<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION
ON OCTOBER 30, 1997
SECURITIES ACT REGISTRATION NO. 2-91215
INVESTMENT COMPANY ACT REGISTRATION NO. 811-4024
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 / /
PRE-EFFECTIVE AMENDMENT NO. / /
POST-EFFECTIVE AMENDMENT NO. 24 /X/
AND/OR
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 / /
AMENDMENT NO. 25 /X/
(Check appropriate box or boxes)
------------------------
PRUDENTIAL CALIFORNIA MUNICIPAL FUND
(Exact name of registrant as specified in charter)
GATEWAY CENTER THREE,
NEWARK, NEW JERSEY 07102
(Address of Principal Executive Offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (212) 214-1250
S. JANE ROSE, ESQ.
GATEWAY CENTER THREE
NEWARK, NEW JERSEY 07102
(Name and Address of Agent for Service)
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING:
As soon as practicable after the effective
date of the Registration Statement.
It is proposed that this filing will become effective
(check appropriate box):
/X/ immediately upon filing pursuant to paragraph (b)
/ / on (date) pursuant to paragraph (b)
/ / 60 days after filing pursuant to paragraph (a)(1)
/ / on (date) pursuant to paragraph (a)(1)
/ / 75 days after filing pursuant to paragraph (a)(2)
/ / on (date) pursuant to paragraph (a)(2) of rule
485.
If appropriate, check the following box:
/ / this post-effective amendment designates a new
effective date for a previously filed
post-effective amendment.
Title of Securities Being
Registered..... Shares of
Beneficial Interest, $.01 Per Value.
Approximate Date of Proposed Public Offering............................
- ----------------------------------------------------------------------
- ----------------------------------------------------------------------
<PAGE>
CROSS REFERENCE SHEET
(AS REQUIRED BY RULE 495)
<TABLE>
<CAPTION>
N-1A ITEM NO. LOCATION
- ------------------------------------------------------------------------------ ---------------------------------------------
<S> <C> <C>
PART A
Item 1. Cover Page......................................................... Cover Page
Item 2. Synopsis........................................................... Fund Expenses; Fund Highlights
Item 3. Condensed Financial Information.................................... Fund Expenses; Financial Highlights; How the
Fund Calculates Performance
Item 4. General Description of Registrant.................................. Cover Page; Fund Highlights; How the Fund
Invests; General Information
Item 5. Management of the Fund............................................. Financial Highlights; How the Fund is Managed
Item 5A. Management's Discussion of Fund Performance........................ Financial Highlights
Item 6. Capital Stock and Other Securities................................. Taxes, Dividends and Distributions; General
Information
Item 7. Purchase of Securities Being Offered............................... Shareholder Guide; How the Fund Values its
Shares
Item 8. Redemption or Repurchase........................................... Shareholder Guide; How the Fund Values its
Shares; General Information
Item 9. Pending Legal Proceedings.......................................... Not Applicable
PART B
Item 10. Cover Page......................................................... Cover Page
Item 11. Table of Contents.................................................. Table of Contents
Item 12. General Information and History.................................... Investment Objectives and Policies;
Organization and Capitalization
Item 13. Investment Objectives and Policies................................. Investment Objectives and Policies;
Investment Restrictions
Item 14. Management of the Fund............................................. Trustees and Officers; Manager; Distributor
Item 15. Control Persons and Principal Holders of Securities................ Trustees and Officers
Item 16. Investment Advisory and Other Services............................. Manager; Distributor; Custodian, Transfer and
Dividend Disbursing Agent and Independent
Accountants
Item 17. Brokerage Allocation and Other Practices........................... Portfolio Transactions and Brokerage
Item 18. Capital Stock and Other Securities................................. Not Applicable
Item 19. Purchase, Redemption and Pricing of Securities Purchase and Redemption of Fund Shares;
Being Offered...................................................... Shareholder Investment Account; Net Asset
Value
Item 20. Tax Status......................................................... Distributions and Tax Information
Item 21. Underwriters....................................................... Distributor
Item 22. Calculation of Performance Data.................................... Performance Information
Item 23. Financial Statements............................................... Financial Statements
PART C
Information required to be included in Part C is set forth under the appropriate Item, so numbered, in Part C to this
Post-Effective Amendment to this Registration Statement.
</TABLE>
<PAGE>
PRUDENTIAL CALIFORNIA MUNICIPAL FUND
(California Series)
- --------------------------------------------------------------------------------
PROSPECTUS DATED OCTOBER 30, 1997
- ----------------------------------------------------------------
Prudential California Municipal Fund (the Fund) (California Series) (the Series)
is one of three series of an open-end, management investment company, or mutual
fund. This Series is diversified and seeks to provide the maximum amount of
income that is exempt from California State and federal income taxes consistent
with the preservation of capital and, in conjunction therewith, the Series may
invest in debt securities with the potential for capital gain. The net assets of
the Series are invested in obligations within the four highest ratings of
Moody's Investors Service, Standard & Poor's Ratings Group or another nationally
recognized statistical rating organization or in unrated obligations which, in
the opinion of the Fund's investment adviser, are of comparable quality. Subject
to the limitations described herein, the Series may utilize derivatives,
including buying and selling futures contracts and options thereon for the
purpose of hedging its portfolio securities. There can be no assurance that the
Series' investment objective will be achieved. See "How the Fund
Invests--Investment Objective and Policies." The Fund's address is Gateway
Center Three, 100 Mulberry Street, Newark, New Jersey 07102-4077, and its
telephone number is (800) 225-1852.
This Prospectus sets forth concisely the information about the Fund and the
California Series that a prospective investor should know before investing.
Additional information about the Fund has been filed with the Securities and
Exchange Commission in a Statement of Additional Information dated October 30,
1997, which information is incorporated herein by reference (is legally
considered a part of this Prospectus) and is available without charge upon
request to the Fund at the address or telephone number noted above.
- --------------------------------------------------------------------------------
INVESTORS ARE ADVISED TO READ THIS PROSPECTUS AND RETAIN IT FOR FUTURE
REFERENCE.
- --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
<PAGE>
FUND HIGHLIGHTS
The following summary is intended to highlight certain information contained
in this Prospectus and is qualified in its entirety by the more detailed
information appearing elsewhere herein.
WHAT IS PRUDENTIAL CALIFORNIA MUNICIPAL FUND?
Prudential California Municipal Fund is a mutual fund whose shares are
offered in three series, each of which operates as a separate fund. A mutual
fund pools the resources of investors by selling its shares to the public
and investing the proceeds of such sale in a portfolio of securities
designed to achieve its investment objective. Technically, the Fund is an
open-end, management investment company. Only the California Series is
offered through this Prospectus.
WHAT IS THE SERIES' INVESTMENT OBJECTIVE?
The Series' investment objective is to maximize current income that is
exempt from California State and federal income taxes consistent with the
preservation of capital. It seeks to achieve this objective by investing
primarily in California State, municipal and local government obligations
and obligations of other qualifying issuers, such as issuers located in
Puerto Rico, the Virgin Islands and Guam, which pay income exempt, in the
opinion of counsel, from California State and federal income taxes
(California Obligations). There can be no assurance that the Series'
investment objective will be achieved. See "How the Fund Invests--Investment
Objective and Policies" at page 9.
WHAT ARE THE SERIES' RISK FACTORS AND SPECIAL CHARACTERISTICS?
In seeking to achieve its investment objective, the Series will invest at
least 80% of the value of its total assets in California Obligations. This
degree of investment concentration makes the Series particularly susceptible
to factors adversely affecting issuers of California Obligations. See "How
the Fund Invests--Investment Objective and Policies-- Special
Considerations" at page 13. To hedge against changes in interest rates, the
Series may also purchase put options and engage in transactions involving
derivatives, including financial futures contracts and options thereon. See
"How the Fund Invests--Investment Objective and Policies--Futures Contracts
and Options Thereon" at page 11. As with an investment in any mutual fund,
an investment in this series can decrease in value and you can lose money.
WHO MANAGES THE FUND?
Prudential Investments Fund Management LLC (PIFM or the Manager) is the
Manager of the Fund and is compensated for its services at an annual rate of
.50 of 1% of the Series' average daily net assets. As of September 30, 1997,
PIFM served as manager or administrator to 63 investment companies,
including 41 mutual funds, with aggregate assets of approximately $59.9
billion. The Prudential Investment Corporation, which does business under
the name Prudential Investments (PI, the Subadviser or the investment
adviser), furnishes investment advisory services in connection with the
management of the Fund under a Subadvisory Agreement with PIFM. See "How the
Fund is Managed--Manager" at page 14.
WHO DISTRIBUTES THE SERIES' SHARES?
Prudential Securities Incorporated (Prudential Securities, PSI or the
Distributor), a major securities underwriter and securities and commodities
broker, acts as the Distributor of the Series' Class A, Class B, Class C and
Class Z shares and is paid a distribution and service fee with respect to
Class A shares which is currently being charged at the annual rate of .10 of
1% of the average daily net assets of the Class A shares and is paid a
distribution and service fee with respect to Class B shares at the annual
rate of .50 of 1% of the average daily net assets of the Class B shares and
is paid an annual distribution and service fee with respect to Class C
shares which is currently being charged at the rate of .75 of 1% of the
average daily net assets of the Class C shares. Prudential Securities incurs
the expense of distributing the Series' Class Z shares under a Distribution
Agreement with the Fund, none of which is reimbursed or paid for by the
Fund. See "How the Fund is Managed--Distributor" at page 15.
2
<PAGE>
WHAT IS THE MINIMUM INVESTMENT?
The minimum initial investment is $1,000 for Class A and Class B shares
and $5,000 for Class C shares. The minimum subsequent investment is $100 for
Class A, Class B and Class C shares. Class Z shares are not subject to any
minimum investment requirements. There is no minimum investment requirement
for certain employee savings plans. For purchases made through the Automatic
Savings Accumulation Plan, the minimum initial and subsequent investment is
$50. See "Shareholder Guide--How to Buy Shares of the Fund" at page 22 and
"Shareholder Guide--Shareholder Services" at page 31.
HOW DO I PURCHASE SHARES?
You may purchase shares of the Series through Prudential Securities, Pruco
Securities Corporation (Prusec) or directly from the Fund through its
transfer agent, Prudential Mutual Fund Services LLC (PMFS or the Transfer
Agent), at the net asset value per share (NAV) next determined after receipt
of your purchase order by the Transfer Agent or Prudential Securities plus a
sales charge which may be imposed either (i) at the time of purchase (Class
A shares) or (ii) on a deferred basis (Class B or Class C shares). Class Z
shares are offered to a limited group of investors at net asset value
without any sales charge. See "How the Fund Values its Shares" at page 17
and "Shareholder Guide--How to Buy Shares of the Fund" at page 22.
WHAT ARE MY PURCHASE ALTERNATIVES?
The Series offers four classes of shares:
- Class A Shares:
Sold with an initial sales charge of up to 3% of the
offering price.
- Class B Shares:
Sold without an initial sales charge but are subject to
a contingent deferred sales charge or CDSC (declining
from 5% to zero of the lower of the amount invested or
the redemption proceeds) which will be imposed on
certain redemptions made within six years of purchase.
Although Class B shares are subject to higher ongoing
distribution-related expenses than Class A shares, Class
B shares will automatically convert to Class A shares
(which are subject to lower ongoing distribution-related
expenses) approximately seven years after purchase.
- Class C Shares:
Sold without an initial sales charge and, for one year
after purchase, are subject to a 1% CDSC on redemptions.
Like Class B shares, Class C shares are subject to
higher ongoing distribution-related expenses than Class
A shares but do not convert to another class.
- Class Z Shares:
Sold without either an initial or contingent deferred
sales charge to a limited group of investors. Class Z
shares are not subject to any ongoing service or
distribution-related expenses.
See "Shareholder Guide--Alternative Purchase Plan" at page 23.
HOW DO I SELL MY SHARES?
You may redeem your shares at any time at the NAV next determined after
Prudential Securities or the Transfer Agent receives your sell order.
However, the proceeds of redemptions of Class B and Class C shares may be
subject to a CDSC. See "Shareholder Guide--How to Sell Your Shares" at page
26.
HOW ARE DIVIDENDS AND DISTRIBUTIONS PAID?
The Series expects to declare daily and pay monthly dividends of net
investment income, if any, and make distributions of any net capital gains
at least annually. Dividends and distributions will be automatically
reinvested in additional shares of the Series at NAV without a sales charge
unless you request that they be paid to you in cash. See "Taxes, Dividends
and Distributions" at page 18.
3
<PAGE>
FUND EXPENSES
(CALIFORNIA SERIES)
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES CLASS C SHARES CLASS Z SHARES
-------------- ------------------------------ --------------------------- --------------
<S> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES+
Maximum Sales Load Imposed
on Purchases (as a
percentage of offering
price)..................... 3% None None None
Maximum Deferred Sales Load
(as a percentage of
original purchase price or
redemption proceeds,
whichever is lower)........ None 5% during the first year, 1% on redemptions made None
decreasing by 1% annually to within one year of purchase
1% in the fifth and sixth
years and 0% the seventh year*
Maximum Sales Load Imposed
on Reinvested Dividends.... None None None None
Redemption Fees............. None None None None
Exchange Fee................ None None None None
</TABLE>
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES CLASS C SHARES CLASS Z SHARES
-------------- -------------- -------------- ---------------
<S> <C> <C> <C> <C>
ANNUAL FUND OPERATING EXPENSES**
(as a percentage of average net assets)
Management Fees..................... .50% .50% .50% .50%
12b-1 Fees (After Reduction)........ .10%++ .50% .75%++ None
Other Expenses...................... .21% .21% .21% .21%
--- --- --- ---
Total Fund Operating Expenses (After
Reduction)......................... .81% 1.21% 1.46% .71%
--- --- --- ---
--- --- --- ---
</TABLE>
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
EXAMPLE
You would pay the following expenses on
a $1,000 investment, assuming (1) 5%
annual return and (2) redemption at
the end of each time period:
Class A............................. $38 $55 $ 74 $127
Class B............................. $62 $68 $ 76 $130
Class C............................. $25 $46 $ 80 $175
Class Z............................. $ 7 $23 $ 40 $ 88
You would pay the following expenses on
the same investment, assuming no
redemption:
Class A............................. $38 $55 $ 74 $127
Class B............................. $12 $38 $ 66 $130
Class C............................. $15 $46 $ 80 $175
Class Z............................. $ 7 $23 $ 40 $ 88
</TABLE>
The above examples are based on restated data for the Series' fiscal year
ended August 31, 1997. THE EXAMPLES SHOULD NOT BE CONSIDERED A
REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER
OR LESS THAN THOSE SHOWN.
The purpose of this table is to assist investors in understanding the
various costs and expenses that an investor in the California Series will
bear, whether directly or indirectly. For more complete descriptions of
the various costs and expenses, see "How the Fund is Managed." "Other
Expenses" includes operating expenses of the Series, such as Trustees' and
professional fees, registration fees, reports to shareholders and transfer
agency and custodian fees.
- ---------------
* Class B shares will automatically convert to Class A shares approximately
seven years after purchase. See "Shareholder Guide--Conversion Feature--
Class B Shares."
** The expense information in the table has been restated to reflect current
fees. Effective September 1, 1997, PIFM eliminated its management fee
waiver (.05 of 1%). See "How the Fund is Managed--Manager--Fee Waivers."
+ Pursuant to rules of the National Association of Securities Dealers, Inc.,
the aggregate initial sales charges, deferred sales charges and
asset-based sales charges on shares of the Series may not exceed 6.25% of
total gross sales, subject to certain exclusions. This 6.25% limitation
is imposed on each class of the Series rather than on a per shareholder
basis. Therefore, long-term shareholders of the Series may pay more in
total sales charges than the economic equivalent of 6.25% of such
shareholders' investment in such shares. See "How the Fund is
Managed--Distributor."
++ Although the Class A and Class C Distribution and Service Plans provide that
the Fund may pay a distribution fee of up to .30 of 1% and 1% per annum
of the average daily net assets of the Class A and Class C shares,
respectively, the Distributor has agreed to limit its distribution fees
with respect to the Class A and Class C shares of the Series to .10 of 1%
and .75 of 1% of the average daily net asset value of the Class A shares
and Class C shares, respectively, for the fiscal year ending August 31,
1998. Total Fund Operating Expenses (Before Waiver) of the Class A and
Class C shares without such limitations would be 1.01% and 1.71%,
respectively. See "How the Fund is Managed--Distributor."
4
<PAGE>
FINANCIAL HIGHLIGHTS
(FOR A SHARE OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT EACH OF THE INDICATED
PERIODS)
(CLASS A SHARES)
The following financial highlights, for the fiscal year ended August 31, 1997,
have been audited by Price Waterhouse LLP, independent accountants, and by
Deloitte & Touche LLP, independent auditors, for the four years ended August 31,
1996. Each of the respective reports by Price Waterhouse LLP and Deloitte &
Touche LLP on such financial highlights were unqualified. This information
should be read in conjunction with the financial statements and the notes
thereto, which appear in the Statement of Additional Information. The following
financial highlights contain selected data for a Class A share of beneficial
interest outstanding, total return, ratios to average net assets and other
supplemental data for the periods indicated. This information is based on data
contained in the financial statements. Further performance information is
contained in the annual report, which may be obtained without charge. See
"Shareholder Guide--Shareholder Services--Reports to Shareholders."
<TABLE>
<CAPTION>
CLASS A
-----------------------------------------------------------------------------------------------------
JANUARY 22,
1990 (a)
YEAR ENDED AUGUST 31, THROUGH
------------------------------------------------------------------------------------- AUGUST 31,
1997 1996 1995 1994 1993 1992 1991 1990
-------- -------- -------- -------- -------- ------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning
of period............... $ 11.44 $ 11.49 $ 11.30 $ 12.16 $ 11.48 $ 11.01 $ 10.57 $ 10.77
-------- -------- -------- -------- -------- ------- -------- -----------
INCOME FROM INVESTMENT
OPERATIONS
Net investment income..... .65(d) .65(d) .66(d) .65 .69 .70 .69 .41
Net realized and
unrealized gain (loss)
on investment
transactions............ .36 (.05) .19 (.74) .68 .47 .44 (.20)
-------- -------- -------- -------- -------- ------- -------- -----------
Total from investment
operations.............. 1.01 .60 .85 (.09) 1.37 1.17 1.13 .21
-------- -------- -------- -------- -------- ------- -------- -----------
LESS DISTRIBUTIONS
Dividends from net
investment income....... (.65) (.65) (.66) (.65) (.69) (.70) (.69) (.41)
Distributions in excess of
net investment income... --(e) -- -- -- -- -- -- --
Distributions from net
realized gains.......... -- -- -- (.12) -- -- -- --
-------- -------- -------- -------- -------- ------- -------- -----------
Total distributions....... (.65) (.65) (.66) (.77) (.69) (.70) (.69) (.41)
-------- -------- -------- -------- -------- ------- -------- -----------
Net asset value, end of
period.................. $ 11.80 $ 11.44 $ 11.49 $ 11.30 $ 12.16 $ 11.48 $ 11.01 $ 10.57
-------- -------- -------- -------- -------- ------- -------- -----------
-------- -------- -------- -------- -------- ------- -------- -----------
TOTAL RETURN (c):......... 9.01% 5.23% 7.90% (0.80)% 12.30% 10.95% 10.98% 1.85%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(000)................... $ 81,535 $ 72,876 $ 68,403 $ 12,082 $ 11,116 $ 5,388 $ 4,188 $ 1,774
Average net assets
(000)................... $ 78,347 $ 71,119 $ 42,617 $ 11,812 $ 7,728 $ 4,322 $ 2,748 $ 1,214
Ratios to average net
assets:
Expenses, including
distribution fee....... .76%(d) .81%(d) .73%(d) .73% .77% .82% .88% .90%(b)
Expenses, excluding
distribution fee....... .66%(d) .71%(d) .63%(d) .63% .67% .72% .78% .80%(b)
Net investment income... 5.53%(d) 5.58%(d) 5.90%(d) 5.57% 5.82% 6.25% 6.37% 6.28%(b)
Portfolio turnover rate... 14% 26% 44% 69% 43% 53% 53% 119%
</TABLE>
- ---------------
(a) Commencement of offering of Class A shares.
(b) Annualized.
(c) Total return does not consider the effects of sales loads. Total
return is calculated assuming a purchase of shares on the first day
and a sale on the last day of each period reported and includes
reinvestment of dividends and distributions. Total returns for
periods of less than a full year are not annualized.
(d) Net of management fee waiver.
(e) Less than $.005 per share.
5
<PAGE>
FINANCIAL HIGHLIGHTS
(FOR A SHARE OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT EACH OF THE INDICATED
PERIODS)
(CLASS B SHARES)
The following financial highlights, for the fiscal year ended August 31, 1997,
have been audited by Price Waterhouse LLP, independent accountants, and by
Deloitte & Touche LLP, independent auditors, for the four years ended August 31,
1996. Each of the respective reports by Price Waterhouse LLP and Deloitte &
Touche LLP on such financial highlights were unqualified. This information
should be read in conjunction with the financial statements and the notes
thereto, which appear in the Statement of Additional Information. The following
financial highlights contain selected data for a Class B share of beneficial
interest outstanding, total return, ratios to average net assets and other
supplemental data for the periods indicated. This information is based on data
contained in the financial statements. Further performance information is
contained in the annual report, which may be obtained without charge. See
"Shareholder Guide--Shareholder Services--Reports to Shareholders."
<TABLE>
<CAPTION>
CLASS B
-------------------------------------------------------------------------------------------------------
YEAR ENDED AUGUST 31,
-------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993 1992 1991 1990 1989 (b)
------ ------ -------- -------- -------- -------- ------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning
of year................. $11.43 $11.49 $ 11.29 $ 12.15 $ 11.48 $ 11.01 $ 10.57 $ 10.76 $ 10.52
------ ------ -------- -------- -------- -------- ------- -------- --------
INCOME FROM INVESTMENT
OPERATIONS
Net investment income..... .60(a) .60(a) .62(a) .60 .64 .66 .64 .64 .66
Net realized and
unrealized gain (loss)
on investment
transactions............ .37 (.06) .20 (.74) .67 .47 .44 (.19) .24
------ ------ -------- -------- -------- -------- ------- -------- --------
Total from investment
operations.............. .97 .54 .82 (.14) 1.31 1.13 1.08 .45 .90
------ ------ -------- -------- -------- -------- ------- -------- --------
LESS DISTRIBUTIONS
Dividends from net
investment income....... (.60) (.60) (.62) (.60) (.64) (.66) (.64) (.64) (.66)
Distributions in excess of
net investment
income.................. --(d) -- -- -- -- -- -- -- --
Distributions from net
realized gains.......... -- -- -- (.12) -- -- -- -- --
------ ------ -------- -------- -------- -------- ------- -------- --------
Total distributions....... (.60) (.60) (.62) (.72) (.64) (.66) (.64) (.64) (.66)
------ ------ -------- -------- -------- -------- ------- -------- --------
Net asset value, end of
year.................... $11.80 $11.43 $ 11.49 $ 11.29 $ 12.15 $ 11.48 $ 11.01 $ 10.57 $ 10.76
------ ------ -------- -------- -------- -------- ------- -------- --------
------ ------ -------- -------- -------- -------- ------- -------- --------
TOTAL RETURN (c):......... 8.67% 4.73% 7.56% (1.20)% 11.74% 10.52% 10.54% 4.21% 8.79%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year
(000)................... $70,093 $85,190 $103,891 $184,985 $207,634 $177,861 $169,190 $174,005 $178,287
Average net assets
(000)................... $75,935 $96,525 $136,275 $201,558 $190,944 $172,495 $169,220 $175,990 $166,305
Ratios to average net
assets:
Expenses, including
distribution fee....... 1.16%(a) 1.21%(a) 1.13%(a) 1.13% 1.17% 1.22% 1.28% 1.24% 1.23%
Expenses, excluding
distribution fee....... .66%(a) .71%(a) .63%(a) .63% .67% .72% .78% .76% .75%
Net investment income... 5.13%(a) 5.18%(a) 5.50%(a) 5.17% 5.44% 5.85% 5.98% 5.95% 6.12%
Portfolio turnover rate... 14% 26% 44% 69% 43% 53% 53% 119% 145%
<CAPTION>
1988
--------
<S> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning
of year................. $ 10.78
--------
INCOME FROM INVESTMENT
OPERATIONS
Net investment income..... .69(a)
Net realized and
unrealized gain (loss)
on investment
transactions............ (.26)
--------
Total from investment
operations.............. .43
--------
LESS DISTRIBUTIONS
Dividends from net
investment income....... (.69)
Distributions in excess of
net investment
income.................. --
Distributions from net
realized gains.......... --
--------
Total distributions....... (.69)
--------
Net asset value, end of
year.................... $ 10.52
--------
--------
TOTAL RETURN (c):......... 4.28%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year
(000)................... $150,733
Average net assets
(000)................... $139,974
Ratios to average net
assets:
Expenses, including
distribution fee....... 1.11%(a)
Expenses, excluding
distribution fee....... .61%(a)
Net investment income... 6.51%(a)
Portfolio turnover rate... 100%
</TABLE>
- -----------------
(a) Net of expense subsidy/fee waiver.
(b) On December 31, 1988, Prudential Mutual Fund Management, Inc.
succeeded The Prudential Insurance Company of America as manager of
the Fund.
(c) Total return does not consider the effects of sales loads. Total
return is calculated assuming a purchase of shares on the first day
and a sale on the last day of each year reported and includes
reinvestment of dividends and distributions.
(d) Less than $.005 per share.
6
<PAGE>
FINANCIAL HIGHLIGHTS
(FOR A SHARE OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT EACH OF THE INDICATED
PERIODS)
(CLASS C SHARES)
The following financial highlights for the fiscal year ended August 31, 1997,
have been audited by Price Waterhouse LLP, independent accountants, and by
Deloitte & Touche LLP, independent auditors, for the two years ended August 31,
1996 and for the period from August 1, 1994 through August 31, 1994. Each of the
respective reports by Price Waterhouse LLP and Deloitte & Touche LLP on such
financial highlights were unqualified. This information should be read in
conjunction with the financial statements and the notes thereto, which appear in
the Statement of Additional Information. The following financial highlights
contain selected data for a Class C share of beneficial interest outstanding,
total return, ratios to average net assets and other supplemental data for the
periods indicated. This information is based on data contained in the financial
statements. Further performance information is contained in the annual report,
which may be obtained without charge. See "Shareholder Guide-- Shareholder
Services--Reports to Shareholders."
<TABLE>
<CAPTION>
CLASS C
----------------------------------------
AUGUST 1,
1994 (a)
YEAR ENDED AUGUST 31, THROUGH
---------------------- AUGUST 31,
1997 1996 1995 1995
---- ---- ---- -------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning of
period...................... $11.43 $11.49 $11.29 $ 11.32
---- ---- ---- ------
INCOME FROM INVESTMENT
OPERATIONS
Net investment income......... .57(d) .57(d) .59(d) .04
Net realized and unrealized
gain (loss) on investment
transactions................ .37 (.06) .20 (.03 )
---- ---- ---- ------
Total from investment
operations.................. .94 .51 .79 .01
---- ---- ---- ------
LESS DISTRIBUTIONS
Dividends from net investment
income...................... (.57) (.57) (.59) (.04 )
Distributions in excess of net
investment income........... --(f)
---- ---- ---- ------
Total Distributions........... (.57) (.57) (.59) (.04 )
---- ---- ---- ------
Net asset value, end of
period...................... $11.80 $11.43 $11.49 $ 11.29
---- ---- ---- ------
---- ---- ---- ------
TOTAL RETURN (c):............. 8.40% 4.47% 7.29% .05%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(000)....................... $334 $543 $129 $ 200 (e)
Average net assets (000)...... $480 $286 $ 76 $ 199 (e)
Ratios to average net assets:
Expenses, including
distribution fee........... 1.41%(d) 1.46%(d) 1.38%(d) 1.71%(b)
Expenses, excluding
distribution fee........... .66%(d) .71%(d) .63%(d) .96%(b)
Net investment income....... 4.88%(d) 4.93%(d) 5.25%(d) 4.87%(b)
Portfolio turnover rate....... 14% 26% 44% 69%
</TABLE>
- -------------
(a) Commencement of offering of Class C shares.
(b) Annualized.
(c) Total return does not consider the effects of sales loads. Total return
is calculated assuming a purchase of shares on the first day and a
sale on the last day of each period reported and includes reinvestment
of dividends and distributions. Total returns for periods of less than
a full year are not annualized.
(d) Net of management fee waiver.
(e) Figures are actual and not rounded to the nearest thousand.
(f) Less than $.005 per share.
7
<PAGE>
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD INDICATED)
(CLASS Z SHARES)
The following financial highlights for the Class Z shares for the period from
September 18, 1996 through August 31, 1997 have been audited by Price Waterhouse
LLP, independent accountants, whose report thereon was unqualified. This
information should be read in conjunction with the financial statements and the
notes thereto, which appear in the Statement of Additional Information. The
financial highlights contain selected data for a Class Z share of common stock
outstanding, total return, ratios to average net assets and other supplemental
data for the period indicated. This information has been determined based on
data contained in the financial statements. Further performance information is
contained in the annual report, which may be obtained without charge. See
"Shareholder Guide--Shareholder Services--Reports to Shareholders."
<TABLE>
<CAPTION>
CLASS Z
SEPTEMBER 18,
1996(a)
THROUGH
AUGUST 31, 1997
--------------------
<S> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period... $ 11.50
------
INCOME FROM INVESTMENT OPERATIONS
Net investment income (d).............. .64
Net realized and unrealized gain on
investment transactions................ .31
------
Total from investment operations....... .95
------
LESS DISTRIBUTIONS
Dividends from net investment income... (.64)
Distributions in excess of net
investment income.................... --(e)
------
Total Distributions.................... (.64)
------
Net asset value, end of period......... $ 11.81
------
------
TOTAL RETURN (b):...................... 8.35%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)........ $ 710
Average net assets (000)............... $ 458
Ratios to average net assets (c)/(d):
Expenses............................. .66%
Net investment income................ 5.35%
Portfolio turnover rate................ 14%
</TABLE>
- ------------
(a) Commencement of offering of Class Z shares.
(b) Total return is calculated assuming a purchase of shares on the first
day and a sale on the last day of the period reported and includes
reinvestment of dividends and distributions. Total returns for periods
of less than a full year are not annualized.
(c) Annualized.
(d) Net of management fee waiver.
(e) Less than $.005 per share.
8
<PAGE>
HOW THE FUND INVESTS
INVESTMENT OBJECTIVE AND POLICIES
PRUDENTIAL CALIFORNIA MUNICIPAL FUND (THE FUND) IS AN OPEN-END, MANAGEMENT
INVESTMENT COMPANY, OR MUTUAL FUND, CONSISTING OF THREE SEPARATE SERIES. EACH
SERIES OF THE FUND IS MANAGED INDEPENDENTLY. THE CALIFORNIA SERIES (THE SERIES)
IS DIVERSIFIED AND ITS INVESTMENT OBJECTIVE IS TO MAXIMIZE CURRENT INCOME THAT
IS EXEMPT FROM CALIFORNIA STATE AND FEDERAL INCOME TAXES CONSISTENT WITH THE
PRESERVATION OF CAPITAL AND, IN CONJUNCTION THEREWITH, THE SERIES MAY INVEST IN
DEBT SECURITIES WITH THE POTENTIAL FOR CAPITAL GAIN. See "Investment Objectives
and Policies" in the Statement of Additional Information.
THE SERIES' INVESTMENT OBJECTIVE IS A FUNDAMENTAL POLICY AND, THEREFORE, MAY
NOT BE CHANGED WITHOUT THE APPROVAL OF THE HOLDERS OF A MAJORITY OF THE SERIES'
OUTSTANDING VOTING SECURITIES AS DEFINED IN THE INVESTMENT COMPANY ACT OF 1940,
AS AMENDED (THE INVESTMENT COMPANY ACT). THE SERIES' POLICIES THAT ARE NOT
FUNDAMENTAL MAY BE MODIFIED BY THE TRUSTEES.
THE SERIES WILL INVEST PRIMARILY IN CALIFORNIA STATE, MUNICIPAL AND LOCAL
GOVERNMENT OBLIGATIONS AND OBLIGATIONS OF OTHER QUALIFYING ISSUERS, SUCH AS
ISSUERS LOCATED IN PUERTO RICO, THE VIRGIN ISLANDS AND GUAM, WHICH PAY INCOME
EXEMPT, IN THE OPINION OF COUNSEL, FROM CALIFORNIA STATE AND FEDERAL INCOME
TAXES (CALIFORNIA OBLIGATIONS). THERE CAN BE NO ASSURANCE THAT THE SERIES WILL
BE ABLE TO ACHIEVE ITS INVESTMENT OBJECTIVE.
As with an investment in any mutual fund, an investment in this Series can
decrease and you can lose money.
Interest on certain municipal obligations may be a preference item for
purposes of the federal alternative minimum tax. The Series may invest without
limit in municipal obligations that are "private activity bonds" (as defined in
the Internal Revenue Code) the interest on which would be a preference item for
purposes of the federal alternative minimum tax. See "Taxes, Dividends and
Distributions." California law provides that dividends paid by the Series are
exempt from California State personal income tax for individuals who reside in
California to the extent such dividends are derived from interest payments on
California Obligations. California Obligations may include general obligation
bonds of the State, counties, cities, towns, etc., revenue bonds of utility
systems, highways, bridges, port and airport facilities, colleges, hospitals,
etc., and industrial development and pollution control bonds. The Series will
invest in long-term California Obligations, and the dollar-weighted average
maturity of the Series' portfolio will generally range between 10-20 years. The
Series may also invest in certain short-term, tax-exempt notes such as Tax
Anticipation Notes, Revenue Anticipation Notes, Bond Anticipation Notes,
Construction Loan Notes and variable and floating rate demand notes.
Generally, municipal obligations with longer maturities produce higher yields
and are subject to greater price fluctuations as a result of changes in interest
rates (market risk) than municipal obligations with shorter maturities. The
prices of municipal obligations vary inversely with interest rates. Interest
rates are currently much lower than in recent years. As a general matter, bond
prices and the Series' net asset value, will vary inversely with interest rate
fluctuations. If rates were to rise sharply, the prices of bonds in the Series'
portfolio might be adversely affected.
THE SERIES MAY INVEST ITS ASSETS IN FLOATING RATE AND VARIABLE RATE
SECURITIES, INCLUDING PARTICIPATION INTERESTS THEREIN AND INVERSE FLOATERS.
There is no limit on the amount of such securities that the Series may purchase.
Floating rate securities normally have a rate of interest which is set as a
specific percentage of a designated base rate, such as the rate on Treasury
bonds or bills or the prime rate at a major commercial bank. The interest rate
on floating rate securities changes periodically when there is a change in the
designated base interest rate. Variable rate securities provide for a specified
periodic adjustment in the interest rate based on prevailing market rates and
generally would allow the Series to demand payment of the obligation on short
notice at par plus accrued interest, which amount may be more or less than the
amount the Series paid for them. An inverse floater is a debt instrument with a
floating or variable interest rate that moves in the opposite direction of the
9
<PAGE>
interest rate on another security or the value of an index. Changes in the
interest rate on the other security or index inversely affect the residual
interest rate paid on the inverse floater, with the result that the inverse
floater's price will be considerably more volatile than that of a fixed rate
bond. The market for inverse floaters is relatively new.
THE SERIES MAY ALSO INVEST IN MUNICIPAL LEASE OBLIGATIONS. A MUNICIPAL LEASE
OBLIGATION IS A MUNICIPAL SECURITY THE INTEREST ON AND PRINCIPAL OF WHICH IS
PAYABLE OUT OF LEASE PAYMENTS MADE BY THE PARTY LEASING THE FACILITIES FINANCED
BY THE ISSUE. Typically, municipal lease obligations are issued by a state or
municipal financing authority to provide funds for the construction of
facilities (E.G., schools, dormitories, office buildings or prisons) or the
acquisition of equipment. The facilities are typically used by the state or
municipality pursuant to a lease with a financing authority. Certain municipal
lease obligations may trade infrequently. Accordingly, the investment adviser
will monitor the liquidity of municipal lease obligations under the supervision
of the Trustees. Municipal lease obligations will not be considered illiquid for
purposes of the Series' 15% limitation on illiquid securities provided the
investment adviser determines that there is a readily available market for such
securities. See "Other Investments and Policies--Illiquid Securities" below.
ALL CALIFORNIA OBLIGATIONS PURCHASED BY THE SERIES WILL BE "INVESTMENT GRADE"
SECURITIES. In other words, all of the California Obligations will, at the time
of purchase, be rated within the four highest quality grades as determined by
Moody's Investors Service (Moody's) (currently Aaa, Aa, A, Baa for bonds, MIG 1,
MIG 2, MIG 3, MIG 4 for notes and Prime-1 for commercial paper), Standard &
Poor's Ratings Group (S&P) (currently AAA, AA, A, BBB for bonds, SP-1, SP-2 for
notes and A-1 for commercial paper) or another nationally recognized statistical
rating organization (NRSRO) or, if unrated, will possess creditworthiness, in
the opinion of the investment adviser, comparable to securities in which the
Series may invest. Securities rated Baa may have speculative characteristics,
and changes in economic conditions or other circumstances are more likely to
lead to a weakened capacity to make principal and interest payments than is the
case with higher grade securities. Subsequent to its purchase by the Series, a
municipal obligation may be assigned a lower rating or cease to be rated. Such
an event would not require the elimination of the issue from the portfolio, but
the investment adviser will consider such an event in determining whether the
Series should continue to hold the security in its portfolio. The Series may
purchase California Obligations which, in the opinion of the investment adviser,
offer the opportunity for capital appreciation. This may occur, for example,
when the investment adviser believes that the issuer of a particular California
Obligation might receive an upgraded credit standing, thereby increasing the
market value of the bonds it has issued or when the investment adviser believes
that interest rates might decline. As a general matter, bond prices and the
Series' net asset value will vary inversely with interest rate fluctuations.
From time to time, the Series may own the majority of a municipal issue. Such
majority-owned holdings may present market and credit risks.
UNDER NORMAL MARKET CONDITIONS, THE SERIES WILL ATTEMPT TO INVEST
SUBSTANTIALLY ALL OF THE VALUE OF ITS ASSETS IN CALIFORNIA OBLIGATIONS. As a
matter of fundamental policy, during normal market conditions the Series' assets
will be invested so that at least 80% of the income will be exempt from
California State and federal income taxes or the Series will have at least 80%
of its total assets invested in California Obligations. During abnormal market
conditions or to provide liquidity, the Series may hold cash or cash equivalents
or investment grade taxable obligations, including obligations that are exempt
from federal, but not state, taxation and the Series may invest in tax-free cash
equivalents, such as floating rate demand notes, tax-exempt commercial paper and
general obligation and revenue notes or in taxable cash equivalents, such as
certificates of deposit, bankers acceptances and time deposits or other
short-term taxable investments such as repurchase agreements. When, in the
opinion of the investment adviser, abnormal market conditions require a
temporary defensive position, the Series may invest more than 20% of the value
of its assets in debt securities other than California Obligations or may invest
its assets so that more than 20% of the income is subject to California State or
federal income taxes. The Series will treat an investment in a municipal bond
refunded with escrowed U.S. Government securities as U.S. Government securities
for purposes of the Investment Company Act's diversification requirements
provided certain conditions are met. See "Investment Objectives and Policies--In
General" in the Statement of Additional Information.
10
<PAGE>
THE SERIES MAY ACQUIRE PUT OPTIONS (PUTS) GIVING THE SERIES THE RIGHT TO SELL
SECURITIES HELD IN THE SERIES' PORTFOLIO AT A SPECIFIED EXERCISE PRICE ON A
SPECIFIED DATE. Such puts may be acquired for the purpose of protecting the
Series from a possible decline in the market value of the security to which the
put applies in the event of interest rate fluctuations or, in the case of
liquidity puts, for the purpose of shortening the effective maturity of the
underlying security. The aggregate value of premiums paid to acquire puts held
in the Series' portfolio (other than liquidity puts) may not exceed 10% of the
net asset value of the Series. The acquisition of a put may involve an
additional cost to the Series, by payment of a premium for the put, by payment
of a higher purchase price for securities to which the put is attached or
through a lower effective interest rate.
In addition, there is a credit risk associated with the purchase of puts in
that the issuer of the put may be unable to meet its obligation to purchase the
underlying security. Accordingly, the Series will acquire puts only under the
following circumstances: (1) the put is written by the issuer of the underlying
security and such security is rated within the four highest quality grades as
determined by an NRSRO; or (2) the put is written by a person other than the
issuer of the underlying security and such person has securities outstanding
which are rated within such four highest quality grades; or (3) the put is
backed by a letter of credit or similar financial guarantee issued by a person
having securities outstanding which are rated within the two highest quality
grades of an NRSRO.
THE SERIES MAY PURCHASE MUNICIPAL OBLIGATIONS ON A "WHEN-ISSUED" OR "DELAYED
DELIVERY" BASIS, IN EACH CASE WITHOUT LIMIT. When municipal obligations are
offered on a when-issued or delayed delivery basis, the price and coupon rate
are fixed at the time the commitment to purchase is made, but delivery and
payment for the securities take place at a later date. The purchase price for
such securities includes interest accrued during the period between purchase and
settlement and, therefore, no interest accrues to the economic benefit of the
purchaser during such period. In the case of purchases by the Series, the price
that the Series is required to pay on the settlement date may be in excess of
the market value of the municipal obligations on that date. While securities may
be sold prior to the settlement date, the Series intends to purchase these
securities with the purpose of actually acquiring them unless a sale would be
desirable for investment reasons. At the time the Series makes the commitment to
purchase a municipal obligation on a when-issued or delayed delivery basis, it
will record the transaction and reflect the value of the obligation each day in
determining its net asset value. This value may fluctuate from day to day in the
same manner as values of municipal obligations otherwise held by the Series. If
the seller defaults in the sale, the Series could fail to realize the
appreciation, if any, that had occurred. The Series will establish a segregated
account with its Custodian in which it will maintain cash, U.S. Government
securities, equity securities or other liquid, unencumbered assets,
marked-to-market daily, equal in value to its commitments for when-issued or
delayed delivery securities.
THE SERIES MAY ALSO PURCHASE MUNICIPAL FORWARD CONTRACTS. A municipal forward
contract is a municipal security which is purchased on a when-issued basis with
delivery taking place up to five years from the date of purchase. No interest
will accrue on the security prior to the delivery date. The investment adviser
will monitor the liquidity, value, credit quality and delivery of the security
under the supervision of the Trustees.
THE SERIES MAY PURCHASE SECONDARY MARKET INSURANCE ON CALIFORNIA OBLIGATIONS
WHICH IT HOLDS OR ACQUIRES. Secondary market insurance would be reflected in the
market value of the municipal obligation purchased and may enable the Series to
dispose of a defaulted obligation at a price similar to that of comparable
municipal obligations which are not in default.
Insurance is not a substitute for the basic credit of an issuer, but
supplements the existing credit and provides additional security therefor. While
insurance coverage for the California Obligations held by the Series reduces
credit risk by providing that the insurance company will make timely payment of
principal and interest if the issuer defaults on its obligation to make such
payment, it does not afford protection against fluctuations in the price, I.E.,
the market value, of the municipal obligations caused by changes in interest
rates and other factors, nor in turn against fluctuations in the net asset value
of the shares of the Series.
FUTURES CONTRACTS AND OPTIONS THEREON
THE SERIES IS AUTHORIZED TO PURCHASE AND SELL CERTAIN DERIVATIVES, INCLUDING
FINANCIAL FUTURES CONTRACTS (FUTURES CONTRACTS) AND OPTIONS THEREON FOR THE
PURPOSE OF HEDGING ITS PORTFOLIO SECURITIES AGAINST FLUCTUATIONS IN VALUE CAUSED
11
<PAGE>
BY CHANGES IN PREVAILING MARKET INTEREST RATES AND HEDGING AGAINST INCREASES IN
THE COST OF SECURITIES THE SERIES INTENDS TO PURCHASE. THE SUCCESSFUL USE OF
FUTURES CONTRACTS AND OPTIONS THEREON BY THE SERIES INVOLVES ADDITIONAL
TRANSACTION COSTS AND IS SUBJECT TO VARIOUS RISKS AND DEPENDS UPON THE
INVESTMENT ADVISER'S ABILITY TO PREDICT THE DIRECTION OF THE MARKET (INCLUDING
INTEREST RATES). THE SERIES, AND THUS INVESTORS, MAY LOSE MONEY THROUGH ANY
UNSUCCESSFUL USE OF THESE STRATEGIES.
A FUTURES CONTRACT OBLIGATES THE SELLER OF THE CONTRACT TO DELIVER TO THE
PURCHASER OF THE CONTRACT CASH EQUAL TO A SPECIFIC DOLLAR AMOUNT TIMES THE
DIFFERENCE BETWEEN THE VALUE OF A SPECIFIC FIXED-INCOME SECURITY OR INDEX AT THE
CLOSE OF THE LAST TRADING DAY OF THE CONTRACT AND THE PRICE AT WHICH THE
AGREEMENT IS MADE. No physical delivery of the underlying securities is made.
The Series will engage in transactions in only those futures contracts and
options thereon that are traded on a commodities exchange or a board of trade.
The Series intends to engage in futures contracts and options thereon as a
hedge against changes, resulting from market conditions, in the value of
securities which are held in the Series' portfolio or which the Series intends
to purchase, in accordance with the rules and regulations of the Commodity
Futures Trading Commission (the CFTC). The Series also intends to engage in such
transactions when they are economically appropriate for the reduction of risks
inherent in the ongoing management of the Series.
THE SERIES MAY NOT PURCHASE OR SELL FUTURES CONTRACTS OR OPTIONS THEREON IF,
IMMEDIATELY THEREAFTER, (i) THE SUM OF INITIAL AND NET CUMULATIVE VARIATION
MARGIN ON OUTSTANDING FUTURES CONTRACTS, TOGETHER WITH PREMIUMS PAID ON OPTIONS
THEREON, WOULD EXCEED 20% OF THE TOTAL ASSETS OF THE SERIES, OR (ii) IN THE CASE
OF RISK MANAGEMENT TRANSACTIONS, THE SUM OF THE AMOUNT OF INITIAL MARGIN
DEPOSITS ON THE SERIES' FUTURES POSITIONS AND PREMIUMS PAID FOR OPTIONS THEREON
WOULD EXCEED 5% OF THE LIQUIDATION VALUE OF THE SERIES' TOTAL ASSETS. There are
no limitations on the percentage of the portfolio which may be hedged and no
limitations on the use of the Series' assets to cover futures contracts and
options thereon, except that the aggregate value of the obligations underlying
put options will not exceed 50% of the Series' assets. Certain requirements for
qualification as a regulated investment company under the Internal Revenue Code
may limit the Series' ability to engage in futures contracts and options
thereon. See "Distributions and Tax Information--Federal Taxation" in the
Statement of Additional Information.
Currently, futures contracts are available on several types of fixed-income
securities, including U.S. Treasury bonds and notes, three-month U.S. Treasury
bills and Eurodollars. Futures contracts are also available on a municipal bond
index, based on THE BOND BUYER Municipal Bond Index, an index of 40 actively
traded municipal bonds. The Series may also engage in transactions in other
futures contracts that become available, from time to time, in other
fixed-income securities or municipal bond indices and in other options on such
contracts if the investment adviser believes such contracts and options would be
appropriate for hedging the Series' portfolio.
THERE CAN BE NO ASSURANCE THAT VIABLE MARKETS WILL CONTINUE OR THAT A LIQUID
SECONDARY MARKET WILL EXIST TO TERMINATE ANY PARTICULAR FUTURES CONTRACT AT ANY
SPECIFIC TIME. If it is not possible to close a futures position entered into by
the Series, the Series will continue to be required to make daily cash payments
of variation margin in the event of adverse price movements. In such a
situation, if the Series had insufficient cash, it might have to sell portfolio
securities to meet daily variation margin requirements at a time when it might
be disadvantageous to do so. The inability to close futures positions also could
have an adverse impact on the ability of the Series to hedge effectively. There
is also a risk of loss by the Series of margin deposits in the event of
bankruptcy of a broker with whom the Series has an open position in a futures
contract.
THE SUCCESSFUL USE OF FUTURES CONTRACTS AND OPTIONS THEREON BY THE SERIES IS
SUBJECT TO VARIOUS ADDITIONAL RISKS. Any use of futures transactions involves
the risk of imperfect correlation in movements in the price of futures contracts
and movements in interest rates and, in turn, the prices of the securities that
are the subject of the hedge. If the price of the futures contract moves more or
less than the price of the security that is the subject of the hedge, the Series
will experience a gain or loss that will not be completely offset by movements
in the price of the security. The risk of imperfect correlation is greater where
the securities underlying futures contracts are taxable securities (rather than
municipal securities), are issued by companies in different market
12
<PAGE>
sectors or have different maturities, ratings or geographic mixes than the
security being hedged. In addition, the correlation may be affected by additions
to or deletions from the index which serves as the basis for a futures contract.
Finally, if the price of the security that is subject to the hedge were to move
in a favorable direction, the advantage to the Series would be partially offset
by the loss incurred on the futures contract.
SPECIAL CONSIDERATIONS
BECAUSE THE SERIES WILL INVEST AT LEAST 80% OF THE VALUE OF ITS TOTAL ASSETS
IN CALIFORNIA OBLIGATIONS, IT IS MORE SUSCEPTIBLE TO FACTORS ADVERSELY AFFECTING
ISSUERS OF SUCH OBLIGATIONS THAN IS A COMPARABLE MUNICIPAL BOND MUTUAL FUND THAT
IS NOT CONCENTRATED IN CALIFORNIA OBLIGATIONS TO THIS DEGREE. The recent
national recession severely affected several key sectors of California's economy
although the State's economy outperformed expectations in 1995 and strong growth
continued into 1996. A central feature of the 1997-98 State budget is welfare
reform and government streamlining. The budget anticipates General Fund revenues
of $52.5 billion, expenditures of $52.8 billion and a fiscal year end budget
reserve of $112 million. California law could restrict the ability of the State
and its local governmental entities to raise revenues sufficient to pay certain
obligations. If the issuers of any of the California Obligations are unable to
meet their financial obligations because of budgetary pressures or for other
reasons, the income derived by the Series, the ability to preserve or realize
appreciation of the Series' capital and the Series' liquidity could be adversely
affected. See "Investment Objectives and Policies--Special Considerations
Regarding Investments in Tax-Exempt Securities" in the Statement of Additional
Information.
OTHER INVESTMENTS AND POLICIES
REPURCHASE AGREEMENTS
The Series may on occasion enter into repurchase agreements whereby the seller
of a security agrees to repurchase that security from the Series at a mutually
agreed-upon time and price. The period of maturity is usually quite short,
possibly overnight or a few days, although it may extend over a number of
months. The resale price is in excess of the purchase price, reflecting an
agreed-upon rate of return effective for the period of time the Series' money is
invested in the security. The Series' repurchase agreements will at all times be
fully collateralized in an amount at least equal to the resale price. The
instruments held as collateral are valued daily and if the value of the
instruments declines, the Series will require additional collateral. If the
seller defaults and the value of the collateral securing the repurchase
agreement declines, the Series may incur a loss. The Series participates in a
joint repurchase account with other investment companies managed by Prudential
Investments Fund Management LLC pursuant to an order of the Securities and
Exchange Commission (SEC).
BORROWING
The Series may borrow an amount equal to no more than 33 1/3% of the value of
its total assets (calculated when the loan is made) for temporary, extraordinary
or emergency purposes or for the clearance of transactions. The Series may
pledge up to 33 1/3% of the value of its total assets to secure these
borrowings. The Series will not purchase portfolio securities if its borrowings
exceed 5% of its total assets.
PORTFOLIO TURNOVER
The Series does not expect to trade in securities for short-term gain. It is
anticipated that the annual portfolio turnover rate will not exceed 150%. The
portfolio turnover rate is calculated by dividing the lesser of sales or
purchases of portfolio securities by the average monthly value of the portfolio
securities, excluding securities having a maturity at the date of purchase of
one year or less.
13
<PAGE>
ILLIQUID SECURITIES
The Series may hold up to 15% of its net assets in illiquid securities
including repurchase agreements which have a maturity of longer than seven days,
securities with legal or contractual restrictions on resale (restricted
securities) and securities that are not readily marketable. Restricted
securities eligible for resale pursuant to Rule 144A under the Securities Act of
1933, as amended (the Securities Act), privately placed commercial paper and
municipal lease obligations that have a readily available market are not
considered illiquid for purposes of this limitation. The investment adviser will
monitor the liquidity of such restricted securities under the supervision of the
Trustees. The Series' investment in Rule 144A Securities could have the effect
of increasing illiquidity to the extent that qualified institutional buyers
become, for a limited time, uninterested in purchasing Rule 144A securities. See
"Investment Objectives and Policies--Illiquid Securities" and "Investment
Restrictions" in the Statement of Additional Information. Repurchase agreements
subject to demand are deemed to have a maturity equal to the notice period.
INVESTMENT RESTRICTIONS
The Series is subject to certain investment restrictions which, like its
investment objectives, constitute fundamental policies. Fundamental policies
cannot be changed without the approval of the holders of a majority of the
Series' outstanding voting securities, as defined in the Investment Company Act.
See "Investment Restrictions" in the Statement of Additional Information.
HOW THE FUND IS MANAGED
THE FUND HAS TRUSTEES WHO, IN ADDITION TO OVERSEEING THE ACTIONS OF THE FUND'S
MANAGER, SUBADVISER AND DISTRIBUTOR, AS SET FORTH BELOW, DECIDE UPON MATTERS OF
GENERAL POLICY. THE FUND'S MANAGER CONDUCTS AND SUPERVISES THE DAILY BUSINESS
OPERATIONS OF THE FUND. THE FUND'S SUBADVISER FURNISHES DAILY INVESTMENT
ADVISORY SERVICES.
For the fiscal year ended August 31, 1997, total expenses of the Series as a
percentage of average net assets, net of fee waivers, were .76%, 1.16% and 1.41%
for the Series' Class A, Class B and Class C shares, respectively. For the
period from September 18, 1996 (commencement of the offering of Class Z shares)
through August 31, 1997, total expenses of the Series as a percentage of average
daily net assets, net of fee waivers, were .66% (annualized) for the Series'
Class Z shares. See "Financial Highlights" above.
MANAGER
PRUDENTIAL INVESTMENTS FUND MANAGEMENT LLC (PIFM OR THE MANAGER), GATEWAY
CENTER THREE, 100 MULBERRY STREET, NEWARK, NEW JERSEY 07102-4077, IS THE MANAGER
OF THE FUND AND IS COMPENSATED FOR ITS SERVICES AT AN ANNUAL RATE OF .50 OF 1%
OF THE AVERAGE DAILY NET ASSETS OF THE SERIES. PIFM is organized in New York as
a limited liability company. It is the successor to Prudential Mutual Fund
Management, Inc., which transferred its assets to PIFM in September 1996. For
the fiscal year ended August 31, 1997, the Series paid PIFM a management fee of
.45 of 1% of the Series' average net assets, after taking into account a
management fee waiver. See "Fee Waivers" below and "Manager" in the Statement of
Additional Information.
As of September 30, 1997, PIFM served as the manager to 41 open-end investment
companies, constituting all of the Prudential Mutual Funds, and as manager or
administrator to 22 closed-end investment companies with aggregate assets of
approximately $59.9 billion.
UNDER THE MANAGEMENT AGREEMENT WITH THE FUND, PIFM MANAGES THE INVESTMENT
OPERATIONS OF EACH SERIES OF THE FUND AND ALSO ADMINISTERS THE FUND'S BUSINESS
AFFAIRS. See "Manager" in the Statement of Additional Information.
UNDER A SUBADVISORY AGREEMENT BETWEEN PIFM AND THE PRUDENTIAL INVESTMENT
CORPORATION (PIC), DOING BUSINESS AS PRUDENTIAL INVESTMENTS (PI, THE SUBADVISER
OR THE INVESTMENT ADVISER), PI FURNISHES INVESTMENT ADVISORY SERVICES
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IN CONNECTION WITH THE MANAGEMENT OF THE FUND AND IS REIMBURSED BY PIFM FOR ITS
REASONABLE COSTS AND EXPENSES INCURRED IN PROVIDING SUCH SERVICES. Under the
Management Agreement, PIFM continues to have responsibility for all investment
advisory services and supervises PI's performance of such services.
The current portfolio manager of the Series is Christian Smith, a Vice
President of Prudential Investments. Mr. Smith has responsibility for the
day-to-day management of the portfolio. He has managed the portfolio since 1991
and has been employed by PIC in various capacities since 1988.
PIFM and PIC are indirect, wholly-owned subsidiaries of The Prudential
Insurance Company of America (Prudential), a major diversified insurance and
financial services company, and are part of Prudential Investments, a business
group of Prudential.
FEE WAIVERS
PIFM may from time to time agree to waive all or a portion of its management
fee and subsidize certain operating expenses of the Series. Fee waivers and
expense subsidies will increase the Series' yield and total return. The Series
is not required to reimburse PIFM for such management fee waiver. Effective
September 1, 1997, PIFM discontinued its waiver of 10% of its management fee.
See "Fund Expenses."
DISTRIBUTOR
PRUDENTIAL SECURITIES INCORPORATED (PRUDENTIAL SECURITIES, PSI OR THE
DISTRIBUTOR), ONE SEAPORT PLAZA, NEW YORK, NEW YORK 10292, IS A CORPORATION
ORGANIZED UNDER THE LAWS OF THE STATE OF DELAWARE AND SERVES AS THE DISTRIBUTOR
OF THE CLASS A, CLASS B, CLASS C AND CLASS Z SHARES OF THE SERIES. It is an
indirect, wholly-owned subsidiary of Prudential.
UNDER SEPARATE DISTRIBUTION AND SERVICE PLANS (THE CLASS A PLAN, THE CLASS B
PLAN AND THE CLASS C PLAN, COLLECTIVELY, THE PLANS) ADOPTED BY THE FUND UNDER
RULE 12b-1 UNDER THE INVESTMENT COMPANY ACT AND A DISTRIBUTION AGREEMENT (THE
DISTRIBUTION AGREEMENT), PRUDENTIAL SECURITIES (THE DISTRIBUTOR) INCURS THE
EXPENSES OF DISTRIBUTING THE CLASS A, CLASS B AND CLASS C SHARES OF THE SERIES.
Prudential Securities also incurs the expense of distributing the Series' Class
Z shares under the Distribution Agreement with the Fund, none of which is
reimbursed by or paid for by the Fund. These expenses include commissions and
account servicing fees paid to, or on account of, financial advisers of
Prudential Securities and representatives of Pruco Securities Corporation
(Prusec), an affiliated broker-dealer, commissions and account servicing fees
paid to, or on account of, other broker-dealers or financial institutions (other
than national banks) which have entered into agreements with the Distributor,
advertising expenses, the cost of printing and mailing prospectuses to potential
investors and indirect and overhead costs of Prudential Securities and Prusec
associated with the sale of Fund shares, including lease, utility,
communications and sales promotion expenses.
Under the Plans, the Series is not obligated to pay distribution and/or
service fees to the Distributor as compensation for its distribution and service
activities, not as reimbursement for specific expenses incurred. If the
Distributor's expenses exceed its distribution and service fees, the Series will
not be obligated to pay any additional expenses. If the Distributor's expenses
are less than such distribution and service fees, it will retain its full fees
and realize a profit.
UNDER THE CLASS A PLAN, THE SERIES MAY PAY PRUDENTIAL SECURITIES FOR ITS
DISTRIBUTION-RELATED ACTIVITIES WITH RESPECT TO CLASS A SHARES AT AN ANNUAL RATE
OF UP TO .30 OF 1% OF THE AVERAGE DAILY NET ASSETS OF THE CLASS A SHARES OF THE
SERIES. The Class A Plan provides that (i) up to .25 of 1% of the average daily
net assets of the Class A shares may be used to pay for personal service and/or
the maintenance of shareholder accounts (service fee) and (ii) total
distribution fees (including the service fee of .25 of 1%) may not exceed .30 of
1% of the average daily net assets of the Class A shares. Prudential Securities
has agreed to limit its distribution-related fees payable under the Class A Plan
to .10 of 1% of the average daily net assets of the Class A shares for the
fiscal year ending August 31, 1998.
UNDER THE CLASS B AND CLASS C PLANS, THE SERIES MAY PAY PRUDENTIAL SECURITIES
FOR ITS DISTRIBUTION-RELATED ACTIVITIES WITH RESPECT TO CLASS B AND CLASS C
SHARES AT AN ANNUAL RATE OF UP TO .50 OF 1% AND UP TO 1% OF THE AVERAGE DAILY
NET
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ASSETS OF THE CLASS B AND CLASS C SHARES, RESPECTIVELY. The Class B Plan
provides for the payment to Prudential Securities of (i) an asset-based sales
charge of up to .50 of 1% of the average daily net assets of the Class B shares,
and (ii) a service fee of up to .25 of 1% of the average daily net assets of the
Class B shares; provided that the total distribution-related fee does not exceed
.50 of 1%. The Class C Plan provides for the payment to Prudential Securities of
(i) an asset-based sales charge of up to .75 of 1% of the average daily net
assets of the Class C shares, and (ii) a service fee of up to .25 of 1% of the
average daily net assets of the Class C shares. The service fee is used to pay
for personal service and/or the maintenance of shareholder accounts. Prudential
Securities has agreed to limit its distribution-related fees payable under the
Class C Plan to .75 of 1% of the average daily net assets of the Class C shares
for the fiscal year ending August 31, 1998. Prudential Securities also receives
contingent deferred sales charges from certain redeeming shareholders. See
"Shareholder Guide--How to Sell Your Shares--Contingent Deferred Sales Charges."
For the fiscal year ended August 31, 1997, the Series paid distribution
expenses of .10 of 1%, .50 of 1% and .75 of 1% of the average daily net assets
of the Class A, Class B and Class C shares, respectively. The Series records all
payments made under the Plans as expenses in the calculation of net investment
income. See "Distributor" in the Statement of Additional Information.
Distribution expenses attributable to the sale of Class A, Class B and Class C
shares of the Series will be allocated to each such class based upon the ratio
of sales of each such class to the sales of Class A, Class B and Class C shares
of the Series other than expenses allocable to a particular class. The
distribution fee and sales charge of one class will not be used to subsidize the
sale of another class.
Each Plan provides that it shall continue in effect from year to year provided
that a majority of the Trustees of the Fund, including a majority of the
Trustees who are not "interested persons" of the Fund (as defined in the
Investment Company Act) and who have no direct or indirect financial interest in
the operation of the Plan or any agreement related to the Plan (the Rule 12b-1
Trustees), vote annually to continue the Plan. Each Plan may be terminated with
respect to the Series at any time by vote of a majority of the Rule 12b-1
Trustees or of a majority of the outstanding shares of the applicable class of
the Series. The Series will not be obligated to pay distribution and service
fees incurred under any Plan if it is terminated or not continued.
In addition to distribution and service fees paid by the Series under the
Class A, Class B and Class C Plans, the Manager (or one of its affiliates) may
make payments out of its own resources to dealers (including Prudential
Securities) and other persons who distribute shares of the Series (including
Class Z shares). Such payments may be calculated by reference to the net asset
value of shares sold by such persons or otherwise.
The Distributor is subject to the rules of the National Association of
Securities Dealers, Inc. (the NASD) governing maximum sales charges. See
"Distributor" in the Statement of Additional Information.
On October 21, 1993, PSI entered into an omnibus settlement with the SEC,
state securities regulators (with the exception of the Texas Securities
Commissioner who joined the settlement on January 18, 1994) and the NASD to
resolve allegations that from 1980 through 1990 PSI sold certain limited
partnership interests in violation of securities laws to persons for whom such
securities were not suitable and misrepresented the safety, potential returns
and liquidity of these investments. Without admitting or denying the allegations
asserted against it, PSI consented to the entry of an SEC Administrative Order
which stated that PSI's conduct violated the federal securities laws, directed
PSI to cease and desist from violating the federal securities laws, pay civil
penalties, and adopt certain remedial measures to address the violations.
Pursuant to the terms of the SEC settlement, PSI agreed to the imposition of a
$10,000,000 civil penalty, established a settlement fund in the amount of
$330,000,000 and procedures to resolve legitimate claims for compensatory
damages by purchasers of the partnership interests. PSI has agreed to provide
additional funds, if necessary, for the purpose of the settlement fund. PSI's
settlement with the state securities regulators included an agreement to pay a
penalty of $500,000 per jurisdiction. PSI consented to a censure and to the
payment of a $5,000,000 fine in settling the NASD action.
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In October 1994, a criminal complaint was filed with the United States
Magistrate for the Southern District of New York alleging that PSI committed
fraud in connection with the sale of certain limited partnership interests in
violation of federal securities laws. An agreement was simultaneously filed to
defer prosecution of these charges for a period of three years from the signing
of the agreement, provided that PSI complies with the terms of the agreement.
If, upon completion of the three year period, PSI has complied with the terms of
the agreement, no prosecution will be instituted by the United States for the
offenses charged in the complaint. If on the other hand, during the course of
the three year period, PSI violates the terms of the agreement, the U.S.
Attorney can then elect to pursue these charges. Under the terms of the
agreement, PSI agreed, among other things, to pay an additional $330,000,000
into the fund established by the SEC to pay restitution to investors who
purchased certain PSI limited partnership interests.
For more detailed information concerning the foregoing matters, see
"Distributor" in the Statement of Additional Information, a copy of which may be
obtained at no cost by calling (800) 225-1852.
The Fund is not affected by PSI's financial condition and is an entirely
separate legal entity from PSI, which has no beneficial ownership therein and
the Fund's assets which are held by State Street Bank and Trust Company, an
independent custodian, are separate and distinct from PSI.
FEE WAIVERS
PSI has agreed to limit its distribution fees for the Class A, Class B and
Class C shares as described under "Distributor." Fee waivers will increase total
return. See "Performance Information" in the "Statement of Additional
Information" and "Fund Expenses."
PORTFOLIO TRANSACTIONS
Prudential Securities may act as a broker or futures commission merchant for
the Fund, provided that the commissions, fees or other remuneration it receives
are fair and reasonable. See "Portfolio Transactions and Brokerage" in the
Statement of Additional Information.
CUSTODIAN AND TRANSFER AND DIVIDEND DISBURSING AGENT
State Street Bank and Trust Company, One Heritage Drive, North Quincy,
Massachusetts 02171, serves as Custodian for the portfolio securities of the
Series and cash and, in that capacity, maintains certain financial and
accounting books and records pursuant to an agreement with the Fund. Its mailing
address is P.O. Box 1713, Boston, Massachusetts 02105.
Prudential Mutual Fund Services LLC (PMFS), Raritan Plaza One, Edison, New
Jersey 08837, serves as Transfer Agent and Dividend Disbursing Agent and in
those capacities maintains certain books and records for the Fund. PMFS is a
wholly-owned subsidiary of PIFM. Its mailing address is P.O. Box 15005, New
Brunswick, New Jersey 08906-5005.
HOW THE FUND VALUES ITS SHARES
THE SERIES' NET ASSET VALUE PER SHARE OR NAV IS DETERMINED BY SUBTRACTING ITS
LIABILITIES FROM THE VALUE OF ITS ASSETS AND DIVIDING THE REMAINDER BY THE
NUMBER OF OUTSTANDING SHARES. NAV IS CALCULATED SEPARATELY FOR EACH CLASS. THE
TRUSTEES HAVE FIXED THE SPECIFIC TIME OF DAY FOR THE COMPUTATION OF THE NET
ASSET VALUE OF THE SERIES TO BE AS OF 4:15 P.M., NEW YORK TIME.
Portfolio securities are valued based on market quotations or, if not readily
available, at fair value as determined in good faith under procedures
established by the Trustees. Securities may also be valued based on values
provided by a pricing service. See "Net Asset Value" in the Statement of
Additional Information.
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The Series will compute its NAV once daily on days that the New York Stock
Exchange is open for trading except on days on which no orders to purchase, sell
or redeem shares have been received by the Series or days on which changes in
the value of the Series' portfolio securities do not materially affect the NAV.
Although the legal rights of each class of shares are substantially identical,
the different expenses borne by each class will result in different dividends.
As long as the Series declares dividends daily, the NAV of the Class A, Class B,
Class C and Class Z shares will generally be the same. It is expected, however,
that the Series' dividends will differ by approximately the amount of any
distribution and/or service fee expense accrual differential among the classes.
HOW THE FUND CALCULATES PERFORMANCE
FROM TIME TO TIME THE FUND MAY ADVERTISE THE YIELD, TAX EQUIVALENT YIELD AND
AVERAGE ANNUAL TOTAL RETURN AND AGGREGATE TOTAL RETURN OF THE SERIES IN
ADVERTISEMENTS OR SALES LITERATURE. YIELD, TAX EQUIVALENT YIELD, AND TOTAL
RETURN ARE CALCULATED SEPARATELY FOR CLASS A, CLASS B, CLASS C AND CLASS Z
SHARES. THESE FIGURES ARE BASED ON HISTORICAL EARNINGS AND ARE NOT INTENDED TO
INDICATE FUTURE PERFORMANCE. The yield refers to the income generated by an
investment in the Series over a one-month or 30-day period. This income is then
annualized; that is, the amount of income generated by the investment during
that 30-day period is assumed to be generated each 30-day period for twelve
periods and is shown as a percentage of the investment. The income earned on the
investment is also assumed to be reinvested at the end of the sixth 30-day
period. The tax equivalent yield is calculated similarly to the yield, except
that the yield is increased using a stated income tax rate to demonstrate the
taxable yield necessary to produce an after-tax yield equivalent to the Series.
The total return shows how much an investment in the Series would have increased
(decreased) over a specified period of time (I.E., one, five or ten years or
since inception of the Series) assuming that all distributions and dividends by
the Series were reinvested on the reinvestment dates during the period and less
all recurring fees. The aggregate total return reflects actual performance over
a stated period of time. Average annual total return is a hypothetical rate of
return that, if achieved annually, would have produced the same aggregate total
return if performance had been constant over the entire period. Average annual
total return smooths out variations in performance and takes into account any
applicable initial or contingent deferred sales charges. Neither average annual
total return nor aggregate total return takes into account any federal or state
income taxes which may be payable upon redemption. The Fund also may include
comparative performance information in advertising or marketing the shares of
the Series. Such performance information may include data from Lipper Analytical
Services, Inc., Morningstar Publications, Inc., other industry publications,
business periodicals and market indices. See "Performance Information" in the
Statement of Additional Information. Further performance information is
contained in the Series' annual and semi-annual reports to shareholders, which
may be obtained without charge. See "Shareholder Guide--Shareholder
Services--Reports to Shareholders."
TAXES, DIVIDENDS AND DISTRIBUTIONS
TAXATION OF THE FUND
THE SERIES HAS ELECTED TO QUALIFY AND INTENDS TO REMAIN QUALIFIED AS A
REGULATED INVESTMENT COMPANY UNDER THE INTERNAL REVENUE CODE. ACCORDINGLY, THE
SERIES WILL NOT BE SUBJECT TO FEDERAL INCOME TAXES ON ITS NET INVESTMENT INCOME
AND NET CAPITAL GAINS, IF ANY, THAT IT DISTRIBUTES TO ITS SHAREHOLDERS. TO THE
EXTENT NOT DISTRIBUTED BY THE SERIES, NET TAXABLE INVESTMENT INCOME AND CAPITAL
GAINS AND LOSSES ARE TAXABLE TO THE SERIES.
To the extent the Series invests in taxable obligations, it will earn taxable
investment income. Also, to the extent the Series engages in hedging
transactions in futures contracts and options thereon, it may earn both
short-term and long-term capital gain or loss. Under the Internal Revenue Code,
special rules apply to the treatment of certain options and futures contracts
(Section 1256 contracts). At the end of each year, such investments held by the
Series will be required to be "marked to market"
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for federal income tax purposes; that is, treated as having been sold at market
value. Sixty percent of any gain or loss recognized on these "deemed sales" and
on actual dispositions will be treated as long-term capital gain or loss, and
the remainder will be treated as short-term capital gain or loss. See
"Distributions and Tax Information" in the Statement of Additional Information.
Gain or loss realized by the Series from the sale of securities generally will
be treated as capital gain or loss; however, gain from the sale of certain
securities (including municipal obligations) will be treated as ordinary income
to the extent of any "market discount." Market discount generally is the
difference, if any, between the price paid by the Series for the security and
the principal amount of the security (or, in the case of a security issued at an
original issue discount, the revised issue price of the security). The market
discount rule does not apply to any security that was acquired by the Series at
its original issue. See "Distributions and Tax Information" in the Statement of
Additional Information.
TAXATION OF SHAREHOLDERS
In general, the character of tax-exempt interest distributed by the Series
will flow through as tax-exempt interest to its shareholders provided that 50%
or more of the value of its assets at the end of each quarter of its taxable
year is invested in state, municipal and other obligations, the interest on
which is excluded from gross income for federal income tax purposes. During
normal market conditions, at least 80% of the Series' total assets will be
invested in such obligations. See "How the Fund Invests--Investment Objective
and Policies."
Any dividends out of net taxable investment income, together with
distributions of net short-term gains (I.E., the excess of net short-term
capital gains over net long-term capital losses) distributed to shareholders,
will be taxable as ordinary income to the shareholder whether or not reinvested.
Any net capital gains (I.E., the excess of net capital gains from the sale of
assets held for more than 12 months over net short-term capital losses)
distributed to shareholders will be taxable as capital gains to the
shareholders, whether or not reinvested and regardless of the length of time a
shareholder has owned his or her shares. The maximum capital gains rate for
individuals is 28% with respect to assets held for more than 12 months, but not
more than 18 months, and 20% with respect to assets held for more than 18
months. The maximum capital gains rate for corporate shareholders currently is
the same as the maximum tax rate for ordinary income.
Any gain or loss realized upon a sale or redemption of Series shares by a
shareholder who is not a dealer in securities will be treated as capital gain or
loss. In the case of an individual, any such capital gain will be treated as
short-term capital loss if the shares were held for not more than 12 months,
mid-term gain, taxable at the maximum rate of 28%, if such shares were held for
more than 12, but not more than 18 months, and long-term capital gain, taxable
at the maximum rate of 20%, if such shares were held for more than 18 months. In
the case of a corporation, any such capital gain will be treated as long-term
capital gain, taxable at the same rates as ordinary income, if such shares were
held for more than 12 months. Any such capital loss will be treated as long-term
capital loss if the shares have been held more than one year and otherwise as
short-term capital loss. Any such loss with respect to shares that are held six
months or less, however, will be treated as long-term capital loss to the extent
of any capital gain distributions received by the shareholder. In addition, any
short-term capital loss will be disallowed to the extent of any tax-exempt
dividends received by the shareholder on shares that are held for six months or
less.
The Fund has obtained opinions of counsel to the effect that neither (i) the
conversion of Class B shares into Class A shares nor (ii) the exchange of any
class of the Series' shares for any other class of its shares constitutes a
taxable event for federal income tax purposes. However, such opinions are not
binding on the Internal Revenue Service.
CERTAIN INVESTORS MAY INCUR FEDERAL ALTERNATIVE MINIMUM TAX LIABILITY AS A
RESULT OF THEIR INVESTMENT IN THE FUND. Tax-exempt interest from certain
municipal obligations (I.E., certain private activity bonds issued after August
7, 1986) will be treated as an item of tax preference for purposes of the
alternative minimum tax. The Fund anticipates that, under regulations to be
promulgated, items of tax preference incurred by the Series will be attributed
to the Series' shareholders, although some portion of such items could be
allocated to the Series itself. Depending upon each shareholder's individual
circumstances, the attribution
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of items of tax preference incurred by the Series could result in liability for
the shareholder for the alternative minimum tax. Similarly, the Series could be
liable for the alternative minimum tax for items of tax preference attributed to
it. The Series is permitted to invest in municipal obligations of the type that
will produce items of tax preference.
Corporate shareholders in the Series also will have to take into account the
adjustment for current earnings for alternative minimum tax purposes. Corporate
shareholders should consult with their tax advisers with respect to this
potential adjustment.
Under California law, the taxation of regulated investment companies and their
shareholders was generally conformed to the federal tax law that was in effect
on January 1, 1997. Dividends paid by the Series and derived from interest on
obligations which (when held by an individual) pay interest excludable from
California personal income under California law will be exempt from the
California personal income tax (although not from the California franchise tax).
To the extent a portion of the dividends are derived from interest on debt
obligations other than those described directly above, such portion will be
subject to the California personal income tax even though it may be excludable
from gross income for federal income tax purposes. In addition, distributions of
short-term capital gains realized by the Fund will be taxable to the
shareholders as ordinary income. Distributions of long-term capital gains will
be taxable as such to the shareholders regardless of how long they held their
shares. Under California law, ordinary income and capital gains currently are
taxed at the same rate. With respect to non-corporate shareholders, California
does not treat tax-exempt interest as a tax preference item for purposes of its
alternative minimum tax. To the extent a corporate shareholder receives
dividends which are exempt from California taxation, a portion of such dividends
may be subject to the alternative minimum tax.
Interest on indebtedness incurred or continued to purchase or carry shares of
the Series will not be deductible for federal or California purposes.
Shareholders are advised to consult their own tax advisers regarding specific
questions as to federal, state or local taxes. See "Distributions and Tax
Information" in the Statement of Additional Information.
WITHHOLDING TAXES
Under the Internal Revenue Code, the Series is required to withhold and remit
to the U.S. Treasury 31% of redemption proceeds on the accounts of certain
shareholders who fail to furnish their tax identification numbers on IRS Form
W-9 (or IRS Form W-8 in the case of certain foreign shareholders) with the
required certifications regarding the shareholder's status under the federal
income tax law. Such withholding is also required on taxable dividends and
capital gain distributions made by the Series unless it is reasonably expected
that at least 95% of the dividends of the Series are comprised of tax-exempt
dividends.
Dividends of net taxable investment income and distributions of net short-term
capital gains paid to a shareholder (including a shareholder acting as a nominee
or fiduciary) who is a nonresident alien individual, a foreign corporation or a
foreign partnership (foreign shareholder) are subject to a 30% (or lower treaty
rate) withholding tax upon the gross amount of the dividends unless the
dividends are effectively connected with a U.S. trade or business conducted by
the foreign shareholder. Capital gain dividends paid to a foreign shareholder
are generally not subject to withholding tax. A foreign shareholder will,
however, be required to pay U.S. income tax on any dividends and capital gain
distributions which are effectively connected with a U.S. trade or business of
the foreign shareholder.
DIVIDENDS AND DISTRIBUTIONS
THE SERIES EXPECTS TO DECLARE DAILY AND PAY MONTHLY DIVIDENDS OF NET
INVESTMENT INCOME, IF ANY, AND MAKE DISTRIBUTIONS AT LEAST ANNUALLY OF ANY
CAPITAL GAINS IN EXCESS OF CAPITAL LOSSES. For federal income tax purposes, the
Series had a capital loss carryforward as of August 31, 1997, of approximately
$2,945,800, which expires in 2003. Such carryforward is after utilization of
approximately $1,245,700 of net taxable gains realized and recognized during the
fiscal year ended August 31, 1997. Accordingly, no capital gains distributions
are expected to be paid to shareholders until net gains have been realized in
excess of such amount. Dividends paid by the Series with respect to each class
of shares, to the extent any dividends are paid, will be calculated in the same
manner, at the same time, on the same day and will be in the same amount except
that each such class
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(other than Class Z) will bear its own distribution charges, generally resulting
in lower dividends for Class B and Class C shares in relation to Class A and
Class Z shares and lower dividends for Class A shares in relation to Class Z
shares. Distributions of net capital gains, if any, will be paid in the same
amount for each class of shares. See "How the Fund Values its Shares."
DIVIDENDS AND DISTRIBUTIONS WILL BE PAID IN ADDITIONAL SHARES OF THE SERIES
BASED ON THE NAV OF EACH CLASS OF THE SERIES ON THE PAYMENT DATE AND RECORD
DATE, RESPECTIVELY, OR SUCH OTHER DATE AS THE TRUSTEES MAY DETERMINE, UNLESS THE
SHAREHOLDER ELECTS IN WRITING NOT LESS THAN FIVE BUSINESS DAYS PRIOR TO THE
RECORD DATE TO RECEIVE SUCH DIVIDENDS AND DISTRIBUTIONS IN CASH. Such election
should be submitted to Prudential Mutual Fund Services LLC, Attention: Account
Maintenance, P.O. Box 15015, New Brunswick, New Jersey 08906-5015. If you hold
shares through Prudential Securities, you should contact your financial adviser
to elect to receive dividends and distributions in cash. The Fund will notify
each shareholder after the close of the Fund's taxable year of both the dollar
amount and the taxable status of that year's dividends and distributions on a
per share basis.
GENERAL INFORMATION
DESCRIPTION OF SHARES
THE FUND WAS ESTABLISHED AS A MASSACHUSETTS BUSINESS TRUST ON MAY 18, 1984, BY
A DECLARATION OF TRUST. The Fund's activities are supervised by its Trustees.
The Declaration of Trust permits the Trustees to issue an unlimited number of
full and fractional shares in separate series, currently designated as the
California Series, the California Income Series and the California Money Market
Series. The Series is authorized to issue an unlimited number of shares, divided
into four classes, designated Class A, Class B, Class C and Class Z. Each class
of shares represents an interest in the same assets of the Series and is
identical in all respects except that (i) each class is subject to different
sales charges and distribution and/or service fees (except for Class Z shares
which are not subject to any sales charges and distribution and/or service
fees), which may affect performance, (ii) each class has exclusive voting rights
on any matter submitted to shareholders that relates solely to its arrangement
and has separate voting rights on any matter submitted to shareholders in which
the interests of one class differ from the interests of any other class, (iii)
each class has a different exchange privilege, (iv) only Class B shares have a
conversion feature and (v) Class Z shares are offered exclusively for sale to a
limited group of investors. See "How the Fund is Managed-- Distributor." In
accordance with the Fund's Declaration of Trust, the Trustees may authorize the
creation of additional series and classes within such series, with such
preferences, privileges, limitations and voting and dividend rights as the
Trustees may determine.
Shares of the Fund, when issued, are fully paid, nonassessable, fully
transferable and redeemable at the option of the holder. Shares are also
redeemable at the option of the Fund under certain circumstances as described
under "Shareholder Guide--How to Sell Your Shares." Each share of each class of
the Series is equal as to earnings, assets and voting privileges, except as
noted above, and each class (with the exception of Class Z shares, which are not
subject to any distribution or service fees) bears the expenses related to the
distribution of its shares. Except for the conversion feature applicable to the
Class B shares, there are no conversion, preemptive or other subscription
rights. In the event of liquidation, each share of beneficial interest in each
series is entitled to its portion of all of the Fund's assets after all debt and
expenses of the Fund have been paid. Since Class B and Class C shares generally
bear higher distribution expenses than Class A shares, the liquidation proceeds
to shareholders of those classes are likely to be lower than to Class A
shareholders and to Class Z shareholders, whose shares are not subject to any
distribution and/or service fees. The Fund's shares do not have cumulative
voting rights for the election of Trustees.
THE FUND DOES NOT INTEND TO HOLD ANNUAL MEETINGS OF SHAREHOLDERS UNLESS
OTHERWISE REQUIRED BY LAW. THE FUND WILL NOT BE REQUIRED TO HOLD MEETINGS OF
SHAREHOLDERS UNLESS, FOR EXAMPLE, THE ELECTION OF TRUSTEES IS REQUIRED TO BE
ACTED
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UPON BY SHAREHOLDERS UNDER THE INVESTMENT COMPANY ACT. SHAREHOLDERS HAVE CERTAIN
RIGHTS, INCLUDING THE RIGHT TO CALL A MEETING UPON A VOTE OF 10% OF THE FUND'S
OUTSTANDING SHARES FOR THE PURPOSE OF VOTING ON THE REMOVAL OF ONE OR MORE
TRUSTEES OR TO TRANSACT ANY OTHER BUSINESS.
The Declaration of Trust and the By-Laws of the Fund are designed to make the
Fund similar in certain respects to a Massachusetts business corporation. The
principal distinction between a Massachusetts business corporation and a
Massachusetts business trust relates to shareholder liability. Under
Massachusetts law, shareholders of a business trust may, under certain
circumstances, be held personally liable as partners for the obligations of the
Fund, which is not the case with a corporation. The Declaration of Trust of the
Fund provides that shareholders shall not be subject to any personal liability
for the acts or obligations of the Fund and that every written obligation,
contract, instrument or undertaking made by the Fund shall contain a provision
to the effect that the shareholders are not individually bound thereunder.
ADDITIONAL INFORMATION
This Prospectus, including the Statement of Additional Information which has
been incorporated by reference herein, does not contain all the information set
forth in the Registration Statement filed by the Fund with the SEC under the
Securities Act. Copies of the Registration Statement may be obtained at a
reasonable charge from the SEC or may be examined, without charge, at the office
of the SEC in Washington, D.C.
SHAREHOLDER GUIDE
HOW TO BUY SHARES OF THE FUND
YOU MAY PURCHASE SHARES OF THE SERIES THROUGH PRUDENTIAL SECURITIES, PRUSEC OR
DIRECTLY FROM THE FUND, THROUGH ITS TRANSFER AGENT, PRUDENTIAL MUTUAL FUND
SERVICES LLC (PMFS OR THE TRANSFER AGENT), ATTENTION: INVESTMENT SERVICES, P.O.
BOX 15020, NEW BRUNSWICK, NEW JERSEY 08906-5020. Participants in programs
sponsored by Prudential Retirement Services should contact their client
representative for more information about Class Z shares. The purchase price is
the NAV next determined following receipt of an order in proper form by the
Transfer Agent or Prudential Securities plus a sales charge which, at your
option, may be imposed either (i) at the time of purchase (Class A shares) or
(ii) on a deferred basis (Class B or Class C shares). Class Z shares are offered
to a limited group of investors at net asset value without any sales charge.
Payment may be made by wire, check or through your brokerage account. See
"Alternative Purchase Plan" below. See also "How the Fund Values its Shares."
An investment in the Series may not be appropriate for tax-exempt or
tax-deferred investors. Such investors should consult their own tax advisers.
The minimum initial investment is $1,000 for Class A and Class B shares and
$5,000 for Class C shares, except that the minimum initial investment for Class
C shares may be waived from time to time. The minimum subsequent investment is
$100 for Class A, Class B and Class C shares. Class Z shares are not subject to
any minimum investment requirements. All minimum investment requirements are
waived for certain employee savings plans. For purchases made through the
Automatic Savings Accumulation Plan, the minimum initial and subsequent
investment is $50. See "Shareholder Services" below.
Application forms can be obtained from PMFS, Prudential Securities or Prusec.
If a share certificate is desired, it must be requested in writing for each
transaction. Certificates are issued only for full shares. Shareholders who hold
their shares through Prudential Securities will not receive share certificates.
The Fund reserves the right to reject any purchase order (including an
exchange into the Series) or to suspend or modify the continuous offering of its
shares. See "How to Sell Your Shares" below.
22
<PAGE>
Your dealer is responsible for forwarding payment promptly to the Fund. The
Distributor reserves the right to cancel any purchase order for which payment
has not been received by the third business day following the investment.
Transactions in shares of the Series may be subject to postage and handling
charges imposed by your dealer.
PURCHASE BY WIRE. For an initial purchase of shares of the Series by wire, you
must first telephone PMFS at (800) 225-1852 (toll-free) to receive an account
number. The following information will be requested: your name, address, tax
identification number, class election, dividend distribution election, amount
being wired and wiring bank. Instructions should then be given by you to your
bank to transfer funds by wire to State Street Bank and Trust Company (State
Street), Boston, Massachusetts, Custody and Shareholder Services Division,
Attention: Prudential California Municipal Fund (California Series), specifying
on the wire the account number assigned by PMFS and your name and identifying
the class in which you are eligible to invest (Class A, Class B, Class C or
Class Z shares) and the name of the Series.
If you arrange for receipt by State Street of Federal Funds prior to the
calculation of NAV (4:15 P.M., New York time), on a business day, you may
purchase shares of the Series as of that day. See "Net Asset Value" in the
Statement of Additional Information.
In making a subsequent purchase order by wire, you should wire State Street
directly and should be sure that the wire specifies Prudential California
Municipal Fund (California Series), Class A, Class B, Class C or Class Z shares
and your name and individual account number. It is not necessary to call PMFS to
make subsequent purchase orders utilizing Federal Funds. The minimum amount
which may be invested by wire is $1,000.
ALTERNATIVE PURCHASE PLAN
THE SERIES OFFERS FOUR CLASSES OF SHARES (CLASS A, CLASS B, CLASS C AND CLASS
Z SHARES) WHICH ALLOWS YOU TO CHOOSE THE MOST BENEFICIAL SALES CHARGE STRUCTURE
FOR YOUR INDIVIDUAL CIRCUMSTANCES GIVEN THE AMOUNT OF THE PURCHASE, THE LENGTH
OF TIME YOU EXPECT TO HOLD THE SHARES AND OTHER RELEVANT CIRCUMSTANCES
(ALTERNATIVE PURCHASE PLAN).
<TABLE>
<CAPTION>
ANNUAL 12b-1 FEES
(AS A % OF AVERAGE
SALES CHARGE DAILY NET ASSETS) OTHER INFORMATION
----------------------------------- ----------------------------------- -----------------------------------
<S> <C> <C> <C>
CLASS A Maximum initial sales charge of 3% .30 of 1% (currently being charged Initial sales charge waived or
of the public offering price at a rate of .10 of 1%) reduced for certain purchases
CLASS B Maximum contingent deferred sales .50 of 1% Shares convert to Class A shares
charge or CDSC of 5% of the lesser approximately seven years after
of the amount invested or the purchase
redemption proceeds; declines to
zero after six years
CLASS C Maximum CDSC of 1% of the lesser of 1% (currently being charged at a Shares do not convert to another
the amount invested or the rate of .75 of 1%) class
redemption proceeds on redemptions
made within one year of purchase
CLASS Z None None Sold to a limited group of
investors
</TABLE>
The four classes of shares represent an interest in the same portfolio of
investments of the Series and have the same rights, except that (i) each class
(with the exception of Class Z shares, which are not subject to any distribution
or service fees) bears the separate expenses of its Rule 12b-1 distribution and
service plan, (ii) each class has exclusive voting rights on any matter
submitted to shareholders that relates solely to its arrangement and has
separate voting rights on any matter submitted to shareholders in which the
interests of one class differ from the interests of any other class, and (iii)
only Class B shares have a
23
<PAGE>
conversion feature. The four classes also have separate exchange privileges. See
"How to Exchange Your Shares" below. The income attributable to each class and
the dividends payable on the shares of each class will be reduced by the amount
of the distribution fee, if any, of each class. Class B and Class C shares bear
the expenses of a higher distribution fee which will generally cause them to
have higher expense ratios and to pay lower dividends than the Class A and Class
Z shares.
Financial advisers and other sales agents who sell shares of the Series will
receive different compensation for selling Class A, Class B, Class C and Class Z
shares and will generally receive more compensation initially for selling Class
A and Class B shares than for selling Class C or Class Z shares.
IN SELECTING A PURCHASE ALTERNATIVE, YOU SHOULD CONSIDER, AMONG OTHER THINGS,
(1) the length of time you expect to hold your investment, (2) the amount of any
applicable sales charge (whether imposed at the time of purchase or redemption)
and distribution-related fees, as noted above, (3) whether you qualify for any
reduction or waiver of any applicable sales charge, (4) the various exchange
privileges among the different classes of shares (see "How to Exchange Your
Shares" below) and (5) the fact that Class B shares automatically convert to
Class A shares approximately seven years after purchase (see "Conversion
Feature--Class B Shares" below).
The following is provided to assist you in determining which method of
purchase best suits your individual circumstances and is based on current fees
and expenses being charged to the Series:
If you intend to hold your investment in the Series for less than 5 years and
do not qualify for a reduced sales charge on Class A shares, since Class A
shares are subject to a maximum initial sales charge of 3% and Class B shares
are subject to a CDSC of 5% which declines to zero over a 6 year period, you
should consider purchasing Class C shares over either Class A or Class B shares.
If you intend to hold your investment for 5 years or more and do not qualify
for a reduced sales charge on Class A shares, since Class B shares convert to
Class A shares approximately 7 years after purchase and because all of your
money would be invested initially in the case of Class B shares, you should
consider purchasing Class B shares over either Class A or Class C shares.
If you qualify for a reduced sales charge on Class A shares, it may be more
advantageous for you to purchase Class A shares over either Class B or Class C
shares regardless of how long you intend to hold your investment. However,
unlike Class B and Class C shares, you would not have all of your money invested
initially because the sales charge on Class A shares is deducted at the time of
purchase.
If you do not qualify for a reduced sales charge on Class A shares and you
purchase Class C shares, you would have to hold your investment for more than 4
years for the higher cumulative annual distribution-related fee on those shares
to exceed the initial sales charge plus cumulative annual distribution-related
fee on Class A shares. This does not take into account the time value of money,
which further reduces the impact of the higher Class C distribution-related fee
on the investment, fluctuations in net asset value, the effect of the return on
the investment over this period of time or redemptions when the CDSC is
applicable.
ALL PURCHASES OF $1 MILLION OR MORE, EITHER AS PART OF A SINGLE INVESTMENT OR
UNDER RIGHTS OF ACCUMULATION OR LETTERS OF INTENT, MUST BE FOR CLASS A SHARES
UNLESS THE PURCHASER IS ELIGIBLE TO PURCHASE CLASS Z SHARES. See "Reduction and
Waiver of Initial Sales Charges" and "Class Z Shares" below.
24
<PAGE>
CLASS A SHARES
The offering price of Class A shares for investors choosing the initial sales
charge alternative is the next determined NAV plus a sales charge (expressed as
a percentage of the offering price and of the amount invested) as shown in the
following table:
<TABLE>
<CAPTION>
SALES CHARGE AS SALES CHARGE AS DEALER CONCESSION
PERCENTAGE OF PERCENTAGE OF AS PERCENTAGE OF
AMOUNT OF PURCHASE OFFERING PRICE AMOUNT INVESTED OFFERING PRICE
------------------------ --------------- --------------- -----------------
<S> <C> <C> <C>
Less than $99,999 3.00% 3.09% 3.00%
$100,000 to $249,999 2.50 2.56 2.50
$250,000 to $499,999 1.50 1.52 1.50
$500,000 to $999,999 1.00 1.01 1.00
$1,000,000 and above None None None
</TABLE>
The Distributor may reallow the entire initial sales charge to dealers.
Selling dealers may be deemed to be underwriters, as that term is defined in the
Securities Act.
In connection with the sale of Class A shares at NAV (without payment of an
initial sales charge), the Manager, the Distributor or one of their affiliates
will pay dealers, financial advisers and other persons which distribute shares a
finders' fee from its own resources based on a percentage of the net asset value
of shares sold by such persons.
REDUCTION AND WAIVER OF INITIAL SALES CHARGES. Reduced sales charges are
available through Rights of Accumulation and Letters of Intent. Shares of the
Fund and shares of other Prudential Mutual Funds (excluding money market funds
other than those acquired pursuant to the exchange privilege) may be aggregated
to determine the applicable reduction. See "Purchase and Redemption of Fund
Shares--Reduction and Waiver of Initial Sales Charges--Class A Shares" in the
Statement of Additional Information.
PRUARRAY SAVINGS PROGRAM. Class A shares are also offered at net asset value
to employees of companies that enter into a written agreement with Prudential
Retirement Services to participate in the PruArray Savings Program. Under this
Program, a limited number of Prudential Mutual Funds are available for purchase
at net asset value by Savings Accumulation Plans of the company's employees. The
Program is available only to employees who open a Savings Accumulation Plan
account with the Transfer Agent. The program is offered to companies that have
at least 250 eligible employees.
SPECIAL RULES APPLICABLE TO RETIREMENT PLANS. After a PruArray Plan qualifies
to purchase Class A shares at NAV, all subsequent purchases will be made at NAV.
OTHER WAIVERS. Class A shares may be purchased at NAV, through Prudential
Securities or the Transfer Agent, by the following persons: (a) officers and
current and former Directors/Trustees of the Prudential Mutual Funds (including
the Fund), (b) employees of Prudential Securities and PIFM and their
subsidiaries and members of the families of such persons who maintain an
"employee related" account at Prudential Securities or the Transfer Agent, (c)
employees of subadvisers of the Prudential Mutual Funds provided that the
purchases at NAV are permitted by such person's employer, (d) Prudential
employees and special agents of Prudential and its subsidiaries and all persons
who have retired directly from active service with Prudential or one of its
subsidiaries, (e) registered representatives and employees of dealers who have
entered into a selected dealer agreement with Prudential Securities provided
that purchases at NAV are permitted by such person's employer and (f) investors
who have a business relationship with a financial adviser who joined Prudential
Securities from another investment firm, provided that (i) the purchase is made
within 180 days of the commencement of the financial adviser's employment at
Prudential Securities or within one year in the case of benefit plans, (ii) the
purchase is made with proceeds of a redemption of shares of any open-end
non-money market fund sponsored by the financial adviser's previous employer
(other than a fund which imposes a distribution or service fee of .25 of 1% or
less) and (iii) the financial adviser served as the client's broker on the
previous purchases.
You must notify the Transfer Agent either directly or through Prudential
Securities or Prusec that you are entitled to the reduction or waiver of the
sales charge. The reduction or waiver will be granted subject to confirmation of
your entitlement. No
25
<PAGE>
initial sales charges are imposed upon Class A shares acquired upon the
reinvestment of dividends and distributions. See "Purchase and Redemption of
Fund Shares--Reduction and Waiver of Initial Sales Charges--Class A Shares" in
the Statement of Additional Information.
CLASS B AND CLASS C SHARES
The offering price of Class B and Class C shares for investors choosing one of
the deferred sales charge alternatives is the NAV next determined following
receipt of an order by the Transfer Agent or Prudential Securities. Although
there is no sales charge imposed at the time of purchase, redemptions of Class B
and Class C shares may be subject to a CDSC. See "How to Sell Your
Shares--Contingent Deferred Sales Charges" below. The Distributor will pay sales
commissions of up to 4% of the purchase price of Class B shares to dealers,
financial advisers and other persons who sell Class B shares at the time of sale
from its own resources. This facilitates the ability of the Fund to sell the
Class B shares without an initial sales charge being deducted at the time of
purchase. The Distributor anticipates that it will recoup its advancement of
sales commissions from the combination of the CDSC and the distribution fee. See
"How the Fund is Managed--Distributor." In connection with the sale of Class C
shares, the Distributor will pay dealers, financial advisers and other persons
which distribute Class C shares a sales commission of up to 1% of the purchase
price at the time of the sale.
CLASS Z SHARES
Class Z shares of the Fund are available for purchase by the following
categories of investors:
(i) participants in any fee-based program or trust program sponsored by
Prudential Securities, The Prudential Savings Bank, F.S.B. (or any affiliate)
which includes mutual funds as investment options and for which the Fund is an
available option; (ii) current and former Directors/Trustees of the Prudential
Mutual Funds (including the Fund); and (iii) employees of Prudential and/ or
Prudential Securities who participate in a Prudential-sponsored employee saving
plan.
In connection with the sale of Class Z shares, the Manager, the Distributor or
one of their affiliates may pay dealers, financial advisers and other persons
which distribute shares a finders' fee based on a percentage of the net asset
value of shares sold by such persons.
HOW TO SELL YOUR SHARES
YOU CAN REDEEM YOUR SHARES OF THE SERIES AT ANY TIME FOR CASH AT THE NAV NEXT
DETERMINED AFTER THE REDEMPTION REQUEST IS RECEIVED IN PROPER FORM BY THE
TRANSFER AGENT OR PRUDENTIAL SECURITIES. SEE "HOW THE FUND VALUES ITS SHARES."
In certain cases, however, redemption proceeds will be reduced by the amount of
any applicable contingent deferred sales charge, as described below. See
"Contingent Deferred Sales Charges" below.
IF YOU HOLD SHARES OF THE SERIES THROUGH PRUDENTIAL SECURITIES, YOU MUST
REDEEM SHARES THROUGH PRUDENTIAL SECURITIES. PLEASE CONTACT YOUR PRUDENTIAL
SECURITIES FINANCIAL ADVISER.
IF YOU HOLD SHARES IN NON-CERTIFICATE FORM, A WRITTEN REQUEST FOR REDEMPTION
SIGNED BY YOU EXACTLY AS THE ACCOUNT IS REGISTERED IS REQUIRED.
IF YOU HOLD CERTIFICATES, THE CERTIFICATES, SIGNED IN THE NAME(S) SHOWN ON THE
FACE OF THE CERTIFICATES, MUST BE RECEIVED BY THE TRANSFER AGENT IN ORDER FOR
THE REDEMPTION REQUEST TO BE PROCESSED. IF REDEMPTION IS REQUESTED BY A
CORPORATION, PARTNERSHIP, TRUST OR FIDUCIARY, WRITTEN EVIDENCE OF AUTHORITY
ACCEPTABLE TO THE TRANSFER AGENT MUST BE SUBMITTED BEFORE SUCH REQUEST WILL BE
ACCEPTED. All correspondence and documents concerning redemptions should be sent
to the Fund in care of its Transfer Agent, Prudential Mutual Fund Services LLC,
Attention: Redemption Services, P.O. Box 15010, New Brunswick, New Jersey
08906-5010.
If the proceeds of the redemption (a) exceed $50,000, (b) are to be paid to a
person other than the record owner, (c) are to be sent to an address other than
the address on the Transfer Agent's records, or (d) are to be paid to a
corporation, partnership, trust
26
<PAGE>
or fiduciary, the signature(s) on the redemption request and on the
certificates, if any, or stock power must be guaranteed by an "eligible
guarantor institution." An "eligible guarantor institution" includes any bank,
broker, dealer or credit union. The Transfer Agent reserves the right to request
additional information from, and make reasonable inquiries of, any eligible
guarantor institution. For clients of Prusec, a signature guarantee may be
obtained from the agency or office manager of most Prudential Insurance and
Financial Services or Preferred Services offices.
PAYMENT FOR SHARES PRESENTED FOR REDEMPTION WILL BE MADE BY CHECK WITHIN SEVEN
DAYS AFTER RECEIPT BY THE TRANSFER AGENT OF THE CERTIFICATE AND/OR WRITTEN
REQUEST EXCEPT AS INDICATED BELOW. IF YOU HOLD SHARES THROUGH PRUDENTIAL
SECURITIES, PAYMENT FOR SHARES PRESENTED FOR REDEMPTION WILL BE CREDITED TO YOUR
PRUDENTIAL SECURITIES ACCOUNT, UNLESS YOU INDICATE OTHERWISE. Such payment may
be postponed or the right of redemption suspended at times (a) when the New York
Stock Exchange is closed for other than customary weekends and holidays, (b)
when trading on such Exchange is restricted, (c) when an emergency exists as a
result of which disposal by the Series of securities owned by it is not
reasonably practicable or it is not reasonably practicable for the Series fairly
to determine the value of its net assets, or (d) during any other period when
the SEC, by order, so permits; provided that applicable rules and regulations of
the SEC shall govern as to whether the conditions prescribed in (b), (c) or (d)
exist.
PAYMENT FOR REDEMPTION OF RECENTLY PURCHASED SHARES WILL BE DELAYED UNTIL THE
FUND OR ITS TRANSFER AGENT HAS BEEN ADVISED THAT THE PURCHASE CHECK HAS BEEN
HONORED, UP TO 10 CALENDAR DAYS FROM THE TIME OF RECEIPT OF THE PURCHASE CHECK
BY THE TRANSFER AGENT. SUCH DELAY MAY BE AVOIDED BY PURCHASING SHARES BY WIRE OR
BY CERTIFIED OR CASHIER'S CHECK.
REDEMPTION IN KIND. If the Trustees determine that it would be detrimental to
the best interests of the remaining shareholders of the Fund to make payment
wholly or partly in cash, the Fund may pay the redemption price in whole or in
part by a distribution in kind of securities from the investment portfolio of
the Series of the Fund, in lieu of cash, in conformity with applicable rules of
the SEC. Securities will be readily marketable and will be valued in the same
manner as in a regular redemption. See "How the Fund Values its Shares." If your
shares are redeemed in kind, you will incur transaction costs in converting the
assets into cash. The Fund, however, has elected to be governed by Rule 18f-1
under the Investment Company Act, under which the Fund is obligated to redeem
shares solely in cash up to the lesser of $250,000 or 1% of the net asset value
of the Fund during any 90-day period for any one shareholder.
INVOLUNTARY REDEMPTION. In order to reduce expenses of the Fund, the Trustees
may redeem all of the shares of any shareholder, other than a shareholder which
is an IRA or other tax-deferred retirement plan, whose account has a net asset
value of less than $500 due to a redemption. The Fund will give such
shareholders 60 days' prior written notice in which to purchase sufficient
additional shares to avoid such redemption. No contingent deferred sales charge
will be imposed on any such involuntary redemption.
90-DAY REPURCHASE PRIVILEGE. If you redeem your shares and have not previously
exercised the repurchase privilege, you may reinvest any portion or all of the
proceeds of such redemption in shares of the Series at the NAV next determined
after the order is received, which must be within 90 days after the date of the
redemption. Any CDSC paid in connection with such redemption will be credited
(in shares) to your account. (If less than a full repurchase is made, the credit
will be on a PRO RATA basis.) You must notify the Fund's Transfer Agent, either
directly or through Prudential Securities, at the time the repurchase privilege
is exercised to adjust your account for the CDSC you previously paid.
Thereafter, any redemptions will be subject to the CDSC applicable at the time
of the redemption. See "Contingent Deferred Sales Charges" below. Exercise of
the repurchase privilege may affect the federal tax treatment of any gain
realized upon redemption. See "Distributions and Tax Information" in the
Statement of Additional Information.
CONTINGENT DEFERRED SALES CHARGES
Redemptions of Class B shares will be subject to a contingent deferred sales
charge or CDSC declining from 5% to zero over a six-year period. Class C shares
redeemed within one year of purchase will be subject to a 1% CDSC. The CDSC will
be deducted from the redemption proceeds and reduce the amount paid to you. The
CDSC will be imposed on any redemption by you which
27
<PAGE>
reduces the current value of your Class B or Class C shares to an amount which
is lower than the amount of all payments by you for shares during the preceding
six years, in the case of Class B shares, and one year, in the case of Class C
shares. A CDSC will be applied on the lesser of the original purchase price or
the current value of the shares being redeemed. Increases in the value of your
shares or shares acquired through reinvestment of dividends or distributions are
not subject to a CDSC. The amount of any contingent deferred sales charge will
be paid to and retained by the Distributor. See "How the Fund Is
Managed--Distributor" and "Waiver of the Contingent Deferred Sales
Charges--Class B Shares" below.
The amount of the CDSC, if any, will vary depending on the number of years
from the time of payment for the purchase of shares until the time of redemption
of such shares. Solely for purposes of determining the number of years from the
time of any payment for the purchase of shares, all payments during a month will
be aggregated and deemed to have been made on the last day of the month. The
CDSC will be calculated from the first day of the month after the initial
purchase, excluding the time shares were held in a money market fund. See "How
to Exchange Your Shares" below.
The following table sets forth the rates of the CDSC applicable to redemptions
of Class B shares:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED SALES
CHARGE AS A PERCENTAGE
YEAR SINCE PURCHASE OF THE DOLLARS INVESTED OR
PAYMENT MADE REDEMPTION PROCEEDS
------------------------------ ------------------------------
<S> <C>
First......................... 5.0%
Second........................ 4.0
Third......................... 3.0
Fourth........................ 2.0
Fifth......................... 1.0
Sixth......................... 1.0
Seventh....................... None
</TABLE>
In determining whether a CDSC is applicable to a redemption, the calculation
will be made in a manner that results in the lowest possible rate. It will be
assumed that the redemption is made first of amounts representing shares
acquired pursuant to the reinvestment of dividends and distributions; then of
amounts representing the increase in net asset value above the total amount of
payments for the purchase of Series shares made during the preceding six years
(five years for Class B shares purchased prior to January 22, 1990); then of
amounts representing the cost of shares held beyond the applicable CDSC period;
and finally, of amounts representing the cost of shares held for the longest
period of time within the applicable CDSC period.
For example, assume you purchased 100 Class B shares at $10 per share for a
cost of $1,000. Subsequently, you acquired 5 additional Class B shares through
dividend reinvestment. During the second year after the purchase you decided to
redeem $500 of your investment. Assuming at the time of the redemption the NAV
had appreciated to $12 per share, the value of your Class B shares would be
$1,260 (105 shares at $12 per share). The CDSC would not be applied to the value
of the reinvested dividend shares and the amount which represents appreciation
($260). Therefore, $240 of the $500 redemption proceeds ($500 minus $260) would
be charged at a rate of 4% (the applicable rate in the second year after
purchase) for a total CDSC of $9.60.
For federal income tax purposes, the amount of the CDSC will reduce the gain
or increase the loss, as the case may be, on the amount recognized on the
redemption of shares.
WAIVER OF THE CONTINGENT DEFERRED SALES CHARGES--CLASS B SHARES. The CDSC will
be waived in the case of a redemption following the death or disability of a
shareholder or, in the case of a trust account, following the death or
disability of the grantor. The waiver is available for total or partial
redemptions of shares owned by a person, either individually or in joint tenancy
(with rights of survivorship), at the time of death or initial determination of
disability, provided that the shares were purchased prior to death or
disability. In addition, the CDSC will be waived on redemptions of shares held
by a Trustee of the Fund.
SYSTEMATIC WITHDRAWAL PLAN. The contingent deferred sales charge (CDSC) will
be waived (or reduced) on certain redemptions from a Systematic Withdrawal Plan.
On an annual basis, up to 12% of the total dollar amount subject to the CDSC
28
<PAGE>
may be redeemed without charge. The Transfer Agent will calculate the total
amount available for this waiver annually on the anniversary of your purchase
or, for shares purchased prior to March 1, 1997, on March 1 of the current year.
The CDSC will be waived (or reduced) on redemptions until this threshold 12%
amount is reached.
You must notify the Fund's Transfer Agent either directly or through
Prudential Securities or Prusec, at the time of redemption, that you are
entitled to waiver of the CDSC and provide the Transfer Agent with such
supporting documentation as it may deem appropriate.The waiver will be granted
subject to confirmation of your entitlement. See "Purchase and Redemption of
Fund Shares--Waiver of the Contingent Deferred Sales Charge--Class B Shares" in
the Statement of Additional Information.
A quantity discount may apply to redemptions of Class B shares purchased prior
to August 1, 1994. See "Purchase and Redemption of Fund Shares--Quantity
Discount--Class B Shares Purchased Prior to August 1, 1994" in the Statement of
Additional Information.
CONVERSION FEATURE--CLASS B SHARES
Class B shares will automatically convert to Class A shares on a quarterly
basis approximately seven years after purchase. Conversions will be effected at
relative net asset value without the imposition of any additional sales charge.
Since the Fund tracks amounts paid rather than the number of shares bought on
each purchase of Class B shares, the number of Class B shares eligible to
convert to Class A shares (excluding shares acquired through the automatic
reinvestment of dividends and other distributions) (the Eligible Shares) will be
determined on each conversion date in accordance with the following formula: (i)
the ratio of (a) the amounts paid for Class B shares purchased at least seven
years prior to the conversion date to (b) the total amount paid for all Class B
shares purchased and then held in your account (ii) multiplied by the total
number of Class B shares purchased and then held in your account. Each time any
Eligible Shares in your account convert to Class A shares, all shares or amounts
representing Class B shares then in your account that were acquired through the
automatic reinvestment of dividends and other distributions will convert to
Class A shares.
For purposes of determining the number of Eligible Shares, if the Class B
shares in your account on any conversion date are the result of multiple
purchases at different net asset values per share, the number of Eligible Shares
calculated as described above will generally be either more or less than the
number of shares actually purchased approximately seven years before such
conversion date. For example, if 100 shares were initially purchased at $10 per
share (for a total of $1,000) and a second purchase of 100 shares was
subsequently made at $11 per share (for a total of $1,100), 95.24 shares would
convert approximately seven years from the initial purchase (I.E., $1,000
divided by $2,100 (47.62%) multiplied by 200 shares equals 95.24 shares). The
Manager reserves the right to modify the formula for determining the number of
Eligible Shares in the future as it deems appropriate on notice to shareholders.
Since annual distribution-related fees are lower for Class A shares than Class
B shares, the per share net asset value of the Class A shares may be higher than
that of the Class B shares at the time of conversion. Thus, although the
aggregate dollar value will be the same, you may receive fewer Class A shares
than Class B shares converted. See "How the Fund Values its Shares."
For purposes of calculating the applicable holding period for conversions, all
payments for Class B shares during a month will be deemed to have been made on
the last day of the month, or for Class B shares acquired through exchange, or a
series of exchanges, on the last day of the month in which the original payment
for purchases of such Class B shares was made. For Class B shares previously
exchanged for shares of a money market fund, the time period during which such
shares were held in the money market fund will be excluded. For example, Class B
shares held in a money market fund for one year will not convert to Class A
shares until approximately eight years from purchase. For purposes of measuring
the time period during which shares are held in a money market fund, exchanges
will be deemed to have been made on the last day of the month. Class B shares
acquired through exchange will convert to Class A shares after expiration of the
conversion period applicable to the original purchase of such shares.
The conversion feature may be subject to the continuing availability of
opinions of counsel or rulings of the Internal Revenue Service (i) that the
dividends and other distributions paid on Class A, Class B, Class C and Class Z
shares will not constitute
29
<PAGE>
"preferential dividends" under the Internal Revenue Code and (ii) that the
conversion of shares does not constitute a taxable event. The conversion of
Class B shares into Class A shares may be suspended if such opinions or rulings
are no longer available. If conversions are suspended, Class B shares of the
Series will continue to be subject, possibly indefinitely, to their higher
annual distribution and service fee.
HOW TO EXCHANGE YOUR SHARES
AS A SHAREHOLDER OF THE SERIES, YOU HAVE AN EXCHANGE PRIVILEGE WITH THE OTHER
SERIES OF THE FUND AND CERTAIN OTHER PRUDENTIAL MUTUAL FUNDS (THE EXCHANGE
PRIVILEGE), INCLUDING ONE OR MORE SPECIFIED MONEY MARKET FUNDS, SUBJECT TO THE
MINIMUM INVESTMENT REQUIREMENTS OF SUCH FUNDS. CLASS A, CLASS B, CLASS C AND
CLASS Z SHARES OF THE SERIES MAY BE EXCHANGED FOR CLASS A, CLASS B, CLASS C AND
CLASS Z SHARES, RESPECTIVELY, OF THE OTHER SERIES OF THE FUND OR ANOTHER FUND ON
THE BASIS OF THE RELATIVE NAV. No sales charge will be imposed at the time of
the exchange. Any applicable CDSC payable upon the redemption of shares
exchanged will be calculated from the first day of the month after the initial
purchase, excluding the time shares were held in a money market fund. Class B
and Class C shares may not be exchanged into money market funds other than
Prudential Special Money Market Fund, Inc. For purposes of calculating the
holding period applicable to the Class B conversion feature, the time period
during which Class B shares were held in a money market fund will be excluded.
See "Conversion Feature--Class B Shares" above. An exchange will be treated as a
redemption and purchase for tax purposes. See "Shareholder Investment
Account--Exchange Privilege" in the Statement of Additional Information.
IN ORDER TO EXCHANGE SHARES BY TELEPHONE, YOU MUST AUTHORIZE TELEPHONE
EXCHANGES ON YOUR INITIAL APPLICATION FORM OR BY WRITTEN NOTICE TO THE TRANSFER
AGENT AND HOLD SHARES IN NON-CERTIFICATE FORM. Thereafter, you may call the Fund
at (800) 225-1852 to execute a telephone exchange of shares, weekdays, except
holidays, between the hours of 8:00 A.M. and 6:00 P.M., New York time. For your
protection and to prevent fraudulent exchanges, your telephone call will be
recorded and you will be asked to provide your personal identification number. A
written confirmation of the exchange transaction will be sent to you. NEITHER
THE FUND NOR ITS AGENTS WILL BE LIABLE FOR ANY LOSS, LIABILITY OR COST WHICH
RESULTS FROM ACTING UPON INSTRUCTIONS REASONABLY BELIEVED TO BE GENUINE UNDER
THE FOREGOING PROCEDURES. All exchanges will be made on the basis of the
relative NAV of the two funds (or series) next determined after the request is
received in good order. The Exchange Privilege is available only in states where
the exchange may legally be made.
IF YOU HOLD SHARES THROUGH PRUDENTIAL SECURITIES, YOU MUST EXCHANGE YOUR
SHARES BY CONTACTING YOUR PRUDENTIAL SECURITIES FINANCIAL ADVISER.
IF YOU HOLD CERTIFICATES, THE CERTIFICATES, SIGNED IN THE NAME(S) SHOWN ON THE
FACE OF THE CERTIFICATES, MUST BE RETURNED IN ORDER FOR THE SHARES TO BE
EXCHANGED. SEE "HOW TO SELL YOUR SHARES" ABOVE.
You may also exchange shares by mail by writing to Prudential Mutual Fund
Services LLC, Attention: Exchange Processing, P.O. Box 15010, New Brunswick, New
Jersey 08906-5010.
IN PERIODS OF SEVERE MARKET OR ECONOMIC CONDITIONS, THE TELEPHONE EXCHANGE OF
SHARES MAY BE DIFFICULT TO IMPLEMENT AND SHAREHOLDERS SHOULD MAKE EXCHANGES BY
MAIL BY WRITING TO PRUDENTIAL MUTUAL FUND SERVICES LLC, AT THE ADDRESS NOTED
ABOVE.
SPECIAL EXCHANGE PRIVILEGES. A special exchange privilege is available for
shareholders who qualify to purchase Class A shares at NAV (see "Alternative
Purchase Plan--Class A Shares--Reduction and Waiver of Initial Sales Charges"
above) and for shareholders who qualify to purchase Class Z shares (see
"Alternative Purchase Plan--Class Z Shares" above). Under this exchange
privilege, amounts representing any Class B and Class C shares (which are not
subject to a CDSC) held in such a shareholder's account will be automatically
exchanged for Class A shares for shareholders who qualify to purchase Class A
shares at NAV on a quarterly basis, unless the shareholder elects otherwise.
Similarly, shareholders who qualify to purchase Class Z shares will have their
Class B and Class C shares which are not subject to a CDSC and their Class A
shares exchanged for Class Z shares on a quarterly basis. Eligibility for this
exchange privilege will be calculated on the business day prior to the date of
the exchange. Amounts representing Class B or Class C shares which are not
subject to a CDSC include the following: (1) amounts representing Class B or
Class C shares acquired pursuant to the automatic reinvestment of dividends and
distributions,
30
<PAGE>
(2) amounts representing the increase in the net asset value above the total
amount of payments for the purchase of Class B or Class C shares and (3) amounts
representing Class B or Class C shares held beyond the applicable CDSC period.
Class B and Class C shareholders must notify the Transfer Agent either directly
or through Prudential Securities or Prusec that they are eligible for this
special exchange privilege.
Participants in any fee-based program for which the Fund is an available
option will have their Class A shares, if any, exchanged for Class Z shares when
they elect to have those assets become a part of the fee-based program. Upon
leaving the program (whether voluntarily or not), such Class Z shares (and, to
the extent provided for in the program, Class Z shares acquired through
participation in the program) will be exchanged for Class A shares at net asset
value.
The Exchange Privilege is not a right and may be suspended, terminated or
modified on 60 days' notice to shareholders.
FREQUENT TRADING. The Fund and the other Prudential Mutual Funds are not
intended to serve as vehicles for frequent trading in response to short-term
fluctuations in the market. Due to the disruptive effect that market timing
investment strategies and excessive trading can have on efficient portfolio
management, each Prudential Mutual Fund and the Fund reserves the right to
refuse purchase orders and exchanges by any person, group or commonly controlled
accounts, if, in the Manager's sole judgment, such person, group or accounts
were following a market timing strategy or were otherwise engaging in excessive
trading (Market Timers).
To implement this authority to protect the Fund and its shareholders from
excessive trading, the Fund will reject all exchanges and purchases from a
Market Timer unless the Market Timer has entered into a written agreement with
the Fund or its affiliates pursuant to which the Market Timer has agreed to
abide by certain procedures, which include a daily dollar limit on trading. The
Fund may notify the Market Timer of rejection of an exchange or purchase order
subsequent to the day on which the order was placed.
SHAREHOLDER SERVICES
In addition to the Exchange Privilege, as a shareholder in the Series, you can
take advantage of the following services and privileges:
- AUTOMATIC REINVESTMENT OF DIVIDENDS AND/OR DISTRIBUTIONS WITHOUT A SALES
CHARGE. For your convenience, all dividends and distributions are automatically
reinvested in full and fractional shares of the Series at NAV without a sales
charge. You may direct the Transfer Agent in writing not less than 5 full
business days prior to the record date to have subsequent dividends and/or
distributions sent in cash rather than reinvested. If you hold shares through
Prudential Securities, you should contact your financial adviser.
- AUTOMATIC SAVINGS ACCUMULATION PLAN (ASAP). Under ASAP you may make regular
purchases of the Series' shares in amounts as little as $50 via an automatic
debit to a bank account or Prudential Securities account (including a Command
Account). For additional information about this service, you may contact your
Prudential Securities financial adviser, Prusec representative or the Transfer
Agent directly.
- SYSTEMATIC WITHDRAWAL PLAN. A systematic withdrawal plan is available to
shareholders which provides for monthly or quarterly checks. Withdrawals of
Class B and Class C shares may be subject to a CDSC. See "How to Sell Your
Shares-- Contingent Deferred Sales Charges" above.
- REPORTS TO SHAREHOLDERS. The Fund will send you annual and semi-annual
reports. The financial statements appearing in annual reports are audited by
independent accountants. In order to reduce duplicate mailing and printing
expenses, the Fund will provide one annual and semi-annual shareholder report
and annual prospectus per household. You may request additional copies of such
reports by calling (800) 225-1852 or by writing to the Fund at Gateway Center
Three, 100 Mulberry Street, Newark, New Jersey 07102-4077. In addition, monthly
unaudited financial data is available upon request from the Fund.
31
<PAGE>
- SHAREHOLDER INQUIRIES. Inquiries should be addressed to the Fund at Gateway
Center Three, 100 Mulberry Street, Newark, New Jersey 07102-4077, or by
telephone, at (800) 225-1852 (toll-free) or, from outside the U.S.A., at (908)
417-7555 (collect).
For additional information regarding the services and privileges described
above, see "Shareholder Investment Account" in the Statement of Additional
Information.
32
<PAGE>
THE PRUDENTIAL MUTUAL FUND FAMILY
Prudential Investments Fund Management offers a broad range of mutual funds
designed to meet your individual needs. We welcome you to review the investment
options available through our family of funds. For more information on the
Prudential Mutual Funds, including charges and expenses, contact your Prudential
Securities financial adviser or Prusec representative or telephone the Funds at
(800) 225-1852 for a free prospectus. Read the prospectus carefully before you
invest or send money.
TAXABLE BOND FUNDS
--------------------------
Prudential Diversified Bond Fund, Inc.
Prudential Government Income Fund, Inc.
Prudential Government Securities Trust
Short-Intermediate Term Series
Prudential High Yield Fund, Inc.
Prudential Mortgage Income Fund, Inc.
Prudential Structured Maturity Fund, Inc.
Income Portfolio
The BlackRock Government Income Trust
TAX-EXEMPT BOND FUNDS
-----------------------------
Prudential California Municipal Fund
California Series
California Income Series
Prudential Municipal Bond Fund
High Yield Series
Insured Series
Intermediate Series
Prudential Municipal Series Fund
Florida Series
Maryland Series
Massachusetts Series
Michigan Series
New Jersey Series
New York Series
North Carolina Series
Ohio Series
Pennsylvania Series
Prudential National Municipals Fund, Inc.
GLOBAL FUNDS
--------------------
Prudential Europe Growth Fund, Inc.
Prudential Global Genesis Fund, Inc.
Prudential Global Limited Maturity Fund, Inc.
Limited Maturity Portfolio
Prudential Intermediate Global Income Fund, Inc.
Prudential International Bond Fund, Inc.
Prudential Natural Resources Fund, Inc.
Prudential Pacific Growth Fund, Inc.
Prudential World Fund, Inc.
Global Series
International Stock Series
The Global Total Return Fund, Inc.
Global Utility Fund, Inc.
EQUITY FUNDS
--------------------
Prudential Balanced Fund
Prudential Distressed Securities Fund, Inc.
Prudential Dryden Fund
Prudential Active Balanced Fund
Prudential Stock Index Fund
Prudential Small-Cap Index Fund
Prudential Bond Market Index Fund
Prudential Pacific Index Fund
Prudential Europe Index Fund
Prudential Emerging Growth Fund, Inc.
Prudential Equity Fund, Inc.
Prudential Equity Income Fund
Prudential Jennison Series Fund, Inc.
Prudential Jennison Growth Fund
Prudential Jennison Growth & Income Fund
Prudential Multi-Sector Fund, Inc.
Prudential Small-Cap Quantum Fund, Inc.
Prudential Small Company Value Fund, Inc.
Prudential Utility Fund, Inc.
Nicholas-Applegate Fund, Inc.
Nicholas-Applegate Growth Equity Fund
MONEY MARKET FUNDS
--------------------------
- - TAXABLE MONEY MARKET FUNDS
Prudential Government Securities Trust
Money Market Series
U.S. Treasury Money Market Series
Prudential Special Money Market Fund, Inc.
Money Market Series
Prudential MoneyMart Assets, Inc.
- - TAX-FREE MONEY MARKET FUNDS
Prudential Tax-Free Money Fund, Inc.
Prudential California Municipal Fund
California Money Market Series
Prudential Municipal Series Fund
Connecticut Money Market Series
Massachusetts Money Market Series
New Jersey Money Market Series
New York Money Market Series
- - COMMAND FUNDS
Command Money Fund
Command Government Fund
Command Tax-Free Fund
- - INSTITUTIONAL MONEY MARKET FUNDS
Prudential Institutional Liquidity Portfolio, Inc.
Institutional Money Market Series
A-1
<PAGE>
No dealer, sales representative or any other person has been authorized to give
any information or to make any representations, other than those contained in
this Prospectus, in connection with the offer contained herein, and, if given or
made, such other information or representations must not be relied upon as
having been authorized by the Fund or the Distributor. This Prospectus does not
constitute an offer by the Fund or by the Distributor to sell or a solicitation
of any offer to buy any of the securities offered hereby in any jurisdiction to
any person to whom it is unlawful to make such offer in such jurisdiction.
-------------------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---
<S> <C>
FUND HIGHLIGHTS................................. 2
What are the Series' Risk Factors and Special
Characteristics?............................. 2
FUND EXPENSES................................... 4
FINANCIAL HIGHLIGHTS............................ 5
HOW THE FUND INVESTS............................ 9
Investment Objective and Policies............. 9
Other Investments and Policies................ 13
Investment Restrictions....................... 14
HOW THE FUND IS MANAGED......................... 14
Manager....................................... 14
Distributor................................... 15
Portfolio Transactions........................ 17
Custodian and Transfer and Dividend Disbursing
Agent........................................ 17
HOW THE FUND VALUES ITS SHARES.................. 17
HOW THE FUND CALCULATES PERFORMANCE............. 18
TAXES, DIVIDENDS AND DISTRIBUTIONS.............. 18
GENERAL INFORMATION............................. 21
Description of Shares......................... 21
Additional Information........................ 22
SHAREHOLDER GUIDE............................... 22
How to Buy Shares of the Fund................. 22
Alternative Purchase Plan..................... 23
How to Sell Your Shares....................... 26
Conversion Feature--Class B Shares............ 29
How to Exchange Your Shares................... 30
Shareholder Services.......................... 31
THE PRUDENTIAL MUTUAL FUND FAMILY............... A-1
</TABLE>
- -------------------------------------------
MF116A 4440472
Class A: 744313-10-7
Class B: 744313-20-6
CUSIP Nos.: Class C: 744313-70-1
Class Z: 744313-88-3
PRUDENTIAL CALIFORNIA MUNICIPAL FUND
(CALIFORNIA SERIES)
PROSPECTUS
OCTOBER 30, 1997
www.prudential.com
[LOGO]
<PAGE>
PRUDENTIAL CALIFORNIA MUNICIPAL FUND
(CALIFORNIA INCOME SERIES)
- --------------------------------------------------------------------------------
PROSPECTUS DATED OCTOBER 30, 1997
- ----------------------------------------------------------------
Prudential California Municipal Fund (the Fund) (California Income Series) (the
Series) is one of three series of an open-end, management investment company, or
mutual fund. This Series is diversified and seeks to provide the maximum amount
of income that is exempt from California State and federal income taxes
consistent with the preservation of capital. The Series will invest primarily in
investment grade municipal obligations but may also invest a portion of its
assets in lower-quality municipal obligations or in non-rated securities which,
in the opinion of the Fund's investment adviser, are of comparable quality.
Subject to limitations described herein, the Series may utilize derivatives,
including buying and selling futures contracts and options thereon for the
purpose of hedging its portfolio securities. There can be no assurance that the
Series' investment objective will be achieved. See "How the Fund
Invests--Investment Objective and Policies." The Fund's address is Gateway
Center Three, 100 Mulberry Street, Newark, New Jersey 07102-4077, and its
telephone number is (800) 225-1852.
This Prospectus sets forth concisely the information about the Fund and the
California Income Series that a prospective investor should know before
investing. Additional information about the Fund has been filed with the
Securities and Exchange Commission in a Statement of Additional Information
dated October 30, 1997, which information is incorporated herein by reference
(is legally considered a part of this Prospectus) and is available without
charge upon request to the Fund at the address or telephone number noted above.
- --------------------------------------------------------------------------------
INVESTORS ARE ADVISED TO READ THIS PROSPECTUS AND RETAIN IT FOR FUTURE
REFERENCE.
- --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
<PAGE>
FUND HIGHLIGHTS
The following summary is intended to highlight certain information contained
in this Prospectus and is qualified in its entirety by the more detailed
information appearing elsewhere herein.
WHAT IS PRUDENTIAL CALIFORNIA MUNICIPAL FUND?
Prudential California Municipal Fund is a mutual fund whose shares are
offered in three series, each of which operates as a separate fund. A mutual
fund pools the resources of investors by selling its shares to the public
and investing the proceeds of such sale in a portfolio of securities
designed to achieve its investment objective. Technically, the Fund is an
open-end, management investment company. Only the California Income Series
is offered through this Prospectus.
WHAT IS THE SERIES' INVESTMENT OBJECTIVE?
The Series' investment objective is to maximize current income that is
exempt from California State and federal income taxes consistent with the
preservation of capital. It seeks to achieve this objective by investing
primarily in California State, municipal and local government obligations
and obligations of other qualifying issuers, such as issuers located in
Puerto Rico, the Virgin Islands and Guam, which pay income exempt, in the
opinion of counsel, from California State and federal income taxes
(California Obligations). There can be no assurance that the Series'
investment objective will be achieved. See "How the Fund Invests--Investment
Objective and Policies" at page 9.
WHAT ARE THE SERIES' RISK FACTORS AND SPECIAL CHARACTERISTICS?
In seeking to achieve its investment objective, the Series will invest at
least 80% of the value of its total assets in California Obligations. This
degree of investment concentration makes the Series particularly susceptible
to factors adversely affecting issuers of California Obligations. See "How
the Fund Invests--Investment Objective and Policies-- Special
Considerations" at page 14. The Series may invest up to 30% of its total
assets in high yield securities, commonly known as "junk bonds," which may
be considered speculative and are subject to the risk of an issuer's
inability to meet principal and interest payments on the obligations as well
as price volatility. See "How the Fund Invests--Investment Objective and
Policies--Risk Factors Relating to Investing in High Yield Municipal
Obligations" at page 12. To hedge against changes in interest rates, the
Series may also purchase put options and engage in transactions involving
derivatives, including financial futures contracts and options thereon. See
"How the Fund Invests--Investment Objective and Policies--Futures Contracts
and Options Thereon" at page 13. As with an investment in any mutual fund,
an investment in this Series can decrease in value and you can lose money.
WHO MANAGES THE FUND?
Prudential Investments Fund Management LLC (PIFM or the Manager) is the
Manager of the Fund and is compensated for its services at an annual rate of
.50 of 1% of the Series' average daily net assets. As of September 30, 1997,
PIFM served as manager or administrator to 63 investment companies,
including 41 mutual funds, with aggregate assets of approximately $59.9
billion. The Prudential Investment Corporation, which does business under
the name Prudential Investments (PI, the Subadviser or the investment
advisor) furnishes investment advisory services in connection with the
management of the Fund under a Subadvisory Agreement with PIFM. See "How the
Fund is Managed--Manager" at page 15.
WHO DISTRIBUTES THE SERIES' SHARES?
Prudential Securities Incorporated (Prudential Securities, PSI or the
Distributor), a major securities underwriter and securities and commodities
broker, acts as the Distributor of the Series' Class A, Class B, Class C and
Class Z shares and is paid a distribution and service fee with respect to
Class A shares which is currently being charged at the annual rate of .10 of
1% of the average daily net assets of the Class A shares and is paid a
distribution and service fee with respect to Class B shares at the annual
rate of .50 of 1% of the average daily net assets of the Class B shares and
is paid an annual
2
<PAGE>
distribution and service fee with respect to Class C shares which is
currently being charged at the rate of .75 of 1% of the average daily net
assets of the Class C shares. Prudential Securities incurs the expense of
distributing the Series' Class Z shares under a Distribution Agreement with
the Fund, none of which is reimbursed or paid for by the Fund. See "How the
Fund is Managed--Distributor" at page 16.
WHAT IS THE MINIMUM INVESTMENT?
The minimum initial investment is $1,000 for Class A and Class B shares
and $5,000 for Class C shares. The minimum subsequent investment is $100 for
Class A, Class B and Class C shares. Class Z shares are not subject to any
minimum investment requirements. There is no minimum investment requirement
for certain employee savings plans. For purchases made through the Automatic
Savings Accumulation Plan, the minimum initial and subsequent investment is
$50. See "Shareholder Guide--How to Buy Shares of the Fund" at page 23 and
"Shareholder Guide--Shareholder Services" at page 32.
HOW DO I PURCHASE SHARES?
You may purchase shares of the Series through Prudential Securities, Pruco
Securities Corporation (Prusec) or directly from the Fund through its
transfer agent, Prudential Mutual Fund Services LLC (PMFS or the Transfer
Agent), at the net asset value per share (NAV) next determined after receipt
of your purchase order by the Transfer Agent or Prudential Securities plus a
sales charge which may be imposed either (i) at the time of purchase (Class
A shares) or (ii) on a deferred basis (Class B or Class C shares). Class Z
shares are offered to a limited group of investors at net asset value
without any sales charge. See "How the Fund Values its Shares" at page 18
and "Shareholder Guide--How to Buy Shares of the Fund" at page 23.
WHAT ARE MY PURCHASE ALTERNATIVES?
The Series offers four classes of shares:
- Class A Shares:
Sold with an initial sales charge of up to 3% of the
offering price.
- Class B Shares:
Sold without an initial sales charge but are subject to
a contingent deferred sales charge or CDSC (declining
from 5% to zero of the lower of the amount invested or
the redemption proceeds) which will be imposed on
certain redemptions made within six years of purchase.
Although Class B shares are subject to higher ongoing
distribution-related expenses than Class A shares, Class
B shares will automatically convert to Class A shares
(which are subject to lower ongoing distribution-related
expenses) approximately seven years after purchase.
- Class C Shares:
Sold without an initial sales charge and, for one year
after purchase, are subject to a 1% CDSC on redemptions.
Like Class B shares, Class C shares are subject to
higher ongoing distribution-related expenses than Class
A shares but do not convert to another class.
- Class Z Shares:
Sold without either an initial or contingent deferred
sales charge to a limited group of investors. Class Z
shares are not subject to any ongoing service or
distribution-related expenses.
See "Shareholder Guide--Alternative Purchase Plan" at page 24.
HOW DO I SELL MY SHARES?
You may redeem your shares at any time at the NAV next determined after
Prudential Securities or the Transfer Agent receives your sell order.
However, the proceeds of redemptions of Class B and Class C shares may be
subject to a CDSC. See "Shareholder Guide--How to Sell Your Shares" at page
27.
HOW ARE DIVIDENDS AND DISTRIBUTIONS PAID?
The Series expects to declare daily and pay monthly dividends of net
investment income, if any, and make distributions of any net capital gains
at least annually. Dividends and distributions will be automatically
reinvested in additional shares of the Series at NAV without a sales charge
unless you request that they be paid to you in cash. See "Taxes, Dividends
and Distributions" at page 19.
3
<PAGE>
FUND EXPENSES
(CALIFORNIA INCOME SERIES)
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES CLASS C SHARES CLASS Z SHARES
-------------- ------------------------------ --------------------------- --------------
<S> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES+
Maximum Sales Load Imposed on
Purchases (as a percentage of
offering price)............... 3% None None None
Maximum Deferred Sales Load (as
a percentage of original
purchase price or redemption
proceeds, whichever is
lower)........................ None 5% during the first year, 1% on redemptions made None
decreasing by 1% annually to within one year of purchase
1% in the fifth and sixth
years and 0% the seventh year*
Maximum Sales Load Imposed on
Reinvested Dividends.......... None None None None
Redemption Fees................ None None None None
Exchange Fee................... None None None None
</TABLE>
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES CLASS C SHARES CLASS Z SHARES
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
ANNUAL FUND OPERATING EXPENSES**
(as a percentage of average net assets)
Management Fees (Before Waiver)..... .50% .50% .50% .50%
12b-1 Fees (After Reduction)........ .10%++ .50% .75%++ None
Other Expenses...................... .18% .18% .18% .18%
------ ----- ------ ------
Total Fund Operating Expenses
(Before Waiver and After
Reduction)......................... .78% 1.18% 1.43% .68%
------ ----- ------ ------
------ ----- ------ ------
</TABLE>
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
EXAMPLE
You would pay the following expenses on
a $1,000 investment, assuming (1) 5%
annual return and (2) redemption at
the end of each time period:
Class A............................. $38 $54 $72 $124
Class B............................. $62 $67 $75 $127
Class C............................. $25 $45 $78 $171
Class Z............................. $ 7 $22 $38 $ 85
You would pay the following expenses on
the same investment, assuming no
redemption:
Class A............................. $38 $54 $72 $124
Class B............................. $12 $37 $65 $127
Class C............................. $15 $45 $78 $171
Class Z............................. $ 7 $22 $38 $ 85
</TABLE>
The above examples are based on restated data for the Series' fiscal year
ended August 31, 1997. THE EXAMPLES SHOULD NOT BE CONSIDERED A
REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER
OR LESS THAN THOSE SHOWN.
The purpose of this table is to assist investors in understanding the
various costs and expenses that an investor in the Series will bear,
whether directly or indirectly. For more complete descriptions of the
various costs and expenses, see "How the Fund is Managed." "Other
Expenses" includes operating expenses of the Series, such as Trustees' and
professional fees, registration fees, reports to shareholders and transfer
agency and custodian fees.
- ---------------
* Class B shares will automatically convert to Class A shares approximately
seven years after purchase. See "Shareholder Guide--Conversion Feature--Class
B Shares."
** Based on expenses incurred during the fiscal year ended August 31, 1997,
without taking into account the management fee waiver. At the current level
of management fee waiver (.05 of 1%), Management Fees would be .45% of Class
A, Class B, Class C and Class Z shares and Total Fund Operating Expenses
would be .73% of the average net assets of the Series' Class A shares, 1.13%
of the average net assets of the Series' Class B shares, 1.38% of the
average net assets of the Series' Class C shares, and .63% of net assets of
the Series' Class Z shares. See "How the Fund is Managed--Manager--Fee
Waiver."
+ Pursuant to rules of the National Association of Securities Dealers, Inc.,
the aggregate initial sales charges, deferred sales charges and asset-based
sales charges on shares of the Series may not exceed 6.25% of total gross
sales, subject to certain exclusions. This 6.25% limitation is imposed on
each class of the Series rather than on a per shareholder basis. Therefore,
long-term shareholders of the Series may pay more in total sales charges than
the economic equivalent of 6.25% of such shareholders' investment in such
shares. See "How the Fund is Managed--Distributor."
++ Although the Class A and Class C Distribution and Service Plans provide that
the Fund may pay a distribution fee of up to .30 of 1% and 1% per annum of
the average daily net assets of the Class A and Class C shares,
respectively, the Distributor has agreed to limit its distribution fees with
respect to the Class A and Class C shares of the Series to no more than .10
of 1% and .75 of 1% of the average daily net asset value of the Class A
shares and Class C shares, respectively, for the fiscal year ending August
31, 1998. Total Fund Operating Expenses (Before Waiver) of the Class A and
Class C shares without such limitations would be .98% and 1.68%,
respectively. See "How the Fund is Managed--Distributor."
4
<PAGE>
FINANCIAL HIGHLIGHTS
(FOR A SHARE OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT EACH OF THE INDICATED
PERIODS)
(CLASS A SHARES)
The following financial highlights, for the fiscal year ended August 31, 1997,
have been audited by Price Waterhouse LLP, independent accountants, and by
Deloitte and Touche LLP, independent auditors, for the four years ended August
31, 1996. Each of the respective reports by Price Waterhouse LLP and Deloitte &
Touche LLP on such financial statements were unqualified. This information
should be read in conjunction with the financial statements and notes thereto,
which appear in the Statement of Additional Information. The following financial
highlights contain selected data for a Class A share of beneficial interest
outstanding, total return, ratios to average net assets and other supplemental
data for the periods indicated. This information is based on data contained in
the financial statements. Further performance information is contained in the
annual report, which may be obtained without charge. See "Shareholder
Guide--Shareholder Services--Reports to Shareholders."
<TABLE>
<CAPTION>
CLASS A
-----------------------------------------------------------------------------------
DECEMBER 3,
1990 (a)
YEAR ENDED AUGUST 31, THROUGH
--------------------------------------------------------------------- AUGUST 31,
1997 1996 1995 1994 1993 1992 1991
--------- --------- --------- --------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period... $ 10.33 $ 10.28 $ 10.19 $ 10.68 $ 10.08 $ 9.76 $ 9.55
--------- --------- --------- --------- --------- --------- -----------
INCOME FROM INVESTMENT OPERATIONS
Net investment income (c).............. .60 .63 .65 .65 .67 .69 .51
Net realized and unrealized gain (loss)
on investment transactions........... .38 .05 .09 (.39) .65 .35 .21
--------- --------- --------- --------- --------- --------- -----------
Total from investment operations....... .98 .68 .74 .26 1.32 1.04 .72
--------- --------- --------- --------- --------- --------- -----------
LESS DISTRIBUTIONS
Dividends from net investment income... (.60) (.63) (.65) (.65) (.67) (.69) (.51)
Distributions in excess of net
investment income...................... (e)
Distributions from net realized
gains................................ -- -- (.10) (.05) (.03) --
--------- --------- --------- --------- --------- --------- -----------
Total distributions.................... (.60) (.63) (.65) (.75) (.72) (.72) (.51)
--------- --------- --------- --------- --------- --------- -----------
Net asset value, end of period......... $ 10.71 $ 10.33 $ 10.28 $ 10.19 $ 10.68 $ 10.08 $ 9.76
--------- --------- --------- --------- --------- --------- -----------
--------- --------- --------- --------- --------- --------- -----------
TOTAL RETURN (d):...................... 9.72% 6.67% 7.67% 2.55% 13.67% 11.08% 7.97%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)........ $ 156,684 $ 153,236 $ 163,538 $ 183,742 $ 200,899 $ 141,101 $ 72,241
Average net assets (000)............... $ 153,019 $ 161,420 $ 165,500 $ 195,610 $ 165,895 $ 102,227 $ 47,540
Ratios to average net assets: (c)
Expenses, including distribution
fee................................. .73% .50% .40% .35% .20% .10% 0%(b)
Expenses, excluding distribution
fee................................. .63% .40% .30% .25% .10% .04% 0%(b)
Net investment income................ 5.66% 6.01% 6.49% 6.25% 6.52% 6.91% 7.04%(b)
Portfolio turnover rate................ 16% 22% 39% 46% 34% 69% 35%
</TABLE>
- ---------------
(a) Commencement of offering of Class A shares.
(b) Annualized.
(c) Net of expense subsidy and/or management fee waiver.
(d) Total return does not consider the effects of sales loads. Total
return is calculated assuming a purchase of shares on the first day
and a sale on the last day of each period reported and includes
reinvestment of dividends and distributions. Total returns for
periods of less than a full year are not annualized.
(e) Less than $.005 per share.
5
<PAGE>
FINANCIAL HIGHLIGHTS
(FOR A SHARE OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT EACH OF THE INDICATED
PERIODS)
(CLASS B SHARES)
The following financial highlights, for the fiscal year ended August 31, 1997
have been audited by Price Waterhouse LLP, independent accountants, and by
Deloitte & Touche LLP, independent auditors, for the two years ended August 31,
1996, and the period from December 7, 1993 through August 31, 1994. Each of the
respective reports by Price Waterhouse LLP and Deloitte & Touche LLP on such
financial statements were unqualified. This information should be read in
conjunction with the financial statements and notes thereto, which appear in the
Statement of Additional Information. The following financial highlights contain
selected data for a Class B share of beneficial interest outstanding, total
return, ratios to average net assets and other supplemental data for the periods
indicated. This information is based on data contained in the financial
statements. Further performance information is contained in the annual report,
which may be obtained without charge. See "Shareholder Guide-- Shareholder
Services--Reports to Shareholders."
<TABLE>
<CAPTION>
CLASS B
--------------------------------------------
DECEMBER 7,
1993 (a)
YEAR ENDED AUGUST 31, THROUGH
------------------------------ AUGUST 31,
1997 1996 1995 1994
-------- -------- -------- -----------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period... $ 10.33 $ 10.28 $ 10.19 $ 10.61
-------- -------- -------- -----------
INCOME FROM INVESTMENT OPERATIONS
Net investment income (c).............. .55 .59 .61 .44
Net realized and unrealized gain on
investment transactions.............. .38 .05 .09 (.42)
-------- -------- -------- -----------
Total from investment operations....... .93 .64 .70 .02
-------- -------- -------- -----------
LESS DISTRIBUTIONS
Dividends from net investment income... (.55) (.59) (.61) (.44)
Distributions in excess of net
investment income.................... --(e) -- -- --
-------- -------- -------- -----------
Total distributions.................. (.55) (.59) (.61) (.44)
-------- -------- -------- -----------
Net asset value, end of period......... $ 10.71 $ 10.33 $ 10.28 $ 10.19
-------- -------- -------- -----------
-------- -------- -------- -----------
TOTAL RETURN (d):...................... 9.28% 6.25% 7.24% (.14)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)........ $ 47,436 $ 35,983 $ 28,609 $18,931
Average net assets (000)............... $ 40,983 $ 32,555 $ 23,722 $ 6,814
Ratios to average net assets: (c)
Expenses, including distribution
fee................................. 1.13% .90% .80% 1.11%(b)
Expenses, excluding distribution
fee................................. .63% .40% .30% .43%(b)
Net investment income................ 5.26% 5.61% 6.09% 8.15%(b)
Portfolio turnover rate................ 16% 22% 39% 46%
</TABLE>
- -------------
(a) Commencement of offering of Class B shares.
(b) Annualized.
(c) Net of expense subsidy and/or management fee waiver.
(d) Total return does not consider the effects of sales loads. Total return
is calculated assuming a purchase of shares on the first day and a sale
on the last day of each period reported and includes reinvestment of
dividends and distributions. Total returns for periods of less than a
full year are not annualized.
(e) Less than $.005 per share.
6
<PAGE>
FINANCIAL HIGHLIGHTS
(FOR A SHARE OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT EACH OF THE INDICATED
PERIODS)
(CLASS C SHARES)
The following financial highlights, for the fiscal year ended August 31, 1997,
have been audited by Price Waterhouse LLP, independent accountants, and by
Deloitte and Touche LLP, independent auditors, for the two years ended August
31, 1996 and for the period from August 1, 1994 through August 31, 1994. Each of
the respective reports by Price Waterhouse LLP and Deloitte & Touche LLP on such
financial statements were unqualified. This information should be read in
conjunction with the financial statements and the notes thereto, which appear in
the Statement of Additional Information. The following financial highlights
contain selected data for a Class C share of beneficial interest outstanding,
total return, ratios to average net assets and other supplemental data for the
periods indicated. This information is based on data contained in the financial
statements. Further performance information is contained in the annual report,
which may be obtained without charge. See "Shareholder Guide-- Shareholder
Services--Reports to Shareholders."
<TABLE>
<CAPTION>
CLASS C
-------------------------------------------
AUGUST 1,
1994 (a)
YEAR ENDED AUGUST 31, THROUGH
----------------------------- AUGUST 31,
1997 1996 1995 1994
--------- ------- ------- -----------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period... $ 10.33 $ 10.28 $ 10.19 $10.18
--------- ------- ------- -----------
INCOME FROM INVESTMENT OPERATIONS
Net investment income (c).............. .53 .56 .58 .05
Net realized and unrealized gain (loss)
on investment transactions........... .38 .05 .09 .01
--------- ------- ------- -----------
Total from investment operations....... .91 .61 .67 .06
--------- ------- ------- -----------
LESS DISTRIBUTIONS
Dividends from net investment income... (.53) (.56) (.58) (.05)
Distributions in excess of net
investment income.................... (--e) -- -- --
--------- ------- ------- -----------
Total distributions.................. (.53) (.56) (.58) (.05)
--------- ------- ------- -----------
Net asset value, end of period......... $ 10.71 $ 10.33 $ 10.28 $10.19
--------- ------- ------- -----------
--------- ------- ------- -----------
TOTAL RETURN (d):...................... 9.01% 5.99% 6.98% .47%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)........ $ 3,611 $ 3,269 $ 2,762 $1,054
Average net assets (000)............... $ 3,135 $ 3,300 $ 1,751 $ 353
Ratios to average net assets: (c)
Expenses, including distribution
fee................................. 1.38% 1.15% 1.05% 1.12%(b)
Expenses, excluding distribution
fee................................. .63% .40% .30% .37%(b)
Net investment income................ 5.01% 5.36% 5.84% 6.25%(b)
Portfolio turnover rate................ %16 22% 39% 46%
</TABLE>
- -------------
(a) Commencement of offering of Class C shares.
(b) Annualized.
(c) Net of expense subsidy and/or management fee waiver.
(d) Total return does not consider the effects of sales loads. Total return
is calculated assuming a purchase of shares on the first day and a sale
on the last day of each period reported and includes reinvestment of
dividends and distributions. Total returns for periods of less than a
full year are not annualized.
(e) Less than $.005 per share.
7
<PAGE>
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD INDICATED)
(CLASS Z SHARES)
The following financial highlights for the Class Z shares for the period from
September 18, 1996 through August 31, 1997 have been audited by Price Waterhouse
LLP, independent accountants, whose report thereon was unqualified. This
information should be read in conjunction with the financial statements and the
notes thereto, which appear in the Statement of Additional Information. The
financial highlights contain selected data for a Class Z share of common stock
outstanding, total return, ratios to average net assets and other supplemental
data for the period indicated. This information has been determined based on
data contained in the financial statements. Further performance information is
contained in the annual report, which may be obtained without charge. See
"Shareholder Guide--Shareholder Services--Reports to Shareholders."
<TABLE>
<CAPTION>
CLASS Z
----------------
SEPTEMBER 18,
1996(a)
THROUGH
AUGUST 31, 1997
----------------
<S> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.............. $10.38
----------------
INCOME FROM INVESTMENT OPERATIONS
Net investment income (d)......................... .57
Net realized and unrealized gain (loss) on
investment transactions........................... .33
----------------
Total from investment operations.................. .90
----------------
LESS DISTRIBUTIONS
Dividends from net investment income.............. (.57)
Distributions in excess of net investment
income.......................................... --(e)
----------------
Total distributions............................. (.57)
----------------
Net asset value, end of period.................... $10.71
----------------
----------------
TOTAL RETURN (b):................................. 8.86%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)................... $1,963
Average net assets (000).......................... $ 970
Ratios to average net assets (c)(d):
Expenses........................................ .63%
Net investment income........................... 5.76%
Portfolio turnover rate........................... 16%
</TABLE>
- ------------
(a) Commencement of offering of Class Z shares.
(b) Total return is calculated assuming a purchase of shares on the first
day and a sale on the last day of the period reported and includes
reinvestment of dividends and distributions. Total returns for periods
of less than a full year are not annualized.
(c) Annualized.
(d) Net of management fee waiver.
(e) Less than $.005 per share.
8
<PAGE>
HOW THE FUND INVESTS
INVESTMENT OBJECTIVE AND POLICIES
PRUDENTIAL CALIFORNIA MUNICIPAL FUND (THE FUND) IS AN OPEN-END, MANAGEMENT
INVESTMENT COMPANY, OR MUTUAL FUND, CONSISTING OF THREE SEPARATE SERIES. EACH
SERIES OF THE FUND IS MANAGED INDEPENDENTLY. THE CALIFORNIA INCOME SERIES (THE
SERIES) IS DIVERSIFIED AND ITS INVESTMENT OBJECTIVE IS TO MAXIMIZE CURRENT
INCOME THAT IS EXEMPT FROM CALIFORNIA STATE AND FEDERAL INCOME TAXES CONSISTENT
WITH THE PRESERVATION OF CAPITAL. See "Investment Objectives and Policies" in
the Statement of Additional Information.
THE SERIES' INVESTMENT OBJECTIVE IS A FUNDAMENTAL POLICY AND, THEREFORE, MAY
NOT BE CHANGED WITHOUT THE APPROVAL OF THE HOLDERS OF A MAJORITY OF THE SERIES'
OUTSTANDING VOTING SECURITIES AS DEFINED IN THE INVESTMENT COMPANY ACT OF 1940,
AS AMENDED (THE INVESTMENT COMPANY ACT). THE SERIES' POLICIES THAT ARE NOT
FUNDAMENTAL MAY BE MODIFIED BY THE TRUSTEES.
THE SERIES WILL INVEST PRIMARILY IN CALIFORNIA STATE, MUNICIPAL AND LOCAL
GOVERNMENT OBLIGATIONS AND OBLIGATIONS OF OTHER QUALIFYING ISSUERS, SUCH AS
ISSUERS LOCATED IN PUERTO RICO, THE VIRGIN ISLANDS AND GUAM, WHICH PAY INCOME
EXEMPT, IN THE OPINION OF COUNSEL, FROM CALIFORNIA STATE AND FEDERAL INCOME
TAXES (CALIFORNIA OBLIGATIONS). THERE CAN BE NO ASSURANCE THAT THE SERIES WILL
BE ABLE TO ACHIEVE ITS INVESTMENT OBJECTIVE. As with an investment in any mutual
fund, an investment in the Series can decrease and you can lose money. Interest
on certain municipal obligations may be a preference item for purposes of the
federal alternative minimum tax. The Series may invest without limit in
municipal obligations that are "private activity bonds" (as defined in the
Internal Revenue Code) the interest on which would be a preference item for
purposes of the federal alternative minimum tax. See "Taxes, Dividends and
Distributions." California law provides that dividends paid by the Series are
exempt from California State personal income tax for individuals who reside in
California to the extent such dividends are derived from interest payments on
California Obligations. California Obligations may include general obligation
bonds of the State, counties, cities, towns, etc., revenue bonds of utility
systems, highways, bridges, port and airport facilities, colleges, hospitals,
etc., and industrial development and pollution control bonds. The Series will
invest in long-term California Obligations, and the dollar-weighted average
maturity of the Series' portfolio will generally range between 10-20 years. The
Series may also invest in certain short-term, tax-exempt notes such as Tax
Anticipation Notes, Revenue Anticipation Notes, Bond Anticipation Notes,
Construction Loan Notes and variable and floating rate demand notes.
Generally, municipal obligations with longer maturities produce higher yields
and are subject to greater price fluctuations as a result of changes in interest
rates (market risk) than municipal obligations with shorter maturities. The
prices of municipal obligations vary inversely with interest rates. Currently,
interest rates are much lower than in recent years. As a general matter, bond
prices and the Series' net asset value vary inversely with interest rate
fluctuations. If rates were to rise sharply, the prices of bonds in the Series'
portfolio may be adversely affected.
THE SERIES MAY INVEST ITS ASSETS IN FLOATING RATE AND VARIABLE RATE
SECURITIES, INCLUDING PARTICIPATION INTERESTS THEREIN AND INVERSE FLOATERS.
There is no limit on the amount of such securities that the Series may purchase.
Floating rate securities normally have a rate of interest which is set as a
specific percentage of a designated base rate, such as the rate on Treasury
bonds or bills or the prime rate at a major commercial bank. The interest rate
on floating rate securities changes periodically when there is a change in the
designated base interest rate. Variable rate securities provide for a specified
periodic adjustment in the interest rate based on prevailing market rates and
generally allow the Series to demand payment of the obligation on short notice
at par plus accrued interest, which amount may be more or less than the amount
the Series paid for them. An inverse floater is a debt instrument with a
floating or variable interest rate that moves in the opposite direction of the
interest rate on another security or the value of an index. Changes in the
interest rate on the other security or index inversely affect the residual
interest rate paid on the inverse floater, with the result that the inverse
floater's price will be considerably more volatile than that of a fixed rate
bond. The market for inverse floaters is relatively new.
9
<PAGE>
THE SERIES MAY ALSO INVEST IN MUNICIPAL LEASE OBLIGATIONS. A MUNICIPAL LEASE
OBLIGATION IS A MUNICIPAL SECURITY THE INTEREST ON AND PRINCIPAL OF WHICH IS
PAYABLE OUT OF LEASE PAYMENTS MADE BY THE PARTY LEASING THE FACILITIES FINANCED
BY THE ISSUE. Typically, municipal lease obligations are issued by a state or
municipal financing authority to provide funds for the construction of
facilities (E.G., schools, dormitories, office buildings or prisons) or the
acquisition of equipment. The facilities are typically used by the state or
municipality pursuant to a lease with a financing authority. Certain municipal
lease obligations may trade infrequently. Accordingly, the investment adviser
will monitor the liquidity of municipal lease obligations under the supervision
of the Trustees. Municipal lease obligations will not be considered illiquid for
purposes of the Series' 15% limitation on illiquid securities provided the
investment adviser determines that there is a readily available market for such
securities. See "Other Investments and Policies--Illiquid Securities" below.
THE SERIES WILL INVEST AT LEAST 70% OF ITS TOTAL ASSETS IN CALIFORNIA
OBLIGATIONS WHICH, AT THE TIME OF PURCHASE, ARE RATED WITHIN THE FOUR HIGHEST
QUALITY GRADES AS DETERMINED BY MOODY'S INVESTORS SERVICE (MOODY'S) (CURRENTLY
Aaa, Aa, A, Baa FOR BONDS, MIG 1, MIG 2, MIG 3, MIG 4 FOR NOTES AND PRIME-1 FOR
COMMERCIAL PAPER), STANDARD & POOR'S RATINGS GROUP (S&P) (CURRENTLY AAA, AA, A,
BBB FOR BONDS, SP-1, SP-2 FOR NOTES AND A-1 FOR COMMERCIAL PAPER) OR ANOTHER
NATIONALLY RECOGNIZED STATISTICAL RATING ORGANIZATION (NRSRO) OR, IF UNRATED,
WILL POSSESS CREDITWORTHINESS, IN THE OPINION OF THE INVESTMENT ADVISER,
COMPARABLE TO SUCH "INVESTMENT GRADE" RATED SECURITIES.
THE SERIES MAY ALSO INVEST UP TO 30% OF ITS TOTAL ASSETS IN CALIFORNIA
OBLIGATIONS RATED BELOW BAA BY MOODY'S OR BELOW BBB BY S&P, OR A COMPARABLE
RATING OF ANOTHER NRSRO OR, IF NON-RATED, OF COMPARABLE QUALITY, IN THE OPINION
OF THE FUND'S INVESTMENT ADVISER, BASED ON ITS CREDIT ANALYSIS. Securities rated
Baa by Moody's and BBB by S&P are described as being investment grade but are
also characterized as having speculative characteristics. Securities rated below
Baa by Moody's and below BBB by S&P are considered speculative. See "Description
of Security Ratings" in the Appendix. Such lower-rated high yield securities are
commonly referred to as "junk bonds." Such securities generally offer a higher
current yield than those in the higher rating categories but may also involve
greater price volatility and risk of loss of principal and income. The
investment adviser will attempt to manage risk and enhance yield through credit
analysis and careful security selection. See "Risk Factors Relating to Investing
in High Yield Municipal Obligations" below. Subsequent to its purchase by the
Series, a municipal obligation may be assigned a lower rating or cease to be
rated. Such an event would not require the elimination of the issue from the
portfolio, but the investment adviser will consider such an event in determining
whether the Series should continue to hold the security in its portfolios. Many
issuers of lower-quality bonds choose not to have their obligations rated and
the Series may invest in such unrated securities. Investors should carefully
consider the relative risks associated with investments in securities which
carry lower ratings and in comparable non-rated securities.
During the year ended August 31, 1997, the monthly dollar weighted average
ratings of the debt obligations held by the Series, expressed as a percentage of
the Series' total assets, were as follows:
<TABLE>
<CAPTION>
PERCENTAGE OF
RATINGS TOTAL INVESTMENTS
--------------- -----------------
<S> <C>
AAA/Aaa 31.62%
AA/Aa 3.17%
A/A 11.12%
BBB/Baa 9.95%
Unrated
AAA/Aaa 7.02%
AA/Aa 0.00%
A/A 1.05%
BBB/Baa 9.60%
BB/Ba 17.12%
B/B 7.35%
CCC/Caa 1.59%
D 0.41%
</TABLE>
10
<PAGE>
From time to time, the Series may own the majority of a municipal issue. Such
majority-owned holdings may present market and credit risks.
UNDER NORMAL MARKET CONDITIONS, THE SERIES WILL ATTEMPT TO INVEST
SUBSTANTIALLY ALL OF THE VALUE OF ITS ASSETS IN CALIFORNIA OBLIGATIONS. As a
matter of fundamental policy, during normal market conditions the Series' assets
will be invested so that at least 80% of the income will be exempt from
California State and federal income taxes or the Series will have at least 80%
of its total assets invested in California Obligations. During abnormal market
conditions or to provide liquidity, the Series may hold cash or cash equivalents
or investment grade taxable obligations, including obligations that are exempt
from federal, but not state, taxation and the Series may invest in tax-free cash
equivalents, such as floating rate demand notes, tax-exempt commercial paper and
general obligation and revenue notes or in taxable cash equivalents, such as
certificates of deposit, bankers acceptances and time deposits or other
short-term taxable investments such as repurchase agreements. When, in the
opinion of the investment adviser, abnormal market conditions require a
temporary defensive position, the Series may invest more than 20% of the value
of its assets in debt securities other than California Obligations or may invest
its assets so that more than 20% of the income is subject to California State or
federal income taxes. The Series will treat an investment in a municipal bond
refunded with escrowed U.S. Government securities as U.S. Government securities
for purposes of the Investment Company Act's diversification requirements
provided certain conditions are met. See "Investment Objectives and Policies--In
General" in the Statement of Additional Information.
THE SERIES MAY ACQUIRE PUT OPTIONS (PUTS) GIVING THE SERIES THE RIGHT TO SELL
SECURITIES HELD IN THE SERIES' PORTFOLIO AT A SPECIFIED EXERCISE PRICE ON A
SPECIFIED DATE. Such puts may be acquired for the purpose of protecting the
Series from a possible decline in the market value of the security to which the
put applies in the event of interest rate fluctuations or, in the case of
liquidity puts, for the purpose of shortening the effective maturity of the
underlying security. The aggregate value of premiums paid to acquire puts held
in the Series' portfolio (other than liquidity puts) may not exceed 10% of the
net asset value of the Series. The acquisition of a put may involve an
additional cost to the Series, by payment of a premium for the put, by payment
of a higher purchase price for securities to which the put is attached or
through a lower effective interest rate.
In addition, there is a credit risk associated with the purchase of puts in
that the issuer of the put may be unable to meet its obligation to purchase the
underlying security. Accordingly, the Series will acquire puts only under the
following circumstances: (1) the put is written by the issuer of the underlying
security and such security is rated within the four highest quality grades as
determined by an NRSRO; or (2) the put is written by a person other than the
issuer of the underlying security and such person has securities outstanding
which are rated within such four highest quality grades; or (3) the put is
backed by a letter of credit or similar financial guarantee issued by a person
having securities outstanding which are rated within the two highest quality
grades of an NRSRO.
THE SERIES MAY PURCHASE MUNICIPAL OBLIGATIONS ON A "WHEN-ISSUED" OR "DELAYED
DELIVERY" BASIS, IN EACH CASE WITHOUT LIMIT. When municipal obligations are
offered on a when-issued or delayed delivery basis, the price and coupon rate
are fixed at the time the commitment to purchase is made, but delivery and
payment for the securities take place at a later date. The purchase price for
such securities includes interest accrued during the period between purchase and
settlement and, therefore, no interest accrues to the economic benefit of the
purchaser during such period. In the case of purchases by the Series, the price
that the Series is required to pay on the settlement date may be in excess of
the market value of the municipal obligations on that date. While securities may
be sold prior to the settlement date, the Series intends to purchase these
securities with the purpose of actually acquiring them unless a sale would be
desirable for investment reasons. At the time the Series makes the commitment to
purchase a municipal obligation on a when-issued or delayed delivery basis, it
will record the transaction and reflect the value of the obligation each day in
determining its net asset value. This value may fluctuate from day to day in the
same manner as values of municipal obligations otherwise held by the Series. If
the seller defaults in the sale, the Series could fail to realize the
appreciation, if any, that had occurred. The Series will establish a segregated
account with its Custodian in which it will maintain cash, U.S. Government
securities, equity securities or other liquid, unencumbered assets,
marked-to-market daily, equal in value to its commitments for when-issued or
delayed delivery securities.
11
<PAGE>
THE SERIES MAY ALSO PURCHASE MUNICIPAL FORWARD CONTRACTS. A municipal forward
contract is a municipal security which is purchased on a when-issued basis with
delivery taking place up to five years from the date of purchase. No interest
will accrue on the security prior to the delivery date. The investment adviser
will monitor the liquidity, value, credit quality and delivery of the security
under the supervision of the Trustees.
THE SERIES MAY PURCHASE SECONDARY MARKET INSURANCE ON CALIFORNIA OBLIGATIONS
WHICH IT HOLDS OR ACQUIRES. Secondary market insurance would be reflected in the
market value of the municipal obligation purchased and may enable the Series to
dispose of a defaulted obligation at a price similar to that of comparable
municipal obligations which are not in default.
Insurance is not a substitute for the basic credit of an issuer, but
supplements the existing credit and provides additional security therefor. While
insurance coverage for the California Obligations held by the Series reduces
credit risk by providing that the insurance company will make timely payment of
principal and interest if the issuer defaults on its obligation to make such
payment, it does not afford protection against fluctuation in the price, I.E.,
the market value, of the municipal obligations caused by changes in interest
rates and other factors, nor in turn against fluctuations in the net asset value
of the shares of the Series.
RISK FACTORS RELATING TO INVESTING IN HIGH YIELD MUNICIPAL OBLIGATIONS.
FIXED-INCOME SECURITIES ARE SUBJECT TO THE RISK OF AN ISSUER'S INABILITY TO MEET
PRINCIPAL AND INTEREST PAYMENTS ON THE OBLIGATIONS (CREDIT RISK) AND MAY ALSO BE
SUBJECT TO PRICE VOLATILITY DUE TO SUCH FACTORS AS INTEREST RATE SENSITIVITY,
MARKET PERCEPTION OF THE CREDITWORTHINESS OF THE ISSUER AND GENERAL MARKET
LIQUIDITY (MARKET RISK). Lower-rated or unrated (I.E., high yield) securities,
commonly known as "junk bonds," are more likely to react to developments
affecting market and credit risk than are more highly rated securities, which
react primarily to movements in the general level of interest rates. The
investment adviser will perform its own investment analysis and will not rely
principally on the ratings assigned by the rating services, although such
ratings will be considered by the investment adviser. The investment adviser
will consider, among other things, credit risk and market risk, as well as the
financial history and condition, the prospects and the management of an issuer
in selecting securities for the Series' portfolio. The achievement of the
Series' investment objective may be more dependent on the investment adviser's
credit analysis than is the case when investing in only higher quality bonds.
Investors should carefully consider the relative risks of investing in high
yield municipal obligations and understand that such securities are not
generally meant for short-term investing and that yields on junk bonds will
fluctuate over time.
The amount of high yield securities outstanding has proliferated recently in
conjunction with the decline in creditworthiness of many obligors on municipal
debt, particularly health care providers and certain governmental bodies. An
economic downturn could severely affect the ability of highly leveraged issuers
to service their debt obligations or to repay their obligations upon maturity.
In addition, the secondary market for high yield securities, which is
concentrated in relatively few market makers, may not be as liquid as the
secondary market for more highly rated securities and, from time to time, it may
be more difficult to value high yield securities than more highly rated
securities, and the judgment of the Board of Trustees and the investment adviser
may play a greater role in valuation because there is less reliable objective
data available. Under adverse market or economic conditions, the secondary
market for high yield securities could contract further, independent of any
specific adverse changes in the condition of a particular issuer. As a result,
the investment adviser could find it more difficult to sell these securities or
may be able to sell the securities only at prices lower than if such securities
were widely traded. Prices realized upon the sale of such lower rated or unrated
securities, under these circumstances, may be less than the prices used in
calculating the Series' net asset value. If the investment adviser becomes
involved in activities such as reorganizations of obligors of troubled
investments held by the Series, this may prevent the Series from disposing of
the securities, due to its possession of material, non-public information
concerning the obligor.
LOWER-RATED OR UNRATED DEBT OBLIGATIONS ALSO PRESENT RISKS BASED ON PAYMENT
EXPECTATIONS. If an issuer calls the obligation for redemption, the Series may
have to replace the security with a lower-yielding security, resulting in a
decreased return for investors. If the Series experiences unexpected net
redemptions, it may be forced to sell its higher quality securities, resulting
in a decline in the overall credit quality of the Series' portfolio and
increasing the exposure of the Series to the risks of high yield securities.
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FUTURES CONTRACTS AND OPTIONS THEREON
THE SERIES IS AUTHORIZED TO PURCHASE AND SELL CERTAIN DERIVATIVES, INCLUDING
FINANCIAL FUTURES CONTRACTS (FUTURES CONTRACTS) AND OPTIONS THEREON FOR THE
PURPOSE OF HEDGING ITS PORTFOLIO SECURITIES AGAINST FLUCTUATIONS IN VALUE CAUSED
BY CHANGES IN PREVAILING MARKET INTEREST RATES AND HEDGING AGAINST INCREASES IN
THE COST OF SECURITIES THE SERIES INTENDS TO PURCHASE. THE SUCCESSFUL USE OF
FUTURES CONTRACTS AND OPTIONS THEREON BY THE SERIES INVOLVES ADDITIONAL
TRANSACTION COSTS AND IS SUBJECT TO VARIOUS RISKS AND DEPENDS UPON THE
INVESTMENT ADVISER'S ABILITY TO PREDICT THE DIRECTION OF THE MARKET (INCLUDING
INTEREST RATES). THE SERIES, AND THUS INVESTORS, MAY LOSE MONEY THROUGH ANY
UNSUCCESSFUL USE OF THESE STRATEGIES.
A FUTURES CONTRACT OBLIGATES THE SELLER OF THE CONTRACT TO DELIVER TO THE
PURCHASER OF THE CONTRACT CASH EQUAL TO A SPECIFIC DOLLAR AMOUNT TIMES THE
DIFFERENCE BETWEEN THE VALUE OF A SPECIFIC FIXED-INCOME SECURITY OR INDEX AT THE
CLOSE OF THE LAST TRADING DAY OF THE CONTRACT AND THE PRICE AT WHICH THE
AGREEMENT IS MADE. No physical delivery of the underlying securities is made.
The Series will engage in transactions in only those futures contracts and
options thereon that are traded on a commodities exchange or a board of trade.
The Series intends to engage in futures contracts and options thereon as a
hedge against changes, resulting from market conditions, in the value of
securities which are held in the Series' portfolio or which the Series intends
to purchase, in accordance with the rules and regulations of the Commodity
Futures Trading Commission (the CFTC). The Series also intends to engage in such
transactions when they are economically appropriate for the reduction of risks
inherent in the ongoing management of the Series.
THE SERIES MAY NOT PURCHASE OR SELL FUTURES CONTRACTS OR OPTIONS THEREON IF,
IMMEDIATELY THEREAFTER, (i) THE SUM OF INITIAL AND NET CUMULATIVE VARIATION
MARGIN ON OUTSTANDING FUTURES CONTRACTS, TOGETHER WITH PREMIUMS PAID ON OPTIONS
THEREON, WOULD EXCEED 20% OF THE TOTAL ASSETS OF THE SERIES, OR (ii) IN THE CASE
OF RISK MANAGEMENT TRANSACTIONS, THE SUM OF THE AMOUNT OF INITIAL MARGIN
DEPOSITS ON THE SERIES' FUTURES POSITIONS AND PREMIUMS PAID FOR OPTIONS THEREON
WOULD EXCEED 5% OF THE LIQUIDATION VALUE OF THE SERIES' TOTAL ASSETS. There are
no limitations on the percentage of the portfolio which may be hedged and no
limitations on the use of the Series' assets to cover futures contracts and
options thereon, except that the aggregate value of the obligations underlying
put options will not exceed 50% of the Series' assets. Certain requirements for
qualification as a regulated investment company under the Internal Revenue Code
may limit the Series' ability to engage in futures contracts and options
thereon. See "Distributions and Tax Information--Federal Taxation" in the
Statement of Additional Information.
Currently, futures contracts are available on several types of fixed-income
securities, including U.S. Treasury bonds and notes, three-month U.S. Treasury
bills and Eurodollars. Futures contracts are also available on a municipal bond
index, based on THE BOND BUYER Municipal Bond Index, an index of 40 actively
traded municipal bonds. The Series may also engage in transactions in other
futures contracts that become available, from time to time, in other
fixed-income securities or municipal bond indices and in other options on such
contracts if the investment adviser believes such contracts and options would be
appropriate for hedging the Series' portfolio.
THERE CAN BE NO ASSURANCE THAT VIABLE MARKETS WILL CONTINUE OR THAT A LIQUID
SECONDARY MARKET WILL EXIST TO TERMINATE ANY PARTICULAR FUTURES CONTRACT AT ANY
SPECIFIC TIME. If it is not possible to close a futures position entered into by
the Series, the Series will continue to be required to make daily cash payments
of variation margin in the event of adverse price movements. In such a
situation, if the Series had insufficient cash, it might have to sell portfolio
securities to meet daily variation margin requirements at a time when it might
be disadvantageous to do so. The inability to close futures positions also could
have an adverse impact on the ability of the Series to hedge effectively. There
is also a risk of loss by the Series of margin deposits in the event of
bankruptcy of a broker with whom the Series has an open position in a futures
contract.
THE SUCCESSFUL USE OF FUTURES CONTRACTS AND OPTIONS THEREON BY THE SERIES IS
SUBJECT TO VARIOUS ADDITIONAL RISKS. Any use of futures transactions involves
the risk of imperfect correlation in movements in the price of futures contracts
and movements
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in interest rates and, in turn, the prices of the securities that are the
subject of the hedge. If the price of the futures contract moves more or less
than the price of the security that is the subject of the hedge, the Series will
experience a gain or loss that will not be completely offset by movements in the
price of the security. The risk of imperfect correlation is greater where the
securities underlying futures contracts are taxable securities (rather than
municipal securities), are issued by companies in different market sectors or
have different maturities, ratings or geographic mixes than the security being
hedged. In addition, the correlation may be affected by additions to or
deletions from the index which serves as the basis for a futures contract.
Finally, if the price of the security that is subject to the hedge were to move
in a favorable direction, the advantage to the Series would be partially offset
by the loss incurred on the futures contract.
SPECIAL CONSIDERATIONS
BECAUSE THE SERIES WILL INVEST AT LEAST 80% OF THE VALUE OF ITS TOTAL ASSETS
IN CALIFORNIA OBLIGATIONS, IT IS MORE SUSCEPTIBLE TO FACTORS ADVERSELY AFFECTING
ISSUERS OF SUCH OBLIGATIONS THAN IS A COMPARABLE MUNICIPAL BOND MUTUAL FUND THAT
IS NOT CONCENTRATED IN CALIFORNIA OBLIGATIONS TO THIS DEGREE. The recent
national recession severely affected several key sectors of California's economy
although the State's economy outperformed expectations in 1995 and strong growth
continued into 1996. A central feature of the 1997-98 State budget is welfare
reform and government streamlining. The budget anticipates General Fund revenues
of $52.5 billion, expenditures of $52.8 billion, and a fiscal year end budget
reserve of $112 million. California law could restrict the ability of the State
and its local governmental entities to raise revenues sufficient to pay certain
obligations. If the issuers of any of the California Obligations are unable to
meet their financial obligations because of budgetary pressures or for other
reasons, the income derived by the Series, the ability to preserve or realize
appreciation of the Series' capital and the Series' liquidity could be adversely
affected. See "Investment Objectives and Policies--Special Considerations
Regarding Investments in Tax-Exempt Securities" in the Statement of Additional
Information.
OTHER INVESTMENTS AND POLICIES
REPURCHASE AGREEMENTS
The Series may on occasion enter into repurchase agreements whereby the seller
of a security agrees to repurchase that security from the Series at a mutually
agreed-upon time and price. The period of maturity is usually quite short,
possibly overnight or a few days, although it may extend over a number of
months. The resale price is in excess of the purchase price, reflecting an
agreed-upon rate of return effective for the period of time the Series' money is
invested in the security. The Series' repurchase agreements will at all times be
fully collateralized in an amount at least equal to the resale price. The
instruments held as collateral are valued daily and if the value of the
instruments declines, the Series will require additional collateral. If the
seller defaults and the value of the collateral securing the repurchase
agreement declines, the Series may incur a loss. The Series participates in a
joint repurchase account with other investment companies managed by Prudential
Investments Fund Management LLC pursuant to an order of the Securities and
Exchange Commission (SEC).
BORROWING
The Series may borrow an amount equal to no more than 33 1/3% of the value of
its total assets (calculated when the loan is made) for temporary, extraordinary
or emergency purposes or for the clearance of transactions. The Series may
pledge up to 33 1/3% of the value of its total assets to secure these
borrowings. The Series will not purchase portfolio securities if its borrowings
exceed 5% of its total assets.
PORTFOLIO TURNOVER
The Series does not expect to trade in securities for short-term gain. It is
anticipated that the annual portfolio turnover rate will not exceed 150%. The
portfolio turnover rate is calculated by dividing the lesser of sales or
purchases of portfolio securities by the average monthly value of the portfolio
securities, excluding securities having a maturity at the date of purchase of
one year or less.
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ILLIQUID SECURITIES
The Series may hold up to 15% of its net assets in illiquid securities
including repurchase agreements which have a maturity of longer than seven days,
securities with legal or contractual restrictions on resale (restricted
securities) and securities that are not readily marketable. Restricted
securities eligible for resale pursuant to Rule 144A under the Securities Act of
1933, as amended (the Securities Act), privately placed commercial paper and
municipal lease obligations that have a readily available market are not
considered illiquid for the purposes of this limitation. The investment adviser
will monitor the liquidity of such restricted securities under the supervision
of the Trustees. The Series' investment in Rule 144A securities could have the
effect of increasing illiquidity to the extent that qualified institutional
buyers become, for a limited time, uninterested in purchasing Rule 144A
securities. See "Investment Objectives and Policies--Illiquid Securities" and
"Investment Restrictions" in the Statement of Additional Information. Repurchase
agreements subject to demand are deemed to have a maturity equal to the notice
period.
INVESTMENT RESTRICTIONS
The Series is subject to certain investment restrictions which, like its
investment objective, constitute fundamental policies. Fundamental policies
cannot be changed without the approval of the holders of a majority of the
Series' outstanding voting securities, as defined in the Investment Company Act.
See "Investment Restrictions" in the Statement of Additional Information.
HOW THE FUND IS MANAGED
THE FUND HAS TRUSTEES WHO, IN ADDITION TO OVERSEEING THE ACTIONS OF THE FUND'S
MANAGER, SUBADVISER AND DISTRIBUTOR, AS SET FORTH BELOW, DECIDE UPON MATTERS OF
GENERAL POLICY. THE FUND'S MANAGER CONDUCTS AND SUPERVISES THE DAILY BUSINESS
OPERATIONS OF THE FUND. THE FUND'S SUBADVISER FURNISHES DAILY INVESTMENT
ADVISORY SERVICES.
For the fiscal year ended August 31, 1997, total expenses of the Series as a
percentage of average daily net assets, net of management fee waivers, were
.73%, 1.13% and 1.38% for the Series' Class A, Class B and Class C shares,
respectively. For the period from September 18, 1996 (commencement of the
offering of Class Z shares) through August 31, 1997, total expenses of the
Series as a percentage of average daily net assets, net of fee waivers were .63%
(annualized) for the Series' Class Z shares. See "Financial Highlights" above
and "Fee Waivers" below.
MANAGER
PRUDENTIAL INVESTMENTS FUND MANAGEMENT LLC (PIFM OR THE MANAGER), GATEWAY
CENTER THREE, 100 MULBERRY STREET, NEWARK, NEW JERSEY 07102-4077, IS THE MANAGER
OF THE FUND AND IS COMPENSATED FOR ITS SERVICES AT AN ANNUAL RATE OF .50 OF 1%
OF THE AVERAGE DAILY NET ASSETS OF THE SERIES. PIFM is organized in New York as
a limited liability company. It is the successor to Prudential Mutual Fund
Management, Inc., which transferred its assets to PIFM in September 1996. For
the fiscal year ended August 31, 1997, the Series paid PIFM a management fee of
.45 of 1% of the Series' average net assets, after taking into account a
management fee waiver. See "Fee Waivers" below and "Manager" in the Statement of
Additional Information.
As of September 30, 1997, PIFM served as the manager to 41 open-end investment
companies, constituting all of the Prudential Mutual Funds, and as manager or
administrator to 22 closed-end investment companies with aggregate assets of
approximately $59.9 billion.
UNDER THE MANAGEMENT AGREEMENT WITH THE FUND, PIFM MANAGES THE INVESTMENT
OPERATIONS OF EACH SERIES OF THE FUND AND ALSO ADMINISTERS THE FUND'S BUSINESS
AFFAIRS. See "Manager" in the Statement of Additional Information.
UNDER A SUBADVISORY AGREEMENT BETWEEN PIFM AND THE PRUDENTIAL INVESTMENT
CORPORATION (PIC), DOING BUSINESS AS PRUDENTIAL INVESTMENTS (PI, THE SUBADVISER
OR THE INVESTMENT ADVISOR), PI FURNISHES INVESTMENT ADVISORY SERVICES
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IN CONNECTION WITH THE MANAGEMENT OF THE FUND AND IS REIMBURSED BY PIFM FOR ITS
REASONABLE COSTS AND EXPENSES INCURRED IN PROVIDING SUCH SERVICES. Under the
Management Agreement, PIFM continues to have responsibility for all investment
advisory services and supervises PI's performance of such services.
The current portfolio manager of the Series is Christian Smith, a Vice
President of Prudential Investments. Mr. Smith has responsibility for the
day-to-day management of the portfolio. He has managed the portfolio since 1991
and has been employed by PIC in various capacities since 1988.
PIFM and PIC are indirect, wholly-owned subsidiaries of The Prudential
Insurance Company of America (Prudential), a major diversified insurance and
financial services company, and are part of Prudential Investments, a business
group of Prudential.
FEE WAIVERS
Effective July 1, 1996, PIFM agreed to waive 10% of its management fee. The
Series is not required to reimburse PIFM for such management fee waiver.
Thereafter, PIFM may from time to time agree to waive its management fee or a
portion thereof and subsidize certain operating expenses of the Series. Fee
waivers and expense subsidies will increase the Series' yield and total return.
See "Fund Expenses."
DISTRIBUTOR
PRUDENTIAL SECURITIES INCORPORATED (PRUDENTIAL SECURITIES, PSI OR THE
DISTRIBUTOR), ONE SEAPORT PLAZA, NEW YORK, NEW YORK 10292, IS A CORPORATION
ORGANIZED UNDER THE LAWS OF THE STATE OF DELAWARE AND SERVES AS THE DISTRIBUTOR
OF THE CLASS A, CLASS B, CLASS C AND CLASS Z SHARES OF THE FUND. It is an
indirect, wholly-owned subsidiary of Prudential.
UNDER SEPARATE DISTRIBUTION AND SERVICE PLANS (THE CLASS A PLAN, THE CLASS B
PLAN AND THE CLASS C PLAN, COLLECTIVELY, THE PLANS) ADOPTED BY THE FUND UNDER
RULE 12b-1 UNDER THE INVESTMENT COMPANY ACT AND A DISTRIBUTION AGREEMENT (THE
DISTRIBUTION AGREEMENT), PRUDENTIAL SECURITIES (THE DISTRIBUTOR) INCURS THE
EXPENSES OF DISTRIBUTING THE CLASS A, CLASS B AND CLASS C SHARES OF THE SERIES.
PRUDENTIAL SECURITIES ALSO INCURS THE EXPENSE OF DISTRIBUTING THE SERIES' CLASS
Z SHARES UNDER THE DISTRIBUTION AGREEMENT WITH THE FUND, NONE OF WHICH IS
REIMBURSED BY OR PAID FOR BY THE FUND. These expenses include commissions and
account servicing fees paid to, or on account of, financial advisers of
Prudential Securities and representatives of Pruco Securities Corporation
(Prusec), an affiliated broker-dealer, commissions and account servicing fees
paid to, or on account of, other broker-dealers or financial institutions (other
than national banks) which have entered into agreements with the Distributor,
advertising expenses, the cost of printing and mailing prospectuses to potential
investors and indirect and overhead costs of Prudential Securities and Prusec
associated with the sale of Fund shares, including lease, utility,
communications and sales promotion expenses.
Under the Plans, the Series is obligated to pay distribution and/or service
fees to the Distributor as compensation for its distribution and service
activities, not as reimbursement for specific expenses incurred. If the
Distributor's expenses exceed its distribution and service fees, the Series will
not be obligated to pay any additional expenses. If the Distributor's expenses
are less than such distribution and service fees, it will retain its full fees
and realize a profit.
UNDER THE CLASS A PLAN, THE SERIES MAY PAY PRUDENTIAL SECURITIES FOR ITS
DISTRIBUTION-RELATED ACTIVITIES WITH RESPECT TO CLASS A SHARES AT AN ANNUAL RATE
OF UP TO .30 OF 1% OF THE AVERAGE DAILY NET ASSETS OF THE CLASS A SHARES OF THE
SERIES. The Class A Plan provides that (i) up to .25 of 1% of the average daily
net assets of the Class A shares may be used to pay for personal service and/or
the maintenance of shareholder accounts (service fee) and (ii) total
distribution fees (including the service fee of .25 of 1%) may not exceed .30 of
1% of the average daily net assets of the Class A shares. Prudential Securities
has agreed to limit its distribution-related fees payable under the Class A Plan
to .10 of 1% of the average daily net assets of the Class A shares for the
fiscal year ending August 31, 1998.
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UNDER THE CLASS B AND CLASS C PLANS, THE SERIES MAY PAY PRUDENTIAL SECURITIES
FOR ITS DISTRIBUTION-RELATED ACTIVITIES WITH RESPECT TO CLASS B AND CLASS C
SHARES AT AN ANNUAL RATE OF UP TO .50 OF 1% AND UP TO 1% OF THE AVERAGE DAILY
NET ASSETS OF THE CLASS B AND CLASS C SHARES, RESPECTIVELY. The Class B Plan
provides for the payment to Prudential Securities of (i) an asset-based sales
charge of up to .50 of 1% of the average daily net assets of the Class B shares,
and (ii) a service fee of up to .25 of 1% of the average daily net assets of the
Class B shares; provided that the total distribution-related fee does not exceed
.50 of 1%. The Class C Plan provides for the payment to Prudential Securities of
(i) an asset-based sales charge of up to .75 of 1% of the average daily net
assets of the Class C shares, and (ii) a service fee of up to .25 of 1% of the
average daily net assets of the Class C shares. The service fee is used to pay
for personal service and/or the maintenance of shareholder accounts. Prudential
Securities has agreed to limit its distribution-related fees payable under the
Class C Plan to .75 of 1% of the average daily net assets of the Class C shares
for the fiscal year ending August 31, 1998. Prudential Securities also receives
contingent deferred sales charges from certain redeeming shareholders. See
"Shareholder Guide--How to Sell Your Shares--Contingent Deferred Sales Charges."
For the fiscal year ended August 31, 1997, the Series paid distribution
expenses of .10 of 1%, .50 of 1% and .75 of 1% of the average daily net assets
of the Class A, Class B and Class C shares, respectively. The Series records all
payments made under the Plans as expenses in the calculation of net investment
income. See "Distributor" in the Statement of Additional Information.
Distribution expenses attributable to the sale of Class A, Class B and Class C
shares of the Series will be allocated to each such class based upon the ratio
of sales of each such class to the sales of Class A, Class B and Class C shares
of the Series other than expenses allocable to a particular class. The
distribution fee and sales charge of one class will not be used to subsidize the
sale of another class.
Each Plan provides that it shall continue in effect from year to year provided
that a majority of the Trustees of the Fund, including a majority of the
Trustees who are not "interested persons" of the Fund (as defined in the
Investment Company Act) and who have no direct or indirect financial interest in
the operation of the Plan or any agreement related to the Plan (the Rule 12b-1
Trustees), vote annually to continue the Plan. Each Plan may be terminated with
respect to the Series at any time by vote of a majority of the Rule 12b-1
Trustees or of a majority of the outstanding shares of the applicable class of
the Series. The Series will not be obligated to pay distribution and service
fees incurred under any Plan if it is terminated or not continued.
In addition to distribution and service fees paid by the Series under the
Class A, Class B and Class C Plans, the Manager (or one of its affiliates) may
make payments out of its own resources to dealers (including Prudential
Securities) and other persons who distribute shares of the Series (including
Class Z shares). Such payments may be calculated by reference to the net asset
value of shares sold by such persons or otherwise.
The Distributor is subject to the rules of the National Association of
Securities Dealers, Inc. (the NASD) governing maximum sales charges. See
"Distributor" in the Statement of Additional Information.
On October 21, 1993, PSI entered into an omnibus settlement with the SEC,
state securities regulators (with the exception of the Texas Securities
Commissioner who joined the settlement on January 18, 1994) and the NASD to
resolve allegations that from 1980 through 1990 PSI sold certain limited
partnership interests in violation of securities laws to persons for whom such
securities were not suitable and misrepresented the safety, potential returns
and liquidity of these investments. Without admitting or denying the allegations
asserted against it, PSI consented to the entry of an SEC Administrative Order
which stated that PSI's conduct violated the federal securities laws, directed
PSI to cease and desist from violating the federal securities laws, pay civil
penalties, and adopt certain remedial measures to address the violations.
Pursuant to the terms of the SEC settlement, PSI agreed to the imposition of a
$10,000,000 civil penalty, established a settlement fund in the amount of
$330,000,000 and procedures to resolve legitimate claims for compensatory
damages by purchasers of the partnership interests. PSI has agreed to provide
additional funds, if necessary, for the purpose of the settlement fund. PSI's
settlement with the state securities regulators included an agreement to pay a
penalty of $500,000 per jurisdiction. PSI consented to a censure and to the
payment of a $5,000,000 fine in settling the NASD action.
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In October 1994, a criminal complaint was filed with the United States
Magistrate for the Southern District of New York alleging that PSI committed
fraud in connection with the sale of certain limited partnership interests in
violation of federal securities laws. An agreement was simultaneously filed to
defer prosecution of these charges for a period of three years from the signing
of the agreement, provided that PSI complies with the terms of the agreement.
If, upon completion of the three year period, PSI has complied with the terms of
the agreement, no prosecution will be instituted by the United States for the
offenses charged in the complaint. If on the other hand, during the course of
the three year period, PSI violates the terms of the agreement, the U.S.
Attorney can then elect to pursue these charges. Under the terms of the
agreement, PSI agreed, among other things, to pay an additional $330,000,000
into the fund established by the SEC to pay restitution to investors who
purchased certain PSI limited partnership interests.
For more detailed information concerning the foregoing matters, see
"Distributor" in the Statement of Additional Information, a copy of which may be
obtained at no cost by calling (800) 225-1852.
The Fund is not affected by PSI's financial condition and is an entirely
separate legal entity from PSI, which has no beneficial ownership therein and
the Fund's assets which are held by State Street Bank and Trust Company, an
independent custodian, are separate and distinct from PSI.
PORTFOLIO TRANSACTIONS
Prudential Securities may act as a broker or futures commission merchant for
the Fund, provided that the commissions, fees or other remuneration it receives
are fair and reasonable. See "Portfolio Transactions and Brokerage" in the
Statement of Additional Information.
CUSTODIAN AND TRANSFER AND DIVIDEND DISBURSING AGENT
State Street Bank and Trust Company, One Heritage Drive, North Quincy,
Massachusetts 02171, serves as Custodian for the portfolio securities of the
Series and cash and, in that capacity, maintains certain financial and
accounting books and records pursuant to an agreement with the Fund. Its mailing
address is P.O. Box 1713, Boston, Massachusetts 02105.
Prudential Mutual Fund Services LLC (PMFS), Raritan Plaza One, Edison, New
Jersey 08837, serves as Transfer Agent and Dividend Disbursing Agent and in
those capacities maintains certain books and records for the Fund. PMFS is a
wholly-owned subsidiary of PIFM. Its mailing address is P.O. Box 15005, New
Brunswick, New Jersey 08906-5005.
HOW THE FUND VALUES ITS SHARES
THE SERIES' NET ASSET VALUE PER SHARE OR NAV IS DETERMINED BY SUBTRACTING ITS
LIABILITIES FROM THE VALUE OF ITS ASSETS AND DIVIDING THE REMAINDER BY THE
NUMBER OF OUTSTANDING SHARES. NAV IS CALCULATED SEPARATELY FOR EACH CLASS. THE
TRUSTEES HAVE FIXED THE SPECIFIC TIME OF DAY FOR THE COMPUTATION OF THE NAV OF
THE SERIES TO BE AS OF 4:15 P.M., NEW YORK TIME.
Portfolio securities are valued based on market quotations or, if not readily
available, at fair value as determined in good faith under procedures
established by the Trustees. Securities may also be valued based on values
provided by a pricing service. See "Net Asset Value" in the Statement of
Additional Information.
The Series will compute its NAV once daily on days that the New York Stock
Exchange is open for trading except on days on which no orders to purchase, sell
or redeem shares have been received by the Series or days on which changes in
the value of the Series' portfolio securities do not materially affect the NAV.
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Although the legal rights of each class of shares are substantially identical,
the different expenses borne by each class will result in different dividends.
As long as the Series declares dividends daily, the NAV of the Class A, Class B,
Class C and Class Z shares will generally be the same. It is expected, however,
that the Series' dividends will differ by approximately the amount of any
distribution and/or service fee expense accrual differential among the classes.
HOW THE FUND CALCULATES PERFORMANCE
FROM TIME TO TIME THE FUND MAY ADVERTISE THE YIELD, TAX EQUIVALENT YIELD AND
AVERAGE ANNUAL TOTAL RETURN AND AGGREGATE TOTAL RETURN OF THE SERIES IN
ADVERTISEMENTS OR SALES LITERATURE. YIELD, TAX EQUIVALENT YIELD AND TOTAL RETURN
ARE CALCULATED SEPARATELY FOR CLASS A, CLASS B, CLASS C AND CLASS Z SHARES.
THESE FIGURES ARE BASED ON HISTORICAL EARNINGS AND ARE NOT INTENDED TO INDICATE
FUTURE PERFORMANCE. The yield refers the income generated by an investment in
the Series over a one-month or 30-day period. This income is then annualized;
that is, the amount of income generated by the investment during that 30-day
period is assumed to be generated each 30-day period for twelve periods and is
shown as a percentage of the investment. The income earned on the investment is
also assumed to be reinvested at the end of the sixth 30-day period. The tax
equivalent yield is calculated similarly to the yield, except that the yield is
increased using a stated income tax rate to demonstrate the taxable yield
necessary to produce an after-tax equivalent to the Series. The total return
shows how much an investment in the Series would have increased (decreased) over
a specified period of time (I.E., one, five or ten years or since inception of
the Series) assuming that all distributions and dividends by the Series were
reinvested on the reinvestment dates during the period and less all recurring
fees. The aggregate total return reflects actual performance over a stated
period of time. Average annual total return is a hypothetical rate of return
that, if achieved annually, would have produced the same aggregate total return
if performance had been constant over the entire period. Average annual total
return smooths out variations in performance and takes into account any
applicable initial or contingent deferred sales charges. Neither average annual
total return nor aggregate total return takes into account any federal or state
income taxes which may be payable upon redemption. The Fund also may include
comparative performance information in advertising or marketing the shares of
the Series. Such performance information may include data from Lipper Analytical
Services, Inc., Morningstar Publications, Inc., other industry publications,
business periodicals and market indices. See "Performance Information" in the
Statement of Additional Information. Further performance information is
contained in the Series' annual and semi-annual reports to shareholders, which
may be obtained without charge. See "Shareholder Guide--Shareholder
Services--Reports to Shareholders."
TAXES, DIVIDENDS AND DISTRIBUTIONS
TAXATION OF THE FUND
THE SERIES HAS ELECTED TO QUALIFY AND INTENDS TO REMAIN QUALIFIED AS A
REGULATED INVESTMENT COMPANY UNDER THE INTERNAL REVENUE CODE. ACCORDINGLY, THE
SERIES WILL NOT BE SUBJECT TO FEDERAL INCOME TAXES ON ITS NET INVESTMENT INCOME
AND NET CAPITAL GAINS, IF ANY, THAT IT DISTRIBUTES TO ITS SHAREHOLDERS. TO THE
EXTENT NOT DISTRIBUTED BY THE SERIES, NET TAXABLE INVESTMENT INCOME AND CAPITAL
GAINS AND LOSSES ARE TAXABLE TO THE SERIES.
To the extent the Series invests in taxable obligations, it will earn taxable
investment income. Also, to the extent the Series engages in hedging
transactions in futures contracts and options thereon, it may earn both
short-term and long-term capital gain or loss. Under the Internal Revenue Code,
special rules apply to the treatment of certain options and futures contracts
(Section 1256 contracts). At the end of each year, such investments held by the
Series will be required to be "marked to market" for federal income tax
purposes; that is, treated as having been sold at market value. Sixty percent of
any gain or loss recognized on these "deemed sales" and on actual dispositions
will be treated as long-term capital gain or loss, and the remainder will be
treated as short-term capital gain or loss. See "Distributions and Tax
Information" in the Statement of Additional Information.
19
<PAGE>
Gain or loss realized by the Series from the sale of securities generally will
be treated as capital gain or loss; however, gain from the sale of certain
securities (including municipal obligations) will be treated as ordinary income
to the extent of any "market discount." Market discount generally is the
difference, if any, between the price paid by the Series for the security and
the principal amount of the security (or, in the case of a security issued at an
original issue discount, the revised issue price of the security). The market
discount rule does not apply to any security that was acquired by the Series at
its original issue. See "Distributions and Tax Information" in the Statement of
Additional Information.
TAXATION OF SHAREHOLDERS
In general, the character of tax-exempt interest distributed by the Series
will flow through as tax-exempt interest to its shareholders provided that 50%
or more of the value of its assets at the end of each quarter of its taxable
year is invested in state, municipal and other obligations, the interest on
which is excluded from gross income for federal income tax purposes. During
normal market conditions, at least 80% of the Series' total assets will be
invested in such obligations. See "How the Fund Invests--Investment Objective
and Policies."
Any dividends out of net taxable investment income, together with
distributions of net short-term gains (I.E., the excess of net short-term
capital gains over net long-term capital losses) distributed to shareholders,
will be taxable as ordinary income to the shareholder whether or not reinvested.
Any net capital gains (I.E., the excess of net capital gains from the sale of
assets held for more than 12 months over net short-term capital losses)
distributed to shareholders will be taxable as capital gains to the
shareholders, whether or not reinvested and regardless of the length of time a
shareholder has owned his or her shares. The maximum capital gains rate for
individuals is 28% with respect to assets held for more than 12 months, but not
more than 18 months, and 20% with respect to assets held for more than 18
months. The maximum capital gains rate for corporate shareholders currently is
the same as the maximum tax rate for ordinary income.
Any gain or loss realized upon a sale or redemption of Series shares by a
shareholder who is not a dealer in securities will be treated as capital gain or
loss. In the case of an individual, any such capital gain will be treated as
short-term capital loss if the shares were held for not more than 12 months,
mid-term gain, taxable at the maximum rate of 28%, if such shares were held for
more than 12, but not more than 18 months, and long-term capital gain, taxable
at the maximum rate of 20%, if such shares were held for more than 18 months. In
the case of a corporation, any such capital gain will be treated as long-term
capital gain, taxable at the same rates as ordinary income, if such shares were
held for more than 12 months. Any such capital loss will be treated as long-term
capital loss if the shares have been held more than one year and otherwise as
short-term capital loss. Any such loss with respect to shares that are held for
six months or less, however, will be treated as long-term capital loss to the
extent of any capital gain distributions received by the shareholder. In
addition, any short-term capital loss will be disallowed to the extent of any
tax-exempt dividends received by the shareholder on shares that are held for six
months or less.
The Fund has obtained opinions of counsel to the effect that neither (i) the
conversion of Class B shares into Class A shares nor (ii) the exchange of any
class of the Series' shares for any other class of its shares constitutes a
taxable event for federal income tax purposes. However, such opinions are not
binding on the Internal Revenue Service.
CERTAIN INVESTORS MAY INCUR FEDERAL ALTERNATIVE MINIMUM TAX LIABILITY AS A
RESULT OF THEIR INVESTMENT IN THE FUND. Tax-exempt interest from certain
municipal obligations (I.E., certain private activity bonds issued after August
7, 1986) will be treated as an item of tax preference for purposes of the
alternative minimum tax. The Fund anticipates that, under regulations to be
promulgated, items of tax preference incurred by the Series will be attributed
to the Series' shareholders, although some portion of such items could be
allocated to the Series itself. Depending upon each shareholder's individual
circumstances, the attribution of items of tax preference incurred by the Series
could result in liability for the shareholder for the alternative minimum tax.
Similarly, the Series could be liable for the alternative minimum tax for items
of tax preference attributed to it. The Series is permitted to invest in
municipal obligations of the type that will produce items of tax preference.
Corporate shareholders in the Series also will have to take into account the
adjustment for current earnings for alternative minimum tax purposes. Corporate
shareholders should consult with their tax advisers with respect to this
potential adjustment.
20
<PAGE>
Under California law, the taxation of regulated investment companies and their
shareholders was generally conformed to the federal tax law that was in effect
on January 1, 1997. Dividends paid by the Series and derived from interest on
obligations which (when held by an individual) pay interest excludable from
California personal income under California law will be exempt from the
California personal income tax (although not from the California franchise tax).
To the extent a portion of the dividends are derived from interest on debt
obligations other than those described directly above, such portion will be
subject to the California personal income tax even though it may be excludable
from gross income for federal income tax purposes. In addition, distributions of
short-term capital gains realized by the Fund will be taxable to the
shareholders as ordinary income. Distributions of long-term capital gains will
be taxable as such to the shareholders regardless of how long they held their
shares. Under California law, ordinary income and capital gains currently are
taxed at the same rate. With respect to non-corporate shareholders, California
does not treat tax-exempt interest as a tax preference item for purposes of its
alternative minimum tax. To the extent a corporate shareholder receives
dividends which are exempt from California taxation, a portion of such dividends
may be subject to the alternative minimum tax.
Interest on indebtedness incurred or continued to purchase or carry shares of
the Series will not be deductible for federal or California purposes.
Shareholders are advised to consult their own tax advisers regarding specific
questions as to federal, state and local taxes. See "Distributions and Tax
Information" in the Statement of Additional Information.
WITHHOLDING TAXES
Under the Internal Revenue Code, the Series is required to withhold and remit
to the U.S. Treasury 31% of redemption proceeds on the accounts of certain
shareholders who fail to furnish their tax identification numbers on IRS Form
W-9 (or IRS Form W-8 in the case of certain foreign shareholders) with the
required certifications regarding the shareholder's status under the federal
income tax law. Such withholding is also required on taxable dividends and
capital gain distributions made by the Series unless it is reasonably expected
that at least 95% of the distributions of the Series are comprised of tax-exempt
dividends.
Dividends of net taxable investment income and distributions of net short-term
capital gains paid to a shareholder (including a shareholder acting as a nominee
or fiduciary) who is a nonresident alien individual, a foreign corporation or a
foreign partnership (foreign shareholder) are subject to a 30% (or lower treaty
rate) withholding tax upon the gross amount of the dividends unless the
dividends are effectively connected with a U.S. trade or business conducted by
the foreign shareholder. Capital gain dividends paid to a foreign shareholder
are generally not subject to withholding tax. A foreign shareholder will,
however, be required to pay U.S. income tax on any dividends and capital gain
distributions which are effectively connected with a U.S. trade or business of
the foreign shareholder.
DIVIDENDS AND DISTRIBUTIONS
THE SERIES EXPECTS TO DECLARE DAILY AND PAY MONTHLY DIVIDENDS OF NET
INVESTMENT INCOME, IF ANY, AND MAKE DISTRIBUTIONS AT LEAST ANNUALLY OF ANY
CAPITAL GAINS IN EXCESS OF CAPITAL LOSSES. For federal income tax purposes, the
Series had a capital loss carryforward at August 31, 1997 of approximately
$2,880,100, of which $1,904,400 expires in 2003 and $975,700 expires in 2004.
Accordingly, no capital gains distributions are expected to be paid to
shareholders until net gains have been realized in excess of such amount.
Dividends paid by the Series with respect to each class of shares, to the extent
any dividends are paid, will be calculated in the same manner, at the same time,
on the same day and will be in the same amount except that each such class
(other than Class Z) will bear its own distribution charges, generally resulting
in lower dividends for Class B and Class C shares in relation to Class A and
Class Z shares and lower dividends for Class A shares in relation to Class Z
shares. Distributions of net capital gains, if any, will be paid in the same
amount for each class of shares. See "How the Fund Values its Shares."
DIVIDENDS AND DISTRIBUTIONS WILL BE PAID IN ADDITIONAL SHARES OF THE SERIES
BASED ON THE NAV OF EACH CLASS OF THE SERIES ON THE PAYMENT DATE AND RECORD
DATE, RESPECTIVELY, OR SUCH OTHER DATE AS THE TRUSTEES MAY DETERMINE, UNLESS
21
<PAGE>
THE SHAREHOLDER ELECTS IN WRITING NOT LESS THAN FIVE BUSINESS DAYS PRIOR TO THE
RECORD DATE TO RECEIVE SUCH DIVIDENDS AND DISTRIBUTIONS IN CASH. Such election
should be submitted to Prudential Mutual Fund Services LLC, Attention: Account
Maintenance, P.O. Box 15015, New Brunswick, New Jersey 08906-5015. If you hold
shares through Prudential Securities, you should contact your financial adviser
to elect to receive dividends and distributions in cash. The Fund will notify
each shareholder after the close of the Fund's taxable year both of the dollar
amount and the taxable status of that year's dividends and distributions on a
per share basis.
GENERAL INFORMATION
DESCRIPTION OF SHARES
THE FUND WAS ESTABLISHED AS A MASSACHUSETTS BUSINESS TRUST ON MAY 18, 1984, BY
A DECLARATION OF TRUST. The Fund's activities are supervised by its Trustees.
The Declaration of Trust permits the Trustees to issue an unlimited number of
full and fractional shares in separate series, currently designated as the
California Series, the California Income Series and the California Money Market
Series. The Series is authorized to issue an unlimited number of shares, divided
into four classes, designated Class A, Class B, Class C and Class Z. Each class
of shares represents an interest in the same assets of the Series and is
identical in all respects except that (i) each class is subject to different
sales charges and distribution and/or service fees (except for Class Z shares
which are not subject to any sales charges and distribution and/or service
fees), which may affect performance, (ii) each class has exclusive voting rights
on any matter submitted to shareholders that relates solely to its arrangement
and has separate voting rights on any matter submitted to shareholders in which
the interests of one class differ from the interests of any other class, (iii)
each class has a different exchange privilege, (iv) only Class B shares have a
conversion feature and (v) Class Z shares are offered exclusively for sale to a
limited group of investors. See "How the Fund is Managed-- Distributor." In
accordance with the Fund's Declaration of Trust, the Trustees may authorize the
creation of additional series and classes within such series, with such
preferences, privileges, limitations and voting and dividend rights as the
Trustees may determine.
Shares of the Fund, when issued, are fully paid, nonassessable, fully
transferable and redeemable at the option of the holder. Shares are also
redeemable at the option of the Fund under certain circumstances as described
under "Shareholder Guide--How to Sell Your Shares." Each share of each class of
the Series is equal as to earnings, assets and voting privileges, except as
noted above, and each class (with the exception of Class Z shares, which are not
subject to any distribution or service fees) bears the expenses related to the
distribution of its shares. Except for the conversion feature applicable to the
Class B shares, there are no conversion, preemptive or other subscription
rights. In the event of liquidation, each share of beneficial interest of each
series is entitled to its portion of all of the Fund's assets after all debt and
expenses of the Fund have been paid. Since Class B and Class C shares generally
bear higher distribution expenses than Class A shares, the liquidation proceeds
to shareholders of those classes are likely to be lower than to Class A
shareholders and to Class Z shareholders, whose shares are not subject to any
distribution and/or service fees. The Fund's shares do not have cumulative
voting rights for the election of Trustees.
THE FUND DOES NOT INTEND TO HOLD ANNUAL MEETINGS OF SHAREHOLDERS UNLESS
OTHERWISE REQUIRED BY LAW. THE FUND WILL NOT BE REQUIRED TO HOLD MEETINGS OF
SHAREHOLDERS UNLESS, FOR EXAMPLE, THE ELECTION OF TRUSTEES IS REQUIRED TO BE
ACTED UPON BY SHAREHOLDERS UNDER THE INVESTMENT COMPANY ACT. SHAREHOLDERS HAVE
CERTAIN RIGHTS, INCLUDING THE RIGHT TO CALL A MEETING UPON A VOTE OF 10% OF THE
FUND'S OUTSTANDING SHARES FOR THE PURPOSE OF VOTING ON THE REMOVAL OF ONE OR
MORE TRUSTEES OR TO TRANSACT ANY OTHER BUSINESS.
The Declaration of Trust and the By-Laws of the Fund are designed to make the
Fund similar in certain respects to a Massachusetts business corporation. The
principal distinction between a Massachusetts business trust and a Massachusetts
business corporation relates to shareholder liability. Under Massachusetts law,
shareholders of a business trust may, under certain circumstances, be held
personally liable as partners for the obligations of the fund, which is not the
case with a
22
<PAGE>
corporation. The Declaration of Trust of the Fund provides that shareholders
shall not be subject to any personal liability for the acts or obligations of
the Fund and that every written obligation, contract, instrument or undertaking
made by the Fund shall contain a provision to the effect that the shareholders
are not individually bound thereunder.
ADDITIONAL INFORMATION
This Prospectus, including the Statement of Additional Information which has
been incorporated by reference herein, does not contain all the information set
forth in the Registration Statement filed by the Fund with the SEC under the
Securities Act. Copies of the Registration Statement may be obtained at a
reasonable charge from the SEC or may be examined, without charge, at the office
of the SEC in Washington, D.C.
SHAREHOLDER GUIDE
HOW TO BUY SHARES OF THE FUND
YOU MAY PURCHASE SHARES OF THE SERIES THROUGH PRUDENTIAL SECURITIES, PRUSEC OR
DIRECTLY FROM THE FUND, THROUGH ITS TRANSFER AGENT, PRUDENTIAL MUTUAL FUND
SERVICES LLC (PMFS OR THE TRANSFER AGENT), ATTENTION: INVESTMENT SERVICES, P.O.
BOX 15020, NEW BRUNSWICK, NEW JERSEY 08906-5020. Participants in programs
sponsored by Prudential Retirement Services should contact their client
representative for more information about Class Z shares. The purchase price is
the NAV next determined following receipt of an order in proper form by the
Transfer Agent or Prudential Securities plus a sales charge which, at your
option, may be imposed either (i) at the time of purchase (Class A shares) or
(ii) on a deferred bases (Class B or Class C shares). Class Z shares are offered
to a limited group of investors at net asset value without any sales charge. See
"Alternative Purchase Plan" below. Payment may be made by wire, check or through
your brokerage account. See also "How the Fund Values its Shares."
An investment in the Series may not be appropriate for tax-exempt or
tax-deferred investors. Such investors should consult their own tax advisers.
The minimum initial investment is $1,000 for Class A and Class B shares and
$5,000 for Class C shares, except that the minimum initial investment for Class
C shares may be waived from time to time. The minimum subsequent investment is
$100 for Class A, Class B and Class C shares. Class Z shares are not subject to
any minimum investment requirements. All minimum investment requirements are
waived for certain employee savings plans. For purchases made through the
Automatic Savings Accumulation Plan, the minimum initial and subsequent
investment is $50. See "Shareholder Services" below.
Application forms can be obtained from PMFS, Prudential Securities or Prusec.
If a share certificate is desired, it must be requested in writing for each
transaction. Certificates are issued only for full shares. Shareholders who hold
their shares through Prudential Securities will not receive share certificates.
The Fund reserves the right to reject any purchase order (including an
exchange into the Series) or to suspend or modify the continuous offering of its
shares. See "How to Sell Your Shares" below.
Your dealer is responsible for forwarding payment promptly to the Fund. The
Distributor reserves the right to cancel any purchase order for which payment
has not been received by the third business day following the investment.
Transactions in shares of the Series may be subject to postage and handling
charges imposed by your dealer.
PURCHASE BY WIRE. For an initial purchase of shares of the Series by wire, you
must first telephone PMFS at (800) 225-1852 (toll-free) to receive an account
number. The following information will be requested: your name, address, tax
identification number, class election, dividend distribution election, amount
being wired and wiring bank. Instructions should then be given by you to your
bank to transfer funds by wire to State Street Bank and Trust Company (State
Street), Boston, Massachusetts, Custody
23
<PAGE>
and Shareholder Services Division, Attention: Prudential California Municipal
Fund (California Income Series), specifying on the wire the account number
assigned by PMFS and your name and identifying the class in which you are
eligible to invest (Class A, Class B, Class C or Class Z shares).
If you arrange for receipt by State Street of Federal Funds prior to the
calculation of NAV (4:15 P.M.), New York time, on a business day, you may
purchase shares of the Series as of that day. See "Net Asset Value" in the
Statement of Additional Information.
In making a subsequent purchase order by wire, you should wire State Street
directly and should be sure that the wire specifies Prudential California
Municipal Fund (California Income Series), Class A, Class B, Class C or Class Z
shares and your name and individual account number. It is not necessary to call
PMFS to make subsequent purchase orders utilizing Federal Funds. The minimum
amount which may be invested by wire is $1,000.
ALTERNATIVE PURCHASE PLAN
THE SERIES OFFERS FOUR CLASSES OF SHARES (CLASS A, CLASS B, CLASS C AND CLASS
Z SHARES) WHICH ALLOWS YOU TO CHOOSE THE MOST BENEFICIAL SALES CHARGE STRUCTURE
FOR YOUR INDIVIDUAL CIRCUMSTANCES, GIVEN THE AMOUNT OF THE PURCHASE AND THE
LENGTH OF TIME YOU EXPECT TO HOLD THE SHARES AND OTHER RELEVANT CIRCUMSTANCES
(ALTERNATIVE PURCHASE PLAN).
<TABLE>
<CAPTION>
ANNUAL 12b-1 FEES
(AS A % OF AVERAGE
SALES CHARGE DAILY NET ASSETS) OTHER INFORMATION
----------------------------------- ----------------------------------- -----------------------------------
<S> <C> <C> <C>
CLASS A Maximum initial sales charge of 3% .30 of 1% (currently being charged Initial sales charge waived or
of the public offering price at a rate of .10 of 1%) reduced for certain purchases
CLASS B Maximum contingent deferred sales .50 of 1% Shares convert to Class A shares
charge or CDSC of 5% of the lesser approximately seven years after
of the amount invested or the
redemption purchase proceeds;
declines to zero after six years
CLASS C Maximum CDSC of 1% of the lesser of 1% (currently being charged at a Shares do not convert to another
the amount invested or the rate of .75 of 1%) class
redemption proceeds on redemptions
made within one year of purchase
CLASS Z None None Sold to a limited group of
investors
</TABLE>
The four classes of shares represent an interest in the same portfolio of
investments of the Series and have the same rights, except that (i) each class
(with the exception of Class Z shares, which are not subject to any distribution
or service fees) bears the separate expenses of its Rule 12b-1 distribution and
service plan, (ii) each class has exclusive voting rights on any matter
submitted to shareholders that relates solely to its arrangement and has
separate voting rights on any matter submitted to shareholders in which the
interests of one class differ from the interests of any other class, and (iii)
only Class B shares have a conversion feature. The four classes also have
separate exchange privileges. See "How to Exchange Your Shares" below. The
income attributable to each class and the dividends payable on the shares of
each class will be reduced by the amount of the distribution fee, if any, of
each class. Class B and Class C shares bear the expenses of a higher
distribution fee which will generally cause them to have higher expense ratios
and to pay lower dividends than the Class A and Class Z shares.
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<PAGE>
Financial advisers and other sales agents who sell shares of the Series will
receive different compensation for selling Class A, Class B, Class C and Class Z
shares and will generally receive more compensation initially for selling Class
A and Class B shares than for selling Class C or Class Z shares.
IN SELECTING A PURCHASE ALTERNATIVE, YOU SHOULD CONSIDER, AMONG OTHER THINGS,
(1) the length of time you expect to hold your investment, (2) the amount of any
applicable sales charge (whether imposed at the time of purchase or redemption)
and distribution-related fees, as noted above, (3) whether you qualify for any
reduction or waiver of any applicable sales charge, (4) the various exchange
privileges among the different classes of shares (see "How to Exchange Your
Shares" below) and (5) the fact that Class B shares automatically convert to
Class A shares approximately seven years after purchase (see "Conversion
Feature--Class B Shares" below).
The following is provided to assist you in determining which method of
purchase best suits your individual circumstances and is based on current fees
and expenses being charged to the Series:
If you intend to hold your investment in the Series for less than 5 years and
do not qualify for a reduced sales charge on Class A shares, since Class A
shares are subject to a maximum initial sales charge of 3% and Class B shares
are subject to a CDSC of 5% which declines to zero over a 6 year period, you
should consider purchasing Class C shares over either Class A or Class B shares.
If you intend to hold your investment for 5 years or more and do not qualify
for a reduced sales charge on Class A shares, since Class B shares convert to
Class A shares approximately 7 years after purchase and because all of your
money would be invested initially in the case of Class B shares, you should
consider purchasing Class B shares over either Class A or Class C shares.
If you qualify for a reduced sales charge on Class A shares, it may be more
advantageous for you to purchase Class A shares over either Class B or Class C
shares regardless of how long you intend to hold your investment. However,
unlike Class B and Class C shares, you would not have all of your money invested
initially because the sales charge on Class A shares is deducted at the time of
purchase.
If you do not qualify for a reduced sales charge on Class A shares and you
purchase Class C shares, you would have to hold your investment for more than 4
years for the higher cumulative annual distribution-related fee on those shares
to exceed the initial sales charge plus cumulative annual distribution-related
fee on Class A shares. This does not take into account the time value of money,
which further reduces the impact of the higher Class C distribution-related fee
on the investment, fluctuations in net asset value, the effect of the return on
the investment over this period of time or redemptions when the CDSC is
applicable.
ALL PURCHASES OF $1 MILLION OR MORE, EITHER AS PART OF A SINGLE INVESTMENT OR
UNDER RIGHTS OF ACCUMULATION OR LETTERS OF INTENT, MUST BE FOR CLASS A SHARES
UNLESS THE PURCHASER IS ELIGIBLE TO PURCHASE CLASS Z SHARES. See "Reduction and
Waiver of Initial Sales Charges" and "Class Z Shares" below.
CLASS A SHARES
The offering price of Class A shares for investors choosing the initial sales
charge alternative is the next determined NAV plus a sales charge (expressed as
a percentage of the offering price and of the amount invested) as shown in the
following table:
<TABLE>
<CAPTION>
SALES CHARGE AS SALES CHARGE AS DEALER CONCESSION
PERCENTAGE OF PERCENTAGE OF AS PERCENTAGE OF
AMOUNT OF PURCHASE OFFERING PRICE AMOUNT INVESTED OFFERING PRICE
------------------------ --------------- --------------- -----------------
<S> <C> <C> <C>
Less than $99,999 3.00% 3.09% 3.00%
$100,000 to $249,999 2.50 2.56 2.50
$250,000 to $499,999 1.50 1.52 1.50
$500,000 to $999,999 1.00 1.01 1.00
$1,000,000 and above None None None
</TABLE>
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<PAGE>
The Distributor may reallow the entire initial sales charge to dealers.
Selling dealers may be deemed to be underwriters, as that term is defined in the
Securities Act.
In connection with the sale of Class A shares at NAV (without payment of an
initial sales charge), the Manager, the Distributor or one of their affiliates
will pay dealers, financial advisers and other persons which distribute shares a
finders' fee from its own resources based on a percentage of the net asset value
of shares sold by such persons.
REDUCTION AND WAIVER OF INITIAL SALES CHARGES. Reduced sales charges are
available through Rights of Accumulation and Letters of Intent. Shares of the
Fund and shares of other Prudential Mutual Funds (excluding money market funds
other than those acquired pursuant to the exchange privilege) may be aggregated
to determine the applicable reduction. See "Purchase and Redemption of Fund
Shares--Reduction and Waiver of Initial Sales Charges--Class A Shares" in the
Statement of Additional Information.
PRUARRAY SAVINGS PROGRAM. Class A shares are also offered at net asset value
to employees of companies that enter into a written agreement with Prudential
Retirement Services to participate in the PruArray Savings Program. Under this
Program, a limited number of Prudential Mutual Funds are available for purchase
at net asset value by Savings Accumulation Plans of the company's employees. The
Program is available only to employees who open a Savings Accumulation Plan
account with the Transfer Agent. The program is offered to companies that have
at least 250 eligible employees.
SPECIAL RULES APPLICABLE TO RETIREMENT PLANS. After a PruArray Plan qualifies
to purchase Class A shares at NAV, all subsequent purchases will be made at NAV.
OTHER WAIVERS. Class A shares may be purchased at NAV, through Prudential
Securities or the Transfer Agent, by the following persons: (a) officers and
current and former Directors/Trustees of the Prudential Mutual Funds (including
the Fund), (b) employees of Prudential Securities and PIFM and their
subsidiaries and members of the families of such persons who maintain an
"employee related" account at Prudential Securities or the Transfer Agent, (c)
employees of subadvisers of the Prudential Mutual Funds provided that such
purchases at NAV are permitted by such person's employer, (d) Prudential
employees and special agents of Prudential and its subsidiaries and all persons
who have retired directly from active service with Prudential or one of its
subsidiaries, (e) registered representatives and employees of dealers who have
entered into a selected dealer agreement with Prudential Securities provided
that purchases at NAV are permitted by such person's employer and (f) investors
who have a business relationship with a financial adviser who joined Prudential
Securities from another investment firm, provided that (i) the purchase is made
within 180 days of the commencement of the financial adviser's employment at
Prudential Securities or within one year in the case of benefit plans, (ii) the
purchase is made with proceeds of a redemption of shares of any open-end
non-money market fund sponsored by the financial adviser's previous employer
(other than a fund which imposes a distribution or service fee of .25 of 1% or
less) and (iii) the financial adviser served as the client's broker on the
previous purchases.
You must notify the Transfer Agent either directly or through Prudential
Securities or Prusec that you are entitled to the reduction or waiver of the
sales charge. The reduction or waiver will be granted subject to confirmation of
your entitlement. No initial sales charges are imposed upon Class A shares
acquired upon the reinvestment of dividends and distributions. See "Purchase and
Redemption of Fund Shares--Reduction and Waiver of Initial Sales Charges--Class
A Shares" in the Statement of Additional Information.
CLASS B AND CLASS C SHARES
The offering price of Class B and Class C shares for investors choosing one of
the deferred sales charge alternatives is the NAV next determined following
receipt of an order by the Transfer Agent or Prudential Securities. Although
there is no sales charge imposed at the time of purchase, redemptions of Class B
and Class C shares may be subject to a CDSC. See "How to Sell Your
Shares--Contingent Deferred Sales Charges" below. The Distributor will pay sales
commissions of up to 4% of the purchase price of Class B shares to dealers,
financial advisers and other persons who sell Class B shares at the time of sale
from its own resources. This facilitates the ability of the Fund to sell the
Class B shares without an initial sales charge being deducted at the
26
<PAGE>
time of purchase. The Distributor anticipates that it will recoup its
advancement of sales commissions from the combination of the CDSC and the
distribution fee. See "How the Fund is Managed--Distributor." In connection with
the sale of Class C shares, the Distributor will pay dealers, financial advisers
and other persons which distribute Class C shares a sales commission of up to 1%
of the purchase price at the time of the sale.
CLASS Z SHARES
Class Z shares of the Fund are available for purchase by the following
categories of investors:
(i) participants in any fee-based program or trust program sponsored by
Prudential Securities, The Prudential Savings Bank F.S.B. (or any affiliate)
which includes mutual funds as investment options and for which the Fund is an
available option; (ii) current and former Directors/Trustees of the Prudential
Mutual Funds (including the Fund); and (iii) employees of Prudential and/or
Prudential Securities who participate in a Prudential sponsored employee saving
plan.
In connection with the sale of Class Z shares, the Manager, the Distributor or
one of their affiliates may pay dealers, financial advisers and other persons
which distribute shares a finders' fee based on a percentage of the net asset
value of shares sold by such persons.
HOW TO SELL YOUR SHARES
YOU CAN REDEEM YOUR SHARES OF THE SERIES AT ANY TIME FOR CASH AT THE NAV NEXT
DETERMINED AFTER THE REDEMPTION REQUEST IS RECEIVED IN PROPER FORM BY THE
TRANSFER AGENT OR PRUDENTIAL SECURITIES. SEE "HOW THE FUND VALUES ITS SHARES."
In certain cases, however, redemption proceeds will be reduced by the amount of
any applicable contingent deferred sales charge, as described below. See
"Contingent Deferred Sales Charges" below.
IF YOU HOLD SHARES OF THE SERIES THROUGH PRUDENTIAL SECURITIES, YOU MUST
REDEEM SHARES THROUGH PRUDENTIAL SECURITIES. PLEASE CONTACT YOUR PRUDENTIAL
SECURITIES FINANCIAL ADVISER.
IF YOU HOLD SHARES IN NON-CERTIFICATE FORM, A WRITTEN REQUEST FOR REDEMPTION
SIGNED BY YOU EXACTLY AS THE ACCOUNT IS REGISTERED IS REQUIRED. IF YOU HOLD
CERTIFICATES, THE CERTIFICATES, SIGNED IN THE NAME(S) SHOWN ON THE FACE OF THE
CERTIFICATES, MUST BE RECEIVED BY THE TRANSFER AGENT IN ORDER FOR THE REDEMPTION
REQUEST TO BE PROCESSED. IF REDEMPTION IS REQUESTED BY A CORPORATION,
PARTNERSHIP, TRUST OR FIDUCIARY, WRITTEN EVIDENCE OF AUTHORITY ACCEPTABLE TO THE
TRANSFER AGENT MUST BE SUBMITTED BEFORE SUCH REQUEST WILL BE ACCEPTED. All
correspondence and documents concerning redemptions should be sent to the Fund
in care of its Transfer Agent, Prudential Mutual Fund Services LLC, Attention:
Redemption Services, P.O. Box 15010, New Brunswick, New Jersey 08906-5010.
If the proceeds of the redemption (a) exceed $50,000, (b) are to be paid to a
person other than the record owner, (c) are to be sent to an address other than
the address on the Transfer Agent's records, or (d) are to be paid to a
corporation, partnership, trust or fiduciary, the signature(s) on the redemption
request and on the certificates, if any, or stock power must be guaranteed by an
"eligible guarantor institution." An "eligible guarantor institution" includes
any bank, broker, dealer or credit union. The Transfer Agent reserves the right
to request additional information from, and make reasonable inquiries of, any
eligible guarantor institution. For clients of Prusec, a signature guarantee may
be obtained from the agency or office manager of most Prudential Insurance and
Financial Services or Preferred Services offices.
PAYMENT FOR SHARES PRESENTED FOR REDEMPTION WILL BE MADE BY CHECK WITHIN SEVEN
DAYS AFTER RECEIPT BY THE TRANSFER AGENT OF THE CERTIFICATE AND/OR WRITTEN
REQUEST EXCEPT AS INDICATED BELOW. IF YOU HOLD SHARES THROUGH PRUDENTIAL
SECURITIES, PAYMENT FOR SHARES PRESENTED FOR REDEMPTION WILL BE CREDITED TO YOUR
PRUDENTIAL SECURITIES ACCOUNT, UNLESS YOU INDICATE OTHERWISE. Such payment may
be postponed or the right of redemption suspended at times (a) when the New York
Stock Exchange is closed for other than customary weekends and holidays, (b)
when trading on such Exchange is restricted, (c) when an emergency exists as a
result of which disposal by the Series of securities owned by it is not
27
<PAGE>
reasonably practicable or it is not reasonably practicable for the Series fairly
to determine the value of its net assets, or (d) during any other period when
the SEC, by order, so permits; provided that applicable rules and regulations of
the SEC shall govern as to whether the conditions prescribed in (b), (c) or (d)
exist.
PAYMENT FOR REDEMPTION OF RECENTLY PURCHASED SHARES WILL BE DELAYED UNTIL THE
FUND OR ITS TRANSFER AGENT HAS BEEN ADVISED THAT THE PURCHASE CHECK HAS BEEN
HONORED, UP TO 10 CALENDAR DAYS FROM THE TIME OF RECEIPT OF THE PURCHASE CHECK
BY THE TRANSFER AGENT. SUCH DELAY MAY BE AVOIDED BY PURCHASING SHARES BY WIRE OR
BY CERTIFIED OR CASHIER'S CHECK.
REDEMPTION IN KIND. If the Trustees determine that it would be detrimental to
the best interests of the remaining shareholders of the Fund to make payment
wholly or partly in cash, the Fund may pay the redemption price in whole or in
part by a distribution in kind of securities from the investment portfolio of
the Series of the Fund, in lieu of cash, in conformity with applicable rules of
the SEC. Securities will be readily marketable and will be valued in the same
manner as in a regular redemption. See "How the Fund Values its Shares." If your
shares are redeemed in kind, you will incur transaction costs in converting the
assets into cash. The Fund, however, has elected to be governed by Rule 18f-1
under the Investment Company Act, under which the Fund is obligated to redeem
shares solely in cash up to the lesser of $250,000 or 1% of the net asset value
of the Fund during any 90-day period for any one shareholder.
INVOLUNTARY REDEMPTION. In order to reduce expenses of the Fund, the Trustees
may redeem all of the shares of any shareholder, other than a shareholder which
is an IRA or other tax-deferred retirement plan, whose account has a net asset
value of less than $500 due to a redemption. The Fund will give such
shareholders 60 days' prior written notice in which to purchase sufficient
additional shares to avoid such redemption. No contingent deferred sales charge
will be imposed on any such involuntary redemption.
90-DAY REPURCHASE PRIVILEGE. If you redeem your shares and have not previously
exercised the repurchase privilege, you may reinvest any portion or all of the
proceeds of such redemption in shares of the Series at the NAV next determined
after the order is received, which must be within 90 days after the date of the
redemption. Any CDSC paid in connection with such redemption will be credited
(in shares) to your account. (If less than a full repurchase is made, the credit
will be on a PRO RATA basis.) You must notify the Fund's Transfer Agent, either
directly or through Prudential Securities, at the time the repurchase privilege
is exercised to adjust your account for the CDSC you previously paid.
Thereafter, any redemptions will be subject to the CDSC applicable at the time
of the redemption. See "Contingent Deferred Sales Charges" below. Exercise of
the repurchase privilege may affect the federal tax treatment of any gain
realized upon redemption. See "Distributions and Tax Information" in the
Statement of Additional Information.
CONTINGENT DEFERRED SALES CHARGES
Redemptions of Class B shares will be subject to a contingent deferred sales
charge or CDSC declining from 5% to zero over a six-year period. Class C shares
redeemed within one year of purchase will be subject to a 1% CDSC. The CDSC will
be deducted from the redemption proceeds and reduce the amount paid to you. The
CDSC will be imposed on any redemption by you which reduces the current value of
your Class B or Class C shares to an amount which is lower than the amount of
all payments by you for shares during the preceding six years, in the case of
Class B shares, and one year, in the case of Class C shares. A CDSC will be
applied on the lesser of the original purchase price or the current value of the
shares being redeemed. Increases in the value of your shares or shares purchased
through reinvestment of dividends or distributions are not subject to a CDSC.
The amount of any contingent deferred sales charge will be paid to and retained
by the Distributor. See "How the Fund is Managed--Distributor" and "Waiver of
the Contingent Deferred Sales Charges--Class B Shares" below.
The amount of the CDSC, if any, will vary depending on the number of years
from the time of payment for the purchase of shares until the time of redemption
of such shares. Solely for purposes of determining the number of years from the
time of any
28
<PAGE>
payment for the purchase of shares, all payments during a month will be
aggregated and deemed to have been made on the last day of the month. The CDSC
will be calculated from the first day of the month after the initial purchase,
excluding the time shares were held in a money market fund. See "How to Exchange
Your Shares" below.
The following table sets forth the rates of the CDSC applicable to redemptions
of Class B shares:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED
SALES
CHARGE AS A PERCENTAGE
YEAR SINCE PURCHASE OF DOLLARS INVESTED OR
PAYMENT MADE REDEMPTION PROCEEDS
- -------------------------------------------------- ----------------------
<S> <C>
First............................................. 5.0%
Second............................................ 4.0
Third............................................. 3.0
Fourth............................................ 2.0
Fifth............................................. 1.0
Sixth............................................. 1.0
Seventh........................................... None
</TABLE>
In determining whether a CDSC is applicable to a redemption, the calculation
will be made in a manner that results in the lowest possible rate. It will be
assumed that the redemption is made first of amounts representing shares
acquired pursuant to the reinvestment of dividends and distributions; then of
amounts representing the increase in net asset value above the total amount of
payments for the purchase of Series shares made during the preceding six years;
then of amounts representing the cost of shares held beyond the applicable CDSC
period; and finally, of amounts representing the cost of shares held for the
longest period of time within the applicable CDSC period.
For example, assume you purchased 100 Class B shares at $10 per share for a
cost of $1,000. Subsequently, you acquired 5 additional Class B shares through
dividend reinvestment. During the second year after the purchase you decided to
redeem $500 of your investment. Assuming at the time of the redemption the NAV
had appreciated to $12 per share, the value of your Class B shares would be
$1,260 (105 shares at $12 per share). The CDSC would not be applied to the value
of the reinvested dividend shares and the amount which represents appreciation
($260). Therefore, $240 of the $500 redemption proceeds ($500 minus $260) would
be charged at a rate of 4% (the applicable rate in the second year after
purchase) for a total CDSC of $9.60.
For federal income tax purposes, the amount of the CDSC will reduce the gain
or increase the loss, as the case may be, on the amount recognized on the
redemption of shares.
WAIVER OF THE CONTINGENT DEFERRED SALES CHARGES--CLASS B SHARES. The CDSC will
be waived in the case of a redemption following the death or disability of a
shareholder or, in the case of a trust account, following the death or
disability of the grantor. The waiver is available for total or partial
redemptions of shares owned by a person, either individually or in joint tenancy
(with rights of survivorship), at the time of death or initial determination of
disability, provided that the shares were purchased prior to death or
disability. In addition, the CDSC will be waived on redemptions of shares held
by a Trustee of the Fund.
SYSTEMATIC WITHDRAWAL PLAN. The CDSC will be waived (or reduced) on certain
redemptions from a Systematic Withdrawal Plan. On an annual basis, up to 12% of
the total dollar amount subject to the CDSC may be redeemed without charge. The
Transfer Agent will calculate the total amount available for this waiver
annually on the anniversary of your purchase or, for shares purchased prior to
March 1, 1997, on March 1 of the current year. The CDSC will be waived (or
reduced) on redemptions until this threshold 12% amount is reached.
You must notify the Fund's Transfer Agent either directly or through
Prudential Securities or Prusec, at the time of redemption, that you are
entitled to waiver of the CDSC and provide the Transfer Agent with such
supporting documentation as it may deem appropriate. The waiver will be granted
subject to confirmation of your entitlement. See "Purchase and Redemption of
Fund Shares--Waiver of the Contingent Deferred Sales Charge--Class B Shares" in
the Statement of Additional Information.
29
<PAGE>
A quantity discount may apply to redemptions of Class B shares purchased prior
to August 1, 1994. See "Purchase and Redemption of Fund Shares--Quantity
Discount--Class B Shares Purchased Prior to August 1, 1994" in the Statement of
Additional Information.
CONVERSION FEATURE--CLASS B SHARES
Class B shares will automatically convert to Class A shares on a quarterly
basis approximately seven years after purchase. Conversions will be effected at
relative net asset value without the imposition of any additional sales charge.
Since the Fund tracks amounts paid rather than the number of shares bought on
each purchase of Class B shares, the number of Class B shares eligible to
convert to Class A shares (excluding shares acquired through the automatic
reinvestment of dividends and other distributions) (the Eligible Shares) will be
determined on each conversion date in accordance with the following formula: (i)
the ratio of (a) the amounts paid for Class B shares purchased at least seven
years prior to the conversion date to (b) the total amount paid for all Class B
shares purchased and then held in your account (ii) multiplied by the total
number of Class B shares purchased and then held in your account. Each time any
Eligible Shares in your account convert to Class A shares, all shares or amounts
representing Class B shares then in your account that were acquired through the
automatic reinvestment of dividends and other distributions will convert to
Class A shares.
For purposes of determining the number of Eligible Shares, if the Class B
shares in your account on any conversion date are the result of multiple
purchases at different net asset values per share, the number of Eligible Shares
calculated as described above will generally be either more or less than the
number of shares actually purchased approximately seven years before such
conversion date. For example, if 100 shares were initially purchased at $10 per
share (for a total of $1,000) and a second purchase of 100 shares was
subsequently made at $11 per share (for a total of $1,100), 95.24 shares would
convert approximately seven years from the initial purchase (I.E., $1,000
divided by $2,100 (47.62%) multiplied by 200 shares equals 95.24 shares). The
Manager reserves the right to modify the formula for determining the number of
Eligible Shares in the future as it deems appropriate on notice to shareholders.
Since annual distribution-related fees are lower for Class A shares than Class
B shares, the per share net asset value of the Class A shares may be higher than
that of the Class B shares at the time of conversion. Thus, although the
aggregate dollar value will be the same, you may receive fewer Class A shares
than Class B shares converted. See "How the Fund Values its Shares."
For purposes of calculating the applicable holding period for conversions, all
payments for Class B shares during a month will be deemed to have been made on
the last day of the month, or for Class B shares acquired through exchange, or a
series of exchanges, on the last day of the month in which the original payment
for purchases of such Class B shares was made. For Class B shares previously
exchanged for shares of a money market fund, the time period during which such
shares were held in the money market fund will be excluded. For example, Class B
shares held in a money market fund for one year will not convert to Class A
shares until approximately eight years from purchase. For purposes of measuring
the time period during which shares are held in a money market fund, exchanges
will be deemed to have been made on the last day of the month. Class B shares
acquired through exchange will convert to Class A shares after expiration of the
conversion period applicable to the original purchase of such shares.
The conversion feature may be subject to the continuing availability of
opinions of counsel or rulings of the Internal Revenue Service (i) that the
dividends and other distributions paid on Class A, Class B, Class C and Class Z
shares will not constitute "preferential dividends" under the Internal Revenue
Code and (ii) that the conversion of shares does not constitute a taxable event.
The conversion of Class B shares into Class A shares may be suspended if such
opinions or rulings are no longer available. If conversions are suspended, Class
B shares of the Series will continue to be subject, possibly indefinitely, to
their higher annual distribution and service fee.
30
<PAGE>
HOW TO EXCHANGE YOUR SHARES
AS A SHAREHOLDER OF THE SERIES, YOU HAVE AN EXCHANGE PRIVILEGE WITH THE OTHER
SERIES OF THE FUND AND CERTAIN OTHER PRUDENTIAL MUTUAL FUNDS (THE EXCHANGE
PRIVILEGE), INCLUDING ONE OR MORE SPECIFIED MONEY MARKET FUNDS, SUBJECT TO THE
MINIMUM INVESTMENT REQUIREMENTS OF SUCH FUNDS. CLASS A, CLASS B, CLASS C AND
CLASS Z SHARES OF THE SERIES MAY BE EXCHANGED FOR CLASS A, CLASS B, CLASS C AND
CLASS Z SHARES, RESPECTIVELY, OF THE OTHER SERIES OF THE FUND OR ANOTHER FUND ON
THE BASIS OF THE RELATIVE NAV. No sales charge will be imposed at the time of
the exchange. Any applicable CDSC payable upon the redemption of shares
exchanged will be calculated from the first day of the month after the initial
purchase, excluding the time shares were held in a money market fund. Class B
and Class C shares may not be exchanged into money market funds other than
Prudential Special Money Market Fund, Inc. For purposes of calculating the
holding period applicable to the Class B conversion feature, the time period
during which Class B shares were held in a money market fund will be excluded.
See "Conversion Feature--Class B Shares" above. An exchange will be treated as a
redemption and purchase for tax purposes. See "Shareholder Investment
Account--Exchange Privilege" in the Statement of Additional Information.
IN ORDER TO EXCHANGE SHARES BY TELEPHONE, YOU MUST AUTHORIZE TELEPHONE
EXCHANGES ON YOUR INITIAL APPLICATION FORM OR BY WRITTEN NOTICE TO THE TRANSFER
AGENT AND HOLD SHARES IN NON-CERTIFICATE FORM. Thereafter, you may call the Fund
at (800) 225-1852 to execute a telephone exchange of shares, weekdays, except
holidays, between the hours of 8:00 A.M. and 6:00 P.M., New York time. For your
protection and to prevent fraudulent exchanges, your telephone call will be
recorded and you will be asked to provide your personal identification number. A
written confirmation of the exchange transaction will be sent to you. NEITHER
THE FUND NOR ITS AGENTS WILL BE LIABLE FOR ANY LOSS, LIABILITY OR COST WHICH
RESULTS FROM ACTING UPON INSTRUCTIONS REASONABLY BELIEVED TO BE GENUINE UNDER
THE FOREGOING PROCEDURES. All exchanges will be made on the basis of the
relative NAV of the two funds (or series) next determined after the request is
received in good order. The Exchange Privilege is available only in states where
the exchange may legally be made.
IF YOU HOLD SHARES THROUGH PRUDENTIAL SECURITIES, YOU MUST EXCHANGE YOUR
SHARES BY CONTACTING YOUR PRUDENTIAL SECURITIES FINANCIAL ADVISER.
IF YOU HOLD CERTIFICATES, THE CERTIFICATES, SIGNED IN THE NAME(S) SHOWN ON THE
FACE OF THE CERTIFICATES, MUST BE RETURNED IN ORDER FOR THE SHARES TO BE
EXCHANGED. SEE "HOW TO SELL YOUR SHARES" ABOVE.
You may also exchange shares by mail by writing to Prudential Mutual Fund
Services LLC, Attention: Exchange Processing, P.O. Box 15010, New Brunswick, New
Jersey 08906-5010.
IN PERIODS OF SEVERE MARKET OR ECONOMIC CONDITIONS, THE TELEPHONE EXCHANGE OF
SHARES MAY BE DIFFICULT TO IMPLEMENT AND SHAREHOLDERS SHOULD MAKE EXCHANGES BY
MAIL BY WRITING TO PRUDENTIAL MUTUAL FUND SERVICES LLC, AT THE ADDRESS NOTED
ABOVE.
SPECIAL EXCHANGE PRIVILEGES. A special exchange privilege is available for
shareholders who qualify to purchase Class A shares at NAV (see "Alternative
Purchase Plan--Class A Shares--Reduction and Waiver of Initial Sales Charges"
above) and for shareholders who qualify to purchase Class Z shares (see
"Alternative Purchase Plan--Class Z Shares" above). Under this exchange
privilege, amounts representing any Class B and Class C shares (which are not
subject to a CDSC) held in such a shareholder's account will be automatically
exchanged for Class A shares for shareholders who qualify to purchase Class A
shares at NAV on a quarterly basis, unless the shareholder elects otherwise.
Similarly, shareholders who qualify to purchase Class Z shares will have their
Class B and Class C shares which are not subject to a CDSC and their Class A
shares exchanged for Class Z shares on a quarterly basis. Eligibility for this
exchange privilege will be calculated on the business day prior to the date of
the exchange. Amounts representing Class B or Class C shares which are not
subject to a CDSC include the following: (1) amounts representing Class B or
Class C shares acquired pursuant to the automatic reinvestment of dividends and
distributions, (2) amounts representing the increase in the net asset value
above the total amount of payments for the purchase of Class B or
31
<PAGE>
Class C shares and (3) amounts representing Class B or Class C shares held
beyond the applicable CDSC period. Class B and Class C shareholders must notify
the Transfer Agent either directly or through Prudential Securities or Prusec
that they are eligible for this special exchange privilege.
Participants in any fee-based program for which the Fund is an available
option will have their Class A shares, if any, exchanged for Class Z shares when
they elect to have those assets become a part of the fee-based program. Upon
leaving the program (whether voluntarily or not), such Class Z shares (and, to
the extent provided for in the program, Class Z shares acquired through
participation in the program) will be exchanged for Class A shares at net asset
value.
The Exchange Privilege is not a right and may be suspended, terminated or
modified on 60 days' notice to shareholders.
FREQUENT TRADING. The Fund and the other Prudential Mutual Funds are not
intended to serve as vehicles for frequent trading in response to short-term
fluctuations in the market. Due to the disruptive effect that market timing
investment strategies and excessive trading can have on efficient portfolio
management, each Prudential Mutual Fund and the Fund reserves the right to
refuse purchase orders and exchanges by any person, group or commonly controlled
accounts, if, in the Manager's sole judgment, such person, group or accounts
were following a market timing strategy or were otherwise engaging in excessive
trading (Market Timers).
To implement this authority to protect the Fund and its shareholders from
excessive trading, the Fund will reject all exchanges and purchases from a
Market Timer unless the Market Timer has entered into a written agreement with
the Fund or its affiliates pursuant to which the Market Timer has agreed to
abide by certain procedures, which include a daily dollar limit on trading. The
Fund may notify the Market Timer of rejection of an exchange or purchase order
subsequent to the day on which the order was placed.
SHAREHOLDER SERVICES
In addition to the Exchange Privilege, as a shareholder in the Series, you can
take advantage of the following services and privileges:
- AUTOMATIC REINVESTMENT OF DIVIDENDS AND/OR DISTRIBUTIONS WITHOUT A SALES
CHARGE. For your convenience, all dividends and distributions are automatically
reinvested in full and fractional shares of the Series at NAV without a sales
charge. You may direct the Transfer Agent in writing not less than 5 full
business days prior to the record date to have subsequent dividends and/or
distributions sent in cash rather than reinvested. If you hold shares through
Prudential Securities, you should contact your financial adviser.
- AUTOMATIC SAVINGS ACCUMULATION PLAN (ASAP). Under ASAP you may make regular
purchases of the Series' shares in amounts as little as $50 via an automatic
debit to a bank account or Prudential Securities account (including a Command
Account). For additional information about this service, you may contact your
Prudential Securities financial adviser, Prusec representative or the Transfer
Agent directly.
- SYSTEMATIC WITHDRAWAL PLAN. A systematic withdrawal plan is available to
shareholders which provides for monthly or quarterly checks. Withdrawals of
Class B and Class C shares may be subject to a CDSC. See "How to Sell Your
Shares-- Contingent Deferred Sales Charges" above.
- REPORTS TO SHAREHOLDERS. The Fund will send you annual and semi-annual
reports. The financial statements appearing in annual reports are audited by
independent accountants. In order to reduce duplicate mailing and printing
expenses, the Fund will provide one annual and semi-annual shareholder report
and annual prospectus per household. You may request additional copies of such
reports by calling (800) 225-1852 or by writing to the Fund at Gateway Center
Three, 100 Mulberry Street, Newark, New Jersey 07102-4077. In addition, monthly
unaudited financial data is available upon request from the Fund.
32
<PAGE>
- SHAREHOLDER INQUIRIES. Inquiries should be addressed to the Fund at Gateway
Center Three, 100 Mulberry Street, Newark, New Jersey 07102-4077, or by
telephone, at (800) 225-1852 (toll-free) or, from outside the U.S.A., at (908)
417-7555 (collect).
For additional information regarding the services and privileges described
above, see "Shareholder Investment Account" in the Statement of Additional
Information.
33
<PAGE>
DESCRIPTION OF SECURITY RATINGS
MOODY'S INVESTORS SERVICE
BOND RATINGS
Aaa: Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edged." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group, they comprise what are generally known
as high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than the Aaa securities.
A: Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper-medium-grade obligations. Factors giving security
to principal and interest are considered adequate but elements may be present
which suggest a susceptibility to impairment sometime in the future.
Baa: Bonds which are rated Baa are considered as medium grade obligations,
I.E., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present, but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba: Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate, and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Bonds rated within the Aa, A, Baa, Ba and B categories which Moody's believes
possess the strongest credit attributes within those categories are designated
by the symbols Aa1, A1, Baa1, Ba1 and B1.
Caa: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca: Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
C: Bonds which are rated C are the lowest-rated class of bonds, and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
SHORT-TERM RATINGS
Moody's ratings for tax-exempt notes and other short-term loans are designated
Moody's Investment Grade (MIG). This distinction is in recognition of the
differences between short-term and long-term credit risk.
MIG 1: Loans bearing the designation MIG 1 are of the best quality, enjoying
strong protection by established cash flows, superior liquidity support or
demonstrated broad-based access to the market for refinancing.
A-1
<PAGE>
MIG 2: Loans bearing the designation MIG 2 are of high quality, with margins
of protection ample although not so large as in the preceding group.
MIG 3: Loans bearing the designation MIG 3 are of favorable quality, with all
security elements accounted for but lacking the strength of the preceding
grades.
MIG 4: Loans bearing the designation MIG 4 are of adequate quality.
Protection commonly regarded and required of an investment security is present
and although not distinctly or predominantly speculative, there is specific
risk.
SHORT-TERM DEBT RATINGS
Moody's Short-Term Debt Ratings are opinions of the ability of issuers to
repay punctually senior debt obligations which have an original maturity not
exceeding one year.
Prime-1: Issuers rated Prime-1 (or supporting institutions) have a superior
ability for repayment of senior short-term debt obligations.
Prime-2: Issuers rated Prime-2 (or supporting institutions) have a strong
ability for repayment of senior short-term debt obligations.
Prime-3: Issuers rated Prime-3 (or supporting institutions) have an
acceptable ability for repayment of senior short-term debt obligations.
Not Prime: Issuers rated Not Prime do not fall within any of the Prime rating
categories.
STANDARD & POOR'S RATINGS GROUP
BOND RATINGS
AAA: Debt rated AAA has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.
AA: Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the highest-rated issues only in small degree.
A: Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB: Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher-rated categories.
BB, B, CCC, CC and C: Debt rated BB, B, CCC, CC or C is regarded as having
predominantly speculative characteristics with respect to capacity to pay
interest and repay principal. BB indicates the least degree of speculation and C
the highest. While such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
D: Debt rated D is in payment default. This rating is used when interest
payments or principal payments are not made on the date due even if the
applicable grace period has not expired, unless S&P believes that such payments
will be made during such grace period.
COMMERCIAL PAPER RATINGS
An S&P Commercial Paper rating is a current assessment of the likelihood of
timely payment of debt considered short-term in the relevant market.
A-2
<PAGE>
A-1: The A-1 designation indicates that the degree of safety regarding timely
payment is strong. Those issues determined to possess extremely strong safety
characteristics are denoted with a plus sign (+) designation.
A-2: Capacity for timely payment on issues with the designation A-2 is
satisfactory. However, the relative degree of safety is not as high as for
issues designated A-1.
A-3: Issues carrying this designation have adequate capacity for timely
payment. They are, however, more vulnerable to the adverse effects of changes in
circumstances than obligations carrying the higher designations.
MUNICIPAL NOTES
A municipal note rating reflects the liquidity concerns and market access
risks unique to municipal notes. Municipal notes due in three years or less will
likely receive a municipal note rating, while notes maturing beyond three years
will most likely receive a long-term debt rating. Municipal notes are rated
SP-1, SP-2 or SP-3. The designation SP-1 indicates a very strong capacity to pay
principal and interest. Those issues determined to possess extremely strong
safety characteristics are denoted with a plus sign (+) designation. An SP-2
designation indicates a satisfactory capacity to pay principal and interest. An
SP-3 designation indicates speculative capacity to pay principal and interest.
A-3
<PAGE>
THE PRUDENTIAL MUTUAL FUND FAMILY
Prudential Investments Fund Management offers a broad range of mutual funds
designed to meet your individual needs. We welcome you to review the investment
options available through our family of funds. For more information on the
Prudential Mutual Funds, including charges and expenses, contact your Prudential
Securities financial adviser or Prusec representative or telephone the Funds at
(800) 225-1852 for a free prospectus. Read the prospectus carefully before you
invest or send money.
TAXABLE BOND FUNDS
--------------------------
Prudential Diversified Bond Fund, Inc.
Prudential Government Income Fund, Inc.
Prudential Government Securities Trust
Short-Intermediate Term Series
Prudential High Yield Fund, Inc.
Prudential Mortgage Income Fund, Inc.
Prudential Structured Maturity Fund, Inc.
Income Portfolio
The BlackRock Government Income Trust
TAX-EXEMPT BOND FUNDS
-----------------------------
Prudential California Municipal Fund
California Series
California Income Series
Prudential Municipal Bond Fund
High Yield Series
Insured Series
Intermediate Series
Prudential Municipal Series Fund
Florida Series
Maryland Series
Massachusetts Series
Michigan Series
New Jersey Series
New York Series
North Carolina Series
Ohio Series
Pennsylvania Series
Prudential National Municipals Fund, Inc.
GLOBAL FUNDS
--------------------
Prudential Europe Growth Fund, Inc.
Prudential Global Genesis Fund, Inc.
Prudential Global Limited Maturity Fund, Inc.
Limited Maturity Portfolio
Prudential Intermediate Global Income Fund, Inc.
Prudential International Bond Fund, Inc.
Prudential Natural Resources Fund, Inc.
Prudential Pacific Growth Fund, Inc.
Prudential World Fund, Inc.
Global Series
International Stock Series
The Global Total Return Fund, Inc.
Global Utility Fund, Inc.
EQUITY FUNDS
--------------------
Prudential Balanced Fund
Prudential Distressed Securities Fund, Inc.
Prudential Dryden Fund
Prudential Active Balanced Fund
Prudential Stock Index Fund
Prudential Small-Cap Index Fund
Prudential Bond Market Index Fund
Prudential Pacific Index Fund
Prudential Europe Index Fund
Prudential Emerging Growth Fund, Inc.
Prudential Equity Fund, Inc.
Prudential Equity Income Fund
Prudential Jennison Series Fund, Inc.
Prudential Jennison Growth Fund
Prudential Jennison Growth & Income Fund
Prudential Multi-Sector Fund, Inc.
Prudential Small-Cap Quantum Fund, Inc.
Prudential Small Company Value Fund, Inc.
Prudential Utility Fund, Inc.
Nicholas-Applegate Fund, Inc.
Nicholas-Applegate Growth Equity Fund
MONEY MARKET FUNDS
--------------------------
- - TAXABLE MONEY MARKET FUNDS
Prudential Government Securities Trust
Money Market Series
U.S. Treasury Money Market Series
Prudential Special Money Market Fund, Inc.
Money Market Series
Prudential MoneyMart Assets, Inc.
- - TAX-FREE MONEY MARKET FUNDS
Prudential Tax-Free Money Fund, Inc.
Prudential California Municipal Fund
California Money Market Series
Prudential Municipal Series Fund
Connecticut Money Market Series
Massachusetts Money Market Series
New Jersey Money Market Series
New York Money Market Series
- - COMMAND FUNDS
Command Money Fund
Command Government Fund
Command Tax-Free Fund
- - INSTITUTIONAL MONEY MARKET FUNDS
Prudential Institutional Liquidity Portfolio, Inc.
Institutional Money Market Series
B-1
<PAGE>
No dealer, sales representative or any other person has been authorized to give
any information or to make any representations, other than those contained in
this Prospectus, in connection with the offer contained herein, and, if given or
made, such other information or representations must not be relied upon as
having been authorized by the Fund or the Distributor. This Prospectus does not
constitute an offer by the Fund or by the Distributor to sell or a solicitation
of any offer to buy any of the securities offered hereby in any jurisdiction to
any person to whom it is unlawful to make such offer in such jurisdiction.
-------------------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---
<S> <C>
FUND HIGHLIGHTS................................. 2
What are the Series' Risk Factors and Special
Characteristics?............................. 2
FUND EXPENSES................................... 4
FINANCIAL HIGHLIGHTS............................ 5
HOW THE FUND INVESTS............................ 9
Investment Objective and Policies............. 9
Other Investments and Policies................ 14
Investment Restrictions....................... 15
HOW THE FUND IS MANAGED......................... 15
Manager....................................... 15
Distributor................................... 16
Portfolio Transactions........................ 18
Custodian and Transfer and Dividend Disbursing
Agent........................................ 18
HOW THE FUND VALUES ITS SHARES.................. 18
HOW THE FUND CALCULATES PERFORMANCE............. 19
TAXES, DIVIDENDS AND DISTRIBUTIONS.............. 19
GENERAL INFORMATION............................. 22
Description of Shares......................... 22
Additional Information........................ 23
SHAREHOLDER GUIDE............................... 23
How to Buy Shares of the Fund................. 23
Alternative Purchase Plan..................... 24
How to Sell Your Shares....................... 27
Conversion Feature--Class B Shares............ 30
How to Exchange Your Shares................... 31
Shareholder Services.......................... 32
DESCRIPTION OF SECURITY RATINGS................. A-1
THE PRUDENTIAL MUTUAL FUND FAMILY............... B-1
</TABLE>
- -------------------------------------------
MF146A 4441272
Class A: 744313-30-5
CUSIP Nos.: Class B: 744313-40-4
Class C: 744313-80-0
Class Z: 744313-87-5
PRUDENTIAL CALIFORNIA MUNICIPAL FUND
CALIFORNIA INCOME SERIES
PROSPECTUS
OCTOBER 30, 1997
www.prudential.com
[LOGO]
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
(California Money Market Series)
- --------------------------------------------------------------------------------
PROSPECTUS DATED OCTOBER 30, 1997
- ----------------------------------------------------------------
Prudential California Municipal Fund (the Fund) (California Money Market Series)
(the Series) is one of three series of an open-end, management investment
company, or mutual fund. This Series is diversified and is designed to provide
the highest level of current income that is exempt from California State and
federal income taxes consistent with liquidity and the preservation of capital.
The net assets of the Series are invested primarily in short-term, tax-exempt
California State, municipal and local debt obligations and obligations of other
qualifying issuers. There can be no assurance that the Series' investment
objective will be achieved. See "How the Fund Invests--Investment Objective and
Policies." The Fund's address is Gateway Center Three, 100 Mulberry Street,
Newark, New Jersey 07102-4077, and its telephone number is (800) 225-1852.
Shares of the Series are sold without a sales charge. The Series is subject to
an annual charge of .125% of its average daily net assets pursuant to the
Distribution and Service Plan. See "How the Fund is Managed--Distributor."
THE SERIES MAY INVEST A SIGNIFICANT PORTION OF ITS ASSETS IN THE OBLIGATIONS OF
A SINGLE ISSUER, AND THEREFORE AN INVESTMENT IN THE SERIES MAY BE MORE RISKY
THAN AN INVESTMENT IN OTHER TYPES OF MONEY MARKET FUNDS.
AN INVESTMENT IN THE SERIES IS NEITHER INSURED NOR GUARANTEED BY THE U.S.
GOVERNMENT AND THERE CAN BE NO ASSURANCE THAT THE SERIES WILL BE ABLE TO
MAINTAIN A STABLE NET ASSET VALUE OF $1.00 PER SHARE. SEE "HOW THE FUND VALUES
ITS SHARES."
This Prospectus sets forth concisely the information about the Fund and the
California Money Market Series that a prospective investor should know before
investing. Additional information about the Fund has been filed with the
Securities and Exchange Commission in a Statement of Additional Information
dated October 30, 1997, which information is incorporated herein by reference
(is legally considered a part of this Prospectus) and is available without
charge upon request to Prudential California Municipal Fund at the address or
telephone number noted above.
- --------------------------------------------------------------------------------
INVESTORS ARE ADVISED TO READ THIS PROSPECTUS AND RETAIN IT FOR FUTURE
REFERENCE.
- --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
<PAGE>
FUND HIGHLIGHTS
The following summary is intended to highlight certain information contained
in this Prospectus and is qualified in its entirety by the more detailed
information appearing elsewhere herein.
WHAT IS PRUDENTIAL CALIFORNIA MUNICIPAL FUND?
Prudential California Municipal Fund is a mutual fund whose shares are
offered in three series, each of which operates as a separate fund. A mutual
fund pools the resources of investors by selling its shares to the public
and investing the proceeds of such sale in a portfolio of securities
designed to achieve its investment objective. Technically, the Fund is an
open-end, management investment company. Only the California Money Market
Series is offered through this Prospectus.
WHAT IS THE SERIES' INVESTMENT OBJECTIVE?
The Series' investment objective is to provide the highest level of
current income that is exempt from California State and federal income taxes
consistent with liquidity and the preservation of capital. It seeks to
achieve this objective by investing primarily in short-term California
State, municipal and local government obligations and obligations of other
qualifying issuers, such as issuers located in Puerto Rico, the Virgin
Islands and Guam, which pay income exempt, in the opinion of counsel, from
California State and federal income taxes (California Obligations). There
can be no assurance that the Series' investment objective will be achieved.
See "How the Fund Invests--Investment Objective and Policies" at page 6.
WHAT ARE THE SERIES' RISK FACTORS AND SPECIAL CHARACTERISTICS?
It is anticipated that the net asset value of the Series will remain
constant at $1.00 per share, although this cannot be assured. In order to
maintain such constant net asset value, the Series will value its portfolio
securities at amortized cost. While this method provides certainty in
valuation, it may result in periods during which the value of a security in
the Series' portfolio, as determined by amortized cost, is higher or lower
than the price the Series would receive if it sold such security. See "How
the Fund Values its Shares" at page 12.
In seeking to achieve its investment objective, the Series will invest
more than 80% of the value of its total assets in California Obligations.
This degree of investment concentration makes the Series particularly
susceptible to factors adversely affecting issuers of California
Obligations, and makes an investment in the Series more risky than an
investment in other types of money market funds. See "How the Fund
Invests--Investment Objective and Policies--Special Considerations" at page
9. As with an investment in any mutual fund, an investment in this Series
can decrease in value and you can lose money.
WHO MANAGES THE FUND?
Prudential Investments Fund Management LLC (PIFM or the Manager) is the
Manager of the Fund and is compensated for its services at an annual rate of
.50 of 1% of the Series' average daily net assets. As of September 30, 1997,
PIFM served as manager or administrator to 63 investment companies,
including 41 mutual funds, with aggregate assets of approximately $59.9
billion. The Prudential Investment Corporation, which does business under
the name Prudential Investments (PI, the Subadviser or the investment
adviser), furnishes investment advisory services in connection with the
management of the Fund under a Subadvisory Agreement with PIFM. See "How the
Fund is Managed--Manager" at page 10.
2
<PAGE>
WHO DISTRIBUTES THE SERIES' SHARES?
Prudential Securities Incorporated (Prudential Securities, PSI or the
Distributor) acts as the Distributor of the Series' shares. The Series
reimburses Prudential Securities for expenses related to the distribution of
the Series' shares at an annual rate of up to .125 of 1% of the average
daily net assets of the Series. See "How the Fund is Managed--Distributor"
at page 10.
WHAT IS THE MINIMUM INVESTMENT?
The minimum initial investment is $1,000. The minimum subsequent
investment is $100. There is no minimum investment requirement for certain
employee savings plans. For purchases made through the Automatic Savings
Accumulation Plan, the minimum initial and subsequent investment is $50. See
"Shareholder Guide--How to Buy Shares of the Fund" at page 16 and
"Shareholder Guide--Shareholder Services" at page 24.
HOW DO I PURCHASE SHARES?
You may purchase shares of the Series through Prudential Securities, Pruco
Securities Corporation (Prusec) or directly from the Fund through its
transfer agent, Prudential Mutual Fund Services LLC (PMFS or the Transfer
Agent), at the net asset value per share (NAV) next determined after receipt
of your purchase order by the Transfer Agent or Prudential Securities. See
"How the Fund Values its Shares" at page 12 and "Shareholder Guide--How to
Buy Shares of the Fund" at page 16.
HOW DO I SELL MY SHARES?
You may redeem shares of the Series at any time at the NAV next determined
after Prudential Securities or the Transfer Agent receives your sell order.
See "Shareholder Guide--How to Sell Your Shares" at page 20.
HOW ARE DIVIDENDS AND DISTRIBUTIONS PAID?
The Series expects to declare daily and pay monthly dividends of net
investment income and short-term capital gains. Dividends and distributions
will be automatically reinvested in additional shares of the Series at NAV
unless you request that they be paid to you in cash. See "Taxes, Dividends
and Distributions" at page 13.
3
<PAGE>
FUND EXPENSES
(CALIFORNIA MONEY MARKET SERIES)
<TABLE>
<CAPTION>
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on
Purchases......................... None
Maximum Deferred Sales Load........ None
Maximum Sales Load Imposed on
Reinvested Dividends.............. None
Redemption Fees.................... None
Exchange Fee....................... None
</TABLE>
<TABLE>
<CAPTION>
<S> <C>
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management Fees.................... .500%
12b-1 Fees......................... .125%
Other Expenses..................... .105%
-----
Total Fund Operating Expenses...... .730%
-----
-----
</TABLE>
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
EXAMPLE
You would pay the following expenses on
a $1,000 investment, assuming (1) 5%
annual return and (2) redemption at
the end of each time period:......... $7 $23 $41 $91
</TABLE>
The above example is based on data for the Series' fiscal year ended August
31, 1997. THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
The purpose of this table is to assist an investor in understanding the
various costs and expenses that an investor in the Series will bear, whether
directly or indirectly. For more complete descriptions of the various costs
and expenses, see "How the Fund is Managed." "Other Expenses" includes
operating expenses of the Series, such as Trustees' and professional fees,
registration fees, reports to shareholders and transfer agency and custodian
fees.
4
<PAGE>
FINANCIAL HIGHLIGHTS
(FOR A SHARE OF BENEFICIAL INTEREST OUTSTANDING THROUGHOUT EACH OF THE INDICATED
PERIODS)
The following financial highlights, for the fiscal year ended August 31, 1997,
have been audited by Price Waterhouse LLP, independent accountants, and by
Deloitte & Touche LLP, independent auditors, for the four years ended August 31,
1996. Each of the respective reports by Price Waterhouse LLP and Deloitte &
Touche LLP on such financial statements were unqualified. This information
should be read in conjunction with the financial statements and the notes
thereto, which appear in the Statement of Additional Information. The following
financial highlights contain selected data for a share of beneficial interest
outstanding, total return, ratios to average net assets and other supplemental
data for the periods indicated. This information is based on data contained in
the financial statements.
<TABLE>
<CAPTION>
MARCH 3,
1989 (a)
YEAR ENDED AUGUST 31, THROUGH
------------------------------------------------------------------------------------- AUGUST 31,
1997 1996 1995 1994 1993 1992 1991 1990 1989
-------- -------- ------------ -------- -------- -------- ------------ ----- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE
OPERATING
PERFORMANCE:
Net asset
value,
beginning of
period...... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $1.00 $ 1.00
Net investment
income and
net realized
gains/losses... .03 .03 (.02e) .02 .02 .03 (.04c) (.05c) .03(c)
Dividends and
distributions... (.03) (.03) (.03) (.02) (.02) (.03) (.04) (.05) (.03)
Capital
contribution
by
affiliate... -- -- .01 -- -- -- -- -- --
-------- -------- ------------ -------- -------- -------- ------------ ----- ---------------
Net asset
value, end
of period... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 $1.00 $ 1.00
-------- -------- ------------ -------- -------- -------- ------------ ----- ---------------
-------- -------- ------------ -------- -------- -------- ------------ ----- ---------------
TOTAL
RETURN (d):... 2.85% 2.88% 3.01%(e) 1.94% 1.86% 2.91% 4.48% 5.59% 3.21%
RATIOS/SUPPLEMENTAL
DATA:
Net assets,
end of
period
(000)....... $285,280 $249,833 $ 229,380 $300,676 $314,925 $315,890 $ 341,625 $388,739 $244,180
Average net
assets
(000)....... $277,720 $256,175 $ 243,130 $326,429 $319,464 $339,941 $ 375,655 $330,581 $174,500
Ratios to
average net
assets:
Expenses,
including
distribution
fee......... .73% .74% %.78 .73% .76% .76% %.63(c) %.38(c) .19%(b)(c)
Expenses,
excluding
distribution
fee........ .61% .62% %.65 .61% .63% .63% %.51(c) %.25(c) .08%(b)(c)
Net
investment
income..... 2.80% 2.83% 2.93% 1.91% 1.83% 2.89% 4.37%(c) 5.40%(c) 5.57%(b)(c)
</TABLE>
- ---------------
(a) Commencement of investment operations.
(b) Annualized.
(c) Net of expense subsidy and/or management fee waiver.
(d) Total return includes reinvestment of dividends and distributions.
Total returns for periods of less than one year are not annualized.
(e) Includes $.01 of net realized loss on investment transactions that
were offset by a capital contribution by an affiliate. Without the
effect of the capital contribution, the Series' total return would
have been 1.88%.
5
<PAGE>
CALCULATION OF YIELD
THE SERIES CALCULATES ITS "CURRENT YIELD" based on the net change, exclusive
of realized and unrealized gains or losses, in the value of a hypothetical
account over a seven calendar day base period. THE SERIES ALSO CALCULATES ITS
"EFFECTIVE ANNUAL YIELD" ASSUMING DAILY COMPOUNDING. Tax-equivalent yield shows
the taxable yield an investor would have to earn from a fully taxable investment
in order to equal the Series' tax-free yield after taxes and is calculated by
dividing the Series' current or effective yield by the result of one minus the
State tax rate times one minus the federal tax rate. The following is an example
of the yield calculations as of August 31, 1997:
<TABLE>
<S> <C>
Value of hypothetical account at end of period.................... $1.000508786
Value of hypothetical account at beginning of period.............. 1.000000000
------------
Base period return................................................ $ .000508786
------------
------------
CURRENT YIELD (.000508786 X (365/7)).............................. 2.65%
EFFECTIVE ANNUAL YIELD, assuming daily compounding................ 2.69%
TAX-EQUIVALENT CURRENT YIELD (2.65% DIVIDED BY
[(1-.396)(1-.093)]).............................................. 4.84%
</TABLE>
THE YIELD WILL FLUCTUATE FROM TIME TO TIME AND DOES NOT INDICATE FUTURE
PERFORMANCE.
The weighted average life to maturity of the portfolio of the Series on August
31, 1997 was 51 days.
Yield is computed in accordance with a standardized formula described in the
Statement of Additional Information. In addition, comparative performance
information may be used from time to time in advertising or marketing the
Series' shares, including data from Lipper Analytical Services, Inc.,
Morningstar Publications, Inc., IBC/Donoghue's Money Fund Report, The Bank Rate
Monitor, other industry publications, business periodicals and market indices.
HOW THE FUND INVESTS
INVESTMENT OBJECTIVE AND POLICIES
PRUDENTIAL CALIFORNIA MUNICIPAL FUND (THE FUND) IS AN OPEN-END, MANAGEMENT
INVESTMENT COMPANY, OR MUTUAL FUND, CONSISTING OF THREE SEPARATE SERIES. EACH
SERIES OF THE FUND IS MANAGED INDEPENDENTLY. THE CALIFORNIA MONEY MARKET SERIES
(THE SERIES) IS DIVERSIFIED AND ITS INVESTMENT OBJECTIVE IS 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. THE
SERIES SEEKS TO ACHIEVE ITS INVESTMENT OBJECTIVE BY INVESTING PRIMARILY IN
SHORT-TERM CALIFORNIA STATE, MUNICIPAL AND LOCAL GOVERNMENT OBLIGATIONS AND
OBLIGATIONS OF OTHER QUALIFYING ISSUERS, SUCH AS ISSUERS LOCATED IN PUERTO RICO,
THE VIRGIN ISLANDS AND GUAM, WHICH PAY INCOME EXEMPT, IN THE OPINION OF COUNSEL,
FROM CALIFORNIA STATE AND FEDERAL INCOME TAXES (CALIFORNIA OBLIGATIONS). SEE
"INVESTMENT OBJECTIVES AND POLICIES" IN THE STATEMENT OF ADDITIONAL INFORMATION.
THERE CAN BE NO ASSURANCE THAT THE SERIES WILL BE ABLE TO ACHIEVE ITS INVESTMENT
OBJECTIVE.
THE SERIES' INVESTMENT OBJECTIVE IS A FUNDAMENTAL POLICY AND, THEREFORE, MAY
NOT BE CHANGED WITHOUT THE APPROVAL OF THE HOLDERS OF A MAJORITY OF THE SERIES'
OUTSTANDING VOTING SECURITIES AS DEFINED IN THE INVESTMENT COMPANY ACT OF 1940,
AS AMENDED (THE INVESTMENT COMPANY ACT). THE SERIES' POLICIES THAT ARE NOT
FUNDAMENTAL MAY BE MODIFIED BY THE TRUSTEES.
As with an investment in any mutual fund, an investment in this Series can
decrease in value and you can lose money.
6
<PAGE>
Interest on certain municipal obligations may be a preference item for
purposes of the federal alternative minimum tax. The Series may invest without
limit in municipal obligations that are "private activity bonds" (as defined in
the Internal Revenue Code), the interest on which would be a preference item for
purposes of the federal alternative minimum tax. See "Taxes, Dividends and
Distributions." California law provides that dividends paid by the Series are
exempt from California State personal income tax for individuals who reside in
California to the extent they are derived from interest payments on California
Obligations. The California Obligations in which the Series may invest include
certain short-term, tax-exempt notes such as Tax Anticipation Notes, Revenue
Anticipation Notes, Bond Anticipation Notes, Construction Loan Notes and certain
variable and floating rate demand notes. See "Investment Objectives and
Policies--Tax-Exempt Securities--Tax-Exempt Notes" in the Statement of
Additional Information. The Series will maintain a dollar-weighted average
maturity of its portfolio of 90 days or less.
THE SERIES MAY INVEST ITS ASSETS IN FLOATING RATE AND VARIABLE RATE
SECURITIES, INCLUDING PARTICIPATION INTERESTS THEREIN, WHICH CONFORM TO THE
REQUIREMENTS OF THE AMORTIZED COST VALUATION RULE AND OTHER REQUIREMENTS OF THE
SECURITIES AND EXCHANGE COMMISSION (SEC). There is no limit on the amount of
such securities that the Series may purchase. Floating rate securities normally
have a rate of interest which is set as a specific percentage of a designated
base rate, such as the rate on Treasury Bonds or Bills or the prime rate at a
major commercial bank. The interest rate on floating rate securities changes
periodically when there is a change in the designated base interest rate.
Variable rate securities provide for a specified periodic adjustment in the
interest rate based on prevailing market rates and generally would allow the
Series to demand payment of the obligation on short notice at par plus accrued
interest, which amount may be more or less than the amount the Series paid for
them.
ALL CALIFORNIA OBLIGATIONS PURCHASED BY THE SERIES WILL, AT THE TIME OF
PURCHASE, HAVE A REMAINING MATURITY OF THIRTEEN MONTHS OR LESS AND BE (I) RATED
IN ONE OF THE TWO HIGHEST RATING CATEGORIES BY AT LEAST TWO NATIONALLY
RECOGNIZED STATISTICAL RATING ORGANIZATIONS (NRSROS) ASSIGNING A RATING TO THE
SECURITY OR ISSUER (OR, IF ONLY ONE SUCH NRSRO ASSIGNED A RATING, BY THAT NRSRO)
OR (II) IF UNRATED, OF COMPARABLE QUALITY AS DETERMINED BY THE INVESTMENT
ADVISER UNDER THE SUPERVISION OF THE TRUSTEES. See "Description of Tax-Exempt
Security Ratings" in the Statement of Additional Information. The investment
adviser will monitor the credit quality of securities purchased for the Series'
portfolio and will limit its investments to those which present minimal credit
risks.
In selecting California Obligations for investment by the Series, the
investment adviser considers ratings assigned by NRSROs, information concerning
the financial history and condition of the issuer and its revenue and expense
prospects and, in the case of revenue bonds, the financial history and condition
of the source of revenue to service the bonds. If a California Obligation held
by the Series is assigned a lower rating or ceases to be rated, the investment
adviser under the supervision of the Trustees will promptly reassess whether
that security presents minimal credit risks and whether the Series should
continue to hold the security in its portfolio. If a portfolio security no
longer presents minimal credit risks or is in default, the Series will dispose
of the security as soon as reasonably practicable unless the Trustees determine
that to do so is not in the best interests of the Series and its shareholders.
The Series utilizes the amortized cost method of valuation in accordance with
regulations issued by the SEC. See "How the Fund Values its Shares."
The Series intends to hold portfolio securities to maturity; however, it may
sell any security at any time in order to meet redemption requests or if the
investment adviser believes it advisable, based on an evaluation of the issuer
or of market conditions.
UNDER NORMAL MARKET CONDITIONS, THE SERIES WILL ATTEMPT TO INVEST
SUBSTANTIALLY ALL OF THE VALUE OF ITS ASSETS IN CALIFORNIA OBLIGATIONS. As a
matter of fundamental policy, during normal market conditions the Series' assets
will be invested so that at least 80% of the income will be exempt from
California State and federal income taxes or the Series will have at least 80%
of its total assets invested in California Obligations. During abnormal market
conditions or to provide liquidity, the Series may hold cash or taxable cash
equivalents such as certificates of deposit, bankers acceptances and time
deposits or other short-term taxable investments such as repurchase agreements,
or high grade taxable obligations, including obligations that are exempt
7
<PAGE>
from federal, but not California State, taxation. When, in the opinion of the
investment adviser, abnormal market conditions require a temporary defensive
position, the Series may invest more than 20% of the value of its assets in
short-term debt securities other than California Obligations or may invest its
assets so that more than 20% of the income is subject to California State or
federal income taxes. The Series will treat an investment in a municipal bond
refunded with escrowed U.S. Government securities as U.S. Government securities
for purposes of the Investment Company Act's diversification requirements
provided certain conditions are met. See "Investment Objectives and Policies--In
General" in the Statement of Additional Information.
THE SERIES MAY ACQUIRE PUT OPTIONS (PUTS) GIVING THE SERIES THE RIGHT TO SELL
SECURITIES HELD IN THE SERIES' PORTFOLIO AT A SPECIFIED EXERCISE PRICE ON A
SPECIFIED DATE. Such puts may be acquired for the purpose of protecting the
Series from a possible decline in the market value of the security to which the
put applies in the event of interest rate fluctuations or, in the case of
liquidity puts, for the purpose of shortening the effective maturity of the
underlying security. The aggregate value of premiums paid to acquire puts held
in the Series' portfolio (other than liquidity puts) may not exceed 10% of the
net asset value of the Series. The acquisition of a put may involve an
additional cost to the Series, by payment of a premium for the put, by payment
of a higher purchase price for securities to which the put is attached or
through a lower effective interest rate.
In addition, there is a credit risk associated with the purchase of puts in
that the issuer of the put may be unable to meet its obligation to purchase the
underlying security. Accordingly, the Series will acquire puts only under the
following circumstances: (1) the put is written by the issuer of the underlying
security and such security is rated (a) in one of the two highest rating
categories by at least two NRSROs assigning a rating to the security or issuer,
or (b) if only one such rating organization assigned a rating, by that rating
organization; or (2) the put is written by a person other than the issuer of the
underlying security and such person has securities outstanding which are rated
within such two highest quality grades; or (3) the put is backed by a letter of
credit or similar financial guarantee issued by a person having securities
outstanding which are rated within the two highest quality grades of such rating
services. The issuer of the put, or another institution, must undertake to
notify promptly the holder of the put if the put feature is substituted with a
put from another issuer.
THE SERIES MAY PURCHASE MUNICIPAL OBLIGATIONS ON A "WHEN-ISSUED" OR "DELAYED
DELIVERY" BASIS, IN EACH CASE WITHOUT LIMIT. When municipal obligations are
offered on a when-issued or delayed delivery basis, the price and coupon rate
are fixed at the time the commitment to purchase is made, but delivery and
payment for the securities take place at a later date. The purchase price for
such securities includes interest accrued during the period between purchase and
settlement, and therefore, no interest accrues to the economic benefit of the
purchaser during such period. In the case of purchases by the Series, the price
that the Series is required to pay on the settlement date may be in excess of
the market value of the municipal obligations on that date. While securities may
be sold prior to the settlement date, the Series intends to purchase these
securities with the purpose of actually acquiring them unless a sale would be
desirable for investment reasons. At the time the Series makes the commitment to
purchase a municipal obligation on a when-issued or delayed delivery basis, it
will record the transaction and reflect the value of the obligation each day in
determining its net asset value. This value may fluctuate from day to day in the
same manner as values of municipal obligations otherwise held by the Series. If
the seller defaults in the sale, the Series could fail to realize the
appreciation, if any, that had occurred. The Series will establish a segregated
account with its Custodian in which it will maintain cash, U.S. Government
securities, equity securities or other liquid, unencumbered assets,
marked-to-market daily, equal in value to its commitments for when-issued or
delayed delivery securities.
THE SERIES MAY PURCHASE SECONDARY MARKET INSURANCE ON CALIFORNIA OBLIGATIONS
WHICH IT HOLDS OR ACQUIRES. Secondary market insurance would be reflected in the
market value of the municipal obligation purchased and may enable the Series to
dispose of a defaulted obligation at a price similar to that of comparable
municipal obligations which are not in default.
Insurance is not a substitute for the basic credit of an issuer, but
supplements the existing credit and provides additional security therefor. While
insurance coverage for the California Obligations held by the Series reduces
credit risk by providing that the insurance company will make timely payment of
principal and interest if the issuer defaults on its obligation to make such
payment, it does not afford protection against fluctuation in the price, I.E.,
the market value, of the municipal obligations caused by changes in interest
rates and other factors, nor in turn against fluctuations in the net asset value
of the shares of the Series.
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SPECIAL CONSIDERATIONS
BECAUSE THE SERIES WILL INVEST AT LEAST 80% OF THE VALUE OF ITS TOTAL ASSETS
IN CALIFORNIA OBLIGATIONS, IT IS MORE SUSCEPTIBLE TO FACTORS ADVERSELY AFFECTING
ISSUERS OF SUCH OBLIGATIONS THAN IS A COMPARABLE MUNICIPAL BOND MUTUAL FUND THAT
IS NOT CONCENTRATED IN CALIFORNIA OBLIGATIONS TO THIS DEGREE. The recent
national recession severely affected several key sectors of California's economy
although the State's economy outperformed expectations in 1995 and strong growth
continued into 1996. A central feature of the 1997-98 State budget is welfare
reform and government streamlining. The budget anticipates General Fund revenues
of $52.5 billion, expenditures of $52.8 billion and a fiscal year end budget
reserve of $112 million. California law could restrict the ability of the State
and its local governmental entities to raise revenues sufficient to pay certain
obligations. If the issuers of any of the California Obligations are unable to
meet their financial obligations because of budgetary pressures or for other
reasons, the income derived by the Series, the ability to preserve or realize
appreciation of the Series' capital and the Series' liquidity could be adversely
affected. See "Investment Objectives and Policies--Special Considerations
Regarding Investments in Tax-Exempt Securities" in the Statement of Additional
Information.
OTHER INVESTMENTS AND POLICIES
REPURCHASE AGREEMENTS
The Series may on occasion enter into repurchase agreements whereby the seller
of a security agrees to repurchase that security from the Series at a mutually
agreed-upon time and price. The period of maturity is usually quite short,
possibly overnight or a few days, although it may extend over a number of
months. The resale price is in excess of the purchase price, reflecting an
agreed-upon rate of return effective for the period of time the Series' money is
invested in the security. The Series' repurchase agreements will at all times be
fully collateralized in an amount at least equal to the resale price. The
instruments held as collateral are valued daily and if the value of the
instruments declines, the Series will require additional collateral. If the
seller defaults and the value of the collateral securing the repurchase
agreement declines, the Series may incur a loss. The Series participates in a
joint repurchase account with other investment companies managed by PIFM
pursuant to an order of the SEC. See "Investment Objectives and
Policies--Repurchase Agreements" in the Statement of Additional Information.
BORROWING
The Series may borrow an amount equal to no more than 33 1/3% of the value of
its total assets (calculated when the loan is made) for temporary, extraordinary
or emergency purposes or for the clearance of transactions. The Series may
pledge up to 33 1/3% of the value of its total assets to secure these
borrowings. The Series will not purchase portfolio securities if its borrowings
exceed 5% of its total assets.
ILLIQUID SECURITIES
The Series may hold up to 10% of its net assets in illiquid securities,
including repurchase agreements which have a maturity of longer than seven days,
securities with legal or contractual restrictions on resale (restricted
securities) and securities that are not readily marketable. Securities that have
a readily available market are not considered illiquid for purposes of this
limitation. See "Investment Restrictions" in the Statement of Additional
Information. The investment adviser will monitor the liquidity of such
restricted securities under the supervision of the Trustees. See "Investment
Objectives and Policies--Illiquid Securities" in the Statement of Additional
Information. Repurchase agreements subject to demand are deemed to have a
maturity equal to the notice period.
INVESTMENT RESTRICTIONS
The Series is subject to certain investment restrictions which, like its
investment objective, constitute fundamental policies. Fundamental policies
cannot be changed without the approval of the holders of a majority of the
Series' outstanding voting securities, as defined in the Investment Company Act.
See "Investment Restrictions" in the Statement of Additional Information.
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HOW THE FUND IS MANAGED
THE FUND HAS TRUSTEES WHO, IN ADDITION TO OVERSEEING THE ACTIONS OF THE FUND'S
MANAGER, SUBADVISER AND DISTRIBUTOR, AS SET FORTH BELOW, DECIDE UPON MATTERS OF
GENERAL POLICY. THE FUND'S MANAGER CONDUCTS AND SUPERVISES THE DAILY BUSINESS
OPERATIONS OF THE FUND. THE FUND'S SUBADVISER FURNISHES DAILY INVESTMENT
ADVISORY SERVICES.
For the fiscal year ended August 31, 1997, total expenses of the Series as a
percentage of its average net assets were .73%. See "Financial Highlights."
MANAGER
PRUDENTIAL INVESTMENTS FUND MANAGEMENT LLC (PIFM OR THE MANAGER), GATEWAY
CENTER THREE, 100 MULBERRY STREET, NEWARK, NEW JERSEY 07102-4077, IS THE MANAGER
OF THE FUND AND IS COMPENSATED FOR ITS SERVICES AT AN ANNUAL RATE OF .50 OF 1%
OF THE AVERAGE DAILY NET ASSETS OF THE SERIES. PIFM is organized in New York as
a limited liability company. It is the successor to Prudential Mutual Fund
Management, Inc., which transferred its assets to PIFM in September 1997. For
the fiscal year ended August 31, 1997, the Series paid a management fee of .50
of 1% of the Series' average net assets. See "Manager" in the Statement of
Additional Information.
As of September 30, 1997, PIFM served as the manager to 41 open-end investment
companies, constituting all of the Prudential Mutual Funds, and as manager or
administrator to 22 closed-end investment companies with aggregate assets of
approximately $59.9 billion.
UNDER THE MANAGEMENT AGREEMENT WITH THE FUND, PIFM MANAGES THE INVESTMENT
OPERATIONS OF EACH SERIES OF THE FUND AND ALSO ADMINISTERS THE FUND'S BUSINESS
AFFAIRS. See "Manager" in the Statement of Additional Information.
UNDER A SUBADVISORY AGREEMENT BETWEEN PIFM AND THE PRUDENTIAL INVESTMENT
CORPORATION (PIC), DOING BUSINESS AS PRUDENTIAL INVESTMENTS (PI, THE SUBADVISER
OR THE INVESTMENT ADIVSER), PI FURNISHES INVESTMENT ADVISORY SERVICES IN
CONNECTION WITH THE MANAGEMENT OF THE FUND AND IS REIMBURSED BY PIFM FOR ITS
REASONABLE COSTS AND EXPENSES INCURRED IN PROVIDING SUCH SERVICES. Under the
Management Agreement, PIFM continues to have responsibility for all investment
advisory services and supervises PI's performance of such services.
PIFM and PIC are indirect, wholly-owned subsidiaries of The Prudential
Insurance Company of America (Prudential), a major diversified insurance and
financial services company, and are part of Prudential Investments, a business
group of Prudential.
PIFM MAY FROM TIME TO TIME AGREE TO WAIVE ALL OR A PORTION OF ITS MANAGEMENT
FEE AND SUBSIDIZE CERTAIN OPERATING EXPENSES OF THE SERIES. Fee waivers and
expense subsidies will increase the Series' yield. See "Fund Expenses" and
"Calculation of Yield."
DISTRIBUTOR
PRUDENTIAL SECURITIES INCORPORATED (PRUDENTIAL SECURITIES, PSI OR THE
DISTRIBUTOR), ONE SEAPORT PLAZA, NEW YORK, NEW YORK 10292, IS A CORPORATION
ORGANIZED UNDER THE LAWS OF THE STATE OF DELAWARE AND SERVES AS THE DISTRIBUTOR
OF THE SERIES' SHARES. It is an indirect, wholly-owned subsidiary of Prudential.
UNDER A DISTRIBUTION AND SERVICE PLAN (THE PLAN) ADOPTED BY THE SERIES UNDER
RULE 12B-1 UNDER THE INVESTMENT COMPANY ACT AND A DISTRIBUTION AGREEMENT (THE
DISTRIBUTION AGREEMENT), THE DISTRIBUTOR INCURS THE EXPENSES OF DISTRIBUTING THE
SHARES OF THE SERIES. These expenses include account servicing fees paid to, or
on account of, financial advisers of Prudential Securities and representatives
of Pruco Securities Corporation (Prusec), affiliated broker-dealers, account
servicing fees paid to, or on account of, other broker-dealers or financial
institutions (other than national banks) which have
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entered into agreements with the Distributor, advertising expenses, the cost of
printing and mailing prospectuses to potential investors and indirect and
overhead costs of Prudential Securities and Prusec associated with the sale of
Series shares, including lease, utility, communications and sales promotion
expenses.
UNDER THE PLAN, THE SERIES REIMBURSES THE DISTRIBUTOR FOR ITS
DISTRIBUTION-RELATED EXPENSES AT THE ANNUAL RATE OF UP TO .125 OF 1% OF THE
AVERAGE DAILY NET ASSETS OF THE SERIES. Account servicing fees are paid based on
the average balance of the Series' shares held in the accounts of the customers
of financial advisers. The entire distribution fee may be used to pay account
servicing fees.
For the fiscal year ended August 31, 1997, the Series paid PSI a distribution
fee equal on an annual basis to .125% of the average net assets of the Series.
Amounts paid to the Distributor by the Series will not be used to pay
distribution expenses incurred by any other series of the Fund.
The Plan provides that it shall continue in effect from year to year provided
that each such continuance is approved annually by a majority vote of the
Trustees of the Fund, including a majority of the Trustees who are not
"interested persons" of the Fund (as defined in the Investment Company Act) and
who have no direct or indirect financial interest in the operation of the Plan
or any agreements related to the Plan. The Trustees are provided with and review
quarterly reports of expenditures under the Plan.
In addition to distribution and service fees paid by the Series under the
Plan, the Manager (or one of its affiliates) may make payments out of its own
resources to dealers (including Prudential Securities) and other persons which
distribute shares of the Series. Such payments may be calculated by reference to
the net asset value of shares sold by such persons or otherwise. The Fund
records all payments made under the Plan as expenses in the calculation of its
net investment income.
On October 21, 1993, PSI entered into an omnibus settlement with the SEC,
state securities regulators (with the exception of the Texas Securities
Commissioner who joined the settlement on January 18, 1994) and the National
Association of Securities Dealers, Inc. (the NASD) to resolve allegations that
from 1980 through 1990 PSI sold certain limited partnership interests in
violation of securities laws to persons for whom such securities were not
suitable and misrepresented the safety, potential returns and liquidity of these
investments. Without admitting or denying the allegations asserted against it,
PSI consented to the entry of an SEC Administrative Order which stated that
PSI's conduct violated the federal securities laws, directed PSI to cease and
desist from violating the federal securities laws, pay civil penalties, and
adopt certain remedial measures to address the violations.
Pursuant to the terms of the SEC settlement, PSI agreed to the imposition of a
$10,000,000 civil penalty, established a settlement fund in the amount of
$330,000,000 and procedures to resolve legitimate claims for compensatory
damages by purchasers of the partnership interests. PSI has agreed to provide
additional funds, if necessary, for the purpose of the settlement fund. PSI's
settlement with the state securities regulators included an agreement to pay a
penalty of $500,000 per jurisdiction. PSI consented to a censure and to the
payment of a $5,000,000 fine in settling the NASD action.
In October 1994, a criminal complaint was filed with the United States
Magistrate for the Southern District of New York alleging that PSI committed
fraud in connection with the sale of certain limited partnership interests in
violation of federal securities laws. An agreement was simultaneously filed to
defer prosecution of these charges for a period of three years from the signing
of the agreement, provided that PSI complies with the terms of the agreement.
If, upon completion of the three year period, PSI has complied with the terms of
the agreement, no prosecution will be instituted by the United States for the
offenses charged in the complaint. If on the other hand, during the course of
the three year period, PSI violates the terms of the agreement, the U.S.
Attorney can then elect to pursue these charges. Under the terms of the
agreement, PSI agreed, among other things, to pay an additional $330,000,000
into the fund established by the SEC to pay restitution to investors who
purchased certain PSI limited partnership interests.
For more detailed information concerning the foregoing matters, see
"Distributor" in the Statement of Additional Information, a copy of which may be
obtained at no cost by calling (800) 225-1852.
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The Fund is not affected by PSI's financial condition and is an entirely
separate legal entity from PSI, which has no beneficial ownership therein and
the Fund's assets which are held by State Street Bank and Trust Company, an
independent custodian, are separate and distinct from PSI.
PORTFOLIO TRANSACTIONS
Prudential Securities may act as a broker for the Fund, provided that the
commissions, fees or other remuneration it receives are fair and reasonable. See
"Portfolio Transactions and Brokerage" in the Statement of Additional
Information.
CUSTODIAN AND TRANSFER AND DIVIDEND DISBURSING AGENT
State Street Bank and Trust Company, One Heritage Drive, North Quincy,
Massachusetts, 02171 serves as Custodian for the portfolio securities of the
Series and cash and, in that capacity, maintains certain financial and
accounting books and records pursuant to an agreement with the Fund. Its mailing
address is P. O. Box 1713, Boston, Massachusetts 02105.
Prudential Mutual Fund Services LLC (PMFS), Raritan Plaza One, Edison, New
Jersey 08837, serves as Transfer Agent and Dividend Disbursing Agent and, in
those capacities, maintains certain books and records for the Fund. PMFS is a
wholly-owned subsidiary of PIFM. Its mailing address is P. O. Box 15005, New
Brunswick, New Jersey 08906-5005.
HOW THE FUND VALUES ITS SHARES
THE SERIES' NET ASSET VALUE PER SHARE OR NAV IS DETERMINED BY SUBTRACTING ITS
LIABILITIES FROM THE VALUE OF ITS ASSETS AND DIVIDING THE REMAINDER BY THE
NUMBER OF OUTSTANDING SHARES. THE TRUSTEES HAVE FIXED THE SPECIFIC TIME OF DAY
FOR THE COMPUTATION OF THE NET ASSET VALUE OF THE SERIES TO BE AS OF 4:30 P.M.,
NEW YORK TIME, IMMEDIATELY AFTER THE DECLARATION OF DIVIDENDS.
The Series will compute its NAV once daily on days that the New York Stock
Exchange is open for trading except on days on which no orders to purchase, sell
or redeem shares have been received by the Series or days on which changes in
the value of the Series' portfolio securities do not materially affect the NAV.
The Series determines the value of its portfolio securities by the amortized
cost method. This method involves valuing an instrument at its cost and
thereafter assuming a constant amortization to maturity of any discount or
premium regardless of the impact of fluctuating interest rates on the market
value of the instrument. While this method provides certainty in valuation, it
may result in periods during which value, as determined by amortized cost, is
higher or lower than the price the Series would receive if it sold the
instrument. During these periods, the yield to a shareholder may differ somewhat
from that which could be obtained from a similar fund which marks its portfolio
securities to the market each day. For example, during periods of declining
interest rates, if the use of the amortized cost method resulted in a lower
value of the Series' portfolio on a given day, a prospective investor in the
Series would be able to obtain a somewhat higher yield and existing shareholders
would receive correspondingly less income. The converse would apply during
periods of rising interest rates. The Trustees have established procedures
designed to stabilize, to the extent reasonably possible, the NAV of the shares
of the Series at $1.00 per share. See "Net Asset Value" in the Statement of
Additional Information.
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TAXES, DIVIDENDS AND DISTRIBUTIONS
TAXATION OF THE FUND
THE SERIES HAS ELECTED TO QUALIFY AND INTENDS TO REMAIN QUALIFIED AS A
REGULATED INVESTMENT COMPANY UNDER THE INTERNAL REVENUE CODE. ACCORDINGLY, THE
SERIES WILL NOT BE SUBJECT TO FEDERAL INCOME TAXES ON ITS NET INVESTMENT INCOME
AND NET CAPITAL GAINS, IF ANY, THAT IT DISTRIBUTES TO ITS SHAREHOLDERS. TO THE
EXTENT NOT DISTRIBUTED BY THE SERIES, NET TAXABLE INVESTMENT INCOME AND CAPITAL
GAINS AND LOSSES ARE TAXABLE TO THE SERIES.
To the extent the Series invests in taxable obligations, it will earn taxable
investment income. Gain or loss realized by the Series from the sale of
securities generally will be treated as capital gain or loss; however, gain from
the sale of certain securities (including municipal obligations) will be treated
as ordinary income to the extent of any "market discount." Market discount
generally is the difference, if any, between the price paid by the Series for
the security and the principal amount of the security (or, in the case of a
security issued at an original issue discount, the revised issue price of the
security). The market discount rule does not apply to any security that was
acquired by the Series at its original issue. See "Distributions and Tax
Information" in the Statement of Additional Information.
TAXATION OF SHAREHOLDERS
In general, the character of tax-exempt interest distributed by the Series
will flow through as tax-exempt interest to its shareholders provided that 50%
or more of the value of its assets at the end of each quarter of its taxable
year is invested in state, municipal and other obligations, the interest on
which is excluded from gross income for federal income tax purposes. During
normal market conditions, at least 80% of the Series' total assets will be
invested in such obligations. See "How the Fund Invests--Investment Objective
and Policies."
Any dividends out of net taxable investment income, together with
distributions of net short-term gains (I.E., the excess of net short-term
capital gains over net long-term capital losses) distributed to shareholders,
will be taxable as ordinary income to the shareholder whether or not reinvested.
Any net capital gains (I.E., the excess of net capital gains from the sale of
assets held for more than 12 months over net short-term capital losses)
distributed to shareholders will be taxable as capital gains to the
shareholders, whether or not reinvested and regardless of the length of time a
shareholder has owned his or her shares. The maximum capital gains rate for
individuals is 28% with respect to assets held for more than 12 months, but not
more than 18 months, and 20% with respect to assets held for more than 18
months. The maximum capital gains rate for corporate shareholders currently is
the same as the maximum tax rate for ordinary income. The Series does not expect
to have capital gains from the sale of assets held for more than 12 months.
CERTAIN INVESTORS MAY INCUR FEDERAL ALTERNATIVE MINIMUM TAX LIABILITY AS A
RESULT OF THEIR INVESTMENT IN THE FUND. Tax-exempt interest from certain
municipal obligations (I.E., certain private activity bonds issued after August
7, 1986) will be treated as an item of tax preference for purposes of the
alternative minimum tax. The Fund anticipates that, under regulations to be
promulgated, items of tax preference incurred by the Series will be attributed
to the Series' shareholders, although some portion of such items could be
allocated to the Series itself. Depending upon each shareholder's individual
circumstances, the attribution of items of tax preference incurred by the Series
could result in liability for the shareholder for the alternative minimum tax.
Similarly, the Series could be liable for the alternative minimum tax for items
of tax preference attributed to it. The Series is permitted to invest in
municipal obligations of the type that will produce items of tax preference.
Corporate shareholders in the Series also will have to take into account the
adjustment for current earnings for alternative minimum tax purposes. Corporate
shareholders should consult with their tax advisers with respect to this
potential adjustment.
Under California law, the taxation of regulated investment companies and their
shareholders was generally conformed to the federal tax law that was in effect
on January 1, 1997. Dividends paid by the Series and derived from interest on
obligations which
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(when held by an individual) pay interest excludable from California personal
income under California law will be exempt from the California personal income
tax (although not from the California franchise tax). To the extent a portion of
the dividends are derived from interest on debt obligations other than those
described directly above, such portion will be subject to the California
personal income tax even though it may be excludable from gross income for
federal income tax purposes. In addition, distributions of short-term capital
gains realized by the Fund will be taxable to the shareholders as ordinary
income. Distributions of long-term capital gains will be taxable as such to the
shareholders regardless of how long they held their shares. Under California
law, ordinary income and capital gains currently are taxed at the same rate.
With respect to non-corporate shareholders, California does not treat tax-exempt
interest as a tax preference item for purposes of its alternative minimum tax.
To the extent a corporate shareholder receives dividends which are exempt from
California taxation, a portion of such dividends may be subject to the
alternative minimum tax.
Interest on indebtedness incurred or continued to purchase or carry shares of
the Series will not be deductible for federal or California purposes.
Shareholders are advised to consult their own tax advisers regarding specific
questions as to federal, state or local taxes. See "Distributions and Tax
Information" in the Statement of Additional Information.
WITHHOLDING TAXES
Under the Internal Revenue Code, the Series is required to withhold and remit
to the U.S. Treasury 31% of redemption proceeds on the accounts of certain
shareholders who fail to furnish their tax identification numbers on IRS Form
W-9 (or IRS Form W-8 in the case of certain foreign shareholders) with the
required certifications regarding the shareholder's status under the federal
income tax law. Such withholding is also required on taxable dividends and
capital gain distributions made by the Series unless it is reasonably expected
that at least 95% of the distributions of the Series are comprised of tax-exempt
dividends.
DIVIDENDS AND DISTRIBUTIONS
THE SERIES EXPECTS TO DECLARE DAILY AND PAY MONTHLY DIVIDENDS OF NET
INVESTMENT INCOME AND SHORT-TERM CAPITAL GAINS.
A shareholder generally begins to earn dividends on the first business day
after his or her order is placed with the Series, as described above, and
continues to earn dividends through the day on which his or her Shares are
redeemed. In the case of certain redemptions, however, Prudential Securities
clients will not be entitled to dividends declared on the date of redemption.
See "Shareholder Guide--How to Sell Your Shares--Redemption of Shares Purchased
Through Prudential Securities."
DIVIDENDS AND DISTRIBUTIONS WILL BE PAID IN ADDITIONAL SHARES OF THE SERIES
BASED ON THE NET ASSET VALUE OF SERIES' SHARES ON THE PAYMENT DATE, OR SUCH
OTHER DATE AS THE TRUSTEES MAY DETERMINE, UNLESS THE SHAREHOLDER ELECTS IN
WRITING NOT LESS THAN FIVE BUSINESS DAYS PRIOR TO THE RECORD DATE TO RECEIVE
SUCH DIVIDENDS AND DISTRIBUTIONS IN CASH. Such election should be submitted to
Prudential Mutual Fund Services LLC, Attention: Account Maintenance, P. O. Box
15015, New Brunswick, New Jersey 08906-5015. If you hold shares through
Prudential Securities, you should contact your financial adviser to elect to
receive dividends and distributions in cash. The Fund will notify each
shareholder after the close of the Fund's taxable year of both the dollar amount
and the taxable status of that year's dividends and distributions.
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GENERAL INFORMATION
DESCRIPTION OF SHARES
THE FUND WAS ESTABLISHED AS A MASSACHUSETTS BUSINESS TRUST ON MAY 18, 1984, BY
A DECLARATION OF TRUST. The Fund's activities are supervised by its Trustees.
The Declaration of Trust permits the Trustees to issue an unlimited number of
full and fractional shares in separate series, currently designated as the
California Series, the California Income Series and the California Money Market
Series. The California Money Market Series offers only one class of shares. The
California Income Series and the California Series offer four classes,
designated Class A, Class B, Class C and Class Z shares. Pursuant to the Fund's
Declaration of Trust, the Trustees may authorize the creation of additional
series and classes within such series, with such preferences, privileges,
limitations and voting and dividend rights as the Trustees may determine.
Shares of the Fund, when issued, are fully paid, nonassessable, fully
transferable and redeemable at the option of the holder. Shares are also
redeemable at the option of the Fund under certain circumstances as described
under "Shareholder Guide--How to Sell Your Shares." Each share of the Series is
equal as to earnings, assets and voting privileges, and each class bears the
expenses related to the distribution of its shares. There are no conversion,
preemptive or other subscription rights. In the event of liquidation, each share
of beneficial interest of each series is entitled to its portion of all of the
Fund's assets after all debt and expenses of the Fund have been paid. The Fund's
shares do not have cumulative voting rights for the election of Trustees.
THE FUND DOES NOT INTEND TO HOLD ANNUAL MEETINGS OF SHAREHOLDERS UNLESS
OTHERWISE REQUIRED BY LAW. THE FUND WILL NOT BE REQUIRED TO HOLD MEETINGS OF
SHAREHOLDERS UNLESS, FOR EXAMPLE, THE ELECTION OF TRUSTEES IS REQUIRED TO BE
ACTED UPON BY SHAREHOLDERS UNDER THE INVESTMENT COMPANY ACT. SHAREHOLDERS HAVE
CERTAIN RIGHTS, INCLUDING THE RIGHT TO CALL A MEETING UPON A VOTE OF 10% OF THE
FUND'S OUTSTANDING SHARES FOR THE PURPOSE OF VOTING ON THE REMOVAL OF ONE OR
MORE TRUSTEES OR TO TRANSACT ANY OTHER BUSINESS.
The Declaration of Trust and the By-Laws of the Fund are designed to make the
Fund similar in certain respects to a Massachusetts business corporation. The
principal distinction between a Massachusetts business corporation and a
Massachusetts business trust relates to shareholder liability. Under
Massachusetts law, shareholders of a business trust may, under certain
circumstances, be held personally liable as partners for the obligations of the
Fund, which is not the case with a corporation. The Declaration of Trust of the
Fund provides that shareholders shall not be subject to any personal liability
for the acts or obligations of the Fund and that every written obligation,
contract, instrument or undertaking made by the Fund shall contain a provision
to the effect that the shareholders are not individually bound thereunder.
ADDITIONAL INFORMATION
This Prospectus, including the Statement of Additional Information which has
been incorporated by reference herein, does not contain all the information set
forth in the Registration Statement filed by the Fund with the SEC under the
Securities Act of 1933, as amended. Copies of the Registration Statement may be
obtained at a reasonable charge from the SEC or may be examined, without charge,
at the office of the SEC in Washington, D.C.
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SHAREHOLDER GUIDE
HOW TO BUY SHARES OF THE FUND
YOU MAY PURCHASE SHARES OF THE SERIES THROUGH PRUDENTIAL SECURITIES, PRUSEC OR
DIRECTLY FROM THE FUND, THROUGH ITS TRANSFER AGENT, PRUDENTIAL MUTUAL FUND
SERVICES LLC (PMFS OR THE TRANSFER AGENT), ATTENTION: INVESTMENT SERVICES, P.O.
BOX 15020, NEW BRUNSWICK, NEW JERSEY 08906-5020. The minimum initial investment
is $1,000. The minimum subsequent investment is $100. All minimum investment
requirements are waived for the Command Account Program (if the Series is
designated as your primary fund) and certain employee savings and retirement
plans. For purchases made through the Automatic Savings Accumulation Plan, the
minimum initial and subsequent investment is $50. See "Shareholder Services"
below. For automatic purchases made through Prudental Securities, the minimum
investment requirement is $1,000 and there is no mimimum subsequent investment
requirement.
An investment in the Series may not be appropriate for tax-exempt or
tax-deferred investors. Such investors should consult with their own tax
advisers.
SHARES OF THE SERIES ARE SOLD THROUGH THE TRANSFER AGENT, WITHOUT A SALES
CHARGE, AT THE NAV PER SHARE NEXT DETERMINED FOLLOWING RECEIPT AND ACCEPTANCE BY
THE TRANSFER AGENT OR PRUDENTIAL SECURITIES OF AN ORDER AND PAYMENT IN PROPER
FORM (I.E., A CHECK OR FEDERAL FUNDS WIRED TO STATE STREET BANK AND TRUST
COMPANY (STATE STREET), THE FUND'S CUSTODIAN). See "How the Fund Values its
Shares." When payment is received by PMFS prior to 4:30 P. M., New York time, in
proper form, a share purchase order will be entered at the price determined as
of 4:30 P. M., New York time, on that day, and dividends on the shares purchased
will begin on the business day following such investment. See "Taxes, Dividends
and Distributions." If your purchase is made through an account at Prudential
Securities or through Prusec or another dealer, your dealer will forward a
purchase order and payment to the Fund.
Investors who purchase their shares through a dealer other than Prudential
Securities or Prusec, which dealer has a clearinghouse arrangement with respect
to shares of the Series, may be able to participate in the automatic sweep
feature described below under "Purchases through Prudential
Securities--Automatic Investment (Autosweep)" and "How to Sell Your
Shares--Redemptions of Shares Purchased through Prudential Securities." For
further information, contact your dealer.
Application forms for Prusec and direct accounts with the Transfer Agent
(E.G., non-Prudential Securities accounts) can be obtained from PMFS, or Prusec.
If a share certificate is desired, it must be requested in writing for each
transaction. Certificates are issued only for full shares. Shareholders who hold
their shares through Prudential Securities will not receive share certificates.
Shareholders cannot utilize Expedited Redemption or Check Redemption or have a
Systematic Withdrawal Plan if they have been issued share certificates.
The Fund reserves the right in its sole discretion to reject any purchase
order (including an exchange into the Series) or to suspend or modify the
continuous offering of its shares. See "How to Sell Your Shares" below.
Your dealer is responsible for forwarding payment promptly to the Fund. The
Distributor reserves the right to cancel any purchase order for which payment
has not been received by the third business day following the investment.
Transactions in shares of the Series may be subject to postage and other
charges imposed by the dealer.
PURCHASES THROUGH PRUDENTIAL SECURITIES
If you have an account with Prudential Securities (or open such an account)
you may ask Prudential Securities to purchase shares of the Series on your
behalf. On the business day following confirmation that a free credit balance
(I.E., immediately available funds) exists in your account, Prudential
Securities will effect a purchase order for shares of the Series in an amount up
to the balance of the NAV determined on that day. Funds held by Prudential
Securities on behalf of its clients in the form of free
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<PAGE>
credit balances are delivered to the Fund by Prudential Securities and begin
earning dividends the second business day after receipt of the order by
Prudential Securities. Accordingly, Prudential Securities will have the use of
such free credit balances during this period.
Shares of the Series purchased by Prudential Securities on behalf of its
clients will be held by Prudential Securities as record holder. Prudential
Securities will therefore receive statements and dividends directly from the
Fund and will in turn provide investors with Prudential Securities account
statements reflecting purchases, redemptions and dividend payments. Although
Prudential Securities clients who purchase shares of the Series through
Prudential Securities may not redeem shares of the Series by check, Prudential
Securities provides its clients with alternative forms of immediate access to
monies invested in shares of the Series.
Prudential Securities clients wishing additional information concerning
investment in shares of the Series made through Prudential Securities should
call their Prudential Securities financial adviser.
AUTOMATIC INVESTMENT (AUTOSWEEP) (FOR NON-COMMAND ACCOUNTS)
Prudential Securities has advised the Fund that it has automatic investment
procedures (Autosweep) pursuant to which it will make automatic investments of
free credit cash balances (Eligible Credit Balances) held in a client's
brokerage account in shares of the Series, if the Series is your Primary Money
Sweep Fund. You may designate the Series (or certain other Prudential money
market funds) as your Primary Money Sweep Fund. If the Series is your Primary
Money Sweep Fund you can purchase shares of the Series only through the
automatic investment procedures described below; no manual purchase orders will
be accepted. You may change your Primary Money Sweep Fund at any time by
notifying your Prudential Securities financial adviser. Under certain
circumstances, you may elect not to have a money market sweep feature for your
account when you open your account.
For accounts other than IRAs and Benefit Plans, as defined below, shares of
the Series will be purchased by Prudential Securities as follows: in the case of
Eligible Credit Balances of $1,000 or more resulting from the proceeds of a
securities sale, maturity of a bond or call and Eligible Credit Balances of
$10,000 or more resulting from a non-trade related credit (E.G., receipt of a
dividend or interest payment or a cash payment into the securities account),
orders to purchase shares will be placed on the business day after such Eligible
Credit Balances become available in your account. For Eligible Credit Balances
of $1.00 or more not otherwise described above, orders to purchase shares will
be placed monthly on the last business day of the month. For IRAs and Benefit
Plans, having Eligible Credit Balances of $1.00 or more, orders to purchase
shares of the Series will be placed by Prudential Securities (i) on the
settlement date of the securities sale, in the case of Eligible Credit Balances
resulting from the proceeds of a securities sale, and (ii) on the business day
after receipt by Prudential Securities of the non-trade related credit
(including the maturity of a bond or a call), in the case of Eligible Credit
Balances resulting from a non-trade related credit. Each time an order resulting
from the settlement of a securities sale is placed, any non-trade related credit
in the client's account will also be invested.
The following chart shows the frequency and amount of the sweep for accounts
other than IRAs and Benefit Plans.
<TABLE>
<S> <C> <C>
DAILY MONTHLY
Eligible Credit Balances resulting from the proceeds of
a securities sale, maturity of a bond or call $1,000 or more
Eligible Credit Balances resulting from a non-trade
related credit $10,000 or more
Remaining Eligible Credit Balances $1.00 or more
</TABLE>
All shares purchased pursuant to these automatic investment procedures will be
issued at the NAV computed on the business day the order is entered and will
begin earning dividends on the following business day. Purchases through
Autosweep are subject to the Series' minimum initial investment requirement of
$1,000, which is waived for certain retirement and employee savings
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<PAGE>
plans and custodial accounts for the benefit of minors. Prudential Securities
will have the use of, and will retain the benefits of, Eligible Credit Balances
in a client's brokerage account until the monies are delivered to the Fund.
(Prudential Securities delivers Federal Funds on the business day after
settlement). Eligible Credit Balances for purposes of Autosweep are measured as
of the close of business on the previous business day.
For the purposes of Autosweep, "Benefit Plans" include (i) employee benefit
plans as defined in Section 3(3) of the Employee Retirement Income Security Act
of 1974 (ERISA) other than governmental plans as defined in Section 3(32) of
ERISA and church plans as defined in Section 3(33) of ERISA, (ii) pension,
profit-sharing or other employee benefit plans qualified under Section 401 of
the Internal Revenue Code and (iii) deferred compensation and annuity plans
under Section 457 or 403(b)(7) of the Internal Revenue Code. "IRAs" are
Individual Retirement Accounts as defined in Section 408(a) of the Internal
Revenue Code.
SELF-DIRECTED INVESTMENT. Prudential Securities clients not electing Autosweep
may continue to place orders for the purchase of shares of the Series through
Prudential Securities, subject to the minimum initial and subsequent investment
requirements described above.
A Prudential Securities client who has not elected Autosweep (Automatic
Investment) and who does not place a purchase order promptly after funds are
credited to his or her Prudential Securities account will have a free credit
balance with Prudential Securities and will not begin earning dividends on
shares of the Series until the second business day after receipt of the order by
Prudential Securities from the client. Accordingly, Prudential Securities will
have the use of such free credit balances during this period.
MANUAL INVESTMENT
Prudential Securities will accept manual purchase orders for shares of the
Series only for those clients (i) who are purchasing shares of a Prudential
money market fund which is not their Primary Money Sweep Fund or (ii) who do not
have a money market sweep feature in their account, as described above under
"Automatic Investment."
Prudential Securities clients eligible to make manual purchases, as described
above, are subject to the minimum initial investment of $1,000 and the minimum
subsequent investment of $100, except that all minimum investment requirements
are waived for certain retirement and employee savings plans and custodial
accounts for the benefit of minors. On the business day after the purchase order
is received, Prudential Securities will place the order for shares of the Series
for settlement that day. Shares will be issued at the NAV determined on that day
and will begin earning dividends the next business day, which is the second
business day after receipt of the purchase order by Prudential Securities.
Prudential Securities will have the use of, and will retain the benefits of,
Eligible Credit Balances in the client's brokerage account until monies are
delivered to the Fund. (Prudential Securities delivers Federal Funds on the
business day after settlement).
PURCHASES THROUGH PRUSEC
You may purchase shares of the Series by placing an order with your Prusec
representative accompanied by payment for the purchase price of such shares and,
in the case of a new account, a completed application form. You should also
submit an IRS Form W-9. The Prusec representative will then forward these items
to the Transfer Agent. See "Purchase by Mail" below.
PURCHASE BY WIRE
For an initial purchase of shares of the Series by wire, you must first
telephone PMFS at (800) 225-1852 (toll-free) to receive an account number. The
following information will be requested: your name, address, tax identification
number, dividend distribution election, amount being wired and wiring bank.
Instructions should then be given by you to your bank to transfer funds by wire
to State Street Bank and Trust Company (State Street), Boston, Massachusetts,
Custody and Shareholder Services Division, Attention: Prudential California
Municipal Fund, California Money Market Series, specifying on the wire the
account number assigned by PMFS and your name.
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<PAGE>
If you arrange for receipt by State Street of Federal Funds prior to the
calculation of NAV (4:30 P. M., New York time), on a business day, you may
purchase shares of the Series as of that day and receive dividends commencing on
the next business day. See "Net Asset Value" in the Statement of Additional
Information.
In making a subsequent purchase order by wire, you should wire State Street
directly, and should be sure that the wire specifies Prudential California
Municipal Fund (California Money Market Series), and your name and individual
account number. It is not necessary to call PMFS to make subsequent purchase
orders utilizing Federal Funds. The minimum amount which may be invested by wire
is $1,000.
PURCHASE BY MAIL
Purchase orders for which remittance is to be made by check or money order may
be submitted directly by mail to Prudential Mutual Fund Services LLC, Attention:
Investment Services, P. O. Box 15020, New Brunswick, New Jersey 08906-5020,
together with payment for the purchase price of such shares and, in the case of
a new account, a completed application form. You should also submit an IRS Form
W-9. If PMFS receives an order to purchase shares of the Series and payment in
proper form prior to 4:30 P. M., New York time, the purchase order will be
effective that day and you will begin earning dividends the following business
day. See "Taxes, Dividends and Distributions." Checks should be made payable to
Prudential California Municipal Fund, California Money Market Series. Certified
checks are not necessary, but checks must be drawn on a bank located in the
United States. There are restrictions on the redemption of shares purchased by
check while the funds are being collected. See "How to Sell Your Shares" below.
The minimum initial investment by check is $1,000 and the minimum subsequent
investment by check is $100.
THE PRUDENTIAL ADVANTAGE ACCOUNT PROGRAM
Shares of the Series are offered to participants in the Prudential Advantage
Account Program (the Advantage Account Program), a financial services program
available to clients of Pruco Securities Corporation. Investors participating in
the Advantage Account Program may select the Series as their primary investment
vehicle. Such investors will have free credit cash balances of $1.00 or more in
their Securities Account (Available Cash) (a component of the Advantage Account
Program carried through Prudential Securities) automatically invested in shares
of the Series. Specifically, an order to purchase shares of the Series is placed
(i) in the case of Available Cash resulting from the proceeds of securities
sales, on the settlement date of the securities sale, and (ii) in the case of
Available Cash resulting from non-trade related credits (I.E., receipt of
dividends and interest payments, or a cash payment by the participant into his
or her Securities Account), on the business day after receipt by Prudential
Securities of the non-trade related credit.
All shares purchased pursuant to these automatic purchase procedures will
begin earning dividends on the business day after the order is placed.
Prudential Securities will arrange for investment in shares of the Series at
4:30 P. M. on the day the order is placed and cause payment to be made in
Federal Funds for the shares prior to 4:30 P. M. on the next business day.
Prudential Securities will have the use of free credit cash balances until
delivery to the Fund.
Redemptions will be automatically effected by Prudential Securities to satisfy
debit balances in a Securities Account created by activity therein or arising
under the Advantage Account Program, such as those incurred by use of the
Visa-Registered Trademark- Account, including Visa purchases, cash advances and
Visa Account checks. Each Advantage Account Program Securities Account will be
automatically scanned for debits each business day as of the close of business
on that day and after application of any free credit cash balances in the
account to such debits, a sufficient number of shares of the Series (if selected
as the Primary Fund) and, if necessary, shares of other Advantage Account funds
owned by the Advantage Account Program participant which have not been selected
as his or her primary fund or shares of a participant's money market funds
managed by PIFM which are not primary Advantage Account Funds will be redeemed
as of that business day to satisfy any remaining debits in the Securities
Account. Shares may not be purchased until all debits, overdrafts and other
requirements in the Securities Account are satisfied.
Advantage Account Program charges and expenses are not reflected in the table
of Fund expenses. See "Fund Expenses."
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<PAGE>
For information on participation in the Advantage Account Program, investors
should telephone (800) 235-7637 (toll-free).
COMMAND-SM- ACCOUNT PROGRAM
Shares of the Series are offered to participants in the Prudential Securities
COMMAND Account program, an integrated financial services program of Prudential
Securities. Investors having a COMMAND Account may select the Series as their
primary fund. Such investors will have free credit cash balances of $1.00 or
more in their Securities Account (Available Cash) (a component of the COMMAND
Account program) automatically invested in shares of the Series as described
below. Specifically, an order to purchase shares of the Series is placed (i) in
the case of Available Cash resulting from the proceeds of securities sales, on
the settlement date of the securities sale, and (ii) in the case of Available
Cash resulting from non-trade related credits (I.E., receipt of dividends and
interest payments, maturity of a bond or a cash payment by the participant into
his or her Securities Account), on the business day after receipt by Prudential
Securities of the non-trade related credit. These automatic purchase procedures
are also applicable for Corporate COMMAND Accounts.
All shares purchased pursuant to these automatic purchase procedures will
begin earning dividends on the business day after the order is placed.
Prudential Securities will arrange for investment in shares of the Series at
4:30 P. M., New York time, on the business day the order is placed and cause
payment to be made in Federal Funds for the shares prior to 4:30 P. M., New York
time, on the next business day. Prudential Securities will have the use of free
credit cash balances until delivery to the Fund. There are no minimum investment
requirements for participants in the COMMAND Account program.
Redemptions will be automatically effected by Prudential Securities to satisfy
debit balances in a Securities Account created by activity therein or arising
under the COMMAND program, such as those incurred by use of the
Visa-Registered Trademark- Gold Account, including Visa purchases, cash advances
and Visa Account checks. Each COMMAND program Securities Account will be
automatically scanned for debits monthly for all Visa purchases incurred during
that month and each business day as of the close of business on that day for all
cash advances and check charges as incurred and after application of any free
credit cash balances in the account to such debits, a sufficient number of
shares of the Series and, if necessary, shares of other COMMAND funds owned by
the COMMAND program participant which have not been selected as his or her
primary fund or shares of a participant's money market funds managed by PIFM
which are not primary COMMAND funds will be redeemed as of that business day to
satisfy any remaining debits in the Securities Account. The single monthly debit
for Visa purchases will be made on the twenty-fifth day of each month, or the
prior business day if the twenty-fifth falls on a weekend or holiday. Margin
loans will be utilized to satisfy debits remaining after the liquidation of all
shares of the Series in a Securities Account, and shares may not be purchased
until all debits, margin loans and other requirements in the Securities Account
are satisfied. COMMAND Account participants will not be entitled to dividends
declared on the date of redemption.
For information on participation in the COMMAND Account program, you should
telephone (800) 222-4321 (toll-free).
HOW TO SELL YOUR SHARES
YOU CAN REDEEM YOUR SHARES OF THE SERIES AT ANY TIME FOR CASH AT THE NAV NEXT
DETERMINED AFTER THE REDEMPTION REQUEST IS RECEIVED IN PROPER FORM BY THE
TRANSFER AGENT OR PRUDENTIAL SECURITIES. SEE "HOW THE FUND VALUES ITS SHARES."
Shares for which a redemption request is received by PMFS prior to 4:30 P. M.,
New York time, are entitled to a dividend on the day on which the request is
received. By pre-authorizing Expedited Redemption, you may arrange to have
payment for redeemed shares made in Federal Funds wired to your bank, normally
on the next bank business day following the date of receipt of the redemption
instructions. Should you redeem all of your shares, you will receive the amount
of all dividends declared for the month to date on those shares. See "Taxes,
Dividends and Distributions."
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<PAGE>
If redemption is requested by a corporation, partnership, trust or fiduciary,
written evidence of authority acceptable to the Transfer Agent must be submitted
before such request will be accepted. All correspondence and documents
concerning redemptions should be sent to the Fund in care of its Transfer Agent,
Prudential Mutual Fund Services LLC, Attention: Redemption Services, P. O. Box
15010, New Brunswick, New Jersey 08906-5010.
If the proceeds of the redemption (a) exceed $50,000, (b) are to be paid to a
person other than the record owner, (c) are to be sent to an address other than
the address on the Transfer Agent's records or (d) are to be paid to a
corporation, partnership, trust or fiduciary, the signature(s) on the redemption
request and on certificates, if any, or stock power must be guaranteed by an
"eligible guarantor institution." An "eligible guarantor institution" includes
any bank, broker, dealer or credit union. The Transfer Agent reserves the right
to request additional information from, and make reasonable inquiries of, any
eligible guarantor institution. For clients of Prusec, a signature guarantee may
be obtained from the agency or office manager of most Prudential Insurance and
Financial Services or Preferred Services offices.
NORMALLY, THE FUND MAKES PAYMENT ON THE NEXT BUSINESS DAY FOR ALL SHARES OF
THE SERIES REDEEMED, BUT IN ANY EVENT, PAYMENT IS MADE WITHIN SEVEN DAYS AFTER
RECEIPT BY PMFS OF SHARE CERTIFICATES AND/OR OF A REDEMPTION REQUEST IN PROPER
FORM. However, the Fund may suspend the right of redemption or postpone the date
of payment (a) for any periods during which the New York Stock Exchange is
closed (other than for customary weekend or holiday closings), (b) for any
periods when trading in the markets which the Fund normally utilizes is closed
or restricted or an emergency exists as determined by the SEC so that disposal
of the Series' investments or determination of its NAV is not reasonably
practicable or (c) for such other periods as the SEC may permit for protection
of the Series' shareholders.
PAYMENT FOR REDEMPTION OF RECENTLY PURCHASED SHARES WILL BE DELAYED UNTIL THE
FUND OR ITS TRANSFER AGENT HAS BEEN ADVISED THAT THE PURCHASE CHECK HAS BEEN
HONORED, UP TO 10 CALENDAR DAYS FROM THE TIME OF RECEIPT OF THE PURCHASE CHECK
BY THE TRANSFER AGENT. SUCH DELAY MAY BE AVOIDED BY PURCHASING SHARES BY WIRE OR
BY CERTIFIED OR CASHIER'S CHECK. THE FUND MAKES NO CHARGE FOR REDEMPTION.
REDEMPTION OF SHARES PURCHASED THROUGH PRUDENTIAL SECURITIES
Prudential Securities clients for whom Prudential Securities has purchased
shares of the Series may have these shares redeemed only by instructing their
Prudential Securities financial adviser orally or in writing.
Prudential Securities has advised the Fund that it has established procedures
pursuant to which shares of the Series held by a Prudential Securities client
having a deficiency in his or her Prudential Securities account will be redeemed
automatically to the extent of that deficiency to the nearest highest dollar.
The amount of the redemption will be the lesser of (a) the total net asset value
of the Series' shares held in the client's Prudential Securities account or (b)
the deficiency in the client's Prudential Securities account at the close of
business on the date such deficiency is due. Accordingly, a Prudential
Securities client who wishes to pay for a securities transaction or satisfy any
other debit balance in his or her account other than through this automatic
redemption procedure must do so prior to the day of settlement for such
securities transaction or the date the debit balance is incurred. In the case of
certain automatic redemptions, where Prudential Securities cannot anticipate
debits in the brokerage account (E.G., checks written against the account),
Prudential Securities clients will not be entitled to dividends declared on the
date of redemption; such dividends will not be retained by Prudential
Securities.
REDEMPTION OF SHARES PURCHASED THROUGH PMFS
If you purchase shares of the Series through PMFS, you may use Regular
Redemption, Expedited Redemption or Check Redemption. Prudential Securities
clients for whom Prudential Securities has purchased shares may not use such
services.
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<PAGE>
REGULAR REDEMPTION. You may redeem your shares by sending a written request,
accompanied by duly endorsed share certificates, if issued, to PMFS, Attention:
Redemption Services, P. O. Box 15010, New Brunswick, New Jersey 08906-5010. In
this case, all share certificates and certain written requests for redemption
must be endorsed by you with signature guaranteed, as described above. Regular
redemption is made by check sent to your address.
EXPEDITED REDEMPTION. By pre-authorizing Expedited Redemption, you may arrange
to have payment for redeemed shares made in Federal Funds wired to your bank,
normally on the next business day following redemption. In order to use
Expedited Redemption, you may so designate at the time the initial application
form is made or at a later date. Once the Expedited Redemption authorization
form has been completed, the signature on the authorization form guaranteed as
set forth below and the form returned to Prudential Mutual Fund Services LLC,
Attention: Account Maintenance, P. O. Box 15015, New Brunswick, New Jersey
08906-5015, requests for redemption may be made by telegraph, letter or
telephone. To request Expedited Redemption by telephone, you should call PMFS at
(800) 225-1852. Calls must be received by PMFS before 4:30 P. M., New York time,
to permit redemption as of such date. Requests by letter should be addressed to
Prudential Mutual Fund Services LLC, at the address set forth above.
A signature guarantee is not required under Expedited Redemption once the
authorization form is properly completed and returned. The Expedited Redemption
privilege may be used only to redeem shares in an amount of $200 or more, except
that, if an account for which Expedited Redemption is requested has a net asset
value of less than $200, the entire account must be redeemed. The proceeds of
redeemed shares in the amount of $1,000 or more are transmitted by wire to your
account at a domestic commercial bank which is a member of the Federal Reserve
System. Proceeds of less than $1,000 are forwarded by check to the shareholder's
designated bank account.
DURING PERIODS OF SEVERE MARKET OR ECONOMIC CONDITIONS, EXPEDITED REDEMPTION
MAY BE DIFFICULT TO IMPLEMENT AND YOU SHOULD REDEEM YOUR SHARES BY MAIL AS
DESCRIBED ABOVE.
CHECK REDEMPTION. At your request, State Street will establish a personal
checking account for you. Checks drawn on this account can be made payable to
the order of any person in any amount greater than $500. When such check is
presented to State Street for payment, State Street presents the check to the
Fund as authority to redeem a sufficient number of shares of the Series in the
shareholder's account to cover the amount of the check. If insufficient shares
are in the account, or if the purchase was made by check within 10 calendar
days, the check will be returned marked "insufficient funds." Checks in an
amount less than $500 will not be honored. Shares for which certificates have
been issued cannot be redeemed by check. There is a service charge of $5.00
payable to PMFS to establish a checking account and order checks.
INVOLUNTARY REDEMPTION. Because of the relatively high cost of maintaining an
account, the Fund reserves the right to redeem, upon 60 days' written notice, an
account which is reduced by a shareholder to a net asset value of $500 or less
due to redemption. You may avoid such redemption by increasing the net asset
value of your account to an amount in excess of $500.
REDEMPTION IN KIND. If the Trustees determine that it would be detrimental to
the best interests of the remaining shareholders of the Series to make payment
wholly or partly in cash, the Fund may pay the redemption price in whole or in
part by a distribution in kind of securities from the portfolio of the Series,
in lieu of cash, in conformity with the applicable rules of the SEC. Securities
will be readily marketable and will be valued in the same manner as in a regular
redemption. See "How the Fund Values its Shares." If your shares are redeemed in
kind, you will incur brokerage costs in converting the assets into cash. The
Fund, however, has elected to be governed by Rule 18f-1 under the Investment
Company Act under which the Fund is obligated to redeem shares solely in cash up
to the lesser of $250,000 or one percent of the net asset value of the Fund
during any 90-day period for any one shareholder.
CLASS B AND CLASS C PURCHASE PRIVILEGE. You may direct that the proceeds of a
redemption of Series shares be invested in Class B or Class C shares of any
Prudential Mutual Fund by calling your Prudential Securities financial adviser
or the Transfer Agent at (800) 225-1852. The transaction will be effected on the
basis of the relative NAV.
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<PAGE>
HOW TO EXCHANGE YOUR SHARES
AS A SHAREHOLDER OF THE SERIES, YOU HAVE AN EXCHANGE PRIVILEGE (THE EXCHANGE
PRIVILEGE) WITH OTHER SERIES OF THE FUND AND CERTAIN OTHER PRUDENTIAL MUTUAL
FUNDS (THE EXCHANGE PRIVILEGE), INCLUDING MONEY MARKET FUNDS AND FUNDS SOLD WITH
AN INITIAL SALES CHARGE, SUBJECT TO THE MINIMUM INVESTMENT REQUIREMENTS OF SUCH
FUNDS. You may exchange your shares for Class A shares of the other series of
the Fund or Class A shares of the Prudential Mutual Funds on the basis of the
relative NAV per share plus the applicable sales charge. No additional sales
charge is imposed in connection with subsequent exchanges. You may not exchange
your shares for Class B shares of the Prudential Mutual Funds except that shares
acquired prior to January 22, 1990 subject to a contingent deferred sales charge
can be exchanged for Class B shares. See "Class B and Class C Purchase
Privilege" above and "Shareholder Investment Account--Exchange Privilege" in the
Statement of Additional Information. An exchange will be treated as a redemption
and purchase for tax purposes. You may not exchange your shares for Class C or
Class Z shares of other series of the Fund or Class C or Class Z shares of the
Prudential Mutual Funds.
IN ORDER TO EXCHANGE SHARES BY TELEPHONE, YOU MUST AUTHORIZE THE TELEPHONE
EXCHANGE PRIVILEGE ON YOUR INITIAL APPLICATION FORM OR BY WRITTEN NOTICE TO THE
TRANSFER AGENT AND HOLD SHARES IN NON-CERTIFICATE FORM. Thereafter, you may call
the Fund at (800) 225-1852 to execute a telephone exchange of shares, weekdays,
except holidays, between the hours of 8:00 A.M. and 6:00 P.M., New York time.
For your protection and to prevent fraudulent exchanges, your telephone call
will be recorded and you will be asked to provide your personal identification
number. A written confirmation of the exchange transaction will be sent to you.
NEITHER THE FUND NOR ITS AGENTS WILL BE LIABLE FOR ANY LOSS, LIABILITY OR COST
WHICH RESULTS FROM ACTING UPON INSTRUCTIONS REASONABLY BELIEVED TO BE GENUINE
UNDER THE FOREGOING PROCEDURES. All exchanges will be made on the basis of the
relative NAV of the two funds (or series) next determined after the request is
received in good order. The Exchange Privilege is available only in states where
the exchange may legally be made.
IF YOU HOLD SHARES THROUGH PRUDENTIAL SECURITIES YOU MUST EXCHANGE YOUR SHARES
BY CONTACTING YOUR PRUDENTIAL SECURITIES FINANCIAL ADVISER.
IF YOU HOLD CERTIFICATES, THE CERTIFICATES, SIGNED IN THE NAME(S) SHOWN ON THE
FACE OF THE CERTIFICATES, MUST BE RETURNED IN ORDER FOR THE SHARES TO BE
EXCHANGED. SEE "HOW TO SELL YOUR SHARES" ABOVE.
You may also exchange shares by mail by writing to Prudential Mutual Fund
Services LLC, Attention: Exchange Processing, P. O. Box 15010, New Brunswick,
New Jersey 08906-5010.
IN PERIODS OF SEVERE MARKET OR ECONOMIC CONDITIONS, THE TELEPHONE EXCHANGE OF
SHARES MAY BE DIFFICULT TO IMPLEMENT AND YOU SHOULD MAKE EXCHANGES BY MAIL BY
WRITING TO PRUDENTIAL MUTUAL FUND SERVICES LLC, AT THE ADDRESS NOTED ABOVE.
The Exchange Privilege is not a right and may be suspended, terminated or
modified on 60 days' notice to shareholders.
FREQUENT TRADING. The Fund and the other Prudential Mutual Funds are not
intended to serve as vehicles for frequent trading in response to short-term
fluctuations in the market. Due to the disrputive effect that market timing
investment strategies and excessive trading can have on efficient portfolio
management, each Prudential Mutual Fund and the Fund reserves the right to
refuse purchase orders and exchanges by any person, group or commonly controlled
accounts, if, in the Manager's sole judgment, such person, group or accounts
were following a market timing strategy or were otherwise engaging in excessive
trading (Market Timers).
To implement this authority to protect the Fund and its shareholders from
excessive trading, the Fund will reject all exchanges and purchases from a
Market Timer unless the Market Timer has entered into a written agreement with
the Fund or its affiliates pursuant to which the Market Timer has agreed to
abide by certain procedures, which include a daily dollar limit on trading. The
Fund may notify the Market Timer of rejection of an exchange or purchase order
subsequent to the day on which the order was placed.
23
<PAGE>
SHAREHOLDER SERVICES
In addition to the Exchange Privilege, as a shareholder in the Series, you can
take advantage of the following services and privileges:
- AUTOMATIC REINVESTMENT OF DIVIDENDS AND/OR DISTRIBUTIONS. For your
convenience, all dividends and distributions are automatically reinvested in
full and fractional shares of the Series at NAV. You may direct the Transfer
Agent in writing not less than 5 full business days prior to the record date to
have subsequent dividends and/or distributions sent in cash rather than
reinvested. If you hold shares through Prudential Securities, you should contact
your financial adviser.
- AUTOMATIC SAVINGS ACCUMULATION PLAN (ASAP). Under ASAP you may make regular
purchases of the Series' shares in amounts as little as $50 via an automatic
charge to a bank account or Prudential Securities account (including a Command
Account). For additional information about this service, you may contact your
Prudential Securities financial adviser, Prusec representative or the Transfer
Agent directly.
- SYSTEMATIC WITHDRAWAL PLAN. A systematic withdrawal plan is available for
shareholders which provides for monthly or quarterly checks. See "How to Sell
Your Shares."
- MULTIPLE ACCOUNTS. Special procedures have been designed for banks and other
institutions that wish to open multiple accounts. An institution may open a
single master account by filing an application form with the Transfer Agent.
Attention: Customer Service, P. O. Box 15005, New Brunswick, New Jersey 08906,
signed by personnel authorized to act for the institution. Individual
sub-accounts may be opened at the time the master account is opened by listing
them, or they may be added at a later date by written advice or by filing forms
supplied by the Fund. Procedures are available to identify sub-accounts by name
and number within the master account name. The investment minimums set forth
above are applicable to the aggregate amounts invested by a group and not to the
amount credited to each sub-account.
- REPORTS TO SHAREHOLDERS. The Fund will send you annual and semi-annual
reports. The financial statements appearing in annual reports are audited by
independent accountants. In order to reduce duplicate mailing and printing
expenses, the Fund will provide one annual and semi-annual shareholder report
and annual prospectus per household. You may request additional copies of such
reports by calling (800) 225-1852 or by writing to the Fund at Gateway Center
Three, 100 Mulberry Street, Newark, New Jersey 07102-4077. In addition, monthly
unaudited financial data is available upon request from the Fund.
- SHAREHOLDER INQUIRIES. Inquiries should be addressed to the Fund at Gateway
Center Three, 100 Mulberry Street, Newark, New Jersey 07102-4077, or by
telephone, at (800) 225-1852 (toll-free) or, from outside the U.S.A., at (908)
417-7555 (collect).
For additional information regarding the services and privileges described
above, see "Shareholder Investment Account" in the Statement of Additional
Information.
24
<PAGE>
THE PRUDENTIAL MUTUAL FUND FAMILY
Prudential Investments Fund Management offers a broad range of mutual funds
designed to meet your individual needs. We welcome you to review the investment
options available through our family of funds. For more information on the
Prudential Mutual Funds, including charges and expenses, contact your Prudential
Securities financial adviser or Prusec representative or telephone the Fund at
(800) 225-1852 for a free prospectus. Read the prospectus carefully before you
invest or send money.
TAXABLE BOND FUNDS
--------------------------
Prudential Diversified Bond Fund, Inc.
Prudential Government Income Fund, Inc.
Prudential Government Securities Trust
Short-Intermediate Term Series
Prudential High Yield Fund, Inc.
Prudential Mortgage Income Fund, Inc.
Prudential Structured Maturity Fund, Inc.
Income Portfolio
The BlackRock Government Income Trust
TAX-EXEMPT BOND FUNDS
-----------------------------
Prudential California Municipal Fund
California Series
California Income Series
Prudential Municipal Bond Fund
High Yield Series
Insured Series
Intermediate Series
Prudential Municipal Series Fund
Florida Series
Maryland Series
Massachusetts Series
Michigan Series
New Jersey Series
New York Series
North Carolina Series
Ohio Series
Pennsylvania Series
Prudential National Municipals Fund, Inc.
GLOBAL FUNDS
--------------------
Prudential Europe Growth Fund, Inc.
Prudential Global Genesis Fund, Inc.
Prudential Global Limited Maturity Fund, Inc.
Limited Maturity Portfolio
Prudential Intermediate Global Income Fund, Inc.
Prudential International Bond Fund, Inc.
Prudential Natural Resources Fund, Inc.
Prudential Pacific Growth Fund, Inc.
Prudential World Fund, Inc.
Global Series
International Stock Series
The Global Total Return Fund, Inc.
Global Utility Fund, Inc.
EQUITY FUNDS
--------------------
Prudential Balanced Fund
Prudential Distressed Securities Fund, Inc.
Prudential Dryden Fund
Prudential Active Balanced Fund
Prudential Stock Index Fund
Prudential Small-Cap Index Fund
Prudential Bond Market Index Fund
Prudential Pacific Index Fund
Prudential Europe Index Fund
Prudential Emerging Growth Fund, Inc.
Prudential Equity Fund, Inc.
Prudential Equity Income Fund
Prudential Jennison Series Fund, Inc.
Prudential Jennison Growth Fund
Prudential Jennison Growth & Income Fund
Prudential Multi-Sector Fund, Inc.
Prudential Small-Cap Quantum Fund, Inc.
Prudential Small Company Value Fund, Inc.
Prudential Utility Fund, Inc.
Nicholas-Applegate Fund, Inc.
Nicholas-Applegate Growth Equity Fund
MONEY MARKET FUNDS
--------------------------
- - TAXABLE MONEY MARKET FUNDS
Prudential Government Securities Trust
Money Market Series
U.S. Treasury Money Market Series
Prudential Special Money Market Fund, Inc.
Money Market Series
Prudential MoneyMart Assets, Inc.
- - TAX-FREE MONEY MARKET FUNDS
Prudential Tax-Free Money Fund, Inc.
Prudential California Municipal Fund
California Money Market Series
Prudential Municipal Series Fund
Connecticut Money Market Series
Massachusetts Money Market Series
New Jersey Money Market Series
New York Money Market Series
- - COMMAND FUNDS
Command Money Fund
Command Government Fund
Command Tax-Free Fund
- - INSTITUTIONAL MONEY MARKET FUNDS
Prudential Institutional Liquidity Portfolio, Inc.
Institutional Money Market Series
A-1
<PAGE>
No dealer, sales representative or any other person has been authorized to give
any information or to make any representations, other than those contained in
this Prospectus, in connection with the offer contained in this Prospectus, and,
if given or made, such other information or representations must not be relied
upon as having been authorized by the Fund or the Distributor. This Prospectus
does not constitute an offer by the Fund or by the Distributor to sell or a
solicitation of any offer to buy any of the securities offered hereby in any
jurisdiction to any person to whom it is unlawful to make such offer in such
jurisdiction.
-------------------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---
<S> <C>
FUND HIGHLIGHTS................................. 2
What are the Series' Risk Factors and Special
Characteristics?............................. 2
FUND EXPENSES................................... 4
FINANCIAL HIGHLIGHTS............................ 5
CALCULATION OF YIELD............................ 6
HOW THE FUND INVESTS............................ 6
Investment Objective and Policies............. 6
Other Investments and Policies................ 9
Investment Restrictions....................... 9
HOW THE FUND IS MANAGED......................... 10
Manager....................................... 10
Distributor................................... 10
Portfolio Transactions........................ 12
Custodian and Transfer and Dividend Disbursing
Agent........................................ 12
HOW THE FUND VALUES ITS SHARES.................. 12
TAXES, DIVIDENDS AND DISTRIBUTIONS.............. 13
GENERAL INFORMATION............................. 15
Description of Shares......................... 15
Additional Information........................ 15
SHAREHOLDER GUIDE............................... 16
How to Buy Shares of the Fund................. 16
How to Sell Your Shares....................... 20
How to Exchange Your Shares................... 23
Shareholder Services.......................... 24
THE PRUDENTIAL MUTUAL FUND FAMILY............... A-1
</TABLE>
- -------------------------------------------
MF139A 444240C
CUSIP No.: 744313-50-3
PRUDENTIAL CALIFORNIA MUNICIPAL FUND
CALIFORNIA MONEY MARKET SERIES
PROSPECTUS
OCTOBER 30, 1997
www.prudential.com
[LOGO]
<PAGE>
PRUDENTIAL CALIFORNIA MUNICIPAL FUND
- --------------------------------------------------------------------------------
STATEMENT OF ADDITIONAL INFORMATION
DATED OCTOBER 30, 1997
- --------------------------------------------------------------------------------
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 Gateway Center Three, 100 Mulberry Street, Newark, New
Jersey 07102-4077, and its telephone number is (800) 225-1852.
This Statement of Additional Information is not a prospectus and should be read
in conjunction with the Prospectuses of each series of the Fund dated October
30, 1997, copies of which may be obtained from the Fund upon request.
- --------------------------------------------------------------------------------
MF116B
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
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
----------- ---------------- ---------------- -----------------------
<S> <C> <C> <C> <C>
Investment Objectives and Policies............. B-3 9 9 6
In General................................... B-3 -- -- --
Tax-Exempt Securities........................ B-5 9 9 6
Special Considerations Regarding Investments
in Tax-Exempt Securities.................... B-7 13 14 9
Put Options.................................. B-11 11 11 8
Financial Futures Contracts and Options
Thereon..................................... B-11 11 13 --
When-Issued and Delayed Delivery
Securities.................................. B-14 11 11 8
Segregated Accounts.......................... B-14 -- -- --
Portfolio Turnover of the California Series
and the California Income Series............ B-14 13 14 --
Illiquid Securities.......................... B-15 14 15 9
Repurchase Agreements........................ B-15 13 14 9
Investment Restrictions........................ B-16 14 15 9
Trustees and Officers.......................... B-17 14 15 10
Manager........................................ B-22 14 15 10
Distributor.................................... B-25 15 16 10
Portfolio Transactions and Brokerage........... B-28 17 18 12
Purchase and Redemption of Fund Shares......... B-30 22 23 16
Specimen Price Make-Up....................... B-30 -- -- --
Reduction and Waiver of Initial Sales Charges
-- Class A Shares........................... B-30 25 26 --
Waiver of the Contingent Deferred Sales
Charge -- Class B Shares.................... B-32 28 29 --
Quantity Discount -- Class B Shares Pur-
chased Prior to August 1, 1994.............. B-32 29 30 --
Shareholder Investment Account................. B-33 31 32 24
Automatic Reinvestment of Dividends and/or
Distributions............................... B-33 31 32 24
Exchange Privilege........................... B-33 30 31 23
Dollar Cost Averaging........................ B-34 -- -- --
Automatic Savings Accumulation Plan (ASAP)... B-35 31 32 24
Systematic Withdrawal Plan................... B-35 31 32 24
How to Redeem Shares of the California Money
Market Series............................... B-36 -- -- 20
Mutual Fund Programs......................... B-37 -- -- --
Net Asset Value................................ B-37 17 18 12
Performance Information........................ B-38 18 19 6
California Series and California Income
Series...................................... B-38 18 19 --
California Money Market Series............... B-40 -- -- 6
Distributions and Tax Information.............. B-41 18 19 13
Distributions................................ B-41 20 21 14
Federal Taxation............................. B-42 18 19 13
California Taxation.......................... B-45 20 21 13
Organization and Capitalization................ B-45 21 22 15
Custodian, Transfer and Dividend Disbursing
Agent and Independent Accountants............. B-47 17 18 12
Description of Tax-Exempt Security Ratings..... B-48 -- A-1 --
Financial Statements........................... B-50 5 5 5
Report of Independent Accountants.............. B-62 -- -- --
Appendix I..................................... I-1 -- -- --
Appendix II.................................... II-1 -- -- --
Appendix III................................... III-1 -- -- --
</TABLE>
B-2
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
IN GENERAL
Prudential California Municipal Fund (the Fund), organized on May 18, 1984,
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 Prime-1 for commercial paper, of Standard & Poor's
Ratings Group (S&P), currently AAA, AA, A, BBB for bonds, SP-1, SP-2 for notes
and A-1 for commercial paper or comparable ratings of another nationally
recognized statistical rating organization (NRSRO). The 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 comparable ratings of another NRSRO
or, if non-rated, of comparable quality, in the opinion of the Fund's investment
adviser, based on its credit analysis. The 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 NRSROs assigning a
rating to the security or issuer (or, if only one such rating organization
assigned a rating, by that rating organization). Each series may invest in
tax-exempt securities which are not rated if, based upon a credit analysis by
the investment adviser under the supervision of the Trustees, the investment
adviser believes that such securities are of comparable quality to other
municipal securities that the series may purchase. A description of the ratings
is set forth under the headings "Description of Security Ratings" in the
California Income Series prospectus and "Description of Tax-Exempt Security
Ratings" in this Statement of Additional Information. The ratings of Moody's and
S&P and other NRSROs represent the respective opinions of such firms of the
qualities of the securities each undertakes to rate and such ratings are general
and are not absolute standards of quality. In determining suitability of
investment in a particular unrated security, the investment adviser will take
into consideration asset and debt service coverage, the purpose of the
financing, history of the issuer, existence of other rated securities of the
issuer, credit enhancement by virtue of letter of credit or other financial
guaranty deemed suitable by the investment adviser and other general conditions
as may be relevant, including comparability to other issuers.
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%
B-3
<PAGE>
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
another NRSRO or, if unrated, judged by the investment adviser to possess
comparable creditworthiness; commercial paper rated in the highest grade by
either of such rating services (Prime-1 or A-1, respectively); certificates of
deposit and bankers' acceptances; and repurchase agreements with respect to any
of the foregoing investments. The 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
NRSROs assigning a rating to the security or issuer (or if only one such rating
organization assigned a rating, by that rating organization). No series intends
to invest more than 5% of its assets in any one of the foregoing taxable
securities. A series may also hold its assets in other cash equivalents or in
cash.
Each series 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. 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.
B-4
<PAGE>
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.
B-5
<PAGE>
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
In August 1996, legislation reforming the welfare system was passed by
Congress. In essence, it eliminated the federal guarantee of welfare benefits
and left the determination of eligibility to the states. The federal government
will provide block grants to the states for their use in the funding of
benefits. Although states are not obligated to absorb any of the reductions,
they may choose to do so. The consequences of such generosity may be adverse in
the event of an economic downturn or a swelling in the ranks of beneficiaries.
If a state feels compelled to offset lost benefits, the net effect is merely a
shifting of the burden to the state and may affect its rating over time.
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
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 (currently estimated to be 32,383,000). 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 12.2% of the nation's population and 12.5% 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. California's economic recovery from the recession is
continuing at a strong pace, and recent economic reports indicate that
California is on a stronger economic upturn than the rest of the country. The
rate of economic growth in California in 1996, in terms of job gains, exceeded
that of the rest of the United States. The State added nearly 350,000 jobs
during 1996, surpassing its pre-recession employment peak of 12.7 million jobs.
Another 380,000 jobs are expected to be created in 1997. The unemployment rate,
while still higher than the national average, fell to the low 6 percent range in
mid-1997, compared to over 10 percent during the recession. Many of the new jobs
were created in such industries as computer services, software design, motion
pictures and high technology manufacturing. Business services, export trade and
other manufacturing also experienced growth. All major economic regions of the
State grew, with particularly large gains in the Silicon Valley region of
Northern California. As California enters its third year of economic recovery,
its finances continue to show slow improvement.
On August 18, 1997, the Governor signed the 1997-98 Budget Act. The Budget
Act anticipates General Fund revenues and transfers of $52.5 billion (a 6.8
percent increase over the final 1996-97 levels), and expenditures of $52.8
billion (an 8.0 percent increase from the 1996-97 levels). On a budgetary basis,
the budget reserve (SFEU) is projected to decrease from $408 million at June 30,
1997 to $112 million at June 30, 1998. The Budget Act also includes Special Fund
expenditures of $14.4 billion (as against estimated Special Fund revenues of
$14.0 billion), and $2.1 billion of expenditures from various Bond Funds.
Following enactment of the Budget Act, the State implemented its annual cash
flow borrowing program, issuing $3 billion of notes which mature on June 30,
1998. Unlike prior years, this Budget Act does not depend on uncertain federal
budget actions. About $300 million in federal funds, already included in the
federal FY 1997 and 1998 budgets, are included in the Budget Act to offset
incarceration costs for illegal immigrants.
After enactment of the Budget Act, and prior to the end of the Legislative
Session, the Legislature and the Governor reached certain agreements related to
State expenditures and taxes. Legislation signed by the Governor includes a
variety of phased-in tax cuts, conformity with certain provisions of the federal
tax reform law passed earlier in the year, and reform of funding for county
trial courts, with the State to assume greater financial responsibility.
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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 June 1996, the
County completed an $880 million bond offering secured by real property owned by
the County. On June 12, 1996, the County emerged from bankruptcy. On January 7,
1997, Orange County returned to the municipal bond market with a $136 million
bond issue maturing in 13 years at an insured yield of 7.23 percent.
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,
among other things, severe operating deficits for the County's health care
system. In addition, the County was affected by an ongoing loss of revenue
caused by State property tax shift initiatives in 1993 through 1995. In June
1997, the Los Angeles County Board of Supervisors approved an approximately $12
billion 1997-98 budget containing measures to eliminate a $157 million deficit.
The County's budgetary difficulties have continued and their effect, as well as
the effect of the improving California economy, on the 1997-98 budget is still
uncertain.
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
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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 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 November 1996, California voters approved Proposition 218. The initiative
applied the provisions of Proposition 62 to all entities, including charter
cities. It requires that all taxes for general purposes obtain a simple majority
popular vote and that taxes for special purposes obtain a two-third majority
vote. Prior to the effectiveness of Proposition 218, charter cities could levy
certain taxes such as transient occupancy taxes and utility user's taxes without
a popular vote. Proposition 218 will also limit the authority of local
governments to impose property-related assessments, fees and charges, requiring
that such assessments be limited to the special benefit conferred and
prohibiting their use for general governmental services. Proposition 218 also
allows voters to use their initiative power to reduce or repeal
previously-authorized taxes, assessments, fees and charges.
In addition, certain tax-exempt securities in which the series may invest
may be obligations payable solely from the revenues of specific institutions, or
may be secured by specific properties, which are subject to provisions of
California law that could adversely affect the holders of such obligations. For
example, the revenues of California health care institutions may be subject to
state laws, and California law limits the remedies of a creditor secured by a
mortgage or deed of trust on real property.
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 returned
to 9.3%, and the alternative minimum tax rate dropped from 8.5% to 7%. In
addition, legislation in July 1991 raised the sales tax by 1.25%. A 0.5% raise
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.
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.
ADDITIONAL ISSUERS
GUAM
Guam is governed under the Organic Act of Guam of 1950, which gave the
island statutory local power of self-government and made the inhabitants of Guam
citizens of the United States. As of the 1990 U.S. Census, the Territory's
population was 133,152. The Government preliminary estimate of the population as
of June 1997 is 155,600.
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According to a Current Employment Report of the Department of Labor of Guam,
from June 1996 - June 1997, the total reduction in employment was 950 jobs in
all sectors in Guam. From 1997 to 1996, civilian employment increased by
approximately 1.3%, public sector employment decreased by approximately 0.3%,
and overall employment increased by approximately 1.5%.
As of June 1997, there were 18,260 employees in the public sector, including
2,100 employed by the federal government and 13,130 employed by the territorial
government. The economy in Guam is heavily influenced by the significant U.S.
military presence on the island. Of the approximately 5,350 civilians employed
in Guam on the island by the federal government in March 1997, approximately 85%
were employed by the Department of Defense and approximately 15% by other
federal departments. Between December 1996 and June 1997, there were 210
permanent employment reductions in the federal government sector due to
continuing implementation of the 1995 BRAC base realignment and closure
recommendations for Guam. Government of Guam employment totals declined for the
year ending June 1997, although this decline was primarily seasonal and
comparable to the seasonal decline in June 1996 due to payroll reductions in
educational institutions that were somewhat offset by temporary summer youth
employment.
Total private sector employment was 47,930 jobs as of June 1997, down
slightly from June 1996. The average compound growth rate of civilian
(government and private) employment since 1994 is 1.32%, primarily in the
sectors of service, trade, finance, insurance and retail. Tourism is a
significant industry, with most visitors coming from Japan. Visitor arrivals
rose to over 1 million in 1994 for the first time, according to the Guam
Visitors Bureau, and increased in 1995 and 1996 as well. Although the increases
have been more modest over the past few years, Guam has maintained its
competitiveness despite fluctuations in the yen during 1996 and 1997.
PUERTO RICO
Puerto Rico enjoys a Commonwealth status with the U.S. as a result of Public
Law 600, enacted by the U.S. Congress in 1950 and affirmed by a referendum in
1952. Residents of Puerto Rico are U.S. citizens.
Since World War II, Puerto Rico has undergone a social and economic
transformation. Puerto Rico, which was at one time a poor, agrarian economy with
a densely populated environment, is now a urbanized society with an economy
based on manufacturing and services. According to a report by the Puerto Rico
Department of Treasury, from fiscal year 1985 (year ended June 30, 1985) through
1996, personal income, both aggregate and per capita, has increased each year.
Gross product has increased each year from the fiscal year 1992 through 1996.
Although the rate of unemployment decreased from 16.5% in fiscal year 1992 to
13.8% in fiscal year 1996, it remains above the rate of unemployment in the
United States.
The Puerto Rico Planning Board's Economic Activity Index, a composite index
of thirteen economic indicators, increased 1.4% for fiscal year 1996, compared
to fiscal year 1995, and 2.5% for fiscal year 1995, compared to fiscal year
1994. During the first three months of fiscal year 1997, the Index decreased
0.9% compared to the same period in fiscal year 1996, for which period it had
registered an increase of 1.7% over the same period of fiscal year 1995.
According to the Puerto Rico Department of Treasury, this decline in the index
was principally due to the short-term negative impact of Hurricane Hortense,
which struck the island on September 9, 1996. It is expected, however, that this
decline will be fully offset in the future, and that the reconstruction process
after Hurricane Hortense will have a positive effect on economic activity.
Amendments incorporated in the Small Business Job Protection Act of 1996
enacted by the United States Congress and signed into law by President Clinton
on August 20, 1996 are now phasing out a special tax credit that was available
under Section 936 of the Code for United States companies operating in Puerto
Rico. The credit provided a federal tax exemption for certain operating and
qualifying investment income from Puerto Rico sources. According to the Puerto
Rico Department of Treasury's Comprehensive Annual Financial Report for the
fiscal year 1996, it is not possible at this time to determine the long-term
effect on the Puerto Rico economy of the enactment of the 1996 Amendments. The
Government of Puerto Rico does not believe there will be short-term or
medium-term material adverse effects on Puerto Rico's economy as a result of the
enactment of the 1996 Amendments. The Government of Puerto Rico further believes
that during the phase-out period sufficient time exists to implement additional
incentive programs to safeguard Puerto Rico's competitive position.
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Financial operations of recent years have reflected general economic trends,
with fiscal improvements registered during good economic times and deterioration
during slowdown. In the mid-1980s, economic recovery and stable oil prices
helped the Commonwealth to reduce the General Fund's accumulated deficit. Later,
as economic slowdown placed financial operations under pressure, the
Commonwealth sought budgetary balance, but with regular reliance on
non-recurring measures. As of June 30, 1993, the Commonwealth's General Fund
(the primary operating fund of the Commonwealth) experienced a deficit of
approximately $47 million. As of June 30, 1994, 1995 and 1996, the General Fund
had a positive balance of $514 million, $608 million and $397 million,
respectively.
UNITED STATES VIRGIN ISLANDS
The Virgin Islands, comprised of St. Thomas, St. Croix and St. John, form an
unincorporated territory of the United States. The residents were granted a
measure of self-government by the Organic Act, as revised in 1954. The
Territorial Government plays a vital role in the economy of the Virgin Islands.
Since governmental services must be provided on three separate islands, the
duplication of effort results in an unusually large public sector.
The Virgin Islands are heavily dependent on links with the U.S. mainland.
More than 90% of the trade is conducted with Puerto Rico and the United States.
Tourism is the predominant source of employment and income for the Islands.
According to the USVI Bureau of Economic Research, cruise ship passenger
arrivals to the USVI during calendar 1996 rose 12.4% compared with the previous
year. Nonetheless, the economy has struggled in recent years largely due to the
impact of Hurricane Marilyn in 1995. Between January 1994 and June 1996, there
was a 15.5% drop in private sector jobs and a 9% drop overall. The governor has
recently designated Christiansted and Frederiksted, St. Croix to be "enterprise
zones" in order to booster their faltering economies. Various tax incentive
plans have also been proposed to encourage tourism and boost the economy.
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 an
NRSRO; or (2) the put is written by a person other than the issuer of the
underlying security and such person has securities outstanding which are rated
within such four (or two for the 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 an NRSRO.
One form of transaction involving liquidity puts consists of an underlying
fixed rate municipal bond that is subject to a third party demand feature or
"tender option." The holder of the bond would pay a "tender fee" to the third
party tender option provider, the amount of which would be periodically adjusted
so that the bond/ tender option combination would reasonably be expected to have
a market value that approximates the par value of the bond. This bond/tender
option combination would therefore be functionally equivalent to ordinary
variable or floating rate obligations, and the Fund may purchase such
obligations subject to certain conditions specified by the Securities and
Exchange Commission (SEC).
FINANCIAL FUTURES CONTRACTS AND OPTIONS THEREON
FUTURES CONTRACTS. 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
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fluctuations in the value of securities which are held in the investment
portfolio or which the California Series or the California Income Series intends
to purchase. A clearing corporation associated with the commodities exchange on
which a futures contract trades assumes responsibility for the completion of
transactions and guarantees that open futures contracts will be closed. Although
interest rate futures contracts call for actual delivery or acceptance of debt
securities, in most cases the contracts are closed out before the settlement
date without the making or taking of delivery.
When the futures contract is entered into, each party deposits with a broker
or in a segregated custodial account approximately 5% of the contract amount,
called the "initial margin." Subsequent payments to and 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 or other liquid assets,
marked-to-market daily, in a segregated account with the Fund's Custodian, so
that the amount so segregated plus the amount of initial and variation margin
held in the account of its broker equals the market value of the futures
contract, thereby ensuring that the use of such futures contract is unleveraged.
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.
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 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
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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 or other
liquid assets, marked-to-market daily, so that the amount so segregated plus the
amount of initial and variation margin held in the account of its broker equals
the market value of the futures contracts and thereby insures that 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 economic or other reasons, decide or be compelled
at some future date to discontinue the trading of options (or
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a particular class or series of options), in which event the secondary market on
that exchange (or in that class or series of options) would cease to exist,
although outstanding options on that exchange could continue to be exercisable
in accordance with their terms.
There is no assurance that higher than anticipated trading activity or other
unforeseen events might not, at times, render certain clearing facilities
inadequate, and thereby result in the institution by an exchange of special
procedures which may interfere with the timely execution of customers' orders.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES
Each series may purchase tax-exempt securities on a when-issued or delayed
delivery basis. The payment obligation and the interest rate that will be
received on the tax-exempt securities are each fixed at the time the buyer
enters into the commitment. The purchase price for the security includes
interest accrued during the period between purchase and settlement and,
therefore, no interest accrues to the economic benefit of the series until
delivery and payment take place. Although a series will only purchase a
tax-exempt security on a when-issued or delayed delivery basis with the
intention of actually acquiring the securities, the series may sell these
securities before the settlement date if it is deemed advisable.
Tax-exempt securities purchased on a when-issued or delayed delivery basis
are subject to changes in market value based upon the public's perception of the
creditworthiness of the issuer and changes, real or anticipated, in the level of
interest rates (which will generally result in similar changes in value, I.E.,
experiencing both appreciation when interest rates decline and depreciation when
interest rates rise). Therefore, to the extent that a series remains
substantially fully invested at the same time that it has purchased securities
on a when-issued or delayed delivery basis, the market value of the series'
assets will vary to a greater extent than otherwise. Purchasing a tax-exempt
security on a when-issued or delayed delivery basis can involve a risk that the
yields available in the market when the delivery takes place may be higher than
those obtained on the security so purchased.
A segregated account of each series consisting of cash or other liquid
assets 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 other assets 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.
SEGREGATED ACCOUNTS
When each series is required to segregate assets in connection with certain
hedging transactions, it will maintain cash or liquid assets in a segregated
account with the Fund's Custodian. "Liquid Assets" means cash, U.S. Government
securities, equity securities, debt obligations or other liquid, unencumbered
assets, marked-to-market daily.
PORTFOLIO TURNOVER 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
B-14
<PAGE>
investment quality of particular issues or the general movement of interest
rates, due to such factors as changes in the overall demand for or supply of
various types of tax-exempt securities or changes in the investment objectives
of investors.
The series' investment policies may lead to frequent changes in investments,
particularly in periods of rapidly fluctuating interest rates. A change in
securities held by the California Series and the California Income Series is
known as "portfolio turnover" and may involve the payment by the series of
dealer mark-ups or 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, 1997 and August 31, 1996, the
portfolio turnover rate of the California Series was 14% and 26%, respectively.
For the fiscal years ended August 31, 1997 and August 31, 1996, the portfolio
turnover rate of the California Income Series was 16% and 22%, respectively.
ILLIQUID SECURITIES
A series may hold 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.
Securities of financially and operationally troubled obligors (distressed
securities) are less liquid and more volatile than securities of companies not
experiencing financial difficulties. A series might have to sell portfolio
securities at a disadvantageous time or at a disadvantageous price in order to
maintain no more than 15% (or 10%) of its net assets in illiquid securities.
Municipal lease obligations will not be considered illiquid for purposes of
the series' limitation on illiquid securities provided the investment adviser
determines that there is a readily available market for such securities. In
reaching liquidity decisions, the investment adviser will consider, INTER ALIA,
the following factors: (1) the frequency of trades and quotes for the security;
(2) the number of dealers wishing to purchase or sell the security and the
number of other potential purchasers; (3) dealer undertakings to make a market
in the security; and (4) the nature of the security and the nature of the
marketplace trades (E.G., the time needed to dispose of the security, the method
of soliciting offers and the mechanics of the transfer). With respect to
municipal lease obligations, the investment adviser also considers: (1) the
willingness of the municipality to continue, annually or biannually, to
appropriate funds for payment of the lease; (2) the general credit quality of
the municipality and the essentiality to the municipality of the property
covered by the lease; (3) in the case of unrated municipal lease obligations, an
analysis of factors similar to that performed by nationally recognized
statistical rating organizations in evaluating the credit quality of a municipal
lease obligation, including (i) whether the lease can be cancelled; (ii) if
applicable, what assurance there is that the assets represented by the lease can
be sold; (iii) the strength of the lessee's general credit (E.G., its debt,
administrative, economic and financial characteristics); (iv) the likelihood
that the municipality will discontinue appropriating funding for the leased
property because the property is no longer deemed essential to the operations of
the municipality (E.G., the potential for an event of non-appropriation); and
(v) the legal recourse in the event of failure to appropriate; and (4) any other
factors unique to municipal lease obligations as determined by the investment
adviser.
REPURCHASE AGREEMENTS
The series' repurchase agreements will be collateralized by U.S. Government
obligations. The series will enter into repurchase transactions only with
parties meeting creditworthiness standards approved by the Fund's Trustees. The
Fund's investment adviser will monitor the creditworthiness of such parties,
under the
B-15
<PAGE>
general supervision of the Trustees. In the event of a default or bankruptcy by
a seller, the series will promptly seek to liquidate the collateral. To the
extent that the proceeds from any sale of such collateral upon a default in the
obligation to repurchase are less than the repurchase price, the series will
suffer a loss.
The series participate in a joint repurchase account with other investment
companies managed by Prudential Investments Fund Management LLC (PIFM) pursuant
to an order of the SEC. On a daily basis, any univested cash balances of the
series may be aggregated with those of such investment companies and invested in
one or more repurchase agreements. Each fund or series participates in the
income earned or accrued in the joint account based on the percentage of its
investment.
Except as described above and under "Investment Restrictions," the foregoing
investment policies are not fundamental and may be changed by the Trustees of
the Fund without the vote of a majority of its outstanding voting securities (as
defined above).
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 33 1/3% of the value of its total assets (calculated
when the loan is made) for temporary, extraordinary or emergency purposes or for
the clearance of transactions. The series may pledge up to 33 1/3% of the value
of its total assets to secure 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.
B-16
<PAGE>
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.
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 (72).............................. Trustee President and Director of BMC Fund, Inc., a
c/o Prudential Investments closed-end investment company; previously, Vice
Fund Management LLC Chairman of Broyhill Furniture Industries, Inc.;
Gateway Center Three Certified Public Accountant; Secretary and
Newark, NJ Treasurer of Broyhill Family Foundation, Inc.;
Member of the Board of Trustees of Mars Hill
College; Director of The High Yield Income Fund,
Inc.
Eugene C. Dorsey (70)............................. Trustee Retired President, Chief Executive Officer and
c/o Prudential Investments Trustee of the Gannett Foundation (now Freedom
Fund Management LLC Forum); former Publisher of four Gannett
Gateway Center Three newspapers and Vice President of Gannett
Newark, NJ Company; past Chairman of Independent Sector
(national coalition of philanthropic
organizations); former Chairman of the American
Council for the Arts; Director of the Advisory
Board of Chase Manhattan Bank of Rochester and
The High Yield Income Fund, Inc.
Delayne Dedrick Gold (59)......................... Trustee Marketing and Management Consultant, Director of
c/o Prudential Investments The High Yield Income Fund, Inc.
Fund Management LLC
Gateway Center Three
Newark, NJ
* Robert F. Gunia (50).............................. Trustee Comptroller (since May 1996) of Prudential Invest-
Gateway Center Three ments, Executive Vice President and Treasurer
Newark, NJ (since December 1996) of Prudential Investments
Fund Management LLC (PIFM), formerly Chief
Administrative Officer (July 1990-September
1996), Director (January 1989-September 1996),
Executive Vice President, Treasurer and Chief
Financial Officer (June 1987-September 1996) of
Prudential Mutual Fund Management, Inc.; Vice
President and Director of The Asia Pacific Fund,
Inc. (since May 1989); Senior Vice President of
Prudential Securities Incorporated (Prudential
Securities) (since March 1987); Director of The
High Yield Income Fund.
</TABLE>
- ------------------------
* "Interested" Trustee, as defined in the Investment Company Act, by reason of
his affiliation with The Prudential Insurance Company of America
(Prudential) or Prudential Securities.
B-17
<PAGE>
<TABLE>
<CAPTION>
NAME, ADDRESS AND AGE POSITION WITH FUND PRINCIPAL OCCUPATION DURING PAST 5 YEARS
-------------------------------------------------- ------------------ --------------------------------------------------
<C> <S> <C> <C>
* Harry A. Jacobs, Jr. (76)......................... Trustee Senior Director of Prudential Securities (since
One New York Plaza January 1986); formerly Interim Chairman and Chief
New York, NY Executive Officer of Prudential Mutual Fund
Management, Inc. (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. and The
High Yield Income Fund; Trustee of the Trudeau
Institute.
Donald D. Lennox (78)............................. Trustee Chairman (since February 1990) and Director (since
c/o Prudential Investments April 1989) of International Imaging Materials,
Fund Management LLC Inc.; Retired Chairman, Chief Executive Officer
Gateway Center Three and Director of Schlegel Corporation (industrial
Newark, NJ manufacturing) (March 1987 - February 1989);
Director of Gleason Corporation, Personal Sound
Technologies, Inc. and The High Yield Income
Fund, Inc.
* Mendel A. Melzer, CFA (36)........................ Trustee Chief Investment Officer (since October 1996) of
751 Broad Street Prudential Mutual Funds; formerly Chief Financial
Newark, NJ Officer of Prudential Investments (November 1995
- September 1996), Senior Vice President and
Chief Financial Officer of Prudential Preferred
Financial Services (April 1993 - November 1995),
Managing Director of Prudential Investment
Advisors (April 1991 - April 1993) and Senior
Vice President of Prudential Capital Corporation
(July 1989 - April 1991); Director of The High
Yield Income Fund, Inc.
Thomas T. Mooney (55)............................. Trustee President of the Greater Rochester Metro Chamber
c/o Prudential Investments of Commerce; formerly Rochester City Manager;
Fund Management LLC Trustee of Center for Governmental Research,
Gateway Center Three Inc.; Director of Monroe County Water Authority,
Newark, NJ Rochester Jobs, Inc., Blue Cross of Rochester,
Executive Service Corps of Rochester, Monroe
County Industrial Development Corporation,
Northeast Midwest Institute, The Business
Counsel of New York State, First Financial Fund,
Inc., The High Yield Plus Fund, Inc. and The
High Yield Income Fund, Inc.
</TABLE>
- ------------------------
* "Interested" Trustee, as defined in the Investment Company Act, by reason of
his affiliation with Prudential or Prudential Securities.
B-18
<PAGE>
<TABLE>
<CAPTION>
NAME, ADDRESS AND AGE POSITION WITH FUND PRINCIPAL OCCUPATION DURING PAST 5 YEARS
-------------------------------------------------- ------------------ --------------------------------------------------
<C> <S> <C> <C>
Thomas H. O'Brien (72)............................ Trustee President of O'Brien Associates (Financial and
c/o Prudential Investments Management Consultants) (since April 1984);
Fund Management LLC formerly President of Jamaica Water Securities
Gateway Center Three Corp. (holding company) (February 1989-August
Newark, NJ 1990); Chairman of the Board and Chief Executive
Officer (September 1987-February 1989) of
Jamaica Water Supply Company and Director
(September 1987-April 1991); Director of
Ridgewood Savings Bank and The High Yield Income
Fund, Inc.; Trustee of Hofstra University.
* Richard A. Redeker (54)........................... President and Employee of Prudential Investments; formerly
751 Broad Street Trustee President, Chief Executive Officer and Director
Newark, NJ (October 1993-September 1996) of Prudential
Mutual Fund Management, Inc.; Executive Vice
President, Director and Member of Operating
Committee (October 1993 - September 1996),
Prudential Securities; Director (October 1993 -
September 1996) of Prudential Securities Group,
Inc.; Executive Vice President, The Prudential
Investment Corporation (January 1994 - September
1996); prior thereto, Senior Executive Vice
President and Director of Kemper Financial Ser-
vices, Inc. (September 1978-September 1993);
President and Director of The High Yield Income
Fund, Inc.
Nancy H. Teeters (67)............................. Trustee Economist; formerly Vice President and Chief
c/o Prudential Investments Economist (March 1986-June 1990) of International
Fund Management LLC Business Machines Corporation; Director of
Gateway Center Three Inland Steel Industries (since July 1991), First
Newark, NJ Financial Fund, Inc., and The High Yield Income
Fund, Inc.
Louis A. Weil, III (56)........................... Trustee Publisher and Chief Executive Officer (since
c/o Prudential Investments January 1996) and Director (since September 1991)
Fund Management LLC of Central Newspapers Inc.; Chairman of the
Gateway Center Three Board (since January 1896), Publisher and Chief
Newark, NJ Executive Officer (August 1991-December 1995) of
Phoenix Newspapers, Inc.; prior thereto,
Publisher of Time Magazine and Chief Executive
Officer of The Detroit News (February
1986-August 1989); formerly member of the Advi-
sory Board, Chase Manhattan Bank-Westchester;
Director of The High Yield Income Fund, Inc.
Thomas A. Early (42).............................. Vice President Vice President and General Counsel (since March
Gateway Center Three 1997), PMF&A; Executive Vice President,
Newark, NJ Secretary and General Counsel (since December
1996), PIFM; formerly Vice President and General
Counsel (March 1994-March 1997), Prudential
Retirement Services and Associate General
Counsel and Chief Financial Services Officer
(1988-1994), Frank Russell Company.
</TABLE>
- ------------------------
* "Interested" Trustee, as defined in the Investment Company Act, by reason of
his affiliation with Prudential or Prudential Securities.
B-19
<PAGE>
<TABLE>
<CAPTION>
NAME, ADDRESS AND AGE POSITION WITH FUND PRINCIPAL OCCUPATION DURING PAST 5 YEARS
-------------------------------------------------- ------------------ --------------------------------------------------
<C> <S> <C> <C>
S. Jane Rose (51)................................. Secretary Senior Vice President (since December 1996), PIFM,
Gateway Center Three Senior Vice President and Senior Counsel (since
Newark, NJ July 1992) of Prudential Securities; Senior Vice
President (January 1991-September 1996) and
Senior Counsel (June 1987-September 1996) of
Prudential Mutual Fund Management, Inc.
Grace C. Torres (38).............................. Treasurer and First Vice President (since December 1996) of
Gateway Center Three Principal PIFM; First Vice President (since March 1994) of
Newark, NJ Financial and Prudential Securities; formerly First Vice
Accounting President (March 1994-September 1996),
Officer Prudential Mutual Fund Management, Inc. and Vice
President (July 1989-March 1994) of Bankers
Trust.
Stephen M. Ungerman (44).......................... Assistant Tax Director (since March 1996) of Prudential
Gateway Center Three Treasurer Investments and the Private Asset Group of the
Newark, NJ Prudential Insurance Company of America
(Prudential); formerly First Vice President of
Prudential Mutual Fund Management, Inc.
(February 1993-September 1996); prior thereto,
Senior Tax Manager of Price Waterhouse LLP
(1981-January 1993).
Deborah A. Docs (39).............................. Assistant Vice President and Associate General Counsel
Gateway Center Three Secretary (since December 1996) of PIFM; Vice President and
Newark, NJ Associate General Counsel of Prudential
Securities; formerly Vice President and
Associate General Counsel (January
1993-September 1996) of Prudential Mutual Fund
Management, Inc.; Vice President and Associate
General Counsel (since January 1993) of Pru-
dential Securities; previously Associate Vice
President (January 1990-December 1992) and
Assistant General Counsel (November
1991-December 1992) of Prudential Mutual Fund
Management, Inc.
</TABLE>
Trustees and officers of the Fund are also trustees, directors and officers
of some or all of the other investment companies distributed by Prudential
Securities.
The officers conduct and supervise the daily business operations of the
Fund, while the Trustees, in addition to their functions set forth under
"Manager" and "Distributor," review such actions and decide on general policy.
The Fund pays each of its Trustees who is not an affiliated person of the
Manager or the Fund's investment adviser annual compensation of $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.
The Trustees have adopted a retirement policy which calls for the retirement
of Trustees on December 31 of the year in which they reach the age of 72 except
that retirement is being phased in for Trustees who were age 68 or older as of
December 31, 1993. Under this phase-in provision, Messrs. Beach, Jacobs, Lennox
and O'Brien are scheduled to retire on December 31, 1999, 1998, 1997 and 1999,
respectively.
B-20
<PAGE>
Pursuant to the terms of the Management Agreement with the Fund, the Manager
pays all compensation of officers and employees of the Fund as well as the fees
and expenses of all Trustees of the Fund who are affiliated persons of the
Manager.
The following table sets forth the aggregate compensation paid by the Fund
for the fiscal year ended August 31, 1997 to the Trustees who are not affiliated
with the Manager and the aggregate compensation paid to such Trustees for
service on the Fund's Board and the Boards of any other investment companies
managed by PIFM (Fund Complex) for the calendar year ended December 31, 1996.
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 $ 3,333 None N/A $ 166,000(21/39)*
Eugene C. Dorsey, Trustee** $ 3,333 None N/A $ 98,583(12/36)*
Delayne Dedrick Gold, Trustee $ 3,333 None N/A $ 175,308(21/42)*
Robert F. Gunia, Trustee+ -- None N/A --
Harry A. Jacobs, Jr., Trustee+ -- None N/A --
Donald D. Lennox, Trustee $ 2,000 None N/A $ 90,000(10/22)*
Mendel A. Melzer, Trustee+ -- None N/A --
Thomas T. Mooney, Trustee** $ 3,333 None N/A $ 135,375(18/36)*
Thomas H. O'Brien, Trustee $ 3,333 None N/A $ 32,250(5/20)*
Richard A. Redeker, Trustee+ -- None N/A --
Nancy H. Teeters, Trustee $ 3,333 None N/A $ 103,583(11/28)*
Louis A. Weil, III, Trustee $ 2,000 None N/A $ 91,250(13/18)*
</TABLE>
- ------------------------
@ Effective January 1997, the annual compensation paid to Trustees was reduced
to $3,000 in addition to certain out-of-pocket expenses.
* Indicates number of funds/portfolios in Fund Complex (including the Fund) to
which aggregate compensation relates.
+ Robert F. Gunia, Harry A. Jacobs, Jr., Mendel A. Melzer and Richard A.
Redeker, who are each interested Trustees, do not receive compensation from
the Fund or any fund in the Fund Complex.
** Total compensation from all of the funds in the Fund Complex for the
calendar year ended December 31, 1996, includes amounts deferred at the
election of Trustees under the Fund's deferred compensation plans. Including
accrued interest, total compensation amounted to $111,535 and $139,869 for
Eugene C. Dorsey and Thomas T. Mooney, respectively.
As of October 3, 1997, the Trustees and officers of the Fund, as a group,
owned beneficially less than 1% of the outstanding shares of beneficial interest
of each series of the Fund.
As of October 3, 1997, the beneficial owners, directly or indirectly, of
more than 5% of the outstanding shares of any class of beneficial interest of a
Series were: Dr. Edwin S. Gottlieb, Bess Singer Revocable Trust, UA DTD
07/29/83, FBO Bess Singer, 2226 Alpine Blvd, Alpine, CA 91901-2115 who held
1,818 Class C shares of the California Series (6.4%); Natanmuay Soparpun, 1266
Lisbon Ln., Pebble Beach, CA 93953-3204 who held 2,839 Class C shares of The
California Series (9.9%); Margaret R. Reddell, TTEE Successor Trust FBO Ferd D.
& Margaret Reddell Family Trust, 13 Fountain Grove Circle, Napa, CA 94558-2463
who held 2,125 Class C shares of The California Series (7.5%); Anong Jackson
Trust, Anong Jackson TTEE, FBO Anong Jackson, 1266 Lisbon Ln., Pebble Beach, CA
93953-3204 who held 2,814 Class C shares of The California Series (9.8%); James
M. Stone, Pearl C. Stone, CO-TTEES, 20 W. Monterey Ave., Stockton, CA 95204-3602
who held 5,724 Class C shares of The California Series (20.1%); Mrs. Margaret R.
Reddell, Mr. Rayford Redell, CO-TTEES, Ferd D. & Margaret R. Reddell, FAM SURV
TR UA DTD 05/14/91, 709 Sutter Ave, Palo Alto, CA 94303-3939 who held 2,125
Class C shares of the California Series (7.5%); Lloyd M. Ives, M. Constance Ives
CO-TTEES, The Ives
B-21
<PAGE>
Family Trust, P.O. Box 701, Diablo, CA 94528-0701 who held 19,691 Class Z shares
of the California Series (32.3%); August G. Bako, Evelyn M. Bako CO-TTEES,
August Bako and Evelyn Baco REV LIV TR UA DTD 09/11/87, 4905 Elrod Dr., Castro
Valley, CA 94546-2415 who held 12,253 Class Z shares of the California Series
(20.1%); Julie M. McLaughlin TTEE, FBO The Alton and Julia McLaughlin Trust A UA
DTD 12/12/77, 1840 Tice Creek Dr., Apt 2115, Walnut Creek, CA 94595-2458 who
held 3,252 Class Z shares of the California Series (5.3%); Harold Ulrici TTEE,
Harold Ulrici REV TR UA DTD 04/14/92, 11951 Torrey Pines Dr., Auburn, CA
95602-8319 who held 3,374 Class Z shares of the California Series (5.5%); Roy H.
Bostic, Rita M. Bostic CO-TTEES, The Bostic REV FAM TR UA DTD 04/18/90, 6117
Oakgreen Cir, Carmichael CA, 95608-1010 who held 3,576 Class Z shares of the
California Series (5.9%); Mr. Duncan Lent Howard, TTEE, Elizabeth Lent Howard
Trust, UA DTD 08/10/76, 799 Silver Oaks Pl, Walnut Creek CA 94596-2682 who held
5,930 Class Z shares of the California Series (9.7%); Julia M. McLaughlin TTEE,
Alton & Julia McLaughlin Trust, UA DTD 12/12/77, 1840 Tice Creek Dr., Apt. 2115,
Walnut Creek, CA 94595-2458 who held 8,673 Class Z shares of the California
Series (14.2%); Zoe Ann Orr TTEE, The Marcus 1984 REV TRUST, 740 Brewington
Ave., Watsonville, CA 95076-3260 who held 35,779 Class C shares of The
California Income Series (10.1%); Ms. Robert A. Hollenbaugh, Jessica L.
Lollenbaugh CO-TTEES, RV TR UA DTD 06/05/97, 17360 Iron Mountain Dr., Poway, CA
92064-6310 who held 18,491 Class C shares of The California Income Series
(5.2%); Mr. Ronald P. Dick, 1444 N. Whitney Ave, Fresno, CA 93703-4513 who held
17,777 Class C shares of The California Income Series (5.0%); Gerald F. Marcus,
TTEE, The Marcus 1984 REV Trust, 740 Brewington Ave, Watsonville CA 95076-3260
who held 26,996 Class C shares of The California Income Series (7.6%); Marjorie
Britain Lurmann, TTEE Lurmann Survivor Trust, 625 Semple Ct, Benicia, CA
94510-3136 who held 14,541 Class Z shares of The California Income Series
(6.9%); Mrs. Tracey H. Pullen, 25903 Mission St., Carmel CA 93923-9211 who held
27,795 Class Z shares of The California Income Series (13.3%); August G. Bako,
Evelyn M. Bako CO-TTEES, August Bako and Evelyn Baco REV LIV TR UA DTD 09/11/87,
4905 Elrod Dr., Castro Valley, CA 94546-2415 who held 11,408 Class Z shares of
The California Income Series (5.5%); Julia M. McLaughlin TTEE, Alton & Julia
McLaughlin Trust, UA DTD 12/12/77, 1840 Tice Creek Dr., Apt. 2115, Walnut Creek,
CA 94595-2458 who held 30,108 Class Z shares of the California Income Series
(14.4%); Marjorie Britain Lurmann, TTEE, Lurmann Qualified Terminable Interest
PROP TR UA DTD 02/16/84, 625 Semple Ct, Benicia, CA 94510-3136 who held 17,194
Class Z shares of The California Income Series (8.2%); and Mr. Duncan Lent
Howard, TTEE, Elizabeth Lent Howard Trust UA DTD 08/10/76, 799 Silver Oaks Pl.,
Walnut Creek, CA 94596-2682 who held 11,366 Class Z shares of The California
Income Series (5.4%).
As of October 3, 1997, Prudential Securities was the record holder for other
beneficial owners of 3,972,975 Class A shares (or 57% of the outstanding Class A
shares), 3,389,997 Class B shares (or 59% of the outstanding Class B shares),
16,368 Class C shares (or 57% of the outstanding Class C shares) and 60,955
Class Z shares of the California Series; 11,855,913 Class A shares (or 81% of
the outstanding Class A shares), 3,662,752 Class B shares (or 81% of the
outstanding Class B shares), 327,767 Class C shares (or 93% of the outstanding
Class C shares) and 208,850 Class Z shares or 99% of the outstanding Class Z
shares of the California Income Series; and 282,709,569 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 Investments Fund Management LLC (PIFM
or the Manager), Gateway Center Three, 100 Mulberry Street, Newark, New Jersey
07102-4077. PIFM 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, 1997, PIFM managed and/or administered open-end and
closed-end management investment companies with assets of approximately $59.9
billion. According to the Investment Company Institute, as of December 31, 1996,
the Prudential Mutual Funds were the 15th largest family of mutual funds in the
United States.
PIFM is a subsidiary of Prudential Securities and Prudential. Prudential
Mutual Fund Services LLC (PMFS or the Transfer Agent), a wholly owned subsidiary
of PIFM, serves as the transfer agent for the Prudential Mutual Funds and, in
addition, provides customer service, recordkeeping and management and
administration services to qualified plans.
B-22
<PAGE>
Pursuant to the Management Agreement with the Fund (the Management
Agreement), PIFM, subject to the supervision of the Fund's Trustees and in
conformity with the stated policies of the Fund, manages both the investment
operations of each series and the composition of each series' portfolio,
including the purchase, retention, disposition and loan of securities. In
connection therewith, PIFM is obligated to keep certain books and records of the
Fund. PIFM also administers the Fund's business affairs and, in connection
therewith, furnishes the Fund with office facilities, together with those
ordinary clerical and bookkeeping services which are not being furnished by
State Street Bank and Trust Company (the Custodian), the Fund's custodian, and
PMFS, the Fund's transfer and dividend disbursing agent. The management services
of PIFM for the Fund are not exclusive under the terms of the Management
Agreement and PIFM is free to, and does, render management services to others.
For its services, PIFM receives, pursuant to the Management Agreement, a fee
at an annual rate of .50 of 1% of the average daily net assets of each series.
The fee is computed daily and payable monthly. The Management Agreement also
provides that, in the event the expenses of the Fund (including the fees of
PIFM, but excluding interest, taxes, brokerage commissions, distribution fees
and litigation and indemnification expenses and other extraordinary expenses not
incurred in the ordinary course of the Fund's business) for any fiscal year
exceed the lowest applicable annual expense limitation established and enforced
pursuant to the statutes or regulations of any jurisdiction in which the Fund's
shares are qualified for offer and sale, the compensation due to PIFM will be
reduced by the amount of such excess. Reductions in excess of the total
compensation payable to PIFM will be paid by PIFM to the Fund. No such
reductions were required during the fiscal year ended August 31, 1997. No
jurisdiction currently limits the Fund's expenses.
In connection with its management of the business affairs of the Fund, PIFM
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 PIFM or the Fund's investment adviser;
(b) all expenses incurred by PIFM or by the Fund in connection with
managing the ordinary course of the Fund's business, other than those
assumed by the Fund as described below; and
(c) the costs and expenses payable to The Prudential Investment
Corporation, doing business as Prudential Investments (PI, the Subadviser or
the investment adviser), pursuant to the subadvisory agreement between PIFM
and PI (the Subadvisory Agreement).
Under the terms of the Management Agreement, the Fund is responsible for the
payment of the following expenses: (a) the fees payable to the Manager, (b) the
fees and expenses of Trustees who are not affiliated persons of the Manager or
the Fund's investment adviser, (c) the fees and certain expenses of the 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 and the states, 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 PIFM will not be liable for any
error of judgment or for any loss suffered by the Fund in connection with the
matters to which the Management Agreement relates, except a loss resulting from
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
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<PAGE>
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 22, 1997, 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, 1995, 1996 and 1997, PIFM received
management fees of $836,149, $755,684 and $698,387, respectively, from the
California Series. Effective January 1, 1995 through August 31, 1997, PIFM
agreed to waive 10% of its management fee from the California Series. The amount
of fees waived for the fiscal years ended August 31, 1996 and 1997 amounted to
$83,965 and $77,598, respectively. With respect to the California Money Market
Series, PIFM received $1,215,652, $1,280,877 and $1,388,598 in management fees
for the fiscal years ended August 31, 1995, 1996 and 1997, respectively. With
respect to the California Income Series, PIFM waived its entire management fee
for the fiscal year ended August 31, 1993. Effective December 1, 1993, PIFM
reduced its voluntary waiver to 75% of its management fee. Effective January 1,
1995, PIFM increased its voluntary waiver to 85% of its management fee. PIFM
reduced its voluntary waiver during fiscal year 1997 and currently is waiving
10% of its management fee. For the fiscal years ended August 31, 1995, 1996 and
1997, PIFM received $175,685, $455,115 and $891,272, respectively, in management
fees from the California Income Series. The amount of the fees waived for the
years ended August 31, 1995, 1996 and 1997 amounted to $779,180, $533,497 and
$99,030, respectively.
PIFM has entered into the Subadvisory Agreement with PI (the Subadviser).
The Subadvisory Agreement provides that PI will furnish investment advisory
services in connection with the management of the Fund. In connection therewith,
PI is obligated to keep certain books and records of the Fund. PIFM continues to
have responsibility for all investment advisory services pursuant to the
Management Agreement and supervises PI's performance of such services. PI is
reimbursed by PIFM for the reasonable costs and expenses incurred by PI in
furnishing those services.
Peter Allegrini oversees the municipal bond team at the Subadviser. He also
serves as the portfolio manager of The High Yield Series of Prudential Municipal
Bond Fund. He has been in the investment business since 1978.
The Subadvisory Agreement was last approved by the Trustees, including a
majority of the Trustees who are not parties to the contract or interested
persons of any such party as defined in the Investment Company Act, on May 22,
1997, by shareholders of 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, PIFM or PI upon not more than 60 days', nor less than 30
days', written notice. The Subadvisory Agreement provides that it will continue
in effect for a period of more than two years from its execution only so long as
such continuance is specifically approved at least annually in accordance with
the requirements of the Investment Company Act.
The Subadviser maintains a credit unit which provides credit analysis and
research on both tax-exempt and taxable fixed-income securities. The portfolio
managers routinely consult with the credit unit in managing the Fund's
portfolios. The credit unit reviews on an ongoing basis issuers of tax-exempt
and taxable fixed-income obligations, including prospective purchases and
portfolio holdings of the Fund. Credit analysts have broad access to research
and financial reports, data retrieval services and industry analysts.
With respect to tax-exempt issuers, credit analysts review financial and
operating statements supplied by state and local governments and other issuers
of municipal securities to evaluate revenue projections and the financial
soundness of municipal issuers. They study the impact of economic and political
developments on state and local governments, evaluate industry sectors and meet
periodically with public officials and other
B-24
<PAGE>
representatives of state and local governments and other tax-exempt issuers to
discuss such matters as budget projections, debt policy, the strength of the
regional economy and, in the case of revenue bonds, the demand for facilities.
They also make site inspections to review specified projects and to evaluate the
progress of construction or the operation of a facility.
DISTRIBUTOR
Prudential Securities Incorporated (Prudential Securities, PSI or the
Distributor), One Seaport Plaza, New York, New York 10292, acts as the
distributor of the shares of the Fund.
Under separate Distribution and Service Plans (the Class A Plan, the Class B
Plan and the Class C Plan, collectively, the Plans) adopted by the California
Income Series and the California Series under Rule 12b-1 under the Investment
Company Act and separate distribution agreements for the California Money Market
Series and the other series (the Distribution Agreements), Prudential Securities
(the Distributor) incurs the expenses of distributing shares of the California
Money Market Series and the Class A, Class B and Class C shares of the
California Income Series and the California Series. Prudential Securities also
incurs the expenses of distributing the Fund's Class Z shares under the
Distribution Agreement for the California Series and the California Income
Series, none of which is reimbursed by or paid for by the Fund. See "How the
Fund is Managed -- Distributor" in each Prospectus.
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 22, 1997. 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, 1997, PSI received
payments of $78,347 and $153,019 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
B-25
<PAGE>
Class A shares. For the fiscal year ended August 31, 1997, PSI also received
approximately $26,100 and $250,840 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, 1997, Prudential
Securities received $379,673 from the California Series under the Fund's Class B
Plan and spent approximately $234,500 in distributing the Class B shares of the
California Series during such period. For the fiscal year ended August 31, 1997,
Prudential Securities received $204,917 from the California Income Series under
the Fund's Class B Plan and spent approximately $554,400 in distributing the
Class B shares of the California Income Series during such period.
For the fiscal year ended August 31, 1997, 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..... $ 4,800 $ 122,300 $ 62,600 $ 44,800 $ 234,500
California
Income
Series..... 600 200,100 306,800 46,900 554,400
</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, 1996, Prudential Securities
received approximately $126,000 and $80,000 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, 1997, Prudential
Securities received $3,597 and $23,514 from the California Income Series and the
California Series, respectively, under the Fund's Class C Plan and spent
approximately $27,100 and $2,200 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, 1997, Prudential
Securities received approximately $3,000 and $1,800 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),
B-26
<PAGE>
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 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
Prudential Securities to the extent permitted by applicable law against certain
liabilities under the Securities Act of 1933, as amended. The Distribution
Agreements were last approved by the Trustees, including a majority of the Rule
12b-1 Trustees, on May 22, 1997. The Trustees approved the transfer of the
Distribution Agreement for the California Money Market Series with PMFD to
Prudential Securities effective January 2, 1996.
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 22, 1997, and by shareholders of the California Money Market Series on
December 18, 1989. For the fiscal year ended August 31, 1997, Prudential
Securities incurred distribution expenses of $347,149 with respect to the
California Money Market Series, all of which were recovered by Prudential
Securities 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
B-27
<PAGE>
period of twenty consecutive business days, and agreed that its other Texas
offices would be subject to the same restrictions for a period of five
consecutive business days. PSI also agreed to institute training programs for
its securities salesmen in Texas.
On October 27, 1994, Prudential Securities Group, Inc. (PSG) and PSI entered
into agreements with the United States Attorney deferring prosecution (provided
PSI complies with the terms of the agreement for three years) for any alleged
criminal activity related to the sale of certain limited partnership programs
from 1983 to 1990. In connection with these agreements, PSI agreed to add the
sum of $330,000,000 to the fund established by the SEC and executed a
stipulation providing for a reversion of such funds to the United States Postal
Inspection Service. PSI further agreed to obtain a mutually acceptable outside
director to sit on the Board of Directors of PSG and the Compliance Committee of
PSI. The new director serves as an independent "ombudsman" who PSI employees can
call anonymously with complaints about ethics and compliance. Prudential
Securities reports any allegations or instances of criminal conduct and material
improprieties to the new director. The new director submits compliance reports
which identify all such allegations or instances of criminal conduct and
material improprieties every three months and will continue to do so for a
three-year period.
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
B-28
<PAGE>
Fund, will not significantly affect the series' ability to pursue their
investment objectives. However, in the future in other circumstances, the series
may be at a disadvantage because of this limitation in comparison to other funds
with similar objectives but not subject to such limitations.
In placing orders for portfolio securities for the Fund, the Manager is
required to give primary consideration to obtaining the most favorable price and
efficient execution. The Manager seeks to effect each transaction at a price and
commission, if any, that provides the most favorable total cost or proceeds
reasonably attainable in the circumstances. Within the framework of this policy,
the Manager will consider the research and investment services provided by
brokers, dealers or futures commission merchants who effect or are parties to
portfolio transactions of the Fund, the Manager or the Manager's other clients.
Such research and investment services are those which brokerage houses
customarily provide to institutional investors and include statistical and
economic data and research reports on particular companies and industries. Such
services are used by the Manager in connection with all of its investment
activities, and some of such services obtained in connection with the execution
of transactions for the Fund may be used in managing other investment accounts.
Conversely, brokers, dealers or futures commission merchants furnishing such
services may be selected for the execution of transactions of such other
accounts, whose aggregate assets are far larger than the Fund, and the services
furnished by such brokers, dealers or futures commission merchants may be used
by the Manager in providing investment management for the Fund. Commission rates
are established pursuant to negotiations with the broker, dealer or futures
commission merchant based on the quality and quantity of execution services
provided by the broker in the light of generally prevailing rates. The Manager's
policy is to pay higher commissions to brokers, dealers or futures commission
merchants other than Prudential Securities, for particular transactions than
might be charged if a different broker had been selected, on occasions when, in
the Manager's opinion, this policy furthers the objective of obtaining best
price and execution. The Manager is 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, 1995, 1996 and 1997, the California
Series paid brokerage commissions of $29,802, $19,688 and $9,450, 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, 1995, 1996 and 1997, the California Money Market Series
paid no brokerage commissions. During the fiscal years ended August 31, 1995,
1996 and 1997, the California Income Series paid brokerage commissions of
$26,355, $15,942 and $13,633, respectively. None of the brokerage commissions
paid by the California Income Series were paid to Prudential Securities.
B-29
<PAGE>
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). Class Z shares of the California Series and the
California Income Series are offered to a limited group of investors at net
asset value without a sales charge. 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 is subject to different sales charges and distribution and/or service fees
(except for Class Z shares, which are not subject to any sales charges and
distribution and/or service fees), which may affect performance, (ii) each class
has exclusive voting rights on any matter submitted to shareholders that relates
solely to its arrangement and has separate voting rights on any matter submitted
to shareholders in which the interests of one class differ from the interests of
any other class, (iii) each class has a different exchange privilege, (iv) only
Class B shares have a conversion feature and (v) Class Z shares are offered
exclusively for sale to a limited group of investors. See "Distributor" and
"Shareholder Investment Account -- Exchange Privilege."
For a description of the methods of purchasing shares of the 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*, Class C* and Class Z shares are sold
at net asset value. Using the net asset value of these Series at August 31,
1997, 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................................... $ 11.80 $ 10.71
Maximum sales charge (3% of offering price).............................................. .36 .33
----------- -----------
Offering price to public................................................................. $ 12.16 $ 11.04
----------- -----------
----------- -----------
CLASS B
- -----------------------------------------------------------------------------------------
Net asset value, offering price and redemption price per Class B share*.................. $ 11.80 $ 10.71
----------- -----------
----------- -----------
CLASS C
- -----------------------------------------------------------------------------------------
Net asset value, offering price and redemption price per Class C share*.................. $ 11.80 $ 10.71
----------- -----------
----------- -----------
CLASS Z
- -----------------------------------------------------------------------------------------
Net asset value, offering price and redemption price per Class Z share................... $ 11.81 $ 10.71
----------- -----------
----------- -----------
</TABLE>
- ------------------------
* Class B and Class C shares are subject to a contingent deferred sales charge
on certain redemptions. See "Shareholder Guide -- How to Sell Your Shares --
Contingent Deferred Sales Charges" in the Prospectus of each applicable
Series.
REDUCTION AND WAIVER OF INITIAL SALES CHARGES -- CLASS A SHARES
COMBINED PURCHASE AND CUMULATIVE PURCHASE PRIVILEGE. If an investor or
eligible group of related investors purchases Class A shares of the Fund
concurrently with Class A shares of other series of the Fund or other Prudential
Mutual Funds, the purchases may be combined to take advantage of the reduced
sales charges applicable to larger purchases. See the table of breakpoints under
"Shareholder Guide -- Alternative Purchase Plan" in the applicable Prospectus.
B-30
<PAGE>
An eligible group of related Fund investors includes any combination of the
following:
(a) an individual;
(b) the individual's spouse, their children and their parents;
(c) the individual's and spouse's Individual Retirement Account (IRA);
(d) any company controlled by the individual (a person, entity or group that
holds 25% or more of the outstanding voting securities of a company will
be deemed to control the company, and a partnership will be deemed to be
controlled by each of its general partners);
(e) a trust created by the individual, the beneficiaries of which are the
individual, his or her spouse, parents or children;
(f) a Uniform Gifts to Minors Act/Uniform Transfers to Minors Act account
created by the individual or the individual's spouse; and
(g) one or more employee benefit plans of a company controlled by an
individual.
In addition, an eligible group of related Fund investors may include an
employer (or group of related employers) and one or more qualified retirement
plans of such employer or employers (an employer controlling, controlled by or
under common control with another employer is deemed related to that employer).
The Distributor must be notified at the time of purchase that the investor
is entitled to a reduced sales charge. The reduced sales charges will be granted
subject to confirmation of the investor's holdings.
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.
B-31
<PAGE>
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.
WAIVER OF THE CONTINGENT DEFERRED SALES CHARGE -- CLASS B SHARES
The contingent deferred sales charge is waived under circumstances described
in the applicable Prospectuses. See "Shareholder Guide -- How to Sell Your
Shares -- Waiver of the Contingent Deferred Sales Charges -- Class B Shares" in
the Prospectus of each applicable Series. In connection with these waivers, the
Transfer Agent will require you to submit the supporting documentation set forth
below.
<TABLE>
<S> <C>
CATEGORY OF WAIVER REQUIRED DOCUMENTATION
Death A copy of the shareholder's death certificate
or, in the case of a trust, a copy of the
grantor's death certificate, plus a copy of the
trust agreement identifying the grantor.
Disability - An individual will be considered A copy of the Social Security Administration
disabled if he or she is unable to engage in any award letter or a letter from a physician on the
substantial gainful activity by reason of any physician's letterhead stating that the
medically determinable physical or mental shareholder (or, in the case of a trust, the
impairment which can be expected to result in grantor) is permanently disabled. The letter
death or to be of long-continued and indefinite must also indicate the date of disability.
duration.
</TABLE>
The Transfer Agent reserves the right to request such additional documents as it
may deem appropriate.
QUANTITY DISCOUNT -- CLASS B SHARES PURCHASED PRIOR TO AUGUST 1, 1994
The CDSC is reduced on redemptions of Class B shares of a series of the Fund
purchased prior to August 1, 1994, if immediately after a purchase of such
shares, the aggregate cost of all Class B shares of a series of the Fund owned
by you in a single account exceeded $500,000. For example, if you purchased
$100,000 of Class B shares of a series of the Fund and the following year
purchase an additional $450,000 of Class B shares with the result that the
aggregate cost of your Class B shares of a series of the Fund following the
second purchase was $550,000, the quantity discount would be available for the
second purchase of $450,000 but not for the first purchase of $100,000. The
quantity discount will be imposed at the following rates depending on whether
the aggregate value exceeded $500,000 or $1 million:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED SALES CHARGE AS A
PERCENTAGE OF DOLLARS INVESTED OR REDEMPTION
PROCEEDS
YEAR SINCE PURCHASE PAYMENT ----------------------------------------------
MADE $500,001 TO $1 MILLION OVER $1 MILLION
- ------------------------------ ------------------------ -------------------
<S> <C> <C>
First......................... 3.0% 2.0%
Second........................ 2.0% 1.0%
Third......................... 1.0% 0 %
Fourth and thereafter......... 0 % 0 %
</TABLE>
You must notify the Fund's Transfer Agent either directly or through
Prudential Securities or Prusec, at the time of redemption, that you are
entitled to the reduced CDSC. The reduced CDSC will be granted subject to
confirmation of your holdings.
B-32
<PAGE>
SHAREHOLDER INVESTMENT ACCOUNT
Upon the initial purchase of shares of the Fund, 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 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, Inc. (Class A shares)
Prudential Tax-Free Money Fund, Inc.
B-33
<PAGE>
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, Inc. No CDSC will be payable
upon such exchange, but a CDSC may be payable upon the redemption of the Class B
and Class C shares acquired as a result of the exchange. The applicable sales
charge will be that imposed by the fund in which shares were initially purchased
and the purchase date will be deemed to be the first day of the month after the
initial purchase, rather than the date of the exchange.
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, Inc. without imposition of any CDSC at the time of exchange. Upon
subsequent redemption from such money market fund or after re-exchange into the
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.
CLASS Z. Class Z shares may be exchanged for Class Z shares of other
Prudential Mutual Funds.
Additional details about the Exchange Privilege and prospectuses for each of
the Prudential Mutual Funds are available from the Fund's Transfer Agent,
Prudential Securities or Prusec. The Exchange Privilege may be modified,
terminated or suspended on 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)
- ------------------------
(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.
B-34
<PAGE>
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 below."
</TABLE>
- ------------------------
(2) The chart assumes an effective rate of return of 8% (assuming monthly
compounding). This example is for illustrative purposes only and is not intended
to reflect the performance of an investment in shares of the Fund. The
investment return and principal value of an investment will fluctuate so that an
investor's shares when redeemed may be worth more or less than their original
cost.
AUTOMATIC SAVINGS ACCUMULATION PLAN (ASAP)
Under ASAP, an investor may arrange to have a fixed amount automatically
invested in shares of 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.
B-35
<PAGE>
HOW TO REDEEM SHARES OF THE CALIFORNIA MONEY MARKET SERIES
Redemption orders submitted to and received by Prudential Mutual Fund
Services LLC (PMFS) will be effected at the net asset value next determined
after receipt of the order. Shareholders of the California Money Market Series
(other than Prudential Securities clients for whom Prudential Securities has
purchased shares of such Series) may use Check Redemption, Expedited Redemption
or Regular Redemption.
CHECK REDEMPTION
Shareholders are subject to the Custodian's rules and regulations governing
checking accounts, including the right of the Custodian not to honor checks in
amounts exceeding the value of the shareholder's account at the time the check
is presented for payment.
Shares for which certificates have been issued are not available for
redemption to cover checks. A shareholder should be certain that adequate shares
for which certificates have not been issued are in his or her account to cover
the amount of the check. Also, shares purchased by check are not available to
cover checks until 10 days after receipt of the purchase check by PMFS unless
the Fund or PMFS has been advised that the purchase check has been honored. Such
delay may be avoided by purchasing shares by certified or official bank checks
or by wire. If insufficient shares are in the account, or if the purchase was
made by check within 10 days, the check is returned marked "insufficient funds."
Since the dollar value of an account is constantly changing, it is not possible
for a shareholder to determine in advance the total value of his or her account
so as to write a check for the redemption of the entire account.
There is a service charge of $5.00 payable to PMFS to establish a checking
account and to order checks. The Custodian and the Fund have reserved the right
to modify this checking account privilege or to impose a charge for each check
presented for payment for any individual account or for all accounts in the
future.
The Fund or PMFS may terminate Check Redemption at any time upon 30 days'
notice to participating shareholders. To receive further information, contact
Prudential Mutual Fund Services LLC, 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
LLC, 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
B-36
<PAGE>
requirements from time to time on notice to shareholders, which may be given by
means of a new Prospectus. All correspondence concerning redemptions should be
sent to the Fund in care of its Transfer Agent, Prudential Mutual Fund Services
LLC, Attention: Redemption Services, P.O. Box 15010, New Brunswick, New Jersey
08906-5010. Regular redemption is made by check sent to the shareholder's
address.
MUTUAL FUND PROGRAMS
From time to time, the Fund (or a Series of the Fund) may be included in a
mutual fund program with other Prudential Mutual Funds. Under such a program, a
group of portfolios will be selected and thereafter promoted collectively.
Typically, these programs are created with an investment theme, E.G., to seek
greater diversification, protection from interest rate movements or access to
different management styles. In the event such a program is instituted, there
may be a minimum investment requirement for the program as a whole. The Fund may
waive or reduce the minimum initial investment requirements in connection with
such a program.
The mutual funds in the program may be purchased individually or as part of
the program. Since the allocation of portfolios included in the program may not
be appropriate for all investors, investors should consult their Prudential
Securities Financial Advisor or Prudential/Pruco Securities Representative
concerning the appropriate blend of portfolios for them. If investors elect to
purchase the individual mutual funds that constitute the program in an
investment ratio different from that offered by the program, the standard
minimum investment requirements for the individual mutual funds will apply.
NET ASSET VALUE
The net asset value per share of a series is the net worth of such series
(assets including securities at value minus liabilities) divided by the number
of shares of such series outstanding. Net asset value is calculated separately
for each class. The Fund will compute 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. 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.
B-37
<PAGE>
With respect to the California Money Market Series, the Trustees have
determined to maintain a dollar-weighted average portfolio maturity of 90 days
or less, to purchase instruments having remaining maturities of thirteen months
or less and to invest only in securities determined by the investment adviser
under the supervision of the Trustees to present minimal credit risks and to be
of "eligible quality" in accordance with regulations of the SEC. The Trustees
have adopted procedures designed to stabilize, to the extent reasonably
possible, the California Money Market Series' price per share as computed for
the purpose of sales and redemptions at $1.00. Such procedures will include
review of the California Money Market Series' portfolio holdings by the
Trustees, at such intervals as they may deem appropriate, to determine whether
the California Money Market Series' net asset value calculated by using
available market quotations deviates from $1.00 per share based on amortized
cost. The extent of any deviation will be examined by the Trustees. If such
deviation exceeds 1/2 of 1%, the Trustees will promptly consider what action, if
any, will be initiated. In the event the Trustees determine that a deviation
exists which may result in material dilution or other unfair results to
prospective investors or existing shareholders, the Trustees will take such
corrective action as they consider necessary and appropriate, including the sale
of portfolio instruments prior to maturity to realize capital gains or losses or
to shorten average portfolio maturity, the withholding of dividends, redemptions
of shares in kind, or the use of available market quotations to establish a net
asset value per share.
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, Class C and Class Z 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, Class C and Class Z shares
for the 30 days ended August 31, 1997 was 4.26%, 3.99%, 3.73% and 4.49%,
respectively (4.21%, 3.94%, 3.68% and 4.44%, respectively, adjusted for
management fee waivers). The California Income Series' yield for its Class A,
Class B, Class C and Class Z shares for the 30 days ended August 31, 1997 was
4.60%, 4.34%, 4.09% and 4.84%, respectively (4.55%, 4.29%, 4.04% and 4.79%,
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, 1997, the California Series' tax equivalent yield (assuming a
federal tax rate of 36%) for Class A, Class B, Class C and Class Z shares was
7.34%, 6.87%, 6.43% and 7.74%, respectively (7.26%, 6.78%, 6.35% and 7.65%,
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, Class C, and Class Z shares for the 30 days ended August 31, 1997
was 7.92%, 7.48%, 7.05% and 8.34%, respectively (7.84%, 7.39%, 6.96% and 8.25%,
respectively, adjusted for management fee waivers).
B-38
<PAGE>
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, Class
C and Class Z shares. See "How the Fund Calculates Performance" in the
Prospectus of each applicable Series.
Average annual total return is computed according to the following formula:
P(1+T)TO THE POWER OF n = ERV
Where: P = a hypothetical initial payment of $1000.
T = average annual total return.
n = number of years.
ERV = Ending Redeemable Value at the end of the 1, 5 or 10 year
periods (or fractional portion thereof) of a hypothetical
$1000 payment made at the beginning of the 1, 5 or 10 year
periods.
Average annual total return takes into account any applicable initial or
contingent deferred sales charges but does not take into account any federal or
state income taxes that may be payable upon redemption.
The California Series' average annual total returns for the periods ended
August 31, 1997 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.................. 5.74% 5.99% 7.04% 3.67% 6.05% 6.92% 7.99% 7.40% 6.54%
Average Annual Total
Return Adjusted for
Subsidy/Waiver.......... 5.65% 5.97% 7.02% 3.58% 6.04% 6.88% 7.91% 7.31% 6.51%
</TABLE>
The California Income Series' average annual total returns for the periods
ended August 31, 1997 are as follows:
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
------------------------ ----------------- -----------------
ONE FIVE FROM ONE FROM ONE FROM
YEAR YEARS INCEPTION YEAR INCEPTION YEAR INCEPTION
----- ----- --------- ----- --------- ----- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Average Annual Total Return................................. 6.43% 7.34% 8.22% 4.28% 5.66% 8.01% 7.28%
Average Annual Total Return Adjusted for Subsidy/Waiver..... 6.33% 6.98% 7.83% 4.18% 5.37% 7.91% 7.02%
</TABLE>
Due to the fact that Class Z shares have not been in operation for more than
one full year, no average annual total return is provided.
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, Class C and Class Z shares. See "How
the Fund Calculates Performance" in the Prospectus of each applicable Series.
Aggregate total return represents the cumulative change in the value of an
investment in 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.
B-39
<PAGE>
The California Series' aggregate total returns for the periods ended August
31, 1997 are as follows:
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
------------------------ --------------------- -------------------
ONE FIVE FROM ONE FIVE TEN ONE FROM
YEAR YEARS INCEPTION YEAR YEARS YEARS YEAR INCEPTION
----- ----- -------- ----- ----- ----- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Aggregate Total Return........ 9.01% 37.88% 72.91% 8.67% 35.16% 95.21% 8.40% 21.56%
Aggregate Total Return
Adjusted for
Subsidy/Waiver............... 8.92% 37.76% 72.76% 8.58% 35.04% 94.55% 8.31% 21.45%
</TABLE>
The California Income Series' aggregate total returns for the periods ended
August 31, 1997 are as follows:
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
------------------------- ----------------- -----------------
ONE FIVE FROM ONE FROM ONE FROM
YEAR YEARS INCEPTION YEAR INCEPTION YEAR INCEPTION
----- ------ --------- ----- --------- ----- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Aggregate Total Return............................ 9.72% 46.92% 75.64% 9.28% 24.82% 9.01% 24.19%
Aggregate Total Return Adjusted for
Subsidy/Waiver................................... 9.62% 44.45% 71.38% 9.18% 23.54% 8.91% 23.26%
</TABLE>
The aggregate total return for Class Z shares for the period since inception
(September 18, 1996) periods ended August 31, 1997 for the California Series and
the California Income Series was 8.35% and 8.86%, 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 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'
annualized seven-day current yield and effective annual yield as of August 31,
1997 was 2.65% and 2.69%, respectively.
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 39.6%) as of August 31, 1997 was 4.84%.
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.
B-40
<PAGE>
From time to time, the performance of the series may be measured against
various indices. Set forth below is a chart which compares the performance of
different types of investments over the long-term and the rate of inflation. (1)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C> <C>
Common Stocks Long-Term Govt. Bonds Inflation
10.2% 4.8% 3.1%
</TABLE>
(1) Source: Ibbotson Associates, "Stocks, Bonds, Bills and Inflation -- 1997
Yearbook" (annually updates the work of Roger G. Ibbotson and Rex A.
Sinquefield). Used with permission. All rights reserved. Common stock returns
are based on the Standard & Poor's 500 Stock Index, a market-weighted, unmanaged
index of 500 common stocks in a variety of industry sectors. It is a commonly
used indicator of broad stock price movements. This chart is for illustrative
purposes only, and is not intended to represent the performance of any
particular investment or fund. Investors cannot invest directly in an index.
Past performance is not a guarantee of future results.
DISTRIBUTIONS AND TAX INFORMATION
DISTRIBUTIONS
All of the Fund's net investment income is declared as a dividend each
business day. Shares will begin earning dividends on the day following the date
on which the shares are issued, the date of issuance customarily being the
"settlement" date. Shares continue to earn dividends until they are redeemed.
Unless the shareholder elects (by notice to the Dividend Disbursing Agent by the
first business day of the month) to receive monthly cash payments of dividends,
such dividends will be automatically received in additional 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
B-41
<PAGE>
Income Series, respectively, as a result of the higher distribution-related fee
applicable to the Class B and Class C shares. The per share dividends on Class A
shares will be lower than the per share dividends on Class Z shares, since Class
Z shares bear no distribution-related fee. The per share distributions of net
capital gains, if any, will be paid in the same amount for Class A, Class B,
Class C and Class Z shares. See "Net Asset Value."
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 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. In addition, each series intends to
make distributions in accordance with the provisions of the Internal Revenue
Code so as to avoid the 4% excise tax on certain amounts remaining undistributed
at the end of each calendar year. In order to qualify as a regulated investment
company, each series of the Fund generally must, among other things, (a) derive
at least 90% of its annual gross income (without offset for losses) from
dividends, interest, payments with respect to securities loans and gains from
the sale or other disposition of stock or securities or options thereon; (b)
with respect to tax years beginning on or before August 5, 1997, derive less
than 30% of its annual gross income (without offset for losses) from the sale or
other disposition of stock, securities or futures contracts or options thereon
held for less than three months; (c) diversify its holdings so that, at the end
of each quarter of the taxable year, (i) at least 50% of the value of the assets
of the series is represented by cash, U.S. Government securities and other
securities limited, in respect of any one issuer, to an amount not greater than
5% of the value of the assets of the series and 10% of the outstanding voting
securities of such issuer, and (ii) not more than 25% of the value of the assets
of the series is invested in the securities of any one issuer (other than U.S.
Government securities); and (d) distribute to its shareholders at least 90% of
its net investment income, including net short-term gains (I.E., the excess of
net short-term capital gains over net long-term capital losses), and 90% of its
net tax exempt interest income in each year.
Subchapter M permits the character of tax-exempt interest distributed by a
regulated investment company to flow through as tax-exempt interest to its
shareholders provided that 50% or more of the value of its assets at the end of
each quarter of its taxable year is invested in state, municipal or other
obligations the interest on which is exempt for federal income tax purposes.
Distributions to shareholders of tax-exempt interest earned by any series of the
Fund for the taxable year are not subject to federal income tax (except for
possible application of the alternative minimum tax). Interest from certain
private activity and other bonds is treated as an item of tax preference for
purposes of the alternative minimum tax on individuals and the alternative
minimum tax on corporations. To the extent interest on such bonds is distributed
to shareholders, 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, mid-term or long-term and the
B-42
<PAGE>
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. In addition, the conversion
transaction rules may apply to recharacterize certain capital gains as ordinary
income. Newly-enacted Code Section 1259 will require the recognition of gain
(but not loss) if a Series makes a "constructive sale" of an appreciated
financial position. A Series generally will be considered to make a constructive
sale of an appreciated financial position if it sells the same or substantially
identical property short, enters into a futures or forward contract to deliver
the same or substantially identical property, or enters into certain other
similar transactions.
The California Series' and the California Income Series' hedging activities
may be affected by the requirement (applicable solely to tax years beginning on
or before August 5, 1997) under the Internal Revenue Code that less than 30% of
the series' gross income be derived from the sale or other disposition of
securities, futures contracts, options and other instruments held for less than
three months. From time to time, this requirement may cause the series to limit
their acquisitions of futures contracts to those that will not expire for at
least three months. At the present time, there is only a limited market for
futures contracts on the municipal bond index that will not expire within three
months. Therefore, to meet the 30%/3 month requirement, the series may choose to
use futures contracts based on fixed-income securities that will not expire
within three months.
Any net capital gains (I.E., the excess of net capital gains from the sale
of assets held for more than 12 months over net short-term capital losses)
distributed to shareholders will be taxable as capital gains to the
shareholders, whether or not reinvested and regardless of the length of time a
shareholder has owned his or her shares. The maximum capital gains rate for
individuals is 28% with respect to assets held for more than 12 months, but not
more than 18 months, and 20% with respect to assets held for more than 18
months. The maximum capital gains rate for corporate shareholders currently is
the same as the maximum tax rate for ordinary income.
If any net capital gains from the sale of securities held for more than 12
months in excess of net short-term capital losses are retained by a series for
investment, requiring federal income taxes to be paid thereon by the series, the
series will elect to treat such capital gains as having been distributed to
shareholders. As a result, shareholders will be taxed on such amounts as capital
gains, will be able to claim their proportionate share of the federal income
taxes paid by the series on such gains as a credit against their own federal
income tax liabilities, and will be entitled to increase the adjusted tax basis
of their series shares by the differences between their PRO RATA share of such
gains and their tax credit.
B-43
<PAGE>
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
capital gains distribution will be treated as long-term capital loss to the
extent of such capital gains distribution.
Any loss realized on a sale, redemption or exchange of shares of a Series of
the Fund by a shareholder will be disallowed to the extent the shares are
replaced within a 61-day period (beginning 30 days before the disposition of
shares). Shares purchased pursuant to the reinvestment of a dividend will
constitute a replacement of shares. Distributions of taxable investment income,
including short-term capital gains, to foreign shareholders generally will be
subject to a withholding tax at the rate of 30% (or lower treaty rate).
Interest on indebtedness incurred or continued by shareholders to purchase
or carry shares of the Fund will not be deductible for federal income tax
purposes. In addition, under rules used by the Internal Revenue Service for
determining when borrowed funds are considered to be used for the purpose of
purchasing or carrying particular assets, the purchase of shares may be
considered to have been made with borrowed funds even though the borrowed funds
are not directly traceable to the purchase of shares.
Persons holding certain municipal obligations who also are "substantial
users" (or persons related thereto) of facilities financed by such obligations
may not exclude interest on such obligations from their gross income. No
investigation as to the users of the facilities financed by bonds in the
portfolios of the Fund's series has been made by the Fund. Potential investors
should consult their tax advisers with respect to this matter before purchasing
shares of the Fund.
From time to time, proposals have been introduced before Congress for the
purpose of restricting or eliminating the federal income tax exemption for
interest on 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 capital gains,
whether received in shares or cash, must be reported by each shareholder on his
or her federal income tax return. Shareholders electing to receive distributions
in the form of additional shares will have a cost basis for federal income tax
purposes in each share so received equal to the net asset value of a share of
the applicable series of the Fund on the reinvestment date. Distributions of
tax-exempt interest must also be reported. Under federal income tax law, each
series of the Fund will be required to report to the Internal Revenue Service
all distributions of taxable income and capital gains as well as gross proceeds
from the redemption or exchange of shares of such series, except in the case of
certain exempt shareholders. Under the backup withholding provisions of the
Internal Revenue Code, all proceeds from the redemption or exchange of shares
are subject to withholding of federal income tax at the rate of 31% in the case
of nonexempt shareholders who fail to furnish the appropriate series of the Fund
with their taxpayer identification numbers on IRS Form W-9 and with required
certifications regarding their status under the federal income tax law. Such
withholding is also required on taxable dividends and capital gains
distributions unless it is reasonably expected that at least 95% of the
distributions of the series are comprised of tax-exempt dividends. If the
withholding provisions are applicable, any 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.
A shareholder who acquires shares of a Series of the Fund and sells or
otherwise disposes of such shares within 90 days of acquisition may not be
allowed to include certain sales charges incurred in acquiring such shares for
purposes of calculating gain or loss realized upon a sale or exchange of shares
of the Fund.
B-44
<PAGE>
CALIFORNIA TAXATION
In any year in which each series qualifies as a regulated investment company
under the Internal Revenue Code (as in effect January 1, 1997) and is exempt
from federal income tax under such rules, (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 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
franchise tax for corporate shareholders. In addition, such distributions may be
includable in income subject to the alternative minimum tax.
Interest on indebtedness incurred or continued by shareholders to purchase
or carry shares of a series will not be deductible for California personal
income tax purposes. In addition, as a result of California's incorporation of
certain provisions of the Internal Revenue Code, any loss realized by a
shareholder upon the sale of shares held for six months or less may be
disallowed to the extent of any exempt-interest dividends received with respect
to such shares. Moreover, any loss realized upon the redemption of shares within
6 months from the date of purchase of such shares and following receipt of a
long-term capital gains distribution will be treated as long-term capital loss
to the extent of such long-term capital gains distribution. Finally, any loss
realized upon the redemption of shares within 30 days before or after the
acquisition of other shares of the same series may be disallowed under the "wash
sale" rules.
Shares of the Fund will not be subject to the California property tax.
The foregoing is only a summary of some of the important California income
tax considerations generally affecting the Fund and its shareholders. The Fund
has obtained an opinion of its California tax counsel which confirms these state
tax consequences for California resident individuals and corporations. No
attempt is made to present a detailed explanation of the California personal
income tax treatment of a series or its shareholders, 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.
B-45
<PAGE>
The Declaration of Trust of the Fund provides that shareholders shall not be
subject to any personal liability for the acts or obligations of the Fund and
that every written obligation, contract, instrument or undertaking made by the
Fund shall contain a provision to the effect that the shareholders are not
individually bound thereunder.
Massachusetts counsel for the Fund has advised the Fund that no personal
liability will attach to the shareholders under any undertaking containing such
provision when adequate notice of such provision is given, except possibly in a
few jurisdictions. With respect to all types of claims in the latter
jurisdictions and with respect to tort claims, contract claims 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 requirement that corporations hold annual meetings of shareholders,
which business trusts are not required to do.
The Fund and each series thereof shall continue without limitation of time
subject to the provisions in the Declaration of Trust concerning termination by
action of the shareholders or by the Trustees by written notice to the
shareholders.
The authorized capital of the Fund consists of an unlimited number of shares
of beneficial interest, $.01 par value, issued in three series. Each series of
the Fund, for federal income tax and Massachusetts state law purposes, will
constitute a separate trust which will be governed by the provisions of the
Declaration of Trust. All shares of any series of the Fund issued and
outstanding will be fully paid and non-assessable by the Fund. Each share of
each series of the Fund represents an equal proportionate interest in that
series with each other share of that series. The assets of the Fund received for
the issue or sale of the shares of each series and all income, earnings, profits
and proceeds thereof, subject only to the rights of creditors of such series,
are specially allocated to such series and constitute the underlying assets of
such series. The underlying assets of each series are segregated on the books of
account, and are to be charged with the liabilities in respect to such series
and with a share of the general liabilities of the Fund. Under no circumstances
would the assets of a series be used to meet liabilities which are not otherwise
properly chargeable to it. Expenses with respect to any two or more series are
to be allocated in proportion to the asset value of the respective series except
where allocations of direct expenses can otherwise be fairly made. The officers
of the Fund, subject to the general supervision of the Trustees, have the power
to determine which liabilities are allocable to a given series or which are
general or allocable to two or more series. Upon redemption of shares of a
series of the Fund, the 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,
B-46
<PAGE>
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 LLC (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 PIFM. PMFS provides customary transfer
agency services to the Fund, including the handling of shareholder
communications, the processing of shareholder transactions, the maintenance of
shareholder account records, payment of dividends and distributions, and related
functions. For these services, PMFS receives an annual fee of $13.00 per
shareholder account, in addition to a new set-up fee of $2.00 for each manually
established account and a monthly inactive zero balance account fee of $20.00
per shareholder account. PMFS is also reimbursed for its out-of-pocket expenses,
including but not limited to postage, stationery, printing, allocable
communication and other costs. For the fiscal year ended August 31, 1997, the
Fund incurred fees of approximately $192,000 ($57,400 for the California Series,
$89,800 for the California Money Market Series and $44,800 for the California
Income Series) for the services of PMFS.
Price Waterhouse LLP, 1177 Avenue of the Americas, New York, NY 10036,
serves as the Fund's independent accountants and in that capacity audits the
Fund's annual financial statements.
B-47
<PAGE>
DESCRIPTION OF TAX-EXEMPT SECURITY RATINGS
MOODY'S INVESTORS SERVICE
BOND RATINGS
Aaa: Bonds that are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edged." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa: Bonds that are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group, they comprise what are generally known
as high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present that
make the long-term risks appear somewhat larger than in Aaa securities.
A: Bonds that are rated A possess many favorable investment attributes and
are to be considered as upper-medium-grade obligations. Factors giving security
to principal and interest are considered adequate, but elements may be present
that suggest a susceptibility to impairment sometime in the future.
Baa: Bonds that are rated Baa are considered as medium grade obligations,
I.E., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present, but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Bonds rated within the Aa, A and Baa categories which Moody's believes
possess the strongest credit attributes within those categories are designated
by the symbols Aa1, A1 and Baa1.
SHORT-TERM RATINGS
Moody's ratings for tax-exempt notes and other short-term loans are
designated Moody's Investment Grade (MIG). This distinction is in recognition of
the differences between short-term and long-term credit risk.
MIG 1: Loans bearing the designation MIG 1 are of the best quality,
enjoying strong protection by established cash flows, superior liquidity support
or demonstrated broad-based access to the market for refinancing.
MIG 2: Loans bearing the designation MIG 2 are of high quality, with
margins of protection ample although not so large as in the preceding group.
MIG 3: Loans bearing the designation MIG 3 are of favorable quality, with
all security elements accounted for but lacking the strength of the preceding
grades.
MIG 4: Loans bearing the designation MIG 4 are of adequate quality.
Protection commonly regarded as required of an investment security is present
and although not distinctly or predominantly speculative, there is specific
risk.
SHORT-TERM DEBT RATINGS
Moody's Short-Term Debt Ratings are opinions of the ability of issuers to
repay punctually senior debt obligations having an original maturity not
exceeding one year.
Prime-1: Issuers rated Prime-1 (or supporting institutions) have a superior
ability for repayment of senior short-term debt obligations.
Prime-2: Issuers rated Prime-2 (or supporting institutions) have a strong
ability for repayment of senior short-term debt obligations.
B-48
<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 for debt in higher-rated categories.
COMMERCIAL PAPER RATINGS
An S&P Commercial Paper rating is a current assessment of the likelihood of
timely payment of debt considered short-term in the relevant market.
A-1: This highest category indicates that the degree of safety regarding
timely payment is strong. Those issues determined to possess extremely strong
safety characteristics are denoted with a plus sign (+) designation.
A-2: Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated A-1.
MUNICIPAL NOTES
A municipal note rating reflects the liquidity concerns and market access
risks unique to municipal notes. Municipal notes maturing in three years or less
will likely receive a municipal note rating, while notes maturing beyond three
years will most likely receive a long-term debt rating. The designation SP-1
indicates a strong capacity to pay principal and interest. Those issues
determined to possess very strong safety characteristics are given a plus sign
(+) designation. An SP-2 designation indicates a satisfactory capacity to pay
principal and interest, with some vulnerability to adverse financial and
economic changes over the term of the notes.
B-49
<PAGE>
Portfolio of Investments PRUDENTIAL CALIFORNIA MUNICIPAL FUND
as of August 31, 1997 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--99.1%
- ------------------------------------------------------------------------------------------------------------------------------
Arcadia Unified Sch. Dist.,
Gen. Oblig., Ser. A, M.B.I.A. Aaa Zero 9/01/10 $ 1,765 $ 890,496
Gen. Oblig., Ser. A, M.B.I.A. Aaa Zero 9/01/14 1,370 541,821
Gen. Oblig., Ser. A, M.B.I.A. Aaa Zero 9/01/15 2,555 948,467
Gen. Oblig., Ser. A, M.B.I.A. Aaa Zero 9/01/16 1,225 427,231
Gen. Oblig., Ser. A, M.B.I.A. Aaa Zero 9/01/17 1,790 588,319
Bakersfield Pub. Fac. Corp., Cert. of Part., Wtr.
Treat. Plant, No. 3 NR 8.00% 1/01/10 2,750(f) 2,815,368
Baldwin Park Pub. Fin. Auth. Rev., Tax Alloc. BBB(c) 7.05 9/01/14 1,020 1,119,838
Berkeley Hosp. Rev., Alta Bates Hosp. Corp. Aaa 7.65 12/01/15 1,580(f) 1,726,750
Brea Pub. Fin. Auth. Rev., Sub. Tax Alloc. Redev.
Proj., Ser. C NR 8.10 3/01/21 5,000 5,377,600
Buena Park Cmnty. Redev. Agcy., Central Bus. Dist.
Proj. BBB+(c) 7.10 9/01/14 2,500 2,713,350
California St. Brd. of Pub. Wks., Lease Rev., Univ. of
California at Santa Barbara, High Technology Facs.,
Ser. A Aaa 8.125 2/01/08 2,500(f) 2,594,525
California St. Hlth. Facs. Fin. Auth. Rev.,
Episcopal Homes Foundation, Ser. A A+(c) 7.70 7/01/18 2,500 2,619,250
Eskaton Properties NR 7.50 5/01/20 4,500(f)/(d) 4,949,415
Valleycare Hosp. Corp. A+(c) 5.50 5/01/20 2,250 2,209,770
California St. Hsg. Fin. Agcy. Rev., Sngl. Fam. Mtge.,
Ser. A Aa Zero 2/01/15 8,420 1,632,891
Chula Vista Redev. Agcy., Bayfront Tax Alloc. BBB+(c) 7.625 9/01/24 4,500 5,161,320
Contra Costa Cnty., Spec. Tax Cmnty. Facs. Dist.
Pleasant Hill NR 8.125 8/01/16 1,300 1,390,480
Desert Hosp. Dist., Cert. of Part. AAA(c) 8.10 7/01/20 5,000(f)/(d) 5,622,000
East Palo Alto Sanit. Dist., Cert. of Part. NR 8.25 10/01/15 1,295 1,397,512
Fairfield Pub. Fin. Auth. Rev., Fairfield Redev.
Projs., Ser. A NR 7.90 8/01/21 4,200(f) 4,821,138
Fontana Cmnty. Facs., Dist. No. 2, Spec. Tax Rev., Ser.
B NR 8.50 9/01/17 3,000 3,138,870
Foothill/Eastern Trans. Corridor Agcy.,
Toll Rd. Rev., 1995-A Baa Zero 1/01/16 5,000 1,687,950
Toll Rd. Rev. Baa Zero 1/01/18 2,950 882,905
Kings Cnty. Wst. Mgmt. Auth., Solid Wst. Rev., A.M.T. BBB+(c) 7.20 10/01/14 1,225 1,355,622
La Canada Unified Sch. Dist.,
Capital Apprec., F.G.I.C. Aaa Zero 8/01/12 1,600 719,312
Unltd. Tax Gen. Oblig., F.G.I.C. Aaa Zero 8/01/13 1,680 710,338
Long Beach Redev. Agcy. Dist. No. 3, Spec. Tax Rev. NR 6.375 9/01/23 3,000 3,071,250
Los Angeles Cnty., Cert. of Part.,
Civic Ctr. Heating & Refrigeration Plant NR 8.00 6/01/10 2,000(f)/(d) 2,099,740
Correctional Facs. Proj., M.B.I.A. Aaa Zero 9/01/10 3,770 1,923,906
Solheim Lutheran Home Inc. A(c) 8.125 11/01/17 2,000(f) 2,054,280
Los Angeles Cnty., Hsg. Auth., Multi-fam. Mtge. Rev.,
Mayflower Gardens Proj., Ser. K, G.N.M.A. NR 8.875 12/20/10 2,100(f)/(d) 2,449,566
Los Angeles Conv. & Exhib. Ctr. Auth., Cert. of Part. Aaa 9.00 12/01/10 1,250(e)/(f) 1,633,150
Manhattan Beach California Unified Sch. Dist.,
Capital Apprec., Series A, F.G.I.C. Aaa Zero 9/01/12 1,000 447,560
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-50
<PAGE>
Portfolio of Investments PRUDENTIAL CALIFORNIA MUNICIPAL FUND
as of August 31, 1997 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>
- ------------------------------------------------------------------------------------------------------------------------------
Manhattan Beach California Unified Sch. Dist.,
Capital Apprec., Series A, F.G.I.C. Aaa Zero 9/01/13 $ 1,250 $ 526,150
Capital Apprec., Series A, F.G.I.C. Aaa Zero 9/01/14 2,000 790,980
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 1,034,610
Waterworks Rev. Rfdg., Ser. A Aa 5.75 7/01/21 4,000 4,219,360
Midpeninsula Regional Open Space Dist. Fin. Auth. Rev.,
A.M.B.A.C. Aaa Zero 9/01/15 3,000 1,105,890
Mojave Desert Solid Wst. Victor Vally Materials, Recov.
Fac., A.M.T. Baa1 7.875 6/01/20 1,175 1,334,906
Orange Cnty. Loc. Trans. Auth.,
Linked S.A.V.R.S. & R.I.B.S. Aa 6.20 2/14/11 1,500 1,642,095
Linked S.A.V.R.S. & R.I.B.S., A.M.B.A.C. Aaa 6.20 2/14/11 8,000 8,823,200
Petaluma City Joint Union High Sch. Dist.,
Capital Apprec., M.B.I.A. Aaa Zero 8/01/14 1,170 464,829
Capital Apprec., M.B.I.A. Aaa Zero 8/01/15 1,600 596,688
Capital Apprec., M.B.I.A. Aaa Zero 8/01/16 1,455 509,788
Capital Apprec., M.B.I.A. Aaa Zero 8/01/17 3,015 995,553
Redding Elec. Sys. Rev., Cert. of Part., Linked
S.A.V.R.S. & R.I.B.S., M.B.I.A. Aaa 6.368 7/01/22 3,550 3,995,028
Roseville City Sch. Dist., Cap. Apprec. Ser. A,
F.G.I.C. Aaa Zero 8/01/10 1,230 623,303
San Bernardino Cnty.,
Cert. of Part, Med. Ctr. Fin. Proj., M.B.I.A. Aaa 5.50 8/01/22 4,400 4,453,636
Fin. Auth. Ref. Impt., Granada Hills, Ser. A BBB-(c) 6.90 5/01/27 1,715 1,796,051
San Francisco City & Cnty., Redev. Agcy.,
Lease Rev., Cap. Apprec. A2 Zero 7/01/09 2,000 1,070,460
San Jose, Unified Sch. Dist., Santa Clara,
Gen. Oblig., Ser. A, F.G.I.C. Aaa Zero 8/01/17 1,350 445,770
Gen. Oblig., Ser. A, F.G.I.C. Aaa Zero 8/01/21 2,980 773,906
Santa Cruz Cnty. Pub. Fin. Auth. Rev.,
Tax Alloc. Sub. Ln., Ser. B AAA(c) 7.625 9/01/21 2,350(f) 2,569,749
Santa Margarita, Dana Point Auth.,
Impvt. Dists. 3, Ser. B, M.B.I.A. Aaa 7.25 8/01/08 2,500 3,022,925
Impvt. Dists. 3, Ser. A, M.B.I.A. Aaa 7.25 8/01/09 1,400 1,704,290
Impvt. Dists. 3, Ser. B, M.B.I.A. Aaa 7.25 8/01/09 1,000 1,217,350
Impvt. Dists. 3, Ser. B, M.B.I.A. Aaa 7.25 8/01/14 1,000 1,233,940
So. Orange Cnty., Pub. Fin. Auth.,
Foothill Area Proj., F.G.I.C. Aaa 6.50 8/15/10 750 863,332
Spec. Tax Rev., M.B.I.A. Aaa 7.00 9/01/11 3,500(d) 4,214,735
Southern California Pub. Pwr. Auth.,
Proj. Rev. A 6.75 7/01/10 2,265 2,618,363
Proj. Rev. A 6.75 7/01/11 1,195 1,387,634
Proj. Rev. A 6.75 7/01/12 2,935 3,407,799
Proj. Rev. A 6.75 7/01/13 4,000 4,630,120
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-51
<PAGE>
Portfolio of Investments PRUDENTIAL CALIFORNIA MUNICIPAL FUND
as of August 31, 1997 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>
- ------------------------------------------------------------------------------------------------------------------------------
Southern California Pub. Pwr. Auth.,
Proj. Rev., A.M.B.A.C. Aaa Zero 7/01/16 $ 7,925(d) $ 2,825,580
Transmission Proj. Rev. Rfdg., Ser. A, F.G.I.C. Aaa Zero 7/01/12 7,080 3,234,356
Stockton Cmnty. Facs. Dist. No. 90-2, Brookside Estates NR 6.20% 8/01/15 700 699,209
Sulphur Springs Union Sch. Dist., Ser. A, M.B.I.A. Aaa Zero 9/01/09 2,000 1,076,080
Torrance Redev. Agcy., Rfdg. Tax. Alloc., Downtown
Redev. Baa 7.125 9/01/21 1,580 1,707,869
Vacaville Cmnty. Redev. Agcy., Cmnty. Hsg. Fin.
Multi-family A-(c) 7.375 11/01/14 1,110 1,186,457
Victor Valley Union High Sch. Dist.,
Gen. Oblig., M.B.I.A. Aaa Zero 9/01/09 2,075 1,116,433
Gen. Oblig., M.B.I.A. Aaa Zero 9/01/15 5,070 1,882,085
Virgin Islands Terr., Hugo Ins. Claims Fund Proj., Ser.
91 NR 7.75 10/01/06 785 859,292
Walnut Valley Unified Sch. Dist., M.B.I.A. Aaa 6.00 8/01/15 1,870 2,036,075
Whittier Pub. Fin. Auth. Rev., Whittier Blvd. Redev.
Proj., Ser. A NR 7.50 9/01/14 825 855,764
------------
Total long-term investments (cost $137,711,042) 151,273,630
SHORT-TERM INVESTMENTS--0.3%
California Poll. Ctrl. Fin. Auth. Rev.,
Shell Oil Co. Proj., Ser. 94-A, F.R.D.D. P-1 3.45 9/02/97 300 300,000
Ultrapower Rocklin Proj., Ser. 88-A, F.R.D.D. VMIG1 3.55 9/02/97 200 200,000
------------
Total short-term investments (cost $500,000) 500,000
------------
Total Investments--99.4%
(cost $138,211,042; Note 4) 151,773,630
Other assets in excess of liabilities--0.6% 898,666
------------
Net Assets--100% $152,672,296
------------
------------
</TABLE>
- ---------------
(a) The following abbreviations are used in portfolio descriptions:
A.M.B.A.C.--American Municipal Bond Assurance Corporation.
A.M.T.--Alternative Minimum Tax.
F.G.I.C.--Financial Guaranty Insurance Company.
F.R.D.D.--Floating Rate (Daily) Demand Note (b).
G.N.M.A.--Government National Mortgage Association.
M.B.I.A.--Municipal Bond Insurance Association.
R.I.B.S.--Residual Interest Bearing Securities.
S.A.V.R.S.--Select Auction Variable Rate Securities.
(b) For purposes of amortized cost valuation, the maturity date of Floating Rate
Demand Notes is considered to be the later of the next date on which the
security can be redeemed at par, or the next date on which the rate of
interest is adjusted.
(c) Standard & Poor's Rating.
(d) Segregated as collateral for financial futures contracts.
(e) Pledged as initial margin on financial futures contracts.
(f) Prerefunded issues are secured by escrowed cash and/or direct U.S.
guaranteed obligations.
NR--Not Rated by Moody's or Standard & Poor's.
The Fund's current Statement of Additional Information contains a description of
Moody's and Standard & Poor's ratings.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-52
<PAGE>
PRUDENTIAL CALIFORNIA MUNICIPAL FUND
Statement of Assets and Liabilities CALIFORNIA SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Assets August 31, 1997
<S> <C>
Investments, at value (cost $138,211,042).................................................................. $ 151,773,630
Cash....................................................................................................... 35,286
Interest receivable........................................................................................ 1,994,067
Receivable for Series shares sold.......................................................................... 1,299
Other assets............................................................................................... 4,193
---------------
Total assets............................................................................................ 153,808,475
---------------
Liabilities
Payable for investments purchased.......................................................................... 700,000
Dividends payable.......................................................................................... 129,268
Payable for Series shares reacquired....................................................................... 114,138
Accrued expenses........................................................................................... 76,293
Management fee payable..................................................................................... 58,629
Distribution fee payable................................................................................... 37,142
Due to broker-variation margin............................................................................. 14,063
Deferred trustee's fees.................................................................................... 6,646
---------------
Total liabilities....................................................................................... 1,136,179
---------------
Net Assets................................................................................................. $ 152,672,296
---------------
---------------
Net assets were comprised of:
Shares of beneficial interest, at par................................................................... $ 129,378
Paid-in capital in excess of par........................................................................ 141,829,239
---------------
141,958,617
Accumulated net realized loss on investments............................................................ (2,790,784)
Net unrealized appreciation on investments.............................................................. 13,504,463
---------------
Net assets, August 31, 1997................................................................................ $ 152,672,296
---------------
---------------
Class A:
Net asset value and redemption price per share
($81,535,093 / 6,908,507 shares of beneficial interest issued and outstanding)....................... $11.80
Maximum sales charge (3% of offering price)............................................................. .36
---------------
Maximum offering price to public........................................................................ $12.16
---------------
---------------
Class B:
Net asset value, offering price and redemption price per share
($70,092,799 / 5,940,769 shares of beneficial interest issued and outstanding)....................... $11.80
---------------
---------------
Class C:
Net asset value, offer price and redemption price per share
($334,483 / 28,349 shares of beneficial interest issued and outstanding)............................. $11.80
---------------
---------------
Class Z:
Net asset value, offer price and redemption price per share
($709,921 / 60,130 shares of beneficial interest issued and outstanding)............................. $11.81
---------------
---------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-53
<PAGE>
PRUDENTIAL CALIFORNIA MUNICIPAL FUND
CALIFORNIA SERIES
Statement of Operations
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended
Net Investment Income August 31, 1997
<S> <C>
Income
Interest................................. $ 9,755,392
---------------
Expenses
Management fee........................... 775,985
Distribution fee--Class A................ 78,347
Distribution fee--Class B................ 379,673
Distribution fee--Class C................ 3,597
Custodian's fees and expenses............ 85,000
Transfer agent's fees and expenses....... 79,000
Reports to shareholders.................. 60,000
Registration fees........................ 56,000
Legal fees and expenses.................. 14,000
Audit fees............................... 13,000
Trustees' fees and expenses.............. 8,000
Miscellaneous............................ 10,872
---------------
Total expenses........................ 1,563,474
Less: Management fee waiver (Note 2)..... (77,598)
Custodian fee credit.................. (374)
---------------
Net expenses.......................... 1,485,502
---------------
Net investment income....................... 8,269,890
---------------
Realized and Unrealized
Gain (Loss) on Investments
Net realized gain (loss) on:
Investment transactions.................. 1,740,017
Financial futures transactions........... (225,325)
---------------
1,514,692
---------------
Net change in unrealized appreciation (depreciation) on:
Investments.............................. 3,559,791
Financial futures contracts.............. (154,375)
---------------
3,405,416
---------------
Net gain on investments..................... 4,920,108
---------------
Net Increase in Net Assets
Resulting from Operations................... $13,189,998
---------------
---------------
</TABLE>
PRUDENTIAL CALIFORNIA MUNICIPAL FUND
CALIFORNIA SERIES
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
Increase (Decrease) Year Ended August 31,
in Net Assets 1997 1996
<S> <C> <C>
Operations
Net investment income......... $ 8,269,890 $ 8,976,244
Net realized gain on
investment transactions.... 1,514,692 514,615
Net change in unrealized
appreciation (depreciation)
of investments............. 3,405,416 (1,203,327)
--------------- ---------------
Net increase in net assets
resulting from
operations................. 13,189,998 8,287,532
--------------- ---------------
Dividends and distributions (Note
1)
Dividends from net investment
income
Class A.................... (4,328,873) (3,964,257)
Class B.................... (3,893,152) (4,997,891)
Class C.................... (23,434) (14,096)
Class Z.................... (24,431) --
--------------- ---------------
(8,269,890) (8,976,244)
--------------- ---------------
Distributions in excess of net
investment income
Class A.................... (14,903) --
Class B.................... (14,710) --
Class C.................... (110) --
Class Z.................... (68) --
--------------- ---------------
(29,791) --
--------------- ---------------
Series share transactions (net of
share conversions) (Note 5)
Net proceeds from shares
sold....................... 8,712,231 15,413,483
Net asset value of shares
issued in reinvestment of
dividends and
distributions.............. 4,528,865 4,904,100
Cost of shares reacquired..... (24,068,018) (33,442,925)
--------------- ---------------
Net decrease in net assets
from Series share
transactions............... (10,826,922) (13,125,342)
--------------- ---------------
Total decrease................... (5,936,605) (13,814,054)
Net Assets
Beginning of year................ 158,608,901 172,422,955
--------------- ---------------
End of year...................... $ 152,672,296 $ 158,608,901
--------------- ---------------
--------------- ---------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-54
<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 Net Investment Income: Securities transactions are
recorded on the trade date. Realized gains and losses on sales of securities are
calculated on the identified cost basis. Interest income is recorded on the
accrual basis. The Series amortizes premiums and original issue discount paid on
purchases of portfolio securities as adjustments to interest income. Expenses
are recorded on the accrual basis which may require the use of certain estimates
by management.
Net investment income (other than distribution fees) and 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, no federal income tax provision is required.
Dividends and Distributions: The Series declares daily dividends from net
investment income. Payment of dividends is made monthly. Distributions of net
capital gains, if any, are made annually.
Income distributions and capital gain distributions are determined in accordance
with income tax regulations which may differ from generally accepted accounting
principles.
Custody Fee Credits: The Fund has an arrangement with its custodian bank,
whereby uninvested monies earn credits which reduce the fees charged by the
custodian.
- --------------------------------------------------------------------------------
B-55
<PAGE>
PRUDENTIAL CALIFORNIA MUNICIPAL FUND
Notes to Financial Statements CALIFORNIA SERIES
- --------------------------------------------------------------------------------
Reclassification of Capital Accounts: The Fund accounts and reports for
distributions to shareholders in accordance with Statement of Position 93-2:
Determination, Disclosure, and Financial Statement Presentation of Income,
Capital Gain and Return of Capital Distributions by Investment Companies. The
effect of applying this statement was to increase undistributed net investment
income by $29,791, increase accumulated net realized loss by $65,676 and
increase paid-in capital by $35,885, due to the sale of securities purchased
with market discount. Net investment income, net realized gains and net assets
were not affected by this change.
- ------------------------------------------------------------
Note 2. Agreements
The Fund has a management agreement with Prudential Investments Fund Management
LLC ('PIFM'). Pursuant to this agreement, PIFM has responsibility for all
investment advisory services and supervises the subadviser's performance of such
services. PIFM has entered into a subadvisory agreement with The Prudential
Investment Corporation ('PIC'); PIC furnishes investment advisory services in
connection with the management of the Fund. PIFM pays for the cost of the
subadviser's services, compensation of officers of the Fund, occupancy and
certain clerical and bookkeeping costs of the Fund. The Fund bears all other
costs and expenses.
The management fee paid PIFM is computed daily and payable monthly, at an annual
rate of .50 of 1% of the average daily net assets of the Series. Prior to
September 1, 1997, PIFM agreed to waive a portion (.05 of 1% of the Series'
average daily net assets) of its management fee, which amounted to $77,598
($.003 per share) for the year ended August 31, 1997. The Series is not required
to reimburse PIFM for such waiver. Effective September 1, 1997, PIFM eliminated
its management fee waiver.
The Fund has a distribution agreement with Prudential Securities Incorporated
('PSI') which acts as the distributor of the Class A, Class B, Class C and Class
Z shares of the Fund. The Fund compensates PSI for distributing and servicing
the Fund's Class A, Class B and Class C shares, pursuant to plans of
distribution, (the 'Class A, B and C Plans'), regardless of expenses actually
incurred by PSI. The distribution fees are accrued daily and payable monthly. No
distribution or service fees are paid to PSI as distributor of the Class Z
shares of the Fund.
Pursuant to the Class A, B and C Plans, the Fund compensates PSI for
distribution-related activities at an annual rate of up to .30 of 1%, .50 of 1%
and 1% of the average daily net assets of the Class A, B and C shares,
respectively. Such expenses under the Plans were .10 of 1%, .50 of 1% and .75 of
1% of the average daily net assets of the Class A, B and C shares, respectively,
for the year ended August 31, 1997.
PSI has advised the Series that it has received approximately $26,100 in
front-end sales charges resulting from sales of Class A shares during the year
ended August 31, 1997. From these fees, PSI paid such sales charges to
affiliated broker-dealers, which in turn paid commissions to salespersons and
incurred other distribution costs.
PSI has advised the Series that for the year ended August 31, 1997, it received
approximately $126,000 and $1,800 in contingent deferred sales charges imposed
upon certain redemptions by Class B and Class C shareholders, respectively.
PSI, PIFM and PIC are indirect, wholly-owned subsidiaries of The Prudential
Insurance Company of America.
The Series, along with other affiliated registered investment companies (the
'Funds'), entered into a credit agreement (the 'Agreement') on December 31, 1996
with an unaffiliated lender. The maximum commitment under the Agreement is
$200,000,000. The Agreement expires on December 30, 1997. Interest on any such
borrowings outstanding will be at market rates. The purpose of the Agreement is
to serve as an alternative source of funding for capital share redemptions. The
Series has not borrowed any amounts pursuant to the Agreement as of August 31,
1997. The Funds pay a commitment fee at an annual rate of .055 of 1% on the
unused portion of the credit facility. The commitment fee is accrued and paid
quarterly on a pro-rata basis by the Funds.
- ------------------------------------------------------------
Note 3. Other Transactions with Affiliates
Prudential Mutual Fund Services LLC ('PMFS'), a wholly-owned subsidiary of PIFM,
serves as the Fund's transfer agent. During the year ended August 31, 1997, the
Series incurred fees of approximately $57,400 for the services of PMFS. As of
August 31, 1997, approximately $4,300 of such fees were due to PMFS. Transfer
agent fees and expenses in the Statement of Operations include certain
out-of-pocket expenses paid to non-affiliates.
- ------------------------------------------------------------
Note 4. Portfolio Securities
Purchases and sales of portfolio securities of the Series, excluding short-term
investments, for the year ended August 31, 1997 were $21,631,345 and
$30,486,297, respectively.
At August 31, 1997, the Series sold 30 financial futures contracts on U.S.
Treasury Bonds which expire in December 1997. The value at disposition of such
contracts was $3,354,375. The value of such contracts on August 31, 1997 was
$3,412,500, thereby resulting in an unrealized loss of $58,125.
- --------------------------------------------------------------------------------
B-56
<PAGE>
PRUDENTIAL CALIFORNIA MUNICIPAL FUND
Notes to Financial Statements CALIFORNIA SERIES
- --------------------------------------------------------------------------------
The cost basis of investments for federal income tax purposes at August 31, 1997
was substantially the same as for financial reporting purposes and, accordingly,
net unrealized appreciation of investments for federal income tax purposes was
$13,562,588 (gross unrealized appreciation--$13,757,169; gross unrealized
depreciation--$194,581).
For federal income tax purposes, the Series has a capital loss carryforward as
of August 31, 1997 of approximately $2,945,800 which expires in 2003. Such
carryforward is after utilization of approximately $1,245,700 of net taxable
gains realized and recognized during the year ended August 31, 1997.
Accordingly, no capital gains distribution is expected to be paid to
shareholders until net gains have been realized in excess of such carryforward.
- ------------------------------------------------------------
Note 5. Capital
The Series offers Class A, Class B, Class C and Class Z shares. Class A shares
are sold with a front-end sales charge of up to 3%. Class B shares are sold with
a contingent deferred sales charge which declines from 5% to zero depending on
the period of time the shares are held. Class C shares are sold with a
contingent deferred sales charge of 1% during the first year. Class B shares
will automatically convert to Class A shares on a quarterly basis approximately
seven years after purchase. A special exchange privilege is also available for
shareholders who qualify to purchase Class A shares at net asset value.
Effective September 18, 1996 the Fund commenced offering Class Z shares. Class Z
shares are not subject to any sales or redemption charge and are offered
exclusively for sale to a limited group of investors.
The Fund has authorized an unlimited number of shares of beneficial interest for
each class at $.01 par value per share.
Transactions in shares of beneficial interest for the fiscal years ended August
31, 1997 and August 31, 1996 were as follows:
<TABLE>
<CAPTION>
Class A Shares Amount
- ------------------------------------ ---------- ------------
<S> <C> <C>
Year ended August 31, 1997:
Shares sold......................... 217,828 $ 2,553,793
Shares issued in reinvestment of
dividends and distributions....... 205,336 2,392,394
Shares reacquired................... (867,579) (10,113,668)
---------- ------------
Net decrease in shares outstanding
before conversion................. (444,415) (5,167,481)
Shares issued upon conversion from
Class B........................... 980,623 11,397,357
---------- ------------
Net increase in shares
outstanding....................... 536,208 $ 6,229,876
---------- ------------
---------- ------------
<CAPTION>
Class A Shares Amount
- ------------------------------------ ---------- ------------
<S> <C> <C>
Year ended August 31, 1996:
Shares sold......................... 619,476 $ 7,175,954
Shares issued in reinvestment of
dividends......................... 187,402 2,174,280
Shares reacquired................... (1,344,223) (15,617,393)
---------- ------------
Net decrease in shares outstanding
before conversion................. (537,345) (6,267,159)
Shares issued upon conversion from
Class B........................... 958,791 11,102,285
---------- ------------
Net increase in shares
outstanding....................... 421,446 $ 4,835,126
---------- ------------
---------- ------------
<CAPTION>
Class B
- ------------------------------------
Year ended August 31, 1997:
Shares sold......................... 458,940 $ 5,365,324
Shares issued in reinvestment of
dividends and distributions....... 179,511 2,089,875
Shares reacquired................... (1,168,280) (13,597,983)
---------- ------------
Net decrease in shares outstanding
before conversion................. (529,829) (6,142,784)
Shares reacquired upon conversion
into Class A...................... (980,623) (11,397,357)
---------- ------------
Net decrease in shares
outstanding....................... (1,510,452) $(17,540,141)
---------- ------------
---------- ------------
Year ended August 31, 1996:
Shares sold......................... 667,065 $ 7,754,964
Shares issued in reinvestment of
dividends......................... 234,072 2,717,458
Shares reacquired................... (1,531,579) (17,745,722)
---------- ------------
Net decrease in shares outstanding
before conversion................. (630,442) (7,273,300)
Shares reacquired upon conversion
into Class A...................... (958,791) (11,102,285)
---------- ------------
Net decrease in shares
outstanding....................... (1,589,233) $(18,375,585)
---------- ------------
---------- ------------
</TABLE>
- --------------------------------------------------------------------------------
B-57
<PAGE>
PRUDENTIAL CALIFORNIA MUNICIPAL FUND
Notes to Financial Statements CALIFORNIA SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class C Shares Amount
- ------------------------------------ ---------- ------------
<S> <C> <C>
Year ended August 31, 1997:
Shares sold......................... 7,546 $ 88,551
Shares issued in reinvestment of
dividends and distributions....... 1,947 22,646
Shares reacquired................... (28,622) (334,140)
---------- ------------
Net decrease in shares
outstanding....................... (19,129) $ (222,943)
---------- ------------
---------- ------------
Year ended August 31, 1996:
Shares sold......................... 42,108 $ 482,565
Shares issued in reinvestment of
dividends......................... 1,070 12,362
Shares reacquired................... (6,937) (79,810)
---------- ------------
Net increase in shares
outstanding....................... 36,241 $ 415,117
---------- ------------
---------- ------------
<CAPTION>
Class Z
- ------------------------------------
September 18, 1996(a) through August
31, 1997:
Shares sold......................... 60,003 $ 704,563
Shares issued in reinvestment of
dividends and distributions....... 2,051 23,950
Shares reacquired................... (1,924) (22,227)
---------- ------------
Net increase in shares
outstanding....................... 60,130 $ 706,286
---------- ------------
---------- ------------
</TABLE>
- ---------------
(a) Commencement of offering of Class Z shares.
- --------------------------------------------------------------------------------
B-58
<PAGE>
PRUDENTIAL CALIFORNIA MUNICIPAL FUND
Financial Highlights CALIFORNIA SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A
-------------------------------------------------------
Year Ended August 31,
-------------------------------------------------------
1997 1996 1995 1994 1993
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year.................. $ 11.44 $ 11.49 $ 11.30 $ 12.16 $ 11.48
------- ------- ------- ------- -------
Income from investment operations
Net investment income............................... .65(a) .65(a) .66(a) .65 .69
Net realized and unrealized gain (loss) on
investment transactions.......................... .36 (.05) .19 (.74) .68
------- ------- ------- ------- -------
Total from investment operations................. 1.01 .60 .85 (.09) 1.37
------- ------- ------- ------- -------
Less distributions
Dividends from net investment income................ (.65) (.65) (.66) (.65) (.69)
Distributions in excess of net investment income.... --(c) -- -- -- --
Distributions from net realized gains............... -- -- -- (.12) --
------- ------- ------- ------- -------
Total distributions.............................. (.65) (.65) (.66) (.77) (.69)
------- ------- ------- ------- -------
Net asset value, end of year........................ $ 11.80 $ 11.44 $ 11.49 $ 11.30 $ 12.16
------- ------- ------- ------- -------
------- ------- ------- ------- -------
TOTAL RETURN(b):.................................... 9.01% 5.23% 7.90% (0.80)% 12.30%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)....................... $81,535 $72,876 $68,403 $12,082 $11,116
Average net assets (000)............................ $78,347 $71,119 $42,617 $11,812 $ 7,728
Ratios to average net assets:
Expenses, including distribution fees............ .76%(a) .81%(a) .73%(a) .73% .77%
Expenses, excluding distribution fees............ .66%(a) .71%(a) .63%(a) .63% .67%
Net investment income............................ 5.53%(a) 5.58%(a) 5.90%(a) 5.57% 5.82%
For Class A, B, C and Z shares:
Portfolio turnover rate.......................... 14% 26% 44% 69% 43%
</TABLE>
- ---------------
(a) Net of management fee waiver.
(b) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each year reported and includes reinvestment of dividends and
distributions.
(c) Less than $.005 per share.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-59
<PAGE>
PRUDENTIAL CALIFORNIA MUNICIPAL FUND
Financial Highlights CALIFORNIA SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class B
----------------------------------------------------------
Year Ended August 31,
----------------------------------------------------------
1997 1996 1995 1994 1993
------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year.................. $ 11.43 $ 11.49 $ 11.29 $ 12.15 $ 11.48
------- ------- -------- -------- --------
Income from investment operations
Net investment income............................... .60(a) .60(a) .62(a) .60 .64
Net realized and unrealized gain (loss) on
investment transactions.......................... .37 (.06) .20 (.74) .67
------- ------- -------- -------- --------
Total from investment operations................. .97 .54 .82 (.14) 1.31
------- ------- -------- -------- --------
Less distributions
Dividends from net investment income................ (.60) (.60) (.62) (.60) (.64)
Distributions in excess of net investment income.... --(c) -- -- -- --
Distributions from net realized gains............... -- -- -- (.12) --
------- ------- -------- -------- --------
Total distributions.............................. (.60) (.60) (.62) (.72) (.64)
------- ------- -------- -------- --------
Net asset value, end of year........................ $ 11.80 $ 11.43 $ 11.49 $ 11.29 $ 12.15
------- ------- -------- -------- --------
------- ------- -------- -------- --------
TOTAL RETURN(b):.................................... 8.67% 4.73% 7.56% (1.20)% 11.74%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)....................... $70,093 $85,190 $103,891 $184,985 $207,634
Average net assets (000)............................ $75,935 $96,525 $136,275 $201,558 $190,944
Ratios to average net assets:
Expenses, including distribution fees............ 1.16%(a) 1.21%(a) 1.13%(a) 1.13% 1.17%
Expenses, excluding distribution fees............ .66%(a) .71%(a) .63%(a) .63% .67%
Net investment income............................ 5.13%(a) 5.18%(a) 5.50%(a) 5.17% 5.44%
</TABLE>
- ---------------
(a) Net of management fee waiver.
(b) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each year reported and includes reinvestment of dividends and
distributions.
(c) Less than $.005 per share.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-60
<PAGE>
PRUDENTIAL CALIFORNIA MUNICIPAL FUND
Financial Highlights CALIFORNIA SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class C Class Z
------------------------------------------- -------------
August 1, September 18,
1994(d) 1996(f)
Year Ended August 31, through through
---------------------------- August 31, August 31,
1997 1996 1995 1994 1997
------ ------ ------ ---------- -------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period................ $11.43 $11.49 $11.29 $11.32 $ 11.50
------ ------ ------ ----- -----
Income from investment operations
Net investment income............................... .57(a) .57(a) .59(a) .04 .64(a)
Net realized and unrealized gain (loss) on
investment transactions.......................... .37 (.06) .20 (.03) .31
------ ------ ------ ----- -----
Total from investment operations................. .94 .51 .79 .01 .95
------ ------ ------ ----- -----
Less distributions
Dividends from net investment income................ (.57) (.57) (.59) (.04) (.64)
Distributions in excess of net investment income.... --(c) -- -- -- --(c)
------ ------ ------ ----- -----
Total distributions.............................. (.57) (.57) (.59) (.04) (.64)
------ ------ ------ ----- -----
Net asset value, end of period...................... $11.80 $11.43 $11.49 $11.29 $ 11.81
------ ------ ------ ----- -----
------ ------ ------ ----- -----
TOTAL RETURN(b):.................................... 8.40% 4.47% 7.29% .05% 8.35%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)..................... $ 334 $ 543 $ 129 $ 200(e) $ 710
Average net assets (000)............................ $ 480 $ 286 $ 76 $ 199(e) $ 458
Ratios to average net assets:
Expenses, including distribution fees............ 1.41%(a) 1.46%(a) 1.38%(a) 1.71%(g) .66%(a)/(g)
Expenses, excluding distribution fees............ .66%(a) .71%(a) .63%(a) .96%(g) .66%(a)/(g)
Net investment income............................ 4.88%(a) 4.93%(a) 5.25%(a) 4.87%(g) 5.35%(a)/(g)
</TABLE>
- ---------------
(a) Net of management fee waiver.
(b) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each period reported and includes reinvestment of dividends and
distributions. Total returns for periods of less than a full year are not
annualized.
(c) Less than $.005 per share.
(d) Commencement of offering of Class C shares.
(e) Figures are actual and not rounded to the nearest thousand.
(f) Commencement of offering of Class Z shares.
(g) Annualized.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-61
<PAGE>
PRUDENTIAL CALIFORNIA MUNICIPAL FUND
Report of Independent Accountants CALIFORNIA SERIES
- --------------------------------------------------------------------------------
To the Shareholders and Board of Trustees of
Prudential California Municipal Fund, California Series
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Prudential California Municipal
Fund, California Series (the 'Fund', one of the portfolios constituting
Prudential California Municipal Fund) at August 31, 1997, and the results of its
operations, the changes in its net assets and the financial highlights for the
year then ended, in conformity with generally accepted accounting principles.
These financial statements and financial highlights (hereafter referred to as
'financial statements') are the responsibility of the Fund's management; our
responsibility is to express an opinion on these financial statements based on
our audit. We conducted our audit of these financial statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audit, which included confirmation of securities at August
31, 1997 by correspondence with the custodian and broker and the application of
alternative auditing procedures where securities purchased had not been
received, provides a reasonable basis for the opinion expressed above. The
accompanying statement of changes in net assets for the year ended August 31,
1996, and the financial highlights for each of the four periods in the period
ended August 31, 1996 were audited by other independent accountants, whose
opinion dated October 14, 1996 was unqualified.
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York
October 20, 1997
- --------------------------------------------------------------------------------
B-62
<PAGE>
PRUDENTIAL CALIFORNIA MUNICIPAL FUND
Change of Auditors CALIFORNIA SERIES
- --------------------------------------------------------------------------------
Effective March 1, 1997, Deloitte & Touche LLP was terminated as the Fund's
auditors. For the years ended August 31, 1993, through August 31, 1996, Deloitte
& Touche LLP expressed an unqualified opinion on the Series' financial
statements. There were no disagreements between Fund management and Deloitte &
Touche LLP prior to their termination. The Board of Trustees approved the
termination of Deloitte & Touche LLP and the appointment of Price Waterhouse LLP
as the Fund's independent accountants.
- --------------------------------------------------------------------------------
B-63
<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, 1996, the related statements of operations
for the year then ended and of changes in net assets for each of the two years
in the period then ended, and the financial highlights for each of the five
years in the period then ended. These financial statements and financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of the securities owned as of
August 31, 1996 by correspondence with the custodian and broker. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Prudential
California Municipal Fund, California Series, as of August 31, 1996, the results
of its operations, the changes in its net assets, and its financial highlights
for the respective stated periods, in conformity with generally accepted
accounting principles.
DELOITTE & TOUCHE LLP
New York, New York
October 14, 1996
- --------------------------------------------------------------------------------
B-64
<PAGE>
Portfolio of Investments PRUDENTIAL CALIFORNIA MUNICIPAL FUND
as of August 31, 1997 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--99.6%
- ------------------------------------------------------------------------------------------------------------------------------
Arcadia Unified Sch. Dist.,
Gen. Oblig., Ser. A, M.B.I.A. Aaa Zero 9/01/09 $ 1,200 $ 645,648
Gen. Oblig., Ser. A, M.B.I.A. Aaa Zero 9/01/11 1,875 891,431
Gen. Oblig., Ser. A, M.B.I.A. A Zero 9/01/12 2,045 915,260
Assoc. of Bay Area Govt's. Fin. Auth., Cert. of Part.,
Channing House, Ser. A AAA+(c) 7.125% 1/01/21 1,500(g) 1,618,830
Brea Pub. Fin. Auth. Rev., Tax Alloc. Redev. Proj., Ser. C NR 8.10 3/01/21 3,000 3,226,560
Buena Park Cmnty. Redev. Agcy. Cent. Bus. Dist. Proj. NR 7.80 9/01/14 3,325 3,584,150
California Hsg. Fin. Agcy. Single Fam. Mort., Ser. A,
A.M.T. Aaa 6.00 8/01/20 6,000 6,124,020
California St. Dept. Wtr. Res. Rev., Central Valley Proj.,
Ser. J AA 7.00 12/01/12 1,000 1,206,790
California St. Edl. Facs. Auth. Rev., Chapman College Baa1 7.50 1/01/18 600(f) 671,880
California St. Gen. Oblig., A.M.B.A.C. Aaa 6.50 9/01/10 1,250 1,441,988
California St. Hlth. Facs. Fin. Auth. Rev., Valleycare
Hosp. Corp. A+(c) 5.50 5/01/20 1,500 1,473,180
California Statewide Cmnty. Cap. Apprec., Facs. No. 97-1 NR Zero 9/01/22 4,440 790,853
California Statewide Cmnty. Dev. Rev., Cert. of Part.,
Villaview Cmnty. Hosp. A+(c) 7.00 9/01/09 905(g) 989,654
Carson City Ltd. Oblig. Impvt. Rev., Assmt. Dist. NR 7.375 9/02/22 2,380 2,578,254
Chula Vista Cmnty. Redev. Agcy.,
Ref. Tax Alloc. Sr. Bayfront, Ser. A BBB+(c) 7.625 9/01/24 2,500 2,867,400
Ref. Tax Alloc. Sub. Bayfront, Ser. C NR 8.25 5/01/24 2,500 2,848,375
Contra Costa Cnty., Spec. Tax Cmnty. Facs. Dist. No. 91-1 NR 8.125 8/01/16 1,520 1,625,792
Corona Cert. of Part., Vista Hosp. Sys. Inc., Ser. C NR 8.375 7/01/11 2,000 2,159,560
Davis Pub. Facs. Fin. Auth., Mace Ranch, Ser. A NR 6.60 9/01/25 2,000 1,992,400
Delano Cert. of Part., Regl. Med. Ctr., Ser. 92A NR 9.25 1/01/22 2,890 3,373,324
Desert Hosp. Dist., Cert. of Part. AAA(c) 8.10 7/01/20 2,000(f)(g) 2,248,800
East Palo Alto San. Dist., Cert. of Part. NR 8.25 10/01/15 500 539,580
El Dorado Cnty., Spec. Tax, Cmnty. Facs. Dist. No. 92-1 NR 8.25 9/01/24 1,990 2,259,545
Fairfield Pub. Fin. Auth. Rev., Fairfield Redev. Proj.,
Ser. A NR 7.90 8/01/21 2,500(f) 2,869,725
Folsom Spec. Tax Dist. No. 2 NR 7.70 12/01/19 3,130 3,290,319
Fontana Pub. Fin. Auth., N. Fontana Tax Alloc. Rev. NR 7.65 12/01/09 1,575(f) 1,808,320
Fontana Spec. Tax. Cmnty. Facs. Dist. No. 2, Ser. B NR 8.50 9/01/17 3,595 3,761,413
Foothill/Eastern Trans. Corr. Agcy., Toll Rd., Ser. A Baa Zero 1/01/20 10,000 2,652,400
Gateway Impv. Auth. Rev., Marin City Cmnty. Facs. Dist.-A NR 7.75 9/01/25 2,100 2,330,139
Kings Cnty. Wst. Mgmt. Auth., Solid Wst. Rev., A.M.T. BBB+(c) 7.20 10/01/14 1,275 1,410,953
La Quinta Redev. Agcy.,
Tax Alloc., M.B.I.A. Aaa 7.30 9/01/10 1,000 1,223,390
Tax Alloc., M.B.I.A. Aaa 7.30 9/01/11 1,000 1,229,650
Long Beach Redev. Agcy. Hsg.,
Multi-family Hsg. Rev., Pacific Court Apts. NR 6.80 9/01/13 1,000(d) 650,000
Multi-family Hsg. Rev., Pacific Court Apts. NR 6.95 9/01/23 1,500(d) 975,000
Los Angeles Cmnty. Facs. Dist., No. 5, Spec. Tax NR 7.25 9/01/19 1,500 1,625,790
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-65
<PAGE>
Portfolio of Investments PRUDENTIAL CALIFORNIA MUNICIPAL FUND
as of August 31, 1997 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>
- ------------------------------------------------------------------------------------------------------------------------------
Los Angeles Dept. of Wtr. & Pwr., Waterworks Rev. Aa 4.50% 5/15/23 $ 1,900 $ 1,637,686
Lynwood Pub. Fin. Auth. Rev., Wtr. Sys. Impvt. Proj. BBB-(c) 6.50 6/04/21 1,500 1,577,220
Met. Wtr. Dist. of Southern California, Waterworks Rev.,
Linked S.A.V.R.S. & R.I.B.S. Aa 5.75 8/14/18 1,000 1,034,610
Mojave Desert & Mtn. Solid Waste Joint Pwrs. Auth. Proj.
Rev., A.M.T. Baa1 7.875 6/01/20 1,175 1,334,906
Ontario California Impvt. Bond Act of 1915, Assmt. Dist.
100C - Com. CTR. III NR 8.00 9/02/11 1,380 1,436,621
Orange Cnty. Cmnty. Facs. Dist., Spec. Tax Rev.,
No. 87-4, Foothill Ranch, Ser. A NR 7.375 8/15/18 3,500(f) 4,043,060
No. 87-5B, Rancho Santa Margarita NR 7.50 8/15/17 1,750(f) 2,022,685
No. 88-1, Aliso Viejo, Ser. A AAA(c) 7.15 8/15/06 805(f) 921,878
Orange Cnty. Loc. Trans. Auth.,
Sales Tax Rev., Linked S.A.V.R.S. & R.I.B.S. Aa 6.20 2/14/11 1,500(g) 1,642,095
Sales Tax Rev., Linked S.A.V.R.S. & R.I.B.S.,
A.M.B.A.C. Aaa 6.20 2/14/11 10,000(g) 11,029,000
Perris Sch. Dist., Cert. of Part., Cap. Proj. NR 7.75 3/01/21 1,500(f) 1,696,575
Placentia Pub. Fin. Auth., Tax Rev., Ser. B NR 6.60 9/01/15 1,500 1,530,450
Puerto Rico Hwy. & Trans. Auth. Rev., Ser. Q AAA(c) 7.75 7/01/10 2,100(e)(f) 2,341,311
Puerto Rico Pub. Bldgs. Auth., Gtd. Pub. Ed. & Hlth.
Facs., Ser. J Baa1 Zero 7/01/06 1,605 1,065,415
Redding Elec. Sys. Rev., Cert. of Part., Linked S.A.V.R.S.
& R.I.B.S., M.B.I.A. Aaa 6.368 7/01/22 3,750(g) 4,220,100
Richmond Redev. Agcy. Rev., Multi-family Bridge Affordable
Hsg. NR 7.50 9/01/23 2,500 2,455,150
Rio Vista Impvt. Bond Act of 1915, Assmt. Dist. No. 96-1 NR 7.50 9/02/22 2,000 2,052,120
Riverside Cnty. Cert. of Part., Air Force Vlg. West NR 8.125 6/15/20 3,000 3,241,890
Riverside Cnty. Impvt. Bond Act of 1915, Assmt. Dist. 159,
Ser. A NR 7.625 9/02/14 2,500 2,590,750
Rocklin Stanford Ranch Cmnty. No.3, Facs. Dist., Spec. Tax NR 8.10 11/01/15 1,000(f) 1,132,690
Rocklin Unified Sch. Dist., Gen. Oblig.,
Cap. Apprec., Ser. C, M.B.I.A. Aaa Zero 8/01/12 1,110 499,023
Cap. Apprec., Ser. C, M.B.I.A. Aaa Zero 8/01/13 1,165 492,585
Cap. Apprec., Ser. C, M.B.I.A. Aaa Zero 8/01/14 1,220 484,694
Cap. Apprec., Ser. C, M.B.I.A. Aaa Zero 8/01/15 1,285 479,215
Cap. Apprec., Ser. C, M.B.I.A. Aaa Zero 8/01/16 1,400 490,518
Roseville Jt. Union H.S. Dist., Ser. B, F.G.I.C. Aaa Zero 6/01/20 9,000 2,510,550
Sacramento Impvt. Bond Act of 1915, Willowcreek II Assmt.
Dist. No. 96-1 NR 6.70 9/02/22 2,500 2,503,000
Sacramento City. Fin. Auth.,
Cap. Apprec., Tax Alloc. Comb. Proj., Ser. B, M.B.I.A. Aaa Zero 11/01/16 5,700 1,969,635
Cap. Apprec., Tax Alloc. Comb. Proj., Ser. B, M.B.I.A. Aaa Zero 11/01/17 5,695 1,854,520
Sacramento Cnty. Spec. Tax Rev.,
Dist. No. 1, Elliot Ranch NR 8.20 8/01/21 2,000(f) 2,116,920
Dist. No. 1, Laguna Creek Ranch NR 8.25 12/01/20 1,000 1,078,610
Sacramento Spec. Purpose Fac., Y.M.C.A. of Sacramento NR 7.25 12/01/18 2,200 2,344,650
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-66
<PAGE>
Portfolio of Investments PRUDENTIAL CALIFORNIA MUNICIPAL FUND
as of August 31, 1997 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>
- ------------------------------------------------------------------------------------------------------------------------------
San Bernardino Cnty.,
Cert. of Part, Med. Ctr. Fin. Proj., M.B.I.A. Aaa 5.50% 8/01/22 $ 4,540 $ 4,595,343
Fin. Auth. Ref. Impt., Granada Hills, BBB-(c) 6.90 5/01/27 2,285 2,392,989
San Diego Spec. Tax, Cmnty. Facs. Dist. No. 1, Ser. B NR 7.10 9/01/20 2,000 2,141,940
San Francisco City & Cnty.,
Redev. Agcy., Lease Rev. A2 Zero 7/01/06 1,500 968,595
Redev. Agcy., Lease Rev. A2 Zero 7/01/07 2,250 1,376,122
San Joaquin Hills Trans. Corridor Agcy.,
Toll Road Rev. NR Zero 1/01/11 2,000 842,220
Toll Road Rev. NR Zero 1/01/22 15,000 3,558,000
San Jose Redev. Proj., M.B.I.A. Aaa 6.00 8/01/15 3,000 3,273,780
San Jose Unif. Sch. Dist., Santa Clara
Gen. Oblig., Ser. A., F.G.I.C. Aaa Zero 8/01/16 2,630 921,473
Gen. Oblig., Ser. A., F.G.I.C. Aaa Zero 8/01/18 2,765 863,593
Gen. Oblig., Ser. A., F.G.I.C. Aaa Zero 8/01/19 2,835 832,214
San Luis Obispo Certs. of Part., Vista Hosp. Sys., Inc NR 8.375 7/01/29 1,000 1,014,810
Santa Margarita, Dana Point Auth.,
Impvt. Dists. Ser. A, M.B.I.A. Aaa 7.25 8/01/09 905 1,101,702
Impvt. Dists. Ser. B, M.B.I.A. Aaa 7.25 8/01/14 1,000 1,233,940
South Orange Cnty., Pub. Fin. Auth.,
Foothill Area Proj., Ser. C, F.G.I.C. Aaa 6.50 8/15/10 750 863,333
Spec. Tax Rev., M.B.I.A. Aaa 7.00 9/01/10 2,535 3,039,845
South San Francisco Redev. Agcy., Tax Alloc., Gateway
Redev. Proj. NR 7.60 9/01/18 2,375 2,566,116
South Tahoe Joint Pwrs. Fin., Ser. A, B.A.N. NR 8.00 10/01/01 2,500 2,558,950
Southern California Pub. Pwr. Auth.,
Proj. Rev. A 6.75 7/01/10 6,250 7,225,062
Proj. Rev. A 6.75 7/01/13 3,000 3,472,590
Proj. Rev., A.M.B.A.C. Aaa Zero 7/01/16 8,400 2,994,936
Stockton Cmnty. Facs. Dist. No. 90-2, Brookside Estates NR 6.20 8/01/15 1,050 1,048,814
Sulphur Springs Unified Sch. Dist., Ser. A, M.B.I.A. Aaa Zero 9/01/11 3,000 1,426,290
Temecula Valley Unified Sch. Dist., Cmnty. Facs., Spec.
Tax Dist. No. 89-1 NR 8.60 9/01/17 2,600 2,756,754
Torrance Redev. Agcy.,
Tax Alloc. Downtown Redev. Baa 7.125 9/01/22 2,105 2,269,821
Tax Alloc. Ind. Redev. Proj. NR 7.75 9/01/13 2,500 2,626,400
Vacaville Cmnty. Redev. Agcy., Multi-family Hsg. Rev. A-(c) 7.375 11/01/14 1,110 1,186,457
Victor Valley,
Union H.S. Dist., M.B.I.A Aaa Zero 9/01/17 4,500 1,479,015
Union H.S. Dist., M.B.I.A. Aaa Zero 9/01/19 5,450 1,592,436
Union H.S. Dist., M.B.I.A. Aaa Zero 9/01/20 5,850 1,609,159
Virgin Islands Pub. Fin. Auth. Rev., Hwy. Trans. Trust
Fund BBB(c) 7.70 10/01/04 1,000 1,066,780
Virgin Islands Territory, Hugo Ins. Claims Fund Proj.,
Ser. 91 NR 7.75 10/01/06 1,015 1,111,060
West Contra Costa Unified Sch. Dist., Cert. of Part. Baa3 6.875 1/01/09 1,140 1,239,191
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-67
<PAGE>
Portfolio of Investments PRUDENTIAL CALIFORNIA MUNICIPAL FUND
as of August 31, 1997 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 Sacramento Impvt. Bond Act of 1915, Lighthouse Marina
Assmt. Dist. 90-1 NR 8.50% 9/02/17 $ 2,475 $ 2,580,732
Westminster Redev. Agcy., Tax Allocation Rev., Orange
County, Proj. No. 1, Ser. A Baa 7.30 8/01/21 3,000 3,260,910
------------
Total long-term investments (cost $191,438,377) 208,821,877
------------
SHORT-TERM INVESTMENTS--0.1%
California Poll. Ctrl. Fin. Auth. Ref., Pacific Gas &
Elec. Co., Ser. 96, F.R.D.D. A1+(c) 3.45 9/02/97 100 100,000
California Poll. Ctrl. Fin. Auth. Rev., Shell Oil Co.
Proj., Ser. 94, F.R.D.D. VMIG1 3.45 9/02/97 200 200,000
------------
Total short-term investments (cost $300,000) 300,000
------------
Total Investments--99.7%
(cost $191,738,377; Note 4) 209,121,877
Other assets in excess of liabilities--0.3% 571,903
------------
Net Assets--100% $209,693,780
------------
------------
</TABLE>
- ---------------
(a) The following abbreviations are used in portfolio descriptions:
A.M.B.A.C.--American Municipal Bond Assurance Corporation.
A.M.T.--Alternative Minimum Tax.
B.A.N.--Bond Anticipation Note.
F.G.I.C.--Financial Guaranty Insurance Company.
F.R.D.D.--Floating Rate (Daily) Demand Notes (b).
M.B.I.A.--Municipal Bond Insurance Association.
R.I.B.S.--Residual Interest Bonds.
S.A.V.R.S.--Select Auction Variable Rate Securities.
Y.M.C.A.--Young Mens Christian Association.
(b) For purposes of amortized cost valuation, the maturity date of Floating Rate
Demand Notes is considered to be the later of the next date on which the
security can be redeemed at par, or the next date on which the rate of
interest is adjusted.
(c) Standard & Poor's Rating.
(d) Issuer in default of interest payment.
(e) Pledged as initial margin on financial futures contracts.
(f) Prerefunded issues are secured by escrowed cash and/or direct U.S.
guaranteed obligations.
(g) All or a portion of these securities are segregated as collateral for
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-68
<PAGE>
PRUDENTIAL CALIFORNIA MUNICIPAL FUND
Statement of Assets and Liabilities CALIFORNIA INCOME SERIES
- --------------------------------------------------------------------------------
<TABLE>
Assets August 31, 1997
<S> <C>
Investments, at value (cost $191,738,377)................................................................. $ 209,121,877
Cash...................................................................................................... 31,410
Interest receivable....................................................................................... 3,184,552
Receivable for Series shares sold......................................................................... 726,380
Receivable for investments sold........................................................................... 110,750
Due from broker - variation margin........................................................................ 21,250
Other assets.............................................................................................. 5,276
---------------
Total assets........................................................................................... 213,201,495
---------------
Liabilities
Payable for investments purchased......................................................................... 3,051,100
Dividends payable......................................................................................... 173,509
Accrued expenses.......................................................................................... 121,094
Management fee payable.................................................................................... 79,725
Payable for Series shares reacquired...................................................................... 40,275
Distribution fee payable.................................................................................. 35,366
Deferred trustee's fees................................................................................... 6,646
---------------
Total liabilities...................................................................................... 3,507,715
---------------
Net Assets................................................................................................ $ 209,693,780
---------------
---------------
Net assets were comprised of:
Shares of beneficial interest, at par.................................................................. $ 195,713
Paid-in capital in excess of par....................................................................... 195,003,833
---------------
195,199,546
Accumulated net realized loss on investments........................................................... (2,851,766)
Net unrealized appreciation on investments............................................................. 17,346,000
---------------
Net assets, August 31, 1997............................................................................... $ 209,693,780
---------------
---------------
Class A:
Net asset value and redemption price per share
($156,683,627 / 14,623,882 shares of beneficial interest issued and outstanding).................... $10.71
Maximum sales charge (3% of offering price)............................................................ .33
---------------
Maximum offering price to public....................................................................... $11.04
---------------
---------------
Class B:
Net asset value, offering price and redemption price per share
($47,435,915 / 4,427,143 shares of beneficial interest issued and outstanding)...................... $10.71
---------------
---------------
Class C:
Net asset value, offering price and redemption price per share
($3,610,874 / 336,995 shares of beneficial interest issued and outstanding)......................... $10.71
---------------
---------------
Class Z:
Net asset value, offering price and redemption price per share
($1,963,364 / 183,319 shares of beneficial interest issued and outstanding)......................... $10.71
---------------
---------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-69
<PAGE>
PRUDENTIAL CALIFORNIA MUNICIPAL FUND
CALIFORNIA INCOME SERIES
Statement of Operations
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended
Net Investment Income August 31, 1997
<S> <C>
Income
Interest and discount earned............... $12,659,765
---------------
Expenses
Management fee............................. 990,302
Distribution fee--Class A.................. 153,019
Distribution fee--Class B.................. 204,917
Distribution fee--Class C.................. 23,514
Custodian's fees and expenses.............. 105,000
Reports to shareholders.................... 92,000
Registration fees.......................... 58,000
Transfer agent's fees and expenses......... 57,000
Legal fees and expenses.................... 14,000
Audit fees................................. 13,000
Trustees' fees and expenses................ 8,000
Miscellaneous.............................. 12,015
---------------
Total expenses.......................... 1,730,767
Less: Management fee waiver (Note 2)....... (99,030)
Custodian fee credit.................... (486)
---------------
Net expenses............................ 1,631,251
---------------
Net investment income......................... 11,028,514
---------------
Realized and Unrealized Gain
(Loss) on Investments
Net realized gain (loss) on:
Investment transactions.................... 1,759,698
Financial futures transactions............. (555,008)
---------------
1,204,690
---------------
Net change in unrealized
appreciation/depreciation on:
Investments................................ 6,241,897
Financial futures contracts................ (163,125)
---------------
6,078,772
---------------
Net gain on investments....................... 7,283,462
---------------
Net Increase in Net Assets
Resulting from Operations..................... $18,311,976
---------------
---------------
</TABLE>
PRUDENTIAL CALIFORNIA MUNICIPAL FUND
CALIFORNIA INCOME SERIES
Statement of Changes in Net Assets
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Increase (Decrease) Year Ended August 31,
in Net Assets 1997 1996
<S> <C> <C>
Operations
Net investment income........ $ 11,028,514 $ 11,714,829
Net realized gain on
investment
transactions.............. 1,204,690 575,926
Net change in unrealized
appreciation of
investments............... 6,078,772 347,033
------------ ------------
Net increase in net assets
resulting from
operations................ 18,311,976 12,637,788
------------ ------------
Dividends and distributions
(Note 1):
Dividends from net investment
income
Class A................... (8,663,215) (9,710,835)
Class B................... (2,155,430) (1,827,016)
Class C................... (157,025) (176,978)
Class Z................... (52,844) --
------------ ------------
(11,028,514) (11,714,829)
------------ ------------
Distributions in excess of net
investment income
Class A................... (14,563) --
Class B................... (3,730) --
Class C................... (308) --
Class Z................... (19) --
------------ ------------
(18,620) --
------------ ------------
Series share transactions (net
of share conversions) (Note
5):
Net proceeds from shares
sold...................... 39,086,871 30,762,482
Net asset value of shares
issued to shareholders in
reinvestment of dividends
and distributions......... 5,324,369 5,331,430
Cost of shares reacquired.... (34,470,755) (39,437,718)
------------ ------------
Net increase (decrease) in
net assets from Series
share transactions........ 9,940,485 (3,343,806)
------------ ------------
Total increase (decrease)....... 17,205,327 (2,420,847)
Net Assets
Beginning of year............... 192,488,453 194,909,300
------------ ------------
End of year..................... $209,693,780 $192,488,453
------------ ------------
------------ ------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-70
<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.
The Series will invest primarily in investment grade municipal obligations but
may also invest a portion of its assets in lower-quality municipal obligations
or in non-rated securities which are of comparable quality. The ability of the
issuers of the securities held by the Series to meet their obligations may be
affected by economic developments in a specific state, industry or region.
- ------------------------------------------------------------
Note 1. Accounting Policies
The following is a summary of significant accounting policies followed by the
Fund and the Series in preparation of its financial statements.
Security Valuations: The Series values municipal securities (including
commitments to purchase such securities on a 'when-issued' basis) on the basis
of prices provided by a pricing service which uses information with respect to
transactions in bonds, quotations from bond dealers, market transactions in
comparable securities and various relationships between securities in
determining values. If market quotations are not readily available from such
pricing service, a security is valued at its fair value as determined under
procedures established by the Trustees. Short-term securities which mature in
more than 60 days are valued at current market quotations. Short-term securities
which mature in 60 days or less are valued at amortized cost. All securities are
valued as of 4:15 p.m., New York time.
Financial Futures Contracts: A financial futures contract is an agreement to
purchase (long) or sell (short) an agreed amount of securities at a set price
for delivery on a future date. Upon entering into a financial futures contract,
the Series is required to pledge to the broker an amount of cash and/or other
assets equal to a certain percentage of the contract amount. This amount is
known as the 'initial margin'. Subsequent payments, known as 'variation margin',
are made or received by the Series each day, depending on the daily fluctuations
in the value of the underlying security. Such variation margin is recorded for
financial statement purposes on a daily basis as unrealized gain or loss. When
the contract expires or is closed, the gain or loss is realized and is presented
in the statement of operations as net realized gain (loss) on financial futures
contracts.
The Series invests in financial futures contracts in order to hedge its existing
portfolio securities or securities the Series intends to purchase, against
fluctuations in value caused by changes in prevailing interest rates. Should
interest rates move unexpectedly, the Series may not achieve the anticipated
benefits of the financial futures contracts and may realize a loss. The use of
futures transactions involves the risk of imperfect correlation in movements in
the price of futures contracts, interest rates and the underlying hedged assets.
Securities Transactions and Net Investment Income: Securities transactions are
recorded on the trade date. Realized gains and losses on sales of securities are
calculated on the identified cost basis. Interest income is recorded on the
accrual basis. The Series amortizes premiums and original issue discount paid on
purchases of portfolio securities as adjustments to interest income. Expenses
are recorded on the accrual basis which may require the use of certain estimates
by management.
Net investment income (other than distribution fees) and unrealized and realized
gains or losses are allocated daily to each class of shares based upon the
relative proportion of net assets of each class at the beginning of the day.
Federal Income Taxes: For federal income tax purposes, each series in the Fund
is treated as a separate taxpaying entity. It is the intent of the Series to
continue to meet the requirements of the Internal Revenue Code applicable to
regulated investment companies and to distribute all of its net income to
shareholders. For this reason, no federal income tax provision is required.
Dividends and Distributions: The Series declares daily dividends from net
investment income. Payment of dividends is made monthly. Distributions of net
capital gains, if any, are made annually.
Income distributions and capital gain distributions are determined in accordance
with income tax regulations which may differ from generally accepted accounting
principles.
Custody Fee Credits: The Fund has an arrangement with its custodian bank,
whereby uninvested monies earn credits which reduce the fees charged by the
custodian.
Reclassification of Capital Accounts: The Fund accounts and reports for
distributions to shareholders in accordance with Statement of Position 93-2:
Determination, Disclosure, and Financial Statement Presentation of
- --------------------------------------------------------------------------------
B-71
<PAGE>
PRUDENTIAL CALIFORNIA MUNICIPAL FUND
Notes to Financial Statements CALIFORNIA INCOME SERIES
- --------------------------------------------------------------------------------
Income, Capital Gain, and Return of Capital Distributions by Investment
Companies. The effect of applying this statement was to increase undistributed
net investment income by $18,620, increase accumulated net realized loss by
$35,565 and increase paid-in capital by $16,945, due to the sale of securities
purchased with market discount. Net investment income, net realized gains and
net assets were not affected by this change.
- ------------------------------------------------------------
Note 2. Agreements
The Fund has a management agreement with Prudential Investments Fund Management
LLC ('PIFM'). Pursuant to this agreement, PIFM has responsibility for all
investment advisory services and supervises the subadviser's performance of such
services. PIFM has entered into a subadvisory agreement with The Prudential
Investment Corporation ('PIC'); PIC furnishes investment advisory services in
connection with the management of the Fund. PIFM pays for the cost of the
subadviser's services, the compensation of officers of the Fund, occupancy and
certain clerical and bookkeeping costs of the Fund. The Fund bears all other
costs and expenses.
The management fee paid PIFM is computed daily and payable monthly, at an annual
rate of .50 of 1% of the average daily net assets of the Series.
PIFM has agreed to waive a portion (.05 of 1% of the Series' average daily net
assets) of its management fee, which amounted to $99,030 ($.005 per share) for
the year ended August 31, 1997. The Series is not required to reimburse PIFM for
such waiver.
The Fund has a distribution agreement with Prudential Securities Incorporated
('PSI') which acts as the distributor of the Class A, Class B, Class C and Class
Z shares of the Fund. The Fund compensates PSI for distributing and servicing
the Fund's Class A, Class B and Class C shares, pursuant to plans of
distribution (the 'Class A, B and C Plans'), regardless of expenses actually
incurred by PSI. The distribution fees are accrued daily and payable monthly. No
distribution or service fees are paid to PSI as distributor of the Class Z
shares of the Fund.
Pursuant to the Class A, B and C Plans, the Fund compensates PSI for
distribution-related activities at an annual rate of up to .30 of 1%, .50 of 1%
and 1% of the average daily net assets of the Class A, B and C shares,
respectively. Such expenses under the Plans were .10 of 1%, .50 of 1% and .75 of
1% of the average daily net assets of the Class A, B and C shares, respectively,
for the fiscal year ended August 31, 1997.
PSI has advised the Series that it has received approximately $250,840 in
front-end sales charges resulting from sales of Class A shares during the fiscal
year ended August 31, 1997. From these fees, PSI paid such sales charges to
affiliated broker-dealers which in turn paid commissions to sales persons and
incurred other distribution costs.
PSI has advised the Series that for the fiscal year ended August 31, 1997, it
received approximately $80,000 and $3,000 in contingent deferred sales charges
imposed upon certain redemptions by Class B and Class C shareholders,
respectively.
PSI, PIFM and PIC are indirect, wholly-owned subsidiaries of The Prudential
Insurance Company of America.
The Series, along with other affiliated registered investment companies (the
'Funds'), entered into a credit agreement (the 'Agreement') on December 31, 1996
with an unaffiliated lender. The maximum commitment under the Agreement is
$200,000,000. The Agreement expires on December 30, 1997. Interest on any such
borrowings outstanding will be at market rates. The purpose of the Agreement is
to serve as an alternative source of funding for capital share redemptions. The
Series has not borrowed any amounts pursuant to the Agreement as of August 31,
1997. The Funds pay a commitment fee at an annual rate of .055 of 1% on the
unused portion of the credit facility. The commitment fee is accrued and paid
quarterly on a pro-rata basis by the Funds.
- ------------------------------------------------------------
Note 3. Other Transactions with Affiliates
Prudential Mutual Fund Services LLC ('PMFS'), a wholly-owned subsidiary of PIFM,
serves as the Fund's transfer agent. During the year ended August 31, 1997, the
Series incurred fees of approximately $44,800 for the services of PMFS. As of
August 31, 1997 approximately $3,300 of such fees were due to PMFS. Transfer
agent fees and expenses in the Statement of Operations include certain
out-of-pocket expenses paid to non-affiliates.
- ------------------------------------------------------------
Note 4. Portfolio Securities
Purchases and sales of portfolio securities of the Series, excluding short-term
investments, for the fiscal year ended August 31, 1997 were $41,098,719 and
$31,381,782, respectively.
The federal income tax cost basis of the Fund's investments at August 31, 1997
was $191,788,377 and, accordingly, net unrealized appreciation on investments
for federal income tax purposes was $17,333,500 (gross unrealized
appreciation--$18,327,115; gross unrealized depreciation--$993,615).
- --------------------------------------------------------------------------------
B-72
<PAGE>
PRUDENTIAL CALIFORNIA MUNICIPAL FUND
Notes to Financial Statements CALIFORNIA INCOME SERIES
- --------------------------------------------------------------------------------
As of August 31, 1997, the Series had sold 40 financial futures contracts on U.
S. Treasury Bonds which expire in December 1997. The value at sale of such
contracts was $4,472,500. The value of such contracts on August 31, 1997 was
$4,510,000, thereby resulting in an unrealized loss of $37,500.
For federal income tax purposes, the Series had a capital loss carryforward at
August 31, 1997 of approximately $2,880,100 of which $1,904,400 expires in 2003
and $975,700 expires in 2004. Such carryforward is after utilization of
approximately $847,600 of net taxable gains realized and recognized during the
year ended August 31, 1997. Accordingly, no capital gains distributions are
expected to be paid to shareholders until net gains have been realized in excess
of such amount.
- ------------------------------------------------------------
Note 5. Capital
The Series offers Class A, Class B, Class C and Class Z shares. Class A shares
are sold with a front-end sales charge of up to 3%. Class B shares are sold with
a contingent deferred sales charge which declines from 5% to zero depending on
the period of time the shares are held. Class C shares are sold with a
contingent deferred sales charge of 1% during the first year. Class B shares
will automatically convert to Class A shares on a quarterly basis approximately
seven years after purchase. A special exchange privilege is also available for
shareholders who qualify to purchase Class A shares at net asset value.
Effective September 18, 1996 the Fund commenced offering Class Z shares. Class Z
shares are not subject to any sales or redemption charge and are offered
exclusively for sale to a limited group of investors.
The Fund has authorized an unlimited number of shares of beneficial interest for
each class at $.01 par value per share.
Transactions in shares of beneficial interest for the fiscal years ended August
31, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
Class A Shares Amount
- ----------------------------------- ---------- ------------
<S> <C> <C>
Year ended August 31, 1997:
Shares sold........................ 1,937,503 $ 20,445,041
Shares issued in reinvestment of
dividends and distributions...... 399,645 4,210,389
Shares reacquired.................. (2,590,226) (27,275,477)
---------- ------------
Net decrease in shares outstanding
before conversion................ (253,078) (2,620,047)
Shares issued upon conversion from
Class B.......................... 42,570 446,739
---------- ------------
Net decrease in shares
outstanding...................... (210,508) $ (2,173,308)
---------- ------------
---------- ------------
<CAPTION>
Class A Shares Amount
- ----------------------------------- ---------- ------------
<S> <C> <C>
Year ended August 31, 1996:
Shares sold........................ 1,469,282 $ 15,353,903
Shares issued in reinvestment of
dividends........................ 423,903 4,418,412
Shares reacquired.................. (3,013,190) (31,387,129)
---------- ------------
Net decrease in shares outstanding
before conversion................ (1,120,005) (11,614,814)
Shares issued upon conversion from
Class B.......................... 43,624 462,855
---------- ------------
Net decrease in shares
outstanding...................... (1,076,381) $(11,151,959)
---------- ------------
---------- ------------
<CAPTION>
Class B
- -----------------------------------
Year ended August 31, 1997:
Shares sold........................ 1,426,212 $ 15,041,198
Shares issued in reinvestment of
dividends and distributions...... 91,835 967,638
Shares reacquired.................. (531,588) (5,601,556)
---------- ------------
Net increase in shares outstanding
before conversion................ 986,459 10,407,280
Shares reacquired upon conversion
into Class A..................... (42,570) (446,739)
---------- ------------
Net increase in shares
outstanding...................... 943,889 $ 9,960,541
---------- ------------
---------- ------------
Year ended August 31, 1996:
Shares sold........................ 1,249,539 $ 13,048,395
Shares issued in reinvestment of
dividends........................ 76,710 799,113
Shares reacquired.................. (582,678) (6,087,873)
---------- ------------
Net increase in shares outstanding
before conversion................ 743,571 7,759,635
Shares reacquired upon conversion
into Class A..................... (43,624) (462,855)
---------- ------------
Net increase in shares
outstanding...................... 699,947 $ 7,296,780
---------- ------------
---------- ------------
<CAPTION>
Class C
- -----------------------------------
Year ended August 31, 1997:
Shares sold........................ 139,593 $ 1,480,063
Shares issued in reinvestment of
dividends and distributions...... 9,040 95,296
Shares reacquired.................. (128,116) (1,354,688)
---------- ------------
Net increase in shares
outstanding...................... 20,517 220,671
---------- ------------
---------- ------------
Year ended August 31, 1996:
Shares sold........................ 224,426 $ 2,360,184
Shares issued in reinvestment of
dividends........................ 10,915 113,905
Shares reacquired.................. (187,555) (1,962,716)
---------- ------------
Net increase in shares
outstanding...................... 47,786 $ 511,373
---------- ------------
---------- ------------
<CAPTION>
Class Z
- -----------------------------------
September 18, 1996(a) through
August 31, 1997:
Shares sold........................ 201,074 $ 2,120,569
Shares issued in reinvestment of
dividends and distributions...... 4,829 51,046
Shares reacquired.................. (22,584) (239,034)
---------- ------------
Net increase in shares
outstanding...................... 183,319 1,932,581
---------- ------------
---------- ------------
</TABLE>
- ---------------
(a) Commencement of offering of Class Z shares.
- --------------------------------------------------------------------------------
B-73
<PAGE>
PRUDENTIAL CALIFORNIA MUNICIPAL FUND
Financial Highlights CALIFORNIA INCOME SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A
------------------------------------------------------------
Year Ended August 31,
------------------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year.................. $ 10.33 $ 10.28 $ 10.19 $ 10.68 $ 10.08
-------- -------- -------- -------- --------
Income from investment operations
Net investment income(a)............................ .60 .63 .65 .65 .67
Net realized and unrealized gain (loss) on
investment transactions.......................... .38 .05 .09 (.39) .65
-------- -------- -------- -------- --------
Total from investment operations................. .98 .68 .74 .26 1.32
-------- -------- -------- -------- --------
Less distributions
Dividends from net investment income................ (.60) (.63) (.65) (.65) (.67)
Distributions in excess of net investment income.... --(c) -- -- -- --
Distributions from net realized gains............... -- -- -- (.10) (.05)
-------- -------- -------- -------- --------
Total distributions.............................. (.60) (.63) (.65) (.75) (.72)
-------- -------- -------- -------- --------
Net asset value, end of year........................ $ 10.71 $ 10.33 $ 10.28 $ 10.19 $ 10.68
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
TOTAL RETURN(b):.................................... 9.72% 6.67% 7.67% 2.55% 13.67%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)....................... $156,684 $153,236 $163,538 $183,742 $200,899
Average net assets (000)............................ $153,019 $161,420 $165,500 $195,610 $165,895
Ratios to average net assets(a):
Expenses, including distribution fees............ .73% .50% .40% .35% .20%
Expenses, excluding distribution fees............ .63% .40% .30% .25% .10%
Net investment income............................ 5.66% 6.01% 6.49% 6.25% 6.52%
For Class A, B, C and Z shares:
Portfolio turnover rate.......................... 16% 22% 39% 46% 34%
</TABLE>
- ---------------
(a) Net of expense subsidy and management fee waiver.
(b) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each year reported and includes reinvestment of dividends and
distributions.
(c) Less than $.005 per share.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-74
<PAGE>
PRUDENTIAL CALIFORNIA MUNICIPAL FUND
Financial Highlights CALIFORNIA INCOME SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class B
-----------------------------------------------
December 7,
1993(d)
Year Ended August 31, Through
------------------------------- August 31,
1997 1996 1995 1994
------- ------- ------- -----------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period................ $ 10.33 $ 10.28 $ 10.19 $ 10.61
------- ------- ------- -----------
Income from investment operations
Net investment income(a)............................ .55 .59 .61 .44
Net realized and unrealized gain (loss) on
investment transactions.......................... .38 .05 .09 (.42)
------- ------- ------- -----------
Total from investment operations................. .93 .64 .70 .02
------- ------- ------- -----------
Less distributions
Dividends from net investment income................ (.55) (.59) (.61) (.44)
Distributions in excess of net investment income.... --(e) -- -- --
------- ------- ------- -----------
Total distributions.............................. (.55) (.59) (.61) (.44)
------- ------- ------- -----------
Net asset value, end of period...................... $ 10.71 $ 10.33 $ 10.28 $ 10.19
------- ------- ------- -----------
------- ------- ------- -----------
TOTAL RETURN(b):.................................... 9.28% 6.25% 7.24% (.14)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)..................... $47,436 $35,983 $28,609 $18,931
Average net assets (000)............................ $40,983 $32,555 $23,722 $ 6,814
Ratios to average net assets(a):
Expenses, including distribution fees............ 1.13% .90% .80% 1.11%(c)
Expenses, excluding distribution fees............ .63% .40% .30% .43%(c)
Net investment income............................ 5.26% 5.61% 6.09% 8.15%(c)
</TABLE>
- ---------------
(a) Net of expense subsidy and management fee waiver.
(b) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each period reported and includes reinvestment of dividends and
distributions. Total returns for periods of less than a full year are not
annualized.
(c) Annualized.
(d) Commencement of offering of Class B shares.
(e) Less than $.005 per share.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-75
<PAGE>
PRUDENTIAL CALIFORNIA MUNICIPAL FUND
Financial Highlights CALIFORNIA INCOME SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class C Class Z
---------------------------------------------- -------------
August 1, September 18,
1994(d) 1996(e)
Year Ended August 31, Through Through
------------------------------- August 31, August 31,
1997 1996 1995 1994 1997
------- ------- ------- ---------- -------------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period................ $ 10.33 $ 10.28 $ 10.19 $10.18 $ 10.38
------- ------- ------- ----- -----
Income from investment operations
Net investment income(a)............................ .53 .56 .58 .05 .57
Net realized and unrealized gain (loss) on
investment transactions.......................... .38 .05 .09 .01 .33
------- ------- ------- ----- -----
Total from investment operations................. .91 .61 .67 .06 .90
------- ------- ------- ----- -----
Less distributions
Dividends from net investment income................ (.53) (.56) (.58) (.05) (.57)
Distributions in excess of net investment income.... --(f) -- -- -- --(f)
------- ------- ------- ----- -----
Total distributions.............................. (.53) (.56) (.58) (.05) (.57)
------- ------- ------- ----- -----
Net asset value, end of period...................... $ 10.71 $ 10.33 $ 10.28 $10.19 $ 10.71
------- ------- ------- ----- -----
------- ------- ------- ----- -----
TOTAL RETURN(b):.................................... 9.01% 5.99% 6.98% .47% 8.86%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)..................... $ 3,611 $ 3,269 $ 2,762 $1,054 $ 1,963
Average net assets (000)............................ $ 3,135 $ 3,300 $ 1,751 $ 353 $ 970
Ratios to average net assets(a):
Expenses, including distribution fees............ 1.38% 1.15% 1.05% 1.12%(c) .63%(c)
Expenses, excluding distribution fees............ .63% .40% .30% .37%(c) .63%(c)
Net investment income............................ 5.01% 5.36% 5.84% 6.25%(c) 5.76%(c)
</TABLE>
- ---------------
(a) Net of expense subsidy and/or fee waiver.
(b) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each period reported and includes reinvestment of dividends and
distributions. Total returns for periods of less than a full year are not
annualized.
(c) Annualized.
(d) Commencement of offering of Class C shares.
(e) Commencement of offering of Class Z shares.
(f) Less than $.005 per share.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-76
<PAGE>
PRUDENTIAL CALIFORNIA MUNICIPAL FUND
Report of Independent Accountants CALIFORNIA INCOME SERIES
- --------------------------------------------------------------------------------
To the Shareholders and Board of Trustees of
Prudential California Municipal Fund, California Income Series:
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Prudential California Municipal
Fund, California Income Series (the 'Fund', one of the portfolios constituting
Prudential California Municipal Fund) at August 31, 1997, and the results of its
operations, the changes in its net assets and the financial highlights for the
year then ended, in conformity with generally accepted accounting principles.
These financial statements and financial highlights (hereafter referred to as
'financial statements') are the responsibility of the Fund's management; our
responsibility is to express an opinion on these financial statements based on
our audit. We conducted our audit of these financial statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audit, which included confirmation of securities at August
31, 1997 by correspondence with the custodian and brokers and the application of
alternative auditing procedures where securities purchased had not been
received, provides a reasonable basis for the opinion expressed above. The
accompanying statement of changes in net assets for the year ended August 31,
1996 and the financial highlights for each of the four periods in the period
ended August 31, 1996 were audited by other independent accountants, whose
opinion dated October 14, 1996 was unqualified.
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York
October 20, 1997
- --------------------------------------------------------------------------------
B-77
<PAGE>
PRUDENTIAL CALIFORNIA MUNICIPAL FUND
Change of Auditors CALIFORNIA INCOME SERIES
- --------------------------------------------------------------------------------
Effective March 1, 1997, Deloitte & Touche LLP was terminated as the Fund's
auditors. For the years ended August 31, 1993 through August 31, 1996, Deloitte
& Touche LLP expressed an unqualified opinion on the Series' financial
statements. There were no disagreements between Fund management and Deloitte &
Touche LLP prior to their termination. The Board of Trustees approved the
termination of Deloitte & Touche LLP and the appointment of Price Waterhouse LLP
as the Fund's independent accountants.
- --------------------------------------------------------------------------------
B-78
<PAGE>
PRUDENTIAL CALIFORNIA MUNICIPAL 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, 1996, the related statements of
operations for the year then ended and of changes in net assets for each of the
two years in the period then ended, and the financial highlights for each of the
five years in the period then ended. These financial statements and financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of the securities owned as of
August 31, 1996 by correspondence with the custodian and broker. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Prudential
California Municipal Fund, California Income Series, as of August 31, 1996, the
results of its operations, the changes in its net assets, and its financial
highlights for the respective stated periods in conformity with generally
accepted accounting principles.
DELOITTE & TOUCHE LLP
New York, New York
October 14, 1996
- --------------------------------------------------------------------------------
B-79
<PAGE>
Portfolio of Investments PRUDENTIAL CALIFORNIA MUNICIPAL FUND
as of August 31, 1997 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>
- ------------------------------------------------------------------------------------------------------------------------------
Alum Rock Union Elementary Sch. Dist., Ser. 96, T.R.A.N. SP1+(c) 4.25% 10/23/97 $ 4,500 $ 4,502,777
Anaheim Hsg. Auth., Monterey Apts., Ser. 97B, F.R.W.D.,
A.M.T. A1+(c) 3.15 9/04/97 4,545 4,545,000
California Hsg. Fin. Agcy. Rev., Home Mtg. Rev., Ser. 97J,
A.M.T. VMIG1 3.95 8/03/98 5,000 5,000,000
California Poll. Ctrl. Fin. Auth. Rev.,
Arco Proj., Ser. 94A, F.R.D.D., A.M.T. VMIG1 3.55 9/02/97 3,700 3,700,000
Burrtec Waste Ind., Ser. 97B, F.R.W.D., A.M.T. NR 3.10 9/03/97 2,000 2,000,000
Chevron U.S.A. Inc. Proj., Ser. 84, A.O.T. Aa2 4.00 5/15/98 5,155 5,155,000
Delano Proj., Ser. 89, F.R.D.D., A.M.T. P1 3.55 9/02/97 600 600,000
Delano Proj., Ser. 90, F.R.D.D., A.M.T. P1 3.55 9/02/97 100 100,000
Delano Proj., Ser. 91, F.R.D.D., A.M.T. P1 3.55 9/02/97 800 800,000
Honey Lake Pwr. Proj., Ser. 88, F.R.D.D., A.M.T. Aa3 3.55 9/02/97 700 700,000
Pacific Gas & Elec., Ser. 96A, F.R.W.D., A.M.T. A1+(c) 3.05 9/03/97 5,000 5,000,000
Shell Oil Co. Proj., Ser. 94A, F.R.D.D., A.M.T. VMIG1 3.45 9/02/97 8,600 8,600,000
So. Cal. Ed., Ser. 86C, F.R.D.D. P1 3.50 9/02/97 500 500,000
U.S. Borax Inc. Proj., Ser. 95A, F.R.W.D. Aa2 3.30 9/04/97 5,100 5,100,000
Ultrapower Malaga Fresno Proj., Ser. 88A, F.R.D.D.,
A.M.T. P1 3.55 9/02/97 1,700 1,700,000
Ultrapower Malaga Fresno Proj., Ser. 88B, F.R.D.D.,
A.M.T. P1 3.55 9/02/97 1,000 1,000,000
Ultrapower Rocklin Proj., Ser. 88A, F.R.D.D., A.M.T. P1 3.55 9/02/97 1,100 1,100,000
Ultrapower Rocklin Proj., Ser. 88B, F.R.D.D., A.M.T. P1 3.55 9/02/97 2,200 2,200,000
California St.,
General Obligation, T.E.C.P. P1 3.65 9/16/97 8,000 8,000,000
General Obligation, T.E.C.P. P1 3.65 10/10/97 5,045 5,045,000
California Statewide Cmntys. Dev. Auth.,
Chevron Proj., Ser. 94, F.R.D.D., A.M.T. P1 3.50 9/02/97 1,000 1,000,000
Kimberly Woods Apts., Ser. 95B, F.R.W.D., F.N.M.A.,
A.M.T. A1+(c) 3.15 9/03/97 2,000 2,000,000
Northern Ca. Retired Officers, Ser. 96, F.R.D.D. VMIG1 3.40 9/02/97 1,500 1,500,000
Camarillo Multi-family Hsg. Rev., Hacienda De Camarillo
Proj.,
Ser. 96, F.R.W.D., A.M.T. A1+(c) 3.15 9/04/97 3,000 3,000,000
Chula Vista Ind. Dev. Auth., San Diego Gas & Electric,
Ser. 92C, T.E.C.P., A.M.T. VMIG1 3.70 10/08/97 3,000 3,000,000
City of Fowler Ind. Dev. Auth., Bee Sweet Citrus, Ser. 95,
F.R.W.D., A.M.T. Aa2 3.40 9/04/97 2,000 2,000,000
Contra Costa Cnty., Ser. 97-98, T.R.A.N. MIG1 4.50 7/01/98 5,000 5,026,772
Fresno Multi-family Hsg. Rev.,
Heron Pointe Apartment Proj., F.R.W.D. VMIG1 3.20 9/03/97 4,900 4,900,000
Sunrise Of Fresno Proj., Ser. 96A, F.R.W.D., A.M.T. A1+(c) 3.51 9/04/97 5,500 5,500,000
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-80
<PAGE>
Portfolio of Investments PRUDENTIAL CALIFORNIA MUNICIPAL FUND
as of August 31, 1997 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>
- ------------------------------------------------------------------------------------------------------------------------------
Kern Cnty. Superintendent Of Schs., Ser. 96A, F.R.W.D.
(cost $10,000,000; purchased 12/19/96) A1+(c) 3.30% 9/04/97 $ 10,000 (f) $ 10,000,000
Kings Cnty. Hsg. Auth., Edgewater Isle., Ser. 96A,
F.R.W.D. VMIG1 3.20 9/03/97 2,915 2,915,000
Lassen Muni. Util. Dist. Rev., Refunding Rev., Ser. 96A,
F.R.W.D., F.S.A., A.M.T. VMIG1 3.40 9/04/97 6,600 6,600,000
Los Angeles Cnty. Comm. Sales Tax Rev.,
Ser. 91A, T.E.C.P. P1 3.75 9/04/97 5,000 5,000,000
Ser. 91A, T.E.C.P. P1 3.50 9/10/97 9,000 9,000,000
Los Angeles Comm. Coll. Dist., T.R.A.N. SP1+(c) 4.50 7/02/98 8,000 8,038,417
Los Angeles Dept. Wtr. & Pwr., Ser. 90, T.E.C.P. P1 3.90 10/15/97 6,000 6,000,000
Los Angeles Hsg. Auth., Multi-family Rev., Lanewood Apts.
Proj., Ser. 85, F.R.W.D. VMIG1 3.15 9/03/97 7,700 7,700,000
M S R Pub. Pwr. Agcy., San Juan Project, Ser. D, F.R.W.D.,
M.B.I.A. VMIG1 3.05 9/04/97 10,000 10,000,000
Moorpark Ind. Dev. Auth. Rev., Kavli & Kavlico Corp., Ser.
85, F.R.W.D. VMIG1 3.05 9/04/97 6,795 6,795,000
Oakland Unified Sch. Dist., Ser. 96-97, T.R.A.N. SP1+(c) 4.25 10/14/97 1,000 1,000,454
Olcese Wtr. Dist., Rio Bravo Wtr. Delivery Sys., Ser. 86A,
T.E.C.P., A.M.T. P1 3.60 9/12/97 6,600 6,600,000
Ontario Multi-family Hsg. Rev., Park Ctr. Proj., Ser. 85A,
F.R.W.D. VMIG1 3.05 9/04/97 8,400 8,400,000
Palmdale Cmnty. Redev. Agy., Manzanita Villa Apts. Proj.,
Ser. 93A, F.R.W.D. VMIG1 3.20 9/04/97 4,800 4,800,000
Puerto Rico Aqueduct & Swr. Auth. Rev., Ser. A AAA(c) 7.875 7/01/98 4,000 (d) 4,209,020
Puerto Rico Comnwlth.,
Gov't. Dev. Bank., Ser. 95, T.E.C.P. A1+(c) 3.40 9/03/97 1,000 1,000,000
Gov't. Dev. Bank., Ser. 95, T.E.C.P. A1+(c) 3.55 10/01/97 6,000 6,000,000
Riverside Cnty. Hsg. Auth., McKinely Hills Apt. Proj.,
Ser. 85R, F.R.W.D. A1+(c) 3.15 9/04/97 11,000 11,000,000
Sacramento Cnty. Hsg. Auth., Multi-family Rev., Chesapeake
Apts., Ser. A, F.R.W.D., A.M.T. A1+(c) 3.20 9/04/97 5,000 5,000,000
Sacramento Cnty., Ser. 96, T.R.A.N. MIG1 4.50 9/30/97 10,000 10,006,200
Salinas Multi-family Hsg. Rev., Brentwood Garden Apts.,
Ser. 97A, F.R.W.D. A1+(c) 3.10 9/04/97 7,480 7,480,000
San Bernardino Cnty. Redev. Agcy., Silverwood Apt. Proj.,
Ser. 86, F.R.W.D., A.M.T. A1+(c) 3.20 9/04/97 7,000 7,000,000
San Francisco Airport, A.M.T.
Rapid Transport District, Ser. 97, T.E.C.P. P1 3.65 12/10/97 5,000 5,000,000
Rapid Transport District, Ser. 97, T.E.C.P. P1 3.65 12/19/97 2,500 2,500,000
San Francisco Multi-family Hsg. Rev., City Heights Apts.,
Ser. 97A, F.R.W.D., A.M.T. A1+(c) 3.15 9/03/97 4,000 4,000,000
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-81
<PAGE>
Portfolio of Investments PRUDENTIAL CALIFORNIA MUNICIPAL FUND
as of August 31, 1997 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>
- ------------------------------------------------------------------------------------------------------------------------------
San Jose Multi-family Hsg. Rev., Siena At Renaissance
Square,
Ser. 96B, F.R.W.D., A.M.T. VMIG1 3.20% 9/03/97 $ 5,000 $ 5,000,000
San Luis Obispo Cnty., Ser. 97-98, T.R.A.N. MIG1 4.50 7/08/98 8,000 8,041,152
San Marcos Ind. Dev. Auth. Rev., Village Square Proj.,
Ser. 92, F.R.W.D. Aa2 3.40 9/04/97 3,500 3,500,000
Santa Clara Cnty. Multi-family Hsg. Rev., Refunding Rev.,
Briarwood Apt. Proj., Ser. 96B, F.R.W.D. A1+(c) 3.10 9/04/97 5,000 5,000,000
Southern Met. Wtr. Dist., T.E.C.P. P1 3.80 9/30/97 5,000 5,000,000
Southern Pub. Pwr. Auth., Transmission Proj. Rev., Ser.
91, F.R.W.D., A.M.B.A.C. P1 2.95 9/03/97 4,700 4,700,000
------------
Total Investments--98.3%
(cost $ 280,559,792(e)) 280,559,792
Other assets in excess of liabilities--1.7% 4,720,611
------------
Net Assets--100% $285,280,403
------------
------------
</TABLE>
- ---------------
(a) The following abbreviations are used in portfolio descriptions:
A.M.B.A.C.--American Municipal Bond Assurance Corporation.
A.M.T.--Alternative Minimum Tax.
A.O.T.--Annual Optional Tender.
F.N.M.A.--Federal National Mortgage Association.
F.R.D.D.--Floating Rate (Daily) Demand Note (b).
F.R.W.D.--Floating Rate (Weekly) Demand Note (b).
F.S.A.--Financial Security Assurance.
M.B.I.A.--Municipal Bond Insurance Association.
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 Floating Rate
Demand Notes is considered to be the later of the next date on which the
security can be redeemed at par, or the next date on which the rate of
interest is adjusted.
(c) Standard & Poor's Rating.
(d) Prerefunded issues are secured by escrowed cash and/or direct U.S.
guaranteed obligations.
(e) The cost of securities for federal income tax purposes is substantially the
same as for financial reporting purposes.
(f) Indicates a restricted security; the cost of such security is $10,000,000.
The value ($10,000,000) is approximately 3.5% of net assets.
NR--Not Rated by Moody's or Standard & Poor's.
The Fund's current Statement of Additional Information contains a description of
Moody's and Standard & Poor's ratings.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-82
<PAGE>
PRUDENTIAL CALIFORNIA MUNICIPAL FUND
Statement of Assets and Liabilities CALIFORNIA MONEY MARKET SERIES
- --------------------------------------------------------------------------------
<TABLE>
Assets August 31, 1997
<S> <C>
Investments, at amortized cost which approximates market value............................................ $ 280,559,792
Cash...................................................................................................... 37,457
Receivable for Series shares sold......................................................................... 6,011,933
Interest receivable....................................................................................... 1,429,921
Other assets.............................................................................................. 7,113
---------------
Total assets........................................................................................... 288,046,216
---------------
Liabilities
Payable for Series shares reacquired...................................................................... 2,436,912
Dividends payable......................................................................................... 126,076
Management fee payable.................................................................................... 122,480
Accrued expenses.......................................................................................... 56,904
Distribution fee payable.................................................................................. 16,795
Deferred trustee's fees................................................................................... 6,646
---------------
Total liabilities...................................................................................... 2,765,813
---------------
Net Assets................................................................................................ $ 285,280,403
---------------
---------------
Net assets were comprised of:
Shares of beneficial interest, at $.01 par value....................................................... $ 2,852,804
Paid-in capital in excess of par....................................................................... 282,427,599
---------------
Net assets, August 31, 1997............................................................................... $ 285,280,403
---------------
---------------
Net asset value, offering price and redemption price per share
($285,280,403 / 285,280,403 shares of beneficial interest issued and outstanding; unlimited number of
shares authorized)..................................................................................... $1.00
---------------
---------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-83
<PAGE>
PRUDENTIAL CALIFORNIA MUNICIPAL FUND
CALIFORNIA MONEY MARKET SERIES
Statement of Operations
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended
Net Investment Income August 31, 1997
<S> <C>
Income
Interest and discount earned............... $ 9,815,721
---------------
Expenses
Management fee............................. 1,388,598
Distribution fee........................... 347,149
Transfer agent's fees and expenses......... 103,000
Custodian's fees and expenses.............. 75,000
Reports to shareholders.................... 57,000
Registration fees.......................... 29,500
Legal fees and expenses.................... 14,000
Audit fee.................................. 13,000
Trustees' fees and expenses................ 8,000
Insurance expense.......................... 7,000
Miscellaneous.............................. 2,260
---------------
Total expenses.......................... 2,044,507
Less: Custodian fee credit................. (8,872)
---------------
Net expenses............................ 2,035,635
---------------
Net investment income......................... 7,780,086
Realized Gain on Investments
Net realized gain on investment
transactions............................... 6,865
---------------
Net Increase in Net Assets
Resulting from Operations..................... $ 7,786,951
---------------
---------------
</TABLE>
PRUDENTIAL CALIFORNIA MUNICIPAL FUND
CALIFORNIA MONEY MARKET SERIES
Statement of Changes in Net Assets
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Increase (Decrease) Year Ended August 31,
in Net Assets 1997 1996
<S> <C> <C>
Operations
Net investment income...... $ 7,780,086 $ 7,246,723
Net realized gain on
investment
transactions............ 6,865 1,708
-------------- ---------------
Net increase in net assets
resulting from
operations.............. 7,786,951 7,248,431
-------------- ---------------
Dividends and distributions
(Note 1)................... (7,786,951) (7,248,431)
-------------- ---------------
Series share transactions (at
$1 per share)
Net proceeds from shares
sold.................... 1,770,959,716 1,610,283,415
Net asset value of shares
issued in reinvestment
of dividends and
distributions........... 7,448,192 6,955,588
Cost of shares
reacquired.............. (1,742,960,108) (1,596,786,261)
-------------- ---------------
Net increase in net assets
from Series share
transactions............ 35,447,800 20,452,742
-------------- ---------------
Total increase................ 35,447,800 20,452,742
Net Assets
Beginning of year............. 249,832,603 229,379,861
-------------- ---------------
End of year................... $ 285,280,403 $ 249,832,603
-------------- ---------------
-------------- ---------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-84
<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 and whose ratings are within the two highest ratings
categories by a nationally recognized statistical rating organization or, if not
rated, are of comparable quality. The ability of the issuers of the securities
held by the Series to meet their obligations may be affected by economic
developments in a specific state, industry or region.
- ------------------------------------------------------------
Note 1. Accounting Policies
The following is a summary of significant accounting policies followed by the
Fund, and the Series, in the preparation of its financial statements.
Securities Valuations: Portfolio securities of the Series are valued at
amortized cost, which approximates market value. The amortized cost method of
valuation involves valuing a security at its cost on the date of purchase and
thereafter assuming a constant amortization to maturity of any discount or
premium.
All securities are valued as of 4:30 p.m., New York time.
The Series may hold up to 10% of its net assets in illiquid securities including
those which are restricted as to disposition under securities law ('restricted
securities'). Restricted securities held by the Series at August 31, 1997 do not
include rights with regard to registration. Restricted securities are valued
pursuant to the valuation procedures noted above.
Securities Transactions and Net Investment Income: Securities transactions are
recorded on the trade date. Realized gains and losses on sales of investments
are calculated on the identified cost basis. Interest income is recorded on the
accrual basis. Expenses are recorded on the accrual basis which may require the
use of certain estimates by management.
Federal Income Taxes: For federal income tax purposes, each series in the Fund
is treated as a separate taxpaying entity. It is the intent of the Series to
continue to meet the requirements of the Internal Revenue Code applicable to
regulated investment companies and to continue to distribute all of its net
income to shareholders. For this reason, no federal income tax provision is
required.
Dividends: The Series declares daily dividends from net investment income.
Payment of dividends is made monthly.
Income distributions and capital gain distributions are determined in accordance
with income tax regulations which may differ from generally accepted accounting
principles.
Custody Fee Credits: The Fund has an arrangement with its custodian bank,
whereby uninvested monies earn credits which reduce the fees charged by the
custodian.
- ------------------------------------------------------------
Note 2. Agreements
The Fund has a management agreement with Prudential Investments Fund Management
LLC ('PIFM'). Pursuant to this agreement PIFM has responsibility for all
investment advisory services and supervises the subadviser's performance of such
services. PIFM has entered into a subadvisory agreement with The Prudential
Investment Corporation ('PIC'); PIC furnishes investment advisory services in
connection with the management of the Fund. PIFM pays for the cost of the
subadviser's services, the compensation of officers of the Fund, occupancy and
certain clerical and bookkeeping costs of the Fund. The Fund bears all other
costs and expenses.
The management fee paid PIFM is computed daily and payable monthly, at an annual
rate of .50 of 1% of the average daily net assets of the Series.
The Fund has a distribution agreement with Prudential Securities Incorporated
('PSI'), which acts as the distributor of the Fund. The Series reimbursed PSI
for distributing and servicing the Series' shares pursuant to the plan of
distribution at an annual rate of .125 of 1% of the Series' average daily net
assets. The distribution fee is accrued daily and payable monthly.
PSI, PIC, and PIFM are indirect, wholly-owned subsidiaries of The Prudential
Insurance Company of America.
- ------------------------------------------------------------
Note 3. Other Transactions with Affiliates
Prudential Mutual Fund Services LLC ('PMFS'), a wholly-owned subsidiary of PIFM,
serves as the Fund's transfer agent. During the year ended August 31, 1997, the
Series incurred fees of approximately $89,800 for the services of PMFS. As of
August 31, 1997, approximately $6,300 of such fees were due to PMFS. Transfer
agent fees and expenses in the Statement of Operations include certain
out-of-pocket expenses paid to non-affiliates.
- --------------------------------------------------------------------------------
B-85
<PAGE>
PRUDENTIAL CALIFORNIA MUNICIPAL FUND
Financial Highlights CALIFORNIA MONEY MARKET SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended August 31,
-----------------------------------------------
1997 1996 1995 1994
-------- -------- -------- --------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year.......................................... $ 1.00 $ 1.00 $ 1.00 $ 1.00
Net investment income and net realized gains/losses......................... .03 .03 .02(b) .02
Dividends and distributions................................................. (.03) (.03) (.03) (.02)
Capital contribution by affiliate........................................... -- -- .01 --
-------- -------- -------- --------
Net asset value, end of year................................................ $ 1.00 $ 1.00 $ 1.00 $ 1.00
-------- -------- -------- --------
-------- -------- -------- --------
TOTAL RETURN(a):............................................................ 2.85% 2.88% 3.01%(b) 1.94%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)............................................... $285,280 $249,833 $229,380 $300,676
Average net assets (000).................................................... $277,720 $256,175 $243,130 $326,429
Ratios to average net assets:
Expenses, including distribution fee..................................... .73% .74% .78% .73%
Expenses, excluding distribution fee..................................... .61% .62% .65% .61%
Net investment income.................................................... 2.80% 2.83% 2.93% 1.91%
<CAPTION>
1993
--------
<S> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year.......................................... $ 1.00
Net investment income and net realized gains/losses......................... .02
Dividends and distributions................................................. (.02)
Capital contribution by affiliate........................................... --
--------
Net asset value, end of year................................................ $ 1.00
--------
--------
TOTAL RETURN(a):............................................................ 1.86%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)............................................... $314,925
Average net assets (000).................................................... $319,464
Ratios to average net assets:
Expenses, including distribution fee..................................... .76%
Expenses, excluding distribution fee..................................... .63%
Net investment income.................................................... 1.83%
</TABLE>
- ---------------
(a) Total return includes reinvestment of dividends and distributions.
(b) 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-86
<PAGE>
PRUDENTIAL CALIFORNIA MUNICIPAL FUND
Report of Independent Accountants CALIFORNIA MONEY MARKET SERIES
- --------------------------------------------------------------------------------
To the Shareholders and Board of Trustees of
Prudential California Municipal Fund, California Money Market Series:
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Prudential California Municipal
Fund, California Money Market Series (the 'Fund', one of the portfolios
constituting Prudential California Municipal Fund) at August 31, 1997, and the
results of its operations, the changes in its net assets and the financial
highlights for the year then ended, in conformity with generally accepted
accounting principles. These financial statements and financial highlights
(hereafter referred to as 'financial statements') are the responsibility of the
Fund's management; our responsibility is to express an opinion on these
financial statements based on our audit. We conducted our audit of these
financial statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit, which included
confirmation of securities at August 31, 1997 by correspondence with the
custodian, provides a reasonable basis for the opinion expressed above. The
accompanying statement of changes in net assets for the year ended August 31,
1996 and the financial highlights for each of the four periods in the period
ended August 31, 1996 were audited by other independent accountants, whose
opinion dated October 14, 1996 was unqualified.
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York
October 20, 1997
- --------------------------------------------------------------------------------
B-87
<PAGE>
PRUDENTIAL CALIFORNIA MUNICIPAL FUND
Change of Auditors CALIFORNIA MONEY MARKET SERIES
- --------------------------------------------------------------------------------
Effective March 1, 1997, Deloitte & Touche LLP was terminated as the Fund's
auditors. For the years ended August 31, 1993 through August 31, 1996, Deloitte
& Touche LLP expressed an unqualified opinion on the Series' financial
statements. There were no disagreements between Fund management and Deloitte &
Touche LLP prior to their termination. The Board of Trustees approved the
termination of Deloitte & Touche LLP and the appointment of Price Waterhouse LLP
as the Fund's independent accountants.
- --------------------------------------------------------------------------------
B-88
<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, 1996, the related statements of
operations for the year then ended and of changes in net assets for each of the
two years in the period then ended, and the financial highlights for each of the
five years in the period then ended. These financial statements and financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of the securities owned as of
August 31, 1996 by correspondence with the custodian. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits 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,
1996, the results of its operations, the changes in its net assets, and its
financial highlights for the respective stated periods in conformity with
generally accepted accounting principles.
DELOITTE & TOUCHE LLP
New York, New York
October 14, 1996
- --------------------------------------------------------------------------------
B-89
<PAGE>
APPENDIX I--GENERAL INVESTMENT INFORMATION
The following terms are used in mutual fund investing.
ASSET ALLOCATION
Asset allocation is a technique for reducing risk and providing balance.
Asset allocation among different types of securities within an overall
investment portfolio helps to reduce risk and to potentially provide stable
returns, while enabling investors to work toward their financial goal(s). Asset
allocation is also a 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.
[CHART]
EACH INVESTMENT PROVIDES A DIFFERENT OPPORTUNITY
(Value of $1 invested on 12/31/25)
SMALL STOCKS -- $3,822
COMMON STOCKS -- $1,114
LONG-TERM BONDS -- $34
TREASURY BILLS -- $13
INFLATION -- $9
Source: Stocks, Bonds, Bills and Inflation 1997 Yearbook, Ibbotson Associates,
Chicago, Illinois (annually updates work by Roger G. Ibbotson and Rex A.
Sinquefield. Used with permission. This chart is for illustrative purposes only
and is not indicative of the past, present, or future performance of any asset
class or any Prudential Mutual Fund.
Generally, stock returns are due to capital appreciation and the reinvestment of
any gains. Bond returns are due mainly to reinvesting interest. Also, stock
prices are usually more volatile than bond prices over the long-term.
Small stock returns for 1926-1989 are those of stocks comprising the 5th
quintile of the New York Stock Exchange. Thereafter, returns are those of the
Dimensional Fund Advisors (DFA) Small Company Fund. Common stock returns are
based on the S&P Composite Index, a market-weighted, unmanaged index of 500
stocks (currently) in a variety of industries. It is often used as a broad
measure of stock market performance.
Long-term government bond returns are measured using a constant one-bond
portfolio with a maturity of roughly 20 years. Treasury bill returns are for a
one-month bill. Treasuries are guaranteed by the government as to the timely
payment of principal and interest; equities are not. Inflation is measured by
the consumer price index (CPI)
IMPACT OF INFLATION. The "real" rate of investment return is that which exceeds
the rate of inflation, the percentage change in the value of consumer goods and
the general cost of living. A common goal of long-term investors is to outpace
the erosive impact of inflation on investment returns.
II-1
<PAGE>
Set forth below is historical performance data relating to various sectors
of the fixed-income securities markets. The chart shows the historical total
returns of U.S. Treasury bonds, U.S. mortgage securities, U.S. corporate bonds,
U.S. high yield bonds and world government bonds on an annual basis from 1987
through 1995. The total returns of the indices include accrued interest, plus
the price changes (gains or losses) of the underlying securities during the
period mentioned. The data is provided to illustrate the varying historical
total returns and investors should not consider this performance data as an
indication of the future performance of the Fund or of any sector in which the
Fund invests.
All information relies on data obtained from statistical services, reports
and other services believed by the Manager to be reliable. Such information has
not been verified. The figures do not reflect the operating expenses and fees of
a mutual fund. See "Fund Expenses" in each Prospectus. The net effect of the
deduction of the operating expenses of a mutual fund on these historical total
returns, including the compounded effect over time, could be substantial.
HISTORICAL TOTAL RETURNS OF DIFFERENT BOND MARKET SECTORS
[CHART]
<TABLE>
<CAPTION>
Year '87 '88 '89 '90 '91 '92 '93
- ---------------------------------------------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury Bonds 2.0% 7.0% 14.4% 8.5% 15.3% 7.2% 10.7%
Mortgage Securities 4.3% 8.7% 15.4% 10.7% 15.7% 7.0% 6.8%
U.S. Corporate Bonds 2.6% 9.2% 14.1% 7.1% 18.5% 8.7% 12.2%
U.S. High Yield Corporate Bonds 5.0% 12.5% 0.8% -9.6% 46.2% 15.8% 17.1%
World Government Bonds 35.2% 2.3% -3.4% 15.3% 16.2% 4.8% 15.1%
Difference between highest and lowest return
in percent 33.2 10.2 18.8 24.9 30.9 11.0 10.3
<CAPTION>
Year '94 '95
- ---------------------------------------------- --------- ---------
<S> <C> <C>
U.S. Treasury Bonds -3.4% 18.4%
Mortgage Securities -1.6% 16.8%
U.S. Corporate Bonds -3.9% 22.3%
U.S. High Yield Corporate Bonds -1.0% 19.2%
World Government Bonds 6.0% 19.6%
Difference between highest and lowest return
in percent 9.9 5.5
</TABLE>
(1)
LEHMAN BROTHERS TREASURY BOND INDEX is an unmanaged index made up of over 150
public issues of the U.S. Treasury having maturities of at least one year.
(2)
LEHMAN BROTHERS MORTGAGE-BACKED SECURITIES INDEX is an unmanaged index that
includes over 600 15- and 30-year fixed-rate mortgage-backed securities of the
Government National Mortgage Association (GNMA), Federal National Mortgage
Association (FNMA), and the Federal Home Loan Mortgage Corporation (FHLMC).
(3)
LEHMAN BROTHERS CORPORATE BOND INDEX includes over 3,000 public fixed-rate,
nonconvertible investment-grade bonds. All bonds are U.S. dollar-denominated
issues and include debt issued or guaranteed by foreign sovereign governments,
municipalities, governmental agencies or international agencies. All bonds in
the index have maturities of at least one year.
(4)
LEHMAN BROTHERS HIGH YIELD BOND INDEX is an unmanaged index comprising over
750 public, fixed-rate, nonconvertible bonds that are rated Ba1 or lower by
Moody's Investors Service (or rated BB+ or lower by Standard & Poor's or Fitch
Investors Service). All bonds in the index have maturities of at least one
year.
(5)
SALOMON BROTHERS WORLD GOVERNMENT INDEX (NON U.S.) includes over 800 bonds
issued by various foreign governments or agencies, excluding those in the
U.S., but including Japan, Germany, France, the U.K., Canada, Italy,
Australia, Belgium, Denmark, the Netherlands, Spain, Sweden, and Austria. All
bonds in the index have maturities of at least one year.
II-2
<PAGE>
This chart below shows the historical volatility of general interest rates
as measured by the long U.S. Treasury Bond.
LONG U.S. TREASURY BOND YIELD IN PERCENT (1926-1996)
[CHART]
- ------------------------
Source: Stocks, Bonds, Bills, and Inflation 1996 Yearbook, Ibbotson Associates,
Chicago (annually updates work by Roger G. Ibbotson and Rex A. Sinquefield).
Used with permission. All rights reserved. The chart illustrates the historical
yield of a long-term U.S. Treasury Bond from 1926-1996. Yield represents that of
an annually renewed one-bond portfolio with a remaining maturity of
approximately 20 years. This chart is for illustrative purposes and should not
be construed to represent the yields of any Prudential Mutual Fund.
II-3
<PAGE>
APPENDIX III--INFORMATION RELATING TO THE PRUDENTIAL
Set forth below is information relating to The Prudential Insurance Company
of America (Prudential) and its subsidiaries as well as information relating to
the Prudential Mutual Funds. See "How the Fund is Managed--Manager" in each
Prospectus. The data will be used in sales materials relating to the Prudential
Mutual Funds. Unless otherwise indicated, the information is as of December 31,
1996 and is subject to change thereafter. All information relies on data
provided by The Prudential Investment Corporation (PIC) or from other sources
believed by the Manager to be reliable. Such information has not been verified
by the Fund.
INFORMATION ABOUT PRUDENTIAL
The Manager and PIC(1) are subsidiaries of Prudential, which is one of the
largest diversified financial services institutions in the world and, based on
total assets, the largest insurance company in North America as of December 31,
1996. Principal products and services include life and health insurance, other
healthcare products, property and casualty insurance, securities brokerage,
asset management, investment advisory services and real estate brokerage.
Prudential (together with its subsidiaries) employs almost 81,000 persons
worldwide, and maintains a sales force of approximately 11,500 agents and nearly
6,400 financial advisors. Prudential is a major issuer of annuities, including
variable annuities. Prudential seeks to develop innovative products and services
to meet consumer needs in each of its business areas. Prudential uses the rock
of Gibraltar as its symbol. The Prudential rock is a recognized brand name
throughout the world.
INSURANCE. Prudential has been engaged in the insurance business since 1875.
It insures or provides financial services to nearly 50 million people worldwide.
Long one of the largest issuers of individual life insurance, the Prudential has
22 million life insurance policies in force today with a face value of $1
trillion. Prudential has the largest capital base ($12.1 billion) of any life
insurance company in the United States. Prudential provides auto insurance for
approximately 1.6 million cars and insures approximately 1.2 million homes.
MONEY MANAGEMENT. Prudential is one of the largest pension fund managers in
the country, providing pension services to 1 in 3 Fortune 500 firms. It manages
$36 billion of individual retirement plan assets, such as 401(k) plans. As of
December 31, 1996, Prudential had more than $332 billion in assets under
management. Prudential's Money Management Group, a business group of Prudential
(of which Prudential Mutual Funds is a key part) manages over $190 billion in
assets of institutions and individuals. In the PENSIONS AND INVESTMENTS, dated
May 12, 1997, Prudential was ranked third in terms of total assets under
management.
REAL ESTATE. The Prudential Real Estate Affiliates, the fourth largest real
estate brokerage network in the United States, has more than 37,000 brokers and
agents across the United States.(2)
HEALTHCARE. Over two decades ago, the Prudential introduced the first
federally-funded, for-profit HMO in the country. Today, approximately 4.6
million Americans receive healthcare from a Prudential managed care membership.
FINANCIAL SERVICES. The Prudential Bank, a wholly-owned subsidiary of
Prudential, has over $1 billion in assets and serves nearly 1.5 million
customers across 50 states.
INFORMATION ABOUT THE PRUDENTIAL MUTUAL FUNDS
As of June 30, 1997 Prudential Investments Fund Management is the fifteenth
largest mutual fund company in the country, with over 2.5 million shareholders
invested in more than 50 mutual fund portfolios and variable annuities with more
than 3.7 million shareholder accounts.
The Prudential Mutual Funds have over 30 portfolio managers who manage over
$55 billion in mutual fund and variable annuity assets. Some of Prudential's
portfolio managers have over 20 years of experience managing investment
portfolios.
From time to time, there may be media coverage of portfolio managers and
other investment professionals associated with the Manager and the Subadviser in
national and regional publications, on television and in other media.
Additionally, individual mutual fund portfolios are frequently cited in surveys
conducted by national and regional publications and media organizations such as
THE WALL STREET JOURNAL, THE NEW YORK TIMES, BARRON'S and USA TODAY.
EQUITY FUNDS. FORBES magazine listed Prudential Equity Fund among twenty
mutual funds on its Honor Roll in its mutual fund issue of August 28, 1995.
Honorees are chosen annually among mutual funds (excluding sector funds) which
are open to new investors and have had the same management for at least five
years. Forbes considers, among other criteria, the total return of a mutual fund
in both bull and bear markets as well as a fund's risk profile. Prudential
Equity Fund is
- --------------------------
(1) Prudential Investments, a business group of PIC, serves as the Subadviser to
substantially all of the Prudential Mutual Funds. Wellington Management
Company serves as the subadviser to Global Utility Fund, Inc.,
Nicholas-Applegate Capital Management as the subadviser to
Nicholas-Applegate Fund, Inc., Jennison Associates Capital Corp. as the
subadviser to Prudential Jennison Series Fund, Inc. and Prudential Active
Balanced Fund, a portfolio of Prudential Dryden Fund, Mercator Asset
Management LP as the Subadviser to International Stock Series, a portfolio
of Prudential World Fund, and BlackRock Financial Management, Inc. as
subadviser to The BlackRock Government Income Trust. There are multiple
subadvisers for The Target Portfolio Trust.
(2) As of December 31, 1996.
III-1
<PAGE>
managed with a "value" investment style by PIC. In 1995, Prudential Securities
introduced Prudential Jennison Fund, a growth-style equity fund managed by
Jennison Associates Capital Corp., a premier institutional equity manager and a
subsidiary of Prudential.
HIGH YIELD FUNDS. Investing in high yield bonds is a complex and research
intensive pursuit. A separate team of high yield bond analysts monitor the 167
issues held in the Prudential High Yield Fund (currently the largest fund of its
kind in the country) along with 100 or so other high yield bonds, which may be
considered for purchase.(3) Non-investment grade bonds, also known as junk bonds
or high yield bonds, are subject to a greater risk of loss of principal and
interest including default risk than higher-rated bonds. Prudential high yield
portfolio managers and analysts meet face-to-face with almost every bond issuer
in the High Yield Fund's portfolio annually, and have additional telephone
contact throughout the year.
Prudential's portfolio managers are supported by a large and sophisticated
research organization. Fourteen investment grade bond analysts monitor the
financial viability of approximately 1,750 different bond issuers in the
investment grade corporate and municipal bond markets--from IBM to small
municipalities, such as Rockaway Township, New Jersey. These analysts consider
among other things sinking fund provisions and interest coverage ratios.
Prudential's portfolio managers and analysts receive research services from
almost 200 brokers and market service vendors. They also receive nearly 100
trade publications and newspapers--from Pulp and Paper Forecaster to Women's
Wear Daily--to keep them informed of the industries they follow.
Prudential Mutual Funds' traders scan over 100 computer monitors to collect
detailed information on which to trade. From natural gas prices in the Rocky
Mountains to the results of local municipal elections, a Prudential portfolio
manager or trader is able to monitor it if it's important to a Prudential Mutual
Fund.
Prudential Mutual Funds trade approximately $31 billion in U.S. and foreign
government securities a year. PIC seeks information from government policy
makers. In 1995, Prudential's portfolio managers met with several senior U.S.
and foreign government officials, on issues ranging from economic conditions in
foreign countries to the viability of index-linked securities in the United
States.
Prudential Mutual Funds' portfolio managers and analysts met with over 1,200
companies in 1995, often with the Chief Executive Officer (CEO) or Chief
Financial Officer (CFO). They also attended over 250 industry conferences.
Prudential Mutual Fund global equity managers conducted many of their visits
overseas, often holding private meetings with a company in a foreign language
(our global equity managers speak 7 different languages, including Mandarin
Chinese).
TRADING DATA.(4) On an average day, Prudential Mutual Funds' U.S. and
foreign equity trading desks traded $77 million in securities representing over
3.8 million shares with nearly 200 different firms. Prudential Mutual Funds'
bond trading desks traded $157 million in government and corporate bonds on an
average day. That represents more in daily trading than most bond funds tracked
by Lipper even have in assets.(5) Prudential Mutual Funds' money market desk
traded $3.2 billion in money market securities on an average day, or over $800
billion a year. They made a trade every 3 minutes of every trading day. In 1994,
the Prudential Mutual Funds effected more than 40,000 trades in money market
securities and held on average $20 billion of money market securities.(6)
Based on complex-wide data, on an average day, over 7,250 shareholders
telephoned Prudential Mutual Fund Services LLC, the Transfer Agent of the
Prudential Mutual Funds, on the Prudential Mutual Funds' toll-free number. On an
annual basis, that represents approximately 1.8 million telephone calls
answered.
INFORMATION ABOUT PRUDENTIAL SECURITIES
Prudential Securities is the fifth largest retail brokerage firm in the
United States with approximately 5,600 financial advisors. It offers to its
clients a wide range of products, including Prudential Mutual Funds and
Annuities. As of December 31, 1995, assets held by Prudential Securities for its
clients approximated $168 billion. During 1994, over 28,000 new customer
accounts were opened each month at PSI.(7)
Prudential Securities has a two-year Financial Advisor training program plus
advanced education programs, including Prudential Securities "university," which
provides advanced education in a wide array of investment areas. Prudential
- --------------------------
(3) As of December 31, 1995. The number of bonds and the size of the Fund are
subject to change.
(4) Trading data represents average daily transactions for portfolios of the
Prudential Mutual Funds for which PIC serves as the subadviser, portfolios
of the Prudential Series Fund and institutional and non-US accounts managed
by Prudential Mutual Fund Investment Management, a division of PIC, for the
year ended December 31, 1995.
(5) Based on 669 funds in Lipper Analytical Services categories of Short U.S.
Treasury, Short U.S. Government, Intermediate U.S. Treasury, Intermediate
U.S. Government, Short Investment Grade Debt, Intermediate Investment Grade
Debt, General U.S. Treasury, General U.S. Government and Mortgage funds.
(6) As of December 31, 1994.
(7) As of December 31, 1994.
III-2
<PAGE>
Securities is the only Wall Street firm to have its own in-house Certified
Financial Planner (CFP) program. In the December 1995 issue of Registered Rep,
an industry publication, Prudential Securities' Financial Advisor training
programs received a grade of A- (compared to an industry average of B+).
In 1995, Prudential Securities' equity research team ranked 8th in
INSTITUTIONAL INVESTOR magazine's 1995 "All America Research Team" survey. Five
Prudential Securities' analysts were ranked as first-team finishers.(8)
In addition to training, Prudential Securities provides its financial
advisors with access to firm economists and market analysts. It has also
developed proprietary tools for use by financial advisors, including the
Financial Architect-SM-, a state-of-the-art asset allocation software program
which helps Financial Advisors to evaluate a client's objectives and overall
financial plan, and a comprehensive mutual fund information and analysis system
that compares different mutual funds.
For more complete information about any of the Prudential Mutual Funds,
including charges and expenses, call your Prudential Securities financial
adviser or Pruco/Prudential representative for a free prospectus. Read it
carefully before you invest or send money.
- --------------------------
(8) On an annual basis, INSTITUTIONAL INVESTOR magazine surveys more than 700
institutional money managers, chief investment officers and research
directors, asking them to evaluate analysts in 76 industry sectors. Scores
are produced by taking the number of votes awarded to an individual analyst
and weighting them based on the size of the voting institution. In total,
the magazine sends its survey to approximately 2,000 institutions and a
group of European and Asian institutions.
III-3
<PAGE>
PART C
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS.
(A) FINANCIAL STATEMENTS:
(1) The following financial statements are included in the Prospectuses
constituting Part A of this Registration Statement:
Financial Highlights.
(2) The following financial statements are included in the Statement of
Additional Information constituting Part B of this Registration Statement:
Portfolio of Investments at August 31, 1997.
Statement of Assets and Liabilities at August 31, 1997.
Statement of Operations for the year ended August 31, 1997.
Statement of Changes in Net Assets for the years ended
August 31, 1997 and 1996.
Notes to Financial Statements.
Financial Highlights.
Independent Auditors' Reports.
(B) EXHIBITS:
1. (a) Amended and Restated Declaration of Trust of the Registrant.
(Incorporated by reference to Exhibit No. 1(a) to Post-Effective
Amendment No. 20 to Registration Statement on Form N-1A filed via
EDGAR December 20, 1994 (File No. 2-91215).)
(b) Amended and Restated Certificate of Designation. (Incorporated by
reference to Exhibit No. 1(b) to Post-Effective Amendment No. 20 to
Registration Statement on Form N-1A filed via EDGAR December 20, 1994
(File No. 2-91215).)
(c) Amended Certificate of Designation. (Incorporated by reference to
Exhibit No. 1(c) to Post-Effective Amendment No. 23 to Registration
Statement on Form N-1A filed via EDGAR October 30, 1996 (File No.
2-91215).)
2. Restated By-Laws. (Incorporated by reference to Exhibit No. 2 to
Registration Statement on Form N-1A filed via EDGAR May 12, 1994 (File
No. 2-91215).)
4. (a) Specimen receipt for shares of beneficial interest, $.01 par
value, of the California Income Series.*
(b) Specimen receipt for shares of beneficial interest, $.01 par
value, of California Series.*
(c) Specimen receipt for shares of beneficial interest, $.01 par
value, of California Money Market Series.*
5. (a) Management Agreement between the Registrant and Prudential
Mutual Fund Management, Inc.*
(b) Subadvisory Agreement between Prudential Mutual Fund Management,
Inc. and The Prudential Investment Corporation.*
6. (a) Amended and Restated Distribution Agreement with respect to
California Money Market Series between the Registrant and Prudential
Mutual Fund Distributors, Inc. (Incorporated by reference to Exhibit
No. 6(a) to Post-Effective Amendment No. 23 to Registration Statement
on Form N-1A filed via EDGAR October 30, 1996 (File No. 2-91215).)
(b) Amendment to Distribution Agreements. (Incorporated by reference
to Exhibit No. 6(b) to Post-Effective Amendment No. 23 to Registration
Statement on Form N-1A filed via EDGAR October 30, 1996 (File No.
2-91215).)
(c) Amended and Restated Distribution Agreement. (Incorporated by
reference to Exhibit No. 7(c) to Post-Effective Amendment No. 23 to
Registration Statement on Form N-1A filed via EDGAR October 30, 1996
(File No. 2-91215).)
8. Custodian Contract between the Registrant and State Street Bank and
Trust Company.*
9. Transfer Agency and Service Agreement between the Registrant and
Prudential Mutual Fund Services, Inc.*
C-1
<PAGE>
11. (a) Consent of Price Waterhouse LLP.*
(b) Consent of Deloitte & Touche LLP.*
13. Purchase Agreement. (Incorporated by reference to Exhibit No. 13 to
Pre-Effective Amendment No. 1 to Registration Statement on Form N-1A
filed August 29, 1984 (File No. 2-91215).)
15. (a) Distribution and Service Plan with respect to California Money
Market Series between the Registrant and Prudential Mutual Fund
Distributors, Inc. (Incorporated by reference to Exhibit No. 15(h) to
Post-Effective Amendment No. 17 to Registration Statement on Form N-1A
filed via EDGAR November 1, 1993 (File No. 2-91215).)
(b) Distribution and Service Plan for Class A shares. (Incorporated by
reference to Exhibit No. 15(b) to Post-Effective Amendment No. 20 to
Registration Statement on Form N-1A filed via EDGAR December 20, 1994
(File No. 2-91215).)
(c) Distribution and Service Plan for Class B shares. (Incorporated by
reference to Exhibit No. 15(c) to Post-Effective Amendment No. 20 to
Registration Statement on Form N-1A filed via EDGAR December 20, 1994
(File No. 2-91215).)
(d) Distribution and Service Plan for Class C shares. (Incorporated by
reference to Exhibit No. 15(d) to Post-Effective Amendment No. 20 to
Registration Statement on Form N-1A filed via EDGAR December 20, 1994
(File No. 2-91215).)
16. (a) Schedule of Computation of Performance Information for Class A,
Class B, Class C and Class Z shares.*
(b) Schedule of Computation of Performance Information for shares of
California Money Market Series.*
18. Rule 18f-3 Plan. (Incorporated by reference to Exhibit No. 18 to
Post-Effective Amendment No. 23 on Form N-1A filed via EDGAR October
30, 1996 (File No. 2-91215).)
27. Financial Data Schedules.*
- ------------------------
*Filed herewith.
Powers of Attorney. Executed copies filed under "Other Exhibits" to
Post-Effective Amendment No. 11 to Registration Statement on Form N-1A filed
October 10, 1990 (File No. 2-91215).
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
None.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES.
As of October 3, 1997, each series of the Fund had the following number of
record holders of shares of beneficial interest, $.01 par value per share:
California Series, 2,517 record holders of Class A shares, 2,150 record holders
of Class B shares, 25 record holders of Class C shares and 16 record holders of
Class Z shares; California Income Series, 2,695 record holders of Class A
shares, 1,041 record holders of Class B shares, 81 record holders of Class C
shares and 39 record holders of Class Z shares; California Money Market Series,
5,417 record holders.
ITEM 27. INDEMNIFICATION.
Article V, Section 5.1 of the Registrant's Declaration of Trust provides
that neither shareholders nor Trustees, officers, employees or agents shall be
subject to personal liability to any other person, except (with respect to
Trustees, officers, employees or agents) liability arising from bad faith,
willful misfeasance, gross negligence or reckless disregard of his of her
duties. Section 5.1 also provides that the Registrant will indemnify and hold
harmless each shareholder against all claims and all expenses reasonably related
thereto.
As permitted by Sections 17(h) and (i) of the Investment Company Act of
1940, as amended (the 1940 Act) and pursuant to Article VI of the Fund's By-Laws
(Exhibit 2 to the Registration Statement), officers, Trustees, employees and
agents of the Registrant will not be liable to the Registrant, any shareholder,
officer, Trustee, employee, agent or other person for any action or failure to
act, except for bad faith, willful misfeasance, gross negligence or reckless
disregard of duties, and those individuals may be indemnified against
liabilities in connection with the Registrant, subject to the same exceptions.
As permitted by Section 17(i) of the 1940 Act, pursuant to Section 9 of the
Distribution Agreements (Exhibit 6 to the Registration Statement), the
Distributor of the Registrant may be indemnified against liabilities which it
may incur, except liabilities arising from bad faith, gross negligence, willful
misfeasance or reckless disregard of duties.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended (Securities Act) may be permitted to Trustees, officers and
controlling persons of the Registrant pursuant to the foregoing provisions or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
C-2
<PAGE>
expressed in the 1940 Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by a Trustee, officer or controlling
person of the Registrant in connection with the successful defense of any
action, suit or proceeding) is asserted against the Registrant by such Trustee,
officer or controlling person in connection with the shares being registered,
the Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the 1940 Act and will be governed by the final adjudication of such
issue.
The Registrant has purchased an insurance policy insuring its officers and
Trustees against liabilities, and certain costs of defending claims against such
officers and Trustees, to the extent such officers and Trustees are not found to
have committed conduct constituting willful misfeasance, bad faith, gross
negligence or reckless disregard in the performance of their duties. The
insurance policy also insures the Registrant against the cost of indemnification
payments to officers and Trustees under certain circumstances.
Section 9 of the Management Agreement (Exhibit 5(a) to the Registration
Statement) and Section 4 of the Subadvisory Agreement (Exhibit 5(b) to the
Registration Statement) limit the liability of Prudential Investments Fund
Management LLC (PIFM) and The Prudential Investment Corporation (PIC),
respectively, to liabilities arising from willful misfeasance, bad faith or
gross negligence in the performance of their respective obligations and duties
under the agreements.
The Registrant hereby undertakes that it will apply the indemnification
provisions of its By-Laws and the Distribution Agreement in a manner consistent
with Release No. 11330 of the Securities and Exchange Commission under the 1940
Act so long as the interpretations of Sections 17(h) and 17(i) of such Act
remain in effect and are consistently applied.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
(a) Prudential Investments Fund Management LLC (PIFM)
See "How the Fund is Managed--Manager" in the Prospectuses constituting Part
A of this Registration Statement and "Manager" in the Statement of Additional
Information constituting Part B of this Registration Statement.
The business and other connections of the officers of PIFM are listed in
Schedules A and D of Form ADV of PMF as currently on file with the Securities
and Exchange Commission, the text of which is hereby incorporated by reference
(File No. 801-31104).
The business and other connections of PIFM's directors and principal
executive officers are set forth below. Except as otherwise indicated, the
address of each person is Gateway Center Three, Newark, New Jersey 07102.
<TABLE>
<CAPTION>
NAME AND ADDRESS POSITION WITH PIFM PRINCIPAL OCCUPATIONS
- ----------------------------- ------------------------- -----------------------------------------------------------------
<S> <C> <C>
Brian Storms Officer-in-Charge, President, Prudential Mutual Funds & Annuities (PMF&A); Officer-
President, Chief in-Charge, President, Chief Executive Officer and Chief
Executive Officer and Operating Officer, PIFM
Chief Operating Officer
Thomas A. Early Executive Vice President, Vice President and General Counsel, PMF&A; Executive Vice
Secretary and General President, Secretary and General Counsel, PIFM
Counsel
Robert F. Gunia Executive Vice President Comptroller, Prudential Investments; Executive Vice President and
and Treasurer Treasurer, PIFM; Senior Vice President, Prudential Securities
Neil A. McGuinness Executive Vice President Executive Vice President and Director of Marketing, PMF&A;
Executive Vice President, PIFM
Robert J. Sullivan Executive Vice President Executive Vice President, PMF&A; Executive Vice President, PIFM
</TABLE>
(b) The Prudential Investment Corporation (PIC)
See "How the Fund is Managed--Manager" in the Prospectus constituting Part A
of the Registration Statement and "Manager" in the Statement of Additional
Information constituting Part B of this Registration Statement.
C-3
<PAGE>
The business and other connections of PIC's directors and executive officers
are as set forth below. Except as otherwise indicated, the address of each
person is Prudential Plaza, Newark, NJ 07102.
<TABLE>
<CAPTION>
NAME AND ADDRESS POSITION WITH PIC PRINCIPAL OCCUPATIONS
- ----------------------------- ------------------------- -----------------------------------------------------------------
<S> <C> <C>
E. Michael Caulfield Chairman of the Board, Chief Executive Officer, Prudential Investments of The Prudential
President and Chief Insurance Company of America (Prudential)
Executive Officer and
Director
Jonathan M. Greene Senior Vice President and President--Investment Management, Prudential Investments of
Director Prudential; Senior Vice President and Director, PIC
John R. Strangfeld Vice President and President of Private Asset Management Group of Prudential; Senior
Director Vice President (Prudential); Vice President and Director, PIC
</TABLE>
ITEM 29. PRINCIPAL UNDERWRITERS
(a) Prudential Securities Incorporated
Prudential Securities is distributor for The BlackRock Government Income
Trust, Command Money Fund, Command Government Fund, Command Tax-Free Fund, The
Global Total Return Fund, Inc., Global Utility Fund, Inc., Nicholas-Applegate
Fund, Inc. (NIcholas-Applegate Growth Equity Fund), Prudential Balanced Fund,
Prudential California Municipal Fund, Prudential Distressed Securities Fund,
Inc., Prudential Diversified Bond Fund, Inc., Prudential Dryden Fund, Prudential
Emerging Growth Fund, Inc., Prudential Equity Fund, Inc., Prudential Equity
Income Fund, Prudential Europe Growth Fund, Inc., Prudential Global Genesis
Fund, Inc., Prudential Global Limited Maturity Fund, Inc., Prudential Government
Income Fund, Inc., Prudential Government Securities Trust, Prudential High Yield
Fund, Inc., Prudential Institutional Liquidity Portfolio, Inc., Prudential
Intermediate Global Income Fund, Inc., Prudential International Bond Fund, Inc.,
Prudential Jennison Series Fund, Inc., Prudential MoneyMart Assets, Inc.,
Prudential Mortgage Income Fund, Inc., Prudential Multi-Sector Fund, Inc.,
Prudential Municipal Bond Fund, Prudential Municipal Series Fund, Prudential
National Municipals Fund, Inc., Prudential Natural Resources Fund, Inc.,
Prudential Pacific Growth Fund, Inc., Prudential Small-Cap Quantum Fund, Inc.,
Prudential Small Company Value Fund, Inc., Prudential Special Money Market Fund,
Inc., Prudential Structured Maturity Fund, Inc., Prudential Tax-Free Money Fund,
Inc., Prudential Utility Fund, Inc., Prudential World Fund, Inc. and The Target
Portfolio Trust. Prudential Securities is also a depositor for the following
unit investment trusts:
Corporate Investment Trust Fund
Prudential Equity Trust Shares
National Equity Trust
Prudential Unit Trust
Government Securities Equity Trust
National Municipal Trust
(b) Information concerning the officers and directors of Prudential
Securities Incorporated is set forth below.
<TABLE>
<CAPTION>
POSITIONS AND
POSITIONS AND OFFICES OFFICES
NAME(1) WITH UNDERWRITER WITH REGISTRANT
- ------------------------------------ ----------------------------------------------------------------- -----------------
<S> <C> <C>
Alan D. Hogan....................... Executive Vice President, Chief Administrative Officer and None
Director
George A. Murray.................... Executive Vice President and Director None
Leland B. Paton..................... Executive Vice President and Director None
One New York Plaza
New York, NY 10292
Martin Pfinsgraff................... Executive Vice President, Chief Financial Officer and Director None
Vincent T. Pica, II................. Executive Vice President and Director None
One New York Plaza
New York, NY 10292
Hardwick Simmons.................... Chief Executive Officer, President and Director None
Lee B. Spencer, Jr.................. Executive Vice President, Secretary, General Counsel and Director None
Brian Storms........................ Director None
Gateway Center Three
Newark, NJ 07102
<FN>
- ------------------------
(1) The address of each person named is One Seaport Plaza, New York, NY 10292
unless otherwise indicated.
</TABLE>
(c) Registrant has no principal underwriter who is not an affiliated person
of the Registrant.
C-4
<PAGE>
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
All accounts, books and other documents required to be maintained by Section
31(a) of the 1940 Act and the Rules thereunder are maintained at the offices of
State Street Bank and Trust Company, 1776 Heritage Drive, North Quincy,
Massachusetts 02171, The Prudential Investment Corporation, Prudential Plaza,
751 Broad Street, Newark, New Jersey 07102, the Registrant, Gateway Center
Three, Newark, New Jersey 07102, and Prudential Mutual Fund Services LLC,
Raritan Plaza One, Edison, New Jersey 08837. Documents required by Rules
31a-1(b)(5), (6), (7), (9), (10) and (11) and 31a-1(f) will be kept at Gateway
Center Three, documents required by Rules 31a-1(b)(4) and (11) and 31a-1(d) at
Gateway Center Three, and the remaining accounts, books and other documents
required by such other pertinent provisions of Section 31(a) and the Rules
promulgated thereunder will be kept by State Street Bank and Trust Company and
Prudential Mutual Fund Services LLC.
ITEM 31. MANAGEMENT SERVICES
Other than as set forth under the captions "How the Fund is
Managed--Manager" and "How the Fund is Managed-- Distributor" in the
Prospectuses and the captions "Manager" and "Distributor" in the Statement of
Additional Information, constituting Parts A and B, respectively, of this
Post-Effective Amendment to the Registration Statement, Registrant is not a
party to any management-related service contract.
ITEM 32. UNDERTAKINGS
The Registrant hereby undertakes to furnish each person to whom a Prospectus
is delivered with a copy of the Registrant's latest annual report to
shareholders, upon request and without charge.
C-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant certifies that it meets all of the
requirements for effectiveness of this Post-Effective Amendment to the
Registration Statement pursuant to Rule 485(b) under the Securities Act of 1933
and has duly caused this Post-Effective Amendment to the Registration Statement
to be signed on its behalf by the undersigned thereunto duly authorized, in the
City of Newark, and State of New Jersey, on the 30th day of October, 1997.
PRUDENTIAL CALIFORNIA MUNICIPAL
FUND
By: /s/ RICHARD A. REDEKER
-------------------------------
Richard A. Redeker, President
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment to the Registration Statement has been signed below by
the following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
- ------------------------------------------------------ ----------------------------------------------- -----------------
<C> <S> <C>
/s/ EDWARD D. BEACH
------------------------------------------- Trustee October 30, 1997
Edward D. Beach
/s/ EUGENE C. DORSEY
------------------------------------------- Trustee October 30, 1997
Eugene C. Dorsey
/s/ DELAYNE D. GOLD
------------------------------------------- Trustee October 30, 1997
Delayne D. Gold
/s/ ROBERT F. GUNIA
------------------------------------------- Vice President and Trustee October 30, 1997
Robert F. Gunia
/s/ HARRY A. JACOBS, JR.
------------------------------------------- Trustee October 30, 1997
Harry A. Jacobs, Jr.
/s/ DONALD D. LENNOX
------------------------------------------- Trustee
Donald D. Lennox
/s/ MENDEL A. MELZER
------------------------------------------- Trustee October 30, 1997
Mendel A. Melzer
/s/ THOMAS T. MOONEY
------------------------------------------- Trustee October 30, 1997
Thomas T. Mooney
/s/ THOMAS H. O'BRIEN
------------------------------------------- Trustee October 30, 1997
Thomas H. O'Brien
/s/ RICHARD A. REDEKER
------------------------------------------- President and Trustee October 30, 1997
Richard A. Redeker
/s/ NANCY HAYS TEETERS
------------------------------------------- Trustee October 30, 1997
Nancy Hays Teeters
/s/ LOUIS A. WEIL, III
------------------------------------------- Trustee
Louis A. Weil, III
/s/ GRACE TORRES
------------------------------------------- Principal Financial and Accounting Officer October 30, 1997
Grace Torres
</TABLE>
C-6
<PAGE>
PRUDENTIAL CALIFORNIA MUNICIPAL FUND
EXHIBIT INDEX
1. (a) Amended and Restated Declaration of Trust of the Registrant.
(Incorporated by reference to Exhibit No. 1(a) to Post-Effective
Amendment No. 20 to Registration Statement on Form N-1A filed via
EDGAR December 20, 1994 (File No. 2-91215).)
(b) Amended and Restated Certificate of Designation. (Incorporated by
reference to Exhibit No. 1(b) to Post-Effective Amendment No. 20 to
Registration Statement on Form N-1A filed via EDGAR December 20, 1994
(File No. 2-91215).)
(c) Amended Certificate of Designation. (Incorporated by reference to
Exhibit No. 1(c) to Post-Effective Amendment No. 23 to Registration
Statement on Form N-1A filed via EDGAR October 30, 1996 (File No.
2-91215).)
2. Restated By-Laws. (Incorporated by reference to Exhibit No. 2 to
Registration Statement on Form N-1A filed via EDGAR May 12, 1994 (File
No. 2-91215).)
4. (a) Specimen receipt for shares of beneficial interest, $.01 par
value, of the California Income Series.*
(b) Specimen receipt for shares of beneficial interest, $.01 par
value, of the California Series.*
(c) Specimen receipt for shares of beneficial interest, $.01 par
value, of California Money Market Series.*
5. (a) Management Agreement between the Registrant and Prudential
Mutual Fund Management, Inc.*
(b) Subadvisory Agreement between Prudential Mutual Fund Management,
Inc. and The Prudential Investment Corporation.*
6. (a) Amended and Restated Distribution Agreement with respect to
California Money Market Series between the Registrant and Prudential
Mutual Fund Distributors, Inc. (Incorporated by reference to Exhibit
No. 6(a) to Post-Effective Amendment No. 23 to Registration Statement
on Form N-1A filed via EDGAR October 30, 1996 (File No. 2-91215).)
(b) Amendment to Distribution Agreements. (Incorporated by reference
to Exhibit No. 6(b) to Post-Effective Amendment No. 23 to Registration
Statement on Form N-1A filed via EDGAR October 30, 1996 (File No.
2-91215).)
(c) Amended and Restated Distribution Agreement. (Incorporated by
reference to Exhibit No. 7(c) to Post-Effective Amendment No. 23 to
Registration Statement on Form N-1A filed via EDGAR October 30, 1996
(File No. 2-91215).)
8. Custodian Contract between the Registrant and State Street Bank and
Trust Company.*
9. Transfer Agency and Service Agreement between the Registrant and
Prudential Mutual Fund Services, Inc.*
11. (a) Consent of Price Waterhouse LLP.*
(b) Consent of Deloitte & Touche LLP.*
13. Purchase Agreement. (Incorporated by reference to Exhibit No. 13 to
Pre-Effective Amendment No. 1 to Registration Statement on Form N-1A
filed August 29, 1984 (File No. 2-91215).)
15. (a) Distribution and Service Plan with respect to California Money
Market Series between the Registrant and Prudential Mutual Fund
Distributors, Inc. (Incorporated by reference to Exhibit No. 15(h) to
Post-Effective Amendment No. 17 to Registration Statement on Form N-1A
filed via EDGAR November 1, 1993 (File No. 2-91215).)
(b) Distribution and Service Plan for Class A shares. (Incorporated by
reference to Exhibit No. 15(b) to Post-Effective Amendment No. 20 to
Registration Statement on Form N-1A filed via EDGAR December 20, 1994
(File No. 2-91215).)
(c) Distribution and Service Plan for Class B shares. (Incorporated by
reference to Exhibit No. 15(c) to Post-Effective Amendment No. 20 to
Registration Statement on Form N-1A filed via EDGAR December 20, 1994
(File No. 2-91215).)
(d) Distribution and Service Plan for Class C shares. (Incorporated by
reference to Exhibit No. 15(d) to Post-Effective Amendment No. 20 to
Registration Statement on Form N-1A filed via EDGAR December 20, 1994
(File No. 2-91215).)
16. (a) Schedule of Computation of Performance Information for Class A,
Class B, Class C and Class Z shares.*
(b) Schedule of Computation of Performance Information for shares of
California Money Market Series.*
18. Rule 18f-3 Plan. (Incorporated by reference to Exhibit No. 18 to
Post-Effective Amendment No. 23 to Registration Statement on Form N-1A
filed via EDGAR October 30, 1996 (File No. 2-91215).)
27. Financial Data Schedules.*
- ------------------------
*Filed herewith.
<PAGE>
<TABLE>
<CAPTION>
====================================================================================================
<S> <C>
CLASS A
RECEIPT FOR SHARES
====================== =============================
NUMBER SHARES OF BENEFICIAL INTEREST
====================== =============================
Prudential California Municipal Fund
(California Income Series)
AN UNINCORPORATED BUSINESS TRUST UNDER THE LAWS OF THE COMMONWEALTH OF MASSACHUSETTS
ACCOUNT No. ALPHA CODE ------------------------------
CUSIP 744313 30 5
------------------------------
SEE REVERSE SIDE FOR CERTAIN DEFINITIONS
THIS IS TO EVIDENCE that
SPECIMEN
is the owner of
FULLY-PAID AND NON-ASSESSABLE SHARES OF BENEFICIAL INTEREST, PAR VALUE OF $.01 EACH OF THE
- ---------------------PRUDENTIAL CALIFORNIA MUNICIPAL FUND (CALIFORNIA INCOME SERIES)--------------------
hereafter called the "Trust," transferable on the books of the Trust by the owner in person or by
duly authorized attorney upon surrender of this Certificate properly endorsed.
This Certificate and the shares represented hereby are issued and shall be held subject
to the provisions of the Declaration of Trust and By-Laws of the Trust and all amendments thereof,
copies of which are on file with the Secretary of the Commonwealth of Massachusetts and at the
office of the Trust, to all of which the holder, by acceptance hereof assents.
This Certificate is not valid unless countersigned by the Transfer Agent.
IN WITNESS WHEREOF, the Trust has caused this Certificate to be signed in its name by
its proper officers and to be sealed with the Seal of the Trust.
Dated:
[SEAL]
/s/ S. Jane Rose /s/ Lawrence C. McQuade
Secretary Vice President
COUNTERSIGNED:
PRUDENTIAL MUTUAL FUND SERVICES, INC.
(NEW JERSEY)
TRANSFER AGENT,
BY
AUTHORIZED OFFICER
====================================================================================================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
====================================================================================================
<S> <C>
CLASS A
RECEIPT FOR SHARES
====================== =============================
NUMBER SHARES OF BENEFICIAL INTEREST
====================== =============================
Prudential California Municipal Fund
(California Series)
AN UNINCORPORATED BUSINESS TRUST UNDER THE LAWS OF THE COMMONWEALTH OF MASSACHUSETTS
ACCOUNT No. ALPHA CODE ------------------------------
CUSIP 744313 10 7
------------------------------
SEE REVERSE SIDE FOR CERTAIN DEFINITIONS
THIS IS TO EVIDENCE that
SPECIMEN
is the owner of
FULLY-PAID AND NON-ASSESSABLE SHARES OF BENEFICIAL INTEREST, PAR VALUE OF $.01 EACH OF THE
- ---------------------PRUDENTIAL CALIFORNIA MUNICIPAL FUND (CALIFORNIA SERIES)----------------------
hereafter called the "Trust," transferable on the books of the Trust by the owner in person or by
duly authorized attorney upon surrender of this Certificate properly endorsed.
This Certificate and the shares represented hereby are issued and shall be held subject
to the provisions of the Declaration of Trust and By-Laws of the Trust and all amendments thereof,
copies of which are on file with the Secretary of the Commonwealth of Massachusetts and at the
office of the Trust, to all of which the holder, by acceptance hereof assents.
This Certificate is not valid unless countersigned by the Transfer Agent.
IN WITNESS WHEREOF, the Trust has caused this Certificate to be signed in its name by
its proper officers and to be sealed with the Seal of the Trust.
Dated:
[SEAL]
/s/ S. Jane Rose /s/ Lawrence C. McQuade
Secretary President
COUNTERSIGNED:
PRUDENTIAL MUTUAL FUND SERVICES, INC.
(NEW JERSEY)
TRANSFER AGENT,
BY
AUTHORIZED OFFICER
====================================================================================================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
====================================================================================================
<S> <C>
RECEIPT FOR SHARES
====================== =============================
NUMBER SHARES OF BENEFICIAL INTEREST
====================== =============================
Prudential California Municipal Fund
(California Money Market Series)
AN UNINCORPORATED BUSINESS TRUST UNDER THE LAWS OF THE COMMONWEALTH OF MASSACHUSETTS
ACCOUNT No. ALPHA CODE ------------------------------
CUSIP 744313 50 3
------------------------------
SEE REVERSE SIDE FOR CERTAIN DEFINITIONS
THIS IS TO EVIDENCE that
SPECIMEN
is the owner of
FULLY-PAID AND NON-ASSESSABLE SHARES OF BENEFICIAL INTEREST, PAR VALUE OF $.01 EACH OF THE
- ---------------------PRUDENTIAL CALIFORNIA MUNICIPAL FUND (CALIFORNIA MONEY MARKET SERIES)------------
hereafter called the "Trust," transferable on the books of the Trust by the owner in person or by
duly authorized attorney upon surrender of this Certificate properly endorsed.
This Certificate and the shares represented hereby are issued and shall be held subject
to the provisions of the Declaration of Trust and By-Laws of the Trust and all amendments thereof,
copies of which are on file with the Secretary of the Commonwealth of Massachusetts and at the
office of the Trust, to all of which the holder, by acceptance hereof assents.
This Certificate is not valid unless countersigned by the Transfer Agent.
IN WITNESS WHEREOF, the Trust has caused this Certificate to be signed in its name by
its proper officers and to be sealed with the Seal of the Trust.
Dated:
[SEAL]
/s/ S. Jane Rose /s/ Lawrence C. McQuade
Secretary President
COUNTERSIGNED:
PRUDENTIAL MUTUAL FUND SERVICES, INC.
(NEW JERSEY)
TRANSFER AGENT,
BY
AUTHORIZED OFFICER
====================================================================================================
</TABLE>
<PAGE>
PRUDENTIAL-BACHE CALIFORNIA MUNICIPAL FUND
MANAGEMENT AGREEMENT
Agreement, made this 30th day of December, 1988 between
Prudentia1-Bache California Municipal Fund, a Massachusetts business trust (the
"Fund"), and Prudential Mutua1 Fund Management, Inc., a Delaware corporation
(the "Manager").
WITNESSETH
WHEREAS, the Fund is a diversified, open-end management investment
company registered under the Investment Company Act of 1940, as amended (the
"1940 Act"); and
WHEREAS, the Fund desires to retain the Manager to render or
contract to obtain as hereinafter provided investment advisory services to the
Fund and the Fund also desires to avail itself of the facilities available to
the Manager with respect to the administration of its day to day business
affairs, and the Manager is willing to render such investment advisory and
administrative services:
NOW, THEREFORE, the parties agree as follows:
1. The Fund hereby appoints the Manager to act as manager of the
Fund and administrator of its business affairs for the period and on the terms
set forth in this Agreement. The Manager accepts such appointment and agrees to
render the services herein described, for the compensation herein provided. The
Manager will enter into an agreement, dated the date hereof, with The Prudential
Investment Corporation ("PIC") pursuant to which PIC shall furnish to the Fund
the investment advisory
<PAGE>
services specified therein in connection with the management of the Fund. Such
agreement in the form attached as Exhibit A is hereinafter referred to as the
"Subadvisory Agreement." The Manager will continue to have responsibility for
all investment advisory services furnished pursuant to the Subadvisory
Agreement.
2. Subject to the supervision of the Trustees of the Fund, the
Manager shall administer the Fund's business affairs and, in connection
therewith, shall furnish the Fund with office facilities and with clerical,
bookkeeping and recordkeeping services at such office facilities and, subject to
Section 1 hereof and the Subadvisory Agreement, the Manager shall manage the
investment operations of the Fund and the composition of the Fund's portfolio,
including the purchase, retention and disposition thereof, in accordance with
the Fund's investment objectives, policies and restrictions as stated in the
Prospectus (hereinafter defined) and subject to the following understandings:
(a) The Manager shall provide supervision of the Fund's investments
and determine from time to time what investments or securities will be
purchased, retained, sold or loaned by the Fund, and what portion of the
assets will be invested or held uninvested as cash.
(b) The Manager, in the performance of its duties and obligations
under this Agreement, shall act in conformity with the Declaration of
Trust, By-Laws and Prospectus (hereinafter defined) of the Fund and with
the instruction and directions of the Trustees of the Fund and will
conform to and comply with the
-2-
<PAGE>
requirements of the 1940 Act and all other applicable federal and state
laws and regulations.
(c) The Manager shall determine the securities and futures contracts
to be purchased or sold by the Fund and will place orders pursuant to its
determinations with or through such persons, brokers, dealers or futures
commission merchants (including but not limited to Prudential-Bache
Securities Inc.) in conformity with the policy with respect to brokerage
as set forth in the Fund's Registration Statement and Prospectus
(hereinafter defined) or as the Trustees may direct from time to time. In
providing the Fund with investment supervision, it is recognized that the
Manager will give primary consideration to securing the most favorable
price and efficient execution. Consistent with this policy, the Manager
may consider the financial responsibility, research and investment
information and other services provided by brokers, dealers or futures
commission merchants who may effect or be a party to any such transaction
or other transactions to which other clients of the Manager may be a
party. It is understood that Prudential-Bache Securities Inc. may be used
as principal broker for securities transactions but that no formula has
been adopted for allocation of the Fund's investment transaction business.
It is also understood that it is desirable for the Fund that the Manager
have access to supplemental investment and market research and security
and economic analysis provide by brokers or futures commission merchants
and that such brokers my execute brokerage transactions at a higher cost
to the Fund than may result when allocating brokerage to other brokers or
futures commission merchants on
-3-
<PAGE>
the basis of seeking the most favorable price and efficient execution.
Therefore, the Manager is authorized to pay higher brokerage commissions
for the purchase and sale of securities and futures contracts for the Fund
to brokers or futures commission merchants who provide such research and
analysis, subject to review by the Fund's Trustees from time to time with
respect to the extent and continuation of this practice. It is understood
that the services provided by such broker or futures commission merchant
may be useful to the Manager in connection with its services to other
clients.
On occasions when the Manager deems the purchase or sale of a
security or a futures contract to be in the best interest of the Fund as
well as other clients of the Manager or the Subadviser, the Manager, to
the extent permitted by applicable laws and regulations, may, but shall be
under no obligation to, aggregate the securities or futures contracts to
be so sold or purchased in order to obtain the most favorable price or
lower brokerage commission and efficient execution. In such event,
allocation of the securities or futures contracts so purchased or sold, as
well as the expenses incurred in the transaction, will be made by the
Manager in the manner it considers to be the most equitable and consistent
with its fiduciary obligations to the Fund and to such other clients.
(d) The Manager shall maintain all books and records with respect to
the Fund's portfolio transactions and shall render to the Fund's Trustees
such periodic and special reports as the Trustees may reasonably request.
-4-
<PAGE>
(e) The Manager shall be responsible for the financial and
accounting records to be maintained by the Fund (including those being
maintained by the Fund's Custodian).
(f) The Manager shall provide the Fund's Custodian on each business
day with information relating to all transactions concerning the Fund's
assets.
(g) The investment management services of the Manager to the Fund
under this Agreement are not to be deemed exclusive, and the Manager shall
be free to render similar services to others.
3. The Fund has delivered to the Manager copies of each of the
following documents and will deliver to it all future amendments and
supplements, if any:
(a) Declaration of Trust of the Fund, as filed with the Commonwealth
of Massachusetts (such Declaration of Trust, as in effect on the date
hereof and as amended from time to time, is herein called the "Declaration
of Trust");
(b) By-Laws of the Fund (such By-Laws, as in effect on the date
hereof and as amended from time to time, are herein called the "By-Laws");
(c) Certified resolutions of the Trustees of the Fund authorizing
the appointment of the Manager and approving the form of this agreement;
(d) Registration Statement under the 1940 Act and the Securities Act
of 1933, as amended, on Form N-1A (the "Registration Statement"), as filed
with the Securities and Exchange Commission (the "Commission") relating to
the Fund and shares of beneficial interest of the Fund and all amendments
thereto;
-5-
<PAGE>
(e) Notification of Registration of the Fund under the 1940 Act on
Form N-8A as filed with the Commission and all amendments thereto; and
(f) Prospectus of the Fund (such Prospectus and Statement of
Additional Information, as currently in effect and as amended or
supplemented from time to time, being herein called the "Prospectus").
4. The Manager shall authorize and permit any of its directors,
officers and employees who may be elected as Trustees or officers of the Fund to
serve in the capacities in which they are elected. All services to be furnished
by the Manager under this Agreement may be furnished through the medium of any
such directors, officers or employees of the Manager.
5. The Manager shall keep the Fund's books and records required to
be maintained by it pursuant to paragraph 2 hereof. The Manager agrees that all
records which it maintains for the Fund are the property of the Fund and it will
surrender promptly to the Fund any such records upon the Fund's request,
provided however that the Manager may retain a copy of such records. The Manager
further agrees to preserve for the periods prescribed by Rule 31a-2 under the
1940 Act any such records as are required to be maintained by the Manager
pursuant to Paragraph 2 hereof.
6. During the term of this Agreement, the Manager shall pay the
following expenses:
(i) the salaries and expenses of all personnel of the Fund and the
Manager except the fees and expenses of Trustees who are not affiliated
persons of the Manager or the Fund's investment adviser,
-6-
<PAGE>
(ii) all expenses incurred by the Manager or by the Fund in
connection with managing the ordinary course of the Fund's business other
than those assumed by the Fund herein, and
(iii) the costs and expenses payable to PIC pursuant to the
Subadvisory Agreement.
The Fund assumes and will pay the expenses described below:
(a) the fees and expenses incurred by the Fund in connection with
the management of the investment and reinvestment of the Fund's assets,
(b) the fees and expenses of Trustees who are not affiliated persons
of the Manager or the Fund's investment adviser,
(c) the fees and expenses of the Custodian that relate to (i) the
custodial function and the recordkeeping connected therewith, (ii)
preparing and maintaining the general accounting records of the Fund and
the providing of any such records to the Manager useful to the Manager in
connection with the Manager's responsibility for the accounting records of
the Fund pursuant to Section 31 of the 1940 Act and the rules promulgated
thereunder, (iii) the pricing of the shares of the Fund, including the
cost of any pricing service or services which may be retained pursuant to
the authorization of the Trustees of the Fund, and (iv) for both mail and
wire orders, the cashiering function in connection with the issuance and
redemption of the Fund's securities,
(d) the fees and expenses of the Fund's Transfer and Dividend
Disbursing Agent, which may be the Custodian, that relate to the
maintenance of each shareholder account,
-7-
<PAGE>
(e) the charges and expenses of legal counsel and independent
accountants for the Fund,
(f) brokers' commissions and any issue or transfer taxes chargeable
to the Fund in connection with its securities and futures transactions,
(g) all taxes and corporate fees payable by the Fund to federal,
state or other governmental agencies,
(h) the fees of any trade associations of which the Fund may be a
member,
(i) the cost of share certificates representing, and/or
non-negotiable share deposit receipts evidencing, shares of the Fund,
(j) the cost of fidelity, directors and officers and errors and
omissions insurance,
(k) the fees and expenses involved in registering and maintaining
registration of the Fund and of its shares with the Securities and
Exchange Commission, registering the Fund as a broker or dealer and
qualifying its shares under state securities laws, including the
preparation and printing of the Fund's registration statements,
prospectuses and statements of additional information for filing under
federal and state securities laws for such purposes,
(l) allocable communications expenses with respect to investor
services and all expenses of shareholders' and Trustees' meetings and of
preparing, printing and mailing reports to shareholders in the amount
necessary for distribution to the shareholders,
-8-
<PAGE>
(m) litigation and indemnification expenses and other extraordinary
expenses not incurred in the ordinary coarse of the Fund's business, and
(n) any expenses assumed by the Fund pursuant to a Plan of
Distribution adopted in conformity with Rule 12b-1 under the 1940 Act.
7. In the event the expenses of the Fund for any fiscal year
(including the fees payable to the Manager but excluding interest, taxes,
brokerage commissions, distribution fees and litigation and indemnification
expenses and other extraordinary expenses not incurred in the ordinary course of
the Fund's business) exceed the lowest applicable annual expense limitation
established and enforced pursuant to the statute or regulations of any
jurisdictions in which shares of the Fund are then qualified for offer and sale,
the compensation due the Manager will be reduced by the amount of such excess,
or, if such reduction exceeds the compensation payable to the Manager, the
Manager will pay to the Fund the amount of such reduction which exceeds the
amount of such compensation.
8. For the services provided and the expenses assumed pursuant to
this Agreement, the Fund will pay to the Manager as full compensation therefor a
fee at an annual rate of .50 of 1% of the Fund's average daily net assets. This
fee will be computed daily and will be paid to the Manager monthly. Any
reduction in the fee payable and any payment by the Manager to the Fund pursuant
to paragraph 7 shall be made monthly. Any such reductions or payments are
subject to readjustment during the year.
-9-
<PAGE>
9. The Manager shall not be liable for any error of judgment or for
any loss suffered by the Fund in connection with the matters to which this
Agreement relates, except a loss resulting from a breach of fiduciary duty with
respect to the receipt of compensation for services (in which case any award of
damages shall be limited to the period and the amount set forth in Section 36(b)
(3) of the 1940 Act) or loss resulting from willful misfeasance, bad faith or
gross negligence on its part in the performance of its duties or from reckless
disregard by it of its obligations and duties under this Agreement.
10. This Agreement shall continue in effect for a period of more
than two years from the date hereof only so long as such continuance is
specifically approved at least annually in conformity with the requirements of
the 1940 Act; provided, however, that this Agreement may be terminated by the
Fund at any time, without the payment of any penalty, by the Trustees of the
Fund or by vote of a majority of the outstanding voting securities (as defined
in the 1940 Act) of the Fund, or by the Manager at any time, without the payment
of any penalty, on not more than 60 days' nor less than 30 days' written notice
to the other party. This Agreement shall terminate automatically in the event of
its assignment (as defined in the 1940 Act).
11. Nothing in this Agreement shall limit or restrict the right of
any director, officer or employee of the Manager who my also be a Trustee,
officer or employee of the Fund to engage in any other business or to devote his
or her time and attention in part to the management or other aspects of any
business, whether of a similar or dissimilar nature, nor limit or restrict the
right of the Manager to engage in any other business or to render services of
any kind to any other corporation, firm, individual or association.
-10-
<PAGE>
12. Except as otherwise provided herein or authorized by the
Trustees of the Fund from time to time, the Manager shall for all purposes
herein be deemed to be an independent contractor and shall have no authority to
act for or represent the Fund in any way or otherwise be deemed an agent of the
Fund.
13. During the term of this Agreement, the Fund agrees to furnish
the Manager at its principal office all prospectuses, proxy statements, reports
to shareholders, sales literature, or other material prepared for distribution
to shareholders of the Fund or the public, which refer in any way to the
Manager, prior to use thereof and not to use such material if the Manager
reasonably objects in writing within five business days (or such other time as
may be mutually agreed) after receipt thereof. In the event of termination of
this Agreement, the Fund will continue to furnish to the Manager copies of any
of the above mentioned materials which refer in any way to the Manager. Sales
literature may be furnished to the Manager hereunder by first-class or overnight
mail, facsimile transmission equipment or hard delivery. The Fund shall furnish
or otherwise make available to the Manager such other information relating to
the business affairs of the Fund as the Manager at any time, or from time to
time, reasonably requests in order to discharge its obligations hereunder.
14. This Agreement may be amended by mutual consent, but the consent
of the Fund must be obtained in conformity with the requirements of the 1940
Act.
15. Any notice or other communication required to be given pursuant
to this Agreement shall be deemed duly given if delivered or mailed by
registered mail, postage prepaid, (1) to the Manager at One Seaport Plaza, New
York, N.Y. 10292, Attention: Secretary; or (2) to the Fund at One Seaport Plaza,
New York, N.Y. 10292, Attention: President.
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<PAGE>
16. This Agreement shall be governed by and construed in accordance
with the laws of the State of New York.
17. The Fund may use the name "Prudential-Bache California Municipal
Fund" or any name including the words "Prudential" or "Bache" only for so long
as this Agreement or any extension, renewal or amendment hereof remains in
effect, including any similar agreement with any organization which shall have
succeeded to the Manager's business as Manager or any extension, renewal or
amendment thereof remain in effect. At such time as such an agreement shall no
longer be in effect, the Fund will (to the extent that it lawfully can) cease to
use such a name or any other name indicating that it is advised by, managed by
or otherwise connected with the Manager, or any organization which shall have so
succeeded to such businesses. In no event shall the Fund use the name
"Prudential--Bache California Municipal Fund" or any name including the word
"Prudential" or "Bache" if the Manager's function is transferred or assigned to
a company of which The Prudential Insurance Company of America does not have
control.
18. The name "Prudential-Bache California Municipal Fund" is the
designation of the trustees under a Declaration of Trust, dated May 18, 1984,
and all persons dealing with the Fund must look solely to the property of the
Fund for the enforcement of any claims against the Fund as neither the trustees,
officers, agents or shareholders assume any personal liability for obligations
entered into on behalf of the Fund.
-12-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this instrument
to be executed by their officers designated below as of the day and year first
above written.
PRUDENTIAL-BACHE CALIFORNIA
MUNICIPAL FUND
By /s/ Lawrence C. McQuade
-----------------------------------
PRUDENTIAL MUTUAL FUND MANAGEMENT,
INC.
By /s/ Michael J. Downey
------------------------------------
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<PAGE>
PRUDENTIAL-BACHE CALIFORNIA MUNICIPAL FUND
SUBADVISORY AGREEMENT
Agreement made as of this 30th day of December, 1988 between
Prudential Mutual Fund Management Inc., a Delaware Corporation ("PMF" or the
"Manager"), and The Prudential Investment Corporation, a New Jersey Corporation
(the "Subadviser").
WHEREAS, the Manager has entered into a Management Agreement, dated
December 30, 1988 (the "Management Agreement"), with Prudential-Bache California
Municipal Fund (the "Fund"), a Massachusetts business trust and a diversified
open-end management investment company registered under the Investment Company
Act of 1940 (the "1940 Act"), pursuant to which PMF will act as Manager of the
Fund.
WHEREAS, PMF desires to retain the Subadviser to provide investment
advisory services to the Fund in connection with the management of the Fund and
the Subadviser is willing to render such investment advisory services.
NOW, THEREFORE, the Parties agree as follows:
1. (a) Subject to the supervision of the Manager and of the Trustees
of the Fund, the Subadviser shall manage the investment operations
of the Fund and the composition of the Fund's portfolio, including
the purchase, retention and disposition thereof, in accordance with
the Fund's investment objectives, policies and restrictions as
stated in the Prospectus, (such Prospectus and Statement of
Additional Information as currently in effect and as amended or
supplemented from time to time, being herein called the
"Prospectus"), and subject to the following understandings:
(i) The Subadviser shall provide supervision of the
Fund's investments and determine from time to time what
investments and securities will be purchased, retained, sold
or loaned by the Fund, and what portion of the assets will be
invested or held uninvested as cash.
(ii) In the performance of its duties and obligations
under this Agreement, the Subadviser shall act in conformity
with the Declaration of Trust, By-Laws and Prospectus of the
Fund and with the instructions and directions of the Manager
and of the Trustees of the Fund and will conform to and comply
with the requirements of the 1940 Act, the Internal Revenue
Code of 1986 and all other applicable federal and state laws
and regulations.
(iii) The Subadviser shall determine the securities and
futures contracts to be purchased or sold by the Fund and will
place orders with or through such persons, brokers, dealers or
<PAGE>
futures commission merchants (including but not limited to
Prudential-Bache Securities Inc.) to carry out the policy with
respect to brokerage as set forth in the Fund's Registration
Statement and Prospectus or as the Trustees may direct from
time to time. In providing the Fund with investment
supervision, it is recognized that the Subadviser will give
primary consideration to securing the best favorable price and
efficient execution. Within the framework of this policy, the
Subadviser may consider the financial responsibility, research
and investment information and other services provided by
brokers, dealers or futures commission merchants which may
effect or be a party to any such transaction or other
transactions to which the Subadviser's other clients may be a
party. It is understood that Prudential-Bache Securities Inc.
may be used as principal broker for securities transactions
but that no formula has been adopted for allocation of the
Fund's investment transaction business. It is also understood
that it is desirable for the Fund that the Subadviser have
access to supplemental investment and market research and
security and economic analysis provided by brokers or futures
commission merchants who may execute brokerage transactions at
a higher cost to the Fund than may result when allocating
brokerage to other brokers on the basis of seeking the most
favorable price and efficient execution. Therefore, the
Subadviser is authorized to place orders for the purchase and
sale of securities and futures contracts for the Fund with
such brokers or futures commission merchants, subject to
review by the Fund's Trustees from time to time with respect
to the extent and continuation of this practice. It is
understood that the services provided by such brokers or
futures commission merchants may be useful to the Subadviser
in connection with the Subadviser's services to other clients.
On occasions when the Subadviser deems the purchase or
sale of a security or futures contract to be in the best
interest of the Fund as well as other clients of the
Subadviser, the Subadviser, to the extent permitted by
applicable laws and regulations, may, but shall be under no
obligation to, aggregate the securities or futures contracts
to be sold or purchased in order to obtain the most favorable
price or lower brokerage commissions and efficient execution.
In such event, allocation of the securities or futures
contracts so purchased or sold, as well as the expenses
incurred in the transaction, will be made by the Subadviser in
the manner the Subadviser considers to be the most equitable
and consistent with its fiduciary obligations to the Fund and
to such other clients.
(iv) The Subadviser shall maintain all books and records
with respect to the Fund's portfolio transactions required by
subparagraphs (b)(5), (6), (7), (9), (10) and (11) and
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<PAGE>
paragraph (f) of Rule 31a-1 under the 1940 Act and shall
render to the Fund's Trustees such periodic and special
reports as the Trustees may reasonably request.
(v) The Subadviser shall provide the Fund's Custodian
on each business day with information relating to all
transactions concerning the Fund's assets and shall provide
the Manager with such information upon request of the Manager.
(vi) The investment management services provided by the
Subadviser hereunder are not to be deemed exclusive, and the
Subadviser shall be free to render similar services to others.
(b) The Subadviser shall authorize and permit any of its
directors, officers and employees who may be elected as
Trustees or officers of the Fund to serve in the capacities in
which they are elected. Services to be furnished by the
Subadviser under this Agreement may be furnished through the
medium of any of such directors, officers or employees.
(c) The Subadviser shall keep the Fund's books and records
required to be maintained by the Subadviser pursuant to
paragraph 1(a) hereof and shall timely furnish to the Manager
all information relating to the Subadviser's services
hereunder needed by the Manager to keep the other books and
records of the Fund required by Rule 31a-1 under the 1940 Act.
The Subadviser agrees that all records which it maintains for
the Fund are the property of the Fund and the Subadviser will
surrender promptly to the Fund any of such records upon the
Fund's request, provided however that the Subadviser may
retain a copy of such records. The Subadviser further agrees
to preserve for the periods prescribed by Rule 31a-2 of the
Commission under the 1940 Act any such records as are required
to be maintained by it pursuant to paragraph 1(a) hereof.
2. The Manager shall continue to have responsibility for all
services to be provided to the Fund pursuant to the Management
Agreement and shall oversee and review the Subadviser's performance
of its duties under this Agreement.
3. The Manager shall reimburse the Subadviser for reasonable costs
and expenses incurred by the Subadviser determined in a manner
acceptable to the Manager in furnishing the services described in
paragraph 1 hereof.
4. The Subadviser shall not be liable for any error of judgment or
for any loss suffered by the Fund or the Manager in connection with
the matters to which this Agreement relates, except a loss resulting
from willful misfeasance, bad faith or gross negligence on the
Subadviser's part in the performance of its duties or from its
reckless disregard of its obligations and duties under this
Agreement.
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<PAGE>
5. This Agreement shall continue in effect for a period of more than
two years from the date hereof only so long as such continuance is
specifically approved at least annually in conformity with the
requirements of the 1940 Act; provided, however, that this Agreement
may be terminated by the Fund at any time, without the payment of
any penalty, by the Trustees of the Fund or by vote of a majority of
the outstanding voting securities (as defined in the 1940 Act) of
the Fund, or by the Manager or the Subadviser at any time, without
the payment of any penalty, on not more than 60 days' nor less than
30 days' written notice to the other party. This Agreement shall
terminate automatically in the event of its assignment (as defined
in the 1940 Act) or upon the termination of the Management
Agreement.
6. Nothing in this Agreement shall limit or restrict the right of
any of the Subadviser's directors, officers, or employees who may
also be a Trustee, officer or employee of the Fund to engage in any
other business or to devote his or her time and attention in part to
the management or other aspects of any business, whether of a
similar or a dissimilar nature, nor limit or restrict the
Subadviser's right to engage in any other business or to render
services of any kind to any other corporation, firm, individual or
association.
7. During the term of this Agreement, the Manager agrees to furnish
the Subadviser at its principal office all prospectuses, proxy
statements, reports to shareholders, sales literature or other
material prepared for distribution to shareholders of the Fund or
the public, which refer to the Subadviser in any way, prior to use
thereof and not to use material if the Subadviser reasonably objects
in writing five business days (or such other time as may be mutually
agreed) after receipt thereof. Sales literature may be furnished to
the Subadviser hereunder by first-class or overnight mail, facsimile
transmission equipment or hand delivery.
8. This Agreement may be amended by mutual consent, but the consent
of the Fund must be obtained in conformity with the requirements of
the 1940 Act.
9. This Agreement shall be governed by the laws of the State of New
York.
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<PAGE>
IN WITNESS WHEREOF, the Parties hereto have caused this instrument
to be executed by their officers designated below as of the day and year first
above written.
PRUDENTIAL MUTUAL FUND MANAGEMENT, INC.
By /s/ Michael J. Downey
------------------------------------
THE PRUDENTIAL INVESTMENT CORPORATION
By /s/ John E. Brookmeyer, Jr.
------------------------------------
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<PAGE>
CUSTODIAN CONTRACT
Between
EACH OF THE PARTIES INDICATED ON APPENDIX A
and
STATE STREET BANK AND TRUST COMPANY
<PAGE>
TABLE OF CONTENTS
Page
----
1. Employment of Custodian and Property to be
Held By It.............................................................1
2. Duties of the Custodian with Respect to Property of
the Fund Held by the Custodian in the United States....................2
2.1 Holding Securities............................................2
2.2 Delivery of Securities........................................3
2.3 Registration of Securities....................................8
2.4 Bank Accounts.................................................8
2.5 Availability of Federal Funds.................................9
2.6 Collection of Income.........................................10
2.7 Payment of Fund Monies.......................................10
2.8 Liability for Payment in Advance of
Receipt of Securities Purchased..............................13
2.9 Appointment of Agents. . . . . . ............................14
2.10 Deposit of Securities in Securities System...................14
2.10A Fund Assets Held in the Custodian's Direct
Paper System.................................................17
2.11 Segregated Account...........................................19
2.12 Ownership Certificates for Tax Purposes......................20
2.13 Proxies......................................................20
2.14 Communications Relating to Fund
Portfolio Securities.........................................20
2.15 Reports to Fund by Independent Public
Accountants..................................................21
3. Duties of the Custodian with Respect to Property of
the Fund Held Outside of the United States............................22
3.1 Appointment of Foreign Sub-Custodians........................22
3.2 Assets to be Held............................................22
3.3 Foreign Securities Depositories..............................23
3.4 Segregation of Securities....................................23
3.5 Agreements with Foreign Banking Institutions.................24
3.6 Access of Independent Accountants of the Fund................24
3.7 Reports by Custodian.........................................25
3.8 Transactions in Foreign Custody Account......................25
3.9 Liability of Foreign Sub-Custodians..........................26
3.10 Liability of Custodian.......................................27
3.11 Reimbursement for Advances...................................28
3.12 Monitoring Responsibilities..................................28
3.13 Branches of U.S. Banks.......................................29
4. Payments for Repurchases or Redemptions and Sales
of Shares of the Fund.................................................29
5. Proper Instructions...................................................30
6. Actions Permitted Without Express Authority...........................32
7. Evidence of Authority.................................................32
<PAGE>
8. Duties of Custodian with Respect to the Books of
Account and Calculations of Net Asset Value and
Net Income............................................................33
9. Records .............................................................33
10. Opinion of Fund's Independent Accountant..............................34
11. Compensation of Custodian.............................................34
12. Responsibility of Custodian...........................................34
13. Effective Period, Termination and Amendment...........................37
14. Successor Custodian...................................................38
15. Interpretive and Additional Provisions................................40
16. Massachusetts Law to Apply............................................40
17. Prior Contracts.......................................................40
18. The Parties...........................................................40
19. Limitation of Liability...............................................41
<PAGE>
CUSTODIAN CONTRACT
This Contract between State Street Bank and Trust Company, a Massachusetts
trust company, having its principal place of business at 225 Franklin Street,
Boston, Massachusetts, 02110, hereinafter called the "Custodian", and each Fund
listed on Appendix A which evidences its agreement to be bound hereby by
executing a copy of this Contract (each such Fund individually hereinafter
referred to as the "Fund").
WITNESSETH: That in consideration of the mutual covenants and agreements
hereinafter contained, the parties hereto agree as follows:
1. Employment of Custodian and Property to be Held by It
The Fund hereby employs the Custodian as the custodian of its assets,
including securities it desires to be held in places within the United States
("domestic securities") and securities it desires to be held outside the United
States ("foreign securities") pursuant to the provisions of the Articles of
Incorporation/Declaration of Trust. The Fund agrees to deliver to the Custodian
all securities and cash owned by it, and all payments of income, payments of
principal or capital distributions received by it with respect to all securities
owned by the Fund from time to time, and the cash consideration received by it
for such new or treasury shares of capital stock, ("Shares") of the Fund as may
be issued or sold from time to time. The Custodian shall not be responsible for
any property of the Fund held or received by the Fund and not delivered to the
Custodian.
<PAGE>
Upon receipt of "Proper Instructions" (within the meaning of Article 5),
the Custodian shall from time to time employ one or more sub-custodians located
in the United States, but only in accordance with an applicable vote by the
Board of Directors/Trustees of the Fund, and provided that the Custodian shall
have the same responsibility or liability to the Fund on account of any actions
or omissions of any sub-custodian so employed as any such sub-custodian has to
the Custodian, provided that the Custodian agreement with any such domestic
sub-custodian shall impose on such sub-custodian responsibilities and
liabilities similar in nature and scope to those imposed by this Agreement with
respect to the functions to be performed by such sub-custodian. The Custodian
may employ as sub-custodians for the Fund's securities and other assets the
foreign banking institutions and foreign securities depositories designated in
Schedule "A" hereto but only in accordance with the provisions of Article 3.
2. Duties of the Custodian with Respect to Property of the Fund Held By the
Custodian in the United States
2.1 Holding Securities. The Custodian shall hold and physically segregate for
the account of the Fund all non-cash property, to be held by it in the
United States, including all domestic securities owned by the Fund, other
than (a) securities which are maintained pursuant to Section 2.10 in a
clearing agency which acts as a securities depository or in a book-entry
system authorized by the U.S. Department of the Treasury,
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<PAGE>
collectively referred to herein as "Securities System" and (b) commercial
paper of an issuer for which State Street Bank and Trust Company acts as
issuing and paying agent ("Direct Paper") which is deposited and/or
maintained in the Direct Paper System of the Custodian pursuant to Section
2.10A.
2.2 Delivery of Securities. The Custodian shall release and deliver domestic
securities owned by the Fund held by the Custodian or in a Securities
System account of the Custodian or in the Custodian's Direct Paper
book-entry system account ("Direct Paper System") only upon receipt of
Proper Instructions, which may be continuing instructions when deemed
appropriate by the parties, and only in the following cases:
1) Upon sale of such securities for the account of the Fund and
receipt of payment therefor;
2) Upon the receipt of payment in connection with any repurchase
agreement related to such securities entered into by the Fund;
3) In the case of a sale effected through a Securities System, in
accordance with the provisions of Section 2.10 hereof;
4) To the depository agent in connection with tender or other
similar offers for portfolio securities of the Fund;
5) To the issuer thereof or its agent when such securities are
called, redeemed, retired or
-3-
<PAGE>
otherwise become payable: provided that, in any such case, the
cash or other consideration is to be delivered to the
Custodian;
6) To the issuer thereof, or its agent, for transfer into the
name of the Fund or into the name of any nominee or nominees
of the Custodian or into the name or nominee name of any agent
appointed pursuant to Section 2.9 or into the name or nominee
name of any sub-custodian appointed pursuant to Article 1; or
for exchange for a different number of bonds, certificates or
other evidence representing the same aggregate face amount or
number of units; provided that, in any such case, the new
securities are to be delivered to the Custodian;
7) Upon the sale of such securities for the account of the Fund,
to the broker or its clearing agent, against a receipt, for
examination in accordance with "street delivery" custom;
provided that in any such case, the Custodian shall have no
responsibility or liability for any loss arising from the
delivery of such securities prior to receiving payment for
such securities except as may arise from the
-4-
<PAGE>
Custodian's own negligence or willful misconduct;
8) For exchange or conversion pursuant to any plan of merger,
consolidation, recapitalization, reorganization or
readjustment of the securities of the issuer of such
securities, or pursuant to provisions for conversion contained
in such securities, or pursuant to any deposit agreement:
provided that, in any such case, the new securities and cash,
if any, are to be delivered to the Custodian;
9) In the case of warrants, rights or similar securities, the
surrender thereof in the exercise of such warrants, rights or
similar securities or the surrender of interim receipts or
temporary securities for definitive securities; provided that,
in any such case, the new securities and cash, if any, are to
be delivered to the Custodian;
10) For delivery in connection with any loans of securities made
by the Fund, but only against receipt of adequate collateral
as agreed upon from time to time by the Custodian and the
Fund, which may be in the form of cash or obligations issued
by the United States government, its agencies or
-5-
<PAGE>
instrumentalities, except that in connection with any loans
for which collateral is to be credited to the Custodian's
account in the book-entry system authorized by the U.S.
Department of the Treasury, the Custodian will not be held
liable or responsible for the delivery of securities owned by
the Fund prior to the receipt of such collateral;
11) For delivery as security in connection with any borrowings by
the Fund requiring a pledge of assets by the Fund, but only
against receipt of amounts borrowed;
12) For delivery in accordance with the provisions of any
agreement among the Fund, the Custodian and a broker-dealer
registered under the Securities Exchange Act of 1934 (the
"Exchange Act") and a member of The National Association of
Securities Dealers, Inc. ("NASD"), relating to compliance with
the rules of The Options Clearing Corporation and of any
registered national securities exchange, or of any similar
organization or organizations, regarding escrow or other
arrangements in connection with transactions by the Fund;
13) For delivery in accordance with the provisions of any
agreement among the Fund,
-6-
<PAGE>
the Custodian, and a Futures Commission Merchant registered
under the Commodity Exchange Act, relating to compliance with
the rules of the Commodity Futures Trading Commission and/or
any Contract Market, or any similar organization or
organizations, regarding account deposits in connection with
transactions by the Fund;
14) Upon receipt of instructions from the transfer agent
("Transfer Agent") for the Fund, for delivery to such Transfer
Agent or to the holders of shares in connection with
distributions in kind, as may be described from time to time
in the Fund's currently effective prospectus and statement of
additional information ("prospectus"), in satisfaction of
requests by holders of Shares for repurchase or redemption;
and
15) For any other proper business purpose, but only upon receipt
of, in addition to Proper Instructions, a certified copy of a
resolution of the Board of Directors/Trustees or of the
Executive Committee signed by an officer of the Fund and
certified by the Secretary or an Assistant Secretary,
specifying the securities to be delivered, setting forth the
purpose for which such
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<PAGE>
delivery is to be made, declaring such purpose to be a proper
business purpose, and naming the person or persons to whom
delivery of such securities shall be made.
2.3 Registration of Securities. Domestic securities held by the Custodian
(other than bearer securities) shall be registered in the name of the Fund
or in the name of any nominee of the Fund or of any nominee of the
Custodian which nominee shall be assigned exclusively to the Fund, unless
the Fund has authorized in writing the appointment of a nominee to be used
in common with other registered investment companies having the same
investment adviser as the Fund, or in the name or nominee name of any
agent appointed pursuant to Section 2.9 or in the name or nominee name of
any sub-custodian appointed pursuant to Article 1. All securities accepted
by the Custodian on behalf of the Fund under the terms of this Contract
shall be in "street name" or other good delivery form. If, however, the
Fund directs the Custodian to maintain securities in "street name", the
Custodian shall utilize its best efforts to timely collect income due the
Fund on such securities and to notify the Fund on a best efforts basis of
relevant corporate actions including, without limitation, pendency of
calls, maturities, tender or exchange offers.
2.4 Bank Accounts. The Custodian shall open and maintain a separate bank
account or accounts in the United States in
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<PAGE>
the name of the Fund, subject only to draft or order by the Custodian
acting pursuant to the terms of this Contract, and shall hold in such
account or accounts, subject to the provisions hereof, all cash received
by it from or for the account of the Fund, other than cash maintained by
the Fund in a bank account established and used in accordance with Rule
17f-3 under the Investment Company Act of 1940. Funds held by the
Custodian for the Fund may be deposited by it to its credit as Custodian
in the Banking Department of the Custodian or in such other banks or trust
companies as it may in its discretion deem necessary or desirable;
provided, however, that every such bank or trust company shall be
qualified to act as a custodian under the Investment Company Act of 1940
and that each such bank or trust company and the funds to be deposited
with each such bank or trust company shall be approved by vote of a
majority of the Board of Directors/Trustees of the Fund. Such funds shall
be deposited by the Custodian in its capacity as Custodian and shall be
withdrawable by the Custodian only in that capacity.
2.5 Availability of Federal Funds. Upon mutual agreement between the Fund and
the Custodian, the Custodian shall, upon the receipt of Proper
Instructions, make federal funds available to the Fund as of specified
times agreed upon from time to time by the Fund and the Custodian in the
amount of checks received in payment for Shares of the Fund which are
deposited into the Fund's account.
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<PAGE>
2.6 Collection of Income. Subject to the provisions of Section 2.3, the
Custodian shall collect on a timely basis all income and other payments
with respect to registered securities held hereunder to which the Fund
shall be entitled either by law or pursuant to custom in the securities
business, and shall collect on a timely basis all income and other
payments with respect to bearer securities if, on the date of payment by
the issuer, such securities are held by the Custodian or its agent thereof
and shall credit such income, as collected, to the Fund's custodian
account. Without limiting the generality of the foregoing, the Custodian
shall detach and present for payment all coupons and other income items
requiring presentation as and when they become due and shall collect
interest when due on securities held hereunder. Income due the Fund on
securities loaned pursuant to the provisions of Section 2.2(10) shall be
the responsibility of the Fund. The Custodian will have no duty or
responsibility in connection therewith, other than to provide the Fund
with such information or data as may be necessary to assist the Fund in
arranging for the timely delivery to the Custodian of the income to which
the Fund is properly entitled.
2.7 Payment of Fund Monies. Upon receipt of Proper Instructions, which may be
continuing instructions when deemed appropriate by the parties, the
Custodian shall pay out monies of the Fund in the following cases only:
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1) Upon the purchase of securities held domestically, options,
futures contracts or options on futures contracts for the
account of the Fund but only (a) against the delivery of such
securities, or evidence of title to such options, futures
contracts or options on futures contracts, to the Custodian
(or any bank, banking firm or trust company doing business in
the United States or abroad which is qualified under the
Investment Company Act of 1940, as amended, to act as a
custodian and has been designated by the Custodian as its
agent for this purpose) registered in the name of the Fund or
in the name of a nominee of the Custodian referred to in
Section 2.3 hereof or in proper form for transfer; (b) In the
case of a purchase effected through a Securities System, in
accordance with the conditions set forth in Section 2.10
hereof; (c) in the case of a purchase involving the Direct
Paper System, in accordance with the conditions set forth in
Section 2.10A; (d) in the case of repurchase agreements
entered into between the Fund and the Custodian, or another
bank, or a broker-dealer which is a member of NASD, (i)
against delivery of the securities either in certificate form
or
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<PAGE>
through an entry crediting the Custodian's account at the
Federal Reserve Bank with such securities or (ii) against
delivery of the receipt evidencing purchase by the Fund of
securities owned by the Custodian along with written evidence
of the agreement by the Custodian to repurchase such
securities from the Fund or (e) for transfer to a time deposit
account of the Fund in any bank, whether domestic or foreign;
such transfer may be effected prior to receipt of a
confirmation from a broker and/or the applicable bank pursuant
to Proper Instructions from the Fund as defined in Article 5;
2) In connection with conversion, exchange or surrender of
securities owned by the Fund as set forth in Section 2.2
hereof;
3) For the redemption or repurchase of Shares issued by the Fund
as set forth in Article 4 hereof;
4) For the payment of any expense or liability incurred by the
Fund, including but not limited to the following payments for
the account of the Fund: interest, taxes, management,
accounting, transfer agent and legal fees, and operating
expenses of the
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Fund whether or not such expenses are to be in whole or part
capitalized or treated as deferred expenses;
5) For the payment of any dividends declared pursuant to the
governing documents of the Fund;
6) For payment of the amount of dividends received in respect of
securities sold short;
7) For any other proper purpose, but only upon receipt of, in
addition to Proper Instructions, a certified copy of a
resolution of the Board of Directors/Trustees or of the
Executive Committee of the Fund signed by an officer of the
Fund and certified by its Secretary or an Assistant Secretary,
specifying the amount of such payment, setting forth the
purpose for which such payment is to be made, declaring such
purpose to be a proper purpose, and naming the person or
persons to whom such payment is to be made.
2.8 Liability for Payment in Advance of Receipt of Securities Purchased.
Except as specifically stated otherwise in this Contract, in any and every
case where payment for purchase of securities for the account of the Fund
is made by the Custodian in advance of receipt of the securities purchased
in the absence of specific written
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<PAGE>
instructions from the Fund to so pay in advance, the Custodian shall be
absolutely liable to the Fund for such securities to the same extent as if
the securities had been received by the Custodian.
2.9 Appointment of Agents. The Custodian may at any time or times in its
discretion appoint (and may at any time remove) any other bank or trust
company which is itself qualified under the Investment Company Act of
1940, as amended, to act as a custodian, as its agent to carry out such of
the provisions of this Article 2 as the Custodian may from time to time
direct; provided, however, that the appointment of any agent shall not
relieve the Custodian of its responsibilities or liabilities hereunder.
2.10 Deposit of Securities in Securities Systems. The Custodian may deposit
and/or maintain domestic securities owned by the Fund in a clearing agency
registered with the Securities and Exchange Commission under Section 17A
of the Securities Exchange Act of 1934, which acts as a securities
depository, or in the book-entry system authorized by the U.S. Department
of the Treasury and certain federal agencies, collectively referred to
herein as "Securities System" in accordance with applicable Federal
Reserve Board and Securities and Exchange Commission rules and
regulations, if any, and subject to the following provisions:
1) The Custodian may keep domestic securities of the Fund in a
Securities System provided that
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<PAGE>
such securities are represented in an account ("Account") of
the Custodian in the Securities System which shall not include
any assets of the Custodian other than assets held as a
fiduciary, custodian or otherwise for customers;
2) The records of the Custodian with respect to domestic
securities of the Fund which are maintained in a Securities
System shall identify by book-entry those securities belonging
to the Fund;
3) The Custodian shall pay for domestic securities purchased for
the account of the Fund upon (i) receipt of advice from the
Securities System that such securities have been transferred
to the Account, and (ii) the making of an entry on the records
of the Custodian to reflect such payment and transfer for the
account of the Fund. The Custodian shall transfer domestic
securities sold for the account of the Fund upon (i) receipt
of advice from the Securities System that payment for such
securities has been transferred to the Account, and (ii) the
making of an entry on the records of the Custodian to reflect
such transfer and payment for the account of the Fund. Copies
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<PAGE>
of all advices from the Securities System of transfers of
domestic securities for the account of the Fund shall identify
the Fund, be maintained for the Fund by the Custodian and be
provided to the Fund at its request. Upon request, the
Custodian shall furnish the Fund confirmation of each transfer
to or from the account of the Fund in the form of a written
advice or notice and shall furnish promptly to the Fund copies
of daily transaction sheets reflecting each day's transactions
in the Securities System for the account of the Fund.
4) The Custodian shall provide the Fund with any report obtained
by the Custodian on the Securities System's accounting system,
internal accounting control and procedures for safeguarding
securities deposited in the Securities System;
5) The Custodian shall have received the initial or annual
certificate, as the case may be, required by Article 13
hereof;
6) Anything to the contrary in this Contract notwithstanding, the
Custodian shall be liable to the Fund for any loss or damage
to the Fund resulting from use of the Securities System by
reason of any negligence,
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<PAGE>
misfeasance or misconduct of the Custodian or any of its
agents or of any of its or their employees or from failure of
the Custodian or any such agent to enforce effectively such
rights as it may have against the Securities System; at the
election of the Fund, it shall be entitled to be subrogated to
the rights of the Custodian with respect to any claim against
the Securities System or any other person which the Custodian
may have as a consequence of any such loss or damage if and to
the extent that the Fund has not been made whole for any such
loss or damage.
2.10A Fund Assets Held in the Custodian's Direct Paper System
The Custodian may deposit and/or maintain securities owned by the Fund in
the Direct Paper System of the Custodian subject to the following
provisions:
1) No transaction relating to securities in the Direct Paper
System will be effected in the absence of Proper Instructions;
2) The Custodian may keep securities of the Fund in the Direct
Paper System only if such securities are represented in an
account ("Account") of the Custodian in the Direct Paper
System which shall not include any assets of the Custodian
other than assets held as a fiduciary, custodian or otherwise
for customers;
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<PAGE>
3) The records of the Custodian with respect to securities of the
Fund which are maintained in the Direct Paper System shall
identify by book-entry those securities belonging to the Fund;
4) The Custodian shall pay for securities purchased for the
account of the Fund upon the making of an entry on the records
of the Custodian to reflect such payment and transfer of
securities to the account of the Fund. The Custodian shall
transfer securities sold for the account of the Fund upon the
making of an entry on the records of the Custodian to reflect
such transfer and receipt of payment for the account of the
Fund;
5) The Custodian shall furnish the Fund confirmation of each
transfer to or from the account of the Fund, in the form of a
written advice or notice, of Direct Paper on the next business
day following such transfer and shall furnish to the Fund
copies of daily transaction sheets reflecting each day's
transaction in the Direct Paper System for the account of the
Fund;
6) The Custodian shall provide the Fund with any report on its
system of internal accounting
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control as the Fund may reasonably request from time to time;
2.11 Segregated Account. The Custodian shall upon receipt of Proper
Instructions establish and maintain a segregated account or accounts for
and on behalf of the Fund, into which account or accounts may be
transferred cash and/or securities, including securities maintained in an
account by the Custodian pursuant to Section 2.10 hereof, (i) in
accordance with the provisions of any agreement among the Fund, the
Custodian and a broker-dealer registered under the Exchange Act and a
member of the NASD (or any futures commission merchant registered under
the Commodity Exchange Act), relating to compliance with the rules of The
Options Clearing Corporation and of any registered national securities
exchange (or the Commodity Futures Trading Commission or any registered
contract market), or of any similar organization or organizations,
regarding escrow or other arrangements in connection with transactions by
the Fund, (ii) for purposes of segregating cash, government securities or
liquid, high-grade debt obligations in connection with options purchased,
sold or written by the Fund or commodity futures contracts or options
thereon purchased or sold by the Fund, (iii) for the purposes of
compliance by the Fund with the procedures required by Investment Company
Act Release No. 10666, or any subsequent release or releases of the
Securities and Exchange Commission
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<PAGE>
relating to the maintenance of segregated accounts by registered
investment companies and (iv) for other proper corporate purposes, but
only, in the case of clause (iv), upon receipt of, in addition to Proper
Instructions, a certified copy of a resolution of the Board of
Directors/Trustees or of the Executive Committee signed by an officer of
the Fund and certified by the Secretary or an Assistant Secretary, setting
forth the purpose or purposes of such segregated account and declaring
such purposes to be proper corporate purposes.
2.12 Ownership Certificates for Tax Purposes. The Custodian shall execute
ownership and other certificates and affidavits for all federal and state
tax purposes in connection with receipt of income or other payments with
respect to domestic securities of the Fund held by it and in connection
with transfers of such securities.
2.13 Proxies. The Custodian shall, with respect to the domestic securities held
hereunder, cause to be promptly executed by the registered holder of such
securities, if the securities are registered otherwise than in the name of
the Fund or a nominee of the Fund, all proxies, without indication of the
manner in which such proxies are to be voted, and shall promptly deliver
to the Fund such proxies, all proxy soliciting materials and all notices
relating to such securities.
2.14 Communications Relating to Fund Portfolio Securities
Subject to the provisions of Section 2.3, the Custodian
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<PAGE>
shall transmit promptly to the Fund all written information (including,
without limitation, pendency of calls and maturities of securities held
domestically and expirations of rights in connection therewith and notices
of exercise of call and put options written by the Fund and the maturity
of futures contracts purchased or sold by the Fund) received by the
Custodian from issuers of the securities being held for the Fund. With
respect to tender or exchange offers, the Custodian shall transmit
promptly to the Fund all written information received by the Custodian
from issuers of the securities whose tender or exchange is sought and from
the party (or his agents) making the tender or exchange offer. If the Fund
desires to take action with respect to any tender offer, exchange offer or
any other similar transaction, the Fund shall notify the Custodian at
least three business days prior to the date on which the Custodian is to
take such action.
2.15 Reports to Fund by Independent Public Accountants
The Custodian shall provide the Fund, at such times as the Fund may
reasonably require, with reports by independent public accountants on the
accounting system, internal accounting control and procedures for
safeguarding securities, futures contracts and options on futures
contracts, including securities deposited and/or maintained in a
Securities System, relating to the services provided by the Custodian
under this Contract; such reports shall be of sufficient scope and in
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sufficient detail, as may reasonably be required by the Fund to provide
reasonable assurance that any material inadequacies would be disclosed by
such examination, and, if there are no such inadequacies, the reports
shall so state.
3. Duties of the Custodian with Respect to Property of the Fund Held Outside
of the United States
3.1 Appointment of Foreign Sub-Custodians
The Fund hereby authorizes and instructs the Custodian to employ as
sub-custodians for the Fund's securities and other assets maintained
outside the United States the foreign banking institutions and foreign
securities depositories designated on Schedule A hereto ("foreign
sub-custodians"). Upon receipt of "Proper Instructions", as defined in
Section 5 of this Contract, together with a certified resolution of the
Fund's Board of Directors/Trustees, the Custodian and the Fund may agree
to amend Schedule A hereto from time to time to designate additional
foreign banking institutions and foreign securities depositories to act as
sub-custodian. Upon receipt of Proper Instructions, the Fund may instruct
the Custodian to cease the employment of any one or more such
sub-custodians for maintaining custody of the Fund's assets.
3.2 Assets to be Held. The Custodian shall limit the securities and other
assets maintained in the custody of the foreign sub-custodians to: (a)
"foreign securities",
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as defined in paragraph (c)(1) of Rule 17f-5 under the Investment Company
Act of 1940, and (b) cash and cash equivalents in such amounts as the
Custodian or the Fund may determine to be reasonably necessary to effect
the Fund's foreign securities transactions.
3.3 Foreign Securities Depositories. Except as may otherwise be agreed upon in
writing by the Custodian and the Fund, assets of the Fund shall be
maintained in foreign securities depositories only through arrangements
implemented by the foreign banking institutions serving as sub-custodians
pursuant to the terms hereof. Where possible, such arrangements shall
include entry into agreements containing the provisions set forth in
Section 3.5 hereof.
3.4 Segregation of Securities
The Custodian shall identify on its books as belonging to the Fund, the
foreign securities of the Fund held by each foreign sub-custodian. Each
agreement pursuant to which the Custodian employs a foreign banking
institution shall require that such institution establish a custody
account for the Custodian on behalf of the Fund and physically segregate
in that account, securities and other assets of the Fund, and, in the
event that such institution deposits the Fund's securities in a foreign
securities depository, that it shall identify on its books as belonging to
the Custodian, as agent for the Fund, the securities so deposited.
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3.5 Agreements with Foreign Banking Institutions. Each agreement with a
foreign banking institution shall be substantially in the form set forth
in Exhibit 1 hereto and shall provide that: (a) the Fund's assets will not
be subject to any right, charge, security interest, lien or claim of any
kind in favor of the foreign banking institution or its creditors or
agent, except a claim of payment for their safe custody or administration;
(b) beneficial ownership of the Fund's assets will be freely transferable
without the payment of money or value other than for custody or
administration; (c) adequate records will be maintained identifying the
assets as belonging to the Fund; (d) officers of or auditors employed by,
or other representatives of the Custodian, including to the extent
permitted under applicable law the independent public accountants for the
Fund, will be given access to the books and records of the foreign banking
institution relating to its actions under its agreement with the
Custodian; and (e) assets of the Fund held by the foreign sub-custodian
will be subject only to the instructions of the Custodian or its agents.
3.6 Access of Independent Accountants of the Fund. Upon request of the Fund,
the Custodian will use its best efforts to arrange for the independent
accountants of the Fund to be afforded access to the books and records of
any foreign banking institution employed as a foreign sub-custodian
insofar as such books and records relate to
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<PAGE>
the performance of such foreign banking institution under its agreement
with the Custodian.
3.7 Reports by Custodian. The Custodian will supply to the Fund from time to
time, as mutually agreed upon, statements in respect of the securities and
other assets of the Fund held by foreign sub-custodians, including but not
limited to an identification of entities having possession of the Fund's
securities and other assets and advices or notifications of any transfers
of securities to or from each custodial account maintained by a foreign
banking institution for the Custodian on behalf of the Fund indicating, as
to securities acquired for the Fund, the identity of the entity having
physical possession of such securities.
3.8 Transactions in Foreign Custody Account
(a) Except as otherwise provided in paragraph (b) of this Section 3.8, the
provision of Sections 2.2 and 2.7 of this Contract shall apply, in their
entirety to the foreign securities of the Fund held outside the United
States by foreign sub-custodians.
(b) Notwithstanding any provision of this Contract to the contrary,
settlement and payment for securities received for the account of the Fund
and delivery of securities maintained for the account of the Fund may be
effected in accordance with the customary established securities trading
or securities processing practices and procedures in the jurisdiction or
market in which the transaction
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occurs, including, without limitation, delivering securities to the
purchaser thereof or to a dealer therefor (or an agent for such purchaser
or dealer) against a receipt with the expectation of receiving later
payment for such securities from such purchaser or dealer.
(c) Securities maintained in the custody of a foreign sub-custodian may be
maintained in the name of such entity's nominee to the same extent as set
forth in Section 2.3 of this Contract, and the Fund agrees to hold any
such nominee harmless from any liability as a holder of record of such
securities.
3.9 Liability of Foreign Sub-Custodians. Each agreement pursuant to which the
Custodian employs a foreign banking institution as a foreign sub-custodian
shall require the institution to exercise reasonable care in the
performance of its duties and to indemnify, and hold harmless, the
Custodian and each Fund from and against any loss, damage, cost, expense,
liability or claim arising out of or in connection with the institution's
performance of such obligations. At the election of the Fund, it shall be
entitled to be subrogated to the rights of the Custodian with respect to
any claims against a foreign banking institution as a consequence of any
such loss, damage, cost, expense, liability or claim if and to the extent
that the Fund has not been made whole for any such loss, damage, cost,
expense, liability or claim.
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3.10 Liability of Custodian. The Custodian shall be liable for the acts or
omissions of a foreign banking institution to the same extent as set forth
with respect to sub-custodians generally in this Contract and, regardless
of whether assets are maintained in the custody of a foreign banking
institution, a foreign securities depository or a branch of a U.S. bank as
contemplated by paragraph 3.13 hereof, the Custodian shall not be liable
for any loss, damage, cost, expense, liability or claim resulting from
nationalization, expropriation, currency restrictions, or acts of war or
terrorism or any loss where the sub-custodian has otherwise exercised
reasonable care. Notwithstanding the foregoing provisions of this
paragraph 3.10, in delegating custody duties to State Street London Ltd.,
the Custodian shall not be relieved of any responsibility to the Fund for
any loss due to such delegation, except such loss as may result from (a)
political risk (including, but not limited to, exchange control
restrictions, confiscation, expropriation, nationalization, insurrection,
civil strife or armed hostilities) or (b) other losses (excluding a
bankruptcy or insolvency of State Street London Ltd. not caused by
political risk) due to Acts of God, nuclear incident or other losses under
circumstances where the Custodian and State Street London Ltd. have
exercised reasonable care.
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3.11 Reimbursement for Advances. If the Fund requires the Custodian to advance
cash or securities for any purpose including the purchase or sale of
foreign exchange or of contracts for foreign exchange, or in the event
that the Custodian or its nominee shall incur or be assessed any taxes,
charges, expenses, assessments, claims or liabilities in connection with
the performance of this Contract, except such as may arise from its or its
nominee's own negligent action, negligent failure to act or willful
misconduct, any property at any time held for the account of the Fund
shall be security therefor and should the Fund fail to repay the Custodian
promptly, the Custodian shall be entitled to utilize available cash and to
dispose of the Fund assets to the extent necessary to obtain
reimbursement.
3.12 Monitoring Responsibilities. The Custodian shall furnish annually to the
Fund, during the month of June, information concerning the foreign
sub-custodians employed by the Custodian. Such information shall be
similar in kind and scope to that furnished to the Fund in connection with
the initial approval of this Contract. In addition, the Custodian will
promptly inform the Fund in the event that the Custodian learns of a
material adverse change in the financial condition of a foreign
sub-custodian or any material loss of the assets of the Fund or in the
case of any foreign sub-custodian not the subject of an exemptive order
from the Securities
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and Exchange Commission is notified by such foreign sub-custodian that
there appears to be a substantial likelihood that its shareholders' equity
will decline below $200 million (U.S. dollars or the equivalent thereof)
or that its shareholders' equity has declined below $200 million (in each
case computed in accordance with generally accepted U.S. accounting
principles).
3.13 Branches of U.S. Banks
(a) Except as otherwise set forth in this Contract, the provisions of
Article 3 shall not apply where the custody of the Fund assets are
maintained in a foreign branch of a banking institution which is a "bank"
as defined by Section 2(a)(5) of the Investment Company Act of 1940
meeting the qualification set forth in Section 26(a) of said Act. The
appointment of any such branch as a sub-custodian shall be governed by
paragraph 1 of this Contract.
(b) Cash held for the Fund in the United Kingdom shall be maintained in an
interest bearing account established for the Fund with the Custodian's
London branch, which account shall be subject to the direction of the
Custodian, State Street London Ltd. or both.
4. Payments for Repurchases or Redemptions and Sales of Shares of the Fund
From such funds as may be available for the purpose but subject to the
limitations of the Articles of Incorporation/ Declaration of Trust and any
applicable votes of the Board of
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Directors/Trustees of the Fund pursuant thereto, the Custodian shall, upon
receipt of instructions from the Transfer Agent, make funds available for
payment to holders of Shares who have delivered to the Transfer Agent a request
for redemption or repurchase of their Shares. In connection with the redemption
or repurchase of Shares of the Fund, the Custodian is authorized upon receipt of
instructions from the Transfer Agent to wire funds to or through a commercial
bank designated by the redeeming shareholders. In connection with the redemption
or repurchase of Shares of the Fund, the Custodian shall honor checks drawn on
the Custodian by a holder of Shares, which checks have been furnished by the
Fund to the holder of Shares, when presented to the Custodian in accordance with
such procedures and controls as are mutually agreed upon from time to time
between the Fund and the Custodian.
The Custodian shall receive from the distributor for the Fund's Shares or
from the Transfer Agent of the Fund and deposit into the Fund's account such
payments as are received for Shares of the Fund issued or sold from time to time
by the Fund. The Custodian will provide timely notification to the Fund and the
Transfer Agent of any receipt by it of payments for Shares of the Fund.
5. Proper Instructions
Proper Instructions as used herein means a writing signed or initialled by
one or more person or persons as the officers of the Fund shall have from time
to time authorized. Each such writing shall set forth the specific transaction
or type of
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transaction involved, including a specific statement of the purpose for which
such action is requested. Oral instructions will be considered Proper
Instructions if the Custodian reasonably believes them to have been given by a
person authorized to give such instructions with respect to the transaction
involved. The Fund shall cause all oral instructions to be confirmed in writing.
It is understood and agreed that the Board of Directors/Directors/Trustees has
authorized (i) Prudential Mutual Fund Management, Inc., as Manager of the Fund,
and (ii) The Prudential Investment Corporation (or Prudential-Bache Securities
Inc.), as Subadviser to the Fund, to deliver proper instructions with respect to
all matters for which proper instructions are required by this Article 5. The
Custodian may rely upon the certificate of an officer of the Manager or
Subadviser, as the case may be, with respect to the person or persons authorized
on behalf of the Manager and Subadviser, respectively, to sign, initial or give
proper instructions for the purpose of this Article 5. Proper Instructions may
include communications effected directly between electro-mechanical or
electronic devices provided that the Fund and the Custodian are satisfied that
such procedures afford adequate safeguards for the Fund's assets. For purposes
of this Section, Proper Instructions shall include instructions received by the
Custodian pursuant to any three-party agreement which requires a segregated
asset account in accordance with Section 2.11.
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6. Actions Permitted without Express Authority
The Custodian may in its discretion, without express authority from the
Fund:
1) make payments to itself or others for minor expenses of handling
securities or other similar items relating to its duties under this Contract,
provided that all such payments shall be accounted for to the Fund;
2) surrender securities in temporary form for securities in definitive
form;
3) endorse for collection, in the name of the Fund, checks, drafts and
other negotiable instruments; and
4) in general, attend to all non-discretionary details in connection with
the sale, exchange, substitution, purchase, transfer and other dealings with the
securities and property of the Fund except as otherwise directed by the Board of
Directors/Trustees of the Fund.
7. Evidence of Authority
The Custodian shall be protected in acting upon any instructions, notice,
request, consent, certificate or other instrument or paper believed by it to be
genuine and to have been properly executed by or on behalf of the Fund. The
Custodian may receive and accept a certified copy of a vote of the Board of
Directors/Trustees of the Fund as conclusive evidence (a) of the authority of
any person to act in accordance with such vote or (b) of any determination or of
any action by the Board of Directors/Trustees pursuant to the Articles of
Incorporation/
-32-
<PAGE>
Declaration of Trust as described in such vote, and such vote may be considered
as in full force and effect until receipt by the Custodian of written notice to
the contrary.
8. Duties of Custodian with Respect to the Books of Account and Calculation
of Net Asset Value and Net Income
The Custodian shall cooperate with and supply necessary information to the
entity or entities appointed by the Board of Directors/Trustees of the Fund to
keep the books of account of the Fund and/or compute the net asset value per
share of the outstanding shares of the Fund or, if directed in writing to do so
by the Fund, shall itself keep such books of account and/or compute such net
asset value per share. If so directed, the Custodian shall also calculate daily
the net income of the Fund as described in the Fund's currently effective
prospectus and shall advise the Fund and the Transfer Agent daily of the total
amounts of such net income and, if instructed in writing by an officer of the
Fund to do so, shall advise the Transfer Agent periodically of the division of
such net income among its various components. The calculations of the net asset
value per share and the daily income of the Fund shall be made at the time or
times described from time to time in the Fund's currently effective prospectus.
9. Records
The Custodian shall create and maintain all records relating to its
activities and obligations under this Contract in such manner as will meet the
obligations of the Fund under the Investment Company Act of 1940, with
particular attention to
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<PAGE>
Section 31 thereof and Rules 31a-1 and 31a-2 thereunder. All such records shall
be the property of the Fund and shall at all times during the regular business
hours of the Custodian be open for inspection by duly authorized officers,
employees or agents of the Fund and employees and agents of the Securities and
Exchange Commission. The Custodian shall, at the Fund's request, supply the Fund
with a tabulation of securities owned by the Fund and held by the Custodian and
shall, when requested to do so by the Fund and for such compensation as shall be
agreed upon between the Fund and the Custodian, include certificate numbers in
such tabulations.
10. Opinion of Fund's Independent Accountant
The Custodian shall take all reasonable action, as the Fund may from time
to time request, to obtain from year to year favorable opinions from the Fund's
independent accountants with respect to its activities hereunder in connection
with the preparation of the Fund's Form N-1A, Form N-2 (in the case of a closed
end Fund) and Form N-SAR or other periodic reports to the Securities and
Exchange Commission and with respect to any other requirements of such
Commission.
11. Compensation of Custodian
The Custodian shall be entitled to reasonable compensation for its
services and expenses as Custodian, as agreed upon from time to time between the
Fund and the Custodian.
12. Responsibility of Custodian
So long as and to the extent that it is in the exercise of reasonable
care, the Custodian shall not be responsible for
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<PAGE>
the title, validity or genuineness of any property or evidence of title thereto
received by it or delivered by it pursuant to this Contract and shall be held
harmless in acting upon any notice, request, consent, certificate or other
instrument reasonably believed by it to be genuine and to be signed by the
proper party or parties, including any futures commission merchant acting
pursuant to the terms of a three-party futures or options agreement. The
Custodian shall be held to the exercise of reasonable care in carrying out the
provisions of this Contract, but shall be kept indemnified by and shall be
without liability to the Fund for any action taken or omitted by it in good
faith without negligence. It shall be entitled to rely on and may act upon
advice of counsel (who may be counsel for the Fund) on all matters, and shall be
without liability for any action reasonably taken or omitted pursuant to such
advice. Notwithstanding the foregoing, the responsibility of the Custodian with
respect to redemptions effected by check shall be in accordance with a separate
Agreement entered into between the Custodian and the Fund.
The Custodian shall be liable for the acts or omissions of a foreign
banking institution appointed pursuant to the provisions of Article 3 to the
same extent as set forth in Article 1 hereof with respect to sub-custodians
located in the United States and, regardless of whether assets are maintained in
the custody of a foreign banking institution, a foreign securities depository or
a branch of a U.S. bank as contemplated by paragraph 3.11 hereof, the Custodian
shall not be liable for
-35-
<PAGE>
any loss, damage, cost, expense, liability or claim resulting from, or caused
by, the direction of or authorization by the Fund to maintain custody or any
securities or cash of the Fund in a foreign country including, but not limited
to, losses resulting from nationalization, expropriation, currency restrictions,
or acts of war or terrorism.
If the Fund requires the Custodian to take any action with respect to
securities, which action involves the payment of money or which action may, in
the opinion of the Custodian, result in the Custodian or its nominee assigned to
the Fund being liable for the payment of money or incurring liability of some
other form, the Fund, as a prerequisite to requiring the Custodian to take such
action, shall provide indemnity to the Custodian in an amount and form
satisfactory to it.
If the Fund requires the Custodian to advance cash or securities for any
purpose or in the event that the Custodian or its nominee shall incur or be
assessed any taxes, charges, expenses, assessments, claims or liabilities in
connection with the performance of this Contract, except such as may arise from
its or its nominee's own negligent action, negligent failure to act or willful
misconduct, any property at any time held for the account of the Fund shall be
security therefor and should the Fund fail to repay the Custodian promptly, the
Custodian shall be entitled to utilize available cash and to dispose of the Fund
assets to the extent necessary to obtain reimbursement provided, however that,
prior to disposing of Fund assets hereunder, the Custodian shall give the Fund
notice of its intention to dispose
-36-
<PAGE>
of assets identifying such assets and the Fund shall have one business day from
receipt of such notice to notify the Custodian if the Fund wishes the Custodian
to dispose of Fund assets of equal value other than those identified in such
notice.
13. Effective Period, Termination and Amendment
This Contract shall become effective as of its execution, shall continue
in full force and effect until terminated as hereinafter provided, may be
amended at any time by mutual agreement of the parties hereto and may be
terminated by either party by an instrument in writing delivered or mailed,
postage prepaid to the other party, such termination to take effect not sooner
than sixty (60) days after the date of such delivery or mailing; provided,
however that the Custodian shall not act under Section 2.10 hereof in the
absence of receipt of an initial certificate of the Secretary or an Assistant
Secretary that the Board of Directors/Trustees of the Fund has approved the
initial use of a particular Securities System and the receipt of an annual
certificate of the Secretary or an Assistant Secretary that the Board of
Directors/Trustees has reviewed the use by the Fund of such Securities System,
as required in each case by Rule 17f-4 under the Investment Company Act of 1940,
as amended and that the Custodian shall not act under Section 2.10A hereof in
the absence of receipt of an initial certificate of the Secretary or an
Assistant Secretary that the Board of Directors/Trustees has approved the
initial use of the Direct Paper System and the receipt of an annual certificate
of the Secretary or an Assistant Secretary that the Board of Directors/Trustees
has reviewed the
-37-
<PAGE>
use by the Fund of the Direct Paper System; provided further, however, that the
Fund shall not amend or terminate this Contract in contravention of any
applicable federal or state regulations, or any provision of the Articles of
Incorporation/Declaration of Trust, and further provided, that the Fund may at
any time by action of its Board of Directors/Trustees (i) substitute another
bank or trust company for the Custodian by giving notice as described above to
the Custodian, or (ii) immediately terminate this Contract in the event of the
appointment of a conservator or receiver for the Custodian by the Comptroller of
the Currency or upon the happening of a like event at the direction of an
appropriate regulatory agency or court of competent jurisdiction.
Upon termination of the Contract, the Fund shall pay to the Custodian such
compensation as may be due as of the date of such termination and shall likewise
reimburse the Custodian for its costs, expenses and disbursements.
14. Successor Custodian
If a successor custodian shall be appointed by the Board of
Directors/Trustees of the Fund, the Custodian shall, upon termination, deliver
to such successor custodian at the office of the Custodian, duly endorsed and in
the form for transfer, all securities then held by it hereunder and shall
transfer to an account of the successor custodian all of the Fund's securities
held in a Securities System.
If no such successor custodian shall be appointed, the Custodian shall, in
like manner, upon receipt of a certified copy of a vote of the Board of
Directors/Trustees of the Fund, deliver
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<PAGE>
at the office of the Custodian and transfer such securities, funds and other
properties in accordance with such vote.
In the event that no written order designating a successor custodian or
certified copy of a vote of the Board of Directors/Trustees shall have been
delivered to the Custodian on or before the date when such termination shall
become effective, then the Custodian shall have the right to deliver to a bank
or trust company, which is a "bank" as defined in the Investment Company Act of
1940, doing business in Boston, Massachusetts, of its own selection, having an
aggregate capital, surplus, and undivided profits, as shown by its last
published report, of not less than $25,000,000, all securities, funds and other
properties held by the Custodian and all instruments held by the Custodian
relative thereto and all other property held by it under this Contract and to
transfer to an account of such successor custodian all of the Fund's Securities
held in any Securities System. Thereafter, such bank or trust company shall be
the successor of the Custodian under this Contract.
In the event that securities, funds and other properties remain in the
possession of the Custodian after the date of termination hereof owing to
failure of the Fund to procure the certified copy of the vote referred to or of
the Board of Directors/Trustees to appoint a successor custodian, the Custodian
shall be entitled to fair compensation for its services during such period as
the Custodian retains possession of such securities, funds and other properties
and the provisions of this Contract relating to the duties and obligations of
the Custodian shall remain in full force and effect.
-39-
<PAGE>
15. Interpretive and Additional Provisions
In connection with the operation of this Contract, the Custodian and the
Fund may from time to time agree on such provisions interpretive of or in
addition to the provisions of this Contract as may in their joint opinion be
consistent with the general tenor of this Contract. Any such interpretive or
additional provisions shall be in a writing signed by both parties and shall be
annexed hereto, provided that no such interpretive or additional provisions
shall contravene any applicable federal or state regulations or any provision of
the Articles of Incorporation/Declaration of Trust of the Fund. No interpretive
or additional provisions made as provided in the preceding sentence shall be
deemed to be an amendment of this Contract.
16. Massachusetts Law to Apply
This Contract shall be construed and the provisions thereof interpreted
under and in accordance with laws of the Commonwealth of Massachusetts.
17. Prior Contracts
This Contract supersedes and terminates, as of the date hereof, all prior
contracts between the Fund and the Custodian relating to the custody of the
Fund's assets.
18. The Parties
All references herein to the "Fund" are to each of the Funds listed on
Appendix A individually, as if this Contract were between such individual Fund
and the Custodian. With respect to any Fund listed on Appendix A which is
organized as a
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<PAGE>
Massachusetts Business Trust, references to Board of Directors and Articles of
Incorporation shall be deemed a reference to Board of Directors/Trustees and
Articles of Incorporation/Declaration of Trust respectively and reference to
shares of capital stock shall be deemed a reference to shares of beneficial
interest.
19. Limitation of Liability
Each Fund listed on Appendix A that is referenced as a Massachusetts
Business Trust is the designation of the Directors/Trustees under a Articles of
Incorporation/Declaration of Trust, dated (see Appendix A) and all persons
dealing with the Fund must look solely to the property of the Fund for the
enforcement of any claims against the Fund as neither the Directors/Trustees,
officers, agents or shareholders assume any personal liability for obligations
entered into on behalf of the Fund.
IN WITNESS WHEREOF, each of the parties has caused this instrument to be
executed in its name and behalf by its duly authorized representative and its
seal to be hereunder affixed as of the dates set forth on Appendix A.
ATTEST STATE STREET BANK AND TRUST COMPANY
/s/ [ILLEGIBLE] By /s/ Al O'Neal
- ---------------------------- --------------------------------------
Assistant Secretary Vice President
ATTEST EACH OF THE FUNDS LISTED ON APPENDIX A
/s/ S. Jane Rose By /s/ Robert F. Gunia
- ---------------------------- --------------------------------------
Secretary Vice President
-41-
<PAGE>
Appendix A
<TABLE>
<CAPTION>
Fund Name Execution Date of
- --------- Date Declaration of Trust
---- --------------------
(if applicable)
<S> <C> <C>
Command Government Fund July 1, 1990 August 19, 1981
Command Money Fund July 1, 1990 June 5, 1981
Command Tax-Free Money Fund July 1, 1990 June 5, 1981
The Global Yield Fund, Inc. September 5, 1990
Prudential-Bache California Municipal Fund August 1, 1990 May 18, 1984
Prudential-Bache Equity Fund, Inc. August 1, 1990
Prudential-Bache Global Fund, Inc. June 7, 1990
Prudential-Bache GNMA Fund, Inc. August 1, 1990
Prudential-Bache Government Plus Fund, Inc. July 31, 1990
Prudential-Bache Government Securities Trust July 26, 1990 September 22, 1981
Prudential-Bache Growth Opportunity Fund, Inc. July 26, 1990
Prudential-Bache High Yield Fund, Inc. July 26, 1990
Prudential-Bache IncomeVertible Plus Fund, Inc. June 6, 1990
Prudential-Bache MoneyMart Assets, Inc. July 25, 1990
Prudential-Bache Multi-Sector Fund, Inc. June 1, 1990
Prudential-Bache Municipal Series Fund August 1, 1990 May 18, 1984
Prudential-Bache National Municipals Fund, Inc. July 26, 1990
Prudential-Bache Option Growth Fund, Inc. July 31, 1990
Prudential-Bache Research Fund, Inc. July 25, 1990
Prudential-Bache Special Money Market Fund, Inc. January 12, 1990
Prudential-Bache Structured Maturity Fund, Inc. July 25, 1989
Prudential-Bache Tax-Free Money Fund, Inc. July 26, 1990
Prudential-Bache U. S. Government Fund June 7, 1990 September 22, 1986
Prudential-Bache Utility Fund, Inc. June 6, 1990
</TABLE>
<PAGE>
Schedule A
The following foreign banking institutions and foreign securities
depositories have been approved by the Board of Directors/Trustees of Each of
the Parties Indicated on Appendix A for use as sub-custodians for the Fund's
securities and other assets:
(Insert banks and securities depositories)
Certified:
_______________________________
Fund's Authorized Officer
Date: ________________
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<PAGE>
Prudential Mutual Fund Services, Inc.
TRANSFER AGENCY AND SERVICE AGREEMENT
between
PRUDENTIAL-BACHE CALIFORNIA MUNICIPAL FUND
(a Massachusetts Business Trust)
and
PRUDENTIAL MUTUAL FUND SERVICES, INC.
<PAGE>
TABLE OF CONTENTS
Article 1 Terms of Appointment; Duties of the Agent.................... 1
Article 2 Fees and Expenses............................................ 4
Article 3 Representations and Warranties of the Agent.................. 5
Article 4 Representations of Warranties of the Fund.................... 5
Article 5 Duty of Care and Indemnification............................. 6
Article 6 Documents and Covenants of the Fund and the Agent............ 8
Article 7 Termination of Agreement..................................... 10
Article 8 Assignment................................................... 10
Article 9 Affiliations................................................. 11
Article 10 Amendment.................................................... 11
Article 11 Applicable Law............................................... 12
Article 12 Miscellaneous................................................ 12
Article 13 Merger of Agreement.......................................... 13
<PAGE>
TRANSFER AGENCY AND SERVICE AGREEMENT
AGREEMENT made as of the 1st day of January, 1988 by and between
PRUDENTIAL-BACHE CALIFORNIA MUNICIPAL FUND, a Massachusetts business trust,
having its principal office and place of business at One Seaport Plaza, New
York, New York 10292 (the "Fund"), and PRUDENTIAL MUTUAL FUND SERVICES, INC., a
New Jersey corporation, having its principal office and place of business at
Raritan Plaza I, Edison, New Jersey 08818 (the "Agent" or "PMFS").
WHEREAS, the Fund desires to appoint PMFS as its transfer agent, dividend
disbursing agent and shareholder servicing agent in connection with certain
other activities, and PMFS desires to accept such appointment;
NOW THEREFORE, in consideration of the mutual covenants herein contained,
the parties hereto agree as follows:
Article 1 Terms of Appointment; Duties of PMFS
1.01 Subject to the terms and conditions set forth in this
Agreement, the Fund hereby employs and appoints PMFS to act as, and PMFS agrees
to act as, the transfer agent for the authorized and issued shares of beneficial
interest of each series of the Fund, $.01 par value ("Shares"), dividend
disbursing agent and shareholder servicing agent in connection with any
accumulation, open-account or similar plans provided to the shareholders of the
Fund or any series thereof ("Shareholders") and set out in the currently
effective prospectus and statement of additional information ("prospectus") of
the Fund, including without limitation any periodic investment plan or periodic
withdrawal program.
-1-
<PAGE>
1.02 PMFS agrees that it will perform the following services:
(a) In accordance with procedures established from time to time by
agreement between the Fund and PMFS, PMFS shall:
(i) Receive for acceptance, orders for the purchase of Shares, and
promptly deliver payment and appropriate documentation therefor to the Custodian
of the Fund authorized pursuant to the Declaration of Trust of the Fund (the
"Custodian");
(ii) Pursuant to purchase orders, issue the appropriate number of Shares
and hold such Shares in the appropriate Shareholder account;
(iii) Receive for acceptance redemption requests and redemption directions
and deliver the appropriate documentation therefor to the Custodian;
(iv) At the appropriate time as and when it receives monies paid to it by
the Custodian with respect to any redemption, pay over or cause to be paid over
in the appropriate manner such monies as instructed by the redeeming
Shareholders;
(v) Effect transfers of Shares by the registered owners thereof upon
receipt of appropriate instructions;
(vi) Prepare and transmit payments for dividends and distributions
declared by the Fund;
(vii) Calculate any sales charges payable by a Shareholder on purchases
and/or redemptions of Shares of the Fund as such charges may be reflected in the
prospectus;
(viii) Maintain records of account for and advise the Fund and its
Shareholders as to the foregoing; and
-2-
<PAGE>
(ix) Record the issuance of Shares of the Fund and maintain pursuant to
Rule 17Ad-10(e) under the Securities Exchange Act of 1934 ("1934 Act") a record
of the total number of Shares of the Fund which are authorized, based upon data
provided to it by the Fund, and issued and outstanding. PMFS shall also provide
to the Fund on a regular basis the total number of Shares which are authorized,
issued and outstanding. When recording the issuance of Shares, PMFS shall have
no obligation to take cognizance of any Blue Sky laws relating to the issue or
sale of such Shares, which functions shall be the sole responsibility of the
Fund.
(b) In addition to and not in lieu of the services set forth in the above
paragraph (a), PMFS shall: (i) perform all of the customary services of a
transfer agent, dividend disbursing agent and, as relevant, shareholder
servicing agent in connection with accumulation, open-account or similar plans
(including without limitation any periodic investment plan or periodic
withdrawal program), including but not limited to, maintaining all Shareholder
accounts, preparing Shareholder meeting lists, mailing proxies, receiving and
tabulating proxies, mailing Shareholder reports and prospectuses to current
Shareholders, withholding taxes on non-resident alien accounts, preparing and
filing appropriate forms required with respect to dividends and distributions by
federal tax authorities for all Shareholders, preparing and mailing confirmation
forms and statements of account to Shareholders for all purchases and
redemptions of Shares and other confirmable transactions in Shareholder
accounts, preparing and mailing activity statements for Shareholders and
providing Shareholder account information and (ii) provide a system which will
enable the Fund to monitor the total number of Shares sold in each State or
other jurisdiction.
(c) In addition, the Fund shall (i) identify to PMFS in writing
-3-
<PAGE>
those transactions and assets to be treated as exempt from Blue Sky reporting
for each State and (ii) verify the establishment of transactions for each State
on the system prior to activation and thereafter monitor the daily activity for
each State. The responsibility of PMFS for the Fund's registration status under
the Blue Sky or securities laws of any State or other jurisdiction is solely
limited to the initial establishment of transactions subject to Blue Sky
compliance by the Fund and the reporting of such transactions to the Fund as
provided above and as agreed from time to time by the Fund and PMFS.
PMFS may also provide such additional services and functions not
specifically described herein as may be mutually agreed between PMFS and the
Fund and set forth in Schedule B hereto.
Procedures applicable to certain of these services may be established from
time to time by agreement between the Fund and PMFS.
Article 2 Fees and Expenses
2.01 For performance by PMFS pursuant to this Agreement, the Fund
agrees to pay PMFS an annual maintenance fee for each Shareholder account and
certain transactional fees as set out in the fee schedule attached hereto as
Schedule A. Such fees and out-of-pocket expenses and advances identified under
Section 2.02 below may be changed from time to time subject to mutual written
agreement between the Fund and PMFS.
2.02 In addition to the fees paid under Section 2.01 above, the Fund
agrees to reimburse PMFS for out-of-pocket expenses or advances incurred by PMFS
for the items set out in Schedule A attached hereto. In addition, any other
expenses incurred by PMFS at the request or with the consent of the Fund will be
reimbursed by the Fund.
2.03 The Fund agrees to pay all fees and reimbursable expenses
within a reasonable period of time following the mailing of the respective
-4-
<PAGE>
billing notice. Postage for mailing of dividends, proxies, Fund reports and
other mailings to all Shareholder accounts shall be advanced to PMFS by the Fund
upon request prior to the mailing date of such materials.
Article 3 Representations and Warranties of PMFS
PMFS represents and warrants to the Fund that:
3.01 It is a corporation duly organized and existing and in good
standing under the laws of New Jersey and it is duly qualified to carry on its
business in New Jersey.
3.02 It is and will remain registered with the U.S. Securities and
Exchange Commission ("SEC") as a Transfer Agent pursuant to the requirements of
Section 17A of the 1934 Act.
3.03 It is empowered under applicable laws and by its charter and
By-Laws to enter into and perform this Agreement.
3.04 All requisite corporate proceedings have been taken to
authorize it to enter into and perform this Agreement.
3.05 It has and will continue to have access to the necessary
facilities, equipment and personnel to perform its duties and obligations under
this Agreement.
Article 4 Representations and Warranties of the Fund
The Fund represents and warrants to PMFS that:
4.01 It is a business trust duly organized and existing and in good
standing under the laws of the Commonwealth of Massachusetts.
4.02 It is empowered under applicable laws and by its Declaration of
Trust and By-Laws to enter into and perform this Agreement.
4.03 All corporate proceedings required by said Declaration of Trust
and By-Laws have been taken to authorize it to enter into and perform
-5-
<PAGE>
this Agreement.
4.04 It is an investment company registered with the SEC under the
Investment Company Act of 1940, as amended (the "1940 Act").
4.05 A registration statement under the Securities Act of 1933 (the
"1933 Act") is currently effective and will remain effective, and appropriate
State securities law filings have been made and will continue to be made, with
respect to all Shares of the Fund being offered for sale.
Article 5 Duty of Care and Indemnification
5.01 PMFS shall not be responsible for, and the Fund shall indemnify
and hold PMFS harmless from and against, any and all losses, damages, costs,
charges, counsel fees, payments, expenses and liability arising out of or
attributable to:
(a) All actions of PMFS or its agents or subcontractors required to be
taken pursuant to this Agreement, provided that such actions are taken in good
faith and without negligence or willful misconduct.
(b) The Fund's refusal or failure to comply with the terms of this
Agreement, or which arise out of the Fund's lack of good faith, negligence or
willful misconduct or which arise out of the breach of any representation or
warranty of the Fund hereunder.
(c) The reliance on or use by PMFS or its agents or subcontractors of
information, records and documents which (i) are received by PMFS or its agents
or subcontractors and furnished to it by or on behalf of the Fund, and (ii) have
been prepared and/or maintained by the Fund or any other person or firm on
behalf of the Fund.
(d) The reliance on, or the carrying out by PMFS or its agents or
subcontractors of, any instructions or requests of the Fund.
(e) The offer or sale of Shares in violation of any requirement under
-6-
<PAGE>
the federal securities laws or regulations or the securities or Blue Sky laws of
any State or other jurisdiction that such Shares be registered in such State or
other jurisdiction or in violation of any stop order or other determination or
ruling by any federal agency or any State or other jurisdiction with respect to
the offer or sale of such Shares in such State or other jurisdiction.
5.02 PMFS shall indemnify and hold the Fund harmless from and
against any and all losses, damages, costs, charges, counsel fees, payments,
expenses and liability arising out of or attributable to any action or failure
or omission to act by PMFS as a result of PMFS' lack of good faith, negligence
or willful misconduct.
5.03 At any time PMFS may apply to any officer of the Fund for
instructions, and may consult with legal counsel, with respect to any matter
arising in connection with the services to be performed by PMFS under this
Agreement, and PMFS and its agents or subcontractors shall not be liable and
shall be indemnified by the Fund for any action taken or omitted by it in
reliance upon such instructions or upon the opinion of such counsel. PMFS, its
agents and subcontractors shall be protected and indemnified in acting upon any
paper or document furnished by or on behalf of the Fund, reasonably believed to
be genuine and to have been signed by the proper person or persons, or upon any
instruction, information, data, records or documents provided to PMFS or its
agents or subcontractors by machine readable input, telex, CRT data entry or
other similar means authorized by the Fund, and shall not be held to have notice
of any change of authority of any person, until receipt of written notice
thereof from the Fund. PMFS, its agents and subcontractors shall also be
protected and indemnified in recognizing share certificates which are reasonably
believed to bear the proper manual or facsimile signature of the officers of the
Fund, and the proper countersignature of any former transfer
-7-
<PAGE>
agent or registrar, or of a co-transfer agent or co-registrar.
5.04 In the event either party is unable to perform its obligations
under the terms of this Agreement because of acts of God, strikes, equipment or
transmission failure or damage reasonably beyond its control, or other causes
reasonably beyond its control, such party shall not be liable for damages to the
other for any damages resulting from such failure to perform or otherwise from
such causes.
5.05 Neither party to this Agreement shall be liable to the other
party for consequential damages under any provision of this Agreement or for any
act or failure to act hereunder.
5.06 In order that the indemnification provisions contained in this
Article 5 shall apply, upon the assertion of a claim for which either party may
be required to indemnify the other, the party seeking indemnification shall
promptly notify the other party of such assertion, and shall keep the other
party advised with respect to all developments concerning such claim. The party
who may be required to indemnify shall have the option to participate with the
party seeking indemnification in the defense of such claim. The party seeking
indemnification shall in no case confess any claim or make any compromise in any
case in which the other party may be required to indemnify it except with the
other party's prior written consent.
Article 6 Documents and Covenants of the Fund and PMFS
6.01 The Fund shall promptly furnish to PMFS the following:
(a) A certified copy of the resolution of the Trustee of the Fund
authorizing the appointment of PMFS and the execution and delivery of this
Agreement;
(b) A certified copy of the Declaration of Trust and By-Laws of the Fund
and all amendments thereto;
-8-
<PAGE>
(c) The current registration statements and any amendments and supplements
thereto filed with the SEC pursuant to the requirements of the 1933 Act and the
1940 Act;
(d) A specimen of the certificate for Shares of the Fund in the form
approved by the Trustee with a certificate of the Secretary of the Fund as to
such approval;
(e) All account application forms or other documents relating to
Shareholder accounts and/or relating to any plan program or service offered or
to be offered by the Fund; and
(f) Such other certificates, documents or opinions as the Agent deems to
be appropriate or necessary for the proper performance of its duties.
6.02 PMFS hereby agrees to establish and maintain facilities and
procedures reasonably acceptable to the Fund for safekeeping of share
certificates, check forms and facsimile signature imprinting devices, if any;
and for the preparation or use, and for keeping account of, such certificates,
forms and devices.
6.03 PMFS shall prepare and keep records relating to the services to
be performed hereunder, in the form and manner as it may deem advisable. To the
extent required by Section 31 of the 1940 Act, and the Rules and Regulations
thereunder, PMFS agrees that all such records prepared or maintained by PMFS
relating to the services to be performed by PMFS hereunder are the property of
the Fund and will be preserved, maintained and made available in accordance with
such Section 31 of the 1940 Act, and the Rules and Regulations thereunder, and
will be surrendered promptly to the Fund on and in accordance with its request.
6.04 PMFS and the Fund agree that all books, records, information
and data pertaining to the business of the other party which are exchanged or
-9-
<PAGE>
received pursuant to the negotiation or the carrying out of this Agreement shall
remain confidential and shall not be voluntarily disclosed to any other person
except as may be required by law or with the prior consent of PMFS and the Fund.
6.05 In case of any requests or demands for the inspection of the
Shareholder records of the Fund, PMFS will endeavor to notify the Fund and to
secure instruction from an authorized officer of the Fund as to such inspection.
PMFS reserves the right, however, to exhibit the Shareholder records to any
person whenever it is advised by its counsel that it may be held liable for the
failure to exhibit the Shareholder records to such person.
Article 7 Termination of Agreement
7.01 This Agreement may be terminated by either party upon one
hundred twenty (120) days written notice to the other.
7.02 Should the Fund exercise its right to terminate, all
out-of-pocket expenses associated with the movement of records and other
materials will be borne by the Fund. Additionally, PMFS reserves the right to
charge for any other reasonable fees and expenses associated with such
termination.
Article 8 Assignment
8.01 Except as provided in Section 8.03 below, neither this
Agreement nor any rights or obligations hereunder may be assigned by either
party without the written consent of the other party.
8.02 This Agreement shall inure to the benefit of and be binding
upon the parties and their respective permitted successors and assigns.
8.03 PMFS may, in its sole discretion and without further consent by
the Fund, subcontract, in whole or in part, for the performance of its
obligations and duties hereunder with any person or entity including but not
limited to: (i) Prudential-Bache Securities Inc. ("Prudential-Bache"), a
-10-
<PAGE>
registered broker-dealer, (ii) The Prudential Insurance Company of America
("Prudential"), (iii) Pruco Securities Corporation, a registered broker-dealer,
(iv) any Prudential Bache or Prudential subsidiary or affiliate duly registered
as a broker-dealer and/or a transfer agent pursuant to the 1934 Act or (iv) any
other Prudential-Bache or Prudential affiliate or subsidiary; provided, however,
that PMFS shall be as fully responsible to the Fund for the acts and omissions
of any agent or subcontractor as it is for its own acts and omissions.
Article 9 Affiliations
9.01 PMFS may now or hereafter, without the consent of or notice to
the Fund, function as Transfer Agent and/or Shareholder Servicing Agent for any
other investment company registered with the SEC under the 1940 Act, including
without limitation any investment company whose adviser, administrator, sponsor
or principal underwriter is or may become affiliated with Prudential-Bache
and/or Prudential or any of its or their direct or indirect subsidiaries or
affiliates.
9.02 It is understood and agreed that the directors, officers,
employees, agents and Shareholders of the Fund, and the directors, officers,
employees, agents and shareholders of the Fund's investment adviser and/or
distributor, are or may be interested in the Agent as directors, officers,
employees, agents, shareholders or otherwise, and that the directors, officers,
employees, agents or shareholders of the Agent may be interested in the Fund as
directors, officers, employees, agents, Shareholders or otherwise, or in the
investment adviser and/or distributor as officers, directors, employees, agents,
shareholders or otherwise.
Article 10 Amendment
10.01 This Agreement may be amended or modified by a written
-11-
<PAGE>
agreement executed by both parties and authorized or approved by a resolution of
the Board of Directors of the Fund.
Article 11 Applicable Law
11.01 This Agreement shall be construed and the provisions thereof
interpreted under and in accordance with the laws of the State of New Jersey.
Article 12 Miscellaneous
12.01 In the event of an alleged loss or destruction of any Share
certificate, no new certificate shall be issued in lieu thereof, unless there
shall first be furnished to PMFS an affidavit of loss or non-receipt by the
holder of Shares with respect to which a certificate has been lost or destroyed,
supported by an appropriate bond satisfactory to PMFS and the Fund issued by a
surety company satisfactory to PMFS, except that PMFS may accept an affidavit of
loss and indemnity agreement executed by the registered holder (or legal
representative) without surety in such form as PMFS deems appropriate
indemnifying PMFS and the Fund for the issuance of a replacement certificate, in
cases where the alleged loss is in the amount of $1000 or less.
12.02 In the event that any check or other order for payment of
money on the account of any Shareholder or new investor is returned unpaid for
any reason, PMFS will (a) give prompt notification to the Fund's distributor
("Distributor") of such non-payment; and (b) take such other action, including
imposition of a reasonable processing or handling fee, as PMFS may, in its sole
discretion, deem appropriate or as the Fund and the Distributor may instruct
PMFS.
12.03 Any notice or other instrument authorized or required by this
Agreement to be given in writing to the Fund or to PMFS shall be sufficiently
given if addressed to that party and received by it as its office set forth or
at such other place as it may from time to time designate in
-12-
<PAGE>
writing.
To the Fund:
Prudential-Bache California Municipal Fund
One Seaport Plaza
New York, NY 10292
To PMFS:
Prudential Mutual Funds Services, Inc.
Raritan Plaza I
Edison, NJ 08818
Attention: President
12.04 All references to actions of or by Trustees herein shall
require action by such Trustees acting as a board or a formally constituted
group and not individually. The name "Prudential-Bache California Municipal
Fund" is the designation of the Trustees under the Declaration of Trust, and all
persons dealing with the Fund must look solely to the Fund for the enforcement
of any claims against the Fund as none of the Trustees, officers, agents or
Shareholders assume any personal responsibility for obligations entered into on
behalf of the Fund.
Article 13 Merger of Agreement
13.01 This Agreement constitutes the entire agreement between the
parties hereto and supersedes any prior agreement with respect to the subject
matter hereof whether oral or written.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed in their names and on their behalf under their seals by and through
their duly authorized officers, as of the day and year first above written.
-13-
<PAGE>
PRUDENTIAL-BACHE CALIFORNIA MUNICIPAL
FUND
BY: /s/ Robert F. Gunia
-------------------------------------
ATTEST:
/s/ S. Jane Rose
- ----------------------------
PRUDENTIAL MUTUAL FUND
SERVICES, INC.
BY: /s/ Fred A. Fiandaca
-------------------------------------
ATTEST:
/s/ Lynda M. Puglisi
- ----------------------------
-14-
<PAGE>
SCHEDULE A
PRUDENTIAL MUTUAL FUND SERVICES, INC.
Fee Schedule
Fee Information for Services as
Transfer Agent, Dividend Disbursing Agent
and Shareholder Servicing Agent
PRUDENTIAL-BACHE CALIFORNIA MUNICIPAL FUND
General - Fees are based on an annual per shareholder account charge for account
maintenance plus out-of-pocket expenses. The effective period of this fee
schedule is January 1, 1988 through December 31, 1988 and shall continue
thereafter from year to year, unless otherwise amended.
Annual Maintenance Charges - The annual maintenance charge includes the
processing of all transactions and correspondence. The fee is billable on a
monthly basis at the rate of 1/12 of the annual fee. A charge is made for an
account in the month that an account opens or closes.
Basic Annual Per Account Fee $ 8.00
New Account Set-up Fee for Manually $ 2.00
Established Accounts
Out-of-Pocket Expenses - Out-of-pocket expenses include but are not limited to:
postage, stationery and printing, allocable communication costs, microfilm,
microfiche, and expenses incurred at the specific direction of the Fund.
Payment - An invoice will be presented to the Fund on a monthly basis assessing
the Fund the appropriate fee and out-of-pocket expenses.
PRUDENTIAL-BACHE CALIFORNIA PRUDENTIAL MUTUAL FUND
MUNICIPAL FUND SERVICES, INC.
NAME: /s/ Susan Cote NAME: /s/ Fred A. Fiandaca
-------------------------- --------------------------
TITLE: Treasurer TITLE: President
-------------------------- --------------------------
DATE: January 1, 1988 DATE: January 1, 1988
-------------------------- --------------------------
<PAGE>
Schedule A
Prudential Mutual Fund Services, Inc.
Fee Schedule
Fee Information for Services as
Transfer Agent, Dividend Disbursing Agent
and Shareholder Servicing Agent
PRUDENTIAL-BACHE CALIFORNIA MUNICIPAL FUND
(CALIFORNIA SERIES)
General - Fees are based on an annual per shareholder account charge for account
maintenance plus out-of-pocket expenses. The effective period of this fee
schedule is January 1, 1989 through December 31, 1989 and shall continue
thereafter from year to year, unless otherwise amended.
Annual Maintenance Charges - The annual maintenance charge includes the
processing of all transactions and correspondence. The fee is billable on a
monthly basis at the rate of 1/12 of the annual fee. A charge is made for an
account in the month that an account opens or closes.
Basic Annual Per Account Fee $ 10.00
New Account Set-up Fee for Manually $ 2.00
Established Accounts
Out-of-Pocket Expenses - Out-of-pocket expenses include but are not limited to:
postage, stationery and printing, allocable communication costs, microfilm,
microfiche, and expenses incurred at the specific direction of the Fund.
Payment - An invoice will be presented to the Fund on a monthly basis assessing
the Fund the appropriate fee and out-of-pocket expenses.
PRUDENTIAL-BACHE CALIFORNIA PRUDENTIAL MUTUAL FUND
MUNICIPAL FUND (CA SERIES) SERVICES, INC.
NAME: /s/ Susan Cote NAME: /s/ Fred A. Fiandaca
-------------------------- --------------------------
TITLE: Treasurer TITLE: President
-------------------------- --------------------------
DATE: January 1, 1989 DATE: January 1, 1989
-------------------------- --------------------------
<PAGE>
Schedule A
Prudential Mutual Fund Services, Inc.
Fee Schedule
Fee Information for Services as
Transfer Agent, Dividend Disbursing Agent
and Shareholder Servicing Agent
PRUDENTIAL-BACHE CALIFORNIA MUNICIPAL FUND
(CALIFORNIA MONEY MARKET SERIES)
General - Fees are based on an annual per shareholder account charge for account
maintenance plus out-of-pocket expenses. The effective period of this fee
schedule is January 1, 1989 through December 31, 1989 and shall continue
thereafter from year to year, unless otherwise amended.
Annual Maintenance Charges - The annual maintenance charge includes the
processing of all transactions and correspondence. The fee is billable on a
monthly basis at the rate of 1/12 of the annual fee. A charge is made for an
account in the month that an account opens or closes.
Basic Annual Per Account Fee $ 12.00
New Account Set-up Fee for Manually $ 2.00
Established Accounts
Out-of-Pocket Expenses - Out-of-pocket expenses include but are not limited to:
postage, stationery and printing, allocable communication costs, microfilm,
microfiche, and expenses incurred at the specific direction of the Fund.
Payment - An invoice will be presented to the Fund on a monthly basis assessing
the Fund the appropriate fee and out-of-pocket expenses.
PRUDENTIAL-BACHE CALIFORNIA PRUDENTIAL MUTUAL FUND
MUNICIPAL FUND (CA MONEY SERVICES, INC.
MARKET SERIES)
NAME: /s/ Susan Cote NAME: /s/ Fred A. Fiandaca
-------------------------- --------------------------
TITLE: Treasurer TITLE: President
-------------------------- --------------------------
DATE: January 1, 1989 DATE: January 1, 1989
-------------------------- --------------------------
<PAGE>
Schedule A
Prudential Mutual Fund Services, Inc.
Fee Schedule
Fee Information for Services as
Transfer Agent, Dividend Disbursing Agent
and Shareholder Servicing Agent
PRUDENTIAL-BACHE CALIFORNIA MUNICIPAL FUND
(CALIFORNIA SERIES)
General - Fees are based on an annual per shareholder account charge for account
maintenance plus out-of-pocket expenses. The effective period of this fee
schedule is January 1, 1990 through December 31, 1990 and shall continue
thereafter from year to year, unless otherwise amended.
Annual Maintenance Charges - The annual maintenance charge includes the
processing of all transactions and correspondence. The fee is billable on a
monthly basis at the rate of 1/12 of the annual fee. A charge is made for an
account in the month that an account opens or closes.
Basic Annual Per Account Fee $ 10.00
New Account Set-up Fee for Manually $ 2.00
Established Accounts
Inactive Account Fee - $.20 per month. A monthly fee is charged for inactive
accounts with a zero balance.
Out-of-Pocket Expenses - Out-of-pocket expenses include but are not limited to:
postage, stationery and printing, allocable communication costs, microfilm,
microfiche, and expenses incurred at the specific direction of the Fund.
Payment - An invoice will be presented to the Fund on a monthly basis assessing
the Fund the appropriate fee and out-of-pocket expenses.
PRUDENTIAL-BACHE CALIFORNIA PRUDENTIAL MUTUAL FUND
MUNICIPAL FUND SERVICES, INC.
NAME: /s/ Susan Cote NAME: /s/ Fred A. Fiandaca
-------------------------- --------------------------
TITLE: Treasurer TITLE: President
-------------------------- --------------------------
DATE: January 1, 1990 DATE: January 1, 1990
-------------------------- --------------------------
<PAGE>
Schedule A
Prudential Mutual Fund Services, Inc.
Fee Schedule
Fee Information for Services as
Transfer Agent, Dividend Disbursing Agent
and Shareholder Servicing Agent
PRUDENTIAL-BACHE CALIFORNIA MUNICIPAL FUND
(CALIFORNIA MONEY MARKET SERIES)
General - Fees are based on an annual per shareholder account charge for account
maintenance plus out-of-pocket expenses. The effective period of this fee
schedule is January 1, 1990 through December 31, 1990 and shall continue
thereafter from year to year, unless otherwise amended.
Annual Maintenance Charges - The annual maintenance charge includes the
processing of all transactions and correspondence. The fee is billable on a
monthly basis at the rate of 1/12 of the annual fee. A charge is made for an
account in the month that an account opens or closes.
Basic Annual Per Account Fee $ 12.00
New Account Set-up Fee for Manually $ 2.00
Established Accounts
Inactive Account Fee - $.20 per month. A monthly fee is charged for inactive
accounts with a zero balance.
Out-of-Pocket Expenses - Out-of-pocket expenses include but are not limited to:
postage, stationery and printing, allocable communication costs, microfilm,
microfiche, and expenses incurred at the specific direction of the Fund.
Payment - An invoice will be presented to the Fund on a monthly basis assessing
the Fund the appropriate fee and out-of-pocket expenses.
PRUDENTIAL-BACHE CALIFORNIA PRUDENTIAL MUTUAL FUND
MUNICIPAL FUND (CALIFORNIA SERVICES, INC.
MONEY MARKET SERIES)
NAME: /s/ Susan Cote NAME: /s/ Fred A. Fiandaca
-------------------------- --------------------------
TITLE: Treasurer TITLE: President
-------------------------- --------------------------
DATE: January 1, 1990 DATE: January 1, 1990
-------------------------- --------------------------
<PAGE>
Schedule A
Prudential Mutual Fund Services, Inc.
Fee Schedule
Fee Information for Services as
Transfer Agent, Dividend Disbursing Agent
and Shareholder Servicing Agent
PRUDENTIAL CALIFORNIA MUNICIPAL FUND
(California Series)
(California Income Series)
General - Fees are based on an annual per shareholder account charge for account
maintenance plus out-of-pocket expenses. In addition, there is a one time set-up
charge per account for manually established accounts and a monthly charge for
inactive zero balance accounts. The effective period of this fee schedule is
January 1, 1990 through December 31, 1990 and shall continue thereafter from
year to year, unless otherwise amended.
Annual Maintenance Charges - The annual maintenance charge includes the
processing of all transactions and correspondence. The fee is billable on a
monthly basis at the rate of 1/12 of the annual fee. A charge is made for an
account in the month that an account opens or closes.
Annual Maintenance Per Account Fee $ 10.00
Other Charges
New Account Set-up Fee for Manually $ 2.00
Established Accounts
Monthly Inactive Zero Balance Account Fee $ .20
Out-of-Pocket Expenses - Out-of-pocket expenses include but are not limited to:
postage, stationery and printing, allocable communication costs, microfilm,
microfiche, and expenses incurred at the specific direction of the Fund.
Payment - An invoice will be presented to the Fund on a monthly basis assessing
the Fund the appropriate fee and out-of-pocket expenses.
PRUDENTIAL CALIFORNIA PRUDENTIAL MUTUAL FUND
MUNICIPAL FUND SERVICES, INC.
NAME: /s/ Susan Cote NAME: /s/ Fred A. Fiandaca
-------------------------- --------------------------
TITLE: Treasurer TITLE: President
-------------------------- --------------------------
Dated as of January 1, 1990, and amended thereafter.
<PAGE>
Exhibit 99.B11(a)
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Statement of Additional Information
constituting part of this Post-Effective Amendment No. 24 to the registration
statement on Form N-1A (the "Registration Statement") of our reports dated
October 20, 1997, relating to the financial statements and financial
highlights of the California Money Market, California Income and California
Series of the Prudential California Municipal Fund, which appear in such
Statement of Additional Information, and to the incorporation by reference
of our reports into the Prospectuses which constitute part of this
Registration Statement. We also consent to the reference to us under the
heading "Custodian, Transfer and Dividend Disbursing Agent and
Independent Accountants" in such Statement of Additional Information
and to the references to us under the heading "Financial Highlights" in such
Prospectuses.
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York 10036
October 27, 1997
<PAGE>
Exhibit 99.B11(b)
CONSENT OF INDEPENDENT AUDITORS
We consent to the use in Post-Effective Amendment No. 24 to Registration
Statement No.2-91215 of Prudential California Municipal Fund of our reports
dated October 14, 1996, appearing in the Statement of Additional Information,
which is included in such Registration Statement, and to the references to us
under the heading "Financial Highlights" in the Prospectus which is also
included in such Registration Statement.
Deloitte & Touche LLP
New York, New York
October 29, 1997
<PAGE>
PRUDENTIAL MUNICIPAL SERIES FUND
CALIFORNIA SERIES
YIELD CALCULATION
YIELD = 2*[([(a-b)/(c*d)]+1)^6-1]
Where a = dividends & interest earned during the period.
b = expenses accrued for the period.
c = average daily number of shares outstanding during the
period that were entitled to receive dividends.
d = maximum offering price per share on the last day of the
period.
- --------------------------------------------------------------------------------
Yield for the 30 day period
ended August 31, 1997
-------------------------------------------------------
Class A Class B Class C Class Z
--------- --------- -------- ---------
a = $347,023 $299,774 $1,420 $3,018
b = $52,133 $68,280 $392 $395
c = 6,890,374 5,954,042 28,195 58,898
d = $12.16 $11.80 $11.80 $11.81
YIELD = 4.28% 3.89% 3.73% 4.49%
TAX EQUIVALENT YIELD 1/(1-38%)(1-9.3%)
t = THE PORTION OF THE YIELD WHICH IS
DERIVED FROM TAX EXEMPT INCOME
TAX EQUIVALENT YIELD =
7.34% 6.87% 6.43% 7.74%
- -----------------------------------------------------------------------------
Subsidy-Adjusted Yield for the 30 day period
ended August 31, 1997
-------------------------------------------------------
Class A Class B Class C Class Z
--------- --------- -------- ---------
a = $347,023 $299,774 $1,420 $3,018
b = $55,490 $71,161 $406 $424
c = 6,890,374 5,954,042 28,195 59,898
d = $12.16 $11.80 $11.80 $11.81
YIELD = 4.21% 3.94% 3.68% 4.44%
SUBSIDY-ADJUSTED TAX EQUIVALENT YIELD = t/(1-36%)(1 - 9.3%)
t = THE SUBSIDY-ADJUSTED PORTION OF THE YIELD
WHICH IS DERIVED FROM TAX EXEMPT INCOME
SUBSIDY-ADJUSTED TAX EQUIVALENT YIELD =
7.26% 6.78% 6.35% 7.65%
<PAGE>
PRUDENTIAL CALIFORNIA MUNICIPAL FUND
CALIFORNIA SERIES
EXHIBIT
AVERAGE ANNUAL TOTAL RETURN
CALCULATION
n
P(1+T) = ERV
Where:
P = hypothetical initial payment of $1,000.
T = average annual total return.
n = number of years.
ERV = ending redeemable value.
- --------------------------------------------------------------------------------
One Year ended August 31, 1997
------------------------------------------------
Class A Class B Class C
-------- -------- --------
P = $1,000 $1,000 $1,000
ERV = $1,057 $1,037 $1,074
n = 1.0 1.0 1.0
T = 5.74% 3.67% 7.40%
Five Years ended Ten Years ended
August 31, 1997 August 31, 1997
---------------------------- ---------------
Class A Class B Class C
-------- -------- --------
P = $1,000 $1,000 $1,000
ERV = $1,338 $1,347 $1,952
n = 5.0 5.0 10.0
T = 5.99% 6.05% 6.92%
Since Inception Period ended August 31, 1997
------------------------------------------------
Class A Class B Class C
-------- -------- --------
P = $1,000 $1,000 $1,000
ERV = $1,678 $2,708 $1,215
n = 7.6 13.0 3.1
T = 7.04% 7.99% 6.54%
SUBSIDY/WAIVER ADJUSTED
------------------------------------------------
One Year ended August 31, 1997
------------------------------------------------
Class A Class B Class C
-------- -------- --------
P = $1,000 $1,000 $1,000
ERV = $1,057 $1,036 $1,073
n = 1.0 1.0 1.0
T = 5.65% 3.58% 7.31%
Five Years ended Ten Years ended
August 31, 1997 August 31, 1997
---------------------------- ---------------
Class A Class B Class C
-------- -------- --------
P = $1,000 $1,000 $1,000
ERV = $1,336 $1,341 $1,945
n = 5.0 5.0 10.0
T = 5.97% 6.04% 6.88%
Since Inception Period ended August 31, 1997
------------------------------------------------
Class A Class B Class C
-------- -------- --------
P = $1,000 $1,000 $1,000
ERV = $1,676 $2,680 $1,214
n = 7.6 13.0 3.1
T = 7.02% 7.91% 6.51%
<PAGE>
PRUDENTIAL CALIFORNIA MUNICIPAL FUND
CALIFORNIA MONEY MARKET SERIES
ANNUALIZED YIELD CALCULATION
----------------------------
DATE SHARES DIVIDEND RATE DIVIDEND
---- ------ ------------- --------
25-Aug-97 1.000000000 X 0.000072572 = 0.0000726
26-Aug-97 1.000072572 X 0.000072583 = 0.0000726
27-Aug-97 1.000145160 X 0.000072821 = 0.0000728
28-Aug-97 1.000217992 X 0.000073350 = 0.0000734
31-Aug-97 1.000291358 X 0.000217365 = 0.0002174
- -------------------------------------------------------------------------------
1.000508786
-----------
-----------
CURRENT YIELD
-------------
0.000508786 X 365 / 7 = 2.65%
----------
----------
ANNUALIZED YIELD FORMULA
------------------------
=(1+0.000508786/7)^365-1 = = 2.69%
----------
----------
TAX-EQUIVALENT YIELD FORMULA
----------------------------
=2.65%/(1-.396)*(1-.093) = = 4.84%
----------
----------
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0000746518
<NAME> PRUDENTIAL CALIFORNIA MUNICIPAL FUND
<SERIES>
<NUMBER> 001
<NAME> CALIFORNIA SERIES (CLASS A)
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> AUG-31-1997
<PERIOD-END> AUG-31-1997
<INVESTMENTS-AT-COST> 138,211,042
<INVESTMENTS-AT-VALUE> 151,773,630
<RECEIVABLES> 1,995,366
<ASSETS-OTHER> 39,479
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 0
<PAYABLE-FOR-SECURITIES> 700,000
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 436,179
<TOTAL-LIABILITIES> 0
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 141,958,617
<SHARES-COMMON-STOCK> 12,937,755
<SHARES-COMMON-PRIOR> 13,870,998
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (2,790,784)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 13,504,463
<NET-ASSETS> (26,808,753)
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 9,755,392
<OTHER-INCOME> 0
<EXPENSES-NET> 1,485,502
<NET-INVESTMENT-INCOME> 8,269,890
<REALIZED-GAINS-CURRENT> 1,514,692
<APPREC-INCREASE-CURRENT> 3,405,416
<NET-CHANGE-FROM-OPS> 13,189,998
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> (29,791)
<DISTRIBUTIONS-OTHER> (8,269,890)
<NUMBER-OF-SHARES-SOLD> 8,712,231
<NUMBER-OF-SHARES-REDEEMED> (24,068,018)
<SHARES-REINVESTED> 4,528,865
<NET-CHANGE-IN-ASSETS> (5,936,605)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (4,239,800)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 775,985
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,407,904
<AVERAGE-NET-ASSETS> 78,347,000
<PER-SHARE-NAV-BEGIN> 11.44
<PER-SHARE-NII> 0.65
<PER-SHARE-GAIN-APPREC> 0.36
<PER-SHARE-DIVIDEND> (0.65)
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 11.80
<EXPENSE-RATIO> 0.76
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0000746518
<NAME> PRUDENTIAL CALIFORNIA MUNICIPAL FUND
<SERIES>
<NUMBER> 002
<NAME> CALIFORNIA SERIES (CLASS B)
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> AUG-31-1997
<PERIOD-END> AUG-31-1997
<INVESTMENTS-AT-COST> 138,211,042
<INVESTMENTS-AT-VALUE> 151,773,630
<RECEIVABLES> 1,995,366
<ASSETS-OTHER> 39,479
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 0
<PAYABLE-FOR-SECURITIES> 700,000
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 436,179
<TOTAL-LIABILITIES> 0
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 141,958,617
<SHARES-COMMON-STOCK> 12,937,755
<SHARES-COMMON-PRIOR> 13,870,998
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (2,790,784)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 13,504,463
<NET-ASSETS> (26,808,753)
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 9,755,392
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