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PRUDENTIAL CALIFORNIA MUNICIPAL FUND
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STATEMENT OF ADDITIONAL INFORMATION
DATED NOVEMBER 1, 1995
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Prudential California Municipal Fund (the Fund) is an open-end, management
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.
There can be no assurance that any series' investment objective will be
achieved. See "Investment Objectives and Policies."
The Fund's address is One Seaport Plaza, New York, New York 10292, and its
telephone number is (800) 225-1852.
This Statement of Additional Information is not a prospectus and should be read
in conjunction with the Prospectuses of each series of the Fund dated November
1, 1995, copies of which may be obtained from the Fund upon request.
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116B
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TABLE OF CONTENTS
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Cross-Reference Cross-Reference Cross-Reference
to Pages in to Pages to Pages in
California in California California Money
Series Income Series Market Series
Page Prospectus Prospectus Prospectus
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<S> <C> <C> <C> <C>
General Information.................... B-3 20 20 14
Investment Objectives and Policies..... B-3 8 8 6
In General........................... B-3 8 8 6
Tax-Exempt Securities................ B-5 8 8 6
Special Considerations Regarding In-
vestments in Tax-Exempt
Securities.......................... B-7 12 12 8
Put Options.......................... B-9 10 10 8
Financial Futures Contracts and
Options Thereon..................... B-9 10 11 --
When-Issued and Delayed Delivery
Securities.......................... B-12 10 10 8
Portfolio Turnover of the California
Series and the California Income
Series.............................. B-12 12 13 --
Illiquid Securities.................. B-13 12 13 9
Repurchase Agreements................ B-13 12 13 9
Investment Restrictions................ B-14 13 13 9
Trustees and Officers.................. B-16 13 14 9
Manager................................ B-20 13 14 10
Distributor............................ B-24 14 14 10
Portfolio Transactions and Brokerage... B-27 16 17 11
Purchase and Redemption of Fund
Shares................................ B-28 21 21 15
Specimen Price Make-Up............... B-29 -- -- --
Reduction and Waiver of Initial Sales
Charges -- Class A Shares........... B-29 23 24 --
Waiver of the Contingent Deferred
Sales Charge -- Class B Shares...... B-31 26 27
Quantity Discount -- Class B Shares
Purchased Prior to August 1, 1994... B-31 26 27
Shareholder Investment Account......... B-31 29 29 21
Automatic Reinvestment of Dividends
and/or Distributions................ B-31 29 29 21
Exchange Privilege................... B-32 28 28 20
Dollar Cost Averaging................ B-33 -- -- --
Automatic Savings Accumulation Plan
(ASAP).............................. B-34 29 30 21
Systematic Withdrawal Plan........... B-34 29 30 21
How to Redeem Shares of the
California Money Market Series...... B-34 -- -- 18
Mutual Fund Programs................. B-35
Net Asset Value........................ B-36 16 17 12
Performance Information................ B-37 17 17 6
California Series and California
Income Series....................... B-37 17 17 --
California Money Market Series....... B-38 -- -- 6
Distributions and Tax Information...... B-40 17 18 12
Distributions........................ B-40 19 20 14
Federal Taxation..................... B-40 17 18 12
California Taxation.................. B-43 18 19 13
Organization and Capitalization........ B-44 20 20 14
Custodian, Transfer and Dividend
Disbursing Agent and Independent
Accountants........................... B-45 16 17 12
Description of Tax-Exempt Security
Ratings............................... B-46 -- -- --
Financial Statements................... B-48 5 5 5
Appendix I............................. I-1 -- -- --
Appendix II............................ II-1 -- -- --
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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 (Moody's), currently Aaa, Aa, A, Baa for bonds, MIG 1, MIG 2,
MIG 3, MIG 4 for notes and P-1 for commercial paper, or of Standard & Poor's
Ratings Group (S&P), currently AAA, AA, A, BBB for bonds, SP-1, SP-2 for notes
and A-1 for commercial paper. The 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 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 its 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.
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 its assets,
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; obligations of municipal
utilities systems; bonds that are secured or backed by the Treasury or other
U.S.
B-4
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Government guaranteed securities; or industrial development and pollution
control bonds. Each of the foregoing types of investments might be subject to
particular risks which, to the extent that a series is concentrated in such
investments, could affect the value or liquidity of the series.
Each series will treat an investment in a municipal bond refunded with
escrowed U.S. Government securities as U.S. Government securities for purposes
of the Investment Company Act's diversification requirements provided: (i) the
escrowed securities are "government securities" as defined in the Investment
Company Act, (ii) the escrowed securities are irrevocably pledged only to
payment of debt service on the refunded bonds, except to the extent there are
amounts in excess of funds necessary for such debt service, (iii) principal and
interest on the escrowed securities will be sufficient to satisfy all scheduled
principal, interest and any premiums on the refunded bonds and a verification
report prepared by a party acceptable to a nationally recognized statistical
rating agency, or counsel to the holders of the refunded bonds, so verifies,
(iv) the escrow agreement provides that the issuer of the refunded bonds grants
and assigns to the escrow agent, for the equal and ratable benefit of the
holders of the refunded bonds, an express first lien on, pledge of and perfected
security interest in the escrowed securities and the interest income thereon,
(v) the escrow agent has no lien of any type with respect to the escrowed
securities for payment of its fees or expenses except to the extent there are
excess securities, as described in (ii) above, and (vi) the series will not
invest more than 25% of its total assets in pre-refunded bonds of the same
municipal issuer.
TAX-EXEMPT SECURITIES
Tax-exempt securities include notes and bonds issued by or on behalf of
states, territories and possessions of the United States and their political
subdivisions, agencies and instrumentalities and the District of Columbia, the
interest on which is exempt from federal income tax (except for possible
application of the alternative minimum tax) and, in certain instances,
applicable state or local income and personal property taxes. Such securities
are traded primarily in the over-the-counter market.
For purposes of diversification and concentration under the Investment
Company Act, the identification of the issuer of tax-exempt bonds or notes
depends on the terms and conditions of the obligation. If the assets and
revenues of an agency, authority, instrumentality or other political subdivision
are separate from those of the government creating the subdivision and the
obligation is backed only by the assets and revenues of the subdivision, such
subdivision is regarded as the sole issuer. Similarly, in the case of an
industrial development revenue bond or pollution control revenue bond, if the
bond is backed only by the assets and revenues of the nongovernmental user, the
nongovernmental user is regarded as the sole issuer. If in either case the
creating government or another entity guarantees an obligation, the guaranty may
be regarded as a separate security and treated as an issue of such guarantor.
TAX-EXEMPT BONDS. Tax-exempt bonds are issued to obtain funds for various
public purposes, including the construction of a wide range of public facilities
such as airports, bridges, highways, housing, hospitals, 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.
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TAX-EXEMPT NOTES. Tax-exempt notes generally are used to provide for
short-term capital needs and generally have maturities of one year or less.
Tax-exempt notes include:
1. TAX ANTICIPATION NOTES. Tax Anticipation Notes are issued to finance
working capital needs of municipalities. Generally, they are issued in
anticipation of various seasonal tax revenues, such as income, sales, use and
business taxes, and are payable from these specific future taxes.
2. REVENUE ANTICIPATION NOTES. Revenue Anticipation Notes are issued in
expectation of receipt of other kinds of revenue, such as federal revenues
available under the Federal Revenue Sharing Programs.
3. BOND ANTICIPATION NOTES. Bond Anticipation Notes are issued to provide
interim financing until long-term financing can be arranged. In most cases, the
long-term bonds then provide the money for the repayment of the Notes.
4. CONSTRUCTION LOAN NOTES. Construction Loan Notes are sold to provide
construction financing. Permanent financing, the proceeds of which are applied
to the payment of Construction Loan Notes, is sometimes provided by a commitment
by the Government National Mortgage Association (GNMA) to purchase the loan,
accompanied by a commitment by the Federal Housing Administration to insure
mortgage advances thereunder. In other instances, permanent financing is
provided by commitments of banks to purchase the loan.
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 the 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
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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 regarding certain
California considerations is provided to investors in view of each series'
policy 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 relating to securities offerings of California issuers and
other sources deemed reliable.
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 of between 18% and 49% in each decade since 1950. During
the last decade, population rose 26%. The State now comprises 12.3% of the
nation's population and 12.9% of the nation's total personal income.
California's 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 1980s, the State was
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 1990, unemployment moved above the national
average for the first time in many years and it remained significantly above the
United States average in late 1994. Overall, the State lost over 800,000 jobs
since the Spring of 1990. The California economy began growing again in the
second quarter of 1993. Employment growth has resumed at a slow rate during the
last two years, and approximately 300,000 jobs have been restored since the low
point of the recession. As California enters its third year of economic
recovery, its finances continue to show slow improvement.
California's structural budget imbalance has been evident since fiscal year
1985-1986, during which time the State has recorded General Fund operating
deficits in several fiscal years. Many of these problems have been attributed to
great population influx that 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. By June 30, 1995, the General Fund had an
accumulated deficit, on a budgeted basis, of approximately $1.0 billion.
On August 3, 1995, the Governor signed into law a new $57.5 billion budget
which, among other things, reduces welfare payments and increases education
spending from the previous fiscal year. The fiscal 1995-96 budget calls for
$44.1 billion in revenues and $43.4 billion in spending, an increase of over
3.5% and 4.0%, respectively, from the fiscal 1994-95 budget. Although the
State's budget projects an operating surplus of approximately $600 million, it
continues to rely on federal actions, both to fund programs relating to MediCal
and incarceration costs associated with illegal immigrants and to relieve the
State from federally mandated spending, which are not certain of occurring.
Accordingly, the surplus may not be realized unless the economy outperforms
expectations or spending falls below planned levels.
On December 6, 1994, Orange County (California) became the largest
municipality in the United States to file for protection under the federal
bankruptcy laws. The filing stemmed from approximately $1.7 billion in losses
suffered by the County's investment pool due to a high risk investment strategy
utilizing excessive leverage and "derivative" securities. In September 1995, the
State legislature approved legislation permitting Orange County to use for
bankruptcy recovery $820 million over 20 years in sales taxes previously
earmarked for highways, transit and development. Such legislation also permits
the Governor to appoint a trustee to take over Orange County's financial affairs
if the county does not have a full recovery plan filed with the Bankruptcy Court
by May 1996.
Los Angeles County, the nation's largest county, is also experiencing
financial difficulty. In August 1995, the credit rating of the County's
long-term bonds was downgraded for the third time since 1992 as a result of,
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among other things, severe operating deficits for the County's health care
system. In September 1995, federal and State aid to Los Angeles County totalling
$514 million was pledged, providing a short-term solution to the County's budget
problems.
From time to time, the State is a party to numerous legal proceedings, many
of which normally occur in governmental operations. In addition, the State is
involved in certain other legal proceedings that, if decided against the State,
might require the State to make significant future expenditures or impair future
revenue sources.
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 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 to 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 appropriation 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. In September 1995, the
California Supreme Court upheld the constitutionality of Proposition 62,
creating uncertainty as to the legality of certain local taxes enacted by
non-charter cities in California without voter approval. 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. The 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
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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. For years
beginning after January 1, 1996, 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 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.
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 exceed 10% of the net
asset value of such series. The acquisition of a put may involve an additional
cost to the series by payment of a premium for the put, by payment of a higher
purchase price for securities to which the put is attached or through a lower
effective interest rate.
In addition, there is a credit risk associated with the purchase of puts in
that the issuer of the put may be unable to meet its obligation to purchase the
underlying security. Accordingly, the series will acquire puts only under the
following circumstances: (1) the put is written by the issuer of the underlying
security and such security is rated within the four highest quality grades (two
highest grades for the 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
B-9
<PAGE>
exchange on which a futures contract trades assumes responsibility for the
completion of transactions and guarantees that open futures contracts will be
closed. Although interest rate futures contracts call for actual delivery or
acceptance of debt securities, in most cases the contracts are closed out before
the settlement date without the making or taking of delivery.
When the futures contract is entered into, each party deposits with a broker
or in a segregated custodial account approximately 5% of the contract amount,
called the "initial margin." Subsequent payments to and from the broker, called
"variation margin," will be made on a daily basis as the price of the underlying
security or index fluctuates, making the long and short positions in the futures
contracts more or less valuable, a process known as "marking to the market."
When 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
the premium paid, to assume a position in a futures contract (a long position if
the option is a call and a short position if the option is a put) at a specified
exercise price at any time during the period of the option. Upon exercise of the
option, the delivery of the futures position by the writer of the option to the
holder of the option will be accompanied by delivery of the accumulated balance
in the writer's futures margin account which represents the amount by which the
market price of the futures contract, at exercise, exceeds, in the case of a
call, or is less than, in the case of a put, the exercise price of the option on
the futures contract. If an option is exercised on the last trading day prior to
the expiration date of the option, the settlement will be made entirely in cash
equal to the difference between the exercise price of the option and the closing
price of the futures contract on the expiration date. Currently, options can be
purchased or written with respect to futures contracts on U.S. Treasury Bonds,
among other fixed-income securities, and on municipal bond indices on the
Chicago Board of Trade. As with options on debt securities, the holder or writer
of an option may terminate his or her position by selling or purchasing an
option of the same series. There is no guaranty that such closing transactions
can be effected.
When 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 the
Series' purchasing and selling financial futures contracts and options thereon
for BONA FIDE hedging transactions, except that the Series may purchase and sell
futures contracts and options thereon for any other purpose, to the
B-10
<PAGE>
extent that the aggregate initial margin and option premiums do not exceed 5% of
the liquidation value of the Series total assets. 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 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 -- Futures Contracts and
Options Thereon" 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
may not at all times be adequate to handle current trading volume; or (vi) one
or more exchanges could, for
B-11
<PAGE>
economic or other reasons, decide or be compelled at some future date to
discontinue the trading of options (or a particular class or series of options),
in which event the secondary market on that exchange (or in that class or series
of options) would cease to exist, although outstanding options on that exchange
could continue to be exercisable in accordance with their terms.
There is no assurance that higher than anticipated trading activity or other
unforeseen events might not, at times, render certain clearing facilities
inadequate, and thereby result in the institution by an exchange of special
procedures which may interfere with the timely execution of customers' orders.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES
Each series may purchase tax-exempt securities on a when-issued or delayed
delivery basis, in which case delivery and payment normally take place within
one month after the date of the commitment to purchase. The payment obligation
and the interest rate that will be received on the tax-exempt securities are
each fixed at the time the buyer enters into the commitment. The purchase price
for the security includes interest accrued during the period between purchase
and settlement and, therefore, no interest accrues to the economic benefit of
the series until delivery and payment take place. Although a series will only
purchase a tax-exempt security on a when-issued or delayed delivery basis with
the intention of actually acquiring the securities, the series may sell these
securities before the settlement date if it is deemed advisable.
Tax-exempt securities purchased on a when-issued or delayed delivery basis
are subject to changes in market value based upon the public's perception of the
creditworthiness of the issuer and changes, real or anticipated, in the level of
interest rates (which will generally result in similar changes in value, I.E.,
experiencing both appreciation when interest rates decline and depreciation when
interest rates rise). Therefore, to the extent that a series remains
substantially fully invested at the same time that it has purchased securities
on a when-issued or delayed delivery basis, the market value of the series'
assets will vary to a greater extent than otherwise. Purchasing a tax-exempt
security on a when-issued or delayed delivery basis can involve a risk that the
yields available in the market when the delivery takes place may be higher than
those obtained on the security so purchased.
A segregated account of each series consisting of cash or liquid high-grade
debt securities equal to the amount of the when-issued 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.
B-12
<PAGE>
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 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, 1995 and August 31, 1994, the
portfolio turnover rate of the California Series was 44% and 69%, respectively.
For the fiscal years ended August 31, 1995 and August 31, 1994, the portfolio
turnover rate of the California Income Series was 39% and 46%, respectively.
ILLIQUID SECURITIES
A series may invest up to 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 non-appropriation); and
(v) the legal recourse in the event of failure to appropriate; and (4) any other
factors unique to municipal lease obligations as determined by the investment
adviser.
REPURCHASE AGREEMENTS
The series' repurchase agreements will be collateralized by U.S. Government
obligations. The series will enter into repurchase transactions only with
parties meeting creditworthiness standards approved by the Fund's Trustees. The
Fund's investment adviser will monitor the creditworthiness of such parties,
under the general supervision of the Trustees. In the event of a default or
bankruptcy by a seller, the series will promptly seek to liquidate the
collateral. To the extent that the proceeds from any sale of such collateral
upon a default in the obligation to repurchase are less than the repurchase
price, the series will suffer a loss.
The series participate in a joint repurchase account with other investment
companies managed by Prudential Mutual Fund Management, Inc. (PMF) pursuant to
an order of the SEC. On a daily basis, any 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.
B-13
<PAGE>
Except as described above and under "Investment Restrictions," the foregoing
investment policies are not fundamental and may be changed by the Trustees of
the Fund without the vote of a majority of its outstanding voting securities (as
defined above).
INVESTMENT RESTRICTIONS
The following restrictions are fundamental policies. Fundamental policies
are those which cannot be changed without the approval of the holders of a
majority of the outstanding voting securities of a series. A "majority of the
outstanding voting securities" of a series, when used in this Statement of
Additional Information, means the lesser of (i) 67% of the voting shares
represented at a meeting at which more than 50% of the outstanding voting shares
are present in person or represented by proxy or (ii) more than 50% of the
outstanding voting shares.
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 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 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.
The California Income Series has changed its subclassification from a
non-diversified to a diversified investment company. As a diversified investment
company, the California Income Series may not purchase any security if, as a
result, with respect to 75% of its total assets, more than 5% of the Series'
total assets would be invested in the securities of any one issuer (provided
that this restriction does not apply to U.S. Government securities).
B-15
<PAGE>
TRUSTEES AND OFFICERS
<TABLE>
<CAPTION>
NAME, ADDRESS AND AGE POSITION WITH FUND PRINCIPAL OCCUPATION DURING PAST 5 YEARS
--------------------------------------- ------------------ ----------------------------------------------------------
<C> <S> <C> <C>
Edward D. Beach (70)................... Trustee President and Director of BMC Fund, Inc., a closed- end
c/o Prudential Mutual Fund investment company; previously, Vice Chairman of
Management, Inc. Broyhill Furniture Industries, Inc.; Certified Public
One Seaport Plaza Accountant; Secretary and Treasurer of Broyhill Family
New York, NY Foundation, Inc.; Member of the Board of Trustees of
Mars Hill College; President, Treasurer and Director of
The High Yield Plus Fund, Inc. and First Financial Fund,
Inc.; Director of The Global Government Plus Fund, Inc.
and The Global Total Return Fund, Inc.
Eugene C. Dorsey (68).................. Trustee Retired President, Chief Executive Officer and Trustee of
c/o Prudential Mutual Fund the Gannett Foundation (now Freedom Forum); former
Management, Inc. Publisher of four Gannett newspapers and Vice President
One Seaport Plaza of Gannett Company; past Chairman of Independent Sector
New York, NY (national coalition of philanthropic organizations);
former Chairman of the American Council for the Arts;
Director of the Advisory Board of Chase Manhattan Bank
of Rochester and The High Yield Income Fund, Inc.
Delayne Dedrick Gold (57).............. Trustee Marketing and Management Consultant.
c/o Prudential Mutual Fund
Management, Inc.
One Seaport Plaza
New York, NY
* Harry A. Jacobs, Jr. (74).............. Trustee Senior Director 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-September 1993); formerly Chairman of the
Board of Prudential Securities (1982-1985) and Chairman
of the Board and Chief Executive Officer of Bache Group
Inc. (1977-1982); Director of the Center for National
Policy, The First Australia Fund, Inc., The First
Australia Prime Income Fund, Inc., The Global Government
Plus Fund, Inc. and The Global Total Return Fund, Inc.;
Trustee of the Trudeau Institute.
<FN>
- ------------------------
* "Interested" Trustee, as defined in the Investment Company Act, by reason
of his affiliation with Prudential Securities or PMF.
</TABLE>
B-16
<PAGE>
<TABLE>
<CAPTION>
NAME, ADDRESS AND AGE POSITION WITH FUND PRINCIPAL OCCUPATION DURING PAST 5 YEARS
--------------------------------------- ------------------ ----------------------------------------------------------
<S> <C> <C> <C>
Thomas T. Mooney (53).................. Trustee President of the Greater Rochester Metro Chamber of
c/o Prudential Mutual Fund Commerce; formerly Rochester City Manager; Trustee of
Management, Inc. Center for Governmental Research, Inc.; Director of
One Seaport Plaza Monroe County Water Authority, Rochester Jobs, Inc.,
New York, NY Blue Cross of Rochester, Executive Service Corps of
Rochester, Monroe County Industrial Development
Corporation, Northeast Midwest Institute, First
Financial Fund, Inc., The Global Government Plus Fund,
Inc., The Global Total Return Fund, Inc. and The High
Yield Plus Fund, Inc.
Thomas H. O'Brien (70)................. Trustee President of O'Brien Associates (Financial and 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; Director of Ridgewood
Savings Bank and Yankee Energy System, Inc.; Trustee of
Hofstra University.
* Richard A. Redeker (52)................ President and President, Chief Executive Officer and Director (since
One Seaport Plaza Trustee October 1993) of PMF; Executive Vice President, Director
New York, NY and Member of Operating Committee (since October 1993),
Prudential Securities; Director (since October 1993) of
Prudential Securities Group, Inc.; Executive Vice
President, The Prudential Investment Corporation (since
January 1994); formerly Senior Executive Vice President
and Director of Kemper Financial Services, Inc.
(September 1978-September 1993); President and Director
of The Global Government Plus Fund, Inc., The Global
Total Return Fund, Inc. and The High Yield Income Fund,
Inc.
<FN>
- ------------------------
* "Interested" Trustee, as defined in the Investment Company Act, by reason
of his affiliation with Prudential Securities or PMF.
</TABLE>
B-17
<PAGE>
<TABLE>
<CAPTION>
NAME, ADDRESS AND AGE POSITION WITH FUND PRINCIPAL OCCUPATION DURING PAST 5 YEARS
--------------------------------------- ------------------ ----------------------------------------------------------
<S> <C> <C> <C>
Nancy H. Teeters (65).................. Trustee Economist; formerly Vice President and Chief Economist
c/o Prudential Mutual Fund (March 1986-June 1990) of International Business
Management, Inc. Machines Corporation; Director of Inland Steel
One Seaport Plaza Industries (since July 1991), First Financial Fund, Inc.
New York, NY and The Global Total Return Fund, Inc.
Robert F. Gunia (48)................... 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).
S. Jane Rose (49)...................... 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.
Eugene S. Stark (37)................... Treasurer and First Vice President (since January 1990) of PMF
One Seaport Plaza Principal
New York, NY Financial and
Accounting
Officer
Deborah A. Docs (37)................... Assistant Vice President and Associate General Counsel (since
One Seaport Plaza Secretary January 1993) of PMF; Vice President and Associate
New York, NY General Counsel (since January 1993) of Prudential
Securities; previously Associate Vice President (January
1990-December 1992), Assistant Vice President (January
1989-
December 1989) and Assistant General Counsel (November
1991-December 1992) of PMF.
</TABLE>
Trustees and officers of the Fund are also trustees, directors and officers
of some or all of the other investment companies distributed by Prudential
Securities or Prudential Mutual Fund Distributors, Inc.
The officers conduct and supervise the daily business operations of the
Fund, while the Trustees, in addition to their functions set forth under
"Manager" and "Distributor," review such actions and decide on general policy.
The Fund pays each of its Trustees who is not an affiliated person of the
Manager or the Fund's investment adviser annual compensation of $4,000, in
addition to certain out-of-pocket expenses. Mr. Dorsey receives his Trustees'
fee pursuant to a deferred fee agreement with the Fund. Under the terms of the
agreement, the Fund accrues daily the amount of such Trustees' fees which accrue
interest at a rate equivalent to the prevailing rate applicable to 90-day U.S.
Treasury Bills at the beginning of each calendar quarter or, pursuant to an SEC
exemptive order, at the daily rate of return of the Fund. 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.
B-18
<PAGE>
The Trustees have adopted a retirement policy which calls for the retirement
of Trustees on December 31 of the year in which they reach the age of 72 except
that retirement is being phased in for Trustees who were age 68 or older as of
December 31, 1993. Under this phase-in provision, Messrs. Beach, Jacobs and
O'Brien are scheduled to retire on December 31, 1999, 1998 and 1999,
respectively.
Pursuant to the terms of the Management Agreement with the Fund, the Manager
pays all compensation of officers and employees of the Fund as well as the fees
and expenses of all Trustees of the Fund who are affiliated persons of the
Manager.
The following table sets forth the aggregate compensation paid by the Fund
for the fiscal year ended August 31, 1995 to the Trustees who are not affiliated
with the Manager and the aggregate compensation paid to such Trustees for
service on the Fund's Board and the Boards of any other investment companies
managed by PMF (Fund Complex) for the calendar year ended December 31, 1994.
COMPENSATION TABLE
<TABLE>
<CAPTION>
PENSION OR
RETIREMENT TOTAL COMPENSATION
AGGREGATE BENEFITS ACCRUED ESTIMATED ANNUAL FROM FUND AND FUND
COMPENSATION AS PART OF FUND BENEFITS UPON COMPLEX PAID TO
NAME AND POSITION FROM FUND EXPENSES RETIREMENT TRUSTEES
- --------------------------------------------- -------------- ----------------- --------------------- ---------------------
<S> <C> <C> <C> <C>
Edward D. Beach, Trustee $ 4,000 None N/A $ 159,000(20/39)**
Eugene C. Dorsey, Trustee $ 4,000 None N/A $ 61,000*(7/34)**
Delayne Dedrick Gold, Trustee $ 4,000 None N/A $ 185,000(24/43)**
Thomas T. Mooney, Trustee $ 4,000 None N/A $ 126,000(15/36)**
Thomas H. O'Brien, Trustee $ 4,000 None N/A $ 44,000 (6/24)**
Nancy H. Teeters, Trustee $ 4,000 None N/A $ 95,000(12/28)**
<FN>
- ------------------------
* All compensation for the calendar year ended December 31, 1994 represents
deferred compensation. Aggregate compensation from the Fund for the fiscal
year ended August 31, 1995, including accrued interest, amounted to $4,478.
Aggregate compensation from all of the funds in the Fund Complex for the
calendar year ended December 31, 1994, including accrued interest, amounted
to approximately $61,000.
** Indicates number of funds/portfolios in Fund Complex (including the Fund)
to which aggregate compensation relates.
</TABLE>
As of October 13, 1995, the Trustees and officers of the Fund, as a group,
owned beneficially less than 1% of the outstanding shares of beneficial interest
of each series of the Fund.
As of October 13, 1995, the only beneficial owners, directly or indirectly,
of more than 5% of the outstanding shares of any class of beneficial interest of
a series were Richard F. Novak, Kathleen A. Novak, Co-Trustees, Novak Family
Trust et al, Walnut Creek, CA 94596-1322, who held 680 Class C shares of the
California Series (6.0%); Patricia Hussey, 7233 Cronin Circle, Dublin, CA
94568-2329, who held 2,590 Class C shares of the California Series (23.1%);
Kenneth Noel Jarman, Kenneth Jarman Revocable Trust, 3418 Stanbridge Ave, Long
Beach, CA 90808-2650, who held 882 Class C shares of the California Series
(7.9%); Thomas G. Sullivan and Cristina M. Sullivan, 8214 Crampton Ct #B,
Twentynine Palms, CA 92278-1611, who held 1,370 Class C shares of the California
Series (12.2%); Erman F. Bradley, John H. Bradley DECD Co-Trustees, F/T Bradley
Family 1991 Trust, 4044 E. Harney Lane, Lodi, CA 95240-6825, who held 618 Class
C shares of the California Series (5.5%); AnJanette Laura Lindner, P.O. Box 121
Patterson, CA 95363-0121, who held 705 Class C shares of the California Series
(6.3%); Richard G. Pardini & Beverly J. Pardini, 3107 N. El Dorado St.,
Stockton, CA 95204-3412, who held 885 Class C shares of the California Series
(7.9%); Cathy Tapella, 1460 Corte De Thais, San Jose, CA 95118-2315, who held
596 Class C shares of the California Series (5.3%); James M. Stone, Pearl C.
Stone Co-Trustees, Stone Revocable Trust, 20 W. Monterey Ave, Stockton, CA
95204-3602, who held 1,921 Class C shares of the California Series (17.1%);
Donald Aluisi & Dolores K. Aluisi, 1269 E. Copper Ave, Fresno, CA 93720-3502,
who held 81,360 Class C shares of the California Income Series (32.0%); John
Pryor and Jeanne Pryor, Co-Trustees of the 1988 Pryor Revocable Trust, 13820
Vista Dorada, Salinas, CA 93908-9443, who held 18,812 Class C shares of the
California Income Series (7.4%); and Zoe Ann Orr, Trustee, 740 Brewington Ave,
Watsonville, CA 95076-3260, who held 26,227 Class C shares of the California
Income Series (10.3%).
B-19
<PAGE>
As of October 13, 1995, Prudential Securities was the record holder for
other beneficial owners of 3,396,326 Class A shares (or 58% of the outstanding
Class A shares), 5,602,756 Class B shares (or 63% of the outstanding Class B
shares) and 10,103 Class C shares (or 90% of the outstanding Class C shares) of
the California Series; 13,662,523 Class A shares (or 86% of the outstanding
Class A shares), 2,538,130 Class B shares (or 89% of the outstanding Class B
shares) and 241,125 Class C shares (or 95% of the outstanding Class C shares) of
the California Income Series; and 249,688,693 shares of the California Money
Market Series (or 99% of the outstanding shares). 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 September 30,
1995, PMF managed and/or administered open-end and closed-end management
investment companies with assets of approximately $51 billion. According to the
Investment Company Institute, as of September 30, 1995, the Prudential Mutual
Funds were the 13th largest family of mutual funds in the United States.
PMF is a subsidiary of Prudential Securities and The Prudential Insurance
Company of America (Prudential). PMF has three wholly-owned subsidiaries:
Prudential Mutual Fund Distributors, Inc., Prudential Mutual Fund Services, Inc.
(PMFS or the Transfer Agent) and Prudential Mutual Fund Investment Management,
Inc. PMFS serves as the transfer agent for the Prudential Mutual Funds and, in
addition, provides customer service, recordkeeping and management and
administration services to qualified plans.
Pursuant to the Management Agreement with the Fund (the Management
Agreement), PMF, subject to the supervision of the Fund's Trustees and in
conformity with the stated policies of the Fund, manages both the investment
operations of each series and the composition of each series' portfolio,
including the purchase, retention, disposition and loan of securities. In
connection therewith, PMF is obligated to keep certain books and records of the
Fund. PMF also administers the Fund's business affairs and, in connection
therewith, furnishes the Fund with office facilities, together with those
ordinary clerical and bookkeeping services which are not being furnished by
State Street Bank and Trust Company (the Custodian), the Fund's custodian, and
PMFS, the Fund's transfer and dividend disbursing agent. The management services
of PMF for the Fund are not exclusive under the terms of the Management
Agreement and PMF is free to, and does, render management services to others.
For its services, PMF receives, pursuant to the Management Agreement, a fee
at an annual rate of .50 of 1% of the average daily net assets of each series.
The fee is computed daily and payable monthly. The Management 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 to PMF will be paid by PMF to the Fund. No such reductions
were required during the fiscal year ended August 31, 1995. Currently, the Fund
believes that the most restrictive expense limitation of state securities
commissions is 2 1/2% of a series' average daily net assets up to $30 million,
2% of the next $70 million of such assets and 1 1/2% of such assets in excess of
$100 million.
In connection with its management of the business affairs of the Fund, PMF
bears the following expenses:
(a) the salaries and expenses of all 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
B-20
<PAGE>
(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.
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 a majority of the Trustees who
are not parties to such contract or interested persons of any such party as
defined in the Investment Company Act, on May 5, 1995, and by shareholders of
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, 1993, 1994 and 1995, PMF received
management fees of $993,612, $1,066,852 and $836,149, respectively, from the
California Series. Effective January 1, 1995, PMF agreed to waive 10% of its
management fee from the California Series. The amount of fees waived for the
fiscal year ended August 31, 1995 amounted to $58,693. With respect to the
California Money Market Series, PMF received $1,597,318, $1,632,146 and
$1,215,652 in management fees for the fiscal years ended August 31, 1993, 1994
and 1995, respectively. With respect to the California Income Series, PMF waived
its entire management fee of $829,475 for the fiscal year ended August 31, 1993.
Effective December 1, 1993, PMF reduced its voluntary waiver to 75% of its
management fee. Effective January 1, 1995, PMF increased its voluntary waiver to
85% of its management fee. For the fiscal years ended August 31, 1994 and 1995,
PMF received $189,532 and $175,685, respectively, in management fees from the
California Income Series. The amount of the fees waived for the years ended
August 31, 1994 and 1995 amounted to $822,628 and $779,180, respectively.
PMF has entered into the Subadvisory Agreement with PIC (the Subadviser).
The Subadvisory Agreement provides that PIC will furnish investment advisory
services in connection with the management of the Fund. In connection therewith,
PIC is obligated to keep certain books and records of the Fund. PMF continues to
have responsibility for all investment advisory services pursuant to the
Management Agreement and supervises PIC's performance of such services. PIC is
reimbursed by PMF for the reasonable costs and expenses incurred by PIC in
furnishing those services. The unit of PIC which provides investment advisory
services to the Fund is known as Prudential Mutual Fund Investment Management.
B-21
<PAGE>
Peter Allegrini oversees the municipal bond team at the Subadviser. He also
serves as the portfolio manager of the High Yield Series of Prudential Municipal
Bond Fund and the Pennsylvania Series of Prudential Municipal Series Fund. He
has been in the investment business since 1978.
The Subadvisory Agreement was last approved by the Trustees, including a
majority of the Trustees who are not parties to the contract or interested
persons of any such party as defined in the Investment Company Act, on May 5,
1995, 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 annually in accordance with
the requirements of the Investment Company Act.
The Subadviser maintains a credit unit which provides credit analysis and
research on both tax-exempt and taxable fixed-income securities. The portfolio
managers routinely consult with the credit unit in managing the Fund's
portfolios. The credit unit reviews on an ongoing basis issuers of tax-exempt
and taxable fixed-income obligations, including prospective purchases and
portfolio holdings of the Fund. Credit analysts have broad access to research
and financial reports, data retrieval services and industry analysts.
With respect to tax-exempt issuers, credit analysts review financial and
operating statements supplied by state and local governments and other issuers
of municipal securities to evaluate revenue projections and the financial
soundness of municipal issuers. They study the impact of economic and political
developments on state and local governments, evaluate industry sectors and meet
periodically with public officials and other representatives of state and local
governments and other tax-exempt issuers to discuss such matters as budget
projections, debt policy, the strength of the regional economy and, in the case
of revenue bonds, the demand for facilities. They also make site inspections to
review specified projects and to evaluate the progress of construction or the
operation of a facility.
The Manager and Subadviser are subsidiaries of Prudential, which is one of
the largest diversified financial services institutions in the world and, based
on total assets, the largest insurance company in North America as of December
31, 1994. Its primary business is to offer a full range of products and services
in three areas: insurance, investments and home ownership for individuals and
families; health-care management and other benefit programs for employees of
companies and members of groups; and asset management for institutional clients
and their associates. Prudential (together with its subsidiaries) employs nearly
100,000 persons world-wide, and maintains a sales force of approximately 19,000
agents, 3,400 insurance brokers and 6,000 financial advisors. It insures or
provides other financial services to more than 50 million people worldwide -- to
more than one of every five people in the United States. Prudential has been
engaged in the insurance business since 1875. In July 1995, INSTITUTIONAL
INVESTOR ranked Prudential the third largest institutional money manager of the
300 largest money management organizations in the United States as of December
31, 1994. As of December 31, 1994, Prudential through its subsidiaries provided
automobile insurance for more than 1.8 cars and insured more than 1.5 million
homes. For the year ended December 31, 1994, The Prudential Bank, a subsidiary
of Prudential, served 940,000 customers in 50 states providing credit card
services and loans totaling more than $1.2 billion. Assets held by Prudential
Securities for its clients totaled approximately $150 billion at December 31,
1994. During 1994, over 28,000 new customer accounts were opened each month at
Prudential Securities. The Prudential Real Estate Affiliates, the fourth largest
real estate brokerage network in the United States, has more than 34,000 brokers
and agents and more than 1,100 offices in the United States. Prudential is a
major issuer of annuities, including variable annuities. Prudential seeks to
develop innovative products and services to meet consumer needs in each of its
business areas.
Based on data for the year ended December 31, 1994 for the Prudential Mutual
Funds, on an average day, there are approximately $80 million in common stock
transactions, over $100 million in bond transactions and over $4.1 billion in
money market transactions. In 1994, the Prudential Mutual Funds effected more
than 57,000 trades in money market securities and held on average $21 billion of
money market securities. Based on
B-22
<PAGE>
complex-wide data for the year ended December 31, 1994, on an average day, 7,168
shareholders telephoned PMFS, the Transfer Agent of the Prudential Mutual Funds,
on the Prudential Mutual Funds' toll-free number. On an annual basis, that
represents approximately 1.8 million telephone calls and approximately 1.1
million fund transactions.
From time to time, there may be media coverage of portfolio managers and
other investment professionals associated with the Manager and the Subadviser in
national and regional publications, on television and in other media.
Additionally, individual mutual fund portfolios are frequently cited in surveys
conducted by national and regional publications and media organizations such as
THE WALL STREET JOURNAL, THE NEW YORK TIMES, BARRON'S and USA TODAY.
B-23
<PAGE>
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 the 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.
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). The Class A Plan became applicable to the California Income
Series effective with the commencement of offering its Class A shares on
December 3, 1990 and the Class B Plan became applicable to the California Income
Series effective with the commencement of offering its Class B shares on
December 6, 1993. On May 6, 1993, the Trustees, including a majority of the Rule
12b-1 Trustees, at a meeting called for the purpose of voting on each Plan,
approved the continuance of the Plans and Distribution Agreements and approved
modifications of the Fund's Class A and Class B Plans and Distribution
Agreements to conform them with recent amendments to the National Association of
Securities Dealers, Inc. (NASD) maximum sales charge rule described below. As so
modified, the Class A Plan provides that (i) up to .25 of 1% of the average
daily net assets of the Class A shares may be used to pay for personal service
and/or the maintenance of shareholder accounts (service fee) and (ii) total
distribution fees (including the service fee of .25 of 1%) may not exceed .30 of
1%. As so modified, the Class B Plan provides that (i) up to .25 of 1% of the
average daily net assets of the Class B shares may be paid as a service fee and
(ii) up to .50 of 1% (including the service fee) of the average daily net assets
of the Class B shares (asset-based sales charge) may be used as reimbursement
for distribution-related expenses with respect to the Class B shares. Total
distribution fees (including the service fee of .25 of 1%) may not exceed .50 of
1%. On May 6, 1993, the Trustees, including a majority of the Rule 12b-1
Trustees, at a meeting called for the purpose of voting on 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 Trustees, including a majority of the Rule 12b-1 Trustees,
on May 5, 1995. The Class A Plan, as amended, was approved by Class A and Class
B shareholders of the California Series and the California Income Series, and
the Class B Plan, as amended, was approved by Class B shareholders of the
California Series and the California Income Series on July 19, 1994. The Class C
Plan was approved by the sole shareholder of Class C shares on August 1, 1994.
CLASS A PLAN. For the fiscal year ended August 31, 1995, PMFD received
payments of $42,617 and $165,500 for the California Series and the California
Income Series, respectively, under the Class A Plan. These amounts were
primarily expended for payment of account servicing fees to financial advisers
and other persons who sell Class A shares. For the fiscal year ended August 31,
1995, PMFD also received approximately $28,300 and $374,000 in initial sales
charges with respect to the sale of Class A shares of the California Series and
the California Income Series, respectively.
CLASS B PLAN. For the fiscal year ended August 31, 1995, Prudential
Securities received $681,374 from the California Series under the Fund's Class B
Plan and spent approximately $420,680 in distributing the Class B
B-24
<PAGE>
shares of the California Series during such period. For the fiscal year ended
August 31, 1995, Prudential Securities received $118,608 from the California
Income Series under the Fund's Class B Plan and spent approximately $420,940 in
distributing the Class B shares of the California Income Series during such
period.
For the fiscal year ended August 31, 1995, it is estimated that Prudential
Securities spent approximately the following amounts on behalf of the series of
the Fund:
<TABLE>
<CAPTION>
COMPENSATION APPROXIMATE
PRINTING AND COMMISSION TO PRUSEC* FOR TOTAL
MAILING PAYMENTS TO OVERHEAD COMMISSION AMOUNT
PROSPECTUSES FINANCIAL COSTS PAYMENTS TO SPENT BY
TO OTHER ADVISERS OF OF REPRESENTATIVES DISTRIBUTOR
THAN CURRENT PRUDENTIAL PRUDENTIAL AND OTHER ON BEHALF OF
SERIES SHAREHOLDERS SECURITIES SECURITIES** EXPENSES** SERIES
- ------------ --------------- ----------- ------------ --------------- -------------
<S> <C> <C> <C> <C> <C>
California
Series..... $ 36,750 $ 184,880 $ 140,830 $ 58,140 $ 420,600
California
Income
Series..... 17,760 98,100 268,180 36,900 420,940
</TABLE>
- ------------------------
*Pruco Securities Corporation, an affiliated broker-dealer.
**Including lease, utility and sales promotional expenses.
The term "overhead costs" represents (a) the expenses of operating the
branch offices of Prudential Securities and Prusec in connection with the sale
of Fund shares, including lease costs, the salaries and employee benefits of
operations and sales support personnel, utility costs, communication costs and
the costs of stationery and supplies, (b) the cost of client sales seminars, (c)
expenses of mutual fund sales coordinators to promote the sale of Fund shares
and (d) other incidental expenses relating to branch promotion of Fund sales.
Prudential Securities also receives the proceeds of contingent deferred
sales charges paid by investors upon certain redemptions of Class B shares. See
"Shareholder Guide -- How to Sell Your Shares -- Contingent Deferred Sales
Charges" in the Prospectuses of the California Income Series and the California
Series. For the fiscal year ended August 31, 1995, Prudential Securities
received approximately $350,000 and $103,200 in contingent deferred sales
charges for the Class B shares of the California Series and California Income
Series, respectively.
CLASS C PLAN. For the fiscal year ended August 31, 1995, Prudential
Securities received $13,132 and $572 from the California Income Series and the
California Series, respectively, under the Fund's Class C Plan and spent
approximately $26,900 and $1,600 in distributing the Class C shares of the
California Income Series and the California Series, respectively, during such
period. These amounts were expended primarily for the payment of account
servicing fees. Prudential Securities also 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. For the fiscal year ended August 31, 1995, Prudential
Securities received approximately $1,400 and $160 on behalf of the California
Income Series and the California Series, respectively, in contingent deferred
sales charges attributable to Class C shares.
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 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
B-25
<PAGE>
the Distributor. The report includes an itemization of the distribution expenses
and the purposes of such expenditures. In addition, as long as the Plans remain
in effect, the selection and nomination of 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 5, 1995.
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 5, 1995, and by shareholders of the California Money Market Series on
December 18, 1989. For the fiscal year ended August 31, 1995, PMFD incurred
distribution expenses of $303,913 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.
On October 21, 1993, Prudential Securities (PSI) entered into an omnibus
settlement with the SEC, state securities regulators in 51 jurisdictions and the
NASD to resolve allegations that PSI sold interests in more than 700 limited
partnerships (and a limited number of other types of securities) from January 1,
1980 through December 31, 1990, in violation of securities laws to persons for
whom such securities were not suitable in light of the individuals' financial
condition or investment objectives. It was also alleged that the safety,
potential returns and liquidity of the investments had been misrepresented. The
limited partnerships principally involved real estate, oil and gas producing
properties and aircraft leasing ventures. The SEC Order (i) included findings
that PSI's conduct violated the federal securities laws and that an order issued
by the SEC in 1986 requiring PSI to adopt, implement and maintain certain
supervisory procedures had not been complied with; (ii) directed PSI to cease
and desist from violating the federal securities laws and imposed a $10 million
civil penalty; and (iii) required PSI to adopt certain remedial measures
including the establishment of a Compliance Committee of its Board of Directors.
Pursuant to the terms of the SEC settlement, PSI established a settlement fund
in the amount of $330,000,000 and procedures, overseen by a court approved
Claims Administrator, to resolve legitimate claims for compensatory damages by
purchasers of the partnership interests. PSI has agreed to provide additional
funds, if necessary, for that purpose. PSI's settlement with the state
securities regulators included an agreement to pay a penalty of $500,000 per
jurisdiction. PSI consented to a censure and to the payment of a $5,000,000 fine
in settling the NASD action. In settling the above referenced matters, PSI
neither admitted nor denied the allegations asserted against it.
On January 18, 1994, PSI agreed to the entry of a Final Consent Order and a
Parallel Consent Order by the Texas Securities Commissioner. The firm also
entered into a related agreement with the Texas Securities Commissioner. The
allegations were that the firm had engaged in improper sales practices and other
improper conduct resulting in pecuniary losses and other harm to investors
residing in Texas with respect to purchases and sales of limited partnership
interests during the period of January 1, 1980 through December 31, 1990.
Without admitting or denying the allegations, PSI consented to a reprimand,
agreed to cease and desist from future violations, and to provide voluntary
donations to the State of Texas in the aggregate amount of $1,500,000. The firm
agreed to suspend the creation of new customer accounts, the general
solicitation of new accounts, and the offer for sale of securities in or from
PSI's North Dallas office to new customers during a period of twenty consecutive
business days, and agreed that its other Texas offices would be subject to the
same restrictions for a period of five consecutive business days. PSI also
agreed to institute training programs for its securities salesmen in Texas.
On October 27, 1994, Prudential Securities Group, Inc. (PSG) and PSI entered
into agreements with the United States Attorney deferring prosecution (provided
PSI complies with the terms of the agreement for three years) for any alleged
criminal activity related to the sale of certain limited partnership programs
from 1983 to 1990. In connection with these agreements, PSI agreed to add the
sum of $330,000,000 to the fund established by the SEC and executed a
stipulation providing for a reversion of such funds to the United States Postal
B-26
<PAGE>
Inspection Service. PSI further agreed to obtain a mutually acceptable outside
director to sit on the Board of Directors of PSG and the Compliance Committee of
PSI. The new director will also serve as an independent "ombudsman" whom PSI
employees can call anonymously with complaints about ethics and compliance.
Prudential Securities shall report any allegations or instances of criminal
conduct and material improprieties to the new director. The new director will
submit compliance reports which shall identify all such allegations or instances
of criminal conduct and material improprieties every three months for a
three-year period.
NASD MAXIMUM SALES CHARGE RULE. Pursuant to rules of the NASD, the
Distributor is required to limit aggregate initial sales charges, deferred sales
charges and asset-based sales charges to 6.25% of total gross sales of each
class of shares. Interest charges on unreimbursed distribution expenses equal to
the prime rate plus one percent per annum may be added to the 6.25% limitation.
Sales from the reinvestment of dividends and distributions are not included in
the calculation of the 6.25% limitation. The annual asset-based sales charge on
shares of a series may not exceed .75 of 1% per class. The 6.25% limitation
applies to each class of a series of the Fund rather than on a per shareholder
basis. If aggregate sales charges were to exceed 6.25% of total gross sales of
any class, all sales charges on shares of that class would be suspended.
PORTFOLIO TRANSACTIONS AND BROKERAGE
The Manager is responsible for decisions to buy and sell securities and
futures and options thereon for 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 principal underwriter (as defined in the Investment Company
Act), except in accordance with rules of the SEC. This limitation, in the
opinion of the Fund, will not significantly affect the series' ability to pursue
their 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
B-27
<PAGE>
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 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 non-interested Trustees, have adopted
procedures which are reasonably designed to provide that any commissions, fees
or other remuneration paid to Prudential Securities (or any affiliate) are
consistent with the foregoing standard. In accordance with Section 11(a) 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, 1993, 1994 and 1995, the California
Series paid brokerage commissions of $10,430, $9,590 and $29,802, 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, 1993, 1994 and 1995, the California Money Market Series
paid no brokerage commissions. During the fiscal years ended August 31, 1993,
1994 and 1995, the California Income Series paid brokerage commissions of
$5,828, $8,104 and $26,355, 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 such 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
B-28
<PAGE>
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
a maximum sales charge of 3% and Class B* and Class C* shares are sold at net
asset value. Using the net asset value of these Series at August 31, 1995, 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................................... $ 11.49 $ 10.28
Maximum sales charge (3% of offering price).............................................. .36 .32
----------- -----------
Offering price to public................................................................. $ 11.85 $ 10.60
----------- -----------
----------- -----------
CLASS B
- -----------------------------------------------------------------------------------------
Net asset value, offering price and redemption price per Class B share*.................. $ 11.49 $ 10.28
----------- -----------
----------- -----------
CLASS C
- -----------------------------------------------------------------------------------------
Net asset value, offering price and redemption price per Class C share*.................. $ 11.49 $ 10.28
----------- -----------
----------- -----------
<FN>
- ------------------------
* Class B and Class C shares are subject to a contingent deferred sales charge
on certain redemptions. See "Shareholder Guide -- How to Sell Your Shares --
Contingent Deferred Sales Charges" in the Prospectus of each applicable
series.
</TABLE>
REDUCTION AND WAIVER OF INITIAL SALES CHARGES -- CLASS A SHARES
COMBINED PURCHASE AND CUMULATIVE PURCHASE PRIVILEGE. If an investor or
eligible group of related investors purchases Class A shares of the Fund
concurrently with Class A shares of other series of the Fund or other Prudential
Mutual Funds, the purchases may be combined to take advantage of the reduced
sales charges applicable to larger purchases. See the table of breakpoints under
"Shareholder Guide -- Alternative Purchase Plan" in the applicable Prospectus.
An eligible group of related Fund investors includes any combination of the
following:
(a) an individual;
(b) the individual's spouse, their children and their parents;
(c) the individual's and spouse's Individual Retirement Account (IRA);
(d) any company controlled by the individual (a person, entity or group that
holds 25% or more of the outstanding voting securities of a 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.
B-29
<PAGE>
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.
RIGHTS OF ACCUMULATION. Reduced sales charges are also available through
Rights of Accumulation, under which an investor or an eligible group of related
investors, as described above under "Combined Purchase and Cumulative Purchase
Privilege," may aggregate the value of their existing holdings of shares of the
Fund and shares of other Prudential Mutual Funds (excluding money market funds
other than those acquired pursuant to the exchange privilege) to determine the
reduced sales charge. However, the value of shares held directly with the
Transfer Agent and through Prudential Securities will not be aggregated to
determine the reduced sales charge. All shares must be held either directly with
the Transfer Agent or through Prudential Securities. The value of existing
holdings for purposes of determining the reduced sales charge is calculated
using the maximum offering price (net asset value plus maximum sales charge) as
of the previous business day. See "How the Fund Values its Shares" in the
Prospectuses. The Distributor must be notified at the time of purchase that the
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. 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.
B-30
<PAGE>
WAIVER OF THE CONTINGENT DEFERRED SALES CHARGE -- CLASS B SHARES
The contingent deferred sales charge is waived under circumstances described
in the applicable Prospectuses. See "Shareholder Guide -- How to Sell Your
Shares -- Waiver of the Contingent Deferred Sales Charges -- Class B Shares" in
the Prospectuses. In connection with these waivers, the Transfer Agent will
require you to submit the supporting documentation set forth below.
<TABLE>
<S> <C>
CATEGORY OF WAIVER REQUIRED DOCUMENTATION
Death A copy of the shareholder's death certificate
or, in the case of a trust, a copy of the
grantor's death certificate, plus a copy of the
trust agreement identifying the grantor.
Disability - An individual will be considered A copy of the Social Security Administration
disabled if he or she is unable to engage in any award letter or a letter from a physician on the
substantial gainful activity by reason of any physician's letterhead stating that the
medically determinable physical or mental shareholder (or, in the case of a trust, the
impairment which can be expected to result in grantor) is permanently disabled. The letter
death or to be of long-continued and indefinite must also indicate the date of disability.
duration.
</TABLE>
The Transfer Agent reserves the right to request such additional documents as it
may deem appropriate.
QUANTITY DISCOUNT -- CLASS B SHARES PURCHASED PRIOR TO AUGUST 1, 1994
The CDSC is reduced on redemptions of Class B shares of a series of the Fund
purchased prior to August 1, 1994, if immediately after a purchase of such
shares, the aggregate cost of all Class B shares of a series of the Fund owned
by you in a single account exceeded $500,000. For example, if you purchased
$100,000 of Class B shares of a series of the Fund and the following year
purchase an additional $450,000 of Class B shares with the result that the
aggregate cost of your Class B shares of a series of the Fund following the
second purchase was $550,000, the quantity discount would be available for the
second purchase of $450,000 but not for the first purchase of $100,000. The
quantity discount will be imposed at the following rates depending on whether
the aggregate value exceeded $500,000 or $1 million:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED SALES CHARGE AS A
PERCENTAGE OF DOLLARS INVESTED OR REDEMPTION
PROCEEDS
YEAR SINCE PURCHASE PAYMENT ----------------------------------------------
MADE $500,001 TO $1 MILLION OVER $1 MILLION
- ------------------------------ ------------------------ -------------------
<S> <C> <C>
First......................... 3.0% 2.0%
Second........................ 2.0% 1.0%
Third......................... 1.0% 0 %
Fourth and thereafter......... 0 % 0 %
</TABLE>
You must notify the Fund's Transfer Agent either directly or through
Prudential Securities or Prusec, at the time of redemption, that you are
entitled to the reduced CDSC. The reduced CDSC will be granted subject to
confirmation of your holdings.
SHAREHOLDER INVESTMENT ACCOUNT
Upon the initial purchase of 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.
An investor may direct the Transfer Agent in writing not less than five
B-31
<PAGE>
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
their 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
(Short-Intermediate Term Series) and shares of the money market funds specified
below. No fee or sales load will be imposed upon the exchange. Shareholders of
money market funds who acquired such shares upon exchange of Class A shares may
use the Exchange Privilege only to acquire Class A shares of the Prudential
Mutual Funds participating in the Exchange Privilege.
The following money market funds participate in the Class A Exchange
Privilege:
Prudential California Municipal Fund
(California Money Market Series)
Prudential Government Securities Trust
(Money Market Series)
(U.S. Treasury Money Market Series)
Prudential Municipal Series Fund
(Connecticut Money Market Series)
(Massachusetts Money Market Series)
(New Jersey Money Market Series)
(New York Money Market Series)
Prudential MoneyMart Assets
Prudential Tax-Free Money Fund
CLASS B AND CLASS C. Shareholders of 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 CDSC
will be payable upon such exchange, but a CDSC may be payable upon the
redemption of the Class B and Class C shares acquired as a result of the
exchange. The applicable sales charge will be that imposed by the fund in which
shares were initially purchased and the purchase date will be deemed to be the
first day of the month after the initial purchase, rather than the date of the
exchange.
Class B and Class C shares of the California Income Series and the
California Series may also be exchanged for shares of Prudential Special Money
Market Fund without imposition of any CDSC at the time of exchange.
B-32
<PAGE>
Upon subsequent redemption from such money market fund or after re-exchange into
the Series, such shares will be subject to the CDSC calculated by excluding the
time such shares were held in the money market fund. In order to minimize the
period of time in which shares are subject to a CDSC, shares exchanged out of
the money market fund will be exchanged on the basis of their remaining holding
periods, with the longest remaining holding periods being transferred first. In
measuring the time period shares are held in a money market fund and "tolled"
for purposes of calculating the CDSC holding period, exchanges are deemed to
have been made on the last day of the month. Thus, if shares are exchanged into
the Fund from a money market fund during the month (and are held in the Fund at
the end of the month), the entire month will be included in the CDSC holding
period. Conversely, if shares are exchanged into a money market fund prior to
the last day of the month (and are held in the money market fund on the last day
of the month), the entire month will be excluded from the CDSC holding period.
For purposes of calculating the seven year holding period applicable to the
Class B conversion feature, the time period during which Class B shares were
held in a money market fund will be excluded.
At any time after acquiring shares of other funds participating in the Class
B or Class C exchange privilege, a shareholder may again exchange those shares
(and any reinvested dividends and distributions) for Class B or Class C shares,
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.
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 $6,000 at a public
university. Assuming these costs increase at a rate of 7% a year, as has been
projected, for the freshman class beginning in 2011, the cost of four years at a
private college could reach $210,000 and over $90,000 at a public university.(1)
The following chart shows how much you would need in monthly investments to
achieve specified lump sums to finance your investment goals.(2)
<TABLE>
<CAPTION>
PERIOD OF
MONTHLY INVESTMENTS: $100,000 $150,000 $200,000 $250,000
- -------------------------------------------------- --------- --------- --------- ---------
<S> <C> <C> <C> <C>
25 Years.......................................... $ 110 $ 165 $ 220 $ 275
20 Years.......................................... 176 264 352 440
15 Years.......................................... 296 444 592 740
10 Years.......................................... 555 833 1,110 1,388
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 and
private universities is available from The College Board Annual Survey of
Colleges, 1993. Average costs for private institutions include tuition, fees,
room and board for the 1993-94 academic year.
(2) The chart assumes an effective rate of return of 8% (assuming monthly
compounding). This example is for illustrative purposes only and is not intended
to reflect the performance of an investment in shares of the Fund. The
investment return and principal value of an investment will fluctuate so that an
investor's shares when redeemed may be worth more or less than their original
cost.
</TABLE>
B-33
<PAGE>
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 Prospectus of each applicable Series.
In the case of shares held through the Transfer Agent, (i) a $10,000 minimum
account value applies, (ii) withdrawals may not be for less than $100 and (iii)
the shareholder must elect to have all dividends and 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 systematic withdrawal 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
B-34
<PAGE>
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 signature must be guaranteed by: (a) a commercial bank which is a
member of the Federal Deposit Insurance Corporation; (b) a trust company; or (c)
a member firm of a domestic securities exchange. Guarantees must be signed by an
authorized signatory of the bank, trust company or member firm, and "Signature
Guaranteed" should appear with the signature. Signature guarantees by savings
banks, savings and loan associations and notaries will not be accepted. PMFS may
request further documentation from corporations, executors, administrators,
trustees or guardians.
To receive further information, investors should contact PMFS at (800)
225-1852.
REGULAR REDEMPTION
Shareholders may redeem their shares by sending to PMFS, at the address set
forth above, a written request, accompanied by duly endorsed share certificates,
if issued. If the proceeds of the redemption (a) exceed $50,000, (b) are to be
paid to a person other than the record owner, (c) are to be sent to an address
other than the address on the Transfer Agent's records or (d) are to be paid to
a corporation, partnership, trust or fiduciary, the signature(s) on the
redemption request and on the certificates, if any, or stock power must be
guaranteed by an "eligible guarantor institution." An "eligible guarantor
institution" includes any bank, broker, dealer or credit union. For clients of
Prusec, a signature guarantee may be obtained from the agency or office manager
of most Prudential District or Ordinary offices. The Fund may change the
signature guarantee requirements from time to time on notice to shareholders,
which may be given by means of a new Prospectus. All correspondence concerning
redemptions should be sent to the Fund in care of its Transfer Agent, Prudential
Mutual Fund Services, Inc., Attention: Redemption Services, P.O. Box 15010, New
Brunswick, New Jersey 08906-5010. Regular redemption is made by check sent to
the shareholder's address.
MUTUAL FUND PROGRAMS
From time to time, the Fund (or a portfolio of the Fund) may be included in
a mutual fund program with other Prudential Mutual Funds. Under such a program,
a group of portfolios will be selected and thereafter promoted collectively.
Typically, these programs are created with an investment theme, E.G., to seek
greater diversification, protection from interest rate movements or access to
different management styles. In the event such a program is instituted, there
may be a minimum investment requirement for the program as a whole. The Fund may
waive or reduce the minimum initial investment requirements in connection with
such a program.
The mutual funds in the program may be purchased individually or as a part
of the program. Since the allocation of portfolios included in the program may
not be appropriate for all investors, investors should consult their Prudential
Securities Financial Advisor or Prudential/Pruco Securities Representative
concerning
B-35
<PAGE>
the appropriate blend of portfolios for them. If investors elect to purchase the
individual mutual funds that constitute the program in an investment ratio
different from that offered by the program, the standard minimum investment
requirements for the individual mutual funds will apply.
NET ASSET VALUE
The net asset value per share of a series is the net worth of such series
(assets including securities at value minus liabilities) divided by the number
of shares of such series outstanding. Net asset value is calculated separately
for each class. The Fund will compute 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. In the event
the New York Stock Exchange closes early on any business day, the net asset
value of the Fund's shares shall be determined at a time between such closing
and 4:15 P.M., New York time (with respect to shares of the California Series
and the California Income Series) and between such closing and 4:30 P.M., New
York time (with respect to shares of the California Money Market Series).
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.
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
B-36
<PAGE>
necessary and appropriate, including the sale of portfolio instruments prior to
maturity to realize capital gains or losses or to shorten average portfolio
maturity, the withholding of dividends, redemptions of shares in kind, or the
use of available market quotations to establish a net asset value per share.
PERFORMANCE INFORMATION
CALIFORNIA SERIES AND CALIFORNIA INCOME SERIES
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>
The California Series' yield for Class A, Class B and Class C shares for the 30
days ended August 31, 1995 was 5.02%, 4.78% and 4.54%, respectively (4.97%,
4.73% and 4.49%, respectively, adjusted for management fee waivers). The
California Income Series' yield for its Class A, Class B and Class C shares for
the 30 days ended August 31, 1995 was 5.79%, 5.57% and 5.32%, respectively
(5.36%, 5.14% and 4.87%, respectively, adjusted for management fee waivers).
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, 1995, the California Series' tax
equivalent yield (assuming a federal tax rate of 36%) for Class A, Class B and
Class C shares was 8.81%, 8.39% and 7.97%, respectively (8.73%, 8.30% and 7.88%,
respectively, adjusted for management fee waivers). The California Income
Series' tax equivalent yield (assuming a federal tax rate of 36%) for its Class
A, Class B and Class C shares for the 30 days ended August 31, 1995 was 10.17%,
9.78% and 9.34%, respectively (9.41%, 9.02% and 8.55%, respectively, adjusted
for management fee 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 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.
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.
B-37
<PAGE>
Average annual total return takes into account any applicable initial or
contingent deferred sales charges but does not take into account any federal or
state income taxes that may be payable upon redemption.
The California Series' average annual total returns for the periods ended
August 31, 1995 are as follows:
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
------------------------ -------------------------------- -------------------
ONE FIVE FROM ONE FIVE TEN FROM ONE FROM
YEAR YEARS INCEPTION YEAR YEARS YEARS INCEPTION YEAR INCEPTION
----- ----- -------- ----- ----- ----- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Average Annual Total Return... 4.67% 7.50% 7.01% 2.56% 7.58% 7.51% 8.24% 6.24% 6.71%
Average Annual Total Return
Adjusted for
Subsidy/Waiver............... 4.67% 7.50% 7.01% 2.56% 7.58% 7.47% 8.18% 6.24% 6.77%
</TABLE>
The California Income Series' average annual total returns for the periods
ended August 31, 1995 are as follows:
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
---------------- ------------------- -------------------
ONE FROM FROM FROM
YEAR INCEPTION ONE YEAR INCEPTION ONE YEAR INCEPTION
----- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Average Annual Total Return... 4.44% 8.24% 2.24% 1.78% 5.78% 6.70%
Average Annual Total Return
Adjusted for
Subsidy/Waiver............... 4.03% 7.82% 1.84% .69% 5.57% 6.52
</TABLE>
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 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.
Aggregate total return does not take into account any federal or state
income taxes that may be payable upon redemption or any applicable initial or
contingent deferred sales charges.
The aggregate total return for Class A shares of the California Series for
the one year, five year and since inception (January 22, 1990) periods ended
August 31, 1995 was 7.90%, 48.00% and 50.73%, respectively, and for the
California Income Series for the one year and since inception (December 3, 1990)
periods ended August 31, 1995 was 7.67% and 50.07%, respectively. The aggregate
total return for Class B shares of the California Series for the one year, five
year and ten year periods ended August 31, 1995 was 7.56%, 45.08% and 106.3%,
respectively, and for the California Income Series for the one year and since
inception (December 6, 1993) periods ended August 31, 1995 was 7.24% and 7.34%.
The aggregate total return for Class C shares for the one year and since
inception (August 1, 1994) periods ended August 31, 1995 for the California
Series and the California Income Series was 7.29% and 7.34% and 6.98% and 7.48%,
respectively.
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
B-38
<PAGE>
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 (assuming a
federal tax rate of 36%) as of August 31, 1995 was %.
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., IBC/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.
From time to time, the performance of the series may be measured against
various indices. Set forth below is a chart which compares the performance of
different types of investments over the long-term and the rate of inflation. 1
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
A LOOK AT PERFORMANCE OVER THE LONG-TERM
<S> <C> <C> <C> <C>
(1926-1992)
Common Stocks Long-Term Government Bonds Inflation
Average Annual Total Return 10.30% 4.80% 3.10%
</TABLE>
(1) Source: Ibbotson Associates, "Stocks, Bonds, Bills and Inflation -- 1993
Yearbook", (annually updates the work of Roger G. Ibbotson and Rex A.
Sinquefield). Common stock returns are based on the Standard & Poor's 500 Stock
Index, a market-weighted, unmanaged index of 500 common stocks in a variety of
industry sectors. It is a commonly used indicator of broad stock price
movements. This chart is for illustrative purposes only, and is not intended to
represent the performance of any particular investment or fund.
B-39
<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-40
<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 28% alternative minimum tax on individuals and the 20%
alternative minimum tax on corporations. To the extent interest on such bonds is
distributed to shareholders, shareholders will be subject to the alternative
minimum tax on such distributions. Moreover, exempt-interest dividends, whether
or not on private activity bonds, that are held by corporations will be taken
into account (i) in determining the alternative minimum tax imposed on 75% of
the excess of adjusted current earnings over alternative minimum taxable income,
(ii) in calculating the environmental tax equal to 0.12 percent of a
corporation's modified alternative minimum taxable income in excess of $2
million, and (iii) in determining the foreign branch profits tax imposed on the
effectively connected earnings and profits (with adjustments) of United States
branches of foreign corporations.
Distributions of taxable net investment income and of the excess of net
short-term capital 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.
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
B-41
<PAGE>
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.
Distributions of the excess of net long-term capital gains over net
short-term capital losses are taxable to shareholders as long-term capital
gains, regardless of the length of time the shares of the 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
B-42
<PAGE>
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.
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
B-43
<PAGE>
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, 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 or the property of the appropriate series
of the Fund for satisfaction of claims arising in connection with the affairs of
the Fund or of the particular series of the Fund, respectively. With the
exceptions stated, the Declaration of Trust permits the Trustees to provide for
the indemnification of Trustees, officers, employees or agents of the Fund
against all liability in connection with the affairs of the Fund.
Other distinctions between a corporation and a Massachusetts business trust
include the absence of a requirement that business trusts issue share
certificates.
The Fund and 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
B-44
<PAGE>
allocations of direct expenses can otherwise be fairly made. The officers of the
Fund, subject to the general supervision of the Trustees, have the power to
determine which liabilities are allocable to a given series or which are general
or allocable to two or more series. Upon redemption of shares of a series of the
Fund, the shareholder will receive proceeds solely of the assets of such series.
In the event of the dissolution or liquidation of the Fund, the holders of the
shares of any series are entitled to receive as a class the underlying assets of
such series available for distribution to shareholders.
Shares of the Fund entitle their holders to one vote per share. However, on
any matter submitted to a vote of the shareholders, all shares then entitled to
vote will be voted by individual series, unless otherwise required by the
Investment Company Act (in which case all shares will be voted in the
aggregate). For example, a change in investment policy for a series would be
voted upon only by shareholders of the series involved. Additionally, approval
of the investment advisory agreement is a matter to be determined separately by
each series. Approval by the shareholders of one series is effective as to that
series whether or not enough votes are received from the shareholders of the
other series to approve the proposal as to those series.
The Fund does not intend to hold annual meetings of shareholders.
Pursuant to the Declaration of Trust, the Trustees may authorize the
creation of additional series of shares (the proceeds of which would be invested
in separate, independently managed portfolios with distinct investment
objectives and policies and share purchase, redemption and net asset valuation
procedures) and additional classes of shares within any series (which would be
used to distinguish among the rights of different categories of shareholders, as
might be required by future regulations or other unforeseen circumstances) with
such preferences, privileges, limitations and voting and dividend rights as the
Trustees may determine. All consideration received by the Fund for shares of any
additional series or class, and all assets in which such consideration is
invested, would belong to that series or class (subject only to the rights of
creditors of that series or class) and would be subject to the liabilities
related thereto. Pursuant to the Investment Company Act, shareholders of any
additional series or class of shares would normally have to approve the adoption
of any advisory contract relating to such series or class and of any changes in
the investment policies related thereto.
The Trustees themselves have the power to alter the number and the terms of
office of the Trustees, and they may at any time lengthen their own terms or
make their terms of unlimited duration (subject to removal upon the action of
two-thirds of the outstanding shares of beneficial interest) and appoint their
own successors, provided that always at least a majority of the Trustees have
been elected by the shareholders of the Fund. The voting rights of shareholders
are not cumulative, so that holders of more than 50 percent of the shares voting
can, if they 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 account. PMFS is
also reimbursed for its out-of-pocket expenses, including but not limited to
postage, stationery, printing, allocable communication and other costs. For the
fiscal year ended August 31, 1995, the Fund incurred fees of approximately
$228,100 ($66,500 for the California Series, $112,000 for the California Money
Market Series and $49,600 for the California Income Series) for the services of
PMFS.
Deloitte & Touche LLP, Two World Financial Center, New York, New York 10281,
serves as the Fund's independent accountants and in that capacity audits the
Fund's annual financial statements.
B-45
<PAGE>
DESCRIPTION OF TAX-EXEMPT SECURITY RATINGS
MOODY'S INVESTORS SERVICE
BOND RATINGS
Aaa: Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edged." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group, they comprise what are generally known
as high grade bonds. They are rated lower than Aaa bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than in Aaa securities.
A: Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper-medium-grade obligations. Factors giving security
to principal and interest are considered adequate but elements may be present
which suggest a susceptibility to impairment sometime in the future.
Baa: Bonds which are rated Baa are considered as medium grade obligations,
I.E., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present, but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Bonds rated within the Aa, A and Baa categories which Moody's believes
possess the strongest credit attributes within those categories are designated
by the symbols Aa1, A1 and Baa1.
SHORT-TERM RATINGS
Moody's ratings for tax-exempt notes and other short-term loans are
designated Moody's Investment Grade (MIG). This distinction is in recognition of
the differences between short-term and long-term credit risk.
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.
SHORT-TERM DEBT RATINGS
Moody's Short-Term Debt Ratings are opinions of the ability of issuers to
repay punctually senior debt obligations having an original maturity not
exceeding one year.
Prime-1: Issuers rated Prime-1 (or supporting institutions) have a superior
ability for repayment of senior short-term debt obligations.
Prime-2: Issuers rated "Prime-2" or "P-2" (or supporting institutions) have
a strong ability for repayment of senior short-term debt obligations.
B-46
<PAGE>
STANDARD & POOR'S RATINGS GROUP
BOND RATINGS
AAA: Debt rated AAA has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.
AA: Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the highest-rated issues only in small degree.
A: Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher-rated categories.
BBB: Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher-rated categories.
COMMERCIAL PAPER RATINGS
An S&P Commercial Paper rating is a current assessment of the likelihood of
timely payment of debt considered short-term in the relevant market.
A-1: The A-1 designation indicates that the degree of safety regarding
timely payment is strong. Those issues determined to possess extremely strong
safety characteristics are denoted with a plus sign (+) designation.
A-2: Capacity for timely payment on issues with the designation A-2 is
satisfactory. However, the relative degree of safety is not as high as for
issues designated A-1.
MUNICIPAL NOTES
A municipal note rating reflects the liquidity concerns and market access
risks unique to municipal notes. Municipal notes due in three years or less will
likely receive a municipal note rating, while notes maturing beyond three years
will most likely receive a long-term debt rating. The designation SP-1 indicates
a very strong capacity to pay principal and interest. Those issues determined to
possess extremely strong safety characteristics are denoted with a plus sign (+)
designation. An SP-2 designation indicates a satisfactory capacity to pay
principal and interest.
B-47
<PAGE>
Portfolio of Investments as of PRUDENTIAL CALIFORNIA MUNICIPAL FUND
August 31, 1995 CALIFORNIA SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
LONG-TERM INVESTMENTS--98.6%
- ------------------------------------------------------------------------------------------------------------------------------
Alameda Impvt. Bond Act of 1915,
Marina Vlg. Assmt. Dist. 89-1 NR 7.55% 9/02/06 $ 1,700 $ 1,755,403
Marina Vlg. Assmt. Dist. 89-1 NR 7.65 9/02/09 1,120 1,158,338
Arcadia Unified Sch. Dist.,
Gen. Oblig., Ser. A, M.B.I.A. Aaa Zero 9/01/10 1,765 728,186
Gen. Oblig., Ser. A, M.B.I.A. Aaa Zero 9/01/14 1,370 433,386
Gen. Oblig., Ser. A, M.B.I.A. Aaa Zero 9/01/15 2,555 754,849
Gen. Oblig., Ser. A, M.B.I.A. Aaa Zero 9/01/16 1,225 339,129
Gen. Oblig., Ser. A, M.B.I.A. Aaa Zero 9/01/17 1,790 464,183
Bakersfield Pub. Fac. Corp., Cert. of Part., Wst. Wtr.
Treat. Plant, No. 3 A1 8.00 1/01/10 2,750 (c) 3,010,425
Baldwin Park California Pub. Fin. Auth. Rev. BBB(b) 7.05 9/01/14 1,020 1,049,070
Berkley Hosp. Rev., Alta Bates Hosp. Corp. Baa1 7.65 12/01/15 1,715 (c) 1,977,549
Brea Pub. Fin. Auth. Rev., Tax Alloc. Redev. Proj., Ser. C NR 8.10 3/01/21 5,000 5,292,800
Buena Park Cmnty. Redev. Agcy. Tax Allocation, Central
Bus. Dist. Proj. BBB+(b) 7.10 9/01/14 2,500 2,570,125
California St. Brd. of Pub. Wks., Lease Rev.,
Univ. of California at San Diego, High Technology
Facs., Ser. A A1 7.375 4/01/06 1,570 1,687,483
Univ. of California at Santa Barbara, High Technology
Facs.,
Ser. A A1 8.125 2/01/08 2,500 (c) 2,779,375
California St. Brd. of Pub., Wks. Lease Rev., Ser. A A1 5.00 6/01/23 3,115 2,597,474
California St. Hlth. Facs. Fin. Auth. Rev.,
Episcopal Homes Foundation, Ser. A A(b) 7.70 7/01/18 2,500 2,707,725
Eskaton Properties A(b) 7.50 5/01/20 4,500 (c) 5,096,475
Sutter Hlth. Sys., Ser. B NR 8.00 1/01/16 750 (c) 802,635
California St. Hsg. Fin. Agcy. Rev., Sngl. Fam. Mtge.,
Ser. A Aa Zero 2/01/15 8,420 1,275,462
California St. Poll. Ctrl. Fin. Auth. Rev., Pacific Gas &
Elec. Co., Ser. A A2 8.20 12/01/18 3,250 3,519,132
California Statewide Cmnty. Dev. Corp., Children's Hosp.,
M.B.I.A. Aaa 4.75 6/01/21 1,700 1,401,769
Chula Vista Redev. Agcy., Refunding Tax Alloc. BBB+(b) 7.625 9/01/24 4,500 4,828,005
Contra Costa Cnty., Spec. Tax, Cmnty. Facs. Dist.
No.1991-1, Pleasant Hill NR 8.125 8/01/16 1,300 1,376,687
Desert Hosp. Dist., Cert. of Part. AAA(b) 8.10 7/01/20 5,000 (c) 5,884,100
East Palo Alto Sanit. Dist., Cert. of Part. NR 8.25 10/01/15 1,295 1,385,961
Fairfield Pub. Fin. Auth. Rev., Fairfield Redev. Projs.,
Ser. A NR 7.90 8/01/21 4,200 (c) 4,974,690
Fontana Cmnty. Facs., Dist. No. 2, Spec. Tax Rev.,
Ser. B NR 8.50 9/01/17 3,000 3,177,870
Foothill/Eastern Trans. Corridor Agcy.
Toll Rd. Rev. Baa Zero 1/01/16 5,000 1,214,750
Toll Rd. Rev. Baa Zero 1/01/18 2,950 616,904
Kings Cnty. Wst. Mgmt. Auth., Solid Wst. Rev. BBB+(b) 7.20 10/01/14 1,225 1,290,905
Long Beach Redev. Agcy. Dist. No. 3, Spec. Tax Rev. NR 6.375 9/01/23 3,000 2,795,370
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-48
<PAGE>
Portfolio of Investments as of PRUDENTIAL CALIFORNIA MUNICIPAL FUND
August 31, 1995 CALIFORNIA SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
Los Angeles Cnty., Cert. of Part.,
Civic Ctr. Heating & Refrigeration Plant A1 8.00% 6/01/10 $ 2,000 (c) $ 2,231,440
Correctional Facs. Proj., M.B.I.A. Aaa Zero 9/01/10 3,770 1,539,630
Solheim Lutheran Nursing Home Proj. A(b) 8.125 11/01/17 2,000 (c) 2,207,460
Los Angeles Cnty., Hsg. Auth., Multifam. Mtge. Rev.,
MayFlower Gardens Proj., Ser. K, G.N.M.A. AAA(b) 8.875 12/20/10 2,100 (c) 2,573,046
Los Angeles Conv. & Exhib. Ctr. Auth., Cert. of Part. Aaa 9.00 12/01/10 1,250 (c)(d) 1,663,725
Los Angeles Dept. of Wtr. & Pwr., Elec. Plant Rev. Aaa 5.375 9/01/23 8,940 8,164,008
Met. Wtr. Dist. of Southern California,
Rev. Linked S.A.V.R.S. & R.I.B.S. Aa 5.75 8/10/18 1,000 961,810
Waterworks Rev., Ser. A Aa 5.75 7/01/21 4,000 3,920,560
Mojave Desert & Solid Wst. Victor Valley Materials, Recov.
Fac. Baa1 7.875 6/01/20 1,175 1,250,647
Orange Cnty. Loc. Trans., Auth. Linked S.A.V.R.S. & R.I.B. Aa 6.20 2/14/11 1,500 1,482,330
Orange Cnty. Loc. Trans. Auth., S.A.V.R.S. & R.I.B.,
A.M.B.A.C. Aaa 6.20 2/14/11 4,000 4,128,120
Redding Elec. Sys. Rev., Cert. of Part., Reg. Linked
S.A.V.R.S. & R.I.B. Aaa 6.368 7/01/22 3,550 3,722,281
Riverside Wtr. Rev., Tyler Mall Cmnty. Facs. Aa Zero 10/01/07 1,660 843,678
Roseville City Sch. Dist., Ser. A, F.G.I.C. Aaa Zero 8/01/10 1,230 509,983
San Bernardino Cnty., Cert. of Part., Med. Ctr. Fin. Proj. Baa1 5.50 8/01/22 4,400 3,813,788
San Bernardino Cnty., Cert. of Part., Med. Ctr. Fin.
Proj., Ser. A, M.B.I.A. Aaa 5.50 8/01/22 8,000 7,418,320
San Diego Cnty. Regl. Trans. Cmnty., Sales Tax Rev., Ser.
A A1 6.00 4/01/08 1,750 1,793,418
San Francisco City & Cnty.,
Pub. Utils. Comn. Wtr. Rev. Aa 8.00 11/01/11 2,000 2,193,940
Redev. Agcy., Lease Rev. A Zero 7/01/09 2,000 871,000
Santa Ana Tax Alloc., South Main St. Redev., M.B.I.A. Aaa 5.00 9/01/19 3,000 2,624,430
Santa Cruz Cnty. Pub. Fin. Auth. Rev., Tax Alloc. Sub.
Ln., Ser. B AAA(b) 7.625 9/01/21 2,350 (c) 2,693,288
Santa Margarita, Dana Point Auth., M.B.I.A.,
Impvt. Dists. 3, 3A, 4 & 4A Aaa 7.25 8/01/08 2,500 2,943,875
Impvt. Dists. 3, 3A, 4 & 4A Aaa 7.25 8/01/09 2,400 2,822,592
Impvt. Dists. 3, 3A, 4 & 4A Aaa 7.25 8/01/14 1,000 1,171,510
So. Orange Cnty. Pub. Fin. Auth.,
Foothill Area Proj., F.G.I.C. Aaa 8.00 8/15/08 750 933,997
Foothill Area Proj., F.G.I.C. Aaa 6.50 8/15/10 750 823,343
Spec. Tax Rev., M.B.I.A. Aaa 7.00 9/01/11 3,500 3,989,335
</TABLE>
- --------------------------------------------------------------------------------
B-49 See Notes to Financial Statements.
<PAGE>
Portfolio of Investments as of PRUDENTIAL CALIFORNIA MUNICIPAL FUND
August 31, 1995 CALIFORNIA SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
Sonoma Cnty., Cert. of Part., Correctional Facs. Proj. NR 8.125% 6/01/12 $ 4,000(c) $ 4,383,400
Southern California Pub. Pwr. Auth.,
Proj. Rev. A 6.75 7/01/10 2,250 2,402,528
Proj. Rev. A 6.75 7/01/12 2,435 2,602,479
Proj. Rev. A 6.75 7/01/13 4,000 4,275,280
Proj. Rev., A.M.B.A.C. Aaa Zero 7/01/16 7,925 2,284,777
Proj. Rev., A.M.B.A.C. Aaa 4.75 7/01/16 1,500 1,269,090
Transmission Proj. Rev. Rfdg., Ser. A, F.G.I.C. Aaa Zero 7/01/12 7,080 2,617,193
Sulphur Springs Union Sch. Dist., Ser. A, M.B.I.A. Aaa Zero 9/01/09 2,000 890,920
Torrance Redev. Agcy., Tax. Alloc., Downtown Redev. Baa 7.125 9/01/21 1,580 1,627,953
Univ. of California Rev., Pkg. Sys., Ser. C A 7.75 11/01/14 2,000 (c) 2,130,280
Vacaville Cmnty. Redev. Agcy., Multifamily Rev. A-(b) 7.375 11/01/14 1,110 1,179,764
Victor Valley Union High Sch. Dist.
Gen. Oblig., M.B.I.A. Aaa Zero 9/01/09 2,075 924,328
Gen. Oblig., M.B.I.A. Aaa Zero 9/01/15 5,070 1,497,881
Virgin Islands Terr., Hugo Ins. Claims Fund Prog., Ser. 91 NR 7.75 10/01/06 880 958,918
Walnut Valley Unified School Dist., M.B.I.A. Aaa 6.00 8/01/15 1,870 1,918,171
Whittier Pub. Fin. Auth. Rev., Whittier Blvd. Redev.
Proj., Ser. A NR 7.50 9/01/14 825 856,334
------------
Total Investments--98.6%
(cost $158,640,003; Note 4) 170,057,065
Other assets in excess of liabilities--1.4% 2,365,890
------------
Net Assets--100% $172,422,955
------------
------------
</TABLE>
- ---------------
(a) The following abbreviations are used in portfolio descriptions:
A.M.B.A.C.--American Municipal Bond Assurance Corporation.
F.G.I.C.--Financial Guaranty Insurance Company.
G.N.M.A.--Government National Mortgage Association.
M.B.I.A.--Municipal Bond Insurance Association.
R.I.B.--Residual Interest Bonds.
S.A.V.R.S.--Select Auction Variable Rate Securities.
(b) Standard & Poor's rating.
(c) Prerefunded issues are secured by escrowed cash and/or direct U.S.
guaranteed obligations.
(d) Entire principal amount pledged as initial margin on financial futures
contracts.
NR--Not Rated by Moody's or Standard & Poor's.
The Fund's current Statement of Additional Information contains a description
of Moody's and Standard & Poor's ratings.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-50
<PAGE>
PRUDENTIAL CALIFORNIA MUNICIPAL FUND
Statement of Assets and Liabilities CALIFORNIA SERIES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Assets August 31, 1995
Investments, at value (cost $158,640,003).................................................................... $170,057,065
Cash......................................................................................................... 35,116
Receivable for investments sold.............................................................................. 3,885,142
Interest receivable.......................................................................................... 2,798,656
Receivable for Series shares sold............................................................................ 40,197
Other assets................................................................................................. 5,256
------------
Total assets.............................................................................................. 176,821,432
------------
Liabilities
Payable for investments purchased............................................................................ 4,035,546
Dividends payable............................................................................................ 103,135
Due to broker - variation margin............................................................................. 73,437
Payable for Series shares reacquired......................................................................... 67,513
Management fee payable....................................................................................... 65,247
Distribution fee payable..................................................................................... 49,699
Deferred trustees' fees...................................................................................... 3,900
------------
Total liabilities......................................................................................... 4,398,477
------------
Net Assets................................................................................................... $172,422,955
------------
------------
Net assets were comprised of:
Shares of beneficial interest, at par..................................................................... $ 150,025
Paid-in capital in excess of par.......................................................................... 165,724,971
------------
165,874,996
Accumulated net realized loss on investments.............................................................. (4,754,415)
Net unrealized appreciation on investments................................................................ 11,302,374
------------
Net assets, August 31, 1995.................................................................................. $172,422,955
------------
------------
Class A:
Net asset value and redemption price per share
($68,402,692 / 5,950,853 shares of beneficial interest issued and outstanding)......................... $11.49
Maximum sales charge (3.0% of offering price)............................................................. .36
Maximum offering price to public.......................................................................... $11.85
Class B:
Net asset value, offering price and redemption price per share
($103,891,126 / 9,040,454 shares of beneficial interest issued and outstanding)........................ $11.49
Class C:
Net asset value, offering price and redemption price per share
($129,137 / 11,237 shares of beneficial interest issued and outstanding)............................... $11.49
</TABLE>
- --------------------------------------------------------------------------------
B-51 See Notes to Financial Statements.
<PAGE>
PRUDENTIAL CALIFORNIA MUNICIPAL FUND PRUDENTIAL CALIFORNIA MUNICIPAL FUND
CALIFORNIA SERIES CALIFORNIA SERIES
Statement of Operations Statement of Changes in Net Assets
- ------------------------------------------------------------
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended
Net Investment Income August 31, 1995
---------------
<S> <C>
Income
Interest................................. $11,902,826
---------------
Expenses
Management fee, net of waiver of
$58,693............................... 836,149
Distribution fee--Class A................ 42,617
Distribution fee--Class B................ 681,374
Distribution fee--Class C................ 572
Transfer agent's fees and expenses....... 93,000
Custodian's fees and expenses............ 63,000
Registration fees........................ 55,000
Reports to shareholders.................. 50,000
Audit fee................................ 17,000
Legal fee................................ 15,000
Trustees' fees........................... 8,000
Miscellaneous............................ 6,379
---------------
Total expenses........................ 1,868,091
Less: custodian fee credit.................. (13,179)
---------------
Net expenses.......................... 1,854,912
---------------
Net investment income....................... 10,047,914
---------------
Realized and Unrealized
Gain (Loss) on Investments
Net realized gain (loss) on:
Investment transactions.................. 962,101
Financial futures transactions........... (1,160,490)
---------------
(198,389)
---------------
Net change in unrealized appreciation on:
Investments.............................. 2,551,628
Financial futures contracts.............. (41,406)
---------------
2,510,222
---------------
Net gain on investments..................... 2,311,833
---------------
Net Increase in Net Assets
Resulting from Operations................... $$12,359,747
---------------
---------------
</TABLE>
<TABLE>
<CAPTION>
Increase (Decrease) Year Ended August 31,
in Net Assets 1995 1994
<S> <C> <C>
Operations
Net investment income......... $ 10,047,914 $ 11,071,242
Net realized loss on
investment transactions.... (198,389) (1,281,438)
Net change in unrealized
appreciation/depreciation
of investments............. 2,510,222 (12,467,405)
------------- ------------
Net increase (decrease) in net
assets resulting from
operations................. 12,359,747 (2,677,601)
------------- ------------
Dividends and distributions (Note
1)
Dividends to shareholders from
net investment income
Class A.................... (2,510,344) (658,209)
Class B.................... (7,533,552) (10,413,033)
Class C.................... (4,018) --
------------- ------------
(10,047,914) (11,071,242)
------------- ------------
Distributions to shareholders
from net realized gains
Class A.................... -- (111,145)
Class B.................... -- (1,998,700)
------------- ------------
-- (2,109,845)
------------- ------------
Series share transactions (net of
share conversions) (Note 5)
Net proceeds from shares
sold....................... 14,662,935 27,913,990
Net asset value of shares
issued in reinvestment of
dividends and
distributions.............. 5,451,092 7,430,369
Cost of shares reacquired..... (47,070,094) (41,168,151)
------------- ------------
Net decrease in net assets
from Series share
transactions............... (26,956,067) (5,823,792)
------------- ------------
Total decrease................... (24,644,234) (21,682,480)
Net Assets
Beginning of year................ 197,067,189 218,749,669
------------- ------------
End of year...................... $ 172,422,955 $197,067,189
------------- ------------
------------- ------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-52
<PAGE>
PRUDENTIAL CALIFORNIA MUNICIPAL FUND
Notes to Financial Statements CALIFORNIA SERIES
- --------------------------------------------------------------------------------
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 Policies
The following is a summary of significant accounting policies followed by the
Fund, and the Series, in the preparation of its financial statements.
Securities Valuations: The Series values municipal securities (including
commitments to purchase such securities on a ``when-issued'' basis) on the basis
of prices provided by a pricing service which uses information with respect to
transactions in bonds, quotations from bond dealers, market transactions in
comparable securities and various relationships between securities in
determining values. If market quotations are not readily available from such
pricing service, a security is valued at its fair value as determined under
procedures established by the Trustees.
Short-term securities which mature in more than 60 days are valued at current
market quotations. Short-term securities which mature in 60 days or less are
valued at amortized cost.
All securities are valued as of 4:15 P.M., New York time.
Financial Futures Contracts: A financial futures contract is an agreement to
purchase (long) or sell (short) an agreed amount of securities at a set price
for delivery on a future date. Upon entering into a financial futures contract,
the Series is required to pledge to the broker an amount of cash and/or other
assets equal to a certain percentage of the contract amount. This amount is
known as the ``initial margin''. Subsequent payments, known as ``variation
margin'', are made or received by the Series each day, depending on the daily
fluctuations in the value of the underlying security. Such variation margin is
recorded for financial statement purposes on a daily basis as unrealized gain or
loss. When the contract expires or is closed, the gain or loss is realized and
is presented in the statement of operations as net realized gain(loss) on
financial futures contracts. The Series invests in financial futures contracts
in order to hedge its existing portfolio securities or securities the Series
intends to purchase, against fluctuations in value caused by changes in
prevailing interest rates. Should interest rates move unexpectedly, the Series
may not achieve the anticipated benefits of the financial futures contracts and
may realize a loss. The use of futures transactions involves the risk of
imperfect correlation in movements in the price of futures contracts, interest
rates and the underlying hedged assets.
Securities Transactions and Investment Income: Securities transactions are
recorded on the trade date. Realized gains and losses on sales of securities are
calculated on the identified cost basis. Interest income is recorded on the
accrual basis. The Series amortizes premiums and original issue discount paid on
purchases of portfolio securities as adjustments to interest income.
Net investment income (other than distribution fees) and 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.
- ------------------------------------------------------------
Note 2. Agreements
The Fund has a management agreement with Prudential Mutual Fund Management, Inc.
(``PMF''). Pursuant to this agreement, PMF has responsibility for all investment
advisory services and supervises the subadviser's
- --------------------------------------------------------------------------------
B-53
<PAGE>
PRUDENTIAL CALIFORNIA MUNICIPAL FUND
Notes to Financial Statements CALIFORNIA SERIES
- --------------------------------------------------------------------------------
performance of such services. PMF has entered into a subadvisory agreement with
The Prudential Investment Corporation (``PIC''); PIC furnishes investment
advisory services in connection with the management of the Fund. PMF pays for
the cost of the subadviser's services, compensation of officers of the Fund,
occupancy and certain clerical and bookkeeping costs of the Fund. The Fund bears
all other costs and expenses.
The management fee paid PMF is computed daily and payable monthly, at an annual
rate of .50 of 1% of the average daily net assets of the Series. Effective
January 1, 1995, PMF has agreed to waive a portion (.05 of 1% of the Series'
average daily net assets) of its management fee, which amounted to $58,693
($.004 per share, .03% of average net assets). The Series is not required to
reimburse PMF for such waiver.
The Fund has distribution agreements with Prudential Mutual Fund Distributors,
Inc. (``PMFD''), which acts as the distributor of the Class A shares of the
Fund, and with Prudential Securities Incorporated (``PSI''), which acts as
distributor of the Class B and Class C shares of the Fund (collectively the
``Distributors''). The Fund compensates the Distributors for distributing and
servicing the Fund's Class A, Class B and Class C shares, pursuant to plans of
distribution, (the ``Class A, B and C Plans'') regardless of expenses actually
incurred by them. The distribution fees are accrued daily and payable monthly.
Pursuant to the Class A, B and C Plans, the Fund compensates the Distributors
for distribution-related activities at an annual rate of up to .30 of 1%, .50 of
1% and 1%, of the average daily net assets of the Class A, B and C shares,
respectively. Such expenses under the Plans were .10 of 1%, .50 of 1% and .75 of
1% of the average daily net assets of the Class A, B and C shares, respectively,
for the fiscal year ended August 31, 1995.
PMFD has advised the Series that it has received approximately $28,300 in
front-end sales charges resulting from sales of Class A shares during the fiscal
year ended August 31, 1995. From these fees, PMFD paid such sales charges to PSI
and Pruco Securities Corporation, affiliated broker-dealers, which in turn paid
commissions to salespersons and incurred other distribution costs.
PSI has advised the Series that for the fiscal year ended August 31, 1995, it
received approximately $350,000 and $160 in contingent deferred sales charges
imposed upon certain redemptions by Class B and Class C shareholders,
respectively.
PMFD is a wholly-owned subsidiary of PMF; PSI, PMF and PIC are indirect,
wholly-owned subsidiaries of The Prudential Insurance Company of America.
- ------------------------------------------------------------
Note 3. Other Transactions with Affiliates
Prudential Mutual Fund Services, Inc. (``PMFS''), a wholly-owned subsidiary of
PMF, serves as the Fund's transfer agent. During the fiscal year ended August
31, 1995, the Series incurred fees of approximately $66,500 for the services of
PMFS. As of August 31, 1995, approximately $5,000 of such fees were due to PMFS.
Transfer agent fees and expenses in the Statement of Operations include certain
out-of-pocket expenses paid to non-affiliates.
- ------------------------------------------------------------
Note 4. Portfolio Securities
Purchases and sales of portfolio securities of the Series, excluding short-term
investments, for the fiscal year ended August 31, 1995 were $76,235,223 and
$91,333,495, respectively.
At August 31, 1995, the Series sold 82 financial futures contracts on U.S.
Treasury Bonds and 58 financial futures contracts on the Municipal Bond Index,
both of which expire in September 1995. The value at disposition of such
contracts was $16,027,812. The value of such contracts on August 31, 1995 was
$16,142,500, thereby resulting in an unrealized loss of $114,688.
The cost basis of investments for federal income tax purposes was substantially
the same as for financial reporting purposes and, accordingly, at August 31,
1995 net unrealized appreciation of investments for federal income tax purposes
was $11,417,062 (gross unrealized appreciation--$12,199,936; gross unrealized
depreciation--$782,874).
For federal income tax purposes, the Series has a capital loss carryforward as
of August 31, 1995 of approximately $4,882,400 which expires in 2003.
- ------------------------------------------------------------
Note 5. Capital
The Series offers Class A, Class B and Class C shares. Class A shares are sold
with a front-end sales charge of up to 3%. Class B shares are sold with a
contingent deferred sales charge which declines from 5% to zero depending on the
period of time the shares are held. Class C shares are sold with a contingent
deferred sales charge of 1% during the first year. Class B shares will
automatically convert to Class A shares on a quarterly basis approximately seven
years after purchase.
- --------------------------------------------------------------------------------
B-54
<PAGE>
PRUDENTIAL CALIFORNIA MUNICIPAL FUND
Notes to Financial Statements CALIFORNIA SERIES
- --------------------------------------------------------------------------------
The Fund has authorized an unlimited number of shares of beneficial interest for
each class at $.01 par value per share. A special exchange privilege is also
available for shareholders who qualify to purchase Class A shares at net asset
value.
Transactions in shares of beneficial interest for the fiscal years ended August
31, 1995 and 1994 were as follows:
<TABLE>
<CAPTION>
Class A Shares Amount
- ------------------------------------ ---------- ------------
<S> <C> <C>
Year ended August 31, 1995:
Shares sold......................... 378,328 $ 4,180,841
Shares issued in reinvestment of
dividends......................... 117,773 1,337,448
Shares reacquired................... (1,225,036) (13,742,541)
---------- ------------
Net decrease in shares outstanding
before conversion................. (728,935) (8,224,252)
Shares issued upon conversion from
Class B........................... 5,610,964 62,338,422
---------- ------------
Net increase in shares
outstanding....................... 4,882,029 $ 54,114,170
---------- ------------
---------- ------------
Year ended August 31, 1994:
Shares sold......................... 418,290 $ 4,907,256
Shares issued in reinvestment of
dividends and distributions....... 37,214 435,710
Shares reacquired................... (300,703) (3,517,825)
---------- ------------
Net increase in shares
outstanding....................... 154,801 $ 1,825,141
---------- ------------
---------- ------------
<CAPTION>
Class B Shares Amount
- ------------------------------------ ---------- ------------
<S> <C> <C>
Year ended August 31, 1995:
Shares sold......................... 928,019 $ 10,337,210
Shares issued in reinvestment of
dividends......................... 370,841 4,111,099
Shares reacquired................... (3,028,920) (33,303,902)
---------- ------------
Net decrease in shares outstanding
before conversion................. (1,730,060) (18,855,593)
Shares reacquired upon conversion
into Class A...................... (5,610,964) (62,338,422)
---------- ------------
Net decrease in shares
outstanding....................... (7,341,024) $(81,194,015)
---------- ------------
---------- ------------
Year ended August 31, 1994:
Shares sold......................... 1,940,266 $ 23,006,534
Shares issued in reinvestment of
dividends and distributions....... 596,575 6,994,659
Shares reacquired................... (3,247,104) (37,650,326)
---------- ------------
Net decrease in shares
outstanding....................... (710,263) $ (7,649,133)
---------- ------------
---------- ------------
<CAPTION>
Class C
- ------------------------------------
<S> <C> <C>
Year ended August 31, 1995:
Shares sold......................... 13,073 $ 144,884
Shares issued in reinvestment of
dividends......................... 224 2,545
Shares reacquired................... (2,078) (23,651)
---------- ------------
Net increase in shares
outstanding....................... 11,219 $ 123,778
---------- ------------
---------- ------------
August 1, 1994* through August 31,
1994:
Shares sold......................... 18 $ 200
---------- ------------
---------- ------------
</TABLE>
- ---------------
* Commencement of offering of Class C shares.
- --------------------------------------------------------------------------------
B-55
<PAGE>
PRUDENTIAL CALIFORNIA MUNICIPAL FUND
Financial Highlights CALIFORNIA SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A
-----------------------------------------------------
Year Ended August 31,
-----------------------------------------------------
1995 1994 1993 1992 1991
------- ------- ------- ------ ------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year... $ 11.30 $ 12.16 $ 11.48 $11.01 $10.57
------- ------- ------- ------ ------
Income from investment operations
Net investment income................ .66(a) .65 .69 .70 .69
Net realized and unrealized gain
(loss) on investment
transactions...................... .19 (.74) .68 .47 .44
------- ------- ------- ------ ------
Total from investment
operations..................... .85 (.09) 1.37 1.17 1.13
------- ------- ------- ------ ------
Less distributions
Dividends from net investment
income............................ (.66) (.65) (.69) (.70) (.69)
Distributions from net realized
gains............................. -- (.12) -- -- --
------- ------- ------- ------ ------
Total distributions............... (.66) (.77) (.69) (.70) (.69)
------- ------- ------- ------ ------
Net asset value, end of year......... $ 11.49 $ 11.30 $ 12.16 $11.48 $11.01
------- ------- ------- ------ ------
------- ------- ------- ------ ------
TOTAL RETURN(b):..................... 7.90% (0.80)% 12.30% 10.95% 10.98%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)........ $68,403 $12,082 $11,116 $5,388 $4,188
Average net assets (000)............. $42,617 $11,812 $7,728 $4,322 $2,748
Ratios to average net assets:
Expenses, including distribution
fees........................... .73%(a) .73% .77% .82% .88%
Expenses, excluding distribution
fees........................... .63%(a) .63% .67% .72% .78%
Net investment income............. 5.90%(a) 5.57% 5.82% 6.25% 6.37%
Portfolio turnover rate.............. 44% 69% 43% 53% 53%
</TABLE>
- ---------------
(a) Net of fee waiver.
(b) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on
the last day of each period reported and includes reinvestment of
dividends and distributions.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-56
<PAGE>
PRUDENTIAL CALIFORNIA MUNICIPAL FUND
Financial Highlights CALIFORNIA SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class B Class C
------------------------- -------------------------
August 1,
Year 1994(d)
Year Ended August 31, Ended through
------------------------------------------------------------ August 31, August 31,
1995 1994 1993 1992 1991 1995 1994
<S> <C> <C> <C> <C> <C> <C> <C>
-------- -------- -------- -------- -------- ---------- --------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of
period............................ $ 11.29 $ 12.15 $ 11.48 $ 11.01 $ 10.57 $11.29 $11.32
-------- -------- -------- -------- -------- ----- ------
Income from investment operations
Net investment income................ .62(a) .60 .64 .66 .64 .59(a) .04
Net realized and unrealized gain
(loss) on investment
transactions...................... .20 (.74) .67 .47 .44 .20 (.03)
-------- -------- -------- -------- -------- ----- -----
Total from investment
operations..................... .82 (.14) 1.31 1.13 1.08 .79 .01
-------- -------- -------- -------- -------- ----- -----
Less distributions
Dividends from net investment
income............................ (.62) (.60) (.64) (.66) (.64) (.59) (.04)
Distributions from net realized
gains............................. -- (.12) -- -- -- -- --
-------- -------- -------- -------- -------- ----- -----
Total distributions............... (.62) (.72) (.64) (.66) (.64) (.59) (.04)
-------- -------- -------- -------- -------- ----- -----
Net asset value, end of period....... $ 11.49 $ 11.29 $ 12.15 $ 11.48 $ 11.01 $11.49 $11.29
-------- -------- -------- -------- -------- ----- -----
-------- -------- -------- -------- -------- ----- -----
TOTAL RETURN(b):..................... 7.56% (1.20)% 11.74% 10.52% 10.54% 7.29% .05%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)...... $103,891 $184,985 $207,634 $177,861 $169,190 $129 $200(e)
Average net assets (000)............. $136,275 $201,558 $190,944 $172,495 $169,220 $ 76 $199(e)
Ratios to average net assets:
Expenses, including distribution
fees........................... 1.13%(a) 1.13% 1.17% 1.22% 1.28% 1.38%(a) 1.71%(c)
Expenses, excluding distribution
fees........................... .63%(a) .63% .67% .72% .78% .63%(a) .96%(c)
Net investment income............. 5.50%(a) 5.17% 5.44% 5.85% 5.98% 5.25%(a) 4.87%(c)
Portfolio turnover rate.............. 44% 69% 43% 53% 53% 44% 69%
</TABLE>
- ---------------
(a) Net of fee waiver.
(b) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on
the last day of each period reported and includes reinvestment of
dividends and distributions. Total returns for periods of less than a
full year are not annualized.
(c) Annualized.
(d) Commencement of offering of Class C shares.
(e) Figures are actual and not rounded to the nearest thousand.
- --------------------------------------------------------------------------------
B-57 See Notes to Financial Statements.
<PAGE>
PRUDENTIAL CALIFORNIA MUNICIPAL FUND
Independent Auditors' Report CALIFORNIA SERIES
- --------------------------------------------------------------------------------
The Shareholders and Board of Trustees
Prudential California Municipal Fund, California Series
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of Prudential California Municipal Fund,
California Series, as of August 31, 1995, the related statements of operations
for the year then ended and of changes in net assets for each of the two years
in the period then ended, and the financial highlights for each of the five
years in the period then ended. These financial statements and financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of the securities owned as of
August 31, 1995 by correspondence with the custodian. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Prudential
California Municipal Fund, California Series, as of August 31, 1995, the results
of its operations, the changes in its net assets, and its financial highlights
for the respective stated periods, in conformity with generally accepted
accounting principles.
DELOITTE & TOUCHE LLP
New York, New York
October 16, 1995
B-58
<PAGE>
Portfolio of Investments as PRUDENTIAL CALIFORNIA MUNICIPAL FUND
of August 31, 1995 CALIFORNIA INCOME SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
LONG-TERM INVESTMENTS--97.5%
- ------------------------------------------------------------------------------------------------------------------------------
Alameda Cmnty. Facs. Dist., Spec. Tax Rev. No. 1 NR 7.75% 9/01/19 $ 3,000 $ 3,133,980
Arcadia Unified Sch. Dist.,
Gen. Oblig., Ser. A, M.B.I.A. Aaa Zero 9/01/09 1,200 534,552
Gen. Oblig., Ser. A, M.B.I.A. Aaa Zero 9/01/11 1,875 724,725
Gen. Oblig., Ser. A, M.B.I.A. Aaa Zero 9/01/12 2,045 739,963
Gen. Oblig., Ser. A, M.B.I.A. Aaa Zero 9/01/13 1,205 407,832
Gen. Oblig., Ser. A, M.B.I.A. Aaa Zero 9/01/18 1,940 471,013
Assoc. of Bay Area Govt's. Fin. Auth., Cert. of Part.,
Ser. A, Channing House A(e) 7.125 1/01/21 1,500 1,591,455
Baldwin Park Pub. Fin. Auth. Rev., Tax Alloc. Bonds BBB(e) 7.10 9/01/24 1,225 1,256,948
Brea Pub. Fin. Auth. Rev., Tax Alloc. Redev. Proj., Ser. C NR 8.10 3/01/21 3,000 3,175,680
Buena Park Cmnty. Redev. Agcy., Cent. Bus. Dist. Proj. NR 7.80 9/01/14 3,325 3,471,067
California St. Dept. Wtr. Res. Rev., Central Valley Proj. Aa 7.00 12/01/12 1,000 1,145,030
California St. Edl. Facs. Auth. Rev., Chapman College Baa 7.50 1/01/18 600 633,756
California St. Gen. Oblig., A.M.B.A.C. Aaa 6.50 9/01/10 1,250 1,375,200
California Statewide Cmnty. Dev. Rev., Cert. of Part.,
Villaview Cmnty. Hosp. A(e) 7.00 9/01/09 1,000 1,068,480
Carson City Ltd. Oblig. Impvt. Rev., Assmt. Dist. NR 7.375 9/02/22 2,445 2,501,333
Chula Vista Cmnty. Redev. Agcy.,
Bayfront Tax Alloc. NR 8.25 5/01/24 2,500 2,732,925
Bayfront Tax Alloc. BBB/ /(e) 7.625 9/01/24 2,500 2,682,225
Contra Costa Cnty., Spec. Tax, Cmnty. Facs. Pleasant Hill NR 8.125 8/01/16 1,520 1,609,665
Delano, Cert. of Part., Reg. Med. Ctr., Ser. 92A NR 9.25 1/01/22 2,950 3,355,713
Desert Hosp. Dist., Cert. of Part. AAA(e) 8.10 7/01/20 2,000 (c) 2,353,640
East Palo Alto San. Dist., Cert. of Part. NR 8.25 10/01/15 500 535,120
El Dorado Cnty., Spec. Tax, Cmnty. Facs. Dist. No. 92-1 NR 8.25 9/01/24 2,000 2,189,200
Fairfield Impvt. Bond Act of 1915,
No. Cordella Impvt. Dist. NR 7.20 9/02/09 790 808,905
No. Cordella Impvt. Dist. NR 8.00 9/02/11 715 738,180
Fairfield Pub. Fin. Auth. Rev., Fairfield Redev. Projs.,
Ser. A NR 7.90 8/01/21 2,500 (c) 2,961,125
Folsom Spec. Tax Dist. No. 2 NR 7.70 12/01/19 3,130 3,242,054
Fontana Redev. Agcy., No. Fontana Redev. Proj. NR 7.65 12/01/09 1,575 (c) 1,853,113
Fontana Special Tax Cmnty. Facs., Dist. No. 2, Spec. Tax
Rev., Ser. B NR 8.50 9/01/17 3,595 3,808,148
Foothill/Eastern Trans. Corr. Agcy., Toll Rd., Ser. A Baa Zero 1/01/20 10,000 1,809,200
Kings Cnty. Wst. Mgmt. Auth., Solid Wst. Rev. BBB/ /(e) 7.20 10/01/14 1,275 1,343,595
La Quinta Redev. Agcy.,
Tax Alloc., M.B.I.A. Aaa 7.30 9/01/10 1,000 1,181,100
Tax Alloc., M.B.I.A. Aaa 7.30 9/01/11 1,000 1,176,940
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-59
<PAGE>
Portfolio of Investments as PRUDENTIAL CALIFORNIA MUNICIPAL FUND
of August 31, 1995 CALIFORNIA INCOME SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
Long Beach Redev. Agcy. Hsg.,
Multifamily Hsg. Rev., Pacific Court Apts. NR 6.80% 9/01/13 $ 1,000 $ 919,920
Multifamily Hsg. Rev., Pacific Court Apts. NR 6.95 9/01/23 1,500 1,343,280
Los Angeles Cmnty. Facs. Dist., No. 5 Spec. Tax NR 7.25 9/01/19 1,500 1,524,960
Los Angeles Dept. of Wtr. & Pwr.,
Electric Rev., M.B.I.A. Aaa 5.375 9/01/23 1,500 1,369,800
Waterworks Rev. Aa 4.50 5/15/23 1,900 1,490,493
Met. Wtr. Dist. of Southern California,
Waterworks Rev. Aa 5.75 8/10/18 1,000 961,810
Waterworks Rev., Ser. A Aa 5.75 7/01/21 2,000 1,960,280
Mojave Desert & Mtn. Solid Wste. Jt. Pwrs. Auth., Proj.
Rev. Baa1 7.875 6/01/20 1,175 1,250,647
Ontario Impvt. Bond Act of 1915, Assmt. Dist. 100C NR 8.00 9/02/11 1,410 1,455,712
Orange Cnty. Facs. Dist., Spec. Tax Rev.,
No. 87-4, Foothill Ranch, Ser. A NR 7.375 8/15/18 3,500 (c) 4,102,805
No. 87-5B, Rancho Santa Margarita NR 7.50 8/15/17 1,750 (c) 2,059,697
No. 88-1, Aliso Viejo, Ser. 92 AAA(e) 7.35 8/15/18 3,500 (c) 4,129,790
No. 88-1, Aliso Viejo, Ser. A AAA(e) 7.15 8/15/06 805 (c) 940,345
Orange Cnty. Loc. Trans. Auth.,
Sales Tax Rev. Aa 6.20 2/14/11 1,500 1,482,330
Sales Tax Rev., A.M.B.A.C. Aaa 6.20 2/14/11 6,000 6,192,180
Perris Sch. Dist., Cert. of Part., Cap. Projs. NR 7.75 3/01/21 1,500 (c) 1,750,650
Puerto Rico Hwy. & Trans. Auth. Rev., Ser. Q AAA(e) 7.75 7/01/10 2,100 c)(d) 2,439,633
Puerto Rico Pub. Bldgs. Auth., Gtd. Pub. Ed. & Hlth.
Facs., Ser. J Baa1 Zero 7/01/06 1,605 892,589
Redding California Elec. Sys. Rev., Cert. of Part.,
M.B.I.A. Aaa 6.368 7/01/22 3,750 3,931,987
Richmond Redev. Agcy. Rev., Multifamily Bridge Affordable
Hsg. NR 7.50 6/01/23 2,500 2,514,825
Riverside Cnty. Cert. of Part., Air Force Vlg. West NR 8.125 6/15/20 3,000 3,099,060
Riverside Cnty. Impvt. Bond Act of 1915, Ser. A NR 7.625 9/02/14 2,500 2,575,000
Riverside Sch. Dist. Special Tax, Cmnty. Facs. Dist. No.
2, Ser. A NR 7.25 9/01/18 1,000 1,017,810
Rocklin Stanford Ranch Cmnty. Facs., Dist. Spec. Tax NR 8.10 11/01/15 1,000 1,063,540
Rocklin Unified Sch. Dist., Gen. Oblig.,
Cap. Apprec., Ser. C, M.B.I.A. Aaa Zero 8/01/12 1,110 403,629
Cap. Apprec., Ser. C, M.B.I.A. Aaa Zero 8/01/13 1,165 396,286
Cap. Apprec., Ser. C, M.B.I.A. Aaa Zero 8/01/14 1,220 387,887
Cap. Apprec., Ser. C, M.B.I.A. Aaa Zero 8/01/15 1,285 381,581
Cap. Apprec., Ser. C, M.B.I.A. Aaa Zero 8/01/16 1,400 389,564
Roseville Jt. Union H.S. Dist., Ser. B, F.G.I.C. Aaa Zero 6/01/20 5,000 1,077,050
Sacramento City Fin. Auth.,
Cap. Apprec. Tax Alloc., Ser. B, M.B.I.A. Aaa Zero 11/01/16 5,700 1,562,028
Cap. Apprec. Tax Alloc., Ser. B, M.B.I.A. Aaa Zero 11/01/17 5,695 1,461,736
Sacramento Cnty. Spec. Tax Rev.,
Dist. No. 1, Elliot Ranch NR 8.20 8/01/21 2,000 2,109,460
Dist. No. 1, Laguna Creek Ranch NR 8.25 12/01/20 1,000 1,066,520
</TABLE>
- --------------------------------------------------------------------------------
B-60 See Notes to Financial Statements.
<PAGE>
Portfolio of Investments as PRUDENTIAL CALIFORNIA MUNICIPAL FUND
of August 31, 1995 CALIFORNIA INCOME SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
Sacramento Spec. Purpose Fac., Y.M.C.A. of Sacramento NR 7.25% 12/01/18 $ 2,200 $ 2,202,772
San Bernardino Cnty., Cert. of Part.,
Med. Ctr. Fin. Proj. Baa1 5.50 8/01/22 4,540 3,935,136
Med. Ctr. Fin. Proj. Baa1 5.50 8/01/24 6,750 5,819,715
San Diego Cnty. Wtr. Auth., Water Rev., Cert. of Part.,
F.G.I.C. Aaa 5.681 4/23/08 2,000 2,026,860
San Francisco City & Cnty.,
Redev. Agcy., Lease Rev. A Zero 7/01/06 1,500 812,505
Redev. Agcy., Lease Rev. A Zero 7/01/07 2,250 1,137,240
San Joaquin Hills Trans. Corridor Agcy., Toll Road Rev. NR Zero 1/01/11 2,000 592,400
San Jose Redev. Proj., M.B.I.A. Aaa 6.00 8/01/15 2,900 2,988,595
Santa Cruz Cnty. Pub. Fin. Auth. Rev., Tax Alloc. Sub.,
Ser. B AAA(e) 7.625 9/01/21 2,500 (c) 2,865,200
Santa Margarita, Dana Point Auth.,
Impvt. Dist., Ser. B, M.B.I.A. Aaa 7.25 8/01/09 905 1,064,352
Impvt. Dist., Ser. B, M.B.I.A. Aaa 7.25 8/01/14 1,000 1,171,510
South Orange Cnty.
Pub. Fin. Auth. NR 7.00 9/01/08 1,900 1,915,865
Pub. Fin. Auth. NR 7.25 9/01/13 2,000 2,009,100
Pub. Fin. Auth., M.B.I.A. Aaa 7.00 9/01/10 2,535 2,908,710
Pub. Fin. Auth., Foothill Area Proj., F.G.I.C. Aaa 8.00 8/15/08 750 933,997
Pub. Fin. Auth., Foothill Area Proj., F.G.I.C. Aaa 6.50 8/15/10 750 823,343
South San Francisco Redev. Agcy., Tax Alloc., Gateway
Redev. Proj. NR 7.60 9/01/18 2,375 2,472,161
Southern California Pub. Pwr. Auth.,
Proj. Rev. A 6.75 7/01/10 6,250 6,673,687
Proj. Rev. A 6.75 7/01/13 3,000 3,206,460
Proj. Rev., A.M.B.A.C. Aaa Zero 7/01/16 8,400 (c) 2,421,720
Proj. Rev., A.M.B.A.C. Aaa 4.75 7/01/16 1,500 1,269,090
Sulphur Springs Unified Sch. Dist., Ser. A, M.B.I.A. Aaa Zero 9/01/11 3,000 1,159,560
Temecula Valley Unified Sch. Cmnty. Facs., Spec. Tax Dist.
No. 89-1 NR 8.60 9/01/17 2,600 2,685,332
Torrance Redev. Agcy.,
Tax Alloc. Downtown Redev. Baa 7.125 9/01/22 3,925 4,044,124
Tax Alloc. Ind. Redev. Proj. NR 7.75 9/01/13 2,500 2,605,450
Vacaville Cmnty. Redev. Agcy., Multifamily Hsg. Rev. A-(e) 7.375 11/01/14 1,110 1,179,764
Victor Valley
Union H.S. Dist., M.B.I.A. Aaa Zero 9/01/17 4,500 1,166,940
Union H.S. Dist., M.B.I.A. Aaa Zero 9/01/19 5,450 1,238,512
Union H.S. Dist., M.B.I.A. Aaa Zero 9/01/20 5,850 1,240,668
Virgin Islands Pub. Fin. Auth. Rev., Hwy. Trans. Trust
Fund BBB(e) 7.70 10/01/04 1,000 1,095,820
Virgin Islands Territory, Hugo Ins. Claims Fund Prog.,
Ser. 91 NR 7.75 10/01/06 1,140 1,242,235
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-61
<PAGE>
Portfolio of Investments as PRUDENTIAL CALIFORNIA MUNICIPAL FUND
of August 31, 1995 CALIFORNIA INCOME SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
West Contra Costa Unified Sch. Dist., Cert. of Part. Ba 6.875% 1/01/09 $ 1,140 $ 1,183,514
West Sacramento Impvt. Bond Act of 1915, Lighthouse Marina
Assmt. Dist. 90-1 NR 8.50 9/02/17 2,500 2,581,100
Westminster Redev. Agcy., Tax Alloc. Rev., Orange County,
Proj. No. 1, Ser. A Baa1 7.30 8/01/21 3,000 3,073,800
------------
Total long-term investments (cost $179,131,601) 190,063,983
------------
SHORT-TERM INVESTMENTS--2.9%
California Poll. Ctrl. Fin. Auth. Rev.,
Burney Forest Proj., Ser. 88A, F.R.D.D. P1 3.65 9/01/95 600 600,000
Delano Proj., Ser. 91, F.R.D.D. P1 3.50 9/01/95 4,000 4,000,000
Honey Lake Pwr. Proj., Ser. 88, F.R.D.D. Aa3 3.50 9/01/95 600 600,000
Ultrapower Rocklin Proj., Ser. 88A, F.R.D.D. P1 3.55 9/01/95 100 100,000
California Poll. Ctrl. Solid Waste Disposal Rev.,
Shell Oil Co., Ser. 94, F.R.D.D. VMIG1 3.60 9/01/95 300 300,000
------------
Total short-term investments (cost $5,600,000) 5,600,000
------------
Total Investments--100.4%
(cost $184,731,601; Note 4) 195,663,983
Liabilities in excess of other assets--(0.4)% (754,683)
------------
Net Assets--100% $194,909,300
------------
------------
</TABLE>
- ---------------
(a) The following abbreviations are used in portfolio descriptions:
A.M.B.A.C.--American Municipal Bond Assurance Corporation.
F.G.I.C.--Financial Guaranty Insurance Company.
F.R.D.D.--Floating Rate (Daily) Demand Note (b).
M.B.I.A.--Municipal Bond Insurance Association.
(b) For purposes of amortized cost valuation, the maturity date of such
securities is considered to be the later of the next date on which the
security can be redeemed at par or the next date on which the rate of
interest is adjusted.
(c) Prerefunded issues are secured by escrowed cash and/or direct U.S.
guaranteed obligations.
(d) Pledged as initial margin on financial futures contracts.
(e) Standard & Poor's rating.
NR--Not Rated by Moody's or Standard & Poor's.
The Fund's current Statement of Additional Information contains a description of
Moody's and Standard & Poor's ratings.
- --------------------------------------------------------------------------------
B-62 See Notes to Financial Statements.
<PAGE>
PRUDENTIAL CALIFORNIA MUNICIPAL FUND
Statement of Assets and Liabilities CALIFORNIA INCOME SERIES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Assets August 31, 1995
Investments, at value (cost $184,731,601).................................................................... $195,663,983
Cash......................................................................................................... 79,592
Interest receivable.......................................................................................... 3,459,149
Receivable for investments sold.............................................................................. 2,275,434
Receivable for Series shares sold............................................................................ 137,145
Deferred expenses and other assets........................................................................... 5,527
------------
Total assets.............................................................................................. 201,620,830
------------
Liabilities
Payable for investments purchased............................................................................ 6,135,827
Payable for Series shares reacquired......................................................................... 312,897
Dividends payable............................................................................................ 123,914
Accrued expenses............................................................................................. 38,998
Due to broker - variation margin............................................................................. 56,844
Distribution fee payable..................................................................................... 27,064
Management fee payable....................................................................................... 12,086
Deferred trustees' fees...................................................................................... 3,900
------------
Total liabilities......................................................................................... 6,711,530
------------
Net Assets................................................................................................... $194,909,300
------------
------------
Net assets were comprised of:
Shares of beneficial interest, at par..................................................................... $ 189,628
Paid-in capital in excess of par.......................................................................... 188,396,294
------------
188,585,922
Accumulated net realized loss on investments.............................................................. (4,596,817)
Net unrealized appreciation on investments................................................................ 10,920,195
------------
Net assets, August 31, 1995.................................................................................. $194,909,300
------------
------------
Class A:
Net asset value and redemption price per share
($163,537,929 3 15,910,771 shares of beneficial interest issued and outstanding)....................... $10.28
Maximum sales charge (3.0% of offering price)............................................................. .32
------------
Maximum offering price to public.......................................................................... $10.60
------------
------------
Class B:
Net asset value, offering price and redemption price per share
($28,609,408 3 2,783,307 shares of beneficial interest issued and outstanding)......................... $10.28
------------
------------
Class C:
Net asset value, offering price and redemption price per share
($2,761,963 3 268,692 shares of beneficial interest issued and outstanding)............................ $10.28
------------
------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-63
<PAGE>
PRUDENTIAL CALIFORNIA MUNICIPAL FUND
CALIFORNIA INCOME SERIES
Statement of Operations
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended
Net Investment Income August 31, 1995
<S> <C>
Income
Interest................................... $13,141,056
---------------
Expenses
Management fee, net of waiver of
$779,180................................ 175,685
Distribution fee--Class A.................. 165,500
Distribution fee--Class B.................. 118,608
Distribution fee--Class C.................. 13,132
Custodian's fees and expenses.............. 100,000
Reports to shareholders.................... 98,000
Registration fees.......................... 74,000
Transfer agent's fees and expenses......... 61,000
Audit fee.................................. 15,000
Legal fees................................. 14,000
Trustees' fees............................. 8,000
Amortization of organizational expenses.... 7,200
Miscellaneous.............................. 20,370
---------------
Total expenses.......................... 870,495
Less: custodian fee credit................. (11,264)
---------------
Net expenses............................ 859,231
---------------
Net investment income......................... 12,281,825
---------------
Realized and Unrealized Loss
on Investments
Net realized loss on:
Investment transactions.................... (591,274)
Financial futures transactions............. (1,526,511)
---------------
(2,117,785)
---------------
Net change in unrealized appreciation on:
Investments................................ 3,167,760
Financial futures contracts................ 10,125
---------------
3,177,885
---------------
Net gain on investments....................... 1,060,100
---------------
Net Increase in Net Assets
Resulting from Operations..................... $13,341,925
---------------
---------------
</TABLE>
PRUDENTIAL CALIFORNIA MUNICIPAL FUND
CALIFORNIA INCOME SERIES
Statement of Changes in Net Assets
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Increase (Decrease) Year Ended August 31,
<S> <C> <C>
in Net Assets 1995 1994
Operations
Net investment income.......... $ 12,281,825 $ 12,628,785
Net realized loss on investment
transactions................ (2,117,785) (1,000,583)
Net change in unrealized
appreciation (depreciation)
on investments.............. 3,177,885 (6,676,047)
------------ ------------
Net increase in net assets
resulting from operations... 13,341,925 4,952,155
------------ ------------
Dividends and distributions (Note 1)
Dividends to shareholders
from net investment income
Class A..................... (10,737,201) (12,219,313)
Class B..................... (1,442,735) (407,719)
Class C..................... (101,889) (1,753)
------------ ------------
(12,281,825) (12,628,785)
------------ ------------
Distributions to shareholders
from net realized gains
Class A..................... -- (1,957,806)
------------ ------------
Series share transactions (net of
share conversions) (Note 5)
Net proceeds from shares
sold........................ 45,224,907 50,787,060
Net asset value of shares
issued to shareholders in
reinvestment of dividends
and distributions........... 5,353,440 6,449,654
Cost of shares reacquired...... (60,456,281) (44,773,937)
------------ ------------
Net increase (decrease) in net
assets from Series share
transactions................ (9,877,934) 12,462,777
------------ ------------
Total increase (decrease)......... (8,817,834) 2,828,341
Net Assets
Beginning of year................. 203,727,134 200,898,793
------------ ------------
End of year....................... $194,909,300 $203,727,134
------------ ------------
------------ ------------
</TABLE>
- --------------------------------------------------------------------------------
B-64 See Notes to Financial Statements.
<PAGE>
PRUDENTIAL CALIFORNIA MUNICIPAL FUND
Notes to Financial Statements CALIFORNIA INCOME SERIES
- --------------------------------------------------------------------------------
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 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 Policies
The following is a summary of significant accounting policies followed by the
Fund, and the Series, in preparation of its financial statements.
Security Valuations: The Series values municipal securities (including
commitments to purchase such securities on a ``when-issued'' basis) on the basis
of prices provided by a pricing service which uses information with respect to
transactions in bonds, quotations from bond dealers, market transactions in
comparable securities and various relationships between securities in
determining values. If market quotations are not readily available from such
pricing service, a security is valued at its fair value as determined under
procedures established by the Trustees.
Short-term securities which mature in more than 60 days are valued at current
market quotations. Short-term securities which mature in 60 days or less are
valued at amortized cost.
All securities are valued as of 4:15 P.M., New York time.
Financial Futures Contracts: A financial futures contract is an agreement to
purchase (long) or sell (short) an agreed amount of securities at a set price
for delivery on a future date. Upon entering into a financial futures contract,
the Series is required to pledge to the broker an amount of cash and/or other
assets equal to a certain percentage of the contract amount. This amount is
known as the ``initial margin''. Subsequent payments, known as ``variation
margin'', are made or received by the Series each day, depending on the daily
fluctuations in the value of the underlying security. Such variation margin is
recorded for financial statement purposes on a daily basis as unrealized gain or
loss. When the contract expires or is closed, the gain or loss is realized and
is presented in the statement of operations as net realized gain(loss) on
financial futures contracts.
The Series invests in financial futures contracts in order to hedge its existing
portfolio securities or securities the Series intends to purchase, against
fluctuations in value caused by changes in prevailing interest rates. Should
interest rates move unexpectedly, the Series may not achieve the anticipated
benefits of the financial futures contracts and may realize a loss. The use of
futures transactions involves the risk of imperfect correlation in movements in
the price of futures contracts, interest rates and the underlying hedged assets.
Securities Transactions and Investment Income: Securities transactions are
recorded on the trade date. Realized gains and losses on sales of securities are
calculated on the identified cost basis. Interest income is recorded on the
accrual basis. The Series amortizes premiums and original issue discount paid on
purchases of portfolio securities as adjustments to interest income.
Net investment income (other than distribution fees) and unrealized and realized
gains or losses are allocated daily to each class of shares based upon the
relative proportion of net assets of each class at the beginning of the day.
Federal Income Taxes: For federal income tax purposes, each series in the Fund
is treated as a separate taxpaying entity. It is the intent of the Series to
continue to meet the requirements of the Internal Revenue Code applicable to
regulated investment companies and to distribute all of its net income to
shareholders. For this reason and because substantially all of the Series' gross
income consists of tax-exempt interest, no federal income tax provision is
required.
Dividends and Distributions: The Series declares daily dividends from net
investment income. Payment of dividends 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-65
<PAGE>
PRUDENTIAL CALIFORNIA MUNICIPAL FUND
Notes to Financial Statements CALIFORNIA INCOME SERIES
- --------------------------------------------------------------------------------
Reclassification of Capital Accounts: The Series accounts for and reports
distributions to shareholders in accordance with the A.I.C.P.A.'s 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 applying this statement as of August 31, 1994
was to decrease paid-in capital and decrease accumulated net realized loss on
investments by $21,495 due to over distribution of capital gains. Net investment
income, net realized losses, and net assets were not affected by this change.
Deferred Organization Expenses: The Series incurred approximately $36,000 in
organization and initial registration expenses. Such amount has been deferred
and is being amortized over a period of 60 months ending December 1995.
- ------------------------------------------------------------
Note 2. Agreements
The Fund has a management agreement with Prudential Mutual Fund Management, Inc.
(``PMF''). Pursuant to this agreement, PMF has responsibility for all investment
advisory services and supervises the subadviser's performance of such services.
PMF has entered into a subadvisory agreement with The Prudential Investment
Corporation (``PIC''); PIC furnishes investment advisory services in connection
with the management of the Fund. PMF pays for the cost of the subadviser's
services, compensation of officers of the Fund, occupancy and certain clerical
and bookkeeping costs of the Fund. The Fund bears all other costs and expenses.
The management fee paid PMF is computed daily and payable monthly, at an annual
rate of .50 of 1% of the average daily net assets of the Series. Effective
January 1, 1995, PMF increased its voluntary waiver from 75% to 85% of its
management fee. The amount of such fees waived for the fiscal year ended August
31, 1995 amounted to $779,180 ($.04 per share, .41% 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 with Prudential Securities Incorporated (``PSI''), which acts as
distributor of the Class B and Class C shares of the Fund (collectively the
``Distributors''). The Fund compensates the Distributors for distributing and
servicing the Fund's Class A, Class B and Class C shares, pursuant to plans of
distribution, (the ``Class A, B and C Plans'') regardless of expenses actually
incurred by them. The distribution fees are accrued daily and payable monthly.
Pursuant to the Class A, B and C Plans, the Fund compensates the Distributors
for distribution-related activities at an annual rate of up to .30 of 1%, .50 of
1% and 1%, of the average daily net assets of the Class A, B and C shares,
respectively. Such expenses under the Plans were .10 of 1%, .50 of 1% and .75 of
1% of the average daily net assets of the Class A, B and C shares, respectively,
for the fiscal year ended August 31, 1995.
PMFD has advised the Series that it has received approximately $374,000 in
front-end sales charges resulting from sales of Class A shares during the fiscal
year ended August 31, 1995. From these fees, PMFD paid such sales charges to PSI
and Pruco Securities Corporation, affiliated broker-dealers, which in turn paid
commissions to salespersons and incurred other distribution costs.
PSI has advised the Series that for the fiscal year ended August 31, 1995, it
received approximately $103,200 and $1,400 in contingent deferred sales charges
imposed upon certain redemptions by Class B and Class C shareholders,
respectively.
PMFD is a wholly-owned subsidiary of PMF; PSI, PMF and PIC are indirect,
wholly-owned subsidiaries of The Prudential Insurance Company of America.
- ------------------------------------------------------------
Note 3. Other Transactions with Affiliates
Prudential Mutual Fund Services, Inc. (``PMFS''), a wholly-owned subsidiary of
PMF, serves as the Fund's transfer agent. During the fiscal year ended August
31, 1995, the Series incurred fees of approximately $49,600 for the services of
PMFS. As of August 31, 1995, approximately $3,800 of such fees were due to PMFS.
Transfer agent fees and expenses in the Statement of Operations include certain
out-of-pocket expenses paid to non-affiliates.
- ------------------------------------------------------------
Note 4. Portfolio Securities
Purchases and sales of portfolio securities of the Series, excluding short-term
investments, for the fiscal year ended August 31, 1995 were $73,217,211 and
$74,379,090, respectively.
The federal income tax cost basis of the Fund's investments, at August 31, 1995,
was $184,854,121 and, accordingly, net unrealized appreciation on investments
for federal income tax purposes was $10,809,862 (gross unrealized
appreciation--$11,437,165; gross unrealized depreciation-- $627,303).
- --------------------------------------------------------------------------------
B-66
<PAGE>
PRUDENTIAL CALIFORNIA MUNICIPAL FUND
Notes to Financial Statements CALIFORNIA INCOME SERIES
- --------------------------------------------------------------------------------
At August 31, 1995, the Series sold 115 financial futures contracts on U.S.
Treasury Bonds which expire in September 1995. The value at disposition of such
contracts was $13,078,938. The value of such contracts on August 31, 1995 was
$13,091,125, thereby resulting in an unrealized loss of $12,187.
For federal income tax purposes, the Series had a capital loss carryforward at
August 31, 1995, of approximately $2,741,000 which expires in 2003. Accordingly,
no capital gains distributions are expected to be paid to shareholders until net
gains have been realized in excess of such amount.
The Series has elected to treat approximately $1,685,900 of net capital losses
incurred in the ten-month period ended August 31, 1995, as having occurred in
the following fiscal year.
- ------------------------------------------------------------
Note 5. Capital
The Series currently offers Class A, Class B and Class C shares. Class A shares
are sold with a front-end sales charge of up to 3%. Class B shares are sold with
a contingent deferred sales charge which declines from 5% to zero depending on
the period of time the shares are held. Class C shares are sold with a
contingent deferred sales charge of 1% during the first year. Class B shares
will automatically convert to Class A shares on a quarterly basis approximately
seven years after purchase.
The Fund has authorized an unlimited number of shares of beneficial interest for
each class at $.01 par value per share.
Transactions in shares of beneficial interest for the fiscal years ended August
31, 1995 and 1994 were as follows:
<TABLE>
<CAPTION>
Class A Shares Amount
- ----------------------------------- ---------- ------------
<S> <C> <C>
Year ended August 31, 1995:
Shares sold........................ 2,688,054 $ 26,760,642
Shares issued in reinvestment of
dividends........................ 465,901 4,658,191
Shares reacquired.................. (5,339,235) (52,933,797)
---------- ------------
Net decrease in shares outstanding
before conversion................ (2,185,280) (21,514,964)
Shares issued upon conversion from
Class B.......................... 64,557 643,530
---------- ------------
Net decrease in shares
outstanding...................... (2,120,723) $(20,871,434)
---------- ------------
---------- ------------
</TABLE>
<TABLE>
<CAPTION>
Shares Amount
---------- ------------
<S> <C> <C>
Year ended August 31, 1994:
Shares sold........................ 2,832,276 $ 29,779,955
Shares issued in reinvestment of
dividends and distributions...... 603,170 6,281,627
Shares reacquired.................. (4,212,175) (43,795,883)
---------- ------------
Net decrease in shares
outstanding...................... (776,729) $ (7,734,301)
---------- ------------
---------- ------------
<CAPTION>
Class B
- -----------------------------------
<S> <C> <C>
Year ended August 31, 1995:
Shares sold........................ 1,511,295 $ 15,116,805
Shares issued in reinvestment of
dividends........................ 61,615 617,971
Shares reacquired.................. (582,865) (5,794,588)
---------- ------------
Net increase in shares outstanding
before conversion................ 990,045 9,940,188
Shares reacquired upon conversion
into Class A..................... (64,557) (643,530)
---------- ------------
Net increase in shares
outstanding...................... 925,488 $ 9,296,658
---------- ------------
---------- ------------
December 7, 1993(a) through
August 31, 1994:
Shares sold........................ 1,938,204 $ 19,956,652
Shares issued in reinvestment of
dividends........................ 16,467 167,359
Shares reacquired.................. (96,852) (978,054)
---------- ------------
Net increase in shares
outstanding...................... 1,857,819 $ 19,145,957
---------- ------------
---------- ------------
<CAPTION>
Class C
- -----------------------------------
<S> <C> <C>
Year ended August 31, 1995:
Shares sold........................ 330,637 $ 3,347,460
Shares issued in reinvestment of
dividends........................ 7,682 77,278
Shares reacquired.................. (173,108) (1,727,896)
---------- ------------
Net increase in shares
outstanding...................... 165,211 $ 1,696,842
---------- ------------
---------- ------------
August 1, 1994(b) through
August 31, 1994:
Shares sold........................ 103,415 $ 1,050,453
Shares issued in reinvestment of
dividends........................ 66 668
---------- ------------
Net increase in shares
outstanding...................... 103,481 $ 1,051,121
---------- ------------
---------- ------------
- ---------------
(a) Commencement of Class B operations.
(b) Commencement of Class C operations.
</TABLE>
- --------------------------------------------------------------------------------
B-67
<PAGE>
PRUDENTIAL CALIFORNIA MUNICIPAL FUND
Financial Highlights CALIFORNIA INCOME SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A Class B
--------------------------------------------------------------- ------------
<S> <C> <C> <C> <C> <C> <C>
December 3,
1990(a)
Year Ended August 31, Through Year Ended
----------------------------------------------- August 31, August 31,
1995 1994 1993 1992 1991 1995
-------- -------- -------- -------- ----------- ------
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of
period............................. $ 10.19 $ 10.68 $ 10.08 $ 9.76 $ 9.55 $ 10.19
-------- -------- -------- -------- ----------- ------
Income from investment operations
Net investment income(c).............. .65 .65 .67 .69 .51 .61
Net realized and unrealized gain
(loss) on investment
transactions....................... .09 (.39) .65 .35 .21 .09
-------- -------- -------- -------- ----------- ------
Total from investment operations... .74 .26 1.32 1.04 .72 .70
-------- -------- -------- -------- ----------- ------
Less distributions
Dividends from net investment
income............................. (.65) (.65) (.67) (.69) (.51) (.61)
Distributions from net realized
gains.............................. -- (.10) (.05) (.03) -- --
-------- -------- -------- -------- ----------- ------
Total distributions................ (.65) (.75) (.72) (.72) (.51) (.61)
-------- -------- -------- -------- ----------- ------
Net asset value, end of period........ $ 10.28 $ 10.19 $ 10.68 $ 10.08 $ 9.76 $ 10.28
-------- -------- -------- -------- ----------- ------
-------- -------- -------- -------- ----------- ------
TOTAL RETURN(f)....................... 7.67% 2.55% 13.67% 11.08% 7.97% 7.24%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000)....... $163,538 $183,742 $200,899 $141,101 $72,241 $ 28,609
Average net assets (000).............. $165,500 $195,610 $165,895 $102,227 $47,540 $ 23,722
Ratios to average net assets(c):
Expenses, including distribution
fees............................ .40% .35% .20% .10% .0%(b) .80%
Expenses, excluding distribution
fees............................ .30% .25% .10% .04% .0%(b) .30%
Net investment income.............. 6.49% 6.25% 6.52% 6.91% 7.04%(b) 6.09%
Portfolio turnover rate............... 39% 46% 34% 69% 35% 39%
<CAPTION>
Class C
---------------------------
<S> C> <C> <C>
December 7, August 1,
1993(d) 1994(e)
Through Year Ended Through
August 31, August 31, August 31,
1994 1995 1994
------ ----- -----
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of
period............................. $ 10.61 $10.19 $10.18
------ ----- -----
Income from investment operations
Net investment income(c).............. .44 .58 .05
Net realized and unrealized gain
(loss) on investment
transactions....................... (.42) .09 .01
------ ----- -----
Total from investment operations... .02 .67 .06
------ ----- -----
Less distributions
Dividends from net investment
income............................. (.44) (.58) (.05)
Distributions from net realized
gains.............................. -- -- --
------ ----- -----
Total distributions................ (.44) (.58) (.05)
------ ----- -----
Net asset value, end of period........ $ 10.19 $10.28 $10.19
------ ----- -----
------ ----- -----
TOTAL RETURN(f)....................... (.14)% 6.98% .47%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000)....... $18,931 $2,762 $1,054
Average net assets (000).............. $ 6,814 $1,751 $ 353
Ratios to average net assets(c):
Expenses, including distribution
fees............................ 1.11%(b) 1.05% 1.12%(b)
Expenses, excluding distribution
fees............................ .43%(b) .30% .37%(b)/(g)
Net investment income.............. 8.15%(b) 5.84% 6.25%(b)
Portfolio turnover rate............... 46% 39% 46%
</TABLE>
- ---------------
(a) Commencement of investment operations.
(b) Annualized.
(c) Net of expense subsidy and/or fee waiver.
(d) Commencement of offering of Class B shares.
(e) Commencement of offering of Class C shares.
(f) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on
the last day of each period reported and includes reinvestment of
dividends and distributions. Total returns for periods of less
than a full year are not annualized.
(g) Restated.
- --------------------------------------------------------------------------------
B-68 See Notes to Financial Statements.
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
Independent Auditors' Report CALIFORNIA INCOME SERIES
- --------------------------------------------------------------------------------
The Shareholders and Board of Trustees
Prudential California Municipal Fund, California Income Series
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of Prudential California Municipal Fund,
California Income Series as of August 31, 1995, the related statements of
operations for the year then ended and of changes in net assets for each of the
two years in the period then ended, and the financial highlights for each of the
four years in the period then ended and for the period December 3, 1990
(commencement of investment operations) through August 31, 1991. These financial
statements and financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of the securities owned as of
August 31, 1995 by correspondence with the custodian and brokers; where replies
were not received from brokers, we performed other auditing procedures. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Prudential
California Municipal Fund, California Income Series, as of August 31, 1995, the
results of its operations, the changes in its net assets, and its financial
highlights for the respective stated periods in conformity with generally
accepted accounting principles.
DELOITTE & TOUCHE LLP
New York, New York
October 16, 1995
B-69
<PAGE>
Portfolio of Investments as of PRUDENTIAL CALIFORNIA MUNICIPAL FUND
August 31, 1995 CALIFORNIA MONEY MARKET SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
California Poll. Ctrl. Fin. Auth. Rev.,
Arco Proj., F.R.D.D., Ser. 94A VMIG1 3.65% 9/01/95 $ 2,700 $ 2,700,000
Burney Forest Proj., F.R.D.D., Ser. A P1 3.65 9/01/95 2,900 2,900,000
Chevron U.S.A. Inc. Proj., A.O.T., Ser. 84 NR 4.50 5/15/96 4,155 4,155,000
Delano Proj., F.R.D.D., Ser. 89 P1 3.50 9/01/95 2,600 2,600,000
Delano Proj., F.R.D.D., Ser. 90 P1 3.50 9/01/95 5,500 5,500,000
Delano Proj., F.R.D.D., Ser. 91 P1 3.50 9/01/95 3,200 3,200,000
Honey Lake Power Proj., F.R.D.D., Ser. 88 NR 3.50 9/01/95 5,500 5,500,000
Shell Oil Co. Proj., F,R.D.D., Ser. 94 VMIG1 3.60 9/01/95 3,400 3,400,000
So. Cal. Ed., F.R.D.D., Ser 86B P1 3.45 9/01/95 2,400 2,400,000
So. Cal. Ed., F.R.D.D., Ser. 86C P1 3.45 9/01/95 2,100 2,100,000
U.S. Borax, Inc. Proj., F.R.W.D., Ser. 95A NR 3.65 9/07/95 5,100 5,100,000
Ultrapower Malaga Fresno Proj., F.R.D.D., Ser. 88A P1 3.55 9/01/95 2,600 2,600,000
Ultrapower Malaga Fresno Proj., F.R.D.D., Ser. 88B P1 3.55 9/01/95 3,400 3,400,000
Ultrapower Rocklin Proj., F.R.D.D., Ser. 88A P1 3.55 9/01/95 2,000 2,000,000
Ultrapower Rocklin Proj., F.R.D.D., Ser. 88B P1 3.55 9/01/95 1,200 1,200,000
California St. Dept. Water Res.,
Central Valley Proj., F.R.W.D. VMIG1 3.35 9/06/95 6,000 6,000,000
Water Rev., T.E.C.P. P1 3.60 9/26/95 3,854 3,854,000
California Statewide Cmntys Dev. Auth.,
Apartment Dev. Rev., F.R.W.D., Ser. 95A A1+(c) 3.45 9/06/95 3,500 3,500,000
Multifamily Rev., F.R.W.D., Ser. 95B A1+(c) 3.65 9/06/95 8,000 8,000,000
Contra Costa Trans. Auth. Rev., F.R.W.D., Ser. A VMIG1 3.40 9/06/95 3,700 3,700,000
East Bay Mun. Util. Dist., T.E.C.P. P1 3.60 9/11/95 7,350 7,350,000
Kings Cnty. Multi-family Rev. Hsg. Auth., Edgewater Isle
Proj., F.R.W.D., Ser. 85A VMIG1 3.55 9/06/95 7,800 7,800,000
Los Angeles Cnty. Met. Trans. Auth. Rev., Union Station
Proj., F.R.W.D., Ser. A VMIG1 3.50 9/07/95 5,600 5,600,000
Los Angeles Cnty. Trans. Comm. Sales Tax Rev., F.R.W.D.,
Ser. A VMIG1 3.20 9/06/95 4,600 4,600,000
Los Angeles Cnty., T.R.A.N. MIG1 4.50 7/01/96 15,200 15,287,012
Los Angeles Hsg. Auth., Multi-family Rev., Lanewood Apts.
Proj., F.R.W.D., Ser. 85 VMIG1 3.55 9/06/95 7,000 7,000,000
Monterey Cnty. Fin. Auth. Rev., Adjusted Recl. & Dist.
Projs., F.R.W.D., Ser. 95A VMIG1 3.60 9/07/95 4,000 4,000,000
Moorpark Ind. Dev. Auth. Rev., Kavli & Kavli Co.,
F.R.W.D.,
Ser. 85 VMIG1 3.85 9/07/95 6,795 6,795,000
Oakland Multi-family Hsg. Rev., Skyline Hills Assoc.,
F.R.W.D.,
Ser. 85A MIG1 3.40 9/07/95 6,700 6,700,000
Olcese Wtr. Dist., Rio Bravo Wtr. Delivery Sys., T.E.C.P.,
Ser. 86A P1 3.90 9/20/95 7,900 7,900,000
Ontario Multi-family Hsg. Rev., Park Ctr. Proj., F.R.W.D.,
Ser. 85A VMIG1 3.45 9/07/95 8,400 8,400,000
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-70
<PAGE>
Portfolio of Investments as of PRUDENTIAL CALIFORNIA MUNICIPAL FUND
August 31, 1995 CALIFORNIA MONEY MARKET SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
Palmdale Cmnty. Redev. Agy., Manzanita Villas Apt. Proj.,
F.R.W.D.,
Ser. 93A VMIG1 3.65% 9/07/95 $ 4,800 $ 4,800,000
Puerto Rico Comnwlth.,
Gov't. Dev. Bank., F.R.W.D., Ser. 85 VMIG1 3.20 9/06/95 1,300 1,300,000
Gov't. Dev. Bank., F.R.W.D., Ser. 95 A1+(c) 4.10 9/08/95 1,500 1,500,000
Sacramento Mun. Util. Dist. Rev.,
T.E.C.P., P1 3.60 9/12/95 3,000 3,000,000
T.E.C.P., P1 3.75 9/12/95 1,200 1,200,000
San Francisco Cnty. Redev. Fin. Auth. Rev., Yerba Buena
Gardens, F.R.W.D., Ser. 95 VMIG1 3.70 9/06/95 7,000 7,000,000
San Francisco Cnty., Unified School Dist., T.R.A.N., Ser.
95 MIG1 4.50 7/25/96 7,200 7,237,204
San Joaquin Cnty. Trans. Auth., Sales Tax Rev., F.R.W.D.,
Ser. 93 P1 3.50 9/06/95 5,700 5,700,000
San Lorenzo Unified School Dist., T.R.A.N. SP1+(c) 4.75 7/05/96 4,800 4,832,241
San Marcos Ind. Dev. Auth. Rev., Village Square Proj.,
F.R.W.D., Ser. 92 NR 3.75 9/07/95 3,900 3,900,000
Santa Clara Cnty. Trans. Dist., F.R.D.D., Ser. 85A VMIG1 3.50 9/01/95 300 300,000
Southern Pub. Pwr. Auth., Transmission Proj. Rev.,
F.R.W.D., Ser. 91 P1 3.15 9/06/95 13,700 13,700,000
Visalia, Cert. of Part., Convention Ctr., F.R.W.D. A1+(c) 3.75 9/06/95 8,680 8,680,000
------------
Total Investments--95.2%
(amortized cost $218,390,457(d)) 218,390,457
Other assets in excess of liabilities--4.8% 10,989,404
------------
Net Assets--100% $229,379,861
------------
------------
</TABLE>
- ---------------
(a) The following abbreviations are used in portfolio descriptions:
A.O.T.--Annual Optional Tender.
F.R.D.D.--Floating Rate (Daily) Demand Note (b).
F.R.W.D.--Floating Rate (Weekly) Demand Note (b).
T.E.C.P.--Tax-Exempt Commercial Paper.
T.R.A.N.--Tax & Revenue Anticipation Note.
(b) For purposes of amortized cost valuation, the maturity date of such
securities is considered to be the later of the next date on which the
security can be redeemed at par or the next date on which the rate of
interest is adjusted.
(c) Standard & Poor's rating.
(d) The cost of securities for federal income tax purposes is substantially the
same as for financial reporting purposes.
NR--Not Rated by Moody's or Standard & Poor's.
The Fund's current Statement of Additional Information contains a description
of Moody's and Standard & Poor's ratings.
- --------------------------------------------------------------------------------
B-71 See Notes to Financial Statements.
<PAGE>
PRUDENTIAL CALIFORNIA MUNICIPAL FUND
Statement of Assets and Liabilities CALIFORNIA MONEY MARKET SERIES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Assets August 31, 1995
Investments, at amortized cost which approximates market value............................................... $218,390,457
Receivable for investments sold.............................................................................. 9,191,250
Receivable for Series shares sold............................................................................ 4,732,065
Interest receivable.......................................................................................... 904,165
Other assets................................................................................................. 6,047
------------
Total assets.............................................................................................. 233,223,984
------------
Liabilities
Payable for Series shares reacquired......................................................................... 3,576,738
Management fee payable....................................................................................... 99,633
Accrued expenses and other liabilities....................................................................... 77,152
Dividends payable............................................................................................ 73,026
Distribution fee payable..................................................................................... 13,674
Deferred trustees' fee....................................................................................... 3,900
------------
Total liabilities......................................................................................... 3,844,123
------------
Net Assets................................................................................................... $229,379,861
------------
------------
Net assets were comprised of:
Shares of beneficial interest, at $.01 par value.......................................................... $ 2,293,799
Paid-in capital in excess of par.......................................................................... 227,086,062
------------
Net assets, August 31, 1995.................................................................................. $229,379,861
------------
------------
Net asset value, offering price and redemption price per share
($229,379,861 / 229,379,861 shares of beneficial interest issued and outstanding; unlimited number of
shares authorized)........................................................................................ $1.00
------------
------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-72
<PAGE>
PRUDENTIAL CALIFORNIA MUNICIPAL FUND PRUDENTIAL CALIFORNIA MUNICIPAL FUND
CALIFORNIA MONEY MARKET SERIES CALIFORNIA MONEY MARKET SERIES
Statement of Operations Statement of Changes in Net Assets
- ------------------------------------------------------------
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended
Net Investment Income August 31, 1995
---------------
<S> <C>
Income
Interest and discount earned............. $ 8,979,883
---------------
Expenses
Management fee........................... 1,215,652
Distribution fee......................... 303,913
Legal fees............................... 140,000
Transfer agent's fees and expenses....... 120,000
Custodian's fees and expenses............ 30,000
Reports to shareholders.................. 25,000
Registration fees........................ 20,000
Audit fee................................ 15,000
Insurance expense........................ 9,000
Trustees' fees........................... 8,000
Miscellaneous............................ 8,748
---------------
Total expenses........................ 1,895,313
Less: custodian fee credit.................. (42,250)
---------------
Net expenses............................. 1,853,063
---------------
Net investment income....................... 7,126,820
---------------
Realized Loss on Investments
Net realized loss on investment transactions
(Note 3)................................. (2,750,000)
---------------
Net Increase in Net Assets
Resulting from Operations................... $ 4,376,820
---------------
---------------
</TABLE>
<TABLE>
<CAPTION>
Increase (Decrease) Year Ended August 31,
in Net Assets 1995 1994
<S> <C> <C>
Operations
Net investment income..... $ 7,126,820 $ 6,229,905
Net realized gain (loss)
on investment
transactions........... (2,750,000) 20,403
--------------- ---------------
Net increase in net assets
resulting from
operations............. 4,376,820 6,250,308
--------------- ---------------
Dividends and distributions
to shareholders (Note
1)........................ (7,126,820) (6,250,308)
--------------- ---------------
Series share transactions (at
$1 per share)
Net proceeds from shares
sold................... 1,409,780,343 1,419,314,621
Net asset value of shares
issued to shareholders
in reinvestment of
dividends and
distributions.......... 6,813,982 5,984,806
Cost of shares
reacquired............. (1,487,890,017) (1,439,549,204)
--------------- ---------------
Net decrease in net assets
from Series share
transactions........... (71,295,692) (14,249,777)
--------------- ---------------
Capital contribution by
affiliate (Note 3)........ 2,750,000 --
--------------- ---------------
Total decrease............... (71,295,692) (14,249,777)
Net Assets
Beginning of year............ 300,675,553 314,925,330
--------------- ---------------
End of year.................. $ 229,379,861 $ 300,675,553
--------------- ---------------
--------------- ---------------
</TABLE>
- --------------------------------------------------------------------------------
B-73 See Notes to Financial Statements.
<PAGE>
PRUDENTIAL CALIFORNIA MUNICIPAL FUND
Notes to Financial Statements CALIFORNIA MONEY MARKET SERIES
- --------------------------------------------------------------------------------
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 Policies
The following is a summary of significant accounting policies followed by the
Fund, and the Series, in the preparation of its financial statements.
Securities Valuations: Portfolio securities of the Series are valued at
amortized cost, which approximates market value. The amortized cost method of
valuation involves valuing a security at its cost on the date of purchase and
thereafter assuming a constant amortization to maturity of any discount or
premium.
All securities are valued as of 4:30 P.M., New York time.
Securities Transactions and Investment Income: Securities transactions are
recorded on the trade date. Realized gains and losses on sales of investments
are calculated on the identified cost basis. Interest income is recorded on the
accrual basis.
Federal Income Taxes: For federal income tax purposes, each series in the Fund
is treated as a separate taxpaying entity. It is the intent of the Series to
continue to meet the requirements of the Internal Revenue Code applicable to
regulated investment companies and to 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.
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: The effect of applying Statement of
Position 93-2: Determination, Disclosure and Financial Statement Presentation of
Income, Capital Gain and Return of Capital Distributions by Investment Companies
during the year was to decrease accumulated loss on investments and decrease
paid-in capital by $2,750,000 due to the contribution of capital to the Series
(Note 3).
- ------------------------------------------------------------
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 Transactions with Affiliates
Prudential Mutual Fund Services, Inc. (``PMFS''), a wholly-owned subsidiary of
PMF, serves as the Fund's transfer agent. During the year ended August 31, 1995,
the Series incurred fees of approximately $112,000 for
- --------------------------------------------------------------------------------
B-74
<PAGE>
PRUDENTIAL CALIFORNIA MUNICIPAL FUND
Notes to Financial Statements CALIFORNIA MONEY MARKET SERIES
- --------------------------------------------------------------------------------
the services of PMFS. As of August 31, 1995, approximately $8,000 of such fees
were due to PMFS. Transfer agent fees and expenses in the Statement of
Operations include certain out-of-pocket expenses paid to non-affiliates.
At the time of the financial crisis in Orange County, California in late 1994,
the Series held (i) $15,000,000 principal amount of Orange County, California,
Teeter Plan Tax-Exempt Notes due June 30, 1995 (Teeter Notes) and (ii)
$10,000,000 principal amount of Orange County, California, Tax Revenue
Anticipation Notes due July 19, 1995 (TRANS A Notes) (collectively, the Orange
County Notes).
On December 7, 1994, Prudential Securities Group, Inc. (``PSG''), an indirect
wholly-owned subsidiary of The Prudential Insurance Company of America and the
parent company of PSI, entered into put agreements with the Series with respect
to the Orange County Notes. The put agreements, originally scheduled to expire
on March 6, 1995, were subsequently extended to the maturity dates of the
respective Orange County Notes. The put agreements provided that the Fund had
the unconditional right at maturity to require PSG to purchase the Orange County
Notes from the Series at par value plus accrued interest. The Series recorded a
loss on the Orange County Notes and an associated capital contribution to the
Series equal in value to the decline in fair market value of the Orange County
Notes as of December 7, 1994.
On June 30, 1995 the Teeter Notes matured, the Series received par value plus
accrued interest in the normal course of business from Orange County and the put
expired unexercised. On July 19, 1995, with Orange County having defaulted on
its obligations with respect to the TRANS A Notes, the Series put (sold) the
TRANS A Notes to PSG in return for par value plus accrued interest in accordance
with the terms of the put agreement. Accordingly, shareholders of the Series
have incurred no loss of principal or reduction in income, except for certain
legal costs, as a result of its ownership of the Orange County Notes. Since July
19, 1995 the Series has not owned any Orange County, California obligations.
- --------------------------------------------------------------------------------
B-75
<PAGE>
PRUDENTIAL CALIFORNIA MUNICIPAL FUND
Financial Highlights CALIFORNIA MONEY MARKET SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended August 31,
------------------------------------------------------------
1995 1994 1993 1992 1991
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year.................. $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
Net investment income and net realized
gains/losses...................................... .02(c) .02 .02 .03 .04(a)
Dividends and distributions......................... (.03) (.02) (.02) (.03) (.04)
Capital contribution by affiliate................... .01 -- -- -- --
-------- -------- -------- -------- --------
Net asset value, end of year........................ $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
TOTAL RETURN(b):.................................... 3.01%(c) 1.94% 1.86% 2.91% 4.48%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)....................... $229,380 $300,676 $314,925 $315,890 $341,625
Average net assets (000)............................ $243,130 $326,429 $319,464 $339,941 $375,655
Ratios to average net assets:
Expenses, including distribution fee............. .78% .73% .76% .76% .63%(a)
Expenses, excluding distribution fee............. .65% .61% .63% .63% .51%(a)
Net investment income............................ 2.93% 1.91% 1.83% 2.89% 4.37%(a)
</TABLE>
- ---------------
(a) Net of management fee waiver and/or expense subsidy.
(b) Total return includes reinvestment of dividends and distributions.
(c) Includes $.01 of net realized loss on investment transactions that were
offset by a capital contribution by affiliate.
Without the effect of the capital contribution, the Series' total return
would have been 1.88%.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-76
<PAGE>
PRUDENTIAL CALIFORNIA MUNICIPAL FUND
Independent Auditors' Report CALIFORNIA MONEY MARKET SERIES
- --------------------------------------------------------------------------------
The Shareholders and Board of Trustees
Prudential California Municipal Fund, California Money Market Series
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of Prudential California Municipal Fund,
California Money Market Series, as of August 31, 1995, the related statements of
operations for the year then ended and of changes in net assets for each of the
two years in the period then ended, and the financial highlights for each of the
five years in the period then ended. These financial statements and financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of the securities owned as of
August 31, 1995 by correspondence with the custodian. 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 provides a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Prudential
California Municipal Fund, California Money Market Series, as of August 31,
1995, the results of its operations, the changes in its net assets, and its
financial highlights for the respective stated periods in conformity with
generally accepted accounting principles.
DELOITTE & TOUCHE LLP
New York, New York
October 16, 1995
B-77
<PAGE>
APPENDIX I--GENERAL INVESTMENT INFORMATION
The following terms are used in mutual fund investing.
ASSET ALLOCATION
Asset allocation is a technique for reducing risk, providing balance. Asset
allocation among different types of securities within an overall investment
portfolio helps to reduce risk and to potentially provide stable returns, while
enabling investors to work toward their financial goal(s). Asset allocation is
also a stratgegy to gain exposure to better performing asset classes while
maintaining investment in other asset classes.
DIVERSIFICATION
Diversification is a time-honored technique for reducing risk, providing
"balance" to an overall portfolio and potentially achieving more stable returns.
Owning a portfolio of securities mitigates the individual risks (and returns) of
any one security. Additionally, diversification among types of securities
reduces the risks (and general returns) of any one type of security.
DURATION
Debt securities have varying levels of sensitivity to interest rates. As
interest rates fluctuate, the value of a bond (or a bond portfolio) will
increase or decrease. Longer term bonds are generally more sensitive to changes
in interest rates. When interest rates fall, bond prices generally rise.
Conversely, when interest rates rise, bond prices generally fall.
Duration is an approximation of the price sensitivity of a bond (or a bond
portfolio) to interest rate changes. It measures the weighted average maturity
of a bond's (or a bond portfolio's) cash flows, I.E., principal and interest
rate payments. Duration is expressed as a measure of time in years--the longer
the duration of a bond (or a bond portfolio), the greater the impact of interest
rate changes on the bond's (or the bond portfolio's) price. Duration differs
from effective maturity in that duration takes into account call provisions,
coupon rates and other factors. Duration measures interest rate risk only and
not other risks, such as credit risk and, in the case of non-U.S. dollar
denominated securities, currency risk. Effective maturity measures the final
maturity dates of a bond (or a bond portfolio).
MARKET TIMING
Market timing--buying securities when prices are low and selling them when
prices are relatively higher--may not work for many investors because it is
impossible to predict with certainty how the price of a security will fluctuate.
However, owning a security for a long period of time may help investors offset
short-term price volatility and realize positive returns.
POWER OF COMPOUNDING
Over time, the compounding of returns can significantly impact investment
returns. Compounding is the effect of continuous investment on long-term
investment results, by which the proceeds of capital appreciation (and income
distributions, if elected) are reinvested to contribute to the overall growth of
assets. The long-term investment results of compounding may be greater than that
of an equivalent initial investment in which the proceeds of capital
appreciation and income distributions are taken in cash.
I-1
<PAGE>
APPENDIX II--HISTORICAL PERFORMANCE DATA
The historical performance data contained in this Appendix relies on data
obtained from statistical services, reports and other services believed by the
Manager to be reliable. The information has not been independently verified by
the Manager.
This chart show the long-term performance of various asset classes and the
rate of inflation.
Source: Stocks, Bonds, Bills, and Inflation 1995 Yearbook, Ibbotson Associates,
Chicago (annually updates work by Roger G. Ibbotson and Rex A. Sinquefield).
Used with permission. All rights reserved. This chart is for illustrative
purposes only and is not indicative of the past, present, or future performance
of any asset class or any Prudential Mutual Fund.
Generally, stock returns are attributable to capital appreciation and the
reinvestment of distributions. Bond returns are attributable mainly to the
reinvestment of distributions. Also, stock prices are usually more volatile than
bond prices over the long-term.
Small stock returns for 1926-1989 are those of stocks comprising the 5th
quintile of the New York Stock Exchange. Thereafter, returns are those of the
Dimensional Fund Advisors (DFA) Small Company Fund. Common stock returns are
based on the S&P Composite Index, a market-weighted, unmanaged index of 500
stocks (currently) in a variety of industries. It is often used as a broad
measure of stock market performance.
Long-term government bond returns are represented by a portfolio that contains
only one bond with a maturity of roughly 20 years. At the beginning of each year
a new bond with a then-current coupon replaces the old bond. Treasury bill
returns are for a one-month bill. Treasuries are guaranteed by the government as
to the timely payment of principal and interest; equities are not. Inflation is
measured by the consumer price index (CPI).
IMPACT OF INFLATION. The "real" rate of investment return is that which exceeds
the rate of inflation, the percentage change in the value of consumer goods and
the general cost of living. A common goal of long-term investors is to outpace
the erosive impact of inflation on investment returns.
II-1
<PAGE>
Set forth below is historical performance data relating to various sectors
of the fixed-income securities markets. The chart shows the historical total
returns of U.S. Treasury bonds, U.S. mortgage securities, U.S. corporate bonds,
U.S. high yield bonds and world government bonds on an annual basis from 1987 to
May 1995. The total returns of the indices include accrued interest, plus the
price changes (gains or losses) of the underlying securities during the period
mentioned. The data is provided to illustrate the varying historical total
returns and investors should not consider this performance data as an indication
of the future performance of the Fund or of any sector in which the Fund
invests.
All information relies on data obtained from statistical services, reports
and other services believed by the Manager to be reliable. Such information has
not been verified. The figures do not reflect the operating expenses and fees of
a mutual fund. See "Fund Expenses" in each Prospectus. The net effect of the
deduction of the operating expenses of a mutual fund on these historical total
returns, including the compounded effect over time, could be substantial.
HISTORICAL TOTAL RETURNS OF DIFFERENT BOND MARKET SECTORS
(1)
LEHMAN BROTHERS TREASURY BOND INDEX is an unmanaged index made up of over 150
public issues of the U.S. Treasury having maturities of at least one year.
(2)
LEHMAN BROTHERS MORTGAGE-BACKED SECURITIES INDEX is an unmanaged index that
includes over 600 15- and 30-year fixed-rate mortgage-backed securities of the
Government National Mortgage Association (GNMA), Federal National Mortgage
Association (FNMA), and the Federal Home Loan Mortgage Corporation (FHLMC).
(3)
LEHMAN BROTHERS CORPORATE BOND INDEX includes over 3,000 public fixed-rate,
nonconvertible investment-grade bonds. All bonds are U.S. dollar-denominated
issues and include debt issued or guaranteed by foreign sovereign governments,
municipalities, governmental agencies or international agencies. All bonds in
the index have maturities of at least one year.
(4)
LEHMAN BROTHERS HIGH YIELD BOND INDEX is an unmanaged index comprising over
750 public, fixed-rate, nonconvertible bonds that are rated Ba1 or lower by
Moody's Investors Service (or rated BB+ or lower by Standard & Poor's or Fitch
Investors Service). All bonds in the index have maturities of at least one
year.
(5)
SALOMON BROTHERS WORLD GOVERNMENT INDEX (NON U.S.) includes over 800 bonds
issued by various foreign governments or agencies, excluding those in the
U.S., but including Japan, Germany, France, the U.K., Canada, Italy,
Australia, Belgium, Denmark, the Netherlands, Spain, Sweden, and Austria. All
bonds in the index have maturities of at least one year.
II-2
<PAGE>
This chart below shows the historical volatility of general interest rates
as measured by the long U.S. Treasury Bond.
LONG U.S. TREASURY BOND YIELD IN PERCENT (1926-1994)
- ------------------------
Source: Stocks, Bonds, Bills, and Inflation 1995 Yearbook, Ibbotson Associates,
Chicago (annually updates work by Roger G. Ibbotson and Rex A. Sinquefield).
Used with permission. All rights reserved. The chart illustrates the historical
yield of a long-term U.S. Treasury Bond from 1926-1994. Yield represents that of
an annually renewed one-bond portfolio with a remaining maturity of
approximately 20 years. This chart is for illustrative purposes and should not
be construed to represent the yields of any Prudential Mutual Fund.
II-3
