<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION
ON MAY 12, 1994
REGISTRATION NO. 2-91215
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 /X/
PRE-EFFECTIVE AMENDMENT NO. / /
POST-EFFECTIVE AMENDMENT NO. 18 /X/
AND/OR
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 /X/
AMENDMENT NO. 19 /X/
(Check appropriate box or boxes)
------------------------
PRUDENTIAL CALIFORNIA MUNICIPAL FUND
(Exact name of registrant as specified in charter)
ONE SEAPORT PLAZA,
NEW YORK, NEW YORK 10292
(Address of Principal Executive Offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (212) 214-1250
S. JANE ROSE, ESQ.
ONE SEAPORT PLAZA
NEW YORK, NEW YORK 10292
(Name and Address of Agent for Service)
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING:
As soon as practicable after the effective
date of the Registration Statement.
It is proposed that this filing will become effective
(check appropriate box):
/ / immediately upon filing pursuant to paragraph (b)
/ / on (date) pursuant to paragraph (b)
/X/ 60 days after filing pursuant to paragraph (a)
/ / on (date) pursuant to paragraph (a), of Rule 485.
PURSUANT TO RULE 24F-2 UNDER THE INVESTMENT COMPANY ACT OF 1940, REGISTRANT
HAS PREVIOUSLY REGISTERED AN INDEFINITE NUMBER OF SHARES OF BENEFICIAL INTEREST,
PAR VALUE $.01 PER SHARE. THE REGISTRANT WILL FILE A NOTICE UNDER SUCH RULE FOR
ITS FISCAL YEAR ENDING AUGUST 31, 1994 ON OR BEFORE OCTOBER 31, 1994.
- ---------------------------------------------------------------------------
- ---------------------------------------------------------------------------
<PAGE>
CROSS REFERENCE SHEET
(AS REQUIRED BY RULE 495)
<TABLE>
<CAPTION>
N-1A ITEM NO. LOCATION
- ------------------------------------------------------------------------------- ---------------------------------------------
<S> <C> <C>
PART A
Item 1. Cover Page.......................................................... Cover Page
Item 2. Synopsis............................................................ Fund Expenses
Item 3. Condensed Financial Information..................................... Fund Expenses; Financial Highlights; How the
Fund Calculates Performance
Item 4. General Description of Registrant................................... Cover Page; Financial Highlights; How the
Fund Invests; General Information
Item 5. Management of the Fund.............................................. Financial Highlights; How the Fund is Managed
Item 6. Capital Stock and Other Securities.................................. Taxes, Dividends and Distributions; General
Information
Item 7. Purchase of Securities Being Offered................................ Shareholder Guide; How the Fund Values its
Shares
Item 8. Redemption or Repurchase............................................ Shareholder Guide; How the Fund Values its
Shares; General Information
Item 9. Pending Legal Proceedings........................................... Not Applicable
PART B
Item 10. Cover Page.......................................................... Cover Page
Item 11. Table of Contents................................................... Table of Contents
Item 12. General Information and History..................................... General Information; Organization and
Capitalization
Item 13. Investment Objectives and Policies.................................. Investment Objectives and Policies;
Investment Restrictions
Item 14. Management of the Fund.............................................. Trustees and Officers; Manager; Distributor
Item 15. Control Persons and Principal Holders of Securities................. Not Applicable
Item 16. Investment Advisory and Other Services.............................. Manager; Distributor; Custodian, Transfer and
Dividend Disbursing Agent and Independent
Accountants
Item 17. Brokerage Allocation and Other Practices............................ Portfolio Transactions and Brokerage
Item 18. Capital Stock and Other Securities.................................. Not Applicable
Item 19. Purchase, Redemption and Pricing of Securities
Being Offered....................................................... Purchase and Redemption of Fund Shares;
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 this Registration Statement.
</TABLE>
<PAGE>
This Registration Statement is not intended to amend the Prospectus of the
California Money Market Series dated December 6, 1993, which shall remain in
full force and effect.
<PAGE>
PRUDENTIAL CALIFORNIA MUNICIPAL FUND
(CALIFORNIA SERIES)
- --------------------------------------------------------------------------------
PROSPECTUS DATED , 1994
- --------------------------------------------------------------------------------
Prudential California Municipal Fund (the "Fund") (California Series) (the
"Series") is one of three series of an open-end investment company, or mutual
fund. This Series is diversified and seeks to provide the maximum amount of
income that is exempt from California State and federal income taxes consistent
with the preservation of capital and, in conjunction therewith, the Series may
invest in debt securities with the potential for capital gain. The net assets of
the Series are invested in obligations within the four highest ratings of either
Moody's Investors Service or Standard & Poor's Corporation or in unrated
obligations which, in the opinion of the Fund's investment adviser, are of
comparable quality. See "How the Fund Invests--Investment Objective and
Policies." The Fund's address is One Seaport Plaza, New York, New York 10292,
and its telephone number is (800) 225-1852.
This Prospectus sets forth concisely the information about the Fund and the
California Series that a prospective investor ought to know before investing.
Additional information about the Fund has been filed with the Securities and
Exchange Commission in a Statement of Additional Information dated ,
1994, which information is incorporated herein by reference (is legally
considered to be part of this Prospectus) and is available without charge upon
request to Prudential California Municipal Fund at the address or telephone
number noted above.
- --------------------------------------------------------------------------------
INVESTORS ARE ADVISED TO READ THIS PROSPECTUS AND RETAIN IT FOR FUTURE
REFERENCE.
- --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<PAGE>
FUND HIGHLIGHTS
The following summary is intended to highlight certain information
contained in this Prospectus and is qualified in its entirety by the more
detailed information appearing elsewhere herein.
WHAT IS PRUDENTIAL CALIFORNIA MUNICIPAL FUND?
Prudential California Municipal Fund is a mutual fund whose shares are
offered in three 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, diversified management investment company. Only the California
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 California State and federal income taxes consistent with the
preservation of capital. It seeks to achieve this objective by investing
primarily in California 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 California State and federal income taxes
(California Obligations). See "How the Fund Invests--Investment Objective
and Policies" at page 6.
WHAT ARE THE SERIES' SPECIAL CHARACTERISTICS AND RISKS?
In seeking to achieve its investment objective, the Series will invest at
least 80% of the value of its total assets in California Obligations. This
degree of investment concentration makes the Series particularly susceptible
to factors adversely affecting issuers of California Obligations. See "How
the Fund Invests--Investment Objective and Policies--Special Considerations"
at page 10. To hedge against changes in interest rates, the Series may also
purchase put options and engage in transactions involving financial futures
contracts and options thereon. See "How the Fund Invests--Investment
Objective and Policies" at page 6.
WHO MANAGES THE FUND?
Prudential Mutual Fund Management, Inc. (PMF or the Manager) is the
Manager of the Fund and is compensated for its services at an annual rate of
.50 of 1% of the Series' average daily net assets. As of March 31, 1994, PMF
served as manager or administrator to [66] investment companies, including
[37] mutual funds, with aggregate assets of approximately $[51] billion. The
Prudential Investment Corporation (PIC or the Subadviser) furnishes
investment advisory services in connection with the management of the Fund
under a Subadvisory Agreement with PMF. See "How the Fund is
Managed--Manager" at page 11.
WHO DISTRIBUTES THE FUND'S SHARES?
Prudential Mutual Fund Distributors, Inc. (PMFD) acts as the Distributor
of the Series' Class A shares and is currently paid for its services at an
annual rate of .10 of 1% of the average daily net assets of the Class A
shares.
Prudential Securities Incorporated (Prudential Securities or PSI), a major
securities underwriter and securities and commodities broker, acts as the
Distributor of the Series' Class B and Class C shares and is paid for its
services at an annual rate of .50 of 1% of the average daily net assets of
the Class B shares and is currently paid for its services at an annual rate
of .75 of 1% of the average daily net assets of the Class C shares.
See "How the Fund Is Managed--Distributor" at page 12.
2
<PAGE>
WHAT IS THE MINIMUM INVESTMENT?
The minimum initial investment for Class A and Class B shares is $1,000
per class and $5,000 for Class C shares. The minimum subsequent investment
is $100 for all classes. There is no minimum investment requirement for
certain retirement and employee savings plans or custodial accounts for the
benefit of minors. 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 18 and
"Shareholder Guide--Shareholder Services" at page 27.
HOW DO I PURCHASE SHARES?
You may purchase shares of the Fund through Prudential Securities, Pruco
Securities Corporation (Prusec) or directly from the Fund through its
transfer agent, Prudential Mutual Fund Services, Inc. (PMFS or the Transfer
Agent), at the net asset value per share (NAV) next determined after receipt
of your purchase order by the Transfer Agent or Prudential Securities plus a
sales charge which may be imposed either (i) at the time of purchase (Class
A shares) or (ii) on a deferred basis (Class B or Class C shares). See "How
the Fund Values its Shares" at page 14 and "Shareholder Guide--How to Buy
Shares of the Fund" at page 19.
WHAT ARE MY PURCHASE ALTERNATIVES?
The Series offers three classes of shares:
- Class A Shares:__ Sold with an initial sales charge of up to 3% of
the offering price.
- Class B Shares:__ Sold without an initial sales charge but are
subject to a contingent deferred sales charge or
CDSC (declining from 5% to zero of the lower of
the amount invested or the redemption proceeds)
which will be imposed on certain redemptions made
within six years of purchase. Although Class B
shares are subject to higher ongoing
distribution-related expenses than Class A shares,
Class B shares will automatically convert to Class
A shares (which are subject to lower ongoing
expenses) approximately seven years after
purchase.
- Class C Shares:__ Sold without an initial sales charge and for one
year after purchase, are subject to a 1% CDSC on
redemptions. Like Class B shares, Class C shares
are subject to higher ongoing distribution-related
expenses than Class A shares but do not convert to
another class.
See "Shareholder Guide--Alternative Purchase Plan" at page 20.
HOW DO I SELL MY SHARES?
You may redeem your shares at any time at the NAV next determined after
Prudential Securities or the Transfer Agent receives your sell order.
However, the proceeds of redemptions of Class B and Class C shares may be
subject to a CDSC. See "Shareholder Guide--How to Sell Your Shares" at page
22.
HOW ARE DIVIDENDS AND DISTRIBUTIONS PAID?
The Fund 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 Fund at NAV without a sales charge
unless you request that they be paid to you in cash. See "Taxes, Dividends
and Distributions" at page 15.
3
<PAGE>
FUND EXPENSES
(CALIFORNIA SERIES)
<TABLE>
<CAPTION>
CLASS A
SHAREHOLDER TRANSACTION EXPENSES+ SHARES CLASS B SHARES CLASS C SHARES
------------- -------------------- ---------------------
<S> <C> <C> <C>
Maximum Sales Load Imposed on Purchases (as
a percentage of offering price)........... 3% None None
Maximum Sales Load or Deferred Sales Load
Imposed on Reinvested Dividends........... None None None
Deferred Sales Load (as a percentage of
original purchase price or redemption
proceeds, whichever is lower)............. None 5% during the first 1% on redemptions
year, decreasing by made within one year
1% annually to 1% in of purchase
the fifth and sixth
years and 0% the
seventh year*
Redemption Fees............................ None None None
Exchange Fee............................... None None None
</TABLE>
<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES CLASS A CLASS C
(as a percentage of average net assets) SHARES CLASS B SHARES SHARES**
--------- -------------- ---------------
<S> <C> <C> <C>
Management Fees............................ .50% .50% .50%
12b-1 Fees+................................ .10%++ .50% .75%++
Other Expenses............................. .17% .17% .17%
--------- -------------- ---------------
Total Fund Operating Expenses.............. .77% 1.17% 1.42%
--------- -------------- ---------------
--------- -------------- ---------------
</TABLE>
<TABLE>
<CAPTION>
1 3 5 10
EXAMPLE YEAR YEARS YEARS YEARS
- ---------------------------------------------------------------------------- --- ----- ----- ---------
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000 investment, assuming (1) 5%
annual return and (2) redemption at the end of each time period:
Class A................................................................. $ 38 $ 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
<FN>
The above example with respect to Class A and Class B shares is based on
restated data for the Series' fiscal year ended August 31, 1993. The above
example with respect to Class C shares is based on expenses expected to have
been incurred if Class C shares had been in existence during the fiscal year
ended August 31, 1993. THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF
PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE
SHOWN.
The purpose of this table is to assist investors in understanding the various
costs and expenses that an investor in the California 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."
** Estimated based on expenses expected to have been incurred if Class C shares
had been in existence during the fiscal year ended August 31, 1993.
+ 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 Class B and Class C 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 expenses
with respect to the Class A and Class C shares of the Series to .10 of 1%
and .75 of 1% of the average daily net asset value of the Class A and Class
C shares, respectively, for the fiscal year ending August 31, 1994. See "How
the Fund Is Managed--Distributor."
</TABLE>
4
<PAGE>
FINANCIAL HIGHLIGHTS
(for a share of beneficial interest outstanding throughout each of the indicated
periods)
(Class A Shares)
The following financial highlights (with the exception of the six months
ended February 28, 1994) have been audited by Deloitte & Touche, independent
accountants, whose report thereon was unqualified. This information should be
read in conjunction with the financial statements and the notes thereto, which
appear in the Statement of Additional Information. The following financial
highlights contain selected data for a Class A share of beneficial interest
outstanding, total return, ratios to average net assets and other supplemental
data for the periods indicated. This information is based on data contained in
the financial statements. No Class C shares were outstanding during the periods
indicated.
<TABLE>
<CAPTION>
CLASS A
-------------------------------------------------------
SIX
MONTHS
ENDED JANUARY 22,
FEBRUARY 1990*
28, YEAR ENDED AUGUST 31, THROUGH
1994 ------------------------------ AUGUST 31,
(UNAUDITED) 1993 1992 1991 1990
-------- -------- -------- -------- -----------
<S> <C> <C> <C> <C> <C>
PER SHARE
OPERATING
PERFORMANCE:
INCOME FROM
INVESTMENT
OPERATIONS
Net asset value,
beginning of
period......... $ 12.16 $ 11.48 $ 11.01 $ 10.57 $ 10.77
-------- -------- -------- -------- -----------
Net investment
income......... .33 .69 .70 .69 .41
Net realized and
unrealized gain
(loss) on
investment
transactions... (.20) .68 .47 .44 (.20)
-------- -------- -------- -------- -----------
Total from
investment
operations... .13 1.37 1.17 1.13 .21
-------- -------- -------- -------- -----------
LESS
DISTRIBUTIONS
Dividends from
net investment
income......... (.33) (.69) (.70) (.69) (.41)
Distributions
from net
realized
gains.......... (.12) -- -- -- --
-------- -------- -------- -------- -----------
Total
distributions... (.45) (.69) (.70) (.69) (.41)
-------- -------- -------- -------- -----------
Net asset value,
end of
period......... $ 11.84 $ 12.16 $ 11.48 $ 11.01 $ 10.57
-------- -------- -------- -------- -----------
-------- -------- -------- -------- -----------
TOTAL
RETURN+:....... 1.09% 12.30% 10.95% 10.98% 1.85%
RATIOS/SUPPLEMENTAL
DATA:
Net assets, end
of period
(000).......... $11,809 $ 11,116 $ 5,388 $ 4,188 $ 1,774
Average net
assets (000)... $11,810 $ 7,728 $ 4,322 $ 2,748 $ 1,214
Ratios to
average net
assets:
Expenses,
including
distribution
fee.......... .73%** .77% .82% .88% .90%**
Expenses,
excluding
distribution
fee.......... .63%** .67% .72% .78% .80%**
Net investment
income....... 5.48%** 5.82% 6.25% 6.37% 6.28%**
Portfolio
turnover....... 33% 43% 53% 53% 119%
<FN>
- --------------------
* Commencement of offering of Class A shares.
** Annualized.
+ Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on
the last day of each period reported and includes reinvestment of
dividends and distributions. Total returns for periods of less than a full
year are not annualized.
</TABLE>
5
<PAGE>
FINANCIAL HIGHLIGHTS
(for a share of beneficial interest outstanding throughout each of the indicated
periods)
(Class B Shares)
__The following financial highlights, with respect to the five-year period
ended August 31, 1993, have been audited by Deloitte & Touche, independent
accountants, whose report thereon was unqualified. This information should be
read in conjunction with the financial statements and the notes thereto, which
appear in the Statement of Additional Information. The following financial
highlights contain selected data for a Class B share of beneficial interest
outstanding, total return, ratios to average net assets and other supplemental
data for the periods indicated. This information is based on data contained in
the financial statements. No Class C shares were outstanding during the periods
indicated.
<TABLE>
<CAPTION>
CLASS B
---------------------------------------------------------------------------------------------------------------
SIX
MONTHS
ENDED FEBRUARY 13,
FEBRUARY 1985*
28, YEAR ENDED AUGUST 31, THROUGH
1994 ----------------------------------------------------------------------------------------- AUGUST 31,
(UNAUDITED) 1993 1992 1991 1990 1989++ 1988 1987 1986 1985
------ --------- --------- --------- --------- --------- ---------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE
OPERATING
PERFORMANCE:
INCOME FROM
INVESTMENT
OPERATIONS
Net asset
value,
beginning of
period....... $12.15 $ 11.48 $ 11.01 $ 10.57 $ 10.76 $ 10.52 $ 10.78 $ 11.84 $ 10.71 $ 10.00
------ --------- --------- --------- --------- --------- ---------- ---------- ---------- ------------
Net investment
income....... .30 .64 .66 .64 .64 .66 .69+ .72+ .83+ .78+
Net realized
and
unrealized
gain (loss)
on investment
transactions... (.20) .67 .47 .44 (.19) .24 (.26) (.61) 1.16 .71
------ --------- --------- --------- --------- --------- ---------- ---------- ---------- ------------
Total from
investment
operations... .10 1.31 1.13 1.08 .45 .90 .43 .11 1.99 1.49
------ --------- --------- --------- --------- --------- ---------- ---------- ---------- ------------
LESS
DISTRIBUTIONS
Dividends from
net
investment
income....... (.30) (.64) (.66) (.64) (.64) (.66) (.69) (.72) (.83) (.78)
Distributions
from net
realized
gains........ (.12) -- -- -- -- -- -- (.45) (.03) --
------ --------- --------- --------- --------- --------- ---------- ---------- ---------- ------------
Total
distributions... (.42) (.64) (.66) (.64) (.64) (.66) (.69) (1.17) (.86) (.78)
------ --------- --------- --------- --------- --------- ---------- ---------- ---------- ------------
Net asset
value, end of
period....... $11.83 $ 12.15 $ 11.48 $ 11.01 $ 10.57 $ 10.76 $ 10.52 $ 10.78 $ 11.84 $ 10.71
------ --------- --------- --------- --------- --------- ---------- ---------- ---------- ------------
------ --------- --------- --------- --------- --------- ---------- ---------- ---------- ------------
TOTAL
RETURN+++:... .88% 11.74% 10.52% 10.54% 4.21% 8.79% 4.28% .86% 19.33% 15.23%
RATIOS/SUPPLEMENTAL
DATA:
Net assets,
end of period
(000)........ $$206,997 $ 207,634 $ 177,861 $ 169,190 $ 174,005 $ 178,287 $ 150,733 $ 141,591 $ 110,989 $48,362
Average net
assets
(000)........ $210,647 $ 190,944 $ 172,495 $ 169,220 $ 175,990 $ 166,305 $ 139,974 $ 134,824 $ 85,523 $23,511
Ratios to
average net
assets:
Expenses,
including
distribution
fee........ 1.13%** 1.17% 1.22% 1.28% 1.24% 1.23% 1.11%+ 1.07%+ 1.06%+ 1.29%+**
Expenses,
excluding
distribution
fee........ .63%** .67% .72% .78% .76% .75% .61%+ .58%+ .58%+ .81%+**
Net
investment
income..... 5.08%** 5.44% 5.85% 5.98% 5.95% 6.12% 6.51%+ 6.24%+ 6.92%+ 7.49%+**
Portfolio
turnover..... 33% 43% 53% 53% 119% 145% 100% 110% 75% 75%
<FN>
- --------------------
* Commencement of offering of Class B shares.
** Annualized.
+ Net of expense subsidy.
++ On December 31, 1988, Prudential Mutual Fund Management, Inc. succeeded
The Prudential Insurance Company of America as manager of the Fund. See
"Manager" in the Statement of Additional Information.
+++ Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on
the last day of each period reported and includes reinvestment of
dividends and distributions. Total returns for periods of less than a full
year are not annualized.
</TABLE>
6
<PAGE>
HOW THE FUND INVESTS
INVESTMENT OBJECTIVE AND POLICIES
PRUDENTIAL CALIFORNIA MUNICIPAL FUND (THE FUND) IS AN OPEN-END INVESTMENT
COMPANY, OR MUTUAL FUND, CONSISTING OF THREE SEPARATE SERIES. EACH SERIES OF THE
FUND IS MANAGED INDEPENDENTLY. THE CALIFORNIA SERIES (THE SERIES) IS DIVERSIFIED
AND ITS INVESTMENT OBJECTIVE IS TO MAXIMIZE CURRENT INCOME THAT IS EXEMPT FROM
CALIFORNIA 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 CALIFORNIA 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 CALIFORNIA STATE AND FEDERAL INCOME
TAXES (CALIFORNIA OBLIGATIONS). THERE CAN BE NO ASSURANCE THAT THE SERIES WILL
BE ABLE TO ACHIEVE ITS INVESTMENT OBJECTIVE.
Interest on certain municipal obligations may be a preference item for
purposes of the federal alternative minimum tax. The Series may invest without
limit in municipal obligations that are "private activity bonds" (as defined in
the Internal Revenue Code) the interest on which would be a preference item for
purposes of the federal alternative minimum tax. See "Taxes, Dividends and
Distributions." California law provides that dividends paid by the Series are
exempt from California State personal income tax for individuals who reside in
California to the extent such dividends are derived from interest payments on
California Obligations. California Obligations may include general obligation
bonds of the State, counties, cities, towns, etc., revenue bonds of utility
systems, highways, bridges, port and airport facilities, colleges, hospitals,
etc., and industrial development and pollution control bonds. The Series will
invest in long-term California Obligations, and the dollar-weighted average
maturity of the Series' portfolio will generally range between 10-20 years. The
Series may also invest in certain short-term, tax-exempt notes such as Tax
Anticipation Notes, Revenue Anticipation Notes, Bond Anticipation Notes,
Construction Loan Notes and variable and floating rate demand notes.
Generally, municipal obligations with longer maturities produce higher yields
and are subject to greater price fluctuations as a result of changes in interest
rates (market risk) than municipal obligations with shorter maturities. The
prices of municipal obligations vary inversely with interest rates. Interest
rates are currently much lower than in recent years. If rates were to rise
sharply, the prices of bonds in the Series' portfolio might be adversely
affected.
THE SERIES MAY INVEST ITS ASSETS IN FLOATING RATE AND VARIABLE RATE
SECURITIES, INCLUDING PARTICIPATION INTERESTS THEREIN AND INVERSE FLOATERS.
THERE IS NO LIMIT ON THE AMOUNT OF SUCH SECURITIES THAT THE SERIES MAY PURCHASE.
Floating rate securities normally have a rate of interest which is set as a
specific percentage of a designated base rate, such as the rate on Treasury
bonds or bills or the prime rate at a major commercial bank. The interest rate
on floating rate securities changes periodically when there is a change in the
designated base interest rate. Variable rate securities provide for a specified
periodic 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
7
<PAGE>
interest rate on another security or the value of an index. Changes in the
interest rate on the other security or index inversely affect the residual
interest rate paid on the inverse floater, with the result that the inverse
floater's price will be considerably more volatile than that of a fixed rate
bond. The market for inverse floaters is relatively new.
THE SERIES MAY ALSO INVEST IN MUNICIPAL LEASE OBLIGATIONS. A MUNICIPAL LEASE
OBLIGATION IS A MUNICIPAL SECURITY THE INTEREST ON AND PRINCIPAL OF WHICH IS
PAYABLE OUT OF LEASE PAYMENTS MADE BY THE PARTY LEASING THE FACILITIES FINANCED
BY THE ISSUE. Typically, municipal lease obligations are issued by a state or
municipal financing authority to provide funds for the construction of
facilities (E.G., schools, dormitories, office buildings or prisons) or the
acquisition of equipment. The facilities are typically used by the state or
municipality pursuant to a lease with a financing authority. Certain municipal
lease obligations may trade infrequently. Accordingly, the investment adviser
will monitor the liquidity of municipal lease obligations under the supervision
of the Trustees. Municipal lease obligations will not be considered illiquid for
purposes of the Series' 15% limitation on illiquid securities provided the
investment adviser determines that there is a readily available market for such
securities. See "Other Investments and Policies--Illiquid Securities" below.
ALL CALIFORNIA OBLIGATIONS PURCHASED BY THE SERIES WILL BE "INVESTMENT GRADE"
SECURITIES. In other words, all of the California Obligations will, at the time
of purchase, be rated within the four highest quality grades as determined by
either Moody's Investors Service, Inc. (Moody's) (currently Aaa, Aa, A, Baa for
bonds, MIG 1, MIG 2, MIG 3, MIG 4 for notes and P-1 for commercial paper) or
Standard & Poor's Corporation (S&P) (currently AAA, AA, A, BBB for bonds, SP-1,
SP-2 for notes and A-1 for commercial paper) or, if unrated, will possess
creditworthiness, in the opinion of the investment adviser, comparable to
securities in which the Series may invest. Securities rated Baa or BBB may have
speculative characteristics, and changes in economic conditions or other
circumstances are more likely to lead to a weakened capacity to make principal
and interest payments than is the case with higher grade securities. Subsequent
to its purchase by the Series, a municipal obligation may be assigned a lower
rating or cease to be rated. Such an event would not require the elimination of
the issue from the portfolio, but the investment adviser will consider such an
event in determining whether the Series should continue to hold the security in
its portfolio. See "Description of Tax-Exempt Security Ratings" in the Statement
of Additional Information. The Series may purchase California 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 California Obligation might receive an upgraded
credit standing, thereby increasing the market value of the bonds it has issued
or when the investment adviser believes that interest rates might decline. As a
general matter, bond prices and the Series' net asset value will vary inversely
with interest rate fluctuations.
UNDER NORMAL MARKET CONDITIONS, THE SERIES WILL ATTEMPT TO INVEST
SUBSTANTIALLY ALL OF THE VALUE OF ITS ASSETS IN CALIFORNIA 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
California State and federal income taxes or the Series will have at least 80%
of its total assets invested in California 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 California Obligations or may invest
its assets so that more than 20% of the income is subject to California State or
federal income taxes.
THE SERIES MAY ACQUIRE PUT OPTIONS (PUTS) GIVING THE SERIES THE RIGHT TO SELL
SECURITIES HELD IN THE SERIES' PORTFOLIO AT A SPECIFIED EXERCISE PRICE ON A
SPECIFIED DATE. Such puts may be acquired for the purpose of protecting the
Series from a possible decline in the market value of the security to which the
put applies in the event of interest rate fluctuations or, in the case of
liquidity puts, for the purpose of shortening the effective maturity of the
underlying security. The aggregate value of premiums
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paid to acquire puts held in the Series' portfolio (other than liquidity puts)
may not exceed 10% of the net asset value of the Series. The acquisition of a
put may involve an additional cost to the Series, by payment of a premium for
the put, by payment of a higher purchase price for securities to which the put
is attached or through a lower effective interest rate.
In addition, there is a credit risk associated with the purchase of puts in
that the issuer of the put may be unable to meet its obligation to purchase the
underlying security. Accordingly, the Series will acquire puts only under the
following circumstances: (1) the put is written by the issuer of the underlying
security and such security is rated within the four highest quality grades as
determined by Moody's or S&P; or (2) the put is written by a person other than
the issuer of the underlying security and such person has securities outstanding
which are rated within such four highest quality grades; or (3) the put is
backed by a letter of credit or similar financial guarantee issued by a person
having securities outstanding which are rated within the two highest quality
grades of such rating services.
THE SERIES MAY PURCHASE MUNICIPAL OBLIGATIONS ON A "WHEN-ISSUED" OR "DELAYED
DELIVERY" BASIS IN EACH CASE WITHOUT LIMIT. When municipal obligations are
offered on a when-issued or delayed delivery basis, the price and coupon rate
are fixed at the time the commitment to purchase is made, but delivery and
payment for the securities take place at a later date. Normally, the settlement
date occurs within one month of purchase. The purchase price for such securities
includes interest accrued during the period between purchase and settlement and,
therefore, no interest accrues to the economic benefit of the purchaser during
such period. In the case of purchases by the Series, the price that the Series
is required to pay on the settlement date may be in excess of the market value
of the municipal obligations on that date. While securities may be sold prior to
the settlement date, the Series intends to purchase these securities with the
purpose of actually acquiring them unless a sale would be desirable for
investment reasons. At the time the Series makes the commitment to purchase a
municipal obligation on a when-issued or delayed delivery basis, it will record
the transaction and reflect the value of the obligation each day in determining
its net asset value. This value may fluctuate from day to day in the same manner
as values of municipal obligations otherwise held by the Series. If the seller
defaults in the sale, the Series could fail to realize the appreciation, if any,
that had occurred. The Series will establish a segregated account with its
Custodian in which it will maintain cash and liquid, high-grade debt obligations
equal in value to its commitments for when-issued or delayed delivery
securities.
THE SERIES MAY ALSO PURCHASE MUNICIPAL FORWARD CONTRACTS. A municipal forward
contract is a municipal security which is purchased on a when-issued basis with
delivery taking place up to five years from the date of purchase. No interest
will accrue on the security prior to the delivery date. The investment adviser
will monitor the liquidity, value, credit quality and delivery of the security
under the supervision of the Trustees.
THE SERIES MAY PURCHASE SECONDARY MARKET INSURANCE ON CALIFORNIA 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 California 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 fluctuations in the price, I.E.,
the market value, of the municipal obligations caused by changes in interest
rates and other factors, nor in turn against fluctuations in the net asset value
of the shares of the Series.
FUTURES CONTRACTS AND OPTIONS THEREON
THE SERIES IS AUTHORIZED TO PURCHASE AND SELL CERTAIN FINANCIAL FUTURES
CONTRACTS (FUTURES CONTRACTS) AND OPTIONS THEREON SOLELY FOR THE PURPOSE OF
HEDGING ITS PORTFOLIO SECURITIES AGAINST FLUCTUATIONS IN VALUE CAUSED BY CHANGES
IN PREVAILING MARKET INTEREST RATES AND HEDGING AGAINST INCREASES IN THE COST OF
SECURITIES THE SERIES INTENDS TO PURCHASE. THE SUCCESSFUL USE OF FUTURES
CONTRACTS AND OPTIONS THEREON BY THE SERIES INVOLVES ADDITIONAL TRANSACTION
COSTS AND IS SUBJECT TO VARIOUS RISKS AND DEPENDS UPON THE INVESTMENT ADVISER'S
ABILITY TO PREDICT THE DIRECTION OF THE MARKET (INCLUDING INTEREST RATES).
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A FUTURES CONTRACT OBLIGATES THE SELLER OF THE CONTRACT TO DELIVER TO THE
PURCHASER OF THE CONTRACT CASH EQUAL TO A SPECIFIC DOLLAR AMOUNT TIMES THE
DIFFERENCE BETWEEN THE VALUE OF A SPECIFIC FIXED-INCOME SECURITY OR INDEX AT THE
CLOSE OF THE LAST TRADING DAY OF THE CONTRACT AND THE PRICE AT WHICH THE
AGREEMENT IS MADE. No physical delivery of the underlying securities is made.
The Series will engage in transactions in only those futures contracts and
options thereon that are traded on a commodities exchange or a board of trade.
The Series intends to engage in futures contracts and options on futures
transactions as a hedge against changes, resulting from market conditions, in
the value of securities which are held in the Series' portfolio or which the
Series intends to purchase, in accordance with the rules and regulations of the
Commodity Futures Trading Commission (the CFTC). The Series also intends to
engage in such transactions when they are economically appropriate for the
reduction of risks inherent in the ongoing management of the Series.
THE SERIES MAY NOT PURCHASE OR SELL FUTURES CONTRACTS OR OPTIONS THEREON IF,
IMMEDIATELY THEREAFTER, (I) THE SUM OF INITIAL AND NET CUMULATIVE VARIATION
MARGIN ON OUTSTANDING FUTURES CONTRACTS, TOGETHER WITH PREMIUMS PAID ON OPTIONS
THEREON, WOULD EXCEED 20% OF THE TOTAL ASSETS OF THE SERIES, OR (II) IN THE CASE
OF RISK MANAGEMENT TRANSACTIONS, THE SUM OF THE AMOUNT OF INITIAL MARGIN
DEPOSITS ON THE SERIES' FUTURES POSITIONS AND PREMIUMS PAID FOR OPTIONS THEREON
WOULD EXCEED 5% OF THE LIQUIDATION VALUE OF THE SERIES' TOTAL ASSETS. There are
no limitations on the percentage of the portfolio which may be hedged and no
limitations on the use of the Series' assets to cover futures contracts and
options thereon, except that the aggregate value of the obligations underlying
put options will not exceed 50% of the Series' assets. Certain requirements for
qualification as a regulated investment company under the Internal Revenue Code
may limit the Series' ability to engage in futures contracts and options
thereon. See "Distributions and Tax Information--Federal Taxation" in the
Statement of Additional Information.
Currently, futures contracts are available on several types of fixed-income
securities, including U.S. Treasury bonds and notes, three-month U.S. Treasury
bills and Eurodollars. Futures contracts are also available on a municipal bond
index, based on THE BOND BUYER Municipal Bond Index, an index of 40 actively
traded municipal bonds. The Series may also engage in transactions in other
futures contracts that become available, from time to time, in other
fixed-income securities or municipal bond indices and in other options on such
contracts if the investment adviser believes such contracts and options would be
appropriate for hedging the Series' portfolio.
THERE CAN BE NO ASSURANCE THAT VIABLE MARKETS WILL CONTINUE OR THAT A LIQUID
SECONDARY MARKET WILL EXIST TO TERMINATE ANY PARTICULAR FUTURES CONTRACT AT ANY
SPECIFIC TIME. If it is not possible to close a futures position entered into by
the Series, the Series will continue to be required to make daily cash payments
of variation margin in the event of adverse price movements. In such a
situation, if the Series had insufficient cash, it might have to sell portfolio
securities to meet daily variation margin requirements at a time when it might
be disadvantageous to do so. The inability to close futures positions also could
have an adverse impact on the ability of the Series to hedge effectively. There
is also a risk of loss by the Series of margin deposits in the event of
bankruptcy of a broker with whom the Series has an open position in a futures
contract.
THE SUCCESSFUL USE OF FUTURES CONTRACTS AND OPTIONS THEREON BY THE SERIES IS
SUBJECT TO VARIOUS ADDITIONAL RISKS. Any use of futures transactions involves
the risk of imperfect correlation in movements in the price of futures contracts
and movements in interest rates and, in turn, the prices of the securities that
are the subject of the hedge. If the price of the futures contract moves more or
less than the price of the security that is the subject of the hedge, the Series
will experience a gain or loss that will not be completely offset by movements
in the price of the security. The risk of imperfect correlation is greater where
the securities underlying futures contracts are taxable securities (rather than
municipal securities), are issued by companies in different market sectors or
have different maturities, ratings or geographic mixes than the security being
hedged. In addition, the correlation may be affected by additions to or
deletions from the index which serves as the basis for a futures contract.
Finally, if the price of the security that is subject to the hedge were to move
in a favorable direction, the advantage to the Series would be partially offset
by the loss incurred on the futures contract.
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SPECIAL CONSIDERATIONS
BECAUSE THE SERIES WILL INVEST AT LEAST 80% OF THE VALUE OF ITS TOTAL ASSETS
IN CALIFORNIA 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 CALIFORNIA OBLIGATIONS TO THIS DEGREE. The recent
national recession has severely affected several key sectors of California's
economy. In addition, California law could restrict the ability of the State and
its local governmental entities to raise revenues sufficient to pay certain
obligations. The fiscal 1994 budget was approved on time and contains $38.5
billion in general fund spending, a decline of over 6% from fiscal 1993. If the
issuers of any of the California Obligations are unable to meet their financial
obligations because of earthquakes 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.
OTHER INVESTMENTS AND POLICIES
REPURCHASE AGREEMENTS
The Series may on occasion enter into repurchase agreements, whereby the
seller of a security agrees to repurchase that security from the Series at a
mutually agreed-upon time and price. The period of maturity is usually quite
short, possibly overnight or a few days, although it may extend over a number of
months. The resale price is in excess of the purchase price, reflecting an
agreed-upon rate of return effective for the period of time the Series' money is
invested in the security. The Series' repurchase agreements will at all times be
fully collateralized in an amount at least equal to the purchase price,
including accrued interest earned on the underlying securities. The instruments
held as collateral are valued daily and as the value of the instruments
declines, the Series will require additional collateral. If the seller defaults
and the value of the collateral securing the repurchase agreement declines, the
Series may incur a loss. The Series participates in a joint repurchase account
with other investment companies managed by Prudential Mutual Fund Management,
Inc. pursuant to an order of the Securities and Exchange Commission (SEC). See
"Investment Objectives and Policies--Repurchase Agreements" in the Statement of
Additional Information.
BORROWING
The Series may borrow an amount equal to no more than 20% of the value of its
total assets (calculated when the loan is made) for temporary, extraordinary or
emergency purposes or for the clearance of transactions. The Series may pledge
up to 20% of the value of its total assets to secure these borrowings. The
Series will not purchase portfolio securities if its borrowings exceed 5% of its
total assets.
PORTFOLIO TURNOVER
The Series does not expect to trade in securities for short-term gain. It is
anticipated that the annual portfolio turnover rate will not exceed 150%. The
portfolio turnover rate is calculated by dividing the lesser of sales or
purchases of portfolio securities by the average monthly value of the portfolio
securities, excluding securities having a maturity at the date of purchase of
one year or less.
ILLIQUID SECURITIES
The Series may not invest more than 15% of its net assets in repurchase
agreements which have a maturity of longer than seven days or in other illiquid
securities, including securities that are illiquid by virtue of the absence of a
readily available market or contractual restrictions on resale. 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 municipal lease obligations 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.
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The staff of the SEC has taken the position that purchased over-the-counter
options and the assets used as "cover" for written over-the-counter options are
illiquid securities unless the Series and the counterparty have provided for the
Series, at the Series' election, to unwind the over-the-counter option. The
exercise of such an option ordinarily would involve the payment by the Series of
an amount designed to reflect the counterparty's economic loss from an early
termination, but does allow the Series to treat the assets used as "cover" as
"liquid."
INVESTMENT RESTRICTIONS
The Series is subject to certain investment restrictions which, like its
investment objectives, 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, 1993, total expenses of the Series as a
percentage of average net assets were .77% and 1.17% for the Series' Class A and
Class B shares, respectively. See "Financial Highlights." No Class C shares were
outstanding during the fiscal year ended August 31, 1993.
MANAGER
PRUDENTIAL MUTUAL FUND MANAGEMENT, INC. (PMF OR THE MANAGER), ONE SEAPORT
PLAZA, NEW YORK, NEW YORK 10292, IS THE MANAGER OF THE FUND AND IS COMPENSATED
FOR ITS SERVICES AT AN ANNUAL RATE OF .50 OF 1% OF THE AVERAGE DAILY NET ASSETS
OF THE SERIES. PMF was incorporated in May 1987 under the laws of the State of
Delaware. For the fiscal year ended August 31, 1993, the Series paid PMF a
management fee of .50 of 1% of the Series' average net assets. See "Manager" in
the Statement of Additional Information.
As of March 31, 1994, PMF served as the manager to [37] open-end investment
companies, constituting all of the Prudential Mutual Funds, and as manager or
administrator to [29] closed-end investment companies. These companies have
aggregate assets of approximately $[51] billion.
UNDER THE MANAGEMENT AGREEMENT WITH THE FUND, PMF MANAGES THE INVESTMENT
OPERATIONS OF EACH SERIES OF THE FUND AND ALSO ADMINISTERS THE FUND'S BUSINESS
AFFAIRS. See "Manager" in the Statement of Additional Information.
UNDER A SUBADVISORY AGREEMENT BETWEEN PMF AND THE PRUDENTIAL INVESTMENT
CORPORATION (PIC OR THE SUBADVISER), PIC FURNISHES INVESTMENT ADVISORY SERVICES
IN CONNECTION WITH THE MANAGEMENT OF THE FUND AND IS REIMBURSED BY PMF FOR ITS
REASONABLE COSTS AND EXPENSES INCURRED IN PROVIDING SUCH SERVICES. PMF continues
to have responsibility for all investment advisory services under the Management
Agreement and supervises PIC's performance of such services.
Jerry A. Webman, a Managing Director of PIC, sets broad investment strategies
for the Series which are then implemented by the Series' portfolio manager. The
current portfolio manager is Christian Smith, an Investment Associate of
Prudential Investment Advisors. Mr. Smith has responsibility for the day-to-day
management of the portfolio. He has managed the portfolio since 1991 and has
been employed by PIC in various capacities since 1988.
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PMF and PIC are indirect, wholly-owned subsidiaries of The Prudential
Insurance Company of America (Prudential), a major diversified insurance and
financial services company.
PMF MAY FROM TIME TO TIME AGREE TO WAIVE ALL OR A PORTION OF ITS MANAGEMENT
FEE AND SUBSIDIZE CERTAIN OPERATING EXPENSES OF THE SERIES. The Series is not
required to reimburse PMF for such management fee waiver or expense subsidy. Fee
waivers and expense subsidies will increase the Series' yield. See "Fund
Expenses."
DISTRIBUTOR
PRUDENTIAL MUTUAL FUND DISTRIBUTORS, INC. (PMFD), ONE SEAPORT PLAZA, NEW YORK,
NEW YORK 10292, IS A CORPORATION ORGANIZED UNDER THE LAWS OF THE STATE OF
DELAWARE AND SERVES AS THE DISTRIBUTOR OF THE CLASS A SHARES OF THE SERIES. IT
IS A WHOLLY-OWNED SUBSIDIARY OF PMF.
PRUDENTIAL SECURITIES INCORPORATED (PRUDENTIAL SECURITIES OR PSI), ONE SEAPORT
PLAZA, NEW YORK, NEW YORK 10292, IS A CORPORATION ORGANIZED UNDER THE LAWS OF
THE STATE OF DELAWARE AND SERVES AS THE DISTRIBUTOR OF THE CLASS B AND CLASS C
SHARES OF THE SERIES. IT IS AN INDIRECT, WHOLLY-OWNED SUBSIDIARY OF PRUDENTIAL.
UNDER SEPARATE DISTRIBUTION AND SERVICE PLANS (THE CLASS A PLAN, THE CLASS B
PLAN AND THE CLASS C PLAN, COLLECTIVELY, THE PLANS) ADOPTED BY THE FUND UNDER
RULE 12B-1 UNDER THE INVESTMENT COMPANY ACT AND SEPARATE DISTRIBUTION AGREEMENTS
(THE DISTRIBUTION AGREEMENTS), PMFD AND PRUDENTIAL SECURITIES (COLLECTIVELY, THE
DISTRIBUTOR) INCUR THE EXPENSES OF DISTRIBUTING THE CLASS A, CLASS B AND CLASS C
SHARES OF THE SERIES. These expenses include commissions and account servicing
fees paid to, or on account of, financial advisers of Prudential Securities and
Pruco Securities Corporation (Prusec), an affiliated broker-dealer, commissions
and account servicing fees paid to, or on account of, other broker-dealers or
financial institutions (other than national banks) which have entered into
agreements with the Distributor, advertising expenses, the cost of printing and
mailing prospectuses to potential investors and indirect and overhead costs of
Prudential Securities and Prusec associated with the sale of Fund shares,
including lease, utility, communications and sales promotion expenses. The State
of Texas requires that shares of the Series may be sold in that state only by
dealers or other financial institutions which are registered there as
broker-dealers.
Under the Plans, the Series is not obligated to pay distribution and/or
service fees to the Distributor as compensation for its distribution and service
activities, not as reimbursement for specific expenses incurred. If the
Distributor's expenses exceed its distribution and service fees, the Series will
not be obligated to pay any additional expenses. If the Distributor's expenses
are less than such distribution and service fees, it will retain its full fees
and realize a profit.
UNDER THE CLASS A PLAN, THE SERIES MAY PAY PMFD FOR ITS DISTRIBUTION-RELATED
EXPENSES 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. PFMD 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, 1994.
For the fiscal year ended August 31, 1993, PMFD received payments of $7,728
under the Class A Plan as reimbursement of expenses related to the distribution
of Class A shares. 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, 1993, PMFD also received approximately
$180,000 in initial sales charges.
UNDER THE CLASS B AND CLASS C PLANS, THE SERIES MAY PAY PRUDENTIAL SECURITIES
FOR ITS DISTRIBUTION-RELATED EXPENSES 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
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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, 1994. 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, 1993, Prudential Securities incurred
distribution expenses of approximately $2,054,100 under the Class B Plan and
received $954,972 from the Series under the Class B Plan. In addition,
Prudential Securities received approximately $341,800 in contingent deferred
sales charges from redemptions of Class B shares during this period. No Class C
shares were outstanding during the fiscal year ended August 31, 1993.
For the fiscal year ended August 31, 1993, the Series paid distribution
expenses of .10 of 1% and .50 of 1% of the average daily net assets of the Class
A and Class B shares, respectively. The Series records all payments made under
the Plans as expenses in the calculation of net investment income. No Class C
shares were outstanding during the fiscal year ended August 31, 1993.
Distribution expenses attributable to the sale of shares of the Series will be
allocated to each class based upon the ratio of sales of each class to the sales
of all shares of the Series other than expenses allocable to a particular class.
The distribution fee and sales charge of one class will not be used to subsidize
the sale of another class.
Each Plan provides that it shall continue in effect from year to year provided
that a majority of the Trustees of the Fund, including a majority of the
Trustees who are not "interested persons" of the Fund (as defined in the
Investment Company Act) and who have no direct or indirect financial interest in
the operation of the Plan or any agreement related to the Plan (the Rule 12b-1
Trustees), vote annually to continue the Plan. Each Plan may be terminated with
respect to the Series at any time by vote of a majority of the Rule 12b-1
Trustees or of a majority of the outstanding shares of the applicable class of
the Series. The Series will not be obligated to pay expenses incurred under any
Plan if it is terminated or not continued.
In addition to distribution and service fees paid by the Series under the
Class A, Class B and Class C Plans, the Manager (or one of its affiliates) may
make payments to dealers and other persons who distribute shares of the Series.
Such payments may be calculated by reference to the net asset value of shares
sold by such persons or otherwise.
The Distributor is subject to the rules of the National Association of
Securities Dealers, Inc. governing maximum sales charges. See "Distributor" in
the Statement of Additional Information.
PORTFOLIO TRANSACTIONS
Prudential Securities may act as a broker or futures commission merchant for
the Fund, provided that the commissions, fees or other remuneration it receives
are fair and reasonable. See "Portfolio Transactions and Brokerage" in the
Statement of Additional Information.
CUSTODIAN AND TRANSFER AND DIVIDEND DISBURSING AGENT
State Street Bank and Trust Company, One Heritage Drive, North Quincy,
Massachusetts 02171, serves as Custodian for the portfolio securities of the
Series and cash and, in that capacity, maintains certain financial and
accounting books and records pursuant to an agreement with the Fund. Its mailing
address is P.O. Box 1713, Boston, Massachusetts 02105.
Prudential Mutual Fund Services, Inc. (PMFS), Raritan Plaza One, Edison, New
Jersey 08837, serves as Transfer Agent and Dividend Disbursing Agent and in
those capacities maintains certain books and records for the Fund. PMFS is a
wholly-owned subsidiary of PMF. Its mailing address is P.O. Box 15005, New
Brunswick, New Jersey 08906-5005.
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HOW THE FUND VALUES ITS SHARES
THE SERIES NET ASSET VALUE PER SHARE OR NAV IS DETERMINED BY SUBTRACTING ITS
LIABILITIES FROM THE VALUE OF ITS ASSETS AND DIVIDING THE REMAINDER BY THE
NUMBER OF OUTSTANDING SHARES. NAV IS CALCULATED SEPARATELY FOR EACH CLASS. THE
TRUSTEES HAVE FIXED THE SPECIFIC TIME OF DAY FOR THE COMPUTATION OF THE NET
ASSET VALUE OF THE SERIES TO BE AS OF 4:15 P.M., NEW YORK TIME.
Portfolio securities are valued based on market quotations or, if not readily
available, at fair value as determined in good faith under procedures
established by the Trustees. Securities may also be valued based on values
provided by a pricing service. See "Net Asset Value" in the Statement of
Additional Information.
The Series will compute its NAV once daily on days that the New York Stock
Exchange is open for trading except on days on which no orders to purchase, sell
or redeem shares have been received by the Series or days on which changes in
the value of the Series' portfolio securities do not materially affect the NAV.
The New York Stock Exchange is closed on the following holidays: New Year's Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day.
Although the legal rights of each class of shares are substantially identical,
the different expenses borne by each class will result in different NAVs and
dividends. As long as the Series declares dividends daily, the NAV of the Class
A, Class B and Class C shares will generally be the same. It is expected,
however, that the Series' dividends will differ by approximately the amount of
the distribution-related expense accrual differential among the classes.
HOW THE FUND CALCULATES PERFORMANCE
FROM TIME TO TIME THE FUND MAY ADVERTISE THE "YIELD," "TAX EQUIVALENT YIELD"
AND "TOTAL RETURN" (INCLUDING "AVERAGE ANNUAL" TOTAL RETURN AND "AGGREGATE"
TOTAL RETURN) OF THE SERIES IN ADVERTISEMENTS AND 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., other industry publications, business periodicals and
market indices. See "Performance Information" in the Statement of Additional
Information. The Fund will include performance data for each class of shares of
the Series in any
15
<PAGE>
advertisement or information including performance data of the Series. Further
performance information is contained in the Series' annual and semi-annual
reports to shareholders, which may be obtained without charge. See "Shareholder
Guide-- Shareholder Services--Reports to Shareholders."
TAXES, DIVIDENDS AND DISTRIBUTIONS
TAXATION OF THE FUND
THE SERIES HAS ELECTED TO QUALIFY AND INTENDS TO REMAIN QUALIFIED AS A
REGULATED INVESTMENT COMPANY UNDER THE INTERNAL REVENUE CODE. ACCORDINGLY, THE
SERIES WILL NOT BE SUBJECT TO FEDERAL INCOME TAXES ON ITS NET INVESTMENT INCOME
AND CAPITAL GAINS, IF ANY, THAT IT DISTRIBUTES TO ITS SHAREHOLDERS. TO THE
EXTENT NOT DISTRIBUTED BY THE SERIES, NET TAXABLE INVESTMENT INCOME AND CAPITAL
GAINS AND LOSSES ARE TAXABLE TO THE SERIES.
To the extent the Series invests in taxable obligations, it will earn taxable
investment income. Also, to the extent the Series engages in hedging
transactions in futures contracts and options thereon, it may earn both
short-term and long-term capital gain or loss. Under the Internal Revenue Code,
special rules apply to the treatment of certain options and futures contracts
(Section 1256 contracts). At the end of each year, such investments held by the
Series will be required to be "marked to market" for federal income tax
purposes; that is, treated as having been sold at market value. Sixty percent of
any gain or loss recognized on these "deemed sales" and on actual dispositions
will be treated as long-term capital gain or loss, and the remainder will be
treated as short-term capital gain or loss. See "Distributions and Tax
Information" in the Statement of Additional Information.
Gain or loss realized by the Series from the sale of securities generally will
be treated as capital gain or loss; however, gain from the sale of certain
securities (including municipal obligations) will be treated as ordinary income
to the extent of any "market discount." Market discount generally is the
difference, if any, between the price paid by the Series for the security and
the principal amount of the security (or, in the case of a security issued at an
original issue discount, the revised issue price of the security). The market
discount rule does not apply to any security that was acquired by the Series at
its original issue. See "Distributions and Tax Information" in the Statement of
Additional Information.
TAXATION OF SHAREHOLDERS
In general, the character of tax-exempt interest distributed by the Series
will flow through as tax-exempt interest to its shareholders provided that 50%
or more of the value of its assets at the end of each quarter of its taxable
year is invested in state, municipal and other obligations, the interest on
which is excluded from gross income for federal income tax purposes. During
normal market conditions, at least 80% of the Series' total assets will be
invested in such obligations. See "Description of the Fund--Investment Objective
and Policies."
All dividends out of net investment income, together with distributions of net
short-term capital gains in excess of net long-term capital losses will be
taxable as ordinary income to the shareholder whether or not reinvested. Any net
capital gains (I.E., the excess of net long-term capital gains over net
short-term capital losses) distributed to shareholders will be taxable as
long-term capital gains to the shareholders, whether or not reinvested and
regardless of the length of time a shareholder has owned his or her shares. The
maximum long-term capital gains rate for individuals is 28%.The maximum
long-term capital gains rate for corporate shareholders currently is the same as
the maximum tax rate for ordinary income.
Any gain or loss realized upon a sale or redemption of Series shares by a
shareholder who is not a dealer in securities will be treated as long-term
capital gain or loss if the shares have been held more than one year and
otherwise as short-term capital gain or loss. Any such loss, however, although
otherwise treated as a short-term capital loss, will be treated as long-term
capital loss
16
<PAGE>
to the extent of any capital gain distributions received by the shareholder on
shares that are held for six months or less. In addition, any short-term capital
loss will be disallowed to the extent of any tax-exempt dividends received by
the shareholder on shares that are held for six months or less.
The Fund has obtained an opinion of counsel to the effect that the conversion
of Class B shares into Class A shares does not constitute a taxable event for
U.S. income tax purposes. However, such opinion is not binding on the Internal
Revenue Service.
CERTAIN INVESTORS MAY INCUR FEDERAL ALTERNATIVE MINIMUM TAX LIABILITY AS A
RESULT OF THEIR INVESTMENT IN THE FUND. Tax-exempt interest from certain
municipal obligations (I.E., certain private activity bonds issued after August
7, 1986) will be treated as an item of tax preference for purposes of the
alternative minimum tax. The Fund anticipates that, under regulations to be
promulgated, items of tax preference incurred by the Series will be attributed
to the Series' shareholders, although some portion of such items could be
allocated to the Series itself. Depending upon each shareholder's individual
circumstances, the attribution of items of tax preference incurred by the Series
could result in liability for the shareholder for the alternative minimum tax.
Similarly, the Series could be liable for the alternative minimum tax for items
of tax preference attributed to it. The Series is permitted to invest in
municipal obligations of the type that will produce items of tax preference.
Corporate shareholders in the Series may incur a preference item known as the
"adjustment for current earnings" and corporate shareholders should consult with
their tax advisers with respect to this potential preference item.
Under California law, the taxation of regulated investment companies and their
shareholders was generally conformed to the federal tax law that was in effect
on January 1,1992.Dividends paid by the Series and derived from interest on
obligations which (when held by an individual) pay interest excludable from
California personal income under California law will be exempt from the
California personal income tax (although not from the California franchise tax).
To the extent a portion of the dividends are derived from interest on debt
obligations other than those described directly above, such portion will be
subject to the California personal income tax even though it may be excludable
from gross income for federal income tax purposes. In addition, distributions of
short-term capital gains realized by the Fund will be taxable to the
shareholders as ordinary income. Distributions of long-term capital gains will
be taxable as such to the shareholders regardless of how long they held their
shares. Under California law, ordinary income and capital gains currently are
taxed at the same rate. With respect to non-corporate shareholders, California
does not treat tax-exempt interest as a tax preference item for purposes of its
alternative minimum tax. To the extent a corporate shareholder receives
dividends which are exempt from California taxation, a portion of such dividends
may be subject to the alternative minimum tax.
Interest on indebtedness incurred or continued to purchase or carry shares of
the Series will not be deductible for federal or California purposes.
WITHHOLDING TAXES
Under U.S. Treasury Regulations, the Series is required to withhold and remit
to the U.S. Treasury 31% of redemption proceeds on the accounts of those
shareholders who fail to furnish their tax identification numbers on IRS Form
W-9 (or IRS Form W-8 in the case of certain foreign shareholders) with the
required certifications regarding the shareholder's status under the federal
income tax law. Such withholding is also required on taxable dividends and
capital gains distributions made by the Series unless it is reasonably expected
that at least 95% of the dividends of the Series are comprised of tax-exempt
dividends.
Shareholders are advised to consult their own tax advisers regarding specific
questions as to federal, state or local taxes. See "Distributions and Tax
Information" in the Statement of Additional Information.
DIVIDENDS AND DISTRIBUTIONS
THE SERIES EXPECTS TO DECLARE DAILY AND PAY MONTHLY DIVIDENDS OF NET
INVESTMENT INCOME, IF ANY, AND MAKE DISTRIBUTIONS AT LEAST ANNUALLY OF ANY
CAPITAL GAINS IN EXCESS OF CAPITAL LOSSES. For federal income tax purposes, the
Series had a capital loss carryforward as of August 31, 1993 of approximately
$1,216,000. Accordingly, no capital gains distributions
17
<PAGE>
are expected to be paid to shareholders until net gains have been realized in
excess of such carryforward. Dividends and distributions paid by the Series with
respect to each class of shares, to the extent any distributions and 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 and service fees, 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 DETERMINE, UNLESS THE
SHAREHOLDER ELECTS IN WRITING NOT LESS THAN FIVE BUSINESS DAYS PRIOR TO THE
RECORD DATE TO RECEIVE SUCH DIVIDENDS AND DISTRIBUTIONS IN CASH. Such election
should be submitted to Prudential Mutual Fund Services, Inc., Attention: Account
Maintenance, P.O. Box 15015, New Brunswick, New Jersey 08906-5015. If you hold
shares through Prudential Securities, you should contact your financial adviser
to elect to receive dividends and distributions in cash. The Fund will notify
each shareholder after the close of the Fund's taxable year of both the dollar
amount and the taxable status of that year's dividends and distributions on a
per share basis.
Any distributions of capital gains paid shortly after a purchase by an
investor will have the effect of reducing the per share net asset value of the
investor's shares by the per share amount of the distributions. Such
distributions, although in effect a return of invested principal, are subject to
federal income taxes. Accordingly, prior to purchasing shares of the Series, an
investor should carefully consider the impact of capital gains distributions
which are expected to be or have been announced.
GENERAL INFORMATION
DESCRIPTION OF SHARES
THE FUND WAS ESTABLISHED AS A MASSACHUSETTS BUSINESS TRUST ON MAY 18, 1984, BY
A DECLARATION OF TRUST. The Fund's activities are supervised by its Trustees.
The Declaration of Trust permits the Trustees to issue an unlimited number of
full and fractional shares in separate series, currently designated as the
California Series, the California Income Series and the California Money Market
Series. The Series is authorized to issue an unlimited number of shares, divided
into three classes, designated Class A, Class B and Class C. Each class of
shares represents an interest in the same assets of the Series and is identical
in all respects except that (i) each class bears different distribution
expenses, (ii) each class has exclusive voting rights with respect to its
distribution and service plan (except that the Fund has agreed with the SEC in
connection with the offering of a conversion feature on Class B shares to submit
any amendment of the Class A Plan to both Class A and Class B shareholders),
(iii) each class has a different exchange privilege and (iv) only Class B shares
have a conversion feature. See "How the Fund is Managed--Distributor." The Fund
has received an order from the SEC permitting the issuance and sale of multiple
classes of shares. Currently, the Series is offering three classes, designated
Class A, Class B and Class C shares. In accordance with the Fund's Declaration
of Trust, the Trustees may authorize the creation of additional series and
classes within such series, with such preferences, privileges, limitations and
voting and dividend rights as the Trustees may determine.
Shares of the Fund, when issued, are fully paid, nonassessable, fully
transferable and redeemable at the option of the holder. Shares are also
redeemable at the option of the Fund under certain circumstances as described
under "Shareholder Guide--How to Sell Your Shares." Each share of each class 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.
18
<PAGE>
THE FUND DOES NOT INTEND TO HOLD ANNUAL MEETINGS OF SHAREHOLDERS UNLESS
OTHERWISE REQUIRED BY LAW. THE FUND WILL NOT BE REQUIRED TO HOLD MEETINGS OF
SHAREHOLDERS UNLESS, FOR EXAMPLE, THE ELECTION OF TRUSTEES IS REQUIRED TO BE
ACTED UPON BY SHAREHOLDERS UNDER THE INVESTMENT COMPANY ACT. SHAREHOLDERS HAVE
CERTAIN RIGHTS, INCLUDING THE RIGHT TO CALL A MEETING UPON A VOTE OF 10% OF THE
FUND'S OUTSTANDING SHARES FOR THE PURPOSE OF VOTING ON THE REMOVAL OF ONE OR
MORE TRUSTEES OR TO TRANSACT ANY OTHER BUSINESS.
The Declaration of Trust and the By-Laws of the Fund are designed to make the
Fund similar in certain respects to a Massachusetts business corporation. The
principal distinction between a Massachusetts business corporation and a
Massachusetts business trust relates to shareholder liability. Under
Massachusetts law, shareholders of a business trust may, under certain
circumstances, be held personally liable as partners for the obligations of the
Fund, which is not the case with a corporation. The Declaration of Trust of the
Fund provides that shareholders shall not be subject to any personal liability
for the acts or obligations of the Fund and that every written obligation,
contract, instrument or undertaking made by the Fund shall contain a provision
to the effect that the shareholders are not individually bound thereunder.
ADDITIONAL INFORMATION
This Prospectus, including the Statement of Additional Information which has
been incorporated by reference herein, does not contain all the information set
forth in the Registration Statement filed by the Fund with the SEC under the
Securities Act of 1933. Copies of the Registration Statement may be obtained at
a reasonable charge from the SEC or may be examined, without charge, at the
office of the SEC in Washington, D.C.
SHAREHOLDER GUIDE
HOW TO BUY SHARES OF THE FUND
YOU MAY PURCHASE SHARES OF THE SERIES THROUGH PRUDENTIAL SECURITIES, PRUSEC OR
DIRECTLY FROM THE FUND THROUGH ITS TRANSFER AGENT, PRUDENTIAL MUTUAL FUND
SERVICES, INC. (PMFS OR THE TRANSFER AGENT), ATTENTION: INVESTMENT SERVICES,
P.O. BOX 15020, NEW BRUNSWICK, NEW JERSEY 08906-5020. The minimum initial
investment for Class A and Class B shares is $1,000 per class and $5,000 for
Class C shares. The minimum subsequent investment is $100 for all classes. All
minimum investment requirements are waived for certain retirement and employee
savings plans or custodial accounts for the benefit of minors. For purchases
made through the Automatic Savings Accumulation Plan, the minimum initial and
subsequent investment is $50. See "Shareholder Services" below.
An investment in the Series may not be appropriate for tax-exempt or
tax-deferred investors. Such investors should consult their own tax advisers.
THE PURCHASE PRICE IS THE NAV NEXT DETERMINED FOLLOWING RECEIPT OF AN ORDER BY
THE TRANSFER AGENT OR PRUDENTIAL SECURITIES PLUS A SALES CHARGE WHICH, AT YOUR
OPTION, MAY BE IMPOSED EITHER (I) AT THE TIME OF PURCHASE (CLASS A SHARES) OR
(II) ON A DEFERRED BASIS (CLASS B OR CLASS C SHARES). SEE "ALTERNATIVE PURCHASE
PLAN" BELOW. SEE ALSO "HOW THE FUND VALUES ITS SHARES."
Application forms can be obtained from PMFS, Prudential Securities or Prusec.
If a share certificate is desired, it must be requested in writing for each
transaction. Certificates are issued only for full shares. Shareholders who hold
their shares through Prudential Securities will not receive share certificates.
The Fund reserves the right to reject any purchase order (including an
exchange) 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 fifth business day following the investment.
Transactions in shares of the Series may be subject to postage and handling
charges imposed by your dealer.
PURCHASE BY WIRE. For an initial purchase of shares of the Series by wire, you
must first telephone PMFS at (800) 225-1852 (toll-free) to receive an account
number. The following information will be requested: your name, address, tax
identification number, class election, dividend distribution election, amount
being wired and wiring bank. Instructions should then be given by you to your
bank to transfer funds by wire to State Street Bank and Trust Company (State
Street), Boston, Massachusetts, Custody and Shareholder Services Division,
Attention: Prudential California Municipal Fund, specifying on the wire the
account number assigned by PMFS and your name and identifying the sales charge
alternative (Class A, Class B or Class C shares) and the name of the Series.
If you arrange for receipt by State Street of Federal Funds prior to 4:15
P.M., New York time, on a business day, you may purchase shares of the Series as
of that day.
In making a subsequent purchase order by wire, you should wire State Street
directly and should be sure that the wire specifies Prudential California
Municipal Fund, the name of the Series, Class A, Class B or Class C shares and
your name and individual account number. It is not necessary to call PMFS to
make subsequent purchase orders utilizing Federal Funds. The minimum amount
which may be invested by wire is $1,000.
ALTERNATIVE PURCHASE PLAN
THE SERIES OFFERS THREE CLASSES OF SHARES (CLASS A, CLASS B AND CLASS C
SHARES) WHICH ALLOWS YOU TO CHOOSE THE MOST BENEFICIAL SALES CHARGE STRUCTURE
FOR YOUR INDIVIDUAL CIRCUMSTANCES GIVEN THE AMOUNT OF THE PURCHASE, THE LENGTH
OF TIME YOU EXPECT TO HOLD THE SHARES AND OTHER REVELVANT CIRCUMSTANCES
(ALTERNATIVE PURCHASE PLAN).
<TABLE>
<CAPTION>
ANNUAL 12B-1 FEES
(AS A % OF AVERAGE
DAILY
SALES CHARGE NET ASSETS) OTHER INFORMATION
-------------------------------------- ----------------------- --------------------------------------
<S> <C> <C> <C>
CLASS A Maximum initial sales charge of 3% of .30 of 1% (currently Initial sales charge waived or reduced
the public offering price being charged at a rate for certain purchases
of .10 of 1%)
CLASS B Maximum contingent deferred sales .50 of 1% Shares convert to Class A shares
charge or CDSC of 5% of the lesser of approximately seven years after
the amount invested or the redemption purchase
proceeds; declines to zero after six
years
CLASS C Maximum CDSC of 1% of the lesser of 1% (currently being Shares do not convert to another class
the amount invested or the redemption charged at a rate of
proceeds on redemptions made within .75 of 1%)
one year of purchase.
</TABLE>
The three classes of shares represent an interest in the same portfolio of
investments of the Series and have the same rights, except that (i) each class
bears the separate expenses of its Rule 12b-1 distribution and service plan,
(ii) each class has exclusive voting rights with respect to its plan (except as
noted under the heading "General Information--Description of Shares"), and (iii)
only Class B shares have a conversion feature. The three classes also have
separate exchange privileges. See "How to Exchange Your Shares" below. The
income attributable to each class and the dividends payable on the shares of
each class will be reduced by the amount of the distribution fee of each class.
Class B and Class C shares bear the expenses of a higher distribution fee which
will generally cause them to have higher expense ratios and to pay lower
dividends than the Class A shares.
20
<PAGE>
Financial advisers and other sales agents who sell shares of the Series will
receive different compensation for selling Class A, Class B and Class C shares
and will generally receive more compensation initially for selling Class A and
Class B shares than for selling Class C shares.
IN SELECTING A PURCHASE ALTERNATIVE, YOU SHOULD CONSIDER, AMONG OTHER THINGS,
(1) the length of time you expect to hold your investment, (2) the amount of any
applicable sales charge (whether imposed at the time of purchase or redemption)
and distribution-related fees, as noted above, (3) whether you qualify for any
reduction or waiver of any applicable sales charge, (4) the various exchange
privileges among the different classes of shares (see "How to Exchange Your
Shares" below) and (5) the fact that Class B shares automatically convert to
Class A shares approximately seven years after purchase (see "Conversion Feature
- -- Class B Shares" below).
The following is provided to assist you in determining which method of
purchase best suits your individual circumstances and is based on current fees
and expenses being charged to the Series:
__If you intend to hold your investment in the Series for less than 5 years and
do not qualify for a reduced sales charge on Class A shares, since Class A
shares are subject to an 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 B or Class C shares, you would have to hold your investment for
more than 4 years in the case of Class C shares for the higher cumulative annual
distribution-related fee on those shares to exceed the initial sales charge plus
cumulative annual distribution-related fees on Class A shares. This does not
take into account the time value of money, which further reduces the impact of
the higher Class C distribution-related fee on the investment, fluctuations in
net asset value, the effect of the return on the investment over this period of
time or redemptions during which the CDSC is applicable.
ALL PURCHASES OF $1 MILLION OR MORE, EITHER AS PART OF A SINGLE INVESTMENT OR
UNDER RIGHTS OF ACCUMULATION OR LETTERS OF INTENT, MUST BE FOR CLASS A SHARES.
See "Reduction and Waiver of Initial Sales Charges" below.
CLASS A SHARES
The offering price of Class A shares for investors choosing the initial sales
charge alternative is the next determined NAV plus a sales charge (expressed as
a percentage of the offering price and of the amount invested) as shown in the
following table:
<TABLE>
<CAPTION>
SALES CHARGE AS SALES CHARGE AS DEALER CONCESSION
PERCENTAGE OF PERCENTAGE OF AS PERCENTAGE OF
AMOUNT OF PURCHASE OFFERING PRICE AMOUNT INVESTED OFFERING PRICE
- ------------------------- ----------------- ----------------- -------------------
<S> <C> <C> <C>
Less than $99,999 3.00% 3.09% 2.50%
$100,000 to $249,999 2.50 2.56 2.40
$250,000 to $499,999 1.50 1.52 1.40
$500,000 to $999,999 1.00 1.01 0.95
$1,000,000 and above None None None
</TABLE>
Selling dealers may be deemed to be underwriters, as that term is defined in
the Securities Act of 1933.
21
<PAGE>
REDUCTION AND WAIVER OF INITIAL SALES CHARGES. Reduced sales charges are
available through Rights of Accumulation and Letters of Intent. Shares of the
Fund and shares of other Prudential Mutual Funds (excluding money market funds
other than those acquired pursuant to the exchange privilege) may be aggregated
to determine the applicable reduction. See "Purchase and Redemption of Fund
Shares--Reduction and Waiver of Initial Sales Charges--Class A Shares" in the
Statement of Additional Information. Class A shares may be purchased at NAV,
without payment of an initial sales charge, by pension, profit-sharing or other
employee benefit plans qualified under Section 401 of the Internal Revenue Code
and deferred compensation and annuity plans under Sections 457 and 403(b)(7) of
the Internal Revenue Code (Benefit Plans), provided that the plan has existing
assets of at least $1 million invested in shares of Prudential Mutual Funds
(excluding money market funds other than those acquired pursuant to the exchange
privilege) or 1,000 eligible employees or members. In the case of Benefit Plans
whose accounts are held directly with the Transfer Agent and for which the
Transfer Agent does individual account record keeping (Direct Account Benefit
Plans) and Benefit Plans sponsored by PSI or its subsidiaries (PSI or Subsidiary
Prototype Benefit Plans), Class A shares may be purchased at NAV by participants
who are repaying loans made from such plans to the participant. Additional
information concerning the reduction and waiver of initial sales charges is set
forth in the Statement of Additional Information.
In addition, Class A shares may be purchased at NAV, through Prudential
Securities or the Transfer Agent, by the following persons: (a) Trustees and
officers of the Fund and other Prudential Mutual Funds, (b) employees of
Prudential Securities and PMF and their subsidiaries and members of the families
of such persons who maintain an "employee related" account at Prudential
Securities or the Transfer Agent, (c) employees and special agents of Prudential
and its subsidiaries and all persons who have retired directly from active
service with Prudential or one of its subsidiaries, (d) registered
representatives and employees of dealers who have entered into a selected dealer
agreement with Prudential Securities provided that purchases at NAV are
permitted by such person's employer and (e) investors who have a business
relationship with a financial adviser who joined Prudential Securities from
another investment firm, provided that (i) the purchase is made within 90 days
of the commencement of the financial adviser's employment at Prudential
Securities, (ii) the purchase is made with proceeds of a redemption of shares of
any open-end, non-money market fund sponsored by the financial adviser's
previous employer (other than a fund which imposes a distribution or service fee
of .25 of 1% or less) on which no deferred sales load, fee or other charge was
imposed on redemption and (iii) the financial adviser served as the client's
broker on the previous purchases.
You must notify the Fund's Transfer Agent either directly or through
Prudential Securities or Prusec that you are entitled to the reduction or waiver
of the sales charge. The reduction or waiver will be granted subject to
confirmation of your entitlement. No initial sales charges are imposed upon
Class A shares purchased 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 per share next determined
following receipt of an order by the Transfer Agent or Prudential Securities.
Although there is no sales charge imposed at the time of purchase, redemptions
of Class B and Class C shares may be subject to a CDSC. See "How to Sell Your
Shares--Contingent Deferred Sales Charges" below.
HOW TO SELL YOUR SHARES
YOU CAN REDEEM YOUR SHARES OF THE SERIES AT ANY TIME FOR CASH AT THE NAV PER
SHARE NEXT DETERMINED AFTER THE REDEMPTION REQUEST IS RECEIVED IN PROPER FORM BY
THE TRANSFER AGENT OR PRUDENTIAL SECURITIES. SEE "HOW THE FUND VALUES ITS
SHARES." In certain cases, however, redemption proceeds will be reduced by the
amount of any applicable contingent deferred sales charge, as described below.
See "Contingent Deferred Sales Charges" below.
IF YOU HOLD SHARES OF THE SERIES THROUGH PRUDENTIAL SECURITIES, YOU MUST
REDEEM SHARES BY CONTACTING YOUR PRUDENTIAL SECURITIES FINANCIAL ADVISER. IF YOU
HOLD SHARES IN NON-CERTIFICATE FORM, A WRITTEN REQUEST FOR REDEMPTION SIGNED BY
YOU EXACTLY AS THE ACCOUNT IS REGISTERED IS REQUIRED. IF YOU HOLD CERTIFICATES,
THE CERTIFICATES, SIGNED IN THE NAME(S) SHOWN ON THE FACE OF THE CERTIFICATES,
MUST BE RECEIVED BY THE TRANSFER AGENT IN ORDER FOR THE REDEMPTION
22
<PAGE>
REQUEST TO BE PROCESSED. IF REDEMPTION IS REQUESTED BY A CORPORATION,
PARTNERSHIP, TRUST OR FIDUCIARY, WRITTEN EVIDENCE OF AUTHORITY ACCEPTABLE TO THE
TRANSFER AGENT MUST BE SUBMITTED BEFORE SUCH REQUEST WILL BE ACCEPTED. All
correspondence and documents concerning redemptions should be sent to the Fund
in care of its Transfer Agent, Prudential Mutual Fund Services, Inc., Attention:
Redemption Services, P.O. Box 15010, New Brunswick, New Jersey 08906-5010.
If the proceeds of the redemption (a) exceed $50,000, (b) are to be paid to a
person other than the record owner, (c) are to be sent to an address other than
the address on the Transfer Agent's records, or (d) are to be paid to a
corporation, partnership, trust or fiduciary, the signature(s) on the redemption
request and on the certificates, if any, or stock power must be guaranteed by an
"eligible guarantor institution." An "eligible guarantor institution" includes
any bank, broker, dealer or credit union. The Transfer Agent reserves the right
to request additional information from, and make reasonable inquiries of, any
eligible guarantor institution. For clients of Prusec, a signature guarantee may
be obtained from the agency or office manager of most Prudential Insurance and
Financial Services or Preferred Services offices.
PAYMENT FOR SHARES PRESENTED FOR REDEMPTION WILL BE MADE BY CHECK WITHIN SEVEN
DAYS AFTER RECEIPT BY THE TRANSFER AGENT OF THE CERTIFICATE AND/OR WRITTEN
REQUEST EXCEPT AS INDICATED BELOW. Such payment may be postponed or the right of
redemption suspended at times (a) when the New York Stock Exchange is closed for
other than customary weekends and holidays, (b) when trading on such Exchange is
restricted, (c) when an emergency exists as a result of which disposal by the
Series of securities owned by it is not reasonably practicable or it is not
reasonably practicable for the Series fairly to determine the value of its net
assets, or (d) during any other period when the SEC, by order, so permits;
provided that applicable rules and regulations of the SEC shall govern as to
whether the conditions prescribed in (b), (c) or (d) exist.
PAYMENT FOR REDEMPTION OF RECENTLY PURCHASED SHARES WILL BE DELAYED UNTIL THE
FUND OR ITS TRANSFER AGENT HAS BEEN ADVISED THAT THE PURCHASE CHECK HAS BEEN
HONORED, UP TO 10 CALENDAR DAYS FROM THE TIME OF RECEIPT OF THE PURCHASE CHECK
BY THE TRANSFER AGENT. SUCH DELAY MAY BE AVOIDED BY PURCHASING SHARES BY WIRE OR
BY CERTIFIED OR OFFICIAL BANK CHECK.
REDEMPTION IN KIND. If the Trustees determine that it would be detrimental to
the best interests of the remaining shareholders of the Fund to make payment
wholly or partly in cash, the Fund may pay the redemption price in whole or in
part by a distribution in kind of securities from the investment portfolio of
the Series of the Fund, in lieu of cash, in conformity with applicable rules of
the SEC. Securities will be readily marketable and will be valued in the same
manner as in a regular redemption. See "How the Fund Values its Shares." If your
shares are redeemed in kind, you will incur transaction costs in converting the
assets into cash. The Fund, however, has elected to be governed by Rule 18f-1
under the Investment Company Act, under which the Fund is obligated to redeem
shares solely in cash up to the lesser of $250,000 or 1% of the net asset value
of the Fund during any 90-day period for any one shareholder.
INVOLUNTARY REDEMPTION. In order to reduce expenses of the Fund, the Trustees
may redeem all of the shares of any shareholder, other than a shareholder which
is an IRA or other tax-deferred retirement plan, whose account has a net asset
value of less than $500 due to a redemption. The Fund will give such
shareholders 60 days' prior written notice in which to purchase sufficient
additional shares to avoid such redemption. No contingent deferred sales charge
will be imposed on any involuntary redemption.
30-DAY REPURCHASE PRIVILEGE. If you redeem your shares and have not previously
exercised the repurchase privilege you may reinvest any portion or all of the
proceeds of such redemption in shares of the Series at the NAV next determined
after the order is received, which must be within 30 days after the date of the
redemption. No sales charge will apply to such repurchases. You will receive PRO
RATA credit for any contingent deferred sales charge paid in connection with the
redemption of your shares. You must notify the Fund's Transfer Agent, either
directly or through Prudential Securities or Prusec, at the time the repurchase
privilege is exercised that the shareholder is entitled to credit for the
contingent deferred sales charge previously paid. Exercise of the repurchase
privilege will generally not affect federal income tax treatment of any gain
realized upon redemption. If the redemption resulted in a loss, some or all of
the loss, depending on the amount reinvested, will not be allowed for federal
income tax purposes.
23
<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 purchased
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 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 purchased more than six years prior to
redemption; 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 the investor's 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
24
<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.
The CDSC will also be waived in the case of a total or partial redemption in
connection with certain distributions made without penalty under the Internal
Revenue Code from a tax-deferred retirement plan, an IRA or Section 403(b)
custodial account. These distributions include a lump-sum or other distribution
after retirement, or for an IRA or Section 403(b) custodial account, after
attaining age 59 1/2, a tax-free return of an excess contribution or plan
distributions following the death or disability of the shareholder (provided
that the shares were purchased prior to death or disability). The waiver does
not apply in the case of a tax-free rollover or transfer of assets, other than
one following a separation from service. In the case of Direct Account and PSI
or Subsidiary Prototype Benefit Plans, the CDSC will be waived on redemptions
which represent borrowings from such plans. Shares purchased with amounts used
to repay a loan from such plans on which a CDSC was not previously deducted will
thereafter be subject to a CDSC without regard to the time such amounts were
previously invested. In the case of a 401(k) plan, the CDSC will also be waived
upon the redemption of shares purchased with amounts used to repay loans made
from the account to the participant and from which a CDSC was previously
deducted.
In addition, the CDSC will be waived in 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 contingent deferred sales charge. The waiver will be
granted subject to confirmation of your entitlement.
A quantity discount may apply to redemptions of Class B shares purchased prior
to _, 1994. See "Purchase and Redemption of Fund Shares--Quantity
Discount--Class B Shares Purchased Prior to __________, 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 occur during of
the month following each calendar quarter and will be effected at relative net
asset value without the imposition of any additional sales charge. It is
currently anticipated that conversions will occur on the first Friday of the
month following each calendar quarter, or, if not a business day, then on the
next Friday of the month.
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 then 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.
25
<PAGE>
Since annual distribution-related fees are lower for Class A shares than Class
B shares, the per share net asset value of the Class A shares may be higher than
that of the Class B shares at the time of conversion. Thus, although the
aggregate dollar value will be the same, you may receive fewer Class A shares
than Class B shares converted. See "How the Fund Values its Shares."
For purposes of calculating the applicable holding period for conversions, all
payments for Class B shares during a month will be deemed to have been made on
the last day of the month, or for Class B shares acquired through exchange, or a
series of exchanges, on the last day of the month in which the original payment
for purchases of such Class B shares was made. For Class B shares previously
exchanged for shares of a money market fund, the time period during which such
shares were held in the money market fund will be excluded. For example, Class B
shares held in a money market fund for one year will not convert to Class A
shares until approximately eight years from purchase. For purposes of measuring
the time period during which shares are held in a money market fund, exchanges
will be deemed to have been made on the last day of the month. Class B shares
acquired through exchange will convert to Class A shares after expiration of the
conversion period applicable to the original purchase of such shares. It is
currently anticipated that the first conversion of Class B shares will occur in
or about January 1995. At that time all amounts representing Class B shares then
outstanding beyond the expiration of the applicable conversion period will
automatically convert to Class A shares together with all shares or amounts
representing Class B shares acquired through the automatic reinvestment of
dividends and distributions then held in your account.
The conversion feature may be subject to the continuing availability of
opinions of counsel or rulings of the Internal Revenue Service (i) that the
dividends and other distributions paid on Class A, Class B and Class C shares
will not constitute "preferential dividends" under the Internal Revenue Code and
(ii) that the conversion of shares does not constitute a taxable event. The
conversion of Class B shares into Class A shares may be suspended if such
opinions or rulings are no longer available. If conversions are suspended, Class
B shares of the Series will continue to be subject, possibly indefinitely, to
their higher annual distribution and service fee.
HOW TO EXCHANGE YOUR SHARES
AS A SHAREHOLDER OF THE SERIES, YOU HAVE AN EXCHANGE PRIVILEGE WITH THE OTHER
SERIES OF THE FUND AND CERTAIN OTHER PRUDENTIAL MUTUAL FUNDS (THE EXCHANGE
PRIVILEGE), INCLUDING ONE OR MORE SPECIFIED MONEY MARKET FUNDS, SUBJECT TO THE
MINIMUM INVESTMENT REQUIREMENTS OF SUCH FUNDS. CLASS A, CLASS B AND CLASS C
SHARES OF THE SERIES MAY BE EXCHANGED FOR CLASS A, CLASS B AND CLASS C SHARES,
RESPECTIVELY, OF THE OTHER SERIES OF THE FUND OR ANOTHER FUND ON THE BASIS OF
THE RELATIVE NAV. Any applicable CDSC payable upon the redemption of shares
exchanged will be that imposed by the fund in which shares were initially
purchased and will be calculated from the first day of the month after the
initial purchase, excluding the time shares were held in a money market fund.
Class B and Class C shares may not be exchanged into money market funds other
than Prudential Special Money Market Fund. For purposes of calculating the
holding period applicable to the Class B conversion feature, the time period
during which Class B shares were held in a money market fund will be excluded.
See "Conversion Feature--Class B Shares" above. If your investment in shares of
Prudential Mutual Funds (excluding money market funds other than those acquired
pursuant to the exchange privilege) reaches $1 million and you then hold Class B
and/or Class C shares of the Fund which are free of CDSC, you will be so
notified and offered the opportunity to exchange those shares for Class A shares
of the Fund without the imposition of any sales charge. In the case of
tax-exempt shareholders, if no response is received within 60 days of the
mailing of such notice, eligible Class B and/or Class C shares will be
automatically exchanged for Class A shares. All other shareholders must
affirmatively elect to have their eligible Class B and/or Class C shares
exchanged for Class A shares. 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
26
<PAGE>
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."
You may also exchange shares by mail by writing to Prudential Mutual Fund
Services, Inc., Attention: Exchange Processing, P.O. Box 15010, New Brunswick,
New Jersey 08906-5010.
IN PERIODS OF SEVERE MARKET OR ECONOMIC CONDITIONS, THE TELEPHONE EXCHANGE OF
SHARES MAY BE DIFFICULT TO IMPLEMENT AND SHAREHOLDERS SHOULD MAKE EXCHANGES BY
MAIL BY WRITING TO PRUDENTIAL MUTUAL FUND SERVICES, INC., AT THE ADDRESS NOTED
ABOVE.
The Exchange Privilege may be modified or terminated at any time on 60 days'
notice to shareholders.
SHAREHOLDER SERVICES
In addition to the Exchange Privilege, as a shareholder in the Fund, 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 registered representative or the
Transfer Agent directly.
- SYSTEMATIC WITHDRAWAL PLAN. A systematic withdrawal plan is available to
shareholders which provides for monthly or quarterly checks. Withdrawals of
Class B and Class C shares may be subject to a CDSC. See "How to Sell Your
Shares-- Contingent Deferred Sales Charges" above.
- REPORTS TO SHAREHOLDERS. The Fund will send you annual and semi-annual
reports. The financial statements appearing in annual reports are audited by
independent accountants. In order to reduce duplicate mailing and printing
expenses, the Fund will provide one annual and semi-annual shareholder report
and annual prospectus per household. You may request additional copies of such
reports by calling (800) 225-1852 or by writing to the Fund at One Seaport
Plaza, New York, New York 10292. In addition, monthly unaudited financial data
is available upon request from the Fund.
- SHAREHOLDER INQUIRIES. Inquiries should be addressed to the Fund at One
Seaport Plaza, New York, New York 10292, or by telephone, at (800) 225-1852
(toll-free) or, from outside the U.S.A., at (908) 417-7555 (collect).
For additional information regarding the services and privileges described
above, see "Shareholder Investment Account" in the Statement of Additional
Information.
27
<PAGE>
THE PRUDENTIAL MUTUAL FUND FAMILY
Prudential Mutual Fund Management offers a broad range of mutual funds
designed to meet your individual needs. We welcome you to review the investment
options available through our family of funds. For more information on the
Prudential Mutual Funds, including charges and expenses, contact your Prudential
Securities financial adviser or Prusec registered representative or telephone
the Funds at (800) 225-1852 for a free prospectus. Read the prospectus carefully
before you invest or send money.
TAXABLE BOND FUNDS
Prudential Adjustable Rate Securities Fund, Inc.
Prudential GNMA Fund, Inc.
Prudential Government Income Fund, Inc.
Prudential Government Securities Trust
Intermediate Term Series
Prudential High Yield Fund, Inc.
Prudential Structured Maturity Fund, Inc.
Income Portfolio
Prudential U.S. Government Fund
The BlackRock Government Income Trust
TAX-EXEMPT BOND FUNDS
Prudential California Municipal Fund
California Series
California Income Series
Prudential Municipal Bond Fund
High Yield Series
Insured Series
Modified Term Series
Prudential Municipal Series Fund
Arizona Series
Florida Series
Georgia Series
Maryland Series
Massachusetts Series
Michigan Series
Minnesota Series
New Jersey Series
New York Series
North Carolina Series
Ohio Series
Pennsylvania Series
Prudential National Municipals Fund, Inc.
GLOBAL FUNDS
Prudential Global Fund, Inc.
Prudential Global Genesis Fund, Inc.
Prudential Global Natural Resources Fund, Inc.
Prudential Intermediate Global Income Fund, Inc.
Prudential Pacific Growth Fund, Inc.
Prudential Short-Term Global Income Fund, Inc.
Global Assets Portfolio
Short-Term Global Income Portfolio
Global Utility Fund, Inc.
EQUITY FUNDS
Prudential Allocation Fund
Conservatively Managed Portfolio
Strategy Portfolio
Prudential Equity Fund, Inc.
Prudential Equity Income Fund
Prudential Growth Opportunity Fund, Inc.
Prudential IncomeVertible-R- Fund, Inc.
Prudential Multi-Sector Fund, Inc.
Prudential Strategist Fund, Inc.
Prudential Utility Fund, Inc.
Nicholas-Applegate Fund, Inc.
Nicholas-Applegate Growth Equity Fund
MONEY MARKET FUNDS
- -TAXABLE MONEY MARKET FUNDS
Prudential Government Securities Trust
Money Market Series
U.S. Treasury Money Market Series
Prudential Special Money Market Fund
Money Market Series
Prudential MoneyMart Assets
- -TAX-FREE MONEY MARKET FUNDS
Prudential Tax-Free Money Fund
Prudential California Municipal Fund
California Money Market Series
Prudential Municipal Series Fund
Connecticut Money Market Series
Massachusetts Money Market Series
New Jersey Money Market Series
New York Money Market Series
- -COMMAND FUNDS
Command Money Fund
Command Government Fund
Command Tax-Free Fund
- -INSTITUTIONAL MONEY MARKET FUNDS
Prudential Institutional Liquidity Portfolio, Inc.
Institutional Money Market Series
A-1
<PAGE>
No dealer, sales representative or any other person has been authorized to give
any information or to make any representations, other than those contained in
this Prospectus, in connection with the offer contained herein, and, if given or
made, such other information or representations must not be relied upon as
having been authorized by the Fund or the Distributor. This Prospectus does not
constitute an offer by the Fund or by the Distributor to sell or a solicitation
of any offer to buy any of the securities offered hereby in any jurisdiction to
any person to whom it is unlawful to make such offer in such jurisdiction.
-------------------------------------------
TABLE OF CONTENTS
<TABLE>
<S> <C>
PAGE
----
FUND HIGHLIGHTS...................................................... 2
FUND EXPENSES........................................................ 4
FINANCIAL HIGHLIGHTS................................................. 5
HOW THE FUND INVESTS................................................. 7
Investment Objective and Policies.................................. 7
Other Investments and Policies..................................... 11
Investment Restrictions............................................ 12
HOW THE FUND IS MANAGED.............................................. 12
Manager............................................................ 12
Distributor........................................................ 13
Portfolio Transactions............................................. 14
Custodian and Transfer and Dividend Disbursing Agent............... 14
HOW THE FUND VALUES ITS SHARES....................................... 15
HOW THE FUND CALCULATES PERFORMANCE.................................. 15
TAXES, DIVIDENDS AND DISTRIBUTIONS................................... 16
GENERAL INFORMATION.................................................. 18
Description of Shares.............................................. 18
Additional Information............................................. 19
SHAREHOLDER GUIDE.................................................... 19
How to Buy Shares of the Fund...................................... 19
Alternative Purchase Plan.......................................... 20
How to Sell Your Shares............................................ 22
Conversion Feature--Class B Shares................................. 25
How to Exchange Your Shares........................................ 26
Shareholder Services............................................... 27
THE PRUDENTIAL MUTUAL FUND FAMILY.................................... A-1
</TABLE>
-------------------------------------------
MF116A 4440472
Class A: 744313-10-7
CUSIP Nos.: Class B: 744313-20-6
Class C:
PRUDENTIAL
CALIFORNIA
MUNICIPAL FUND
(CALIFORNIA SERIES)
- --------------------------------------
[LOGO]
<PAGE>
PRUDENTIAL CALIFORNIA MUNICIPAL FUND
(CALIFORNIA INCOME SERIES)
- --------------------------------------------------------------------------------
PROSPECTUS DATED , 1994
- --------------------------------------------------------------------------------
Prudential California Municipal Fund (the "Fund") (California Income Series)
(the "Series") is one of three series of an open-end investment company, or
mutual fund. This Series is non-diversified and seeks to provide the maximum
amount of income that is exempt from California State and federal income taxes
consistent with the preservation of capital. The Series will invest primarily in
investment grade municipal obligations but may also invest a portion of its
assets in lower-quality municipal obligations or in non-rated securities which,
in the opinion of the Fund's investment adviser, are of comparable quality. The
Fund's address is One Seaport Plaza, New York, New York 10292, and its telephone
number is (800) 225-1852.
This Prospectus sets forth concisely the information about the Fund and the
California Income Series that a prospective investor ought to know before
investing. Additional information about the Fund has been filed with the
Securities and Exchange Commission in a Statement of Additional Information
dated , 1994 which information is incorporated herein by reference (is
legally considered to be a part of this Prospectus) and is available without
charge upon request to Prudential California Municipal Fund (California Income
Series), at the address or telephone number noted above.
- --------------------------------------------------------------------------------
INVESTORS ARE ADVISED TO READ THIS PROSPECTUS AND RETAIN IT FOR FUTURE
REFERENCE.
- --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<PAGE>
FUND HIGHLIGHTS
The following summary is intended to highlight certain information
contained in this Prospectus and is qualified in its entirety by the more
detailed information appearing elsewhere herein.
WHAT IS PRUDENTIAL CALIFORNIA MUNICIPAL FUND?
Prudential California Municipal Fund is a mutual fund whose shares are
offered in three 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, non-diversified management investment company. Only the California
Income Series is offered through this Prospectus.
WHAT IS THE SERIES' INVESTMENT OBJECTIVE?
The Series' investment objective is to maximize current income that is
exempt from California State and federal income taxes consistent with the
preservation of capital. It seeks to achieve this objective by investing
primarily in California 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 California State and federal income taxes
(California Obligations). See "How the Fund Invests--Investment Objective
and Policies" at page 6.
WHAT ARE THE SERIES' SPECIAL CHARACTERISTICS AND RISKS?
In seeking to achieve its investment objective, the Series will invest at
least 80% of the value of its total assets in California Obligations. This
degree of investment concentration makes the Series particularly susceptible
to factors adversely affecting issuers of California Obligations. The Series
may invest up to 30% of its total assets in high yield securities, commonly
known as "junk bonds," which may be considered speculative and are subject
to the risk of an issuer's inability to meet principal and interest payments
on the obligations as well as price volatility. The Series is
non-diversified so that more than 5% of its total assets may be invested in
the securities of one or more issuers. Investment in a non-diversified
portfolio involves greater risk than investment in a diversified portfolio.
See "How the Fund Invests--Investment Objective and Policies--Special
Considerations" at page 10. To hedge against changes in interest rates, the
Series may also purchase put options and engage in transactions involving
financial futures contracts and options thereon. See "How the Fund
Invests--Investment Objective and Policies" at page 6.
WHO MANAGES THE FUND?
Prudential Mutual Fund Management, Inc. (PMF or the Manager) is the
Manager of the Fund and is compensated for its services at an annual rate of
.50 of 1% of the Series' average daily net assets. As of March 31, 1994, PMF
served as manager or administrator to [66] investment companies, including
[37] mutual funds, with aggregate assets of approximately $[51] billion. The
Prudential Investment Corporation (PIC or the Subadviser) furnishes
investment advisory services in connection with the management of the Fund
under a Subadvisory Agreement with PMF. See "How the Fund is
Managed--Manager" at page 11.
WHO DISTRIBUTES THE SERIES' SHARES?
Prudential Mutual Fund Distributors, Inc. (PMFD) acts as the Distributor
of the Series' Class A shares and is currently paid for its services at an
annual rate of .10 of 1% of the average daily net assets of the Class A
shares.
Prudential Securities Incorporated (Prudential Securities or PSI), a major
securities underwriter and securities and commodities broker, acts as the
Distributor of the Series' Class B and Class C shares, and is paid for its
services at an annual rate of .50 of 1% of the average daily net assets of
the Class B shares and is currently paid for its services at an annual rate
of .75 of 1% of the average daily net assets of the Class C shares.
See "How the Fund Is Managed--Distributor" at page 12.
2
<PAGE>
WHAT IS THE MINIMUM INVESTMENT?
The minimum initial investment for Class A and Class B shares is $1,000
per class and $5,000 for Class C shares. The minimum subsequent investment
is $100 for all classes. There is no minimum investment requirement for
certain retirement and employee savings plans or custodial accounts for the
benefit of minors. 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 17 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, Inc. (PMFS or the Transfer
Agent), at the net asset value per share (NAV) next determined after receipt
of your purchase order by the Transfer Agent or Prudential Securities plus a
sales charge which may be imposed either (i) at the time of purchase (Class
A Shares) or (ii) on a deferred basis (Class B or Class C shares). See "How
the Fund Values Its Shares" at page 13 and "Shareholder Guide--How to Buy
Shares of the Fund" at page 17.
WHAT ARE MY PURCHASE ALTERNATIVES?
The Series offers three classes:
- 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 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 18.
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
20.
HOW ARE DIVIDENDS AND DISTRIBUTIONS PAID?
The Series expects to declare daily and pay monthly dividends of net
investment income, if any, and make distributions of any net capital gains
at least annually. Dividends and distributions will be automatically
reinvested in additional shares of the Series at NAV without a sales charge
unless you request that they be paid to you in cash. See "Taxes, Dividends
and Distributions" at page 14.
3
<PAGE>
FUND EXPENSES
(CALIFORNIA INCOME SERIES)
<TABLE>
<CAPTION>
CLASS A
SHAREHOLDER TRANSACTION EXPENSES+ SHARES CLASS B SHARES CLASS C SHARES
------------- ------------------------ -----------------
<S> <C> <C> <C>
None None
Maximum Sales Load Imposed on Purchases
(as a percentage of offering price)................... 3%
Maximum Sales Load or Deferred Sales Load Imposed on
Reinvested Dividends.................................. None None None
Deferred Sales Load (as a percentage of original
purchase price or redemption proceeds, whichever is
lower)................................................ None 5% during the first 1% on redemptions
year, decreasing by 1% made within one
annually to 1% in the year of purchase
fifth and sixth years
and 0% the seventh year*
Redemption Fees........................................ None None None
Exchange Fee........................................... None None None
</TABLE>
<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES** CLASS A SHARES CLASS B SHARES CLASS C SHARES***
--------------------- ------------------- ----------------------
<S> <C> <C> <C>
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
Management Fees (Before Waiver)...................... .50% .50% .50%
12b-1 Fees+.......................................... .10%++ .50% .75%++
Other Expenses....................................... .16% .16% .16%
--
----- -----
Total Fund Operating Expenses (Before Waiver)........ .76% 1.16% 1.41%
--
--
----- -----
----- -----
</TABLE>
<TABLE>
<CAPTION>
1 3 5 10
EXAMPLE* YEAR YEARS YEARS YEARS
- ----------------------------------------------------------- -------- -------- -------- ---------
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000
investment, assuming (1) 5% annual return and (2)
redemption at the end of each time period:
Class A................................................ $ 38 $ 54 $ 71 $ 121
Class B................................................ $ 62 $ 67 $ 74 $ 125
Class C***............................................. $ 24 $ 45 $ 77 $ 168
You would pay the following expenses on the same
investment, assuming no redemption:
Class A................................................ $ 38 $ 54 $ 71 $ 121
Class B................................................ $ 12 $ 37 $ 64 $ 125
Class C***............................................. $ 14 $ 45 $ 77 $ 168
The above example with respect to Class A and Class B shares is based on restated data for the Series' fiscal
year ended August 31, 1993. The above example with respect to Class C shares is based on expenses expected to
have been incurred if Class C shares had been in existence during the fiscal year ended August 31, 1993. THE
EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER
OR LESS THAN THOSE SHOWN.
The purpose of this table is to assist investors in understanding the various costs and expenses that an
investor in the Series will bear, whether directly or indirectly. For more complete descriptions of the
various costs and expenses, see "How the Fund is Managed." "Other Expenses" include operating expenses of the
Series, such as Trustees' and professional fees, registration fees, reports to shareholders and transfer
agency and custodian fees.
<FN>
- ------------------
* Class B shares will automatically convert to Class A shares approximately
seven years after purchase. See "Shareholder Guide--Conversion Feature--
Class B Shares."
** Based on expenses incurred during the fiscal year ended August 31, 1993,
without taking into account the management fee waiver and expense subsidy
of Class A shares. At the current level of management fee waiver (75%),
Management Fees and Total Fund Operating Expenses would be .125% and .385%,
respectively, of the average net assets of the Series' Class A shares and
.125% and .785%, respectively, of the average net assets of the Series'
Class B shares. With respect to Class B shares, annual fund operating
expenses are estimated based on expenses expected to have been incurred as
if the Class B shares had been in existence for the entire fiscal year
ended August 31, 1993. See "How the Fund is Managed--Manager--Fee Waivers
and Subsidy."
*** Estimated based on expenses expected to have been incurred if Class C
shares had been in existence during the fiscal year ended August 31, 1993.
+ 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 Fund 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 Class B and Class C shareholders of the Fund 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 expenses
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 and Class C shares, respectively, for the fiscal year ending August
31, 1994. See "How the Fund is Managed--Distributor."
</TABLE>
4
<PAGE>
FINANCIAL HIGHLIGHTS
(FOR A SHARE OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT EACH OF THE INDICATED
PERIODS)
The following financial highlights (with the exception of the six months ended
February 28, 1994) have been audited by Deloitte & Touche, independent
accountants, whose report thereon was unqualified. This information should be
read in conjunction with the financial statements and notes thereto, which
appear in the Statement of Additional Information. The following financial
highlights contain selected data for a Class A and 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. No Class C shares were outstanding during
the periods indicated.
<TABLE>
<CAPTION>
CLASS A
------------------------------------------------------------------------------
SIX MONTHS ENDED YEAR ENDED AUGUST 31, DECEMBER 3, 1990*
FEBRUARY 28,1994 ------------------------------------ THROUGH
(UNAUDITED) 1993 1992 AUGUST 31, 1991
---------------- ---------------- ---------------- ------------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.... $ 10.88 $ 10.08 $ 9.76 $ 9.55
-------- -------- -------- -------
INCOME FROM INVESTMENT OPERATIONS
Net investment income+.................. .33 .67 .69 .51
Net realized and unrealized gain on
investment transactions................ (.08) .65 .35 .21
-------- -------- -------- -------
Total from investment operations...... .25 1.32 1.04 .72
-------- -------- -------- -------
LESS DISTRIBUTIONS
Dividends from net investment income.... (.33) (.67) (.69) (.51)
Distributions from net realized gains... (.10) (.05) (.03) --
-------- -------- -------- -------
Total distributions................... (.43) (.72) (.72) (.51)
-------- -------- -------- -------
Net asset value, end of period.......... $ 10.50 $ 10.68 $ 10.08 $ 9.76
-------- -------- -------- -------
-------- -------- -------- -------
TOTAL RETURN++:......................... 2.45% 13.67% 11.08% 7.97%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)......... $200,015 $200,899 $141,101 $72,241
Average net assets (000)................ $203,895 $165,895 $102,227 $47,540
Ratios to average net assets:+@
Expenses, including distribution
fee.................................. .29%*** .20% .10% 0%***
Expenses, excluding distribution
fee.................................. .19%*** .10% .04% 0%***
Net investment income................. 6.19%*** 6.52% 6.91% 7.04%***
Portfolio turnover...................... 20%*** 34% 69% 35%
<CAPTION>
CLASS B
----------------
DECEMBER 7,
1993**
THROUGH
FEBUARY 28, 1994
(UNAUDITED)
----------------
<S> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.... $ 10.61
INCOME FROM INVESTMENT OPERATIONS
Net investment income+.................. .15
Net realized and unrealized gain on
investment transactions................ (.11)
Total from investment operations...... .04
LESS DISTRIBUTIONS
Dividends from net investment income.... (.15)
Distributions from net realized gains... --
Total distributions................... (.15)
Net asset value, end of period.......... $ 10.50
------
------
TOTAL RETURN++:......................... .82%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)......... $ 6,662
Average net assets (000)................ $ 3,105
Ratios to average net assets:+@
Expenses, including distribution
fee.................................. .78%***
Expenses, excluding distribution
fee.................................. .26%***
Net investment income................. 6.07%***
Portfolio turnover...................... 20%
<FN>
- --------------
*Commencement of offering of Class A shares.
**Commencement of offering of Class B shares.
***Annualized.
+Net of expense subsidy and fee waiver.
++Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each period reported and includes reinvestment of dividends and
distributions. Total returns for periods of less than a full year are not
annualized.
@Because of the events referred to in ** and the timing of such, the ratios for
the Class A shares are not necessarily comparable to that of Class B shares
and are not necessarily indicative of future ratios.
</TABLE>
5
<PAGE>
HOW THE FUND INVESTS
INVESTMENT OBJECTIVE AND POLICIES
PRUDENTIAL CALIFORNIA MUNICIPAL FUND (THE FUND) IS AN OPEN-END INVESTMENT
COMPANY, OR MUTUAL FUND, CONSISTING OF THREE SEPARATE SERIES. EACH SERIES OF THE
FUND IS MANAGED INDEPENDENTLY. THE CALIFORNIA INCOME SERIES (THE SERIES) IS
NON-DIVERSIFIED AND ITS INVESTMENT OBJECTIVE IS TO MAXIMIZE CURRENT INCOME THAT
IS EXEMPT FROM CALIFORNIA STATE AND FEDERAL INCOME TAXES CONSISTENT WITH THE
PRESERVATION OF CAPITAL. See "Investment Objectives and Policies" in the
Statement of Additional Information.
THE SERIES' INVESTMENT OBJECTIVE IS A FUNDAMENTAL POLICY AND, THEREFORE, MAY
NOT BE CHANGED WITHOUT THE APPROVAL OF THE HOLDERS OF A MAJORITY OF THE SERIES'
OUTSTANDING VOTING SECURITIES AS DEFINED IN THE INVESTMENT COMPANY ACT OF 1940,
AS AMENDED (THE INVESTMENT COMPANY ACT). THE SERIES' POLICIES THAT ARE NOT
FUNDAMENTAL MAY BE MODIFIED BY THE TRUSTEES.
THE SERIES WILL INVEST PRIMARILY IN CALIFORNIA 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 CALIFORNIA STATE AND FEDERAL INCOME
TAXES (CALIFORNIA OBLIGATIONS). THERE CAN BE NO ASSURANCE THAT THE SERIES WILL
BE ABLE TO ACHIEVE ITS INVESTMENT OBJECTIVE. Interest on certain municipal
obligations may be a preference item for purposes of the federal alternative
minimum tax. The Series may invest without limit in municipal obligations that
are "private activity bonds" (as defined in the Internal Revenue Code) the
interest on which would be a preference item for purposes of the federal
alternative minimum tax. See "Taxes, Dividends and Distributions." California
law provides that dividends paid by the Series are exempt from California State
personal income tax for individuals who reside in California to the extent such
dividends are derived from interest payments on California Obligations.
California Obligations may include general obligation bonds of the State,
counties, cities, towns, etc., revenue bonds of utility systems, highways,
bridges, port and airport facilities, colleges, hospitals, etc., and industrial
development and pollution control bonds. The Series will invest in long-term
California Obligations, and the dollar-weighted average maturity of the Series'
portfolio will generally range between 10-20 years. The Series may also invest
in certain short-term, tax-exempt notes such as Tax Anticipation Notes, Revenue
Anticipation Notes, Bond Anticipation Notes, Construction Loan Notes and
variable and floating rate demand notes.
Generally, municipal obligations with longer maturities produce higher yields
and are subject to greater price fluctuations as a result of changes in interest
rates (market risk) than municipal obligations with shorter maturities. The
prices of municipal obligations vary inversely with interest rates. Currently,
interest rates are much lower than in recent years. If rates were to rise
sharply, the prices of bonds in the Series' portfolio may be adversely affected.
THE SERIES MAY INVEST ITS ASSETS IN FLOATING RATE AND VARIABLE RATE
SECURITIES, INCLUDING PARTICIPATION INTERESTS THEREIN AND INVERSE FLOATERS.
There is no limit on the amount of such securities that the Series may purchase.
Floating rate securities normally have a rate of interest which is set as a
specific percentage of a designated base rate, such as the rate on Treasury
bonds or bills or the prime rate at a major commercial bank. The interest rate
on floating rate securities changes periodically when there is a change in the
designated base interest rate. Variable rate securities provide for a specified
periodic adjustment in the interest rate based on prevailing market rates and
generally allow the Series to demand payment of the obligation on short notice
at par plus accrued interest, which amount may be more or less than the amount
the Series paid for them. An inverse floater is a debt instrument with a
floating or variable interest rate that moves in the opposite direction of the
interest rate on another security or the value of an index. Changes in the
interest rate on the other security or index inversely affect the residual
interest rate paid on the inverse floater, with the result that the inverse
floater's price will be considerably more volatile than that of a fixed rate
bond. The market for inverse floaters is relatively new.
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
6
<PAGE>
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 CALIFORNIA
OBLIGATIONS WHICH, AT THE TIME OF PURCHASE, ARE RATED WITHIN THE FOUR HIGHEST
QUALITY GRADES AS DETERMINED BY EITHER MOODY'S INVESTORS SERVICE, INC. (MOODY'S)
(CURRENTLY AAA, AA, A, BAA FOR BONDS, MIG 1, MIG 2, MIG 3, MIG 4 FOR NOTES AND
P-1 FOR COMMERCIAL PAPER) OR STANDARD & POOR'S CORPORATION (S&P) (CURRENTLY AAA,
AA, A, BBB FOR BONDS, SP-1, SP-2 FOR NOTES AND A-1 FOR COMMERCIAL PAPER) OR, IF
UNRATED, WILL POSSESS CREDITWORTHINESS, IN THE OPINION OF THE INVESTMENT
ADVISER, COMPARABLE TO SUCH "INVESTMENT GRADE" RATED SECURITIES. THE SERIES MAY
ALSO INVEST UP TO 30% OF ITS TOTAL ASSETS IN CALIFORNIA OBLIGATIONS RATED BELOW
BAA BY MOODY'S OR BELOW BBB BY S&P OR, IF NON-RATED, OF COMPARABLE QUALITY, IN
THE OPINION OF THE FUND'S INVESTMENT ADVISER, BASED ON ITS CREDIT ANALYSIS.
Securities rated Baa by Moody's are described by Moody's as being investment
grade but are also characterized as having speculative characteristics.
Securities rated below Baa by Moody's and below BBB by S&P are considered
speculative. See "Description of Security Ratings" in the Appendix. Such
lower-rated high yield securities are commonly referred to as "junk bonds." Such
securities generally offer a higher current yield than those in the higher
rating categories but also involve greater price volatility and risk of loss of
principal and income. See "Risk Factors Relating to Investing in High Yield
Municipal Obligations" below. Many issuers of lower-quality bonds choose not to
have their obligations rated and the Series may invest without further limit in
such unrated securities. Investors should carefully consider the relative risks
associated with investments in securities which carry lower ratings and in
comparable non-rated securities. As a general matter, bond prices and the
Series' net asset value will vary inversely with interest rate fluctuations.
UNDER NORMAL MARKET CONDITIONS, THE SERIES WILL ATTEMPT TO INVEST
SUBSTANTIALLY ALL OF THE VALUE OF ITS ASSETS IN CALIFORNIA 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
California State and federal income taxes or the Series will have at least 80%
of its total assets invested in California 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 California Obligations or may invest
its assets so that more than 20% of the income is subject to California State or
federal income taxes.
THE SERIES MAY ACQUIRE PUT OPTIONS (PUTS) GIVING THE SERIES THE RIGHT TO SELL
SECURITIES HELD IN THE SERIES' PORTFOLIO AT A SPECIFIED EXERCISE PRICE ON A
SPECIFIED DATE. Such puts may be acquired for the purpose of protecting the
Series from a possible decline in the market value of the security to which the
put applies in the event of interest rate fluctuations or, in the case of
liquidity puts, for the purpose of shortening the effective maturity of the
underlying security. The aggregate value of premiums paid to acquire puts held
in the Series' portfolio (other than liquidity puts) may not exceed 10% of the
net asset value of the Series. The acquisition of a put may involve an
additional cost to the Series, by payment of a premium for the put, by payment
of a higher purchase price for securities to which the put is attached or
through a lower effective interest rate.
In addition, there is a credit risk associated with the purchase of puts in
that the issuer of the put may be unable to meet its obligation to purchase the
underlying security. Accordingly, the Series will acquire puts only under the
following circumstances: (1) the put is written by the issuer of the underlying
security and such security is rated within the four highest quality grades as
determined by Moody's or S&P; or (2) the put is written by a person other than
the issuer of the underlying security and such person has securities outstanding
which are rated within such four highest quality grades; or (3) the put is
backed by a letter of credit or similar financial guarantee issued by a person
having securities outstanding which are rated within the two highest quality
grades of such rating services.
7
<PAGE>
THE SERIES MAY PURCHASE MUNICIPAL OBLIGATIONS ON A "WHEN-ISSUED" OR "DELAYED
DELIVERY" BASIS, IN EACH CASE WITHOUT LIMIT. When municipal obligations are
offered on a when-issued or delayed delivery basis, the price and coupon rate
are fixed at the time the commitment to purchase is made, but delivery and
payment for the securities take place at a later date. Normally, the settlement
date occurs within one month of purchase. The purchase price for such securities
includes interest accrued during the period between purchase and settlement and,
therefore, no interest accrues to the economic benefit of the purchaser during
such period. In the case of purchases by the Series, the price that the Series
is required to pay on the settlement date may be in excess of the market value
of the municipal obligations on that date. While securities may be sold prior to
the settlement date, the Series intends to purchase these securities with the
purpose of actually acquiring them unless a sale would be desirable for
investment reasons. At the time the Series makes the commitment to purchase a
municipal obligation on a when-issued or delayed delivery basis, it will record
the transaction and reflect the value of the obligation each day in determining
its net asset value. This value may fluctuate from day to day in the same manner
as values of municipal obligations otherwise held by the Series. If the seller
defaults in the sale, the Series could fail to realize the appreciation, if any,
that had occurred. The Series will establish a segregated account with its
Custodian in which it will maintain cash and liquid, high-grade debt obligations
equal in value to its commitments for when-issued or delayed delivery
securities.
THE SERIES MAY ALSO PURCHASE MUNICIPAL FORWARD CONTRACTS. A municipal forward
contract is a municipal security which is purchased on a when-issued basis with
delivery taking place up to five years from the date of purchase. No interest
will accrue on the security prior to the delivery date. The investment adviser
will monitor the liquidity, value, credit quality and delivery of the security
under the supervision of the Trustees.
THE SERIES MAY PURCHASE SECONDARY MARKET INSURANCE ON CALIFORNIA 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 California Obligations held by the Series reduces
credit risk by providing that the insurance company will make timely payment of
principal and interest if the issuer defaults on its obligation to make such
payment, it does not afford protection against fluctuation in the price, I.E.,
the market value, of the municipal obligations caused by changes in interest
rates and other factors, nor in turn against fluctuations in the net asset value
of the shares of the Series.
RISK FACTORS RELATING TO INVESTING IN HIGH YIELD MUNICIPAL OBLIGATIONS.
FIXED-INCOME SECURITIES ARE SUBJECT TO THE RISK OF AN ISSUER'S INABILITY TO MEET
PRINCIPAL AND INTEREST PAYMENTS ON THE OBLIGATIONS (CREDIT RISK) AND MAY ALSO BE
SUBJECT TO PRICE VOLATILITY DUE TO SUCH FACTORS AS INTEREST RATE SENSITIVITY,
MARKET PERCEPTION OF THE CREDITWORTHINESS OF THE ISSUER AND GENERAL MARKET
LIQUIDITY (MARKET RISK). Lower-rated or unrated (I.E., high yield) securities,
commonly known as "junk bonds," are more likely to react to developments
affecting market and credit risk than are more highly rated securities, which
react primarily to movements in the general level of interest rates. The
investment adviser considers both credit risk and market risk in making
investment decisions for the Series. 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.
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 FINANCIAL FUTURES
CONTRACTS (FUTURES CONTRACTS) AND OPTIONS THEREON SOLELY 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
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PURCHASE. THE SUCCESSFUL USE OF FUTURES CONTRACTS AND OPTIONS THEREON BY THE
SERIES INVOLVES ADDITIONAL TRANSACTION COSTS AND IS SUBJECT TO VARIOUS RISKS AND
DEPENDS UPON THE INVESTMENT ADVISER'S ABILITY TO PREDICT THE DIRECTION OF THE
MARKET (INCLUDING INTEREST RATES).
A FUTURES CONTRACT OBLIGATES THE SELLER OF THE CONTRACT TO DELIVER TO THE
PURCHASER OF THE CONTRACT CASH EQUAL TO A SPECIFIC DOLLAR AMOUNT TIMES THE
DIFFERENCE BETWEEN THE VALUE OF A SPECIFIC FIXED-INCOME SECURITY OR INDEX AT THE
CLOSE OF THE LAST TRADING DAY OF THE CONTRACT AND THE PRICE AT WHICH THE
AGREEMENT IS MADE. No physical delivery of the underlying securities is made.
The Series will engage in transactions in only those futures contracts and
options thereon that are traded on a commodities exchange or a board of trade.
The Series intends to engage in futures contracts and options thereon as a
hedge against changes, resulting from market conditions, in the value of
securities which are held in the Series' portfolio or which the Series intends
to purchase, in accordance with the rules and regulations of the Commodity
Futures Trading Commission (the CFTC). The Series also intends to engage in such
transactions when they are economically appropriate for the reduction of risks
inherent in the ongoing management of the Series.
THE SERIES MAY NOT PURCHASE OR SELL FUTURES CONTRACTS OR OPTIONS THEREON IF,
IMMEDIATELY THEREAFTER, (I) THE SUM OF INITIAL AND NET CUMULATIVE VARIATION
MARGIN ON OUTSTANDING FUTURES CONTRACTS, TOGETHER WITH PREMIUMS PAID ON OPTIONS
THEREON, WOULD EXCEED 20% OF THE TOTAL ASSETS OF THE SERIES, AND (II), IN THE
CASE OF RISK MANAGEMENT TRANSACTIONS, THE SUM OF THE AMOUNT OF INITIAL MARGIN
DEPOSITS ON THE SERIES' FUTURES POSITIONS AND PREMIUMS PAID FOR OPTIONS THEREON
WOULD EXCEED 5% OF THE LIQUIDATION VALUE OF THE SERIES' TOTAL ASSETS. There are
no limitations on the percentage of the portfolio which may be hedged and no
limitations on the use of the Series' assets to cover futures contracts and
options thereon, except that the aggregate value of the obligations underlying
put options will not exceed 50% of the Series' assets. Certain requirements for
qualification as a regulated investment company under the Internal Revenue Code
may limit the Series' ability to engage in futures contracts and options
thereon. See "Distributions and Tax Information--Federal Taxation" in the
Statement of Additional Information.
Currently, futures contracts are available on several types of fixed-income
securities, including U.S. Treasury bonds and notes, three-month U.S. Treasury
bills and Eurodollars. Futures contracts are also available on a municipal bond
index, based on THE BOND BUYER Municipal Bond Index, an index of 40 actively
traded municipal bonds. The Series may also engage in transactions in other
futures contracts that become available, from time to time, in other
fixed-income securities or municipal bond indices and in other options on such
contracts if the investment adviser believes such contracts and options would be
appropriate for hedging the Series' portfolio.
THERE CAN BE NO ASSURANCE THAT VIABLE MARKETS WILL CONTINUE OR THAT A LIQUID
SECONDARY MARKET WILL EXIST TO TERMINATE ANY PARTICULAR FUTURES CONTRACT AT ANY
SPECIFIC TIME. If it is not possible to close a futures position entered into by
the Series, the Series will continue to be required to make daily cash payments
of variation margin in the event of adverse price movements. In such a
situation, if the Series had insufficient cash, it might have to sell portfolio
securities to meet daily variation margin requirements at a time when it might
be disadvantageous to do so. The inability to close futures positions also could
have an adverse impact on the ability of the Series to hedge effectively. There
is also a risk of loss by the Series of margin deposits in the event of
bankruptcy of a broker with whom the Series has an open position in a futures
contract.
THE SUCCESSFUL USE OF FUTURES CONTRACTS AND OPTIONS THEREON BY THE SERIES IS
SUBJECT TO VARIOUS ADDITIONAL RISKS. Any use of futures transactions involves
the risk of imperfect correlation in movements in the price of futures contracts
and movements in interest rates and, in turn, the prices of the securities that
are the subject of the hedge. If the price of the futures contract moves more or
less than the price of the security that is the subject of the hedge, the Series
will experience a gain or loss that will not be completely offset by movements
in the price of the security. The risk of imperfect correlation is greater where
the securities underlying futures contracts are taxable securities (rather than
municipal securities), are issued by companies in different market sectors or
have different maturities, ratings or geographic mixes than the security being
hedged. In addition, the correlation may be affected by additions to or
deletions from the index which serves as the basis for a futures contract.
Finally, if the price of the security that is subject to the hedge were to move
in a favorable direction, the advantage to the Series would be partially offset
by the loss incurred on the futures contract.
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SPECIAL CONSIDERATIONS
BECAUSE THE SERIES WILL INVEST AT LEAST 80% OF THE VALUE OF ITS TOTAL ASSETS
IN CALIFORNIA 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 CALIFORNIA OBLIGATIONS TO THIS DEGREE. The recent
national recession has severely affected several key sectors of California's
economy. California law could restrict the ability of the State and its local
governmental entities to raise revenues sufficient to pay certain obligations.
The fiscal 1994 budget was approved on time and contains $38.5 billion in
general fund spending, a decline of over 6% from fiscal 1993. If the issuers of
any of the California Obligations are unable to meet their financial obligations
because of earthquakes or for other reasons, the income derived by the Series,
the ability to preserve or realize appreciation of the Series' capital and the
Series' liquidity could be adversely affected.
THE SERIES IS "NON-DIVERSIFIED" SO THAT MORE THAN 5% OF ITS TOTAL ASSETS MAY
BE INVESTED IN THE SECURITIES OF ONE OR MORE ISSUERS. Investment in a
non-diversified portfolio involves greater risk than investment in a diversified
portfolio because a loss resulting from the default of a single issuer may
represent a greater portion of the total assets of a non-diversified portfolio.
The Series may not purchase securities (other than municipal obligations and
obligations guaranteed as to principal and interest by the U.S. Government or
its agencies or instrumentalities) if, as a result of such purchase, 25% or more
of the total assets of the Series (taken at current market value) would be
invested in any one industry.
OTHER INVESTMENTS AND POLICIES
REPURCHASE AGREEMENTS
The Series may on occasion enter into repurchase agreements, whereby the
seller of a security agrees to repurchase that security from the Series at a
mutually agreed-upon time and price. The period of maturity is usually quite
short; possibly overnight or a few days, although it may extend over a number of
months. The resale price is in excess of the purchase price, reflecting an
agreed-upon rate of return effective for the period of time the Series' money is
invested in the security. The Series' repurchase agreements will at all times be
fully collateralized in an amount at least equal to the purchase price,
including accrued interest earned on the underlying securities. The instruments
held as collateral are valued daily and as the value of the instruments
declines, the Series will require additional collateral. If the seller defaults
and the value of the collateral securing the repurchase agreement declines, the
Series may incur a loss. The Series participates in a joint repurchase account
with other investment companies managed by Prudential Mutual Fund Management,
Inc. pursuant to an order of the Securities and Exchange Commission (SEC). See
"Investment Objectives and Polices--Repurchase Agreements" in the Statement of
Additional Information.
BORROWING
The Series may borrow an amount equal to no more than 20% of the value of its
total assets (calculated when the loan is made) for temporary, extraordinary or
emergency purposes or for the clearance of transactions. The Series may pledge
up to 20% of the value of its total assets to secure these borrowings. The
Series will not purchase portfolio securities if its borrowings exceed 5% of its
total assets.
PORTFOLIO TURNOVER
The Series does not expect to trade in securities for short-term gain. It is
anticipated that the annual portfolio turnover rate will not exceed 150%. The
portfolio turnover rate is calculated by dividing the lesser of sales or
purchases of portfolio securities by the average monthly value of the portfolio
securities, excluding securities having a maturity at the date of purchase of
one year or less.
ILLIQUID SECURITIES
The Series may not invest more than 15% of its net assets in repurchase
agreements which have a maturity of longer than seven days or in other illiquid
securities, including securities that are illiquid by virtue of the absence of a
readily available market or contractual restrictions on resale. 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 municipal lease obligations 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.
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The staff of the SEC has taken the position that purchased over-the-counter
options and the assets used as "cover" for written over-the-counter options are
illiquid securities unless the Series and the counterparty have provided for the
Series, at the Series' election, to unwind the over-the-counter option. The
exercise of such an option ordinarily would involve the payment by the Series of
an amount designed to relect the counterparty's economic loss from an early
termination, but does allow the Series to treat the assets used as "cover" as
"liquid."
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, 1993, total expenses of Class A shares as
a percentage of average daily net assets were .20 of 1%. See "Financial
Highlights" and "Fee Waivers and Subsidy" below. No Class B or Class C shares
were outstanding during the fiscal year ended August 31, 1993.
MANAGER
PRUDENTIAL MUTUAL FUND MANAGEMENT, INC. (PMF OR THE MANAGER), ONE SEAPORT
PLAZA, NEW YORK, NEW YORK 10292, IS THE MANAGER OF THE FUND AND IS COMPENSATED
FOR ITS SERVICES AT AN ANNUAL RATE OF .50 OF 1% OF THE AVERAGE DAILY NET ASSETS
OF THE SERIES. It was incorporated in May 1987 under the laws of the State of
Delaware. PMF waived its management fees for the fiscal year ended August 31,
1993. See "Manager" in the Statement of Additional Information.
As of March 31, 1994, PMF served as the manager to [37] open-end investment
companies, constituting all of the Prudential Mutual Funds, and as manager or
administrator to [29] closed-end investment companies with aggregate assets of
approximately $[51] billion.
UNDER THE MANAGEMENT AGREEMENT WITH THE FUND, PMF MANAGES THE INVESTMENT
OPERATIONS OF EACH SERIES OF THE FUND AND ALSO ADMINISTERS THE FUND'S BUSINESS
AFFAIRS. See "Manager" in the Statement of Additional Information.
UNDER A SUBADVISORY AGREEMENT BETWEEN PMF AND THE PRUDENTIAL INVESTMENT
CORPORATION (PIC OR THE SUBADVISER), PIC FURNISHES INVESTMENT ADVISORY SERVICES
IN CONNECTION WITH THE MANAGEMENT OF THE FUND AND IS REIMBURSED BY PMF FOR ITS
REASONABLE COSTS AND EXPENSES INCURRED IN PROVIDING SUCH SERVICES. PMF continues
to have responsibility for all investment advisory services under the Management
Agreement and supervises PIC's performance of such services.
Jerry A. Webman, a Managing Director of PIC, sets broad investment strategies
which are then implemented by the Series' portfolio manager. The current
portfolio manager is Christian Smith, an Investment Associate of Prudential
Investment Advisors. Mr. Smith has responsibility for the day-to-day management
of the portfolio. He has managed the portfolio since 1991 and has been employed
by PIC in various capacities since 1988.
PMF and PIC are indirect, wholly-owned subsidiaries of The Prudential
Insurance Company of America (Prudential), a major diversified insurance and
financial services company.
FEE WAIVERS AND SUBSIDY
With respect to Class A shares, during the fiscal year ended August 31, 1993,
PMF voluntarily waived its management fee and subsidized a portion of the
operating expenses of the Class A shares of the Series. Effective December 1,
1993, PMF has agreed
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to waive 75% of its management fee. The Series is not required to reimburse PMF
for such management fee waiver or expense subsidy. Thereafter, PMF may from time
to time agree to waive its management fee and subsidize certain operating
expenses of the Series. Fee waivers and expense subsidies will increase the
Series' yield. See "Fund Expenses."
DISTRIBUTOR
PRUDENTIAL MUTUAL FUND DISTRIBUTORS, INC. (PMFD), ONE SEAPORT PLAZA, NEW YORK,
NEW YORK 10292, IS A CORPORATION ORGANIZED UNDER THE LAWS OF THE STATE OF
DELAWARE AND SERVES AS THE DISTRIBUTOR OF THE CLASS A SHARES OF THE SERIES. IT
IS A WHOLLY-OWNED SUBSIDIARY OF PMF.
PRUDENTIAL SECURITIES INCORPORATED (PRUDENTIAL SECURITIES OR PSI), ONE SEAPORT
PLAZA, NEW YORK, NEW YORK 10292, IS A CORPORATION ORGANIZED UNDER THE LAWS OF
THE STATE OF DELAWARE AND SERVES AS THE DISTRIBUTOR OF THE CLASS B AND CLASS C
SHARES OF THE FUND. IT IS AN INDIRECT, WHOLLY-OWNED SUBSIDIARY OF PRUDENTIAL.
UNDER SEPARATE DISTRIBUTION AND SERVICE PLANS (THE CLASS A PLAN, THE CLASS B
PLAN AND THE CLASS C PLAN, COLLECTIVELY, THE PLANS) ADOPTED BY THE FUND UNDER
RULE 12B-1 UNDER THE INVESTMENT COMPANY ACT AND SEPARATE DISTRIBUTION AGREEMENTS
(THE DISTRIBUTION AGREEMENTS), PMFD AND PRUDENTIAL SECURITIES (COLLECTIVELY, THE
DISTRIBUTOR) INCUR THE EXPENSES OF DISTRIBUTING THE CLASS A, CLASS B AND CLASS C
SHARES OF THE SERIES. These expenses include commissions and account servicing
fees paid to, or on account of, financial advisers of Prudential Securities and
Pruco Securities Corporation (Prusec), an affiliated broker-dealer, commissions
and account servicing fees paid to, or on account of, other broker-dealers or
financial institutions (other than national banks) which have entered into
agreements with the Distributor, advertising expenses, the cost of printing and
mailing prospectuses to potential investors and indirect and overhead costs of
Prudential Securities and Prusec associated with the sale of Fund shares,
including lease, utility, communications and sales promotion expenses. The State
of Texas requires that shares of the Series may be sold in that state only by
dealers or other financial institutions which are registered there as
broker-dealers.
Under the Plans, the Series is obligated to pay distribution and/or service
fees to the Distributor as compensation for its distribution and service
activities, not as reimbursement for specific expenses incurred. If the
Distributor's expenses exceed its distribution and service fees, the Series will
not be obligated to pay any additional expenses. If the Distributor's expenses
are less than such distribution and service fees, it will retain its full fees
and realize a profit.
UNDER THE CLASS A PLAN, THE SERIES MAY PAY PMFD FOR ITS DISTRIBUTION-RELATED
EXPENSES AT AN ANNUAL RATE OF UP TO .30 OF 1% OF THE AVERAGE DAILY NET ASSETS OF
THE CLASS A SHARES OF THE SERIES. The Class A Plan provides that (i) up to .25
of 1% of the average daily net assets of the Class A shares may be used to pay
for personal service and/or the maintenance of shareholder accounts (service
fee) and (ii) total distribution fees (including the service fee of .25 of 1%)
may not exceed .30 of 1% of the average daily net assets of the Class A shares.
PMFD has agreed to limit its distribution-related fees payable under the Class A
Plan to .10 of 1% of the average daily net asset value of the Class A shares for
the fiscal year ending August 31, 1994.
For the fiscal year ended August 31, 1993, PMFD received payments of $165,895
under the Class A Plan as reimbursement of expenses related to the distribution
of Class A shares. 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, 1993, PMFD also received approximately
$2,860,300 in initial sales charges. No Class B or Class C shares were
outstanding during the fiscal year ended August 31, 1993.
UNDER THE CLASS B AND CLASS C PLANS, THE SERIES MAY PAY PRUDENTIAL SECURITIES
FOR ITS DISTRIBUTION-RELATED EXPENSES 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
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average daily net assets of the Class C shares for the fiscal year ending August
31, 1994. Prudential Securities also receives contingent deferred sales charges
from certain redeeming shareholders. See "Shareholder Guide--How to Sell Your
Shares-- Contingent Deferred Sales Charges."
No Class B or Class C shares were outstanding during the fiscal year ended
August 31, 1993.
For the fiscal year ended August 31, 1993, the Series paid distribution
expenses of .10 of 1% of the average daily net assets of the Class A shares. The
Series records all payments made under the Plans as expenses in the calculation
of net investment income. No Class B or Class C shares were outstanding during
the fiscal year ended August 31, 1993.
Distribution expenses attributable to the sale of shares of the Series will be
allocated to each class based upon the ratio of sales of each class to the sales
of all shares of the Series other than expenses allocable to a particular class.
The distribution fee and sales charge of one class will not be used to subsidize
the sale of another class.
Each Plan provides that it shall continue in effect from year to year provided
that a majority of the Trustees of the Fund, including a majority of the
Trustees who are not "interested persons" of the Fund (as defined in the
Investment Company Act) and who have no direct or indirect financial interest in
the operation of the Plan or any agreement related to the Plan (the Rule 12b-1
Trustees), vote annually to continue the Plan. Each Plan may be terminated with
respect to the Series at any time by vote of a majority of the Rule 12b-1
Trustees or of a majority of the outstanding shares of the Series. The Series
will not be obligated to pay expenses incurred under any Plan if it is
terminated or not continued.
In addition to distribution and service fees paid by the Series under the
Class A and Class B Plans, the Manager (or one of its affiliates) may make
payments to dealers and other persons who distribute shares of the Series. Such
payments may be calculated by reference to the net asset value of shares sold by
such persons or otherwise.
The Distributor is subject to the rules of the National Association of
Securities Dealers, Inc. governing maximum sales charges. See "Distributor" in
the Statement of Additional Information.
PORTFOLIO TRANSACTIONS
Prudential Securities may act as a broker or futures commission merchant for
the Fund, provided that the commissions, fees or other remuneration it receives
are fair and reasonable. See "Portfolio Transactions and Brokerage" in the
Statement of Additional Information.
CUSTODIAN AND TRANSFER AND DIVIDEND DISBURSING AGENT
State Street Bank and Trust Company, One Heritage Drive, North Quincy,
Massachusetts 02171, serves as Custodian for the portfolio securities of the
Series and cash and, in that capacity, maintains certain financial and
accounting books and records pursuant to an agreement with the Fund. Its mailing
address is P.O. Box 1713, Boston, Massachusetts 02105.
Prudential Mutual Fund Services, Inc. (PMFS), Raritan Plaza One, Edison, New
Jersey 08837, serves as Transfer Agent and Dividend Disbursing Agent and in
those capacities maintains certain books and records for the Fund. PMFS is a
wholly-owned subsidiary of PMF. Its mailing address is P.O. Box 15005, New
Brunswick, New Jersey 08906-5005.
HOW THE FUND VALUES ITS SHARES
THE SERIES' NET ASSET VALUE PER SHARE OR NAV IS DETERMINED BY SUBTRACTING ITS
LIABILITIES FROM THE VALUE OF ITS ASSETS AND DIVIDING THE REMAINDER BY THE
NUMBER OF OUTSTANDING SHARES. NAV IS CALCULATED SEPARATELY FOR EACH CLASS. THE
TRUSTEES HAVE FIXED THE SPECIFIC TIME OF DAY FOR THE COMPUTATION OF THE NAV OF
THE SERIES TO BE AS OF 4:15 P.M., NEW YORK TIME.
Portfolio securities are valued based on market quotations or, if not readily
available, at fair value as determined in good faith under procedures
established by the Trustees. Securities may also be valued based on values
provided by a pricing service. See "Net Asset Value" in the Statement of
Additional Information.
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The Series will compute its net asset value once daily on days that the New
York Stock Exchange is open for trading except on days on which no orders to
purchase, sell or redeem shares have been received by the Series or days on
which changes in the value of the Series' portfolio securities do not materially
affect the NAV. The New York Stock Exchange is closed on the following holidays:
New Year's Day, Presidents' Day, Good Friday, Memorial Day, Independence Day,
Labor Day, Thanksgiving Day and Christmas Day.
Although the legal rights of each class of shares are substantially identical,
the different expenses borne by each class will result in different NAVs and
dividends. As long as the Series declares dividends daily, the NAV of the Class
A, Class B and Class C shares will generally be the same. It is expected,
however, that the Series' dividends will differ by approximately the amount of
the distribution-related expense accrual differential among the classes.
HOW THE FUND CALCULATES PERFORMANCE
FROM TIME TO TIME THE FUND MAY ADVERTISE THE "YIELD," "TAX EQUIVALENT YIELD"
AND "TOTAL RETURN" (INCLUDING "AVERAGE ANNUAL" TOTAL RETURN AND "AGGREGATE"
TOTAL RETURN) OF THE SERIES IN ADVERTISEMENTS AND 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 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., other industry publications, business periodicals and
market indices. See "Performance Information" in the Statement of Additional
Information. The Fund will include performance data for each class of shares of
the Series in any advertisement or information including performance data of the
Fund. Further performance information is contained in the Series' annual and
semi-annual reports to shareholders, which may be obtained without charge. See
"Shareholder Guide--Shareholder Services--Reports to Shareholders."
TAXES, DIVIDENDS AND DISTRIBUTIONS
TAXATION OF THE FUND
THE SERIES HAS ELECTED TO QUALIFY AND INTENDS TO REMAIN QUALIFIED AS A
REGULATED INVESTMENT COMPANY UNDER THE INTERNAL REVENUE CODE. ACCORDINGLY, THE
SERIES WILL NOT BE SUBJECT TO FEDERAL INCOME TAXES ON ITS NET INVESTMENT INCOME
AND CAPITAL GAINS, IF ANY, THAT IT DISTRIBUTES TO ITS SHAREHOLDERS. TO THE
EXTENT NOT DISTRIBUTED BY THE SERIES, NET TAXABLE INVESTMENT INCOME AND CAPITAL
GAINS AND LOSSES ARE TAXABLE TO THE SERIES.
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To the extent the Series invests in taxable obligations, it will earn taxable
investment income. Also, to the extent the Series engages in hedging
transactions in futures contracts and options thereon, it may earn both
short-term and long-term capital gain or loss. Under the Internal Revenue Code,
special rules apply to the treatment of certain options and futures contracts
(Section 1256 contracts). At the end of each year, such investments held by the
Series will be required to be "marked to market" for federal income tax
purposes; that is, treated as having been sold at market value. Sixty percent of
any gain or loss recognized on these "deemed sales" and on actual dispositions
will be treated as long-term capital gain or loss, and the remainder will be
treated as short-term capital gain or loss. See "Distributions and Tax
Information" in the Statement of Additional Information.
Gain or loss realized by the Series from the sale of securities generally will
be treated as capital gain or loss; however, gain from the sale of certain
securities (including municipal obligations) will be treated as ordinary income
to the extent of any "market discount." Market discount generally is the
difference, if any, between the price paid by the Series for the security and
the principal amount of the security (or, in the case of a security issued at an
original issue discount, the revised issue price of the security). The market
discount rule does not apply to any security that was acquired by the Series at
its original issue.
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."
All dividends of net taxable investment income, together with distributions of
net short-term capital gains in excess of net long-term capital losses, will be
taxable as ordinary income to the shareholder whether or not reinvested. Any net
capital gains (i.e., the excess of net long-term capital gains over net
short-term capital losses) distributed to shareholders will be taxable as
long-term capital gains to the shareholders, whether or not reinvested and
regardless of the length of time a shareholder has owned his or her shares. The
maximum long-term capital gains rate for individuals is 28%. The maximum
long-term capital gains rate for corporate shareholders currently is the same as
the maximum tax rate for ordinary income.
Any gain or loss realized upon a sale or redemption of Series shares by a
shareholder who is not a dealer in securities will be treated as long-term
capital gain or loss if the shares have been held more than one year and
otherwise as short-term capital gain or loss. Any such loss, however, although
otherwise treated as a short-term capital loss, will be treated as long-term
capital loss to the extent of any capital gain distributions received by the
shareholder on shares that are held for six months or less. In addition, any
short-term capital loss will be disallowed to the extent of any tax-exempt
dividends received by the shareholder on shares that are held for six months or
less.
The Fund has obtained an opinion of counsel to the effect that the conversion
of Class B shares into Class A shares does not constitute a taxable event for
U.S. income tax purposes. However, such opinion is not binding on the Internal
Revenue Service.
CERTAIN INVESTORS MAY INCUR FEDERAL ALTERNATIVE MINIMUM TAX LIABILITY AS A
RESULT OF THEIR INVESTMENT IN THE FUND. Tax-exempt interest from certain
municipal obligations (I.E., certain private activity bonds issued after August
7, 1986) will be treated as an item of tax preference for purposes of the
alternative minimum tax. The Fund anticipates that, under regulations to be
promulgated, items of tax preference incurred by the Series will be attributed
to the Series' shareholders, although some portion of such items could be
allocated to the Series itself. Depending upon each shareholder's individual
circumstances, the attribution of items of tax preference incurred by the Series
could result in liability for the shareholder for the alternative minimum tax.
Similarly, the Series could be liable for the alternative minimum tax for items
of tax preference attributed to it. The Series is permitted to invest in
municipal obligations of the type that will produce items of tax preference.
Corporate shareholders in the Series may incur a preference item known as the
"adjustment for current earnings" and corporate shareholders should consult with
their tax advisers with respect to this potential preference item.
Under California law, the taxation of regulated investment companies and their
shareholders was generally conformed to the federal tax law that was in effect
on January 1, 1992. Dividends paid by the Series and derived from interest on
obligations which (when held by an individual) pay interest excludable from
California personal income under California law will be exempt from the
California personal income tax (although not from the California franchise tax).
To the extent a portion of the dividends are derived
15
<PAGE>
from interest on debt obligations other than those described directly above,
such portion will be subject to the California personal income tax even though
it may be excludable from gross income for federal income tax purposes. In
addition, distributions of short-term capital gains realized by the Fund will be
taxable to the shareholders as ordinary income. Distributions of long-term
capital gains will be taxable as such to the shareholders regardless of how long
they held their shares. Under California law, ordinary income and capital gains
currently are taxed at the same rate. With respect to non-corporate
shareholders, California does not treat tax-exempt interest as a tax preference
item for purposes of its alternative minimum tax. To the extent a corporate
shareholder receives dividends which are exempt from California taxation, a
portion of such dividends may be subject to the alternative minimum tax.
Interest on indebtedness incurred or continued to purchase or carry shares of
the Series will not be deductible for federal or California purposes.
WITHHOLDING TAXES
Under U.S. Treasury Regulations, the Series is required to withhold and remit
to the U.S. Treasury 31% of redemption proceeds on the accounts of those
shareholders who fail to furnish their tax identification numbers on IRS Form
W-9 (or IRS Form W-8 in the case of certain foreign shareholders) with the
required certifications regarding the shareholder's status under the federal
income tax law. Such withholding is also required on taxable dividends and
capital gains distributions made by the Series unless it is reasonably expected
that at least 95% of the distributions of the Series are comprised of tax-exempt
dividends.
Shareholders are advised to consult their own tax advisers regarding specific
questions as to federal, state and local taxes. See "Distributions and Tax
Information" in the Statement of Additional Information.
DIVIDENDS AND DISTRIBUTIONS
THE SERIES EXPECTS TO DECLARE DAILY AND PAY MONTHLY DIVIDENDS OF NET
INVESTMENT INCOME, IF ANY, AND MAKE DISTRIBUTIONS AT LEAST ANNUALLY OF ANY
CAPITAL GAINS IN EXCESS OF CAPITAL LOSSES. Dividends and distributions paid by
the Series with respect to each class of shares, to the extent any dividends or
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 such class will
bear its own distribution and service fees, generally resulting in lower
dividends for Class B and Class C shares. Distributions of net capital gains, if
any, will be paid in the same amount for each class of shares. See "How the Fund
Values its Shares."
DIVIDENDS AND DISTRIBUTIONS WILL BE PAID IN ADDITIONAL SHARES OF THE SERIES
BASED ON THE NAV OF EACH CLASS OF THE SERIES ON THE PAYMENT DATE AND RECORD
DATE, RESPECTIVELY, OR SUCH OTHER DATE AS THE TRUSTEES MAY DETERMINE, UNLESS THE
SHAREHOLDER ELECTS IN WRITING NOT LESS THAN FIVE BUSINESS DAYS PRIOR TO THE
RECORD DATE TO RECEIVE SUCH DIVIDENDS AND DISTRIBUTIONS IN CASH. Such election
should be submitted to Prudential Mutual Fund Services, Inc., Attention: Account
Maintenance, P.O. Box 15015, New Brunswick, New Jersey 08906-5015. If you hold
shares through Prudential Securities, you should contact your financial adviser
to elect to receive dividends and distributions in cash. The Fund will notify
each shareholder after the close of the Fund's taxable year both of the dollar
amount and the taxable status of that year's dividends and distributions on a
per share basis.
Any distributions of capital gains paid shortly after a purchase by an
investor will have the effect of reducing the per share net asset value of the
investor's shares by the per share amount of the distributions. Such
distributions, although in effect a return of invested principal, are subject to
federal income taxes. Accordingly, prior to purchasing shares of the the Series,
an investor should carefully consider the impact of capital gains distributions
which are expected to be or have been announced.
GENERAL INFORMATION
DESCRIPTION OF SHARES
THE FUND WAS ESTABLISHED AS A MASSACHUSETTS BUSINESS TRUST ON MAY 18, 1984, BY
A DECLARATION OF TRUST. The Fund's activities are supervised by its Trustees.
The Declaration of Trust permits the Trustees to issue an unlimited number of
full and fractional shares in separate series, currently designated as the
California Series, the California Income Series and the
16
<PAGE>
California Money Market Series. The Series is authorized to issue an unlimited
number of shares, divided into three classes, designated Class A, Class B and
Class C. Each class of shares represents an interest in the same assets of the
Series and is identical in all respects except that (i) each class bears
different distribution expenses, (ii) each class has exclusive voting rights
with respect to its distribution and service plan (except that the Fund has
agreed with the SEC in connection with the offering of a conversion feature on
Class B shares to submit any amendment of the Class A Plan to both Class A and
Class B shareholders), (iii) each class has a different exchange privilege and
(iv) only Class B shares have a conversion feature. See "How the Fund is
Managed--Distributor." The Fund has received an order from the SEC permitting
the issuance and sale of multiple classes of shares. Currently the Series is
offering three classes of shares, designated Class A, Class B and Class C
shares. In accordance with the Fund's Declaration of Trust, the Trustees may
authorize the creation of additional series and classes within such series, with
such preferences, privileges, limitations and voting and dividend rights as the
Trustees may determine.
Shares of the Fund, when issued, are fully paid, nonassessable, fully
transferable and redeemable at the option of the holder. Shares are also
redeemable at the option of the Fund under certain circumstances as described
under "Shareholder Guide--How to Sell Your Shares." Each share of each class is
equal as to earnings, assets and voting privileges, except as noted above, and
each class bears the expenses related to the distribution of its shares. Except
for the conversion feature applicable to the Class B shares, there are no
conversion, preemptive or other subscription rights. In the event of
liquidation, each share of beneficial interest of each series is entitled to its
portion of all of the Fund's assets after all debt and expenses of the Fund have
been paid. Since Class B and Class C shares generally bear higher distribution
expenses than Class A shares, the liquidation proceeds to shareholders of those
classes are likely to be lower than to Class A shareholders. The Fund's shares
do not have cumulative voting rights for the election of Trustees.
THE FUND DOES NOT INTEND TO HOLD ANNUAL MEETINGS OF SHAREHOLDERS UNLESS
OTHERWISE REQUIRED BY LAW. THE FUND WILL NOT BE REQUIRED TO HOLD MEETINGS OF
SHAREHOLDERS UNLESS, FOR EXAMPLE, THE ELECTION OF TRUSTEES IS REQUIRED TO BE
ACTED UPON BY SHAREHOLDERS UNDER THE INVESTMENT COMPANY ACT. SHAREHOLDERS HAVE
CERTAIN RIGHTS, INCLUDING THE RIGHT TO CALL A MEETING UPON A VOTE OF 10% OF THE
FUND'S OUTSTANDING SHARES FOR THE PURPOSE OF VOTING ON THE REMOVAL OF ONE OR
MORE TRUSTEES OR TO TRANSACT ANY OTHER BUSINESS.
The Declaration of Trust and the By-Laws of the Fund are designed to make the
Fund similar in certain respects to a Massachusetts business corporation. The
principal distinction between a Massachusetts business trust and a Massachusetts
business corporation relates to shareholder liability. Under Massachusetts law,
shareholders of a business trust may, under certain circumstances, be held
personally liable as partners for the obligations of the Fund, which is not the
case with a corporation. The Declaration of Trust of the Fund provides that
shareholders shall not be subject to any personal liability for the acts or
obligations of the Fund and that every written obligation, contract, instrument
or undertaking made by the Fund shall contain a provision to the effect that the
shareholders are not individually bound thereunder.
ADDITIONAL INFORMATION
This Prospectus, including the Statement of Additional Information which has
been incorporated by reference herein, does not contain all the information set
forth in the Registration Statement filed by the Fund with the SEC under the
Securities Act of 1933. Copies of the Registration Statement may be obtained at
a reasonable charge from the SEC or may be examined, without charge, at the
office of the SEC in Washington, D.C.
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 (PMFS OR THE TRANSFER AGENT), ATTENTION: INVESTMENT SERVICES, P.O. BOX
15020, NEW BRUNSWICK, NEW JERSEY 08906-5020. The minimum initial investment for
Class A and Class B shares is $1,000 per class and $5,000 for Class C shares.The
minimum subsequent investment is $100 for all classes. All minimum
17
<PAGE>
investment requirements are waived for certain retirement and employee savings
plans or custodial accounts for the benefit of minors. For purchases made
through the Automatic Savings Accumulation Plan, the minimum initial and
subsequent investment is $50. See "Shareholder Services" below.
An investment in the Series may not be appropriate for tax-exempt or
tax-deferred investors. Such investors should consult their own tax advisers.
THE PURCHASE PRICE IS THE NAV PER SHARE NEXT DETERMINED FOLLOWING RECEIPT OF
AN ORDER BY THE TRANSFER AGENT OR PRUDENTIAL SECURITIES PLUS A SALES CHARGE
WHICH, AT YOUR OPTION, MAY BE IMPOSED EITHER (I) AT THE TIME OF PURCHASE (CLASS
A SHARES) OR (II) ON A DEFERRED BASIS (CLASS B OR CLASS C SHARES). SEE
"ALTERNATE PURCHASE PLAN" BELOW. SEE ALSO "HOW THE FUND VALUES ITS SHARES."
Application forms can be obtained from PMFS, Prudential Securities or Prusec.
If a share certificate is desired, it must be requested in writing for each
transaction. Certificates are issued only for full shares. Shareholders who hold
their shares through Prudential Securities will not receive share certificates.
The Fund reserves the right to reject any purchase order (including an
exchange) or to suspend or modify the continuous offering of its shares. See
"How to Sell Your Shares" below.
Your dealer is responsible for forwarding payment promptly to the Fund. The
Distributor reserves the right to cancel any purchase order for which payment
has not been received by the fifth business day following the investment.
Transactions in shares of the Series may be subject to postage and handling
charges imposed by your dealer.
PURCHASE BY WIRE. For an initial purchase of shares of the Series by wire, you
must first telephone PMFS at (800) 225-1852 (toll-free) to receive an account
number. The following information will be requested: your name, address, tax
identification number, 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
California Municipal Fund (California Income Series), specifying on the wire the
account number assigned by PMFS and your name and identifying the sales charge
alternative (Class A, Class B or Class C shares).
If you arrange for receipt by State Street of Federal Funds prior to 4:15
P.M., New York time, on a business day, you may purchase shares of the Series as
of that day.
In making a subsequent purchase order by wire, you should wire State Street
directly and should be sure that the wire specifies Prudential California
Municipal 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.
18
<PAGE>
ALTERNATIVE PURCHASE PLAN
THE SERIES OFFERS THREE CLASSES OF SHARES (CLASS A, CLASS B AND CLASS C
SHARES) WHICH ALLOWS YOU TO CHOOSE THE MOST BENEFICIAL SALES CHARGE STRUCTURE
FOR YOUR INDIVIDUAL CIRCUMSTANCES, GIVEN THE AMOUNT OF THE PURCHASE AND THE
LENGTH OF TIME YOU EXPECT TO HOLD THE SHARES AND OTHER RELEVANT CIRCUMSTANCES
(ALTERNATIVE PURCHASE PLAN).
<TABLE>
<CAPTION>
ANNUAL 12B-1 FEES
(AS A % OF AVERAGE
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 .1% (currently being Shares do not convert to another class
the amount invested or the redemption charged at a rate of
proceeds on redemptions made within .75 of 1%)
one year of purchase
</TABLE>
The three classes of shares represent an interest in the same portfolio of
investments of the Series and have the same rights, except that (i) each class
bears the separate expenses of its Rule 12b-1 distribution and service plan,
(ii) each class has exclusive voting rights with respect to its plan (except as
noted under the heading "General Information--Description of Shares"), and (iii)
only Class B shares have a conversion feature. The three classes also have
separate exchange privileges. See "How to Exchange Your Shares" below. The
income attributable to each class and the dividends payable on the shares of
each class will be reduced by the amount of the distribution fee of each class.
Class B and Class C shares bear the expenses of a higher distribution fee which
will generally cause them to have higher expense ratios and to pay lower
dividends than the Class A shares.
Financial advisers and other sales agents who sell shares of the Series will
receive different compensation for selling Class A, Class B and Class C shares
and will generally receive more compensation initially for selling Class A and
Class B shares than for selling Class C shares.
IN SELECTING A PURCHASE ALTERNATIVE, YOU SHOULD CONSIDER, AMONG OTHER THINGS,
(1) the length of time you expect to hold your investment, (2) the amount of any
applicable sales charge (whether imposed at the time of purchase or redemption)
and distribution-related fees, as noted above, (3) whether you qualify for any
reduction or waiver of any applicable sales charge, (4) the various exchange
privileges among the different classes of shares (see "How to Exchange Your
Shares" below) and (5) the fact that Class B shares automatically convert to
Class A shares approximately seven years after purchase (see "Conversion
Feature--Class B Shares" below).
The following is provided to assist you in determining which method of
purchase best suits your individual circumstances and is based on current fees
and expenses being charged to the Series:
If you intend to hold your investment in the Fund 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 an 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.
19
<PAGE>
If you do not qualify for a reduced sales charge on Class A shares and you
purchase Class B or Class C shares, you would have to hold your investment for
more than 4 years in the case of Class C shares for the higher cumulative annual
distribution-related fee on those shares to exceed the initial sales charge plus
cumulative annual distribution-related fees on Class A shares. This does not
take into account the time value of money, which further reduces the impact of
the higher Class C distribution-related fee on the investment, fluctuations in
net asset value, the effect of the return on the investment over this period of
time or redemptions during which the CDSC is applicable.
ALL PURCHASES OF $1 MILLION OR MORE, EITHER AS PART OF A SINGLE INVESTMENT OR
UNDER RIGHTS OF ACCUMULATION OR LETTERS OF INTENT, MUST BE FOR CLASS A SHARES.
See "Redemption and Waiver of Initial Sales Charges" below.
CLASS A SHARES
The offering price of Class A shares for investors choosing the initial sales
charge alternative is the next determined NAV plus a sales charge (expressed as
a percentage of the offering price and of the amount invested) as shown in the
following table:
<TABLE>
<CAPTION>
SALES CHARGE AS SALES CHARGE AS DEALER CONCESSION
PERCENTAGE OF PERCENTAGE OF NET AS PERCENTAGE OF
AMOUNT OF PURCHASE OFFERING PRICE AMOUNT INVESTED OFFERING PRICE
- --------------------------- ---------------------- ---------------------- --------------------------
<S> <C> <C> <C>
Less than $99,999 3.00% 3.09% 2.50%
$100,000 to $249,999 2.50 2.56 2.40
$250,000 to $499,999 1.50 1.52 1.40
$500,000 to $999,999 1.00 1.01 0.95
$1,000,000 and above None None None
<FN>
</TABLE>
Selling dealers may be deemed to be underwriters, as that term is defined in
the Securities Act of 1933.
REDUCTION AND WAIVER OF INITIAL SALES CHARGES._Reduced sales charges are
available through Rights of Accumulation and Letters of Intent. Shares of the
Fund and shares of other Prudential Mutual Funds (excluding money market funds
other than those acquired pursuant to the exchange privilege) may be aggregated
to determine the applicable reduction. See "Purchase and Redemption of Fund
Shares--Reduction and Waiver of Initial Sales Charges--Class A Shares" in the
Statement of Additional Information. Class A shares may be purchased at NAV,
without payment of an initial sales charge, by pension, profit-sharing or other
employee benefit plans qualified under Section 401 of the Internal Revenue Code
and deferred compensation and annuity plans under Sections 457 and 403(b)(7) of
the Internal Revenue Code (Benefit Plans), provided that the plan has existing
assets of at least $1 million invested in shares of Prudential Mutual Funds
(excluding money market funds other than those acquired pursuant to the exchange
privilege) or 1,000 eligible employees or members. In the case of Benefit Plans
whose accounts are held directly with the Transfer Agent and for which the
Transfer Agent does individual account record keeping (Direct Account Benefit
Plans) and Benefit Plans sponsored by PSI or its subsidiaries (PSI or Subsidiary
Prototype Benefit Plans), Class A shares may be purchased at NAV by participants
who are repaying loans made from such plans to the participant. Additional
information concerning the reduction and waiver of initial sales charges is set
forth in the Statement of Additional Information.
In addition, Class A shares may be purchased at NAV, through Prudential
Securities or the Transfer Agent, by the following persons: (a) Trustees and
officers of the Fund and other Prudential Mutual Funds, (b) employees of
Prudential Securities and PMF and their subsidiaries and members of the families
of such persons who maintain an "employee related" account at Prudential
Securities or the Transfer Agent, (c) employees and special agents of Prudential
and its subsidiaries and all persons who have retired directly from active
service with Prudential or one of its subsidiaries, (d) registered
representatives and employees of dealers who have entered into a selected dealer
agreement with Prudential Securities provided that purchases at NAV are
permitted by such person's employer and (e) investors who have a business
relationship with a financial adviser who joined Prudential Securities from
another investment firm, provided that (i) the purchase is made within 90 days
of the commencement of the financial adviser's employment at Prudential
Securities, (ii) the purchase is made with proceeds of a redemption of shares
20
<PAGE>
of any open-end, non-money market fund sponsored by the financial adviser's
previous employer (other than a fund which imposes a distribution or service fee
of .25 of 1% or less) on which no deferred sales load, fee or other charge was
imposed on redemption and (iii) the financial adviser served as the client's
broker on the previous purchases.
You must notify the Fund's Transfer Agent either directly or through
Prudential Securities or Prusec that you are entitled to the reduction or waiver
of the sales charge. The reduction or waiver will be granted subject to
confirmation of your entitlement. No initial sales charges are imposed upon
Class A shares purchased 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 per share next determined
following receipt of an order by the Transfer Agent or Prudential Securities.
Although there is no sales charge imposed at the time of purchase, redemptions
of Class B and Class C shares may be subject to a CDSC. See "How to Sell Your
Shares--Contingent Deferred Sales Charges" below.
HOW TO SELL YOUR SHARES
YOU CAN REDEEM YOUR SHARES OF THE SERIES AT ANY TIME FOR CASH AT THE NAV PER
SHARE NEXT DETERMINED AFTER THE REDEMPTION REQUEST IS RECEIVED IN PROPER FORM BY
THE TRANSFER AGENT OR PRUDENTIAL SECURITIES. SEE "HOW THE FUND VALUES ITS
SHARES." In certain cases, however, redemption proceeds will be reduced by the
amount of any applicable contingent deferred sales charge, as described below.
See "Contingent Deferred Sales Charges" below.
IF YOU HOLD SHARES OF THE SERIES THROUGH PRUDENTIAL SECURITIES, YOU MUST
REDEEM SHARES BY CONTACTING YOUR PRUDENTIAL SECURITIES FINANCIAL ADVISOR. IF YOU
HOLD SHARES IN NON-CERTIFICATE FORM, A WRITTEN REQUEST FOR REDEMPTION SIGNED BY
YOU EXACTLY AS THE ACCOUNT IS REGISTERED IS REQUIRED. IF YOU HOLD CERTIFICATES,
THE CERTIFICATES, SIGNED IN THE NAME(S) SHOWN ON THE FACE OF THE CERTIFICATES,
MUST BE RECEIVED BY THE TRANSFER AGENT IN ORDER FOR THE REDEMPTION REQUEST TO BE
PROCESSED. IF REDEMPTION IS REQUESTED BY A CORPORATION, PARTNERSHIP, TRUST OR
FIDUCIARY, WRITTEN EVIDENCE OF AUTHORITY ACCEPTABLE TO THE TRANSFER AGENT MUST
BE SUBMITTED BEFORE SUCH REQUEST WILL BE ACCEPTED. All correspondence and
documents concerning redemptions should be sent to the Fund in care of its
Transfer Agent, Prudential Mutual Fund Services, Inc., Attention: Redemption
Services, P.O. Box 15010, New Brunswick, New Jersey 08906-5010.
If the proceeds of the redemption (a) exceed $50,000, (b) are to be paid to a
person other than the record owner, (c) are to be sent to an address other than
the address on the Transfer Agent's records, or (d) are to be paid to a
corporation, partnership, trust or fiduciary, the signature(s) on the redemption
request and on the certificates, if any, or stock power must be guaranteed by an
"eligible guarantor institution." An "eligible guarantor institution" includes
any bank, broker, dealer or credit union. The Transfer Agent reserves the right
to request additional information from, and make reasonable inquiries of, any
eligible guarantor institution. For clients of Prusec, a signature guarantee may
be obtained from the agency or office manager of most Prudential Insurance and
Financial Services or Preferred Services offices.
PAYMENT FOR SHARES PRESENTED FOR REDEMPTION WILL BE MADE BY CHECK WITHIN SEVEN
DAYS AFTER RECEIPT BY THE TRANSFER AGENT OF THE CERTIFICATE AND/OR WRITTEN
REQUEST EXCEPT AS INDICATED BELOW. Such payment may be postponed or the right of
redemption suspended at times (a) when the New York Stock Exchange is closed for
other than customary weekends and holidays, (b) when trading on such Exchange is
restricted, (c) when an emergency exists as a result of which disposal by the
Series of securities owned by it is not reasonably practicable or it is not
reasonably practicable for the Series fairly to determine the value of its net
assets, or (d) during any other period when the SEC, by order, so permits;
provided that applicable rules and regulations of the SEC shall govern as to
whether the conditions prescribed in (b), (c) or (d) exist.
PAYMENT FOR REDEMPTION OF RECENTLY PURCHASED SHARES WILL BE DELAYED UNTIL THE
FUND OR ITS TRANSFER AGENT HAS BEEN ADVISED THAT THE PURCHASE CHECK HAS BEEN
HONORED, UP TO 10 CALENDAR DAYS FROM THE TIME OF RECEIPT OF THE PURCHASE CHECK
BY THE TRANSFER AGENT. SUCH DELAY MAY BE AVOIDED BY PURCHASING SHARES BY WIRE OR
BY CERTIFIED OR OFFICIAL BANK CHECK.
21
<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 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 redemption.
30-DAY REPURCHASE PRIVILEGE. If you redeem your shares and have not previously
exercised the repurchase privilege, you may reinvest any portion or all of the
proceeds of such redemption in shares of the Series at the NAV next determined
after the order is received, which must be within 30 days after the date of the
redemption. No sales charge will apply to such repurchases. You will receive PRO
RATA credit for any contingent deferred sales charge paid in connection with the
redemption of Class B shares. You must notify the Fund's Transfer Agent, either
directly or through Prudential Securities or Prusec, at the time the repurchase
privilege is exercised that you are entitled to credit for the contingent
deferred sales charge previously paid. Exercise of the repurchase privilege will
generally not affect federal income tax treatment of any gain realized upon
redemption. If the redemption resulted in a loss, some or all of the loss,
depending on the amount reinvested, will not be allowed for federal income tax
purposes.
CONTINGENT DEFERRED SALES CHARGES
Redemptions of Class B shares will be subject to a contingent deferred sales
charge or CDSC declining from 5% to zero over a six-year period. Class C shares
redeemed within one year of purchase will be subject to a 1% CDSC. The CDSC will
be deducted from the redemption proceeds and reduce the amount paid to you. The
CDSC will be imposed on any redemption by you which reduces the current value of
your Class B or Class C shares to an amount which is lower than the amount of
all payments by you for shares during the preceding six years, in the case of
Class B shares, and one year, in the case of Class C shares. A CDSC will be
applied on the lesser of the original purchase price or the current value of the
shares being redeemed. Increases in the value of your shares or shares purchased
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 following table sets forth the rates of the CDSC applicable to redemptions
of Class B shares:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED SALES
CHARGE AS A
PERCENTAGE OF DOLLARS
SINCE PURCHASE 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>
22
<PAGE>
In determining whether a CDSC is applicable to a redemption, the calculation
will be made in a manner that results in the lowest possible rate. It will be
assumed that the redemption is made first of amounts representing shares
acquired pursuant to the reinvestment of dividends and distributions; then of
amounts representing the increase in net asset value above the total amount of
payments for the purchase of Series shares made during the preceding six years,
then of amounts representing the cost of shares held beyond the applicable CDSC
period; and finally of amounts representing the cost of shares held for the
longest period of time within the applicable CDSC period.
For example, assume you purchased 100 Class B shares at $10 per share for a
cost of $1,000. Subsequently, you acquired 5 additional Class B shares through
dividend reinvestment. During the second year after the purchase you decided to
redeem $500 of your investment. Assuming at the time of the redemption the NAV
had appreciated to $12 per share, the value of your Class B shares would be
$1,260 (105 shares at $12 per share). The CDSC would not be applied to the value
of the reinvested dividend shares and the amount which represents appreciation
($260). Therefore, $240 of the $500 redemption proceeds ($500 minus $260) would
be charged at a rate of 4% (the applicable rate in the second year after
purchase) for a total CDSC of $9.60.
For federal income tax purposes, the amount of the CDSC will reduce the gain
or increase the loss, as the case may be, on the amount recognized on the
redemption of shares.
WAIVER OF THE CONTINGENT DEFERRED SALES CHARGES--CLASS B SHARES. The CDSC will
be waived in the case of a redemption following the death or disability of a
shareholder or, in the case of a trust account, following the death or
disability of the grantor. The waiver is available for total or partial
redemptions of shares owned by a person, either individually or in joint tenancy
(with rights of survivorship), at the time of death or initial determination of
disability, provided that the Shares were purchased prior to death or
disability.
The CDSC will also be waived in the case of a total or partial redemption in
connection with certain distributions made without penalty under the Internal
Revenue Code from a tax-deferred retirement plan, an IRA or Section 403(b)
custodial account. These distributions include a lump-sum or other distribution
after retirement, or for an IRA or Section 403(b) custodial account, after
attaining age 59 1/2, a tax-free return of an excess contribution or plan
distributions following the death or disability of the shareholder (provided
that the shares were purchased prior to death or disability). The waiver does
not apply in the case of a tax-free rollover or transfer of assets, other than
one following a separation from service. In the case of Direct Account and PSI
or Subsidiary Prototype Benefit Plans, the CDSC will be waived on redemptions
which represent borrowings from such plans. Shares purchased with amounts used
to repay a loan from such plans on which a CDSC was not previously deducted will
thereafter be subject to a CDSC without regard to the time such amounts were
previously invested. In the case of a 401(k) plan, the CDSC will also be waived
upon the redemption of shares purchased with amounts used to repay loans made
from the account to the participant and from which a CDSC was previously
deducted.
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. The waiver will be granted subject to
confirmation of your entitlement.
A quantity discount may apply to redemptions of Class B shares purchased prior
to _________, 1994. See "Purchase and Redemption of Fund Shares--Quantity
Discount--Class B Shares Purchased Prior to ______________, 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 occur during
the month following each calendar quarter and will be effected at relative net
asset value without the imposition of any additional sales charge. It is
currently anticipated that conversions will occur on the first Friday of the
month following each calendar quarter, or, if not a business day, then on the
next Friday of the month.
__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
23
<PAGE>
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 then 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. It is
currently anticipated that the first conversion of Class B shares will occur in
or about January 1995. At that time all amounts representing Class B shares then
outstanding beyond the applicable conversion period will automatically convert
to Class A shares together with all shares or amounts representing Class B
shares acquired through the automatic reinvestment of dividends and
distributions then held in your account.
The conversion feature may be subject to the continuing availability of
opinions of counsel or rulings of the Internal Revenue Service (i) that the
dividends and other distributions paid on Class A, Class B, and Class C shares
will not constitute "preferential dividends" under the Internal Revenue Code and
(ii) that the conversion of shares does not constitute a taxable event. The
conversion of Class B shares into Class A shares may be suspended if such
opinions or rulings are no longer available. If conversions are suspended, Class
B shares of the Series will continue to be subject, possibly indefinitely, to
their higher annual distribution and service fee.
HOW TO EXCHANGE YOUR SHARES
AS A SHAREHOLDER OF THE SERIES, YOU HAVE AN EXCHANGE PRIVILEGE WITH THE OTHER
SERIES OF THE FUND AND CERTAIN OTHER PRUDENTIAL MUTUAL FUNDS (THE EXCHANGE
PRIVILEGE), INCLUDING ONE OR MORE SPECIFIED MONEY MARKET FUNDS, SUBJECT TO THE
MINIMUM INVESTMENT REQUIREMENTS OF SUCH FUNDS. CLASS A, CLASS B AND CLASS C
SHARES OF THE SERIES MAY BE EXCHANGED FOR CLASS A, CLASS B AND CLASS C SHARES,
RESPECTIVELY, OF THE OTHER SERIES OF THE FUND OR ANOTHER FUND ON THE BASIS OF
THE RELATIVE NAV. Any applicable CDSC payable upon the redemption of shares
exchanged will be that imposed by the fund in which shares were initially
purchased and will be calculated from the first day of the month after the
initial purchase, excluding the time shares were held in a money market fund.
Class B and Class C shares may not be exchanged into money market funds other
than Prudential Special Money Market Fund. For purposes of calculating the
holding period applicable to the Class B conversion feature, the time period
during which Class B shares were held in a money market fund will be excluded.
See "Conversion Feature--Class B Shares" above. If your investment in shares of
Prudential Mutual Funds (excluding money market funds other than those acquired
pursuant to the exchange privilege) reaches $1 million and you then hold Class B
and/or Class C
24
<PAGE>
shares of the Series which are free of CDSC, you will be so notified and offered
the opportunity to exchange those shares for Class A shares of the Series
without the imposition of any sales charge. In the case of tax-exempt
shareholders, if no response is received within 60 days of the mailing of such
notice, eligible Class B and/or Class C shares will be automatically exchanged
for Class A shares. All other shareholders must affirmatively elect to have
their eligible Class B and/or Class C shares exchanged for Class A shares. An
exchange will be treated as a redemption and purchase for tax purposes. See
"Shareholder Investment Account--Exchange Privilege" in the Statement of
Additional Information.
IN ORDER TO EXCHANGE SHARES BY TELEPHONE, YOU MUST AUTHORIZE TELEPHONE
EXCHANGES ON YOUR INITIAL APPLICATION FORM OR BY WRITTEN NOTICE TO THE TRANSFER
AGENT AND HOLD SHARES IN NON-CERTIFICATE FORM. Thereafter, you may call the Fund
at (800) 225-1852 to execute a telephone exchange of shares, weekdays, except
holidays, between the hours of 8:00 A.M. and 6:00 P.M., New York time. For your
protection and to prevent fraudulent exchanges, your telephone call will be
recorded and you will be asked to provide your personal identification number. A
written confirmation of the exchange transaction will be sent to you. NEITHER
THE FUND NOR ITS AGENTS WILL BE LIABLE FOR ANY LOSS, LIABILITY OR COST WHICH
RESULTS FROM ACTING UPON INSTRUCTIONS REASONABLY BELIEVED TO BE GENUINE UNDER
THE FOREGOING PROCEDURES. All exchanges will be made on the basis of the
relative NAV of the two funds (or series) next determined after the request is
received in good order. The Exchange Privilege is available only in states where
the exchange may legally be made.
IF YOU HOLD SHARES THROUGH PRUDENTIAL SECURITIES, YOU MUST EXCHANGE YOUR
SHARES BY CONTACTING YOUR PRUDENTIAL SECURITIES FINANCIAL ADVISER.
IF YOU HOLD CERTIFICATES, THE CERTIFICATES, SIGNED IN THE NAME(S) SHOWN ON THE
FACE OF THE CERTIFICATES, MUST BE RETURNED IN ORDER FOR THE SHARES TO BE
EXCHANGED. SEE "HOW TO SELL YOUR SHARES" ABOVE.
You may also exchange shares by mail by writing to Prudential Mutual Fund
Services, Inc., Attention: Exchange Processing, P.O. Box 15010, New Brunswick,
New Jersey 08906-5010.
IN PERIODS OF SEVERE MARKET OR ECONOMIC CONDITIONS, THE TELEPHONE EXCHANGE OF
SHARES MAY BE DIFFICULT TO IMPLEMENT AND SHAREHOLDERS SHOULD MAKE EXCHANGES BY
MAIL BY WRITING TO PRUDENTIAL MUTUAL FUND SERVICES, INC., AT THE ADDRESS NOTED
ABOVE.
The Exchange Privilege may be modified or terminated at any time on 60 days'
notice to shareholders.
SHAREHOLDER SERVICES
In addition to the Exchange Privilege, as a shareholder of the Series, you can
take advantage of the following services and privileges:
-AUTOMATIC REINVESTMENT OF DIVIDENDS AND/OR DISTRIBUTIONS WITHOUT A SALES
CHARGE. For your convenience, all dividends and distributions are automatically
reinvested in full and fractional shares of the Series at NAV without a sales
charge. You may direct the Transfer Agent in writing not less than 5 full
business days prior to the record date to have subsequent dividends and/or
distributions sent in cash rather than reinvested. If you hold shares through
Prudential Securities, you should contact your financial adviser.
-AUTOMATIC SAVINGS ACCUMULATION PLAN (ASAP). Under ASAP, you may make regular
purchases of the Series shares in amounts as little as $50 via an automatic
debit to a bank account or Prudential Securities account (including a Command
Account). For additional information about this service, you may contact your
Prudential Securities financial adviser, Prusec registered representative or the
Transfer Agent directly.
-SYSTEMATIC WITHDRAWAL PLAN. A systematic withdrawal plan is available to
shareholders which provides for monthly or quarterly checks. Withdrawals of
Class B and Class C shares may be subject to a CDSC. See "How to Sell Your
Shares-- Contingent Deferred Sales Charges."
-REPORTS TO SHAREHOLDERS. The Fund will send you annual and semi-annual
reports. The financial statements appearing in annual reports are audited by
independent accountants. In order to reduce duplicate mailing and printing
expenses, the Fund will
25
<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 One Seaport Plaza, New York, New York
10292. In addition, monthly unaudited financial data is available upon request
from the Fund.
-SHAREHOLDER INQUIRIES. Inquiries should be addressed to the Fund at One
Seaport Plaza, New York, New York 10292, or by telephone, at (800) 225-1852
(toll-free) or, from outside the U.S.A., at (908) 417-7555 (collect).
For additional information regarding the services and privileges described
above, see "Shareholder Investment Account" in the Statement of Additional
Information.
26
<PAGE>
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 argin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are more unlikely to impair
the fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group, they comprise what are generally known
as high grade bonds. They are rated lower than Aaa bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than in Aaa securities.
Moody's applies numerical modifiers "1", "2" and "3" to each generic rating
classification from Aa through B. The modifier "1" indicates that the security
ranks in the higher end of its generic category; the modifier "2" indicates a
mid ranking; and the modifier "3" indicates that the issue ranks in the lower
end of its generic rating category.
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.
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.
TAX-EXEMPT NOTES
Moody's ratings for tax-exempt notes and other short-term loans are designated
Moody's Investment Grade (MIG). This distinction is in recognition of the
differences between short-term and long-term credit risk.
MIG 1: Loans bearing the designation MIG 1 are of the best quality, enjoying
strong protection by established cash flows, superior liquidity support or
demonstrated broad-based access to the market for refinancing.
MIG 2: Loans bearing the designation MIG 2 are of high quality, with margins
of protection ample although not so large as in the preceding group.
MIG 3: Loans bearing the designation MIG 3 are of favorable quality, with all
security elements accounted for but lacking the strength of the preceding
grades.
MIG 4: Loans bearing the designation MIG 4 are of adequate quality.
Protection commonly regarded and required of an investment security is present
and although not distinctly or predominantly speculative, there is specific
risk.
A-1
<PAGE>
COMMERCIAL PAPER
Moody's Commercial Paper Ratings are opinions of the ability of issuers to
repay punctually promissory obligations not having an original maturity in
excess of 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 CORPORATION
BOND RATINGS
AAA: Debt rated AAA has the highest rating assigned by Standard & Poors.
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 in accordance with the terms of the obligation. BB
indicates the lowest degree of speculation and C the highest degree of
speculation. While such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
D: Debt rated D is in default, and payment of interest and/or repayment of
principal is in arrears.
COMMERCIAL PAPER RATINGS
A Standard & Poor's Commercial Paper rating is a current assessment of the
likelihood of timely payment of debt considered short-term in the relevant
market.
A-1: The A-1 designation indicates that the degree of safety regarding timely
payment is strong. A "+" designation is applied to those issued rated A-1 which
possess extremely strong safety characteristics.
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 a satisfactory capacity for timely
payment. They are, however, somewhat more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher designations.
TAX-EXEMPT NOTES
Municipal notes issued after July 29, 1984 are rated SP-1, SP-2 and SP-3.
Municipal notes outstanding on July 29, 1984 carry the same symbols as municipal
bonds. The designation SP-1 indicates a very strong capacity to pay principal
and interest. A "+" is added to those issues determined to possess overwhelming
safety characteristics. An SP-2 designation indicates a satisfactory capacity to
pay principal and interest. An SP-3 designation indicates speculative capacity
to pay principal and interest.
A-2
<PAGE>
THE PRUDENTIAL MUTUAL FUND FAMILY
Prudential Mutual Fund Management offers a broad range of mutual funds
designed to meet your individual needs. We welcome you to review the investment
options available through our family of funds. For more information on the
Prudential Mutual Funds, including charges and expenses, contact your Prudential
Securities financial adviser or Prusec registered representative or telephone
the Funds at (800) 225-1852 for a free prospectus. Read the prospectus carefully
before you invest or send money.
TAXABLE BOND FUNDS
Prudential Adjustable Rate Securities Fund, Inc.
Prudential GNMA Fund, Inc.
Prudential Government Income Fund, Inc.
Prudential Government Securities Trust
Intermediate Term Series
Prudential High Yield Fund, Inc.
Prudential Structured Maturity Fund, Inc.
Income Portfolio
Prudential U.S. Government Fund
The BlackRock Government Income Trust
TAX-EXEMPT BOND FUNDS
Prudential California Municipal Fund
California Series
California Income Series
Prudential Municipal Bond Fund
High Yield Series
Insured Series
Modified Term Series
Prudential Municipal Series Fund
Arizona Series
Florida Series
Georgia Series
Maryland Series
Massachusetts Series
Michigan Series
Minnesota Series
New Jersey Series
New York Series
North Carolina Series
Ohio Series
Pennsylvania Series
Prudential National Municipals Fund, Inc.
GLOBAL FUNDS
Prudential Global Fund, Inc.
Prudential Global Genesis Fund, Inc.
Prudential Global Natural Resources Fund, Inc.
Prudential Intermediate Global Income Fund, Inc.
Prudential Pacific Growth Fund, Inc.
Prudential Short-Term Global Income Fund, Inc.
Global Assets Portfolio
Short-Term Global Income Portfolio
Global Utility Fund, Inc.
EQUITY FUNDS
Prudential Allocation Fund
Conservatively Managed Portfolio
Strategy Portfolio
Prudential Equity Fund, Inc.
Prudential Equity Income Fund
Prudential Growth Opportunity Fund, Inc.
Prudential IncomeVertible-R- Fund, Inc.
Prudential Multi-Sector Fund, Inc.
Prudential Strategist Fund, Inc.
Prudential Utility Fund, Inc.
Nicholas-Applegate Fund, Inc.
Nicholas-Applegate Growth Equity Fund
MONEY MARKET FUNDS
- -TAXABLE MONEY MARKET FUNDS
Prudential Government Securities Trust
Money Market Series
U.S. Treasury Money Market Series
Prudential Special Money Market Fund
Money Market Series
Prudential MoneyMart Assets
- -TAX-FREE MONEY MARKET FUNDS
Prudential Tax-Free Money Fund
Prudential California Municipal Fund
California Money Market Series
Prudential Municipal Series Fund
Connecticut Money Market Series
Massachusetts Money Market Series
New Jersey Money Market Series
New York Money Market Series
- -COMMAND FUNDS
Command Money Fund
Command Government Fund
Command Tax-Free Fund
- -INSTITUTIONAL MONEY MARKET FUNDS
Prudential Institutional Liquidity Portfolio, Inc.
Institutional Money Market Series
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>
<S> <C>
PAGE
----
FUND HIGHLIGHTS...................................................... 2
FUND EXPENSES........................................................ 4
FINANCIAL HIGHLIGHTS................................................. 5
HOW THE FUND INVESTS................................................. 6
Investment Objective and Policies.................................. 6
Other Investments and Policies..................................... 10
Investment Restrictions............................................ 11
HOW THE FUND IS MANAGED.............................................. 11
Manager............................................................ 11
Distributor........................................................ 12
Portfolio Transactions............................................. 13
Custodian and Transfer and Dividend Disbursing Agent............... 13
HOW THE FUND VALUES ITS SHARES....................................... 13
HOW THE FUND CALCULATES PERFORMANCE.................................. 14
TAXES, DIVIDENDS AND DISTRIBUTIONS................................... 14
GENERAL INFORMATION.................................................. 16
Description of Shares.............................................. 16
Additional Information............................................. 17
SHAREHOLDER GUIDE.................................................... 17
How to Buy Shares of the Fund...................................... 17
Alternative Purchase Plan.......................................... 19
How to Sell Your Shares............................................ 21
Conversion Feature--Class B Shares................................. 23
How to Exchange Your Shares........................................ 24
Shareholder Services............................................... 25
DESCRIPTION OF SECURITY RATINGS...................................... A-1
THE PRUDENTIAL MUTUAL FUND FAMILY.................................... B-1
</TABLE>
-------------------------------------------
MF146A 444-1272
Class A: 744313-30-5
CUSIP Nos.: Class B: 744313-40-4
Class C:
PRUDENTIAL
CALIFORNIA
MUNICIPAL FUND
(CALIFORNIA INCOME SERIES)
- --------------------------------------
[LOGO]
<PAGE>
PRUDENTIAL CALIFORNIA MUNICIPAL FUND
- --------------------------------------------------------------------------------
STATEMENT OF ADDITIONAL INFORMATION
DATED , 1994
- --------------------------------------------------------------------------------
Prudential California Municipal Fund (the Fund) is an open-end investment
company, or mutual fund, consisting of three series--the California Series, the
California Income Series and the California Money Market Series. The objective
of the California Series is to seek to provide the maximum amount of income that
is exempt from California State and federal income taxes consistent with the
preservation of capital, and in conjunction therewith, the California Series may
invest in debt securities with the potential for capital gain. The objective of
the California Income Series is to seek to provide the maximum amount of income
that is exempt from California State and federal income taxes consistent with
the preservation of capital. The objective of the California Money Market Series
is to seek to provide the highest level of current income that is exempt from
California State and federal income taxes consistent with liquidity and the
preservation of capital. All of the series are diversified except the California
Income Series.
The Fund's address is One Seaport Plaza, New York, New York 10292, and its
telephone number is (800) 225-1852.
This Statement of Additional Information is not a prospectus and should be read
in conjunction with the Prospectuses of each series of the Fund dated ,
1994, copies of which may be obtained from the Fund upon request.
- --------------------------------------------------------------------------------
116B
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Cross-Reference Cross-Reference
Cross-Reference to Pages to Pages in
to Pages in in California California Money
California Series Income Series Market Series
Page Prospectus Prospectus Prospectus
---------- ------------------- ------------------- ---------------------
<S> <C> <C> <C> <C>
General Information.................... B-3 18 16 13
Investment Objectives and Policies..... B-3 7 6 6
In General........................... B-3 7 6 6
Tax-Exempt Securities................ B-5 7 6 6
Special Considerations Regarding In-
vestments in Tax-Exempt
Securities.......................... B-6 11 10 8
California Concentration........... B-6 11 10 8
Put Options.......................... B-9 8 7 7
Financial Futures Contracts and
Options Thereon..................... B-9 9 8 --
When-Issued and Delayed Delivery
Securities.......................... B-12 9 8 8
Portfolio Turnover of the California
Series and the California Income
Series.............................. B-12 11 10 --
Illiquid Securities.................. B-13 11 10 --
Repurchase Agreements................ B-13 11 10 9
Investment Restrictions................ B-14 12 11 9
Trustees and Officers.................. B-16 12 11 9
Manager................................ B-18 12 11 9
Distributor............................ B-20 13 12 10
Portfolio Transactions and Brokerage... B-23 14 13 10
Purchase and Redemption of Fund
Shares................................ B-24 19 17 14
Specimen Price Make-Up............... B-24 -- -- --
Reduction and Waiver of Initial Sales
Charges -- Class A Shares........... B-25 21 20 --
Quantity Discount -- Class B Shares
Purchased Prior to ,
1994................................ B-26 25 23
Shareholder Investment Account......... B-27 27 25 21
Automatic Reinvestment of Dividends
and/or Distributions................ B-27 27 25 21
Exchange Privilege................... B-27 26 24 20
Dollar Cost Averaging................ B-29 -- -- --
Automatic Savings Accumulation Plan
(ASAP).............................. B-29 27 25 21
Systematic Withdrawal Plan........... B-29 27 25 21
How to Redeem Shares of the
California Money Market Series...... B-30 -- -- 18
Net Asset Value........................ B-31 15 13 11
Performance Information................ B-32 15 14 6
California Series and California
Income Series....................... B-32 15 14 --
California Money Market Series....... B-34 -- -- 6
Distributions and Tax Information...... B-36 16 14 12
Distributions........................ B-36 17 16 13
Federal Taxation..................... B-36 16 15 12
California Taxation.................. B-39 17 15 12
Organization and Capitalization........ B-40 18 16 13
Custodian, Transfer and Dividend
Disbursing Agent and Independent
Accountants........................... B-41 14 13 11
Financial Statements................... B-42 5 5 5
Description of Tax-Exempt Security
Ratings . . A-1 8 A-1 --
</TABLE>
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GENERAL INFORMATION
The Fund was organized on May 18, 1984. On February 28, 1991, the Trustees
approved an amendment to the Declaration of Trust to change the Fund's name from
Prudential-Bache California Municipal Fund to Prudential California Municipal
Fund.
INVESTMENT OBJECTIVES AND POLICIES
IN GENERAL
Prudential California Municipal Fund (the Fund) is an open-end management
investment company consisting of three series -- the California Series, the
California Income Series and the California Money Market Series. A separate
Prospectus has been prepared for each series. This Statement of Additional
Information is applicable to all series. The investment objective of the
California Series is to seek to provide to shareholders who are residents of
California the maximum amount of income that is exempt from California State and
federal income taxes consistent with the preservation of capital, and in
conjunction therewith, the California 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 the California Income Series
is to seek to provide the maximum amount of income that is exempt from
California State and federal income taxes consistent with the preservation of
capital. The investment objective of the California Money Market Series is to
seek to provide the highest level of current income that is exempt from
California State and federal income taxes consistent with liquidity and the
preservation of capital. There can be no assurance that any series will achieve
its objective or that all income will be exempt from all federal, state or local
income taxes.
The investment objective of each 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.
The California Series and the California Income Series will invest in
California Obligations that are "investment grade" tax-exempt securities and
which on the date of investment are within the four highest ratings of Moody's
Investors Service, Inc. (Moody's), currently Aaa, Aa, A, Baa for bonds, MIG 1,
MIG 2, MIG 3, MIG 4 for notes and P-1 for commercial paper, or of Standard &
Poor's Corporation (S & P), currently AAA, AA, A, BBB for bonds, SP-1, SP-2 for
notes and A-1 for commercial paper. The California Income Series also may invest
up to 30% of its total assets in California Obligations rated below Baa by
Moody's or below BBB by S & P or, if non-rated, of comparable quality, in the
opinion of the Fund's investment adviser, based on its credit analysis. The
California Money Market Series will invest in securities which, at the time of
purchase, have a remaining maturity of thirteen months or less and are rated (or
issued by an issuer that is rated with respect to a class of short-term debt
obligations, or any security within that class, that is comparable in priority
and security with the security) in one of the two highest rating categories by
at least two nationally recognized statistical rating organizations assigning a
rating to the security or issuer (or, if only one such rating organization
assigned a rating, by that rating organization). Each series may invest in
tax-exempt securities which are not rated if, based upon a credit analysis by
the investment adviser under the supervision of the Trustees, the investment
adviser believes that such securities are of comparable quality to other
municipal securities that the series may purchase. A description of the ratings
is set forth under the heading "Description of Tax-Exempt Security Ratings" in
this Statement of Additional Information. The ratings of Moody's and S & P
represent the respective opinions of such firms of the qualities of the
securities each undertakes to rate and 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 total assets in securities the interest on which is
exempt from California State and federal income taxes or the series' assets will
be invested so that at least 80% of the income will be exempt from California
State and federal income taxes. Each series will continuously monitor both 80%
tests to ensure that either the asset investment test or the income test is met
at all times except for temporary defensive positions 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 of the California
Series and the California Income Series in taxable securities may include:
obligations of the U.S. Government, its agencies or instrumentalities; other
debt securities rated within the four highest grades by either Moody's or S & P
or, if unrated, judged by the investment adviser to possess comparable
creditworthiness; commercial paper rated in the highest grade by either of such
rating services (P-1 or A-1, respectively); certificates of deposit and bankers
acceptances; and repurchase agreements with respect to any of the foregoing
investments. The California Money Market Series may also invest in the taxable
securities listed above, except that its debt securities, if rated, will be
rated within the two highest rating categories by at least two nationally
recognized statistical rating organizations assigning a rating to the security
or issuer (or if only one such rating organization assigned a rating, by that
rating organization). No series intends to invest more than 5% of its assets in
any one of the foregoing taxable securities. A series may also hold its assets
in other cash equivalents or in cash.
Each series other than the California Income 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) it may not invest more than 5% of its total assets in the securities
of any one issuer (except U.S. Government obligations and obligations issued or
guaranteed by its agencies or instrumentalities) and (2) it may not own more
than 10% of the outstanding voting securities of any one issuer. For purposes of
calculating this 5% or 10% ownership limitation, 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 California Income Series' Prospectus.
Because 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 that a series may own so long as, with respect to 75% of the assets
of each series other than the California Income Series, it does not invest more
than 5% of its total assets in the securities of such issuer (except obligations
issued or guaranteed by the U.S. Government). As for the other 25% of a series'
assets not subject to the limitation described above, there is no limitation on
the amount of these assets that may be invested in a minimum number of issuers,
so that all of such assets may be invested in the securities of any one issuer.
Because of the relatively small number of issuers of investment-grade tax-exempt
securities (or, in the case of the California Money Market Series, high-quality
tax-exempt securities) in any one state, 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 should the issuer be unable to
make interest or principal payments 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, nursing homes, retirement
facilities and other 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
local authorities; lease rental obligations of states and local authorities;
obligations of state and local housing authorities;
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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.
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, 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
manufacturing, housing, sewage, solid waste disposal, airport, mass transit and
port 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
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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.
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 California 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 specified periodic adjustment in the interest rate based on
prevailing market rates and generally would allow the series to demand payment
of the obligation on short notice at par plus accrued interest, which amount may
be more or less than the amount the series paid for them. An inverse floater is
a debt instrument with a floating or variable interest rate that moves in the
opposite direction of the interest rate on another security or the value of an
index. Changes in the interest rate on the other security or 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
are frequently 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 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.
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
CALIFORNIA CONCENTRATION. The following information as to certain
California considerations is given to investors in view of the policy of each
series of concentrating its investments in California issuers. Such information
is derived from sources that are generally available to investors and is
believed to be accurate. Such information constitutes only a brief summary, does
not purport to be a complete description and is based on information from
official statements and Moody's relating to securities offerings of California
issuers.
California is the most populous state in the nation with a total population
at the 1990 census of 29,976,000. Growth has been incessant since World War II,
with population gains in each decade since 1950 of between 18% and 49%. During
the last decade, population rose 26%. The State now comprises 12% of the
nation's
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population and 13.3% of its total personal income. Its economy is broad and
diversified with major concentrations in high technology research and
manufacturing, aerospace and defense-related manufacturing, trade, real estate,
and financial services. After experiencing strong growth throughout much of the
1980's, the State is now being adversely affected by both the recent national
recession and the cutbacks in aerospace and defense spending which have had a
severe impact on the economy in Southern California. This recession has been the
deepest and longest-lasting in the post World War II era. In the past three
years, California has lost nearly six percent of its job base. In its June 1993
Quarterly General Fund Forecast, the bipartisan Commission on State Finance
("Commission") estimates that national military spending cutbacks will result in
the loss of 125,000 defense-related jobs during the next four years,
particularly in the high-paying aerospace manufacturing sector. The Commission
notes that other industries are still restructuring and downsizing, and predicts
that revenue shortages will result in significant layoffs by state and local
governments. These factors, combined with persistent unfavorable perceptions
about California's business climate, led the Commission to hold to its January
forecast, which anticipated near-stagnant economic conditions in California
through 1994.
These economic difficulties have exacerbated the structural budget imbalance
which has been evident since fiscal year 1985-1986. Since that time, budget
shortfalls have become increasingly more difficult to solve and the State has
recorded General Fund operating deficits in five of the past six fiscal years.
Many of these problems have been attributable to the fact that the great
population influx has produced increased demand for education and social
services at a far greater pace than the growth in the State's tax revenues.
Despite substantial tax increases, expenditure reductions and the shift of some
expenditure responsibilities to local government, the budget condition remains
problematic in recent years.
The State's General Fund revenues for the 1992-93 fiscal year totalled
nearly $2.5 million less than the $43.4 million that Governor Wilson had
projected. It is anticipated that revenues and transfers in the 1993-94 fiscal
year will be lower than those in the 1992-93 fiscal year. This represents the
second consecutive year of actual decline.
On June 30, 1993, the Governor signed into law a $52.1 billion budget which,
among other things, (a) shifts $2.6 billion of property taxes from cities,
counties, special districts and redevelopment agencies to schools and community
college districts, (b) reduces higher education and community college funding,
forcing higher student fees, and (c) reduces welfare grants and aid to the aged,
blind, and disabled. In addition, related legislation (a) suspends the renters'
tax credit for two years and (b) allows counties to reduce general assistance
welfare payments by as much as 27%. The stability of the budget would be
jeopardized if the property tax transfer were invalidated by the courts in
current and future cases between the State and its counties.
The current budget includes General Fund spending of $38.5 billion, down
$2.6 billion, or 6.3%, from the amount budgeted for the 1992-1993 fiscal year.
The Commission believes that actual revenue will be $700 million below what
Governor Wilson anticipates. Specifically criticizing the State's using -- for
the second consecutive year -- off-budget loans to maintain school funding at
its current per-pupil level, the Commission expresses concern that the current
budget may fail to resolve the State's fiscal crisis.
Three court cases may upset California's budgetary balance: one concerning
the medically indigent and Medi-Cal funding, a second concerning employee
pensions, and a third on California's unitary method of taxing multi-national
companies. In KINLAW V. STATE OF CALIFORNIA, the State faced possible
retroactive reimbursement to counties of $2-$3 billion for Medi-Cal costs for
medically indigent adults. The ruling could have added annual operating costs of
$600-$700 million and would have precluded the State-county realignment of
responsibilities. On August 30, 1991, the California Supreme Court overturned
the case on procedural grounds; however, a case of similar scope and substance
regarding employee pensions, SAN BERNADINO COUNTY V. STATE OF CALIFORNIA, is
pending in the Court of Appeals that raises the same substantial questions. The
California Supreme Court in BARCLAY'S BANK INTERNATIONAL, LTD. upheld
California's unitary method of taxing multinational companies. The U.S. Supreme
Court has granted cert in BARCLAY'S and the related case, COLGATE-PALMOLIVE. An
adverse holding could cost California $4 billion in refunds and lost revenue,
according to Brad Sherman, Chairman of the California State Board of
Equalization.
Certain municipal securities may be obligations of issuers which rely in
whole or in part on State revenues for payment of such obligations. In 1978,
State voters approved an amendment to the State Constitution known as
Proposition 13, which added Article XIIIA to the State Constitution. The effect
of Article XIIIA is to limit ad
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valorem taxes on real property and to restrict the ability of taxing entities to
increase real property tax revenues. After the adoption of Article XIIIA,
legislation was adopted which provided for the reallocation of property taxes
and other revenues to local public agencies, increased State aid to such
agencies, and the assumption by the State of certain obligations previously paid
out of local funds. More recent legislation has, however, reduced State
assistance payments to local governments. There can be no assurance that any
particular level of State aid to local governments will be maintained in future
years. In NORDLINGER V. HAHN, the U.S. Supreme Court upheld certain provisions
of Proposition 13 against claims that it violated the equal protection clause of
the Constitution.
In 1979, an amendment was passed adding Article XIIIB to the State
Constitution. As amended in 1990, Article XIIIB imposes an "appropriations
limit" on the spending authority of the State and local government entities. In
general, the appropriations limit is based on certain 1985-1986 expenditures,
adjusted annually to reflect changes in the cost of living, population and
certain services provided by State and local government entities.
"Appropriations limit" does not include appropriations for qualified capital
outlay projects, certain increases in transportation-related taxes, and certain
emergency appropriations. If a government entity raises revenues beyond its
"appropriations limit" in any year, a portion of the excess which cannot be
appropriated within the following year's limit must be returned to the entity's
taxpayers within two subsequent fiscal years, generally by a tax credit, refund
or temporary suspension of tax rates or fee schedules. Debt service is excluded
from these limitations and is defined as "appropriations required to pay the
cost of interest and redemption charges, including the funding of any reserve or
sinking fund required in connection therewith, on indebtedness existing or
legally authorized as of January 1, 1979 or on bonded indebtedness thereafter
approved by the voters. In addition, Article XIIIB requires the State
Legislature to establish a prudent State reserve, and to require the transfer of
50% of excess revenue to the State School Fund; any amounts allocated to the
State School Fund will increase the appropriations limit.
In 1986, State voters approved an initiative measure known as Proposition
62, which among other things requires that any tax for general governmental
purposes imposed by local governments be approved by a two-thirds vote of the
governmental entity's legislative body and by a majority of its electorate,
requires that any special tax (levied for other than general governmental
purposes) imposed by a local government be approved by a two-thirds vote of its
electorate, and restricts the use of revenues from a special tax to the purposes
or for the service for which the special tax was imposed. Portions of the
Proposition were declared unconstitutional in September 1988, and it is not
possible to predict the impact of the decision. In 1988, State voters approved
Proposition 87, which amended Article XVI of the State Constitution to authorize
the State Legislature to prohibit redevelopment agencies from receiving any
property tax revenues raised by increased property taxes to repay bonded
indebtedness of local government which is not approved by voters on or after
January 1, 1989. It is not possible to predict whether the State Legislature
will enact such a prohibition, nor is it possible to predict the impact of
Proposition 87 on redevelopment agencies and their ability to make payments on
outstanding debt obligations.
In November 1988, California voters approved Proposition 98. This initiative
requires that revenues in excess of amounts permitted to be spent and which
would otherwise be returned by revision of tax rates or fee schedules, be
transferred and allocated (up to a maximum of 40%) to the State School Fund and
be expended solely for purposes of instructional improvement and accountability.
No such transfer or allocation of funds will be required if certain designated
state officials determine that annual student expenditures and class size meet
certain criteria as set forth in Proposition 98. Any funds allocated to the
State School Fund shall cause the appropriation limits to be annually increased
for any such allocation made in the prior year. Proposition 98 also requires the
State of California to provide a minimum level of funding for public schools and
community colleges. The initiative permits the enactment of legislation, by a
two-thirds vote, to suspend the minimum funding requirement for one year.
In July 1991, California increased taxes by adding two new marginal tax
rates, at 10% and 11%, effective for tax years 1991 through 1995. After 1995,
the maximum personal income tax rate is scheduled to return to 9.3%, and the
alternative minimum tax rate is scheduled to drop from 8.5% to 7%. In addition,
legislation in July 1991 raised the sales tax by 1.25%. 0.5% was a permanent
addition to counties, but with the money earmarked to trust funds to pay for
health and welfare programs whose administration was transferred to counties.
This tax increase will be cancelled if a court rules that such transfer and tax
increase violate any
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constitutional requirements. 0.5% of the State tax rate was scheduled to expire
on June 30, 1993, but was extended for six months for the benefit of counties
and cities. On November 2, 1993, voters made this half-percent levy a permanent
source of funding for local government.
On November 3, 1992, voters approved an initiative statute, Proposition 163,
which exempts certain food products, including candy and other snack foods, from
California's sales tax. 1991-92 budget legislation had broadened the sales tax
to include those items. The State Legislative Analyst estimates a resultant
revenue reduction of $300-330 million per year.
The effect of these various constitutional and statutory amendments, cases
and budgetary developments upon the ability of California issuers to pay
interest and principal on their obligations remains unclear. Furthermore, other
measures affecting the taxing or spending authority of California or its
political subdivisions may be approved or enacted in the future.
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 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 a series' portfolio (other than liquidity puts) may not exeed 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 California Money Market Series) as determined by Moody's
or S&P; or (2) the put is written by a person other than the issuer of the
underlying security and such person has securities outstanding which are rated
within such four (or two for the California Money Market Series) highest quality
grade of such rating services; or (3) the put is backed by a letter of credit or
similar financial guarantee issued by a person having securities outstanding
which are rated within the two highest quality grades of such rating services.
One form of transaction involving liquidity puts consists of an underlying
fixed rate municipal bond that is subject to a third party demand feature or
"tender option." The holder of the bond would pay a "tender fee" to the third
party tender option provider, the amount of which would be periodically adjusted
so that the bond/ tender option combination would reasonably be expected to have
a market value that approximates the par value of the bond. This bond/tender
option combination would therefore be functionally equivalent to ordinary
variable or floating rate obligations, and the Fund may purchase such
obligations subject to certain conditions specified by the Securities and
Exchange Commission (SEC).
FINANCIAL FUTURES CONTRACTS AND OPTIONS THEREON
FUTURES CONTRACTS. The California Series and the California Income Series
(but not the California 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 California Series or the California Income 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
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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 the California Series or the California Income Series purchases a
futures contract, it will maintain an amount of cash, U.S. Government
obligations or liquid, high-grade debt securities in a segregated account with
the Fund's Custodian, so that the amount so segregated plus the amount of
initial and variation margin held in the account of its broker equals the market
value of the futures contract, thereby ensuring that the use of such futures
contract is unleveraged. Should the California Series or the California Income
Series sell a futures contract it may "cover" that position by owning the
instruments underlying the futures contract or by holding a call option on such
futures contract. The California Series or the California Income Series will not
sell futures contracts if the value of such futures contracts exceeds the total
market value of the securities of the California Series or the California Income
Series. It is not anticipated that transactions in futures contracts will have
the effect of increasing portfolio turnover.
OPTIONS ON FINANCIAL FUTURES. The California Series and the California
Income Series (but not the California 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. The California Series and the California Income 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
a 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 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 the California Series or the California Income 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 the California Series or the
California Income Series writes a put option on a futures contract, it may,
rather than establish a segregated account, sell the futures contract underlying
the put option or purchase a similar put option. In instances involving the
purchase of a call option on a futures contract, the California Series or the
California Income Series will deposit in a segregated account with the Fund's
Custodian an amount in cash, U.S. Government obligations or liquid, high-grade
debt obligations equal to the market value of the obligation underlying the
futures contract, less any amount held in the initial and variation margin
accounts.
LIMITATIONS ON PURCHASE AND SALE. Under regulations of the Commodity
Exchange Act, investment companies registered under the Investment Company Act
are exempted from the definition of "commodity pool operator," subject to
compliance with certain conditions. The exemption is conditioned upon a
requirement that all of the investment company's futures transactions constitute
BONA FIDE hedging transactions. In addition, the exemption is also conditioned
upon each series not purchasing or selling futures contracts or options thereon
for non-hedging purposes if the aggregate initial margin, together with premiums
paid for options thereon, exceeds 5% of the liquidation value of the total
assets of the series. The California Series and the California Income Series
will use financial futures and options thereon in a manner consistent with these
requirements. With respect to long positions assumed by the California Series or
the California Income Series, the series will segregate with the Fund's
Custodian an amount of cash, U.S. Government securities or liquid, high-grade
debt securities so that the amount so segregated plus the amount of initial and
variation margin held in the account of its broker equals the market value of
the futures contracts and thereby insures that its use of
B-10
<PAGE>
futures contracts is unleveraged. Each of the California Series and the
California Income Series will continue to invest at least 80% of its total
assets in California municipal obligations except in certain circumstances, as
described in the Prospectuses under "How the Fund Invests -- Investment
Objective and Policies." The California Series and the California Income 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" in the Prospectuses of
the California Series and the California Income Series, there are a number of
other risks associated with the use of financial futures for hedging purposes.
The California Series and the California Income Series intend to purchase
and sell futures contracts only on exchanges where there appears to be a market
in the futures sufficiently active to accommodate the volume of its trading
activity. There can be no assurance that a liquid market will always exist for
any particular contract at any particular time. Accordingly, there can be no
assurance that it will always be possible to close a futures position when such
closing is desired; and, in the event of adverse price movements, the series
would continue to be required to make daily cash payments of variation margin.
However, if futures contracts have been sold to hedge portfolio securities,
these securities will not be sold until the offsetting futures contracts can be
purchased. Similarly, if futures have been bought to hedge anticipated
securities purchases, the purchases will not be executed until the offsetting
futures contracts can be sold.
The hours of trading of interest rate futures contracts 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 the California Series and the
California Income 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 the 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 the 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 the 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 or
The Options Clearing Corporation 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 that had
been issued by The Options Clearing Corporation as a result of trades on that
exchange could continue to be exercisable in accordance with their terms.
B-11
<PAGE>
There is no assurance that higher than anticipated trading activity or other
unforeseen events might not, at times, render certain of the facilities of The
Options Clearing Corporation inadequate, and thereby result in the institution
by an exchange of special procedures which may interfere with the timely
execution of customers' orders.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES
Each series may purchase tax-exempt securities on a when-issued or delayed
delivery basis, in which case delivery and payment normally take place within
one month after the date of the commitment to purchase. The payment obligation
and the interest rate that will be received on the tax-exempt securities are
each fixed at the time the buyer enters into the commitment. The purchase price
for the security includes interest accrued during the period between purchase
and settlement and, therefore, no interest accrues to the economic benefit of
the series until delivery and payment take place. Although a series will only
purchase a tax-exempt security on a when-issued or delayed delivery basis with
the intention of actually acquiring the securities, the series may sell these
securities before the settlement date if it is deemed advisable.
Tax-exempt securities purchased on a when-issued or delayed delivery basis
are subject to changes in market value based upon the public's perception of the
creditworthiness of the issuer and changes, real or anticipated, in the level of
interest rates (which will generally result in similar changes in value, I.E.,
experiencing both appreciation when interest rates decline and depreciation when
interest rates rise). Therefore, to the extent that a series remains
substantially fully invested at the same time that it has purchased securities
on a when-issued or delayed delivery basis, the market value of the series'
assets will vary to a greater extent than otherwise. Purchasing a tax-exempt
security on a when-issued or delayed delivery basis can involve a risk that the
yields available in the market when the delivery takes place may be higher than
those obtained on the security so purchased.
A segregated account of each series consisting of cash or liquid high-grade
debt securities equal to the amount of the when-issued or delayed delivery
commitments will be established with the Fund's Custodian and marked to market
daily, with additional cash or liquid high-grade debt securities added when
necessary. When the time comes to pay for when-issued or delayed delivery
securities, each series will meet its obligations from then available cash flow,
sale of securities held in the separate account, sale of other securities or,
although it would not normally expect to do so, from the sale of the securities
themselves (which may have a value greater or lesser 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 California 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.
PORTFOLIO TURNOVER OF THE CALIFORNIA SERIES AND THE CALIFORNIA INCOME SERIES
Portfolio transactions will be undertaken principally to accomplish the
objective of the California Series and the California Income Series in relation
to anticipated movements in the general level of interest rates but each such
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 series' investment policies may lead to frequent changes in investments,
particularly in periods of rapidly fluctuating interest rates. A change in
securities held by the California Series and the California Income Series is
known as "portfolio turnover" and may involve the payment by the series of
dealer mark-ups or
B-12
<PAGE>
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. The series' portfolio turnover rate will not be a
limiting factor when the series deem it desirable to sell or purchase
securities. For the fiscal years ended August 31, 1993 and August 31, 1992, the
portfolio turnover rate for the California Series was 43% and 53%, respectively.
For the fiscal years ended August 31, 1993 and August 31, 1992, the portfolio
turnover rate of the California Income Series was 34% and 69%, respectively.
ILLIQUID SECURITIES
A series may not invest more than 15% (10% in the case of the California
Money Market Series) of its net assets in illiquid securities, including
repurchase agreements which have a maturity of longer than seven days,
securities with legal or contractual restrictions on resale (restricted
securities) and securities that are not readily marketable. Repurchase
agreements subject to demand are deemed to have a maturity equal to the notice
period. Mutual funds do not typically hold a significant amount of illiquid
securities because of the potential for delays on resale and uncertainty in
valuation. Limitations on resale may have an adverse effect on the marketability
of portfolio securities and a mutual fund might be unable to dispose of illiquid
securities promptly or at reasonable prices and might thereby experience
difficulty satisfying redemptions within seven days.
Municipal lease obligations will not be considered illiquid for purposes of
the series' limitation on illiquid securities provided the investment adviser
determines that there is a readily available market for such securities. In
reaching liquidity decisions, the investment adviser will consider, INTER ALIA,
the following factors: (1) the frequency of trades and quotes for the security;
(2) the number of dealers wishing to purchase or sell the security and the
number of other potential purchasers; (3) dealer undertakings to make a market
in the security and (4) the nature of the security and the nature of the
marketplace trades (E.G., the time needed to dispose of the security, the method
of soliciting offers and the mechanics of the transfer). With respect to
municipal lease obligations, the investment adviser also considers (1) the
willingness of the municipality to continue, annually or biannually, to
appropriate funds for payment of the lease; (2) the general credit quality of
the municipality and the essentiality to the municipality of the property
covered by the lease; (3) in the case of unrated municipal lease obligations, an
analysis of factors similar to that performed by nationally recognized
statistical rating organizations in evaluating the credit quality of a municipal
lease obligation, including (i) whether the lease can be cancelled; (ii) if
applicable, what assurance there is that the assets represented by the lease can
be sold; (iii) the strength of the lessee's general credit (E.G., its debt,
administrative, economic and financial characteristics); (iv) the likelihood
that the municipality will discontinue appropriating funding for the leased
property because the property is no longer deemed essential to the operations of
the municipality (E.G., the potential for an event of nonappropriation); 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 agreement account with other
investment companies managed by Prudential Mutual Fund Management, Inc. (PMF)
pursuant to an order of the SEC. On a daily basis, any univested 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). The series do not currently expect to enter into repurchase
agreements.
B-13
<PAGE>
INVESTMENT RESTRICTIONS
The following restrictions are fundamental policies. A fundamental policy
cannot be changed without the approval of the holders of a majority of the
outstanding voting securities of a series. As defined in the Investment Company
Act, a majority of the outstanding voting securities of a series 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.
A series may not:
1. Purchase securities on margin (but the series 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 California Series or the
California Income 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 series may borrow up to 20% 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 20% of the value of
its total assets to secure such borrowings. A series will not purchase portfolio
securities if its borrowings exceed 5% of its 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
and the writing of related options by the California Series or the California
Income 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 its total
assets , more than 5% of its total assets (except with respect to the California
Income 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 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, securities which are secured by real estate and
securities of companies which invest or deal in real estate. The California
Money Market Series may not purchase and sell financial futures contracts and
related options.
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.
The California Income Series may not purchase securities (other than
municipal obligations and obligations guaranteed as to principal and interest by
the U.S. Government or its agencies or instrumentalities) if, as a result of
such purchase, 25% or more of the total assets of the Series (taken at current
market value) would be invested in any one industry.
Whenever any fundamental investment policy or investment restriction states
a maximum percentage of a series' 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 series'
asset coverage for borrowings falls below 300%, the series will take prompt
action to reduce its borrowings, as required by applicable law.
B-14
<PAGE>
In order to comply with certain state "blue sky" restrictions, the series
will not as a matter of operating policy:
1. Invest in oil, gas and mineral leases or programs.
2. Purchase warrants if as a result the series would then have more than
5% of its net assets (determined at the time of investment) invested in
warrants. Warrants will be valued at the lower of cost or market and
investment in warrants which are not listed on the New York Stock Exchange or
American Stock Exchange will be limited to 2% of the series' net assets
(determined at the time of investment). For the purpose of this limitation,
warrants acquired in units or attached to securities are deemed to be without
value.
3. Purchase the securities of any one issuer if, to the knowledge of the
Fund, any officer or Trustee of the Fund or the Manager or Subadviser owns
more than 1/2 of 1% of the outstanding securities of such issuer, and such
officers, Trustees and directors who own more than 1/2 of 1% own in the
aggregate more than 5% of the outstanding securities of such issuer.
B-15
<PAGE>
TRUSTEES AND OFFICERS
<TABLE>
<CAPTION>
NAME AND ADDRESS POSITION WITH FUND PRINCIPAL OCCUPATION DURING PAST 5 YEARS
--------------------------------------- ------------------ ----------------------------------------------------------
<C> <S> <C> <C>
Edward D. Beach........................ Trustee President and Director of BMC Fund, Inc., a closed-end
c/o Prudential Mutual Fund investment company; prior thereto, Vice Chairman of
Management, Inc. Broyhill Furniture Industries, Inc.; Certified Public
One Seaport Plaza Accountant; Secretary and Treasurer of Broyhill Family
New York, NY Foundation Inc.; President, Treasurer and Director of
The High Yield Plus Fund, Inc. and First Financial Fund,
Inc.; Director of The Global Government Plus Fund, Inc.
and The Global Yield Fund, Inc.
Eugene C. Dorsey....................... Trustee [Formerly] Chairman of Independent Sector (national
c/o Prudential Mutual Fund coalition of philanthropic organizations) (since October
Management, Inc. 1989); formerly President, Chief Executive Officer and
One Seaport Plaza Trustee of the Gannett Foundation; former Publisher of
New York, NY four Gannett newspapers and Vice President of Gannett
Company; former Chairman of the American Council for the
Arts; Director of the Advisory Board of Chase Lincoln
First Bank of Rochester and The High Yield Income Fund,
Inc.
Delayne Dedrick Gold................... Trustee Marketing and Management Consultant.
c/o Prudential Mutual Fund
Management, Inc.
One Seaport Plaza
New York, NY
* Harry A. Jacobs, Jr.................... Trustee Senior Director of Prudential Securities Incorporated
One Seaport Plaza (Prudential Securities) (since January 1986); formerly
New York, NY Interim Chairman and Chief Executive Officer of PMF
(June 1993-October 1993); formerly Chairman of the Board
of Prudential Securities (1982-1985) and Chairman and
Chief Executive Officer of Bache Group Inc. (1977-1982);
Director of the Center for National Policy, The First
Australia Fund, Inc., The First Australia Prime Income
Fund, Inc., The Global Government Plus Fund, Inc. and
The Global Yield Fund, Inc.; Trustee of the Trudeau
Institute.
* Lawrence C. McQuade.................... President and Vice Chairman of PMF (since 1988); Managing Director,
One Seaport Plaza Trustee Investment Banking, of Prudential Securities
New York, NY (1988-1991); Director of Quixote Corporation (since
February 1992) and BUNZL, PLC (since June 1991);
formerly Director of Crazy Eddie Inc. (1987-1990) and
Kaiser Tech., Ltd. and Kaiser Aluminum and Chemical
Corp. (March 1987-November 1988); formerly Executive
Vice President and Director of W.R. Grace & Company
(1975-1987); President and Director of The High Yield
Income Fund, Inc., The Global Government Plus Fund, Inc.
and The Global Yield Fund, Inc.
<FN>
- --------------
* "Interested" Trustee as defined in the Investment Company Act.
</TABLE>
B-16
<PAGE>
<TABLE>
<CAPTION>
NAME AND ADDRESS POSITION WITH FUND PRINCIPAL OCCUPATION DURING PAST 5 YEARS
--------------------------------------- ------------------ ----------------------------------------------------------
<S> <C> <C> <C>
Thomas T. Mooney....................... Trustee President of the Greater Rochester Metro Chamber of
c/o Prudential Mutual Fund Commerce (since October 1976); former Rochester City
Management, Inc. Manager; Trustee of Center for Governmental Research,
One Seaport Plaza Inc.; Director of Monroe County Water Authority,
New York, NY Rochester Jobs, Inc., Blue Cross of Rochester, Executive
Service Corps of Rochester, Monroe County Industrial
Development Corporation, Northeast Midwest Institute,
First Financial Fund, Inc., The Global Government Plus
Fund, Inc., The Global Yield Fund, Inc. and The High
Yield Plus Fund, Inc.
Thomas H. O'Brien...................... Trustee President of O'Brien Associates (Financial and Management
c/o Prudential Mutual Fund Consultants) (since April 1984); formerly President of
Management, Inc. Jamaica Water Securities Corp. (holding company)
One Seaport Plaza (February 1989-August 1990); Director (September
New York, NY 1987-April 1991) and Chairman of the Board and Chief
Executive Officer (September 1987-February 1989) of
Jamaica Water Supply Company; formerly Director of
TransCanada Pipelines U.S.A. Ltd. (1984-June 1989) and
Winthrop University Hospital (November 1976-June 1988);
Director of Ridgewood Savings Bank and Yankee Energy
System, Inc.
Richard A. Redeker..................... Trustee President, Chief Executive Officer and Director (since
One Seaport Plaza October 1993), PMF; Executive Vice President, Director
New York, NY and Member of the Operating Committee (since October
1993), Prudential Securities Incorporated; Director
(since October 1993) of Prudential Securities Group,
Inc.; formerly Senior Executive Vice President and
Director of Kemper Financial Services, Inc. (September
1978-September 1993); Director of The Global Government
Plus Fund, Inc. and The High Yield Income Fund, Inc.
Nancy H. Teeters....................... Trustee Economist; formerly Vice President and Chief Economist
c/o Prudential Mutual Fund (March 1986-June 1990) of International Business
Management, Inc. Machines Corporation; Member of the Board of Governors
One Seaport Plaza of the Horace H. Rackham School of Graduate Studies of
New York, NY the University of Michigan; Director of Inland Steel
Corporation (since July 1991), First Financial Fund,
Inc. and The Global Yield Fund, Inc.
Robert F. Gunia........................ Vice President Chief Administrative Officer (since July 1990), Director
One Seaport Plaza (since January 1989), Executive Vice President,
New York, NY Treasurer and Chief Financial Officer (since June 1987)
of PMF; Senior Vice President of Prudential Securities
(since March 1987); Vice President and Director of The
Asia Pacific Fund, Inc. (since May 1989).
</TABLE>
B-17
<PAGE>
<TABLE>
<CAPTION>
NAME AND ADDRESS POSITION WITH FUND PRINCIPAL OCCUPATION DURING PAST 5 YEARS
--------------------------------------- ------------------ ----------------------------------------------------------
<S> <C> <C> <C>
S. Jane Rose........................... Secretary Senior Vice President (since January 1991), Senior Counsel
One Seaport Plaza (since June 1987) and First Vice President (June
New York, NY 1987-December 1990) of PMF; Senior Vice President and
Senior Counsel (since July 1992) of Prudential
Securities; formerly Vice President and Associate
General Counsel of Prudential Securities.
Susan C. Cote.......................... Treasurer and Senior Vice President (since January 1989) and First Vice
One Seaport Plaza Principal President (June 1987-January 1989) of PMF; Senior Vice
New York, NY Financial and President (since January 1992) and Vice President
Accounting (January 1986-December 1991) of Prudential Securities.
Officer
Deborah A. Docs........................ Assistant Vice President (since January 1993) and Assistant General
One Seaport Plaza Secretary Counsel (since November 1991) of PMF; Vice President
New York, NY (since January 1993) and Assistant General Counsel
(since January 1992) of Prudential Securities;
previously Associate Vice President (January
1990-December 1992) and Assistant Vice President
(January 1989-December 1989) of PMF.
</TABLE>
Trustees and officers of the Fund are also trustees, directors and officers
of some or all of the other investment companies distributed by Prudential
Securities or Prudential Mutual Fund Distributors, Inc.
The officers conduct and supervise the daily business operations of the
Fund, while the Trustees, in addition to their functions set forth under
"Manager" and "Distributor," review such actions and decide on general policy.
Pursuant to the Management Agreement with the Fund, the Manager pays all
compensation of officers and employees of the Fund as well as the fees and
expenses of all Trustees of the Fund who are affiliated persons of the Manager.
The Fund pays each of its Trustees who is not an affiliated person of the
Manager or the Fund's investment adviser annual compensation of $4,000, in
addition to certain out-of-pocket expenses. Messrs. Dorsey and O'Brien receive
their Trustees' fee pursuant to a deferred fee agreement with the Fund. Under
the terms of the agreement, the Fund accrues daily the amount of such Trustees'
fees which accrue interest at a rate equivalent to the prevailing rate
applicable to 90-day U.S. Treasury Bills at the beginning of each calendar
quarter or at the daily rate of return of the Fund. Payment of the interest so
accrued is also deferred and accruals become payable at the option of the
Trustee. The Fund's obligation to make payments of deferred Trustees' fees,
together with interest thereon, is a general obligation of the Fund.
As of March 31, 1994, the Trustees and officers of the Fund, as a group,
owned beneficially less than 1% of the outstanding shares of beneficial interest
of each series of the Fund.
As of March 31, 1994, Prudential Securities was the record holder for other
beneficial owners of 17,221,267 Class A shares (or 87% of the outstanding Class
A shares) and 11,907,544 Class B shares (or 65% of the outstanding Class B
shares) of the Fund and 7,939 shares of the California Money Market Series. In
the event of any meetings of shareholders, Prudential Securities will forward,
or cause the forwarding of, proxy materials to the beneficial owners for which
it is the record holder.
MANAGER
The manager of the Fund is Prudential Mutual Fund Management, Inc. (PMF or
the Manager), One Seaport Plaza, New York, New York 10292. PMF serves as the
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 March 31, 1994,
PMF managed and/or administered open-end and
B-18
<PAGE>
closed-end management investment companies with assets of approximately [$51]
billion. According to the Investment Company Institute, as of December 31, 1993,
the Prudential Mutual Funds were the 12th largest family of mutual funds in the
United States.
Pursuant to the Management Agreement with the Fund (the Management
Agreement), PMF, subject to the supervision of the Fund's Trustees and in
conformity with the stated policies of the Fund, manages both the investment
operations of the Fund and the composition of the Fund's portfolios, including
the purchase, retention, disposition and loan of securities. In connection
therewith, PMF is obligated to keep certain books and records of the Fund. PMF
also administers the Fund's business affairs and, in connection therewith,
furnishes the Fund with office facilities, together with those ordinary clerical
and bookkeeping services which are not being furnished by State Street Bank and
Trust Company (the Custodian), the Fund's custodian, and Prudential Mutual Fund
Services, Inc. (PMFS or the Transfer Agent), the Fund's transfer and dividend
disbursing agent. The management services of PMF for the Fund are not exclusive
under the terms of the Management Agreement and PMF is free to, and does, render
management services to others.
For its services, PMF receives, pursuant to the Management Agreement, a fee
at an annual rate of .50 of 1% of the average daily net assets of each series.
The fee is computed daily and payable monthly. The Management Agreement also
provides that, in the event the expenses of the Fund (including the fees of PMF,
but excluding interest, taxes, brokerage commissions, distribution fees and
litigation and indemnification expenses and other extraordinary expenses not
incurred in the ordinary course of the Fund's business) for any fiscal year
exceed the lowest applicable annual expense limitation established and enforced
pursuant to the statutes or regulations of any jurisdiction in which the Fund's
shares are qualified for offer and sale, the compensation due to PMF will be
reduced by the amount of such excess. Reductions in excess of the total
compensation payable PMF will be paid by PMF to the Fund. No such reductions
were required during the fiscal year ended August 31, 1993. Currently, the Fund
believes that the most restrictive expense limitation of state securities
commissions is 2 1/2% of a series' average daily net assets up to $30 million,
2% of the next $70 million of such assets and 1 1/2% of such assets in excess of
$100 million.
In connection with its management of the business affairs of the Fund, PMF
bears the following expenses:
(a) the salaries and expenses of all personnel of the Fund and the
Manager, except the fees and expenses of Trustees who are not affiliated
persons of PMF or the Fund's investment adviser;
(b) all expenses incurred by PMF or by the Fund in connection with
managing the ordinary course of the Fund's business, other than those assumed
by the Fund as described below; and
(c) the costs and expenses payable to The Prudential Investment
Corporation (PIC) pursuant to the subadvisory agreement between PMF and PIC
(the Subadvisory Agreement).
Under the terms of the Management Agreement, the Fund is responsible for the
payment of the following expenses: (a) the fees payable to the Manager, (b) the
fees and expenses of Trustees who are not affiliated persons of the Manager or
the Fund's investment adviser, (c) the fees and certain expenses of the Fund's
Custodian and Transfer and Dividend Disbursing Agent, including the cost of
providing records to the Manager in connection with its obligation of
maintaining required records of the Fund and of pricing the Fund's shares, (d)
the charges and expenses of the Fund's legal counsel and independent
accountants, (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 association of which the Fund is a member, (h) the cost of
share certificates representing shares of the Fund, (i) the cost of fidelity and
liability insurance, (j) certain organization expenses of the Fund and the fees
and expenses involved in registering and maintaining registration of the Fund
and of its shares with the SEC, registering the Fund and qualifying its shares
under state securities laws, including the preparation and printing of the
Fund's registration statements and prospectuses for such purposes, (k) allocable
communications 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, (l) litigation and
indemnification expenses and other extraordinary expenses not incurred in the
ordinary course of the Fund's business and (m) distribution fees.
B-19
<PAGE>
The Management Agreement also provides that PMF will not be liable for any
error of judgment or for any loss suffered by the Fund in connection with the
matters to which the Management Agreement relates, except a loss resulting from
a breach of fiduciary duty with respect to the receipt of compensation for
services or 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 provides that it 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
accordance with the requirements of the Investment Company Act applicable to
continuance of investment advisory contracts. The Management Agreement was last
approved by the Trustees of the Fund, including all of the Trustees who are not
parties to such contract or interested persons of such parties as defined in the
Investment Company Act, on May 4, 1994, and by shareholders of the California
Series on December 8, 1988, by shareholders of the California Money Market
Series on December 18, 1989 and by the shareholders of the California Income
Series on December 30, 1991.
For the fiscal years ended August 31, 1991, 1992 and 1993 PMF received
management fees of $859,830, $884,085 and $993,612, respectively, from the
California Series. With respect to the California Money Market Series, PMF
received $1,444,578 (net of waiver of $433,698), $1,699,704 and $1,597,318 in
management fees for the fiscal years ended August 31, 1991, 1992 and 1993,
respectively. With respect to the California Income Series, PMF waived its
entire management fee of $177,134, $511,134 and $829,475 for the fiscal period
December 3, 1990 (commencement of operations) through August 31, 1991 and for
the fiscal years ended August 31, 1992 and 1993, respectively.
PMF has entered into the Subadvisory Agreement with PIC (the Subadviser), a
wholly-owned subsidiary of Prudential. The Subadvisory Agreement provides that
PIC will furnish investment advisory services in connection with the management
of the Fund. In connection therewith, PIC is obligated to keep certain books and
records of the Fund. PMF continues to have responsibility for all investment
advisory services pursuant to the Management Agreement and supervises PIC's
performance of such services. PIC is reimbursed by PMF for the reasonable costs
and expenses incurred by PIC in furnishing those services.
The Subadvisory Agreement was last approved by the Trustees, including all
of the Trustees who are not interested persons of the Fund and who have no
direct or indirect financial interest in the Subadvisory Agreement, on May 4,
1994, by shareholders of the California Series on December 8, 1988, by
shareholders of the California Money Market Series on December 18, 1989 and by
the shareholders of the California Income Series on December 30, 1991.
The Subadvisory Agreement provides that it will terminate in the event of
its assignment (as defined in the Investment Company Act) or upon the
termination of the Management Agreement. The Subadvisory Agreement may be
terminated by the Fund, PMF or PIC upon not more than 60 days, nor less than 30
days, written notice. The Subadvisory Agreement provides that it will continue
in effect for a period of more than two years from its execution only so long as
such continuance is specifically approved at least in accordance with the
requirements of the Investment Company Act.
The Manager and the Subadviser are indirect subsidiaries of Prudential
which, as of December 31, 1993, is one of the largest financial institutions in
the world and the largest insurance company in North America. Prudential has
been engaged in the insurance business since 1875. In July 1993, INSTITUTIONAL
INVESTOR ranked Prudential the third largest institutional money manager of the
300 largest money management organizations in the United States as of December
31, 1992.
DISTRIBUTOR
Prudential Mutual Fund Distributors, Inc. (PMFD), One Seaport Plaza, New
York, New York 10292, acts as the distributor of the Class A shares of the
California Income Series and California Series and of the shares of the
California Money Market Series. Prudential Securities, One Seaport Plaza, New
York, New York 10292, acts as the distributor of the Class B and Class C shares
of the California Income Series and the California Series.
B-20
<PAGE>
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 California
Income Series and the California Series under Rule 12b-1 under the Investment
Company Act and separate distribution agreements (the Distribution Agreements),
PMFD and Prudential Securities (collectively, the Distributor) incur the
expenses of distributing the Class A, Class B and Class C shares of the
California Income Series and the California Series. See "How the Fund is Managed
- -- Distributor" in the Prospectuses of the California Income Series and the
California Series.
Prior to January 22, 1990, the California Series 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 either Plan (the Rule
12b-1 Trustees), at a meeting called for the purpose of voting on each Plan,
adopted a new plan of distribution for the Class A shares of the California
Series (the Class A Plan) and approved an amended and restated plan of
distribution with respect to the Class B shares of the California Series (the
Class B Plan). On May 6, 1993, the Trustees, including a majority of the Rule
12b-1 Trustees, at a meeting called for the purpose of voting on each Plan,
approved the continuance of the Plans and Distribution Agreements and approved
modifications of the Fund's Class A and Class B Plans and Distribution
Agreements to conform them with recent amendments to the National Association of
Securities Dealers, Inc. (NASD) maximum sales charge rule described below. As so
modified, the Class A Plan provides that (i) up to .25 of 1% of the average
daily net assets of the Class A shares may be used to pay for personal service
and/or the maintenance of shareholder accounts (service fee) and (ii) total
distribution fees (including the service fee of .25 of 1%) may not exceed .30 of
1%. As so modified, the Class B Plan provides that (i) up to .25 of 1% of the
average daily net assets of the Class B shares may be paid as a service fee and
(ii) up to .50 of 1% (not 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%. Prior to December 6, 1993, the California Income Series offered
only one class of shares (the then existing Class A shares). 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, 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. The Plans were last approved by the Board of
Trustees, including a majority of the Rule 12b-1 Trustees, on May 4, 1994. The
Class A Plan, as amended, was approved by Class A and Class B shareholders, and
the Class B Plan, as amended, was approved by Class B shareholders on ________,
1994. The Class C Plan was approved by the sole shareholder of Class C shares on
________ 1994.
CLASS A PLAN. For the fiscal year ended August 31, 1993, PMFD received
payments of $7,728 and $165,895 for the California Series and the California
Income Series, respectively, under the Class A Plan for those Series as
reimbursement of expenses related to the distribution of Class A shares. These
amounts were primarily expended for payments of commissions and account
servicing fees to financial advisers and other persons who sell Class A shares.
For the fiscal year ended August 31, 1993, PMFD also received approximately
$180,000 and $2,860,300 in initial sales charges with respect to the sale of
shares of the California Series and the California Income Series, respectively.
CLASS B PLAN. For the fiscal year ended August 31, 1993, Prudential
Securities received $954,972 from the California Series under the Fund's Class B
Plan and spent approximately $2,054,100 in distributing the Class B shares of
the California Series during such period. It is estimated that of the latter
amount approximately .6% ($11,400) was spent on printing and mailing of
prospectuses to other than current shareholders; 8.6% ($177,660) in interest
and/or carrying charges; 22.8% ($468,780) on compensation to Prusec for
commissions to its account executives and other expenses, including an
allocation on account of overhead and other branch office distribution-related
expenses, incurred by it for distribution of California Series shares; and 68.0%
($1,396,260) on the aggregate of (i) payments of commissions to account
executives (57.8% or $1,187,120) and (ii) an allocation on account of overhead
and other branch office distribution-related expenses (10.2% or $209,140). The
term "overhead and other branch office distribution-related expenses" represents
(a) the expenses of operating Prudential Securities' branch offices in
connection with the sale of California Series shares, including lease costs, the
salaries and employee benefits of operations and sales support personnel,
B-21
<PAGE>
utility costs, communications costs and the costs of stationery and supplies,
(b) the costs of client sales seminars, (c) expenses of mutual fund sales
coordinators to promote the sale of California Series shares, and (d) other
incidental expenses relating to branch promotion of California Series shares.
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 Prospectuses of the California Income Series and the California
Series. For the fiscal year ended August 31, 1993, Prudential Securities
received approximately $5,511,200 in contingent deferred sales charges for the
California Series.
CLASS C PLAN.__Prudential Securities receives the proceeds of contingent
deferred sales charges paid by investors upon certain redemptions of Class C
shares. See "Shareholder Guide -- How to Sell Your Shares -- Contingent Deferred
Sales Charges" in the Prospectuses of the California Income Series and the
California Series. Prior to the date of this Statement of Additional
Information, no distribution expenses were incurred under the Class C Plan.
The Class A, Class B and Class C Plans continue in effect from year to year,
provided that each such continuance is approved at least annually by a vote of
the Trustees, including a majority vote of the Rule 12b-1 Trustees, cast in
person at a meeting called for the purpose of voting on such continuance. The
Plans may each be terminated at any time, without penalty, by the vote of a
majority of the Rule 12b-1 Trustees or by the vote of the holders of a majority
of the outstanding shares of the applicable class on not more than 30 days'
written notice to any other party to the Plans. The Plans may not be amended to
increase materially the amounts to be spent for the services described therein
without approval by 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 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 are 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 California Income Series and the California Series by the Distributor.
The report will include 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 Rule 12b-1 Trustees shall be committed
to the Rule 12b-1 Trustees.
Pursuant to each Distribution Agreement, the Fund has agreed to indemnify
PMFD and 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 4, 1994 with respect to Class A and Class B
shares of the California Series and the California Income Series.
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. In the case of Class B 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 required to be included in the calculation of the 6.25%
limitation. The annual asset-based sales charge on shares of the Fund 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, all sales
charges on shares of that class would be suspended.
CALIFORNIA MONEY MARKET SERIES PLAN OF DISTRIBUTION. The California Money
Market Series' Plan of Distribution (the CMMS Plan) was last approved by the
Trustees of the Fund, 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 CMMS Plan or in any agreements related to the
CMMS Plan, at a meeting called for the purpose of voting on the CMMS Plan, on
May 4, 1994, and by shareholders of the California Money Market Series on
B-22
<PAGE>
December 18, 1989. For the fiscal year ended August 31, 1993, PMFD incurred
distribution expenses of $399,329 with respect to the California Money Market
Series, all of which was recovered by PMFD through the distribution fee paid by
the California Money Market Series.
PORTFOLIO TRANSACTIONS AND BROKERAGE
The Manager is responsible for decisions to buy and sell securities and
futures and options thereon for 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 the
Fund, 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 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.
Portfolio securities may not be purchased from any underwriting or selling
group of which Prudential Securities (or any affiliate), during the existence of
the group, is a member, 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 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.
In placing orders for portfolio securities for 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, dealer or futures
commission merchant based on the quality and quantity of execution services
provided by the broker in the light of generally prevailing rates. The Manager's
policy is to pay higher commissions to brokers, dealers or futures commission
merchants 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
B-23
<PAGE>
authorized to pay higher commissions on brokerage transactions for the Fund to
brokers other than Prudential Securities in order to secure the research and
investment services described above, subject to review by the Fund's Trustees
from time to time as to the extent and continuation of this practice. The
allocation of orders among brokers and the commission rates paid are reviewed
periodically by the Fund's Trustees.
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 a securities 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 arms-length transaction. Furthermore, the Trustees of
the Fund, including a majority of the Rule 12b-1 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) under
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, 1991, 1992 and 1993, the California
Series paid brokerage commissions of $15,593, $6,983 and $10,430 respectively,
on certain futures transactions. The California Series paid no brokerage
commissions to Prudential Securities during those periods. During the fiscal
years ended August 31, 1991, 1992 and 1993, the California Money Market Series
paid no brokerage commissions. During the period December 3, 1990 (commencement
of investment operations) through August 31, 1991 and for the fiscal years ended
August 31, 1992 and 1993, the California Income Series paid brokerage
commissions of $2,470, $4,760 and $5,828 respectively. None of the brokerage
commissions paid by the California Income Series were paid to Prudential
Securities.
PURCHASE AND REDEMPTION OF FUND SHARES
Shares of the California Series and the California Income Series of the Fund
may be purchased at a price equal to the next determined net asset value per
share plus a sales charge which, at the election of the investor, may be imposed
either (i) at the time of purchase (Class A shares) or (ii) on a deferred basis
(Class B or Class C shares). See "Shareholder Guide -- How to Buy Shares of the
Fund" in the Prospectuses of the California Series and the California Income
Series.
Each class of shares represents an interest in the same portfolio of
investments of each Series and has the same rights, except that (i) each class
bears the separate expenses of its Rule 12b-1 distribution and service plan,
(ii) each class has exclusive voting rights with respect to its plan (except
that the Fund has agreed with the SEC in connection with the offering of a
conversion feature on Class B shares to submit any amendment of the Class A
distribution and service plan to both Class A and Class B shareholders) and
(iii) only Class B shares have a conversion feature. See "Distributor." Each
class also has separate exchange privileges. See "Shareholder Investment Account
- -- Exchange Privilege."
For a description of the methods of purchasing shares of the California
Money Market Series, see the Prospectus of the California Money Market Series.
SPECIMEN PRICE MAKE-UP
Under the current distribution arrangements between the California Income
Series and the California Series and the Distributor, Class A shares are sold at
net asset value plus a maximum sales charge of 3.00% and
B-24
<PAGE>
Class B* and Class C* shares are sold at net asset value. Using the net asset
value of the series (other than California Money Market Series) at August 31,
1993, the maximum offering price of the series' shares would have been as
follows:
<TABLE>
<CAPTION>
CALIFORNIA
CALIFORNIA INCOME
SERIES SERIES
----------- -----------
<S> <C> <C>
CLASS A
- -----------------------------------------------------------------------------------------
Net asset value and redemption price per Class A share................................... $ 12.16 $ 10.68
Maximum sales charge (3.00% of offering price)...........................................
----------- -----------
Offering price to public................................................................. $ $
----------- -----------
----------- -----------
CLASS B
- -----------------------------------------------------------------------------------------
Net asset value, offering price and redemption price per Class B share*.................. $ 12.15 **
-----------
-----------
CLASS C
- -----------------------------------------------------------------------------------------
Net asset value, offering price and redemption price per Class C share*.................. $ 12.15
-----------
-----------
<FN>
- --------------
* Class B shares are subject to a contingent deferred sales charge on certain
redemptions. See "Shareholder Guide -- How to Sell Your Shares -- Contingent
Deferred Sales Charges -- Class B Shares" in the Prospectus.
** Class B shares of the California Income Series were not offered as of August
31, 1993.
</TABLE>
REDUCTION AND WAIVER OF INITIAL SALES CHARGES -- CLASS A SHARES
COMBINED PURCHASES 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
"Purchase and Redemption of Fund Shares -- How to Purchase Shares" or
"Shareholder Guide -- Alternative Purchase Plan" in the applicable Prospectuses.
An eligible group of related Fund investors includes any combination of the
following:
(a) an individual;
(b) the individual's spouse, their children and their parents;
(c) the individual's and spouse's Individual Retirement Account (IRA);
(d) any company controlled by the individual (a person, entity or group that
holds 25% or more of the outstanding voting securities of a company will
be deemed to control the company, 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 charges will be granted
subject to confirmation of the investor's holdings.
B-25
<PAGE>
RIGHTS OF ACCUMULATION. Reduced sales charges are also available through
Rights of Accumulation, under which an investor or an eligible group of related
investors, as described above under "Combined Purchase and Cumulative Purchase
Privilege," may aggregate the value of their existing holdings of shares of the
Fund and shares of other Prudential Mutual Funds (excluding money market funds
other than those acquired pursuant to the exchange privilege) to determine the
reduced sales charge. However, the value of shares held directly with the
Transfer Agent and through Prudential Securities will not be aggregated to
determine the reduced sales charge. All shares must be held either directly with
the Transfer Agent or through Prudential Securities. The value of existing
holdings for purposes of determining the reduced sales charge is calculated
using the maximum offering price (net asset value plus maximum sales charge) as
of the previous business day. See "Net Asset Value" or "How the Fund Values Its
Shares" in the Prospectuses. The Distributor must be notified at the time of
purchase that the shareholder is entitled to a reduced sales charge. The reduced
sales charges 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
California Series or the California Income Series to sell, the indicated amount.
In the event the Letter of Intent goal is not achieved within the thirteen-month
period, the purchaser is required to pay the difference between the sales charge
otherwise applicable to the purchases made during this period and sales charges
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. If the goal is exceeded in an amount which qualifies for a lower
sales charge, a price adjustment is made by refunding to the purchaser the
amount of excess sales charge, if any, paid during the thirteen-month period.
Investors electing to purchase Class A shares of the California Series or the
California Income Series pursuant to a Letter of Intent should carefully read
such Letter of Intent.
QUANTITY DISCOUNT -- CLASS B SHARES PURCHASED PRIOR TO ____________, 1994
The CDSC is reduced on redemptions of Class B shares of the Fund purchased
prior to ____________, 1994, if immediately after a purchase of such shares, the
aggregate cost of all Class B shares 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 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
the Fund following the second purchase was $550,000, the quantity discount would
be
B-26
<PAGE>
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 Class A, Class B or Class C shares of the
California Income Series or the California Series or upon the initial purchase
of shares of the California Money Market Series, a Shareholder Investment
Account is established for each investor under which the shares are held for the
investor by the Transfer Agent. If a share certificate is desired, it must be
requested in writing for each transaction. Certificates are issued only for full
shares and may be redeposited in the Account at any time. There is no charge to
the investor for issuance of a certificate. The Fund makes available to its
shareholders the following privileges and plans.
AUTOMATIC REINVESTMENT OF DIVIDENDS AND/OR DISTRIBUTIONS
For the convenience of investors, all dividends and distributions are
automatically reinvested in full and fractional shares of a Series of the Fund
at the net asset value per share. An investor may direct the Transfer Agent in
writing not less than five full business days prior to the record date 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. Such 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 shareholders will receive credit for any contingent
deferred sales charge paid in connection with the amount of proceeds being
reinvested.
EXCHANGE PRIVILEGE
The California Income Series and the California Series make available to its
shareholders the privilege of exchanging their shares of the Series for shares
of 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 California Income Series and the California Series. 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 California Income Series and the California
Series may exchange their Class A shares for Class A shares of certain other
Prudential Mutual Funds, shares of Prudential Government Securities Trust
(Intermediate Term Series) and shares of the money market funds specified below.
No fee or
B-27
<PAGE>
sales load will be imposed upon the exchange. Shareholders of money market funds
who acquired such shares upon exchange of Class A shares may use the Exchange
Privilege only to acquire Class A shares of the Prudential Mutual Funds
participating in the Exchange Privilege.
The following money market funds participate in the Class A Exchange
Privilege:
Prudential California Municipal Fund
(California Money Market Series)
Prudential Government Securities Trust
(Money Market Series)
(U.S. Treasury Money Market Series)
Prudential Municipal Series Fund
(Connecticut Money Market Series)
(Massachusetts Money Market Series)
(New Jersey Money Market Series)
(New York Money Market Series)
Prudential MoneyMart Assets
Prudential Tax-Free Money Fund
CLASS B AND CLASS C. Shareholders of the California Income Series and the
California Series may exchange their Class B and Class C shares for Class B and
Class C shares, respectively, of certain other Prudential Mutual Funds and
shares of Prudential Special Money Market Fund, a money market fund. No
contingent deferred sales charge will be payable upon such exchange, but a CDSC
may be payable upon the redemption of the Class B and Class C shares acquired as
a result of the exchange. The applicable sales charge will be that imposed by
the fund in which shares were initially purchased and the purchase date will be
deemed to be the first day of the month after the initial purchase, rather than
the date of the exchange.
Class B and Class C shares of the California Income Series and the
California Series may also be exchanged for shares of an eligible money market
fund without imposition of any CDSC at the time of exchange. Upon subsequent
redemption from such money market fund or after re-exchange into the Series,
such shares will be subject to the CDSC calculated without regard to 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,
respectively, of the California Income Series and the California Series 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,
respectively, of other funds without being subject to any CDSC.
B-28
<PAGE>
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 sixty 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 CALIFORNIA MONEY MARKET SERIES)
Dollar cost averaging is a method of accumulating shares by investing a
fixed amount of dollars in shares at set intervals. An investor buys more shares
when the price is low and fewer shares when the price is high. The average cost
per share is lower than it would be if a constant number of shares were bought
at set intervals.
Dollar cost averaging may be used, for example, to plan for retirement, to
save for a major expenditure, such as the purchase of a home, or to finance a
college education. The cost of a year's education at a four-year college today
averages around $14,000 at a private college and around $4,800 at a public
university. Assuming these costs increase at a rate of 7% a year, as has been
projected, for the freshman class of 2007, the cost of four years at a private
college could reach $163,000 and over $97,000 at a public university.(1)
The following chart shows how much you would need in monthly investments to
achieve specified lump sums to finance your investment goals.(2)
<TABLE>
<CAPTION>
PERIOD OF
MONTHLY INVESTMENTS: $100,000 $150,000 $200,000 $250,000
- ------------------------------------------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
25 Years......................................... $ 110 $ 165 $ 220 $ 275
20 Years......................................... 176 264 352 440
15 Years......................................... 296 444 592 740
10 Years......................................... 555 833 1,110 1,388
5 Years......................................... 1,371 2,057 2,742 3,428
See "Automatic Savings Accumulation Plan."
<FN>
- --------------
(1) Source information concerning the costs of education at public
universities is available from The College Board Annual Survey of Colleges,
1992. Information about the costs of private colleges is from the Digest of
Education Statistics, 1992, The National Center for Educational Statistics and
the U.S. Department of Education. Average costs for private institutions include
tuition, fees, room and board.
(2) The chart assumes an effective rate of return of 8% (assuming monthly
compounding). This example is for illustrative purposes only and is not intended
to reflect the performance of an investment in shares of the Fund. The
investment return and principal value of an investment will fluctuate so that an
investor's shares when redeemed may be worth more or less than their original
cost.
</TABLE>
AUTOMATIC SAVINGS ACCUMULATION PLAN (ASAP)
Under ASAP, an investor may arrange to have a fixed amount automatically
invested in shares of the California Income Series or the California 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 Fund. 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 systematic 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
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 Prospectuses.
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
B-29
<PAGE>
distributions automatically reinvested in additional full and fractional shares
at net asset value on shares held under the 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 shareholders.
Withdrawal payments should not be considered as dividends, yield or income.
If periodic withdrawals continuously exceed reinvested dividends and
distributions, the shareholder's original investment will be correspondingly
reduced and ultimately exhausted.
Furthermore, each withdrawal constitutes a redemption of shares, and any
gain or loss realized must be recognized for federal income tax purposes. In
addition, withdrawals made concurrently with purchases of additional shares are
inadvisable because of the sales charge applicable to (i) the purchase of Class
A shares and (ii) the withdrawal of Class B and Class C shares. Each shareholder
should consult his or her own tax adviser with regard to the tax consequences of
the plan.
HOW TO REDEEM SHARES OF THE CALIFORNIA MONEY MARKET SERIES
Redemption orders submitted to and received by Prudential Mutual Fund
Services, Inc. (PMFS) will be effected at the net asset value next determined
after receipt of the order. Shareholders of the California 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.
There is a service charge of $5.00 payable to PMFS to establish a checking
account and to order checks. The Custodian and the Fund have reserved the right
to modify this checking account privilege or to impose a charge for each check
presented for payment for any individual account or for all accounts in the
future.
The Fund or PMFS may terminate Check Redemption at any time upon 30 days'
notice to participating shareholders. To receive further information, contact
Prudential Mutual Fund Services, Inc., Attention: Redemption Services, P.O. Box
15010, New Brunswick, New Jersey 08906-5015.
EXPEDITED REDEMPTION
To request Expedited Redemption by telephone, a shareholder should call PMFS
at (800) 225-1852. Calls must be received by PMFS before 4:30 P.M., New York
time. Requests by letter should be addressed to Prudential Mutual Fund Services,
Inc., Attention: Redemption Services, P.O. Box 15010, 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
B-30
<PAGE>
signature must be guaranteed by: (a) a commercial bank which is a member of the
Federal Deposit Insurance Corporation; (b) a trust company; or (c) a member firm
of a domestic securities exchange. Guarantees must be signed by an authorized
signatory of the bank, trust company or member firm, and "Signature Guaranteed"
should appear with the signature. Signature guarantees by savings banks, savings
and loan associations and notaries will not be accepted. PMFS may request
further documentation from corporations, executors, administrators, trustees or
guardians.
To receive further information, investors should contact PMFS at (800)
225-1852.
REGULAR REDEMPTION
Shareholders may redeem their shares by sending to PMFS, at the address set
forth above, a written request, accompanied by duly endorsed share certificates,
if issued. If the proceeds of the redemption (a) exceed $50,000, (b) are to be
paid to a person other than the record owner, (c) are to be sent to an address
other than the address on the Transfer Agent's records or (d) are to be paid to
a corporation, partnership, trust or fiduciary, the signature(s) on the
redemption request and on the certificates, if any, or stock power must be
guaranteed by a commercial bank or trust company (not a savings bank) or a
member firm of a national securities exchange. For clients of Prusec, a
signature guarantee may be obtained from the agency or office manager of most
Prudential District or Ordinary offices. The Fund may change the signature
guarantee requirements from time to time on notice to shareholders, which may be
given by means of a new Prospectus. All correspondence concerning redemptions
should be sent to the Fund in care of its Transfer Agent, Prudential Mutual Fund
Services, Inc., Attention: Redemption Services, P.O. Box 15010, New Brunswick,
New Jersey 08906-5010. Regular redemption is made by check sent to the
shareholder's address.
NET ASSET VALUE
The net asset value per share of a series is the net worth of such series
(assets including securities at value minus liabilities) divided by the number
of shares of such series outstanding. Net asset value is calculated separately
for each class. The Fund will compute its net asset value daily at 4:15 P.M.,
New York time, for the California Series and the California Income Series and at
4:30 P.M., New York time, for the California Money Market Series 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 applicable series have been received or
on days on which changes in the value of the portfolio securities of that series
do not affect net asset value. The New York Stock Exchange is closed on the
following holidays: New Year's Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
Portfolio securities for which market quotations are readily available are
valued at their bid quotations. When market quotations are not readily
available, such securities and other assets 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 instruments which mature in less than
60 days are valued at amortized cost, if their original term to maturity was
less than 60 days, or are valued at amortized cost on the 60th day prior to
maturity if their original term to maturity when acquired by the Fund was more
than 60 days, unless this is determined not to represent fair value by the
Trustees.
The California Money Market Series uses the amortized cost method to
determine the value of its 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.
B-31
<PAGE>
With respect to the California 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 California 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 California Money Market Series' portfolio holdings by the
Trustees, at such intervals as they may deem appropriate, to determine whether
the California 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.
The net asset value of Class B and Class C shares will generally be lower
than the net asset value of Class A shares as a result of the larger
distribution-related fee to which Class B and Class C shares are subject. It is
expected, however, that the net asset value per share of each class will tend to
converge immediately after the recording of dividends which will differ by
approximately the amount of the distribution expense accrual differential among
the classes.
PERFORMANCE INFORMATION
CALIFORNIA SERIES AND CALIFORNIA INCOME SERIES
The California Series and the California Income Series may from time to time
advertise their yield as calculated over a 30-day period. The yield will be
computed by dividing the California Series' and California Income 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 Prospectuses of the California Series and the California Income Series.
The California Series' yield for Class A and Class B shares for the 30 days
ended August 31, 1993 was 4.47% and 4.28%, respectively. The California Income
Series' yield for the 30 days ended August 31, 1993 was 5.78% (5.30% adjusted
for management subsidies and waivers). During this period, no Class C shares
were outstanding.
The California Series and California Income 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 California
Series and California Income 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, 1993, the California Series' tax equivalent yield for Class A
and Class B shares was 8.32% and 7.96%, respectively. The California Income
Series' tax equivalent yield for the 30 days ended August 31, 1993 was 10.75%
(9.86% adjusted for management subsidies and waivers).
AVERAGE ANNUAL TOTAL RETURN. Each of the California Series and California
Income Series may from time to time advertise its average annual total return.
Average annual return is determined separately for Class A and Class B and Class
C shares. See "How the Fund Calculates Performance" in the Prospectus of each
series.
B-32
<PAGE>
Average annual total return is computed according to the following formula:
P(1+T)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.
AGGREGATE TOTAL RETURN. Each of the California Series and California Income
Series may also advertise its aggregate total return. Aggregate total return is
determined separately for Class A, Class B and Class C shares. See "How the Fund
Calculates Performance" in the Prospectus of each Series. Aggregate total return
represents the cumulative change in the value of an investment in one of the
Series and is computed according to the following formula:
ERV - P
--------
P
Where: P = a hypothetical initial payment of $1000.
ERV = ending redeemable value of a hypothetical $1000 payment made
at the beginning of the 1, 5 or 10 year periods (or fractional
portion thereof) at the end of the 1, 5 or 10 year periods.
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.
YIELD. Each of the California Series and California Income Series may from
time to time advertise its yield as calculated over a 30-day period. Yield is
calculated separately for Class A, Class B and Class C shares. This yield will
be computed by dividing the Series' net investment income per share earned
during this 30-day period by the maximum offering price per share on the last
day of this period.
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>
Average annual total return is computed by assuming a hypothetical initial
payment of $1,000. It was assumed that all of the dividends and distributions by
the series over the relevant time period were reinvested. It was then assumed
that at the end of the relevant period, the entire amount was redeemed and any
applicable contingent deferred sales charge paid upon redemption was deducted
from the redeemed amount. The average annual total return was then calculated by
calculating the annual rate required for the initial payment to grow to the
amount which would have been received upon redemption.
B-33
<PAGE>
The California Series' average annual total return for the periods ended
August 31, 1993 is as follows:
<TABLE>
<CAPTION>
CLASS A CLASS B
---------------- ------------------------
ONE FROM ONE FIVE FROM
YEAR INCEPTION YEAR YEARS INCEPTION
----- -------- ----- ----- --------
<S> <C> <C> <C> <C> <C>
Average Annual Total Return... 7.25% 8.56% 6.74% 8.99% 9.42%
Average Annual Total Return
Adjusted for
Subsidy/Waiver............... 7.25% 8.56% 6.74% 8.99% 9.38%
</TABLE>
The California Income Series' average annual total return for the one year
period ended August 31, 1993 and for the period December 3, 1990 through August
31, 1993 was 8.56% (8.05% adjusted for management subsidies and waivers) and
9.96% (9.55% adjusted for management subsidies and waivers), respectively.
During these periods, no Class C shares were outstanding.
CALIFORNIA MONEY MARKET SERIES
The California 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 California Money Market
Series' portfolio and its operating expenses. The California 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 California Money Market Series may also calculate its 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 California Money Market Series' 7-day tax equivalent yield as of August 31,
1993 was 3.20%.
Comparative performance information may be used from time to time in
advertising or marketing the California Money Market Series' shares, including
data from Lipper Analytical Services, Inc., Donoghue's Money Fund Report or
other industry publications.
The California Money Market Series' yield fluctuates, and an annualized
yield quotation is not a representation by the California Money Market Series as
to what an investment in the California Money Market Series will actually yield
for any given period. Yield for the California Money Market Series will vary
based on a number of factors including changes in market conditions, and level
of interest rates and the level of California Money Market Series income and
expenses.
B-34
<PAGE>
From time to time, the performance of the Fund may be measured against
various indices. Set forth below is a chart which compares the performance of
different types of investments over the long-term and the rate of inflation.1
[GRAPHIC]
(1) Source: Ibbotson Associates, "Stocks, Bonds, Bills and Inflation -- 1993
Yearbook", (annually updates the work of Roger G. Ibbotson and Rex A.
Sinquefield). Common stock returns are based on the Standard & Poor's 500 Stock
Index, a market-weighted, unmanaged index of 500 common stocks in a variety of
industry sectors. It is a commonly used indicator of broad stock price
movements. This chart is for illustrative purposes only, and is not intended to
represent the performance of any particular investment or fund.
B-35
<PAGE>
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 Fund 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 previous business day on which the
Fund is open for business. Accordingly, a shareholder of the California Series
and the California Income Series who redeems his or her shares effective as of
4:15 P.M. (4:30 P.M. for the California 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 in the California
Series and the California Income Series whose purchase order is effective as of
4:15 P.M. (4:30 P.M. for the California Money Market Series), New York time, on
a Friday does not begin earning dividends until the following business day. For
series other than California Money Market Series, net investment income consists
of interest income accrued on portfolio securities less all expenses, calculated
daily. For the California Money Market Series, net investment income consists of
interest income accrued on portfolio securities less all expenses, calculated
daily plus/minus any capital gains/losses.
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 the series.
The per share dividends on Class B and Class C shares of the California
Series and the California Income Series will be lower than the per share
dividends on Class A shares of the California Series and the California Income
Series, respectively, as a result of the higher distribution-related fee
applicable to the Class B shares. The per share distributions of net capital
gains, if any, will be paid in the same amount for Class A, Class B and Class C
shares. See "Net Asset Value."
Annually, the Fund will mail to shareholders information regarding the tax
status of distributions made by the Fund in the calendar year. The Fund intends
to report the proportion of all distributions that were tax-exempt for that
calendar year. The percentage of income designated as tax-exempt for the
calendar year may be substantially different from the percentage of the Fund's
income that was tax-exempt for a particular period.
FEDERAL TAXATION
Under the Internal Revenue Code, each series of the Fund is required to be
treated as a separate entity for federal income tax purposes. Each series of the
Fund has elected to qualify and intends to remain qualified to be treated as a
regulated investment company under the requirements of Subchapter M of the
Internal Revenue Code for each taxable year. If so qualified, each series will
not be subject to federal income taxes on its net investment income and capital
gains, if any, realized during the taxable year which it distributes to its
shareholders, assuming it distributes at least 90% of its net investment income
and short-term capital gains and 90% of any excess of its tax-exempt interest
over certain disallowed deductions during the taxable year. In addition, each
series intends to make distributions in accordance with the provisions of the
Internal Revenue Code so as to avoid the 4% excise tax on certain amounts
remaining undistributed at the end of each calendar year. In order to qualify as
a regulated investment company, each series of the Fund must, among other
things, (a) derive at least 90% of its gross income (without offset for losses)
from dividends, interest, payments with respect to securities loans and gains
from the sale or other disposition of stock or securities; (b) derive less than
30% of its gross income (without offset for losses) from the sale or other
disposition of stock, securities or futures contracts or options thereon held
for less than three months; and (c) diversify its holdings so that, at the end
of each quarter of the taxable year, (i) at least 50% of the market value of the
assets of the series is represented by cash, U.S. Government securities and
other securities limited, in respect of any one issuer, to an
B-36
<PAGE>
amount not greater than 5% of the market value of the assets of the series and
10% of the outstanding voting securities of such issuer, and (ii) not more than
25% of the value of the assets of the series is invested in the securities of
any one issuer (other than U.S. Government securities).
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 24% alternative minimum tax on individuals and the 20%
alternative minimum tax on corporations. To the extent interest on such bonds is
distributed to shareholders, shareholders will be subject to the alternative
minimum tax on such distributions.
Distributions of taxable net investment income and of the excess of net
short-term capital gain over the net long-term capital loss 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.
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 short-term or long-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 are computed by taking into account any capital
loss carryforward of the series.
For federal income tax purposes, the California Series has a capital loss
carryforward as of August 31, 1993 of approximately $1,216,000 which expires in
1999. Accordingly, no capital gains distributions are expected to be paid to
shareholders until net gains have been realized in excess of such carryforward.
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 the 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 the series, all outstanding put options or other Section 1256 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.
The California Series' and the California Income Series' hedging activities
may be affected by the requirement under the Internal Revenue Code that less
than 30% of the series' gross 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 the
series to limit their 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, the series
may choose to use futures contracts based on fixed-income securities that will
not expire within three months.
B-37
<PAGE>
Distributions of the excess of net long-term capital gains over the net
short-term capital losses are taxable to shareholders as long-term capital
gains, regardless of the length of time the shares of the Fund have been held by
such shareholders. Such distributions are not eligible for the dividends
received deduction. Distributions of long-term capital gain of the Fund are
includible in income subject to the alternative minimum tax.
If any net long-term capital gains in excess of net short-term capital
losses are retained by a series for investment, requiring federal income taxes
to be paid thereon by the series, the series will elect to treat such capital
gains as having been distributed to shareholders. As a result, shareholders will
be taxed on such amounts as long-term capital gains, will be able to claim their
proportionate share of the federal income taxes paid by the series on such gains
as a credit against their own federal income tax liabilities, and will be
entitled to increase the adjusted tax basis of their series shares by the
differences between their PRO RATA share of such gains and their tax credit.
Any short-term capital loss realized upon the redemption of shares within 6
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
exempt-interest dividend. Any loss realized upon the redemption of shares within
6 months from the date of purchase of such shares and following receipt of a
long-term capital gains distribution will be treated as long-term capital loss
to the extent of such long-term capital gains distribution.
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
portfolio of the Fund 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 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 Fund may be
adversely affected. In such case, each series would reevaluate its investment
objective and policies.
All distributions of taxable net investment income and net realized capital
gains, whether received in shares or cash, must be reported by each shareholder
on his or her federal income tax return. Shareholders electing to receive
distributions in the form of additional shares will have a cost basis for
federal income tax purposes in each share so received equal to the net asset
value of a share of the applicable series of the Fund on the reinvestment date.
Distributions of tax-exempt interest must also be reported. Under federal income
tax law, each series of the Fund will be required to report to the Internal
Revenue Service all distributions of taxable income and capital gains as well as
gross proceeds from the redemption or exchange of shares of such series, except
in the case of certain exempt shareholders. Under the backup withholding
provisions of the Internal Revenue Code, all proceeds from the redemption or
exchange of shares are subject to withholding of federal income tax at the rate
of 31% in the case of nonexempt shareholders who fail to furnish the appropriate
series of the Fund with their taxpayer identification numbers on IRS Form W-9
and with required certifications regarding their status under the federal income
tax law. Such withholding is also required on taxable dividends and capital
gains distributions unless it is reasonably expected that at least 95% of the
distributions of the series are comprised of tax-exempt interest. If the
withholding provisions are applicable, any taxable 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.
B-38
<PAGE>
Any loss realized on a sale, redemption or exchange of shares of the Fund by
a shareholder will be disallowed to the extent the shares are replaced within a
61-day period (beginning 30 days before the disposition of shares). Shares
purchased pursuant to the reinvestment of a dividend will constitute a
replacement of shares.
A shareholder who acquires shares of the Fund and sells or otherwise
disposes of such shares within 90 days of acquisition may not be allowed to
include certain sales charges incurred in acquiring such shares for purposes of
calculating gain or loss realized upon a sale or exchange of shares of the Fund.
CALIFORNIA TAXATION
In any year in which each series qualifies as a regulated investment company
under the Internal Revenue Code and is exempt from federal income tax, (i) such
series will also be exempt from the California corporate income and franchise
taxes to the extent it distributes its income and (ii) provided 50% or more of
the value of the total assets of such series at the close of each quarter of its
taxable year consists of obligations the interest on which (when held by an
individual) is exempt from personal income taxation under California law, such
series will be qualified under California law to pay "exempt-interest" dividends
which will be exempt from the California personal income tax.
Individual shareholders of a series who reside in California will not be
subject to California personal income tax on distributions received from the
series to the extent such distributions are attributable to interest received by
the series during its taxable year on obligations which (when held by an
individual) pay interest that is exempt from taxation under California law.
Distributions from such series which are attributable to sources other than
those described in the preceding sentence will generally be taxable to such
shareholders. In addition, distributions other than exempt-interest dividends to
such shareholders are includable in income subject to the California alternative
minimum tax.
The portion of dividends constituting exempt-interest dividends is that
portion derived from interest on obligations which (when held by an individual)
pay interest excludable from California personal income under California law.
The total amount of California exempt-interest dividends paid by a series to all
of its shareholders with respect to any taxable year cannot exceed the amount of
interest received by the series during such year on such obligations less any
expenses and expenditures (including dividends paid to corporate shareholders)
deemed to have been paid from such interest. Any dividends paid to corporate
shareholders subject to the California franchise or corporate income tax will be
taxed as ordinary dividends to such shareholders.
Distributions of investment income and long-term and short-term capital
gains will not be excluded from taxable income in determining the California
corporate income or franchise tax for corporate shareholders. In addition, such
distributions may be includable in income subject to the alternative minimum
tax.
Interest on indebtedness incurred or continued by shareholders to purchase
or carry shares of a series will not be deductible for California personal
income tax purposes. In addition, as a result of California's incorporation of
certain provisions of the Internal Revenue Code, any loss realized by a
shareholder upon the sale of shares held for six months or less may be
disallowed to the extent of any exempt-interest dividends received with respect
to such shares. Moreover, any loss realized upon the redemption of shares within
6 months from the date of purchase of such shares and following receipt of a
long-term capital gains distribution will be treated as long-term capital loss
to the extent of such long-term capital gains distribution. Finally, any loss
realized upon the redemption of shares within 30 days before or after the
acquisition of other shares of the same series may be disallowed under the "wash
sale" rules.
Shares of the Fund will not be subject to the California property tax.
The foregoing is only a summary of some of the important California income
tax considerations generally affecting the Fund and its shareholders. The Fund
has obtained an opinion of its California tax counsel which confirms these state
tax consequences for California resident individuals and corporations. No
attempt is made to present a detailed explanation of the California personal
income tax treatment of a series or its shareholders,
B-39
<PAGE>
and this discussion is not intended as a substitute for careful planning.
Shareholders of the Fund should consult their tax advisers about other state and
local tax consequences of their investments in the Fund and their own California
tax situation.
ORGANIZATION AND CAPITALIZATION
The Fund is a Massachusetts business trust established under a Declaration
of Trust dated May 18, 1984, as amended. The Declaration of Trust and the
By-Laws of the Fund are designed to make the Fund similar in most respects to a
Massachusetts business corporation. The principal distinction between the two
forms relates to shareholder liability: under Massachusetts law, shareholders of
a business trust may, in certain circumstances, be held personally liable as
partners for the obligations of the Fund, which is not the case with a
corporation. The Declaration of Trust of the Fund provides that shareholders
shall not be subject to any personal liability for the acts or obligations of
the Fund and that every written obligation, contract, instrument or undertaking
made by the Fund shall contain a provision to the effect that the shareholders
are not individually bound thereunder.
Counsel for the Fund have advised the Fund that no personal liability will
attach to the shareholders under any undertaking containing such provision when
adequate notice of such provision is given, except possibly in a few
jurisdictions. With respect to all types of claims in the latter jurisdictions
and with respect to tort claims, contract claims when 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 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 for satisfaction of claims arising in
connection with the affairs of the Fund. With the exceptions stated, the
Declaration of Trust permits the Trustees to provide for the indemnification of
Trustees, officers, employees or agents of the Fund against all liability in
connection with the affairs of the Fund.
Other distinctions between a corporation and a Massachusetts business trust
include the absence of a requirement that business trusts issue share
certificates.
The Fund and each 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 three 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 of the Fund 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
B-40
<PAGE>
shareholder will receive proceeds solely of the assets of such series. In the
event of the dissolution or liquidation of the Fund, the holders of the shares
of any series are entitled to receive as a class the underlying assets of such
series available for distribution to shareholders.
Shares of the Fund entitle their holders to one vote per share. However, on
any matter submitted to a vote of the shareholders, all shares then entitled to
vote will be voted by individual series, unless otherwise required by the
Investment Company Act (in which case all shares will be voted in the
aggregate). For example, a change in investment policy for a series would be
voted upon only by shareholders of the series involved. Additionally, approval
of the investment advisory agreement is a matter to be determined separately by
each series. Approval by the shareholders of one series is effective as to that
series whether or not enough votes are received from the shareholders of the
other series to approve the proposal as to those series.
The Fund does not intend to hold annual meetings of shareholders.
Pursuant to the Declaration of Trust, the Trustees may authorize the
creation of additional series of shares (the proceeds of which would be invested
in separate, independently managed portfolios with distinct investment
objectives and policies and share purchase, redemption and net asset value
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 that series) 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 chose, elect all Trustees being selected, while the holders of the
remaining shares would be unable to elect any Trustees.
CUSTODIAN, TRANSFER AND DIVIDEND DISBURSING AGENT AND
INDEPENDENT ACCOUNTANTS
State Street Bank and Trust Company, One Heritage Drive, North Quincy,
Massachusetts 02171 serves as Custodian for the Fund's portfolio securities and
cash and in that capacity maintains cash and certain financial and accounting
books and records pursuant to an agreement with the Fund. See "How the Fund Is
Managed -- Custodian and Transfer and Dividend Disbursing Agent" in the
Prospectus of each Series.
Prudential Mutual Fund Services, Inc. (PMFS), Raritan Plaza One, Edison, New
Jersey 08837, serves as the Transfer and Dividend Disbursing Agent of the Fund.
Its mailing address is P.O. Box 15005, New Brunswick, New Jersey 08906-5005.
PMFS is a wholly-owned subsidiary of PMF. PMFS provides customary transfer
agency services to the Fund, including the handling of shareholder
communications, the processing of shareholder transactions, the maintenance of
shareholder account records, payment of dividends and distributions, and related
functions. For these services, PMFS receives an annual fee per shareholder
account, in addition to a new set-up fee for each manually established account
and a monthly inactive zero balance account fee per shareholder acount. PMFS is
also reimbursed for its out-of-pocket expenses, including but not limited to
postage, stationery, printing, allocable communication and other costs. For the
fiscal year ended August 31, 1993, the Fund incurred fees of $224,500 ($67,600
for the California Series, $112,900 for the California Money Market Series and
$44,000 for the California Income Series) for the services of PMFS.
Deloitte & Touche, 1633 Broadway, New York, New York 10019, serves as the
Fund's independent accountants and in that capacity audits the Fund's annual
financial statements.
B-41
<PAGE>
PRUDENTIAL CALIFORNIA MUNICIPAL FUND
CALIFORNIA SERIES
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount Value
(Unaudited) (000) Description (a) (Note 1)
<S> <C> <C> <C>
LONG-TERM INVESTMENTS--97.0%
Alameda Impvt. Bond Act
of 1915,
Marina Vlg. Assmt.
Dist. 89-1,
NR $ 1,700 7.55%, 9/2/06........... $ 1,754,638
NR 1,120 7.65%, 9/2/09........... 1,155,806
Anaheim Elec. Rev.,
Pub. Impvt. Proj.,
Aa 5,400 5.75%, 10/1/07.......... 5,574,582
Antioch Area Pub. Facs.
Fin.
Agcy., Cmnty. Facs.
Dist.,
Aaa 5,000 5.00%, 8/1/18,
F.G.I.C............... 4,727,500
Azusa Pub. Fin. Auth.
Rev.,
Aaa 3,800 5.00%, 7/1/23, Ser. A... 3,575,610
Bakersfield Pub. Fac.
Corp.,
Cert. of Part.,
Wst. Wtr. Treat.
Plant, No. 3,
A1 2,750 8.00%, 1/1/10........... 3,101,175
Benicia Unified Sch.
Dist.,
Gen. Oblig.,
Aaa 1,000 6.85%, 8/1/16, Ser. A... 1,135,310
Berkeley Hosp. Rev.,
Alta Bates Hosp.
Corp.,
BBB+* 1,840+ 7.65%, 12/1/15.......... 2,163,711
Brea Pub. Fin. Auth.
Rev.,
Tax Alloc. Redev.
Proj.,
NR 5,000 8.10%, 3/1/21, Ser. C... 5,575,050
Buena Park Cmnty. Redev. Agcy.,
Central Bus. Dist. Proj.,
BBB+* 2,500 7.10%, 9/1/14........... 2,706,525
California St. Brd. of
Pub. Wks., Lease Rev.,
A1 6,630 5.00%, 6/1/23, Ser. A... 6,110,341
Dept. of Corrections,
Aaa 775 5.25%, 12/1/08, Ser. A,
A.M.B.A.C............. 783,858
California St. Brd. of
Pub. Wks., Lease Rev.,
Univ. of California at
San
Diego, High Technology
Facs.,
A1 $ 1,570 7.375%, 4/1/06, Ser.
A..................... $ 1,842,521
Univ. of California at
Santa
Barbara, High
Technology Facs.,
A1 2,500 8.125%, 2/1/08, Ser.
A..................... 2,949,950
California St. Dept.
Wtr. Res. Rev.,
Ctrl. Valley Proj.,
Aa 1,750 5.50%, 12/1/23, Ser.
L..................... 1,755,635
California St. Hlth.
Facs. Fin. Auth. Rev.,
Brookside Hosp.,
A+* 1,500 8.10%, 11/1/17, Ser.
A..................... 1,695,390
Episcopal Homes
Foundation,
A+* 2,500 7.70%, 7/1/18, Ser. A... 2,808,525
Eskaton Properties,
NR 4,500+ 7.50%, 5/1/20........... 5,345,235
Kaiser Permanente Med.
Care,
Aa2 800 9.125%, 10/1/15, Ser.
A..................... 892,776
Sisters of Providence
Hosp.,
A1 1,500 7.50%, 10/1/10.......... 1,721,070
Sutter Hlth. Sys.,
A1 1,500 9.125%, 1/1/06.......... 1,627,545
A1 750+ 8.00%, 1/1/16, Ser. B... 862,185
California St. Hsg. Fin. Agcy. Rev.,
Home Mtge.,
Aa 4,055 7.75%, 8/1/17, Ser. A... 4,448,619
Aa 1,035 8.125%, 8/1/19, Ser.
A..................... 1,100,588
Sngl. Fam. Mtge.,
Aa 17,025 Zero coupon, 2/1/15,
Ser. A................ 2,088,967
</TABLE>
B-42 See Notes to Financial Statements.
<PAGE>
PRUDENTIAL CALIFORNIA MUNICIPAL FUND
CALIFORNIA SERIES
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount Value
(Unaudited) (000) Description (a) (Note 1)
<S> <C> <C> <C>
California St. Poll.
Ctrl. Fin. Auth.
Rev., Pacific Gas &
Elec. Co.,
A1 $ 1,650 6.625%, 6/1/09, Ser.
A..................... $ 1,796,669
A1 3,250 8.20%, 12/1/18, Ser.
A..................... 3,725,052
Contra Costa Cnty.,
Spec. Tax,
Cmnty. Facs. Pleasant
Hill,
NR 1,300 8.125%, 8/1/16.......... 1,401,062
Contra Costa Wtr. Dist.
Rev.,
A 2,000+ 7.25%, 10/1/10, Ser.
A..................... 2,371,600
Desert Hosp. Dist., Cert. of Part.,
AAA* 5,000+ 8.10%, 7/1/20........... 6,180,400
East Palo Alto San. Dist.,
Cert. of Part.,
Aux. Facs. Sch. Bldg.
Corp.,
NR 1,295 8.25%, 10/1/15.......... 1,396,204
Fairfield Pub. Fin.
Auth. Rev.,
Fairfield Redev.
Projs.,
NR 4,200 7.90%, 8/1/21, Ser. A... 4,623,360
Fontana Cmnty. Facs.,
Dist. No. 2, Spec. Tax
Rev.,
NR 3,000 8.50%, 9/1/17, Ser. B... 3,346,560
Fontana Redev. Agcy.,
Multifam. Hsg. Rev.,
AAA* 3,750 7.15%, 5/1/28, F.H.A.... 4,047,525
Industry City, Gen.
Oblig.,
Helene Curtis Proj.,
Aaa 1,660+ 8.00%, 7/1/11,
F.G.I.C............... 1,999,669
Aaa 1,795+ 8.00%, 7/1/12,
F.G.I.C............... 2,164,070
Urban Dev. Agcy.,
NR 970+ 10.40%, 5/1/15.......... 1,097,798
Los Angeles Cmnty. Redev. Agcy.,
Bunker Hill Proj., Sub. Tax.
Alloc.,
Aaa 750 6.00%, 12/1/09, Ser. C,
M.B.I.A............... 804,300
Los Angeles Cnty., Cert. of Part.,
Civic Ctr. Heating &
Refrigeration Plant,
A1 $ 2,000@/+ 8.00%, 6/1/10........... $ 2,373,380
Correctional Facs. Proj.,
Aaa 3,770 Zero coupon, 9/1/10,
M.B.I.A............... 1,481,572
Solheim Lutheran Nursing
Home Proj.,
A+* 2,000 8.125%, 11/1/17......... 2,259,960
Los Angeles Cnty. Hsg.
Auth., Multifam. Mtge.
Rev.,
Mayflower Gardens Proj.,
NR 2,100+ 8.875%, 12/20/10, Ser.
K, G.N.M.A............ 2,732,625
Los Angeles Cnty. Metro.
Trans. Auth., Sales
Tax Rev.,
Aaa 5,505 5.00%, 7/1/21, Ser. A,
F.G.I.C............... 5,189,343
Los Angeles Cnty. Trans.
Comn., Sales Tax Rev.,
Aaa 1,000+ 6.75%, 7/1/18, Ser. A,
F.G.I.C............... 1,159,570
Los Angeles Conv. &
Exhib. Ctr. Auth.,
Cert. of Part.,
Aaa 1,250+ 9.00%, 12/1/10.......... 1,692,225
Met. Wtr. Dist. of Southern
California, Waterworks
Rev.,
Aa 5,250 5.00%, 7/1/20........... 4,953,795
Aa 4,000 5.75%, 7/1/21, Ser. A... 4,241,920
Moulton Niguel Wtr. Dist.,
Aaa 2,000 5.30%, 9/1/08,
M.B.I.A............... 2,039,140
Mt. Diablo Hosp. Dist. Rev.,
Aaa 1,250+ 8.00%, 12/1/11, Ser. A,
A.M.B.A.C............. 1,556,362
Oakland Redev. Agcy.,
Cert. of Part.,
Aaa 3,000+ 9.25%, 8/1/16, Ser. A... 3,385,680
Petaluma, Cert. of Part.,
Petaluma Cmnty. Ctr.
Proj.,
A 1,380+ 8.10%, 6/15/12.......... 1,519,049
</TABLE>
B-43 See Notes to Financial Statements.
<PAGE>
PRUDENTIAL CALIFORNIA MUNICIPAL FUND
CALIFORNIA SERIES
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount Value
(Unaudited) (000) Description (a) (Note 1)
<S> <C> <C> <C>
Pleasanton Impvt. Bond
Act of 1915, Assmt.
Dist. No. 86-9,
NR $ 1,495 7.80%, 9/2/13, Ser. B... $ 1,541,121
Port of Oakland Rev.,
M.B.I.A.,
Aaa 1,000 6.50%, 11/1/16, Ser.
E..................... 1,113,220
Aaa 5,320 6.40%, 11/1/22, Ser.
A..................... 5,863,172
Puerto Rico Hwy. & Trans.
Auth. Rev.,
Baa1 5,000 6.625%, 7/1/12, Ser.
V..................... 5,512,950
Baa1 1,250 6.625%, 7/1/18, Ser.
T..................... 1,378,238
Riverside Wtr. Rev.,
Tyler Mall Cmnty. Facs.,
Aa 1,660 Zero coupon, 10/1/07.... 777,378
Aa 2,920 6.00%, 10/1/15.......... 3,023,660
Sacramento Mun. Util. Dist.
Elec. Rev.,
Aaa 3,650 5.75%, 11/15/09, Ser. C,
M.B.I.A............... 3,818,520
San Diego Cnty. Regl.
Trans. Cmnty., Sales
Tax Rev.,
Aaa 2,000 5.25%, 4/1/08, Ser. A,
F.G.I.C............... 2,032,560
A1 1,750 6.00%, 4/1/08, Ser. A... 1,864,030
San Diego Ind. Dev. Rev.,
San Diego Gas & Elec.
Co. Proj.,
Aa3 2,000 7.625%, 7/1/21, Ser.
A..................... 2,217,120
San Francisco City & Cnty.
Airports Comn., Issue
No. 3,
Aaa 4,500 6.20%, 5/1/20,
M.B.I.A............... 4,816,215
Pub. Utils. Comn. Wtr. Rev.,
Aa 2,000 8.00%, 11/1/11.......... 2,329,740
Redev. Agcy., Lease Rev.,
A 2,000 Zero coupon, 7/1/09..... 795,280
San Francisco Port Comm.
Rev.,
A1 1,000 9.80%, 7/1/99, Ser. C... 1,080,370
Santa Cruz Cnty. Pub. Fin.
Auth. Rev.,
Tax Alloc. Sub. Ln.,
NR 2,350 7.625%, 9/1/21, Ser.
B..................... 2,537,906
Santa Maria, Cert. of
Part., Local Wtr. Sys. &
Rfdg. Projs.,
Aaa $ 1,425 5.00%, 8/1/23,
F.G.I.C............... $ 1,340,797
Sonoma Cnty., Cert. of Part.,
Correctional Facs. Proj.,
NR 4,000+ 8.125%, 6/1/12.......... 4,699,000
Southern California Pub.
Pwr. Auth. Rev., Pwr. Proj.,
A 2,000 6.75%, 7/1/12........... 2,306,140
Transmission Proj.,
Aaa 7,080 Zero coupon, 7/1/12,
F.G.I.C............... 2,538,959
Southern California Pub.
Pwr. Auth., Proj. Rev.,
A 6,875 6.00%, 7/1/18, Ser.
11.................... 6,993,594
Southern California
Rapid Transit
Dist., Cert. of Part.,
Worker's Compensation Fund,
Aaa 2,095 6.00%, 7/1/10,
M.B.I.A............... 2,241,839
Sulphur Springs Union Sch. Dist.,
Aaa 2,000 Zero coupon, 9/1/09, Ser. A,
M.B.I.A............... 840,780
Torrance Redev. Agcy.,
Tax. Alloc. Downtown Redev.,
Baa 1,580 7.125%, 9/1/21.......... 1,726,087
Univ. of California Rev.,
Hsg. Sys., M.B.I.A.,
Aaa 3,035 5.00%, 11/1/13, Ser.
A..................... 2,908,258
Pkg. Sys.,
A 2,000+ 7.75%, 11/1/14, Ser.
C..................... 2,216,220
Rfdg. Hsg. Sys., Group A,
A1 2,000 7.875%, 11/1/13......... 2,280,860
Virgin Islands Pub. Fin.
Auth. Rev.,
NR 600 7.25%, 10/1/18, Ser.
A..................... 680,178
Virgin Islands Territory.,
Hugo Ins. Claims Fund Proj.,
NR 965 7.75%, 10/1/06, Ser.
91.................... 1,114,102
Virgin Islands Wtr. & Pwr.
Auth., Elec. Sys. Rev.,
NR 500 7.40%, 7/1/11, Ser. A... 551,790
NR 830 7.60%, 1/1/12, Ser. B... 935,277
Wtr. Sys. Rev.,
NR 250 7.20%, 1/1/02, Ser. B... 276,845
</TABLE>
B-44 See Notes to Financial Statements.
<PAGE>
PRUDENTIAL CALIFORNIA MUNICIPAL FUND
CALIFORNIA SERIES
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount Value
(Unaudited) (000) Description (a) (Note 1)
<S> <C> <C> <C>
Whittier Pub. Fin. Auth. Rev.,
Whittier Blvd. Redev. Proj.,
NR $ 825 7.50%, 9/1/14, Ser. A... $ 867,125
------------
Total long-term
investments
(cost $190,950,963)..... 212,261,333
------------
SHORT-TERM INVESTMENTS--0.6%
California Poll. Ctrl. Fin. Auth.
Rev.,
Delano Proj., F.R.D.D.,
P1 100 2.45%, 9/1/93, Ser.
91.................... 100,000
Rocklin Proj., F.R.D.D.,
P1 1,100 2.50%, 9/1/93, Ser.
88B................... 1,100,000
------------
Total short-term
investments
(cost $1,200,000)....... 1,200,000
------------
Total Investments--97.6%
(cost $192,150,963; Note
4).................... 213,461,333
Other assets in excess of
liabilities--2.4%..... 5,288,336
------------
Net Assets--100%........ $218,749,669
------------
------------
<FN>
- ------------------
(a) The following abbreviations are used in portfolio descriptions:
A.M.B.A.C.--American Municipal Bond Assurance Corporation.
F.G.I.C.--Financial Guaranty Insurance Company.
F.H.A.--Federal Housing Administration.
F.R.D.D.--Floating Rate Daily Demand#.
G.N.M.A.--Government National Mortgage Association.
M.B.I.A.--Municipal Bond Insurance Association.
# For purposes of amortized cost valuation, the maturity date of these
instruments 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.
* Ratings of Standard & Poor's Corporation.
+ Prerefunded issues are secured by escrowed cash and/or direct U.S. guaranteed
obligations.
@ $1,250,000 of principal amount pledged as initial margin on financial futures
contracts.
NR--Not rated by Moody's or Standard & Poor's.
The Fund's current Statement of Additional Information contains a description of
Moody's and Standard & Poor's ratings.
</TABLE>
B-45 See Notes to Financial Statements.
<PAGE>
PRUDENTIAL CALIFORNIA MUNICIPAL FUND
CALIFORNIA SERIES
Statement of Assets and Liabilities
<TABLE>
<CAPTION>
August 31,
Assets 1993
------------
<S> <C>
Investments, at value (cost $192,150,963)................................................. $213,461,333
Cash...................................................................................... 37,401
Accrued interest receivable............................................................... 3,553,043
Receivable for Fund shares sold........................................................... 1,416,338
Receivable for investments sold........................................................... 1,127,150
Other assets.............................................................................. 5,562
------------
Total assets............................................................................ 219,600,827
------------
Liabilities
Payable for Fund shares reacquired........................................................ 322,711
Dividends payable......................................................................... 178,725
Accrued expenses.......................................................................... 164,774
Due to Manager............................................................................ 91,548
Due to Distributors....................................................................... 87,904
Due to broker-variation margin............................................................ 4,488
Deferred trustees' fees................................................................... 1,008
------------
Total liabilities....................................................................... 851,158
------------
Net Assets................................................................................ $218,749,669
------------
------------
Net assets were comprised of:
Shares of beneficial interest, at par................................................... $ 180,058
Paid-in capital in excess of par........................................................ 198,474,797
------------
198,654,855
Accumulated net realized loss........................................................... (1,164,743)
Net unrealized appreciation............................................................. 21,259,557
------------
Net assets, August 31, 1993............................................................. $218,749,669
------------
------------
Class A:
Net asset value and redemption price per share
($11,115,613 / 914,023 shares of beneficial interest issued and outstanding).......... $12.16
Maximum sales charge (4.5% of offering price)........................................... .57
------------
Maximum offering price to public........................................................ $12.73
------------
------------
Class B:
Net asset value, offering price and redemption price per share
($207,634,056 / 17,091,741 shares of beneficial interest issued and outstanding)...... $12.15
------------
------------
</TABLE>
See Notes to Financial Statements.
B-46
<PAGE>
PRUDENTIAL CALIFORNIA MUNICIPAL FUND
CALIFORNIA SERIES
Statement of Operations
<TABLE>
<CAPTION>
Year Ended
August 31,
Net Investment Income 1993
-----------
<S> <C>
Income
Interest............................ $13,121,435
-----------
Expenses
Management fee...................... 993,612
Distribution fee--Class A........... 7,728
Distribution fee--Class B........... 954,972
Custodian's fees and expenses....... 142,400
Transfer agent's fees and
expenses............................ 101,000
Registration fees................... 25,000
Reports to shareholders............. 15,000
Audit fee........................... 15,000
Legal fee........................... 14,000
Trustees' fees...................... 8,000
Miscellaneous....................... 9,925
-----------
Total expenses.................... 2,286,637
-----------
Net investment income................. 10,834,798
-----------
Realized and Unrealized
Gain (Loss) on Investments
Net realized gain (loss) on:
Investment transactions............. 2,816,105
Financial futures transactions...... (942,368)
-----------
1,873,737
-----------
Net change in unrealized appreciation/depreciation
on:
Investments......................... 9,755,183
Financial futures contracts......... (50,813)
-----------
9,704,370
-----------
Net gain on investments............... 11,578,107
-----------
Net Increase in Net Assets
Resulting from Operations............. $22,412,905
-----------
-----------
</TABLE>
PRUDENTIAL CALIFORNIA MUNICIPAL FUND
CALIFORNIA SERIES
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
Year Ended August 31,
Increase (Decrease) ------------------------------
in Net Assets 1993 1992
------------- -------------
<S> <C> <C>
Operations
Net investment income... $ 10,834,798 $ 10,363,999
Net realized gain on
investment
transactions.......... 1,873,737 3,373,632
Net change in unrealized
appreciation on
investments........... 9,704,370 4,116,602
------------- -------------
Net increase in net
assets resulting from
operations............ 22,412,905 17,854,233
------------- -------------
Dividends to shareholders (Note 1)
Class A................... (449,523) (267,750)
Class B................... (10,385,275) (10,096,249)
------------- -------------
(10,834,798) (10,363,999)
------------- -------------
Fund share transactions
(Note 5)
Net proceeds from shares
subscribed............ 49,271,241 39,003,929
Net asset value of
shares issued in
reinvestment of
dividends............. 5,878,940 5,339,428
Cost of shares
reacquired.............. (31,227,312) (41,963,672)
------------- -------------
Net increase in net
assets from Fund share
transactions.......... 23,922,869 2,379,685
------------- -------------
Total increase............ 35,500,976 9,869,919
Net Assets
Beginning of year......... 183,248,693 173,378,774
------------- -------------
End of year............... $ 218,749,669 $ 183,248,693
------------- -------------
------------- -------------
</TABLE>
See Notes to Financial Statements.
B-47
<PAGE>
PRUDENTIAL CALIFORNIA MUNICIPAL FUND
CALIFORNIA SERIES
Notes to Financial Statements
Prudential California Municipal 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
three series. The monies of each series are invested in separate, independently
managed portfolios. The California Series (the ``Series'') commenced investment
operations on September 19, 1984. The Series is diversified and seeks to achieve
its investment objective of obtaining the maximum amount of income exempt from
federal and California state income taxes with the minimum of risk by investing
in ``investment grade'' tax-exempt securities whose ratings are within the four
highest ratings categories by a nationally recognized statistical rating
organization or, if not rated, are of comparable quality. The ability of the
issuers of the securities held by the Series to meet their obligations may be
affected by economic developments in a specific state, industry or region.
Note 1. Accounting The following is a summary
Policies of significant accounting
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 service, a security is valued at its fair value as determined under
procedures established by the Trustees.
Short-term securities which mature in more than 60 days are valued at current
market quotations. Short-term securities which mature in 60 days or less are
valued at amortized cost.
All securities are valued as of 4:15 P.M., New York time.
Financial Futures Contracts: A financial futures contract is an agreement to
purchase (long) or sell (short) an agreed amount of debt securities at a set
price for delivery on a future date. Upon entering into a financial futures
contract, the Series is required to pledge to the broker an amount of cash
and/or other assets equal to a certain percentage of the contract amount. This
amount is known as the ``initial margin''. Subsequent payments, known as
``variation margin'', are made or received by the Series each day, depending on
the daily fluctuations in the value of the underlying security. Such variation
margin is recorded for financial statement purposes on a daily basis as
unrealized gain or loss. The Series invests in financial futures contracts
solely for the purpose of hedging its existing portfolio securities or
securities the Series intends to purchase against fluctuations in value caused
by changes in prevailing market interest rates. Should interest rates move
unexpectedly, the Series may not achieve the anticipated benefits of the
financial futures contracts and may realize a loss. The use of futures
transactions involves the risk of imperfect correlation in movements in the
price of futures contracts, interest rates and the underlying hedged assets.
Securities Transactions and Investment Income: Securities transactions are
recorded on the trade date. Realized gains and losses on sales of securities are
calculated on the identified cost basis. Interest income is recorded on the
accrual basis. The Series amortizes premiums and original issue discount paid on
purchases of portfolio securities as adjustments to interest income.
Net investment income (other than distribution fees) and realized and
unrealized gains or losses are allocated daily to each class of shares based
upon the relative proportion of net assets of each class at the beginning of the
day.
Federal Income Taxes: For federal income tax purposes, each series in the Fund
is treated as a separate taxpaying entity. It is the intent of the Series to
continue to meet the requirements of the Internal Revenue Code applicable to
regulated investment companies and to distribute all of its net income to
shareholders. For this reason and because substantially all of the Series' gross
income consists of tax-exempt interest, no federal income tax provision is
required.
B-48
<PAGE>
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.
Reclassification of Capital Accounts: Effective September 1, 1992, the Fund
began accounting and reporting for distributions to shareholders in accordance
with Statement of Position 93-2: Determination, Disclosure, and Financial
Statement Presentation of Income, Capital Gain, and Return of Capital
Distributions by Investment Companies. The effect caused by adopting this
statement was to decrease paid-in capital and decrease accumulated net realized
losses on investments by $28,037 compared to amounts previously reported through
August 31, 1992. Net investment income, net realized gains, and net assets were
not affected by this change.
Note 2. Agreements The Fund has a management agreement with
Prudential Mutual Fund Management, Inc. (``PMF'').
Pursuant to this agreement, PMF has responsibility
for all investment advisory services and supervises the subadviser's performance
of such services. PMF has entered into a subadvisory agreement with The
Prudential Investment Corporation (``PIC''); PIC furnishes investment advisory
services in connection with the management of the Fund. PMF pays for the cost of
the subadviser's services, the compensation of officers of the Fund, occupancy
and certain clerical and bookkeeping costs of the Fund. The Fund bears all other
costs and expenses.
The management fee paid PMF is computed daily and payable monthly, at an
annual rate of .50 of 1% of the average daily net assets of the Series.
The Fund has distribution agreements with Prudential Mutual Fund
Distributors, Inc. (``PMFD''), which acts as the distributor of the Class A
shares of the Fund and Prudential Securities Incorporated (``PSI'') which acts
as distributor of the Class B shares of the Fund (collectively the
``Distributors''). To reimburse the Distributors for their expenses incurred in
distributing and servicing the Fund's Class A and B shares, the Fund, pursuant
to plans of distribution, pays the Distributors a reimbursement, accrued daily
and payable monthly.
Pursuant to the Class A Plan, the Fund reimburses PMFD for its distribution
and service related expenses 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. Such
expenses under the Class A Plan were .10 of 1% of the average daily net assets
of the Class A shares for the year ended August 31, 1993. PMFD pays various
broker-dealers, including PSI and Pruco Securities Corporation (``Prusec''),
affiliated broker-dealers, for account servicing fees and other expenses
incurred by such broker-dealers.
Pursuant to the Class B Plan, the Series reimburses PSI for its distribution
and service related expenses with respect to Class B shares at an annual rate of
up to .50 of 1% of the average daily net assets of the Class B shares.
The Class B distribution and service related expenses include commision
credits for payment of commissions and account servicing fees to financial
advisers and an allocation for overhead and other branch office
distribution-related expenses, interest and/or carrying charges, the cost of
printing and mailing prospectuses to potential investors and of advertising
incurred in connection with the distribution of shares.
The Distributors recover the distribution expenses and service fees incurred
through the receipt of reimbursement payments from the Series under the plans
and the receipt of initial sales charges (Class A only) and contingent deferred
sales charges (Class B only) from shareholders.
PMFD has advised the Series that it has received approximately $180,000 in
front-end sales charges resulting from sales of Class A shares during the year
ended August 31, 1993. From these fees, PMFD paid such sales charges to dealers
(PSI and Prusec) which in turn paid commissions to salespersons and incurred
other distribution costs.
With respect to the Class B Plan, at any given time the amount of expenses
incurred by PSI in distributing the Series' shares and not recovered through the
imposition of contingent deferred sales charges in connection with certain
redemptions of shares may exceed the total payments made by the Series pursuant
to the Plan. PSI has advised the Series that for the year ended August 31, 1993,
it received approximately $341,800 in contingent deferred sales charges imposed
upon certain redemptions by investors. PSI, as distributor, has also advised the
Series that as of August 31, 1993, the amount of distribution expenses incurred
by PSI and not yet reimbursed by the Series or recovered through contingent
deferred sales charges approximated $5,511,200. This amount may be
B-49
<PAGE>
recovered through future payments under the Class B Plan or contingent deferred
sales charges.
In the event of termination or noncontinuation of the Class B Plan, the
Series would not be contractually obligated to pay PSI as distributor, for any
expenses not previously reimbursed or recovered through contingent deferred
sales charges.
PMFD is a wholly-owned subsidiary of PMF; PSI, PMF and PIC are (indirect)
wholly-owned subsidiaries of The Prudential Insurance Company of America.
Note 3. Other Prudential Mutual Fund
Transactions Services, Inc. (``PMFS''), a
with Affiliates wholly-owned subsidiary of
PMF, serves as the Fund's transfer agent. During
the year ended August 31, 1993, the Series incurred fees of approximately
$67,600 for the services of PMFS. As of August 31, 1993, approximately $5,900 of
such fees were due to PMFS. Transfer agent fees and expenses in the Statement of
Operations include certain out-of-pocket expenses paid to non-affiliates.
Note 4. Portfolio Purchases and sales of port folio securities of
Securities the Series, excluding short-term investments, for
the year ended August 31, 1993 were $105,203,852
and $82,834,468, respectively.
The cost basis of investments for federal income tax purposes was
substantially the same as for financial reporting purposes and, accordingly, at
August 31, 1993 net unrealized appreciation of investments for federal income
tax purposes was $21,310,370 (gross unrealized appreciation--$21,691,220; gross
unrealized depreciation--$380,850).
At August 31, 1993, the Series sold 18 financial futures contracts on the
Municipal Bond Index which expire in September 1993 and sold 57 financial
futures contracts on U.S. Treasury Bonds which expire in December 1993. The
value at sale of such contracts was $8,573,156. The value of such contracts on
August 31, 1993 was $8,623,969, thereby resulting in an unrealized loss of
$50,813. The Series has pledged $1,250,000 principal amount of Los Angeles
Cnty., Cert. of Part., Civic Ctr. Heating & Refrigeration Plant as initial
margin on such contracts.
For federal income tax purposes, the Series has a capital loss carryforward
as of August 31, 1993 of approximately $1,216,000 which expires in 1999. Such
carryforward is after utilization of approximately $1,822,900 to offset the
Series' net taxable gains realized or recognized in the year ended August 31,
1993. Accordingly, no capital gains distributions are expected to be paid to
shareholders until net gains have been realized in excess of such carryforward.
Note 5. Capital The Series offers both Class
A and Class B shares. Class A shares are sold with a
front-end sales charge of up to 4.5%. 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. Both classes of shares have equal rights as to
earnings, assets and voting privileges except that each class bears different
distribution expenses and has exclusive voting rights with respect to its
distribution plan.
The Fund has authorized an unlimited number of shares of beneficial interest
for each class at $.01 par value per share.
Transactions in shares of beneficial interest for the fiscal years ended
August 31, 1993 and 1992 were as follows:
<TABLE>
<CAPTION>
Class A Shares Amount
- ---------------------------- ---------- ------------
<S> <C> <C>
Year ended August 31, 1993:
Shares sold................. 551,246 $ 6,493,924
Shares issued in
reinvestment of
dividends................. 20,712 244,188
Shares reacquired........... (127,066) (1,500,007)
---------- ------------
Net increase in shares
outstanding............... 444,892 $ 5,238,105
---------- ------------
---------- ------------
Year ended August 31, 1992:
Shares sold................. 828,280 $ 9,319,063
Shares issued in
reinvestment of
dividends................. 10,429 117,651
Shares reacquired........... (750,092) (8,458,136)
---------- ------------
Net increase in shares
outstanding............... 88,617 $ 978,578
---------- ------------
---------- ------------
<CAPTION>
Class B
- ----------------------------
<S> <C> <C>
Year ended August 31, 1993:
Shares sold................. 3,646,925 $ 42,777,317
Shares issued in
reinvestment of
dividends................. 480,211 5,634,752
Shares reacquired........... (2,532,383) (29,727,305)
---------- ------------
Net increase in shares
outstanding............... 1,594,753 $ 18,684,764
---------- ------------
---------- ------------
Year ended August 31, 1992:
Shares sold................. 2,634,424 $ 29,684,866
Shares issued in
reinvestment of
dividends................. 464,396 5,221,777
Shares reacquired........... (2,971,552) (33,505,536)
---------- ------------
Net increase in shares
outstanding............... 127,268 $ 1,401,107
---------- ------------
---------- ------------
</TABLE>
B-50
<PAGE>
PRUDENTIAL CALIFORNIA MUNICIPAL FUND
CALIFORNIA SERIES
Financial Highlights
<TABLE>
<CAPTION>
Class A Class B
---------------------------------------- ----------------------------------------------------
January 22,
1990*
Year Ended August 31, Through Year Ended August 31,
------------------------- August 31, ----------------------------------------------------
1993 1992 1991 1990 1993 1992 1991 1990 1989
------- ------ ------ ------------ -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of
period........................ $ 11.48 $11.01 $10.57 $10.77 $ 11.48 $ 11.01 $ 10.57 $ 10.76 $ 10.52
------- ------ ------ ------ -------- -------- -------- -------- --------
Income from investment
operations
Net investment income........... .69 .70 .69 .41 .64 .66 .64 .64 .66
Net realized and unrealized gain
(loss) on investment
transactions.................. .68 .47 .44 (.20) .67 .47 .44 (.19) .24
------- ------ ------ ------ -------- -------- -------- -------- --------
Total from investment
operations.................... 1.37 1.17 1.13 .21 1.31 1.13 1.08 .45 .90
------- ------ ------ ------ -------- -------- -------- -------- --------
Less dividends
Dividends from net investment
income........................ (.69) (.70) (.69) (.41) (.64) (.66) (.64) (.64) (.66)
------- ------ ------ ------ -------- -------- -------- -------- --------
Net asset value, end of
period........................ $ 12.16 $11.48 $11.01 $10.57 $ 12.15 $ 11.48 $ 11.01 $ 10.57 $ 10.76
------- ------ ------ ------ -------- -------- -------- -------- --------
------- ------ ------ ------ -------- -------- -------- -------- --------
TOTAL RETURN#:.................. 12.30% 10.95% 10.98% 1.85% 11.74% 10.52% 10.54% 4.21% 8.79%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(000)......................... $11,116 $5,388 $4,188 $1,774 $207,634 $177,861 $169,190 $174,005 $178,287
Average net assets (000)........ $7,728 $4,322 $2,748 $1,214 $190,944 $172,495 $169,220 $175,990 $166,305
Ratios to average net assets:
Expenses, including
distribution fees........... .77% .82% .88% .90%** 1.17% 1.22% 1.28% 1.24% 1.23%
Expenses, excluding
distribution fees........... .67% .72% .78% .80%** .67% .72% .78% .76% .75%
Net investment income......... 5.82% 6.25% 6.37% 6.28%** 5.44% 5.85% 5.98% 5.95% 6.12%
Portfolio turnover.............. 43% 53% 53% 119% 43% 53% 53% 119% 145%
<FN>
- ---------------
* Commencement of offering of Class A shares.
** Annualized.
# Total return does not consider the effects of sales loads. Total return is calculated assuming a purchase
of shares on the first day and a sale on the last day of each period reported and includes reinvestment of
dividends and distributions. Total returns for periods of less than a full year are not annualized.
</TABLE>
See Notes to Financial Statements.
B-51
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Shareholders and Board of Trustees
Prudential California Municipal Fund, California Series
We have audited the accompanying statement of assets and liabilities of
Prudential California Municipal Fund, California Series, including the portfolio
of investments, as of August 31, 1993, 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, 1993 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
California Municipal Fund, California Series, as of August 31, 1993, the results
of its operations, the changes in its net assets, and the financial highlights
for the respective stated periods, in conformity with generally accepted
accounting principles.
Deloitte & Touche
New York, New York
October 20, 1993
B-52
<PAGE>
PRUDENTIAL CALIFORNIA MUNICIPAL FUND
CALIFORNIA INCOME SERIES
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount Value
(Unaudited) (000) Description (a) (Note 1)
<S> <C> <C> <C>
LONG-TERM INVESTMENTS--96.4%
Alameda Cmnty. Facs. Dist.,
Spec. Tax Rev. No. 1,
NR $ 3,000 7.75%, 9/1/19........... $ 3,124,860
Alameda Impvt. Bond Act
of 1915,
Marina Vlg. Assmt.
Dist. 89-1,
NR 1,000 7.65%, 9/2/10........... 1,031,820
NR 2,000 7.65%, 9/2/11........... 2,063,640
Antioch Area Pub. Facs. Fin.
Agcy., Cmnty. Facs. Dist.,
Aaa 2,000 5.00%, 8/1/18,
F.G.I.C............... 1,891,000
Assoc. of Bay Area Govt's. Fin.
Auth., Cert. of Part.,
Channing House,
A+* 1,500@ 7.125%, 1/1/21, Ser.
A..................... 1,671,255
Brea Pub. Fin. Auth. Rev.,
Tax Alloc. Redev. Proj.,
NR 3,000 8.10%, 3/1/21, Ser. C... 3,345,030
Buena Park Cmnty. Redev. Agcy.,
Cent. Bus. Dist. Proj.,
NR 3,325 7.80%, 9/1/14........... 3,760,641
California St. Brd. of
Pub. Wks. Lease Rev.,
A1 5,895 5.00%, 6/1/23, Ser. A... 5,432,950
Dept. of Corrections,
Aaa 225 5.25%, 12/1/08, Ser. A,
A.M.B.A.C............. 227,572
California St. Dept.
Wtr. Res. Rev.,
Cent. Valley Proj.,
Aa 4,250 5.50%, 12/1/23, Ser.
L..................... 4,263,685
California St. Edl.
Facs. Auth.
Rev., Chapman Coll.,
Baa 600 7.50%, 1/1/18........... 680,382
California St. Hsg. Fin. Agcy.,
Mtge. Rev., M.B.I.A.,
Aaa 1,000 7.20%, 2/1/26, Ser.
91A................... 1,087,270
California St. Poll.
Ctrl. Fin. Auth.,
Res. Recovery Rev.,
Waste Mgmt., Inc.,
A1 $ 2,000 7.15%, 2/1/11, Ser. A... $ 2,246,600
California Statewide
Cmnty. Dev.
Corp., Cert. of Part.,
Sutter Hlth. Obligated
Group,
Aaa 2,850 6.125%, 8/15/22,
A.M.B.A.C............. 3,063,037
Villaview Cmnty. Hosp.,
A+* 1,000 7.00%, 9/1/09........... 1,116,580
California Transit
Finance Corp.,
Los Angeles Cnty.
Trans. Comn.,
A1 2,500 6.25%, 7/1/04, Ser. B... 2,739,875
Carson City Ltd. Oblig. Impvt.
Rev., Assmt. Dist.,
NR 2,500 7.375%, 9/2/22.......... 2,601,250
Contra Costa Cnty.,
Spec. Tax,
Cmnty. Facs. Pleasant Hill,
NR 1,520 8.125%, 8/1/16.......... 1,638,165
Contra Costa Trans. Auth.,
Sales Tax Rev.,
A1 1,000 6.875%, 3/1/07, Ser.
A..................... 1,120,520
Danville Impvt. Bd.,
Tassajara Ranch No. 93-1,
NR 1,000 6.75%, 9/2/11........... 1,014,320
NR 1,000 6.80%, 9/2/12........... 1,012,590
Delano, Cert. of Part.,
Regional Medical Center,
NR 2,990 9.25%, 1/1/22, Ser.
92A................... 3,199,300
Desert Hosp. Dist.,
Cert. of Part.,
AAA* 2,000+ 8.10%, 7/1/20........... 2,472,160
Dry Creek Jt. Sch. Dist.,
Spec. Tax Rev.,
Cmnty. Facs. Dist. No. 1,
BBB* 1,355 7.25%, 9/1/11........... 1,464,511
</TABLE>
B-53 See Notes to Financial Statements.
<PAGE>
PRUDENTIAL CALIFORNIA MUNICIPAL FUND
CALIFORNIA INCOME SERIES
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount Value
(Unaudited) (000) Description (a) (Note 1)
<S> <C> <C> <C>
East Bay Mun. Util. Dist.,
Wtr. Sys. Rev.,
A1 $ 1,620 6.00%, 6/1/12........... $ 1,698,327
East Palo Alto San. Dist.,
Cert. of Part.,
Aux. Facs. Sch. Bldg. Corp.,
NR 500 8.25%, 10/1/15.......... 539,075
Fairfield Impvt. Bond
Act of 1915,
No. Cordella Impvt. Dist.,
NR 830 7.20%, 9/2/09........... 838,649
NR 920 7.20%, 9/2/10........... 929,899
NR 825 8.00%, 9/2/11........... 851,408
NR 1,000 7.375%, 9/2/18.......... 1,018,970
Fairfield Pub. Fin.
Auth. Rev.,
Fairfield Redev. Projs.,
NR 2,500 7.90%, 8/1/21, Ser. A... 2,752,000
Folsom Spec. Tax Dist.
No. 2,
NR 3,130 7.70%, 12/1/19.......... 3,247,187
Fontana Redev. Agcy.,
Downtown Redev. Proj.,
BBB* 2,000 7.00%, 9/1/21........... 2,155,000
Multifam. Hsg. Rev.,
AAA* 2,250 7.15%, 5/1/28, F.H.A.... 2,428,515
No. Fontana Redev. Proj.,
BBB* 2,000 7.65%, 12/1/09.......... 2,316,080
Fontana Spec. Tax Cmnty. Facs.,
Dist. No. 2,
NR 3,595 8.50%, 9/1/17, Ser. B... 4,010,294
Foster City Pub. Fin. Auth.
Rev., Cmnty. Dev. Proj.,
A-* 2,100 6.00%, 9/1/13, Ser. A... 2,161,341
Hemet Pub. Fin. Auth.,
Wtr. Rev.,
NR 1,720 6.50%, 2/1/12, Ser. A... 1,765,683
Industry,
Aaa 1,000 5.875%, 7/1/12,
F.G.I.C............... 1,037,160
Industry Impvt. Bond Act
of 1915,
Assmt. Dist. No. 91-1,
NR 1,200 7.65%, 9/2/21........... 1,239,216
Los Angeles Cnty. Metro. Trans.
Auth., Sales Tax Rev.,
F.G.I.C.,
Aaa $ 3,855 5.00%, 7/1/21, Ser. A... $ 3,633,954
Los Angeles Cnty. Trans.
Comn.,
Sales Tax Rev.,
A1 2,000 7.40%, 7/1/15, Ser. A... 2,287,560
Los Angeles Dept. of
Wtr. & Pwr.,
Waterworks Rev.,
Aa 1,945 6.875%, 4/1/14.......... 2,170,659
Met. Wtr. Dist. of Southern
California, Waterworks Rev.,
Aa 5,500 5.00%, 7/1/20........... 5,189,690
Aa 2,000 5.75%, 7/1/21, Ser. A... 2,120,960
Nevada Cnty., Cert. of Part.,
Baa1 1,000 7.50%, 6/1/21........... 1,099,810
Ontario Impvt. Bond Act
of 1915,
Assmt. Dist. 100,
NR 1,500 8.00%, 9/2/11........... 1,548,330
Orange Cnty., Cert. of Part.,
Pub. Facs. Corp.,
Solid Wst. Mgmt.,
A 3,000 7.875%, 12/1/13......... 3,463,980
Orange Cnty. Cmnty.
Facs. Dist., Special Tax Rev.,
No. 87-4, Foothill Ranch,
NR 3,500 7.375%, 8/15/18, Ser.
A..................... 3,650,745
No. 87-5B, Rancho Santa
Margarita,
NR 1,750 7.50%, 8/15/17.......... 1,862,927
No. 88-1, Aliso Viejo,
NR 805 7.15%, 8/15/06, Ser.
A..................... 852,632
NR 3,500 7.35%, 8/15/18, Ser.
92.................... 3,677,205
Oxnard Fin. Auth., Waste
Wtr. Rev.,
Aaa 500 5.25%, 6/1/20,
F.G.I.C............... 489,400
Perris Sch. Dist., Cert.
of Part., Cap. Projs.,
NR 1,500 7.75%, 3/1/21........... 1,592,070
</TABLE>
B-54 See Notes to Financial Statements.
<PAGE>
PRUDENTIAL CALIFORNIA MUNICIPAL FUND
CALIFORNIA INCOME SERIES
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount Value
(Unaudited) (000) Description (a) (Note 1)
<S> <C> <C> <C>
Pleasanton Impvt. Bond Act
of 1915,
Assmt. Dist. No. 86-9,
NR $ 500 7.60%, 9/2/10, Ser. C... $ 515,995
Puerto Rico Hwy. & Trans.
Auth. Rev.,
Baa1 2,100+ 7.75%, 7/1/10, Ser. Q... 2,556,393
Baa1 5,000 6.625%, 7/1/12, Ser.
V..................... 5,512,950
Baa1 2,175 6.625%, 7/1/18, Ser.
T..................... 2,398,133
Puerto Rico Pub. Bldgs. Auth.,
Gtd. Pub. Ed. & Hlth. Facs.,
Baa1 1,605 Zero Coupon, 7/1/06,
Ser. J................ 812,050
Baa1 2,625+ 6.875%, 7/1/21, Ser.
L..................... 3,102,094
Riverside Cnty. Cert. of Part.,
Air Force Vlg. West,
NR 3,000 8.125%, 6/15/20......... 3,168,300
Riverside Redev. Agcy.,
Multifam. Hsg. Rev.,
First & Mkt. Proj.,
Baa 3,500 7.75%, 9/1/21, Ser. A... 3,695,650
Riverside Sch. Dist. Special Tax,
Cmnty. Facs. Dist. No. 2,
NR 1,000 7.25%, 9/1/18, Ser. A... 1,041,520
Rocklin Stanford Ranch Cmnty.
Facs., Dist. Spec. Tax,
NR 1,000 8.10%, 11/1/15.......... 1,099,380
Sacramento Cnty.,
Sngl. Fam. Mtge. Rev.,
Proj. A,
AAA* 1,080 7.25%, 10/1/23,
F.N.M.A............... 1,182,697
Sacramento Cnty. Spec.
Tax Rev.,
Dist. No. 1, Elliot Ranch,
NR 2,000 8.20%, 8/1/21........... 2,104,540
Dist. No. 1, Laguna
Creek Ranch,
NR 1,000 8.25%, 12/1/20.......... 1,094,060
San Bernardino Cnty.,
Cert. of Part., Cap.
Facs. Proj.,
A 3,500 6.25%, 8/1/19, Ser. B... 3,630,060
San Diego Cnty. Regl. Trans.
Cmnty., Sales Tax Rev.,
Aaa $ 500 5.25%, 4/1/08, Ser. A,
F.G.I.C............... $ 508,140
San Diego Cnty. Wtr.
Auth. Rev.,
Aaa 1,000 8.548%, 4/23/08,
F.G.I.C............... 1,125,000
San Francisco City & Cnty.
Airports Comn., Issue
No. 3,
Aaa 1,500 6.20%, 5/1/20,
M.B.I.A............... 1,605,405
Redev. Agcy., Lease Rev.,
A 1,500 Zero coupon, 7/1/06..... 727,380
A 2,250 Zero coupon, 7/1/07..... 1,018,823
San Joaquin Hills Trans.
Corridor Agcy.,
Toll Road Rev.,
NR 2,000 Zero coupon, 1/1/11..... 496,100
NR 4,000 7.00%, 1/1/30........... 4,197,440
NR 1,000 5.00%, 1/1/33........... 801,900
Santa Cruz Cnty. Pub.
Fin. Auth. Rev.,
Tax Alloc. Sub. Lien.,
NR 2,500 7.625%, 9/1/21, Ser.
B..................... 2,699,900
South San Francisco Redev.
Agcy., Tax Alloc.,
Gateway Redev. Proj.,
NR 2,375 7.60%, 9/1/18........... 2,547,140
Southern California Pub.
Pwr. Auth., Proj. Rev.,
A 3,000 6.75%, 7/1/13........... 3,453,000
A 5,375 6.00%, 7/1/18, Ser.
11.................... 5,467,719
Std. Elem. Sch. Dist.,
Cert. of Part.,
BBB+* 1,000 7.375%, 6/1/11.......... 1,071,940
Temecula Valley Unified
Sch. Cmnty. Facs.,
Spec. Tax Dist. No.
89-1,
NR 1,500** 8.60%, 9/1/17........... 1,155,000
</TABLE>
B-55 See Notes to Financial Statements.
<PAGE>
PRUDENTIAL CALIFORNIA MUNICIPAL FUND
CALIFORNIA INCOME SERIES
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount Value
(Unaudited) (000) Description (a) (Note 1)
<S> <C> <C> <C>
Torrance Redev. Agcy.,
Tax Alloc. Downtown
Redev.,
Baa $ 3,925 7.125%, 9/1/22.......... $ 4,287,906
Tax Alloc. Ind. Redev.
Proj.,
NR 2,500 7.75%, 9/1/13........... 2,686,000
Univ. of California Rev.,
Hsg. Sys., M.B.I.A.,
Aaa 2,000 5.25%, 11/1/12, Ser.
A..................... 1,978,380
Virgin Islands Pub. Fin. Auth.
Rev., Hwy. Trans. Trust Fund,
BBB* 1,000 7.70%, 10/1/04.......... 1,154,290
NR 1,200 7.25%, 10/1/18, Ser.
A..................... 1,360,356
Virgin Islands Territory.,
Hugo Ins. Claims Fund Proj.,
NR 1,255 7.75%, 10/1/06, Ser.
91.................... 1,448,910
Virgin Islands Wtr. & Pwr. Auth.,
Elec. Sys. Rev.,
NR 1,000 7.40%, 7/1/11, Ser. A... 1,103,580
Wtr. Sys. Rev.,
NR 1,015 7.20%, 1/1/02, Ser. B... 1,123,991
West Sacramento Impvt. Bond
Act of 1915, Lighthouse
Marina Assmt. Dist. 90-1,
NR 2,500 8.50%, 9/2/17........... 2,580,500
Westminster Redev. Agcy.,
Tax Allocation Rev.,
Orange County, Proj.
No. 1,
Baa1 2,000 7.30%, 8/1/21, Ser. A... 2,229,800
------------
Total long-term
investments
(cost $179,053,929)..... 193,640,161
------------
SHORT-TERM INVESTMENTS--0.7%
California Poll. Ctrl.
Fin. Auth. Rev.,
Delano Proj., F.R.D.D.,
P1 $ 400 2.45%, 9/1/93, Ser.
89.................... $ 400,000
P1 100 2.45%, 9/1/93, Ser.
91.................... 100,000
Ultrapower Rocklin
Proj., F.R.D.D.,
P1 1,000 2.50%, 9/2/93, Ser.
88A................... 1,000,000
------------
Total short-term
investments
(cost $1,500,000)....... 1,500,000
------------
Total Investments--97.1%
(cost $180,553,929; Note
5).................... 195,140,161
Other assets in excess
of
liabilities--2.9%..... 5,758,632
------------
Net Assets--100%........ $200,898,793
------------
------------
<FN>
- ------------------
(a) The following abbreviations are used in portfolio descriptions:
A.M.B.A.C.--American Municipal Bond Assurance Corporation.
F.G.I.C.--Financial Guaranty Insurance Company.
F.H.A.--Federal Housing Administration.
F.N.M.A.--Federal National Mortgage Association.
F.R.D.D.--Floating Rate (Daily) Demand Note #.
M.B.I.A.--Municipal Bond Insurance Association.
# For purposes of amortized cost valuation, the maturity date of Floating Rate
Demand Notes is considered to be the later of the next date on which the
security can be redeemed at par or the next date on which the rate of
interest is adjusted.
* Standard & Poor's rating.
** Represents issuer in default on interest payment.
+ Prerefunded issues are secured by escrowed cash and/or direct U.S. guaranteed
obligations.
@ Pledged as initial margin on financial futures contracts.
NR--Not rated by Moody's or Standard & Poor's.
The Fund's current Statement of Additional Information contains a description of
Moody's and Standard & Poor's ratings.
</TABLE>
B-56 See Notes to Financial Statements.
<PAGE>
PRUDENTIAL CALIFORNIA MUNICIPAL FUND
CALIFORNIA INCOME SERIES
Statement of Assets and Liabilities
<TABLE>
<CAPTION>
Assets August 31, 1993
---------------
<S> <C>
Investments, at value (cost $180,553,929)............................................... $ 195,140,161
Cash.................................................................................... 4,340
Receivable for Fund shares sold......................................................... 3,684,590
Accrued interest receivable............................................................. 3,439,245
Receivable for investments sold......................................................... 772,500
Deferred expenses and other assets...................................................... 20,188
Due from broker-variation margin........................................................ 4,844
---------------
Total assets........................................................................ 203,065,868
---------------
Liabilities
Payable for investments purchased....................................................... 1,047,115
Payable for Fund shares reacquired...................................................... 791,424
Dividends payable....................................................................... 192,886
Accrued expenses and other liabilities.................................................. 118,799
Due to distributor...................................................................... 15,843
Deferred trustees' fees................................................................. 1,008
---------------
Total liabilities................................................................... 2,167,075
---------------
Net Assets.............................................................................. $ 200,898,793
---------------
---------------
Net assets were comprised of:
Shares of beneficial interest, at par................................................. $ 188,082
Paid-in capital in excess of par...................................................... 185,834,492
---------------
186,022,574
Accumulated net realized gain......................................................... 457,862
Net unrealized appreciation........................................................... 14,418,357
---------------
Net assets, August 31, 1993........................................................... $ 200,898,793
---------------
---------------
Net asset value and redemption price per share
($200,898,793 / 18,808,223 shares of beneficial interest issued and outstanding).... $10.68
Maximum sales charge (4.5% of offering price)......................................... .50
---------------
Maximum offering price to public...................................................... $11.18
---------------
---------------
</TABLE>
See Notes to Financial Statements.
B-57
<PAGE>
PRUDENTIAL CALIFORNIA MUNICIPAL FUND
CALIFORNIA INCOME SERIES
Statement of Operations
<TABLE>
<CAPTION>
Year Ended
August 31,
Net Investment Income 1993
-----------
<S> <C>
Income
Interest............................ $11,147,393
-----------
Expenses
Management fee, net of waiver of
$829,475............................ --
Distribution fee.................... 165,895
Custodian's fees and expenses....... 127,000
Transfer agent's fees and
expenses............................ 54,000
Reports to shareholders............. 20,000
Audit fee........................... 15,000
Legal fees.......................... 14,000
Registration fees................... 12,000
Trustees' fees...................... 8,000
Amortization of organizational
expenses............................ 7,421
Miscellaneous....................... 8,662
-----------
Total expenses.................... 431,978
Less: expense subsidy (Note 4)...... (96,974)
-----------
Net expenses.......................... 335,004
-----------
Net investment income................. 10,812,389
-----------
Realized and Unrealized
Gain (Loss) on Investments
Net realized gain (loss) on:
Investment transactions............. 1,418,409
Financial futures transactions...... (714,290)
-----------
704,119
-----------
Net change in unrealized
appreciation/depreciation on:
Investments......................... 10,492,775
Financial futures................... (167,875)
-----------
10,324,900
-----------
Net gain on investments............... 11,029,019
-----------
Net Increase in Net Assets
Resulting from Operations............. $21,841,408
-----------
-----------
</TABLE>
PRUDENTIAL CALIFORNIA MUNICIPAL FUND
CALIFORNIA INCOME SERIES
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
Year Ended August 31,
Increase (Decrease) ------------------------------
in Net Assets 1992
1993 -------------
-------------
<S> <C> <C>
Operations
Net investment income... $ 10,812,389 $ 7,064,623
Net realized gain on
investment
transactions.......... 704,119 852,232
Net change in unrealized
appreciation on
investments........... 10,324,900 2,847,707
------------- -------------
Net increase in net
assets
resulting from
operations............ 21,841,408 10,764,562
------------- -------------
Dividends and distributions (Note 1)
Dividends to
shareholders
from net investment
income................ (10,812,389) (7,064,623)
------------- -------------
Distributions to
shareholders
from net realized
gains................... (738,313) (276,321)
------------- -------------
Fund share transactions (Note 6)
Net proceeds from shares
subscribed............ 79,117,892 81,307,628
Net asset value of
shares
issued in reinvestment
of
dividends and
distributions......... 4,887,486 3,073,587
Cost of shares
reacquired.............. (34,498,281) (18,945,047)
------------- -------------
Net increase in net
assets from Fund share
transactions.......... 49,507,097 65,436,168
------------- -------------
Total increase............ 59,797,803 68,859,786
Net Assets
Beginning of year......... 141,100,990 72,241,204
------------- -------------
End of year............... $ 200,898,793 $ 141,100,990
------------- -------------
------------- -------------
</TABLE>
See Notes to Financial Statements.
B-58
<PAGE>
PRUDENTIAL CALIFORNIA MUNICIPAL FUND
CALIFORNIA INCOME SERIES
Notes to Financial Statements
Prudential California Municipal 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
three series. The monies of each series are invested in separate, independently
managed portfolios. The California Income Series (the ``Series'') commenced
investment operations on December 3, 1990. The Series is non-diversified and
seeks to achieve its investment objective of obtaining the maximum amount of
income exempt from federal and California state 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 but may also invest in lower-quality tax-exempt securities. The ability
of the issuers of the securities held by the Series to meet their obligations
may be affected by economic developments in a specific state, industry or
region.
Note 1. Accounting The following is a summary
Policies of significant accounting
policies followed by the Fund, and the Series, in
preparation of its financial statements.
Security 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 upon amount of debt securities at a
set price for delivery on a future date. Upon entering into a financial futures
contract, the Series is required to pledge to the broker an amount of cash
and/or other assets equal to a certain percentage of the contract amount. This
amount is known as the ``initial margin''. Subsequent payments, known as
``variation margin'', are made or received by the Series each day, depending on
the daily fluctuations in the value of the underlying security. Such variation
margin is recorded for financial statement purposes on a daily basis as
unrealized gain or loss. The Series invests in financial futures contracts
solely for the purpose of hedging its existing portfolio securities or
securities the Series intends to purchase against fluctuations in value caused
by changes in prevailing market interest rates. Should interest rates move
unexpectedly, the Series may not achieve the anticipated benefits of the
financial futures contracts and may realize a loss. The use of futures
transactions involves the risk of imperfect correlation in movements in the
price of futures contracts, interest rates and the underlying hedged assets.
Securities Transactions and Investment Income: Securities transactions are
recorded on the trade date. Realized gains and losses on sales of securites 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.
Federal Income Taxes: For federal income tax purposes, each series in the Fund
is treated as a separate taxpaying entity. It is the intent of the Series to
continue to meet the requirements of the Internal Revenue Code applicable to
regulated investment companies and to distribute all of its net income to
shareholders. For this reason and because substantially all of the Series' gross
income consists of tax-exempt interest, no federal income tax provision is
required.
Dividends and Distributions: The Series declares daily dividends from net
investment income. Payment of dividends are made monthly. Distributions of net
capital gains, if any, are made annually.
Income distributions and capital gain distributions are determined in
accordance with income tax regulations which may differ from generally accepted
accounting principles.
B-59
<PAGE>
Deferred Organization Expenses: The Series incurred $35,818 in organization and
initial registration expenses. Such amount has been deferred and is being
amortized over a period of 60 months ending December 1995.
Note 2. Agreements The Fund has a manage
ment agreement with Prudential Mutual Fund
Management, Inc. (``PMF''). Pursuant to this agreement, PMF has responsibility
for all investment advisory services and supervises the subadviser's performance
of such services. PMF has entered into a subadvisory agreement with The
Prudential Investment Corporation (``PIC''); PIC furnishes investment advisory
services in connection with the management of the Fund. PMF pays for the cost of
the subadviser's services, the compensation of officers of the Fund, occupancy
and certain clerical and bookkeeping costs of the Fund. The Fund bears all other
costs and expenses.
The management fee paid PMF is computed daily and payable monthly, at an
annual rate of .50 of 1% of the average daily net assets of the Series. PMF
voluntarily waived 100% of its management fee during the year ended August 31,
1993. Effective November 1, 1993, PMF will reduce its voluntary waiver to 75% of
its management fee. The amount of such fees waived for the year ended August 31,
1993 amounted to $829,475 ($0.044 per share; .50% of average net assets).
The Fund has a distribution agreement with Prudential Mutual Fund
Distributors, Inc. (``PMFD''). To reimburse PMFD for its expenses incurred in
distributing and servicing the Series' shares, the Fund, pursuant to a plan of
distribution (the ``Plan''), pays PMFD a reimbursement, accrued daily and
payable monthly, at an annual rate of up to .30 of 1% of the Series' average
daily net assets. Such expenses under the Plan were .10 of 1% of the average
daily net assets for the year ended August 31, 1993. PMFD pays various
broker-dealers, including Prudential Securities Incorporated (``PSI'') and Pruco
Securities Corporation (``Prusec''), affiliated broker-dealers, for account
servicing fees and other expenses incurred by such broker-dealers.
The distribution and service related expenses include commission credits for
payment of commissions and account servicing fees to financial advisers and an
allocation for overhead and other distribution-related expenses, the cost of
printing and mailing prospectuses to potential investors and of advertising
incurred in connection with the distribution of shares.
PMFD recovers the distribution expenses and service fees incurred through the
receipt of reimbursement payments from the Series under the Plan and the receipt
of initial sales charges.
PMFD has advised the Series that it has received approximately $2,860,300 in
front-end sales charges resulting from sales of the Series' shares during the
year ended August 31, 1993. From these fees, PMFD paid such sales charges to
dealers (PSI and Prusec) which in turn paid commissions to salespersons and
incurred other distribution costs.
PMFD is a wholly-owned subsidiary of PMF; PSI, PMF and PIC are (indirect)
wholly-owned subsidiaries of The Prudential Insurance Company of America.
Note 3. Other Prudential Mutual Fund
Transactions Services, Inc. (``PMFS''), a
with Affiliates wholly-owned subsidiary of
PMF, serves as the Fund's transfer agent. During
the year ended August 31, 1993, the Series incurred fees of approximately
$44,000 for the services of PMFS. As of August 31, 1993, approximately $4,000 of
such fees were due to PMFS. Transfer agent fees and expenses in the Statement of
Operations include certain out-of-pocket expenses paid to non-affiliates.
Note 4. Expense PMF voluntarily subsidized
Subsidy 75% of all operating
expenses (other than management and distribution
fees) of the Series through February 28, 1993. Effective March 1, 1993, PMF
discontinued subsidizing the Series' expenses. For the year ended August 31,
1993, PMF subsidized $96,974 ($0.005 per share; .06% of average net assets) of
the Series' expenses. The Series is not required to reimburse PMF for such
subsidy.
Note 5. Portfolio Purchases and sales of port
Securities folio securities of the Series,
excluding short-term investments, for the year
ended August 31, 1993 were $103,597,522 and $56,072,379, respectively.
The cost basis of investments for federal income tax purposes was
substantially the same as for financial reporting purposes and accordingly, as
of August 31, 1993 net unrealized appreciation of investments for federal income
tax purposes was $14,586,232 (gross unrealized appreciation--$14,916,232; gross
unrealized depreciation--$330,000).
At August 31, 1993, the Series sold 63 financial futures contracts on the
Municipal Bond Index which
B-60
<PAGE>
expire in September 1993 and sold 40 financial futures contracts on U.S.
Treasury Bonds which expire in December 1993. The aggregate value at sale of
such contracts was $11,130,219. The aggregate value of such contracts on August
31, 1993 was $11,298,094, thereby resulting in an unrealized loss of $167,875.
The Series has pledged $1,500,000 principal amount of Assoc. of Bay Area Govt's.
Fin. Auth., Cert. of Part., Channing House, as initial margin on such contracts.
Note 6. Capital The Fund has authorized an
unlimited number of shares of beneficial interest
at $.01 par value per share.
Transactions in shares of beneficial interest were as follows:
<TABLE>
<S> <C>
Year ended August 31, 1993:
Shares sold.............................. 7,698,093
Shares issued in reinvestment of
dividends and distributions............ 476,213
Shares reacquired........................ (3,368,427)
----------
Net increase in shares outstanding....... 4,805,879
----------
----------
<S> <C>
Year ended August 31, 1992:
Shares sold.............................. 8,200,617
Shares issued in reinvestment of
dividends and distributions............ 310,945
Shares reacquired........................ (1,910,053)
----------
Net increase in shares outstanding....... 6,601,509
----------
----------
</TABLE>
The Board of Trustees of the Fund approved the creation of a second class of
shares of the Series. Each class will be offered at a price equal to the next
determined net asset value per share plus a sales charge which, at the election
of the purchaser, may be imposed (1) at the time of purchase (Class A shares) or
(2) on a contingent deferred basis (Class B shares). The offering of Class B
shares is expected to commence during the first half of the current fiscal year.
Shares issued prior to that date will be designated Class A shares.
B-61
<PAGE>
PRUDENTIAL CALIFORNIA MUNICIPAL FUND
CALIFORNIA INCOME SERIES
Financial Highlights
<TABLE>
<CAPTION>
December 3,
1990*
Year Ended August 31, Through
----------------------- August 31,
1993 1992 1991
-------- -------- ------------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period...................................... $ 10.08 $ 9.76 $ 9.55
-------- -------- ------------
Income from investment operations
Net investment income+.................................................... .67 .69 .51
Net realized and unrealized gain on investment transactions............... .65 .35 .21
-------- -------- ------------
Total from investment operations........................................ 1.32 1.04 .72
-------- -------- ------------
Less distributions
Dividends from net investment income...................................... (.67) (.69) (.51)
Distributions from net realized gains..................................... (.05) (.03) --
-------- -------- ------------
Total distributions..................................................... (.72) (.72) (.51)
-------- -------- ------------
Net asset value, end of period............................................ $ 10.68 $ 10.08 $ 9.76
-------- -------- ------------
-------- -------- ------------
TOTAL RETURN#:............................................................ 13.67% 11.08% 7.97%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)........................................... $200,899 $141,101 $ 72,241
Average net assets (000).................................................. $165,895 $102,227 $ 47,540
Ratios to average net assets+:
Expenses, including distribution fees................................... .20% .10% .0%**
Expenses, excluding distribution fees................................... .10% .04% .0%**
Net investment income................................................... 6.52% 6.91% 7.04%**
Portfolio turnover........................................................ 34% 69% 35%
<FN>
- ---------------
* Commencement of investment operations.
** Annualized.
+ Net of expense subsidy and/or fee waiver.
# Total return does not consider the effects of sales loads. Total return is calculated assuming a purchase of shares
on the first day and a sale on the last day of each period reported and includes reinvestment of dividends and
distributions. Total returns for periods of less than a full year are not annualized.
</TABLE>
See Notes to Financial Statements.
B-62
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Shareholders and Board of Trustees
Prudential California Municipal Fund, California Income Series
We have audited the accompanying statement of assets and liabilities of
Prudential California Municipal Fund, California Income Series, including the
portfolio of investments, as of August 31, 1993, 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
two years in the period then ended and for the period December 3, 1990
(commencement of investment operations) through August 31, 1991. These financial
statements and financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of the securities owned as of
August 31, 1993 by correspondence with the custodian and brokers, where replies
were not received from brokers, we performed other auditing procedures. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Prudential
California Municipal Fund, California Income Series, as of August 31, 1993, the
results of its operations, the changes in its net assets and the financial
highlights for the respective stated periods in conformity with generally
accepted accounting principles.
Deloitte & Touche
New York, New York
October 20, 1993
B-63
<PAGE>
PRUDENTIAL CALIFORNIA MUNICIPAL FUND
CALIFORNIA MONEY MARKET SERIES
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount Value
(Unaudited) (000) Description (a) (Note 1)
<S> <C> <C> <C>
Alameda Rev.,
KQED Inc. Proj.,
F.R.W.D.,
VMIG2 $ 6,300 3.25%, 9/1/93, Ser. 90... $ 6,300,000
California Poll. Ctrl. Fin. Auth. Rev.,
Pacific Gas & Electric, T.E.C.P.,
A1+* 8,000 2.55%, 9/16/93, Ser.
88B.................... 8,000,000
A1* 5,000 2.65%, 9/16/93, Ser.
88E.................... 5,000,000
A1+* 5,000 2.45%, 9/17/93, Ser.
88B.................... 5,000,000
A1+* 5,000 2.50%, 9/22/93, Ser.
88B.................... 5,000,000
So. California Edison, T.E.C.P.,
P1 9,350 2.45%, 9/8/93, Ser.
85D.................... 9,350,000
P1 5,000 2.55%, 10/22/93, Ser.
85C.................... 5,000,000
Ultrapower Rocklin Proj.,
F.R.D.D.,
P1 1,000 2.50%, 9/1/93, Ser.
88A.................... 1,000,000
California St.,
Veterans Mtg., O.T.,
Aa 13,850 2.60%, 10/1/93, Ser.
89AY................... 13,850,000
California St., R.A.W.,
MIG1 15,000 2.20%, 12/23/93, Ser.
93..................... 14,965,568
Chula Vista Ind. Dev. Auth. Rev.,
San Diego Gas & Elec. Co.,
T.E.C.P.,
P1 4,000 2.60%, 9/10/93, Ser.
92C.................... 4,000,000
VMIG1 9,000 2.55%, 9/15/93, Ser.
92D.................... 9,000,000
East Bay Mun. Util.
Dist.,
Wastewater Rev.,
P1 5,350 2.30%, 9/20/93,
T.E.C.P................ 5,350,000
Irvine Impvt. Bd., Dist.
85-7, T.E.C.P.,
VMIG1 4,300 2.30%, 10/1/93, Ser.
86..................... 4,300,000
VMIG1 3,805 2.40%, 10/13/93, Ser.
86..................... 3,805,000
Kings Cnty. Multi-family
Rev. Hsg. Auth.,
Edgewater Isle Proj.,
F.R.W.D.,
VMIG1 $14,970 2.40%, 9/1/93, Ser.
85A.................... $ 14,970,000
Los Angeles Cnty. Trans.
Comm.
Tax Rev., T.E.C.P.,
P1 10,000 2.25%, 9/10/93, Ser.
91A.................... 10,000,000
Los Angeles Cnty.,
T.R.A.N.,
MIG1 5,000 3.00%, 6/30/94, Ser.
93-94.................. 5,001,713
Los Angeles Hsg. Auth.,
Multi-family Rev.,
Lanewood Apts. Proj.,
F.R.W.D.,
VMIG1 6,600 2.40%, 9/1/93, Ser. 85... 6,600,000
Los Angeles Unified Sch.
Dist.,
T.R.A.N.,
MIG1 15,000 3.25%, 7/15/94, Ser.
93-94.................. 15,063,358
Los Angeles Waste Wtr.
Sys. Rev.,
P1 6,900 2.30%, 9/20/93,
T.E.C.P................ 6,900,000
Met. Wtr. Dist. So. Cal.,
VMIG1 9,250 2.60%, 11/30/93.......... 9,250,000
Moorpark Ind. Dev. Auth.
Rev.,
Kavli & Kavlico Corp.,
F.R.W.D.,
VMIG1 6,795 2.65%, 9/2/93, Ser. 85... 6,795,000
Oakland Multi-family Hsg.
Rev.,
Skyline Hills Assoc.,
F.R.W.D.,
MIG1 6,700 2.50%, 9/2/93, Ser.
85A.................... 6,700,000
Ontario Multi-family Hsg.
Rev.,
Park Ctr. Proj.,
F.R.W.D.,
VMIG1 8,400 2.50%, 9/2/93, Ser.
85A.................... 8,400,000
</TABLE>
B-64 See Notes to Financial Statements.
<PAGE>
PRUDENTIAL CALIFORNIA MUNICIPAL FUND
CALIFORNIA MONEY MARKET SERIES
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount Value
(Unaudited) (000) Description (a) (Note 1)
<S> <C> <C> <C>
Orange Cnty. Apt. Dev. Rev.,
Bear Brand Apts. Proj.,
F.R.W.D.,
VMIG1 $ 4,000 2.50%, 9/2/93, Ser.
85Z.................... $ 4,000,000
Irvine Co. Proj., T.E.C.P.,
VMIG1 4,600 2.40%, 9/13/93, Ser.
85V.................... 4,600,000
Lakes Proj., F.R.W.D.,
A1* 4,600 2.40%, 9/2/93, Ser.
91A.................... 4,600,000
Lantern Pines Proj.,
F.R.W.D.,
VMIG1 3,525 2.50%, 9/1/93, Ser.
85C.................... 3,525,000
Robinson Ranch Apts., F.R.W.D.,
VMIG1 8,400 2.50%, 9/2/93, Ser.
85Y.................... 8,400,000
Vintage Woods Apts.,
F.R.W.D.,
VMIG1 8,300 2.45%, 9/2/93, Ser.
84E.................... 8,300,000
Orange Cnty. Local Trans.
Sales Tax Rev.,
P1 11,800 2.40%, 9/16/93,
T.E.C.P................ 11,800,000
Orange Cnty. Unit Priced
Apt. Dev. Rev.,
Irvine Co. Proj., T.E.C.P.,
VMIG1 4,700 2.30%, 10/1/93, Ser.
85I.................... 4,700,000
Palmdale Cmnty. Redev. Agy.,
Manzanita Villas Apt.
Proj., F.R.W.D.,
VMIG1 4,800 2.65%, 9/2/93, Ser.
93A.................... 4,800,000
Sacramento Mun. Utility
Dist., T.E.C.P.,
P1 3,000 2.10%, 9/8/93............ 2,999,418
P1 11,743 2.35%, 9/9/93............ 11,743,000
P1 4,600 2.60%, 9/13/93........... 4,600,000
San Diego Cnty.,
MIG1 15,000 3.25%, 7/29/94,
T.R.A.N................ 15,057,549
San Joaquin Cnty. Trans.
Auth., Sales Tax Rev.,
F.R.W.D.,
P1 8,000 2.45%, 9/1/93, Ser. 93... 8,000,000
San Marcos Ind. Dev. Auth. Rev.,
Village Square Proj., F.R.W.D.,
Aa2 4,200 2.55%, 9/2/93, Ser. 92... 4,200,000
Santa Maria, Cert. of
Part., Town Ctr. & Westside
Pkg. Facs.,
AAA* $ 9,695 10.75%, 6/1/94........... $ 10,490,917
Southern Pub. Pwr. Auth.,
Transmission Proj.
Rev., F.R.W.D.,
VMIG1 3,000 3.55%, 9/2/93, Ser 84A... 3,000,000
Tulare Cnty., T.R.A.N.,
SP1+* 8,000 3.25%, 7/14/94, Ser.
93..................... 8,033,660
Visalia, Cert. of Part.,
Convention Ctr.,
A1+* 3,795 2.45%, 9/1/93,
F.R.W.D................ 3,795,000
------------
Total Investments--100.4%
(amortized cost--
$316,245,183**)........ 316,245,183
Liabilities in excess of
other
assets--(0.4%)......... (1,319,853)
------------
Net Assets--100%......... $314,925,330
------------
------------
<FN>
------------------
(a) The following abbreviations are used in portfolio descriptions:
F.R.D.D.--Floating Rate (Daily) Demand Note #.
F.R.W.D.--Floating Rate (Weekly) Demand Note #.
O.T.--Optional Tender.
R.A.W.--Revenue Anticipation Warrants.
T.E.C.P.--Tax-Exempt Commercial Paper.
T.R.A.N.--Tax & Revenue Anticipation Note.
# For purposes of amortized cost valuation, the maturity date of Floating Rate
Demand Notes is considered to be the later of the next date on which the
security can be redeemed at par or the next date on which the rate of
interest is adjusted.
* Standard & Poor's rating.
** The cost of securities for federal income tax purposes is substantially the
same as for financial reporting purposes.
The Fund's current Statement of Additional Information contains
a description of Moody's and Standard & Poor's ratings.
</TABLE>
B-65 See Notes to Financial Statements.
<PAGE>
PRUDENTIAL CALIFORNIA MUNICIPAL FUND
CALIFORNIA MONEY MARKET SERIES
Statement of Assets and Liabilities
<TABLE>
<CAPTION>
August 31,
Assets 1993
---------------
<S> <C>
Investments, at amortized cost which approximates market value.......................... $ 316,245,183
Receivable for Fund shares sold......................................................... 4,452,319
Accrued interest receivable............................................................. 1,578,817
Deferred expenses and other assets...................................................... 12,208
---------------
Total assets........................................................................ 322,288,527
---------------
Liabilities
Payable for Fund shares reacquired...................................................... 6,855,658
Accrued expenses and other liabilities.................................................. 220,943
Due to Manager.......................................................................... 139,229
Dividends payable....................................................................... 94,419
Due to Distributor...................................................................... 51,940
Deferred trustee's fees................................................................. 1,008
---------------
Total liabilities................................................................... 7,363,197
---------------
Net Assets.............................................................................. $ 314,925,330
---------------
---------------
Net assets were comprised of:
Shares of benefical interest, at $.01 par value....................................... $ 3,149,253
Paid-in capital in excess of par...................................................... 311,776,077
---------------
Net assets, August 31, 1993........................................................... $ 314,925,330
---------------
---------------
Net asset value, offering price and redemption price per share ($314,925,330 /
314,925,330 shares of
beneficial interest issued and outstanding; unlimited number of shares authorized).... $1.00
---------------
---------------
</TABLE>
See Notes to Financial Statements.
B-66
<PAGE>
PRUDENTIAL CALIFORNIA MUNICIPAL FUND
CALIFORNIA MONEY MARKET SERIES
Statement of Operations
<TABLE>
<CAPTION>
Year Ended
August 31,
Net Investment Income 1993
----------
<S> <C>
Income
Interest........................... $8,277,332
----------
Expenses
Management fee..................... 1,597,318
Distribution fee................... 399,329
Custodian's fees and expenses...... 180,000
Transfer agent's fees and
expenses........................... 125,000
Reports to shareholders............ 37,000
Registration fees.................. 28,000
Audit fee.......................... 15,000
Legal fees......................... 14,000
Amortization of organization
expenses........................... 9,200
Insurance expense.................. 9,000
Trustees' fees..................... 8,000
Miscellaneous...................... 3,276
----------
Total expenses................... 2,425,123
----------
Net investment income................ 5,852,209
Realized Gain on Investments
Net realized gain on investment
transactions....................... 10,297
----------
Net Increase in Net Assets
Resulting from Operations............ $5,862,506
----------
----------
</TABLE>
PRUDENTIAL CALIFORNIA MUNICIPAL FUND
CALIFORNIA MONEY MARKET SERIES
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
Year Ended August 31,
Increase (Decrease) ----------------------------------
in Net Assets 1993 1992
--------------- ---------------
<S> <C> <C>
Operations
Net investment
income.............. $ 5,852,209 $ 9,833,850
Net realized gain on
investment
transactions........ 10,297 78,066
--------------- ---------------
Net increase in net
assets
resulting from
operations........ 5,862,506 9,911,916
--------------- ---------------
Dividends and
distributions
to shareholders
(Note 1)............ (5,862,506) (9,911,916)
--------------- ---------------
Fund share
transactions
(at $1 per share)
Net proceeds from
shares
subscribed........ 1,219,363,584 1,118,664,867
Net asset value of
shares
issued in
reinvestment
of dividends and
distributions..... 5,672,116 9,673,969
Cost of shares
reacquired.......... (1,226,000,814) (1,154,074,383)
--------------- ---------------
Net decrease in net
assets from Fund
share
transactions...... (965,114) (25,735,547)
--------------- ---------------
Total decrease........ (965,114) (25,735,547)
Net Assets
Beginning of year..... 315,890,444 341,625,991
--------------- ---------------
End of year........... $ 314,925,330 $ 315,890,444
--------------- ---------------
--------------- ---------------
</TABLE>
See Notes to Financial Statements.
B-67
<PAGE>
PRUDENTIAL CALIFORNIA MUNICIPAL FUND
CALIFORNIA MONEY MARKET SERIES
Notes to Financial Statements
Prudential California Municipal 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
three series. The monies of each series are invested in separate, independently
managed portfolios. The California Money Market Series (the ``Series'')
commenced investment operations on March 3, 1989. The Series is diversified and
seeks to achieve its investment objective of obtaining the maximum amount of
income exempt from California state and federal income taxes with the minimum
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 a nationally recognized statistical rating organization
or, if not rated, are of comparable quality. The ability of the issuers of the
securities held by the Series to meet their obligations may be affected by
economic developments in a specific state, industry or region.
Note 1. Accounting The following is a summary
Policies of significant accounting
policies followed by the Fund, and the Series, in
the preparation of its financial statements.
Securities Valuations: Portfolio securities of the Series are valued at
amortized cost, which approximates market value. The amortized cost method of
valuation involves valuing a security at its cost on the date of purchase and
thereafter assuming a constant amortization to maturity of any discount or
premium.
All securities are valued as of 4:30 P.M., New York time.
Securities Transactions and Investment Income: Securities transactions are
recorded on the trade date. Realized gains and losses on sales of investments
are calculated on the identified cost basis. Interest income is recorded on the
accrual basis.
Federal Income Taxes: For federal income tax purposes, each series in the Fund
is treated as a separate taxpaying entity. It is the intent of the Series to
continue to meet the requirements of the Internal Revenue Code applicable to
regulated investment companies and to continue to distribute all of its net
income to shareholders. For this reason and because substantially all of the
Series' gross income consists of tax-exempt interest, no federal income tax
provision is required.
Dividends: The Series declares daily dividends from net investment income.
Payment of dividends is made monthly.
Deferred Organization Expenses: The Series incurred $46,000 in organization and
initial registration expenses. Such amount has been deferred and is being
amortized over a period of 60 months ending March 1994.
Note 2. Agreements The Fund has a manage
ment agreement with Prudential Mutual Fund
Management, Inc. (``PMF''). Pursuant to this agreement PMF has responsibility
for all investment advisory services and supervises the subadviser's performance
of such services. PMF has entered into a subadvisory agreement with The
Prudential Investment Corporation (``PIC''); PIC furnishes investment advisory
services in connection with the management of the Fund. PMF pays for the cost of
the subadviser's services, the compensation of officers of the Fund, occupancy
and certain clerical and bookkeeping costs of the Fund. The Fund bears all other
costs and expenses.
The management fee paid PMF is computed daily and payable monthly, at the
annual rate of .50 of 1% of the average daily net assets of the Series.
The Fund has a distribution agreement with Prudential Mutual Fund
Distributors, Inc. (``PMFD''). To reimburse PMFD for its expenses incurred
pursuant to a plan of distribution, the Fund pays PMFD a reimbursement, accrued
daily and payable monthly, at an annual rate of .125 of 1% of the Series'
average daily net assets. PMFD pays various broker-dealers, including Prudential
Securities Incorporated (``PSI'') and Pruco Securities Corporation, affiliated
broker-dealers, for account servicing fees and other expenses incurred by such
broker-dealers.
B-68
<PAGE>
PMFD is a wholly-owned subsidiary of PMF; PSI, PIC, and PMF are (indirect)
wholly-owned subsidiaries of The Prudential Insurance Company of America.
Note 3. Other Prudential Mutual Fund
Transactions Services, Inc. (``PMFS''), a
with Affiliates wholly-owned subsidiary of
PMF, serves as the Fund's transfer agent. During
the year ended August 31, 1993, the Series incurred fees of approximately
$112,900 for the services of PMFS. As of August 31, 1993, approximately $9,700
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-69
<PAGE>
PRUDENTIAL CALIFORNIA MUNICIPAL FUND
CALIFORNIA MONEY MARKET SERIES
Financial Highlights
<TABLE>
<CAPTION>
March 3,
1989*
through
Year Ended August 31, August
-------------------------------------------- 31,
PER SHARE OPERATING PERFORMANCE: 1993 1992 1991 1990 1989
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period......................... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
Net investment income and net realized gains................. .02 .03 .04+ .05+ .03+
Dividends and distributions.................................. (.02) (.03) (.04) (.05) (.03)
-------- -------- -------- -------- --------
Net asset value, end of period............................... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
TOTAL RETURN#: 1.86% 2.91% 4.48% 5.59% 3.21%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000).............................. $314,925 $315,890 $341,625 $388,739 $244,180
Average net assets (000)..................................... $319,464 $339,941 $375,655 $330,581 $174,500
Ratios to average net assets:
Expenses, including distribution fee....................... .76% .76% .63%+ .38%+ .19%**+
Expenses, excluding distribution fee....................... .63% .63% .51%+ .25%+ .08%**+
Net investment income...................................... 1.83% 2.89% 4.37%+ 5.40%+ 5.57%**+
<FN>
- ---------------
* Commencement of investment operations.
** Annualized.
+ Net of management fee waiver and/or expense subsidy.
# Total return includes reinvestment of dividends and distributions. Total returns for periods of less
than a full year are not annualized.
</TABLE>
See Notes to Financial Statements.
B-70
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Shareholders and Board of Trustees
Prudential California Municipal Fund, California Money Market Series
We have audited the accompanying statement of assets and liabilities of
Prudential California Municipal Fund, California Money Market Series, including
the portfolio of investments, as of August 31, 1993, the related statements of
operations for the year then ended and of changes in net assets for each of the
two years in the period then ended, and the financial highlights for each of the
four years in the period then ended and for the period March 3, 1989
(commencement of investment operations) through August 31, 1989. 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, 1993 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
California Municipal Fund, California Money Market Series, as of August 31,
1993, the results of its operations, the changes in its net assets, and the
financial highlights for the respective stated periods in conformity with
generally accepted accounting principles.
Deloitte & Touche
New York, New York
October 20, 1993
B-71
<PAGE>
PRUDENTIAL CALIFORNIA MUNICIPAL FUND Portfolio of Investments
CALIFORNIA SERIES February 28, 1994 (Unaudited)
<TABLE>
<CAPTION>
Principal
Moody's Amount Value
Rating (000) Description (a) (Note 1)
<S> <C> <C> <C>
LONG-TERM INVESTMENTS--97.5%
Alameda Impvt. Bond Act
of 1915, Marina Vlg.
Assmt. Dist. 89-1,
NR $ 1,700 7.55%, 9/2/06........... $ 1,752,411
NR 1,120 7.65%, 9/2/09........... 1,154,306
Arcadia Unified Sch.
Dist., Ser. A, M.B.I.A.,
Aaa 1,765 Zero coupon, 9/1/10..... 685,685
Aaa 1,370 Zero coupon, 9/1/14..... 407,548
Aaa 2,555 Zero coupon, 9/1/15..... 717,929
Aaa 1,225 Zero coupon, 9/1/16..... 324,478
Aaa 1,790 Zero coupon, 9/1/17..... 446,963
Azusa Pub. Fin. Auth.
Rev.,
Aaa 3,800 5.00%, 7/1/23, Ser. A,
F.G.I.C............... 3,427,714
Bakersfield Pub. Fac.
Corp., Cert. of Part.,
Wst. Wtr. Treat.
Plant, No. 3,
A1 2,750 8.00%, 1/1/10........... 3,081,072
Benicia Unified Sch.
Dist., Gen. Oblig.,
Aaa 1,000 6.85%, 8/1/16, Ser. A... 1,115,480
Berkeley Hosp. Rev.,
Alta Bates Hosp.
Corp.,
Baa1 1,785(D) 7.65%, 12/1/15.......... 2,073,849
Brea Pub. Fin. Auth.
Rev.,
Tax Alloc. Redev. Proj.,
NR 5,000 8.10%, 3/1/21, Ser. C... 5,684,300
Buena Park Cmnty. Redev.
Agcy., Central Bus.
Dist. Proj.,
BBB+* 2,500 7.10%, 9/1/14........... 2,648,025
California St. Brd. of
Pub. Wks., Lease Rev.,
Dept. of Corrections,
Aaa 775 5.25%, 12/1/08, Ser. A,
A.M.B.A.C............. 772,566
Univ. of California at
San Diego, High
Technology Facs.,
A1 1,570 7.375%, 4/1/06, Ser. A.. 1,747,881
Univ. of California at
Santa Barbara, High
Technology Facs.,
A1 2,500(D) 8.125%, 2/1/08, Ser. A.. 2,889,075
California St. Hlth.
Facs. Fin. Auth. Rev.,
Brookside Hosp.,
A+* $ 1,500 8.10%, 11/1/17, Ser. A.. $ 1,674,900
Catholic Hlth. Facs.,
Aaa 2,000 5.00%, 7/1/14,
A.M.B.A.C............. 1,841,560
Aaa 6,630 5.00%, 7/1/21,
A.M.B.A.C............. 5,998,890
Episcopal Homes
Foundation,
A+* 2,500 7.70%, 7/1/18, Ser. A... 2,748,075
Eskaton Properties,
A+* 4,500(D)/@ 7.50%, 5/1/20........... 5,259,465
Scripps Memorial Hosp.,
Aaa 1,705 4.50%, 10/1/18, Ser. A,
M.B.I.A............... 1,442,021
Sisters of Providence
Hosp.,
A1 1,500 7.50%, 10/1/10.......... 1,701,825
Sutter Hlth. Sys.,
A1 1,500 9.125%, 1/1/06.......... 1,592,760
NR 750(D) 8.00%, 1/1/16, Ser. B... 842,513
California St. Hsg. Fin.
Agcy. Rev.,
Sngl. Fam. Mtge.,
Aa 14,100 Zero coupon, 2/1/15,
Ser. A................ 1,877,979
California St. Poll.
Ctrl. Fin. Auth. Rev.,
Pacific Gas & Elec. Co.,
A* 1,650 6.625%, 6/1/09, Ser. A.. 1,765,797
A1 3,250 8.20%, 12/1/18, Ser. A.. 3,641,202
California Statewide
Cmnty. Dev. Corp.,
J. Paul Getty Museum,
Aaa 2,330 5.00%, 10/1/11.......... 2,199,613
Aaa 1,255 5.00%, 10/1/14.......... 1,187,042
Aaa 1,500 5.00%, 10/1/15.......... 1,414,830
Cert. of Part.,
Aaa 4,500 5.00%, 10/1/23.......... 4,142,070
Clearlake Redev. Agcy.,
Highlands Park Cmnty.
Dev. Proj., Tax Alloc.
Rev.,
BBB* 2,000 6.20%, 10/1/22.......... 1,999,840
Contra Costa Cnty.,
Spec. Tax,
Cmnty. Facs. Pleasant
Hill,
NR 1,300 8.125%, 8/1/16.......... 1,418,768
Contra Costa Wtr. Dist.
Rev.,
A 2,000(D)/@ 7.25%, 10/1/10, Ser. A. 2,330,440
</TABLE>
B-72 See Notes to Financial Statements.
<PAGE>
PRUDENTIAL CALIFORNIA MUNICIPAL FUND
CALIFORNIA SERIES
<TABLE>
<CAPTION>
Principal
Moody's Amount Value
Rating (000) Description (a) (Note 1)
<S> <C> <C> <C>
Culver City Redev. Fin.
Auth.,
Tax Alloc. Rev.,
Aaa $ 4,500 4.60%, 11/1/20,
A.M.B.A.C............. $ 3,841,515
Desert Hosp. Dist.,
Cert. of Part.,
AAA* 5,000(D) 8.10%, 7/1/20........... 6,027,600
East Palo Alto San. Dist.,
Cert. of Part.,
Aux. Facs. Sch. Bldg.
Corp.,
NR 1,295 8.25%, 10/1/15.......... 1,394,197
Fairfield Pub. Fin.
Auth. Rev.,
Fairfield Redev.
Projs.,
NR 4,200(D) 7.90%, 8/1/21, Ser. A... 5,072,844
Fontana Cmnty. Facs.,
Dist. No. 2, Spec. Tax
Rev.,
NR 3,000 8.50%, 9/1/17, Ser. B... 3,349,680
Fresno Swr. Rev.,
A.M.B.A.C.,
Aaa 1,000 6.25%, 9/1/14........... 1,091,520
Aaa 1,500 5.25%, 9/1/19........... 1,421,355
Aaa 795 4.50%, 9/1/23........... 664,429
Industry City, Gen.
Oblig.,
Helene Curtis Proj.,
Aaa 1,660(D) 8.00%, 7/1/11,
F.G.I.C............... 1,966,453
Aaa 1,795(D) 8.00%, 7/1/12,
F.G.I.C............... 2,123,144
Urban Dev. Agcy.,
NR 970 10.40%, 5/1/15.......... 1,068,697
Long Beach Redev. Agcy.,
Dist. 3, Spec. Tax
Rev.,
NR 3,000 6.375%, 9/1/23.......... 2,875,230
Los Angeles Cmnty. Redev. Agcy.,
Bunker Hill Proj., Sub. Tax. Alloc.,
Aaa 750(D) 6.00%, 12/1/09, Ser. C,
M.B.I.A............... 822,653
Los Angeles Cnty., Cert. of Part.,
Civic Ctr. Heating &
Refrigeration Plant,
A1 2,000(D)/(D)(D) 8.00%, 6/1/10..... 2,318,980
Correctional Facs.
Proj.,
Aaa 3,770 Zero coupon, 9/1/10,
M.B.I.A............... 1,429,810
Solheim Lutheran Nursing
Home Proj.,
A+* 2,000 8.125%, 11/1/17......... 2,237,720
Los Angeles Cnty., Hsg.
Auth.,
Multifam. Mtge. Rev.,
Mayflower Gardens
Proj.,
NR $ 2,100(D) 8.875%, 12/20/10, Ser.
K, G.N.M.A............ $ 2,673,678
Los Angeles Cnty., Pub.
Wks. Fin. Auth., Lease
Rev.,
Mult. Cap. Fac. Proj.,
Aaa 6,000 4.75%, 12/1/13,
M.B.I.A............... 5,407,800
Los Angeles Conv. &
Exhib.
Ctr. Auth., Cert. of
Part.,
Aaa 1,250(D) 9.00%, 12/1/10.......... 1,683,925
Met. Wtr. Dist. of
Southern
California, Waterworks
Rev.,
Aa 4,000 5.75%, 7/1/21, Ser. A... 4,145,960
Mt. Diablo Hosp. Dist.
Rev.,
Aaa 1,250(D) 8.00%, 12/1/11, Ser. A,
A.M.B.A.C............. 1,514,350
Petaluma, Cert. of
Part.,
Petaluma Cmnty. Ctr.
Proj.,
A 1,380(D) 8.10%, 6/15/12.......... 1,487,557
Pleasanton Impvt. Bond Act of 1915,
Assmt. Dist. No. 86-9,
NR 1,495 7.80%, 9/2/13, Ser. B... 1,540,508
Port of Oakland Rev.,
M.B.I.A.,
Aaa 1,000 6.50%, 11/1/16, Ser.
E,.................... 1,082,350
Aaa 2,500 6.40%, 11/1/22, Ser.
A,.................... 2,662,950
Puerto Rico Hwy. &
Trans.
Auth. Rev.,
Baa1 5,000 6.625%, 7/1/12, Ser.
V..................... 5,511,350
Baa1 1,250 6.625%, 7/1/18, Ser.
T..................... 1,378,725
Rancho Wtr. Dist. Fin.
Auth., Rfdg. Rev.,
Aaa 2,250 4.75%, 8/15/21,
A.M.B.A.C............. 1,963,485
Riverside Wtr. Rev.,
Tyler Mall Cmnty.
Facs.,
Aa 1,660 Zero coupon, 10/1/07.... 787,753
Aa 2,920 6.00%, 10/1/15.......... 2,994,840
Roseville Cert. of
Part.,
Pub. Facs. Proj.,
Aaa 1,325 4.75%, 8/1/20,
M.B.I.A............... 1,159,017
Roseville City Sch.
Dist.,
Aaa 1,230 Zero coupon, 8/1/10,
Ser. A, F.G.I.C....... 480,131
</TABLE>
B-73 See Notes to Financial Statements.
<PAGE>
PRUDENTIAL CALIFORNIA MUNICIPAL FUND
CALIFORNIA SERIES
<TABLE>
<CAPTION>
Principal
Moody's Amount Value
Rating (000) Description (a) (Note 1)
<S> <C> <C> <C>
Sacramento Cnty. San.
Dist.
Fin. Auth. Rev.,
Aa $ 2,500 4.75%, 12/1/23.......... $ 2,174,200
Sacramento Mun. Util.
Dist. Elec. Rev.,
Aaa 3,650 5.75%, 11/15/09, Ser. C,
M.B.I.A............... 3,749,535
Aaa 2,750 4.75%, 9/1/21,
M.B.I.A............... 2,399,623
San Buenaventura, Wtr. Rev. Rfdg.,
Aaa 5,000 4.75%, 10/1/20,
A.M.B.A.C............. 4,371,800
San Diego Cnty. Regl.
Trans.
Cmnty., Sales Tax
Rev.,
Aaa 2,000 5.25%, 4/1/08, Ser. A,
F.G.I.C............... 1,993,980
A1 1,750 6.00%, 4/1/08, Ser. A... 1,827,105
San Francisco City &
Cnty.,
Airports Comn., Issue
No. 3,
Aaa 4,500 6.20%, 5/1/20,
M.B.I.A............... 4,631,130
Pub. Utils. Comn. Wtr.
Rev.,
Aa 2,000 8.00%, 11/1/11.......... 2,283,600
Redev. Agcy., Lease
Rev.,
A 2,000 Zero coupon, 7/1/09..... 793,180
San Francisco Port Comm. Rev.,
A1 1,000 9.80%, 7/1/99, Ser. C... 1,047,680
San Jose Redev. Proj.,
Aaa 2,100 6.00%, 8/1/15,
M.B.I.A............... 2,231,082
San Mateo Cnty. Jt.
Pwrs.
Fin. Auth., Lease
Rev.,
Aaa 3,475@ 6.50%, 7/1/16,
M.B.I.A............... 3,937,870
Aaa 1,700 5.125%, 7/1/18,
M.B.I.A............... 1,593,240
Santa Cruz Cnty. Pub.
Fin. Auth. Rev.,
Tax Alloc. Sub. Ln.,
AAA* 2,350(D) 7.625%, 9/1/21, Ser.
B..................... 2,746,938
Sonoma Cnty., Cert. of
Part.,
Correctional Facs.
Proj.,
NR 4,000(D) 8.125%, 6/1/12.......... 4,592,640
Southern California Pub.
Pwr.
Auth. Rev., Pwr.
Proj.,
A 2,000 6.75%, 7/1/12........... 2,276,260
Southern California Pub.
Pwr.
Auth. Rev., Pwr.
Proj.,
Transmission Proj.,
Aaa $ 7,080 Zero coupon, 7/1/12,
F.G.I.C............... $ 2,467,592
Southern California Rapid
Transit Dist., Cert. of Part.,
Worker's Compensation Fund,
Aaa 2,095 6.00%, 7/1/10,
M.B.I.A............... 2,196,230
Sulphur Springs Union Sch. Dist.,
Aaa 2,000 Zero coupon, 9/1/09,
Ser. A, M.B.I.A....... 836,540
Torrance Redev. Agcy.,
Tax. Alloc., Downtown Redev.,
Baa 1,580 7.125%, 9/1/21.......... 1,688,467
Univ. of California
Rev.,
Mult. Purpose Proj.,
M.B.I.A.,
Aaa 9,840 4.75%, 9/1/21........... 8,586,286
Pkg. Sys.,
A 2,000(D) 7.75%, 11/1/14, Ser.
C..................... 2,235,680
Virgin Islands Pub. Fin. Auth. Rev.,
NR 600 7.25%, 10/1/18, Ser.
A..................... 674,652
Virgin Islands Terr.,
Hugo Ins. Claims Fund Prog.,
NR 925 7.75%, 10/1/06, Ser.
91.................... 1,065,554
Virgin Islands Wtr. & Pwr. Auth.,
Elec. Sys. Rev.,
NR 500 7.40%, 7/1/11, Ser. A... 569,605
Wtr. Sys. Rev.,
NR 250 7.20%, 1/1/02, Ser. B... 273,255
NR 830 7.60%, 1/1/12, Ser. B... 927,351
Whittier Pub. Fin. Auth.
Rev.,
Whittier Blvd. Redev.
Proj.,
NR 825 7.50%, 9/1/14, Ser. A... 888,640
------------
Total long-term
investments
(cost $200,754,141)... 213,248,793
------------
SHORT-TERM INVESTMENTS--1.3%
California St. Poll. Ctrl. Fin. Auth.
Rev.,
Burney Forest Proj.,
F.R.D.D.,
P1 1,400 2.20%, 3/1/94, Ser.
88A................... 1,400,000
</TABLE>
B-74 See Notes to Financial Statements.
<PAGE>
PRUDENTIAL CALIFORNIA MUNICIPAL FUND
CALIFORNIA SERIES
<TABLE>
<CAPTION>
Principal
Moody's Amount Value
Rating (000) Description (a) (Note 1)
<S> <C> <C> <C>
Delano Proj., F.R.D.D.,
P1 $ 1,500 2.30%, 3/1/94, Ser.
91.................... $ 1,500,000
------------
Total short-term
investments
(cost $2,900,000)..... 2,900,000
------------
Total Investments--98.8%
(cost $203,654,141;
Note 4).............. 216,148,793
Other assets in excess
of
liabilities--1.2%..... 2,656,434
------------
Net Assets--100%........ $218,805,227
------------
------------
</TABLE>
- ------------------
(a) The following abbreviations are used in portfolio descriptions:
A.M.B.A.C.--American Municipal Bond Assurance Corporation.
F.G.I.C.--Financial Guaranty Insurance Company.
F.R.D.D.--Floating Rate Daily Demand#.
G.N.M.A.--Government National Mortgage Association.
M.B.I.A.--Municipal Bond Insurance Association.
# For purposes of amortized cost valuation, the maturity date of these
instruments 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.
* Ratings of Standard & Poor's Corporation.
(D) Prerefunded issues are secured by escrowed cash and/or direct U.S.
guaranteed obligations.
(D)(D) $1,250,000 of principal amount pledged as initial margin on financial
futures contracts.
@ Entire principal amount pledged as initial margin on financial futures
contracts.
NR--Not rated by Moody's or Standard & Poor's.
The Fund's current Statement of Additional Information contains a description of
Moody's and Standard & Poor's ratings.
B-75 See Notes to Financial Statements.
<PAGE>
PRUDENTIAL CALIFORNIA MUNICIPAL FUND
CALIFORNIA SERIES
Statement of Assets and Liabilities
(Unaudited)
<TABLE>
<CAPTION>
February 28,
Assets 1994
------------
<S> <C>
Investments, at value (cost $203,654,141)................................................. $216,148,793
Cash...................................................................................... 12,968
Interest receivable....................................................................... 3,582,959
Receivable for Fund shares sold........................................................... 399,237
Deferred expenses and other assets........................................................ 3,999
------------
Total assets.......................................................................... 220,147,956
------------
Liabilities
Payable for Fund shares reacquired........................................................ 940,105
Accrued expenses.......................................................................... 119,949
Management fee payable.................................................................... 85,301
Distribution fee payable.................................................................. 81,620
Due to broker-variation margin payable.................................................... 74,954
Dividends payable......................................................................... 39,108
Deferred trustees' fees................................................................... 1,692
------------
Total liabilities..................................................................... 1,342,729
------------
Net Assets................................................................................ $218,805,227
------------
------------
Net assets were comprised of:
Shares of beneficial interest, at par................................................... $ 185,008
Paid-in capital in excess of par........................................................ 204,490,963
------------
204,675,971
Accumulated net realized gains on investments........................................... 1,106,104
Net unrealized appreciation on investments.............................................. 13,023,152
------------
Net assets, February 28, 1994........................................................... $218,805,227
------------
------------
Class A:
Net asset value and redemption price per share
($11,808,573 / 997,448 shares of beneficial interest issued and outstanding).......... $11.84
Maximum sales charge (4.5% of offering price)........................................... .56
------------
Maximum offering price to public........................................................ $12.40
------------
------------
Class B:
Net asset value, offering price and redemption price per share
($206,996,654 / 17,503,392 shares of beneficial interest issued and outstanding)...... $11.83
------------
------------
</TABLE>
See Notes to Financial Statements.
B-76
<PAGE>
PRUDENTIAL CALIFORNIA MUNICIPAL FUND
CALIFORNIA SERIES
Statement of Operations
(Unaudited)
<TABLE>
<CAPTION>
Six Months
Ended
February
28,
Net Investment Income 1994
-----------
<S> <C>
Income
Interest............................ $ 6,845,480
-----------
Expenses
Management fee...................... 551,571
Distribution fee--Class A........... 5,856
Distribution fee--Class B........... 522,289
Custodian's fees and expenses....... 55,000
Transfer agent's fees and
expenses............................ 49,000
Registration fees................... 12,500
Audit fee........................... 7,500
Legal fee........................... 7,000
Reports to shareholders............. 5,000
Trustees' fees...................... 4,000
Miscellaneous....................... 657
-----------
Total expenses.................... 1,220,373
-----------
Net investment income................. 5,625,107
-----------
Realized and Unrealized
Gain (Loss) on Investments
Net realized gain (loss) on:
Investment transactions............. 4,517,412
Financial futures contract
transactions...................... (136,720)
-----------
4,380,692
-----------
Net change in unrealized appreciation/
depreciation on:
Investments......................... (8,815,718)
Financial futures contracts......... 579,313
-----------
(8,236,405)
-----------
Net loss on investments............... (3,855,713)
-----------
Net Increase in Net Assets
Resulting from Operations............. $ 1,769,394
-----------
-----------
</TABLE>
PRUDENTIAL CALIFORNIA MUNICIPAL FUND
CALIFORNIA SERIES
Statement of Changes in Net Assets
(Unaudited)
<TABLE>
<CAPTION>
Six Months
Ended Year Ended
Increase (Decrease) February 28, August 31,
in Net Assets 1994 1993
------------ ------------
<S> <C> <C>
Operations
Net investment
income............... $ 5,625,107 $ 10,834,798
Net realized gain on
investment
transactions......... 4,380,692 1,873,737
Net change in
unrealized
appreciation/
depreciation
on investments....... (8,236,405) 9,704,370
------------ ------------
Net increase in net
assets resulting from
operations........... 1,769,394 22,412,905
------------ ------------
Dividends and distributions (Note 1)
Dividends to
shareholders from net
investment income
Class A.............. (320,950) (449,523)
Class B.............. (5,304,157) (10,385,275)
------------ ------------
(5,625,107) (10,834,798)
------------ ------------
Distributions to
shareholders from net
realized gains
Class A.............. (111,145) --
Class B.............. (1,998,700) --
------------ ------------
(2,109,845) --
------------ ------------
Fund share transactions
(Note 5)
Net proceeds from
shares subscribed.... 18,027,824 49,271,241
Net asset value of
shares issued in
reinvestment of
dividends and
distributions........ 4,522,738 5,878,940
Cost of shares
reacquired........... (16,529,446) (31,227,312)
------------ ------------
Net increase in net
assets from Fund
share transactions... 6,021,116 23,922,869
------------ ------------
Total increase........... 55,558 35,500,976
Net Assets
Beginning of period...... 218,749,669 183,248,693
------------ ------------
End of period............ $218,805,227 $218,749,669
------------ ------------
------------ ------------
</TABLE>
See Notes to Financial Statements. See Notes to Financial Statements.
B-77
<PAGE>
PRUDENTIAL CALIFORNIA MUNICIPAL FUND
CALIFORNIA SERIES
Notes to Financial Statements
(Unaudited)
Prudential California Municipal 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
three series. The monies of each series are invested in separate, independently
managed portfolios. The California Series (the ``Series'') commenced investment
operations on September 19, 1984. The Series is diversified and seeks to achieve
its investment objective of obtaining the maximum amount of income exempt from
federal and California state income taxes with the minimum of risk by investing
in ``investment grade'' tax-exempt securities whose ratings are within the four
highest ratings categories by a nationally recognized statistical rating
organization or, if not rated, are of comparable quality. The ability of the
issuers of the securities held by the Series to meet their obligations may be
affected by economic developments in a specific state, industry or region.
Note 1. Accounting The following is a summary
Policies of significant accounting poli-
cies followed by the Fund, and the Series, in
preparation of its financial statements.
Securities Valuations: The Series values municipal securities (including
commitments to purchase such securities on a ``when-issued'' basis) on the basis
of prices provided by a pricing service which uses information with respect to
transactions in bonds, quotations from bond dealers, market transactions in
comparable securities and various relationships between securities in
determining values. If market quotations are not readily available from such
pricing service, a security is valued at its fair value as determined under
procedures established by the Trustees.
Short-term securities which mature in more than 60 days are valued at current
market quotations. Short-term securities which mature in 60 days or less are
valued at amortized cost.
All securities are valued as of 4:15 P.M., New York time.
Financial Futures Contracts: A financial futures contract is an agreement to
purchase (long) or sell (short) an agreed amount of debt securities at a set
price for delivery on a future date. Upon entering into a financial futures
contract, the Series is required to pledge to the broker an amount of cash
and/or other assets equal to a certain percentage of the contract amount. This
amount is known as the ``initial margin''. Subsequent payments, known as
``variation margin'', are made or received by the Series each day, depending on
the daily fluctuations in the value of the underlying security. Such variation
margin is recorded for financial statement purposes on a daily basis as
unrealized gain or loss. The Series invests in financial futures contracts
solely for the purpose of hedging its existing portfolio securities or
securities the Series intends to purchase against fluctuations in value caused
by changes in prevailing market interest rates. Should interest rates move
unexpectedly, the Series may not achieve the anticipated benefits of the
financial futures contracts and may realize a loss. The use of futures
transactions involves the risk of imperfect correlation in movements in the
price of futures contracts, interest rates and the underlying hedged assets.
Securities Transactions and Investment Income: Securities transactions are
recorded on the trade date. Realized gains and losses on sales of securities are
calculated on the identified cost basis. Interest income is recorded on the
accrual basis. The Series amortizes premiums and original issue discount paid on
purchases of portfolio securities as adjustments to interest income.
Net investment income (other than distribution fees) and realized and
unrealized gains or losses are allocated daily to each class of shares based
upon the relative proportion of net assets of each class at the beginning of the
day.
Federal Income Taxes: For federal income tax purposes, each series in the Fund
is treated as a separate taxpaying entity. It is the intent of the Series to
continue to meet the requirements of the Internal Revenue Code applicable to
regulated investment companies and to distribute all of its net income to
shareholders. For this reason and because substantially all of the Series' gross
income consists of tax-exempt interest, no federal income tax provision is
required.
Dividends and Distributions: The Series declares daily dividends from net
investment income. Payment of dividends is made monthly. Distributions of net
capital gains, if any, are made annually.
Income distributions and capital gain distributions are determined in
accordance with income tax regulations which may differ from generally accepted
accounting principles.
B-78
<PAGE>
Note 2. Agreements The Fund has a management
agreement with Prudential Mutual Fund Management,
Inc. (``PMF''). Pursuant to this agreement, PMF has responsibility for all
investment advisory services and supervises the subadviser's performance of such
services. PMF has entered into a subadvisory agreement with The Prudential
Investment Corporation (``PIC''); PIC furnishes investment advisory services in
connection with the management of the Fund. PMF pays for the cost of the
subadviser's services, the compensation of officers of the Fund, occupancy and
certain clerical and bookkeeping costs of the Fund. The Fund bears all other
costs and expenses.
The management fee paid PMF is computed daily and payable monthly, at an
annual rate of .50 of 1% of the average daily net assets of the Series.
The Fund has distribution agreements with Prudential Mutual Fund
Distributors, Inc. (``PMFD''), which acts as the distributor of the Class A
shares of the Fund and with Prudential Securities Incorporated (``PSI''), which
acts as distributor of the Class B shares of the Fund (collectively the
``Distributors''). To reimburse the Distributors for their expenses incurred in
distributing and servicing the Fund's Class A and B shares, the Fund, pursuant
to plans of distribution, pays the Distributors a reimbursement, accrued daily
and payable monthly.
Pursuant to the Class A Plan, the Fund reimburses PMFD for its distribution
and service related expenses 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. Such
expenses under the Class A Plan were .10 of 1% of the average daily net assets
of the Class A shares for the six months ended February 28, 1994. PMFD pays
various broker-dealers, including PSI and Pruco Securities Corporation
(``Prusec''), affiliated broker-dealers, for account servicing fees and other
expenses incurred by such broker-dealers.
Pursuant to the Class B Plan, the Series reimburses PSI for its distribution
and service related expenses with respect to Class B shares at an annual rate of
up to .50 of 1% of the average daily net assets of the Class B shares.
The Class B distribution and service related expenses include commission
credits for payment of commissions and account servicing fees to financial
advisers and an allocation for overhead and other branch office
distribution-related expenses, interest and/or carrying charges, the cost of
printing and mailing prospectuses to potential investors and of advertising
incurred in connection with the distribution of shares.
The Distributors recover the distribution expenses and service fees incurred
through the receipt of reimbursement payments from the Series under the plans
and the receipt of initial sales charges (Class A only) and contingent deferred
sales charges (Class B only) from shareholders.
PMFD has advised the Series that it has received approximately $66,500 in
front-end sales charges resulting from sales of Class A shares during the six
months ended February 28, 1994. From these fees, PMFD paid such sales charges to
dealers (PSI and Prusec) which in turn paid commissions to salespersons and
incurred other distribution costs.
With respect to the Class B Plan, at any given time the amount of expenses
incurred by PSI in distributing the Series' shares and not recovered through the
imposition of contingent deferred sales charges in connection with certain
redemptions of shares may exceed the total payments made by the Series pursuant
to the Plan. PSI has advised the Series that for the six months ended February
28, 1994, it received approximately $158,600 in contingent deferred sales
charges imposed upon certain redemptions by investors. PSI, as distributor, has
also advised the Series that as of February 28, 1994, the amount of distribution
expenses incurred by PSI and not yet reimbursed by the Series or recovered
through contingent deferred sales charges approximated $5,556,300. This amount
may be recovered through future payments under the Class B Plan or contingent
deferred sales charges.
In the event of termination or noncontinuation of the Class B Plan, the
Series would not be contractually obligated to pay PSI as distributor, for any
expenses not previously reimbursed or recovered through contingent deferred
sales charges.
PMFD is a wholly-owned subsidiary of PMF; PSI, PMF and PIC are (indirect)
wholly-owned subsidiaries of The Prudential Insurance Company of America.
Note 3. Other Prudential Mutual Fund Ser-
Transactions vices, Inc. (``PMFS''), a
with Affiliates wholly-owned subsidiary of
PMF, serves as the Fund's transfer agent. During
the six months ended February 28, 1994, the Series incurred fees of
approximately $35,800 for the services of PMFS. As of February 28, 1994,
approximately $6,000 of such fees were due to PMFS. Transfer agent fees and
expenses in the Statement of Operations include certain out-of-pocket expenses
paid to non-affiliates.
Note 4. Portfolio Purchases and sales of port-
Securities folio securities of the Series,
excluding short-term investments, for the six
months ended February 28, 1994 were $77,908,382 and $73,009,944, respectively.
B-79
<PAGE>
The cost basis of investments for federal income tax purposes was
substantially the same as for financial reporting purposes and, accordingly, at
February 28, 1994 net unrealized appreciation of investments for federal income
tax purposes was $12,494,652 (gross unrealized appreciation-- $15,532,668; gross
unrealized depreciation--$3,038,016).
At February 28, 1994, the Series sold 132 financial futures contracts on the
Municipal Bond Index and sold 33 financial futures contracts on U.S. Treasury
Bonds both of which expire in March 1994. The value at sale of such contracts
was $17,376,031. The value of such contracts on February 28, 1994 was
$16,847,531, thereby resulting in an unrealized gain of $528,500. The Series has
pledged $1,250,000 principal amount of Los Angeles Cnty., Cert. of Part., Civic
Ctr. Heating & Refrigeration Plant, $4,500,000 principal amount of California
Hlth. Facs. Fin Auth. Rev., Eskaton Properties, $2,000,000 principal amount of
Contra Costa Wtr. Dist. Rev. and $3,475,000 principal amount of San Mateo Cnty.
Jt. Pwrs. Fin. Auth., Lease Rev. as initial margin on such contracts.
For federal income tax purposes, the Series has a capital loss carryforward
as of August 31, 1993 of approximately $1,216,000 which expires in 1999.
Note 5. Capital The Series offers both Class A and
Class B shares. Class A shares are sold with a
front-end sales charge of up to 4.5%. 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. Both classes of shares have equal rights as to
earnings, assets and voting privileges except that each class bears different
distribution expenses and has exclusive voting rights with respect to its
distribution plan.
The Fund has authorized an unlimited number of shares of beneficial interest
for each class at $.01 par value per share.
Transactions in shares of beneficial interest for the six months ended
February 28, 1994 and fiscal year ended August 31, 1993 were as follows:
<TABLE>
<CAPTION>
Class A Shares Amount
- ------------------------------ ---------- ------------
<S> <C> <C>
Six months ended February 28, 1994:
Shares sold................... 203,909 $ 2,478,568
Shares issued in reinvestment
of dividends and
distributions............... 20,784 249,912
Shares reacquired............. (141,268) (1,707,967)
---------- ------------
Net increase in shares
outstanding................. 83,425 $ 1,020,513
---------- ------------
---------- ------------
Year ended August 31, 1993:
Shares sold................... 551,246 $ 6,493,924
Shares issued in reinvestment
of dividends................ 20,712 244,188
Shares reacquired............. (127,066) (1,500,007)
---------- ------------
Net increase in shares
outstanding................. 444,892 $ 5,238,105
---------- ------------
---------- ------------
<CAPTION>
Class B
- ------------------------------
<S> <C> <C>
Six months ended February 28, 1994:
Shares sold................... 1,283,035 $ 15,549,256
Shares issued in reinvestment
of dividends and
distributions............... 355,683 4,272,826
Shares reacquired............. (1,227,067) (14,821,479)
---------- ------------
Net increase in shares
outstanding................. 411,651 $ 5,000,603
---------- ------------
---------- ------------
Year ended August 31, 1993:
Shares sold................... 3,646,925 $ 42,777,317
Shares issued in reinvestment
of dividends. .............. 480,211 5,634,752
Shares reacquired............. (2,532,383) (29,727,305)
---------- ------------
Net increase in shares
outstanding................. 1,594,753 $ 18,684,764
---------- ------------
---------- ------------
</TABLE>
B-80
<PAGE>
PRUDENTIAL CALIFORNIA MUNICIPAL FUND
CALIFORNIA SERIES
Financial Highlights
(Unaudited)
<TABLE>
<CAPTION>
Class A Class B
--------------------------------------------------------------- ----------------------------------
January 22,
Six Months 1990* Six Months Year Ended August
Ended Year Ended August 31, Through Ended 31,
February 28, --------------------------------- August 31, February 28, -------------------
1994 1993 1992 1991 1990 1994 1993 1992
------------ ------- ------- ------ ------------ ------------ -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value,
beginning of
period............... $12.16 $ 11.48 $11.01 $10.57 $10.77 $ 12.15 $ 11.48 $ 11.01
------------ ------- ------- ------ ------------ ------------ -------- ---------
Income from investment
operations
Net investment
income............... .33 .69 .70 .69 .41 .30 .64 .66
Net realized and
unrealized gain
(loss) on investment
transactions......... (.20) .68 .47 .44 (.20) (.20) .67 .47
------------ ------- ------- ------ ------------ ------------ -------- ---------
Total from investment
operations......... .13 1.37 1.17 1.13 .21 .10 1.31 1.13
------------ ------- ------- ------ ------------ ------------ -------- ---------
Less distributions
Dividends from net
investment income.... (.33) (.69) (.70) (.69) (.41) (.30) (.64) (.66)
Distributions from net
realized gains....... (.12) -- -- -- -- (.12) -- --
------------ ------- ------- ------ ------------ ------------ -------- ---------
Total distributions.... (.45) (.69) (.70) (.69) (.41) (.42) (.64) (.66)
------------ ------- ------- ------ ------------ ------------ -------- ---------
Net asset value, end of
period............... $11.84 $ 12.16 $11.48 $11.01 $10.57 $ 11.83 $ 12.15 $ 11.48
------------ ------- ------- ------ ------------ ------------ -------- ---------
------------ ------- ------- ------ ------------ ------------ -------- ---------
TOTAL RETURN#:......... 1.09% 12.30% 10.95% 10.98% 1.85% .88% 11.74% 10.52%
RATIOS/SUPPLEMENTAL
DATA:
Net assets, end of
period (000)......... $11,809 $11,116 $5,388 $4,188 $1,774 $206,997 $207,634 $177,861
Average net assets
(000)................ $11,810 $7,728 $4,322 $2,748 $1,214 $210,647 $190,944 $172,495
Ratios to average net
assets:
Expenses, including
distribution
fees............... .73%** .77% .82% .88% .90%** 1.13%** 1.17% 1.22%
Expenses, excluding
distribution
fees............... .63%** .67% .72% .78% .80%** .63%** .67% .72%
Net investment
income............... 5.48%** 5.82% 6.25% 6.37% 6.28%** 5.08%** 5.44% 5.85%
Portfolio turnover..... 33% 43% 53% 53% 119% 33% 43% 53%
<CAPTION>
1991 1990 1989
-------- -------- --------
<S> <C> <C> <C>
PER SHARE OPERATING PER
Net asset value,
beginning of
period............... $ 10.57 $ 10.76 $ 10.52
-------- -------- --------
Income from investment
operations
Net investment
income............... .64 .64 .66
Net realized and
unrealized gain
(loss) on investment
transactions......... .44 (.19) .24
-------- -------- --------
Total from investment
operations......... 1.08 .45 .90
-------- -------- --------
Less distributions
Dividends from net
investment income.... (.64) (.64) (.66)
Distributions from net
realized gains....... -- -- --
-------- -------- --------
Total distributions.... (.64) (.64) (.66)
-------- -------- --------
Net asset value, end of
period............... $ 11.01 $ 10.57 $ 10.76
-------- -------- --------
-------- -------- --------
TOTAL RETURN#:......... 10.54% 4.21% 8.79%
RATIOS/SUPPLEMENTAL
DATA:
Net assets, end of
period (000)......... $169,190 $174,005 $178,287
Average net assets
(000)................ $169,220 $175,990 $166,305
Ratios to average net
assets:
Expenses, including
distribution
fees............... 1.28% 1.24% 1.23%
Expenses, excluding
distribution
fees............... .78% .76% .75%
Net investment
income............. 5.98% 5.95% 6.12%
Portfolio turnover..... 53% 119% 145%
</TABLE>
- ---------------
* Commencement of offering of Class A shares.
** Annualized.
# Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on
the last day of each period reported and includes reinvestment of
dividends and distributions. Total returns for periods of less than
a full year are not annualized.
See Notes to Financial Statements.
B-81
<PAGE>
PRUDENTIAL CALIFORNIA MUNICIPAL FUND Portfolio of Investments
CALIFORNIA INCOME SERIES February 28, 1994 (Unaudited)
<TABLE>
<CAPTION>
Principal
Moody's Amount Value
Rating (000) Description (a) (Note 1)
<S> <C> <C> <C>
LONG-TERM INVESTMENTS--98.5%
Alameda Cmnty. Facs.
Dist.,
Spec. Tax Rev. No. 1,
NR $ 3,000 7.75%, 9/1/19........... $ 3,127,830
Alameda Impvt. Bond Act of 1915,
Marina Vlg. Assmt. Dist.
89-1,
NR 1,000 7.65%, 9/2/10........... 1,030,570
NR 2,000 7.65%, 9/2/11........... 2,061,040
Arcadia Unified Sch.
Dist., Gen. Oblig.,
M.B.I.A., Ser. A,
Aaa 1,200 Zero Coupon, 9/1/09..... 496,656
Aaa 1,875 Zero Coupon, 9/1/11..... 682,050
Aaa 2,045 Zero Coupon, 9/1/12..... 697,120
Aaa 1,205 Zero Coupon, 9/1/13..... 383,913
Aaa 1,940 Zero Coupon, 9/1/18..... 456,657
Assoc. of Bay Area
Govt's. Fin.
Auth., Cert. of Part.,
Channing House,
A+* 1,500@ 7.125%, 1/1/21, Ser.
A..................... 1,617,780
Brea Pub. Fin. Auth.
Rev.,
Tax Alloc. Redev. Proj.,
NR 3,000 8.10%, 3/1/21, Ser. C... 3,410,580
Buena Park Cmnty. Redev.
Agcy.,
Cent. Bus. Dist. Proj.,
NR 3,325 7.80%, 9/1/14........... 3,665,613
California Hlth. Facs
Fin.,
Catholic Hlth. Fac.,
Aaa 1,370 5.00%, 7/1/21,
A.M.B.A.C............. 1,239,590
A1 4,525 5.00%, 6/1/23, Ser. A... 3,954,533
California St. Brd. of
Pub.
Wks. Lease Rev.,
Dept. of Corrections,
Aaa 225 5.25%, 12/1/08, Ser. A,
A.M.B.A.C............. 224,294
California St. Edl.
Facs. Auth. Rev.,
Chapman Coll.,
Baa 600 7.50%, 1/1/18........... 662,100
California St. Hsg. Fin.
Agcy.,
Mtge. Rev., M.B.I.A.,
Aaa $ 1,000 7.20%, 2/1/26, Ser.
91A................... $ 1,060,000
California St. Poll.
Ctrl. Fin. Auth.,
Res. Recovery Rev.,
Waste Mgmt., Inc.,
A1 2,000 7.15%, 2/1/11, Ser. A... 2,221,640
California Statewide
Cmnty. Dev. Corp.,
Cert. of Part.,
J. Paul Getty Museum,
Aaa 1,500 5.00%, 10/1/23.......... 1,380,690
Sutter Hlth. Obligated
Group,
Aaa 2,850 6.125%, 8/15/22,
A.M.B.A.C............. 2,942,083
Villaview Cmnty. Hosp.,
A+* 1,000 7.00%, 9/1/09........... 1,076,900
California Transit
Finance Corp.,
Los Angeles Cnty. Trans. Comn.,
A1 2,500 6.25%, 7/1/04, Ser. B... 2,699,375
Carson City Ltd. Oblig.
Impvt.
Rev., Assmt. Dist.,
NR 2,500 7.375%, 9/2/22.......... 2,610,100
Clearlake Redev. Agcy.,
Highlands Park Cmnty.,
BBB* 1,225 6.20%, 10/1/22.......... 1,224,902
BBB* 500 6.40%, 10/1/23.......... 502,630
Contra Costa Cnty.,
Spec. Tax,
Cmnty. Facs. Pleasant
Hill,
NR 1,520 8.125%, 8/1/16.......... 1,658,867
Contra Costa Trans.
Auth.,
Sales Tax Rev.,
A1 1,000(D) 6.875%, 3/1/07, Ser.
A..................... 1,129,600
Culver City Redev. Fin.
Auth. Rev.,
Aaa 4,500@ 4.60%, 11/1/20,
A.M.B.A.C............. 3,841,515
Danville Impvt. Bd.,
Tassajara Ranch No.
93-1,
NR 1,000 6.75%, 9/2/11........... 1,008,990
NR 1,000 6.80%, 9/2/12........... 1,008,970
Delano, Cert. of Part.,
Regional Medical Center,
NR 2,970 9.25%, 1/1/22, Ser.
92A................... 3,363,525
</TABLE>
B-82 See Notes to Financial Statements.
<PAGE>
PRUDENTIAL CALIFORNIA MUNICIPAL FUND
CALIFORNIA INCOME SERIES
<TABLE>
<CAPTION>
Principal
Moody's Amount Value
Rating (000) Description (a) (Note 1)
<S> <C> <C> <C>
Desert Hosp. Dist.,
Cert. of Part.,
AAA* $ 2,000(D) 8.10%, 7/1/20........... $ 2,411,040
Dry Creek Jt. Sch.
Dist.,
Spec. Tax Rev.,
Cmnty. Facs. Dist. No.
1,
BBB* 1,355 7.25%, 9/1/11........... 1,465,107
East Bay Mun. Util.
Dist.,
Wtr. Sys. Rev.,
A1 1,620 6.00%, 6/1/12........... 1,690,438
East Palo Alto San.
Dist.,
Cert. of Part., Aux.
Facs.
Sch. Bldg. Corp.,
NR 500 8.25%, 10/1/15.......... 538,300
Fairfield Impvt. Bond
Act of 1915,
No. Cordella Impvt.
Dist.,
NR 830 7.20%, 9/2/09........... 854,261
NR 920 7.20%, 9/2/10........... 948,125
NR 800 8.00%, 9/2/11........... 824,416
NR 995 7.375%, 9/2/18.......... 1,025,178
Fairfield Pub. Fin.
Auth. Rev.,
Fairfield Redev. Projs.,
NR 2,500(D) 7.90%, 8/1/21, Ser. A... 3,019,550
Folsom Spec. Tax Dist.
No. 2,
NR 3,130 7.70%, 12/1/19.......... 3,253,259
Fontana Redev. Agcy.,
Downtown Redev. Proj.,
BBB* 2,000 7.00%, 9/1/21........... 2,135,840
No. Fontana Redev.
Proj.,
BBB* 1,575(D) 7.65%, 12/1/09.......... 1,885,669
Fontana Spec. Tax Cmnty.
Facs.,
Dist. No. 2,
NR 3,595 8.50%, 9/1/17, Ser. B... 4,014,033
Foster City Pub. Fin.
Auth.
Rev., Cmnty. Dev. Proj.,
A-* 2,100 6.00%, 9/1/13, Ser. A... 2,119,509
Fresno Swr. Rev., Ser.
A-1, A.M.B.A.C.,
Aaa 1,500 5.25%, 9/1/19........... 1,421,355
Aaa 790 4.50%, 9/1/23........... 660,250
Hemet Pub. Fin. Auth.,
Wtr. Rev.,
NR $ 1,720 6.50%, 2/1/12, Ser. A... $ 1,738,662
Industry Impvt. Bond Act of 1915,
Assmt. Dist. No. 91-1,
NR 1,200 7.65%, 9/2/21........... 1,235,028
Long Beach Redev. Agcy.,
Pacific Court Apts.,
NR 1,000 6.80%, 9/1/13........... 984,090
NR 1,500 6.95%, 9/1/23........... 1,490,670
Los Angeles Cnty. Pub.
Wks. Fin.
Auth., Lease Rev.,
Mult. Cap. Fac. Proj.,
Aaa 3,000 4.75%, 12/1/13,
M.B.I.A............... 2,703,900
Los Angeles Cnty. Trans.
Comn.,
Sales Tax Rev.,
A1 2,000 7.40%, 7/1/15, Ser. A... 2,255,100
Los Angeles Dept. of
Wtr. & Pwr.,
Waterworks Rev.,
Aa 1,945 6.875%, 4/1/14.......... 2,205,572
Met. Wtr. Dist. of
Southern
California, Waterworks
Rev.,
Aa 2,000@ 5.75%, 7/1/21, Ser. A... 2,072,980
Nevada Cnty., Cert. of
Part.,
Baa1 1,000 7.50%, 6/1/21........... 1,111,990
Ontario Impvt. Bond Act
of 1915,
Assmt. Dist. 100,
NR 1,410 8.00%, 9/2/11........... 1,453,033
Orange Cnty., Cert. of
Part.,
Pub. Facs. Corp.,
Solid Wst. Mgmt.,
A 3,000 7.875%, 12/1/13......... 3,408,300
Orange Cnty. Cmnty.
Facs. Dist.,
Special Tax Rev.,
No. 87-4, Foothill
Ranch,
NR 3,500 7.375%, 8/15/18, Ser.
A..................... 3,646,125
No. 87-5B, Rancho Santa
Margarita,
NR 1,750 7.50%, 8/15/17.......... 1,895,967
No. 88-1, Aliso Viejo,
NR 805 7.15%, 8/15/06, Ser.
A..................... 860,642
NR 3,500 7.35%, 8/15/18, Ser.
92.................... 3,764,425
</TABLE>
B-83 See Notes to Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
Principal
Moody's Amount Value
Rating (000) Description (a) (Note 1)
<S> <C> <C> <C>
Perris Sch. Dist., Cert.
of Part.,
Cap. Projs.,
NR $ 1,500 7.75%, 3/1/21........... $ 1,613,670
Pleasanton Impvt. Bond
Act of 1915,
Assmt. Dist. No. 86-9,
NR 500 7.60%, 9/2/10, Ser. C... 515,285
Puerto Rico Hwy. &
Trans.
Auth. Rev.,
AAA* 2,100(D)/@ 7.75%, 7/1/10, Ser. Q... 2,498,517
Baa1 5,000 6.625%, 7/1/12, Ser.
V..................... 5,511,350
Baa1 2,175 6.625%, 7/1/18, Ser.
T..................... 2,398,981
Puerto Rico Pub. Bldgs.
Auth.,
Gtd. Pub. Ed. & Hlth.
Facs.,
Baa1 1,605 Zero Coupon, 7/1/06,
Ser. J................ 818,630
A* 2,625(D)/@ 6.875%, 7/1/21, Ser.
L..................... 3,032,295
Rancho Wtr. Dist. Fin.
Auth. Rfdg. Rev.,
Aaa 1,250 4.75%, 8/15/21,
A.M.B.A.C............. 1,090,825
Richmond Redev. Agcy.
Rev.,
NR 2,500 7.50%, 9/1/23........... 2,397,150
Riverside Cnty. Cert. of
Part.,
Air Force Vlg. West,
NR 3,000 8.125%, 6/15/20......... 3,180,930
Riverside Redev. Agcy.,
Multifam. Hsg. Rev.,
First & Mkt. Proj.,
Baa 3,500 7.75%, 9/1/21, Ser. A... 3,594,535
Riverside Sch. Dist.
Special Tax,
Cmnty. Facs. Dist. No.
2,
NR 1,000 7.25%, 9/1/18, Ser. A... 999,980
Rocklin Stanford Ranch
Cmnty.
Facs., Dist. Spec. Tax,
NR 1,000 8.10%, 11/1/15.......... 1,098,430
Sacramento Cnty.
Sanitation Dist.
Fin. Auth. Rev.,
Aa 2,500 4.75%, 12/1/23.......... 2,174,200
Sacramento Cnty. Spec.
Tax Rev.,
Dist. No. 1, Elliot
Ranch,
NR 2,000 8.20%, 8/1/21........... 2,100,580
Dist. No. 1, Laguna Creek Ranch,
NR 1,000 8.25%, 12/1/20.......... 1,100,950
Sacramento Mun. Util.
Dist. Elec. Rev.,
Aaa $ 2,750 4.75%, 9/1/21,
M.B.I.A............... $ 2,399,623
Sacramento Spec. Purpose
Fac.,
NR 2,200 7.25%, 12/1/18.......... 2,155,054
San Bernardino Cnty.,
Cert. of Part.,
Cap. Facs. Proj.,
A 3,500 6.25%, 8/1/19, Ser. B... 3,825,115
Medical Cent. Fin.
Proj.,
Baa1 2,750 5.50%, 8/1/24........... 2,467,135
San Diego Cnty. Regl.
Trans.
Cmnty., Sales Tax Rev.,
Aaa 500 5.25%, 4/1/08, Ser. A,
F.G.I.C............... 498,495
San Diego Cnty. Wtr.
Auth. Rev.,
Aaa 1,000 8.834%, 4/23/08,
F.G.I.C............... 1,063,750
San Francisco City &
Cnty.,
Airports Comn., Issue
No. 3,
Aaa 1,500 6.20%, 5/1/20,
M.B.I.A............... 1,543,710
Redev. Agcy., Lease
Rev.,
A 1,500 Zero Coupon, 7/1/06..... 739,800
A 2,250 Zero Coupon, 7/1/07..... 1,034,438
San Joaquin Hills Trans.
Corridor Agcy.,
Toll Road Rev.,
NR 2,000 Zero Coupon, 1/1/11..... 512,060
NR 4,000 7.00%, 1/1/30........... 4,090,880
NR 1,000 5.00%, 1/1/33........... 781,470
San Jose Redev. Proj.,
Aaa 900 6.00%, 8/1/15,
M.B.I.A............... 956,178
San Mateo Cnty. Jt.
Pwrs. Fin. Auth. Lease
Rev., M.B.I.A.,
Aaa 3,000 6.50%, 7/1/15........... 3,373,800
Santa Cruz Cnty. Pub. Fin. Auth. Rev.,
Tax Alloc. Sub. Lien.,
AAA* 2,500(D) 7.625%, 9/1/21, Ser.
B..................... 2,922,275
South San Francisco
Redev.
Agcy., Tax Alloc.,
Gateway Redev. Proj.,
NR 2,375 7.60%, 9/1/18........... 2,567,874
</TABLE>
B-84 See Notes to Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
Principal
Moody's Amount Value
Rating (000) Description (a) (Note 1)
<S> <C> <C> <C>
Southern California Pub.
Pwr.
Auth., Proj. Rev.,
A $ 2,000 6.75%, 7/1/12........... $ 2,276,260
A 3,000 6.75%, 7/1/13........... 3,415,620
Std. Elem. Sch. Dist.,
Cert. of Part.,
BBB+* 1,000 7.375%, 6/1/11.......... 1,066,490
Temecula Valley Unified
Sch. Cmnty. Facs.,
Spec. Tax Dist. No.
89-1,
NR 1,500** 8.60%, 9/1/17........... 1,200,000
Torrance Redev. Agcy.,
Tax Alloc. Downtown
Redev.,
Baa 3,925 7.125%, 9/1/22.......... 4,185,738
Tax Alloc. Ind. Redev.
Proj.,
NR 2,500 7.75%, 9/1/13........... 2,695,975
Univ. of California
Rev.,
Mult. Purpose Proj.,
M.B.I.A.,
Aaa 2,500 4.75%, 9/1/21........... 2,181,475
Virgin Islands Pub. Fin.
Auth.
Rev., Hwy. Trans. Trust
Fund,
BBB* 1,000 7.70%, 10/1/04.......... 1,115,260
NR 1,200 7.25%, 10/1/18, Ser.
A..................... 1,349,304
Virgin Islands
Territory,
Hugo Ins. Claims Fund
Proj.,
NR 1,200 7.75%, 10/1/06, Ser.
91.................... 1,382,340
Virgin Islands Wtr. &
Pwr. Auth.,
Elec. Sys. Rev.,
NR 1,000 7.40%, 7/1/11, Ser. A... 1,139,210
Wtr. Sys. Rev.,
NR 1,015 7.20%, 1/1/02, Ser. B... 1,109,415
West Sacramento Impvt.
Bond Act of 1915,
Lighthouse Marina Assmt.
Dist. 90-1,
NR 2,500 8.50%, 9/2/17........... 2,575,825
Westminster Redev.
Agcy.,
Tax Allocation Rev.,
Orange County, Proj.
No. 1,
Baa1 2,000 7.30%, 8/1/21, Ser. A... 2,212,600
------------
Total long-term
investments
(cost $192,396,935)..... 203,496,404
------------
SHORT-TERM INVESTMENTS--1.0%
California Poll. Ctrl.
Fin. Auth. Rev.,
Burney Forest Proj.,
F.R.D.D.,
P1 $ 300 2.30%, 3/1/94, Ser.
89A................... $ 300,000
Delano Proj., F.R.D.D.,
P1 500 2.30%, 3/1/94, Ser.
90.................... 500,000
P1 300 2.30%, 3/1/94, Ser.
91.................... 300,000
Orange Cnty. Var. Sanit.
Dist. Cert of Part.,
F.R.D.D.,
VMIG1 1,000 2.20%, 3/1/94........... 1,000,000
------------
Total short-term
investments
(cost $2,100,000)..... 2,100,000
------------
Total Investments--99.5%
(cost $194,496,935; Note
4).................... 205,596,404
Other assets in excess
of
liabilities--0.5%..... 1,079,850
------------
Net Assets--100%........ $206,676,254
------------
------------
</TABLE>
- ------------------
(a) The following abbreviations are used in portfolio descriptions:
A.M.B.A.C.--American Municipal Bond Assurance Corporation.
F.G.I.C.--Financial Guaranty Insurance Company.
F.R.D.D.--Floating Rate (Daily) Demand Note #.
M.B.I.A.--Municipal Bond Insurance Association.
# For purposes of amortized cost valuation, the maturity date of Floating Rate
Demand Notes is considered to be the later of the next date on which the
security can be redeemed at par or the next date on which the rate of
interest is adjusted.
* Standard & Poor's rating.
** Represents issuer in default on interest payment.
(D) Prerefunded issues are secured by escrowed cash and/or direct U.S.
guaranteed obligations.
@ Pledged as initial margin on financial futures contracts.
NR--Not rated by Moody's or Standard & Poor's.
The Fund's current Statement of Additional Information contains a description of
Moody's and Standard & Poor's ratings.
B-85 See Notes to Financial Statements.
<PAGE>
PRUDENTIAL CALIFORNIA MUNICIPAL FUND
CALIFORNIA INCOME SERIES
Statement of Assets and Liabilities
(Unaudited)
<TABLE>
<CAPTION>
Assets February 28, 1994
-----------------
<S> <C>
Investments, at value (cost $194,496,935).............................................. $ 205,596,404
Interest receivable.................................................................... 3,865,135
Receivable for Fund shares sold........................................................ 1,212,697
Receivable for investments sold........................................................ 123,600
Deferred expenses and other assets..................................................... 15,139
-----------------
Total assets....................................................................... 210,812,975
-----------------
Liabilities
Payable for investments purchased...................................................... 2,578,884
Payable for Fund shares reacquired..................................................... 1,346,222
Accrued expenses and other liabilities................................................. 101,654
Dividends payable...................................................................... 37,584
Due to broker - variation margin....................................................... 33,031
Management fee payable................................................................. 20,015
Distribution fee payable............................................................... 17,639
Deferred trustees' fees................................................................ 1,692
-----------------
Total liabilities.................................................................. 4,136,721
-----------------
Net Assets............................................................................. $ 206,676,254
-----------------
-----------------
Net assets were comprised of:
Shares of beneficial interest, at par................................................ $ 196,904
Paid-in capital in excess of par..................................................... 195,224,217
-----------------
195,421,121
Accumulated net realized gain on investments......................................... 21,195
Net unrealized appreciation on investments........................................... 11,233,938
-----------------
Net assets, February 28,1994......................................................... $ 206,676,254
-----------------
-----------------
Class A:
Net asset value and redemption price per share
($200,014,625 / 19,055,732 shares of beneficial interest issued and outstanding)... $10.50
Maximum sales charge (4.5% of offering price)........................................ .49
-----------------
Maximum offering price to public..................................................... $10.99
-----------------
-----------------
Class B:
Net asset value, offering price and redemption price per share
($6,661,629 / 634,654 shares of beneficial interest issued and outstanding)........ $10.50
-----------------
-----------------
</TABLE>
See Notes to Financial Statements.
B-86
<PAGE>
PRUDENTIAL CALIFORNIA MUNICIPAL FUND
CALIFORNIA INCOME SERIES
Statement of Operations
(Unaudited)
<TABLE>
<CAPTION>
Six Months
Ended
February
28,
Net Investment Income 1994
-----------
<S> <C>
Income
Interest............................ $ 6,595,665
-----------
Expenses
Management fee, net of waiver of
$445,374.......................... 63,747
Distribution fee--Class A........... 101,110
Distribution fee--Class B........... 3,573
Custodian's fees and expenses....... 57,000
Transfer agent's fees and
expenses.......................... 28,000
Registration fees................... 12,000
Reports to shareholders............. 10,000
Audit fee........................... 7,500
Legal fees.......................... 7,000
Trustees' fees...................... 4,000
Amortization of organizational
expenses.......................... 3,680
Miscellaneous....................... 3,115
-----------
Total expenses.................... 300,725
-----------
Net investment income................. 6,294,940
-----------
Realized and Unrealized
Gain (Loss) on Investments
Net realized gain (loss) on:
Investment transactions............. 1,760,268
Financial futures transactions...... (239,129)
-----------
1,521,139
-----------
Net change in unrealized appreciation
on:
Investments......................... (3,486,763)
Financial futures................... 302,344
-----------
(3,184,419)
-----------
Net loss on investments............... (1,663,280)
-----------
Net Increase in Net Assets
Resulting from Operations............. $ 4,631,660
-----------
-----------
</TABLE>
PRUDENTIAL CALIFORNIA MUNICIPAL FUND
CALIFORNIA INCOME SERIES
Statement of Changes in Net Assets
(Unaudited)
<TABLE>
<CAPTION>
Six Months
Ended Year Ended
Increase (Decrease) February 28, August 31,
in Net Assets 1994 1993
------------- -------------
<S> <C> <C>
Operations
Net investment
income................. $ 6,294,940 $ 10,812,389
Net realized gain on
investment
transactions......... 1,521,139 704,119
Net change in
unrealized
appreciation on
investments.......... (3,184,419) 10,324,900
------------- -------------
Net increase in net
assets
resulting from
operations........... 4,631,660 21,841,408
------------- -------------
Dividends and distributions (Note 1)
Dividends to
shareholders
from net investment
income
Class A................ (6,251,565) (10,812,389)
Class B................ (43,375) --
------------- -------------
(6,294,940) (10,812,389)
------------- -------------
Distributions to
shareholders
from net realized
gains
Class A................ (1,957,806) (738,313)
Class B................ -- --
------------- -------------
(1,957,806) (738,313)
------------- -------------
Fund share transactions (Note 5)
Net proceeds from
shares
subscribed........... 26,439,461 79,117,892
Net asset value of
shares
issued in
reinvestment of
dividends and
distributions........ 3,811,177 4,887,486
Cost of shares
reacquired............. (20,852,091) (34,498,281)
------------- -------------
Net increase in net
assets from Fund
share
transactions......... 9,398,547 49,507,097
------------- -------------
Total increase........... 5,777,461 59,797,803
Net Assets
Beginning of period...... 200,898,793 141,100,990
------------- -------------
End of period............ $ 206,676,254 $ 200,898,793
------------- -------------
------------- -------------
</TABLE>
See Notes to Financial Statements. See Notes to Financial Statements.
B-87
<PAGE>
PRUDENTIAL CALIFORNIA MUNICIPAL FUND
CALIFORNIA INCOME SERIES
Notes to Financial Statements
(Unaudited)
Prudential California Municipal 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
three series. The monies of each series are invested in separate, independently
managed portfolios. The California Income Series (the ``Series'') commenced
investment operations on December 3, 1990. The Series is non-diversified and
seeks to achieve its investment objective of obtaining the maximum amount of
income exempt from federal and California state 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 but may also invest in lower-quality tax-exempt securities. The ability
of the issuers of the securities held by the Series to meet their obligations
may be affected by economic developments in a specific state, industry or
region.
Note 1. Accounting The following is a summary
Policies of significant accounting poli-
cies followed by the Fund, and the Series, in
preparation of its financial statements.
Security 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 upon amount of debt securities at a
set price for delivery on a future date. Upon entering into a financial futures
contract, the Series is required to pledge to the broker an amount of cash
and/or other assets equal to a certain percentage of the contract amount. This
amount is known as the ``initial margin''. Subsequent payments, known as
``variation margin'', are made or received by the Series each day, depending on
the daily fluctuations in the value of the underlying security. Such variation
margin is recorded for financial statement purposes on a daily basis as
unrealized gain or loss. The Series invests in financial futures contracts
solely for the purpose of hedging its existing portfolio securities or
securities the Series intends to purchase against fluctuations in value caused
by changes in prevailing market interest rates. Should interest rates move
unexpectedly, the Series may not achieve the anticipated benefits of the
financial futures contracts and may realize a loss. The use of futures
transactions involves the risk of imperfect correlation in movements in the
price of futures contracts, interest rates and the underlying hedged assets.
Securities Transactions and Investment Income: Securities transactions are
recorded on the trade date. Realized gains and losses on sales of securities are
calculated on the identified cost basis. Interest income is recorded on the
accrual basis. The Series amortizes premiums and original issue discount paid on
purchases of portfolio securities as adjustments to interest income.
Federal Income Taxes: For federal income tax purposes, each series in the Fund
is treated as a separate taxpaying entity. It is the intent of the Series to
continue to meet the requirements of the Internal Revenue Code applicable to
regulated investment companies and to distribute all of its net income to
shareholders. For this reason and because substantially all of the Series' gross
income consists of tax-exempt interest, no federal income tax provision is
required.
Dividends and Distributions: The Series declares daily dividends from net
investment income. Payment of dividends are made monthly. Distributions of net
capital gains, if any, are made annually.
Income distributions and capital gain distributions are determined in
accordance with income tax regulations which may differ from generally accepted
accounting principles.
Deferred Organization Expenses: The Series incurred $35,818 in organization and
initial registration expenses.
B-88
<PAGE>
Such amount has been deferred and is being amortized over a period of 60 months
ending December 1995.
Note 2. Agreements The Fund has a management
agreement with Prudential Mutual Fund Management,
Inc. (``PMF''). Pursuant to this agreement, PMF has responsibility for all
investment advisory services and supervises the subadviser's performance of such
services. PMF has entered into a subadvisory agreement with The Prudential
Investment Corporation (``PIC''); PIC furnishes investment advisory services in
connection with the management of the Fund. PMF pays for the cost of the
subadviser's services, the compensation of officers of the Fund, occupancy and
certain clerical and bookkeeping costs of the Fund. The Fund bears all other
costs and expenses.
The management fee paid PMF is computed daily and payable monthly, at an
annual rate of .50 of 1% of the average daily net assets of the Series. PMF
voluntarily waived 100% of its management fee during the three months ended
November 30, 1993. Effective December 1, 1993, PMF reduced its voluntary waiver
to 75% of its management fee. The amount of such fees waived for the six months
ended February 28, 1994 amounted to $445,374 ($0.023 per share; .44% of average
net assets).
The Fund has distribution agreements with Prudential Mutual Fund
Distributors, Inc. (``PMFD''), which acts as the distributor of the Class A
shares of the Fund, and Prudential Securities Incorporated (``PSI''), which acts
as distributor of the Class B shares of the Fund (collectively the
``Distributors''). To reimburse the Distributors for their expenses incurred in
distributing and servicing the Fund's Class A and Class B shares, the Fund,
pursuant to plans of distribution, pays the Distributors a reimbursement,
accrued daily and payable monthly.
Pursuant to the Class A Plan, the Fund reimburses PMFD for its distribution
and service related expenses 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. Such
expenses under the Class A Plan were .10 of 1% of the average daily net assets
of the Class A shares for the six months ended February 28, 1994. PMFD pays
various broker-dealers, including PSI and Pruco Securities Corporation
(``Prusec''), affiliated broker-dealers, for account servicing fees and other
expenses incurred by such broker-dealers.
Pursuant to the Class B Plan, the Fund reimburses PSI for its distribution
and service related expenses with respect to Class B shares at an annual rate of
up to .50 of 1% of the average daily net assets of the Class B shares.
The Class B distribution and service related expenses include commission
credits for payment of commissions and account servicing fees to financial
advisers and an allocation for overhead and other branch office
distribution-related expenses, interest and/or carrying charges, the cost of
printing and mailing prospectuses to potential investors and of advertising
incurred in connection with the distribution of shares.
The Distributors recover the distribution expenses and service fees incurred
through the receipt of reimbursement payments from the Series under the plans
and the receipt of initial sales charges (Class A only) and contingent deferred
sales charges (Class B only) from shareholders.
PMFD has advised the Series that it has received approximately $724,700 in
front-end sales charges resulting from sales of Class A shares during the period
ended February 28, 1994. From these fees, PMFD paid such sales charges to
dealers (PSI and Prusec) which in turn paid commissions to salespersons and
incurred other distribution costs.
With respect to the Class B Plan, at any given time the amount of expenses
incurred by PSI in distributing the Series' shares and not recovered through the
imposition of contingent deferred sales charges in connection with certain
redemptions of shares may exceed the total payments made by the Series pursuant
to the Plan. PSI, as distributor, has advised the Series that as of February 28,
1994, the amount of distribution expenses incurred by PSI and not yet reimbursed
by the Series or recovered through contingent deferred sales charges
approximated $253,700. This amount may be recovered through future payments
under the Class B Plan or contingent deferred sales charges.
In the event of termination or noncontinuation of the Class B Plan, the
Series would not be contractually obligated to pay PSI, as distributor, for any
expenses not previously reimbursed or recovered through contingent deferred
sales charges.
PMFD is a wholly-owned subsidiary of PMF; PSI, PMF and PIC are (indirect)
wholly-owned subsidiaries of The Prudential Insurance Company of America.
Note 3. Other Prudential Mutual Fund Ser-
Transactions vices, Inc. (``PMFS''), a
with Affiliates wholly-owned subsidiary of
PMF, serves as the Fund's transfer agent. During
the six months ended February 28, 1994, the Series incurred fees of
approximately $24,600 for the services of PMFS. As of February 28, 1994,
approximately $4,200 of such fees were due to PMFS. Transfer agent fees and
expenses in the Statement of Operations include certain out-of-pocket expenses
paid to non-affiliates.
B-89
<PAGE>
Note 4. Portfolio Purchases and sales of port-
Securities folio securities of the Series,
excluding short-term investments, for the six
months ended February 28, 1994 were $51,973,065 and $40,553,596, respectively.
The cost basis of investments for federal income tax purposes was
substantially the same as for financial reporting purposes and accordingly, as
of February 28, 1994 net unrealized appreciation of investments for federal
income tax purposes was $11,099,469 (gross unrealized appreciation--
$13,034,434; gross unrealized depreciation--$1,934,965).
At February 28, 1994, the Series sold 26 financial futures contracts on the
Municipal Bond Index which expire in March 1994 and sold 33 financial futures
contracts on U.S. Treasury Bonds which expire in March 1994. The aggregate value
at sale of such contracts was $6,431,688. The aggregate value of such contracts
on February 28, 1994 was $6,297,219, thereby resulting in an unrealized gain of
$134,469. The Series has pledged $1,500,000 principal amount of Assoc. of Bay
Area Govt's. Fin. Auth., Cert. of Part., Channing House, $4,500,000 principal
amount of Culver City Redev. Fin. Auth. Rev., $2,000,000 principal amount of
Met. Wtr. Dist. of Southern California, Waterworks Rev., $2,100,000 principal
amount of Puerto Rico Hwy. & Trans. Auth. Rev., and $2,625,000 principal amount
of Puerto Rico Pub. Bldgs. Auth., Gtd. Pub. Ed. & Hlth. Facs., as initial margin
on such contracts.
Note 5. Capital The Series offers both Class
A and Class B shares. Class A shares are sold with
a front-end sales charge of up to 4.5%. 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. Both classes of shares have equal rights as
to earnings, assets and voting privileges except that each class bears
different distribution expenses and has exclusive voting rights with respect to
its distribution plan.
The Fund has authorized an unlimited number of shares of beneficial interest
for each class at $.01 par value per share.
Transactions in shares of beneficial interest for the six months ended
February 28, 1994 and the fiscal year ended August 31, 1993 were as follows:
<TABLE>
<CAPTION>
Class A Shares Amount
- ------------------------------ ---------- ------------
<S> <C> <C>
Six months ended February 28,
1994:
Shares sold................... 1,827,115 $ 19,577,919
Shares issued in reinvestment
of
dividends and
distributions............... 357,375 3,793,034
Shares reacquired............. (1,936,981) (20,737,507)
---------- ------------
Net increase in shares
outstanding................. 247,509 $ 2,633,446
---------- ------------
---------- ------------
Year ended August 31, 1993:
Shares sold................... 7,698,093 $ 79,117,890
Shares issued in reinvestment
of
dividends and
distributions............... 476,213 4,887,486
Shares reacquired............. (3,368,427) (34,498,280)
---------- ------------
Net increase in shares
outstanding................. 4,805,879 $ 49,507,096
---------- ------------
---------- ------------
<CAPTION>
Class B
- ------------------------------
<S> <C> <C>
December 7, 1993* through
February 28, 1994:
Shares sold................... 643,684 $ 6,861,542
Shares issued in reinvestment
of
dividends................... 1,720 18,143
Shares reacquired............. (10,750) (114,584)
---------- ------------
Net increase in shares
outstanding................. 634,654 $ 6,765,101
---------- ------------
---------- ------------
- ---------------
*Commencement of Class B operations.
</TABLE>
B-90
<PAGE>
PRUDENTIAL CALIFORNIA MUNICIPAL FUND
CALIFORNIA INCOME SERIES
Financial Highlights
(Unaudited)
<TABLE>
<CAPTION>
Class A Class B
------------------------------------------------------------- ------------
<S> <C> <C> <C> <C> <C>
December 3, December 7,
Six Months 1990* 1993(D)(D)
Ended Year Ended August 31, Through Through
February 28, --------------------------- August 31, February 28,
1994 1993 1992 1991 1994
<CAPTION>
------------ -------- -------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period............ $ 10.68 $ 10.08 $ 9.76 $ 9.55 $ 10.61
------------ -------- -------------- ------------ ------------
Income from investment operations
Net investment income(D)........................ .33 .67 .69 .51 .15
Net realized and unrealized gain (loss) on
investment transactions....................... (.08) .65 .35 .21 (.11)
------------ -------- -------------- ------------ ------------
Total from investment operations.............. .25 1.32 1.04 .72 .04
------------ -------- -------------- ------------ ------------
Less distributions
Dividends from net investment income............ (.33) (.67) (.69) (.51) (.15)
Distributions from net realized gains........... (.10) (.05) (.03) -- --
------------ -------- -------------- ------------ ------------
Total distributions........................... (.43) (.72) (.72) (.51) (.15)
------------ -------- -------------- ------------ ------------
Net asset value, end of period.................. $ 10.50 $ 10.68 $ 10.08 $ 9.76 $ 10.50
------------ -------- -------------- ------------ ------------
------------ -------- -------------- ------------ ------------
TOTAL RETURN#................................... 2.45% 13.67% 11.08% 7.97% .82%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000)................. $200,015 $200,899 $141,101 $72,241 $6,662
Average net assets (000)........................ $203,895 $165,895 $102,227 $47,540 $3,105
Ratios to average net assets(D)/@:
Expenses, including distribution fees......... .29%** .20% .10% .0%** .76%**
Expenses, excluding distribution fees......... .19%** .10% .04% .0%** .26%**
Net investment income......................... 6.19%** 6.52% 6.91% 7.04%** 6.07%**
Portfolio turnover.............................. 20% 34% 69% 35% 20%
</TABLE>
- ---------------
* Commencement of investment operations.
** Annualized.
(D) Net of expense subsidy and/or fee waiver.
(D)(D) Commencement of offering of Class B shares.
# Total return does not consider the effects of sales loads. Total
return is calculated assuming a purchase of shares on the first
day and a sale on the last day of each period reported and
includes reinvestment of dividends and distributions. Total
returns for periods of less than a full year are not annualized.
@ Because of the events referred to in (D)(D) and the timing of
such, the ratios for the Class A shares are not necessarily
comparable to that of Class B shares and are not necessarily
indicative of future ratios.
See Notes to Financial Statements.
B-91
<PAGE>
PRUDENTIAL CALIFORNIA MUNICIPAL FUND Portfolio of Investments
CALIFORNIA MONEY MARKET SERIES February 28, 1994 (Unaudited)
<TABLE>
<CAPTION>
Principal
Moody's Amount Value
Rating (000) Description (a) (Note 1)
<S> <C> <C> <C>
Alameda Rev.,
KQED, Inc. Proj.,
F.R.W.D.,
VMIG2 $ 6,300 3.10%, 3/2/94, Ser.
90.................... $ 6,300,000
California Hsg. Fin.
Agy. Rev., A.N.N.M.T.,
Home Mtge. Rev.,
VMIG1 15,000 2.40%, 9/15/94, Ser.
93F................... 14,987,785
California Poll. Ctrl.
Fin. Auth.
Rev., T.E.C.P.,
A1+* 8,000 2.40%, 4/25/94, Ser.
88B................... 8,000,000
Honey Lake Power Proj.,
F.R.D.D.,
Aa1 100 2.25%, 3/1/94, Ser.
88.................... 100,000
Ultrapower Malaga Fresno
Proj., F.R.D.D.,
P1 5,000 2.35%, 3/1/94, Ser.
88A................... 5,000,000
P1 3,000 2.35%, 3/1/94, Ser.
88B................... 3,000,000
Ultrapower Rocklin
Proj., F.R.D.D.,
P1 2,300 2.35%, 3/1/94, Ser.
88A................... 2,300,000
P1 1,600 2.35%, 3/1/94, Ser.
88B................... 1,600,000
California Rural Home
Mtge. Fin. Auth. Rev.,
F.R.M.D.,
VMIG1 11,345 2.81%, 3/1/94, Ser.
93.................... 11,345,000
California St., R.A.N.,
MIG1 18,300 2.55%, 3/3/94, Ser.
93-94................. 18,300,000
Chula Vista Ind. Dev.
Auth. Rev.,
San Diego Gas & Elec.
Co., T.E.C.P.,
P1 5,000 2.30%, 3/11/94, Ser.
92C................... 5,000,000
VMIG1 10,000 2.40%, 4/22/94, Ser.
92E................... 10,000,000
Delaware Mar Race Track
Auth., T.E.C.P.,
P1 3,000 2.60%, 4/8/94, Ser.
94.................... 3,000,000
Irvine Impvt. Bd., Dist.
85-7,
T.E.C.P.,
VMIG1 8,000 2.55%, 3/1/94, Ser.
86.................... 8,000,000
VMIG1 6,900 2.45%, 3/8/94, Ser.
86.................... 6,900,000
Irvine Ranch Wtr. Dist., F.R.D.D.,
VMIG1 $ 600 2.25%, 3/1/94, Ser.
93A................... $ 600,000
Kings Cnty. Multi-family
Rev.
Hsg. Auth., Edgewatger
Isle
Proj., F.R.W.D.,
VMIG1 15,170 2.55%, 3/2/94, Ser.
85A................... 15,170,000
Long Beach, T.R.A.N.,
MIG1 12,000 3.25%, 9/21/94, Ser.
93-94................. 12,026,693
Los Angeles Cnty.,
T.E.C.P.,
VMIG1 7,200 2.30%, 4/21/94, Ser.
93-94................. 7,200,000
Los Angeles Dept. Wtr. &
Pwr., T.E.C.P.,
P1 6,000 2.35%, 3/28/94, Ser.
90.................... 6,000,000
Los Angeles Hsg. Auth.,
Multi-family Rev.,
Lanewood Apts. Proj.,
F.R.W.D.,
VMIG1 7,000 2.55%, 3/2/94, Ser.
85.................... 7,000,000
Los Angeles Unified Sch.
Dist.,
T.R.A.N.,
MIG1 15,000 3.25%, 7/15/94, Ser.
93-94................. 15,027,182
Moorpark Ind. Dev. Auth.
Rev.,
Kavli & Kavlico Corp., F.R.W.D.,
VMIG1 6,795 2.60%, 3/3/94, Ser.
85.................... 6,795,000
Oakland Multi-family
Hsg. Rev.,
Skyline Hills Assoc.,
F.R.W.D.,
MIG1 6,700 2.55%, 3/3/94, Ser.
85A................... 6,700,000
Ontario Multi-family
Hsg. Rev.,
Park Ctr. Proj.,
F.R.W.D.,
VMIG1 8,400 2.45%, 3/3/94, Ser.
85A................... 8,400,000
Orange Cnty. Apt. Dev.
Rev.,
Bear Brand Apts. Proj.,
F.R.W.D.,
VMIG1 4,000 2.35%, 3/3/94, Ser.
85Z................... 4,000,000
Irvine Co. Proj.,
T.E.C.P.,
VMIG1 9,800 2.50%, 3/23/94, Ser.
85V................... 9,800,000
Lakes Proj., F.R.W.D.,
A1* 4,600 2.35%, 3/3/94, Ser.
91A................... 4,600,000
Lantern Pines Proj.,
F.R.W.D.,
VMIG1 3,475 2.40%, 3/2/94, Ser.
85C................... 3,475,000
</TABLE>
B-92 See Notes to Financial Statements.
<PAGE>
PRUDENTIAL CALIFORNIA MUNICIPAL FUND
CALIFORNIA MONEY MARKET SERIES
<TABLE>
<CAPTION>
Principal
Moody's Amount Value
Rating (000) Description (a) (Note 1)
<S> <C> <C> <C>
Orange Cnty. Apt. Dev. Rev. (cont'd.)
Robinson Ranch Apts.,
F.R.W.D.,
VMIG1 $ 8,400 2.55%, 3/3/94, Ser.
85Y................... $ 8,400,000
Vintage Woods Apts.,
F.R.W.D.,
VMIG1 8,300 2.45%, 3/3/94, Ser.
84E................... 8,300,000
Orange Cnty. Local
Trans. Sales Tax Rev.,
T.E.C.P.,
P1 13,000 2.50%, 3/9/94........... 13,000,000
Orange Cnty. Sanitation,
F.R.D.D.,
VMIG1 4,000 2.20%, 3/1/94, Ser.
90-92C................ 4,000,000
Palmdale Cmnty. Redev.
Agy.,
Manzanita Villas Apt.
Proj., F.R.W.D.,
VMIG1 4,800 2.65%, 3/3/94, Ser.
93A................... 4,800,000
San Diego Cnty.,
T.R.A.N.,
MIG1 10,000 3.25%, 7/29/94.......... 10,017,373
San Diego Cnty., Regl.
Trans. Cmnty., Sales
Tax Rev., T.E.C.P.,
P1 3,800 2.45%, 3/24/94, Ser.
A..................... 3,800,000
VMIG1 4,000 2.60%, 4/1/94, Ser. A... 4,000,000
San Francisco Bay Area,
Rapid Trans. Dist.,
T.E.C.P.,
P1 3,000 2.40%, 3/25/94, Ser.
A..................... 3,000,000
San Joaquin Cnty.Trans.
Auth.,
Sales Tax Rev.,
F.R.W.D.,
P1 8,000 2.35%, 3/2/94, Ser.
93.................... 8,000,000
San Marcos Ind. Dev.
Auth. Rev.,
Village Square Proj.,
F.R.W.D.,
Aa2 4,000 2.50%, 3/3/94, Ser.
92.................... 4,000,000
Santa Maria, Cert. of
Part.,
Town Ctr. & Westside Pkg. Facs.,
AAA* 9,695 10.75%, 6/1/94.......... 10,175,060
Southern Pub. Pwr.
Auth.,
Transmission Proj. Rev.,
F.R.W.D.,
P1 14,000 2.25%, 3/2/94, Ser.
91.................... 14,000,000
Tulare Cnty., T.R.A.N.,
SP1+* $15,000 3.25%, 7/14/94, Ser.
93.................... $ 15,028,022
Visalia, Cert. of Part.,
Convention Ctr.,
A1+* 8,980 2.30%, 3/2/94,
F.R.W.D............... 8,980,000
------------
Total Investments--99.3%
(amortized cost--
$330,127,115**)....... 330,127,115
Other assets in excess
of
liabilities--0.7%..... 2,284,273
------------
Net Assets--100%........ $332,411,388
------------
------------
</TABLE>
- ------------------
(a) The following abbreviations are used in portfolio descriptions:
A.N.N.M.T.--Annual Mandatory Tender.
F.R.D.D.--Floating Rate (Daily) Demand Note #.
F.R.M.D.--Floating Rate (Monthly) Demand Note #.
F.R.W.D.--Floating Rate (Weekly) Demand Note #.
R.A.N.--Revenue Anticipation Note.
T.E.C.P.--Tax-Exempt Commercial Paper.
T.R.A.N.--Tax & Revenue Anticipation Note.
# For purposes of amortized cost valuation, the maturity date of Floating Rate
Demand Notes is considered to be the later of the next date on which the
security can be redeemed at par or the next date on which the rate of
interest is adjusted.
* Standard & Poor's rating.
** The cost of securities for federal income tax purposes is substantially the
same as for financial reporting purposes.
The Fund's current Statement of Additional Information contains
a description of Moody's and Standard & Poor's ratings.
B-93 See Notes to Financial Statements.
<PAGE>
PRUDENTIAL CALIFORNIA MUNICIPAL FUND
CALIFORNIA MONEY MARKET SERIES
Statement of Assets and Liabilities
(Unaudited)
<TABLE>
<CAPTION>
February 28,
Assets 1994
------------
<S> <C>
Investments, at amortized cost which approximates market value............................ $330,127,115
Cash...................................................................................... 3,655
Receivable for Fund shares sold........................................................... 4,147,516
Accrued interest receivable............................................................... 2,303,727
Deferred expenses and other assets........................................................ 4,120
------------
Total assets.......................................................................... 336,586,133
------------
Liabilities
Payable for Fund shares reacquired........................................................ 3,738,008
Accrued expenses and other liabilities.................................................... 233,038
Due to Manager............................................................................ 131,227
Due to Distributor........................................................................ 50,877
Dividends payable......................................................................... 20,164
Deferred trustee's fees................................................................... 1,431
------------
Total liabilities..................................................................... 4,174,745
------------
Net Assets................................................................................ $332,411,388
------------
------------
Net assets were comprised of:
Shares of beneficial interest, at $.01 par value......................................... $ 3,324,114
Paid-in capital in excess of par........................................................ 329,087,274
------------
Net assets, February 28, 1994........................................................... $332,411,388
------------
------------
Net asset value, offering price and redemption price per share ($332,411,388 / 332,411,388
shares of
beneficial interest issued and outstanding; unlimited number of shares authorized)...... $1.00
------------
------------
</TABLE>
See Notes to Financial Statements.
B-94
<PAGE>
PRUDENTIAL CALIFORNIA MUNICIPAL FUND
CALIFORNIA MONEY MARKET SERIES
Statement of Operations
(Unaudited)
<TABLE>
<CAPTION>
Six Months
Ended
February
Net Investment Income 28, 1994
----------
<S> <C>
Income
Interest........................... $4,346,279
----------
Expenses
Management fee..................... 840,382
Distribution fee................... 210,096
Custodian's fees and expenses...... 89,000
Transfer agent's fees and
expenses........................... 68,000
Reports to shareholders............ 11,000
Registration fees.................. 10,000
Audit fee.......................... 7,500
Legal fees......................... 7,000
Amortization of organization
expenses........................... 4,600
Insurance expense.................. 4,000
Trustees' fees..................... 4,000
Miscellaneous...................... 1,965
----------
Total expenses................... 1,257,543
----------
Net investment income................ 3,088,736
Realized Gain on Investments
Net realized gain on investment
transactions....................... 17,614
----------
Net Increase in Net Assets
Resulting from Operations............ $3,106,350
----------
----------
</TABLE>
PRUDENTIAL CALIFORNIA MUNICIPAL FUND
CALIFORNIA MONEY MARKET SERIES
Statement of Changes in Net Assets
(Unaudited)
<TABLE>
<CAPTION>
Six Months
Ended Year Ended
Increase (Decrease) February 28, August 31,
in Net Assets 1994 1993
------------- ---------------
<S> <C> <C>
Operations
Net investment
income............... $ 3,088,736 $ 5,852,209
Net realized gain on
investment
transactions....... 17,614 10,297
------------- ---------------
Net increase in net
assets resulting
from operations.... 3,106,350 5,862,506
------------- ---------------
Dividends and
distributions
to shareholders (Note
1)................... (3,106,350) (5,862,506)
------------- ---------------
Fund share transactions
(at $1 per share)
Net proceeds from
shares
subscribed......... 702,527,806 1,219,363,584
Net asset value of
shares issued in
reinvestment of
dividends and
distributions...... 3,074,956 5,672,116
Cost of shares
reacquired......... (688,116,704) (1,226,000,814)
------------- ---------------
Net increase
(decrease) in net
assets from Fund
share
transactions....... 17,486,058 (965,114)
------------- ---------------
Total increase
(decrease)........... 17,486,058 (965,114)
Net Assets
Beginning of period.... 314,925,330 315,890,444
------------- ---------------
End of period.......... $ 332,411,388 $ 314,925,330
------------- ---------------
------------- ---------------
</TABLE>
See Notes to Financial Statements. See Notes to Financial Statements.
B-95
<PAGE>
PRUDENTIAL CALIFORNIA MUNICIPAL FUND
CALIFORNIA MONEY MARKET SERIES
Notes to Financial Statements
(Unaudited)
Prudential California Municipal 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
three series. The monies of each series are invested in separate, independently
managed portfolios. The California Money Market Series (the ``Series'')
commenced investment operations on March 3, 1989. The Series is diversified and
seeks to achieve its investment objective of obtaining the maximum amount of
income exempt from California state and federal income taxes with the minimum
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 a nationally recognized statistical rating organization
or, if not rated, are of comparable quality. The ability of the issuers of the
securities held by the Series to meet their obligations may be affected by
economic developments in a specific state, industry or region.
Note 1. Accounting The following is a summary
Policies of significant accounting poli-
cies followed by the Fund, and the Series, in the
preparation of its financial statements.
Securities Valuations: Portfolio securities of the Series are valued at
amortized cost, which approximates market value. The amortized cost method of
valuation involves valuing a security at its cost on the date of purchase and
thereafter assuming a constant amortization to maturity of any discount or
premium.
All securities are valued as of 4:30 P.M., New York time.
Securities Transactions and Investment Income: Securities transactions are
recorded on the trade date. Realized gains and losses on sales of investments
are calculated on the identified cost basis. Interest income is recorded on the
accrual basis.
Federal Income Taxes: For federal income tax purposes, each series in the Fund
is treated as a separate taxpaying entity. It is the intent of the Series to
continue to meet the requirements of the Internal Revenue Code applicable to
regulated investment companies and to continue to distribute all of its net
income to shareholders. For this reason and because substantially all of the
Series' gross income consists of tax-exempt interest, no federal income tax
provision is required.
Dividends: The Series declares daily dividends from net investment income.
Payment of dividends is made monthly.
Deferred Organization Expenses: The Series incurred $46,000 in organization and
initial registration expenses. Such amount has been deferred and is being
amortized over a period of 60 months ending March 1994.
Note 2. Agreements The Fund has a management
agreement with Prudential Mutual Fund Management,
Inc. (``PMF''). Pursuant to this agreement PMF has responsibility for all
investment advisory services and supervises the subadviser's performance of such
services. PMF has entered into a subadvisory agreement with The Prudential
Investment Corporation (``PIC''); PIC furnishes investment advisory services in
connection with the management of the Fund. PMF pays for the cost of the
subadviser's services, the compensation of officers of the Fund, occupancy and
certain clerical and bookkeeping costs of the Fund. The Fund bears all other
costs and expenses.
The management fee paid PMF is computed daily and payable monthly, at the
annual rate of .50 of 1% of the average daily net assets of the Series.
The Fund has a distribution agreement with Prudential Mutual Fund
Distributors, Inc. (``PMFD''). To reimburse PMFD for its expenses incurred
pursuant to a plan of distribution, the Fund pays PMFD a reimbursement, accrued
daily and payable monthly, at an annual rate of .125 of 1% of the Series'
average daily net assets. PMFD pays various broker-dealers, including Prudential
Securities Incorporated (``PSI'') and Pruco Securities Corporation, affiliated
broker-dealers, for account servicing fees and other expenses incurred by such
broker-dealers.
PMFD is a wholly-owned subsidiary of PMF; PSI, PIC, and PMF are (indirect)
wholly-owned subsidiaries of The Prudential Insurance Company of America.
Note 3. Other Prudential Mutual Fund Ser-
Transactions vices, Inc. (``PMFS''), a
with Affiliates wholly-owned subsidiary of
PMF, serves as the Fund's transfer agent. During
the six months ended February 28, 1994, the Series incurred fees of
approximately $60,700 for the services of PMFS. As of February 28, 1994,
approximately $10,300 of such fees were due to PMFS. Transfer agent fees and
expenses in the Statement of Operations include certain out-of-pocket expenses
paid to non-affiliates.
B-96
<PAGE>
PRUDENTIAL CALIFORNIA MUNICIPAL FUND
CALIFORNIA MONEY MARKET SERIES
Financial Highlights
(Unaudited)
<TABLE>
<CAPTION>
March 3,
1989*
Six Months through
Ended Year Ended August 31, August
February 28, -------------------------------------------- 31,
PER SHARE OPERATING PERFORMANCE: 1994 1993 1992 1991 1990 1989
------------ -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
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...... .01 .02 .03 .04(D) .05(D) .03(D)
Dividends and distributions....................... (.01) (.02) (.03) (.04) (.05) (.03)
------------ -------- -------- -------- -------- --------
Net asset value, end of period.................... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
------------ -------- -------- -------- -------- --------
------------ -------- -------- -------- -------- --------
TOTAL RETURN#:.................................... .94% 1.86% 2.91% 4.48% 5.59% 3.21%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)................... $ 332,411 $314,925 $315,890 $341,625 $388,739 $244,180
Average net assets (000).......................... $ 338,939 $319,464 $339,941 $375,655 $330,581 $174,500
Ratios to average net assets:
Expenses, including distribution fee............ .75%** .76% .76% .63%(D) .38%(D) .19%**(D)
Expenses, excluding distribution fee............ .62%** .63% .63% .51%(D) .25%(D) .08%**(D)
Net investment income........................... 1.84%** 1.83% 2.89% 4.37%(D) 5.40%(D) 5.57%**(D)
- ---------------
* Commencement of investment operations.
** Annualized.
(D) Net of management fee waiver and/or expense subsidy.
# Total return includes reinvestment of dividends and distributions. Total returns for periods of less than a
full year are not annualized.
</TABLE>
See Notes to Financial Statements.
B-97
<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 more unlikely to impair
the fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group, they comprise what are generally known
as high grade bonds. They are rated lower than Aaa bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than in Aaa securities.
Moody's applies numerical modifiers "1", "2" and "3" to each generic rating
classification from Aa through B. The modifier "1" indicates that the security
ranks in the higher end of its generic category; the modifier "2" indicates a
mid ranking; and the modifier "3" indicates that the issue ranks in the lower
end of its generic rating category.
A: Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving security
to principal and interest are considered adequate but elements may be present
which suggest a susceptibility to impairment sometime in the future.
Baa: Bonds which are rated Baa are considered as medium grade obligations,
I.E., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present, but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba: Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate, and thereby not well safeguarded
during other good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
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.
TAX-EXEMPT NOTES
Moody's ratings for tax-exempt notes and other short-term loans are
designated Moody's Investment Grade (MIG). This distinction is in recognition of
the differences between short-term and long-term credit risk.
MIG 1: Loans bearing the designation MIG 1 are of the best quality, enjoying
strong protection by established cash flows, superior liquidity support or
demonstrated broad-based access to the market for refinancing.
MIG 2: Loans bearing the designation MIG 2 are of high quality, with margins
of protection ample although not so large as in the preceding group.
MIG 3: Loans bearing the designation MIG 3 are of favorable quality, with all
security elements accounted for but lacking the strength of the preceding
grades.
A-1
<PAGE>
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.
COMMERCIAL PAPER
Moody's Commercial Paper Ratings are opinions of the ability of issuers to
repay punctually promissory obligations not having an original maturity in
excess of 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 CORPORATION
BOND RATINGS
AAA: Debt rated AAA has the highest rating assigned by Standard & Poors.
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 in accordance with the terms of the obligation. BB
indicates the lowest degree of speculation and C the highest degree of
speculation. While such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
D: Debt rated D is in default, and payment of interest and/or repayment of
principal is in arrears.
COMMERCIAL PAPER
A Standard & Poor's Commercial Paper rating is a current assessment of the
likelihood of timely payment of debt considered short-term in the relevant
market.
A-1: The A-1 designation indicates that the degree of safety regarding timely
payment is either overwhelming or very strong. A "+" designation is applied to
those issues rated A-1 which possess extremely strong safety characteristics.
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.
A-3: Issues carrying this designation have a satisfactory capacity for timely
payment. They are, however, somewhat more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher designations.
TAX-EXEMPT NOTES
Municipal notes issued after July 29, 1984 are rated SP-1, SP-2 and SP-3.
Municipal notes outstanding on July 29, 1984 carry the same symbols as municipal
bonds. The designation SP-1 indicates a very strong capacity to pay principal
and interest. A "+" is added to those issues determined to possess overwhelming
safety characteristics. An SP-2 designation indicates a satisfactory capacity to
pay principal and interest. An SP-3 designation indicates speculative capacity
to pay principal and interest.
A-2
<PAGE>
PART C
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS.
(A) FINANCIAL STATEMENTS:
(1) The following financial statements are included in the Prospectuses
constituting Part A of this Registration Statement:
Financial Highlights.
(2) The following financial statements are included in the Statement of
Additional Information constituting Part B of this Registration Statement:
Portfolio of Investments at August 31, 1993 and at February
28, 1994 (unaudited).
Statement of Assets and Liabilities at August 31, 1993 and
at February 28, 1994 (unaudited).
Statement of Operations for the year ended August 31, 1993
and the six months ended February 28, 1994 (unaudited).
Statement of Changes in Net Assets for the years ended
August 31, 1993 and 1992 and the six months ended February
28, 1994 (unaudited).
Notes to Financial Statements.
Financial Highlights.
Independent Auditors' Reports.
(B) EXHIBITS:
1. (a) Declaration of Trust of the Registrant. (Incorporated by
reference to Exhibit No. 1 to Registration Statement on Form N-1A
filed May 18, 1984 (File No. 2-91215).)
(b) Amendments to Declaration of Trust. (Incorporated by reference
to Exhibit No. 1(b) to Post-Effective Amendment No. 9 to
Registration Statement on Form N-1A filed December 28, 1989 (File
No. 2-91215).)
2. Restated By-Laws.*
4. (a) Specimen receipt for shares of beneficial interest, $.01 par
value, of the Registrant (for Class B shares and shares of the
California Money Market Series). (Incorporated by reference to
Exhibit No. 4 to Post-Effective Amendment No. 5 to Registration
Statement on Form N-1A filed October 31, 1988 (File No. 2-91215).)
(b) Specimen receipt for shares of beneficial interest, $.01 par
value, of the Registrant (for Class A shares). (Incorporated by
reference to Exhibit No. 4(b) to Post-Effective Amendment No. 10
to Registration Statement on Form N-1A filed August 24, 1990 (File
No. 2-91215).)
(c) Specimen receipt for shares of beneficial interest of
California Income Series. (Incorporated by reference to Exhibit
No. 4(c) to Post-Effective Amendment No. 12 to Registration
Statement on Form N-1A filed December 3, 1990 (File No. 2-91215).)
5. (a) Management Agreement between the Registrant and Prudential
Mutual Fund Management, Inc. (Incorporated by reference to Exhibit
No. 5(a) to Post-Effective Amendment No. 7 to Registration
Statement on Form N-1A filed November 2, 1989 (File No. 2-91215).)
(b) Subadvisory Agreement between Prudential Mutual Fund
Management, Inc. and The Prudential Investment Corporation.
(Incorporated by reference to Exhibit No. 5(b) to Post-Effective
Amendment No. 7 to Registration Statement on Form N-1A filed
November 2, 1989 (File No. 2-91215).)
6 (a) Subscription Offering Agreement between Prudential-Bache
California Municipal Fund and Prudential Mutual Fund Distributors,
Inc. (Incorporated by reference to Exhibit No. 6(e) to
Post-Effective Amendment No. 11 to Registration Statement on Form
N-1A filed October 10, 1990 (File No. 2-91215).)
C-1
<PAGE>
(b) Amended and Restated Distribution Agreement with respect to
Class A shares between the Registrant and Prudential Mutual Fund
Distributors, Inc. (Incorporated by reference to Exhibit No. 6(g)
to Post-Effective Amendment No. 17 to Registration Statement on
Form N-1A via EDGAR filed November 1, 1993 (File No. 2-91215).)
(c) Amended and Restated Distribution Agreement with respect to
Class B shares between the Registrant and Prudential Securities
Incorporated (Incorporated by reference to Exhibit No. 6(h) to
Post-Effective Amendment No. 17 to Registration Statement on Form
N-1A via EDGAR filed November 1, 1993 (File No. 2-91215).)
(d) Amended and Restated Distribution Agreement with respect to
California Money Market Series between the Registrant and
Prudential Mutual Fund Distributors, Inc. (Incorporated by
reference to Exhibit No. 6(i) to Post-Effective Amendment No. 17 to
Registration Statement on Form N-1A via EDGAR filed November 1,
1993 (File No. 2-91215).)
(e)_Form of Distribution Agreement for Class A shares.*
(f)_Form of Distribution Agreement for Class B shares.*
(g)_Form of Distribution Agreement for Class C shares.*
8. (a) Custodian Agreement between the Registrant and State Street
Bank and Trust Company. (Incorporated by reference to Exhibit No.
8 to Post-Effective Amendment No. 7 to Registration Statement on
Form N-1A filed November 2, 1989 (File No. 2-91215).)
(b) Custodian Contract between the Registrant and State Street
Bank and Trust Company. (Incorporated by reference to Exhibit No.
8(b) to Post-Effective Amendment No. 10 to Registration Statement
on Form N-1A filed August 24, 1990 (File No. 2-91215).)
9. Transfer Agency and Service Agreement between the Registrant and
Prudential Mutual Fund Services, Inc. (Incorporated by reference
to Exhibit No. 9 to Post-Effective Amendment No. 7 to Registration
Statement on Form N-1A filed November 2, 1989 (File No. 2-91215).)
11. Consent of Independent Accountants.*
13. Purchase Agreement. (Incorporated by reference to Exhibit No. 13
to Pre-Effective Amendment No. 1 to Registration Statement on Form
N-1A filed August 29, 1984 (File No. 2-91215).)
15. (a) Distribution and Service Plan with respect to Class A shares
between Registrant and Prudential Mutual Fund Distributors, Inc.
(Incorporated by reference to Exhibit No. 15(f) to Post-Effective
Amendment No. 17 to Registration Statement on Form N-1A via EDGAR
filed November 1, 1993 (File No. 2-91215).)
(b) Distribution and Service Plan with respect to Class B shares
between the Registrant and Prudential Securities Incorporated
(Incorporated by reference to Exhibit No. 15(g) to Post-Effective
Amendment No. 17 to Registration Statement on Form N-1A via EDGAR
filed November 1, 1993 (File No. 2-91215).)
(c) Distribution and Service Plan with respect to California Money
Market Series between the Registrant and Prudential Mutual Fund
Distributors, Inc. (Incorporated by reference to Exhibit No. 15(h)
to Post-Effective Amendment No. 17 to Registration Statement on
Form N-1A via EDGAR filed November 1, 1993 (File No. 2-91215).)
(d)_Form of Distribution and Service Plan for Class A shares.*
(e)_Form of Distribution and Service Plan for Class B shares.*
(f)_Form of Distribution and Service Plan for Class C shares.*
16. (a) Schedule of Computation of Performance Information.
(Incorporated by reference to Exhibit No. 16 to Post-Effective
Amendment No. 7 to Registration Statement on Form N-1A filed
November 2, 1989 (File No. 2-91215).)
(b) Schedule of Computation of Performance Information for Class A
shares. (Incorporated by reference to Exhibit No. 16(b) to
Post-Effective Amendment No. 12 to Registration Statement on Form
N-1A filed December 3, 1990 (File No. 2-91215).)
- --------------
*Filed herewith.
Powers of Attorney. Executed copies filed under "Other Exhibits" to
Post-Effective Amendment No. 11 to Registration Statement on Form N-1A filed
October 10, 1990 (File No. 2-91215).
C-2
<PAGE>
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
None.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES.
As of March 31, 1994, each series of the Fund had the following number of
record holders of shares of beneficial interest, $.01 par value per share:
California Series, 228 record holders of Class A shares and 2,689 record holders
of Class B shares; California Income Series, 514 record holders of Class A
shares and 24 record holders of Class B shares; and California Money Market
Series, 200 record holders.
ITEM 27. INDEMNIFICATION.
Article V, Section 5.1 of the Registrant's Declaration of Trust provides
that neither shareholders nor Trustees, officers, employees or agents shall be
subject to personal liability to any other person, except (with respect to
Trustees, officers, employees or agents) liability arising from bad faith,
willful misfeasance, gross negligence or reckless disregard of his of her
duties. Section 5.1 also provides that the Registrant will indemnify and hold
harmless each shareholder against all claims and all expenses reasonably related
thereto.
As permitted by Sections 17(h) and (i) of the Investment Company Act of 1940
(the 1940 Act) and pursuant to Article VI of the Fund's By-Laws (Exhibit 2 to
the Registration Statement), officers, Trustees, employees and agents of the
Registrant will not be liable to the Registrant, any shareholder, officer,
Trustee, employee, agent or other person for any action or failure to act,
except for bad faith, willful misfeasance, gross negligence or reckless
disregard of duties, and those individuals may be indemnified against
liabilities in connection with the Registrant, subject to the same exceptions.
As permitted by Section 17(i) of the 1940 Act, pursuant to Section 9 or 10 of
each Distribution Agreement (Exhibits 6(b), 6(c) and 6(d) to the Registration
Statement), each Distributor of the Registrant may be indemnified against
liabilities which it may incur, except liabilities arising from bad faith, gross
negligence, willful misfeasance or reckless disregard of duties.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (Securities Act) may be permitted to Trustees, officers and controlling
persons of the Registrant pursuant to the foregoing provisions or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
1940 Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a Trustee, officer or controlling
person of the Registrant in connection with the successful defense of any
action, suit or proceeding) is asserted against the Registrant by such Trustee,
officer or controlling person in connection with the shares being registered,
the Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the 1940 Act and will be governed by the final adjudication of such
issue.
The Registrant has purchased an insurance policy insuring its officers and
Trustees against liabilities, and certain costs of defending claims against such
officers and Trustees, to the extent such officers and Trustees are not found to
have committed conduct constituting willful misfeasance, bad faith, gross
negligence or reckless disregard in the performance of their duties. The
insurance policy also insures the Registrant against the cost of indemnification
payments to officers and Trustees under certain circumstances.
Section 9 of the Management Agreement (Exhibit 5(a) to the Registration
Statement) and Section 4 of the Subadvisory Agreement (Exhibit 5(b) to the
Registration Statement) limit the liability of Prudential Mutual Fund
Management, Inc. (PMF) and The Prudential Investment Corporation (PIC),
respectively, to liabilities arising from willful misfeasance, bad faith or
gross negligence in the performance of their respective obligations and duties
under the agreements.
The Registrant hereby undertakes that it will apply the indemnification
provisions of its By-Laws and each Distribution Agreement in a manner consistent
with Release No. 11330 of the Securities and Exchange Commission under the 1940
Act so long as the interpretations of Section 17(h) and 17(i) of such Act remain
in effect and are consistently applied.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
(a) Prudential Mutual Fund Management, Inc.
See "How the Fund is Managed" in the Prospectuses constituting Part A of
this Registration Statement and "Manager" in the Statement of Additional
Information constituting Part B of this Registration Statement.
The business and other connections of the officers of PMF are listed in
Schedules A and D of Form ADV of PMF as currently on file with the Securities
and Exchange Commission, the text of which is hereby incorporated by reference
(File No. 801-31104, filed in October 1993).
C-3
<PAGE>
The business and other connections of PMF's directors and principal
executive officers are set forth below. Except as otherwise indicated, the
address of each person is One Seaport Plaza, New York, NY 10292.
<TABLE>
<CAPTION>
NAME AND ADDRESS POSITION WITH PMF PRINCIPAL OCCUPATIONS
- ----------------------------- ------------------------- -----------------------------------------------------------------
<S> <C> <C>
Brendan D. Boyle Executive Vice President Executive Vice President and Director of Marketing, PMF
and Director of
Marketing
John D. Brookmeyer, Jr. Director Senior Vice President, The Prudential Insurance Company of
Two Gateway Center America (Prudential); Senior Vice President, PIC
Newark, NJ 07102
Susan C. Cote Senior Vice President Senior Vice President, PMF; Senior Vice President, Prudential
Securities
Fred A. Fiandaca Executive Vice President, Executive Vice President, Chief Operating Officer and Director,
Raritan Plaza One Chief Operating Officer PMF; Chairman, Chief Operating Officer and Director, Prudential
Edison, NJ 08847 and Director Mutual Fund Services, Inc.
Stephen P. Fisher Senior Vice President Senior Vice President, PMF; Senior Vice President, Prudential
Securities
Frank W. Giordano Executive Vice President, Executive Vice President, General Counsel and Secretary, PMF;
General Counsel and Senior Vice President, Prudential Securities
Secretary
Robert F. Gunia Executive Vice President, Executive Vice President, Chief Financial and Administrative
Chief Financial and Officer, Treasurer and Director, PMF; Senior Vice President,
Administrative Officer, Prudential Securities
Treasurer and Director
Eugene B. Heimberg Director Senior Vice President, Prudential; President, Director and Chief
Prudential Plaza Investment Officer, PIC
Newark, NJ 07101
Lawrence C. McQuade Vice Chairman Vice Chairman, PMF
Leland B. Paton Director Executive Vice President and Director, Prudential Securities;
Director, Prudential Securities Group, Inc. ("PSG")
Richard A. Redeker President, Chief President, Chief Executive Officer and Director, PMF; Executive
Executive Officer and Vice President, Director and Member of Operating Committee,
Director Prudential Securities; Director, PSG
S. Jane Rose Senior Vice President, Senior Vice President, Senior Counsel and Assistant Secretary,
Senior Counsel and PMF; Senior Vice President and Senior Counsel, Prudential
Assistant Secretary Securities
Donald G. Southwell Director Senior Vice President, Prudential; Director, PSG
213 Washington Street
Newark, NJ 07102
</TABLE>
(b) Prudential Investment Corporation (PIC)
See "How the Fund is Managed--Subadviser" in the Prospectus constituting
Part A of the Registration Statement and "Subadviser" in the Statement of
Additional Information constituting Part B of this Registration Statement.
C-4
<PAGE>
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 07101.
<TABLE>
<CAPTION>
NAME AND ADDRESS POSITION WITH PIC PRINCIPAL OCCUPATIONS
- ----------------------------- ------------------------- -----------------------------------------------------------------
<S> <C> <C>
Martin A. Berkowitz Senior Vice President, Vice President, Prudential; Senior Vice President, Chief
Chief Financial and Financial and Compliance Officer, PIC
Compliance Officer
William M. Bethke Senior Vice President Senior Vice President, Prudential; Senior Vice President, PIC
Two Gateway Center
Newark, NJ 07102
John D. Brookmeyer, Jr. Senior Vice President Senior Vice President, Prudential; Senior Vice President, PIC
Two Gateway Center
Newark, NJ 07102
Eugene B. Heimberg President, Director and Senior Vice President, Prudential; President, Director and Chief
Chief Investment Officer Investment Officer, PIC
Garnett L. Keith, Jr. Director Vice Chairman and Director, Prudential; Director, PIC
Harry E. Knapp, Jr. Vice President Vice President, Prudential; Vice President, PIC
Four Gateway Center
Newark, NJ 07102
William P. Link Senior Vice President Executive Vice President, Prudential; Senior Vice President, PIC
Four Gateway Center
Newark, NJ 07102
Robert E. Riley Executive Vice President Executive Vice President, Prudential; Executive Vice President,
800 Boylston Avenue PIC; Director, PSG
Boston, MA 02199
James W. Stevens Executive Vice President Executive Vice President, Prudential; Executive Vice President,
Four Gateway Center PIC; Director, PSG
Newark, NJ 07102
Robert C. Winters Director Chairman of the Board and Chief Executive Officer, Prudential;
Director, PIC; Chairman of the Board, PSG
Claude J. Zinngrabe, Jr. Executive Vice President Vice President, Prudential; Executive Vice President, PIC
</TABLE>
ITEM 29. PRINCIPAL UNDERWRITERS
(a)(i) Prudential Securities Incorporated
Prudential Securities Incorporated is distributor for Prudential Government
Securities Trust (Intermediate Term Series), The Target Portfolio Trust and for
Class B shares of Prudential Adjustable Rate Securities Fund, Inc., Prudential
Allocation Fund, The BlackRock Government Income Trust, Prudential California
Municipal Fund (California Income Series and California Series), Prudential
Equity Fund, Inc., Prudential Equity Income Fund, Prudential Global Fund, Inc.,
Prudential Global Genesis Fund, Inc., Prudential Global Natural Resources Fund,
Inc., Prudential GNMA Fund, Inc., Prudential Government Income Fund, Inc.,
Prudential Growth Fund, Inc., Prudential Growth Opportunity Fund, Inc.,
Prudential High Yield Fund, Inc., Prudential IncomeVertible-R- Fund, Inc.,
Prudential Intermediate Global Income Fund, Inc., Prudential Multi-Sector Fund,
Inc., Prudential Municipal Bond Fund, Prudential Municipal Series Fund (except
Connecticut Money Market Series, Massachusetts Money Market Series, New Jersey
Money Market Series, New York Money Market Series and Florida Series),
Prudential National Municipals Fund, Inc., Prudential Utility Fund, Inc., Global
Utility Fund, Inc. and Nicholas-Applegate Fund, Inc. (Nicholas-Applegate Growth
Equity Fund). Prudential Securities is also a depositor for the following unit
investment trusts:
The Corporate Income Fund
Corporate Investment Trust Fund
Equity Income Fund
Government Securities Income Fund
International Bond Fund
Municipal Investment Trust
Prudential Equity Trust Shares
National Equity Trust
C-5
<PAGE>
Prudential Unit Trusts
Government Securities Equity Trust
National Municipal Trust
(ii)_Prudential Mutual Fund Distributors, Inc.
Prudential Mutual Fund Distributors, Inc. is distributor for Command
Government Fund, Command Money Fund, Command Tax-Free Fund, Prudential
California Municipal Fund (California Money Market Series and Class A shares of
the California Income Series and California Series), Prudential Government
Securities Trust (Money Market Series and U.S. Treasury Money Market Series),
Prudential-Bache MoneyMart Assets, Inc., (d/b/a Prudential MoneyMart Assets),
Prudential Municipal Series Fund (Connecticut Money Market Series, Massachusetts
Money Market Series, New Jersey Money Market Series and New York Money Market
Series), Prudential Institutional Liquidity Portfolio, Inc., Prudential-Bache
Special Money Market Fund, Inc. (d/b/a Prudential Special Money Market Fund),
Prudential-Bache Tax-Free Money Fund, Inc. (d/b/a Prudential Tax-Free Money
Fund), and for Class A shares of Prudential Adjustable Rate Securities Fund,
Inc., Prudential Allocation Fund, The BlackRock Government Income Trust,
Prudential Equity Fund, Inc., Prudential Equity Income Fund, Prudential Global
Fund, Inc., Prudential Global Genesis Fund, Inc., Prudential Global Natural
Resources Fund, Inc., Prudential GNMA Fund, Inc., Prudential Government Income
Fund, Inc., Prudential Growth Fund, Inc., Prudential Growth Opportunity Fund,
Inc., Prudential High Yield Fund, Inc., Prudential IncomeVertible-R- Fund, Inc.,
Prudential Intermediate Global Income Fund, Inc., Prudential Multi-Sector Fund,
Inc., Prudential Municipal Bond Fund, Prudential Municipal Series Fund (Arizona
Series, Florida Series, Georgia Series, Maryland Series, Massachusetts Series,
Michigan Series, Minnesota Series, New Jersey Series, North Carolina Series,
Ohio Series and Pennsylvania Series), Prudential National Municipals Fund, Inc.,
Prudential Pacific Growth Fund, Inc., Prudential Short-Term Global Income Fund,
Inc., Prudential Structured Maturity Fund, Inc., Prudential U.S. Government
Fund, Prudential Utility Fund, Inc., Global Utility Fund, Inc. and
Nicholas-Applegate Fund, Inc. (Nicholas-Applegate Growth Equity Fund).
(b)(i) Information concerning the officers and directors of Prudential
Securities Incorporated is set forth below.
<TABLE>
<CAPTION>
POSITIONS AND
POSITIONS AND OFFICES OFFICES
NAME(1) WITH UNDERWRITER WITH REGISTRANT
- ------------------------------------ ----------------------------------------------------------------- -----------------
<S> <C> <C>
Alan D. Hogan....................... Executive Vice President, Chief Administrative Officer and None
Director
Howard A. Knight.................... Executive Vice President, Director, Corporate Strategy and New None
Business Development
George A. Murray.................... Executive Vice President and Director None
John P. Murray...................... Executive Vice President and Director of Risk Management None
Leland B. Paton..................... Executive Vice President and Director None
Richard A. Redeker.................. Director Trustee
Hardwick Simmons.................... Chief Executive Officer, President and Director None
Lee Spencer......................... Interim General Counsel None
(ii)Information concerning the officers and directors of Prudential Mutual Fund Distributors, Inc. is set forth below.
Joanne Accurso-Soto................. Vice President None
Dennis Annarumma.................... Vice President, Assistant Treasurer and Assistant Comptroller None
Phyllis J. Berman................... Vice President None
Fred A. Fiandaca.................... President, Chief Executive Officer and Director None
Raritan Plaza One
Edison, NJ 08847
Stephen L. Fisher................... Vice President None
Frank W. Giordano................... Executive Vice President, General Counsel, Secretary and Director None
Robert F. Gunia..................... Executive Vice President, Treasurer, Comptroller and Director Vice President
Andrew J. Varley.................... Vice President None
Anita L. Whelan..................... Vice President and Assistant Secretary None
<FN>
- ------------
(1) The address of each person named is One Seaport Plaza, New York, NY 10292
unless otherwise indicated.
</TABLE>
(c) Registrant has no principal underwriter who is not an affiliated person
of the Registrant.
C-6
<PAGE>
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, 1776 Heritage Drive, North Quincy,
Massachusetts, The Prudential Investment Corporation, Prudential Plaza, 745
Broad Street, Newark, New Jersey, the Registrant, One Seaport Plaza, New York,
New York, and Prudential Mutual Fund Services, Inc., Raritan Plaza One, Edison,
New Jersey. Documents required by Rules 31a-1(b)(5), (6), (7), (9), (10) and
(11) and 31a-1(f) will be kept at Two Gateway Center, documents required by
Rules 31a-1(b)(4) and (11) and 31a-1(d) at One Seaport Plaza and the remaining
accounts, books and other documents required by such other pertinent provisions
of Section 31(a) and the Rules promulgated thereunder will be kept by State
Street Bank and Trust Company and Prudential Mutual Fund Services, Inc.
ITEM 31. MANAGEMENT SERVICES
Other than as set forth under the captions "How the Fund is
Managed--Manager" and "How the Fund is Managed-- Distributor" in the
Prospectuses and the captions "Manager" and "Distributor" in the Statement of
Additional Information, constituting Parts A and B, respectively, of this
Registration Statement, Registrant is not a party to any management-related
service contract.
ITEM 32. UNDERTAKINGS
The Registrant hereby undertakes to furnish each person to whom a Prospectus
is delivered with a copy of the Registrant's latest annual report to
shareholders, upon request and without charge.
C-7
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this
Post-Effective Amendment to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of New York,
and State of New York, on the 12th day of May, 1994.
PRUDENTIAL CALIFORNIA MUNICIPAL
FUND
By: /s/ LAWRENCE C. MCQUADE
-------------------------------
Lawrence C. McQuade,
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/ LAWRENCE C. MCQUADE
------------------------------------------- President and Trustee May 12, 1994
Lawrence C. McQuade
/s/ EDWARD D. BEACH
------------------------------------------- Trustee May 12, 1994
Edward D. Beach
/s/ EUGENE C. DORSEY
------------------------------------------- Trustee May 12, 1994
Eugene C. Dorsey
/s/ DELAYNE D. GOLD
------------------------------------------- Trustee May 12, 1994
Delayne D. Gold
/s/HARRY A. JACOBS, JR.
------------------------------------------- Trustee May 12, 1994
Harry A. Jacobs, Jr.
/s/ THOMAS T. MOONEY
------------------------------------------- Trustee May 12, 1994
Thomas T. Mooney
/s/ THOMAS H. O'BRIEN
------------------------------------------- Trustee May 12, 1994
Thomas H. O'Brien
/s/RICHARD A. REDEKER
------------------------------------------- Trustee May 12, 1994
Richard A. Redeker
/s/ NANCY HAYS TEETERS
------------------------------------------- Trustee May 12, 1994
Nancy Hays Teeters
/s/ SUSAN C. COTE
------------------------------------------- Treasurer and Principal Financial and May 12, 1994
Susan C. Cote Accounting Officer
</TABLE>
C-8
<PAGE>
PRUDENTIAL CALIFORNIA MUNICIPAL FUND
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT PAGE
NUMBER DESCRIPTION NUMBER
- --------- --------------------------------------------------------------------------------------------------------- ---------
<S> <C> <C>
1(a) Declaration of Trust of the Registrant. (Incorporated by reference to Exhibit No. 1 to Registration --
Statement on Form N-1A filed May 18, 1984 (File No. 2-91215).)
1(b) Amendments to Declaration of Trust. (Incorporated by reference to Exhibit No. 1(b) to Post-Effective --
Amendment No. 9 to Registration Statement on Form N-1A filed December 28, 1989 (File No. 2-91215).)
2 Restated By-Laws.* --
4(a) Specimen receipt for shares of beneficial interest, $.01 par value, of the Registrant (for Class B shares --
and shares of the California Money Market Series). (Incorporated by reference to Exhibit No. 4 to Post-
Effective Amendment No. 5 to Registration Statement on Form N-1A filed October 31, 1988 (File No.
2-91215).)
4(b) Specimen receipt for shares of beneficial interest, $.01 par value, of the Registrant (for Class A --
shares). (Incorporated by reference to Exhibit No. 4(b) to Post-Effective Amendment No. 10 to
Registration Statement on Form N-1A filed August 24, 1990 (File No. 2-91215).)
4(c) Specimen receipt for shares of beneficial interest of California Income Series. (Incorporated by --
reference to Exhibit No. 4(c) to Post-Effective Amendment No. 12 to Registration Statement on Form N-1A
filed December 3, 1990 (File No. 2-91215).)
5(a) Management Agreement between the Registrant and Prudential Mutual Fund Management, Inc. (Incorporated by --
reference to Exhibit No. 5(a) to Post-Effective Amendment No. 7 to Registration Statement on Form N-1A
filed November 2, 1989 (File No. 2-91215).)
5(b) Subadvisory Agreement between Prudential Mutual Fund Management, Inc. and The Prudential Investment --
Corporation. (Incorporated by reference to Exhibit No. 5(b) to Post-Effective Amendment No. 7 to
Registration Statement on Form N-1A filed November 2, 1989 (File No. 2-91215).)
6(a) Subscription Offering Agreement between Prudential-Bache California Municipal Fund and Prudential Mutual --
Fund Distributors, Inc. (Incorporated by reference to Exhibit No. 6(e) to Post-Effective Amendment No. 11
to Registration Statement on Form N-1A filed October 10, 1990 (File No. 2-91215).)
6(b) Amended and Restated Distribution Agreement with respect to Class A shares between the Registrant and --
Prudential Mutual Fund Distributors, Inc. (Incorporated by reference to Exhibit No. 6(g) to
Post-Effective Amendment No. 17 to Registration Statement on Form N-1A via EDGAR filed November 1, 1993
(File No. 2-91215).)
6(c) Amended and Restated Distribution Agreement with respect to Class B shares between the Registrant and --
Prudential Securities Incorporated (Incorporated by reference to Exhibit No. 6(h) to Post-Effective
Amendment No. 17 to Registration Statement on Form N-1A via EDGAR filed November 1, 1993 (File No.
2-91215).)
6(d) Amended and Restated Distribution Agreement with respect to California Money Market Series between the --
Registrant and Prudential Mutual Fund Distributors, Inc. (Incorporated by reference to Exhibit No. 6(i)
to Post-Effective Amendment No. 17 to Registration Statement on Form N-1A via EDGAR filed November 1,
1993 (File No. 2-91215).)
6(e) Form of Distribution Agreement for Class A shares.* --
6(f) Form of Distribution Agreement for Class B shares.* --
6(g) Form of Distribution Agreement for Class C shares.* --
8(a) Custodian Agreement between the Registrant and State Street Bank and Trust Company. (Incorporated by --
reference to Exhibit No. 8 to Post-Effective Amendment No. 7 to Registration Statement on Form N-1A filed
November 2, 1989 (File No. 2-91215).)
8(b) Custodian Contract between the Registrant and State Street Bank and Trust Company. (Incorporated by --
reference to Exhibit No. 8(b) to Post-Effective Amendment No. 10 to Registration Statement on Form N-1A
filed August 24, 1990 (File No. 2-91215).)
9 Transfer Agency and Service Agreement between the Registrant and Prudential Mutual Fund Services, Inc. --
(Incorporated by reference to Exhibit No. 9 to Post-Effective Amendment No. 7 to Registration Statement
on Form N-1A filed November 2, 1989 (File No. 2-91215).)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT PAGE
NUMBER DESCRIPTION NUMBER
- --------- --------------------------------------------------------------------------------------------------------- ---------
<S> <C> <C>
11 Consent of Independent Accountants.* --
13 Purchase Agreement. (Incorporated by reference to Exhibit No. 13 to Pre-Effective Amendment No. 1 to --
Registration Statement on Form N-1A filed August 29, 1984 (File No. 2-91215).)
15(a) Distribution and Service Plan with respect to Class A shares between Registrant and Prudential Mutual --
Fund Distributors, Inc. (Incorporated by reference to Exhibit No. 15(f) to Post-Effective Amendment No.
17 to Registration Statement on Form N-1A via EDGAR filed November 1, 1993 (File No. 2-91215).)
15(b) Distribution and Service Plan with respect to Class B shares between the Registrant and Prudential --
Securities Incorporated (Incorporated by reference to Exhibit No. 15(g) to Post-Effective Amendment No.
17 to Registration Statement on Form N-1A via EDGAR filed November 1, 1993 (File No. 2-91215).)
15(c) Distribution and Service Plan with respect to California Money Market Series between the Registrant and --
Prudential Mutual Fund Distributors, Inc. (Incorporated by reference to Exhibit No. 15(h) to
Post-Effective Amendment No. 17 to Registration Statement on Form N-1A via EDGAR filed November 1, 1993
(File No. 2-91215).)
15(d) Form of Distribution and Service Plan for Class A shares.* --
15(e) Form of Distribution and Service Plan for Class B shares.* --
15(f) Form of Distribution and Service Plan for Class C shares.* --
16(a) Schedule of Computation of Performance Information. (Incorporated by reference to Exhibit No. 16 to --
Post-Effective Amendment No. 7 to Registration Statement on Form N-1A filed November 2, 1989 (File No.
2-91215).)
16(b) Schedule of Computation of Performance Information for Class A shares. (Incorporated by reference to --
Exhibit No. 16(b) to Post-Effective Amendment No. 12 to Registration Statement on Form N-1A filed
December 3, 1990 (File No. 2-91215).)
Other Exhibits:
Powers of Attorney.
<FN>
- --------------
*Filed herewith.
</TABLE>
<PAGE>
Exhibit 2
AMENDED AND RESTATED
BY-LAWS
OF
CALIFORNIA MUNICIPAL FUND
May 6, 1993
<PAGE>
TABLE OF CONTENTS
Page
----
ARTICLE I - DEFINITIONS
ARTICLE II - OFFICES
Section 1. Principal Office 1
Section 2. Other Offices 1
ARTICLE III - SHAREHOLDERS
Section 1. Meetings 2
Section 2. Notice of Meetings 2
Section 3. Record Date for Meetings 2
and Other Purposes
Section 4. Proxies 3
Section 5. Inspection of Records 4
Section 6. Action without Meeting 4
ARTICLE IV - TRUSTEES
Section 1. Meetings of the Trustees 4
Section 2. Quorum and Manner of Acting 6
ARTICLE V - COMMITTEES
Section 1. Executive and Other Committees 6
Section 2. Meetings, Quorum and Manner of 7
Acting
ARTICLE VI - OFFICERS
Section 1. General Provisions 7
Section 2. Term of Office and Qualifications 8
Section 3. Removal 8
Section 4. Powers and Duties of the President 8
Section 5. Powers and Duties of the Vice 9
Presidents
Section 6. Powers and Duties of the Treasurer 9
Section 7. Powers and Duties of the Secretary 10
Section 8. Powers and Duties of the Assistant 10
Treasurers
Section 9. Powers and Duties of Assistant 10
Secretaries
Section 10. Compensation of Officers and 11
Trustees and Members of Advisory
Board
ARTICLE VII - FISCAL YEAR 11
ARTICLE VIII - SEAL 11
ARTICLE IX - WAIVERS OF NOTICE 12
- ii -
<PAGE>
TABLE OF CONTENTS (continued)
Page
----
ARTICLE X - CUSTODY OF SECURITIES
Section 1. Employment of a Custodian 12
Section 2. Action upon Termination of 12
Custodian Agreement
Section 3. Provisions of Custodian Contract 13
Section 4. Central Certificate System 14
ARTICLE XI - INDEMNIFICATION 15
ARTICLE XII - AMENDMENTS 18
- iii -
<PAGE>
AMENDED AND RESTATED
BY-LAWS
OF
PRUDENTIAL CALIFORNIA MUNICIPAL FUND
ARTICLE I
DEFINITIONS
The terms "COMMISSION", "CUSTODIAN", "DECLARATION", "DISTRIBUTOR",
"INVESTMENT ADVISER", "1940 ACT", "SHAREHOLDER", "SHARES", "TRANSFER AGENT",
"TRUST", "TRUST PROPERTY", "TRUSTEES", and "MAJORITY SHAREHOLDER VOTE", have the
respective meanings given them in the Declaration of Trust of Prudential
California Municipal Fund dated May 18, 1984, as amended from time to time.
ARTICLE II
OFFICES
Section 1. PRINCIPAL OFFICE. Until changed by the Trustees, the
principal office of the Trust in the Commonwealth of Massachusetts shall be in
the City of Boston, County of Suffolk.
Section 2. OTHER OFFICES. The Trust may have offices in such other
places without as well as within the Commonwealth as the Trustees may from time
to time determine.
ARTICLE III
SHAREHOLDERS
Section 1. MEETINGS. Meetings of the Shareholders shall be held to the
extent provided in the Declaration as such place within or without the
Commonwealth of Massachusetts as the Trustees shall designate. The holders of a
majority of outstanding Shares of the Trust or series of the Trust present in
person or by proxy
<PAGE>
and entitled to vote shall constitute a quorum with respect to Shares of the
Trust or such series at any meeting of the Shareholders.
Section 2. NOTICE OF MEETINGS. Notice of all meetings of the
Shareholders, stating the time, place and purposes of the meeting, shall be
given by the Trustees by mail to each Shareholder at his address as recorded on
the register of the Trust mailed at least (10) days and not more than ninety
(90) days before the meeting. Only the business stated in the notice of the
meeting shall be considered at such meeting. Any adjourned meeting may be held
as adjourned without further notice. No notice need be given to any Shareholder
who shall have failed to inform the Trust of his current address or if a written
waiver of notice, executed before or after the meeting by the Shareholder or his
attorney thereunto authorized, is filed with the records of the meeting.
Section 3. RECORD DATE FOR MEETINGS AND OTHER PURPOSES. For the
purpose of determining the Shareholders who are entitled to notice of and to
vote at any meeting, or to participate in any distribution, or for the purpose
of any other the Trustees may from time to time close the transfer books for
such period, not exceeding thirty (30) days, as the Trustees may determine; or
without closing the transfer books the Trustees may fix a date not more than
ninety (90) days prior to the date of any meeting of Shareholders or
distribution or other action as a record date for the determinations of the
persons to be treated as Shareholders of record for such purposes, except for
dividend payments which shall be governed by the Declaration.
2
<PAGE>
Section 4. PROXIES. At any meeting of Shareholders, any holder of
Shares entitled to vote thereat may vote by proxy, provided that no proxy shall
be vote at any meeting unless it shall have been placed on file with the
Secretary, or with such other officer or agent of the Trust as the Secretary may
direct, for verification prior to the time at which such vote shall be taken.
Proxies may be solicited in the name of one or more Trustees or one or more of
the officers of the Trust. Only Shareholders of record shall be entitled to
vote. Each whole share shall be entitled to one vote as to any matter on which
it is entitled by the Declaration to vote, and each fractional Share shall be
entitled to a proportionate fractional vote. When any Share is held jointly by
several persons, any one of them may vote at any meeting in person or by proxy
in respect of such Share, but if more than one of them shall be present at such
meeting in person or by proxy, and such joint owners or their proxies so present
disagree as to any vote to be cast, such vote shall not be received in respect
of such Share. A proxy purporting to be executed by or on behalf of a
Shareholder shall be deemed valid unless challenged at or prior to its exercise,
and the burden of proving invalidity shall rest on the challenger. If the
holder of any such Share is a minor or a person of unsound mind, and subject to
guardianship or the legal control of any other person as regards the charge or
management of such Share, he may vote by his guardian or such other person
appointed or having such control, and such vote may be given in person or by
proxy.
3
<PAGE>
Section 5. INSPECTION OF RECORDS. The records of the Trust shall be
open to inspection by Shareholders to the same extent as is permitted
shareholders of a Massachusetts business corporation.
Section 6. ACTION WITHOUT MEETING. Any action which may be taken by
Shareholders may be taken without a meeting if a majority of Shareholders of the
Trust or the applicable series of the Trust entitled to vote on the matter (or
such larger proportion thereof as shall be required by law, the Declaration of
these By-Laws for approval of such matter) consent to the action in writing and
the written consents are filed with the records of the meetings of Shareholders.
Such consents shall be treated for all purposes as a vote taken as a meeting of
Shareholders.
ARTICLE IV
TRUSTEES
Section 1. MEETINGS OF THE TRUSTEES. The Trustees may in their
discretion provide for regular or stated meetings of the Trustees. Notice of
regular or stated meetings need not be given. Meetings of the Trustees other
than regular or stated meetings shall be held whenever called by the President,
or by any one of the Trustees, at the time being in office. Notice of the time
and place of each meeting other than regular or stated meetings shall be given
by the Secretary or an Assistant Secretary or by the officer of Trustee calling
the meeting and shall be mailed to each Trustee at least two days before the
meeting, or shall be telegraphed, cabled, or wirelessed to each Trustee at his
business
4
<PAGE>
address, or personally delivered to him at least one day before the meeting.
Such notice may, however, be waived by any Trustee. Notice of a meeting need
not be given to any Trustee if a written waiver of notice, executed by him
before or after the meeting, is filed with the records of the meeting, or to any
Trsutee who attends the meeting without protesting prior thereto or at its
commencement the lack of notice to him. A notice or waiver of notice need not
specify the purpose of any meeting. The Trustees may meet by means of a
telephone conference circuit or similar communications equipment by means of
which all persons participating in the meeting are connected, which meeting
shall be deemed to have been held at a place designated by the Trustees at the
meeting. Participation in a telephone conference meeting shall constitute
presence in person at such meeting. Any action required or permitted to be
taken at any meeting of the Trustees may be taken by the Trustees without a
meeting if all the Trustees consent to the action in writing and the written
consents are filed with the records of the Trustees meetings. Such consents
shall be treated for all purposes as a vote at a meeting of the Trustees.
Section 2. QUORUM AND MANNER OF ACTING. A majority of the Trustees
shall be present in person at any regular or special meeting of the Trustees in
order to constitute a quorum for the transaction of business at such meeting and
(except as otherwise required by law, the Declaration of these By-Laws) the act
of a majority of the Trustees present at any such meeting, at which a quorum is
present, shall be the act of the Trustees. In the
5
<PAGE>
absence of a quorum, a majority of the Trustees present may adjourn the meeting
from time to time until a quorum shall be present. Notice of an adjourned
meeting need not be given.
ARTICLE V
COMMITTEES
Section 1. EXECUTIVE AND OTHER COMMITTEES. The Trustees by vote of a
majority of all the Trustees may elect from their own number an Executive
Committee to consist of not less than three (3) Trustees to hold office at the
pleasure of the Trustees, which shall have the power to conduct the current and
ordinary business of the Trust while the Trustees are not in session, including
the purchase and sale of securities an the designation of securities to be
delivered upon redemption of Shares of the Trust, and such other powers of the
Trustees as the Trustees may, from time to time, delegate to them except those
peers which by law, the Declaration of these By-Laws they are prohibited from
delegating. The Trustees may also elect from their own number or otherwise
other Committees from time to time, the number composing such committees, the
powers conferred upon the same (subject to the same limitations as with respect
to the Executive Committee) and the term of membership on such Committees to be
determined by the Trustees. The Trustees may designate a chairman of any such
Committee. In the absence of such designation the Committee may elect its own
Chairman.
Section 2. MEETINGS, QUORUM AND MANNER OF ACTING. The Trustees may (1)
provide for stated meetings of any Committee (2) specify the manner of calling
and notice required for special
6
<PAGE>
meetings of any Committee, (3) specify the number of members of a Committee
required to constitute a quorum and the number of members of a Committee
required to exercise specified powers delegated to such Committee, (4) authorize
the making of decisions to exercise specified powers by written assent of the
requisite number of members of a Committee without a meeting, and (5) authorize
the members of a Committee to meet by means of a telephone conference circuit.
The Executive Committee shall keep regular minutes of its meetings and
records of decisions taken without a meeting and cause them to be recorded in a
book designated for that purpose and kept in the Office of the Trust.
ARTICLE VI
OFFICERS
Section 1. GENERAL PROVISIONS. The officers of the Trust shall be a
President, a Treasurer and a Secretary, who shall be elected by the Trustees.
The Trustees may elect or appoint such other officers or agents as the business
of the Trust may require, including one or more Vice President, one or more
Assistant Secretaries, and one or more Assistant Treasurers. The Trustees may
delegate to any officer or committee the power to appoint any subordinate
officers or agents.
Section 2. TERM OF OFFICE AND QUALIFICATIONS. Except as otherwise
provided by law, the Declaration of these By-Laws, the President, the Treasurer
and the Secretary shall each hold office until his successor shall have been
duly elected and qualified, and
7
<PAGE>
all other officers shall hold office at the pleasure of the Trustees. The
Secretary and Treasurer may be the same person. A Vice President and the
Treasurer or a Vice President and the Secretary may be the same person, but the
offices of Vice President, Secretary and Treasurer shall not be held by the same
person. The President shall hold no other office. Except as above provided,
any two offices may be held by the same person. Any officer may be but none
need be a Trustee or Shareholder.
Section 3. REMOVAL. The Trustees, at any regular or special meeting of
the Trustees, may remove any officer without cause, by a vote of a majority of
the Trustees then in office. Any officer or agent appointed by an officer or
committee may be removed with or without cause by such appointing officer or
committee.
Section 4. POWERS AND DUTIES OF THE PRESIDENT. The President shall be
the principal executive officer of the Trust. He may call meetings of the
Trustees and of any Committee thereof when he deems it necessary and shall
preside at all meetings of the Shareholders. Subject to the control of the
Trustees and to the control of any Committees of the Trustees, within their
respective spheres, as provided by the Trustees, he shall at all times exercise
a general supervision and direction over the affairs of the Trust. He shall
have the power to employ attorneys and counsel for the Trust and to employ such
subordinate officers, agents, clerks and employees as he may find necessary to
transact the business of the Trust. He shall also have the power to grant,
8
<PAGE>
issue, execute or sign such powers of attorney, proxies or other documents as
may be deemed advisable or necessary in furtherance of the interests of the
Trust. The President shall have such other powers and duties, as from time to
time may be conferred upon or assigned to him by the Trustees.
Section 5. POWERS AND DUTIES OF VICE PRESIDENTS. In the absence or
disability of the President, the Vice President or, if there be more than one
Vice President, any Vice President designated by the Trustees shall perform all
the duties and may exercise any of the powers of the President, subject to the
control of the Trustees. Each Vice President shall perform such other duties as
may be assigned to him from time to time by the Trustees and the President.
Section 7. POWERS AND DUTIES OF THE TREASURER. The Treasurer shall be
the principal financial and accounting officer of the Trust. He shall deliver
all funds of the Trust which may come into his hands to such Custodian as the
Trustees may employ pursuant to Article X of these By-Laws. He shall render a
statement of condition of the finances of the Trust to the Trustees as often as
they shall require the same and he shall in general perform all the duties
incident to the office of Treasurer and such other duties as from time to time
may be assigned to him by the Trustees. The Treasurer shall give a bond for the
faithful discharge of his duties, if required so to do by the Trustees, in such
sum and with such surety or sureties as the Trustees shall require.
9
<PAGE>
Section 7. POWERS AND DUTIES OF THE SECRETARY. The Secretary shall
keep the minutes of all meetings of the Trustees and of the Shareholders in
proper books provided for that purpose; he shall have custody of the seal of the
Trust; he shall have charge of the Share transfer books, lists an records unless
the same are in the charge of the Transfer Agent. He shall attend to the giving
and serving of all notices by the Trust in accordance with the provisions of
these By-Laws, he shall in general perform all duties incident to the office of
Secretary and such other duties as from time to time may be assigned to him by
the Trustees.
Section 8. POWERS AND DUTIES OF ASSISTANT TREASURERS. In the absence
or disability of the Treasurer, any Assistant Treasurer designated by the
Trustees shall perform all the duties, and may exercise any of the powers, of
the Treasurer. Each Assistant Treasurer shall perform such other duties as from
time to time may be assigned to him by the Trustees. Each Assistant Treasurer
shall give a bond for the faithful discharge of his duties, if required so to do
by the Trustees, in such sum and with such surety or sureties as the Trustees
shall require.
Section 9. POWERS AND DUTIES OF ASSISTANT SECRETARIES. In the absence
or disability of the Secretary, and Assistant Secretary designed by the Trustees
shall perform all the duties, and may exercise any of the powers, of the
Secretary. Each Assistant Secretary shall perform such other duties as from
time to time may be assigned to him by the Trustees.
10
<PAGE>
Section 10. COMPENSATION OF OFFICERS AND TRUSTEES AND MEMBERS OF THE
ADVISORY BOARD. Subject to any applicable provisions of the Declaration, the
compensation of the officers and Trustees and members of the Advisory Board
shall be fixed from time to time by the Trustees or, in the case of officers, by
any Committee or officer upon whom such power may be conferred by the Trustees.
No officer shall be prevented from receiving such compensation as such officer
by reason of the fact that he is also a Trustee.
ARTICLE VII
FISCAL YEAR
The fiscal year of the Trust shall begin on the first day of September in
each year and shall end on the thirty-first day of August in each year,
provided, however, that the Trustees may from time to time change the fiscal
year.
ARTICLE VIII
SEAL
The Trustees may adopt a seal which shall be in such form and shall have
such inscription thereon as the Trustees may from time to time prescribe.
ARTICLE IX
WAIVERS OF NOTICE
Whenever any notice whatever is required to be given by law, the
Declaration of these By-Laws, a waiver thereof in writing, signed by the person
or persons entitled to said notice, whether before or after the time stated
therein, shall be deemed equivalent
11
<PAGE>
thereto. A notice shall be deemed to have been telegraphed, cabled or
wirelessed for the purposes of these By-Laws when it has been delivered to a
representative of any telegraph, cable or wireless company with instructions
that it be telegraphed, cabled or wirelessed.
ARTICLE X
CUSTODY OF SECURITIES
Section 1. EMPLOYMENT OF A CUSTODIAN. The Trust shall place and at all
times maintain in the custody of a Custodian (including any sub-custodian for
the Custodian) all funds, securities and similar investments included in the
Trust Property. The Custodian (and any sub-custodian) shall be a bank having
not less than $2,000,000 aggregate capital, surplus and undivided profits and
shall be appointed from time to time by the Trustees, who shall fix its
remuneration.
Section 2. ACTION UPON TERMINATION OF CUSTODIAN AGREEMENT. Upon
termination of a Custodian Agreement or inability of the Custodian to continue
to serve, the trustees shall promptly appoint a successor custodian, but in the
event that no successor custodian can be found who has the required
qualifications and is willing to serve, the Trustees shall call as promptly as
possible a special meeting of the Shareholders to determine whether the Trust
shall function without a custodian or shall be liquidated. If so directed by a
Majority Shareholder Vote, the Custodian shall deliver and pay over all Trust
Property held by it as specified in such vote.
12
<PAGE>
Section 3. PROVISIONS OF CUSTODIAN CONTRACT. The following provisions
shall apply to the employment of a Custodian and to any contract entered into
with the Custodian so employed: The Trustees shall cause to be delivered to the
Custodian all securities included in the Trust Property or to which the Trust
may become entitled, and shall order the same to be delivered by the Custodian
only in completion of a sale, exchange, transfer, pledge, loan of portfolio
securities to another person, or other disposition thereof, all as the Trustees
may generally or from time to time require or approve or to a successor
Custodian; and the Trustees shall cause all funds included in the Trust Property
or to which it may become entitled to be paid to the Custodian, and shall order
the same disbursed only for investment against delivery of the securities
acquired (including securities acquired under a repurchase agreement), or the
return of cash held as collateral for loans of portfolio securities, or in
payment of expenses, including management compensation, and liabilities of the
Trust, including distributions to shareholders, or to a successor Custodian.
Notwithstanding anything to the contrary in these By-Laws, upon receipt of
proper instructions, which may be standing instructions, the Custodian may
deliver funds in the following cases. In connection with repurchase agreements,
the Custodian shall transmit, prior to receipt on behalf of the Fund of any
securities or other property, funds from the Fund's custodian account to a
special custodian approved by the Trustees of the Fund, which funds shall be
used to pay for securities to be purchased by the Fund
13
<PAGE>
subject to the Fund's obligation to sell and the seller's obligation to
repurchase such securities. In such case, the securities shall be held in the
custody of the special custodian. In connection with the Trust's purchase or
sale of financial futures contracts, the Custodian shall transmit, prior to
receipt on behalf of the Fund of any securities or other property, funds from
the Trust's custodian account in order to furnish to and maintain funds with
brokers as margin to guarantee the performance of the Trust's futures
obligations in accordance with the applicable requirements of commodities
exchanges and brokers.
Section 4. CENTRAL CERTIFICATE SYSTEM. Subject to applicable rules,
regulations and orders adopted by the Commission, the Trustees may direct the
Custodian to deposit all or any part of the securities owned by the Trust in a
system for the central handling of securities established by a national
securities exchange or a national securities association registered with the
Commission under the Securities Exchange Act of 1934, or such other person as
may be permitted by the Commission, or otherwise in accordance with the 1940
Act, pursuant to which system all securities of any particular class or series
of any issuer deposited within the system are treated as fungible and may be
transferred or pledged by bookkeeping entry without physical delivery of such
securities, provided that all such deposits shall be subject to withdrawal only
upon the order of the Trust.
14
<PAGE>
ARTICLE XI
INDEMNIFICATION
A representative of the Trust shall be indemnified by the Trust with
respect to each proceeding against such representative, except a proceeding
brought by or on behalf of the Trust, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by such representative in connection with such proceeding, provided
that such representative acted in good faith and in a manner he reasonably
believed to be in or not opposed to the best interests of the Trust and, with
respect to any criminal proceeding, had no reasonable cause to believe his
conduct was unlawful. The termination of any proceeding by judgment, order,
settlement, conviction or upon a plea of nolo contendere or its equivalent,
shall not, of itself, create a presumption that the person did not act in good
faith and in a manner which he reasonably believed to be in or not opposed to
the best interests of the Trust and, with respect to any criminal proceeding,
had reasonable cause to believe that his conduct was unlawful.
A representative of the Trust shall be indemnified by the Trust, with
respect to each proceeding brought by or on behalf of the Trust to obtain
judgment or decree in its favor, against expenses (including attorneys' fees)
actually and reasonably incurred by him in connection with the defense or
settlement of such proceeding, if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests
15
<PAGE>
of the Trust; except that no indemnification shall be made in respect of any
claim, issue, or matter as to which such representative has been adjudged to be
liable for negligence or misconduct in the performance of his duty to the Trust,
unless and only to the extent that the count in which the proceeding was
brought, or a court of equity in the county in which the Trust has its principal
office, determines upon application that, despite the adjudication of liability
but in view of all circumstances of the case, such representative is fairly and
reasonably entitled to indemnity for the expenses which the court considers
proper.
To the extent that the representative of the Trust has been successful on
the merits or otherwise in defense of any proceeding referred to in the
preceding two paragraphs, or in defense of any claim, issue or matter therein,
the Trust shall indemnify him against all expenses (including attorneys' fees)
actually and reasonably incurred by him in connection therewith.
Except as provided in the preceding paragraph any indemnification under the
first two paragraphs of this Article XI (unless ordered by a court) shall be
made by the Trust only as authorized in the specific case upon a determination
that indemnification of the representative of the Trust is proper in the
circumstances because he has met the applicable standard of conduct set forth in
such paragraphs. The determination shall be made (1) by the Trustees by a
majority vote of a quorum consisting of Trustees who were not parties to the
proceeding, or (2) if a quorum is not obtainable or if a quorum of disinterested
Trustees so
16
<PAGE>
directs, by independent legal counsel in a written opinion, or (3) by a Majority
Shareholder Vote.
Expenses (including attorneys' fees) incurred in defending a proceeding may
be paid by the Trust in advance of the final disposition thereof if (1)
authorized by the Trustees in the specific case, and (2) the Trust receives an
undertaking by or on behalf of the representative of the Trust to repay the
advance if it is not ultimately determined that he is entitled to be indemnified
by the Trust as authorized in this Article XI.
The indemnification provided by this Article XI shall not be deemed
exclusive of any other rights to which a representative of the Trust or other
person may be entitled under any agreement, vote of Shareholders or
disinterested Trustees or otherwise, both as to action in his official capacity
and as to action in another capacity while holding the office, and shall
continue as to a person who has ceased to be a Trustee, officer, employee or
agent and inure to the benefit of his heirs and personal representatives.
The Trust may purchase and maintain insurance on behalf of any person who
is or was a Trustee, officer, employee or agent of the Trust, or is or was
serving at the request of the Trust as a trustee, director, officer, employee,
or agent of another trust, corporation, partnership, joint venture or other
enterprise, against any liability asserted against him and incurred by him in
any such capacity or arising out of his status as such, regardless of whether
the Trust would have the power to indemnify him against the liability under the
provisions of the Article XI.
17
<PAGE>
Nothing contained in this Article XI shall be construed to indemnify any
representative of the Trust against any liability to the Trust or to its
Shareholders to which he would otherwise be subject by reason of misfeasance,
bad faith, gross negligence or reckless disregard of the duties involved in the
conduct of his office.
As used in this Article XI "representative of the Trust" means an
individual (1) who is a present or former Trustee, officer, agent or employee of
the Trust or who serves or has served another trust, corporation, partnership,
joint venture or other enterprise in one of such capacities at the request of
the Trust, and (2) who by reason of his position is, has been or is threatened
to be made a party to a proceeding; and "proceeding" includes any threatened,
pending or completed action, suit or proceeding, whether civil, criminal,
administrative or investigative.
ARTICLE XII
AMENDMENTS
These By-Laws, or any of them, may be altered, amended or repealed, or new
By-Laws may be adopted by (1) a Majority Shareholder Vote or (b) by the
Trustees, provided, however, that no By-Law may be amended, adopted or repealed
by the Trustees if such amendment, adoption or repeal requires, pursuant to law,
the Declaration of these By-Laws, a vote of the Shareholders.
End of By-Laws
18
<PAGE>
Exhibit 6(e)
PRUDENTIAL _________ FUND
Form of
Distribution Agreement
(CLASS A SHARES)
Agreement made as of _____________199_, between Prudential ________
Fund [a Maryland Corporation/Massachusetts Business Trust] (the Fund) and
Prudential Mutual Fund Distributors, Inc., a Delaware Corporation (the
Distributor).
WITNESSETH
WHEREAS, the Fund is registered under the Investment Company Act of
1940, as amended (the Investment Company Act), as a diversified, open-end,
management investment company and it is in the interest of the Fund to offer its
Class A shares for sale continuously;
WHEREAS, the Distributor is a broker-dealer registered under the
Securities Exchange Act of 1934, as amended, and is engaged in the business of
selling shares of registered investment companies either directly or through
other broker-dealers;
WHEREAS, the Fund and the Distributor wish to enter into an agreement
with each other, with respect to the continuous offering of the Fund's Class A
shares from and after the date hereof in order to promote the growth of the Fund
and facilitate the distribution of its Class A shares; and
WHEREAS, upon approval by the Class A shareholders of the Fund it is
contemplated that the Fund will adopt a plan of distribution pursuant to Rule
12b-1 under the Investment Company Act (the Plan) authorizing payments by the
Fund to the Distributor with respect to the distribution of Class A shares of
the Fund and the maintenance of Class A shareholder accounts.
NOW, THEREFORE, the parties agree as follows:
Section 1. APPOINTMENT OF THE DISTRIBUTOR
The Fund hereby appoints the Distributor as the principal underwriter
and distributor of the Class A shares of the Fund to sell Class A shares to the
public and the Distributor hereby accepts such appointment and agrees to act
hereunder. The Fund hereby agrees during the term of this Agreement to sell
Class A shares of the Fund to the Distributor on the terms and conditions set
forth below.
<PAGE>
Section 2. EXCLUSIVE NATURE OF DUTIES
The Distributor shall be the exclusive representative of the Fund to
act as principal underwriter and distributor of the Fund's Class A shares,
except that:
2.1 The exclusive rights granted to the Distributor to purchase Class
A shares from the Fund shall not apply to Class A shares of the Fund issued in
connection with the merger or consolidation of any other investment company or
personal holding company with the Fund or the acquisition by purchase or
otherwise of all (or substantially all) the assets or the outstanding shares of
any such company by the Fund.
2.2 Such exclusive rights shall not apply to Class A shares issued by
the Fund pursuant to reinvestment of dividends or capital gains distributions.
2.3 Such exclusive rights shall not apply to Class A shares issued by
the Fund pursuant to the reinstatement privilege afforded redeeming
shareholders.
2.4 Such exclusive rights shall not apply to purchases made through
the Fund's transfer and dividend disbursing agent in the manner set forth in the
currently effective Prospectus of the Fund. The term "Prospectus" shall mean
the Prospectus and Statement of Additional Information included as part of the
Fund's Registration Statement, as such Prospectus and Statement of Additional
Information may be amended or supplemented from time to time, and the term
"Registration Statement" shall mean the Registration Statement filed by the Fund
with the Securities and Exchange Commission and effective under the Securities
Act of 1933, as amended (Securities Act), and the Investment Company Act, as
such Registration Statement is amended from time to time.
Section 3. PURCHASE OF CLASS A SHARES FROM THE FUND
3.1 The Distributor shall have the right to buy from the Fund the
Class A shares needed, but not more than the Class A shares needed (except for
clerical errors in transmission) to fill unconditional orders for Class A shares
placed with the Distributor by investors or registered and qualified securities
dealers and other financial institutions (selected dealers). The price which
the Distributor shall pay for the Class A shares so purchased from the Fund
shall be the net asset value, determined as set forth in the Prospectus.
3.2 The Class A shares are to be resold by the Distributor or
selected dealers, as described in Section 6.4 hereof, to investors at the
offering price as set forth in the Prospectus.
2
<PAGE>
3.3 The Fund shall have the right to suspend the sale of its Class A
shares at times when redemption is suspended pursuant to the conditions in
Section 4.3 hereof or at such other times as may be determined by the Board of
Directors. The Fund shall also have the right to suspend the sale of its Class
A shares if a banking moratorium shall have been declared by federal or New York
authorities.
3.4 The Fund, or any agent of the Fund designated in writing by the
Fund, shall be promptly advised of all purchase orders for Class A shares
received by the Distributor. Any order may be rejected by the Fund; provided,
however, that the Fund will not arbitrarily or without reasonable cause refuse
to accept or confirm orders for the purchase of Class A shares. The Fund (or
its agent) will confirm orders upon their receipt, will make appropriate book
entries and upon receipt by the Fund (or its agent) of payment therefor, will
deliver deposit receipts for such Class A shares pursuant to the instructions of
the Distributor. Payment shall be made to the Fund in New York Clearing House
funds or federal funds. The Distributor agrees to cause such payment and such
instructions to be delivered promptly to the Fund (or its agent).
Section 4. REPURCHASE OR REDEMPTION OF CLASS A SHARES BY THE FUND
4.1 Any of the outstanding Class A shares may be tendered for
redemption at any time, and the Fund agrees to repurchase or redeem the Class A
shares so tendered in accordance with its Articles of Incorporation as amended
from time to time, and in accordance with the applicable provisions of the
Prospectus. The price to be paid to redeem or repurchase the Class A shares
shall be equal to the net asset value determined as set forth in the Prospectus.
All payments by the Fund hereunder shall be made in the manner set forth in
Section 4.2 below.
4.2 The Fund shall pay the total amount of the redemption price as
defined in the above paragraph pursuant to the instructions of the Distributor
on or before the seventh calendar day subsequent to its having received the
notice of redemption in proper form. The proceeds of any redemption of Class A
shares shall be paid by the Fund to or for the account of the redeeming
shareholder, in each case in accordance with applicable provisions of the
Prospectus.
4.3 Redemption of Class A shares or payment may be suspended at times
when the New York Stock Exchange is closed for other than customary weekends and
holidays, when trading on said Exchange is restricted, when an emergency exists
as a result of which disposal by the Fund of securities owned by it is not
reasonably practicable or it is not reasonably practicable for the Fund fairly
to determine the value of its net assets, or during any other period when the
Securities and Exchange Commission, by order,
3
<PAGE>
so permits.
Section 5. DUTIES OF THE FUND
5.1 Subject to the possible suspension of the sale of Class A shares
as provided herein, the Fund agrees to sell its Class A shares so long as it has
Class A shares available.
5.2 The Fund shall furnish the Distributor copies of all information,
financial statements and other papers which the Distributor may reasonably
request for use in connection with the distribution of Class A shares, and this
shall include one certified copy, upon request by the Distributor, of all
financial statements prepared for the Fund by independent public accountants.
The Fund shall make available to the Distributor such number of copies of its
Prospectus and annual and interim reports as the Distributor shall reasonably
request.
5.3 The Fund shall take, from time to time, but subject to the
necessary approval of the Board of Directors and the shareholders, all necessary
action to fix the number of authorized Class A shares and such steps as may be
necessary to register the same under the Securities Act, to the end that there
will be available for sale such number of Class A shares as the Distributor
reasonably may expect to sell. The Fund agrees to file from time to time such
amendments, reports and other documents as may be necessary in order that there
will be no untrue statement of a material fact in the Registration Statement, or
necessary in order that there will be no omission to state a material fact in
the Registration Statement which omission would make the statements therein
misleading.
5.4 The Fund shall use its best efforts to qualify and maintain the
qualification of any appropriate number of its Class A shares for sales under
the securities laws of such states as the Distributor and the Fund may approve;
provided that the Fund shall not be required to amend its Articles of
Incorporation or By-Laws to comply with the laws of any state, to maintain an
office in any state, to change the terms of the offering of its Class A shares
in any state from the terms set forth in its Registration Statement, to qualify
as a foreign corporation in any state or to consent to service of process in any
state other than with respect to claims arising out of the offering of its Class
A shares. Any such qualification may be withheld, terminated or withdrawn by
the Fund at any time in its discretion. As provided in Section 9.1 hereof, the
expense of qualification and maintenance of qualification shall be borne by the
Fund. The Distributor shall furnish such information and other material
relating to its affairs and activities as may be required by the Fund in
connection with such qualifications.
4
<PAGE>
Section 6. DUTIES OF THE DISTRIBUTOR
6.1 The Distributor shall devote reasonable time and effort to effect
sales of Class A shares of the Fund, but shall not be obligated to sell any
specific number of Class A shares. Sales of the Class A shares shall be on the
terms described in the Prospectus. The Distributor may enter into like
arrangements with other investment companies. The Distributor shall compensate
the selected dealers as set forth in the Prospectus.
6.2 In selling the Class A shares, the Distributor shall use its best
efforts in all respects duly to conform with the requirements of all federal and
state laws relating to the sale of such securities. Neither the Distributor nor
any selected dealer nor any other person is authorized by the Fund to give any
information or to make any representations, other than those contained in the
Registration Statement or Prospectus and any sales literature approved by
appropriate officers of the Fund.
6.3 The Distributor shall adopt and follow procedures for the
confirmation of sales to investors and selected dealers, the collection of
amounts payable by investors and selected dealers on such sales and the
cancellation of unsettled transactions, as may be necessary to comply with the
requirements of the National Association of Securities Dealers, Inc. (NASD).
6.4 The Distributor shall have the right to enter into selected
dealer agreements with registered and qualified securities dealers and other
financial institutions of its choice for the sale of Class A shares, provided
that the Fund shall approve the forms of such agreements. Within the United
States, the Distributor shall offer and sell Class A shares only to such
selected dealers as are members in good standing of the NASD. Class A shares
sold to selected dealers shall be for resale by such dealers only at the
offering price determined as set forth in the Prospectus.
Section 7. PAYMENTS TO THE DISTRIBUTOR
The Distributor shall receive and may retain any portion of any
front-end sales charge which is imposed on sales of Class A shares and not
reallocated to selected dealers as set forth in the Prospectus, subject to the
limitations of Article III, Section 26 of the NASD Rules of Fair Practice.
Payment of these amounts to the Distributor is not contingent upon the adoption
or continuation of the Plan.
Section 8. PAYMENT OF THE DISTRIBUTOR UNDER THE PLAN
8.1 The Fund shall pay to the Distributor as compensation for
services under the Distribution and Service Plan and this Agreement a fee of .30
of 1% (including an asset-based sales charge of .05 of 1% and a service fee of
.25 of 1%) per annum
5
<PAGE>
of the average daily net assets of the Class A shares of the Fund. Amounts
payable under the Plan shall be accrued daily and paid monthly or at such other
intervals as Directors/Trustees may determine. Amounts payable under the Plan
shall be subject to the limitations of Article III, Section 26 of the NASD Rules
of Fair Practice.
8.2 So long as the Plan or any amendment thereto is in effect, the
Distributor shall inform the Board of Directors of the commissions and account
servicing fees to be paid by the Distributor to account executives of the
Distributor and to broker-dealers and financial institutions which have dealer
agreements with the Distributor. So long as the Plan (or any amendment thereto)
is in effect, at the request of the Board of Directors or any agent or
representative of the Fund, the Distributor shall provide such additional
information as may reasonably be requested concerning the activities of the
Distributor hereunder and the costs incurred in performing such activities.
8.3 Expenses of distribution with respect to the Class A shares of
the Fund include, among others:
(a) amounts paid to Prudential Securities for performing
services under a selected dealer agreement between
Prudential Securities and the Distributor for sale of Class
A shares of the Fund, including sales commissions and
trailer commissions paid to, or on account of, account
executives and indirect and overhead costs associated with
distribution activities, including central office and branch
expenses;
(b) amounts paid to Prusec for performing services under a
selected dealer agreement between Prusec and the Distributor
for sale of Class A shares of the Fund, including sales
commissions and trailer commissions paid to, or on account
of, agents and indirect and overhead costs associated with
distribution activities;
(c) sales commissions and trailer commissions paid to, or on
account of, broker-dealers and financial institutions (other
than Prudential Securities and Prusec) which have entered
into selected dealer agreements with the Distributor with
respect to Class A shares of the Fund.
(d) amounts paid to, or an account of, account executives of
Prudential Securities, Prusec,
6
<PAGE>
or of other broker-dealers or financial institutions for personal
service and/or the maintenance of shareholder accounts; and
(e) advertising for the Fund in various forms through any
available medium, including the cost of printing and mailing
Fund Prospectuses, and periodic financial reports and sales
literature to persons other than current shareholders of the
Fund.
Indirect and overhead costs referred to in clauses (a) and (b) of the
foregoing sentence include (i) lease expenses, (ii) salaries and benefits of
personnel including operations and sales support personnel, (iii) utility
expenses, (iv) communications expenses, (v) sales promotion expenses, (vi)
expenses of postage, stationery and supplies and (vii) general overhead.
Section 9. ALLOCATION OF EXPENSES
9.1 The Fund shall bear all costs and expenses of the continuous
offering of its Class A shares, including fees and disbursements of its counsel
and auditors, in connection with the preparation and filing of any required
Registration Statements and/or Prospectuses under the Investment Company Act or
the Securities Act, and preparing and mailing annual and periodic reports and
proxy materials to shareholders (including but not limited to the expense of
setting in type any such Registration Statements, Prospectuses, annual or
periodic reports or proxy materials). The Fund shall also bear the cost of
expenses of qualification of the Class A shares for sale, and, if necessary or
advisable in connection therewith, of qualifying the Fund as a broker or dealer,
in such states of the United States or other jurisdictions as shall be selected
by the Fund and the Distributor pursuant to Section 5.4 hereof and the cost and
expense payable to each such state for continuing qualification therein until
the Fund decides to discontinue such qualification pursuant to Section 5.4
hereof. As set forth in Section 8 above, the Fund shall also bear the expenses
it assumes pursuant to the Plan with respect to Class A shares, so long as the
Plan is in effect.
Section 10. INDEMNIFICATION
10.1 The Fund agrees to indemnify, defend and hold the Distributor,
its officers and directors and any person who controls the Distributor within
the meaning of Section 15 of the Securities Act, free and harmless from and
against any and all claims, demands, liabilities and expenses (including the
cost of investigating or defending such claims, demands or liabilities and any
counsel fees incurred in connection therewith) which the Distributor, its
officers, directors or any such controlling person may incur under the
Securities Act, or under common law or
7
<PAGE>
otherwise, arising out of or based upon any untrue statement of a material fact
contained in the Registration Statement or Prospectus or arising out of or based
upon any alleged omission to state a material fact required to be stated in
either thereof or necessary to make the statements in either thereof not
misleading, except insofar as such claims, demands, liabilities or expenses
arise out of or are based upon any such untrue statement or omission or alleged
untrue statement or omission made in reliance upon and in conformity with
information furnished in writing by the Distributor to the Fund for use in the
Registration Statement or Prospectus; provided, however, that this indemnity
agreement shall not inure to the benefit of any such officer, director, trustee
or controlling person unless a court of competent jurisdiction shall determine
in a final decision on the merits, that the person to be indemnified was not
liable by reason of willful misfeasance, bad faith or gross negligence in the
performance of its duties, or by reason of its reckless disregard of its
obligations under this Agreement (disabling conduct), or, in the absence of such
a decision, a reasonable determination, based upon a review of the facts, that
the indemnified person was not liable by reason of disabling conduct, by (a) a
vote of a majority of a quorum of directors or trustees who are neither
"interested persons" of the Fund as defined in Section 2(a)(19) of the
Investment Company Act nor parties to the proceeding, or (b) an independent
legal counsel in a written opinion. The Fund's agreement to indemnify the
Distributor, its officers and directors or trustees and any such controlling
person as aforesaid is expressly conditioned upon the Fund's being promptly
notified of any action brought against the Distributor, its officers or
directors or trustees, or any such controlling person, such notification to be
given by letter or telegram addressed to the Fund at its principal business
office. The Fund agrees promptly to notify the Distributor of the commencement
of any litigation or proceedings against it or any of its officers or directors
in connection with the issue and sale of any Class A shares.
10.2 The Distributor agrees to indemnify, defend and hold the Fund,
its officers and Directors and any person who controls the Fund, if any, within
the meaning of Section 15 of the Securities Act, free and harmless from and
against any and all claims, demands, liabilities and expenses (including the
cost of investigating or defending against such claims, demands or liabilities
and any counsel fees incurred in connection therewith) which the Fund, its
officers and Directors or any such controlling person may incur under the
Securities Act or under common law or otherwise, but only to the extent that
such liability or expense incurred by the Fund, its Directors or officers or
such controlling person resulting from such claims or demands shall arise out of
or be based upon any alleged untrue statement of a material fact contained in
information furnished in writing by the Distributor to the Fund for use in the
Registration Statement or Prospectus or shall arise out of or be based upon any
alleged omission to state
8
<PAGE>
a material fact in connection with such information required to be stated in the
Registration Statement or Prospectus or necessary to make such information not
misleading. The Distributor's agreement to indemnify the Fund, its officers and
Directors and any such controlling person as aforesaid, is expressly conditioned
upon the Distributor's being promptly notified of any action brought against the
Fund, its officers and Directors or any such controlling person, such
notification being given to the Distributor at its principal business office.
Section 11. DURATION AND TERMINATION OF THIS AGREEMENT
11.1 This Agreement shall become effective as of the date first above
written and shall remain in force for two years from the date hereof and
thereafter, but only so long as such continuance is specifically approved at
least annually by (a) the Board of Directors of the Fund, or by the vote of a
majority of the outstanding voting securities of the Class A shares of the Fund,
and (b) by the vote of a majority of those Directors who are not parties to this
Agreement or interested persons of any such parties and who have no direct or
indirect financial interest in this Agreement or in the operation of the Fund's
Plan or in any agreement related thereto (Rule 12b-1 Directors), cast in person
at a meeting called for the purpose of voting upon such approval.
11.2 This Agreement may be terminated at any time, without the
payment of any penalty, by a majority of the Rule 12b-1 Directors or by vote of
a majority of the outstanding voting securities of the Class A shares of the
Fund, or by the Distributor, on sixty (60) days' written notice to the other
party. This Agreement shall automatically terminate in the event of its
assignment.
11.3 The terms "affiliated person," "assignment," "interested person"
and "vote of a majority of the outstanding voting securities", when used in this
Agreement, shall have the respective meanings specified in the Investment
Company Act.
Section 12. AMENDMENTS TO THIS AGREEMENT
This Agreement may be amended by the parties only if such amendment is
specifically approved by (a) the Board of Directors of the Fund, or by the vote
of a majority of the outstanding voting securities of the Class A shares of the
Fund, and (b) by the vote of a majority of the Rule 12b-1 Directors cast in
person at a meeting called for the purpose of voting on such amendment.
Section 13. GOVERNING LAW
The provisions of this Agreement shall be construed and interpreted in
accordance with the laws of the State of New York as at the time in effect and
the applicable provisions of the
9
<PAGE>
Investment Company Act. To the extent that the applicable law of the State of
New York, or any of the provisions herein, conflict with the applicable
provisions of the Investment Company Act, the latter shall control.
*[Section 14. LIABILITIES OF THE FUND
The name "Prudential ___________ Trust" is the designation of the
Trustees under a Declaration of Trust dated ______, 19__ 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, and neither the Trustees, officers, agents of
shareholders assume any personal liability for obligations entered into on
behalf of the Fund.]
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year above written.
Prudential Mutual Fund
Distributors, Inc.
By: ________________________
________________________
(Title)
Prudential______________Fund
By: _______________________
(Name)
(Title)
*For Massachusetts Business Trusts only.
10
<PAGE>
CMF 6(f)
PRUDENTIAL ____________ FUND
Form of
Distribution Agreement
(CLASS B SHARES)
Agreement made as of ______ __, 199_, between Prudential ___________
Fund, [a Maryland Corporation/Massachusetts Business Trust] (the Fund) and
Prudential Securities Incorporated, a Delaware Corporation (the Distributor).
WITNESSETH
WHEREAS, the Fund is registered under the Investment Company Act of
1940, as amended (the Investment Company Act), as a diversified, open-end,
management investment company and it is in the interest of the Fund to offer its
Class B shares for sale continuously;
WHEREAS, the Distributor is a broker-dealer registered under the
Securities Exchange Act of 1934, as amended, and is engaged in the business of
selling shares of registered investment companies either directly or through
other broker-dealers;
WHEREAS, the Fund and the Distributor wish to enter into an agreement
with each other, with respect to the continuous offering of the Fund's Class B
shares from and after the date hereof in order to promote the growth of the Fund
and facilitate the distribution of its Class B shares; and
WHEREAS, the Fund has adopted a distribution and service plan pursuant
to Rule 12b-1 under the Investment Company Act (the Plan) authorizing payments
by the Fund to the Distributor with respect to the distribution of Class B
shares of the Fund and the maintenance of Class B shareholder accounts.
NOW, THEREFORE, the parties agree as follows:
Section 1. APPOINTMENT OF THE DISTRIBUTOR
The Fund hereby appoints the Distributor as the principal underwriter
and distributor of the Class B shares of the Fund to sell Class B shares to the
public and the Distributor hereby accepts such appointment and agrees to act
hereunder. The Fund hereby agrees during the term of this Agreement to sell
Class B shares of the Fund to the Distributor on the terms and conditions set
forth below.
<PAGE>
Section 2. EXCLUSIVE NATURE OF DUTIES
The Distributor shall be the exclusive representative of the Fund to
act as principal underwriter and distributor of the Fund's Class B shares,
except that:
2.1 The exclusive rights granted to the Distributor to purchase Class
B shares from the Fund shall not apply to Class B shares of the Fund issued in
connection with the merger or consolidation of any other investment company or
personal holding company with the Fund or the acquisition by purchase or
otherwise of all (or substantially all) the assets or the outstanding shares of
any such company by the Fund.
2.2 Such exclusive rights shall not apply to Class B shares issued by
the Fund pursuant to reinvestment of dividends or capital gains distributions.
2.3 Such exclusive rights shall not apply to Class B shares issued by
the Fund pursuant to the reinstatement privilege afforded redeeming
shareholders.
2.4 Such exclusive rights shall not apply to purchases made through
the Fund's transfer and dividend disbursing agent in the manner set forth in the
currently effective Prospectus of the Fund. The term "Prospectus" shall mean
the Prospectus and Statement of Additional Information included as part of the
Fund's Registration Statement, as such Prospectus and Statement of Additional
Information may be amended or supplemented from time to time, and the term
"Registration Statement" shall mean the Registration Statement filed by the Fund
with the Securities and Exchange Commission and effective under the Securities
Act of 1933, as amended (the Securities Act), and the Investment Company Act, as
such Registration Statement is amended from time to time.
Section 3. PURCHASE OF CLASS B SHARES FROM THE FUND
3.1 The Distributor shall have the right to buy from the Fund the
Class B shares needed, but not more than the Class B shares needed (except for
clerical errors in transmission) to fill unconditional orders for Class B shares
placed with the Distributor by investors or registered and qualified securities
dealers and other financial institutions (selected dealers). The price which
the Distributor shall pay for the Class B shares so purchased from the Fund
shall be the net asset value, determined as set forth in the Prospectus.
3.2 The Class B shares are to be resold by the Distributor or
selected dealers, as described in Section 6.4 hereof, to investors at the
offering price as set forth in the Prospectus.
3.3 The Fund shall have the right to suspend the sale of
<PAGE>
its Class B shares at times when redemption is suspended pursuant to the
conditions in Section 4.3 hereof or at such other times as may be determined by
the Board of Directors/Trustees. The Fund shall also have the right to suspend
the sale of its Class B shares if a banking moratorium shall have been declared
by federal or New York authorities.
3.4 The Fund, or any agent of the Fund designated in writing by the
Fund, shall be promptly advised of all purchase orders for Class B shares
received by the Distributor. Any order may be rejected by the Fund; provided,
however, that the Fund will not arbitrarily or without reasonable cause refuse
to accept or confirm orders for the purchase of Class B shares. The Fund (or
its agent) will confirm orders upon their receipt, will make appropriate book
entries and upon receipt by the Fund (or its agent) of payment therefor, will
deliver deposit receipts for such Class B shares pursuant to the instructions of
the Distributor. Payment shall be made to the Fund in New York Clearing House
funds or federal funds. The Distributor agrees to cause such payment and such
instructions to be delivered promptly to the Fund (or its agent).
Section 4. REPURCHASE OR REDEMPTION OF CLASS B SHARES BY THE FUND
4.1 Any of the outstanding Class B shares may be tendered for
redemption at any time, and the Fund agrees to repurchase or redeem the Class B
shares so tendered in accordance with its Articles of Incorporation as amended
from time to time, and in accordance with the applicable provisions of the
Prospectus. The price to be paid to redeem or repurchase the Class B shares
shall be equal to the net asset value determined as set forth in the
Prospectus. All payments by the Fund hereunder shall be made in the manner set
forth in Section 4.2 below.
4.2 The Fund shall pay the total amount of the redemption price as
defined in the above paragraph pursuant to the instructions of the Distributor
on or before the seventh day subsequent to its having received the notice of
redemption in proper form. The proceeds of any redemption of Class B shares
shall be paid by the Fund as follows: (a) any applicable contingent deferred
sales charge shall be paid to the Distributor and (b) the balance shall be paid
to or for the account of the redeeming shareholder, in each case in accordance
with applicable provisions of the Prospectus.
4.3 Redemption of Class B shares or payment may be suspended at times
when the New York Stock Exchange is closed for other than customary weekends and
holidays, when trading on said Exchange is restricted, when an emergency exists
as a result of which disposal by the Fund of securities owned by it is not
reasonably practicable or it is not reasonably practicable for the Fund fairly
to determine the value of its net assets, or during any
3
<PAGE>
other period when the Securities and Exchange Commission, by order, so permits.
Section 5. DUTIES OF THE FUND
5.1 Subject to the possible suspension of the sale of Class B shares
as provided herein, the Fund agrees to sell its Class B shares so long as it has
Class B shares available.
5.2 The Fund shall furnish the Distributor copies of all information,
financial statements and other papers which the Distributor may reasonably
request for use in connection with the distribution of Class B shares, and this
shall include one certified copy, upon request by the Distributor, of all
financial statements prepared for the Fund by independent public accountants.
The Fund shall make available to the Distributor such number of copies of its
Prospectus and annual and interim reports as the Distributor shall reasonably
request.
5.3 The Fund shall take, from time to time, but subject to the
necessary approval of the Board of Directors/Trustees and the shareholders, all
necessary action to fix the number of authorized Class B shares and such steps
as may be necessary to register the same under the Securities Act, to the end
that there will be available for sale such number of Class B shares as the
Distributor reasonably may expect to sell. The Fund agrees to file from time to
time such amendments, reports and other documents as may be necessary in order
that there will be no untrue statement of a material fact in the Registration
Statement, or necessary in order that there will be no omission to state a
material fact in the Registration Statement which omission would make the
statements therein misleading.
5.4 The Fund shall use its best efforts to qualify and maintain the
qualification of any appropriate number of its Class B shares for sales under
the securities laws of such states as the Distributor and the Fund may approve;
provided that the Fund shall not be required to amend its Articles of
Incorporation or By-Laws to comply with the laws of any state, to maintain an
office in any state, to change the terms of the offering of its Class B shares
in any state from the terms set forth in its Registration Statement, to qualify
as a foreign corporation in any state or to consent to service of process in any
state other than with respect to claims arising out of the offering of its Class
B shares. Any such qualification may be withheld, terminated or withdrawn by
the Fund at any time in its discretion. As provided in Section 9.1 hereof, the
expense of qualification and maintenance of qualification shall be borne by the
Fund. The Distributor shall furnish such information and other material
relating to its affairs and activities as may be required by the Fund in
connection with such qualifications.
4
<PAGE>
Section 6. DUTIES OF THE DISTRIBUTOR
6.1 The Distributor shall devote reasonable time and effort to effect
sales of Class B shares of the Fund, but shall not be obligated to sell any
specific number of Class B shares. Sales of the Class B shares shall be on the
terms described in the Prospectus. The Distributor may enter into like
arrangements with other investment companies. The Distributor shall compensate
the selected dealers as set forth in the Prospectus.
6.2 In selling the Class B shares, the Distributor shall use its best
efforts in all respects duly to conform with the requirements of all federal and
state laws relating to the sale of such securities. Neither the Distributor nor
any selected dealer nor any other person is authorized by the Fund to give any
information or to make any representations, other than those contained in the
Registration Statement or Prospectus and any sales literature approved by
appropriate officers of the Fund.
6.3 The Distributor shall adopt and follow procedures for the
confirmation of sales to investors and selected dealers, the collection of
amounts payable by investors and selected dealers on such sales and the
cancellation of unsettled transactions, as may be necessary to comply with the
requirements of the National Association of Securities Dealers, Inc. (NASD).
6.4 The Distributor shall have the right to enter into selected
dealer agreements with registered and qualified securities dealers and other
financial institutions of its choice for the sale of Class B shares, provided
that the Fund shall approve the forms of such agreements. Within the United
States, the Distributor shall offer and sell Class B shares only to such
selected dealers as are members in good standing of the NASD. Class B shares
sold to selected dealers shall be for resale by such dealers only at the
offering price determined as set forth in the Prospectus.
Section 7. PAYMENTS TO THE DISTRIBUTOR
The Distributor shall receive and may retain any contingent deferred
sales charge which is imposed with respect to repurchases and redemptions of
Class B shares as set forth in the Prospectus, subject to the limitations of
Article III, Section 26 of the NASD Rules of Fair Practice. Payment of these
amounts to the Distributor is not contingent upon the adoption or continuation
of the Plan.
Section 8. PAYMENT OF THE DISTRIBUTOR UNDER THE PLAN
5
<PAGE>
8.1 The Fund shall pay to the Distributor as compensation for
services under the Distribution and Service Plan and this Agreement a fee of .50
of 1% (including an asset-based sales charge of up to .50 of 1% and a service
fee of up to .25 of 1%; provided that the total fee does not exceed .50 of 1%)
per annum of the average daily net assets of the Class B shares of the Fund.
Amounts payable under the Plan shall be accrued daily and paid monthly or at
such other intervals as Directors may determine. Amounts payable under the Plan
shall be subject to the limitations of Article III, Section 26 of the NASD Rules
of Fair Practice.
8.2 So long as the Plan or any amendment thereto is in effect, the
Distributor shall inform the Board of Directors/Trustees of the commissions
(including trailer commissions) and account servicing fees to be paid by the
Distributor to account executives of the Distributor and to broker-dealers and
financial institutions which have selected dealer agreements with the
Distributor. So long as the Plan (or any amendment thereto) is in effect, at
the request of the Board of Directors/Trustees or any agent or representative of
the Fund, the Distributor shall provide such additional information as may
reasonably be requested concerning the activities of the Distributor hereunder
and the costs incurred in performing such activities.
8.3 Expenses of distribution with respect to the Class B shares of
the Fund include, among others:
(a) sales commissions (including trailer commissions) paid to,
or on account of, account executives of the Distributor;
(b) indirect and overhead costs of the Distributor associated
with performance of distribution activities, including
central office and branch expenses;
(c) amounts paid to Prusec for performing services under a
selected dealer agreement between Prusec and the Distributor
for sale of Class B shares of the Fund, including sales
commissions and trailer commissions paid to, or on account
of, agents and indirect and overhead costs associated with
distribution activities;
(d) sales commissions (including trailer commissions) paid to,
or on account of, broker-dealers and financial institutions
(other than Prusec) which have entered into selected dealer
agreements with the Distributor with respect to Class B
shares of
6
<PAGE>
the Fund;
(e) amounts paid to, or an account of, account executives of the
Distributor or of other broker-dealers or financial
institutions for personal service and/or the maintenance of
shareholder accounts; and
(f) advertising for the Fund in various forms through any
available medium, including the cost of printing and mailing
Fund Prospectuses, and periodic financial reports and sales
literature to persons other than current shareholders of the
Fund.
Indirect and overhead costs referred to in clauses (b) and (c) of the
foregoing sentence include (i) lease expenses, (ii) salaries and benefits of
personnel including operations and sales support personnel, (iii) utility
expenses, (iv) communications expenses, (v) sales promotion expenses, (vi)
expenses of postage, stationery and supplies and (vii) general overhead.
Section 9. ALLOCATION OF EXPENSES
9.1 The Fund shall bear all costs and expenses of the continuous
offering of its Class B shares, including fees and disbursements of its counsel
and auditors, in connection with the preparation and filing of any required
Registration Statements and/or Prospectuses under the Investment Company Act or
the Securities Act, and preparing and mailing annual and periodic reports and
proxy materials to shareholders (including but not limited to the expense of
setting in type any such Registration Statements, Prospectuses, annual or
periodic reports or proxy materials). The Fund shall also bear the cost of
expenses of qualification of the Class B shares for sale, and, if necessary or
advisable in connection therewith, of qualifying the Fund as a broker or dealer,
in such states of the United States or other jurisdictions as shall be selected
by the Fund and the Distributor pursuant to Section 5.4 hereof and the cost and
expense payable to each such state for continuing qualification therein until
the Fund decides to discontinue such qualification pursuant to Section 5.4
hereof. As set forth in Section 8 above, the Fund shall also bear the expenses
it assumes pursuant to the Plan with respect to Class B shares, so long as the
Plan is in effect.
Section 10. INDEMNIFICATION
7
<PAGE>
10.1 The Fund agrees to indemnify, defend and hold the Distributor,
its officers and Directors and any person who controls the Distributor within
the meaning of Section 15 of the Securities Act, free and harmless from and
against any and all claims, demands, liabilities and expenses (including the
cost of investigating or defending such claims, demands or liabilities and any
counsel fees incurred in connection therewith) which the Distributor, its
officers, Directors or any such controlling person may incur under the
Securities Act, or under common law or otherwise, arising out of or based upon
any untrue statement of a material fact contained in the Registration Statement
or Prospectus or arising out of or based upon any alleged omission to state a
material fact required to be stated in either thereof or necessary to make the
statements in either thereof not misleading, except insofar as such claims,
demands, liabilities or expenses arise out of or are based upon any such untrue
statement or omission or alleged untrue statement or omission made in reliance
upon and in conformity with information furnished in writing by the Distributor
to the Fund for use in the Registration Statement or Prospectus; provided,
however, that this indemnity agreement shall not inure to the benefit of any
such officer, Director or controlling person unless a court of competent
jurisdiction shall determine in a final decision on the merits, that the person
to be indemnified was not liable by reason of willful misfeasance, bad faith or
gross negligence in the performance of its duties, or by reason of its reckless
disregard of its obligations under this Agreement (disabling conduct), or, in
the absence of such a decision, a reasonable determination, based upon a review
of the facts, that the indemnified person was not liable by reason of disabling
conduct, by (a) a vote of a majority of a quorum of Directors who are neither
"interested persons" of the Fund as defined in Section 2(a)(19) of the
Investment Company Act nor parties to the proceeding, or (b) an independent
legal counsel in a written opinion. The Fund's agreement to indemnify the
Distributor, its officers and Directors and any such controlling person as
aforesaid is expressly conditioned upon the Fund's being promptly notified of
any action brought against the Distributor, its officers or Directors, or any
such controlling person, such notification to be given in writing addressed to
the Fund at its principal business office. The Fund agrees promptly to notify
the Distributor of the commencement of any litigation or proceedings against it
or any of its officers or Directors in connection with the issue and sale of any
Class B shares.
10.2 The Distributor agrees to indemnify, defend and hold the Fund,
its officers and Directors and any person who controls the Fund, if any, within
the meaning of Section 15 of the Securities Act, free and harmless from and
against any and all claims, demands, liabilities and expenses (including the
cost of investigating or defending against such claims, demands or liabilities
and any counsel fees incurred in connection therewith) which the Fund, its
officers and Directors or any such controlling
8
<PAGE>
person may incur under the Securities Act or under common law or otherwise, but
only to the extent that such liability or expense incurred by the Fund, its
Directors or officers or such controlling person resulting from such claims or
demands shall arise out of or be based upon any alleged untrue statement of a
material fact contained in information furnished in writing by the Distributor
to the Fund for use in the Registration Statement or Prospectus or shall arise
out of or be based upon any alleged omission to state a material fact in
connection with such information required to be stated in the Registration
Statement or Prospectus or necessary to make such information not misleading.
The Distributor's agreement to indemnify the Fund, its officers and Directors
and any such controlling person as aforesaid, is expressly conditioned upon the
Distributor's being promptly notified of any action brought against the Fund,
its officers and Directors or any such controlling person, such notification to
be given to the Distributor in writing at its principal business office.
Section 11. DURATION AND TERMINATION OF THIS AGREEMENT
11.1 This Agreement shall become effective as of the date first above
written and shall remain in force for two years from the date hereof and
thereafter, but only so long as such continuance is specifically approved at
least annually by (a) the Board of Directors/Trustees of the Fund, or by the
vote of a majority of the outstanding voting securities of the Class B shares of
the Fund, and (b) by the vote of a majority of those Directors/Trustees who are
not parties to this Agreement or interested persons of any such parties and who
have no direct or indirect financial interest in this Agreement or in the
operation of the Fund's Plan or in any agreement related thereto (Rule 12b-1
Directors/Trustees), cast in person at a meeting called for the purpose of
voting upon such approval.
11.2 This Agreement may be terminated at any time, without the
payment of any penalty, by a majority of the Rule 12b-1 Directors/Trustees or by
vote of a majority of the outstanding voting securities of the Class B shares of
the Fund, or by the Distributor, on sixty (60) days' written notice to the
other party. This Agreement shall automatically terminate in the event of its
assignment.
11.3 The terms "affiliated person," "assignment," "interested person"
and "vote of a majority of the outstanding voting securities," when used in this
Agreement, shall have the respective meanings specified in the Investment
Company Act.
Section 12. AMENDMENTS TO THIS AGREEMENT
9
<PAGE>
This Agreement may be amended by the parties only if such amendment is
specifically approved by (a) the Board of Directors/Trustees of the Fund, or by
the vote of a majority of the outstanding voting securities of the Class B
shares of the Fund, and (b) by the vote of a majority of the Rule 12b-1 Board of
Directors/Trustees cast in person at a meeting called for the purpose of voting
on such amendment.
Section 13. GOVERNING LAW
The provisions of this Agreement shall be construed and interpreted in
accordance with the laws of the State of New York as at the time in effect and
the applicable provisions of the Investment Company Act. To the extent that the
applicable law of the State of New York, or any of the provisions herein,
conflict with the applicable provisions of the Investment Company Act, the
latter shall control.
*[Section 14. LIABILITIES OF THE FUND
The name "Prudential ___________Trust" is the designation of the
Trustees under a Declaration of Trust dated ______, 19__ 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, and neither the Trustees, officers, agents of
shareholders assume any personal liability for obligations entered into on
behalf of the Fund.]
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year above written.
Prudential Securities
Incorporated
By: ________________________
________________________
(Title)
Prudential ____________ Fund
By: _______________________
(Name)
(Title)
*For Massachusetts Business Trusts only.
<PAGE>
Exhibit 6(g)
PRUDENTIAL ___________ FUND
Form of
Distribution Agreement
(CLASS C SHARES)
Agreement made as of ______ __, 199_, between Prudential ________
Fund, [a Maryland Corporation/Massachusetts Business Trust] (the Fund) and
Prudential Securities Incorporated, a Delaware Corporation (the Distributor).
WITNESSETH
WHEREAS, the Fund is registered under the Investment Company Act of
1940, as amended (the Investment Company Act), as a diversified, open-end,
management investment company and it is in the interest of the Fund to offer its
Class C shares for sale continuously;
WHEREAS, the Distributor is a broker-dealer registered under the
Securities Exchange Act of 1934, as amended, and is engaged in the business of
selling shares of registered investment companies either directly or through
other broker-dealers;
WHEREAS, the Fund and the Distributor wish to enter into an agreement
with each other, with respect to the continuous offering of the Fund's Class C
shares from and after the date hereof in order to promote the growth of the Fund
and facilitate the distribution of its Class C shares; and
WHEREAS, the Fund has adopted a distribution and service plan pursuant
to Rule 12b-1 under the Investment Company Act (the Plan) authorizing payments
by the Fund to the Distributor with respect to the distribution of Class C
shares of the Fund and the maintenance of Class C shareholder accounts.
NOW, THEREFORE, the parties agree as follows:
Section 1. APPOINTMENT OF THE DISTRIBUTOR
The Fund hereby appoints the Distributor as the principal underwriter
and distributor of the Class C shares of the Fund to sell Class C shares to the
public and the Distributor hereby accepts such appointment and agrees to act
hereunder. The Fund hereby agrees during the term of this Agreement to sell
Class C shares of the Fund to the Distributor on the terms and conditions set
forth below.
1
<PAGE>
Section 2. EXCLUSIVE NATURE OF DUTIES
The Distributor shall be the exclusive representative of the Fund to
act as principal underwriter and distributor of the Fund's Class C shares,
except that:
2.1 The exclusive rights granted to the Distributor to purchase Class
C shares from the Fund shall not apply to Class C shares of the Fund issued in
connection with the merger or consolidation of any other investment company or
personal holding company with the Fund or the acquisition by purchase or
otherwise of all (or substantially all) the assets or the outstanding shares of
any such company by the Fund.
2.2 Such exclusive rights shall not apply to Class C shares issued by
the Fund pursuant to reinvestment of dividends or capital gains distributions.
2.3 Such exclusive rights shall not apply to Class C shares issued by
the Fund pursuant to the reinstatement privilege afforded redeeming
shareholders.
2.4 Such exclusive rights shall not apply to purchases made through
the Fund's transfer and dividend disbursing agent in the manner set forth in the
currently effective Prospectus of the Fund. The term "Prospectus" shall mean
the Prospectus and Statement of Additional Information included as part of the
Fund's Registration Statement, as such Prospectus and Statement of Additional
Information may be amended or supplemented from time to time, and the term
"Registration Statement" shall mean the Registration Statement filed by the Fund
with the Securities and Exchange Commission and effective under the Securities
Act of 1933, as amended (the Securities Act), and the Investment Company Act, as
such Registration Statement is amended from time to time.
Section 3. PURCHASE OF CLASS C SHARES FROM THE FUND
3.1 The Distributor shall have the right to buy from the Fund the
Class C shares needed, but not more than the Class C shares needed (except for
clerical errors in transmission) to fill unconditional orders for Class C shares
placed with the Distributor by investors or registered and qualified securities
dealers and other financial institutions (selected dealers). The price which
the Distributor shall pay for the Class C shares so purchased from the Fund
shall be the net asset value, determined as set forth in the Prospectus.
3.2 The Class C shares are to be resold by the Distributor or
selected dealers, as described in Section 6.4 hereof, to investors at the
offering price as set forth in the Prospectus.
3.3 The Fund shall have the right to suspend the sale of its Class C
shares at times when redemption is suspended pursuant
2
<PAGE>
to the conditions in Section 4.3 hereof or at such other times as may be
determined by the Board of Directors. The Fund shall also have the right to
suspend the sale of its Class C shares if a banking moratorium shall have been
declared by federal or New York authorities.
3.4 The Fund, or any agent of the Fund designated in writing by the
Fund, shall be promptly advised of all purchase orders for Class C shares
received by the Distributor. Any order may be rejected by the Fund; provided,
however, that the Fund will not arbitrarily or without reasonable cause refuse
to accept or confirm orders for the purchase of Class C shares. The Fund (or
its agent) will confirm orders upon their receipt, will make appropriate book
entries and upon receipt by the Fund (or its agent) of payment therefor, will
deliver deposit receipts for such Class C shares pursuant to the instructions of
the Distributor. Payment shall be made to the Fund in New York Clearing House
funds or federal funds. The Distributor agrees to cause such payment and such
instructions to be delivered promptly to the Fund (or its agent).
Section 4. REPURCHASE OR REDEMPTION OF CLASS C SHARES BY THE FUND
4.1 Any of the outstanding Class C shares may be tendered for
redemption at any time, and the Fund agrees to repurchase or redeem the Class C
shares so tendered in accordance with its Articles of Incorporation as amended
from time to time, and in accordance with the applicable provisions of the
Prospectus. The price to be paid to redeem or repurchase the Class C shares
shall be equal to the net asset value determined as set forth in the Prospectus.
All payments by the Fund hereunder shall be made in the manner set forth in
Section 4.2 below.
4.2 The Fund shall pay the total amount of the redemption price as
defined in the above paragraph pursuant to the instructions of the Distributor
on or before the seventh day subsequent to its having received the notice of
redemption in proper form. The proceeds of any redemption of Class C shares
shall be paid by the Fund as follows: (a) any applicable contingent deferred
sales charge shall be paid to the Distributor and (b) the balance shall be paid
to or for the account of the redeeming shareholder, in each case in accordance
with applicable provisions of the Prospectus.
4.3 Redemption of Class C shares or payment may be suspended at times
when the New York Stock Exchange is closed for other than customary weekends and
holidays, when trading on said Exchange is restricted, when an emergency exists
as a result of which disposal by the Fund of securities owned by it is not
reasonably practicable or it is not reasonably practicable for the Fund fairly
to determine the value of its net assets, or during any other period when the
Securities and Exchange Commission, by order,
3
<PAGE>
so permits.
Section 5. DUTIES OF THE FUND
5.1 Subject to the possible suspension of the sale of Class C shares
as provided herein, the Fund agrees to sell its Class C shares so long as it has
Class C shares available.
5.2 The Fund shall furnish the Distributor copies of all information,
financial statements and other papers which the Distributor may reasonably
request for use in connection with the distribution of Class C shares, and this
shall include one certified copy, upon request by the Distributor, of all
financial statements prepared for the Fund by independent public accountants.
The Fund shall make available to the Distributor such number of copies of its
Prospectus and annual and interim reports as the Distributor shall reasonably
request.
5.3 The Fund shall take, from time to time, but subject to the
necessary approval of the Board of Directors and the shareholders, all necessary
action to fix the number of authorized Class C shares and such steps as may be
necessary to register the same under the Securities Act, to the end that there
will be available for sale such number of Class C shares as the Distributor
reasonably may expect to sell. The Fund agrees to file from time to time such
amendments, reports and other documents as may be necessary in order that there
will be no untrue statement of a material fact in the Registration Statement, or
necessary in order that there will be no omission to state a material fact in
the Registration Statement which omission would make the statements therein
misleading.
5.4 The Fund shall use its best efforts to qualify and maintain the
qualification of any appropriate number of its Class C shares for sales under
the securities laws of such states as the Distributor and the Fund may approve;
provided that the Fund shall not be required to amend its Articles of
Incorporation or By-Laws to comply with the laws of any state, to maintain an
office in any state, to change the terms of the offering of its Class C shares
in any state from the terms set forth in its Registration Statement, to qualify
as a foreign corporation in any state or to consent to service of process in any
state other than with respect to claims arising out of the offering of its Class
C shares. Any such qualification may be withheld, terminated or withdrawn by
the Fund at any time in its discretion. As provided in Section 9.1 hereof, the
expense of qualification and maintenance of qualification shall be borne by the
Fund. The Distributor shall furnish such information and other material
relating to its affairs and activities as may be required by the Fund in
connection with such qualifications.
4
<PAGE>
Section 6. DUTIES OF THE DISTRIBUTOR
6.1 The Distributor shall devote reasonable time and effort to effect
sales of Class C shares of the Fund, but shall not be obligated to sell any
specific number of Class C shares. Sales of the Class C shares shall be on the
terms described in the Prospectus. The Distributor may enter into like
arrangements with other investment companies. The Distributor shall compensate
the selected dealers as set forth in the Prospectus.
6.2 In selling the Class C shares, the Distributor shall use its best
efforts in all respects duly to conform with the requirements of all federal and
state laws relating to the sale of such securities. Neither the Distributor nor
any selected dealer nor any other person is authorized by the Fund to give any
information or to make any representations, other than those contained in the
Registration Statement or Prospectus and any sales literature approved by
appropriate officers of the Fund.
6.3 The Distributor shall adopt and follow procedures for the
confirmation of sales to investors and selected dealers, the collection of
amounts payable by investors and selected dealers on such sales and the
cancellation of unsettled transactions, as may be necessary to comply with the
requirements of the National Association of Securities Dealers, Inc. (NASD).
6.4 The Distributor shall have the right to enter into selected
dealer agreements with registered and qualified securities dealers and other
financial institutions of its choice for the sale of Class C shares, provided
that the Fund shall approve the forms of such agreements. Within the United
States, the Distributor shall offer and sell Class C shares only to such
selected dealers as are members in good standing of the NASD. Class C shares
sold to selected dealers shall be for resale by such dealers only at the
offering price determined as set forth in the Prospectus.
Section 7. PAYMENTS TO THE DISTRIBUTOR
The Distributor shall receive and may retain any contingent deferred
sales charge which is imposed with respect to repurchases and redemptions of
Class C shares as set forth in the Prospectus, subject to the limitations of
Article III, Section 26 of the NASD Rules of Fair Practice. Payment of these
amounts to the Distributor is not contingent upon the adoption or continuation
of the Plan.
Section 8. PAYMENT OF THE DISTRIBUTOR UNDER THE PLAN
8.1 The Fund shall pay to the Distributor as compensation for
services under the Distribution and Service Plan and this Agreement a fee of 1%
(including an asset-based sales charge of .75 of 1% and a service fee of .25 of
1%) per annum of
5
<PAGE>
the average daily net assets of the Class C shares of the Fund. Amounts payable
under the Plan shall be accrued daily and paid monthly or at such other
intervals as Directors/Trustees may determine. Amounts payable under the Plan
shall be subject to the limitations of Article III, Section 26 of the NASD Rules
of Fair Practice.
8.2 So long as the Plan or any amendment thereto is in effect, the
Distributor shall inform the Board of Directors of the commissions (including
trailer commissions) and account servicing fees to be paid by the Distributor to
account executives of the Distributor and to broker-dealers and financial
institutions which have selected dealer agreements with the Distributor. So
long as the Plan (or any amendment thereto) is in effect, at the request of the
Board of Directors or any agent or representative of the Fund, the Distributor
shall provide such additional information as may reasonably be requested
concerning the activities of the Distributor hereunder and the costs incurred in
performing such activities.
8.3 Expenses of distribution with respect to the Class C shares of
the Fund include, among others:
(a) sales commissions (including trailer commissions) paid to,
or on account of, account executives of the Distributor;
(b) indirect and overhead costs of the Distributor associated
with performance of distribution activities, including
central office and branch expenses;
(c) amounts paid to Prusec for performing services under a
selected dealer agreement between Prusec and the Distributor
for sale of Class C shares of the Fund, including sales
commissions and trailer commissions paid to, or on account
of, agents and indirect and overhead costs associated with
distribution activities;
(d) sales commissions (including trailer commissions) paid to,
or on account of, broker-dealers and financial institutions
(other than Prusec) which have entered into selected dealer
agreements with the Distributor with respect to Class C
shares of the Fund;
(e) amounts paid to, or an account of, account executives of the
Distributor or of other broker-dealers or financial
institutions for
6
<PAGE>
personal service and/or the maintenance of shareholder accounts; and
(f) advertising for the Fund in various forms through any
available medium, including the cost of printing and mailing
Fund Prospectuses, and periodic financial reports and sales
literature to persons other than current shareholders of the
Fund.
Indirect and overhead costs referred to in clauses (b) and (c) of the
foregoing sentence include (i) lease expenses, (ii) salaries and benefits of
personnel including operations and sales support personnel, (iii) utility
expenses, (iv) communications expenses, (v) sales promotion expenses, (vi)
expenses of postage, stationery and supplies and (vii) general overhead.
Section 9. ALLOCATION OF EXPENSES
9.1 The Fund shall bear all costs and expenses of the continuous
offering of its Class C shares, including fees and disbursements of its counsel
and auditors, in connection with the preparation and filing of any required
Registration Statements and/or Prospectuses under the Investment Company Act or
the Securities Act, and preparing and mailing annual and periodic reports and
proxy materials to shareholders (including but not limited to the expense of
setting in type any such Registration Statements, Prospectuses, annual or
periodic reports or proxy materials). The Fund shall also bear the cost of
expenses of qualification of the Class C shares for sale, and, if necessary or
advisable in connection therewith, of qualifying the Fund as a broker or dealer,
in such states of the United States or other jurisdictions as shall be selected
by the Fund and the Distributor pursuant to Section 5.4 hereof and the cost and
expense payable to each such state for continuing qualification therein until
the Fund decides to discontinue such qualification pursuant to Section 5.4
hereof. As set forth in Section 8 above, the Fund shall also bear the expenses
it assumes pursuant to the Plan with respect to Class C shares, so long as the
Plan is in effect.
Section 10. INDEMNIFICATION
10.1 The Fund agrees to indemnify, defend and hold the Distributor,
its officers and Directors and any person who controls the Distributor within
the meaning of Section 15 of the Securities Act, free and harmless from and
against any and all claims, demands, liabilities and expenses (including the
cost of investigating or defending such claims, demands or liabilities and any
counsel fees incurred in connection therewith) which the Distributor, its
officers, Directors or any such controlling person may incur under the
Securities Act, or under common law or otherwise, arising out of or based upon
any untrue statement of a
7
<PAGE>
material fact contained in the Registration Statement or Prospectus or arising
out of or based upon any alleged omission to state a material fact required to
be stated in either thereof or necessary to make the statements in either
thereof not misleading, except insofar as such claims, demands, liabilities or
expenses arise out of or are based upon any such untrue statement or omission or
alleged untrue statement or omission made in reliance upon and in conformity
with information furnished in writing by the Distributor to the Fund for use in
the Registration Statement or Prospectus; provided, however, that this indemnity
agreement shall not inure to the benefit of any such officer, Director or
controlling person unless a court of competent jurisdiction shall determine in a
final decision on the merits, that the person to be indemnified was not liable
by reason of willful misfeasance, bad faith or gross negligence in the
performance of its duties, or by reason of its reckless disregard of its
obligations under this Agreement (disabling conduct), or, in the absence of such
a decision, a reasonable determination, based upon a review of the facts, that
the indemnified person was not liable by reason of disabling conduct, by (a) a
vote of a majority of a quorum of Directors who are neither "interested persons"
of the Fund as defined in Section 2(a)(19) of the Investment Company Act nor
parties to the proceeding, or (b) an independent legal counsel in a written
opinion. The Fund's agreement to indemnify the Distributor, its officers and
Directors and any such controlling person as aforesaid is expressly conditioned
upon the Fund's being promptly notified of any action brought against the
Distributor, its officers or Directors, or any such controlling person, such
notification to be given in writing addressed to the Fund at its principal
business office. The Fund agrees promptly to notify the Distributor of the
commencement of any litigation or proceedings against it or any of its officers
or Directors in connection with the issue and sale of any Class C shares.
10.2 The Distributor agrees to indemnify, defend and hold the Fund,
its officers and Directors and any person who controls the Fund, if any, within
the meaning of Section 15 of the Securities Act, free and harmless from and
against any and all claims, demands, liabilities and expenses (including the
cost of investigating or defending against such claims, demands or liabilities
and any counsel fees incurred in connection therewith) which the Fund, its
officers and Directors or any such controlling person may incur under the
Securities Act or under common law or otherwise, but only to the extent that
such liability or expense incurred by the Fund, its Directors or officers or
such controlling person resulting from such claims or demands shall arise out of
or be based upon any alleged untrue statement of a material fact contained in
information furnished in writing by the Distributor to the Fund for use in the
Registration Statement or Prospectus or shall arise out of or be based upon any
alleged omission to state a material fact in connection with such information
required to be stated in the Registration Statement or Prospectus or necessary
to
8
<PAGE>
make such information not misleading. The Distributor's agreement to indemnify
the Fund, its officers and Directors and any such controlling person as
aforesaid, is expressly conditioned upon the Distributor's being promptly
notified of any action brought against the Fund, its officers and Directors or
any such controlling person, such notification to be given to the Distributor in
writing at its principal business office.
Section 11. DURATION AND TERMINATION OF THIS AGREEMENT
11.1 This Agreement shall become effective as of the date first above
written and shall remain in force for two years from the date hereof and
thereafter, but only so long as such continuance is specifically approved at
least annually by (a) the Board of Directors of the Fund, or by the vote of a
majority of the outstanding voting securities of the Class C shares of the Fund,
and (b) by the vote of a majority of those Directors who are not parties to this
Agreement or interested persons of any such parties and who have no direct or
indirect financial interest in this Agreement or in the operation of the Fund's
Plan or in any agreement related thereto (Rule 12b-1 Directors), cast in person
at a meeting called for the purpose of voting upon such approval.
11.2 This Agreement may be terminated at any time, without the
payment of any penalty, by a majority of the Rule 12b-1 Directors or by vote of
a majority of the outstanding voting securities of the Class C shares of the
Fund, or by the Distributor, on sixty (60) days' written notice to the other
party. This Agreement shall automatically terminate in the event of its
assignment.
11.3 The terms "affiliated person," "assignment," "interested person"
and "vote of a majority of the outstanding voting securities," when used in this
Agreement, shall have the respective meanings specified in the Investment
Company Act.
Section 12. AMENDMENTS TO THIS AGREEMENT
This Agreement may be amended by the parties only if such amendment is
specifically approved by (a) the Board of Directors of the Fund, or by the vote
of a majority of the outstanding voting securities of the Class C shares of the
Fund, and (b) by the vote of a majority of the Rule 12b-1 Board of Directors
cast in person at a meeting called for the purpose of voting on such amendment.
Section 13. GOVERNING LAW
The provisions of this Agreement shall be construed and interpreted in
accordance with the laws of the State of New York as at the time in effect and
the applicable provisions of the Investment Company Act. To the extent that the
applicable law of the State of New York, or any of the provisions herein,
conflict
9
<PAGE>
with the applicable provisions of the Investment Company Act, the latter shall
control.
*[Section 14. LIABILITIES OF THE FUND
The name "Prudential ___________ Trust" is the designation of the
Trustees under a Declaration of Trust dated ______, 19__ 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, and neither the Trustees, officers, agents of
shareholders assume any personal liability for obligations entered into on
behalf of the Fund.]
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year above written.
Prudential Securities
Incorporated
By: ________________________
________________________
(Title)
Prudential ________Fund
By: _______________________
(Name)
(Title)
*For Massachusetts Business Trusts only.
<PAGE>
Exh 11
CONSENT OF INDEPENDENT AUDITORS
We consent to the use in Post-Effective Amendment No. 18 to Registration
Statement No. 2-91215 of Prudential California Municipal Fund of our reports
dated October 20, 1993, appearing in the Statement of Additional Information,
which is a part of such Registration Statement, and to the references to us
under the headings "Financial Highlights" in the Prospectuses, which are a part
of such Registration Statement, and "Custodian, Transfer and Dividend Disbursing
Agent and Independent Accountants" in the Statement of Additional Information.
Deloitte & Touche
New York, New York
May 11, 1994
<PAGE>
Exhibit 15(d)
PRUDENTIAL ________ FUND
Form of
Distribution and Service Plan
(CLASS A SHARES)
INTRODUCTION
The Distribution and Service Plan (the Plan) set forth below which is
designed to conform to the requirements of Rule 12b-1 under the Investment
Company Act of 1940 (the Investment Company Act) and Article III, Section 26 of
the Rules of Fair Practice of the National Association of Securities Dealers,
Inc. (NASD) has been adopted by Prudential __________ Fund (the Fund) and by
Prudential Mutual Fund Distributors, Inc., the Fund's distributor (the
Distributor).
The Fund has entered into a distribution agreement pursuant to which the
Fund will employ the Distributor to distribute Class A shares issued by the Fund
(Class A shares). Under the Plan, the Fund intends to pay to the Distributor, as
compensation for its services, a distribution and service fee with respect to
Class A shares.
A majority of the Board of Directors or Trustees of the Fund, including a
majority of those Directors or 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 this Plan or any agreements
related to it (the Rule 12b-1 Directors or Trustees), have determined by votes
cast in person at a meeting called for the purpose of voting on this Plan that
there is a reasonable
<PAGE>
likelihood that adoption of this Plan will benefit the Fund and its
shareholders. Expenditures under this Plan by the Fund for Distribution
Activities (defined below) are primarily intended to result in the sale of Class
A shares of the Fund within the meaning of paragraph (a)(2) of Rule 12b-1
promulgated under the Investment Company Act.
The purpose of the Plan is to create incentives to the Distributor and/or
other qualified broker-dealers and their account executives to provide
distribution assistance to their customers who are investors in the Fund, to
defray the costs and expenses associated with the preparation, printing and
distribution of prospectuses and sales literature and other promotional and
distribution activities and to provide for the servicing and maintenance of
shareholder accounts.
THE PLAN
The material aspects of the Plan are as follows:
1. DISTRIBUTION ACTIVITIES
The Fund shall engage the Distributor to distribute Class A shares of the
Fund and to service shareholder accounts using all of the facilities of the
distribution networks of Prudential Securities Incorporated (Prudential
Securities) and Pruco Securities Corporation (Prusec), including sales personnel
and branch office and central support systems, and also using such other
qualified broker-dealers and financial institutions as the Distributor may
select. Services provided and activities undertaken to distribute Class A
shares of the Fund are referred to herein as "Distribution Activities."
2
<PAGE>
2. PAYMENT OF SERVICE FEE
The Fund shall pay to the Distributor as compensation for providing
personal service and/or maintaining shareholder accounts a service fee of .25 of
1% per annum of the average daily net assets of the Class A shares (service
fee). The Fund shall calculate and accrue daily amounts payable by the Class A
shares of the Fund hereunder and shall pay such amounts monthly or at such other
intervals as the Board of Directors/Trustees may determine.
3. PAYMENT FOR DISTRIBUTION ACTIVITIES
The Fund shall pay to the Distributor as compensation for its services a
distribution fee, together with the service fee (described in Section 2 hereof),
of .30 of 1% per annum of the average daily net assets of the Class A shares of
the Fund for the performance of Distribution Activities. The Fund shall
calculate and accrue daily amounts payable by the Class A shares of the Fund
hereunder and shall pay such amounts monthly or at such other intervals as the
Board of Directors/Trustees may determine. Amounts payable under the Plan shall
be subject to the limitations of Article III, Section 26 of the NASD Rules of
Fair Practice.
Amounts paid to the Distributor by the Class A shares of the Fund will not
be used to pay the distribution expenses incurred with respect to any other
class of shares of the Fund except that distribution expenses attributable to
the Fund as a whole will be allocated to the Class A shares according to the
ratio of the sales of Class A shares to the total sales of the Fund's shares
3
<PAGE>
over the Fund's fiscal year or such other allocation method approved by the
Board of Directors or Trustees. The allocation of distribution expenses among
classes will be subject to the review of the Board of Directors or Trustees.
The Distributor shall spend such amounts as it deems appropriate on
Distribution Activities which include, among others:
(a) amounts paid to Prudential Securities for performing
services under a selected dealer agreement between
Prudential Securities and the Distributor for sale of Class
A shares of the Fund, including sales commissions and
trailer commissions paid to, or on account of, account
executives and indirect and overhead costs associated with
Distribution Activities, including central office and branch
expenses;
(b) amounts paid to Prusec for performing services under a
selected dealer agreement between Prusec and the Distributor
for sale of Class A shares of the Fund, including sales
commissions and trailer commissions paid to, or on account
of, agents and indirect and overhead costs associated with
Distribution Activities;
(c) advertising for the Fund in various forms through any
available medium, including the cost of printing and mailing
Fund prospectuses, statements of additional information and
periodic financial reports and sales literature to persons
other than current shareholders of the Fund; and
(d) sales commissions (including trailer commissions) paid to,
or on account of, broker-dealers and financial institutions
(other than Prudential Securities and Prusec) which have
entered into selected dealer agreements with the Distributor
with respect to shares of the Fund.
4
<PAGE>
4. QUARTERLY REPORTS; ADDITIONAL INFORMATION
An appropriate officer of the Fund will provide to the Board of Directors
or Trustees of the Fund for review, at least quarterly, a written report
specifying in reasonable detail the amounts expended for Distribution Activities
(including payment of the service fee) and the purposes for which such
expenditures were made in compliance with the requirements of Rule 12b-1. The
Distributor will provide to the Board of Directors or Trustees of the Fund such
additional information as the Board or Trustees shall from time to time
reasonably request, including information about Distribution Activities
undertaken or to be undertaken by the Distributor.
The Distributor will inform the Board of Directors or Trustees of the Fund
of the commissions and account servicing fees to be paid by the Distributor to
account executives of the Distributor and to broker-dealers and financial
institutions which have selected dealer agreements with the Distributor.
5. EFFECTIVENESS; CONTINUATION
The Plan shall not take effect until it has been approved by a vote of a
majority of the outstanding voting securities (as defined in the Investment
Company Act) of the Class A shares of the Fund.
If approved by a vote of a majority of the outstanding voting securities of
the Class A shares of the Fund, the Plan shall, unless earlier terminated in
accordance with its terms, continue in full force and effect thereafter for so
long as such continuance is specifically approved at least annually by a
5
<PAGE>
majority of the Board of Directors or Trustees of the Fund and a majority of the
Rule 12b-1 Directors or Trustees by votes cast in person at a meeting called for
the purpose of voting on the continuation of the Plan.
6. TERMINATION
This Plan may be terminated at any time by vote of a majority of the Rule
12b-1 Directors or Trustees, or by vote of a majority of the outstanding voting
securities (as defined in the Investment Company Act) of the Class A shares of
the Fund.
7. AMENDMENTS
The Plan may not be amended to change the combined service and distribution
fees to be paid as provided for in Sections 2 and 3 hereof so as to increase
materially the amounts payable under this Plan unless such amendment shall be
approved by the vote of a majority of the outstanding voting securities (as
defined in the Investment Company Act) of the Class A shares of the Fund. All
material amendments of the Plan shall be approved by a majority of the Board of
Directors or the Trustees of the Fund and a majority of the Rule 12b-1 Directors
or Trustees by votes cast in person at a meeting called for the purpose of
voting on the Plan.
8. RULE 12b-1 DIRECTORS OR TRUSTEES
While the Plan is in effect, the selection and nomination of the Rule 12b-1
Directors or Trustees shall be committed to the discretion of the Rule 12b-1
Directors or Trustees.
6
<PAGE>
9. RECORDS
The Fund shall preserve copies of the Plan and any related agreements and
all reports made pursuant to Section 4 hereof, for a period of not less than six
years from the date of effectiveness of the Plan, such agreements or reports,
and for at least the first two years in an easily accessible place.
*[10. ENFORCEMENT OF CLAIMS.
The name "Prudential ___________ Trust" is the designation of the Trustees
under a Declaration of Trust dated ______, 19__ 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, and neither the Trustees, officers, agents of
shareholders assume any personal liability for obligations entered into on
behalf of the Fund.]
Dated:
7
CMF 15(e)
PRUDENTIAL ____________ FUND
Form of
Distribution and Service Plan
(CLASS B SHARES)
INTRODUCTION
The Distribution and Service Plan (the Plan) set forth below which is
designed to conform to the requirements of Rule 12b-1 under the Investment
Company Act of 1940 (the Investment Company Act) and Article III, Section 26 of
the Rules of Fair Practice of the National Association of Securities Dealers,
Inc. (NASD) has been adopted by Prudential ___________ Fund, (the Fund) and by
Prudential Securities Incorporated (Prudential Securities), the Fund's
distributor (the Distributor).
The Fund has entered into a distribution agreement pursuant to which
the Fund will continue to employ the Distributor to distribute Class B shares
issued by the Fund (Class B shares). Under the Plan, the Fund wishes to pay to
the Distributor, as compensation for its services, a distribution and service
fee with respect to Class B shares.
A majority of the Board of Directors/Trustees of the Fund including a
majority 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 this Plan or any agreements related to it (the Rule 12b-1
Directors/Trustees), have determined by votes cast in person at a meeting called
for the purpose of voting on this Plan that there is a reasonable likelihood
that adoption of this Plan will benefit the Fund and its
<PAGE>
shareholders. Expenditures under this Plan by the Fund for Distribution
Activities (defined below) are primarily intended to result in the sale of Class
B shares of the Fund within the meaning of paragraph (a)(2) of Rule 12b-1
promulgated under the Investment Company Act.
The purpose of the Plan is to create incentives to the Distributor
and/or other qualified broker-dealers and their account executives to provide
distribution assistance to their customers who are investors in the Fund, to
defray the costs and expenses associated with the preparation, printing and
distribution of prospectuses and sales literature and other promotional and
distribution activities and to provide for the servicing and maintenance of
shareholder accounts.
THE PLAN
The material aspects of the Plan are as follows:
1. DISTRIBUTION ACTIVITIES
The Fund shall engage the Distributor to distribute Class B shares of the
Fund and to service shareholder accounts using all of the facilities of the
Prudential Securities distribution network including sales personnel and branch
office and central support systems, and also using such other qualified broker-
dealers and financial institutions as the Distributor may select, including
Pruco Securities Corporation (Prusec). Services provided and activities
undertaken to distribute Class B shares of the Fund are referred to herein as
"Distribution Activities."
<PAGE>
2. PAYMENT OF SERVICE FEE
The Fund shall pay to the Distributor as compensation for providing
personal service and/or maintaining shareholder accounts a service fee of .25 of
1% per annum of the average daily net assets of the Class B shares (service
fee). The Fund shall calculate and accrue daily amounts payable by the Class B
shares of the Fund hereunder and shall pay such amounts monthly or at such other
intervals as the Board of Directors/Trustees may determine.
3. PAYMENT FOR DISTRIBUTION ACTIVITIES
The Fund shall pay to the Distributor as compensation for its services a
distribution fee, together with the service fee (described in Section 2 hereof),
of .50 of 1% per annum of the average daily net assets of the Class B shares of
the Fund for the performance of Distribution Activities. The Fund shall
calculate and accrue daily amounts payable by the Class B shares of the Fund
hereunder and shall pay such amounts monthly or at such other intervals as the
Board of Directors/Trustees may determine. Amounts payable under the Plan shall
be subject to the limitations of Article III, Section 26 of the NASD Rules of
Fair Practice.
Amounts paid to the Distributor by the Class B shares of the Fund will not
be used to pay the distribution expenses incurred with respect to any other
class of shares of the Fund except that distribution expenses attributable to
the Fund as a whole will be allocated to the Class B shares according to the
ratio of the sale of Class B shares to the total sales of the Fund's shares over
the Fund's fiscal year or such other allocation method approved by the
3
<PAGE>
Board of Directors/Trustees. The allocation of distribution expenses among
classes will be subject to the review of the Board of Directors/Trustees.
The Distributor shall spend such amounts as it deems appropriate on
Distribution Activities which include, among others:
(a) sales commissions (including trailer commissions) paid to, or on
account of, account executives of the Distributor;
(b) indirect and overhead costs of the Distributor associated with
performance of Distribution Activities including central office and
branch expenses;
(c) amounts paid to Prusec for performing services under a selected
dealer agreement between Prusec and the Distributor for sale of Class
B shares of the Fund, including sales commissions and trailer
commissions paid to, or on account of, agents and indirect and
overhead costs associated with Distribution Activities;
(d) advertising for the Fund in various forms through any available
medium, including the cost of printing and mailing Fund prospectuses,
statements of additional information and periodic financial reports
and sales literature to persons other than current shareholders of the
Fund; and
(e) sales commissions (including trailer commissions) paid to, or on
account of, broker-dealers and other financial institutions (other
than Prusec) which have entered into selected dealer agreements with
the Distributor with respect to shares of the Fund.
4. QUARTERLY REPORTS; ADDITIONAL INFORMATION
An appropriate officer of the Fund will provide to the Board of
Directors/Trustees of the Fund for review, at least quarterly, a written report
specifying in reasonable detail the amounts expended for Distribution Activities
(including payment of the service fee) and the purposes for which such
expenditures were made in compliance with the requirements of Rule 12b-1. The
Distributor
4
<PAGE>
will provide to the Board of Directors/Trustees of the Fund such additional
information as they shall from time to time reasonably request, including
information about Distribution Activities undertaken or to be undertaken by the
Distributor.
The Distributor will inform the Board of Directors/Trustees of the Fund of
the commissions and account servicing fees to be paid by the Distributor to
account executives of the Distributor and to broker-dealers and other financial
institutions which have selected dealer agreements with the Distributor.
5. EFFECTIVENESS; CONTINUATION
The Plan shall not take effect until it has been approved by a vote of a
majority of the outstanding voting securities (as defined in the Investment
Company Act) of the Class B shares of the Fund.
If approved by a vote of a majority of the outstanding voting securities of
the Class B shares of the Fund, the Plan shall, unless earlier terminated in
accordance with its terms, continue in full force and effect thereafter for so
long as such continuance is specifically approved at least annually by a
majority of the Board of Directors/Trustees of the Fund and a majority of the
Rule 12b-1 Directors/Trustees by votes cast in person at a meeting called for
the purpose of voting on the continuation of the Plan.
6. TERMINATION
This Plan may be terminated at any time by vote of a majority of the Rule
12b-1 Directors/Trustees, or by vote of a majority of the outstanding voting
securities (as defined in the Investment
5
<PAGE>
Company Act) of the Class B shares of the Fund.
7. AMENDMENTS
The Plan may not be amended to change the combined service and distribution
fees to be paid as provided for in Sections 2 and 3 hereof so as to increase
materially the amounts payable under this Plan unless such amendment shall be
approved by the vote of a majority of the outstanding voting securities (as
defined in the Investment Company Act) of the Class B shares of the Fund. All
material amendments of the Plan shall be approved by a majority of the Board of
Directors/Trustees of the Fund and a majority of the Rule 12b-1
Directors/Trustees by votes cast in person at a meeting called for the purpose
of voting on the Plan.
8. RULE 12B-1 DIRECTORS/TRUSTEES
While the Plan is in effect, the selection and nomination of the Rule 12b-1
Directors/Trustees shall be committed to the discretion of the Rule 12b-1
Directors/Trustees.
9. RECORDS
The Fund shall preserve copies of the Plan and any related agreements and
all reports made pursuant to Section 4 hereof, for a period of not less than six
years from the date of effectiveness of the Plan, such agreements or reports,
and for at least the first two years in an easily accessible place.
6
<PAGE>
*[10. ENFORCEMENT OF CLAIMS.
The name "Prudential __________ Trust" is the designation of the
Trustees under a Declaration of Trust Dated ______, 19__ and all persons dealing
with the Fund must look solely to the property of the Fund for the enforcement
of any claims against Trustees, officers, agents of shareholders assume any
personal liability for obligations entered into on behalf of the Fund.]
Dated:
7
<PAGE>
Exhibit 15(f)
PRUDENTIAL ________ FUND
Form of
Distribution and Service Plan
(CLASS C SHARES)
INTRODUCTION
The Distribution and Service Plan (the Plan) set forth below which is
designed to conform to the requirements of Rule 12b-1 under the Investment
Company Act of 1940 (the Investment Company Act) and Article III, Section 26 of
the Rules of Fair Practice of the National Association of Securities Dealers,
Inc. (NASD) has been adopted by Prudential __________ Fund, (the Fund) and by
Prudential Securities Incorporated (Prudential Securities), the Fund's
distributor (the Distributor).
The Fund has entered into a distribution agreement pursuant to which
the Fund will continue to employ the Distributor to distribute Class C shares
issued by the Fund (Class C shares). Under the Plan, the Fund wishes to pay to
the Distributor, as compensation for its services, a distribution and service
fee with respect to Class C shares.
A majority of the Board of Directors or Trustees of the Fund including a
majority 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 this Plan or any agreements related to it (the Rule 12b-1
Directors or Trustees), have determined by votes cast in person at a meeting
called for the purpose of voting on this Plan that there is a reasonable
likelihood that adoption of this Plan will benefit the Fund and its
<PAGE>
shareholders. Expenditures under this Plan by the Fund for Distribution
Activities (defined below) are primarily intended to result in the sale of Class
C shares of the Fund within the meaning of paragraph (a)(2) of Rule 12b-1
promulgated under the Investment Company Act.
The purpose of the Plan is to create incentives to the Distributor
and/or other qualified broker-dealers and their account executives to provide
distribution assistance to their customers who are investors in the Fund, to
defray the costs and expenses associated with the preparation, printing and
distribution of prospectuses and sales literature and other promotional and
distribution activities and to provide for the servicing and maintenance of
shareholder accounts.
THE PLAN
The material aspects of the Plan are as follows:
1. DISTRIBUTION ACTIVITIES
The Fund shall engage the Distributor to distribute Class C shares of the
Fund and to service shareholder accounts using all of the facilities of the
Prudential Securities distribution network including sales personnel and branch
office and central support systems, and also using such other qualified broker-
dealers and financial institutions as the Distributor may select, including
Pruco Securities Corporation (Prusec). Services provided and activities
undertaken to distribute Class C shares of the Fund are referred to herein as
"Distribution Activities."
2
<PAGE>
2. PAYMENT OF SERVICE FEE
The Fund shall pay to the Distributor as compensation for providing
personal service and/or maintaining shareholder accounts a service fee of .25 of
1% per annum of the average daily net assets of the Class C shares (service
fee). The Fund shall calculate and accrue daily amounts payable by the Class C
shares of the Fund hereunder and shall pay such amounts monthly or at such other
intervals as the Board of Directors/Trustees may determine.
3. PAYMENT FOR DISTRIBUTION ACTIVITIES
The Fund shall pay to the Distributor as compensation for its services a
distribution fee of .75 of 1% per annum of the average daily net assets of the
Class C shares of the Fund for the performance of Distribution Activities. The
Fund shall calculate and accrue daily amounts payable by the Class C shares of
the Fund hereunder and shall pay such amounts monthly or at such other intervals
as the Board of Directors/Trustees may determine. Amounts payable under the
Plan shall be subject to the limitations of Article III, Section 26 of the NASD
Rules of Fair Practice.
Amounts paid to the Distributor by the Class C shares of the Fund will not
be used to pay the distribution expenses incurred with respect to any other
class of shares of the Fund except that distribution expenses attributable to
the Fund as a whole will be allocated to the Class C shares according to the
ratio of the sale of Class C shares to the total sales of the Fund's shares over
the Fund's fiscal year or such other allocation method approved by the Board of
Directors or Trustees. The allocation of distribution
3
<PAGE>
expenses among classes will be subject to the review of the Board of Directors
or Trustees.
The Distributor shall spend such amounts as it deems appropriate on
Distribution Activities which include, among others:
(a) sales commissions (including trailer commissions) paid to, or on
account of, account executives of the Distributor;
(b) indirect and overhead costs of the Distributor associated with
performance of Distribution Activities including central office and
branch expenses;
(c) amounts paid to Prusec for performing services under a selected
dealer agreement between Prusec and the Distributor for sale of Class
C shares of the Fund, including sales commissions and trailer
commissions paid to, or on account of, agents and indirect and
overhead costs associated with Distribution Activities;
(d) advertising for the Fund in various forms through any available
medium, including the cost of printing and mailing Fund prospectuses,
statements of additional information and periodic financial reports
and sales literature to persons other than current shareholders of the
Fund; and
(e) sales commissions (including trailer commissions) paid to, or on
account of, broker-dealers and other financial institutions (other
than Prusec) which have entered into selected dealer agreements with
the Distributor with respect to shares of the Fund.
4. QUARTERLY REPORTS; ADDITIONAL INFORMATION
An appropriate officer of the Fund will provide to the Board of Directors
or Trustees of the Fund for review, at least quarterly, a written report
specifying in reasonable detail the amounts expended for Distribution Activities
(including payment of the service fee) and the purposes for which such
expenditures were made in compliance with the requirements of Rule 12b-1. The
Distributor will provide to the Board of Directors or Trustees of
4
<PAGE>
the Fund such additional information as they shall from time to time reasonably
request, including information about Distribution Activities undertaken or to be
undertaken by the Distributor.
The Distributor will inform the Board of Directors or Trustees of the Fund
of the commissions and account servicing fees to be paid by the Distributor to
account executives of the Distributor and to broker-dealers and other financial
institutions which have selected dealer agreements with the Distributor.
5. EFFECTIVENESS; CONTINUATION
The Plan shall not take effect until it has been approved by a vote of a
majority of the outstanding voting securities (as defined in the Investment
Company Act) of the Class C shares of the Fund.
If approved by a vote of a majority of the outstanding voting securities of
the Class C shares of the Fund, the Plan shall, unless earlier terminated in
accordance with its terms, continue in full force and effect thereafter for so
long as such continuance is specifically approved at least annually by a
majority of the Board of Directors or Trustees of the Fund and a majority of the
Rule 12b-1 Directors or Trustees by votes cast in person at a meeting called for
the purpose of voting on the continuation of the Plan.
6. TERMINATION
This Plan may be terminated at any time by vote of a majority of the Rule
12b-1 Directors or Trustees, or by vote of a majority of the outstanding voting
securities (as defined in the Investment
5
<PAGE>
Company Act) of the Class C shares of the Fund.
7. AMENDMENTS
The Plan may not be amended to change the combined service and distribution
fees to be paid as provided for in Sections 2 and 3 hereof so as to increase
materially the amounts payable under this Plan unless such amendment shall be
approved by the vote of a majority of the outstanding voting securities (as
defined in the Investment Company Act) of the Class C shares of the Fund. All
material amendments of the Plan shall be approved by a majority of the Board of
Directors or Trustees of the Fund and a majority of the Rule 12b-1 Directors or
Trustees by votes cast in person at a meeting called for the purpose of voting
on the Plan.
8. RULE 12b-1 DIRECTORS OR TRUSTEES
While the Plan is in effect, the selection and nomination of the Rule 12b-1
Directors or Trustees shall be committed to the discretion of the Rule 12b-1
Directors or Trustees.
9. RECORDS
The Fund shall preserve copies of the Plan and any related agreements and
all reports made pursuant to Section 4 hereof, for a period of not less than six
years from the date of effectiveness of the Plan, such agreements or reports,
and for at least the first two years in an easily accessible place.
*[10. ENFORCEMENT OF CLAIMS.
The name "Prudential ___________ Trust" is the designation of the Trustees
under a Declaration of Trust dated ______, 19__ and all persons dealing with the
Fund must look solely to the property
6
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of the Fund for the enforcement of any claims against the Fund, and neither the
Trustees, officers, agents of shareholders assume any personal liability for
obligations entered into on behalf of the Fund.]
Dated:
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