<PAGE>
As filed with the Securities and Exchange Commission on June 26, 1998
Securities Act Registration No. 33-10649
Investment Company Act Registration No. 811-4930
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 / /
PRE-EFFECTIVE AMENDMENT NO. / /
POST-EFFECTIVE AMENDMENT NO. 18 /X/
AND/OR
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 / /
AMENDMENT NO. 22 /X/
(Check appropriate box or boxes)
------------------------
PRUDENTIAL MUNICIPAL BOND FUND
(Exact name of registrant as specified in charter)
GATEWAY CENTER THREE
100 MULBERRY STREET
NEWARK, NEW JERSEY 07102-4077
(Address of Principal Executive Offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (973) 367-7530
S. JANE ROSE, ESQ.
GATEWAY CENTER THREE
100 MULBERRY STREET
NEWARK, NEW JERSEY 07102-4077
(NAME AND ADDRESS OF AGENT FOR SERVICE)
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING:
AS SOON AS PRACTICABLE AFTER THE EFFECTIVE
DATE OF THE REGISTRATION STATEMENT.
IT IS PROPOSED THAT THIS FILING WILL BECOME EFFECTIVE
(CHECK APPROPRIATE BOX):
/ / immediately upon filing pursuant to paragraph (b)
/ / on (date) pursuant to paragraph (b)
/X/ 60 days after filing pursuant to paragraph (a)(1)
/ / on (date) pursuant to paragraph (a)(1)
/ / 75 days after filing pursuant to paragraph (a)(2)
/ / on (date) pursuant to paragraph (a)(2) of Rule 485.
If appropriate, check the following box:
/ / this post-effective amendment designates a new
effective date for a previously filed post-effective
amendment.
Title of Securities Being
Registered.......... Shares of
Beneficial Interest, par value $.01 per share.
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<PAGE>
CROSS REFERENCE SHEET
(AS REQUIRED BY RULE 495)
<TABLE>
<CAPTION>
N-1A ITEM NO. LOCATION
- ---------------------------------------------------- ----------------------------------------
<S> <C> <C> <C>
PART A
Item 1. Cover Page.............................. Cover Page
Item 2. Synopsis................................ Fund Expenses; Fund Highlights
Item 3. Condensed Financial Information......... Fund Expenses; Financial Highlights
Item 4. General Description of Registrant....... Cover Page; How the Fund Invests;
General Information
Item 5. Management of Fund...................... Financial Highlights; How the Fund is
Managed; General Information;
Shareholder Guide
Item 5A. Management's Discussion of Fund
Performance............................. Financial Highlights
Item 6. Capital Stock and Other Securities...... Taxes, Dividends and Distributions;
General Information; Shareholder Guide
Item 7. Purchase of Securities Being Offered.... Shareholder Guide; How the Fund Values
its Shares; How the Fund is Managed
Item 8. Redemption or Repurchase................ Shareholder Guide; General Information
Item 9. Pending Legal Proceedings............... How the Fund is Managed
PART B
Item 10. Cover Page.............................. Cover Page
Item 11. Table of Contents....................... Table of Contents
Item 12. General Information and History......... General Information
Item 13. Investment Objectives and Policies...... Investment Objectives and Policies;
Investment Restrictions
Item 14. Management of the Fund.................. Trustees and Officers; Manager;
Distributor; Supplement
Item 15. Control Persons and Principal Holders of
Securities.............................. Trustees and Officers; Supplement
Item 16. Investment Advisory and Other
Services................................ Manager; Distributor; Custodian,
Transfer
and Dividend Disbursing Agent and
Independent Accountants
Item 17. Brokerage Allocation and Other
Practices............................... Portfolio Transactions and Brokerage
Item 18. Capital Stock and Other Securities...... Organization and Capitalization
Item 19. Purchase, Redemption and Pricing of
Securities Being Offered................ Purchase and Redemption of Fund Shares;
Shareholder Investment Account;
Supplement
Item 20. Tax Status.............................. Taxes, Dividends and Distributions
Item 21. Underwriters............................ Distributor
Item 22. Calculation of Performance Data......... Performance Information
Item 23. Financial Statements.................... Financial Statements
PART C
Information required to be included in Part C is set forth under the appropriate Item,
so numbered, in Part C to this Post-Effective Amendment to the Registration Statement.
</TABLE>
<PAGE>
Prudential Municipal Bond Fund
- --------------------------------
PROSPECTUS DATED JULY 1, 1998
- ----------------------------------------------------------------
Prudential Municipal Bond Fund (the Fund) is an open-end, diversified,
management investment company, or mutual fund, consisting of three separate
portfolios--the High Income Series, the Insured Series and the Intermediate
Series (collectively, the Series). The investment objectives of the Series are
as follows: (i) the objective of the High Income Series is to provide the
maximum amount of income that is eligible for exclusion from federal income
taxes, (ii) the objective of the Insured Series is to provide the maximum amount
of income that is eligible for exclusion from federal income taxes consistent
with the preservation of capital and (iii) the objective of the Intermediate
Series is to provide a high level of income that is eligible for exclusion from
federal income taxes consistent with the preservation of capital. Although each
Series will seek income that is eligible for exclusion from federal income
taxes, a portion of the dividends and distributions paid by each Series (and, in
particular, the High Income Series) may be treated as a preference item for
purposes of the alternative minimum tax. Each Series seeks to achieve its
objective through the separate investment policies described in this Prospectus.
There can be no assurance that the Series' investment objectives will be
achieved. See "How the Fund Invests--Investment Objectives and Policies."
Subject to the limitations described herein, each Series may utilize
derivatives, including buying and selling futures contracts for the purpose of
hedging its portfolio securities. See "How the Fund Invests--Investment
Objectives and Policies."
THE HIGH INCOME SERIES MAY INVEST UP TO 100% OF ITS ASSETS IN LOWER RATED BONDS,
COMMONLY KNOWN AS JUNK BONDS. INVESTMENTS OF THIS TYPE ARE SUBJECT TO A GREATER
RISK OF LOSS OF PRINCIPAL AND INTEREST, INCLUDING DEFAULT RISK, THAN HIGHER
RATED BONDS. PURCHASERS SHOULD CAREFULLY ASSESS THE RISKS ASSOCIATED WITH AN
INVESTMENT IN THIS SERIES. See "How the Fund Invests--Investment Objectives and
Policies--The High Income Series--Risk Factors Relating to Investing in High
Income Securities."
The Insured Series invests at least 70% of its assets in insured obligations
under normal conditions. The insurance relates to the timely payment of
principal and interest on portfolio investments and not to the shares of the
Series.
The Fund's address is Gateway Center Three, 100 Mulberry Street, Newark, New
Jersey 07102-4077, and its telephone number is (800) 225-1852.
This Prospectus sets forth concisely the information about the Fund that a
prospective investor should know before investing and is available at the Web
site of the Prudential Insurance Company of America (http://www.prudential.com).
Additional information about the Fund has been filed with the Securities and
Exchange Commission (the Commission) in a Statement of Additional Information,
dated July 1, 1998, which information is incorporated herein by reference (is
legally considered a part of this Prospectus) and is available without charge
upon request to the Fund at the address or telephone number noted above. The
Commission maintains a Web site (http://www.sec.gov) that contains the Statement
of Additional Information, material incorporated by reference and other
information regarding the Fund.
- --------------------------------------------------------------------------------
INVESTORS ARE ADVISED TO READ THIS PROSPECTUS AND RETAIN IT FOR FUTURE
REFERENCE.
- --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE>
FUND HIGHLIGHTS
The following summary is intended to highlight certain information contained
in this Prospectus and is qualified in its entirety by the more detailed
information appearing elsewhere herein.
WHAT IS PRUDENTIAL MUNICIPAL BOND FUND?
Prudential Municipal Bond Fund is a mutual fund. A mutual fund pools the
resources of investors by selling its shares to the public and investing the
proceeds of such sale in a portfolio of securities designed to achieve its
investment objective. Technically, the Fund is an open-end, diversified,
management investment company. The Fund is comprised of three separate
portfolios--the High Income Series, the Insured Series and the Intermediate
Series.
WHAT ARE THE SERIES' INVESTMENT OBJECTIVES?
The investment objective of the High Income Series is to provide the
maximum amount of income that is eligible for exclusion from federal income
taxes. The investment objective of the Insured Series is to provide the
maximum amount of income that is eligible for exclusion from federal income
taxes consistent with the preservation of capital. The investment objective
of the Intermediate Series is to provide a high level of income that is
eligible for exclusion from federal income taxes consistent with the
preservation of capital. Each Series seeks to achieve its objective through
the separate investment policies described in this Prospectus. There can be
no assurance that the Series' objectives will be achieved. See "How the Fund
Invests--Investment Objectives and Policies" at page 18.
WHAT ARE THE SERIES' RISK FACTORS AND SPECIAL CHARACTERISTICS?
The High Income Series invests in high yield securities, commonly known as
junk bonds, which may be considered speculative and are subject to the risk
of an issuer's inability to meet principal and interest payments on the
obligations, as well as price volatility. The Insured Series invests
primarily in insured municipal obligations. Although the insurance policies
protect against the failure to make timely payment of principal and interest
on the insured municipal obligations, the price of the municipal obligations
and the stability of the Series' net asset value per share (NAV) are not
insured. The Intermediate Series invests primarily in municipal obligations
with maturities between 3 and 15 years and will have a dollar-weighted
average portfolio maturity of more than 3 and less than 10 years. Generally,
the yield earned on longer-term municipal obligations is greater than that
earned on similar obligations with shorter maturities. However, obligations
with longer maturities are subject to greater market risk due to larger
fluctuations in value given specific changes in the level of interest rates
relative to the value of shorter-term obligations. See "How the Fund
Invests--Investment Objectives and Policies" at page 18. Each Series may
purchase and sell derivatives, including certain financial futures contracts
and options thereon, for hedging purposes. These activities may be
considered speculative and may result in higher risks and costs to the Fund.
See "How the Fund Invests--Hedging Strategies--Risks of Hedging Strategies"
at page 25. As with an investment in any mutual fund, an investment in this
Fund can decrease in value and you can lose money.
WHO MANAGES THE FUND?
Prudential Investments Fund Management LLC (PIFM or the Manager) is the
Manager of the Fund and is compensated for its services at an annual rate of
.50 of 1% of the average daily net assets of each Series up to $1 billion
and .45 of 1% of the average daily net assets of each Series in excess of $1
billion. As of May 31, 1998, PIFM served as manager or administrator to 67
investment companies, including 45 mutual funds, with aggregate assets of
approximately $65 billion. The Prudential Investment Corporation (PIC),
doing business as Prudential Investments (the Subadviser) furnishes
investment advisory services in connection with the management of the Fund
under a Subadvisory Agreement with PIFM. See "How the Fund is
Managed--Manager" at page 29.
WHO DISTRIBUTES THE FUND'S SHARES?
On and after July 1, 1998, Prudential Investment Management Services LLC
(the Distributor), will act as the Distributor of the Fund's Class A, Class
B, Class C and Class Z shares. Before July 1, 1998, Prudential Securities
Incorporated (Prudential Securities) served as Distributor of Fund shares.
Prudential Securities and Prudential Investment Management Services LLC are
each referred to as the Distributor. The Distributor is paid an annual
distribution and service fee which is currently being charged at the rate of
.10 of 1% of the average daily net assets of the Class A shares of each
Series, is paid an annual distribution and service fee which is currently
being charged at the rate of .50 of 1% of the average daily net assets of
the Class B shares of each Series and is paid an annual distribution and
service fee which is currently being charged at the rate of .75 of 1% of the
average daily net assets of the Class C shares of each Series. The
Distributor incurs the expense of distributing the Fund's Class Z shares
under a distribution agreement with the Fund, none of which is reimbursed or
paid for by the Fund. See "How the Fund is Managed--Distributor" at page 29.
2
<PAGE>
WHAT IS THE MINIMUM INVESTMENT?
The minimum initial investment is $1,000 for Class A and Class B shares
per class and $5,000 for Class C shares. The minimum subsequent investment
is $100 for Class A, Class B and Class C shares. Class Z shares are not
subject to any minimum investment requirements. There is no minimum
investment requirement for certain employee savings plans. For purchases
made through the Automatic Savings Accumulation Plan, the minimum initial
and subsequent investment is $50. See "Shareholder Guide--How to Buy Shares
of the Fund" at page 37 and "Shareholder Guide--Shareholder Services" at
page 46.
HOW DO I PURCHASE SHARES?
You may purchase shares of the Fund through the Distributor or brokers or
dealers that have entered into agreements to act as participating or
introducing brokers for the Distributor (Dealers), including Prudential
Securities or Pruco Securities Incorporated (Prusec), or directly from the
Fund through its transfer agent, Prudential Mutual Fund Services LLC (PMFS
or the Transfer Agent). In each case, sales are made at the NAV next
determined after receipt of your purchase order by the Transfer Agent, a
Dealer or the Distributor, plus a sales charge which may be imposed either
(i) at the time of purchase (Class A shares) or (ii) on a deferred basis
(Class B or Class C shares). Class Z shares are offered to a limited group
of investors at NAV without any sales charge. Dealers may charge their
customers a separate fee for handling purchase transactions. See "How the
Fund Values its Shares" at page 32 and "Shareholder Guide--How to Buy Shares
of the Fund" at page 37.
WHAT ARE MY PURCHASE ALTERNATIVES?
The Fund offers four classes of shares through this Prospectus:
- Class A Shares: Sold with an initial sales charge of up to 3% of
the offering price.
- Class B Shares: Sold without an initial sales charge but are
subject to a contingent deferred sales charge or
CDSC (declining from 5% to zero of the lower of the
amount invested or the redemption proceeds) which
will be imposed on certain redemptions made within
six years of purchase. Although Class B shares are
subject to higher ongoing distribution-related
expenses than Class A shares, Class B shares will
automatically convert to Class A shares (which are
subject to lower ongoing distribution-related
expenses) approximately seven years after purchase.
- Class C Shares: Sold without an initial sales charge and, for one
year after purchase, are subject to a 1% CDSC on
redemptions. Class C shares are subject to higher
ongoing distribution-related expenses than Class A
shares but, unlike Class B shares, do not convert
to another class.
- Class Z Shares: Sold without either an initial sales charge or CDSC
to a limited group of investors. Class Z shares are
not subject to any ongoing service or distribution
expenses.
See "Shareholder Guide--Alternative Purchase Plan" at page 38.
HOW DO I SELL MY SHARES?
You may redeem your shares at any time at the NAV next determined after
your Dealer, the Distributor or the Transfer Agent receives your sell order.
However, the proceeds of redemptions of Class B and Class C shares may be
subject to a CDSC. Dealers may charge their customers a separate fee for
handling sale transactions. See "Shareholder Guide--How to Sell Your Shares"
at page 41. Participants in programs sponsored by Prudential Retirement
Services should contact their client representative for more information
about selling their Class Z shares.
HOW ARE DIVIDENDS AND DISTRIBUTIONS PAID?
The Fund expects to declare daily and pay monthly dividends of net
investment income, if any, and make distributions of any net capital gains
at least annually. Dividends and distributions will be automatically
reinvested in additional shares of a Series at NAV without a sales charge
unless you request that they be paid to you in cash. See "Taxes, Dividends
and Distributions" at page 33.
3
<PAGE>
FUND EXPENSES
(FOR EACH SERIES)
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES (b) CLASS C SHARES CLASS Z SHARES
-------------- ------------------------------------- ----------------- ----------------
<S> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES (a)
Maximum Sales Load Imposed on
Purchases (as a percentage of
offering price)...................... 3% None None None
Maximum Sales Load Imposed on
Reinvested Dividends................. None None None None
Maximum Deferred Sales Load (as a
percentage of original purchase price
or redemption proceeds, whichever is
lower)............................... None 5% during the first year, decreasing 1% on redemptions None
by 1% annually to 1% in the fifth and made within one
sixth years and 0% the seventh year year
of purchase
Redemption Fees....................... None None None None
Exchange Fee.......................... None None None None
</TABLE>
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES CLASS C SHARES CLASS Z SHARES
-------------- ------------------------------------- ----------------- ----------------
<S> <C> <C> <C> <C>
ANNUAL FUND OPERATING EXPENSES (c)
(as a percentage of average net assets)
Management Fees:
High Income Series (Before
Waiver)........................ .50% .50% .50% .50%
Insured Series.................. .50 .50 .50 .50
Intermediate Series............. .50 .50 .50 .50
12b-1 Fees (After Reduction):
High Income Series.............. .10%(d) .50% .75%(d) None
Insured Series.................. .10(d) .50 .75(d) None
Intermediate Series............. .10(d) .50 .75(d) None
Other Expenses:
High Income Series.............. .07% .07% .07% .07%
Insured Series.................. .11 .11 .11 .11
Intermediate Series............. .73 .73 .73 .73
Total Fund Operating Expenses
(Before Waiver and After
Reduction):
High Income Series.............. .67% 1.07% 1.32% .57%
Insured Series.................. .71 1.11 1.36 .61
Intermediate Series............. 1.33 1.73 1.98 1.23
</TABLE>
- ---------------
(a) Dealers may independently charge additional fees for shareholder
transactions or advisory services. Pursuant to rules of the National
Association of Securities Dealers, Inc., the aggregate initial sales
charges, deferred sales charges and asset-based sales charges on shares of
each Series may not exceed 6.25% of total gross sales, subject to certain
exclusions. This 6.25% limitation is imposed on each class of the Series
rather than on a per shareholder basis. Therefore, long-term shareholders
of the Fund may pay more in total sales charges than the economic
equivalent of 6.25% of such shareholders' investment in such shares. See
"How the Fund is Managed--Distributor."
(b) Class B shares will automatically convert to Class A shares approximately
seven years after purchase. See "Shareholder Guide--Conversion Feature--
Class B Shares."
(c) Based on expenses incurred during the fiscal year ended April 30, 1998,
without taking into account the management fee waiver. At the current level
of management fee waiver (10%), Management Fees would be .45% for all
classes and Total Fund Operating Expenses for Class A, B, C and Class Z
shares would be .62%, 1.02%, 1.27% and .52%, respectively for the High
Income Series. The expense information in the table with respect to the
Insured and Intermediate Series has been restated to reflect current fees.
Effective August 31, 1997, PIFM eliminated its management fee waiver (10%)
with respect to the Insured and Intermediate Series. See "How the Fund is
Managed--Fee Waivers and Subsidy."
(d) Although the Class A and Class C Distribution and Service Plans provide
that the Fund may pay a distribution fee of up to .30 of 1% and 1% of the
average daily net assets of the Class A and Class C shares, respectively,
the Distributor may voluntarily waive all or a portion of the distribution
fees as it may determine from time to time. Any such waivers may be
terminated at any time without prior notice to shareholders. The fee table
reflects the 12b-1 fees that are estimated to be incurred by the Fund
during its current fiscal year. Total Fund Operating Expenses of the Class
A and Class C shares without such waivers would be .87% and 1.57%,
respectively, of the High Income Series, .91% and 1.61%, respectively, of
the Insured Series and 1.53% and 2.23%, respectively, of the Intermediate
Series. See "How the Fund is Managed--Distributor."
4
<PAGE>
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- -------------- --------
<S> <C> <C> <C> <C>
EXAMPLE (EACH SERIES)
You would pay the following expenses on
a $1,000 investment, assuming (1) 5%
annual return and (2) redemption at
the end of each time period:
High Income Series
Class A............................. $36 $49 $ 64 $105
Class B............................. $60 $62 $ 66 $108
Class C............................. $23 $40 $ 70 $153
Class Z............................. $ 5 $17 $ 29 $ 70
Insured Series
Class A............................. $37 $51 $ 67 $113
Class B............................. $61 $65 $ 70 $116
Class C............................. $24 $42 $ 73 $161
Class Z............................. $ 6 $19 $ 33 $ 79
Intermediate Series
Class A............................. $43 $70 $100 $183
Class B............................. $67 $84 $103 $186
Class C............................. $30 $62 $106 $229
Class Z............................. $12 $38 $ 66 $151
You would pay the following expenses on
the same investment, assuming no
redemption:
High Income Series
Class A............................. $36 $49 $ 64 $105
Class B............................. $10 $32 $ 56 $108
Class C............................. $13 $40 $ 70 $153
Class Z............................. $ 5 $17 $ 29 $ 70
Insured Series
Class A............................. $37 $51 $ 67 $113
Class B............................. $11 $35 $ 60 $116
Class C............................. $14 $42 $ 73 $161
Class Z............................. $ 6 $19 $ 33 $ 79
Intermediate Series
Class A............................. $43 $70 $100 $183
Class B............................. $17 $54 $ 93 $186
Class C............................. $20 $62 $106 $229
Class Z............................. $12 $38 $ 66 $151
</TABLE>
- ---------------
The above examples are based on data for the Fund's fiscal year ended
April 30, 1998. THE EXAMPLES SHOULD NOT BE CONSIDERED A REPRESENTATION OF
PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE
SHOWN.
The purpose of this table is to assist investors in understanding the
various costs and expenses that an investor in the Fund will bear, whether
directly or indirectly. For more complete descriptions of the various
costs and expenses, see "How the Fund is Managed." "Other Expenses"
includes operating expenses of the Series, such as Trustees' and
professional fees, registration fees, reports to shareholders and transfer
agency and custodian fees.
5
<PAGE>
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH OF THE INDICATED PERIODS)
(HIGH INCOME SERIES - CLASS A SHARES)
The following financial highlights, for the fiscal years ended April 30, 1997
and 1998, have been audited by Price Waterhouse LLP, independent accountants,
and by Deloitte & Touche LLP, independent auditors, for the three years ended
April 30, 1996. Each of the respective reports by Price Waterhouse LLP and
Deloitte & Touche LLP on such financial highlights were unqualified. This
information should be read in conjunction with the financial statements and
notes thereto, which appear in the Statement of Additional Information. The
financial highlights contain selected data for a Class A share of beneficial
interest outstanding, total return, ratios to average net assets and other
supplemental data for the periods indicated. The information is based on data
contained in the financial statements. Further performance information is
contained in the annual report, which may be obtained without charge. See
"Shareholder Guide--Shareholder Services--Reports to Shareholders."
<TABLE>
<CAPTION>
HIGH INCOME SERIES
------------------------------------------------------------------------------------------------------------
CLASS A
------------------------------------------------------------------------------------------------------------
JANUARY 22,
1990(a)
YEARS ENDED APRIL 30, THROUGH
------------------------------------------------------------------------------------------- APRIL 30,
1998 1997 1996 1995 1994 1993 1992 1991 1990
-------- -------- -------- -------- ------- ------- ------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of
period............ $ 10.84 $ 10.70 $ 10.72 $ 10.74 $ 11.14 $ 10.68 $ 10.45 $ 10.33 $10.58
-------- -------- -------- -------- ------- ------- ------- ------- ------
INCOME FROM
INVESTMENT
OPERATIONS
Net investment
income............ .67(d) .70(d) .72(d) .72(d) .72 .77 .77(d) .79(d) .23(d)
Net realized and
unrealized gain
(loss) on
investment
transactions...... .47 .14 (.02) (.02) (.39) .46 .23 .12 (.25)
-------- -------- -------- -------- ------- ------- ------- ------- ------
Total from
investment
operations........ 1.14 .84 .70 .70 .33 1.23 1.00 .91 (.02)
-------- -------- -------- -------- ------- ------- ------- ------- ------
LESS DISTRIBUTIONS
Dividends from net
investment
income............ (.67) (.70) (.72) (.72) (.72) (.77) (.77) (.79) (.23)
Distributions from
capital gains..... -- -- -- -- (.01) -- -- -- --
-------- -------- -------- -------- ------- ------- ------- ------- ------
Total
distributions..... (.67) (.70) (.72) (.72) (.73) (.77) (.77) (.79) (.23)
-------- -------- -------- -------- ------- ------- ------- ------- ------
Net asset value, end
of period......... $ 11.31 $ 10.84 $ 10.70 $ 10.72 $ 10.74 $ 11.14 $ 10.68 $ 10.45 $10.33
-------- -------- -------- -------- ------- ------- ------- ------- ------
-------- -------- -------- -------- ------- ------- ------- ------- ------
TOTAL RETURN (b):... 10.80% 8.03% 6.55% 6.90% 2.88% 11.90% 9.82% 9.14% (1.49)%
RATIOS/SUPPLEMENTAL
DATA:
Net assets, end of
period (000)...... $421,503 $334,062 $223,073 $115,501 $54,491 $43,529 $24,725 $15,089 $3,905
Average net assets
(000)............. $381,735 $294,940 $162,329 $ 65,207 $52,982 $31,658 $19,702 $11,594 $1,914
Ratios to average
net assets:
Expenses,
including
distribution
fees............. 0.62%(d) 0.64%(d) 0.64%(d) 0.69%(d) 0.69% 0.74% 0.65%(d) 0.60%(d) 0.60%(c)(d)
Expenses,
excluding
distribution
fees............. 0.52%(d) 0.54%(d) 0.54%(d) 0.59%(d) 0.59% 0.64% 0.55%(d) 0.50%(d) 0.50%(c)(d)
Net investment
income........... 6.03%(d) 6.44%(d) 6.58%(d) 6.83%(d) 6.42% 7.04% 7.25%(d) 7.62%(d) 8.17%(c)(d)
Portfolio turnover
rate.............. 13% 26% 35% 39% 36% 27% 34% 29% 44%
</TABLE>
- -----------------
(a) Commencement of offering of Class A shares.
(b) Total return does not consider the effects of sales loads. Total
return is calculated assuming a purchase of shares on the first day
and a sale on the last day of each period reported and includes
reinvestment of dividends and distributions. Total returns for
periods of less than a full year are not annualized.
(c) Annualized.
(d) Net of management fee waiver. See "Manager" in the Statement of
Additional Information.
6
<PAGE>
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH OF THE INDICATED PERIODS)
(HIGH INCOME SERIES - CLASS B SHARES)
The following financial highlights, for the fiscal years ended April 30, 1997
and 1998, have been audited by Price Waterhouse LLP, independent accountants,
and by Deloitte & Touche LLP, independent auditors, for the three years ended
April 30, 1996. Each of the respective reports by Price Waterhouse LLP and
Deloitte & Touche LLP on such financial highlights were unqualified. This
information should be read in conjunction with the financial statements and
notes thereto, which appear in the Statement of Additional Information. The
financial highlights contain selected data for a Class B share of beneficial
interest outstanding, total return, ratios to average net assets and other
supplemental data for the periods indicated. The information is based on data
contained in the financial statements. Further performance information is
contained in the annual report, which may be obtained without charge. See
"Shareholder Guide--Shareholder Services--Reports to Shareholders."
<TABLE>
<CAPTION>
HIGH INCOME SERIES
----------------------------------------------------------------------
CLASS B
----------------------------------------------------------------------
YEARS ENDED APRIL 30,
----------------------------------------------------------------------
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.............. $ 10.84 $ 10.69 $ 10.72 $ 10.74 $ 11.14
---------- ---------- ---------- ---------- ----------
INCOME FROM INVESTMENT OPERATIONS
Net investment income............................. .63(b) .66(b) .68(b) .68(b) .68
Net realized and unrealized gain (loss) on
investment transactions......................... .47 .15 (.03) (.02) (.39)
---------- ---------- ---------- ---------- ----------
Total from investment operations.................. 1.10 .81 .65 .66 .29
---------- ---------- ---------- ---------- ----------
LESS DISTRIBUTIONS
Dividends from net investment income.............. (.63) (.66) (.68) (.68) (.68)
Distributions from capital gains.................. -- -- -- -- (.01)
---------- ---------- ---------- ---------- ----------
Total distributions............................... (.63) (.66) (.68) (.68) (.69)
---------- ---------- ---------- ---------- ----------
Net asset value, end of period.................... $ 11.31 $ 10.84 $ 10.69 $ 10.72 $ 10.74
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
TOTAL RETURN (a):................................. 10.36% 7.71% 6.12% 6.37% 2.46%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)................... $ 669,223 $ 665,525 $ 799,048 $ 934,725 $1,099,640
Average net assets (000).......................... $ 669,132 $ 725,305 $ 900,115 $1,024,132 $1,132,653
Ratios to average net assets:
Expenses, including distribution fees........... 1.02%(b) 1.04%(b) 1.04%(b) 1.09%(b) 1.09%
Expenses, excluding distribution fees........... 0.52%(b) 0.54%(b) 0.54%(b) 0.59%(b) 0.58%
Net investment income........................... 5.63%(b) 6.05%(b) 6.19%(b) 6.37%(b) 6.02%
Portfolio turnover rate........................... 13% 26% 35% 39% 36%
<CAPTION>
1993 1992 1991 1990 1989
---------- -------- -------- -------- --------
<S> <C><C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.............. $ 10.68 $ 10.45 $ 10.34 $ 10.56 $ 10.13
---------- -------- -------- -------- --------
INCOME FROM INVESTMENT OPERATIONS
Net investment income............................. .73 .73(b) .75(b) .79(b) .86(b)
Net realized and unrealized gain (loss) on
investment transactions......................... .46 .23 .11 (.17) .45
---------- -------- -------- -------- --------
Total from investment operations.................. 1.19 .96 .86 .62 1.31
---------- -------- -------- -------- --------
LESS DISTRIBUTIONS
Dividends from net investment income.............. (.73) (.73) (.75) (.79) (.86)
Distributions from capital gains.................. -- -- -- (.05) (.02)
---------- -------- -------- -------- --------
Total distributions............................... (.73) (.73) (.75) (.84) (.88)
---------- -------- -------- -------- --------
Net asset value, end of period.................... $ 11.14 $ 10.68 $ 10.45 $ 10.34 $ 10.56
---------- -------- -------- -------- --------
---------- -------- -------- -------- --------
TOTAL RETURN (a):................................. 11.47% 9.40% 8.59% 6.04% 13.40%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)................... $1,028,480 $803,838 $701,483 $622,970 $549,426
Average net assets (000).......................... $ 893,203 $759,779 $667,751 $549,485 $185,367
Ratios to average net assets:
Expenses, including distribution fees........... 1.14% 1.05%(b) 1.00%(b) 0.83%(b) 0.27%(b)
Expenses, excluding distribution fees........... .64% 0.55%(b) 0.50%(b) 0.33%(b) 0.12%(b)
Net investment income........................... 6.66% 6.85%(b) 7.22%(b) 7.24%(b) 7.26%(b)
Portfolio turnover rate........................... 27% 34% 29% 44% 17%
</TABLE>
- -----------------
(a) 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.
(b) Net of expense subsidy, fee waivers and distribution fee deferrals.
See "Manager" in the Statement of Additional Information.
7
<PAGE>
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH OF THE INDICATED PERIODS)
(HIGH INCOME SERIES - CLASS C SHARES)
The following financial highlights for the fiscal years ended April 30, 1997
and 1998, have been audited by Price Waterhouse LLP, independent accountants,
and by Deloitte & Touche LLP, independent auditors, for the year ended April 30,
1996 and for the period from August 1, 1994 through April 30, 1995. Each of the
respective reports by Price Waterhouse LLP and Deloitte & Touche LLP on such
financial highlights were unqualified. This information should be read in
conjunction with the financial statements and notes thereto, which appear in the
Statement of Additional Information. The financial highlights contain selected
data for a Class C share of beneficial interest outstanding, total return,
ratios to average net assets and other supplemental data for the periods
indicated. The information is based on data contained in the financial
statements. Further performance information is contained in the annual report,
which may be obtained without charge. See "Shareholder Guide--Shareholder
Services--Reports to Shareholders."
<TABLE>
<CAPTION>
HIGH INCOME SERIES
--------------------------------------
CLASS C
--------------------------------------
AUGUST 1,
1994(a)
YEAR ENDED APRIL 30, THROUGH
------------------------- APRIL 30,
1998 1997 1996 1995
------- ------- ------- -----------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.............. $ 10.84 $ 10.69 $ 10.72 $10.79
------- ------- ------- -----------
INCOME FROM INVESTMENT OPERATIONS
Net investment income (d)......................... .61 .63 .65 .49
Net realized and unrealized gain (loss) on
investment transactions......................... .47 .15 (.03) (.07)
------- ------- ------- -----------
Total from investment operations.................. 1.08 .78 .62 .42
------- ------- ------- -----------
LESS DISTRIBUTIONS
Dividends from net investment income.............. (.61) (.63) (.65) (.49)
------- ------- ------- -----------
Net asset value, end of period.................... $ 11.31 $ 10.84 $ 10.69 $10.72
------- ------- ------- -----------
------- ------- ------- -----------
TOTAL RETURN (b):................................. 10.09% 7.44% 5.86% 3.91%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)................... $20,554 $ 9,563 $ 6,471 $3,208
Average net assets (000).......................... $14,932 $ 8,060 $ 5,608 $1,385
Ratios to average net assets:
Expenses, including distribution fees (d)....... 1.27% 1.29% 1.29% 1.34%(c)
Expenses, excluding distribution fees (d)....... 0.52% 0.54% 0.54% 0.59%(c)
Net investment income (d)....................... 5.39% 5.80% 5.93% 6.34%(c)
Portfolio turnover rate........................... 13% 26% 35% 39%
</TABLE>
- -------------
(a) Commencement of offering of Class C shares.
(b) Total return does not consider the effects of sales loads. Total return
is calculated assuming a purchase of shares on the first day and a sale
on the last day of each period reported and includes reinvestment of
dividends and distributions. Total returns for periods of less than a
full year are not annualized.
(c) Annualized.
(d) Net of management fee waiver. See "Manager" in the Statement of
Additional Information.
8
<PAGE>
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD INDICATED)
(HIGH INCOME SERIES - CLASS Z SHARES)
The following financial highlights for the Class Z shares for the fiscal year
ended April 30, 1998 and for the period from September 16, 1996 through April
30, 1997 have been audited by Price Waterhouse LLP, independent accountants,
whose report thereon was unqualified. This information should be read in
conjunction with the financial statements and the notes thereto, which appear in
the Statement of Additional Information. The financial highlights contain
selected data for a Class Z share of common stock outstanding, total return,
ratios to average net assets and other supplemental data for the period
indicated. This information has been determined based on data contained in the
financial statements. Further performance information is contained in the annual
report, which may be obtained without charge. See "Shareholder
Guide--Shareholder Services--Reports to Shareholders."
<TABLE>
<CAPTION>
HIGH INCOME SERIES
---------------------------
CLASS Z
---------------------------
SEPTEMBER 16,
YEAR ENDED 1996(a)
APRIL 30, THROUGH
1998 APRIL 30, 1997
---------- --------------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.............. $ 10.83 $10.79
---------- ------
INCOME FROM INVESTMENT OPERATIONS
Net investment income (d)......................... .68 .45
Net realized and unrealized gain (loss) on
investment transactions......................... .47 .04
---------- ------
Total from investment operations.................. 1.15 .49
---------- ------
LESS DISTRIBUTIONS
Dividends from net investment income.............. (.68) (.45)
---------- ------
Net asset value, end of period.................... $ 11.30 $10.83
---------- ------
---------- ------
TOTAL RETURN(b):.................................. 10.91% 4.36%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)................... $ 9,919 $2,719
Average net assets (000).......................... $ 6,064 $ 704
Ratios to average net assets:
Expenses (d).................................... 0.52% 0.54%(c)
Net investment income (d)....................... 6.14% 6.55%(c)
Portfolio turnover rate........................... 13% 26%
</TABLE>
- ------------
(a) Commencement of offering of Class Z shares.
(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 the period reported and includes reinvestment of
dividends and distributions. Total returns for periods of less than a
full year are not annualized.
(c) Annualized.
(d) Net of management fee waiver. See "Manager" in the Statement of
Additional Information.
9
<PAGE>
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH OF THE INDICATED PERIODS)
(INSURED SERIES - CLASS A SHARES)
The following financial highlights, for the fiscal years ended April 30, 1997
and 1998, have been audited by Price Waterhouse LLP, independent accountants,
and by Deloitte & Touche LLP, independent auditors, for the three years ended
April 30, 1996. Each of the respective reports by Price Waterhouse LLP and
Deloitte & Touche LLP on such financial highlights were unqualified. This
information should be read in conjunction with the financial statements and
notes thereto, which appear in the Statement of Additional Information. The
financial highlights contain selected data for a Class A share of beneficial
interest outstanding, total return, ratios to average net assets and other
supplemental data for the periods indicated. The information is based on data
contained in the financial statements. Further performance information is
contained in the annual report, which may be obtained without charge. See
"Shareholder Guide--Shareholder Services--Reports to Shareholders."
<TABLE>
<CAPTION>
INSURED SERIES
----------------------------------------------------------------------------------------------------------
CLASS A
----------------------------------------------------------------------------------------------------------
JANUARY 22,
1990(a)
YEARS ENDED APRIL 30, THROUGH
----------------------------------------------------------------------------------------- APRIL 30,
1998 1997 1996 1995 1994 1993 1992 1991 1990
-------- -------- -------- ------- ------- ------- ------- ------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of
period............ $ 10.90 $ 10.94 $ 10.83 $ 10.71 $ 11.44 $ 10.98 $ 10.76 $10.25 $ 10.51
-------- -------- -------- ------- ------- ------- ------- ------ ------
INCOME FROM
INVESTMENT
OPERATIONS
Net investment
income............ .53(d) .55(d) .58(d) .58(d) .58 .61 .66(d) .67(d) .18(d)
Net realized and
unrealized gain
(loss) on
investment
transactions...... .40 .08 .11 .12 (.43) .73 .24 .54 (.26)
-------- -------- -------- ------- ------- ------- ------- ------ ------
Total from
investment
operations........ .93 .63 .69 .70 .15 1.34 .90 1.21 (.08)
-------- -------- -------- ------- ------- ------- ------- ------ ------
LESS DISTRIBUTIONS
Dividends from net
investment
income............ (.53) (.55) (.58) (.58) (.58) (.61) (.66) (.67) (.18)
Distributions in
excess of net
investment
income............ --(e) (.01) -- -- -- -- -- -- --
Distributions from
capital gains..... (.25) (.11) -- -- (.30) (.27) (.02) (.03) --
-------- -------- -------- ------- ------- ------- ------- ------ ------
Total
distributions..... (.78) (.67) (.58) (.58) (.88) (.88) (.68) (.70) (.18)
-------- -------- -------- ------- ------- ------- ------- ------ ------
Net asset value, end
of period......... $ 11.05 $ 10.90 $ 10.94 $ 10.83 $ 10.71 $ 11.44 $ 10.98 $10.76 $ 10.25
-------- -------- -------- ------- ------- ------- ------- ------ ------
-------- -------- -------- ------- ------- ------- ------- ------ ------
TOTAL RETURN (b):... 8.67% 5.74% 6.47% 6.73% 1.04% 12.68% 8.59% 11.86% (3.37)%
RATIOS/SUPPLEMENTAL
DATA:
Net assets, end of
period (000)...... $224,409 $208,411 $139,548 $75,800 $30,669 $30,098 $19,177 $7,630 $ 2,700
Average net assets
(000)............. $222,115 $187,371 $102,456 $39,471 $32,309 $24,589 $12,731 $5,164 $ 1,280
Ratios to average
net assets:
Expenses,
including
distribution
fees............. 0.69%(d) 0.68%(d) 0.68%(d) 0.74%(d) 0.71% 0.72% 0.62%(d) 0.61%(d) 0.62%(c)(d)
Expenses,
excluding
distribution
fees............. 0.59%(d) 0.58%(d) 0.58%(d) 0.64%(d) 0.61% 0.62% 0.52%(d) 0.51%(d) 0.52%(c)(d)
Net investment
income........... 4.75%(d) 4.95%(d) 5.20%(d) 5.45%(d) 5.09% 5.46% 6.06%(d) 6.38%(d) 6.64%(c)(d)
Portfolio turnover
rate.............. 85% 110% 68% 64% 105% 85% 56% 51% 82%
</TABLE>
- -----------------
(a) Commencement of offering of Class A shares.
(b) Total return does not consider the effects of sales loads. Total
return is calculated assuming a purchase of shares on the first day
and a sale on the last day of each period reported and includes
reinvestment of dividends and distributions. Total returns for
periods of less than a full year are not annualized.
(c) Annualized.
(d) Net of management fee waiver. See "Manager" in the Statement of
Additional Information.
(e) Less than $.005 per share.
10
<PAGE>
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH OF THE INDICATED PERIODS)
(INSURED SERIES - CLASS B SHARES)
The following financial highlights, with respect to the fiscal years ended
April 30, 1997 and 1998, have been audited by Price Waterhouse LLP, independent
accountants, and by Deloitte & Touche LLP, independent auditors, for the three
years ended April 30, 1996. Each of the respective reports by Price Waterhouse
LLP and Deloitte & Touche LLP on such financial highlights were unqualified.
This information should be read in conjunction with the financial statements and
notes thereto, which appear in the Statement of Additional Information. The
financial highlights contain selected data for a Class B share of beneficial
interest outstanding, total return, ratios to average net assets and other
supplemental data for the periods indicated. The information is based on data
contained in the financial statements. Further performance information is
contained in the annual report, which may be obtained without charge. See
"Shareholder Guide--Shareholder Services--Reports to Shareholders."
<TABLE>
<CAPTION>
INSURED SERIES
------------------------------------------------------------
CLASS B
------------------------------------------------------------
YEARS ENDED APRIL 30,
------------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.............. $ 10.91 $ 10.95 $ 10.84 $ 10.71 $ 11.44
-------- -------- -------- -------- --------
INCOME FROM INVESTMENT OPERATIONS
Net investment income............................. .49(b) .50(b) .54(b) .54(b) .54
Net realized and unrealized gain (loss) on
investment transactions......................... .40 .08 .11 .13 (.43)
-------- -------- -------- -------- --------
Total from investment operations.................. .89 .58 .65 .67 .11
-------- -------- -------- -------- --------
LESS DISTRIBUTIONS
Dividends from net investment income.............. (.49) (.50) (.54) (.54) (.54)
Distributions in excess of net investment
income.......................................... --(c) (.01) -- -- --
Distributions from capital gains.................. (.25) (.11) -- -- (.30)
-------- -------- -------- -------- --------
Total distributions............................... (.74) (.62) (.54) (.54) (.84)
-------- -------- -------- -------- --------
Net asset value, end of period.................... $ 11.06 $ 10.91 $ 10.95 $ 10.84 $ 10.71
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
TOTAL RETURN (a):................................. 8.23% 5.32% 6.04% 6.40% 0.63%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)................... $236,370 $298,005 $443,391 $567,648 $740,447
Average net assets (000).......................... $270,553 $365,891 $524,452 $660,237 $807,794
Ratios to average net assets:
Expenses, including distribution fees........... 1.09%(b) 1.08%(b) 1.08%(b) 1.14%(b) 1.11%
Expenses, excluding distribution fees........... 0.59%(b) 0.58%(b) 0.58%(b) 0.64%(b) 0.61%
Net investment income........................... 4.35%(b) 4.54%(b) 4.80%(b) 4.99%(b) 4.69%
Portfolio turnover rate........................... 85% 110% 68% 64% 105%
<CAPTION>
1993 1992 1991 1990 1989
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.............. $ 10.99 $ 10.76 $ 10.25 $ 10.54 $ 10.18
-------- -------- -------- -------- --------
INCOME FROM INVESTMENT OPERATIONS
Net investment income............................. .56 .62(b) .63(b) .67(b) .76(b)
Net realized and unrealized gain (loss) on
investment transactions......................... .72 .25 .54 (.22) .42
-------- -------- -------- -------- --------
Total from investment operations.................. 1.28 .87 1.17 .45 1.18
-------- -------- -------- -------- --------
LESS DISTRIBUTIONS
Dividends from net investment income.............. (.56) (.62) (.63) (.67) (.76)
Distributions in excess of net investment
income.......................................... -- -- -- -- --
Distributions from capital gains.................. (.27) (.02) (.03) (.07) (.06)
-------- -------- -------- -------- --------
Total distributions............................... (.83) (.64) (.66) (.74) (.82)
-------- -------- -------- -------- --------
Net asset value, end of period.................... $ 11.44 $ 10.99 $ 10.76 $ 10.25 $ 10.54
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
TOTAL RETURN (a):................................. 12.14% 8.24% 11.43% 4.36% 11.97%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)................... $770,060 $638,451 $578,412 $497,139 $447,101
Average net assets (000).......................... $705,846 $609,516 $537,275 $446,904 $160,158
Ratios to average net assets:
Expenses, including distribution fees........... 1.12% 1.02%(b) 1.01%(b) 0.85%(b) 0.22%(b)
Expenses, excluding distribution fees........... 0.62% 0.52%(b) 0.51%(b) 0.35%(b) 0.13%(b)
Net investment income........................... 5.06% 5.66%(b) 5.98%(b) 6.07%(b) 6.52%(b)
Portfolio turnover rate........................... 85% 56% 51% 82% 87%
</TABLE>
- -----------------
(a) 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.
(b) Net of expense subsidy, fee waivers and distribution fee deferrals.
See "Manager" in the Statement of Additional Information.
(c) Less than $.005 per share.
11
<PAGE>
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH OF THE INDICATED PERIODS)
(INSURED SERIES - CLASS C SHARES)
The following financial highlights, for the fiscal years ended April 30, 1997
and 1998, have been audited by Price Waterhouse LLP, independent accountants,
and by Deloitte & Touche LLP, independent auditors, for the year ended April 30,
1996 and the period August 1, 1994 through April 30, 1995. Each of the
respective reports by Price Waterhouse LLP and Deloitte & Touche LLP on such
financial highlights were unqualified. This information should be read in
conjunction with the financial statements and notes thereto, which appear in the
Statement of Additional Information. The financial highlights contain selected
data for a Class C share of beneficial interest outstanding, total return,
ratios to average net assets and other supplemental data for the periods
indicated. The information is based on data contained in the financial
statements. Further performance information is contained in the annual report,
which may be obtained without charge. See "Shareholder Guide--Shareholder
Services--Reports to Shareholders."
<TABLE>
<CAPTION>
INSURED SERIES
----------------------------------------
CLASS C
---------------------------------------------------------------------
YEAR ENDED APRIL 30, AUGUST 1, 1994(a)
---------------------------------------- THROUGH APRIL 30,
1998 1997 1996 1995
---------- ---------- ---------- ------------------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.... $ 10.91 $ 10.95 $ 10.84 $ 10.79
---------- ---------- ---------- ------
INCOME FROM INVESTMENT OPERATIONS
Net investment income................... .46(d) .48(d) .51(d) .39(d)
Net realized and unrealized gain (loss)
on investment transactions............ .40 .08 .11 .05
---------- ---------- ---------- ------
Total from investment operations........ .86 .56 .62 .44
---------- ---------- ---------- ------
LESS DISTRIBUTIONS
Dividends from net investment income.... (.46) (.48) (.51) (.39)
Distributions in excess of net
investment income..................... --(e) (.01) -- --
Distributions from capital gains........ (.25) (.11) -- --
---------- ---------- ---------- ------
Total distributions..................... (.71) (.60) (.51) (.39)
---------- ---------- ---------- ------
Net asset value, end of period.......... $ 11.06 $ 10.91 $ 10.95 $ 10.84
---------- ---------- ---------- ------
---------- ---------- ---------- ------
TOTAL RETURN (b):....................... 7.96% 5.06% 5.78% 4.03%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)......... $ 1,509 $ 888 $ 1,137 $ 525
Average net assets (000)................ $ 1,142 $ 973 $ 827 $ 224
RATIOS TO AVERAGE NET ASSETS:
Expenses, including distribution
fees................................. 1.34%(d) 1.33%(d) 1.33%(d) 1.39%(c)(d)
Expenses, excluding distribution
fees................................. 0.59%(d) 0.58%(d) 0.58%(d) 0.64%(c)(d)
Net investment income................. 4.11%(d) 4.29%(d) 4.56%(d) 4.92%(c)(d)
Portfolio turnover rate................. 85% 110% 68% 64%
</TABLE>
- ---------------
(a) Commencement of offering of Class C shares.
(b) Total return does not consider the effects of sales loads. Total
return is calculated assuming a purchase of shares on the first day
and a sale on the last day of each period reported and includes
reinvestment of dividends and distributions. Total returns for
periods of less than a full year are not annualized.
(c) Annualized.
(d) Net of management fee waiver. See "Manager" in the Statement of
Additional Information.
(e) Less than $.005 per share.
12
<PAGE>
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD INDICATED)
(INSURED SERIES - CLASS Z SHARES)
The following financial highlights for the Class Z shares for the fiscal year
ended April 30, 1998 and for the period from September 16, 1996 through April
30, 1997 have been audited by Price Waterhouse LLP, independent accountants,
whose report thereon was unqualified. This information should be read in
conjunction with the financial statements and the notes thereto, which appear in
the Statement of Additional Information. The financial highlights contain
selected data for a Class Z share of common stock outstanding, total return,
ratios to average net assets and other supplemental data for the period
indicated. This information has been determined based on data contained in the
financial statements. Further performance information is contained in the annual
report, which may be obtained without charge. See "Shareholder
Guide--Shareholder Services--Reports to Shareholders."
<TABLE>
<CAPTION>
INSURED SERIES
---------------------------------
CLASS Z
---------------------------------
SEPTEMBER 16,
YEAR ENDED 1996(a)
APRIL 30, THROUGH
1998 APRIL 30, 1997
------------- -----------------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period............................. $ 10.91 $ 11.05
------ ------
INCOME FROM INVESTMENT OPERATIONS
Net investment income............................................ .54(d) .36(d)
Net realized and unrealized gain (loss) on investment
transactions................................................... .39 (.02)
------ ------
Total from investment operations................................. .93 .34
------ ------
LESS DISTRIBUTIONS
Dividends from net investment income............................. (.54) (.36)
Distributions in excess of net investment income................. --(e) (.01)
Distributions from capital gains................................. (.25) (.11)
------ ------
Total distributions.............................................. (.79) (.48)
------ ------
Net asset value, end of period................................... $ 11.05 $ 10.91
------ ------
------ ------
TOTAL RETURN (b):................................................ 8.68% 2.86%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000).................................. $418 $15
Average net assets (000)......................................... $173 $10
Ratios to average net assets:
Expenses....................................................... 0.60%(d) 0.58%(c)(d)
Net investment income.......................................... 4.92%(d) 4.18%(c)(d)
Portfolio turnover rate.......................................... 85% 110%
</TABLE>
- -------------
(a) Commencement of offering of Class Z shares.
(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 the period reported and includes reinvestment of
dividends and distributions. Total returns for periods of less than a
full year are not annualized.
(c) Annualized.
(d) Net of management fee waiver. See "Manager" in the Statement of
Additional Information.
(e) Less than $.005 per share.
13
<PAGE>
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH OF THE INDICATED PERIODS)
(INTERMEDIATE SERIES - CLASS A SHARES)
The following financial highlights, with respect to the fiscal years ended
April 30, 1997 and 1998, have been audited by Price Waterhouse LLP, independent
accountants, and by Deloitte & Touche LLP, independent auditors, for the three
years ended April 30, 1996. Each of the respective reports by Price Waterhouse
LLP and Deloitte & Touche LLP on such financial highlights were unqualified.
This information should be read in conjunction with the financial statements and
notes thereto, which appear in the Statement of Additional Information. The
financial highlights contain selected data for a Class A share of beneficial
interest outstanding, total return, ratios to average net assets and other
supplemental data for the periods indicated. The information is based on data
contained in the financial statements. Further performance information is
contained in the annual report, which may be obtained without charge. See
"Shareholder Guide--Shareholder Services--Reports to Shareholders."
<TABLE>
<CAPTION>
INTERMEDIATE SERIES
----------------------------------------------------------------------------------------------------------
CLASS A
----------------------------------------------------------------------------------------------------------
JANUARY 22,
1990(a)
YEARS ENDED APRIL 30, THROUGH
----------------------------------------------------------------------------------------- APRIL 30,
1998 1997 1996 1995 1994 1993 1992 1991 1990
------- ------- ------- ------- ------- ------- ------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of
period............... $ 10.59 $ 10.65 $ 10.45 $ 10.67 $ 11.08 $ 10.59 $ 10.48 $ 9.98 $10.21
------- ------- ------- ------- ------- ------- ------- ------- ------
INCOME FROM INVESTMENT
OPERATIONS
Net investment
income............... .43(d) .46(d) .47(d) .51(d) .53 .54(d) .57(d) .59(d) .18(d)
Net realized and
unrealized gain
(loss) on investment
transactions......... .28 (.05) .20 (.03) (.19) .60 .26 .50 (.23)
------- ------- ------- ------- ------- ------- ------- ------- ------
Total from investment
operations........... .71 .41 .67 .48 .34 1.14 .83 1.09 (.05)
------- ------- ------- ------- ------- ------- ------- ------- ------
LESS DISTRIBUTIONS
Dividends from net
investment income.... (.43) (.46) (.47) (.51) (.53) (.54) (.57) (.59) (.18)
Distributions in excess
of net investment
income............... -- (.01) -- (.01) -- -- -- -- --
Distributions from
capital gains........ (.06) -- -- (.18) (.22) (.11) (.15) -- --
------- ------- ------- ------- ------- ------- ------- ------- ------
Total distributions.... (.49) (.47) (.47) (.70) (.75) (.65) (.72) (.59) (.18)
------- ------- ------- ------- ------- ------- ------- ------- ------
Net asset value, end of
period............... $10.81 $10.59 $10.65 $10.45 $ 10.67 $ 11.08 $ 10.59 $ 10.48 $ 9.98
------- ------- ------- ------- ------- ------- ------- ------- ------
------- ------- ------- ------- ------- ------- ------- ------- ------
TOTAL RETURN (b):...... 6.76% 3.86% 6.48% 4.52% 2.83% 11.13% 8.14% 11.20% (2.49)%
RATIOS/SUPPLEMENTAL
DATA:
Net assets, end of
period (000)......... $13,126 $13,740 $12,552 $10,507 $5,810 $3,594 $1,424 $397 $164
Average net assets
(000)................ $13,591 $13,487 $12,604 $7,742 $4,981 $1,883 $ 599 $305 $80
Ratios to average net
assets:
Expenses, including
distribution fees... 1.31%(d) 1.15%(d) 1.16%(d) 1.05%(d) 1.00% 1.06%(d) 1.06%(d) 0.92%(d) 0.63%(c)(d)
Expenses, excluding
distribution fees... 1.21%(d) 1.05%(d) 1.06%(d) 0.95%(d) 0.90% 0.96%(d) 0.96%(d) 0.82%(d) 0.53%(c)(d)
Net investment
income.............. 3.99%(d) 4.30%(d) 4.36%(d) 4.75%(d) 4.63% 5.09%(d) 5.41%(d) 5.92%(d) 6.26%(c)(d)
Portfolio turnover
rate................. 54% 46% 35% 30% 55% 22% 78% 128% 91%
</TABLE>
- -----------------
(a) Commencement of offering of Class A shares.
(b) Total return does not consider the effects of sales loads. Total
return is calculated assuming a purchase of shares on the first day
and a sale on the last day of each period reported and includes
reinvestment of dividends and distributions. Total returns for
periods of less than a full year are not annualized.
(c) Annualized.
(d) Net of management fee waiver. See "Manager" in the Statement of
Additional Information.
14
<PAGE>
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH OF THE INDICATED PERIODS)
(INTERMEDIATE SERIES - CLASS B SHARES)
The following financial highlights, with respect to the fiscal years ended
April 30, 1997 and 1998, have been audited by Price Waterhouse LLP, independent
accountants, and by Deloitte & Touche LLP, independent auditors, for the three
years ended April 30, 1996. Each of the respective reports by Price Waterhouse
LLP and Deloitte & Touche LLP on such financial highlights were unqualified.
This information should be read in conjunction with the financial statements and
notes thereto, which appear in the Statement of Additional Information. The
financial highlights contain selected data for a Class B share of beneficial
interest outstanding, total return, ratios to average net assets and other
supplemental data for the periods indicated. The information is based on data
contained in the financial statements. Further performance information is
contained in the annual report, which may be obtained without charge. See
"Shareholder Guide--Shareholder Services--Reports to Shareholders."
<TABLE>
<CAPTION>
INTERMEDIATE SERIES
-------------------------------------------------------
CLASS B
-------------------------------------------------------
YEARS ENDED APRIL 30,
-------------------------------------------------------
1998 1997 1996 1995 1994
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.............. $ 10.59 $ 10.65 $ 10.45 $ 10.68 $ 11.09
------- ------- ------- ------- -------
INCOME FROM INVESTMENT OPERATIONS
Net investment income............................. .39(b) .42(b) .43(b) .45(b) .48
Net realized and unrealized gain (loss) on
investment transactions......................... .28 (.05) .20 (.04) (.19)
------- ------- ------- ------- -------
Total from investment operations.................. .67 .37 .63 .41 .29
------- ------- ------- ------- -------
LESS DISTRIBUTIONS
Dividends from net investment income.............. (.39) (.42) (.43) (.45) (.48)
Distributions in excess of net investment
income.......................................... -- (.01) -- (.01) --
Distributions from capital gains.................. (.06) -- -- (.18) (.22)
------- ------- ------- ------- -------
Total distributions............................... (.45) (.43) (.43) (.64) (.70)
------- ------- ------- ------- -------
Net asset value, end of period.................... $ 10.81 $ 10.59 $ 10.65 $ 10.45 $ 10.68
------- ------- ------- ------- -------
------- ------- ------- ------- -------
TOTAL RETURN (a):................................. 6.33% 3.44% 6.05% 3.99% 2.43%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)................... $24,017 $29,980 $40,550 $51,039 $65,215
Average net assets (000).......................... $27,175 $35,221 $46,127 $60,174 $59,811
Ratios to average net assets:
Expenses, including distribution fees........... 1.71%(b) 1.55%(b) 1.56%(b) 1.45%(b) 1.40%
Expenses, excluding distribution fees........... 1.21%(b) 1.05%(b) 1.06%(b) 0.95%(b) 0.90%
Net investment income........................... 3.59%(b) 3.89%(b) 3.96%(b) 4.35%(b) 4.23%
Portfolio turnover rate........................... 54% 46% 35% 30% 55%
<CAPTION>
1993 1992 1991 1990 1989
------- ------- ------- ------- -------
<S> <C><C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.............. $ 10.60 $ 10.48 $ 9.98 $ 10.17 $ 10.14
------- ------- ------- ------- -------
INCOME FROM INVESTMENT OPERATIONS
Net investment income............................. .50(b) .53(b) .56(b) .62(b) .70(b)
Net realized and unrealized gain (loss) on
investment transactions......................... .60 .27 .50 (.16) .09
------- ------- ------- ------- -------
Total from investment operations.................. 1.10 .80 1.06 .46 .79
------- ------- ------- ------- -------
LESS DISTRIBUTIONS
Dividends from net investment income.............. (.50) (.53) (.56) (.62) (.70)
Distributions in excess of net investment
income.......................................... -- -- -- -- --
Distributions from capital gains.................. (.11) (.15) -- (.03) (.06)
------- ------- ------- ------- -------
Total distributions............................... (.61) (.68) (.56) (.65) (.76)
------- ------- ------- ------- -------
Net asset value, end of period.................... $ 11.09 $ 10.60 $ 10.48 $ 9.98 $ 10.17
------- ------- ------- ------- -------
------- ------- ------- ------- -------
TOTAL RETURN (a):................................. 10.62% 7.68% 10.82% 4.61% 8.21%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)................... $57,049 $45,401 $45,401 $47,838 $45,362
Average net assets (000).......................... $50,154 $44,439 $46,521 $46,246 $30,515
Ratios to average net assets:
Expenses, including distribution fees........... 1.46%(b) 1.46%(b) 1.32%(b) 0.83%(b) 0.15%(b)
Expenses, excluding distribution fees........... 0.96%(b) 0.96%(b) 0.82%(b) 0.33%(b) 0.05%(b
Net investment income........................... 4.69%(b) 5.01%(b) 5.52%(b) 6.03%(b) 6.59%(b)
Portfolio turnover rate........................... 22% 78% 128% 91% 135%
</TABLE>
- -----------------
(a) 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.
(b) Net of expense subsidy, fee waivers and distribution fee deferrals.
See "Manager" in the Statement of Additional Information.
15
<PAGE>
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH OF THE INDICATED PERIODS)
(INTERMEDIATE SERIES - CLASS C SHARES)
The following financial highlights, with respect to the fiscal years ended
April 30, 1997 and 1998 have been audited by Price Waterhouse LLP, independent
accountants, and by Deloitte & Touche LLP, independent auditors, for the year
ended April 30, 1996 and the period August 1, 1994 through April 30, 1995. Each
of the respective reports by Price Waterhouse LLP and Deloitte & Touche LLP on
such financial highlights were unqualified. This information should be read in
conjunction with the financial statements and notes thereto, which appear in the
Statement of Additional Information. The financial highlights contain selected
data for a Class C share of beneficial interest outstanding, total return,
ratios to average net assets and other supplemental data for the periods
indicated. The information is based on data contained in the financial
statements. Further performance information is contained in the annual report,
which may be obtained without charge. See "Shareholder Guide--Shareholder
Services--Reports to Shareholders."
<TABLE>
<CAPTION>
INTERMEDIATE SERIES
-----------------------------------------------------------------
CLASS C
-----------------------------------------------------------------
YEAR ENDED APRIL 30, AUGUST 1, 1994(a)
---------------------------------------- THROUGH APRIL 30,
1998 1997 1996 1995
---------- ---------- ---------- --------------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.............. $ 10.59 $ 10.65 $ 10.45 $ 10.54
---------- ---------- ---------- ------
INCOME FROM INVESTMENT OPERATIONS
Net investment income............................. .36(d) .39(d) .40(d) .35(d)
Net realized and unrealized gain (loss) on
investment transactions......................... .28 (.05) .20 (.08)
---------- ---------- ---------- ------
Total from investment operations................ .64 .34 .60 .27
---------- ---------- ---------- ------
LESS DISTRIBUTIONS
Dividends from net investment income.............. (.36) (.39) (.40) (.35)
Distributions in excess of net investment
income.......................................... -- (.01) -- (.01)
Distributions from capital gains.................. (.06) -- -- --
---------- ---------- ---------- ------
Total distributions............................... (.42) (.40) (.40) (.36)
---------- ---------- ---------- ------
Net asset value, end of period.................... $ 10.81 $ 10.59 $ 10.65 $ 10.45
---------- ---------- ---------- ------
---------- ---------- ---------- ------
TOTAL RETURN (b):................................. 6.07% 3.17% 5.79% 2.14%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)................... $ 449 $ 257 $ 225 $ 167
Average net assets (000).......................... $ 381 $ 149 $ 197 $ 28
Ratios to average net assets:
Expenses, including distribution fees........... 1.96%(d) 1.80%(d) 1.81%(d) 1.81%(c)(d)
Expenses, excluding distribution fees........... 1.21%(d) 1.05%(d) 1.06%(d) 1.06%(c)(d)
Net investment income........................... 3.33%(d) 3.65%(d) 3.71%(d) 4.34%(c)(d)
Portfolio turnover rate........................... 54% 46% 35% 30%
</TABLE>
- -----------------
(a) Commencement of offering of Class C shares.
(b) Total return does not consider the effects of sales loads. Total
return is calculated assuming a purchase of shares on the first day
and a sale on the last day of each period reported and includes
reinvestment of dividends and distributions. Total returns for
periods of less than a full year are not annualized.
(c) Annualized.
(d) Net of management fee waiver. See "Manager" in the Statement of
Additional Information.
16
<PAGE>
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD INDICATED)
(INTERMEDIATE SERIES - CLASS Z SHARES)
The following financial highlights for the Class Z shares for the fiscal year
ended April 30, 1998 and for the period September 1996 through April 30, 1997
have been audited by Price Waterhouse LLP, independent accountants, whose report
thereon was unqualified. This information should be read in conjunction with the
financial statements and the notes thereto, which appear in the Statement of
Additional Information. The financial highlights contain selected data for a
Class Z share of common stock outstanding, total return, ratios to average net
assets and other supplemental data for the period indicated. This information
has been determined based on data contained in the financial statements. Further
performance information is contained in the annual report, which may be obtained
without charge. See "Shareholder Guide--Shareholder Services--Reports to
Shareholders."
<TABLE>
<CAPTION>
INTERMEDIATE SERIES
----------------------------------------
CLASS Z
----------------------------------------
SEPTEMBER 16,
1996(a)
YEAR ENDED THROUGH
APRIL 30, 1998 APRIL 30, 1997
-------------- --------------------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period....................................... $ 10.59 $ 10.63
------ ------
INCOME FROM INVESTMENT OPERATIONS
Net investment income...................................................... .44(d) .31(d)
Net realized and unrealized gain (loss) on investment transactions......... .28 (.03)
------ ------
Total from investment operations........................................... .72 .28
------ ------
LESS DISTRIBUTIONS
Dividends from net investment income....................................... (.44) (.31)
Distributions in excess of net investment income........................... -- (.01)
Distributions from capital gains (.06) --
------ ------
Total distributions........................................................ (.50) (.32)
------ ------
Net asset value, end of period............................................. $ 10.81 $ 10.59
------ ------
------ ------
TOTAL RETURN(b):........................................................... 6.86% 2.50%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)............................................ $ 1,194 $ 246
Average net assets (000)................................................... $ 447 $ 63
Ratios to average net assets:
Expenses................................................................. 1.21%(d) 1.05%(c)(d)
Net investment income.................................................... 4.09%(d) 4.65%(c)(d)
Portfolio turnover rate.................................................... 54% 46%
</TABLE>
- -------------
(a) Commencement of offering of Class Z shares.
(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 the period reported and includes reinvestment of
dividends and distributions. Total returns for periods of less than a
full year are not annualized.
(c) Annualized.
(d) Net of management fee waiver. See "Manager" in the Statement of
Additional Information.
17
<PAGE>
HOW THE FUND INVESTS
INVESTMENT OBJECTIVES AND POLICIES
THE FUND IS COMPRISED OF THREE SEPARATE DIVERSIFIED PORTFOLIOS--THE HIGH
INCOME SERIES, THE INSURED SERIES AND THE INTERMEDIATE SERIES--EACH OF WHICH IS
MANAGED INDEPENDENTLY. THE INVESTMENT OBJECTIVES OF THE SERIES ARE AS FOLLOWS:
(i) THE OBJECTIVE OF THE HIGH INCOME SERIES IS TO PROVIDE THE MAXIMUM AMOUNT OF
INCOME THAT IS ELIGIBLE FOR EXCLUSION FROM FEDERAL INCOME TAXES, (ii) THE
OBJECTIVE OF THE INSURED SERIES IS TO PROVIDE THE MAXIMUM AMOUNT OF INCOME THAT
IS ELIGIBLE FOR EXCLUSION FROM FEDERAL INCOME TAXES CONSISTENT WITH THE
PRESERVATION OF CAPITAL AND (iii) THE OBJECTIVE OF THE INTERMEDIATE SERIES IS TO
PROVIDE A HIGH LEVEL OF INCOME THAT IS ELIGIBLE FOR EXCLUSION FROM FEDERAL
INCOME TAXES CONSISTENT WITH THE PRESERVATION OF CAPITAL. THERE CAN BE NO
ASSURANCE THAT SUCH OBJECTIVES WILL BE ACHIEVED. See "Investment Objectives and
Policies" in the Statement of Additional Information. Although each Series will
seek income that is eligible for exclusion from federal income taxes, a portion
of the dividends and distributions paid by each Series (and, in particular, the
High Income Series) may be treated as a preference item for purposes of the
alternative minimum tax. See "Taxes, Dividends and Distributions."
As with an investment in any mutual fund, an investment in any Series of this
Fund can decrease in value and you can lose money.
EACH SERIES' INVESTMENT OBJECTIVE IS A FUNDAMENTAL POLICY AND, THEREFORE, MAY
NOT BE CHANGED WITHOUT THE APPROVAL OF THE HOLDERS OF A MAJORITY OF THE
OUTSTANDING VOTING SECURITIES OF THE SERIES AS DEFINED IN THE INVESTMENT COMPANY
ACT OF 1940, AS AMENDED (THE INVESTMENT COMPANY ACT). POLICIES OF THE SERIES
THAT ARE NOT FUNDAMENTAL MAY BE MODIFIED BY THE TRUSTEES.
EACH SERIES PURSUES ITS INVESTMENT OBJECTIVE THROUGH THE SEPARATE INVESTMENT
POLICIES DESCRIBED BELOW. These policies differ with respect to the maturity and
quality of portfolio securities in which a Series may invest and can affect the
yield for each Series and the degree of market risk and credit risk to which
each Series is subject.
EACH SERIES WILL SEEK TO ACHIEVE ITS INVESTMENT OBJECTIVE BY INVESTING IN A
PORTFOLIO OF OBLIGATIONS ISSUED BY OR ON BEHALF OF STATES, TERRITORIES AND
POSSESSIONS OF THE UNITED STATES AND THE DISTRICT OF COLUMBIA AND THEIR
POLITICAL SUBDIVISIONS, AGENCIES AND INSTRUMENTALITIES, THE INTEREST ON WHICH IS
GENERALLY ELIGIBLE FOR EXCLUSION FROM FEDERAL INCOME TAXATION (MUNICIPAL
OBLIGATIONS OR MUNICIPAL SECURITIES). THE PORTFOLIO SECURITIES HELD BY EACH OF
THE SERIES WILL VARY WITH RESPECT TO YIELD, MARKET PRICE VOLATILITY AND QUALITY.
Generally, municipal obligations with longer maturities produce higher yields
and are subject to greater price fluctuations as a result of changes in interest
rates (market risk) than municipal obligations with shorter maturities. The
prices of municipal obligations generally vary inversely with interest rates. In
addition, lower rated municipal obligations typically provide a higher yield
than higher rated municipal obligations of similar maturity. However, lower
rated municipal obligations are also subject to a greater degree of risk with
respect to the ability of the issuer to meet the principal and interest payments
on the obligations (credit risk) and may also be subject to greater price
volatility due to the market perceptions of the creditworthiness of the issuer.
Insurance policies may be obtained to insure against credit risk, but not
against market risk. From time to time, a Series may own the majority of a
municipal obligation. Such majority-owned holdings may present additional market
and credit risks.
Municipal securities include bonds and notes issued by or on behalf of states,
territories and possessions of the United States and their political
subdivisions, agencies and instrumentalities, the interest on which is generally
eligible for exclusion from federal income tax. Municipal bonds are typically
issued to obtain funds for various public purposes, including the construction
of
18
<PAGE>
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. Municipal notes generally are used to finance short-term
capital needs and typically have maturities of one year or less.
DURING NORMAL MARKET CONDITIONS, THE ASSETS OF EACH SERIES WILL BE INVESTED SO
THAT IT WILL HAVE AT LEAST 80% OF ITS NET ASSETS INVESTED IN MUNICIPAL
OBLIGATIONS. However, when the Fund's investment adviser believes that market
conditions warrant a temporary defensive investment posture or when necessary to
meet large redemptions, a Series may hold more than 20% of its net assets in
cash, cash equivalents or investment grade taxable obligations, including
obligations that are generally exempt from state, but not federal, taxation.
Each Series may invest in municipal cash equivalents, such as floating rate
demand notes, municipal commercial paper and general obligation and revenue
notes, or in taxable cash equivalents, such as certificates of deposit, bankers'
acceptances and time deposits or other short-term taxable investments, such as
repurchase agreements. 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 certain conditions are met.
THE HIGH INCOME SERIES
THE HIGH INCOME SERIES WILL INVEST PRIMARILY IN MUNICIPAL OBLIGATIONS WHICH
ARE RATED B OR BETTER BY MOODY'S INVESTORS SERVICE (MOODY'S) OR STANDARD &
POOR'S RATINGS GROUP (S&P) OR A SIMILAR NATIONALLY RECOGNIZED STATISTICAL RATING
ORGANIZATION (NRSRO) AND WHICH GENERALLY HAVE MATURITIES IN EXCESS OF TEN YEARS
AT THE TIME OF PURCHASE, ALTHOUGH THE SERIES ALSO WILL INVEST IN MUNICIPAL
OBLIGATIONS HAVING MATURITIES RANGING FROM ONE YEAR TO TEN YEARS, PROVIDED THAT
THE WEIGHTED AVERAGE MATURITY OF THE SERIES' INVESTMENT PORTFOLIO REMAINS WITHIN
THE FIFTEEN TO THIRTY YEAR RANGE. 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 as well. Securities
rated Ba or BB or lower by Moody's or S&P, respectively, are generally
considered to be predominantly speculative with respect to the issuer's capacity
to pay interest and repay principal and are commonly referred to as junk bonds.
While such securities may have some quality and protective characteristics,
those are outweighed by large uncertainties or major risk exposures to adverse
conditions. See "Risk Factors Relating to Investing in High Yield Securities"
below and "Description of Security Ratings" in the Appendix. Subsequent to its
purchase by the Series, a municipal obligation may be assigned a lower rating or
cease to be rated. Such an event would not require the elimination of the issue
from the portfolio, but the investment adviser will consider such an event in
determining whether the Series should continue to hold the security in its
portfolio.
THE SERIES MAY ALSO INVEST IN MUNICIPAL SECURITIES WHICH ARE NOT RATED IF,
BASED UPON A CREDIT ANALYSIS BY THE FUND'S INVESTMENT ADVISER, THE INVESTMENT
ADVISER BELIEVES THAT SUCH SECURITIES ARE OF COMPARABLE QUALITY TO RATED
MUNICIPAL SECURITIES IN WHICH THE SERIES MAY INVEST. The High Income Series
normally can be expected to offer the highest yields of the three Series, but it
will also be subject to the greatest market and credit risk.
THE SERIES ALSO MAY INVEST IN SHORT-TERM MUNICIPAL OBLIGATIONS (I.E., CASH
EQUIVALENTS) THAT ARE, AT THE TIME OF PURCHASE, RATED WITHIN THE FOUR HIGHEST
QUALITY GRADES AS DETERMINED BY EITHER MOODY'S (CURRENTLY MIG 1, MIG 2, MIG 3
AND MIG 4 FOR NOTES AND P-1, P-2 AND P-3 FOR COMMERCIAL PAPER) OR S&P (CURRENTLY
A-1, A-2 AND A-3 FOR COMMERCIAL PAPER AND SP-1 AND SP-2 FOR NOTES). See "Other
Investments and Policies--General" below.
The Series may also invest up to 10% of its total assets in debt securities of
financially troubled and operationally troubled obligors (distressed
securities). Financially troubled obligors include obligors involved in
bankruptcy or reorganization proceedings or financial restructurings or
otherwise in default on their obligations. Operationally troubled obligors are
ones experiencing poor operating results that may have severely depressed
earnings or have special competitive or product obsolescence problems.
The Series is permitted to invest in defaulted securities and in low quality
debt securities having a rating of D or better as determined by S&P or Moody's
or having a comparable rating determined by another NRSRO, or in unrated
securities which, in the opinion of the investment adviser, are of equivalent
quality. See "Risk Factors Relating to Investing in High Yield Securities"
19
<PAGE>
below and the "Description of Security Ratings" in the Appendix. Such
lower-quality debt securities are considered to have speculative
characteristics, and involve greater risk of default or price changes due to
changes in the obligor's creditworthiness, or they may already be in default.
The market prices of these securities may fluctuate more than higher-quality
securities and may decline significantly in periods of general or regional
economic difficulty.
The Subadviser maintains a fixed-income research group which the Series'
portfolio manager may consult in managing the portfolio and in researching
financially troubled and operationally troubled obligors. The Series' portfolio
manager reviews on an ongoing basis financially troubled and operationally
troubled obligors, including prospective purchases and portfolio holdings of the
Series. The portfolio manager has broad access to research and financial
reports, data retrieval services and industry analysts.
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 AND THE
MARKET PERCEPTION OF THE CREDITWORTHINESS OF THE ISSUER (MARKET RISK). Lower
rated (I.E., high yield) securities or non-rated securities of comparable
quality are more likely to react to developments affecting market and credit
risk than are more highly rated securities, which react primarily to movements
in the general level of interest rates. The investment adviser considers both
credit risk and market risk in making investment decisions for the Series.
Investors should carefully consider the relative risks of investing in high
yield securities and understand that such securities are not generally meant for
short-term trading.
The amount of high yield securities outstanding has proliferated recently in
conjunction with the decline in creditworthiness of many obligors on municipal
debt, particularly health care providers and certain governmental bodies. An
economic downturn could severely affect the ability of highly leveraged issuers
to service their debt obligations or to repay their obligations upon maturity.
Furthermore, changes in economic conditions and other circumstances are more
likely to lead to a weakened capacity to make principal and interest payments
than in the case of higher grade bonds. 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.
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.
Debt rated Ba, B, Caa, Ca and C by Moody's, and debt rated BB, B, CCC, CC and
C by S&P is regarded by the rating agency, on balance, as predominantly
speculative with respect to the issuer's capacity to pay interest and repay
principal in accordance with the terms of the obligation. Among junk bonds,
Ba/BB indicates the lowest degree of speculation and C/D 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. Debt rated C by S&P is the lowest rated debt
that is not in default as to principal or interest and such issues so rated can
be regarded as having extremely poor prospects of ever attaining any real
investment standing. Such securities are also generally considered to be subject
to greater risk than securities with higher ratings with regard to a
deterioration of general economic conditions. Debt rated D by S&P is in payment
default. Moody's does not have a D rating. See the "Description of Security
Ratings" in the Appendix.
Ratings of fixed-income securities represent the rating agency's opinion
regarding their credit quality and are not a guarantee of quality. Rating
agencies attempt to evaluate the safety of principal and interest payments and
do not evaluate the risks of fluctuations in market value. Also, rating agencies
may fail to make timely changes in credit ratings in response to subsequent
events, so that an issuer's current financial condition may be better or worse
than a rating indicated.
20
<PAGE>
From time to time proposals have been introduced to limit the use, or tax and
other advantages, of municipal securities which, if enacted, could adversely
affect the Series' NAV and investment practices. Such proposals could also
adversely affect the secondary market for high yield municipal securities, the
financial condition of issuers of these securities and the value of outstanding
high yield municipal securities. Reevaluation of the 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.
LOWER RATED OR UNRATED DEBT OBLIGATIONS ALSO PRESENT RISKS BASED ON PAYMENT
EXPECTATIONS. If an issuer calls the obligation for redemption, the Series may
have to replace the security with a lower yielding security, resulting in a
decreased return for investors. If the Series experiences unexpected net
redemptions, it may be forced to sell its higher 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.
During the year ended April 30, 1998, the monthly dollar weighted average
ratings of the debt obligations held by the Series, expressed as a percentage of
the Series' total investments, were as follows:
<TABLE>
<CAPTION>
PERCENTAGE OF TOTAL
RATINGS INVESTMENTS
------------ -------------------
<S> <C>
AAA/Aaa 26.7%
AA/Aa 4.9%
A/A 0.8%
BBB/Baa 10.6%
BB/Ba 4.5%
B/B 1.9%
CCC/Caa 0.0%
Unrated
AAA/Aaa 2.7%
AA/Aa 0.0%
A/A 0.3%
BBB/Baa 3.0%
BB/Ba 14.1%
B/B 27.8%
CCC/Caa 0.5%
D 2.2%
</TABLE>
THE INSURED SERIES
THE INSURED SERIES WILL INVEST PRIMARILY IN MUNICIPAL OBLIGATIONS WHICH ARE
(i) INSURED BY AN ENTITY WHOSE CLAIMS-PAYING ABILITY AT THE TIME OF PURCHASE IS
RATED Aaa BY MOODY'S OR AAA BY S&P, OR A SIMILAR NRSRO, SO THAT THE OBLIGATION
IS RATED AAA OR Aaa OR MEETS THE ELIGIBILITY CRITERIA IMPOSED BY SUCH INSURERS,
(ii) RATED Aaa OR AAA BY MOODY'S OR S&P, RESPECTIVELY, OR A SIMILAR NRSRO (OR,
IN THE CASE OF NOTES OR VARIABLE RATE SECURITIES, A-1, P-1, MIG 1 OR SP-1),
BASED ON THE CREDIT OF THE ISSUER OR (iii) BACKED BY THE FULL FAITH AND CREDIT
OF THE U.S. GOVERNMENT. The Series may also invest up to 5% of its total assets
in municipal obligations which are rated A/A or Aa/AA by Moody's or S&P,
respectively, or a similar NRSRO. See "Description of Security Ratings" in the
Appendix. The Series may also invest in municipal securities which are not rated
if, based upon a credit analysis by the Fund's investment adviser, the
investment adviser believes that such securities are of comparable quality to
other municipal securities that the Series may purchase.
UNDER NORMAL CONDITIONS, AT LEAST 70% OF THE SERIES' TOTAL ASSETS WILL CONSIST
OF INSURED OBLIGATIONS. AS OF APRIL 30, 1998, APPROXIMATELY 90% OF THE SERIES'
TOTAL ASSETS WERE OBLIGATIONS INSURED BY A MUNICIPAL BOND INSURER. This
insurance may be provided either (i) under a new issue insurance policy obtained
by the issuer or underwriter of a bond or note or
21
<PAGE>
(ii) under a secondary market insurance policy on a particular bond or note
purchased either by the Series or a previous bondholder or noteholder. See
"Insurance" below. As noted above, the Series will acquire insurance only from,
and purchase municipal bonds and notes insured by, insurers whose claims-paying
ability is rated AAA or Aaa at the time of purchase. Changes in the financial
condition of an insurer could result in a subsequent reduction or withdrawal of
this rating. In each case, the insurance policies protect only against the
timely payment of principal and interest on the insured municipal bonds and
notes. The price of the municipal obligations, which may fluctuate due to
changes in interest rates generally or factors affecting the credit of the
insurer, and the stability of the Series' NAV are not insured.
INSURANCE. The Series may at times purchase secondary market insurance on
municipal bonds and notes which it holds or acquires. Secondary market insurance
would be reflected in the market value of the municipal obligation and may
enable the Series to dispose of a defaulted obligation at a price similar to
that of comparable municipal obligations which are not in default.
Insurance is not a substitute for the basic credit of an issuer, but
supplements the existing credit and provides additional security therefor. While
insurance coverage for the municipal bonds and notes held by the Insured Series
reduces credit risk by providing that the insurance company will make timely
payment of principal and interest if the issuer defaults on its obligation to
make such payment, it does not afford protection against fluctuation in the
price, I.E., the market value, of the municipal obligations caused by changes in
interest rates and other factors, nor in turn against fluctuations in the NAV of
the shares of the Insured Series.
The ratings of insured municipal obligations depend, 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. It is anticipated that,
under current market conditions, a great majority of the municipal obligations
held by the Insured Series will be insured by the following entities, among
others: MBIA Insurance Corporation, AMBAC Indemnity Corporation, Financial
Guaranty Insurance Company and Financial Security Assurance Inc. S&P rates
securities insured by all of these companies AAA. Moody's rates securities
insured by all of these companies Aaa. The Insured Series may, from time to
time, purchase municipal securities insured by other entities or acquire
insurance coverage for individual uninsured municipal securities directly from
another insurer provided any such entity has a claims-paying ability rated AAA
or Aaa by S&P or Moody's, respectively. See "Investment Objectives and
Policies--The Insured Series" in the Statement of Additional Information for
additional information concerning the insurers.
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 the 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.
THE INTERMEDIATE SERIES
THE INTERMEDIATE SERIES WILL INVEST PRIMARILY IN MUNICIPAL OBLIGATIONS WITH
MATURITIES BETWEEN 3 AND 15 YEARS AND WILL HAVE A DOLLAR-WEIGHTED AVERAGE
PORTFOLIO MATURITY OF MORE THAN 3 AND LESS THAN 10 YEARS. ALL OF THE MUNICIPAL
OBLIGATIONS HELD BY THE INTERMEDIATE SERIES WILL BE RATED AT LEAST Baa BY
MOODY'S OR BBB BY S&P OR A SIMILAR NRSRO AT THE TIME OF PURCHASE OR BE NON-RATED
OBLIGATIONS OF COMPARABLE QUALITY IN THE OPINION OF THE FUND'S INVESTMENT
ADVISER. Subsequent to its purchase by the Series, a municipal obligation may be
assigned a lower rating or cease to be rated. Such an event would not require
the elimination of the issue from the portfolio, but the investment adviser will
consider such an event in determining whether the Series should continue to hold
the security in its portfolio. Under normal circumstances, at least 60% of the
municipal obligations purchased by the Series will be rated A or better by
Moody's or S&P or a similar NRSRO. See "Description of Security Ratings" in the
Appendix.
For purposes of determining the dollar-weighted average portfolio maturity of
the Series' portfolio, the maturity of a municipal security will be its ultimate
maturity, unless it is probable that the issuer of the security will take
advantage of maturity-shortening
22
<PAGE>
devices such as a call, refunding or redemption provision, in which case the
maturity date will be the date on which it is probable that the security will be
called, refunded or redeemed. If the municipal security includes the right to
demand payment, the maturity of the security for purposes of determining the
Series' dollar-weighted average portfolio maturity will be the period remaining
until the principal amount of the security can be recovered by exercising the
right to demand payment.
GENERALLY, THE YIELD EARNED ON LONGER-TERM MUNICIPAL OBLIGATIONS IS GREATER
THAN THAT EARNED ON SIMILAR OBLIGATIONS WITH SHORTER MATURITIES. HOWEVER,
OBLIGATIONS WITH LONGER MATURITIES ARE SUBJECT TO GREATER MARKET RISK. Given a
specific change in the level of interest rates, the value of longer-term
obligations will fluctuate relatively more than the value of shorter-term
obligations. For example, 30-year municipal obligations typically yield 60-90
basis points (.60%-.90%) more than 10-year obligations and have 60-70% more
price volatility (market risk) than 10-year obligations.
THE INTERMEDIATE SERIES INTENDS TO INVEST IN LONGER-TERM, HIGHER YIELDING
OBLIGATIONS AND REDUCE THE GREATER MARKET RISK OF SUCH OBLIGATIONS THROUGH THE
USE OF FINANCIAL FUTURES CONTRACTS. SPECIFICALLY, THE SERIES WILL INVEST IN
MUNICIPAL OBLIGATIONS WITH MATURITIES OF BETWEEN 5 AND 30 YEARS AND
SIMULTANEOUSLY HEDGE THE PRICE VOLATILITY OF SUCH OBLIGATIONS THROUGH THE SALE
OF FUTURES CONTRACTS. RATHER THAN HEDGING THE MUNICIPAL OBLIGATION ENTIRELY, THE
SERIES WILL SELL FUTURES CONTRACTS IN SUFFICIENT AMOUNTS SO THAT THE
DOLLAR-WEIGHTED AVERAGE MATURITY OF THE COMBINED MUNICIPAL OBLIGATION/FUTURES
POSITION WILL BE MORE THAN 3 AND LESS THAN 10 YEARS. IN THIS MANNER, THE
INVESTMENT ADVISER WILL CREATE A SYNTHETIC OBLIGATION THROUGH THE CONSTRUCTION
OF A PARTIALLY HEDGED LONGER-TERM OBLIGATION POSITION.
The Fund's investment adviser intends to create such synthetic obligation
positions when, in its opinion, the Series will realize one or more of the
following benefits compared to buying municipal obligations with shorter
maturities: (a) greater market liquidity; (b) lower transaction costs; (c)
greater expected capital appreciation or enhanced preservation of capital; or
(d) higher yields.
In the municipal securities market, most new issues are structured with many
serial maturities that are relatively small in principal amount and one or
several longer-term maturities that are relatively large in principal amount.
Therefore, long-term municipal obligations typically have greater liquidity and
the associated transaction costs are relatively less than obligations with
maturities of 3 to 15 years.
It is expected that synthetic obligation positions will often provide greater
returns than actual intermediate maturity municipal obligations. This can occur
when interest rate futures contracts are relatively overpriced in relation to
the current prices of municipal obligations, so that the sale of the futures
contracts, as part of a synthetic position, would be advantageous to the Series.
Synthetic positions can also be more attractive to the Series when the
investment adviser expects yields on longer-term municipal obligations to
decrease more (or increase less) than yields on medium-term municipal
obligations. If such expectations are correct, the net capital appreciation of
the synthetic obligation position should exceed (or the price decline be less
than) that of an actual intermediate-term municipal obligation.
THERE IS NO ASSURANCE THAT THE SYNTHETIC OBLIGATION POSITION WILL TRADE LIKE
AN INTERMEDIATE-TERM MUNICIPAL OBLIGATION. ANY USE OF FUTURES CONTRACTS INVOLVES
THE RISK OF IMPERFECT CORRELATION IN MOVEMENTS IN THE PRICE OF THE FUTURES
CONTRACTS AND MOVEMENTS IN THE PRICE OF THE SECURITY BEING HEDGED. FURTHERMORE,
THE SERIES' ABILITY TO CREATE SYNTHETIC OBLIGATIONS IS SUBJECT TO VARIOUS OTHER
LIMITATIONS. See "Hedging Strategies--Futures Contracts and Options Thereon"
below.
THE SERIES ALSO MAY USE FUTURES CONTRACTS TO HEDGE AGAINST OVERALL MARKET RISK
OF THE ENTIRE PORTFOLIO, as described under "Hedging Strategies--Futures
Contracts and Options Thereon" below.
23
<PAGE>
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 and to take advantage of investment opportunities 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 Fund will take prompt action to reduce its
borrowings. If the 300% asset coverage should decline as a result of market
fluctuations or other reasons, the Fund 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.
If a Series borrows to invest in securities, any investment gains made on the
securities in excess of interest paid on the borrowing will cause the NAV of the
shares to rise faster than would otherwise be the case. On the other hand, if
the investment performance of the additional securities purchased fails to cover
their cost (including any interest paid on the money borrowed) to the Series,
the Series' NAV will decrease faster than would otherwise be the case. This is
the speculative factor known as leverage. Money borrowed for leveraging will be
subject to interest costs which may or may not be recovered by appreciation of
the securities purchased and may exceed the income from the securities
purchased. In addition, the Fund may be required to maintain minimum average
balances in connection with such borrowing or pay a commitment fee to maintain a
line of credit which would increase the cost of borrowing over the stated
interest rate.
HEDGING STRATEGIES
FUTURES CONTRACTS AND OPTIONS THEREON
EACH SERIES IS AUTHORIZED TO PURCHASE AND SELL CERTAIN DERIVATIVES, INCLUDING
FINANCIAL FUTURES CONTRACTS (FUTURES CONTRACTS) AND OPTIONS THEREON FOR THE
PURPOSE OF ATTEMPTING TO HEDGE ITS INVESTMENT IN MUNICIPAL OBLIGATIONS AGAINST
FLUCTUATIONS IN VALUE CAUSED BY CHANGES IN PREVAILING MARKET INTEREST RATES AND
ATTEMPTING TO HEDGE AGAINST INCREASES IN THE COST OF SECURITIES THE SERIES
INTENDS TO PURCHASE. A SERIES, AND THUS AN INVESTOR, MAY LOSE MONEY THROUGH
UNSUCCESSFUL USE OF THESE STRATEGIES. In that regard, the Intermediate Series
may sell futures contracts to create synthetic positions by partially hedging
longer-term obligation positions. See "Investment Objectives and Policies--The
Intermediate Series" above. The successful use of futures contracts and options
thereon by a Series involves additional transaction costs, is subject to various
risks and depends upon the investment adviser's ability to predict the direction
of the market and interest rates.
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.
EACH SERIES INTENDS TO ENGAGE IN FUTURES CONTRACTS AND OPTIONS THEREON AS A
HEDGE AGAINST CHANGES, RESULTING FROM MARKET CONDITIONS, IN THE VALUE OF
SECURITIES WHICH ARE HELD IN THE SERIES' PORTFOLIO OR WHICH THE SERIES INTENDS
TO PURCHASE, IN ACCORDANCE WITH THE RULES AND REGULATIONS OF THE COMMODITY
FUTURES TRADING COMMISSION (THE CFTC). The Series also 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 Fund's 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
24
<PAGE>
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.
Currently, futures contracts are available on several types of fixed-income
securities, including U.S. Treasury Bonds and Notes, Government National
Mortgage Association modified pass-through mortgage-backed securities,
three-month U.S. Treasury Bills and bank certificates of deposit. Futures
contracts are also available on a municipal bond index, based on THE BOND BUYER
Municipal Bond Index, an index of 40 actively traded municipal bonds. Each
Series may also engage in transactions in other futures contracts that become
available, from time to time, in other fixed-income securities or municipal bond
indices and in other options on such contracts if the investment adviser
believes such contracts and options would be appropriate for hedging investments
in municipal obligations.
THERE CAN BE NO ASSURANCE THAT VIABLE MARKETS WILL CONTINUE OR THAT A LIQUID
SECONDARY MARKET WILL EXIST TO TERMINATE ANY PARTICULAR FUTURES CONTRACT AT ANY
SPECIFIC TIME. If it is not possible to close a futures position entered into by
a Series, the Series will continue to be required to make daily cash payments of
variation margin in the event of adverse price movements. In such a situation,
if the Series had insufficient cash, it might have to sell portfolio securities
to meet daily variation margin requirements at a time when it might be
disadvantageous to do so. The inability to close futures positions also could
have an adverse impact on the ability of a Series to hedge effectively. There is
also a risk of loss by a Series of margin deposits in the event of bankruptcy of
a broker with whom the Series has an open position in a futures contract.
THE SUCCESSFUL USE OF FUTURES CONTRACTS AND OPTIONS THEREON BY A SERIES IS
SUBJECT TO VARIOUS ADDITIONAL RISKS. Any use of futures transactions involves
the risk of imperfect correlation in movements in the price of futures contracts
and movements in interest rates and, in turn, the prices of the securities that
are the subject of the hedge. If the price of the futures contract moves more or
less than the price of the security that is the subject of the hedge, the Series
will experience a gain or loss that will not be completely offset by movements
in the price of the security. The risk of imperfect correlation is greater where
the securities underlying futures contracts are taxable securities (rather than
municipal securities), are issued by companies in different market sectors or
have different maturities, ratings or geographic mixes than the security being
hedged. In addition, the correlation may be affected by additions to or
deletions from the index which serves as the basis for a futures contract.
Finally, if the price of the security that is subject to the hedge were to move
in a favorable direction, the advantage to the Series would be partially offset
by the loss incurred on the futures contract.
RISKS OF HEDGING STRATEGIES
PARTICIPATION IN THE OPTIONS OR FUTURES MARKETS INVOLVES INVESTMENT RISKS AND
TRANSACTION COSTS TO WHICH A SERIES WOULD NOT BE SUBJECT ABSENT THE USE OF THESE
STRATEGIES. A SERIES, AND THUS AN INVESTOR, MAY LOSE MONEY THROUGH UNSUCCESSFUL
USE OF THESE STRATEGIES. If the investment adviser's prediction of movements in
the direction of the securities and interest rate markets is inaccurate, the
adverse consequences to the Fund may leave the Fund in a worse position than if
such strategies were not used. Risks inherent in the use of futures contracts
and options thereon include (1) dependence on the investment adviser's ability
to predict correctly movements in the direction of interest rates and securities
prices or the movement in indicies; (2) imperfect correlation between the price
of futures contracts and options thereon and movements in the prices of the
securities 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 Fund 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 Fund to maintain cover or to segregate securities
in connection with hedging transactions. See "Investment Objectives and
Policies" in the Statement of Additional Information.
25
<PAGE>
OTHER INVESTMENTS AND POLICIES
GENERAL
EACH SERIES MAY INVEST MORE THAN 5% OF ITS ASSETS IN FLOATING RATE AND
VARIABLE RATE SECURITIES, INCLUDING PARTICIPATION INTERESTS THEREIN. Floating
and variable 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. These securities
also allow the holder to demand payment of the obligation on short notice at par
plus accrued interest, which amount may be more or less than the amount the
Series paid for them. Variable rate securities provide for a specified periodic
adjustment in the interest rate. The interest rate on floating rate securities
changes whenever there is a change in the designated base interest rate.
Each Series may also invest in inverse floaters. An inverse floater is a debt
instrument with a floating or variable interest rate that moves in the opposite
direction of the interest rate on another security or the value of an index.
Changes in the interest rate on the other security or index inversely affect the
residual interest rate paid on the inverse floater, with the result that the
inverse floater's price will be considerably more volatile than that of a fixed
rate bond. The market for inverse floaters is relatively new.
Each Series may purchase a rating from an NRSRO for non-rated securities. The
purchase of a rating is expected to enhance the value of the security for which
the rating is purchased. The cost of purchasing a rating is an expense of the
Series.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES
Each Series may purchase municipal obligations on a when-issued or delayed
delivery basis and may from time to time sell obligations on a delayed delivery
basis, in each case without limit. When municipal obligations are offered on a
when-issued or delayed delivery basis, the price and coupon rate are fixed at
the time the commitment to purchase is made, but delivery and payment for the
when-issued securities take place at a later date. During the period between
purchase and settlement, no interest accrues to the purchaser. In the case of
purchases by a Series, the price that the Series is required to pay on the
settlement date may be in excess of the market value of the municipal
obligations on that date. While securities may be sold prior to the settlement
date, each Series intends to purchase these securities with the purpose of
actually acquiring them unless a sale would be desirable for investment reasons.
At the time a Series makes the commitment to purchase a municipal obligation on
a when-issued basis, it will record the transaction and 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 the seller defaults in the sale, the Series could fail to realize
the appreciation, if any, that had occurred. Each Series will establish a
segregated account in which it will maintain cash or other liquid assets having
a value equal to or greater than the Series' purchase commitments.
As in the case of purchases, the price of the municipal obligations sold on a
delayed delivery basis is determined at the time of the commitment. The price
that a Series may be required to accept on the settlement date may be less than
the market value of the obligation on that date.
Each 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. The investment
adviser will monitor the liquidity, value, credit quality and delivery of the
security under the supervision of the Trustees.
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
26
<PAGE>
(E.G., schools, dormitories, office buildings or prisons) or the acquisition of
equipment. The facilities are typically used by the state or municipality
pursuant to a lease with a financing authority. Certain municipal lease
obligations may trade infrequently. Accordingly, the investment adviser will
monitor the liquidity of municipal lease obligations under the supervision of
the Trustees. See "Illiquid Securities" below.
LIQUIDITY PUTS
Each Series may purchase and exercise puts on municipal bonds and notes
without limit. Puts give the Series the right to sell the securities at a
specified exercise price on a specified date. Puts may be acquired to reduce the
volatility of the market value of the securities subject to the puts, but the
acquisition of the puts may involve an additional cost to the Series. See
"Investment Objectives and Policies" in the Statement of Additional Information.
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. Each Series participates in a
joint repurchase account with other investment companies managed by PIFM
pursuant to an order of the Commission.
SECURITIES OF OTHER INVESTMENT COMPANIES
Each Series may invest up to 10% of its total assets in securities of other
investment companies. To the extent that a Series does invest in securities of
other investment companies, shareholders of the Series may be subject to
duplicate management and advisory fees.
ILLIQUID SECURITIES
Each Series may hold up to 15% of its net assets in illiquid securities,
including repurchase agreements which have a maturity of longer than seven days,
securities with legal or contractual restrictions on resale (restricted
securities) and securities that are not readily marketable. 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. A Series' investment in Rule 144A securities could have the effect of
increasing illiquidity to the extent that qualified institutional buyers become,
for a limited time, uninterested in purchasing Rule 144A securities. See
"Investment Restrictions" in the Statement of Additional Information. Repurchase
agreements subject to demand are deemed to have a maturity equal to the
applicable notice period.
Municipal lease obligations will not be considered illiquid for purposes of
the each Series' 15% 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
27
<PAGE>
biannually, to appropriate funds for payment of the lease; (2) the general
credit quality of the municipality and the essentiality to the municipality of
the property covered by the lease; (3) in the case of unrated municipal lease
obligations, an analysis of factors similar to that performed by nationally
recognized statistical rating organizations in evaluating the credit quality of
a municipal lease obligation, including (i) whether the lease can be cancelled;
(ii) if applicable, what assurance there is that the assets represented by the
lease can be sold; (iii) the strength of the lessee's general credit (E.G., its
debt, administrative, economic and financial characteristics); (iv) the
likelihood that the municipality will discontinue appropriating funding for the
leased property because the property is no longer deemed essential to the
operations of the municipality (E.G., the potential for an event of
nonappropriation); (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.
SECURITIES LENDING
The Fund may lend its portfolio securities to brokers or dealers, banks or
other recognized institutional borrowers of securities, provided that the
borrower at all times maintains cash or other liquid assets or secures an
irrevocable letter of credit in favor of the Fund in an amount equal to at least
100%, determined daily, of the market value of the securities loaned which are
segregated pursuant to applicable regulations. During the time portfolio
securities are on loan, the borrower will pay the Fund an amount equivalent to
any dividend or interest paid on such securities and the Fund may invest the
cash collateral and earn additional income, or it may receive an agreed upon
amount of interest income from the borrower. As with any extensions of credit,
there are risks of delay in recovery and in some cases loss of rights in the
collateral should the borrower of the securities fail financially. The Fund will
not lend more than 33% of the value of its total assets. See "Investment
Objectives and Policies--Municipal Securities--Lending of Securities" in the
Statement of Additional Information. The Fund may pay reasonable administration
and custodial fees in connection with a loan.
PORTFOLIO TURNOVER
The Series do not expect to trade in securities for short-term gain. It is
anticipated that the annual portfolio turnover rate will not exceed 150%. The
portfolio turnover rate is calculated by dividing the lesser of sales or
purchases of portfolio securities by the average monthly value of a Series'
portfolio securities, excluding securities having a maturity at the date of
purchase of one year or less.
INVESTMENT RESTRICTIONS
Each Series is subject to certain investment restrictions which, like its
investment objective, constitute fundamental policies. Fundamental policies
cannot be changed without the approval of the holders of a majority of each
Series' outstanding voting securities, as defined in the Investment Company Act.
See "Investment Restrictions" in the Statement of Additional Information.
HOW THE FUND IS MANAGED
THE FUND HAS TRUSTEES WHO, IN ADDITION TO OVERSEEING THE ACTIONS OF THE FUND'S
MANAGER, SUBADVISER AND DISTRIBUTOR, AS SET FORTH BELOW, DECIDE UPON MATTERS OF
GENERAL POLICY. THE FUND'S MANAGER CONDUCTS AND SUPERVISES THE DAILY BUSINESS
OPERATIONS OF THE FUND. THE FUND'S SUBADVISER FURNISHES DAILY INVESTMENT
ADVISORY SERVICES.
For the fiscal year ended April 30, 1998, the total expenses as a percentage
of average net assets were .62%, 1.02%, 1.27% and .52% of the Class A, Class B,
Class C and Class Z shares, respectively, of the High Income Series, .69%,
1.09%, 1.34% and .60% of the Class A, Class B, Class C and Class Z shares,
respectively, of the Insured Series, and 1.31%, 1.71%, 1.96% and 1.21% of the
Class A, Class B, Class C and Class Z shares, respectively, of the Intermediate
Series. See "Financial Highlights."
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MANAGER
PRUDENTIAL INVESTMENTS FUND MANAGEMENT LLC (PIFM OR THE MANAGER), GATEWAY
CENTER THREE, 100 MULBERRY STREET, NEWARK, NEW JERSEY 07102-4077, IS THE MANAGER
OF THE FUND AND IS COMPENSATED FOR ITS SERVICES AT AN ANNUAL RATE OF .50 OF 1%
OF THE AVERAGE DAILY NET ASSETS OF EACH SERIES UP TO $1 BILLION AND .45 OF 1% OF
THE AVERAGE DAILY NET ASSETS OF EACH SERIES IN EXCESS OF $1 BILLION. PIFM is
organized in New York as a limited liability company. It is the successor to
Prudential Mutual Fund Management, Inc., which transferred its assets to PIFM in
September 1996. For the fiscal year ended April 30, 1998, PIFM received a
management fee of .45%, .48% and .48% of average daily net assets on behalf of
the High Income Series, Insured Series and Intermediate Series, respectively.
See "Manager" in the Statement of Additional Information.
PIFM may from time to time waive its management fee and subsidize operating
expenses of a Series. PIFM has agreed to waive 10% of its management fee
(approximately .05 of 1% of average net assets, as annualized), with respect to
the High Income Series. See "Fund Expenses." The Fund is not required to
reimburse PIFM for such fee waiver. Fee waivers and expense subsidies will
increase a Series' yield and total return. See "How the Fund Calculates
Performance."
As of May 31, 1998, PIFM served as the manager to 45 open-end investment
companies, constituting all of the Prudential Mutual Funds, and as manager or
administrator to 22 closed-end investment companies with aggregate assets of
approximately $65 billion.
UNDER THE MANAGEMENT AGREEMENT WITH THE FUND, PIFM MANAGES THE INVESTMENT
OPERATIONS OF EACH SERIES OF THE FUND AND ALSO ADMINISTERS THE FUND'S BUSINESS
AFFAIRS. See "Manager" in the Statement of Additional Information.
UNDER A SUBADVISORY AGREEMENT BETWEEN PIFM AND THE PRUDENTIAL INVESTMENT
CORPORATION (PIC), DOING BUSINESS AS PRUDENTIAL INVESTMENTS (PI, THE SUBADVISER
OR THE INVESTMENT ADVISER), THE SUBADVISER FURNISHES INVESTMENT ADVISORY
SERVICES IN CONNECTION WITH THE MANAGEMENT OF THE FUND AND IS REIMBURSED BY PIFM
FOR ITS REASONABLE COSTS AND EXPENSES INCURRED IN PROVIDING SUCH SERVICES. PIC's
address is Prudential Plaza, Newark, New Jersey 07102-3777. Under the Management
Agreement, 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 current portfolio manager of the High Income Series is Peter J. Allegrini,
a Managing Director of Prudential Investments, a business group of PIC. Mr.
Allegrini has managed the Series' portfolio since July 1994. From 1982 to 1986,
he was employed by Fidelity Investments as a senior bond analyst and, from 1986
to 1994, he was a portfolio manager, most recently of Fidelity Advisor High
Income Municipal Fund, and has been employed by PIC since 1994. Mr. Allegrini
has responsibility for the day-to-day management of the Series' portfolio. The
current portfolio manager of the Insured Series is Christian Smith. Mr. Smith
has responsibility for the day-to-day management of the Series' portfolio. He
has managed the Series' portfolio since October 1997 and has been employed by
PIC in various capacities since 1988. The current portfolio managers of the
Intermediate Series are Peter Allegrini and Mr. Diamond, who share
responsibility for the day-to-day management of the Series' portfolio. They have
managed the portfolio since October 1997. Mr. Diamond has been employed by PIC
in various capacities since 1993.
PIFM and PIC are indirect wholly-owned subsidiaries of The Prudential
Insurance Company of America (Prudential), a major diversified insurance and
financial services company.
DISTRIBUTOR
PRUDENTIAL INVESTMENT MANAGEMENT SERVICES LLC (THE DISTRIBUTOR), GATEWAY
CENTER THREE, 100 MULBERRY STREET, NEWARK, NEW JERSEY 07102-4077, IS A LIMITED
LIABILITY COMPANY ORGANIZED UNDER THE LAWS OF THE STATE OF DELAWARE AND SERVES
AS THE DISTRIBUTOR OF THE SHARES OF EACH SERIES OF THE FUND. IT IS A
WHOLLY-OWNED SUBSIDIARY OF PRUDENTIAL. Prudential Securities, One Seaport Plaza,
New York, New York 10292, previously served as distributor of Fund shares. It is
an indirect, wholly-owned subsidiary of Prudential.
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UNDER SEPARATE DISTRIBUTION AND SERVICE PLANS (THE CLASS A PLAN, THE CLASS B
PLAN AND THE CLASS C PLAN, COLLECTIVELY, THE PLANS) ADOPTED BY THE FUND UNDER
RULE 12b-1 UNDER THE INVESTMENT COMPANY ACT AND A DISTRIBUTION AGREEMENT (THE
DISTRIBUTION AGREEMENT), THE DISTRIBUTOR INCURS THE EXPENSES OF DISTRIBUTING THE
CLASS A, CLASS B AND CLASS C SHARES. THE DISTRIBUTOR INCURS THE EXPENSES OF
DISTRIBUTING THE FUND'S CLASS Z SHARES UNDER THE DISTRIBUTION AGREEMENT, NONE OF
WHICH IS REIMBURSED BY OR PAID FOR BY THE FUND. These expenses include
commissions and account servicing fees paid to, or on account of, Dealers or
financial institutions (other than national banks) which have entered into
agreements with the Distributor, advertising expenses, the cost of printing and
mailing prospectuses to potential investors and indirect and overhead costs of
the Distributor associated with the sale of Fund shares, including lease,
utility, communications and sales promotion expenses. Certain Dealers are paid
higher fees than others with respect to Class A shares pursuant to separate
agreements with the Distributor.
Under the Plans, the Fund is obligated to pay distribution and/or service fees
to the Distributor as compensation for its distribution and service activities,
not as reimbursement for specific expenses incurred. If the Distributor's
expenses exceed its distribution and service fees, the Fund will not be
obligated to pay any additional expenses. If the Distributor's expenses are less
than such distribution and service fees, it will retain its full fees and
realize a profit.
The distribution and/or service fees may also be used by the Distributor to
compensate on a continuing basis Dealers in consideration for the distribution,
marketing, administrative and other services and activities provided by Dealers
with respect to the promotion of the sale of the Fund's shares and the
maintenance of related shareholder accounts.
UNDER THE CLASS A PLAN, EACH SERIES 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 THE
SERIES. The Class A Plan provides that (i) up to .25 of 1% of the average daily
net assets of the Class A shares may be used to pay for personal service and/or
the maintenance of shareholder accounts (service fee) and (ii) total
distribution fees (including the service fee of up to .25 of 1%) may not exceed
..30 of 1% of the average daily net assets of the Class A shares.
UNDER THE CLASS B AND CLASS C PLANS, EACH SERIES 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
ASSETS OF THE CLASS B AND CLASS C SHARES, RESPECTIVELY. The Class B Plan
provides for the payment to the Distributor of (i) an asset-based sales charge
of up to .50 of 1% of the average daily net assets of the Class B shares, and
(ii) a service fee of up to .25 of 1% of the average daily net assets of the
Class B shares; provided that the total distribution-related fee does not exceed
..50 of 1%. The Class C Plan provides for the payment to the Distributor of (i)
an asset-based sales charge of up to .75 of 1% of the average daily net assets
of the Class C shares, and (ii) a service fee of up to .25 of 1% of the average
daily net assets of the Class C shares. The service fee is used to pay for
personal service and/or the maintenance of shareholders accounts. The
Distributor also receives contingent deferred sales charges from certain
redeeming shareholders. See "Shareholder Guide--How to Sell Your
Shares--Contingent Deferred Sales Charges."
For the fiscal year ended April 30, 1998, each Series paid distribution
expenses of .10%, .50% and .75% of the average daily net assets of the Class A,
Class B and Class C shares, respectively. The Series record all payments made
under the Plans as expenses in the calculation of net investment income. See
"Distributor" in the Statement of Additional Information.
Distribution expenses attributable to the sale of Class A, Class B and Class C
shares of each Series will be allocated to each such class based upon the ratio
of sales of each such class to the sales of Class A, Class B and Class C shares
of the Series other than expenses allocable to a particular class. The
distribution fee and sales charge of one class will not be used to subsidize the
sale of another class.
Each Plan provides that it shall continue in effect from year to year provided
that a majority of the Trustees of the Fund, including a majority of the
Trustees who are not interested persons of the Fund (as defined in the
Investment Company Act) and who have no direct or indirect financial interest in
the operation of the Plan or any agreement related to the Plan (the Rule 12b-1
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Trustees), vote annually to continue the Plan. Each Plan may be terminated with
respect to a Series at any time by vote of a majority of the Rule 12b-1 Trustees
or of a majority of the outstanding shares of the applicable class of the
Series. The Series will not be obligated to pay distribution and service fees
incurred under any Plan if it is terminated or not continued.
In addition to distribution and service fees paid by the Fund under the Class
A, Class B and Class C Plans, the Manager (or one of its affiliates) may make
payments out of its own resources to Dealers and other persons which distribute
shares of the Fund (including Class Z shares). Such payments may be calculated
by reference to the NAV sold by such persons or otherwise.
The Distributor is subject to the rules of the National Association of
Securities Dealers, Inc. (the NASD) governing maximum sales charges. See
"Distributor" in the Statement of Additional Information.
FEE WAIVERS AND SUBSIDY
PIFM may from time to time voluntarily waive all or a portion of its
management fee and subsidize all or a portion of the operating expenses of the
Fund. Effective August 31, 1997, PIFM discontinued its waiver of 10% of its
management fee related to the Insured Series and Intermediate Series. The
Distributor has voluntarily waived a portion of its distribution fees for the
Class A and Class C shares as described under "Fund Expenses." Fee waivers and
expense subsidies will increase the Fund's total return. Any such waivers may be
terminated at any time without prior notice to shareholders. See "Performance
Information" in the Statement of Additional Information and "Fund Expenses."
PORTFOLIO TRANSACTIONS
Affiliates of the Distributor may act as brokers or futures commission
merchants for the Fund, provided that the commissions, fees or other
remuneration they receive are fair and reasonable. See "Portfolio Transactions
and Brokerage" in the Statement of Additional Information.
CUSTODIAN AND TRANSFER AND DIVIDEND DISBURSING AGENT
State Street Bank and Trust Company, One Heritage Drive, North Quincy,
Massachusetts 02171, serves as Custodian for the portfolio securities and cash
of each Series and, in that capacity, maintains certain financial and accounting
books and records pursuant to an agreement with the Fund. Its mailing address is
P.O. Box 1713, Boston, Massachusetts 02105.
Prudential Mutual Fund Services LLC (PMFS or the Transfer Agent), Raritan
Plaza One, Edison, New Jersey 08837, serves as Transfer Agent and Dividend
Disbursing Agent and in those capacities maintains certain books and records for
the Fund. PMFS is a wholly-owned subsidiary of PIFM. Its mailing address is P.O.
Box 15005, New Brunswick, New Jersey 08906-5005.
YEAR 2000
The services provided to the Fund and the shareholders by the Manager, the
Distributor, the Transfer Agent and the Custodian depend on the smooth
functioning of their computer systems and those of their outside service
providers. Many computer software systems in use today cannot distinguish the
year 2000 from the year 1900 because of the way dates are encoded and
calculated. Such event could have a negative impact on handling securities
trades, payments of interest and dividends, pricing and account services.
Although at this time, there can be no assurance that there will be no adverse
impact on the Fund, the Manager, the Distributor, the Transfer Agent and the
Custodian have advised the Fund that they have been actively working on
necessary changes to their computer systems to prepare for the year 2000 and
expect that their systems, and those of their outside service providers, will be
adapted in time for that event.
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HOW THE FUND VALUES ITS SHARES
EACH SERIES' NET ASSET VALUE PER SHARE OR NAV IS DETERMINED BY SUBTRACTING ITS
LIABILITIES FROM THE VALUE OF ITS ASSETS AND DIVIDING THE REMAINDER BY THE
NUMBER OF OUTSTANDING SHARES. NAV IS CALCULATED SEPARATELY FOR EACH CLASS. THE
TRUSTEES HAVE FIXED THE SPECIFIC TIME OF DAY FOR THE COMPUTATION OF THE SERIES'
NAV TO BE AS OF 4:15 P.M., NEW YORK TIME.
Portfolio securities are valued based on market quotations or, if not readily
available, at fair value as determined in good faith under procedures
established by the Fund's Trustees. Securities may also be valued based on
values provided by a pricing service. See "Net Asset Value" in the Statement of
Additional Information.
Each Series will compute its NAV once daily on days that the New York Stock
Exchange is open for trading except on days on which no orders to purchase, sell
or redeem shares have been received by the Series or days on which changes in
the value of the Series' portfolio securities do not materially affect the NAV.
Although the legal rights of each class of shares are substantially identical,
the different expenses borne by each class will result in different dividends.
As long as the Series declare dividends daily, the NAV of the Class A, Class B,
Class C and Class Z shares will generally be the same. It is expected, however,
that the Series' dividends will differ by approximately the amount of any
distribution and/or service fee expense accrual differential among the classes.
HOW THE FUND CALCULATES PERFORMANCE
FROM TIME TO TIME THE FUND MAY ADVERTISE THE YIELD, TAX EQUIVALENT YIELD AND
TOTAL RETURN (INCLUDING AVERAGE ANNUAL TOTAL RETURN AND AGGREGATE TOTAL RETURN)
OF A SERIES IN ADVERTISEMENTS OR SALES LITERATURE. YIELD, TAX EQUIVALENT YIELD
AND TOTAL RETURN ARE CALCULATED SEPARATELY FOR CLASS A, CLASS B, CLASS C AND
CLASS Z SHARES. THESE FIGURES ARE NOT INTENDED TO INDICATE FUTURE PERFORMANCE.
The yield refers to the income generated by an investment in a Series over a
30-day period. This income is then annualized; that is, the amount of income
generated by the investment during that 30-day period is assumed to be generated
each 30-day period for twelve periods and is shown as a percentage of the
investment. The income earned on the investment is also assumed to be reinvested
at the end of the sixth 30-day period. The tax equivalent yield is calculated
similarly to the yield, except that the yield is increased using a stated income
tax rate to demonstrate the taxable yield necessary to produce an after-tax
yield equivalent to a Series. The total return shows how much an investment in a
Series would have increased (decreased) over a specified period of time (I.E.,
one, five or ten years or since inception of the Series) assuming that all
distributions and dividends by the Series were reinvested on the reinvestment
dates during the period and less all recurring fees. The aggregate total return
reflects actual performance over a stated period of time. Average annual total
return is a hypothetical rate of return that, if achieved annually, would have
produced the same aggregate total return if performance had been constant over
the entire period. Average annual total return smooths out variations in
performance and takes into account any applicable initial or contingent deferred
sales charges. Neither average annual total return nor aggregate total return
takes into account any federal or state income taxes which may be payable upon
redemption. The Fund also may include comparative performance information in
advertising or marketing the shares of each Series. Such performance information
may include data from Lipper Analytical Services, Inc., Morningstar
Publications, Inc., other industry publications, business periodicals and market
indices. See "Performance Information" in the Statement of Additional
Information. Further performance information is contained in the Series' annual
and semi-annual reports to shareholders, which may be obtained without charge.
See "Shareholder Guide-- Shareholder Services--Reports to Shareholders."
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TAXES, DIVIDENDS AND DISTRIBUTIONS
TAXATION OF THE FUND
EACH SERIES OF THE FUND HAS QUALIFIED AND INTENDS TO REMAIN QUALIFIED AS A
REGULATED INVESTMENT COMPANY UNDER THE INTERNAL REVENUE CODE. ACCORDINGLY, EACH
SERIES WILL NOT BE SUBJECT TO FEDERAL INCOME TAXES ON ITS NET TAXABLE INVESTMENT
INCOME AND NET CAPITAL GAINS, IF ANY, THAT IT DISTRIBUTES TO ITS SHAREHOLDERS.
TO THE EXTENT NOT DISTRIBUTED BY A SERIES, NET TAXABLE INVESTMENT INCOME AND
CAPITAL GAINS ARE TAXABLE TO THE SERIES. See "Taxes, Dividends and
Distributions" in the Statement of Additional Information.
To the extent a Series invests in taxable obligations, it will earn taxable
investment income. Also, to the extent a Series sells securities or engages in
hedging transactions in futures contracts and options thereon, it may earn both
capital gain or loss. Capital gain or loss may also arise upon the sale of
municipal securities, as well as taxable obligations. Under the Internal Revenue
Code, special rules apply to the treatment of certain options and futures
contracts (Section 1256 contracts). At the end of each year, such investments
held by the Series will be required to be marked to market for federal income
tax purposes; that is, treated as having been sold at market value. Sixty
percent of any gain or loss recognized on these deemed sales and on actual
dispositions will be treated as long-term capital gain or loss, and the
remainder will be treated as short-term capital gain or loss. See "Taxes,
Dividends and Distributions" in the Statement of Additional Information.
Gain or loss realized by the Series from the sale of securities generally will
be treated as capital gain or loss; however, gain from the sale of certain
securities (including municipal obligations) will be treated as ordinary income
to the extent of any market discount. Market discount generally is the
difference, if any, between the price paid by the Series for the security and
the principal amount of the security (or, in the case of a security issued at an
original issue discount, the revised issue price of the security). The market
discount rule does not apply to any security that was acquired by the Series at
its original issue.
TAXATION OF SHAREHOLDERS
In general, the character of tax-exempt interest distributed by each Series
will flow through as tax-exempt interest to its shareholders provided that 50%
or more of the value of its assets at the end of each quarter of its taxable
year is invested in state, municipal and other obligations, the interest on
which is excluded from gross income for federal income tax purposes. During
normal market conditions, at least 80% of each Series' net assets will be
invested in such obligations. See "How the Fund Invests--Other Investments and
Policies."
Any dividends out of net taxable investment income, together with
distributions of net short-term gains (I.E., the excess of net short-term
capital gains over net long-term capital losses) distributed to shareholders,
will be taxable as ordinary income to the shareholder whether or not reinvested.
Any capital gains (I.E., the excess of net capital gains from the sale of assets
held for more than 12 months over net short-term capital losses) distributed to
shareholders will be taxable as capital gains to the shareholders, whether or
not reinvested and regardless of the length of time a shareholder has owned his
or her shares. The maximum capital gains rate for individuals is 28% with
respect to assets held for more than 12 months, but not more than 18 months, and
20% with respect to assets held for more than 18 months. The maximum capital
gains rate for corporate shareholders currently is the same as the maximum tax
rate for ordinary income.
Any gain or loss realized upon the sale or redemption of a Series' shares by a
shareholder who is not a dealer in securities will be treated as capital gain or
loss. In the case of an individual, any such capital gain will be treated as
short-term capital gain if the shares were held for not more than 12 months,
gain taxable at the maximum rate of 28% if such shares were held for more than
12, but not more than 18 months, and gain taxable at the maximum rate of 20% if
such shares were held for more than 18 months. In the case of a corporation, any
such capital gain will be treated as long-term capital gain, taxable at the same
rates as ordinary
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income, if such shares were held for more than 12 months. Any such capital loss
will be treated as long-term capital loss if the shares have been held for more
than one year and otherwise as short-term capital loss. Any loss realized by a
shareholder upon the sale of shares of a Series held by the shareholder for six
months or less will be disallowed to the extent of any exempt interest dividends
received with respect to such shares and treated as long-term capital loss to
the extent of capital gains distributions received by the shareholder.
Any loss realized on a sale, redemption or exchange of shares of the Fund by a
shareholder will be disallowed to the extent the shares are replaced within a
61-day period (beginning 30 days before the disposition of shares). Shares
purchased pursuant to the reinvestment of a dividend will constitute a
replacement of shares.
A shareholder who acquires shares of the Fund and sells or otherwise disposes
of such shares within 90 days of acquisition may not be allowed to include
certain sales charges incurred in acquiring such shares for purposes of
calculating gain or loss realized upon a sale or exchange of shares of the Fund.
CERTAIN INVESTORS MAY INCUR FEDERAL ALTERNATIVE MINIMUM TAX LIABILITY AS A
RESULT OF THEIR INVESTMENT IN THE FUND. Tax-exempt interest from certain
municipal obligations (I.E., certain private activity bonds issued after August
7, 1986) will be treated as an item of tax preference for purposes of the
alternative minimum tax. The Fund anticipates that, under regulations to be
promulgated, items of tax preference incurred by a Series which has invested in
such municipal obligations will be attributed to the Series' shareholders,
although some portion of such items could be allocated to the Series itself.
Depending upon each shareholder's individual circumstances, the attribution of
items of tax preference incurred by a Series could result in liability for the
shareholder for the alternative minimum tax. Similarly, a Series could be liable
for the alternative minimum tax for items of tax preference attributed to it.
With the exception of the High Income Series, the Fund intends to minimize the
investment of each Series in municipal obligations of the type that will produce
items of tax preference. With respect to the High Income Series, however, it is
anticipated that a substantial portion of the Series' assets will be invested in
such obligations.
Distributions relating to interest on all municipal obligations will be
included in a corporate shareholder's current earnings for purposes of the
adjustment for current earnings for alternative minimum tax purposes. Corporate
shareholders should consult with their tax advisers with respect to this
potential adjustment.
The Fund has obtained opinions of counsel to the effect that neither (i) the
conversion of Class B shares into Class A shares nor (ii) the exchange of any
class of the Fund's shares for any other class of its shares constitutes a
taxable event for federal income tax purposes. However, such opinions are not
binding on the Internal Revenue Service.
Shareholders are advised to consult their own tax advisers regarding specific
questions as to federal, state, local or foreign taxes. See "Taxes, Dividends
and Distributions" in the Statement of Additional Information.
WITHHOLDING TAXES
Under the Internal Revenue Code, the Fund is required to withhold and remit to
the U.S. Treasury 31% of redemption proceeds on the accounts of those
shareholders who fail to furnish their tax identification numbers on IRS Form
W-9 (or IRS Form W-8 in the case of certain foreign shareholders) with the
required certifications regarding the shareholders' status under the federal
income tax law. Withholding generally is also required on taxable dividends and
capital gains distributions made by a Series.
Dividends of net investment income and distributions of net short-term capital
gains paid to a shareholder (including a shareholder acting as a nominee or
fiduciary) who is a nonresident alien individual, a foreign corporation or a
foreign partnership (foreign shareholder) are subject to a 30% (or lower treaty
rate) withholding tax upon the gross amount of the dividends unless the
dividends are effectively connected with a U.S. trade or business conducted by
the foreign shareholder. Capital gain dividends
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<PAGE>
paid to a foreign shareholder are generally not subject to withholding tax. A
foreign shareholder will, however, be required to pay U.S. income tax on any
dividends and capital gain distributions which are effectively connected with a
U.S. trade or business of the foreign shareholder.
DIVIDENDS AND DISTRIBUTIONS
THE FUND EXPECTS TO DECLARE DAILY AND PAY MONTHLY DIVIDENDS OF NET INVESTMENT
INCOME, IF ANY, AND MAKE DISTRIBUTIONS AT LEAST ANNUALLY OF ANY NET CAPITAL
GAINS. Dividends paid by each Series with respect to each class of shares, to
the extent dividends are paid, will be calculated in the same manner, at the
same time, on the same day and will be in the same amount except that each class
(other than Class Z) will bear its own distribution charges, generally resulting
in lower dividends for Class B and Class C shares in relation to Class A shares
and lower dividends for Class A shares in relation to Class Z shares.
Distributions of net capital gains, if any, will be paid in the same amount for
each class of shares. See "How the Fund Values its Shares."
DIVIDENDS AND DISTRIBUTIONS WILL BE PAID IN ADDITIONAL SHARES OF A SERIES
BASED ON THE NAV OF EACH CLASS ON THE PAYMENT DATE, OR SUCH OTHER DATE AS THE
TRUSTEES MAY DETERMINE, UNLESS THE SHAREHOLDER ELECTS IN WRITING NOT LESS THAN
FIVE BUSINESS DAYS PRIOR TO THE RECORD DATE TO RECEIVE SUCH DIVIDENDS AND
DISTRIBUTIONS IN CASH. Such election should be submitted to Prudential Mutual
Fund Services LLC, Attention: Account Maintenance, P.O. Box 15015, New
Brunswick, New Jersey 08906-5015. If you hold shares through Prudential
Securities, you should contact your financial adviser to elect to receive
dividends and distributions in cash. The Fund will notify each shareholder after
the close of the Fund's taxable year both of the dollar amount and the taxable
status of that year's dividends and distributions on a per share basis.
Any taxable dividends or distributions of net capital gains paid shortly after
a purchase by an investor will have the effect of reducing the NAV of the
investor's shares by the per share amount of the dividends or distributions.
Such dividends or distributions, although in effect a return of invested
principal, are subject to federal income taxes. Accordingly, prior to purchasing
shares of a Series, an investor should carefully consider the impact of taxable
dividends and capital gains distributions which are expected to be or have been
announced.
GENERAL INFORMATION
DESCRIPTION OF SHARES
THE FUND IS AN OPEN-END, MANAGEMENT INVESTMENT COMPANY COMPRISED OF THREE
SERIES WHICH WAS ORGANIZED UNDER THE LAWS OF MASSACHUSETTS ON NOVEMBER 3, 1986
AS AN UNINCORPORATED BUSINESS TRUST, A FORM OF ORGANIZATION THAT IS COMMONLY
CALLED A MASSACHUSETTS BUSINESS TRUST. THE FUND IS AUTHORIZED TO ISSUE AN
UNLIMITED NUMBER OF SHARES, DIVIDED INTO FOUR CLASSES, DESIGNATED CLASS A, CLASS
B, CLASS C AND CLASS Z. Each class of shares represents an interest in the same
assets of the Fund and is identical in all respects except that (i) each class
is subject to different sales charges and distribution and/or service fees
(except for Class Z shares, which are not subject to any sales charges or
distribution and/or service fees), which may affect performance, (ii) each class
has exclusive voting rights on any matter submitted to shareholders that relates
solely to its arrangement and has separate voting rights on any matter submitted
to shareholders in which the interests of one class differ from the interests of
any other class, (iii) each class has a different exchange privilege, (iv) only
Class B shares have a conversion feature and (v) Class Z shares are offered
exclusively to a limited group of investors. See "How the Fund is
Managed--Distributor." In accordance with the Fund's Declaration of Trust, the
Trustees may authorize the creation of additional series and classes of shares
within such series, with such preferences, privileges, limitations and voting
and dividend rights as the Trustees may determine.
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Shares of the Fund, when issued, are fully paid, nonassessable, fully
transferable and redeemable at the option of the holder. Shares are also
redeemable at the option of the Fund under certain circumstances as described
under "Shareholder Guide--How to Sell Your Shares." Each share of each class of
each Series is equal as to earnings, assets and voting privileges, except as
noted above, and each class of shares (with the exception of Class Z shares,
which are not subject to any distribution or service fees) bears the expenses
related to the distribution of its shares. Except for the conversion feature
applicable to the Class B shares, there are no conversion, preemptive or other
subscription rights. In the event of liquidation, each share of beneficial
interest in each Series is entitled to its portion of all of the Fund's assets
after all debt and expenses of the Fund have been paid. Since Class B and Class
C shares bear higher distribution expenses than Class A shares, the liquidation
proceeds to shareholders of those classes are likely to be lower than to Class A
shareholders and to Class Z shareholders, whose shares are not subject to any
distribution and/or service fees. The Fund's shares do not have cumulative
voting rights for the election of Trustees.
THE FUND DOES NOT INTEND TO HOLD ANNUAL MEETINGS OF SHAREHOLDERS UNLESS
OTHERWISE REQUIRED BY LAW. THE FUND WILL NOT BE REQUIRED TO HOLD MEETINGS OF
SHAREHOLDERS UNLESS, FOR EXAMPLE, THE ELECTION OF TRUSTEES IS REQUIRED TO BE
ACTED ON BY SHAREHOLDERS UNDER THE INVESTMENT COMPANY ACT. SHAREHOLDERS HAVE
CERTAIN RIGHTS, INCLUDING THE RIGHT TO CALL A MEETING UPON A VOTE OF 10% OF THE
FUND'S OUTSTANDING SHARES FOR THE PURPOSE OF VOTING ON THE REMOVAL OF ONE OR
MORE TRUSTEES OR TO TRANSACT ANY OTHER BUSINESS.
The Declaration of Trust and the By-Laws of the Fund are designed to make the
Fund similar in certain respects to a Massachusetts business corporation. The
principal distinction between a Massachusetts business corporation and a
Massachusetts business trust relates to shareholder liability. Under
Massachusetts law, shareholders of a business trust may, under certain
circumstances, be held personally liable as partners for the obligations of the
Fund, which is not the case with a corporation. The Declaration of Trust of the
Fund provides that shareholders shall not be subject to any personal liability
for the acts or obligations of the Fund and that every written obligation,
contract, instrument or undertaking made by the Fund shall contain a provision
to the effect that the shareholders are not individually bound thereunder.
ADDITIONAL INFORMATION
This Prospectus, including the Statement of Additional Information which has
been incorporated by reference herein, does not contain all the information set
forth in the Registration Statement filed by the Fund with the Commission under
the Securities Act of 1933. Copies of the Registration Statement may be obtained
at a reasonable charge from the Commission or may be examined, without charge,
at the office of the Commission in Washington, D.C.
36
<PAGE>
SHAREHOLDER GUIDE
HOW TO BUY SHARES OF THE FUND
YOU MAY PURCHASE SHARES OF EACH SERIES OF THE FUND THROUGH THE DISTRIBUTOR,
THROUGH DEALERS, INCLUDING PRUDENTIAL SECURITIES OR PRUSEC, OR DIRECTLY FROM THE
FUND THROUGH ITS TRANSFER AGENT, PRUDENTIAL MUTUAL FUND SERVICES LLC (PMFS OR
THE TRANSFER AGENT) ATTENTION: INVESTMENT SERVICES, P.O. BOX 15020, NEW
BRUNSWICK, NEW JERSEY 08906-5020. Participants in programs sponsored by
Prudential Retirement Services should contact their client representative for
more information about Class Z shares. The purchase price is the NAV next
determined following receipt of an order in proper form (in accordance with
procedures established by the Transfer Agent in connection with investors
accounts) by the Distributor, your Dealer or the Transfer Agent, plus a sales
charge which, at your option, may be imposed either (i) at the time of purchase
(Class A shares) or (ii) on a deferred basis (Class B or Class C shares). Class
Z shares are offered to a limited group of investors at NAV without any sales
charge. Dealers may charge their customers a separate fee for handling purchase
transactions. Payments may be made by wire, check or through your brokerage
account. See "Alternative Purchase Plan" below. See also "How the Fund Values
its Shares."
In order to receive that day's NAV, your order must be received before the
Fund's NAV is computed (currently 4:15 P.M., New York time). If you purchase
shares through your Dealer, the Dealer must receive your order before the Fund's
NAV is computed that day and must transmit the order to the Distributor that
same day for you to receive that day's NAV.
An investment in the Series may not be appropriate for tax-exempt or
tax-deferred investors. Such investors should consult their own tax advisers.
The minimum initial investment is $1,000 for Class A and Class B shares and
$5,000 for Class C shares except that the minimum initial investment for Class C
shares may be waived from time to time. There is no minimum investment
requirement for Class Z shares. The minimum subsequent investment is $100 for
all classes, except for Class Z shares, for which there is no minimum. All
minimum investment requirements are waived for certain employee savings plans.
For purchases made through the Automatic Savings Accumulation Plan, the minimum
initial and subsequent investment is $50. See "Shareholder Services" below.
Application forms can be obtained from the Transfer Agent or the Distributor
(Class A shares only). If a share certificate is desired, it must be requested
in writing for each transaction. Certificates are issued only for full shares.
Shareholders who hold their shares through Prudential Securities will not
receive share certificates.
The Fund reserves the right to reject any purchase order (including an
exchange into the Fund) or to suspend or modify the continuous offering of its
shares. See "How to Sell Your Shares" below.
Your Dealer is responsible for forwarding payment promptly to the Fund. The
Distributor reserves the right to cancel any purchase order for which payment
has not been received by the third business day following the placement of the
order.
Transactions in Fund shares may be subject to postage and handling charges
imposed by your Dealer. Any such charge is retained by the Dealer and is not
remitted to the Fund.
PURCHASE BY WIRE. For an initial purchase of shares of the Fund by wire, you
must complete an application and telephone PMFS at (800) 225-1852 (toll-free) to
receive an account number. The following information will be requested: your
name, address, tax identification number, class election, dividend distribution
election, amount being wired and wiring bank. Instructions should then be given
by you to your bank to transfer funds by wire to State Street Bank and Trust
Company, Boston, Massachusetts, Custody and Shareholder Services Division,
Attention: Prudential Municipal Bond Fund, specifying on the wire the account
number assigned by PMFS and your name and identifying the class in which you are
eligible to invest (Class A, Class B, Class C or Class Z shares) and the name of
the Series.
37
<PAGE>
If you arrange for receipt by State Street of Federal Funds prior to the
calculation of NAV (4:15 P.M., New York time), on a business day, you may
purchase shares of a Series as of that day. See "Net Asset Value" in the
Statement of Additional Information.
In making a subsequent purchase order by wire, you should wire State Street
directly and should be sure that the wire specifies Prudential Municipal Bond
Fund, the name of the Series, Class A, Class B, Class C or Class Z shares and
your name and individual account number. It is not necessary to call PMFS to
make subsequent purchase orders utilizing Federal Funds. The minimum amount
which may be invested by wire is $1,000.
ALTERNATIVE PURCHASE PLAN
THE FUND OFFERS THROUGH THIS PROSPECTUS FOUR CLASSES OF SHARES (CLASS A, CLASS
B, CLASS C AND CLASS Z SHARES) WHICH ALLOWS YOU TO CHOOSE THE MOST BENEFICIAL
SALES CHARGE STRUCTURE FOR YOUR INDIVIDUAL CIRCUMSTANCES, GIVEN THE AMOUNT OF
THE PURCHASE AND THE LENGTH OF TIME YOU EXPECT TO HOLD THE SHARES AND OTHER
RELEVANT CIRCUMSTANCES (ALTERNATIVE PURCHASE PLAN).
<TABLE>
<CAPTION>
ANNUAL 12b-1 FEES
(AS A % OF AVERAGE
SALES CHARGE DAILY NET ASSETS) OTHER INFORMATION
-------------------------------------- ----------------------- --------------------------------------
<S> <C> <C> <C>
CLASS A Maximum initial sales charge of 3% of .30 of 1% (Currently Initial sales charge waived or reduced
the public offering price being charged at a rate for certain purchases
of .10 of 1%)
CLASS B Maximum contingent deferred sales .50 of 1% Shares convert to Class A shares
charge or CDSC of 5% of the lesser of approximately seven years after
the amount invested or the redemption purchase
proceeds; declines to zero after six
years
CLASS C Maximum CDSC of 1% of the lesser of 1% (Currently being Shares do not convert to another class
the amount invested or the redemption charged at a rate of
proceeds on redemptions made within .75 of 1%)
one year of purchase
CLASS Z None None Sold to a limited group of investors
</TABLE>
The four classes of shares represent an interest in the same portfolio of
investments of each Series and have the same rights, except that (i) each class
is subject to different sales charges and distribution and/or service fees (with
the exception of Class Z shares, which are not subject to any distribution or
service fees), which may affect performance, (ii) each class has exclusive
voting rights on any matter submitted to shareholders that relates solely to its
arrangement and has separate voting rights on any matter submitted to
shareholders in which the interests of one class differ from the interests of
any other class, and (iii) only Class B shares have a conversion feature. The
four classes also have separate exchange privileges. See "How to Exchange Your
Shares" below. The income attributable to each class and the dividends payable
on the shares of each class will be reduced by the amount of the distribution
fee (if any) of each class. Class B and Class C shares bear the expenses of a
higher distribution fee which will generally cause them to have higher expense
ratios and to pay lower dividends than the Class A and Class Z shares.
Dealers, financial advisers and other sales agents who sell shares of the
Series will receive different compensation for selling Class A, Class B, Class C
and Class Z shares and will generally receive more compensation initially for
selling Class A and Class B shares than for selling Class C or Class Z shares.
38
<PAGE>
IN SELECTING A PURCHASE ALTERNATIVE, YOU SHOULD CONSIDER, AMONG OTHER THINGS,
(1) the length of time you expect to hold your investment, (2) the amount of any
applicable sales charge (whether imposed at the time of purchase or redemption)
and distribution-related fees, as noted above, (3) whether you qualify for any
reduction or waiver of any applicable sales charge, (4) the various exchange
privileges among the different classes of shares (see "How to Exchange Your
Shares" below) and (5) the fact that Class B shares automatically convert to
Class A shares approximately seven years after purchase (see "Conversion
Feature--Class B Shares" below).
The following is provided to assist you in determining which method of
purchase best suits your individual circumstances and is based on current fees
and expenses being charged to the Series:
If you intend to hold your investment in a Series for less than 5 years and do
not qualify for a reduced sales charge on Class A shares, since Class A shares
are subject to a maximum initial sales charge of 3% and Class B shares are
subject to a CDSC of 5% which declines to zero over a 6 year period, you should
consider purchasing Class C shares over either Class A or Class B shares.
If you intend to hold your investment for more than 5 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 and Class C shares, you would not have all of your money invested
initially because the sales charge on Class A shares is deducted at the time of
purchase.
If you do not qualify for a reduced sales charge on Class A shares and you
purchase Class C shares, you would have to hold your investment for more than 4
years in the case of Class C shares for the higher cumulative annual
distribution-related fee on those shares to exceed the initial sales charge plus
cumulative annual distribution-related fee on Class A shares. This does not take
into account the time value of money, which further reduces the impact of the
higher Class C distribution-related fee on the investment, fluctuations in NAV,
the effect of the return on the investment over this period of time or
redemptions when the CDSC is applicable.
ALL PURCHASES OF $1 MILLION OR MORE, EITHER AS PART OF A SINGLE INVESTMENT OR
UNDER RIGHTS OF ACCUMULATION OR LETTERS OF INTENT, MUST BE FOR CLASS A SHARES
UNLESS THE PURCHASER IS ELIGIBLE TO PURCHASE CLASS Z SHARES. See "Reduction and
Waiver of Initial Sales Charges" and "Class Z Shares" below.
CLASS A SHARES
The offering price of Class A shares for investors choosing the initial sales
charge alternative is the next determined NAV plus a sales charge (expressed as
a percentage of the offering price and of the amount invested) as shown in the
following table:
<TABLE>
<CAPTION>
SALES CHARGE AS SALES CHARGE AS DEALER CONCESSION
PERCENTAGE OF PERCENTAGE OF AS PERCENTAGE OF
AMOUNT OF PURCHASE OFFERING PRICE AMOUNT INVESTED OFFERING PRICE
- ------------------------ ---------------- ---------------- -----------------
<S> <C> <C> <C>
Less than $99,999 3.00% 3.09% 3.00%
$100,000 to $249,999 2.50 2.56 2.50
$250,000 to $499,999 1.50 1.52 1.50
$500,000 to $999,999 1.00 1.01 1.00
$1,000,000 and above None None None
</TABLE>
39
<PAGE>
The Distributor may reallow the entire initial sales charge to Dealers.
Dealers may be deemed to be underwriters, as that term is defined under the
federal securities laws. The Distributor reserves the right, without prior
notice to any Dealer, to suspend or eliminate Dealer concessions or commissions.
In connection with the sale of Class A shares at NAV (without payment of an
initial sales charge), the Manager, the Distributor or one of their affiliates
will pay Dealers, financial advisers and other persons which distribute shares a
finders' fee from its own resources based on a percentage of the NAV of shares
sold by such persons.
REDUCTION AND WAIVER OF INITIAL SALES CHARGES. Reduced sales charges are
available through Rights of Accumulation and Letters of Intent. Shares of the
Fund and shares of other Prudential Mutual Funds (excluding money market funds
other than those acquired pursuant to the exchange privilege) may be aggregated
to determine the applicable reduction. See "Purchase and Redemption of Fund
Shares--Reduction and Waiver of Initial Sales Charges--Class A Shares" in the
Statement of Additional Information.
OTHER WAIVERS. Class A shares may be purchased at NAV, through the
Distributor, Dealers or the Transfer Agent, by the following persons: (a)
officers of the Prudential Mutual Funds (including the Fund), (b) employees of
Prudential Securities and PIFM and their subsidiaries and members of the
families of such persons who maintain an employee related account at Prudential
Securities or the Transfer Agent, (c) employees of subadvisers of the Prudential
Mutual Funds provided that the purchases at NAV are permitted by such person's
employer, (d) Prudential employees and special agents of Prudential and its
subsidiaries and all persons who have retired directly from active service with
Prudential or one of its subsidiaries, (e) registered representatives and
employees of Dealers who have entered into a selected dealer agreement with the
Distributor provided that purchases at NAV are permitted by such person's
employer and (f) investors who have a business relationship with a financial
adviser who joined Prudential Securities from another investment firm, provided
that (i) the purchase is made within 180 days of the commencement of the
financial adviser's employment at Prudential Securities or within one year in
the case of benefit plans, (ii) the purchase is made with proceeds of a
redemption of shares of any open-end non-money market fund sponsored by the
financial adviser's previous employer (other than a fund which imposes a
distribution or service fee of .25 of 1% or less) and (iii) the financial
adviser served as the client's broker on the previous purchase.
You must notify the Transfer Agent either directly or through Prudential
Securities or Prusec that you are entitled to the reduction or waiver of the
sales charge. The reduction or waiver will be granted subject to confirmation of
your entitlement. No initial sales charges are imposed upon Class A shares
acquired upon the reinvestment of dividends and distributions. See "Purchase and
Redemption of Fund Shares--Reduction and Waiver of Initial Sales Charges--Class
A Shares" in the Statement of Additional Information.
CLASS B AND CLASS C SHARES
The offering price of Class B and Class C shares for investors choosing one of
the deferred sales charge alternatives is the NAV next determined following
receipt of an order by the Distributor, your Dealer or the Transfer Agent.
Although there is no sales charge imposed at the time of purchase, redemptions
of Class B and Class C shares may be subject to a CDSC. See "How to Sell Your
Shares--Contingent Deferred Sales Charges." The Distributor will pay, from its
own resources, sales commissions of up to 4% of the purchase price of Class B
shares to Dealers, financial advisers and other persons who sell Class B shares
at the time of sale from its own resources. This facilitates the ability of the
Fund to sell the Class B shares without an initial sales charge being deducted
at the time of purchase. The Distributor anticipates that it will recoup its
advancement of sales commissions from the combination of the CDSC and the
distribution fee. See "How the Fund is Managed--Distributor." In connection with
the sale of Class C shares, the Distributor will pay, from its own resources,
Dealers, financial advisers and other persons which distribute Class C shares a
sales commission of up to 1% of the purchase price at the time of the sale.
40
<PAGE>
CLASS Z SHARES
Class Z shares of the Fund are currently available for purchase by the
following categories of investors:
(i) participants in any fee-based program or trust program sponsored by
Prudential Securities, The Prudential Savings Bank, F.S.B. (or any affiliate)
which includes mutual funds as investment options and for which the Fund is an
available option; (ii) current and former Directors/Trustees of the Prudential
Mutual Funds (including the Fund); and (iii) employees of Prudential and/or
Prudential Securities who participate in a Prudential-sponsored employee saving
plan.
In connection with the sale of Class Z shares, the Manager, the Distributor or
one of their affiliates may pay Dealers, financial advisers and other persons
which distribute shares a finders' fee, from its own resources, based on a
percentage of the NAV of shares sold by such persons.
HOW TO SELL YOUR SHARES
YOU CAN REDEEM YOUR SHARES OF EACH SERIES OF THE FUND 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, DISTRIBUTOR, OR YOUR DEALER.
SEE "HOW THE FUND VALUES ITS SHARES." In certain cases, however, redemption
proceeds will be reduced by the amount of any applicable CDSC as described
below. See "Contingent Deferred Sales Charges" below. If you are redeeming your
shares through a Dealer, your Dealer must receive your sell order before the
Fund computes its NAV for that day (I.E., 4:15 P.M., New York time) in order to
receive that day's NAV. Your Dealer will be responsible for furnishing all
necessary documentation to the Distributor and may charge you for its services
in connection with redeeming shares of the Fund.
IF YOU HOLD SHARES OF THE FUND THROUGH PRUDENTIAL SECURITIES, YOU MUST REDEEM
YOUR SHARES THROUGH PRUDENTIAL SECURITIES. PLEASE CONTACT YOUR PRUDENTIAL
SECURITIES FINANCIAL ADVISER. IF YOU HOLD SHARES IN NON-CERTIFICATE FORM, A
WRITTEN REQUEST FOR REDEMPTION SIGNED BY YOU EXACTLY AS THE ACCOUNT IS
REGISTERED IS REQUIRED. IF YOU HOLD CERTIFICATES, THE CERTIFICATES, SIGNED IN
THE NAME(S) SHOWN ON THE FACE OF THE CERTIFICATES, MUST BE RECEIVED BY THE
TRANSFER AGENT IN ORDER FOR THE REDEMPTION REQUEST TO BE PROCESSED. IF
REDEMPTION IS REQUESTED BY A CORPORATION, PARTNERSHIP, TRUST OR FIDUCIARY,
WRITTEN EVIDENCE OF AUTHORITY ACCEPTABLE TO THE TRANSFER AGENT MUST BE SUBMITTED
BEFORE SUCH REQUEST WILL BE ACCEPTED. All correspondence and documents
concerning redemptions should be sent to the Fund in care of its Transfer Agent,
Prudential Mutual Fund Services LLC, Attention: Redemption Services, P.O. Box
15010, New Brunswick, New Jersey 08906-5010.
If the proceeds of the redemption (a) exceed $50,000, (b) are to be paid to a
person other than the record owner, (c) are to be sent to an address other than
the address on the Transfer Agent's records, or (d) are to be paid to a
corporation, partnership, trust or fiduciary, the signature(s) on the redemption
request and on the certificates, if any, or stock power must be guaranteed by an
eligible guarantor institution. An eligible guarantor institution includes any
bank, broker, dealer or credit union. The Transfer Agent reserves the right to
request additional information from, and make reasonable inquiries of, any
eligible guarantor institution. For clients of Prusec, a signature guarantee may
be obtained from the agency or office manager of most Prudential Insurance and
Financial Services or Preferred Services offices.
PAYMENT FOR SHARES PRESENTED FOR REDEMPTION WILL BE MADE BY CHECK WITHIN SEVEN
DAYS AFTER RECEIPT BY THE TRANSFER AGENT OF THE CERTIFICATE AND/OR WRITTEN
REQUEST, EXCEPT AS INDICATED BELOW. IF YOU HOLD SHARES THROUGH PRUDENTIAL
SECURITIES, PAYMENT FOR SHARES PRESENTED FOR REDEMPTION WILL BE CREDITED TO YOUR
PRUDENTIAL SECURITIES ACCOUNT, UNLESS YOU INDICATE OTHERWISE. Such payment may
be postponed or the right of redemption suspended at times (a) when the New York
Stock Exchange is closed for other than customary weekends and holidays, (b)
when trading on such Exchange is restricted, (c) when an emergency exists as a
result of which disposal by the Fund of securities owned by it is not
41
<PAGE>
reasonably practicable or it is not reasonably practicable for the Fund fairly
to determine the value of its net assets, or (d) during any other period when
the Commission, by order, so permits, provided that applicable rules and
regulations of the Commission shall govern as to whether the conditions
prescribed in (b), (c) or (d) exist.
PAYMENT FOR REDEMPTION OF RECENTLY PURCHASED SHARES WILL BE DELAYED UNTIL THE
FUND OR ITS TRANSFER AGENT HAS BEEN ADVISED THAT THE PURCHASE CHECK HAS BEEN
HONORED, UP TO 10 CALENDAR DAYS FROM THE TIME OF RECEIPT OF THE PURCHASE CHECK
BY THE TRANSFER AGENT. SUCH DELAY MAY BE AVOIDED BY PURCHASING SHARES BY WIRE OR
BY CERTIFIED OR CASHIER'S CHECK.
REDEMPTION IN KIND. If the Trustees determine that it would be detrimental to
the best interests of the remaining shareholders of the Fund to make payment
wholly or partly in cash, the Fund may pay the redemption price in whole or in
part by a distribution in kind of securities from the investment portfolio of a
Series, 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 a
regular redemption. See "How the Fund Values its Shares." If your shares are
redeemed in kind, you would incur transaction costs in converting the assets
into cash. The Fund, however, has elected to be governed by Rule 18f-1 under the
Investment Company Act, under which the Fund is obligated to redeem shares
solely in cash up to the lesser of $250,000 or 1% of the NAV of the Fund during
any 90-day period for any one shareholder.
INVOLUNTARY REDEMPTION. In order to reduce expenses of the Fund, the Trustees
may redeem all of the shares of any shareholder, other than a shareholder which
is an IRA or other tax-deferred retirement plan, whose account has a NAV of less
than $500 due to a redemption. The Fund will give such shareholders 60 days'
prior written notice in which to purchase sufficient additional shares to avoid
such redemption. No CDSC will be imposed on any such involuntary redemption.
90-DAY REPURCHASE PRIVILEGE. If you redeem your shares and have not previously
exercised the repurchase privilege, you may reinvest any portion or all of the
proceeds of such redemption in shares of a Series of the Fund at the NAV next
determined after the order is received, which must be within 90 days after the
date of the redemption. Any CDSC paid in connection with such redemption will be
credited (in shares) to your account. If less than a full repurchase is made,
the credit will be on a PRO RATA basis. You must notify the Transfer Agent,
either directly or through the Distributor or your Dealer, at the time the
repurchase privilege is exercised to adjust your account for the CDSC you
previously paid. Thereafter, any redemptions will be subject to the CDSC
applicable at the time of the redemption. See "Contingent Deferred Sales
Charges" below. Exercise of the repurchase privilege may affect the federal tax
treatment of any gain or loss realized upon redemption.
CONTINGENT DEFERRED SALES CHARGES
Redemptions of Class B shares will be subject to a CDSC declining from 5% to
zero over a six-year period. Class C shares redeemed within one year of purchase
will be subject to a 1% CDSC. The CDSC will be deducted from the redemption
proceeds and reduce the amount paid to you. The CDSC will be imposed on any
redemption by you which reduces the current value of your Class B or Class C
shares of a Series of the Fund to an amount which is lower than the amount of
all payments by you for shares of the Series during the preceding six years, in
the case of Class B shares, and one year, in the case of Class C shares. A CDSC
will be applied on the lesser of the original purchase price or the current
value of the shares being redeemed. Increases in the value of your shares or
shares acquired through reinvestment of dividends or distributions are not
subject to a CDSC. The amount of any contingent deferred sales charge will be
paid to and retained by the Distributor. See "How the Fund is
Managed--Distributor" and "Waiver of Contingent Deferred Sales Charges--Class B
Shares" below.
The amount of the CDSC, if any, will vary depending on the number of years
from the time of payment for the purchase of shares until the time of redemption
of such shares. Solely for purposes of determining the number of years from the
time of any payment for the purchase of shares, all payments during a month will
be aggregated and deemed to have been made on the last day of the month. The
CDSC will be calculated from the first day of the month after the initial
purchase, excluding the time shares were held in a money market fund. See "How
to Exchange Your Shares" below.
42
<PAGE>
The following table sets forth the rates of the CDSC applicable to redemptions
of Class B shares:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED
SALES
CHARGE AS A PERCENTAGE
YEAR SINCE PURCHASE OF DOLLARS INVESTED OR
PAYMENT MADE REDEMPTION PROCEEDS
------------------------------- ------------------------
<S> <C>
First.......................... 5.0%
Second......................... 4.0%
Third.......................... 3.0%
Fourth......................... 2.0%
Fifth.......................... 1.0%
Sixth.......................... 1.0%
Seventh........................ None
</TABLE>
In determining whether a CDSC is applicable to a redemption, the calculation
will be made in a manner that results in the lowest possible rate. It will be
assumed that the redemption is made first of amounts representing shares
acquired pursuant to the reinvestment of dividends and distributions; then of
amounts representing the increase in NAV above the total amount of payments for
the purchase of Fund shares made during the preceding six years (five years for
Class B shares purchased prior to January 22, 1990); then of amounts
representing the cost of shares held beyond the applicable CDSC period; and
finally, of amounts representing the cost of shares held for the longest period
of time within the applicable CDSC period.
For example, assume you purchased 100 Class B shares at $10 per share for a
cost of $1,000. Subsequently, you acquired 5 additional Class B shares through
dividend reinvestment. During the second year after the purchase you decided to
redeem $500 of your investment. Assuming at the time of the redemption the net
asset value had appreciated to $12 per share, the value of your Class B shares
would be $1,260 (105 shares at $12 per share). The CDSC would not be applied to
the value of the reinvested dividend shares and the amount which represents
appreciation ($260). Therefore, $240 of the $500 redemption proceeds ($500 minus
$260) would be charged at a rate of 4% (the applicable rate in the second year
after purchase) for a total CDSC of $9.60.
For federal income tax purposes, the amount of the CDSC will reduce the gain
or increase the loss, as the case may be, on the amount recognized on the
redemption of shares.
WAIVER OF CONTINGENT DEFERRED SALES CHARGES--CLASS B SHARES. The CDSC will be
waived in the case of a redemption following the death or disability of a
shareholder or, in the case of a trust account, following the death or
disability of the grantor. The waiver is available for total or partial
redemptions of shares owned by a person, either individually or in joint tenancy
(with rights of survivorship), or a trust at the time of death or initial
determination of disability, provided that the shares were purchased prior to
death or disability. In addition, the CDSC will be waived on redemptions of
shares held by a Trustee of the Fund.
You must notify the Transfer Agent either directly or through your Dealer, at
the time of redemption, that you are entitled to waiver of the CDSC and provide
the Transfer Agent with such supporting documentation as it may deem
appropriate. The waiver will be granted subject to confirmation of your
entitlement. See "Purchase and Redemption of Fund Shares--Waiver of the
Contingent Deferred Sales Charge--Class B Shares" in the Statement of Additional
Information.
A quantity discount may apply to redemptions of Class B shares purchased prior
to August 1, 1994. See "Purchase and Redemption of Fund Shares--Quantity
Discount--Class B Shares Purchased Prior to August 1, 1994" in the Statement of
Additional Information.
SYSTEMATIC WITHDRAWAL PLAN. The CDSC will be waived (or reduced) on certain
redemptions from a Systematic Withdrawal Plan. On an annual basis, up to 12% of
the total dollar amount subject to the CDSC may be redeemed without charge. The
Transfer
43
<PAGE>
Agent will calculate the total amount available for this waiver annually on the
anniversary date of your purchase, or for shares purchased prior to March 1,
1997, on March 1 of the current year. The CDSC will be waived (or reduced) on
redemptions until this threshold 12% amount is reached.
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 NAV without the imposition of any additional sales charge. The first
conversion of Class B shares occurred in February 1995, when the conversion
feature was first implemented.
Since the Fund tracks amounts paid rather than the number of shares bought on
each purchase of Class B shares, the number of Class B shares eligible to
convert to Class A shares (excluding shares acquired through the automatic
reinvestment of dividends and other distributions) (the Eligible Shares) will be
determined on each conversion date in accordance with the following formula: (i)
the ratio of (a) the amounts paid for Class B shares purchased at least seven
years prior to the conversion date to (b) the total amount paid for all Class B
shares purchased and then held in your account (ii) multiplied by the total
number of Class B shares purchased and then held in your account. Each time any
Eligible Shares in your account convert to Class A shares, all shares or amounts
representing Class B shares then in your account that were acquired through the
automatic reinvestment of dividends and other distributions will convert to
Class A shares.
For purposes of determining the number of Eligible Shares, if the Class B
shares in your account on any conversion date are the result of multiple
purchases at different NAVs, the number of Eligible Shares calculated as
described above will generally be either more or less than the number of shares
actually purchased approximately seven years before such conversion date. For
example, if 100 shares were initially purchased at $10 per share (for a total of
$1,000) and a second purchase of 100 shares was subsequently made at $11 per
share (for a total of $1,100), 95.24 shares would convert approximately seven
years from the initial purchase (I.E., $1,000 divided by $2,100 (47.62%),
multiplied by 200 shares equals 95.24 shares). The Manager reserves the right to
modify the formula for determining the number of Eligible Shares in the future
as it deems appropriate on notice to shareholders.
Since annual distribution-related fees are lower for Class A shares than Class
B shares, the 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.
See "How the Fund Values its Shares."
For purposes of calculating the applicable holding period for conversions, all
payments for Class B shares during a month will be deemed to have been made on
the last day of the month, or for Class B shares acquired through exchange, or a
series of exchanges, on the last day of the month in which the original payment
for purchases of such Class B shares was made. For Class B shares previously
exchanged for shares of a money market fund, the time period during which such
shares were held in the money market fund will be excluded. For example, Class B
shares held in a money market fund for one year will not convert to Class A
shares until approximately eight years from purchase. For purposes of measuring
the time period during which shares are held in a money market fund, exchanges
will be deemed to have been made on the last day of the month. Class B shares
acquired through exchange will convert to Class A shares after expiration of the
conversion period applicable to the original purchase of such shares.
The conversion feature may be subject to the continuing availability of
opinions of counsel or rulings of the Internal Revenue Service (i) that the
dividends and other distributions paid on Class A, Class B, Class C and Class Z
shares will not constitute preferential dividends under the Internal Revenue
Code and (ii) that the conversion of shares does not constitute a taxable event.
The conversion of Class B shares into Class A shares may be suspended if such
opinions or rulings are no longer available. If conversions are suspended, Class
B shares of the Series will continue to be subject, possibly indefinitely, to
their higher annual distribution and service fee.
44
<PAGE>
HOW TO EXCHANGE YOUR SHARES
AS A SHAREHOLDER OF THE FUND, YOU HAVE AN EXCHANGE PRIVILEGE WITH THE OTHER
SERIES OF THE FUND AND CERTAIN OTHER PRUDENTIAL MUTUAL FUNDS (THE EXCHANGE
PRIVILEGE), INCLUDING ONE OR MORE SPECIFIED MONEY MARKET FUNDS, SUBJECT TO THE
MINIMUM INVESTMENT REQUIREMENTS OF SUCH FUNDS. CLASS A, CLASS B, CLASS C AND
CLASS Z SHARES MAY BE EXCHANGED FOR CLASS A, CLASS B, CLASS C AND CLASS Z
SHARES, RESPECTIVELY, OF THE OTHER SERIES OF THE FUND AND OF ANOTHER FUND ON THE
BASIS OF THE RELATIVE NAV. No sales charge will be imposed at the time of the
exchange. Any applicable CDSC payable upon the redemption of shares exchanged
will be calculated from the first day of the month after the initial purchase,
excluding the time shares were held in a money market fund. Class B and Class C
shares may not be exchanged into money market funds other than Prudential
Special Money Market Fund, Inc. For purposes of calculating the holding period
applicable to the Class B conversion feature, the time period during which Class
B shares were held in a money market fund will be excluded. See "Conversion
Feature--Class B Shares" above. An exchange will be treated as a redemption and
purchase for tax purposes. See "Shareholder Investment Account--Exchange
Privilege" in the Statement of Additional Information.
IN ORDER TO EXCHANGE SHARES BY TELEPHONE, YOU MUST AUTHORIZE TELEPHONE
EXCHANGES ON YOUR INITIAL APPLICATION FORM OR BY WRITTEN NOTICE TO THE TRANSFER
AGENT AND HOLD SHARES IN NON-CERTIFICATE FORM. Thereafter, you may call the Fund
at (800) 225-1852 to execute a telephone exchange of shares, weekdays, except
holidays, between the hours of 8:00 A.M. and 6:00 P.M., New York time. For your
protection and to prevent fraudulent exchanges, your telephone call will be
recorded and you will be asked to provide your personal identification number. A
written confirmation of the exchange transaction will be sent to you. NEITHER
THE FUND NOR ITS AGENTS WILL BE LIABLE FOR ANY LOSS, LIABILITY OR COST WHICH
RESULTS FROM ACTING UPON INSTRUCTIONS REASONABLY BELIEVED TO BE GENUINE UNDER
THE FOREGOING PROCEDURES. All exchanges will be made on the basis of the
relative NAV of the two funds or two Series next determined after the request is
received in good order.
IF YOU HOLD SHARES THROUGH PRUDENTIAL SECURITIES, YOU MUST EXCHANGE YOUR
SHARES BY CONTACTING YOUR PRUDENTIAL SECURITIES FINANCIAL ADVISER.
IF YOU HOLD CERTIFICATES, THE CERTIFICATES, SIGNED IN THE NAME(S) SHOWN ON THE
FACE OF THE CERTIFICATES, MUST BE RETURNED IN ORDER FOR THE SHARES TO BE
EXCHANGED. SEE "HOW TO SELL YOUR SHARES" ABOVE.
You may also exchange shares by mail by writing to Prudential Mutual Fund
Services LLC, Attention: Exchange Processing, P.O. Box 15010, New Brunswick, New
Jersey 08906-5010.
IN PERIODS OF SEVERE MARKET OR ECONOMIC CONDITIONS THE TELEPHONE EXCHANGE OF
SHARES MAY BE DIFFICULT TO IMPLEMENT AND YOU SHOULD MAKE EXCHANGES BY MAIL BY
WRITING TO PRUDENTIAL MUTUAL FUND SERVICES LLC AT THE ADDRESS NOTED ABOVE.
SPECIAL EXCHANGE PRIVILEGES. A special exchange privilege is available for
shareholders who qualify to purchase Class A shares at NAV (see "Alternative
Purchase Plan--Class A Shares--Reduction and Waiver of Initial Sales Charges"
above) and for shareholders who qualify to purchase Class Z shares (see
"Alternative Purchase Plan--Class Z Shares" above). Under this exchange
privilege, amounts representing any Class B and Class C shares (which are not
subject to a CDSC) held in such a shareholder's account will be automatically
exchanged for Class A shares for shareholders who qualify to purchase Class A
shares at NAV, on a quarterly basis, unless the shareholder elects otherwise.
Similarly, shareholders who qualify to purchase Class Z shares will have their
Class B and Class C shares which are not subject to a CDSC and their Class A
shares exchanged for Class Z shares on a quarterly basis. Eligibility for this
exchange privilege will be calculated on the business day prior to the date of
the exchange. Amounts representing Class B or Class C shares which are not
subject to a CDSC include the following: (1) amounts representing Class B or
Class C shares acquired pursuant to the automatic reinvestment of dividends and
distributions, (2) amounts representing the increase in the NAV above the total
amount of payments for the purchase of Class B or Class C shares and (3) amounts
representing Class B or Class C shares held beyond the applicable CDSC period.
Class B and Class C shareholders must notify the Transfer Agent either directly
or through Prudential Securities, Prusec or another Dealer that they are
eligible for this special exchange privilege.
45
<PAGE>
Participants in any fee-based program for which the Fund is an available
option will have their Class A shares, if any, exchanged for Class Z shares when
they elect to have those assets become a part of the fee-based program. Upon
leaving the program (whether voluntarily or not), such Class Z shares (and, to
the extent provided for in the program, Class Z shares acquired through
participation in the program) will be exchanged for Class A shares at NAV.
The exchange privilege is not a right and may be suspended, modified or
terminated on 60 days' notice to shareholders.
FREQUENT TRADING. The Fund and the other Prudential Mutual Funds are not
intended to serve as vehicles for frequent trading in response to short-term
fluctuations in the market. Due to the disruptive effect that market timing
investment strategies and excessive trading can have on efficient portfolio
management, each Prudential Mutual Fund, including the Fund, reserves the right
to refuse purchase orders and exchanges by any person, group or commonly
controlled accounts, if, in the Manager's sole judgment, such person, group or
accounts were following a market timing strategy or were otherwise engaging in
excessive trading (Market Timers).
To implement this authority to protect the Fund and its shareholders from
excessive trading, the Fund will reject all exchanges and purchases from a
Market Timer unless the Market Timer has entered into a written agreement with
the Fund or its affiliates pursuant to which the Market Timer has agreed to
abide by certain procedures, which include a daily dollar limit on trading. The
Fund may notify the Market Timer of rejection of an exchange or purchase order
subsequent to the day on which the order was placed.
SHAREHOLDER SERVICES
In addition to the exchange privilege, as a shareholder of the Fund, you can
take advantage of the following services and privileges:
-AUTOMATIC REINVESTMENTS OF DIVIDENDS AND/OR DISTRIBUTIONS WITHOUT A SALES
CHARGE. For your convenience, all dividends and distributions are automatically
reinvested in full and fractional shares of the Fund at NAV without a sales
charge. You may direct the Transfer Agent in writing not less than 5 full
business days prior to the record date to have subsequent dividends and/or
distributions sent in cash rather than reinvested. If you hold shares through
your Dealer, you should contact your financial adviser.
-AUTOMATIC SAVINGS ACCUMULATION PLAN (ASAP). Under ASAP, you may make regular
purchases of the Fund's shares in amounts as little as $50 via an automatic
debit to a bank account or brokerage account (including a Command Account). For
additional information about this service, you may contact the Distributor, your
Dealer or the Transfer Agent directly.
-SYSTEMATIC WITHDRAWAL PLAN. A systematic withdrawal plan is available to
shareholders which provides for monthly or quarterly checks. Withdrawals of
Class B and Class C shares may be subject to a CDSC. See "How to Sell Your
Shares-- Contingent Deferred Sales Charges" above.
-REPORTS TO SHAREHOLDERS. The Fund will send you annual and semi-annual
reports. The financial statements appearing in annual reports are audited by
independent accountants. In order to reduce duplicate mailing and printing
expenses, the Fund will provide one annual and semi-annual shareholder report
and annual prospectus per household. You may request additional copies of such
reports by calling (800) 225-1852 or by writing to the Fund at Gateway Center
Three, 100 Mulberry Street, Newark, New Jersey 07102-4077. In addition, monthly
unaudited financial data is available upon request from the Fund.
-SHAREHOLDER INQUIRIES. Inquiries should be addressed to the Fund at Gateway
Center Three, 100 Mulberry Street, Newark, New Jersey 07102-4077, or by
telephone, at (800) 225-1852 (toll-free) or, from outside the U.S.A., at
(732) 417-7555 (collect).
For additional information regarding the services and privileges described
above, see "Shareholder Investment Account" in the Statement of Additional
Information.
46
<PAGE>
DESCRIPTION OF SECURITY RATINGS
MOODY'S INVESTORS SERVICE
BOND RATINGS
Aaa: Bonds that are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edge." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa: Bonds that are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present that make the
long-term risks appear somewhat larger than in Aaa securities.
A: Bonds that are rated A possess many favorable investment attributes and are
to be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present that
suggest a susceptibility to impairment some time in the future.
Baa: Bonds that are rated Baa are considered as medium grade obligations I.E.,
they are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba: Bonds that are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate, and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B: Bonds that are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or 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
repay punctually senior debt obligations which have an original maturity not
exceeding one year.
P-1: Issuers rated "Prime-1" or "P-1" (or supporting institutions) have a
superior ability for repayment of senior short-term debt obligations.
A-1
<PAGE>
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 issues only in small degree.
A: Debt rated A has a strong capacity to pay interest and repay principal,
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher-rated categories.
BBB: Debt rated BBB is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher-rated categories.
BB, B, CCC, CC AND C: Debt rated BB, B, CCC, CC 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. While such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major exposures
to adverse conditions.
D: Debt rated D is in payment default. The D rating category 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-2
<PAGE>
A-1: The A-1 designation indicates that the degree of safety regarding timely
payment is strong. Those issues determined to possess extremely strong safety
characteristics are denoted with a plus sign (+) designation.
A-2: Capacity for timely payment on issues with the designation A-2 is
satisfactory. However, the relative degree of safety is not as high as for
issues designated A-1.
A-3: Issues 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 rated SP-1, SP-2 or SP-3. The
designation SP-1 indicates a very strong capacity to pay principal and interest.
Those issues determined to possess extremely strong 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.
A-3
<PAGE>
THE PRUDENTIAL MUTUAL FUND FAMILY
Prudential offers a broad range of mutual funds designed to meet your
individual needs. We welcome you to review the investment options available
through our family of funds. For more information on the Prudential Mutual
Funds, including charges and expenses, contact your Prudential Securities
financial adviser or Prusec representative or telephone the Funds at
(800) 225-1852 for a free prospectus. Read the prospectus carefully before you
invest or send money.
TAXABLE BOND FUNDS
--------------------------
Prudential Diversified Bond Fund, Inc.
Prudential Government Income Fund, Inc.
Prudential Government Securities Trust
Short-Intermediate Term Series
Prudential High Yield Fund, Inc.
Prudential High Yield Total Return Fund, Inc.
Prudential Mortgage Income Fund, Inc.
Prudential Structured Maturity Fund, Inc.
Income Portfolio
TAX-EXEMPT BOND FUNDS
-----------------------------
Prudential California Municipal Fund
California Series
California Income Series
Prudential Municipal Bond Fund
High Income Series
Insured Series
Intermediate Series
Prudential Municipal Series Fund
Florida Series
Maryland Series
Massachusetts Series
Michigan Series
New Jersey Series
New York Series
North Carolina Series
Ohio Series
Pennsylvania Series
Prudential National Municipals Fund, Inc.
GLOBAL FUNDS
--------------------
Prudential Developing Markets Fund
Prudential Developing Markets Equity Fund
Prudential Latin America Equity Fund
Prudential Europe Growth Fund, Inc.
Prudential Global Genesis Fund, Inc.
Prudential Global Limited Maturity Fund, Inc.
Limited Maturity Portfolio
Prudential Intermediate Global Income Fund, Inc.
Prudential International Bond Fund, Inc.
Prudential Natural Resources Fund, Inc.
Prudential Pacific Growth Fund, Inc.
Prudential World Fund, Inc.
Global Series
International Stock Series
Global Utility Fund, Inc.
The Global Total Return Fund, Inc.
EQUITY FUNDS
--------------------
Prudential Balanced Fund
Prudential Distressed Securities Fund, Inc.
Prudential Emerging Growth Fund
Prudential Equity Fund, Inc.
Prudential Equity Income Fund
Prudential Index Series Fund
Prudential Bond Market Index Fund
Prudential Europe Index Fund
Prudential Pacific Index Fund
Prudential Small-Cap Index Fund
Prudential Stock Index Fund
The Prudential Investment Portfolios, Inc.
Prudential Active Balanced Fund
Prudential Jennison Growth Fund
Prudential Jennison Growth & Income Fund
Prudential Mid-Cap Value Fund
Prudential Real Estate Securities Fund, Inc.
Prudential Small-Cap Quantum Fund, Inc.
Prudential Small Company Value Fund, Inc.
Prudential Utility Fund, Inc.
Prudential 20/20 Focus Fund
Nicholas-Applegate Fund, Inc.
Nicholas-Applegate Growth Equity Fund
MONEY MARKET FUNDS
--------------------------
- -TAXABLE MONEY MARKET FUNDS
Cash Accumulation Trust
Liquid Assets Fund
National Money Market Fund
Prudential Government Securities Trust
Money Market Series
U.S. Treasury Money Market Series
Prudential Special Money Market Fund, Inc.
Money Market Series
Prudential MoneyMart Assets, Inc.
- -TAX-FREE MONEY MARKET FUNDS
Prudential Tax-Free Money Fund, Inc.
Prudential California Municipal Fund
California Money Market Series
Prudential Municipal Series Fund
Connecticut Money Market Series
Massachusetts Money Market Series
New Jersey Money Market Series
New York Money Market Series
- -COMMAND FUNDS
Command Money Fund
Command Government Fund
Command Tax-Free Fund
- -INSTITUTIONAL MONEY MARKET FUNDS
Prudential Institutional Liquidity Portfolio, Inc.
Institutional Money Market Series
B-1
<PAGE>
No Dealer, sales representative or any other person has been authorized to give
any information or to make any representations, other than those contained in
this Prospectus, in connection with the offer contained herein, and, if given or
made, such other information or representations must not be relied upon as
having been authorized by the Fund or the Distributor. This Prospectus does not
constitute an offer by the Fund or by the Distributor to sell or a solicitation
of any offer to buy any of the securities offered hereby in any jurisdiction to
any person to whom it is unlawful to make such offer in such jurisdiction.
- -------------------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
FUND HIGHLIGHTS............................................................. 2
What are the Series' Risk Factors and Special Characteristics?............ 2
FUND EXPENSES............................................................... 4
FINANCIAL HIGHLIGHTS........................................................ 6
HOW THE FUND INVESTS........................................................ 18
Investment Objectives and Policies........................................ 18
Hedging Strategies........................................................ 24
Other Investments and Policies............................................ 26
Investment Restrictions................................................... 28
HOW THE FUND IS MANAGED..................................................... 28
Manager................................................................... 29
Distributor............................................................... 29
Fee Waivers and Subsidy................................................... 31
Portfolio Transactions.................................................... 31
Custodian and Transfer and Dividend Disbursing Agent...................... 31
Year 2000................................................................. 31
HOW THE FUND VALUES ITS SHARES.............................................. 32
HOW THE FUND CALCULATES PERFORMANCE......................................... 32
TAXES, DIVIDENDS AND DISTRIBUTIONS.......................................... 33
GENERAL INFORMATION......................................................... 35
Description of Shares..................................................... 35
Additional Information.................................................... 36
SHAREHOLDER GUIDE........................................................... 37
How to Buy Shares of the Fund............................................. 37
Alternative Purchase Plan................................................. 38
How to Sell Your Shares................................................... 41
Conversion Feature--Class B Shares........................................ 44
How to Exchange Your Shares............................................... 45
Shareholder Services...................................................... 46
DESCRIPTION OF SECURITY RATINGS............................................. A-1
THE PRUDENTIAL MUTUAL FUND FAMILY........................................... B-1
</TABLE>
- -------------------------------------------
MF133A
CUSIP Nos.:
Class A: 74435L103; Class B: 74435L202
High Income Series Class C: 74435L707 Class Z: 74435L871
Class A: 74435L301; Class B: 74435L400
Insured Series Class C: 74435L806 Class Z: 74435L863
Class A: 74435L509; Class B: 74435L608
Intermediate Series Class C: 74435L889 Class Z: 74435L855
PRUDENTIAL
MUNICIPAL
BOND FUND
- -----------
HIGH INCOME SERIES
INSURED SERIES
INTERMEDIATE SERIES
PROSPECTUS
July 1, 1998
www.prudential.com
--------------------------
[LOGO]
<PAGE>
Prudential Municipal Bond Fund
- --------------------------------
PROSPECTUS DATED JULY 1, 1998
- ----------------------------------------------------------------
Prudential Municipal Bond Fund (the Fund) is an open-end, diversified,
management investment company, or mutual fund, consisting of three separate
portfolios--the High Income Series, the Insured Series and the Intermediate
Series (collectively, the Series). The investment objectives of the Series are
as follows: (i) the objective of the High Income Series is to provide the
maximum amount of income that is eligible for exclusion from federal income
taxes, (ii) the objective of the Insured Series is to provide the maximum amount
of income that is eligible for exclusion from federal income taxes consistent
with the preservation of capital and (iii) the objective of the Intermediate
Series is to provide a high level of income that is eligible for exclusion from
federal income taxes consistent with the preservation of capital. Although each
Series will seek income that is eligible for exclusion from federal income
taxes, a portion of the dividends and distributions paid by each Series (and, in
particular, the High Income Series) may be treated as a preference item for
purposes of the alternative minimum tax. Each Series seeks to achieve its
objective through the separate investment policies described in this Prospectus.
There can be no assurance that the Series' investment objectives will be
achieved. See "How the Fund Invests--Investment Objectives and Policies."
Subject to the limitations described herein, each Series may utilize
derivatives, including buying and selling futures contracts for the purpose of
hedging its portfolio securities. See "How the Fund Invests--Investment
Objectives and Policies."
THE HIGH INCOME SERIES MAY INVEST UP TO 100% OF ITS ASSETS IN LOWER RATED BONDS,
COMMONLY KNOWN AS JUNK BONDS. INVESTMENTS OF THIS TYPE ARE SUBJECT TO A GREATER
RISK OF LOSS OF PRINCIPAL AND INTEREST, INCLUDING DEFAULT RISK, THAN HIGHER
RATED BONDS. PURCHASERS SHOULD CAREFULLY ASSESS THE RISKS ASSOCIATED WITH AN
INVESTMENT IN THIS SERIES. See "How the Fund Invests--Investment Objectives and
Policies--The High Income Series--Risk Factors Relating to Investing in High
Income Securities."
The Insured Series invests at least 70% of its assets in insured obligations
under normal circumstances. The insurance relates to the timely payment of
principal and interest on portfolio investments and not to the shares of the
Series.
The Fund's address is Gateway Center Three, 100 Mulberry Street, Newark, New
Jersey 07102-4077, and its telephone number is (800) 225-1852.
This Prospectus sets forth concisely the information about the Fund that a
prospective investor should know before investing and is available at the Web
site of the Prudential Insurance Company of America (http://www.prudential.com).
Additional information about the Fund has been filed with the Securities and
Exchange Commission (the Commission) in a Statement of Additional Information,
dated July 1, 1998, which information is incorporated herein by reference (is
legally considered a part of this Prospectus) and is available without charge
upon request to the Fund at the address or telephone number noted above. The
Commission maintains a Web site (http://www.sec.gov) that contains the Statement
of Additional, material incorporated by reference, and other information
regarding the Fund.
- --------------------------------------------------------------------------------
INVESTORS ARE ADVISED TO READ THIS PROSPECTUS AND RETAIN IT FOR FUTURE
REFERENCE.
- --------------------------------------------------------------------------------
AN INVESTMENT IN THE FUND IS NOT A DEPOSIT OF ANY BANK AND IS NOT INSURED OR
GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT
AGENCY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE>
FUND HIGHLIGHTS
The following summary is intended to highlight certain information contained
in this Prospectus and is qualified in its entirety by the more detailed
information appearing elsewhere herein.
WHAT IS PRUDENTIAL MUNICIPAL BOND FUND?
Prudential Municipal Bond Fund is a mutual fund. A mutual fund pools the
resources of investors by selling its shares to the public and investing the
proceeds of such sale in a portfolio of securities designed to achieve its
investment objective. Technically, the Fund is an open-end, diversified,
management investment company. The Fund is comprised of three separate
portfolios--the High Income Series, the Insured Series and the Intermediate
Series.
WHAT ARE THE SERIES' INVESTMENT OBJECTIVES?
The investment objective of the High Income Series is to provide the
maximum amount of income that is eligible for exclusion from federal income
taxes. The investment objective of the Insured Series is to provide the
maximum amount of income that is eligible for exclusion from federal income
taxes consistent with the preservation of capital. The investment objective
of the Intermediate Series is to provide a high level of income that is
eligible for exclusion from federal income taxes consistent with the
preservation of capital. Each Series seeks to achieve its objective through
the separate investment policies described in this Prospectus. There can be
no assurance that the Series' objectives will be achieved. See "How the Fund
Invests--Investment Objectives and Policies" at page 18.
WHAT ARE THE SERIES' RISK FACTORS AND SPECIAL CHARACTERISTICS?
The High Income Series invests in high yield securities, commonly known as
junk bonds, which may be considered speculative and are subject to the risk
of an issuer's inability to meet principal and interest payments on the
obligations, as well as price volatility. The Insured Series invests
primarily in insured municipal obligations. Although the insurance policies
protect against the failure to make timely payment of principal and interest
on the insured municipal obligations, the price of the municipal obligations
and the stability of the Series' net asset value per share (NAV) are not
insured. The Intermediate Series invests primarily in municipal obligations
with maturities between 3 and 15 years and will have a dollar-weighted
average portfolio maturity of more than 3 and less than 10 years. Generally,
the yield earned on longer-term municipal obligations is greater than that
earned on similar obligations with shorter maturities. However, obligations
with longer maturities are subject to greater market risk due to larger
fluctuations in value given specific changes in the level of interest rates
relative to the value of shorter-term obligations. See "How the Fund
Invests--Investment Objectives and Policies" at page 18. Each Series may
purchase and sell derivatives, including certain financial futures contracts
and options thereon, for hedging purposes. These activities may be
considered speculative and may result in higher risks and costs to the Fund.
See "How the Fund Invests--Hedging Strategies--Risks of Hedging Strategies"
at page 25. As with an investment in any mutual fund, an investment in this
Fund can decrease in value and you can lose money.
WHO MANAGES THE FUND?
Prudential Investments Fund Management LLC (PIFM or the Manager) is the
Manager of the Fund and is compensated for its services at an annual rate of
.50 of 1% of the average daily net assets of each Series up to $1 billion
and .45 of 1% of the average daily net assets of each Series in excess of $1
billion. As of May 31, 1998, PIFM served as manager or administrator to 67
investment companies, including 45 mutual funds, with aggregate assets of
approximately $65 billion. The Prudential Investment Corporation (PIC),
doing business as Prudential Investments (the Subadviser) furnishes
investment advisory services in connection with the management of the Fund
under a Subadvisory Agreement with PIFM. See "How the Fund is
Managed--Manager" at page 29.
WHO DISTRIBUTES THE FUND'S SHARES?
Prudential Investment Management Services LLC (the Distributor) acts as
the Distributor of the Fund's Class A, Class B, Class C and Class Z shares
and is paid an annual distribution and service fee which is currently being
charged at the rate of .10 of 1% of the average daily net assets of the
Class A shares of each Series, is paid an annual distribution and service
fee which is currently being charged at the rate of .50 of 1% of the average
daily net assets of the Class B shares of each Series and is paid an annual
distribution and service fee which is currently being charged at the rate of
.75 of 1% of the average daily net assets of the Class C shares of each
Series. The Distributor incurs the expense of distributing the Fund's Class
Z shares under a distribution agreement with the Fund, none of which is
reimbursed or paid for by the Fund. See "How the Fund is
Managed--Distributor" at page 29.
2
<PAGE>
WHAT IS THE MINIMUM INVESTMENT?
The minimum initial investment is $1,000 for Class A and Class B shares
per class and $5,000 for Class C shares. The minimum subsequent investment
is $100 for Class A, Class B and Class C shares. Class Z shares are not
subject to any minimum investment requirements. There is no minimum
investment requirement for certain employee savings plans. For purchases
made through the Automatic Savings Accumulation Plan, the minimum initial
and subsequent investment is $50. See "Shareholder Guide--How to Buy Shares
of the Fund" at page 37 and "Shareholder Guide--Shareholder Services" at
page 46.
HOW DO I PURCHASE SHARES?
You may purchase shares of the Fund through the Distributor or brokers or
dealers that have entered into agreements to act as participating or
introducing brokers for the Distributor (Dealers) or directly from the Fund
through its transfer agent, Prudential Mutual Fund Services LLC (PMFS or the
Transfer Agent). In each case, sales are made at the NAV next determined
after receipt of your purchase order by the Transfer Agent, a Dealer or the
Distributor, plus a sales charge which may be imposed either (i) at the time
of purchase (Class A shares) or (ii) on a deferred basis (Class B or Class C
shares). Class Z shares are offered to a limited group of investors at NAV
without any sales charge. Dealers may charge their customers a separate fee
for handling purchase transactions. See "How the Fund Values its Shares" at
page 32 and "Shareholder Guide--How to Buy Shares of the Fund" at page 37.
WHAT ARE MY PURCHASE ALTERNATIVES?
The Fund offers four classes of shares through this Prospectus:
- Class A Shares: Sold with an initial sales charge of up to 3% of
the offering price.
- Class B Shares: Sold without an initial sales charge but are
subject to a contingent deferred sales charge or
CDSC (declining from 5% to zero of the lower of
the amount invested or the redemption proceeds)
which will be imposed on certain redemptions
made within six years of purchase. Although
Class B shares are subject to higher ongoing
distribution-related expenses than Class A
shares, Class B shares will automatically
convert to Class A shares (which are subject to
lower ongoing distribution-related expenses)
approximately seven years after purchase.
- Class C Shares: Sold without an initial sales charge and, for
one year after purchase, are subject to a 1%
CDSC on redemptions. Class C shares are subject
to higher ongoing distribution-related expenses
than Class A shares but, unlike Class B shares,
do not convert to another class.
- Class Z Shares: Sold without either an initial sales charge or
CDSC to a limited group of investors. Class Z
shares are not subject to any ongoing service or
distribution expenses.
See "Shareholder Guide--Alternative Purchase Plan" at page 38.
HOW DO I SELL MY SHARES?
You may redeem your shares at any time at the NAV next determined after
your Dealer, the Distributor or the Transfer Agent receives your sell order.
The proceeds of redemptions of Class B and Class C shares may be subject to
a CDSC. Dealers may charge their customers a separate fee for handling sale
transactions. See "Shareholder Guide--How to Sell Your Shares" at page 41.
HOW ARE DIVIDENDS AND DISTRIBUTIONS PAID?
The Fund expects to declare daily and pay monthly dividends of net
investment income, if any, and make distributions of any net capital gains
at least annually. Dividends and distributions will be automatically
reinvested in additional shares of a Series at NAV without a sales charge
unless you request that they be paid to you in cash. See "Taxes, Dividends
and Distributions" at page 33.
3
<PAGE>
FUND EXPENSES
(FOR EACH SERIES)
<TABLE>
<CAPTION>
CLASS A CLASS Z
SHAREHOLDER TRANSACTION EXPENSES (a) SHARES CLASS B SHARES (b) CLASS C SHARES SHARES
---------- ------------------------ ----------------------- ----------
<S> <C> <C> <C> <C>
Maximum Sales Load Imposed on
Purchases (as a percentage of
offering price)................ 3% None None None
Maximum Sales Load Imposed on
Reinvested Dividends........... None None None None
Maximum Deferred Sales Load (as
a percentage of original
purchase price or redemption
proceeds, whichever is
lower)......................... None 5% during the first 1% on redemptions None
year, decreasing by 1% made within one year
annually to 1% in the of purchase
fifth and sixth years
and 0% the seventh year
Redemption Fees................. None None None None
Exchange Fee.................... None None None None
<CAPTION>
ANNUAL FUND OPERATING EXPENSES (c)
(as a percentage of average net CLASS A CLASS Z
assets) SHARES CLASS B SHARES CLASS C SHARES SHARES
---------- ------------------------ ----------------------- ----------
<S> <C> <C> <C> <C>
Management Fees:
High Income Series Before
Waiver....................... .50% .50% .50% .50%
Insured Series................ .50 .50 .50 .50
Intermediate Series........... .50 .50 .50 .50
12b-1 Fees (After Reduction):
High Income Series............ .10%(d) .50% .75%(d) None
Insured Series................ .10(d) .50 .75(d) None
Intermediate Series........... .10(d) .50 .75(d) None
Other Expenses:
High Income Series............ .07 .07 .07 .07
Insured Series................ .11 .11 .11 .11
Intermediate Series........... .73 .73 .73 .73
Total Fund Operating Expenses
(Before Waiver and After
Reduction):
High Income Series............ .67 1.07 1.32 .57
Insured Series................ .71 1.11 1.36 .61
Intermediate Series........... 1.33 1.73 1.98 1.23
</TABLE>
<TABLE>
<S> <C>
- ------------------
(a) Dealers may independently charge additional fees for shareholder
transactions or advisory services. Pursuant to rules of the National
Association of Securities Dealers, Inc., the aggregate initial sales
charges, deferred sales charges and asset-based sales charges on shares of
each Series may not exceed 6.25% of total gross sales, subject to certain
exclusions. This 6.25% limitation is imposed on each class of the Series
rather than on a per shareholder basis. Therefore, long-term shareholders
of the Fund may pay more in total sales charges than the economic
equivalent of 6.25% of such shareholders' investment in such shares. See
"How the Fund is Managed--Distributor."
(b) Class B shares will automatically convert to Class A shares approximately
seven years after purchase. See "Shareholder Guide--Conversion Feature--
Class B Shares."
(c) Based on expenses incurred during the fiscal year ended April 30, 1998,
without taking into account the management fee waiver. At the current level
of management fee waiver (10%), Management Fees would be .45% for all
classes. Total Fund Operating Expenses for Class A, B, C and Class Z shares
would be .62%, 1.02%, 1.27% and .52%, respectively for the High Income
Series. The expense information in the table with respect to the Insured
and Intermediate Series has been restated to reflect current fees.
Effective August 31, 1997, PIFM eliminated its management fee waiver (10%)
with respect to the Insured and Intermediate Series. See "How the Fund is
Managed--Fee Waivers and Subsidy."
(d) Although the Class A and Class C Distribution and Service Plans provide
that the Fund may pay a distribution fee of up to .30 of 1% and 1% of the
average daily net assets of the Class A and Class C shares, respectively,
the Distributor may voluntarily waive all or a portion of the distribution
fees as it may determine from time to time. Any such waivers may be
terminated at any time without prior notice to shareholders. The fee table
reflects the 12b-1 fees that are estimated to be incurred by the Fund
during its current fiscal year. Total Fund Operating Expenses of the Class
A and Class C shares without such limitation would be .87% and 1.57%,
respectively, of the High Income Series, .91% and 1.61%, respectively, of
the Insured Series and 1.53% and 2.23%, respectively, of the Intermediate
Series. See "How the Fund is Managed--Distributor."
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
EXAMPLE (EACH SERIES) 1 YEAR 3 YEARS 5 YEARS 10 YEARS
--------- --------- --------- ----------
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000 investment,
assuming (1) 5% annual return and (2) redemption at the end
of each time period:
High Income Series
Class A................................................ $36 $49 $ 64 $105
Class B................................................ $60 $62 $ 66 $108
Class C................................................ $23 $40 $ 70 $153
Class Z................................................ $ 5 $17 $ 29 $ 70
Insured Series
Class A................................................ $37 $51 $ 67 $113
Class B................................................ $61 $65 $ 70 $116
Class C................................................ $24 $42 $ 73 $161
Class Z................................................ $ 6 $19 $ 33 $ 79
Intermediate Series
Class A................................................ $43 $70 $100 $183
Class B................................................ $67 $84 $103 $186
Class C................................................ $30 $62 $106 $229
Class Z................................................ $12 $38 $ 66 $151
You would pay the following expenses on the same investment,
assuming no redemption:
High Income Series
Class A................................................ $36 $49 $ 64 $105
Class B................................................ $10 $32 $ 56 $108
Class C................................................ $13 $40 $ 70 $153
Class Z................................................ $ 5 $17 $ 29 $ 70
Insured Series
Class A................................................ $37 $51 $ 67 $113
Class B................................................ $11 $35 $ 60 $116
Class C................................................ $14 $42 $ 73 $161
Class Z................................................ $ 6 $19 $ 33 $ 79
Intermediate Series
Class A................................................ $43 $70 $100 $183
Class B................................................ $17 $54 $ 93 $186
Class C................................................ $20 $62 $106 $229
Class Z................................................ $12 $38 $ 66 $151
- ----------------
The above examples are based on data for the Fund's fiscal year ended April 30, 1998. THE EXAMPLES SHOULD NOT BE
CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
The purpose of this table is to assist investors in understanding the various costs and expenses that an investor
in the Fund will bear, whether directly or indirectly. For more complete descriptions of the various costs and
expenses, see "How the Fund is Managed." "Other Expenses" includes operating expenses of the Series, such as
Trustees' and professional fees, registration fees, reports to shareholders and transfer agency and custodian fees.
</TABLE>
5
<PAGE>
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH OF THE INDICATED PERIODS)
(HIGH INCOME SERIES--CLASS A SHARES)
The following financial highlights, for the fiscal years ended April 30, 1997
and 1998, have been audited by Price Waterhouse LLP, independent accountants,
and by Deloitte & Touche LLP, independent auditors, for the three years ended
April 30, 1996. Each of the respective reports by Price Waterhouse LLP and
Deloitte & Touche LLP on such financial highlights were unqualified. This
information should be read in conjunction with the financial statements and
notes thereto, which appear in the Statement of Additional Information. The
financial highlights contain selected data for a Class A share of beneficial
interest outstanding, total return, ratios to average net assets and other
supplemental data for the periods indicated. The information is based on data
contained in the financial statements. Further performance information is
contained in the annual report, which may be obtained without charge. See
"Shareholder Guide--Shareholder Services--Reports to Shareholders."
<TABLE>
<CAPTION>
HIGH INCOME SERIES
-----------------------------------------------------------------------------------------------------------
CLASS A
-----------------------------------------------------------------------------------------------------------
JANUARY 22,
1990(a)
YEARS ENDED APRIL 30, THROUGH
------------------------------------------------------------------------------------------- APRIL 30,
1998 1997 1996 1995 1994 1993 1992 1991 1990
-------- -------- -------- -------- ------- ------- ------- ------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of
period........... $ 10.84 $ 10.70 $ 10.72 $ 10.74 $ 11.14 $ 10.68 $ 10.45 $ 10.33 $10.58
-------- -------- -------- -------- ------- ------- ------- ------- -----------
INCOME FROM
INVESTMENT
OPERATIONS
Net investment
income........... .67(d) .70(d) .72(d) .72(d) .72 .77 .77(d) .79(d) .23(d)
Net realized and
unrealized gain
(loss) on
investment
transactions..... .47 .14 (.02) (.02) (.39) .46 .23 .12 (.25)
-------- -------- -------- -------- ------- ------- ------- ------- -----------
Total from
investment
operations....... 1.14 .84 .70 .70 .33 1.23 1.00 .91 (.02)
-------- -------- -------- -------- ------- ------- ------- ------- -----------
LESS DISTRIBUTIONS
Dividends from net
investment
income........... (.67) (.70) (.72) (.72) (.72) (.77) (.77) (.79) (.23)
Distributions from
capital gains.... -- -- -- -- (.01) -- -- -- --
-------- -------- -------- -------- ------- ------- ------- ------- -----------
Total
distributions.... (.67) (.70) (.72) (.72) (.73) (.77) (.77) (.79) (.23)
-------- -------- -------- -------- ------- ------- ------- ------- -----------
Net asset value,
end of period.... $ 11.31 $ 10.84 $ 10.70 $ 10.72 $ 10.74 $ 11.14 $ 10.68 $ 10.45 $10.33
-------- -------- -------- -------- ------- ------- ------- ------- -----------
-------- -------- -------- -------- ------- ------- ------- ------- -----------
TOTAL RETURN
(b):............. 10.80% 8.03% 6.55% 6.90% 2.88% 11.90% 9.82% 9.14% (1.49)%
RATIOS/SUPPLEMENTAL
DATA:
Net assets, end of
period (000)..... $421,503 $334,062 $223,073 $115,501 $54,491 $43,529 $24,725 $15,089 $3,905
Average net assets
(000)............ $381,735 $294,940 $162,329 $ 65,207 $52,982 $31,658 $19,702 $11,594 $1,914
Ratios to average
net assets:
Expenses,
including
distribution
fees............ 0.62%(d) 0.64%(d) 0.64%(d) 0.69%(d) 0.69% 0.74% 0.65%(d) 0.60%(d) 0.60%(c)(d)
Expenses,
excluding
distribution
fees............ 0.52%(d) 0.54%(d) 0.54%(d) 0.59%(d) 0.59% 0.64% 0.55%(d) 0.50%(d) 0.50%(c)(d)
Net investment
income.......... 6.03%(d) 6.44%(d) 6.58%(d) 6.83%(d) 6.42% 7.04% 7.25%(d) 7.62%(d) 8.17%(c)(d)
Portfolio turnover
rate............. 13% 26% 35% 39% 36% 27% 34% 29% 44%
</TABLE>
- ---------------
(a) Commencement of offering of Class A shares.
(b) Total return does not consider the effects of sales loads. Total
return is calculated assuming a purchase of shares on the first day
and a sale on the last day of each period reported and includes
reinvestment of dividends and distributions. Total returns for
periods of less than a full year are not annualized.
(c) Annualized.
(d) Net of management fee waiver. See "Manager" in the Statement of
Additional Information.
6
<PAGE>
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH OF THE INDICATED PERIODS)
(HIGH INCOME SERIES--CLASS B SHARES)
The following financial highlights, for the fiscal years ended April 30, 1997
and 1998, have been audited by Price Waterhouse LLP, independent accountants,
and by Deloitte & Touche LLP, independent auditors, for the three years ended
April 30, 1996. Each of the respective reports by Price Waterhouse LLP and
Deloitte & Touche LLP on such financial highlights were unqualified. This
information should be read in conjunction with the financial statements and
notes thereto, which appear in the Statement of Additional Information. The
financial highlights contain selected data for a Class B share of beneficial
interest outstanding, total return, ratios to average net assets and other
supplemental data for the periods indicated. The information is based on data
contained in the financial statements. Further performance information is
contained in the annual report, which may be obtained without charge. See
"Shareholder Guide--Shareholder Services--Reports to Shareholders."
<TABLE>
<CAPTION>
HIGH INCOME SERIES
---------------------------------------------------------------------------------
CLASS B
---------------------------------------------------------------------------------
YEARS ENDED APRIL 30,
---------------------------------------------------------------------------------
1998 1997 1996 1995 1994 1993
-------- -------- -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period... $ 10.84 $ 10.69 $ 10.72 $ 10.74 $ 11.14 $ 10.68
-------- -------- -------- ---------- ---------- ----------
INCOME FROM INVESTMENT OPERATIONS
Net investment income.................. .63(b) .66(b) .68(b) .68(b) .68 .73
Net realized and unrealized gain (loss)
on investment transactions........... .47 .15 (.03) (.02) (.39) .46
-------- -------- -------- ---------- ---------- ----------
Total from investment operations....... 1.10 .81 .65 .66 .29 1.19
-------- -------- -------- ---------- ---------- ----------
LESS DISTRIBUTIONS
Dividends from net investment income... (.63) (.66) (.68) (.68) (.68) (.73)
Distributions from capital gains....... -- -- -- -- (.01) --
-------- -------- -------- ---------- ---------- ----------
Total distributions.................... (.63) (.66) (.68) (.68) (.69) (.73)
-------- -------- -------- ---------- ---------- ----------
Net asset value, end of period......... $ 11.31 $ 10.84 $ 10.69 $ 10.72 $ 10.74 $ 11.14
-------- -------- -------- ---------- ---------- ----------
-------- -------- -------- ---------- ---------- ----------
TOTAL RETURN (a):...................... 10.36% 7.71% 6.12% 6.37% 2.46% 11.47%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)........ $669,223 $665,525 $799,048 $ 934,725 $1,099,640 $1,028,480
Average net assets (000)............... $669,132 $725,305 $900,115 $1,024,132 $1,132,653 $ 893,203
Ratios to average net assets:
Expenses, including distribution
fees................................ 1.02%(b) 1.04%(b) 1.04%(b) 1.09%(b) 1.09% 1.14%
Expenses, excluding distribution
fees................................ 0.52%(b) 0.54%(b) 0.54%(b) 0.59%(b) 0.58% .64%
Net investment income................ 5.63%(b) 6.05%(b) 6.19%(b) 6.37%(b) 6.02% 6.66%
Portfolio turnover rate................ 13% 26% 35% 39% 36% 27%
<CAPTION>
1992 1991 1990 1989
-------- -------- -------- --------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period... $ 10.45 $ 10.34 $ 10.56 $ 10.13
-------- -------- -------- --------
INCOME FROM INVESTMENT OPERATIONS
Net investment income.................. .73(b) .75(b) .79(b) .86(b)
Net realized and unrealized gain (loss)
on investment transactions........... .23 .11 (.17) .45
-------- -------- -------- --------
Total from investment operations....... .96 .86 .62 1.31
-------- -------- -------- --------
LESS DISTRIBUTIONS
Dividends from net investment income... (.73) (.75) (.79) (.86)
Distributions from capital gains....... -- -- (.05) (.02)
-------- -------- -------- --------
Total distributions.................... (.73) (.75) (.84) (.88)
-------- -------- -------- --------
Net asset value, end of period......... $ 10.68 $ 10.45 $ 10.34 $ 10.56
-------- -------- -------- --------
-------- -------- -------- --------
TOTAL RETURN (a):...................... 9.40% 8.59% 6.04% 13.40%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)........ $803,838 $701,483 $622,970 $549,426
Average net assets (000)............... $759,779 $667,751 $549,485 $185,367
Ratios to average net assets:
Expenses, including distribution
fees................................ 1.05%(b) 1.00%(b) 0.83%(b) 0.27%(b)
Expenses, excluding distribution
fees................................ 0.55%(b) 0.50%(b) 0.33%(b) 0.12%(b)
Net investment income................ 6.85%(b) 7.22%(b) 7.24%(b) 7.26%(b)
Portfolio turnover rate................ 34% 29% 44% 17%
</TABLE>
- -----------------
(a) 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.
(b) Net of expense subsidy, fee waivers and distribution fee deferrals.
See "Manager" in the Statement of Additional Information.
7
<PAGE>
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH OF THE INDICATED PERIODS)
(HIGH INCOME SERIES--CLASS C SHARES)
The following financial highlights for the fiscal years ended April 30, 1997
and 1998, have been audited by Price Waterhouse LLP, independent accountants,
and by Deloitte & Touche LLP, independent auditors, for the year ended April 30,
1996 and for the period from August 1, 1994 through April 30, 1995. Each of the
respective reports by Price Waterhouse LLP and Deloitte & Touche LLP on such
financial highlights were unqualified. This information should be read in
conjunction with the financial statements and notes thereto, which appear in the
Statement of Additional Information. The financial highlights contain selected
data for a Class C share of beneficial interest outstanding, total return,
ratios to average net assets and other supplemental data for the periods
indicated. The information is based on data contained in the financial
statements. Further performance information is contained in the annual report,
which may be obtained without charge. See "Shareholder Guide--Shareholder
Services--Reports to Shareholders."
<TABLE>
<CAPTION>
HIGH INCOME SERIES
------------------------------------------
CLASS C
------------------------------------------
AUGUST 1,
1994(a)
YEAR ENDED APRIL 30, THROUGH
------------------------------ APRIL 30,
1998 1997 1996 1995
-------- -------- -------- ---------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period................ $ 10.84 $ 10.69 $ 10.72 $10.79
-------- -------- -------- ---------
INCOME FROM INVESTMENT OPERATIONS
Net investment income (d)........................... .61 .63 .65 .49
Net realized and unrealized gain (loss) on
investment transactions........................... .47 .15 (.03) (.07)
-------- -------- -------- ---------
Total from investment operations.................... 1.08 .78 .62 .42
-------- -------- -------- ---------
LESS DISTRIBUTIONS
Dividends from net investment income................ (.61) (.63) (.65) (.49)
-------- -------- -------- ---------
Net asset value, end of period...................... $ 11.31 $ 10.84 $ 10.69 $10.72
-------- -------- -------- ---------
-------- -------- -------- ---------
TOTAL RETURN (b):................................... 10.09% 7.44% 5.86% 3.91%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)..................... $ 20,554 $ 9,563 $ 6,471 $3,208
Average net assets (000)............................ $ 14,932 $ 8,060 $ 5,608 $1,385
Ratios to average net assets:
Expenses, including distribution fees (d)......... 1.27% 1.29% 1.29% 1.34%(c)
Expenses, excluding distribution fees (d)......... 0.52% 0.54% 0.54% 0.59%(c)
Net investment income (d)......................... 5.39% 5.80% 5.93% 6.34%(c)
Portfolio turnover rate............................. 13% 26% 35% 39%
</TABLE>
- ------------
(a) Commencement of offering of Class C shares.
(b) Total return does not consider the effects of sales loads. Total return
is calculated assuming a purchase of shares on the first day and a sale
on the last day of each period reported and includes reinvestment of
dividends and distributions. Total returns for periods of less than a
full year are not annualized.
(c) Annualized.
(d) Net of management fee waiver. See "Manager" in the Statement of
Additional Information.
8
<PAGE>
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD INDICATED)
(HIGH INCOME SERIES--CLASS Z SHARES)
The following financial highlights for the Class Z shares for the fiscal year
ended April 30, 1998 and for the period from September 16, 1996 through April
30, 1997 have been audited by Price Waterhouse LLP, independent accountants,
whose report thereon was unqualified. This information should be read in
conjunction with the financial statements and the notes thereto, which appear in
the Statement of Additional Information. The financial highlights contain
selected data for a Class Z share of common stock outstanding, total return,
ratios to average net assets and other supplemental data for the period
indicated. This information has been determined based on data contained in the
financial statements. Further performance information is contained in the annual
report, which may be obtained without charge. See "Shareholder
Guide--Shareholder Services--Reports to Shareholders."
<TABLE>
<CAPTION>
HIGH INCOME SERIES
--------------------------
CLASS Z
--------------------------
SEPTEMBER 16,
1996(a)
YEAR ENDED THROUGH
APRIL 30, APRIL 30,
1998 1997
---------- -------------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period..................... $ 10.83 $10.79
---------- ------
INCOME FROM INVESTMENT OPERATIONS
Net investment income (d)................................ .68 .45
Net realized and unrealized gain (loss) on investment
transactions........................................... .47 .04
---------- ------
Total from investment operations......................... 1.15 .49
---------- ------
LESS DISTRIBUTIONS
Dividends from net investment income..................... (.68) (.45)
---------- ------
Net asset value, end of period........................... $ 11.30 $10.83
---------- ------
---------- ------
TOTAL RETURN(b):......................................... 10.91% 4.36%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000).......................... $ 9,919 $2,719
Average net assets (000)................................. $ 6,064 $ 704
Ratios to average net assets:
Expenses (d)........................................... 0.52% 0.54%(c)
Net investment income (d).............................. 6.14% 6.55%(c)
Portfolio turnover rate.................................. 13% 26%
</TABLE>
- ------------
(a) Commencement of offering of Class Z shares.
(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 the period reported and includes reinvestment of
dividends and distributions. Total returns for periods of less than a
full year are not annualized.
(c) Annualized.
(d) Net of management fee waiver. See "Manager" in the Statement of
Additional Information.
9
<PAGE>
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH OF THE INDICATED PERIODS)
(INSURED SERIES--CLASS A SHARES)
The following financial highlights, for the fiscal years ended April 30, 1997
and 1998, have been audited by Price Waterhouse LLP, independent accountants,
and by Deloitte & Touche LLP, independent auditors, for the three years ended
April 30, 1996. Each of the respective reports by Price Waterhouse LLP and
Deloitte & Touche LLP on such financial highlights were unqualified. This
information should be read in conjunction with the financial statements and
notes thereto, which appear in the Statement of Additional Information. The
financial highlights contain selected data for a Class A share of beneficial
interest outstanding, total return, ratios to average net assets and other
supplemental data for the periods indicated. The information is based on data
contained in the financial statements. Further performance information is
contained in the annual report, which may be obtained
without charge. See "Shareholder Guide--Shareholder Services--Reports to
Shareholders."
<TABLE>
<CAPTION>
INSURED SERIES
--------------------------------------------------------------------------------------------------------
CLASS A
--------------------------------------------------------------------------------------------------------
JANUARY 22,
1990(a)
YEARS ENDED APRIL 30, THROUGH
---------------------------------------------------------------------------------------- APRIL 30,
1998 1997 1996 1995 1994 1993 1992 1991 1990
-------- -------- -------- ------- ------- ------- ------- ------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of
period............ $ 10.90 $ 10.94 $ 10.83 $ 10.71 $ 11.44 $ 10.98 $ 10.76 $ 10.25 $10.51
-------- -------- -------- ------- ------- ------- ------- ------- -----------
INCOME FROM
INVESTMENT
OPERATIONS
Net investment
income............ .53(d) .55(d) .58(d) .58(d) .58 .61 .66(d) .67(d) .18(d)
Net realized and
unrealized gain
(loss) on
investment
transactions...... .40 .08 .11 .12 (.43) .73 .24 .54 (.26)
-------- -------- -------- ------- ------- ------- ------- ------- -----------
Total from
investment
operations........ .93 .63 .69 .70 .15 1.34 .90 1.21 (.08)
-------- -------- -------- ------- ------- ------- ------- ------- -----------
LESS DISTRIBUTIONS
Dividends from net
investment
income............ (.53) (.55) (.58) (.58) (.58) (.61) (.66) (.67) (.18)
Distributions in
excess of net
investment
income............ --(e) (.01) -- -- -- -- -- -- --
Distributions from
capital gains..... (.25) (.11) -- -- (.30) (.27) (.02) (.03) --
-------- -------- -------- ------- ------- ------- ------- ------- -----------
Total
distributions..... (.78) (.67) (.58) (.58) (.88) (.88) (.68) (.70) (.18)
-------- -------- -------- ------- ------- ------- ------- ------- -----------
Net asset value, end
of period......... $ 11.05 $ 10.90 $ 10.94 $ 10.83 $ 10.71 $ 11.44 $ 10.98 $ 10.76 $10.25
-------- -------- -------- ------- ------- ------- ------- ------- -----------
-------- -------- -------- ------- ------- ------- ------- ------- -----------
TOTAL RETURN (b):... 8.67% 5.74% 6.47% 6.73% 1.04% 12.68% 8.59% 11.86% (3.37)%
RATIOS/SUPPLEMENTAL
DATA:
Net assets, end of
period (000)...... $224,409 $208,411 $139,548 $75,800 $30,669 $30,098 $19,177 $ 7,630 $2,700
Average net assets
(000)............. $222,115 $187,371 $102,456 $39,471 $32,309 $24,589 $12,731 $ 5,164 $1,280
Ratios to average
net assets:
Expenses,
including
distribution
fees............. 0.69%(d) 0.68%(d) 0.68%(d) 0.74%(d) 0.71% 0.72% 0.62%(d) 0.61%(d) 0.62%(c)(d)
Expenses,
excluding
distribution
fees............. 0.59%(d) 0.58%(d) 0.58%(d) 0.64%(d) 0.61% 0.62% 0.52%(d) 0.51%(d) 0.52%(c)(d)
Net investment
income........... 4.75%(d) 4.95%(d) 5.20%(d) 5.45%(d) 5.09% 5.46% 6.06%(d) 6.38%(d) 6.64%(c)(d)
Portfolio turnover
rate.............. 85% 110% 68% 64% 105% 85% 56% 51% 82%
</TABLE>
- -----------------
(a) Commencement of offering of Class A shares.
(b) Total return does not consider the effects of sales loads. Total
return is calculated assuming a purchase of shares on the first day
and a sale on the last day of each period reported and includes
reinvestment of dividends and distributions. Total returns for
periods of less than a full year are not annualized.
(c) Annualized.
(d) Net of management fee waiver. See "Manager" in the Statement of
Additional Information.
(e) Less than $.005 per share.
10
<PAGE>
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH OF THE INDICATED PERIODS)
(INSURED SERIES--CLASS B SHARES)
The following financial highlights, with respect to the fiscal years ended
April 30, 1997 and 1998, have been audited by Price Waterhouse LLP, independent
accountants, and by Deloitte & Touche LLP, independent auditors, for the three
years ended April 30, 1996. Each of the respective reports by Price Waterhouse
LLP and Deloitte & Touche LLP on such financial highlights were unqualified.
This information should be read in conjunction with the financial statements and
notes thereto, which appear in the Statement of Additional Information. The
financial highlights contain selected data for a Class B share of beneficial
interest outstanding, total return, ratios to average net assets and other
supplemental data for the periods indicated. The information is based on data
contained in the financial statements. Further performance information is
contained in the annual report, which may be obtained without charge. See
"Shareholder Guide--Shareholder Services--Reports to Shareholders."
<TABLE>
<CAPTION>
INSURED SERIES
--------------------------------------------------------------------------------------
CLASS B
--------------------------------------------------------------------------------------
YEARS ENDED APRIL 30,
--------------------------------------------------------------------------------------
1998 1997 1996 1995 1994 1993 1992
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning of
period...................... $ 10.91 $ 10.95 $ 10.84 $ 10.71 $ 11.44 $ 10.99 $ 10.76
-------- -------- -------- -------- -------- -------- --------
INCOME FROM INVESTMENT
OPERATIONS
Net investment income......... .49(b) .50(b) .54(b) .54(b) .54 .56 .62(b)
Net realized and unrealized
gain (loss) on investment
transactions................ .40 .08 .11 .13 (.43) .72 .25
-------- -------- -------- -------- -------- -------- --------
Total from investment
operations.................. .89 .58 .65 .67 .11 1.28 .87
-------- -------- -------- -------- -------- -------- --------
LESS DISTRIBUTIONS
Dividends from net investment
income...................... (.49) (.50) (.54) (.54) (.54) (.56) (.62)
Distributions in excess of net
investment income........... --(c) (.01) -- -- -- -- --
Distributions from capital
gains....................... (.25) (.11) -- -- (.30) (.27) (.02)
-------- -------- -------- -------- -------- -------- --------
Total distributions........... (.74) (.62) (.54) (.54) (.84) (.83) (.64)
-------- -------- -------- -------- -------- -------- --------
Net asset value, end of
period...................... $ 11.06 $ 10.91 $ 10.95 $ 10.84 $ 10.71 $ 11.44 $ 10.99
-------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- --------
TOTAL RETURN (a):............. 8.23% 5.32% 6.04% 6.40% 0.63% 12.14% 8.24%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(000)....................... $236,370 $298,005 $443,391 $567,648 $740,447 $770,060 $638,451
Average net assets (000)...... $270,553 $365,891 $524,452 $660,237 $807,794 $705,846 $609,516
Ratios to average net assets:
Expenses, including
distribution fees.......... 1.09%(b) 1.08%(b) 1.08%(b) 1.14%(b) 1.11% 1.12% 1.02%(b)
Expenses, excluding
distribution fees.......... 0.59%(b) 0.58%(b) 0.58%(b) 0.64%(b) 0.61% 0.62% 0.52%(b)
Net investment income....... 4.35%(b) 4.54%(b) 4.80%(b) 4.99%(b) 4.69% 5.06% 5.66%(b)
Portfolio turnover rate....... 85% 110% 68% 64% 105% 85% 56%
<CAPTION>
1991 1990 1989
-------- -------- --------
<S> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning of
period...................... $ 10.25 $ 10.54 $ 10.18
-------- -------- --------
INCOME FROM INVESTMENT
OPERATIONS
Net investment income......... .63(b) .67(b) .76(b)
Net realized and unrealized
gain (loss) on investment
transactions................ .54 (.22) .42
-------- -------- --------
Total from investment
operations.................. 1.17 .45 1.18
-------- -------- --------
LESS DISTRIBUTIONS
Dividends from net investment
income...................... (.63) (.67) (.76)
Distributions in excess of net
investment income........... -- -- --
Distributions from capital
gains....................... (.03) (.07) (.06)
-------- -------- --------
Total distributions........... (.66) (.74) (.82)
-------- -------- --------
Net asset value, end of
period...................... $ 10.76 $ 10.25 $ 10.54
-------- -------- --------
-------- -------- --------
TOTAL RETURN (a):............. 11.43% 4.36% 11.97%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(000)....................... $578,412 $497,139 $447,101
Average net assets (000)...... $537,275 $446,904 $160,158
Ratios to average net assets:
Expenses, including
distribution fees.......... 1.01%(b) 0.85%(b) 0.22%(b)
Expenses, excluding
distribution fees.......... 0.51%(b) 0.35%(b) 0.13%(b)
Net investment income....... 5.98%(b) 6.07%(b) 6.52%(b)
Portfolio turnover rate....... 51% 82% 87%
</TABLE>
- -----------------
(a) 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.
(b) Net of expense subsidy, fee waivers and distribution fee deferrals.
See "Manager" in the Statement of Additional Information.
(c) Less than $.005 per share.
11
<PAGE>
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH OF THE INDICATED PERIODS)
(INSURED SERIES--CLASS C SHARES)
The following financial highlights, for the fiscal years ended April 30, 1997
and 1998, have been audited by Price Waterhouse LLP, independent accountants,
and by Deloitte & Touche LLP, independent auditors, for the year ended April 30,
1996 and the period August 1, 1994 through April 30, 1995. Each of the
respective reports by Price Waterhouse LLP and Deloitte & Touche LLP on such
financial highlights were unqualified. This information should be read in
conjunction with the financial statements and notes thereto, which appear in the
Statement of Additional Information. The financial highlights contain selected
data for a Class C share of beneficial interest outstanding, total return,
ratios to average net assets and other supplemental data for the periods
indicated. The information is based on data contained in the financial
statements. Further performance information is contained in the annual report,
which may be obtained without charge. See "Shareholder Guide--Shareholder
Services--Reports to Shareholders."
<TABLE>
<CAPTION>
INSURED SERIES
---------------------------------------------
CLASS C
---------------------------------------------
AUGUST 1,
1994(a)
YEAR ENDED APRIL 30, THROUGH
------------------------------- APRIL 30,
1998 1997 1996 1995
------- ------- ------- ---------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period......... $10.91 $10.95 $10.84 $10.79
------- ------- ------- ---------
INCOME FROM INVESTMENT OPERATIONS
Net investment income........................ .46(d) .48(d) .51(d) .39(d)
Net realized and unrealized gain (loss) on
investment transactions.................... .40 .08 .11 .05
------- ------- ------- ---------
Total from investment operations............. .86 .56 .62 .44
------- ------- ------- ---------
LESS DISTRIBUTIONS
Dividends from net investment income......... (.46) (.48) (.51) (.39)
Distributions in excess of net investment
income..................................... --(e) (.01) -- --
Distributions from capital gains............. (.25) (.11) -- --
------- ------- ------- ---------
Total distributions.......................... (.71) (.60) (.51) (.39)
------- ------- ------- ---------
Net asset value, end of period............... $11.06 $10.91 $10.95 $10.84
------- ------- ------- ---------
------- ------- ------- ---------
TOTAL RETURN (b):............................ 7.96% 5.06% 5.78% 4.03%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000).............. $1,509 $ 888 $1,137 $ 525
Average net assets (000)..................... $1,142 $ 973 $ 827 $ 224
Ratios to average net assets:
Expenses, including distribution fees...... 1.34%(d) 1.33%(d) 1.33%(d) 1.39%(d)
Expenses, excluding distribution fees...... 0.59%(d) 0.58%(d) 0.58%(d) 0.64%(d)
Net investment income...................... 4.11%(d) 4.29%(d) 4.56%(d) 4.92%(d)
Portfolio turnover rate...................... 85% 110% 68% 64%
</TABLE>
- ---------------
(a) Commencement of offering of Class C shares.
(b) Total return does not consider the effects of sales loads. Total
return is calculated assuming a purchase of shares on the first day
and a sale on the last day of each period reported and includes
reinvestment of dividends and distributions. Total returns for
periods of less than a full year are not annualized.
(c) Annualized.
(d) Net of management fee waiver. See "Manager" in the Statement of
Additional Information.
(e) Less than $.005 per share.
12
<PAGE>
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD INDICATED)
(INSURED SERIES--CLASS Z SHARES)
The following financial highlights for the Class Z shares for the fiscal year
ended April 30, 1998 and the period from September 16, 1996 through April 30,
1997 have been audited by Price Waterhouse LLP, independent accountants, whose
report thereon was unqualified. This information should be read in conjunction
with the financial statements and the notes thereto, which appear in the
Statement of Additional Information. The financial highlights contain selected
data for a Class Z share of common stock outstanding, total return, ratios to
average net assets and other supplemental data for the period indicated. This
information has been determined based on data contained in the financial
statements. Further performance information is contained in the annual report,
which may be obtained without charge. See "Shareholder Guide--Shareholder
Services--Reports to Shareholders."
<TABLE>
<CAPTION>
INSURED SERIES
-----------------------------
CLASS Z
-----------------------------
SEPTEMBER 16,
1996(a)
YEAR ENDED THROUGH
APRIL 30, APRIL 30,
1998 1997
---------- -------------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period...... $10.91 $11.05
---------- ------
INCOME FROM INVESTMENT OPERATIONS
Net investment income..................... .54(d) .36(d)
Net realized and unrealized gain (loss) on
investment transactions................. .39 (.02)
---------- ------
Total from investment operations.......... .93 .34
---------- ------
LESS DISTRIBUTIONS
Dividends from net investment income...... (.54) (.36)
Distributions in excess of net investment
income.................................. --(e) (.01)
Distributions from capital gains.......... (.25) (.11)
---------- ------
Total distributions....................... (.79) (.48)
---------- ------
Net asset value, end of period............ $11.05 $10.91
---------- ------
---------- ------
TOTAL RETURN (b):......................... 8.68% 2.86%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)........... $ 418 $15
Average net assets (000).................. $ 173 $10
Ratios to average net assets:
Expenses................................ 0.59%(d) 0.58%(c)(d)
Net investment income................... 4.92%(d) 4.18%(c)(d)
Portfolio turnover rate................... 85% 110%
</TABLE>
- -------------
(a) Commencement of offering of Class Z shares.
(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 the period reported and includes reinvestment of
dividends and distributions. Total returns for periods of less than a
full year are not annualized.
(c) Annualized.
(d) Net of management fee waiver. See "Manager" in the Statement of
Additional Information.
(e) Less than $.005 per share.
13
<PAGE>
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH OF THE INDICATED PERIODS)
(INTERMEDIATE SERIES--CLASS A SHARES)
The following financial highlights, with respect to the fiscal years ended
April 30, 1997 and 1998, have been audited by Price Waterhouse LLP, independent
accountants, and by Deloitte & Touche LLP, independent auditors, for the three
years ended April 30, 1996. Each of the respective reports by Price Waterhouse
LLP and Deloitte & Touche LLP on such financial highlights were unqualified.
This information should be read in conjunction with the financial statements and
notes thereto, which appear in the Statement of Additional Information. The
financial highlights contain selected data for a Class A share of beneficial
interest outstanding, total return, ratios to average net assets and other
supplemental data for the periods indicated. The information is based on data
contained in the financial statements. Further performance information is
contained in the annual report, which may be obtained without charge. See
"Shareholder Guide--Shareholder Services--Reports to Shareholders."
<TABLE>
<CAPTION>
INTERMEDIATE SERIES
-------------------------------------------------------------------------------------------------------
CLASS A
-------------------------------------------------------------------------------------------------------
JANUARY 22,
1990(a)
YEARS ENDED APRIL 30, THROUGH
--------------------------------------------------------------------------------------- APRIL 30,
1998 1997 1996 1995 1994 1993 1992 1991 1990
------- ------- ------- ------- ------ ------- ------- ------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of
period............ $ 10.59 $ 10.65 $ 10.45 $ 10.67 $11.08 $ 10.59 $ 10.48 $ 9.98 $10.21
------- ------- ------- ------- ------ ------- ------- ------- -----------
INCOME FROM
INVESTMENT
OPERATIONS
Net investment
income............ .43(d) .46(d) .47(d) .51(d) .53 .54(d) .57(d) .59(d) .18(d)
Net realized and
unrealized gain
(loss) on
investment
transactions...... .28 (.05) .20 (.03) (.19) .60 .26 .50 (.23)
------- ------- ------- ------- ------ ------- ------- ------- -----------
Total from
investment
operations........ .71 .41 .67 .48 .34 1.14 .83 1.09 (.05)
------- ------- ------- ------- ------ ------- ------- ------- -----------
LESS DISTRIBUTIONS
Dividends from net
investment
income............ (.43) (.46) (.47) (.51) (.53) (.54) (.57) (.59) (.18)
Distributions in
excess of net
investment
income............ -- (.01) -- (.01) -- -- -- -- --
Distributions from
capital gains..... (.06) -- -- (.18) (.22) (.11) (.15) -- --
------- ------- ------- ------- ------ ------- ------- ------- -----------
Total
distributions..... (.49) (.47) (.47) (.70) (.75) (.65) (.72) (.59) (.18)
------- ------- ------- ------- ------ ------- ------- ------- -----------
Net asset value, end
of period......... $ 10.81 $ 10.59 $ 10.65 $ 10.45 $10.67 $ 11.08 $ 10.59 $ 10.48 $ 9.98
------- ------- ------- ------- ------ ------- ------- ------- -----------
------- ------- ------- ------- ------ ------- ------- ------- -----------
TOTAL RETURN (b):... 6.76% 3.86% 6.48% 4.52% 2.83% 11.13% 8.14% 11.20% (2.49)%
RATIOS/SUPPLEMENTAL
DATA:
Net assets, end of
period (000)...... $13,126 $13,740 $12,552 $10,507 $5,810 $ 3,594 $ 1,424 $ 397 $ 164
Average net assets
(000)............. $13,591 $13,487 $12,604 $ 7,742 $4,981 $ 1,883 $ 599 $ 305 $ 80
Ratios to average
net assets:
Expenses,
including
distribution
fees............. 1.31%(d) 1.15%(d) 1.16%(d) 1.05%(d) 1.00% 1.06%(d) 1.06%(d) 0.92%(d) 0.63%(c)(d)
Expenses,
excluding
distribution
fees............. 1.21%(d) 1.05%(d) 1.06%(d) 0.95%(d) 0.90% 0.96%(d) 0.96%(d) 0.82%(d) 0.53%(c)(d)
Net investment
income........... 3.99%(d) 4.30%(d) 4.36%(d) 4.75%(d) 4.63% 5.09%(d) 5.41%(d) 5.92%(d) 6.26%(c)(d)
Portfolio turnover
rate.............. 54% 46% 35% 30% 55% 22% 78% 128% 91%
</TABLE>
- -----------------
(a) Commencement of offering of Class A shares.
(b) Total return does not consider the effects of sales loads. Total
return is calculated assuming a purchase of shares on the first day
and a sale on the last day of each period reported and includes
reinvestment of dividends and distributions. Total returns for
periods of less than a full year are not annualized.
(c) Annualized.
(d) Net of management fee waiver. See "Manager" in the Statement of
Additional Information.
14
<PAGE>
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH OF THE INDICATED PERIODS)
(INTERMEDIATE SERIES--CLASS B SHARES)
The following financial highlights, with respect to the fiscal years ended
April 30, 1997 and 1998, have been audited by Price Waterhouse LLP, independent
accountants, and by Deloitte & Touche LLP, independent auditors, for the three
years ended April 30, 1996. Each of the respective reports by Price Waterhouse
LLP and Deloitte & Touche LLP on such financial highlights were unqualified.
This information should be read in conjunction with the financial statements and
notes thereto, which appear in the Statement of Additional Information. The
financial highlights contain selected data for a Class B share of beneficial
interest outstanding, total return, ratios to average net assets and other
supplemental data for the periods indicated. The information is based on data
contained in the financial statements. Further performance information is
contained in the annual report, which may be obtained without charge. See
"Shareholder Guide--Shareholder Services--Reports to Shareholders."
<TABLE>
<CAPTION>
INTERMEDIATE SERIES
---------------------------------------------------------------------------------------------------------------
CLASS B
---------------------------------------------------------------------------------------------------------------
YEARS ENDED APRIL 30,
---------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994 1993 1992 1991 1990 1989
------- ------- ------- ------- ------ ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE
OPERATING
PERFORMANCE:
Net asset
value,
beginning of
period....... $ 10.59 $ 10.65 $ 10.45 $ 10.68 $11.09 $ 10.60 $ 10.48 $ 9.98 $ 10.17 $ 10.14
------- ------- ------- ------- ------ ------- ------- ------- ------- -------
INCOME FROM
INVESTMENT
OPERATIONS
Net investment
income....... .39(b) .42(b) .43(b) .45(b) .48 .50(b) .53(b) .56(b) .62(b) .70(b)
Net realized
and
unrealized
gain (loss)
on investment
transactions... .28 (.05) .20 (.04) (.19) .60 .27 .50 (.16) .09
------- ------- ------- ------- ------ ------- ------- ------- ------- -------
Total from
investment
operations... .67 .37 .63 .41 .29 1.10 .80 1.06 .46 .79
------- ------- ------- ------- ------ ------- ------- ------- ------- -------
LESS
DISTRIBUTIONS
Dividends from
net
investment
income....... (.39) (.42) (.43) (.45) (.48) (.50) (.53) (.56) (.62) (.70)
Distributions
in excess of
net
investment
income....... -- (.01) -- (.01) -- -- -- -- -- --
Distributions
from capital
gains........ (.06) -- -- (.18) (.22) (.11) (.15) -- (.03) (.06)
------- ------- ------- ------- ------ ------- ------- ------- ------- -------
Total
distributions... (.45) (.43) (.43) (.64) (.70) (.61) (.68) (.56) (.65) (.76)
------- ------- ------- ------- ------ ------- ------- ------- ------- -------
Net asset
value, end of
period....... $ 10.81 $ 10.59 $ 10.65 $ 10.45 $10.68 $ 11.09 $ 10.60 $ 10.48 $ 9.98 $ 10.17
------- ------- ------- ------- ------ ------- ------- ------- ------- -------
------- ------- ------- ------- ------ ------- ------- ------- ------- -------
TOTAL RETURN
(a):......... 6.33% 3.44% 6.05% 3.99% 2.43% 10.62% 7.68% 10.82% 4.61% 8.21%
RATIOS/SUPPLEMENTAL
DATA:
Net assets, end
of period
(000)........ $24,017 $29,980 $40,550 $51,039 $65,215 $57,049 $45,401 $45,401 $47,838 $45,362
Average net
assets
(000)........ $27,175 $35,221 $46,127 $60,174 $59,811 $50,154 $44,439 $46,521 $46,246 $30,515
Ratios to
average net
assets:
Expenses,
including
distribution
fees........ 1.71%(b) 1.55%(b) 1.56%(b) 1.45%(b) 1.40% 1.46%(b) 1.46%(b) 1.32%(b) 0.83%(b) 0.15%(b)
Expenses,
excluding
distribution
fees........ 1.21%(b) 1.05%(b) 1.06%(b) 0.95%(b) 0.90% 0.96%(b) 0.96%(b) 0.82%(b) 0.33%(b) 0.05%(b)
Net
investment
income...... 3.59%(b) 3.89%(b) 3.96%(b) 4.35%(b) 4.23% 4.69%(b) 5.01%(b) 5.52%(b) 6.03%(b) 6.59%(b)
Portfolio
turnover
rate......... 54% 46% 35% 30% 55% 22% 78% 128% 91% 135%
</TABLE>
- -----------------
(a) 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.
(b) Net of expense subsidy, fee waivers and distribution fee deferrals.
See "Manager" in the Statement of Additional Information.
15
<PAGE>
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH OF THE INDICATED PERIODS)
(INTERMEDIATE SERIES--CLASS C SHARES)
The following financial highlights, with respect to the fiscal years ended
April 30, 1997 and 1998 have been audited by Price Waterhouse LLP, independent
accountants, and by Deloitte & Touche LLP, independent auditors, for the year
ended April 30, 1996 and the period August 1, 1994 through April 30, 1995. Each
of the respective reports by Price Waterhouse LLP and Deloitte & Touche LLP on
such financial highlights were unqualified. This information should be read in
conjunction with the financial statements and notes thereto, which appear in the
Statement of Additional Information. The financial highlights contain selected
data for a Class C share of beneficial interest outstanding, total return,
ratios to average net assets and other supplemental data for the periods
indicated. The information is based on data contained in the financial
statements. Further performance information is contained in the annual report,
which may be obtained without charge. See "Shareholder Guide--Shareholder
Services--Reports to Shareholders."
<TABLE>
<CAPTION>
INTERMEDIATE SERIES
------------------------------------------
CLASS C
------------------------------------------
AUGUST 1,
1994(a)
YEAR ENDED APRIL 30, THROUGH
---------------------------- APRIL 30,
1998 1997 1996 1995
------ ------ ------ ---------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.............. $10.59 $10.65 $10.45 $10.54
------ ------ ------ ---------
INCOME FROM INVESTMENT OPERATIONS
Net investment income............................. .36(d) .39(d) .40(d) .35(d)
Net realized and unrealized gain (loss) on
investment transactions......................... .28 (.05) .20 (.08)
------ ------ ------ ---------
Total from investment operations.................. .64 .34 .60 .27
------ ------ ------ ---------
LESS DISTRIBUTIONS
Dividends from net investment income.............. (.36) (.39) (.40) (.35)
Distributions in excess of net investment
income.......................................... -- (.01) -- (.01)
Distributions from capital gains.................. (.06) -- -- --
------ ------ ------ ---------
Total distributions............................... (.42) (.40) (.40) (.36)
------ ------ ------ ---------
Net asset value, end of period.................... $10.81 $10.59 $10.65 $10.45
------ ------ ------ ---------
------ ------ ------ ---------
TOTAL RETURN (b):................................. 6.07% 3.17% 5.79% 2.14%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)................... $ 449 $ 257 $ 225 $ 167
Average net assets (000).......................... $ 381 $ 149 $ 197 $ 28
Ratios to average net assets:
Expenses, including distribution fees........... 1.96%(d) 1.80%(d) 1.81%(d) 1.81%(c)(d)
Expenses, excluding distribution fees........... 1.21%(d) 1.05%(d) 1.06%(d) 1.06%(c)(d)
Net investment income........................... 3.33%(d) 3.65%(d) 3.71%(d) 4.34%(c)(d)
Portfolio turnover rate........................... 54% 46% 35% 30%
</TABLE>
- ---------------
(a) Commencement of offering of Class C shares.
(b) Total return does not consider the effects of sales loads. Total
return is calculated assuming a purchase of shares on the first day
and a sale on the last day of each period reported and includes
reinvestment of dividends and distributions. Total returns for
periods of less than a full year are not annualized.
(c) Annualized.
(d) Net of management fee waiver. See "Manager" in the Statement of
Additional Information.
16
<PAGE>
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT THE PERIOD INDICATED)
(INTERMEDIATE SERIES--CLASS Z SHARES)
The following financial highlights for the Class Z shares for the fiscal year
ended April 30, 1998 and the period from September 16, 1996 through April 30,
1997 have been audited by Price Waterhouse LLP, independent accountants, whose
report thereon was unqualified. This information should be read in conjunction
with the financial statements and the notes thereto, which appear in the
Statement of Additional Information. The financial highlights contain selected
data for a Class Z share of common stock outstanding, total return, ratios to
average net assets and other supplemental data for the period indicated. This
information has been determined based on data contained in the financial
statements. Further performance information is contained in the annual report,
which may be obtained without charge. See "Shareholder Guide--Shareholder
Services--Reports to Shareholders."
<TABLE>
<CAPTION>
INTERMEDIATE SERIES
-----------------------------
CLASS Z
-----------------------------
SEPTEMBER 16,
1996(a)
YEAR ENDED THROUGH
APRIL 30, APRIL 30,
1998 1997
---------- -------------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.............. $10.59 $10.63
---------- ------
INCOME FROM INVESTMENT OPERATIONS
Net investment income............................. .44(d) .31(d)
Net realized and unrealized gain (loss) on
investment transactions......................... .28 (.03)
---------- ------
Total from investment operations.................. .72 .28
---------- ------
LESS DISTRIBUTIONS
Dividends from net investment income.............. (.44) (.31)
Distributions in excess of net investment
income.......................................... -- (.01)
Distributions from capital gains.................. (.06) --
---------- ------
Total distributions............................... (.50) (.32)
---------- ------
Net asset value, end of period.................... $10.81 $10.59
---------- ------
---------- ------
TOTAL RETURN(b):.................................. 6.86% 2.50%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)................... $1,194 $ 246
Average net assets (000).......................... $ 447 $ 63
Ratios to average net assets:
Expenses........................................ 1.21%(d) 1.05%(c)(d)
Net investment income........................... 4.09%(d) 4.65%(c)(d)
Portfolio turnover rate........................... 54% 46%
</TABLE>
- ---------------
(a) Commencement of offering of Class Z shares.
(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 the period reported and includes
reinvestment of dividends and distributions. Total returns for
periods of less than a full year are not annualized.
(c) Annualized.
(d) Net of management fee waiver. See "Manager" in the Statement of
Additional Information.
17
<PAGE>
HOW THE FUND INVESTS
INVESTMENT OBJECTIVES AND POLICIES
THE FUND IS COMPRISED OF THREE SEPARATE DIVERSIFIED PORTFOLIOS--THE HIGH
INCOME SERIES, THE INSURED SERIES AND THE INTERMEDIATE SERIES--EACH OF WHICH IS
MANAGED INDEPENDENTLY. THE INVESTMENT OBJECTIVES OF THE SERIES ARE AS FOLLOWS:
(i) THE OBJECTIVE OF THE HIGH INCOME SERIES IS TO PROVIDE THE MAXIMUM AMOUNT OF
INCOME THAT IS ELIGIBLE FOR EXCLUSION FROM FEDERAL INCOME TAXES, (ii) THE
OBJECTIVE OF THE INSURED SERIES IS TO PROVIDE THE MAXIMUM AMOUNT OF INCOME THAT
IS ELIGIBLE FOR EXCLUSION FROM FEDERAL INCOME TAXES CONSISTENT WITH THE
PRESERVATION OF CAPITAL AND (iii) THE OBJECTIVE OF THE INTERMEDIATE SERIES IS TO
PROVIDE A HIGH LEVEL OF INCOME THAT IS ELIGIBLE FOR EXCLUSION FROM FEDERAL
INCOME TAXES CONSISTENT WITH THE PRESERVATION OF CAPITAL. THERE CAN BE NO
ASSURANCE THAT SUCH OBJECTIVES WILL BE ACHIEVED. See "Investment Objectives and
Policies" in the Statement of Additional Information. Although each Series will
seek income that is eligible for exclusion from federal income taxes, a portion
of the dividends and distributions paid by each Series (and, in particular, the
High Income Series) may be treated as a preference item for purposes of the
alternative minimum tax. See "Taxes, Dividends and Distributions."
As with an investment in any mutual fund, an investment in any Series of this
Fund can decrease in value and you can lose money.
EACH SERIES' INVESTMENT OBJECTIVE IS A FUNDAMENTAL POLICY AND, THEREFORE, MAY
NOT BE CHANGED WITHOUT THE APPROVAL OF THE HOLDERS OF A MAJORITY OF THE
OUTSTANDING VOTING SECURITIES OF THE SERIES AS DEFINED IN THE INVESTMENT COMPANY
ACT OF 1940, AS AMENDED (THE INVESTMENT COMPANY ACT). POLICIES OF THE SERIES
THAT ARE NOT FUNDAMENTAL MAY BE MODIFIED BY THE TRUSTEES.
EACH SERIES PURSUES ITS INVESTMENT OBJECTIVE THROUGH THE SEPARATE INVESTMENT
POLICIES DESCRIBED BELOW. These policies differ with respect to the maturity and
quality of portfolio securities in which a Series may invest and can affect the
yield for each Series and the degree of market risk and credit risk to which
each Series is subject.
EACH SERIES WILL SEEK TO ACHIEVE ITS INVESTMENT OBJECTIVE BY INVESTING IN A
PORTFOLIO OF OBLIGATIONS ISSUED BY OR ON BEHALF OF STATES, TERRITORIES AND
POSSESSIONS OF THE UNITED STATES AND THE DISTRICT OF COLUMBIA AND THEIR
POLITICAL SUBDIVISIONS, AGENCIES AND INSTRUMENTALITIES, THE INTEREST ON WHICH IS
GENERALLY ELIGIBLE FOR EXCLUSION FROM FEDERAL INCOME TAXATION (MUNICIPAL
OBLIGATIONS OR MUNICIPAL SECURITIES). THE PORTFOLIO SECURITIES HELD BY EACH OF
THE SERIES WILL VARY WITH RESPECT TO YIELD, MARKET PRICE VOLATILITY AND QUALITY.
Generally, municipal obligations with longer maturities produce higher yields
and are subject to greater price fluctuations as a result of changes in interest
rates (market risk) than municipal obligations with shorter maturities. The
prices of municipal obligations generally vary inversely with interest rates. In
addition, lower rated municipal obligations typically provide a higher yield
than higher rated municipal obligations of similar maturity. However, lower
rated municipal obligations are also subject to a greater degree of risk with
respect to the ability of the issuer to meet the principal and interest payments
on the obligations (credit risk) and may also be subject to greater price
volatility due to the market perceptions of the creditworthiness of the issuer.
Insurance policies may be obtained to insure against credit risk, but not
against market risk. From time to time, a Series may own the majority of a
municipal obligation. Such majority-owned holdings may present additional market
and credit risks.
Municipal securities include bonds and notes issued by or on behalf of states,
territories and possessions of the United States and their political
subdivisions, agencies and instrumentalities, the interest on which is generally
eligible for exclusion from federal income tax. Municipal bonds are typically
issued to obtain funds for various public purposes, including the construction
of
18
<PAGE>
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. Municipal notes generally are used to finance short-term
capital needs and typically have maturities of one year or less.
DURING NORMAL MARKET CONDITIONS, THE ASSETS OF EACH SERIES WILL BE INVESTED SO
THAT IT WILL HAVE AT LEAST 80% OF ITS NET ASSETS INVESTED IN MUNICIPAL
OBLIGATIONS. However, when the Fund's investment adviser believes that market
conditions warrant a temporary defensive investment posture or when necessary to
meet large redemptions, a Series may hold more than 20% of its net assets in
cash, cash equivalents or investment grade taxable obligations, including
obligations that are generally exempt from state, but not federal, taxation.
Each Series may invest in municipal cash equivalents, such as floating rate
demand notes, municipal commercial paper and general obligation and revenue
notes, or in taxable cash equivalents, such as certificates of deposit, bankers'
acceptances and time deposits or other short-term taxable investments, such as
repurchase agreements. 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 certain conditions are met.
THE HIGH INCOME SERIES
THE HIGH INCOME SERIES WILL INVEST PRIMARILY IN MUNICIPAL OBLIGATIONS WHICH
ARE RATED B OR BETTER BY MOODY'S INVESTORS SERVICE (MOODY'S) OR STANDARD &
POOR'S RATINGS GROUP (S&P) OR A SIMILAR NATIONALLY RECOGNIZED STATISTICAL RATING
ORGANIZATION (NRSRO) AND WHICH GENERALLY HAVE MATURITIES IN EXCESS OF TEN YEARS
AT THE TIME OF PURCHASE, ALTHOUGH THE SERIES ALSO WILL INVEST IN MUNICIPAL
OBLIGATIONS HAVING MATURITIES RANGING FROM ONE YEAR TO TEN YEARS, PROVIDED THAT
THE WEIGHTED AVERAGE MATURITY OF THE SERIES' INVESTMENT PORTFOLIO REMAINS WITHIN
THE FIFTEEN TO THIRTY YEAR RANGE. 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 as well. Securities
rated Ba or BB or lower by Moody's or S&P, respectively, are generally
considered to be predominantly speculative with respect to the issuer's capacity
to pay interest and repay principal and are commonly referred to as junk bonds.
While such securities may have some quality and protective characteristics,
those are outweighed by large uncertainties or major risk exposures to adverse
conditions. See "Risk Factors Relating to Investing in High Yield Securities"
below and "Description of Security Ratings" in the Appendix. Subsequent to its
purchase by the Series, a municipal obligation may be assigned a lower rating or
cease to be rated. Such an event would not require the elimination of the issue
from the portfolio, but the investment adviser will consider such an event in
determining whether the Series should continue to hold the security in its
portfolio.
THE SERIES MAY ALSO INVEST IN MUNICIPAL SECURITIES WHICH ARE NOT RATED IF,
BASED UPON A CREDIT ANALYSIS BY THE FUND'S INVESTMENT ADVISER, THE INVESTMENT
ADVISER BELIEVES THAT SUCH SECURITIES ARE OF COMPARABLE QUALITY TO RATED
MUNICIPAL SECURITIES IN WHICH THE SERIES MAY INVEST. The High Income Series
normally can be expected to offer the highest yields of the three Series, but it
will also be subject to the greatest market and credit risk.
THE SERIES ALSO MAY INVEST IN SHORT-TERM MUNICIPAL OBLIGATIONS (I.E., CASH
EQUIVALENTS) THAT ARE, AT THE TIME OF PURCHASE, RATED WITHIN THE FOUR HIGHEST
QUALITY GRADES AS DETERMINED BY EITHER MOODY'S (CURRENTLY MIG 1, MIG 2, MIG 3
AND MIG 4 FOR NOTES AND P-1, P-2 AND P-3 FOR COMMERCIAL PAPER) OR S&P (CURRENTLY
A-1, A-2 AND A-3 FOR COMMERCIAL PAPER AND SP-1 AND SP-2 FOR NOTES). See "Other
Investments and Policies--General" below.
The Series may also invest up to 10% of its total assets in debt securities of
financially troubled and operationally troubled obligors (distressed
securities). Financially troubled obligors include obligors involved in
bankruptcy or reorganization proceedings or financial restructurings or
otherwise in default on their obligations. Operationally troubled obligors are
ones experiencing poor operating results that may have severely depressed
earnings or have special competitive or product obsolescence problems.
The Series is permitted to invest in defaulted securities and in low quality
debt securities having a rating of D or better as determined by S&P or Moody's
or having a comparable rating determined by another NRSRO, or in unrated
securities which, in the opinion of the investment adviser, are of equivalent
quality. See "Risk Factors Relating to Investing in High Yield Securities"
19
<PAGE>
below and the "Description of Security Ratings" in the Appendix. Such
lower-quality debt securities are considered to have speculative
characteristics, and involve greater risk of default or price changes due to
changes in the obligor's creditworthiness, or they may already be in default.
The market prices of these securities may fluctuate more than higher-quality
securities and may decline significantly in periods of general or regional
economic difficulty.
The Subadviser maintains a fixed-income research group which the Series'
portfolio manager may consult in managing the portfolio and in researching
financially troubled and operationally troubled obligors. The Series' portfolio
manager reviews on an ongoing basis financially troubled and operationally
troubled obligors, including prospective purchases and portfolio holdings of the
Series. The portfolio manager has broad access to research and financial
reports, data retrieval services and industry analysts.
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 AND THE
MARKET PERCEPTION OF THE CREDITWORTHINESS OF THE ISSUER (MARKET RISK). Lower
rated (I.E., high yield) securities or non-rated securities of comparable
quality are more likely to react to developments affecting market and credit
risk than are more highly rated securities, which react primarily to movements
in the general level of interest rates. The investment adviser considers both
credit risk and market risk in making investment decisions for the Series.
Investors should carefully consider the relative risks of investing in high
yield securities and understand that such securities are not generally meant for
short-term trading.
The amount of high yield securities outstanding has proliferated recently in
conjunction with the decline in creditworthiness of many obligors on municipal
debt, particularly health care providers and certain governmental bodies. An
economic downturn could severely affect the ability of highly leveraged issuers
to service their debt obligations or to repay their obligations upon maturity.
Furthermore, changes in economic conditions and other circumstances are more
likely to lead to a weakened capacity to make principal and interest payments
than in the case of higher grade bonds. 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.
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.
Debt rated Ba, B, Caa, Ca and C by Moody's, and debt rated BB, B, CCC, CC and
C by S&P is regarded by the rating agency, on balance, as predominantly
speculative with respect to the issuer's capacity to pay interest and repay
principal in accordance with the terms of the obligation. Among junk bonds,
Ba/BB indicates the lowest degree of speculation and C/D 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. Debt rated C by S&P is the lowest rated debt
that is not in default as to principal or interest and such issues so rated can
be regarded as having extremely poor prospects of ever attaining any real
investment standing. Such securities are also generally considered to be subject
to greater risk than securities with higher ratings with regard to a
deterioration of general economic conditions. Debt rated D by S&P is in payment
default. Moody's does not have a D rating. See the "Description of Security
Ratings" in the Appendix.
Ratings of fixed-income securities represent the rating agency's opinion
regarding their credit quality and are not a guarantee of quality. Rating
agencies attempt to evaluate the safety of principal and interest payments and
do not evaluate the risks of fluctuations in market value. Also, rating agencies
may fail to make timely changes in credit ratings in response to subsequent
events, so that an issuer's current financial condition may be better or worse
than a rating indicated.
20
<PAGE>
From time to time proposals have been introduced to limit the use, or tax and
other advantages, of municipal securities which, if enacted, could adversely
affect the Series' NAV and investment practices. Such proposals could also
adversely affect the secondary market for high yield municipal securities, the
financial condition of issuers of these securities and the value of outstanding
high yield municipal securities. Reevaluation of the 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.
LOWER RATED OR UNRATED DEBT OBLIGATIONS ALSO PRESENT RISKS BASED ON PAYMENT
EXPECTATIONS. If an issuer calls the obligation for redemption, the Series may
have to replace the security with a lower yielding security, resulting in a
decreased return for investors. If the Series experiences unexpected net
redemptions, it may be forced to sell its higher 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.
During the year ended April 30, 1998, the monthly dollar weighted average
ratings of the debt obligations held by the Series, expressed as a percentage of
the Series' total investments, were as follows:
<TABLE>
<CAPTION>
PERCENTAGE OF
RATINGS TOTAL INVESTMENTS
------------ -------------------
<S> <C>
AAA/Aaa 26.7%
AA/Aa 4.9%
A/A 0.8%
BBB/Baa 10.6%
BB/Ba 4.5%
B/B 1.9%
CCC/Caa 0.0%
Unrated
AAA/Aaa 2.7%
AA/Aa 0.0%
A/A 0.3%
BBB/Baa 3.0%
BB/Ba 14.1%
B/B 27.8%
CCC/Caa 0.5%
D 2.2%
</TABLE>
THE INSURED SERIES
THE INSURED SERIES WILL INVEST PRIMARILY IN MUNICIPAL OBLIGATIONS WHICH ARE
(i) INSURED BY AN ENTITY WHOSE CLAIMS-PAYING ABILITY AT THE TIME OF PURCHASE IS
RATED Aaa BY MOODY'S OR AAA BY S&P, OR A SIMILAR NRSRO, SO THAT THE OBLIGATION
IS RATED AAA OR Aaa OR MEETS THE ELIGIBILITY CRITERIA IMPOSED BY SUCH INSURERS,
(ii) RATED Aaa OR AAA BY
MOODY'S OR S&P, RESPECTIVELY, OR A SIMILAR NRSRO (OR, IN THE CASE OF NOTES OR
VARIABLE RATE SECURITIES, A-1, P-1, MIG 1 OR SP-1), BASED ON THE CREDIT OF THE
ISSUER OR (iii) BACKED BY THE FULL FAITH AND CREDIT OF THE U.S. GOVERNMENT. The
Series may also invest up to 5% of its total assets in municipal obligations
which are rated A/A or Aa/AA by Moody's or S&P, respectively, or a similar
NRSRO. See "Description of Security Ratings" in the Appendix. The Series may
also invest in municipal securities which are not rated if, based upon a credit
analysis by the Fund's investment adviser, the investment adviser believes that
such securities are of comparable quality to other municipal securities that the
Series may purchase.
UNDER NORMAL CONDITIONS, AT LEAST 70% OF THE SERIES' TOTAL ASSETS WILL CONSIST
OF INSURED OBLIGATIONS. AS OF APRIL 30, 1998, APPROXIMATELY 90% OF THE SERIES'
TOTAL ASSETS WERE OBLIGATIONS INSURED BY A MUNICIPAL BOND INSURER. This
insurance may be provided either (i) under a new issue insurance policy obtained
by the issuer or underwriter of a bond or note or (ii) under a secondary market
insurance policy on a particular bond or note purchased either by the Series or
a previous
21
<PAGE>
bondholder or noteholder. See "Insurance" below. As noted above, the Series will
acquire insurance only from, and purchase municipal bonds and notes insured by,
insurers whose claims-paying ability is rated AAA or Aaa at the time of
purchase. Changes in the financial condition of an insurer could result in a
subsequent reduction or withdrawal of this rating. In each case, the insurance
policies protect only against the timely payment of principal and interest on
the insured municipal bonds and notes. The price of the municipal obligations,
which may fluctuate due to changes in interest rates generally or factors
affecting the credit of the insurer, and the stability of the Series' NAV are
not insured.
INSURANCE. The Series may at times purchase secondary market insurance on
municipal bonds and notes which it holds or acquires. Secondary market insurance
would be reflected in the market value of the municipal obligation and may
enable the Series to dispose of a defaulted obligation at a price similar to
that of comparable municipal obligations which are not in default.
Insurance is not a substitute for the basic credit of an issuer, but
supplements the existing credit and provides additional security therefor. While
insurance coverage for the municipal bonds and notes held by the Insured Series
reduces credit risk by providing that the insurance company will make timely
payment of principal and interest if the issuer defaults on its obligation to
make such payment, it does not afford protection against fluctuation in the
price, I.E., the market value, of the municipal obligations caused by changes in
interest rates and other factors, nor in turn against fluctuations in the NAV of
the shares of the Insured Series.
The ratings of insured municipal obligations depend, 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. It is anticipated that,
under current market conditions, a great majority of the municipal obligations
held by the Insured Series will be insured by the following entities, among
others: MBIA Insurance Corporation, AMBAC Indemnity Corporation, Financial
Guaranty Insurance Company and Financial Security Assurance Inc. S&P rates
securities insured by all of these companies AAA. Moody's rates securities
insured by all of these companies Aaa. The Insured Series may, from time to
time, purchase municipal securities insured by other entities or acquire
insurance coverage for individual uninsured municipal securities directly from
another insurer provided any such entity has a claims-paying ability rated AAA
or Aaa by S&P or Moody's, respectively. See "Investment Objectives and
Policies--The Insured Series" in the Statement of Additional Information for
additional information concerning the insurers.
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 the 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.
THE INTERMEDIATE SERIES
THE INTERMEDIATE SERIES WILL INVEST PRIMARILY IN MUNICIPAL OBLIGATIONS WITH
MATURITIES BETWEEN 3 AND 15 YEARS AND WILL HAVE A DOLLAR-WEIGHTED AVERAGE
PORTFOLIO MATURITY OF MORE THAN 3 AND LESS THAN 10 YEARS. ALL OF THE MUNICIPAL
OBLIGATIONS HELD BY THE INTERMEDIATE SERIES WILL BE RATED AT LEAST BAA BY
MOODY'S OR BBB BY S&P OR A SIMILAR NRSRO AT THE TIME OF PURCHASE OR BE NON-RATED
OBLIGATIONS OF COMPARABLE QUALITY IN THE OPINION OF THE FUND'S INVESTMENT
ADVISER. Subsequent to its purchase by the Series, a municipal obligation may be
assigned a lower rating or cease to be rated. Such an event would not require
the elimination of the issue from the portfolio, but the investment adviser will
consider such an event in determining whether the Series should continue to hold
the security in its portfolio. Under normal circumstances, at least 60% of the
municipal obligations purchased by the Series will be rated A or better by
Moody's or S&P or a similar NRSRO. See "Description of Security Ratings" in the
Appendix.
For purposes of determining the dollar-weighted average portfolio maturity of
the Series' portfolio, the maturity of a municipal security will be its ultimate
maturity, unless it is probable that the issuer of the security will take
advantage of maturity-shortening devices such as a call, refunding or redemption
provision, in which case the maturity date will be the date on which it is
probable
22
<PAGE>
that the security will be called, refunded or redeemed. If the municipal
security includes the right to demand payment, the maturity of the security for
purposes of determining the Series' dollar-weighted average portfolio maturity
will be the period remaining until the principal amount of the security can be
recovered by exercising the right to demand payment.
GENERALLY, THE YIELD EARNED ON LONGER-TERM MUNICIPAL OBLIGATIONS IS GREATER
THAN THAT EARNED ON SIMILAR OBLIGATIONS WITH SHORTER MATURITIES. HOWEVER,
OBLIGATIONS WITH LONGER MATURITIES ARE SUBJECT TO GREATER MARKET RISK. Given a
specific change in the level of interest rates, the value of longer-term
obligations will fluctuate relatively more than the value of shorter-term
obligations. For example, 30-year municipal obligations typically yield 60-90
basis points (.60%-.90%) more than 10-year obligations and have 60-70% more
price volatility (market risk) than 10-year obligations.
THE INTERMEDIATE SERIES INTENDS TO INVEST IN LONGER-TERM, HIGHER YIELDING
OBLIGATIONS AND REDUCE THE GREATER MARKET RISK OF SUCH OBLIGATIONS THROUGH THE
USE OF FINANCIAL FUTURES CONTRACTS. SPECIFICALLY, THE SERIES WILL INVEST IN
MUNICIPAL OBLIGATIONS WITH MATURITIES OF BETWEEN 5 AND 30 YEARS AND
SIMULTANEOUSLY HEDGE THE PRICE VOLATILITY OF SUCH OBLIGATIONS THROUGH THE SALE
OF FUTURES CONTRACTS. RATHER THAN HEDGING THE MUNICIPAL OBLIGATION ENTIRELY, THE
SERIES WILL SELL FUTURES CONTRACTS IN SUFFICIENT AMOUNTS SO THAT THE
DOLLAR-WEIGHTED AVERAGE MATURITY OF THE COMBINED MUNICIPAL OBLIGATION/FUTURES
POSITION WILL BE MORE THAN 3 AND LESS THAN 10 YEARS. IN THIS MANNER, THE
INVESTMENT ADVISER WILL CREATE A SYNTHETIC OBLIGATION THROUGH THE CONSTRUCTION
OF A PARTIALLY HEDGED LONGER-TERM OBLIGATION POSITION.
The Fund's investment adviser intends to create such synthetic obligation
positions when, in its opinion, the Series will realize one or more of the
following benefits compared to buying municipal obligations with shorter
maturities: (a) greater market liquidity; (b) lower transaction costs; (c)
greater expected capital appreciation or enhanced preservation of capital; or
(d) higher yields.
In the municipal securities market, most new issues are structured with many
serial maturities that are relatively small in principal amount and one or
several longer-term maturities that are relatively large in principal amount.
Therefore, long-term municipal obligations typically have greater liquidity and
the associated transaction costs are relatively less than obligations with
maturities of 3 to 15 years.
It is expected that synthetic obligation positions will often provide greater
returns than actual intermediate maturity municipal obligations. This can occur
when interest rate futures contracts are relatively overpriced in relation to
the current prices of municipal obligations, so that the sale of the futures
contracts, as part of a synthetic position, would be advantageous to the Series.
Synthetic positions can also be more attractive to the Series when the
investment adviser expects yields on longer-term municipal obligations to
decrease more (or increase less) than yields on medium-term municipal
obligations. If such expectations are correct, the net capital appreciation of
the synthetic obligation position should exceed (or the price decline be less
than) that of an actual intermediate-term municipal obligation.
THERE IS NO ASSURANCE THAT THE SYNTHETIC OBLIGATION POSITION WILL TRADE LIKE
AN INTERMEDIATE-TERM MUNICIPAL OBLIGATION. ANY USE OF FUTURES CONTRACTS INVOLVES
THE RISK OF IMPERFECT CORRELATION IN MOVEMENTS IN THE PRICE OF THE FUTURES
CONTRACTS AND MOVEMENTS IN THE PRICE OF THE SECURITY BEING HEDGED. FURTHERMORE,
THE SERIES' ABILITY TO CREATE SYNTHETIC OBLIGATIONS IS SUBJECT TO VARIOUS OTHER
LIMITATIONS. See "Hedging Strategies--Futures Contracts and Options Thereon"
below.
THE SERIES ALSO MAY USE FUTURES CONTRACTS TO HEDGE AGAINST OVERALL MARKET RISK
OF THE ENTIRE PORTFOLIO, as described under "Hedging Strategies--Futures
Contracts and Options Thereon" below.
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 and to take advantage of investment opportunities or for
the clearance
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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 Fund will take prompt action to reduce its borrowings. If
the 300% asset coverage should decline as a result of market fluctuations or
other reasons, the Fund 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.
If a Series borrows to invest in securities, any investment gains made on the
securities in excess of interest paid on the borrowing will cause the NAV of the
shares to rise faster than would otherwise be the case. On the other hand, if
the investment performance of the additional securities purchased fails to cover
their cost (including any interest paid on the money borrowed) to the Series,
the Series' NAV will decrease faster than would otherwise be the case. This is
the speculative factor known as leverage. Money borrowed for leveraging will be
subject to interest costs which may or may not be recovered by appreciation of
the securities purchased and may exceed the income from the securities
purchased. In addition, the Fund may be required to maintain minimum average
balances in connection with such borrowing or pay a commitment fee to maintain a
line of credit which would increase the cost of borrowing over the stated
interest rate.
HEDGING STRATEGIES
FUTURES CONTRACTS AND OPTIONS THEREON
EACH SERIES IS AUTHORIZED TO PURCHASE AND SELL CERTAIN DERIVATIVES, INCLUDING
FINANCIAL FUTURES CONTRACTS (FUTURES CONTRACTS) AND OPTIONS THEREON FOR THE
PURPOSE OF ATTEMPTING TO HEDGE ITS INVESTMENT IN MUNICIPAL OBLIGATIONS AGAINST
FLUCTUATIONS IN VALUE CAUSED BY CHANGES IN PREVAILING MARKET INTEREST RATES AND
ATTEMPTING TO HEDGE AGAINST INCREASES IN THE COST OF SECURITIES THE SERIES
INTENDS TO PURCHASE. A SERIES, AND THUS AN INVESTOR, MAY LOSE MONEY THROUGH
UNSUCCESSFUL USE OF THESE STRATEGIES. In that regard, the Intermediate Series
may sell futures contracts to create synthetic positions by partially hedging
longer-term obligation positions. See "Investment Objectives and Policies--The
Intermediate Series" above. The successful use of futures contracts and options
thereon by a Series involves additional transaction costs, is subject to various
risks and depends upon the investment adviser's ability to predict the direction
of the market and interest rates.
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.
EACH SERIES INTENDS TO ENGAGE IN FUTURES CONTRACTS AND OPTIONS THEREON AS A
HEDGE AGAINST CHANGES, RESULTING FROM MARKET CONDITIONS, IN THE VALUE OF
SECURITIES WHICH ARE HELD IN THE SERIES' PORTFOLIO OR WHICH THE SERIES INTENDS
TO PURCHASE, IN ACCORDANCE WITH THE RULES AND REGULATIONS OF THE COMMODITY
FUTURES TRADING COMMISSION (THE CFTC). The Series also 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 Fund's 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.
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Currently, futures contracts are available on several types of fixed-income
securities, including U.S. Treasury Bonds and Notes, Government National
Mortgage Association modified pass-through mortgage-backed securities,
three-month U.S. Treasury Bills and bank certificates of deposit. Futures
contracts are also available on a municipal bond index, based on THE BOND BUYER
Municipal Bond Index, an index of 40 actively traded municipal bonds. Each
Series may also engage in transactions in other futures contracts that become
available, from time to time, in other fixed-income securities or municipal bond
indices and in other options on such contracts if the investment adviser
believes such contracts and options would be appropriate for hedging investments
in municipal obligations.
THERE CAN BE NO ASSURANCE THAT VIABLE MARKETS WILL CONTINUE OR THAT A LIQUID
SECONDARY MARKET WILL EXIST TO TERMINATE ANY PARTICULAR FUTURES CONTRACT AT ANY
SPECIFIC TIME. If it is not possible to close a futures position entered into by
a Series, the Series will continue to be required to make daily cash payments of
variation margin in the event of adverse price movements. In such a situation,
if the Series had insufficient cash, it might have to sell portfolio securities
to meet daily variation margin requirements at a time when it might be
disadvantageous to do so. The inability to close futures positions also could
have an adverse impact on the ability of a Series to hedge effectively. There is
also a risk of loss by a Series of margin deposits in the event of bankruptcy of
a broker with whom the Series has an open position in a futures contract.
THE SUCCESSFUL USE OF FUTURES CONTRACTS AND OPTIONS THEREON BY A SERIES IS
SUBJECT TO VARIOUS ADDITIONAL RISKS. Any use of futures transactions involves
the risk of imperfect correlation in movements in the price of futures contracts
and movements in interest rates and, in turn, the prices of the securities that
are the subject of the hedge. If the price of the futures contract moves more or
less than the price of the security that is the subject of the hedge, the Series
will experience a gain or loss that will not be completely offset by movements
in the price of the security. The risk of imperfect correlation is greater where
the securities underlying futures contracts are taxable securities (rather than
municipal securities), are issued by companies in different market sectors or
have different maturities, ratings or geographic mixes than the security being
hedged. In addition, the correlation may be affected by additions to or
deletions from the index which serves as the basis for a futures contract.
Finally, if the price of the security that is subject to the hedge were to move
in a favorable direction, the advantage to the Series would be partially offset
by the loss incurred on the futures contract.
RISKS OF HEDGING STRATEGIES
PARTICIPATION IN THE OPTIONS OR FUTURES MARKETS INVOLVES INVESTMENT RISKS AND
TRANSACTION COSTS TO WHICH A SERIES WOULD NOT BE SUBJECT ABSENT THE USE OF THESE
STRATEGIES. A SERIES, AND THUS AN INVESTOR, MAY LOSE MONEY THROUGH UNSUCCESSFUL
USE OF THESE STRATEGIES. If the investment adviser's prediction of movements in
the direction of the securities and interest rate markets is inaccurate, the
adverse consequences to the Fund may leave the Fund in a worse position than if
such strategies were not used. Risks inherent in the use of futures contracts
and options thereon include (1) dependence on the investment adviser's ability
to predict correctly movements in the direction of interest rates and securities
prices or the movement in indicies; (2) imperfect correlation between the price
of futures contracts and options thereon and movements in the prices of the
securities 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 Fund 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 Fund to maintain cover or to segregate securities
in connection with hedging transactions. See "Investment Objectives and
Policies" in the Statement of Additional Information.
OTHER INVESTMENTS AND POLICIES
GENERAL
EACH SERIES MAY INVEST MORE THAN 5% OF ITS NET ASSETS IN FLOATING RATE AND
VARIABLE RATE SECURITIES, INCLUDING PARTICIPATION INTERESTS THEREIN. Floating
and variable rate securities normally have a rate of interest which is set as a
specific
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percentage of a designated base rate, such as the rate on Treasury Bonds or
Bills or the prime rate at a major commercial bank. These securities also allow
the holder to demand payment of the obligation on short notice at par plus
accrued interest, which amount may be more or less than the amount the Series
paid for them. Variable rate securities provide for a specified periodic
adjustment in the interest rate. The interest rate on floating rate securities
changes whenever there is a change in the designated base interest rate.
Each Series may also invest in inverse floaters. An inverse floater is a debt
instrument with a floating or variable interest rate that moves in the opposite
direction of the interest rate on another security or the value of an index.
Changes in the interest rate on the other security or index inversely affect the
residual interest rate paid on the inverse floater, with the result that the
inverse floater's price will be considerably more volatile than that of a fixed
rate bond. The market for inverse floaters is relatively new.
Each Series may purchase a rating from an NRSRO for non-rated securities. The
purchase of a rating is expected to enhance the value of the security for which
the rating is purchased. The cost of purchasing a rating is an expense of the
Series.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES
Each Series may purchase municipal obligations on a when-issued or delayed
delivery basis and may from time to time sell obligations on a delayed delivery
basis, in each case without limit. When municipal obligations are offered on a
when-issued or delayed delivery basis, the price and coupon rate are fixed at
the time the commitment to purchase is made, but delivery and payment for the
when-issued securities take place at a later date. During the period between
purchase and settlement, no interest accrues to the purchaser. In the case of
purchases by a Series, the price that the Series is required to pay on the
settlement date may be in excess of the market value of the municipal
obligations on that date. While securities may be sold prior to the settlement
date, each Series intends to purchase these securities with the purpose of
actually acquiring them unless a sale would be desirable for investment reasons.
At the time a Series makes the commitment to purchase a municipal obligation on
a when-issued basis, it will record the transaction and 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 the seller defaults in the sale, the Series could fail to realize
the appreciation, if any, that had occurred. Each Series will establish a
segregated account in which it will maintain cash or other liquid assets having
a value equal to or greater than the Series' purchase commitments.
As in the case of purchases, the price of the municipal obligations sold on a
delayed delivery basis is determined at the time of the commitment. The price
that a Series may be required to accept on the settlement date may be less than
the market value of the obligation on that date.
Each 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. The investment
adviser will monitor the liquidity, value, credit quality and delivery of the
security under the supervision of the Trustees.
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 (E.G., schools, dormitories, office buildings or prisons) or the
acquisition of equipment. The facilities are typically used by the state or
municipality pursuant to a lease with a financing authority. Certain municipal
lease obligations may trade infrequently. Accordingly, the investment adviser
will monitor the liquidity of municipal lease obligations under the supervision
of the Trustees. See "Illiquid Securities" below.
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LIQUIDITY PUTS
Each Series may purchase and exercise puts on municipal bonds and notes
without limit. Puts give the Series the right to sell the securities at a
specified exercise price on a specified date. Puts may be acquired to reduce the
volatility of the market value of the securities subject to the puts, but the
acquisition of the puts may involve an additional cost to the Series. See
"Investment Objectives and Policies" in the Statement of Additional Information.
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. Each Series participates in a
joint repurchase account with other investment companies managed by PIFM
pursuant to an order of the Commission.
SECURITIES OF OTHER INVESTMENT COMPANIES
Each Series may invest up to 10% of its total assets in securities of other
investment companies. To the extent that a Series does invest in securities of
other investment companies, shareholders of the Series may be subject to
duplicate management and advisory fees.
ILLIQUID SECURITIES
Each Series may hold up to 15% of its net assets in illiquid securities,
including repurchase agreements which have a maturity of longer than seven days,
securities with legal or contractual restrictions on resale (restricted
securities) and securities that are not readily marketable. 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. A Series' investment in Rule 144A securities could have the effect of
increasing illiquidity to the extent that qualified institutional buyers become,
for a limited time, uninterested in purchasing Rule 144A securities. See
"Investment Restrictions" in the Statement of Additional Information. Repurchase
agreements subject to demand are deemed to have a maturity equal to the
applicable notice period.
Municipal lease obligations will not be considered illiquid for purposes of
the each Series' 15% limitation on illiquid securities provided the investment
adviser determines that there is a readily available market for such securities.
In reaching liquidity decisions, the investment adviser will consider, INTER
ALIA, the following factors: (1) the frequency of trades and quotes for the
security; (2) the number of dealers wishing to purchase or sell the security and
the number of other potential purchasers; (3) dealer undertakings to make a
market in the security; and (4) the nature of the security and the nature of the
marketplace trades (E.G., the time needed to dispose of the security, the method
of soliciting offers and the mechanics of the transfer). With respect to
municipal lease obligations, the investment adviser also considers: (1) the
willingness of the municipality to continue, annually or biannually, to
appropriate funds for payment of the lease; (2) the general credit quality of
the municipality and the essentiality to the municipality of the property
covered by the lease; (3) in the case of unrated municipal lease obligations, an
analysis of factors similar to that performed by nationally recognized
statistical rating organizations in evaluating the credit quality of a municipal
lease obligation, including (i) whether the lease can be cancelled; (ii) if
applicable, what assurance there is that the assets represented by the lease can
be sold; (iii) the strength of the lessee's general credit (E.G., its debt,
administrative, economic and
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financial characteristics); (iv) the likelihood that the municipality will
discontinue appropriating funding for the leased property because the property
is no longer deemed essential to the operations of the municipality (E.G., the
potential for an event of nonappropriation); (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.
SECURITIES LENDING
The Fund may lend its portfolio securities to brokers or dealers, banks or
other recognized institutional borrowers of securities, provided that the
borrower at all times maintains cash or other liquid assets or secures an
irrevocable letter of credit in favor of the Fund in an amount equal to at least
100%, determined daily, of the market value of the securities loaned which are
segregated pursuant to applicable regulations. During the time portfolio
securities are on loan, the borrower will pay the Fund an amount equivalent to
any dividend or interest paid on such securities and the Fund may invest the
cash collateral and earn additional income, or it may receive an agreed upon
amount of interest income from the borrower. As with any extensions of credit,
there are risks of delay in recovery and in some cases loss of rights in the
collateral should the borrower of the securities fail financially. The Fund will
not lend more than 33% of the value of its total assets. See "Portfolio
Characteristics--Lending of Securities" in the Statement of Additional
Information. The Fund may pay reasonable administration and custodial fees in
connection with a loan.
PORTFOLIO TURNOVER
The Series do not expect to trade in securities for short-term gain. It is
anticipated that the annual portfolio turnover rate will not exceed 150%. The
portfolio turnover rate is calculated by dividing the lesser of sales or
purchases of portfolio securities by the average monthly value of a Series'
portfolio securities, excluding securities having a maturity at the date of
purchase of one year or less.
INVESTMENT RESTRICTIONS
Each Series is subject to certain investment restrictions which, like its
investment objective, constitute fundamental policies. Fundamental policies
cannot be changed without the approval of the holders of a majority of each
Series' outstanding voting securities, as defined in the Investment Company Act.
See "Investment Restrictions" in the Statement of Additional Information.
HOW THE FUND IS MANAGED
THE FUND HAS TRUSTEES WHO, IN ADDITION TO OVERSEEING THE ACTIONS OF THE FUND'S
MANAGER, SUBADVISER AND DISTRIBUTOR, AS SET FORTH BELOW, DECIDE UPON MATTERS OF
GENERAL POLICY. THE FUND'S MANAGER CONDUCTS AND SUPERVISES THE DAILY BUSINESS
OPERATIONS OF THE FUND. THE FUND'S SUBADVISER FURNISHES DAILY INVESTMENT
ADVISORY SERVICES.
For the fiscal year ended April 30, 1998, the total expenses as a percentage
of average net assets were .62%, 1.02%, 1.27% and .52% of the Class A, Class B,
Class C and Class Z shares, respectively, of the High Income Series, .69%,
1.09%, 1.34% and .60% of the Class A, Class B, Class C and Class Z shares,
respectively, of the Insured Series, and 1.31%, 1.71%, 1.96% and 1.21% of the
Class A, Class B, Class C and Class Z shares, respectively, of the Intermediate
Series. See "Financial Highlights."
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MANAGER
PRUDENTIAL INVESTMENTS FUND MANAGEMENT LLC (PIFM OR THE MANAGER), GATEWAY
CENTER THREE, 100 MULBERRY STREET, NEWARK, NEW JERSEY 07102-4077, IS THE MANAGER
OF THE FUND AND IS COMPENSATED FOR ITS SERVICES AT AN ANNUAL RATE OF .50 OF 1%
OF THE AVERAGE DAILY NET ASSETS OF EACH SERIES UP TO $1 BILLION AND .45 OF 1% OF
THE AVERAGE DAILY NET ASSETS OF EACH SERIES IN EXCESS OF $1 BILLION. PIFM is
organized in New York as a limited liability company. It is the successor to
Prudential Mutual Fund Management, Inc., which transferred its assets to PIFM in
September 1996. For the fiscal year ended April 30, 1998, PIFM received a
management fee of .45%, .48% and .48% of average daily net assets on behalf of
the High Income Series, Insured Series and Intermediate Series, respectively.
See "Manager" in the Statement of Additional Information.
PIFM may from time to time waive its management fee and subsidize operating
expenses of a Series. PIFM has agreed to waive 10% of its management fee
(approximately .05 of 1% of average net assets, as annualized), with respect to
the High Income Series. See "Fund Expenses." The Fund is not required to
reimburse PIFM for such fee waiver. Fee waivers and expense subsidies will
increase a Series' yield and total return. See "How the Fund Calculates
Performance."
As of May 31, 1998, PIFM served as the manager to 45 open-end investment
companies, constituting all of the Prudential Mutual Funds, and as manager or
administrator to 22 closed-end investment companies with aggregate assets of
approximately $65 billion.
UNDER THE MANAGEMENT AGREEMENT WITH THE FUND, PIFM MANAGES THE INVESTMENT
OPERATIONS OF EACH SERIES OF THE FUND AND ALSO ADMINISTERS THE FUND'S BUSINESS
AFFAIRS. See "Manager" in the Statement of Additional Information.
UNDER A SUBADVISORY AGREEMENT BETWEEN PIFM AND THE PRUDENTIAL INVESTMENT
CORPORATION (PIC), DOING BUSINESS AS PRUDENTIAL INVESTMENTS (PI, THE SUBADVISER
OR THE INVESTMENT ADVISER), THE SUBADVISER FURNISHES INVESTMENT ADVISORY
SERVICES IN CONNECTION WITH THE MANAGEMENT OF THE FUND AND IS REIMBURSED BY PIFM
FOR ITS REASONABLE COSTS AND EXPENSES INCURRED IN PROVIDING SUCH SERVICES. PIC's
address is Prudential Plaza, Newark, New Jersey 07102-3777. Under the Management
Agreement, 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 current portfolio manager of the High Income Series is Peter J. Allegrini,
a Managing Director of Prudential Investments, a business group of PIC. Mr.
Allegrini has managed the Series' portfolio since July 1994. From 1982 to 1986,
he was employed by Fidelity Investments as a senior bond analyst and, from 1986
to 1994, he was a portfolio manager, most recently of Fidelity Advisor High
Income Municipal Fund, and has been employed by PIC since 1994. Mr. Allegrini
has responsibility for the day-to-day management of the Series' portfolio. The
current portfolio manager of the Insured Series is Christian Smith. Mr. Smith
has responsibility for the day-to-day management of the Series' portfolio. He
has managed the Series' portfolio since October 1997 and has been employed by
PIC in various capacities since 1988. The current portfolio managers of the
Intermediate Series are Peter Allegrini and Scott Diamond, who share
responsibility for the day-to-day management of the Series' portfolio. They have
managed the portolio since October 1997. Mr. Diamond has been employed by PIC in
various capacities since 1993.
PIFM and PIC are indirect wholly-owned subsidiaries of The Prudential
Insurance Company of America (Prudential), a major diversified insurance and
financial services company.
DISTRIBUTOR
PRUDENTIAL INVESTMENT MANAGEMENT SERVICES LLC (THE DISTRIBUTOR), GATEWAY
CENTER THREE, 100 MULBERRY STREET, NEWARK, NEW JERSEY 07102-4077, IS A LIMITED
LIABILITY COMPANY ORGANIZED UNDER THE LAWS OF THE STATE OF DELAWARE AND SERVES
AS THE DISTRIBUTOR OF THE SHARES OF EACH SERIES OF THE FUND. IT IS A
WHOLLY-OWNED SUBSIDIARY OF PRUDENTIAL. Prudential Securities Incorporated
(Prudential Securities), One Seaport Plaza, New York, New York 10292, previously
served as distributor of Fund shares. It is an indirect, wholly-owned subsidiary
of Prudential.
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UNDER SEPARATE DISTRIBUTION AND SERVICE PLANS (THE CLASS A PLAN, THE CLASS B
PLAN AND THE CLASS C PLAN, COLLECTIVELY, THE PLANS) ADOPTED BY THE FUND UNDER
RULE 12b-1 UNDER THE INVESTMENT COMPANY ACT AND A DISTRIBUTION AGREEMENT (THE
DISTRIBUTION AGREEMENT), THE DISTRIBUTOR INCURS THE EXPENSES OF DISTRIBUTING THE
CLASS A, CLASS B AND CLASS C SHARES. THE DISTRIBUTOR INCURS THE EXPENSES OF
DISTRIBUTING THE FUND'S CLASS Z SHARES UNDER THE DISTRIBUTION AGREEMENT, NONE OF
WHICH IS REIMBURSED BY OR PAID FOR BY THE FUND. These expenses include
commissions and account servicing fees paid to, or on account of, Dealers or
financial institutions (other than national banks) which have entered into
agreements with the Distributor, advertising expenses, the cost of printing and
mailing prospectuses to potential investors and indirect and overhead costs of
the Distributor associated with the sale of the Fund's shares, including lease,
utility, communications and sales promotion expenses. Certain Dealers are paid
higher fees than others with respect to Class A shares pursuant to separate
agreements with the Distributor.
Under the Plans, the Fund is obligated to pay distribution and/or service fees
to the Distributor as compensation for its distribution and service activities,
not as reimbursement for specific expenses incurred. If the Distributor's
expenses exceed its distribution and service fees, the Fund will not be
obligated to pay any additional expenses. If the Distributor's expenses are less
than such distribution and service fees, it will retain its full fees and
realize a profit.
The distribution and/or service fees may also be used by the Distributor to
compensate on a continuing basis Dealers in consideration for the distribution,
marketing, administrative and other services and activities provided by Dealers
with respect to the promotion of the sale of the Fund's shares and the
maintenance of related shareholder accounts.
UNDER THE CLASS A PLAN, EACH SERIES 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 THE
SERIES. The Class A Plan provides that (i) up to .25 of 1% of the average daily
net assets of the Class A shares may be used to pay for personal service and/or
the maintenance of shareholder accounts (service fee) and (ii) total
distribution fees (including the service fee of up to .25 of 1%) may not exceed
..30 of 1% of the average daily net assets of the Class A shares.
UNDER THE CLASS B AND CLASS C PLANS, EACH SERIES 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
ASSETS OF THE CLASS B AND CLASS C SHARES, RESPECTIVELY. The Class B Plan
provides for the payment to the Distributor of (i) an asset-based sales charge
of up to .50 of 1% of the average daily net assets of the Class B shares, and
(ii) a service fee of up to .25 of 1% of the average daily net assets of the
Class B shares; provided that the total distribution-related fee does not exceed
..50 of 1%. The Class C Plan provides for the payment to the Distributor of (i)
an asset-based sales charge of up to .75 of 1% of the average daily net assets
of the Class C shares, and (ii) a service fee of up to .25 of 1% of the average
daily net assets of the Class C shares. The service fee is used to pay for
personal service and/or the maintenance of shareholders accounts. The
Distributor also receives contingent deferred sales charges from certain
redeeming shareholders. See "Shareholder Guide--How to Sell Your
Shares--Contingent Deferred Sales Charges."
For the fiscal year ended April 30, 1998, each Series paid distribution
expenses of .10%, .50% and .75% of the average daily net assets of the Class A,
Class B and Class C shares, respectively. The Series record all payments made
under the Plans as expenses in the calculation of net investment income. See
"Distributor" in the Statement of Additional Information.
Distribution expenses attributable to the sale of Class A, Class B and Class C
shares of each Series will be allocated to each such class based upon the ratio
of sales of each such class to the sales of Class A, Class B and Class C shares
of the Series other than expenses allocable to a particular class. The
distribution fee and sales charge of one class will not be used to subsidize the
sale of another class.
Each Plan provides that it shall continue in effect from year to year provided
that a majority of the Trustees of the Fund, including a majority of the
Trustees who are not interested persons of the Fund (as defined in the
Investment Company Act) and who have no direct or indirect financial interest in
the operation of the Plan or any agreement related to the Plan (the Rule 12b-1
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<PAGE>
Trustees), vote annually to continue the Plan. Each Plan may be terminated with
respect to a Series at any time by vote of a majority of the Rule 12b-1 Trustees
or of a majority of the outstanding shares of the applicable class of the
Series. The Series will not be obligated to pay distribution and service fees
incurred under any Plan if it is terminated or not continued.
In addition to distribution and service fees paid by the Fund under the Class
A, Class B and Class C Plans, the Manager (or one of its affiliates) may make
payments out of its own resources to Dealers and other persons which distribute
shares of the Fund (including Class Z shares). Such payments may be calculated
by reference to the NAV sold by such persons or otherwise.
The Distributor is subject to the rules of the National Association of
Securities Dealers, Inc. governing maximum sales charges. See "Distributor" in
the Statement of Additional Information.
FEE WAIVERS AND SUBSIDY
PIFM may from time to time voluntarily waive all or a portion of its
management fee and subsidize all or a portion of the operating expenses of the
Fund. Effective August 31, 1997, PIFM discontinued its waiver of 10% of its
management fee related to the Insured Series and Intermediate Series. The
Distributor has voluntarily waived a portion of its distribution fees for the
Class A and Class C shares as described under "Fund Expenses." Fee waivers and
expense subsidies will increase the Fund's total return. Any such waivers may be
terminated at any time without prior notice to shareholders. See "Performance
Information" in the Statement of Additional Information and "Fund Expenses."
PORTFOLIO TRANSACTIONS
Affiliates of the Distributor may act as brokers or futures commission
merchants for the Fund, provided that the commissions, fees or other
remuneration they receive are fair and reasonable. See "Portfolio Transactions
and Brokerage" in the Statement of Additional Information.
CUSTODIAN AND TRANSFER AND DIVIDEND DISBURSING AGENT
State Street Bank and Trust Company, One Heritage Drive, North Quincy,
Massachusetts 02171, serves as Custodian for the portfolio securities and cash
of each Series and, in that capacity, maintains certain financial and accounting
books and records pursuant to an agreement with the Fund. Its mailing address is
P.O. Box 1713, Boston, Massachusetts 02105.
Prudential Mutual Fund Services LLC (PMFS or the Transfer Agent), Raritan
Plaza One, Edison, New Jersey 08837, serves as Transfer Agent and Dividend
Disbursing Agent and in those capacities maintains certain books and records for
the Fund. PMFS is a wholly-owned subsidiary of PIFM. Its mailing address is P.O.
Box 15035, New Brunswick, New Jersey 08906-5005.
YEAR 2000
The services provided to the Fund and the shareholders by the Manager, the
Distributor, the Transfer Agent and the Custodian depend on the smooth
functioning of their computer systems and those of their outside service
providers. Many computer software systems in use today cannot distinguish the
year 2000 from the year 1900 because of the way dates are encoded and
calculated. Such event could have a negative impact on handling securities
trades, payments of interest and dividends, pricing and account services.
Although, at this time, there can be no assurance that there will be no adverse
impact on the Fund, the Manager, the Distributor, the Transfer Agent and the
Custodian have advised the Fund that they have been actively working on
necessary changes to their computer systems to prepare for the year 2000 and
expect that their systems, and those of their outside service providers, will be
adapted in time for that event.
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<PAGE>
HOW THE FUND VALUES ITS SHARES
EACH SERIES' NET ASSET VALUE PER SHARE OR NAV IS DETERMINED BY SUBTRACTING ITS
LIABILITIES FROM THE VALUE OF ITS ASSETS AND DIVIDING THE REMAINDER BY THE
NUMBER OF OUTSTANDING SHARES. NAV IS CALCULATED SEPARATELY FOR EACH CLASS. THE
TRUSTEES HAVE FIXED THE SPECIFIC TIME OF DAY FOR THE COMPUTATION OF THE SERIES'
NAV TO BE AS OF 4:15 P.M., NEW YORK TIME.
Portfolio securities are valued based on market quotations or, if not readily
available, at fair value as determined in good faith under procedures
established by the Fund's Trustees. Securities may also be valued based on
values provided by a pricing service. See "Net Asset Value" in the Statement of
Additional Information.
Each Series will compute its NAV once daily on days that the New York Stock
Exchange is open for trading except on days on which no orders to purchase, sell
or redeem shares have been received by the Series or days on which changes in
the value of the Series' portfolio securities do not materially affect the NAV.
Although the legal rights of each class of shares are substantially identical,
the different expenses borne by each class will result in different dividends.
As long as the Series declare dividends daily, the NAV of the Class A, Class B,
Class C and Class Z shares will generally be the same. It is expected, however,
that the Series' dividends will differ by approximately the amount of any
distribution and/or service fee expense accrual differential among the classes.
HOW THE FUND CALCULATES PERFORMANCE
FROM TIME TO TIME THE FUND MAY ADVERTISE THE YIELD, TAX EQUIVALENT YIELD AND
TOTAL RETURN (INCLUDING AVERAGE ANNUAL TOTAL RETURN AND AGGREGATE TOTAL RETURN)
OF A SERIES IN ADVERTISEMENTS OR SALES LITERATURE. YIELD, TAX EQUIVALENT YIELD
AND TOTAL RETURN ARE CALCULATED SEPARATELY FOR CLASS A, CLASS B, CLASS C AND
CLASS Z SHARES. THESE FIGURES ARE NOT INTENDED TO INDICATE FUTURE PERFORMANCE.
The yield refers to the income generated by an investment in a Series over a
30-day period. This income is then annualized; that is, the amount of income
generated by the investment during that 30-day period is assumed to be generated
each 30-day period for twelve periods and is shown as a percentage of the
investment. The income earned on the investment is also assumed to be reinvested
at the end of the sixth 30-day period. The tax equivalent yield is calculated
similarly to the yield, except that the yield is increased using a stated income
tax rate to demonstrate the taxable yield necessary to produce an after-tax
yield equivalent to a Series. The total return shows how much an investment in a
Series would have increased (decreased) over a specified period of time (I.E.,
one, five or ten years or since inception of the Series) assuming that all
distributions and dividends by the Series were reinvested on the reinvestment
dates during the period and less all recurring fees. The aggregate total return
reflects actual performance over a stated period of time. Average annual total
return is a hypothetical rate of return that, if achieved annually, would have
produced the same aggregate total return if performance had been constant over
the entire period. Average annual total return smooths out variations in
performance and takes into account any applicable initial or contingent deferred
sales charges. Neither average annual total return nor aggregate total return
takes into account any federal or state income taxes which may be payable upon
redemption. The Fund also may include comparative performance information in
advertising or marketing the shares of each Series. Such performance information
may include data from Lipper Analytical Services, Inc., Morningstar
Publications, Inc., other industry publications, business periodicals and market
indices. See "Performance Information" in the Statement of Additional
Information. Further performance information is contained in the Series' annual
and semi-annual reports to shareholders, which may be obtained without charge.
See "Shareholder Guide-- Shareholder Services--Reports to Shareholders."
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<PAGE>
TAXES, DIVIDENDS AND DISTRIBUTIONS
TAXATION OF THE FUND
EACH SERIES OF THE FUND HAS QUALIFIED AND INTENDS TO REMAIN QUALIFIED AS A
REGULATED INVESTMENT COMPANY UNDER THE INTERNAL REVENUE CODE. ACCORDINGLY, EACH
SERIES WILL NOT BE SUBJECT TO FEDERAL INCOME TAXES ON ITS NET TAXABLE INVESTMENT
INCOME AND NET CAPITAL GAINS, IF ANY, THAT IT DISTRIBUTES TO ITS SHAREHOLDERS.
TO THE EXTENT NOT DISTRIBUTED BY A SERIES, NET TAXABLE INVESTMENT INCOME AND
CAPITAL GAINS ARE TAXABLE TO THE SERIES. See "Taxes, Dividends and
Distributions" in the Statement of Additional Information.
To the extent a Series invests in taxable obligations, it will earn taxable
investment income. Also, to the extent a Series sells securities or engages in
hedging transactions in futures contracts and options thereon, it may earn both
short-term and long-term capital gain or loss. Capital gain or loss may also
arise upon the sale of municipal securities, as well as taxable obligations.
Under the Internal Revenue Code, special rules apply to the treatment of certain
options and futures contracts (Section 1256 contracts). At the end of each year,
such investments held by the Series will be required to be marked to market for
federal income tax purposes; that is, treated as having been sold at market
value. Sixty percent of any gain or loss recognized on these deemed sales and on
actual dispositions will be treated as long-term capital gain or loss, and the
remainder will be treated as short-term capital gain or loss. See "Taxes,
Dividends and Distributions" in the Statement of Additional Information.
Gain or loss realized by the Series from the sale of securities generally will
be treated as capital gain or loss; however, gain from the sale of certain
securities (including municipal obligations) will be treated as ordinary income
to the extent of any market discount. Market discount generally is the
difference, if any, between the price paid by the Series for the security and
the principal amount of the security (or, in the case of a security issued at an
original issue discount, the revised issue price of the security). The market
discount rule does not apply to any security that was acquired by the Series at
its original issue.
TAXATION OF SHAREHOLDERS
In general, the character of tax-exempt interest distributed by each Series
will flow through as tax-exempt interest to its shareholders provided that 50%
or more of the value of its assets at the end of each quarter of its taxable
year is invested in state, municipal and other obligations, the interest on
which is excluded from gross income for federal income tax purposes. During
normal market conditions, at least 80% of each Series' net assets will be
invested in such obligations. See "How the Fund Invests--Other Investments and
Policies."
Any dividends out of net taxable investment income, together with
distributions of net short-term gains (I.E., the excess of net short-term
capital gains over net long-term capital losses) distributed to shareholders,
will be taxable as ordinary income to the shareholder whether or not reinvested.
Any capital gains (I.E., the excess of net capital gains from the sale of assets
held for more than 12 months over net short-term capital losses) distributed to
shareholders will be taxable as capital gains to the shareholders, whether or
not reinvested and regardless of the length of time a shareholder has owned his
or her shares. The maximum capital gains rate for individuals is 28% with
respect to assets held for more than 12 months, but not more than 18 months, and
20% with respect to assets held for more than 18 months. The maximum capital
gains rate for corporate shareholders currently is the same as the maximum tax
rate for ordinary income.
Any gain or loss realized upon the sale or redemption of a Series' shares by a
shareholder who is not a dealer in securities will be treated as capital gain or
loss. In the case of an individual, any such capital gain will be treated as
short-term capital gain if the shares were held for not more than 12 months,
gain taxable at the maximum rate of 28% if such shares were held for more than
12, but not more than 18 months, and gain taxable at the maximum rate of 20% if
such shares were held for more than 18 months. In the case of a corporation, any
such capital gain will be treated as long-term capital gain, taxable at the same
rates as ordinary
33
<PAGE>
income, if such shares were held for more than 12 months. Any such capital loss
will be treated as long-term capital loss if the shares have been held for more
than one year and otherwise as short-term capital loss. Any loss realized by a
shareholder upon the sale of shares of a Series held by the shareholder for six
months or less will be disallowed to the extent of any exempt interest dividends
received with respect to such shares and treated as long-term capital loss to
the extent of capital gains distributions received by the shareholder.
Any loss realized on a sale, redemption or exchange of shares of the Fund by a
shareholder will be disallowed to the extent the shares are replaced within a
61-day period (beginning 30 days before the disposition of shares). Shares
purchased pursuant to the reinvestment of a dividend will constitute a
replacement of shares.
A shareholder who acquires shares of the Fund and sells or otherwise disposes
of such shares within 90 days of acquisition may not be allowed to include
certain sales charges incurred in acquiring such shares for purposes of
calculating gain or loss realized upon a sale or exchange of shares of the Fund.
CERTAIN INVESTORS MAY INCUR FEDERAL ALTERNATIVE MINIMUM TAX LIABILITY AS A
RESULT OF THEIR INVESTMENT IN THE FUND. Tax-exempt interest from certain
municipal obligations (I.E., certain private activity bonds issued after August
7, 1986) will be treated as an item of tax preference for purposes of the
alternative minimum tax. The Fund anticipates that, under regulations to be
promulgated, items of tax preference incurred by a Series which has invested in
such municipal obligations will be attributed to the Series' shareholders,
although some portion of such items could be allocated to the Series itself.
Depending upon each shareholder's individual circumstances, the attribution of
items of tax preference incurred by a Series could result in liability for the
shareholder for the alternative minimum tax. Similarly, a Series could be liable
for the alternative minimum tax for items of tax preference attributed to it.
With the exception of the High Income Series, the Fund intends to minimize the
investment of each Series in municipal obligations of the type that will produce
items of tax preference. With respect to the High Income Series, however, it is
anticipated that a substantial portion of the Series' assets will be invested in
such obligations.
Distributions relating to interest on all municipal obligations will be
included in a corporate shareholder's current earnings for purposes of the
adjustment for current earnings for alternative minimum tax purposes. Corporate
shareholders should consult with their tax advisers with respect to this
potential adjustment.
The Fund has obtained opinions of counsel to the effect that neither (i) the
conversion of Class B shares into Class A shares nor (ii) the exchange of any
class of the Fund's shares for any other class of its shares constitutes a
taxable event for federal income tax purposes. However, such opinions are not
binding on the Internal Revenue Service.
WITHHOLDING TAXES
Under the Internal Revenue Code, the Fund is required to withhold and remit to
the U.S. Treasury 31% of redemption proceeds on the accounts of those
shareholders who fail to furnish their tax identification numbers on IRS Form
W-9 (or IRS Form W-8 in the case of certain foreign shareholders) with the
required certifications regarding the shareholders' status under the federal
income tax law. Withholding generally is also required on taxable dividends and
capital gains distributions made by a Series.
Dividends of net investment income and distributions of net short-term capital
gains paid to a shareholder (including a shareholder acting as a nominee or
fiduciary) who is a nonresident alien individual, a foreign corporation or a
foreign partnership (foreign shareholder) are subject to a 30% (or lower treaty
rate) withholding tax upon the gross amount of the dividends unless the
dividends are effectively connected with a U.S. trade or business conducted by
the foreign shareholder. Capital gain dividends paid to a foreign shareholder
are generally not subject to withholding tax. A foreign shareholder will,
however, be required to pay U.S. income tax on any dividends and capital gain
distributions which are effectively connected with a U.S. trade or business of
the foreign shareholder.
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<PAGE>
Shareholders are advised to consult their own tax advisers regarding specific
questions as to federal, state, local or foreign taxes. See "Taxes, Dividends
and Distributions" in the Statement of Additional Information.
DIVIDENDS AND DISTRIBUTIONS
THE FUND EXPECTS TO DECLARE DAILY AND PAY MONTHLY DIVIDENDS OF NET INVESTMENT
INCOME, IF ANY, AND MAKE DISTRIBUTIONS AT LEAST ANNUALLY OF ANY NET CAPITAL
GAINS. Dividends paid by each Series with respect to each class of shares, to
the extent dividends are paid, will be calculated in the same manner, at the
same time, on the same day and will be in the same amount except that each class
(other than Class Z) will bear its own distribution charges, generally resulting
in lower dividends for Class B and Class C shares in relation to Class A shares
and lower dividends for Class A shares in relation to Class Z shares.
Distributions of net capital gains, if any, will be paid in the same amount for
each class of shares. See "How the Fund Values its Shares."
DIVIDENDS AND DISTRIBUTIONS WILL BE PAID IN ADDITIONAL SHARES OF A SERIES
BASED ON THE NAV OF EACH CLASS ON THE PAYMENT DATE, OR SUCH OTHER DATE AS THE
TRUSTEES MAY DETERMINE, UNLESS THE SHAREHOLDER ELECTS IN WRITING NOT LESS THAN
FIVE BUSINESS DAYS PRIOR TO THE RECORD DATE TO RECEIVE SUCH DIVIDENDS AND
DISTRIBUTIONS IN CASH. Such election should be submitted to Prudential Mutual
Fund Services LLC, Attention: Account Maintenance, P.O. Box 15035, New
Brunswick, New Jersey 08906-5015. The Fund will notify each shareholder after
the close of the Fund's taxable year both of the dollar amount and the taxable
status of that year's dividends and distributions on a per share basis.
Any taxable dividends or distributions of net capital gains paid shortly after
a purchase by an investor will have the effect of reducing the NAV of the
investor's shares by the per share amount of the dividends or distributions.
Such dividends or distributions, although in effect a return of invested
principal, are subject to federal income taxes. Accordingly, prior to purchasing
shares of a Series, an investor should carefully consider the impact of taxable
dividends and capital gains distributions which are expected to be or have been
announced.
GENERAL INFORMATION
DESCRIPTION OF SHARES
THE FUND IS AN OPEN-END, MANAGEMENT INVESTMENT COMPANY COMPRISED OF THREE
SERIES WHICH WAS ORGANIZED UNDER THE LAWS OF MASSACHUSETTS ON NOVEMBER 3, 1986
AS AN UNINCORPORATED BUSINESS TRUST, A FORM OF ORGANIZATION THAT IS COMMONLY
CALLED A MASSACHUSETTS BUSINESS TRUST. THE FUND IS AUTHORIZED TO ISSUE AN
UNLIMITED NUMBER OF SHARES, DIVIDED INTO FOUR CLASSES, DESIGNATED CLASS A, CLASS
B, CLASS C AND CLASS Z. Each class of shares represents an interest in the same
assets of the Fund and is identical in all respects except that (i) each class
is subject to different sales charges and distribution and/or service fees
(except for Class Z shares, which are not subject to any sales charges or
distribution and/or service fees), which may affect performance, (ii) each class
has exclusive voting rights on any matter submitted to shareholders that relates
solely to its arrangement and has separate voting rights on any matter submitted
to shareholders in which the interests of one class differ from the interests of
any other class, (iii) each class has a different exchange privilege, (iv) only
Class B shares have a conversion feature and (v) Class Z shares are offered
exclusively to a limited group of investors. See "How the Fund is
Managed--Distributor." In accordance with the Fund's Declaration of Trust, the
Trustees may authorize the creation of additional series and classes of shares
within such series, with such preferences, privileges, limitations and voting
and dividend rights as the Trustees may determine.
Shares of the Fund, when issued, are fully paid, nonassessable, fully
transferable and redeemable at the option of the holder. Shares are also
redeemable at the option of the Fund under certain circumstances as described
under "Shareholder Guide--How to Sell Your Shares." Each share of each class of
each Series is equal as to earnings, assets and voting privileges, except as
noted
35
<PAGE>
above, and each class of shares (with the exception of Class Z shares, which are
not subject to any distribution or service fees) bears the expenses related to
the distribution of its shares. Except for the conversion feature applicable to
the Class B shares, there are no conversion, preemptive or other subscription
rights. In the event of liquidation, each share of beneficial interest in each
Series is entitled to its portion of all of the Fund's assets after all debt and
expenses of the Fund have been paid. Since Class B and Class C shares bear
higher distribution expenses than Class A shares, the liquidation proceeds to
shareholders of those classes are likely to be lower than to Class A
shareholders and to Class Z shareholders, whose shares are not subject to any
distribution and/or service fees. The Fund's shares do not have cumulative
voting rights for the election of Trustees.
THE FUND DOES NOT INTEND TO HOLD ANNUAL MEETINGS OF SHAREHOLDERS UNLESS
OTHERWISE REQUIRED BY LAW. THE FUND WILL NOT BE REQUIRED TO HOLD MEETINGS OF
SHAREHOLDERS UNLESS, FOR EXAMPLE, THE ELECTION OF TRUSTEES IS REQUIRED TO BE
ACTED ON BY SHAREHOLDERS UNDER THE INVESTMENT COMPANY ACT. SHAREHOLDERS HAVE
CERTAIN RIGHTS, INCLUDING THE RIGHT TO CALL A MEETING UPON A VOTE OF 10% OF THE
FUND'S OUTSTANDING SHARES FOR THE PURPOSE OF VOTING ON THE REMOVAL OF ONE OR
MORE TRUSTEES OR TO TRANSACT ANY OTHER BUSINESS.
The Declaration of Trust and the By-Laws of the Fund are designed to make the
Fund similar in certain respects to a Massachusetts business corporation. The
principal distinction between a Massachusetts business corporation and a
Massachusetts business trust relates to shareholder liability. Under
Massachusetts law, shareholders of a business trust may, under certain
circumstances, be held personally liable as partners for the obligations of the
Fund, which is not the case with a corporation. The Declaration of Trust of the
Fund provides that shareholders shall not be subject to any personal liability
for the acts or obligations of the Fund and that every written obligation,
contract, instrument or undertaking made by the Fund shall contain a provision
to the effect that the shareholders are not individually bound thereunder.
ADDITIONAL INFORMATION
This Prospectus, including the Statement of Additional Information which has
been incorporated by reference herein, does not contain all the information set
forth in the Registration Statement filed by the Fund with the Commission under
the Securities Act of 1933. Copies of the Registration Statement may be obtained
at a reasonable charge from the Commission or may be examined, without charge,
at the office of the Commission in Washington, D.C.
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<PAGE>
SHAREHOLDER GUIDE
HOW TO BUY SHARES OF THE FUND
YOU MAY PURCHASE SHARES OF EACH SERIES OF THE FUND THROUGH THE DISTRIBUTOR,
THROUGH DEALERS, OR DIRECTLY FROM THE FUND THROUGH ITS TRANSFER AGENT,
PRUDENTIAL MUTUAL FUND SERVICES LLC (PMFS OR THE TRANSFER AGENT) ATTENTION:
INVESTMENT SERVICES, P.O. BOX 15035, NEW BRUNSWICK, NEW JERSEY 08906-5020. The
purchase price is the NAV next determined following receipt of an order in
proper form (in accordance with procedures established by the Transfer Agent in
connection with investors' accounts); by the Distributor, your Dealer or the
Transfer Agent, plus a sales charge which, at your option, may be imposed either
(i) at the time of purchase (Class A shares) or (ii) on a deferred basis (Class
B or Class C shares). Class Z shares are offered to a limited group of investors
at NAV without any sales charge. Dealers may charge their customers a separate
fee for handling purchase transactions. Payments may be made by wire, check or
through your brokerage account. See "Alternative Purchase Plan" below. See also
"How the Fund Values its Shares."
In order to receive that day's NAV, your order must be received before the
Fund's NAV is computed (currently 4:15 P. M., New York time). If you purchase
shares through your Dealer, the Dealer must receive your order before the Fund's
NAV is computed that day and must transmit the order to the Distributor that
same day for you to receive that day's NAV.
An investment in the Series may not be appropriate for tax-exempt or
tax-deferred investors. Such investors should consult their own tax advisers.
The minimum initial investment is $1,000 for Class A and Class B shares and
$5,000 for Class C shares except that the minimum initial investment for Class C
shares may be waived from time to time. There is no minimum investment
requirement for Class Z shares. The minimum subsequent investment is $100 for
all classes, except for Class Z shares, for which there is no minimum. All
minimum investment requirements are waived for certain employee savings plans.
For purchases made through the Automatic Savings Accumulation Plan, the minimum
initial and subsequent investment is $50. See "Shareholder Services" below.
The Fund reserves the right to reject any purchase order (including an
exchange into the Fund) or to suspend or modify the continuous offering of its
shares. See "How to Sell Your Shares" below.
If a share certificate is desired, it must be requested in writing for each
transaction. Certificates are issued only for full shares. Shareholders who hold
their shares in street name with their Dealer will not receive share
certificates.
Your Dealer is responsible for forwarding payment promptly to the Fund. The
Distributor reserves the right to cancel any purchase order for which payment
has not been received by the third business day following the placement of the
order.
Transactions in Fund shares may be subject to postage and handling charges
imposed by your Dealer. Any such charge is retained by the Dealer and is not
remitted to the Fund.
PURCHASE BY WIRE. For an initial purchase of shares of the Fund by wire, you
must complete an application and telephone PMFS at (800) 225-1852 (toll-free) to
receive an account number. The following information will be requested: your
name, address, tax identification number, class election, dividend distribution
election, amount being wired and wiring bank. Instructions should then be given
by you to your bank to transfer funds by wire to State Street Bank and Trust
Company, Boston, Massachusetts, Custody and Shareholder Services Division,
Attention: Prudential Municipal Bond Fund, specifying on the wire the account
number assigned by PMFS and your name and identifying the class in which you are
eligible to invest (Class A, Class B, Class C or Class Z shares) and the name of
the Series.
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<PAGE>
If you arrange for receipt by State Street of Federal Funds prior to the
calculation of NAV (4:15 P.M., New York time), on a business day, you may
purchase shares of a Series as of that day. See "Net Asset Value" in the
Statement of Additional Information.
In making a subsequent purchase order by wire, you should wire State Street
directly and should be sure that the wire specifies Prudential Municipal Bond
Fund, the name of the Series, Class A, Class B, Class C or Class Z shares and
your name and individual account number. It is not necessary to call PMFS to
make subsequent purchase orders utilizing Federal Funds. The minimum amount
which may be invested by wire is $1,000.
ALTERNATIVE PURCHASE PLAN
THE FUND OFFERS THROUGH THIS PROSPECTUS FOUR CLASSES OF SHARES (CLASS A, CLASS
B, CLASS C AND CLASS Z SHARES) WHICH ALLOWS YOU TO CHOOSE THE MOST BENEFICIAL
SALES CHARGE STRUCTURE FOR YOUR INDIVIDUAL CIRCUMSTANCES, GIVEN THE AMOUNT OF
THE PURCHASE AND THE LENGTH OF TIME YOU EXPECT TO HOLD THE SHARES AND OTHER
RELEVANT CIRCUMSTANCES (ALTERNATIVE PURCHASE PLAN).
<TABLE>
<CAPTION>
ANNUAL 12b-1 FEES
(AS A % OF AVERAGE
DAILY
SALES CHARGE NET ASSETS) OTHER INFORMATION
-------------------------------------- ----------------------- --------------------------------------
<S> <C> <C> <C>
CLASS A Maximum initial sales charge of 3% of .30 of 1% (Currently Initial sales charge waived or reduced
the public offering price being charged at a rate for certain purchases
of .10 of 1%)
CLASS B Maximum contingent deferred sales .50 of 1% Shares convert to Class A shares
charge or CDSC of 5% of the lesser of approximately seven years after
the amount invested or the redemption purchase
proceeds; declines to zero after six
years
CLASS C Maximum CDSC of 1% of the lesser of 1% (Currently being Shares do not convert to another class
the amount invested or the redemption charged at a rate of
proceeds on redemptions made within .75 of 1%)
one year of purchase
CLASS Z None None Sold to a limited group of investors
</TABLE>
The four classes of shares represent an interest in the same portfolio of
investments of each Series and have the same rights, except that (i) each class
is subject to different sales charges and distribution and/or service fees (with
the exception of Class Z shares, which are not subject to any distribution or
service fees), which may affect performance, (ii) each class has exclusive
voting rights on any matter submitted to shareholders that relates solely to its
arrangement and has separate voting rights on any matter submitted to
shareholders in which the interests of one class differ from the interests of
any other class, and (iii) only Class B shares have a conversion feature. The
four classes also have separate exchange privileges. See "How to Exchange Your
Shares" below. The income attributable to each class and the dividends payable
on the shares of each class will be reduced by the amount of the distribution
fee (if any) of each class. Class B and Class C shares bear the expenses of a
higher distribution fee which will generally cause them to have higher expense
ratios and to pay lower dividends than the Class A and Class Z shares.
Dealers, financial advisers and other sales agents who sell shares of the
Series will receive different compensation for selling Class A, Class B, Class C
and Class Z shares and will generally receive more compensation initially for
selling Class A and Class B shares than for selling Class C or Class Z shares.
IN SELECTING A PURCHASE ALTERNATIVE, YOU SHOULD CONSIDER, AMONG OTHER THINGS,
(1) the length of time you expect to hold your investment, (2) the amount of any
applicable sales charge (whether imposed at the time of purchase or redemption)
and distribution-related fees, as noted above, (3) whether you qualify for any
reduction or waiver of any applicable sales charge,
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<PAGE>
(4) the various exchange privileges among the different classes of shares (see
"How to Exchange Your Shares" below) and (5) the fact that Class B shares
automatically convert to Class A shares approximately seven years after purchase
(see "Conversion Feature--Class B Shares" below).
The following is provided to assist you in determining which method of
purchase best suits your individual circumstances and is based on current fees
and expenses being charged to the Series:
If you intend to hold your investment in a Series for less than 5 years and do
not qualify for a reduced sales charge on Class A shares, since Class A shares
are subject to a maximum initial sales charge of 3% and Class B shares are
subject to a CDSC of 5% which declines to zero over a 6 year period, you should
consider purchasing Class C shares over either Class A or Class B shares.
If you intend to hold your investment for more than 5 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 and Class C shares, you would not have all of your money invested
initially because the sales charge on Class A shares is deducted at the time of
purchase.
If you do not qualify for a reduced sales charge on Class A shares and you
purchase Class C shares, you would have to hold your investment for more than 4
years in the case of Class C shares for the higher cumulative annual
distribution-related fee on those shares to exceed the initial sales charge plus
cumulative annual distribution-related fee on Class A shares. This does not take
into account the time value of money, which further reduces the impact of the
higher Class C distribution-related fee on the investment, fluctuations in NAV,
the effect of the return on the investment over this period of time or
redemptions when the CDSC is applicable.
ALL PURCHASES OF $1 MILLION OR MORE, EITHER AS PART OF A SINGLE INVESTMENT OR
UNDER RIGHTS OF ACCUMULATION OR LETTERS OF INTENT, MUST BE FOR CLASS A SHARES
UNLESS THE PURCHASER IS ELIGIBLE TO PURCHASE CLASS Z SHARES. See "Reduction and
Waiver of Initial Sales Charges" and "Class Z Shares" below.
CLASS A SHARES
The offering price of Class A shares for investors choosing the initial sales
charge alternative is the next determined NAV plus a sales charge (expressed as
a percentage of the offering price and of the amount invested) as shown in the
following table:
<TABLE>
<CAPTION>
SALES CHARGE AS SALES CHARGE AS DEALER CONCESSION
PERCENTAGE OF PERCENTAGE OF AS PERCENTAGE OF
AMOUNT OF PURCHASE OFFERING PRICE AMOUNT INVESTED OFFERING PRICE
- ------------------------ --------------- --------------- -----------------
<S> <C> <C> <C>
Less than $99,999 3.00% 3.09% 3.00%
$100,000 to $249,999 2.50 2.56 2.50
$250,000 to $499,999 1.50 1.52 1.50
$500,000 to $999,999 1.00 1.01 1.00
$1,000,000 and above None None None
</TABLE>
The Distributor may reallow the entire sales charge to Dealers. Dealers may be
deemed to be underwriters, as that term is defined under federal securities
laws. The Distributor reserves the right, without prior notice to any Dealer, to
suspend or eliminate Dealer concessions or commissions.
39
<PAGE>
In connection with the sale of Class A shares at NAV (without payment of an
initial sales charge), the Manager, the Distributor or one of their affiliates
will pay Dealers, financial advisers and other persons which distribute shares a
finders' fee from its own resources based on a percentage of the NAV of shares
sold by such persons.
REDUCTION AND WAIVER OF INITIAL SALES CHARGES. Reduced sales charges are
available through Rights of Accumulation and Letters of Intent. Shares of the
Fund and shares of other Prudential Mutual Funds (excluding money market funds
other than those acquired pursuant to the exchange privilege) may be aggregated
to determine the applicable reduction. See "Purchase and Redemption of Fund
Shares--Reduction and Waiver of Initial Sales Charges--Class A Shares" in the
Statement of Additional Information.
OTHER WAIVERS. Class A shares may be purchased at NAV, through the
Distributor, Dealers or the Transfer Agent, by the following persons: (a)
officers of the Prudential Mutual Funds (including the Fund), (b) employees of
the Distributor and PIFM and their subsidiaries and members of the families of
such persons who maintain an employee related account at the Transfer Agent, (c)
employees of subadvisers of the Prudential Mutual Funds provided that the
purchases at NAV are permitted by such person's employer, (d) Prudential
employees and special agents of Prudential and its subsidiaries and all persons
who have retired directly from active service with Prudential or one of its
subsidiaries, (e) registered representatives and employees of Dealers, provided
that purchases at NAV are permitted by such person's employer, (f) investors
previously eligible to purchase Class A shares at NAV because of their
participation in programs sponsored by an affiliate of the Distributor for
certain retirement plan or deferred compensation plan participants, (g) 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 their services (E.G., mutual fund wrap or asset
allocation programs), and (h) orders placed by clients of broker-dealers,
investment advisers or financial planners who place trades for their own
accounts if the accounts are linked to the master account of such broker-dealer,
investment adviser or financial planner on the books and records of the
broker-dealer, investment adviser or financial planner (E.G., mutual fund
supermarket programs).
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 Dealer
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 charges are imposed upon Class A shares
acquired upon the reinvestment of dividends and distributions. See "Purchase and
Redemption of Fund Shares--Reduction and Waiver of Initial Sales Charges--Class
A Shares" in the Statement of Additional Information.
CLASS B AND CLASS C SHARES
The offering price of Class B and Class C shares for investors choosing one of
the deferred sales charge alternatives is the NAV next determined following
receipt of an order by the Transfer Agent, your Dealer or the Distributor.
Although there is no sales charge imposed at the time of purchase, redemptions
of Class B and Class C shares may be subject to a CDSC. See "How to Sell Your
Shares--Contingent Deferred Sales Charges." The Distributor will pay, from its
own resources, sales commissions of up to 4% of the purchase price of Class B
shares to Dealers, financial advisers and other persons who sell Class B shares
at the time of sale from its own resources. This facilitates the ability of the
Fund to sell the Class B shares without an initial sales charge being deducted
at the time of purchase. The Distributor anticipates that it will recoup its
advancement of sales commissions from the combination of the CDSC and the
distribution fee. See "How the Fund is Managed--Distributor." In connection with
the sale of Class C shares, the Distributor will pay, from its own resources,
dealers, financial advisers and other persons which distribute Class C shares a
sales commission of up to 1% of the purchase price at the time of the sale.
40
<PAGE>
CLASS Z SHARES
Class Z shares of the Fund are currently available for purchase by the
following categories of investors:
(i) participants in any fee-based program or trust program sponsored by any
affiliate of the Distributor which includes mutual funds as investment options
and for which the Fund is an available option; (ii) current and former
Directors/Trustees of the Prudential Mutual Funds (including the Fund); and
(iii) employees of an affiliate of the Distributor who participate in an
employer-sponsored employee saving plan. After a Benefit Plan qualifies to
purchase Class Z shares, all subsequent purchases will be for Class Z shares.
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 NAV of shares sold by such persons.
HOW TO SELL YOUR SHARES
YOU CAN REDEEM YOUR SHARES OF EACH SERIES OF THE FUND 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 DEALER.
SEE "HOW THE FUND VALUES ITS SHARES." In certain cases, however, redemption
proceeds will be reduced by the amount of any applicable contingent deferred
sales charge, as described below. See "Contingent Deferred Sales Charges" below.
If you are redeeming your shares through a Dealer, your Dealer must receive your
sell order before the Fund computes its NAV for the day (I.E., 4:15 P. M., New
York time) in order to receive that day's NAV. Your Dealer 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 IN NON-CERTIFICATE FORM, A WRITTEN REQUEST FOR REDEMPTION
SIGNED BY YOU EXACTLY AS THE ACCOUNT IS REGISTERED IS REQUIRED. IF YOU HOLD
CERTIFICATES, THE CERTIFICATES, SIGNED IN THE NAME(S) SHOWN ON THE FACE OF THE
CERTIFICATES, MUST BE RECEIVED BY THE TRANSFER AGENT, THE DISTRIBUTOR OR YOUR
DEALER IN ORDER FOR THE REDEMPTION REQUEST TO BE PROCESSED. IF REDEMPTION IS
REQUESTED BY A CORPORATION, PARTNERSHIP, TRUST OR FIDUCIARY, WRITTEN EVIDENCE OF
AUTHORITY ACCEPTABLE TO THE TRANSFER AGENT MUST BE SUBMITTED BEFORE SUCH REQUEST
WILL BE ACCEPTED. All correspondence and documents concerning redemptions should
be sent to the Fund in care of its Transfer Agent, Prudential Mutual Fund
Services LLC, Attention: Redemption Services, P.O. Box 15035, New Brunswick, New
Jersey 08906-5010, the Distributor or to your Dealer.
If the proceeds of the redemption (a) exceed $50,000, (b) are to be paid to a
person other than the record owner, (c) are to be sent to an address other than
the address on the Transfer Agent's records, or (d) are to be paid to a
corporation, partnership, trust or fiduciary, the signature(s) on the redemption
request and on the certificates, if any, or stock power must be guaranteed by an
eligible guarantor institution. An eligible guarantor institution includes any
bank, broker, dealer or credit union. The Transfer Agent reserves the right to
request additional information from, and make reasonable inquiries of, any
eligible guarantor institution.
PAYMENT FOR SHARES PRESENTED FOR REDEMPTION WILL BE MADE BY CHECK WITHIN SEVEN
DAYS AFTER RECEIPT BY THE TRANSFER AGENT, THE DISTRIBUTOR OR YOUR DEALER OF THE
CERTIFICATE AND/OR WRITTEN REQUEST, EXCEPT AS INDICATED BELOW. IF YOU HOLD
SHARES THROUGH PRUDENTIAL SECURITIES, PAYMENT FOR SHARES PRESENTED FOR
REDEMPTION WILL BE CREDITED TO YOUR PRUDENTIAL SECURITIES ACCOUNT, UNLESS YOU
INDICATE OTHERWISE. Such payment may be postponed or the right of redemption
suspended at times (a) when the New York Stock Exchange is closed for other than
customary weekends and holidays, (b) when trading on such Exchange is
restricted, (c) when an emergency exists as a result of which disposal by the
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 (d) during any other period when the Commission, by order, so
permits, provided that applicable rules and regulations of the Commission shall
govern as to whether the conditions prescribed in (b), (c) or (d) exist.
41
<PAGE>
PAYMENT FOR REDEMPTION OF RECENTLY PURCHASED SHARES WILL BE DELAYED UNTIL THE
FUND OR THE 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 FUND OR THE TRANSFER AGENT. SUCH DELAY MAY BE AVOIDED BY
PURCHASING SHARES BY WIRE OR BY CERTIFIED OR CASHIER'S CHECK.
REDEMPTION IN KIND. If the Trustees determine that it would be detrimental to
the best interests of the remaining shareholders of the Fund to make payment
wholly or partly in cash, the Fund may pay the redemption price in whole or in
part by a distribution in kind of securities from the investment portfolio of a
Series, 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 a
regular redemption. See "How the Fund Values its Shares." If your shares are
redeemed in kind, you would incur transaction costs in converting the assets
into cash. The Fund, however, has elected to be governed by Rule 18f-1 under the
Investment Company Act, under which the Fund is obligated to redeem shares
solely in cash up to the lesser of $250,000 or 1% of the NAV of the Fund during
any 90-day period for any one shareholder.
INVOLUNTARY REDEMPTION. In order to reduce expenses of the Fund, the Trustees
may redeem all of the shares of any shareholder, other than a shareholder which
is an IRA or other tax-deferred retirement plan, whose account has a NAV of less
than $500 due to a redemption. The Fund will give such shareholders 60 days'
prior written notice in which to purchase sufficient additional shares to avoid
such redemption. No CDSC will be imposed on any such involuntary redemption.
90-DAY REPURCHASE PRIVILEGE. If you redeem your shares and have not previously
exercised the repurchase privilege, you may reinvest any portion or all of the
proceeds of such redemption in shares of a Series of the Fund at the NAV next
determined after the order is received, which must be within 90 days after the
date of the redemption. Any CDSC paid in connection with such redemption will be
credited (in shares) to your account. If less than a full repurchase is made,
the credit will be on a PRO RATA basis. You must notify the Transfer Agent,
either directly or through your Dealer or the Distributor, at the time the
repurchase privilege is exercised to adjust your account for the CDSC you
previously paid. Thereafter, any redemptions will be subject to the CDSC
applicable at the time of the redemption. See "Contingent Deferred Sales
Charges" below. Exercise of the repurchase privilege may affect the federal tax
treatment of any gain or loss realized upon redemption. See "Taxes, Dividends
and Distributions" in the Statement of Additional Information.
CONTINGENT DEFERRED SALES CHARGES
Redemptions of Class B shares will be subject to a CDSC declining from 5% to
zero over a six-year period. Class C shares redeemed within one year of purchase
will be subject to a 1% CDSC. The CDSC will be deducted from the redemption
proceeds and reduce the amount paid to you. The CDSC will be imposed on any
redemption by you which reduces the current value of your Class B or Class C
shares of a Series of the Fund to an amount which is lower than the amount of
all payments by you for shares of the Series during the preceding six years, in
the case of Class B shares, and one year, in the case of Class C shares. A CDSC
will be applied on the lesser of the original purchase price or the current
value of the shares being redeemed. Increases in the value of your shares or
shares acquired through reinvestment of dividends or distributions are not
subject to a CDSC. The amount of any contingent deferred sales charge will be
paid to and retained by the Distributor. See "How the Fund is
Managed--Distributor" and "Waiver of Contingent Deferred Sales Charges--Class B
Shares" below.
The amount of the CDSC, if any, will vary depending on the number of years
from the time of payment for the purchase of shares until the time of redemption
of such shares. Solely for purposes of determining the number of years from the
time of any payment for the purchase of shares, all payments during a month will
be aggregated and deemed to have been made on the last day of the month. The
CDSC will be calculated from the first day of the month after the initial
purchase, excluding the time shares were held in a money market fund. See "How
to Exchange Your Shares" below.
42
<PAGE>
The following table sets forth the rates of the CDSC applicable to redemptions
of Class B shares:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED
SALES
CHARGE AS A PERCENTAGE
YEAR SINCE PURCHASE OF DOLLARS INVESTED OR
PAYMENT MADE REDEMPTION PROCEEDS
------------------------------- ------------------------
<S> <C>
First.......................... 5.0%
Second......................... 4.0%
Third.......................... 3.0%
Fourth......................... 2.0%
Fifth.......................... 1.0%
Sixth.......................... 1.0%
Seventh........................ None
</TABLE>
In determining whether a CDSC is applicable to a redemption, the calculation
will be made in a manner that results in the lowest possible rate. It will be
assumed that the redemption is made first of amounts representing shares
acquired pursuant to the reinvestment of dividends and distributions; then of
amounts representing the increase in NAV above the total amount of payments for
the purchase of Fund shares made during the preceding six years (five years for
Class B shares purchased prior to January 22, 1990); then of amounts
representing the cost of shares held beyond the applicable CDSC period; and
finally, of amounts representing the cost of shares held for the longest period
of time within the applicable CDSC period.
For example, assume you purchased 100 Class B shares at $10 per share for a
cost of $1,000. Subsequently, you acquired 5 additional Class B shares through
dividend reinvestment. During the second year after the purchase you decided to
redeem $500 of your investment. Assuming at the time of the redemption the net
asset value had appreciated to $12 per share, the value of your Class B shares
would be $1,260 (105 shares at $12 per share). The CDSC would not be applied to
the value of the reinvested dividend shares and the amount which represents
appreciation ($260). Therefore, $240 of the $500 redemption proceeds ($500 minus
$260) would be charged at a rate of 4% (the applicable rate in the second year
after purchase) for a total CDSC of $9.60.
For federal income tax purposes, the amount of the CDSC will reduce the gain
or increase the loss, as the case may be, on the amount recognized on the
redemption of shares.
WAIVER OF CONTINGENT DEFERRED SALES CHARGES--CLASS B SHARES. The CDSC will be
waived in the case of a redemption following the death or disability of a
shareholder or, in the case of a trust account, following the death or
disability of the grantor. The waiver is available for total or partial
redemptions of shares owned by a person, either individually or in joint tenancy
(with rights of survivorship), or a trust at the time of death or initial
determination of disability, provided that the shares were purchased prior to
death or disability. In addition, the CDSC will be waived on redemptions of
shares held by a Trustee of the Fund.
You must notify the Transfer Agent either directly or through your Dealer, at
the time of redemption, that you are entitled to waiver of the CDSC and provide
the Transfer Agent with such supporting documentation as it may deem
appropriate. The waiver will be granted subject to confirmation of your
entitlement. See "Purchase and Redemption of Fund Shares--Waiver of the
Contingent Deferred Sales Charge--Class B Shares" in the Statement of Additional
Information.
A quantity discount may apply to redemptions of Class B shares purchased prior
to August 1, 1994. See "Purchase and Redemption of Fund Shares--Quantity
Discount--Class B Shares Purchased Prior to August 1, 1994" in the Statement of
Additional Information.
SYSTEMATIC WITHDRAWAL PLAN. The CDSC will be waived (or reduced) on certain
redemptions from a Systematic Withdrawal Plan. On an annual basis, up to 12% of
the total dollar amount subject to the CDSC may be redeemed without charge. The
Transfer Agent will calculate the total amount available for this waiver
annually on the anniversary date of your purchase or, for shares purchased prior
to March 1, 1997, on March 1 of the current year. The CDSC will be waived (or
reduced) on redemptions until this threshold 12% amount is reached.
43
<PAGE>
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 NAV without the imposition of any additional sales charge. The first
conversion of Class B shares occurred in February 1995, when the conversion
feature was first implemented.
Since the Fund tracks amounts paid rather than the number of shares bought on
each purchase of Class B shares, the number of Class B shares eligible to
convert to Class A shares (excluding shares acquired through the automatic
reinvestment of dividends and other distributions) (the Eligible Shares) will be
determined on each conversion date in accordance with the following formula: (i)
the ratio of (a) the amounts paid for Class B shares purchased at least seven
years prior to the conversion date to (b) the total amount paid for all Class B
shares purchased and then held in your account (ii) multiplied by the total
number of Class B shares purchased and then held in your account. Each time any
Eligible Shares in your account convert to Class A shares, all shares or amounts
representing Class B shares then in your account that were acquired through the
automatic reinvestment of dividends and other distributions will convert to
Class A shares.
For purposes of determining the number of Eligible Shares, if the Class B
shares in your account on any conversion date are the result of multiple
purchases at different NAVs, the number of Eligible Shares calculated as
described above will generally be either more or less than the number of shares
actually purchased approximately seven years before such conversion date. For
example, if 100 shares were initially purchased at $10 per share (for a total of
$1,000) and a second purchase of 100 shares was subsequently made at $11 per
share (for a total of $1,100), 95.24 shares would convert approximately seven
years from the initial purchase (I.E., $1,000 divided by $2,100 (47.62%),
multiplied by 200 shares equals 95.24 shares). The Manager reserves the right to
modify the formula for determining the number of Eligible Shares in the future
as it deems appropriate on notice to shareholders.
Since annual distribution-related fees are lower for Class A shares than Class
B shares, the 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.
See "How the Fund Values its Shares."
For purposes of calculating the applicable holding period for conversions, all
payments for Class B shares during a month will be deemed to have been made on
the last day of the month, or for Class B shares acquired through exchange, or a
series of exchanges, on the last day of the month in which the original payment
for purchases of such Class B shares was made. For Class B shares previously
exchanged for shares of a money market fund, the time period during which such
shares were held in the money market fund will be excluded. For example, Class B
shares held in a money market fund for one year will not convert to Class A
shares until approximately eight years from purchase. For purposes of measuring
the time period during which shares are held in a money market fund, exchanges
will be deemed to have been made on the last day of the month. Class B shares
acquired through exchange will convert to Class A shares after expiration of the
conversion period applicable to the original purchase of such shares.
The conversion feature may be subject to the continuing availability of
opinions of counsel or rulings of the Internal Revenue Service (i) that the
dividends and other distributions paid on Class A, Class B, Class C and Class Z
shares will not constitute preferential dividends under the Internal Revenue
Code and (ii) that the conversion of shares does not constitute a taxable event.
The conversion of Class B shares into Class A shares may be suspended if such
opinions or rulings are no longer available. If conversions are suspended, Class
B shares of the Series will continue to be subject, possibly indefinitely, to
their higher annual distribution and service fee.
HOW TO EXCHANGE YOUR SHARES
AS A SHAREHOLDER OF THE FUND, YOU HAVE AN EXCHANGE PRIVILEGE WITH THE OTHER
SERIES OF THE FUND AND CERTAIN OTHER PRUDENTIAL MUTUAL FUNDS (THE EXCHANGE
PRIVILEGE), INCLUDING ONE OR MORE SPECIFIED MONEY MARKET FUNDS, SUBJECT TO THE
MINIMUM INVESTMENT REQUIREMENTS OF SUCH FUNDS. CLASS A, CLASS B, CLASS C AND
CLASS Z SHARES MAY BE
44
<PAGE>
EXCHANGED FOR CLASS A, CLASS B, CLASS C AND CLASS Z SHARES, RESPECTIVELY, OF THE
OTHER SERIES OF THE FUND AND OF ANOTHER FUND ON THE BASIS OF THE RELATIVE NAV.
No sales charge will be imposed at the time of the exchange. Any applicable CDSC
payable upon the redemption of shares exchanged will be calculated from the
first day of the month after the initial purchase, excluding the time shares
were held in a money market fund. Class B and Class C shares may not be
exchanged into money market funds other than Prudential Special Money Market
Fund, Inc. For purposes of calculating the holding period applicable to the
Class B conversion feature, the time period during which Class B shares were
held in a money market fund will be excluded. See "Conversion Feature--Class B
Shares" above. An exchange will be treated as a redemption and purchase for tax
purposes. See "Shareholder Investment Account--Exchange Privilege" in the
Statement of Additional Information.
IN ORDER TO EXCHANGE SHARES BY TELEPHONE, YOU MUST AUTHORIZE TELEPHONE
EXCHANGES ON YOUR INITIAL APPLICATION FORM OR BY WRITTEN NOTICE TO THE TRANSFER
AGENT AND HOLD SHARES IN NON-CERTIFICATE FORM. Thereafter, you may call the Fund
at (800) 225-1852 to execute a telephone exchange of shares, weekdays, except
holidays, between the hours of 8:00 A.M. and 6:00 P.M., New York time. For your
protection and to prevent fraudulent exchanges, your telephone call will be
recorded and you will be asked to provide your personal identification number. A
written confirmation of the exchange transaction will be sent to you. NEITHER
THE FUND NOR ITS AGENTS WILL BE LIABLE FOR ANY LOSS, LIABILITY OR COST WHICH
RESULTS FROM ACTING UPON INSTRUCTIONS REASONABLY BELIEVED TO BE GENUINE UNDER
THE FOREGOING PROCEDURES. All exchanges will be made on the basis of the
relative NAV of the two funds or two Series next determined after the request is
received in good order.
IF YOU HOLD CERTIFICATES, THE CERTIFICATES, SIGNED IN THE NAME(S) SHOWN ON THE
FACE OF THE CERTIFICATES, MUST BE RETURNED IN ORDER FOR THE SHARES TO BE
EXCHANGED. SEE "HOW TO SELL YOUR SHARES" ABOVE.
You may also exchange shares by mail by writing to Prudential Mutual Fund
Services LLC, Attention: Exchange Processing, P.O. Box 15035, New Brunswick, New
Jersey 08906-5010.
IN PERIODS OF SEVERE MARKET OR ECONOMIC CONDITIONS THE TELEPHONE EXCHANGE OF
SHARES MAY BE DIFFICULT TO IMPLEMENT AND YOU SHOULD MAKE EXCHANGES BY MAIL BY
WRITING TO PRUDENTIAL MUTUAL FUND SERVICES LLC AT THE ADDRESS NOTED ABOVE.
SPECIAL EXCHANGE PRIVILEGES. A special exchange privilege is available for
shareholders who qualify to purchase Class A shares at NAV (see "Alternative
Purchase Plan--Class A Shares--Reduction and Waiver of Initial Sales Charges"
above) and for shareholders who qualify to purchase Class Z shares (see
"Alternative Purchase Plan--Class Z Shares" above). Under this exchange
privilege, amounts representing any Class B and Class C shares (which are not
subject to a CDSC) held in such a shareholder's account will be automatically
exchanged for Class A shares for shareholders who qualify to purchase Class A
shares at NAV, on a quarterly basis, unless the shareholder elects otherwise.
Similarly, shareholders who qualify to purchase Class Z shares will have their
Class B and Class C shares which are not subject to a CDSC and their Class A
shares exchanged for Class Z shares on a quarterly basis. Eligibility for this
exchange privilege will be calculated on the business day prior to the date of
the exchange. Amounts representing Class B or Class C shares which are not
subject to a CDSC include the following: (1) amounts representing Class B or
Class C shares acquired pursuant to the automatic reinvestment of dividends and
distributions, (2) amounts representing the increase in the NAV above the total
amount of payments for the purchase of Class B or Class C shares and (3) amounts
representing Class B or Class C shares held beyond the applicable CDSC period.
Class B and Class C shareholders must notify the Transfer Agent either directly
or through their Dealer that they are eligible for this special exchange
privilege.
Participants in any fee-based program for which the Fund is an available
option will have their Class A shares, if any, exchanged for Class Z shares when
they elect to have those assets become a part of the fee-based program. Upon
leaving the program (whether voluntarily or not), such Class Z shares (and, to
the extent provided for in the program, Class Z shares acquired through
participation in the program) will be exchanged for Class A shares at NAV.
The exchange privilege is not a right and may be suspended, modified or
terminated on 60 days' notice to shareholders.
45
<PAGE>
FREQUENT TRADING. The Fund and the other Prudential Mutual Funds are not
intended to serve as vehicles for frequent trading in response to short-term
fluctuations in the market. Due to the disruptive effect that market timing
investment strategies and excessive trading can have on efficient portfolio
management, each Prudential Mutual Fund and the Fund reserves the right to
refuse purchase orders and exchanges by any person, group or commonly controlled
accounts, if, in the Manager's sole judgment, such person, group or accounts
were following a market timing strategy or were otherwise engaging in excessive
trading (Market Timers).
To implement this authority to protect each Series and its shareholders from
excessive trading, the Series will reject all exchanges and purchases from a
Market Timer unless the Market Timer has entered into a written agreement with
the Series or its affiliates pursuant to which the Market Timer has agreed to
abide by certain procedures, which include a daily dollar limit on trading. The
Series may notify the Market Timer of rejection of an exchange or purchase order
subsequent to the day on which the order was placed.
SHAREHOLDER SERVICES
In addition to the exchange privilege, as a shareholder of the Fund, you can
take advantage of the following services and privileges:
- AUTOMATIC REINVESTMENTS OF DIVIDENDS AND/OR DISTRIBUTIONS WITHOUT A SALES
CHARGE. For your convenience, all dividends and distributions are automatically
reinvested in full and fractional shares of the Fund at NAV without a sales
charge. You may direct the Transfer Agent in writing not less than 5 full
business days prior to the record date to have subsequent dividends and/or
distributions sent in cash rather than reinvested.
- AUTOMATIC SAVINGS ACCUMULATION PLAN (ASAP). Under ASAP, you may make regular
purchases of the Fund's shares in amounts as little as $50 via an automatic
debit to a bank account. For additional information about this service, you may
contact the Transfer Agent directly.
- SYSTEMATIC WITHDRAWAL PLAN. A systematic withdrawal plan is available to
shareholders which provides for monthly or quarterly checks. Withdrawals of
Class B and Class C shares may be subject to a CDSC. See "How to Sell Your
Shares-- Contingent Deferred Sales Charges" above.
- REPORTS TO SHAREHOLDERS. The Fund will send you annual and semi-annual
reports. The financial statements appearing in annual reports are audited by
independent accountants. In order to reduce duplicate mailing and printing
expenses, the Fund will provide one annual and semi-annual shareholder report
and annual prospectus per household. You may request additional copies of such
reports by calling (800) 225-1852 or by writing to the Fund at Gateway Center
Three, 100 Mulberry Street, Newark, New Jersey 07102-4077. In addition, monthly
unaudited financial data is available upon request from the Fund.
- SHAREHOLDER INQUIRIES. Inquiries should be addressed to the Fund at Gateway
Center Three, 100 Mulberry Street, Newark, New Jersey 07102-4077, or by
telephone, at (800) 225-1852 (toll-free) or, from outside the U.S.A., at
(732) 417-7555 (collect).
For additional information regarding the services and privileges described
above, see "Shareholder Investment Account" in the Statement of Additional
Information.
46
<PAGE>
DESCRIPTION OF SECURITY RATINGS
MOODY'S INVESTORS SERVICE
BOND RATINGS
Aaa: Bonds that are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edge." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa: Bonds that are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present that make the
long-term risks appear somewhat larger than in Aaa securities.
A: Bonds that are rated A possess many favorable investment attributes and are
to be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present that
suggest a susceptibility to impairment some time in the future.
Baa: Bonds that are rated Baa are considered as medium grade obligations I.E.,
they are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba: Bonds that are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate, and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B: Bonds that are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or 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
repay punctually senior debt obligations which have an original maturity not
exceeding one year.
P-1: Issuers rated "Prime-1" or "P-1" (or supporting institutions) have a
superior ability for repayment of senior short-term debt obligations.
A-1
<PAGE>
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 issues only in small degree.
A: Debt rated A has a strong capacity to pay interest and repay principal,
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher-rated categories.
BBB: Debt rated BBB is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher-rated categories.
BB, B, CCC, CC AND C: Debt rated BB, B, CCC, CC 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. While such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major exposures
to adverse conditions.
D: Debt rated D is in payment default. The D rating category 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-2
<PAGE>
A-1: The A-1 designation indicates that the degree of safety regarding timely
payment is strong. Those issues determined to possess extremely strong safety
characteristics are denoted with a plus sign (+) designation.
A-2: Capacity for timely payment on issues with the designation A-2 is
satisfactory. However, the relative degree of safety is not as high as for
issues designated A-1.
A-3: Issues 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 rated SP-1, SP-2 or SP-3. The
designation SP-1 indicates a very strong capacity to pay principal and interest.
Those issues determined to possess extremely strong 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.
A-3
<PAGE>
No Dealer, sales representative or any other person has been authorized to give
any information or to make any representations, other than those contained in
this Prospectus, in connection with the offer contained herein, and, if given or
made, such other information or representations must not be relied upon as
having been authorized by the Fund or the Distributor. This Prospectus does not
constitute an offer by the Fund or by the Distributor to sell or a solicitation
of any offer to buy any of the securities offered hereby in any jurisdiction to
any person to whom it is unlawful to make such offer in such jurisdiction.
- ------------------------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
FUND HIGHLIGHTS............................................................. 2
What are the Series' Risk Factors and Special Characteristics?............ 2
FUND EXPENSES............................................................... 4
FINANCIAL HIGHLIGHTS........................................................ 6
HOW THE FUND INVESTS........................................................ 18
Investment Objectives and Policies........................................ 18
Hedging Strategies........................................................ 24
Other Investments and Policies............................................ 25
Investment Restrictions................................................... 28
HOW THE FUND IS MANAGED..................................................... 28
Manager................................................................... 29
Distributor............................................................... 29
Fee Waivers and Subsidy................................................... 31
Portfolio Transactions.................................................... 31
Custodian and Transfer and Dividend Disbursing Agent...................... 31
Year 2000................................................................. 31
HOW THE FUND VALUES ITS SHARES.............................................. 32
HOW THE FUND CALCULATES PERFORMANCE......................................... 32
TAXES, DIVIDENDS AND DISTRIBUTIONS.......................................... 33
GENERAL INFORMATION......................................................... 35
Description of Shares..................................................... 35
Additional Information.................................................... 36
SHAREHOLDER GUIDE........................................................... 37
How to Buy Shares of the Fund............................................. 37
Alternative Purchase Plan................................................. 38
How to Sell Your Shares................................................... 41
Conversion Feature--Class B Shares........................................ 44
How to Exchange Your Shares............................................... 44
Shareholder Services...................................................... 46
DESCRIPTION OF SECURITY RATINGS............................................. A-1
</TABLE>
- ------------------------------------------------
MF133P
CUSIP Nos.:
Class A: 74435L103; Class B: 74435L202
High Income Series Class C: 74435L707 Class Z: 74435L871
Class A: 74435L301; Class B: 74435L400
Insured Series Class C: 74435L806 Class Z: 74435L863
Class A: 74435L509; Class B: 74435L608
Intermediate Series Class C: 74435L889 Class Z: 74435L855
PRUDENTIAL
MUNICIPAL BOND FUND
PROSPECTUS
[GRAPHIC]
JULY 1, 1998
HIGH INCOME SERIES
INSURED SERIES
INTERMEDIATE SERIES
[LOGO]
<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
Statement of Additional Information
dated July 1, 1998
Prudential Municipal Bond Fund (the Fund) is an open-end, diversified,
management investment company, or mutual fund, consisting of three separate
portfolios--the High Income Series, the Insured Series and the Intermediate
Series. The investment objectives of the Series are as follows: (i) the
objective of the High Income Series is to provide the maximum amount of income
that is eligible for exclusion from federal income taxes, (ii) the objective of
the Insured Series is to provide the maximum amount of income that is eligible
for exclusion from federal income taxes consistent with the preservation of
capital and (iii) the objective of the Intermediate Series is to provide a high
level of income that is eligible for exclusion from federal income taxes
consistent with the preservation of capital. Although each Series will seek
income that is eligible for exclusion from federal income taxes, a portion of
the dividends and distributions paid by each Series (and, in particular, the
High Income Series) may be treated as a preference item for purposes of the
alternative minimum tax. Each Series seeks to achieve its objective through the
separate investment policies described under "Investment Objectives and
Policies." There can be no assurance that the Series' investment objectives will
be achieved.
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 Fund's Prospectus dated July 1, 1998, a copy of
which may be obtained from the Fund upon request.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
CROSS-REFERENCE
TO PAGE IN
PRUDENTIAL
MUNICIPAL BOND
PAGE FUND PROSPECTUS
---- ---------------
<S> <C> <C>
General Information.................................. B-2 35
Investment Objectives and Policies................... B-2 18
Investment Restrictions.............................. B-9 28
Trustees and Officers................................ B-10 28
Manager.............................................. B-14 29
Distributor.......................................... B-16 29
Portfolio Transactions and Brokerage................. B-18 31
Purchase and Redemption of Fund Shares............... B-19 37
Shareholder Investment Account....................... B-22 37
Net Asset Value...................................... B-25 32
Taxes, Dividends and Distributions................... B-25 33
Performance Information.............................. B-28 32
Organization and Capitalization...................... B-31 35
Custodian, Transfer and Dividend Disbursing Agent and
Independent Accountants............................ B-33 31
Financial Statements................................. B-34 --
Independent Accountants' Report...................... B-78 --
Appendix I -- General Investment Information......... I-1 --
Appendix II -- Historical Performance Data........... II-1 --
Appendix III -- Information Relating to The
Prudential......................................... III-1 --
</TABLE>
MF133B
<PAGE>
GENERAL INFORMATION
On May 3, 1995, the Trustees approved a change in the name of the Modified
Term Series to the Intermediate Series, effective June 29, 1995. On June 23,
1998, the Trustees approved a change in the name of the High Yield Series to the
High Income Series, effective July 1, 1998.
INVESTMENT OBJECTIVES AND POLICIES
Prudential Municipal Bond Fund is a diversified, open-end, management
investment company consisting of three separate portfolios: the High Income
Series, the Insured Series and the Intermediate Series. The investment
objectives of the Series are as follows: (i) the objective of the High Income
Series is to provide the maximum amount of income that is eligible for exclusion
from federal income taxes, (ii) the objective of the Insured Series is to
provide the maximum amount of income that is eligible for exclusion from federal
income taxes consistent with the preservation of capital and (iii) the objective
of the Intermediate Series is to provide a high level of income that is eligible
for exclusion from federal income taxes consistent with the preservation of
capital. There can be no assurance that any Series will achieve its objective.
Although each Series will seek income that is eligible for exclusion from
federal income taxes, a portion of the dividends and distributions paid by each
Series (and, in particular, the High Income Series) may be treated as a
preference item for purposes of the alternative minimum tax.
The investment objective of each Series may not be changed without the
approval of the holders of a majority of the outstanding voting securities of
such Series. A "majority of the outstanding voting securities" of a Series, when
used in the Prospectus or this Statement of Additional Information, means the
lesser of (i) 67% of the voting shares of a Series represented at a meeting at
which more than 50% of the outstanding voting shares of a Series are present in
person or represented by proxy or (ii) more than 50% of the outstanding voting
shares of a Series.
Each Series will seek to achieve its investment objective by investing in a
diversified portfolio of obligations issued by or on behalf of states,
territories and possessions of the United States and the District of Columbia
and their political subdivisions, agencies and instrumentalities, the interest
on which is eligible for exclusion from federal income taxation (municipal
obligations or municipal securities). Each Series pursues its investment
objective through the separate investment policies described below and in the
Prospectus. There can be no assurance that the Series' investment objectives
will be achieved.
THE HIGH INCOME SERIES
The High Income Series invests primarily in municipal obligations rated B or
better by Moody's Investors Service (Moody's) or Standard & Poor's Ratings Group
(S&P) or a similar nationally recognized statistical rating organization (NRSRO)
having maturities generally in excess of ten years. The Series also will invest
in municipal obligations having maturities ranging from one year to ten years.
The weighted average maturity of the portfolio is expected to range between 15
and 30 years.
THE INSURED SERIES
The Insured Series invests primarily in municipal obligations which are
insured, rated in the highest rating category of Moody's or S&P or a similar
NRSRO, or backed by the U.S. Government. The Series may also invest up to 5% of
its total assets in municipal obligations rated A/A or Aa/AA by Moody's or S&P,
respectively, or a similar NRSRO. It is anticipated that the Series will offer
generally lower yields and be subject to less credit and market risk than the
High Yield Series.
It is anticipated that, under current market conditions, a great majority of
the municipal obligations held by the Insured Series will be insured by the
following entities: MBIA Insurance Corporation (MBIA Corp.), AMBAC Indemnity
Corporation (AMBAC), Financial Guaranty Insurance Company (FGIC) and Financial
Security Assurance Inc. (FSA). Each of these entities is described more fully
below. The Series will not invest in obligations insured by The Prudential
Insurance Company of America (Prudential), except as may be permitted by
applicable law, nor will it settle any claim under portfolio insurance provided
by an insurer whose insurance obligations are reinsured by an affiliate of
Prudential for less than full payment except in accordance with an exemptive
order obtained from the Securities and Exchange Commission (Commission).
MBIA Corp. (formerly known as Municipal Bond Investors Assurance
Corporation) is the principal operating subsidiary of MBIA Inc., a New York
Stock Exchange listed company. As of December 31, 1996, MBIA Corp. had admitted
assets of approximately $4.476 billion, total liabilities of approximately
$3.009 billion and total policyholders' surplus of approximately $1.467 billion.
MBIA Inc. is not obligated to pay the debts of or claims against MBIA Corp. MBIA
Corp. is domiciled in the state of New York and licensed to do business in all
50 states, the District of Columbia, the Commonwealth of Puerto Rico, the
Commonwealth of the Northern Mariana Islands, the Virgin Islands of the United
States and the Territory of Guam. MBIA Corp. has one European branch in the
Republic of France.
B-2
<PAGE>
FGIC Corporation, the owner of FGIC, is a wholly-owned subsidiary of General
Electric Capital Corporation. Neither FGIC Corporation nor General Electric
Capital Corporation is obligated to pay the debts of or claims against FGIC. As
of December 31, 1996, FGIC had admitted assets of approximately $2.392 billion,
total liabilities of approximately $1.298 billion and total policyholders'
surplus of approximately $1.093 billion.
AMBAC is a Wisconsin-domiciled stock insurance corporation regulated by the
Office of the Commissioner of Insurance of the State of Wisconsin and licensed
to do business in 50 states, the District of Columbia and the Commonwealth of
Puerto Rico, with admitted assets of approximately $2.585 billion, total
liabilities of approximately $1.686 billion and total policyholders' surplus of
approximately $.899 billion as of December 31, 1996. Statutory capital consists
of AMBAC policyholders' surplus and statutory contingency reserve. AMBAC is a
wholly-owned subsidiary of AMBAC, Inc., a 100% publicly-held company.
FSA is a wholly-owned subsidiary of Financial Security Assurance Holdings,
Ltd. (Holdings), a New York Stock Exchange listed company. Holdings is owned
approximately 40.4% by US West Capital Corporation (US WEST), 11.5% by Fund
American Enterprises Holdings, Inc. (Fund American), and 6.4% by The Tokio
Marine and Fire Insurance Co., Ltd. (Tokio Marine). Neither US WEST, Fund
American, Tokio Marine nor any other shareholder of Holdings is obligated to pay
the debts of or claims against FSA. As of December 31, 1996, FSA had admitted
assets of approximately $.958 billion, total liabilities of approximately $.506
billion and total policyholders' surplus of approximately $.452 billion. The
company formerly known as Capital Guaranty Insurance Company is now a subsidiary
of FSA.
THE INTERMEDIATE SERIES
The Intermediate Series invests primarily in municipal obligations rated Baa
or BBB or better by Moody's or S&P, respectively, or a similar nationally
recognized statistical rating organization, with maturities of 3 to 15 years and
with a dollar-weighted average portfolio maturity of more than 3 and less than
10 years. Under normal circumstances, at least 60% of the municipal obligations
purchased by the Series will be rated A or better by Moody's or S&P. It is
anticipated that this Series will offer generally lower yields and be subject to
less market risk than the High Yield Series or the Insured Series.
GENERAL
The Prudential Investment Corporation (PIC), doing business as Prudential
Investments (PI, the Subadviser or the investment adviser), maintains a
fixed-income research group which provides credit analysis and research on
fixed-income securities. The portfolio manager consults routinely with the
research group in managing the Fund's portfolios. The fixed-income research
group, which currently maintains a staff of 26 persons including 22 credit
analysts, reviews on an ongoing basis issuers of fixed-income obligations,
including prospective purchases and portfolio holdings of the Series. Credit
analysts have broad access to research and financial reports, data retrieval
services and industry analysts. They 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 specific
projects and to evaluate the progress of construction or the operation of a
facility.
Each Series may invest in municipal securities which are not rated if, based
upon a credit analysis by the Subadviser, the Subadviser believes that the
securities are of comparable quality to other municipal securities that the
Series may purchase. A description of the ratings is set forth under the heading
"Description of Security Ratings" in the Fund's Prospectus. The ratings of
Moody's and S&P represent the respective opinions of those firms of the quality
of the securities each undertakes to rate. The ratings are general and are not
absolute standards of quality. In determining the suitability for investment in
a particular unrated security, the Subadviser will take into consideration asset
and debt service coverage, the purpose of the financing, the history of the
issuer, the existence of other rated securities of the issuer, any credit
enhancement by virtue of a letter of credit or other financial guaranty deemed
suitable by the investment adviser and other factors as may be relevant,
including comparability to other issuers.
After its purchase by a Series of the Fund, an issue of municipal bonds or
notes may cease to be rated or its rating(s) may be reduced. Neither event
requires the elimination of that obligation from the portfolio of the Series,
but each event will be a factor in determining whether the Series should
continue to hold that issue in its portfolio.
B-3
<PAGE>
Each Series will attempt to invest substantially all of its net assets in
municipal securities. Under normal market conditions, each Series anticipates
that its assets will be invested so that at least 80% of its net assets will be
invested in municipal securities. Each Series will continuously monitor its
portfolio to ensure that the asset investment test is met at all times, except
for temporary defensive positions during abnormal market conditions.
A Series may invest its assets from time to time on a temporary basis in
debt securities, the interest on which is subject to federal, state or local
income tax: (i) pending the investment or reinvestment in municipal securities
of the proceeds from the sale of shares of the Series or sales of portfolio
securities, (ii) in order to avoid the necessity of liquidating portfolio
investments to meet redemptions of shares by investors, or (iii) where market
conditions due to rising interest rates or other adverse factors warrant
temporary investing. Investments in taxable securities may include: obligations
of the U.S. Government, its agencies or instrumentalities; commercial paper
rated in the two highest grades by either Moody's or S&P (A-1 and A-2, or P-1
and P-2, respectively), except that the Insured Series may invest only in
commercial paper rated A-1 or P-1; certificates of deposit and bankers'
acceptances; other debt securities rated within the three highest grades by
either Moody's or S&P or, if unrated, judged by the Subadviser to possess
comparable creditworthiness; and repurchase agreements with respect to any of
the foregoing investments. Each Series does not intend to invest more than 5% of
its assets in any one category of the foregoing taxable securities. A Series may
also hold its assets in other cash equivalents or in cash.
The Fund, as well as each Series of the Fund, is classified as diversified
under the Investment Company Act of 1940, as amended (the Investment Company
Act). This means that with respect to 75% of the assets of a Series, (i) the
Series may not invest more than 5% of its total assets in the securities of any
one issuer (except U.S. Government obligations) and (ii) the Series may not own
more than 10% of the outstanding voting securities of any one issuer. For
purposes of diversification and concentration under the Investment Company Act,
the identification of the issuer of the municipal obligation depends upon the
terms and conditions of the obligation. If the assets and revenues of an agency,
authority, instrumentality or other political subdivision are separate from
those of the government creating the subdivision and the obligation is backed
only by the assets and revenues of the subdivision, the 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 non-governmental user, the non-governmental 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 the guarantor.
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 premiums on the refunded bonds and a verification report
prepared by a party acceptable to a nationally recognized statistical rating
agency, or counsel to the holders of the refunded bonds, so verifies, (iv) the
escrow agreement provides that the issuer of the refunded bonds grants and
assigns to the escrow agent, for the equal and ratable benefit of the holders of
the refunded bonds, an express first lien on, pledge of and perfected security
interest in the escrowed securities and the interest income thereon, (v) the
escrow agent had no lien of any type with respect to the escrowed securities for
payment of its fees and expenses except to the extent there are excess
securities, as described in (ii) above, and (vi) the Series will not invest more
than 25% of its total assets in pre-refunded bonds of the same municipal issuer.
Since 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 which 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 that
issuer (except obligations issued or guaranteed by the U.S. Government). As for
the other 25% of the assets of a Series not subject to the limitation described
above, there is no minimum limitation as to the number of issuers in whose
securities these assets may be invested.
The Fund expects that normally a Series will not invest more than 25% of its
total assets in any one sector of the municipal obligations market, including:
hospitals; nursing homes, retirement facilities and other health facilities;
turnpikes and toll roads; solid waste and resource recovery; ports and airports;
colleges, universities and other educational facilities; state and local housing
finance programs; obligations of municipal water and sewer utilities systems,
obligations of municipal electric and gas utilities systems; or other industrial
development and pollution control facilities. However, depending upon prevailing
market conditions, a Series may have more than 25% of its total assets invested
in any one sector of the municipal obligations market. Each of the foregoing
types of investments might be subject to particular risks which, to the extent
that a Series is concentrated in such investments, could affect the value or
liquidity of the Series' portfolio.
B-4
<PAGE>
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
alternate 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. The Fund's Subadviser
intends (except with respect to the High Income Series) to invest in securities
so as to minimize the portion of such dividends or distributions that are
treated as a tax preference item. 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."
As in the past, proposals may be submitted to Congress in the future with
the intended effect of eliminating or further restricting the issuance of
municipal obligations or the federal tax exemption for interest paid on
municipal obligations. In that event, the Fund may re-evaluate its investment
objectives.
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, municipal obligations are customarily purchased from or sold to
dealers who are selling or buying for their own account. Most municipal
obligations are not required to be registered with or qualified for sale by
federal or state securities regulators. Since there are large numbers of
municipal obligation issues 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.
Although almost all municipal obligations are marketable, the structure of
the 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 municipal obligations, the price of a Series'
shares may be subject to greater fluctuation than shares of other investment
companies with different investment policies. See "Net Asset Value."
MUNICIPAL SECURITIES
Municipal 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 generally eligible for exclusion from federal income 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.
MUNICIPAL BONDS. Municipal 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.
Municipal bonds also may be issued in connection with the refunding of
outstanding obligations and obtaining funds to lend to other public institutions
or for general operating expenses.
The two principal classifications of municipal bonds are general obligation
and revenue. General obligation bonds are secured by the issuer's pledge of its
full faith, credit and taxing power for the payment of principal and interest.
Revenue bonds are payable only from the revenues derived from a particular
facility or class of facilities or, in some cases, from the proceeds of a
special excise tax or other specific revenue source.
Industrial development bonds (IDBs) are issued by or on behalf of public
authorities to obtain funds to provide various privately-operated facilities for
business and manufacturing, housing, sports, pollution control, and for airport,
mass transit, port and parking facilities. 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 the payment.
MUNICIPAL NOTES. Municipal notes generally are used to provide for
short-term capital needs and generally have maturities of one year or less.
Municipal notes include:
1. TAX ANTICIPATION NOTES. Tax Anticipation Notes are issued to finance
working capital needs of municipalities. Generally, they are issued in
anticipation of various seasonal tax revenues, such as income, sales, use and
business taxes, and are payable from these specific future taxes.
2. REVENUE ANTICIPATION NOTES. Revenue Anticipation Notes are issued in the
expectation of reception of other kinds of revenue, such as federal revenues
available under the Federal Revenue Sharing Programs.
B-5
<PAGE>
3. BOND ANTICIPATION NOTES. Bond Anticipation Notes are issued to provide
interim financing until long-term financing can be arranged. In most cases, the
long-term bonds then provide the money for the repayment of the Notes.
4. CONSTRUCTION LOAN NOTES. Construction Loan Notes are sold to provide
construction financing. Permanent financing, the proceeds of which are applied
to the payment of Construction Loan Notes, is sometimes provided by a commitment
by the Government National Mortgage Association (GNMA) to purchase the loan,
accompanied by a commitment by the Federal Housing Administration to insure
mortgage advances thereunder. In other instances, permanent financing is
provided by commitments of banks to purchase the loan.
TAX-EXEMPT COMMERCIAL PAPER. Issues of tax-exempt commercial paper, the
interest on which is generally exempt from federal income taxes, typically are
represented by short-term, unsecured, negotiable promissory notes. These
obligations are issued by agencies of state and local governments to finance
seasonal working capital needs of municipalities or to provide interim
construction financing and are paid from general revenues of municipalities or
are refinanced with long-term debt. In most cases, tax-exempt commercial paper
is backed by letters of credit, lending agreements, note repurchase agreements
or other credit facility agreements offered by banks or other institutions and
is actively traded.
FLOATING RATE AND VARIABLE RATE SECURITIES. Each Series may invest more than
5% of its assets in floating rate and variable rate securities, including
participation interests therein and inverse floaters. Floating or variable rate
securities often have a rate of interest that 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. These securities also allow the holder to
demand payment of the obligation on short notice at par plus accrued interest,
which amount may be more or less than the amount the holder paid for them.
Variable rate securities provide for a specified periodic adjustment in the
interest rate. The interest rate on floating rate securities changes whenever
there is a change in the designated base interest rate. Floating rate and
variable rate securities typically have long maturities but afford the holder
the right to demand payment at earlier dates. Such floating rate and variable
rate securities will be treated as having maturities equal to the period of
adjustment of the interest rate.
An inverse floater is a debt instrument with a floating or variable interest
rate that moves in the opposite direction of the interest rate on another
security or the value of an index. Changes in the interest rate on the other
security or index inversely affect the residual interest rate paid on the
inverse floater, with the result that the inverse floater's price will be
considerably more volatile than that of a fixed rate bond. The market for
inverse floaters is relatively new.
LIQUIDITY PUTS. Each Series may purchase and exercise puts on municipal
bonds and notes. Puts give the Series the right to sell securities held in the
portfolio at a specified exercise price on a specified date. Puts may be
acquired to reduce the volatility of the market value of securities subject to
puts. 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 either by way of an initial or periodic premium for the put or by
way of a higher purchase price for securities to which the put is attached. 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 a put only under the
following circumstances: (i) the put is written by the issuer of the underlying
security and the security is rated within the quality grades in which the Series
is permitted to invest; (ii) the put is written by a person other than the
issuer of the underlying security and that person has securities outstanding
which are rated within the quality grades in which the Series is permitted to
invest; or (iii) the put is backed by a letter of credit or similar financial
guaranty issued by a person having securities outstanding which are rated within
the quality grades in which the Series is permitted to invest.
Puts will be valued at an amount equal to the difference between the value
of the underlying security taking the put into consideration and the value of
the same or a comparable security without taking the put into consideration.
LENDING OF SECURITIES. Consistent with applicable regulatory requirements,
each Series may lend its portfolio securities to brokers, dealers and financial
institutions, provided that outstanding loans do not exceed in the aggregate 33%
of the value of the Series' total assets and provided that such loans are
callable at any time by the Series and are at all times secured by cash or
equivalent collateral or obtains a letter of credit that is equal to at least
the market value, determined daily, of the loaned securities. The advantage of
such loans is that the Series continues to receive payments in lieu of the
interest and dividends on the loaned securities, while at the same time earning
interest either directly from the borrower or on the collateral which will be
invested in short-term obligations.
A loan may be terminated by the borrower on one business day's notice or by
the Series any time. If the borrower fails to maintain the requisite amount of
collateral, the loan automatically terminates, and the Series can use the
collateral to replace the securities while holding the borrower liable for any
excess of replacement cost over collateral. As with any extensions of credit,
there are risks of delay in recovery and in some cases loss of rights in the
collateral should the borrower of the securities fail
B-6
<PAGE>
financially. However, these loans of portfolio securities will only be made to
firms determined to be creditworthy pursuant to procedures approved by the
Fund's Trustees. On termination of the loan, the borrower is required to return
the securities to the Series, and any gain or loss in the market price during
the loan would inure to the Series.
Since voting or consent rights which accompany loaned securities pass to the
borrower, the Series will follow the policy of calling the loan, in whole or in
part as may be appropriate, to permit the exercise of such rights if the matters
involved would have a material effect on the Series' investment in the
securities which are the subject of the loan. The Series will pay reasonable
finders', administrative and custodial fees in connection with a loan of its
securities or may share the interest earned on collateral with the borrower.
FUTURES CONTRACTS. Each 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
Series intends to purchase. A clearing corporation associated with the
commodities exchange on which a futures contract trades assumes responsibility
for the completion of transactions and guarantees that open futures contracts
will be closed. Although interest rate futures contracts call for actual
delivery or acceptance of debt securities, in most cases the contracts are
closed out before the settlement date without the making or taking of delivery.
When the futures contract is entered into, each party deposits in a
segregated account approximately 5% of the contract amount, called the initial
margin. Subsequent payments to and from the broker, called variation margin,
will be made on a daily basis as the price of the underlying security or index
fluctuates, making the long and short positions in the futures contracts more or
less valuable, a process known as "marking to market." In the case of options on
futures contracts, the holder of the option pays a premium and receives the
right, upon exercise of the option at a specified price during the option
period, to assume a position in the futures contract (a long position if the
option is a call and a short position if the option is a put). If the option is
exercised by the holder before the last trading day during the option period,
the option writer delivers the futures position, as well as any balance in the
writer's futures margin account. If it is exercised on the last trading day, the
option writer delivers to the option holder cash in an amount equal to the
difference between the option exercise price and the closing level of the
relevant index on the date the option expires.
When a Series purchases a futures contract, it will maintain an amount of
cash or other liquid assets in a segregated account 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. A Series that has sold a
futures contract may cover that position by owning the instruments underlying
the futures contract or by holding a call option on such futures contract. A
Series will not sell futures contracts if the value of such futures contracts
exceeds the total market value of the securities of the Series. It is not
anticipated that transactions in futures contracts will have the effect of
increasing portfolio turnover.
OPTIONS ON FINANCIAL FUTURES. Each 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.
Each Series will use options on futures in connection with hedging strategies.
An option on a futures contract gives the purchaser the right, in return for
the premium paid, to assume a position in a futures contract (a long position if
the option is a call and a short position if the option is a put) at a specified
exercise price at any time during the period of the option. Upon exercise of the
option, the delivery of the futures position by the writer of the option to the
holder of the option will be accompanied by delivery of the accumulated balance
in the writer's futures margin account which represents the amount by which the
market price of the futures contract, at exercise, exceeds, in the case of a
call, or is less than, in the case of a put, the exercise price of the option on
the futures contract. If an option is exercised on the last trading day prior to
the expiration date of the option, the settlement will be made entirely in cash
equal to the difference between the exercise price of the option and the closing
price of the futures contract on the expiration date. Currently options can be
purchased or written with respect to futures contracts on U.S. Treasury Bonds,
among other fixed-income securities, and on municipal bond indices on the
Chicago Board of Trade. As with options on debt securities, the holder or writer
of an option may terminate his or her position by selling or purchasing an
option of the same series. There is no guaranty that such closing transactions
can be effected.
When a 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 a
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
B-7
<PAGE>
certain conditions. The exemption is conditioned upon a Series' purchasing and
selling 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. Each Series will use financial futures in a manner
consistent with these requirements. Each Series will continue to invest at least
80% of its net assets in municipal bonds and municipal notes except in certain
circumstances, as described in the Prospectus under "How the Fund
Invests--Investment Objectives and Policies." A Series may not enter into
futures contracts if, immediately thereafter, the sum of the amount of initial
and net cumulative variation margin on outstanding futures contracts, together
with premiums paid on options thereon, would exceed 20% of the total assets of
the Series.
RISKS OF FINANCIAL FUTURES TRANSACTIONS. In addition to the risk associated
with predicting movements in the direction of interest rates, discussed in "How
the Fund Invests--Hedging Strategies--Futures Contracts and Options Thereon" in
the Prospectus, there are a number of other risks associated with the use of
financial futures for hedging purposes.
Each Series intends to purchase and sell futures contracts only on exchanges
where there appears to be a market in the futures sufficiently active to
accommodate the volume of its trading activity. There can be no assurance that a
liquid market will always exist for any particular contract at any particular
time. Accordingly, there can be no assurance that it will always be possible to
close a futures position when such closing is desired; and, in the event of
adverse price movements, the Series would continue to be required to make daily
cash payments of variation margin. However, if futures contracts have been sold
to hedge portfolio securities, these securities will not be sold until the
offsetting futures contracts can be purchased. Similarly, if futures have been
bought to hedge anticipated securities purchases, the purchases will not be
executed until the offsetting futures contracts can be sold.
The hours of trading of interest rate futures contracts may not conform to
the hours during which the Series may trade municipal securities. To the extent
that the futures markets close before the municipal securities market,
significant price and rate movements can take place that cannot be reflected in
the futures markets on a day-to-day basis.
RISKS OF TRANSACTIONS IN OPTIONS ON FINANCIAL FUTURES. In addition to the
risks which apply to all options transactions, there are several special risks
relating to options on futures. The ability to establish and close out positions
on such options will be subject to the maintenance of a liquid secondary market.
Compared to the sale of financial futures, the purchase of put options on
financial futures involves less potential risk to a 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 a 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 a 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 a Series would have to exercise its options in order to
realize any profit and would incur transaction costs upon the sale of underlying
securities pursuant to the exercise of put options.
Reasons for the absence of a liquid secondary market on an exchange include
the following: (i) there may be insufficient trading interest in certain
options; (ii) restrictions may be imposed by an exchange on opening transactions
or closing transactions or both; (iii) trading halts, suspensions or other
restrictions may be imposed with respect to particular classes or series of
options or underlying securities; (iv) unusual or unforeseen circumstances may
interrupt normal operations on an exchange; (v) the facilities of an exchange
may not at all times be adequate to handle current trading volume; or (vi) one
or more exchanges could, for economic or other reasons, decide or be compelled
at some future date to discontinue the trading of options (or 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.
REPURCHASE AGREEMENTS
The Fund's repurchase agreements will be collateralized by U.S. Government
obligations. The Fund will enter into repurchase transactions only with parties
meeting creditworthiness standards approved by the Fund's Trustees. The Fund's
investment
B-8
<PAGE>
adviser will monitor the creditworthiness of such parties, under the general
supervision of the Trustees. In the event of a default or bankruptcy by a
seller, the Fund will promptly seek to liquidate the collateral. To the extent
that the proceeds from any sale of such collateral upon a default in the
obligation to repurchase are less than the repurchase price, the Fund will
suffer a loss.
The Fund participates 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 uninvested cash balances of
the Fund may be aggregated with those of such investment companies and invested
in one or more repurchase agreements. Each fund participates in the income
earned or accrued in the joint account based on the percentage of its
investment.
PORTFOLIO TURNOVER
A Series may engage in short-term trading consistent with its investment
objective. Portfolio transactions will be undertaken in response to anticipated
movements in the general level of interest rates. Municipal securities or
futures contracts may be sold in anticipation of a market decline (resulting
from a rise in interest rates) or purchased in anticipation of a market rise
(resulting from 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 factors
such as changes in the overall demand for or supply of various types of
municipal securities or changes in the investment objectives of investors.
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.
SEGREGATED ACCOUNTS
When the Fund is required to segregate assets in connection with certain
hedging transactions, it will maintain cash or other liquid assets in a
segregated account. "Liquid assets" means cash, U.S. Government securities,
foreign securities, equity securities, debt obligations or other 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 a Series' outstanding voting securities. 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.
Each 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 and for margin
payments in connection with transactions in financial futures contracts and
options thereon).
2. Make short sales of securities or maintain a short position.
3. Issue senior securities, borrow money or pledge its assets, except that
each 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 and to take advantage of investment opportunities 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. 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 or sale of securities on a when-issued or delayed delivery
basis, the purchase and sale of financial futures contracts and collateral
arrangements with respect thereto and obligations of the Series to Trustees,
pursuant to deferred compensation arrangements, are not deemed to be the
issuance of a senior security or a pledge of assets.
4. Purchase any security if as a result, with respect to 75% of the total
assets of the Series, more than 5% of the total assets of the Series would be
invested in the securities of any one issuer (provided that this restriction
shall not apply to obligations issued or guaranteed as to principal and interest
by the U.S. Government or its agencies or instrumentalities).
5. 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
B-9
<PAGE>
(taken at current market value) would be invested in any one industry. (For
purposes of this restriction, industrial development bonds, where the payment of
the principal and interest is the ultimate responsibility of companies within
the same industry, are grouped together as an "industry.")
6. Buy or sell commodities or commodity contracts, except financial futures
contracts and options thereon.
7. Buy or sell real estate or interests in real estate, although it may
purchase and sell securities which are secured by real estate and securities of
companies which invest or deal in real estate.
8. 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.
9. Purchase securities of other investment companies, except in the open
market involving only customary brokerage commissions and as a result of which
no more than 10% of its total assets (determined at the time of investment)
would be invested in such securities or except in connection with a merger,
consolidation, reorganization or acquisition of assets.
10. Invest in interests in oil, gas or other mineral exploration or
development programs.
11. Make loans, except through repurchase agreements and loans of portfolio
securities (limited to 33% of the Series' total assets).
12. Purchase or write puts, calls or combinations thereof except as
described in the Prospectus and this Statement of Additional Information with
respect to puts and options on futures contracts.
13. Invest for the purpose of exercising control or management of another
company.
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 a Series'
asset coverage for borrowings falls below 300%, the Series will take prompt
action to reduce its borrowings, as required by applicable law.
TRUSTEES AND OFFICERS
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS
NAME, ADDRESS AND AGE(1) POSITION WITH FUND DURING PAST FIVE YEARS
- --------------------------- ----------------------- -------------------------------------------------------------------
<S> <C> <C>
Edward D. Beach (73) Trustee President and Director of BMC Fund, Inc., a closed-end investment
company; previously, Vice Chairman of Broyhill Furniture
Industries, Inc.; Certified Public Accountant; Secretary and
Treasurer of Broyhill Family Foundation, Inc.; Member of the Board
of Trustees of Mars Hill College; Director of The High Yield
Income Fund, Inc.
Eugene C. Dorsey (71) Trustee Retired President, Chief Executive Officer and Trustee of the
Gannett Foundation (now Freedom Forum); former Publisher of four
Gannett newspapers and Vice President of Gannett Company; past
Chairman of Independent Sector (national coalition of
philanthropic organizations); former Chairman of the American
Council for the Arts; former Director of the Advisory Board of
Chase Manhattan Bank of Rochester, Director of The High Yield
Income Fund, Inc. and First Financial Fund, Inc.
</TABLE>
B-10
<PAGE>
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS
NAME, ADDRESS AND AGE(1) POSITION WITH FUND DURING PAST FIVE YEARS
- --------------------------- ----------------------- -------------------------------------------------------------------
<S> <C> <C>
Delayne Dedrick Gold (59) Trustee Marketing and Management Consultant; Director of The High Yield
Income Fund, Inc.
*Robert F. Gunia (51) Trustee Vice President (since January 1996), Prudential Insurance Company
of America (Prudential); Executive Vice President and Treasurer
(since December 1996), Prudential Investments Fund Management LLC
(PIFM); Senior Vice President (since March 1987) of Prudential
Securities Incorporated (Prudential Securities); formerly Chief
Administrative Officer (July 1990-September 1996), Director
(January 1989-September 1996) and Executive Vice President,
Treasurer and Chief Financial Officer (June 1987-December 1996) of
Prudential Mutual Fund Management, Inc. (PMF); Vice President and
Director of The Asia Pacific Fund, Inc. (since May 1989); Director
of The High Yield Income Fund, Inc.
*Harry A. Jacobs, Jr. (76) Trustee Senior Director (since January 1986) of Prudential Securities;
One Seaport Plaza formerly Interim Chairman and Chief Executive Officer of PMF
New York, NY 10292 (June-September 1993); formerly Chairman of the Board of
Prudential Securities (1982-1985) and Chairman of the Board and
Chief Executive Officer of Bache Group Inc. (1977-1982); Trustee
of The Trudeau Institute; Director of The First Australia Fund,
Inc., The First Australia Prime Income Fund, Inc. and The High
Yield Income Fund, Inc.
*Mendel A. Melzer CFA (37) Trustee Chief Investment Officer (since October 1996) of Prudential Mutual
751 Broad Street Funds; formerly Chief Financial Officer of Prudential Investments
Newark, NJ 07102 (November 1995-September 1996), Senior Vice President and Chief
Financial Officer of Prudential Preferred Financial Services
(April 1993-November 1995), Managing Director of Prudential
Investment Advisors (April 1991-April 1993) and Senior Vice
President of Prudential Capital Corporation (July 1989-April
1991); Chairman and Director of Prudential Series Fund, Inc;
Director of The High Yield Income Fund, Inc.
Thomas T. Mooney (56) Trustee President of the Greater Rochester Metro Chamber of Commerce;
former Rochester City Manager; Trustee of Center for Governmental
Research, Inc.; Director of Blue Cross of Rochester, The Business
Council of New York State, Monroe County Water Authority,
Rochester Jobs, Inc., Northeast-Midwest Institute, Executive
Service Corps of Rochester, Monroe County Industrial Development
Corporation and The High Yield Income Fund, Inc.; Director and
Treasurer of First Financial Fund, Inc. and The High Yield Plus
Fund, Inc.
Thomas H. O'Brien (73) Trustee President, O'Brien Associates (financial and management
consultants) (since April 1984); formerly President of Jamaica
Water Securities Corp. (holding company) (February 1989-August
1990); Chairman and Chief Executive Officer (September
1987-February 1989) and Director (September 1987-August 1990) of
Jamaica Water Supply Company; Director and President of Winthrop
Regional Health System and United Presbyterian Home at Syoset
Inc.; Director of Ridgewood Savings Bank and The High Yield Income
Fund; Trustee of Hofstra University.
<FN>
- ------------------------
* "Interested" Trustee, as defined in the Investment Company Act, by reason of his affiliation with Prudential
Securities, Prudential or PIFM.
</TABLE>
B-11
<PAGE>
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS
NAME, ADDRESS AND AGE(1) POSITION WITH FUND DURING PAST FIVE YEARS
- --------------------------- ----------------------- -------------------------------------------------------------------
<S> <C> <C>
*Richard A. Redeker (54) Trustee and President Employee of Prudential Investments; formerly President, Chief
751 Broad Street Executive Officer and Director (October 1993-September 1996), PMF;
Newark, N.J. 07102 Executive Vice President, Director and Member of the Operating
Committee (October 1993-September 1996), Prudential Securities;
Director (October 1993-September 1996) of Prudential Securities
Group, Inc. (PSG); Executive Vice President, The Prudential
Investment Corporation (July 1994-September 1996); Director
(January 1994-September 1996) of Prudential Mutual Fund
Distributors, Inc. (PMFD) and Prudential Mutual Fund Services,
Inc. (PMFS); formerly Senior Executive Vice President and Director
of Kemper Financial Services, Inc. (September 1978-September
1993); Director and President of The High Yield Income Fund, Inc.
Nancy H. Teeters (67) Trustee Economist; formerly Vice President and Chief Economist of
International Business Machines Corporation (March 1986-June
1990); Member of the Board of Governors of the Horace Rackham
School of Graduate Studies at the University of Michigan; Director
of Inland Steel Industries (since July 1991) and The High Yield
Income Fund, Inc.
Louis A. Weil, III (57) Trustee Publisher and Chief Executive Officer (since January 1996) and
Director (since September 1991) of Central Newspapers, Inc.;
Chairman (since January 1996), Publisher and Chief Executive
Officer of Phoenix Newspapers, Inc. (August 1991-December 1995).
Director of Central Newspapers, Inc. (since September 1991),
formerly, Publisher of Time Magazine (May 1989-March 1991);
formerly President, Publisher and Chief Executive Officer of the
Detroit News (February 1986-August 1989); formerly member of the
Advisory Board, Chase Manhattan Bank-Westchester; Director of The
High Yield Income Fund, Inc.
Grace Torres (38) Treasurer and Principal First Vice President (since December 1996) of PIFM; formerly First
Financial and Vice President (March 1994-September 1996), of Prudential Mutual
Accounting Officer Fund Management, Inc.; First Vice President of Prudential
Securities (since March 1994); prior thereto, Vice President (July
1989-March 1994) of Bankers Trust Corporation.
Stephen M. Ungerman (45) Assistant Treasurer Vice President and Tax Director of Prudential Investments (since
March 1996); formerly First Vice President of Prudential Mutual
Fund Management, Inc. (February 1993-March 1996).
S. Jane Rose (52) Secretary Senior Vice President (since December 1996) of PIFM; Senior Vice
President and Senior Counsel of Prudential Securities (since July
1992); formerly Senior Vice President (January 1991-September
1996) and Senior Counsel (June 1987-September 1996) of PMF.
Deborah A. Docs (40) Assistant Secretary Vice President (since December 1996) of PIFM; Vice President and
Associate General Counsel of Prudential Securities; formerly Vice
President and Associate General Counsel (June 1991-September 1996)
of PMF.
<FN>
- ------------------------
* "Interested" Trustee, as defined in the Investment Company Act, by reason of affiliation with Prudential Securities,
Prudential or PIFM.
(1) Unless otherwise noted the address for each of the above persons is c/o: Prudential Investments Fund Management LLC,
Gateway Center Three, 100 Mulberry Street, 9th Floor, Newark, New Jersey 07102-4077.
</TABLE>
Trustees and officers of the Fund are also trustees, directors and officers
of some or all of the other investment companies distributed by Prudential
Securities or Prudential Investment Management Services LLC.
B-12
<PAGE>
The officers conduct and supervise the daily business operations of the
Fund, while the Trustees, in addition to their functions set forth under
"Manager" and "Distributor," review such actions and decide on general policy.
The Trustees have adopted a retirement policy which calls for the retirement
of Trustees on December 31 of the year in which they reach the age of 72, except
that retirement is being phased in for Trustees who were age 68 or older as of
December 31, 1993. Under this phase-in provision, Messrs. Beach, Dorsey, Jacobs
and O'Brien are scheduled to retire on December 31, 1999, 1999, 1998 and 1999,
respectively.
Pursuant to the terms of the Management Agreement with the Fund, the Manager
pays all compensation of officers and employees of the Fund as well as the fees
and expenses of Trustees of the Fund who are affiliated persons of the Manager.
The Fund pays each of its Trustees who is not an affiliated person of PIFM or
Prudential Investments annual compensation of $5,500, in addition to certain
out-of-pocket expenses. The amount of annual compensation paid to each Director
may change as a result of the introduction of additional funds upon which the
Director will be asked to serve.
Trustees may receive their Trustees' fees pursuant to a deferred fee
agreement with the Fund. Under the terms of the agreement, the Fund accrues
daily the amount of such Trustee's fees which accrue interest at a rate
equivalent to the prevailing rate applicable to 90-day U.S. Treasury Bills at
the beginning of each calendar quarter or, pursuant to an SEC exemptive order,
at the daily rate of return of the Fund. Payment of the interest so accrued is
also deferred and accruals become payable at the option of the Trustee. The
Fund's obligation to make payments of deferred Trustees' fees, together with
interest thereon, is a general obligation of the Fund.
Pursuant to the 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 April 30, 1998 and the aggregate compensation paid to such Trustees for
service on the Fund's Board and that of all other funds managed by PIFM (Fund
Complex) for the calendar year ended December 31, 1997.
COMPENSATION TABLE
<TABLE>
<CAPTION>
PENSION OR TOTAL
RETIREMENT COMPENSATION FROM
AGGREGATE BENEFITS ACCRUED ESTIMATED ANNUAL FUND AND FUND
COMPENSATION AS PART OF FUND BENEFITS UPON COMPLEX PAID TO
NAME OF TRUSTEE FROM FUND EXPENSES RETIREMENT DIRECTORS
- ----------------------------------- ------------ ---------------- ---------------- -----------------
<S> <C> <C> <C> <C>
Edward D. Beach, Trustee $5,500 None N/A $ 135,000(38/63)*
Eugene C. Dorsey, Trustee** $5,500 None N/A $ 70,000(16/43)*
Delayne Dedrick Gold, Trustee $5,500 None N/A $ 135,000(38/63)*
Robert F. Gunia, Trustee and Vice
President+ -- -- -- --
Harry A. Jacobs, Jr., Trustee+ -- -- -- --
Donald D. Lennox, Retired Trustee $4,125 None N/A $ 90,000(26/50)*
Mendel A. Melzer, CFA, Trustee+ -- -- -- --
Thomas T. Mooney, Trustee** $5,500 None N/A $ 115,000(31/64)*
Thomas H. O'Brien, Trustee $5,500 None N/A $ 45,000(11/29)*
Richard A. Redeker, Trustee and
President+ $-- -- -- --
Nancy H. Teeters, Trustee $5,500 None N/A $ 90,000(23/42)*
Louis A. Weil, III, Trustee $5,500 None N/A $ 90,000(26/50)*
</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, 1997, includes amounts deferred at the
election of Directors. Including accrued interest, total compensation
amounted to $87,401 and $143,909 for Eugene C. Dorsey and Thomas T. Mooney,
respectively.
+ Robert F. Gunia, Harry A. Jacobs, Jr., Mendel A. Melzer and Richard A.
Redeker, who are each interested Directors, do not receive compensation from
the Fund or any other fund in the Fund Complex.
As of June 5, 1998, the Trustees and officers of the Fund, as a group, owned
beneficially less than 1% of the outstanding shares of beneficial interest of
the Fund.
As of June 5, 1998, Prudential Securities was record holder for other
beneficial owners of 26,212,432 Class A shares (or 70% of the outstanding Class
A shares) of the High Income Series, 9,239,519 Class A shares (or 46% of the
outstanding Class A shares) of the Insured Series and 684,379 Class A shares (or
57% of the outstanding Class A shares) of the Intermediate Series; 45,635,465
Class B shares (or 77% of the outstanding Class B shares) of the High Income
Series, 7,537,046 Class B shares (or 36% of the outstanding Class B shares) of
the Insured Series and 999,847 Class B shares (or 46% of the outstanding Class B
B-13
<PAGE>
shares) of the Intermediate Series: 1,803,396 Class C shares (or 95% of the
outstanding Class C shares) of the High Income Series, 94,349 Class C shares (or
71% of the outstanding Class C shares) of the Insured Series and 37,776 Class C
shares (or 91% of the outstanding Class C shares) of the Intermediate Series;
and 912,470 Class Z shares (or 99% of the outstanding Class Z shares) of the
High Income Series, 37,245 Class Z shares (or 99% of the outstanding Class Z
shares) of the Insured Series and 120,239 Class Z shares (or 99% of the
outstanding Class Z shares) of the Intermediate Series. In the event of any
meetings of shareholders, Prudential Securities will forward, or cause the
forwarding of, proxy material to the beneficial owners for which it is the
record holder.
As of June 5, 1998, the beneficial owners, directly or indirectly, of more
than 5% of the outstanding shares of any class of beneficial interest of a
Series were: Mr. Stephen J. Charms, 2787 Sulgrave Rd, Beachwood, OH 44122-2343
who held 81,050 Class Z shares of the High Income Series (8.8%); John D. Cooke,
13665 E. 114th St, Fishers, IN 46038-9712 who held 208,915 Class Z shares of the
High Income Series (22.9%); Lance E. Radbill, Ruth M. Radbill, 444 Saint Annes
Dr., Birmingham, AL 35244-3267 who held 14,603 Class C shares of the
Intermediate Series (35.1%); Frank R. Grabenhofer, Loretta M. Grabenhofer JT
TEN, 15606 Plum Tree Dr, Orland Park, IL 60462-5987 who held 3,841 Class C
shares of the Intermediate Series (9.2%); Mr. Ben L. Danna, 6261 Inwood Dr,
Houston, TX 77057-3507 who held 2,459 Class C shares of the Intermediate Series
(5.9%); Ms. Linda Lappin, Marshall Family Trust, UA DTD 4/18/96, 4302 N. Stowell
Ave., Shorewood, WI 53211-1747 who held 8,216 Class Z shares of the Intermediate
Series (22.0%); Mr. James R. McCabe, 60 Loeffler Road, Apt P-210, Bloomfield, CT
06002-2281 who held 4,750 Class C shares of the Intermediate Series (11.4%);
National Door Industries Inc., Bob R. Barnard, Jim Lewis and Mike Barnard TTEES,
6310 Airport FWY, Fort Worth, TX 76117-5322 who held 14,089 Class C shares of
the Intermediate Series (33.8%); Denis N. Maiorani & Lynn H. Maiorani, Jt Ten,
P.O. Box 648, Rye Beach, NH 03871-9648 who held 39,291 Class Z shares of the
Intermediate Series (32.7%); David R. Hopkins, Trustee, David R. Hopkins
Revocable Trust, DTD 4/5/97, P.O. Box Drawer 4345, St. Augustine, FL 32085-4345
who held 7,843 Class C shares of the Insured Series (5.9%);Elizabeth A.
Straubmuller, 1598 Silver Run Rd, Millville, NJ 08332-7334 who held 26,486 Class
C shares of the Insured Series (19.9%); George J. Straubmuller, 1598 Silver Run
Rd., Millville, NJ 08332-7334 who held 8,849 Class C shares of the Insured
Series (6.7%); Jack H. Piehl & Laverne Z. Piehl, JT Ten, 1902 River Falls,
Kingwood, TX 77339-3112 who held 11,546 Class C shares of the Insured Series
(8.7%); Mr. Charles Smith, Jr., 2 Hazelwood Ct., San Antonio, TX 78257-1706 who
held 2,925 Class Z shares of the Insured Series (7.8%); Yekaterina Khalamayzer,
11 Iris Ct., Edison, NJ 08820-4302, who held 2,199 Class Z shares of the Insured
Series (5.9%); Mr. Vincent G. Pavanello & Mrs. Paula L. Pavanello, JT Ten, 5007
Remington Dr., Coopersburg, PA 18036-1376 who held 2,212 Class Z shares of the
Insured Series (5.9%); Mr. Christopher M. Blackstone TTEE, Rev Tr Trust, UA DTD
09/05/95, FBO Christopher M. Blackstone, 905 Augusta Road, Wilmington, DE
19807-2807 who held 8,715 Class Z shares of the Insured Series (23.4%); Mr.
Sarwat Ramadan, 2431 Palisades Crest Dr., Lake Oswego, OR 97034-7551 who held
6,094 Class Z shares of the Insured Series (16.3%); Dr. In-Ho Chang and Mrs.
Eun-Aei Chang, Jt Ten, 4310 Farmington Cir., Allentown, PA 18104-1960 who held
5,166 Class Z shares of the Insured Series (13.9%); and Mr. Eugene E. Poirot,
Mrs. Patricia F. Poirot TEN COM ACCT#2, 130 N Burnet Dr, Baytown, TX 77520-1104
who held 2,279 Class Z shares of the Insured Series (6.1%).
MANAGER
The manager of the Fund is Prudential Investments Fund Management LLC (PIFM
or the Manager), Gateway Center Three, Newark, 100 Mulberry Street, New Jersey
07102-4077. The Manager serves as manager to all of the other open-end
management investment companies that, together with the Fund, comprise the
Prudential Mutual Funds. See "How the Fund is Managed--Manager" in the
Prospectus. As of May 31, 1998, PIFM managed and/or administered open-end and
closed-end management investment companies with assets of approximately $66.5
billion and, according to the Investment Company Institute, as of December,
1997, the Prudential Mutual Funds were the 18th largest family of mutual funds
in the United States.
The Manager is a subsidiary of Prudential Securities and Prudential.
Prudential Mutual Fund Services LLC (the Transfer Agent), a wholly owned
subsidiary of the Manager, serves as the transfer agent for the Prudential
Mutual Funds and, in addition, provides customer service, recordkeeping and
management and administration services to qualified plans.
Pursuant to the Management Agreement with the Fund (the Management
Agreement), the Manager, 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, the Manager is obligated to keep certain books and records
of the Fund. The Manager 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 Fund's custodian, and the Fund's
transfer and dividend disbursing agent. The services of the Manager for the Fund
are not exclusive under the terms of the Management Agreement and the Manager is
free to, and does, render management services to others.
For its services, the Manager 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 up to $1 billion and .45 of 1% of the average daily net assets in
excess of $1 billion. PIFM has agreed to waive 10% of its management fee
(approximately .05 of 1% of average net assets, as annualized) with respect to
the
B-14
<PAGE>
High Income 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 the Manager, but excluding interest, taxes, brokerage
commissions, distribution fees and litigation and indemnification expenses and
other extraordinary expenses not incurred in the ordinary course of the Fund's
business) 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 the Manager will be reduced by the amount of such excess.
Reductions in excess of the total compensation payable to the Manager will be
paid by the Manager to the Fund. No such reductions were required during the
fiscal year ended April 30, 1998. No jurisdiction currently limits the Fund's
expenses.
In connection with its management of the business affairs of the Fund, the
Manager bears the following expenses:
(a) the salaries and expenses of all of its and the Fund's personnel except
the fees and expenses of Trustees who are not affiliated persons of the Manager
or the Subadviser;
(b) all expenses incurred by the Manager or by the Fund in connection with
managing the ordinary course of the Fund's business, other than those assumed by
the Fund as described below; and
(c) the costs and expenses payable to the Subadviser pursuant to the
subadvisory agreement between the Manager and the Subadviser (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 Subadviser, (c) the fees and certain expenses of the Custodian and Transfer
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 legal counsel and independent
accountants for the Fund, (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 associations of which the Fund may be 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 under state
securities laws, 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 in the amount
necessary for distribution to the 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 provides that the Manager 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 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 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 conformity with the Investment Company Act. The Management
Agreement was last approved by the Trustees of the Fund, including a majority of
the Trustees who are not parties to such contract or interested persons of such
parties as defined in the Investment Company Act, on May 12, 1998 and by the
shareholders of each Series on February 19, 1988.
For the fiscal year ended April 30, 1998, the Manager received a management
fee of $4,787,451 (net of waiver of $535,931), $2,384,469 (net of waiver of
$85,444) and $200,622 (net of waiver of $7,346) on behalf of the High Income
Series, Insured Series and Intermediate Series, respectively. For the fiscal
year ended April 30, 1997, PIFM received a management fee of $4,614,964 (net of
waiver of $514,371), $2,494,083 (net of waiver of $277,120) and $220,036 (net of
waiver of $24,449) on behalf of the High Income Series, Insured Series and
Intermediate Series, respectively. For the fiscal year ended April 30, 1996,
PIFM received a management fee of $4,774,952 (net of waiver of $534,026),
$2,824,806 (net of waiver of $313,867) and $265,175 (net of waiver of $29,464)
on behalf of the High Income Series, Insured Series and Intermediate Series,
respectively.
The Manager has entered into a 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. The Manager 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 is reimbursed by the Manager for the reasonable costs and expenses
incurred by the Subadviser in furnishing those services.
B-15
<PAGE>
Peter J. Allegrini oversees the municipal bond team at PIC. The portfolio
manager analyzes the risks and negotiates credit terms for high yield municipal
bonds to build a well-diversified portfolio of bonds that, in his opinion, have
low prices and good potential to appreciate. Then, the portfolio manager and a
credit team monitor each issuer's ability to pay interest and principal on a
timely basis, under various economic conditions. The portfolio manager seeks to
avoid making short-term gains based on interest rate movements and will shift
maturities to capture good relative returns.
The Subadvisory Agreement was last approved by the Trustees, including a
majority of the Trustees who are not parties to the contract or interested
persons of any such party as defined in the Investment Company Act, on May 12,
1998, and by the shareholders of each Series on February 19, 1988.
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, the Manager 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.
DISTRIBUTOR
Prudential Investment Management Services LLC (the Distributor) Gateway
Center Three, 100 Mulberry Street, Newark, New Jersey 07102-4077, acts as the
distributor of the shares of the Fund. Prior to July 1, 1998, Prudential
Securities Incorporated, One Seaport Plaza, New York, New York 10292, served as
the distributor of the shares of the Fund.
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 Fund
under Rule 12b-1 under the Investment Company Act and a distribution agreement
(the Distribution Agreement), the Distributor incurs the expenses of
distributing the Fund's Class A, Class B and Class C shares. The Distributor
incurs the expenses of distributing the Fund's Class Z shares under the
Distribution Agreement, none of which are reimbursed or paid for by the Fund.
See "How the Fund is Managed--Distributor" in the Prospectus.
Prior to January 22, 1990, the Fund offered only one class of shares (the
existing Class B shares). On October 11, 1989, the Trustees, including a
majority of the Trustees who are not interested persons of the Fund and who have
no direct or indirect financial interest in the operation of the Class A or
Class B Plan or in any agreement related to either Plan (the Rule 12b-1
Trustees), at a meeting called for the purpose of voting on each Plan, adopted a
new plan of distribution for the Class A shares of the Fund (the Class A Plan)
and approved an amended and restated plan of distribution with respect to the
Class B shares of the Fund (the Class B Plan). On February 9, 1993, the
Trustees, including a majority of the Rule 12b-1 Trustees, at a meeting called
for the purpose of voting on each Plan, approved the continuance of the Plans
and Distribution Agreements and approved modifications of the Fund's Class A and
Class B Plans and Distribution Agreements to conform them with recent amendments
to the National Association of Securities Dealers, Inc. (NASD) maximum sales
charge rule described below. As so modified, the Class A Plan provides that (i)
up to .25 of 1% of the average daily net assets of the Class A shares may be
used to pay for personal service and the maintenance of shareholder accounts
(service fee) and (ii) total distribution fees (including the service fee of .25
of 1%) may not exceed .30 of 1%. As so modified, the Class B Plan provides that
(i) up to .25 of 1% of the average daily net assets of the Class B shares may be
paid as a service fee and (ii) up to .50 of 1% (including the service fee) of
the average daily net assets of the Class B shares (asset-based sales charge)
may be used as reimbursement for distribution-related expenses with respect to
the Class B shares. On May 4, 1993, the Trustees, including a majority of the
Rule 12b-1Trustees, at a meeting called for the purpose of voting on each Plan,
adopted a plan of distribution for the Class C shares of the Fund and approved
further amendments to the plans of distribution for the Fund's Class A and Class
B shares changing them from reimbursement type plans to compensation type plans.
Prior to July 10, 1998, Prudential Securities Incorporated (Prudential
Securities) acted as the distributor of the shares of the Fund. On May 12, 1998,
the Trustees including a majority of the Rule 12b-1 Trustees at a meeting called
for the purpose of voting on each Plan and the Distribution Agreement, adopted a
new distribution agreement and an amendment to the Class A, Class B and Class C
Plans, effective July 1,1998, under which the responsibility for distribution
was transferred from Prudential Securities to the Distributor. The Class A Plan,
as previously amended, was approved by the Class A and Class B shareholders of
each Series of the Fund and the Class B Plan, as amended, was approved by the
Class B shareholders of each Series on July 19, 1994. The Class C Plan was
approved by the sole shareholder of Class C shares of each Series on August 1,
1994.
B-16
<PAGE>
CLASS A PLAN. For the fiscal year ended April 30, 1998, Prudential
Securities, as the predecessor distributor, received payments of $381,735,
$222,115 and $13,591 on behalf of the High Income Series, Insured Series and
Intermediate Series, respectively, under the Class A Plan. These amounts were
primarily for payment of account servicing fees to financial advisers and other
persons who sell Class A shares. For the fiscal year ended April 30, 1998,
Prudential Securities also received approximately $493,600, $30,300 and $5,300
on behalf of the High Income Series, Insured Series and Intermediate Series,
respectively, in initial sales charges.
CLASS B PLAN. For the fiscal year ended April 30, 1998, Prudential
Securities, as the predecessor distributor, received $3,345,658, $1,352,766 and
$135,876 on behalf of the High Income Series, Insured Series and Intermediate
Series, respectively, under the Class B Plan. For the fiscal year ended April
30, 1998, the Distributor spent approximately the following amounts on behalf of
each Series of the Fund:
<TABLE>
<CAPTION>
COMPENSATION TO APPROXIMATE
COMMISSION PRUSEC FOR TOTAL
PAYMENTS TO COMMISSION AMOUNT
FINANCIAL PAYMENTS TO SPENT BY
ADVISERS OF OVERHEAD COSTS REPRESENTATIVES DISTRIBUTOR
PRUDENTIAL OF PRUDENTIAL AND ON BEHALF OF
SERIES PRINTING SECURITIES SECURITIES* OTHER EXPENSES* SERIES
- ---------------------- ---------------- -------------- --------------- ------------------ -------------
<S> <C> <C> <C> <C> <C>
High Yield Series $ 23,669 $ 2,746,150 $2,385,880 $ 323,123 $ 5,478,822
Insured Series $ 922 $ 453,815 $ 102,771 $ 187,016 $ 744,524
Intermediate Series $ 105 $ 57,489 $ 22,453 $ 6,470 $ 86,517
- ------------------------
* Including lease, utility and sales promotion expenses.
</TABLE>
The Distributor also receives the proceeds of contingent deferred sales
charges paid by shareholders upon certain redemptions of Class B shares. See
"Shareholder Guide--How to Sell Your Shares--Contingent Deferred Sales Charges"
in the Prospectus. For the fiscal year ended April 30, 1998, Prudential
Securities, as the predecessor distributor, received approximately $866,900,
$388,200 and $65,600 on behalf of the High Income Series, Insured Series and
Intermediate Series, respectively, in contingent deferred sales charges
attributable to Class B shares.
CLASS C PLAN. For the fiscal year ended April 30, 1998, Prudential
Securities received $111,993, $8,567 and $2,856 on behalf of the High Income
Series, Insured Series and Intermediate Series, respectively, under the Class C
Plan. For the fiscal year ended April 30, 1998, Prudential Securities spent
approximately the following amounts on behalf of each Series of the Fund.
<TABLE>
<CAPTION>
APPROXIMATE
TOTAL
COMMISSION COMPENSATION TO AMOUNT
PAYMENTS TO PRUSEC FOR SPENT BY
FINANCIAL COMMISSION DISTRIBUTOR
ADVISERS OF OVERHEAD COSTS PAYMENTS TO ON BEHALF
PRUDENTIAL OF PRUDENTIAL REPRESENTATIVES AND OF
SERIES PRINTING SECURITIES SECURITIES* OTHER EXPENSES* SERIES
- -------------------- --------- ----------- -------------- ------------------- -----------
<S> <C> <C> <C> <C> <C>
High Yield Series $ 2,729 $94,465 $53,545 $3,829 $154,568
Insured Series $ 12 $ 7,956 $ 3,262 $ 691 $ 11,921
Intermediate Series $ 0 $ 2,189 $ 1,650 $ 0 $ 3,839
- ------------------------
* Including lease, utility and sales promotion expenses.
</TABLE>
The Distributor also receives the proceeds of contingent deferred sales
charges paid by shareholders upon certain redemptions of Class C shares. See
"Shareholder Guide--How to Sell Your Shares--Contingent Deferred Sales Charges"
in the Prospectus. For the fiscal year ended April 30, 1998, Prudential
Securities, as the predecessor distributor, received approximately $11,600 and
$600 on behalf of the High Income Series and Intermediate Series, respectively,
in contingent deferred sales charges attributable to Class C shares and did not
receive any contingent deferred sales charges with respect to the Insured
Series.
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
B-17
<PAGE>
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 Fund by the Distributor. The report will include an itemization of the
distribution expenses and the purposes of such expenditures. In addition, as
long as the Plans remain in effect, the selection and nomination of Rule 12b-1
Trustees shall be committed to the Rule 12b-1 Trustees.
Pursuant to the Distribution Agreement, the Fund has agreed to indemnify the
Distributor to the extent permitted by applicable law against certain
liabilities under federal securities laws. The Distribution Agreement was
approved by the Trustees, including a majority of the Rule 12b-1 Trustees, on
May 12, 1998.
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 each Series of the Fund rather than on a per
shareholder basis. If aggregate sales charges were to exceed 6.25% of total
gross sales of any class, all sales charges on shares of that class would be
suspended.
PORTFOLIO TRANSACTIONS AND BROKERAGE
The Manager is responsible for decisions to buy and sell securities and
financial futures for each Series of the Fund, the selection of brokers, dealers
and futures commission merchants to effect the transactions and the negotiation
of brokerage commissions, if any. 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 any Series, are effected through brokers who charge a commission
for their services. 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.
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. Thus it will not deal in over-the-counter securities with the
Distributor or an affiliate acting as a market-maker, and it will not execute a
negotiated trade with the Distributor or an affiliate if the 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 most favorable price and
efficient execution. 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. These 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. These services are used by the
Manager in connection with all of its investment activities, and some of these
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 these services may be selected for
the execution of transactions of these other accounts, whose aggregate assets
may be far larger than the Fund, and the services furnished by the 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 policy of the Manager is to pay higher
commissions to brokers, 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. In addition, 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 research
and investment services described above, subject to review by the Fund's
Trustees from time to time as to the extent and
B-18
<PAGE>
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
syndicate of which the Distributor (or any affiliate), during the existence of
the syndicate, 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 present 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, the Distributor or an affiliate may act
as a securities broker or futures commission merchant for the Fund. In order for
the Distributor or an affiliate to effect any portfolio transactions for the
Fund, the commissions, fees or other remuneration received by the Distributor or
an affiliate must not exceed certain rates set forth in the Investment Company
Act and 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 being
purchased or sold on an exchange during a comparable period of time. This
standard would allow the Distributor or an 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 arm's-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 the
Distributor or an affiliate are consistent with the foregoing standard. In
accordance with Section 11(a) of the Securities Exchange Act of 1934, the
Distributor or an affiliate 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. The Distributor and its
affiliates must furnish to the Fund at least annually a statement setting forth
the total amount of all compensation retained by the Distributor and its
affiliates from transactions effected for the Fund during the applicable period.
Brokerage and futures transactions with the Distributor or an affiliate are also
subject to such fiduciary standards as may be imposed upon the Distributor (or
such affiliate) by applicable law.
During the fiscal years ended April 30, 1998, 1997 and 1996 the Fund paid
$136,400, $163,500 and $263,800, respectively, in brokerage commissions on
certain options and/or futures transactions. No such brokerage commissions were
paid to the Distributor or any affiliate thereof.
PURCHASE AND REDEMPTION OF FUND SHARES
Shares of each 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 (i) at the time of purchase
(Class A shares) or (ii) on a deferred basis (Class B or Class C shares). Class
Z shares of the Fund are offered to a limited group of investors at NAV without
any sales charges. See "Shareholder Guide--How to Buy Shares of the Fund" in the
Prospectus.
Each class of shares represents an interest in the same portfolio of
investments of the Fund and has the same rights, except that (i) each class is
subject to different sales charges and distribution and/or service fees (except
for Class Z shares, which are not subject to any sales charges and distribution
and/or service fees), which may affect performance, (ii) each class has
exclusive voting rights with respect to any matter submitted to shareholders
that relates solely to its arrangement and has separate voting rights on any
matter submitted to shareholders in which the interests of one class differ from
the interests of any other class, (iii) each class has a different exchange
privilege, (iv) only Class B shares have a conversion feature and (v) Class Z
shares are offered exclusively for sale to a limited group of investors. See
"Distributor" and "Shareholder Investment Account--Exchange Privilege."
ISSUANCE OF FUND SHARES FOR SECURITIES
Transactions involving the issuance of Fund shares for securities (rather
than cash) will be limited to (i) reorganizations, (ii) statutory mergers, or
(iii) 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.
B-19
<PAGE>
SPECIMEN PRICE MAKE-UP
Under the current distribution arrangements between the Fund and the
Distributor, Class A shares are sold at a maximum sales charge of 3% and Class
B* Class C* and Class Z shares are sold at NAV. Using the Fund's NAV at April
30, 1998, the maximum offering price of the Fund's shares is as follows:
<TABLE>
<CAPTION>
HIGH
INCOME INSURED INTERMEDIATE
CLASS A SERIES SERIES SERIES
---------- ------- -------------
<S> <C> <C> <C>
Net asset value and redemption price per
Class A share.............................. $11.31 $ 11.05 $10.81
Maximum sales charge (3% of offering
price)..................................... .35 .34 .33
---------- ------- ------
Offering price to public..................... $11.66 $ 11.39 $11.14
---------- ------- ------
---------- ------- ------
CLASS B
Net asset value, redemption price and
offering price to public per Class B
share*..................................... $11.31 $ 11.06 $10.81
---------- ------- ------
---------- ------- ------
CLASS C
Net asset value, redemption price and
offering price to public per Class C
share*..................................... $11.31 $ 11.06 $10.81
---------- ------- ------
---------- ------- ------
CLASS Z
Net asset value, offering price and
redemption price per Class Z share......... $11.30 $ 11.05 $10.81
---------- ------- ------
---------- ------- ------
</TABLE>
- ------------------------
* Class B and Class C shares are subject to a contingent deferred sales charge
on certain redemptions. See "Shareholder Guide--How to Sell Your
Shares--Contingent Deferred Sales Charges" in the Prospectus.
REDUCTION AND WAIVER OF INITIAL SALES CHARGES--CLASS A SHARES
COMBINED PURCHASE AND CUMULATIVE PURCHASE PRIVILEGE. If an investor or
eligible group of related investors purchases Class A shares of the Fund
concurrently with Class A shares of other series of the Fund or other Prudential
Mutual Funds, the purchases may be combined to take advantage of the reduced
sales charge applicable to larger purchases. See the table of breakpoints under
"Shareholder Guide--Alternative Purchase Plan" in the Prospectus.
An eligible group of related Fund investors includes any combination of the
following:
(a) an individual;
(b) the individual's spouse, their children and their parents;
(c) the individual's and spouse's Individual Retirement Account (IRA);
(d) any company controlled by the individual (a person, entity or group that
holds 25% or more of the outstanding voting securities of a corporation will be
deemed to control the corporation, and a partnership will be deemed to be
controlled by each of its general partners);
(e) a trust created by the individual, the beneficiaries of which are the
individual, his or her spouse, parents or children;
(f) a Uniform Gifts to Minors Act/Uniform Transfers to Minors Act account
created by the individual or the individual's spouse; and
(g) one or more employee benefit plans of a company controlled by an
individual.
In addition, an eligible group of related Fund investors may include an
employer (or group of related employers) and one or more retirement or group
plans of such employer or employers (an employer controlling, controlled by or
under common control with another employer is deemed related to that employer).
The Transfer Agent, the Distributor or your Dealer must be notified at the
time of purchase that the investor is entitled to a reduced sales charge. The
reduced sales charges will be granted subject to confirmation of the investor's
holdings. The Combined Purchase and Cumulative Purchase Privilege does not apply
to individual participants in any retirement or group plans.
RIGHTS OF ACCUMULATION. Reduced sales charges are also available through
Rights of Accumulation, under which an investor or an eligible group of related
investors, as described above under "Combined Purchase and Cumulative Purchase
Privilege," may aggregate the value of their existing holdings of shares of the
Fund and shares of other Prudential Mutual Funds (excluding money market funds
other than those acquired pursuant to the exchange privilege) to determine the
reduced sales charge. However, the value of shares held directly with the
Transfer Agent and through the Distributor or a Dealer will not be aggregated to
determine the reduced sales charge. All shares must be held either directly with
the Transfer Agent or through the Distributor or a Dealer. The
B-20
<PAGE>
value of existing holdings for purposes of determining the reduced sales charge
is calculated using the maximum offering price (net asset value plus maximum
sales charge) as of the previous business day. See "How the Fund Values its
Shares" in the 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 charges will be granted subject to confirmation of the investors'
holdings. Rights of accumulation are not available to individual participants in
any retirement or group plans.
LETTER OF INTENT. Reduced sales charges are available to investors (or an
eligible group of related investors) who enter into a written Letter of Intent
providing for the purchase, within a thirteen-month period, of shares of a
Series of the Fund and shares of other Prudential Mutual Funds (Investment
Letter of Intent). Retirement and group plans may also qualify to purchase Class
A shares at NAV by entering into a Letter of Intent whereby they agree to enroll
within a thirteen-month period, a specified number of eligible employees or
participants (Participant Letter of Intent).
For purposes of the Investment Letter of Intent, all shares of the Fund and
shares of other Prudential Mutual Funds (excluding money market funds other than
those acquired pursuant to the exchange privilege) which were previously
purchased and are still owned are also included in determining the applicable
reduction. However, the value of shares held directly with the Transfer Agent
and through the Distributor or a Dealer will not be aggregated to determine the
reduced sales charge.
A Letter of Intent permits a purchaser, in the case of an Investment Letter
of Intent, to establish a total investment goal to be achieved by any number of
investments over a thirteen-month period and, in the case of a Participant
Letter of Intent, to establish a minimum eligible employee or participant
enrollment goal over a thirteen-month period. Each investment made during the
period, in the case of an Investment Letter of Intent, will receive the reduced
sales charge applicable to the amount represented by the goal, as if it were a
single investment. In the case of a Participant Letter of Intent, each
investment made during the period will be made at net asset value. Escrowed
Class A shares totaling 5% of the dollar amount of the Letter of Intent will be
held by the Transfer Agent in the name of the purchaser. The effective date of
an Investment Letter of Intent (except in the case of retirement and group
plans) may be back-dated up to 90 days, in order that any investments made
during this 90-day period, valued at the purchaser's cost, can be applied to the
fulfillment of the Letter of Intent goal.
The Investment Letter of Intent does not obligate the investor to purchase,
nor the Fund to sell, the indicated amount. Similarly, the Participant Letter of
Intent does not obligate the retirement or group plan to enroll the indicated
number of eligible employees or participants. In the event the Letter of Intent
goal is not achieved within the thirteen-month period, the purchaser (or the
employer or plan sponsor in the case of any retirement or group plan) is
required to pay the difference between the sales charge otherwise applicable to
the purchases made during this period and the sales charge 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 Fund pursuant to a Letter of Intent
should carefully read such Letter of Intent.
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, in the
case of an Investment Letter of Intent, be granted subject to confirmation of
the investor's holdings or, in the case of a Participant Letter of Intent,
subject to confirmation of the number of eligible employees or participants in
the retirement or group plan. Letters of Intent are not available to individual
participants in any retirement or group plans.
WAIVER OF THE CONTINGENT DEFERRED SALES CHARGE--CLASS B SHARES
The contingent deferred sales charge (CDSC) is waived under circumstances
described in the Prospectus. See "Shareholder Guide--How to Sell Your
Shares--Waiver of Contingent Deferred Sales Charges--Class B Shares" in the
Prospectus. In connection with these waivers, the Transfer Agent will require
you to submit the supporting documentation set forth below.
<TABLE>
<S> <C>
CATEGORY OF WAIVER REQUIRED DOCUMENTATION
Death A copy of the shareholder's death certificate
or, in the case of a trust, a copy of the
grantor's death certificate, plus a copy of
the trust agreement identifying the grantor.
Disability - An individual will be considered A copy of the Social Security Administration
disabled if he or she is unable to engage in award letter or a letter from a physician on
any substantial gainful activity by reason of the physician's letterhead stating that the
any medically determinable physical or mental shareholder (or, in the case of a trust, the
impairment which can be expected to result in grantor) is permanently disabled. The letter
death or to be of long-continued and must also indicate the date of disability.
indefinite duration.
The Transfer Agent reserves the right to request such additional documents as it may
deem appropriate.
</TABLE>
B-21
<PAGE>
QUANTITY DISCOUNT--CLASS B SHARES PURCHASED PRIOR TO AUGUST 1, 1994
The CDSC is reduced on redemptions of Class B shares 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 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 the Fund following the second purchase was $550,000, the quantity
discount would be available for the second purchase of $450,000 but not for the
first purchase of $100,000. The quantity discount will be imposed at the
following rates depending on whether the aggregate value exceeded $500,000 or $1
million:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED SALES CHARGE AS A
PERCENTAGE OF DOLLARS INVESTED OR
REDEMPTION PROCEEDS
----------------------------------------
YEAR SINCE PURCHASE PAYMENT MADE $500,001 TO $1 MILLION OVER $1 MILLION
- --------------------------------------------- ---------------------- ---------------
<S> <C> <C>
First........................................ 3.0% 2.0%
Second....................................... 2.0% 1.0%
Third........................................ 1.0% 0%
Fourth and thereafter........................ 0% 0%
</TABLE>
You must notify the Fund's Transfer Agent either directly or through the
Distributor, Prudential Securities, Prusec, 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.
SHAREHOLDER INVESTMENT ACCOUNT
Upon the initial purchase of Fund shares, 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 DISTRIBUTIONS
For the convenience of investors, all dividends and distributions are
automatically reinvested in full and fractional shares of the Fund. An investor
may direct the Transfer Agent in writing not less than five full business days
prior to the record date to have subsequent dividends and/or distributions sent
in cash rather than reinvested. In the case of recently purchased shares for
which registration instructions have not been received on the record date, cash
payment will be made directly to the Dealer. Any shareholder who receives a cash
payment representing a dividend or distribution may reinvest such dividend or
distribution at NAV by returning the check or the proceeds to the Transfer Agent
within 30 days after the payment date. Such investment will be made at the NAV
next determined after receipt of the check or proceeds by the Transfer Agent.
Such shareholder will receive credit for any CDSC paid in connection with the
amount of proceeds being reinvested.
EXCHANGE PRIVILEGE
The Fund makes available to its shareholders the privilege of exchanging
their shares of the Fund for shares of certain other Prudential Mutual Funds,
including one or more specified money market funds, subject in each case to the
minimum investment requirements of such funds. Shares of such other Prudential
Mutual Funds may also be exchanged for shares of the Fund. 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.
CLASS A. Shareholders of the Fund may exchange their Class A shares for
Class A shares of certain other Prudential Mutual Funds, shares of Prudential
Government Securities Trust (Short-Intermediate Term Series) and shares of the
money market funds specified below. No fee or sales load will be imposed upon
the exchange. Shareholders of money market funds who acquired such shares upon
exchange of Class A shares may use the exchange privilege only to acquire Class
A shares of the Prudential Mutual Funds participating in the exchange privilege.
B-22
<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)(Class A shares)
(U.S. Treasury Money Market Series)(Class A shares)
Prudential Municipal Series Fund
(Connecticut Money Market Series)
(Massachusetts Money Market Series)
(New Jersey Money Market Series)
(New York Money Market Series)
Prudential MoneyMart Assets, Inc. (Class A shares)
Prudential Tax-Free Money Fund, Inc.
CLASS B AND CLASS C. Shareholders of the Fund may exchange their Class B and
Class C shares for Class B and Class C shares, respectively, of certain other
Prudential Mutual Funds and shares of Prudential Special Money Market Fund,
Inc., a money market fund. No CDSC will be payable upon such exchange, but a
CDSC may be payable upon the redemption of the Class B and Class C shares
acquired as a result of the exchange. The applicable sales charge will be that
imposed by the fund in which shares were initially purchased and the purchase
date will be deemed to be the first day of the month after the initial purchase,
rather than the date of the exchange.
Class B and Class C shares of the Fund may also be exchanged for shares of
Prudential Special Money Market Fund, Inc. without imposition of any CDSC at the
time of exchange. Upon subsequent redemption from such money market fund or
after re-exchange into the Fund, such shares will be subject to the CDSC
calculated by excluding the time such shares were held in the money market fund.
In order to minimize the period of time in which shares are subject to a CDSC,
shares exchanged out of the money market fund will be exchanged on the basis of
their remaining holding periods, with the longest remaining holding periods
being transferred first. In measuring the time period shares are held in a money
market fund and "tolled" for purposes of calculating the CDSC holding period,
exchanges are deemed to have been made on the last day of the month. Thus, if
shares are exchanged into the Fund from a money market fund during the month
(and are held in the Fund at the end of the month), the entire month will be
included in the CDSC holding period. Conversely, if shares are exchanged into a
money market fund prior to the last day of the month (and are held in the money
market fund on the last day of the month), the entire month will be excluded
from the CDSC holding period. For purposes of calculating the seven year holding
period applicable to the Class B conversion feature, the time period during
which Class B shares were held in a money market fund will be excluded.
At any time after acquiring shares of other funds participating in the Class
B or Class C Exchange Privilege, a shareholder may again exchange those shares
(and any reinvested dividends and distributions) for Class B or Class C shares
of the Fund, respectively, without subjecting such shares to any CDSC. Shares of
any fund participating in the Class B or Class C exchange privilege that were
acquired through reinvestment of dividends or distributions may be exchanged for
Class B or Class C shares, respectively, of other funds without being subject to
any CDSC.
CLASS Z Class Z shares may be exchanged for Class Z shares of other
Prudential Mutual Funds.
Additional details about the exchange privilege and prospectuses for each of
the Prudential Mutual Funds are available from the Transfer Agent, the
Distributor or your Dealer. The exchange privilege may be modified, terminated
or suspended on sixty days' notice and any fund, including the Fund, or the
Distributor, has the right to reject any exchange application relating to such
fund's shares.
DOLLAR COST AVERAGING
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
B-23
<PAGE>
at a private college and around $6,000 at a public university. Assuming these
costs increase at a rate of 7% a year, as has been projected, for the freshman
class beginning in 2011, the cost of four years at a private college could reach
$210,000 and over $90,000 at a public university.(1)
The following chart shows how much you would need in monthly investments to
achieve specified lump sums to finance your investment goals.(2)
<TABLE>
<CAPTION>
PERIOD OF
MONTHLY INVESTMENTS: $100,000 $150,000 $200,000 $250,000
- -------------------------------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
25 years.............................. $ 110 $ 165 $ 220 $ 275
20 years.............................. 176 264 352 440
15 years.............................. 296 444 592 740
10 years.............................. 555 833 1,110 1,388
5 years.............................. 1,371 2,057 2,742 3,428
See "Automatic Savings Accumulation Plan (ASAP)" below.
- ------------------------------
(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 and
room and board for the 1993-1994 academic year.
(2)The chart assumes an effective rate of return of 8% (assuming monthly
compounding). This example is for illustrative purposes only and is not intended
to reflect the performance of an investment in shares of the Fund. The
investment return and principal value of an investment will fluctuate so that an
investor's shares when redeemed may be worth more or less than their original
cost.
</TABLE>
AUTOMATIC SAVINGS ACCUMULATION PLAN (ASAP)
Under ASAP, an investor may arrange to have a fixed amount automatically
invested in shares of a Series of the Fund monthly by authorizing his or her
bank account or Prudential Securities account (including a Command Account) to
be debited to invest specified dollar amounts in shares of the Fund. The
investor's bank must be a member of the Automatic Clearing House System. Share
certificates are not issued to ASAP participants.
Further information about this program and an application form can be
obtained from the Transfer Agent, the Distributor or your Dealer.
SYSTEMATIC WITHDRAWAL PLAN
A systematic withdrawal plan is available to shareholders through the
Transfer Agent, the Distributor or your Dealer. Such withdrawal plan provides
for monthly or quarterly checks in any amount, except as provided below, up to
the value of the shares in the shareholder's account. Withdrawals of Class B or
Class C shares may be subject to a CDSC. See "Shareholder Guide--How to Sell
Your Shares--Contingent Deferred Sales Charges" in the Prospectus.
In the case of shares held through the Transfer Agent (i) a $10,000 minimum
account value applies, (ii) withdrawals may not be for less than $100 and (iii)
the shareholder must elect to have all dividends and/or distributions
automatically reinvested in additional full and fractional shares at NAV on
shares held under this plan. See "Automatic Reinvestment of Dividends and/or
Distributions" above.
The Distributor and the Transfer Agent act as agents for the shareholder in
redeeming sufficient full and fractional shares to provide the amount of the
periodic withdrawal payment. The systematic withdrawal plan may be terminated at
any time, and the Distributor reserves the right to initiate a fee of up to $5
per withdrawal, upon 30 days' written notice to the shareholder.
Withdrawal payments should not be considered as dividends, yield or income.
If periodic withdrawals continuously exceed reinvested dividends and
distributions, the shareholder's original investment will be correspondingly
reduced and ultimately exhausted.
Furthermore, each withdrawal constitutes a redemption of shares, and any
gain or loss realized must be recognized for federal income tax purposes. In
addition, withdrawals made concurrently with purchases of additional shares are
inadvisable because of the sales charge applicable to (i) the purchase of Class
A shares and (ii) the withdrawal of Class B and Class C shares. Each shareholder
should consult his or her own tax adviser with regard to the tax consequences of
the systematic withdrawal plan, particularly if used in connection with a
retirement plan.
B-24
<PAGE>
MUTUAL FUND PROGRAM
From time to time, 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 marketed collectively. Typically, these programs are
marketed with an investment theme, E.G., to seek greater diversification,
protection from interest rate movements or access to different management
styles. In the event such a program is instituted, there may be a minimum
investment requirement for the program as a whole. The Fund may waive or reduce
the minimum initial investment requirements in connection with such a program.
The mutual funds in the program may be purchased individually or as a part
of a program. Since the allocation of portfolios included in the program may not
be appropriate for all investors, investors should consult their Prudential
Securities Financial Adviser, Prudential/Pruco Securities Representative, or
other Dealer concerning the appropriate blends of portfolios for them. If
investors elect to purchase the individual mutual funds that constitute the
program in an investment ratio different from that offered by the program, the
standard minimum investment requirements for the individual mutual funds will
apply.
NET ASSET VALUE
The NAV is the net worth of a Series (assets, including securities at value,
minus liabilities) divided by the number of shares outstanding. NAV is
calculated separately for each class. Under the Investment Company Act, the
Trustees are responsible for determining in good faith the fair value of
securities of each Series of the Fund. The Trustees have fixed the specific time
of day for the computation of each Series' NAV to be at 4:15 P.M., New York
time. In the event the New York Stock Exchange closes early on any business day,
the NAV of the Series' shares shall be determined at a time between such closing
and 4:15 P.M., New York time.
Portfolio securities for which market quotations are readily available are
valued at their bid quotations. Futures contracts are valued daily at 4:15 P.M.,
New York time, at market quotations provided by the Chicago Board of Trade.
Under the Investment Company Act, the Trustees are responsible for determining
in good faith the fair value of securities and other assets of the Fund for
which market quotations are not readily available. Securities for which market
quotations are not readily available are valued at fair value in accordance with
procedures adopted by the Trustees. Under these procedures, the Manager values
municipal securities on the basis of valuations provided by a pricing service
which uses information with respect to transactions in securities, quotations
from bond dealers, market transactions in comparable securities and various
relationships between securities in determining value. This service is furnished
by Kenny-S&P, a division of J.J. Kenny Information Systems. Reliable market
quotations generally are not readily available for purposes of valuing municipal
securities. As a result, depending on the particular municipal 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
investments are valued at amortized cost if their original term to maturity was
less than 60 days, or by amortizing their value on the 61st day prior to
maturity if their original term to maturity when acquired by the Fund was more
than 60 days, unless this valuation is determined not to represent fair value by
the Trustees.
NAV is calculated separately for each class. As long as long as the Series
declare dividends daily, the NAV of the Class A, Class B, Class C and Class Z
shares will generally be the same. Series' dividends will differ by
approximately the amount any distribution and/or service fee expense accrual
differential among the classes.
TAXES, DIVIDENDS AND DISTRIBUTIONS
Each Series of the Fund has elected to qualify and intends to remain
qualified to be treated as a regulated investment company under Subchapter M of
the Internal Revenue Code. In general, such election relieves each Series (but
not its shareholders) from paying federal income tax on income which is
distributed to shareholders, and permits net capital gains of the Series (I.E.,
the excess of net capital gains from the sale of assets held for more than 12
months over net short-term capital losses) to be treated as long-term capital
gains of the shareholders, regardless of how long shares in the Series are held.
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 generally not subject to federal income tax (see
the discussion of the alternative minimum tax below). Distributions of taxable
net investment income (including market discount on municipal obligations) and
of the excess of net short-term capital gain over net long-term capital loss are
taxable to shareholders as ordinary income.
The federal alternative minimum tax may affect corporations and other
shareholders in the Fund. Interest on certain categories of tax-exempt
obligations (I.E., most private activity bonds issued after August 7, 1986) will
constitute a preference item for purposes of the alternative minimum tax. Each
Series has invested in such obligations and, therefore, receives interest
B-25
<PAGE>
that will be treated as a preference item. Preference items received by a Series
will be allocated between the Series and its shareholders. It is possible that a
Series will incur some liability under the alternative minimum tax to the extent
preference items are allocated to it. Corporate shareholders in any of the
Series will also have to take into account interest on all municipal obligations
for purposes of the adjustment for current earnings for alternative minimum tax
purposes.
The alternative minimum tax is a tax equal to 20% of a corporation's
so-called alternative minimum taxable income and 26% of a non-corporate
taxpayer's so-called alternative minimum taxable income up to $175,000 and 28%
of such income in excess of $175,000. Individual taxpayers may reduce their
alternative minimum taxable income by a standard exemption amount of $45,000
($33,750 if filing singly), although the exemption amount is reduced for
taxpayers with adjusted gross incomes of more than $150,000 ($112,500 if filing
singly). Alternative minimum taxable income is determined by adding to the
taxpayer's regularly-computed taxable income items of tax preference and certain
other adjustments. All shareholders should consult their tax advisers to
determine whether their investment in the Fund will cause them to incur
liability for the alternative minimum tax.
Qualification as a regulated investment company requires, among other
things, that (a) at least 90% of the annual gross income of each Series (without
reduction for losses from the sale or other disposition of securities) be
derived from interest, dividends, payments with respect to securities loans and
gains from the sale or other disposition of securities or options thereof or
foreign currencies, 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 securities or currencies; (b) each Series diversify its
holdings so that, at the end of each quarter of the taxable year, (i) at least
50% of the value of the assets of the Series is represented by cash, U.S.
Government securities and other securities limited in respect of any one issuer
to an amount not greater than 5% of the market value of the assets of the Series
and 10% of the outstanding voting securities of the 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) each Series
distribute to its shareholders at least 90% of each of (i) its net tax-exempt
interest income and (ii) its net investment income and net short-term gains
(I.E., the excess of net short-term capital gains over net long-term capital
losses) in each year.
Qualification as a regulated investment company will be determined at the
level of each Series and not at the level of the Fund. Accordingly, the
determination of whether any particular Series qualifies as a regulated
investment company will be based on the activities of that Series, including the
purchases and sales of securities and the income received and expenses incurred
in that Series. Net capital gains of a Series which are available for
distribution to shareholders will be computed by taking into account any capital
loss carryforward of the Series.
The High Income Series has a net capital loss carryforward as of April 30,
1998 of approximately $17,547,000 of which $2,024,000 expires in 2002,
$5,361,000 expires 2003, $6,383,000 expires in 2004, and $3,225,000 expires in
2005, and $554,000 expires in 2006. No capital gains distribution is expected to
be paid to shareholders until net gains have been realized in excess of the
aggregate of such amounts. In addition, the High Income Series elected to treat
net realized capital losses of approximately $6,709,700 incurred in the year
ended April 30, 1998, as having been incurred in the following year.
Each Series may purchase debt securities (such as zero coupon bonds) that
contain original issue discount. Original issue discount that accrues in a
taxable year is treated as income earned by the 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.
Special rules will apply to futures contracts and options thereon in which
the Series invest. See "Investment Objectives and Policies." These investments
will generally constitute "Section 1256 contracts" and will be required to be
"marked to market" for federal income tax purposes at the end of each Series'
taxable year; that is, treated as having been sold at market value. Sixty
percent of any gain or loss recognized on such "deemed sales" and on actual
dispositions will be treated as long-term capital gain or loss, and the
remainder will be treated as short-term capital gain or loss.
Distributions of net capital gains are taxable to shareholders as long-term
capital gains, regardless of the length of time the shares of the Series have
been held by the shareholders.
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 these capital gains as having been distributed to shareholders. As a
result, these amounts will be taxed to shareholders as capital gains, and
shareholders will be able to claim their proportionate share of the federal
income taxes paid by the Series on the gains as a credit against their own
federal income tax liabilities and will be entitled to increase the adjusted tax
basis of their shares in that Series by the difference between their PRO RATA
share of such gains and their tax credit.
B-26
<PAGE>
Distributions of taxable net investment income and net capital gains will be
taxable as described above, whether made in shares or in cash. 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 NAV of a share of the applicable Series of the Fund on the distribution
date.
Any loss realized on a sale, redemption or exchange of shares of the Fund by
a shareholder will be disallowed to the extent the shares are replaced within a
61-day period (beginning 30 days before the disposition of shares). Shares
purchased pursuant to the reinvestment of a dividend will constitute a
replacement of shares.
Any short-term capital loss realized upon the sale or redemption of shares
within six 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 tax-exempt
dividend. Any loss realized upon the redemption of shares within 6 months from
the date of purchase of the shares and following receipt of a capital gain
distribution from the sale of assets held more than 12 months will be treated as
long-term capital loss to the extent of the capital gain distribution.
Interest on indebtedness and other expenses incurred by shareholders to
purchase or carry shares of the Fund will generally not be deductible for
federal income tax purposes under Section 265 of the Internal Revenue Code. 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 are also 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 municipal obligations in the
portfolios of the 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 certain state and municipal obligations. It can be expected that
similar proposals may be introduced in the future. If such a proposal were
enacted, the availability of state or municipal obligations for investment by
each Series of the Fund and the value of portfolio securities held by the Series
would be affected. In addition, each Series of the Fund 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. In addition, each shareholder must disclose on
his or her return the amount of tax-exempt dividends received from the Fund.
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. Further, all
such distributions and proceeds from the redemption or exchange of shares may be
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. If the
withholding provisions are applicable, any such 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.
Each Series is required under the Internal Revenue Code to distribute 98% of
its ordinary income in the same calendar year in which it is earned. Each Series
is also required to distribute during the calendar year 98% of the capital gain
net income it earned during the twelve months ending on October 31 of such
calendar year. In addition, the Series must distribute during the calendar year
any undistributed ordinary income and undistributed capital gain net income from
the prior year or the 12 month period ending on October 31 of such prior
calendar year, respectively. To the extent it does not meet these distribution
requirements, a Series will be subject to a non-deductible 4% excise tax on the
undistributed amount. For purposes of this excise tax, income on which the
Series pays income tax is treated as distributed.
A shareholder who acquires shares of the Fund and sells or otherwise
disposes of such shares within 90 days of acquisition may not be allowed to
include certain sales charges incurred in acquiring such shares for purposes of
calculating gain or loss realized upon a sale or exchange of shares of the Fund.
Dividends of net investment income and distributions of net short-term
capital gains paid to a shareholder (including a shareholder acting as a nominee
or fiduciary) who is a nonresident alien individual, a foreign corporation or a
foreign partnership (foreign shareholder) are subject to a 30% (or lower treaty
rate) withholding tax upon the gross amount of the dividends unless the
B-27
<PAGE>
dividends are effectively connected with a U.S. trade or business conducted by
the foreign shareholder. Capital gain dividends paid to a foreign shareholder
are generally not subject to withholding tax. A foreign shareholder will,
however, be required to pay U.S. income tax on any dividends and capital gain
distributions which are effectively connected with a U.S. trade or business of
the foreign shareholder.
The per share dividends on Class B and Class C shares will be lower than the
per share dividends on Class A shares as a result of the higher
distribution-related fee applicable to the Class B and Class C shares. The per
share distributions of net capital gains, if any, will be paid in the same
amount for each Class of 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.
PERFORMANCE INFORMATION
YIELD. Each 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 a 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. Yield is calculated
according to the following formula:
a - b
YIELD = 2[( ------- +1)to the power of 6 - 1]
cd
Where: a = dividends and interest earned during the period.
b = expenses accrued for the period.
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.
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 yield for the 30 days ended April 30, 1998 was 4.82% (4.77% without the
management fee waiver), 4.52% and 3.31% for Class A shares of the High Income
Series, Insured Series and Intermediate Series, respectively. The yield for the
30 days ended April 30, 1998 was 4.57% (4.52% without the management fee
waiver), 4.25% and 3.01% for Class B shares of the High Income Series, Insured
Series and Intermediate Series, respectively. The yield for the 30 days ended
April 30, 1998 was 4.32% (4.27% without the management fee waiver), 4.00% and
2.76% for Class C shares of the High Income Series, Insured Series and
Intermediate Series, respectively. The yield for the 30 days ended April 30,
1998 was 5.08% (5.03% without the management fee waiver), 4.76% and 3.51% for
Class Z shares of the High Income Series, Insured Series and Intermediate
Series, respectively.
Each 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 Series will then determine what portion of that yield is
attributable to securities, the income of which is exempt for federal income tax
purposes. This portion of the yield will then be divided by one minus 39.6% (the
assumed maximum tax rate for individual taxpayers not subject to alternative
minimum tax) and then added to the portion of the yield that is attributable to
other securities. For the 30 days ended April 30, 1998, the tax equivalent yield
for the Class A shares of the High Income Series, Insured Series and
Intermediate Series was 7.98% (7.90% without the management fee waiver), 7.48%
and 5.48%, respectively. For the 30 days ended April 30, 1998, the tax
equivalent yield for the Class B shares of the High Income Series, Insured
Series and Intermediate Series was 7.57% (7.48% without the management fee
waiver), 7.04% and 4.98%, respectively. For the 30 days ended April 30, 1998,
the tax equivalent yield for the Class C shares of the High Income Series,
Insured Series and Intermediate Series was 7.15% (7.07% without the management
fee waiver), 6.62% and 4.57%, respectively. For the 30 days ended April 30,
1998, the tax equivalent yield for the Class Z shares of the High Income Series,
Insured Series and Intermediate Series was 8.41% (8.33% without the management
fee waiver), 7.88% and 5.81%, respectively.
The following chart shows the tax-equivalent yield of an investment at
varying rates:
<TABLE>
<CAPTION>
A TAX-EXEMPT YIELD OF:
<S> <C> <C> <C> <C> <C> <C> <C>
3.5% 4.0% 4.5% 5.0% 5.5% 6% 6.5%
<CAPTION>
FEDERAL
TAX RATE IS EQUIVALENT TO A TAXABLE RATE OF:
<S> <C> <C> <C> <C> <C> <C> <C>
28 % 4.86% 5.56% 6.25% 6.94% 7.64% 8.33% 9.03%
31 % 5.07% 5.80% 6.52% 7.25% 7.97% 8.70% 9.42%
39.6% 5.79% 6.62% 7.45% 8.28% 9.11% 9.93% 10.76%
</TABLE>
B-28
<PAGE>
Income earned on this portfolio could be subject to the federal alternative
minimum tax. The above information is for illustrative purposes only and is not
intended to imply actual performance.
AVERAGE ANNUAL TOTAL RETURN. Each Series may from time to time advertise its
average annual total return. Average annual total return is determined
separately for Class A, Class B, Class C and Class Z shares. See "How the Fund
Calculates Performance" in the Prospectus.
Average annual total return is computed according to the following formula:
P(1+T) to the power of n = ERV
Where: P = a hypothetical initial payment of $1000.
T = average annual total return.
n = number of years.
ERV = Ending Redeemable Value at the end of the 1, 5 or 10 year periods
(or fractional portion thereof) of a hypothetical $1000 payment
made at the beginning of the 1, 5 or 10 year periods.
Average annual total return takes into account any applicable initial or
contingent deferred sales charges but does not take into account any federal or
state income taxes that may be payable upon redemption.
The average annual total return and subsidy/waiver adjusted average annual
total return from the inception of the Class A shares (January 22, 1990) and for
the one year and five year periods ended April 30, 1998 were as follows:
<TABLE>
<CAPTION>
SUBSIDY/WAIVER
ADJUSTED
------------------------------------
FIVE YEARS FIVE YEARS
ENDED YEAR ENDED ENDED YEAR ENDED
FROM APRIL 30, APRIL 30, FROM APRIL 30, APRIL 30,
SERIES INCEPTION 1998 1998 INCEPTION 1998 1998
- ---------------------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
High Income Series 7.5% 6.4% 7.5% 7.4% 6.3% 7.5%
Insured Series 6.9% 5.1% 5.4% 6.9% 5.0% 5.4%
Intermediate Series 6.1% 4.2% 3.6% 6.0% 4.2% 3.6%
</TABLE>
The average annual total return and subsidy/waiver adjusted average annual
total return of the Class B shares for the one, five and ten year periods ended
April 30, 1998 were as follows:
<TABLE>
<CAPTION>
SUBSIDY/WAIVER
ADJUSTED
------------------------------------
TEN YEARS FIVE YEARS TEN YEARS FIVE YEARS
ENDED ENDED YEAR ENDED ENDED ENDED YEAR ENDED
APRIL 30, APRIL 30, APRIL 30, APRIL 30, APRIL 30, APRIL 30,
SERIES 1998 1998 1998 1998 1998 1998
- ---------------------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
High Income Series 8.2% 6.4% 5.4% 8.1% 6.4% 5.4%
Insured Series 7.4% 5.1% 3.2% 7.3% 5.1% 3.2%
Intermediate Series 6.4% 4.3% 1.3% 6.0% 4.2% 1.3%
</TABLE>
The average annual total return and subsidy/waiver adjusted average annual
total return from inception of the Class C shares (August 1, 1994) and for the
one year ended April 30, 1998 were as follows:
<TABLE>
<CAPTION>
SUBSIDY/WAIVER
ADJUSTED
YEAR -----------------------
ENDED YEAR ENDED
FROM APRIL 30, FROM APRIL 30,
SERIES INCEPTION 1998 INCEPTION 1998
- ---------------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
High Income Series 7.3% 9.1% 7.3% 9.1%
Insured Series 6.1% 7.0% 6.1% 7.0%
Intermediate Series 4.6% 5.1% 4.5% 5.1%
</TABLE>
B-29
<PAGE>
The average annual total return and subsidy/waiver adjusted average annual
total return from inception of the Class Z shares (September 16, 1996) and for
the one year ended April 30, 1998 were as follows:
<TABLE>
<CAPTION>
SUBSIDY/WAIVER
ADJUSTED
YEAR -----------------------
ENDED YEAR ENDED
FROM APRIL 30, FROM APRIL 30,
SERIES INCEPTION 1998 INCEPTION 1998
- ---------------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
High Income Series 9.5% 10.9% 9.4% 10.9%
Insured Series 7.1% 8.7% 7.1% 8.7%
Intermediate Series 5.8% 6.9% 5.7% 6.9%
</TABLE>
AGGREGATE TOTAL RETURN. Each Series may also advertise its aggregate total
return. Aggregate annual total return is determined separately for Class A,
Class B, Class C and Class Z shares. See "How the Fund Calculates Performance"
in the Prospectus.
Aggregate total return represents the cumulative change in the value of an
investment in a 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 charge.
The aggregate total return and subsidy/waiver adjusted aggregate total
return from the inception of the Class A shares (January 22, 1990) and for the
one year and five year periods ended April 30, 1998 were as follows:
<TABLE>
<CAPTION>
SUBSIDY/WAIVER
ADJUSTED
------------------------------------
FIVE YEARS FIVE YEARS
ENDED YEAR ENDED ENDED YEAR ENDED
FROM APRIL 30, APRIL 30, FROM APRIL 30, APRIL 30,
SERIES INCEPTION 1998 1998 INCEPTION 1998 1998
- ---------------------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
High Income Series 87.3% 40.3% 10.8% 86.6% 40.1% 10.8%
Insured Series 79.3% 31.9% 8.7% 78.3% 31.7% 8.7%
Intermediate Series 68.5% 26.9% 6.8% 66.5% 26.7% 6.8%
</TABLE>
The aggregate total return and subsidy/waiver adjusted aggregate total
return of the Class B shares for the one, five and ten year periods ended April
30, 1998 were as follows:
<TABLE>
<CAPTION>
SUBSIDY/WAIVER
ADJUSTED
------------------------------------
TEN YEARS FIVE YEARS TEN YEARS FIVE YEARS
ENDED ENDED YEAR ENDED ENDED ENDED YEAR ENDED
APRIL 30, APRIL 30, APRIL 30, APRIL 30, APRIL 30, APRIL 30,
SERIES 1998 1998 1998 1998 1998 1998
- ---------------------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
High Income Series 118.9% 37.5% 10.4% 117.3% 37.4% 10.4%
Insured Series 104.9% 29.4% 8.2% 102.2% 29.2% 8.2%
Intermediate Series 85.9% 24.3% 6.3% 79.3% 24.0% 6.3%
</TABLE>
B-30
<PAGE>
The aggregate total return and subsidy/waiver adjusted aggregate total
return from inception of the Class C shares (August 1, 1994) and for the one
year period ended April 30, 1998 were as follows:
<TABLE>
<CAPTION>
SUBSIDY/WAIVER
ADJUSTED
-----------------------
YEAR ENDED YEAR ENDED
FROM APRIL 30, FROM APRIL 30,
SERIES INCEPTION 1998 INCEPTION 1998
- ---------------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
High Income Series 30.1% 10.1% 30.0% 10.1%
Insured Series 24.8% 8.0% 24.6% 8.0%
Intermediate Series 18.3% 6.1% 18.0% 6.1%
</TABLE>
The aggregate total return and subsidy/waiver adjusted aggregate total
return from inception of the Class Z shares (September 16, 1996) and for the one
year ended April 30, 1998 were as follows:
<TABLE>
<CAPTION>
SUBSIDY/WAIVER
ADJUSTED
-----------------------
YEAR ENDED YEAR ENDED
FROM APRIL 30, FROM APRIL 30,
SERIES INCEPTION 1998 INCEPTION 1998
- ---------------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
High Income Series 15.7% 10.9% 15.6% 10.9%
Insured Series 11.8% 8.7% 11.7% 8.7%
Intermediate Series 9.5% 6.9% 9.4% 6.9%
</TABLE>
From time to time, the performance of the Series may be measured against
various indices. Set forth below is a chart which compares the performance of
different types of investments over the long-term and the rate of inflation.(1)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
A LOOK AT PERFORMANCE
OVER THE LONG-TERM
AVERAGE ANNUAL
RETURNS
1/1/26-12/31/97
<S> <C> <C> <C>
Long-Term
Common Stocks Govt. Bonds Inflation
11.0% 5.2% 3.1%
</TABLE>
- ------------------------
(1)Source: Ibbotson Associates, "Stocks, Bonds, Bills and Inflation--1997
Yearbook" (annually updates the work of Roger G. Ibbotson and Rex A.
Sinquefield). Used with permission. All rights reserved. Common stock
returns are based on the Standard & Poor's 500 Stock Index, a
market-weighted, unmanaged index of 500 common stocks in a variety of
industry sectors. It is a commonly used indicator of broad stock
price movements. This chart is for illustrative purposes only, and is
not intended to represent the performance of any particular
investment or fund. Investors cannot invest directly in an index.
Past performance is not a guarantee of future results.
ORGANIZATION AND CAPITALIZATION
The Fund is a Massachusetts business trust established under a Declaration
of Trust dated November 3, 1986. 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 the two
forms relates to shareholder liability. Under Massachusetts law, shareholders of
a business trust may, in certain circumstances, be held personally liable as
partners for the obligations of the
B-31
<PAGE>
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.
Massachusetts counsel for the Fund has advised the Fund that no personal
liability with respect to contract obligations will attach to the shareholders
under any undertaking containing such a provision when adequate notice of the
provision is given, except possibly in a few jurisdictions. With respect to all
types of claims in the latter jurisdictions and with respect to tort claims,
contract claims where the provision referred to is omitted from the undertaking,
claims for taxes and certain statutory liabilities, shareholders may be held
personally liable to the extent that claims are not satisfied by the Fund.
However, upon payment of any such liability, shareholders will be entitled to
reimbursement from the general assets of the appropriate Series of the Fund. The
Trustees intend to conduct the operations of the Fund in such a way so as to
avoid, to the extent possible, ultimate liability of the shareholders for
liabilities of the Fund.
The Declaration of Trust further provides that no Trustee, officer, employee
or agent of the Fund is liable to the Fund or to a shareholder, nor is any
Trustee, officer, employee or agent liable to any third persons in connection
with the affairs of the Fund, except as this liability may arise from his or her
own bad faith, willful misfeasance, gross negligence, or reckless disregard of
his or her duties. It also provides that all third parties shall look solely to
the Fund property or the property of the appropriate Series of the Fund for
satisfaction of claims arising in connection with the affairs of the Fund or of
the particular Series of the Fund, respectively. With the exceptions stated, the
Declaration of Trust permits the Trustees to provide for the indemnification of
Trustees, officers, employees or agents of the Fund against all liability in
connection with the affairs of the Fund.
The Fund does not intend to issue share certificates or hold annual meetings
of shareholders.
The Fund and all Series thereof shall continue without limitation of time
subject to the provisions in the Declaration of Trust concerning termination by
action of the shareholders or by the Trustees by written notice to the
shareholders.
The authorized capital of the Fund consists of an unlimited number of shares
of beneficial interest, $.01 par value, issued in three classes in separate
Series. Each Series of the Fund, for federal income tax and Massachusetts state
law purposes, will constitute a separate trust which will be governed by the
provisions of the Declaration of Trust. All shares of any Series issued and
outstanding will be fully paid and non-assessable by the Fund. Each share of
each Series represents an equal proportionate interest in that Series with each
other share of that Series. The assets of the Fund received for the issue or
sale of the shares of each Series and all income, earnings, profits and proceeds
thereof, subject only to the rights of creditors of that Series, are specially
allocated to the Series and constitute the underlying assets of the Series. The
underlying assets of each Series are segregated on the books of account and are
to be charged with the liabilities in respect to the Series and with a share of
the general liabilities of the Fund. Under no circumstances would the assets of
a Series be used to meet liabilities that are not otherwise properly chargeable
to it. Expenses with respect to any two or more Series are to be allocated in
proportion to the asset value of the respective Series except where allocations
of direct expenses can otherwise be fairly made. The officers of the Fund,
subject to the general supervision of the Trustees, have the power to determine
which liabilities are allocable to a given Series or which are general or
allocable to two or more Series. Upon redemption of shares of a Series of the
Fund, the shareholder will receive proceeds solely of the assets of such Series.
In the event of the dissolution or liquidation of the Fund, the holders of the
shares of any Series are entitled to receive as a class the underlying assets of
that Series available for distribution to shareholders.
Shares of the Fund entitle their holders to one vote per share. Matters will
be acted upon by the vote of the shareholders of each class of each Series
separately, except to the extent otherwise provided in the Investment Company
Act. A change in the investment objective or investment restrictions for a
Series would be voted upon only by shareholders of the Series involved. In
addition, approval of any investment advisory agreement is a matter to be
determined separately by each Series. Approval by the shareholders of one Series
is effective as to that Series whether or not enough votes are received from the
shareholders of the other Series to approve the proposal as to those Series.
Pursuant to the Declaration of Trust, the Trustees may authorize the
creation of additional series of shares (the proceeds of which would be invested
in separate, independently managed portfolios with distinct investment
objectives and policies and share purchase, redemption and net asset valuation
procedures) with such preferences, privileges, limitations and voting and
dividend rights as the Trustees may determine. All consideration received by the
Fund for shares of any additional series, and all assets in which such
consideration is invested, would belong to that series (subject only to the
rights of creditors of such series) and would be subject to the liabilities
related thereto.
Pursuant to the Investment Company Act, shareholders of any additional
series of shares would normally have to approve the adoption of any advisory
contract relating to such series and of any changes in the investment objective
or investment restrictions related thereto. The Trustees have the power to alter
the number and the terms of office of the Trustees, and they may at any time
B-32
<PAGE>
lengthen their own terms or make their terms of unlimited duration and appoint
their own successors, provided that always at least a majority of the Trustees
have been elected by the shareholders of the Fund. The voting rights of
shareholders are not cumulative, so that holders of more than 50 percent of the
shares voting can, if they choose, elect all Trustees being selected, while the
holders of the remaining shares would be unable to elect any Trustees.
CUSTODIAN, TRANSFER AND DIVIDEND DISBURSING AGENT
AND INDEPENDENT ACCOUNTANTS
State Street Bank and Trust Company, One Heritage Drive, North Quincy,
Massachusetts 02171, serves as Custodian for the Fund's portfolio securities and
cash and in that capacity maintains certain financial and accounting books and
records pursuant to an agreement with the Fund. See "How the Fund is
Managed--Custodian and Transfer and Dividend Disbursing Agent" in the
Prospectus.
Prudential Mutual Fund Services LLC (PMFS), Raritan Plaza One, Edison, New
Jersey 08837, serves as Transfer and Dividend Disbursing Agent. It is a
wholly-owned subsidiary of PIFM. PMFS provides customary transfer agency
services to the Fund, including the handling of shareholder communications, the
processing of shareholder transactions, the maintenance of shareholder account
records, payment of dividends and distributions and related functions. For these
services, PMFS receives an annual fee of $13.00 per shareholder account, a new
account set-up fee of $2.00 for each manually established account and a monthly
inactive zero balance account fee of $20.00 per shareholder account. PMFS is
also reimbursed for its out-of-pocket expenses, including but not limited to
postage, stationery, printing, allocable communications expenses and other
costs. For the fiscal year ended April 30, 1998, the Fund incurred fees of
approximately $609,100 ($361,000-High Income Series, $221,700-Insured Series and
$26,400-Intermediate Series) for the services of PMFS.
Price Waterhouse LLP, 1177 Avenue of the Americas, New York, New York 10036,
serves as the Fund's independent accountants and in that capacity audits the
Fund's annual financial statements.
B-33
<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
Portfolio of Investments as of April 30, 1998 HIGH YIELD SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------------
LONG-TERM INVESTMENTS--98.0%
- ---------------------------------------------------------------------------------------------------------------------------------
Arizona--1.8%
Coconino Cnty. Pol. Ctrl. Corp. Rev.
Tucson Elec. Pwr., Navajo A B2 7.125% 10/01/32 $ 5,000 $ 5,706,500
Tucson Elec. Pwr., Navajo B B2 7.00 10/01/32 1,700 1,934,175
Pima Cnty. Ind. Dev. Auth.,
Multifam. Mtge. Rev., La Cholla Proj. NR 8.50 7/01/20 9,680 10,103,694
Tuscon Elec. Pwr. Co., Ser. A B2 6.10 9/01/25 2,000 2,044,000
--------------
19,788,369
- ---------------------------------------------------------------------------------------------------------------------------------
Arkansas--0.7%
Northwest Arkansas Reg'l. Arpt. Auth. Rev. NR 7.625 2/01/27 7,000 8,012,130
- ---------------------------------------------------------------------------------------------------------------------------------
California--10.4%
Abag Fin. Auth. For Nonprofit Corps. Ref. Amer. Baptist
Homes., Ser. A BBB(b) 6.20 10/01/27 3,200 3,353,312
California Hsg. Fin. Agcy. Rev., Home Mtge., Ser. G Aa 8.15 8/01/19 795 813,841
Corona Ctfs. of Part., Vista Hosp. Sys. Inc., Ser. C NR 8.375 7/01/11 10,000 11,161,600
Delano Ctfs. of Part., Reg'l. Med. Ctr., Ser. A NR 9.25 1/01/22 6,710 7,811,245
Folsom Spec. Tax Dist. No. 2 NR 7.70 12/01/19 3,130(c) 3,369,351
Long Beach Harbor Rev. Ref., Ser. A, F.G.I.C. Aaa 6.00 5/15/19 4,000 4,379,280
Long Beach Redev. Agcy. Hsg.,
Multifam. Hsg. Rev., Pacific Court Apts. NR 6.95 9/01/23 6,195(e) 3,407,250
Multifam. Hsg. Rev., Pacific Court Apts., Issue B NR 6.80 9/01/13 3,805(e) 2,092,750
Los Angeles Regl. Arpts. Impvt. Corp., Cont. Air
Sublease NR 9.25 8/01/24 10,270 12,303,357
Orange Cnty. Cmnty. Loc. Trans. Auth., Reg. Linked
Savrs. & Ribs Aa3 6.20 2/14/11 7,000 7,862,330
Richmond Redev. Agcy. Rev., Multifam. Bridge Affordable
Hsg. NR 7.50 9/01/23 10,000 10,041,400
Roseville Joint Union H.S. Dist.,
Ser. B, F.G.I.C. Aaa Zero 8/01/09 1,740 1,010,296
Ser. B, F.G.I.C. Aaa Zero 8/01/11 1,890 970,893
Ser. B, F.G.I.C. Aaa Zero 8/01/14 2,220 948,695
Sacramento City Fin. Auth. Rev., Tax Alloc., M.B.I.A. Aaa Zero 11/01/15 5,695 2,256,473
Sacramento Cnty. Spec. Tax Rev., Dist. No. 1 NR 8.25 12/01/20 4,500(c) 5,025,735
San Joaquin Hills Trans. Corr. Agcy.,
Toll Rd. Rev. Aaa Zero 1/01/14 8,420 3,801,462
Toll Rd. Rev. Aaa Zero 1/01/25 10,000 2,497,500
San Luis Obispo Ctfs. of part., Vista Hosp. Sys., Inc. NR 8.375 7/01/29 4,000 4,381,000
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-34
<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
Portfolio of Investments as of April 30, 1998 HIGH YIELD SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------------
California (cont'd.)
Santa Margarita/Dana Point Auth., Impvt. Dist.,
Ser. A, M.B.I.A. Aaa 7.25% 8/01/13 $ 1,990(i) $ 2,468,515
Ser. B, M.B.I.A. Aaa 7.25 8/01/12 3,000(i) 3,692,280
So. California Pub. Pwr. Auth. Trans., Cap. Apprec. Aa3 Zero 7/01/14 8,500 3,619,640
So. San Francisco Redev. Agcy., Tax Alloc., Gateway
Redev. Proj. NR 7.60 9/01/18 2,375 2,579,345
So. Tahoe Joint Pwrs. Fin. NR 8.00 10/01/01 5,795 5,883,548
Turlock Irrigation Dist. Rev., Ser. A, M.B.I.A. Aaa 6.25 1/01/12 5,000 5,639,700
Victor Valley Union H.S. Dist.,+
Gen. Oblig., M.B.I.A. Aaa Zero 9/01/12 3,605 1,729,391
Gen. Oblig., M.B.I.A. Aaa Zero 9/01/14 4,740 2,016,775
Gen. Oblig., M.B.I.A. Aaa Zero 9/01/16 3,990 1,504,629
--------------
116,621,593
- ---------------------------------------------------------------------------------------------------------------------------------
Colorado--3.0%
Denver Urban Ren. Auth. Tax,
Inc. Rev. NR 7.50 9/01/04 3,000 3,201,600
Inc. Rev. NR 7.75 9/01/16 4,000 4,423,080
Eagle Cnty. Co., Lake Creek Affordable Hsg., Ser. A NR 8.00 12/01/23 11,395 11,947,886
San Miguel Cnty., Mountain Vlge. Met. Dist. NR 8.10 12/01/11 3,200(c) 3,691,923
Superior Met. Dist. No. 1, Wtr. & Swr.,
Rev. NR 7.50 12/01/98 855 867,158
Rev. NR 8.50 12/01/13 8,900 9,951,357
--------------
34,083,004
- ---------------------------------------------------------------------------------------------------------------------------------
Connecticut--1.0%
Connecticut St. Dev. Auth. Mystic Marinelife Aquarium
Proj. Rev. NR 7.00 12/01/27 1,500 1,593,825
Connecticut St. Dev. Auth. Swr., Netco Waterbury Ltd. NR 9.375 6/01/16 8,000 9,350,720
--------------
10,944,545
- ---------------------------------------------------------------------------------------------------------------------------------
District of Columbia--1.6%
Dist. of Columbia Rev., Nat'l. Public Radio NR 7.625 1/01/18 8,800 9,610,832
Dist. of Columbia, Ser. A Ba1 5.25 6/01/27 9,000 8,463,960
--------------
18,074,792
- ---------------------------------------------------------------------------------------------------------------------------------
Florida--4.2%
Crossings At Fleming Island Cmnty. Dev. Dist., Clay City NR 8.25 5/01/16 7,860 8,649,301
Escambia Cnty. Hlth. Facs. Auth. Rev., Baptist Hosp.
Ref., Ser. A BBB+(b) 8.60 10/01/02 3,375 3,499,031
Florida Hsg. Fin. Agcy., Palm Aire Proj., Multifam.
Mtge. Rev. NR 10.00 1/01/20 9,448(e) 7,464,403
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-35
<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
Portfolio of Investments as of April 30, 1998 HIGH YIELD SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------------
Florida (cont'd.)
No. Springs Impvt. Dist. Wtr. Mgt.,
Ser. A NR 8.20% 5/01/24 $ 1,960 $ 2,159,704
Ser. A NR 8.30 5/01/24 1,720 1,904,900
Northern Palm Beach Cnty. Impt. Ref., Wtr. Ctl. & Impt.
Unit Dev. NR 6.00 8/01/10 3,250 3,216,363
Orlando Util. Comm., Wtr. & Elec. Rev., Ser. D Aa2 6.75 10/01/17 2,000 2,398,060
Palm Beach Cnty. Hsg. Auth., Banyan Club Apts. NR 7.75 3/01/23 4,470 4,812,044
Sarasota Hlth. Facs., Kobernick Hsg. Meadow Park Proj. Aaa 10.00 7/01/22 6,855(c) 8,335,132
Seminole Cnty. Ind. Dev. Auth. Rev., Fern Park NR 9.25 4/01/12 4,335 4,361,487
--------------
46,800,425
- ---------------------------------------------------------------------------------------------------------------------------------
Georgia--3.2%
Atlanta Arpt. Facs. Rev., M.B.I.A. Aaa Zero 1/01/10 2,000 1,061,840
Atlanta Urban Res. Fin. Auth., Clark Atlanta Univ. Dorm.
Proj. NR 9.25 6/01/10 4,440(c) 4,947,758
Effingham Cnty. Dev. Auth., Ft. Howard Corp. Baa3 7.90 10/01/05 10,000 10,676,900
Fulton Cnty. Wtr. & Swr. Rev., F.G.I.C. Aaa 6.375 1/01/14 6,000(i) 6,874,260
Henry Cnty. Wtr. & Swg. Auth. Rev., A.M.B.A.C. Aaa 6.15 2/01/20 3,000 3,393,330
Rockdale Cnty. Dev. Auth., Solid Wste. Disp. Rev. NR 7.50 1/01/26 8,100 8,769,951
--------------
35,724,039
- ---------------------------------------------------------------------------------------------------------------------------------
Hawaii--1.1%
Hawaii Cnty. Impvt. Dist. No. 17 NR 9.50 8/01/11 6,565 7,093,614
Hawaii St. Dept. Trans. Spl. Fac. Rev., Continental
Airlines, Inc. Ba2 5.625 11/15/27 5,225 5,127,449
--------------
12,221,063
- ---------------------------------------------------------------------------------------------------------------------------------
Illinois--9.3%
Chicago Brd. Edl., Lease Ctfs., Ser. A, M.B.I.A. Aaa 6.00 1/01/20 10,000 11,045,600
Chicago O'Hare Int'l. Arpt.,
Amer. Airlines Proj., Ser. B Baa2 8.20 12/01/24 1,000 1,204,930
United Airlines, Ser. B Baa2 8.45 5/01/07 6,000 6,519,000
United Airlines, Ser. B Baa2 8.50 5/01/18 6,500 7,059,260
United Airlines, Ser. B Baa2 8.85 5/01/18 2,700 3,026,943
United Airlines, Ser. B Baa2 8.95 5/01/18 2,320 2,603,388
Chicago Pub. Bldg. Comm. Rev., Ser. A, M.B.I.A. Aaa 7.00 1/01/20 6,530(i) 8,115,484
Hennepin Ind. Dev. Rev., Exolon-Esk Co. Proj. NR 8.875 1/01/18 8,000 8,996,400
Illinois Reg'l. Trans. Auth. Ref., F.G.I.C. Aaa 6.00 6/01/14 3,530 3,892,037
Illinois St. Hlth. Facs. Auth. Rev.,
Adventist Living Ctr. NR 11.00 12/01/15 2,245(e) 202,009
Beacon Hill Proj., Ser. A NR 9.00 8/15/19 7,135 7,531,064
Midwest Physician Group Ltd. Proj. BBB-(b) 8.10 11/15/14 3,075 3,726,531
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-36
<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
Portfolio of Investments as of April 30, 1998 HIGH YIELD SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------------
Illinois (cont'd.)
Midwest Physician Group Ltd. Proj. BBB-(b) 5.50% 11/15/19 $ 2,000 $ 1,924,060
Midwest Physician Group Ltd. Proj. BBB-(b) 8.125 11/15/19 3,285 3,985,625
Illinois, Ser. K, A.M.B.A.C. Aaa 6.25 1/01/13 6,825 7,688,636
Kane And De Kalb Cntys. Sch.,
Dist. No. 301, Cap. Apprec. A.M.B.A.C. Aaa Zero 12/01/11 3,360 1,666,157
Dist. No. 301, Cap. Apprec. A.M.B.A.C. Aaa Zero 12/01/13 4,065 1,777,055
Vlge. of Robbins, Cook Cnty. Robbins Res. Rec. NR 8.375 10/15/16 18,000 18,670,500
Winnebago Cnty. Hsg. Auth., Park Tower Assoc., Sec. 8 NR 8.125 1/01/11 3,954 4,202,656
--------------
103,837,335
- ---------------------------------------------------------------------------------------------------------------------------------
Indiana--2.1%
Bluffton Econ. Dev. Rev., Kroger Co. Proj. Baa3 7.85 8/01/15 7,500 8,483,700
Indianapolis Int'l. Arpt. Auth. Rev., Federal Express
Corp. Proj. Baa2 7.10 1/15/17 6,000 6,708,660
Wabash Econ. Dev. Rev. Bonds, Connell Ltd. NR 8.50 11/24/17 7,250 8,032,130
--------------
23,224,490
- ---------------------------------------------------------------------------------------------------------------------------------
Iowa--2.6%
City of Cedar Rapids Rev.,
1st Mtge., Cottage Grove Place Proj. NR 9.00 7/01/18 9,375 11,076,469
1st Mtge., Cottage Grove Place Proj. NR 9.00 7/01/25 4,435 5,239,908
Iowa St. Fin. Auth., Hlth. Care Facs. Rev., Mercy Hlth.
Initiatives Proj. NR 9.25 7/01/25 10,000 13,348,100
--------------
29,664,477
- ---------------------------------------------------------------------------------------------------------------------------------
Kentucky--0.8%
Kentucky St. Tpke. Auth. Rev., F.G.I.C. Aaa Zero 1/01/10 8,250 4,646,895
Owensboro Elec. Lt. & Pwr. Rev.,
Ser. B, A.M.B.A.C. Aaa Zero 1/01/14 5,000(i) 2,209,650
Ser. B, A.M.B.A.C. Aaa Zero 1/01/16 6,650(i) 2,620,699
--------------
9,477,244
- ---------------------------------------------------------------------------------------------------------------------------------
Louisiana--3.1%
Hodge Util. Rev., Stone Container Corp. NR 9.00 3/01/10 7,000 7,560,350
New Orleans Home Mtge. Auth. Rev., Sngl. Fam. Mtge.,
Ser. A, G.N.M.A. Aaa 8.60 12/01/19 1,670(f) 1,721,970
New Orleans Ind. Dev. Rev. BBB(b) 8.75 10/01/19 3,600 4,224,276
New Orleans, Gen Oblig., Cap. Apprec., A.M.B.A.C. Aaa Zero 9/01/18 3,090 1,051,836
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-37
<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
Portfolio of Investments as of April 30, 1998 HIGH YIELD SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------------
Louisiana (cont'd.)
St. Charles Parish Poll. Ctrl. Rev.,
Pwr. & Lt. Co. Baa3 8.25% 6/01/14 $ 10,000 $ 10,659,000
Pwr. & Lt. Co., Ser. 1989 Baa3 8.00 12/01/14 3,500 3,774,015
West Feliciana Parish Poll. Ctrl. Rev., Gulf St. Util.
Co. Proj. NR 9.00 5/01/15 5,250 5,802,038
--------------
34,793,485
- ---------------------------------------------------------------------------------------------------------------------------------
Maryland--1.8%
Anne Arundel Cnty. 1st Mtge. Rev., Pleasant Living Conv. NR 8.50 7/01/13 3,230 3,503,807
Northeast Wste. Disp. Auth.,
Sludge Comp. Fac. NR 7.25 7/01/07 4,059 4,459,095
Sludge Comp. Fac. NR 8.50 7/01/07 3,095 3,378,100
Washington Sub. San. Dist.
Ref., Gen. Const. Aa1 6.00 6/01/18 3,705 4,115,885
Ref., Gen. Const. Aa1 6.00 6/01/19 3,940 4,372,927
--------------
19,829,814
- ---------------------------------------------------------------------------------------------------------------------------------
Massachusetts--4.7%
Boston Ind. Dev. Fin. Auth. Ind. Rev., 1st Mtge.
Springhouse Proj. NR 9.25 7/01/15 8,000 9,962,560
Mass. Bay Trans. Auth., Gen. Trans. Sys., Ser. A,
F.G.I.C. Aaa 7.00 3/01/21 7,500(i) 9,303,150
Mass. St. Coll. Bldg. Proj. and Ref. Bonds A1 7.50 5/01/14 1,750(i) 2,216,795
Mass. St. Hlth. & Edl. Facs. Auth. Rev.,
Cardinal Cushing Gen. Hosp. NR 8.875 7/01/18 7,500 7,967,250
St. Josephs Hosp., Ser. C NR 9.50 10/01/20 5,640(c) 6,176,815
Mass. St. Ind. Fin. Agcy. Cont. Res., Ser. A NR 9.50 2/01/00 1,100 1,133,616
Massachusetts St. Indl. Fin. Agcy. Rev.,
Ref., Chestnut Knoll Proj. A NR 5.50 2/15/18 1,250 1,224,650
Ref., Chestnut Knoll Proj. A NR 5.625 2/15/25 1,250 1,219,488
Glenmeadow Proj. NR 7.00 2/15/06 3,700 3,700,000
Massachusetts St. Wtr. Res. Auth., Ser. A, F.S.A. Aaa 5.50 8/01/14 3,250 3,417,960
Randolph Hsg. Auth., Multifam. Hsg., Liberty Place Proj.
A, Ser. A NR 9.00 12/01/21 5,885 5,965,448
--------------
52,287,732
- ---------------------------------------------------------------------------------------------------------------------------------
Michigan--4.6%
Grand Rapids Dev. Auth.
Cap. Apprec., M.B.I.A. Aaa Zero 6/01/10 3,000 1,647,690
Cap. Apprec., M.B.I.A. Aaa Zero 6/01/11 3,160 1,628,601
Cap. Apprec., M.B.I.A. Aaa Zero 6/01/12 3,000 1,449,720
Gratiot Cnty. Econ. Dev. Corp., Danley Die Proj. Connell
L.P. NR 7.625 4/01/07 3,200 3,480,160
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-38
<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
Portfolio of Investments as of April 30, 1998 HIGH YIELD SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------------
Michigan (cont'd.)
Holland Sch. Dist., Cap. Apprec., A.M.B.A.C. Aaa Zero 5/01/17 $ 2,950 $ 1,069,729
Lowell Area Sch., F.G.I.C. Aaa Zero 5/01/14 5,000 2,154,700
Michigan St. Hosp. Fin. Auth. Rev.,
Genesys Regl. Hosp. Baa2 5.50% 10/01/27 3,250 3,171,187
Saratoga Cmnty. Hosp. NR 8.75 6/01/10 6,345(c) 7,313,945
Michigan Strategic Fund, Great Lakes Pulp & Fiber Proj. NR 8.00 12/01/27 12,291 11,861,008
Michigan Strategic Fund, Solid Wste. Disp., Gennese Pwr.
Station NR 7.50 1/01/21 10,000 10,824,600
Wayne Cnty. Bldg. Auth., Ser. A Baa2 8.00 3/01/17 3,500(c) 3,994,830
West Ottawa Sch. Dist.,
F.G.I.C. Aaa Zero 5/01/15 4,825 1,956,489
F.G.I.C. Aaa Zero 5/01/18 3,000 1,029,300
--------------
51,581,959
- ---------------------------------------------------------------------------------------------------------------------------------
Minnesota--0.4%
Minneapolis St. Paul Hsg. Fin. Brd., Multifam. Mtge.
Rev., Riverside Plaza, G.N.M.A. AAA(b) 8.25 12/20/30 4,000 (i) 4,132,440
- ---------------------------------------------------------------------------------------------------------------------------------
Mississipi--1.6%
Claiborne Cnty. Poll. Ctrl. Rev.,
Mid. So. Engy. Sys. Ba1 9.875 12/01/14 6,100 6,448,066
Mid. So. Engy. Sys., Ser. A Ba1 9.50 12/01/13 10,350 10,918,422
--------------
17,366,488
- ---------------------------------------------------------------------------------------------------------------------------------
Missouri--2.0%
Sikeston Elec. Rev. Ref., M.B.I.A. Aaa 6.00 6/01/15 9,250 10,258,712
St. Louis Cnty. Ind. Dev. Auth. Rev.,
Soemm Proj. NR 10.25 7/01/08 1,560 1,565,257
Soemm Proj. NR 10.25 7/01/08 590 591,989
St. Louis Cnty. Reg. Conv. & Sports Comp., Ser. C Aaa 7.90 8/15/21 8,820(c) 10,262,335
--------------
22,678,293
- ---------------------------------------------------------------------------------------------------------------------------------
Nebraska--0.1%
Nebraska Invest. Fin. Auth., G.N.M.A., Sngl. Fam. Mtge.
Rev.,
Ser. I, M.B.I.A. Aaa 8.125 8/15/38 1,615(i) 1,656,942
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-39
<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
Portfolio of Investments as of April 30, 1998 HIGH YIELD SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------------
New Hampshire--1.7%
New Hampshire Higher Edl. & Hlth. Facs. Auth. Rev.,
Antioch College NR 7.875% 12/01/22 $ 5,335 $ 5,942,817
Havenwood/Heritage Heights NR 9.75 12/01/19 7,495(c) 8,372,964
New Hampshire St. Bus. Pollutn. Ref., Pub. Svc. Co. Ba3 6.00 5/01/21 5,000 5,004,700
--------------
19,320,481
- ---------------------------------------------------------------------------------------------------------------------------------
New Jersey--6.5%
New Jersey Econ. Dev. Corp. Rev., Ref. Newark Arpt.
Marriot Hotel NR 7.00 10/01/14 3,800 4,171,298
New Jersey Hlthcare Facs., Fin. Auth. Rev. NR 8.00 7/01/27 5,000 5,486,650
New Jersey St. Econ. Dev. Auth. Rev., 1st Mtge.,
Fellowship Vlge., Proj. A Aaa 9.25 1/01/25 11,500(c) 14,690,790
Leisure Park Proj., Ser. A NR 5.875 12/01/27 4,000 4,031,520
New Jersey St. Edl. Facs. Auth. Rev., Felician College
Of Lodi,
Ser. D NR 7.375 11/01/22 4,000 4,109,840
New Jersey St. Ref., Ser. E Aa1 6.00 7/15/10 10,000(i) 11,157,000
New Jersey St. Tpke. Auth. Rev., Ser. C, M.B.I.A. Aaa 6.50 1/01/16 11,000(i) 12,757,360
New Jersey St. Trans. Trust Fund Auth., Trans. Sys.,
M.B.I.A. Aaa 6.50 6/15/11 14,500(i) 16,786,650
--------------
73,191,108
- ---------------------------------------------------------------------------------------------------------------------------------
New Mexico--0.5%
Farmington Pollutn. Ctrl. Rev.,
Ref., Pub. Svc. Co., Ser. C Ba1 5.80 4/01/22 1,000 1,004,430
Ref., Pub. Svc. Co., Ser. A Ba1 5.80 4/01/22 1,500 1,527,090
Ref., Pub. Svc. Co., Ser. B Ba1 5.80 4/01/22 3,000 3,054,180
--------------
5,585,700
- ---------------------------------------------------------------------------------------------------------------------------------
New York--4.1%
Met. Trans. Auth. Facs. Rev., Ser. N, F.G.I.C. Aaa Zero 7/01/13 8,340(i) 3,827,977
New York City Ind. Dev. Agcy.,
Amer. Airlines Inc. Baa2 8.00 7/01/20 3,320 3,463,424
Bklyn. Navy Yard Cogen Partners Baa3 6.20 10/01/22 6,925 7,503,099
Bklyn. Navy Yard Cogen Partners Baa3 5.75 10/01/36 5,000 4,977,450
Mesorah Pub. Ltd. NR 10.25 3/01/19 1,861 1,974,837
Visy Paper Inc. Proj. NR 7.95 1/01/28 6,500 7,532,850
New York City, Ser. I A3 6.25 4/15/27 3,000 3,208,800
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-40
<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
Portfolio of Investments as of April 30, 1998 HIGH YIELD SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------------
New York (cont'd.)
New York St. Dorm. Auth. Rev.,
Colgate Univ., M.B.I.A. Aaa 6.00% 7/01/21 $ 3,350 $ 3,717,863
Memorial Sloan Kettering Cancer Ctr., M.B.I.A. Aaa 5.75 7/01/20 5,000 5,365,850
Port Auth. of New York & New Jersey, USAir, LaGuardia
Arpt. B3 9.125 12/01/15 4,000 4,480,480
--------------
46,052,630
- ---------------------------------------------------------------------------------------------------------------------------------
North Carolina--0.1%
North Carolina Med. Care Comm. Hosp. Rev., Ref. Annie
Penn Mem. Hosp. Baa3 5.375 1/01/22 1,000 973,160
- ---------------------------------------------------------------------------------------------------------------------------------
North Dakota--1.1%
Mercer Cnty., Antelope Valley Station, A.M.B.A.C Aaa 7.20 6/30/13 10,000(i) 12,115,000
- ---------------------------------------------------------------------------------------------------------------------------------
Ohio--4.4%
Cleveland Arpt. Spl. Rev., Ref. Continental Airlines,
Inc. Ba2 5.70 12/01/19 4,850(h) 4,740,778
Cleveland Pub. Pwr. Sys. Rev.,
1st Mtge., M.B.I.A. Aaa Zero 11/15/12 1,000 472,010
1st Mtge., M.B.I.A. Aaa Zero 11/15/13 1,500 667,320
1st Mtge., Ser. A, M.B.I.A. Aaa Zero 11/15/09 3,000 1,710,030
Dayton Spl. Facs. Rev., Ref. Emery Air Freight, Ser. A BBB(b) 5.625 2/01/18 3,500(h) 3,498,355
Mahoning Valley San. Dist. Wtr. Rev. NR 7.75 5/15/19 8,000 8,851,040
Montgomery Cnty. Hlthcare. Facs. Rev., Friendship Vlge.
Dayton, Proj. B NR 9.25 2/01/16 4,500(c) 4,965,660
Ohio St. Air Quality Dev. Auth. Ref., Amt. Coll. Poll.
Ctrl., Ser. A Ba1 6.10 8/01/20 3,000 3,103,380
Ohio St. Solid Wste. Rev.,
Cscltd. Proj. NR 8.50 8/01/22 5,000 5,267,600
Rep. Eng. Steels Inc. NR 9.00 6/01/21 2,250 2,408,287
Ohio St. Wtr. Dev. Auth. Poll. Ctrl. Facs., 1st Mtge.,
Toledo Edison Ba1 8.00 10/01/23 5,500 6,286,775
Stark Cnty. Hlthcare. Facs. Rev., Rose Lane Inc. Proj. NR 9.00 12/01/23 6,135 6,985,925
--------------
48,957,160
- ---------------------------------------------------------------------------------------------------------------------------------
Oklahoma--1.5%
Grand River Dam Auth. Rev., A.M.B.A.C. Aaa 6.25 6/01/11 12,000(i) 13,588,080
Tulsa Ind. Dev. Auth., Univ. Tulsa, Ser. A, M.B.I.A. Aaa 6.00 10/01/16 3,250(f) 3,567,817
--------------
17,155,897
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-41
<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
Portfolio of Investments as of April 30, 1998 HIGH YIELD SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------------
Pennsylvania--5.0%
Allegheny Cnty. Hosp. Rev., West Penn. Hosp. Hlth. Ctr. NR 8.50% 1/01/20 $ 2,800 $ 3,007,508
Berks Cnty. Mun. Auth. Rev.,
Adventist Living Ctrs. Proj. NR 11.00 12/01/15 367(e) 33,072
Alvernia Coll. Proj. NR 7.75 11/15/16 5,240 5,848,154
Dauphin Cnty. Gen. Auth. Hosp. Rev., NW Med. Ctr. Proj. BBB-(b) 8.625 10/15/13 6,570 7,854,961
Lancaster Cnty. Solid Wste. Mgmt., Res. Rec. Auth. Sys.
Rev., Ser. A Baa2 8.50 12/15/10 5,965(c) 6,116,272
Philadelphia Auth., Ind. Dev. Rev. NR 7.75 12/01/17 5,000 5,617,650
Philadelphia Hosps. & Higher Ed. Facs. Auth. Rev.,
Grad. Hlth. Sys. B2 7.00 7/01/05 2,500 2,619,175
Grad. Hlth. Sys. B2 7.25 7/01/18 2,710 2,869,185
Grad. Hlth. Sys., Ser. A B2 6.25 7/01/13 2,500 2,515,500
Philadelphia Wtr. & Wstewtr. Auth. Rev.,
M.B.I.A. Aaa 6.25 8/01/10 2,500 2,807,925
M.B.I.A. Aaa 6.25 8/01/12 3,000(i) 3,375,450
Somerset Cnty. Hosp. Auth. Rev.,
Hlthcare 1st Mtge. NR 8.40 6/01/09 2,305 2,587,316
Hlthcare 1st Mtge. NR 8.50 6/01/24 8,805 9,894,091
Wilkes Barre Gen. Mun. Auth. Coll. Rev., Misericordia
Coll., Ser. A NR 7.75 12/01/12 1,245 1,361,657
--------------
56,507,916
- ---------------------------------------------------------------------------------------------------------------------------------
Rhode Island--1.0%
Rhode Island Redev. Agcy., Ser. A NR 8.00 9/01/24 10,560 11,584,742
- ---------------------------------------------------------------------------------------------------------------------------------
South Carolina--0.4%
So. Carolina St. Hsg. Fin. & Dev. Auth., Homeownership
Mtge. Aa2 7.75 7/01/22 4,345(i) 4,573,982
- ---------------------------------------------------------------------------------------------------------------------------------
South Dakota--0.8%
Education Loans Inc. Student Loan Rev. A2 5.60 6/01/20 3,300 3,226,641
So. Dakota Econ. Dev. Fin. Auth., Dakota Park NR 10.25 1/01/19 4,930 5,258,387
--------------
8,485,028
- ---------------------------------------------------------------------------------------------------------------------------------
Tennessee--1.4%
Knox Cnty. Hlth. & Edl. Facs. Rev., Baptist Hlth. Hosp. Aaa 8.50 4/15/04 5,225(c) 5,549,890
Met. Gov't. Nashville & Davidson Cnty. H&E Facs. Brd.
Rev., Ref.
Blakeford Green Hills NR 5.65 7/01/24 1,500 1,464,825
Rutherford Cnty. Hlth. & Edl. Facs., Brd. 1st Mtge. Rev. NR 9.50 12/01/19 7,300 8,525,451
--------------
15,540,166
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-42
<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
Portfolio of Investments as of April 30, 1998 HIGH YIELD SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------------
Texas--3.4%
Beaumont Hsg. Fin. Corp., Sngl. Fam. Mtge. Rev. A1 9.20% 3/01/12 $ 1,380 $ 1,545,434
Houston Arpt. Sys. Rev. Ba2 6.125 7/15/27 3,200 3,333,280
Houston Wtr. & Swr. Sys. Rev., Ser. C, A.M.B.A.C. Aaa Zero 12/01/10 5,000 2,659,250
Keller Ind. Sch. Dist., Cap. Apprec. Ref., Ser. A,
P.S.F.G. Aaa Zero 8/15/17 4,075 1,441,491
New Braunfels Ind. Sch. Dist.,
Cap. Apprec., P.S.F.G. Aaa Zero 2/01/08 2,365 1,472,189
Cap. Apprec., P.S.F.G. Aaa Zero 2/01/09 2,365 1,392,086
Cap. Apprec., P.S.F.G. Aaa Zero 2/01/12 2,365 1,154,948
Nueces Riv. Auth., Ref. Asarco Inc. Proj. Baa2 5.60 1/01/27 2,500 2,499,775
Round Rock Ind. Sch. Dist., Gen. Oblig., M.B.I.A. Aaa Zero 8/15/11 4,385 2,222,099
San Antonio Elec. & Gas Rev.,
F.G.I.C. Aaa Zero 2/01/09 5,000 2,943,100
F.G.I.C., Ser. B Aaa Zero 2/01/12 7,500 3,662,625
Tarrant Cnty. Hlth. Facs. Dev. Corp. Rev., Foundation
Proj. NR 10.25 9/01/19 5,000 5,319,550
Texas Mun. Pwr. Agcy. Rev., M.B.I.A. Aaa Zero 9/01/15 16,300 6,438,989
Tyler Tex. Hlth. Facs. Dev. Corp., Mother Frances Hosp.,
Ser. A Baa2 5.625 7/01/13 1,680 1,682,318
--------------
37,767,134
- ---------------------------------------------------------------------------------------------------------------------------------
Utah--0.5%
Carbon Cnty. Solid Wste. Disp. Rev. Ref., Laidlaw
Environmental, Ser. A NR 7.45 7/01/17 1,500 1,642,950
Tooele Cnty Poll. Ctrl. Rev. Ref., Laidlaw
Environmental, Ser. A NR 7.55 7/01/27 4,000 4,404,360
--------------
6,047,310
- ---------------------------------------------------------------------------------------------------------------------------------
Virginia--1.6%
Loudoun Cnty. Ind. Dev. Auth., Rev. NR 7.125 9/01/15 2,000 2,209,680
Norfolk Redev. & Hsg. Auth., Multifam. Rental Hsg. Fac.
Rev. NR 8.00 9/01/26 6,000 6,126,840
Pittsylvania Cnty. Ind. Dev. Auth. Rev. Multitrade NR 7.55 1/01/19 9,000 9,902,340
--------------
18,238,860
- ---------------------------------------------------------------------------------------------------------------------------------
Washington--2.5%
Bellevue Conv. Ctr. Auth.,
King City, Oblig. Rev., M.B.I.A. Aaa Zero 2/01/10 870 482,467
King City, Oblig. Rev., M.B.I.A. Aaa Zero 2/01/11 1,200 625,092
King City, Oblig. Rev., M.B.I.A. Aaa Zero 2/01/12 1,300 634,855
King City, Oblig. Rev., M.B.I.A. Aaa Zero 2/01/14 1,385 600,135
Chelan Cnty. Pub. Util., Dist. No. 1, Columbia River
Rock, Hydro Elec. Sys. Rev., M.B.I.A. Aaa Zero 6/01/15 7,585 3,036,655
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-43
<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
Portfolio of Investments as of April 30, 1998 HIGH YIELD SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------------
Washington (cont'd.)
Thurston Cnty. Sch. Dist. 333,
F.G.I.C. Aaa Zero 12/01/12 $ 6,830 $ 3,193,640
F.G.I.C., Ser. B Aaa Zero 12/01/11 6,415 3,202,175
Washington St. Ref., Ser. R, 97A Aa1 Zero 7/01/16 7,000 2,639,770
Washington St. Pub. Pwr. Supply Sys. Rev.,
Nuclear Proj. No. 1, Ser. B Aa1 7.25% 7/01/09 5,000(i) 5,897,400
Nuclear Proj. No. 3, M.B.I.A. Aaa Zero 7/01/17 5,000 1,747,450
Nuclear Proj. No. 3, Ser. B, M.B.I.A. Aaa 7.125 7/01/16 5,000 6,074,800
--------------
28,134,439
- ---------------------------------------------------------------------------------------------------------------------------------
West Virginia--1.0%
So. Charleston Ind. Dev. Rev., Union Carbide Chem. &
Plastics Co. Baa2 8.00 8/01/20 2,450 2,635,930
Weirton Poll. Ctrl. Rev., Weirton Steel Proj. B2 8.625 11/01/14 4,000 4,230,120
West Virginia St. Hsg. Dev. Fund Hsg. Fin., Ser. A,
F.H.A. Aaa 7.95 5/01/17 1,160 1,160,128
West Virginia St. Pkwys. Econ. Dev. & Tourism Auth.,
F.G.I.C. Aaa 7.423 5/16/19 3,250(d) 3,542,500
--------------
11,568,678
- ---------------------------------------------------------------------------------------------------------------------------------
Wisconsin--0.4%
Oconto Falls Cmnty. Dev. Auth. Dev. Rev., Oconto Falls
Tissue, Inc. Proj. NR 7.75 12/01/22 4,000 4,149,840
--------------
Total long-term investments (cost $1,016,977,321) 1,098,749,890
--------------
SHORT-TERM INVESTMENTS--0.7%
- ---------------------------------------------------------------------------------------------------------------------------------
Florida
St. Lucie Cnty. Solid Wst. Disp. Rev., Ser. 93,
F.R.D.D., A.M.T. VMIG1 4.40 5/01/98 100 100,000
- ---------------------------------------------------------------------------------------------------------------------------------
Louisiana--0.2%
Plaquemines Parish Environmental Rev. Adj., Ref. BP.
Exploration & Oil, Ser. 95, F.R.D.D., A.M.T. P-1 4.40 5/01/98 1,500 1,500,000
West Baton Rouge Parish Ind. Dist. Pound3 Rev., Dow
Chemical Co. Proj., Ser. 95, F.R.D.D., A.M.T. P-1 4.40 5/01/98 700 700,000
--------------
2,200,000
- ---------------------------------------------------------------------------------------------------------------------------------
Texas--0.3%
Brazos River Harbor Nav. Dist. Rev., Dow Chemical Co.,
Ser. A, F.R.D.D., A.M.T. P-1 4.40 5/01/98 2,600 2,600,000
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-44
<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
Portfolio of Investments as of April 30, 1998 HIGH YIELD SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------------
Texas (cont'd.)
Brazos River Harbor Nav. Dist., Dow Chemical Co. Proj.,
Ser. 96, F.R.D.D., A.M.T. P-1 4.40% 5/01/98 $ 400 $ 400,000
Gulf Coast Ind. Dev. Auth. Solid Wste. Rev., Citgo
Petroleum, Ser. 95, F.R.D.D., A.M.T. VMIG1 4.40 5/01/98 400 400,000
--------------
3,400,000
- ---------------------------------------------------------------------------------------------------------------------------------
Virginia
King George Cnty. Ind. Dev. Auth. Expt. Fac. Rev.,
F.R.D.D. A1+(b) 4.40 5/01/98 600 600,000
- ---------------------------------------------------------------------------------------------------------------------------------
Washington--0.2%
Washington St. Hsg. Fin. Comm. Nonprofit Hsg. Rev.,
Emerald Height Proj., Ser. 90, F.R.D.D. A-1(b) 4.25 5/01/98 2,000 2,000,000
Ref. Panorama Cty. Proj., Ser. 97, F.R.D.D. VMIG1 4.25 5/01/98 200 200,000
--------------
2,200,000
--------------
Total short-term investments (cost $8,500,000) 8,500,000
- ---------------------------------------------------------------------------------------------------------------------------------
Total Investments--98.7%
(cost $1,025,477,321; Note 4) 1,107,249,890
Other assets in excess of liabilities--1.3% 13,980,703
--------------
Net Assets--100% $1,121,230,593
--------------
--------------
</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.H.A.--Federal Housing Administration
F.R.D.D.--Floating Rate (Daily) Demand Note (g)
F.S.A.--Financial Security Assurance
G.N.M.A.--Government National Mortgage Association
M.B.I.A.--Municipal Bond Insurance Association
P.S.F.G.--Public School Fund Guaranty
(b) Standard & Poor's Rating.
(c) Prerefunded issues are secured by escrowed cash and direct U.S. guaranteed
obligations.
(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) Issuer in default of interest payment. Non-income producing security.
(f) All or partial principal amount pledged as initial margin on financial
futures contracts.
(g) The maturity date shown is 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.
(h) When-issued security.
(i) All or partial amount of principal segregated as collateral for financial
futures contracts and when-issued security.
NR--Not Rated by Moody's or Standard & Poor's.
The Fund's current Prospectus contains a description of Moody's and Standard &
Poor's ratings.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-45
<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
Statement of Assets and Liabilities HIGH YIELD SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Assets April 30, 1998
<S> <C>
Investments, at value (cost $1,025,477,321)................................................................. $1,107,249,890
Cash........................................................................................................ 532,945
Interest receivable......................................................................................... 20,820,891
Receivable for investments sold............................................................................. 7,493,133
Receivable for Series shares sold........................................................................... 3,114,900
Due from broker - variation margin.......................................................................... 35,062
Other assets................................................................................................ 16,732
--------------
Total assets............................................................................................. 1,139,263,553
--------------
Liabilities
Payable for investments purchased........................................................................... 13,292,139
Payable for Series shares reacquired........................................................................ 2,008,464
Dividends payable........................................................................................... 1,788,096
Management fee payable...................................................................................... 410,722
Distribution fee payable.................................................................................... 323,222
Accrued expenses............................................................................................ 210,317
--------------
Total liabilities........................................................................................ 18,032,960
--------------
Net Assets.................................................................................................. $1,121,230,593
--------------
--------------
Net assets were comprised of:
Shares of beneficial interest, at par.................................................................... $ 991,547
Paid-in capital in excess of par......................................................................... 1,063,404,578
--------------
1,064,396,125
Accumulated net realized loss on investments............................................................. (24,938,101)
Net unrealized appreciation of investments............................................................... 81,772,569
--------------
Net assets, April 30, 1998.................................................................................. $1,121,230,593
--------------
--------------
Class A:
Net asset value and redemption price per share
($421,515,355 DIVIDED BY 37,273,437 shares of beneficial interest issued and outstanding)............. $11.31
Maximum sales charge (3% of offering price).............................................................. .35
--------------
Maximum offering price to public......................................................................... $11.66
--------------
--------------
Class B:
Net asset value, offering price and redemption price per share
($669,241,615 DIVIDED BY 59,185,536 shares of beneficial interest issued and outstanding)............. $11.31
--------------
--------------
Class C:
Net asset value, offering price and redemption price per share
($20,554,428 DIVIDED BY 1,817,829 shares of beneficial interest issued and outstanding)............... $11.31
--------------
--------------
Class Z:
Net asset value, offering price and redemption price per share
($9,919,195 DIVIDED BY 877,903 shares of beneficial interest issued and outstanding).................. $11.30
--------------
--------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-46
<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
HIGH YIELD SERIES
Statement of Operations
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended
Net Investment Income April 30, 1998
<S> <C>
Income
Interest.................................. $ 71,328,838
--------------
Expenses
Management fee............................ 5,323,382
Distribution fee--Class A................. 381,735
Distribution fee--Class B................. 3,345,658
Distribution fee--Class C................. 111,993
Transfer agent's fees and expenses........ 450,000
Custodian's fees and expenses............. 152,000
Reports to shareholders................... 81,000
Registration fees......................... 64,000
Insurance expense......................... 29,000
Legal fees and expenses................... 18,000
Audit fee................................. 15,000
Trustees' fees and expenses............... 13,000
Miscellaneous............................. 8,437
--------------
Total expenses......................... 9,993,205
Less: Management fee waiver............... (535,931)
Custodian fee credit................... (4,478)
--------------
Net expenses........................... 9,452,796
--------------
Net investment income........................ 61,876,042
--------------
Realized and Unrealized
Gain (Loss) on Investments
Net realized gain (loss) on:
Investment transactions................... (5,710,322)
Financial futures contract transactions... (740,523)
--------------
(6,450,845)
--------------
Net change in unrealized appreciation of:
Investments............................... 50,351,593
--------------
Net gain on investments...................... 43,900,748
--------------
Net Increase in Net Assets
Resulting from Operations.................... $105,776,790
--------------
--------------
</TABLE>
PRUDENTIAL MUNICIPAL BOND FUND
HIGH YIELD SERIES
Statement of Changes in Net Assets
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Increase (Decrease) Year Ended April 30,
in Net Assets 1998 1997
<S> <C> <C>
Operations
Net investment income....... $ 61,876,042 $ 63,368,111
Net realized loss on
investment
transactions............. (6,450,845) (4,271,817)
Net change in unrealized
appreciation of
investments.............. 50,351,593 18,105,192
-------------- --------------
Net increase in net assets
resulting from
operations............... 105,776,790 77,201,486
-------------- --------------
Dividends and distributions
(Note 1):
Dividends from net
investment income
Class A.................. (23,016,599) (18,998,681)
Class B.................. (37,682,645) (43,873,295)
Class C.................. (804,495) (467,478)
Class Z.................. (372,303) (28,657)
-------------- --------------
(61,876,042) (63,368,111)
-------------- --------------
Distributions in excess of
net investment income
Class A.................. -- (39,610)
Class B.................. -- (82,405)
Class C.................. -- (965)
Class Z.................. -- (28)
-------------- --------------
-- (123,008)
-------------- --------------
Series share transactions (net of
share conversions) (Note 5):
Net proceeds from shares
subscribed............... 194,658,081 116,459,010
Net asset value of shares
issued in reinvestment of
dividends................ 27,600,737 28,109,609
Cost of shares reacquired... (156,797,816) (175,001,590)
-------------- --------------
Net increase (decrease) in
net assets from Series
share transactions....... 65,461,002 (30,432,971)
-------------- --------------
Total increase (decrease)...... 109,361,750 (16,722,604)
Net Assets
Beginning of year.............. 1,011,868,843 1,028,591,447
-------------- --------------
End of year.................... $1,121,230,593 $1,011,868,843
-------------- --------------
-------------- --------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-47
<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
Portfolio of Investments as of April 30, 1998 INSURED SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------------
LONG-TERM INVESTMENTS--98.3%
- ---------------------------------------------------------------------------------------------------------------------------------
Alabama--0.7%
Huntsville Solid Wste. Disp. Auth., F.G.I.C. Aaa 7.00% 10/01/08 $ 2,000 $ 2,147,080
Jefferson Cnty. Swr. Rev. Wste., Ser. D, F.G.I.C. Aaa 5.75 2/01/22 1,200 1,249,716
------------
3,396,796
- ---------------------------------------------------------------------------------------------------------------------------------
Alaska--2.4%
Alaska St. Engy. Auth. Pwr. Rev., Bradley Lake Hydro, 1st
Ser., A.M.B.A.C. Aaa 7.25 7/01/16 2,000(g) 2,106,600
Anchorage Hosp. Rev., Sisters of Providence, A.M.B.A.C. Aaa 7.125 10/01/05 5,000 5,512,450
No. Slope Boro., Cap. Apprec., Ser. A, M.B.I.A. Aaa Zero 6/30/06 5,000 3,375,300
------------
10,994,350
- ---------------------------------------------------------------------------------------------------------------------------------
Arizona--1.9%
Maricopa Cnty. Ind. Dev. Auth. Rev.,
Hosp. Facs., John C. Lincoln Hosp., F.S.A. Aaa 7.00 12/01/00 1,755 1,827,569
Hosp. Facs., John C. Lincoln Hosp., F.S.A. Aaa 7.50 12/01/13 1,045(c) 1,149,155
Hosp. Facs., John C. Lincoln Hosp., F.S.A. Aaa 7.50 12/01/13 1,205 1,315,294
Maricopa Cnty. Unified Sch. Dist. No. 69, Paradise
Valley, Ser. E, F.G.I.C. Aaa 6.80 7/01/12 3,700 4,390,013
------------
8,682,031
- ---------------------------------------------------------------------------------------------------------------------------------
California--6.3%
California St. Pub. Wks. Brd.,
Comm. Coll. Proj., Ser. A, A.M.B.A.C. Aaa 5.625 3/01/16 2,000 2,078,700
Dept. of Corrections, A.M.B.A.C. Aaa 5.75 1/01/12 2,000 2,127,940
Contra Costa Wtr. Dist. Wtr. Rev., Ser. E, A.M.B.A.C. Aaa 6.25 10/01/12 1,455 1,648,253
Inland Empire Solid Wste. Fin. Auth., Landfill Impvt.
Fin., Proj. B, F.S.A. Aaa 6.00 8/01/16 2,000 2,117,580
Roseville Joint Union H.S. Dist., Ser. B, F.G.I.C. Aaa Zero 8/01/13 2,015 915,455
San Diego Cnty. Wtr. Auth. Wtr. Rev., Ctfs. of Part.,
F.G.I.C Aaa 7.037 4/26/06 5,800(d) 6,590,250
San Francisco City & Cnty. Arpt. Comm. Int'l. Arpt. Rev.,
Ser. 2, F.S.A. Aaa 4.75 5/01/29 5,755 5,243,265
So. Orange Cnty. Pub. Fin. Auth.,
Foothill Area Proj., F.G.I.C Aaa 8.00 8/15/08 2,000(g) 2,537,220
Foothill Area Proj., F.G.I.C. Aaa 6.50 8/15/10 2,725(g) 3,151,136
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-48
<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
Portfolio of Investments as of April 30, 1998 INSURED SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------------
California (cont'd.)
Victor Valley Element. Sch. Dist.,
Cap. Apprec., Ser. A, M.B.I.A. Aaa Zero 6/01/17 $ 3,550 $ 1,279,207
Cap. Apprec., Ser. A, M.B.I.A. Aaa Zero 6/01/18 3,700 1,258,925
------------
28,947,931
- ---------------------------------------------------------------------------------------------------------------------------------
Colorado--1.2%
Denver City & Cnty. Arpt. Rev., Ser. C, M.B.I.A. Aaa 5.60% 11/15/11 5,000 5,199,300
Jefferson Cnty. Sngl. Fam. Mtge. Rev., Ser. A, M.B.I.A. Aaa 8.875 10/01/13 435 464,141
------------
5,663,441
- ---------------------------------------------------------------------------------------------------------------------------------
Connecticut--1.1%
Connecticut St. Res. Rec. Auth., Mid. Connecticut. Sys.,
Ser. A, M.B.I.A. Aaa 5.25 11/15/08 5,000 5,209,200
- ---------------------------------------------------------------------------------------------------------------------------------
District of Columbia--8.5%
Dist. of Columbia Hosp. Rev. Medlantic Hlthcare Grp.,
M.B.I.A. Aaa 5.875 8/15/19 3,500 3,652,110
M.B.I.A. Aaa 5.75 8/15/26 3,000(g) 3,093,750
Dist. of Columbia Met. Area Trans. Auth.,
Gross Rev., F.G.I.C. Aaa 6.00 7/01/09 2,400 2,655,336
Gross Rev., F.G.I.C. Aaa 6.00 7/01/10 1,500 1,659,960
Dist. of Columbia Ref.,
Ser. B, F.S.A. Aaa 5.50 6/01/10 7,565(g) 7,890,673
Ser. B, M.B.I.A. Aaa 6.00 6/01/18 4,460 4,866,083
Ser. B, M.B.I.A. Aaa 6.00 6/01/19 3,965 4,319,987
Dist. of Columbia,
Assoc. American Med. Colleges, A.M.B.A.C Aaa 5.375 2/15/27 4,500 4,483,260
Gen. Oblig., Ser. A, M.B.I.A. Aaa 6.50 6/01/10 6,000(g) 6,797,040
------------
39,418,199
- ---------------------------------------------------------------------------------------------------------------------------------
Florida--4.2%
Brevard Hlth. Facs. Auth. Rev., Holmes Reg'l. Med. Ctr.,
M.B.I.A. Aaa 5.60 10/01/10 6,000(g) 6,349,800
Dade Cnty. Edl. Facs. Auth. Rev. Ref., Ser. A, M.B.I.A. Aaa 5.625 4/01/06 3,000 3,200,010
Dade Cnty. Res. Rec., Facs. Rev. Ref., A.M.B.A.C. Aaa 5.10 10/01/04 3,355 3,458,468
Orange Cnty. Hlth. Facs. Auth. Rev. Hosp., Orlando Reg'l.
Hlthcare, Ser. A, M.B.I.A. Aaa 6.25 10/01/07 3,160 3,536,862
Palm Beach Cnty. Solid Wste. Auth. Rev. Ref., Ser. A,
A.M.B.A.C. Aaa 6.00 10/01/09 2,500 2,770,550
------------
19,315,690
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-49
<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
Portfolio of Investments as of April 30, 1998 INSURED SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------------
Georgia--2.6%
Atlanta Arpt. Facs. Rev., A.M.B.A.C. Aaa 6.50% 1/01/10 $ 2,000 $ 2,295,120
Georgia Mun. Elec. Auth.,
Proj. No. 1, A.M.B.A.C. Aaa 6.00 1/01/06 5,570 6,050,022
Pwr. Rev., M.B.I.A. Aaa 6.20 1/01/10 3,495(e) 3,891,613
------------
12,236,755
- ---------------------------------------------------------------------------------------------------------------------------------
Hawaii--3.3%
Hawaii St. Dept. Bud. & Fin. Spec. Purpose Rev., Hawaiian
Elec. Co. Inc., Ser. A, M.B.I.A. Aaa 5.65 10/01/27 15,000 15,199,950
- ---------------------------------------------------------------------------------------------------------------------------------
Illinois--11.7%
Arlington Hts. Park Dist. Cap. Apprec., Ser. E, F.G.I.C. Aaa Zero 12/01/13 4,175 1,825,143
Chicago Bd. Edl.
Cap. Apprec. Chicago Sch. Rfm., Ser. A, A.M.B.A.C. Aaa Zero 12/01/11 5,000 2,479,400
Cap. Apprec. Chicago Sch. Rfm., Ser. A, A.M.B.A.C. Aaa Zero 12/01/12 6,000 2,785,680
Cap. Apprec. Chicago Sch. Rfm., Ser. A, A.M.B.A.C. Aaa Zero 12/01/13 3,500 1,530,060
Cap. Apprec. Chicago Sch. Rfm., Ser. A, A.M.B.A.C. Aaa Zero 12/01/14 7,195 2,958,728
Cap. Apprec. Chicago Sch. Rfm., Ser. A, A.M.B.A.C. Aaa Zero 12/01/15 3,245 1,254,030
Chicago Bd. Edl. Sch. Ref., A.M.B.A.C. Aaa 5.75 12/01/27 10,000 10,394,200
Chicago Midway Arpt. Rev., Ser. B, M.B.I.A. Aaa 5.75 1/01/22 6,835 7,009,771
Chicago O'Hare Int'l. Arpt. Rev., Pass. Facs. Chrg., Ser.
A, A.M.B.A.C. Aaa 5.625 1/01/15 2,000 2,057,660
Chicago Park Dist., A.M.B.A.C. Aaa 5.30 1/01/15 3,000 3,008,760
Chicago Skyway Toll Brdg. Rev., M.B.I.A. Aaa 5.50 1/01/23 650 657,794
Chicago Wstewtr. Trans. Rev.
Cap. Apprec. Ref., Ser. A, M.B.I.A. Aaa Zero 1/01/20 7,275 2,221,494
Cap. Apprec. Ref., Ser. A, M.B.I.A. Aaa Zero 1/01/21 13,655 3,947,524
Cap. Apprec. Ref., Ser. A, M.B.I.A. Aaa Zero 1/01/24 13,695 3,349,386
Chicago Wtr. Rev. Cap. Apprec., F.G.I.C. Aaa Zero 11/01/16 3,055 1,121,490
Onterie Ctr. Hsg. Fin. Corp. Mtge. Rev.,
Ser. A, M.B.I.A. Aaa 7.00 7/01/12 1,575 1,673,579
Ser. A, M.B.I.A. Aaa 7.05 7/01/27 5,400 5,741,658
------------
54,016,357
- ---------------------------------------------------------------------------------------------------------------------------------
Indiana--2.0%
Marion Cnty. Hosp. Auth. Facs. Rev., A.M.B.A.C. Aaa 8.625 10/01/12 8,500(c)(g) 9,211,705
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-50
<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
Portfolio of Investments as of April 30, 1998 INSURED SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------------
Louisiana--0.5%
New Orleans, Gen. Oblig., Cap. Apprec., A.M.B.A.C. Aaa Zero 9/01/09 $ 4,000 $ 2,313,200
- ---------------------------------------------------------------------------------------------------------------------------------
Massachusetts--1.3%
Massachusetts Bay Trans. Auth. Gen. Sys., Ser. A,
M.B.I.A. Aaa 4.50% 3/01/26 4,000 3,474,000
Massachusetts St. Hlth. & Edl. Facs. Auth. Rev., Baystate
Med. Ctr., Ser. E, F.S.A. Aaa 6.00 7/01/26 2,475 2,617,610
------------
6,091,610
- ---------------------------------------------------------------------------------------------------------------------------------
Michigan--4.1%
Detroit Dwntwn. Dev., Ser. A, A.M.B.A.C. Aaa 5.75 7/15/15 1,820 1,903,702
Detroit Swr. Disp. Rev., Ser. 1993A, F.G.I.C. Aaa 7.263 7/01/23 6,500(d)(g) 6,833,125
Michigan St. Hosp. Fin. Auth. Rev., Mid. Michigan Oblig.,
M.B.I.A. Aaa 7.50 6/01/15 2,350(c) 2,550,126
Monroe Cnty. Poll. Ctrl. Rev., Detroit Edison Co., Proj.
1, Ser. I, A.M.B.A.C. Aaa 7.30 9/01/19 3,250 3,461,542
Saginaw Hosp. Fin. Auth., St. Luke's Hosp., Ser. C,
M.B.I.A. Aaa 6.50 7/01/11 4,000 4,278,440
------------
19,026,935
- ---------------------------------------------------------------------------------------------------------------------------------
Mississipi--0.6%
Harrison Cnty. Wste. Wtr. Mgmt. Dist. Rev., Wste. Wtr.
Treatmt., Facs. Auth., F.G.I.C. Aaa 6.50 2/01/06 2,400 2,576,832
- ---------------------------------------------------------------------------------------------------------------------------------
Missouri--0.3%
Missouri St. Hlth. & Edl. Facs. Rev.,
SSM Hlthcare, Ser. AA, M.B.I.A. NR 6.25 6/01/16 285(c) 309,806
SSM Hlthcare, Unref., Ser. AA, M.B.I.A. Aaa 6.25 6/01/16 1,215 1,304,315
------------
1,614,121
- ---------------------------------------------------------------------------------------------------------------------------------
Montana--0.5%
Forsyth Poll. Ctrl. Rev., Puget Sound Pwr. & Lt. Co., 1st
Mtge., Ser. A, A.M.B.A.C. Aaa 7.05 8/01/21 2,000 2,171,280
- ---------------------------------------------------------------------------------------------------------------------------------
New Jersey--6.3%
East Orange Bd. Edl. Ctfs. Part.
Cap. Apprec., F.S.A. Aaa Zero 2/01/15 1,425 595,180
Cap. Apprec., F.S.A. Aaa Zero 2/01/16 1,000 395,770
Cap. Apprec., F.S.A. Aaa Zero 2/01/17 1,425 533,335
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-51
<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
Portfolio of Investments as of April 30, 1998 INSURED SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------------
New Jersey (cont'd.)
East Orange Bd. Edl. Ctfs. Part.
Cap. Apprec., F.S.A. Aaa Zero 2/01/18 $ 2,845 $ 1,008,496
Cap. Apprec., F.S.A. Aaa Zero 8/01/18 1,425 492,038
Cap. Apprec., F.S.A. Aaa Zero 2/01/20 1,845 585,086
Cap. Apprec., F.S.A. Aaa Zero 8/01/21 2,845 834,837
Cap. Apprec., F.S.A. Aaa Zero 8/01/23 1,400 368,606
Jersey City Swr. Auth.,
A.M.B.A.C. Aaa 6.00% 1/01/10 2,585 2,854,615
A.M.B.A.C. Aaa 6.25 1/01/14 4,255 4,817,809
New Jersey Econ. Dev. Auth.,
Mkt. Trans. Facs. Rev., M.B.I.A. Aaa 5.875 7/01/11 5,900 6,270,756
Mkt. Trans. Facs. Rev., Sr. Lien, M.B.I.A. Aaa 5.80 7/01/09 3,340 3,567,454
Natural Gas Facs. Rev., M.B.I.A. Aaa 5.70 6/01/32 5,000 5,148,900
New Jersey Impvt. Auth. Rev., Util. Sys., M.B.I.A. Aaa 5.75 7/01/27 1,500 1,559,595
------------
29,032,477
- ---------------------------------------------------------------------------------------------------------------------------------
New York--11.5%
Erie Cnty. Wtr. Auth. Rev., A.M.B.A.C. Aaa Zero 12/01/17 770 189,682
Islip Res. Rec., Ser. B, A.M.B.A.C. Aaa 7.20 7/01/10 1,750 2,095,887
Met. Trans. Auth. N.Y. Trans. Facs. Rev., F.S.A. Aaa 5.75 7/01/11 5,000 5,291,600
New York City Mun. Wtr. Fin. Auth., Wtr. & Swr. Sys.
Rev., M.B.I.A. Aaa 5.75 6/15/26 5,000 5,182,750
New York City,
Cap. Apprec., Ser. G, M.B.I.A. Aaa Zero 8/01/07 4,000 2,604,800
Cap. Apprec., Ser. G, M.B.I.A. Aaa Zero 8/01/08 3,325 2,030,212
Ser. D, M.B.I.A. Aaa 5.25 8/01/21 2,500 2,466,750
Ser. G, M.B.I.A. Aaa 5.75 2/01/14 3,000 3,134,040
New York St. Dorm. Auth. Rev., Montefiore Med. Ctr.,
A.M.B.A.C. Aaa 6.00 8/01/08 3,400 3,738,606
New York St. Envir. Facs. Corp.,
Poll. Ctrl. Rev. Aaa 5.70 7/15/12 3,375 3,567,442
Poll. Ctrl. Rev. Aaa 5.75 7/15/13 1,060 1,132,239
Poll. Ctrl. Rev. Aaa 5.80 7/15/14 3,755 3,998,362
New York St. Thrwy. Auth. Gen. Rev.,
Ser. D Aa3 5.40 1/01/11 5,370 5,570,730
Ser. D Aa3 5.50 1/01/12 3,865 4,016,508
Port Auth. New York & New Jersey Cons., Ser. 99, F.G.I.C. Aaa 5.90 11/01/11 7,665 8,114,246
------------
53,133,854
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-52
<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
Portfolio of Investments as of April 30, 1998 INSURED SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------------
Ohio--3.9%
Cleveland City Sch. Dist.,
Rev. Antic. Nts., A.M.B.A.C. Aaa 5.50% 6/01/06 $ 6,465 $ 6,836,026
Rev. Antic. Nts., A.M.B.A.C. Aaa 5.75 6/01/07 5,870 6,325,806
Kent City Sch. Dist., F.G.I.C. Aaa 5.75 12/01/21 1,000 1,043,820
Lorain Cnty. Hosp. Rev., Catholic Hlthcare Partners,
M.B.I.A. Aaa 5.50 9/01/27 4,000 4,046,800
------------
18,252,452
- ---------------------------------------------------------------------------------------------------------------------------------
Oklahoma--1.5%
Norman Reg'l. Hosp. Auth., Rev. Ref., Ser. A, M.B.I.A. Aaa 5.50 9/01/11 4,110 4,267,290
Oklahoma City Arpt. Trust, Jr. Lien, Ser. 24, A.M.B.A.C. Aaa 5.75 2/01/18 2,620 2,690,399
------------
6,957,689
- ---------------------------------------------------------------------------------------------------------------------------------
Pennsylvania--1.3%
Philadelphia Mun. Auth. Rev., Criminal Justice Ctr., Ser.
A, M.B.I.A. Aaa 6.90 11/15/03 3,000 3,299,010
Philadelphia, Sch. Dist., Ser. B, A.M.B.A.C. Aaa 5.375 4/01/27 2,500 2,504,275
------------
5,803,285
- ---------------------------------------------------------------------------------------------------------------------------------
Puerto Rico--3.1%
Puerto Rico Comm., M.B.I.A. Aaa 4.875 7/01/23 3,000 2,823,690
Puerto Rico Gen. Oblig., M.B.I.A. Aaa 6.25 7/01/13 1,250 1,421,825
Puerto Rico Pub. Bldgs. Auth. Rev., Gov't. Facs., Ser. A,
A.M.B.A.C. Aaa 6.25 7/01/13 1,700 1,933,682
Puerto Rico Tel. Auth. Rev.,
Ser. I, M.B.I.A. Aaa 6.667 1/25/07 4,100(d) 4,407,500
Ser. I, M.B.I.A. Aaa 6.915 1/16/15 3,800(d) 3,952,000
------------
14,538,697
- ---------------------------------------------------------------------------------------------------------------------------------
South Dakota--2.8%
So. Dakota Hsg. Dev. Auth., Homeownership Mtge., Ser. F Aa1 5.80 5/01/28 12,620 12,960,866
- ---------------------------------------------------------------------------------------------------------------------------------
Tennessee--1.2%
Metro. Gov't. Nashville & Davidson Cnty. Wtr. & Swr.
Rev., A.M.B.A.C. Aaa 8.216 1/01/22 5,000(d) 5,731,250
- ---------------------------------------------------------------------------------------------------------------------------------
Texas--5.4%
Austin Util. Sys. Rev. Comb., Ser. A, M.B.I.A. Aaa 4.875 11/15/10 5,500 5,466,725
Austin Util. Sys. Rev., M.B.I.A. Aaa Zero 5/15/03 8,000 6,354,480
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-53
<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
Portfolio of Investments as of April 30, 1998 INSURED SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------------
Texas (cont'd.)
Brazos Rvr. Auth. Rev., Houston Lt. & Pwr., Ser. B, 1st
Mtge., F.G.I.C. Aaa 7.20% 12/01/18 $ 1,000 $ 1,061,030
Houston Arpt. Sys. Rev. Aaa 7.20 7/01/13 3,900 4,600,323
Houston Arpt. Sys. Rev., Spec. Facs. People Mover, Ser.
A, F.S.A. Aaa 6.00 7/15/05 3,255 3,508,857
Keller Ind. Sch. Dist., P.S.F.G. Aaa Zero 8/15/15 4,945 1,958,072
Texas Wtr. Res. Fin. Auth. Rev., A.M.B.A.C. Aaa 7.50 8/15/13 1,985 2,067,298
------------
25,016,785
- ---------------------------------------------------------------------------------------------------------------------------------
Virginia--3.7%
Chesapeake Bay Brdg. & Tunn. Comm., Dist. Rev., F.G.I.C. Aaa 5.875 7/01/10 5,000 5,386,850
Richmond Met. Auth. Expwy. Rev. Ref., F.G.I.C. Aaa 5.25 7/15/22 4,265 4,299,675
Virginia Beach Hosp. Facs. Rev.,
1st Mtge., A.M.B.A.C. Aaa 6.00 2/15/10 1,220 1,352,882
1st Mtge., A.M.B.A.C. Aaa 6.00 2/15/13 1,455 1,608,925
Virginia Coll. Bldg. Auth. Edl. Facs. Rev., M.B.I.A. Aaa 5.25 1/01/26 4,275 4,324,718
------------
16,973,050
- ---------------------------------------------------------------------------------------------------------------------------------
Washington--4.4%
Washington St. Hlthcare Facs. Auth. Rev., Yakima Valley
Memorial Hosp. Assoc. AAA(b) 5.25 12/01/20 2,500 2,435,375
Washington St. Pub. Pwr. Supply Sys.,
Nuclear Proj. No. 1, Ser. A, M.B.I.A. Aaa 5.75 7/01/10 7,000 7,436,940
Nuclear Proj. No. 2, Ser. A, M.B.I.A. Aaa Zero 7/01/11 5,210 2,622,818
Nuclear Proj. No. 2, Ser. B, F.G.I.C. Aaa 7.25 7/01/03 3,000(c) 3,245,040
Nuclear Proj. No. 3, Ser. B, F.G.I.C. Aaa 7.00 7/01/05 2,000(c) 2,130,900
Nuclear Proj. No. 3, Ser. B, F.G.I.C. Aaa Zero 7/01/08 4,500 2,717,955
------------
20,589,028
------------
Total long-term investments (cost $434,670,225) 455,075,816
------------
SHORT-TERM INVESTMENTS--0.9%
- ---------------------------------------------------------------------------------------------------------------------------------
District of Columbia--0.1%
Dist. of Columbia, Gen. Oblig., Ser. 92A-4, F.R.D.D. VMIG1 4.35 5/01/98 500 500,000
- ---------------------------------------------------------------------------------------------------------------------------------
Illinois--0.0%
Will County Solid Wste. Disp. Rev., Daily BASF Corp.
Proj.,
Ser. 97, F.R.D.D., A.M.T. P-1 4.25 5/01/98 100 100,000
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-54
<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
Portfolio of Investments as of April 30, 1998 INSURED SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------------
New Mexico--0.6%
Hurley Cnty., Poll. Ctrl. Rev., Ser. 85, F.R.D.D. P-1 4.25% 5/01/98 $ 2,800 $ 2,800,000
- ---------------------------------------------------------------------------------------------------------------------------------
Texas--0.2%
Gulf Coast Wste. Disp. Auth., Poll. Ctrl. Rev., Ser. 94,
F.R.D.D., A.M.T. VMIG1 4.35 5/01/98 600 600,000
------------
Total short-term investments (cost $4,000,000) 4,000,000
------------
- ---------------------------------------------------------------------------------------------------------------------------------
Total Investments--99.2%
(cost $438,670,225; Note 4) 459,075,816
Other assets in excess of liabilities--0.8% 3,629,791
------------
Net Assets--100% $462,705,607
------------
------------
</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 (f)
F.S.A.--Financial Security Assurance
M.B.I.A.--Municipal Bond Insurance Association
P.S.F.G.--Public School Fund Guaranty
(b) Standard & Poor's rating.
(c) Prerefunded issues are secured by escrowed cash and direct U.S. guaranteed
obligations.
(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) Principal amount pledged as initial margin on financial futures contracts.
(f) The maturity date shown is 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.
(g) All or partial amount of principal segregated as collateral for financial
futures contracts.
The Fund's current Prospectus contains a description of Moody's and Standard &
Poor's ratings.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-55
<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
Statement of Assets and Liabilities INSURED SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Assets April 30, 1998
<S> <C>
Investments, at value (cost $438,670,225)................................................................... $459,075,816
Cash........................................................................................................ 27,338
Interest receivable......................................................................................... 6,179,023
Receivable for Series shares sold........................................................................... 73,218
Other assets................................................................................................ 9,084
--------------
Total assets............................................................................................. 465,364,479
--------------
Liabilities
Payable for Series shares reacquired........................................................................ 1,103,751
Dividends payable........................................................................................... 599,998
Due to broker-variation margin.............................................................................. 405,337
Accrued expenses............................................................................................ 233,850
Management fee payable...................................................................................... 200,112
Distribution fee payable.................................................................................... 115,824
--------------
Total liabilities........................................................................................ 2,658,872
--------------
Net Assets.................................................................................................. $462,705,607
--------------
--------------
Net assets were comprised of:
Shares of beneficial interest, at par.................................................................... $ 418,602
Paid-in capital in excess of par......................................................................... 439,345,140
--------------
439,763,742
Accumulated net realized gain on investments............................................................. 2,430,211
Net unrealized appreciation of investments............................................................... 20,511,654
--------------
Net assets, April 30, 1998.................................................................................. $462,705,607
--------------
--------------
Class A:
Net asset value and redemption price per share
($224,409,371 DIVIDED BY 20,312,259 shares of beneficial interest issued and outstanding)............. $11.05
Maximum sales charge (3.0% of offering price)............................................................ .34
--------------
Maximum offering price to public......................................................................... $11.39
--------------
--------------
Class B:
Net asset value, offering price and redemption price per share
($236,369,629 DIVIDED BY 21,373,644 shares of beneficial interest issued and outstanding)............. $11.06
--------------
--------------
Class C:
Net asset value, offering price and redemption price per share
($1,508,667 DIVIDED BY 136,421 shares of beneficial interest issued and outstanding).................. $11.06
--------------
--------------
Class Z:
Net asset value, offering price and redemption price per share
($417,940 DIVIDED BY 37,833 shares of beneficial interest issued and outstanding)..................... $11.05
--------------
--------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-56
<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
INSURED SERIES
Statement of Operations
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended
Net Investment Income April 30, 1998
<S> <C>
Income
Interest.................................. $ 26,886,125
--------------
Expenses
Management fee............................ 2,469,913
Distribution fee--Class A................. 222,115
Distribution fee--Class B................. 1,352,766
Distribution fee--Class C................. 8,567
Transfer agent's fees and expenses........ 301,000
Custodian's fees and expenses............. 97,000
Reports to shareholders................... 50,000
Registration fees......................... 41,000
Insurance expense......................... 16,000
Audit fee................................. 15,000
Trustees' fees and expenses............... 13,000
Legal fees and expenses................... 11,000
Miscellaneous............................. 5,599
--------------
Total expenses......................... 4,602,960
Less: Management fee waiver............... (85,444)
Custodian fee credit................... (5,707)
--------------
Net expenses........................... 4,511,809
--------------
Net investment income........................ 22,374,316
--------------
Realized and Unrealized
Gain (Loss) on Investments
Net realized gain (loss) on:
Investment transactions................... 10,397,180
Financial futures contract transactions... (2,978,111)
--------------
7,419,069
--------------
Net change in unrealized
appreciation on:
Investments............................... 10,580,044
Financial futures contracts............... 297,750
--------------
10,877,794
--------------
Net gain on investments...................... 18,296,863
--------------
Net Increase in Net Assets
Resulting from Operations.................... $ 40,671,179
--------------
--------------
</TABLE>
PRUDENTIAL MUNICIPAL BOND FUND
INSURED SERIES
Statement of Changes in Net Assets
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Increase (Decrease) Year Ended April 30,
in Net Assets 1998 1997
<S> <C> <C>
Operations
Net investment income........ $ 22,374,316 $ 25,911,892
Net realized gain on
investment transactions... 7,419,069 12,131,022
Net change in unrealized
appreciation
(depreciation) of
investments............... 10,877,794 (7,713,454)
------------- -------------
Net increase in net assets
resulting from
operations................ 40,671,179 30,329,460
------------- -------------
Dividends and distributions
(Note 1):
Dividends from net investment
income
Class A................... (10,553,524) (9,267,489)
Class B................... (11,765,355) (16,602,381)
Class C................... (46,954) (41,775)
Class Z................... (8,483) (247)
------------- -------------
(22,374,316) (25,911,892)
------------- -------------
Dividends in excess of net
investment income
Class A................... (80,333) (117,523)
Class B................... (90,260) (180,111)
Class C................... (469) (467)
Class Z................... (60) --
------------- -------------
(171,122) (298,101)
------------- -------------
Distributions from net
capital gains
Class A................... (4,980,680) (2,135,002)
Class B................... (5,596,092) (3,272,015)
Class C................... (29,102) (8,473)
Class Z................... (3,703) (2)
------------- -------------
(10,609,577) (5,415,492)
------------- -------------
Series share transactions (net
of share conversions) (Note
5):
Net proceeds from shares
subscribed................ 17,849,201 201,450,948
Net asset value of shares
issued in reinvestment of
dividends and
distributions............. 19,222,401 17,841,830
Cost of shares reacquired.... (89,200,577) (294,754,828)
------------- -------------
Net decrease in net assets
from Series share
transactions.............. (52,128,975) (75,462,050)
------------- -------------
Total decrease.................. (44,612,811) (76,758,075)
Net Assets
Beginning of year............... 507,318,418 584,076,493
------------- -------------
End of year..................... $ 462,705,607 $ 507,318,418
------------- -------------
------------- -------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-57
<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
Portfolio of Investments as of April 30, 1998 INTERMEDIATE SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------------
LONG-TERM INVESTMENTS--97.7%
- ---------------------------------------------------------------------------------------------------------------------------------
Alaska--4.8%
Alaska Ind. Dev. & Expt. Auth., Revolving Loan Fund A2 5.40% 4/01/01 $ 945 $ 967,992
No. Slope Boro., Cap. Apprec., Ser. A, M.B.I.A. Aaa Zero 6/30/07 1,430 915,886
------------
1,883,878
- ---------------------------------------------------------------------------------------------------------------------------------
Colorado--2.6%
Eaglebend Affordable Hsg. Corp., Multifam. Rev. NR 5.75 7/01/07 1,000 1,019,170
- ---------------------------------------------------------------------------------------------------------------------------------
Connecticut--5.4%
Conn. Spec. Tax Oblig. Rev., Ser. A AA-(b) 7.00 6/01/03 1,000(c) 1,086,790
Conn. St. Hlth. & Edl. Facs. Auth. Rev. Baa2 5.125 7/01/07 1,000 992,350
------------
2,079,140
- ---------------------------------------------------------------------------------------------------------------------------------
District of Columbia--6.6%
Dist. Columbia Hsg. Fin. Agcy. Mtge. Rev.
Amt. Sngl. Fam., Ser. B AAA(b) 5.25 12/01/08 440 447,128
Amt. Sngl. Fam., Ser. B AAA(b) 5.30 12/01/09 315 319,309
Dist. of Columbia Ref., Ser. B, M.B.I.A. Aaa 6.00 6/01/13 1,000 1,090,550
Dist. of Columbia Rev., America Geophysical Union, Ser.
199 BBB-(b) 5.50 9/01/03 700 709,912
------------
2,566,899
- ---------------------------------------------------------------------------------------------------------------------------------
Florida--1.3%
Palm Beach Cnty. Hlth. Facs. Auth. Rev., Abbey Delray So.
Proj. BBB(b) 5.30 10/01/07 500 501,865
- ---------------------------------------------------------------------------------------------------------------------------------
Georgia--2.4%
Burke Cnty. Dev. Auth., Oglethorpe Pwr. Co., M.B.I.A. Aaa 7.50 1/01/03 862 927,305
- ---------------------------------------------------------------------------------------------------------------------------------
Illinois--1.2%
Illinois Hlth. Facs. Auth. Rev., Edward Hosp., Ser. A A2 5.75 2/15/09 450 466,524
- ---------------------------------------------------------------------------------------------------------------------------------
Indiana--2.7%
Univ. Southern Indiana Rev. Student Fee., Ser. F, F.G.I.C. Aaa 5.50 10/01/13 1,000 1,045,580
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-58
<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
Portfolio of Investments as of April 30, 1998 INTERMEDIATE SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------------
Massachusetts--5.1%
Massachusetts Edl. Fing Auth. Ed. Ln. Rev., Iss. G., Ser.
A, M.B.I.A. AAA(b) 5.10% 12/01/13 $ 1,000 $ 970,660
Massachusetts St. Hsg. Fin. Agcy. Hsg. Dev., Ser. A,
M.B.I.A Aaa 5.15 6/01/11 1,000 996,190
------------
1,966,850
- ---------------------------------------------------------------------------------------------------------------------------------
Michigan--1.4%
Michigan Mun. Bond Auth. Rev., Wayne Cnty. Proj., M.B.I.A. Aaa 7.40 12/01/02 500 547,675
- ---------------------------------------------------------------------------------------------------------------------------------
Missouri--1.3%
Clayton Sch. Dist., Cap. Apprec., Ser. A, F.S.A. Aaa Zero 2/01/07 750 494,325
- ---------------------------------------------------------------------------------------------------------------------------------
New Jersey--18.4%
Brick Twnshp., Mun. Util. Auth. Rev., F.G.I.C. Aaa 5.50 12/01/03 1,295 1,362,858
New Jersey Econ. Dev. Auth. Rev.,
Mkt. Trans. Facs. Rev., M.B.I.A. Aaa 5.75 7/01/06 950 1,018,144
Mkt. Trans. Facs. Rev., M.B.I.A. Aaa 5.80 7/01/07 1,000 1,071,480
Performing Arts Ctr., A.M.B.A.C. Aaa 6.00 6/15/08 1,410 1,553,862
So. Reg'l. High Sch. Dist., M.B.I.A. Aaa 5.50 9/01/06 1,010 1,074,438
West Windsor Plainsboro Sch., F.G.I.C. Aaa 5.25 12/01/05 1,000 1,046,400
------------
7,127,182
- ---------------------------------------------------------------------------------------------------------------------------------
New York--8.0%
Met. Trans. Auth. N.Y. Trans. Facs. Rev., F.S.A. Aaa 5.75 7/01/11 675 714,366
New York, N.Y., Ser. F A3 5.50 8/01/07 1,000 1,040,350
New York St. Env. Facs. Corp., Poll. Ctrl. Rev. Aaa 5.80 1/15/14 1,280 1,362,957
------------
3,117,673
- ---------------------------------------------------------------------------------------------------------------------------------
Ohio--1.4%
Ohio St. Bldg. Auth., Admin. Bldg. Fund Proj., M.B.I.A. Aaa 5.60 10/01/06 500 534,555
- ---------------------------------------------------------------------------------------------------------------------------------
Oklahoma--6.0%
Oklahoma St. Ind. Auth. Rev. Hosp., Deaconess Hlthcare.,
Ser. A Baa2 5.50 10/01/12 1,250 1,242,562
Oklahoma St. Ind. Auth. Rev. Hlth. Sys., Integris Bapt.,
A.M.B.A.C. Aaa 6.00 8/15/09 1,000 1,094,810
------------
2,337,372
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-59
<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
Portfolio of Investments as of April 30, 1998 INTERMEDIATE SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------------
Pennsylvania--10.4%
Clarion Cnty. Hosp. Auth. Rev., Ref. Clarion Hosp. Proj. BBB-(b) 5.60% 7/01/10 $ 685 $ 694,597
Montgomery Cnty. Redev. Auth., Multifam. Hsg. Rev., Ser. A NR 5.75 7/01/99 780 788,011
Pennsylvania St. Ctfs. of Part., Ser. A, F.S.A. Aaa 6.25 11/01/06 600 645,768
Pennsylvania St. Higher Edl. Facs. Auth., Hlth. Svs. Rev.,
M.B.I.A. Aaa 5.70 11/15/11 755 812,697
Philadelphia Hosp. Auth. & Higher Edl. Auth., Childrens
Seashore House, Ser. A A-(b) 7.00 8/15/03 1,000 1,088,010
------------
4,029,083
- ---------------------------------------------------------------------------------------------------------------------------------
Puerto Rico--2.1%
Puerto Rico Comnwlth., Gen. Oblig., Ser. A, M.B.I.A. Aaa 6.25 7/01/10 750 806,310
- ---------------------------------------------------------------------------------------------------------------------------------
Rhode Island--2.8%
Rhode Island St., Ref. Cons. Cap. Dev. Loan, M.B.I.A. Aaa 6.00 8/01/06 1,000 1,092,290
- ---------------------------------------------------------------------------------------------------------------------------------
Texas--4.5%
San Antonio Elec. & Gas Rev., Ser. A, F.G.I.C. Aaa Zero 2/01/05 1,000 727,370
Tyler Tex. Hlth. Facs. Dev. Corp., Mother Francis Hosp.,
Ser. A Baa2 5.50 7/01/09 1,000 1,004,350
------------
1,731,720
- ---------------------------------------------------------------------------------------------------------------------------------
Utah--2.7%
Utah St. Brd. of Regents, Student Loan Rev., Ser. F,
A.M.B.A.C. Aaa 7.00 11/01/01 1,000 1,064,200
- ---------------------------------------------------------------------------------------------------------------------------------
Washington--2.7%
Wash. St. Pub. Pwr. Supp. Sys., Nuclear Proj. No. 3, Ser.
B Aa1 7.00 7/01/99 1,000 1,034,100
- ---------------------------------------------------------------------------------------------------------------------------------
Wyoming--3.9%
Wyoming Cmnty. Dev. Auth. Hsg. Rev. Amt., Ser. 5 Aa2 5.60 12/01/06 1,450 1,526,401
------------
Total long-term investments (cost $36,635,565) 37,900,097
------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-60
<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
Portfolio of Investments as of April 30, 1998 INTERMEDIATE SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------------
SHORT-TERM INVESTMENTS--1.6%
- ---------------------------------------------------------------------------------------------------------------------------------
Texas--1.6%
Brazos River Auth. Poll. Ctrl. Rev., Texas Util. Elec.
Co., Ser. 95C, F.R.D.D., A.M.T. (cost $600,000) VMIG1 4.40% 5/01/98 $ 600 $ 600,000
------------
Total Investments--99.3% (cost $37,235,565; Note 4 ) 38,500,097
Other assets in excess of liabilities--0.7% 286,268
------------
Net Assets--100% $ 38,786,365
------------
------------
</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 (d)
F.S.A.--Financial Security Assurance
M.B.I.A.--Municipal Bond Insurance Association
(b) Standard & Poor's Rating.
(c) Prerefunded issues are secured by escrowed cash and direct U.S.
guaranteed obligations.
(d) The maturity date shown is 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.
NR--Not rated by Moody's or Standard & Poor's.
The Fund's current Prospectus contains a description of Moody's and Standard &
Poor's ratings.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-61
<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
Statement of Assets and Liabilities INTERMEDIATE SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Assets April 30, 1998
<S> <C>
Investments, at value (cost $37,235,565).................................................................... $ 38,500,097
Interest receivable......................................................................................... 602,522
Receivable for Series shares sold........................................................................... 17,063
Other assets................................................................................................ 852
--------------
Total assets............................................................................................. 39,120,534
--------------
Liabilities
Bank overdraft.............................................................................................. 23,529
Accrued expenses............................................................................................ 127,453
Payable for Series shares reacquired........................................................................ 115,603
Dividends payable........................................................................................... 40,096
Management fee payable...................................................................................... 15,692
Distribution fee payable.................................................................................... 11,796
--------------
Total liabilities........................................................................................ 334,169
--------------
Net Assets.................................................................................................. $ 38,786,365
--------------
--------------
Net assets were comprised of:
Shares of beneficial interest, at par.................................................................... $ 35,867
Paid-in capital in excess of par......................................................................... 37,195,390
--------------
37,231,257
Accumulated net realized gain on investments............................................................. 290,576
Net unrealized appreciation on investments............................................................... 1,264,532
--------------
Net assets, April 30, 1998.................................................................................. $ 38,786,365
--------------
--------------
Class A:
Net asset value and redemption price per share
($13,125,685 DIVIDED BY 1,213,932 shares of beneficial interest issued and outstanding)............... $10.81
Maximum sales charge (3% of offering price).............................................................. .33
--------------
Maximum offering price to public......................................................................... $11.14
--------------
--------------
Class B:
Net asset value, offering price and redemption price per share
($24,017,088 DIVIDED BY 2,220,773 shares of beneficial interest issued and outstanding)............... $10.81
--------------
--------------
Class C:
Net asset value, offering price and redemption price per share
($449,061 DIVIDED BY 41,523 shares of beneficial interest issued and outstanding)..................... $10.81
--------------
--------------
Class Z:
Net asset value, offering price and redemption price per share
($1,194,531 DIVIDED BY 110,471 shares of beneficial interest issued and outstanding).................. $10.81
--------------
--------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-62
<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
INTERMEDIATE SERIES
Statement of Operations
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended
Net Investment Income April 30, 1998
<S> <C>
Income
Interest.................................. $2,205,779
--------------
Expenses
Management fee............................ 207,968
Distribution fee--Class A................. 13,591
Distribution fee--Class B................. 135,876
Distribution fee--Class C................. 2,856
Reports to shareholders................... 87,000
Custodian's fees and expenses............. 72,000
Registration fees......................... 62,000
Transfer agent's fees and expenses........ 38,000
Audit fee................................. 15,000
Trustees' fees and expenses............... 13,000
Legal fees and expenses................... 10,500
Miscellaneous............................. 6,554
--------------
Total expenses......................... 664,345
Less: Management fee waiver............... (7,346)
Custodian fee credit................... (185)
--------------
Net expenses........................... 656,814
--------------
Net investment income........................ 1,548,965
--------------
Realized and Unrealized
Gain (Loss) on Investments
Net realized gain (loss) on:
Investment transactions................... 535,746
Financial futures contract transactions... (196,033)
--------------
339,713
--------------
Net change in unrealized appreciation/depreciation on:
Investments............................... 829,293
Financial futures contracts............... (12,906)
--------------
816,387
--------------
Net gain on investments...................... 1,156,100
--------------
Net Increase in Net Assets
Resulting from Operations.................... $2,705,065
--------------
--------------
</TABLE>
PRUDENTIAL MUNICIPAL BOND FUND
INTERMEDIATE SERIES
Statement of Changes in Net Assets
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Increase (Decrease) Year Ended April 30,
in Net Assets 1998 1997
<S> <C> <C>
Operations
Net investment income........... $ 1,548,965 $ 1,958,229
Net realized gain on investment
transactions................. 339,713 478,036
Net change in unrealized
appreciation
(depreciation) of
investments.................. 816,387 (699,669)
----------- ------------
Net increase in net assets
resulting from operations.... 2,705,065 1,736,596
----------- ------------
Dividends and distributions (Note
1):
Dividends from net investment
income
Class A...................... (542,230) (579,475)
Class B...................... (975,783) (1,371,478)
Class C...................... (12,672) (5,456)
Class Z...................... (18,280) (1,820)
----------- ------------
(1,548,965) (1,958,229)
----------- ------------
Distributions in excess of net
investment income
Class A...................... -- (9,615)
Class B...................... -- (22,423)
Class C...................... -- (75)
Class Z...................... -- (3)
----------- ------------
-- (32,116)
----------- ------------
Distributions from net capital
gains
Class A...................... (66,647) --
Class B...................... (130,950) --
Class C...................... (2,322) --
Class Z...................... (1,731) --
----------- ------------
(201,650) --
----------- ------------
Series share transactions (net of
share conversions) (Note 5):
Net proceeds from shares
subscribed................... 3,202,633 5,261,896
Net asset value of shares issued
in reinvestment of
dividends.................... 1,116,810 1,242,265
Cost of shares reacquired....... (10,710,780) (15,354,228)
----------- ------------
Net decrease in net assets from
Series share transactions.... (6,391,337) (8,850,067)
----------- ------------
Total decrease..................... (5,436,887) (9,103,816)
Net Assets
Beginning of year.................. 44,223,252 53,327,068
----------- ------------
End of year........................ $38,786,365 $ 44,223,252
----------- ------------
----------- ------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-63
<PAGE>
Notes to Financial Statements PRUDENTIAL MUNICIPAL BOND FUND
- --------------------------------------------------------------------------------
Prudential Municipal Bond Fund (the 'Fund') is registered under the Investment
Company Act of 1940 as a diversified, open-end management investment company.
The Fund was organized as an unincorporated business trust in Massachusetts on
November 3, 1986 and consists of three series: the High Yield Series, the
Insured Series and the Intermediate Series. Investment operations for Class A,
Class B, Class C and Class Z shares of each series commenced on January 22,
1990, September 17, 1987, August 1, 1994 and September 16, 1996, respectively.
The investment objectives of the series are as follows: (i) the objective of the
High Yield Series is to provide the maximum amount of income that is eligible
for exclusion from federal income taxes, (ii) the objective of the Insured and
Intermediate Series is to provide the maximum amount of income that is eligible
for exclusion from federal income taxes consistent with the preservation of
capital. The ability of issuers of debt securities held by the Fund to meet
their obligations may be affected by economic and political developments in a
specific state, region or industry.
- ------------------------------------------------------------
Note 1. Accounting Policies
Securities Valuation: Municipal securities (including commitments to purchase
such securities on a 'when-issued' basis) are valued 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.
Financial Futures Contracts: A financial futures contract is an agreement to
purchase (long) or sell (short) an agreed amount of debt securities at a set
price for delivery on a future date. Upon entering into a financial futures
contract, the Fund 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 Fund 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 Fund invests in financial futures contracts in order to hedge its existing
portfolio securities, or securities the Fund intends to purchase, against
fluctuations in value caused by changes in prevailing interest rates. Should
interest rates move unexpectedly, the Fund 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. 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 basis 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.
The Fund, as writer of an option, has 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 Fund amortizes premiums and accretes original issue discount
on portfolio securities as adjustments to interest income. Net investment
income, other than distribution fees, and realized and unrealized gains or
losses are allocated daily to each class of shares based upon the relative
proportion of net assets of each class at the beginning of the day. Expenses are
recorded on the accrual basis which may require the use of certain estimates by
management.
- --------------------------------------------------------------------------------
B-64
<PAGE>
Notes to Financial Statements PRUDENTIAL MUNICIPAL BOND FUND
- --------------------------------------------------------------------------------
Federal Income Taxes: For federal income tax purposes, each series in the Fund
is treated as a separate tax paying entity. It is the intent of each series to
continue to meet the requirements of the Internal Revenue Code applicable to
regulated investment companies and to distribute all net income to shareholders.
For this reason no federal income tax provision is required.
Dividends and Distributions: Dividends from net investment income are declared
daily and paid monthly. The Fund will distribute at least annually any net
capital gains. Dividends and distributions are recorded on the ex-dividend date.
Income distributions and capital gain distributions are determined in accordance
with income tax regulations which may differ from generally accepted accounting
principles.
Reclassification of Capital Accounts: The 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. For
the fiscal year ended April 30, 1998, the effect of applying this statement was
to increase undistributed net investment income and decrease accumulated net
realized gain by $171,122 for the Insured Series.
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'), doing business as Prudential Investments ('PI,'
the Subadviser or the investment adviser); PIC furnishes investment advisory
services in connection with the management of the Fund. PIFM pays for the cost
of the subadviser's services, the compensation of officers of the Fund,
occupancy and certain clerical and bookkeeping costs of the Fund. The Fund bears
all other costs and expenses.
The management fee paid PIFM is computed daily and payable monthly at an annual
rate of .50 of 1% of the average daily net assets of each series up to $1
billion and .45 of 1% of the average daily net assets of each series in excess
of $1 billion. PIFM has agreed to voluntarily waive a portion of each series'
management fee, which amounted to $535,931, $85,444 and $7,346 for the High
Yield Series, Insured Series and Intermediate Series, respectively. Such amounts
represented .05 of 1% of the average daily net assets or $.005 per share for the
High Yield Series and .02 of 1% of the average daily net assets or $.002 per
share for the Insured Series and Intermediate Series. Effective September 1,
1997, PIFM eliminated its management fee waiver for the Insured Series and
Intermediate Series.
The Fund has a distribution agreement with Prudential Securities Incorporated
('PSI'), which acts as the distributor of the Class A, Class B, Class C and
Class Z shares of the Fund. The Fund compensates PSI for distributing and
servicing the Fund's Class A, Class B and Class C shares, pursuant to plans of
distribution (the 'Class A, B and C Plans'), regardless of expenses actually
incurred by PSI. The distribution fees are accrued daily and payable monthly. No
distribution or service fees are paid to PSI as distributor of the Class Z
shares of the Fund. Effective July 1, 1998, Prudential Investment Management
Services LLC will become the distributor of the Fund and will serve the Fund
under the same terms and conditions as under the arrangement with PSI.
Pursuant to the Class A, B and C Plans, the Fund compensates PSI for
distribution-related activities at an annual rate of up to .30 of 1%, .50 of 1%
and 1%, of the average daily net assets of the Class A, B and C shares,
respectively. Such expenses under the Plans were .10 of 1%, .50 of 1% and .75 of
1% of the average daily net assets of the Class A, B and C shares, respectively,
for the year ended April 30, 1998.
PSI has advised the Fund that it received approximately $529,300 ($493,600-High
Yield Series; $30,400-Insured Series; $5,300-Intermediate Series) in front-end
sales charges resulting from sales of Class A shares during the year ended April
30, 1998. From these fees, PSI paid such sales charges to affiliated
broker-dealers which in turn paid commissions to salespersons and incurred other
distribution costs.
PSI has advised the Fund that for the year ended April 30, 1998, it received
approximately $1,320,700 ($866,900-High Yield Series; $388,200-Insured Series;
$65,600-Intermediate Series) in contingent deferred sales charges imposed upon
certain redemptions by Class B and C shareholders.
PSI, PIC and PIFM are indirect, wholly owned subsidiaries of The Prudential
Insurance Company of America.
The Fund, along with other affiliated registered investment companies (the
'Funds'), has a credit agreement (the 'Agreement') with an unaffiliated lender.
The maximum commitment under the Agreement is $200,000,000. Interest on any such
borrowings outstanding will be at market rates. The purpose of the Agreement is
to serve as an alternative
- --------------------------------------------------------------------------------
B-65
<PAGE>
Notes to Financial Statements PRUDENTIAL MUNICIPAL BOND FUND
- --------------------------------------------------------------------------------
source of funding for capital share redemptions. The Fund has not borrowed any
amounts pursuant to the Agreement during the year ended April 30, 1998. The
Funds pay a commitment fee at an annual rate of .055 of 1% on the unused portion
of the credit facility. The commitment fee is accrued and paid quarterly on a
pro rata basis by the Funds. The Agreement expired on December 30, 1997 and has
been extended through December 29, 1998 under the same terms.
- ------------------------------------------------------------
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 April 30, 1998, the
Fund incurred fees of approximately $609,100 ($361,000-High Yield Series;
$221,700-Insured Series; $26,400-Intermediate Series) for the services of PMFS.
As of April 30, 1998, approximately $51,600 ($31,100-High Yield Series;
$18,300-Insured Series; $2,200-Intermediate Series) of such fees were due to
PMFS. Transfer agent fees and expenses in the Statement of Operations also
include certain out of pocket expenses paid to nonaffiliates.
- ------------------------------------------------------------
Note 4. Portfolio Securities
Purchases and sales of portfolio securities, excluding short-term investments,
for the year ended April 30, 1998, were as follows:
<TABLE>
<CAPTION>
Series Purchases Sales
- -------------------------------- ------------ ------------
<S> <C> <C>
High Yield...................... $208,053,727 $139,078,918
Insured......................... 404,690,101 456,797,559
Intermediate.................... 21,888,177 28,523,204
</TABLE>
At April 30, 1998, the High Yield Series and the Insured Series sold 100,000 and
284,000 financial futures contracts, respectively of U.S. Treasury Bonds
expiring in June 1998.
The values of these financial futures contracts at April 30, 1998 were as
follows:
<TABLE>
<CAPTION>
Financial Futures
Contracts Sold
--------------------------
High Yield Insured
Series Series
----------- -----------
<S> <C> <C>
Value at disposition.............. $12,003,625 $34,421,156
Value at April 30, 1998........... 12,003,625 34,315,093
----------- -----------
Unrealized gain................... $ 0 $ 106,063
----------- -----------
----------- -----------
</TABLE>
The federal income tax basis of the Fund's investments, at April 30, 1998 was
$1,026,195,791-High Yield Series; $438,671,525-Insured Series; and
$37,235,565-Intermediate Series and, accordingly, net unrealized appreciation of
investments for federal income tax purposes was as follows:
<TABLE>
<CAPTION>
Gross Gross
Net unrealized unrealized unrealized
Series appreciation appreciation depreciation
- --------------------- -------------- ----------- ----------
<S> <C> <C> <C>
High Yield........... $ 81,054,099 $90,185,030 $9,130,931
Insured.............. 20,404,291 21,977,695 1,573,404
Intermediate......... 1,264,532 1,334,659 70,127
</TABLE>
The High Yield Series has a net capital loss carryforward as of April 30, 1998
of approximately $17,547,000, of which $2,024,000 expires in 2002, $5,361,000
expires in 2003, $6,383,000 expires in 2004, $3,225,000 expires in 2005, and
$554,000 expires in 2006. No capital gains distribution is expected to be paid
to shareholders until net gains have been realized in excess of the aggregate of
such amounts. In addition, the High Yield Series elected to treat net realized
capital losses of approximately $6,709,700 incurred in the six-month period
ended April 30, 1998, as having been incurred in the following year.
- ------------------------------------------------------------
Note 5. Capital
Each 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 3.0%. Class B shares are sold
with a contingent deferred sales charge which declines from 5% to zero depending
on the period of time the shares are held. Class C shares are sold with a
contingent deferred sales charge of 1% during the first year. Class B shares
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. Class Z
shares are not subject to any sales or redemption charge and are offered
exclusively for sale to a limited group of investors.
- --------------------------------------------------------------------------------
B-66
<PAGE>
Notes to Financial Statements PRUDENTIAL MUNICIPAL BOND FUND
- --------------------------------------------------------------------------------
The Fund has authorized an unlimited number of shares of beneficial interest of
each class at $.01 par value per share. Transactions in shares of beneficial
interest were as follows:
<TABLE>
<CAPTION>
High Yield Series Insured Series Intermediate Series
Class A Class A Class A
---------------------------- ---------------------------- ------------------------
Year Ended April 30, 1998 Shares Amount Shares Amount Shares Amount
- ---------------------------------- ----------- ------------- ----------- ------------- -------- ------------
<S> <C> <C> <C> <C> <C> <C>
Shares issued..................... 5,097,999 $ 57,395,615 569,674 $ 6,395,067 51,122 $ 558,941
Shares issued in reinvestment of
dividends and distributions.... 962,597 10,829,429 785,872 8,843,968 36,144 393,414
Shares reacquired................. (6,025,736) (67,587,666) (3,276,382) (36,775,017) (331,385) (3,600,677)
----------- ------------- ----------- ------------- -------- ------------
Net increase (decrease) in shares
outstanding before
conversion..................... 34,860 637,378 (1,920,836) (21,535,982) (244,119) (2,648,322)
Shares issued upon conversion from
Class B........................ 6,417,324 71,773,373 3,118,260 35,134,908 160,123 1,739,629
----------- ------------- ----------- ------------- -------- ------------
Net increase (decrease) in shares
outstanding.................... 6,452,184 $ 72,410,751 1,197,424 $ 13,598,926 (83,996) $ (908,693)
----------- ------------- ----------- ------------- -------- ------------
----------- ------------- ----------- ------------- -------- ------------
Year Ended April 30, 1997
- ----------------------------------
Shares issued..................... 2,690,433 $ 29,194,209 17,268,103 $ 190,281,225 146,988 $ 1,570,573
Shares issued in reinvestment of
dividends and distributions.... 816,257 8,853,738 562,530 6,209,882 33,834 360,674
Shares reacquired................. (5,951,712) (64,552,270) (20,358,917) (224,259,104) (505,221) (5,381,606)
----------- ------------- ----------- ------------- -------- ------------
Net decrease in shares outstanding
before
conversion..................... (2,445,022) (26,504,323) (2,528,284) (27,767,997) (324,399) (3,450,359)
Shares issued upon conversion from
Class B........................ 12,411,968 133,842,041 8,887,896 97,509,503 443,554 4,710,903
----------- ------------- ----------- ------------- -------- ------------
Net increase in shares
outstanding.................... 9,966,946 $ 107,337,718 6,359,612 $ 69,741,506 119,155 $ 1,260,544
----------- ------------- ----------- ------------- -------- ------------
----------- ------------- ----------- ------------- -------- ------------
<CAPTION>
High Yield Series Insured Series Intermediate Series
Class B Class B Class B
---------------------------- ---------------------------- ------------------------
Year Ended April 30, 1998 Shares Amount Shares Amount Shares Amount
- ---------------------------------- ----------- ------------- ----------- ------------- -------- ------------
<S> <C> <C> <C> <C> <C> <C>
Shares issued..................... 10,261,223 $ 115,317,304 894,372 $ 10,051,980 113,994 $ 1,243,792
Shares issued in reinvestment of
dividends and distributions.... 1,416,916 15,920,018 915,681 10,310,964 63,393 689,975
Shares reacquired................. (7,485,320) (84,004,151) (4,626,069) (51,987,346) (627,441) (6,818,594)
----------- ------------- ----------- ------------- -------- ------------
Net increase (decrease) in shares
outstanding before
conversion..................... 4,192,819 47,233,171 (2,816,016) (31,624,402) (450,054) (4,884,827)
Shares issued upon conversion from
Class A........................ (6,418,319) (71,773,373) (3,114,481) (35,134,908) (160,109) (1,739,629)
----------- ------------- ----------- ------------- -------- ------------
Net decrease in shares
outstanding.................... (2,225,500) $ (24,540,202) (5,930,497) $ (66,759,310) (610,163) $ (6,624,456)
----------- ------------- ----------- ------------- -------- ------------
----------- ------------- ----------- ------------- -------- ------------
Year Ended April 30, 1997
- ----------------------------------
Shares issued..................... 7,261,475 $ 78,657,488 991,206 $ 10,920,454 293,960 $ 3,134,459
Shares issued in reinvestment of
dividends and distributions.... 1,747,161 18,927,857 1,049,549 11,593,012 82,134 875,459
Shares reacquired................. (9,901,712) (107,242,000) (6,341,050) (69,974,266) (909,089) (9,694,638)
----------- ------------- ----------- ------------- -------- ------------
Net decrease in shares outstanding
before conversion.............. (893,076) (9,656,655) (4,300,295) (47,460,800) (532,995) (5,684,720)
Shares reacquired upon conversion
into Class A................... (12,411,968) (133,842,041) (8,879,800) (97,509,503) (443,243) (4,710,903)
----------- ------------- ----------- ------------- -------- ------------
Net decrease in shares
outstanding.................... (13,305,044) $(143,498,696) (13,180,095) $(144,970,303) (976,238) $(10,395,623)
----------- ------------- ----------- ------------- -------- ------------
----------- ------------- ----------- ------------- -------- ------------
</TABLE>
- --------------------------------------------------------------------------------
B-67
<PAGE>
Notes to Financial Statements PRUDENTIAL MUNICIPAL BOND FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
High Yield Series Insured Series Intermediate Series
Class C Class C Class C
---------------------------- ---------------------------- ------------------------
Year Ended April 30, 1998 Shares Amount Shares Amount Shares Amount
- ---------------------------------- ----------- ------------- ----------- ------------- -------- ------------
<S> <C> <C> <C> <C> <C> <C>
Shares issued..................... 1,210,837 $ 13,633,168 75,353 $ 851,857 31,683 $ 345,224
Shares issued in reinvestment of
dividends and distributions.... 45,608 514,159 4,949 55,759 1,355 14,774
Shares reacquired................. (321,058) (3,613,378) (25,249) (284,339) (15,800) (171,265)
----------- ------------- ----------- ------------- -------- ------------
Net increase in shares
outstanding.................... 935,387 $ 10,533,949 55,053 $ 623,277 17,238 $ 188,733
----------- ------------- ----------- ------------- -------- ------------
----------- ------------- ----------- ------------- -------- ------------
Year Ended April 30, 1997
- ----------------------------------
Shares issued..................... 505,330 $ 5,472,765 21,265 $ 234,063 28,931 $ 311,189
Shares issued in reinvestment of
dividends and distributions.... 28,059 304,264 3,510 38,759 436 4,639
Shares reacquired................. (256,031) (2,781,902) (47,234) (521,343) (26,221) (277,703)
----------- ------------- ----------- ------------- -------- ------------
Net increase (decrease) in shares
outstanding.................... 277,358 $ 2,995,127 (22,459) $ (248,521) 3,146 $ 38,125
----------- ------------- ----------- ------------- -------- ------------
----------- ------------- ----------- ------------- -------- ------------
<CAPTION>
High Yield Series Insured Series Intermediate Series
Class Z Class Z Class Z
---------------------------- ---------------------------- ------------------------
Year Ended April 30, 1998 Shares Amount Shares Amount Shares Amount
- ---------------------------------- ----------- ------------- ----------- ------------- -------- ------------
<S> <C> <C> <C> <C> <C> <C>
Shares issued..................... 737,972 $ 8,311,994 49,053 $ 550,297 96,575 $ 1,054,676
Shares issued in reinvestment of
dividends and distributions.... 29,882 337,131 1,039 11,710 1,711 18,647
Shares reacquired................. (141,036) (1,592,621) (13,642) (153,875) (11,026) (120,244)
----------- ------------- ----------- ------------- -------- ------------
Net increase in shares
outstanding.................... 626,818 $ 7,056,504 36,450 $ 408,132 87,260 $ 953,079
----------- ------------- ----------- ------------- -------- ------------
----------- ------------- ----------- ------------- -------- ------------
September 16, 1996(a) Through
April 30, 1997
- ----------------------------------
Shares issued..................... 287,958 $ 3,134,548 1,377 $ 15,206 23,097 $ 245,675
Shares issued in reinvestment of
dividends and distributions.... 2,192 23,750 16 177 140 1,493
Shares reacquired................. (39,065) (425,418) (10) (115) (27) (281)
----------- ------------- ----------- ------------- -------- ------------
Net increase in shares
outstanding.................... 251,085 $ 2,732,880 1,383 $ 15,268 23,210 $ 246,887
----------- ------------- ----------- ------------- -------- ------------
----------- ------------- ----------- ------------- -------- ------------
</TABLE>
- ---------------
(a) Commencement of offering of Class Z shares.
- ------------------------------------------------------------
Note 6. Subsequent Event
On June 23, 1998 the Trustees of the Fund approved a change in the name of the
High Yield Series to the High Income Series effective July 1, 1998.
- --------------------------------------------------------------------------------
B-68
<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
Financial Highlights HIGH YIELD SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A
-----------------------------------------------------------
Years Ended April 30,
-----------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year.................. $ 10.84 $ 10.70 $ 10.72 $ 10.74 $ 11.14
-------- -------- -------- -------- -------
Income from investment operations
Net investment income............................... .67(b) .70(b) .72(b) .72(b) .72
Net realized and unrealized gain (loss) on
investment transactions.......................... .47 .14 (.02) (.02) (.39)
-------- -------- -------- -------- -------
Total from investment operations................. 1.14 .84 .70 .70 .33
-------- -------- -------- -------- -------
Less distributions
Dividends from net investment income................ (.67) (.70) (.72) (.72) (.72)
Distributions from capital gains.................... -- -- -- -- (.01)
-------- -------- -------- -------- -------
Total distributions.............................. (.67) (.70) (.72) (.72) (.73)
-------- -------- -------- -------- -------
Net asset value, end of year........................ $ 11.31 $ 10.84 $ 10.70 $ 10.72 $ 10.74
-------- -------- -------- -------- -------
-------- -------- -------- -------- -------
TOTAL RETURN(a):.................................... 10.80% 8.03% 6.55% 6.90% 2.88%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)....................... $421,504 $334,062 $223,073 $115,501 $54,491
Average net assets (000)............................ $381,735 $294,940 $162,329 $ 65,207 $52,982
Ratios to average net assets:
Expenses, including distribution fees............ .62%(b) 0.64%(b) 0.64%(b) 0.69%(b) 0.69%
Expenses, excluding distribution fees............ .52%(b) 0.54%(b) 0.54%(b) 0.59%(b) 0.59%
Net investment income............................ 6.03%(b) 6.44%(b) 6.58%(b) 6.83%(b) 6.42%
For Class A, B, C and Z shares:
Portfolio turnover rate.......................... 13% 26% 35% 39% 36%
</TABLE>
- --------------
(a) 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.
(b) Net of management fee waiver.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-69
<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
Financial Highlights HIGH YIELD SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class B
----------------------------------------------------------------
Years Ended April 30,
----------------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year.................. $ 10.84 $ 10.69 $ 10.72 $ 10.74 $ 11.14
-------- -------- -------- ---------- ----------
Income from investment operations
Net investment income............................... .63(b) .66(b) .68(b) .68(b) .68
Net realized and unrealized gain (loss) on
investment transactions.......................... .47 .15 (.03) (.02) (.39)
-------- -------- -------- ---------- ----------
Total from investment operations................. 1.10 .81 .65 .66 .29
-------- -------- -------- ---------- ----------
Less distributions
Dividends from net investment income................ (.63) (.66) (.68) (.68) (.68)
Distributions from capital gains.................... -- -- -- -- (.01)
-------- -------- -------- ---------- ----------
Total distributions.............................. (.63) (.66) (.68) (.68) (.69)
-------- -------- -------- ---------- ----------
Net asset value, end of year........................ $ 11.31 $ 10.84 $ 10.69 $ 10.72 $ 10.74
-------- -------- -------- ---------- ----------
-------- -------- -------- ---------- ----------
TOTAL RETURN(a):.................................... 10.36% 7.71% 6.12% 6.37% 2.46%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)....................... $669,223 $665,525 $799,048 $ 934,725 $1,099,640
Average net assets (000)............................ $669,132 $725,305 $900,115 $1,024,132 $1,132,653
Ratios to average net assets:
Expenses, including distribution fees............ 1.02%(b) 1.04%(b) 1.04%(b) 1.09%(b) 1.09%
Expenses, excluding distribution fees............ .52%(b) 0.54%(b) 0.54%(b) 0.59%(b) 0.58%
Net investment income............................ 5.63%(b) 6.05%(b) 6.19%(b) 6.37%(b) 6.02%
</TABLE>
- ---------------
(a) 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.
(b) Net of management fee waiver.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-70
<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
Financial Highlights HIGH YIELD SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class C Class Z
---------------------------------------------------- ----------
August 1,
1994(c) Year
Years Ended April 30, Through Ended
------------------------------------- April 30, April 30,
1998 1997 1996 1995 1998
--------- --------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year.................. $ 10.84 $ 10.69 $ 10.72 $10.79 $10.83
--------- --------- --------- ----- -----
Income from investment operations
Net investment income (b)........................... .61 .63 .65 .49 .68
Net realized and unrealized gain (loss) on
investment transactions.......................... .47 .15 (.03) (.07) .47
--------- --------- --------- ----- -----
Total from investment operations................. 1.08 .78 .62 .42 1.15
--------- --------- --------- ----- -----
Less distributions
Dividends from net investment income................ (.61) (.63) (.65) (.49) (.68)
--------- --------- --------- ----- -----
Net asset value, end of year........................ $ 11.31 $ 10.84 $ 10.69 $10.72 $11.30
--------- --------- --------- ----- -----
--------- --------- --------- ----- -----
TOTAL RETURN(a):.................................... 10.09% 7.44% 5.86% 3.91% 10.91%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)....................... $20,554 $ 9,563 $ 6,471 $3,208 $9,919
Average net assets (000)............................ $14,932 $ 8,060 $ 5,608 $1,385 $6,064
Ratios to average net assets:
Expenses, including distribution fees (b)........ 1.27% 1.29% 1.29% 1.34%(e) .52%
Expenses, excluding distribution fees (b)........ .52% 0.54% 0.54% 0.59%(e) .52%
Net investment income (b)........................ 5.39% 5.80% 5.93% 6.34%(e) 6.14%
<CAPTION>
September 16,
1996(d)
Through
April 30,
1997
-------------
<S> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year.................. $ 10.79
-----
Income from investment operations
Net investment income (b)........................... .45
Net realized and unrealized gain (loss) on
investment transactions.......................... .04
-----
Total from investment operations................. .49
-----
Less distributions
Dividends from net investment income................ (.45)
-----
Net asset value, end of year........................ $ 10.83
-----
-----
TOTAL RETURN(a):.................................... 4.36%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)....................... $ 2,719
Average net assets (000)............................ $ 704
Ratios to average net assets:
Expenses, including distribution fees (b)........ 0.54%(e)
Expenses, excluding distribution fees (b)........ 0.54%(e)
Net investment income (b)........................ 6.55%(e)
</TABLE>
- ---------------
(a) 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. Total returns for periods of less than a full year are not
annualized.
(b) Net of management fee waiver.
(c) Commencement of offering of Class C shares.
(d) Commencement of offering of Class Z shares.
(e) Annualized.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-71
<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
Financial Highlights INSURED SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A
----------------------------------------------------------
Years Ended April 30,
----------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- ------- -------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year.................. $ 10.90 $ 10.94 $ 10.83 $ 10.71 $ 11.44
-------- -------- -------- ------- -------
Income from investment operations
Net investment income............................... .53(b) .55(b) .58(b) .58(b) .58
Net realized and unrealized gain (loss) on
investment transactions.......................... .40 .08 .11 .12 (.43)
-------- -------- -------- ------- -------
Total from investment operations................. .93 .63 .69 .70 .15
-------- -------- -------- ------- -------
Less distributions
Dividends from net investment income................ (.53) (.55) (.58) (.58) (.58)
Distributions in excess of net investment income.... --(c) (.01) -- -- --
Distributions from capital gains.................... (.25) (.11) -- -- (.30)
-------- -------- -------- ------- -------
Total distributions.............................. (.78) (.67) (.58) (.58) (.88)
-------- -------- -------- ------- -------
Net asset value, end of year........................ $ 11.05 $ 10.90 $ 10.94 $ 10.83 $ 10.71
-------- -------- -------- ------- -------
-------- -------- -------- ------- -------
TOTAL RETURN(a):.................................... 8.67% 5.74% 6.47% 6.73% 1.04%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)....................... $224,409 $208,411 $139,548 $75,800 $30,669
Average net assets (000)............................ $222,115 $187,371 $102,456 $39,471 $32,309
Ratios to average net assets:
Expenses, including distribution fees............ 0.69%(b) 0.68%(b) 0.68%(b) 0.74%(b) 0.71%
Expenses, excluding distribution fees............ 0.59%(b) 0.58%(b) 0.58%(b) 0.64%(b) 0.61%
Net investment income............................ 4.75%(b) 4.95%(b) 5.20%(b) 5.45%(b) 5.09%
For Class A, B, C and Z shares:
Portfolio turnover rate.......................... 85% 110% 68% 64% 105%
</TABLE>
- ---------------
(a) 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.
(b) Net of management fee waiver.
(c) Less than $.005 per share.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-72
<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
Financial Highlights INSURED SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class B
------------------------------------------------------------
Years Ended April 30,
------------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year.................. $ 10.91 $ 10.95 $ 10.84 $ 10.71 $ 11.44
-------- -------- -------- -------- --------
Income from investment operations
Net investment income............................... .49(b) .50(b) .54(b) .54(b) .54
Net realized and unrealized gain (loss) on
investment transactions.......................... .40 .08 .11 .13 (.43)
-------- -------- -------- -------- --------
Total from investment operations................. .89 .58 .65 .67 .11
-------- -------- -------- -------- --------
Less distributions
Dividends from net investment income................ (.49) (.50) (.54) (.54) (.54)
Distributions in excess of net investment income.... --(c) (.01) -- -- --
Distributions from capital gains.................... (.25) (.11) -- -- (.30)
-------- -------- -------- -------- --------
Total distributions.............................. (.74) (.62) (.54) (.54) (.84)
-------- -------- -------- -------- --------
Net asset value, end of year........................ $ 11.06 $ 10.91 $ 10.95 $ 10.84 $ 10.71
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
TOTAL RETURN(a):.................................... 8.23% 5.32% 6.04% 6.40% 0.63%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)....................... $236,370 $298,005 $443,391 $567,648 $740,447
Average net assets (000)............................ $270,553 $365,891 $524,452 $660,237 $807,794
Ratios to average net assets:
Expenses, including distribution fees............ 1.09%(b) 1.08%(b) 1.08%(b) 1.14%(b) 1.11%
Expenses, excluding distribution fees............ 0.59%(b) 0.58%(b) 0.58%(b) 0.64%(b) 0.61%
Net investment income............................ 4.35%(b) 4.54%(b) 4.80%(b) 4.99%(b) 4.69%
</TABLE>
- ---------------
(a) 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.
(b) Net of management fee waiver.
(c) Less than $.005 per share.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-73
<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
Financial Highlights INSURED SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class C Class Z
---------------------------------------------------- ----------
August 1,
1994(c) Year
Years Ended April 30, Through Ended
------------------------------------- April 30, April 30,
1998 1997 1996 1995 1998
--------- --------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year.................. $ 10.91 $ 10.95 $ 10.84 $10.79 $10.91
--------- --------- --------- ----- -----
Income from investment operations
Net investment income(b)............................ .46 .48 .51 .39 .54
Net realized and unrealized gain (loss) on
investment transactions.......................... .40 .08 .11 .05 .39
--------- --------- --------- ----- -----
Total from investment operations................. .86 .56 .62 .44 .93
--------- --------- --------- ----- -----
Less distributions
Dividends from net investment income................ (.46) (.48) (.51) (.39) (.54)
Distributions in excess of net investment income.... --(f) (.01) -- -- --(f)
Distributions from capital gains.................... (.25) (.11) -- -- (.25)
--------- --------- --------- ----- -----
Total distributions.............................. (.71) (.60) (.51) (.39) (.79)
--------- --------- --------- ----- -----
Net asset value, end of year........................ $ 11.06 $ 10.91 $ 10.95 $10.84 $11.05
--------- --------- --------- ----- -----
--------- --------- --------- ----- -----
TOTAL RETURN(a):.................................... 7.96% 5.06% 5.78% 4.03% 8.68%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)....................... $ 1,509 $ 888 $ 1,137 $ 525 $ 418
Average net assets (000)............................ $ 1,142 $ 973 $ 827 $ 224 $ 173
Ratios to average net assets:
Expenses, including distribution fees(b)......... 1.34% 1.33% 1.33% 1.39%(e) 0.60%
Expenses, excluding distribution fees(b)......... 0.59% 0.58% 0.58% 0.64%(e) 0.60%
Net investment income(b)......................... 4.11% 4.29% 4.56% 4.92%(e) 4.92%
<CAPTION>
September 16,
1996(d)
Through
April 30,
1997
-------------
<S> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year.................. $ 11.05
-----
Income from investment operations
Net investment income(b)............................ .36
Net realized and unrealized gain (loss) on
investment transactions.......................... (.02)
-----
Total from investment operations................. .34
-----
Less distributions
Dividends from net investment income................ (.36)
Distributions in excess of net investment income.... (.01)
Distributions from capital gains.................... (.11)
-----
Total distributions.............................. (.48)
-----
Net asset value, end of year........................ $ 10.91
-----
-----
TOTAL RETURN(a):.................................... 2.86%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)....................... $ 15
Average net assets (000)............................ $ 10
Ratios to average net assets:
Expenses, including distribution fees(b)......... 0.58%(e)
Expenses, excluding distribution fees(b)......... 0.58%(e)
Net investment income(b)......................... 4.18%(e)
</TABLE>
- ---------------
(a) 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. Total returns for periods of less than a full year are not
annualized.
(b) Net of management fee waiver.
(c) Commencement of offering of Class C shares.
(d) Commencement of offering of Class Z shares.
(e) Annualized.
(f) Less than $.005 per share.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-74
<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
Financial Highlights INTERMEDIATE SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A
------------------------------------------------------
Years Ended April 30,
------------------------------------------------------
1998 1997 1996 1995 1994
------- ------- ------- ------- ------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year.................. $ 10.59 $ 10.65 $ 10.45 $ 10.67 $11.08
------- ------- ------- ------- ------
Income from investment operations
Net investment income............................... .43(b) .46(b) .47(b) .51(b) .53
Net realized and unrealized gain (loss) on
investment transactions.......................... .28 (.05) .20 (.03) (.19)
------- ------- ------- ------- ------
Total from investment operations................. .71 .41 .67 .48 .34
------- ------- ------- ------- ------
Less distributions
Dividends from net investment income................ (.43) (.46) (.47) (.51) (.53)
Distributions in excess of net investment income.... -- (.01) -- (.01) --
Distributions from capital gains.................... (.06) -- -- (.18) (.22)
------- ------- ------- ------- ------
Total distributions.............................. (.49) (.47) (.47) (.70) (.75)
------- ------- ------- ------- ------
Net asset value, end of year........................ $ 10.81 $ 10.59 $ 10.65 $ 10.45 $10.67
------- ------- ------- ------- ------
------- ------- ------- ------- ------
TOTAL RETURN(a):.................................... 6.76% 3.86% 6.48% 4.52% 2.83%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)....................... $13,126 $13,740 $12,552 $10,507 $5,810
Average net assets (000)............................ $13,591 $13,487 $12,604 $ 7,742 $4,981
Ratios to average net assets:
Expenses, including distribution fees............ 1.31%(b) 1.15%(b) 1.16%(b) 1.05%(b) 1.00%
Expenses, excluding distribution fees............ 1.21%(b) 1.05%(b) 1.06%(b) 0.95%(b) 0.90%
Net investment income............................ 3.99%(b) 4.30%(b) 4.36%(b) 4.75%(b) 4.63%
For Class A, B, C and Z shares:
Portfolio turnover rate.......................... 54% 46% 35% 30% 55%
</TABLE>
- ---------------
(a) 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.
(b) Net of management fee waiver.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-75
<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
Financial Highlights INTERMEDIATE SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class B
-------------------------------------------------------
Years Ended April 30,
-------------------------------------------------------
1998 1997 1996 1995 1994
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year.................. $ 10.59 $ 10.65 $ 10.45 $ 10.68 $ 11.09
------- ------- ------- ------- -------
Income from investment operations
Net investment income............................... .39(b) .42(b) .43(b) .45(b) .48
Net realized and unrealized gain (loss) on
investment transactions.......................... .28 (.05) .20 (.04) (.19)
------- ------- ------- ------- -------
Total from investment operations................. .67 .37 .63 .41 .29
------- ------- ------- ------- -------
Less distributions
Dividends from net investment income................ (.39) (.42) (.43) (.45) (.48)
Distributions in excess of net investment income.... -- (.01) -- (.01) --
Distributions from capital gains.................... (.06) -- -- (.18) (.22)
------- ------- ------- ------- -------
Total distributions.............................. (.45) (.43) (.43) (.64) (.70)
------- ------- ------- ------- -------
Net asset value, end of year........................ $ 10.81 $ 10.59 $ 10.65 $ 10.45 $ 10.68
------- ------- ------- ------- -------
------- ------- ------- ------- -------
TOTAL RETURN(a):.................................... 6.33% 3.44% 6.05% 3.99% 2.43%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)....................... $24,017 $29,980 $40,550 $51,039 $65,215
Average net assets (000)............................ $27,175 $35,221 $46,127 $60,174 $59,811
Ratios to average net assets:
Expenses, including distribution fees............ 1.71%(b) 1.55%(b) 1.56%(b) 1.45%(b) 1.40%
Expenses, excluding distribution fees............ 1.21%(b) 1.05%(b) 1.06%(b) 0.95%(b) 0.90%
Net investment income............................ 3.59%(b) 3.89%(b) 3.96%(b) 4.35%(b) 4.23%
</TABLE>
- ---------------
(a) 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.
(b) Net of management fee waiver.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-76
<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
Financial Highlights INTERMEDIATE SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class C Class Z
---------------------------------------------------- ----------
August 1,
1994(c) Year
Years Ended April 30, Through Ended
------------------------------------- April 30, April 30,
1998 1997 1996 1995 1998
--------- --------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year.................. $ 10.59 $ 10.65 $ 10.45 $10.54 $10.59
--------- --------- --------- ----- -----
Income from investment operations
Net investment income(b)............................ .36 .39 .40 .35 .44
Net realized and unrealized gain (loss) on
investment transactions.......................... .28 (.05) .20 (.08) .28
--------- --------- --------- ----- -----
Total from investment operations................. .64 .34 .60 .27 .72
--------- --------- --------- ----- -----
Less distributions
Dividends from net investment income................ (.36) (.39) (.40) (.35) (.44)
Distributions in excess of net investment income.... -- (.01) -- (.01) --
Distributions from capital gains.................... (.06) -- -- -- (.06)
--------- --------- --------- ----- -----
Total distributions.............................. (.42) (.40) (.40) (.36) (.50)
--------- --------- --------- ----- -----
Net asset value, end of year........................ $ 10.81 $ 10.59 $ 10.65 $10.45 $10.81
--------- --------- --------- ----- -----
--------- --------- --------- ----- -----
TOTAL RETURN(a):.................................... 6.07% 3.17% 5.79% 2.14% 6.86%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)....................... $ 449 $ 257 $ 225 $ 167 $1,194
Average net assets (000)............................ $ 381 $ 149 $ 197 $ 28 $ 447
Ratios to average net assets:
Expenses, including distribution fees(b)......... 1.96% 1.80% 1.81% 1.81%(e) 1.21%
Expenses, excluding distribution fees(b)......... 1.21% 1.05% 1.06% 1.06%(e) 1.21%
Net investment income(b)......................... 3.33% 3.65% 3.71% 4.34%(e) 4.09%
<CAPTION>
September 16,
1996(d)
Through
April 30,
1997
-------------
<S> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year.................. $ 10.63
-----
Income from investment operations
Net investment income(b)............................ .31
Net realized and unrealized gain (loss) on
investment transactions.......................... (.03)
-----
Total from investment operations................. .28
-----
Less distributions
Dividends from net investment income................ (.31)
Distributions in excess of net investment income.... (.01)
Distributions from capital gains.................... --
-----
Total distributions.............................. (.32)
-----
Net asset value, end of year........................ $ 10.59
-----
-----
TOTAL RETURN(a):.................................... 2.50%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)....................... $ 246
Average net assets (000)............................ $ 63
Ratios to average net assets:
Expenses, including distribution fees(b)......... 1.05%(e)
Expenses, excluding distribution fees(b)......... 1.05%(e)
Net investment income(b)......................... 4.65%(e)
</TABLE>
- ---------------
(a) 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. Total returns for periods of less than a full year are not
annualized.
(b) Net of management fee waiver.
(c) Commencement of offering of Class C shares.
(d) Commencement of offering of Class Z shares.
(e) Annualized.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-77
<PAGE>
Report of Independent Accountants PRUDENTIAL MUNICIPAL BOND FUND
- --------------------------------------------------------------------------------
To the Shareholders and Trustees of
Prudential Municipal Bond Fund
In our opinion, the accompanying statements of assets and liabilities, including
the portfolios 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 High Yield Series, Insured Series
and Intermediate Series (constituting Prudential Municipal Bond Fund, hereafter
referred to as the 'Fund') at April 30, 1998, the results of each of their
operations for the year then ended and the changes in each of their net assets
and the financial highlights for each of the two years in the period then ended,
in conformity with generally accepted accounting principles. These financial
statements and financial highlights (hereafter referred to as 'financial
statements') are the responsibility of the Fund's management; our responsibility
is to express an opinion on these financial statements based on our audits. We
conducted our audits of these financial statements in accordance with generally
accepted auditing standards which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at April 30, 1998 by
correspondence with the custodian and brokers and the application of alternative
auditing procedures where confirmations from brokers were not received, provide
a reasonable basis for the opinion expressed above. The accompanying financial
highlights for each of the three years in the period ended April 30, 1996 were
audited by other independent accountants, whose opinion dated June 13, 1996 was
unqualified.
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York
June 18, 1998
- --------------------------------------------------------------------------------
B-78
<PAGE>
APPENDIX I--GENERAL INVESTMENT INFORMATION
The following terms are used in mutual fund investing.
ASSET ALLOCATION
Asset allocation is a technique for reducing risk, providing balance. Asset
allocation among different types of securities within an overall investment
portfolio helps to reduce risk and to potentially provide stable returns, while
enabling investors to work toward their financial goal(s). Asset allocation is
also a strategy 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
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.
[CHART]
- ------------------------
Source: Stocks, Bonds, Bills and Inflation 1996 Yearbook, Ibbotson Associates',
Chicago, Illinois (annually updates work by Roger G. Ibbotson and Rex A.
Singlefield). Used with permission. All rights reserved. This chart is for
illustrative purposes only and is not indicative of the past, present, or future
performance of any asset class of any Prudential Mutual Fund.
Generally, stock returns are due to capital appreciation and reinvesting any
gains. Bond returns are due mainly to reinvesting interest. Also, stock prices
are usually more volatile than bond prices over the long-term.
Small stock returns for 1926-1980 are those of stocks comprising the 5th
quintile of the New York Stock Exchange. Thereafter, returns are those of the
Dimensional Fund Advisors (DFA) Small Company Fund. Common stock returns are
based on the S&P Composite Index, a market-weighted, unmanaged index of 500
stocks (currently) in a variety of industries. It is often used as a broad
measure of stock market performance.
Long-term government bond returns are represented by a portfolio that contains
only one bond with a maturity of roughly 20 years. At the beginning of each year
a new bond with a then-current coupon replaces the old bond. Treasury bill
returns are for a one-month bill. Treasuries are guaranteed by the government as
to the timely payment of principal and interest; equities are not. Inflation is
measured by the consumer price index (CPI).
Impact of Inflation. The "real" rate of investment return is that which exceeds
the rate of inflation, the percentage change in the value of consumer goods and
the general cost of living. A common goal of long-term investors is to outpace
the erosive impact of inflation on investment returns.
II-1
<PAGE>
Set forth below is historical performance data relating to various sectors
of the fixed-income securities markets. The chart shows the historical total
returns of U.S. Treasury bonds, U.S. mortgage securities, U.S. corporate bonds,
U.S. high yield bonds and world government bonds on an annual basis from 1987
through 1997. The total returns of the indices include accrued interest, plus
the price changes (gains or losses) of the underlying securities during the
period mentioned. The data is provided to illustrate the varying historical
total returns and investors should not consider this performance data as an
indication of the future performance of the Fund or of any sector in which the
Fund invests.
All information relies on data obtained from statistical services, reports
and other services believed by the Manager to be reliable. Such information has
not been verified. The figures do not reflect the operating expenses and fees of
a mutual fund. See "Fund Expenses" in the 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
HISTORICAL TOTAL RETURNS OF DIFFERENT BOND MARKET SECTORS
<TABLE>
<CAPTION>
'87 '88 '89 '90 '91 '92 '93 '94 '95 '96 '97
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. GOVERNMENT
TREASURY
BONDS(1) 2.0% 7.0% 14.4% 8.5% 15.3% 7.2% 10.7% (3.4)% 18.4% 2.7% 9.6%
U.S. GOVERNMENT
MORTGAGE
SECURITIES(2) 4.3% 8.7% 15.4% 10.7% 15.7% 7.0% 6.8% (1.6)% 16.8% 5.4% 9.5%
U.S. INVESTMENT GRADE
CORPORATE
BONDS(3) 2.6% 9.2% 14.1% 7.1% 18.5% 8.7% 12.2% (3.9)% 22.3% 3.3% 10.2%
U.S.
HIGH YIELD
CORPORATE
BONDS(4) 5.0% 12.5% 0.8% (9.6)% 46.2% 15.8% 17.1% (1.0)% 19.2% 11.4% 12.8%
WORLD
GOVERNMENT
BONDS(5) 35.2% 2.3% (3.4)% 15.3% 16.2% 4.8% 15.1% 6.0% 19.6% 4.1% (4.3)%
DIFFERENCE BETWEEN HIGHEST
AND LOWEST RETURN PERCENT 33.2 10.2 18.8 24.9 30.9 11.0 10.3 9.9 5.5 8.7% 17.1%
</TABLE>
(1) LEHMAN BROTHERS TREASURY BOND INDEX is an unmanaged index made up of over
150 public issues of the U.S. Treasury having maturities of at least one year.
(2) LEHMAN BROTHERS MORTGAGE-BACKED SECURITIES INDEX is an unmanaged index that
includes over 600 15- and 30-year fixed-rate mortgage-backed securities of the
Government National Mortgage Association (GNMA), Federal National Mortgage
Association (FNMA), and the Federal Home Loan Mortgage Corporation (FHLMC).
(3) LEHMAN BROTHERS CORPORATE BOND INDEX includes over 3,000 public fixed-rate,
nonconvertible investment-grade bonds. All bonds are U.S. dollar-denominated
issues and include debt issued or guaranteed by foreign sovereign governments,
municipalities, governmental agencies or international agencies. All bonds in
the index have maturities of at least one year.
(4) LEHMAN BROTHERS HIGH YIELD BOND INDEX is an unmanaged index comprising over
750 public, fixed-rate, nonconvertible bonds that are rated Ba1 or lower by
Moody's Investors Service (or rated BB+ or lower by Standard & Poor's or Fitch
Investors Service). All bonds in the index have maturities of at least one year.
(5) SALOMON BROTHERS WORLD GOVERNMENT INDEX (NON U.S.) includes over 800 bonds
issued by various foreign governments or agencies, excluding those in the U.S.,
but including those in Japan, Germany, France, the U.K., Canada, Italy,
Australia, Belgium, Denmark, the Netherlands, Spain, Sweden, and Austria. All
bonds in the index have maturities of at least one year.
II-2
<PAGE>
This chart below shows the historical volatility of general interest rates
as measured by the long U.S. Treasury Bond.
LONG U.S. TREASURY BOND YIELD IN PERCENT (1926-1997)
[CHART]
- ------------------------
Source: Stocks, Bonds, Bills, and Inflation 1997 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 the long-term U.S. Treasury Bond from 1926-1997. Yields represent that
of an annually renewed one-bond portfolio with a remaining maturity of
approximately 20 years. This chart is for illustrative purposes and should not
be construed to represent the yields of any Prudential Mutual Fund.
II-3
<PAGE>
APPENDIX III--INFORMATION RELATING TO THE PRUDENTIAL
Set forth below is information relating to The Prudential Insurance Company
of America (Prudential) and its subsidiaries as well as information relating to
the Prudential Mutual Funds. See "How the Fund is Managed--Manager" in the
Prospectus. The data will be used in sales materials relating to the Prudential
Mutual Funds. Unless otherwise indicated, the information is as of December 31,
1996 and is subject to change thereafter. All information relies on data
provided by The Prudential Investment Corporation (PIC) or from other sources
believed by the Manager to be reliable. Such information has not been verified
by the Fund.
INFORMATION ABOUT PRUDENTIAL
The Manager and PIC(1) are subsidiaries of Prudential, which is one of the
largest diversified financial services institutions in the world and, based on
total assets, the largest insurance company in North America as of December 31,
1997. Its primary business is to offer a full range of products and services in
three areas: insurance, investments and home ownership for individuals and
families; health-care management and other benefit programs for employees of
companies and members of groups; and asset management for institutional clients
and their associates. Prudential (together with its subsidiaries) employs more
than 79,000 persons worldwide, and maintains a sales force of approximately
10,100 agents and 6,500 financial advisors. Prudential is a major issuer of
annuities, including variable annuities. Prudential seeks to develop innovative
products and services to meet consumer needs in each of its business areas.
Prudential uses the rock of Gibraltar as its symbol. The Prudential rock is a
recognized brand name throughout the world.
INSURANCE. Prudential has been engaged in the insurance business since 1875.
It insures or provides financial services to more than 40 million people
worldwide--one of every five people in the United States. Long one of the
largest issuers of individual life insurance, the Prudential has 25 million life
insurance policies in force today with a face value of $1 trillion. Prudential
has the largest capital base ($12.1 billion) of any life insurance company in
the United States. Prudential provides auto insurance for more than 1.5 million
cars and insures more than 1.2 million homes.
MONEY MANAGEMENT. Prudential is one of the largest pension fund managers in
the country, providing pension services to 1 in 3 Fortune 500 firms. It manages
$36 billion of individual retirement plan assets, such as 401(k) plans. As of
December 31, 1997, Prudential had more than $370 billion in assets under
management. Prudential Investments, a business group of Prudential (of which
Prudential Mutual Funds is a key part) manages over $211 billion in assets of
institutions and individuals. In PENSIONS & INVESTMENTS, May 12, 1997,
Prudential was ranked third in terms of total assets under management.
REAL ESTATE. The Prudential Real Estate Affiliates, the fourth largest real
estate brokerage network in the United States, has more than 37,000 brokers and
agents across the United States.(2)
HEALTHCARE. Over two decades ago, Prudential introduced the first
federally-funded, for-profit HMO in the country. Today, almost 4.9 million
Americans receive healthcare from a Prudential managed care membership.
FINANCIAL SERVICES. The Prudential Bank, a wholly-owned subsidiary of
Prudential, has nearly $1 billion in assets and serves nearly 1.5 million
customers across 50 states.
INFORMATION ABOUT THE PRUDENTIAL MUTUAL FUNDS
As of December 31, 1997, Prudential Investments Fund Management was the 18th
largest mutual fund company in the country, with over 2.5 million shareholders
invested in more than 50 mutual fund portfolios and variable annuities with more
than 3.7 million shareholder accounts.
The Prudential Mutual Funds have over 30 portfolio managers who manage over
$55 billion in mutual fund and variable annuity assets. Some of Prudential's
portfolio managers have over 20 years of experience managing investment
portfolios.
From time to time, there may be media coverage of portfolio managers and
other investment professionals associated with the Manager and the Subadviser in
national and regional publications, on television and in other media.
Additionally, individual mutual fund portfolios are frequently cited in surveys
conducted by national and regional publications and media organizations such as
THE WALL STREET JOURNAL, THE NEW YORK TIMES, BARRON'S and USA TODAY.
- ------------------------
(1) The Prudential Investments,a business group of PIC, serves as the Subadviser
to substantially all of the Prudential Mutual Funds. Wellington Management
Company serves as the subadviser to Global Utility Fund, Inc.,
Nicholas-Applegate Capital Management as the subadviser to
Nicholas-Applegate Fund, Inc., Jennison Associates Capital Corp. as the
subadviser to Prudential Jennison Series Fund, Inc. and Mercator Asset
Management LP as the subadvisor to International Stock Series, a portfolio
of Prudential World Fund, Inc. There are multiple subadvisers for The Target
Portfolio Trust.
(2) As of December 31, 1994.
III-1
<PAGE>
EQUITY FUNDS. FORBES magazine listed Prudential Equity Fund among twenty
mutual funds on its Honor Roll in its mutual fund issue of August 28, 1995.
Honorees are chosen annually among mutual funds (excluding sector funds) which
are open to new investors and have had the same management for at least five
years. Forbes considers, among other criteria, the total return of a mutual fund
in both bull and bear markets as well as a fund's risk profile. Prudential
Equity Fund is managed with a "value" investment style by PIC. In 1995,
Prudential Securities introduced Prudential Jennison Fund, a growth-style equity
fund managed by Jennison Associates Capital Corp., a premier institutional
equity manager and a subsidiary of Prudential.
HIGH YIELD FUNDS. Investing in high yield bonds is a complex and research
intensive pursuit. A separate team of high yield bond analysts monitor
approximately 200 issues held in the Prudential High Yield Fund (currently the
largest fund of its kind in the country) along with 100 or so other high yield
bonds, which may be considered for purchase.(3) Non-investment grade bonds, also
known as junk bonds or high yield bonds, are subject to a greater risk of loss
of principal and interest including default risk than higher-rated bonds.
Prudential high yield portfolio managers and analysts meet face-to-face with
almost every bond issuer in the High Yield Fund's portfolio annually, and have
additional telephone contact throughout the year.
Prudential's portfolio managers are supported by a large and sophisticated
research organization. Fourteen investment grade bond analysts monitor the
financial viability of approximately 1,750 different bond issuers in the
investment grade corporate and municipal bond markets--from IBM to small
municipalities, such as Rockaway Township, New Jersey. These analysts consider
among other things sinking fund provisions and interest coverage ratios.
Prudential's portfolio managers and analysts receive research services from
almost 200 brokers and market service vendors. They also receive nearly 100
trade publications and newspapers--from PULP AND PAPER FORECASTER to WOMEN'S
WEAR DAILY--to keep them informed of the industries they follow.
Prudential Mutual Funds' traders scan over 100 computer monitors to collect
detailed information on which to trade. From natural gas prices in the Rocky
Mountains to the results of local municipal elections, a Prudential portfolio
manager or trader is able to monitor it if it's important to a Prudential mutual
fund.
Prudential Mutual Funds trade approximately $31 billion in U.S. and foreign
government securities a year. PIC seeks information from government policy
makers. In 1995, Prudential's portfolio managers met with several senior U.S.
and foreign government officials, on issues ranging from economic conditions in
foreign countries to the viability of index-linked securities in the United
States.
Prudential Mutual Funds' portfolio managers and analysts met with over 1,200
companies in 1995, often with the Chief Executive Officer (CEO) or Chief
Financial Officer (CFO). They also attended over 250 industry conferences.
Prudential Mutual Fund global equity managers conducted many of their visits
overseas, often holding private meetings with a company in a foreign language
(our global equity managers speak 7 different languages, including Mandarin
Chinese).
TRADING DATA.(4) On an average day, Prudential Mutual Funds' U.S. and
foreign equity trading desks traded $77 million in securities representing over
3.8 million shares with nearly 200 different firms. Prudential Mutual Funds'
bond trading desks traded $157 million in government and corporate bonds on an
average day. That represents more in daily trading than most bond funds tracked
by Lipper even have in assets.(5) Prudential Mutual Funds' money market desk
traded $3.2 billion in money market securities on an average day, or over $800
billion a year. They made a trade every 3 minutes of every trading day. In 1994,
the Prudential Mutual Funds effected more than 40,000 trades in money market
securities and held on average $20 billion of money market securities.(6)
Based on complex-wide data, on an average day, over 7,250 shareholders
telephoned Prudential Mutual Fund Services, Inc., the Transfer Agent of the
Prudential Mutual Funds, on the Prudential Mutual Funds' toll-free number. On an
annual basis, that represents approximately 1.8 million telephone calls
answered.
- ------------------------
(3) As of December 31, 1996. The number of bonds and the size of the Fund are
subject to change.
(4) Trading data represents average daily transactions for portfolios of the
Prudential Mutual Funds for which PIC serves as the subadviser, portfolios
of the Prudential Series Fund and institutional and non-US accounts managed
by Prudential Mutual Fund Investment Management, a division of PIC, for the
year ended December 31, 1995.
(5) Based on 669 funds in Lipper Analytical Services categories of Short U.S.
Treasury, Short U.S. Government, Intermediate U.S. Treasury, Intermediate
U.S. Government, Short Investment Grade Debt, Intermediate Investment Grade
Debt, General U.S. Treasury, General U.S. Government and Mortgage funds.
(6) As of December 31, 1994.
III-2
<PAGE>
INFORMATION ABOUT PRUDENTIAL SECURITIES
Prudential Securities is the fifth largest retail brokerage firm in the
United States with approximately 6,000 financial advisors. It offers to its
clients a wide range of products, including Prudential Mutual Funds and
annuities. As of December 31, 1997, assets held by Prudential Securities for its
clients approximated $235 billion. During 1997, over 29,000 new customer
accounts were opened each month at PSI.(7)
Prudential Securities has a two-year Financial Advisor training program plus
advanced education programs, including Prudential Securities "university," which
provides advanced education in a wide array of investment areas. Prudential
Securities is the only Wall Street firm to have its own in-house Certified
Financial Planner (CFP) program. In the December 1995 issue of REGISTERED REP,
an industry publication, Prudential Securities Financial Advisor training
programs received a grade of A- (compared to an industry average of B+).
In 1995, Prudential Securities' equity research team ranked 8th in
INSTITUTIONAL INVESTOR magazine's 1995 "All America Research Team" survey. Five
Prudential Securities analysts were ranked as first-team finishers.(8)
In addition to training, Prudential Securities provides its financial
advisors with access to firm economists and market analysts. It has also
developed proprietary tools for use by financial advisors, including the
Financial Architect-SM-, a state-of-the-art asset allocation software program
which helps Financial Advisors to evaluate a client's objectives and overall
financial plan, and a comprehensive mutual fund information and analysis system
that compares different mutual funds.
For more complete information about any of the Prudential Mutual Funds,
including charges and expenses, call your Prudential Securities financial
adviser or Pruco/Prudential representative for a free prospectus. Read it
carefully before you invest or send money.
- ------------------------
(7) As of December 31, 1997.
(8) On an annual basis, INSTITUTIONAL INVESTOR magazine surveys more than 700
institutional money managers, chief investment officers and research
directors, asking them to evaluate analysts in 76 industry sectors. Scores
are produced by taking the number of votes awarded to an individual analyst
and weighting them based on the size of the voting institution. In total,
the magazine sends its survey to approximately 2,000 institutions and a
group of European and Asian institutions.
III-3
<PAGE>
PART C
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS.
(a) FINANCIAL STATEMENTS:
(1) Financial statements included in the Prospectus constituting Part A
of this Registration Statement:
Financial Highlights
(2) Financial statements included in the Statement of Additional
Information constituting Part B of this Registration Statement:
Portfolios of Investments at April 30, 1998
Statements of Assets and Liabilities at April 30, 1998
Statements of Operations for the year ended April 30, 1998
Statements of Changes in Net Assets for the years ended April 30,
1998 and April 30, 1997
Notes to Financial Statements
Financial Highlights
Independent Auditors' Reports
(b) EXHIBITS:
1. (a) Amended and Restated Declaration of Trust, incorporated by
reference to Exhibit No. 1(a) to Post-Effective Amendment No. 12 to
the Registration Statement on Form N-1A filed via EDGAR on May 5,
1995 (File No. 33-10649).
(b) Amended and Restated Certificate of Designation, incorporated by
reference to Exhibit No. 1(b) to Post-Effective Amendment No. 12 to
the Registration Statement on Form N-1A filed via EDGAR on May 5,
1995 (File No. 33-10649).
(c) Amended Certificate of Designation, incorporated by reference to
Exhibit No. 1(c) to Post-Effective Amendment No. 14 to the
Registration Statement on Form N-1A filed via EDGAR on June 27, 1996
(File No. 33-10649).
2. By-Laws, incorporated by reference to Exhibit No. 2(b) to
Post-Effective Amendment No.11 to the Registration Statement on Form
N-1A filed via EDGAR on July 6, 1994 (File No. 33-10649).
4. Specimen receipt for shares of beneficial interest, incorporated by
reference to Exhibit No. 4 to Post-Effective Amendment No. 16 to the
Registration Statement on Form N-1A filed via EDGAR on July 1, 1998
(File No. 33-10649).
5. (a) Amended and Restated Management Agreement between the Registrant
and Prudential Mutual Fund Management, Inc., incorporated by
reference to Exhibit No. 5(a) to Post-Effective Amendment No. 14 to
the Registration Statement on Form N-1A filed via EDGAR on June 27,
1996 (File No. 33-10649).
(b) Subadvisory Agreement between Prudential Mutual Fund Management,
Inc. and The Prudential Investment Corporation, incorporated by
reference to Exhibit No. 5(b) to Post-Effective Amendment No. 16 to
the Registration Statement on Form N-1A filed via EDGAR on July 1,
1997 (File No. 33-10649).
6. (a) Amended and Restated Distribution Agreement, incorporated by
reference to Exhibit No. 6 to Post-Effective Amendment No. 14 to the
Registration Statement on Form N-1A filed via EDGAR on June 27, 1996
(File No. 33-10649).
(b) Distribution Agreement between the Registrant and Prudential
Investments Management Services LLC.*
(c) Form of Dealer Agreement.*
8. (a) Custodian Contract between the Registrant and State Street Bank
and Trust Company, incorporated by reference to Exhibit No. 8(a) to
Post-Effective Amendment No. 16 to the Registration Statement on
Form N-1A filed via EDGAR on July 1, 1997 (File No. 33-10649).
(b) Subcustodian Agreement between State Street Bank and Trust
Company and Morgan Guaranty Trust Co.*
(c) Subcustodian Agreement between State Street Bank and Trust
Company and Bankers Trust Company.*
(d) Subcustodian Agreement between State Street Bank and Trust
Company and Bankers Trust Company.*
C-1
<PAGE>
(e) Subcustodian Agreement between State Street Bank and Trust
Company and Chemical Bank.*
(f) Subcustodian Agreement between State Street Bank and Trust
Company and Irving Bank.*
9. Transfer Agency and Service Agreement between the Registrant and
Prudential Mutual Fund Services, LLC, incorporated by reference to
Exhibit No. 9 to Post-Effective Amendment No. 16 to the Registration
Statement on Form N-1A filed via EDGAR on July 1, 1997 (File No.
33-10649).
10. Opinion of Counsel.*
11. Consent of Price Waterhouse LLP.*
13. N/A
15. (a) Distribution and Service Plan for Class A shares. Incorporated
by reference to Exhibit No. 15(a) to Post-Effective Amendment No. 12
to the Registration Statement on Form N-1A filed via EDGAR on May 5,
1995 (File No. 33-10649).
(b) Distribution and Service Plan for Class B shares. Incorporated
by reference to Exhibit No. 15(b) to Post-Effective Amendment No. 12
to the Registration Statement on Form N-1A filed via EDGAR on May 5,
1995 (File No. 33-10649).
(c) Distribution and Service Plan for Class C shares. Incorporated
by reference to Exhibit No. 15(c) to Post-Effective Amendment No. 12
to the Registration Statement on Form N-1A filed via EDGAR on May 5,
1995 (File No. 33-10649).
(d) Amended Distribution and Service Plan for Class A, B and C
shares.*
16. (a) Schedule of Computation of Performance Quotations for Class B
shares, incorporated by reference to Exhibit No. 16(a) to
Post-Effective Amendment No. 16 to the Registration Statement on
Form N-1A filed via EDGAR on July 1, 1997 (File No. 33-10649).
(b) Schedule of Computation of Performance Quotations for Class A
shares, incorporated by reference to Exhibit No. 16(b) to
Post-Effective Amendment No. 16 to the Registration Statement on
Form N-1A filed via EDGAR on July 1, 1997 (File No. 33-10649).
(c) Schedule of Computation of Performance Quotations for Class C
shares, incorporated by reference to Exhibit No. 16(c) to
Post-Effective Amendment No. 16 to the Registration Statement on
Form N-1A filed via EDGAR on July 1, 1997 (File No. 33-10649).
(d) Schedule of Computation of Performance Quotations for Class Z
shares, incorporated by reference to Exhibit No. 16(d) to
Post-Effective Amendment No. 16 to the Registration Statement on
Form N-1A filed via EDGAR on July 1, 1997 (File No. 33-10649).
18. Rule 18f-3 Plan, incorporated by reference to Exhibit No. 18 to
Post-Effective Amendment No. 14 to the Registration Statement on Form
N-1A filed via EDGAR on June 27, 1996 (File No. 33-10649).
27. Financial Data Schedules.*
- --------------
*Filed herewith.
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
None.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES.
As of June 5, 1998, there were 37,188,138, 19,987,256 and 1,209,490 record
holders of Class A shares of beneficial interest of the High Income Series,
Insured Series and Intermediate Series, respectively; 59,576,243, 21,116,734 and
2,177,429 record holders of Class B shares of beneficial interest of the High
Income Series, Insured Series and Intermediate Series, respectively; 1,899,399,
132,626 and 41,637 record holders of Class C shares of beneficial interest of
the High Income Series, Insured Series and Intermediate Series, respectively;
and 912,564, 37,273 and 120,288 record holders of Class Z shares of beneficial
interest of the High Income Series, Insured Series and Intermediate Series,
respectively.
C-2
<PAGE>
ITEM 27. INDEMNIFICATION.
As permitted by Sections 17(h) and (i) of the Investment Company Act of 1940,
as amended (the 1940 Act) and pursuant to Article VII of the Fund's By-Laws
(Exhibit 2 to the Registration Statement), officers, Trustees, employees and
agents of the Registrant will not be liable to the Registrant, any shareholder,
officer, trustee, employee, agent or other person for any action or failure to
act, except for bad faith, willful misfeasance, gross negligence or reckless
disregard of duties, and those individuals may be indemnified against
liabilities in connection with the Registrant, subject to the same exceptions.
As permitted by Section 17(i) of the 1940 Act, pursuant to Section 9 of the
Distribution Agreement (Exhibit 6 to the Registration Statement), the
Distributor of the Registrant may be indemnified against liabilities which it
may incur, except liabilities arising from bad faith, gross negligence, willful
misfeasance or reckless disregard of duties.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended (Securities Act) may be permitted to Trustees, officers and
controlling persons of the Registrant pursuant to the foregoing provisions or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the 1940 Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by a Trustee, officer, or
controlling person of the Registrant in connection with the successful defense
of any action, suit or proceeding) is asserted against the Registrant by such
Trustee, officer or controlling person in connection with the shares being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the 1940 Act and will be governed by the final
adjudication of such issue.
The Registrant maintains an insurance policy insuring its officers and
Trustees against liabilities, and certain costs of defending claims against such
officers and Trustees, to the extent such officers and Trustees are not found to
have committed conduct constituting willful misfeasance, bad faith, gross
negligence or reckless disregard in the performance of their duties. The
insurance policy also insures the Registrant against the cost of indemnification
payments to officers and Trustees under certain circumstances.
Section 9 of the Management Agreement (Exhibit 5(a) to the Registration
Statement) and Section 4 of the Subadvisory Agreement (Exhibit 5(b) to the
Registration Statement) limit the liability of Prudential Investments Fund
Management LLC (PIFM) and The Prudential Investment Corporation (PIC),
respectively, to liabilities arising from willful misfeasance, bad faith or
gross negligence in the performance of their respective duties or from reckless
disregard by them of their respective obligations and duties under the
agreements.
The Registrant hereby undertakes that it will apply the indemnification
provisions of its By-Laws and the Distribution Agreement in a manner consistent
with Release No. 11330 of the Securities and Exchange Commission under the 1940
Act so long as the interpretation of Sections 17(h) and 17(i) of such Act remain
in effect and are consistently applied.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
(i) Prudential Investments Fund Management LLC (PIFM)
See "How the Fund is Managed--Manager" in the Prospectus constituting Part A
of this Registration Statement and "Manager" in the Statement of Additional
Information constituting Part B of this Registration Statement.
The business and other connections of the officers of PIFM are listed in
Schedules A and D of Form ADV of PIFM as currently on file with the Securities
and Exchange Commission, the text of which is hereby incorporated by reference.
C-3
<PAGE>
The business and other connections of PIFM's directors and principal
executive officers are set forth below. Except as otherwise indicated, the
address of each person is Gateway Center Three, Newark, New Jersey 07102.
<TABLE>
<CAPTION>
NAME AND ADDRESS POSITION WITH PIFM PRINCIPAL OCCUPATIONS
- ------------------------------- -------------------- -----------------------------------------------------------------
<S> <C> <C>
Frank W. Giordano Executive Vice Executive Vice President, Secretary and General Counsel, PIFM;
President, Secretary Senior Vice President, Prudential Securities
and General Counsel
Robert F. Gunia Executive Vice Executive Vice President and Treasurer, PIFM; Senior Vice
President and President of Prudential Securities Incorporated (Prudential
Treasurer Securities)
Neil A. McGuinness Executive Vice Executive Vice President and Director of Marketing, PMF&A;
President Executive Vice President, PIFM
Brian M. Storms Officer-in-charge, President, Prudential Mutual Funds & Annuities (PMF&A); Officer
President, Chief in Charge, President, Chief Executive Officer and Chief
Executive Officer Operating Officer, PIFM
and Chief Operating
Officer
Robert J. Sullivan Executive Vice Executive Vice President, PMF&A; Executive Vice President, PIFM
President
</TABLE>
(b) The Prudential Investment Corporation (PIC)
See "How the Fund is Managed--Manager" in the Prospectus constituting Part A
of this Registration Statement and "Manager" in the Statement of Additional
Information constituting Part B of this Registration Statement.
The business and other connections of PIC's directors and executive officers
are as set forth below. Except as otherwise indicated, the address of each
person is Prudential Plaza, Newark, New Jersey 07101.
<TABLE>
<CAPTION>
NAME AND ADDRESS POSITION WITH PIC PRINCIPAL OCCUPATIONS
- ------------------------------- -------------------- -----------------------------------------------------------------
<S> <C> <C>
E. Michael Caulfield Chairman of the Chief Executive Officer, Prudential Investments of Prudential;
Board, President, Chairman of the Board, President, Chief Executive Officer and
Chief Executive Director, PIC
Officer and Director
Jonathan M. Greene Senior Vice President--Investment Management, Prudential Investments of
President and Prudential; Senior Vice President and Director, PIC
Director
John R. Strangfeld Vice President and President of Private Asset Management Group of Prudential; Senior
Director Vice President, Prudential; Vice President and Director, PIC
</TABLE>
ITEM 29. PRINCIPAL UNDERWRITERS
(a) Prudential Investment Management Services LLC
Prudential Investment Management Services LLC is distributor for Cash
Accumulation Trust Command Government Fund, Command Money Fund, Command Tax-Free
Fund, The Global Total Return Fund, Inc., Global Utility Fund, Inc.,
Nicholas-Applegate Fund, Inc. (Nicholas-Applegate Growth Utility Fund),
Prudential Balanced Fund, Prudential California Municipal Fund, Prudential
Developing Markets Fund, Prudential Distressed Securities Fund, Inc., Prudential
Diversified Bond Fund, Inc., Prudential Dryden Fund, Prudential Emerging Growth
Fund, Inc., Prudential Equity Fund, Inc., Prudential Equity Income Fund,
Prudential Europe Growth Fund, Inc., Prudential Global Genesis Fund, Inc.,
Prudential Global Limited Maturity Fund, Inc., Prudential Government Income
Fund, Inc., Prudential Government Securities Trust, Prudential High Yield Fund,
Inc., Prudential High Yield Total Return Fund, Inc., Prudential Index Series
Fund, Prudential Institutional Liquidity Portfolio, Inc., Prudential
Intermediate Global Income Fund, Inc., Prudential International Bond Fund, Inc.,
Prudential Jennison Series Fund, Inc., Prudential Mid-Cap Value Fund, Prudential
MoneyMart Assets, Inc., Prudential Mortgage Income Fund, Inc., Prudential
Multi-Sector Fund, Inc., Prudential Municipal Bond Fund, Prudential Municipal
Series Fund,
C-4
<PAGE>
Prudential National Municipals Fund, Inc., Prudential Natural Resources Fund,
Inc., Prudential Pacific Growth Fund, Inc., Prudential Real Estate Securities
Fund, Prudential Small-Cap Quantum Fund, Inc., Prudential Small Company Value
Fund, Inc., Prudential Special Money Market Fund, Inc., Prudential Structured
Maturity Fund, Inc., Prudential Tax-Free Money Fund, Inc., Prudential Utility
Fund, Inc., Prudential World Fund, Inc. and The Target Portfolio Trust.
(b) Information concerning the directors and officers of Prudential
Investment Management Services LLC is set forth below.
<TABLE>
<CAPTION>
POSITIONS
AND
POSITIONS AND OFFICES
OFFICES WITH WITH
NAME(1) UNDERWRITER REGISTRANT
- ------------------------------------------ -------------------------------------------- -----------
<S> <C> <C>
E. Michael Caulfield...................... President None
Mark R. Fetting........................... Executive Vice President None
Johnathan M. Greene....................... Executive Vice President None
Jean D. Hamilton.......................... Executive Vice President None
Ronald P. Joelson......................... Executive Vice President None
Brian M. Storms........................... Executive Vice President None
John R. Strangfeld........................ Executive Vice President None
Mario A. Mosse............................ Senior Vice President and Chief Operating None
Officer
Scott S. Wallner.......................... Vice President, Secretary and Chief Legal None
Officer
Michael G. Williamson..................... Vice President, Comptroller and Chief None
Financial Officer
C. Edward Chaplin......................... Treasurer None
</TABLE>
(c) Registrant has no principal underwriter who is not an affiliated person
of the Registrant.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
All accounts, books and other documents required to be maintained by Section
31(a) of the 1940 Act and the Rules thereunder are maintained at the offices of
State Street Bank and Trust Company, One Heritage Drive, North Quincy,
Massachusetts 02171; The Prudential Investment Corporation, Prudential Plaza,
751 Broad Street, Newark, New Jersey 07102; the Registrant, Gateway Center
Three, Newark, New Jersey 07102; and Prudential Mutual Fund Services LLC,
Raritan Plaza One, Edison, New Jersey 08837. Documents required by Rules
31a-1(b)(5),(6),(7),(9),(10) and (11) and 31a-1(f) will be kept at Gateway
Center Three, 100 Mulberry Street, Newark, New Jersey 07102-4077, documents
required by Rules 31a-1(b)(4) and (11) and 31a-1(d) at Gateway Center Three, 100
Mulberry Street, Newark, New Jersey 07102-4077 and the remaining accounts, books
and other documents required by such other pertinent provisions of Section 31(a)
and the Rules promulgated thereunder will be kept by State Street Bank and Trust
Company and Prudential Mutual Fund Services LLC.
ITEM 31. MANAGEMENT SERVICES
Other than as set forth under the captions "How the Fund is Managed--Manager"
and "--Distributor" in the Prospectus and the captions "Manager" and
"Distributor" in the Statement of Additional Information, constituting Parts A
and B, respectively, of this Registration Statement, Registrant is not a party
to any management-related service contract.
ITEM 32. UNDERTAKINGS
The Registrant hereby undertakes to furnish each person to whom a prospectus
is delivered with a copy of the Registrant's latest annual report to
shareholders upon request and without charge.
C-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this
Post-Effective Amendment to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Newark, and
State of New Jersey, on the 25th day of June, 1998.
PRUDENTIAL MUNICIPAL BOND FUND, INC.
/s/ Richard A. Redeker
-----------------------------------------------
(RICHARD A. REDEKER, PRESIDENT)
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment to the Registration Statement has been signed below by
the following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------------------------------------------- ----------------------------------------------------
<S> <C> <C>
/s/ Grace C. Torres Treasurer and Principal Financial June 25, 1998
- ------------------------------------ and Accounting Officer
GRACE C. TORRES
/s/ Edward D. Beach Trustee June 25, 1998
- ------------------------------------
EDWARD D. BEACH
/s/ Eugene C. Dorsey Trustee June 25, 1998
- ------------------------------------
EUGENE C. DORSEY
/s/ Delayne Dedrick Gold Trustee June 25, 1998
- ------------------------------------
DELAYNE DEDRICK GOLD
/s/ Robert F. Gunia Trustee June 25, 1998
- ------------------------------------
ROBERT F. GUNIA
/s/ Harry A. Jacobs, Jr. Trustee June 25, 1998
- ------------------------------------
HARRY A. JACOBS, JR.
/s/ Mendel A. Melzer Trustee June 25, 1998
- ------------------------------------
MENDEL A. MELZER
/s/ Thomas T. Mooney Trustee June 25, 1998
- ------------------------------------
THOMAS T. MOONEY
/s/ Thomas O'Brien Trustee June 25, 1998
- ------------------------------------
THOMAS O'BRIEN
/s/ Richard A. Redeker President and Trustee June 25, 1998
- ------------------------------------
RICHARD A. REDEKER
/s/ Nancy H. Teeters Trustee June 25, 1998
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NANCY H. TEETERS
/s/ Louis A. Weil, III Trustee June 25, 1998
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LOUIS A. WEIL, III
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EXHIBIT INDEX
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1. (a) Amended and Restated Declaration of Trust, incorporated by reference to Exhibit No. 1(a) to
Post-Effective Amendment No. 12 to the Registration Statement on Form N-1A filed via EDGAR on May 5,
1995 (File No. 33-10649).
(b) Amended and Restated Certificate of Designation, incorporated by reference to Exhibit No. 1(b) to
Post-Effective Amendment No. 12 to the Registration Statement on Form N-1A filed via EDGAR on May 5,
1995 (File No. 33-10649).
(c) Amended Certificate of Designation, incorporated by reference to Exhibit No. 1(c) to Post-Effective
Amendment No. 14 to the Registration Statement on Form N-1A filed via EDGAR on June 27, 1996 (File No.
33-10649).
2. By-Laws, incorporated by reference to Exhibit No. 2(b) to Post-Effective Amendment No.11 to the
Registration Statement on Form N-1A filed via EDGAR on July 6, 1994 (File No. 33-10649).
4. Specimen receipt for shares of beneficial interest, incorporated by reference to Exhibit No. 4 to
Post-Effective Amendment No. 16 to the Registration Statement on Form N-1A filed via EDGAR on July 1,
1997 (File No. 33-10649).
5. (a) Amended and Restated Management Agreement between the Registrant and Prudential Mutual Fund
Management, Inc., incorporated by reference to Exhibit No. 5(a) to Post-Effective Amendment No. 14 to
the Registration Statement on Form N-1A filed via EDGAR on June 27, 1996 (File No. 33-10649).
(b) Subadvisory Agreement between Prudential Mutual Fund Management, Inc. and The Prudential Investment
Corporation, incorporated by reference to Exhibit No. 5(b) to Post-Effective Amendment No. 16 to the
Registration Statement on Form N-1A filed via EDGAR on July 1, 1997 (File No. 33-10649).
6. (a) Amended and Restated Distribution Agreement, incorporated by reference to Exhibit No. 6 to
Post-Effective Amendment No. 14 to the Registration Statement on Form N-1A filed via EDGAR on June 27,
1996 (File No. 33-10649).
(b) Distribution Agreement between the Registrant and Prudential Investments Management Services LLC.*
(c) Form of Dealer Agreement.*
8. (a) Custodian Contract between the Registrant and State Street Bank and Trust Company, incorporated by
reference to Exhibit No. 8(a) to Post-Effective Amendment No. 16 to the Registration Statement on Form
N-1A filed via EDGAR on July 1, 1997 (File No. 33-10649).
(b) Subcustodian Agreement between State Street Bank and Trust Company and Morgan Guaranty Trust Co.*
(c) Subcustodian Agreement between State Street Bank and Trust Company and Bankers Trust Company.*
(d) Subcustodian Agreement between State Street Bank and Trust Company and Bankers Trust Company.*
(e) Subcustodian Agreement between State Street Bank and Trust Company and Chemical Bank.*
(f) Subcustodian Agreement between State Street Bank and Trust Company and Irving Bank.*
9. Transfer Agency and Service Agreement between the Registrant and Prudential Mutual Fund Services, LLC,
incorporated by reference to Exhibit No. 9 to Post-Effective Amendment No. 16 to the Registration
Statement on Form N-1A filed via EDGAR on July 1, 1997 (File No. 33-10649).
10. Opinion of Counsel.*
11. (a) Consent of Price Waterhouse LLP.*
13. N/A
15. (a) Distribution and Service Plan for Class A shares. Incorporated by reference to Exhibit No. 15(a) to
Post-Effective Amendment No. 12 to the Registration Statement on Form N-1A filed via EDGAR on May 5,
1995 (File No. 33-10649).
(b) Distribution and Service Plan for Class B shares. Incorporated by reference to Exhibit No. 15(b) to
Post-Effective Amendment No. 12 to the Registration Statement on Form N-1A filed via EDGAR on May 5,
1995 (File No. 33-10649).
(c) Distribution and Service Plan for Class C shares. Incorporated by reference to Exhibit No. 15(c) to
Post-Effective Amendment No. 12 to the Registration Statement on Form N-1A filed via EDGAR on May 5,
1995 (File No. 33-10649).
(d) Amended Distribution and Service Plan for Class A, B and C shares.*
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16. (a) Schedule of Computation of Performance Quotations for Class B shares, incorporated by reference to
Exhibit No. 16(a) to Post-Effective Amendment No. 16 to the Registration Statement on Form N-1A filed
via EDGAR on July 1, 1997 (File No. 33-10649).
(b) Schedule of Computation of Performance Quotations for Class A shares, incorporated by reference to
Exhibit No. 16(b) to Post-Effective Amendment No. 16 to the Registration Statement on Form N-1A filed
via EDGAR on July 1, 1997 (File No. 33-10649).
(c) Schedule of Computation of Performance Quotations for Class C shares, incorporated by reference to
Exhibit No. 16(c) to Post-Effective Amendment No. 16 to the Registration Statement on Form N-1A filed
via EDGAR on July 1, 1997 (File No. 33-10649).
(d) Schedule of Computation of Performance Quotations for Class Z shares, incorporated by reference to
Exhibit No. 16(d) to Post-Effective Amendment No. 16 to the Registration Statement on Form N-1A filed
via EDGAR on July 1, 1997 (File No. 33-10649).
18. Rule 18f-3 Plan, incorporated by reference to Exhibit No. 18 to Post-Effective Amendment No. 14 to the
Registration Statement on Form N-1A filed via EDGAR on June 27, 1996 (File No. 33-10649).
27. Financial Data Schedules.*
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*Filed herewith.
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PRUDENTIAL MUNICIPAL BOND FUND
DISTRIBUTION AGREEMENT
Agreement made as of June 1, 1998, between Prudential Municipal Bond
Fund (the Fund), and Prudential Investment Management Services LLC, a Delaware
limited liability company (the Distributor).
WITNESSETH
WHEREAS, the Fund is registered under the Investment Company Act of
1940, as amended (the Investment Company Act), as a diversified, open-end,
management investment company and it is in the interest of the Fund to offer its
shares for sale continuously;
WHEREAS, the shares of the Fund may be divided into classes and/or
series (all such shares being referred to herein as Shares) and the Fund
currently is authorized to offer Class A, Class B, Class C and Class Z Shares;
WHEREAS, the Distributor is a broker-dealer registered under the
Securities Exchange Act of 1934, as amended, and is engaged in the business of
selling shares of registered investment companies either directly or through
other broker-dealers;
WHEREAS, the Fund and the Distributor wish to enter into an agreement
with each other, with respect to the continuous offering of the Fund's Shares
from and after the date hereof in order to promote the growth of the Fund and
facilitate the distribution of its Shares; and
WHEREAS, the Fund has adopted a plan (or plans) of distribution
pursuant to Rule 12b-1 under the Investment Company Act with respect to certain
of its classes and/or series of Shares (the Plans) authorizing payments by the
Fund to the Distributor with respect to the distribution of such classes and/or
series of Shares and the maintenance of related shareholder accounts.
NOW, THEREFORE, the parties agree as follows:
Section 1. APPOINTMENT OF THE DISTRIBUTOR
The Fund hereby appoints the Distributor as the principal underwriter
and distributor of the Shares of the Fund to sell Shares to the public on behalf
of the Fund and the Distributor hereby accepts such appointment and agrees to
act hereunder. The Fund hereby agrees during the term of this Agreement to sell
Shares of the Fund through the Distributor on the terms and conditions set forth
below.
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Section 2. EXCLUSIVE NATURE OF DUTIES
The Distributor shall be the exclusive representative of the Fund to
act as principal underwriter and distributor of the Fund's Shares, except that:
2.1 The exclusive rights granted to the Distributor to sell Shares of
the Fund shall not apply to Shares of the Fund issued in connection with the
merger or consolidation of any other investment company or personal holding
company with the Fund or the acquisition by purchase or otherwise of all (or
substantially all) the assets or the outstanding shares of any such company by
the Fund.
2.2 Such exclusive rights shall not apply to Shares issued by the
Fund pursuant to reinvestment of dividends or capital gains distributions or
through the exercise of any conversion feature or exchange privilege.
2.3 Such exclusive rights shall not apply to Shares issued by the
Fund pursuant to the reinstatement privilege afforded redeeming shareholders.
2.4 Such exclusive rights shall not apply to purchases made through
the Fund's transfer and dividend disbursing agent in the manner set forth in the
currently effective Prospectus of the Fund. The term "Prospectus" shall mean
the Prospectus and Statement of Additional Information included as part of the
Fund's Registration Statement, as such Prospectus and Statement of Additional
Information may be amended or supplemented from time to time, and the term
"Registration Statement" shall mean the Registration Statement filed by the Fund
with the Securities and Exchange Commission and effective under the Securities
Act of 1933, as amended (Securities Act), and the Investment Company Act, as
such Registration Statement is amended from time to time.
Section 3. PURCHASE OF SHARES FROM THE FUND
3.1 The Distributor shall have the right to buy from the Fund on
behalf of investors the Shares needed, but not more than the Shares needed
(except for clerical errors in transmission) to fill unconditional orders for
Shares placed with the Distributor by investors or registered and qualified
securities dealers and other financial institutions (selected dealers).
3.2 The Shares shall be sold by the Distributor on behalf of the Fund
and delivered by the Distributor or selected dealers, as described in Section
6.4 hereof, to investors at the offering price as set forth in the Prospectus.
3.3 The Fund shall have the right to suspend the sale of any or all
classes and/or series of its Shares at times when redemption is suspended
pursuant to
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the conditions in Section 4.3 hereof or at such other times as may be determined
by the Board. The Fund shall also have the right to suspend the sale of any or
all classes and/or series of its Shares if a banking moratorium shall have been
declared by federal or New Jersey authorities.
3.4 The Fund, or any agent of the Fund designated in writing by the
Fund, shall be promptly advised of all purchase orders for Shares received by
the Distributor. Any order may be rejected by the Fund; provided, however, that
the Fund will not arbitrarily or without reasonable cause refuse to accept or
confirm orders for the purchase of Shares. The Fund (or its agent) will confirm
orders upon their receipt, will make appropriate book entries and upon receipt
by the Fund (or its agent) of payment therefor, will deliver deposit receipts
for such Shares pursuant to the instructions of the Distributor. Payment shall
be made to the Fund in New York Clearing House funds or federal funds. The
Distributor agrees to cause such payment and such instructions to be delivered
promptly to the Fund (or its agent).
Section 4. REPURCHASE OR REDEMPTION OF SHARES BY THE FUND
4.1 Any of the outstanding Shares may be tendered for redemption at
any time, and the Fund agrees to repurchase or redeem the Shares so tendered in
accordance with its Declaration of Trust as amended from time to time, and in
accordance with the applicable provisions of the Prospectus. The price to be
paid to redeem or repurchase the Shares shall be equal to the net asset value
determined as set forth in the Prospectus. All payments by the Fund hereunder
shall be made in the manner set forth in Section 4.2 below.
4.2 The Fund shall pay the total amount of the redemption price as
defined in the above paragraph pursuant to the instructions of the Distributor
on or before the seventh day subsequent to its having received the notice of
redemption in proper form. The proceeds of any redemption of Shares shall be
paid by the Fund as follows: (i) in the case of Shares subject to a contingent
deferred sales charge, any applicable contingent deferred sales charge shall be
paid to the Distributor, and the balance shall be paid to or for the account of
the redeeming shareholder, in each case in accordance with applicable provisions
of the Prospectus; and (ii) in the case of all other Shares, proceeds shall be
paid to or for the account of the redeeming shareholder, in each case in
accordance with applicable provisions of the Prospectus.
4.3 Redemption of any class and/or series of Shares or payment may be
suspended at times when the New York Stock Exchange is closed for other than
customary weekends and holidays, when trading on said Exchange is restricted,
when an emergency exists as a result of which disposal by the Fund of securities
owned by it is not reasonably practicable or it is not reasonably practicable
for the Fund fairly to determine the value of its net assets, or during any
other period when the Securities and Exchange Commission, by order, so permits.
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Section 5. DUTIES OF THE FUND
5.1 Subject to the possible suspension of the sale of Shares as
provided herein, the Fund agrees to sell its Shares so long as it has Shares of
the respective class and/or series available.
5.2 The Fund shall furnish the Distributor copies of all information,
financial statements and other papers which the Distributor may reasonably
request for use in connection with the distribution of Shares, and this shall
include one certified copy, upon request by the Distributor, of all financial
statements prepared for the Fund by independent public accountants. The Fund
shall make available to the Distributor such number of copies of its Prospectus
and annual and interim reports as the Distributor shall reasonably request.
5.3 The Fund shall take, from time to time, but subject to the
necessary approval of the Board and the shareholders, all necessary action to
register the same under the Securities Act, to the end that there will be
available for sale such number of Shares as the Distributor reasonably may
expect to sell. The Fund agrees to file from time to time such amendments,
reports and other documents as may be necessary in order that there will be no
untrue statement of a material fact in the Registration Statement, or necessary
in order that there will be no omission to state a material fact in the
Registration Statement which omission would make the statements therein
misleading.
5.4 The Fund shall use its best efforts to notify such states as the
Distributor and the Fund may approve of its intention to sell any appropriate
number of its Shares; provided that the Fund shall not be required to amend its
Declaration of Trust or By-Laws to comply with the laws of any state, to
maintain an office in any state, to change the terms of the offering of its
Shares in any state from the terms set forth in its Registration Statement, to
qualify as a foreign corporation in any state or to consent to service of
process in any state other than with respect to claims arising out of the
offering of its Shares. Any such notification may be withheld, terminated or
withdrawn by the Fund at any time in its discretion. As provided in Section 9
hereof, the expense of notification and maintenance of notification shall be
borne by the Fund. The Distributor shall furnish such information and other
material relating to its affairs and activities as may be required by the Fund
in connection with such notifications.
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Section 6. DUTIES OF THE DISTRIBUTOR
6.1 The Distributor shall devote reasonable time and effort to effect
sales of Shares, but shall not be obligated to sell any specific number of
Shares. Sales of the Shares shall be on the terms described in the Prospectus.
The Distributor may enter into like arrangements with other investment
companies. The Distributor shall compensate the selected dealers as set forth
in the Prospectus.
6.2 In selling the Shares, the Distributor shall use its best efforts
in all respects duly to conform with the requirements of all federal and state
laws relating to the sale of such securities. Neither the Distributor nor any
selected dealer nor any other person is authorized by the Fund to give any
information or to make any representations, other than those contained in the
Registration Statement or Prospectus and any sales literature approved by
appropriate officers of the Fund.
6.3 The Distributor shall adopt and follow procedures for the
confirmation of sales to investors and selected dealers, the collection of
amounts payable by investors and selected dealers on such sales and the
cancellation of unsettled transactions, as may be necessary to comply with the
requirements of Securities Exchange Act Rule 10b-10 and the rules of the
National Association of Securities Dealers, Inc. (NASD).
6.4 The Distributor shall have the right to enter into selected
dealer agreements with registered and qualified securities dealers and other
financial institutions of its choice for the sale of Shares, provided that the
Fund shall approve the forms of such agreements. Within the United States, the
Distributor shall offer and sell Shares only to such selected dealers as are
members in good standing of the NASD or are institutions exempt from
registration under applicable federal securities laws. Shares sold to selected
dealers shall be for resale by such dealers only at the offering price
determined as set forth in the Prospectus.
Section 7. PAYMENTS TO THE DISTRIBUTOR
7.1 With respect to classes and/or series of Shares which impose a
front-end sales charge, the Distributor shall receive and may retain any portion
of any front-end sales charge which is imposed on such sales and not reallocated
to selected dealers as set forth in the Prospectus, subject to the limitations
of Rule 2830 of the Conduct Rules of the NASD. Payment of these amounts to the
Distributor is not contingent upon the adoption or continuation of any
applicable Plans.
7.2 With respect to classes and/or series of Shares which impose a
contingent deferred sales charge, the Distributor shall receive and may retain
any contingent deferred sales charge which is imposed on such sales as set forth
in the Prospectus, subject to the limitations of Rule 2830 of the Conduct Rules
of the NASD.
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Payment of these amounts to the Distributor is not contingent upon the adoption
or continuation of any Plan.
Section 8. PAYMENT OF THE DISTRIBUTOR UNDER THE PLAN
8.1 The Fund shall pay to the Distributor as compensation for
services under any Plans adopted by the Fund and this Agreement a distribution
and service fee with respect to the Fund's classes and/or series of Shares as
described in each of the Fund's respective Plans and this Agreement.
8.2 So long as a Plan or any amendment thereto is in effect, the
Distributor shall inform the Board of the commissions and account servicing fees
with respect to the relevant class and/or series of Shares to be paid by the
Distributor to account executives of the Distributor and to broker-dealers,
financial institutions and investment advisers which have dealer agreements with
the Distributor. So long as a Plan (or any amendment thereto) is in effect, at
the request of the Board or any agent or representative of the Fund, the
Distributor shall provide such additional information as may reasonably be
requested concerning the activities of the Distributor hereunder and the costs
incurred in performing such activities with respect to the relevant class and/or
series of Shares.
Section 9. ALLOCATION OF EXPENSES
The Fund shall bear all costs and expenses of the continuous offering
of its Shares (except for those costs and expenses borne by the Distributor
pursuant to a Plan and subject to the requirements of Rule 12b-1 under the
Investment Company Act), including fees and disbursements of its counsel and
auditors, in connection with the preparation and filing of any required
Registration Statements and/or Prospectuses under the Investment Company Act or
the Securities Act, and all amendments and supplements thereto, and preparing
and mailing annual and periodic reports and proxy materials to shareholders
(including but not limited to the expense of setting in type any such
Registration Statements, Prospectuses, annual or periodic reports or proxy
materials). The Fund shall also bear the cost of expenses of making notice
filings for the Shares for sale, and, if necessary or advisable in connection
therewith, of qualifying the Fund as a broker or dealer, in such states of the
United States or other jurisdictions as shall be selected by the Fund and the
Distributor pursuant to Section 5.4 hereof and the cost and expense payable to
each such state for continuing notification therein until the Fund decides to
discontinue such notification pursuant to Section 5.4 hereof. As set forth in
Section 8 above, the Fund shall also bear the expenses it assumes pursuant to
any Plan, so long as such Plan is in effect.
Section 10. INDEMNIFICATION
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10.1 The Fund agrees to indemnify, defend and hold the Distributor,
its officers and directors and any person who controls the Distributor within
the meaning of Section 15 of the Securities Act, free and harmless from and
against any and all claims, demands, liabilities and expenses (including the
cost of investigating or defending such claims, demands or liabilities and any
reasonable counsel fees incurred in connection therewith) which the Distributor,
its officers, members or any such controlling person may incur under the
Securities Act, or under common law or otherwise, arising out of or based upon
any untrue statement of a material fact contained in the Registration Statement
or Prospectus or arising out of or based upon any alleged omission to state a
material fact required to be stated in either thereof or necessary to make the
statements in either thereof not misleading, except insofar as such claims,
demands, liabilities or expenses arise out of or are based upon any such untrue
statement or omission or alleged untrue statement or omission made in reliance
upon and in conformity with information furnished by the Distributor to the Fund
for use in the Registration Statement or Prospectus; provided, however, that
this indemnity agreement shall not inure to the benefit of any such officer,
member or controlling person unless a court of competent jurisdiction shall
determine in a final decision on the merits, that the person to be indemnified
was not liable by reason of willful misfeasance, bad faith or gross negligence
in the performance of its duties, or by reason of its reckless disregard of its
obligations under this Agreement (disabling conduct), or, in the absence of such
a decision, a reasonable determination, based upon a review of the facts, that
the indemnified person was not liable by reason of disabling conduct, by (a) a
vote of a majority of a quorum of trustees or trustees who are neither
"interested persons" of the Fund as defined in Section 2(a)(19) of the
Investment Company Act nor parties to the proceeding, or (b) an independent
legal counsel in a written opinion. The Fund's agreement to indemnify the
Distributor, its officers and members and any such controlling person as
aforesaid is expressly conditioned upon the Fund's being promptly notified of
any action brought against the Distributor, its officers or members, or any such
controlling person, such notification to be given by letter or telegram
addressed to the Fund at its principal business office. The Fund agrees
promptly to notify the Distributor of the commencement of any litigation or
proceedings against it or any of its officers or directors in connection with
the issue and sale of any Shares.
10.2 The Distributor agrees to indemnify, defend and hold the Fund,
its officers and trustees and any person who controls the Fund, if any, within
the meaning of Section 15 of the Securities Act, free and harmless from and
against any and all claims, demands, liabilities and expenses (including the
cost of investigating or defending against such claims, demands or liabilities
and any reasonable counsel fees incurred in connection therewith) which the
Fund, its officers and trustees or any such controlling person may incur under
the Securities Act or under common law or otherwise, but only to the extent that
such liability or expense incurred by the Fund, its trustees or officers or such
controlling person resulting from such claims or demands
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shall arise out of or be based upon any alleged untrue statement of a material
fact contained in information furnished by the Distributor to the Fund for use
in the Registration Statement or Prospectus or shall arise out of or be based
upon any alleged omission to state a material fact in connection with such
information required to be stated in the Registration Statement or Prospectus or
necessary to make such information not misleading. The Distributor's agreement
to indemnify the Fund, its officers and trustees and any such controlling person
as aforesaid, is expressly conditioned upon the Distributor's being promptly
notified of any action brought against the Fund, its officers and trustees or
any such controlling person, such notification being given to the Distributor at
its principal business office.
Section 11. DURATION AND TERMINATION OF THIS AGREEMENT
11.1 This Agreement shall become effective as of the date first above
written and shall remain in force for two years from the date hereof and
thereafter, but only so long as such continuance is specifically approved at
least annually by (a) the Board of the Fund, or by the vote of a majority of the
outstanding voting securities of the applicable class and/or series of the Fund,
and (b) by the vote of a majority of those trustees who are not parties to this
Agreement or interested persons of any such parties and who have no direct or
indirect financial interest in this Agreement or in the operation of any of the
Fund's Plans or in any agreement related thereto (Independent trustees), cast in
person at a meeting called for the purpose of voting upon such approval.
11.2 This Agreement may be terminated at any time, without the payment
of any penalty, by a majority of the independent trustees or by vote of a
majority of the outstanding voting securities of the applicable class and/or
series of the Fund, or by the Distributor, on sixty (60) days' written notice to
the other party. This Agreement shall automatically terminate in the event of
its assignment.
11.3 The terms "affiliated person," "assignment," "interested person"
and "vote of a majority of the outstanding voting securities", when used in this
Agreement, shall have the respective meanings specified in the Investment
Company Act.
Section 12. AMENDMENTS TO THIS AGREEMENT
This Agreement may be amended by the parties only if such amendment is
specifically approved by (a) the Board of the Fund, or by the vote of a majority
of the outstanding voting securities of the applicable class and/or series of
the Fund, and (b) by the vote of a majority of the independent trustees cast in
person at a meeting called for the purpose of voting on such amendment.
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Section 13. SEPARATE AGREEMENT AS TO CLASSES AND/OR SERIES
The amendment or termination of this Agreement with respect to any
class and/or series shall not result in the amendment or termination of this
Agreement with respect to any other class and/or series unless explicitly so
provided.
Section 14. GOVERNING LAW
The provisions of this Agreement shall be construed and interpreted in
accordance with the laws of the State of New Jersey as at the time in effect and
the applicable provisions of the Investment Company Act. To the extent that the
applicable law of the State of New Jersey, or any of the provisions herein,
conflict with the applicable provisions of the Investment Company Act, the
latter shall control.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year above written.
Prudential Investment Management Services LLC
By: ________________________
Prudential Municipal Bond Fund
By: ________________________
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DEALER AGREEMENT
PRUDENTIAL INVESTMENT MANAGEMENT SERVICES LLC
Prudential Investment Management Services LLC ("Distributor") and
_________________ ("Dealer") have agreed that Dealer will participate in the
distribution of shares ("Shares") of all the funds and series thereof (as they
may exist from time to time) comprising the Prudential Mutual Fund Family (each
a "Fund" and collectively the "Funds") and any classes thereof for which
Distributor now or in the future serves as principal underwriter and
distributor, subject to the terms of this Dealer Agreement ("Agreement"). Any
such additional Funds will be included in this Agreement upon Distributor's
written notification to Dealer.
1. LICENSING
a. Dealer represents and warrants that it is: (i) a broker-dealer
registered with the Securities and Exchange Commission ("SEC"); (ii) a member in
good standing of the National Association of Securities Dealers, Inc. ("NASD");
and (iii) licensed by the appropriate regulatory agency of each state or other
jurisdiction in which Dealer will offer and sell Shares of the Funds, to the
extent necessary to perform the duties and activities contemplated by this
Agreement.
b. Dealer represents and warrants that each of its partners,
directors, officers, employees, and agents who will be utilized by Dealer with
respect to its duties and activities under this Agreement is either
appropriately licensed or exempt from such licensing requirements by the
appropriate regulatory agency of each state or other jurisdiction in which
Dealer will offer and sell Shares of the Funds.
c. Dealer agrees that: (i) termination or suspension of its
registration with the SEC; (ii) termination or suspension of its membership with
the NASD; or (iii) termination or suspension of its license to do business by
any state or other jurisdiction or federal regulatory agency shall immediately
cause the termination of this Agreement. Dealer further agrees to immediately
notify Distributor in writing of any such action or event.
d. Dealer agrees that this Agreement is in all respects subject to
the Conduct Rules of the NASD and such Conduct Rules shall control any provision
to the contrary in this Agreement.
e. Dealer agrees to be bound by and to comply with all applicable
state and federal laws and all rules and regulations promulgated thereunder
generally affecting the sale or distribution of mutual fund shares.
2. ORDERS
a. Dealer agrees to offer and sell Shares of the Funds (including
those of each of its classes) only at the regular public offering price
applicable to such Shares and in effect at the time of each transaction. The
procedures relating to all orders and the handling of each order (including the
manner of computing the net asset value of Shares and the effective time of
orders received from Dealer) are subject to: (i) the terms of the then current
prospectus and statement of
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additional information (including any supplements, stickers or amendments
thereto) relating to each Fund, as filed with the SEC ("Prospectus"); (ii) the
new account application for each Fund, as supplemented or amended from time to
time; and (iii) Distributor's written instructions and multiple class pricing
procedures and guidelines, as provided to Dealer from time to time. To the
extent that the Prospectus contains provisions that are inconsistent with this
Agreement or any other document, the terms of the Prospectus shall be
controlling.
b. Distributor reserves the right at any time, and without notice to
Dealer, to suspend the sale of Shares or to withdraw or limit the offering of
Shares. Distributor reserves the unqualified right not to accept any specific
order for the purchase or sale of Shares.
c. In all offers and sales of the Shares to the public, Dealer is
not authorized to act as broker or agent for, or employee of, Distributor, any
Fund or any other dealer, and Dealer shall not in any manner represent to any
third party that Dealer has such authority or is acting in such capacity.
Rather, Dealer agrees that it is acting as principal for Dealer's own account or
as agent on behalf of Dealer's customers in all transactions in Shares, except
as provided in Section 3.i. hereof. Dealer acknowledges that it is solely
responsible for all suitability determinations with respect to sales of Shares
of the Funds to Dealer's customers and that Distributor has no responsibility
for the manner of Dealer's performance of, or for Dealer's acts or omissions in
connection with, the duties and activities Dealer provides under this Agreement.
d. All orders are subject to acceptance by Distributor in its sole
discretion and become effective only upon confirmation by Distributor.
e. Distributor agrees that it will accept from Dealer orders placed
through a remote terminal or otherwise electronically transmitted via the
National Securities Clearing Corporation ("NSCC") Fund/Serv Networking program,
provided, however, that appropriate documentation thereof and agreements
relating thereto are executed by both parties to this Agreement, including in
particular the standard NSCC Networking Agreement and any other related
agreements between Distributor and Dealer deemed appropriate by Distributor, and
that all accounts opened or maintained pursuant to that program will be governed
by applicable NSCC rules and procedures. Both parties further agree that, if
the NSCC Fund/Serv Networking program is used to place orders, the standard NSCC
Networking Agreement will control insofar as there is any conflict between any
provision of the Dealer Agreement and the standard NSCC Networking Agreement.
3. DUTIES OF DEALER
a. Dealer agrees to purchase Shares only from Distributor or from
Dealer's customers.
b. Dealer agrees to enter orders for the purchase of Shares only
from Distributor and only for the purpose of covering purchase orders Dealer has
already received from its customers or for Dealer's own bona fide investment.
c. Dealer agrees to date and time stamp all orders received by
Dealer and promptly, upon receipt of any and all orders, to transmit to
Distributor all orders received prior to
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<PAGE>
the time described in the Prospectus for the calculation of each Fund's net
asset value so as to permit Distributor to process all orders at the price next
determined after receipt by Dealer, in accordance with the Prospectus. Dealer
agrees not to withhold placing orders for Shares with Distributor so as to
profit itself as a result of such inaction.
d. Dealer agrees to maintain records of all purchases and sales of
Shares made through Dealer and to furnish Distributor or regulatory authorities
with copies of such records upon request. In that regard, Dealer agrees that,
unless Dealer holds Shares as nominee for its customers or participates in the
NSCC Fund/Serv Networking program, at certain matrix levels, it will provide
Distributor with all necessary information to comply properly with all federal,
state and local reporting requirements and backup and nonresident alien
withholding requirements for its customer accounts including, without
limitation, those requirements that apply by treating Shares issued by the Funds
as readily tradable instruments. Dealer represents and agrees that all Taxpayer
Identification Numbers ("TINs") provided are certified, and that no account that
requires a certified TIN will be established without such certified TIN. With
respect to all other accounts, including Shares held by Dealer in omnibus
accounts and Shares purchased or sold through the NSCC Fund/Serv Networking
program, at certain matrix levels, Dealer agrees to perform all federal, state
and local tax reporting with respect to such accounts, including without
limitation redemptions and exchanges.
e. Dealer agrees to distribute or cause to be delivered to its
customers Prospectuses, proxy solicitation materials and related information and
proxy cards, semi-annual and annual shareholder reports and any other materials
in compliance with applicable legal requirements, except to the extent that
Distributor expressly undertakes to do so in writing.
f. Dealer agrees that if any Share is repurchased by any Fund or is
tendered for redemption within seven (7) business days after confirmation by
Distributor of the original purchase order from Dealer, Dealer shall forfeit its
right to any concession or commission received by Dealer with respect to such
Share and shall forthwith refund to Distributor the full concession allowed to
Dealer or commission paid to Dealer on the original sale. Distributor agrees to
notify Dealer of such repurchase or redemption within a reasonable time after
settlement. Termination or cancellation of this Agreement shall not relieve
Dealer from its obligation under this provision.
g. Dealer agrees that payment for Shares ordered from Distributor
shall be in Fed Funds, New York clearinghouse or other immediately available
funds and that such funds shall be received by Distributor by the earlier of:
(i) the end of the third (3rd) business day following Dealer's receipt of the
customer's order to purchase such Shares; or (ii) the settlement date
established in accordance with Rule 15c6-1 under the Securities Exchange Act of
1934, as amended. If such payment is not received by Distributor by such date,
Dealer shall forfeit its right to any concession or commission with respect to
such order, and Distributor reserves the right, without notice, forthwith to
cancel the sale, or, at its option, to sell the Shares ordered back to the Fund,
in which case Distributor may hold Dealer responsible for any loss, including
loss of profit, suffered by Distributor resulting from Dealer's failure to make
payment as aforesaid. If a purchase is made by check, the purchase is deemed
made upon conversion of the purchase instrument into Fed Funds, New York
clearinghouse or other immediately available funds.
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<PAGE>
h. Dealer agrees that it: (i) shall assume responsibility for any
loss to the Fund caused by a correction to any order placed by Dealer that is
made subsequent to the trade date for the order, provided such order correction
was not based on any negligence on Distributor's part; and (ii) will immediately
pay such loss to the Fund upon notification.
i. Dealer agrees that in connection with orders for the purchase of
Shares on behalf of any IRAs, 401(k) plans or other retirement plan accounts, by
mail, telephone, or wire, Dealer shall act as agent for the custodian or trustee
of such plans (solely with respect to the time of receipt of the application and
payments), and Dealer shall not place such an order with Distributor until it
has received from its customer payment for such purchase and, if such purchase
represents the first contribution to such a retirement plan account, the
completed documents necessary to establish the retirement plan. Dealer agrees
to indemnify Distributor and its affiliates for any claim, loss, or liability
resulting from incorrect investment instructions received by Distributor from
Dealer.
j. Dealer agrees that it will not make any conditional orders for
the purchase or redemption of Shares and acknowledges that Distributor will not
accept conditional orders for Shares.
k. Dealer agrees that all out-of-pocket expenses incurred by it in
connection with its activities under this Agreement will be borne by Dealer.
l. Dealer agrees that it will keep in force appropriate broker's
blanket bond insurance policies covering any and all acts of Dealer's partners,
directors, officers, employees, and agents adequate to reasonably protect and
indemnify the Distributor and the Funds against any loss which any party may
suffer or incur, directly or indirectly, as a result of any action by Dealer or
Dealer's partners, directors, officers, employees, and agents.
m. Dealer agrees that it will maintain the required net capital as
specified by the rules and regulations of the SEC, NASD and other regulatory
authorities.
4. DEALER COMPENSATION
a. On each purchase of Shares by Dealer from Distributor, the total
sales charges and dealer concessions or commissions, if any, payable to Dealer
shall be as stated on Schedule A to this Agreement, which may be amended by
Distributor from time to time. Distributor reserves the right, without prior
notice, to suspend or eliminate such dealer concession or commissions by
amendment, sticker or supplement to the then current Prospectus for each Fund.
Such sales charges and dealer concessions or commissions, are subject to
reduction under a variety of circumstances as described in each Fund's then
current Prospectus. For an investor to obtain any reduction, Distributor must
be notified at the time of the sale that the sale qualifies for the reduced
sales charge. If Dealer fails to notify Distributor of the applicability of a
reduction in the sales charge at the time the trade is placed, neither
Distributor nor any Fund will be liable for amounts necessary to reimburse any
investor for the reduction that should have been effected. Dealer acknowledges
that no sales charge or concession or commission will be paid to Dealer on the
reinvestment of dividends or capital gains reinvestment or on Shares acquired in
exchange for Shares of another Fund, or class thereof, having the same sales
charge structure as the Fund, or class thereof, from which the exchange was
made, in accordance with the Prospectus.
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<PAGE>
b. In accordance with the Funds' Prospectuses, Distributor or any
affiliate may, but is not obligated to, make payments to dealers from
Distributor's own resources as compensation for certain sales that are made at
net asset value ("Qualifying Sales"). If Dealer notifies Distributor of a
Qualifying Sale, Distributor may make a contingent advance payment up to the
maximum amount available for payment on the sale. If any of the Shares
purchased in a Qualifying Sale are redeemed within twelve (12) months of the end
of the month of purchase, Distributor shall be entitled to recover any advance
payment attributable to the redeemed Shares by reducing any account payable or
other monetary obligation Distributor may owe to Dealer or by making demand upon
Dealer for repayment in cash. Distributor reserves the right to withhold
advances to Dealer, if for any reason Distributor believes that it may not be
able to recover unearned advances from Dealer.
c. With respect to any Fund that offers Shares for which
distribution plans have been adopted under Rule 12b-1 under the Investment
Company Act of 1940, as amended ("Rule 12b-1 Plans"), Distributor also is
authorized to pay the Dealer continuing distribution and/or service fees, as
specified in Schedule A and the relevant Fund Prospectus, with respect to Shares
of any such Fund, to the extent that Dealer provides distribution, marketing,
administrative and other services and activities regarding the promotion of such
Shares and the maintenance of related shareholder accounts.
d. In connection with the receipt of distribution fees and/or
service fees under Rule 12b-1 Plans applicable to Shares purchased by Dealer's
customers, Distributor directs Dealer to provide enhanced shareholder services
such as: processing purchase and redemption transactions; establishing
shareholder accounts; and providing certain information and assistance with
respect to the Funds. (Redemption levels of shareholder accounts assigned to
Dealer will be considered in evaluating Dealer's continued ability to receive
payments of distribution and/or service fees.) In addition, Dealer agrees to
support Distributor's marketing efforts by, among other things, granting
reasonable requests for visits to Dealer's office by Distributor's wholesalers
and marketing representatives, including all Funds covered by a Rule 12b-1 Plan
on Dealer's "approved," "preferred" or other similar product lists, if
applicable, and otherwise providing satisfactory product, marketing and sales
support. Further, Dealer agrees to provide Distributor with supporting
documentation concerning the shareholder services provided, as Distributor may
reasonably request from time to time.
e. All Rule 12b-1 Plan distribution and/or servicing fees shall be
based on the value of Shares attributable to Dealer's customers and eligible for
such payment, and shall be calculated on the basis of and at the rates set forth
in the compensation schedule then in effect. Without prior approval by a
majority of the outstanding shares of a Fund, the aggregate annual fees paid to
Dealer pursuant to any Rule 12b-1 Plan shall not exceed the amounts stated as
the "annual maximums" in each Fund's Prospectus, which amount shall be a
specified percent of the value of the Fund's net assets held in Dealer's
customers' accounts that are eligible for payment pursuant to the Rule 12b-1
Plans (determined in the same manner as each Fund uses to compute its net assets
as set forth in its then current Prospectus).
f. The provisions of any Rule 12b-1 Plan between the Funds and the
Distributor shall control over this Agreement in the event of any inconsistency.
Each Rule 12b-1 Plan in effect on the date of this Agreement is described in the
relevant Fund's Prospectus. Dealer
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<PAGE>
hereby acknowledges that all payments under Rule 12b-1 Plans are subject to
limitations contained in such Rule 12b-1 Plans and may be varied or discontinued
at any time.
5. REDEMPTIONS, REPURCHASES AND EXCHANGES
a. The Prospectus for each Fund describes the provisions whereby the
Fund, under all ordinary circumstances, will redeem Shares held by shareholders
on demand. Dealer agrees that it will not make any representations to
shareholders relating to the redemption of their Shares other than the
statements contained in the Prospectus and the underlying organizational
documents of the Fund, to which it refers, and that Dealer will pay as
redemption proceeds to shareholders the net asset value, minus any applicable
deferred sales charge or redemption fee, determined after receipt of the order
as discussed in the Prospectus.
b. Dealer agrees not to repurchase any Shares from its customers at
a price below that next quoted by the Fund for redemption or repurchase, I.E.,
at the net asset value of such Shares, less any applicable deferred sales
charge, or redemption fee, in accordance with the Fund's Prospectus. Dealer
shall, however, be permitted to sell Shares for the account of the customer or
record owner to the Funds at the repurchase price then currently in effect for
such Shares and may charge the customer or record owner a fair service fee or
commission for handling the transaction, provided Dealer discloses the fee or
commission to the customer or record owner. Nevertheless, Dealer agrees that it
shall not under any circumstances maintain a secondary market in such
repurchased Shares.
c. Dealer agrees that, with respect to a redemption order it has
made, if instructions in proper form, including any outstanding certificates,
are not received by Distributor within the time customary or the time required
by law, the redemption may be canceled forthwith without any responsibility or
liability on Distributor's part or on the part of any Fund, or Distributor, at
its option, may buy the shares redeemed on behalf of the Fund, in which latter
case Distributor may hold Dealer responsible for any loss, including loss of
profit, suffered by Distributor resulting from Distributor's failure to settle
the redemption.
d. Dealer agrees that it will comply with any restrictions and
limitations on exchanges described in each Fund's Prospectus, including any
restrictions or prohibitions relating to frequent purchases and redemptions
(i.e., market timing).
6. MULTIPLE CLASSES OF SHARES
Distributor may, from time to time, provide Dealer with written
guidelines or standards relating to the sale or distribution of Funds offering
multiple classes of Shares with different sales charges and distribution-related
operating expenses.
7. FUND INFORMATION
a. Dealer agrees that neither it nor any of its partners, directors,
officers, employees, and agents is authorized to give any information or make
any representations concerning Shares of any Fund except those contained in the
Fund's then current Prospectus or in materials provided by Distributor.
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<PAGE>
b. Distributor will supply to Dealer Prospectuses, reasonable
quantities of sales literature, sales bulletins, and additional sales
information as provided by Distributor. Dealer agrees to use only advertising
or sales material relating to the Funds that: (i) is supplied by Distributor, or
(ii) conforms to the requirements of all applicable laws or regulations of any
government or authorized agency having jurisdiction over the offering or sale of
Shares of the Funds and is approved in writing by Distributor in advance of its
use. Such approval may be withdrawn by Distributor in whole or in part upon
written notice to Dealer, and Dealer shall, upon receipt of such notice,
immediately discontinue the use of such sales literature, sales bulletins and
advertising. Dealer is not authorized to modify or translate any such materials
without Distributor's prior written consent.
8. SHARES
a. Distributor acts solely as agent for the Fund and Distributor
shall have no obligation or responsibility with respect to Dealer's right to
purchase or sell Shares in any state or jurisdiction.
b. Distributor shall periodically furnish Dealer with information
identifying the states or jurisdictions in which it is believed that all
necessary notice, registration or exemptive filings for Shares have been made
under applicable securities laws such that offers and sales of Shares may be
made in such states or jurisdictions. Distributor shall have no obligation to
make such notice, registration or exemptive filings with respect to Shares in
any state or jurisdiction.
c. Dealer agrees not to transact orders for Shares in states or
jurisdictions in which it has been informed that Shares may not be sold or in
which it and its personnel are not authorized to sell Shares.
d. Distributor shall have no responsibility, under the laws
regulating the sale of securities in the United States or any foreign
jurisdiction, with respect to the qualification or status of Dealer or Dealer's
personnel selling Fund Shares. Distributor shall not, in any event, be liable
or responsible for the issue, form, validity, enforceability and value of such
Shares or for any matter in connection therewith.
e. Dealer agrees that it will make no offers or sales of Shares in
any foreign jurisdiction, except with the express written consent of
Distributor.
9. INDEMNIFICATION
a. Dealer agrees to indemnify, defend and hold harmless Distributor
and the Funds and their predecessors, successors, and affiliates, each current
or former partner, officer, director, employee, shareholder or agent and each
person who controls or is controlled by Distributor from any and all losses,
claims, liabilities, costs, and expenses, including attorney fees, that may be
assessed against or suffered or incurred by any of them howsoever they arise,
and as they are incurred, which relate in any way to: (i) any alleged violation
of any statute or regulation (including without limitation the securities laws
and regulations of the United States or any state or foreign country) or any
alleged tort or breach of contract, related to the offer or sale by Dealer of
Shares of the Funds pursuant to this Agreement (except to the extent that
Distributor's negligence or failure to follow correct instructions received from
Dealer is the cause of such loss,
A-7
<PAGE>
claim, liability, cost or expense); (ii) any redemption or exchange pursuant to
instructions received from Dealer or its partners, affiliates, officers,
directors, employees or agents; or (iii) the breach by Dealer of any of its
representations and warranties specified herein or the Dealer's failure to
comply with the terms and conditions of this Agreement, whether or not such
action, failure, error, omission, misconduct or breach is committed by Dealer or
its predecessor, successor, or affiliate, each current or former partner,
officer, director, employee or agent and each person who controls or is
controlled by Dealer.
b. Distributor agrees to indemnify, defend and hold harmless Dealer
and its predecessors, successors and affiliates, each current or former partner,
officer, director, employee or agent, and each person who controls or is
controlled by Dealer from any and all losses, claims, liabilities, costs and
expenses, including attorney fees, that may be assessed against or suffered or
incurred by any of them which arise, and which relate to any untrue statement of
or omission to state a material fact contained in the Prospectus or any written
sales literature or other marketing materials provided by the Distributor to the
Dealer, required to be stated therein or necessary to make the statements
therein not misleading.
c. Dealer agrees to notify Distributor, within a reasonable time, of
any claim or complaint or any enforcement action or other proceeding with
respect to Shares offered hereunder against Dealer or its partners, affiliates,
officers, directors, employees or agents, or any person who controls Dealer,
within the meaning of Section 15 of the Securities Act of 1933, as amended.
d. Dealer further agrees promptly to send Distributor copies of
(i) any report filed pursuant to NASD Conduct Rule 3070, including, without
limitation quarterly reports filed pursuant to Rule 3070(c), (ii) reports filed
with any other self-regulatory organization in lieu of Rule 3070 reports
pursuant to Rule 3070(e) and (iii) amendments to Dealer's Form BD.
e. Each party's obligations under these indemnification provisions
shall survive any termination of this Agreement.
10. TERMINATION; AMENDMENT
a. In addition to the automatic termination of this Agreement
specified in Section 1.c. of this Agreement, each party to this Agreement may
unilaterally cancel its participation in this Agreement by giving thirty (30)
days prior written notice to the other party. In addition, each party to this
Agreement may terminate this Agreement immediately by giving written notice to
the other party of that other party's material breach of this Agreement. Such
notice shall be deemed to have been given and to be effective on the date on
which it was either delivered personally to the other party or any officer or
member thereof, or was mailed postpaid or delivered to a telegraph office for
transmission to the other party's designated person at the addresses shown
herein or in the most recent NASD Manual.
b. This Agreement shall terminate immediately upon the appointment
of a Trustee under the Securities Investor Protection Act or any other act of
insolvency by Dealer.
c. The termination of this Agreement by any of the foregoing means
shall have no effect upon transactions entered into prior to the effective date
of termination and shall
A-8
<PAGE>
not relieve Dealer of its obligations, duties and indemnities specified in this
Agreement. A trade placed by Dealer subsequent to its voluntary termination of
this Agreement will not serve to reinstate the Agreement. Reinstatement, except
in the case of a temporary suspension of Dealer, will only be effective upon
written notification by Distributor.
d. This Agreement is not assignable or transferable and will
terminate automatically in the event of its "assignment," as defined in the
Investment Company Act of 1940, as amended and the rules, regulations and
interpretations thereunder. The Distributor may, however, transfer any of its
duties under this Agreement to any entity that controls or is under common
control with Distributor.
e. This Agreement may be amended by Distributor at any time by
written notice to Dealer. Dealer's placing of an order or accepting payment of
any kind after the effective date and receipt of notice of such amendment shall
constitute Dealer's acceptance of such amendment.
11. DISTRIBUTOR'S REPRESENTATIONS AND WARRANTIES
Distributor represents and warrants that:
a. It is a limited liability company duly organized and existing and
in good standing under the laws of the state of Delaware and is duly registered
or exempt from registration as a broker-dealer in all states and jurisdictions
in which it provides services as principal underwriter and distributor for the
Funds.
b. It is a member in good standing of the NASD.
c. It is empowered under applicable laws and by Distributor's
charter and by-laws to enter into this Agreement and perform all activities and
services of the Distributor provided for herein and that there are no
impediments, prior or existing, regulatory, self-regulatory, administrative,
civil or criminal matters affecting Distributor's ability to perform under this
Agreement.
d. All requisite actions have been taken to authorize Distributor to
enter into and perform this Agreement.
12. ADDITIONAL DEALER REPRESENTATIONS AND WARRANTIES
In addition to the representations and warranties found elsewhere in
this Agreement, Dealer represents and warrants that:
a. It is duly organized and existing and in good standing under the
laws of the state, commonwealth or other jurisdiction in which Dealer is
organized and that Dealer will not offer Shares of any Fund for sale in any
state or jurisdiction where such Shares may not be legally sold or where Dealer
is not qualified to act as a broker-dealer.
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<PAGE>
b. It is empowered under applicable laws and by Dealer's
organizational documents to enter into this Agreement and perform all activities
and services of the Dealer provided for herein and that there are no
impediments, prior or existing, regulatory, self-regulatory, administrative,
civil or criminal matters affecting Dealer's ability to perform under this
Agreement.
c. All requisite actions have been taken to authorize Dealer to
enter into and perform this Agreement.
d. It is not, at the time of the execution of this Agreement,
subject to any enforcement or other proceeding with respect to its activities
under state or federal securities laws, rules or regulations.
13. SETOFF; DISPUTE RESOLUTION; GOVERNING LAW
a. Should any of Dealer's concession accounts with Distributor have
a debit balance, Distributor shall be permitted to offset and recover the amount
owed from any other account Dealer has with Distributor, without notice or
demand to Dealer.
b. In the event of a dispute concerning any provision of this
Agreement, either party may require the dispute to be submitted to binding
arbitration under the commercial arbitration rules and procedures of the NASD.
The parties agree that, to the extent permitted under such arbitration rules and
procedures, the arbitrators selected shall be from the securities industry.
Judgment upon any arbitration award may be entered by any state or federal court
having jurisdiction.
c. This Agreement shall be governed and construed in accordance with
the laws of the state of New Jersey, not including any provision which would
require the general application of the law of another jurisdiction.
14. INVESTIGATIONS AND PROCEEDINGS
The parties to this Agreement agree to cooperate fully in any
securities regulatory investigation or proceeding or judicial proceeding with
respect to each's activities under this Agreement and promptly to notify the
other party of any such investigation or proceeding.
15. CAPTIONS
All captions used in this Agreement are for convenience only, are not
a party hereof, and are not to be used in construing or interpreting any aspect
hereof.
16. ENTIRE UNDERSTANDING
This Agreement contains the entire understanding of the parties hereto
with respect to the subject matter contained herein and supersedes all previous
agreements. This Agreement shall be binding upon the parties hereto when signed
by Dealer and accepted by Distributor.
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<PAGE>
17. SEVERABILITY
Whenever possible, each provision of this Agreement shall be
interpreted in such manner as to be effective and valid under applicable law.
If, however, any provision of this Agreement is held under applicable law to be
invalid, illegal, or unenforceable in any respect, such provision shall be
ineffective only to the extent of such invalidity, and the validity, legality
and enforceability of the remaining provisions of this Agreement shall not be
affected or impaired in any way.
18. ENTIRE AGREEMENT
This Agreement contains the entire understanding of the parties hereto
with respect to the subject matter contained herein and supersedes all previous
agreements and/or understandings of the parties. This Agreement shall be
binding upon the parties hereto when signed by Dealer and accepted by
Distributor.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the day and year set forth below.
PRUDENTIAL INVESTMENT MANAGEMENT
SERVICES LLC
By: ________________________________
Name:_________________________________
Title:__________________________________
Date:__________________________________
DEALER: _____________________________
By: _________________________________
(Signature)
Name: _________________________________
Title: _________________________________
Address:________________________________
________________________________
________________________________
Telephone: _____________________________
NASD CRD # __________________________
Prudential Dealer # _______________________
(Internal Use Only)
Date: _________________________________
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<PAGE>
EX-8.(b)
Subcustodian Agreement
SUBCUSTODIAN AGREEMENT
Between
STATE STREET BANK AND TRUST COMPANY
and
MORGAN GUARANTY TRUST COMPANY
OF NEW YORK
<PAGE>
SUBCUSTODIAN AGREEMENT
The undersigned custodian (the "Custodian") on behalf of the investment
companies identified on Exhibit A attached hereto and for each such additional
investment company as may hereafter be added by agreement between the Custodian
and Morgan Guaranty Trust Company of New York (each such investment company
shall be referred to herein as "Fund") hereby appoints upon the following terms
and conditions Morgan Guaranty Trust Company of New York as subcustodian (the
"Subcustodian") for the purposes herein defined and the Subcustodian hereby
accepts such appointment upon the following terms and conditions as of the date
set forth below.
1. Qualification. The Custodian and the Subcustodian each represent to the
other and to the Fund that it is a bank qualified to act as a custodian for a
registered investment company under the Investment Company Act of 1940, as
amended (the "1940 Act").
2. Subcustody. The Subcustodian agrees to hold in a separate account,
segregated at all times from all other accounts maintained by the Subcustodian,
all securities and rights thereto of each Fund (such securities and rights of
each such Fund shall be referred to in this Agreement as "Fund Securities")
deposited from time to time by the Custodian with the Subcustodian. The
Subcustodian will accept, hold or dispose of and take such other actions with
respect to Fund Securities in addition to those specified in Section 3 in
accordance with the Instructions of the Custodian given in the manner set forth
<PAGE>
in Section 4. Registered Fund Securities may be held in the name of the
Subcustodian's nominee.
3. Subcustodian's Acts Without Instructions. Except as otherwise
instructed pursuant to Section 4, the Subcustodian will (i) present all Fund
Securities requiring presentation for any payment thereon, (ii) distribute to
the Custodian cash received thereupon, (iii) collect and distribute to the
Custodian interest and any dividends and distributions on Fund Securities, (iv)
execute any necessary declarations or certificates of ownership under any tax
law now or hereafter in effect, (v) forward to the Custodian all confirmations,
notices, proxies or proxy soliciting materials relating to the Fund Securities
received by it (and the Custodian agrees to forward same to each Fund), (vi)
report to the Custodian any missed payment or other default upon any Fund
Securities known to it as Subcustodian hereunder and (vii) make no free delivery
of Fund Securities to anyone other than the Custodian. Promptly after the
Subcustodian is furnished with any report of its independent public accountants
on an examination of its internal accounting controls and procedures for
safeguarding securities held in its custody for the account of others, the
Subcustodian will furnish a copy thereof to the Custodian. Payment by the
Subcustodian for Fund Securities may be made only against receipt of such
securities.
4. Instructions, Other Communications. Any officer of the Custodian
designated from time to time by letter to the Subcustodian, signed by the
President or any Vice President and
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<PAGE>
any Assistant Vice President, Assistant Secretary or Assistant Treasurer of
the Custodian, as an officer of the Custodian authorized to give Instructions
to the Subcustodian with respect to Fund Securities (an "Authorized Officer")
shall be authorized to instruct the Subcustodian as to the acceptance,
holding, voting, presentation, disposition or any other action with respect
to Fund Securities form time to time by telephone (if recorded) or in writing
signed by such Authorized Officer and delivered by hand, mail, telecopier,
tested telex, tested computer printout or such other reasonable method as the
Custodian and Subcustodian shall agree is designed to prevent unauthorized
officer'sinstructions. The Subcustodian will promptly transmit to the
Custodian all receipts, confirmations or other transactional evidence
received by it in respect of Fund Securities as to which the Subcustodian has
received any Instructions. Instructions to the Subcustodian shall be given to
Morgan Guaranty Trust Company of New York, 15 Broad Street (16th Floor), New
York, New York 10015, Attention: Corporate Trust and Securities Department;
Phone (212) 483-4140. Communications to the Custodian and each Fund shall be
made at the address set forth below.
5. The Subcustodian. The Subcustodian shall be held to the exercise of
reasonable care in carrying out the provisions of this Agreement and shall not
be liable for any action taken or omitted to be taken if done without negligence
or willful misconduct. The Subcustodian will indemnify, defend and save harmless
the Custodian for any loss or liability incurred by the
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<PAGE>
Custodian arising out of or in connection with the Subcustodian's negligence or
willful misconduct.
6. The Funds. The name of each Fund listed on Exhibit A attached hereto or
hereafter added to Exhibit A noted by an asterisk is the designation of the
Trustees of the Fund for the time being under a Declaration of Trust described
on Exhibit A, and all persons dealing with each such Fund must look solely to
such Fund property for the enforcement of any claims against such Fund, as
neither the Trustees, officers, agents or shareholders assume any personal
liability or obligations entered into on behalf of such Fund.
7. Miscellaneous. This Agreement (i) shall be governed by and construed in
accordance with the laws of the State of New York, (ii) may be executed in
counterparts each of which shall be deemed an original but all of which shall
constitute the same instrument, (iii) may be amended by the parties hereto in
writing and (iv) may be terminated by either party hereto upon 10 days' written
notice to the other (and the Subcustodian shall cause any Fund Securities held
by it upon such termination to be made available to the Custodian or its order).
-4-
<PAGE>
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the
date set forth below.
Dated: STATE STREET BANK AND TRUST COMPANY
("Custodian")
BY:
------------------------------------
Vice President
P.O. Box 351, Mutual Funds
Boston, Massachusetts 02101
As Custodian for:
(See Exhibit A)
MORGAN GUARANTY TRUST COMPANY
OF NEW YORK ("Subcustodian")
BY:
------------------------------------
Title:
-5-
<PAGE>
EX-8.(c)
State Street/Bankers Trust Subcust. Arrangement
STATE STREET/BANKERS TRUST SUBCUSTODIAL
ARRANGEMENT
<PAGE>
1
SUBCUSTODIAN AGREEMENT
The undersigned custodian (the "Custodian") for each of the investment
companies (each such investment company is herein referred to as the "Fund")
identified in EXHIBIT #2 of the OPERATING PROCEDURES attached hereto as APPENDIX
I and, as amended from time to time, made a part hereof, hereby appoints on the
following terms and conditions Bankers Trust Company as subcustodian (the
"Subcustodian") for it and the Subcustodian hereby accepts such appointment on
the following terms and conditions as of the date set forth below.
1. Qualification. The Custodian and the Subcustodian each represents to
the other and to the Fund that it is qualified to act as a custodian for a
registered investment company under the Investment Company Act of 1940, as
amended (the "1940 Act").
2. Subcustody. The Subcustodian agrees to maintain a separate account and
to hold segregated at all times from the Subcustodian's securities and from all
other customers' securities held by the Subcustodian, all the Fund's securities
and evidence of rights thereto ("Fund Securities") deposited, from time to time
by the Custodian's authorized representative with the Subcustodian. The
Subcustodian will accept, hold or dispose of and take other actions with respect
to Fund Securities in accordance with the Instructions of the Custodian given in
the manner set forth in Section 4 and will take certain other actions as
specified in Section 3. The Subcustodian may take steps to register and continue
to hold Fund Securities in the name of the Subcustodian's nominee and shall take
such other steps as the Subcustodian believes necessary or appropriate to carry
out efficiently the terms of this Agreement. To the extent that ownership of
Fund Securities may be recorded by a book entry system maintained by any
transfer agent or registrar for such Fund Securities or by Depository Trust
Company, the Subcustodian may hold Fund Securities as a book entry reflecting
the ownership of such Fund Securities by its nominee and need not possess
certificates or any other evidence of ownership of Fund Securities. The
Subcustodian shall identify on its records Fund Securities wish are held in a
book entry system.
3. Subcustodian's Acts Without Instructions. Except as otherwise
instructed pursuant to Section 4, the Subcustodian will (i) present all Fund
Securities requiring presentation for any payment thereon, (ii) distribute to
the Custodian cash received thereon, (iii) collect and distribute to the
Custodian interest and
<PAGE>
2
execute any necessary declarations or certificates of ownership (provided by
the Custodian or on its behalf) under any tax law now or hereafter in effect,
(v) forward to the Custodian, or notify it by telephone of, confirmations,
notices, proxies or proxy soliciting materials relating to the Fund Securities
received by it as registered holder (and the Custodian agrees to forward same to
the Fund), (vi) report to the Custodian any missed payment or other default upon
any Fund Securities known to it as Subcustodian and (vii) make no free delivery
of Fund Securities to anyone other than the Custodian. Promptly after the
Subcustodian is furnished with any report of its independent public accountants
on an examination of its internal accounting controls and procedures for
safeguarding securities held in its custody as subcustodian under this Agreement
or under similar agreements, the Subcustodian will furnish a copy thereof to the
Custodian.
4. Instruction, Other Communications. Any officer of the Custodian
designated from time to time by letter to the Subcustodian, signed by the
President or any Vice President and any Assistant Vice President, Assistant
Secretary or Assistant Treasurer of the Custodian, as an officer of the
Custodian authorized to give instructions to the Subcustodian with respect to
Fund Securities (an "Authorized Officer"), shall be authorized to instruct the
Subcustodian as to the acceptance, holding, presentation, disposition or any
other action with respect to Fund Securities from time to time by telephone, or
in writing signed by such Authorized officer and delivered by tested telex,
tested computer printout or such other reasonable method as the Custodian and
Subcustodian shall agree is designated to prevent unauthorized officer's
instructions; provided, however, the Subcustodian is authorized to accept and
act upon orders from the Custodian, whether orally, by telephone or otherwise,
which the Subcustodian reasonably believes to be given by an authorized person.
The Subcustodian will promptly transmit to the Custodian all receipts and
transaction confirmations in respect of Fund Securities as to which the
Subcustodian has received any instructions. The Authorized Officers shall be as
set forth on EXHIBIT #1 of the OPERATING PROCEDURES. The Subcustodian will
furnish a weekly statement relating to the account which shall reflect Fund
Securities held in the account at the date of such statement.
5. Liabilities. (i) The Subcustodian shall not be liable for any action
taken or omitted to be taken in carrying out the terms and provision of this
Agreement if done without willful malfeasance, bad faith, negligence or reckless
disregard of its obligations and duties under this Agreement. Except as
otherwise set forth herein, the Subcustodian shall have no responsibility for
ascertaining or acting upon any calls, conversions, exchange offers, tenders,
interest rate changes or similar matters relating to the Fund
<PAGE>
3
Securities (except at the instructions of the Custodian), nor for informing the
Custodian with respect thereto, whether or not the Subcustodian has, or is
deemed to have, knowledge of the aforesaid. The Subcustodian is under no duty to
supervise or to provide investment counseling or advice to the Custodian or the
Fund relative to the purchase, sale, retention or other disposition of any Fund
Securities held hereunder. The Subcustodian shall for the benefit of the
Custodian and the Fund use the same care with respect to receiving, safekeeping,
handling and delivery of Fund Securities as it uses in respect of its own
securities.
(ii) The Subcustodian will indemnify, defend and save harmless the
Custodian and the Fund from and against all loss, liability, claims and demands
incurred by the Custodian or the Fund arising out of or in connection with the
Subcustodian's willful malfeasance, bad faith, negligence or reckless disregard
of it obligations and duties under this Agreement.
(iii) The Custodian agrees to be responsible for and indemnify the
Subcustodian and any nominee in whose name the Fund Securities are registered,
from and against all loss, liability, claims and demands incurred by the
Subcustodian and the nominee in connection with performance of any activity
pursuant to this Agreement, done in good faith and without negligence, including
any expenses, taxes or other charges which the Subcustodian is required to pay
in connection therewith.
6. Each party may terminate this Agreement at any time by not less than
ten (10) business days' prior written notice. In the event that such notice is
given, the Subcustodian shall make delivery of the Fund Securities held in the
Subcustodian account to the Custodian or to any third party within the Borough
of Manhattan, specified by the Custodian in writing within ten (10) days of
receipt of the termination notice, at the Custodian's expense.
7. All communications required or permitted to be given under this
Agreement, unless otherwise agreed by the parties, shall be addressed as
follows:
(i) to the Subcustodian:
Bankers Trust Company
1 Bankers Trust Plaza
32nd Floor
New York, NY 10015
Attention: Barbara Walter
RMD Safekeeping Unit
<PAGE>
4
(ii) to the Custodian:
State Street Bank and Trust Company
1776 Heritage Drive
Quincy, Massachusetts 02171
Attn: Mutual Funds Service Administration
B. Miscellaneous: This Agreement (i) shall be governed by and construed in
accordance with the laws of the State of New York, (ii) may be executed in
counterparts each of which shall be deemed an original but all of which shall
constitute the same instrument, and (iii) may be amended by the parties hereto
in writing.
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the
date set forth below.
Dated: August 21, 1986
STATE STREET BANK & TRUST COMPANY
As Custodian
By: /s/ B. Weidlich
----------------------------
Title: Vice President
-------------------------
BANKERS TRUST COMPANY
As Subcustodian
By: /s/ [Illegible]
----------------------------
Title: Senior VP
-------------------------
<PAGE>
EX-8.(d)
Sub-Custodian Agreement
SUBCUSTODIAN AGREEMENT
between
BANKERS TRUST COMPANY
and
STATE STREET BANK AND TRUST COMPANY
<PAGE>
Sub-Custodian Agreement
State Street Bank and Trust Company, a Massachusetts trust company, having
its principal place of business at 225 Franklin Street, Boston, Massachusetts,
02110 (hereinafter called the "Custodian"), hereby appoints Bankers Trust
Company, a New York banking corporation, having its principal place of business
at 4 Albany Street, New York, New York 10015, (hereinafter called the
"Sub-Custodian") to serve as Sub-Custodian and to hold such securities as the
Custodian may designate on behalf of and upon the instructions of the
appropriate entity listed on Exhibit A attached hereto (each a "Fund" and
collectively, the "Funds") for which the Custodian is custodian, subject to the
terms and conditions set forth herein.
1. Representation by Sub-Custodian.
The Sub-Custodian hereby represents that it is qualified to act as
custodian for a registered investment company under the Investment Company Act
of 1940, as amended, and that it has aggregate capital, surplus and undivided
profits, as shown by its last published report, of not less than $25,000,000.
2. Custodian Services.
The Sub-Custodian shall hold in an account in the name of the Custodian,
as custodian for the Funds, securities registered in the name of the
Sub-Custodian's nominee (the "Account") and owned by each such Fund. Such
securities shall be designated by
<PAGE>
the Custodian upon instructions of the appropriate Fund and shall consist of
bonds or notes of any issue that (a) are tax exempt, (b) incorporate an
adjustable interest rate that is convertible to interest rates determinable on a
variable or fixed rate basis, (c) entitle the owners of such securities to have
such securities purchased at specified times and (d) require the services of a
custodian (which may be the Sub-Custodian) to establish a book-entry system
similar to that set forth in the Relevant Master Custody Agreement (as
hereinafter defined in paragraph 13 hereof). Such securities may be commingled
with other securities of the same issue or with other securities held in a
fiduciary or custodial capacity but shall be physically segregated from all
securities held in the Sub-Custodian's individual capacity or for its account.
Subject to paragraph 13 hereof, the Sub-Custodian shall release and deliver such
securities only upon receipt of instructions form the Custodian.
The Sub-Custodian shall collect on a timely basis, and credit to each
Fund's Sub-Custodial account, all income and other payments with respect to
securities held under this Agreement to which such Fund is entitled as owner of
the securities and shall notify the Custodian of any income or other payments
that are not collected within a reasonable time after they become payable.
Payments of income are to be made by wire advice to the account of each Fund so
specified on Exhibit A.
The Sub-Custodian shall at no time supervise the investment of, or advise
or make any recommendations for the sale, purchase or other disposition of
securities held under this Agreement.
-2-
<PAGE>
All purchase and sale transactions shall be carried out by the Sub-Custodian
only as the Custodian may instruct pursuant to paragraph 3 hereof.
3. Instructions.
Subject to paragraph 13 hereof, instructions furnished by the Custodian to
the Sub-Custodian with respect to securities held by the Sub-Custodian under
this Agreement shall be signed by such officer or officers of the Custodian as
are authorized from time to time by the Custodian; provided, however, that the
Sub-Custodian is authorized to accept and act upon orders from the Custodian,
whether given orally, by telephone or otherwise, which the Sub-Custodian
reasonably believes to be given by an authorized person and the Sub-Custodian
shall be entitled to rely on such written or oral authorization provided it has
not actual knowledge to the contrary. The Custodian shall confirm such orders in
writing. The Sub-Custodian shall use the same care with respect to the
receiving, safekeeping, handling and delivering of securities held under this
Agreement as it uses in respect of its own similar securities, but it need not
maintain any special insurance for the benefit of the Custodian or the Funds
unless it may be required to do so by applicable law, in which case the costs of
any such insurance shall be an additional charge to the Custodian or the Funds.
The Sub-Custodian shall not be liable for any action taken or thing done by it
in carrying out the terms and provisions of this Agreement or the Relevant
Master Custody Agreement if done in good faith and
-3-
<PAGE>
without negligence or wilful misconduct on the Sub-Custodian's part. The
Custodian shall not be liable for any action taken or thing done by it in
carrying out the terms and provisions of this Agreement if done in good faith
and without negligence or misconduct on the Custodian's part. The Sub-Custodian
shall have no authority to select any broker or similar agent used to effect the
purchase and sale of securities.
4. Ownership Certificates for Tax Purposes and Indemnification.
The Sub-Custodian shall execute, as Custodian (as defined in Section 13
hereof), any necessary declarations or certificates of ownership required under
any tax law now or hereafter in effect.
The Custodian agrees to indemnify the Sub-Custodian and any nominee in
whose name securities hereunder are registered against, and hold it harmless
from, any liabilities, and any related out-of-pocket expenses, which it may
incur in connection with this Agreement, other than any liabilities and expenses
arising out of the Sub-Custodian's bad faith, wilful misconduct or negligence.
The Sub-Custodian agrees to indemnify the Custodian against, and to hold
harmless from, any liabilities, and any related out-of-pocket expenses, which it
may incur in connection with this Agreement which arise out of the
Sub-Custodian's bad faith, negligence or wilful misconduct.
At the election of the Custodian, it shall be entitled to be subrogated to
the rights of the Sub-Custodian with respect to any claim against any person the
Sub-Custodian may have as a consequence of any such loss, expense or damage, if,
and to the
-4-
<PAGE>
extent the Custodian has not been made whole for any such loss, expense or
damage.
5. Reports by Sub-Custodian's Independent Public Accountants.
To the extent permitted by applicable law the Sub-Custodian shall provide
the Custodian, upon request, with any quarterly or annual reports prepared in
the normal course of business of the Sub-Custodian by the Sub-Custodian's
independent public accountants on the accounting system, internal accounting
controls and procedures for safeguarding securities relating to the services
provided by the Sub-Custodian under this Agreement.
6. Access to Records.
To the extent permitted by applicable law the Sub-Custodian will not
refuse any reasonable request for inspection and audit on its books and records
by an agent of a Fund or Custodian.
7. Cooperation.
The Sub-Custodian shall cooperate with each Fund and Custodian and their
respective independent public accountants in connection with annual and other
audits of the books and records of Custodian or the Fund.
8. Compensation of Sub-Custodian.
The Sub-Custodian shall be entitled to reasonable compensation for its
services and expenses as Sub-Custodian, as agreed upon in writing (at the time
of delivery of the Agreement)
-5-
<PAGE>
from time to time by and between the Sub-Custodian and the Custodian.
9. Effective Period, Termination and Amendment.
This Agreement shall become effective as of its execution, shall continue
in full force and effect until terminated as hereinafter provided, may be
amended at any time by mutual agreement of the parties hereto, and may be
terminated by either party by an instrument in writing delivered or mailed,
postage prepaid to the other party, such termination to take effect not sooner
than thirty (30) days after the date of such delivery or mailing; provided,
however, that the Agreement shall not be amended or terminated in contravention
of any applicable federal or state regulations, or any provision of the
custodial agreements entered into between the Custodian and the separate Funds,
and further, provided that the Custodian may immediately terminate this
Agreement in the event of the appointment of a conservator or receiver for the
Sub-Custodian by the appropriate federal supervisory authority or upon the
happening of a like event at the direction of an appropriate regulatory agency
or court of competent jurisdiction.
Upon termination of this Agreement, the Sub-Custodian shall promptly
deliver to the Custodian in person in New York or by registered mail all
property by delivery of appropriate certificates then held by the Sub-Custodian
under this Agreement.
-6-
<PAGE>
10. Interpretive and Additional Provisions.
In connection with the operation of this Agreement, the Sub-Custodian and
the Custodian may from time to time agree in writing on such provisions
interpretive of or in addition to the provisions of this Agreement as may in
their joint opinion be consistent with the general tenor of this Agreement,
which shall be annexed hereto, provided that no such interpretive or additional
provisions shall contravene any applicable federal or state regulations or any
provision of the custodian agreements entered into between the Custodian and the
separate Funds. No interpretive or additional provisions made as provided in the
preceding sentence shall be deemed to be an amendment of this Agreement.
11. New York Law to Apply.
This agreement shall be construed and the provisions thereof interpreted
under and in accordance with the laws of the State of New York.
12. Communications Received by the Sub-Custodian.
The Sub-Custodian shall promptly transmit to the Custodian all
communications it receives concerning the securities it holds under this
Agreement and shall furnish statements of account in such manner and frequency
as the Sub-Custodian and the Custodian shall agree.
All communications required or permitted to be given under this Agreement
shall be in writing (including telecopy or
-7-
<PAGE>
telegraph) unless expressly provided otherwise, and addressed as follows:
(a) If to the Sub-Custodian: Bankers Trust Company
4 Albany Street
New York, New York 10015
Attn: Corporate Trust and
Agency Group
(b) If to the Custodian: State Street Bank & Trust Company
Mutual Fund Services
P.O. Box 1713
Boston, MA 02105
Attention:
13. Acknowledgement and Consent to Relevant Master Custody Agreement.
The Custodian acknowledges that each of the entities named on Exhibit B
hereto (as such Exhibit may be amended form time to time by notice from the
Sub-Custodian to the Custodian) has been appointed remarketing agent (each a
"Remarketing Agent") for certain series of securities held in custody pursuant
to this Agreement and that such Remarketing Agent and Bankers Trust Company, as
custodian, (the "Master Custodian") have entered into a Master Custody Agreement
identified in such Exhibit as such Master Custody Agreement may be amended or
supplemented from time to time (each, a "Relevant Master Custody Agreement") for
the benefit of the owners of such series of securities held in custody pursuant
to this Agreement to promote the transfer of such series of securities
remarketed by such Remarketing Agent through a book-entry system maintained by
the Master Custodian. The Sub-Custodian will provide, upon request of the
Custodian,
-8-
<PAGE>
copies of each Relevant Master Custody Agreement for each series of securities
held in custody hereunder.
IN WITNESS WHEREOF, each of the parties has caused this Agreement to be
executed this 15th day of August, 1989.
ATTEST: BANKERS TRUST COMPANY
/s/ [ILLEGIBLE] By: /s/ [ILLEGIBLE] Kaufmann
- ------------------------------- ------------------------------------
Assistant Secretary Title: Assistant Vice President
ATTEST: STATE STREET BANK AND TRUST COMPANY
/s/ [ILLEGIBLE] By: /s/ [ILLEGIBLE]
- ------------------------------- ------------------------------------
Assistant Secretary Vice President
-9-
<PAGE>
EX-8.(e)
Sub-Custodian Agreement
SUBCUSTODIAN AGREEMENT
between
CHEMICAL BANK
and
STATE STREET BANK AND TRUST COMPANY
<PAGE>
Sub-Custodian Agreement
State Street Bank and Trust Company, a Massachusetts trust company, having
its principal place of business at 225 Franklin Street, Boston, Massachusetts,
02110 (hereinafter called the "Custodian"), hereby appoints Chemical Bank, a New
York banking corporation, having its principal place of business at 277 Park
Avenue, New York, New York 10172, (hereinafter called the "Sub-Custodian") to
serve as Sub-Custodian and to hold such securities as the Custodian may
designate on behalf of and upon the instructions of the appropriate entity
listed on Exhibit A attached hereto (each a "Fund" and collectively, the
"Funds") for which the Custodian is custodian, subject to the terms and
conditions set forth herein.
1. Representation by Sub-Custodian.
The Sub-Custodian hereby represents that it is qualified to act as
custodian for a registered investment company under the Investment Company Act
of 1940, as amended, and that it has aggregate capital, surplus and undivided
profits, as shown by its last published report, of not less than $25,000,000.
2. Custodian Services.
The Sub-Custodian shall hold in an account in the name of the Custodian,
as custodian for the Funds, securities registered in the name of the
Sub-Custodian's nominee (the "Account") and owned by each such Fund. Such
securities shall be designated by
<PAGE>
the Custodian upon instructions of the appropriate Fund and shall consist of
bonds or notes of any issue that (a) are tax exempt, (b) incorporate an
adjustable interest rate that is convertible to interest rates determinable on a
variable or a fixed rate basis, (c) entitle the owners of such securities to
have such securities purchased at specified times and (d) require the services
of a custodian to establish a book-entry system similar to that set forth in the
Relevant Master Custody Agreement (as hereinafter defined in paragraph 13
hereof). Such securities may be commingled with other securities of the same
issue or with other securities held in a fiduciary or custodial capacity but
shall be physically segregated from all securities held in the Sub-Custodian's
individual capacity or for its account. Subject to paragraph 13 hereof, the
Sub-Custodian shall release and deliver such securities only upon receipt of
instructions form the Custodian.
The Sub-Custodian shall collect on a timely basis, and credit to each
Fund's Sub-Custodian account, all income and other payments with respect to
securities held under this Agreement to which such Fund is entitled as owner of
the securities and shall notify the Custodian of any income or other payments
that are not collected within a reasonable time after they become payable.
Payments of income are to be made by wire advice to the account of each Fund so
specified on Exhibit A.
The Sub-Custodian shall at no time supervise the investment of, or advise
or make any recommendations for the sale, purchase or other disposition of
securities held under this Agreement.
<PAGE>
All purchase and sale transactions shall be carried out by the Sub-Custodian
only as the Custodian may instruct pursuant to paragraph 3 hereof.
3. Instructions.
Subject to paragraph 13 hereof, instructions furnished by the Custodian to
the Sub-Custodian with respect to securities held by the Sub-Custodian under
this Agreement shall be signed by such officer or officers of the Custodian as
are authorized from time to time by the Custodian; provided, however, that the
Sub-Custodian is authorized to accept and act upon orders from the Custodian,
whether given orally, by telephone or otherwise, which the Sub-Custodian
reasonably believes to be given by an authorized person. The Custodian shall
confirm such orders in writing. The Sub-Custodian shall use the same care with
respect to the receiving, safekeeping, handling and delivering of securities
held under this Agreement as it uses in respect of its own similar securities,
but it need not maintain any special insurance for the benefit of the Custodian
of the Funds. The Sub-Custodian shall not be liable for any action taken or
thing done by it in carrying out the terms and provisions of this Agreement or
the Relevant Master Custody Agreement if done in good faith and without
negligence or misconduct on the Sub-Custodian's part. The Custodian shall not be
liable for any action taken or thing done by it in carrying out the terms and
provisions of this Agreement if done in good faith and without negligence or
misconduct on the Custodian's part. The
<PAGE>
Sub-Custodian shall have no authority to select any broker or similar agent used
to effect the purchase and sale of securities.
4. Ownership Certificates for Tax Purposes and Indemnification.
The Sub-Custodian shall execute, as Custodian (as defined in Section 13
hereof), any necessary declarations or certificates of ownership required under
any tax law now or hereafter in effect.
The Custodian agrees to indemnify the Sub-Custodian against, and hold it
harmless from, any liabilities, and any related out-of-pocket expenses, which it
may incur in connection with this Agreement, other than any liabilities and
expenses arising out of the Sub-Custodian's bad faith, wilful misconduct or
negligence. The Sub-Custodian agrees to indemnify the Custodian against, and to
hold harmless from, any liabilities, and any related out-of-pocket expenses,
which it may incur in connection with this Agreement which arise out of the
Sub-Custodian's bad faith, negligence or wilful misconduct. The indemnification
provided hereunder by the Custodian and the Sub-Custodian shall not extend to
any special or consequential damages arising out of the performance of this
Agreement.
At the election of the Custodian, it shall be entitled to be subrogated to
the rights of the Sub-Custodian with respect to any claim against any person the
Sub-Custodian may have as a consequence of any such loss, expense or damage, if,
and to the extent the Custodian has not been made whole for any such loss,
expense or damage.
<PAGE>
5. Reports by Sub-Custodian's Independent Public Accountants.
The Sub-Custodian shall provide the Custodian, upon request, with any
quarterly or annual reports prepared in the normal course of business of the
Sub-Custodian by the Sub-Custodian's independent public accountants on the
accounting system, internal accounting controls and procedures for safeguarding
securities relating to the services provided by the Sub-Custodian under this
Agreement.
6. Access to Records.
The Sub-Custodian will not refuse any reasonable request for inspection
and audit on its books and records by an agent of a Fund or Custodian.
7. Cooperation.
The Sub-Custodian shall cooperate with each Fund and Custodian and their
respective independent public accountants in connection with annual and other
audits of the books and records of Custodian or the Fund.
8. Compensation of Sub-Custodian.
The Sub-Custodian shall be entitled to reasonable compensation for its
services and expenses as Sub-Custodian, as agreed upon in writing from time to
time by and between the Sub-Custodian and the Custodian.
<PAGE>
9. Effective Period, Termination and Amendment.
This Agreement shall become effective as of its execution, shall continue
in full force and effect until terminated as hereinafter provided, may be
amended at any time by mutual agreement of the parties hereto, and may be
terminated by either party by an instrument in writing delivered or mailed,
postage prepaid to the other party, such termination to take effect not sooner
than thirty (30) days after the date of such delivery or mailing; provided,
however, that the Agreement shall not be amended or terminated in contravention
of any applicable federal or state regulations, or any provision of the
custodial agreements entered into between the Custodian and the separate Funds,
and further, provided that the Custodian may immediately terminate this
Agreement in the event of the appointment of a conservator or receiver for the
Sub-Custodian by the Federal Deposit Insurance Corporation or upon the happening
of a like event at the direction of an appropriate regulatory agency or court of
competent jurisdiction.
Upon termination of this Agreement, the Sub-Custodian shall promptly
deliver to the Custodian in person in New York or by registered mail all
property by delivery of appropriate certificates then held by the Sub-Custodian
under this Agreement.
10. Interpretive and Additional Provisions.
In connection with the operation of this Agreement, the Sub-Custodian and
the Custodian may from time to time agree in writing on such provisions
interpretive of or in addition to the provisions of this Agreement as may in
their joint opinion be
<PAGE>
consistent with the general tenor of this Agreement, which shall be annexed
hereto, provided that no such interpretive or additional provisions shall
contravene any applicable federal or state regulations or any provision of the
custodian agreements entered into between the Custodian and the separate Funds.
No interpretive or additional provisions made as provided in the preceding
sentence shall be deemed to be an amendment of this Agreement.
11. New York Law to Apply.
This agreement shall be construed and the provisions thereof interpreted
under and in accordance with the laws of the State of New York.
12. Communications Received by the Sub-Custodian.
The Sub-Custodian shall promptly transmit to the Custodian all
communications it receives concerning the securities it holds under this
Agreement and shall furnish statements of account in such manner and frequency
as the Sub-Custodian and the Custodian shall agree.
All communications required or permitted to be given under this Agreement
shall be in writing (including telex or telegraph) unless expressly provided
otherwise, and addressed as follows:
(a) If to the Sub-Custodian: Chemical Bank
55 Water Street
Room 540
New York, New York 10172
Attn: Special Handling/
Tender Unit
<PAGE>
(b) If to the Custodian: State Street Bank & Trust Company
Mutual Fund Services
P.O. Box 1713
Boston, MA 02105
Attention:
13. Acknowledgement and Consent to Relevant Master Custody Agreement.
The Custodian acknowledges that each of the entities named on Exhibit B
hereto (as such Exhibit may be amended from time to time by notice from the
Sub-Custodian to the Custodian) has been appointed remarketing agent (each a
"Remarketing Agent") for certain series of securities held in custody pursuant
to this Agreement and that such Remarketing Agent and Chemical Bank, as
custodian, (the "Master Custodian") have entered into a Master Custody Agreement
identified in such Exhibit as such Master Custody Agreement may be amended or
supplemented from time to time (each, a "Relevant Master Custody Agreement") for
the benefit of the owners of such series of securities held in custody pursuant
to this Agreement to promote the transfer of such series of securities
remarketed by such Remarketing Agent through a book-entry system maintained by
the Master Custodian. The Sub-Custodian will provide, upon request of the
Custodian, copies of each Relevant Master Custody Agreement for each series of
securities held in custody hereunder. The Custodian consents in all respects to
be bound by the terms thereof and to the extend that there is a conflict between
the terms of the Relevant Master Custody Agreement and this Agreement, the terms
of this Agreement shall govern.
<PAGE>
IN WITNESS WHEREOF, each of the parties has caused this Agreement to be
executed this 31st day of May, 1988.
ATTEST: CHEMICAL BANK
/s/ [ILLEGIBLE] By: /s/ [ILLEGIBLE] Kaufmann
- ------------------------------- ------------------------------------
Title: VICE PRESIDENT
ATTEST: STATE STREET BANK AND TRUST COMPANY
/s/ [ILLEGIBLE] By: /s/ [ILLEGIBLE]
- ------------------------------- ------------------------------------
Assistant Secretary Vice President
<PAGE>
EX-8.(f)
Sub-Custodian Agreement
EXAMPLE
DRAFT
SUBCUSTODIAN AGREEMENT
between
IRVING TRUST COMPANY/BONY
and
STATE STREET BANK AND TRUST COMPANY
<PAGE>
Sub-Custodian Agreement
State Street Bank and Trust Company, a Massachusetts trust company, having
its principal place of business at 225 Franklin Street, Boston, Massachusetts,
02110 (hereinafter called the "Custodian"), hereby appoints Irving Trust
Company, a New York banking corporation, having its principal place of business
at One Wall Street, New York, New York 10015, (hereinafter called the
"Sub-Custodian") to serve as Sub-Custodian and to hold such securities as the
Custodian may designate on behalf of and upon the instructions of the
appropriate entity listed on Exhibit A attached hereto (each a "Fund" and
collectively, the "Funds") for which the Custodian is custodian, subject to the
terms and conditions set forth herein.
1. Representation by Sub-Custodian.
The Sub-Custodian hereby represents that it is qualified to act as
custodian for a registered investment company under the Investment Company Act
of 1940, as amended, and that it has aggregate capital, surplus and undivided
profits, as shown by its last published report, of not less than $25,000,000.
2. Custodian Services.
The Sub-Custodian shall hold in an account in the name of the Custodian,
as custodian for the Funds, securities registered in the name of the
Sub-Custodian's nominee (the "Account") and owned by each such Fund. Such
securities shall be designated by
<PAGE>
the Custodian upon instructions of the appropriate Fund and shall consist of
bonds of any issue that (a) are tax exempt, (b) incorporate a daily adjustable
interest rate that is convertible to interest rates determinable on a variable
or a fixed rate basis, (c) entitle the owners of such securities to have such
securities purchased on on a daily basis or at certain other specified times and
(d) require the services of a custodian to establish a book-entry system similar
to that set forth in the Relevant Master Custody Agreement (as hereinafter
defined in paragraph 13 hereof). Such securities may be commingled with other
securities of the same issue or with other securities held in a fiduciary or
custodial capacity but shall be physically segregated from all securities held
in the Sub-Custodian's individual capacity or for its account. Subject to
paragraph 13 hereof, the Sub-Custodian shall release and deliver such securities
only upon receipt of instructions from the Custodian.
The Sub-Custodian shall collect on a timely basis, and credit to each
Fund's Sub-Custodial account, all income and other payments with respect to
securities held under this Agreement to which such Fund is entitled by law and
shall notify the Custodian of any income or other payments that are not
collected within a reasonable time after they become payable. Payments of income
are to be made by wire advice to the account of each Fund so specified on
Exhibit A.
The Sub-Custodian shall at no time supervise the investment of, or advise
or make any recommendations for the sale, purchase or other disposition of
securities held under this Agreement.
-2-
<PAGE>
All purchase and sale transactions shall be carried out by the Sub-Custodian
only as the Custodian may instruct pursuant to paragraph 3 hereof.
3. Instructions.
Subject to paragraph 13 hereof, instructions furnished by the Custodian to
the Sub-Custodian with respect to securities held by the Sub-Custodian under
this Agreement shall be signed by such officer or officers of the Custodian as
are authorized from time to time by the Custodian; provided, however, that the
Sub-Custodian is authorized to accept and act upon orders from the Custodian,
whether given orally, by telephone or otherwise, which the Sub-Custodian
reasonably believes to be given by an authorized person. The Custodian shall
confirm such orders in writing. The Sub-Custodian shall use the same care with
respect to the receiving, safekeeping, handling and delivering of securities
held under this Agreement as it uses in respect of its own similar securities,
but it need not maintain any special insurance for the benefit of the Custodian
or the Funds. The Sub-Custodian shall not be liable for any action taken or
thing done by it in carrying out the terms and provisions of this Agreement or
the Relevant Master Custody Agreement if done in good faith and without
negligence or misconduct on the Sub-Custodian's part. The Custodian shall not be
liable for any action taken or thing done by it in carrying out the terms and
provisions of this Agreement if done in good faith and without negligence or
misconduct on the Custodian's part. The
-3-
<PAGE>
Sub-Custodian shall have no authority to select any broker or similar agent used
to effect the purchase and sale of securities.
4. Ownership Certificates for Tax Purposes and Indemnification.
The Sub-Custodian shall execute, as Custodian (as defined in Section 13
hereof), any necessary declarations or certificates of ownership required under
any tax law now or hereafter in effect.
The Custodian agrees to indemnify the Sub-Custodian against, and hold it
harmless from, any liabilities, and any related out-of-pocket expenses, which it
may incur in connection with this Agreement, other than any liabilities and
expenses arising out of the Sub-Custodian's bad faith, wilful misconduct or
negligence. The Sub-Custodian agrees to indemnify the Custodian against, and to
hold harmless it from, any liabilities, and any related out-of-pocket expenses,
which it may incur in connection with this Agreement which arise out of the
Sub-Custodian's bad faith, negligence or wilful misconduct. The indemnification
provided hereunder by the Custodian and the Sub-Custodian shall not extend to
any special or consequential damages arising out of the performance of this
Agreement.
At the election of the Custodian, it shall be entitled to be subrogated to
the rights of the Sub-Custodian with respect to any claim against any person the
Sub-Custodian may have as a consequence of any such loss, expense or damage, if,
and to the extent the Custodian has not been made whole for any such loss,
expense or damage.
-4-
<PAGE>
5. Reports by Sub-Custodian's Independent Public Accountants.
The Sub-Custodian shall provide the Custodian, upon request, with any
quarterly or annual reports prepared in the normal course of business of the
Sub-Custodian by the Sub-Custodian's independent public accountants on the
accounting system, internal accounting controls and procedures for safeguarding
securities relating to the services provided by the Sub-Custodian under this
Agreement.
6. Access to Records.
The Sub-Custodian will not refuse any reasonable request for inspection
and audit on its books and records by an agent of a Fund or Custodian.
7. Cooperation.
The Sub-Custodian shall cooperate with each Fund and Custodian and their
respective independent public accountants in connection with annual and other
audits of the books and records of Custodian or the Fund.
8. Compensation of Sub-Custodian.
The Sub-Custodian shall be entitled to reasonable compensation for its
services and expenses as Sub-Custodian, as agreed upon in writing from time to
time by and between the Sub-Custodian and the Custodian.
-5-
<PAGE>
9. Effective Period, Termination and Amendment.
This Agreement shall become effective as of its execution, shall continue
in full force and effect until terminated as hereinafter provided, may be
amended at any time by mutual agreement of the parties hereto, and may be
terminated by either party by an instrument in writing delivered or mailed,
postage prepaid to the other party, such termination to take effect not sooner
than thirty (30) days after the date of such delivery or mailing; provided,
however, that the Agreement shall not be amended or terminated in contravention
of any applicable federal or state regulations, or any provision of the
custodial agreements entered into between the Custodian and the separate Funds,
and further, provided that the Custodian may immediately terminate this
Agreement in the event of the appointment of a conservator or receiver for the
Sub-Custodian by the Federal Deposit Insurance Corporation or upon the happening
of a like event at the direction of an appropriate regulatory agency or court of
competent jurisdiction.
Upon termination of this Agreement, the Sub-Custodian shall promptly
deliver to the Custodian in person or by registered mail all property then held
by the Sub-Custodian under this Agreement.
10. Interpretive and Additional Provisions.
In connection with the operation of this Agreement, the Sub-Custodian and
the Custodian may from time to time agree in writing on such provisions
interpretive of or in addition to the provisions of this Agreement as may in
their joint opinion be
-6-
<PAGE>
consistent with the general tenor of this Agreement, which shall be annexed
hereto, provided that no such interpretive or additional provisions shall
contravene any applicable federal or state regulations or any provision of the
custodian agreements entered into between the Custodian and the separate Funds.
No interpretive or additional provisions made as provided in the preceding
sentence shall be deemed to be an amendment of this Agreement.
11. New York Law to Apply.
This agreement shall be construed and the provisions thereof interpreted
under and in accordance with the laws of the State of New York.
12. Communications Received by the Sub-Custodian.
The Sub-Custodian shall promptly transmit to the Custodian all
communications it receives concerning the securities it holds under this
Agreement and shall furnish statements of account in such manner and frequency
as the Sub-Custodian and the Custodian shall agree.
All communications required or permitted to be given under this Agreement
shall be in writing (including telex or telegraph) unless expressly provided
otherwise, and addressed as follows:
(a) If to the Sub-Custodian: Irving Trust Company
One Wall Street
New York, New York 10015
Attn: Corporate Trust Dept.
-7-
<PAGE>
(b) If to the Custodian: State Street Bank & Trust Company
Mutual Fund Services
P.O. Box 1713
Boston, MA 02105
Attention:
13. Acknowledgement and Consent to Relevant Master Custody Agreement.
The Custodian acknowledges that each of the entities named on Exhibit B
hereto (as such Exhibit may be amended from time to time by notice from the
Sub-Custodian to the Custodian) has been appointed remarketing agent (each a
"Remarketing Agent") for certain series of securities held in custody pursuant
to this Agreement and that such Remarketing Agent and Irving Trust Company, as
custodian, (the "Master Custodian") have entered into a Master Custody Agreement
identified in such Exhibit as such Master Custody Agreement may be amended or
supplemented from time to time (each, a "Relevant Master Custody Agreement") for
the benefit of the owners of such series of securities held in custody pursuant
to this Agreement to promote the transfer of such series of securities
remarketed by such Remarketing Agent through a book-entry system maintained by
the Master Custodian. The Sub-Custodian will provide, upon request of the
Custodian, copies of each Relevant Master Custody Agreement for each series of
securities held in custody hereunder. The Custodian consents in all respects to
be bound by the terms thereof and to the extend that there is a conflict between
the terms of the Relevant Master Custody Agreement and this Agreement, the terms
of this Agreement shall govern:
-8-
<PAGE>
IN WITNESS WHEREOF, each of the parties has caused this Agreement to be executed
this 30th day of November, 1987.
ATTEST: IRVING TRUST COMPANY
/s/ [ILLEGIBLE] By: /s/ [ILLEGIBLE]
- ------------------------------- ------------------------------------
Assistant Secretary Title: [ILLEGIBLE]
ATTEST: STATE STREET BANK AND TRUST COMPANY
/s/ [ILLEGIBLE] By: /s/ [ILLEGIBLE]
- ------------------------------- ------------------------------------
Assistant Secretary Vice President
<PAGE>
SHEREFF, FRIEDMAN, HOFFMAN & GOODMAN, LLP
919 Third Avenue
New York, New York 10022-9998
June 25, 1998
Prudential Municipal Bond Fund
100 Mulberry Street
Newark, NJ 07102-4077
Re: The Prudential Municipal Bond Fund
----------------------------------
Dear Sirs:
The Prudential Municipal Bond Fund (the "Fund") proposes to continue
issuing and selling an indefinite number of shares of beneficial interest, par
value $.01 per share (the "Shares"), in the manner and on terms set forth in
its Registration Statement on Form N-1A filed with the Securities and Exchange
Commission (File No. 33-10649) (the "Registration Statement").
We have examined copies, either certified or otherwise proved to our
satisfaction to be genuine, of the Fund's Declaration of Trust and By-Laws, as
currently in effect, a certificate of good standing issued by the Secretary
of the Commonwealth of Massachusetts and other documents relating to its
organization and operation. We have also reviewed the current version of the
Registration Statement.
Based upon the foregoing, it is our opinion that:
1. The Fund has been duly organized and is validly existing under
the laws of the Commonwealth of Massachusetts.
2. The Fund is authorized to issue an unlimited number of its
Shares.
3. Subject to the effectiveness of the above-mentioned Registration
Statement and compliance with applicable state securities laws, upon the
issuance of the Shares for a consideration not less than the par value
thereof, and not less than the net asset value thereof as required by
the Investment Company Act of 1940 and in accordance with the terms of
the Registration Statement, such Shares will be legally issued and
outstanding and fully paid and non-assessable. However, we note that, as
set forth in the Registration Statement, shareholders of the Fund might,
under certain circumstances, be liable for transactions effected by the
Fund.
<PAGE>
We hereby consent to the filing of this opinion with the Securities and
Exchange Commission as a part of the above-mentioned Registration Statement
and with any state securities commission where such filing is required. We
also consent to the reference of our firm as counsel in the prospectus filed
as a part thereof. In giving this consent we do not admit that we come within
the category of persons whose consent is required under Section 7 of the
Securities Act of 1933, as amended.
We are members of the Bar of the State of New York and do not hold
ourselves out as being conversant with the laws of any jurisdiction other
than those of the United States of America and the State of New York. We note
that we are not licensed to practice law in the Commonwealth of
Massachusetts, and to the extent that any opinion expressed herein involves
the law of Massachusetts, such opinion should be understood to be based
solely upon our review of the good standing certificate referred to above,
the published statutes of that Commonwealth and, where applicable, published
cases, rules or regulations of regulatory bodies of that State.
Very truly yours,
/s/ Shereff, Friedman, Hoffman & Goodman, LLP
SHEREFF, FRIEDMAN, HOFFMAN & GOODMAN, LLP
SFHG:MKN:JLS:MGM
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Statement of Additional Information
constituting part of this Post-Effective Amendment No. 18 to the registration
statement on Form N-1A (the "Registration Statement") of our report dated
June 18, 1998, relating to the financial statements and financial highlights of
High Yield Series, Insured Series and Intermediate Series (constituting
Prudential Municipal Bond Fund), which appears in such Statement of Additional
Information, and to the incorporation by reference of our report into the
Prospectuses which constitute part of this Registration Statement. We also
consent to the reference to us under the heading "Custodian, Transfer and
Dividend Disbursing Agent and Independent Accountants" in such Statement of
Additional Information and to the references to us under the heading "Financial
Highlights" in such Prospectuses.
/s/ Price Waterhouse LLP
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York 10036
June 24, 1998
<PAGE>
_________________________________________
Prudential Municipal Bond Fund
Amended and Restated
Distribution and Service Plan
(CLASS A SHARES)
INTRODUCTION
The Distribution and Service Plan (the Plan) set forth below which is
designed to conform to the requirements of Rule 12b-1 under the Investment
Company Act of 1940 (the Investment Company Act) and Rule 2830 of the Conduct
Rules of the National Association of Securities Dealers, Inc. (NASD) has been
adopted by Prudential Municipal Bond Fund (the Fund) and by Prudential
Investment Management Services LLC, the Fund's distributor (the Distributor).
The Fund has entered into a distribution agreement pursuant to which the
Fund will employ the Distributor to distribute Class A shares issued by the Fund
(Class A shares). Under the Plan, the Fund intends to pay to the Distributor,
as compensation for its services, a distribution and service fee with respect to
Class A shares.
A majority of the Trustees of the Fund, including a majority of those
Trustees who are not "interested persons" of the Fund (as defined in the
Investment Company Act) and who have no direct or indirect financial interest
in the operation of this Plan or any agreements related to it (the Rule 12b-1
Trustees), have determined by votes cast in person at a meeting called for
the purpose of voting on this Plan that there is a reasonable likelihood that
adoption and continuation of this Plan will benefit the Fund and its
shareholders. Expenditures under this Plan by the Fund for Distribution
Activities (defined below) are primarily
1
<PAGE>
intended to result in the sale of Class A shares of the Fund within the meaning
of paragraph (a)(2) of Rule 12b-1 promulgated under the Investment Company Act.
The purpose of the Plan is to create incentives to the Distributor and/or
other qualified broker-dealers and their account executives to provide
distribution assistance to their customers who are investors in the Fund, to
defray the costs and expenses associated with the preparation, printing and
distribution of prospectuses and sales literature and other promotional and
distribution activities and to provide for the servicing and maintenance of
shareholder accounts.
THE PLAN
The material aspects of the Plan are as follows:
1. DISTRIBUTION ACTIVITIES
The Fund shall engage the Distributor to distribute Class A shares of the
Fund and to service shareholder accounts using all of the facilities of the
Distributor's distribution network, including sales personnel and branch office
and central support systems, and also using such other qualified broker-dealers
and financial institutions as the Distributor may select, including Prudential
Securities Incorporated (Prudential Securities) and Pruco Securities Corporation
(Prusec). Services provided and activities undertaken to distribute Class A
shares of the Fund are referred to herein as "Distribution Activities."
2. PAYMENT OF SERVICE FEE
The Fund shall pay to the Distributor as compensation for providing
personal service and/or maintaining shareholder accounts a service fee of .25 of
1% per annum of the average daily net assets of the Class A shares (service
fee). The Fund shall
2
<PAGE>
calculate and accrue daily amounts payable by the Class A shares of the Fund
hereunder and shall pay such amounts monthly or at such other intervals as the
Board of Directors/Trustees may determine.
3. PAYMENT FOR DISTRIBUTION ACTIVITIES
The Fund shall pay to the Distributor as compensation for its services a
distribution fee, together with the service fee (described in Section 2
hereof), of .30 of 1% per annum of the average daily net assets of the Class
A shares of the Fund for the performance of Distribution Activities. The
Fund shall calculate and accrue daily amounts payable by the Class A shares
of the Fund hereunder and shall pay such amounts monthly or at such other
intervals as the Trustees may determine. Amounts payable under the Plan
shall be subject to the limitations of Rule 2830 of the NASD Conduct Rules.
Amounts paid to the Distributor by the Class A shares of the Fund will
not be used to pay the distribution expenses incurred with respect to any
other class of shares of the Fund except that distribution expenses
attributable to the Fund as a whole will be allocated to the Class A shares
according to the ratio of the sales of Class A shares to the total sales of
the Fund's shares over the Fund's fiscal year or such other allocation method
approved by the Trustees. The allocation of distribution expenses among
classes will be subject to the review of the Trustees.
The Distributor shall spend such amounts as it deems appropriate on
Distribution Activities which include, among others:
3
<PAGE>
(a) sales commissions and trailer commissions paid to, or
on account of, account executives of the Distributor;
(b) indirect and overhead costs of the Distributor associated with
Distribution Activities, including central office and branch
expenses;
(c) amounts paid to Prudential Securities or Prusec for
performing services under a selected dealer agreement
between Prudential Securities or Prusec and the
Distributor for sale of Class A shares of the Fund,
including sales commissions, trailer commissions paid
to, or on account of, agents and indirect and overhead
costs associated with Distribution Activities;
(d) advertising for the Fund in various forms through any
available medium, including the cost of printing and
mailing Fund prospectuses, statements of additional
information and periodic financial reports and sales
literature to persons other than current shareholders
of the Fund; and
(e) sales commissions (including trailer commissions) paid
to, or on account of, broker-dealers and financial
institutions (other than Prudential Securities or
Prusec) which have entered into selected dealer
agreements with the Distributor with respect to Class A
shares of the Fund.
4. QUARTERLY REPORTS; ADDITIONAL INFORMATION
An appropriate officer of the Fund will provide to the Trustees of the
Fund for review, at least quarterly, a written report specifying in
reasonable detail the amounts expended for Distribution Activities (including
payment of the service fee) and the purposes for which such expenditures were
made in compliance with the requirements of Rule 12b-1. The Distributor will
provide to the Trustees of the Fund such additional information as the Board
shall from time to time reasonably request, including information about
Distribution Activities undertaken or to be undertaken by the Distributor.
4
<PAGE>
The Distributor will inform the Trustees of the Fund of the commissions
and account servicing fees to be paid by the Distributor to account
executives of the Distributor and to broker-dealers and financial
institutions which have selected dealer agreements with the Distributor.
5. EFFECTIVENESS; CONTINUATION
The Plan shall not take effect until it has been approved by a vote of a
majority of the outstanding voting securities (as defined in the Investment
Company Act) of the Class A shares of the Fund.
If approved by a vote of a majority of the outstanding voting securities
of the Class A shares of the Fund, the Plan shall, unless earlier terminated
in accordance with its terms, continue in full force and effect thereafter
for so long as such continuance is specifically approved at least annually by
a majority of the Trustees of the Fund and a majority of the Rule 12b-1
Trustees by votes cast in person at a meeting called for the purpose of
voting on the continuation of the Plan.
6. TERMINATION
This Plan may be terminated at any time by vote of a majority of the
Rule 12b-1 Trustees, or by vote of a majority of the outstanding voting
securities (as defined in the Investment Company Act) of the Class A shares
of the Fund.
7. AMENDMENTS
The Plan may not be amended to change the combined service and distribution
fees to be paid as provided for in Sections 2 and 3 hereof so as to increase
materially the amounts payable under this Plan unless such amendment shall be
approved by the
5
<PAGE>
vote of a majority of the outstanding voting securities (as defined in the
Investment Company Act) of the Class A shares of the Fund. All material
amendments of the Plan shall be approved by a majority of the Trustees of the
Fund and a majority of the Rule 12b-1 Trustees by votes cast in person at a
meeting called for the purpose of voting on the Plan.
8. RULE 12b-1 TRUSTEES
While the Plan is in effect, the selection and nomination of the
Directors/Trustees shall be committed to the discretion of the Rule 12b-1
Directors/Trustees.
9. RECORDS
The Fund shall preserve copies of the Plan and any related agreements and
all reports made pursuant to Section 4 hereof, for a period of not less than six
years from the date of effectiveness of the Plan, such agreements or reports,
and for at least the first two years in an easily accessible place.
Dated: August 1, 1994
Amended: June 1, 1998
6
<PAGE>
___________________________________
Prudential Municipal Bond Fund
Amended and Restated
Distribution and Service Plan
(CLASS B SHARES)
INTRODUCTION
The Distribution and Service Plan (the Plan) set forth below which is
designed to conform to the requirements of Rule 12b-1 under the Investment
Company Act of 1940 (the Investment Company Act) and Rule 2830 of the Conduct
Rules of the National Association of Securities Dealers, Inc. (NASD) has been
adopted by Prudential Municipal Bond Fund (the Fund) and by Prudential
Investment Management Services LLC, the Fund's distributor (the Distributor).
The Fund has entered into a distribution agreement pursuant to which the
Fund will employ the Distributor to distribute Class B shares issued by the Fund
(Class B shares). Under the Plan, the Fund wishes to pay to the Distributor, as
compensation for its services, a distribution and service fee with respect to
Class B shares.
A majority of the Trustees of the Fund, including a majority who are not
"interested persons" of the Fund (as defined in the Investment Company Act)
and who have no direct or indirect financial interest in the operation of
this Plan or any agreements related to it (the Rule 12b-1 Trustees), have
determined by votes cast in person at a meeting called for the purpose of
voting on this Plan that there is a reasonable likelihood that adoption and
continuation of this Plan will benefit the Fund and its shareholders.
Expenditures under this Plan by the Fund for Distribution Activities (defined
below) are primarily intended to result in the sale of Class B shares
1
<PAGE>
of the Fund within the meaning of paragraph (a)(2) of Rule 12b-1 promulgated
under the Investment Company Act.
The purpose of the Plan is to create incentives to the Distributor and/or
other qualified broker-dealers and their account executives to provide
distribution assistance to their customers who are investors in the Fund, to
defray the costs and expenses associated with the preparation, printing and
distribution of prospectuses and sales literature and other promotional and
distribution activities and to provide for the servicing and maintenance of
shareholder accounts.
THE PLAN
The material aspects of the Plan are as follows:
1. DISTRIBUTION ACTIVITIES
The Fund shall engage the Distributor to distribute Class B shares of the
Fund and to service shareholder accounts using all of the facilities of the
Distributor's distribution network including sales personnel and branch office
and central support systems, and also using such other qualified broker-dealers
and financial institutions as the Distributor may select, including Prudential
Securities Incorporated (Prudential Securities) and Pruco Securities Corporation
(Prusec). Services provided and activities undertaken to distribute Class B
shares of the Fund are referred to herein as "Distribution Activities."
2. PAYMENT OF SERVICE FEE
The Fund shall pay to the Distributor as compensation for providing
personal service and/or maintaining shareholder accounts a service fee of .25 of
1% per annum of the average daily net assets of the Class B shares (service
fee). The Fund shall
2
<PAGE>
calculate and accrue daily amounts payable by the Class B shares of the Fund
hereunder and shall pay such amounts monthly or at such other intervals as the
Trustees may determine.
3. PAYMENT FOR DISTRIBUTION ACTIVITIES
The Fund shall pay to the Distributor as compensation for its services a
distribution fee of .75 of 1% per annum of the average daily net assets of the
Class B shares of the Fund for the performance of Distribution Activities. The
Fund shall calculate and accrue daily amounts payable by the Class B shares of
the Fund hereunder and shall pay such amounts monthly or at such other intervals
as the Board of Directors/Trustees may determine. Amounts payable under the
Plan shall be subject to the limitations of Rule 2830 of the NASD Conduct Rules.
Amounts paid to the Distributor by the Class B shares of the Fund will not
be used to pay the distribution expenses incurred with respect to any other
class of shares of the Fund except that distribution expenses attributable to
the Fund as a whole will be allocated to the Class B shares according to the
ratio of the sale of Class B shares to the total sales of the Fund's shares over
the Fund's fiscal year or such other allocation method approved by the
Trustees. The allocation of distribution expenses among classes will
be subject to the review of the Trustees. Payments hereunder
will be applied to distribution expenses in the order in which they are
incurred, unless otherwise determined by the Trustees.
The Distributor shall spend such amounts as it deems appropriate on
Distribution Activities which include, among others:
3
<PAGE>
(a) sales commissions (including trailer commissions) paid to, or on
account of, account executives of the Distributor;
(b) indirect and overhead costs of the Distributor associated with
performance of Distribution Activities including central office and
branch
expenses;
(c) amounts paid to Prudential Securities or Prusec for performing
services under a selected dealer agreement between Prudential
Securities or Prusec and the Distributor for sale of Class B shares of
the Fund, including sales commissions and trailer commissions paid to,
or on account of, agents and indirect and overhead costs associated
with Distribution Activities;
(d) advertising for the Fund in various forms through any available
medium, including the cost of printing and mailing Fund prospectuses,
statements of additional information and periodic financial reports
and sales literature to persons other than current shareholders of the
Fund; and
(e) sales commissions (including trailer commissions) paid to, or on
account of, broker-dealers and other financial institutions (other
than Prudential Securities or Prusec) which have entered into selected
dealer agreements with the Distributor with respect to Class B shares
of the Fund.
4. QUARTERLY REPORTS; ADDITIONAL INFORMATION
An appropriate officer of the Fund will provide to the Trustees of the
Fund for review, at least quarterly, a written report specifying in
reasonable detail the amounts expended for Distribution Activities (including
payment of the service fee) and the purposes for which such expenditures were
made in compliance with the requirements of Rule 12b-1. The Distributor will
provide to the Trustees of the Fund such additional information as they shall
from time to time reasonably request, including information about
Distribution Activities undertaken or to be undertaken by the Distributor.
4
<PAGE>
The Distributor will inform the Trustees of the Fund of the commissions
and account servicing fees to be paid by the Distributor to account
executives of the Distributor and to broker-dealers and other financial
institutions which have selected dealer agreements with the Distributor.
5. EFFECTIVENESS; CONTINUATION
The Plan shall not take effect until it has been approved by a vote of a
majority of the outstanding voting securities (as defined in the Investment
Company Act) of the Class B shares of the Fund.
If approved by a vote of a majority of the outstanding voting securities
of the Class B shares of the Fund, the Plan shall, unless earlier terminated
in accordance with its terms, continue in full force and effect thereafter
for so long as such continuance is specifically approved at least annually by
a majority of the Trustees of the Fund and a majority of the Rule 12b-1
Directors/Trustees by votes cast in person at a meeting called for the
purpose of voting on the continuation of the Plan.
6. TERMINATION
This Plan may be terminated at any time by vote of a majority of the
Rule 12b-1 Trustees, or by vote of a majority of the outstanding voting
securities (as defined in the Investment Company Act) of the Class B shares
of the Fund.
7. AMENDMENTS
The Plan may not be amended to change the combined service and distribution
expenses to be paid as provided for in Sections 2 and 3 hereof so as to increase
materially the amounts payable under this Plan unless such amendment shall be
5
<PAGE>
approved by the vote of a majority of the outstanding voting securities (as
defined in the Investment Company Act) of the Class B shares of the Fund.
All material amendments of the Plan shall be approved by a majority of the
Trustees of the Fund and a majority of the Rule 12b-1 Trustees by votes cast
in person at a meeting called for the purpose of voting on the Plan.
8. RULE 12b-1 TRUSTEES
While the Plan is in effect, the selection and nomination of the Rule
12b-1 Trustees shall be committed to the discretion of the Rule 12b-1
Trustees.
9. RECORDS
The Fund shall preserve copies of the Plan and any related agreements and
all reports made pursuant to Section 4 hereof, for a period of not less than six
years from the date of effectiveness of the Plan, such agreements or reports,
and for at least the first two years in an easily accessible place.
Dated: August 1, 1994
Amended: June 1, 1998
6
<PAGE>
___________________________________
Prudential Municipal Bond Fund
Distribution and Service Plan
(CLASS C SHARES)
INTRODUCTION
The Distribution and Service Plan (the Plan) set forth below which is
designed to conform to the requirements of Rule 12b-1 under the Investment
Company Act of 1940 (the Investment Company Act) and Rule 2830 of the Conduct
Rules of the National Association of Securities Dealers, Inc. (NASD) has been
adopted by Prudential Municipal Bond Fund (the Fund) and by Prudential
Investment Management Services LLC, the Fund's distributor (the Distributor).
The Fund has entered into a distribution agreement pursuant to which the
Fund will employ the Distributor to distribute Class C shares issued by the Fund
(Class C shares). Under the Plan, the Fund wishes to pay to the Distributor, as
compensation for its services, a distribution and service fee with respect to
Class C shares.
A majority of the Trustees of the Fund, including a majority who are not
"interested persons" of the Fund (as defined in the Investment Company Act)
and who have no direct or indirect financial interest in the operation of
this Plan or any agreements related to it (the Rule 12b-1 Trustees), have
determined by votes cast in person at a meeting called for the purpose of
voting on this Plan that there is a reasonable likelihood that adoption and
continuation of this Plan will benefit the Fund and its shareholders.
Expenditures under this Plan by the Fund for Distribution Activities (defined
below) are primarily intended to result in the sale of Class C shares of the
Fund within the meaning of paragraph (a)(2) of Rule 12b-1 promulgated under
1
<PAGE>
the Investment Company Act.
The purpose of the Plan is to create incentives to the Distributor and/or
other qualified broker-dealers and their account executives to provide
distribution assistance to their customers who are investors in the Fund, to
defray the costs and expenses associated with the preparation, printing and
distribution of prospectuses and sales literature and other promotional and
distribution activities and to provide for the servicing and maintenance of
shareholder accounts.
THE PLAN
The material aspects of the Plan are as follows:
1. DISTRIBUTION ACTIVITIES
The Fund shall engage the Distributor to distribute Class C shares of the
Fund and to service shareholder accounts using all of the facilities of the
Distributor's distribution network including sales personnel and branch office
and central support systems, and also using such other qualified broker-dealers
and financial institutions as the Distributor may select, including Prudential
Securities Incorporated (Prudential Securities) and Pruco Securities Corporation
(Prusec). Services provided and activities undertaken to distribute Class C
shares of the Fund are referred to herein as "Distribution Activities."
2. PAYMENT OF SERVICE FEE
The Fund shall pay to the Distributor as compensation for providing
personal service and/or maintaining shareholder accounts a service fee of .25 of
1% per annum of the average daily net assets of the Class C shares (service
fee). The Fund shall calculate and accrue daily amounts payable by the Class C
shares of the Fund
2
<PAGE>
hereunder and shall pay such amounts monthly or at such other intervals as the
Trustees may determine.
3. PAYMENT FOR DISTRIBUTION ACTIVITIES
The Fund shall pay to the Distributor as compensation for its services a
distribution fee of .75 of 1% per annum of the average daily net assets of the
Class C shares of the Fund for the performance of Distribution Activities. The
Fund shall calculate and accrue daily amounts payable by the Class C shares of
the Fund hereunder and shall pay such amounts monthly or at such other intervals
as the Board of Directors/Trustees may determine. Amounts payable under the
Plan shall be subject to the limitations of Rule 2830 of the NASD Conduct Rules.
Amounts paid to the Distributor by the Class C shares of the Fund will
not be used to pay the distribution expenses incurred with respect to any
other class of shares of the Fund except that distribution expenses
attributable to the Fund as a whole will be allocated to the Class C shares
according to the ratio of the sale of Class C shares to the total sales of
the Fund's shares over the Fund's fiscal year or such other allocation method
approved by the Trustees. The allocation of distribution expenses among
classes will be subject to the review of the Trustees. Payments hereunder
will be applied to distribution expenses in the order in which they are
incurred, unless otherwise determined by the Trustees.
The Distributor shall spend such amounts as it deems appropriate on
Distribution Activities which include, among others:
(a) sales commissions (including trailer commissions) paid to, or on
3
<PAGE>
account of, account executives of the Distributor;
(b) indirect and overhead costs of the Distributor associated with
performance of Distribution Activities including central office and
branch expenses;
(c) amounts paid to Prudential Securities or Prusec for performing
services under a selected dealer agreement between Prudential
Securities or Prusec and the Distributor for sale of Class C shares of
the Fund, including sales commissions and trailer commissions paid to,
or on account of, agents and indirect and overhead costs associated
with Distribution Activities;
(d) advertising for the Fund in various forms through any available
medium, including the cost of printing and mailing Fund prospectuses,
statements of additional information and periodic financial reports
and sales literature to persons other than current shareholders of the
Fund; and
(e) sales commissions (including trailer commissions) paid to, or on
account of, broker-dealers and other financial institutions (other
than Prudential Securities or Prusec) which have entered into selected
dealer agreements with the Distributor with respect to Class C shares
of the Fund.
4. QUARTERLY REPORTS; ADDITIONAL INFORMATION
An appropriate officer of the Fund will provide to the Trustees of the
Fund for review, at least quarterly, a written report specifying in
reasonable detail the amounts expended for Distribution Activities (including
payment of the service fee) and the purposes for which such expenditures were
made in compliance with the requirements of Rule 12b-1. The Distributor will
provide to the Trustees of the Fund such additional information as they shall
from time to time reasonably request, including information about
Distribution Activities undertaken or to be undertaken by the Distributor.
The Distributor will inform the Trustees of the Fund of the
4
<PAGE>
commissions and account servicing fees to be paid by the Distributor to account
executives of the Distributor and to broker-dealers and other financial
institutions which have selected dealer agreements with the Distributor.
5. EFFECTIVENESS; CONTINUATION
The Plan shall not take effect until it has been approved by a vote of a
majority of the outstanding voting securities (as defined in the Investment
Company Act) of the Class C shares of the Fund.
If approved by a vote of a majority of the outstanding voting securities
of the Class C shares of the Fund, the Plan shall, unless earlier terminated
in accordance with its terms, continue in full force and effect thereafter
for so long as such continuance is specifically approved at least annually by
a majority of the Trustees of the Fund and a majority of the Rule 12b-1
Trustees by votes cast in person at a meeting called for the purpose of
voting on the continuation of the Plan.
6. TERMINATION
This Plan may be terminated at any time by vote of a majority of the
Rule 12b-1 Trustees, or by vote of a majority of the outstanding voting
securities (as defined in the Investment Company Act) of the Class C shares
of the Fund.
7. AMENDMENTS
The Plan may not be amended to change the combined service and distribution
expenses to be paid as provided for in Sections 2 and 3 hereof so as to increase
materially the amounts payable under this Plan unless such amendment shall be
approved by the vote of a majority of the outstanding voting securities (as
defined in the
5
<PAGE>
Investment Company Act) of the Class C shares of the Fund. All material
amendments of the Plan shall be approved by a majority of the Trustees of the
Fund and a majority of the Rule 12b-1 Trustees by votes cast in person at a
meeting called for the purpose of voting on the Plan.
8. RULE 12b-1 TRUSTEES
While the Plan is in effect, the selection and nomination of the Rule
12b-1 Trustees shall be committed to the discretion of the Rule 12b-1
Trustees.
9. RECORDS
The Fund shall preserve copies of the Plan and any related agreements and
all reports made pursuant to Section 4 hereof, for a period of not less than six
years from the date of effectiveness of the Plan, such agreements or reports,
and for at least the first two years in an easily accessible place.
Dated: August 1, 1994
Amended: June 1, 1998
6
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0000807394
<NAME> PRUDENTIAL MUNICIPAL BOND FUND
<SERIES>
<NUMBER> 001
<NAME> HIGH YIELD SERIES (CLASS A)
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> APR-30-1998
<PERIOD-END> APR-30-1998
<INVESTMENTS-AT-COST> 1,025,477,321
<INVESTMENTS-AT-VALUE> 1,107,249,890
<RECEIVABLES> 31,428,924
<ASSETS-OTHER> 584,739
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 1,139,263,553
<PAYABLE-FOR-SECURITIES> 13,292,139
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 4,740,821
<TOTAL-LIABILITIES> 18,032,960
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 1,064,396,125
<SHARES-COMMON-STOCK> 99,154,705
<SHARES-COMMON-PRIOR> 93,365,816
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (24,938,101)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 81,772,569
<NET-ASSETS> 1,121,230,593
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 71,328,838
<OTHER-INCOME> 0
<EXPENSES-NET> 9,452,796
<NET-INVESTMENT-INCOME> 61,876,042
<REALIZED-GAINS-CURRENT> (6,450,845)
<APPREC-INCREASE-CURRENT> 50,351,593
<NET-CHANGE-FROM-OPS> 105,776,790
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> (61,876,042)
<NUMBER-OF-SHARES-SOLD> 194,658,081
<NUMBER-OF-SHARES-REDEEMED> (156,797,816)
<SHARES-REINVESTED> 27,600,737
<NET-CHANGE-IN-ASSETS> 109,361,750
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (18,487,254)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 5,323,382
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 8,912,387
<AVERAGE-NET-ASSETS> 381,735,000
<PER-SHARE-NAV-BEGIN> 10.84
<PER-SHARE-NII> 0.67
<PER-SHARE-GAIN-APPREC> 0.47
<PER-SHARE-DIVIDEND> 0.00
<PER-SHARE-DISTRIBUTIONS> (0.67)
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 11.31
<EXPENSE-RATIO> 0.62
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0000807394
<NAME> PRUDENTIAL MUNICIPAL BOND FUND
<SERIES>
<NUMBER> 002
<NAME> HIGH YIELD SERIES (CLASS B)
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> APR-30-1998
<PERIOD-END> APR-30-1998
<INVESTMENTS-AT-COST> 1,025,477,321
<INVESTMENTS-AT-VALUE> 1,107,249,890
<RECEIVABLES> 31,428,924
<ASSETS-OTHER> 584,739
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 1,139,263,553
<PAYABLE-FOR-SECURITIES> 13,292,139
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 4,740,821
<TOTAL-LIABILITIES> 18,032,960
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 1,064,396,125
<SHARES-COMMON-STOCK> 99,154,705
<SHARES-COMMON-PRIOR> 93,365,816
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (24,938,101)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 81,772,569
<NET-ASSETS> 1,121,230,593
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 71,328,838
<OTHER-INCOME> 0
<EXPENSES-NET> 9,452,796
<NET-INVESTMENT-INCOME> 61,876,042
<REALIZED-GAINS-CURRENT> (6,450,845)
<APPREC-INCREASE-CURRENT> 50,351,593
<NET-CHANGE-FROM-OPS> 105,776,790
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> (61,876,042)
<NUMBER-OF-SHARES-SOLD> 194,658,081
<NUMBER-OF-SHARES-REDEEMED> (156,797,816)
<SHARES-REINVESTED> 27,600,737
<NET-CHANGE-IN-ASSETS> 109,361,750
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (18,487,254)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 5,323,382
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 8,912,387
<AVERAGE-NET-ASSETS> 669,132,000
<PER-SHARE-NAV-BEGIN> 10.84
<PER-SHARE-NII> 0.63
<PER-SHARE-GAIN-APPREC> 0.47
<PER-SHARE-DIVIDEND> 0.00
<PER-SHARE-DISTRIBUTIONS> (0.63)
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 11.31
<EXPENSE-RATIO> 1.02
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0000807394
<NAME> PRUDENTIAL MUNICIPAL BOND FUND
<SERIES>
<NUMBER> 003
<NAME> HIGH YIELD SERIES (CLASS C)
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> APR-30-1998
<PERIOD-END> APR-30-1998
<INVESTMENTS-AT-COST> 1,025,477,321
<INVESTMENTS-AT-VALUE> 1,107,249,890
<RECEIVABLES> 31,428,924
<ASSETS-OTHER> 584,739
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 1,139,263,553
<PAYABLE-FOR-SECURITIES> 13,292,139
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 4,740,821
<TOTAL-LIABILITIES> 18,032,960
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 1,064,396,125
<SHARES-COMMON-STOCK> 99,154,705
<SHARES-COMMON-PRIOR> 93,365,816
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (24,938,101)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 81,772,569
<NET-ASSETS> 1,121,230,593
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 71,328,838
<OTHER-INCOME> 0
<EXPENSES-NET> 9,452,796
<NET-INVESTMENT-INCOME> 61,876,042
<REALIZED-GAINS-CURRENT> (6,450,845)
<APPREC-INCREASE-CURRENT> 50,351,593
<NET-CHANGE-FROM-OPS> 105,776,790
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> (61,876,042)
<NUMBER-OF-SHARES-SOLD> 194,658,081
<NUMBER-OF-SHARES-REDEEMED> (156,797,816)
<SHARES-REINVESTED> 27,600,737
<NET-CHANGE-IN-ASSETS> 109,361,750
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (18,487,254)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 5,323,382
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 8,912,387
<AVERAGE-NET-ASSETS> 14,932,000
<PER-SHARE-NAV-BEGIN> 10.84
<PER-SHARE-NII> 0.61
<PER-SHARE-GAIN-APPREC> 0.47
<PER-SHARE-DIVIDEND> 0.00
<PER-SHARE-DISTRIBUTIONS> (0.61)
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 11.31
<EXPENSE-RATIO> 1.27
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0000807394
<NAME> PRUDENTIAL MUNICIPAL BOND FUND
<SERIES>
<NUMBER> 004
<NAME> HIGH YIELD SERIES (CLASS Z)
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> APR-30-1998
<PERIOD-END> APR-30-1998
<INVESTMENTS-AT-COST> 1,025,477,321
<INVESTMENTS-AT-VALUE> 1,107,249,890
<RECEIVABLES> 31,428,924
<ASSETS-OTHER> 584,739
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 1,139,263,553
<PAYABLE-FOR-SECURITIES> 13,292,139
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 4,740,821
<TOTAL-LIABILITIES> 18,032,960
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 1,064,396,125
<SHARES-COMMON-STOCK> 99,154,705
<SHARES-COMMON-PRIOR> 93,365,816
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (24,938,101)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 81,772,569
<NET-ASSETS> 1,121,230,593
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 71,328,838
<OTHER-INCOME> 0
<EXPENSES-NET> 9,452,796
<NET-INVESTMENT-INCOME> 61,876,042
<REALIZED-GAINS-CURRENT> (6,450,845)
<APPREC-INCREASE-CURRENT> 50,351,593
<NET-CHANGE-FROM-OPS> 105,776,790
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> (61,876,042)
<NUMBER-OF-SHARES-SOLD> 194,658,081
<NUMBER-OF-SHARES-REDEEMED> (156,797,816)
<SHARES-REINVESTED> 27,600,737
<NET-CHANGE-IN-ASSETS> 109,361,750
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (18,487,254)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 5,323,382
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 8,912,387
<AVERAGE-NET-ASSETS> 6,064,000
<PER-SHARE-NAV-BEGIN> 10.83
<PER-SHARE-NII> 0.68
<PER-SHARE-GAIN-APPREC> 0.47
<PER-SHARE-DIVIDEND> 0.00
<PER-SHARE-DISTRIBUTIONS> (0.68)
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 11.30
<EXPENSE-RATIO> 0.52
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0000807394
<NAME> PRUDENTIAL MUNICIPAL BOND FUND
<SERIES>
<NUMBER> 001
<NAME> INSURED SERIES (CLASS A)
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> APR-30-1998
<PERIOD-END> APR-30-1998
<INVESTMENTS-AT-COST> 438,670,225
<INVESTMENTS-AT-VALUE> 459,075,816
<RECEIVABLES> 6,252,241
<ASSETS-OTHER> 36,422
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 465,364,479
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 2,658,872
<TOTAL-LIABILITIES> 2,658,872
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 439,763,742
<SHARES-COMMON-STOCK> 41,860,157
<SHARES-COMMON-PRIOR> 46,501,727
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 2,430,211
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 20,511,654
<NET-ASSETS> 462,705,607
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 26,886,125
<OTHER-INCOME> 0
<EXPENSES-NET> 4,511,809
<NET-INVESTMENT-INCOME> 22,374,316
<REALIZED-GAINS-CURRENT> 7,419,069
<APPREC-INCREASE-CURRENT> 10,877,794
<NET-CHANGE-FROM-OPS> 40,671,179
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> (10,609,577)
<DISTRIBUTIONS-OTHER> (22,545,438)
<NUMBER-OF-SHARES-SOLD> 17,849,201
<NUMBER-OF-SHARES-REDEEMED> (89,200,577)
<SHARES-REINVESTED> 19,222,401
<NET-CHANGE-IN-ASSETS> (44,612,811)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 5,791,841
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 2,469,913
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 4,420,658
<AVERAGE-NET-ASSETS> 222,115,000
<PER-SHARE-NAV-BEGIN> 10.90
<PER-SHARE-NII> 0.53
<PER-SHARE-GAIN-APPREC> 0.40
<PER-SHARE-DIVIDEND> 0.00
<PER-SHARE-DISTRIBUTIONS> (0.78)
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 11.05
<EXPENSE-RATIO> 0.69
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
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WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0000807394
<NAME> PRUDENTIAL MUNICIPAL BOND FUND
<SERIES>
<NUMBER> 002
<NAME> INSURED SERIES (CLASS B)
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> APR-30-1998
<PERIOD-END> APR-30-1998
<INVESTMENTS-AT-COST> 438,670,225
<INVESTMENTS-AT-VALUE> 459,075,816
<RECEIVABLES> 6,252,241
<ASSETS-OTHER> 36,422
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 465,364,479
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 2,658,872
<TOTAL-LIABILITIES> 2,658,872
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 439,763,742
<SHARES-COMMON-STOCK> 41,860,157
<SHARES-COMMON-PRIOR> 46,501,727
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 2,430,211
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 20,511,654
<NET-ASSETS> 462,705,607
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 26,886,125
<OTHER-INCOME> 0
<EXPENSES-NET> 4,511,809
<NET-INVESTMENT-INCOME> 22,374,316
<REALIZED-GAINS-CURRENT> 7,419,069
<APPREC-INCREASE-CURRENT> 10,877,794
<NET-CHANGE-FROM-OPS> 40,671,179
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> (10,609,577)
<DISTRIBUTIONS-OTHER> (22,545,438)
<NUMBER-OF-SHARES-SOLD> 17,849,201
<NUMBER-OF-SHARES-REDEEMED> (89,200,577)
<SHARES-REINVESTED> 19,222,401
<NET-CHANGE-IN-ASSETS> (44,612,811)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 5,791,841
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 2,469,913
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 4,420,658
<AVERAGE-NET-ASSETS> 270,553,000
<PER-SHARE-NAV-BEGIN> 10.91
<PER-SHARE-NII> 0.49
<PER-SHARE-GAIN-APPREC> 0.40
<PER-SHARE-DIVIDEND> 0.00
<PER-SHARE-DISTRIBUTIONS> (0.74)
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 11.06
<EXPENSE-RATIO> 1.09
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0000807394
<NAME> PRUDENTIAL MUNICIPAL BOND FUND
<SERIES>
<NUMBER> 003
<NAME> INSURED SERIES (CLASS C)
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> APR-30-1998
<PERIOD-END> APR-30-1998
<INVESTMENTS-AT-COST> 438,670,225
<INVESTMENTS-AT-VALUE> 459,075,816
<RECEIVABLES> 6,252,241
<ASSETS-OTHER> 36,422
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 465,364,479
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 2,658,872
<TOTAL-LIABILITIES> 2,658,872
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 439,763,742
<SHARES-COMMON-STOCK> 41,860,157
<SHARES-COMMON-PRIOR> 46,501,727
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 2,430,211
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 20,511,654
<NET-ASSETS> 426,705,607
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 28,886,125
<OTHER-INCOME> 0
<EXPENSES-NET> 4,511,809
<NET-INVESTMENT-INCOME> 22,374,316
<REALIZED-GAINS-CURRENT> 7,419,069
<APPREC-INCREASE-CURRENT> 10,877,794
<NET-CHANGE-FROM-OPS> 40,671,179
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> (10,609,577)
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<NUMBER-OF-SHARES-SOLD> 17,849,201
<NUMBER-OF-SHARES-REDEEMED> (89,200,577)
<SHARES-REINVESTED> 19,222,401
<NET-CHANGE-IN-ASSETS> (44,612,811)
<ACCUMULATED-NII-PRIOR> 0
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<OVERDIST-NET-GAINS-PRIOR> 0
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<GROSS-EXPENSE> 4,420,658
<AVERAGE-NET-ASSETS> 1,142,000
<PER-SHARE-NAV-BEGIN> 10.91
<PER-SHARE-NII> 0.46
<PER-SHARE-GAIN-APPREC> 0.40
<PER-SHARE-DIVIDEND> 0.00
<PER-SHARE-DISTRIBUTIONS> (0.71)
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 11.06
<EXPENSE-RATIO> 1.34
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0000807394
<NAME> PRUDENTIAL MUNICIPAL BOND FUND
<SERIES>
<NUMBER> 004
<NAME> INSURED SERIES (CLASS Z)
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> APR-30-1998
<PERIOD-END> APR-30-1998
<INVESTMENTS-AT-COST> 438,670,225
<INVESTMENTS-AT-VALUE> 459,075,816
<RECEIVABLES> 6,252,241
<ASSETS-OTHER> 36,422
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 465,364,479
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 2,658,872
<TOTAL-LIABILITIES> 2,658,872
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 439,763,872
<SHARES-COMMON-STOCK> 41,860,157
<SHARES-COMMON-PRIOR> 46,501,727
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 2,430,211
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 20,511,654
<NET-ASSETS> 462,705,607
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 26,886,125
<OTHER-INCOME> 0
<EXPENSES-NET> 4,511,809
<NET-INVESTMENT-INCOME> 22,374,316
<REALIZED-GAINS-CURRENT> 7,419,069
<APPREC-INCREASE-CURRENT> 10,877,794
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<DISTRIBUTIONS-OF-GAINS> (10,609,577)
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<NUMBER-OF-SHARES-SOLD> 17,849,201
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<SHARES-REINVESTED> 19,222,401
<NET-CHANGE-IN-ASSETS> (44,612,811)
<ACCUMULATED-NII-PRIOR> 0
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<GROSS-EXPENSE> 4,420,658
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<PER-SHARE-NAV-BEGIN> 11
<PER-SHARE-NII> 1
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> (1)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 11
<EXPENSE-RATIO> 1
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0000807394
<NAME> PRUDENTIAL MUNICIPAL BOND FUND
<SERIES>
<NUMBER> 001
<NAME> INTERMEDIATE SERIES (CLASS A)
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> APR-30-1998
<PERIOD-END> APR-30-1998
<INVESTMENTS-AT-COST> 37,235,565
<INVESTMENTS-AT-VALUE> 38,500,097
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<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 334,169
<TOTAL-LIABILITIES> 334,169
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 37,231,257
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<SHARES-COMMON-PRIOR> 4,176,360
<ACCUMULATED-NII-CURRENT> 0
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<ACCUMULATED-NET-GAINS> 290,576
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 1,264,532
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<DIVIDEND-INCOME> 0
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<OTHER-INCOME> 0
<EXPENSES-NET> 656,814
<NET-INVESTMENT-INCOME> 1,548,965
<REALIZED-GAINS-CURRENT> 339,713
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<EQUALIZATION> 0
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<DISTRIBUTIONS-OF-GAINS> (201,650)
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<NUMBER-OF-SHARES-SOLD> 3,202,633
<NUMBER-OF-SHARES-REDEEMED> (10,710,780)
<SHARES-REINVESTED> 1,116,810
<NET-CHANGE-IN-ASSETS> (5,436,887)
<ACCUMULATED-NII-PRIOR> 0
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<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 207,968
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 649,283
<AVERAGE-NET-ASSETS> 13,591,000
<PER-SHARE-NAV-BEGIN> 10.59
<PER-SHARE-NII> 0.43
<PER-SHARE-GAIN-APPREC> 0.28
<PER-SHARE-DIVIDEND> 0.00
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<PER-SHARE-NAV-END> 10.81
<EXPENSE-RATIO> 1.31
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0000807394
<NAME> PRUDENTIAL MUNICIPAL BOND FUND
<SERIES>
<NUMBER> 002
<NAME> INTERMEDIATE SERIES (CLASS B)
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> APR-30-1998
<PERIOD-END> APR-30-1998
<INVESTMENTS-AT-COST> 37,235,565
<INVESTMENTS-AT-VALUE> 38,500,097
<RECEIVABLES> 619,585
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<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 334,169
<TOTAL-LIABILITIES> 334,169
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 37,231,257
<SHARES-COMMON-STOCK> 3,586,699
<SHARES-COMMON-PRIOR> 4,176,360
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<ACCUMULATED-NET-GAINS> 290,576
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 1,264,532
<NET-ASSETS> 38,786,365
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 2,205,779
<OTHER-INCOME> 0
<EXPENSES-NET> 656,814
<NET-INVESTMENT-INCOME> 1,548,965
<REALIZED-GAINS-CURRENT> 339,713
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<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> (201,650)
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<NUMBER-OF-SHARES-SOLD> 3,202,633
<NUMBER-OF-SHARES-REDEEMED> (10,710,780)
<SHARES-REINVESTED> 1,116,810
<NET-CHANGE-IN-ASSETS> (5,436,887)
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<OVERDISTRIB-NII-PRIOR> 0
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<GROSS-EXPENSE> 649,283
<AVERAGE-NET-ASSETS> 27,175,000
<PER-SHARE-NAV-BEGIN> 10.59
<PER-SHARE-NII> 0.39
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<PER-SHARE-NAV-END> 10.81
<EXPENSE-RATIO> 1.71
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<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0000807394
<NAME> PRUDENTIAL MUNICIPAL BOND FUND
<SERIES>
<NUMBER> 003
<NAME> INTERMEDIATE SERIES (CLASS C)
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> APR-30-1998
<PERIOD-END> APR-30-1998
<INVESTMENTS-AT-COST> 37,235,565
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<OTHER-ITEMS-LIABILITIES> 334,169
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<PAID-IN-CAPITAL-COMMON> 37,231,257
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<ACCUM-APPREC-OR-DEPREC> 1,264,532
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<DIVIDEND-INCOME> 0
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<EXPENSES-NET> 656,814
<NET-INVESTMENT-INCOME> 1,548,965
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<GROSS-EXPENSE> 649,283
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<PER-SHARE-NAV-BEGIN> 10.59
<PER-SHARE-NII> 0.36
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<PER-SHARE-NAV-END> 10.81
<EXPENSE-RATIO> 1.96
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</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0000807394
<NAME> PRUDENTIAL MUNICIPAL BOND FUND
<SERIES>
<NUMBER> 004
<NAME> INTERMEDIATE SERIES (CLASS Z)
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> APR-30-1998
<PERIOD-END> APR-30-1998
<INVESTMENTS-AT-COST> 37,235,565
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<PER-SHARE-NAV-BEGIN> 11
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<PER-SHARE-NAV-END> 11
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<AVG-DEBT-PER-SHARE> 0
</TABLE>
