/s/ THOMAS H. O'BRIEN
- ------------------------------------------- Trustee October 31, 1997
Thomas H. O'Brien
</TABLE>
C-6
<PAGE>
<TABLE>
<CAPTION>
NAME TITLE DATE
- ------------------------------------------------------ -------------------------------------------- --------------------
<C> <S> <C>
/s/ RICHARD A. REDEKER
- ------------------------------------------- President and Trustee October 31, 1997
Richard A. Redeker
/s/ NANCY HAYS TEETERS
- ------------------------------------------- Trustee October 31, 1997
Nancy Hays Teeters
/S/ LOUIS A. WEIL, III
- ------------------------------------------- Trustee October 31, 1997
Louis A. Weil, III
/s/ GRACE TORRES
- ------------------------------------------- Principal Financial and Accounting Officer October 31, 1997
Grace Torres
</TABLE>
C-7
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT PAGE
NUMBER DESCRIPTION NUMBER
-------- -------------------------------------------------------------------- --------
<C> <S> <C>
1. (a) Amended and Restated Declaration of Trust of the Registrant,
incorporated by reference to Exhibit No. 1(a) to Post-Effective
Amendment No. 30 to the Registration Statement on Form N-1A filed
via EDGAR on December 28, 1994 (File No. 2-91216). --
(b) Amended Certificate of Designation, incorporated by reference to
Exhibit No. 1(b) to Post-Effective Amendment No. 34 to the
Registration Statement on Form N-1A filed via EDGAR on November 22,
1996. (File No. 2-91216).
2. Restated By-Laws, incorporated by reference to Exhibit No. 2 to
Post-Effective Amendment No. 27 to the Registration Statement on
Form N-1A filed via EDGAR on May 12, 1994 (File No. 2-91216). --
4. (a) Specimen receipt for shares of beneficial interest, $.01 par
value, of Connecticut Money Market Series (for Class A shares).*
(b) Specimen receipt for shares of beneficial interest, $.01 par
value, of Florida Series (for Class A shares).*
(c) Specimen receipt for shares of beneficial interest, $.01 par
value, of Maryland Series (for Class A shares).*
(d) Specimen receipt for shares of beneficial interest, $.01 par
value, of Massachusetts Series (for Class A shares).*
(e) Specimen receipt for shares of beneficial interest, $.01 par
value, of Massachusetts Money Market Series (for Class A shares).*
(f) Specimen receipt for shares of beneficial interest, $.01 par
value, of Michigan Series (for Class A shares).*
(g) Specimen receipt for shares of beneficial interest, $.01 par
value, of New Jersey Series (for Class A shares).*
(h) Specimen receipt for shares of beneficial interest, $.01 par
value, of New Jersey Money Market Series (for Class A shares).*
(i) Specimen receipt for shares of beneficial interest, $.01 par
value, of New York Series (for Class A shares).*
(j) Specimen receipt for shares of beneficial interest, $.01 par
value, of New York Money Market Series.*
(k) Specimen receipt for shares of beneficial interest, $.01 par
value, of North Carolina Series (for Class A shares).*
(l) Specimen receipt for shares of beneficial interest, $.01 par
value, of Ohio Series (for Class A shares).*
(m) Specimen receipt for shares of beneficial interest, $.01 par
value, of Pennsylvania Series (for Class A shares).*
5. (a) Management Agreement between the Registrant and Prudential
Mutual Fund Management, Inc.* --
(b) Subadvisory Agreement between Prudential Mutual Fund Management,
Inc. and The Prudential Investment Corporation.* --
6. (a) Amended and Restated Distribution Agreement between the
Registrant (Connecticut Money Market Series, Massachusetts Money
Market Series, New Jersey Money Market Series, New York Money Market
Series) and Prudential Mutual Fund Distributors, Inc, incorporated
by reference to Exhibit No. 6(a) to Post-Effective Amendment No. 33
to the Registration Statement on Form N-1A filed via EDGAR on
October 31, 1996 (File No. 2-91216). --
(b) Amendment to Distribution Agreements, incorporated by reference
to Exhibit No. 6(b) to Post-Effective Amendment No. 33 to the
Registration Statement on Form N-1A filed via EDGAR on October 31,
1996 (File No. 2-91216). --
(c) Amended and Restated Distribution Agreement, incorporated by
reference to Exhibit No. 6(c) to Post-Effective Amendment No. 33 to
the Registration Statement on Form N-1A filed via EDGAR on October
31, 1996 (File No. 2-91216). --
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT PAGE
NUMBER DESCRIPTION NUMBER
-------- -------------------------------------------------------------------- --------
<C> <S> <C>
8. Custodian Contract between the Registrant and State Street Bank and
Trust Company.* --
9. Transfer Agency and Service Agreement between the Registrant and
Prudential Mutual Fund Services, Inc.* --
11. (a) Consent of Price Waterhouse LLP.*
(b) Consent of Deloitte & Touche LLP.*
15. (a) Distribution and Service Plan between the Registrant (Class D
shares) and Prudential Securities Incorporated, incorporated by
reference to Exhibit No. 15(g) to Post-Effective Amendment No. 26 to
the Registration Statement on Form N-1A filed via EDGAR on November
1, 1993 (File No. 2-91216). --
(b) Distribution and Service Plan between the Registrant
(Connecticut Money Market Series, Massachusetts Money Market Series,
New Jersey Money Market Series, New York Money Market Series) and
Prudential Mutual Fund Distributors, Inc., incorporated by reference
to Exhibit No. 15(j) to Post-Effective Amendment No. 26 to the
Registration Statement on Form N-1A filed via EDGAR on November 1,
1993 (File No. 2-91216). --
(c) Distribution and Service Plan for Class A shares, incorporated
by reference to Exhibit No. 15(c) to Post-Effective Amendment No. 30
to the Registration Statement on Form N-1A filed via EDGAR on
December 28, 1994 (File No. 2-91216). --
(d) Distribution and Service Plan for Class B shares, incorporated
by reference to Exhibit No. 15(d) to Post-Effective Amendment No. 30
to the Registration Statement on Form N-1A filed via EDGAR on
December 28, 1994 (File No. 2-91216). --
(e) Distribution and Service Plan for Class C shares, incorporated
by reference to Exhibit No. 15(e) to Post-Effective Amendment No. 30
to the Registration Statement on Form N-1A filed via EDGAR on
December 28, 1994 (File No. 2-91216). --
16. (a) Schedule of Computation of Performance Information of Class A,
Class B, Class C and Class Z shares.*
(b) Schedule of Computation of Performance Information of Money
Market Series.*
18. Rule 18f-3 Plan, incorporated by reference to Exhibit No. 18 to
Post-Effective Amendment No. 33 to the Registration Statement on
Form N-1A filed via EDGAR on October 31, 1996 (File No. 2-91216). --
27. Financial Data Schedules --
</TABLE>
- ------------------------
*Filed herewith.
<PAGE>
<TABLE>
<CAPTION>
====================================================================================================
<S> <C>
RECEIPT FOR SHARES
====================== =============================
NUMBER SHARES OF BENEFICIAL INTEREST
====================== =============================
Prudential Municipal Series Fund
(Connecticut Money Market Series)
AN UNINCORPORATED BUSINESS TRUST UNDER THE LAWS OF THE COMMONWEALTH OF MASSACHUSETTS
ACCOUNT No. ALPHA CODE ------------------------------
CUSIP
------------------------------
SEE REVERSE SIDE FOR CERTAIN DEFINITIONS
THIS IS TO EVIDENCE that
SPECIMEN VOID
is the owner of
FULLY-PAID AND NON-ASSESSABLE SHARES OF BENEFICIAL INTEREST, PAR VALUE OF $.01 EACH OF THE
- -----------------PRUDENTIAL MUNICIPAL SERIES FUND (CONNECTICUT MONEY MARKET SERIES)-----------------
hereafter called the "Trust", transferable on the books of the Trust by the owner in person or by
duly authorized attorney upon surrender of this Certificate properly endorsed.
This Certificate and the shares represented hereby are issued and shall be held subject
to the provisions of the Declaration of Trust and By-Laws of the Trust and all amendments thereof,
copies of which are on file with the Secretary of the Commonwealth of Massachusetts and at the
office of the Trust, to all of which the holder, by acceptance hereof assents.
This Certificate is not valid unless countersigned by the Transfer Agent.
IN WITNESS WHEREOF, the Trust has caused this Certificate to be signed in its name by
its proper officers and to be sealed with the Seal of the Trust.
Dated:
/s/ S. Jane Rose /s/ Robert F. Gunia
Secretary Vice President
COUNTERSIGNED:
PRUDENTIAL MUTUAL FUND SERVICES, INC.
(NEW JERSEY)
BY TRANSFER AGENT,
AUTHORIZED OFFICER
====================================================================================================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
RECEIPT FOR SHARES
====================== =============================
NUMBER SHARES OF BENEFICIAL INTEREST
====================== =============================
CLASS A
PRUDENTIAL MUNICIPAL SERIES FUND
(FLORIDA SERIES)
AN UNINCORPORATED BUSINESS TRUST UNDER THE LAWS OF THE COMMONWEALTH OF MASSACHUSETTS
ACCOUNT No. ALPHA CODE ------------------------------
CUSIP
------------------------------
SEE REVERSE SIDE FOR CERTAIN DEFINITIONS
THIS IS TO CERTIFY that
Specimen Void
is the owner of
FULLY-PAID AND NON-ASSESSABLE SHARES OF BENEFICIAL INTEREST, PAR VALUE OF $.01 EACH OF THE
- ----------------------------------PRUDENTIAL MUNICIPAL SERIES FUND----------------------------------
hereafter called the "Trust", transferable on the books of the Trust by the owner in person or by
duly authorized attorney upon surrender of this Certificate properly endorsed.
This Certificate and the shares represented hereby are issued and shall be held subject
to the provisions of the Declaration of Trust and By-Laws of the Trust and all amendments thereto,
copies of which are on file with the Secretary of the Commonwealth of Massachusetts and at the
office of the Trust, all of which the holder by acceptance hereof assents.
This Certificate is not valid unless countersigned by the Transfer Agent.
IN WITNESS WHEREOF, the Trust has caused this Certificate to be signed in its name by
its proper officers and to be sealed with the Seal of the Trust.
Dated:
[SEAL]
/s/ S. Jane Rose /s/ Laurence C. McQuade
Secretary President
COUNTERSIGNED:
PRUDENTIAL MUTUAL FUND SERVICES, INC.
(NEW JERSEY)
BY TRANSFER AGENT,
AUTHORIZED SIGNATURE
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
====================================================================================================
<S> <C>
CLASS A
RECEIPT FOR SHARES
====================== =============================
NUMBER SHARES OF BENEFICIAL INTEREST
====================== =============================
Prudential-Bache Municipal Series Fund
(Maryland Series)
AN UNINCORPORATED BUSINESS TRUST UNDER THE LAWS OF THE COMMONWEALTH OF MASSACHUSETTS
ACCOUNT No. ALPHA CODE ------------------------------
CUSIP 744303 72 8
------------------------------
SEE REVERSE SIDE FOR CERTAIN DEFINITIONS
THIS IS TO EVIDENCE that
SPECIMEN VOID
is the owner of
FULLY-PAID AND NON-ASSESSABLE SHARES OF BENEFICIAL INTEREST, PAR VALUE OF $.01 EACH OF THE
- ----------------------PRUDENTIAL-BACHE MUNICIPAL SERIES FUND (MARYLAND SERIES)----------------------
hereafter called the "Trust," transferable on the books of the Trust by the owner in person or by
duly authorized attorney upon surrender of this Certificate properly endorsed.
This Certificate and the shares represented hereby are issued and shall be held subject
to the provisions of the Declaration of Trust and By-Laws of the Trust and all amendments thereof,
copies of which are on file with the Secretary of the Commonwealth of Massachusetts and at the
office of the Trust, to all of which the holder, by acceptance hereof assents.
This Certificate is not valid unless countersigned by the Transfer Agent.
IN WITNESS WHEREOF, the Trust has caused this Certificate to be signed in its name by
its proper officers and to be sealed with the Seal of the Trust.
Dated:
[SEAL]
/s/ S. Jane Rose /s/ Lawrence C. McQuade
Secretary President
COUNTERSIGNED:
PRUDENTIAL MUTUAL FUND SERVICES, INC.
(NEW JERSEY)
BY TRANSFER AGENT,
AUTHORIZED OFFICER
====================================================================================================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
====================================================================================================
<S> <C>
CLASS A
RECEIPT FOR SHARES
====================== =============================
NUMBER SHARES OF BENEFICIAL INTEREST
====================== =============================
Prudential-Bache Municipal Series Fund
(Massachusetts Series)
AN UNINCORPORATED BUSINESS TRUST UNDER THE LAWS OF THE COMMONWEALTH OF MASSACHUSETTS
ACCOUNT No. ALPHA CODE ------------------------------
CUSIP 744303 79 3
------------------------------
SEE REVERSE SIDE FOR CERTAIN DEFINITIONS
THIS IS TO EVIDENCE that
SPECIMEN VOID
is the owner of
FULLY-PAID AND NON-ASSESSABLE SHARES OF BENEFICIAL INTEREST, PAR VALUE OF $.01 EACH OF THE
- -------------------PRUDENTIAL-BACHE MUNICIPAL SERIES FUND (MASSACHUSETTS SERIES)-------------------
hereafter called the "Trust," transferable on the books of the Trust by the owner in person or by
duly authorized attorney upon surrender of this Certificate properly endorsed.
This Certificate and the shares represented hereby are issued and shall be held subject
to the provisions of the Declaration of Trust and By-Laws of the Trust and all amendments thereof,
copies of which are on file with the Secretary of the Commonwealth of Massachusetts and at the
office of the Trust, to all of which the holder, by acceptance hereof assents.
This Certificate is not valid unless countersigned by the Transfer Agent.
IN WITNESS WHEREOF, the Trust has caused this Certificate to be signed in its name by
its proper officers and to be sealed with the Seal of the Trust.
Dated:
[SEAL]
/s/ S. Jane Rose /s/ Lawrence C. McQuade
Secretary President
COUNTERSIGNED:
PRUDENTIAL MUTUAL FUND SERVICES, INC.
(NEW JERSEY)
BY TRANSFER AGENT,
AUTHORIZED OFFICER
====================================================================================================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
====================================================================================================
<S> <C>
RECEIPT FOR SHARES
====================== =============================
NUMBER SHARES OF BENEFICIAL INTEREST
====================== =============================
Prudential Municipal Series Fund
(Massachusetts Money Market Series)
AN UNINCORPORATED BUSINESS TRUST UNDER THE LAWS OF THE COMMONWEALTH OF MASSACHUSETTS
ACCOUNT No. ALPHA CODE ------------------------------
CUSIP
------------------------------
SEE REVERSE SIDE FOR CERTAIN DEFINITIONS
THIS IS TO EVIDENCE that
SPECIMEN VOID
is the owner of
FULLY-PAID AND NON-ASSESSABLE SHARES OF BENEFICIAL INTEREST, PAR VALUE OF $.01 EACH OF THE
- ----------------PRUDENTIAL MUNICIPAL SERIES FUND (MASSACHUSETTS MONEY MARKET SERIES)----------------
hereafter called the "Trust", transferable on the books of the Trust by the owner in person or by
duly authorized attorney upon surrender of this Certificate properly endorsed.
This Certificate and the shares represented hereby are issued and shall be held subject
to the provisions of the Declaration of Trust and By-Laws of the Trust and all amendments thereof,
copies of which are on file with the Secretary of the Commonwealth of Massachusetts and at the
office of the Trust, to all of which the holder, by acceptance hereof assents.
This Certificate is not valid unless countersigned by the Transfer Agent.
IN WITNESS WHEREOF, the Trust has caused this Certificate to be signed in its name by
its proper officers and to be sealed with the Seal of the Trust.
Dated:
/s/ S. Jane Rose /s/ Robert F. Gunia
Secretary Vice President
COUNTERSIGNED:
PRUDENTIAL MUTUAL FUND SERVICES, INC.
(NEW JERSEY)
BY TRANSFER AGENT,
AUTHORIZED OFFICER
====================================================================================================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
====================================================================================================
<S> <C>
CLASS A
RECEIPT FOR SHARES
====================== =============================
NUMBER SHARES OF BENEFICIAL INTEREST
====================== =============================
Prudential-Bache Municipal Series Fund
(Michigan Series)
AN UNINCORPORATED BUSINESS TRUST UNDER THE LAWS OF THE COMMONWEALTH OF MASSACHUSETTS
ACCOUNT No. ALPHA CODE ------------------------------
CUSIP 744303 78 5
------------------------------
SEE REVERSE SIDE FOR CERTAIN DEFINITIONS
THIS IS TO EVIDENCE that
SPECIMEN VOID
is the owner of
FULLY-PAID AND NON-ASSESSABLE SHARES OF BENEFICIAL INTEREST, PAR VALUE OF $.01 EACH OF THE
- ----------------------PRUDENTIAL-BACHE MUNICIPAL SERIES FUND (MICHIGAN SERIES)----------------------
hereafter called the "Trust," transferable on the books of the Trust by the owner in person or by
duly authorized attorney upon surrender of this Certificate properly endorsed.
This Certificate and the shares represented hereby are issued and shall be held subject
to the provisions of the Declaration of Trust and By-Laws of the Trust and all amendments thereof,
copies of which are on file with the Secretary of the Commonwealth of Massachusetts and at the
office of the Trust, to all of which the holder, by acceptance hereof assents.
This Certificate is not valid unless countersigned by the Transfer Agent.
IN WITNESS WHEREOF, the Trust has caused this Certificate to be signed in its name by
its proper officers and to be sealed with the Seal of the Trust.
Dated:
[SEAL]
/s/ S. Jane Rose /s/ Lawrence C. McQuade
Secretary President
COUNTERSIGNED:
PRUDENTIAL MUTUAL FUND SERVICES, INC.
(NEW JERSEY)
BY TRANSFER AGENT,
AUTHORIZED OFFICER
====================================================================================================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
====================================================================================================
<S> <C>
CLASS A
RECEIPT FOR SHARES
====================== =============================
NUMBER SHARES OF BENEFICIAL INTEREST
====================== =============================
Prudential-Bache Municipal Series Fund
(New Jersey Series)
AN UNINCORPORATED BUSINESS TRUST UNDER THE LAWS OF THE COMMONWEALTH OF MASSACHUSETTS
ACCOUNT No. ALPHA CODE ------------------------------
CUSIP 744303 74 4
------------------------------
SEE REVERSE SIDE FOR CERTAIN DEFINITIONS
THIS IS TO EVIDENCE that
SPECIMEN VOID
is the owner of
FULLY-PAID AND NON-ASSESSABLE SHARES OF BENEFICIAL INTEREST, PAR VALUE OF $.01 EACH OF THE
- ---------------------PRUDENTIAL-BACHE MUNICIPAL SERIES FUND (NEW JERSEY SERIES)---------------------
hereafter called the "Trust," transferable on the books of the Trust by the owner in person or by
duly authorized attorney upon surrender of this Certificate properly endorsed.
This Certificate and the shares represented hereby are issued and shall be held subject
to the provisions of the Declaration of Trust and By-Laws of the Trust and all amendments thereof,
copies of which are on file with the Secretary of the Commonwealth of Massachusetts and at the
office of the Trust, to all of which the holder, by acceptance hereof assents.
This Certificate is not valid unless countersigned by the Transfer Agent.
IN WITNESS WHEREOF, the Trust has caused this Certificate to be signed in its name by
its proper officers and to be sealed with the Seal of the Trust.
Dated:
[SEAL]
/s/ S. Jane Rose /s/ Lawrence C. McQuade
Secretary President
COUNTERSIGNED:
PRUDENTIAL MUTUAL FUND SERVICES, INC.
(NEW JERSEY)
BY TRANSFER AGENT,
AUTHORIZED OFFICER
====================================================================================================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
RECEIPT FOR SHARES
====================== =============================
NUMBER SHARES OF BENEFICIAL INTEREST
====================== =============================
Prudential-Bache Municipal Series Fund
(New Jersey Money Market Series)
AN UNINCORPORATED BUSINESS TRUST UNDER THE LAWS OF THE COMMONWEALTH OF MASSACHUSETTS
ACCOUNT No. ALPHA CODE ------------------------------
CUSIP 744303 67 8
------------------------------
SEE REVERSE SIDE FOR CERTAIN DEFINITIONS
THIS IS TO EVIDENCE that
SPECIMEN VOID
is the owner of
FULLY-PAID AND NON-ASSESSABLE SHARES OF BENEFICIAL INTEREST, PAR VALUE OF $.01 EACH OF THE
- --------------PRUDENTIAL-BACHE MUNICIPAL SERIES FUND (NEW JERSEY MONEY MARKET SERIES)--------------
hereafter called the "Trust", transferable on the books of the Trust by the owner in person or by
duly authorized attorney upon surrender of this Certificate properly endorsed.
This Certificate and the shares represented hereby are issued and shall be held subject
to the provisions of the Declaration of Trust and By-Laws of the Trust and all amendments thereof,
copies of which are on file with the Secretary of the Commonwealth of Massachusetts and at the
office of the Trust, to all of which the holder, by acceptance hereof assents.
This Certificate is not valid unless countersigned by the Transfer Agent.
IN WITNESS WHEREOF, the Trust has caused this Certificate to be signed in its name by
its proper officers and to be sealed with the Seal of the Trust.
Dated:
[SEAL]
Secretary President
COUNTERSIGNED:
PRUDENTIAL MUTUAL FUND SERVICES, INC.
(NEW JERSEY)
BY TRANSFER AGENT,
AUTHORIZED OFFICER.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
====================================================================================================
<S> <C>
CLASS A
RECEIPT FOR SHARES
====================== =============================
NUMBER SHARES OF BENEFICIAL INTEREST
====================== =============================
Prudential-Bache Municipal Series Fund
(New York Series)
AN UNINCORPORATED BUSINESS TRUST UNDER THE LAWS OF THE COMMONWEALTH OF MASSACHUSETTS
ACCOUNT No. ALPHA CODE ------------------------------
CUSIP 744303 76 9
------------------------------
SEE REVERSE SIDE FOR CERTAIN DEFINITIONS
THIS IS TO EVIDENCE that
SPECIMEN VOID
is the owner of
FULLY-PAID AND NON-ASSESSABLE SHARES OF BENEFICIAL INTEREST, PAR VALUE OF $.01 EACH OF THE
- ----------------------PRUDENTIAL-BACHE MUNICIPAL SERIES FUND (NEW YORK SERIES)----------------------
hereafter called the "Trust," transferable on the books of the Trust by the owner in person or by
duly authorized attorney upon surrender of this Certificate properly endorsed.
This Certificate and the shares represented hereby are issued and shall be held subject
to the provisions of the Declaration of Trust and By-Laws of the Trust and all amendments thereof,
copies of which are on file with the Secretary of the Commonwealth of Massachusetts and at the
office of the Trust, to all of which the holder, by acceptance hereof assents.
This Certificate is not valid unless countersigned by the Transfer Agent.
IN WITNESS WHEREOF, the Trust has caused this Certificate to be signed in its name by
its proper officers and to be sealed with the Seal of the Trust.
Dated:
[SEAL]
/s/ S. Jane Rose /s/ Lawrence C. McQuade
Secretary President
COUNTERSIGNED:
PRUDENTIAL MUTUAL FUND SERVICES, INC.
(NEW JERSEY)
BY TRANSFER AGENT,
AUTHORIZED OFFICER
====================================================================================================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
====================================================================================================
<S> <C>
RECEIPT FOR SHARES
====================== =============================
NUMBER SHARES OF BENEFICIAL INTEREST
====================== =============================
Prudential-Bache Municipal Series Fund
(New York Money Market Series)
AN UNINCORPORATED BUSINESS TRUST UNDER THE LAWS OF THE COMMONWEALTH OF MASSACHUSETTS
ACCOUNT No. ALPHA CODE ------------------------------
CUSIP 744303 30 6
------------------------------
SEE REVERSE SIDE FOR CERTAIN DEFINITIONS
THIS IS TO EVIDENCE that
SPECIMEN VOID
is the owner of
FULLY-PAID AND NON-ASSESSABLE SHARES OF BENEFICIAL INTEREST, PAR VALUE OF $.01 EACH OF THE
- ---------------PRUDENTIAL-BACHE MUNICIPAL SERIES FUND (NEW YORK MONEY MARKET SERIES)----------------
hereafter called the "Trust," transferable on the books of the Trust by the owner in person or by
duly authorized attorney upon surrender of this Certificate properly endorsed.
This Certificate and the shares represented hereby are issued and shall be held subject
to the provisions of the Declaration of Trust and By-Laws of the Trust and all amendments thereof,
copies of which are on file with the Secretary of the Commonwealth of Massachusetts and at the
office of the Trust, to all of which the holder, by acceptance hereof assents.
This Certificate is not valid unless countersigned by the Transfer Agent.
IN WITNESS WHEREOF, the Trust has caused this Certificate to be signed in its name by
its proper officers and to be sealed with the Seal of the Trust.
Dated:
[SEAL]
/s/ S. Jane Rose /s/ Robert F. Gunia
Secretary Vice President
COUNTERSIGNED:
PRUDENTIAL MUTUAL FUND SERVICES, INC.
(NEW JERSEY)
BY TRANSFER AGENT,
AUTHORIZED OFFICER
====================================================================================================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
====================================================================================================
<S> <C>
CLASS A
RECEIPT FOR SHARES
====================== =============================
NUMBER SHARES OF BENEFICIAL INTEREST
====================== =============================
Prudential-Bache Municipal Series Fund
(North Carolina Series)
AN UNINCORPORATED BUSINESS TRUST UNDER THE LAWS OF THE COMMONWEALTH OF MASSACHUSETTS
ACCOUNT No. ALPHA CODE ------------------------------
CUSIP 744303 73 6
------------------------------
SEE REVERSE SIDE FOR CERTAIN DEFINITIONS
THIS IS TO EVIDENCE that
SPECIMEN VOID
is the owner of
FULLY-PAID AND NON-ASSESSABLE SHARES OF BENEFICIAL INTEREST, PAR VALUE OF $.01 EACH OF THE
- -------------------PRUDENTIAL-BACHE MUNICIPAL SERIES FUND (NORTH CAROLINA SERIES)-------------------
hereafter called the "Trust," transferable on the books of the Trust by the owner in person or by
duly authorized attorney upon surrender of this Certificate properly endorsed.
This Certificate and the shares represented hereby are issued and shall be held subject
to the provisions of the Declaration of Trust and By-Laws of the Trust and all amendments thereof,
copies of which are on file with the Secretary of the Commonwealth of Massachusetts and at the
office of the Trust, to all of which the holder, by acceptance hereof assents.
This Certificate is not valid unless countersigned by the Transfer Agent.
IN WITNESS WHEREOF, the Trust has caused this Certificate to be signed in its name by
its proper officers and to be sealed with the Seal of the Trust.
Dated:
[SEAL]
/s/ S. Jane Rose /s/ Lawrence C. McQuade
Secretary President
COUNTERSIGNED:
PRUDENTIAL MUTUAL FUND SERVICES, INC.
(NEW JERSEY)
BY TRANSFER AGENT,
AUTHORIZED OFFICER
====================================================================================================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
====================================================================================================
<S> <C>
CLASS A
RECEIPT FOR SHARES
====================== =============================
NUMBER SHARES OF BENEFICIAL INTEREST
====================== =============================
Prudential-Bache Municipal Series Fund
(Ohio Series)
AN UNINCORPORATED BUSINESS TRUST UNDER THE LAWS OF THE COMMONWEALTH OF MASSACHUSETTS
ACCOUNT No. ALPHA CODE ------------------------------
CUSIP 744303 75 1
------------------------------
SEE REVERSE SIDE FOR CERTAIN DEFINITIONS
THIS IS TO EVIDENCE that
SPECIMEN VOID
is the owner of
FULLY-PAID AND NON-ASSESSABLE SHARES OF BENEFICIAL INTEREST, PAR VALUE OF $.01 EACH OF THE
- ------------------------PRUDENTIAL-BACHE MUNICIPAL SERIES FUND (OHIO SERIES)------------------------
hereafter called the "Trust," transferable on the books of the Trust by the owner in person or by
duly authorized attorney upon surrender of this Certificate properly endorsed.
This Certificate and the shares represented hereby are issued and shall be held subject
to the provisions of the Declaration of Trust and By-Laws of the Trust and all amendments thereof,
copies of which are on file with the Secretary of the Commonwealth of Massachusetts and at the
office of the Trust, to all of which the holder, by acceptance hereof assents.
This Certificate is not valid unless countersigned by the Transfer Agent.
IN WITNESS WHEREOF, the Trust has caused this Certificate to be signed in its name by
its proper officers and to be sealed with the Seal of the Trust.
Dated:
[SEAL]
/s/ S. Jane Rose /s/ Lawrence C. McQuade
Secretary President
COUNTERSIGNED:
PRUDENTIAL MUTUAL FUND SERVICES, INC.
(NEW JERSEY)
BY TRANSFER AGENT,
AUTHORIZED OFFICER
====================================================================================================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
====================================================================================================
<S> <C>
CLASS A
RECEIPT FOR SHARES
====================== =============================
NUMBER SHARES OF BENEFICIAL INTEREST
====================== =============================
Prudential-Bache Municipal Series Fund
(Pennsylvania Series)
AN UNINCORPORATED BUSINESS TRUST UNDER THE LAWS OF THE COMMONWEALTH OF MASSACHUSETTS
ACCOUNT No. ALPHA CODE ------------------------------
CUSIP 744303 69 4
------------------------------
SEE REVERSE SIDE FOR CERTAIN DEFINITIONS
THIS IS TO EVIDENCE that
SPECIMEN VOID
is the owner of
FULLY-PAID AND NON-ASSESSABLE SHARES OF BENEFICIAL INTEREST, PAR VALUE OF $.01 EACH OF THE
- --------------------PRUDENTIAL-BACHE MUNICIPAL SERIES FUND (PENNSYLVANIA SERIES)-------------------
hereafter called the "Trust," transferable on the books of the Trust by the owner in person or by
duly authorized attorney upon surrender of this Certificate properly endorsed.
This Certificate and the shares represented hereby are issued and shall be held subject
to the provisions of the Declaration of Trust and By-Laws of the Trust and all amendments thereof,
copies of which are on file with the Secretary of the Commonwealth of Massachusetts and at the
office of the Trust, to all of which the holder, by acceptance hereof assents.
This Certificate is not valid unless countersigned by the Transfer Agent.
IN WITNESS WHEREOF, the Trust has caused this Certificate to be signed in its name by
its proper officers and to be sealed with the Seal of the Trust.
Dated:
[SEAL]
/s/ S. Jane Rose /s/ Laurence C. McQuade
Secretary President
COUNTERSIGNED:
PRUDENTIAL MUTUAL FUND SERVICES, INC.
(NEW JERSEY)
BY TRANSFER AGENT,
AUTHORIZED OFFICER
====================================================================================================
</TABLE>
<PAGE>
PRUDENTIAL-BACHE SERIES FUND
MANAGEMENT AGREEMENT
Agreement, made this 30th day of December, 1988 between Prudential-Bache
Municipal Series Fund, a Massachusetts business trust (the "Fund"), and
Prudential Mutual Fund Management, Inc., a Delaware corporation (the "Manager").
WITNESSETH
WHEREAS, the Fund is a diversified, open-end management investment company
registered under the Investment Company Act of 1940, as amended (the "1940
Act"); and
WHEREAS the shares of beneficial interest of the Fund are divided into
separate series, each of which is established pursuant to a written instrument
executed by the Trustees of the Fund, and the Trustees may from time to time
termite such series or establish and terminate additiona1 series; and
WHEREAS, the Fund desires to retain the Manager to render or contract to
obtain as hereinafter provided investment advisory services to the Fund and the
Fund also desires to avail itself of the facilities available to the Manager
with respect to the administration of its day to day business affairs, and the
Manager is willing to render such investment advisory and administrative
services;
NOW, THEREFORE, the parties agree as follows:
1. The Fund hereby appoints the Manager to act as manager of the Fund and
administrator of its business affairs far the period and
<PAGE>
on the terms set forth in this Agreement. The Manager accepts such appointment
and agrees to render the services herein described, for the compensation herein
provided. The Manager will enter into an agreement, dated the date hereof, with
The Prudential Investment Corporation ("PIC") pursuant to which PIC shall
furnish to the Fund the investment advisory services specified therein in
connection with the management of the Fund. Such agreement in the form attached
as Exhibit A is hereinafter referred to as the "Subadvisory Agreement." The
Manager will continue to have responsibility for all investment advisory
services furnished pursuant to the Subadvisory Agreement.
2. Subject to the supervision of the Trustees of the Fund, the Manager
shall administer the Fund's business affairs and, in connection therewith, shall
furnish the Fund with office facilities and with clerical, bookkeeping and
recordkeeping services at such office facilities and, subject to Section 1
hereof and the Subadvisory Agreement, the Manager shall manage the investment
operations of each series of the Fund and the composition of the portfolio of
each series, including the purchase, retention and disposition thereof, in
accordance with the investment objectives, policies and restrictions of each
such series as stated in the Prospectus (hereinafter defined) and subject to the
following understandings:
(a) The Manager shall provide supervision of each series'
investments and determine from time to time what investments or securities
will purchased, retained, sold or loaned by each series of the Fund, and
what portion of the assets will be invested or held uninvested as cash.
-2-
<PAGE>
(b) The Manager, in the performance of its duties and obligations
under this Agreement, shall act in conformity with the Declaration of
Trust, By-Laws and Prospectus (hereinafter defined) of the Fund and with
the instructions and directions of the Trustees of the Fund and will
conform to and comply with the requirements of the 1940 Act and all other
applicable federal and state laws and regulations.
(c) The Manager shall determine the securities and futures contracts
to be purchased or sold by each series of the Fund and will place orders
pursuant to its determinations with or through such persons, brokers,
dealers or futures commission merchants (including but not limited to
Prudential-Bache Securities Inc.) in conformity with the policy with
respect to brokerage as set forth in the Fund's Registration Statement and
Prospectus (hereinafter defined) or as the Trustees may direct from time
to time. In providing the Fund with investment supervision, it is
recognized that the Manager will give primary consideration to securing
the most favorable price and efficient execution. Consistent with this
policy, the Manager may consider the financial responsibility, research
and investment information and other services provided by brokers, dealers
or futures commission merchants who may effect or be a party to any such
transaction or other transactions to which other clients of the Manager
may be a party. It is understood that Prudential-Bache Securities Inc. may
be used as principal broker for securities transactions but that no
formula has been adopted for allocation of the of the Fund's investment
transaction business. It is also understood that it is
-3-
<PAGE>
desirable for the Fund that the Manager have access to supplemental
investment and market research and security and economic analysis provided
by brokers or futures commission merchants and that such brokers may
execute brokerage transactions at a higher cost to the Fund than may
result when allocating brokerage to other brokers or futures commission
merchants on the basis of seeking the most favorable price and efficient
execution. Therefore, the Manager is authorized to pay higher brokerage
commissions for the purchase and sale of securities and futures contracts
for each series of the Fund to brokers or futures commission merchants who
provide such research and analysis, subject to review by the Fund's
Trustees from time to time with respect to the extent and continuation of
this practice. It is understood that the services provided by such broker
or futures commission merchant may be useful to the Manager in connection
with its services to other clients.
On occasions when the Manager deems the purchase or sale of a
security or a futures contract to be in the best interest of the Fund (and
each series of the Fund) as well as other clients of the Manager or the
Subadviser, the Manager, to the extent permitted by applicable laws and
regulations, may, but shall be under no obligation to, aggregate the
securities or futures contracts to be so sold or purchased in order to
obtain the most favorable price or lower brokerage commissions and
efficient execution. In such event, allocation of the securities or
futures contracts so purchased or sold, as well as the expenses incurred
in the transaction, will be made by the Manager in the manner it
-4-
<PAGE>
considers to be the most equitable and consistent with its fiduciary
obligations to the Fund (and each series of the Fund) and to such other
clients.
(d) The Manager shall maintain all books and records with respect to
the Fund's portfolio transactions and shall render to the Fund's Trustees
such periodic and special reports as the Trustees may reasonably request.
(e) The Manager shall be responsible for the financial and
accounting records to be maintained by the Fund (including those being
maintained by the Fund's Custodian).
(f) The Manager shall provide the Fund's Custodian on each business
day with information relating to transactions concerning the Fund's
assets.
(g) The investment management services of the Manager to the Fund
under this Agreement are not to be deemed exclusive, and the Manager shall
be free to render similar services to others.
3. The Fund has delivered to the Manager copies of each of the following
documents and will deliver to it all future amendments and supplements, if any:
(a) Declaration of Trust of the Fund, as filed with the Commonwealth
of Massachusetts (such Declaration of Trust, as in effect on the date
hereof and as amended from time to time, is herein called the "Declaration
of Trust");
(b) By-Laws of the Fund (such By-Laws, as in effect on the date
hereof and as amended from time to time, are herein called the "By-Laws");
-5-
<PAGE>
(c) Certified resolutions of the Trustees of the Fund authorizing
the appointment of the Manager and approving the form of this agreement;
(d) Written Instrument to Establish and Designate Separate Series of
Shares;
(e) Registration Statement under the 1940 Act and the Securities Act
of 1933, as amended, on Form N-1A (the "Registration Statement"), as filed
with the Securities and Exchange Commission (the "Commission") relating to
the Fund and shares of beneficial interest of the Fund and all amendments
thereto;
(f) Notification of Registration of the Fund under the 1940 Act on
Form N-8A as filed with the Commission and all amendments thereto; and
(g) Prospectus of the Fund (such Prospectus and Statement of
Additional Information, as currently in effect and as amended or
supplemented from time to time, being herein called the "Prospectus").
4. The Manager shall authorize and permit any of its directors, officers
and employees who may be elected as Trustees or officers of the Fund to serve in
the capacities in which they are elected. All services to be furnished by the
Manager under this Agreement may be furnished through the medium of any such
directors, officers or employees of the Manager.
5. The Manager shall keep the Fund's books and records required to be
maintained by it pursuant to paragraph 2 hereof. The Manager agrees that all
records which it maintains for the Fund are the property of the Fund and it will
surrender promptly to the Fund any such
-6-
<PAGE>
records upon the Fund's request, provided however that the Manager may
retain a copy of such records. The Manager further agrees to preserve for the
periods prescribed by Rule 31a-2 under the 1940 Act any such records as are
required to be maintained by the Manager pursuant to Paragraph 2 hereof.
6. During the term of this Agreement, the Manager shall pay the
following expenses:
(i) the salaries and expenses of all personnel of the Fund and the
Manager except the fees and expenses of Trustees who are not affiliated
persons of the Manager or the fund's investment adviser,
(ii) all expenses incurred by the Manager or by the Fund in
connection with managing the ordinary course of the Fund's business other
than those assumed by the Fund herein, and
(iii) the costs and expenses payable to PIC pursuant to the
Subadvisory Agreement.
The Fund assumes and will pay the expenses described below:
(a) the fees and expenses incurred by each series of the Fund in
connection with the management of the investment and reinvestment of the
assets of each series,
(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 expenses of the Custodian that relate to (i) the
custodial function and the recordkeeping connected therewith, (ii)
preparing and maintaining the general accounting records of the Fund and
the providing of any such records to the Manager useful to the Manager in
connection with the Manager's
-7-
<PAGE>
responsibility for the accounting records of the Fund pursuant to Section
31 of the 1940 Act and the rules promulgated thereunder, (iii) the pricing
of the shares of each series of the Fund, including the cost of any
pricing service or services which may be retained pursuant to the
authorization of the Trustees of the Fund, and (iv) for both mail and wire
orders, the cashiering function in connection with the issuance and
redemption of the Fund's securities,
(d) the fees and expenses of the Fund's Transfer and Dividend
Disbursing Agent, which may be the Custodian, that relate to the
maintenance of each shareholder account,
(e) the charges and expenses of legal counsel and independent
accountants for the Fund,
(f) brokers' commissions and any issue or transfer taxes chargeable
to each series of the Fund in connection with its securities and futures
transactions,
(g) all taxes and corporate fees payable by the Fund to federal,
state or other governmental agencies,
(h) the fees of any trade associations of which the Fund may be a
member,
(i) the cost of share certificates representing, and/or
non-negotiable share deposit receipts evidencing, shares of each series of
the Fund,
(j) the cost of fidelity, directors and officers and errors and
omissions insurance,
(k) the fees and expenses involved in registering and maintaining
registration of the Fund and of its shares with the Securities and
Exchange Commission, registering the Fund as a
-8-
<PAGE>
broker or dealer and qualifying its shares under state securities laws,
including the preparation and printing of the Fund's registration
statements, prospectuses and statements of additional information for
filing under federal and state securities laws for such purposes,
(l) allocable communications expenses with respect to investor
services and all expenses of shareholders' and Trustees' meetings and of
preparing, printing and mailing reports to shareholders in the amount
necessary for distribution to the shareholders,
(m) litigation and indemnification expenses and other extraordinary
expenses not incurred in the ordinary course of the Fund's business, and
(n) any expenses assumed by the Fund pursuant to a Plan of
Distribution adopted in conformity with Rule 12b-1 under the 1940 Act.
7. In the event the expenses of the Fund for any fiscal year
(including the fees payable to the Manager 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) exceed the lowest applicable annual expense limitation
established and enforced pursuant to the statute or regulations of any
jurisdictions in which shares of the Fund are then qualified for offer and sale,
the compensation due the Manager will be reduced by the amount of such excess,
or, if such reduction exceeds the compensation payable to the Manager, the
Manager will pay to the Fund the amount of such reduction which exceeds the
amount of such compensation.
-9-
<PAGE>
8. For the services provided and the expenses assumed pursuant to
this Agreement, the Fund will pay to the Manager as full compensation therefor a
fee at an annual rate of .50 of 1% of the average daily net assets of each
series of the Fund. This fee will be computed daily and will be paid to the
Manager monthly. Any reduction in the fee payable and any payment by the Manager
to the Fund pursuant to paragraph 7 shall be made monthly. Any such reductions
or payments are subject to readjustment during the year.
9. The Manager shall not be liable for any error of judgment or for
any loss suffered by the Fund in connection with the matters to which this
Agreement relates, except a loss resulting from a breach of fiduciary duty with
respect to the receipt of compensation for services (in which case any award of
damages shall be limited to the period and the amount set forth in Section
36(b)(3) of the 1940 Act) or loss resulting from willful misfeasance, bad faith
or gross negligence on its part in the performance of its duties or from
reckless disregard by it of its obligations and duties under this Agreement.
10. This Agreement shall continue in effect for a period of more
than two years from the date hereof only so long as such continuance is
specifically approved at least annually with respect to each series in
conformity with the requirements of the 1940 Act; provided, however, that this
Agreement may be terminated with respect to any series by the Fund at any time,
without the payment of any penalty, by the Trustees of the Fund or by vote of a
majority of the outstanding voting securities (as defined in the 1940 Act) of
such series, or by the Manager at any time, without the payment of any penalty,
on not more than 60 days' nor less than 30 days' written notice to the other
party. This Agreement shall terminate automatically in the event of its
assignment (as defined in the 1940 Act).
-10-
<PAGE>
11. Nothing in this Agreement shall limit or restrict the right of
any director, officer or employee of the Manager who may also be a Trustee,
officer or employee of the Fund to engage in any other business or to devote his
or her time and attention in part to the management or other aspects of any
business, whether of a similar or dissimilar nature, nor limit or restrict the
right of the Manager to engage in any other business or to render services of
any kind to any other corporation, firm, individual or association.
12. Except as otherwise provided herein or authorized by the
Trustees of the Fund from time to time, the Manager shall for all purposes
herein be deemed to be an independent contractor and shall have no authority to
act for or represent the Fund in any way or otherwise be deemed an agent of the
Fund.
13. During the term of this Agreement, the Fund agrees to furnish
the Manager at its principal office all prospectuses, proxy statements, reports
to shareholders, sales literature, or other material prepared for distribution
to shareholders of the Fund or the public, which refer in any way to the
Manager, prior to use thereof and not to such material if the Manager reasonably
objects in writing within five business days (or such other time as may be
mutually agreed) after receipt thereof. In the event of termination of this
Agreement, the Fund will continue to furnish to the Manager copies of any of the
above mentioned materials which refer in any way to the Manager. Sales
literature may be furnished to the Manager hereunder by first-class or overnight
mail, facsimile transmission equipment or hand delivery. The Fund shall furnish
or otherwise make available to the Manager such other information relating to
the business affairs of the Fund as the Manager at any time, or from time to
time, reasonably requests in order to discharge its obligations hereunder.
-11-
<PAGE>
14. This Agreement may be amended by mutual consent, but the consent
of each series of the Fund must be obtained in conformity with the requirements
of the 1940 Act.
15. Any notice or other communication required to be given to this
Agreement shall be deemed duly given if delivered or mailed by registered mail,
postage prepaid, (1) to the Manager at One Seaport Plaza, New York, N.Y. 10292,
Attention: Secretary; or (2) to the Fund at One seaport Plaza, New York, N.Y.
10292, Attention: President.
16. This Agreement shall be governed by and construed in accordance
with the laws of the State of New York.
17. The Fund may use the name "Prudential-Bache Municipal Series
Fund" or any name including the words "Prudential" or "Bache" only for so long
as this Agreement or any extension, renewal or amendment hereof remains in
effect, including any similar agreement with any organization which shall have
succeeded to the Manager's business as Manager or any extension, renewal or
amendment thereof remain in effect. At such time as such an agreement shall no
longer be in effect, the Fund will (to the extent that it lawfully can) cease to
use such a name or any other name indicating that it is advised by, managed by
or otherwise connected with the Manager, or any organization which shall have so
succeeded to such businesses. In no event shall the Fund use the name
"Prudential-Bache Municipal Series Fund" or any name including the word
"Prudential" or "Bache" if the Manager's function is transferred or assigned to
a company of which The Prudential Insurance Company of America does not have
control.
18. The name "Prudential-Bache Municipal Series Fund" is the
designation of the Trustees under a Declaration of Trust, dated May 18, 1984,
and all persons dealing with the Fund must look solely to the
-12-
<PAGE>
property of the Fund for the enforcement of any claims against the Fund as
neither the Trustees, officers, agents or shareholders assume any personal
liability for obligations entered into on behalf of the Fund.
IN WITNESS WHEREOF, the parties hereto have caused this instrument
to be executed by their officers designated below as of the day and year first
above written.
PRUDENTIAL-BACHE MUNICIPAL SERIES FUND
By /s/ Lawrence C. McQuade
------------------------------------
PRUDENTIAL MUTUAL FUND MANAGEMENT, INC.
By /s/ Michael J. Downey
------------------------------------
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<PAGE>
PRUDENTIAL-BACHE MUNICIPAL SERIES FUND
SUBADVISORY AGREEMENT
Agreement made as of this 30th day of December, 1988 between
Prudential Mutual Fund Management Inc., a Delaware Corporation ("PMF" or the
"Manager"), and The Prudential Investment Corporation, a New Jersey Corporation
(the "Subadviser").
WHEREAS, the manager has entered into a Management Agreement, dated
December 30, 1988 (the "Management Agreement"), with Prudential-Bache Municipal
Series Fund (the "Fund"), a Massachusetts business trust and a diversified
open-end management investment company registered under the Investment Company
Act of 1940 (the "1940 Act"), pursuant to which PMF will act as Manager of the
Fund.
WHEREAS the shares of beneficial interest of the Fund are divided
into separate series, each of which is established pursuant to a written
instrument executed by the Trustees of the Fund, and the Trustees may from time
to time terminate such series or establish and terminate additional series; and
WHEREAS, PMF desires to retain the Subadviser to provide investment
advisory sefices to the Fund in connection with the management of the Fund and
the Subadviser is willing to render such investment advisory services.
NOW, THEREFORE, the Parties agree as follows:
1. (a) Subject to the supervision of the Manager and of the Trustees
of the Fund, the Subadviser shall manage the investment operations
of each series of the Fund and the composition of the portfolio of
each series, including the purchase, retention and disposition
thereof, in accordance with the investment objectives, policies and
restrictions of each such series as stated in the Prospectus, (such
Prospectus and Statement of Additional Information as currently in
effect and as amended or supplemented from time to time, being
herein called the "Prospectus"), and subject to the following
understandings:
(i) The Subadviser shall provide supervision of each
series' investments and determine from time to time what
investments and securities will be purchased, retained, sold
or loaned by each series of the Fund, and what portion of the
assets will be invested or held uninvested as cash.
(ii) In the performance of its duties and obligations
under this Agreement, the Subadviser shall act in conformity
with the Declaration of Trust, By-Laws and Prospectus of the
Fund and with the instructions and directions of the Manager
and of the trustees of the Fund and will conform to and comply
with the requirements of the 1940 Act, the Internal Revenue
Code of 1986 and all other applicable federal and state laws
and regulations.
<PAGE>
(iii) The Subadviser shall determine the securities and
futures contracts to be purchased or sold by each series of
the Fund and will place orders with or through such persons,
brokers, dealers or futures commission merchants (including
but not limited to Prudential-Bache Securities Inc.) to carry
out the policy with respect to brokerage as set forth in the
Fund's Registration Statement and Prospectus or as the
Trustees may direct from time to time. In providing the Fund
with investment supervision, it is recognized that the
Subadviser will give primary consideration to securing the
most favorable price and efficient execution. Within the
framework of this policy, the Subadviser may consider the
financial responsibility, research and investment information
and other services provided by brokers, dealers or futures
commission merchants who may effect or be a party to any such
transaction or other transactions to which the Subadviser's
other clients may be a party. It is understood that
Prudential-Bache Securities Inc. may be used as principal
broker for securities transactions but that no formula has
been adopted for allocation of the Fund's investment
transaction business. It is also understood that it is
desirable for the Fund that the Subadviser have access to
supplemental investment and market research and security and
economic analysis provided by brokers or futures commission
merchants who may execute brokerage transactions at a higher
cost to the Fund than may result when allocating brokerage to
other brokers on the basis of seeking the most favorable price
and efficient execution. Therefore, the Subadviser is
authorized to placed orders for the purchase and sale of
securities and futures contracts for each series of the Fund
with such brokers or futures commission merchants, subject to
review by the Fund's trustees from time to time with respect
to the extent and continuation of this practice. It is
understood that the services provided by such brokers or
futures commission merchants may be useful to the Subadviser
in connection with the Subadviser's services to other clients.
On occasions when the Subadviser deems the
purchase or sale of a security or futures contract to be in
the best interest of the Fund (and each series of the Fund) as
well as other clients of the Subadviser, the Subadviser, to
the extent permitted by applicable laws and regulations, may,
but shall be under no obligation to, aggregate the securities
or futures contracts to be sold or purchased in order to
obtained the most favorable price or lower brokerage
commissions and efficient execution. In such event, allocation
of the securities or futures contracts so purchased or sold,
as well as the expenses incurred in the transaction, will be
made by the Subadviser in the manner the Subadviser considers
to be the most equitable and consistent with its fiduciary
obligations to the Fund (and each series of the Fund) and to
such other clients.
-2-
<PAGE>
(iv) The Subadviser shall maintain all books and records
with respect to the fund's portfolio transactions required by
subparagraphs (b)(5), (6), (7), (9), (10), and (11) and
paragraph (f) of Rule 31a-1 under the 1940 Act and shall
render to the Fund's Trustees such periodic and special
reports as the Trustees may reasonably request.
(v) The Subadviser shall provide the Fund's Custodian on
each business day with information relating to all
transactions concerning the Fund's assets and shall provide
the manager with such information upon request of the Manager.
(vi) The investment management services provided by the
Subadviser hereunder are not to be deemed exclusive, and the
Subadviser shall be free to render similar services to others.
(b) The Subadivser shall authorize and permit any of its directors,
officers and employees who may be elected as Trustee or officers of
the Fund to serve in the capacities in which they are elected.
Services to be furnished by the Subadviser under this Agreement may
be furnished through the medium of any of such directors, officers
or employees.
(c) The Subadviser shall keep the Fund's books and records required
to be maintained by the Subadviser pursuant to paragraph 1(a) hereof
and shall timely furnish to the Manager all information relating to
the Subadviser's services hereunder needed by the Manager to keep
the other books and records of the Fund required by Rule 31a-1 under
the 1940 Act. The Subadviser agrees that all records which it
maintains for the Fund are the property of the Fund and the
Subadviser will surrender promptly to the Fund any of such records
upon the Fund's request, provided however that the Subadviser may
retain a copy of such records. The Subadviser further agrees to
preserve for the periods prescribed by Rule 31a-2 of the Commission
under the 1940 Act any such records as are required to be maintained
by it pursuant to paragraph 1(a) hereof.
2. The Manager shall continue to have responsibility for all
services to be provided to the Fund pursuant to the Management
Agreement and shall oversee and review the Subadviser's performance
of its duties under this Agreement.
3. The Manager shall reimburse the Subadviser for reasonable costs
and expenses incurred by the Subadviser determined in a manner
acceptable to the Manager in furnishing the services described in
paragraph 1 hereof.
4. The Subadviser shall not be liable for any error of judgment or
for any loss suffered by the Fund or the Manager in connection with
the matters to which this Agreement relates, except a loss resulting
from willful misfeasance, bad faith or gross negligence on the
Subadviser's part in the performance of its duties or from its
reckless disregard of its obligations and duties under this
Agreement.
-3-
<PAGE>
5. This Agreement shall continue in effect for a period of more than
two years from the date hereof only so long as such continuance is
specifically approved at least annually with respect to each series
in conformity with the requirements of the 1940 Act; provided,
however, that this Agreement may be terminated with respect to any
series by the Fund at any time, without the payment of any penalty,
by the Trustees of the Fund or by vote of a majority of the
outstanding voting securities (as defined in the 1940 Act) of the
Fund, or by the Manager or the Subadviser at any time, without the
payment of any penalty, on not more than 60 days' nor less than 30
days' written notice to the other party. This Agreement shall
terminate automatically in the event of its assignment (as defined
in the 1940 Act) or upon the termination of the Management
Agreement.
6. Nothing in this Agreement shall limit or restrict the right of
any of the Subadviser's directors, officers, or employees who may
also be a Trustee, officer or employee of the Fund to engage in any
other business or to devote his or her time and attention in part to
the management or other aspects of any business, whether of a
similar or a dissimilar nature, nor limit or restrict the
Subadviser's right to engage in any other business or to render
services of any kind to any kind to any other corporation, firm,
individual or association.
7. During the term of this Agreement, the Manager agrees to furnish
the Subadviser at its principal office all prospectuses, proxy
statements, reports to shareholders, sales literature or other
material prepared for distribution to shareholders of the Fund or
the public, which refer to the Subadviser in any way, prior to use
thereof and not to use material if the Subadviser reasonably objects
in writing five business days (or such other time as may be mutually
agreed) after receipt thereof. Sales literature may be furnished to
the Subadviser hereunder by first-class or overnight mail, facsimile
transmission equipment or hand delivery.
8. This Agreement may be amended by mutual consent, but the consent
of each series of the Fund must be obtained in conformity with the
requirements of the 1940 Act.
9. This Agreement shall be governed by the laws of the State of New
York.
IN WITNESS WHEREOF, the Parties hereto have caused this instrument
to be executed by their officers designated below as of the day and year first
above written.
PRUDENTIAL MUTUAL FUND MANAGEMENT, INC.
By /s/ Michael J. Downey
-------------------------------------
THE PRUDENTIAL INVESTMENT CORPORATION
By /s/ [ILLEGIBLE]
-------------------------------------
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<PAGE>
CUSTODIAN CONTRACT
Between
PRUDENTIAL-BACHE MUNICIPAL SERIES FUND
and
STATE STREET BANK AND TRUST COMPANY
DATED: As of August 29, 1984
<PAGE>
TABLE OF CONTENTS
Page
----
1. Emp1oyment of Custodian and Property to be
Held by It ............................................................ 1
2. Duties of the Custodian with Respect to
Property of the Fund Held by the Custodian ............................ 2
2.1 Holding Securities .............................................. 2
2.2 Delivery of Securities .......................................... 3
2.3 Registration of Securities ...................................... 7
2.4 Bank Accounts ................................................... 7
2.5 Payments for Shares ............................................. 8
2.6 Investment and Availability of Federal
Funds ........................................................... 8
2.7 Collection of Income ............................................ 9
2.8 Payment of Fund Moneys .......................................... 10
2.9 Liability for Payment in Advance of
Receipt of Securities Purchased ................................. 12
2.10 Payments for Repurchases or Redemptions
of Shares of the Fund ........................................... 13
2.11 Appointment of Agents ........................................... 13
2.12 Deposit of Fund Assets in Securities
Systems ......................................................... 14
2.13 Segregated Account .............................................. 17
2.14 Ownership Certificates for Tax Purposes ......................... 18
2.15 Proxies ......................................................... 18
2.16 Communications Relating to Fund
Portfolio Securities ............................................ 18
2.17 Proper Instructions ............................................. 19
2.18 Actions Permitted Without Express
Authority ....................................................... 21
2.19 Evidence of Authority ........................................... 21
3. Duties of Custodian With Respect to the Books of
Account and Calculation of Net Asset Value
and Net Income ........................................................ 22
4. Records ............................................................... 23
5. Opinion of Fund's Independent Accountant .............................. 23
6. Reports to Fund by Independent Public
Accountants ........................................................... 24
7. Compensation of Custodian ............................................. 24
8. Responsibility of Custodian ........................................... 24
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<PAGE>
9. Effective Period, Termination and Amendment ......................... 26
10. Successor Custodian ................................................. 27
11. Interpretive and Additional Provisions .............................. 29
12. Trustees ............................................................ 29
13. Massachusetts Law to Apply .......................................... 29
-iii-
<PAGE>
CUSTODIAN CONTRACT
This Contract made as of August 29, 1984 between Prudential-Bache
Municipal Series Fund (the "Fund"), a Massachusetts business trust created under
a Declaration of Trust dated May 18, 1984, as the same may be amended from time
to time, (the "Declaration of Trust") and State Street Bank and Trust Company
(the "Custodian"),
WITNESSETH: That in consideration of the mutual covenants and agreements
hereinafter contained, the parties hereto agree as follows:
1. Employment of Custodian and Property to be Held by It
The Fund hereby employs the Custodian as the custodian of its assets,
subject to the provisions hereof, pursuant to the provisions of the Fund's
By-Laws. The Fund agrees to deliver to the Custodian all securities and cash
owned by it, and all payments of income, payments of principal or capital
distributions received by it with respect to all securities owned by the Fund
from time to time, and the cash consideration received by it for such new or
treasury shares of beneficial interest, $.01 par value, ("Shares") of all series
of the Fund as may be issued or sold from time to time. The Custodian shall not
be responsible for any property of the Fund held or received by the Fund and not
delivered to the Custodian.
The Custodian may from time to time employ one or more sub-custodians, but
only in accordance with an applicab1e vote by the Trustees of the Fund, and
provided that the Custodian shall
<PAGE>
have no more or less responsibility or liability to the Fund on account of any
actions or omissions of any sub-custodian so employed than any such
sub-custodian has to the Custodian, provided that the Custodian's agreement with
any such sub-custodian imposes on such sub-custodian responsibilities and
liabilities similar in nature and scope to those imposed by this Contract with
respect to the functions to be performed by such sub-custodian.
State Street acknowledges that series of the Fund may be terminated, and
additional series established, from time to time by action of the Trustees of
the Fund. If the context requires and unless otherwise specifically provided
herein, the term "Fund" as used in this Contract shall mean in addition each
separate series.
2. Duties of the Custodian with Respect to Property of the Fund Held by the
Custodian
2.1 Holding Securities. The Custodian shall hold and physically
segregate in a separate account for each series of the Fund all
non-cash property allocated to such series, including all securities
owned by the Fund and allocated to such series, except that
securities which are maintained pursuant to Section 2.12 hereof in a
clearing agency which acts as a securities depository or in a
book-entry system authorized by the U.S. Department of the Treasury,
collectively referred to herein as "Securities Systems", shall be
identified as belonging to a specified series.
-2-
<PAGE>
2.2 Delivery of Securities. The Custodian shall release and deliver
securities owned by the Fund held by the Custodian or in a
Securities Systems account of the Custodian only upon receipt of
proper instructions, which may be continuing instructions when
deemed appropriate by the parties, and only in the following cases:
(1) Upon sale of such securities for the account of the Fund and
receipt of payment therefor;
(2) Upon the receipt of payment in connection with any repurchase
agreement related to such securities entered into by the Fund;
(3) In the case of a sale effected through a Securities System, in
accordance with the provisions of Section 2.12 hereof;
(4) To the depository agent in connection with tender or other
similar offers for portfolio securities of the Fund;
(5) To the issuer thereof or its agent when such securities are
called, redeemed, retired or otherwise become payable;
provided that, in any such case, the cash or other
consideration is to be delivered to the Custodian;
(6) To the issuer thereof, or its agent, for transfer into the
name of the Fund or into the name of any nominee or nominees
of the Custodian or into the
-3-
<PAGE>
name or nominee name of any agent appointed pursuant to
Section 2.11 hereof or into the name or nominee name of any
sub-custodian appointed pursuant to Article 1 hereof; or for
exchange for a different number of bonds, certificates or
other evidence representing the same aggregate face amount or
number of units; provided that, in any such case, the new
securities are to be delivered to the Custodian;
(7) To the broker selling the same for examination in accordance
with the "street delivery" custom; provided that the Custodian
shall adopt such procedures, as the Fund from time to time
shall approve, to ensure their prompt return to the Custodian
by the broker in the event the broker elects not to accept
them;
(8) For exchange or conversion pursuant to any plan of merger,
consolidation, recapitalization, reorganization or
readjustment of the securities of the issuer of such
securities, or pursuant to provisions for conversion contained
in such securities, or pursuant to any deposit agreement;
provided that, in any such case, the new securities and cash,
if any, are to be delivered to the Custodian;
-4-
<PAGE>
(9) In the case of warrants, rights or similar securities, for the
surrender thereof in the exercise of such warrants, rights, or
similar securities or the surrender of interim receipts or
temporary securities for definitive securities; provided that,
in any such case, the new securities and cash, if any, are to
be delivered to the Custodian;
(10) For delivery in connection with any loans of securities made
by the Fund, but only against receipt of adequate collateral
as agreed upon from time to time by the Custodian and the
Fund, which may be in the form of cash or obligations issued
by the United States government, its agencies or
instrumentalities;
(11) For delivery as security in connection with any borrowings by
the Fund requiring a pledge of assets by the Fund, but only
against receipt of amounts borrowed;
(12) For delivery in accordance with the provisions of any
agreement among the Fund, the Custodian and a broker-dealer
registered under the Securities Exchange Act of 1934, as
amended (the "Exchange Act") and a member of The National
Association of Securities Dealers, Inc. ("NASD"), relating to
compliance with the rules of The Options Clearing
-5-
<PAGE>
Corporation and of any registered national securities
exchange, or of any similar organization or organizations,
regarding escrow or other arrangements in connection with
transactions by the Fund;
(13) Upon receipt of instructions from the transfer and dividend
disbursing agent for the Fund (the "Transfer Agent"), for
delivery to the Transfer Agent or to holders of Shares in
connection with distributions in kind, as may be described
from time to time in the Fund's currently effective
prospectus, in satisfaction of requests by holders of Shares
for repurchase or redemption; and
(14) For any other proper corporate purposes, but only upon receipt
of, in addition to proper instructions, a certified copy of a
resolution of the Trustees or of the Executive Committee
signed by an officer of the Fund and certified by the
Secretary or an Assistant Secretary, specifying the securities
to be delivered, setting forth the purpose for which such
delivery is to be made, declaring such purposes to be proper
trust purposes, and naming the person or persons to whom
delivery of such securities shall be made.
-6-
<PAGE>
2.3 Registration of Securities. Securities held by the Custodian (other
than bearer securities) shall be registered in the name of the Fund
or in the name of any nominee of the Fund or of any nominee of the
Custodian which nominee shall be assigned exclusively to the Fund,
unless the Fund has authorized in writing the appointment of a
nominee to be used in common with other registered investment
companies having the same investment adviser as the Fund, or in the
name or nominee name of any agent appointed pursuant to Section 2.11
hereof or in the name or nominee name of any sub-custodian or
special custodian appointed pursuant to Article 1 hereof. All
securities accepted by the Custodian on behalf of the Fund under the
terms of this Contract shall be in "street" or other good delivery
form.
2.4 Bank Accounts. The Custodian shall open and maintain a separate bank
account or accounts in the name of the Fund, subject only to draft
or order by the Custodian acting pursuant to the terms of this
Contract, and shall hold in such account or accounts, subject to the
provisions hereof, all cash received by it from or for the account
of the Fund, other than cash maintained by the Fund in a bank
account established and used in accordance with Rule 17f-3 under the
Investment Company Act of 1940, as amended. Funds held by the
-7-
<PAGE>
Custodian for the Fund may be deposited by it to its credit as
Custodian in the Banking Department of the Custodian or in such
other banks or trust companies as it may in its discretion deem
necessary or desirable; provided, however, that every such bank or
trust company shall be qualified to act as a custodian under the
Investment Company Act of 1940, as amended, and that each such bank
or trust company and the funds to be deposited with each such bank
or trust company shall be approved by vote of a majority of the
Trustees of the Fund. Such funds shall be deposited by the Custodian
in its capacity as Custodian and shall be withdrawable by the
Custodian only in that capacity.
2.5 Payments for Shares. The Custodian shall receive from the
distributor for the Fund's Shares or from the Transfer Agent of the
Fund and deposit into the Fund's account such payments as are
received for Shares of the Fund issued or sold from time to time by
the Fund. The Custodian will provide timely notification to the Fund
and the Transfer Agent of any receipt by it of payments for Shares
of the Fund.
2.6 Investment and Availability of Federal Funds. Upon mutual agreement
between the Fund and the Custodian, the Custodian shal1, upon the
receipt of Proper Instructions, which may be continuing instructions
when deemed appropriate by the parties.
-8-
<PAGE>
1) invest in such instruments as may be set forth in such
instructions on the same day as received all federal funds
received after a time agreed upon between the Custodian and
the Fund; and
2) make federal funds available to the Fund as of specified times
agreed upon from time to time by the Fund and the Custodian in
the amount of checks received in payment for Shares of the
Fund, of funds received in respect of sales of portfolio
securities by the Fund, and of funds obtained through
borrowings by the Fund, in each case which are deposited into
the Fund's account.
2.7 Collection of Income. The Custodian shall collect on a timely basis
all income and other payments with respect to registered securities
held hereunder to which the Fund shall be entitled either by law or
pursuant to custom in the securities business, and shall collect an
a timely basis all income and other payments with respect to bearer
securities if, on the date of payment by the issuer, such securities
are held by the Custodian or agent thereof and shall credit such
income, as collected, to the Fund's custodian account. Without
limiting the generality of the foregoing, the Custodian shall detach
and present for payment all coupons and other income items requiring
-9-
<PAGE>
presentation as and when they become due and shall collect interest
when due on securities held hereunder.
2.8 Payment of Fund Moneys. Upon receipt of Proper Instructions, which
may be continuing instructions when deemed appropriate by the
parties, the Custodian shall pay out moneys of the Fund in the
following cases only:
(1) Upon the purchase of securities for the account of the Fund
but only (a) against the delivery of such securities to the
Custodian (or any bank, banking firm or trust company doing
business in the United States or abroad which is qualified
under the Investment Company Act of 1940, as amended, or is
permitted by a rule under such Act, to act as a custodian and
has been designated by the Custodian as its agent for this
purpose) or sub-custodian registered in the name of the Fund
or in the name of a nominee of the Custodian referred to in
Section 2.3 hereof or in proper form for transfer; (b) in the
case of a purchase effected through a Securities System, in
accordance with the conditions set forth in Section 2.12
hereof or (c) in the case of repurchase agreements entered
into between the Fund and the Custodian, another bank or a
broker
-10-
<PAGE>
or dealer which is a member of the NASD, (i) against delivery
of the securities either in certificate form or through an
entry crediting the Custodian's account at the Federal Reserve
Bank with such securities or (ii) against delivery of the
receipt evidencing purchase by the Fund of securities owned by
the Custodian or other bank along with written evidence of the
agreement by the Custodian or other bank to repurchase such
securities from the Fund;
(2) In connection with conversion, exchange or surrender of
securities owned by the Fund as set forth in Section 2.2
hereof;
(3) For the redemption or repurchase of Shares issued by the Fund
as set forth in Section 2.10 hereof;
(4) For the payment of any expense or liability incurred by the
Fund, including but not limited to the following payments for
the account of the Fund: interest, taxes, management,
accounting, transfer agent and legal fees, and operating
expenses of the Fund whether or not such expenses are to be in
whole or part capitalized or treated as deferred expenses;
(5) For the payment of any dividends declared pursuant to the
governing documents of the Fund;
(6) For payment of the amount of dividends received in respect of
securities sold short;
-11-
<PAGE>
(7) For any other proper purposes, but only upon receipt of, in
addition to Proper Instructions, a certified copy of a
resolution of the Trustees or of the Executive Committee of
the Fund signed by an officer of the Fund and certified by its
Secretary or an Assistant Secretary, specifying the amount of
such payment, setting forth the purpose for which such payment
is to be made, declaring such purpose to be a proper purpose,
and naming the person or persons to whom such payment is to be
made.
2.9 Liability for Payment in Advance of Receipt of Securities Purchased.
In any and every case where payment for purchase of securities for
the account of the Fund is made by the Custodian in advance of
receipt of the securities purchased in the absence of specific
written instructions from the Fund to so pay in advance, the
Custodian shall be absolutely liable to the Fund for such securities
to the same extent as if the securities had been received by the
Custodian, except that in the case of repurchase agreements entered
into by the Fund with a bank which is a member of the Federal
Reserve System, the Custodian may transfer funds to the account of
such bank prior to the receipt of written evidence that the
securities subject to such repurchase agreement have been trans-
-12-
<PAGE>
ferred by book-entry into a segregated non-proprietary account of
the Custodian maintained with the Federal Reserve Bank of Boston or
of the safe-keeping receipt, provided that such securities have in
fact been so transferred by book-entry.
2.10 Payments for Repurchases or Redemptions of Shares of the Fund. From
such funds as may be available for the purpose but subject to the
limitations of the Declaration of Trust and any applicable votes of
the Trustees of the Fund pursuant thereto, the Custodian shall, upon
receipt of instructions from the Transfer Agent, make funds
available for payment to holders of Shares who have delivered to the
Transfer Agent a request for redemption or repurchase of their
Shares. In connection with the redemption or repurchase of Shares of
the Fund, the Custodian is authorized upon receipt of instructions
from the Transfer Agent to wire funds to or through a commercial
bank designated by the redeeming shareholders.
2.11 Appointment of Agents. The Custodian may at any time or times in its
discretion appoint (and may at any time remove) any other bank or
trust company which is itself qualified under the Investment Company
Act of 1940, as amended, to act as a custodian, as its agent to
carry out such of the provisions of this Article 2 as the Custodian
may from time to time direct; pro-
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<PAGE>
vided, however, that the appointment of any agent shall not relieve
the Custodian of any of its responsibilities or liabilities
hereunder.
2.12 Deposit of Fund Assets in Securities Systems. The Custodian may
deposit and/or maintain securities owned by the Fund in a clearing
agency registered with the Securities and Exchange Commission under
Section 17A of the Exchange Act, which acts as a securities
depository, or in the book-entry system authorized by the U.S.
Department of the Treasury and certain federal agencies,
collectively referred to herein as "Securities Systems" in
accordance with applicable Federal Reserve Board and Securities and
Exchange Commission rules and regulations, if any, and subject to
the following provisions:
(1) The Custodian may keep securities of the Fund in a Securities
System provided that such securities are represented in an
account ("Account") of the Custodian in the Securities System
which shall not include any assets of the Custodian other than
assets held as a fiduciary, custodian, or otherwise for
customers.
(2) The records of the Custodian with respect to securities of the
Fund which are maintained in a Securities System shall
identify by series by book-entry those securities belonging to
the Fund.
-14-
<PAGE>
(3) The Custodian shall pay for securities purchased for the
account of the Fund upon (i) receipt of advice from the
Securities System that such securities have been transferred
to the Account, and (ii) the making of an entry on the records
of the Custodian to reflect such payment and transfer for the
account of the Fund. The Custodian shall transfer securities
sold for the account of the Fund upon (i) receipt of advice
from the Securities System that payment for such securities
has been transferred to the Account, and (ii) the making of an
entry on the records of the Custodian to reflect such transfer
and payment for the account of the Fund. Copies of all advices
from the Securities System of transfers of securities for the
account of the Fund shall identify the Fund, be maintained for
the Fund by the Custodian and be provided to the Fund at its
request. The Custodian shall furnish the Fund confirmation of
each transfer to or from the account of the Fund in the form
of a written advice or notice and shall furnish to the Fund
copies of daily transaction sheets reflecting each day's
transactions in the Securities System for the account of the
Fund on the next business day.
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<PAGE>
(4) The Custodian shall provide the Fund with any report obtained
by the Custodian on the Securities System's accounting system,
internal accounting control and procedures for safeguarding
securities deposited in the Securities System.
(5) The Custodian shall have received the initial or annual
certificate, as the case may be, required by Article 9 hereof.
(6) Anything to the contrary in this Contract notwithstanding, the
Custodian shall be liable to the Fund for any loss or damage
to the Fund resulting from use of the Securities System by
reason of any negligence, misfeasance or misconduct of the
Custodian or any of its agents or of any of its or their
employees or from any failure of the Custodian or any such
agent to enforce effectively such rights as it may have
against the Securities System; at the election of the Fund, it
shall be entitled to be subrogated to the rights of the
Custodian with respect to any claim against the Securities
System or any other person which the Custodian may have as a
consequence of any such loss or damage if and to the extent
that the Fund has not been made whole for any such loss or
damage.
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<PAGE>
2.13 Segregated Account. The Custodian shall upon receipt of Proper
Instructions establish and maintain a segregated account or accounts
for and on behalf of the Fund, into which account or accounts may be
transferred cash and/or securities, including securities maintained
in an account by the Custodian pursuant to Section 2.12 hereof, (i)
in accordance with the provisions of any agreement among the Fund,
the Custodian and a broker-dealer registered under the Exchange Act
and a member of the NASD, relating to compliance with the rules of
The Options Clearing Corporation and of any registered national
securities exchange, or of any similar organization or
organizations, regarding escrow or other arrangements in connection
with transactions by the Fund, (ii) for purposes of segregating cash
or government securities in connection with put options sold or
written by the Fund, (iii) for the purposes of compliance by the
Fund with the procedures required by Investment Company Act Release
No. 10666, or any subsequent release or releases of the Securities
and Exchange Commission relating to the maintenance of segregated
accounts by registered investment companies and (iv) for other
proper trust purposes, but only, in the case of clause (iv), upon
receipt of, in addition to Proper Instructions, a certified copy of
a resolution of the
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<PAGE>
Trustees or of the Executive Committee signed by an officer of the
Fund and certified by the Secretary or an Assistant Secretary,
setting forth the purpose or purposes of such segregated account and
declaring such purposes to be proper trust purposes.
2.14 Ownership Certificates for Tax Purposes. The Custodian shall execute
ownership and other certificates and affidavits for all federal and
state tax purposes in connection with receipt of income or other
payments with respect to securities of the Fund held by it and in
connection with transfers of securities.
2.15 Proxies. The Custodian shall, with respect to the securities held
hereunder, cause to be promptly executed by the registered holder of
such securities, if the securities are registered otherwise than in
the name of the Fund or a nominee of the Fund, all proxies, without
indication of the manner in which such proxies are to be voted, and
shall promptly deliver to the Fund such proxies, all proxy
soliciting materials and all notices relating to such securities.
2.16 Communications Relating to Fund Portfolio Securities. The Custodian
shall transmit promptly to the Fund all written information
(including, without limitation, pendency of calls and maturities of
securities and expirations of rights in connection therewith) re-
-18-
<PAGE>
ceived by the Custodian from issuers of the securities being held
for the Fund. With respect to tender or exchange offers, the
Custodian shall transmit promptly to the Fund all written
information received by the Custodian from issuers of the securities
whose tender or exchange is sought and from the party (or his
agents) making the tender or exchange offer. If the Fund desires to
take action with respect to any tender offer, exchange offer or any
other similar transaction, the Fund shall notify the Custodian at
least three business days prior to the date on which the Custodian
is to take such action.
2.17 Proper Instructions. Proper Instructions as used throughout this
Article 2 means a writing signed or initialled by one or more person
or persons as the Trustees shall have from time to time authorized.
Each such writing shall set forth the specific transaction or type
of transaction involved, including a specific statement of the
purpose for which such action is requested. Oral instructions will
be considered Proper Instructions if the Custodian reasonably
believes them to have been given by a person authorized to give such
instructions with respect to the transaction involved. The Fund
shall cause all oral instructions to be confirmed in writing. It is
understood and agreed that the Trustees have autho-
-19-
<PAGE>
rized (i) The Prudential Insurance Company of America
("Prudential"), as adviser of the Fund pursuant to an Investment
Advisory Agreement dated as of August 29, 1984 between Prudential
and the Fund, to deliver Proper Instructions with respect to all
matters for which Proper Instructions are required by this Article 2
except Section 2.2(13), Section 2.2(14), Section 2.8(3), Section
2.8(4), Section 2.8(5) and Section 2.8(7) hereof and (ii)
Prudential-Bache Securities Inc. ("Bache"), as administrator of the
Fund pursuant to an Administration Agreement, dated as of August 29,
1984 between Bache and the Fund, to deliver Proper Instructions with
respect to matters set forth in Section 2.2(13), Section 2.8(3),
Section 2.8(4) and Section 2.8(5). The Custodian may rely upon the
certificate of an officer of Prudential or Bache, as the case may
be, with respect to the person or persons authorized on behalf of
Prudential and Bache, respectively, to sign, initial or give Proper
Instructions for the purposes of this Article 2.
Upon receipt of a certificate of the Secretary or an Assistant Secretary
as to the authorization by the Trustees of the Fund accompanied by a detailed
description of procedures approved by the Trustees, Proper Instructions may
include communications effected directly between electromechanical or electronic
devices provided that the Trustees
-20-
<PAGE>
and the Custodian are satisfied that such procedures afford adequate safeguards
for the Fund's assets.
2.18 Actions Permitted Without Express Authority. The Custodian may in
its discretion, without express authority from the Fund:
(1) make payments to itself or others for minor expenses of
handling securities or other similar items relating to its
duties under this Contract, provided that all such payments
shall be accounted for to the Fund;
(2) surrender securities in temporary form for securities in
definitive form;
(3) endorse for collection, in the name of the Fund, checks,
drafts and other negotiab1e instruments; and
(4) in general, attend to all non-discretionary details in
connection with the sale, exchange, substitution, purchase,
transfer and other dealings with the securities and property
of the Fund except as otherwise directed by the Trustees of
the Fund.
2.19 Evidence of Authority. The Custodian shall be protected in acting
upon any instructions, notice, request, consent, certificate or
other instrument or paper believed by it to be genuine and to have
been
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<PAGE>
properly executed by or on behalf of the Fund. The Custodian may
receive and accept a certified copy of a vote of the Trustees of the
Fund as conclusive evidence (a) of the authority of any person to
act in accordance with such vote or (b) of any determination or of
any action by the Trustees pursuant to the Declaration of Trust as
described in such vote, and such vote may be considered as in full
force and effect until receipt by the Custodian of written notice to
the contrary.
3. Duties of Custodian with Respect to Books of Account and Calculation of
Net Asset Value and Net Income
The Custodian shall cooperate with and supply necessary information to the
entity or entities appointed by the Trustees of the Fund to keep the books of
account of the Fund. Unless otherwise directed by Proper Instructions, the
Custodian shall compute the net asset value per share of the outstanding shares
of each series of the Fund. The Custodian shall also calculate daily the net
income of each series of the Fund as described in the Fund's currently effective
prospectus, and shall advise the Transfer Agent periodically of the division of
such net income among its various components. The calculations of the net asset
value per share and the daily income of each series of the Fund shall be made at
the time or times described from time to time in the Fund's currently effective
prospectus.
-22-
<PAGE>
4. Records
The Custodian shall create and maintain all records relating to its
activities and obligations under this Contract in such manner as will meet the
obligations of the Fund under the Investment Company Act of l940, as amended,
with particular attention to Section 31 thereof and Rules 31a-l and 31a-2
thereunder, applicable federal and state tax laws and any other law or
administrative rules or procedures which may be applicable to the Fund. All such
records shall be the property of the Fund and shall at all times during the
regular business hours of the Custodian be open for inspection by duly
authorized officers, employees or agents of the Fund and employees and agents of
the Securities and Exchange Commission. The Custodian shall, at the Fund's
request, supply the Fund with a tabulation of securities owned by the Fund and
held by the Custodian and shall, when requested to do so by the Fund and for
such compensation as shall be agreed upon between the Fund and the Custodian,
include certificate numbers in such tabulations.
5. Opinion of Fund's Independent Accountant
The Custodian shall take all reasonable action, as the Fund may from time
to time request, to obtain from year to year favorable opinions from the Fund's
independent accountants with respect to its activities hereunder in connection
with the preparation of the Fund's registration statement on Form N-1A, and its
annual report on Form N-1R or other annual reports to
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<PAGE>
the Securities and Exchange Commission and with respect to any other
requirements of such Commission.
6. Reports to Fund by Independent Public Accountants
The Custodian shall provide the Fund, at such times as the Fund may
reasonably require, with reports by independent public accountants on the
accounting system, internal accounting control and procedures for safeguarding
securities, including securities deposited and/or maintained in a Securities
System, relating to the services provided by the Custodian under this Contract;
such reports, which shall be of sufficient scope and in sufficient detail, as
may reasonably be required by the Fund, to provide reasonable assurance that any
material inadequacies would be disclosed, shall state in detail material
inadequacies disclosed by such examination, and, if there are no such
inadequacies, shall so state.
7. Compensation of Custodian
The Custodian shall be entitled to reasonable compensation for its
services and expenses as Custodian, as agreed upon from time to time between the
Fund and the Custodian.
8. Responsibility of Custodian
So long as and to the extent that it is in the exercise of reasonable
care, the Custodian shall not be responsible for the title, validity or
genuineness of any property or evidence of title thereto received by it or
delivered by it pursuant to this Contract and shall be held harmless in acting
upon any notice, request, consent, certificate or other instrument
-24-
<PAGE>
reasonably believed by it to be genuine and to be signed by the proper party or
parties. The Custodian shall be held to the exercise of reasonable care in
carrying out the provisions of this Contract, but shall be kept indemnified by
and shall be without liability to the Fund for any action taken or omitted by it
in good faith without negligence. It shall be entitled to rely on and may act
upon advice of counsel (who may be counsel for the Fund) on all matters, and
shall be without liability for any action reasonably taken or omitted pursuant
to such advice. In order that the indemnification provisions contained in this
Article 8 shall apply, however, it is understood that if in any case the Fund
may be asked to indemnify or save the Custodian harmless, the Fund shall be
fully and promptly advised of all pertinent facts concerning any situation which
may give rise to a claim for indemnification against the Fund and it is
understood that the Custodian will use all reasonable care to identify and
notify the Fund promptly concerning any situation which presents or appears
likely to present the probability of such a claim for indemnification against
the Fund. The Fund shall have the option to defend the Custodian against any
claim which may be the subject to this indemnification, and in the event that
the Fund so elects it will so notify the Custodian, and thereupon the Fund shall
take over complete defense of the claim, and the Custodian shall in such
situations initiate no further legal or other expenses for which it shall seek
indemnification under this Article 8. The Custodian shall
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<PAGE>
in no case confess any claim or make any compromise in any case in which the
Fund will be asked to indemnify the Custodian except with the Fund's prior
written consent.
If the Fund requires the Custodian to take any action with respect to
securities, which action involves the payment of money or which action may, in
the opinion of the Custodian, result in the Custodian or its nominee assigned to
the Fund being liable for the payment of money or incurring liability in some
other form, the Fund, as a prerequisite to requiring the Custodian to take such
action, shall provide indemnity to the Custodian in an amount and form
satisfactory to it.
9. Effective Period, Termination and Amendment
This Contract shall become effective as of the date first above
written, shall continue in full force and effect until terminated as hereinafter
provided, may be amended at any time by mutual agreement of the parties hereto
and may be terminated by either party by an instrument in writing delivered or
mailed, postage prepaid to the other party, such termination to take effect not
sooner than thirty (30) days after the date of such delivery or mailing;
provided, however that the Custodian shall not act under Section 2.12 hereof in
the absence of receipt of an initial certificate of the Secretary or an
Assistant Secretary that the Trustees of the Fund have approved the initial use
of a particular Securities System and the receipt of an annual certificate of
the Secretary or an Assistant Secretary that the Trustees have reviewed the use
by
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<PAGE>
the Fund of such Securities System, as required in each case by Rule 17f-4 under
the Investment Company Act of 1940, as amended; provided further, however, that
the Fund shall not amend or terminate this Contract in contravention of any
applicable federal or state regulations, or any provision of the Dec1aration of
Trust or By-Laws of the Fund, and further provided, that the Fund may at any
time by action of its Trustees (i) substitute another bank or trust company for
the Custodian by giving notice as described above to the Custodian, or (ii)
immediately terminate this Contract in the event of the appointment of a
conservator or receiver for the Custodian by the Federal Deposit Insurance
Corporation or Commissioner of Banks for the Commonwealth of Massachusetts or
upon the happening of a like event at the direction of an appropriate regulatory
agency or court of competent jurisdiction.
Upon termination of the Contract, the Fund shall pay to the Custodian such
compensation as may be due as of the date of such termination and shall likewise
reimburse the Custodian for its costs, expenses and disbursements.
10. Successor Custodian
If a successor custodian shall be appointed by the Trustees of the Fund,
the Custodian shall, upon termination, deliver to such successor custodian at
the office of the Custodian, duly endorsed and in the form for transfer, all
securities then held by it hereunder.
-27-
<PAGE>
If no such successor custodian shall be appointed, the Custodian shall, in
like manner, upon receipt of a certified copy of a vote of the Trustees of the
Fund, deliver at the office of the Custodian such securities, funds and other
properties in accordance with such vote.
In the event that no written order designating a successor custodian or
certified copy of a vote of the Trustees shall have been delivered to the
Custodian on or before the date when such termination shall become effective,
then the Custodian shall have the right to deliver to a bank or trust company,
which is a "bank" as defined in the Investment Company Act of 1940, as amended,
doing business in Boston, Massachusetts, of its own selection, having an
aggregate capital, surplus, and undivided profits, as shown by its last
published report, of not less than $50,000,000, all securities, funds and other
properties held by the Custodian and all instruments held by the Custodian
relative thereto and all other property held by it under this Contract.
Thereafter, such bank or trust company shall be the successor of the Custodian
under this Contract.
In the event that securities, funds and other properties remain in the
possession of the Custodian after the date of termination hereof owing to
failure of the Fund to procure the certified copy of vote referred to or of the
Trustees to appoint a successor custodian, the Custodian shall be entitled to
fair compensation for its services during such period as the Custodian retains
possession of such securities, funds and
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<PAGE>
other properties and the provisions of this Contract relating to the duties and
obligations of the Custodian shall remain in full force and effect.
11. Interpretive and Additional Provisions
In connection with the operation of this Contract, the Custodian and the
Fund may from time to time agree on such provisions interpretive of or in
addition to the provisions of this Contract as may in their joint opinion be
consistent with the general tenor of this Contract. Any such interpretive or
additional provisions shall be in a writing signed by both parties and shall be
annexed hereto, provided that no such interpretive or additional provisions
shall contravene any applicable federal or state regulations or any provision of
the Declaration of Trust or the By-Laws of the Fund. No interpretive or
additional provisions made as provided in the preceding sentence shall be deemed
to be an amendment of this Contract.
12. Trustees
All references to actions of or by Trustees herein shall require action by
such Trustees acting as a board or formally constituted group and not
individually.
13. Massachusetts Law to Apply
This Contract shall be construed and the provisions thereof interpreted
under and in accordance with the laws of the Commonwealth of Massachusetts.
The name "Prudential-Bache Municipal Series Fund" is the designation of
the Trustees for the time being under a
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<PAGE>
Declaration of Trust dated May 18, 1984 and all persons dealing with the Fund
must look solely to the property of the Fund for the enforcement of any claims
against the Fund as neither the Trustees, officers, agents or shareholders
assume any personal liability for obligations entered into on behalf of the
Fund.
IN WITNESS WHEREOF, each of the parties has caused this instrument to be
executed in its name and behalf by its duly authorized representative and its
seal to be hereunder affixed as of the day and year first above written.
[SEAL] PRUDENTIAL-BACHE MUNICIPAL SERIES
ATTEST FUND
/s/ S. Jane Rose By: /s/ [ILLEGIBLE]
- ----------------------------- -----------------------------
President
[SEAL] STATE STREET BANK AND TRUST
ATTEST COMPANY
/s/ [ILLEGIBLE] By: /s/ [ILLEGIBLE]
- ----------------------------- -----------------------------
Assistant Secretary Vice President
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<PAGE>
CUSTODIAN CONTRACT
Between
EACH OF THE PARTIES INDICATED ON APPENDIX A
and
STATE STREET BANK AND TRUST COMPANY
21M1089
WP1041C
<PAGE>
TABLE OF CONTENTS
Page
1. Employment of Custodian and Property to be
Held By It ........................................................... 1
2. Duties of the Custodian with Respect to Property of
the Fund Held by the Custodian in the United States .................. 2
2.1 Holding Securities ............................................. 2
2.2 Delivery of Securities ......................................... 3
2.3 Registration of Securities ..................................... 8
2.4 Bank Accounts .................................................. 8
2.5 Availability of Federal Funds .................................. 9
2.6 Collection of Income ........................................... 10
2.7 Payment of Fund Monies ......................................... 10
2.8 Liability for Payment in Advance of
Receipt of Securities Purchased ................................ 13
2.9 Appointment of Agents .......................................... 14
2.10 Deposit of Securities in Securities System ..................... 14
2.10A Fund Assets Held in the Custodian's Direct
Paper System ................................................... 17
2.11 Segregated Account ............................................. 19
2.12 Ownership Certificates for Tax Purposes ........................ 20
2.13 Proxies ........................................................ 20
2.14 Communications Relating to Fund
Portfolio Securities ........................................... 20
2.15 Reports to Fund by Independent Public
Accountants .................................................... 21
3. Duties of the Custodian with Respect to Property of
the Fund Held Outside of the United States ........................... 22
3.1 Appointment of Foreign Sub-Custodians .......................... 22
3.2 Assets to be Held .............................................. 22
3.3 Foreign Securities Depositories ................................ 23
3.4 Segregation of Securities ...................................... 23
3.5 Agreements with Foreign Banking Institutions ................... 24
3.6 Access of Independent Accountants of the Fund .................. 24
3.7 Reports by Custodian ........................................... 25
3.8 Transactions in Foreign Custody Account ........................ 25
3.9 Liability of Foreign Sub-Custodians ............................ 26
3.10 Liability of Custodian ......................................... 27
3.11 Reimbursement for Advances ..................................... 28
3.12 Monitoring Responsibilities .................................... 28
3.13 Branches of U.S. Banks ......................................... 29
4. Payments for Repurchases or Redemptions and Sales
of Shares of the Fund ................................................ 29
5. Proper Instructions .................................................. 30
6. Actions Permitted Without Express Authority .......................... 32
7. Evidence of Authority ................................................ 32
<PAGE>
8. Duties of Custodian with Respect to the Books of
Account and Calculations of Net Asset Value and
Net Income ........................................................... 33
9. Records .............................................................. 33
10. Opinion of Fund's Independent Accountant ............................. 34
11. Compensation of Custodian ............................................ 34
12. Responsibility of Custodian .......................................... 34
13. Effective Period, Termination and Amendment .......................... 37
14. Successor Custodian .................................................. 38
15. Interpretive and Additional Provisions ............................... 40
16. Massachusetts Law to Apply ........................................... 40
17. Prior Contracts ...................................................... 40
18. The Parties .......................................................... 40
19. Limitation of Liability .............................................. 41
<PAGE>
CUSTODIAN CONTRACT
This Contract between State Street Bank and Trust Company, a Massachusetts
trust company, having its principal place of business at 225 Franklin Street,
Boston, Massachusetts, 02110, hereinafter called the "Custodian", and each Fund
listed on Appendix A which evidences its agreement to be bound hereby by
executing a copy of this Contract (each such Fund individually hereinafter
referred to as the "Fund").
WITNESSETH: That in consideration of the mutual covenants and agreements
hereinafter contained, the parties hereto agree as follows:
1. Employment of Custodian and Property to be Held by It
The Fund hereby employs the Custodian as the custodian of its assets,
including securities it desires to be held in places within the United States
("domestic securities") and securities it desires to be held outside the United
States ("foreign securities") pursuant to the provisions of the Articles of
Incorporation/Declaration of Trust. The Fund agrees to deliver to the Custodian
all securities and cash owned by it, and all payments of income, payments of
principal or capital distributions received by it with respect to all securities
owned by the Fund from time to time, and the cash consideration received by it
for such new or treasury shares of capital stock, ("Shares") of the Fund as may
be issued or sold from time to time. The Custodian shall not be responsible for
any property of the Fund held or received by the Fund and not delivered to the
Custodian.
<PAGE>
Upon receipt of "Proper Instructions" (within the meaning of Article 5),
the Custodian shall from time to time employ one or more sub-custodians located
in the United States, but only in accordance with an applicable vote by the
Board of Directors/Trustees of the Fund, and provided that the Custodian shall
have the same responsibility or liability to the Fund on account of any actions
or omissions of any sub-custodian so employed as any such sub-custodian has to
the Custodian, provided that the Custodian agreement with any such domestic sub-
custodian shall impose on such sub-custodian responsibilities and liabilities
similar in nature and scope to those imposed by this Agreement with respect to
the functions to be performed by such sub-custodian. The Custodian may employ as
sub-custodians for the Fund's securities and other assets the foreign banking
institutions and foreign securities depositories designated in Schedule "A"
hereto but only in accordance with the provisions of Article 3.
2. Duties of the Custodian with Respect to Property of the Fund Held By the
Custodian in the United States
2.1 Holding Securities. The Custodian shall hold and physically segregate for
the account of the Fund all non-cash property, to be held by it in the
United States, including all domestic securities owned by the Fund, other
than (a) securities which are maintained pursuant to Section 2.10 in a
clearing agency which acts as a securities depository or in a book-entry
system authorized by the U.S. Department of the Treasury,
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<PAGE>
collectively referred to herein as "Securities System" and (b) commercial
paper of an issuer for which State Street Bank and Trust Company acts as
Issuing and paying agent ("Direct Paper") which is deposited and/or
maintained in the Direct Paper System of the Custodian pursuant to Section
2.10A.
2.2 Delivery of Securities. The Custodian shall release and deliver domestic
securities owned by the Fund held by the Custodian or in a Securities
System account of the Custodian or in the Custodian's Direct Paper book-
entry system account ("Direct Paper System") only upon receipt of Proper
Instructions, which may be continuing instructions when deemed appropriate
by the parties, and only in the following cases:
1) Upon sale of such securities for the account of the Fund and receipt
of payment therefor;
2) Upon the receipt of payment in connection with any repurchase
agreement related to such securities entered into by the Fund;
3) In the case of a sale effected through a Securities System, in
accordance with the provisions of Section 2.10 hereof;
4) To the depository agent In connection with tender or other similar
offers for portfolio securities of the Fund;
5) To the issuer thereof or its agent when such securities are called,
redeemed, retired or
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<PAGE>
otherwise become payable; provided that, in any such case, the cash
or other consideration is to be delivered to the Custodian;
6) To the issuer thereof, or its agent, for transfer into the name of
the Fund or into the name of any nominee or nominees of the
Custodian or into the name or nominee name of any agent appointed
pursuant to Section 2.9 or into the name or nominee name of any
sub-custodian appointed pursuant to Article 1; or for exchange for a
different number of bonds, certificates or other evidence
representing the same aggregate face amount or number of units;
provided that, in any such case, the new securities are to be
delivered to the Custodian;
7) Upon the sale of such securities for the account of the Fund, to the
broker or its clearing agent, against a receipt, for examination in
accordance with "street delivery" custom: provided that in any such
case, the Custodian shall have no responsibility or liability for
any loss arising from the delivery of such securities prior to
receiving payment for such securities except as may arise from the
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<PAGE>
Custodian's own negligence or willful misconduct;
8) For exchange or conversion pursuant to any plan of merger,
consolidation, recapitalization, reorganization or readjustment of
the securities of the issuer of such securities, or pursuant to
provisions for conversion contained in such securities, or pursuant
to any deposit agreement; provided that, in any such case, the new
securities and cash, if any, are to be delivered to the Custodian;
9) In the case of warrants, rights or similar securities, the surrender
thereof in the exercise of such warrants, rights or similar
securities or the surrender of interim receipts or temporary
securities for definitive securities; provided that, in any such
case, the new securities and cash, if any, are to be delivered to
the Custodian;
10) For delivery in connection with any loans of securities made by the
Fund, but only against receipt of adequate collateral as agreed upon
from time to time by the Custodian and the Fund, which may be in the
form of cash or obligations issued by the United States government,
its agencies or
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<PAGE>
instrumentalities, except that in connection with any loans for
which collateral is to be credited to the Custodian's account in the
book-entry system authorized by the U.S. Department of the
Treasury, the Custodian will not be held liable or responsible for
the delivery of securities owned by the Fund prior to the receipt of
such collateral;
11) For delivery as security in connection with any borrowings by the
Fund requiring a pledge of assets by the Fund, but only against
receipt of amounts borrowed;
12) For delivery in accordance with the provisions of any agreement
among the Fund, the Custodian and a broker-dealer registered under
the Securities Exchange Act of 1934 (the "Exchange Act") and a
member of The National Association of Securities Dealers, Inc.
("NASD"), relating to compliance with the rules of The Options
Clearing Corporation and of any registered national securities
exchange, or of any similar organization or organizations, regarding
escrow or other arrangements in connection with transactions by the
Fund;
13) For delivery in accordance with the provisions of any agreement
among the Fund,
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<PAGE>
the Custodian, and a Futures Commission Merchant registered under
the Commodity Exchange Act, relating to compliance with the rules of
the Commodity Futures Trading Commission and/or any Contract Market,
or any similar organization or organizations, regarding account
deposits in connection with transactions by the Fund;
14) Upon receipt of instructions from the transfer agent ("Transfer
Agent") for the Fund, for delivery to such Transfer Agent or to the
holders of shares in connection with distributions in kind, as may
be described from time to time in the Fund's currently effective
prospectus and statement of additional information ("prospectus"),
in satisfaction of requests by holders of Shares for repurchase or
redemption; and
15) For any other proper business purpose, but only upon receipt of, in
addition to Proper Instructions, a certified copy of a resolution of
the Board of Directors/Trustees or of the Executive Committee signed
by an officer of the Fund and certified by the Secretary or an
Assistant Secretary, specifying the securities to be delivered,
setting forth the purpose for which such
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<PAGE>
delivery is to be made, declaring such purpose to be a proper
business purpose, and naming the person or persons to whom delivery
of such securities shall be made.
2.3 Registration of Securities. Domestic securities held by the Custodian
(other than bearer securities) shall be registered in the name of the Fund
or in the name of any nominee of the Fund or of any nominee of the
Custodian which nominee shall be assigned exclusively to the Fund, unless
the Fund has authorized in writing the appointment of a nominee to be used
in common with other registered investment companies having the same
investment adviser as the Fund, or in the name or nominee name of any
agent appointed pursuant to Section 2.9 or in the name or nominee name of
any sub-custodian appointed pursuant to Article 1. All securities
accepted by the Custodian on behalf of the Fund under the terms of this
Contract shall be in "street name" or other good delivery form. If,
however, the Fund directs the Custodian to maintain securities in "street
name", the Custodian shall utilize its best efforts to timely collect
income due the Fund on such securities and to notify the Fund on a best
efforts basis of relevant corporate actions including, without limitation,
pendency of calls, maturities, tender or exchange offers.
2.4 Bank Accounts. The Custodian shall open and maintain a separate bank
account or accounts in the United States in
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<PAGE>
the name of the Fund, subject only to draft or order by the Custodian
acting pursuant to the terms of this Contract, and shall hold in such
account or accounts, subject to the provisions hereof, all cash received
by it from or for the account of the Fund, other than cash maintained by
the Fund in a bank account established and used in accordance with Rule
17f-3 under the Investment Company Act of 1940. Funds held by the
Custodian for the Fund may be deposited by it to its credit as Custodian
in the Banking Department of the Custodian or in such other banks or trust
companies as it may in its discretion deem necessary or desirable;
provided, however, that every such bank or trust company shall be
qualified to act as a custodian under the Investment Company Act of 1940
and that each such bank or trust company and the funds to be deposited
with each such bank or trust company shall be approved by vote of a
majority of the Board of Directors/Trustees of the Fund. Such funds shall
be deposited by the Custodian in its capacity as Custodian and shall be
withdrawable by the Custodian only in that capacity.
2.5 Availability of Federal Funds. Upon mutual agreement between the Fund and
the Custodian, the Custodian shall, upon the receipt of Proper
Instructions, make federal funds available to the Fund as of specified
times agreed upon from time to time by the Fund and the Custodian in the
amount of checks received in payment for Shares of the Fund which are
deposited into the Fund's account.
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<PAGE>
2.6 Collection of Income. Subject to the provisions of Section 2.3, the
Custodian shall collect on a timely basis all income and other payments
with respect to registered securities held hereunder to which the Fund
shall be entitled either by law or pursuant to custom in the securities
business, and shall collect on a timely basis all income and other
payments with respect to bearer securities if, on the date of payment by
the issuer, such securities are held by the Custodian or its agent thereof
and shall credit such income, as collected, to the Fund's custodian
account. Without limiting the generality of the foregoing, the Custodian
shall detach and present for payment all coupons and other income items
requiring presentation as and when they become due and shall collect
interest when due on securities held hereunder. Income due the Fund on
securities loaned pursuant to the provisions of Section 2.2 (10) shall be
the responsibility of the Fund. The Custodian will have no duty or
responsibility in connection therewith, other than to provide the Fund
with such information or data as may be necessary to assist the Fund in
arranging for the timely delivery to the Custodian of the income to which
the Fund is properly entitled.
2.7 Payment of Fund Monies. Upon receipt of Proper Instructions, which may be
continuing instructions when deemed appropriate by the parties, the
Custodian shall pay out monies of the Fund in the following cases only:
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<PAGE>
1) Upon the purchase of securities held domestically, options, futures
contracts or options on futures contracts for the account of the
Fund but only (a) against the delivery of such securities, or
evidence of title to such options, futures contracts or options on
futures contracts, to the Custodian (or any bank, banking firm or
trust company doing business in the United States or abroad which is
qualified under the Investment Company Act of 1940, as amended, to
act as a custodian and has been designated by the Custodian as Its
agent for this purpose) registered in the name of the Fund or in the
name of a nominee of the Custodian referred to in Section 2.3 hereof
or in proper form for transfer; (b) in the case of a purchase
effected through a Securities System, in accordance with the
conditions set forth in Section 2.10 hereof; (c) in the case of a
purchase involving the Direct Paper System, in accordance with the
conditions set forth in Section 2.10A; (d) in the case of repurchase
agreements entered Into between the Fund and the Custodian, or
another bank, or a broker-dealer which is a member of NASD, (i)
against delivery of the securities either in certificate form or
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<PAGE>
through an entry crediting the Custodian's account at the Federal
Reserve Bank with such securities or (ii) against delivery of the
receipt evidencing purchase by the Fund of securities owned by the
Custodian along with written evidence of the agreement by the
Custodian to repurchase such securities from the Fund or (e) for
transfer to a time deposit account of the Fund in any bank, whether
domestic or foreign; such transfer may be effected prior to receipt
of a confirmation from a broker and/or the applicable bank pursuant
to Proper Instructions from the Fund as defined in Article 5;
2) In connection with conversion, exchange or surrender of securities
owned by the Fund as set forth in Section 2.2 hereof;
3) For the redemption or repurchase of Shares issued by the Fund as set
forth in Article 4 hereof;
4) For the payment of any expense or liability incurred by the Fund,
including but not limited to the following payments for the account
of the Fund: interest, taxes, management, accounting, transfer agent
and legal fees, and operating expenses of the
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<PAGE>
Fund whether or not such expenses are to be in whole or part
capitalized or treated as deferred expenses;
5) For the payment of any dividends declared pursuant to the governing
documents of the Fund;
6) For payment of the amount of dividends received in respect of
securities sold short;
7) For any other proper purpose, but only upon receipt of, in addition
to Proper Instructions, a certified copy of a resolution of the
Board of Directors/Trustees or of the Executive Committee of the
Fund signed by an officer of the Fund and certified by its Secretary
or an Assistant Secretary, specifying the amount of such payment,
setting forth the purpose for which such payment is to be made,
declaring such purpose to be a proper purpose, and naming the person
or persons to whom such payment is to be made.
2.8 Liability for Payment in Advance of Receipt of Securities Purchased.
Except as specifically stated otherwise in this Contract, in any and every
case where payment for purchase of securities for the account of the Fund
is made by the Custodian in advance of receipt of the securities purchased
in the absence of specific written
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<PAGE>
instructions from the Fund to so pay in advance, the Custodian shall be
absolutely liable to the Fund for such securities to the same extent as if
the securities had been received by the Custodian.
2.9 Appointment of Agents. The Custodian may at any time or times in its
discretion appoint (and may at any time remove) any other bank or trust
company which is itself qualified under the Investment Company Act of
1940, as amended, to act as a custodian, as its agent to carry out such of
the provisions of this Article 2 as the Custodian may from time to time
direct; provided, however, that the appointment of any agent shall not
relieve the Custodian of its responsibilities or liabilities hereunder.
2.10 Deposit of Securities in Securities Systems. The Custodian may deposit
and/or maintain domestic securities owned by the Fund in a clearing agency
registered with the Securities and Exchange Commission under Section 17A
of the Securities Exchange Act of 1934, which acts as a securities
depository, or in the book-entry system authorized by the U.S. Department
of the Treasury and certain federal agencies, collectively referred to
herein as "Securities System" in accordance with applicable Federal
Reserve Board and Securities and Exchange Commission rules and
regulations, if any, and subject to the following provisions:
1) The Custodian may keep domestic securities of the Fund in a
Securities System provided that
-14-
<PAGE>
such securities are represented in an account ("Account") of the
Custodian in the Securities System which shall not include any
assets of the Custodian other than assets held as a fiduciary,
custodian or otherwise for customers;
2) The records of the Custodian with respect to domestic securities of
the Fund which are maintained in a Securities System shall identify
by book-entry those securities belonging to the Fund;
3) The Custodian shall pay for domestic securities purchased for the
account of the Fund upon (i) receipt of advice from the Securities
System that such securities have been transferred to the Account,
and (ii) the making of an entry on the records of the Custodian to
reflect such payment and transfer for the account of the Fund. The
Custodian shall transfer domestic securities sold for the account of
the Fund upon (i) receipt of advice from the Securities System that
payment for such securities has been transferred to the Account, and
(ii) the making of an entry on the records of the Custodian to
reflect such transfer and payment for the account of the Fund.
Copies
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<PAGE>
of all advices from the Securities System of transfers of domestic
securities for the account of the Fund shall identify the Fund, be
maintained for the Fund by the Custodian and be provided to the Fund
at its request. Upon request, the Custodian shall furnish the Fund
confirmation of each transfer to or from the account of the Fund in
the form of a written advice or notice and shall furnish promptly to
the Fund copies of daily transaction sheets reflecting each day's
transactions in the Securities System for the account of the Fund.
4) The Custodian shall provide the Fund with any report obtained by the
Custodian on the Securities System's accounting system, internal
accounting control and procedures for safeguarding securities
deposited in the Securities System;
5) The Custodian shall have received the initial or annual certificate,
as the case may be, required by Article 13 hereof;
6) Anything to the contrary in this Contract notwithstanding, the
Custodian shall be liable to the Fund for any loss or damage to the
Fund resulting from use of the Securities System by reason of any
negligence,
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<PAGE>
misfeasance or misconduct of the Custodian or any of its agents or
of any of its or their employees or from failure of the Custodian or
any such agent to enforce effectively such rights as it may have
against the Securities System; at the election of the Fund, it shall
be entitled to be subrogated to the rights of the Custodian with
respect to any claim against the Securities System or any other
person which the Custodian may have as a consequence of any such
loss or damage if and to the extent that the Fund has not been made
whole for any such loss or damage.
2.10A Fund Assets Held in the Custodian's Direct Paper System
The Custodian may deposit and/or maintain securities owned by the Fund in
the Direct Paper System of the Custodian subject to the following
provisions:
1) No transaction relating to securities in the Direct Paper System
will be effected in the absence of Proper Instructions;
2) The Custodian may keep securities of the Fund in the Direct Paper
System only if such securities are represented in an account
("Account") of the Custodian in the Direct Paper System which shall
not include any assets of the Custodian other than assets held as a
fiduciary, custodian or otherwise for customers;
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<PAGE>
3) The records of the Custodian with respect to securities of the Fund
which are maintained in the Direct Paper System shall identify by
book-entry those securities belonging to the Fund;
4) The Custodian shall pay for securities purchased for the account of
the Fund upon the making of an entry on the records of the Custodian
to reflect such payment and transfer of securities to the account of
the Fund. The Custodian shall transfer securities sold for the
account of the Fund upon the making of an entry on the records of
the Custodian to reflect such transfer and receipt of payment for
the account of the Fund;
5) The Custodian shall furnish the Fund confirmation of each transfer
to or from the account of the Fund, in the form of a written advice
or notice, of Direct Paper on the next business day following such
transfer and shall furnish to the Fund copies of daily transaction
sheets reflecting each day's transaction in the Direct Paper System
for the account of the Fund;
6) The Custodian shall provide the Fund with any report on its system
of internal accounting
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<PAGE>
control as the Fund may reasonably request from time to time;
2.11 Segregated Account. The Custodian shall upon receipt of Proper
Instructions establish and maintain a segregated account or accounts for
and on behalf of the Fund, into which account or accounts may be
transferred cash and/or securities, including securities maintained in an
account by the Custodian pursuant to Section 2.10 hereof, (i) in
accordance with the provisions of any agreement among the Fund, the
Custodian and a broker-dealer registered under the Exchange Act and a
member of the NASD (or any futures commission merchant registered under
the Commodity Exchange Act), relating to compliance with the rules of The
Options Clearing Corporation and of any registered national securities
exchange (or the Commodity Futures Trading Commission or any registered
contract market), or of any similar organization or organizations,
regarding escrow or other arrangements in connection with transactions by
the Fund, (ii) for purposes of segregating cash, government securities or
liquid, high-grade debt obligations in connection with options purchased,
sold or written by the Fund or commodity futures contracts or options
thereon purchased or sold by the Fund, (iii) for the purposes of
compliance by the Fund with the procedures required by Investment Company
Act Release No. 10666, or any subsequent release or releases of the
Securities and Exchange Commission
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<PAGE>
relating to the maintenance of segregated accounts by registered
investment companies and (iv) for other proper corporate purposes, but
only, in the case of clause (iv), upon receipt of, in addition to Proper
Instructions, a certified copy of a resolution of the Board of
Directors/Trustees or of the Executive Committee signed by an officer of
the Fund and certified by the Secretary or an Assistant Secretary, setting
forth the purpose or purposes of such segregated account and declaring
such purposes to be proper corporate purposes.
2.12 Ownership Certificates for Tax Purposes. The Custodian shall execute
ownership and other certificates and affidavits for all federal and state
tax purposes in connection with receipt of income or other payments with
respect to domestic securities of the Fund held by it and in connection
with transfers of such securities.
2.13 Proxies. The Custodian shall, with respect to the domestic securities held
hereunder, cause to be promptly executed by the registered holder of such
securities, if the securities are registered otherwise than in the name of
the Fund or a nominee of the Fund, all proxies, without indication of the
manner in which such proxies are to be voted, and shall promptly deliver
to the Fund such proxies, all proxy soliciting materials and all notices
relating to such securities.
2.14 Communications Relating to Fund Portfolio Securities
Subject to the provisions of Section 2.3, the Custodian
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<PAGE>
shall transmit promptly to the Fund all written information (including,
without limitation, pendency of calls and maturities of securities held
domestically and expirations of rights in connection therewith and notices
of exercise of call and put options written by the Fund and the maturity
of futures contracts purchased or sold by the Fund) received by the
Custodian from issuers of the securities being held for the Fund. With
respect to tender or exchange offers, the Custodian shall transmit
promptly to the Fund all written information received by the Custodian
from issuers of the securities whose tender or exchange is sought and from
the party (or his agents) making the tender or exchange offer. If the Fund
desires to take action with respect to any tender offer, exchange offer or
any other similar transaction, the Fund shall notify the Custodian at
least three business days prior to the date on which the Custodian is to
take such action.
2.15 Reports to Fund by Independent Public Accountants
The Custodian shall provide the Fund, at such times as the Fund may
reasonably require, with reports by independent public accountants on the
accounting system, internal accounting control and procedures for
safeguarding securities, futures contracts and options on futures
contracts, including securities deposited and/or maintained in a
Securities System, relating to the services provided by the Custodian
under this Contract; such reports shall be of sufficient scope and in
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<PAGE>
sufficient detail, as may reasonably be required by the Fund to provide
reasonable assurance that any material inadequacies would be disclosed by
such examination, and, if there are no such inadequacies, the reports
shall so state.
3. Duties of the Custodian with Respect to Property of the Fund Held Outside of
the United States
3.1 Appointment of Foreign Sub-Custodians
The Fund hereby authorizes and instructs the Custodian to employ as sub-
custodians for the Fund's securities and other assets maintained outside
the United States the foreign banking institutions and foreign securities
depositories designated on Schedule A hereto ("foreign sub-custodians").
Upon receipt of "Proper Instructions", as defined in Section 5 of this
Contract, together with a certified resolution of the Fund's Board of
Directors/Trustees, the Custodian and the Fund may agree to amend Schedule
A hereto from time to time to designate additional foreign banking
institutions and foreign securities depositories to act as sub-custodian.
upon receipt of Proper Instructions, the Fund may instruct the Custodian
to cease the employment of any one or more such sub-custodians for
maintaining custody of the Fund's assets.
3.2 Assets to be Held. The Custodian shall limit the securities and other
assets maintained in the custody of the foreign sub-custodians to: (a)
"foreign securities",
-22-
<PAGE>
as defined in paragraph (c)(l) of Rule 17f-5 under the Investment Company
Act of 1940, and (b) cash and cash equivalents in such amounts as the
Custodian or the Fund may determine to be reasonably necessary to effect
the Fund's foreign securities transactions.
3.3 Foreign Securities Depositories. Except as may otherwise be agreed upon in
writing by the Custodian and the Fund, assets of the Fund shall be
maintained in foreign securities depositories only through arrangements
implemented by the foreign banking institutions serving as sub-custodians
pursuant to the terms hereof. Where possible, such arrangements shall
include entry into agreements containing the provisions set forth in
Section 3.5 hereof.
3.4 Segregation of Securities
The Custodian shall identify on its books as belonging to the Fund, the
foreign securities of the Fund held by each foreign sub-custodian. Each
agreement pursuant to which the Custodian employs a foreign banking
institution shall require that such institution establish a custody
account for the Custodian on behalf of the Fund and physically segregate
in that account, securities and other assets of the Fund, and, in the
event that such institution deposits the Fund's securities in a foreign
securities depository, that it shall identify on its books as belonging to
the Custodian, as agent for the Fund, the securities so deposited.
-23-
<PAGE>
3.5 Agreements with Foreign Banking Institutions. Each agreement with a
foreign banking institution shall be substantially in the form set forth
in Exhibit 1 hereto and shall provide that: (a) the Fund's assets will not
be subject to any right, charge, security interest, lien or claim of any
kind in favor of the foreign banking institution or its creditors or
agent, except a claim of payment for their safe custody or administration;
(b) beneficial ownership of the Fund's assets will be freely transferable
without the payment of money or value other than for custody or
administration; (c) adequate records will be maintained identifying the
assets as belonging to the Fund; (d) officers of or auditors employed by,
or other representatives of the Custodian, including to the extent
permitted under applicable law the independent public accountants for the
Fund, will be given access to the books and records of the foreign banking
institution relating to its actions under its agreement with the
Custodian; and (e) assets of the Fund held by the foreign sub-custodian
will be subject only to the instructions of the Custodian or its agents.
3.6 Access of Independent Accountants of the Fund. Upon request of the Fund,
the Custodian will use its best efforts to arrange for the independent
accountants of the Fund to be afforded access to the books and records of
any foreign banking institution employed as a foreign sub-custodian
insofar as such books and records relate to
-24-
<PAGE>
the performance of such foreign banking institution under its agreement
with the Custodian.
3.7 Reports by Custodian. Custodian will supply to the Fund from time to time,
as mutually agreed upon, statements in respect of the securities and other
assets of the Fund held by foreign sub-custodians, including but not
limited to an identification of entities having possession of the Fund's
securities and other assets and advices or notifications of any transfers
of securities to or from each custodial account maintained by a foreign
banking institution for the Custodian on behalf of the Fund indicating, as
to securities acquired for the Fund, the identity of the entity having
physical possession of such securities.
3.8 Transactions in Foreign Custody Account
(a) Except as otherwise provided in paragraph (b) of this Section 3.8, the
provision of Sections 2.2 and 2.7 of this Contract shall apply, in their
entirety to the foreign securities of the Fund held outside the United
States by foreign sub-custodians.
(b) Notwithstanding any provision of this Contract to the contrary,
settlement and payment for securities received for the account of the Fund
and delivery of securities maintained for the account of the Fund may be
effected in accordance with the customary established securities trading
or securities processing practices and procedures in the jurisdiction or
market in which the transaction
-25-
<PAGE>
occurs, including, without limitation, delivering securities to the
purchaser thereof or to a dealer therefor (or an agent for such purchaser
or dealer) against a receipt with the expectation of receiving later
payment for such securities from such purchaser or dealer.
(c) Securities maintained in the custody of a foreign sub-custodian may be
maintained in the name of such entity's nominee to the same extent as set
forth in Section 2.3 of this Contract, and the Fund agrees to hold any
such nominee harmless from any liability as a holder of record of such
securities.
3.9 Liability of Foreign Sub-Custodians. Each agreement pursuant to which the
Custodian employs a foreign banking institution as a foreign sub-custodian
shall require the institution to exercise reasonable care in the
performance of its duties and to indemnify, and hold harmless, the
Custodian and each Fund from and against any loss, damage, cost, expense,
liability or claim arising out of or in connection with the institution's
performance of such obligations. At the election of the Fund, it shall be
entitled to be subrogated to the rights of the Custodian with respect to
any claims against a foreign banking institution as a consequence of any
such loss, damage, cost, expense, liability or claim if and to the extent
that the Fund has not been made whole for any such loss, damage, cost,
expense, liability or claim.
-26-
<PAGE>
3.10 Liability of Custodian. The Custodian shall be liable for the acts or
omissions of a foreign banking institution to the same extent as set forth
with respect to sub-custodians generally in this Contract and, regardless
of whether assets are maintained in the custody of a foreign banking
institution, a foreign securities depository or a branch of a U.S. bank as
contemplated by paragraph 3.13 hereof, the Custodian shall not be liable
for any loss, damage, cost, expense, liability or claim resulting from
nationalization, expropriation, currency restrictions, or acts of war or
terrorism or any loss where the sub-custodian has otherwise exercised
reasonable care. Notwithstanding the foregoing provisions of this
paragraph 3.10, in delegating custody duties to State Street London Ltd.,
the Custodian shall not be relieved of any responsibility to the Fund for
any loss due to such delegation, except such loss as may result from (a)
political risk (including, but not limited to, exchange control
restrictions, confiscation, expropriation, nationalization, insurrection,
civil strife or armed hostilities) or (b) other losses (excluding a
bankruptcy or insolvency of State Street London Ltd. not caused by
political risk) due to Acts of God, nuclear incident or other losses under
circumstances where the Custodian and State Street London Ltd. have
exercised reasonable care.
-27-
<PAGE>
3.11 Reimbursement for Advances. If the Fund requires the Custodian to advance
cash or securities for any purpose including the purchase or sale of
foreign exchange or of contracts for foreign exchange, or in the event
that the Custodian or its nominee shall incur or be assessed any taxes,
charges, expenses, assessments, claims or liabilities in connection with
the performance of this Contract, except such as may arise from its or its
nominee's own negligent action, negligent failure to act or willful
misconduct, any property at any time held for the account of the Fund
shall be security therefor and should the Fund fail to repay the Custodian
promptly, the Custodian shall be entitled to utilize available cash and to
dispose of the Fund assets to the extent necessary to obtain
reimbursement.
3.12 Monitoring Responsibilities. The Custodian shall furnish annually to the
Fund, during the month of June, information concerning the foreign sub-
custodians employed by the Custodian. Such information shall be similar in
kind and scope to that furnished to the Fund in connection with the
initial approval of this Contract. In addition, the Custodian will
promptly inform the Fund in the event that the Custodian learns of a
material adverse change in the financial condition of a foreign sub-
custodian or any material loss of the assets of the Fund or in the case of
any foreign sub-custodian not the subject of an exemptive order from the
Securities
-28-
<PAGE>
and Exchange Commission is notified by such foreign sub-custodian that
there appears to be a substantial likelihood that its shareholders' equity
will decline below $200 million (U.S. dollars or the equivalent thereof)
or that its shareholders' equity has declined below $200 million (in each
case computed in accordance with generally accepted U.S. accounting
principles).
3.13 Branches of U.S. Banks
(a) Except as otherwise set forth in this Contract, the provisions of
Article 3 shall not apply where the custody of the Fund assets are
maintained in a foreign branch of a banking institution which is a "bank"
as defined by Section 2(a)(5) of the Investment Company Act of 1940
meeting the qualification set forth in Section 26(a) of said Act. The
appointment of any such branch as a sub-custodian shall be governed by
paragraph 1 of this Contract.
(b) Cash held for the Fund in the United Kingdom shall be maintained in an
interest bearing account established for the Fund with the Custodian's
London branch, which account shall be subject to the direction of the
Custodian, State Street London Ltd. or both.
4. Payments for Repurchases or Redemptions and Sales of Shares of the Fund
From such funds as may be available for the purpose but subject to the
limitations of the Articles of Incorporation/ Declaration of Trust and any
applicable votes of the Board of
-29-
<PAGE>
Directors/Trustees of the Fund pursuant thereto, the Custodian shall, Upon
receipt of instructions from the Transfer Agent, make funds available for
payment to holders of Shares who have delivered to the Transfer Agent a request
for redemption or repurchase of their Shares. In connection with the redemption
or repurchase of Shares of the Fund, the Custodian is authorized upon receipt of
instructions from the Transfer Agent to wire funds to or through a commercial
bank designated by the redeeming shareholders. In connection with the redemption
or repurchase of Shares of the Fund, the Custodian shall honor checks drawn on
the Custodian by a holder of Shares, which checks have been furnished by the
Fund to the holder of Shares, when presented to the Custodian in accordance with
such procedures and controls as are mutually agreed upon from time to time
between the Fund and the Custodian.
The Custodian shall receive from the distributor for the Fund's Shares or
from the Transfer Agent of the Fund and deposit into the Fund's account such
payments as are received for Shares of the Fund issued or sold from time to time
by the Fund. The Custodian will provide timely notification to the Fund and the
Transfer Agent of any receipt by it of payments for Shares of the Fund.
5. Proper Instructions
Proper Instructions as used herein means a writing signed or initialled by
one or more person or persons as the officers of the Fund shall have from time
to time authorized. Each such writing shall set forth the specific transaction
or type of
-30-
<PAGE>
transaction involved, including a specific statement of the purpose for which
such action is requested. Oral instructions will be considered Proper
Instructions if the Custodian reasonably believes them to have been given by a
person authorized to give such instructions with respect to the transaction
involved. The Fund shall cause all oral instructions to be confirmed in writing.
It is understood and agreed that the Board of Directors/Directors/Trustees has
authorized (i) Prudential Mutual Fund Management, Inc., as Manager of the Fund,
and (ii) The Prudential Investment Corporation (or Prudential-Bache Securities
Inc.), as Subadviser to the Fund, to deliver proper instructions with respect to
all matters for which proper Instructions are required by this Article 5. The
Custodian may rely upon the certificate of an officer of the Manager or
Subadviser, as the case may be, with respect to the person or persons authorized
on behalf of the Manager and Subadviser, respectively, to sign, initial or give
proper instructions for the purpose of this Article 5. Proper Instructions may
include communications effected directly between electro-mechanical or
electronic devices provided that the Fund and the Custodian are satisfied that
such procedures afford adequate safeguards for the Fund's assets. For purposes
of this Section, Proper Instructions shall include instructions received by the
Custodian pursuant to any three-party agreement which requires a segregated
asset account in accordance with Section 2.11.
-31-
<PAGE>
6. Actions Permitted without Express Authority
The Custodian may in its discretion, without express authority from the
Fund:
1) make payments to itself or others for minor expenses of handling
securities or other similar items relating to its duties under this Contract,
provided that all such payments shall be accounted for to the Fund;
2) surrender securities in temporary form for securities in definitive
form;
3) endorse for collection, in the name of the Fund, checks, drafts and
other negotiable instruments; and
4) in general, attend to all non-discretionary details in connection with
the sale, exchange, substitution, purchase, transfer and other dealings with the
securities and property of the Fund except as otherwise directed by the Board of
Directors/Trustees of the Fund.
7. Evidence of Authority
The Custodian shall be protected in acting upon any instructions, notice,
request, consent, certificate or other instrument or paper believed by it to be
genuine and to have been properly executed by or on behalf of the Fund. The
Custodian may receive and accept a certified copy of a vote of the Board of
Directors/Trustees of the Fund as conclusive evidence (a) of the authority of
any person to act in accordance with such Vote or (b) of any determination or of
any action by the Board of Directors/Trustees pursuant to the Articles of
Incorporation/
-32-
<PAGE>
Declaration of Trust as described in such vote, and such vote may be considered
as in full force and effect until receipt by the Custodian of written notice to
the contrary.
8. Duties of Custodian with Respect to the Books of Account and Calculation of
Net Asset Value and Net Income
The Custodian shall cooperate with and supply necessary information to the
entity or entities appointed by the Board of Directors/Trustees of the Fund to
keep the books of account of the Fund and/or compute the net asset value per
share of the outstanding shares of the Fund or, if directed in writing to do so
by the Fund, shall itself keep such books of account and/or compute such net
asset value per share. If so directed, the Custodian shall also calculate daily
the net income of the Fund as described in the Fund's currently effective
prospectus and shall advise the Fund and the Transfer Agent daily of the total
amounts of such net income and, if instructed in writing by an officer of the
Fund to do so, shall advise the Transfer Agent periodically of the division of
such net income among its various components. The calculations of the net asset
value per share and the daily income of the Fund shall be made at the time or
times described from time to time in the Fund's currently effective prospectus.
9. Records
The Custodian shall create and maintain all records relating to its
activities and obligations under this Contract in such manner as will meet the
obligations of the Fund under the Investment Company Act of 1940, with
particular attention to
-33-
<PAGE>
Section 31 thereof and Rules 31a-1 and 31a-2 thereunder. All such records shall
be the property of the Fund and shall at all times during the regular business
hours of the Custodian be open for inspection by duly authorized officers,
employees or agents of the Fund and employees and agents of the Securities and
Exchange Commission. The Custodian shall, at the Fund's request, supply the Fund
with a tabulation of securities owned by the Fund and held by the Custodian and
shall, when requested to do so by the Fund and for such compensation as shall be
agreed upon between the Fund and the Custodian, include certificate numbers in
such tabulations.
10. Opinion of Fund's Independent Accountant
The Custodian shall take all reasonable action, as the Fund may from time
to time request, to obtain from year to year favorable opinions from the Fund's
independent accountants with respect to its activities hereunder in connection
with the preparation of the Fund's Form N-1A, Form N-2 (in the case of a closed
end Fund) and Form N-SAR or other periodic reports to the Securities and
Exchange Commission and with respect to any other requirements of such
Commission.
11. Compensation of Custodian
The Custodian shall be entitled to reasonable compensation for its
services and expenses as Custodian, as agreed upon from time to time between the
Fund and the Custodian.
l2. Responsibility of Custodian
So long as and to the extent that it is in the exercise of reasonable
care, the Custodian shall not be responsible for
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<PAGE>
the title, validity or genuineness of any property or evidence of title thereto
received by it or delivered by it pursuant to this Contract and shall be held
harmless in acting upon any notice, request, consent, certificate or other
instrument reasonably believed by it to be genuine and to be signed by the
proper party or parties, including any futures commission merchant acting
pursuant to the terms of a three-party futures or options agreement. The
Custodian shall be held to the exercise of reasonable care in carrying out the
provisions of this Contract, but shall be kept indemnified by and shall be
without liability to the Fund for any action taken or omitted by it in good
faith without negligence. It shall be entitled to rely on and may act upon
advice of counsel (who may be counsel for the Fund) on all matters, and shall be
without liability for any action reasonably taken or omitted pursuant to such
advice. Notwithstanding the foregoing, the responsibility of the Custodian with
respect to redemptions effected by check shall be in accordance with a separate
Agreement entered into between the Custodian and the Fund.
The Custodian shall be liable for the acts or omissions of a foreign
banking institution appointed pursuant to the provisions of Article 3 to the
same extent as set forth in Article 1 hereof with respect to sub-custodians
located in the United States and, regardless of whether assets are maintained in
the custody of a foreign banking institution, a foreign securities depository or
a branch of a U.S. bank as contemplated by paragraph 3.11 hereof, the Custodian
shall not be liable for
-35-
<PAGE>
any loss, damage, cost, expense, liability or claim resulting from, or caused
by, the direction of or authorization by the Fund to maintain custody or any
securities or cash of the Fund in a foreign country including, but not limited
to, losses resulting from nationalization, expropriation, currency restrictions,
or acts of war or terrorism.
If the Fund requires the Custodian to take any action with respect to
securities, which action involves the payment of money or which action may, in
the opinion of the Custodian, result in the Custodian or its nominee assigned to
the Fund being liable for the payment of money or incurring liability of some
other form, the Fund, as a prerequisite to requiring the Custodian to take such
action, shall provide indemnity to the Custodian in an amount and form
satisfactory to it.
If the Fund requires the Custodian to advance cash or securities for any
purpose or in the event that the Custodian or its nominee shall incur or be
assessed any taxes, charges, expenses, assessments, claims or liabilities in
connection with the performance of this Contract, except such as may arise from
its or its nominee's own negligent action, negligent failure to act or willful
misconduct, any property at any time held for the account of the Fund shall be
security therefor and should the Fund fail to repay the Custodian promptly, the
Custodian shall be entitled to utilize available cash and to dispose of the Fund
assets to the extent necessary to obtain reimbursement provided, however that,
prior to disposing of Fund assets hereunder, the Custodian shall give the Fund
notice of its intention to dispose
-36-
<PAGE>
of assets identifying such assets and the Fund shall have one business day from
receipt of such notice to notify the Custodian if the Fund wishes the Custodian
to dispose of Fund assets of equal value other than those identified in such
notice.
13. Effective Period, Termination and Amendment
This Contract shall become effective as of its execution, shall continue
in full force and effect until terminated as hereinafter provided, may be
amended at any time by mutual agreement of the parties hereto and may be
terminated by either party by an instrument in writing delivered or mailed,
postage prepaid to the other party, such termination to take effect not sooner
than sixty (60) days after the date of such delivery or mailing; provided,
however that the Custodian shall not act under Section 2.10 hereof in the
absence of receipt of an initial certificate of the Secretary or an Assistant
Secretary that the Board of Directors/Trustees of the Fund has approved the
initial use of a particular Securities System and the receipt of an annual
certificate of the Secretary or an Assistant Secretary that the Board of
Directors/Trustees has reviewed the use by the Fund of such Securities System,
as required in each case by Rule 17f-4 under the Investment Company Act of 1940,
as amended and that the Custodian shall not act under Section 2.10A hereof in
the absence of receipt of an initial certificate of the Secretary or an
Assistant Secretary that the Board of Directors/Trustees has approved the
initial use of the Direct Paper System and the receipt of an annual certificate
of the Secretary or an Assistant Secretary that the Board of Directors/Trustees
has reviewed the
-37-
<PAGE>
use by the Fund of the Direct Paper System; provided further, however, that the
Fund shall not amend or terminate this Contract in contravention of any
applicable federal or state regulations, or any provision of the Articles of
Incorporation/Declaration of Trust, and further provided, that the Fund may at
any time by action of its Board of Directors/Trustees (i) substitute another
bank or trust company for the Custodian by giving notice as described above to
the Custodian, or (ii) immediately terminate this Contract in the event of the
appointment of a conservator or receiver for the Custodian by the Comptroller of
the Currency or upon the happening of a like event at the direction of an
appropriate regulatory agency or court of competent jurisdiction.
Upon termination of the Contract, the Fund shall pay to the Custodian such
compensation as may be due as of the date of such termination and shall likewise
reimburse the Custodian for its costs, expenses and disbursements.
14. Successor Custodian
If a successor custodian shall be appointed by the Board of Directors/
Trustees of the Fund, the Custodian shall, upon termination, deliver to such
successor custodian at the office of the Custodian; duly endorsed and in the
form for transfer, all securities then held by it hereunder and shall transfer
to an account of the successor custodian all of the Fund's securities held in a
Securities System.
If no such successor custodian shall be appointed, the Custodian shall, in
like manner, upon receipt of a certified copy of a vote of the Board of
Directors/Trustees of the Fund, deliver
-38-
<PAGE>
at the office of the Custodian and transfer such securities, funds and other
properties in accordance with such vote.
In the event that no written order designating a successor custodian or
certified copy of a vote of the Board of Directors/Trustees shall have been
delivered to the Custodian on or before the date when such termination shall
become effective, then the Custodian shall have the right to deliver to a bank
or trust company, which is a "bank" as defined in the Investment Company Act of
1940, doing business in Boston, Massachusetts, of its own selection, having an
aggregate capital, surplus, and undivided profits, as shown by its last
published report, of not less than $25,000,000, all securities, funds and other
properties held by the Custodian and all instruments held by the Custodian
relative thereto and all other property held by it under this Contract and to
transfer to an account of such successor custodian all of the Fund's securities
held in any Securities System. Thereafter, such bank or trust company shall be
the successor of the Custodian under this Contract.
In the event that securities, funds and other properties remain in the
possession of the Custodian after the date of termination hereof owing to
failure of the Fund to procure the certified copy of the vote referred to or of
the Board of Directors/Trustees to appoint a successor custodian, the Custodian
shall be entitled to fair compensation for its services during such period as
the Custodian retains possession of such securities, funds and other properties
and the provisions of this Contract relating to the duties and obligations of
the Custodian shall remain in full force and effect.
-39-
<PAGE>
15. Interpretive and Additional Provisions
In connection with the operation of this Contract, the Custodian and the
Fund may from time to time agree on such provisions interpretive of or in
addition to the provisions of this Contract as may in their joint opinion be
consistent with the general tenor of this Contract. Any such interpretive or
additional provisions shall be in a writing signed by both parties and shall be
annexed hereto, provided that no such interpretive or additional provisions
shall contravene any applicable federal or state regulations or any provision of
the Articles of Incorporation/Declaration of Trust of the Fund. No interpretive
or additional provisions made as provided in the preceding sentence shall be
deemed to be an amendment of this Contract.
16. Massachusetts Law to Apply
This Contract shall be construed and the provisions thereof interpreted
under and in accordance with laws of the Commonwealth of Massachusetts.
17. Prior Contracts
This Contract supersedes and terminates, as of the date hereof, all prior
contracts between the Fund and the Custodian relating to the custody of the
Fund's assets.
18. The Parties
All references herein to the "Fund" are to each of the Funds listed on
Appendix A individually, as if this Contract were between such individual Fund
and the Custodian. With respect to any Fund listed on Appendix A which is
organized as a
-40-
<PAGE>
Massachusetts Business Trust, references to Board of Directors and Articles of
Incorporation shall be deemed a reference to Board of Directors/Trustees and
Articles of Incorporation/Declaration of Trust respectively and reference to
shares of capital stock shall be deemed a reference to shares of beneficial
interest.
19. Limitation of Liability
Each Fund listed on Appendix A that is referenced as a Massachusetts
Business Trust is the designation of the Directors/Trustees under a Articles of
Incorporation/Declaration of Trust, dated (see Appendix A) and all persons
dealing with the Fund must look solely to the property of the Fund for the
enforcement of any claims against the Fund as neither the Directors/Trustees,
officers, agents or shareholders assume any personal liability for obligations
entered into on behalf of the Fund.
IN WITNESS WHEREOF, each of the parties has caused this instrument to be
executed in its name and behalf by its duly authorized representative and its
seal to be hereunder affixed as of the dates set forth on Appendix A.
ATTEST STATE STREET BANK AND TRUST COMPANY
/s/[SIGNATURE ILLEGIBLE] By /s/ Al O'Neal
- ------------------------------ ------------------------------
Assistant Secretary Vice President
ATTEST EACH OF THE FUNDS LISTED ON APPENDIX A
/s/ S. Jane Rose By /s/ Robert F. Gunia
- ------------------------------ ------------------------------
Secretary Vice President
-41-
<PAGE>
Appendix A
<TABLE>
<CAPTION>
Execution Date of
Fund Name Date Declaration of Trust
- --------- ---- --------------------
(if applicable)
<S> <C> <C>
Command Government Fund July 1, 1990 August 19, 1981
Command Money Fund July 1, 1990 June 5, 1981
Command Tax-Free Money Fund July 1, 1990 June 5, 1981
The Global Yield Fund, Inc. September 5, 1990
Prudential-Bache California Municipal Fund August 1, 1990 May 18, 1984
Prudential-Bache Equity Fund, Inc. August 1, 1990
Prudential-Bache Global Fund, Inc. June 7, 1990
Prudential-Bache GNMA Fund, Inc. August 1, 1990
Prudential-Bache Government Plus Fund, Inc. July 31, 1990
Prudential-Bache Government Securities Trust July 26, 1990 September 22, 1981
Prudential-Bache Growth Opportunity Fund, Inc. July 26, 1990
Prudential-Bache High Yield Fund, Inc. July 26, 1990
Prudential-Bache IncomeVertible Plus Fund, Inc. June 6, 1990
Prudential-Bache MoneyMart Assets, Inc. July 25, 1990
Prudential-Bache Multi-Sector Fund, Inc. June 1, 1990
Prudential-Bache Municipal Series Fund August 1, 1990 May 18, 1984
Prudential-Bache National Municipals Fund, Inc. July 26, 1990
Prudential-Bache Option Growth Fund, Inc. July 31, 1990
Prudential-Bache Research Fund, Inc. July 25, 1990
Prudential-Bache Special Money Market Fund, Inc. January 12, 1990
Prudential-Bache Structured Maturity Fund, Inc. July 25, 1989
Prudential-Bache Tax-Free Money Fund, Inc. July 26, 1989
Prudential-Bache U.S. Government Fund June 7, 1990 September 22, 1986
Prudential-Bache Utility Fund, Inc. June 6, 1990
</TABLE>
<PAGE>
Schedule A
The following foreign banking institutions and foreign securities
depositories have been approved by the Board of Directors/Trustees of Each of
the Parties Indicated on Appendix A for use as sub-custodians for the Fund's
securities and other assets:
(Insert banks and securities depositories)
Certified:
- -------------------------
Fund's Authorized Officer
Date: ______________________
<PAGE>
TRANSFER AGENCY AND SERVICE AGREEMENT
between
PRUDENTIAL-BACHE MUNICIPAL SERIES FUND
(a Massachusetts Business Trust)
and
PRUDENTIAL MUTUAL FUND SERVICES, INC.
<PAGE>
TABLE OF CONTENTS
Article 1 Terms of Appointment; Duties of the Agent........................ 1
Article 2 Fees and Expenses................................................ 4
Article 3 Representations and Warranties of the Agent...................... 5
Article 4 Representations of Warranties of the Fund........................ 5
Article 5 Duty of Care and Indemnification................................. 6
Article 6 Documents and Covenants of the Fund and the Agent................ 8
Article 7 Termination of Agreement......................................... 10
Article 8 Assignment....................................................... 10
Article 9 Affiliations..................................................... 11
Article 10 Amendment........................................................ 11
Article 11 Applicable Law................................................... 12
Article 12 Miscellaneous.................................................... 12
Article 13 Merger of Agreement.............................................. 13
<PAGE>
TRANSFER AGENCY AND SERVICE AGREEMENT
AGREEMENT made as of the 1st January day of January, 1988 by and between
PRUDENTIAL-BACHE MUNICIPAL SERIES FUND, a Massachusetts business trust, having
its principal office and place of business at One Seaport Plaza, New York, New
York 10292 (the "Fund"), and PRUDENTIAL MUTUAL FUND SERVICES, INC., a New Jersey
corporation, having its principal office and place of business at Raritan Plaza
I, Edison, New Jersey 08818 (the "Agent" or "PMFS").
WHEREAS, the Fund desires to appoint PMFS as its transfer agent, dividend
disbursing agent and shareholder servicing agent in connection with certain
other activities, and PMFS desires to accept such appointment;
NOW THEREFORE, in consideration of the mutual covenants herein contained,
the parties hereto agree as follows:
Article 1 Terms of Appointment; Duties of PMFS
1.01 Subject to the terms and conditions set forth in this
Agreement, the Fund hereby employs and appoints PMFS to act as, and PMFS agrees
to act as, the transfer agent for the authorized and issued shares of beneficial
interest of each series of the Fund, $.01 par value ("Shares"), dividend
disbursing agent and shareholder servicing agent in connection with any
accumulation, open-account or similar plans provided to the shareholders of the
Fund or any series thereof ("Shareholders") and set out in the currently
effective prospectus and statement of additional information ("prospectus") of
the Fund, including without limitation any periodic investment plan or periodic
withdrawal program.
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<PAGE>
1.02 PMFS agrees that it will perform the following services:
(a) In accordance with procedures established from time to time by
agreement between the Fund and PMFS, PMFS shall:
(i) Receive for acceptance, orders for the purchase of Shares, and
promptly deliver payment and appropriate documentation therefor to the Custodian
of the Fund authorized pursuant to the Declaration of Trust of the Fund (the
"Custodian");
(ii) Pursuant to purchase orders, issue the appropriate number of shares
and hold such Shares in the appropriate Shareholder account;
(iii) Receive for acceptance redemption requests and redemption directions
and deliver the appropriate documentation therefor to the Custodian;
(iv) At the appropriate time as and when it receives monies paid to it by
the Custodian with respect to any redemption, pay over or cause to be paid over
in the appropriate manner such monies as instructed by the redeeming
Shareholders;
(v) Effect transfers of Shares by the registered owners thereof upon
receipt of appropriate instructions;
(vi) Prepare and transmit payments for dividends and distributions
declared by the Fund;
(vii) Calculate any sales charges payable by a Shareholder on purchases
and/or redemptions of Shares of the Fund as such charges may be reflected in the
prospectus;
(viii) Maintain records of account for and advise the Fund and its
Shareholders as to the foregoing; and
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<PAGE>
(ix) Record the issuance of Shares of the Fund and maintain pursuant to
Rule 17Ad-10(e) under the Securities Exchange Act of 1934 ("1934 Act") a record
of the total number of Shares of the Fund which are authorized, based upon data
provided to it by the Fund, and issued and outstanding. PMFS shall also provide
to the Fund on a regular basis the total number of Shares which are authorized,
issued and outstanding. When recording the issuance of Shares, PMFS shall have
no obligation to take cognizance of any Blue Sky laws relating to the issue or
sale of such Shares, which functions shall be the sole responsibility of the
Fund.
(b) In addition to and not in lieu of the services set forth in the above
paragraph (a), PMFS shall: (i) perform all of the customary services of a
transfer agent, dividend disbursing agent and, as relevant, shareholder
servicing agent in connection with accumulation, open-account or similar plans
(including without limitation any periodic investment plan or periodic
withdrawal program), including but not limited to, maintaining all Shareholder
accounts, preparing Shareholder meeting lists, mailing proxies, receiving and
tabulating proxies, mailing Shareholder reports and prospectuses to current
Shareholders, withholding taxes on non-resident alien accounts, preparing and
filing appropriate forms required with respect to dividends and distributions by
federal tax authorities for all Shareholders, preparing and mailing confirmation
forms and statements of account to Shareholders for all purchases and
redemptions of Shares and other confirmable transactions in Shareholder
accounts, preparing and mailing activity statements for Shareholders and
providing Shareholder account information and (ii) provide a system which will
enable the Fund to monitor the total number of Shares sold in each State or
other jurisdiction.
(c) In addition, the Fund shall (i) identify to PMFS in writing
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<PAGE>
those transactions and assets to be treated as exempt from Blue Sky reporting
for each State and (ii) verify the establishment of transactions for each State
on the system prior to activation and thereafter monitor the daily activity for
each State. The responsibility of PMFS for the Fund's registration status under
the Blue Sky or securities laws of any State or other jurisdiction is solely
limited to the initial establishment of transactions subject to Blue Sky
compliance by the Fund and the reporting of such transactions to the Fund as
provided above and as agreed from time to time by the Fund and PMFS.
PMFS may also provide such additional services and functions not
specifically described herein as may be mutually agreed between PMFS and the
Fund and set forth in Schedule B hereto.
Procedures applicable to certain of these services may be established from
time to time by agreement between the Fund and PMFS.
Article 2 Fees and Expenses
2.01 For performance by PMFS pursuant to this Agreement, the Fund
agrees to pay PMFS an annual maintenance fee for each Shareholder account and
certain transactional fees as set out in the fee schedule attached hereto as
Schedule A. Such fees and out-of-pocket expenses and advances identified under
Section 2.02 below may be changed from time to time subject to mutual written
agreement between the Fund and PMFS.
2.02 In addition to the fees paid under Section 2.01 above, the Fund
agrees to reimburse PMFS for out-of-pocket expenses or advances incurred by PMFS
for the items set out in Schedule A attached hereto. In addition, any other
expenses incurred by PMFS at the request or with the consent of the Fund will be
reimbursed by the Fund.
2.03 The Fund agrees to pay all fees and reimbursable expenses
within a reasonable period of time following the mailing of the respective
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<PAGE>
billing notice. Postage for mailing of dividends, proxies, Fund reports and
other mailings to all Shareholder accounts shall be advanced to PMFS by the Fund
upon request prior to the mailing date of such materials.
Article 3 Representations and Warranties of PMFS
PMFS represents and warrants to the Fund that:
3.01 It is a corporation duly organized and existing and in good
standing under the laws of New Jersey and it is duly qualified to carry on its
business in New Jersey.
3.02 It is and will remain registered with the U.S. Securities and
Exchange Commission ("SEC") as a Transfer Agent pursuant to the requirements of
Section 17A of the 1934 Act.
3.03 It is empowered under applicable laws and by its charter and
By-Laws to enter into and perform this Agreement.
3.04 All requisite corporate proceedings have been taken to
authorized it to enter into and perform this Agreement.
3.05 It has and will continue to have access to the necessary
facilities, equipment and personnel to perform its duties and obligations under
this Agreement.
Article 4 Representations and Warranties of the Fund
The Fund represents and warrants to PMFS that:
4.01 It is a business trust duly organized and existing and in good
standing under the laws of the Commonwealth of Massachusetts.
4.02 It is empowered under applicable laws and by its Declaration of
Trust and By-Laws to enter into and perform this Agreement.
4.03 All corporate proceedings required by said Declaration of Trust
and By-Laws have been taken to authorize it to enter into and perform
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<PAGE>
this Agreement.
4.04 It is an investment company registered with the SEC under the
Investment Company Act of 1940, as amended (the "1940 Act").
4.05 A registration statement under the Securities Act of 1933 (the
"1933 Act") is currently effective and will remain effective, and appropriate
State securities law filings have been made and will continue to be made, with
respect to all Shares of the Fund being offered for sale.
Article 5 Duty of Care and Indemnification
5.01 PMFS shall not be responsible for, and the Fund shall indemnify
and hold PMFS harmless from and against, any and all losses, damages, costs,
charges, counsel fees, payments, expenses and liability arising out of or
attributable to:
(a) All actions of PMFS or its agents or subcontractors required to be
taken pursuant to this Agreement, provided that such actions are taken in good
faith and without negligence or willful misconduct.
(b) The Fund's refusal or failure to comply with the terms of this
Agreement, or which arise out of the Fund's lack of good faith, negligence or
willful misconduct or which arise out of the breach of any representation or
warranty of the Fund hereunder.
(c) The reliance on or use by PMFS or its agents or subcontractors of
information, records and documents which (i) are received by PMFS or its agents
or subcontractors and furnished to it by or on behalf of the Fund, and (ii) have
been prepared and/or maintained by the Fund or any other person or firm on
behalf of the Fund.
(d) The reliance on, or the carrying out by PMFS or its agents or
subcontractors of, any instructions or requests of the Fund.
(e) The offer or sale of Shares in violation of any requirement under
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<PAGE>
the federal securities laws or regulations or the securities or Blue Sky laws of
any State or other jurisdiction that such Shares be registered in such State or
other jurisdiction or in violation of any stop order or other determination or
ruling by any federal agency or any State or other jurisdiction with respect to
the offer or sale of such Shares in such State or other jurisdiction.
5.02 PMFS shall indemnify and hold the Fund harmless from and against any
and all losses, damages, costs, charges, counsel fees, payments, expenses and
liability arising out of or attributable to any action or failure or omission to
act by PMFS as a result of PMFS' lack of good faith, negligence or willful
misconduct.
5.03 At any time PMFS may apply to any officer of the Fund for
instructions, and may consult with legal counsel, with respect to any matter
arising in connection with the services to be performed by PMFS under this
Agreement, and PMFS and its agents or subcontractors shall not be liable and
shall be indemnified by the Fund for any action taken or omitted by it in
reliance upon such instructions or upon the opinion of such counsel. PMFS, its
agents and subcontractors shall be protected and indemnified in acting upon any
paper or document furnished by or on behalf of the Fund, reasonably believed to
be genuine and to have been signed by the proper person or persons, or upon any
instruction, information, data, records or documents provided to PMFS or its
agents or subcontractors by machine readable input, telex, CRT data entry or
other similar means authorized by the Fund, and shall not be held to have notice
of any change of authority of any person, until receipt of written notice
thereof from the Fund. PMFS, its agents and subcontractors shall also be
protected and indemnified in recognizing share certificates which are reasonably
believed to bear the proper manual or facsimile signature of the officers of the
Fund, and the proper countersignature of any former transfer
-7-
<PAGE>
agent or registrar, or of a co-transfer agent or co-registrar.
5.04 in the event either party is unable to perform its obligations under
the terms of this Agreement because of acts of God, strikes, equipment or
transmission failure or damage reasonably beyond its control, or other causes
reasonably beyond its control, such party shall not be liable for damages to the
other for any damages resulting from such failure to perform or otherwise from
such causes.
5.05 Neither party to this Agreement shall be liable to the other party
for consequential damages under any provision of this Agreement or for any act
or failure to act hereunder.
5.06 In order that the indemnification provisions contained in this
Article 5 shall apply, upon the assertion of a claim for which either party may
be required to indemnify the other, the party seeking indemnification shall
promptly notify the other party of such assertion, and shall keep the other
party advised with respect to all developments concerning such claim. The party
who may be required to indemnify shall have the option to participate with the
party seeking indemnification in the defense of such claim. The party seeking
indemnification shall in no case confess any claim or make any compromise in any
case in which the other party may be required to indemnify it except with the
other party's prior written consent.
Article 6 Documents and Covenants of the Fund and PMFS
6.01 The Fund shall promptly furnish to PMFS the following:
(a) A certified copy of the resolution of the Trustees of the Fund
authorizing the appointment of PMFS and the execution and delivery of this
Agreement;
(b) A certified copy of the Declaration of Trust and By-Laws of the Fund
and all amendments thereto;
-8-
<PAGE>
(c) The current registration statements and any amendments and supplements
thereto filed with the SEC pursuant to the requirements of the 1933 Act and the
1940 Act;
(d) A specimen of the certificate for Shares of the Fund in the form
approved by the Trustees with a certificate of the Secretary of the Fund as to
such approval;
(e) All account application forms or other documents relating to
Shareholder accounts and/or relating to any plan program or service offered or
to be offered by the Fund; and
(f) Such other certificates, documents or opinions as the Agent deems to
be appropriate or necessary for the proper performance of its duties.
6.02 PMFS hereby agrees to establish and maintain facilities and
procedures reasonably acceptable to the Fund for safekeeping of share
certificates, check forms and facsimile signature imprinting devices, if any;
and for the preparation or use, and for keeping account of, such certificates,
forms and devices.
6.03 PMFS shall prepare and keep records relating to the services to be
performed hereunder, in the form and manner as it may deem advisable. To the
extent required by Section 31 of the 1940 Act, and the Rules and Regulations
thereunder, PMFS agrees that all such records prepared or maintained by PMFS
relating to the services to be performed by PMFS hereunder are the property of
the Fund and will be preserved, maintained and made available in accordance with
such Section 31 of the 1940 Act, and the Rules and Regulations thereunder, and
will be surrendered promptly to the Fund on and in accordance with its request.
6.04 PMFS and the Fund agree that all books, records, information and data
pertaining to the business of the other party which are exchanged or
-9-
<PAGE>
received pursuant to the negotiation or the carrying out of this Agreement shall
remain confidential and shall not be voluntarily disclosed to any other person
except as may be required by law or with the prior consent of PMFS and the Fund.
6.05 In case of any requests or demands for the inspection of the
Shareholder records of the Fund, PMFS will endeavor to notify the Fund and to
secure instructions from an authorized officer of the Fund as to such
inspection. PMFS reserves the right, however, to exhibit the Shareholder records
to any person whenever it is advised by its counsel that it may be held liable
for the failure to exhibit the Shareholder records to such person.
Article 7 Termination of Agreement
7.01 This Agreement may be terminated by either party upon one hundred
twenty (120) days written notice to the other.
7.02 Should the Fund exercise its right to terminate, all out-of-pocket
expenses associated with the movement of records and other materials will be
borne by the Fund. Additionally, PMFS reserves the right to charge for any other
reasonable fees and expenses associated with such termination.
Article 8 Assignment
8.01 Except as provided in Section 8.03 below, neither this
Agreement nor any rights or obligations hereunder may be assigned by either
party without the written consent of the other party.
8.02 This Agreement shall inure to the benefit of and be binding
upon the parties and their respective permitted successors and assigns.
8.03 PMFS may, in its sole discretion and without further consent by
the Fund, subcontract, in whole or in part, for the performance of its
obligations and duties hereunder with any person or entity including but not
limited to: (i) Prudential-Bache Securities Inc. ("Prudential-Bache"), a
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<PAGE>
registered broker-dealer, (ii) The Prudential Insurance Company of America
("Prudential"), (iii) Pruco Securities Corporation, a registered broker-dealer,
(iv) any Prudential-Bache or Prudential subsidiary or affiliate duly registered
as a broker-dealer and/or a transfer agent pursuant to the 1934 Act or (vi) any
other Prudential-Bache or Prudential affiliate or subsidiary; provided, however,
that PMFS shall be as fully responsible to the Fund for the acts and omissions
of any agent or subcontractor as it is for its own acts and omissions.
Article 9 Affiliations
9.01 PMFS may now or hereafter, without the consent of or notice to
the Fund, function as Transfer Agent and/or Shareholder Servicing Agent for any
other investment company registered with the SEC under the 1940 Act, including
without limitation any investment company whose adviser, administrator, sponsor
or principal underwriter is or may become affiliated with Prudential-Bache
and/or Prudential or any of its or their direct or indirect subsidiaries or
affiliates.
9.02 It is understood and agreed that the directors, officers,
employees, agents and Shareholders of the Fund, and the directors, officers,
employees, agents and shareholders of the Fund's investment adviser and/or
distributor, are or may be interested in the Agent as directors, officers,
employees, agents and shareholders or otherwise, and that the directors,
officers, employees, agents and shareholders of the Agent may be interested in
the Fund as directors, officers, employees, agents and shareholders or
otherwise, or in the investment adviser and/or distributor as officers,
directors, employees, agents and shareholders or otherwise.
Article 10 Amendement
10.01 This Agreement may be amended or modified by a written
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<PAGE>
agreement executed by both parties and authorized or approved by a resolution of
the Board of Directors of the Fund.
Article 11 Applicable Law
11.01 This Agreement shall be construed and the provisions thereof
interpreted under and in accordance with the laws of the State of New Jersey.
Article 12 Miscellaneous
12.01 In the event of an alleged loss or destruction of any Share
certificate, no new certificate shall be issued in lieu thereof, unless there
shall first be furnished to PMFS an affidavit of loss or non-receipt by the
holder of Shares with respect to which a certificate has been lost or destroyed,
supported by an appropriate bond satisfactory to PMFS and the Fund issued by a
surety company satisfactory to PMFS, except that PMFS may accept an affidavit of
loss and indemnity agreement executed by the registered holder (or legal
representative) without surety in such form as PMFS deems appropriate
indemnifying PMFS and the Fund for the issuance of a replacement certificate, in
cases where the alleged loss is in the amount of $1000 or less. 12.02 In the
event that any check or other order for payment of money on the account of any
Shareholder or new investor is returned unpaid for any reason, PMFS will (a)
give prompt notification to the Fund's distributor ("Distributor") of such
non-payment; and (b) take such other action, including imposition of a
reasonable processing or handling fee, as PMFS may, in its sole discretion, deem
appropriate or as the Fund and the Distributor may instruct PMFS.
12.03 Any notice or other instrument authorized or required by this
Agreement to be given in writing to the Fund or to PMFS shall be sufficiently
given if addressed to that party and received by it at its office set forth
below or at such other place as it may from time to time designate in
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<PAGE>
writing.
To the Fund:
Prudential-Bache Municipal Series Fund
One Seaport Plaza
New York, NY 10292
Attention: President
To PMFS
Prudential Mutual Fund Services, Inc.
Raritan Plaza I
Edison, NJ 08818
Attention: President
12.04 All references to actions of or by Trustees herein shall
require action by such Trustees acting as a board or a formally constituted
group and not individually. The name "Prudential-Bache Municipal Series Fund" is
the designation of the Trustees under the Declaration of Trust, and all persons
dealing with the Fund must look solely to the Fund for the enforcement of any
claims against the Fund as none of the Trustees, officers, agents or
Shareholders assume any personal responsibility for obligations entered into on
behalf of the Fund.
Article 13 Merger of Agreement
13.01 This Agreement constitutes the entire agreement between the
parties hereto and supersedes any prior agreement with respect to the subject
matter hereof whether oral or written.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed in their names and on their behalf under their seals by and through
their duly authorized officers, as of the day and year first above written.
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<PAGE>
PRUDENTIAL-BACHE MUNICIPAL SERIES FUND
By /s/ Robert F. Gunia
------------------------------------
ATTEST:
/s/ S. Jane Rose
- ------------------------------------
PRUDENTIAL MUTUAL FUND
SERVICES, INC.
By /s/ Fred A. Fiandaca
------------------------------------
ATTEST:
/s/ Lynda M. Puglisi
- ------------------------------------
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<PAGE>
SCHEDULE A
PRUDENTIAL MUTUAL FUND SERVICES, INC.
Fee Schedule
Fee Information for Services as
Transfer Agent, Dividend Disbursing Agent
and Shareholder Servicing Agent
PRUDENTIAL-BACHE MUNICIPAL SERIES FUND
General - Fees are based on an annual per shareholder account charge for account
maintenance plus out-of-pocket expenses. The effective period of this fee
schedule is January 1, 1988 through December 31, 1988 and shall continue
thereafter from year to year, unless otherwise amended.
Annual Maintenance Charges - The annual maintenance charge includes the
processing of all transactions and correspondence. The fee is billable on a
monthly basis at the rate of 1/12 of the annual fee. A charge is made for an
account in the month that an account opens or closes.
Basic Annual Per Account Fee $ 8.00
New Account Set-up Fee for Manually
Established Accounts $ 2.00
Out-of-Pocket Expenses - Out-of-pocket expenses include but are not limited to:
postage, stationery and printing, allocable communication costs, microfilm,
microfiche, and expenses incurred at the specific direction of the Fund.
Payment - An invoice will be presented to the Fund on a monthly basis assessing
the Fund the appropriate fee and out-of-pocket expenses.
PRUDENTIAL-BACHE PRUDENTIAL MUTUAL FUND
MUNICIPAL SERIES FUND SERVICES, INC.
NAME: /s/ Susan Cote NAME: /s/ Fred A. Fiandaca
-------------------------- --------------------------
TITLE: Treasurer TITLE: President
DATE: January 1, 1988 DATE: January 1, 1988
<PAGE>
Schedule A
Prudential Mutual Fund Services, Inc.
Fee Schedule
Fee Information for Services as
Transfer Agent, Dividend Disbursing Agent
and Shareholder Servicing Agent
PRUDENTIAL-BACHE MUNICIPAL SERIES FUND
General - Fees are based on an annual per shareholder account charge for account
maintenance plus out-of-pocket expenses. The effective period of this fee
schedule is January 1, 1989 through December 31, 1989 and shall continue
thereafter from year to year, unless otherwise amended.
Annual Maintenance Charges - The annual maintenance charge includes the
processing of all transactions and correspondence. The fee is billable on a
monthly basis at the rate of 1/12 of the annual fee. A charge is made for an
account in the month that an account opens or closes.
Basic Annual Per Account Fee $ 10.00
New Account Set-up Fee for Manually $ 2.00
Established Accounts
Out-of-Pocket Expenses - Out-of-pocket expenses include but are not limited to:
postage, stationery and printing, allocable communication costs, microfilm,
microfiche, and expenses incurred at the specific direction of the Fund.
Payment - An invoice will be presented to the Fund on a monthly basis assessing
the Fund the appropriate fee and out-of-pocket expenses.
PRUDENTIAL-BACHE MUNICIPAL PRUDENTIAL MUTUAL FUND
SERIES FUND SERVICES, INC.
NAME: /s/ Susan Cote NAME: /s/ Fred A. Fiandaca
-------------------------- --------------------------
TITLE: Treasurer TITLE: President
DATE: January 1, 1989 DATE: January 1, 1989
<PAGE>
Schedule A
Prudential Mutual Fund Services, Inc.
Fee Schedule
Fee Information for Services as
Transfer Agent, Dividend Disbursing Agent
and Shareholder Servicing Agent
PRUDENTIAL-BACHE MUNICIPAL SERIES FUND
(NEW YORK MONEY MARKET SERIES)
General - Fees are based on an annual per shareholder account charge for account
maintenance plus out-of-pocket expenses. The effective period of this fee
schedule is January 1, 1990 through December 31, 1990 and shall continue
thereafter from year to year, unless otherwise amended.
Annual Maintenance Charges - The annual maintenance charge includes the
processing of all transactions and correspondence. The fee is billable on a
monthly basis at the rate of 1/12 of the annual fee. A charge is made for an
account in the month that an account opens or closes.
Basic Annual Per Account Fee $ 12.00
New Account Set-up Fee for Manually $ 2.00
Established Accounts
Inactive Account Fee - $.20 per month. A monthly fee is charged for inactive
accounts with a zero balance.
Out-of-Pocket Expenses - Out-of-pocket expenses include but are not limited to:
postage, stationery and printing, allocable communication costs, microfilm,
microfiche, and expenses incurred at the specific direction of the Fund.
Payment - An invoice will be presented to the Fund on a monthly basis assessing
the Fund the appropriate fee and out-of-pocket expenses.
PRUDENTIAL-BACHE MUNICIPAL PRUDENTIAL MUTUAL FUND
SERIES FUND (NEW YORK SERVICES, INC.
MONEY MARKET SERIES)
NAME: /s/ Susan Cote NAME: /s/ Fred A. Fiandaca
-------------------------- --------------------------
TITLE: Treasurer TITLE: President
DATE: January 1, 1990 DATE: January 1, 1990
<PAGE>
Schedule A
Prudential Mutual Fund Services, Inc.
Fee Schedule
Fee Information for Services as
Transfer Agent, Dividend Disbursing Agent
and Shareholder Servicing Agent
PRUDENTIAL-BACHE MUNICIPAL SERIES FUND
(NEW YORK MONEY MARKET SERIES)
General - Fees are based on an annual per shareholder account charge for account
maintenance plus out-of-pocket expenses. The effective period of this fee
schedule is January 1, 1989 through December 31, 1989 and shall continue
thereafter from year to year, unless otherwise amended.
Annual Maintenance Charges - The annual maintenance charge includes the
processing of all transactions and correspondence. The fee is billable on a
monthly basis at the rate of 1/12 of the annual fee. A charge is made for an
account in the month that an account opens or closes.
Basic Annual Per Account Fee $ 12.00
New Account Set-up Fee for Manually $ 2.00
Established Accounts
Out-of-Pocket Expenses - Out-of-pocket expenses include but are not limited to:
postage, stationery and printing, allocable communication costs, microfilm,
microfiche, and expenses incurred at the specific direction of the Fund.
Payment - An invoice will be presented to the Fund on a monthly basis assessing
the Fund the appropriate fee and out-of-pocket expenses.
PRUDENTIAL-BACHE MUNICIPAL PRUDENTIAL MUTUAL FUND
SERIES FUND (NY MONEY MKT. SER.) SERVICES, INC.
NAME: /s/ Susan Cote NAME: /s/ Fred A. Fiandaca
-------------------------- --------------------------
TITLE: Treasurer TITLE: President
DATE: January 1, 1989 DATE: January 1, 1989
<PAGE>
Schedule A
Prudential Mutual Fund Services, Inc.
Fee Schedule
Fee Information for Services as
Transfer Agent, Dividend Disbursing Agent
and Shareholder Servicing Agent
PRUDENTIAL-BACHE MUNICIPAL SERIES FUND
General - Fees are based on an annual per shareholder account charge for account
maintenance plus out-of-pocket expenses. The effective period of this fee
schedule is January 1, 1990 through December 31, 1990 and shall continue
thereafter from year to year, unless otherwise amended.
Annual Maintenance Charges - The annual maintenance charge includes the
processing of all transactions and correspondence. The fee is billable on a
monthly basis at the rate of 1/12 of the annual fee. A charge is made for an
account in the month that an account opens or closes.
Basic Annual Per Account Fee $ 10.00
New Account Set-up Fee for Manually $ 2.00
Established Accounts
Inactive Account Fee - $.20 per month. A monthly fee is charged for inactive
accounts with a zero balance.
Out-of-Pocket Expenses - Out-of-pocket expenses include but are not limited to:
postage, stationery and printing, allocable communication costs, microfilm,
microfiche, and expenses incurred at the specific direction of the Fund.
Payment - An invoice will be presented to the Fund on a monthly basis assessing
the Fund the appropriate fee and out-of-pocket expenses.
PRUDENTIAL-BACHE MUNICIPAL PRUDENTIAL MUTUAL FUND
SERIES FUND SERVICES, INC.
NAME: /s/ Susan Cote NAME: /s/ Fred A. Fiandaca
-------------------------- --------------------------
TITLE: Treasurer TITLE: President
DATE: January 1, 1990 DATE: January 1, 1990
<PAGE>
Schedule A
Prudential Mutual Fund Services, Inc.
Fee Schedule
Fee Information for Services as
Transfer Agent, Dividend Disbursing Agent
and Shareholder Servicing Agent
PRUDENTIAL MUNICIPAL SERIES FUND
(New Jersey Money Market Series)
(New York Money Market Series)
General - Fees are based on an annual per shareholder account charge for account
maintenance plus out-of-pocket expenses. In addition, there is a one time set-up
charge per account for manually established accounts and a monthly charge for
inactive zero balance accounts. The effective period of this fee schedule is
January 1, 1990 through December 31, 1990 and shall continue thereafter from
year to year, unless otherwise amended.
Annual Maintenance Charges - The annual maintenance charge includes the
processing of all transactions and correspondence. The fee is billable on a
monthly basis at the rate of 1/12 of the annual fee. A charge is made for an
account in the month that an account opens or closes.
Annual Maintenance Per Account Fee $12.00
Other Charges
New Account Set-up Fee for Manually $ 2.00
Established Accounts
Monthly Inactive Zero Balance Account Fee $ .20
Out-of-Pocket Expenses - Out-of-pocket expenses include but are not limited to:
postage, stationery and printing, allocable communication costs, microfilm,
microfiche, and expenses incurred at the specific direction of the Fund.
Payment - An invoice will be presented to the Fund on a monthly basis assessing
the Fund the appropriate fee and out-of-pocket expenses.
PRUDENTIAL MUNICIPAL PRUDENTIAL MUTUAL FUND
SERIES FUND SERVICES, INC.
NAME: /s/ Susan Cote NAME: /s/ Fred A. Fiandaca
-------------------------- --------------------------
TITLE: Treasurer TITLE: President
Dated as of January 1, 1990, and amended thereafter.
<PAGE>
Schedule A
Prudential Mutual Fund Services, Inc.
Fee Schedule
Fee Information for Services as
Transfer Agent, Dividend Disbursing Agent
and Shareholder Servicing Agent
PRUDENTIAL MUNICIPAL SERIES FUND
(All Money Market Series)
General - Fees are based on an annual per shareholder account charge for account
maintenance plus out-of-pocket expenses. In addition, there is a one time set-up
charge per account for manually established accounts and a monthly charge for
inactive zero balance accounts. The effective period of this fee schedule is
January 1, 1990 through December 31, 1990 and shall continue thereafter from
year to year, unless otherwise amended.
Annual Maintenance Charges - The annual maintenance charge includes the
processing of all transactions and correspondence. The fee is billable on a
monthly basis at the rate of 1/12 of the annual fee. A charge is made for an
account in the month that an account opens or closes.
Annual Maintenance Per Account Fee $12.00
Other Charges
New Account Set-up Fee for Manually $ 2.00
Established Accounts
Monthly Inactive Zero Balance Account Fee $ .20
Out-of-Pocket Expenses - Out-of-pocket expenses include but are not limited to:
postage, stationery and printing, allocable communication costs, microfilm,
microfiche, and expenses incurred at the specific direction of the Fund.
Payment - An invoice will be presented to the Fund on a monthly basis assessing
the Fund the appropriate fee and out-of-pocket expenses.
PRUDENTIAL MUNICIPAL PRUDENTIAL MUTUAL FUND
SERIES FUND SERVICES, INC.
NAME: /s/ Susan Cote NAME: /s/ Vincent M. Marra
-------------------------- --------------------------
TITLE: Treasurer TITLE: President
Dated as of January 1, 1990, and amended thereafter.
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Statement of Additional Information
constituting part of this Post-Effective Amendment No. 35 to the registration
statement on Form N-1A (the "Registration Statement") of our reports dated
October 20, 1997, relating to the financial statements and financial highlights
of the Connecticut Money Market, Florida, Maryland, Massachusetts, Massachusetts
Money Market, Michigan, New Jersey, New Jersey Money Market, New York, New York
Money Market, North Carolina, Ohio and Pennsylvania Series of the Prudential
Municipal Series Fund, which appear in such Statement of Additional Information,
and to the incorporation by reference of our reports into the Prospectuses which
constitute part of this Registration Statement. We also consent to the
reference to us under the heading "Custodian, Transfer and Dividend Disbursing
Agent and Independent Accountants" in such Statement of Additional Information
and to the references to us under the heading "Financial Highlights" in such
Prospectuses.
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York 10036
October 27, 1997
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
We consent to the use in Post-Effective Amendment No. 35 to Registration
Statement No. 2-91216 of Prudential Municipal Series Fund of our reports dated
October 14, 1996, appearing in the Statement of Additional Information, which is
included in such Registration Statement, and to the references to us under the
heading "Financial Highlights" in the Prospectus which is also included in such
Registration Statement.
Deloitte & Touche LLP
New York, New York
October 29, 1997
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
NEW YORK SERIES
YIELD CALCULATION
YIELD = 2*[([(a-b)/(c*d)]+1)^6-1]
Where a = dividends & interest earned during the period.
b = expenses accrued for the period.
c = average daily number of shares outstanding during the period
that were entitled to receive dividends.
d = maximum offering price per share on the last day of the
period.
- --------------------------------------------------------------------------------
YIELD FOR THE 30 DAY PERIOD
ENDED AUGUST 31, 1997
-----------------------------------------------
Class A Class B Class C Class Z
------- ------- ------- -------
a= $727,359 $471,339 $3,169 $83
b= $98,346 $101,036 $835 $10
c= 14,580,295 9,445,633 63,513 1,665
d= $12.31 $11.94 $11.94 $11.95
YIELD = 4.24% 3.97% 3.72% 4.47%
TAX EQUIVALENT YIELD t/(1-36%)(1-6.85%)
t = THE PORTION OF THE YIELD WHICH IS
DERIVED FROM TAX EXEMPT INCOME
TAX EQUIVALENT YIELD =
7.12% 6.66% 6.24% 7.50%
- --------------------------------------------------------------------------------
SUBSIDY-ADJUSTED YIELD FOR THE 30 DAY PERIOD
ENDED AUGUST 31, 1997
----------------------------------------------------
Class A Class B Class C Class Z
------- ------- ------- -------
a= $727,359 $471,339 $3,169 $83
b= $105,538 $105,696 $866 $10
c= 14,580,295 9,445,633 63,513 1,665
d= $12.31 $11.94 $11.94 $11.95
YIELD = 4.19% 3.92% 3.67% 4.42%
SUBSIDY-ADJUSTED TAX EQUIVALENT YIELD = t/(1-36%)(1-6.85%)
t = THE SUBSIDY-ADJUSTED PORTION OF THE YIELD WHICH IS DERIVED FROM TAX
EXEMPT INCOME
SUBSIDY-ADJUSTED TAX EQUIVALENT YIELD =
7.03% 6.58% 6.16% 7.42%
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
NEW YORK SERIES
EXHIBIT
AVERAGE ANNUAL TOTAL RETURN
CALCULATION
n
P(1+T ) =ERV
Where:
P = hypothetical initial payment of $1,000.
T = average annual total return.
n = number of years
ERV = ending redeemable value.
- -------------- ----------- ---------------- --------------- ----------
ONE YEAR ENDED AUGUST 31, 1997
----------------------------------------
Class A Class B Class C
---------- ---------- ----------
P = $1,000 $1,000 $1,000
ERV = $1,059 $1,038 $1,075
n = 1.0 1.0 1.0
T = 5.91% 3.76% 7.49%
FIVE YEARS ENDED TEN YEARS ENDED
AUGUST 31, 1997 AUGUST 31, 1997
-----------------------------------------
Class A Class B Class B
---------- ---------- ----------
P = $1,000 $1,000 $1,000
ERV = $1,329 $1,334 $1,993
n = 5.0 5.0 10.0
T = 5.86% 5.93% 7.14%
SINCE INCEPTION PERIOD ENDED AUGUST 31, 1997
--------------------------------------------
Class A Class B Class C
------------ ------------ -------------
P = $1,000 $1,000 $1,000
ERV = $1,706 $2,780 $1,206
n = 7.6 13.0 3.1
T = 7.27% 8.21% 6.28%
SUBSIDY/WAIVER ADJUSTED
---------------------------------------
ONE YEAR ENDED AUGUST 31, 1997
---------------------------------------
Class A Class B Class C
---------- ---------- ----------
P = $1,000 $1,000 $1,000
ERV = $1,058 $1,037 $1,074
n = 1.0 1.0 1.0
T = 5.82% 3.66% 7.39%
FIVE YEARS ENDED TEN YEARS ENDED
AUGUST 31, 1997 AUGUST 31, 1997
----------------------------------------
Class A Class B Class B
---------- ---------- ----------
P = $1,000 $1,000 $1,000
ERV = $1,328 $1,331 $1,989
n = 5.0 5.0 10.0
T = 5.83% 5.89% 7.12%
SINCE INCEPTION PERIOD ENDED AUGUST 31, 1997
--------------------------------------------
Class A Class B Class C
----------- ----------- --------------
P = $1,000 $1,000 $1,000
ERV = $1,703 $2,774 $1,204
n = 7.6 13.0 3.1
T = 7.25% 8.19% 6.22%
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
NEW YORK MONEY MARKET SERIES
ANNUALIZED YIELD CALCULATION
----------------------------
DATE SHARES DIVIDEND RATE DIVIDEND
---- ------ ------------- --------
25-Aug-97 1.000000000 X 0.000076180 = 0.0000762
26-Aug-97 1.000076180 X 0.000076394 = 0.0000764
27-Aug-97 1.000152580 X 0.000076973 = 0.0000770
28-Aug-97 1.000229565 X 0.000077570 = 0.0000776
31-Aug-97 1.000307152 X 0.000229083 = 0.0002292
- --------------------------------------------------------------------------------
1.000536306
-----------
-----------
CURRENT YIELD
-------------
0.000536306 X 365 / 7 = 2.80%
-------------
-------------
ANNUALIZED YIELD FORMULA
------------------------
=(1+0.000536306/7)^365-1 = = 2.84%
-------------
-------------
TAX-EQUIVALENT YIELD FORMULA
----------------------------
=2.80%/(1-.396)*(1-.0685) = = 4.98%
-------------
-------------
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0000746382
<NAME> PRUDENTIAL MUNICIPAL SERIES FUND:
<SERIES>
<NUMBER> 001
<NAME> CONNECTICUT MONEY MARKET SERIES
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> AUG-31-1997
<PERIOD-END> AUG-31-1997
<INVESTMENTS-AT-COST> 0
<INVESTMENTS-AT-VALUE> 74,370,149
<RECEIVABLES> 2,471,348
<ASSETS-OTHER> 70,298
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 0
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 984,989
<TOTAL-LIABILITIES> 0
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 75,926,806
<SHARES-COMMON-STOCK> 75,926,806
<SHARES-COMMON-PRIOR> 77,682,593
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> (153,609,399)
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 2,725,584
<OTHER-INCOME> 0
<EXPENSES-NET> 352,108
<NET-INVESTMENT-INCOME> 2,373,476
<REALIZED-GAINS-CURRENT> 52
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 2,373,528
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 251,461,796
<NUMBER-OF-SHARES-REDEEMED> (255,521,446)
<SHARES-REINVESTED> 2,303,863
<NET-CHANGE-IN-ASSETS> 617,741
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 387,500
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 57,679
<AVERAGE-NET-ASSETS> 77,500,000
<PER-SHARE-NAV-BEGIN> 1.00
<PER-SHARE-NII> 0.03
<PER-SHARE-GAIN-APPREC> 0.00
<PER-SHARE-DIVIDEND> 0.00
<PER-SHARE-DISTRIBUTIONS> (0.03)
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 1.00
<EXPENSE-RATIO> 0.46
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0000746382
<NAME> PRUDENTIAL MUNICIPAL SERIES FUND:
<SERIES>
<NUMBER> 002
<NAME> FLORIDA SERIES (CLASS A)
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> AUG-31-1997
<PERIOD-END> AUG-31-1997
<INVESTMENTS-AT-COST> 111,234,963
<INVESTMENTS-AT-VALUE> 117,020,462
<RECEIVABLES> 2,109,488
<ASSETS-OTHER> 84,248
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 0
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 385,514
<TOTAL-LIABILITIES> 0
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 114,583,920
<SHARES-COMMON-STOCK> 11,413,086
<SHARES-COMMON-PRIOR> 12,309,156
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (1,540,735)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 5,785,499
<NET-ASSETS> (23,722,242)
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 7,244,553
<OTHER-INCOME> 0
<EXPENSES-NET> 824,053
<NET-INVESTMENT-INCOME> 6,420,500
<REALIZED-GAINS-CURRENT> (79,447)
<APPREC-INCREASE-CURRENT> 3,713,700
<NET-CHANGE-FROM-OPS> 10,054,753
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (6,420,500)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> (72,412)
<NUMBER-OF-SHARES-SOLD> 13,962,419
<NUMBER-OF-SHARES-REDEEMED> (25,937,462)
<SHARES-REINVESTED> 2,752,296
<NET-CHANGE-IN-ASSETS> (5,660,906)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (1,396,932)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 614,337
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 578,318
<AVERAGE-NET-ASSETS> 97,700,000
<PER-SHARE-NAV-BEGIN> 10.11
<PER-SHARE-NII> 0.54
<PER-SHARE-GAIN-APPREC> 0.31
<PER-SHARE-DIVIDEND> (0.54)
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> (0.01)
<PER-SHARE-NAV-END> 10.41
<EXPENSE-RATIO> 0.57
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0000746382
<NAME> PRUDENTIAL MUNICIPAL SERIES FUND:
<SERIES>
<NUMBER> 003
<NAME> FLORIDA SERIES (CLASS B)
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> AUG-31-1997
<PERIOD-END> AUG-31-1997
<INVESTMENTS-AT-COST> 111,234,963
<INVESTMENTS-AT-VALUE> 117,020,462
<RECEIVABLES> 2,109,488
<ASSETS-OTHER> 84,248
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 0
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 385,514
<TOTAL-LIABILITIES> 0
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 114,583,920
<SHARES-COMMON-STOCK> 11,413,086
<SHARES-COMMON-PRIOR> 12,309,156
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (1,540,735)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 5,785,499
<NET-ASSETS> (23,722,242)
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 7,244,553
<OTHER-INCOME> 0
<EXPENSES-NET> 824,053
<NET-INVESTMENT-INCOME> 6,420,500
<REALIZED-GAINS-CURRENT> (79,447)
<APPREC-INCREASE-CURRENT> 3,713,700
<NET-CHANGE-FROM-OPS> 10,054,753
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (6,420,500)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> (72,412)
<NUMBER-OF-SHARES-SOLD> 13,962,419
<NUMBER-OF-SHARES-REDEEMED> (25,937,462)
<SHARES-REINVESTED> 2,752,296
<NET-CHANGE-IN-ASSETS> (5,660,906)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (1,396,932)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 614,337
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 578,318
<AVERAGE-NET-ASSETS> 17,565,000
<PER-SHARE-NAV-BEGIN> 10.11
<PER-SHARE-NII> 0.50
<PER-SHARE-GAIN-APPREC> 0.31
<PER-SHARE-DIVIDEND> (0.50)
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> (0.01)
<PER-SHARE-NAV-END> 10.41
<EXPENSE-RATIO> 0.97
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0000746382
<NAME> PRUDENTIAL MUNICIPAL SERIES FUND:
<SERIES>
<NUMBER> 004
<NAME> FLORIDA SERIES (CLASS C)
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> AUG-31-1997
<PERIOD-END> AUG-31-1997
<INVESTMENTS-AT-COST> 111,234,963
<INVESTMENTS-AT-VALUE> 117,020,462
<RECEIVABLES> 2,109,488
<ASSETS-OTHER> 84,248
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 0
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 385,514
<TOTAL-LIABILITIES> 0
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 114,583,920
<SHARES-COMMON-STOCK> 11,413,086
<SHARES-COMMON-PRIOR> 12,309,156
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (1,540,735)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 5,785,499
<NET-ASSETS> (23,722,242)
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 7,244,553
<OTHER-INCOME> 0
<EXPENSES-NET> 824,053
<NET-INVESTMENT-INCOME> 6,420,500
<REALIZED-GAINS-CURRENT> (79,447)
<APPREC-INCREASE-CURRENT> 3,713,700
<NET-CHANGE-FROM-OPS> 10,054,753
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (6,420,500)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> (72,412)
<NUMBER-OF-SHARES-SOLD> 13,962,419
<NUMBER-OF-SHARES-REDEEMED> (25,937,462)
<SHARES-REINVESTED> 2,752,296
<NET-CHANGE-IN-ASSETS> (5,660,906)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (1,396,932)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 614,337
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 578,318
<AVERAGE-NET-ASSETS> 7,575,000
<PER-SHARE-NAV-BEGIN> 10.11
<PER-SHARE-NII> 0.48
<PER-SHARE-GAIN-APPREC> 0.31
<PER-SHARE-DIVIDEND> (0.48)
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> (0.01)
<PER-SHARE-NAV-END> 10.41
<EXPENSE-RATIO> 1.22
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0000746382
<NAME> PRUDENTIAL MUNICIPAL SERIES FUND:
<SERIES>
<NUMBER> 005
<NAME> FLORIDA SERIES (CLASS Z)
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> AUG-31-1997
<PERIOD-END> AUG-31-1997
<INVESTMENTS-AT-COST> 111234963
<INVESTMENTS-AT-VALUE> 117020462
<RECEIVABLES> 2109488
<ASSETS-OTHER> 84248
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 0
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 385514
<TOTAL-LIABILITIES> 0
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 114583920
<SHARES-COMMON-STOCK> 11413086
<SHARES-COMMON-PRIOR> 12309156
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (1540735)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 5785499
<NET-ASSETS> (23722242)
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 7244553
<OTHER-INCOME> 0
<EXPENSES-NET> 824053
<NET-INVESTMENT-INCOME> 6420500
<REALIZED-GAINS-CURRENT> (79447)
<APPREC-INCREASE-CURRENT> 3713700
<NET-CHANGE-FROM-OPS> 10054753
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (6420500)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> (72412)
<NUMBER-OF-SHARES-SOLD> 13962419
<NUMBER-OF-SHARES-REDEEMED> (25937462)
<SHARES-REINVESTED> 2752296
<NET-CHANGE-IN-ASSETS> (5660906)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (1396932)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 614337
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 578318
<AVERAGE-NET-ASSETS> 36,000
<PER-SHARE-NAV-BEGIN> 10.36
<PER-SHARE-NII> 0.41
<PER-SHARE-GAIN-APPREC> 0.06
<PER-SHARE-DIVIDEND> (0.41)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> (0.01)
<PER-SHARE-NAV-END> 10.41
<EXPENSE-RATIO> 0.47
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0000746382
<NAME> PRUDENTIAL MUNICIPAL SERIES FUND:
<SERIES>
<NUMBER> 006
<NAME> MARYLAND SERIES (CLASS A)
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> AUG-31-1997
<PERIOD-END> AUG-31-1997
<INVESTMENTS-AT-COST> 30,752,311
<INVESTMENTS-AT-VALUE> 32,395,367
<RECEIVABLES> 804,111
<ASSETS-OTHER> 30,127
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 0
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 191,610
<TOTAL-LIABILITIES> 0
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 31,351,975
<SHARES-COMMON-STOCK> 3,005,513
<SHARES-COMMON-PRIOR> 3,432,938
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 42,964
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 1,643,056
<NET-ASSETS> (6,438,451)
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 1,980,854
<OTHER-INCOME> 0
<EXPENSES-NET> 458,432
<NET-INVESTMENT-INCOME> 1,522,422
<REALIZED-GAINS-CURRENT> 78,313
<APPREC-INCREASE-CURRENT> 1,152,180
<NET-CHANGE-FROM-OPS> 2,752,915
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (1,522,422)
<DISTRIBUTIONS-OF-GAINS> (427,600)
<DISTRIBUTIONS-OTHER> (19,888)
<NUMBER-OF-SHARES-SOLD> 767,369
<NUMBER-OF-SHARES-REDEEMED> (6,736,831)
<SHARES-REINVESTED> 1,326,652
<NET-CHANGE-IN-ASSETS> (3,859,805)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 433,556
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 175,657
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 433,146
<AVERAGE-NET-ASSETS> 18,970,000
<PER-SHARE-NAV-BEGIN> 10.74
<PER-SHARE-NII> 0.49
<PER-SHARE-GAIN-APPREC> 0.39
<PER-SHARE-DIVIDEND> (0.49)
<PER-SHARE-DISTRIBUTIONS> (0.13)
<RETURNS-OF-CAPITAL> (0.01)
<PER-SHARE-NAV-END> 10.99
<EXPENSE-RATIO> 1.12
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0000746382
<NAME> PRUDENTIAL MUNICIPAL SERIES FUND:
<SERIES>
<NUMBER> 007
<NAME> MARYLAND SERIES (CLASS B)
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> AUG-31-1997
<PERIOD-END> AUG-31-1997
<INVESTMENTS-AT-COST> 30,752,311
<INVESTMENTS-AT-VALUE> 32,395,367
<RECEIVABLES> 804,111
<ASSETS-OTHER> 30,127
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 0
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 191,610
<TOTAL-LIABILITIES> 0
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 31,351,975
<SHARES-COMMON-STOCK> 3,005,513
<SHARES-COMMON-PRIOR> 3,432,938
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 42,964
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 1,643,056
<NET-ASSETS> (6,438,451)
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 1,980,854
<OTHER-INCOME> 0
<EXPENSES-NET> 458,432
<NET-INVESTMENT-INCOME> 1,522,422
<REALIZED-GAINS-CURRENT> 78,313
<APPREC-INCREASE-CURRENT> 1,152,180
<NET-CHANGE-FROM-OPS> 2,752,915
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (1,522,422)
<DISTRIBUTIONS-OF-GAINS> (427,600)
<DISTRIBUTIONS-OTHER> (19,888)
<NUMBER-OF-SHARES-SOLD> 767,369
<NUMBER-OF-SHARES-REDEEMED> (6,736,831)
<SHARES-REINVESTED> 1,326,652
<NET-CHANGE-IN-ASSETS> (3,859,805)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 433,556
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 175,657
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 433,146
<AVERAGE-NET-ASSETS> 16,113,000
<PER-SHARE-NAV-BEGIN> 10.75
<PER-SHARE-NII> 0.45
<PER-SHARE-GAIN-APPREC> 0.39
<PER-SHARE-DIVIDEND> (0.45)
<PER-SHARE-DISTRIBUTIONS> (0.13)
<RETURNS-OF-CAPITAL> (0.01)
<PER-SHARE-NAV-END> 11.00
<EXPENSE-RATIO> 1.52
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0000746382
<NAME> PRUDENTIAL MUNICIPAL SERIES FUND:
<SERIES>
<NUMBER> 008
<NAME> MARYLAND SERIES (CLASS C)
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> AUG-31-1997
<PERIOD-END> AUG-31-1997
<INVESTMENTS-AT-COST> 30,752,311
<INVESTMENTS-AT-VALUE> 32,395,367
<RECEIVABLES> 804,111
<ASSETS-OTHER> 30,127
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 0
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 191,610
<TOTAL-LIABILITIES> 0
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 31,351,975
<SHARES-COMMON-STOCK> 3,005,513
<SHARES-COMMON-PRIOR> 3,432,938
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 42,964
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 1,643,056
<NET-ASSETS> (6,438,451)
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 1,980,854
<OTHER-INCOME> 0
<EXPENSES-NET> 458,432
<NET-INVESTMENT-INCOME> 1,522,422
<REALIZED-GAINS-CURRENT> 78,313
<APPREC-INCREASE-CURRENT> 1,152,180
<NET-CHANGE-FROM-OPS> 2,752,915
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (1,522,422)
<DISTRIBUTIONS-OF-GAINS> (427,600)
<DISTRIBUTIONS-OTHER> (19,888)
<NUMBER-OF-SHARES-SOLD> 767,369
<NUMBER-OF-SHARES-REDEEMED> (6,736,831)
<SHARES-REINVESTED> 1,326,652
<NET-CHANGE-IN-ASSETS> (3,859,805)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 433,556
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 175,657
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 433,146
<AVERAGE-NET-ASSETS> 49,000
<PER-SHARE-NAV-BEGIN> 10.75
<PER-SHARE-NII> 0.42
<PER-SHARE-GAIN-APPREC> 0.39
<PER-SHARE-DIVIDEND> (0.42)
<PER-SHARE-DISTRIBUTIONS> (0.13)
<RETURNS-OF-CAPITAL> (0.01)
<PER-SHARE-NAV-END> 11.00
<EXPENSE-RATIO> 1.77
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0000746382
<NAME> PRUDENTIAL MUNICIPAL SERIES FUND:
<SERIES>
<NUMBER> 009
<NAME> MASSACHUSETTS SERIES (CLASS A)
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> AUG-31-1997
<PERIOD-END> AUG-31-1997
<INVESTMENTS-AT-COST> 43,327,104
<INVESTMENTS-AT-VALUE> 46,830,437
<RECEIVABLES> 1,065,159
<ASSETS-OTHER> 39,224
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 0
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 719,509
<TOTAL-LIABILITIES> 0
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 43,308,589
<SHARES-COMMON-STOCK> 4,058,576
<SHARES-COMMON-PRIOR> 4,409,817
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 403,389
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 3,503,333
<NET-ASSETS> (8,468,393)
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 2,965,145
<OTHER-INCOME> 0
<EXPENSES-NET> 575,284
<NET-INVESTMENT-INCOME> 2,389,861
<REALIZED-GAINS-CURRENT> 616,296
<APPREC-INCREASE-CURRENT> 767,106
<NET-CHANGE-FROM-OPS> 3,773,263
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (2,389,861)
<DISTRIBUTIONS-OF-GAINS> (757,303)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,727,524
<NUMBER-OF-SHARES-REDEEMED> (7,848,716)
<SHARES-REINVESTED> 1,848,518
<NET-CHANGE-IN-ASSETS> (3,646,575)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 571,517
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 247,224
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 549,418
<AVERAGE-NET-ASSETS> 29,096,000
<PER-SHARE-NAV-BEGIN> 11.54
<PER-SHARE-NII> 0.58
<PER-SHARE-GAIN-APPREC> 0.33
<PER-SHARE-DIVIDEND> (0.58)
<PER-SHARE-DISTRIBUTIONS> (0.18)
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 11.69
<EXPENSE-RATIO> 1.00
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0000746382
<NAME> PRUDENTIAL MUNICIPAL SERIES FUND:
<SERIES>
<NUMBER> 010
<NAME> MASSACHUSETTS SERIES (CLASS B)
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> AUG-31-1997
<PERIOD-END> AUG-31-1997
<INVESTMENTS-AT-COST> 43,327,104
<INVESTMENTS-AT-VALUE> 46,830,437
<RECEIVABLES> 1,065,159
<ASSETS-OTHER> 39,224
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 0
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 719,509
<TOTAL-LIABILITIES> 0
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 43,308,589
<SHARES-COMMON-STOCK> 4,058,576
<SHARES-COMMON-PRIOR> 4,409,817
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 403,389
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 3,503,333
<NET-ASSETS> (8,468,393)
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 2,965,145
<OTHER-INCOME> 0
<EXPENSES-NET> 575,284
<NET-INVESTMENT-INCOME> 2,389,861
<REALIZED-GAINS-CURRENT> 616,296
<APPREC-INCREASE-CURRENT> 767,106
<NET-CHANGE-FROM-OPS> 3,773,263
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (2,389,861)
<DISTRIBUTIONS-OF-GAINS> (757,303)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,727,524
<NUMBER-OF-SHARES-REDEEMED> (7,848,716)
<SHARES-REINVESTED> 1,848,518
<NET-CHANGE-IN-ASSETS> (3,646,575)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 571,517
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 247,224
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 549,418
<AVERAGE-NET-ASSETS> 20,301,000
<PER-SHARE-NAV-BEGIN> 11.53
<PER-SHARE-NII> 0.53
<PER-SHARE-GAIN-APPREC> 0.33
<PER-SHARE-DIVIDEND> (0.53)
<PER-SHARE-DISTRIBUTIONS> (0.18)
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 11.68
<EXPENSE-RATIO> 1.40
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0000746382
<NAME> PRUDENTIAL MUNICIPAL SERIES FUND:
<SERIES>
<NUMBER> 011
<NAME> MASSACHUSETTS SERIES (CLASS C)
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> AUG-31-1997
<PERIOD-END> AUG-31-1997
<INVESTMENTS-AT-COST> 43,327,104
<INVESTMENTS-AT-VALUE> 46,830,437
<RECEIVABLES> 1,065,159
<ASSETS-OTHER> 39,224
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 0
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 719,509
<TOTAL-LIABILITIES> 0
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 43,308,589
<SHARES-COMMON-STOCK> 4,058,576
<SHARES-COMMON-PRIOR> 4,409,817
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 403,389
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 3,503,333
<NET-ASSETS> (8,468,393)
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 2,965,145
<OTHER-INCOME> 0
<EXPENSES-NET> 575,284
<NET-INVESTMENT-INCOME> 2,389,861
<REALIZED-GAINS-CURRENT> 616,296
<APPREC-INCREASE-CURRENT> 767,106
<NET-CHANGE-FROM-OPS> 3,773,263
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (2,389,861)
<DISTRIBUTIONS-OF-GAINS> (757,303)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,727,524
<NUMBER-OF-SHARES-REDEEMED> (7,848,716)
<SHARES-REINVESTED> 1,848,518
<NET-CHANGE-IN-ASSETS> (3,646,575)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 571,517
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 247,224
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 549,418
<AVERAGE-NET-ASSETS> 48,000
<PER-SHARE-NAV-BEGIN> 11.53
<PER-SHARE-NII> 0.50
<PER-SHARE-GAIN-APPREC> 0.33
<PER-SHARE-DIVIDEND> (0.50)
<PER-SHARE-DISTRIBUTIONS> (0.18)
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 11.68
<EXPENSE-RATIO> 1.65
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0000746382
<NAME> PRUDENTIAL MUNICIPAL SERIES FUND:
<SERIES>
<NUMBER> 012
<NAME> MASSACHUSETTS SERIES (CLASS Z)
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> AUG-31-1997
<PERIOD-END> AUG-31-1997
<INVESTMENTS-AT-COST> 43327104
<INVESTMENTS-AT-VALUE> 46830437
<RECEIVABLES> 1065159
<ASSETS-OTHER> 39224
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 0
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 719509
<TOTAL-LIABILITIES> 0
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 43308589
<SHARES-COMMON-STOCK> 4058576
<SHARES-COMMON-PRIOR> 4409817
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 403389
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 3503333
<NET-ASSETS> (8468393)
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 2965145
<OTHER-INCOME> 0
<EXPENSES-NET> 575284
<NET-INVESTMENT-INCOME> 2389861
<REALIZED-GAINS-CURRENT> 616296
<APPREC-INCREASE-CURRENT> 767106
<NET-CHANGE-FROM-OPS> 3773263
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (2389861)
<DISTRIBUTIONS-OF-GAINS> (757303)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1727524
<NUMBER-OF-SHARES-REDEEMED> (7848716)
<SHARES-REINVESTED> 1848518
<NET-CHANGE-IN-ASSETS> (3646575)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 571517
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 247224
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 549418
<AVERAGE-NET-ASSETS> 200 <F1>
<PER-SHARE-NAV-BEGIN> 11.8
<PER-SHARE-NII> 0.47
<PER-SHARE-GAIN-APPREC> 0.06
<PER-SHARE-DIVIDEND> (0.47)
<PER-SHARE-DISTRIBUTIONS> (0.18)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 11.68
<EXPENSE-RATIO> 1.16
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
<FN>
<F1> Amounts are actual and not rounded to the nearest thousand.
</FN>
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0000746382
<NAME> PRUDENTIAL MUNICIPAL SERIES FUND:
<SERIES>
<NUMBER> 013
<NAME> MASSACHUSETTS MONEY MARKET SERIES
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> AUG-31-1997
<PERIOD-END> AUG-31-1997
<INVESTMENTS-AT-COST> 0
<INVESTMENTS-AT-VALUE> 52,948,806
<RECEIVABLES> 2,162,613
<ASSETS-OTHER> 54,428
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 0
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1,725,326
<TOTAL-LIABILITIES> 0
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 53,440,521
<SHARES-COMMON-STOCK> 53,440,521
<SHARES-COMMON-PRIOR> 50,511,412
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> (103,951,933)
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 1,898,136
<OTHER-INCOME> 0
<EXPENSES-NET> 286,390
<NET-INVESTMENT-INCOME> 1,611,746
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 1,611,746
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> (1,611,746)
<NUMBER-OF-SHARES-SOLD> 204,476,371
<NUMBER-OF-SHARES-REDEEMED> (203,119,396)
<SHARES-REINVESTED> 1,572,134
<NET-CHANGE-IN-ASSETS> 2,929,109
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 265,392
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 87,346
<AVERAGE-NET-ASSETS> 53,078,000
<PER-SHARE-NAV-BEGIN> 1.00
<PER-SHARE-NII> 0.03
<PER-SHARE-GAIN-APPREC> 0.00
<PER-SHARE-DIVIDEND> (0.03)
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 1.00
<EXPENSE-RATIO> 0.54
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0000746382
<NAME> PRUDENTIAL MUNICIPAL SERIES FUND:
<SERIES>
<NUMBER> 014
<NAME> MICHIGAN SERIES (CLASS A)
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> AUG-31-1997
<PERIOD-END> AUG-31-1997
<INVESTMENTS-AT-COST> 52,621,688
<INVESTMENTS-AT-VALUE> 56,712,212
<RECEIVABLES> 982,623
<ASSETS-OTHER> 409,463
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 0
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 221,025
<TOTAL-LIABILITIES> 0
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 53,635,213
<SHARES-COMMON-STOCK> 4,821,445
<SHARES-COMMON-PRIOR> 5,448,315
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 157,536
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 4,090,524
<NET-ASSETS> (10,269,760)
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 3,668,952
<OTHER-INCOME> 0
<EXPENSES-NET> 685,756
<NET-INVESTMENT-INCOME> 2,983,196
<REALIZED-GAINS-CURRENT> 345,600
<APPREC-INCREASE-CURRENT> 1,386,469
<NET-CHANGE-FROM-OPS> 4,715,265
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (2,983,196)
<DISTRIBUTIONS-OF-GAINS> (210,752)
<DISTRIBUTIONS-OTHER> (10,537)
<NUMBER-OF-SHARES-SOLD> 1,545,990
<NUMBER-OF-SHARES-REDEEMED> (10,932,206)
<SHARES-REINVESTED> 1,945,329
<NET-CHANGE-IN-ASSETS> (5,930,107)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 30,452
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 306,001
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 655,156
<AVERAGE-NET-ASSETS> 29,737,000
<PER-SHARE-NAV-BEGIN> 11.72
<PER-SHARE-NII> 0.61
<PER-SHARE-GAIN-APPREC> 0.33
<PER-SHARE-DIVIDEND> (0.61)
<PER-SHARE-DISTRIBUTIONS> (0.04)
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 12.01
<EXPENSE-RATIO> 0.91
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0000746382
<NAME> PRUDENTIAL MUNICIPAL SERIES FUND:
<SERIES>
<NUMBER> 015
<NAME> MICHIGAN SERIES (CLASS B)
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> AUG-31-1997
<PERIOD-END> AUG-31-1997
<INVESTMENTS-AT-COST> 52,621,688
<INVESTMENTS-AT-VALUE> 56,712,212
<RECEIVABLES> 982,623
<ASSETS-OTHER> 409,463
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 0
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 221,025
<TOTAL-LIABILITIES> 0
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 53,635,213
<SHARES-COMMON-STOCK> 4,821,445
<SHARES-COMMON-PRIOR> 5,448,315
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 157,536
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 4,090,524
<NET-ASSETS> (10,269,760)
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 3,668,952
<OTHER-INCOME> 0
<EXPENSES-NET> 685,756
<NET-INVESTMENT-INCOME> 2,983,196
<REALIZED-GAINS-CURRENT> 345,600
<APPREC-INCREASE-CURRENT> 1,386,469
<NET-CHANGE-FROM-OPS> 4,715,265
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (2,983,196)
<DISTRIBUTIONS-OF-GAINS> (210,752)
<DISTRIBUTIONS-OTHER> (10,537)
<NUMBER-OF-SHARES-SOLD> 1,545,990
<NUMBER-OF-SHARES-REDEEMED> (10,932,206)
<SHARES-REINVESTED> 1,945,329
<NET-CHANGE-IN-ASSETS> (5,930,107)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 30,452
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 306,001
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 655,156
<AVERAGE-NET-ASSETS> 31,302,000
<PER-SHARE-NAV-BEGIN> 11.71
<PER-SHARE-NII> 0.56
<PER-SHARE-GAIN-APPREC> 0.33
<PER-SHARE-DIVIDEND> (0.56)
<PER-SHARE-DISTRIBUTIONS> (0.04)
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 12.00
<EXPENSE-RATIO> 1.31
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0000746382
<NAME> PRUDENTIAL MUNICIPAL SERIES FUND:
<SERIES>
<NUMBER> 016
<NAME> MICHIGAN SERIES (CLASS C)
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> AUG-31-1997
<PERIOD-END> AUG-31-1997
<INVESTMENTS-AT-COST> 52,621,688
<INVESTMENTS-AT-VALUE> 56,712,212
<RECEIVABLES> 982,623
<ASSETS-OTHER> 409,463
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 0
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 221,025
<TOTAL-LIABILITIES> 0
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 53,635,213
<SHARES-COMMON-STOCK> 4,821,445
<SHARES-COMMON-PRIOR> 5,448,315
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 157,536
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 4,090,524
<NET-ASSETS> (10,269,760)
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 3,668,952
<OTHER-INCOME> 0
<EXPENSES-NET> 685,756
<NET-INVESTMENT-INCOME> 2,983,196
<REALIZED-GAINS-CURRENT> 345,600
<APPREC-INCREASE-CURRENT> 1,386,469
<NET-CHANGE-FROM-OPS> 4,715,265
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (2,983,196)
<DISTRIBUTIONS-OF-GAINS> (210,752)
<DISTRIBUTIONS-OTHER> (10,537)
<NUMBER-OF-SHARES-SOLD> 1,545,990
<NUMBER-OF-SHARES-REDEEMED> (10,932,206)
<SHARES-REINVESTED> 1,945,329
<NET-CHANGE-IN-ASSETS> (5,930,107)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 30,452
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 306,001
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 655,156
<AVERAGE-NET-ASSETS> 161,000
<PER-SHARE-NAV-BEGIN> 11.71
<PER-SHARE-NII> 0.53
<PER-SHARE-GAIN-APPREC> 0.33
<PER-SHARE-DIVIDEND> (0.53)
<PER-SHARE-DISTRIBUTIONS> (0.04)
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 12.00
<EXPENSE-RATIO> 1.56
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0000746382
<NAME> PRUDENTIAL MUNICIPAL SERIES FUND:
<SERIES>
<NUMBER> 017
<NAME> NEW JERSEY SERIES (CLASS A)
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> AUG-31-1997
<PERIOD-END> AUG-31-1997
<INVESTMENTS-AT-COST> 228,251,759
<INVESTMENTS-AT-VALUE> 240,079,304
<RECEIVABLES> 3,228,253
<ASSETS-OTHER> 46,412
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 0
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 981,196
<TOTAL-LIABILITIES> 0
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 230,616,821
<SHARES-COMMON-STOCK> 22,096,627
<SHARES-COMMON-PRIOR> 24,358,079
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (71,593)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 11,827,545
<NET-ASSETS> (46,454,706)
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 14,543,673
<OTHER-INCOME> 0
<EXPENSES-NET> 2,442,497
<NET-INVESTMENT-INCOME> 12,101,176
<REALIZED-GAINS-CURRENT> (16,231)
<APPREC-INCREASE-CURRENT> 6,768,682
<NET-CHANGE-FROM-OPS> 18,853,627
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (12,101,176)
<DISTRIBUTIONS-OF-GAINS> (4,425,585)
<DISTRIBUTIONS-OTHER> (47,081)
<NUMBER-OF-SHARES-SOLD> 9,836,460
<NUMBER-OF-SHARES-REDEEMED> (44,438,627)
<SHARES-REINVESTED> 9,926,237
<NET-CHANGE-IN-ASSETS> (22,396,145)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 4,290,195
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,267,554
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 2,305,616
<AVERAGE-NET-ASSETS> 89,280,000
<PER-SHARE-NAV-BEGIN> 10.87
<PER-SHARE-NII> 0.55
<PER-SHARE-GAIN-APPREC> 0.29
<PER-SHARE-DIVIDEND> (0.55)
<PER-SHARE-DISTRIBUTIONS> (0.19)
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 10.97
<EXPENSE-RATIO> 0.70
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0000746382
<NAME> PRUDENTIAL MUNICIPAL SERIES FUND:
<SERIES>
<NUMBER> 018
<NAME> NEW JERSEY SERIES (CLASS B)
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> AUG-31-1997
<PERIOD-END> AUG-31-1997
<INVESTMENTS-AT-COST> 228,251,759
<INVESTMENTS-AT-VALUE> 240,079,304
<RECEIVABLES> 3,228,253
<ASSETS-OTHER> 46,412
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 0
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 981,196
<TOTAL-LIABILITIES> 0
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 230,616,821
<SHARES-COMMON-STOCK> 22,096,627
<SHARES-COMMON-PRIOR> 24,358,079
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (71,593)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 11,827,545
<NET-ASSETS> (46,454,706)
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 14,543,673
<OTHER-INCOME> 0
<EXPENSES-NET> 2,442,497
<NET-INVESTMENT-INCOME> 12,101,176
<REALIZED-GAINS-CURRENT> (16,231)
<APPREC-INCREASE-CURRENT> 6,768,682
<NET-CHANGE-FROM-OPS> 18,853,627
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (12,101,176)
<DISTRIBUTIONS-OF-GAINS> (4,425,585)
<DISTRIBUTIONS-OTHER> (47,081)
<NUMBER-OF-SHARES-SOLD> 9,836,460
<NUMBER-OF-SHARES-REDEEMED> (44,438,627)
<SHARES-REINVESTED> 9,926,237
<NET-CHANGE-IN-ASSETS> (22,396,145)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 4,290,195
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,267,554
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 2,305,616
<AVERAGE-NET-ASSETS> 162,330,000
<PER-SHARE-NAV-BEGIN> 10.87
<PER-SHARE-NII> 0.50
<PER-SHARE-GAIN-APPREC> 0.29
<PER-SHARE-DIVIDEND> (0.50)
<PER-SHARE-DISTRIBUTIONS> (0.19)
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 10.97
<EXPENSE-RATIO> 1.10
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0000746382
<NAME> PRUDENTIAL MUNICIPAL SERIES FUND:
<SERIES>
<NUMBER> 019
<NAME> NEW JERSEY SERIES (CLASS C)
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> AUG-31-1997
<PERIOD-END> AUG-31-1997
<INVESTMENTS-AT-COST> 228,251,759
<INVESTMENTS-AT-VALUE> 240,079,304
<RECEIVABLES> 3,228,253
<ASSETS-OTHER> 46,412
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 0
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 981,196
<TOTAL-LIABILITIES> 0
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 230,616,821
<SHARES-COMMON-STOCK> 22,096,627
<SHARES-COMMON-PRIOR> 24,358,079
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (71,593)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 11,827,545
<NET-ASSETS> (46,454,706)
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 14,543,673
<OTHER-INCOME> 0
<EXPENSES-NET> 2,442,497
<NET-INVESTMENT-INCOME> 12,101,176
<REALIZED-GAINS-CURRENT> (16,231)
<APPREC-INCREASE-CURRENT> 6,768,682
<NET-CHANGE-FROM-OPS> 18,853,627
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (12,101,176)
<DISTRIBUTIONS-OF-GAINS> (4,425,585)
<DISTRIBUTIONS-OTHER> (47,081)
<NUMBER-OF-SHARES-SOLD> 9,836,460
<NUMBER-OF-SHARES-REDEEMED> (44,438,627)
<SHARES-REINVESTED> 9,926,237
<NET-CHANGE-IN-ASSETS> (22,396,145)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 4,290,195
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,267,554
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 2,305,616
<AVERAGE-NET-ASSETS> 1,894,000
<PER-SHARE-NAV-BEGIN> 10.87
<PER-SHARE-NII> 0.48
<PER-SHARE-GAIN-APPREC> 0.29
<PER-SHARE-DIVIDEND> (0.48)
<PER-SHARE-DISTRIBUTIONS> (0.19)
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 10.97
<EXPENSE-RATIO> 1.35
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0000746382
<NAME> PRUDENTIAL MUNICIPAL SERIES FUND:
<SERIES>
<NUMBER> 020
<NAME> NEW JERSEY SERIES (CLASS Z)
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> AUG-31-1997
<PERIOD-END> AUG-31-1997
<INVESTMENTS-AT-COST> 228251759
<INVESTMENTS-AT-VALUE> 240079304
<RECEIVABLES> 3228253
<ASSETS-OTHER> 46412
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 0
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 981196
<TOTAL-LIABILITIES> 0
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 230616821
<SHARES-COMMON-STOCK> 22096627
<SHARES-COMMON-PRIOR> 24358079
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (71593)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 11827545
<NET-ASSETS> (46454706)
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 14543673
<OTHER-INCOME> 0
<EXPENSES-NET> 2442497
<NET-INVESTMENT-INCOME> 12101176
<REALIZED-GAINS-CURRENT> (16231)
<APPREC-INCREASE-CURRENT> 6768682
<NET-CHANGE-FROM-OPS> 18853627
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (12101176)
<DISTRIBUTIONS-OF-GAINS> (4425585)
<DISTRIBUTIONS-OTHER> (47081)
<NUMBER-OF-SHARES-SOLD> 9836460
<NUMBER-OF-SHARES-REDEEMED> (44438627)
<SHARES-REINVESTED> 9926237
<NET-CHANGE-IN-ASSETS> (22396145)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 4290195
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1267554
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 2305616
<AVERAGE-NET-ASSETS> 198 <F1>
<PER-SHARE-NAV-BEGIN> 11.1
<PER-SHARE-NII> 0.41
<PER-SHARE-GAIN-APPREC> 0.07
<PER-SHARE-DIVIDEND> (0.41)
<PER-SHARE-DISTRIBUTIONS> (0.19)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.98
<EXPENSE-RATIO> 0.6
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
<FN>
<F1> AMOUNTS ARE ACTUAL AND NOT ROUNDED TO THE NEAREST THOUSAND.
</FN>
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0000746382
<NAME> PRUDENTIAL MUNICIPAL SERIES FUND:
<SERIES>
<NUMBER> 021
<NAME> NEW JERSEY MONEY MARKET FUND
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> AUG-31-1997
<PERIOD-END> AUG-31-1997
<INVESTMENTS-AT-COST> 0
<INVESTMENTS-AT-VALUE> 197,688,182
<RECEIVABLES> 3,689,873
<ASSETS-OTHER> 4,916
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 0
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1,911,236
<TOTAL-LIABILITIES> 0
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 199,471,735
<SHARES-COMMON-STOCK> 199,471,735
<SHARES-COMMON-PRIOR> 181,396,293
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> (380,868,028)
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 6,897,534
<OTHER-INCOME> 0
<EXPENSES-NET> 1,437,895
<NET-INVESTMENT-INCOME> 5,459,639
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 5,459,639
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> (5,459,639)
<NUMBER-OF-SHARES-SOLD> 640,701,796
<NUMBER-OF-SHARES-REDEEMED> (627,970,024)
<SHARES-REINVESTED> 5,343,670
<NET-CHANGE-IN-ASSETS> 18,075,442
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 981,113
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,437,895
<AVERAGE-NET-ASSETS> 196,223,000
<PER-SHARE-NAV-BEGIN> 1.00
<PER-SHARE-NII> 0.03
<PER-SHARE-GAIN-APPREC> 0.00
<PER-SHARE-DIVIDEND> (0.03)
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 1.00
<EXPENSE-RATIO> 0.73
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0000746382
<NAME> PRUDENTIAL MUNICIPAL SERIES FUND:
<SERIES>
<NUMBER> 022
<NAME> NEW YORK SERIES (CLASS A)
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> AUG-31-1997
<PERIOD-END> AUG-31-1997
<INVESTMENTS-AT-COST> 265,636,328
<INVESTMENTS-AT-VALUE> 283,367,394
<RECEIVABLES> 3,717,192
<ASSETS-OTHER> 37,461
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 0
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1,184,559
<TOTAL-LIABILITIES> 0
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 267,187,954
<SHARES-COMMON-STOCK> 23,943,471
<SHARES-COMMON-PRIOR> 25,886,851
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 1,018,468
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 17,731,066
<NET-ASSETS> (49,830,322)
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 17,337,551
<OTHER-INCOME> 0
<EXPENSES-NET> 2,513,250
<NET-INVESTMENT-INCOME> 14,824,301
<REALIZED-GAINS-CURRENT> 1,136,405
<APPREC-INCREASE-CURRENT> 9,791,072
<NET-CHANGE-FROM-OPS> 25,751,778
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (14,824,301)
<DISTRIBUTIONS-OF-GAINS> (6,604,717)
<DISTRIBUTIONS-OTHER> (101,611)
<NUMBER-OF-SHARES-SOLD> 11,515,705
<NUMBER-OF-SHARES-REDEEMED> (47,746,814)
<SHARES-REINVESTED> 13,270,052
<NET-CHANGE-IN-ASSETS> (18,739,908)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 6,655,377
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,487,565
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 2,356,789
<AVERAGE-NET-ASSETS> 173,963,000
<PER-SHARE-NAV-BEGIN> 11.77
<PER-SHARE-NII> 0.61
<PER-SHARE-GAIN-APPREC> 0.43
<PER-SHARE-DIVIDEND> (0.61)
<PER-SHARE-DISTRIBUTIONS> (0.26)
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 11.94
<EXPENSE-RATIO> 0.68
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0000746382
<NAME> PRUDENTIAL MUNICIPAL SERIES FUND:
<SERIES>
<NUMBER> 023
<NAME> NEW YORK SERIES (CLASS B)
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> AUG-31-1997
<PERIOD-END> AUG-31-1997
<INVESTMENTS-AT-COST> 265,636,328
<INVESTMENTS-AT-VALUE> 283,367,394
<RECEIVABLES> 3,717,192
<ASSETS-OTHER> 37,461
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 0
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1,184,559
<TOTAL-LIABILITIES> 0
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 267,187,954
<SHARES-COMMON-STOCK> 23,943,471
<SHARES-COMMON-PRIOR> 25,886,851
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 1,018,468
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 17,731,066
<NET-ASSETS> (49,830,322)
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 17,337,551
<OTHER-INCOME> 0
<EXPENSES-NET> 2,513,250
<NET-INVESTMENT-INCOME> 14,824,301
<REALIZED-GAINS-CURRENT> 1,136,405
<APPREC-INCREASE-CURRENT> 9,791,072
<NET-CHANGE-FROM-OPS> 25,751,778
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (14,824,301)
<DISTRIBUTIONS-OF-GAINS> (6,604,717)
<DISTRIBUTIONS-OTHER> (101,611)
<NUMBER-OF-SHARES-SOLD> 11,515,705
<NUMBER-OF-SHARES-REDEEMED> (47,746,814)
<SHARES-REINVESTED> 13,270,052
<NET-CHANGE-IN-ASSETS> (18,739,908)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 6,655,377
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,487,565
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 2,356,789
<AVERAGE-NET-ASSETS> 122,744,000
<PER-SHARE-NAV-BEGIN> 11.77
<PER-SHARE-NII> 0.56
<PER-SHARE-GAIN-APPREC> 0.43
<PER-SHARE-DIVIDEND> (0.56)
<PER-SHARE-DISTRIBUTIONS> (0.26)
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 11.94
<EXPENSE-RATIO> 1.08
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0000746382
<NAME> PRUDENTIAL MUNICIPAL SERIES FUND:
<SERIES>
<NUMBER> 024
<NAME> NEW YORK SERIES (CLASS C)
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> AUG-31-1997
<PERIOD-END> AUG-31-1997
<INVESTMENTS-AT-COST> 265,636,328
<INVESTMENTS-AT-VALUE> 283,367,394
<RECEIVABLES> 3,717,192
<ASSETS-OTHER> 37,461
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 0
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1,184,559
<TOTAL-LIABILITIES> 0
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 267,187,954
<SHARES-COMMON-STOCK> 23,943,471
<SHARES-COMMON-PRIOR> 25,886,851
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 1,018,468
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 17,731,066
<NET-ASSETS> (49,830,322)
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 17,337,551
<OTHER-INCOME> 0
<EXPENSES-NET> 2,513,250
<NET-INVESTMENT-INCOME> 14,824,301
<REALIZED-GAINS-CURRENT> 1,136,405
<APPREC-INCREASE-CURRENT> 9,791,072
<NET-CHANGE-FROM-OPS> 25,751,778
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (14,824,301)
<DISTRIBUTIONS-OF-GAINS> (6,604,717)
<DISTRIBUTIONS-OTHER> (101,611)
<NUMBER-OF-SHARES-SOLD> 11,515,705
<NUMBER-OF-SHARES-REDEEMED> (47,746,814)
<SHARES-REINVESTED> 13,270,052
<NET-CHANGE-IN-ASSETS> (18,739,908)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 6,655,377
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,487,565
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 2,356,789
<AVERAGE-NET-ASSETS> 798,000
<PER-SHARE-NAV-BEGIN> 11.77
<PER-SHARE-NII> 0.53
<PER-SHARE-GAIN-APPREC> 0.43
<PER-SHARE-DIVIDEND> (0.53)
<PER-SHARE-DISTRIBUTIONS> (0.26)
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 11.94
<EXPENSE-RATIO> 1.33
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0000746382
<NAME> PRUDENTIAL MUNICIPAL SERIES FUND:
<SERIES>
<NUMBER> 025
<NAME> NEW YORK SERIES (CLASS Z)
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> AUG-31-1997
<PERIOD-END> AUG-31-1997
<INVESTMENTS-AT-COST> 265636328
<INVESTMENTS-AT-VALUE> 283367394
<RECEIVABLES> 3717192
<ASSETS-OTHER> 37461
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 0
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1184559
<TOTAL-LIABILITIES> 0
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 267187954
<SHARES-COMMON-STOCK> 23943471
<SHARES-COMMON-PRIOR> 25886851
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 1018468
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 17731066
<NET-ASSETS> (49830322)
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 17337551
<OTHER-INCOME> 0
<EXPENSES-NET> 2513250
<NET-INVESTMENT-INCOME> 14824301
<REALIZED-GAINS-CURRENT> 1136405
<APPREC-INCREASE-CURRENT> 9791072
<NET-CHANGE-FROM-OPS> 25751778
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (14824301)
<DISTRIBUTIONS-OF-GAINS> (6604717)
<DISTRIBUTIONS-OTHER> (101611)
<NUMBER-OF-SHARES-SOLD> 11515705
<NUMBER-OF-SHARES-REDEEMED> (47746814)
<SHARES-REINVESTED> 13270052
<NET-CHANGE-IN-ASSETS> (18739908)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 6655377
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1487565
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 2356789
<AVERAGE-NET-ASSETS> 11,000
<PER-SHARE-NAV-BEGIN> 12.09
<PER-SHARE-NII> 0.46
<PER-SHARE-GAIN-APPREC> 0.12
<PER-SHARE-DIVIDEND> (0.46)
<PER-SHARE-DISTRIBUTIONS> (0.26)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 11.95
<EXPENSE-RATIO> 0.58
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0000746382
<NAME> PRUDENTIAL MUNICIPAL SERIES FUND:
<SERIES>
<NUMBER> 026
<NAME> NEW YORK MONEY MARKET SERIES
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> AUG-31-1997
<PERIOD-END> AUG-31-1997
<INVESTMENTS-AT-COST> 0
<INVESTMENTS-AT-VALUE> 353,521,952
<RECEIVABLES> 8,307,047
<ASSETS-OTHER> 24,911
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 0
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 3,562,658
<TOTAL-LIABILITIES> 0
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 358,291,252
<SHARES-COMMON-STOCK> 358,291,252
<SHARES-COMMON-PRIOR> 349,469,807
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> (707,761,059)
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 11,653,909
<OTHER-INCOME> 0
<EXPENSES-NET> 2,287,323
<NET-INVESTMENT-INCOME> 9,366,586
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 9,366,586
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,086,099,180
<NUMBER-OF-SHARES-REDEEMED> (1,086,385,693)
<SHARES-REINVESTED> 9,107,958
<NET-CHANGE-IN-ASSETS> 18,188,031
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,630,461
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 2,287,323
<AVERAGE-NET-ASSETS> 326,092,000
<PER-SHARE-NAV-BEGIN> 1.00
<PER-SHARE-NII> 0.03
<PER-SHARE-GAIN-APPREC> 0.00
<PER-SHARE-DIVIDEND> 0.00
<PER-SHARE-DISTRIBUTIONS> (0.03)
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 1.00
<EXPENSE-RATIO> 0.71
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0000746382
<NAME> PRUDENTIAL MUNICIPAL SERIES FUND:
<SERIES>
<NUMBER> 027
<NAME> NORTH CAROLINA SERIES (CLASS A)
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> AUG-31-1997
<PERIOD-END> AUG-31-1997
<INVESTMENTS-AT-COST> 50,724,771
<INVESTMENTS-AT-VALUE> 53,581,035
<RECEIVABLES> 869,695
<ASSETS-OTHER> 200,189
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 0
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 286,884
<TOTAL-LIABILITIES> 0
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 51,756,102
<SHARES-COMMON-STOCK> 4,817,015
<SHARES-COMMON-PRIOR> 5,352,771
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (248,331)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 2,856,264
<NET-ASSETS> (10,169,786)
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 3,292,879
<OTHER-INCOME> 0
<EXPENSES-NET> 636,104
<NET-INVESTMENT-INCOME> 2,656,775
<REALIZED-GAINS-CURRENT> (242,579)
<APPREC-INCREASE-CURRENT> 2,214,384
<NET-CHANGE-FROM-OPS> 4,628,580
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (2,656,775)
<DISTRIBUTIONS-OF-GAINS> (818,757)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,147,633
<NUMBER-OF-SHARES-REDEEMED> (8,951,218)
<SHARES-REINVESTED> 1,824,425
<NET-CHANGE-IN-ASSETS> (4,826,112)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 815,072
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 284,129
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 607,691
<AVERAGE-NET-ASSETS> 29,055,000
<PER-SHARE-NAV-BEGIN> 11.06
<PER-SHARE-NII> 0.54
<PER-SHARE-GAIN-APPREC> 0.38
<PER-SHARE-DIVIDEND> (0.54)
<PER-SHARE-DISTRIBUTIONS> (0.16)
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 11.28
<EXPENSE-RATIO> 0.93
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0000746382
<NAME> PRUDENTIAL MUNICIPAL SERIES FUND:
<SERIES>
<NUMBER> 028
<NAME> NORTH CAROLINA SERIES (CLASS B)
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> AUG-31-1997
<PERIOD-END> AUG-31-1997
<INVESTMENTS-AT-COST> 50,724,771
<INVESTMENTS-AT-VALUE> 53,581,035
<RECEIVABLES> 869,695
<ASSETS-OTHER> 200,189
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 0
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 286,884
<TOTAL-LIABILITIES> 0
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 51,756,102
<SHARES-COMMON-STOCK> 4,817,015
<SHARES-COMMON-PRIOR> 5,352,771
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (248,331)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 2,856,264
<NET-ASSETS> (10,169,786)
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 3,292,879
<OTHER-INCOME> 0
<EXPENSES-NET> 636,104
<NET-INVESTMENT-INCOME> 2,656,775
<REALIZED-GAINS-CURRENT> (242,579)
<APPREC-INCREASE-CURRENT> 2,214,384
<NET-CHANGE-FROM-OPS> 4,628,580
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (2,656,775)
<DISTRIBUTIONS-OF-GAINS> (818,757)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,147,633
<NUMBER-OF-SHARES-REDEEMED> (8,951,218)
<SHARES-REINVESTED> 1,824,425
<NET-CHANGE-IN-ASSETS> (4,826,112)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 815,072
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 284,129
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 607,691
<AVERAGE-NET-ASSETS> 27,703,000
<PER-SHARE-NAV-BEGIN> 11.06
<PER-SHARE-NII> 0.50
<PER-SHARE-GAIN-APPREC> 0.39
<PER-SHARE-DIVIDEND> (0.50)
<PER-SHARE-DISTRIBUTIONS> (0.16)
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 11.29
<EXPENSE-RATIO> 1.33
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0000746382
<NAME> PRUDENTIAL MUNICIPAL SERIES FUND:
<SERIES>
<NUMBER> 029
<NAME> NORTH CAROLINA SERIES (CLASS C)
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> AUG-31-1997
<PERIOD-END> AUG-31-1997
<INVESTMENTS-AT-COST> 50,724,771
<INVESTMENTS-AT-VALUE> 53,581,035
<RECEIVABLES> 869,695
<ASSETS-OTHER> 200,189
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 0
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 286,884
<TOTAL-LIABILITIES> 0
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 51,756,102
<SHARES-COMMON-STOCK> 4,817,015
<SHARES-COMMON-PRIOR> 5,352,771
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (248,331)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 2,856,264
<NET-ASSETS> (10,169,786)
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 3,292,879
<OTHER-INCOME> 0
<EXPENSES-NET> 636,104
<NET-INVESTMENT-INCOME> 2,656,775
<REALIZED-GAINS-CURRENT> (242,579)
<APPREC-INCREASE-CURRENT> 2,214,384
<NET-CHANGE-FROM-OPS> 4,628,580
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (2,656,775)
<DISTRIBUTIONS-OF-GAINS> (818,757)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,147,633
<NUMBER-OF-SHARES-REDEEMED> (8,951,218)
<SHARES-REINVESTED> 1,824,425
<NET-CHANGE-IN-ASSETS> (4,826,112)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 815,072
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 284,129
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 607,691
<AVERAGE-NET-ASSETS> 68,000
<PER-SHARE-NAV-BEGIN> 11.06
<PER-SHARE-NII> 0.47
<PER-SHARE-GAIN-APPREC> 0.39
<PER-SHARE-DIVIDEND> (0.47)
<PER-SHARE-DISTRIBUTIONS> (0.16)
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 11.29
<EXPENSE-RATIO> 1.58
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0000746382
<NAME> PRUDENTIAL MUNICIPAL SERIES FUND:
<SERIES>
<NUMBER> 030
<NAME> OHIO SERIES (CLASS A)
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> AUG-31-1997
<PERIOD-END> AUG-31-1997
<INVESTMENTS-AT-COST> 84,354,819
<INVESTMENTS-AT-VALUE> 90,943,270
<RECEIVABLES> 2,507,002
<ASSETS-OTHER> 2,660
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 0
<PAYABLE-FOR-SECURITIES> 1,025,055
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 610,052
<TOTAL-LIABILITIES> 0
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 84,822,858
<SHARES-COMMON-STOCK> 7,677,938
<SHARES-COMMON-PRIOR> 8,621,996
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 406,516
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 6,588,451
<NET-ASSETS> (16,299,934)
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 5,989,053
<OTHER-INCOME> 0
<EXPENSES-NET> 953,682
<NET-INVESTMENT-INCOME> 5,035,371
<REALIZED-GAINS-CURRENT> 715,637
<APPREC-INCREASE-CURRENT> 1,564,511
<NET-CHANGE-FROM-OPS> 7,315,519
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (5,035,371)
<DISTRIBUTIONS-OF-GAINS> (142,105)
<DISTRIBUTIONS-OTHER> (16,718)
<NUMBER-OF-SHARES-SOLD> 3,739,237
<NUMBER-OF-SHARES-REDEEMED> (18,009,150)
<SHARES-REINVESTED> 3,073,341
<NET-CHANGE-IN-ASSETS> (9,075,247)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (141,913)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 486,009
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 905,081
<AVERAGE-NET-ASSETS> 51,641,000
<PER-SHARE-NAV-BEGIN> 11.70
<PER-SHARE-NII> 0.63
<PER-SHARE-GAIN-APPREC> 0.27
<PER-SHARE-DIVIDEND> (0.63)
<PER-SHARE-DISTRIBUTIONS> (0.02)
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 11.95
<EXPENSE-RATIO> 0.80
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0000746382
<NAME> PRUDENTIAL MUNICIPAL SERIES FUND:
<SERIES>
<NUMBER> 031
<NAME> OHIO SERIES (CLASS B)
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> AUG-31-1997
<PERIOD-END> AUG-31-1997
<INVESTMENTS-AT-COST> 84,354,819
<INVESTMENTS-AT-VALUE> 90,943,270
<RECEIVABLES> 2,507,002
<ASSETS-OTHER> 2,660
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 0
<PAYABLE-FOR-SECURITIES> 1,025,055
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 610,052
<TOTAL-LIABILITIES> 0
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 84,822,858
<SHARES-COMMON-STOCK> 7,677,938
<SHARES-COMMON-PRIOR> 8,621,996
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 406,516
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 6,588,451
<NET-ASSETS> (16,299,934)
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 5,989,053
<OTHER-INCOME> 0
<EXPENSES-NET> 953,682
<NET-INVESTMENT-INCOME> 5,035,371
<REALIZED-GAINS-CURRENT> 715,637
<APPREC-INCREASE-CURRENT> 1,564,511
<NET-CHANGE-FROM-OPS> 7,315,519
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (5,035,371)
<DISTRIBUTIONS-OF-GAINS> (142,105)
<DISTRIBUTIONS-OTHER> (16,718)
<NUMBER-OF-SHARES-SOLD> 3,739,237
<NUMBER-OF-SHARES-REDEEMED> (18,009,150)
<SHARES-REINVESTED> 3,073,341
<NET-CHANGE-IN-ASSETS> (9,075,247)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (141,913)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 486,009
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 905,081
<AVERAGE-NET-ASSETS> 45,503,000
<PER-SHARE-NAV-BEGIN> 11.71
<PER-SHARE-NII> 0.59
<PER-SHARE-GAIN-APPREC> 0.27
<PER-SHARE-DIVIDEND> (0.59)
<PER-SHARE-DISTRIBUTIONS> (0.02)
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 11.96
<EXPENSE-RATIO> 1.20
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0000746382
<NAME> PRUDENTIAL MUNICIPAL SERIES FUND:
<SERIES>
<NUMBER> 032
<NAME> OHIO SERIES (CLASS C)
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> AUG-31-1997
<PERIOD-END> AUG-31-1997
<INVESTMENTS-AT-COST> 84,354,819
<INVESTMENTS-AT-VALUE> 90,943,270
<RECEIVABLES> 2,507,002
<ASSETS-OTHER> 2,660
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 0
<PAYABLE-FOR-SECURITIES> 1,025,055
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 610,052
<TOTAL-LIABILITIES> 0
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 84,822,858
<SHARES-COMMON-STOCK> 7,677,938
<SHARES-COMMON-PRIOR> 8,621,996
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 406,516
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 6,588,451
<NET-ASSETS> (16,299,934)
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 5,989,053
<OTHER-INCOME> 0
<EXPENSES-NET> 953,682
<NET-INVESTMENT-INCOME> 5,035,371
<REALIZED-GAINS-CURRENT> 715,637
<APPREC-INCREASE-CURRENT> 1,564,511
<NET-CHANGE-FROM-OPS> 7,315,519
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (5,035,371)
<DISTRIBUTIONS-OF-GAINS> (142,105)
<DISTRIBUTIONS-OTHER> (16,718)
<NUMBER-OF-SHARES-SOLD> 3,739,237
<NUMBER-OF-SHARES-REDEEMED> (18,009,150)
<SHARES-REINVESTED> 3,073,341
<NET-CHANGE-IN-ASSETS> (9,075,247)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (141,913)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 486,009
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 905,081
<AVERAGE-NET-ASSETS> 57,000
<PER-SHARE-NAV-BEGIN> 11.71
<PER-SHARE-NII> 0.56
<PER-SHARE-GAIN-APPREC> 0.27
<PER-SHARE-DIVIDEND> (0.56)
<PER-SHARE-DISTRIBUTIONS> (0.02)
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 11.96
<EXPENSE-RATIO> 1.45
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0000746382
<NAME> PRUDENTIAL MUNICIPAL SERIES FUND:
<SERIES>
<NUMBER> 033
<NAME> PENNSYLVANIA SERIES (CLASS A)
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> AUG-31-1997
<PERIOD-END> AUG-31-1997
<INVESTMENTS-AT-COST> 207,694,080
<INVESTMENTS-AT-VALUE> 224,324,055
<RECEIVABLES> 5,504,325
<ASSETS-OTHER> 6,276
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 0
<PAYABLE-FOR-SECURITIES> 2,560,448
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1,923,629
<TOTAL-LIABILITIES> 0
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 208,719,763
<SHARES-COMMON-STOCK> 21,014,326
<SHARES-COMMON-PRIOR> 22,723,999
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 145,216
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 16,485,600
<NET-ASSETS> (43,738,325)
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 14,695,771
<OTHER-INCOME> 0
<EXPENSES-NET> 2,262,663
<NET-INVESTMENT-INCOME> 12,433,108
<REALIZED-GAINS-CURRENT> 933,160
<APPREC-INCREASE-CURRENT> 6,293,940
<NET-CHANGE-FROM-OPS> 19,660,208
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (12,433,108)
<DISTRIBUTIONS-OF-GAINS> (2,026,218)
<DISTRIBUTIONS-OTHER> (44,532)
<NUMBER-OF-SHARES-SOLD> 9,187,094
<NUMBER-OF-SHARES-REDEEMED> (35,414,489)
<SHARES-REINVESTED> 8,124,772
<NET-CHANGE-IN-ASSETS> (12,946,273)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 1,314,482
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,163,118
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 2,133,763
<AVERAGE-NET-ASSETS> 83,552,000
<PER-SHARE-NAV-BEGIN> 10.49
<PER-SHARE-NII> 0.59
<PER-SHARE-GAIN-APPREC> 0.33
<PER-SHARE-DIVIDEND> (0.59)
<PER-SHARE-DISTRIBUTIONS> (0.09)
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 10.73
<EXPENSE-RATIO> 0.72
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0000746382
<NAME> PRUDENTIAL MUNICIPAL SERIES FUND:
<SERIES>
<NUMBER> 034
<NAME> PENNSYLVANIA SERIES (CLASS B)
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> AUG-31-1997
<PERIOD-END> AUG-31-1997
<INVESTMENTS-AT-COST> 207,694,080
<INVESTMENTS-AT-VALUE> 224,324,055
<RECEIVABLES> 5,504,325
<ASSETS-OTHER> 6,276
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 0
<PAYABLE-FOR-SECURITIES> 2,560,448
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1,923,629
<TOTAL-LIABILITIES> 0
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 208,719,763
<SHARES-COMMON-STOCK> 21,014,326
<SHARES-COMMON-PRIOR> 22,723,999
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 145,216
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 16,485,600
<NET-ASSETS> (43,738,325)
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 14,695,771
<OTHER-INCOME> 0
<EXPENSES-NET> 2,262,663
<NET-INVESTMENT-INCOME> 12,433,108
<REALIZED-GAINS-CURRENT> 933,160
<APPREC-INCREASE-CURRENT> 6,293,940
<NET-CHANGE-FROM-OPS> 19,660,208
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (12,433,108)
<DISTRIBUTIONS-OF-GAINS> (2,026,218)
<DISTRIBUTIONS-OTHER> (44,532)
<NUMBER-OF-SHARES-SOLD> 9,187,094
<NUMBER-OF-SHARES-REDEEMED> (35,414,489)
<SHARES-REINVESTED> 8,124,772
<NET-CHANGE-IN-ASSETS> (12,946,273)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 1,314,482
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,163,118
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 2,133,763
<AVERAGE-NET-ASSETS> 148,394,000
<PER-SHARE-NAV-BEGIN> 10.49
<PER-SHARE-NII> 0.55
<PER-SHARE-GAIN-APPREC> 0.32
<PER-SHARE-DIVIDEND> (0.55)
<PER-SHARE-DISTRIBUTIONS> (0.09)
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 10.72
<EXPENSE-RATIO> 1.12
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0000746382
<NAME> PRUDENTIAL MUNICIPAL SERIES FUND:
<SERIES>
<NUMBER> 035
<NAME> PENNSYLVANIA SERIES (CLASS C)
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> AUG-31-1997
<PERIOD-END> AUG-31-1997
<INVESTMENTS-AT-COST> 207,694,080
<INVESTMENTS-AT-VALUE> 224,324,055
<RECEIVABLES> 5,504,325
<ASSETS-OTHER> 6,276
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 0
<PAYABLE-FOR-SECURITIES> 2,560,448
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1,923,629
<TOTAL-LIABILITIES> 0
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 208,719,763
<SHARES-COMMON-STOCK> 21,014,326
<SHARES-COMMON-PRIOR> 22,723,999
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 145,216
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 16,485,600
<NET-ASSETS> (43,738,325)
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 14,695,771
<OTHER-INCOME> 0
<EXPENSES-NET> 2,262,663
<NET-INVESTMENT-INCOME> 12,433,108
<REALIZED-GAINS-CURRENT> 933,160
<APPREC-INCREASE-CURRENT> 6,293,940
<NET-CHANGE-FROM-OPS> 19,660,208
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (12,433,108)
<DISTRIBUTIONS-OF-GAINS> (2,026,218)
<DISTRIBUTIONS-OTHER> (44,532)
<NUMBER-OF-SHARES-SOLD> 9,187,094
<NUMBER-OF-SHARES-REDEEMED> (35,414,489)
<SHARES-REINVESTED> 8,124,772
<NET-CHANGE-IN-ASSETS> (12,946,273)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 1,314,482
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,163,118
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 2,133,763
<AVERAGE-NET-ASSETS> 678,000
<PER-SHARE-NAV-BEGIN> 10.49
<PER-SHARE-NII> 0.52
<PER-SHARE-GAIN-APPREC> 0.32
<PER-SHARE-DIVIDEND> (0.52)
<PER-SHARE-DISTRIBUTIONS> (0.09)
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 10.72
<EXPENSE-RATIO> 1.37
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
