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Prudential California Municipal Fund
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STATEMENT OF ADDITIONAL INFORMATION
DATED NOVEMBER 3, 2000
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Prudential California Municipal Fund (the Fund) is an open-end, management
investment company, or mutual fund, consisting of three series -- the California
Series, the California Income Series and the California Money Market Series. The
objective of the California Series is to maximize current 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 obligations with the potential for capital gain. The objective of the
California Income Series is to maximize current income that is exempt from
California state and federal income taxes, consistent with the preservation of
capital and in conjunction therewith, the California Income Series may invest in
debt obligations with the potential for capital gain. The objective of the
California Money Market Series 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. 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 November
3, 2000, copies of which may be obtained from the Fund upon request.
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TABLE OF CONTENTS
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Fund History................................................ B-3
Description of the Fund, Its Investments and Risks.......... B-3
Investment Restrictions..................................... B-26
Management of the Fund...................................... B-27
Control Persons and Principal Holders of Securities......... B-31
Investment Advisory and Other Services...................... B-32
Brokerage Allocation and Other Practices.................... B-38
Capital Shares, Other Securities and Organization........... B-40
Purchase, Redemption and Pricing of Fund Shares............. B-41
Shareholder Investment Account.............................. B-50
Net Asset Value............................................. B-56
Performance Information..................................... B-57
California Series and California Income Series............ B-57
California Money Market Series............................ B-58
Taxes, Dividends and Distributions.......................... B-60
Distributions............................................. B-60
Federal Taxation.......................................... B-61
California Taxation....................................... B-64
Description of Tax-Exempt Security Ratings.................. B-65
Financial Statements and Reports of Independent
Accountants................................................ B-68
Appendix I.................................................. I-1
Appendix II................................................. II-1
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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, California 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.
The California Money Market Series will invest in securities which, at the time
of purchase, have an effective remaining maturity of thirteen months or less and
are of "eligible quality". "Eligible quality" for this purpose means a security:
(i) rated in one of the two highest short-term rating categories by at least two
NRSROs or, if only one NRSRO has rated the security, so rated by that NRSRO;
(ii) rated in one of the three highest long-term rating categories by at least
two NRSROs or, if only one NRSRO has rated the security, so rated by that NRSRO;
or (iii) if unrated, of comparable quality as determined in the manner described
below. 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 invest, so that at least
80% of the income from its investments will be exempt from California state and
federal income taxes or at least 80% of its total assets will be invested in
California obligations. 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 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
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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.
A portion of the dividends and distributions paid on the shares of each
series of the Fund may be treated as a preference item for purposes of the
alternative minimum tax for individuals and corporations. Such treatment may
cause certain investors, depending upon other aspects of their individual tax
situation, to incur some federal income tax liability. In addition, corporations
are subject to an alternative minimum tax which treats as a tax preference item
75% of a corporation's adjusted current earnings. A corporation's adjusted
current earnings would include interest paid on municipal obligations and
dividends paid on shares of the Fund. See "Taxes, Dividends and Distributions."
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
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government creating the subdivision and the obligation is backed only by the
assets and revenues of the subdivision, such subdivision is regarded as the sole
issuer. Similarly, in the case of an industrial development revenue bond or
pollution control revenue bond, if the bond is backed only by the assets and
revenues of the nongovernmental user, the nongovernmental user is regarded as
the sole issuer. If in either case the creating government or another entity
guarantees an obligation, the guaranty may be regarded as a separate security
and treated as an issue of such guarantor.
TAX-EXEMPT BONDS. Tax-exempt bonds are issued to obtain funds for various
public purposes, including the construction of a wide range of public facilities
such as airports, bridges, highways, housing, hospitals, mass transportation,
schools, streets, water and sewer works, and gas and electric utilities.
Tax-exempt bonds also may be issued in connection with the refunding of
outstanding obligations, to obtain funds to lend to other public institutions,
or for general operating expenses.
The two principal classifications of tax-exempt bonds are "general
obligation" and "revenue." General obligation bonds are secured by the issuer's
pledge of its full faith, credit and taxing power for the payment of principal
and interest. Revenue bonds are payable only from the revenues derived from a
particular facility or class of facilities or, in some cases, from the proceeds
of a special excise tax or other specific revenue source. Private activity bonds
that are municipal bonds are in most cases revenue bonds and do not generally
constitute the pledge of the credit of the issuer of such bonds. The credit
quality of private activity revenue bonds is usually directly related to the
credit standing of the industrial user involved. There are, in addition, a
variety of hybrid and special types of municipal obligations as well as numerous
differences in the security of municipal bonds, both within and between the two
principal classifications described above.
Industrial development bonds are issued by or on behalf of public
authorities to obtain funds to provide various privately-operated facilities for
business, manufacturing, housing, sports, sewage and pollution control, and for
airport, mass transit, port and parking facilities. The Internal Revenue Code
restricts the types of industrial development bonds (IDBs) which qualify to pay
interest exempt from federal income tax, and interest on certain IDBs issued
after August 7, 1986 is subject to the alternative minimum tax. Although IDBs
are issued by municipal authorities, they are generally secured by the revenues
derived from payments of the industrial user. The payment of the principal and
interest on IDBs is dependent solely on the ability of the user of the
facilities financed by the bonds to meet its financial obligations and the
pledge, if any, of real and personal property so financed as security for such
payment.
The interest rates payable on certain municipal bonds and municipal notes
are not fixed and may fluctuate based upon changes in market rates. Municipal
bonds and notes of this type are called "variable rate" obligations. The
interest rate payable on a variable rate obligation is adjusted either at
predesignated intervals or whenever there is a change in the market rate of
interest on which the interest rate payable is based. Other features may include
the right whereby the Fund may demand prepayment of the principal amount of the
obligation prior to its stated maturity (a demand feature) and the right of the
issuer to prepay the principal amount prior to maturity. The principal benefit
of a variable rate obligation is that the interest rate adjustment minimizes
changes in the market value of the obligation. As a result, the purchase of
variable rate obligations should enhance the ability of a series to maintain a
stable NAV per share and to sell an obligation prior to maturity at a price
approximating the full principal amount of the obligation. For further
discussion, see "Floating Rate and Variable Rate Securities" below.
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 may 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.
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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; INVERSE AND SECONDARY INVERSE
FLOATERS. 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 specific periodic adjustment in the interest rate based on
prevailing market rates and generally would allow the series to demand payment
of the obligation on short notice at par plus accrued interest, which amount
may, at times, be more or less than the amount the series paid for them. Some
floating rate and variable rate securities typically have maturities longer than
397 calendar days but afford the holder the right to demand payment at dates
earlier than the final maturity date. Such "long term" floating rate and
variable rate securities will be treated as having maturities equal to the
demand date or the period of adjustment of the interest rate whichever date is
longer.
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-
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 index 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 IDBs) owned by banks. A participation
interest gives a series an undivided interest in the tax-exempt security in the
proportion that a 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 a 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 a series' participation
interest in the par value of the tax-exempt security, plus accrued interest.
Each series intends to exercise the demand under the letter of credit only
(1) upon a default under the terms of the documents of the tax-exempt security,
(2) as needed to provide liquidity in order to meet redemptions, or (3) to
maintain a high quality investment portfolio. Banks will retain a service and
letter of credit fee and a fee for issuing repurchase commitments in an amount
equal to the excess of the interest paid by the issuer on the tax-exempt
securities over the negotiated yield at which the instruments were purchased
from the bank by a series. The investment adviser will monitor the pricing,
quality and liquidity of the variable rate demand instruments held by each
series, including IDBs supported by bank letters of credit or guarantees, on the
basis of published financial information, reports of rating agencies and other
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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
lines 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
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 (junk) municipal
securities, the financial condition of issuers of these securities and the value
of outstanding high yield (junk) 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.
In August 1996, legislation reforming the welfare system was passed by
Congress. In essence, it eliminated the federal guarantee of welfare benefits
and left the determination of eligibility to the states. The federal government
will provide block grants to the states for their use in the funding of
benefits. Although states are not obligated to absorb any of the reductions,
they may choose to do so. The consequences of such generosity may be adverse in
the event of an economic downturn or a swelling in the ranks of beneficiaries.
If a state feels compelled to offset lost benefits, the net effect is merely a
shifting of the burden to the state and may affect its rating over time.
CALIFORNIA CONCENTRATION. The following is a discussion of the general
factors that might influence the ability of issuers of California obligations to
repay principal and interest when due on the obligations contained in the
portfolio of each series. Such information constitutes only a brief summary,
does not purport to be a complete description, is derived from sources that are
generally available to investors and is believed to be accurate, but has not
been independently verified and may not be complete. General factors may not
affect local issuers, such as counties or municipalities, or issuers of revenue
bonds. Furthermore, the creditworthiness of general obligations of California
generally is unrelated to the creditworthiness with respect to the State's
revenue obligations, obligations of local issuers in the state or obligations of
other issuers.
The California economy and general financial condition affect the ability of
the State and local governments to raise and redistribute revenues to assist
issuers of municipal securities to make timely payments on
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their obligations. California is the most populous state in the nation with a
total population estimated at 33.4 million. California has a diverse economy,
with major employment in the agriculture, manufacturing, high technology,
services, trade, entertainment and construction sectors.
Certain of the State's significant industries, such as high technology, are
sensitive to economic disruptions in their export markets and the State's rate
of economic growth, therefore, could be adversely affected by any such
disruption. A significant downturn in U.S. stock market prices could adversely
affect California's economy by reducing household spending and business
investment, particularly in the important high technology sector. Moreover, a
large and increasing share of the State's General Fund revenue in the form of
income and capital gains taxes is directly related to, and would be adversely
affected by a significant downturn in the performance of, the stock markets.
In addition, it is impossible to predict the time, magnitude or location of
a major earthquake or its effect on the California economy. In January 1994, a
major earthquake struck the Los Angeles area, causing significant damage in a
four county area. The possibility exists that another such earthquake could
create a major dislocation of the California economy and significantly affect
state and local government budgets.
After experiencing strong growth throughout much of the 1980s, from
1990-1993 the State suffered through a severe recession, the worst since the
1930's, heavily influenced by large cutbacks in defense/aerospace industries,
military base closures and a major drop in real estate construction.
California's economy has been performing strongly since the start of 1994.
The recession severely affected state revenues while the State's health and
welfare costs were increasing. Consequently, the State had a lengthy period of
budget imbalance; the State's accumulated budget deficit approached $2.8 billion
at its peak at June 30, 1993. The large budget deficits depleted the State's
available cash resources and it had to use a series of external borrowings to
meet its cash needs. With the end of the recession, the State's financial
condition improved with a combination of better than expected revenues, slowdown
in growth of social welfare programs, and continued spending restraint. The
accumulated budget deficit from the recession years was eliminated. No deficit
borrowing has occurred at the end of the last several fiscal years.
The combination of resurging exports, a strong stock market, and a rapidly
growing economy in 1999 and early 2000 resulted in unprecedented growth in the
State's General Fund revenues during fiscal year 1999-2000. Revenues are
estimated to have been about $71.2 billion, which is $8.2 billion higher than
projected for the 1999 Budget Act. The State's Special Fund for Economic
Uncertainties ("SFEU") had a record balance of over $7.2 billion on June 30,
2000. On that date, the Governor signed the 2000 Budget Act enacting the State's
fiscal year 2000-01 budget. The spending plan assumes General Fund revenues and
transfers of $73.9 billion, an increase of 3.8 percent above the estimates for
1999-2000. The Budget Act appropriates $78.8 billion from the General Fund, an
increase of 17.3 percent over 1999-2000, and reflects the use of $5.5 billion
from the SFEU. The Budget Act also includes Special Fund expenditures of
$15.6 billion, from revenues estimated at $16.5 billion, and Bond Fund
expenditure of $5.0 billion.
In order not to place undue pressure on future budget years, about
$7.0 billion of the increased spending in 2000-01 will be for one-time
expenditures and investments. The State estimates the SFEU will have a balance
of $1.781 billion at June 30, 2001. In addition, the Governor held back
$500 million as a set aside for litigation costs. The Governor vetoed just over
$1 billion in General Fund and Special Fund appropriations from the 2000 Budget
Act in order to achieve the budget reserve. The State will not undertake a
revenue anticipation note borrowing in 2000-01.
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 S&P's, and to A from AA by Fitch Investors Service, Inc. (Fitch). The
State's improved economy and budget, however, have resulted since then in
several upgrades in its general obligation bond ratings. As of October 6, 2000,
the State's general obligation bonds were rated Aa2 by Moody's, AA by
Standard & Poor's, and AA by Fitch. It is not presently possible to determine
whether, or the extent to which, Moody's, S&P or Fitch will change such ratings
in the future. It should be noted that the creditworthiness of obligations
issued by local California issuers may be unrelated to the creditworthiness of
obligations issued by the State, and there is no obligation on the part of the
State to make payment on such local obligations in the event of default.
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Some local governments in California have experienced notable financial
difficulties and there is no assurance that any California issuer will make full
or timely payments of principal or interest or remain solvent. For example, in
December 1994, Orange County, California, together with its pooled investment
funds, which included investment funds from other local governments, filed for
bankruptcy. The County has since emerged from bankruptcy. Los Angeles County,
the nation's largest county, in the recent past has also experienced financial
difficulty and its financial condition will continue to be affected by the large
number of County residents who are dependent on government services and a
structural deficit in its health department. Moreover, California's improved
economy has caused Los Angeles County, and other local governments, to come
under increased pressure from public employee unions for improved compensation
and retirement benefits.
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 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.
Although the State Legislature has not yet enacted such a prohibition, it is not
possible to predict whether, in the future, 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
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special benefit conferred and prohibiting their use for general governmental
services. Proposition 218 also allows voters to use their initiative power to
reduce or repeal previously-authorized taxes, assessments, fees and charges.
In addition, certain tax-exempt securities in which the series may invest
may be obligations payable solely from the revenues of specific institutions, or
may be secured by specific properties, which are subject to provisions of
California law that could adversely affect the holders of such obligations. For
example, the revenues of California health care institutions may be subject to
state laws, and California law limits the remedies of a creditor secured by a
mortgage or deed of trust on real property.
The effect of these various constitutional and statutory amendments, cases
and budgetary developments upon the ability of California issuers to pay
interest and principal on their obligations remains unclear. Furthermore, other
measures affecting the taxing or spending authority of California or its
political subdivisions may be approved or enacted in the future.
From time to time, the State is a party to numerous legal proceedings, many
of which normally occur in governmental operations. In addition, the State is
involved in certain other legal proceedings that, if decided against the State,
might require the State to make significant future expenditures or impair future
revenue sources.
ADDITIONAL ISSUERS
GUAM
Guam is an unincorporated territory of the United States represented by an
elected non-voting delegate to the U.S. House of Representatives. The island is
governed by the Organic Act of 1950, which granted Guam the statutory local
power of self-government and made Guamanians citizens of the United States.
However, the U.S. controls the island's foreign and defense policies and plays a
significant role in its economic affairs. As of the 1990 Census, Guam's
population was 133,152. According to the Guam Annual Economic Review (1998-1999)
published by the Guam Department of Commerce (Annual Review) the total
population is projected to be 167,292 in 2000 an increase of 25.6%. In recent
years, Governor Gutierrez has sought greater self-government for the island and
has approached Congress with a proposal to change Guam's political status to
that of a Commonwealth.
Guam's economy depends on tourism revenues, U.S. federal and military
spending and service industries. According to the Annual Review, in fiscal year
1998, the U.S. government allocated approximately $507 million for military
operations in Guam, of which $319 million was allocated for wages and salaries
and $160 million for military construction. However, the island has been
affected by the downsizing of the U.S. military presence that has occurred since
1993, most notably the implementation of the Base Realignment and Closure
Commission (BRACC) '95. In April 1995, the Naval Air Station, Agana, was
officially closed, and control was transferred to the Government of Guam.
According to the 1998-1999 Annual Review, the economic impact of base closures,
unit transfers and scaling back of defense activities in Guam has resulted in
estimated job losses of about 4,800 (3,500 federal civilian jobs and 1,300
military positions). In terms of lost income, cumulative current dollar loss of
Gross Island Product for the period 1996-1999 has been estimated at
$942 million. Total active duty military personnel increased 1.8%
(114 personnel) in 1998 from 1997, from 6,265 to 6,379. According to the Guam
Economic Review Quarterly Report (October-December 1999) published by the
Economic Research Center Guam Department of Commerce (Quarterly Report), the
unemployment rate in June 1999 had increased to about 15.2%, up from 7.7% in
March 1998. There were 60,440 employees on payroll in December, 1999. Of the
60,440 employees, 42,370 were in the private sector, 4,530 were employed by the
Federal Government and 13,540 were in the Territorial Government.
The Asian economic crisis, as well as damage from natural disasters such as
Super Typhoon Paka, have disrupted the island's tourist business, which normally
caters to more than a million visitors a year, mostly from Japan. According to a
December 17, 1997 report by the Office of the Governor of Guam, Super Typhoon
Paka cost Guam approximately $600 million. The Asian and Japanese recessions
have reduced vacation package costs among many of Guam's visitor industry
competitors, increased the relative cost of Guam vacation packages because of
the devaluation of Asian currencies versus the U.S. dollar and seriously
impacted
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consumer confidence among Guam's major Asian trading partners, which has
resulted in a decline in investment and trade. According to the Annual Review,
Guam's economy correlates with Asia's business cycle rather than that of the
U.S., since more than 90% of its tourists come from Asia and about 60% of trade
links are with Asia. The Asian economy as a whole is on the way to recovery.
Guam's economy, as part of Asia, is beginning to experience the recovery of its
primary industry, tourism. Given the improved performance in the second half of
1999 and the positive impact of regional recovery and the upturn in the Japan
economy, the outlook for Guam's economy in 2000 has brightened. Visitor arrivals
are expected to achieve a higher growth than 1999, while retail sales are
projected to have a positive growth. According to the Quarterly Report, visitor
arrivals increased to approximately 1,160,325 in calendar year 1999, a 2%
increase over 1998. Construction is likely to continue declining but at a lower
rate.
However, some economic risks remain including if regional (especially Japan)
recovery falters, the resulting decline in outbound traveling would exert a drag
on Guam the economy again.
New aggressive diversification policies in financial services, insurance and
telecommunications will help to stabilize Guam's sustainability in relation to
the other Asian economies. For example, in 1977, the Government of Guam enacted
Public Law 23-109 which includes 100% abatement of gross receipt taxes on
insurance premiums and other revenues.
It has been reported that for fiscal year 1999, Guam is anticipating a
deficit of $51.5 million for year-end 1999 and expects its accumulated general
fund deficit to total $146.5 million by the end of calendar year 1999. In
addition, it has been reported that Guam's government is planning to refinance
the island's existing general obligation bonds and transfer certain retirement
obligations to the retirement fund to reduce the accumulated total deficit to
$130.5 million by the end of the year. The government is planning to reduce the
accumulated deficit in 2000 to approximately $33.4 million by the sale and
leaseback of certain property and the privatization of the telephone company.
As of October 27, 2000, S&P maintained Guam's outstanding general obligation
bond rating of BBB-. While we note that Guam is not a state but rather an
unincorporated territory of the U.S., by comparison, most states' general
obligations are rated AA by S&P.
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. Puerto Rico's voters rejected
U.S. statehood for the second time in six years in a local plebiscite held in
December 1998, which is likely to close the debate of statehood for some time,
according to an April 12, 1999 report of the Economist Intelligence Unit (EIU
Report).
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 per capita each year from 1994 to 1999 according to a
report by the Government of Puerto Rico, Puerto Rico Industrial Development
Company (PRIDCO). The average family income has also increased each year from
1993 to 1999 according to the report by PRIDCO. According to a July 27, 2000 EIU
Report, during the first three quarters of fiscal year 1999-2000 (Puerto Rico's
fiscal year is July through June,) total employment rose by 0.8% to 1,150,000,
compared with the same period last year. The labor force as a whole, however,
decreased by 1.1%, which is equivalent to an annual reduction of 14,000 jobs.
As stated in the July 27, 2000 EIU Report, during the first three quarters
of fiscal year 1999-2000, construction led economic growth as did, to a lesser
extent, tourism. According to the May 15, 2000 EIU Report, stimulated this year
by pre-electoral increase in public works, a 9.6% real growth in construction is
anticipated in fiscal year 1999-2000. According to the same report, tourism,
which has been strong in the local economy since 1994-95, is showing signs of
weakness and is not anticipated to add much to overall growth. Although
manufacturing output and exports have continued to grow at a moderate pace, jobs
in manufacturing industries have continued to decline. Manufacturing output will
continue to expand at 2-3%. This moderate growth will not, however, be enough to
lower the current 12.5% unemployment rate.
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During the first nine months of fiscal year 1999/2000, government revenue
reached $4.7 billion, a 10.2% increase. The May 15, 2000 EIU Report indicates
that the official forecast is real GNP growth of 2.7% in fiscal year 1999/2000,
2.3% in fiscal year 2000-2001, mainly due to growth in the construction
industry. A July 28, 2000 EIU Report indicates that the economy is anticipated
to grow by 5.9% in calendar year 2000 after growing by 11.5% in the first
quarter of 2000.
The inflation rate shaved an average 5.2% increase in fiscal year 1998-1999.
The inflation rate was expected to fall to 4% in fiscal year 1999-2000 with high
food prices and heavy public spending according to a November 29, 1999 EIU
Report.
According to a July 27, 2000 EIU Report, an indication of the impact of
increasing oil prices on the local economy is evident based on partial data on
petroleum product imports. Between July 1999 and February 2000, NAPHTA
importation reached 6.4 million barrels, valued at US $158.1 million. NAPHTA
importation volume increased by 19.6% in comparison with the year-earlier
period, while value rose 115.2% with the average price growing by 80%. While no
data currently is available, crude petroleum imports usually double those of
NAPHTA.
According to the November 29, 1999 EIU Report, local exports were
$34.9 billion during fiscal year 1998-1999, an increase of 15% from the previous
fiscal year, while imports rose to $25.3 billion from $21.9 billion during the
same period. According to the November 29, 1999 EIU Report, it was anticipated
that during fiscal year 1999-2000, exports would decline to approximately
$30 billion, with imports decreasing to $23 billion.
One of the principal sources of capital inflows in Puerto Rico is
public-sector borrowing, which is usually in the form of debt placement in the
US municipal bond market, according to the May 5, 1999 EIU Report. Puerto Rico
has played a significant role in the municipal markets for decades;
public-sector borrowing has averaged $1.4 billion per year during fiscal years
1992-93 through 1997-1998, with around one-quarter of this being incurred by the
central and municipal governments and the rest going to public corporations.
According to the Governor's Message on the Budget for Fiscal Year 2000-2001
(Message on the Budget) Puerto Rico's proposed budget for fiscal year 2000-2001
is $20.9 billion, a 9.16% or $1.7 million increase from the prior fiscal year.
The budget allows for direct contributions to the municipalities totaling $338
million. 4.7% of the budget will pay for government operations. Debt service
will be at $2.3 million, or 11.2% of the total budget. During the past two
decades, the public debt has fluctuated between 9 and 13.2%. As of the time of
the Message on the Budget, it stood at 9%, the second lowest percentage in 19
years. For the current fiscal year, the extra-constitutional debt has been
reduced by $657 million. It currently stands at $3 million, and during the year
2001 it is projected to drop to $2.8 million.
The Message on the Budget indicates a proposed estimate of $7.5 million,
with respect to revenues to the General Fund, an increase of $462 million than
was estimated last year. At the close of fiscal year 1999-2000, the General
Fund's fiscal base shall have increased by 82.4%, with average annual growth of
7.8%.
Various measures in issuing bonds have permitted the government to refinance
$12 billion, reaching savings in excess of $640 million, according to the
Message on the Budget.
The November 29, 1999 EIU Report indicates that multinational companies have
been reassessing Puerto Rico's appeal as an investment site due to Mexico's
NAFTA advantages, the extension of the U.S. federal minimum wage to Puerto Rico,
and the loss of federal tax breaks under Section 936 of the US Tax Code for
United States companies operating in Puerto Rico. However, according to a
March 31, 1999 EIU Report, many companies have taken advantage of new local tax
incentives which are aimed at counteracting problems associated with the Section
936 phase-out. In addition, tourism and large government infrastructure projects
continue to spur offshore interest, according to the November 29, 1999 EIU
Report. Now, Puerto Rican development plans focus on enticing high-tech industry
and tourism. The Economic Development and Commerce Department announced in
January 1999 that it plans to spend $20 million annually to promote a high-
technology corridor industrial complex between Aguadilla and Mayaguez.
Additionally, the Puerto Rico Government has begun privatization of industries,
such as the sale of Puerto Rico Telephone in July 1998.
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As of October 27, 2000, Puerto Rico's general obligations were rated A by
S&P. As of October 31, 2000 Moody's rates the Commonwealth Baa1.
UNITED STATES VIRGIN ISLANDS
The Virgin Islands, comprised of St. Thomas, St. Croix and St. John, form an
incorporated 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. Federal
and local government constituted about 33% of all nonagricultural jobs in 1999.
Federal government jobs have remained relatively unchanged at 877 and
Territorial Government jobs have declined by 2.4% to 12,566 from 12,876 in 1998.
Total government employment declined by 2% in 1999 to 13,438 from 13,753 in
1998. According to an April 2000 report by the Bureau of Economic Research of
the Government Development Bank for the Virgin Islands (BER), public sector
employment is expected to decrease mainly as a result of a mandated 10%
reduction in local government employment. Federal government jobs are expected
to remain unchanged.
Tourism is the predominant source of employment and income of the Virgin
Islands. After experiencing four consecutive years of growth and a record
2.1 million visitors in 1998, activity in the tourism sector slowed in 1999
mainly due to a reduction in the number of cruise ship calls. In 1999, the
Virgin Islands recorded 2.0 million visitors, a decrease of about 8% over the
1998 total. This decrease was mainly due to a drop in cruise ship passenger
arrivals that totaled 1.4 million in 1999, representing a decrease of 13% over
the 1998 total of 1.6 million. Cruise ship business declined because of damage
caused by hurricanes. BER is forecasting the rate of cruise passenger arrivals
to rebound in fiscal year 2001 to record levels with the introduction of new
mega-vessels and to increase by 8% to 1.6 million. During calendar year 1999,
overnight visitors increased, by 7.1% over 1998 to 560,133, which is partially
attributable to the introduction of additional seats into the Virgin Islands on
both chartered and scheduled air services. The weekly direct flight seats grew
to 13,099 seats, 5.1% over the 12,466 total in 1998, although the weekly direct
seat capacity is still below the 17,000 seat average during the peak 1994-95
years. The rate of air arrivals is expected to grow by 5% in fiscal year 2001.
March 1999 through April 2000 air arrivals totaled 172,699 up 2% over the
corresponding period in 1998. Hotels and condominiums available for rental
declined marginally in 1999 to 4,849 from 4,929 in 1998. The territory's hotel
occupancy rate was up 3.0% from 1998 to 56% in 1999. However, the hotel
occupancy rate is still low when compared to averages of 60% prior to 1996. BER
forecasts hotel occupancy to improve with an increase in overnight visitors.
There was a total of 40,993 non-agricultural jobs in the territory in 1999
compared to 41,668 jobs in 1998 a decrease of about 2% percent. Job losses,
especially in the private sector, have reduced employment to a level not seen
since 1987. The private sector has lost just over 1% or approximately 381 jobs
in 1999 to 27,554 from 27,935 in 1998. The decline in 1999 reflected job losses
mainly in the private sector in tourist related business. The Virgin Island's
overall unemployment rate increased from 6.4% in 1998 to 7% in 1999. St. Croix's
unemployment rate increased from 7.6% in 1998 to 8.4% in 1999. St. Thomas and
St. John, also registered an increase in the unemployment rate from 5.6% in 1998
to 6.1% in 1999. The overall increase in unemployment has been attributed in
part to a continuing lack of new business ventures and consequently, job
opportunities as well as job losses in retail trade including those that cater
to tourists, with respect to St. Thomas and St. John. For the first quarter of
calendar year 1999, the territory's unemployment rate remained steady at 6.7%.
According to the BER, the number of jobs is expected to grow during fiscal year
2001 by as much as 6% due to the opening of the Divi Carina Bay Resort and
Casino on St. Croix, and new public and private--sector construction projects,
as well as temporary jobs created by the VI 2000 Census.
There were 2,427 manufacturing jobs in 1999, up slightly from 2,418 jobs in
1998, pushing manufacturing employment to its highest level since 1995. In 1998,
Petroleos de Venezuela (PDVSA) bought 50 percent of the Hess oil refinery on
St. Croix. Hess and PDVSA (renamed Hovensa) agreed to share the cost of building
a $500 million plant to refine crude oil. Construction of the plant is expected
to take three years and increase the
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refinery's daily oil production by 50,000 barrels. Current production averages
about 430,000 barrels per day. The BER foresees a 3% growth in employment in the
manufacturing sector during fiscal year 2001, with increased activity at
Hovensa, although significant increases will not occur until the construction of
the coker.
The construction sector is expected to continue to grow, as indicated by the
value of permits issued. The construction of roads, the extension of the Rohlsen
Airport, the expansion of Wico dock, new hotel expansion and the coker
construction are among the projects expected to boost construction jobs by as
much as 13% during fiscal year 2001.
According to an October 12, 1999 report of the U.S. Newswire, the Virgin
Islands is facing a long-term deficit of over $1 billion and an expected deficit
of $98 million for 1999 alone. A July 29, 1999 report of the Agence France
Presse states that the financial difficulties of the Virgin Islands are due to
its growing public sector, a series of three hurricanes in the 1990s, and
inefficient management by the government over the years. The October 12, 1999
report further states that the U.S. Secretary of the Interior and the Governor
of the Virgin Islands have signed a Memorandum of Understanding which addresses
the Virgin Islands' financial difficulties and need for fiscal austerity. The
Memorandum of Understanding sets forth certain measures the Governor has agreed
to implement, effective October 1, 1999, and pledges the federal government's
(Department of the Interior's) support for local initiatives to achieve fiscal
recovery and stability in the Virgin Islands.
As of October 31, 2000, S&P assigned no general obligation/issuer-level
rating to the Virgin Islands as a whole.
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 compared to the cost of securities with similar credit
ratings, stated maturities and interest coupons but without applicable puts.
This increased cost may be paid by way 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, each 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.
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HEDGING AND RETURN ENHANCEMENT STRATEGIES
Each series (other than the California Money Market Series) is authorized to
purchase and sell certain derivatives, including financial futures contracts
(futures contracts), options on futures contracts and interest rate swaps for
the purpose of attempting to hedge its investment in municipal obligations
against fluctuations in value caused by changes in prevailing market interest
rates, attempting to hedge against increases in the cost of securities the
series intends to purchase and in certain cases, attempting to enhance return. A
series, and thus an investor, may lose money through unsuccessful use of these
strategies. The successful use of futures contracts, options on futures
contracts and interest rate swaps 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. A series'
ability to use these strategies may be limited by various factors, such as
market conditions, regulatory limits and tax considerations, and there can be no
assurance that any of these strategies will succeed. If new financial products
and risk management techniques are developed, a series may use them to the
extent consistent with its investment objective and policies.
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
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.
A series neither pays nor receives money upon the purchase or sale of a
futures contract. Instead, 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. Initial margin in futures
transactions is different from margin in securities transactions in that futures
contract initial margin does not involve the borrowing of funds by the customer
to finance the transactions. Rather, initial margin is in the nature of a good
faith deposit on the contract which is returned to a series upon termination of
the futures contract, assuming all contractual obligations have been satisfied.
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".
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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
indexes 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, but not the
obligation, in return for the premium paid, to assume a position in a futures
contract (a long position if the option is a call or a short position if the
option is a put) at a specified exercise price at any time during the period of
the option. Upon exercise of the option, the delivery of the futures position by
the writer of the option to the holder of the option will be accompanied by
delivery of the accumulated balance in the writer's futures margin account which
represents the amount by which the market price of the futures contract, at
exercise, exceeds, in the case of a call, or is less than, in the case of a put,
the exercise price of the option on the futures contract. If an option is
exercised on the last trading day prior to the expiration date of the option,
the settlement will be made entirely in cash equal to the difference between the
exercise price of the option and the closing price of the futures contract on
the expiration date. Currently, options can be purchased or written with respect
to futures contracts on U.S. Treasury Bonds, among other fixed-income
securities, and on municipal bond indexes 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
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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 Series 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.
INTEREST RATE SWAP TRANSACTIONS
Each series (other than the California Money Market Series) may enter into
interest rate swaps (including interest rate swaps with embedded options), on
either an asset-based or liability-based basis, depending on whether it is
hedging its assets or its liabilities. Under normal circumstances, a series will
enter into interest rate swaps on a net basis, that is, the two payment streams
netted out, with a 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 a 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 other liquid assets having
an aggregate net asset value per share 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 a 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 a 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, a 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. A series will enter into interest
rate swaps only with creditworthy parties. The investment adviser will monitor
the creditworthiness of such parties under the supervision of the Board of
Trustees.
A series may enter into interest rate swaps as a hedge against changes in
the interest rate of a security in its portfolio or that of a security a series
anticipates buying. If a series purchases an interest rate swap to hedge against
a change in an interest rate of a security a series anticipates buying, and such
interest rate changes unfavorably for a series, then a series may determine not
to invest in the securities as planned and will realize a loss on the interest
rate swap that is not offset by a change in the interest rates or the price of
the securities.
The use of interest rate swaps is a 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 a series would diminish compared to what
it would have been if this investment technique was never used.
A series may enter into interest rate swaps traded on an exchange or in the
over-the-counter market. A 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 a series is contractually obligated to make. If the other
party to an interest rate swap defaults, a series' risk of loss consists of the
net amount of interest payments that a series is contractually entitled to
receive. Since interest rate swaps are individually negotiated, a 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.
RISKS OF HEDGING AND RETURN ENHANCEMENT 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
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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 interest rate swap transactions, 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.
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
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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.
Successful use of futures contracts by a series is subject to, among other
things, the ability of the series' investment adviser to predict correctly
movements in the direction of interest rates and other factors affecting markets
for securities. For example, if a series has hedged against the possibility of
an increase in interest rates which would adversely affect the price of
securities in its portfolio and the price of such securities increases instead,
a series will lose part or all of the benefit of the increased value of its
securities because it will have offsetting losses in its futures positions. In
addition, in such situations, if a series has insufficient cash to meet daily
variation margin requirements, it may have to sell securities to meet such
requirements. Such sales of securities may be, but will not necessarily be, at
increased prices which reflect the rising market. A series may have to sell
securities at a time when it is disadvantageous to do so.
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.
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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.
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.
HIGH YIELD (JUNK) 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 or BBB by S&P, although considered to be
investment grade, lack outstanding investment characteristics and, in fact, have
speculative characteristics. Securities rated below Baa by Moody's and below BBB
by S&P are considered to have speculative characteristics. See "Description of
Security Ratings" in the California Income Series Prospectus. Such lower-rated
high yield securities are commonly referred to as junk bonds. Such securities
generally offer a higher current yield than those in the higher rating
categories but may also involve greater price volatility and risk of loss of
principal and income. The investment adviser will attempt to manage risk and
enhance yield through credit analysis and careful security selection. See "Risk
Factors Relating to Investing in High Yield 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.
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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. Low-rated and comparable
unrated securities tend to offer higher yields than higher rated securities with
the same maturities because the historical financial condition of the issuers of
such securities may not have been as strong as that of other issuers.
Fluctuations in the prices of fixed-income securities may be caused by, among
other things, the supply and demand for similarly rated securities. Fluctuations
in the prices of portfolio securities subsequent to their acquisition will not
affect cash income from such securities but will be reflected in the Series' net
asset value. 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. Since lower rated securities generally
involve greater risks of loss of income and principal than higher rated
securities, investors should consider carefully the relative risks associated
with investments in securities which carry lower ratings and in comparable
unrated securities. Under circumstances where the Series owns the majority of an
issue, market and credit risks may be greater. Moreover, from time to time, it
may be more difficult to value high-yield securities than more highly rated
securities.
An economic downturn could severely affect the ability of highly leveraged
issuers to service their debt obligations or to repay their obligations upon
maturity. Furthermore, changes in economic conditions and other circumstances
are more likely to lead to a weakened capacity to make principal and interest
payments then in the case of higher grade bonds. In addition to the risk of
default, there are the related costs of recovery on defaulted issues. 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.
Since investors generally perceive that there are greater risks associated
with the medium to lower rated securities of the type in which the Series may
invest, the yields and prices of such securities may tend to fluctuate more than
those for higher rated securities. In the lower quality segments of the
fixed-income securities market, changes in perceptions of issuers'
creditworthiness tend to occur more frequently and in a more pronounced manner
than do changes in higher quality segments of the fixed-income securities which,
as a general rule, fluctuate in response to the general level of interest rates.
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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 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.
At the time a series makes the commitment to purchase a municipal obligation
on a when-issued or delayed-delivery basis, it will record the transaction and
thereafter reflect the value of the obligation, each day, in determining its
NAV. This value may fluctuate from day to day in the same manner as values of
municipal obligations otherwise held by the series. If a series chooses to
dispose of the right to acquire a when-issued security prior to its acquisition,
it could, as with the disposition of any other portfolio security, incur a gain
or loss due to market fluctuations.
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 a 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, that is, 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. The
ratings of insured municipal obligations depend,
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in substantial part, on the creditworthiness of the insurer; thus their value
will fluctuate largely on the basis of factors relating to the insurer's ability
to satisfy its obligations, as well as on market factors generally. New issue
insurance is obtained by the issuer or underwriter upon issuance of a bond or
note, and the insurance premiums are reflected in the price of such bond or
note. Insurance premiums with respect to secondary insurance may, on the other
hand, be paid by a Series. Premiums paid for secondary market insurance will be
treated as capital costs, increasing the cost basis of the investment and
thereby reducing the effective yield of the investment.
MUNICIPAL LEASE OBLIGATIONS
Each 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.
In addition to the risks relating to municipal obligations, municipal lease
obligations also expose each Series to abatement risk. Abatement risk is the
risk that the entity leasing the equipment or facility will not be required to
make lease payments because it does not have full use and possession of the
equipment or facility.
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 municipal bond or pool of municipal bonds.
ZERO COUPON MUNICIPAL BONDS
A series may invest in zero coupon municipal bonds. Zero coupon municipal
bonds do not pay current interest but are purchased at a discount from their
face values. The discount approximates the total amount of interest the security
will accrue and compound over the period until maturity or the particular
interest payment date at a rate of interest reflecting the market rate of the
security at the time of issuance. Upon maturity, the holder is entitled to
receive the par value of the security. Zero coupon municipal bonds do not
require the periodic payment of interest. The effect of owning instruments which
do not make current interest payments is that a fixed yield is earned not only
on the original investment but also, in effect, on all discount accretion during
the life of the obligations. This implicit reinvestment of earnings at the same
rate eliminates the risk of being unable to invest distributions at a rate as
high as the implicit yield on the zero coupon bond, but at the same time
eliminates the holder's ability to reinvest at higher rates in the future. For
this reason, some of these securities may be subject to substantially greater
price fluctuations during periods of changing market interest rates than are
comparable securities which pay interest currently, which fluctuation increases
the longer the period to maturity. These investments benefit the issuer by
mitigating its need for cash to meet debt service, but also require a higher
rate of return to attract investors who are willing to defer receipt of cash.
Because a series accrues income which may not be represented by cash, the Fund
may be required to sell other securities in order to satisfy the distribution
requirements applicable to the series.
There are certain risks related to investing in zero coupon securities.
These securities generally are more sensitive to movements in interest rates and
are less liquid than comparably rated securities paying cash interest at regular
intervals. Consequently, such securities may be subject to greater fluctuation
in value. During a period of severe market conditions, the market for such
securities may become even less liquid. In addition, as these securities do not
pay cash interest, a Series' investment exposure to these securities and their
risks, including credit risk, will increase during the time these securities are
held in a series' portfolio.
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
B-23
<PAGE>
to reduce a 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. Historically, illiquid securities have included
securities subject to contractual or legal restrictions on resale because they
have not been registered under the Securities Act of 1933, as amended (the
Securities Act), securities which are otherwise not readily marketable and
repurchase agreements having a maturity of longer than seven days. Securities
which have not been registered under the Securities Act are referred to as
private placement or restricted securities and are purchased directly from the
issuer or in the secondary market. 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. A
mutual fund might also have to register such restricted securities in order to
dispose of them resulting in additional expense and delay. Adverse market
conditions could impede such a public offering of securities.
In recent years, however, a large institutional market has developed for
certain securities that are not registered under the Securities Act including
repurchase agreements, commercial paper, foreign securities, municipal
securities, convertible securities and corporate bonds and notes. Institutional
investors depend on an efficient institutional market in which the unregistered
security can be readily resold or on an issuer's ability to honor a demand for
repayment. The fact that there are contractual or legal restrictions on resale
to the general public or to certain institutions may not be indicative of the
liquidity of such investments.
Rule 144A under the Securities Act allows for a broader institutional
trading market for securities otherwise subject to restriction on resale to the
general pubilc. Rule 144A establishes a "safe harbor" from the registration
requirements of the Securities Act for resales of certain securities to
qualified institutional buyers. The investment adviser anticipates that the
market for certain restricted securities such as institutional commercial paper
and foreign securities will expand further as a result of this regulation and
the development of automated systems for the trading, clearance and settlement
of unregistered securities of domestic and foreign issuers, such as the PORTAL
System sponsored by the National Association of Securities Dealers, Inc. (NASD).
A series' investment in Rule 144A securities could have the effect of increasing
illiquidity to the extent that qualified institutional buyers become, for a
time, uninterested in purchasing Rule 144A securities.
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 NRSROs 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
B-24
<PAGE>
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.
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 as required by
applicable law. 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 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, economic or political
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 of "eligible quality," as
defined under "(b) and (c) Investment Strategies, Policies and Risks." Investing
heavily in cash, cash equivalents, or investment-grade taxable obligations
limits our ability to achieve each series' investment objective, but can help to
preserve each 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.
B-25
<PAGE>
The non-money market 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. A
100% turnover rate would occur, for example, if all of the securities held in a
series' portfolio were sold and replaced within one year. In addition, high
portfolio turnover may also mean that a proportionately greater amount of
distributions to interest holders will be taxed as ordinary income rather than
long-term capital gains compared to investment companies with lower portfolio
turnover. For the fiscal year ended August 31, 1999 and the fiscal year ended
August 31, 2000, the portfolio turnover rates for the California Series and the
California Income Series were 13% and 23%, and 34% and 23%, respectively. The
series' portfolio turnover rate will not be a limiting factor when the series
deem it desirable to sell or purchase securities. See "Brokerage Allocation and
Other Practices" and "Taxes, Dividends and Distributions" below.
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.
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).
B-26
<PAGE>
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.
MANAGEMENT OF THE FUND
<TABLE>
<CAPTION>
NAME AND ADDRESS** (AGE) POSITION WITH FUND PRINCIPAL OCCUPATION DURING PAST FIVE YEARS
------------------------ ------------------ -------------------------------------------
<C> <S> <C> <C>
Eugene C. Dorsey (73)............................. 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 Co.,
Inc.; past Chairman of Independent Sector,
Washington, D.C. (largest national coalition of
philanthropic organizations); formerly Chairman
of the American Council for the Arts; former
Director of the Advisory Board of Chase
Manhattan Bank of Rochester and Trustee of
several funds within the Prudential Mutual Funds
complex.
Delayne Dedrick Gold (62)......................... Trustee Marketing and Management Consultant and Trustee of
several funds within the Prudential Mutual Funds
complex.
</TABLE>
B-27
<PAGE>
<TABLE>
<CAPTION>
NAME AND ADDRESS** (AGE) POSITION WITH FUND PRINCIPAL OCCUPATION DURING PAST FIVE YEARS
------------------------ ------------------ -------------------------------------------
<C> <S> <C> <C>
* Robert F. Gunia (53).............................. Vice President and Executive Vice President and Chief Administrative
Trustee Officer (since June 1999) of Prudential
Investments; Executive Vice President and
Treasurer (since December 1996) of PIFM;
President (since April 1999) of Prudential
Investment Management Services LLC (PIMS);
Corporate Vice President (since September 1997)
of The Prudential Insurance Company of America
(Prudential); formerly Senior Vice President
(March 1987-May 1999) of Prudential Securities
Incorporated; formerly Chief Administrative
Officer (July 1989-September 1996), Director
(January 1989-September 1996) and Executive Vice
President, Treasurer and Chief Financial Officer
(June 1987-December 1996) of Prudential Mutual
Fund Management, Inc. (PMF); Vice President and
Director (since May 1989) of The Asia Pacific
Fund, Inc. and Director or Trustee of
substantially all funds within the Prudential
Mutual Funds complex.
Thomas T. Mooney (58)............................. Trustee President of the Greater Rochester Metro Chamber
of Commerce; former Rochester City Manager; former
Deputy Monroe County Executive; Trustee of
Center for Governmental Research, Inc.; Director
of Blue Cross of Rochester, Monroe County Water
Authority, Executive Service Corps of Rochester
and Trustee of several funds within the
Prudential Mutual Funds complex.
Stephen P. Munn (58).............................. Trustee Chairman, Director and President and former Chief
Executive Officer of Carlisle Companies
Incorporated (manufacturer of industrial
products) and Trustee of several funds within
the Prudential Mutual Funds complex.
* David R. Odenath, Jr. (43)........................ Vice President and Officer in Charge, President, Chief Executive
Trustee Officer and Chief Operating Officer (since June
1999) of PIFM; Senior Vice President (since June
1999) of Prudential; formerly Senior Vice
President (August 1993-May 1999), of PaineWebber
Group, Inc. and Trustee of substantially all
funds within the Prudential Mutual Funds
complex.
</TABLE>
B-28
<PAGE>
<TABLE>
<CAPTION>
NAME AND ADDRESS** (AGE) POSITION WITH FUND PRINCIPAL OCCUPATION DURING PAST FIVE YEARS
------------------------ ------------------ -------------------------------------------
<C> <S> <C> <C>
Richard A. Redeker (57)........................... Trustee Former employee of Prudential Investments (October
1996-December 1998); prior thereto, President,
Chief Executive Officer and Director (October
1993-September 1996) of PMF; Executive Vice
President, Director and Member of the Operating
Committee (October 1993-September 1996) of
Prudential Securities; Director (October
1993-September 1996) of Prudential Securities
Group, Inc.; Executive Vice President of The
Prudential Investment Corporation (January
1994-September 1996); Director (January
1994-September 1996) of Prudential Mutual Fund
Distributors, Inc. and Prudential Mutual Fund
Services, Inc. and Trustee of several funds
within the Prudential Mutual Funds complex.
* John R. Strangfeld, Jr. (46)...................... President and Chief Executive Officer of Prudential Securities
Trustee Incorporated (since October 2000); formerly, Chief
Executive Officer, Chairman, President and
Director (January 1990-September 2000) of The
Prudential Investment Corporation; Executive
Vice President (since February 1998) of
Prudential Global Asset Management; various
positions to Chief Executive Officer (November
1994-December 1998) of the Private Asset
Management Group of Prudential (PAMG) and
Director or Trustee of all funds within the
Prudential Mutual Funds complex.
Nancy H. Teeters (70)............................. Trustee Economist; former Vice President and Chief Econo-
mist, International Business Machines
Corporation; former Director of Inland Steel
Industries (July 1991-1999) and Trustee of
several funds within the Prudential Mutual Funds
complex.
Louis A. Weil, III (59)........................... Trustee Former Chairman (January 1996-July 2000),
President and Chief Executive Officer (January
1996-July 2000) and Director (since September
1991) of Central Newspapers, Inc; former
Chairman of the Board (January 1996-July 2000),
Publisher and Chief Executive Officer (August
1991-December 1995) of Phoenix Newspapers, Inc.
and Trustee of several funds within the
Prudential Mutual Funds complex.
Grace C. Torres (40).............................. Treasurer and First Vice President (since December 1996) of
Principal PIFM; former First Vice President (March 1993-May
Financial and 1999) of Prudential Securities; First Vice
Accounting President (March 1994-September 1996) of
Officer Prudential Mutual Fund Management, Inc.
Deborah A. Docs (42).............................. Secretary Vice President (since December 1996) of PIFM;
former Vice President and Associate General
Counsel (June 1991-September 1996) of Prudential
Securities; Vice President and Associate General
Counsel (June 1991-September 1996) of PMF.
</TABLE>
B-29
<PAGE>
<TABLE>
<CAPTION>
NAME AND ADDRESS** (AGE) POSITION WITH FUND PRINCIPAL OCCUPATION DURING PAST FIVE YEARS
------------------------ ------------------ -------------------------------------------
<C> <S> <C> <C>
William V. Healey (46)............................ Assistant Vice President and Associate General Counsel
Secretary (since 1998) of Prudential; Chief Legal Officer
(since August 1998) of Prudential Investments;
Director (since June 1999) of ICI Mutual
Insurance Company; prior to August 1998,
Associate General Counsel of The Dreyfus
Corporation ("Dreyfus"), a subsidiary of Mellon
Bank, N.A. ("Mellon Bank"), and an officer
and/or director of various affiliates of Mellon
Bank and Dreyfus.
</TABLE>
------------------------
* "Interested" Trustee, as defined in the Investment Company Act, by reason of
his or her affiliation with Prudential Securities Incorporated (Prudential
Securities), Prudential or PIFM.
** 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
"Investment Advisory and Other Services -- Manager and Investment Adviser" and
"Principal Underwriter, Distributor and Rule 12b-1 Plans," review such actions
and decide on general policy.
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 75.
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 $3,200, in
addition to certain out-of-pocket expenses. The amount of annual compensation
paid to each Trustee may change as a result of the introduction of additional
funds upon which the Trustees will be asked to serve.
Trustees may receive their Trustees' fees pursuant to a deferred fee
agreement with the Fund. Under the terms of such agreement, the Fund accrues
daily the amount of 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 a Commission exemptive order, at the daily
rate of return of any Prudential mutual 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, 2000 and the aggregate compensation paid to such Trustees for
service on the Fund's Board and the Boards of all other investment companies
managed by PIFM (Fund Complex) for the calendar year ended December 31, 1999.
B-30
<PAGE>
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 (a) $3,200 None N/A $142,500(43/70)*
Eugene C. Dorsey, Trustee** $3,200 None N/A $ 81,000(17/48)*
Delayne Dedrick Gold, Trustee $3,325 None N/A $144,500(43/70)*
Robert F. Gunia, Trustee and Vice
President+ -- -- -- --
Thomas T. Mooney, Trustee** $3,200 None N/A $129,500(35/75)*
Stephen P. Munn, Trustee $ 950 None N/A $ 62,250(29/53)*
Thomas H. O'Brien, Trustee (a) $3,200 None N/A $ 47,500(11/26)*
David R. Odenath, Jr., Trustee and
Vice President+ -- -- -- --
Richard A. Redeker, Trustee $3,200 None N/A $ 95,000(19/53)*
John R. Strangfeld, Jr., Trustee and
President+ -- -- -- --
Nancy H. Teeters, Trustee $3,200 None N/A $ 97,000(25/43)*
Louis A. Weil, III, Trustee $3,275 None N/A $ 96,000(29/53)*
</TABLE>
------------------------
* Indicates number of funds/portfolios in Fund Complex (including the Fund) to
which aggregate compensation relates.
** Total aggregate compensation from all of the funds in the Fund Complex for
the calendar year ended December 31, 1999, includes amounts deferred at the
election of Trustees under the Fund's deferred compensation plans. Including
accrued interest, total compensation amounted to $103,573 and $135,101 for
Eugene C. Dorsey and Thomas T. Mooney, respectively.
+ Trustees who are interested do not receive compensation from the Fund or any
fund in the Fund Complex.
(a) Former Trustee, retired on December 31, 1999.
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
Trustees of the Fund are eligible to purchase Class Z shares of each series,
if any, which are sold without an initial sales charge or contingent deferred
sales charge.
As of October 6, 2000, 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 October 6, 2000, the beneficial owners, directly or indirectly, of
more than 5% of the outstanding shares of any class of beneficial interest of a
series were: David L. Stark & Joyce A. Stark, JT TEN, 6609 Via Canada, Rancho
Palos Verdes, CA 90274, who held 7,304 Class C shares of the California Series
(7.99%); Robert J. Cassietto & Terry A. Cassietto, JT TEN, 2901 Poinsetta Ave.,
Manhattan Beach, CA 90266-2404, who held 7,106 Class C shares of the California
Series (7.77%); Mr. John Dibiase & Mrs. Lois Dibiase, CO-TTEES, Dibiase Family
Trust, UA DTD 01/23/91, 7955 Sierra Vista St., RCH Cucamonga, CA 91730-1834, who
held 8,773 Class C shares of the California Series (9.59%); Mr. Terrance J. Chan
& Mrs. Karen Chan, JT TEN, 1518 Ruby CT., Diamond Bar, CA 91765-4039, who held
11,751 Class C shares of the California Series (12.85%); Mr. Thomas H. Bay &
Mrs. Shirley R. Bay, CO-TTEES, The Bay 2000 Trust, UA DTD 04/25/00, P.O. Box
439060, San Diego, CA 92143-9060, who held 9,022 Class C shares of the
California Series (9.86%); Seamus P. Burlingame, 3546 N. Riverside Ave., Rialto,
CA 92377-3802, who held 5,054 Class C shares of the California Series (5.53%);
Hugin Components Inc., 4231 Pacific St., Ste. 23, Rocklin, CA 95677-2135, who
held 9,223 Class C shares of the California Series (10.08%); Mrs. Ruth Leader,
PRU CHOICE, 8757 Burton Way #407, Los Angeles, CA 90048-3839, who held 16,498
Class Z shares of the California Series (12.43%); Lloyd M. Ives, M. Constance
Ives, CO-TTEES, The Ives Family Trust, UA DTD 08/09/89, 1761 Calle Arroyo,
Diablo, CA 94528,
B-31
<PAGE>
who held 18,058 Class Z shares of the California Series (13.6%); August G. Bako
& Evelyn M. Bako, CO TTEES, August G. Bako & Evelyn Bako Rev Liv Tr, UA DTD
09/11/87, 4905 Elrod Dr., Castro Valley, CA 94546-2415, who held 14,345 Class Z
shares of the California Series (10.81%); Julia M. McLaughlin, TTEE, Alton &
Julie McLaughlin Trust, UA DTD 12/12/77, 1840 Tice Creek Dr., Apt. 2115, Walnut
Creek, CA 94595-2458, who held 10,183 Class Z shares of the California Series
(7.67%); Yeoh Ming Ting Yee, TTEE, Yeoh Ming Ting Yee Tr., UA DTD 02/07/83, FBO
Yeoh Ming Ting Yee, 101 Alma St., Apt. 1105, Palo Alto, CA 94301-1011, who held
20,865 Class Z shares of the California Series (15.72%); Andrea D. Brennan,
1507 Berkeley St., Apt. 1, Santa Monica, CA 90404-3228, who held 11,658 Class Z
shares of the California Series (8.78%); Julia M. McLaughlin, TTEE, FBO The
Alton and Julia McLaughlin Trust, UA DTD 12/12/77, 1840 Tice Creek Dr.,
Apt. 2115, Walnut Creek, CA 94595-2458, who held 48,201 Class Z shares of the
California Income Series (11.38%); Dr. George D. Mallory & Mrs. June A. Mallory,
CO-TTEES, Mallory Rev Trust of 03/13/87, UA DTD 07/09/97, 13847 Mallory Ct.,
Grass Valley, CA 95949-7658, who held 26,257 Class Z shares of the California
Income Series (6.20%); Ms. Nairn Kirkpatrick, TTEE, Nairn Kirkpatrick Trust, UA
DTD 08/26/82, 7677 Greenridge Way, Fair Oaks, CA 95628-4808, who held 51,486
Class Z shares of the California Income Series (12.16%).
As of October 6, 2000, Prudential Securities was the record holder for other
beneficial owners of 4,205,669 Class A shares (or 51.07% of the outstanding
Class A shares), 1,385,007 Class B shares (or 55.96% of the outstanding Class B
shares), 86,412 Class C shares (or 94.47% of the outstanding Class C shares) and
132,703 Class Z shares (or 99.97% of the outstanding Class Z shares) of the
California Series; 11,105,849 Class A shares (or 72.7% of the outstanding
Class A shares), 5,638,138 Class B shares (or 74.13% of the outstanding Class B
shares), 678,529 Class C shares (or 86.98% of the outstanding Class C shares)
and 423,405 Class Z shares (or 99.98% of the outstanding Class Z shares) of the
California Income Series; and 279,482,573 shares of the California Money Market
Series (or 99.36% 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, 2000 PIFM managed and/or administered open-end
and closed-end management investment companies with assets of approximately
$75.1 billion. According to the Investment Company Institute, as of June 30,
2000, the Prudential mutual funds were the 22nd 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 and dividend distribution 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 has hired the Subadviser to provide subadvisory services to 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-32
<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. Currently, the
Fund believes there are no such expense limitations.
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, 1998, 1999 and 2000, PIFM received
management fees of $766,228, $768,543 and $672,142, respectively, from the
California Series. With respect to the California Money Market Series, PIFM
received $1,436,251, $1,445,776 and $1,498,012, in management fees for the
fiscal year ended August 31, 1998, 1999 and 2000, respectively. For the fiscal
years ended August 31, 1998, 1999 and 2000, PIFM received $1,147,925, $1,410,411
and $1,318,663, respectively, in management fees from the California Income
Series. With respect to the California Income Series, PIFM waived 10% of its
management fee for the fiscal year
B-33
<PAGE>
ended August 31, 1998 and for the period from September 1, 1998 through May 31,
1999. Effective June 1, 1999, PIFM discontinued its management fee waiver. The
amount of the fees waived for the years ended August 31, 1998 and 1999 amounted
to $114,792 and $104,983, respectively.
PIFM has entered into the Subadvisory Agreement with the Subadviser, a
wholly-owned subsidiary of Prudential. The Subadvisory Agreement provides that
the Subadviser will furnish investment advisory services in connection with the
management of the Fund. In connection therewith, the Subadviser is obligated to
keep certain books and records of the Fund. Under the Subadvisory Agreement, the
Subadviser, subject to the supervision of PIFM, is responsible for managing the
assets of each series in accordance with its investment objectives and policies.
The Subadviser determines what securities and other instruments are purchased
and sold for the series and is responsible for obtaining and evaluating
financial data relevant to the series. PIFM continues to have responsibility for
all investment advisory services pursuant to the Management Agreement and
supervises the Subadviser's performance of such services. The Subadviser was
reimbursed by PIFM for the reasonable costs and expenses it incurred in
furnishing those services. Effective January 1, 2000, the Subadviser is paid by
PIFM at an annual rate of .250 of 1.00% of the average daily net assets of each
Series.
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 the Subadviser 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.
With respect to the non-money market series, Prudential Investment's Fixed
Income Group includes the following sector team which may contribute towards
security selection in addition to the sector team described in the relevant
prospectus (assets under management are as of June 30, 2000).
MONEY MARKETS
ASSETS UNDER MANAGEMENT: $33.9 billion.
TEAM LEADER: Joseph Tully. GENERAL INVESTMENT EXPERIENCE: 16 years.
PORTFOLIO MANAGERS: 9. AVERAGE GENERAL INVESTMENT EXPERIENCE: 10 years,
which includes team members with significant mutual fund experience.
SECTOR: High-quality, short-term securities, including both taxable and
tax-exempt instruments. INVESTMENT STRATEGY: Focus is on safety of principal,
liquidity and controlled risk.
CODE OF ETHICS
The Board of Trustees of the Fund has adopted a Code of Ethics. In addition,
the Manager, Subadviser and Distributor have each adopted a Code of Ethics (the
"Codes"). The Codes permit personnel subject to the Codes to invest in
securities, including securities that may be purchased or held by the Fund.
However, the protective
B-34
<PAGE>
provisions of the Codes prohibit certain investments and limit such personnel
from making investments during periods when the Fund is making such investments.
The Codes are on public file with, and are available from, the Commission.
(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. The Distributor is a subsidiary of
Prudential.
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
these expenses of distribution are 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 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 brokers 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. The Distributor has contractually agreed to
limit its distribution-related fees payable under the Class A Plan to .25 of 1%
of the average daily net assets of the Class A shares of the Series for the
fiscal year ending August 31, 2001. Fee waivers will increase the Series' total
return.
CLASS A PLAN. For the fiscal year ended August 31, 2000, the Distributor
received payments of $233,900 and $429,221 from the Fund on behalf of the
California Series and the California Income Series, respectively, under the
Class A Plan and spent approximately $221,800 and $377,400 in distributing the
California Series' and the California Income Series' Class A shares,
respectively. These amounts were primarily expended for payments of account
servicing fees to financial advisers and other persons who sell Class A shares.
For the fiscal year ended August 31, 2000, the Distributor also received
approximately $22,400 and $123,000 from the Fund on behalf of the California
Series and the California Income Series, respectively in initial sales charges
attributable to Class A shares.
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
B-35
<PAGE>
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. The
Distributor also receives contingent deferred sales charges from certain
redeeming shareholders and, with respect to Class C shares, initial sales
charges. The Distributor has contractually agreed to limit its
distribution-related fees payable under the Class C Plan to .75 of 1% of the
average daily net assets of the Series for the fiscal year ending Augus 31,
2001. Fee waivers will increase the Series' total return.
CLASS B PLAN. For the fiscal year ended August 31, 2000, the Distributor
received $191,741 from the Fund on behalf of the California Series under the
Fund's Class B Plan and spent approximately $178,800 in distributing the
Class B shares of the California Series during such period. For the fiscal year
ended August 31, 2000, the Distributor received $393,715 from the Fund on behalf
of the California Income Series under the Fund's Class B Plan and spent
approximately $185,997 in distributing the Class B shares of the California
Income Series during such period.
For the fiscal year ended August 31, 2000, it is estimated that the
Distributor spent approximately the following amounts on behalf of the series of
the Fund:
<TABLE>
<CAPTION>
COMPENSATION
PRINTING AND TO PRUSEC* FOR
MAILING COMMISSION COMMISSION
PROSPECTUSES PAYMENTS TO PAYMENTS TO
TO OTHER FINANCIAL REPRESENTATIVES
THAN CURRENT ADVISERS OF OVERHEAD COSTS AND OTHER
SERIES SHAREHOLDERS DISTRIBUTOR OF DISTRIBUTOR** EXPENSES**
------ ------------------------ ----------------------- -------------------------- ----------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
California
Series... $1,000 (0.59%) $ 17,700 (9.90%) $ 9,000 (5.01%) $151,100 (84.5%)
California
Income
Series... $2,000 (0%) $344,800 (49%) $318,500 (45%) $ 39,800 (6%)
<CAPTION>
APPROXIMATE
TOTAL
AMOUNT
SPENT BY
DISTRIBUTOR
ON BEHALF OF
SERIES SERIES
------ ------------
<S> <C>
California
Series... $178,800
California
Income
Series... $705,100
</TABLE>
------------------------
*Pruco Securities Corporation, an affiliated broker-dealer.
**Including lease, utility and sales promotional expenses.
The term "overhead costs" represents (a) the expenses of operating the
branch offices of Prudential Securities and Prusec in connection with the sale
of Fund shares, including lease costs, the salaries and employee benefits of
operations and sales support personnel, utility costs, communication costs and
the costs of stationery and supplies, (b) the cost of client sales seminars, (c)
expenses of mutual fund sales coordinators to promote the sale of Fund shares
and (d) other incidental expenses relating to branch promotion of Fund sales.
The Distributor also receives the proceeds of contingent deferred sales
charges paid by investors of Class B shares 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, 2000, the Distributor received approximately $95,700 and
$281,500 from the Fund on behalf of the California Series and the California
Income Series, respectively, in contingent deferred sales charges attributable
to Class B shares.
CLASS C PLAN. For the fiscal year ended August 31, 2000, the Distributor
received $9,674 and $67,660 from the Fund on behalf of the California Series and
the California Income Series, respectively, under the
B-36
<PAGE>
Fund's Class C Plan. For the fiscal year ended August 31, 2000, the Distributor
spent approximately $8,700 and $37,900 in distributing the Class C shares of the
California Series and the California Income Series, respectively. These amounts
were expended primarily for the payment of account servicing fees.
<TABLE>
<CAPTION>
COMPENSATION
PRINTING AND TO PRUSEC* FOR
MAILING COMMISSION COMMISSION
PROSPECTUSES PAYMENTS TO PAYMENTS TO
TO OTHER FINANCIAL REPRESENTATIVES
THAN CURRENT ADVISERS OF OVERHEAD COSTS AND OTHER
SERIES SHAREHOLDERS DISTRIBUTOR OF DISTRIBUTOR* EXPENSES*
------ ------------------------ ----------------------- --------------------------- -----------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
California
Series... $ -- (0%) $ 100 (1.15%) $1,400 (16.07%) $7,200 (82.75%)
California
Income
Series... $300 (1%) $42,400 (78%) $7,800 (15%) $3,400 (6%)
<CAPTION>
APPROXIMATE
TOTAL
AMOUNT
SPENT BY
DISTRIBUTOR
ON BEHALF OF
SERIES SERIES
------ ------------
<S> <C>
California
Series... $ 8,700
California
Income
Series... $53,900
</TABLE>
------------------------
*Pruco Securities Corporation, an affiliated broker-dealer.
**Including lease, utility and sales promotional expenses.
The Distributor also receives the proceeds of initial sales charges with
respect to the sale of Class C shares and 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 (CDSC)" in the Prospectuses of the California Income
Series and the California Series. For the fiscal year ended August 31, 2000, the
Distributor received approximately $600 and $7,900 on behalf of the California
Series and the California Income Series, respectively, in contingent deferred
sales charges attributable to Class C shares. For the same period, the
Distributor also received approximately $1,400 and $11,900 on behalf of the
California Series and the California Income Series, respectively, in initial
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.
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
B-37
<PAGE>
August 31, 2000, the Distributor incurred distribution expenses of $374,503 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. In addition,
the Distributor has contractually agreed to waive a portion of its distribution
fees for Class A and Class C shares as described above. Fee waivers and
subsidies will increase a Series' total return.
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), 194 Wood Avenue South, Iselin,
New Jersey 08830, 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 $13.00 per
shareholder account, a new account set-up fee of $2.00 for each manually
established shareholder account and a monthly inactive zero balance account fee
of $20.00 per shareholder account. PMFS is also reimbursed for its out-of-pocket
expenses, including but not limited to postage, stationery, printing, allocable
communication expenses and other costs.
For the fiscal year ended August 31, 2000, the Fund incurred expenses of
approximately $45,000 and $56,000 for the services of PMFS on behalf of the
California Series and the California Income Series, respectively.
PricewaterhouseCoopers LLP 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, the Distributor 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.
B-38
<PAGE>
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 the Distributor
or an affiliate in any transaction in which the Distributor or an affiliate acts
as principal except in accordance with rules of the Commission. Thus it will not
deal in the over-the-counter market with the Distributor or an affiliate acting
as market maker, and it will not execute a negotiated trade with the Distributor
or an affiliate if execution involves the Distributor or an affiliate acting as
principal with respect to any part of the Fund's order.
In placing orders for portfolio securities for the Fund, the Manager is
required to give primary consideration to obtaining the, best possible
combination of 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 the Distributor
or an affiliate, 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 the Distributor or an affiliate 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.
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.
Subject to the above considerations, Prudential Securities may act as a
broker or futures commission merchant for the Fund. In order for Prudential
Securities (or any affiliate) to effect any portfolio transactions for the Fund,
the commissions, fees or other remuneration received by Prudential Securities
(or any affiliate) must be reasonable and fair compared to the commissions, fees
or other remuneration paid to other brokers or futures commission merchants in
connection with comparable transactions involving similar securities or futures
contracts being purchased or sold on a securities exchange or board of trade
during a comparable period of time. This standard would allow Prudential
Securities (or any affiliate) to receive no more than the remuneration which
would be expected to be received by an unaffiliated broker or futures commission
merchant in a commensurate arms-length transaction. Furthermore, the Trustees of
the Fund, including a majority of the non-interested Trustees, have adopted
procedures which are reasonably designed to provide that any commissions, fees
or other remuneration paid to Prudential Securities (or any affiliate) are
consistent
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<PAGE>
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, 1998, 1999 and 2000, the California
Series paid brokerage commissions of $10,448, $11,393 and $7,840 respectively,
on certain futures transactions. The California Series paid no brokerage
commissions to any of the Fund's affiliates, including the Distributor during
those periods. During the fiscal years ended August 31, 1998, 1999 and 2000, the
California Money Market Series paid no brokerage commissions. During the fiscal
years ended August 31, 1998, 1999 and 2000, the California Income Series paid
brokerage commissions of $10,448, $15,155 and $19,320 respectively. None of the
brokerage commissions paid by the California Income Series were paid to any of
the Fund's affiliates, including the Distributor.
The Fund is required to disclose its holdings of securities of its regular
brokers and dealers (as defined under Rule 10b-1 of the Investment Company Act)
and their parents at August 31, 2000. As of August 31, 2000, 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, and
(4) only Class B shares have a conversion feature. 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.
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
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<PAGE>
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 "How to Buy, Sell and Exchange Shares of the Series --
How to Buy Shares" in 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, fund, series, and
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 investing (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 4:30 p.m. with
respect to the California Money Market Series, you may purchase shares of the
Fund as of that day.
In making a subsequent purchase 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 using 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 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.
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<PAGE>
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 Class B* and Class Z shares are sold at NAV. Using the NAV of
these Series at August 31, 2000, the maximum offering prices of the Series'
shares are as follows:
<TABLE>
<CAPTION>
CALIFORNIA
CALIFORNIA INCOME
SERIES SERIES
---------- ----------
<S> <C> <C>
CLASS A
------------------------------------------------------------
Net asset value and redemption price per Class A share...... $11.78 $10.66
Maximum initial sales charge (3% of offering price)......... .36 .33
------ ------
Maximum offering price to public............................ $12.14 $10.99
====== ======
CLASS B
------------------------------------------------------------
Net asset value, offering price and redemption price per
Class B share*............................................. $11.78 $10.67
====== ======
CLASS C
------------------------------------------------------------
Net asset value and redemption price per Class C share*..... $11.78 $10.67
Maximum initial sales charge (1% of offering price)......... .12 .11
------ ------
Offering price to public.................................... $11.90 $10.78
====== ======
CLASS Z
------------------------------------------------------------
Net asset value, offering price and redemption price per
Class Z share.............................................. $11.79 $10.65
====== ======
</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 4 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 4
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
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<PAGE>
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 CHARGE -- 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 of subadvisers of the Prudential mutual funds provided that
purchases at NAV are permitted by such person's employer
- 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
- members of the Board of Directors of Prudential
- real estate brokers, agents and employees of real estate brokerage
companies affiliated with The Prudential Real Estate Affiliates who
maintain an account at Prudential Securities, Prusec or with the Transfer
Agent
- 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 programs)
- 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 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.
For an investor to obtain any reduction or waiver of the initial sales
charges, at the time of the sale either the Transfer Agent must be notified
directly by the investor or the Distributor must be notified by the broker
facilitating the transaction that the sale qualifies for the reduced or waived
sales charge. The reduction or waiver will be granted subject to confirmation of
your entitlement. No initial sales charge is imposed upon Class A shares
acquired upon the reinvestment of dividends and distributions.
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
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<PAGE>
other Prudential mutual funds, the purchases may be combined to take advantage
of the reduced sales charges applicable to larger purchases. See "How to Buy,
Sell and Exchange Shares of the Series -- How to Buy Shares -- Step 2: Choose a
Share Class -- 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
- 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 broker 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.
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 investment, within a thirteen-month period, of a
specific dollar amount in the Fund and other Prudential mutual funds (Letter of
Intent).
For purposes of the Letter of Intent, the value of all shares of the Fund
and shares of other Prudential mutual funds (excluding money market funds other
than those acquired pursuant to the exchange privilege) which were previously
purchased and are still owned are also included in determining the applicable
reduction. However, the value of shares held directly with the Transfer Agent or
its affiliates, and through your broker, will not be aggregated to determine the
reduced sales charge.
A Letter of Intent permits an investor 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 investor.
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
investor'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 satisfied within the
thirteen-month period, the investor is required to pay the difference between
the sales charges otherwise applicable to the purchases made during this period
and sales charges actually paid. Such payment may be made directly to the
Distributor or, if not paid, the Distributor will liquidate sufficient escrowed
shares to obtain such difference. Investors electing to purchase Class A shares
of the California Series or the California Income Series pursuant to a Letter of
Intent should carefully read such Letter of Intent.
B-44
<PAGE>
The Distributor must be notified at the time of purchase that the investor
is entitled to a reduced sales charge. The reduced sales charge will be granted
subject to confirmation of the investor's holdings. Letters of intent are not
available to individual participants in any retirement or group plans.
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 Charge" 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 your broker if you are
entitled to this waiver and provide it with such supporting documents as it may
deem appropriate.
CLASS Z SHARES
MUTUAL FUND PROGRAMS. Class Z shares of the California Series and California
Income Series also can be purchased by participants in any fee-based program or
trust program sponsored by Prudential or an affiliate that includes mutual funds
as investment options and the Fund 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
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
- 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 also are available for purchase by the
following categories of investors:
- 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 investment option
B-45
<PAGE>
- Current and former Directors/Trustees of the Prudential mutual funds
(including the Fund)
- 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.
RIGHTS OF ACCUMULATION
Reduced sales charges also are 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.
Rights of Accumulation may be applied across the classes of the Prudential
mutual funds. The value of shares held directly with the Transfer Agent and
through your broker will not be aggregated to determine the reduced sales
charge. The value of existing holdings for purposes of determining the reduced
sales charge is calculated using the maximum offering price (net asset value
plus maximum sales charge) as of the previous business day. "See Risk/Return
Summary -- Evaluating Performance" in the Prospectus.
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 charge will be granted subject to confirmation of the investors' holdings.
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 Charge"
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, for the California Series and the California Income
Series, and at 4:30 p.m., New York time, with respect to the California Money
Market Series) 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.
In order to redeem shares, a written request for redemption signed by you
exactly as the account is registered is required. If you hold certificates, 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, and your shares are
held directly with the Transfer Agent, 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 8149, Philadelphia, PA 19101 to the
Distributor, or to your broker.
SIGNATURE GUARANTEE. If the proceeds of the redemption (1) exceed $100,000,
(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, and your
shares are held directly with the Transfer Agent, the signature(s) on the
redemption request or stock power must be signature guaranteed by an "eligible
guarantor institution." An "eligible guarantor institution" includes any bank,
broker, dealer or credit union. The Transfer Agent reserves the right to request
additional information from, and make reasonable inquires of, any eligible
guarantor institution. In the case of redemptions from a PruArray Plan, if
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<PAGE>
the proceeds of the redemption are invested in another investment option of the
plan in the name of the record holder and at the same address as reflected in
the Transfer Agent's records, a signature guarantee 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 written request and certificates, if issued, 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 Securities and Exchange Commission (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 Board of Trustees determines 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 Board
of 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 back into your
account any portion or all of the proceeds of such redemption in shares of the
same Series at the NAV next determined after the order is received, which must
be within 90 days after the date of the redemption. Any CDSC paid in connection
with such redemption will be credited (in shares) to your account. (If less than
a full repurchase is made, the credit will 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
Charge" below.
CONTINGENT DEFERRED SALES CHARGE
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 will be subject to a 1% CDSC. The CDSC
will be deducted from the redemption proceeds and reduce the amount paid to you.
The CDSC will be imposed on any redemption by you which reduces the current
value of your Class B or Class C shares to an amount which is lower than the
amount of all payments by you for shares during the preceding six years, in the
case of Class B shares, and 18 months, in the case of Class C shares. A CDSC
will be applied on the
B-47
<PAGE>
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 a 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 SINCE PURCHASE OF DOLLARS INVESTED OR
PAYMENT MADE REDEMPTION PROCEEDS
------------------------------------------------ -------------------------
<S> <C>
First........................................... 5.0%
Second.......................................... 4.0%
Third........................................... 3.0%
Fourth.......................................... 2.0%
Fifth........................................... 1.0%
Sixth........................................... 1.0%
Seventh......................................... None
</TABLE>
In determining whether a CDSC is applicable to redemption, the calculation
will be made in a manner that results in the lowest possible rate. It will be
assumed that the redemption is made first of amounts representing shares
acquired pursuant to the reinvestment of dividends and distributions; then of
amounts representing the increase in NAV above the total amount of payments for
the purchase of Class B shares made during the preceding six years and 18 months
for Class C shares; 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 CHARGE -- 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, at the time of death or initial determination of disability, provided
that the shares were purchased prior to death or disability.
The CDSC also will be waived in the case of a total or partial redemption in
connection with certain distributions made without penalty under the Internal
Revenue Code from a tax-deferred retirement plan, an IRA or Section 403(b)
custodial account. For more information, call Prudential at (800) 353-2847.
Finally, the CDSC will be waived to the extent that the proceeds from shares
redeemed are invested in Prudential mutual funds, The Guaranteed Investment
Account, the Guaranteed Insulated Separate Account or units of The Stable Value
Fund.
B-48
<PAGE>
SYSTEMATIC WITHDRAWAL PLAN. The CDSC will be waived (or reduced) on certain
redemptions effected through the 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. The CDSC will be
waived (or reduced) on redemptions until this threshold 12% is reached.
In addition, the CDSC will be waived on redemptions of shares held by
Trustees of the Fund.
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>
<CAPTION>
CATEGORY OF WAIVER REQUIRED DOCUMENTATION
<S> <C>
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 (a copy of the trust agreement
death or to be of long-continued and indefinite identifying the grantor will be required as
duration. well)) is permanently disabled. The letter must
also indicate the date of disability.
</TABLE>
The Transfer Agent reserves the right to request such additional documents as it
may deem appropriate.
QUANTITY DISCOUNT -- CLASS B SHARES PURCHASED PRIOR TO AUGUST 1, 1994
The CDSC is reduced on redemptions of Class B shares of a series of the Fund
purchased prior to August 1, 1994, if immediately after a purchase of such
shares, the aggregate cost of all Class B shares of a series of the Fund owned
by you in a single account exceeded $500,000. For example, if you purchased
$100,000 of Class B shares of a series of the Fund and the following year
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.
B-49
<PAGE>
Since the Fund tracks amounts paid rather than the number of shares bought
on each purchase of Class B shares, the number of Class B shares eligible to
convert to Class A shares (excluding shares acquired through the automatic
reinvestment of dividends and other distributions) (the Eligible Shares) will be
determined on each conversion date in accordance with the following formula: (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. Shareholders should consult
their tax advisers regarding the state and local tax consequences of the
conversion or exchange of shares.
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 at net asset
value per share. An investor may direct the Transfer Agent in writing not
B-50
<PAGE>
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 by the record date, cash payment will be made directly to the broker.
Any shareholder who receives dividends or distributions in cash may subsequently
reinvest any such dividends or distributions at NAV by returning the check to
the Transfer Agent within 30 days after the payment date. The reinvestment will
be made at the NAV per share next determined after receipt of the check by the
Transfer Agent. Shares purchased with reinvested dividends and/or distributions
will not be subject to CDSC upon redemption.
EXCHANGE PRIVILEGE
Each series makes available to its shareholders the privilege of exchanging
their shares of the series for shares of other series of the Fund and certain
other Prudential mutual funds, including one or more specified money market
funds, subject in each case to the minimum investment requirements of such
funds. Shares of such other Prudential mutual funds may also be exchanged for
shares of the 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 8:00 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 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 8157, Philadelphia, PA
19101.
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 other series of
the Fund or certain other Prudential mutual funds 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-51
<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
(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 each 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 other series of the Fund or certain
other Prudential mutual funds and shares of Prudential Special Money Market
Fund, Inc., a money market mutual fund. No CDSC will be payable upon such
exchange, but a CDSC may be payable upon the redemption of the Class B and
Class C shares acquired as a result of the exchange. The applicable sales charge
will be that imposed by the fund in which shares were initially purchased and
the purchase date will be deemed to be the first day of the month after the
initial purchase, rather than the date of the exchange.
Class B and Class C shares of the California Income Series and the
California Series may also be exchanged for shares of an eligible money market
fund without imposition of any CDSC at the time of exchange. Upon subsequent
redemption from such money market fund or after re-exchange into the Series,
such shares will be subject to the CDSC calculated 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 exchanged 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.
Shareholders who qualify to purchase Class Z shares will have their Class B
and Class C shares which are not subject to a CDSC and their Class A shares
exchanged for Class Z shares on a quarterly basis. Eligibility for
B-52
<PAGE>
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 Fund's Transfer Agent, the
Distributor or your broker. 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............................... $ 105 $ 158 $ 210 $ 263
20 Years............................... 170 255 340 424
15 Years............................... 289 438 578 722
10 Years............................... 547 820 1,093 1,366
5 Years............................... 1,361 2,041 2,721 3,402
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-53
<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 by
authorizing his or her bank account or Prudential Securities account (including
a Prudential Securities COMMAND Account) to be debited to invest specified
dollar amounts for subsequent investment into the Fund. The investor's bank must
be a member of the Automatic Clearing House System.
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,
quarterly, semi-annual or annual redemption checks in any amount, except as
provided below, up to the value of shares in the shareholder's account.
Systematic 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 (CDSC)" 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) systematic withdrawals may not be for less than $100
and (3) all dividends and/or distributions must be automatically reinvested in
additional full and fractional shares of the Fund in order for the shareholder
to participate in 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 systematic 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.
Systematic withdrawal payments should not be considered as dividends, yield
or income. If systematic withdrawals continuously exceed reinvested dividends
and distributions, the shareholder's original investment will be correspondingly
reduced and ultimately exhausted.
Furthermore, each systematic withdrawal constitutes a redemption of shares,
and any gain or loss realized must be recognized for federal income tax
purposes. In addition, systematic withdrawals made concurrently with purchases
of additional shares are inadvisable because of the sales charges 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.
CHECKWRITING REDEMPTION
Shareholders are subject to the Custodian's rules and regulations governing
checkwriting redemption privileges, 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 for
check redemptions 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 check or by
wire. If insufficient shares are in the account, or if the purchase was made by
check within
B-54
<PAGE>
10 days, the check is returned marked "insufficient funds." Since the dollar
value of an account is constantly changing, it is not possible for a shareholder
to determine in advance the total value of his or her account so as to write a
check for the redemption of the entire account.
There is a service charge of $5.00 payable to PMFS to establish the
checkwriting redemption privilege and to order checks. The Custodian and the
Fund have reserved the right to modify this checkwriting 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 Checkwriting Redemption Privilege 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 an 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 an "eligible guarantor institution" as
defined below. 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 share certificates, if issued. If
the proceeds of the redemption (a) exceed $100,000, (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 or stock power must be signature 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 of record.
MUTUAL FUND PROGRAMS
From time to time, the Fund (or a series of the Fund) may be included in a
mutual fund program with other Prudential mutual funds. Under such a program, a
group of portfolios will be selected and thereafter promoted collectively.
Typically, these programs are created with an investment theme, such as pursuit
of 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 broker 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.
B-55
<PAGE>
NET ASSET VALUE
The net asset value per share (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 Commission. 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-56
<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> <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, 2000 was 4.26%, 4.15%, 3.86% and 4.64%,
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, 2000 was 4.37%,
4.25%, 3.96% and 4.75%, 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, 2000, the California Series' tax equivalent yield (assuming a
federal tax rate of 36%) for Class A, Class B, Class C and Class Z shares was
7.34%, 7.15%, 6.65% and 7.99%, 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, 2000 was 7.53%,
6.32%, 6.82% and 8.18%, 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.
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 assumes reinvestment of all dividends and
distributions and 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-57
<PAGE>
The California Series' average annual total returns for the periods ended
August 31, 2000 for the Class A, Class B, Class C and Class Z shares are set
forth below. The average annual total return for the since inception period is
provided for each class the inception date of which is after September 1, 1990.
The average annual total return for the ten year period is provided for each
class the inception date of which was on or before September 1, 1990.
<TABLE>
<CAPTION>
CLASS A
---------------------------------------------------------------------------
ONE FIVE TEN
YEAR(*) YEARS YEARS
----------------------- ----------------------- -----------------------
<S> <C> <C> <C>
Average Annual Total Return....... 5.10% 5.31% 6.72%
Average Annual Total Return
without Subsidy/Waiver*.......... 5.10% 5.29% 6.71%
<CAPTION>
CLASS B
---------------------------------------------------------------------------
ONE FIVE TEN
YEAR(*) YEARS YEARS
----------------------- ----------------------- -----------------------
<S> <C> <C> <C>
Average Annual Total Return....... 3.18% 5.42% 6.72%
Average Annual Total Return
without Subsidy/Waiver*.......... 3.18% 5.41% 6.63%
<CAPTION>
CLASS C
---------------------------------------------------------------------------------------
ONE FIVE FROM INCEPTION
YEAR(*) YEARS INCEPTION DATE
----------------------- ----------------------- ----------------------- ---------
<S> <C> <C> <C> <C>
Average Annual Total Return....... 5.83% 5.11% 5.40% 8/1/94
Average Annual Total Return
without Subsidy/Waiver*.......... 5.83% 5.10% 5.37% 8/1/94
<CAPTION>
CLASS Z
-------------------------------------------------------------
ONE FROM INCEPTION
YEAR(*) INCEPTION DATE
----------------------- ----------------------- ---------
<S> <C> <C> <C>
Average Annual Total Return....... 8.71% 6.20% 9/18/96
Average Annual Total Return
without Subsidy/Waiver*.......... 8.71% 6.18% 9/18/96
</TABLE>
The California Income Series' average annual total returns for the periods
ended August 31, 2000 for the Class A, Class B, Class C and Class Z shares are
set forth below.
<TABLE>
<CAPTION>
CLASS A
---------------------------------------------------------------------------------------
ONE FIVE FROM INCEPTION
YEAR(*) YEARS INCEPTION DATE
----------------------- ----------------------- ----------------------- ---------
<S> <C> <C> <C> <C>
Average Annual Total
Return.................. 3.88% 5.75% 7.29% 12/3/90
Average Annual Total
Return without
Subsidy/Waiver.......... 3.88% 5.68% 7.04% 12/3/90
<CAPTION>
CLASS B
---------------------------------------------------------------------------------------
ONE FIVE FROM INCEPTION
YEAR(*) YEARS INCEPTION DATE
----------------------- ----------------------- ----------------------- ---------
<S> <C> <C> <C> <C>
Average Annual Total
Return.................. 1.93% 5.89% 5.59% 12/7/93
Average Annual Total
Return without
Subsidy/Waiver.......... 1.93% 5.81% 5.46% 12/7/93
<CAPTION>
CLASS C
---------------------------------------------------------------------------------------
ONE FIVE FROM INCEPTION
YEAR(*) YEARS INCEPTION DATE
----------------------- ----------------------- ----------------------- ---------
<S> <C> <C> <C> <C>
Average Annual Total
Return.................. 4.59% 5.57% 5.81% 8/1/94
Average Annual Total
Return without
Subsidy/Waiver.......... 4.59% 5.49% 5.69% 8/1/94
<CAPTION>
CLASS Z
--------------------------------------------------------------
ONE FROM INCEPTION
YEAR(*) INCEPTION DATE
------------------------ ----------------------- ---------
<S> <C> <C> <C>
Average Annual Total
Return.................. 7.26% 6.32% 9/18/96
Average Annual Total
Return without
Subsidy/Waiver.......... 7.26% 6.30% 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.
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, 2000 are set forth below. The aggregate total return for the since
inception period is provided for each class the inception date of which is after
September 1, 1990. The aggregate total return for the ten year period is
provided for each class the inception date of which was on or before
September 1, 1990.
<TABLE>
<CAPTION>
CLASS A
------------------------------------------------------------------------------
ONE FIVE TEN
YEAR(*) YEARS YEARS
------------------------ ------------------------ ------------------------
<S> <C> <C> <C>
Aggregate Total Return....... 8.35% 33.54% 97.63%
Aggregate Total Return
without Subsidy/Waiver*..... 8.35% 33.42% 97.29%
<CAPTION>
CLASS B
------------------------------------------------------------------------------
ONE FIVE TEN
YEAR(*) YEARS YEARS
----------------------- ------------------------ -------------------------
<S> <C> <C> <C>
Aggregate Total Return....... 8.18% 31.23% 90.39%
Aggregate Total Return
without Subsidy/Waiver*..... 8.18% 31.12% 90.07%
<CAPTION>
CLASS C
------------------------------------------------------------------------------------------
ONE FIVE FROM INCEPTION
YEAR(*) YEARS INCEPTION DATE
----------------------- ------------------------- ------------------------ ---------
<S> <C> <C> <C> <C>
Aggregate Total Return....... 7.91% 29.62% 39.13% 8/1/94
Aggregate Total Return
without Subsidy/Waiver*..... 7.91% 29.51% 38.89% 8/1/94
<CAPTION>
CLASS Z
--------------------------------------------------------------
ONE FROM INCEPTION
YEAR(*) INCEPTION DATE
----------------------- ------------------------ ---------
<S> <C> <C> <C>
Aggregate Total Return....... 8.71% 26.82% 9/18/96
Aggregate Total Return
without Subsidy/Waiver*..... 8.71% 26.71% 9/18/96
</TABLE>
The California Income Series' aggregate total returns for the periods ended
August 31, 2000 are set forth below.
<TABLE>
<CAPTION>
CLASS A
------------------------------------------------------------------------------------------
ONE FIVE FROM INCEPTION
YEAR(*) YEARS INCEPTION DATE
------------------------ ------------------------ ------------------------ ---------
<S> <C> <C> <C> <C>
Aggregate Total
Return............... 7.10% 36.37% 104.66% 12/3/90
Aggregate Total Return
without
Subsidy/Waiver*...... 7.10% 35.86% 100.05% 12/3/90
<CAPTION>
CLASS B
----------------------------------------------------------------------------------------
ONE FIVE FROM INCEPTION
YEAR(*) YEARS INCEPTION DATE
----------------------- ----------------------- ------------------------ ---------
<S> <C> <C> <C> <C>
Aggregate Total
Return............... 6.93% 34.14% 44.21% 12/7/93
Aggregate Total Return
without
Subsidy/Waiver*...... 6.93% 33.64% 42.99% 12/7/93
<CAPTION>
CLASS C
-----------------------------------------------------------------------------------------
ONE FIVE FROM INCEPTION
YEAR(*) YEARS INCEPTION DATE
----------------------- ------------------------ ------------------------ ---------
<S> <C> <C> <C> <C>
Aggregate Total
Return............... 6.66% 32.48% 42.39% 8/1/94
Aggregate Total Return
without
Subsidy/Waiver*...... 6.66% 31.98% 41.46% 8/1/94
<CAPTION>
CLASS Z
---------------------------------------------------------------
ONE FROM INCEPTION
YEAR(*) INCEPTION DATE
------------------------ ------------------------ ---------
<S> <C> <C> <C>
Aggregate Total
Return............... 7.26% 27.41% 9/18/96
Aggregate Total Return
without
Subsidy/Waiver*...... 7.26% 27.29% 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
B-58
<PAGE>
will be based on a hypothetical account having a balance of exactly one share at
the beginning of the seven-day period. The base period return will be the change
in the value of the hypothetical account during the seven-day period, including
dividends declared on any shares purchased with dividends on the shares but
excluding any capital changes. The yield will vary as interest rates and other
conditions affecting money market instruments change. Yield also depends on the
quality, length of maturity and type of instruments in the California Money
Market Series' portfolio and its operating expenses. The California Money Market
Series may also prepare an effective annual yield computed by compounding the
unannualized seven-day period return as follows: by adding 1 to the unannualized
seven-day period return, raising the sum to a power equal to 365 divided by 7,
and subtracting 1 from the result. The California Money Market Series'
annualized seven-day current yield and effective annual yield as of August 31,
2000 was 3.16% and 3.21%, 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, 2000 was 5.77%.
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.
ADVERTISING. Advertising materials for each Series may include biographical
information relating to its portfolio manager(s), and may include or refer to
commentary by the Series' manager(s) concerning investment style, investment
discipline, asset growth, current or past business experience, business
capabilities, political, economic or financial conditions and other matters of
general interest to investors. Advertising materials for each Series' also may
include mention of The Prudential Insurance Company of America, its affiliates
and subsidiaries, and reference the assets, products and services of those
entities.
From time to time, advertising materials for each Series' may include
information concerning retirement and investing for retirement, may refer to the
approximate number of Series' shareholders and may refer to Lipper rankings or
Morningstar ratings, other related analyses supporting those ratings, other
industry publications, business periodicals and market indices. In addition,
advertising materials may reference studies or analyses performed by the Manager
or its affiliates. Advertising materials for sector funds, funds that focus on
market capitalizations, index funds and international/global funds may discuss
the potential benefits and risks of that investment style. Advertising materials
for fixed income funds may discuss the benefits and risks of investing in the
bond market including discussions of credit quality, duration and maturity.
From time to time, the performance of a series may be measured against
various indexes. 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)
B-59
<PAGE>
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
PERFORMANCE
COMPARISON OF DIFFERENT TYPES OF INVESTMENTS
OVER THE LONG TERM
(12/31/25-12/31/99)
<S> <C>
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 Composite 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.
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.
B-60
<PAGE>
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 is qualified as, intends to remain qualified as, and
has elected 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 under the Internal Revenue Code, 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 the sale or other disposition of stock, securities, or
foreign currency) from dividends, interest, payments with respect to securities
loans and gains from the sale or other disposition of stock or securities or
options thereon or other income (including but not limited to gains from
options, futures, or forward contracts) derived with respect to its business of
investing in such stock or securities or currencies; (b) diversify its holdings
so that, at the end of each quarter of the taxable year, (i) at least 50% of the
value of the assets of the series is represented by cash, U.S. government
securities and other stock or 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 (c) distribute to
its shareholders at least 90% of its net investment income, including net
short-term capital 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 of the Fund as a regulated investment company under the
Internal Revenue Code 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 that 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
B-61
<PAGE>
alternative minimum taxable income, and (ii) in determining the foreign branch
profits tax imposed on the effectively connected earnings and profits (with
adjustments) of United States branches of foreign corporations.
AMT is imposed in addition to, but only to the extent it exceeds, the
regular tax and is computed at a maximum marginal rate of 28% for noncorporate
taxpayers and 20% for corporate taxpayers on the excess of the taxpayer's
alternative minimum taxable income ("AMTI") over an exemption amount.
Exempt-interest dividends derived from certain "private activity" municipal
obligations issued after Augest 7, 1986 will generally constitute an item of tax
preference includable in AMTI for both corporate and noncorporate taxpayers.
Corporate investors should note that 75% of the amount by which adjusted current
earnings (which includes all tax-exempt interest) exceeds the AMTI of the
corporation constitutes an upward adjustment for purposed of the corporate AMT.
Shareholders are advised to consult their tax advisers with respect to
alternative minimum tax consequences of an investment in the Portfolio.
For federal income tax purposes, the Series has a capital loss carryforward
as of August 31, 2000 of approximately $1,826,000, of which, $1,823,700 expires
in 2003 and $2,900 expires in 2006. Such carryforward is after utilization of
approximately $972,100 to offset net taxable gains recognized during the year
ended August 31, 2000. Accordingly, no capital gains distribution is expected to
be paid to shareholders until net gains have been realized in excess of such
capital loss carryforward.
For federal income tax purposes, the Series has a capital loss carryforward
at August 31, 2000 of approximately $3,408,000 of which $1,520,900 expires in
2003, $975,700 expires in 2004 and $911,400 expires in 2008. Accordingly, no
capital gains distributions are expected to be paid to shareholders until net
gains have been realized in excess of such amount.
Distributions of taxable net investment income and of the excess of net
short-term capital gain over the net long-term capital loss are taxable to
shareholders as ordinary income. None of the income distributions of the Fund
will be eligible for the deduction for dividends received by corporations.
Since each series is treated as a separate entity for federal income tax
purposes, the determination of the amount of net capital gains, the
identification of those gains as short-term or long-term and the determination
of the amount of income dividends of a particular series will be based on the
purchases and sales of securities and the income received and expenses incurred
in that series.
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 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
B-62
<PAGE>
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 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 capital 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 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.
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).
B-63
<PAGE>
Under certain circumstances, a shareholder who acquires shares of a Series
of the Fund and sells or otherwise disposes of such shares within 90 days of
acquisition may not be allowed to include certain sales charges incurred in
acquiring such shares for purposes of calculating gain or loss realized upon a
sale or exchange of shares of the Fund.
Interest on indebtedness incurred or continued by shareholders to purchase
or carry shares of the Fund will not be deductible for federal income tax
purposes. In addition, under rules used by the Internal Revenue Service for
determining when borrowed funds are considered to be used for the purpose of
purchasing or carrying particular assets, the purchase of shares may be
considered to have been made with borrowed funds even though the borrowed funds
are not directly traceable to the purchase of shares.
Persons holding certain municipal obligations who also are "substantial
users" (or persons related thereto) of facilities financed by such obligations
may not exclude interest on such obligations from their gross income. No
investigation as to the users of the facilities financed by bonds in the
portfolios of the Fund's series has been made by the Fund. Potential investors
should consult their tax advisers with respect to this matter before purchasing
shares of the Fund.
From time to time, proposals have been introduced before Congress for the
purpose of restricting or eliminating the federal income tax exemption for
interest on 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.
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, 1998) 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 and corporate shareholders of a series who reside in California
will not be subject to California personal income tax or California corporate
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
B-64
<PAGE>
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.
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 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.
B-65
<PAGE>
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.
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
honor senior financial obligations and contracts. These obligations have an
original maturity not exceeding one year, unless explicitly noted.
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 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.
B-66
<PAGE>
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.
Debt rated BB, B, CCC and C is regarded as having predominantly speculative
characteristics with respect to capacity to pay interest and repay principal. BB
indicates the least degree of speculation and C the highest degree of
speculation. While such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
BB: Debt rated BB has less near-term vulnerability to default than other
speculative grade debt. However, it faces major ongoing uncertainties or
exposure to adverse business, financial or economic conditions that could lead
to inadequate capacity to meet timely interest and principal payment. The BB
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied BBB- rating.
B: Debt rated B has a greater vulnerability to default but presently has
the capacity to meet interest payments and principal repayments. Adverse
business, financial or economic conditions would likely impair capacity or
willingness to pay interest or repay principal. The B rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
BB or BB- rating.
CCC: Debt rated CCC has a current identifiable vulnerability to default,
and is dependent upon favorable business, financial and economic conditions to
meet timely payments of interest and repayments of principal. In the event of
adverse business, financial or economic conditions, it is not likely to have the
capacity to pay interest and repay principal. The CCC rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
B or B- rating.
CC: The rating CC is typically applied to debt subordinated to senior debt
that is assigned an actual or implied CCC rating.
C: The rating C is typically applied to debt subordinated to senior debt
that is assigned an actual or implied CCC- debt rating. The C rating may be used
to cover a situation where a bankruptcy petition has been filed but debt service
payments are continued.
CI: The rating CI is reserved for income bonds on which no interest is
being paid.
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-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. 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 designation indicates speculative capacity to
pay principal and interest.
B-67
<PAGE>
PRUDENTIAL CALIFORNIA MUNICIPAL FUND California Series
Portfolio of Investments as of August 31, 2000
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
RATING INTEREST MATURITY AMOUNT VALUE
DESCRIPTION (a) (UNAUDITED) RATE DATE (000) (NOTE 1)
------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
LONG-TERM INVESTMENTS 97.8%
Abag Fin. Auth. Rev., Schools of
Sacred Heart, Ser. A Baa3 6.45% 6/01/30 $ 1,500 $ 1,562,325
Baldwin Park Pub. Fin. Auth.
Rev., Tax Alloc. BBB(d) 7.05 9/01/14 1,020 1,142,492
Brea Pub. Fin. Auth. Rev., Sub.
Tax Alloc. Redev. Proj., Ser. C NR 8.10 3/01/21 5,000 5,158,750
Buena Park Cmnty. Redev. Agcy.,
Central Bus. Dist. Proj. BBB+(d) 7.10 9/01/14 2,500 2,621,400
California St. Hsg. Fin. Agcy.
Rev., Sngl. Fam. Mtge., Ser. A Aa2 Zero 2/01/15 8,420 2,155,015
Chula Vista Redev. Agcy.,
Bayfront Tax Alloc. BBB+(d) 7.625 9/01/24 4,500 4,985,910
Commerce California Cmnty. Dev.
Comm., Rfdg. Merged Redev.
Proj., Ser. A NR 5.65 8/01/18 1,175 1,138,176
East Palo Alto Sanit. Dist.,
Cert. of Part. NR 8.25 10/01/15 1,295 1,323,386
Fairfield Pub. Fin. Auth. Rev.,
Fairfield Redev. Projs., Ser. A NR 7.90 8/01/21 4,200(b) 4,428,732
Foothill/Eastern Trans. Corridor
Agcy.,
Toll Rd. Rev. Aaa Zero 1/01/13 2,250(b) 2,041,290
Toll Rd. Rev. Aaa Zero 1/01/16 5,000 2,241,950
Toll Rd. Rev. Aaa Zero 1/01/18 2,950 1,163,539
Toll Rd. Rev. Baa3 Zero 1/15/26 5,200 2,979,964
Grass Valley Redev. Agcy.,
Redev. Proj. BBB(d) 6.40 12/01/34 2,000 2,050,820
Kings Cnty. Wst. Mgmt. Auth.,
Solid Wst. Rev., A.M.T. BBB(d) 7.20 10/01/14 1,150 1,240,390
Long Beach Harbor Rev., Ser. A,
A.M.T., F.G.I.C. Aaa 6.00 5/15/16 5,500 6,042,520
Long Beach Redev. Agcy. Dist.
No. 3, Spec. Tax Rev.
(cost $2,950,530; purchased
10/18/93) NR 6.375 9/01/23 3,000(c) 3,064,200
</TABLE>
See Notes to Financial Statements
B-68
<PAGE>
PRUDENTIAL CALIFORNIA MUNICIPAL FUND California Series
Portfolio of Investments as of August 31, 2000 Cont'd.
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
RATING INTEREST MATURITY AMOUNT VALUE
DESCRIPTION (a) (UNAUDITED) RATE DATE (000) (NOTE 1)
------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Los Angeles Cnty., Cert. of
Part., Correctional Facs.
Proj., M.B.I.A. Aaa Zero 9/01/10 $ 3,770 $ 2,394,704
Los Angeles Cnty., Hsg. Auth.,
Multi-fam. Mtge. Rev.,
Mayflower Gardens Proj.,
Ser. K, G.N.M.A. NR 8.875% 12/20/10 2,100(b) 2,192,190
Los Angeles Community Red. Agcy.
Parking Sys. Rev. A(d) 5.40 7/01/15 1,145 1,156,141
Los Angeles Conv. & Exhib. Ctr.
Auth., Cert. of Part. Aaa 9.00 12/01/10 1,250(b) 1,539,200
Met. Wtr. Dist. of Southern
California,
Rev. Linked S.A.V.R.S. &
R.I.B.S. Aa2 5.75 8/10/18 1,000 1,063,630
Waterworks Rev. Rfdg., Ser. A Aa2 5.75 7/01/21 4,000 4,251,200
Midpeninsula Regional Open Space
Dist. Fin. Auth. Rev., 1996,
A.M.B.A.C. Aaa Zero 9/01/15 3,000 1,384,950
Mojave Desert Solid Wst. Victor
Vally Materials, Recov. Fac.,
A.M.T. Baa1 7.875 6/01/20 1,175 1,254,124
Orange Cnty. Cmnty. Facs. Dist.,
Spec. Tax Rev., No. 87-5B,
Rancho Santa Margarita NR 7.50 8/15/17 1,750(b) 1,893,010
Orange Cnty. Loc. Trans. Auth.,
Linked S.A.V.R.S. & R.I.B.S.,
A.M.B.A.C. Aaa 6.20 2/14/11 8,000 9,002,560
Spec. Tax Rev., R.I.B.S. Aa3 7.604(e) 2/14/11 750 910,312
Petaluma City Joint Union High
Sch. Dist.,
Capital Apprec., M.B.I.A. Aaa Zero 8/01/15 1,600 742,896
Capital Apprec., M.B.I.A. Aaa Zero 8/01/16 1,455 632,809
Capital Apprec., M.B.I.A. Aaa Zero 8/01/17 3,015 1,230,180
Port Redwood City Rev., A.M.T. BBB(d) 5.125 6/01/30 1,600 1,373,296
</TABLE>
See Notes to Financial Statements
B-69
<PAGE>
PRUDENTIAL CALIFORNIA MUNICIPAL FUND California Series
Portfolio of Investments as of August 31, 2000 Cont'd.
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
RATING INTEREST MATURITY AMOUNT VALUE
DESCRIPTION (a) (UNAUDITED) RATE DATE (000) (NOTE 1)
------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Puerto Rico Comnwlth.
Gen. Oblig.,
Ser. 642A, M.B.I.A. NR 7.497%(e) 7/01/10 $ 1,000 $ 1,195,130
Puerto Rico Ind. Tourist Edl.,
Cogen Fac. AES Proj., A.M.T. Baa2 6.625 6/01/26 2,000 2,084,860
Redding Elec. Sys. Rev.,
Cert. of Part., R.I.B.S.,
M.B.I.A. Aaa 8.457(e) 7/01/22 1,750 2,089,062
Linked S.A.V.R.S. & R.I.B.S.,
M.B.I.A. Aaa 6.368 7/01/22 50 54,854
Roseville City Sch. Dist., Cap.
Apprec. Ser. A, F.G.I.C. Aaa Zero 8/01/10 1,230 779,709
San Bernardino Cnty., Cert. of
Part., Med. Ctr. Fin. Proj.,
M.B.I.A. Aaa 5.50 8/01/22 4,400 4,536,224
San Francisco City & Cnty.,
Redev. Agcy., Lease Rev.,
Cap. Apprec. A1 Zero 7/01/09 2,000 1,329,120
San Jose, Unified Sch. Dist.,
Santa Clara, Gen. Oblig.,
Ser. A, F.G.I.C. Aaa Zero 8/01/17 1,350 550,827
Santa Margarita/Dana Point Auth.
Rev.,
Ser. 644A, M.B.I.A. NR 13.827(e) 8/01/08 825 1,320,470
Ser. 644B, M.B.I.A. NR 13.827(e) 8/01/09 325 535,408
Ser. 644C, M.B.I.A. NR 13.827(e) 8/01/09 460 757,652
Ser. 644G, M.B.I.A. NR 13.827(e) 8/01/14 330 576,032
So. Orange Cnty. Pub. Fin.
Auth., Spec. Tax Rev., M.B.I.A. Aaa 7.00 9/01/11 3,500 4,259,465
So. Tahoe Joint Pwrs. Fin. Auth.
Rev., Rfdg. So. Tahoe Redev.
Proj., Ser. A BBB-(d) 5.375 10/01/30 1,250 1,136,888
</TABLE>
See Notes to Financial Statements
B-70
<PAGE>
PRUDENTIAL CALIFORNIA MUNICIPAL FUND California Series
Portfolio of Investments as of August 31, 2000 Cont'd.
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
RATING INTEREST MATURITY AMOUNT VALUE
DESCRIPTION (a) (UNAUDITED) RATE DATE (000) (NOTE 1)
------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Southern California Pub. Pwr.
Auth.,
Proj. Rev. A3 6.75% 7/01/10 $ 2,265 $ 2,648,510
Proj. Rev. A3 6.75 7/01/11 1,195 1,399,907
Proj. Rev. A3 6.75 7/01/12 2,935 3,461,451
Proj. Rev. A3 6.75 7/01/13 4,000 4,685,920
Proj. Rev., A.M.B.A.C. Aaa Zero 7/01/16 7,925 3,504,752
Proj. Rev., Ser. A, F.G.I.C. Aaa Zero 7/01/12 7,080 3,960,410
Stockton Cmnty. Facs. Dist. No.
90-2, Brookside Estates NR 6.20 8/01/15 700 718,928
Sulphur Springs Union Sch.
Dist., Ser. A, M.B.I.A. Aaa Zero 9/01/09 2,000 1,334,080
Vacaville Cmnty. Redev. Agcy.,
Cmnty. Hsg. Fin. Multi-fam. A-(d) 7.375 11/01/14 1,110(b) 1,266,144
Victor Valley Union High Sch.
Dist.,
Gen. Oblig., M.B.I.A. Aaa Zero 9/01/09 2,075 1,393,881
Gen. Oblig., M.B.I.A. Aaa Zero 9/01/15 5,070 2,371,543
Virgin Islands Terr., Hugo Ins.
Claims Fund Proj., Ser. 91 NR 7.75 10/01/06 605(b) 632,891
Walnut Valley Unified Sch.
Dist., M.B.I.A. Aaa 6.00 8/01/15 1,870 2,060,721
------------
Total long-term investments
(cost $115,453,082) 127,006,900
------------
SHORT-TERM INVESTMENT
<CAPTION>
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
California Hlth. Fac. Fin. Auth.
Rev., Ser. A
(cost $10,000) VMIG1 3.40 9/01/00 10 10,000
------------
TOTAL INVESTMENTS 97.8 %
(COST $115,463,082; NOTE 4) 127,016,900
Other assets in excess of
liabilities 2.2% 2,872,671
------------
NET ASSETS 100% $129,889,571
------------
------------
</TABLE>
See Notes to Financial Statements
B-71
<PAGE>
PRUDENTIAL CALIFORNIA MUNICIPAL FUND California Series
Portfolio of Investments as of August 31, 2000 Cont'd.
(a) The following abbreviations are used in portfolio descriptions:
A.M.B.A.C.--American Municipal Bond Assurance Corporation.
A.M.T.--Alternative Minimum Tax.
F.G.I.C.--Financial Guaranty Insurance Company.
G.N.M.A.--Government National Mortgage Association.
M.B.I.A.--Municipal Bond Insurance Association.
R.I.B.S.--Residual Interest Bearing Securities.
S.A.V.R.S.--Select Auction Variable Rate Securities.
(b) Prerefunded issues are secured by escrowed cash and/or direct U.S.
guaranteed obligations.
(c) Indicates a restricted security. The aggregate cost of restricted securities
is $2,950,530 and the aggregate value is $3,064,200 which represents
approximately 2.4% of net assets.
(d) Standard & Poor's Rating.
(e) Inverse floating rate bond. The coupon is inversely indexed to a floating
interest rate. The rate shown is the rate at year end.
NR--Not Rated by Moody's or Standard & Poor's.
The Fund's current Statement of Additional Information contains a description of
Moody's and Standard & Poor's ratings.
See Notes to Financial Statements
B-72
<PAGE>
PRUDENTIAL CALIFORNIA MUNICIPAL FUND California Series
Statement of Assets and Liabilities
<TABLE>
<CAPTION>
AUGUST 31, 2000
----------------------------------------------------------------------------------------
<S> <C>
ASSETS
Investments, at value (cost $115,463,082) $ 127,016,900
Cash 10,451
Receivable for investments sold 3,178,920
Interest receivable 1,492,148
Receivable for Series shares sold 20,200
Other assets 3,094
-----------------
TOTAL ASSETS 131,721,713
-----------------
LIABILITIES
Payable for investments purchased 966,350
Payable for Series shares reacquired 651,630
Dividends payable 68,274
Management fee payable 55,223
Accrued expenses 44,986
Distribution fee payable 34,669
Deferred trustee's fees 11,010
-----------------
TOTAL LIABILITIES 1,832,142
-----------------
NET ASSETS $ 129,889,571
-----------------
-----------------
Net assets were comprised of:
Shares of beneficial interest, at par $ 110,270
Paid-in capital in excess of par 120,043,155
-----------------
120,153,425
Accumulated net realized loss on investments (1,817,672)
Net unrealized appreciation on investments 11,553,818
-----------------
Net assets, August 31, 2000 $ 129,889,571
-----------------
-----------------
</TABLE>
See Notes to Financial Statements
B-73
<PAGE>
PRUDENTIAL CALIFORNIA MUNICIPAL FUND California Series
Statement of Assets and Liabilities Con't.
<TABLE>
<CAPTION>
AUGUST 31, 2000
----------------------------------------------------------------------------------------
<S> <C>
Class A:
Net asset value and redemption price per share ($94,775,534
divided by 8,045,400 shares of beneficial interest issued
and outstanding) $11.78
Maximum sales charge (3% of offering price) .36
-----------------
Maximum offering price to public $12.14
-----------------
-----------------
Class B:
Net asset value, offering price and redemption price per
share
($32,403,283 divided by 2,751,575 shares of beneficial
interest issued and outstanding) $11.78
-----------------
-----------------
Class C:
Net asset value and redemption price per share
($1,111,932 divided by 94,421 shares of beneficial
interest issued and outstanding) $11.78
Sales charge (1% of offering price) .12
-----------------
Offering price to public $11.90
-----------------
-----------------
Class Z:
Net asset value, offering price and redemption price per
share
($1,598,822 divided by 135,612 shares of beneficial
interest issued and outstanding) $11.79
-----------------
-----------------
</TABLE>
See Notes to Financial Statements
B-74
<PAGE>
PRUDENTIAL CALIFORNIA MUNICIPAL FUND California Series
Statement of Operations
<TABLE>
<CAPTION>
YEAR
ENDED
AUGUST 31, 2000
----------------------------------------------------------------------------------------
<S> <C>
NET INVESTMENT INCOME
Income
Interest $ 8,146,703
-----------------
Expenses
Management fee 672,142
Distribution fee--Class A 233,900
Distribution fee--Class B 191,741
Distribution fee--Class C 9,674
Custodian's fees and expenses 75,000
Reports to shareholders 50,000
Transfer agent's fees and expenses 45,000
Legal fees and expenses 21,000
Registration fees 21,000
Audit fee 13,000
Trustees' fees and expenses 10,000
Miscellaneous 5,301
-----------------
TOTAL EXPENSES 1,347,758
Less: Custodian fee credit (Note 1) (1,565)
-----------------
Net expenses 1,346,193
-----------------
NET INVESTMENT INCOME 6,800,510
-----------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Net realized gain on:
Investment transactions 636,560
Financial futures transactions 424,723
-----------------
1,061,283
-----------------
Net change in unrealized appreciation (depreciation) on:
Investments 2,576,103
Financial futures contracts (87,938)
-----------------
2,488,165
-----------------
Net gain on investments 3,549,448
-----------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $10,349,958
-----------------
-----------------
</TABLE>
See Notes to Financial Statements
B-75
<PAGE>
PRUDENTIAL CALIFORNIA MUNICIPAL FUND California Series
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
YEAR YEAR
ENDED ENDED
AUGUST 31, 2000 AUGUST 31, 1999
-------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
Operations
Net investment income $ 6,800,510 $ 7,409,014
Net realized gain on investment
transactions 1,061,283 324,713
Net change in unrealized appreciation
(depreciation) of investments 2,488,165 (10,186,236)
----------------- ---------------
Net increase (decrease) in net assets
resulting from operations 10,349,958 (2,452,509)
----------------- ---------------
DIVIDENDS AND DISTRIBUTIONS (NOTE 1)
Dividends from net investment income
Class A (4,800,732) (4,684,010)
Class B (1,873,857) (2,591,035)
Class C (59,842) (60,435)
Class Z (66,079) (73,534)
----------------- ---------------
(6,800,510) (7,409,014)
----------------- ---------------
Distributions in excess of net investment
income
Class A (28,246) --
Class B (12,173) --
Class C (412) --
Class Z (300) --
----------------- ---------------
(41,131) --
----------------- ---------------
SERIES SHARE TRANSACTIONS (NET OF SHARE
CONVERSIONS) (NOTE 5)
Net proceeds from shares sold 13,855,044 18,346,773
Net asset value of shares issued in
reinvestment of dividends and
distributions 3,751,457 4,059,444
Cost of shares reacquired (34,664,321) (24,798,715)
----------------- ---------------
Net decrease in net assets from Series
share transactions (17,057,820) (2,392,498)
----------------- ---------------
Total decrease (13,549,503) (12,254,021)
NET ASSETS
Beginning of year 143,439,074 155,693,095
----------------- ---------------
End of year $ 129,889,571 $ 143,439,074
----------------- ---------------
----------------- ---------------
</TABLE>
See Notes to Financial Statements
B-76
<PAGE>
PRUDENTIAL CALIFORNIA MUNICIPAL FUND California Series
Notes to Financial Statements
Prudential California Municipal Fund (the "Fund") is registered under the
Investment Company Act of 1940 as an open-end investment company. The Fund was
organized as a Massachusetts business trust on May 18, 1984 and consists of
three series. The monies of each series are invested in separate, independently
managed portfolios. The California Series (the "Series") commenced investment
operations on September 19, 1984. The Series is diversified and seeks to achieve
its investment objective of obtaining the maximum amount of income exempt from
federal and California state income taxes with the minimum of risk by investing
in "investment grade" tax-exempt securities whose ratings are within the four
highest ratings categories by a nationally recognized statistical rating
organization or, if not rated, are of comparable quality. The ability of the
issuers of the securities held by the Series to meet their obligations may be
affected by economic developments in a specific state, industry or region.
NOTE 1. ACCOUNTING POLICIES
The following is a summary of significant accounting policies followed by the
Fund, and the Series, in the preparation of its financial statements.
SECURITIES VALUATIONS: The Series values municipal securities
(including commitments to purchase such securities on a "when-issued" basis) on
the basis of prices provided by a pricing service which uses information with
respect to transactions in bonds, quotations from bond dealers, market
transactions in comparable securities and various relationships between
securities in determining values. If market quotations are not readily available
from such pricing service, a security is valued at its fair value as determined
under procedures established by the Board of Trustees. Short-term securities
which mature in more than 60 days are valued at current market quotations.
Short-term securities which mature in 60 days or less are valued at amortized
cost.
The Series held illiquid securities, including those which are restricted
as to disposition under securities law ("restricted securities"). The restricted
security held by the Series at August 31, 2000 include registration rights under
which the Series may demand registration by the issuer. Restricted securities,
sometimes referred to as private placements, are valued pursuant to the
valuation procedures noted above.
All securities are valued as of 4:15 p.m., New York time.
FINANCIAL FUTURES CONTRACTS: A financial futures contract is an
agreement to purchase (long) or sell (short) an agreed amount of securities at a
set price for delivery on a future date. Upon entering into a financial futures
contract, the Series is required to pledge to the broker an amount of cash
and/or other assets equal to a certain percentage of the contract amount. This
amount is known as the "initial margin."
B-77
<PAGE>
PRUDENTIAL CALIFORNIA MUNICIPAL FUND California Series
Notes to Financial Statements Cont'd.
Subsequent payments, known as "variation margin," are made or received by the
Series each day, depending on the daily fluctuations in the value of the
underlying security. Such variation margin is recorded for financial statement
purposes on a daily basis as unrealized gain or loss. When the contract expires
or is closed, the gain or loss is realized and is presented in the statement of
operations as net realized gain(loss) on financial futures contracts.
The Series invests in financial futures contracts in order to hedge its
existing portfolio of securities or securities the Series intends to purchase,
against fluctuations in value caused by changes in prevailing interest rates.
Should interest rates move unexpectedly, the Series may not achieve the
anticipated benefits of the financial futures contracts and may realize a loss.
The use of futures transactions involves the risk of imperfect correlation in
movements in the price of futures contracts, interest rates and the underlying
hedged assets.
SECURITIES TRANSACTIONS AND NET INVESTMENT INCOME: Securities
transactions are recorded on the trade date. Realized gains and losses on sales
of securities are calculated on the identified cost basis. Interest income is
recorded on the accrual basis. The Series amortizes premiums and original issue
discount paid on purchases of portfolio securities as adjustments to interest
income. Expenses are recorded on the accrual basis which may require the use of
certain estimates by management.
Net investment income (other than distribution fees) and realized and
unrealized gains or losses are allocated daily to each class of shares based
upon the relative proportion of net assets of each class at the beginning of the
day.
FEDERAL INCOME TAXES: For federal income tax purposes, each series in
the Fund is treated as a separate taxpaying entity. It is the intent of the
Series to continue to meet the requirements of the Internal Revenue Code
applicable to regulated investment companies and to distribute all of its net
income to shareholders. For this reason, no federal income tax provision is
required.
DIVIDENDS AND DISTRIBUTIONS: The Series declares daily dividends from
net investment income. Payment of dividends is made monthly. Distributions of
net capital gains, if any, are made annually.
Income distributions and capital gain distributions are determined in
accordance with income tax regulations which may differ from generally accepted
accounting principles.
CUSTODY FEE CREDITS: The Fund has an arrangement with its custodian
bank, whereby uninvested monies earn credits which reduce the fees charged by
the custodian.
B-78
<PAGE>
PRUDENTIAL CALIFORNIA MUNICIPAL FUND California Series
Notes to Financial Statements Cont'd.
RECLASSIFICATION OF CAPITAL ACCOUNTS: The Fund accounts and reports for
distributions to shareholders in accordance with Statement of Position 93-2:
Determination, Disclosure and Financial Statement Presentation of Income,
Capital Gain and Return of Capital Distributions by Investment Companies. The
effect of applying this statement was to increase undistributed net investment
income and increase accumulated net realized loss by $41,131 due to the sale of
securities purchased with market discount. Net investment income, net realized
gains and net assets were not affected by this change.
NOTE 2. AGREEMENTS
The Fund has a management agreement with Prudential Investments Fund Management
LLC ("PIFM"). Pursuant to this agreement, PIFM has responsibility for all
investment advisory services and supervises the subadviser's performance of such
services. PIFM has entered into a subadvisory agreement with The Prudential
Investment Corporation ("PIC"); PIC furnishes investment advisory services in
connection with the management of the Fund. PIFM pays for the services of PIC,
the cost of compensation of officers of the Fund, occupancy and certain clerical
and bookkeeping costs of the Fund. The Fund bears all other costs and expenses.
The management fee paid PIFM is computed daily and payable monthly, at an
annual rate of .50 of 1% of the average daily net assets of the Series.
Effective January 1, 2000, the subadvisory fee paid to PIC by PIFM is
computed daily and payable monthly at an annual rate of .250 of 1% of the
average daily net assets of the Fund. Prior to January 1, 2000, PIC was
reimbursed by PIFM for reasonable costs and expenses incurred in furnishing
investment advisory services. The change in the subadvisory fee structure has no
impact on the management fee charged to the Fund or its shareholders.
The Fund has a distribution agreement with Prudential Investment
Management Services LLC ("PIMS") which acts as the distributor of the Fund. The
Fund compensates PIMS for distributing and servicing the Fund's Class A, Class B
and Class C shares, pursuant to plans of distribution (the "Class A, B and C
Plans"), regardless of expenses actually incurred by it. The distribution fees
are accrued daily and payable monthly. No distribution or service fees are paid
to PIMS as distributor of the Class Z shares of the Fund.
Pursuant to the Class A, B and C Plans, the Fund compensates PIMS for
distribution-related activities at an annual rate of up to .30 of 1%, .50 of 1%
and 1% of the average daily net assets of the Class A, B and C shares,
respectively. Such
B-79
<PAGE>
PRUDENTIAL CALIFORNIA MUNICIPAL FUND California Series
Notes to Financial Statements Cont'd.
expenses under the Plans were .25 of 1%, .50 of 1% and .75 of 1% of the average
daily net assets of the Class A, B and C shares for the year ended August 31,
2000.
PIMS has advised the Series that it has received approximately $22,400 and
$1,400 in front-end sales charges resulting from sales of Class A and Class C
shares, respectively, during the year ended August 31, 2000. From these fees,
PIMS paid such sales charges to affiliated broker-dealers, which in turn paid
commissions to salespersons and incurred other distribution costs.
PIMS has advised the Series that for the year ended August 31, 2000, they
received approximately $95,700 and $600 in contingent deferred sales charges
imposed upon certain redemptions by Class B and Class C shareholders,
respectively.
PIFM, PIMS and PIC are wholly owned subsidiaries of The Prudential
Insurance Company of America.
The Fund, along with other affiliated registered investment companies (the
"Funds"), entered into a syndicated credit agreement ("SCA") with an
unaffiliated lender. The maximum commitment under the SCA is $1 billion.
Interest on any such borrowings will be at market rates. The purpose of the
agreement is to serve as an alternative source of funding for capital share
redemptions. The Funds pay a commitment fee at an annual rate of .080 of 1% of
the unused portion of the credit facility. The commitment fee is accrued and
paid quarterly on a pro rata basis by the Funds. The expiration date of the SCA
is March 9, 2001. Prior to March 9, 2000, the commitment fee was .065 of 1% of
the unused portion of the credit facility. The Fund did not borrow any amounts
pursuant to the SCA during the year ended August 31, 2000.
NOTE 3. OTHER TRANSACTIONS WITH AFFILIATES
Prudential Mutual Fund Services LLC ("PMFS"), a wholly owned subsidiary of PIFM,
serves as the Fund's transfer agent. During the year ended August 31, 2000, the
Series incurred fees of approximately $43,600 for the services of PMFS. As of
August 31, 2000, approximately $3,300 of such fees were due to PMFS. Transfer
agent fees and expenses in the Statement of Operations include certain
out-of-pocket expenses paid to nonaffiliates.
NOTE 4. PORTFOLIO SECURITIES
Purchases and sales of portfolio securities of the Series, excluding short-term
investments, for the year ended August 31, 2000 were $33,198,847 and
$52,778,813, respectively.
The cost basis of investments for federal income tax purposes at August
31, 2000 was substantially the same as for financial reporting purposes and,
accordingly,
B-80
<PAGE>
PRUDENTIAL CALIFORNIA MUNICIPAL FUND California Series
Notes to Financial Statements Cont'd.
net unrealized appreciation of investments for federal income tax purposes was
$11,553,818 (gross unrealized appreciation--$11,834,526; gross unrealized
depreciation--$280,708).
For federal income tax purposes, the Series has a capital loss
carryforward as of August 31, 2000 of approximately $1,826,600, of which,
$1,823,700 expires in 2003 and $2,900 expires in 2006. Such carryforward is
after utilization of approximately $972,100 to offset net taxable gains
recognized during the year ended August 31, 2000. Accordingly, no capital gains
distribution is expected to be paid to shareholders until net gains have been
realized in excess of such capital loss carryforward.
NOTE 5. CAPITAL
The Series offers Class A, Class B, Class C and Class Z shares. Class A shares
are sold with a front-end sales charge of up to 3%. Class B shares are sold with
a contingent deferred sales charge which declines from 5% to zero depending on
the period of time the shares are held. Class C shares are sold with a front-end
sales charge of 1% and a contingent deferred sales charge of 1% during the first
18 months. Class B shares will automatically convert to Class A shares on a
quarterly basis approximately seven years after purchase. A special exchange
privilege is also available for shareholders who qualify to purchase Class A
shares at net asset value.
The Fund has authorized an unlimited number of shares of beneficial
interest for each class at $.01 par value per share.
Transactions in shares of beneficial interest for the fiscal years ended
August 31, 2000 and August 31, 1999 were as follows:
<TABLE>
<CAPTION>
CLASS A SHARES AMOUNT
------------------------------------------------------------ ---------- ------------
<S> <C> <C>
Year ended August 31, 2000:
Shares sold 637,977 $ 7,185,783
Shares issued in reinvestment of dividends and distributions 234,288 2,651,560
Shares reacquired (2,028,431) (22,902,100)
---------- ------------
Net increase (decrease) in shares outstanding before
conversion (1,156,166) (13,064,757)
Shares issued upon conversion from Class B 1,087,815 12,320,095
---------- ------------
Net increase (decrease) in shares outstanding (68,351) $ (744,662)
---------- ------------
---------- ------------
Year ended August 31, 1999:
Shares sold 795,762 $ 9,586,464
Shares issued in reinvestment of dividends 216,108 2,593,281
Shares reacquired (914,438) (10,998,324)
---------- ------------
Net increase (decrease) in shares outstanding before
conversion 97,432 1,181,421
Shares issued upon conversion from Class B 541,419 6,534,806
---------- ------------
Net increase (decrease) in shares outstanding 638,851 $ 7,716,227
---------- ------------
---------- ------------
</TABLE>
B-81
<PAGE>
PRUDENTIAL CALIFORNIA MUNICIPAL FUND California Series
Notes to Financial Statements Cont'd.
<TABLE>
<CAPTION>
CLASS B SHARES AMOUNT
------------------------------------------------------------ ---------- ------------
<S> <C> <C>
Year ended August 31, 2000
Shares sold 367,823 $ 4,136,928
Shares issued in reinvestment of dividends and distributions 88,653 1,001,612
Shares reacquired (828,681) (9,384,778)
---------- ------------
Net increase (decrease) in shares outstanding before
conversion (372,205) (4,246,238)
Shares reacquired upon conversion into Class A (1,088,264) (12,320,095)
---------- ------------
Net increase (decrease) in shares outstanding (1,460,469) $(16,566,333)
---------- ------------
---------- ------------
Year ended August 31, 1999:
Shares sold 514,171 $ 6,183,598
Shares issued in reinvestment of dividends 114,358 1,373,595
Shares reacquired (952,947) (11,419,751)
---------- ------------
Net increase (decrease) in shares outstanding before
conversion (324,418) (3,862,558)
Shares reacquired upon conversion into Class A (541,523) (6,534,806)
---------- ------------
Net increase (decrease) in shares outstanding (865,941) $(10,397,364)
---------- ------------
---------- ------------
<CAPTION>
CLASS C
------------------------------------------------------------
<S> <C> <C>
Year ended August 31, 2000
Shares sold 138,301 $ 1,570,858
Shares issued in reinvestment of dividends and distributions 4,033 45,608
Shares reacquired (174,362) (1,976,318)
---------- ------------
Net increase (decrease) in shares outstanding (32,028) $ (359,852)
---------- ------------
---------- ------------
Year ended August 31, 1999:
Shares sold 53,745 $ 647,299
Shares issued in reinvestment of dividends 3,582 42,860
Shares reacquired (33,739) (402,855)
---------- ------------
Net increase (decrease) in shares outstanding 23,588 $ 287,304
---------- ------------
---------- ------------
<CAPTION>
CLASS Z
------------------------------------------------------------
<S> <C> <C>
Year ended August 31, 2000
Shares sold 85,546 $ 961,475
Shares issued in reinvestment of dividends and distributions 4,641 52,677
Shares reacquired (35,603) (401,125)
---------- ------------
Net increase (decrease) in shares outstanding 54,584 $ 613,027
---------- ------------
---------- ------------
Year ended August 31, 1999:
Shares sold 161,138 $ 1,929,412
Shares issued in reinvestment of dividends 4,138 49,708
Shares reacquired (169,051) (1,977,785)
---------- ------------
Net increase (decrease) in shares outstanding (3,775) $ 1,335
---------- ------------
---------- ------------
</TABLE>
B-82
<PAGE>
PRUDENTIAL CALIFORNIA MUNICIPAL FUND California Series
Financial Highlights
<TABLE>
<CAPTION>
Class A
-----------------
YEAR ENDED
AUGUST 31, 2000
----------------------------------------------------------------------------------------
<S> <C>
PER SHARE OPERATING PERFORMANCE:
NET ASSET VALUE, BEGINNING OF YEAR $ 11.45
--------
Income from investment operations
Net investment income .58
Net realized and unrealized gain (loss) on investment
transactions .33
--------
Total from investment operations .91
--------
LESS DISTRIBUTIONS
Dividends from net investment income (.58)
Distributions in excess of net investment income --(c)
--------
Total distributions (.58)
--------
Net asset value, end of year $ 11.78
--------
--------
TOTAL RETURN(b): 8.35%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000) $94,776
Average net assets (000) $93,560
Ratios to average net assets:
Expenses, including distribution and service (12b-1) fees .93%
Expenses, excluding distribution and service (12b-1) fees .68%
Net investment income 5.13%
For Class A, B, C and Z shares:
Portfolio turnover rate 25%
</TABLE>
------------------------------
(a) Net of management fee waiver.
(b) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each year reported and includes reinvestment of dividends and
distributions.
(c) Less than $.005 per share.
See Notes to Financial Statements
B-83
<PAGE>
PRUDENTIAL CALIFORNIA MUNICIPAL FUND California Series
Financial Highlights Cont'd.
<TABLE>
<CAPTION>
CLASS A
-------------------------------------------------------------------------------------
YEAR ENDED AUGUST 31,
-------------------------------------------------------------------------------------
1999 1998 1997 1996
-------------------------------------------------------------------------------------
<S> <C> <C> <C>
$ 12.22 $ 11.80 $ 11.44 $ 11.49
-------- -------- -------- --------
.59 .62 .65(a) .65(a)
(.77) .43 .36 (.05)
-------- -------- -------- --------
(.18) 1.05 1.01 .60
-------- -------- -------- --------
(.59) (.62) (.65) (.65)
-- (.01) --(c) --
-------- -------- -------- --------
(.59) (.63) (.65) (.65)
-------- -------- -------- --------
$ 11.45 $ 12.22 $ 11.80 $ 11.44
-------- -------- -------- --------
-------- -------- -------- --------
(1.56)% 9.13% 9.01% 5.23%
$ 92,868 $ 91,356 $ 81,535 $ 72,876
$ 94,868 $ 85,624 $ 78,347 $ 71,119
.89% .78% .76%(a) .81%(a)
.69% .68% .66%(a) .71%(a)
4.94% 5.18% 5.53%(a) 5.58%(a)
13% 11% 14% 26%
</TABLE>
See Notes to Financial Statements
B-84
<PAGE>
PRUDENTIAL CALIFORNIA MUNICIPAL FUND California Series
Financial Highlights Cont'd.
<TABLE>
<CAPTION>
CLASS B
-----------------
YEAR ENDED
AUGUST 31, 2000
----------------------------------------------------------------------------------------
<S> <C>
PER SHARE OPERATING PERFORMANCE:
NET ASSET VALUE, BEGINNING OF YEAR $ 11.44
--------
Income from investment operations
Net investment income .56
Net realized and unrealized gain (loss) on investment
transactions .34
--------
Total from investment operations .90
--------
LESS DISTRIBUTIONS
Dividends from net investment income (.56)
Distributions in excess of net investment income --(c)
--------
Total distributions (.56)
--------
Net asset value, end of year $ 11.78
--------
--------
TOTAL RETURN(b): 8.18%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000) $32,403
Average net assets (000) $38,348
Ratios to average net assets:
Expenses, including distribution and service (12b-1) fees 1.18%
Expenses, excluding distribution and service (12b-1) fees .68%
Net investment income 4.89%
</TABLE>
------------------------------
(a) Net of management fee waiver.
(b) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each year reported and includes reinvestment of dividends and
distributions.
(c) Less than $.005 per share.
See Notes to Financial Statements
B-85
<PAGE>
PRUDENTIAL CALIFORNIA MUNICIPAL FUND California Series
Financial Highlights Cont'd.
<TABLE>
<CAPTION>
CLASS B
-------------------------------------------------------------------------------------
YEAR ENDED AUGUST 31,
-------------------------------------------------------------------------------------
1999 1998 1997 1996
-------------------------------------------------------------------------------------
<S> <C> <C> <C>
$ 12.22 $ 11.80 $ 11.43 $ 11.49
-------- -------- -------- --------
.56 .58 .60(a) .60(a)
(.78) .43 .37 (.06)
-------- -------- -------- --------
(.22) 1.01 .97 .54
-------- -------- -------- --------
(.56) (.58) (.60) (.60)
-- (.01) --(c) --
-------- -------- -------- --------
(.56) (.59) (.60) (.60)
-------- -------- -------- --------
$ 11.44 $ 12.22 $ 11.80 $ 11.43
-------- -------- -------- --------
-------- -------- -------- --------
(1.94)% 8.70% 8.67% 4.73%
$ 48,196 $ 62,043 $ 70,093 $ 85,190
$ 56,041 $ 66,086 $ 75,935 $ 96,525
1.19% 1.18% 1.16%(a) 1.21%(a)
.69% .68% .66%(a) .71%(a)
4.62% 4.78% 5.13%(a) 5.18%(a)
</TABLE>
See Notes to Financial Statements
B-86
<PAGE>
PRUDENTIAL CALIFORNIA MUNICIPAL FUND California Series
Financial Highlights Cont'd.
<TABLE>
<CAPTION>
CLASS C
-----------------
YEAR ENDED
AUGUST 31, 2000
----------------------------------------------------------------------------------------
<S> <C>
PER SHARE OPERATING PERFORMANCE:
NET ASSET VALUE, BEGINNING OF YEAR $ 11.44
--------
Income from investment operations
Net investment income .53
Net realized and unrealized gain (loss) on investment
transactions .34
--------
Total from investment operations .87
--------
LESS DISTRIBUTIONS
Dividends from net investment income (.53)
Distributions in excess of net investment income --(c)
--------
Total distributions (.53)
--------
Net asset value, end of year $ 11.78
--------
--------
TOTAL RETURN(b): 7.91%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000) $ 1,112
Average net assets (000) $ 1,290
Ratios to average net assets:
Expenses, including distribution and service (12b-1) fees 1.43%
Expenses, excluding distribution and service (12b-1) fees .68%
Net investment income 4.64%
</TABLE>
------------------------------
(a) Net of management fee waiver.
(b) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each year reported and includes reinvestment of dividends and
distributions.
(c) Less than $.005 per share.
See Notes to Financial Statements
B-87
<PAGE>
PRUDENTIAL CALIFORNIA MUNICIPAL FUND California Series
Financial Highlights Cont'd.
<TABLE>
<CAPTION>
CLASS C
-------------------------------------------------------------------------------------
YEAR ENDED AUGUST 31,
-------------------------------------------------------------------------------------
1999 1998 1997 1996
-------------------------------------------------------------------------------------
<S> <C> <C> <C>
$ 12.22 $ 11.80 $ 11.43 $ 11.49
-------- -------- -------- --------
.53 .55 .57(a) .57(a)
(.78) .43 .37 (.06)
-------- -------- -------- --------
(.25) .98 .94 .51
-------- -------- -------- --------
(.53) (.55) (.57) (.57)
-- (.01) --(c) --
-------- -------- -------- --------
(.53) (.56) (.57) (.57)
-------- -------- -------- --------
$ 11.44 $ 12.22 $ 11.80 $ 11.43
-------- -------- -------- --------
-------- -------- -------- --------
(2.18)% 8.43% 8.40% 4.47%
$ 1,447 $ 1,257 $ 334 $ 543
$ 1,373 $ 689 $ 480 $ 286
1.44% 1.43% 1.41%(a) 1.46%(a)
.69% .68% .66%(a) .71%(a)
4.40% 4.53% 4.88%(a) 4.93%(a)
</TABLE>
See Notes to Financial Statements
B-88
<PAGE>
PRUDENTIAL CALIFORNIA MUNICIPAL FUND California Series
Financial Highlights Cont'd.
<TABLE>
<CAPTION>
CLASS Z
-----------------
YEAR ENDED
AUGUST 31, 2000
----------------------------------------------------------------------------------------
<S> <C>
PER SHARE OPERATING PERFORMANCE:
NET ASSET VALUE, BEGINNING OF PERIOD $ 11.45
--------
Income from investment operations
Net investment income .61
Net realized and unrealized gain (loss) on investment
transactions .34
--------
Total from investment operations .95
--------
LESS DISTRIBUTIONS
Dividends from net investment income (.61)
Distributions in excess of net investment income --(c)
--------
Total distributions (.61)
--------
Net asset value, end of period $ 11.79
--------
--------
TOTAL RETURN(b): 8.71%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000) $ 1,599
Average net assets (000) $ 1,231
Ratios to average net assets:
Expenses, including distribution and service (12b-1) fees .68%
Expenses, excluding distribution and service (12b-1) fees .68%
Net investment income 5.37%
</TABLE>
------------------------------
(a) Net of management fee waiver.
(b) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each period reported and includes reinvestment of dividends and
distributions.
(c) Less than $.005 per share.
(d) Commencement of offering of Class Z shares.
(e) Annualized.
See Notes to Financial Statements
B-89
<PAGE>
PRUDENTIAL CALIFORNIA MUNICIPAL FUND California Series
Financial Highlights Cont'd.
<TABLE>
<CAPTION>
CLASS Z
---------------------------------------------------------------------------------------
YEAR ENDED AUGUST 31, SEPTEMBER 18, 1996(d)
------------------------------------------ THROUGH AUGUST 31,
1999 1998 1997
---------------------------------------------------------------------------------------
<S> <C> <C>
$ 12.23 $ 11.81 $ 11.50
---------------- ---------------- ----------
.62 .63 .64(a)
(.78) .43 .31
---------------- ---------------- ----------
(.16) 1.06 .95
---------------- ---------------- ----------
(.62) (.63) (.64)
-- (.01) --(c)
---------------- ---------------- ----------
(.62) (.64) (.64)
---------------- ---------------- ----------
$ 11.45 $ 12.23 $ 11.81
---------------- ---------------- ----------
---------------- ---------------- ----------
(1.44)% 9.24% 8.35%
$ 928 $ 1,037 $ 710
$ 1,427 $ 847 $ 458
.69% .68% .66%(a)/(e)
.69% .68% .66%(a)/(e)
5.15% 5.28% 5.35%(a)/(e)
</TABLE>
See Notes to Financial Statements
B-90
<PAGE>
PRUDENTIAL CALIFORNIA MUNICIPAL FUND California Series
Report of Independent Accountants
To the Shareholders and Board of Trustees of
Prudential California Municipal Fund, California Series
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Prudential California Municipal
Fund, California Series (the "Fund", one of the portfolios constituting
Prudential California Municipal Fund) at August 31, 2000, the results of its
operations for the year then ended, the changes in its net assets for each of
the two years in the period then ended and the financial highlights for each of
the four years in the period then ended, in conformity with accounting
principles generally accepted in the United States of America. These financial
statements and financial highlights (hereafter referred to as "financial
statements") are the responsibility of the Fund's management; our responsibility
is to express an opinion on these financial statements based on our audits. We
conducted our audits of these financial statements in accordance with auditing
standards generally accepted in the United States of America, which require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits, which included confirmation
of securities at August 31, 2000 by correspondence with the custodian and
brokers, provide a reasonable basis for our opinion. The accompanying financial
highlights for the year ended August 31, 1996 were audited by other independent
accountants, whose opinion dated October 14, 1996 was unqualified.
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York
October 20, 2000
B-91
<PAGE>
PRUDENTIAL CALIFORNIA MUNICIPAL FUND California Series
Federal Income Tax Information (Unaudited)
We are required by the Internal Revenue Code to advise you within 60 days
of the Series' fiscal year end (August 31, 2000) as to the federal tax status of
dividends and distributions paid by the Series during such fiscal year.
Accordingly, we are advising you that in the fiscal year ended August 31, 2000,
dividends paid from net investment income of $.58 per Class A share, $.56 per
Class B share, $.53 per Class C share and $.61 per Class Z share were all
federally tax-exempt interest dividends.
We wish to advise you that the corporate dividends received deduction for
the Series is zero. Only funds that invest in U.S. equity securities are
entitled to pass-through a corporate dividends received deduction.
B-92
<PAGE>
PRUDENTIAL CALIFORNIA MUNICIPAL FUND California Income Series
Portfolio of Investments as of August 31, 2000
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
RATING INTEREST MATURITY AMOUNT VALUE
DESCRIPTION (a) (UNAUDITED) RATE DATE (000) (NOTE 1)
------------------------------------------------------------------------------------------------------------
LONG-TERM INVESTMENTS 97.2%
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Alisal Union Sch. Dist.,
Cap. Apprec., Ser. C., F.G.I.C. Aaa Zero 8/1/19 $ 1,615 $ 578,670
Cap. Apprec., Ser. C., F.G.I.C. Aaa Zero 8/1/22 675 201,616
Assoc. of Bay Area Govt's. Fin.
Auth., Cert. of Part., Channing
House, Ser. A NR 7.125% 1/1/21 1,500(f) 1,544,580
Brea Pub. Fin. Auth. Rev., Tax
Alloc. Redev. Proj., Ser. C NR 8.10 3/1/21 3,000 3,095,250
Buena Park Cmnty. Redev. Agcy.
Cent. Bus. Dist. Proj. NR 7.80 9/1/14 3,325 3,513,261
Calabasas Spec. Tax Ref. Cmnty.
Facs., Dist. 98-1 NR 5.75 9/1/28 1,000 948,160
California Cmnty. Dev. Comm., Ref.
Ser. A NR 5.70 8/1/28 2,250 2,144,363
California Edl. Facs. Auth. Rev.,
Univ. S. California, Ser. A Aa2 5.00 10/1/28 2,000 1,876,700
California Infrastructure & Econ.
Dev. Bk. Rev.,
Scripps Research Institute,
Ser. A A1 5.75 7/1/30 1,500 1,532,640
Amer.Ctr. for Wine, Food & Arts A(c) 5.70 12/1/19 2,060 2,104,084
California St. Cmnty. Cap. Apprec.
Cmnty. Facs.,Dist. No. 97-1 NR Zero 9/1/22 4,440 1,043,888
California St. Edl. Facs. Auth.
Rev., Chapman College Baa2 7.50 1/1/18 600(f) 618,756
Carson City Ltd. Oblig. Impvt.
Rev., Assmt. Dist. NR 7.375 9/2/22 2,310 2,447,884
Chula Vista Cmnty. Redev. Agcy.,
Ref. Tax Alloc. Sr. Bayfront,
Ser. A BBB+(c) 7.625 9/1/24 2,500 2,769,950
Ref. Tax Alloc. Sub. Bayfront,
Ser. C NR 8.25 5/1/24 2,500 2,791,800
</TABLE>
See Notes to Financial Statements
B-93
<PAGE>
PRUDENTIAL CALIFORNIA MUNICIPAL FUND California Income Series
Portfolio of Investments as of August 31, 2000 Cont'd.
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
RATING INTEREST MATURITY AMOUNT VALUE
DESCRIPTION (a) (UNAUDITED) RATE DATE (000) (NOTE 1)
------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Chula Vista Spec. Tax Cmnty.
Facs., Dist. No. 97-3 NR 6.05% 9/1/29 $ 2,765 $ 2,765,000
Corona Cert. of Part., Vista Hosp.
Sys., Inc., Ser. C NR 8.375 7/1/11 2,000(e) 800,360
Davis Pub. Facs. Fin. Auth., Mace
Ranch, Ser. A NR 6.60 9/1/25 1,375 1,429,409
Delano Cert. of Part., Reg. Med.
Ctr., Ser. 92-A AAA(c) 9.25 1/1/22 2,810(f) 3,160,407
East Palo Alto San. Dist., Cert.
of Part. NR 8.25 10/1/15 500 510,960
El Dorado Cnty., Spec. Tax,
Cmnty. Facs., Dist. No. 92-1 NR 6.125 9/1/16 1,000 1,001,190
Cmnty. Facs., Dist. No. 92-1 NR 6.25 9/1/29 2,990 2,990,000
El Dorado Hills Dev., Cmnty.
Facs., Dist. No. 92-1 NR 8.25 9/1/24 1,945(f) 2,269,154
Fairfield Pub. Fin. Auth. Rev.,
Fairfield Redev. Proj., Ser. A NR 7.90 8/1/21 2,500(f) 2,636,150
Folsom Spec. Tax,
Cmnty. Facs., Dist. No. 10 NR 6.875 9/1/19 2,000 2,115,500
Cmnty. Facs., Dist. No. 7 NR 6.00 9/1/24 2,500 2,459,425
Fontana Pub. Fin. Auth., N.
Fontana Tax Alloc. Rev. NR 7.65 12/1/09 1,575(f) 1,674,194
Fontana Redev. Agcy. Tax Alloc.,
Ref. Jurupa Hills Redev. Proj. A BBB+(c) 5.60 10/1/27 1,595 1,516,143
Foothill/Eastern Trans. Corr.
Agcy.,
Conv. Cap. Apprec., Ser. A Aaa Zero 1/1/13 4,750(f) 4,309,390
Conv. Cap. Apprec. Baa3 Zero 1/15/26 4,800 2,750,736
Conv. Cap. Apprec. Baa3 Zero 1/15/28 4,890 2,775,906
Toll Rd., Ser. A Aaa Zero 1/1/20 10,000 3,483,200
Gateway Impvt. Auth. Rev., Marine
City Cmnty. Facs. Dist. & Redev. NR 7.75 9/1/25 2,100(f) 2,478,693
Golden West Sch. Fin. Auth.,
California Rev. Cap. Apprec.
Ref., Ser. A Aaa Zero 2/1/19 2,110 775,425
Irvine Impvt. Bond Act of 1915,
Assmt. Dist. No. 87-8 Grp. NR 6.00 9/2/24 3,000 2,988,660
Assmt. Dist. No. 94-13 NR 6.00 9/2/22 1,000 1,000,000
</TABLE>
See Notes to Financial Statements
B-94
<PAGE>
PRUDENTIAL CALIFORNIA MUNICIPAL FUND California Income Series
Portfolio of Investments as of August 31, 2000 Cont'd.
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
RATING INTEREST MATURITY AMOUNT VALUE
DESCRIPTION (a) (UNAUDITED) RATE DATE (000) (NOTE 1)
------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Kings Cnty. Wst. Mgmt. Auth.,
Solid Wst. Rev., A.M.T. BBB(c) 7.20% 10/1/14 $ 1,200 $ 1,294,320
La Mesa Impvt. Bond Act of 1915,
Ltd. Oblig., Dist. No. 98-1 NR 5.75 9/2/23 1,000 955,840
La Mirada Redev. Agcy. Spec. Tax,
Ref. Cmnty. Fac., Dist. No. 89-1 NR 5.70 10/1/20 1,000 946,460
La Quinta Redev. Agcy.,
Proj. Area No. 1, M.B.I.A. Aaa 7.30 9/1/10 1,000 1,234,140
Tax Alloc. Ref. Proj. No.1,
M.B.I.A. Aaa 7.30 9/1/11 1,000 1,239,860
Lincoln Impvt. Bond Act of 1915,
Pub. Fin. Auth., Twelve Bridges NR 6.20 9/2/25 2,980 2,996,509
Long Beach Hbr. Rev.,
Ref. Ser. A., A.M.T., F.G.I.C. Aaa 6.00 5/15/17 5,000 5,471,850
Ref. Ser. A., A.M.T., F.G.I.C. Aaa 6.00 5/15/19 3,000 3,258,210
Long Beach Redev. Agcy. Hsg.,
Multifamily Hsg. Rev., Pacific
Ct. Apts., Ser. B NR Zero 9/1/13 1,000(e) 620,000
Multifamily Hsg. Rev., Pacific
Ct. Apts., Ser. B NR Zero 9/1/23 1,500(e) 930,000
Los Angeles Cmnty. Redev. Agy.
Sys. Rev., Cinerama Dome Pub.Pkg.
Proj. A(c) 5.75 7/1/26 3,000 2,999,730
Los Angeles Cmnty. Facs., Dist.
No. 5, Rowland Heights Area NR 7.25 9/1/19 1,500(f) 1,697,595
Lynwood Pub. Fin. Auth. Rev., Wtr.
Sys. Impvt. Proj. BBB(c) 6.50 6/1/21 1,500 1,552,710
Met. Wtr. Dist. of Southern
California, Waterworks Rev.,
Linked S.A.V.R.S. & R.I.B.S. Aa2 5.75 8/14/18 1,000 1,063,630
Mojave Desert & Mtn. Solid Waste,
Victor Valley Nat'l. Recov.
Facs., A.M.T. Baa1 7.875 6/1/20 1,175 1,254,125
</TABLE>
See Notes to Financial Statements
B-95
<PAGE>
PRUDENTIAL CALIFORNIA MUNICIPAL FUND California Income Series
Portfolio of Investments as of August 31, 2000 Cont'd.
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
RATING INTEREST MATURITY AMOUNT VALUE
DESCRIPTION (a) (UNAUDITED) RATE DATE (000) (NOTE 1)
------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Montebello Unified Sch. Dist.,
Cap. Apprec., F.G.I.C. Aaa Zero 8/1/18 $ 2,195 $ 839,061
Cap. Apprec., F.G.I.C. Aaa Zero 8/1/19 2,250 806,197
Cap. Apprec., F.G.I.C. Aaa Zero 8/1/20 2,300 776,066
Morgan Hill Unified Sch. Dist. Aaa 5.75% 8/1/18 1,000 1,060,730
Norco Spec.Tax Cmnty. Facs., Dist.
No. 97-1 NR 7.10 10/1/30 1,320 1,387,069
Ontario California Impvt. Bond Act
of 1915, Assmt. Dist. 100C, Com.
Ctr. III NR 8.00 9/2/11 1,050 1,093,596
Orange Cnty. Cmnty. Facs. Dist.,
Spec. Tax Rev., No. 88-1, Aliso
Viejo, Ser. A AAA 7.15(c) 8/15/06 805(f) 867,283
Orange Cnty. Loc. Trans. Auth.,
Sales Tax Rev., Linked S.A.V.R.S.
& R.I.B.S., A.M.B.A.C. Aaa 6.20 2/14/11 10,000 11,253,200
Spec. Tax Rev., Linked S.A.V.R.S.
& R.I.B.S. Aa3 7.604(d) 2/14/11 750 910,312
Perris Sch. Dist., Cert. of Part.,
Cap. Proj. NR 7.75 3/1/21 1,500(f) 1,557,360
Pico Rivera California Wtr. Auth.
Rev., Wtr. Sys. Proj. Ser. A,
M.B.I.A. Aaa 5.50 5/1/29 4,000 4,075,320
Pittsburg California Redev. Agcy.
Tax Alloc., Ext. Spec. Redem.,
Los Medanos, F.S.A. Aaa 5.80 8/1/34 2,700 2,816,856
Los Medanos Cmnty. Dev. Proj.,
A.M.B.A.C. Aaa Zero 8/1/26 1,375 323,661
Los Medanos Cmnty. Dev. Proj.,
A.M.B.A.C. Aaa Zero 8/1/30 4,145 775,944
Placentia Pub. Fin. Auth., Spec.
Tax Rev., Ser. B NR 6.60 9/1/15 1,500 1,536,165
Poway Cmnty. Facs., Dist. No.
88-1, Parkway Bus. Ctr. NR 6.75 8/1/15 1,000 1,069,490
</TABLE>
See Notes to Financial Statements
B-96
<PAGE>
PRUDENTIAL CALIFORNIA MUNICIPAL FUND California Income Series
Portfolio of Investments as of August 31, 2000 Cont'd.
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
RATING INTEREST MATURITY AMOUNT VALUE
DESCRIPTION (a) (UNAUDITED) RATE DATE (000) (NOTE 1)
------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Puerto Rico Commonwealth, Rites,
PA 642A, M.B.I.A. NR 7.497%(d) 7/1/10 $ 1,000 $ 1,195,130
Puerto Rico Indl. Tourist Edl.
Med. & Environmental Clt. Facs.,
Cogen Fac., A.M.T. Baa2 6.625 6/1/26 3,750 3,909,112
Puerto Rico Pub. Bldgs. Auth.,
Gtd. Pub. Ed. & Hlth. Facs.,
Ser. J Baa1 Zero 7/1/06 1,605 1,230,297
Redding Elec. Sys. Rev.,
Linked S.A.V.R.S. & R.I.B.S.,
M.B.I.A. Aaa 6.368 7/1/22 50 54,854
Cert. of Part., M.B.I.A. Aaa 8.457(d) 7/1/22 1,850 2,208,437
Richmond Redev. Agcy. Tax Alloc.,
Cap. Apprec. Ref. Harbor, Ser.
B., M.B.I.A. Aaa Zero 7/1/20 1,150 389,045
Cap. Apprec. Ref. Harbor, Ser.
B., M.B.I.A. Aaa Zero 7/1/21 1,150 366,126
Multifamily Hsg., Bridge
Affordable Hsg. NR 7.50 9/1/23 2,500 2,542,100
Rio Vista Impvt. Bond Act of 1915,
Assmt. Dist. No. 96-1, River View
Pt. NR 7.50 9/2/22 1,940 2,088,371
Riverside Unified Sch. Dist. Spec.
Tax,
Cmnty. Facs. Dist. No. 7, Ser. A NR 6.90 9/1/20 1,320 1,389,854
Cmnty. Facs. Dist. No. 7, Ser. A NR 7.00 9/1/30 1,000 1,051,440
Riverside Cnty. Cert. of Part.,
Air Force Village West NR 8.125 6/15/20 3,000(f) 3,262,170
Rocklin Stanford Ranch Cmnty.,
Spec.Tax Facs., Dist. No. 3 NR 8.10 11/1/15 1,000(f) 1,026,590
Rocklin Unified Sch. Dist., Gen.
Oblig.,
Cap. Apprec., Ser. C, M.B.I.A. Aaa Zero 8/1/12 1,110 624,153
Cap. Apprec., Ser. C, M.B.I.A. Aaa Zero 8/1/13 1,165 615,586
Cap. Apprec., Ser. C, M.B.I.A. Aaa Zero 8/1/14 1,220 604,498
Cap. Apprec., Ser. C, M.B.I.A. Aaa Zero 8/1/15 1,285 596,638
Cap. Apprec., Ser. C, M.B.I.A. Aaa Zero 8/1/16 1,400 608,888
</TABLE>
See Notes to Financial Statements
B-97
<PAGE>
PRUDENTIAL CALIFORNIA MUNICIPAL FUND California Income Series
Portfolio of Investments as of August 31, 2000 Cont'd.
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
RATING INTEREST MATURITY AMOUNT VALUE
DESCRIPTION (a) (UNAUDITED) RATE DATE (000) (NOTE 1)
------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Roseville California Spec. Tax,
Highland Cmnty. Fac., Dist.
No. 1 NR 6.30% 9/1/25 $ 1,900 $ 1,910,773
Ref. N. Central Cmnty., Dist.
No. 1 NR 5.80 9/1/17 2,500 2,457,625
Sacramento City Fin. Auth.,
Cap. Apprec., Tax Alloc. Comb.
Proj., Ser. B, M.B.I.A. Aaa Zero 11/1/16 5,700 2,446,839
Cap. Apprec., Tax Alloc. Comb.
Proj., Ser. B, M.B.I.A. Aaa Zero 11/1/17 5,695 2,293,092
Sacramento Cnty. Spec. Tax Rev.,
Dist. No. 1, Laguna Creek Ranch NR 5.70 12/1/20 1,410 1,349,821
Dist. No. 1, Laguna Creek Ranch NR 8.25 12/1/20 1,000(f) 1,030,070
Sacramento Impvt. Bond Act of
1915, Willowcreek II, Assmt.
Dist., No.96-1 NR 6.70 9/2/22 2,495 2,577,460
Sacramento Spec. Purpose Facs.,
Y.M.C.A. of Sacramento NR 7.25 12/1/18 2,060 2,158,674
San Bernardino Cnty., Cert. of
Part., Med. Ctr. Fin. Proj.,
M.B.I.A. Aaa 5.50 08/1/22 4,540 4,680,558
San Bruno Park Sch. Dist.,
Cap. Apprec., F.S.A. Aaa Zero 8/1/20 1,275 430,211
Cap. Apprec., F.S.A. Aaa Zero 8/1/21 1,220 387,423
Cap. Apprec., F.S.A. Aaa Zero 8/1/22 1,080 322,585
San Diego Spec. Tax, Cmnty. Facs.,
Dist. No. 1, Ser. B NR 7.10 9/1/20 2,000(f) 2,302,400
San Francisco City & Cnty.,
Redev. Agcy., Lease Rev. A1 Zero 7/1/06 1,500 1,156,395
Redev. Agcy., Lease Rev. A1 Zero 7/1/07 2,250 1,654,493
San Joaquin Hills Trans. Corridor
Agcy.,
Toll Rd. Rev. Aaa Zero 1/1/11 2,000 1,228,800
Toll Rd. Rev. Aaa Zero 1/1/22 15,000 4,626,900
</TABLE>
See Notes to Financial Statements
B-98
<PAGE>
PRUDENTIAL CALIFORNIA MUNICIPAL FUND California Income Series
Portfolio of Investments as of August 31, 2000 Cont'd.
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
RATING INTEREST MATURITY AMOUNT VALUE
DESCRIPTION (a) (UNAUDITED) RATE DATE (000) (NOTE 1)
------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Toll Rd. Rev., Cap. Apprec. Ref.,
Ser. A, M.B.I.A. Aaa Zero 1/15/26 $ 7,000 $ 1,677,760
Toll Rd. Rev. Aaa 5.00% 1/1/33 1,000 939,080
San Jose Multifamily Hsg. Rev.,
Sixth & Martha Family Apts.,
A.M.T., F.N.M.A. AAA(c) 5.875 3/1/33 1,400 1,408,134
San Jose Unified Sch. Dist., Santa
Clara,
Gen. Oblig., Ser. A., F.G.I.C. Aaa Zero 8/1/16 2,630 1,143,839
Gen. Oblig., Ser. A., F.G.I.C. Aaa Zero 8/1/18 2,765 1,056,949
Gen. Oblig., Ser. A., F.G.I.C. Aaa Zero 8/1/19 2,835 1,015,809
San Leandro Cmnty. Facs., Spec.
Tax, Dist. No. 001 NR 6.50 9/1/25 2,160 2,172,614
San Luis Obispo, Certs. of Part.,
Vista Hosp. Sys. NR 8.375 7/1/29 1,000(e) 400,190
San Marino Unified Sch. Dist.,
General Oblig., Ser. A AA(c) 5.25 7/1/19 1,840 1,866,330
General Oblig., Ser. A AA(c) 5.00 6/1/23 1,500 1,440,795
Santa Margarita, Dana Point Rites,
PA Ser. 644G, M.B.I.A. NR 13.827(d) 8/1/14 330 576,032
PA Ser. 644B, M.B.I.A. NR 13.827(d) 8/1/09 305 502,460
Santa Margarita Wtr. Dist. Spec.
Tax,
Cmnty Fac., Dist. No. 99-1 NR 6.20 9/1/20 2,000 2,038,320
Cmnty Fac., Dist. No. 99-1 NR 6.25 9/1/29 2,000 2,031,800
Santa Rosa Impvt. Bond Act of
1915, Ref. Fountaingrove Parkway NR 5.70 9/2/19 1,000 961,000
South Orange Cnty., Pub. Fin.
Auth., Spec. Tax Rev., M.B.I.A. Aaa 7.00 9/1/10 2,535 3,068,187
South San Francisco Redev. Agcy.,
Tax Alloc., Gateway Redev. Proj. NR 7.60 9/1/18 2,375(f) 2,581,174
South Tahoe Joint Pwrs. Fin. Ref.,
Redev. Proj., Ser. A BBB-(c) 5.375 10/1/30 1,500 1,364,265
</TABLE>
See Notes to Financial Statements
B-99
<PAGE>
PRUDENTIAL CALIFORNIA MUNICIPAL FUND California Income Series
Portfolio of Investments as of August 31, 2000 Cont'd.
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
RATING INTEREST MATURITY AMOUNT VALUE
DESCRIPTION (a) (UNAUDITED) RATE DATE (000) (NOTE 1)
------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Southern California Pub. Pwr.
Auth.,
Proj. Rev. A2 6.75% 7/1/10 $ 6,250 $ 7,308,250
Proj. Rev. A2 6.75 7/1/13 3,000 3,514,440
Proj. Rev., A.M.B.A.C. Aaa Zero 7/1/16 8,400 3,714,816
Stockton Cmnty. Facs., Dist. No.
90-2, Brookside Estates NR 6.20 8/1/15 1,050 1,078,392
Sulphur Springs Unified Sch.
Dist., Ser. A, M.B.I.A. Aaa Zero 9/1/11 3,000 1,786,170
Temecula Valley Unified Sch.
Dist., Cmnty. Facs., Spec. Tax,
Dist. No. 89-1 NR 8.60 9/1/17 2,600 2,684,786
Tustin Unified Sch. Dist.,
Bond Anticipation Notes, Cmnty.
Facs., Dist. No. 97-1 NR 6.10 9/1/02 1,000 1,000,560
Spec. Tax, Cmnty.
Facs., Dist. No. 97-1 NR 6.375 9/1/35 1,500 1,512,240
Vacaville Cmnty. Redev. Agcy.,
Multifamily Hsg. Rev. NR 7.375 11/1/14 1,110(f) 1,266,144
Vallejo Cert. of Part., Touro
Univ. Baa 7.375 6/1/29 2,500 2,562,025
Ventura California Port Dist.,
Cert. of Part. NR 6.375 8/1/28 4,000 4,040,680
Victor Valley,
Union H.S. Dist., M.B.I.A. Aaa Zero 9/1/17 4,500 1,852,380
Union H.S. Dist., M.B.I.A. Aaa Zero 9/1/19 5,450 1,972,954
Union H.S. Dist., M.B.I.A. Aaa Zero 9/1/20 5,850 1,995,786
Virgin Islands Territory, Hugo
Ins. Claims Fund Proj., Ser. 91 NR 7.75 10/1/06 785(f) 821,189
West Contra Costa Unified Sch.
Dist., Cert. of Part. Baa3 6.875 1/1/09 1,015 1,096,982
------------
Total long-term investments (cost
$238,903,209) $252,994,733
------------
</TABLE>
See Notes to Financial Statements
B-100
<PAGE>
PRUDENTIAL CALIFORNIA MUNICIPAL FUND California Income Series
Portfolio of Investments as of August 31, 2000 Cont'd.
<TABLE>
<CAPTION>
MOODY'S PRINCIPAL
RATING INTEREST MATURITY AMOUNT VALUE
DESCRIPTION (a) (UNAUDITED) RATE DATE (000) (NOTE 1)
------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SHORT-TERM INVESTMENTS 1.0%
Bear Stearns Municipal Secs. Trust
Ctfs., Ser. 00-95, Class A,
F.R.D.D. A-1(c) 3.90% 9/1/00 $ 2,600 $ 2,600,000
California Hlth. Facs. Fin. Auth.
Rev., Var. Ind. Hosp. Adventist,
Ser. C, F.R.D.D. VMIG1 3.40 9/1/00 60 60,000
------------
Total short-term investments (cost
$2,660,000) $ 2,660,000
------------
TOTAL INVESTMENTS 98.2%
(COST $241,563,209; NOTE 4) 255,654,733
Other assets in excess of
liabilities 1.8% 4,723,376
------------
NET ASSETS 100% $260,378,109
------------
------------
</TABLE>
------------------------------
(a) The following abbreviations are used in portfolio descriptions:
A.M.B.A.C.--American Municipal Bond Assurance Corporation.
A.M.T.--Alternative Minimum Tax.
F.G.I.C.--Financial Guaranty Insurance Company.
F.N.M.A.--Federal National Mortgage Association.
F.R.D.D.--Floating Rate (Daily) Demand Notes (b)
F.S.A.--Financial Security Assurance.
M.B.I.A.--Municipal Bond Insurance Association.
R.I.B.S.--Residual Interest Bearing Securities.
S.A.V.R.S.--Select Auction Variable Rate Securities.
Y.M.C.A.--Young Mens Christian Association.
(b) For purposes of amortized cost valuation, the maturity date of Floating Rate
Demand Notes is considered to be the later of the next date on which the
security can be redeemed at par, or the next date on which the rate of
interest is adjusted.
(c) Standard & Poor's Rating.
(d) Inverse floating rate bond. The coupon is inversely indexed to a floating
interest rate. The rate shown is the rate at year end.
(e) Issue in default on interest payment, non-income producing security.
(f) Prerefunded issues are secured by escrowed cash and/or direct U.S.
guaranteed obligations.
NR--Not Rated by Moody's or Standard & Poor's.
The Fund's current Statement of Additional Information contains a description of
Moody's and Standard & Poor's ratings.
See Notes to Financial Statements
B-101
<PAGE>
PRUDENTIAL CALIFORNIA MUNICIPAL FUND California Income Series
Statement of Assets and Liabilities
<TABLE>
<CAPTION>
AUGUST 31, 2000
----------------------------------------------------------------------------------------
<S> <C>
ASSETS
Investments, at value (cost $241,563,209) $ 255,654,733
Cash 1,480,048
Interest receivable 3,860,335
Receivable for investments sold 1,937,850
Receivable for Series shares sold 204,486
Other assets 4,527
---------------
TOTAL ASSETS 263,141,979
---------------
LIABILITIES
Payable for investments purchased 1,932,700
Payable for Series shares reacquired 424,041
Dividends payable 129,848
Management fee payable 109,522
Accrued expenses 82,144
Distribution fee payable 74,209
Deferred trustee's fees 11,406
---------------
TOTAL LIABILITIES 2,763,870
---------------
NET ASSETS $ 260,378,109
---------------
---------------
Net assets were comprised of:
Shares of beneficial interest, at par $ 244,149
Paid-in capital in excess of par 250,653,961
---------------
250,898,110
Accumulated net realized loss on investments (4,611,525)
Net unrealized appreciation on investments 14,091,524
---------------
Net assets, August 31, 2000 $ 260,378,109
---------------
---------------
</TABLE>
See Notes to Financial Statements
B-102
<PAGE>
PRUDENTIAL CALIFORNIA MUNICIPAL FUND California Income Series
Statement of Assets and Liabilities Cont'd.
<TABLE>
<CAPTION>
AUGUST 31, 2000
----------------------------------------------------------------------------------------
<S> <C>
Class A:
Net asset value and redemption price per share ($167,152,548
divided by 15,673,459 shares of beneficial interest issued
and outstanding) $10.66
Maximum sales charge (3% of offering price) .33
---------------
Maximum offering price to public $10.99
---------------
---------------
Class B:
Net asset value, offering price and redemption price per
share ($80,580,224 divided by 7,555,173 shares of
beneficial interest issued and outstanding) $10.67
---------------
---------------
Class C:
Net asset value and redemption price per share ($8,309,390
divided by 779,090 shares of beneficial interest issued
and outstanding) $10.67
Sales charge (1% of offering price) .11
---------------
Offering price to public $10.78
---------------
---------------
Class Z:
Net asset value, offering price and redemption price per
share ($4,335,947 / 407,205 shares of beneficial interest
issued and outstanding) $10.65
---------------
---------------
</TABLE>
See Notes to Financial Statements
B-103
<PAGE>
PRUDENTIAL CALIFORNIA MUNICIPAL FUND California Income Series
Statement of Operations
<TABLE>
<CAPTION>
YEAR
ENDED
AUGUST 31, 2000
----------------------------------------------------------------------------------------
<S> <C> <C>
NET INVESTMENT INCOME
Income
Interest $ 15,989,770
---------------
Expenses
Management fee 1,318,663
Distribution fee--Class A 429,221
Distribution fee--Class B 393,715
Distribution fee--Class C 67,660
Custodian's fees and expenses 91,000
Transfer agent's fees and expenses 56,000
Reports to shareholders 45,000
Registration fees 39,000
Legal fees and expenses 25,000
Audit fees and expenses 13,000
Trustees' fees and expenses 11,000
Miscellaneous 7,152
---------------
TOTAL EXPENSES 2,496,411
Custodian fee credit (Note 1) (8,903)
---------------
Net expenses 2,487,508
---------------
NET INVESTMENT INCOME 13,502,262
---------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Net realized gain (loss) on:
Investment transactions (1,610,894)
Financial futures transactions 912,868
---------------
(698,026)
---------------
Net change in unrealized appreciation (depreciation) on:
Investments 4,511,933
Financial futures contracts (156,625)
---------------
4,355,308
---------------
Net gain on investments 3,657,282
---------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 17,159,544
---------------
---------------
</TABLE>
See Notes to Financial Statements
B-104
<PAGE>
PRUDENTIAL CALIFORNIA MUNICIPAL FUND California Income Series
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
YEAR YEAR
ENDED ENDED
AUGUST 31, 2000 AUGUST 31, 1999
------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net investment income $ 13,502,262 $ 14,041,421
Net realized loss on investment transactions (698,026) (825,958)
Net change in unrealized appreciation
(depreciation) on investments 4,355,308 (17,810,023)
--------------- ---------------
Net increase (decrease) in net assets
resulting from operations 17,159,544 (4,594,560)
--------------- ---------------
DIVIDENDS AND DISTRIBUTIONS (NOTE 1):
Dividends from net investment income
Class A (8,940,906) (9,496,580)
Class B (3,903,458) (3,882,376)
Class C (424,644) (413,457)
Class Z (233,254) (249,008)
--------------- ---------------
(13,502,262) (14,041,421)
--------------- ---------------
Distributions in excess of net investment
income
Class A (29,079) --
Class B (12,950) --
Class C (1,428) --
Class Z (623) --
--------------- ---------------
(44,080) --
--------------- ---------------
SERIES SHARE TRANSACTIONS (NET OF SHARE
CONVERSIONS) (NOTE 5):
Net proceeds from shares sold 64,974,467 92,907,502
Net asset value of shares issued to
shareholders in reinvestment of dividends
and distributions 6,255,584 6,830,426
Cost of shares reacquired (98,900,936) (59,179,182)
--------------- ---------------
Net increase (decrease) in net assets from
Series share transactions (27,670,885) 40,558,746
--------------- ---------------
Total increase (decrease) (24,057,683) 21,922,765
NET ASSETS
Beginning of year 284,435,792 262,513,027
--------------- ---------------
End of year $ 260,378,109 $ 284,435,792
--------------- ---------------
--------------- ---------------
</TABLE>
See Notes to Financial Statements
B-105
<PAGE>
PRUDENTIAL CALIFORNIA MUNICIPAL FUND California Income Series
Notes to Financial Statements
Prudential California Municipal Fund (the "Fund") is registered under the
Investment Company Act of 1940, as an open-end investment company. The Fund was
organized as a Massachusetts business trust on May 18, 1984 and consists of
three series. The monies of each series are invested in separate, independently
managed portfolios. The California Income Series (the "Series") commenced
investment operations on December 3, 1990. The Series is diversified and seeks
to achieve its investment objective of obtaining the maximum amount of income
exempt from federal and California state income taxes with the minimum of risk.
The Series will invest primarily in investment grade municipal obligations but
may also invest a portion of its assets in lower-quality municipal obligations
or in nonrated securities which are of comparable quality. The ability of the
issuers of the securities held by the Series to meet their obligations may be
affected by economic developments in California or in a specific industry or
region.
NOTE 1. ACCOUNTING POLICIES
The following is a summary of significant accounting policies followed by the
Fund and the Series in preparation of its financial statements.
SECURITY VALUATIONS: The Series values municipal securities (including
commitments to purchase such securities on a "when-issued" basis) on the basis
of prices provided by a pricing service which uses information with respect to
transactions in bonds, quotations from bond dealers, market transactions in
comparable securities and various relationships between securities in
determining values. If market quotations are not readily available from such
pricing service, a security is valued at its fair value as determined under
procedures established by the Trustees. Short-term securities which mature in
more than 60 days are valued at current market quotations. Short-term securities
which mature in 60 days or less are valued at amortized cost.
All securities are valued as of 4:15 p.m., New York time.
FINANCIAL FUTURES CONTRACTS: A financial futures contract is an
agreement to purchase (long) or sell (short) an agreed amount of securities at a
set price for delivery on a future date. Upon entering into a financial futures
contract, the Series is required to pledge to the broker an amount of cash
and/or other assets equal to a certain percentage of the contract amount. This
amount is known as the "initial margin." Subsequent payments, known as
"variation margin," are made or received by the Series each day, depending on
the daily fluctuations in the value of the underlying security. Such variation
margin is recorded for financial statement purposes on a daily basis as
unrealized gain or loss. When the contract expires or is closed, the gain or
B-106
<PAGE>
PRUDENTIAL CALIFORNIA MUNICIPAL FUND California Income Series
Notes to Financial Statements Cont'd.
loss is realized and is presented in the statement of operations as net realized
gain (loss) on financial futures transactions.
The Series invests in financial futures contracts in order to hedge its
existing portfolio securities or securities the Series intends to purchase,
against fluctuations in value caused by changes in prevailing interest rates.
Should interest rates move unexpectedly, the Series may not achieve the
anticipated benefits of the financial futures contracts and may realize a loss.
The use of futures transactions involves the risk of imperfect correlation in
movements in the price of futures contracts, interest rates and the underlying
hedged assets.
OPTIONS: The Fund may either purchase or write options in order to
hedge against adverse market movements or fluctuations in value caused by
changes in prevailing interest rates with respect to securities which the Fund
currently owns or intends to purchase. The Fund's principal reason for writing
options is to realize, through receipt of premiums, a greater current return
than would be realized on the underlying security alone. When the Fund purchases
an option, it pays a premium and an amount equal to that premium is recorded as
an investment. When the Fund writes an option, it receives a premium and an
amount equal to that premium is recorded as a liability. The investment or
liability is adjusted daily to reflect the current market value of the option.
If an option expires unexercised, the Fund realizes a gain or loss to the extent
of the premium received or paid. If an option is exercised, the premium received
or paid is an adjustment to the proceeds from the sale or the cost of the
purchase in determining whether the Fund has realized a gain or loss. The
difference between the premium and the amount received or paid on effecting a
closing purchase or sale transaction is also treated as a realized gain or loss.
Gain or loss on purchased options is included in net realized gain (loss) on
investment transactions. Gain or loss on written options is presented separately
as net realized gain (loss) on written option transactions.
The Fund, as writer of an option, may have no control over whether the
underlying securities may be sold (called) or purchased (put). As a result, the
Fund bears the market risk of an unfavorable change in the price of the security
underlying the written option. The Fund, as purchaser of an option, bears the
risk of the potential inability of the counterparties to meet the terms of their
contracts.
SECURITIES TRANSACTIONS AND NET INVESTMENT INCOME: Securities
transactions are recorded on the trade date. Realized gains and losses on sales
of securities are calculated on the identified cost basis. Interest income is
recorded on the accrual basis. The Series amortizes premiums and original issue
discount paid on purchases
B-107
<PAGE>
PRUDENTIAL CALIFORNIA MUNICIPAL FUND California Income Series
Notes to Financial Statements Cont'd.
of portfolio securities as adjustments to interest income. Expenses are recorded
on the accrual basis which may require the use of certain estimates by
management.
Net investment income (other than distribution fees) and unrealized and
realized gains or losses are allocated daily to each class of shares based upon
the relative proportion of net assets of each class at the beginning of the day.
FEDERAL INCOME TAXES: For federal income tax purposes, each series in
the Fund is treated as a separate taxpaying entity. It is the intent of the
Series to continue to meet the requirements of the Internal Revenue Code
applicable to regulated investment companies and to distribute all of its net
income to shareholders. For this reason, no federal income tax provision is
required.
DIVIDENDS AND DISTRIBUTIONS: The Series declares daily dividends from
net investment income. Payment of dividends is made monthly. Distributions of
net capital gains, if any, are made annually.
Income distributions and capital gain distributions are determined in
accordance with income tax regulations which may differ from generally accepted
accounting principles.
CUSTODY FEE CREDITS: The Fund has an arrangement with its custodian
bank, whereby uninvested monies earn credits which reduce the fees charged by
the custodian.
RECLASSIFICATION OF CAPITAL ACCOUNTS: The Fund accounts for and reports
distributions to shareholders in accordance with Statement of Position 93-2:
Determination, Disclosure, and Financial Statement Presentation of Income,
Capital Gain and Return of Capital Distributions by Investment Companies. The
effect of applying this statement was to increase undistributed net investment
income and increase accumulated net realized loss by $44,080 due to the sale of
securities purchased with market discount. Net investment income, net realized
gains and net assets were not affected by this change.
NOTE 2. AGREEMENTS
The Fund has a management agreement with Prudential Investments Fund Management
LLC ("PIFM"). Pursuant to this agreement, PIFM has responsibility for all
investment advisory services and supervises the subadviser's performance of such
services. PIFM has entered into a subadvisory agreement with The Prudential
Investment Corporation ("PIC"). 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. PIFM continues to have reponsibility for all investment
advisory services pursuant to the management agreement and supervises PIC's
performance of such services. PIFM
B-108
<PAGE>
PRUDENTIAL CALIFORNIA MUNICIPAL FUND California Income Series
Notes to Financial Statements Cont'd.
pays for the services of PIC, the cost of compensation of officers of the Fund,
occupancy and certain clerical and bookkeeping costs of the Fund. The Fund bears
all other costs and expenses.
The management fee paid to PIFM is computed daily and payable monthly, at
an annual rate of .50 of 1% of the average daily net assets of the Series.
Effective January 1, 2000, the subadvisory fee paid to PIC by PIFM is
computed daily and payable monthly at an annual rate of .250 of 1% of the
average daily net assets of the Fund. Prior to January 1, 2000, PIC was
reimbursed by PIFM for reasonable costs and expenses incurred in furnishing
investment advisory services. The change in subadvisory fee structure has no
impact on the management fee charged to the Fund or its shareholders.
The Fund has a distribution agreement with Prudential Investment
Management Services LLC ("PIMS") which acts as the distributor of the Fund. The
Fund compensates PIMS for distributing and servicing the Fund's Class A, Class B
and Class C shares, pursuant to plans of distribution (the "Class A, B and C
Plans"), regardless of expenses actually incurred by it. The distribution fees
are accrued daily and payable monthly. No distribution or service fees are paid
to PIMS as distributor of the Class Z shares of the Fund.
Pursuant to the Class A, B and C Plans, the Fund compensates PIMS for
distribution-related activities at an annual rate of up to .30 of 1%, .50 of 1%
and 1% of the average daily net assets of the Class A, B and C shares,
respectively. Such expenses under the Plans were .25 of 1%, .50 of 1% and .75 of
1% of the average daily net assets of the Class A, B and C shares, respectively.
PIMS has advised the Series that it received approximately $123,000 and
$11,900 in front-end sales charges resulting from sales of Class A and Class C
shares, respectively, during the year ended August 31, 2000. From these fees,
PIMS paid such sales charges to affiliated broker-dealers which in turn paid
commissions to sales persons and incurred other distribution costs.
PIMS has advised the Series that for the year ended August 31, 2000, it
received approximately $281,500 and $7,900 in contingent deferred sales charges
imposed upon certain redemptions by Class B and Class C shareholders,
respectively.
PIFM, PIMS and PIC are wholly owned subsidiaries of The Prudential
Insurance Company of America.
The Fund, along with other affiliated registered investment companies (the
"Funds"), entered into a syndicated credit agreement ("SCA") with an
unaffiliated lender. The maximum commitment under the SCA is $1 billion.
Interest on any such borrowings will be at market rates. The purpose of the
agreement is to serve as an
B-109
<PAGE>
PRUDENTIAL CALIFORNIA MUNICIPAL FUND California Income Series
Notes to Financial Statements Cont'd.
alternative source of funding for capital share redemptions. The Funds pay a
commitment fee at an annual rate of .080 of 1% of the unused portion of the
credit facility. The commitment fee is accrued and paid quarterly on a pro rata
basis by the Funds. The expiration date of the SCA is March 9, 2001. Prior to
March 9, 2000, the commitment fee was .065 of 1% of the unused portion of the
credit facility. The Fund did not borrow any amounts pursuant to the SCA during
the year ended August 31, 2000.
NOTE 3. OTHER TRANSACTIONS WITH AFFILIATES
Prudential Mutual Fund Services LLC ("PMFS"), a wholly owned subsidiary of PIFM,
serves as the Fund's transfer agent. During the year ended August 31, 2000, the
Series incurred fees of approximately $50,000 for the services of PMFS. As of
August 31, 2000 approximately $3,800 of such fees were due to PMFS. Transfer
agent fees and expenses in the Statement of Operations include certain
out-of-pocket expenses paid to nonaffiliates.
NOTE 4. PORTFOLIO SECURITIES
Purchases and sales of portfolio securities of the Series, excluding short-term
investments, for the year ended August 31, 2000 were $86,897,914 and
$120,720,585, respectively.
The United States federal income tax cost basis of the Fund's investments
as of August 31, 2000 was $241,734,504 and accordingly, net unrealized
appreciation on investments for federal income tax purposes was $13,920,228
(gross unrealized appreciation--$17,583,998; gross unrealized
depreciation--$3,663,770).
For federal income tax purposes, the Series has a capital loss
carryforward at August 31, 2000 of approximately $3,408,000 of which $1,520,900
expires in 2003, $975,700 expires in 2004 and $911,400 expires in 2008.
Accordingly, no capital gains distributions are expected to be paid to
shareholders until net gains have been realized in excess of such amount.
For federal income tax purposes, the Series will elect to treat net
capital losses of $933,900 incurred in the ten month period ended August 31,
2000 as being incurred in the next year.
NOTE 5. CAPITAL
The Series offers Class A, Class B, Class C and Class Z shares. Class A shares
are sold with a front-end sales charge of up to 3%. Class B shares are sold with
a contingent deferred sales charge which declines from 5% to zero depending on
the period of time the shares are held. Class C shares are sold with front-end
sales charge of 1% and a contingent deferred sales charge of 1% during the first
18 months. Class
B-110
<PAGE>
PRUDENTIAL CALIFORNIA MUNICIPAL FUND California Income Series
Notes to Financial Statements Cont'd.
B shares will automatically convert to Class A shares on a quarterly basis
approximately seven years after purchase. A special exchange privilege is also
available for shareholders who qualify to purchase Class A shares at net asset
value.
The Fund has authorized an unlimited number of shares of beneficial
interest for each class at $.01 par value per share.
Transactions in shares of beneficial interest for the years ended August
31, 2000 and August 31, 1999 were as follows:
<TABLE>
<CAPTION>
CLASS A SHARES AMOUNT
------------------------------------------------------------ ---------- ------------
<S> <C> <C>
Year ended August 31, 2000:
Shares sold 4,664,081 $ 47,656,875
Shares issued in reinvestment of dividends 398,989 4,096,741
Shares reacquired (7,048,893) (72,195,003)
---------- ------------
Net decrease in shares outstanding before conversion (1,985,823) (20,441,387)
Shares issued upon conversion from Class B 158,801 1,630,903
---------- ------------
Net decrease in shares outstanding (1,827,022) $(18,810,484)
---------- ------------
---------- ------------
Year ended August 31, 1999:
Shares sold 4,622,707 50,892,275
Shares issued in reinvestment of dividends 417,857 4,593,136
Shares reacquired (3,868,964) (42,458,852)
---------- ------------
Net increase in shares outstanding before conversion 1,171,600 13,026,559
Shares issued upon conversion from Class B 109,917 1,217,865
---------- ------------
Net increase in shares outstanding 1,281,517 $ 14,244,424
---------- ------------
---------- ------------
<CAPTION>
CLASS B
------------------------------------------------------------
<S> <C> <C>
Year ended August 31, 2000:
Shares sold 1,303,211 $ 13,414,428
Shares issued in reinvestment of dividends 167,619 1,720,710
Shares reacquired (1,815,491) (18,615,231)
---------- ------------
Net decrease in shares outstanding before conversion (344,661) (3,480,093)
Shares reacquired upon conversion into Class A (158,801) (1,630,903)
---------- ------------
Net decrease in shares outstanding (503,462) $ (5,110,996)
---------- ------------
---------- ------------
Year ended August 31, 1999:
Shares sold 2,701,343 $ 29,886,200
Shares issued in reinvestment of dividends 160,200 1,758,724
Shares reacquired (995,244) (10,928,291)
---------- ------------
Net increase in shares outstanding before conversion 1,866,299 20,716,633
Shares reacquired upon conversion into Class A (109,917) (1,217,865)
---------- ------------
Net increase in shares outstanding 1,756,382 $ 19,498,768
---------- ------------
---------- ------------
</TABLE>
B-111
<PAGE>
PRUDENTIAL CALIFORNIA MUNICIPAL FUND California Income Series
Notes to Financial Statements Cont'd.
<TABLE>
<CAPTION>
CLASS C SHARES AMOUNT
------------------------------------------------------------ ---------- ------------
Year ended August 31, 2000:
<S> <C> <C>
Shares sold 151,693 $ 1,563,439
Shares issued in reinvestment of dividends 28,025 287,690
Shares reacquired (434,581) (4,447,901)
---------- ------------
Net decrease in shares outstanding (254,683) $ (2,596,772)
---------- ------------
---------- ------------
Year ended August 31, 1999:
Shares sold 696,989 $ 7,705,871
Shares issued in reinvestment of dividends 26,026 285,305
Shares reacquired (221,550) (2,436,064)
---------- ------------
Net increase in shares outstanding 501,465 $ 5,555,112
---------- ------------
---------- ------------
<CAPTION>
CLASS Z
------------------------------------------------------------
<S> <C> <C>
Year ended August 31, 2000:
Shares sold 230,133 $ 2,339,725
Shares issued in reinvestment of dividends 14,647 150,443
Shares reacquired (357,044) (3,642,801)
---------- ------------
Net decrease in shares outstanding (112,264) $ (1,152,633)
---------- ------------
Year ended August 31, 1999:
Shares sold 405,701 $ 4,423,156
Shares issued in reinvestment of dividends 17,560 193,261
Shares reacquired (306,708) (3,355,975)
---------- ------------
Net increase in shares outstanding 116,553 $ 1,260,442
---------- ------------
---------- ------------
</TABLE>
B-112
<PAGE>
PRUDENTIAL CALIFORNIA MUNICIPAL FUND California Income Series
Financial Highlights
<TABLE>
<CAPTION>
CLASS A
---------------
YEAR ENDED
AUGUST 31, 2000
----------------------------------------------------------------------------------------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE:
NET ASSET VALUE, BEGINNING OF YEAR $ 10.49
---------------
INCOME FROM INVESTMENT OPERATIONS
Net investment income .54
Net realized and unrealized gain (loss) on investment
transactions .17
---------------
Total from investment operations .71
---------------
LESS DISTRIBUTIONS
Dividends from net investment income (.54)
Distributions in excess of net investment income --(c)
---------------
Total distributions (.54)
---------------
Net asset value, end of year $ 10.66
---------------
---------------
TOTAL RETURN(b): 7.10%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000) $ 167,153
Average net assets (000) $ 171,688
Ratios to average net assets:
Expenses, including distribution and service (12b-1) fees .86%
Expenses, excluding distribution and service (12b-1) fees .61%
Net investment income 5.21%
For Class A, B, C and Z shares:
Portfolio turnover rate 34%
</TABLE>
------------------------------
(a) Net of management fee waiver.
(b) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each year reported and includes reinvestment of dividends and
distributions.
(c) Less than $.005 per share.
See Notes to Financial Statements
B-113
<PAGE>
PRUDENTIAL CALIFORNIA MUNICIPAL FUND California Income Series
Financial Highlights Cont'd.
<TABLE>
<CAPTION>
CLASS A
-------------------------------------------------------------------------------------
YEAR ENDED AUGUST 31,
-------------------------------------------------------------------------------------
1999 1998 1997 1996
-------------------------------------------------------------------------------------
<S> <C> <C> <C>
$ 11.19 $ 10.71 $ 10.33 $ 10.28
---------------- ---------------- ---------------- ----------------
.56(a) .59(a) .60(a) .63(a)
(.70) .49 .38 .05
---------------- ---------------- ---------------- ----------------
(.14) 1.08 .98 .68
---------------- ---------------- ---------------- ----------------
(.56) (.59) (.60) (.63)
-- (.01) --(c) --
---------------- ---------------- ---------------- ----------------
(.56) (.60) (.60) (.63)
---------------- ---------------- ---------------- ----------------
$ 10.49 $ 11.19 $ 10.71 $ 10.33
---------------- ---------------- ---------------- ----------------
---------------- ---------------- ---------------- ----------------
(1.37)% 10.31% 9.72% 6.67%
$183,593 $181,512 $156,684 $153,236
$187,106 $165,771 $153,019 $161,420
.76%(a) .68%(a) .73%(a) .50%(a)
.56%(a) .58%(a) .63%(a) .40%(a)
5.03%(a) 5.39%(a) 5.66%(a) 6.01%(a)
23% 10% 16% 22%
</TABLE>
See Notes to Financial Statements
B-114
<PAGE>
PRUDENTIAL CALIFORNIA MUNICIPAL FUND California Income Series
Financial Highlights Cont'd.
<TABLE>
<CAPTION>
CLASS B
---------------
Year Ended
August 31, 2000
----------------------------------------------------------------------------------------
<S> <C>
PER SHARE OPERATING PERFORMANCE:
NET ASSET VALUE, BEGINNING OF YEAR $ 10.49
---------------
INCOME FROM INVESTMENT OPERATIONS
Net investment income .51
Net realized and unrealized gain (loss) on investment
transactions .18
---------------
Total from investment operations .69
---------------
LESS DISTRIBUTIONS
Dividends from net investment income (.51)
Distributions in excess of net investment income --(c)
---------------
Total distributions (.51)
---------------
Net asset value, end of year $ 10.67
---------------
---------------
TOTAL RETURN(b): 6.93%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000) $80,580
Average net assets (000) $78,743
Ratios to average net assets:
Expenses, including distribution and service (12b-1) fees 1.11%
Expenses, excluding distribution and service (12b-1) fees .61%
Net investment income 4.96%
</TABLE>
------------------------------
(a) Net of management fee waiver.
(b) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each year reported and includes reinvestment of dividends and
distributions.
(c) Less than $.005 per share.
See Notes to Financial Statements
B-115
<PAGE>
PRUDENTIAL CALIFORNIA MUNICIPAL FUND California Income Series
Financial Highlights Cont'd.
<TABLE>
<CAPTION>
CLASS B
-------------------------------------------------------------------------------------
YEAR ENDED AUGUST 31,
-------------------------------------------------------------------------------------
1999 1998 1997 1996
-------------------------------------------------------------------------------------
<S> <C> <C> <C>
$ 11.19 $ 10.71 $ 10.33 $ 10.28
-------- -------- -------- --------
.53(a) .55(a) .55(a) .59(a)
(.70) .49 .38 .05
-------- -------- -------- --------
(.17) 1.04 .93 .64
-------- -------- -------- --------
(.53) (.55) (.55) (.59)
-- (.01) --(c) --
-------- -------- -------- --------
(.53) (.56) (.55) (.59)
-------- -------- -------- --------
$ 10.49 $ 11.19 $ 10.71 $ 10.33
-------- -------- -------- --------
-------- -------- -------- --------
(1.67)% 9.87% 9.28% 6.25%
$ 84,546 $ 70,535 $ 47,436 $ 35,983
$ 81,163 $ 56,011 $ 40,983 $ 32,555
1.06%(a) 1.08%(a) 1.13%(a) .90%(a)
.56%(a) .58%(a) .63%(a) .40%(a)
4.78%(a) 4.99%(a) 5.26%(a) 5.61%(a)
</TABLE>
See Notes to Financial Statements
B-116
<PAGE>
PRUDENTIAL CALIFORNIA MUNICIPAL FUND California Income Series
Financial Highlights Cont'd.
<TABLE>
<CAPTION>
CLASS C
---------------
YEAR ENDED
AUGUST 31, 2000
----------------------------------------------------------------------------------------
<S> <C>
PER SHARE OPERATING PERFORMANCE:
NET ASSET VALUE, BEGINNING OF YEAR $ 10.49
-------
INCOME FROM INVESTMENT OPERATIONS
Net investment income .49
Net realized and unrealized gain (loss) on investment
transactions .18
-------
Total from investment operations .67
-------
LESS DISTRIBUTIONS
Dividends from net investment income (.49)
Distributions in excess of net investment income --(c)
-------
Total distributions (.49)
-------
Net asset value, end of year $ 10.67
-------
-------
TOTAL RETURN(b): 6.66%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000) $ 8,309
Average net assets (000) $ 9,021
Ratios to average net assets:
Expenses, including distribution and service (12b-1) fees 1.36%
Expenses, excluding distribution and service (12b-1) fees .61%
Net investment income 4.71%
</TABLE>
------------------------------
(a) Net of management fee waiver.
(b) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each year reported and includes reinvestment of dividends and
distributions.
(c) Less than $.005 per share.
See Notes to Financial Statements
B-117
<PAGE>
PRUDENTIAL CALIFORNIA MUNICIPAL FUND California Income Series
Financial Highlights Cont'd.
<TABLE>
<CAPTION>
CLASS C
-------------------------------------------------------------------------------------
YEAR ENDED AUGUST 31,
-------------------------------------------------------------------------------------
1999 1998 1997 1996
-------------------------------------------------------------------------------------
<S> <C> <C> <C>
$ 11.19 $10.71 $10.33 $10.28
-------- ------- ------- -------
.50(a) .52(a) .53(a) .56(a)
(.70) .49 .38 .05
-------- ------- ------- -------
(.20) 1.01 .91 .61
-------- ------- ------- -------
(.50) (.52) (.53) (.56)
-- (.01) --(c) --
-------- ------- ------- -------
(.50) (.53) (.53) (.56)
-------- ------- ------- -------
$ 10.49 $11.19 $10.71 $10.33
-------- ------- ------- -------
-------- ------- ------- -------
(1.91)% 9.60% 9.01% 5.99%
$ 10,847 $5,960 $3,611 $3,269
$ 9,088 $4,491 $3,135 $3,300
1.31%(a) 1.33%(a) 1.38%(a) 1.15%(a)
.56%(a) .58%(a) .63%(a) .40%(a)
4.53%(a) 4.74%(a) 5.01%(a) 5.36%(a)
</TABLE>
See Notes to Financial Statements
B-118
<PAGE>
PRUDENTIAL CALIFORNIA MUNICIPAL FUND California Income Series
Financial Highlights Cont'd.
<TABLE>
<CAPTION>
CLASS Z
---------------
YEAR ENDED
AUGUST 31, 2000
----------------------------------------------------------------------------------------
<S> <C>
PER SHARE OPERATING PERFORMANCE:
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.49
-------
INCOME FROM INVESTMENT OPERATIONS
Net investment income .56
Net realized and unrealized gain (loss) on investment
transactions .16
-------
Total from investment operations .72
-------
LESS DISTRIBUTIONS
Dividends from net investment income (.56)
Distributions in excess of net investment income --(c)
-------
Total distributions (.56)
-------
Net asset value, end of period $ 10.65
-------
-------
TOTAL RETURN(b): 7.26%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000) $ 4,336
Average net assets (000) $ 4,281
Ratios to average net assets:
Expenses, including distribution and service (12b-1) fees .61%
Expenses, excluding distribution and service (12b-1) fees .61%
Net investment income 5.45%
</TABLE>
------------------------------
(a) Net of management fee waiver.
(b) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each period reported and includes reinvestment of dividends and
distributions. Total returns for periods of less than a full year are not
annualized.
(c) Less than $.005 per share.
(d) Commencement of offering of Class Z shares.
(e) Annualized.
See Notes to Financial Statements
B-119
<PAGE>
PRUDENTIAL CALIFORNIA MUNICIPAL FUND California Income Series
Financial Highlights Cont'd.
<TABLE>
<CAPTION>
CLASS Z
---------------------------------------------------------------------------------------
YEAR ENDED AUGUST 31, SEPTEMBER 18, 1996(d)
------------------------------------------ THROUGH AUGUST 31,
1999 1998 1997
---------------------------------------------------------------------------------------
<S> <C> <C>
$11.19 $10.71 $10.38
------- ------- -------
.58(a) .61(a) .57(a)
(.70) .49 .33
------- ------- -------
(.12) 1.10 .90
------- ------- -------
(.58) (.61) (.57)
-- (.01) --(c)
------- ------- -------
(.58) (.62) (.57)
------- ------- -------
$10.49 $11.19 $10.71
------- ------- -------
------- ------- -------
(1.18)% 10.42% 8.86%
$5,449 $4,507 $1,963
$4,725 $3,312 $ 970
.56%(a) .58%(a) .63%(a)(e)
.56%(a) .58%(a) .63%(a)(e)
5.28%(a) 5.49%(a) 5.76%(a)(e)
</TABLE>
See Notes to Financial Statements
B-120
<PAGE>
PRUDENTIAL CALIFORNIA MUNICIPAL FUND California Income Series
Report of Independent Accountants
To the Shareholders and Board of Trustees of
Prudential California Municipal Fund, California Income Series
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Prudential California Municipal
Fund, California Income Series (the "Fund", one of the portfolios constituting
Prudential California Municipal Fund) at August 31, 2000, the results of its
operations for the year then ended, the changes in its net assets for each of
the two years in the period then ended and the financial highlights for each of
the four years in the period then ended, in conformity with accounting
principles generally accepted in the United States of America. These financial
statements and financial highlights (hereafter referred to as "financial
statements") are the responsibility of the Fund's management; our responsibility
is to express an opinion on these financial statements based on our audits. We
conducted our audits of these financial statements in accordance with auditing
standards generally accepted in the United States of America, which require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits, which included confirmation
of securities at August 31, 2000 by correspondence with the custodian and
brokers, provide a reasonable basis for our opinion. The accompanying financial
highlights for the year ended August 31, 1996 were audited by other independent
accountants, whose opinion dated October 14, 1996 was unqualified.
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York
October 20, 2000
B-121
<PAGE>
PRUDENTIAL CALIFORNIA MUNICIPAL FUND California Income Series
Federal Income Tax Information (Unaudited)
We are required by the Internal Revenue Code to advise you within 60 days
of the Series' fiscal year end (August 31, 2000) as to the federal tax status of
dividends paid by the Series during such fiscal year. Accordingly, we are
advising you that in the fiscal year ended August 31, 2000, dividends paid from
net investment income of $.54 per share for Class A shares, $.51 per Class B
share, $.49 per Class C share and $.56 per Class Z share were all federally
tax-exempt interest dividends.
We wish to advise you that the corporate dividends received deduction for
the Series is zero. Only funds that invest in U.S. equity securities are
entitled to pass-through a corporate dividends received deduction.
In January 2001, you will be advised on IRS Form 1099 DIV or substitute
1099 DIV as to federal tax status of the distributions received by you in
calendar 2000.
B-122
<PAGE>
PRUDENTIAL CALIFORNIA MUNICIPAL FUND California Money Market Series
Portfolio of Investments as of August 31, 2000
<TABLE>
<CAPTION>
PRINCIPAL
MOODY'S RATING INTEREST MATURITY AMOUNT VALUE
DESCRIPTION (a) (UNAUDITED) RATE DATE (000) (NOTE 1)
---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Abag Fin. Auth.,
Eastridge Apts., Ser. 00A,
F.R.W.D., A.M.T. VMIG1 3.65% 9/07/00 $ 2,545 $ 2,545,000
Gaia Bldg. Proj., Ser. 00A,
F.R.W.D., A.M.T. A-1+(d) 3.70 9/07/00 1,665 1,665,000
Alameda Cnty. Ind. Dev. Auth. Rev.,
Edward Shimmon Proj., Ser. 96A,
F.R.W.D., A.M.T. A-1(d) 3.70 9/07/00 5,700 5,700,000
Meskimen Fam.Trust Proj.,
Ser 98A, F.R.W.D., A.M.T. A-1(d) 3.70 9/07/00 1,300 1,300,000
Anaheim Elec. Rev., Ser. 96A,
A.M.B.A.C. NR 4.50 10/01/00 560 560,196
Antioch Unified Sch. Dist., Ser.
99, T.R.A.N. SP-1+(d) 4.00 10/27/00 10,000 10,008,132
California Dept. of Wtr. Res.,
Wtr. Rev., Ser. 1, T.E.C.P. P-1 4.25 9/12/00 1,330 1,330,000
Central Valley Project, Ser. T NR 5.00 12/01/00 1,000 1,003,023
California Econ. Dev. Fin. Auth.
Rev., Mannesmann Dematic Rapistan
Corp., Ser. 98, F.R.W.D., A.M.T. NR 4.30 9/07/00 3,200 3,200,000
California Hlth. Facilities Fin.
Auth. Rev., Auth. Rev. A Hlth.
Fac. Fin. VMIG1 3.40 9/01/00 250 250,000
California Infrastructure & Econ.
Dev. Bank, Ind. Dev. Rev., Starter
& Alternator Proj., Ser. 99,
F.R.W.D., A.M.T. A-1+(d) 4.05 9/06/00 5,000 5,000,000
California Poll. Ctrl. Fin. Auth.
Rev.,
Wadham Energy, Ser. B, F.R.W.D.,
A.M.T. A-1(d) 4.35 9/06/00 2,475 2,475,000
Wadham Energy, Ser. C, F.R.W.D.,
A.M.T. A-1(d) 4.35 9/06/00 9,150 9,150,000
U.S. Borax Inc. Proj., Ser. 95A,
F.R.W.D. NR 4.20 9/07/00 5,100 5,100,000
California Pub. Cap. Impts. Fin.
Auth.
Rev. Bond-Lehman, Ser. A35,
F.R.W.D., M.B.I.A. VMIG1 4.00 9/06/00 7,500 7,500,000
California Sch. Cash Reserve Prog.
Auth., Ser. A, A.M.B.A.C. MIG1 5.25 7/03/01 10,000 10,078,464
</TABLE>
See Notes to Financial Statements
B-123
<PAGE>
PRUDENTIAL CALIFORNIA MUNICIPAL FUND California Money Market Series
Portfolio of Investments as of August 31, 2000 Cont'd.
<TABLE>
<CAPTION>
PRINCIPAL
MOODY'S RATING INTEREST MATURITY AMOUNT VALUE
DESCRIPTION (a) (UNAUDITED) RATE DATE (000) (NOTE 1)
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
California St.
Gen. Oblig., Ser. 142, F.R.W.D.S. A-1+(d) 3.80% 9/07/00 $ 1,200 $ 1,200,000
Gen. Oblig., T.E.C.P. P-1 4.05 10/20/00 5,000 5,000,000
Gen. Oblig., T.E.C.P. P-1 4.00 11/10/00 5,000 5,000,000
California St. Pub. Wks. Board,
Lease Rev., Dept. of Corrections,
Ser 210, F.R.W.D., A.M.B.A.C. VMIG1 3.83 9/07/00 3,050 3,050,000
State Univ. Library Proj.,
Ser. 1990A NR 6.25 9/01/00 2,000(c) 2,040,000
California St., Veterans Gen.
Oblig.,
Ser. 00A, F.R.W.D.S., A.M.B.A.C.,
A.M.T. VMIG1 4.02 9/06/00 5,000 5,000,000
California Statewide Cmntys. Dev.
Auth. Rev.,
Ser. A, T.R.A.N., F.S.A. MIG1 5.25 6/29/01 4,700 4,736,412
Ser. B, T.R.A.N., F.S.A. MIG1 5.25 8/03/01 4,700 4,739,199
Aegis of Aptos Proj., Multi-Family
Rev., Ser. 98Y, F.R.W.D., A.M.T. A-2(d) 4.05 9/07/00 2,500 2,500,000
Karcher Prop. Inc., Ser. 1994C,
F.R.W.D., A.M.T. VMIG1 4.35 9/06/00 2,000 2,000,000
Propak-California Corp., Ser. 94B,
F.R.W.D., A.M.T. A-1+(d) 4.35 9/06/00 1,840 1,840,000
Dix Metals, Ser. 98B, F.R.W.D.,
A.M.T. NR 4.35 9/06/00 5,475 5,475,000
Fresno Cnty. Trans. Auth.
Sales Tax Rev., Ser. 98,
A.M.B.A.C. NR 5.00 4/01/01 500 503,238
Fresno Unified Sch. Dist., Ed. Fac.
Corp., Ser. 91A NR 7.20 5/01/01 1,000(c) 1,039,073
Inglewood Redev. Agency Tax Alloc.,
Refunding Bonds,
Ser. 1998A, A.M.B.A.C. NR 4.00 5/01/01 560 560,534
</TABLE>
See Notes to Financial Statements
B-124
<PAGE>
PRUDENTIAL CALIFORNIA MUNICIPAL FUND California Money Market Series
Portfolio of Investments as of August 31, 2000 Cont'd.
<TABLE>
<CAPTION>
PRINCIPAL
MOODY'S RATING INTEREST MATURITY AMOUNT VALUE
DESCRIPTION (a) (UNAUDITED) RATE DATE (000) (NOTE 1)
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Kern Cnty. Superintendent of Schs.,
Master Lease, Ser. 96A, F.R.W.D. A-1+(d) 3.75% 9/07/00 $ 1,615 $ 1,615,000
Kings River Conservation Dist.,
Pine Flatland Pwr. Rev., Ser. 92D NR 6.00 1/01/01 3,575(c) 3,669,125
Lassen Muni. Util. Dist. Rev.,
Refunding Rev., Ser. 96A,
F.R.W.D., F.S.A., A.M.T. VMIG1 4.10 9/07/00 5,300 5,300,000
Long Beach Harbor Rev., Ser. 91 NR 7.20 5/15/01 1,220 1,245,708
Los Angeles City of L.A.,
Ser. 98A NR 4.50 9/01/00 2,100 2,100,000
Los Angeles Cnty. Sch. Pooled Fin.
Prog. Ser. A, T.R.A.N., F.S.A. SP-1+(d) 5.00 7/02/01 5,000 5,029,147
Los Angeles Cnty., Correctional
Fac. Proj., M.B.I.A. NR 6.50 9/01/00 2,000(c) 2,037,800
Los Angeles Cnty., Pub. Wks. Fin.
Auth. Rev., Reg. Park & Open Space
Dist. NR 5.00 10/01/00 4,250 4,253,650
Los Angeles Dept. of Wtr. & Pwr.,
Waterworks Rev., Ser. 99L,
F.R.W.D.S., F.G.I.C. VMIG1 3.97 9/05/00 8,000 8,000,000
Elec. Plant Rev., Ser. 276,
F.R.W.D. VMIG1 3.83 9/07/00 6,000 6,000,000
Elec. Plant Rev., Ser. 370,
F.R.W.D. VMIG1 3.98 9/07/00 10,055 10,055,000
Los Angeles Harbor. Dept. Rev.,
Class F, Ser. 7, F.R.W.D.,
M.B.I.A. VMIG1 3.88 9/07/00 5,995 5,995,000
Los Angeles Ind. Dev. Auth. Apparel
Prod. Serv., Ser. 00A, F.R.W.D.,
A.M.T. A-1+(d) 3.95 9/06/00 2,150 2,150,000
Metropolitan Wtr. Dist. So. Cal.,
Ser. A, T.E.C.P. P-1 4.00 9/22/00 4,200 4,200,000
Waterworks. Rev., Ser. 99O,
F.R.W.D.S. VMIG1 3.97 9/05/00 10,000 10,000,000
</TABLE>
See Notes to Financial Statements
B-125
<PAGE>
PRUDENTIAL CALIFORNIA MUNICIPAL FUND California Money Market Series
Portfolio of Investments as of August 31, 2000 Cont'd.
<TABLE>
<CAPTION>
PRINCIPAL
MOODY'S RATING INTEREST MATURITY AMOUNT VALUE
DESCRIPTION (a) (UNAUDITED) RATE DATE (000) (NOTE 1)
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Muni. Secs. Trust Certif.,
Ser. 2000-95 Class A, F.R.D.D. A-1(d) 3.90% 9/01/00 $ 12,100 $ 12,100,000
Oakland Rev., Ser.00M, F.R.W.D.S.,
A.M.B.A.C. VMIG1 3.97 9/05/00 1,500 1,500,000
Ontario Rev., Hsg. Fin., Ser. 97A,
F.R.W.D., A.M.T. A-1+(d) 3.85 9/07/00 2,900 2,900,000
Pittsburg Pub. Fin. Auth.
Wastewater Rev., Ser. 91 NR 6.80 6/01/01 1,000(c) 1,038,145
Port of Oakland, Port Rev.,
Ser. 99-A1, F.R.W.D.S., M.B.I.A.,
A.M.T. VMIG1 4.05 9/06/00 1,775 1,775,000
Puerto Rico Elec. Pwr. Auth.,
Pub. Improv. Bonds, Ser. 9820,
F.R.W.D.S., M.B.I.A. VMIG1 3.93 9/07/00 8,300 8,300,000
Muni. Sec. Trust Recpts., Ser.
SGA43, F.R.W.D.S., M.B.I.A. A-1+(d) 3.67 9/06/00 2,000 2,000,000
Puerto Rico Hsg. Fin. Comm.,
Multi-Family Mtge. Rev. Port. A,
Ser. 90I, A.M.B.A.C. NR 4.20 9/15/00 2,360 2,360,000
Puerto Rico Muni. Fin. Agcy.,
Ser. 225, F.R.W.D.S., F.S.A. VMIG1 3.83 9/07/00 3,125 3,125,000
Redlands, Loma Linda Univ. Med.
Cntr., Ser. 90C NR 7.00 12/01/00 2,600(c) 2,671,351
Regents of University of California
Ser. A P-1 3.95 9/13/00 4,500 4,500,000
Ser. A P-1 4.05 10/11/00 4,000 4,000,000
Ser. A P-1 3.95 10/12/00 4,500 4,500,000
Riverside Cnty. Trans. Comm.,
Lmtd. Tax Bonds, Ser. 1991A,
A.M.B.A.C. NR 6.50 6/01/01 1,320 1,342,872
Sacramento Cnty. Hsg. Auth.,
Normandy Park Senior Apts,
Ser. 2000A, F.R.W.D., F.N.M.A.,
A.M.T. A-1+(d) 3.60 9/07/00 6,000 6,000,000
Sacramento Cnty. Sanit. Dist., Ser.
SSS VMIG1 4.10 8/01/01 2,300(c) 2,300,000
San Diego Cnty. Wtr. Auth., Ser.
91A NR 6.40 5/01/01 2,000(c) 2,071,440
</TABLE>
See Notes to Financial Statements
B-126
<PAGE>
PRUDENTIAL CALIFORNIA MUNICIPAL FUND California Money Market Series
Portfolio of Investments as of August 31, 2000 Cont'd.
<TABLE>
<CAPTION>
PRINCIPAL
MOODY'S RATING INTEREST MATURITY AMOUNT VALUE
DESCRIPTION (a) (UNAUDITED) RATE DATE (000) (NOTE 1)
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
San Francisco Airport Comm.,
Ser. SSP 38, F.R.D.D., F.S.A.,
A.M.T. VMIG1 3.83% 9/06/00 $ 8,950 $ 8,950,000
San Francisco Swr. Rev., Ser. 237,
F.R.W.D.S., F.G.I.C. VMIG1 3.83 9/07/00 4,700 4,700,000
San Mateo Cnty., Multi-Family Hsg.
Rev., Pacific Oaks Apt. Proj.,
Ser. 87A, F.R.W.D., A.M.T. VMIG1 3.70 9/06/00 2,600 2,600,000
Santa Ana Comm. Redev. Agcy., Santa
Ana Inter-City Commuter
Station, Ser. 85A NR 6.50 12/15/00 1,490(c) 1,529,849
Santa Clara Valley Wtr. Dist.,
Ser. 2000A NR 5.00 2/01/01 1,455 1,462,332
Torrance, Hosp. Rev., Little
Company of Mary Hospital, Ser. 92,
F.R.W.D. A-1+(d) 3.75 9/07/00 5,000 5,000,000
------------
TOTAL INVESTMENTS 98.0%
(COST $269,924,690; (e)) 269,924,690
Other assets in excess of
liabilities 2.0% 5,642,446
------------
NET ASSETS 100% $275,567,136
------------
------------
</TABLE>
------------------------------
(a) The following abbreviations are used in portfolio descriptions:
A.M.B.A.C.--American Municipal Bond Assurance Corporation.
A.M.T.--Alternative Minimum Tax.
F.G.I.C.--Financial Guaranty Insurance Company.
F.R.D.D.--Floating Rate (Daily) Demand Note (b).
F.R.W.D.--Floating Rate (Weekly) Demand Note (b).
F.R.W.D.S.--Floating Rate (Weekly) Demand Note Synthetic (b).
F.S.A.--Financial Security Assurance.
M.B.I.A.--Municipal Bond Insurance Corporation.
T.E.C.P.--Tax-Exempt Commercial Paper.
T.R.A.N.--Tax & Revenue Anticipation Note.
(b) For purposes of amortized cost valuation, the maturity date of Floating Rate
Demand Notes is considered to be the later of the next date on which the
security can be redeemed at par, or the next date on which the rate of
interest is adjusted.
(c) Prerefunded issues are secured by escrowed cash and/or direct U.S.
guaranteed obligations.
(d) Standard & Poor's Rating.
(e) The cost of securities for federal income tax purposes is substantially the
same as for financial reporting purposes.
NR--Not Rated by Moody's or Standard & Poor's.
The Fund's current Statement of Additional Information contains a description of
Moody's and Standard & Poor's ratings.
See Notes to Financial Statements
B-127
<PAGE>
PRUDENTIAL CALIFORNIA MUNICIPAL FUND California Money Market Series
Statement of Assets and Liabilities
<TABLE>
<CAPTION>
AUGUST 31, 2000
----------------------------------------------------------------------------------
<S> <C>
ASSETS
Investments, at amortized cost which approximates market value $ 269,924,690
Cash 73,770
Receivable for Series shares sold 16,233,873
Receivable for investments sold 2,700,000
Interest receivable 2,626,174
Other assets 5,738
---------------
TOTAL ASSETS 291,564,245
---------------
LIABILITIES
Payable for Series shares reacquired 13,421,779
Payable for investments purchased 2,300,000
Management fee payable 114,807
Dividends payable 96,123
Accrued expenses 36,677
Distribution fee payable 16,161
Deferred trustee's fees 11,562
---------------
TOTAL LIABILITIES 15,997,109
---------------
NET ASSETS $ 275,567,136
---------------
---------------
Net assets were comprised of:
Shares of beneficial interest, at $.01 par value $ 2,755,671
Paid-in capital in excess of par 272,811,465
---------------
Net assets, August 31, 2000 $ 275,567,136
---------------
---------------
Net asset value, offering price and redemption price per share
($275,567,136 divided by 275,567,136 shares of beneficial interest
issued and outstanding; unlimited number of shares authorized) $1.00
---------------
---------------
</TABLE>
See Notes to Financial Statements
B-128
<PAGE>
PRUDENTIAL CALIFORNIA MUNICIPAL FUND California Money Market Series
Statement of Operations
<TABLE>
<CAPTION>
YEAR
ENDED
AUGUST 31, 2000
----------------------------------------------------------------------------------
<S> <C>
NET INVESTMENT INCOME
Income
Interest and discount earned $ 10,426,510
---------------
Expenses
Management fee 1,498,012
Distribution fee 374,503
Transfer agent's fees and expenses 67,000
Custodian's fees and expenses 59,000
Reports to shareholders 45,000
Registration fees 30,000
Legal fees and expenses 28,000
Audit fees 13,000
Trustees' fees and expenses 13,000
Miscellaneous 5,840
---------------
TOTAL EXPENSES 2,133,355
Less: Custodian fee credit (Note 1) (20,693)
---------------
Net expenses 2,112,662
---------------
NET INVESTMENT INCOME 8,313,848
REALIZED LOSS ON INVESTMENTS
Net realized loss on investment transactions (24,550)
---------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 8,289,298
---------------
---------------
</TABLE>
See Notes to Financial Statements
B-129
<PAGE>
PRUDENTIAL CALIFORNIA MUNICIPAL FUND California Money Market Series
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
2000 1999
----------------------------------------------------------------------------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net investment income $ 8,313,848 $ 6,660,928
Net realized gain (loss) on investment
transactions (24,550) 18,632
--------------- ---------------
Net increase in net assets resulting from
operations 8,289,298 6,679,560
--------------- ---------------
DIVIDENDS AND DISTRIBUTIONS (NOTE 1) (8,289,298) (6,679,560)
--------------- ---------------
SERIES SHARE TRANSACTIONS (AT $1 PER SHARE)
Net proceeds from shares sold 1,616,264,808 1,284,076,534
Net asset value of shares issued to
shareholders in reinvestment of
dividends and distributions 8,005,325 6,453,709
Cost of shares reacquired (1,614,175,628) (1,326,335,873)
--------------- ---------------
Net increase (decrease) in net assets from
Series share transactions 10,094,505 (35,805,630)
--------------- ---------------
Total increase (decrease) 10,094,505 (35,805,630)
NET ASSETS
Beginning of year 265,472,631 301,278,261
--------------- ---------------
End of year $ 275,567,136 $ 265,472,631
--------------- ---------------
--------------- ---------------
</TABLE>
See Notes to Financial Statements
B-130
<PAGE>
PRUDENTIAL CALIFORNIA MUNICIPAL FUND California Money Market Series
Notes to Financial Statements
Prudential California Municipal Fund (the "Fund") is registered under
the Investment Company Act of 1940, as an open-end investment company. The
Fund was organized as a Massachusetts business trust on May 18, 1984 and
consists of three series. The monies of each series are invested in separate,
independently managed portfolios. The California Money Market Series (the
"Series") commenced investment operations on March 3, 1989. The Series is
diversified and seeks to achieve its investment objective of obtaining the
maximum amount of income exempt from California state and federal income
taxes with the minimum risk by investing in "investment grade" tax-exempt
securities having a maturity of 13 months or less and whose ratings are
within the two highest ratings categories by a nationally recognized
statistical rating organization or, if not rated, are of comparable quality.
The ability of the issuers of the securities held by the Series to meet their
obligations may be affected by economic developments in a specific state,
industry or region.
NOTE 1. ACCOUNTING POLICIES
The following is a summary of significant accounting policies followed by the
Fund, and the Series, in the preparation of its financial statements.
SECURITIES VALUATIONS: Portfolio securities of the Series are valued
at amortized cost, which approximates market value. The amortized cost method
of valuation involves valuing a security at its cost on the date of purchase
and thereafter assuming a constant amortization to maturity of any discount
or premium.
All securities are valued as of 4:30 p.m., New York time.
SECURITIES TRANSACTIONS AND NET INVESTMENT INCOME: Securities
transactions are recorded on the trade date. Realized gains and losses on
sales of investments are calculated on the identified cost basis. Interest
income is recorded on the accrual basis. The Series amortizes premiums and
accretes original issue discount on portfolio securities as adjustments to
interest income. Expenses are recorded on the accrual basis which may require
the use of certain estimates by management.
FEDERAL INCOME TAXES: For federal income tax purposes, each series
in the Fund is treated as a separate taxpaying entity. It is the intent of
the Series to continue to meet the requirements of the Internal Revenue Code
applicable to regulated investment companies and to distribute all of its net
income to shareholders. For this reason, no federal income tax provision is
required.
DIVIDENDS: The Series declares daily dividends from net investment
income and net realized short-term capital gains or losses. Payment of
dividends is made monthly. Income distributions and capital gain
distributions are determined in accordance with income tax regulations which
may differ from generally accepted accounting principles.
B-131
<PAGE>
PRUDENTIAL CALIFORNIA MUNICIPAL FUND California Money Market Series
Notes to Financial Statements Cont'd.
CUSTODY FEE CREDITS: The Fund has an arrangement with its custodian
bank, whereby uninvested monies earn credits which reduce the fees charged by
the custodian.
NOTE 2. AGREEMENTS
The Fund has a management agreement with Prudential Investments Fund
Management LLC ("PIFM"). Pursuant to this agreement, PIFM has responsibility
for all investment advisory services and supervises the subadviser's
performance of such services. PIFM has entered into a subadvisory agreement
with The Prudential Investment Corporation ("PIC"); PIC furnishes investment
advisory services in connection with the management of the Fund. In
connection therewith, the Subadvisor is obligated to keep certain books and
records of the fund. PIFM pays for the services of PIC, the cost of
compensation of officers of the Fund, occupancy and certain clerical and
bookkeeping costs of the Fund. The Fund bears all other costs and expenses.
The management fee paid PIFM is computed daily and payable monthly, at
an annual rate of .50 of 1% of the average daily net assets of the Series.
Effective January 1, 2000 the Subadvisory fee paid to PIC by PIFM is
computed daily and payable monthly at an annual rate of .250 of 1% of the
average daily net assets of the Series. Prior to January 1, 2000, PIC was
reimbursed by PIFM for reasonable costs and expenses incurred in furnishing
investment advisory services. The change in the subadvisory fee structure has
no impact on the management fee charged to the Series or its shareholders.
The Fund has a distribution agreement with Prudential Investment
Management Services LLC ("PIMS") which acts as the distributor of the Fund.
The Fund compensates PIMS for distributing and servicing the Fund's shares
pursuant to the plan of distribution regardless of expenses actually incurred
by them. The Series reimburses PIMS for distributing and servicing the
Series' shares pursuant to the plan of distribution at an annual rate of .125
of 1% of the Series' average daily net assets. The distribution fee is
accrued daily and payable monthly.
PIC, PIMS and PIFM are wholly owned subsidiaries of The Prudential
Insurance Company of America.
NOTE 3. OTHER TRANSACTIONS WITH AFFILIATES
Prudential Mutual Fund Services LLC ("PMFS"), a wholly owned subsidiary of
PIFM, serves as the Fund's transfer agent. During the year ended August 31,
2000, the Series incurred fees of approximately $64,000 for the services of
PMFS. As of August 31, 2000, approximately $5,100 of such fees were due to
PMFS. Transfer agent fees and expenses in the Statement of Operations include
certain out-of-pocket expenses paid to nonaffiliates.
B-132
<PAGE>
PRUDENTIAL CALIFORNIA MUNICIPAL FUND California Money Market Series
Financial Highlights
<TABLE>
<CAPTION>
YEAR ENDED
AUGUST 31, 2000
----------------------------------------------------------------------------------------
<S> <C>
PER SHARE OPERATING PERFORMANCE:
NET ASSET VALUE, BEGINNING OF YEAR $ 1.00
Net investment income and net realized gains .03
Dividends and distributions (.03)
---------------
Net asset value, end of year $ 1.00
---------------
---------------
TOTAL RETURN(a): 2.83%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000) $ 275,567
Average net assets (000) $ 299,602
Ratios to average net assets:
Expenses, including distribution and service (12b-1) fees 0.70%
Expenses, excluding distribution and service (12b-1) fees 0.58%
Net investment income 2.77%
</TABLE>
------------------------------
(a) Total return includes reinvestment of dividends and distributions.
See Notes to Financial Statements
B-133
<PAGE>
PRUDENTIAL CALIFORNIA MUNICIPAL FUND California Money Market Series
Financial Highlights Cont'd.
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
-------------------------------------------------------------------------------------
1999 1998 1997 1996
-------------------------------------------------------------------------------------
<S> <C> <C> <C>
$ 1.00 $ 1.00 $ 1.00 $ 1.00
.02 .03 .03 .03
(.02) (.03) (.03) (.03)
---------------- ---------------- ---------------- ----------------
$ 1.00 $ 1.00 $ 1.00 $ 1.00
---------------- ---------------- ---------------- ----------------
---------------- ---------------- ---------------- ----------------
2.34% 2.81% 2.85% 2.88%
$265,473 $301,278 $285,280 $249,833
$289,155 $287,250 $277,720 $256,175
.71% .72% .73% .74%
.59% .60% .61% .62%
2.30% 2.77% 2.80% 2.83%
</TABLE>
See Notes to Financial Statements
B-134
<PAGE>
PRUDENTIAL CALIFORNIA MUNICIPAL FUND California Money Market Series
Report of Independent Accountants
To the Shareholders and Board of Trustees of
Prudential California Municipal Fund, California Money Market Series
In our opinion, the accompanying statement of assets and liabilities,
including the portfolio of investments, and the related statements of
operations and of changes in net assets and the financial highlights present
fairly, in all material respects, the financial position of Prudential
California Municipal Fund, California Money Market Series (the "Fund", one of
the portfolios constituting Prudential California Municipal Fund) at August
31, 2000, the results of its operations for the year then ended, the changes
in its net assets for each of the two years in the period then ended and the
financial highlights for each of the four years in the period then ended, in
conformity with accounting principles generally accepted in the United States
of America. These financial statements and financial highlights (hereafter
referred to as "financial statements") are the responsibility of the Fund's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these financial
statements in accordance with auditing standards generally accepted in the
United States of America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits, which included confirmation of securities at August
31, 2000 by correspondence with the custodian and brokers, provide a
reasonable basis for our opinion. The accompanying financial highlights for
the year ended August 31, 1996 were audited by other independent accountants,
whose opinion dated October 14, 1996 was unqualified.
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York
October 20, 2000
B-135
<PAGE>
PRUDENTIAL CALIFORNIA MUNICIPAL FUND California Money Market Series
Federal Income Tax Information (Unaudited)
We are required by the Internal Revenue Code to advise you within 60
days of the Series' fiscal year end (August 31, 2000) as to the federal tax
status of dividends and distributions paid by the Series during such fiscal
year. Accordingly, we are advising you that for the year ended August 31,
2000, dividends paid from net investment income totaling $.03 per share were
all federally tax-exempt interest dividends.
B-136
<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
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
Value of $1.00 invested on
1/1/1926 through 12/31/1999
<TABLE>
<CAPTION>
SMALL STOCKS COMMON LONG-TERM BONDS TREASURY BILLS INFLATION
STOCKS
<S> <C> <C> <C> <C> <C>
1926
1936
1946
1956
1966
1976
1986
1999 $6,640.79 $2,845.63 $40.22 $15.64 $9.40
</TABLE>
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 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 1989
through 1999. 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>
'89 '90 '91 '92 '93 '94 '95 '96 '97 '98 '99
---------------------------------------------------------------------------------------------------------
<S> <C> <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% (2.56)%
---------------------------------------------------------------------------------------------------------
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% 1.86%
---------------------------------------------------------------------------------------------------------
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% (1.96)%
---------------------------------------------------------------------------------------------------------
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% 2.39%
---------------------------------------------------------------------------------------------------------
WORLD
GOVERNMENT
BONDS(5) (3.4)% 15.3% 16.2% 4.8% 15.1% 6.0% 19.6% 4.1% (4.3)% 5.3% (5.07)%
---------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------
DIFFERENCE BETWEEN HIGHEST AND
LOWEST RETURNS PERCENT 18.8 24.9 30.9 11.0 10.3 9.9 5.5 8.7 17.1 8.4 7.46%
</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. Source 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>
The chart below shows the historical volatility of general interest rates as
measured by the long U.S. Treasury Bond.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
LONG TERM U.S. TREASURY BOND YIELD IN PERCENT (1926-1999)
1926 1936 1946 1956 1966 1976 1986 1996 1999 YEAR-END
------------------------
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 1926-1999. 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.
WORLD STOCK MARKET CAPITALIZATION BY REGION
WORLD TOTAL: 20.7 TRILLION
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
CANADA 2.1%
PACIFIC BASIN 16.4%
EUROPE 32.5%
U.S. 49.0%
</TABLE>
------------------------
Source: Morgan Stanley Capital International, December 31, 1999. Used with
permission. This chart represents the capitalization of major world stock
markets as measured by the Morgan Stanley Capital International (MSCI) World
Index. The total market capitalization is based on the value of approximately
1,577 companies in 22 countries (representing approximately 60% of the aggregate
market value of the stock exchanges). This chart is for illustrative purposes
only and does not represent the allocation of any Prudential mutual fund.
II-3
<PAGE>
This chart illustrates the performance of major world stock markets for the
period from December 31, 1985 through December 31, 1999. It does not represent
the performance of any Prudential mutual fund.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Sweden 22.70%
Hong Kong 20.37%
Spain 20.11%
Netherland 18.63%
Belgium 18.41%
France 17.69%
USA 17.39%
UK 16.41%
Europe 16.28%
Switzerland 15.58%
Sing/Mlysia 15.07%
Denmark 14.72%
Germany 13.29%
Australia 11.68%
Italy 11.39%
Canada 11.10%
Japan 9.59%
Norway 8.91%
Austria 7.09%
</TABLE>
------------------------
Source: Morgan Stanley Capital International (MSCI) and Lipper Inc. as of
12/31/99. Used with permission. Morgan Stanley Country indexes are unmanaged
indexes which include those stocks making up the largest two-thirds of each
country's total stock market capitalization. Returns reflect the reinvestment of
all distributions. This chart is for illustrative purposes only and is not
indicative of the past, present or future performance of any specific
investment. Investors cannot invest directly in stock indexes.
This chart shows the growth of a hypothetical $10,000 investment made in the
stocks representing the S&P 500 Stock Index with and without reinvested
dividends.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
CAPITAL APPRECIATION CAPITAL APPRECIATION
AND REINVESTING DIVIDENDS ONLY
<S> <C> <C>
1969
1973
1977
1981
1985
1989
1993
1997
1999 $474,094 $159,957
</TABLE>
------------------------
Source: Lipper Inc. Used with permission. All rights reserved. This chart is for
illustrative purposes only and is not intended to represent the past, present or
future performance of any Prudential mutual fund. Common stock total return is
based on the Standard & Poor's 500 Composite Stock Price index, a
market-value-weighted index made up of 500 of the largest stocks in the U.S.
based upon their stock market value. Investors cannot invest directly in
indexes.
II-4
