<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION
ON OCTOBER 22, 1999
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. 26 /X/
AND/OR
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 / /
AMENDMENT NO. 27 /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
DEBORAH A. DOCS, 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):
<TABLE>
<S> <C>
/ / immediately upon filing pursuant to paragraph (b)
/ / on (date) pursuant to paragraph (b)
/X/ 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.
</TABLE>
Title of Securities Being Registered......Shares of Beneficial Interest,
$.01 Per Value.
- ----------------------------------------------------------------------
- ----------------------------------------------------------------------
<PAGE>
TYPE OF FUND:
- -------------------------------------
Tax-exempt bond
INVESTMENT OBJECTIVE:
- -------------------------------------
Maximize current income that is exempt from
California state and federal income taxes
consistent with the preservation of capital
[LOGO]
PRUDENTIAL
CALIFORNIA
MUNICIPAL
FUND
- ---------------------------------------------------------------
CALIFORNIA SERIES
PROSPECTUS: DECEMBER , 1999
<TABLE>
<S> <C>
As with all mutual funds, the
Securities and Exchange Commission has
not approved or disapproved the
Series' shares, nor has the SEC
determined that this prospectus is
complete or accurate. It is a criminal
offense to state otherwise. [LOGO]
</TABLE>
<PAGE>
TABLE OF CONTENTS
- -------------------------------------
<TABLE>
<S> <C>
1 RISK/RETURN SUMMARY
1 Investment Objective and Principal Strategies
1 Principal Risks
2 Evaluating Performance
5 Fees and Expenses
7 HOW THE SERIES INVESTS
7 Investment Objective and Policies
9 Other Investments and Strategies
11 Investment Risks
17 HOW THE SERIES IS MANAGED
17 Board of Trustees
17 Manager
17 Investment Adviser
19 Distributor
19 Year 2000 Readiness Disclosure
21 SERIES DISTRIBUTIONS AND TAX ISSUES
21 Distributions
22 Tax Issues
23 If You Sell or Exchange Your Shares
24 HOW TO BUY, SELL AND EXCHANGE SHARES OF THE SERIES
24 How to Buy Shares
32 How to Sell Your Shares
35 How to Exchange Your Shares
37 FINANCIAL HIGHLIGHTS
38 Class A Shares
39 Class B Shares
40 Class C Shares
41 Class Z Shares
42 THE PRUDENTIAL MUTUAL FUND FAMILY
A-1 APPENDIX A: DESCRIPTION OF SECURITY RATINGS
FOR MORE INFORMATION (Back Cover)
</TABLE>
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CALIFORNIA SERIES [ICON] (800) 225-1852
<PAGE>
RISK/RETURN SUMMARY
- -------------------------------------
This section highlights key information about the CALIFORNIA SERIES (the Series)
of the PRUDENTIAL CALIFORNIA MUNICIPAL FUND (the Fund). Additional information
follows this summary.
INVESTMENT OBJECTIVE AND PRINCIPAL STRATEGIES
Our investment objective is to maximize CURRENT INCOME that is EXEMPT FROM
CALIFORNIA STATE AND FEDERAL INCOME TAXES, consistent with the PRESERVATION OF
CAPITAL. This means we invest primarily in California state and municipal bonds,
which are debt obligations or fixed income securities, including notes,
commercial paper and other securities, as well as obligations of other issuers
that pay interest income that is exempt from those taxes (collectively called
"California obligations"). In conjunction with our investment objective, we may
invest in debt obligations with the potential for capital gain.
To achieve our objective, we normally invest so that at least 80% of the
income from the Series' investments will be exempt from California state and
federal income taxes or the Series will invest at least 80% of the Series' total
assets in California obligations. We normally invest at least 70% of the Series'
total assets in "investment grade" debt obligations, which are debt obligations
rated at least BBB by Standard & Poor's Ratings Group (S&P), Baa by Moody's
Investors Service (Moody's), or comparably rated by another major rating
service, and unrated debt obligations that we believe are comparable in quality.
The Series may invest in municipal bonds the interest and/or principal payments
on which are insured by the bond issuers or other parties. The Series may also
invest in certain municipal bonds the interest on which is subject to the
federal alternative minimum tax (AMT). The dollar-weighted average maturity of
the Series will normally be between 10 and 20 years.
While we make every effort to achieve our objective, we can't guarantee
success.
PRINCIPAL RISKS
Although we try to invest wisely, all investments involve risk. The securities
in which the Series invests are generally subject to the risk that the issuer
may be unable to make principal and interest payments when they are due, as well
as the risk that the securities may lose value because interest rates change or
because there is a lack of confidence in the issuer. Bonds with
- --------------------------------------------------------------------------------
1
<PAGE>
RISK/RETURN SUMMARY
- ------------------------------------------------
longer maturity dates typically produce higher yields and are subject to greater
price fluctuations as a result of changes in interest rates than bonds with
shorter maturity dates.
The Series may purchase insured municipal bonds to reduce credit risks.
Although insurance coverage reduces credit risks by providing that the insurer
will make timely payment of interest and/or principal, it does not provide
protection against the market fluctuations of insured bonds or fluctuations in
the price of the shares of the Series. An insured municipal bond fluctuates in
value largely based on factors relating to the insurer's creditworthiness or
ability to satisfy its obligations.
Bond prices and the Series' net asset value generally move in opposite
directions from interest rates--if interest rates go up, the prices of the bonds
in the Series' portfolio may fall because the bonds the Series holds won't, as a
rule, pay as well as the newer bonds issued. Bonds that are issued when interest
rates are high generally increase in value when interest rates fall.
Municipal bonds may be subject to the risk that the borrower may not set
aside funds to make the bond or lease payments.
Because the Series will concentrate its investments in California
obligations, the Series is more susceptible to economic, political and other
developments that may adversely affect issuers of California obligations than a
municipal bond fund that is not as geographically concentrated. For more
information on the risks of investing in California obligations, see
"Description of the Fund, Its Investments and Risks" in the Statement of
Additional Information.
Like any mutual fund, an investment in the Series could lose value, and you
could lose money. For more information about the risks associated with the
Series, see "How the Series Invests--Investment Risks."
An investment in the Series is not a bank deposit and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or by any other
government agency.
EVALUATING PERFORMANCE
A number of factors--including risk--can affect how the Series performs. The
following bar chart and table show the Series' performance for each full
calendar year of operation for the last 10 years. The bar chart and table
demonstrate the risk of investing in the Series by showing how returns can
- -------------------------------------------------------------------
2 CALIFORNIA SERIES [ICON] (800) 225-1852
<PAGE>
RISK/RETURN SUMMARY
- ------------------------------------------------
change from year to year and by showing how the Series' average annual total
returns compare with a bond index and a group of similar mutual funds. Past
performance does not mean that the Series will achieve similar results in the
future.
- --------------------------------------------------------------------------------
3
<PAGE>
RISK/RETURN SUMMARY
- ------------------------------------------------
ANNUAL RETURNS*--(CLASS B SHARES)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
BEST QUARTER: % ( quarter of )
WORST QUARTER: % ( quarter of )
</TABLE>
* THESE ANNUAL RETURNS DO NOT INCLUDE SALES CHARGES. IF THE SALES CHARGES WERE
INCLUDED, THE ANNUAL RETURNS WOULD BE LOWER THAN THOSE SHOWN. WITHOUT THE
DISTRIBUTION AND SERVICE (12b-1) FEE WAIVER, THE ANNUAL RETURNS WOULD HAVE
BEEN LOWER, TOO. THE TOTAL RETURN OF THE CLASS B SHARES FROM 1-1-99 TO 9-30-99
WAS %.
AVERAGE ANNUAL RETURNS(1) (AS OF 12-31-98)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
1 YR 5 YRS 10 YRS SINCE INCEPTION
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A shares % % N/A % (since 1-22-90)
Class B shares % % % % (since 9-13-84)
Class C shares % N/A N/A % (since 8-1-94)
Class Z shares % N/A N/A % (since 9-18-96)
Muni Bond Index(2) % % % N/A
Lipper Average(3) % % % N/A
</TABLE>
<TABLE>
<S> <C>
1 THE SERIES' RETURNS ARE AFTER DEDUCTION OF SALES CHARGES AND
EXPENSES.
2 THE LEHMAN BROTHERS MUNICIPAL BOND INDEX (MUNI BOND INDEX)
IS AN UNMANAGED INDEX OF OVER 21,000 MUNICIPAL BONDS WHICH
ARE GENERALLY REPRESENTATIVE OF THE LONG-TERM INVESTMENT
GRADE MUNICIPAL BOND MARKET. THESE RETURNS DO NOT INCLUDE
THE EFFECT OF ANY SALES CHARGES. THESE RETURNS WOULD BE
LOWER IF THEY INCLUDED THE EFFECT OF SALES CHARGES. THE MUNI
BOND INDEX SINCE INCEPTION RETURNS ARE % FOR CLASS A, %
FOR CLASS B, % FOR CLASS C AND % FOR CLASS Z SHARES.
SOURCE: LEHMAN BROS.
3 THE LIPPER CALIFORNIA MUNICIPAL DEBT FUNDS CATEGORY IS BASED
ON THE AVERAGE RETURN OF ALL MUTUAL FUNDS IN THIS CATEGORY
AND DOES NOT INCLUDE THE EFFECT OF ANY SALES CHARGES. AGAIN,
THESE RETURNS WOULD BE LOWER IF THEY INCLUDED THE EFFECT OF
SALES CHARGES. THE LIPPER RETURNS SINCE THE INCEPTION OF
EACH CLASS ARE % FOR CLASS A, % FOR CLASS B, % FOR CLASS
C AND % FOR CLASS Z SHARES. SOURCE: LIPPER, INC.
</TABLE>
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4 CALIFORNIA SERIES [ICON] (800) 225-1852
<PAGE>
RISK/RETURN SUMMARY
- ------------------------------------------------
FEES AND EXPENSES
These tables show the sales charges, fees, and expenses that you may pay if you
buy and hold shares of each share class of the Series--Class A, B, C, and Z.
Each share class has different sales charges--known as loads--and expenses, but
represents an investment in the same fund. Class Z shares are available only to
a limited group of investors. For more information about which share class may
be right for you, see "How to Buy, Sell and Exchange Shares of the Series."
SHAREHOLDER FEES(1) (PAID DIRECTLY FROM YOUR INVESTMENT)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
CLASS A CLASS B CLASS C CLASS Z
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Maximum sales charge (load) imposed on
purchases (as a percentage of offering
price) 3% None 1% None
Maximum deferred sales charge (load) (as a
percentage of the lower of original purchase
price or sale proceeds) None 5%(2) 1%(3) None
Maximum sales charge (load) imposed on
reinvested dividends and other distributions None None None None
Redemption fees None None None None
Exchange fee None None None None
</TABLE>
ANNUAL SERIES OPERATING EXPENSES (DEDUCTED FROM SERIES ASSETS)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
CLASS A CLASS B CLASS C CLASS Z
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Management fees .50% .50% .50% .50%
+ Distribution (12b-1) and service fees(4) .30%(4) .50% 1.00%(4) None
+ Other expenses % % % %
= Total annual Series operating expenses(4) % % % %
- Fee waiver or expense reimbursement(4) .05% % .25% %
= NET ANNUAL SERIES OPERATING EXPENSES % % % %
</TABLE>
<TABLE>
<S> <C>
1 YOUR BROKER MAY CHARGE YOU A SEPARATE OR ADDITIONAL FEE FOR
PURCHASES AND SALES OF SHARES.
2 THE CONTINGENT DEFERRED SALES CHARGE (CDSC) FOR CLASS B
SHARES DECREASES BY 1% ANNUALLY TO 1% IN THE FIFTH AND SIXTH
YEARS AND 0% IN THE SEVENTH YEAR. CLASS B SHARES CONVERT TO
CLASS A SHARES APPROXIMATELY SEVEN YEARS AFTER PURCHASE.
3 THE CDSC FOR CLASS C SHARES IS 1% FOR SHARES REDEEMED WITHIN
18 MONTHS OF PURCHASE.
4 FOR THE FISCAL YEAR ENDING AUGUST 31, 2000, THE DISTRIBUTOR
OF THE SERIES HAS CONTRACTUALLY AGREED TO REDUCE ITS
DISTRIBUTION AND SERVICE FEES FOR CLASS A AND CLASS C SHARES
TO .25 OF 1% AND .75 OF 1% OF THE AVERAGE DAILY NET ASSETS
OF THE CLASS A AND CLASS C SHARES, RESPECTIVELY.
</TABLE>
- --------------------------------------------------------------------------------
5
<PAGE>
RISK/RETURN SUMMARY
- ------------------------------------------------
EXAMPLE
This example will help you compare the fees and expenses of the Series'
different share classes and the cost of investing in the Series with the cost of
investing in other mutual funds.
The example assumes that you invest $10,000 in the Series for the time
periods indicated and then sell all of your shares at the end of those periods.
The example also assumes that your investment has a 5% return each year and that
the Series' operating expenses remain the same, except for the Distributor's
reduction of distribution and service (12b-1) fees for Class A and Class C
shares during the first year. Although your actual costs may be higher or lower,
based on these assumptions your costs would be:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
1 YR 3 YRS 5 YRS 10 YRS
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A shares $ $ $ $
Class B shares $ $ $ $
Class C shares $ $ $ $
Class Z shares $ $ $ $
</TABLE>
You would pay the following expenses on the same investment if you did not sell
your shares:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
1 YR 3 YRS 5 YRS 10 YRS
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A shares $ $ $ $
Class B shares $ $ $ $
Class C shares $ $ $ $
Class Z shares $ $ $ $
</TABLE>
- -------------------------------------------------------------------
6 CALIFORNIA SERIES [ICON] (800) 225-1852
<PAGE>
HOW THE SERIES INVESTS
- -------------------------------------
INVESTMENT OBJECTIVE AND POLICIES
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. In conjunction with its investment objective, the Series may invest
in debt securities with the potential for capital gain. While we make every
effort to achieve our objective, we can't guarantee success.
To achieve the Series' objective, we invest primarily in CALIFORNIA
OBLIGATIONS, including California state and municipal bonds as well as
obligations of other issuers (such as issuers located in Puerto Rico, the Virgin
Islands and Guam) that pay interest income that is exempt from California and
federal income taxes. We normally invest so that at least 80% of the income from
the Series' investments will be exempt from those taxes or the Series will have
at least 80% of its total assets invested in California obligations. The Series,
however, may hold private activity bonds, which are municipal bonds the interest
on which is subject to the federal alternative minimum tax (AMT).
Municipal bonds include GENERAL OBLIGATION BONDS and REVENUE BONDS. General
obligation bonds are obligations supported by the credit of an issuer that has
the power to tax and are payable from that issuer's general revenues and not
from any specific source. Revenue bonds, on the other hand, are payable from
revenues from a particular source.
We normally invest at least 70% of the Series' assets in "investment grade"
obligations, which are obligations rated at least BBB by S&P, Baa by Moody's, or
comparably rated by another major rating service, and unrated debt obligations
that we believe are comparable in quality. We may also invest in insured
municipal bonds. A rating is an assessment of the likelihood of timely repayment
of interest and principal (with respect to a municipal bond) or claims (with
respect to an insurer of a municipal bond) and can be useful when comparing
different municipal bonds. These ratings are not a guarantee of quality. The
opinions of the rating agencies do not reflect market risk and they may at times
lag behind the current
- -------------------------------------------------------------------
States and municipalities issue bonds in order to borrow money to finance a
project. You can think of bonds as loans that investors make to the state, local
government or other issuer. The government gets the cash needed to complete the
project and investors earn income on their investment.
- -------------------------------------------------------------------
- --------------------------------------------------------------------------------
7
<PAGE>
HOW THE SERIES INVESTS
- ------------------------------------------------
financial conditions of the issuer or insurer. An investor can evaluate the
expected likelihood of debt repayment by an issuer by looking at its ratings as
compared to another similar issuer.
During the year ended August 31, 1999, 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>
- ---------------------------------------------------------------------------------
PERCENTAGES OF
RATINGS TOTAL INVESTMENTS
- ---------------------------------------------------------------------------------
<S> <C>
AAA/Aaa xx%
AA/Aa xx%
A/A xx%
BBB/Baa xx%
BB/Ba xx%
</TABLE>
In determining which securities to buy and sell, the investment adviser will
consider, among other things, yield, maturity, issue, quality characteristics
and expectations regarding economic and political developments, including
movements in interest rates and demand for municipal bonds. The investment
adviser will seek to anticipate interest rate movements and will purchase and
sell municipal bonds accordingly. The investment adviser will also consider the
claims-paying ability with respect to insurers of municipal bonds. The
investment adviser will also seek to take advantage of differentials in yields
with respect to securities with similar credit ratings and maturities, but which
vary according to the purpose for which they were issued. The investment adviser
will also seek to take advantage of differentials in yields with respect to
securities issued for similar purposes with similar maturities, but which vary
according to ratings.
The dollar-weighted average maturity of the obligations held by the Series
generally ranges between 10 and 20 years.
For more information, see "Investment Risks" and the Statement of Additional
Information, "Description of the Fund, Its Investment and Risks." The Statement
of Additional Information--which we refer to as the "SAI"--contains additional
information about the Series. To obtain a copy, see the back cover page of this
prospectus.
The Series' investment objective is a fundamental policy that cannot be
changed without shareholder approval. The Board of the Prudential California
Municipal Fund can change investment policies that are not
- -------------------------------------------------------------------
8 CALIFORNIA SERIES [ICON] (800) 225-1852
<PAGE>
HOW THE SERIES INVESTS
- ------------------------------------------------
fundamental.
OTHER INVESTMENTS AND STRATEGIES
In addition to the principal strategies, we may also make the following
investments to try to increase the Series' returns or protect its assets if
market conditions warrant.
MUNICIPAL LEASE OBLIGATIONS
The Series may invest in MUNICIPAL LEASE OBLIGATIONS. The interest and principal
on municipal lease obligations are paid out of lease payments made by the party
leasing the equipment or facilities that were acquired or built with the bonds.
Typically, municipal lease obligations are issued by states or financing
authorities to provide money for construction projects such as schools, offices
or stadiums. The entity that leases the building or facility would be
responsible for paying the interest and principal on the obligation.
MUNICIPAL ASSET-BACKED SECURITIES
The Series may invest in MUNICIPAL ASSET-BACKED SECURITIES. A municipal
asset-backed security is a type of pass-through instrument that pays interest
which is eligible for exclusion from federal income taxation based upon the
income from an underlying pool of municipal bonds.
FLOATING RATE BONDS, VARIABLE RATE BONDS, INVERSE FLOATERS AND
SECONDARY INVERSE FLOATERS
The Series may invest in floating rate bonds, variable rate bonds, inverse
floaters and secondary inverse floaters. FLOATING RATE BONDS are municipal bonds
that have an interest rate that is set as a specific percentage of a designated
rate, such as the rate on Treasury bonds or the prime rate at major commercial
banks. The interest rate on floating rate bonds changes when there is a change
in the designated rate. VARIABLE RATE BONDS are municipal bonds that have an
interest rate that is adjusted, based on the market rate at a specified period.
They generally allow the Series to demand payment of the bond on short notice
for an amount that may be more or less than the amount paid. INVERSE FLOATERS
are municipal bonds 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. SECONDARY
- --------------------------------------------------------------------------------
9
<PAGE>
HOW THE SERIES INVESTS
- ------------------------------------------------
INVERSE FLOATERS are municipal asset-backed securities with a floating or
variable interest rate that moves in the opposite direction of the interest rate
or another security or the value of an index.
WHEN-ISSUED AND DELAYED-DELIVERY SECURITIES
The Series may purchase municipal bonds on a "WHEN-ISSUED" or "DELAYED-DELIVERY"
basis, without limit. When the Series makes this type of purchase, the price and
rate are fixed at the time of purchase, but delivery and payment for the bonds
take place at a later time. The Series does not earn interest income until the
date the bonds are delivered.
REPURCHASE AGREEMENTS
The Series may use REPURCHASE AGREEMENTS where a party agrees to sell a security
to the Series and then repurchase it at an agreed-upon price at a stated time. A
repurchase agreement is like a loan by the Series to the other party which
creates a fixed return for the Series.
LIQUIDITY PUTS
The Series may purchase and exercise PUTS on municipal bonds without limit. Puts
give the Series the right to sell securities at a specified price and date. Puts
may be acquired to reduce the risk of the securities subject to the puts, but
puts may involve additional costs to the Series, which could reduce the Series'
return.
TEMPORARY DEFENSIVE STRATEGY
For temporary defensive purposes, the Series may hold up to 100% of its assets
in cash or investment-grade bonds, including bonds that are not exempt from
state, local and federal income taxation. Investing heavily in these securities
can limit our ability to achieve the Series' objective, but can help to preserve
the Series' assets.
DERIVATIVE STRATEGIES
We may use various derivative strategies to try to improve the Series' returns
or protect its assets, although we cannot guarantee that these strategies will
work, that the instruments necessary to implement these strategies will be
available or that the Series will not lose money. Derivatives--such as
- -------------------------------------------------------------------
10 CALIFORNIA SERIES [ICON] (800) 225-1852
<PAGE>
HOW THE SERIES INVESTS
- ------------------------------------------------
FUTURES CONTRACTS, OPTIONS, OPTIONS ON FUTURES AND INTEREST RATE SWAPS--involve
costs and can be volatile. A futures contract is an agreement to buy or sell a
set quantity of an underlying product at a future date, or to make or receive a
cash payment based on the value of a securities index. An option is the right to
buy or sell securities or, in the case of an option on a futures contract, the
right to buy or sell a futures contract in exchange for a premium. An interest
rate swap is a transaction in which the Series and another party "trade" income
streams. The swap is done to preserve a return or spread on a particular
investment or portion of the Series or to protect against any increase in the
price of securities the Series anticipates purchasing at a later date.
With derivatives, the investment adviser tries to predict if the underlying
investment, whether a security, market index, currency, interest rate or some
other benchmark, will go up or down at some future date. We may use derivatives
to try to reduce risk or to increase return consistent with the Series' overall
investment objective. Any derivatives we may use may not match the Series'
underlying holdings. For more information about these strategies, see the SAI,
"Description of the Fund, Its Investments and Risks--Hedging Strategies."
ADDITIONAL STRATEGIES
The Series also follows certain policies when it: BORROWS MONEY (the Series can
borrow up to 33 1/3% of the value of its total assets); and HOLDS ILLIQUID
SECURITIES (the Series may hold up to 15% of its net assets in illiquid
securities, including certain securities with legal or contractual restrictions
on resale, those without a readily available market and repurchase agreements
with maturities longer than 7 days). The Series is subject to certain investment
restrictions that are fundamental policies and cannot be changed without
shareholder approval. For more information about these restrictions, see the
SAI.
INVESTMENT RISKS
As noted, all investments involve risk, and investing in the Series is no
exception. Since the Series' holdings can vary significantly from broad market
indexes, performance of the Series can deviate from performance of the indexes.
This chart outlines the key risks and potential rewards of the Series' principal
investments and certain of the Series' non-principal
- --------------------------------------------------------------------------------
11
<PAGE>
HOW THE SERIES INVESTS
- ------------------------------------------------
investments and strategies. See, too, "Description of the Fund, Its Investments
and Risks" in the SAI.
- -------------------------------------------------------------------
12 CALIFORNIA SERIES [ICON] (800) 225-1852
<PAGE>
HOW THE SERIES INVESTS
- ------------------------------------------------
INVESTMENT TYPE
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------
% OF SERIES' TOTAL ASSETS RISKS POTENTIAL REWARDS
- ------------------------------------------------------------------------------------
<S> <C> <C>
- ------------------------------------------------------------------------------------
MUNICIPAL BONDS -- Concentration -- Tax-exempt interest
risk--the risk that income, except with
PROVIDE AT LEAST 80% OF bonds may lose value respect to certain
SERIES' INCOME OR because of political, bonds, such as
COMPRISE AT LEAST 80% OF economic or other private activity
ITS TOTAL ASSETS events affecting bonds, which are
issuers of California subject to the
obligations federal alternative
-- Credit risk--the risk minimum tax (AMT)
that the borrower -- If interest rates
can't pay back the decline, long-term
money borrowed or yields should be
make interest higher than money
payments (lower for market yields
insured and
higher-rated bonds)
-- Market risk--the risk
that bonds will lose
value in the market
because interest
rates change or there
is a lack of
confidence in the
borrower
-- Illiquidity risk--the
risk that it may be
difficult to value
precisely and sell at
time or price desired
-- Nonappropriation
risk--the risk that
the municipality may
not include the bond
obligations in future
budgets
-- Tax risk--the risk
that federal, state
or local income tax
rates may decrease,
which could decrease
demand for municipal
bonds, or that a
change in law may
limit or eliminate
exemption of interest
on municipal bonds
from such taxes
- ------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
13
<PAGE>
HOW THE SERIES INVESTS
- ------------------------------------------------
INVESTMENT TYPE (CONT'D)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------
% OF SERIES' TOTAL ASSETS RISKS POTENTIAL REWARDS
- ------------------------------------------------------------------------------------
<S> <C> <C>
- ------------------------------------------------------------------------------------
MUNICIPAL LEASE -- Concentration risk -- Tax-exempt interest
OBLIGATIONS -- Credit risk income, except with
-- Market risk respect to certain
PERCENTAGE VARIES -- Illiquidity risk bonds, such as
-- Nonappropriation risk private activity
-- Tax risk bonds, which are
subject to the AMT
-- If interest rates
decline, long-term
yields should be
higher than money
market yields
- ------------------------------------------------------------------------------------
</TABLE>
- -------------------------------------------------------------------
14 CALIFORNIA SERIES [ICON] (800) 225-1852
<PAGE>
HOW THE SERIES INVESTS
- ------------------------------------------------
INVESTMENT TYPE (CONT'D)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------
% OF SERIES' TOTAL ASSETS RISKS POTENTIAL REWARDS
- ------------------------------------------------------------------------------------
<S> <C> <C>
- ------------------------------------------------------------------------------------
MUNICIPAL ASSET-BACKED -- Prepayment risk--the -- Regular interest
SECURITIES risk that the income
underlying bonds may -- Pass-through
PERCENTAGE VARIES be prepaid, partially instruments provide
or completely, greater
generally during diversification than
periods of falling direct ownership of
interest rates, which municipal bonds
could adversely
effect yield to
maturity and could
require the Series to
reinvest in lower
yielding bonds
-- Credit risk--the risk
that the underlying
municipal bonds will
not be paid by
issuers or by credit
insurers or
guarantors of such
instruments. Some
municipal
asset-backed
securities are
unsecured or secured
by lower-rated
insurers or
guarantors and thus
may involve greater
risk
-- Market risk
-- Tax risk
- ------------------------------------------------------------------------------------
VARIABLE/FLOATING RATE -- Value lags value of -- May offer protection
SECURITIES fixed-rate securities against interest rate
when interest rates changes
PERCENTAGE VARIES change
- ------------------------------------------------------------------------------------
INVERSE FLOATERS/ -- High market risk--risk -- Income generally will
SECONDARY INVERSE that inverse floaters increase when
FLOATERS will fluctuate in interest rates
value more decrease
PERCENTAGE VARIES dramatically than
other debt securities
when interest rates
change
-- Credit risk
-- Illiquidity risk
-- Secondary inverse
floaters are subject
to additional risks
of municipal
asset-backed
securities
- ------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
15
<PAGE>
HOW THE SERIES INVESTS
- ------------------------------------------------
INVESTMENT TYPE (CONT'D)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------
% OF SERIES' TOTAL ASSETS RISKS POTENTIAL REWARDS
- ------------------------------------------------------------------------------------
<S> <C> <C>
- ------------------------------------------------------------------------------------
DERIVATIVES -- Derivatives such as -- The Series could make
futures and options money and protect
PERCENTAGE VARIES may not fully offset against losses if the
the underlying investment analysis
positions and this proves correct
could result in -- One way to manage the
losses to the Series Series' risk/return
that would not have balance is to lock in
otherwise occurred the value of an
-- Derivatives used for investment ahead of
risk management may time
not have the intended -- Derivatives that
effects and may involve leverage
result in losses or could generate
missed opportunities substantial gains or
-- The other party to a low costs
derivatives contract
could default
-- Derivatives that
involve leverage
(borrowing for
investment) could
magnify losses
-- Certain types of
derivatives involve
costs to the Series
which can reduce
returns
- ------------------------------------------------------------------------------------
WHEN-ISSUED AND -- May magnify underlying -- May magnify underlying
DELAYED-DELIVERY investment losses investment gains
SECURITIES -- Investment costs may
exceed potential
PERCENTAGE VARIES underlying investment
gains
- ------------------------------------------------------------------------------------
ILLIQUID SECURITIES -- May be difficult to -- May offer more
value precisely attractive yield or
UP TO 15% OF NET ASSETS -- May be difficult to potential for growth
sell at the time or than more widely
price desired traded securities
- ------------------------------------------------------------------------------------
</TABLE>
- -------------------------------------------------------------------
16 CALIFORNIA SERIES [ICON] (800) 225-1852
<PAGE>
HOW THE SERIES IS MANAGED
- -------------------------------------
BOARD OF TRUSTEES
The Fund's Board of Trustees oversees the actions of the Manager, Investment
Adviser and Distributor and decides on general policies. The Board also oversees
the Fund's officers who conduct and supervise the daily business operations of
the Fund.
MANAGER
PRUDENTIAL INVESTMENTS FUND MANAGEMENT LLC (PIFM)
GATEWAY CENTER THREE, 100 MULBERRY STREET
NEWARK, NEW JERSEY 07102-4077
Under a management agreement with the Fund, PIFM manages the Series'
investment operations and administers its business affairs. For the fiscal year
ended August 31, 1999, the Series paid PIFM management fees of .50 of 1% of the
Series' average net assets.
PIFM and its predecessors have served as manager or administrator to
investment companies since 1987. As of , 1999, PIFM served as the
Manager to all of the Prudential Mutual Funds, and as Manager or
administrator to closed-end investment companies, with aggregate assets of
approximately $ billion.
INVESTMENT ADVISER
The Prudential Investment Corporation, called Prudential Investments, is the
Series' investment adviser. Its address is Prudential Plaza, 751 Broad Street,
Newark, NJ 07102. PIFM has responsibility for all investment advisory services,
supervises Prudential Investments and reimburses Prudential Investments for its
reasonable costs and expenses.
Prudential Investments' Fixed Income Group manages more than $135 billion
for Prudential's retail investors, institutional investors, and policyholders.
Senior Managing Directors James J. Sullivan and Jack W. Gaston head the Group,
which is organized into teams specializing in different market sectors.
Top-down, broad investment decisions are made by the Fixed Income Policy
Committee, whereas bottom-up security selection is made by the sector teams.
Mr. Sullivan has overall responsibility for overseeing portfolio management
and credit research. Prior to joining Prudential Investments in 1998, he was a
managing director in Prudential's Capital Management Group,
- --------------------------------------------------------------------------------
17
<PAGE>
HOW THE SERIES IS MANAGED
- ------------------------------------------------
where he oversaw portfolio management and credit research for Prudential's
General Account and subsidiary fixed-income portfolios. He has more than 16
years of experience in risk management, arbitrage trading, and corporate bond
investing.
Mr. Gaston has overall responsibility for overseeing quantitative research
and risk management. Prior to this appointment in 1999, he was senior managing
director of the Capital Management Group where he was responsible for the
investment performance and risk management for Prudential's General Account and
subsidiary fixed-income portfolios. He has more than 20 years of experience in
investment management, including extensive experience applying quantitative
techniques to portfolio management.
The Fixed Income Investment Policy Committee is comprised of key senior
investment managers. Members include seven sector team leaders, the chief
investment strategist, and the head of risk management. The Committee uses a
top-down approach to investment strategy, asset allocation, and general risk
management, identifying sectors in which to invest.
The Municipal Bond Team, headed by Evan Lamp, is primarily responsible for
overseeing the day-to-day management of the Series. This Team uses a bottom-up
approach, which focuses on individual securities, while staying within the
guidelines of the Investment Policy Committee and the Series' investment
restrictions and policies. In addition, the Credit Research team of analysts
supports the sector teams using bottom-up fundamentals, as well as economic and
industry trends. Other sector teams may contribute to securities selection when
appropriate.
The following are the fixed income sector teams and the corresponding team
leaders: (Assets under management are as of , 1999.)
MUNICIPAL BONDS
ASSETS UNDER MANAGEMENT: $ billion.
TEAM LEADER: Evan Lamp. GENERAL INVESTMENT EXPERIENCE: 7 years.
PORTFOLIO MANAGERS: 5. AVERAGE GENERAL INVESTMENT EXPERIENCE: 10 years, which
includes team members with significant mutual fund experience.
SECTOR: City, state and local government securities.
- -------------------------------------------------------------------
18 CALIFORNIA SERIES [ICON] (800) 225-1852
<PAGE>
HOW THE SERIES IS MANAGED
- ------------------------------------------------
INVESTMENT APPROACH: Focus is on identifying spread, credit quality and
liquidity trends to capitalize on changing opportunities in the municipal
market. Ultimately, they seek the highest expected return with the least risk.
MONEY MARKETS
ASSETS UNDER MANAGEMENT: $ billion.
TEAM LEADER: Joseph Tully. GENERAL INVESTMENT EXPERIENCE: 16 years
PORTFOLIO MANAGERS: 8. AVERAGE GENERAL INVESTMENT EXPERIENCE: 12 years, which
includes team members with significant mutual fund experience.
SECTOR: High-quality short-term securities, including both taxable and tax-
exempt instruments.
INVESTMENT APPROACH: Focus is on safety of principal, liquidity and controlled
risk.
DISTRIBUTOR
Prudential Investment Management Service LLC (PIMS) distributes the Series'
shares under a Distribution Agreement with the Fund. The Fund has Distribution
and Service Plans under Rule 12b-1 of the Investment Company Act. Under the
Plans and the Distribution Agreement, PIMS pays the expenses of distributing the
Series' Class A, B, C, and Z shares and provides certain shareholder support
services. The Fund pays distribution and other fees to PIMS as compensation for
its services for each class of shares other than Class Z. These fees--known as
12b-1 fees--are shown in the "Fees and Expenses" tables.
YEAR 2000 READINESS DISCLOSURE
The services provided to the Fund and the shareholders by the Manager, the
Distributor, the Transfer Agent and the Custodian depend on the smooth
functioning of their computer systems and those of outside service providers.
Many computer software systems in use today cannot distinguish the year 2000
from the year 1900 because of the way dates are encoded and calculated. Such an
event could have a negative impact on handling securities trades, payments of
interest and dividends, pricing and account services. Although, at this time,
there can be no assurance that there will be no adverse impact on the Fund, the
Manager, the Distributor, the
- --------------------------------------------------------------------------------
19
<PAGE>
HOW THE SERIES IS MANAGED
- ------------------------------------------------
Transfer Agent and the Custodian have advised the Fund that they have been
actively working on necessary changes to their computer systems to prepare for
the year 2000. The Fund and its Board receive, and have received since early
1998, satisfactory quarterly reports from the principal service providers as to
their preparations for year 2000 readiness, although there can be no assurance
that the service providers (or other securities market participants) will
successfully complete the necessary changes in a timely manner. Moreover, the
Fund at this time has not considered retaining alternative service providers or
directly undertaken efforts to achieve year 2000 readiness, the latter of which
would involve substantial expenses without an assurance of success.
Additionally, issuers of securities generally, as well as those purchased by
the Series, may confront year 2000 compliance issues which, if material and not
resolved, could have an adverse impact on securities markets and/ or a specific
issuer's performance and could result in a decline in the value of the
securities held by the Series.
- -------------------------------------------------------------------
20 CALIFORNIA SERIES [ICON] (800) 225-1852
<PAGE>
SERIES DISTRIBUTIONS AND TAX ISSUES
- -------------------------------------
Investors who buy shares of the Series should be aware of some important tax
issues. For example, the Series pays DIVIDENDS of net investment income monthly,
and distributes LONG-TERM CAPITAL GAINS, if any, at least annually. Dividends
generally will be exempt from federal and California state income taxes. If,
however, the Series invests in taxable obligations, it will pay dividends that
are not exempt from these income taxes. Also, if you sell shares of the Series
for a profit, you may have to pay capital gains taxes on the amount of your
profit.
The following briefly discusses some of the important state and federal tax
issues you should be aware of, but is not meant to be tax advice. For tax
advice, please speak with your tax adviser.
DISTRIBUTIONS
The Series distributes DIVIDENDS of any net investment income to shareholders,
typically every month. For example, if the Series owns a City XYZ bond and the
bond pays interest, the Series will pay out a portion of this interest as a
dividend to its shareholders, assuming the Series' income is more than its costs
and expenses. These dividends generally will be EXEMPT FROM FEDERAL INCOME
TAXES, as long as 50% or more of the value of the Series' assets at the end of
each quarter is invested in state, municipal and other obligations, the interest
on which is excluded from gross income for federal income tax purposes.
As we mentioned before, the Series will concentrate its investments in
California obligations. In addition to being exempt from federal taxes, Series'
dividends are EXEMPT FROM CALIFORNIA STATE INCOME TAXES (but not from California
franchise taxes) FOR CALIFORNIA RESIDENTS if the dividends are excluded from
federal income taxes and are derived from interest payments on California
obligations. Dividends attributable to the interest on taxable bonds held by the
Series, market discount on taxable and tax-exempt obligations and short-term
capital gains, however, will be subject to federal, state and local income tax
at ordinary income tax rates. 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.
Some shareholders may be subject to federal alternative minimum tax (AMT)
liability. Tax-exempt interest from certain bonds is treated as an item of tax
preference, and may be attributed to shareholders. A portion of all tax-exempt
interest is includable as an upward adjustment in determining a corporation's
alternative minimum taxable income. These rules could make you liable for the
AMT.
- --------------------------------------------------------------------------------
21
<PAGE>
SERIES DISTRIBUTIONS AND TAX ISSUES
- ------------------------------------------------
The Series also distributes LONG-TERM CAPITAL GAINS to shareholders
(typically once a year). Long-term capital gains are generated when the Series
sells assets that it held for more than 12 months, for a profit. For an
individual, the maximum long-term capital gains rate is 20%.
For your convenience, distributions of dividends and capital gains are
AUTOMATICALLY REINVESTED in the Series without any sales charge. If you ask us
to pay the distributions in cash, we will send you a check if your account is
with the Transfer Agent. Otherwise, if your account is with a broker you will
receive a credit to your account. Either way, the distributions may be subject
to taxes. For more information about Automatic Reinvestment and other
shareholder services, see "Step 4: Additional Shareholder Services" in the next
section.
TAX ISSUES
FORM 1099
Every year, you will receive a Form 1099, which reports the amount of dividends
and capital gains we distributed to you during the prior year.
Series distributions are generally taxable to you in the year they are
received, except when we declare certain dividends in the fourth quarter and
actually pay them in January of the following year. In such cases, the dividends
are treated as if they were paid to you on December 31 of the prior year.
Corporate shareholders are not eligible for the 70% dividends-received deduction
on dividends paid by the Series.
WITHHOLDING TAXES
If federal law requires you to provide the Series with your tax identification
number and certifications as to your tax status, and you fail to do so, or are
otherwise subject to backup withholding, we generally withhold and pay to the
U.S. Treasury 31% of your taxable distributions and gross sale proceeds. If you
are subject to backup withholding, we will withhold and pay to the Treasury 31%
of your distributions.
IF YOU PURCHASE JUST BEFORE RECORD DATE
If you buy shares of the Series just before the record date (the date that
determines who receives the dividend), that distribution will be paid to you. As
explained above, the distribution may be subject to income or capital gains
taxes. You may think you've done well since you bought shares one day and soon
thereafter received a distribution. That is not so because when dividends are
paid out, the value of each share of the Series
- -------------------------------------------------------------------
22 CALIFORNIA SERIES [ICON] (800) 225-1852
<PAGE>
SERIES DISTRIBUTIONS AND TAX ISSUES
- ------------------------------------------------
decreases by the amount of the dividend to reflect the payout although this may
not be apparent because the value of each share of the Series will also be
affected by the market changes, if any. The distribution you receive makes up
for the decrease in share value. However, if the distribution is taxable, the
timing of your purchase does mean that part of your investment came back to you
as taxable income.
IF YOU SELL OR EXCHANGE YOUR SHARES
If you sell any shares of the Series for a profit, you have REALIZED A CAPITAL
GAIN, which is subject to tax. The amount of tax you pay depends on whether you
hold your shares for more than one year. If you sell shares of the Series for a
loss, you may have a capital loss, which you may use to offset certain capital
gains you have.
Exchanging your shares of the Series for the shares of another Prudential
mutual fund is considered a sale for tax purposes. In other words, it's a
"taxable event." Therefore, if the shares you exchanged have increased in value
since you purchased them, you have capital gains, which are subject to the taxes
described above.
RECEIPTS FROM SALE $ --> +$ CAPITAL GAIN
(taxes owed)
OR
RECEIPTS FROM SALE $ --> -$ CAPITAL LOSS
(offset against gain)
[GRAPH]
Any gain or loss you may have from selling or exchanging Series shares will
not be reported on the Form 1099; however, proceeds from the sale or exchange
will be reported on Form 1099-B. Therefore, you or your financial adviser should
keep track of the dates on which you buy and sell--or exchange--Series shares,
as well as the amount of any gain or loss on each transaction. For tax advice,
please see your tax adviser.
AUTOMATIC CONVERSION OF CLASS B SHARES
We have obtained a legal opinion that the conversion of Class B shares into
Class A shares--which happens automatically approximately seven years after
purchase--is not a "taxable event." This opinion, however, is not binding on the
Internal Revenue Service (IRS). For more information about the automatic
conversion of Class B shares, see "Class B Shares Convert to Class A Shares
After Approximately Seven Years," in the next section.
- --------------------------------------------------------------------------------
23
<PAGE>
HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE SERIES
- -------------------------------------
HOW TO BUY SHARES
STEP 1: OPEN AN ACCOUNT
If you don't have an account with us or a securities firm that is permitted to
buy or sell shares of the Series for you, call Prudential Mutual Fund Services
LLC (PMFS) at (800) 225-1852 or contact:
PRUDENTIAL MUTUAL FUND SERVICES LLC
ATTN: INVESTMENT SERVICES
P.O. BOX 15020
NEW BRUNSWICK, NJ 08906-5020
To purchase by wire, call the number above to obtain an application. After
PMFS receives your completed application, you will receive an account number.
For additional information about purchasing shares of the Series, see the back
cover page of this prospectus. We have the right to reject any purchase order
(including an exchange into the Series) or suspend or modify the Series' sale of
its shares.
STEP 2: CHOOSE A SHARE CLASS
Individual investors can choose among Class A, Class B, Class C and Class Z
shares of the Series, although Class Z shares are available to a limited group
of investors.
Multiple share classes let you choose a cost structure that meets your
needs. With Class A shares, you pay the sales charge at the time of purchase,
but the operating expenses each year are lower than the expenses of Class B and
Class C shares. With Class B shares, you only pay a sales charge if you sell
your shares within six years (that is why they call it a Contingent Deferred
Sales Charge or CDSC), but the operating expenses each year are higher than the
Class A share expenses. With Class C shares, you pay a 1% front end sales charge
and a 1% CDSC if you sell within 18 months of purchase, but the operating
expenses are also higher than the expenses for Class A shares.
When choosing a share class, you should consider the following:
-- The amount of your investment
-- The length of time you expect to hold the shares and the impact of
varying distribution fees
- -------------------------------------------------------------------
24 CALIFORNIA SERIES [ICON] (800) 225-1852
<PAGE>
HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE SERIES
- ------------------------------------------------
-- The different sales charges that apply to each share class--
Class A's front-end sales charge vs. Class B's CDSC vs. Class C's low
front end sales charge and low CDSC
-- Whether you qualify for any reduction or waiver of sales charges
-- The fact that Class B shares automatically convert to Class A shares
approximately seven years after purchase
-- Whether you qualify to purchase Class Z shares.
See "How to Sell Your Shares" for a description of the impact of CDSCs.
SHARE CLASS COMPARISON. Use this chart to help you compare the Series' different
share classes. The discussion following this chart will tell you whether you are
entitled to a reduction or waiver of any sales charges.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
CLASS A CLASS B CLASS C CLASS Z
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Minimum purchase $1,000 $1,000 $2,500 None
amount(1)
Minimum amount for $100 $100 $100 None
subsequent
purchases(1)
Maximum initial 3% of the None 1% of the None
sales charge public public
offering offering
price price
Contingent Deferred None If sold during: 1% on sales None
Sales Charge (CDSC)(2) Year 1 5% made within
Year 2 4% 18 months of
Year 3 3% purchase(2)
Year 4 2%
Years 5/6 1%
Year 7 0%
Annual distribution .30 of 1% .50 of 1% 1% (.75 of None
and service (12b-1) (.25 of 1% 1%
fees (shown as currently) currently)
a percentage of
average net
assets)(3)
</TABLE>
<TABLE>
<S> <C>
1 THE MINIMUM INVESTMENT REQUIREMENTS DO NOT APPLY TO CERTAIN
RETIREMENT AND EMPLOYEE SAVINGS PLANS AND CUSTODIAL ACCOUNTS
FOR MINORS. THE MINIMUM INITIAL AND SUBSEQUENT INVESTMENT
FOR PURCHASES MADE THROUGH THE AUTOMATIC INVESTMENT PLAN IS
$50. FOR MORE INFORMATION, SEE "STEP 4: ADDITIONAL
SHAREHOLDER SERVICES--AUTOMATIC INVESTMENT PLAN."
2 FOR MORE INFORMATION ABOUT THE CDSC AND HOW IT IS
CALCULATED, SEE "HOW TO SELL YOUR SHARES--CONTINGENT
DEFERRED SALES CHARGES (CDSC)." CLASS C SHARES BOUGHT BEFORE
NOVEMBER 2, 1998 HAVE A 1% CDSC IF SOLD WITHIN ONE YEAR.
3 THESE DISTRIBUTION FEES ARE PAID FROM THE SERIES' ASSETS ON
A CONTINUOUS BASIS. OVER TIME, THE FEES WILL INCREASE THE
COST OF YOUR INVESTMENT AND MAY COST YOU MORE THAN PAYING
OTHER TYPES OF SALES CHARGES. THE SERVICE FEE FOR CLASS A,
CLASS B AND CLASS C SHARES IS .25 OF 1%. THE DISTRIBUTION
FEE FOR CLASS A SHARES IS LIMITED TO .30 OF 1% (INCLUDING
THE .25 OF 1% SERVICE FEE), FOR CLASS B SHARES IS LIMITED TO
.50 OF 1% (INCLUDING THE .25 OF 1% SERVICE FEE), AND IS .75
OF 1% FOR CLASS C SHARES. FOR THE FISCAL YEAR ENDING AUGUST
31, 2000, THE DISTRIBUTOR OF THE FUND HAS CONTRACTUALLY
AGREED TO REDUCE ITS DISTRIBUTION AND SERVICE (12b-1) FEES
FOR CLASS A AND CLASS C SHARES TO .25 OF 1% AND .75 OF 1% OF
THE AVERAGE DAILY NET ASSETS OF CLASS A SHARES AND CLASS C
SHARES, RESPECTIVELY.
</TABLE>
- --------------------------------------------------------------------------------
25
<PAGE>
HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE SERIES
- ------------------------------------------------
REDUCING OR WAIVING CLASS A'S INITIAL SALES CHARGE
The following describes the different ways investors can reduce or avoid
paying Class A's initial sales charge.
INCREASE THE AMOUNT OF YOUR INVESTMENT. You can reduce Class A's initial
sales charge by increasing the amount of your investment. This table shows
you how the sales charge decreases as the amount of your investment
increases.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
SALES CHARGE AS % OF SALES CHARGE AS % OF DEALER
AMOUNT OF PURCHASE OFFERING PRICE AMOUNT INVESTED REALLOWANCE
- -------------------------------------------------------------------------------------
<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 million and
above(1) None None None
</TABLE>
<TABLE>
<S> <C>
1 IF YOU INVEST $1 MILLION OR MORE, YOU CAN BUY ONLY CLASS A
SHARES, UNLESS YOU QUALIFY TO BUY CLASS Z SHARES.
</TABLE>
To satisfy the purchase amounts above, you can:
-- Invest with an eligible group of related investors
-- Buy the Class A shares of two or more Prudential mutual funds at the
same time
-- Use your RIGHTS OF ACCUMULATION, which allow you to combine the value
of Prudential mutual fund shares you already own with the value of
the shares you are purchasing for purposes of determining the
applicable sales charge (note: you must notify the Transfer Agent if
you qualify for Rights of Accumulation)
-- Sign a LETTER OF INTENT, stating in writing that you or an eligible
group of related investors will purchase a certain amount of shares
in the Series and other Prudential mutual funds within 13 months.
The Distributor may reallow Class A's sales charge to dealers.
MUTUAL FUND PROGRAMS. The initial sales charge will be waived for investors in
certain programs sponsored by broker-dealers, investment advisers and financial
planners who have agreements with Prudential Investments
- -------------------------------------------------------------------
26 CALIFORNIA SERIES [ICON] (800) 225-1852
<PAGE>
HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE SERIES
- ------------------------------------------------
Advisory Group relating to:
-- Mutual Fund "wrap" or asset allocation programs where the sponsor
places Series trades and charges its clients a management, consulting
or other fee for its services, or
-- Mutual fund "supermarket" programs where the sponsor links its
clients' accounts to a master account in the sponsor's name and the
sponsor charges a fee for its services.
Broker-dealers, investment advisers or financial planners sponsoring these
mutual fund programs may offer their clients more than one class of shares in
the Series in connection with different pricing options for their programs.
Investors should consider carefully any separate transaction and other fees
charged by these programs in connection with investing in each available share
class before selecting a share class.
OTHER TYPES OF INVESTORS. Other investors pay no sales charges, including
certain officers, employees or agents of Prudential and its affiliates, the
Prudential mutual funds, the subadvisers of the Prudential mutual funds and
clients of brokers that have entered into a selected dealer agreement with the
Distributor. To qualify for a reduction or waiver of the sales charge, you must
notify the Transfer Agent or your broker at the time of purchase. For more
information, see the SAI, "Purchase, Redemption and Pricing of Fund
Shares--Reduction and Waiver of Initial Sales Charge--Class A Shares."
WAIVING CLASS C'S INITIAL SALES CHARGE
INVESTMENT OF REDEMPTION PROCEEDS FROM OTHER INVESTMENT COMPANIES. The initial
sales charge will be waived for purchases of Class C shares if the purchase is
made with money from the redemption of shares of any unaffiliated investment
company, as long as the shares were not held in an account at Prudential
Securities Incorporated or one of its affiliates. These purchases must be made
within 60 days of the redemption. To qualify for this waiver, you must do one of
the following:
-- Purchase your shares through an account at Prudential Securities
-- Purchase your shares through an ADVANTAGE Account or an Investor
Account with Pruco Securities Corporation, or
-- Purchase your shares through another broker.
- --------------------------------------------------------------------------------
27
<PAGE>
HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE SERIES
- ------------------------------------------------
The waiver is not available to investors who purchase shares directly from
the Transfer Agent. If you are entitled to the waiver, you must notify either
the Transfer Agent or your broker. The Transfer Agent may require any supporting
documents it considers appropriate.
QUALIFYING FOR CLASS Z SHARES
MUTUAL FUND PROGRAMS. Class Z shares can be purchased by participants in any
fee-based program or trust program sponsored by Prudential or an affiliate that
includes the Series as an available option. Class Z shares also can be purchased
by investors in certain programs sponsored by broker-dealers, investment
advisers and financial planners who have agreements with Prudential Investments
Advisory Group relating to:
-- Mutual fund "wrap" or asset allocation programs where the sponsor
places Series trades, links its clients' accounts to a master account
in the sponsor's name and charges its clients a management,
consulting or other fee for its services, or
-- Mutual fund "supermarket" programs, where the sponsor links its
clients' accounts to a master account in the sponsor's name and the
sponsor charges a fee for its services.
Broker-dealers, investment advisers or financial planners sponsoring these
mutual fund programs may offer their clients more than one class of
shares in the Series in connection with different pricing options for their
programs. Investors should consider carefully any separate transaction and other
fees charged by these programs in connection with investing in each available
share class before selecting a share class.
OTHER TYPES OF INVESTORS. Class Z shares also can be purchased by any of the
following:
-- Certain participants in the MEDLEY Program (group variable annuity
contracts) sponsored by Prudential for whom Class Z shares of the
Prudential mutual funds are an available option,
-- Current and former Directors/Trustees of the Prudential mutual funds
(including the Fund), and
-- Prudential, with an investment of $10 million or more.
- -------------------------------------------------------------------
28 CALIFORNIA SERIES [ICON] (800) 225-1852
<PAGE>
HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE SERIES
- ------------------------------------------------
In connection with the sale of shares, the Manager, the Distributor or one
of their affiliates may pay brokers, financial advisers and other persons a
commission of up to 4% of the purchase price for Class B shares, up to 2% of the
purchase price for Class C shares and a finder's fee for Class A or Class Z
shares from their own resources based on a percentage of the net asset value of
shares sold or otherwise.
CLASS B SHARES CONVERT TO CLASS A SHARES AFTER APPROXIMATELY SEVEN YEARS
If you buy Class B shares and hold them for approximately seven years, we will
automatically convert them into Class A shares without charge. At that time, we
will also convert any Class B that you purchased with reinvested dividends and
other distributions. Since the 12b-1 fees for Class A shares are lower than for
Class B shares, switching to Class A shares lowers your Series expenses.
When we do the conversion, you will get fewer Class A shares than the number
of converted Class B shares converted if the price of the Class A shares is
higher than the price of Class B shares. The total dollar value will be the
same, so you will not have lost any money by getting fewer Class A shares. We do
the conversions quarterly, not on the anniversary date of your purchase. For
more information, see the SAI, "Purchase, Redemption and Pricing of Fund
Shares--Conversion Feature--Class B shares."
- --------------------------------------------------------------------------------
29
<PAGE>
HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE SERIES
- ------------------------------------------------
STEP 3: UNDERSTANDING THE PRICE YOU'LL PAY
The price you pay for each share of the Series is based on the share value. The
share value of a mutual fund--known as the NET ASSET VALUE or NAV--is determined
by a simple calculation: it's the total value of the fund (assets minus
liabilities) divided by the total number of shares outstanding. For example, if
the value of the investments held by Fund XYZ (minus its liabilities) is $1,000
and there are 100 shares of Fund XYZ owned by shareholders, the price of one
share of the fund--or the NAV--is $10 ($1,000 divided by 100). Portfolio
securities are valued based upon market quotations or, if not readily available,
at fair value as determined in good faith under procedures established by the
Fund's Board. Most national newspapers report the NAVs of most mutual funds,
which allows investors to check the price of mutual funds daily.
We determine the NAV of our shares once each business day at 4:15 p.m. New
York time on days that the New York Stock Exchange (NYSE) is open for trading.
The NYSE is closed on national holidays and Good Friday. We do not determine NAV
with respect to the Series on days when we have not received any orders to
purchase, sell, or exchange the Series' shares, or when changes in the value of
the Series' portfolio do not materially affect the NAV.
WHAT PRICE WILL YOU PAY FOR SHARES OF THE SERIES?
For Class A and Class C shares, you'll pay the public offering price, which is
NAV next determined after we receive your order to purchase, plus an initial
sales charge (unless you're entitled to a waiver). For Class B and Class Z
shares, you will pay the NAV next determined after we receive your order to
purchase (remember, there are no up-front sales charges for these share
classes). Your broker may charge you a separate or additional fee for purchases
of shares.
- -------------------------------------------------------------------
MUTUAL FUND SHARES
The NAV of mutual fund shares changes every day because the value of a fund's
portfolio changes constantly. For example, if Fund XYZ holds City ABC bonds in
its portfolio and the price of City ABC bonds goes up while the value of the
fund's other holdings remains the same and expenses don't change, the NAV of
Fund XYZ will increase.
- -------------------------------------------------------------------
- -------------------------------------------------------------------
30 CALIFORNIA SERIES [ICON] (800) 225-1852
<PAGE>
HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE SERIES
- ------------------------------------------------
STEP 4: ADDITIONAL SHAREHOLDER SERVICES
As a Series shareholder, you can take advantage of the following services and
privileges:
AUTOMATIC REINVESTMENT. As we explained in the "Series Distributions and Tax
Issues" section, the Series pays out--or distributes--its net investment income
and capital gains to all shareholders. For your convenience, we will
automatically reinvest your distributions in the Series at NAV without any sales
charge. If you want your distributions paid in cash, you can indicate this
preference on your application, notify your broker or notify the Transfer Agent
in writing (at the address below) at least five business days before the date we
determine who receives dividends.
PRUDENTIAL MUTUAL FUND SERVICES LLC
ATTN: ACCOUNT MAINTENANCE
P.O. BOX 15015
NEW BRUNSWICK, NJ 08906-5015
AUTOMATIC INVESTMENT PLAN. You can make regular purchases of the Series for as
little as $50 by having the funds automatically withdrawn from your bank or
brokerage account at specified intervals.
THE PRUTECTOR PROGRAM. Optional group term life insurance--which protects the
value of your Prudential mutual fund investment for your beneficiaries against
market declines--is available to investors who purchase their shares through
Prudential. This insurance is subject to various restrictions and charges and is
not available in all states.
SYSTEMATIC WITHDRAWAL PLAN. A systematic withdrawal plan is available that will
provide you with monthly or quarterly checks. Remember, the sale of Class B and
Class C shares may be subject to a CDSC.
REPORTS TO SHAREHOLDERS. Every year we will send you an annual report (along
with an updated prospectus) and a semi-annual report, which contain important
financial information about your Series. To reduce the Series' expenses, we will
send one annual shareholder report, one semi-annual shareholder report and one
annual prospectus per household, unless you instruct us or your broker
otherwise.
- --------------------------------------------------------------------------------
31
<PAGE>
HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE SERIES
- ------------------------------------------------
HOW TO SELL YOUR SHARES
You can sell your shares of the Series for cash (in the form of a check) at any
time, subject to certain restrictions.
When you sell shares of the Series--also known as redeeming your shares--the
price you will receive will be the NAV next determined after the Transfer Agent,
the Distributor or your broker receives your order to sell. If your broker holds
your shares, he must receive your order to sell by 4:15 p.m. New York time to
process the sale on that day. Otherwise, contact:
PRUDENTIAL MUTUAL FUND SERVICES LLC
ATTN: REDEMPTION SERVICES
P.O. BOX 15010
NEW BRUNSWICK, NJ 08906-5010
Generally, we will pay you for the shares that you sell within seven days
after the Transfer Agent, the Distributor or your broker receives your sell
order. If you hold shares through a broker, payment will be credited to your
account. If you are selling shares you recently purchased with a check, we may
delay sending you the proceeds until your check clears, which can take up to
10 days from the purchase date. You can avoid delay if you purchase shares by
wire, certified check or cashier's check. Your broker may charge a separate or
additional fee for sales of shares.
RESTRICTIONS ON SALES
There are certain times when you may not be able to sell shares of the Series,
or when we may delay paying you the proceeds from a sale. This may happen during
unusual market conditions or emergencies when the Series can't determine the
value of its assets or sell its holdings. For more information, see the SAI,
"Purchase, Redemption and Pricing of Fund Shares--Sale of Shares."
If you are selling more than $100,000 of shares, you want the check sent to
someone or some place that is not in our records or you are a business trust and
you hold shares directly with the Transfer Agent, you will need to have the
signature on your sell order guaranteed by an "eligible guarantor institution."
An "eligible guarantor institution" includes any bank, broker-dealer or credit
union. For more information, see the SAI, "Purchase,
- -------------------------------------------------------------------
32 CALIFORNIA SERIES [ICON] (800) 225-1852
<PAGE>
HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE SERIES
- ------------------------------------------------
Redemption and Pricing of Fund Shares--Sale of Shares--Signature Guarantee."
CONTINGENT DEFERRED SALES CHARGE (CDSC)
If you sell Class B shares within six years of purchase or Class C shares within
18 months of purchase, you will have to pay a CDSC. To keep the CDSC as low as
possible, we will sell your shares in the following order:
-- Amounts representing shares you purchased with reinvested dividends
and distributions
-- Amounts representing the increase in NAV above the total amount of
payments for shares made during the past six years for Class B shares
and 18 months for Class C shares (one year for Class C shares
purchased before November 2, 1998)
-- Amounts representing the cost of shares held beyond the CDSC period
(six years for Class B shares and 18 months for Class C shares)
Since shares that fall into any of the categories listed above are not
subject to the CDSC, selling them first helps you to avoid--or at least
minimize--the CDSC.
Having sold the exempt shares first, if there are any remaining shares that
are subject to the CDSC, we will apply the CDSC to amounts representing the cost
of shares held for the longest period of time within the applicable CDSC period.
As we noted in the "Share Class Comparison" chart, the CDSC for Class B
shares is 5% in the first year, 4% in the second, 3% in the third, 2% in the
fourth, and 1% in the fifth and sixth years. The rate decreases on the first day
of the month following the anniversary date of your purchase, not on the
anniversary date itself. The CDSC is 1% for Class C shares--which is applied to
shares sold within 18 months of purchase. For both Class B and Class C shares,
the CDSC is calculated based on the lesser of the original purchase price or the
redemption proceeds. For purposes of determining how long you've held your
shares, all purchases during the month are grouped together and considered to
have been made on the last day of the month.
The holding period for purposes of determining the applicable CDSC will be
calculated from the first day of the month after initial purchase,
- --------------------------------------------------------------------------------
33
<PAGE>
HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE SERIES
- ------------------------------------------------
excluding any time shares were held in a money market fund.
WAIVER OF THE CDSC--CLASS B SHARES
The CDSC will be waived if the Class B shares are sold:
-- After a shareholder is deceased or disabled (or, in the case of a
trust account, the death or disability of the grantor). This waiver
applies to individual shareholders, as well as shares owned in joint
tenancy (with rights of survivorship), provided the shares were
purchased before the death or disability
-- On certain sales from a Systematic Withdrawal Plan.
For more information on the above and other waivers, see the SAI, "Purchase,
Redemption and Pricing of Fund Shares--Waiver of Contingent Deferred Sales
Charge--Class B shares."
REDEMPTION IN KIND
If the sales of Series shares you make during any 90-day period reach the lesser
of $250,000 or 1% of the value of the Series' net assets, we can then give you
securities from the Series' portfolio instead of cash. If you want to sell the
securities for cash, you would have to pay the costs charged by a broker.
SMALL ACCOUNTS
If you make a sale that reduces your account value to less than $500, we may
sell the rest of your shares (without charging any CDSC) and close your account.
We would do this to minimize the Series' expenses paid by other shareholders. We
will give you 60 days' notice, during which time you can purchase additional
shares to avoid this action.
90-DAY REPURCHASE PRIVILEGE
After you redeem your shares, you have a 90-day period during which you may
reinvest any of the redemption proceeds in shares of the Series without paying
an initial sales charge. Also, if you paid a CDSC when you redeemed your shares,
we will credit your new account with the appropriate number of shares to reflect
the amount of the CDSC you paid. In order to take advantage of this one-time
privilege, you must notify the Transfer
- -------------------------------------------------------------------
34 CALIFORNIA SERIES [ICON] (800) 225-1852
<PAGE>
HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE SERIES
- ------------------------------------------------
Agent or your broker at the time of the repurchase. See the SAI, "Purchase,
Redemption and Pricing of Fund Shares--Sale of Shares."
HOW TO EXCHANGE YOUR SHARES
You can exchange your shares of the Series for shares of the same class in
certain other Prudential mutual funds--including certain money market funds--if
you satisfy the minimum investment requirements. For example, you can exchange
Class A shares of the Series for Class A shares of another Prudential mutual
fund, but you can't exchange Class A shares for Class B, Class C or Class Z
shares. Class B and C shares may not be exchanged into money market funds other
than Prudential Special Money Market Fund, Inc. After an exchange, at redemption
the CDSC will be calculated from the first day of the month after initial
purchase, excluding any time shares were held in a money market fund. We may
change the terms of the exchange privilege after giving you 60 days' notice.
If you hold shares through a broker, you must exchange shares through your
broker. Otherwise contact:
PRUDENTIAL MUTUAL FUND SERVICES LLC
ATTN: EXCHANGE PROCESSING
P.O. BOX 15010
NEW BRUNSWICK, NJ 08906-5010
There is no sales charge for such exchanges. However, if you exchange--and
then sell--Class B shares within approximately six years of your original
purchase or Class C shares within 18 months of your original purchase, you must
still pay the applicable CDSC. If you have exchanged Class B or Class C shares
into a money market fund, the time you hold the shares in the money market
account will not be counted in calculating the required holding periods for CDSC
liability.
Remember, as we explained in the section entitled "Series Distributions and
Tax Issues--If You Sell or Exchange Your Shares," exchanging shares is
considered a sale for tax purposes. Therefore, if the shares you exchange are
worth more than you paid for them, you may have to pay capital gains tax. For
additional information about exchanging shares, see the SAI, "Shareholder
Investment Account--Exchange Privilege."
- --------------------------------------------------------------------------------
35
<PAGE>
HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE SERIES
- ------------------------------------------------
If you own Class B or Class C shares and qualify to purchase Class A shares
without paying an initial sales charge, we will automatically exchange your
Class B or Class C shares which are not subject to a CDSC for Class A shares. We
make such exchanges on a quarterly basis if you qualify for this exchange
privilege. We have obtained a legal opinion that this exchange is not a "taxable
event" for federal income tax purposes. This opinion is not binding on the IRS.
FREQUENT TRADING
Frequent trading of the Series' shares in response to short-term fluctuations in
the market--also known as "market timing"--may make it very difficult to manage
the Series' investments. When market timing occurs, the Series may have to sell
portfolio securities to have the cash necessary to redeem the market timer's
shares. This can happen at a time when it is not advantageous to sell any
securities, so the Series' performance may be hurt. When large dollar amounts
are involved, market timing can also make it difficult to use long-term
investment strategies because we cannot predict how much cash the Series will
have to invest. When, in our opinion, such activity would have a disruptive
effect on portfolio management, the Fund reserves the right to refuse purchase
orders and exchanges into the Series by any person, group or commonly controlled
account. The Fund may notify a market timer of rejection of an exchange or
purchase order after the day the order is placed. If the Fund allows a market
timer to trade Series shares, it may require the market timer to enter into a
written agreement to follow certain procedures and limitations.
- -------------------------------------------------------------------
36 CALIFORNIA SERIES [ICON] (800) 225-1852
<PAGE>
FINANCIAL HIGHLIGHTS
- -------------------------------------
The financial highlights will help you evaluate financial performance of the
Series. The TOTAL RETURN in each chart represents the rate that a shareholder
earned on an investment in that share class of the Series, assuming reinvestment
of all dividends and other distributions. The information is for each share
class for the periods indicated.
Review each chart with the financial statements and report of independent
accountants, which appear in the SAI and are available upon request. Additional
performance information for each share class is contained in the annual report,
which you can receive at no charge.
- --------------------------------------------------------------------------------
37
<PAGE>
FINANCIAL HIGHLIGHTS
- ------------------------------------------------
CLASS A SHARES
The financial highlights for the three years ended August 31, 1999 were audited
by LLP, independent accountants, and the financial
highlights for the two years ended August 31, 1996 were audited by other
independent auditors, whose reports were unqualified.
CLASS A SHARES (FISCAL PERIOD ENDED 8-31)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE 1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $-- $11.80 $11.44 $11.49 $11.30
INCOME FROM INVESTMENT OPERATIONS:
Net investment income -- .62 .65(3) .65(3) .66
Net realized and unrealized gain
(loss) on investment transactions -- .43 .36 (.05) .19
TOTAL FROM INVESTMENT OPERATIONS -- 1.05 1.01 .60 .85
- ------------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS:
Dividends from net investment
income -- (.62) (.65) (.65) (.66)
Distributions in excess of
investment income -- (.01) --(1) -- --
Distributions from net realized
gains -- -- -- -- --
TOTAL DISTRIBUTIONS -- (.63) (.65) (.65) (.66)
NET ASSET VALUE, END OF YEAR $-- $12.22 $11.80 $11.44 $11.49
TOTAL RETURN(2) --% 9.13% 9.01% 5.23% 7.90%
- ---------------------------------
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA 1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
- ---------------------------------
NET ASSETS, END OF YEAR (000) $-- $91,356 $81,535 $72,876 $68,403
AVERAGE NET ASSETS (000) $-- $85,624 $78,347 $71,119 $42,617
RATIOS TO AVERAGE NET ASSETS:
Expenses, including distribution
fees --% .78% .76%(3) .81%(3) .73%(3)
Expenses, excluding distribution
fees --% .68% .66%(3) .71%(3) .63%(3)
Net investment income --% 5.18% 5.53%(3) 5.58%(3) 5.90%(3)
Portfolio turnover --% 11% 14% 26% 44%
- ---------------------------------
</TABLE>
1 LESS THAN $.005 PER SHARE.
2 TOTAL RETURN ASSUMES REINVESTMENT OF DIVIDENDS AND ANY OTHER DISTRIBUTIONS,
BUT DOES NOT INCLUDE THE EFFECT OF SALES CHARGES. IT IS CALCULATED ASSUMING
SHARES ARE PURCHASED ON THE FIRST DAY AND ARE SOLD ON THE LAST DAY OF EACH
PERIOD REPORTED.
3 NET OF MANAGEMENT FEE WAIVER.
- -------------------------------------------------------------------
38 CALIFORNIA SERIES [ICON] (800) 225-1852
<PAGE>
FINANCIAL HIGHLIGHTS
- ------------------------------------------------
CLASS B SHARES
The financial highlights for the three years ended August 31, 1999 were audited
by LLP, independent accountants, and the financial
highlights for the two years ended August 31, 1996 were audited by other
independent auditors, whose reports were unqualified.
CLASS B SHARES (FISCAL YEAR ENDED 8-31)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE 1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $-- $11.80 $11.43 $11.49 $11.29
INCOME FROM INVESTMENT OPERATIONS:
Net investment income -- .58 .60(3) .60(3) .62(3)
Net realized and unrealized gain
(loss) on investment transactions -- .43 .37 (.06) .20
TOTAL FROM INVESTMENT OPERATIONS -- 1.01 .97 .54 .82
- ------------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS:
Dividends from net investment
income -- (.58) (.60) (.60) (.62)
Distributions in excess of
investment income -- (.01) --(1) -- --
Distributions from net realized
gains -- -- -- -- --
TOTAL DISTRIBUTIONS -- (.59) (.60) (.60) (.62)
NET ASSET VALUE, END OF YEAR $-- $12.22 $11.80 $11.43 $11.49
TOTAL RETURN(2) --% 8.70% 8.67% 4.73% 7.56%
- ---------------------------------
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA 1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
- ---------------------------------
NET ASSETS, END OF YEAR (000) $-- $62,043 $70,093 $85,190 $103,891
AVERAGE NET ASSETS (000) $-- $66,086 $75,935 $96,525 $136,275
RATIOS TO AVERAGE NET ASSETS:
Expenses, including distribution
fees --% 1.18% 1.16%(3) 1.21%(3) 1.13%(3)
Expenses, excluding distribution
fees --% .68% .66%(3) .71%(3) .63%(3)
Net investment income --% 4.78% 5.13%(3) 5.18%(3) 5.50%(3)
Portfolio turnover --% 11% 14% 26% 44%
- ---------------------------------
</TABLE>
1 LESS THAN $.005 PER SHARE.
2 TOTAL RETURN ASSUMES REINVESTMENT OF DIVIDENDS AND ANY OTHER DISTRIBUTIONS,
BUT DOES NOT INCLUDE THE EFFECT OF SALES CHARGES. IT IS CALCULATED ASSUMING
SHARES ARE PURCHASED ON THE FIRST DAY AND ARE SOLD ON THE LAST DAY OF EACH
PERIOD REPORTED.
3 NET OF MANAGEMENT FEE WAIVER.
- --------------------------------------------------------------------------------
39
<PAGE>
FINANCIAL HIGHLIGHTS
- ------------------------------------------------
CLASS C SHARES
The financial highlights for the three years ended August 31, 1999 were audited
by LLP, independent accountants, and the financial
highlights for the two years ended August 31, 1996 were audited by other
independent auditors, whose reports were unqualified.
CLASS C SHARES (FISCAL YEAR ENDED 8-31)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE 1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $-- $11.80 $11.43 $11.49 $11.29
INCOME FROM INVESTMENT OPERATIONS:
Net investment income -- .55 .57(3) .57(3) .59(3)
Net realized and unrealized gain
(loss) on investment transactions -- .43 .37 (.06) .20
TOTAL FROM INVESTMENT OPERATIONS -- .98 .94 .51 .79
- --------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS:
Dividends from net investment
income -- (.55) (.57) (.57) (.59)
Distributions in excess of
investment income -- (.01) --(1)
Distributions from net realized
gains --
TOTAL DISTRIBUTIONS -- (.56) (.57) (.57) (.59)
NET ASSET VALUE, END OF YEAR $-- $12.22 $11.80 $11.43 $11.49
TOTAL RETURN(2) --% 8.43% 8.40% 4.47% 7.29%
- -----------------------------------
<CAPTION>
- --------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA 1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
- -----------------------------------
NET ASSETS, END OF YEAR (000) $-- $1,257 $334 $543 $129
AVERAGE NET ASSETS (000) $-- $689 $480 $286 $76
RATIOS TO AVERAGE NET ASSETS:
Expenses, including distribution
fees --% 1.43% 1.41%(3) 1.46%(3) 1.38%(3)
Expenses, excluding distribution
fees --% .68% .66%(3) .71%(3) .63%(3)
Net investment income --% 4.53% 4.88%(3) 4.93%(3) 5.25%(3)
Portfolio turnover --% 11% 14% 26% 44%
- -----------------------------------
</TABLE>
1 LESS THAN $.005 PER SHARE.
2 TOTAL RETURN ASSUMES REINVESTMENT OF DIVIDENDS AND ANY OTHER DISTRIBUTIONS,
BUT DOES NOT INCLUDE THE EFFECT OF SALES CHARGES. IT IS CALCULATED ASSUMING
SHARES ARE PURCHASED ON THE FIRST DAY AND ARE SOLD ON THE LAST DAY OF EACH
PERIOD REPORTED.
3 NET OF MANAGEMENT FEE WAIVER.
- -------------------------------------------------------------------
40 CALIFORNIA SERIES [ICON] (800) 225-1852
<PAGE>
FINANCIAL HIGHLIGHTS
- ------------------------------------------------
CLASS Z SHARES
The financial highlights for the two years ended August 31, 1999 were audited by
LLP, independent accountants, and the financial highlights
for the period from December 6, 1996 through August 31, 1997 were audited by
other independent auditors, whose reports were unqualified.
CLASS Z SHARES (FISCAL YEAR ENDED 8-31)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE 1999 1998 1997(1)
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
PERIOD $-- $11.81 $11.50
INCOME FROM INVESTMENT OPERATIONS:
Net investment income -- .63 .64(4)
Net realized and unrealized gain
on investment transactions -- .43 .31
TOTAL FROM INVESTMENT OPERATIONS -- 1.06 .95
- -------------------------------------------------------------------------------------
LESS DISTRIBUTIONS:
Dividends from net investment
income -- (.63) (.64)
Distributions in excess of
investment income -- (.01) --(5)
Distributions from net investment
income --
TOTAL DISTRIBUTIONS -- (.64) (.64)
NET ASSET VALUE, END OF PERIOD $-- $12.23 $11.81
TOTAL RETURN(2) --% 9.24% 8.35%
- -----------------------------------
<CAPTION>
- -------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA 1999 1998 1997
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
- -----------------------------------
NET ASSETS, END OF PERIOD (000) $-- $1,037 $710
AVERAGE NET ASSETS (000) $-- $847 $458
RATIOS TO AVERAGE NET ASSETS:
Expenses, including distribution
fees --% .68% .66%(3),(4)
Net investment income --% 5.28% 5.35%(3),(4)
Portfolio turnover --% 11% 14%
- -----------------------------------
</TABLE>
1 INFORMATION SHOWN IS FOR THE PERIOD 12-6-96 (WHEN CLASS Z SHARES WERE FIRST
OFFERED) THROUGH 8-31-97.
2 TOTAL RETURN ASSUMES REINVESTMENT OF DIVIDENDS AND ANY OTHER DISTRIBUTIONS,
BUT DOES NOT INCLUDE THE EFFECT OF SALES CHARGES. IT IS CALCULATED ASSUMING
SHARES ARE PURCHASED ON THE FIRST DAY AND ARE SOLD ON THE LAST DAY OF EACH
PERIOD REPORTED. TOTAL RETURN FOR PERIODS OF LESS THAN A FULL YEAR IS NOT
ANNUALIZED.
3 ANNUALIZED.
4 NET OF MANAGEMENT FEE WAIVER.
5 LESS THAN $.005 PER SHARE.
- --------------------------------------------------------------------------------
41
<PAGE>
THE PRUDENTIAL MUTUAL FUND FAMILY
- -------------------------------------
Prudential offers a broad range of mutual funds designed to meet your individual
needs. For information about these funds, contact your financial adviser or
dealer or call us at (800) 225-1852. Read the prospectus carefully before you
invest or send money.
STOCK FUNDS
PRUDENTIAL DISTRESSED SECURITIES FUND, INC.
PRUDENTIAL EMERGING GROWTH FUND, INC.
PRUDENTIAL EQUITY FUND, INC.
PRUDENTIAL EQUITY INCOME FUND
PRUDENTIAL INDEX SERIES FUND
PRUDENTIAL SMALL-CAP INDEX FUND
PRUDENTIAL STOCK INDEX FUND
THE PRUDENTIAL INVESTMENT PORTFOLIOS, INC.
PRUDENTIAL JENNISON GROWTH FUND
PRUDENTIAL JENNISON GROWTH & INCOME FUND
PRUDENTIAL MID-CAP VALUE FUND
PRUDENTIAL REAL ESTATE SECURITIES FUND
PRUDENTIAL SECTOR FUNDS, INC.
PRUDENTIAL FINANCIAL SERVICES FUND
PRUDENTIAL HEALTH SCIENCES FUND
PRUDENTIAL TECHNOLOGY FUND
PRUDENTIAL UTILITY FUND
PRUDENTIAL SMALL-CAP QUANTUM FUND, INC.
PRUDENTIAL SMALL COMPANY VALUE FUND, INC.
PRUDENTIAL TAX-MANAGED EQUITY FUND
PRUDENTIAL 20/20 FOCUS FUND
NICHOLAS-APPLEGATE FUND, INC.
NICHOLAS-APPLEGATE GROWTH EQUITY FUND
TARGET FUNDS
LARGE CAPITALIZATION GROWTH FUND
LARGE CAPITALIZATION VALUE FUND
SMALL CAPITALIZATION GROWTH FUND
SMALL CAPITALIZATION VALUE FUND
ASSET ALLOCATION/BALANCED FUNDS
PRUDENTIAL BALANCED FUND
PRUDENTIAL DIVERSIFIED FUNDS
CONSERVATIVE GROWTH FUND
MODERATE GROWTH FUND
HIGH GROWTH FUND
THE PRUDENTIAL INVESTMENT PORTFOLIOS, INC.
PRUDENTIAL ACTIVE BALANCED FUND
GLOBAL FUNDS
GLOBAL STOCK FUNDS
PRUDENTIAL DEVELOPING MARKETS FUND
PRUDENTIAL DEVELOPING MARKETS EQUITY FUND
PRUDENTIAL LATIN AMERICA EQUITY FUND
PRUDENTIAL EUROPE GROWTH FUND, INC.
PRUDENTIAL GLOBAL GENESIS FUND, INC.
PRUDENTIAL INDEX SERIES FUND
PRUDENTIAL EUROPE INDEX FUND
PRUDENTIAL PACIFIC INDEX FUND
PRUDENTIAL NATURAL RESOURCES FUND, INC.
PRUDENTIAL PACIFIC GROWTH FUND, INC.
PRUDENTIAL WORLD FUND, INC.
GLOBAL SERIES
INTERNATIONAL STOCK SERIES
GLOBAL UTILITY FUND, INC.
TARGET FUNDS
INTERNATIONAL EQUITY FUND
- -------------------------------------------------------------------
42 CALIFORNIA SERIES [ICON] (800) 225-1852
<PAGE>
THE PRUDENTIAL MUTUAL FUND FAMILY
- -------------------------------------
GLOBAL BOND FUNDS
PRUDENTIAL GLOBAL LIMITED MATURITY FUND, INC.
LIMITED MATURITY PORTFOLIO
PRUDENTIAL GLOBAL TOTAL RETURN FUND, INC.
PRUDENTIAL INTERMEDIATE GLOBAL
INCOME FUND, INC.
PRUDENTIAL INTERNATIONAL BOND FUND, INC.
BOND FUNDS
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 HIGH YIELD TOTAL RETURN FUND, INC.
PRUDENTIAL INDEX SERIES FUND
PRUDENTIAL BOND MARKET INDEX FUND
PRUDENTIAL STRUCTURED MATURITY FUND, INC.
INCOME PORTFOLIO
TARGET FUNDS
TOTAL RETURN BOND FUND
TAX-EXEMPT BOND FUNDS
PRUDENTIAL CALIFORNIA MUNICIPAL FUND
CALIFORNIA SERIES
CALIFORNIA INCOME SERIES
PRUDENTIAL MUNICIPAL BOND FUND
HIGH INCOME SERIES
INSURED SERIES
PRUDENTIAL MUNICIPAL SERIES FUND
FLORIDA SERIES
MASSACHUSETTS SERIES
NEW JERSEY SERIES
NEW YORK SERIES
NORTH CAROLINA SERIES
OHIO SERIES
PENNSYLVANIA SERIES
PRUDENTIAL NATIONAL MUNICIPALS FUND, INC.
MONEY MARKET FUNDS
TAXABLE MONEY MARKET FUNDS
CASH ACCUMULATION TRUST
LIQUID ASSETS FUND
NATIONAL MONEY MARKET FUND
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
- --------------------------------------------------------------------------------
43
<PAGE>
APPENDIX A
- -------------------------------------
DESCRIPTION OF SECURITY RATINGS
MOODY'S INVESTORS SERVICE
BOND RATINGS
Aaa: Bonds that are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa: Bonds that are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group, they comprise what are generally known
as high-grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than the 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.
Ba: Bonds that 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 that 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.
- --------------------------------------------------------------------------------
A-1
<PAGE>
APPENDIX A
- ------------------------------------------------
Bonds rated within the Aa, A, Baa, Ba and B categories that Moody's believes
possess the strongest credit attributes within those categories are designated
by the symbols Aa1, A1, Baa1, Ba1 and B1.
Caa: Bonds that 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 that are rated Ca represent obligations that are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
C: Bonds that 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 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.
P-1: Issuers rated "Prime-1" or "P-1" (or supporting institutions) have a
superior ability for repayment of senior short-term debt obligations.
P-2: Issuers rated "Prime-2" or "P-2" (or supporting institutions) have a
strong ability for repayment of senior short-term debt obligations.
P-3: Issuers rated "Prime-3" or "P-3" (or supporting institutions) have an
acceptable ability for repayment of senior short-term debt obligations.
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. There
is present 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. Margins of
protection are ample although not so large as in the preceding group.
MIG 3: Loans bearing the designation MIG 3 are of favorable quality. All
security elements are accounted for but there is lacking the undeniable
- -------------------------------------------------------------------
A-2 CALIFORNIA SERIES [ICON] (800) 225-1852
<PAGE>
APPENDIX A
- ------------------------------------------------
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.
STANDARD & POOR'S RATINGS GROUP
DEBT 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 obligations 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 and C is regarded as having
predominately 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 outweighted by large uncertainties or major 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
S&P's commercial paper ratings are current assessments of the likelihood of
timely payment of debt considered short-term in the relevant market.
- --------------------------------------------------------------------------------
A-3
<PAGE>
APPENDIX A
- ------------------------------------------------
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 with the A-3 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 factors and market access risks
unique to notes. Notes maturing in three years or less will likely receive a
note rating, while notes maturing beyond three years or less will likely receive
a note rating. Notes maturing beyond three years will most likely receive a
long-term debt rating. Municipal notes are SP-1, SP-2 or SP-3. The designation
SP-1 indicates a very strong capacity to pay principal an interest. Those issues
determined to possess extremely strong characteristics are given a plus (+)
designation. An SP-2 designation indicates a satisfactory capacity to pay
principal and interest. An SP-3 designations indicates speculative capacity to
pay principal and interest.
- -------------------------------------------------------------------
A-4 CALIFORNIA SERIES [ICON] (800) 225-1852
<PAGE>
FOR MORE INFORMATION:
- -------------------------------------
Please read this prospectus before you invest
in the Series and keep it for future reference.
For information or shareholder questions
contact:
PRUDENTIAL MUTUAL FUND SERVICES LLC
P.O. BOX 15005
NEW BRUNSWICK, NJ 08906-5005
(800) 225-1852
(732) 417-7555
(if calling from outside the U.S.)
- --------------------------------
Outside Brokers Should Contact:
PRUDENTIAL INVESTMENT MANAGEMENT SERVICES LLC
P.O. BOX 15035
NEW BRUNSWICK, NJ 08906-5035
(800) 778-8769
- ------------------------------------
Visit Prudential's Web Site At:
http://www.prudential.com
- --------------------------------
Additional information about the Series can be obtained without charge and can
be found in the following documents:
STATEMENT OF ADDITIONAL
INFORMATION (SAI)
(incorporated by reference into this prospectus)
ANNUAL REPORT
(contains a discussion of the market conditions and investment strategies that
significantly affected the Fund's performance)
SEMI-ANNUAL REPORT
You can also obtain copies of Fund documents from the Securities and Exchange
Commission as follows:
By Mail:
Securities and Exchange Commission
Public Reference Section
Washington, DC 20549-0102
By Electronic Request:
[email protected]
(The SEC charges a fee to copy documents.)
In Person:
Public Reference Room in
Washington, DC
(For hours of operation, call
(202)942-8090.)
Via the Internet:
on the EDGAR Database at
http://www.sec.gov
- --------------------------------
<TABLE>
<S> <C> <C>
CUSIP Quotron
Numbers: Symbols:
Class A: 744313-10-7
Class B: 744313-20-6
Class C: 744313-70-1
Class Z: 744313-88-3
</TABLE>
Investment Company Act File No:
811-04024
<TABLE>
<S> <C>
[MF122A] [LOGO] Printed on Recycled Paper
</TABLE>
<PAGE>
TYPE OF FUND:
- -------------------------------------
Tax-exempt bond
INVESTMENT OBJECTIVE:
- -------------------------------------
Maximize current income that is exempt from
California state and federal income taxes
consistent with the preservation of capital
[LOGO]
PRUDENTIAL
CALIFORNIA
MUNICIPAL
FUND
- ---------------------------------------------------------------
CALIFORNIA INCOME SERIES
PROSPECTUS: DECEMBER , 1999
<TABLE>
<S> <C>
As with all mutual funds, the
Securities and Exchange Commission has
not approved or disapproved the
Series' shares, nor has the SEC
determined that this prospectus is
complete or accurate. It is a criminal
offense to state otherwise. [LOGO]
</TABLE>
<PAGE>
TABLE OF CONTENTS
- -------------------------------------
<TABLE>
<S> <C>
1 RISK/RETURN SUMMARY
1 Investment Objective and Principal Strategies
1 Principal Risks
3 Evaluating Performance
5 Fees and Expenses
7 HOW THE SERIES INVESTS
7 Investment Objective and Policies
9 Other Investments and Strategies
11 Investment Risks
16 HOW THE SERIES IS MANAGED
16 Board of Trustees
16 Manager
16 Investment Adviser
18 Distributor
18 Year 2000 Readiness Disclosure
20 SERIES DISTRIBUTIONS AND TAX ISSUES
20 Distributions
21 Tax Issues
22 If You Sell or Exchange Your Shares
23 HOW TO BUY, SELL AND EXCHANGE SHARES OF THE SERIES
23 How to Buy Shares
31 How to Sell Your Shares
34 How to Exchange Your Shares
36 FINANCIAL HIGHLIGHTS
37 Class A Shares
38 Class B Shares
39 Class C Shares
40 Class Z Shares
42 THE PRUDENTIAL MUTUAL FUND FAMILY
A-1 APPENDIX A: DESCRIPTION OF SECURITY RATINGS
FOR MORE INFORMATION (Back Cover)
</TABLE>
- -------------------------------------------------------------------
CALIFORNIA INCOME SERIES [ICON] (800) 225-1852
<PAGE>
RISK/RETURN SUMMARY
- -------------------------------------
This section highlights key information about the CALIFORNIA INCOME SERIES (the
Series) of the PRUDENTIAL CALIFORNIA MUNICIPAL FUND (the Fund). Additional
information follows this summary.
INVESTMENT OBJECTIVE AND PRINCIPAL STRATEGIES
Our investment objective is to maximize CURRENT INCOME that is EXEMPT FROM
CALIFORNIA STATE AND FEDERAL INCOME TAXES, consistent with the PRESERVATION OF
CAPITAL. This means we invest primarily in California state and municipal bonds,
which are debt obligations or fixed income securities, including notes,
commercial paper and other securities, as well as obligations of other issuers
that pay interest income that is exempt from those taxes (collectively called
"California obligations"). In conjunction with our investment objective, we may
invest in debt obligations with the potential for capital gain.
To achieve our objective, we normally invest so that at least 80% of the
income from the Series' investments will be exempt from California state and
federal income taxes or the Series will invest at least 80% of its total assets
in California obligations. We normally invest at least 70% of the Series' total
assets in "investment grade" debt obligations, which are debt obligations rated
at least BBB by Standard & Poor's Ratings Group (S&P), Baa by Moody's Investors
Service (Moody's), or comparably rated by another major rating service, and
unrated debt obligations that we believe are comparable in quality. However, we
may invest up to 30% of the Series' assets in "non-investment grade" or HIGH
YIELD DEBT OBLIGATIONS, commonly known as "JUNK BONDS". The Series may invest in
municipal bonds the interest and/or principal payments on which are insured by
the bond issuers or other parties. The Series may also invest in certain
municipal bonds the interest on which is subject to the federal alternative
minimum tax (AMT). The dollar-weighted average maturity of the Series will
normally be between 10 and 20 years.
While we make every effort to achieve our objective, we can't guarantee
success.
PRINCIPAL RISKS
Although we try to invest wisely, all investments involve risk. The securities
in which the Series invests are generally subject to the risk that the issuer
may be unable to make principal and interest payments when they are due,
- --------------------------------------------------------------------------------
1
<PAGE>
RISK/RETURN SUMMARY
- ------------------------------------------------
as well as the risk that the securities may lose value because interest rates
change or because there is a lack of confidence in the issuer. Bonds with longer
maturity dates typically produce higher yields and are subject to greater price
fluctuations as a result of changes in interest rates than bonds with shorter
maturity dates. The Series invests in non-investment grade securities--also
known as "junk bonds"--which have a higher risk of default and tend to be less
liquid than higher-rated securities. Therefore, an investment in the Series may
not be appropriate for short-term investing.
The Series may purchase insured municipal bonds to reduce credit risks.
Although insurance coverage reduces credit risks by providing that the insurer
will make timely payment of interest and/or principal, it does not provide
protection against the market fluctuations of insured bonds or fluctuations in
the price of the shares of the Series. An insured municipal bond fluctuates in
value largely based on factors relating to the insurer's creditworthiness or
ability to satisfy its obligations.
Bond prices and the Series' net asset value generally move in opposite
directions from interest rates--if interest rates go up, the prices of the bonds
in the Series' portfolio may fall because the bonds the Series holds won't, as a
rule, pay as well as the newer bonds issued. Bonds that are issued when interest
rates are high generally increase in value when interest rates fall.
Municipal bonds may be subject to the risk that the borrower may not set
aside funds to make the bond or lease payments.
Because the Series will concentrate its investments in California
obligations, the Series is more susceptible to economic, political and other
developments that may adversely affect issuers of California obligations than a
municipal bond fund that is not as geographically concentrated. For more
information on the risks of investing in California obligations, see
"Description of the Fund, Its Investments and Risks" in the Statement of
Additional Information.
Like any mutual fund, an investment in the Series could lose value, and you
could lose money. For more information about the risks associated with the
Series, see "How the Series Invests--Investment Risks."
An investment in the Series is not a bank deposit and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or by any other
government agency.
- -------------------------------------------------------------------
2 CALIFORNIA INCOME SERIES [ICON] (800) 225-1852
<PAGE>
RISK/RETURN SUMMARY
- ------------------------------------------------
EVALUATING PERFORMANCE
A number of factors--including risk--can affect how the Series performs. The
following bar chart and table show the Series' performance for each full
calendar year of operation for the last 10 years. The bar chart and table
demonstrate the risk of investing in the Series by showing how returns can
change from year to year and by showing how the Series' average annual total
returns compare with a bond index and a group of similar mutual funds. Past
performance does not mean that the Series will achieve similar results in the
future.
ANNUAL RETURNS*--(CLASS B SHARES)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
BEST QUARTER: -% (- quarter of -)
WORST QUARTER: -% (- quarter of -)
</TABLE>
* THESE ANNUAL RETURNS DO NOT INCLUDE SALES CHARGES. IF THE SALES CHARGES WERE
INCLUDED, THE ANNUAL RETURNS WOULD BE LOWER THAN THOSE SHOWN. WITHOUT THE
DISTRIBUTION AND SERVICE (12B-1) FEE WAIVER, THE ANNUAL RETURNS WOULD HAVE
BEEN LOWER, TOO. THE TOTAL RETURN OF THE CLASS B SHARES FROM 1-1-99 TO 9-30-99
WAS %.
- --------------------------------------------------------------------------------
3
<PAGE>
RISK/RETURN SUMMARY
- ------------------------------------------------
AVERAGE ANNUAL RETURNS(1) (AS OF 12-31-98)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
1 YR 5 YRS 10 YRS SINCE INCEPTION
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A shares % % N/A % (since 12-3-90)
Class B shares % % % % (since 12-7-93)
Class C shares % N/A N/A % (since 8-1-94)
Class Z shares % N/A N/A % (since 9-18-96)
Muni Bond Index(2) % % % N/A
Lipper Average(3) % % % N/A
</TABLE>
<TABLE>
<S> <C>
1 THE SERIES' RETURNS ARE AFTER DEDUCTION OF SALES CHARGES AND
EXPENSES.
2 THE LEHMAN BROTHERS MUNICIPAL BOND INDEX (MUNI BOND INDEX)
IS AN UNMANAGED INDEX OF OVER 21,000 MUNICIPAL BONDS WHICH
ARE GENERALLY REPRESENTATIVE OF THE LONG-TERM INVESTMENT
GRADE MUNICIPAL BOND MARKET. THESE RETURNS DO NOT INCLUDE
THE EFFECT OF ANY SALES CHARGES. THESE RETURNS WOULD BE
LOWER IF THEY INCLUDED THE EFFECT OF SALES CHARGES. THE MUNI
BOND INDEX SINCE INCEPTION RETURNS ARE % FOR CLASS A, %
FOR CLASS B, % FOR CLASS C AND % FOR CLASS Z SHARES.
SOURCE: LEHMAN BROS.
3 THE LIPPER CALIFORNIA MUNICIPAL DEBT FUNDS CATEGORY IS BASED
ON THE AVERAGE RETURN OF ALL MUTUAL FUNDS IN THIS CATEGORY
AND DOES NOT INCLUDE THE EFFECT OF ANY SALES CHARGES. AGAIN,
THESE RETURNS WOULD BE LOWER IF THEY INCLUDED THE EFFECT OF
SALES CHARGES. THE LIPPER RETURNS SINCE THE INCEPTION OF
EACH CLASS ARE % FOR CLASS A, % FOR CLASS B, % FOR CLASS
C AND % FOR CLASS Z SHARES. SOURCE: LIPPER, INC.
</TABLE>
- -------------------------------------------------------------------
4 CALIFORNIA INCOME SERIES [ICON] (800) 225-1852
<PAGE>
RISK/RETURN SUMMARY
- ------------------------------------------------
FEES AND EXPENSES
These tables show the sales charges, fees, and expenses that you may pay if you
buy and hold shares of each share class of the Series--Class A, B, C, and Z.
Each share class has different sales charges--known as loads--and expenses, but
represents an investment in the same fund. Class Z shares are available only to
a limited group of investors. For more information about which share class may
be right for you, see "How to Buy, Sell and Exchange Shares of the Series."
SHAREHOLDER FEES(1) (PAID DIRECTLY FROM YOUR INVESTMENT)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
CLASS A CLASS B CLASS C CLASS Z
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Maximum sales charge (load) imposed on
purchases (as a percentage of offering
price) 3% None 1% None
Maximum deferred sales charge (load) (as a
percentage of the lower of original purchase
price or sale proceeds) None 5%(2) 1%(3) None
Maximum sales charge (load) imposed on
reinvested dividends and other distributions None None None None
Redemption fees None None None None
Exchange fee None None None None
</TABLE>
ANNUAL SERIES OPERATING EXPENSES (DEDUCTED FROM SERIES ASSETS)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
CLASS A CLASS B CLASS C CLASS Z
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Management fees .50% .50% .50% .50%
+ Distribution (12b-1) and service fees(4) .30%(4) .50% 1.00%(4) None
+ Other expenses % % % %
= Total annual Series operating expenses(4) % % % %
- Fee waiver or expense reimbursement(4) .05% % .25% %
= NET ANNUAL SERIES OPERATING EXPENSES % % % %
</TABLE>
<TABLE>
<S> <C>
1 YOUR BROKER MAY CHARGE YOU A SEPARATE OR ADDITIONAL FEE FOR
PURCHASES AND SALES OF SHARES.
2 THE CONTINGENT DEFERRED SALES CHARGE (CDSC) FOR CLASS B
SHARES DECREASES BY 1% ANNUALLY TO 1% IN THE FIFTH AND SIXTH
YEARS AND 0% IN THE SEVENTH YEAR. CLASS B SHARES CONVERT TO
CLASS A SHARES APPROXIMATELY SEVEN YEARS AFTER PURCHASE.
3 THE CDSC FOR CLASS C SHARES IS 1% FOR SHARES REDEEMED WITHIN
18 MONTHS OF PURCHASE.
4 FOR THE FISCAL YEAR ENDING AUGUST 31, 2000, THE DISTRIBUTOR
OF THE SERIES HAS CONTRACTUALLY AGREED TO REDUCE ITS
DISTRIBUTION AND SERVICE FEES FOR CLASS A AND CLASS C SHARES
TO .25 OF 1% AND .75 OF 1% OF THE AVERAGE DAILY NET ASSETS
OF THE CLASS A AND CLASS C SHARES, RESPECTIVELY.
</TABLE>
- --------------------------------------------------------------------------------
5
<PAGE>
RISK/RETURN SUMMARY
- ------------------------------------------------
EXAMPLE
This example will help you compare the fees and expenses of the Series'
different share classes and the cost of investing in the Series with the cost of
investing in other mutual funds.
The example assumes that you invest $10,000 in the Series for the time
periods indicated and then sell all of your shares at the end of those periods.
The example also assumes that your investment has a 5% return each year and that
the Series' operating expenses remain the same, except for the Distributor's
reduction of distribution and service (12b-1) fees for Class A and Class C
shares during the first year. Although your actual costs may be higher or lower,
based on these assumptions your costs would be:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
1 YR 3 YRS 5 YRS 10 YRS
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A shares $ $ $ $
Class B shares $ $ $ $
Class C shares $ $ $ $
Class Z shares $ $ $ $
</TABLE>
You would pay the following expenses on the same investment if you did not sell
your shares:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
1 YR 3 YRS 5 YRS 10 YRS
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A shares $ $ $ $
Class B shares $ $ $ $
Class C shares $ $ $ $
Class Z shares $ $ $ $
</TABLE>
- -------------------------------------------------------------------
6 CALIFORNIA INCOME SERIES [ICON] (800) 225-1852
<PAGE>
HOW THE SERIES INVESTS
- -------------------------------------------
INVESTMENT OBJECTIVE AND POLICIES
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. In conjunction with its investment objective, the Series may invest
in debt securities with the potential for capital gain. While we make every
effort to achieve our objective, we can't guarantee success.
To achieve the Series' objective, we invest primarily in CALIFORNIA
OBLIGATIONS, including California state and municipal bonds as well as
obligations of other issuers (such as issuers located in Puerto Rico, the Virgin
Islands and Guam) that pay interest income that is exempt from California state
and federal income taxes. We normally invest so that at least 80% of the income
from the Series' investments will be exempt from those taxes or the Series will
have at least 80% of its total assets invested in California obligations. The
Series, however, may hold private activity bonds, which are municipal bonds the
interest on which is subject to the federal alternative minimum tax (AMT).
Municipal bonds include GENERAL OBLIGATION BONDS and REVENUE BONDS. General
obligation bonds are obligations supported by the credit of an issuer that has
the power to tax and are payable from that issuer's general revenues and not
from any specific source. Revenue bonds, on the other hand, are payable from
revenues from a particular source.
We normally invest at least 70% of the Series' assets in "investment grade"
obligations, which are obligations rated at least BBB by S&P, Baa by Moody's, or
comparably rated by another major rating service, and unrated debt obligations
that we believe are comparable in quality. We may also invest in insured
municipal bonds. However, we may invest up to 30% of the Series' assets in HIGH
YIELD OBLIGATIONS ("JUNK BONDS"). A rating is an assessment of the likelihood of
timely repayment of interest and principal (with respect to a municipal bond) or
claims (with respect to an insurer of a municipal bond) and can be useful when
comparing different municipal bonds. These ratings are not a guarantee of
quality. The opinions of the
- -------------------------------------------------------------------
States and municipalities issue bonds in order to borrow money to finance a
project. You can think of bonds as loans that investors make to the state, local
government or other issuer. The government gets the cash needed to complete the
project and investors earn income on their investment.
- -------------------------------------------------------------------
- --------------------------------------------------------------------------------
7
<PAGE>
rating agencies do not reflect market risk and they may at times lag behind the
current financial conditions of the issuer or insurer. An investor can evaluate
the expected likelihood of debt repayment by an issuer by looking at its ratings
as compared to another similar issuer.
During the year ended August 31, 1999, 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>
- ---------------------------------------------------------------------------------
PERCENTAGES OF
RATINGS TOTAL INVESTMENTS
- ---------------------------------------------------------------------------------
<S> <C>
AAA/Aaa xx%
AA/Aa xx%
A/A xx%
BBB/Baa xx%
BB/Ba xx%
</TABLE>
In determining which securities to buy and sell, the investment adviser will
consider, among other things, yield, maturity, issue, quality characteristics
and expectations regarding economic and political developments, including
movements in interest rates and demand for municipal bonds. The investment
adviser will seek to anticipate interest rate movements and will purchase and
sell municipal bonds accordingly. The investment adviser will also consider the
claims-paying ability with respect to insurers of municipal bonds. The
investment adviser will also seek to take advantage of differentials in yields
with respect to securities with similar credit ratings and maturities, but which
vary according to the purpose for which they were issued. The investment adviser
will also seek to take advantage of differentials in yields with respect to
securities issued for similar purposes with similar maturities, but which vary
according to ratings.
The dollar-weighted average maturity of the obligations held by the Series
generally ranges between 10 and 20 years.
For more information, see "Investment Risks" and the Statement of Additional
Information, "Description of the Fund, Its Investment and Risks." The Statement
of Additional Information--which we refer to as the "SAI"--contains additional
information about the Series. To obtain a copy, see the back cover page of this
prospectus.
The Series' investment objective is a fundamental policy that cannot be
changed without shareholder approval. The Board of the Prudential
- -------------------------------------------------------------------
8 CALIFORNIA INCOME SERIES [ICON] (800) 225-1852
<PAGE>
California Municipal Fund can change investment policies that are not
fundamental.
OTHER INVESTMENTS AND STRATEGIES
In addition to the principal strategies, we may also make the following
investments to try to increase the Series' returns or protect its assets if
market conditions warrant.
MUNICIPAL LEASE OBLIGATIONS
The Series may invest in MUNICIPAL LEASE OBLIGATIONS. The interest and principal
on municipal lease obligations are paid out of lease payments made by the party
leasing the equipment or facilities that were acquired or built with the bonds.
Typically, municipal lease obligations are issued by states or financing
authorities to provide money for construction projects such as schools, offices
or stadiums. The entity that leases the building or facility would be
responsible for paying the interest and principal on the obligation.
MUNICIPAL ASSET-BACKED SECURITIES
The Series may invest in MUNICIPAL ASSET-BACKED SECURITIES. A municipal
asset-backed security is a type of pass-through instrument that pays interest
which is eligible for exclusion from federal income taxation based upon the
income from an underlying pool of municipal bonds.
FLOATING RATE BONDS, VARIABLE RATE BONDS, INVERSE FLOATERS AND
SECONDARY INVERSE FLOATERS
The Series may invest in floating rate bonds, variable rate bonds, inverse
floaters and secondary inverse floaters. FLOATING RATE BONDS are municipal bonds
that have an interest rate that is set as a specific percentage of a designated
rate, such as the rate on Treasury bonds or the prime rate at major commercial
banks. The interest rate on floating rate bonds changes when there is a change
in the designated rate. VARIABLE RATE BONDS are municipal bonds that have an
interest rate that is adjusted, based on the market rate at a specified period.
They generally allow the Series to demand payment of the bond on short notice
for an amount that may be more or less than the amount paid. INVERSE FLOATERS
are municipal bonds 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. SECONDARY INVERSE FLOATERS are municipal asset-backed securities with a
floating or variable interest rate that moves in the opposite direction of the
interest rate or another security or the value of an index.
- --------------------------------------------------------------------------------
9
<PAGE>
WHEN-ISSUED AND DELAYED-DELIVERY SECURITIES
The Series may purchase municipal bonds on a "WHEN-ISSUED" or "DELAYED-DELIVERY"
basis, without limit. When the Series makes this type of purchase, the price and
rate are fixed at the time of purchase, but delivery and payment for the bonds
take place at a later time. The Series does not earn interest income until the
date the bonds are delivered.
REPURCHASE AGREEMENTS
The Series may use REPURCHASE AGREEMENTS where a party agrees to sell a security
to the Series and then repurchase it at an agreed-upon price at a stated time. A
repurchase agreement is like a loan by the Series to the other party which
creates a fixed return for the Series.
LIQUIDITY PUTS
The Series may purchase and exercise PUTS on municipal bonds without limit. Puts
give the Series the right to sell securities at a specified price and date. Puts
may be acquired to reduce the risk of the securities subject to the puts, but
puts may involve additional costs to the Series, which could reduce the Series'
return.
TEMPORARY DEFENSIVE STRATEGY
For temporary defensive purposes, the Series may hold up to 100% of its assets
in cash or investment-grade bonds, including bonds that are not exempt from
state, local and federal income taxation. Investing heavily in these securities
can limit our ability to achieve the Series' objective, but can help to preserve
the Series' assets.
DERIVATIVE STRATEGIES
We may use various derivative strategies to try to improve the Series' returns
or protect its assets, although we cannot guarantee that these strategies will
work, that the instruments necessary to implement these strategies will be
available or that the Series will not lose money. Derivatives--such as FUTURES
CONTRACTS, OPTIONS, OPTIONS ON FUTURES AND INTEREST RATE SWAPS--involve costs
and can be volatile. A futures contract is an agreement to buy or sell a set
quantity of an underlying product at a future date, or to make or receive a cash
payment based on the value of a securities index. An option is the right to buy
or sell securities or, in the case of an option on a futures contract, the right
to buy or sell a futures contract in exchange for a premium. An interest rate
swap is a transaction in which the Series and another party "trade" income
streams. The swap is done to preserve a return or spread on a particular
investment or portion of the Series or to
- -------------------------------------------------------------------
10 CALIFORNIA INCOME SERIES [ICON] (800) 225-1852
<PAGE>
protect against any increase in the price of securities the Series anticipates
purchasing at a later date.
With derivatives, the investment adviser tries to predict if the underlying
investment, whether a security, market index, currency, interest rate or some
other benchmark, will go up or down at some future date. We may use derivatives
to try to reduce risk or to increase return consistent with the Series' overall
investment objective. Any derivatives we may use may not match the Series'
underlying holdings. For more information about these strategies, see the SAI,
"Description of the Fund, Its Investments and Risks--Hedging Strategies."
ADDITIONAL STRATEGIES
The Series also follows certain policies when it: BORROWS MONEY (the Series can
borrow up to 33 1/3% of the value of its total assets); and HOLDS ILLIQUID
SECURITIES (the Series may hold up to 15% of its net assets in illiquid
securities, including certain securities with legal or contractual restrictions
on resale, those without a readily available market and repurchase agreements
with maturities longer than 7 days). The Series is subject to certain investment
restrictions that are fundamental policies and cannot be changed without
shareholder approval. For more information about these restrictions, see the
SAI.
INVESTMENT RISKS
As noted, all investments involve risk, and investing in the Series is no
exception. Since the Series' holdings can vary significantly from broad market
indexes, performance of the Series can deviate from performance of the indexes.
This chart outlines the key risks and potential rewards of the Series' principal
investments and certain of the Series' non-principal investments and strategies.
See, too, "Description of the Fund, Its Investments and Risks" in the SAI.
INVESTMENT TYPE
- --------------------------------------------------------------------------------
11
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------
% OF SERIES' TOTAL ASSETS RISKS POTENTIAL REWARDS
- ------------------------------------------------------------------------------------
<S> <C> <C>
- ------------------------------------------------------------------------------------
MUNICIPAL BONDS -- Concentration -- Tax-exempt interest
risk--the risk that income, except with
PROVIDE AT LEAST 80% OF bonds may lose value respect to certain
SERIES' INCOME OR because of political, bonds, such as
COMPRISE AT LEAST 80% OF economic or other private activity
ITS TOTAL ASSETS events affecting bonds, which are
issuers of California subject to the
obligations federal alternative
-- Credit risk--the risk minimum tax (AMT)
that the borrower -- If interest rates
can't pay back the decline, long-term
money borrowed or yields should be
make interest higher than money
payments (lower for market yields
insured and
higher-rated bonds)
-- Market risk--the risk
that bonds will lose
value in the market
because interest
rates change or there
is a lack of
confidence in the
borrower
-- Illiquidity risk--the
risk that it may be
difficult to value
precisely and sell at
time or price desired
-- Nonappropriation
risk--the risk that
the municipality may
not include the bond
obligations in future
budgets
-- Tax risk--the risk
that federal, state
or local income tax
rates may decrease,
which could decrease
demand for municipal
bonds, or that a
change in law may
limit or eliminate
exemption of interest
on municipal bonds
from such taxes
- ------------------------------------------------------------------------------------
</TABLE>
- -------------------------------------------------------------------
12 CALIFORNIA INCOME SERIES [ICON] (800) 225-1852
<PAGE>
INVESTMENT TYPE (CONT'D)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------
% OF SERIES' TOTAL ASSETS RISKS POTENTIAL REWARDS
- ------------------------------------------------------------------------------------
<S> <C> <C>
- ------------------------------------------------------------------------------------
HIGH-YIELD DEBT -- Higher market risk -- May offer higher
OBLIGATIONS than higher-grade interest income than
(JUNK BONDS) municipal bonds higher-grade bonds
-- Higher credit risk
UP TO 30% than higher-grade
municipal bonds (more
sensitive to economic
downturns)
-- Certain high-yield
bonds may be more
illiquid (harder to
value and sell), in
which case valuation
would depend more on
investment adviser's
judgment than is
generally the case
with higher-rated
bonds
-- Tax risk
- ------------------------------------------------------------------------------------
MUNICIPAL LEASE -- Concentration risk -- Tax-exempt interest
OBLIGATIONS -- Credit risk income, except with
-- Market risk respect to certain
PERCENTAGE VARIES -- Illiquidity risk bonds, such as
-- Nonappropriation risk private activity
-- Tax risk bonds, which are
subject to the AMT
-- If interest rates
decline, long-term
yields should be
higher than money
market yields
- ------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
13
<PAGE>
INVESTMENT TYPE (CONT'D)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------
% OF SERIES' TOTAL ASSETS RISKS POTENTIAL REWARDS
- ------------------------------------------------------------------------------------
<S> <C> <C>
- ------------------------------------------------------------------------------------
MUNICIPAL ASSET-BACKED -- Prepayment risk--the -- Regular interest
SECURITIES risk that the income
underlying bonds may -- Pass-through
PERCENTAGE VARIES be prepaid, partially instruments provide
or completely, greater
generally during diversification than
periods of falling direct ownership of
interest rates, which municipal bonds
could adversely
effect yield to
maturity and could
require the Series to
reinvest in lower
yielding bonds
-- Credit risk--the risk
that the underlying
municipal bonds will
not be paid by
issuers or by credit
insurers or
guarantors of such
instruments. Some
municipal
asset-backed
securities are
unsecured or secured
by lower-rated
insurers or
guarantors and thus
may involve greater
risk
-- Market risk
-- Tax risk
- ------------------------------------------------------------------------------------
VARIABLE/FLOATING RATE -- Value lags value of -- May offer protection
SECURITIES fixed-rate securities against interest rate
when interest rates changes
PERCENTAGE VARIES change
- ------------------------------------------------------------------------------------
INVERSE FLOATERS/ -- High market risk--risk -- Income generally will
SECONDARY INVERSE that inverse floaters increase when
FLOATERS will fluctuate in interest rates
value more decrease
PERCENTAGE VARIES dramatically than
other debt securities
when interest rates
change
-- Credit risk
-- Illiquidity risk
-- Secondary inverse
floaters are subject
to additional risks
of municipal
asset-backed
securities
- ------------------------------------------------------------------------------------
</TABLE>
- -------------------------------------------------------------------
14 CALIFORNIA INCOME SERIES [ICON] (800) 225-1852
<PAGE>
INVESTMENT TYPE (CONT'D)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------
% OF SERIES' TOTAL ASSETS RISKS POTENTIAL REWARDS
- ------------------------------------------------------------------------------------
<S> <C> <C>
- ------------------------------------------------------------------------------------
DERIVATIVES -- Derivatives such as -- The Series could make
futures and options money and protect
PERCENTAGE VARIES may not fully offset against losses if the
the underlying investment analysis
positions and this proves correct
could result in -- One way to manage the
losses to the Series Series' risk/return
that would not have balance is to lock in
otherwise occurred the value of an
-- Derivatives used for investment ahead of
risk management may time
not have the intended -- Derivatives that
effects and may involve leverage
result in losses or could generate
missed opportunities substantial gains or
-- The other party to a low costs
derivatives contract
could default
-- Derivatives that
involve leverage
(borrowing for
investment) could
magnify losses
-- Certain types of
derivatives involve
costs to the Series
which can reduce
returns
- ------------------------------------------------------------------------------------
WHEN-ISSUED AND -- May magnify underlying -- May magnify underlying
DELAYED-DELIVERY investment losses investment gains
SECURITIES -- Investment costs may
exceed potential
PERCENTAGE VARIES underlying investment
gains
- ------------------------------------------------------------------------------------
ILLIQUID SECURITIES -- May be difficult to -- May offer more
value precisely attractive yield or
UP TO 15% OF NET ASSETS -- May be difficult to potential for growth
sell at the time or than more widely
price desired traded securities
- ------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
15
<PAGE>
HOW THE SERIES IS MANAGED
- -------------------------------------
BOARD OF TRUSTEES
The Fund's Board of Trustees oversees the actions of the Manager, Investment
Adviser and Distributor and decides on general policies. The Board also oversees
the Fund's officers who conduct and supervise the daily business operations of
the Fund.
MANAGER
PRUDENTIAL INVESTMENTS FUND MANAGEMENT LLC (PIFM)
GATEWAY CENTER THREE, 100 MULBERRY STREET
NEWARK, NEW JERSEY 07102-4077
Under a management agreement with the Fund, PIFM manages the Series'
investment operations and administers its business affairs. For the fiscal year
ended August 31, 1999, the Series paid PIFM management fees of .50 of 1% of the
Series' average net assets.
PIFM and its predecessors have served as manager or administrator to
investment companies since 1987. As of , 1999, PIFM served as the
Manager to all of the Prudential Mutual Funds, and as Manager or
administrator to closed-end investment companies, with aggregate assets of
approximately $ billion.
INVESTMENT ADVISER
The Prudential Investment Corporation, called Prudential Investments, is the
Series' investment adviser. Its address is Prudential Plaza, 751 Broad Street,
Newark, NJ 07102. PIFM has responsibility for all investment advisory services,
supervises Prudential Investments and reimburses Prudential Investments for its
reasonable costs and expenses.
Prudential Investments' Fixed Income Group manages more than $135 billion
for Prudential's retail investors, institutional investors, and policyholders.
Senior Managing Directors James J. Sullivan and Jack W. Gaston head the Group,
which is organized into teams specializing in different market sectors.
Top-down, broad investment decisions are made by the Fixed Income Policy
Committee, whereas bottom-up security selection is made by the sector teams.
Mr. Sullivan has overall responsibility for overseeing portfolio management
and credit research. Prior to joining Prudential Investments in 1998, he was a
managing director in Prudential's Capital Management Group,
- -------------------------------------------------------------------
16 CALIFORNIA INCOME SERIES [ICON] (800) 225-1852
<PAGE>
HOW THE SERIES IS MANAGED
- ------------------------------------------------
where he oversaw portfolio management and credit research for Prudential's
General Account and subsidiary fixed-income portfolios. He has more than 16
years of experience in risk management, arbitrage trading, and corporate bond
investing.
Mr. Gaston has overall responsibility for overseeing quantitative research
and risk management. Prior to this appointment in 1999, he was senior managing
director of the Capital Management Group where he was responsible for the
investment performance and risk management for Prudential's General Account and
subsidiary fixed-income portfolios. He has more than 20 years of experience in
investment management, including extensive experience applying quantitative
techniques to portfolio management.
The Fixed Income Investment Policy Committee is comprised of key senior
investment managers. Members include seven sector team leaders, the chief
investment strategist, and the head of risk management. The Committee uses a
top-down approach to investment strategy, asset allocation, and general risk
management, identifying sectors in which to invest.
The Municipal Bond Team, headed by Evan Lamp, is primarily responsible for
overseeing the day-to-day management of the Series. This Team uses a bottom-up
approach, which focuses on individual securities, while staying within the
guidelines of the Investment Policy Committee and the Series' investment
restrictions and policies. In addition, the Credit Research team of analysts
supports the sector teams using bottom-up fundamentals, as well as economic and
industry trends. Other sector teams may contribute to securities selection when
appropriate.
The following are the fixed income sector teams and the corresponding team
leaders: (Assets under management are as of , 1999.)
MUNICIPAL BONDS
ASSETS UNDER MANAGEMENT: $ billion.
TEAM LEADER: Evan Lamp. GENERAL INVESTMENT EXPERIENCE: 7 years.
PORTFOLIO MANAGERS: 5. AVERAGE GENERAL INVESTMENT EXPERIENCE: 10 years, which
includes team members with significant mutual fund experience.
SECTOR: City, state and local government securities.
- --------------------------------------------------------------------------------
17
<PAGE>
HOW THE SERIES IS MANAGED
- ------------------------------------------------
INVESTMENT APPROACH: Focus is on identifying spread, credit quality and
liquidity trends to capitalize on changing opportunities in the municipal
market. Ultimately, they seek the highest expected return with the least risk.
MONEY MARKETS
ASSETS UNDER MANAGEMENT: $ billion.
TEAM LEADER: Joseph Tully. GENERAL INVESTMENT EXPERIENCE: 16 years
PORTFOLIO MANAGERS: 8. AVERAGE GENERAL INVESTMENT EXPERIENCE: 12 years, which
includes team members with significant mutual fund experience.
SECTOR: High-quality short-term securities, including both taxable and tax-
exempt instruments.
INVESTMENT APPROACH: Focus is on safety of principal, liquidity and controlled
risk.
DISTRIBUTOR
Prudential Investment Management Service LLC (PIMS) distributes the Series'
shares under a Distribution Agreement with the Fund. The Fund has Distribution
and Service Plans under Rule 12b-1 of the Investment Company Act. Under the
Plans and the Distribution Agreement, PIMS pays the expenses of distributing the
Series' Class A, B, C, and Z shares and provides certain shareholder support
services. The Fund pays distribution and other fees to PIMS as compensation for
its services for each class of shares other than Class Z. These fees--known as
12b-1 fees--are shown in the "Fees and Expenses" tables.
YEAR 2000 READINESS DISCLOSURE
The services provided to the Fund and the shareholders by the Manager, the
Distributor, the Transfer Agent and the Custodian depend on the smooth
functioning of their computer systems and those of outside service providers.
Many computer software systems in use today cannot distinguish the year 2000
from the year 1900 because of the way dates are encoded and calculated. Such an
event could have a negative impact on handling securities trades, payments of
interest and dividends, pricing and account services. Although, at this time,
there can be no assurance that there will be no adverse impact on the Fund, the
Manager, the Distributor, the
- -------------------------------------------------------------------
18 CALIFORNIA INCOME SERIES [ICON] (800) 225-1852
<PAGE>
HOW THE SERIES IS MANAGED
- ------------------------------------------------
Transfer Agent and the Custodian have advised the Fund that they have been
actively working on necessary changes to their computer systems to prepare for
the year 2000. The Fund and its Board receive, and have received since early
1998, satisfactory quarterly reports from the principal service providers as to
their preparations for year 2000 readiness, although there can be no assurance
that the service providers (or other securities market participants) will
successfully complete the necessary changes in a timely manner. Moreover, the
Fund at this time has not considered retaining alternative service providers or
directly undertaken efforts to achieve year 2000 readiness, the latter of which
would involve substantial expenses without an assurance of success.
Additionally, issuers of securities generally, as well as those purchased by
the Series, may confront year 2000 compliance issues which, if material and not
resolved, could have an adverse impact on securities markets and/ or a specific
issuer's performance and could result in a decline in the value of the
securities held by the Series.
- --------------------------------------------------------------------------------
19
<PAGE>
SERIES DISTRIBUTIONS AND TAX ISSUES
- -------------------------------------
Investors who buy shares of the Series should be aware of some important tax
issues. For example, the Series pays DIVIDENDS of net investment income monthly,
and distributes LONG-TERM CAPITAL GAINS, if any, at least annually. Dividends
generally will be exempt from federal and California state income taxes. If,
however, the Series invests in taxable obligations, it will pay dividends that
are not exempt from these income taxes. Also, if you sell shares of the Series
for a profit, you may have to pay capital gains taxes on the amount of your
profit.
The following briefly discusses some of the important state and federal tax
issues you should be aware of, but is not meant to be tax advice. For tax
advice, please speak with your tax adviser.
DISTRIBUTIONS
The Series distributes DIVIDENDS of any net investment income to shareholders,
typically every month. For example, if the Series owns a City XYZ bond and the
bond pays interest, the Series will pay out a portion of this interest as a
dividend to its shareholders, assuming the Series' income is more than its costs
and expenses. These dividends generally will be EXEMPT FROM FEDERAL INCOME
TAXES, as long as 50% or more of the value of the Series' assets at the end of
each quarter is invested in state, municipal and other obligations, the interest
on which is excluded from gross income for federal income tax purposes.
As we mentioned before, the Series will concentrate its investments in
California obligations. In addition to being exempt from federal taxes, Series'
dividends are EXEMPT FROM CALIFORNIA STATE INCOME TAXES (but not from California
franchise taxes) FOR CALIFORNIA RESIDENTS if the dividends are excluded from
federal income taxes and are derived from interest payments on California
obligations. Dividends attributable to the interest on taxable bonds held by the
Series, market discount on taxable and tax-exempt obligations and short-term
capital gains, however, will be subject to federal, state and local income tax
at ordinary income tax rates. 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.
Some shareholders may be subject to federal alternative minimum tax (AMT)
liability. Tax-exempt interest from certain bonds is treated as an item of tax
preference, and may be attributed to shareholders. A portion of all tax-exempt
interest is includable as an upward adjustment in determining a corporation's
alternative minimum taxable income. These rules could make you liable for the
AMT.
- -------------------------------------------------------------------
20 CALIFORNIA INCOME SERIES [ICON] (800) 225-1852
<PAGE>
SERIES DISTRIBUTIONS AND TAX ISSUES
- ------------------------------------------------
The Series also distributes LONG-TERM CAPITAL GAINS to shareholders
(typically once a year). Long-term capital gains are generated when the Series
sells assets that it held for more than 12 months, for a profit. For an
individual, the maximum long-term capital gains rate is 20%.
For your convenience, distributions of dividends and capital gains are
AUTOMATICALLY REINVESTED in the Series without any sales charge. If you ask us
to pay the distributions in cash, we will send you a check if your account is
with the Transfer Agent. Otherwise, if your account is with a broker you will
receive a credit to your account. Either way, the distributions may be subject
to taxes. For more information about Automatic Reinvestment and other
shareholder services, see "Step 4: Additional Shareholder Services" in the next
section.
TAX ISSUES
FORM 1099
Every year, you will receive a Form 1099, which reports the amount of dividends
and capital gains we distributed to you during the prior year.
Series distributions are generally taxable to you in the year they are
received, except when we declare certain dividends in the fourth quarter and
actually pay them in January of the following year. In such cases, the dividends
are treated as if they were paid to you on December 31 of the prior year.
Corporate shareholders are not eligible for the 70% dividends-received deduction
on dividends paid by the Series.
WITHHOLDING TAXES
If federal law requires you to provide the Series with your tax identification
number and certifications as to your tax status, and you fail to do so, or are
otherwise subject to backup withholding, we generally withhold and pay to the
U.S. Treasury 31% of your taxable distributions and gross sale proceeds. If you
are subject to backup withholding, we will withhold and pay to the Treasury 31%
of your distributions.
IF YOU PURCHASE JUST BEFORE RECORD DATE
If you buy shares of the Series just before the record date (the date that
determines who receives the dividend), that distribution will be paid to you. As
explained above, the distribution may be subject to income or capital gains
taxes. You may think you've done well since you bought shares one day and soon
thereafter received a distribution. That is not so because when dividends are
paid out, the value of each share of the Series
- --------------------------------------------------------------------------------
21
<PAGE>
SERIES DISTRIBUTIONS AND TAX ISSUES
- ------------------------------------------------
decreases by the amount of the dividend to reflect the payout although this may
not be apparent because the value of each share of the Series will also be
affected by the market changes, if any. The distribution you receive makes up
for the decrease in share value. However, if the distribution is taxable, the
timing of your purchase does mean that part of your investment came back to you
as taxable income.
IF YOU SELL OR EXCHANGE YOUR SHARES
If you sell any shares of the Series for a profit, you have REALIZED A CAPITAL
GAIN, which is subject to tax. The amount of tax you pay depends on whether you
hold your shares for more than one year. If you sell shares of the Series for a
loss, you may have a capital loss, which you may use to offset certain capital
gains you have.
Exchanging your shares of the Series for the shares of another Prudential
mutual fund is considered a sale for tax purposes. In other words, it's a
"taxable event." Therefore, if the shares you exchanged have increased in value
since you purchased them, you have capital gains, which are subject to the taxes
described above.
RECEIPTS FROM SALE $ --> +$ CAPITAL GAIN
(taxes owed)
OR
RECEIPTS FROM SALE $ --> -$ CAPITAL LOSS
(offset against gain)
[GRAPH]
Any gain or loss you may have from selling or exchanging Series shares will
not be reported on the Form 1099; however, proceeds from the sale or exchange
will be reported on Form 1099-B. Therefore, you or your financial adviser should
keep track of the dates on which you buy and sell--or exchange--Series shares,
as well as the amount of any gain or loss on each transaction. For tax advice,
please see your tax adviser.
AUTOMATIC CONVERSION OF CLASS B SHARES
We have obtained a legal opinion that the conversion of Class B shares into
Class A shares--which happens automatically approximately seven years after
purchase--is not a "taxable event." This opinion, however, is not binding on the
Internal Revenue Service (IRS). For more information about the automatic
conversion of Class B shares, see "Class B Shares Convert to Class A Shares
After Approximately Seven Years," in the next section.
- -------------------------------------------------------------------
22 CALIFORNIA INCOME SERIES [ICON] (800) 225-1852
<PAGE>
HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE SERIES
- -------------------------------------
HOW TO BUY SHARES
STEP 1: OPEN AN ACCOUNT
If you don't have an account with us or a securities firm that is permitted to
buy or sell shares of the Series for you, call Prudential Mutual Fund Services
LLC (PMFS) at (800) 225-1852 or contact:
PRUDENTIAL MUTUAL FUND SERVICES LLC
ATTN: INVESTMENT SERVICES
P.O. BOX 15020
NEW BRUNSWICK, NJ 08906-5020
To purchase by wire, call the number above to obtain an application. After
PMFS receives your completed application, you will receive an account number.
For additional information about purchasing shares of the Series, see the back
cover page of this prospectus. We have the right to reject any purchase order
(including an exchange into the Series) or suspend or modify the Series' sale of
its shares.
STEP 2: CHOOSE A SHARE CLASS
Individual investors can choose among Class A, Class B, Class C and Class Z
shares of the Series, although Class Z shares are available to a limited group
of investors.
Multiple share classes let you choose a cost structure that meets your
needs. With Class A shares, you pay the sales charge at the time of purchase,
but the operating expenses each year are lower than the expenses of Class B and
Class C shares. With Class B shares, you only pay a sales charge if you sell
your shares within six years (that is why they call it a Contingent Deferred
Sales Charge or CDSC), but the operating expenses each year are higher than the
Class A share expenses. With Class C shares, you pay a 1% front end sales charge
and a 1% CDSC if you sell within 18 months of purchase, but the operating
expenses are also higher than the expenses for Class A shares.
When choosing a share class, you should consider the following:
-- The amount of your investment
-- The length of time you expect to hold the shares and the impact of
varying distribution fees
- --------------------------------------------------------------------------------
23
<PAGE>
HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE SERIES
- ------------------------------------------------
-- The different sales charges that apply to each share class--
Class A's front-end sales charge vs. Class B's CDSC vs. Class C's low
front end sales charge and low CDSC
-- Whether you qualify for any reduction or waiver of sales charges
-- The fact that Class B shares automatically convert to Class A shares
approximately seven years after purchase
-- Whether you qualify to purchase Class Z shares.
See "How to Sell Your Shares" for a description of the impact of CDSCs.
SHARE CLASS COMPARISON. Use this chart to help you compare the Series' different
share classes. The discussion following this chart will tell you whether you are
entitled to a reduction or waiver of any sales charges.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
CLASS A CLASS B CLASS C CLASS Z
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Minimum purchase $1,000 $1,000 $2,500 None
amount(1)
Minimum amount for $100 $100 $100 None
subsequent
purchases(1)
Maximum initial 3% of the None 1% of the None
sales charge public public
offering offering
price price
Contingent Deferred None If sold during: 1% on sales None
Sales Charge (CDSC)(2) Year 1 5% made within
Year 2 4% 18 months of
Year 3 3% purchase(2)
Year 4 2%
Years 5/6 1%
Year 7 0%
Annual distribution .30 of 1% .50 of 1% 1% (.75 of None
and service (12b-1) (.25 of 1% 1%
fees (shown as currently) currently)
a percentage of
average net
assets)(3)
</TABLE>
<TABLE>
<S> <C>
1 THE MINIMUM INVESTMENT REQUIREMENTS DO NOT APPLY TO CERTAIN
RETIREMENT AND EMPLOYEE SAVINGS PLANS AND CUSTODIAL ACCOUNTS
FOR MINORS. THE MINIMUM INITIAL AND SUBSEQUENT INVESTMENT
FOR PURCHASES MADE THROUGH THE AUTOMATIC INVESTMENT PLAN IS
$50. FOR MORE INFORMATION, SEE "STEP 4: ADDITIONAL
SHAREHOLDER SERVICES--AUTOMATIC INVESTMENT PLAN."
2 FOR MORE INFORMATION ABOUT THE CDSC AND HOW IT IS
CALCULATED, SEE "HOW TO SELL YOUR SHARES--CONTINGENT
DEFERRED SALES CHARGES (CDSC)." CLASS C SHARES BOUGHT BEFORE
NOVEMBER 2, 1998 HAVE A 1% CDSC IF SOLD WITHIN ONE YEAR.
3 THESE DISTRIBUTION FEES ARE PAID FROM THE SERIES' ASSETS ON
A CONTINUOUS BASIS. OVER TIME, THE FEES WILL INCREASE THE
COST OF YOUR INVESTMENT AND MAY COST YOU MORE THAN PAYING
OTHER TYPES OF SALES CHARGES. THE SERVICE FEE FOR CLASS A,
CLASS B AND CLASS C SHARES IS .25 OF 1%. THE DISTRIBUTION
FEE FOR CLASS A SHARES IS LIMITED TO .30 OF 1% (INCLUDING
THE .25 OF 1% SERVICE FEE), FOR CLASS B SHARES IS LIMITED TO
.50 OF 1% (INCLUDING THE .25 OF 1% SERVICE FEE), AND IS .75
OF 1% FOR CLASS C SHARES. FOR THE FISCAL YEAR ENDING AUGUST
31, 2000, THE DISTRIBUTOR OF THE FUND HAS CONTRACTUALLY
AGREED TO REDUCE ITS DISTRIBUTION AND SERVICE (12B-1) FEES
FOR CLASS A AND CLASS C SHARES TO .25 OF 1% AND .75 OF 1% OF
THE AVERAGE DAILY NET ASSETS OF CLASS A SHARES AND CLASS C
SHARES, RESPECTIVELY.
</TABLE>
- -------------------------------------------------------------------
24 CALIFORNIA INCOME SERIES [ICON] (800) 225-1852
<PAGE>
HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE SERIES
- ------------------------------------------------
REDUCING OR WAIVING CLASS A'S INITIAL SALES CHARGE
The following describes the different ways investors can reduce or avoid
paying Class A's initial sales charge.
INCREASE THE AMOUNT OF YOUR INVESTMENT. You can reduce Class A's initial
sales charge by increasing the amount of your investment. This table shows
you how the sales charge decreases as the amount of your investment
increases.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
SALES CHARGE AS % OF SALES CHARGE AS % OF DEALER
AMOUNT OF PURCHASE OFFERING PRICE AMOUNT INVESTED REALLOWANCE
- -------------------------------------------------------------------------------------
<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 million and
above(1) None None None
</TABLE>
<TABLE>
<S> <C>
1 IF YOU INVEST $1 MILLION OR MORE, YOU CAN BUY ONLY CLASS A
SHARES, UNLESS YOU QUALIFY TO BUY CLASS Z SHARES.
</TABLE>
To satisfy the purchase amounts above, you can:
-- Invest with an eligible group of related investors
-- Buy the Class A shares of two or more Prudential mutual funds at the
same time
-- Use your RIGHTS OF ACCUMULATION, which allow you to combine the value
of Prudential mutual fund shares you already own with the value of
the shares you are purchasing for purposes of determining the
applicable sales charge (note: you must notify the Transfer Agent if
you qualify for Rights of Accumulation)
-- Sign a LETTER OF INTENT, stating in writing that you or an eligible
group of related investors will purchase a certain amount of shares
in the Series and other Prudential mutual funds within 13 months.
The Distributor may reallow Class A's sales charge to dealers.
MUTUAL FUND PROGRAMS. The initial sales charge will be waived for investors in
certain programs sponsored by broker-dealers, investment advisers and financial
planners who have agreements with Prudential Investments
- --------------------------------------------------------------------------------
25
<PAGE>
HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE SERIES
- ------------------------------------------------
Advisory Group relating to:
-- Mutual Fund "wrap" or asset allocation programs where the sponsor
places Series trades and charges its clients a management, consulting
or other fee for its services, or
-- Mutual fund "supermarket" programs where the sponsor links its
clients' accounts to a master account in the sponsor's name and the
sponsor charges a fee for its services.
Broker-dealers, investment advisers or financial planners sponsoring these
mutual fund programs may offer their clients more than one class of shares in
the Series in connection with different pricing options for their programs.
Investors should consider carefully any separate transaction and other fees
charged by these programs in connection with investing in each available share
class before selecting a share class.
OTHER TYPES OF INVESTORS. Other investors pay no sales charges, including
certain officers, employees or agents of Prudential and its affiliates, the
Prudential mutual funds, the subadvisers of the Prudential mutual funds and
clients of brokers that have entered into a selected dealer agreement with the
Distributor. To qualify for a reduction or waiver of the sales charge, you must
notify the Transfer Agent or your broker at the time of purchase. For more
information, see the SAI, "Purchase, Redemption and Pricing of Fund
Shares--Reduction and Waiver of Initial Sales Charge--Class A Shares."
WAIVING CLASS C'S INITIAL SALES CHARGE
INVESTMENT OF REDEMPTION PROCEEDS FROM OTHER INVESTMENT COMPANIES. The initial
sales charge will be waived for purchases of Class C shares if the purchase is
made with money from the redemption of shares of any unaffiliated investment
company, as long as the shares were not held in an account at Prudential
Securities Incorporated or one of its affiliates. These purchases must be made
within 60 days of the redemption. To qualify for this waiver, you must do one of
the following:
-- Purchase your shares through an account at Prudential Securities
-- Purchase your shares through an ADVANTAGE Account or an Investor
Account with Pruco Securities Corporation, or
-- Purchase your shares through another broker.
- -------------------------------------------------------------------
26 CALIFORNIA INCOME SERIES [ICON] (800) 225-1852
<PAGE>
HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE SERIES
- ------------------------------------------------
The waiver is not available to investors who purchase shares directly from
the Transfer Agent. If you are entitled to the waiver, you must notify either
the Transfer Agent or your broker. The Transfer Agent may require any supporting
documents it considers appropriate.
QUALIFYING FOR CLASS Z SHARES
MUTUAL FUND PROGRAMS. Class Z shares can be purchased by participants in any
fee-based program or trust program sponsored by Prudential or an affiliate that
includes the Series as an available option. Class Z shares also can be purchased
by investors in certain programs sponsored by broker-dealers, investment
advisers and financial planners who have agreements with Prudential Investments
Advisory Group relating to:
-- Mutual fund "wrap" or asset allocation programs where the sponsor
places Series trades, links its clients' accounts to a master account
in the sponsor's name and charges its clients a management,
consulting or other fee for its services, or
-- Mutual fund "supermarket" programs, where the sponsor links its
clients' accounts to a master account in the sponsor's name and the
sponsor charges a fee for its services.
Broker-dealers, investment advisers or financial planners sponsoring these
mutual fund programs may offer their clients more than one class of
shares in the Series in connection with different pricing options for their
programs. Investors should consider carefully any separate transaction and other
fees charged by these programs in connection with investing in each available
share class before selecting a share class.
OTHER TYPES OF INVESTORS. Class Z shares also can be purchased by any of the
following:
-- Certain participants in the MEDLEY Program (group variable annuity
contracts) sponsored by Prudential for whom Class Z shares of the
Prudential mutual funds are an available option,
-- Current and former Directors/Trustees of the Prudential mutual funds
(including the Fund), and
-- Prudential, with an investment of $10 million or more.
- --------------------------------------------------------------------------------
27
<PAGE>
HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE SERIES
- ------------------------------------------------
In connection with the sale of shares, the Manager, the Distributor or one
of their affiliates may pay brokers, financial advisers and other persons a
commission of up to 4% of the purchase price for Class B shares, up to 2% of the
purchase price for Class C shares and a finder's fee for Class A or Class Z
shares from their own resources based on a percentage of the net asset value of
shares sold or otherwise.
CLASS B SHARES CONVERT TO CLASS A SHARES AFTER APPROXIMATELY SEVEN YEARS
If you buy Class B shares and hold them for approximately seven years, we will
automatically convert them into Class A shares without charge. At that time, we
will also convert any Class B that you purchased with reinvested dividends and
other distributions. Since the 12b-1 fees for Class A shares are lower than for
Class B shares, switching to Class A shares lowers your Series expenses.
When we do the conversion, you will get fewer Class A shares than the number
of converted Class B shares converted if the price of the Class A shares is
higher than the price of Class B shares. The total dollar value will be the
same, so you will not have lost any money by getting fewer Class A shares. We do
the conversions quarterly, not on the anniversary date of your purchase. For
more information, see the SAI, "Purchase, Redemption and Pricing of Fund
Shares--Conversion Feature--Class B shares."
- -------------------------------------------------------------------
28 CALIFORNIA INCOME SERIES [ICON] (800) 225-1852
<PAGE>
HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE SERIES
- ------------------------------------------------
STEP 3: UNDERSTANDING THE PRICE YOU'LL PAY
The price you pay for each share of the Series is based on the share value. The
share value of a mutual fund--known as the NET ASSET VALUE or NAV--is determined
by a simple calculation: it's the total value of the fund (assets minus
liabilities) divided by the total number of shares outstanding. For example, if
the value of the investments held by Fund XYZ (minus its liabilities) is $1,000
and there are 100 shares of Fund XYZ owned by shareholders, the price of one
share of the fund--or the NAV--is $10 ($1,000 divided by 100). Portfolio
securities are valued based upon market quotations or, if not readily available,
at fair value as determined in good faith under procedures established by the
Fund's Board. Most national newspapers report the NAVs of most mutual funds,
which allows investors to check the price of mutual funds daily.
We determine the NAV of our shares once each business day at 4:15 p.m. New
York time on days that the New York Stock Exchange (NYSE) is open for trading.
The NYSE is closed on national holidays and Good Friday. We do not determine NAV
with respect to the Series on days when we have not received any orders to
purchase, sell, or exchange the Series' shares, or when changes in the value of
the Series' portfolio do not materially affect the NAV.
WHAT PRICE WILL YOU PAY FOR SHARES OF THE SERIES?
For Class A and Class C shares, you'll pay the public offering price, which is
NAV next determined after we receive your order to purchase, plus an initial
sales charge (unless you're entitled to a waiver). For Class B and Class Z
shares, you will pay the NAV next determined after we receive your order to
purchase (remember, there are no up-front sales charges for these share
classes). Your broker may charge you a separate or additional fee for purchases
of shares.
- -------------------------------------------------------------------
MUTUAL FUND SHARES
The NAV of mutual fund shares changes every day because the value of a fund's
portfolio changes constantly. For example, if Fund XYZ holds City ABC bonds in
its portfolio and the price of City ABC bonds goes up while the value of the
fund's other holdings remains the same and expenses don't change, the NAV of
Fund XYZ will increase.
- -------------------------------------------------------------------
- --------------------------------------------------------------------------------
29
<PAGE>
HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE SERIES
- ------------------------------------------------
STEP 4: ADDITIONAL SHAREHOLDER SERVICES
As a Series shareholder, you can take advantage of the following services and
privileges:
AUTOMATIC REINVESTMENT. As we explained in the "Series Distributions and Tax
Issues" section, the Series pays out--or distributes--its net investment income
and capital gains to all shareholders. For your convenience, we will
automatically reinvest your distributions in the Series at NAV without any sales
charge. If you want your distributions paid in cash, you can indicate this
preference on your application, notify your broker or notify the Transfer Agent
in writing (at the address below) at least five business days before the date we
determine who receives dividends.
PRUDENTIAL MUTUAL FUND SERVICES LLC
ATTN: ACCOUNT MAINTENANCE
P.O. BOX 15015
NEW BRUNSWICK, NJ 08906-5015
AUTOMATIC INVESTMENT PLAN. You can make regular purchases of the Series for as
little as $50 by having the funds automatically withdrawn from your bank or
brokerage account at specified intervals.
THE PRUTECTOR PROGRAM. Optional group term life insurance--which protects the
value of your Prudential mutual fund investment for your beneficiaries against
market declines--is available to investors who purchase their shares through
Prudential. This insurance is subject to various restrictions and charges and is
not available in all states.
SYSTEMATIC WITHDRAWAL PLAN. A systematic withdrawal plan is available that will
provide you with monthly or quarterly checks. Remember, the sale of Class B and
Class C shares may be subject to a CDSC.
REPORTS TO SHAREHOLDERS. Every year we will send you an annual report (along
with an updated prospectus) and a semi-annual report, which contain important
financial information about your Series. To reduce the Series' expenses, we will
send one annual shareholder report, one semi-annual shareholder report and one
annual prospectus per household, unless you instruct us or your broker
otherwise.
- -------------------------------------------------------------------
30 CALIFORNIA INCOME SERIES [ICON] (800) 225-1852
<PAGE>
HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE SERIES
- ------------------------------------------------
HOW TO SELL YOUR SHARES
You can sell your shares of the Series for cash (in the form of a check) at any
time, subject to certain restrictions.
When you sell shares of the Series--also known as redeeming your shares--the
price you will receive will be the NAV next determined after the Transfer Agent,
the Distributor or your broker receives your order to sell. If your broker holds
your shares, he must receive your order to sell by 4:15 p.m. New York time to
process the sale on that day. Otherwise, contact:
PRUDENTIAL MUTUAL FUND SERVICES LLC
ATTN: REDEMPTION SERVICES
P.O. BOX 15010
NEW BRUNSWICK, NJ 08906-5010
Generally, we will pay you for the shares that you sell within seven days
after the Transfer Agent, the Distributor or your broker receives your sell
order. If you hold shares through a broker, payment will be credited to your
account. If you are selling shares you recently purchased with a check, we may
delay sending you the proceeds until your check clears, which can take up to
10 days from the purchase date. You can avoid delay if you purchase shares by
wire, certified check or cashier's check. Your broker may charge a separate or
additional fee for sales of shares.
RESTRICTIONS ON SALES
There are certain times when you may not be able to sell shares of the Series,
or when we may delay paying you the proceeds from a sale. This may happen during
unusual market conditions or emergencies when the Series can't determine the
value of its assets or sell its holdings. For more information, see the SAI,
"Purchase, Redemption and Pricing of Fund Shares--Sale of Shares."
If you are selling more than $100,000 of shares, you want the check sent to
someone or some place that is not in our records or you are a business trust and
you hold shares directly with the Transfer Agent, you will need to have the
signature on your sell order guaranteed by an "eligible guarantor institution."
An "eligible guarantor institution" includes any bank, broker-dealer or credit
union. For more information, see the SAI, "Purchase,
- --------------------------------------------------------------------------------
31
<PAGE>
HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE SERIES
- ------------------------------------------------
Redemption and Pricing of Fund Shares--Sale of Shares--Signature Guarantee."
CONTINGENT DEFERRED SALES CHARGE (CDSC)
If you sell Class B shares within six years of purchase or Class C shares within
18 months of purchase, you will have to pay a CDSC. To keep the CDSC as low as
possible, we will sell your shares in the following order:
-- Amounts representing shares you purchased with reinvested dividends
and distributions
-- Amounts representing the increase in NAV above the total amount of
payments for shares made during the past six years for Class B shares
and 18 months for Class C shares (one year for Class C shares
purchased before November 2, 1998)
-- Amounts representing the cost of shares held beyond the CDSC period
(six years for Class B shares and 18 months for Class C shares)
Since shares that fall into any of the categories listed above are not
subject to the CDSC, selling them first helps you to avoid--or at least
minimize--the CDSC.
Having sold the exempt shares first, if there are any remaining shares that
are subject to the CDSC, we will apply the CDSC to amounts representing the cost
of shares held for the longest period of time within the applicable CDSC period.
As we noted in the "Share Class Comparison" chart, the CDSC for Class B
shares is 5% in the first year, 4% in the second, 3% in the third, 2% in the
fourth, and 1% in the fifth and sixth years. The rate decreases on the first day
of the month following the anniversary date of your purchase, not on the
anniversary date itself. The CDSC is 1% for Class C shares--which is applied to
shares sold within 18 months of purchase. For both Class B and Class C shares,
the CDSC is calculated based on the lesser of the original purchase price or the
redemption proceeds. For purposes of determining how long you've held your
shares, all purchases during the month are grouped together and considered to
have been made on the last day of the month.
The holding period for purposes of determining the applicable CDSC will be
calculated from the first day of the month after initial purchase,
- -------------------------------------------------------------------
32 CALIFORNIA INCOME SERIES [ICON] (800) 225-1852
<PAGE>
HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE SERIES
- ------------------------------------------------
excluding any time shares were held in a money market fund.
WAIVER OF THE CDSC--CLASS B SHARES
The CDSC will be waived if the Class B shares are sold:
-- After a shareholder is deceased or disabled (or, in the case of a
trust account, the death or disability of the grantor). This waiver
applies to individual shareholders, as well as shares owned in joint
tenancy (with rights of survivorship), provided the shares were
purchased before the death or disability
-- On certain sales from a Systematic Withdrawal Plan.
For more information on the above and other waivers, see the SAI, "Purchase,
Redemption and Pricing of Fund Shares--Waiver of Contingent Deferred Sales
Charge--Class B shares."
REDEMPTION IN KIND
If the sales of Series shares you make during any 90-day period reach the lesser
of $250,000 or 1% of the value of the Series' net assets, we can then give you
securities from the Series' portfolio instead of cash. If you want to sell the
securities for cash, you would have to pay the costs charged by a broker.
SMALL ACCOUNTS
If you make a sale that reduces your account value to less than $500, we may
sell the rest of your shares (without charging any CDSC) and close your account.
We would do this to minimize the Series' expenses paid by other shareholders. We
will give you 60 days' notice, during which time you can purchase additional
shares to avoid this action.
90-DAY REPURCHASE PRIVILEGE
After you redeem your shares, you have a 90-day period during which you may
reinvest any of the redemption proceeds in shares of the Series without paying
an initial sales charge. Also, if you paid a CDSC when you redeemed your shares,
we will credit your new account with the appropriate number of shares to reflect
the amount of the CDSC you paid. In order to take advantage of this one-time
privilege, you must notify the Transfer
- --------------------------------------------------------------------------------
33
<PAGE>
HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE SERIES
- ------------------------------------------------
Agent or your broker at the time of the repurchase. See the SAI, "Purchase,
Redemption and Pricing of Fund Shares--Sale of Shares."
HOW TO EXCHANGE YOUR SHARES
You can exchange your shares of the Series for shares of the same class in
certain other Prudential mutual funds--including certain money market funds--if
you satisfy the minimum investment requirements. For example, you can exchange
Class A shares of the Series for Class A shares of another Prudential mutual
fund, but you can't exchange Class A shares for Class B, Class C or Class Z
shares. Class B and C shares may not be exchanged into money market funds other
than Prudential Special Money Market Fund, Inc. After an exchange, at redemption
the CDSC will be calculated from the first day of the month after initial
purchase, excluding any time shares were held in a money market fund. We may
change the terms of the exchange privilege after giving you 60 days' notice.
If you hold shares through a broker, you must exchange shares through your
broker. Otherwise contact:
PRUDENTIAL MUTUAL FUND SERVICES LLC
ATTN: EXCHANGE PROCESSING
P.O. BOX 15010
NEW BRUNSWICK, NJ 08906-5010
There is no sales charge for such exchanges. However, if you exchange--and
then sell--Class B shares within approximately six years of your original
purchase or Class C shares within 18 months of your original purchase, you must
still pay the applicable CDSC. If you have exchanged Class B or Class C shares
into a money market fund, the time you hold the shares in the money market
account will not be counted in calculating the required holding periods for CDSC
liability.
Remember, as we explained in the section entitled "Series Distributions and
Tax Issues--If You Sell or Exchange Your Shares," exchanging shares is
considered a sale for tax purposes. Therefore, if the shares you exchange are
worth more than you paid for them, you may have to pay capital gains tax. For
additional information about exchanging shares, see the SAI, "Shareholder
Investment Account--Exchange Privilege."
- -------------------------------------------------------------------
34 CALIFORNIA INCOME SERIES [ICON] (800) 225-1852
<PAGE>
HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE SERIES
- ------------------------------------------------
If you own Class B or Class C shares and qualify to purchase Class A shares
without paying an initial sales charge, we will automatically exchange your
Class B or Class C shares which are not subject to a CDSC for Class A shares. We
make such exchanges on a quarterly basis if you qualify for this exchange
privilege. We have obtained a legal opinion that this exchange is not a "taxable
event" for federal income tax purposes. This opinion is not binding on the IRS.
FREQUENT TRADING
Frequent trading of the Series' shares in response to short-term fluctuations in
the market--also known as "market timing"--may make it very difficult to manage
the Series' investments. When market timing occurs, the Series may have to sell
portfolio securities to have the cash necessary to redeem the market timer's
shares. This can happen at a time when it is not advantageous to sell any
securities, so the Series' performance may be hurt. When large dollar amounts
are involved, market timing can also make it difficult to use long-term
investment strategies because we cannot predict how much cash the Series will
have to invest. When, in our opinion, such activity would have a disruptive
effect on portfolio management, the Fund reserves the right to refuse purchase
orders and exchanges into the Series by any person, group or commonly controlled
account. The Fund may notify a market timer of rejection of an exchange or
purchase order after the day the order is placed. If the Fund allows a market
timer to trade Series shares, it may require the market timer to enter into a
written agreement to follow certain procedures and limitations.
- --------------------------------------------------------------------------------
35
<PAGE>
FINANCIAL HIGHLIGHTS
- -------------------------------------
The financial highlights will help you evaluate financial performance of the
Series. The TOTAL RETURN in each chart represents the rate that a shareholder
earned on an investment in that share class of the Series, assuming reinvestment
of all dividends and other distributions. The information is for each share
class for the periods indicated.
Review each chart with the financial statements and report of independent
accountants, which appear in the SAI and are available upon request. Additional
performance information for each share class is contained in the annual report,
which you can receive at no charge.
- -------------------------------------------------------------------
36 CALIFORNIA INCOME SERIES [ICON] (800) 225-1852
<PAGE>
FINANCIAL HIGHLIGHTS
- ------------------------------------------------
CLASS A SHARES
The financial highlights for the three years ended August 31, 1999 were audited
by LLP, independent accountants, and the financial
highlights for the two years ended August 31, 1996 were audited by other
independent auditors, whose reports were unqualified.
CLASS A SHARES (FISCAL PERIOD ENDED 8-31)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE 1999 1998 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
YEAR $-- $10.71 $10.33 $10.28 $10.19
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income -- .59 .60(3) .63(3) .65(3)
Net realized and unrealized gain
(loss) on investment
transactions -- .49 .38 .05 .09
TOTAL FROM INVESTMENT OPERATIONS -- 1.08 .98 .68 .74
- -----------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS:
Dividends from net investment
income -- (.59) (.60) (.63) (.65)
Distributions in excess of
investment income -- (.01) --(1)
Distributions from net realized
gains -- -- -- -- --
TOTAL DISTRIBUTIONS -- (.59) (.60) (.63) (.65)
NET ASSET VALUE, END OF YEAR $-- $11.19 $10.71 $10.33 $10.28
TOTAL RETURN(2) --% 10.31% 9.72% 6.67% 7.67%
- ---------------------------------
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA 1999 1998 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
- ---------------------------------
NET ASSETS, END OF YEAR (000) $-- $181,512 $156,684 $153,236 $163,538
AVERAGE NET ASSETS (000) $-- $165,771 $153,019 $161,420 $165,500
RATIOS TO AVERAGE NET ASSETS:
Expenses, including distribution
fees --% .68% .73%(3) .50%(3) .40%(3)
Expenses, excluding distribution
fees --% .58% .63%(3) .40%(3) .30%(3)
Net investment income --% 5.39% 5.66%(3) 6.01%(3) 6.49%(3)
Portfolio turnover --% 10% 16% 22% 39%
- ---------------------------------
</TABLE>
<TABLE>
<S> <C>
1 LESS THAN $.005 PER SHARE.
2 TOTAL RETURN ASSUMES REINVESTMENT OF DIVIDENDS AND ANY OTHER
DISTRIBUTIONS, BUT DOES NOT INCLUDE THE EFFECT OF SALES
CHARGES. IT IS CALCULATED ASSUMING SHARES ARE PURCHASED ON
THE FIRST DAY AND ARE SOLD ON THE LAST DAY OF EACH PERIOD
REPORTED.
3 NET OF MANAGEMENT FEE WAIVER.
</TABLE>
- --------------------------------------------------------------------------------
37
<PAGE>
FINANCIAL HIGHLIGHTS
- ------------------------------------------------
CLASS B SHARES
The financial highlights for the three years ended August 31, 1999 were audited
by LLP, independent accountants, and the financial
highlights for the two years ended August 31, 1996 were audited by other
independent auditors, whose reports were unqualified.
CLASS B SHARES (FISCAL YEAR ENDED 8-31)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE 1999 1998 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
YEAR $-- $10.71 $10.33 $10.28 $10.19
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income -- .55 .55(3) .59(3) .61(3)
Net realized and unrealized gain
(loss) on investment
transactions -- .49 .38 .05 .09
TOTAL FROM INVESTMENT OPERATIONS -- 1.04 .93 .64 .70
- -----------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS:
Dividends from net investment
income -- (.55) (.55) (.59) (.61)
Distributions in excess of
investment income -- (.01) --(1) -- --
Distributions from net realized
gains --
TOTAL DISTRIBUTIONS -- (.56) (.55) (.59) (.61)
NET ASSET VALUE, END OF YEAR $-- $11.19 $10.71 $10.33 $10.28
TOTAL RETURN(2) --% 9.87% 9.28% 6.25% 7.24%
- ---------------------------------
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA 1999 1998 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
- ---------------------------------
NET ASSETS, END OF YEAR (000) $-- $70,535 $47,436 $35,983 $28,609
AVERAGE NET ASSETS (000) $-- $56,011 $40,983 $32,555 $23,722
RATIOS TO AVERAGE NET ASSETS:
Expenses, including distribution
fees --% 1.08% 1.13%(3) .90%(3) .80%(3)
Expenses, excluding distribution
fees --% .58% .63%(3) .40%(3) .30%(3)
Net investment income --% 4.99% 5.26%(3) 5.61%(3) 6.09%(3)
Portfolio turnover --% 10% 16% 22% 39%
- ---------------------------------
</TABLE>
<TABLE>
<S> <C>
1 LESS THAN $.005 PER SHARE.
2 TOTAL RETURN ASSUMES REINVESTMENT OF DIVIDENDS AND ANY OTHER
DISTRIBUTIONS, BUT DOES NOT INCLUDE THE EFFECT OF SALES
CHARGES. IT IS CALCULATED ASSUMING SHARES ARE PURCHASED ON
THE FIRST DAY AND ARE SOLD ON THE LAST DAY OF EACH PERIOD
REPORTED.
3 NET OF MANAGEMENT FEE WAIVER.
</TABLE>
- -------------------------------------------------------------------
38 CALIFORNIA INCOME SERIES [ICON] (800) 225-1852
<PAGE>
FINANCIAL HIGHLIGHTS
- ------------------------------------------------
CLASS C SHARES
The financial highlights for the three years ended August 31, 1999 were audited
by LLP, independent accountants, and the financial
highlights for the two years ended August 31, 1996 were audited by other
independent auditors, whose reports were unqualified.
CLASS C SHARES (FISCAL YEAR ENDED 8-31)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE 1999 1998 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $-- $10.71 $10.33 $10.28 $10.19
INCOME FROM INVESTMENT OPERATIONS:
Net investment income -- .52 .53(3) .56(3) .58(3)
Net realized and unrealized gain (loss) on
investment transactions -- .49 .38 .05 .09
TOTAL FROM INVESTMENT OPERATIONS -- 1.01 .91 .61 .67
- -------------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS:
Dividends from net investment income -- (.52) (.53) (.56) (.58)
Distributions in excess of investment income -- (.01) --(1) -- --
Distributions from net realized gains --
TOTAL DISTRIBUTIONS -- (.53) (.53) (.56) (.58)
NET ASSET VALUE, END OF YEAR $-- $11.19 $10.71 $10.33 $10.28
TOTAL RETURN(2) --% 9.60% 9.01% 5.99% 6.98%
- ---------------------------------------------
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA 1999 1998 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSETS, END OF YEAR (000) $-- $5,960 $3,611 $3,269 $2,762
AVERAGE NET ASSETS (000) $-- $4,491 $3,135 $3,300 $1,751
RATIOS TO AVERAGE NET ASSETS:
Expenses, including distribution fees --% 1.33% 1.38%(3) 1.15%(3) 1.05%(3)
Expenses, excluding distribution fees --% .58% .63%(3) .40%(3) .30%(3)
Net investment income --% 4.74% 5.01%(3) 5.36%(3) 5.84%(3)
Portfolio turnover --% 10% 16% 22% 39%
- ---------------------------------------------
</TABLE>
<TABLE>
<S> <C>
1 LESS THAN $.005 PER SHARE.
2 TOTAL RETURN ASSUMES REINVESTMENT OF DIVIDENDS AND ANY OTHER
DISTRIBUTIONS, BUT DOES NOT INCLUDE THE EFFECT OF SALES
CHARGES. IT IS CALCULATED ASSUMING SHARES ARE PURCHASED ON
THE FIRST DAY AND ARE SOLD ON THE LAST DAY OF EACH PERIOD
REPORTED.
3 NET OF MANAGEMENT FEE WAIVER.
</TABLE>
- --------------------------------------------------------------------------------
39
<PAGE>
FINANCIAL HIGHLIGHTS
- ------------------------------------------------
CLASS Z SHARES
The financial highlights for the two years ended August 31, 1999 were audited by
LLP, independent accountants, and the financial highlights
for the period from December 6, 1996 through August 31, 1997 were audited by
other independent auditors, whose reports were unqualified.
CLASS Z SHARES (FISCAL YEAR ENDED 8-31)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE 1999 1998 1997(1)
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $-- $10.71 $10.38
INCOME FROM INVESTMENT OPERATIONS:
Net investment income -- .61(4) .57(4)
Net realized and unrealized gain on
investment transactions -- .49 .33
TOTAL FROM INVESTMENT OPERATIONS -- 1.10 .90
- ----------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS:
Dividends from net investment income -- (.61) (.57)
Distributions in excess of investment income -- (.01) --(5)
Distributions from net investment income --
TOTAL DISTRIBUTIONS -- (.62) (.57)
NET ASSET VALUE, END OF PERIOD $-- $11.19 $10.71
TOTAL RETURN(2) --% 10.42% 8.86%
- ---------------------------------------------
<CAPTION>
- ----------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA 1999 1998 1997
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
- ---------------------------------------------
NET ASSETS, END OF PERIOD (000) $-- $4,507 $1,963
AVERAGE NET ASSETS (000) $-- $3,312 $970
RATIOS TO AVERAGE NET ASSETS:
Expenses, including distribution fees --% .58%(4) .63%(3),(4)
Net investment income --% 5.49%(4) 5.76%(3),(4)
Portfolio turnover --% 10% 16%
- ---------------------------------------------
</TABLE>
<TABLE>
<S> <C>
1 INFORMATION SHOWN IS FOR THE PERIOD 12-6-96 (WHEN CLASS Z
SHARES WERE FIRST OFFERED) THROUGH 8-31-97.
2 TOTAL RETURN ASSUMES REINVESTMENT OF DIVIDENDS AND ANY OTHER
DISTRIBUTIONS, BUT DOES NOT INCLUDE THE EFFECT OF SALES
CHARGES. IT IS CALCULATED ASSUMING SHARES ARE PURCHASED ON
THE FIRST DAY AND ARE SOLD ON THE LAST DAY OF EACH PERIOD
REPORTED. TOTAL RETURN FOR PERIODS OF LESS THAN A FULL YEAR
IS NOT ANNUALIZED.
3 ANNUALIZED.
4 NET OF MANAGEMENT FEE WAIVER.
5 LESS THAN $.005 PER SHARE.
</TABLE>
- -------------------------------------------------------------------
40 CALIFORNIA INCOME SERIES [ICON] (800) 225-1852
<PAGE>
[This page has been left blank intentionally.]
- --------------------------------------------------------------------------------
41
<PAGE>
THE PRUDENTIAL MUTUAL FUND FAMILY
- -------------------------------------
Prudential offers a broad range of mutual funds designed to meet your individual
needs. For information about these funds, contact your financial adviser or
dealer or call us at (800) 225-1852. Read the prospectus carefully before you
invest or send money.
STOCK FUNDS
PRUDENTIAL DISTRESSED SECURITIES FUND, INC.
PRUDENTIAL EMERGING GROWTH FUND, INC.
PRUDENTIAL EQUITY FUND, INC.
PRUDENTIAL EQUITY INCOME FUND
PRUDENTIAL INDEX SERIES FUND
PRUDENTIAL SMALL-CAP INDEX FUND
PRUDENTIAL STOCK INDEX FUND
THE PRUDENTIAL INVESTMENT PORTFOLIOS, INC.
PRUDENTIAL JENNISON GROWTH FUND
PRUDENTIAL JENNISON GROWTH & INCOME FUND
PRUDENTIAL MID-CAP VALUE FUND
PRUDENTIAL REAL ESTATE SECURITIES FUND
PRUDENTIAL SECTOR FUNDS, INC.
PRUDENTIAL FINANCIAL SERVICES FUND
PRUDENTIAL HEALTH SCIENCES FUND
PRUDENTIAL TECHNOLOGY FUND
PRUDENTIAL UTILITY FUND
PRUDENTIAL SMALL-CAP QUANTUM FUND, INC.
PRUDENTIAL SMALL COMPANY VALUE FUND, INC.
PRUDENTIAL TAX-MANAGED EQUITY FUND
PRUDENTIAL 20/20 FOCUS FUND
NICHOLAS-APPLEGATE FUND, INC.
NICHOLAS-APPLEGATE GROWTH EQUITY FUND
TARGET FUNDS
LARGE CAPITALIZATION GROWTH FUND
LARGE CAPITALIZATION VALUE FUND
SMALL CAPITALIZATION GROWTH FUND
SMALL CAPITALIZATION VALUE FUND
ASSET ALLOCATION/BALANCED FUNDS
PRUDENTIAL BALANCED FUND
PRUDENTIAL DIVERSIFIED FUNDS
CONSERVATIVE GROWTH FUND
MODERATE GROWTH FUND
HIGH GROWTH FUND
THE PRUDENTIAL INVESTMENT PORTFOLIOS, INC.
PRUDENTIAL ACTIVE BALANCED FUND
GLOBAL FUNDS
GLOBAL STOCK FUNDS
PRUDENTIAL DEVELOPING MARKETS FUND
PRUDENTIAL DEVELOPING MARKETS EQUITY FUND
PRUDENTIAL LATIN AMERICA EQUITY FUND
PRUDENTIAL EUROPE GROWTH FUND, INC.
PRUDENTIAL GLOBAL GENESIS FUND, INC.
PRUDENTIAL INDEX SERIES FUND
PRUDENTIAL EUROPE INDEX FUND
PRUDENTIAL PACIFIC INDEX FUND
PRUDENTIAL NATURAL RESOURCES FUND, INC.
PRUDENTIAL PACIFIC GROWTH FUND, INC.
PRUDENTIAL WORLD FUND, INC.
GLOBAL SERIES
INTERNATIONAL STOCK SERIES
GLOBAL UTILITY FUND, INC.
TARGET FUNDS
INTERNATIONAL EQUITY FUND
- -------------------------------------------------------------------
42 CALIFORNIA INCOME SERIES [ICON] (800) 225-1852
<PAGE>
THE PRUDENTIAL MUTUAL FUND FAMILY
- -------------------------------------
GLOBAL BOND FUNDS
PRUDENTIAL GLOBAL LIMITED MATURITY FUND, INC.
LIMITED MATURITY PORTFOLIO
PRUDENTIAL GLOBAL TOTAL RETURN FUND, INC.
PRUDENTIAL INTERMEDIATE GLOBAL
INCOME FUND, INC.
PRUDENTIAL INTERNATIONAL BOND FUND, INC.
BOND FUNDS
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 HIGH YIELD TOTAL RETURN FUND, INC.
PRUDENTIAL INDEX SERIES FUND
PRUDENTIAL BOND MARKET INDEX FUND
PRUDENTIAL STRUCTURED MATURITY FUND, INC.
INCOME PORTFOLIO
TARGET FUNDS
TOTAL RETURN BOND FUND
TAX-EXEMPT BOND FUNDS
PRUDENTIAL CALIFORNIA MUNICIPAL FUND
CALIFORNIA SERIES
CALIFORNIA INCOME SERIES
PRUDENTIAL MUNICIPAL BOND FUND
HIGH INCOME SERIES
INSURED SERIES
PRUDENTIAL MUNICIPAL SERIES FUND
FLORIDA SERIES
MASSACHUSETTS SERIES
NEW JERSEY SERIES
NEW YORK SERIES
NORTH CAROLINA SERIES
OHIO SERIES
PENNSYLVANIA SERIES
PRUDENTIAL NATIONAL MUNICIPALS FUND, INC.
MONEY MARKET FUNDS
TAXABLE MONEY MARKET FUNDS
CASH ACCUMULATION TRUST
LIQUID ASSETS FUND
NATIONAL MONEY MARKET FUND
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
- --------------------------------------------------------------------------------
43
<PAGE>
APPENDIX A
- -------------------------------------
DESCRIPTION OF SECURITY RATINGS
MOODY'S INVESTORS SERVICE
BOND RATINGS
Aaa: Bonds that are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa: Bonds that are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group, they comprise what are generally known
as high-grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than the 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.
Ba: Bonds that 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 that 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.
- --------------------------------------------------------------------------------
A-1
<PAGE>
APPENDIX A
- ------------------------------------------------
Bonds rated within the Aa, A, Baa, Ba and B categories that Moody's believes
possess the strongest credit attributes within those categories are designated
by the symbols Aa1, A1, Baa1, Ba1 and B1.
Caa: Bonds that 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 that are rated Ca represent obligations that are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
C: Bonds that 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 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.
P-1: Issuers rated "Prime-1" or "P-1" (or supporting institutions) have a
superior ability for repayment of senior short-term debt obligations.
P-2: Issuers rated "Prime-2" or "P-2" (or supporting institutions) have a
strong ability for repayment of senior short-term debt obligations.
P-3: Issuers rated "Prime-3" or "P-3" (or supporting institutions) have an
acceptable ability for repayment of senior short-term debt obligations.
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. There
is present 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. Margins of
protection are ample although not so large as in the preceding group.
MIG 3: Loans bearing the designation MIG 3 are of favorable quality. All
security elements are accounted for but there is lacking the undeniable
- -------------------------------------------------------------------
A-2 CALIFORNIA INCOME SERIES [ICON] (800) 225-1852
<PAGE>
APPENDIX A
- ------------------------------------------------
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.
STANDARD & POOR'S RATINGS GROUP
DEBT 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 obligations 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 and C is regarded as having
predominately 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 outweighted by large uncertainties or major 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
S&P's commercial paper ratings are current assessments of the likelihood of
timely payment of debt considered short-term in the relevant market.
- --------------------------------------------------------------------------------
A-3
<PAGE>
APPENDIX A
- ------------------------------------------------
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 with the A-3 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 factors and market access risks
unique to notes. Notes maturing in three years or less will likely receive a
note rating, while notes maturing beyond three years or less will likely receive
a note rating. Notes maturing beyond three years will most likely receive a
long-term debt rating. Municipal notes are 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 characteristics are given a plus
(+) designation. An SP-2 designation indicates a satisfactory capacity to pay
principal and interest. An SP-3 designations indicates speculative capacity to
pay principal and interest.
- -------------------------------------------------------------------
A-4 CALIFORNIA INCOME SERIES [ICON] (800) 225-1852
<PAGE>
FOR MORE INFORMATION:
- -------------------------------------
Please read this prospectus before you invest
in the Series and keep it for future reference.
For information or shareholder questions
contact:
PRUDENTIAL MUTUAL FUND SERVICES LLC
P.O. BOX 15005
NEW BRUNSWICK, NJ 08906-5005
(800) 225-1852
(732) 417-7555
(if calling from outside the U.S.)
- --------------------------------
Outside Brokers Should Contact:
PRUDENTIAL INVESTMENT MANAGEMENT SERVICES LLC
P.O. BOX 15035
NEW BRUNSWICK, NJ 08906-5035
(800) 778-8769
- ------------------------------------
Visit Prudential's Web Site At:
http://www.prudential.com
- --------------------------------
Additional information about the Series can be obtained without charge and can
be found in the following documents:
STATEMENT OF ADDITIONAL
INFORMATION (SAI)
(incorporated by reference into this prospectus)
ANNUAL REPORT
(contains a discussion of the market conditions and investment strategies that
significantly affected the Fund's performance)
SEMI-ANNUAL REPORT
You can also obtain copies of Fund documents from the Securities and Exchange
Commission as follows:
By Mail:
Securities and Exchange Commission
Public Reference Section
Washington, DC 20549-0102
By Electronic Request:
[email protected]
(The SEC charges a fee to copy documents.)
In Person:
Public Reference Room in
Washington, DC
(For hours of operation, call
(202)942-8090.)
Via the Internet:
on the EDGAR Database at
http://www.sec.gov
- --------------------------------
<TABLE>
<S> <C> <C>
CUSIP Quotron
Numbers: Symbols:
Class 744313-30-5
A:
Class 744313-40-4
B:
Class 744313-80-0
C:
Class 744313-87-5
Z:
</TABLE>
Investment Company Act File No:
811-04024
<TABLE>
<S> <C>
[MF122A] [LOGO] Printed on Recycled Paper
</TABLE>
<PAGE>
FUND TYPE:
- -------------------------------------
Money market
INVESTMENT OBJECTIVE:
- -------------------------------------
The highest level of current income that is exempt
from California state and federal income taxes,
consistent with liquidity and the preservation of
capital
[LOGO]
PRUDENTIAL
CALIFORNIA
MUNICIPAL
FUND
- ---------------------------------------------------------------
CALIFORNIA MONEY MARKET SERIES
PROSPECTUS: DECEMBER , 1999
<TABLE>
<S> <C>
As with all mutual funds, the
Securities and Exchange Commission has
not approved or disapproved the
Series' shares nor has the SEC
determined that this prospectus is
complete or accurate. It is a criminal
offense to state otherwise. [LOGO]
</TABLE>
<PAGE>
TABLE OF CONTENTS
- -------------------------------------
<TABLE>
<S> <C>
1 RISK/RETURN SUMMARY
1 Investment Objective and Principal Strategies
1 Principal Risks
2 Evaluating Performance
4 Fees and Expenses
5 HOW THE SERIES INVESTS
5 Investment Objective and Policies
7 Other Investments and Strategies
8 Investment Risks
12 HOW THE SERIES IS MANAGED
12 Board of Trustees
12 Manager
12 Investment Adviser
13 Distributor
13 Year 2000 Readiness Disclosure
14 SERIES DISTRIBUTIONS AND TAX ISSUES
14 Distributions
15 Tax Issues
16 HOW TO BUY, SELL AND EXCHANGE SHARES OF THE SERIES
16 How to Buy Shares
22 How to Sell Your Shares
25 How to Exchange Your Shares
27 FINANCIAL HIGHLIGHTS
28 THE PRUDENTIAL MUTUAL FUND FAMILY
FOR MORE INFORMATION (Back Cover)
</TABLE>
- -------------------------------------------------------------------
CALIFORNIA MONEY MARKET SERIES [ICON] (800) 225-1852
<PAGE>
RISK/RETURN SUMMARY
- -------------------------------------
This section highlights key information about the CALIFORNIA MONEY MARKET SERIES
(the Series) of the PRUDENTIAL CALIFORNIA MUNICIPAL FUND (the Fund). Additional
information follows this summary.
INVESTMENT OBJECTIVE AND PRINCIPAL STRATEGIES
Our 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. This means we invest primarily in
short-term California state and municipal bonds, which are debt obligations or
fixed income securities, including notes, commercial paper and other securities,
as well as short-term obligations of other issuers that pay interest income that
is exempt from those taxes (collectively called "California obligations"). The
Series invests in California obligations which are high-quality money market
instruments with remaining maturities of 13 months or less. To achieve our
objective, we normally invest so that at least 80% of the income from the
Series' investments will be exempt from California state and federal income
taxes or the Series will invest at least 80% of its total assets in California
obligations. The Series may invest in municipal bonds the interest and/or
principal payments on which are insured by the bond issuers or other parties.
The Series may also invest in certain municipal bonds the interest on which is
subject to the federal alternative minimum tax (AMT).
While we make every effort to achieve our investment objective and maintain
a net asset value of $1 per share, we can't guarantee success. To date, the
Series' net asset value has never deviated from $1 per share.
PRINCIPAL RISKS
Although we try to invest wisely, all investments involve risk. The securities
in which the Series invests are generally subject to the risk that the issuer
may be unable to make principal and interest payments when they are due, as well
as the risk that the securities may lose value because interest rates change or
because there is a lack of confidence in the issuer.
The Series may purchase insured municipal bonds to reduce credit risks.
Although insurance coverage reduces credit risks by providing that the insurer
will make timely payment of interest and/or principal, it does not
- -------------------------------------------------------------------
MONEY MARKET FUNDS
Money market funds--which hold high-quality short-term debt obligations--
provide investors with a lower risk, highly liquid investment option. These
funds attempt to maintain a net asset value of $1 per share, although there can
be no quarantee that they will always be able to do so.
- -------------------------------------------------------------------
- --------------------------------------------------------------------------------
1
<PAGE>
RISK/RETURN SUMMARY
- ------------------------------------------------
provide protection against the market fluctuations of insured bonds or
fluctuations in the price of the shares of the Series. An insured municipal bond
fluctuates in value largely based on factors relating to the insurer's
creditworthiness or ability to satisfy its obligations.
Municipal bonds may also be subject to the risk that the borrower may not
set aside funds to make the bond payments.
Because the Series will concentrate its investments in California
obligations, the Series is more susceptible to economic, political and other
developments that may adversely affect issuers of California obligations than a
municipal money market fund that is not as geographically concentrated. For more
information on the risks of investing in California obligations, see
"Description of the Fund, Its Investments and Risks" in the Statement of
Additional Information.
Although investments in mutual funds involve risk, investing in money market
portfolios like the Series is generally less risky than investments in other
types of funds. This is because the Series invests only in high-quality
securities with remaining maturities of 13 months or less and limits the average
maturity of the portfolio to 90 days or less. To satisfy the average maturity
and maximum maturity requirements, securities with demand features are treated
as maturing on the date that the Series can demand repayment of the security.
For more information about the risks associated with the Series, see "How
the Series Invests--Investment Risks."
An investment in the Series is not a bank deposit and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other government
agency.
EVALUATING PERFORMANCE
A number of factors--including risk--can affect how the Series performs. The
following bar chart and table show the Series' performance for each full
calendar year of operation for the last 10 years. The tables provide additional
performance information for the periods indicated. The bar chart and tables
demonstrate the risk of investing in the Series and how returns can change. The
Average Annual Returns table also compares the Series' performance to the
performance of a tax-free money market index. Past performance does not mean
that the Series will achieve similar results in the future. For current yield
information, you can call us at (800) 225-1852.
- -------------------------------------------------------------------
2 CALIFORNIA MONEY MARKET SERIES [ICON] (800) 225-1852
<PAGE>
RISK/RETURN SUMMARY
- ------------------------------------------------
ANNUAL RETURNS(1)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
BEST QUARTER: % (--quarter of--)
WORST QUARTER: % (--quarter of--)
</TABLE>
AVERAGE ANNUAL RETURNS(1) (AS OF 12-31-98)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
1 YR 5 YRS 10 YRS SINCE INCEPTION
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Series shares % % % % (since 3-3-89)
IBC Average(2) % % % N/A
</TABLE>
YIELD(1) (AS OF 12-31-98)
<TABLE>
<S> <C>
7-Day yield of the Series --%
7-Day tax-equivalent yield of the Series --%
</TABLE>
<TABLE>
<S> <C>
1 THE SERIES' RETURNS AND YIELD ARE AFTER DEDUCTION OF
EXPENSES.
2 THE IBC AVERAGE IS BASED UPON THE AVERAGE RETURN OF ALL
MUTUAL FUNDS IN THE INTERNATIONAL BUSINESS COMMUNICATIONS
FINANCIAL DATA TAX-FREE STATE-SPECIFIC MONEY FUND
(CALIFORNIA) CATEGORY.
</TABLE>
- --------------------------------------------------------------------------------
3
<PAGE>
RISK/RETURN SUMMARY
- ------------------------------------------------
FEES AND EXPENSES
These tables show the fees and expenses that you may pay if you buy and hold
shares of the Series.
SHAREHOLDER FEES(1) (PAID DIRECTLY FROM YOUR INVESTMENT)
<TABLE>
<S> <C>
Maximum sales charge (load) imposed on purchases (as a
percentage of offering price) None
Maximum deferred sales charge (load) (as a percentage of
the lower of original purchase price or sale proceeds) None
Maximum sales charge (load) imposed on reinvested
dividends and other distributions None
Redemption fees None
Exchange fee None
</TABLE>
ANNUAL SERIES OPERATING EXPENSES (DEDUCTED FROM SERIES ASSETS)
<TABLE>
<S> <C>
Management fees .500%
+ Distribution (12b-1) and service fees .125%
+ Other expenses %
= TOTAL ANNUAL SERIES OPERATING EXPENSES %
</TABLE>
<TABLE>
<S> <C>
(1) YOUR BROKER MAY CHARGE YOU A SEPARATE OR ADDITIONAL FEE FOR
PURCHASES AND SALES OF SHARES.
</TABLE>
EXAMPLE
This example will help you compare the cost of investing in the Series with the
cost of investing in other mutual funds.
The example assumes that you invest $10,000 in the Series for the time
periods indicated and then sell all of your shares at the end of those periods.
The example also assumes that your investment has a 5% return each year and that
the Series' operating expenses remain the same. Although your actual costs may
be higher or lower, based on these assumptions your costs would be:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
1 YR 3 YRS 5 YRS 10 YRS
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Series shares $ $ $ $
</TABLE>
- -------------------------------------------------------------------
4 CALIFORNIA MONEY MARKET SERIES [ICON] (800) 225-1852
<PAGE>
HOW THE SERIES INVESTS
- -------------------------------------
INVESTMENT OBJECTIVE AND POLICIES
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. While we make every effort to
achieve our objective, we can't guarantee success.
The Series invests in high-quality money market instruments to try to
provide investors with current tax-free income while maintaining a stable net
asset value of $1 per share. We manage the Series to comply with specific rules
designed for money market mutual funds.
To achieve the Series' objective, we invest primarily in short-term CALIFORNIA
OBLIGATIONS, including California state and municipal bonds as well as
obligations of other issuers (such as issuers located in Puerto Rico, the Virgin
Islands and Guam) that pay interest income that is exempt from California state
and federal income taxes. We normally invest so that at least 80% of the income
from the Series' investments will be exempt from California state and federal
income taxes or the Series will invest at least 80% of its total assets in
California obligations. The Series, however, may hold private activity bonds,
which are municipal bonds the interest on which is subject to the federal
alternative minimum tax (AMT).
Municipal bonds include GENERAL OBLIGATION BONDS and REVENUE BONDS. General
obligation bonds are obligations supported by the credit of an issuer that has
the power to tax and are payable from that issuer's general revenues and not
from any specific source. Revenue bonds, on the other hand, are payable from
revenues from a particular source.
The obligations that we purchase must be rated in one of the two highest
rating categories by at least two nationally recognized statistical rating
organizations (NRSROs), such as Moody's Investors Service, Inc. (rated at least
Aa, MIG-2 or Prime-2) or Standard & Poor's Rating Group (rated at least AA, SP-2
or A-2) or, if unrated, of comparable quality. We may also invest in insured
municipal bonds. A rating is an assessment of the likelihood of timely repayment
of interest and principal (with respect to
- -------------------------------------------------------------------
States and municipalities issue bonds in order to borrow money to finance a
project. You can think of bonds as loans that investors make to the state, local
government or other issuer. The government gets the cash needed to complete the
project and investors earn income on their investment.
- -------------------------------------------------------------------
- --------------------------------------------------------------------------------
5
<PAGE>
HOW THE SERIES INVESTS
- ------------------------------------------------
a municipal bond) or payment of claims (with respect to an insurer of a
municipal bond) and can be useful when comparing different municipal bonds.
These ratings are not a guarantee of quality. The opinions of the rating
agencies do not reflect market risk and they may at times lag behind the current
financial conditions of the issuer or insurer. An investor can evaluate the
expected likelihood of debt repayment by an issuer by looking at its ratings as
compared to another similar issuer.
In determining which securities to buy and sell, the investment adviser will
consider, among other things, yield, maturity, issue, quality characteristics
and expectations regarding economic and political developments, including
movements in interest rates and demand for municipal bonds. The investment
adviser will seek to anticipate interest rate movements and will purchase and
sell municipal bonds accordingly. The investment adviser will also consider the
claims-paying ability with respect to insurers of municipal bonds. The
investment adviser will also seek to take advantage of differentials in yields
with respect to securities with similar credit ratings and maturities, but which
vary according to the purpose for which they were issued. The investment adviser
will also seek to take advantage of differentials in yields with respect to
securities issued for similar purposes with similar maturities, but which vary
according to ratings.
Debt obligations in general, including those listed above and any others
that we may purchase, are basically written promises to repay a debt. Among the
various types of debt securities we may purchase, the terms of repayment may
vary, as may the commitment of other parties to honor the obligations of the
issuer of the security. We may purchase securities that include demand features,
which allow us to demand repayment of a debt obligation before the obligation is
due or "matures." This means that we can purchase longer-term securities because
of our expectation that we can demand repayment of the obligation at an agreed-
upon price within a relatively short period of time. This procedure follows the
rules applicable to money market funds.
The securities that we may purchase may change over time as new types of
money market instruments are developed. We will purchase these new instruments,
however, only if their characteristics and features follow the rules governing
the operation of money market funds.
For more information, see "Investment Risks" and the Statement of Additional
Information, "Description of the Fund, Its Investment and Risks."
- -------------------------------------------------------------------
6 CALIFORNIA MONEY MARKET SERIES [ICON] (800) 225-1852
<PAGE>
HOW THE SERIES INVESTS
- ------------------------------------------------
The Statement of Additional Information--which we refer to as the "SAI"--
contains additional information about the Series. To obtain a copy, see the back
cover page of this prospectus.
The Series' investment objective is a fundamental policy that cannot be
changed without shareholder approval. The Board of the Prudential California
Municipal Fund can change investment policies that are not fundamental.
OTHER INVESTMENTS AND STRATEGIES
In addition to the principal strategies, we may also make the following
investments to try to increase the Series' returns or protect its assets if
market conditions warrant.
MUNICIPAL ASSET-BACKED SECURITIES
The Series may invest in MUNICIPAL ASSET-BACKED SECURITIES. A municipal
asset-backed security is a type of pass-through instrument that pays interest
which is eligible for exclusion from federal income taxation based upon the
income from an underlying pool of municipal bonds.
FLOATING RATE BONDS AND VARIABLE RATE BONDS
The Series may invest in floating rate bonds and variable rate bonds. FLOATING
RATE BONDS are municipal bonds that have an interest rate that is set as a
specific percentage of a designated rate, such as the rate on Treasury bonds or
the prime rate at major commercial banks. The interest rate on floating rate
bonds changes when there is a change in the designated rate. VARIABLE RATE BONDS
are municipal bonds that have an interest rate that is adjusted, based on the
market rate at a specified period. They generally allow the Series to demand
payment of the bond on short notice for an amount that may be more or less than
the amount paid.
WHEN-ISSUED AND DELAYED-DELIVERY SECURITIES
The Series may purchase municipal bonds on a "WHEN-ISSUED" or "DELAYED-DELIVERY"
basis, without limit. When the Series makes this type of purchase, the price and
rate are fixed at the time of purchase, but delivery and payment for the bonds
take place at a later time. The Series does not earn interest income until the
date the bonds are delivered.
- --------------------------------------------------------------------------------
7
<PAGE>
HOW THE SERIES INVESTS
- ------------------------------------------------
REPURCHASE AGREEMENTS
The Series may use REPURCHASE AGREEMENTS where a party agrees to sell a security
to the Series and then repurchase it at an agreed-upon price at a stated time. A
repurchase agreement is like a loan by the Series to the other party which
creates a fixed return for the Series.
LIQUIDITY PUTS
The Series may purchase and exercise PUTS on municipal bonds without limit. Puts
give the Series the right to sell securities at a specified price and date. Puts
may be acquired to reduce the risk of the securities subject to the puts, but
puts may involve additional costs to the Series, which could reduce the Series'
return.
TEMPORARY DEFENSIVE STRATEGY
For temporary defensive purposes, the Series may hold up to 100% of its assets
in cash or short-term investment-grade bonds, including bonds that are not
exempt from state, local and federal income taxation. Investing heavily in these
securities can limit our ability to achieve the Series' objective, but can help
to preserve the Series' assets.
ADDITIONAL STRATEGIES
The Series also follows certain policies when it: BORROWS MONEY (the Series can
borrow up to 33 1/3% of the value of its total assets); and HOLDS ILLIQUID
SECURITIES (the Series may hold up to 10% of its net assets in illiquid
securities, including certain securities with legal or contractual restrictions
on resale, those without a readily available market and repurchase agreements
with maturities longer than 7 days). The Series is subject to certain investment
restrictions that are fundamental policies and cannot be changed without
shareholder approval. For more information about these restrictions, see the
SAI.
INVESTMENT RISKS
As noted, all investments involve risk, and investing in the Series is no
exception. Since the Series' holdings can vary significantly from broad market
indexes, performance of the Series can deviate from performance of the indexes.
This chart outlines the key risks and potential rewards of the Series' principal
investments and certain of the Series' non-principal investments and strategies.
See, too, "Description of the Fund, Its Investments and Risks" in the SAI.
- -------------------------------------------------------------------
8 CALIFORNIA MONEY MARKET SERIES [ICON] (800) 225-1852
<PAGE>
HOW THE SERIES INVESTS
- ------------------------------------------------
INVESTMENT TYPE
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------
% OF SERIES' TOTAL ASSETS RISKS POTENTIAL REWARDS
- ------------------------------------------------------------------------------------
<S> <C> <C>
- ------------------------------------------------------------------------------------
MUNICIPAL BONDS -- Concentration -- Tax-exempt interest
risk--the risk that income, except with
PROVIDE AT LEAST 80% OF bonds may lose value respect to certain
SERIES' INCOME OR because of political, bonds, such as
COMPRISE AT LEAST 80% OF economic or other private activity
ITS TOTAL ASSETS events affecting bonds, which are
issuers of California subject to the
obligations federal alternative
-- Credit risk--the risk minimum tax (AMT)
that the borrower
can't pay back the
money borrowed or
make interest
payments
-- Market risk--the risk
that bonds will lose
value in the market
because interest
rates change or there
is a lack of
confidence in the
borrower
-- Illiquidity risk--the
risk that it may be
difficult to value
precisely and sell at
time or price desired
-- Nonappropriation
risk--the risk that
the municipality may
not include the bond
obligations in future
budgets
-- Tax risk--the risk
that federal, state
or local income tax
rates may decrease,
which could decrease
demand for municipal
bonds, or that a
change in law may
limit or eliminate
exemption of interest
on municipal bonds
from such taxes
- ------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
9
<PAGE>
HOW THE SERIES INVESTS
- ------------------------------------------------
INVESTMENT TYPE (CONT'D)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------
% OF SERIES' TOTAL ASSETS RISKS POTENTIAL REWARDS
- ------------------------------------------------------------------------------------
<S> <C> <C>
- ------------------------------------------------------------------------------------
MUNICIPAL ASSET-BACKED -- Prepayment risk--the -- Regular interest
SECURITIES risk that the income
underlying bonds may -- Pass-through
PERCENTAGE VARIES be prepaid, partially instruments provide
or completely, greater
generally during diversification than
periods of falling direct ownership of
interest rates, which municipal bonds
could adversely
effect yield to
maturity and could
require the Series to
reinvest in lower
yielding bonds
-- Credit risk--the risk
that the underlying
municipal bonds will
not be paid by
issuers or by credit
insurers or
guarantors of such
instruments. Some
municipal
asset-backed
securities are
unsecured or secured
by lower-rated
insurers or
guarantors and thus
may involve greater
risk
-- Market risk
-- Tax risk
- ------------------------------------------------------------------------------------
VARIABLE/FLOATING RATE -- Value lags value of -- May offer protection
SECURITIES fixed-rate securities against interest rate
when interest rates changes
PERCENTAGE VARIES change
- ------------------------------------------------------------------------------------
</TABLE>
- -------------------------------------------------------------------
10 CALIFORNIA MONEY MARKET SERIES [ICON] (800) 225-1852
<PAGE>
HOW THE SERIES INVESTS
- ------------------------------------------------
INVESTMENT TYPE (CONT'D)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------
% OF SERIES' TOTAL ASSETS RISKS POTENTIAL REWARDS
- ------------------------------------------------------------------------------------
<S> <C> <C>
- ------------------------------------------------------------------------------------
WHEN-ISSUED AND -- May magnify underlying -- May magnify underlying
DELAYED-DELIVERY investment losses investment gains
SECURITIES -- Investment costs may
exceed potential
PERCENTAGE VARIES underlying investment
gains
- ------------------------------------------------------------------------------------
ILLIQUID SECURITIES -- May be difficult to -- May offer more
value precisely attractive yield or
UP TO 10% OF NET ASSETS -- May be difficult to potential for growth
sell at the time or than more widely
price desired traded securities
- ------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
11
<PAGE>
HOW THE SERIES IS MANAGED
- -------------------------------------
BOARD OF TRUSTEES
The Fund's Board of Trustees oversees the actions of the Manager, Investment
Adviser and Distributor and decides on general policies. The Board also oversees
the Fund's officers who conduct and supervise the daily business operations of
the Fund.
MANAGER
PRUDENTIAL INVESTMENTS FUND MANAGEMENT LLC (PIFM)
GATEWAY CENTER THREE, 100 MULBERRY STREET
NEWARK, NEW JERSEY 07102-4077
Under a management agreement with the Fund, PIFM manages the Series'
investment operations and administers its business affairs. For the fiscal year
ended August 31, 1999, the Series paid PIFM management fees of .50% of the
Series' average net assets.
PIFM and its predecessors have served as manager or administrator to
investment companies since 1987. As of , 1999, PIFM served as the
Manager to all of the Prudential mutual funds, and as Manager or
administrator to closed-end investment companies, with aggregate assets of
approximately $ billion.
INVESTMENT ADVISER
The Prudential Investment Corporation, called Prudential Investments, is the
Series' investment adviser. Its address is Prudential Plaza, 751 Broad Street,
Newark, NJ 07102. PIFM has responsibility for all investment advisory services,
supervises Prudential Investments and reimburses Prudential Investments for its
reasonable costs and expenses.
Prudential Investments Fixed Income Group is organized into teams that
specialize in different market sectors. The Fixed Income Policy Committee, which
is comprised of senior investment staff from each sector team, provides guidance
to the teams regarding duration risk, asset allocations and general risk
parameters. Portfolio managers contribute bottom-up security selection within
those guidelines. The Money Market Sector Team, headed by Joseph Tully, is
responsible for overseeing the day-to-day management of the Series.
- -------------------------------------------------------------------
12 CALIFORNIA MONEY MARKET SERIES [ICON] (800) 225-1852
<PAGE>
HOW THE SERIES IS MANAGED
- ------------------------------------------------
DISTRIBUTOR
Prudential Investment Management Services LLC (PIMS) distributes the Series'
shares under a Distribution Agreement with the Fund. The Fund has a Distribution
and Service Plan under Rule 12b-1 of the Investment Company Act. Under the Plan
and the Distribution Agreement, PIMS pays the expenses of distributing the
Series' shares and provides certain shareholder support services. The Fund pays
distribution and other fees to PIMS as compensation for its services. These
fees--known as 12b-1--shown in the "Fees and Expenses" tables.
YEAR 2000 READINESS DISCLOSURE
The services provided to the Fund and the shareholders by the Manager, the
Distributor, the Transfer Agent and the Custodian depend on the smooth
functioning of their computer systems and those of outside service providers.
Many computer software systems in use today cannot distinguish the year 2000
from the year 1900 because of the way dates are encoded and calculated. Such
event could have a negative impact on handling securities trades, payments of
interest and dividends, pricing and account services. Although, at this time,
there can be no assurance that there will be no adverse impact on the Fund, the
Manager, the Distributor, the Transfer Agent and the Custodian have advised the
Fund that they have been actively working on necessary changes to their computer
systems to prepare for the year 2000. The Fund and its Board receive, and have
received since early 1998, satisfactory quarterly reports from the principal
service providers as to their preparations for year 2000 readiness, although
there can be no assurance that the service providers (or other securities market
participants) will successfully complete the necessary changes in a timely
manner. Moreover, the Fund at this time has not considered retaining alternative
service providers or directly undertaken efforts to achieve year 2000 readiness,
the latter of which would involve substantial expenses without an assurance of
success.
Additionally, issuers of securities generally, as well as those purchased by
the Series, may confront year 2000 compliance issues which, if material and not
resolved, could have an adverse impact on securities markets and/ or a specific
issuer's performance and result in a decline in the value of the securities held
by the Series.
- --------------------------------------------------------------------------------
13
<PAGE>
SERIES DISTRIBUTIONS AND TAX ISSUES
- -------------------------------------
Investors who buy shares of the Series should be aware of some important tax
issues. For example, the Series distributes DIVIDENDS of ordinary income and any
REALIZED NET CAPITAL GAINS to shareholders. Dividends generally will be exempt
from federal and California state income taxes. If, however, the Series invests
in taxable obligations, it will pay dividends that are not exempt from these
income taxes.
The following briefly discusses some of the important state and federal tax
issues you should be aware of, but is not meant to be tax advice. For tax
advice, please speak with your tax adviser.
DISTRIBUTIONS
The Series distributes DIVIDENDS of any net investment income to shareholders
every month. For example, if the Series owns a City XYZ bond and the bond pays
interest, the Series will pay out a portion of this interest as a dividend to
its shareholders, assuming the Series' income is more than its costs and
expenses. These dividends generally will be EXEMPT FROM FEDERAL INCOME TAXES, as
long as 50% or more of the value of the Series' assets at the end of each
quarter is invested in state, municipal and other obligations, the interest on
which is excluded from gross income for federal income tax purposes.
As we mentioned before, the Series will concentrate its investments in
California obligations. In addition to being exempt from federal taxes, Series'
dividends are EXEMPT FROM CALIFORNIA STATE INCOME TAXES (but not from California
franchise taxes) FOR CALIFORNIA RESIDENTS if the dividends are excluded from
federal income taxes and are derived from interest payments on California
obligations. Dividends attributable to the interest on taxable bonds held by the
Series, market discount on taxable and tax-exempt obligations and short-term
capital gains, however, will be subject to federal, state and local income tax
at ordinary income tax rates. 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.
Some shareholders may be subject to federal alternative minimum tax (AMT)
liability. Tax-exempt interest from certain bonds is treated as an item of tax
preference, and may be attributed to shareholders. A portion of all
- -------------------------------------------------------------------
14 CALIFORNIA MONEY MARKET SERIES [ICON] (800) 225-1852
<PAGE>
SERIES DISTRIBUTIONS AND TAX ISSUES
- ------------------------------------------------
tax-exempt interest is includable as an upward adjustment in determining a
corporation's alternative minimum taxable income. These rules could make you
liable for the AMT.
Although the Series is not likely to realize capital gains because of the
types of securities we purchase, any REALIZED NET CAPITAL GAINS will be paid to
shareholders (typically once a year). Capital gains are generated when the
Series sells assets for a profit.
For your convenience, Series distributions of dividends and capital gains
are AUTOMATICALLY REINVESTED in the Series. If you ask us to pay the
distributions in cash, we will send you a check if your account is with the
Transfer Agent. Otherwise, if your account is with a broker you will receive a
credit to your account. Either way, the distributions may be subject is taxes.
For more information about Automatic Reinvestment and other shareholder
services, see "How to Buy, Sell and Exchange Shares of the Series--How To Buy
Shares" at Step 3: Additional Shareholder Services.
TAX ISSUES
FORM 1099
Every year, you will receive a Form 1099, which reports the amount of dividends
and capital gains we distributed to you during the prior year.
Series distributions are generally taxable in the year they are received,
except where we declare certain dividends in December of a calendar year but
actually pay them in January of the following year. In such cases, the dividends
are treated as if they were paid on December 31 of the prior year. Corporate
shareholders are not eligible for the 70% dividends-received deduction on
dividends paid by the Series.
WITHHOLDING TAXES
If federal law requires you to provide the Series with your tax identification
number and certifications as to your tax status, and you fail to do this, or if
you are otherwise subject to back-up withholding, we generally withhold and pay
to the U.S. Treasury 31% of your distributions and gross sale proceeds.
Dividends of net investment income and short-term capital gains paid to a
NONRESIDENT FOREIGN SHAREHOLDER generally will be subject to a U.S. withholding
tax of 30%. This rate may be lower, depending on any tax treaty the U.S. may
have with the shareholder's country.
- --------------------------------------------------------------------------------
15
<PAGE>
HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE SERIES
- -------------------------------------
HOW TO BUY SHARES
STEP 1: OPEN AN ACCOUNT
If you don't have an account with us or a securities firm that is permitted to
buy or sell shares of the Series for you, call PRUDENTIAL MUTUAL FUND SERVICES
LLC (PMFS) at (800) 225-1852 or contact:
PRUDENTIAL MUTUAL FUND SERVICES LLC
ATTN: INVESTMENT SERVICES
P.O. BOX 15020
NEW BRUNSWICK, NJ 08906-5020
To purchase by wire, call the number above to obtain an application. After
PMFS receives your completed application, you will receive an account number.
For additional information about purchasing shares of the Series, see the back
cover page of this prospectus. We have the right to reject any purchase order
(including an exchange into the Series) or suspend or modify the Series' sale of
its shares.
Except as noted below, the minimum initial investment for Series shares is
$1,000 and the minimum subsequent investment is $100. All minimum investment
requirements are waived for certain retirement and employee savings plans and
custodial accounts for the benefit of minors.
PURCHASES THROUGH PRUDENTIAL SECURITIES
Purchases of shares of the Series through Prudential Securities are made through
automatic investment procedures (the Autosweep program). You cannot purchase
shares through Prudential Securities other than through the Autosweep program,
except as specifically provided (that is, you cannot make a manual purchase).
The Autosweep program allows you to designate a money market fund as your
primary money sweep fund. If you do not designate a primary money sweep fund,
Prudential MoneyMart Assets, Inc. will automatically be your primary money sweep
fund. You have the option to change your primary money sweep fund at any time by
notifying your Prudential Securities Financial Advisor. The following discussion
assumes that you have selected the Series as your primary money sweep fund.
For individual retirement accounts (IRAs) and benefit plans in the Autosweep
program, all credit balances (that is, immediately available
- -------------------------------------------------------------------
16 CALIFORNIA MONEY MARKET SERIES [ICON] (800) 225-1852
<PAGE>
HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE SERIES
- ------------------------------------------------
funds) of $1.00 or more will be invested in the Series on a daily basis.
Prudential Securities will arrange for the investment of the credit balance in
the Series and will purchase shares of the Series equal to that amount. This
will occur on the business day following the availability of the credit balance.
Prudential Securities may use and retain the benefit of credit balances in your
account until Series shares are purchased.
For accounts other than IRAs and benefit plans, shares of the Series will be
purchased as follows:
-- When your account has a credit balance of $10,000 or more, Prudential
Securities will arrange for the automatic purchase of shares of the
Series. This will occur on the business day following the
availability of the credit balance
-- When your account has a credit balance that results from a securities
sale totaling $1,000 or more, the available cash will be invested in
the Series on the settlement date
-- For all other credit balances of $1.00 or more, shares will be
purchased automatically at least once a month on the last business
day of each month
Purchases through Autosweep are subject to a minimum initial investment of
$1,000, which is waived for certain retirement and employee savings plans and
custodial accounts for the benefit of minors. You will begin earning dividends
on your shares purchased through the Autosweep program on the first business day
after the order is placed. Prudential Securities will purchase shares of the
Series at the price determined at 4:30 p.m. New York Time on the business day
following the existence of the credit balance, which is the second business day
after the availability of the credit balance. Prudential Securities will use and
retain the benefit of credit balances in your account until Series shares are
purchased.
Your investment in the Series will be held in the name of Prudential
Securities. Prudential Securities will receive all statements and dividends from
the Fund and will, in turn, send you account statements showing your purchases,
sales and dividends.
The charges and expenses of the Autosweep program are not reflected in the
Fees and Expenses tables. For information about participating in the Autosweep
program, you should contact your Prudential Securities Financial Advisor.
- --------------------------------------------------------------------------------
17
<PAGE>
HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE SERIES
- ------------------------------------------------
PURCHASES THROUGH THE PRUDENTIAL ADVANTAGE ACCOUNT PROGRAM
The Prudential Advantage Account Program (the Advantage Account Program) is a
financial services program available to clients of Pruco Securities Corporation
(Pruco) and provides for an automatic investment procedure similar to the
Autosweep program. The Advantage Account Program consists of two types of
accounts: the Investor Account and the Advantage Account, which offers
additional services, such as a debit card and check writing.
The Advantage Account Program allows you to designate a money market fund as
your primary money sweep fund. If you do not designate a primary money sweep
fund, Prudential MoneyMart Assets, Inc. will automatically be your primary money
sweep fund. You have the option to change your primary money sweep fund at any
time by notifying your Pruco representative or the Advantage Service Center. The
following discussion assumes that you have selected the Series as your primary
money sweep fund.
With the Advantage Account as well as the Investor Account for benefit plans
and individual retirement accounts (IRAs), all credit balances (that is,
immediately available funds) of $1.00 or more will be invested in the Series on
a daily basis. Prudential Securities (Pruco's clearing broker) arranges for the
investment of the credit balance in the Series and will purchase shares of the
Series equal to that amount. This will occur on the business day following the
availability of the credit balance. Prudential Securities may use and retain the
benefit of credit balances in your account until Series shares are purchased.
If you have an Investor Account (non-IRAs), shares of the Series will be
purchased as follows:
-- When your account has a credit balance of $10,000 or more, Prudential
Securities will arrange for the automatic purchase of shares of the
Series with all cash balances of $1.00 or more. This will occur on
the business day following the availability of the credit balance
-- When your account has a credit balance that results from a securities
sale totaling more than $1,000, all cash balances of $1.00 or more
will be invested in the Series on the business day following the
settlement date
- -------------------------------------------------------------------
18 CALIFORNIA MONEY MARKET SERIES [ICON] (800) 225-1852
<PAGE>
HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE SERIES
- ------------------------------------------------
-- For all other credit balances of $1.00 or more, shares will be
purchased automatically at least once a month on the last business
day of each month
You will begin earning dividends on your shares purchased through the
Advantage Account Program on the first business day after the order is placed.
Prudential Securities will purchase shares of the Series at the price determined
at 4:30 p.m. New York Time on the business day following the availability of the
credit balance. Prudential Securities will use and retain the benefit of credit
balances in your account until Series shares are purchased.
Purchases of, withdrawals from and dividends from the Series will be shown
on your Advantage Account or Investor Account statement.
The charges and expenses of the Advantage Account Program are not reflected
in the Fees and Expenses tables. For information about participating in the
Advantage Account Program, you should call (800) 235-7637.
PURCHASES THROUGH THE COMMAND PROGRAM OR THE BUSINESSEDGE PROGRAM. Class A
shares of the Series are available to shareholders who participate in either the
corporate COMMAND-SM- Account Program (the COMMAND Program), which is available
through Prudential Securities, or the Prudential BusinessEdge-SM- Account
Program (the BusinessEdge Program), which is available either through Prudential
Securities or Pruco. These programs offer integrated financial services that
link together various product components with the ability to invest in shares of
the Series. If you participate in the COMMAND Program or the BusinessEdge
Program, your purchase of Series shares must be made through your Prudential
Securities Financial Advisor or your Pruco broker, as applicable. [There are no
minimum investment requirements for COMMAND Program or BusinessEdge Program
participants.]
MANUAL PURCHASES
You may make a manual purchase (that is, a non-money market sweep purchase) of
Series shares in either of the following situations:
-- You do not participate in a money market sweep program (E.G., the
Autosweep program or the Advantage Account Program), or
- --------------------------------------------------------------------------------
19
<PAGE>
HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE SERIES
- ------------------------------------------------
-- You participate in a money market sweep program, but the Series is
not designated as your primary money market sweep fund.
The minimum initial investment for a manual purchase for shares of the
Series is $1,000 and the minimum subsequent investment is $100, except that all
minimum investment requirements are waived for certain retirement and employee
savings plans and custodial accounts for the benefit of minors.
If you make a manual purchase through Prudential Securities, Prudential
Securities will place your order for shares of the Series on the business day
after the purchase order is received for settlement that day, which is the
second business day after receipt of the purchase order by Prudential
Securities. Prudential Securities may use and retain the benefit of credit
balances in a client's brokerage account until monies are delivered to the
Series (Prudential Securities delivers federal funds on the business day after
settlement).
If you make a manual purchase through the Fund's Distributor, through your
broker or dealer (other than Prudential Securities) or directly from the Fund,
shares will be purchased at the net asset value next determined after receipt of
your order and payment in proper form. When your payment is received by
4:30 p.m., New York Time, shares will be purchased that day and you will begin
to earn dividends on the following business day. If you purchase shares through
a broker or dealer, your broker or dealer will forward your order and payment to
the Fund. You should contact your broker or dealer for information about
services that they may provide, including an automatic sweep feature.
Transactions in Series shares may be subject to postage and other charges
imposed by your broker or dealer. Any such charge is retained by your broker or
dealer and is not sent to the Fund.
STEP 2: UNDERSTANDING THE PRICE YOU'LL PAY
When you invest in a mutual fund, you buy shares of the Series. Shares of a
money market mutual fund, like the Series, are priced differently than shares of
common stock and other securities.
The price you pay for each share of the Series is based on the share value.
The share value of a mutual fund--known as the NET ASSET VALUE or NAV--is
determined by a simple calculation: it's the total value of the Series (assets
minus liabilities) divided by the total number of shares
- -------------------------------------------------------------------
20 CALIFORNIA MONEY MARKET SERIES [ICON] (800) 225-1852
<PAGE>
HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE SERIES
- ------------------------------------------------
outstanding. In determining NAV, the Series values its securities using the
amortized cost method. The Series seeks to maintain an NAV of $1 per share at
all times. Your broker may charge you a separate or additional fee for purchases
of shares.
We determine the NAV of our shares once each business day at 4:30 p.m. New
York Time on days that the New York Stock Exchange (NYSE) is open for trading.
The NYSE is closed on national holidays and Good Friday. We do not determine NAV
on days when we have not received any orders to purchase, sell, or exchange or
when changes in the value of the Series' portfolio do not affect the NAV.
STEP 3: ADDITIONAL SHAREHOLDER SERVICES
As a Series shareholder, you can take advantage of the following services and
privileges:
AUTOMATIC REINVESTMENT. As we explained in the "Series Distributions and Tax
Issues" section, the Series pays out--or distributes--its net investment income
and capital gains to all shareholders. For your convenience, we will
automatically reinvest your distributions in the Series at NAV. If you want your
distributions paid in cash, you can indicate this preference on your
application, notify your broker or notify the Transfer Agent in writing (at the
address below) at least five business days before the date we determine who
receives dividends.
PRUDENTIAL MUTUAL FUND SERVICES LLC
ATTENTION: ACCOUNT MAINTENANCE
P.O. BOX 15015
NEW BRUNSWICK, NJ 08906-5015
THE PRUTECTOR PROGRAM. Optional group term life insurance -- which protects the
value of your Prudential mutual fund investment for your beneficiaries against
market declines -- is available to investors who purchase their shares through
Prudential. This insurance is subject to various restrictions and charges and is
not available in all states.
REPORTS TO SHAREHOLDERS. Every year we will send you an annual report (along
with an updated prospectus) and a semi-annual report, which
- --------------------------------------------------------------------------------
21
<PAGE>
HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE SERIES
- ------------------------------------------------
contain important financial information about the Series. To reduce Series
expenses, we will send one annual shareholder report, one semi-annual
shareholder report and one annual prospectus per household, unless you instruct
us or your broker otherwise.
HOW TO SELL YOUR SHARES
You can sell your shares of the Series at any time, subject to certain
restrictions.
When you sell shares of the Series--also known as REDEEMING shares--the
price you will receive will be the NAV next determined after the Transfer Agent,
the Distributor or your broker receives your order to sell. If your broker holds
your shares, he must receive your order to sell by 4:30 p.m. New York Time to
process the sale on that day. Otherwise contact:
PRUDENTIAL MUTUAL FUND SERVICES LLC
ATTENTION: REDEMPTION SERVICES
P.O. BOX 15010
NEW BRUNSWICK, NJ 08906-5010
Generally, we will pay you for the shares that you sell within seven days
after the Transfer Agent, the Distributor or your broker receives your sell
order. If you hold shares through a broker, payment will be credited to your
account. If you are selling shares you recently purchased with a check, we may
delay payment of your proceeds until your check clears, which can take up to 10
days from the purchase date. You can avoid delay if you purchase shares by wire,
certified check or cashier's check. Your broker may charge you a separate or
additional fee for sales of shares.
RESTRICTIONS ON SALES. There are certain times when you may not be able to sell
shares of the Series or when we may delay paying you the proceeds from a sale.
This may happen during unusual market conditions or emergencies when the Series
can't determine the value of its assets or sell its holdings. For more
information, see the SAI, "Purchase, Redemption and Pricing of Fund Shares--Sale
of Shares."
If you are selling more than $50,000 of shares, if you want the check sent
to someone or some place that is not in our records, or you are a business or
trust, and if you hold your shares directly with the Transfer
- -------------------------------------------------------------------
22 CALIFORNIA MONEY MARKET SERIES [ICON] (800) 225-1852
<PAGE>
HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE SERIES
- ------------------------------------------------
Agent, you may have to have the signature on your sell order guaranteed by a
financial institution.
REDEMPTION IN KIND. If the sales of Series shares you make during any 90-day
period reach the lesser of $250,000 or 1% of the value of the Series' net
assets, we can then give you securities from the Series' portfolio instead of
cash. If you want to sell the securities for cash, you would have to pay the
costs charged by a broker.
AUTOMATIC REDEMPTION FOR AUTOSWEEP. If you participate in the Autosweep program,
your Series shares may be automatically redeemed to cover any deficit in your
Prudential Securities account. The amount redeemed will be the nearest dollar
amount necessary to cover the deficit.
The amount of the redemption will be the lesser of the total value of Series
shares held in your Prudential Securities account or the deficit in your
Prudential Securities account. If you use this automatic redemption procedure
and want to pay for a securities transaction in your account other than through
this procedure, you must deposit cash in your securities account before the
settlement date. If you use this automatic redemption procedure and want to pay
any other deficit in your securities account other than through this procedure,
you must deposit cash in your securities account before you incur the deficit.
Redemptions are automatically made by Prudential Securities, to the nearest
dollar, on each day to satisfy deficits from securities transactions or to honor
your redemption requests. Your account will be automatically scanned for
deficits each day and, if there is insufficient cash in your account, we will
redeem an appropriate number of shares of the Series at the next determined NAV
to satisfy any remaining deficit. You are entitled to any dividends declared on
the redeemed shares through the day before the redemption is made. Dividends
declared on the redemption date will be retained by Prudential Securities, which
has advanced monies to satisfy deficits in your account.
AUTOMATIC REDEMPTION FOR THE ADVANTAGE ACCOUNT. If you participate in the
Advantage Account Program, your Series shares may be automatically redeemed to
cover any deficit in your securities account. The amount redeemed will be the
nearest dollar amount necessary to cover the deficit.
- --------------------------------------------------------------------------------
23
<PAGE>
HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE SERIES
- ------------------------------------------------
The amount of the redemption will be the lesser of the total value of Series
shares held in your securities account or the deficit in your securities
account. A deficit in your Advantage Account may result from activity arising
under the program, such as debit balances incurred by the use of the
Visa-Registered Trademark- Account, including Visa purchases, cash advances and
Visa Account checks. Your account will be automatically scanned for deficits
each day and, if there is insufficient cash in your account, we will redeem an
appropriate number of shares of the Series to satisfy any remaining deficit. You
are entitled to any dividends declared on the redeemed shares through the day
before the redemption is made. Dividends declared on the redemption date will be
retained by Prudential Securities, which has advanced monies to satisfy deficits
in your account.
Redemptions are automatically made by Prudential Securities, to the nearest
dollar, on each day to satisfy deficits from securities transactions or to honor
your redemption requests.
AUTOMATIC REDEMPTION FOR THE COMMAND PROGRAM OR THE BUSINESSEDGE PROGRAM If you
participate in the COMMAND Program or the BusinessEdge Program, your Series
shares will be automatically redeemed to cover any deficit in your account. The
amount of the redemption will be the nearest dollar amount necessary to cover
the deficit.
The amount of the redemption will be the lesser of the total value of Series
shares held in your account or the deficit in your account. A deficit in your
COMMAND Program account or BusinessEdge Program account may result from activity
arising under the Program, such as debit balances incurred by the use of the
Visa-Registered Trademark- Gold Debit Card Account (for the COMMAND Program) or
the BusinessEdge Visa-Registered Trademark- Debit Card Account (for the
BusinessEdge Program), as well as ATM transactions, cash advances and Program
account checks. Your account will be automatically scanned for deficits each day
and, if there is insufficient cash in your account, we will redeem an
appropriate number of shares of the Series to satisfy any remaining deficit. You
are entitled to any dividends declared on the redeemed shares through the day
before the redemption is made. Dividends declared on the redemption date will be
retained by Prudential Securities or Pruco, as applicable, which has advanced
monies to satisfy deficits in your account.
- -------------------------------------------------------------------
24 CALIFORNIA MONEY MARKET SERIES [ICON] (800) 225-1852
<PAGE>
HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE SERIES
- ------------------------------------------------
Redemptions are automatically made, to the nearest dollar, on each day to
satisfy account deficits or to honor your redemption requests.
MANUAL REDEMPTION FOR THE COMMAND PROGRAM OR THE BUSINESSEDGE PROGRAM If you
participate in the COMMAND Program or the BusinessEdge Program, you may redeem
your Series shares by submitting a written request to your Prudential Securities
Financial Advisor or Pruco broker, as applicable. You should not send a manual
redemption request to the Fund. If you do, we will forward the request to
Prudential Securities or Pruco, as appropriate, which could delay your requested
redemption.
The proceeds from a manual redemption will immediately become a free cash
balance in your Program account and will be automatically invested in the money
market mutual fund that you selected as the "Primary Fund" for cash sweeps in
your account. Both the COMMAND Program and the BusinessEdge Program require that
your written redemption request be signed by all persons in whose name Series
shares are registered, exactly as they appear on your Program account client
statement. In certain situations, additional documents such as trust
instruments, death certificates, appointments as executor or administrator, or
certificates of corporate authority may be required.
Under the COMMAND Program, Prudential Securities has the right to terminate
your Program account at any time for any reason. Likewise, under the
BusinessEdge Program, Prudential Securities or Pruco, as applicable, has the
right to terminate your Program account at any time for any reason. If a Program
account is terminated, all shares of the Series held in the account will be
redeemed.
HOW TO EXCHANGE YOUR SHARES
You can exchange your shares of the Series for shares in certain other
Prudential mutual funds--including certain money market funds--if you satisfy
the minimum investment requirements of such other Prudential mutual fund. You
can exchange shares of the Series for Class A shares of another Prudential
mutual fund, but you can't exchange Series shares for Class B, Class C or Class
Z shares, except that shares purchased prior to January 22, 1990 that are
subject to a contingent deferred sales charge can be exchanged for Class B
shares.
- --------------------------------------------------------------------------------
25
<PAGE>
HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE SERIES
- ------------------------------------------------
If you hold shares through a broker, you must exchange shares through your
broker. Otherwise, contact:
PRUDENTIAL MUTUAL FUND SERVICES LLC
ATTN: EXCHANGE PROCESSING
P.O. BOX 15010
NEW BRUNSWICK, NJ 08906-5010
When you exchange shares of the Series for Class A shares of any other
Prudential mutual fund, you will be subject to any sales charge that may be
imposed by such other Prudential mutual fund. The sales charge is imposed at the
time of your exchange.
FREQUENT TRADING
Frequent trading of Series shares in response to short-term fluctuations in the
market--also known as "market timing"--may make it very difficult to manage the
Series' investments. When market timing occurs, the Series may have to sell
portfolio securities to have the cash necessary to redeem the market timer's
shares. This can happen at a time when it is not advantageous to sell any
securities, so the Series' performance may be hurt. When large dollar amounts
are involved, market timing can also make it difficult to use long-term
investment strategies because we cannot predict how much cash the Series will
have to invest. When in our opinion such activity would have a disruptive effect
on portfolio management, the Fund reserves the right to refuse purchase orders
and exchanges into the Series by any person, group or commonly controlled
accounts. The Fund may notify a market timer of rejection of an exchange
purchase order after the day the order is placed. If the Fund allows a market
timer to trade Series shares, it may require the market timer to enter into a
written agreement to follow certain procedures and limitations.
- -------------------------------------------------------------------
26 CALIFORNIA MONEY MARKET SERIES [ICON] (800) 225-1852
<PAGE>
FINANCIAL HIGHLIGHTS
- -------------------------------------
The financial highlights will help you evaluate the Series' financial
performance. The TOTAL RETURN in the chart represents the rate that a
shareholder earned on an investment in the Series, assuming reinvestment of all
dividends and other distributions. The information is for shares of the Series
for the periods indicated.
Review this chart with the financial statements which appear in the SAI.
Additional performance information is contained in the annual report, which you
can receive at no charge.
The financial highlights for the three fiscal years ended August 31, 1999
were audited by LLP, independent accountants, and the
financial highlights for the two years ended August 31, 1996 were audited by
other independent auditors, whose reports were unqualified.
SERIES SHARES (fiscal year ended 8-31)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE 1999 1998 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
YEAR -- $1.00 $1.00 $1.00 $1.00
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income and net
realized gains -- .03 .03 .03 .02(2)
Dividends and distributions to
shareholders (--) (.03) (.03) (.03) (.03)
Capital contribution by affiliate -- -- -- -- .01
NET ASSET VALUE, END OF YEAR -- $1.00 $1.00 $1.00 $1.00
TOTAL RETURN(1) 2.81% 2.85% 2.88% 3.01%(2)
- ---------------------------------
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA 1999 1998 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------
- ----------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSETS, END OF YEAR (000) $-- $301,278 $285,280 $249,833 $229,380
AVERAGE NET ASSETS (000) $-- $287,250 $277,720 $256,175 $243,130
RATIOS TO AVERAGE NET ASSETS:
Expenses, including distribution
fee --% .72% .73% .74% .78%
Expenses, excluding distribution
fee --% .60% .61% .62% .65%
Net investment income --% 2.77% 2.80% 2.83% 2.93%
Portfolio turnover -- -- -- -- --
- ---------------------------------
</TABLE>
<TABLE>
<S> <C>
1 TOTAL RETURN ASSUMES REINVESTMENT OF DIVIDENDS AND ANY OTHER
DISTRIBUTIONS. IT IS CALCULATED ASSUMING SHARES ARE
PURCHASED ON THE FIRST DAY AND SOLD ON THE LAST DAY OF EACH
PERIOD REPORTED.
2 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%.
</TABLE>
- --------------------------------------------------------------------------------
27
<PAGE>
THE PRUDENTIAL MUTUAL FUND FAMILY
- -------------------------------------
Prudential offers a broad range of mutual funds designed to meet your individual
needs. For information about these funds, contact your financial adviser or
dealer or call us at (800) 225-1852. Read the prospectus carefully before you
invest or send money.
STOCK FUNDS
PRUDENTIAL DISTRESSED SECURITIES FUND, INC.
PRUDENTIAL EMERGING GROWTH FUND, INC.
PRUDENTIAL EQUITY FUND, INC.
PRUDENTIAL EQUITY INCOME FUND
PRUDENTIAL INDEX SERIES FUND
PRUDENTIAL SMALL-CAP INDEX FUND
PRUDENTIAL STOCK INDEX FUND
THE PRUDENTIAL INVESTMENT PORTFOLIOS, INC.
PRUDENTIAL JENNISON GROWTH FUND
PRUDENTIAL JENNISON GROWTH & INCOME FUND
PRUDENTIAL MID-CAP VALUE FUND
PRUDENTIAL REAL ESTATE SECURITIES FUND
PRUDENTIAL SECTOR FUNDS, INC.
PRUDENTIAL FINANCIAL SERVICES FUND
PRUDENTIAL HEALTH SCIENCES FUND
PRUDENTIAL TECHNOLOGY FUND
PRUDENTIAL UTILITY FUND
PRUDENTIAL SMALL-CAP QUANTUM FUND, INC.
PRUDENTIAL SMALL COMPANY VALUE FUND, INC.
PRUDENTIAL TAX-MANAGED EQUITY FUND
PRUDENTIAL 20/20 FOCUS FUND
NICHOLAS-APPLEGATE FUND, INC.
NICHOLAS-APPLEGATE GROWTH EQUITY FUND
TARGET FUNDS
LARGE CAPITALIZATION GROWTH FUND
LARGE CAPITALIZATION VALUE FUND
SMALL CAPITALIZATION GROWTH FUND
SMALL CAPITALIZATION VALUE FUND
ASSET ALLOCATION/BALANCED FUNDS
PRUDENTIAL BALANCED FUND
PRUDENTIAL DIVERSIFIED FUNDS
CONSERVATIVE GROWTH FUND
MODERATE GROWTH FUND
HIGH GROWTH FUND
THE PRUDENTIAL INVESTMENT PORTFOLIOS, INC.
PRUDENTIAL ACTIVE BALANCED FUND
GLOBAL FUNDS
GLOBAL STOCK FUNDS
PRUDENTIAL DEVELOPING MARKETS FUND
PRUDENTIAL DEVELOPING MARKETS EQUITY FUND
PRUDENTIAL LATIN AMERICA EQUITY FUND
PRUDENTIAL EUROPE GROWTH FUND, INC.
PRUDENTIAL GLOBAL GENESIS FUND, INC.
PRUDENTIAL INDEX SERIES FUND
PRUDENTIAL EUROPE INDEX FUND
PRUDENTIAL PACIFIC INDEX FUND
PRUDENTIAL NATURAL RESOURCES FUND, INC.
PRUDENTIAL PACIFIC GROWTH FUND, INC.
PRUDENTIAL WORLD FUND, INC.
GLOBAL SERIES
INTERNATIONAL STOCK SERIES
GLOBAL UTILITY FUND, INC.
TARGET FUNDS
INTERNATIONAL EQUITY FUND
- -------------------------------------------------------------------
28 CALIFORNIA MONEY MARKET SERIES [ICON] (800) 225-1852
<PAGE>
THE PRUDENTIAL MUTUAL FUND FAMILY
- -------------------------------------
GLOBAL BOND FUNDS
PRUDENTIAL GLOBAL LIMITED MATURITY FUND, INC.
LIMITED MATURITY PORTFOLIO
PRUDENTIAL GLOBAL TOTAL RETURN FUND, INC.
PRUDENTIAL INTERMEDIATE GLOBAL
INCOME FUND, INC.
PRUDENTIAL INTERNATIONAL BOND FUND, INC.
BOND FUNDS
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 HIGH YIELD TOTAL RETURN FUND, INC.
PRUDENTIAL INDEX SERIES FUND
PRUDENTIAL BOND MARKET INDEX FUND
PRUDENTIAL STRUCTURED MATURITY FUND, INC.
INCOME PORTFOLIO
TARGET FUNDS
TOTAL RETURN BOND FUND
TAX-EXEMPT BOND FUNDS
PRUDENTIAL CALIFORNIA MUNICIPAL FUND
CALIFORNIA SERIES
CALIFORNIA INCOME SERIES
PRUDENTIAL MUNICIPAL BOND FUND
HIGH INCOME SERIES
INSURED SERIES
PRUDENTIAL MUNICIPAL SERIES FUND
FLORIDA SERIES
MASSACHUSETTS SERIES
NEW JERSEY SERIES
NEW YORK SERIES
NORTH CAROLINA SERIES
OHIO SERIES
PENNSYLVANIA SERIES
PRUDENTIAL NATIONAL MUNICIPALS FUND, INC.
MONEY MARKET FUNDS
TAXABLE MONEY MARKET FUNDS
CASH ACCUMULATION TRUST
LIQUID ASSETS FUND
NATIONAL MONEY MARKET FUND
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
- --------------------------------------------------------------------------------
29
<PAGE>
FOR MORE INFORMATION
- --------------------------------------------------------------------------------
Please read this prospectus before you invest in the Fund and keep it for future
reference. For information or shareholder questions contact:
PRUDENTIAL MUTUAL FUND SERVICES LLC
P.O. BOX 15005
NEW BRUNSWICK, NJ 08906-5005
(800) 225-1852
(732) 417-7555
(if calling from outside the U.S.)
- --------------------------------
Outside Brokers Should Contact:
PRUDENTIAL INVESTMENT MANAGEMENT SERVICES LLC
P.O. BOX 15035
NEW BRUNSWICK, NJ 08906-5035
(800) 778-8769
- ------------------------------------
Visit Prudential's Web Site At:
http://www.prudential.com
- --------------------------------
Additional information about the Fund can be obtained without charge and can be
found in the following documents:
- -- Statement of Additional Information (SAI) (incorporated by reference into
this prospectus)
- -- Annual Report
- -- Semi-Annual Report
You can also obtain copies of Fund documents from the Securities and Exchange
Commission as follows:
By Mail:
Securities and Exchange Commission
Public Reference Section
Washington, DC 20549-6009
(The SEC charges a fee to copy documents.)
In Person:
Public Reference Room in
Washington, DC
(For hours of operation, call 1(800) SEC-0330)
Via the Internet:
http://www.sec.gov
- --------------------------------
CUSIP Number: 744313-50-3
Investment Company Act File No:
811-4023
<TABLE>
<S> <C>
M Printed on Recycled Paper
</TABLE>
<PAGE>
Prudential California Municipal Fund
- --------------------------------------------------------------------------------
STATEMENT OF ADDITIONAL INFORMATION
DATED DECEMBER , 1999
- --------------------------------------------------------------------------------
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. There can be no assurance that any
series' investment objective will be achieved. See "Description of the Fund, Its
Investments and Risks."
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 December
, 1999, copies of which may be obtained from the Fund upon request.
- --------------------------------------------------------------------------------
MF116B
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
---------
<S> <C>
Fund History............................................................................................ B-3
Description of the Fund, Its Investments and Risks...................................................... B-3
Investment Restrictions................................................................................. B-23
Management of the Fund.................................................................................. B-24
Control Persons and Principal Holders of Securities..................................................... B-27
Investment Advisory and Other Services.................................................................. B-28
Brokerage Allocation and Other Practices................................................................ B-33
Capital Shares, Other Securities and Organization....................................................... B-35
Purchase, Redemption and Pricing of Fund Shares......................................................... B-36
Shareholder Investment Account.......................................................................... B-45
Net Asset Value......................................................................................... B-51
Performance Information................................................................................. B-52
California Series and California Income Series........................................................ B-52
California Money Market Series........................................................................ B-53
Taxes, Dividends and Distributions...................................................................... B-55
Distributions......................................................................................... B-55
Federal Taxation...................................................................................... B-55
California Taxation................................................................................... B-59
Description of Tax-Exempt Security Ratings.............................................................. B-60
Financial Statements.................................................................................... B-62
Report of Independent Accountants.......................................................................
Appendix I.............................................................................................. I-1
Appendix II............................................................................................. II-1
Appendix III............................................................................................ III-1
</TABLE>
B-2
<PAGE>
FUND HISTORY
Prudential California Municipal Fund (the Fund) was organized under the laws
of Massachusetts on May 18, 1984 as an unincorporated business trust, a form of
organization that is commonly known as a Massachusetts business trust. The Fund
consists 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.
DESCRIPTION OF THE FUND, ITS INVESTMENTS AND RISKS
(a) CLASSIFICATION. The Fund is an open-end management investment company
under the Investment Company Act of 1940, as amended (the Investment Company
Act). Each series is diversified.
(b) AND (c) INVESTMENT STRATEGIES, POLICIES AND RISKS. The investment
objective of each series and the principal investment policies and strategies
for seeking to achieve the series' objective are set forth in the series'
respective Prospectus. This section provides additional information on the
principal investment policies and strategies of the series, as well as
information on certain non-principal investment policies and strategies. There
can be no assurance that any series will achieve its objective or that all
income from any series will be exempt from all federal, state or local income
taxes.
The 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% 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.
As described above, each series is classified as a "diversified" investment
company under the Investment Company Act. This means that with respect to 75% of
each series' assets, (1) it may not invest more than 5% of its total assets in
the securities of any one issuer (except U.S. Government obligations and
obligations issued or
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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.
From time to time, a series may own the majority of a municipal issue. Such
majority-owned holdings may present additional market and credit risks.
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 an NRSRO 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, and (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.
The Fund expects that normally no series will invest 25% or more of its
total assets in any one sector of the municipal obligations market.
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
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nongovernmental user, the nongovernmental user is regarded as the sole issuer.
If in either case the creating government or another entity guarantees an
obligation, the guaranty may be regarded as a separate security and treated as
an issue of such guarantor.
TAX-EXEMPT BONDS. Tax-exempt bonds are issued to obtain funds for various
public purposes, including the construction of a wide range of public facilities
such as airports, bridges, highways, housing, hospitals, mass transportation,
schools, streets, water and sewer works, and gas and electric utilities.
Tax-exempt bonds also may be issued in connection with the refunding of
outstanding obligations, to obtain funds to lend to other public institutions,
or for general operating expenses.
The two principal classifications of tax-exempt bonds are "general
obligation" and "revenue." General obligation bonds are secured by the issuer's
pledge of its full faith, credit and taxing power for the payment of principal
and interest. Revenue bonds are payable only from the revenues derived from a
particular facility or class of facilities or, in some cases, from the proceeds
of a special excise tax or other specific revenue source.
Industrial development bonds are issued by or on behalf of public
authorities to obtain funds to provide various privately-operated facilities for
manufacturing, housing, sewage, solid waste disposal, airport, mass transit and
port facilities. The Internal Revenue Code restricts the types of industrial
development bonds (IDBs) which qualify to pay interest exempt from federal
income tax, and interest on certain IDBs issued after August 7, 1986 is subject
to the alternative minimum tax. Although IDBs are issued by municipal
authorities, they are generally secured by the revenues derived from payments of
the industrial user. The payment of the principal and interest on IDBs is
dependent solely on the ability of the user of the facilities financed by the
bonds to meet its financial obligations and the pledge, if any, of real and
personal property so financed as security for such payment.
TAX-EXEMPT NOTES. Tax-exempt notes generally are used to provide for
short-term capital needs and generally have maturities of one year or less.
Tax-exempt notes include:
1. TAX ANTICIPATION NOTES. Tax Anticipation Notes are issued to finance
working capital needs of municipalities. Generally, they are issued in
anticipation of various seasonal tax revenues, such as income, sales, use and
business taxes, and are payable from these specific future taxes.
2. REVENUE ANTICIPATION NOTES. Revenue Anticipation Notes are issued in
expectation of receipt of other kinds of revenue, such as federal revenues
available under the Federal Revenue Sharing Programs.
3. BOND ANTICIPATION NOTES. Bond Anticipation Notes are issued to provide
interim financing until long-term financing can be arranged. In most cases, the
long-term bonds then provide the money for the repayment of the Notes.
4. CONSTRUCTION LOAN NOTES. Construction Loan Notes are sold to provide
construction financing. Permanent financing, the proceeds of which are applied
to the payment of Construction Loan Notes, is sometimes 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 in
floating rate and variable rate securities, including participation interests
therein, subject to the requirements of the amortized cost valuation rule and
other requirements of the Securities and Exchange Commission (the Commission)
with respect to the money market series. Each series other than the California
Money Market Series) may invest in inverse floaters and secondary 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. A secondary inverse floater is an asset
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backed security, generally evidenced by a trust or custodial receipt, the
interest rate on which 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
such instruments. Generally, income from inverse floating rate bonds will
decrease when short-term interest rates increase, and will increase when
short-term interest rates decrease. Such securities have the effect of providing
a degree of investment leverage, since they may increase or decrease in value in
response to changes, as an illustration, in market interest rates at a rate that
is a multiple (typically two) of the rate at which fixed-rate, long-term,
tax-exempt securities increase or decrease in response to such changes. As a
result, the market values of such securities generally will be more volatile
than the market values of fixed-rate tax-exempt securities. To seek to limit the
volatility of these securities, a series may, but is not required to, purchase
inverse floating obligations with shorter-term maturities or which contain
limitations on the extent to which the interest rate may vary. Inverse floaters
represent a flexible portfolio management instrument that allows us to vary the
degree of investment leverage relatively efficiently under difference market
conditions. The market for inverse floaters is relatively new.
Each series may invest in participation interests in variable rate
tax-exempt securities (such as certain IDB's) 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 IDB's supported by bank letters of credit or guarantees, on
the basis of published financial information, reports of rating agencies and
other bank analytical services to which the investment adviser may subscribe.
Participation interests will be purchased only if, in the opinion of counsel,
interest income on such interests will be tax-exempt when distributed as
dividends to shareholders.
TAX-EXEMPT COMMERCIAL PAPER. Issues of tax-exempt commercial paper typically
represent short-term, unsecured, negotiable promissory notes. These obligations
are issued by agencies of state and local governments to finance seasonal
working capital needs of municipalities or to provide interim construction
financing and are paid from general revenues of municipalities or are refinanced
with long-term debt. In most cases, tax-exempt commercial paper is backed by
letters of credit, lending agreements, note repurchase agreements or other
credit facility agreements offered by banks or other institutions and is
actively traded.
SPECIAL CONSIDERATIONS REGARDING INVESTMENTS IN TAX-EXEMPT SECURITIES
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.
From time to time, proposals have been introduced to limit the use, or tax
and other advantages, of tax-exempt securities which, if enacted, could
adversely affect each series' NAV and investment practices. Such proposals could
also adversely affect the secondary market for high yield municipal securities,
the financial
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condition of issuers of these securities and the value of outstanding high yield
municipal securities. Reevaluation of each series' investment objective and
structure might be necessary in the future due to market conditions which may
result from future changes in state or federal law.
Unlike many issues of common and preferred stock and corporate bonds which
are traded between brokers acting as agents for their customers on securities
exchanges, such securities are customarily purchased from or sold to dealers who
are selling or buying for their own account. Most tax-exempt securities are not
required to be registered with or qualified for sale by federal or state
securities regulators. Since there are large numbers of tax-exempt securities of
many different issuers, most issues do not trade on any single day. On the other
hand, most issues are always marketable, since a major dealer will normally, on
request, bid for any issue, other than obscure ones. Regional municipal
securities dealers are frequently more willing to bid on issues of
municipalities in their geographic area.
The structure of the tax-exempt securities market introduces its own element
of risk; a seller may find, on occasion, that dealers are unwilling to make bids
for certain issues that the seller considers reasonable. If the seller is forced
to sell, he or she may realize a capital loss that would not have been necessary
in different circumstances. Because the net asset value of a series' shares
reflects the degree of willingness of dealers to bid for tax-exempt securities,
the price of a series' shares may be subject to greater fluctuation than shares
of other investment companies with different investment policies.
[TO BE UPDATED BY AMENDMENT]
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 over 32.9 million).
California's economy is broad and diversified.
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 1997, in terms of job gains, exceeded
that of the rest of the United States. The State added nearly 430,000 non-farm
jobs during 1997. In 1996 California surpassed its pre-recession employment peak
of 12.7 million jobs. The unemployment rate, while still higher than the
national average, fell to 5.8% in June 1998, 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. The rate of employment growth for
the Los Angeles region indicates that growth has almost caught up with that in
the San Francisco bay region on a population share basis. As California enters
its fourth year of economic recovery, its finances continue to show improvement.
The unsettled financial situation occurring in certain Asian economies, and its
spillover effect elsewhere, may adversely the State's export-related industries
and, therefore, the State's rate of economic growth.
The Governor signed the 1998-99 Budget Act on August 21, 1998. The 1998-99
Budget Act is based on projected General Fund revenues and transfers of
$57.0 billion (after giving effect to various tax reductions enacted in 1997 and
1998), a 4.2% increase from the revised 1997-98 figures. Special Fund revenues
were estimated at $14.3 billion. The revenue projections were based on the
Governor's May Revision to the 1998-99 Budget and may be overstated in light of
the possible effect on California's economic growth of worsening economic
problems in various international markets.
The Budget Act provides authority for expenditures of $57.3 billion from the
General Fund (a 7.3% increase from 1997-98), $14.7 billion from Special Funds,
and $3.4 billion from bond funds. The Budget Act
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projects a balance in the SFEU at June 30, 1999 of $1.255 billion, a little more
than 2% of General Fund revenues. The Budget Act assumes the State will carry
out its normal intra-year cash flow borrowing in the amount of $1.7 billion of
revenue anticipation notes issued in October 1998.
The most significant feature of the 1998-99 budget was agreement on a total
of $1.4 billion of tax cuts. The central element is a bill which provides for a
phased-in reduction of the Vehicle License Fee (VLF). Since the VLF is currently
transferred to cities and counties, the bill provides for the General Fund to
replace the lost revenues. Starting on January 1, 1999, the VLF will be reduced
by 25%, at a cost to the General Fund of approximately $500 million in the
1998-99 Fiscal Year and about $1 billion annually thereafter.
In addition to the cut in the VLF, the 1998-99 budget includes both
temporary and permanent increases in the personal income tax dependent credit
($612 million General Fund cost in 1998-99, but less in future years), a
nonrefundable renters tax credit ($133 million), and various targeted business
tax credits ($106 million). About half of the business tax credits will only
become effective if Proposition 7, an initiative measure which includes various
tax credits, is rejected by the voters on the November 3, 1998 ballot.
The 1998-99 Budget Act includes increased funding for schools, higher
education, health, welfare and social service programs, and trial courts and
prisons. The Budget also includes new funding for natural resources projects,
dedication of $376 million of General Fund moneys for capital outlay projects,
funding of a 3% State employee salary increase, funding of 2,000 new Department
of Transportation positions to accelerate transportation construction projects,
and funding of the California Infrastructure and Economic Development Bank
($50 million).
Because of the State's continuing budget problems, the State's General
Obligation bonds were downgraded in July 1994 to A1 from Aa by Moody's, to A
from A+ by Standard & Poor's, and to A from AA by Fitch. All three rating
agencies expressed uncertainty in the State's ability to balance the budget by
1996. However, in 1996, citing California's improving economy and budget
situation, both Fitch and Standard & Poor's raised their ratings from A to A+.
In October 1997, Fitch raised its rating from A+ to AA- referring to
California's fundamental strengths, the extent of economic recovery and the
return of financial stability. In October 1998, Moody's raised its rating from
A1 to Aa3 citing the State's continuing economic recovery and a number of
actions taken to improve the State's credit condition, including the rebuilding
of cash and budget reserves.
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. In December
1997, Moody's raised its ratings on $325 million of Orange County pension
obligation bonds to Baa3 from Ba. In February 1998 Fitch assigned outstanding
Orange County pension obligation bonds a BBB rating.
Los Angeles County, the nation's largest county, has also experienced
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 April
1998 the Los Angeles County Chief Administrative Officer proposed an
approximately $13.2 billion 1998-99 budget, which would be 5.3% larger than the
1997-98 budget, and which would not require cuts in services and jobs to close a
projected deficit. In June 1998 the Los Angeles County Board of Supervisors
approved an approximately $13.6 billion 1998-99 budget, reserving the right to
make further changes to reflect revenue allocation decisions in the final State
budget.
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. The amendment limits ad valorem taxes on real property and
restricts the ability of taxing entities to increase real property tax revenues.
State 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
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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.
The State Constitution imposes an "appropriations limit" on the spending
authority to the State and local government entities. 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.
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 the State Constitution to authorize the State
Legislature to prohibit redevelopment agencies from receiving any property tax
revenues raised by increased property taxes to repay bonded indebtedness of
local government which is not approved by voters on or after January 1, 1989. It
is not possible to predict whether the State Legislature will enact such a
prohibition, nor is it possible to predict the impact of Proposition 87 on
redevelopment agencies and their ability to make payments on outstanding debt
obligations.
In November 1988, California voters approved Proposition 98. The initiative
requires that revenues in excess of amounts permitted to be spent and which
would otherwise be returned by revision of tax rates or fee schedules, be
transferred and allocated (up to a maximum of 40%) to the State School Fund and
be expended solely for purposes of instructional improvement and accountability.
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.
Proposition 9 on the November 3, 1998, State ballot would overturn certain
aspects of legislation enacted in 1996 and 1997 to deregulate the electric
industry in California. As part of this deregulation, the three investor owned
utilities in California issued about $6 billion in aggregate of "rate reduction
bonds" to finance the "stranded costs" (outstanding obligations) incurred in
connection with of certain uneconomic facilities. These bonds are repaid through
a surcharge placed on residential and small business customers' bills. The
legislation authorizing issuance of these bonds included a pledge that the State
would not interfere with the levying of these surcharges without providing other
means to repay the bonds. One part of Proposition 9 would be the cancellation of
the utilities' authority to collect these surcharges. If Proposition 9 is
approved by the voters, it is anticipated that litigation will be filed to
declare the initiative unconstitutional. Because of the uncertainty of
litigation, it is not possible to predict whether any State General Fund moneys
eventually might be required to repay the rate reduction bonds. It is also not
possible to predict what effect, if any, passage of Proposition 9 will have on
the marketability of outstanding California State and local obligations or on
the availability of capital for, or cost of, future State and local borrowing.
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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.
The State's reliance on information technology in every aspect of its
operations has made Year 2000-related ("Y2K") information technology issues a
high priority for the State. The Department of Information Technology ("DOIT"),
an independent office reporting directly to the Governor, is responsible for
ensuring the State's information technology processes are fully functional
before the year 2000. The DOIT has created a Year 2000 Task Force and a
California 2000 Office to establish statewide policy requirements, to gather,
coordinate, and share information, and to monitor statewide progress. In
December 1996, the DOIT began requiring departments to report on Y2K activities
and currently requires departmental monthly reporting of Y2K status. The DOIT
has emphasized to departments that efforts should be focused on applications
that support mission-critical business practices.
Although the DOIT reports that State departments are making substantial
progress overall toward the goal of Y2K compliance, the task is very large and
will likely encounter unexpected difficulties. The State has not predicted
whether all mission critical systems will be ready and tested by late 1999 or
what impact failure of any particular system(s) or of outside interfaces with
State systems might have. There can be no assurance that steps being taken by
California state or local government agencies with respect to the Year 2000
problem will be sufficient to avoid any adverse impact upon the budgets or
operations of those agencies or upon the Fund.
ADDITIONAL ISSUERS
GUAM
Guam is governed by the Organic Act of 1950, which granted the island
statutory local power of self-government and made the inhabitants of Guam
citizens of the United States. As of the 1990 Census, the Territory's population
was 133,152. As of 1998, the population is estimated to be 163,517, according to
the Guam Annual Economic Review (1996-1997) published by the Guam Department of
Commerce ("Annual Review"). Guam has recently increased its efforts to have the
U.S. Congress reevaluate its status as a territory and anticipates holding a
vote on the issue of whether Guamenians desire statehood, independence or free
association.
The economy of Guam is heavily influenced by the significant U.S. military
presence on the island. Military downsizing has been in effect since 1993 and
was most dramatic during the implementation of the 1995 Base Realignment and
Closure (BRAC). Between 1993 and 1997, Guam faced reductions of approximately
40% of its military's active duty and civilian employment, according to the
Annual Review. Guam has also
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struggled to recuperate from the devastation of Super Typhoon Paka, which cost
Guam approximately $600,000,000, as stated in a December 17, 1997 report by the
Office of the Governor of Guam. Finally, Asia's economic crisis has negatively
affected Guam's tourism industry, although there are some signs of revival.
Visitor arrivals totaled 312,787 in the first quarter of 1998, a 13.8% decrease
from the same time period in 1997 and a 2.3% increase over the fourth quarter of
1997, according to the Guam Economic Review, vol. 20, no. 1, (January-March
1998) ("Economic Review"). The Services, Retail and Transportation sectors,
which are heavily affected by the tourism trends, together account for more than
34,000 jobs or 70% of the private sector workforce as of 1997, according to the
Annual Review. Employment in these three sectors has increased by over 13% since
1994, according to the Annual Review.
As of April 1998, Guam's overall unemployment rate was at 6%, a temporary
drop from the 1997 year end unemployment rate of 8.2%. The drop was due in large
part to the temporary disaster unemployment program, according to the Economic
Review. Guam's inflation rate for 1997 was calculated at one-tenth of one
percent, as compared to the national rate of 1.7% during that same period,
according to the Economic Review.
To bolster its economy, Guam hopes to establish itself as an insurance and
financial services hub in the Pacific. To this end, Guam passed a law in October
1997 that provides tax breaks for the insurance industry. In addition, Guam has
been successful in promoting its telecommunications industry, according to the
Economic Review. Guam has been included in the North American Numbering Plan,
under which calls between Guam and the U.S. have domestic rates; privatized the
Guam Telephone Authority; and developed modern communications infrastructure.
Guam anticipates a slower than expected reduction in the General Fund
deficit, in part due to two local laws and the federal Taxpayer Relief Act of
1997, which are estimated will reduce the amount of money available for General
Fund appropriations by approximately one-third, according to the Annual Review.
The Annual Review reports a budget deficit of $75 million at October, 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. It is anticipated that in the
next year, Puerto Ricans will vote on whether they wish to remain a
commonwealth, be independent, become a state or chose Free Association. The
ultimate outcome will depend on the U.S. Congress and will shape the future of
the Puerto Rican economy.
Since World War II, Puerto Rico has transitioned from a poor, agrarian
economy to a more urbanized manufacturing and service based economy. Personal
income has increased both aggregate and per capita each year from 1985 through
1996, according to a report by the Puerto Rican Department of Treasury. Gross
product has increased each year from fiscal year 1992 through 1996, with a 3.2%
increase ($32 billion) as of 1997. Real GNP growth slowed to approximately 2.5%
as of the fiscal year ended June 30, 1998 and is projected to rise to around
2.6-2.8% in fiscal year ending 1999, according to a September 2, 1998 report of
the Economist Intelligence Unit (EIU Report). The rate of unemployment decreased
from 16.5% for the fiscal year 1992 to 13.1% for the fiscal year ended June 30,
1997, according to the Puerto Rico Department of Labor and Human Resources
Household Survey (PR DOL Survey). As of September 1997, 13.5% of the Puerto
Rican labor force was unemployed, according to the PR DOL Survey and that figure
is expected to rise to around 14% by the end of 1999, according to the EIU
Report. This figure can be compared to the 5% unemployment rate for the United
States during 1997, as reported by the US Department of Labor, Bureau of Labor
Statistics. In the past year, the competition from cheaper labor in other
countries resulted in the closing of various companies, particularly in the
textile sector. In addition, the recent Hurricane Georges may harm Puerto Rico's
economy in the upcoming fiscal year.
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 the 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. The
Banco Popular Index of the Puerto Rico economy showed slow growth with
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intermittent drops during the period between September, 1997 and March, 1998.
Banco Popular analysts attribute this to downturns in the manufacturing sector,
which were offset by some growth in the construction and tourism sectors.
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 the
Puerto Rico. According to Banco Popular Reports, many companies have expressed
interest in a new industrial incentives law (Law 135), which is aimed at
counteracting problems associated with the Section 936 phase-out. To meet the
phase-out challenges, the Puerto Rico Government is also focusing on improving
both tourism and capital markets and creating an agro-industry. The hope is to
fortify San Juan as a financial hub which could place Puerto Rico as a gateway
to the North American Free Trade Association. To these ends, Puerto Rico has
embarked on a large scale infrastructure program to encourage local business,
including roadwork improvements, new highways, upgrading the island's transport
facilities, a $1.8 billion project to overhaul the aqueduct and sewer system and
a $1.6 billion metropolitan train. In 1997, the Gross Domestic Product grew by
3.2%, a total of $32 billion. In addition, the Puerto Rico Government has begun
privatization of industries, such as the sale of the Puerto Rico telephone
company in July 1998 and anticipates similar sales of healthcare facilities.
Financial operations of recent years have reflected general economic trends,
with fiscal improvements registered during good economic times and deterioration
during slowdown. As of June 30, 1993, Puerto Rico'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 Virgin
Islands are heavily dependent on links with the U.S. mainland and more than 90%
of the trade is conducted with Puerto Rico and the United States. 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. Total
government employment fell slightly in 1997 to 13,680 from 14,060 in 1996.
Federal and local government employment is expected to remain stable through the
end of 1998, according to an August 7, 1998 report by the Bureau of Economic
Research of the Government Development Bank for the Virgin Islands (BER).
Recent hurricanes have been serious setbacks, although there are some signs
that the Virgin Islands is recovering and returning to a more normal growth
phase. Between January 1994 and June 1996, there was a 15.5% drop in private
sector jobs and a 9% drop overall. The 1997 Virgin Islands Department of Labor's
Current Employment Statistics Report shows that there was a total of 43,380 jobs
in the territory, compared to 43,370 jobs in 1996. Of the 43,380 jobs, 29,700
were in the private sector and 13,680 were in the public sector. The Virgin
Island's overall unemployment rate increased from 5.2% in 1996 to 5.9% in 1997.
St. Croix's unemployment rate increased from 4.8% in 1996 to 6.7% in 1997. St.
Thomas and St. John, on the other hand, registered a decline in the unemployment
rate from 5.5% in 1996 to 5.3% in 1997. The overall increase in unemployment has
been attributed to an increase in labor force participation as workers seek to
reenter the workforce rather than to extensive job losses. Early 1998 showed a
steady expansion in employment and employment is forecast to grow during fiscal
year 1999 by 3%, according to the BER.
Tourism is the predominant source of employment and income for the Islands.
In 1997, the Virgin Islands recorded over 2.1 million visitors, an increase of
17% over the 1996 total of 1.8 million visitors. The rate of air arrivals is
expected to grow by 10% by the end of fiscal year 1998 and the BER forecasts 10%
rate of growth in air arrivals, with a 23% increase over 1996. The BER
anticipates cruise passenger arrivals to increase by up to 11% in fiscal year
1999. Nonetheless, total visitor expenditures dropped from $688 million in 1996
to $601 million in 1997.
Manufacturing employment has shown limited growth in 1998 and is expected to
show an overall annual increase of 3% by fiscal year end. HOVIC, the largest
manufacturer in the Virgin Islands, has entered into a joint venture with
Petroleus de Venezuela, S.A. (PDVSA) in an effort to overcome a seven year
history of losses and as
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a result will invest $500 million to design and construct a coker. Approximately
2,000 new jobs are expected to be created at the peak of the three-year
construction period, which will begin in early 1999. The BER foresees employment
growth in the manufacturing sector to reach 15% during the fiscal year 1999.
Construction growth in 1996 rose 84% as the Virgin Islands faced the task of
rebuilding after hurricane MARILYN in 1996. As this construction decreased, the
construction industry lost approximately 600 jobs, which resulted in a decline
of 24% by 1997. The BER predicts that the construction sector will resume growth
in fiscal year 1999, and may result in up to a 34% increase in the sector as a
result of new hotel and tourist facility development and the HOVIC/PDVSA
construction projects.
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; (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 or (4) for the
California Money Market Series, the put is unrated, but (i) the put is written
by a person that, directly or indirectly, controls, is controlled by or is under
common control with the issuer of the underlying security (other than a sponsor
of a special purpose entity with respect to an asset backed security), (ii) the
put relates to a fully collateralized repurchase agreement, (iii) the put is
backed by the U.S. Government or (iv) the put is not relied upon for quality,
maturity or liquidity purposes.
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 Commission.
HEDGING STRATEGIES
Each series (other than the California Money Market Series) is authorized to
purchase and sell certain derivatives, including financial futures contracts
(futures contracts) and options thereon for the purpose of attempting to hedge
its investment in municipal obligations against fluctuations in value caused by
changes in prevailing market interest rates and attempting to hedge against
increases in the cost of securities the series intends to purchase. A series,
and thus an investor, may lose money through unsuccessful use of these
strategies. The successful use of futures contracts and options thereon by a
series involves additional transaction costs, is subject to various risks and
depends upon the investment adviser's ability to predict the direction of the
market and interest rates.
Each series engaging 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
will do so in accordance with the rules and regulations of the Commodity Futures
Trading Commission (the CFTC). The series also intend to engage in such
transactions when they are economically appropriate for the reduction of risks
inherent in the ongoing management of the series. A series may purchase and sell
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futures contracts and options thereon for bona fide hedging transactions, except
that a series may purchase and sell futures contracts and options thereon for
any other purpose to the extent that the aggregate initial margin and option
premiums do not exceed 5% of the liquidation value of the series' total assets.
In addition, a series may not purchase or sell futures contracts or purchase
options thereon if, immediately thereafter, 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. There are no limitations on the percentage of a portfolio which may be
hedged and no limitations on the use of a 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 a series' assets.
FUTURES CONTRACTS. A futures contract obligates the seller of a contract to
deliver to the purchaser of a 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. A 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 California Series and the California Income Series (but not the
California Money Market Series) may engage in transactions in financial futures
contracts as a hedge against interest rate related fluctuations in the value of
securities which are held in the investment portfolio or which the California
Series or the California Income Series intends to purchase. A clearing
corporation associated with the commodities exchange on which a futures contract
trades assumes responsibility for the completion of transactions and guarantees
that open futures contracts will be closed. Although interest rate futures
contracts call for actual delivery or acceptance of debt securities, in most
cases the contracts are closed out before the settlement date without the making
or taking of delivery.
When the futures contract is entered into, each party deposits with a broker
or in a segregated custodial account approximately 5% of the contract amount,
called the initial margin. Subsequent payments to and 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.
Currently, futures contracts are available on several types of fixed-income
securities, including U.S. Treasury Bonds and Notes, Government National
Mortgage Association modified pass-through mortgage-backed securities,
three-month U.S. Treasury Bills and bank certificates of deposit. 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. Each
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 investments
in municipal obligations.
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
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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 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 HEDGING STRATEGIES
Participation in the options or futures markets involves investment risks
and transaction costs to which the California Series and California Income
Series would not be subject absent the use of these strategies. Each such
series, and thus its investors, may lose money through the unsuccessful use of
these strategies. If the investment adviser's predictions of movements in the
direction of the securities and interest rate markets are inaccurate, the
adverse consequences to the series may leave the series in a worse position than
if such strategies were not used. Risks inherent in the use of options and
futures contracts and options on futures contracts include (1) dependence on the
investment adviser's ability to predict correctly movements in the direction of
interest rates and securities prices; (2) imperfect correlation between the
price of options and futures contracts and options thereon and movements in the
prices of the securities or currencies being hedged; (3) the fact that skills
needed to use these strategies are different from those needed to select
portfolio securities; (4) the possible absence of a liquid secondary market for
any particular instrument at any time; and (5) the possible inability of the
series to purchase or sell a portfolio security at a time that otherwise would
be favorable for it to do so, or the possible need for the fund to sell a
portfolio security at a disadvantageous time, due to the need for the series to
maintain cover or to segregate securities in connection with hedging
transactions.
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A series may sell a futures contract to protect against the decline in the
value of securities held by the series. However, it is possible that the futures
market may advance and the value of securities held in the series' portfolio may
decline. If this were to occur, the series would lose money on the futures
contracts and also experience a decline in value in its portfolio securities.
When a series purchases a futures contract to hedge against the increase in
value of securities it intends to buy, and the value of such securities
decreases, then the series may determine not to invest in the securities as
planned and will realize a loss on the futures contract that is not offset by a
reduction in the price of the securities.
There is a risk that the prices of securities subject to futures contracts
(and thereby the futures contract prices) may correlate imperfectly with the
behavior of the cash prices of the series' portfolio securities. Another such
risk is that prices of futures contracts may not move in tandem with the changes
in prevailing interest rates against which the series seeks a hedge. A
correlation may also be distorted by the fact that the futures market is
dominated by short-term traders seeking to profit from the difference between a
contract or security price objective and their cost of borrowed funds. Such
distortions are generally minor and would diminish as the contract approached
maturity.
There may exist an imperfect correlation between the price movements of
futures contracts purchased by the series and the movements in the prices of the
securities which are the subject of the hedge. If participants in the futures
market elect to close out their contracts through offsetting transactions rather
than meet margin deposit requirements, distortions in the normal relationships
between the debt securities and futures market could result. Price distortions
could also result if transactions due to the resultant reduction in the
liquidity of the futures market. In addition, due to the fact that, from the
point of view of speculators, the deposit requirement in the futures markets are
less onerous than margin requirements in the cash market, increased
participation by speculators in the futures markets could cause temporary price
distortions. Due to the possibility of price distortions in the futures market
and because of the imperfect correlation between movements in the prices of
securities (or currencies) and movements in the prices of futures contracts, a
correct forecast of interest rate trends by the investment adviser may still not
result in a successful hedging transaction.
The risk of imperfect correlation increases as the composition of a series'
securities portfolio diverges from the securities that are the subject of the
futures contract, for example, those included in the municipal index. Because
the change in price of the futures contract may be more or less than the change
in prices of the underlying securities, even a correct forecast of interest rate
changes may not result in a successful hedging transaction.
Pursuant to the requirements of the Commodity Exchange Act, all futures
contracts and options thereon must be traded on an exchange. Each series intends
to purchase and sell futures contracts only on exchanges where there appears to
be a market in such futures sufficiently active to accommodate the volume of its
trading activity. The series' ability to establish and close out positions in
futures contracts and options on futures contracts would be impacted by the
liquidity of these exchanges. Although the series generally would purchase or
sell only those futures contracts and options thereon for which there appeared
to be a liquid market, there is no assurance that a liquid market on an exchange
will exist for any particular futures contract or option at any particular time.
In the event no liquid market exists for a particular futures contract or option
thereon in which the series maintains a position, it would not be possible to
effect a closing transaction in that contract or to do so at a satisfactory
price and the series would have to either make or take delivery under the
futures contract or, in the case of a written call option, wait to sell
underlying securities until the option expired or was exercised or, in the case
of a purchased option, exercise the option and comply with the margin
requirements for the underlying futures contract to realize any profit. In the
case of a futures contract or an option on a futures contract which the series
had written and which the series was unable to close, the series would be
required to maintain margin deposits on the futures contract or option and to
make variation margin payments until the contract was closed. In the event
futures contracts have been sold to hedge portfolio securities, such securities
will not be sold until the offsetting futures contracts can be executed.
Similarly, in the event futures have been bought to hedge anticipated securities
purchases, such purchases will not be executed until the offsetting futures
contracts can be sold.
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Exchanges on which futures and related options trade may impose limits on
the positions that a series may take in certain circumstances. In addition, the
hours of trading of financial futures contracts and options thereon may not
conform to the hours during which the series may trade the underlying
securities. To the extent the futures markets close before the securities
markets, significant price and rate movements can take place in the securities
markets that cannot be reflected in the futures markets.
As described above, under regulations of the Commodity Exchange Act,
investment companies registered under the Investment Company Act are exempt from
the definition of commodity pool operator, subject to compliance with certain
conditions. Each series may purchase and sell futures and related options
contracts without limit for BONA FIDE hedging purchases within the meaning of
the regulations of the CFTC.
In order to determine that a series is entering into transactions in futures
contracts for hedging purposes as such term is defined by the CFTC, either:
(1) a substantial majority (that is, approximately 75%) of all anticipatory
hedge transactions (transactions in which the series does not own at the time of
the transaction, but expects to acquire, the securities underlying the relevant
futures contract) involving the purchase of futures contracts will be completed
by the purchase of securities, which are the subject of the hedge, or (2) the
underlying value of all long positions in futures contracts will not exceed the
total value of (a) all short-term debt obligations held by the series; (b) cash
held by the series; (c) cash proceeds due to the series on investments within
thirty days; (d) the margin deposited on the contracts; and (e) any unrealized
appreciation in the value of the contracts.
If a series holds a long position in a futures contract, it will hold cash
or liquid assets equal to the purchase price of the contract (less the amount of
initial or variation margin on deposit) in a segregated account. Alternatively,
the series could cover its long position by purchasing a put option on the same
futures contract with an exercise price as high or higher than the price of the
contract held by the series.
Exchanges limit the amount by which the price of a futures contract may move
on any day. If the price moves equal the daily limit on successive days, then it
may prove impossible to liquidate a futures position until the daily limit moves
have ceased. In the event of adverse price movements, the series would continue
to be required to make daily cash payments of variation margin on open futures
positions. In such situations, if the series has insufficient cash, it may be
disadvantageous to do so. In addition, the series may be required to take or
make delivery of the instruments underlying futures contracts it holds at a time
when it is disadvantageous to do so. The ability to close out options and
futures positions could also have an adverse impact on the series' ability to
effectively hedge its portfolio.
In the event of the bankruptcy of a broker through which the series engages
in transactions in futures or options thereon, the series could experience
delays and/or losses in liquidating open positions purchased or sold through the
broker and/or incur a loss of all or part of its margin deposits with the
broker. Transactions are entered into by the series only with brokers or
financial institutions deemed creditworthy by the investment adviser.
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.
B-17
<PAGE>
Reasons for the absence of a liquid secondary market on an exchange include
the following: (1) there may be insufficient trading interest in certain
options; (2) restrictions may be imposed by an exchange on opening transactions
or closing transactions or both; (3) trading halts, suspensions or other
restrictions may be imposed with respect to particular classes or series of
options or underlying securities; (4) unusual or unforeseen circumstances may
interrupt normal operations on an exchange; (5) the facilities of an exchange
may not at all times be adequate to handle current trading volume; or (6) one or
more exchanges could, for economic or other reasons, decide or be compelled at
some future date to discontinue the trading of options (or a particular class or
series of options), in which event the secondary market on that exchange (or in
that class or series of options) would cease to exist, although outstanding
options on that exchange could continue to be exercisable in accordance with
their terms.
There is no assurance that higher than anticipated trading activity or other
unforeseen events might not, at times, render certain clearing facilities
inadequate, and thereby result in the institution by an exchange of special
procedures which may interfere with the timely execution of customers' orders.
INTEREST RATE SWAP TRANSACTIONS
Each series (other than the California Money Market Series) may enter into
the interest rate swaps, on either an asset-based or liability-based basis,
depending on whether it is hedging its assets or its liabilities. Under normal
circumstances, the series will enter into interest rate swaps on a net basis,
that is, the two payment streams netted out, with the series receiving or
paying, as the case may be, only the net amount of the two payments. The net
amount of the excess, if any, of the series' obligations over its entitlements
with respect to each interest rate swap will be accrued on a daily basis and an
amount of cash or liquid assets having an aggregate net asset value at least
equal to the accrued excess will be maintained in a segregated account by a
custodian that satisfies the requirements of the Investment Company Act. To the
extent that the series enters into interest rate swaps on other than a net
basis, the amount maintained in a segregated account will be the full amount of
the series' obligations, if any, with respect to such interest rate swaps,
accrued on a daily basis. Inasmuch as segregated accounts are established for
these hedging transactions the investment adviser and the series believe such
obligations do not constitute senior securities. If there is a default by the
other party to such a transaction, the series will have contractual remedies
pursuant to the agreement related to the transaction. The swap market has grown
substantially in recent years with a large number of banks and investment
banking firms acting both as principals and as agents utilizing standardized
swap documentation. As a result, the swap market has become relatively liquid.
The series will enter into interest rate swaps only with parties meeting
creditworthiness standards approved by the Fund's Board of Trustees. The
investment adviser will monitor the creditworthiness of such parties under the
supervision of the Board of Trustees.
The use of interest rate swaps is highly speculative activity which involves
investment techniques and risks different from those associated with ordinary
portfolio securities transactions. If the investment adviser is incorrect in its
forecast of market values, interest rates and other applicable factors, the
investment performance of the Fund would diminish compared to what it would have
been if this investment technique was never used.
The series may only enter into interest rate swaps to hedge its portfolio.
Interest rate swaps do not involve the delivery of securities or other
underlying assets or principal. Accordingly, the risk of loss with respect to
interest rates swaps is limited to the net amount of interest payments that the
series is contractually obligated to make. If the other party to an interest
rate swap defaults, the series' risk of loss consists of the net amount of
interest payments that the series is contractually entitled to receive. Since
interest rate swaps are individually negotiated, the series expects to achieve
an acceptable degree of correlation between its rights to receive interest on
its portfolio securities and its rights and obligations to receive and pay
interest pursuant to interest rate swaps.
HIGH YIELD SECURITIES (CALIFORNIA INCOME SERIES ONLY)
The California Income Series may also invest up to 30% of its total assets
in tax-exempt securities 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 California Income
Series Prospectus. Such lower-
B-18
<PAGE>
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 Securities" below. Subsequent to its
purchase by the Series, a security 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-related securities.
RISK FACTORS RELATING TO INVESTING IN HIGH YIELD SECURITIES. 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
California Income 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 securities 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 death 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 NAV. 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 California
Income 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 rated
securities, resulting in a decline in the overall credit quality of the
portfolio and increasing the exposure of the Series to the risks of high yield
securities.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES
Each series may purchase tax-exempt securities on a when-issued or delayed
delivery basis. When tax-exempt securities are offered 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, but delivery and payment for the securities take
place at a later date. The purchase price for the security includes interest
accrued during the period between purchase and settlement and, therefore, no
B-19
<PAGE>
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. As a result, the price that a
series is required to pay on the settlement date may exceed the market value of
the security on that date.
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 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 "Taxes,
Dividends and Distributions" below. If the seller defaults in the sale, a series
could fail to realize the gain, if any, that had occurred.
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.
INSURANCE
EACH SERIES MAY PURCHASE SECONDARY MARKET INSURANCE ON SECURITIES. Secondary
market insurance would be reflected in the market value of the security
purchased and may enable the series to dispose of a defaulted obligation at a
price similar to that of comparable securities 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 securities held by a 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 securities caused by changes in interest rates and other factors, nor in
turn against fluctuations in the NAV of the shares of the series.
MUNICIPAL LEASE OBLIGATIONS
Each of the California Series and California Income Series may 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 (for example,
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. See "Illiquid Securities" below.
B-20
<PAGE>
MUNICIPAL ASSET BACKED SECURITIES
Each series may invest in municipal asset backed securities. A municipal
asset backed security is a debt or equity interest in a trust, special purpose
corporation or other pass-through structure, the interest or income on which
generally is eligible for exclusion from federal income taxation based upon the
income from an underlying pool of municipal bonds.
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. If a series were to exceed
this limit, the investment adviser would take reasonable measures to reduce the
series' holdings in illiquid securities to no more than 15% (10% in the case of
the California Money Market Series) of its net assets within seven days,
including the sale of such securities. Illiquid securities include 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, including municipal
lease obligations, that have a readily available market are not considered
illiquid for purposes of this limitation. The Subadviser will monitor the
liquidity of such restricted securities under the supervision of the Trustees.
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
Each 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 repurchase agreement. 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.
B-21
<PAGE>
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 Commission. 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.
BORROWING
Each 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. Each
series may pledge up to 33 1/3% of the value of its total assets to secure these
borrowings. If a series' asset coverage for borrowings falls below 300%, the
series will take prompt action to reduce its borrowings. If the 300% asset
coverage should decline as a result of market fluctuations or other reasons, the
series may be required to sell portfolio securities to reduce the debt and
restore the 300% asset coverage, even though it may be disadvantageous from an
investment standpoint to sell securities at that time. A series will not
purchase securities if its borrowings exceed 5% of its total assets.
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.
(d) TEMPORARY DEFENSIVE STRATEGY
When the investment adviser believes that market conditions warrant a
temporary defensive investment posture or when necessary to meet large
redemptions, a series may hold more than 20% of its net assets in cash, cash
equivalents or investment grade taxable obligations. The California Money Market
Series may also invest in investment grade taxable obligations, except that its
debt obligations, 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). Investing heavily in cash, cash equivalents, or investment grade
taxable obligations can limit our ability to achieve a series' investment
objective, but can help to preserve a series' assets.
(e) PORTFOLIO TURNOVER
Portfolio transactions will be undertaken principally to accomplish the
objective of the series in relation to anticipated movements in the general
level of interest rates but each such series may also engage in short-term
trading consistent with its objective. Securities may be sold in anticipation of
a market decline (a rise in interest rates) or purchased in anticipation of a
market rise (a decline in interest rates) and later sold. In addition, a
security may be sold and another purchased at approximately the same time to
take advantage of what the investment adviser believes to be a temporary
disparity in the normal yield relationship between the two securities. Yield
disparities may occur for reasons not directly related to the investment quality
of particular issues or the general movement of interest rates, due to such
factors as changes in the overall demand for or supply of various types of
tax-exempt securities or changes in the investment objectives of investors.
The series' investment policies may lead to frequent changes in investments,
particularly in periods of rapidly fluctuating interest rates. A change in
securities held by a series is known as portfolio turnover and may involve the
payment by the series of dealer mark-ups or underwriting commissions, and other
transaction costs, on the sale of securities, as well as on the reinvestment of
the proceeds in other securities. Portfolio turnover rate for a fiscal year is
the ratio of the lesser of purchases or sales of portfolio securities to the
monthly average of the value of portfolio securities -- excluding securities
whose maturities at acquisition were one year or less. The series' portfolio
turnover rate will not be a limiting factor when the series deem it desirable to
sell or purchase securities.
SEGREGATED ACCOUNTS
When each series is required to segregate assets in connection with certain
hedging transactions, it will mark cash or other liquid assets as segregated
with the Fund's Custodian. "Liquid Assets" means cash, U.S. Government
securities, debt obligations or other eligible liquid, unencumbered assets,
marked-to-market daily.
B-22
<PAGE>
INVESTMENT RESTRICTIONS
The following restrictions are fundamental policies. Fundamental policies
are those which cannot be changed without the approval of the holders of a
majority of the outstanding voting securities of a series. A "majority of the
outstanding voting securities" of a series, when used in this Statement of
Additional Information, means the lesser of (i) 67% of the voting shares
represented at a meeting at which more than 50% of the outstanding voting shares
are present in person or represented by proxy or (ii) more than 50% of the
outstanding voting shares.
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.
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.
For purposes of investment limitation number 4, the California Money Market
Series' compliance with Investment Company Act Rule 2a-7's diversification
requirements is deemed to constitute compliance with the stated diversification
restriction, which reflects the requirements of Section 5(b)(1) of the
Investment Company Act.
Whenever any fundamental investment policy or investment restriction states
a maximum percentage of a series' assets, it is intended that if the percentage
limitation is met at the time the investment is made, a later change in
percentage resulting from changing total or net asset values will not be
considered a violation of such policy. However, in the event that the series'
asset coverage for borrowings falls below 300%, the series will take prompt
action to reduce its borrowings, as required by applicable law.
B-23
<PAGE>
MANAGEMENT OF THE FUND
<TABLE>
<CAPTION>
NAME AND ADDRESS** (AGE) POSITION WITH FUND PRINCIPAL OCCUPATION DURING PAST FIVE YEARS
-------------------------------------------------- ------------------ --------------------------------------------------
<C> <S> <C> <C>
Edward D. Beach (74).............................. Trustee President and Director of BMC Fund, Inc., a
closed-end investment company; formerly, Vice
Chairman of Broyhill Furniture Industries, Inc.;
Certified Public Accountant; Secretary and
Treasurer of Broyhill Family Foundation, Inc.;
Member of the Board of Trustees of Mars Hill
College; Director of The High Yield Income
Fund, Inc.
Eugene C. Dorsey (72)............................. Trustee Retired President, Chief Executive Officer and
Trustee of the Gannett Foundation (now Freedom
Forum); former Publisher of four Gannett
newspapers and Vice President of Gannett
Company; past Chairman of Independent Sector
(national coalition of philanthropic
organizations); former Chairman of the American
Council for the Arts; former Director of the
Advisory Board of Chase Manhattan Bank of
Rochester; Director of The High Yield Income
Fund, Inc. and First Financial Fund, Inc.
Delayne Dedrick Gold (61)......................... Trustee Marketing and Management Consultant; Director of
The High Yield Income Fund, Inc.
* Robert F. Gunia (52).............................. Trustee Vice President (since September 1997) of The Pru-
dential Insurance Company of America; Executive
Vice President and Treasurer (since December
1996) of Prudential Investments Fund Management
LLC (PIFM); Senior Vice President (since March
1987) of Prudential Securities Incorporated
(Prudential Securities); formerly Chief
Administrative Officer (July 1990-September
1996), Director (January 1989-September 1996)
and Executive Vice President, Treasurer and
Chief Financial Officer (June 1987-September
1996) of Prudential Mutual Fund Management, Inc.
(PMF); Vice President and Director of The Asia
Pacific Fund, Inc. (since May 1989); Director of
The High Yield Income Fund, Inc.
Thomas T. Mooney (57)............................. Trustee President of the Greater Rochester Metro Chamber
of Commerce; former Rochester City Manager;
Trustee of Center for Governmental
Research, Inc.; Director of Blue Cross of
Rochester, The Business Counsel of New York
State, Executive Service Corps of Rochester,
Monroe County Water Authority, Rochester
Jobs, Inc., Monroe County Industrial Development
Corporation, Northeast Midwest Institute, and
The High Yield Income Fund, Inc.; Director and
Treasurer of First Financial Fund, Inc. and The
High Yield Plus Fund, Inc.
</TABLE>
B-24
<PAGE>
<TABLE>
<CAPTION>
NAME AND ADDRESS** (AGE) POSITION WITH FUND PRINCIPAL OCCUPATION DURING PAST FIVE YEARS
-------------------------------------------------- ------------------ --------------------------------------------------
<C> <S> <C> <C>
Stephen P. Munn (57).............................. Trustee Chairman (since January 1994). Director and
President (since 1988) and Chief Executive Officer
(1988-December 1993) of Carlisle Companies
Incorporated (manufacturer of industrial
products); Director or Trustee of 30 funds
within the Prudential Mutual Funds.
Thomas H. O'Brien (74)............................ Trustee President of O'Brien Associates (financial and
management consultants) (since April 1984);
formerly President of Jamaica Water Securities
Corp. (holding company) (February 1989-August
1990); Chairman and Chief Executive Officer
(September 1987-February 1989) and Director
(September 1987-August 1990) of Jamaica Water
Supply Company; Director and President of
Winthrop Regional Health System and United
Presbyterian Home at Syoset Inc.; Director of
Ridgewood Savings Bank and The High Yield In-
come Fund, Inc.; Trustee of Hofstra University.
David R. Odenath, Jr. (42)........................ Trustee Officer in Charge, President, Chief Executive
Officer and Chief Operating Officer (since June
1999), PIFM; Senior Vice President (since June
1999), Prudential; Senior Vice President (August
1993-May 1999), PaineWebber Group, Inc.;
Director or Trustee of 44 funds within the
Prudential Mutual Funds.
Richard A. Redeker (56)........................... Trustee Formerly President, Chief Executive Officer and
Director (October 1993-September 1996) of
Prudential Mutual Fund Management, Inc.;
Executive Vice President, Director and Member of
the Operating Committee (October 1993-September
1996), Prudential Securities; Director (October
1993-September 1996) of Prudential Securities
Group, Inc.; Executive Vice President (January
1994-September 1996), The Prudential Investment
Corporation; Director (January 1994-September
1996) of Prudential Mutual Fund Distributors,
Inc. PMFD and Prudential Mutual Fund Services,
Inc. (PMFS); prior thereto, Senior Executive
Vice President and Director of Kemper Financial
Services, Inc. (September 1978-September 1993);
President and Director of The High Yield Income
Fund, Inc.
* John R. Strangfeld, Jr. (45)...................... Trustee and Chief Executive Officer, Chairman, President and
President Director of the Prudential Investment Corporation
(since January 1990); Executive Vice President
of the Prudential Global Asset Management Group
of Prudential (since February 1998); Chairman of
Pricoa Capital Group (since August 1989); Chief
Executive Officer of Private Asset Management
Group of Prudential (November 1994-December
1998).
</TABLE>
B-25
<PAGE>
<TABLE>
<CAPTION>
NAME AND ADDRESS** (AGE) POSITION WITH FUND PRINCIPAL OCCUPATION DURING PAST FIVE YEARS
-------------------------------------------------- ------------------ --------------------------------------------------
<C> <S> <C> <C>
Nancy H. Teeters (69)............................. Trustee Economist; formerly Vice President and Chief
Economist (March 1986-June 1990) of International
Business Machines Corporation; Director of
Inland Steel Industries (since July 1991) and
The High Yield Income Fund, Inc.
Louis A. Weil, III (58)........................... Trustee Publisher and Chief Executive Officer (since
January 1996) and Director (since September 1991)
of Central Newspapers Inc.; Chairman (since
January 1996), Publisher and Chief Executive
Officer (August 1991-December 1995) of Phoenix
Newspapers, Inc.; prior thereto, Publisher of
Time Magazine (May 1989-March 1991); President,
Publisher and Chief Executive Officer of The
Detroit News (February 1986-August 1989);
formerly member of the Advisory Board, Chase
Manhattan Bank-Westchester; Director of The High
Yield Income Fund, Inc.
Grace C. Torres (40).............................. Treasurer and First Vice President (since December 1996) of
Principal PIFM; First Vice President (since March 1994) of
Financial and Prudential Securities; formerly First Vice
Accounting President (March 1994-September 1996) of
Officer Prudential Mutual Fund Management, Inc.; and
Vice President (July 1989-March 1994) of Bankers
Trust Corporation.
Stephen M. Ungerman (46).......................... Assistant Tax Director (since March 1996) of Prudential
Treasurer Investments; formerly First Vice President of
Prudential Mutual Fund Management, Inc.
(February 1993-March 1996) and Senior Tax
Manager (1981-January 1993) at Price Waterhouse
LLP.
Deborah A. Docs (41).............................. Secretary Vice President (since December 1996) of PIFM; Vice
President and Associate General Counsel of Pru-
dential Securities (since December 1996); Vice
President and Associate General Counsel (June
1991-September 1996) of PMF.
David F. Connor (35).............................. Assistant Assistant General Counsel (since March 1998) of
Secretary PIFM; Associate Attorney, Drinker Biddle & Reath
LLP prior thereto.
</TABLE>
- ------------
* "Interested" Trustee, as defined in the Investment Company Act, by reason of
his affiliation with Prudential, Prudential Securities or PIFM.
** Unless otherwise noted, the address for each of the above persons is
c/o: Prudential Investments Fund Management LLC, Gateway Center Three,
100 Mulberry Street, 9th Floor, Newark, New Jersey 07102-4077.
Trustees and officers of the Fund are also trustees, directors and officers
of some or all of the other investment companies distributed by Prudential
Securities or Prudential Investment Management Services LLC.
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.
B-26
<PAGE>
The Trustees have adopted a retirement policy which calls for the retirement
of Trustees on December 31 of the year in which they reach the age of 72 except
that retirement is being phased in for Trustees who were age 68 or older as of
December 31, 1993. Under this phase-in provision, Messrs. Beach, Dorsey and
O'Brien are scheduled to retire on December 31, 1999.
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 $[ ], 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.
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
to the Trustees who are not affiliated with the Manager for the fiscal year
ended August 31, 1999 and the aggregate compensation paid to such Trustees for
service on the Fund's Board and that of all other funds managed by PIFM (Fund
Complex) for the calendar year ended December 31, 1998.
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 None N/A $ *
Eugene C. Dorsey, Trustee** None N/A $ *
Delayne Dedrick Gold, Trustee None N/A $ *
Robert F. Gunia, Trustee+ -- None N/A
Mendel A. Melzer, Former Trustee+ -- None N/A
Thomas T. Mooney, Trustee** None N/A $ *
Stephen P. Munn, Trustee
Thomas H. O'Brien, Trustee None N/A $ *
David R. Odenath, Jr., Trustee
Richard A. Redeker, Trustee -- None N/A
Brian M. Storms, Former Trustee+ -- None N/A --
John R. Strangfeld, Jr., Trustee and President+ -- None N/A --
Nancy H. Teeters, Trustee None N/A $ *
Louis A. Weil, III, Trustee None N/A $ *
</TABLE>
- ------------
* Indicates number of funds/portfolios in Fund Complex (including the Fund) to
which aggregate compensation relates.
** Total compensation from all of the funds in the Fund Complex for the
calendar year ended December 31, 1998, includes amounts deferred at the
election of Trustees under the Fund's deferred compensation plans. Including
accrued interest, total compensation amounted to $85,445 and $119,740 for
Eugene C. Dorsey and Thomas T. Mooney, respectively.
+ Robert F. Gunia, Mendel A. Melzer, Brian M. Storms and John R. Strangfeld,
Jr., who are each current or former interested Trustees, do not receive
compensation from the Fund or any other fund in the Fund Complex.
B-27
<PAGE>
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
Trustees of the Fund are eligible to purchase Class Z shares of the Fund,
which are sold without an initial sales charge or contingent deferred sales
charge.
As of December [ ], 1999, the trustees and officers of the Fund, as a
group, owned beneficially less than 1% of the outstanding shares of beneficial
interest of each class of each series of the Fund.
As of December [ ], 1999, the beneficial owners, directly or indirectly, of
more than 5% of the outstanding shares of any class of beneficial interest of a
series were:
As of December [ ], 1999, Prudential Securities was the record holder for
other beneficial owners of [ ] Class A shares (or [ ]% of the
outstanding Class A shares), [ ] Class B shares (or [ ]% of the
outstanding Class B shares), [ ] Class C shares (or [ ]% of the
outstanding Class C shares) and [ ] Class Z shares (or [ ]% of the
outstanding Class Z shares) of the California Series; [ ] Class A
shares (or [ ]% of the outstanding Class A shares), [ ] Class B shares
(or [ ]% of the outstanding Class B shares), [ ] Class C shares (or [ ]%
of the outstanding Class C shares) and [ ] Class Z shares (or [ ]% of
the outstanding Class Z shares) of the California Income Series; and
[ ] shares of the California Money Market Series (or [ ]% 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.
INVESTMENT ADVISORY AND OTHER SERVICES
(a) MANAGER AND INVESTMENT ADVISER
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 Series is Managed -- Manager" in the Prospectus of
each series. As of September 30, 1999, PIFM managed and/or administered open-end
and closed-end management investment companies with assets of approximately
$[ ] billion. According to the Investment Company Institute, as of
[ ], 1999, the Prudential mutual funds were the 18th largest family
of mutual funds in the United States.
PIFM is a subsidiary of Prudential Securities and The Prudential Insurance
Company of America (Prudential). Prudential Mutual Fund Services LLC (PMFS or
the Transfer Agent), a wholly owned subsidiary of PIFM, serves as the transfer
agent for the Prudential mutual funds and, in addition, provides customer
service, recordkeeping and management and administration services to qualified
plans.
Pursuant to the Management Agreement with the Fund (the Management
Agreement), PIFM, subject to the supervision of the Fund's Trustees and in
conformity with the stated policies of the Fund, manages both the investment
operations of each series and the composition of each series' portfolio,
including the purchase, retention, disposition and loan of securities. In
connection therewith, PIFM is obligated to keep certain books and records of the
Fund. PIFM also administers the Fund's business affairs and, in connection
therewith, furnishes the Fund with office facilities, together with those
ordinary clerical and bookkeeping services which are not being furnished by
State Street Bank and Trust Company (the Custodian), the Fund's custodian, and
PMFS, the Fund's transfer and dividend disbursing agent. The management services
of PIFM for the Fund are not exclusive under the terms of the Management
Agreement and PIFM is free to, and does, render management services to others.
B-28
<PAGE>
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, 1999. 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 (PIC, the Subadviser or the investment adviser), pursuant to the
subadvisory agreement between PIFM and PIC (the Subadvisory Agreement).
Under the terms of the Management Agreement, the Fund is responsible for the
payment of the following expenses: (a) the fees payable to the Manager, (b) the
fees and expenses of Trustees who are not affiliated persons of the Manager or
the Fund's investment adviser, (c) the fees and certain expenses of the Fund's
Custodian and Transfer and Dividend Disbursing Agent, including the cost of
providing records to the Manager in connection with its obligation of
maintaining required records of the Fund and of pricing the Fund's shares,
(d) the charges and expenses of the Fund's legal counsel and independent
accountants, (e) brokerage commissions and any issue or transfer taxes
chargeable to the Fund in connection with its securities transactions, (f) all
taxes and corporate fees payable by the Fund to governmental agencies, (g) the
fees of any trade association of which the Fund is a member, (h) the cost of
share certificates representing shares of the Fund, (i) the cost of fidelity and
liability insurance, (j) certain organization expenses of the Fund and the fees
and expenses involved in registering and maintaining registration of the Fund
and of its shares with the Commission and the states, including the preparation
and printing of the Fund's registration statements and prospectuses for such
purposes and paying the fees and expenses of notice filings made in accordance
with state securities laws, (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 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.
For the fiscal years ended August 31, 1997, 1998 and 1999, PIFM received
management fees of $698,397, $766,228 and $[ ], 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 year ended August 31, 1997 amounted to $77,598.
With respect to the California Money Market Series, PIFM received $1,388,598;
$1,436,251 and $[ ] in management fees for the fiscal years ended
B-29
<PAGE>
August 31, 1997, 1998 and 1999, respectively. With respect to the California
Income Series, PIFM waived 10% of its management fee for the fiscal years ended
August 31, 1997 and 1998 and for the period from September 1, 1998 through
May 31, 1999. Effective June 1, 1999, PIFM discontinued its management fee
waiver. For the fiscal years ended August 31, 1997, 1998 and 1999, PIFM received
$891,272, $1,147,925 and $[ ], respectively, in management fees from the
California Income Series. The amount of the fees waived for the years ended
August 31, 1997, 1998 and 1999 amounted to $99,030, $114,792 and $[ ],
respectively.
PIFM has entered into the Subadvisory Agreement with the Subadviser. The
Subadvisory Agreement provides that PIC will furnish investment advisory
services in connection with the management of the Fund. In connection therewith,
PIC is obligated to keep certain books and records of the Fund. Under the
Subadvisory Agreement, PIC, subject to the supervision of PIFM, is responsible
for managing the assets of the Fund in accordance with its investment objectives
and policies. PIC determines what securities and other instruments are purchased
and sold for the Fund and is responsible for obtaining and evaluating financial
data relevant to the Fund. PIFM continues to have responsibility for all
investment advisory services pursuant to the Management Agreement and supervises
PIC's performance of such services. PIC is reimbursed by PIFM for the reasonable
costs and expenses incurred by PIC in furnishing those services.
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 PIC upon not more than 60 days', nor less than
30 days', written notice. The Subadvisory Agreement provides that it will
continue in effect for a period of more than two years from its execution only
so long as such continuance is specifically approved at least annually in
accordance with the requirements of the Investment Company Act.
The Subadviser maintains a credit unit which provides credit analysis and
research on both tax-exempt and taxable fixed-income securities. The portfolio
managers routinely consult with the credit unit in managing the Fund's
portfolios. The credit unit reviews on an ongoing basis issuers of tax-exempt
and taxable fixed-income obligations, including prospective purchases and
portfolio holdings of the Fund. Credit analysts have broad access to research
and financial reports, data retrieval services and industry analysts.
With respect to tax-exempt issuers, credit analysts review financial and
operating statements supplied by state and local governments and other issuers
of municipal securities to evaluate revenue projections and the financial
soundness of municipal issuers. They study the impact of economic and political
developments on state and local governments, evaluate industry sectors and meet
periodically with public officials and other representatives of state and local
governments and other tax-exempt issuers to discuss such matters as budget
projections, debt policy, the strength of the regional economy and, in the case
of revenue bonds, the demand for facilities. They also make site inspections to
review specified projects and to evaluate the progress of construction or the
operation of a facility.
(b) PRINCIPAL UNDERWRITER, DISTRIBUTOR AND RULE 12B-1 PLANS
Prudential Investment Management Services LLC (PIMS or the Distributor),
Gateway Center Three, 100 Mulberry Street, Newark, New Jersey 07102-04077, acts
as the distributor of the shares of the Fund. Prior to June 1, 1998, Prudential
Securities Incorporated (Prudential Securities), was the Fund's distributor.
Pursuant to 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), 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. The Distributor 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 Series is
Managed -- Distributor" in each Prospectus.
The expenses incurred under the Plans include commissions and account
servicing fees paid to or on account of brokers or financial institutions that
have entered into agreements with the Distributor, advertising
B-30
<PAGE>
expenses, the cost of printing and mailing prospectuses to potential investors
and indirect and overhead costs of the Distributor associated with the sale of
Fund shares including lease, utility, communications and sales promotion
expenses.
Under the Plans, the Fund 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 Fund 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.
The distribution and/or service fees may also be used by the Distributor to
compensate on a continuing basis Dealers in consideration for the distribution,
marketing, administrative and other services and activities provided by brokers
with respect to the promotion of the sale of the Fund's shares and the
maintenance of related shareholder accounts.
CLASS A PLAN. Under the Class A Plan, the Fund may pay the Distributor 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
each series. The Class A Plan provides that (1) up to .25 of 1% of the average
daily net assets of the Class A shares of each series may be used to pay for
personal service and/or the maintenance of shareholder accounts (service fee)
and (2) total distribution fees (including the service fee of .25 of 1%) may not
exceed .30 of 1% of each series.
CLASS A PLAN. For the fiscal year ended August 31, 1999, the Distributor
received payments of $[ ] and $[ ] for the California
Series and the California Income Series, respectively, under the Class A Plan.
These amounts were primarily expended for payment of account servicing fees to
financial advisers and other persons who sell Class A shares. For the fiscal
year ended August 31, 1999, the Distributor received approximately
$[ ] 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 AND CLASS C PLANS. Under the Class B and Class C Plans, the Fund
may pay the Distributor 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 asset of the Class B and Class C shares, respectively, of
each series. The Class B Plan provides for the payment to the Distributor of
(1) an asset-based sales charge of up to .50 of 1% of the average daily net
assets of the Class B shares of each series, and (2) a service fee of up to .25
of 1% of the average daily net assets of the Class B shares of each series,
provided that the total distribution-related fee does not exceed .50 of 1% of
each series. The Class C Plan provides for the payment to the Distributor of (1)
an asset-based sales charge of up to .75 of 1% of the average daily net assets
of the Class C shares of each series, and (2) a service fee of up to .25 of 1%
of the average daily net assets of the Class C shares of each series. The
service fee is used to pay for personal service and/or the maintenance of
shareholder accounts.
CLASS B PLAN. For the fiscal year ended August 31, 1999, the Distributor
received $[ ] from the California Series under the Fund's Class B
Plan and spent approximately $[ ] in distributing the Class B shares
of the California Series during such period. For the fiscal year ended
August 31, 1999. The Distributor received $[ ] from the California
Income Series under the Fund's Class B Plan and spent approximately
$[ ] in distributing the Class B shares of the California Income
Series during such period.
For the fiscal year ended August 31, 1999, it is estimated that the
Distributor 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..... $ [ ] $ [ ] $ [ ] $ [ ] $ [ ]
California
Income
Series..... $ [ ] $ [ ] $ [ ] $ [ ] $ [ ]
</TABLE>
B-31
<PAGE>
- ------------
*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.
The Distributor also receives the proceeds of contingent deferred sales
charges paid by investors upon certain redemptions of Class B shares. See "How
to Buy, Sell and Exchange Shares of the Series -- How to Sell Your Shares --
Contingent Deferred Sales Charge (CDSC)" in the Prospectuses of the California
Income Series and the California Series. For the fiscal year ended August 31,
1999, the Distributor received approximately $[ ] and
$[ ] 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, 1999, the Distributor
received $[ ] and $[ ] from the California Income Series
and the California Series, respectively, under the Fund's Class C Plan. For the
fiscal year ended August 31, 1999, the Distributor spent approximately
$[ ] and $[ ] in distributing the Class C shares of the
California Income Series and the California Series, respectively. These amounts
were expended primarily for the payment of account servicing fees. The
Distributor also receives the proceeds of contingent deferred sales charges paid
by investors upon certain redemptions of Class C shares. See "How to Buy, Sell
and Exchange Shares of the Series -- How to Sell Your Shares -- Contingent
Deferred Sales Charge" in the Prospectuses of the California Income Series and
the California Series. For the fiscal year ended August 31, 1999, the
Distributor received approximately $[ ] and $[ ] on
behalf of the California Income Series and the California Series, respectively,
in contingent deferred sales charges attributable to Class C shares.
Distribution expenses attributable to the sale of Class A, Class B and Class
C shares of each series are allocated to each such class based upon the ratio 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.
The Class A, Class B and Class C Plans continue in effect from year to year,
provided that each such continuance is approved at least annually by a vote of
the Trustees, including a majority vote of the Rule 12b-1 Trustees, cast in
person at a meeting called for the purpose of voting on such continuance. The
Plans may each be terminated at any time, without penalty, by the vote of a
majority of the Rule 12b-1 Trustees or by the vote of the holders of a majority
of the outstanding shares of the applicable class on not more than 30 days'
written notice to any other party to the Plans. The Plans may not be amended to
increase materially the amounts to be spent for the services described therein
without approval by the shareholders of the applicable class (by both Class A
and Class B shareholders, voting separately, in the case of material amendments
to the Class A Plan), and all material amendments are required to be approved by
the Trustees in the manner described above. Each Plan will automatically
terminate in the event of its assignment. The Fund will not be contractually
obligated to pay expenses incurred under any Plan if it is terminated or not
continued.
Pursuant to each Plan, the Trustees will review at least quarterly a written
report of the distribution expenses incurred on behalf of each class of shares
of the California Income Series and the California Series by 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
the Distributor to the extent permitted by applicable law against certain
liabilities under federal securities laws.
B-32
<PAGE>
CALIFORNIA MONEY MARKET SERIES PLAN OF DISTRIBUTION. Under the California
Money Market Series' Plan of Distribution (the CMMS 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. For the fiscal year
ended August 31, 1999, the Distributor incurred distribution expenses of
$[ ] with respect to the California Money Market Series, all of
which were recovered by the Distributor through the distribution fee paid by the
California Money Market Series.
FEE WAIVERS/SUBSIDIES
PIFM may from time to time waive all or a portion of its management fee and
subsidize all or a portion of the operating expenses of the Fund. The
Distributor may from time to time waive all or a portion of its distribution
related fees of the Fund. For the fiscal year ending August 31, 2000, the
Distributor has contractually agreed to limit its distribution fees payable
under the Class A and Class C Plans to .25 of 1% and .75 of 1% of Class A and
Class C shares, respectively.
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.
(c) OTHER SERVICE PROVIDERS
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 certain financial and accounting books and
records pursuant to an agreement with the Fund. Subcustodians provide custodial
services for the Fund's foreign assets held outside the United States.
Prudential Mutual Fund Services LLC (PMFS), Raritan Plaza One, Edison, New
Jersey 08837, serves as the transfer and dividend disbursing agent of the Fund.
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, the payment of dividends and distributions and
related functions. For these services, PMFS receives an annual fee of $ per
shareholder account, a new account set-up fee of $ for each manually
established shareholder account and a monthly inactive zero balance account fee
of $. per shareholder account. PMFS is also reimbursed for its out-of-pocket
expenses, including but not limited to postage, stationary, printing, allocable
communication expenses and other costs.
serves as the Fund's independent accountants and in that
capacity audits the Fund's annual financial statements.
BROKERAGE ALLOCATION AND OTHER PRACTICES
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,
B-33
<PAGE>
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 (or any affiliate)
acts as principal except in accordance with rules of the Commission. Thus it
will not deal in the over-the-counter market 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 Commission. This limitation, in the
opinion of the Fund, will not significantly affect the series' ability to pursue
their investment objectives. However, in the future in other circumstances, the
series may be at a disadvantage because of this limitation in comparison to
other funds with similar objectives but not subject to such limitations.
In placing orders for portfolio securities for the Fund, the Manager is
required to give primary consideration to obtaining the most favorable price and
efficient execution. The Manager seeks to effect each transaction at a price and
commission, if any, that provides the most favorable total cost or proceeds
reasonably attainable in the circumstances. Within the framework of this policy,
the Manager will consider the research and investment services provided by
brokers, dealers or futures commission merchants who effect or are parties to
portfolio transactions of the Fund, the Manager or the Manager's other clients.
Such research and investment services are those which brokerage houses
customarily provide to institutional investors and include statistical and
economic data and research reports on particular companies and industries. Such
services are used by the Manager in connection with all of its investment
activities, and some of such services obtained in connection with the execution
of transactions for the Fund may be used in managing other investment accounts.
Conversely, brokers, dealers or futures commission merchants furnishing such
services may be selected for the execution of transactions of such other
accounts, whose aggregate assets are far larger than the Fund, and the services
furnished by such brokers, dealers or futures commission merchants may be used
by the Manager in providing investment management for the Fund. Commission rates
are established pursuant to negotiations with the broker, dealer or futures
commission merchant based on the quality and quantity of execution services
provided by the broker in the light of generally prevailing rates. The Manager's
policy is to pay higher commissions to brokers, dealers or futures commission
merchants other than Prudential Securities, for particular transactions than
might be charged if a different broker had been selected, on occasions when, in
the Manager's opinion, this policy furthers the objective of obtaining best
price and execution. The Manager is 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
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<PAGE>
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, as
amended, Prudential Securities may not retain compensation for effecting
transactions on a national securities exchange for the Fund unless the Fund has
expressly authorized the retention of such compensation. Prudential Securities
must furnish to the Fund at least annually a statement setting forth the total
amount of all compensation retained by Prudential Securities from transactions
effected for the Fund during the applicable period. Brokerage and futures
transactions with Prudential Securities (or any affiliate) are also subject to
such fiduciary standards as may be imposed upon Prudential Securities (or such
affiliate) by applicable law.
During the fiscal years ended August 31, 1997, 1998 and 1999, the California
Series paid brokerage commissions of $[ ], $[ ] and $[ ]
respectively, on certain futures transactions. The California Series paid no
brokerage commissions to the Distributor or any affiliate thereof during those
periods. During the fiscal years ended August 31, 1997, 1998 and 1999, the
California Money Market Series paid no brokerage commissions. During the fiscal
years ended August 31, 1997, 1998 and 1999, the California Income Series paid
brokerage commissions of $[ ], $[ ] and $[ ] respectively. None
of the brokerage commissions paid by the California Income Series were paid to
the Distributor or any affiliate thereof.
The Fund is required to disclose its holdings of its regular brokers and
dealers (as defined under Rule 10b-1 of the Investment Company Act) and their
parents at August 31, 1999. At August 31, 1999, no series held any securities of
its regular brokers and dealers.
CAPITAL SHARES, OTHER SECURITIES AND ORGANIZATION
The Fund is permitted 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
Series and California Income Series are 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 such
series and is identical in all respects except that (1) 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, (2) 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, (3) each class has a different exchange privilege, (4) only
Class B shares have a conversion feature and (5) Class Z shares are offered
exclusively for sale to a limited group of investors. The California Money
Market Series offers only one class of shares. In accordance with the Fund's
Declaration of Trust, the Trustees may authorize the creation of additional
series and classes within a 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. Each share of
each class of a 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 with respect to the non-money market series,
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.
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<PAGE>
The Fund does not intend to hold annual meetings of shareholders unless
otherwise required by law. The Fund will not be required to hold meetings of
shareholders unless, for example, the election of Trustees is required to be
acted upon by shareholders under the Investment Company Act. Shareholders have
certain rights, including the right to call a meeting upon a vote of 10% of the
Fund's outstanding shares for the purpose of voting on the removal of one or
more Trustees or to transact any other business.
The Declaration of Trust and the By-Laws of the Fund are designed to make
the Fund similar in certain respects to a Massachusetts business corporation.
The principal distinction between a Massachusetts business trust and a
Massachusetts business corporation relates to shareholder liability. Under
Massachusetts law, shareholders of a business trust may, under certain
circumstances, be held personally liable as partners for the obligations of the
Fund, which is not the case with a corporation. The Declaration of Trust of the
Fund provides that shareholders shall not be subject to any personal liability
for the acts or obligations of the Fund and that every written obligation,
contract, instrument or undertaking made by the Fund shall contain a provision
to the effect that the shareholders are not individually bound thereunder.
PURCHASE, REDEMPTION AND PRICING 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 (NAV) plus a sales charge which, at the election of the investor, may be
imposed either at the time of purchase, on a deferred basis or both. Class A
shares are sold with a front-end sales charge. Class B shares are subject to a
contingent-deferred sales charge. Class C shares are sold with a low front-end
sales charge, but are also subject to a contingent deferred sales charge. Class
Z shares of the California Series and the California Income Series are offered
to a limited group of investors at NAV without a sales charge. See "How to Buy,
Sell and Exchange Shares of the Series -- How to Buy Shares" in the Prospectuses
of the California Series and the California Income Series.
For a description of the methods of purchasing shares of the California
Money Market Series, see the Prospectus of the California Money Market Series.
PURCHASE BY WIRE. For an initial purchase of shares of the Fund by wire,
you must complete an application and telephone PMFS at (800) 225-1852
(toll-free) to receive an account number. The following information will be
requested: your name, address, tax identification number, class election,
dividend distribution election, amount being wired and wiring bank. Instructions
should then be given by you to your bank to transfer funds by wire to State
Street Bank and Trust Company (State Street), Boston, Massachusetts, Custody and
Shareholder Services Division. Attention: Prudential California Municipal Fund,
specifying on the wire the account number assigned by PMFS and your name and
identifying the series (California, California Income or California Money
Market) and the class in which you are eligible to invest (Class A, Class B,
Class C or Class Z shares for the California and California Income 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 Fund as of that day.
In making a subsequent purchase order by wire, you should wire State Street
directly and should be sure that the wire specifies Prudential California
Municipal Fund, the series, (California, California Income or California Money
Market) the class in which you are eligible to invest (Class A, Class B,
Class C or Class Z shares for the California and California Income Series), 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.
ISSUANCE OF FUND SHARES FOR SECURITIES
Transactions involving the issuance of Fund shares for securities (rather
than cash) will be limited to (1) reorganizations, (2) statutory mergers, or (3)
other acquisitions of portfolio securities that: (a) meet the
B-36
<PAGE>
investment objectives and policies of the Fund, (b) are liquid and not subject
to restrictions on resale, (c) have a value that is readily ascertainable via
listing on or trading in a recognized United States or international exchange or
market, and (d) are approved by the Fund's investment adviser.
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%, Class C shares* are sold with a front-end sales
charge of 1%, and and Class B* and Class Z shares are sold at NAV. Using the NAV
of these Series at August 31, 1999, 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................................... $ $
Maximum initial sales charge (3% of offering price)......................................
--------- ---------
Offering price to public................................................................. $ $
========= =========
CLASS B
- -----------------------------------------------------------------------------------------
Net asset value, offering price and redemption price per Class B share*.................. $ $
========= =========
CLASS C
- -----------------------------------------------------------------------------------------
Net asset value and redemption price per Class C share................................... $ $
Maximum initial sales charge (1% of offering price)**....................................
--------- ---------
Offering price to public................................................................. $ $
========= =========
CLASS Z
- -----------------------------------------------------------------------------------------
Net asset value, offering price and redemption price per Class Z share................... $ $
========= =========
</TABLE>
- ------------
* Class B and Class C shares are subject to a contingent deferred sales charge
on certain redemptions. See "How to Buy, Sell and Exchange Shares of the
Series -- How to Sell Your Shares -- Contingent Deferred Sales Charge (CDSC)"
in the Prospectus of each applicable Series.
SELECTING A PURCHASE ALTERNATIVE (CALIFORNIA SERIES AND CALIFORNIA INCOME SERIES
ONLY)
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 California Series and California Income
Series:
If you intend to hold your investment in a series for less than 3 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 more than 3 years, but less than 4
years, or for more than 5 years, but less than 6 years, you should consider
purchasing Class A shares, because the maximum 3% initial sales charge plus the
cumulative annual distribution-related fee on Class A shares would be lower
than: (i) the CDSC plus the cumulative annual distribution-related fee on Class
B shares; and (ii) the 1% initial sales charge plus the cumulative annual
distribution-related fee on Class C shares.
If you intend to hold your investment for more than 4 years, but less than 5
years, you may consider purchasing Class A or Class B shares because: (i) the
maximum 3% initial sales charge plus the cumulative annual distribution-related
fee on Class A shares and (ii) the CDSC charge plus the cumulative annual
distribution-related fee on Class B shares would be lower than the 1% initial
sales charge plus the cumulative annual distribution-related fee on Class C
shares.
B-37
<PAGE>
If you intend to hold your investment for more than 6 years 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 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 3
years for the 1% initial sales charge plus the higher cumulative annual
distribution-related fee on the Class C shares to exceed the initial sales
charge plus cumulative annual distribution-related fees on Class A shares. This
does not take into account the time value of money, which further reduces the
impact of the higher Class C distribution-related fee on the investment,
fluctuations in NAV, the effect of the return on the investment over this period
of time or redemptions when the CDSC is applicable.
REDUCTION AND WAIVER OF INITIAL SALES CHARGES -- CLASS A SHARES
Class A shares may be purchased at NAV, through the Distributor or the
Transfer Agent by:
- officers of the Prudential Mutual Funds (including the Fund),
- employees of the Distributor, Prudential Securities, 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,
- employees or subadvisers of the Prudential mutual funds provided that
purchases at NAV are permitted by such person's employer,
- members of the Board of Directors of The Prudential Insurance Company of
America,
- 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,
- registered representatives and employees of brokers who have entered into
a selected dealer agreement with the Distributor provided that purchases
at NAV are permitted by such person's employer,
- investors who have a business relationship with a financial adviser who
joined Prudential Securities from another investment firm, provided that
(1) the purchase is made within 180 days of the commencement of the
financial adviser's employment at Prudential Securities (2) 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 (3) the financial adviser served as the client's broker on the
previous purchase,
- orders placed by broker-dealers, investment advisers or financial planners
who have entered into an agreement with the Distributor, who place trades
for their own accounts or the accounts of their clients and who charge a
management, consulting or other fee for the services (for example, mutual
fund "wrap" or asset allocation program), and
- orders placed by clients of broker-dealers, investment advisers or
financial planners who place trades for customer accounts if the accounts
are linked to the master account of such broker-dealer, investment adviser
or financial planner and the broker-dealer, investment adviser or
financial planner charges its clients a separate fee for its services (for
example, mutual fund "supermarket programs").
Broker-dealers, investment advisers or financial planners sponsoring
fee-based programs (such as mutual fund "wrap" or asset allocation programs and
mutual fund "supermarket" programs) may offer their clients
B-38
<PAGE>
more than one class of shares in the Fund in connection with different pricing
options for their programs. Investors should consider carefully any separate
transaction and other fees charged by these programs in connection with
investing in each available share class before selecting a share class.
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
"How to Buy, Sell and Exchange Shares of the Series -- Reducing or Waiving
Class A's Initial Sales Charge" in the applicable Prospectus.
An eligible group of related Fund investors includes any combination of the
following:
- an individual;
- the individual's spouse, their children and their parents;
- the individual's and spouse's Individual Retirement Account (IRA);
- 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);
- a trust created by the individual, the beneficiaries of which are the
individual, his or her spouse, parents or children;
- a Uniform Gifts to Minors Act/Uniform Transfers to Minors Act account
created by the individual or the individual's spouse; and
- 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 Transfer Agent, the Distributor or your Dealer 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. The Combined Purchase and Cumulative Purchase Privilege does not apply
to individual participants in any retirement or group plans.
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 your Dealer will not be aggregated to determine the
reduced sales charge. All shares must be held directly with the Transfer Agent
or through your broker. The value of existing holdings for purposes of
determining the reduced sales charge is calculated using the maximum offering
price (NAV plus maximum sales charge) as of the previous business day. See
"Risk/Return Summary -- Evaluating Performance" in the Prospectuses.
The Distributor or the Transfer Agent 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. Rights of Accumulation are not available to individual participants in
any retirement or group plans.
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
B-39
<PAGE>
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 the Distributor and through your
Dealer will not be aggregated to determine the reduced sales charge.
A Letter of Intent permits a purchaser to establish a total investment goal
to be achieved by any number of investments over a thirteen-month period. Each
investment made during the period will receive the reduced sales charge
applicable to the amount represented by the goal, as if it were a single
investment. Escrowed Class A shares totaling 5% of the dollar amount of the
Letter of Intent will be held by the Transfer Agent in the name of the
purchaser. The effective date of a Letter of Intent may be back-dated up to
90 days, in order that any investments made during this 90-day period, valued at
the purchaser's cost, can be applied to the fulfillment of the Letter of Intent
goal.
The Letter of Intent does not obligate the investor to purchase, nor the
California Series or the California Income Series to sell, the indicated amount.
In the event the Letter of Intent goal is not achieved within the thirteen-month
period, the purchaser is required to pay the difference between the sales charge
otherwise applicable to the purchases made during this period and sales charges
actually paid. Such payment may be made directly to the Distributor or, if not
paid, the Distributor will liquidate sufficient escrowed shares to obtain such
difference. Investors electing to purchase Class A shares of the California
Series or the California Income Series pursuant to a Letter of Intent should
carefully read such Letter of Intent.
CLASS B SHARES
The offering price of Class B shares for investors choosing one of the
deferred sales charge alternatives is the NAV next determined following receipt
of an order in proper form by the Transfer Agent, your broker or the
Distributor. Redemptions of Class B shares may be subject to a CDSC. See
"Contingent Deferred Sales Charges" below.
The Distributor will pay, from its own resources, sales commissions of up to
4% of the purchase price of Class B shares to brokers, financial advisers and
other persons who sell Class B shares at the time of sale. 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.
CLASS C SHARES
The offering price of Class C shares is the next determined NAV plus a 1%
sales charge. In connection with the sale of Class C shares, the Distributor
will pay, from its own resources, brokers, financial advisers and other persons
which distribute Class C shares a sales commission of up to 2% of the purchase
price at the time of the sale.
WAIVER OF INITIAL SALES CHARGE -- CLASS C SHARES
INVESTMENT OF REDEMPTION PROCEEDS FROM OTHER INVESTMENT COMPANIES. Investors
may purchase Class C shares at NAV, without the initial sales charge, with the
proceeds from the redemption of shares of any unaffiliated registered investment
company which were not held through an account with any Prudential affiliate.
Such purchases must be made within 60 days of the redemption. Investors eligible
for this waiver include: (1) investors purchasing shares through an account at
Prudential Securities; (2) investors purchasing shares through an ADVANTAGE
Account or an Investor Account with Prusec; and (3) investors purchasing shares
through other brokers. This waiver is not available to investors who purchase
shares directly from the Transfer Agent. You must notify the Transfer Agent
directly or through your broker if you are entitled to this waiver and provide
the Transfer Agent with such supporting documents as it may deem appropriate.
B-40
<PAGE>
CLASS Z SHARES
MUTUAL FUND PROGRAMS. Class Z shares can be purchased by participants in any
fee-based program or trust program sponsored by Prudential or an affiliate that
includes the Fund as an available option. Class Z shares can also be purchased
by investors in certain programs sponsored by broker-dealers, investment
advisers and financial planners who have agreements with Prudential Investments
Advisory Group relating to:
- Mutual fund "wrap" or asset allocation programs, where the sponsor places
Fund trades, links its clients' accounts to a master account in the
sponsor's name and charges its clients a management, consulting or other
fee for its services; and
- Mutual fund "supermarket" programs, where the sponsor links its clients'
accounts to a master account in the sponsor's name and the sponsor charges
a fee for its services
Broker-dealers, investment advisers or financial planners sponsoring these
mutual fund programs may offer their clients more than one class of shares in
the Fund in connection with different pricing options for their programs.
Investors should consider carefully any separate transaction and other fees
charged by these programs in connection with investing in each available share
class before selecting a share class.
OTHER TYPES OF INVESTORS. Class Z shares of the California Series and
California Income Series currently are also available for purchase by the
following categories of investors:
- certain participants in the MEDLEY Program (group variable annuity
contracts) sponsored by an affiliate of the Distributor for whom Class Z
shares of the Prudential mutual funds are an available investment option;
- current and former Directors/Trustees of the Prudential Mutual Funds
(including the Fund); and
- Prudential with an investment of $10 million or more.
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 from its own resources based on a
percentage of the net asset value of shares sold by such persons.
SALE OF SHARES
You can redeem your shares at any time for cash at the NAV next determined
after the redemption request is received in proper form (in accordance with
procedures established by the Transfer Agent in connection with investors'
accounts) by the Transfer Agent, the Distributor or your broker. In certain
cases, however, redemption proceeds will be reduced by the amount of any
applicable CDSC, as described below. See "Contingent Deferred Sales Charges"
below. If you are redeeming your shares through a broker, your broker must
receive your sell order before the Fund computes its NAV for the day (that is,
4:15 P.M., New York time) in order to receive that day's NAV. Your broker will
be responsible for furnishing all necessary documentation to the Distributor and
may charge you for its services in connection with redeeming shares of the Fund.
If you hold shares of the Fund through Prudential Securities, you must
redeem your 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, the Distributor or your
broker 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, the Distributor or to your broker.
SIGNATURE GUARANTEE. If the proceeds of the redemption (1) exceed $50,000,
(2) are to be paid to a person other than the record owner, (3) are to be sent
to an address other than the address on the Transfer Agent's records, or
(4) 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."
B-41
<PAGE>
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 inquires 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. In the case of redemptions from a PruArray Plan, if the
proceeds of the redemption are invested in another investment option of the plan
in the name of the record holder and at the time same address as reflected in
the Transfer Agent's records, a signature is not required.
Payment for shares presented for redemption will be made by check within
seven days after receipt by the Transfer Agent, the Distributor or your broker
of the certificate and/or written request, except as indicated below. If you
hold shares through a broker payment for shares presented for redemption will be
credited to your account at your broker, unless you indicate otherwise. Such
payment may be postponed or the right of redemption suspended at times (1) when
the New York Stock Exchange is closed for other than customary weekends and
holidays, (2) when trading on such Exchange is restricted, (3) when an emergency
exists as a result of which disposal by the Fund of securities owned by it is
not reasonably practicable or it is not reasonably practicable for the Fund
fairly to determine the value of its net assets, or (4) during any other period
when the Commission, by order, so permits; provided that applicable rules and
regulations of the Commission shall govern as to whether the conditions
prescribed in (2), (3) or (4) 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, which may take 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 Fund, in lieu of cash, in conformity with applicable rules of the
Commission. Securities will be readily marketable and will be valued in the same
manner as in a regular redemption. If your shares are redeemed in kind, you
would 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 NAV 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 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 CDSC 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 Fund 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 on a PRO RATA basis). You must notify the Transfer Agent, either
directly or through the Distributor or your broker, 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 the redemption.
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 18 months of purchase (or one year in the case of shares
purchased prior to November 2, 1998) 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 reduced the current value of
your Class B or Class C shares to an amount which is
B-42
<PAGE>
lower than the amount of all payments by you for shares during the preceding six
years, in the case of Class B shares, and 18 months, in the case of Class C
shares (one year for Class C shares purchased before November 2, 1998). 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 CDSC will be paid to and retained by the
Distributor.
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 as money market fund. See
"Shareholder Investment Account -- Exchange Privilege" below.
The following table sets forth the rates of the CDSC applicable to
redemption of Class B shares:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED SALES
CHARGE AS A PERCENTAGE
YEAR SHARES 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 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 distribution; then of
amounts representing the increase in NAV above the total amount of payments for
the purchase of Fund 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 represent 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 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
Trustees of the Fund.
B-43
<PAGE>
You must notify the Fund's Transfer Agent either directly or through your
broker, 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.
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.
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 date of your purchase or, for shares purchased prior to March 1,
1999, on March 1 of the current year. The CDSC will be waived (or reduced) on
redemptions until this threshold 12% is reached.
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
purchased 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 Transfer Agent, the Distributor or your Dealer, 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.
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
B-44
<PAGE>
the automatic reinvestment of dividends and other distributions) (the Eligible
Shares) will be determined on each conversion date in accordance with the
following formula: (1) 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 (2)
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 (that is, $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 NAV 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.
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 would 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 (1) 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
Service Code and (2) 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 Fund will continue to be subject, possibly indefinitely,
to their higher annual distribution and service fee.
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
B-45
<PAGE>
cash payment representing a dividend or distribution may reinvest such dividend
or distribution at NAV 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
NAV next determined after receipt of the check or proceeds by the Transfer
Agent. Such shareholders will receive credit for any CDSC 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 the relative NAV 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.
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, on 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 next determined after the request is received in
good order.
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.
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.
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.
B-46
<PAGE>
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.
Prudential Tax-Free Money Fund, Inc.
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 sales charge will be
payable upon such exchange, but a CDSC may be payable upon the redemption of the
Class B and Class C shares acquired as a result of the exchange. The applicable
sales charge will be that imposed by the fund in which shares were initially
purchased and the purchase date will be deemed to be the first day of the month
after the initial purchase, rather than the date of the exchange.
Class B and Class C shares of the California Income Series and the
California Series may also be exchanged for shares of 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.
SPECIAL EXCHANGE PRIVILEGES. A special exchange privilege is available for
shareholders who qualify to purchase Class A shares at NAV and for shareholders
who qualify to purchase Class Z shares. 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 will have their
Class B and Class C shares
B-47
<PAGE>
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 and Class C shares which are not subject to a CDSC include
the following: (1) amounts representing Class B or Class C shares acquired
pursuant to the automatic reinvestment of dividends and distributions,
(2) amounts representing the increase in the net asset value above the total
amount of payments for the purchase of Class B or Class C shares and
(3) amounts representing Class B and Class C shares held beyond the applicable
CDSC period. Class B and Class C shareholders must notify the Transfer Agent
either directly or through Prudential Securities, Prusec or another broker that
they are eligible for this special exchange privilege.
Participants in any fee-based program for which a series 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.
Additional details about the exchange privilege and prospectuses for each of
the Prudential mutual funds are available from the Transfer Agent, the
Distributor or your Dealer. 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. See "How to Buy, Sell and Exchange Shares of the Series -- How to
Exchange Your Shares -- Frequent Trading" in the Prospectus.
DOLLAR COST AVERAGING (NOT APPLICABLE TO CALIFORNIA MONEY MARKET SERIES)
Dollar cost averaging is a method of accumulating shares by investing a
fixed amount of dollars in shares at set intervals. An investor buys more shares
when the price is low and fewer shares when the price is high. The average cost
per share is lower than it would be if a constant number of shares were bought
at set intervals.
Dollar cost averaging may be used, for example, to plan for retirement, to
save for a major expenditure, such as the purchase of a home, or to finance a
college education. The cost of a year's education at a four-year college today
averages around $14,000 at a private college and around $6,000 at a public
university. Assuming these costs increase at a rate of 7% a year, as has been
projected, for the freshman class beginning in 2011, the cost of four years at a
private college could reach $210,000 and over $90,000 at a public university.(1)
The following chart shows how much you would need in monthly investments to
achieve specified lump sums to finance your investment goals.(2)
<TABLE>
<CAPTION>
PERIOD OF
MONTHLY INVESTMENTS: $100,000 $150,000 $200,000 $250,000
- -------------------------------------------------- --------- --------- --------- ---------
<S> <C> <C> <C> <C>
25 Years.......................................... $ 110 $ 165 $ 220 $ 275
20 Years.......................................... 176 264 352 440
15 Years.......................................... 296 444 592 740
10 Years.......................................... 555 833 1,110 1,388
5 Years.......................................... 1,371 2,057 2,742 3,428
See "Automatic Investment Plan (AIP) below."
</TABLE>
- ------------
(1) Source information concerning the costs of education at public and
private universities is available from The College Board Annual Survey of
Colleges, 1993. Average costs for private institutions include tuition, fees,
room and board for the 1993-94 academic year.
(2) The chart assumes an effective rate of return of 8% (assuming monthly
compounding). This example is for illustrative purposes only and is not intended
to reflect the performance of an investment in shares of the Fund. The
investment return and principal value of an investment will fluctuate so that an
investor's shares when redeemed may be worth more or less than their original
cost.
B-48
<PAGE>
AUTOMATIC INVESTMENT PLAN (AIP)
Under AIP, 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 AIP participants.
Further information about this program and an application form can be
obtained from the Transfer Agent, the Distributor or your broker.
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 "How to Buy, Sell and Exchange Shares of the
Series -- How to Sell Your Shares -- Contingent Deferred Sales Charge" in the
Prospectus of each applicable Series.
In the case of shares held through the Transfer Agent, (1) a $10,000 minimum
account value applies, (2) withdrawals may not be for less than $100 and
(3) the shareholder must elect to have all dividends and distributions
automatically reinvested in additional full and fractional shares at NAV on
shares held under the plan. See "Automatic Reinvestment of Dividends and/or
Distributions above."
The Distributor, the Transfer Agent or your broker acts as an agent 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 (1) the purchase of Class
A and Class C shares and (2) the redemption of Class B and Class C shares. Each
shareholder should consult his or her own tax adviser with regard to the tax
consequences of the systematic withdrawal plan.
HOW TO REDEEM SHARES OF THE CALIFORNIA MONEY MARKET SERIES
Redemption orders submitted to and received by Prudential Mutual Fund
Services 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 money market series) may use Check Redemption,
Expedited Redemption or Regular Redemption.
CHECK REDEMPTION
Shareholders are subject to the Custodian's rules and regulations governing
checking accounts, including the right of the Custodian not to honor checks in
amounts exceeding the value of the shareholder's account at the time the check
is presented for payment.
Shares for which certificates have been issued are not available for
redemption to cover checks. A shareholder should be certain that adequate shares
for which certificates have not been issued are in his or her account to cover
the amount of the check. Also, shares purchased by check are not available to
cover checks until 10 days after receipt of the purchase check by PMFS unless
the Fund or PMFS has been advised that the purchase check has been honored. Such
delay may be avoided by purchasing shares by certified or official bank checks
or by wire. If insufficient shares are in the account, or if the purchase was
made by check within 10
B-49
<PAGE>
days, the check is returned marked "insufficient funds." Since the dollar value
of an account is constantly changing, it is not possible for a shareholder to
determine in advance the total value of his or her account so as to write a
check for the redemption of the entire account.
There is a service charge of $5.00 payable to PMFS to establish a checking
account and to order checks. The Custodian and the Fund have reserved the right
to modify this checking account privilege or to impose a charge for each check
presented for payment for any individual account or for all accounts in the
future.
The Fund or PMFS may terminate Check Redemption at any time upon 30 days'
notice to participating shareholders. To receive further information, contact
Prudential Mutual Fund Services 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 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 PROGRAM
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, for example, 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, Prudential/Pruco Securities Representative, or
other
B-50
<PAGE>
Dealer 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 NAV 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. NAV is calculated separately for each class. The Fund will
compute its NAV 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 NAV. In the event the New
York Stock Exchange closes early on any business day, the NAV 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). The New York Stock
Exchange is closed on the following holidays: New Year's Day, Martin Luther
King, Jr. Day, President's Day, Good Friday, Memorial Day, Independence Day,
Labor Day, Thanksgiving Day, and Christmas Day.
Portfolio securities for which market quotations are readily available are
valued at their bid quotations. When market quotations are not readily
available, such securities and other assets are valued at fair value in
accordance with procedures adopted by the Trustees. Under these procedures, the
Fund values municipal securities on the basis of valuations provided by a
pricing service which uses information with respect to transactions in bonds,
quotations from bond dealers, market transactions in comparable securities and
various relationships between securities in determining value. The Trustees
believe that reliable market quotations are generally not readily available for
purposes of valuing tax-exempt securities. As a result, depending on the
particular tax-exempt securities owned by the Fund, it is likely that most of
the valuations for such securities will be based upon fair value determined
under the foregoing procedures. Short-term instruments which mature in less than
60 days are valued at amortized cost, if their original term to maturity was
less than 60 days, or are valued at amortized cost on the 60th day prior to
maturity if their original term to maturity when acquired by the Fund was more
than 60 days, unless this is determined not to represent fair value by the
Trustees.
The California Money Market Series uses the amortized cost method to
determine the value of its portfolio securities in accordance with regulations
of the Commission. The amortized cost method involves valuing a security at its
cost and amortizing any discount or premium over the period until maturity. The
method does not take into account unrealized capital gains and losses which may
result from the effect of fluctuating interest rates on the market value of the
security.
With respect to the California Money Market Series, the Trustees have
determined to maintain a dollar-weighted average portfolio maturity of 90 days
or less, to purchase instruments having remaining maturities of thirteen months
or less and to invest only in securities determined by the investment adviser
under the supervision of the Trustees to present minimal credit risks and to be
of eligible quality in accordance with regulations of the SEC. The Trustees have
adopted procedures designed to stabilize, to the extent reasonably possible, the
California Money Market Series' price per share as computed for the purpose of
sales and redemptions at $1.00. Such procedures will include review of the
California Money Market Series' portfolio holdings by the Trustees, at such
intervals as they may deem appropriate, to determine whether the California
Money Market Series' net asset value calculated by using available market
quotations deviates from $1.00 per share based on amortized cost. The extent of
any deviation will be examined by the Trustees. If such deviation exceeds 1/2 of
1%, the Trustees will promptly consider what action, if any, will be initiated.
In the event the Trustees determine that a deviation exists which may result in
material dilution or other unfair results to prospective investors or existing
shareholders, the Trustees will take such corrective action as they consider
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 NAV.
B-51
<PAGE>
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, 1999 was [ ]%, [ ]%, [ ]% and [ ]%,
respectively. The California Income Series' yield for its Class A, Class B,
Class C and Class Z shares for the 30 days ended August 31, 1999 was [ ]%,
[ ]%, [ ]% and [ ]%, respectively.
Yield fluctuates and an annualized yield quotation is not a representation
by the Fund as to what an investment in the Fund will actually yield for any
given period.
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, 1999, 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
[ ]%, [ ]%, [ ]% and [ ]%, respectively. 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, 1998 was
[ ]%, [ ]%, [ ]% and [ ]%, respectively.
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 "Risk/Return Summary--Evaluating Performance" in
the Prospectus of each applicable Series.
Average annual total return is computed according to the following formula:
P(1+T)TO THE POWER OF n = ERV
Where: P = a hypothetical initial payment of $1000.
T = average annual total return.
n = number of years.
ERV = Ending Redeemable Value at the end of the 1, 5 or 10 year
periods (or fractional portion thereof) of a hypothetical
$1000 payment made at the beginning of the 1, 5 or 10 year
periods.
Average annual total return takes into account any applicable initial or
contingent deferred sales charges but does not take into account any federal or
state income taxes that may be payable upon redemption.
B-52
<PAGE>
The California Series' average annual total returns for the periods ended
August 31, 1999 are as follows:
<TABLE>
<CAPTION>
CLASS A CLASS B
----------------------------------- ---------------------
ONE FIVE FROM INCEPTION ONE FIVE TEN
YEAR YEARS INCEPTION DATE YEAR YEARS YEARS
----- ----- -------- -------- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Average Annual Total Return........ [ ]% [ ]% [ ]% 1/22/90 [ ]% [ ]% [ ]%
Average Annual Total Return without
Subsidy/Waiver.................... N/A [ ]% [ ]% 1/22/90 N/A [ ]% [ ]%
<CAPTION>
CLASS C CLASS Z
-------------------------------------- ------------------------------
ONE FIVE FROM INCEPTION ONE FROM INCEPTION
YEAR YEARS INCEPTION DATE YEAR INCEPTION DATE
-------- ----- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Average Annual Total Return........ [ ]% [ ]% [ ]% 8/1/94 [ ]% [ ]% 9/18/96
Average Annual Total Return without
Subsidy/Waiver.................... N/A [ ]% [ ]% 8/1/94 N/A [ ]% 9/18/96
</TABLE>
The California Income Series' average annual total returns for the periods
ended August 31, 1999 are as follows:
<TABLE>
<CAPTION>
CLASS A CLASS B
------------------------------------ -----------------------------
ONE FIVE FROM INCEPTION ONE FROM INCEPTION
YEAR YEARS INCEPTION DATE YEAR INCEPTION DATE
----- ----- --------- --------- ----- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Average Annual Total Return................................. [ ]% [ ]% [ ]% 12/3/90 [ ]% [ ]% 12/7/93
Average Annual Total Return without Subsidy/Waiver.......... [ ]% [ ]% [ ]% 12/3/90 [ ]% [ ]% 12/7/93
<CAPTION>
CLASS C CLASS Z
------------------------------------ -----------------------------
ONE FIVE FROM INCEPTION ONE FROM INCEPTION
YEAR YEARS INCEPTION DATE YEAR INCEPTION DATE
----- ----- --------- --------- ----- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Average Annual Total Return................................. [ ]% [ ]% [ ]% 8/1/94 [ ]% [ ]% 9/18/96
Average Annual Total Return without Subsidy/Waiver.......... [ ]% [ ]% [ ]% 8/1/94 [ ]% [ ]% 9/18/96
</TABLE>
AGGREGATE TOTAL RETURN. Each of the California Series and California Income
Series may also advertise its aggregate total return. Aggregate total return is
determined separately for Class A, Class B, Class C and Class Z shares. See
"Risk/Return Summary--Evaluating 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.
The California Series' aggregate total returns for the periods ended
August 31, 1998 are as follows:
<TABLE>
<CAPTION>
CLASS A CLASS B
----------------------------------- ---------------------
ONE FIVE FROM INCEPTION ONE FIVE TEN
YEAR YEARS INCEPTION DATE YEAR YEARS YEARS
----- ----- -------- -------- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Aggregate Total Return........ [ ]% [ ]% [ ]% 1/22/90 [ ]% [ ]% [ ]%
Aggregate Total Return without
Subsidy/Waiver............... N/A [ ]% [ ]% 1/22/90 N/A [ ]% [ ]%
<CAPTION>
CLASS C CLASS Z
-------------------------------------- ------------------------------
ONE FIVE FROM INCEPTION ONE FROM INCEPTION
YEAR YEARS INCEPTION DATE YEAR INCEPTION DATE
-------- ----- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Aggregate Total Return........ [ ]% [ ]% [ ]% 8/1/94 [ ]% [ ]% 9/18/96
Aggregate Total Return without
Subsidy/Waiver............... N/A [ ]% [ ]% 8/1/94 N/A [ ]% 9/18/96
</TABLE>
The California Income Series' aggregate total returns for the periods ended
August 31, 1997 are as follows:
<TABLE>
<CAPTION>
CLASS A CLASS B
------------------------------------- -----------------------------
ONE FIVE FROM INCEPTION ONE FROM INCEPTION
YEAR YEARS INCEPTION DATE YEAR INCEPTION DATE
----- ------ --------- --------- ----- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Aggregate Total Return............................ [ ]% [ ]% [ ]% 12/3/90 [ ]% [ ]% 12/7/93
Aggregate Total Return without Subsidy/Waiver..... [ ]% [ ]% [ ]% 12/3/90 [ ]% [ ]% 12/7/93
<CAPTION>
CLASS C CLASS Z
------------------------------------- -----------------------------
ONE FIVE FROM INCEPTION ONE FROM INCEPTION
YEAR YEARS INCEPTION DATE YEAR INCEPTION DATE
----- ------ --------- --------- ----- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Aggregate Total Return............................ [ ]% [ ]% [ ]% 8/1/94 [ ]% [ ]% 9/18/96
Aggregate Total Return without Subsidy/Waiver..... [ ]% [ ]% [ ]% 8/1/94 [ ]% [ ]% 9/18/96
</TABLE>
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
B-53
<PAGE>
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, 1999 was [ ]% and [ ]%, 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, 1999 was [ ]%.
Comparative performance information may be used from time to time in
advertising or marketing the California Money Market Series' shares, including
data from Lipper Analytical Services, Inc., IBC/Donoghue's Money Fund Report or
other industry publications.
The California Money Market Series' yield fluctuates, and an annualized
yield quotation is not a representation by the California Money Market Series as
to what an investment in the California Money Market Series will actually yield
for any given period. Yield for the California Money Market Series will vary
based on a number of factors including changes in market conditions, and level
of interest rates and the level of California Money Market Series income and
expenses.
From time to time, the performance of the series may be measured against
various indices. Set forth below is a chart which compares the performance of
different types of investments over the long-term and the rate of inflation. (1)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
PERFORMANCE
COMPARISON OF DIFFERENT TYPES OF INVESTENTS
OVER THE LONG TERM
(12/31/25-12/31/98)
Common Stocks 11.2%
Long-Term Gov't. Bonds 5.3%
Inflation 3.1%
</TABLE>
(1) Source: Ibbotson Associates, "Stocks, Bonds, Bills and Inflation -- 1999
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.
B-54
<PAGE>
TAXES, DIVIDENDS AND DISTRIBUTIONS
DISTRIBUTIONS
All of the Fund's net investment income is declared as a dividend each
business day. Shares will begin earning dividends on the day following the date
on which the shares are issued, the date of issuance customarily being the
"settlement" date. Shares continue to earn dividends until they are redeemed.
Unless the shareholder elects (by notice to the Dividend Disbursing Agent by the
first business day of the month) to receive monthly cash payments of dividends,
such dividends will be automatically received in additional Fund shares monthly
at net asset value on the payable date. In the event an investor redeems all the
shares in his or her account at any time during the month, all dividends
declared to the date of redemption will be paid to him or her at the time of the
redemption. The Fund's net investment income on weekends, holidays and other
days on which the Fund is closed for business will be declared as a dividend on
shares outstanding on the close of the last previous business day on which the
Fund is open for business. Accordingly, a shareholder of the California Series
and the California Income Series who redeems his or her shares effective as of
4:15 P.M. (4:30 P.M. for the California Money Market Series), New York time, on
a Friday earns a dividend which reflects the income earned by the Fund on the
following Saturday and Sunday. On the other hand, an investor in the California
Series and the California Income Series whose purchase order is effective as of
4:15 P.M. (4:30 P.M. for the California Money Market Series), New York time, on
a Friday does not begin earning dividends until the following business day. For
series other than California Money Market Series, net investment income consists
of interest income accrued on portfolio securities less all expenses, calculated
daily. For the California Money Market Series, net investment income consists of
interest income accrued on portfolio securities less all expenses, calculated
daily plus/minus any capital gains/losses.
Net realized capital gains, if any, will be distributed annually and, unless
the shareholder elects to receive them in cash, will be automatically received
in additional shares of the series.
The per share dividends on Class B and Class C shares of the California
Series and the California Income Series will be lower than the per share
dividends on Class A shares of the California Series and the California Income
Series, respectively, as a result of the higher distribution-related fee
applicable to the Class B 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" above.
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
B-55
<PAGE>
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.
Qualification as a regulated investment company will be determined at the
level of each series and not at the level of the Fund. Accordingly, the
determination of whether any particular series qualifies as a regulated
investment company will be based on the activities of that series, including the
purchases and sales of securities and the income received and expenses incurred
in that Series. Net capital gains of a series which are available for
distribution to shareholders will be computed by taking into account any capital
loss carryforward of the series.
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 may 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.
The alternative minimum tax is a tax equal to 20% of a corporation's
so-called alternative minimum taxable income and 28% of a non-corporate
taxpayer's so-called alternative minimum taxable income. Individual taxpayers
may reduce their alternative minimum taxable income by a standard exemption
amount of $45,000 if filing a joint return ($33,750 if filing singly), although
the exemption amount is reduced for taxpayers with adjusted gross incomes of
more than $150,000 ($112,500 if filing singly). Alternative minimum taxable
income is determined by adding to the taxpayer's regularly-computed taxable
income items of tax preference and certain other adjustments. All shareholders
should consult their tax advisers to determine whether their investment in the
Fund will cause them to incur liability for the alternative minimum tax.
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
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.
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. Original issue discount that accrues in a taxable year is
treated as income earned by a series and therefore is subject to the
distribution requirements of
B-56
<PAGE>
the Internal Revenue Code. Because the original issue discount income earned by
the series in a taxable year may not be represented by cash income, the series
may have to dispose of other securities and use the proceeds to make
distributions to satisfy the Internal Revenue Code's distribution requirements.
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. Code Section 1259 may require the recognition
of gain (but not loss) if a series makes a "constructive sale" of an appreciated
financial position.
Each series gains and losses on the sale, lapse, or other termination of
call options it holds on financial futures contracts will generally be treated
as gains and losses from the sale of financial futures contracts. If call
options written by a series expire unexercised, the premiums received by the
series give rise to short-term capital gains at the time of expiration. Each
series may also have short-term gains and losses associated with closing
transactions with respect to call options written by them. If call options
written by a series are exercised, the selling price of the financial futures
contract is increased by the amount of the premium received by the series, and
the character of the capital gain or loss on the sale of the futures contract
depending on the contract's holding period.
Upon the exercise of a put held by a series, the premium initially paid for
the put is offset against the amount received for the futures contract, bond or
note sold pursuant to the put thereby decreasing any gain (or increasing any
loss) realized on the sale. Generally, such gain or loss is capital gain or
loss, the character of which depends on the holding period of the futures
contract, bond or note. However, in certain cases in which the put is not
acquired on the same day as the underlying securities identified to be used in
the put's exercise, gain on the exercise, sale or disposition of the put is
short-term capital gain. If a put is sold prior to exercise, any gain or loss
recognized by a series would be capital gain or loss, depending on the holding
period of the put. If a put expires unexercised, a series would realize
short-term or long-term capital loss, the character of which depends on the
holding period of the put, in an amount equal to the premium paid for the put.
In certain cases in which the put and securities identified to be used in its
exercise are acquired on the same day, however, the premium paid for the
unexercised put is added to the basis of the identified securities.
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 20% with respect to asset gains recognized by a series. 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-57
<PAGE>
Any gain or loss realized upon a sale, redemption or exchange of shares of a
series by a shareholders who is not a dealer in securities will be treated as
capital gain or loss. Any such capital gain or loss will be treated as a
long-term capital gain or loss if the shares were held for more than 12 months.
Any short-term capital loss realized upon the sale, redemption or exchange
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-58
<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.
B-59
<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-60
<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-61
<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.
STANDARD DEVIATION
Standard Deviation is an absolute (non-relative) measure of volatility
which, for a mutual fund, depicts how widely the returns varied over a certain
period of time. When a fund has a high standard deviation, its range of
performance has been very wide, implying greater volatility potential. Standard
deviation is only one of several measures of a fund's volatility.
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 shows the long-term performance of various asset classes and the
rate of inflation.
EACH INVESTMENT PROVIDES A DIFFERENT OPPORTUNITY
VALUE OF $1.00 INVESTED ON 1/1/26 THROUGH 12/31/98
SMALL STOCKS -- $5,519.97
COMMON STOCKS -- $1,828.33
LONG-TERM BONDS -- $39.07
TREASURY BILLS -- $14.25
INFLATION -- $9.02
Source: Stocks, Bonds, Bills and Inflation 1999 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 1988
through 1998. 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 "Risk/Return Summary -- Fees and 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.
<TABLE>
<CAPTION>
'89 '90 '91 '92 '93 '94 '95 '96 '97 '98
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. GOVERNMENT
TREASURY
BONDS(1) 14.4% 8.5% 15.3% 7.2% 10.7% (3.4)% 18.4% 2.7% 9.6% 10.0%
- ----------------------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT
MORTGAGE
SECURITIES(2) 15.4% 10.7% 15.7% 7.0% 6.8% (1.6)% 16.8% 5.4% 9.5% 7.0%
- ----------------------------------------------------------------------------------------------------------------------------
U.S. INVESTMENT GRADE
CORPORATE
BONDS(3) 14.1% 7.1% 18.5% 8.7% 12.2% (3.9)% 22.3% 3.3% 10.2% 8.6%
- ----------------------------------------------------------------------------------------------------------------------------
U.S.
HIGH YIELD
CORPORATE
BONDS(4) 0.8% (9.6)% 46.2% 15.8% 17.1% (1.0)% 19.2% 11.4% 12.8% 1.6%
- ----------------------------------------------------------------------------------------------------------------------------
WORLD
GOVERNMENT
BONDS(5) (3.4)% 15.3% 16.2% 4.8% 15.1% 6.0% 19.6% 4.1% (4.3)% 5.3%
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
DIFFERENCE BETWEEN HIGHEST AND
LOWEST RETURN PERCENT 18.8 24.9 30.9 11.0 10.3 9.9 5.5 8.7% 17.1% 8.4%
</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. Data retrieved from Lipper,
Inc.
(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 SMITH BARNEY 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.
[CHART]
- ------------
Source: Stocks, Bonds, Bills, and Inflation 1999 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 1926-1998. 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 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 Series 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,
1997 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,
1997. Prudential (together with its subsidiaries) employs almost 79,000 persons
worldwide, and maintains a sales force of approximately 11,500 agents and nearly
6,500 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 life insurance, Prudential has 25 million
life insurance policies in force today with a face value of almost $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, 1997, Prudential had more than $370 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 $211 billion in
assets of institutions and individuals. In INDIVIDUAL INVESTOR, July 1998,
Prudential was ranked eighth in terms of total assets under management as of
December 1997.
REAL ESTATE. The Prudential Real Estate Affiliates is one of the leading,
real estate residential and commercial brokerage networks in North America and
has more than 37,000 real estate brokers and agents and with over 1,400 offices
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 4.9
million Americans receive healthcare from a Prudential managed care
membership.(3)
FINANCIAL SERVICES. The Prudential Bank (FSB), a wholly-owned subsidiary of
Prudential, has over $4 billion in assets and serves nearly 1.5 million
customers across 50 states.
INFORMATION ABOUT THE PRUDENTIAL MUTUAL FUNDS
As of November 30, 1998, Prudential Investments Fund Management was the
eighteenth 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
- ------------
(1) PIC serves as the Subadviser to substantially all of the Prudential mutual
funds. Wellington Management Company serves as the subadviser to Global
Utility Fund, Inc., Nicholas-Applegate Capital Management as the subadviser
to Nicholas-Applegate Fund, Inc., Jennison Associates LLC as one of the
subadvisers to The Prudential Investment Portfolios, Inc., and Mercator
Asset Management LP as the Subadviser to International Stock Series, a
portfolio of Prudential World Fund, Inc. There are multiple subadvisers for
The Target Portfolio Trust.
(2) As of December 31, 1997.
(3) On December 10, 1998, Prudential announced its intention to sell Prudential
Health Care to Aetna, Inc. for $1 billion.
III-1
<PAGE>
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. Prudential Equity Fund is managed with a "value" investment
style by PIC. In 1995, Prudential Securities introduced Prudential Jennison
Growth 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
approximately 200 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.(4) 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. Investment grade bond analysts monitor the financial
viability of 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 billions in U.S. and foreign government
securities a year. PIC seeks information from government policy makers.
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.
INFORMATION ABOUT PRUDENTIAL SECURITIES
Prudential Securities is the fifth largest retail brokerage firm in the
United States with approximately 6,000 financial advisors. It offers to its
clients a wide range of products, including Prudential mutual funds and
Annuities. As of December 31, 1998, assets held by Prudential Securities for its
clients approximated $268 billion. During 1998, over 31,000 new customer
accounts were opened each month at Prudential Securities.(5)
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 and financial planning
areas.
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/Financial Advisers-SM-, to evaluate a client's objectives
and overall financial plan, and a comprehensive mutual fund information and
analysis system that compares different mutual funds.
For more complete information about any of the Prudential mutual funds,
including charges and expenses, call your Prudential Securities financial
adviser or Pruco/Prudential representative for a free prospectus. Read it
carefully before you invest or send money.
- ------------
(4)As of December 31, 1997, the number of bonds and the size of the Fund are
subject to change.
(5) As of December 31, 1998.
III-2
<PAGE>
PART C
OTHER INFORMATION
ITEM 23. EXHIBITS.
(a) (1) 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).)
(2) Amended and Restated Certificate of Designation. (Incorporated by
reference to Exhibit No. 1(b) to Post-Effective Amendment No. 25 to
Registration Statement on Form N-1A filed via EDGAR November 3, 1998.
(File No. 2-91215).)
(b) 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).)
(c) (1) Specimen receipt for shares of beneficial interest, $.01 par
value, of the California Income Series. (Incorporated by reference to
Exhibit 4(a) to Post-Effective Amendment No. 24 to Registration
Statement on Form N-1A filed via EDGAR October 31, 1997 (File
No. 2-91215).)
(2) Specimen receipt for shares of beneficial interest, $.01 par
value, of the California Series. (Incorporated by reference to
Exhibit 4(b) to Post-Effective Amendment No. 24 to Registration
Statement on Form N-1A filed via EDGAR October 31, 1997 (File
No. 2-91215).)
(3) Specimen receipt for shares of beneficial interest, $.01 par
value, of California Money Market Series. (Incorporated by reference
to Exhibit 4(c) to Post-Effective Amendment No. 24 to Registration
Statement on Form N-1A filed via EDGAR October 31, 1997 (File
No. 2-91215).)
(d) (1) Management Agreement between the Registrant and Prudential
Mutual Fund Management, Inc. (Incorporated by reference to
Exhibit 5(a) to Post-Effective Amendment No. 24 to Registration
Statement on Form N-1A filed via EDGAR October 31, 1997 (File
No. 2-91215).)
(2) Subadvisory Agreement between Prudential Mutual Fund Management,
Inc. and The Prudential Investment Corporation. (Incorporated by
reference to Exhibit 5(b) to Post-Effective Amendment No. 24 to
Registration Statement on Form N-1A filed via EDGAR October 31, 1997
(File No. 2-91215).)
(e) Distribution Agreement between the Registrant and Prudential
Investment Management Services LLP. Incorporated by reference to
Exhibit 6 to Post-Effective Amendment No. 25 to the Registration
Statement on Form N-1A filed via EDGAR on November 3, 1998 (File
No. 2-91215).
(f) Not applicable.
(g) Custodian Contract between the Registrant and State Street Bank and
Trust Company. (Incorporated by reference to Exhibit 8 to
Post-Effective Amendment No. 24 to Registration Statement on
Form N-1A filed via EDGAR October 31, 1997 (File No. 2-91215).)
(h) Transfer Agency and Service Agreement between the Registrant and
Prudential Mutual Fund Services, Inc. (Incorporated by reference to
Exhibit 9 to Post-Effective Amendment No. 24 to Registration Statement
on Form N-1A filed via EDGAR October 31, 1997 (File No. 2-91215).)
(i) Opinion and Consent of Counsel.*
(j) Consent of PricewaterhouseCoopers LLP.*
(k) Not applicable.
(l) Not applicable.
(m) (1) Distribution and Service Plan with respect to California Money
Market Series. (Incorporated by reference to Exhibit No. 15(a) to
Post-Effective Amendment No. 25 to Registration Statement on Form N-1A
filed via EDGAR November 3, 1998. (File No. 2-91215).)
(2) Distribution and Service Plan for Class A shares. (Incorporated by
reference to Exhibit No. 15(b) to Post-Effective Amendment No. 25 to
Registration Statement on Form N-1A filed via EDGAR November 3, 1998.
(File No. 2-91215).)
C-1
<PAGE>
(3) Distribution and Service Plan for Class B shares.*
(4) Distribution and Service Plan for Class C shares. (Incorporated by
reference to Exhibit No. 15(d) to Post-Effective Amendment No. 25 to
Registration Statement on Form N-1A filed via EDGAR November 3, 1998.
(File No. 2-91215).)
(n) Amended and Restated Rule 18f-3 Plan. (Incorporated by reference to
Exhibit No. 18 to Post-Effective Amendment No. 25 to Registration
Statement on Form N-1A filed via EDGAR November 3, 1998. (File No.
2-91215).)
- ------------------------
*To be filed by amendment.
ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
None.
ITEM 25. 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
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 26. 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.
C-2
<PAGE>
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>
Robert F. Gunia Executive Vice President Comptroller, Prudential Investments; Executive Vice
and Treasurer President and Treasurer, PIFM; Senior Vice
President, Prudential Securities
William V. Healey Executive Vice President, Vice President and Assistant General Counsel,
Secretary and Chief Prudential; Executive Vice President, Secretary and
Legal Officer Chief Legal Officer, PIFM
Neil A. McGuinness Executive Vice President Executive Vice President and Director of Marketing,
PMF&A; Executive Vice President, PIFM
Stephen Pelletier 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 Prospectuses constituting
Part A of the Registration Statement and "Manager" in the Statement of
Additional Information constituting Part B of this Registration Statement.
The business and other connections of PIC's directors and executive officers
are as set forth below. Except as otherwise indicated, the address of each
person is Prudential Plaza, Newark, NJ 07102.
<TABLE>
<CAPTION>
NAME AND ADDRESS POSITION WITH PIC PRINCIPAL OCCUPATIONS
- ---------------- ----------------- ---------------------
<S> <C> <C>
John R. Strangfeld Vice President and President of Private Asset Management Group of
Director Prudential; Senior Vice President (Prudential);
Vice President and Director, PIC
Bernard Winograd Senior Vice President and Chief Executive Officer, Prudential Real Estate
Director Investments; Senior Vice President and Director,
PIC
Jeffrey Hiller Chief Compliance Officer Chief Compliance Officer, Prudential Private Asset
Management
</TABLE>
ITEM 27. PRINCIPAL UNDERWRITERS
(a) Prudential Investment Management Services LLC (PIMS)
PIMS is distributor for Cash Accumulation 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 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 High Yield Total Return Fund, Inc.,
Prudential Index Series Fund, Prudential Institutional Liquidity Portfolio,
Inc., Prudential Intermediate Global Income Fund, Inc., Prudential International
Bond Fund, Inc., The Prudential Investment Portfolios, Inc., Prudential Mid-Cap
Value Fund, Prudential MoneyMart Assets, 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 Real Estate Securities Fund, Prudential Sector Funds, 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 20/20 Focus Fund,
Prudential World Fund, Inc. and The Target Portfolio Trust.
C-3
<PAGE>
(b) Information concerning the officers and directors of PIMS is set forth
below.
<TABLE>
<CAPTION>
POSITIONS AND POSITIONS AND
OFFICES WITH OFFICES WITH
NAME(1) UNDERWRITER REGISTRANT
- ------- ------------- -------------
<S> <C> <C>
Margaret Deverall...................... Vice President and Chief Financial None
Officer
Robert F. Gunia........................ President Director
Kevin Frawley.......................... Senior Vice President and Chief None
Compliance Officer
William V. Healey...................... Vice President and Chief Legal Officer None
Brian Henderson........................ Senior Vice President and Chief None
Operating Officer
John R. Strangfeld, Jr................. Advisory Board Member Director and President
</TABLE>
- --------------
(1) The address of each person named is 751 Broad Street, Newark, New Jersey
07102-4077, unless otherwise indicated.
(c) Registrant has no principal underwriter who is not an affiliated person
of the Registrant.
ITEM 28. 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 29. 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 caption "Investment Advisory and Other Services" 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 30. 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-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant has duly caused this Post-Effective
Amendment to the Registration Statement to be signed on its behalf by the
undersigned thereunto duly authorized, in the City of Newark, and State of
New Jersey, on the 22nd day of October, 1999.
PRUDENTIAL CALIFORNIA MUNICIPAL
FUND
By: /s/ JOHN R. STRANGFELD, JR.
-------------------------------
John R. Strangfeld, Jr.,
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 22, 1999
Edward D. Beach
/s/ EUGENE C. DORSEY
------------------------------------------- Trustee October 22, 1999
Eugene C. Dorsey
/s/ DELAYNE D. GOLD
------------------------------------------- Trustee October 22, 1999
Delayne D. Gold
/s/ ROBERT F. GUNIA
------------------------------------------- Vice President and Trustee October 22, 1999
Robert F. Gunia
/s/ THOMAS T. MOONEY
------------------------------------------- Trustee October 22, 1999
Thomas T. Mooney
/s/ THOMAS H. O'BRIEN
------------------------------------------- Trustee October 22, 1999
Thomas H. O'Brien
/s/ DAVID R. ODENATH, JR.
------------------------------------------- Trustee October 22, 1999
David R. Odenath, Jr.
/s/ RICHARD A. REDEKER
------------------------------------------- Trustee October 22, 1999
Richard A. Redeker
/s/ JOHN R. STRANGFELD, JR.
------------------------------------------- President and Trustee October 22, 1999
John R. Strangfeld, Jr.
/s/ NANCY H. TEETERS
------------------------------------------- Trustee October 22, 1999
Nancy H. Teeters
/s/ LOUIS A. WEIL, III
------------------------------------------- Trustee October 22, 1999
Louis A. Weil, III
/s/ GRACE C. TORRES
------------------------------------------- Principal Financial and Accounting October 22, 1999
Grace C. Torres Officer
</TABLE>
C-5
