Prudential Municipal Series Fund
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STATEMENT OF ADDITIONAL INFORMATION
DATED NOVEMBER 3, 2000
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Prudential Municipal Series Fund (the Fund) is an open-end, management
investment company, or mutual fund, consisting of eleven series--the Connecticut
Money Market Series, the Florida Series, the Massachusetts Series, the
Massachusetts Money Market Series, the New Jersey Series, the New Jersey Money
Market Series, the New York Series, the New York Money Market Series, the North
Carolina Series, the Ohio Series and the Pennsylvania Series (collectively, the
Series). The objective of each series, other than the Connecticut Money Market
Series, the Massachusetts Money Market Series, the New Jersey Money Market
Series and the New York Money Market Series (collectively, the money market
series), is to maximize current income that is exempt from federal and
applicable state income taxes and, in the case of the New York Series, also New
York City income taxes, consistent with the preservation of capital, and, in
conjunction therewith, the series may invest in debt obligations with the
potential for capital gain. The objective of the money market series is to
provide the highest level of current income that is exempt from federal and
applicable state income taxes and, in the case of the New York Money Market
Series, also New York City income taxes, consistent with liquidity and the
preservation of capital. There can be no assurance that any series' investment
objective will be achieved. See "Description of the Fund, Its Investments and
Risks."
The Fund's address is Gateway Center Three, 100 Mulberry Street, Newark, New
Jersey 07102-4077, and its telephone number is (800) 225-1852.
This Statement of Additional Information is not a prospectus and should be read
in conjunction with the Prospectuses of each series of the Fund dated
November 3, 2000, copies of which may be obtained from the Fund upon request.
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MF117B
TABLE OF CONTENTS
PAGE
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Fund History................................................ B-1
Description of the Fund, Its Investments and Risks.......... B-1
Investment Restrictions..................................... B-33
Management of the Fund...................................... B-35
Control Persons and Principal Holders of Securities......... B-38
Investment Advisory and Other Services...................... B-39
Brokerage Allocation and Other Practices.................... B-47
Capital Shares, Other Securities and Organization........... B-49
Purchase, Redemption and Pricing of Fund Shares............. B-50
Shareholder Investment Account.............................. B-59
Net Asset Value............................................. B-64
Performance Information..................................... B-65
Taxes, Dividends and Distributions.......................... B-70
Distributions............................................. B-70
Federal Taxation.......................................... B-71
State Taxation............................................ B-74
Description of Tax-Exempt Security Ratings.................. B-79
Financial Statements........................................ B-
Report of Independent Accountants........................... B-
Appendix I.................................................. I-1
Appendix II................................................. II-1
Appendix III................................................ III-1
FUND HISTORY
Prudential Municipal Series Fund (the Fund) was organized under the laws of
Massachusetts on May 18, 1984 as an unincorporated business trust, a form of
organization that is commonly known as a Massachusetts business trust. The Fund
consists of eleven separate series: the Connecticut Money Market Series, the
Florida Series, the Massachusetts Series, the Massachusetts Money Market Series,
the New Jersey Series, the New Jersey Money Market Series, the New York Series,
the New York Money Market Series, the North Carolina Series, the Ohio Series and
the Pennsylvania Series. A separate Prospectus has been prepared for each
series. This Statement of Additional Information is applicable to all series.
The Board of Trustees has recently approved proposals in which each of the
(i) Connecticut Money Market Series and Massachusetts Money Market Series will
merge into Prudential Tax-Free Money Fund, Inc. and (ii) Massachusetts Series,
North Carolina Series and Ohio Series will merge into Prudential National
Municipals Fund, Inc. The proposals are subject to approval by the shareholders
of the respective series. The shareholders' meeting with respect to the
Massachusetts Series, North Carolina Series and Ohio Series is scheduled to
occur on December 7, 2000. If approved, each of the Massachusetts Series, North
Carolina Series and Ohio Series mergers is anticipated to occur on December 15,
2000. The shareholders' meeting with respect to the Connecticut Money Market
Series and Massachusetts Money Market Series is anticipated to occur in March
2001. If approved, each of the Connecticut Money Market Series and Massachusetts
Money Market Series is anticipated to occur in late March 2001. As of the close
of business of the New York Stock Exchange on the date each respective merger is
consummated, (i) shareholders of Connecticut Money Market Series and
Massachusetts Money Market Series will receive the number of full and fractional
Class A shares of Prudential Tax-Free Money Fund, Inc. that is equal in value to
the net asset value of their shares of Connecticut Money Market Series or
Massachusetts Money Market Series, as applicable, on that date, and
(ii) shareholders of Massachusetts Series, North Carolina Series and Ohio Series
will receive the number of full and fractional Class A shares of National
Municipals Fund, Inc. that is equal in value to the net asset value of their
Class A, Class B or Class C shares of Massachusetts Series, North Carolina
Series and Ohio Series, as applicable, on that date. On that date, Class Z
shareholders of Massachusetts Series will receive the number of full and
fractional Class Z shares of National Municipals Fund, Inc. that is equal in
value to the net asset value of their Class Z shares. Each series that is merged
into Prudential Tax-Free Money Fund, Inc. or Prudential National Municipals Fund
Inc., as applicable, will cease to exist.
DESCRIPTION OF THE FUND, ITS INVESTMENTS AND RISKS
(a) CLASSIFICATION. The Fund is an open-end management investment company
under the Investment Company Act of 1940, as amended (the Investment Company
Act). Each series is diversified except the Florida Series and the money market
series, other than the New York Money Market Series.
(b) AND (c) INVESTMENT STRATEGIES, POLICIES AND RISKS. The investment
objective of each series and the principal investment policies and strategies
for seeking to achieve the series' objective are set forth in the series'
respective Prospectus. This section provides additional information on the
principal investment policies and strategies of the series, as well as
information on certain non-principal investment policies and strategies. There
can be no assurance that any series will achieve its objective or that all
income from any series will be exempt from all federal, state or local income
taxes.
Each series of the Fund, other than the money market series, will invest at
least 70% of its total assets in "investment grade" tax-exempt securities which
on the date of investment are rated within the four highest ratings of Moody's
Investors Service (Moody's), currently Aaa, Aa, A, Baa for bonds, MIG 1, MIG 2,
MIG 3, MIG 4 for notes, and Prime-1 for commercial paper, of Standard & Poor's
Ratings Group (S&P), currently AAA, AA, A, BBB for bonds, SP-1, SP-2 for notes
and A-1 for commercial paper or comparable ratings of another nationally
recognized statistical rating organization (NRSRO). The Florida Series,
Massachusetts Series, New Jersey Series, New York Series, North Carolina Series,
Ohio Series and Pennsylvania Series each may invest up to 30% of its total
assets in municipal obligations rated below Baa by Moody's or below BBB by S&P
or comparable ratings of another NRSRO. The money market series will invest in
securities which, at the time of purchase, have an effective remaining maturity
of thirteen months or less and are of "eligible quality." "Eligible quality" for
this purpose means a security: (i) rated in one of the two highest short-term
rating categories by at least two
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NRSROs or, if only one NRSRO has rated the security, so rated by that NRSRO;
(ii) rated in one of the three highest long-term rating categories by at least
two NRSROs or, if only one NRSRO has rated the security, so rated by that NRSRO;
or (iii) if unrated, of comparable quality as determined in the manner described
below. Each series may invest in tax-exempt securities which are not rated if,
based upon a credit analysis by the investment adviser under the supervision of
the Trustees, the investment adviser believes that such securities are of
comparable quality to other municipal securities that the series may purchase. A
description of the ratings is set forth under the headings "Description of
Security Ratings" in each series' prospectus (other than the money market
series) and "Description of Tax-Exempt Security Ratings" in this Statement of
Additional Information. The ratings of Moody's and S&P and other NRSRO's
represent the respective opinions of such firms of the qualities of the
securities each undertakes to rate and such ratings are general and are not
absolute standards of quality. In determining suitability of investment in a
particular unrated security, the investment adviser will take into consideration
asset and debt service coverage, the purpose of the financing, history of the
issuer, existence of other rated securities of the issuer, credit enhancement by
virtue of letter of credit or other financial guaranty deemed suitable by the
investment adviser and other general conditions as may be relevant, including
comparability to other issuers.
Under normal market conditions, each series will attempt to invest
substantially all and, as a matter of fundamental policy, will invest at least
80% of the value of its assets in securities the interest on which is exempt
from state and federal income taxes or the series' assets will be invested so
that at least 80% of the income will be exempt from state and federal income
taxes, except that, as a matter of fundamental policy, during normal market
conditions the Florida Series', the New Jersey Series' and the New Jersey Money
Market Series' assets will be invested so that at least 80% of their total
assets will be invested in Florida Obligations (as defined in the Florida
Series' Prospectus) and New Jersey Obligations (as defined in the New Jersey
Series' and the New Jersey Money Market Series' Prospectuses), respectively, and
except that, as a matter of fundamental policy, during normal market conditions
the Connecticut Money Market Series' and the Massachusetts Money Market Series'
assets will be invested so that at least 80% of their total assets will be
invested in municipal securities which pay income exempt from federal income
taxes. These latter securities primarily will be Connecticut Obligations (as
defined in the Connecticut Money Market Series' Prospectus) and Massachusetts
Obligations (as defined in the Massachusetts Money Market Series' Prospectus),
respectively, unless the investment adviser is unable, due to the unavailability
of sufficient or reasonably priced Connecticut Obligations and Massachusetts
Obligations, respectively, that also meet the Series' credit quality and average
weighted maturity requirements, to purchase Connecticut Obligations and
Massachusetts Obligations, respectively. Each series will continuously monitor
the 80% tests to ensure that either the asset investment or the income test is
met at all times, except for temporary defensive measures during abnormal market
conditions.
As described above, each series except for the Florida Series and the money
market series, other than the New York Money Market Series, is classified as a
"diversified" investment company under the Investment Company Act. This means
that with respect to 75% of these series' assets, (1) no series may invest more
than 5% of its total assets in the securities of any one issuer (except U.S.
Government obligations) and (2) no series may own more than 10% of the
outstanding voting securities of any one issuer. For purposes of calculating
these 5% or 10% ownership limitations, the series will consider the ultimate
source of revenues supporting each obligation to be a separate issuer. For
example, even though a state hospital authority or a state economic development
authority might issue obligations on behalf of many different entities, each of
the underlying health facilities or economic development projects will be
considered as a separate issuer. These investments are also subject to the
limitations described in the remainder of this section.
Because securities issued or guaranteed by states or municipalities are not
voting securities, there is no limitation on the percentage of a single issuer's
securities which a series may own so long as, with respect to 75% of the assets
of each series other than the Florida Series and the money market series (except
for the New York Money Market Series), it does not invest more than 5% of its
total assets in the securities of such issuer (except obligations issued or
guaranteed by the U.S. Government). As for the other 25% of a series' assets not
subject to the limitation described above, there is no limitation on the amount
of these assets that may be invested in a minimum number of issuers. Because of
the relatively smaller number of issuers of investment-grade tax-exempt
securities (or, in the case of the New York Money Market Series, high quality
tax-exempt securities) in any one of these states, a series is more likely to
use this ability to invest its assets in the securities
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of a single issuer than is an investment company which invests in a broad range
of tax-exempt securities. Such concentration involves an increased risk of loss
to a series should the issuer be unable to make interest or principal payments
thereon or should the market value of such securities decline.
From time to time, a series may own the majority of a municipal issue. Such
majority-owned holdings may present additional market and credit risks.
Each series will treat an investment in a municipal bond refunded with
escrowed U.S. Government securities as U.S. Government securities for purposes
of the Investment Company Act's diversification requirements provided: (i) the
escrowed securities are "government securities" as defined in the Investment
Company Act, (ii) the escrowed securities are irrevocably pledged only to
payment of debt service on the refunded bonds, except to the extent there are
amounts in excess of funds necessary for such debt service, (iii) principal and
interest on the escrowed securities will be sufficient to satisfy all scheduled
principal, interest and any premiums on the refunded bonds and a verification
report prepared by a party acceptable to an NRSRO, or counsel to the holders of
the refunded bonds, so verifies, (iv) the escrow agreement provides that the
issuer of the refunded bonds grants and assigns to the escrow agent, for the
equal and ratable benefit of the holders of the refunded bonds, an express first
lien on, pledge of and perfected security interest in the escrowed securities
and the interest income thereon, and (v) the escrow agent had no lien of any
type with respect to the escrowed securities for payment of its fees or expenses
except to the extent there are excess securities, as described in (ii) above.
The Fund expects that normally no series will invest 25% or more of its
total assets in any one sector of the municipal obligations market.
A portion of the dividends and distributions paid on the shares of each
series of the Fund may be treated as a preference item for purposes of the
alternative minimum tax for individuals and corporations. Such treatment may
cause certain investors, depending upon other aspects of their individual tax
situation, to incur some federal income tax liability. In addition, corporations
are subject to an alternative minimum tax which treats as a tax preference item
75% of a corporation's adjusted current earnings. A corporation's adjusted
current earnings would include interest paid on municipal obligations and
dividends paid on shares of the Fund. See "Taxes, Dividends and Distributions."
TAX-EXEMPT SECURITIES
Tax-exempt securities include notes and bonds issued by or on behalf of
states, territories and possessions of the United States and their political
subdivisions, agencies and instrumentalities and the District of Columbia, the
interest on which is exempt from federal income tax (except for possible
application of the alternative minimum tax) and, in certain instances,
applicable state or local income and personal property taxes. Such securities
are traded primarily in the over-the-counter market.
For purposes of diversification and concentration under the Investment
Company Act, the identification of the issuer of tax-exempt bonds or notes
depends on the terms and conditions of the obligation. If the assets and
revenues of an agency, authority, instrumentality or other political subdivision
are separate from those of the government creating the subdivision and the
obligation is backed only by the assets and revenues of the subdivision, such
subdivision is regarded as the sole issuer. Similarly, in the case of an
industrial development revenue bond or pollution control revenue bond, if the
bond is backed only by the assets and revenues of the nongovernmental user, the
nongovernmental user is regarded as the sole issuer. If in either case the
creating government or another entity guarantees an obligation, the guaranty may
be regarded as a separate security and treated as an issue of such guarantor.
TAX-EXEMPT BONDS. Tax-exempt bonds are issued to obtain funds for various
public purposes, including the construction of a wide range of public facilities
such as airports, bridges, highways, housing, hospitals, mass transportation,
schools, streets, water and sewer works, and gas and electric utilities.
Tax-exempt bonds also may be issued in connection with the refunding of
outstanding obligations, to obtain funds to lend to other public institutions,
or for general operating expenses.
The two principal classifications of tax-exempt bonds are "general
obligation" and "revenue." General obligation bonds are secured by the issuer's
pledge of its full faith, credit and taxing power for the payment of principal
and interest. Revenue bonds are payable only from the revenues derived from a
particular facility or
B-3
class of facilities or, in some cases, from the proceeds of a special excise tax
or other specific revenue source. Private activity bonds that are municipal
bonds are in most cases revenue bonds and do not generally constitute the pledge
of the credit of the issuer of such bonds. The credit quality of private
activity revenue bonds is usually directly related to the credit standing of the
industrial user involved. There are, in addition, a variety of hybrid and
special types of municipal obligations as well as numerous differences in the
security of municipal bonds, both within and between the two principal
classifications described above.
Industrial development bonds are issued by or on behalf of public
authorities to obtain funds to provide various privately-operated facilities for
business, manufacturing, housing, sports and pollution control and for airport,
mass transit, port and parking facilities. The Internal Revenue Code restricts
the types of industrial development bonds (IDBs) which qualify to pay interest
exempt from federal income tax, and interest on certain IDBs issued after
August 7, 1986 is subject to the alternative minimum tax. Although IDBs are
issued by municipal authorities, they are generally secured by the revenues
derived from payments of the industrial user. The payment of the principal and
interest on IDBs is dependent solely on the ability of the user of the
facilities financed by the bonds to meet its financial obligations and the
pledge, if any, of real and personal property so financed as security for such
payment.
The interest rates payable on certain municipal bonds and municipal notes
are not fixed and may fluctuate based upon changes in market rates. Municipal
bonds and notes of this type are called "variable rate" obligations. The
interest rate payable on a variable rate obligation is adjusted either at
predesignated intervals or whenever there is a change in the market rate of
interest on which the interest rate payable is based. Other features may include
the right whereby the Fund may demand prepayment of the principal amount of the
obligation prior to its stated maturity (a demand feature) and the right of the
issuer to prepay the principal amount prior to maturity. The principal benefit
of a variable rate obligation is that the interest rate adjustment minimizes
changes in the market value of the obligation. As a result, the purchase of
variable rate obligations should enhance the ability of a series to maintain a
stable NAV per share and to sell an obligation prior to maturity at a price
approximating the full principal amount of the obligation. For further
discussion, see "Floating Rate and Variable Rate Securities" below.
TAX-EXEMPT NOTES. Tax-exempt notes generally are used to provide for
short-term capital needs and generally have maturities of one year or less.
Tax-exempt notes may include:
1. TAX ANTICIPATION NOTES. Tax Anticipation Notes are issued to finance
working capital needs of municipalities. Generally, they are issued in
anticipation of various seasonal tax revenues, such as income, sales, use
and business taxes, and are payable from these specific future taxes.
2. REVENUE ANTICIPATION NOTES. Revenue Anticipation Notes are issued in
expectation of receipt of other kinds of revenue, such as federal revenues
available under the Federal Revenue Sharing Programs.
3. BOND ANTICIPATION NOTES. Bond Anticipation Notes are issued to
provide interim financing until long-term financing can be arranged. In most
cases, the long-term bonds then provide the money for the repayment of the
Notes.
4. CONSTRUCTION LOAN NOTES. Construction Loan Notes are sold to provide
construction financing. Permanent financing, the proceeds of which are
applied to the payment of Construction Loan Notes, is sometimes provided by
a commitment by the Government National Mortgage Association (GNMA) to
purchase the loan, accompanied by a commitment by the Federal Housing
Administration to insure mortgage advances thereunder. In other instances,
permanent financing is provided by commitments of banks to purchase the
loan.
FLOATING RATE AND VARIABLE RATE SECURITIES; INVERSE AND SECONDARY INVERSE
FLOATERS. Each series may invest in floating rate and variable rate securities,
including participation interests therein, subject to the requirements of the
amortized cost valuation rule and other requirements of the Securities and
Exchange Commission (the Commission) with respect to the money market series.
Each series other than money market series may invest in inverse floaters and
secondary inverse floaters. Floating rate securities normally have a rate of
interest which is set as a specific percentage of a designated base rate, such
as the rate on Treasury Bonds or Bills or the prime rate at a major commercial
bank. The interest rate on floating rate securities changes
B-4
whenever there is a change in the designated base interest rate. Variable rate
securities provide for a specific periodic adjustment in the interest rate based
on prevailing market rates and generally would allow the series to demand
payment of the obligation on short notice at par plus accrued interest, which
amount may, at times, be more or less than the amount the series paid for them.
Some floating rate and variable rate securities have maturities longer than 397
calendar days but afford the holder the right to demand payment at dates earlier
than the final maturity date. Such "long term" floating rate and variable rate
securities will be treated as having maturities equal to the demand date or the
period of adjustment of the interest rate whichever date is longer.
An inverse floater is a debt instrument with a floating or variable interest
rate that moves in the opposite direction of the interest rate on another
security or the value of an index. A secondary inverse floater is an asset-
backed security, generally evidenced by a trust or custodial receipt, the
interest rate on which moves in the opposite direction of the interest rate on
another security or the value of an index. Changes in the interest rate on the
other security or index inversely affect the residual interest rate paid on such
instruments. Generally, income from inverse floating rate bonds will decrease
when short-term interest rates increase, and will increase when short-term
interest rates decrease. Such securities have the effect of providing a degree
of investment leverage, since they may increase or decrease in value in response
to changes, as an illustration, in market interest rates at a rate that is a
multiple (typically two) of the rate at which fixed-rate, long-term, tax-exempt
securities increase or decrease in response to such changes. As a result, the
market values of such securities generally will be more volatile than the market
values of fixed-rate tax-exempt securities. To seek to limit the volatility of
these securities, a series may, but is not required to, purchase inverse
floating obligations with shorter-term maturities or which contain limitations
on the extent to which the interest rate may vary. Inverse floaters represent a
flexible portfolio management instrument that allows us to vary the degree of
investment leverage relatively efficiently under different market conditions.
The market for inverse floaters is relatively new.
Each series may invest in participation interests in variable rate
tax-exempt securities (such as certain IDBs) owned by banks. A participation
interest gives a series an undivided interest in the tax-exempt security in the
proportion that a series' participation interest bears to the total principal
amount of the tax-exempt security and generally provides that the holder may
demand repurchase within one to seven days. Participation interests frequently
are backed by an irrevocable letter of credit or guarantee of a bank that the
investment adviser, under the supervision of the Trustees, has determined meets
the prescribed quality standards for a series. A series generally has the right
to sell the instrument back to the bank and draw on the letter of credit on
demand, on seven days' notice, for all or any part of a series' participation
interest in the par value of the tax-exempt security, plus accrued interest.
Each series intends to exercise the demand under the letter of credit only
(1) upon a default under the terms of the documents of the tax-exempt security,
(2) as needed to provide liquidity in order to meet redemptions or (3) to
maintain a high quality investment portfolio. Banks will retain a service and
letter of credit fee and a fee for issuing repurchase commitments in an amount
equal to the excess of the interest paid by the issuer on the tax-exempt
securities over the negotiated yield at which the instruments were purchased
from the bank by a series. The investment adviser will monitor the pricing,
quality and liquidity of the variable rate demand instruments held by each
series, including the IDB's supported by bank letters of credit or guarantees,
on the basis of published financial information, reports of rating agencies and
other bank analytical services to which the investment adviser may subscribe.
Participation interests will be purchased only if, in the opinion of counsel,
interest income on such interests will be tax-exempt when distributed as
dividends to shareholders.
TAX-EXEMPT COMMERCIAL PAPER. Issues of tax-exempt commercial paper
typically represent short-term, unsecured, negotiable promissory notes. These
obligations are issued by agencies of state and local governments to finance
seasonal working capital needs of municipalities or to provide interim
construction financing and are paid from general revenues of municipalities or
are refinanced with long-term debt. In most cases, tax-exempt commercial paper
is backed by lines of credit, lending agreements, note repurchase agreements or
other credit facility agreements offered by banks or other institutions and is
actively traded.
B-5
SPECIAL CONSIDERATIONS REGARDING INVESTMENTS IN TAX-EXEMPT SECURITIES
From time to time, proposals have been introduced to limit the use, or tax
and other advantages, of tax-exempt securities which, if enacted, could
adversely affect each series' NAV and investment practices. Such proposals could
also adversely affect the secondary market for high yield (junk) municipal
securities, the financial condition of issuers of these securities and the value
of outstanding high yield (junk) municipal securities. Reevaluation of each
series' investment objective and structure might be necessary in the future due
to market conditions which may result from future changes in state or federal
law.
Unlike many issues of common and preferred stock and corporate bonds which
are traded between brokers acting as agents for their customers on securities
exchanges, such securities are customarily purchased from or sold to dealers who
are selling or buying for their own account. Most tax-exempt securities are not
required to be registered with or qualified for sale by federal or state
securities regulators. Since there are large numbers of tax-exempt securities of
many different issuers, most issues do not trade on any single day. On the other
hand, most issues are always marketable, since a major dealer will normally, on
request, bid for any issue, other than obscure ones. Regional municipal
securities dealers are frequently more willing to bid on issues of
municipalities in their geographic area.
The structure of the tax-exempt securities market introduces its own element
of risk; a seller may find, on occasion, that dealers are unwilling to make bids
for certain issues that the seller considers reasonable. If the seller is forced
to sell, he or she may realize a capital loss that would not have been necessary
in different circumstances. Because the net asset value of a series' shares
reflects the degree of willingness of dealers to bid for tax-exempt securities,
the price of a series' shares may be subject to greater fluctuation than shares
of other investment companies with different investment policies.
The following is a discussion of the general factors that might influence
the ability of the issuers in the various states to repay principal and interest
when due on the obligations contained in the portfolio of each series. Such
information constitutes only a brief summary, does not purport to be a complete
description, is derived from sources that are generally available to investors
and is believed to be accurate, but has not been independently verified and may
not be complete. General factors may not affect local issuers, such as counties
or municipalities, or issuers of revenue bonds. Furthermore, the
creditworthiness of general obligations of a state generally is unrelated to the
creditworthiness with respect to the state's revenue obligations, obligations of
local issuers in the state or obligations of other issuers.
In August 1996, legislation reforming the welfare system was passed by
Congress. In essence, it eliminated the federal guarantee of welfare benefits
and leaves the determination of eligibility to the states. The federal
government will provide block grants to the states for their use in the funding
of benefits. Although states are not obligated to absorb any of the reductions,
they may choose to do so. The consequences of such generosity may be adverse in
the event of an economic downturn or a swelling in the ranks of beneficiaries.
If a state feels compelled to offset lost benefits, the net effect is merely a
shifting of the burden to the state and may affect its rating over time.
CONNECTICUT
Connecticut is a highly developed state with one of the highest per capital
income levels in the country. According to projections made by the U.S.
Department of Commerce through the year 2045, Connecticut is expected to
continue to rank first in the nation in state per capita income throughout the
projected period. During the past ten years, Connecticut's economy has become
more diverse. Manufacturing employment in Connecticut has steadily decreased
since the mid 1980s, while non-manufacturing employment has recovered most of
its losses from its peak in the late 1980s. The export sector of manufacturing
in Connecticut has assumed an increasingly important role. Connecticut's export
of goods grew from 1993 to 1998 at an average annual rate of 5.2%. During the
early 1990s, the State's unemployment rate rose from a low of 3% to
approximately 7.5% during 1992. Since 1992, as the economy steadily improved,
Connecticut's unemployment rate steadily declined to a low of 3.0% for 1999,
which rate is below the national average of 4.2%.
In 1992, the State constitution was amended to provide that the amount of
general budget expenditures authorized for any fiscal year shall not exceed the
estimated amount of revenue for such fiscal year. This
B-6
amendment also provides for a cap on budget expenditures. Except for a declared
state of emergency, the General Assembly is precluded from authorizing an
increase in general budget expenditures for any fiscal year above the amount of
general budget expenditures authorized for the previous fiscal year by a
percentage that exceeds the greater of the percentage increase in personal
income or the percentage increase in inflation.
In 1992, the State acted to reduce the volatility of its budgetary
operations by raising revenues, reducing expenditures and establishing a broader
revenue base. Chief among these actions were the implementation of a 4.5%
personal income tax. These actions permitted the State to achieve modest
surpluses for fiscal years 1992 through 1999. In 1998 and 1999, a portion of the
surpluses were used to provide cash rebates to Connecticut taxpayers.
The adopted budget for fiscal year 1999-2000 anticipates unrestricted
General Fund revenues of $10,646.0 million and General Fund expenditures of
$10,581.6 million, resulting in a projected surplus of $64.4 million. The state
Comptroller's General Fund financial statements released February 1, 2000,
however, estimate an operating surplus for fiscal year 1999-2000 of
$241.1 million. The adopted budget for fiscal year 2000-01 anticipates
unrestricted General Fund revenues of $10,958.9 million and General Fund
expenditures of $11,085.2 million, resulting in a projected surplus of $4.8
million for the fiscal year 2000-01.
The adopted budget reflects the implementation of significant tax changes in
1998 and 1999 aimed at increasing corporate investment in various enterprise
zones in Connecticut, including the allowance of tax credits for loans to
employees and investments in affordable and low income housing and historic
rehabilitation projects. To improve the business climate in the State and
stimulate long-term job growth, legislation was also enacted to reduce
Connecticut's corporate tax rate from the rate of 11.25% in 1995 to 7.5% by
January 1, 2000 and to phase out corporate level tax on S corporations by the
year 2001.
As of October 27, 2000, Connecticut general obligations were rated AA by
S&P.
FLORIDA
In 1980, Florida ranked seventh in population among the fifty states, having
a population of 9.7 million people. The State has grown dramatically since 1980
and, as of April 1, 1998, Florida ranked fourth in the nation, with a population
of 15 million. The service and trade sectors constitute Florida's largest
employment sectors, with services currently accounting for 36% and trade
accounting for 25.5% of the State's total non-farm employment. Florida's
manufacturing jobs exist in the high-tech and high value-added sectors, such as
electrical and electronic equipment, as well as printing and publishing. Since
1992, Florida's non-farm jobs have increased 24.6% while U.S. non-farm jobs have
increased 15.9%. Florida's unemployment rate was consistently below that of the
nation throughout the economic expansion of the 1980's. Because of the recession
in the early 1990's, the pattern reversed. In the current economic expansion,
Florida's unemployment rate has again been mostly below the nation's. In 1998,
Florida's unemployment rate was 4.3%, compared to 4.5% for the U.S.
South Florida, because of its location and involvement with foreign trade,
tourism and investment capital, is particularly susceptible to international
trade and currency imbalances and economic dislocations in Central and South
America. The central and northern portions of the State are affected by problems
in the agricultural sector, particularly in the citrus and sugar industries.
Short-term adverse economic conditions may be experienced by the central and
northern section of Florida, and in the State as a whole, due to crop failures,
severe weather conditions such as hurricanes or other agriculture-related
problems. In addition, the State economy has historically been somewhat
dependent on the tourism and construction industries and is therefore sensitive
to trends in those sectors.
Under the State Constitution and applicable statutes, the State budget as a
whole, and each separate fund within the State budget, must be kept in balance
from currently available revenues during each State fiscal year (July 1 through
June 30). Estimated General Revenue plus Working Capital and Budget
Stabilization funds available total $20,604.9 million for 1990-00, an increase
of 5.2% over revenues for 1998-99. Estimated Revenue of $18,758.6 million for
fiscal year 1990-00 represents an increase of 4.8% over 1998-99. Estimated
Revenues for fiscal year 2000-2001 of $19,320.7 million represent an increase of
3.1% over fiscal year 1999-00.
B-7
Pursuant to a constitutional amendment which was ratified by the voters on
November 8, 1994, the rate of growth in state revenues in a given fiscal year is
limited to no more than the average annual growth rate in Florida personal
income over the previous five years. Revenues collected in excess of the
limitation are to be deposited into the Budget Stabilization Fund unless 2/3 of
the members of both houses of the Legislature vote to raise the limit. The
revenue limit is determined by multiplying the average annual growth rate in
Florida personal income over the previous five years by the maximum amount of
revenue permitted under the cap for the previous year. State revenues are
defined as taxes, licenses, fees and charges for services imposed by the
Legislature as well as revenue from the sale of lottery tickets. Included among
the categories of revenues which are exempt from the proposed revenue limitation
are revenues pledged to State Bonds.
As of August 1, 2000, general obligations of the State of Florida were rated
Aa2 by Moody's, AA+ by Standard & Poor's Rating Service and AA by Fitch, Inc.
(Fitch).
Many factors, including national, economic, social and environmental
policies and conditions, most of which are not within the control of the State
or local government, could affect or adversely impact on the State's financial
condition.
MASSACHUSETTS
Massachusetts is a densely populated urban state with a well-educated
population, comparatively high income levels, low rates of unemployment and a
relatively diversified economy. The Massachusetts services sector is the largest
sector in the Massachusetts economy, with significant concentrations in health
care, information technology, knowledge creation, and financial services.
According to the Bureau of Labor Statistics, as of July 2000 service occupations
constituted approximately 36.3% of the total nonagricultural work force. Other
industries that account for a significant share of employment in the
Commonwealth are plastics, textile and apparel, industrial machinery and
equipment, paper and paper related products, fabricated metals, and tourism. In
August 2000, the unemployment rate was 2.4%, well below the national rate of
4.1%.
The recession of the early 1990s had serious adverse effects on
Massachusetts' financial operations and led to a massive accumulated deficit of
$1.45 billion at the close of fiscal year 1990. In order to regain fiscal
solvency, the Commonwealth sold a total of $1.4 billion in dedicated tax bonds
secured by a portion of the Commonwealth's income tax proceeds as well as the
full faith and credit general obligation pledge of the Commonwealth. In
addition, since 1990, Massachusetts has adopted more conservative revenue
forecasting procedures and has moderated spending growth, resulting in the
achievement of budget surpluses in the eight consecutive years from 1992 to
1999. After a deposit of $229.1 million for fiscal year 1999, the Commonwealth's
Stabilization Fund had a balance of $1.39 billion.
In January 2000, citing the Commonwealth's economic growth, strong financial
position and progress in reducing unfunded pension liabilities, S&P affirmed its
"AA-" rating on outstanding debt issued by and for Massachusetts. In the same
month, Moody's raised the Commonwealth's debt rating to "Aa2".
The budget for fiscal year 2000, which was approved in November 1999,
provided for anticipated tax revenues of $14.8 billion and total appropriations
of approximately $20.77 billion. In July, the Commissioner of Revenue announced
that preliminary tax revenues for fiscal year 2000, subject to a final audit,
were $15.7 billion, up 9.9% from fiscal year 1999. Income and sales tax revenues
exhibited strong growth, increasing 12.6% and 9.0%, respectively.
In January 2000, Governor Cellucci submitted a budget of $21.3 billion for
fiscal year 2001, an increase of 2.8% over fiscal year 2000 spending, with no
major changes in spending priorities. The budget finally adopted in July 2000
provides for total spending of $21.6 billion.
In early February 2000, the Massachusetts Turnpike Authority (MTA) announced
that unforeseen cost overruns had increased the cost estimate for the Central
Artery/Tunnel Project by $1.4 billion, to a total of $12.2 billion. A subsequent
federal audit raised the estimate of total overruns to $1.9 billion. In May
2000, the Legislature adopted an emergency appropriation of $2.4 billion to
cover the overruns and provide funding for other parts of the Commonwealth's
road and bridge program. The plan is funded in part by reinstating motor
B-8
vehicle registration fees and retaining driver's license fees that had been
scheduled to be abolished. Additional funding will come by using capital funds
and the budget surplus to pay down high-interest debt, generating an estimated
$800 million.
Governor Cellucci has been working actively to cut the Commonwealth's
personal income tax rate to 5%, the rate in effect prior to the 1990s recession.
An initiative will be on the ballot in November 2000 that, if approved, would
roll back the rate over three years. Two other tax-cutting initiatives will also
be submitted to voters in November, one granting tax credits for tolls and auto
excise taxes, and the other making charitable contributions deductible for state
tax purposes. The cost of the three tax cuts is estimated at $1.9 billion
annually.
In November 1980, voters in the Commonwealth approved a state-wide tax
limitation initiative petition, commonly known as Proposition 2 1/2, to
constrain levels of property taxation and to limit the charges and fees imposed
on cities and towns by certain government entities, including county
governments. The law is not a constitutional provision and accordingly is
subject to amendment or repeal by the Legislature. Proposition 2 1/2 limits the
property taxes that a Massachusetts city or town may assess in any fiscal year
to the lesser of (i) 2.5% of the full and fair cash value of real estate and
personal property therein and (ii) 2.5% over the previous fiscal year's levy
limit plus any growth in the base from certain new construction and parcel
subdivisions. In addition, Proposition 2 1/2 limits any increase in the charges
and fees assessed by certain governmental entities, including county
governments, on cities and towns to the sum of (i) 2.5% of the total charges and
fees imposed in the preceding fiscal year, and (ii) any increase in charges for
services customarily provided locally or services obtained by the city or town.
The law contains certain override provisions and, in addition, permits certain
debt servicings and expenditures for identified capital projects to be excluded
from the limits by a majority vote, in a general or special election.
NEW JERSEY
During the past year a continuation of the national expansion, a strong
business climate in New Jersey and positive developments in surrounding
metropolitan areas were major sources of State economic growth. The State is
enjoying a record long period of economic expansion which has generated strong
consumer spending, job growth, and income increases, all of which are expected
to continue. Personal income grew 5.8 percent in 1999, better than the
5.7 percent growth in 1998. The State's unemployment rate as of September 2000
was 3.8 percent, making it 36 consecutive months that the New Jersey rate has
been below 5 percent. 1999 was a record setting year for the State in consumer
spending. Sales exceeded $93.4 billion, representing a nearly 7 percent increase
over 1998. The outlook for retailing remains robust and is forecast to increase
by 4.8 percent in 2000 and 5.0 percent in 2001, as the economic expansion
continues and inflation remains subdued.
The principal sources of State revenue are sales, corporate and personal
income taxes. The Constitution of the State prohibits the expenditure of funds
in excess of the State's revenues and reserves. As a result, since the
Constitution was adopted in 1947, New Jersey has always had a positive
undesignated fund balance in its general fund at the end of the year.
The favorable economy in New Jersey has been producing strong revenue
growth. In 2000, for the fourth year in a row, the State Treasury reacted to the
strong economic growth and increased its midyear revenue estimates above the
amounts certified in the appropriations act. New Jersey estimates that it will
finish fiscal year 2000 with total revenue of $19.766 billion, an increase of
$1.56 billion over the total revenue collected during fiscal year 1999. The
three largest taxes, Gross Income, Sales and Corporate Business Tax comprised
over 72 percent of the State's revenue for fiscal year 1999 and are forecasted
to yield $14.001 billion in revenue in fiscal year 2000.
The State Treasury anticipates $20.927 billion in revenue during fiscal year
2001, a $1.61 billion increase (5.9 percent) over projections for fiscal year
2000. Much of this growth is attributable to robust growth in revenues collected
through gross income tax, sales tax and the transfer inheritance tax. In
addition, the Gross State Product increased to $327.3 billion in 1999, an
increase of 5.9%. The New Jersey Council of Economic Advisors forecasts that the
Gross State Product will continue this pace with increases of 5.4 percent in
2000 and 5.9 percent in 2001.
B-9
The State budget for fiscal year 2001 is $21.431 billion, 7.4 percent higher
than the adjusted appropriation level for fiscal year 2000. Anticipated revenues
to support the fiscal year 2001 budget are estimated to be $21,125 billion, some
$306 million less than recommended spending. The difference, or "structural
deficit," would be made up by applying $306 million from this year's projected
$1.176 billion year-end surplus toward next year's budget. The remaining
$870 million of the surplus would be carried as a budgeted surplus for the
fiscal year 2001. The $870 million fiscal year 2001 surplus recommendation
represents a higher surplus target than any previous proposed or enacted New
Jersey budget. Of this surplus, approximately $720 million will be placed in the
State's Surplus Revenue Fund (Rainy Day Fund).
Through the end of the first quarter of 2000, the State's general obligation
bonds were rated Aa1 by Moody's and AA+ by both S&P and Fitch.
NEW YORK
New York State is the third most populous state in the nation (behind
California and Texas) and has a relatively high level of personal wealth and a
diverse economy. It has the tenth largest economy in the world with a gross
state product of nearly $600 billion. A declining proportion of the State's work
force is engaged in manufacturing and an increasing proportion of its work force
is engaged in service industries. This transition reflects a national trend.
According to the Comptroller's 2000 Report on the Financial Condition of New
York State, dated September 2000 (the Comptroller's Report), the State has
experienced tremendous economic growth in New York City and the downstate region
over the past few years which has fueled sizeable State year-end surpluses and
some strengthening of its financial condition. The slower and much more modest
growth in the rest of the State continues to be of concern, but the State's
resources continue to be strong enough to afford investments that should help
improve the business climate throughout the State. In 2000, the State's personal
income is expected to rise by 2.91% (from $618 billion to $636 billion),
according to the Comptroller's Report. The State's per person income continues
to be higher than that of the national average, with the State ranking fourth
highest in personal income per person in 1999, the same position it has held
since 1993. From the first half of 1992--which marked the beginning of the
current economic expansion--to the first half of 2000, the number of jobs in New
York State grew by 11%, just over half of the 21.1 gain nationwide. The pace of
State employment growth has however, picked up in recent years, according to the
Comptroller's Report. The State's unemployment rate has improved from 5.3% to
4.3% as of June 2000, slightly higher than the national unemployment rate of
4.2%, although New York City continues to experience higher unemployment at
5.4%. For the six months ended June 2000, the State gained an average of 175,000
jobs, or 2.1%, compared to the same period in 1999, while the United States
gained an average of 2,959,000 jobs or 2.3%, according to the Comptroller's
Report. Most of New York's job growth occurred in the service industries, while
manufacturing continued to lose jobs. According to the Comptroller's Report, the
State's economy and tax base continues to be overly dependent on the financial
services sector.
For fiscal year 1999-2000, New York's General Fund had an operating surplus
of $2.229 billion, according to the State of New York Comprehensive Annual
Financial Report for fiscal year ended March 31, 2000 (the Annual Report). As a
result, the General Fund reported an accumulated surplus of $3.925 billion at
March 31, 2000, according to the Comptroller's Report. However, without the
benefit of $4.7 billion of New York Local Government Assistance Corporation net
bond proceeds between 1991 and 1995 and the use of $300 million of Dormitory
Authority bond proceeds in 1996, the General Fund would have accumulated a
deficit of $401 million, according to the Annual Report.
According to the Annual Report, the State completed its fiscal year ended
March 31, 2000 with a combined Governmental Funds operating surplus of
$3.030 billion as compared to a combined Governmental Funds operating surplus
for the preceding fiscal year of $1.323 billion. Governmental Funds account for
most of the State's operations, including the General Fund, Federal programs,
debt service and capital construction. The combined 1999-2000 operating surplus
of $3.030 billion included operating surpluses in the General Fund of
$2.229 billion, Special Revenue Funds of $665 million, Debt Service Funds of
$38 million and Capital Projects
B-10
Funds of $98 million. As of March 31, 2000, the State had a balance in its
Governmental Funds of $7.994 billion represented by liabilities of
$15.916 billion and by assets available to liquidate such liabilities of
$23.910 billion.
According to the Comptroller's Report, the State's 2000 spending totaled
$73.6 billion, a 3.6% increase of $2.6 billion from 1999. The 2000-01 budget
provides for total state spending of $77.9 billion, an increase of 6.2% over
1999-2000 budgeted spending, which is more than twice the rate of inflation.
As of October 31, 2000, S&P rates New York's outstanding general obligation
bond rating of A+. Moody's Investors Service rates the state A2.
NORTH CAROLINA
The State is located on the Atlantic seacoast and is bordered by the states
of South Carolina, Georgia, Tennessee and Virginia. The State has a land area,
exclusive of waterways and lakes, of 48,718 square miles. During the period from
1980 to 1990 the State experienced a 12.9% increase in population, growing to
6,655,455 persons and maintaining its position as the tenth most populous state.
According to the North Carolina Office of State Planning, the State's estimated
population as of July 1999 was 7,658,145 and it estimated this population would
reach 7,756,517 by July 2000. The State has six municipalities with populations
in excess of 100,000.
The economic profile of the State consists of a combination of industry,
agriculture and tourism. Nonagricultural wage and salary employment accounted
for approximately 3,866,100 jobs in 1999. Non-agricultural wage and salary
employment accounted for approximately 3,666,800 jobs in 1997. The largest
segment of jobs was approximately 802,700 in manufacturing. Based on July 1997
data from the United States Bureau of Labor Statistics, the State ranked tenth
among the states in non-agricultural employment and eighth among the states in
manufacturing employment. During the period from 1990 to 1998, per capita income
in the State grew from $16,674 to $24,036, an increase of 44.2%. The Employment
Security Commission estimated the seasonally adjusted unemployment rate in
August 2000 to be 3.5% of the labor force, as compared with an unemployment rate
of 4.1% nationwide. According to the Employment Security Commission, the labor
force has grown from 2,855,200 in 1980 to 3,953,500 in 2000, an increase of
38.5%.
North Carolina's economy continues to benefit from a vibrant manufacturing
sector. Manufacturing firms employ approximately 21% of the total
non-agricultural workforce. North Carolina has the fourth highest percentage of
manufacturing workers in the nation. The State's annual value of manufacturing
shipments totaled $156 billion in 1997, ranking the State eighth in the nation.
The State leads the nation in the production of textiles, tobacco products, and
furniture and is among the largest producers of electronics and other electrical
equipment and industrial and commercial machinery and computer equipment.
In 1998, the State ranked fourth in the nation after Michigan, California,
Ohio, and New York in new corporate locations and expansions, with 1,044
announced new facilities and expansions. The State also ranked first in both new
jobs and new location projects per one million residents for 1996-1998.
In 1998 there was an unprecedented $8 billion in new corporate investment in
the State, led by Nucor Corporation and Federal Express, with investments of
approximately $300 million each. Total manufacturing investments increased 18.8
percent to 4.7 billion over 1997, and non-manufacturing investments more than
doubled at $3.1 billion over 1997.
More than 734 international firms have established a presence in the State.
Charlotte is the second largest financial center in the country, based on assets
of banks headquartered there. Bank of America, N.A., the nation's largest bank,
is based in Charlotte. The strength of the State's manufacturing sector also
supports the growth in exports. Foreign-owned firms invested more than $1
billion in the State in 1998, and created 7,173 new jobs. The 1997 annual
statistics showed $18.0 billion in exports, tenth among the States in export
trade.
Agriculture is a basic element in the economy of the State. Gross
agricultural income reached over $8.3 billion in 1997, placing the State eighth
in the nation in gross agricultural income. The poultry industry is the leading
source of agricultural income in the State, accounting for approximately 31% of
gross agricultural
B-11
income. The pork industry provides approximately 18% of the gross agricultural
income. The tobacco industry remains important to the State providing
approximately 14% of gross agricultural income. In 1997, the State also ranked
third in the nation in net farm income.
The diversity of agriculture in North Carolina and a continuing emphasis on
marketing efforts have protected farm income from some of the wide variations
that have been experienced in other states where most of the agricultural
economy is dependent on a small number of agricultural commodities. North
Carolina has the third most diversified agricultural economy in the nation.
According to the State Commissioner of Agriculture, the State ranks first in
the nation in the production of all tobacco, flue-cured tobacco, turkeys and
sweet potatoes and second in hog production, trout and the production of
Christmas trees and cucumbers for pickles. The State ranks third in poultry and
egg products. In 1998 there were approximately 58,000 farms in the State. A
strong agribusiness sector also supports farmers with farm inputs (agricultural
chemicals and fertilizer, farm machinery and building supplies) and processing
of commodities produced by farmers (vegetable canning and cigarette
manufacturing). North Carolina's agricultural industry, including food, fiber
and forest, contributes over $46 billion annually to the State's economy,
accounts for nearly 25% of the State's income and employs approximately 22% of
the State's work force.
As stated in the August 27, 1999 Official Statement of the Department of
State Treasurer relating to the State of North Carolina General Obligation
Bonds, on November 23, 1998, 46 states' Attorneys General and the major tobacco
companies signed a proposed settlement that reimburses states for
smoking-related medical expenses paid through Medicaid and other health care
programs. North Carolina could receive approximately $4.6 billion over the next
25 years. The settlement was approved in North Carolina by a Consent Decree in
December 1998. On March 16, 1999, the General Assembly enacted a law approving
the establishment of a foundation, to comply with the Consent Decree, to help
communities in North Carolina hurt by the decline of tobacco farming. The court
must review the law for compliance with the intent outlined in the Consent
Decree. The foundation would receive 50 percent of the settlement. A trust fund
for tobacco farmers and quota holders and a second trust fund for health
programs, both to be created by the General Assembly, would each get twenty-five
percent of the settlement.
North Carolina is also one of the 14 states that has entered into a major
settlement agreement with several cigarette manufacturers on behalf of tobacco
growers and allotment holders. Approximately $1.9 billion of settlement payments
(under the National Tobacco Growers Settlement Trust) are expected to be paid to
North Carolina tobacco growers and allotment holders under this settlement
agreement. Payments of this amount are expected to average $155 million per year
over a 12-year period which began in 1999.
The North Carolina Department of Commerce, Division of Tourism, Film and
Sports Development, indicates that travel and tourism is increasingly important
to the State's economy. Forty-four million visitors in 1999 contributed to the
$11.9 billion travel and tourism economic impact for the state, a 5.8% increase
over 1998. The North Carolina travel and tourism industry directly supports
198,200 jobs. Without these jobs generated by travel, North Carolina's
unemployment rate would have been 5.2 percent higher.
Moody's rates North Carolina general obligation bonds as Aaa (confirmed
August 18, 2000) and S&P's rates such bonds as AAA (confirmed August 21, 2000).
OHIO
Generally, the creditworthiness of Ohio obligations of local issuers is
unrelated to that of obligations of the State itself, and the State has no
responsibility to make payments on those local obligations.
As of October 31, 2000, Ohio general obligations were rated Aa1 by Moody's
and AA+ by both Fitch and S&P.
There may be specific factors that at particular times apply in connection
with investment in particular Ohio obligations or in those obligations of
particular Ohio issuers. It is possible that the investment may be in particular
Ohio obligations, or in those of particular issuers, as to which those factors
apply. However, the information below is intended only as a general summary, and
is not intended as a discussion of any specific factors that may affect any
particular obligation or issuer.
B-12
While diversifying more into the service and other non-manufacturing areas,
the Ohio economy continues to rely in part on durable goods manufacturing
largely concentrated in motor vehicles and equipment, steel, rubber products and
household appliances. As a result, general economic activity, as in many other
industrially-developed states, tends to be more cyclical than in some other
states and in the nation as a whole. Agriculture is an important segment of the
economy, with over half the State's area devoted to farming and approximately
16% of total employment in agribusiness.
In prior years, the State's overall unemployment rate was commonly somewhat
higher than the national figure. However, for most recent years the State
average monthly rates were below the national rates (4.3% versus 4.5% in 1998).
The rates were, however, 4.3% for the State in 1999 compared to a 4.2% national
rate. The unemployment rate and its effects vary among geographic areas of the
State.
The State operates on the basis of a fiscal biennium for its appropriations
and expenditures, and is precluded by law from ending its July 1 to June 30
fiscal year or fiscal biennium in a deficit position. Most State operations are
financed through the General Revenue Fund (GRF), for which the personal income
and sales-use taxes are the major sources. Growth and depletion of GRF ending
fund balances show a consistent pattern related to national economic conditions,
with the ending fiscal year balance reduced during less favorable and increased
during more favorable economic periods. The State has well-established
procedures for, and has timely taken, necessary actions to ensure
resource/expenditure balances during less favorable economic periods. Those
procedures included general and selected reductions in appropriations spending.
The GRF appropriations acts for the 2000-01 biennium were passed in June
1999 and promptly signed (after selective vetoes) by the Governor. All necessary
GRF appropriations for State debt service and lease rental payments then
projected for the biennium were included in that act.
The State's incurrence or assumption of debt without a vote of the people
is, with limited exceptions, prohibited by current State constitutional
provisions. The State may incur debt, limited in amount to $750,000, to cover
casual deficits or failures in revenues or to meet expenses not otherwise
provided for. The Constitution expressly precludes the State from assuming the
debts of any local government or corporation. ( An exception is made in both
cases for any debt incurred to repel invasion, suppress insurrection or defend
the State in war.)
By 16 constitutional amendments approved from 1921 to date (the latest
adopted in 1999) Ohio voters authorized the incurrence of State debt and the
pledge of taxes or excises to its payment. At October 5, 2000, $1.2 billion
(excluding certain highway bonds payable primarily from highway use receipts) of
this debt was outstanding or awaiting delivery. The only such State debt at that
date still authorized to be incurred were portions of the highway bonds, and the
following: (a) up to $100 million of obligations for coal research and
development may be outstanding at any one time ($29.6 million outstanding);
(b) obligations for local infrastructure improvements, no more than
$120 million of which may be issued in any calendar year (over $1.07 billion
outstanding); and (c) up to $200 million in general obligation bonds for parks,
recreation and natural resource purposes which may be outstanding at any one
time ($131.4 million outstanding, with no more than $50 million to be issued in
any one year).
A constitutional amendment approved by the voters in 1999 authorizes State
general obligation debt to pay costs of facilities for a system of common
schools throughout the State ($130.1 million outstanding as of October 5, 2000)
and facilities for state supported and assisted institutions of higher education
($150 million outstanding, with an additional $150 million in the process of
sale).
That 1999 amendment also provided that State general obligation debt and
other debt represented by direct obligations of the State (including that
authorized by the Ohio Public Facilities Commission and Ohio Building Authority,
and some authorized by the Treasurer), may not be issued if future FY total debt
service on those direct obligations to be paid from the GRF or net lottery
proceeds exceeds 5% of total estimated revenues of the State for the GRF and
from net State lottery proceeds during the FY of issuance.
The Constitution also authorizes the issuance of State obligations for
certain purposes, the owners of which do not have the right to have excises or
taxes levied to pay debt service. Those special obligations include obligations
issued by the Ohio Public Facilities Commission and the Ohio Building Authority,
and certain obligations issued by the State Treasurer, over $5 billion of which
were outstanding at October 5, 2000.
B-13
State and local agencies issue obligations that are payable from revenues
from or relating to certain facilities (but not from taxes). By judicial
interpretation, these obligations are not "debt" within constitutional
provisions. In general, payment obligations under lease-purchase agreements of
Ohio public agencies (in which certificates of participation may be issued) are
limited in duration to the agency's fiscal period, and are renewable only upon
appropriations being made available for the subsequent fiscal period.
Local school districts in Ohio receive a major portion (state-wide aggregate
less than 50% in recent years) of their operating moneys from State subsidies,
but are dependent on local property taxes, and in 127 districts (as of
October 5, 2000) on voter-authorized income taxes, for significant portions of
their budgets. Litigation, similar to that in other states, has been pending
questioning the constitutionality of Ohio's system of school funding and
compliance with the constitutional requirement that the State provide a
"thorough and efficient system of common schools." In May 2000 the Ohio Supreme
Court in a 4-3 decision concluded, as it had in 1997, that the State, even after
crediting significant gubernatorial and legislative steps in recent years, did
not comply with that requirement. It set as general base threshold requirements
that every school district have enough funds to operate, an ample number of
teachers, sound and safe buildings, and equipment sufficient for all students to
be afforded an educational opportunity. The Court maintains continuing
jurisdiction, and has scheduled for June 2001 further review by it of State
responses to its ruling. With particular respect to funding sources, the Supreme
Court repeated its conclusion that property taxes no longer may be the primary
means of school funding in Ohio, noting that recent efforts to reduce that
historic reliance have been laudable but in the Court's view insufficient. A
small number of the State's 611 local school districts have in any year required
special assistance to avoid year-end deficits. A now superseded program provided
for school district cash need borrowing directly from commercial lenders, with
diversion of State subsidy distributions to repayment if needed. Recent
borrowings under this program totalled $87.2 million for 20 districts in fiscal
year 1996 (including $42.1 million for one), $113.2 million for 12 districts in
fiscal year 1997 (including $90 million to one for restructuring its prior
loans), and $23.4 million for 10 districts in fiscal year 1998.
For those few municipalities and school districts that on occasion have
faced significant financial problems, there are statutory procedures for a joint
State/local commission to monitor the fiscal affairs and for development of a
financial plan to eliminate deficits and cure any defaults. (Similar procedures
have recently been extended to counties and townships.) As of October 5, 2000,
these "fiscal emergency" procedures applied to 6 cities and villages; and two
municipalities were in preliminary "fiscal watch" status. As of October 5, 2000,
a school district "fiscal emergency" provision applied to 10 districts, and
three were on preliminary "fiscal watch" status.
At present the State itself does not levy ad valorem taxes on real or
tangible personal property. Those taxes are levied by political subdivisions and
other local taxing districts. The Constitution has since 1934 limited to 1% of
true value in money the amount of the aggregate levy (including a levy for
unvoted general obligations) of property taxes by all overlapping subdivisions,
without a vote of the electors or a municipal charter provision, and statutes
limit the amount of that aggregate levy to 10 mills per $1 of assessed valuation
(commonly referred to as the "ten-mill limitation"). Voted general obligations
of subdivisions are payable from property taxes that are unlimited as to amount
or rate.
Although the State's revenue obligations or its political subdivisions may
be payable from a specific project or source, including lease rentals, there can
be no assurance that economic difficulties and the resulting impact on State and
local governmental finances will not adversely affect the market value of
municipal obligations held in the portfolio of the Ohio Series or the ability of
the respective obligors to make required payments on or leases relating to such
obligations.
PENNSYLVANIA
The Commonwealth of Pennsylvania is one of the most populous states, ranking
sixth behind California, New York, Texas, Florida and Illinois. Pennsylvania has
been historically identified as a heavy industry state, although, due to the
decline of the steel, coal and railroad industries over the last thirty years,
the Commonwealth's business environment has readjusted to reflect a more
diversified industrial base. This economic readjustment was a direct result of a
long-term shift in jobs, investment and workers away from the northeast
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part of the nation. Currently, the major sources of growth in Pennsylvania are
in the service sector, which includes trade, medical, and health services,
education and financial institutions. Pennsylvania's work force is estimated at
5.5 million people, ranking as the sixth largest labor pool in the nation.
The five-year period ending with fiscal 1999 was a time of economic growth
with modest rates of growth at the beginning of the period and larger increases
during the most recent years. Throughout the period, inflation remained
relatively low, helping to restrain expenditure growth. Favorable economic
conditions helped total revenues and other sources rise at an average annual
rate of 5.8% (6% on a "GAAP" basis) during the five-year period. Taxes increased
at an average annual rate of 4.3% (4.2% on a "GAAP" basis) during the period.
Expenditures and other uses during the fiscal 1995 through fiscal 1999 period
rose at a 4.8% (5% on a "GAAP" basis) average annual rate.
The 1999 fiscal year ended with an unappropriated surplus (prior to the
transfer to the Tax Stabilization Reserve Fund) of $702.9 million, an increase
of $214.2 million from June 30, 1998. Transfers to the Tax Stabilization Reserve
Fund totaled $255.4 million for fiscal year 1999, consisting of $105.4 million
representing the statutory 15% of the fiscal year-end unappropriated surplus and
an additional $150 million from the unappropriated surplus authorized by the
General Assembly. The $447.5 million balance of the unappropriated surplus was
carried over to fiscal year 2000. The higher unappropriated surplus was
generated by tax revenues that were $712.0 million (3.9%) above estimate and
$61.0 million of non-tax revenue (18.4%) above estimate. A portion of the higher
revenues and appropriation lapses were used for supplemental fiscal year 1999
appropriations totaling $357.8 million.
At the end of the 2000 fiscal year the unappropriated surplus balance (prior
to the transfer to the Tax Stabilization Reserve Fund) totaled $718.3 million, a
$280.6 million increase from fiscal 1999 year-end. The gain was due to higher
than anticipated revenues and appropriation lapses that were partially offset by
additional supplemental appropriations and reserves for tax refunds. From that
amount $107.7 million was deducted, representing the required transfer of 15% of
the surplus to the Tax Stabilization Reserve Fund. The remaining $610.5 million
fiscal year-end unappropriated surplus balance was carried over to the 2001
fiscal year. Commonwealth revenues for the 2000 fiscal year totaled
$20,256.7 million, an increase of 5.4% $1,030 million) over the prior fiscal
year. Expenditures for the fiscal year (excluding pooled financing expenditures
and net of appropriation lapses) were $19,171 million representing a 5.7%
($1,026 million), increase over the prior fiscal year.
The General Fund budget for the 2001 fiscal year was approved by the General
Assembly in May 2000. The enacted budget authorized $19,910.8 million of
spending from estimated Commonwealth revenues of $19,314.8 million (net of
estimated tax refunds and enacted tax changes and a property tax rebate). A draw
down of most of the $610.5 million fiscal 2000 year-end unappropriated balance
is intended to fund the $596.0 million difference between estimated revenues and
authorized spending. The amount of spending authorized in the enacted budget is
2.5 percent over the total amount of spending authorized for fiscal 2000 of
$19,426.3 million. Tax changes enacted for the fiscal 2001 budget and effective
during the fiscal year are estimated to reduce Commonwealth revenues to the
General Fund by $444.6 million. In addition, a non-recurring state-paid tax
rebate to qualifying property owners equal to a portion of their fiscal year
1998-99 school district property taxes was included in the budget. Tax rebate
payments to be made during the 2000-01 fiscal year are budgeted in the amount of
$330 million.
The estimate in the enacted budget for Commonwealth revenues to be received
during fiscal year 2001 is based upon an economic forecast for real gross
domestic product to grow at a 3.7% rate from the second quarter of 2000 to the
second quarter of 2001. This rate of growth for real gross domestic product
represents an expected slow-down in national economic growth compared to the
rate of growth in fiscal 2000. The more modest economic growth rate is
anticipated to be a response to a slower rate of consumer spending to a level
consistent with personal income gains and by smaller increases in business
investment as interest rates rise and profit gains are weak. The expected slower
economic growth is not expected to cause an appreciable increase in the
unemployment rate during the fiscal year. Inflation is expected to remain quite
moderate during the period. Trends for the Pennsylvania economy are expected to
maintain their current close association with national economic trends. Personal
income growth is anticipated to remain slightly below that of the U.S.,
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while the Pennsylvania unemployment rate is anticipated to be very close to the
national rate. Commonwealth revenues (prior to adjustment for the estimated cost
of enacted tax reductions) are projected to increase by 3.2% over fiscal 2000
receipts. Appropriations from Commonwealth funds in the enacted budget for
fiscal 2001 are 2.5 percent over fiscal 2000 appropriations. Through
September 30, 2000, General Fund revenues have exceeded estimated revenues by
$95.9 million (2.1%).
As of October 9, 2000, general obligations of the Commonwealth were rated
Aa3 by Moody's, AA by S&P and AA by Fitch.
The current constitutional provisions relating to Commonwealth debt permit
the issuance of the following types of debt: (i) debt to suppress insurrection
or rehabilitate areas affected by disaster, (ii) electorate approved debt,
(iii) debt for capital projects subject to an aggregate debt limit of 1.75 times
the annual average tax revenue of the preceding five fiscal years, and (iv) tax
anticipation notes payable in the fiscal year of issuance. All debt except tax
anticipation notes must be amortized in substantial and regular amounts.
Outstanding general obligation debt totaled $5,014.9 million at June 30, 2000.
Other state-related obligations include "moral obligations." Moral
obligation indebtedness may be issued by the Pennsylvania Housing Financing
Agency, a state-created agency which provides financing for housing for lower
and moderate income families, and the Hospitals and Higher Education Facilities
Authority of Philadelphia, a municipal authority organized by the City of
Philadelphia to, among other things, acquire and prepare various sites for use
as intermediate care facilities for the mentally retarded.
The Commonwealth, through several of its departments and agencies, leases
various real property and equipment. Some of these leases and their respective
lease payments are, with the Commonwealth's approval, pledged as security for
debt obligations issued by certain public authorities or other entities within
the state. All lease payments payable by Commonwealth departments and agencies
are subject to and dependent upon an annual spending authorization approved
through the Commonwealth's annual budget process. The Commonwealth is not
required by law to appropriate or otherwise provide monies from which the lease
payments are to be made. The obligations to be paid from such lease payments are
not bonded debt of the Commonwealth.
In addition, certain Commonwealth-created organizations have statutory
authority to issue debt for which Commonwealth appropriations to pay debt
service thereon are not required. The debt of these organizations is funded by
the assets of, or revenues derived from, the various projects financed and is
not a statutory or moral obligation of the Commonwealth. Some of these agencies,
however, are indirectly dependent on Commonwealth operating appropriations. In
addition, the Commonwealth may choose to take action to financially assist these
organizations. The Commonwealth also maintains pension plans covering state
employees, public school employees and employees of certain state-related
organizations.
Pennsylvania's average annual unemployment rate was equivalent to the
national average throughout the 1990s. Slower economic growth caused the
unemployment rate in the Commonwealth to rise to 7.0% in 1991 and 7.6% in 1992.
The resumption of faster economic growth resulted in an annual decrease in the
Commonwealth's unemployment rate to 4.4% in 1999. From 1994 through 1999,
Pennsylvania's annual average unemployment rate was below the Middle Atlantic
Region's average, but slightly higher than that of the United States. As of
August 2000, the seasonably adjusted unemployment rate for the Commonwealth was
4.0%.
The Pennsylvania Intergovernmental Cooperation Authority ("PICA") was
created by Commonwealth legislation in 1991 to assist Philadelphia in remedying
fiscal emergencies. PICA is designed to provide assistance through the issuance
of funding debt and to make factual findings and recommendations to Philadelphia
concerning its budgetary and fiscal affairs. At this time, Philadelphia is
operating under a five-year fiscal plan approved by PICA on May 16, 2000. No
further bonds are to be issued by PICA for the purpose of financing a capital
project or deficit as the authority for such bond sales expired in 1994. PICA's
authority to issue debt for the purpose of financing a cash flow deficit expired
in 1996. Its ability to refund existing outstanding debt is unrestricted. PICA
had $959.4 million in Special Revenue bonds outstanding as of June 30, 2000.
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Pennsylvania municipalities and school districts are, with certain
limitations, authorized to impose a variety of taxes. The real estate tax is the
only tax authorized by law to be levied by all classes of local government in
the state. Thus, property owners generally pay real estate taxes to three
independent authorities--the county, the municipality and the school district.
The Local Tax Enabling Act applicable to almost all political subdivisions
in Pennsylvania, gives local governments (other than counties) and school
districts in Pennsylvania a broad range of non-real estate tax sources. The
taxes commonly in use include the earned income or wage tax, per capita taxes,
occupation taxes, occupational privilege taxes, real estate transfer taxes,
amusement and admission taxes and business gross receipts taxes (although the
authority of political subdivisions to impose new business gross receipts taxes
is limited). Counties are also permitted to impose intangible personal property
taxes (although the constitutional validity of such taxes is presently the
subject of litigation and no counties presently impose such taxes).
In addition, the City and School District of Philadelphia have separate
taxing authority to impose a variety of business taxes, wage taxes, income and
other various taxes.
ADDITIONAL ISSUERS
GUAM
Guam is an unincorporated territory of the United States represented by an
elected non-voting delegate to the U.S. House of Representatives. The island is
governed by the Organic Act of 1950, which granted Guam the statutory local
power of self-government and made Guamanians citizens of the United States.
However, the U.S. controls the island's foreign and defense policies and plays a
significant role in its economic affairs. As of the 1990 Census, Guam's
population was 133,152. According to the Guam Annual Economic Review (1998-1999)
published by the Guam Department of Commerce (Annual Review) the total
population is projected to be 167,292 in 2000 an increase of 25.6%. In recent
years, Governor Gutierrez has sought greater self-government for the island and
has approached Congress with a proposal to change Guam's political status to
that of a Commonwealth.
Guam's economy depends on tourism revenues, U.S. federal and military
spending and service industries. According to the Annual Review, in fiscal year
1998, the U.S. government allocated approximately $507 million for military
operations in Guam, of which $319 million was allocated for wages and salaries
and $160 million for military construction. However, the island has been
affected by the downsizing of the U.S. military presence that has occurred since
1993, most notably the implementation of the Base Realignment and Closure
Commission (BRACC) '95. In April 1995, the Naval Air Station, Agana, was
officially closed, and control was transferred to the Government of Guam.
According to the 1998-1999 Annual Review, the economic impact of base closures,
unit transfers and scaling back of defense activities in Guam has resulted in
estimated job losses of about 4,800 (3,500 federal civilian jobs and 1,300
military positions). In terms of lost income, cumulative current dollar loss of
Gross Island Product for the period 1996-1999 has been estimated at
$942 million. Total active duty military personnel increased 1.8%
(114 personnel) in 1998 from 1997, from 6,265 to 6,379. According to the Guam
Economic Review Quarterly Report (October-December 1999) published by the
Economic Research Center Guam Department of Commerce (Quarterly Report), the
unemployment rate in June 1999 had increased to about 15.2%, up from 7.7% in
March 1998. There were 60,440 employees on payroll in December, 1999. Of the
60,440 employees, 42,370 were in the private sector, 4,530 were employed by the
Federal Government and 13,540 were in the Territorial Government.
The Asian economic crisis, as well as damage from natural disasters such as
Super Typhoon Paka, have disrupted the island's tourist business, which normally
caters to more than a million visitors a year, mostly from Japan. According to a
December 17, 1997 report by the Office of the Governor of Guam, Super Typhoon
Paka cost Guam approximately $600 million. The Asian and Japanese recessions
have reduced vacation package costs among many of Guam's visitor industry
competitors, increased the relative cost of Guam vacation packages because of
the devaluation of Asian currencies versus the U.S. dollar and seriously
impacted consumer confidence among Guam's major Asian trading partners, which
has resulted in a decline in investment and trade. According to the Annual
Review, Guam's economy correlates with Asia's business cycle rather than that of
the U.S., since more than 90% of its tourists come from Asia and about 60% of
trade links are with Asia. The Asian economy as a whole is on the way to
recovery. Guam's economy, as part of Asia, is beginning to
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experience the recovery of its primary industry, tourism. Given the improved
performance in the second half of 1999 and the positive impact of regional
recovery and the upturn in the Japan economy, the outlook for Guam's economy in
2000 has brightened. Visitor arrivals are expected to achieve a higher growth
than 1999, while retail sales are projected to have a positive growth. According
to the Quarterly Report, visitor arrivals increased to approximately 1,160,325
in calendar year 1999, a 2% increase over 1998. Construction is likely to
continue declining but at a lower rate.
However, some economic risks remain including if regional (especially Japan)
recovery falters, the resulting decline in outbound traveling would exert a drag
on Guam the economy again.
New aggressive diversification policies in financial services, insurance and
telecommunications will help to stabilize Guam's sustainability in relation to
the other Asian economies. For example, in 1977, the Government of Guam enacted
Public Law 23-109 which includes 100% abatement of gross receipt taxes on
insurance premiums and other revenues.
It has been reported that for fiscal year 1999, Guam is anticipating a
deficit of $51.5 million for year-end 1999 and expects its accumulated general
fund deficit to total $146.5 million by the end of calendar year 1999. In
addition, it has been reported that Guam's government is planning to refinance
the island's existing general obligation bonds and transfer certain retirement
obligations to the retirement fund to reduce the accumulated total deficit to
$130.5 million by the end of the year. The government is planning to reduce the
accumulated deficit in 2000 to approximately $33.4 million by the sale and
leaseback of certain property and the privatization of the telephone company.
As of October 27, 2000, S&P maintained Guam's outstanding general obligation
bond rating of BBB-. While we note that Guam is not a state but rather an
unincorporated territory of the U.S., by comparison, most states' general
obligations are rated AA by S&P.
PUERTO RICO
Puerto Rico enjoys a commonwealth status with the U.S. as a result of Public
law 600, enacted by the U.S. Congress in 1950 and affirmed by a referendum in
1952. Residents of Puerto Rico are U.S. citizens. Puerto Rico's voters rejected
U.S. statehood for the second time in six years in a local plebiscite held in
December 1998, which is likely to close the debate of statehood for some time,
according to an April 12, 1999 report of the Economist Intelligence Unit (EIU
Report).
Since World War II, Puerto Rico has transitioned from a poor, agrarian
economy to a more urbanized manufacturing and service based economy. Personal
income has increased per capita each year from 1994 to 1999 according to a
report by the Government of Puerto Rico, Puerto Rico Industrial Development
Company (PRIDCO). The average family income has also increased each year from
1993 to 1999 according to the report by PRIDCO. According to a July 27, 2000 EIU
Report, during the first three quarters of fiscal year 1999-2000 (Puerto Rico's
fiscal year is July through June,) total employment rose by 0.8% to 1,150,000,
compared with the same period last year. The labor force as a whole, however,
decreased by 1.1%, which is equivalent to an annual reduction of 14,000 jobs.
As stated in the July 27, 2000 EIU Report, during the first three quarters
of fiscal year 1999-2000, construction led economic growth as did, to a lesser
extent, tourism. According to the May 15, 2000 EIU Report, stimulated this year
by pre-electoral increase in public works, a 9.6% real growth in construction is
anticipated in fiscal year 1999-2000. According to the same report, tourism,
which has been strong in the local economy since 1994-95, is showing signs of
weakness and is not anticipated to add much to overall growth. Although
manufacturing output and exports have continued to grow at a moderate pace, jobs
in manufacturing industries have continued to decline. Manufacturing output will
continue to expand at 2-3%. This moderate growth will not, however, be enough to
lower the current 12.5% unemployment rate.
During the first nine months of fiscal year 1999/2000, government revenue
reached $4.7 billion, a 10.2% increase. The May 15, 2000 EIU Report indicates
that the official forecast is real GNP growth of 2.7% in fiscal
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year 1999/2000, 2.3% in fiscal year 2000-2001, mainly due to growth in the
construction industry. A July 28, 2000 EIU Report indicates that the economy is
anticipated to grow by 5.9% in calendar year 2000 after growing by 11.5% in the
first quarter of 2000.
The inflation rate shaved an average 5.2% increase in fiscal year 1998-1999.
The inflation rate was expected to fall to 4% in fiscal year 1999-2000 with high
food prices and heavy public spending according to a November 29, 1999 EIU
Report.
According to a July 27, 2000 EIU Report, an indication of the impact of
increasing oil prices on the local economy is evident based on partial data on
petroleum product imports. Between July 1999 and February 2000, NAPHTA
importation reached 6.4 million barrels, valued at US $158.1 million. Naphta
importation volume increased by 19.6% in comparison with the year-earlier
period, while value rose 115.2% with the average price growing by 80%. While no
data currently is available, crude petroleum imports usually double those of
naphta.
According to the November 29, 1999 EIU Report, local exports were
$34.9 billion during fiscal year 1998-1999, an increase of 15% from the previous
fiscal year, while imports rose to $25.3 billion from $21.9 billion during the
same period. According to the November 29, 1999 EIU Report, it was anticipated
that during fiscal year 1999-2000, exports would decline to approximately
$30 billion, with imports decreasing to $23 billion.
One of the principal sources of capital inflows in Puerto Rico is
public-sector borrowing, which is usually in the form of debt placement in the
US municipal bond market, according to the May 5, 1999 EIU Report. Puerto Rico
has played a significant role in the municipal markets for decades;
public-sector borrowing has averaged $1.4 billion per year during fiscal years
1992-93 through 1997-1998, with around one-quarter of this being incurred by the
central and municipal governments and the rest going to public corporations.
According to the Governor's Message on the Budget for Fiscal Year 2000-2001
(Message on the Budget) Puerto Rico's proposed budget for fiscal year 2000-2001
is $20.9 billion, a 9.16% or $1.7 million increase from the prior fiscal year.
The budget allows for direct contributions to the municipalities totaling $338
million. 4.7% of the budget will pay for government operations. Debt service
will be at $2.3 million, or 11.2% of the total budget. During the past two
decades, the public debt has fluctuated between 9 and 13.2%. As of the time of
the Message on the Budget, it stood at 9%, the second lowest percentage in 19
years. For the current fiscal year, the extra-constitutional debt has been
reduced by $657 million. It currently stands at $3 million, and during the year
2001 it is projected to drop to $2.8 million.
The Message on the Budget indicates a proposed estimate of $7.5 million,
with respect to revenues to the General Fund, an increase of $462 million than
was estimated last year. At the close of fiscal year 1999-2000, the General
Fund's fiscal base shall have increased by 82.4%, with average annual growth of
7.8%.
Various measures in issuing bonds have permitted the government to refinance
$12 billion, reaching savings in excess of $640 million, according to the
Message on the Budget.
The November 29, 1999 EIU Report indicates that multinational companies have
been reassessing Puerto Rico's appeal as an investment site due to Mexico's
NAFTA advantages, the extension of the U.S. federal minimum wage to Puerto Rico,
and the loss of federal tax breaks under Section 936 of the US Tax Code for
United States companies operating in Puerto Rico. However, according to a
March 31, 1999 EIU Report, many companies have taken advantage of new local tax
incentives which are aimed at counteracting problems associated with the Section
936 phase-out. In addition, tourism and large government infrastructure projects
continue to spur offshore interest, according to the November 29, 1999 EIU
Report. Now, Puerto Rican development plans focus on enticing high-tech industry
and tourism. The Economic Development and Commerce Department announced in
January 1999 that it plans to spend $20 million annually to promote a high-
technology corridor industrial complex between Aguadilla and Mayaguez.
Additionally, the Puerto Rico Government has begun privatization of industries,
such as the sale of Puerto Rico Telephone in July 1998.
As of October 27, 2000, Puerto Rico's general obligations were rated A by
S&P. As of October 31, 2000 Moody's rates the Commonwealth Baa1.
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UNITED STATES VIRGIN ISLANDS
The Virgin Islands, comprised of St. Thomas, St. Croix and St. John, form an
incorporated territory of the United States. The residents were granted a
measure of self-government by the Organic Act, as revised in 1954. The Virgin
Islands are heavily dependent on links with the U.S. mainland and more than 90%
of the trade is conducted with Puerto Rico and the United States.
The Territorial Government plays a vital role in the economy of the Virgin
Islands. Since governmental services must be provided on three separate islands,
the duplication of effort results in an unusually large public sector. Federal
and local government constituted about 33% of all nonagricultural jobs in 1999.
Federal government jobs have remained relatively unchanged at 877 and
Territorial Government jobs have declined by 2.4% to 12,566 from 12,876 in 1998.
Total government employment declined by 2% in 1999 to 13,438 from 13,753 in
1998. According to an April 2000 report by the Bureau of Economic Research of
the Government Development Bank for the Virgin Islands (BER), public sector
employment is expected to decrease mainly as a result of a mandated 10%
reduction in local government employment. Federal government jobs are expected
to remain unchanged.
Tourism is the predominant source of employment and income of the Virgin
Islands. After experiencing four consecutive years of growth and a record
2.1 million visitors in 1998, activity in the tourism sector slowed in 1999
mainly due to a reduction in the number of cruise ship calls. In 1999, the
Virgin Islands recorded 2.0 million visitors, a decrease of about 8% over the
1998 total. This decrease was mainly due to a drop in cruise ship passenger
arrivals that totaled 1.4 million in 1999, representing a decrease of 13% over
the 1998 total of 1.6 million. Cruise ship business declined because of damage
caused by hurricanes. BER is forecasting the rate of cruise passenger arrivals
to rebound in fiscal year 2001 to record levels with the introduction of new
mega-vessels and to increase by 8% to 1.6 million. During calendar year 1999,
overnight visitors increased, by 7.1% over 1998 to 560,133, which is partially
attributable to the introduction of additional seats into the Virgin Islands on
both chartered and scheduled air services. The weekly direct flight seats grew
to 13,099 seats, 5.1% over the 12,466 total in 1998, although the weekly direct
seat capacity is still below the 17,000 seat average during the peak 1994-95
years. The rate of air arrivals is expected to grow by 5% in fiscal year 2001.
March 1999 through April 2000 air arrivals totaled 172,699 up 2% over the
corresponding period in 1998. Hotels and condominiums available for rental
declined marginally in 1999 to 4,849 from 4,929 in 1998. The territory's hotel
occupancy rate was up 3.0% from 1998 to 56% in 1999. However, the hotel
occupancy rate is still low when compared to averages of 60% prior to 1996. BER
forecasts hotel occupancy to improve with an increase in overnight visitors.
There was a total of 40,993 non-agricultural jobs in the territory in 1999
compared to 41,668 jobs in 1998 a decrease of about 2% percent. Job losses,
especially in the private sector, have reduced employment to a level not seen
since 1987. The private sector has lost just over 1% or approximately 381 jobs
in 1999 to 27,554 from 27,935 in 1998. The decline in 1999 reflected job losses
mainly in the private sector in tourist related business. The Virgin Island's
overall unemployment rate increased from 6.4% in 1998 to 7% in 1999. St. Croix's
unemployment rate increased from 7.6% in 1998 to 8.4% in 1999. St. Thomas and
St. John, also registered an increase in the unemployment rate from 5.6% in 1998
to 6.1% in 1999. The overall increase in unemployment has been attributed in
part to a continuing lack of new business ventures and consequently, job
opportunities as well as job losses in retail trade including those that cater
to tourists, with respect to St. Thomas and St. John. For the first quarter of
calendar year 1999, the territory's unemployment rate remained steady at 6.7%.
According to the BER, the number of jobs is expected to grow during fiscal year
2001 by as much as 6% due to the opening of the Divi Carina Bay Resort and
Casino on St. Croix, and new public and private--sector construction projects,
as well as temporary jobs created by the VI 2000 Census.
There were 2,427 manufacturing jobs in 1999, up slightly from 2,418 jobs in
1998, pushing manufacturing employment to its highest level since 1995. In 1998,
Petroleos de Venezuela (PDVSA) bought 50 percent of the Hess oil refinery on
St. Croix. Hess and PDVSA (renamed Hovensa) agreed to share the cost of building
a $500 million plant to refine crude oil. Construction of the plant is expected
to take three years and increase the
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refinery's daily oil production by 50,000 barrels. Current production averages
about 430,000 barrels per day. The BER foresees a 3% growth in employment in the
manufacturing sector during fiscal year 2001, with increased activity at
Hovensa, although significant increases will not occur until the construction of
the coker.
The construction sector is expected to continue to grow, as indicated by the
value of permits issued. The construction of roads, the extension of the Rohlsen
Airport, the expansion of Wico dock, new hotel expansion and the coker
construction are among the projects expected to boost construction jobs by as
much as 13% during fiscal year 2001.
According to an October 12, 1999 report of the U.S. Newswire, the Virgin
Islands is facing a long-term deficit of over $1 billion and an expected deficit
of $98 million for 1999 alone. A July 29, 1999 report of the Agence France
Presse states that the financial difficulties of the Virgin Islands are due to
its growing public sector, a series of three hurricanes in the 1990s, and
inefficient management by the government over the years. The October 12, 1999
report further states that the U.S. Secretary of the Interior and the Governor
of the Virgin Islands have signed a Memorandum of Understanding which addresses
the Virgin Islands' financial difficulties and need for fiscal austerity. The
Memorandum of Understanding sets forth certain measures the Governor has agreed
to implement, effective October 1, 1999, and pledges the federal government's
(Department of the Interior's) support for local initiatives to achieve fiscal
recovery and stability in the Virgin Islands.
As of October 31, 2000, S&P assigned no general obligation/issuer-level
rating to the Virgin Islands as a whole.
PUT OPTIONS
Each series may acquire put options (puts) giving the series the right to
sell securities held in the series' portfolio at a specified exercise price on a
specified date. Such puts may be acquired for the purpose of protecting the
series from a possible decline in the market value of the securities to which
the put applies in the event of interest rate fluctuations and, in the case of
liquidity puts, to shorten the effective maturity of the underlying security.
The aggregate value of the premiums paid to acquire puts held in a series'
portfolio (other than liquidity puts) may not exceed 10% of the net asset value
of such series. The acquisition of a put may involve an additional cost to the
series compared to the cost of securities with similar credit ratings, stated
maturities and interest coupons, but without applicable puts. This increased
cost may be paid by way of a premium for the put, by payment of a higher
purchase price for securities to which the put is attached or through a lower
effective interest rate.
In addition, there is a credit risk associated with the purchase of puts in
that the issuer of the put may be unable to meet its obligation to purchase the
underlying security. Accordingly, each series will acquire puts only under the
following circumstances: (1) the put is written by the issuer of the underlying
security and such security is rated within the four highest quality grades (two
highest grades for the money market series) as determined by an NRSRO; or
(2) the put is written by a person other than the issuer of the underlying
security and such person has securities outstanding which are rated within such
four (or two for the money market series) highest quality grade of such rating
services; (3) the put is backed by a letter of credit or similar financial
guarantee issued by a person having securities outstanding which are rated
within the two highest quality grades of an NRSRO or (4) for the money market
series, the put is unrated, but (i) the put is written by a person that,
directly or indirectly, controls, is controlled by or is under common control
with the issuer of the underlying security (other than a sponsor of a special
purpose entity with respect to an asset backed security), (ii) the put relates
to a fully collateralized repurchase agreement, (iii) the put is backed by the
U.S. Government or (iv) the put is not relied upon for quality, maturity or
liquidity purposes.
One form of transaction involving liquidity puts consists of an underlying
fixed rate municipal bond that is subject to a third party demand feature or
"tender option." The holder of the bond would pay a "tender fee" to the third
party tender option provider, the amount of which would be periodically adjusted
so that the bond/ tender option combination would reasonably be expected to have
a market value that approximates the par value of the bond. This bond/tender
option combination would therefore be functionally equivalent to ordinary
variable or floating rate obligations and the Fund may purchase such obligations
subject to certain conditions specified by the Commission.
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HEDGING AND RETURN ENHANCEMENT STRATEGIES
Each series (other than the money market series) is authorized to purchase
and sell certain derivatives, including financial futures contracts (futures
contracts), options on futures contracts and interest rate swaps for the purpose
of attempting to hedge its investment in municipal obligations against
fluctuations in value caused by changes in prevailing market interest rates,
attempting to hedge against increases in the cost of securities the series
intends to purchase and in certain cases, attempting to enhance return. A
series, and thus an investor, may lose money through unsuccessful use of these
strategies. The successful use of futures contracts, options on futures
contracts and interest rate swaps by a series involves additional transaction
costs, is subject to various risks and depends upon the investment adviser's
ability to predict the direction of the market and interest rates. A series'
ability to use these strategies may be limited by various factors, such as
market conditions, regulatory limits and tax considerations, and there can be no
assurance that any of these strategies will succeed. If new financial products
and risk management techniques are developed, a series may use them to the
extent consistent with its investment objective and policies.
Each series engaging in futures contracts and options thereon as a hedge
against changes resulting from market conditions in the value of securities
which are held in the series' portfolio or which the series intends to purchase
will do so in accordance with the rules and regulations of the Commodity Futures
Trading Commission (the CFTC). The series also intend to engage in such
transactions when they are economically appropriate for the reduction of risks
inherent in the ongoing management of the series. A series may purchase and sell
futures contracts and options thereon for bona fide hedging transactions, except
that a series may purchase and sell futures contracts and options thereon for
any other purpose to the extent that the aggregate initial margin and option
premiums do not exceed 5% of the liquidation value of the series' total assets.
In addition, a series may not purchase or sell futures contracts or purchase
options thereon if, immediately thereafter, the sum of initial and net
cumulative variation margin on outstanding futures contracts, together with
premiums paid on options thereon, would exceed 20% of the total assets of the
series. There are no limitations on the percentage of a portfolio which may be
hedged and no limitations on the use of a series' assets to cover futures
contracts and options thereon, except that the aggregate value of the
obligations underlying put options will not exceed 50% of a series' assets.
FUTURES CONTRACTS. A futures contract obligates the seller of a contract to
deliver to the purchaser of a contract cash equal to a specific dollar amount
times the difference between the value of a specific fixed-income security or
index at the close of the last trading day of the contract and the price at
which the agreement is made. No physical delivery of the underlying securities
is made. A series will engage in transactions in only those futures contracts
and options thereon that are traded on a commodities exchange or a board of
trade.
Each series (except for the money market series) may engage in transactions
in financial futures contracts as a hedge against interest rate related
fluctuations in the value of securities which are held in the investment
portfolio or which the series intends to purchase. A clearing corporation
associated with the commodities exchange on which a futures contract trades
assumes responsibility for the completion of transactions and guarantees that
open futures contracts will be closed. Although interest rate futures contracts
call for actual delivery or acceptance of debt securities, in most cases the
contracts are closed out before the settlement date without the making or taking
of delivery.
A series neither pays nor receives money upon the purchase or sale of a
futures contract. Instead, when the futures contract is entered into, each party
deposits with a broker or in a segregated account approximately 5% of the
contract amount, called the initial margin. Initial margin in futures
transactions is different from margin in securities transactions in that futures
contract initial margin does not involve the borrowing of funds by the customer
to finance the transactions. Rather, initial margin is in the nature of a good
faith deposit on the contract which is returned to a series upon termination of
the futures contract, assuming all contractual obligations have been satisfied.
Subsequent payments to and from the broker, called variation margin, will be
made on a daily basis as the price of the underlying security or index
fluctuates, making the long and short positions in the futures contracts more or
less valuable, a process known as "marking to the market".
When a series purchases a futures contract, it will maintain an amount of
cash or other liquid assets, marked-to-market daily, in a segregated account, so
that the amount so segregated plus the amount of initial and
B-22
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.
Currently, futures contracts are available on several types of fixed-income
securities, including U.S. Treasury Bonds and Notes, Government National
Mortgage Association modified pass-through mortgage-backed securities,
three-month U.S. Treasury Bills and bank certificates of deposit. Futures
contracts are also available on a municipal bond index, based on THE BOND BUYER
Municipal Bond Index, an index of 40 actively traded municipal bonds. Each
series may also engage in transactions in other futures contracts that become
available, from time to time, in other fixed-income securities or municipal bond
indexes and in other options on such contracts if the investment adviser
believes such contracts and options would be appropriate for hedging investments
in municipal obligations.
OPTIONS ON FINANCIAL FUTURES. Each series (other than the money market
series) may purchase call options and write put and call options on futures
contracts and enter into closing transactions with respect to such options to
terminate an existing position. Each series will use options on futures in
connection with hedging strategies.
An option on a futures contract gives the purchaser the right, but not the
obligation, in return for the premium paid, to assume a position in a futures
contract (a long position if the option is a call or a short position if the
option is a put) at a specified exercise price at any time during the period of
the option. Upon exercise of the option, the delivery of the futures position by
the writer of the option to the holder of the option will be accompanied by
delivery of the accumulated balance in the writer's futures margin account which
represents the amount by which the market price of the futures contract, at
exercise, exceeds, in the case of a call, or is less than, in the case of a put,
the exercise price of the option on the futures contract. If an option is
exercised on the last trading day prior to the expiration date of the option,
the settlement will be made entirely in cash equal to the difference between the
exercise price of the option and the closing price of the futures contract on
the expiration date. Currently, options can be purchased or written with respect
to futures contracts on U.S. Treasury Bonds, among other fixed-income
securities, and on municipal bond indexes on the Chicago Board of Trade. As with
options on debt securities, the holder or writer of an option may terminate his
or her position by selling or purchasing an option of the same series. There is
no guaranty that such closing transactions can be effected.
When 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 certain conditions. The exemption is conditioned upon a series'
purchasing and selling financial 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. With respect to long positions
assumed by a series, the series will segregate an amount of cash or other liquid
assets, marked-to-market daily so that the amount so segregated plus the amount
of initial and variation margin held in the account of its broker equals the
market value of the futures contracts and thereby insures that the use of
futures contracts is unleveraged. Each series will continue to invest at least
80% of its total assets in municipal obligations except in certain
circumstances, as described in its Prospectus under "How the Series Invests--
B-23
Investment Objective 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.
INTEREST RATE SWAP TRANSACTIONS
Each series (other than the money market series) may enter into interest
rate swaps (including interest rate swaps with embedded options), on either an
asset-based or liability-based basis, depending on whether it is hedging its
assets or its liabilities. Under normal circumstances, a series will enter into
interest rate swaps on a net basis, that is, the two payment streams netted out,
with a series receiving or paying, as the case may be, only the net amount of
the two payments. The net amount of the excess, if any, of a series' obligations
over its entitlements with respect to each interest rate swap, will be accrued
on a daily basis and an amount of cash or other liquid assets having an
aggregate net asset value per share at least equal to the accrued excess will be
maintained in a segregated account by a custodian that satisfies the
requirements of the Investment Company Act. To the extent that a series enters
into interest rate swaps on other than a net basis, the amount maintained in a
segregated account will be the full amount of a series' obligations, if any,
with respect to such interest rate swaps, accrued on a daily basis. Inasmuch as
segregated accounts are established for these hedging transactions, the
investment adviser and the series believe such obligations do not constitute
senior securities. If there is a default by the other party to such a
transaction, a series will have contractual remedies pursuant to the agreement
related to the transaction. The swap market has grown substantially in recent
years with a large number of banks and investment banking firms acting both as
principals and as agents utilizing standardized swap documentation. As a result,
the swap market has become relatively liquid. A series will enter into interest
rate swaps only with creditworthy parties. The investment adviser will monitor
the creditworthiness of such parties under the supervision of the Board of
Trustees.
A series may enter into interest rate swaps as a hedge against changes in
the interest rate of a security in its portfolio or that of a security a series
anticipates buying. If a series purchases an interest rate swap to hedge against
a change in an interest rate of a security a series anticipates buying, and such
interest rate changes unfavorably for a series, then a series may determine not
to invest in the securities as planned and will realize a loss on the interest
rate swap that is not offset by a change in the interest rates or the price of
the securities.
The use of interest rate swaps is a highly speculative activity which
involves investment techniques and risks different from those associated with
ordinary portfolio securities transactions. If the investment adviser is
incorrect in its forecast of market values, interest rates and other applicable
factors, the investment performance of a series would diminish compared to what
it would have been if this investment technique was never used.
A series may enter into interest rate swaps traded on an exchange or in the
over-the-counter market. A series may only enter into interest rate swaps to
hedge its portfolio. Interest rate swaps do not involve the delivery of
securities or other underlying assets or principal. Accordingly, the risk of
loss with respect to interest rates swaps is limited to the net amount of
interest payments that a series is contractually obligated to make. If the other
party to an interest rate swap defaults, a series' risk of loss consists of the
net amount of interest payments that the series is contractually entitled to
receive. Since interest rate swaps are individually negotiated, a series expects
to achieve an acceptable degree of correlation between its rights to receive
interest on its portfolio securities and its rights and obligations to receive
and pay interest pursuant to interest rate swaps.
RISKS OF HEDGING AND RETURN ENHANCEMENT STRATEGIES
Participation in the options or futures markets involves investment risks
and transaction costs to which a series would not be subject absent the use of
these strategies. Each such series, and thus its investors, may lose money
through the unsuccessful use of these strategies. If the investment adviser's
predictions of movements in the direction of the securities and interest rate
markets are inaccurate, the adverse consequences to the series may leave the
series in a worse position than if such strategies were not used. Risks inherent
in the use of interest rate swap transactions, futures contracts and options on
futures contracts include (1) dependence on the investment adviser's ability to
predict correctly movements in the direction of interest rates and securities
prices; (2) imperfect correlation between the price of options and futures
contracts and options thereon and
B-24
movements in the prices of the securities or currencies being hedged; (3) the
fact that skills needed to use these strategies are different from those needed
to select portfolio securities; (4) the possible absence of a liquid secondary
market for any particular instrument at any time; and (5) the possible inability
of the series to purchase or sell a portfolio security at a time that otherwise
would be favorable for it to do so, or the possible need for the fund to sell a
portfolio security at a disadvantageous time, due to the need for the series to
maintain cover or to segregate securities in connection with hedging
transactions.
A series may sell a futures contract to protect against the decline in the
value of securities held by the series. However, it is possible that the futures
market may advance and the value of securities held in the series' portfolio may
decline. If this were to occur, the series would lose money on the futures
contracts and also experience a decline in value in its portfolio securities.
When a series purchases a futures contract to hedge against the increase in
value of securities it intends to buy, and the value of such securities
decreases, then the series may determine not to invest in the securities as
planned and will realize a loss on the futures contract that is not offset by a
reduction in the price of the securities.
There is a risk that the prices of securities subject to futures contracts
(and thereby the futures contract prices) may correlate imperfectly with the
behavior of the cash prices of the series' portfolio securities. Another such
risk is that prices of futures contracts may not move in tandem with the changes
in prevailing interest rates against which the series seeks a hedge. A
correlation may also be distorted by the fact that the futures market is
dominated by short-term traders seeking to profit from the difference between a
contract or security price objective and their cost of borrowed funds. Such
distortions are generally minor and would diminish as the contract approached
maturity.
There may exist an imperfect correlation between the price movements of
futures contracts purchased by the series and the movements in the prices of the
securities which are the subject of the hedge. If participants in the futures
market elect to close out their contracts through offsetting transactions rather
than meet margin deposit requirements, distortions in the normal relationships
between the debt securities and futures market could result. Price distortions
could also result if transactions due to the resultant reduction in the
liquidity of the futures market. In addition, due to the fact that, from the
point of view of speculators, the deposit requirement in the futures markets are
less onerous than margin requirements in the cash market, increased
participation by speculators in the futures markets could cause temporary price
distortions. Due to the possibility of price distortions in the futures market
and because of the imperfect correlation between movements in the prices of
securities (or currencies) and movements in the prices of futures contracts, a
correct forecast of interest rate trends by the investment adviser may still not
result in a successful hedging transaction.
The risk of imperfect correlation increases as the composition of a series'
securities portfolio diverges from the securities that are the subject of the
futures contract, for example, those included in the municipal index. Because
the change in price of the futures contract may be more or less than the change
in prices of the underlying securities, even a correct forecast of interest rate
changes may not result in a successful hedging transaction.
Pursuant to the requirements of the Commodity Exchange Act, all futures
contracts and options thereon must be traded on an exchange. Each series intends
to purchase and sell futures contracts only on exchanges where there appears to
be a market in such futures sufficiently active to accommodate the volume of its
trading activity. The series' ability to establish and close out positions in
futures contracts and options on futures contracts would be impacted by the
liquidity of these exchanges. Although the series generally would purchase or
sell only those futures contracts and options thereon for which there appeared
to be a liquid market, there is no assurance that a liquid market on an exchange
will exist for any particular futures contract or option at any particular time.
In the event no liquid market exists for a particular futures contract or option
thereon in which the series maintains a position, it would not be possible to
effect a closing transaction in that contract or to do so at a satisfactory
price and the series would have to either make or take delivery under the
futures contract or, in the case of a written call option, wait to sell
underlying securities until the option expired or was exercised or, in the case
of a purchased option, exercise the option and comply with the margin
requirements for the underlying futures contract to realize any profit. In the
case of a futures contract or an option on a futures
B-25
contract which the series had written and which the series was unable to close,
the series would be required to maintain margin deposits on the futures contract
or option and to make variation margin payments until the contract was closed.
In the event futures contracts have been sold to hedge portfolio securities,
such securities will not be sold until the offsetting futures contracts can be
executed. Similarly, in the event futures have been bought to hedge anticipated
securities purchases, such purchases will not be executed until the offsetting
futures contracts can be sold.
Successful use of futures contracts by a series is subject to, among other
things, the ability of the series' investment adviser to predict correctly
movements in the direction of interest rates and other factors affecting markets
for securities. For example, if a series has hedged against the possibility of
an increase in interest rates which would adversely affect the price of
securities in its portfolio and the price of such securities increases instead,
a series will lose part or all of the benefit of the increased value of its
securities because it will have offsetting losses in its futures positions. In
addition, in such situations, if a series has insufficient cash to meet daily
variation margin requirements, it may have to sell securities to meet such
requirements. Such sales of securities may be, but will not necessarily be, at
increased prices which reflect the rising market. A series may have to sell
securities at a time when it is disadvantageous to do so.
Exchanges on which futures and related options trade may impose limits on
the positions that a series may take in certain circumstances. In addition, the
hours of trading of financial futures contracts and options thereon may not
conform to the hours during which the series may trade the underlying
securities. To the extent the futures markets close before the securities
markets, significant price and rate movements can take place in the securities
markets that cannot be reflected in the futures markets.
As described above, under regulations of the Commodity Exchange Act,
investment companies registered under the Investment Company Act are exempt from
the definition of commodity pool operator, subject to compliance with certain
conditions. Each series may purchase and sell futures and related options
contracts without limit for BONA FIDE hedging purchases within the meaning of
the regulations of the CFTC.
In order to determine that a series is entering into transactions in futures
contracts for hedging purposes as such term is defined by the CFTC, either:
(1) a substantial majority (that is, approximately 75%) of all anticipatory
hedge transactions (transactions in which the series does not own at the time of
the transaction, but expects to acquire, the securities underlying the relevant
futures contract) involving the purchase of futures contracts will be completed
by the purchase of securities, which are the subject of the hedge, or (2) the
underlying value of all long positions in futures contracts will not exceed the
total value of (a) all short-term debt obligations held by the series; (b) cash
held by the series; (c) cash proceeds due to the series on investments within
thirty days; (d) the margin deposited on the contracts; and (e) any unrealized
appreciation in the value of the contracts.
If a series holds a long position in a futures contract, it will hold cash
or liquid assets equal to the purchase price of the contract (less the amount of
initial or variation margin on deposit) in a segregated account. Alternatively,
the series could cover its long position by purchasing a put option on the same
futures contract with an exercise price as high or higher than the price of the
contract held by the series.
Exchanges limit the amount by which the price of a futures contract may move
on any day. If the price moves equal the daily limit on successive days, then it
may prove impossible to liquidate a futures position until the daily limit moves
have ceased. In the event of adverse price movements, the series would continue
to be required to make daily cash payments of variation margin on open futures
positions. In such situations, if the series has insufficient cash, it may be
disadvantageous to do so. In addition, the series may be required to take or
make delivery of the instruments underlying futures contracts it holds at a time
when it is disadvantageous to do so. The ability to close out options and
futures positions could also have an adverse impact on the series' ability to
effectively hedge its portfolio.
In the event of the bankruptcy of a broker through which the series engages
in transactions in futures or options thereon, the series could experience
delays and/or losses in liquidating open positions purchased or
B-26
sold through the broker and/or incur a loss of all or part of its margin
deposits with the broker. Transactions are entered into by the series only with
brokers or financial institutions deemed credit worthy by the investment
adviser.
RISKS OF TRANSACTIONS IN OPTIONS ON FINANCIAL FUTURES. In addition to the
risks which apply to all options transactions, there are several special risks
relating to options on futures. The ability to establish and close out positions
on such options will be subject to the maintenance of a liquid secondary market.
Compared to the sale of financial futures, the purchase of put options on
financial futures involves less potential risk to 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: (1) there may be insufficient trading interest in certain
options, (2) restrictions may be imposed by an exchange on opening transactions
or closing transactions or both, (3) trading halts, suspensions or other
restrictions may be imposed with respect to particular classes or series of
options or underlying securities, (4) unusual or unforeseen circumstances may
interrupt normal operations on an exchange, (5) the facilities of an exchange
may not at all times be adequate to handle current trading volume or (6) one or
more exchanges could, for economic or other reasons, decide or be compelled at
some future date to discontinue the trading of options (or a particular class or
series of options), in which event the secondary market on that exchange (or in
that class or series of options) would cease to exist, although outstanding
options on that exchange could continue to be exercisable in accordance with
their terms.
There is no assurance that higher than anticipated trading activity or other
unforeseen events might not, at times, render certain clearing facilities
inadequate, and thereby result in the institution by an exchange of special
procedures which may interfere with the timely execution of customers' orders.
HIGH YIELD (JUNK) SECURITIES
Each series (other than the money market series) may also invest up to 30%
of its total assets in tax-exempt securities rated below Baa by Moody's or below
BBB by S&P, or a comparable rating of another NRSRO or, if non-rated, of
comparable quality, in the opinion of the Fund's investment adviser, based on
its credit analysis. Securities rated Baa by Moody's or BBB by S&P, although
considered to be investment grade, lack outstanding investment characteristics
and, in fact, have speculative characteristics. Securities rated below Baa by
Moody's and below BBB by S&P are considered speculative. See "Description of
Security Ratings" in the Prospectuses. Such lower-rated high yield securities
are commonly referred to as junk bonds. Such securities generally offer a higher
current yield than those in the higher rating categories but may also involve
greater price volatility and risk of loss of principal and income. The
investment adviser will attempt to manage risk and enhance yield through credit
analysis and careful security selection. See "Risk Factors Relating to Investing
in High Yield Securities" below. Subsequent to its purchase by the series, a
security may be assigned a lower rating or cease to be rated. Such an event
would not require the elimination of the issue from the portfolio, but the
investment adviser will consider such an event in determining whether the series
should continue to hold the security in its portfolios. Many issuers of
lower-quality bonds choose not to have their obligations rated and the series
may invest in such unrated securities. Investors should carefully consider the
relative risks associated with investments in securities which carry lower
ratings and in comparable non-rated securities.
B-27
RISK FACTORS RELATING TO INVESTING IN HIGH YIELD SECURITIES. Fixed-income
securities are subject to the risk of an issuer's inability to meet principal
and interest payments on the obligations (credit risk) and may also be subject
to price volatility due to such factors as interest rate sensitivity, market
perception of the creditworthiness of the issuer and general market liquidity
(market risk). Lower-rated or unrated (I.E., high yield) securities, commonly
known as junk bonds, are more likely to react to developments affecting market
and credit risk than are more highly rated securities, which react primarily to
movements in the general level of interest rates. Low-rated and comparable
unrated securities tend to offer higher yields than higher rated securities with
the same maturities because the historical financial condition of the issuers of
such securities may not have been as strong as that of other issuers.
Fluctuations in the prices of fixed-income securities may be caused by, among
other things, the supply and demand for similarly rated securities. Fluctuations
in the prices of portfolio securities subsequent to their acquisition will not
affect cash income from such securities but will be reflected in the Series' net
asset value. The investment adviser will perform its own investment analysis and
will not rely principally on the ratings assigned by the rating services,
although such ratings will be considered by the investment adviser. The
investment adviser will consider, among other things, credit risk and market
risk, as well as the financial history and condition, the prospects and the
management of an issuer in selecting securities for the series' portfolio. The
achievement of the series' investment objective may be more dependent on the
investment adviser's credit analysis than is the case when investing in only
higher quality bonds. Investors should carefully consider the relative risks of
investing in high yield securities and understand that such securities are not
generally meant for short-term investing and that yields on junk bonds will
fluctuate over time. Since lower rated securities generally involve greater
risks of loss of income and principal than higher rated securities, investors
should consider carefully the relative risks associated with investments in
securities which carry lower ratings and in comparable unrated securities. Under
circumstances where the Series owns the majority of an issue, market and credit
risks may be greater. Moreover, from time to time, it may be more difficult to
value high-yield securities than more highly rated securities.
An economic downturn could severely affect the ability of highly leveraged
issuers to service their debt obligations or to repay their obligations upon
maturity. Furthermore, changes in economic conditions and other circumstances
are more likely to lead to a weakened capacity to make principal and interest
payments than in the case of higher grade bonds. In addition to the risk of
default, there are the related costs of recovery on defaulted issues. In
addition, the secondary market for high yield securities, which is concentrated
in relatively few market makers, may not be as liquid as the secondary market
for more highly rated securities and, from time to time, it may be more
difficult to value high yield securities than more highly rated securities, and
the judgment of the Board of Trustees and the investment adviser may play a
greater role in valuation because there is less reliable objective data
available. Under adverse market or economic conditions, the secondary market for
high yield securities could contract further, independent of any specific
adverse changes in the condition of a particular issuer. As a result, the
investment adviser could find it more difficult to sell these securities or may
be able to sell the securities only at prices lower than if such securities were
widely traded. Prices realized upon the sale of such lower rated or unrated
securities, under these circumstances, may be less than the prices used in
calculating the series' NAV. If the investment adviser becomes involved in
activities such as reorganizations of obligors of troubled investments held by
the series, this may prevent the series from disposing of the securities, due to
its possession of material, non-public information concerning the obligor.
Lower rated or unrated debt obligations also present risks based on payment
expectations. If an issuer calls the obligation for redemption, the series may
have to replace the security with a lower yielding security, resulting in a
decreased return for investors. If the series experiences unexpected net
redemptions, it may be forced to sell its higher rated securities, resulting in
a decline in the overall credit quality of the portfolio and increasing the
exposure of the series to the risks of high yield securities.
Since investors generally perceive that there are greater risks associated
with the medium to lower rated securities of the type in which the Series may
invest, the yields and prices of such securities may tend to fluctuate more than
those for higher rated securities. In the lower quality segments of the
fixed-income securities market, changes in perceptions of issuers'
creditworthiness tend to occur more frequently and in a more pronounced manner
than do changes in higher quality segments of the fixed-income securities which,
as a general rule, fluctuate in response to the general level of interest rates.
B-28
WHEN-ISSUED AND DELAYED-DELIVERY SECURITIES
Each series may purchase tax-exempt securities on a when-issued or
delayed-delivery basis. When tax-exempt securities are offered on a when-issued
or delayed-delivery basis, the payment obligation and the interest rate that
will be received on the tax-exempt securities are each fixed at the time the
buyer enters into the commitment, but delivery and payment for the securities
takes place at a later date. The purchase price for the security includes
interest accrued during the period between purchase and settlement and,
therefore, no interest accrues to the economic benefit of the series until
delivery and payment take place. Although a series will only purchase a
tax-exempt security on a when-issued or delayed-delivery basis with the
intention of actually acquiring the securities, the series may sell these
securities before the settlement date if it is deemed advisable.
Tax-exempt securities purchased on a when-issued or delayed-delivery basis
are subject to changes in market value based upon the public's perception of the
creditworthiness of the issuer and changes, real or anticipated, in the level of
interest rates (which will generally result in similar changes in value, I.E.,
experiencing both appreciation when interest rates decline and depreciation when
interest rates rise). Therefore, to the extent that a series remains
substantially fully invested at the same time that it has purchased securities
on a when-issued or delayed-delivery basis, the market value of the series'
assets will vary to a greater extent than otherwise. Purchasing a tax-exempt
security on a when-issued or delayed-delivery basis can involve a risk that the
yields available in the market when the delivery takes place may be higher than
those obtained on the security so purchased. As a result, the price that a
series is required to pay on the settlement date may exceed the market value of
the security on that date.
At the time a series makes the commitment to purchase a municipal obligation
on a when-issued or delayed-delivery basis, it will record the transaction and
thereafter reflect the value of the obligation, each day, in determining its
NAV. This value may fluctuate from day to day in the same manner as values of
municipal obligations otherwise held by the series. If a series chooses to
dispose of the right to acquire a when-issued security prior to its acquisition,
it could, as with the disposition of any other portfolio security, incur a gain
or loss due to market fluctuations.
A segregated account of each series consisting of cash or other liquid
assets equal to the amount of the when-issued and delayed delivery commitments
will be established and marked to market daily, with additional cash or other
assets added when necessary. When the time comes to pay for when-issued or
delayed delivery securities, the series will meet their respective obligations
from then available cash flow, sale of securities held in a separate account,
sale of other securities or, although they would not normally expect to do so,
from the sale of the when-issued securities themselves (which may have a value
greater or less than the series' payment obligations). The sale of securities to
meet such obligations carries with it a greater potential for the realization of
capital gain, which is not exempt from state or federal income taxes. See
"Taxes, Dividends and Distributions" below. If the seller defaults in the sale,
a series could fail to realize the gain, if any, that had occurred.
Each series (other than the money market series) may also purchase municipal
forward contracts. A municipal forward contract is a municipal security which is
purchased on a when-issued basis with delivery taking place up to five years
from the date of purchase. No interest will accrue on the security prior to the
delivery date. The investment adviser will monitor the liquidity, value, credit
quality and delivery of the security under the supervision of the Trustees. The
Fund has obtained a ruling from Florida authorities that such municipal forward
contracts qualify as assets exempt from the Florida intangibles tax.
INSURANCE
Each series may purchase secondary market insurance on securities. Secondary
market insurance would be reflected in the market value of the security
purchased and may enable a series to dispose of a defaulted obligation at a
price similar to that of comparable securities which are not in default.
Insurance is not a substitute for the basic credit of an issuer, but
supplements the existing credit and provides additional security therefor. While
insurance coverage for the securities held by a series reduces credit risk by
providing that the insurance company will make timely payment of principal and
interest if the issuer
B-29
defaults on its obligation to make such payment, it does not afford protection
against fluctuation in the price, that is, the market value, of the securities
caused by changes in interest rates and other factors, nor in turn against
fluctuations in the NAV of the shares of the series. The ratings of insured
municipal obligations depend, in substantial part, on the creditworthiness of
the insurer; thus their value will fluctuate largely on the basis of factors
relating to the insurer's ability to satisfy its obligations, as well as on
market factors generally. New issue insurance is obtained by the issuer or
underwriter upon issuance of a bond or note, and the insurance premiums are
reflected in the price of such bond or note. Insurance premiums with respect to
secondary insurance may, on the other hand, be paid by a series. Premiums paid
for secondary market insurance will be treated as capital costs, increasing the
cost basis of the investment and thereby reducing the effective yield of the
investment.
MUNICIPAL LEASE OBLIGATIONS
Each series may invest in municipal lease obligations. A municipal lease
obligation is a municipal security the interest on and principal of which is
payable out of lease payments made by the party leasing the facilities financed
by the issue. Typically, municipal lease obligations are issued by a state or
municipal financing authority to provide funds for the construction of
facilities (for example, schools, dormitories, office buildings or prisons) or
the acquisition of equipment. The facilities are typically used by the state or
municipality pursuant to a lease with a financing authority. Certain municipal
lease obligations may trade infrequently. Accordingly, the investment adviser
will monitor the liquidity of municipal lease obligations under the supervision
of the trustees. See "Illiquid Securities" below.
In addition to the risks relating to municipal obligations, municipal lease
obligations also expose each Series to abatement risk. Abatement risk is the
risk that the entity leasing the equipment or facility will not be required to
make lease payments because it does not have full use and possession of the
equipment or facility.
MUNICIPAL ASSET-BACKED SECURITIES
Each series may invest in municipal asset-backed securities. A municipal
asset-backed security is a debt or equity interest in a trust, special purpose
corporation or other pass-through structure, the interest or income on which
generally is eligible for exclusion from federal income taxation based upon the
income from an underlying municipal bond or pool of municipal bonds.
ZERO COUPON MUNICIPAL BONDS
A series may invest in zero coupon municipal bonds. Zero coupon municipal
bonds do not pay current interest but are purchased at a discount from their
face values. The discount approximates the total amount of interest the security
will accrue and compound over the period until maturity or the particular
interest payment date at a rate of interest reflecting the market rate of the
security at the time of issuance. Upon maturity, the holder is entitled to
receive the par value of the security. Zero coupon municipal bonds do not
require the periodic payment of interest. The effect of owning instruments which
do not make current interest payments is that a fixed yield is earned not only
on the original investment but also, in effect, on all discount accretion during
the life of the obligations. This implicit reinvestment of earnings at the same
rate eliminates the risk of being unable to invest distributions at a rate as
high as the implicit yield on the zero coupon bond, but at the same time
eliminates the holder's ability to reinvest at higher rates in the future. For
this reason, some of these securities may be subject to substantially greater
price fluctuations during periods of changing market interest rates than are
comparable securities which pay interest currently, which fluctuation increases
the longer the period to maturity. These investments benefit the issuer by
mitigating its need for cash to meet debt service, but also require a higher
rate of return to attract investors who are willing to defer receipt of cash.
Because a series accrues income which may not be represented by cash, the Fund
may be required to sell other securities in order to satisfy the distribution
requirements applicable to the series.
There are certain risks related to investing in zero coupon securities.
These securities generally are more sensitive to movements in interest rates and
are less liquid than comparably rated securities paying cash interest at regular
intervals. Consequently, such securities may be subject to greater fluctuation
in value. During a period of severe market conditions, the market for such
securities become even less liquid. In addition, as these securities do not pay
cash interest, a Series' investment exposure to these securities and their
risks, including credit risk, will increase during the time these securities are
held in a series' portfolio.
B-30
ILLIQUID SECURITIES
A series may hold up to 15% (10% in the case of the money market series) of
its net assets in illiquid securities. If a series were to exceed this limit,
the investment adviser would take reasonable measures to reduce a series'
holdings in illiquid securities to no more than 15% (10% in the case of the
money market series) of its net assets within seven days, including the sale of
such securities. Illiquid securities include repurchase agreements which have a
maturity of longer than seven days, securities with legal or contractual
restrictions on resale (restricted securities) and securities that are not
readily marketable. Securities, including municipal lease obligations, that have
a readily available market are not considered illiquid for purposes of this
limitation. The Subadviser will monitor the liquidity of such restricted
securities under the supervision of the Trustees. Repurchase agreements subject
to demand are deemed to have a maturity equal to the notice period.
Historically, illiquid securities have included securities subject to
contractual or legal restrictions on resale because they have not been
registered under the Securities Act of 1933, as amended (the Securities Act),
securities which are otherwise not readily marketable and repurchase agreements
having a maturity of longer than seven days. Securities which have not been
registered under the Securities Act are referred to as private placement or
restricted securities and are purchased directly from the issuer or in the
secondary market. Mutual funds do not typically hold a significant amount of
illiquid securities because of the potential for delays on resale and
uncertainty in valuation. Limitations on resale may have an adverse effect on
the marketability of portfolio securities and a mutual fund might be unable to
dispose of illiquid securities promptly or at reasonable prices and might
thereby experience difficulty satisfying redemptions within seven days. A mutual
fund might also have to register such restricted securities in order to dispose
of them resulting in additional expense and delay. Adverse market conditions
could impede such a public offering of securities.
In recent years, however, a large institutional market has developed for
certain securities that are not registered under the Securities Act including
repurchase agreements, commercial paper, foreign securities, municipal
securities, convertible securities and corporate bonds and notes. Institutional
investors depend on an efficient institutional market in which the unregistered
security can be readily resold or on an issuer's ability to honor a demand for
repayment. The fact that there are contractual or legal restrictions on resale
to the general public or to certain institutions may not be indicative of the
liquidity of such investments.
Rule 144A under the Securities Act allows for a broader institutional
trading market for securities otherwise subject to restriction on resale to the
general public. Rule 144A establishes a "safe harbor" from the registration
requirements of the Securities Act for resales of certain securities to
qualified institutional buyers. The investment adviser anticipates that the
market for certain restricted securities such as institutional commercial paper
and foreign securities will expand further as result of this regulation and the
development of automated systems for the trading, clearance and settlement of
unregistered securities of domestic and foreign issuers, such as the PORTAL
System sponsored by the National Association of Securities Dealers, Inc. (NASD).
A series' investment in Rule 144A securities could have the effect of increasing
illiquidity to the extent that qualified institutional buyers become, for a
time, uninterested in purchasing Rule 144A securities.
Securities of financially and operationally troubled obligors (distressed
securities) are less liquid and are more volatile than securities of companies
not experiencing financial difficulties. A series might have to sell portfolio
securities at a disadvantageous time or at a disadvantageous price in order to
maintain no more than 15% (or 10%) of its net assets in illiquid securities.
Municipal lease obligations will not be considered illiquid for purposes of
the series' limitation on illiquid securities provided the investment adviser
determines that there is a readily available market for such securities. In
reaching liquidity decisions, the investment adviser will consider, INTER ALIA,
the following factors: (1) the frequency of trades and quotes for the security,
(2) the number of dealers wishing to purchase or sell the security and the
number of other potential purchasers, (3) dealer undertakings to make a market
in the security, and (4) the nature of the security and the nature of the
marketplace trades (E.G., the time needed to dispose of the security, the method
of soliciting offers and the mechanics of the transfer). With respect to
municipal lease obligations, the investment adviser also considers: (1) the
willingness of the municipality to continue, annually or biannually, to
appropriate funds for payment of the lease, (2) the general credit quality of
the municipality and the essentiality to the municipality of the property
covered by the lease, (3) in the case of unrated
B-31
municipal lease obligations, an analysis of factors similar to that performed by
NRSROs in evaluating the credit quality of a municipal lease obligation,
including (i) whether the lease can be cancelled, (ii) if applicable, what
assurance there is that the assets represented by the lease can be sold,
(iii) the strength of the lessee's general credit (E.G., its debt,
administrative, economic and financial characteristics), (iv) the likelihood
that the municipality will discontinue appropriating funding for the leased
property because the property is no longer deemed essential to the operations of
the municipality (E.G., the potential for an event of non-appropriation) and
(v) the legal recourse in the event of failure to appropriate and (4) any other
factors unique to municipal lease obligations as determined by the investment
adviser.
REPURCHASE AGREEMENTS
Each series may on occasion enter into repurchase agreements, whereby the
seller of a security agrees to repurchase that security from the series at a
mutually agreed-upon time and price. The period of maturity is usually quite
short, possibly overnight or a few days, although it may extend over a number of
months. The resale price is in excess of the purchase price, reflecting an
agreed-upon rate of return effective for the period of time the series' money is
invested in the repurchase agreement. The series' repurchase agreements will at
all times be fully collateralized in an amount at least equal to the resale
price. The instruments held as collateral are valued daily and, if the value of
the instruments declines, the series will require additional collateral. If the
seller defaults and the value of the collateral securing the repurchase
agreement declines, the series may incur a loss.
The series participate in a joint repurchase account with other investment
companies managed by Prudential Investments Fund Management LLC (PIFM) pursuant
to an order of the Commission. On a daily basis, any uninvested cash balances of
the series may be aggregated with those of such investment companies and
invested in one or more repurchase agreements. Each fund or series participates
in the income earned or accrued in the joint account based on the percentage of
its investment.
BORROWING
Each series may borrow an amount equal to no more than 33 1/3% of the value
of its total assets (calculated when the loan is made) for temporary,
extraordinary or emergency purposes or for the clearance of transactions. Each
series may pledge up to 33 1/3% of the value of its total assets to secure these
borrowings. If a series' asset coverage for borrowings falls below 300%, the
series will take prompt action to reduce its borrowings as required by
applicable law. If the 300% asset coverage should decline as a result of market
fluctuations or other reasons, the series may be required to sell portfolio
securities to reduce the debt and restore the 300% asset coverage, even though
it may be disadvantageous from an investment standpoint to sell securities at
that time. A series will not purchase securities if its borrowings exceed 5% of
its assets.
Except as described above and under "Investment Restrictions," the foregoing
investment policies are not fundamental and may be changed by the Trustees of
the Fund without the vote of a majority of its outstanding voting securities.
(d) TEMPORARY DEFENSIVE STRATEGY
When the investment adviser believes that market, economic or political
conditions warrant a temporary defensive investment posture or when necessary to
meet large redemptions, a series may hold more than 20% of its net assets in
cash, cash equivalents or investment-grade taxable obligations. The money market
series may also invest in investment-grade taxable obligations, except that
their debt, if rated, will be of "eligible quality," also defined under "(b) and
(c) Investment Strategies, Policies and Risks." Investing heavily in cash, cash
equivalents or investment-grade taxable obligations limits our ability to
achieve each series' investment objective, but can help to preserve each series'
assets.
(e) PORTFOLIO TURNOVER
Portfolio transactions will be undertaken principally to accomplish the
objective of the series in relation to anticipated movements in the general
level of interest rates but each such series may also engage in short-term
trading consistent with its objective. Securities may be sold in anticipation of
a market decline (a rise in interest rates) or purchased in anticipation of a
market rise (a decline in interest rates) and later sold. In addition, a
security may be sold and another purchased at approximately the same time to
take advantage of what the
B-32
investment adviser believes to be a temporary disparity in the normal yield
relationship between the two securities. Yield disparities may occur for reasons
not directly related to the investment quality of particular issues or the
general movement of interest rates, due to such factors as changes in the
overall demand for or supply of various types of tax-exempt securities or
changes in the investment objectives of investors.
The non-money market series series' investment policies may lead to frequent
changes in investments, particularly in periods of rapidly fluctuating interest
rates. A change in securities held by a series is known as portfolio turnover
and may involve the payment by the series of dealer mark-ups or underwriting
commissions, and other transaction costs, on the sale of securities, as well as
on the reinvestment of the proceeds in other securities. Portfolio turnover rate
for a fiscal year is the ratio of the lesser of purchases or sales of portfolio
securities to the monthly average of the value of portfolio
securities--excluding securities whose maturities at acquisition were one year
or less. A 100% turnover rate would occur, for example, if all of the securities
held in a series' portfolio were sold and replaced within one year. In addition,
high portfolio turnover may also mean that a proportionately greater amount of
distributions to interest holders will be taxed as ordinary income rather than
long-term capital gains compared to investment companies with lower portfolio
turnover. For the fiscal year ended August 31, 1999 and the fiscal year ended
August 31, 2000, the portfolio turnover rates for the non-money market series
were as follows:
AUGUST 31, AUGUST 31,
SERIES 1999 2000
- ------ ---------- ----------
Florida........................................... 13% 41%
Massachusetts..................................... 24% 34%
New Jersey........................................ 15% 28%
New York.......................................... 11% 32%
North Carolina.................................... 15% 22%
Ohio.............................................. 45% 26%
Pennsylvania...................................... 23% 21%
The series' portfolio turnover rate will not be a limiting factor when the
series deem it desirable to sell or purchase securities. See "Brokerage
Allocation and Other Practices" and "Taxes, Dividends and Distributions" below.
SEGREGATED ACCOUNTS
When each series is required to segregate assets in connection with certain
hedging transactions, it will mark cash or other liquid assets as segregated
with the Fund's Custodian. "Liquid Assets" means cash, U.S. Government
securities, debt obligations or other eligible liquid, unencumbered assets
marked-to-market daily.
INVESTMENT RESTRICTIONS
The following restrictions are fundamental policies. Fundamental policies
are those which cannot be changed without the approval of the holders of a
majority of the outstanding voting securities of a series. A "majority of the
outstanding voting securities" of a series, when used in this Statement of
Additional Information, means the lesser of (i) 67% of the voting shares
represented at a meeting at which more than 50% of the outstanding voting shares
are present in person or represented by proxy or (ii) more than 50% of the
outstanding voting shares.
The Fund may not:
1. Purchase securities on margin, but the Fund may obtain such
short-term credits as may be necessary for the clearance of transactions.
For the purpose of this restriction, the deposit or payment by the Fund
(except with respect to the Connecticut Money Market Series, the
Massachusetts Money Market Series, the New York Money Market Series and the
New Jersey Money Market Series) of initial or maintenance margin in
connection with futures contracts or related options transactions is not
considered the purchase of a security on margin.
2. Make short sales of securities or maintain a short position.
B-33
3. Issue senior securities, borrow money or pledge its assets, except
that the Fund may on behalf of a series borrow up to 33 1/3% of the value of
its total assets (calculated when the loan is made) for temporary,
extraordinary or emergency purposes or for the clearance of transactions.
The Fund on behalf of a series may pledge up to 33 1/3% of the value of its
total assets to secure such borrowings. A series will not purchase portfolio
securities if its borrowings exceed 5% of the assets. For purposes of this
restriction, the preference as to shares of a series in liquidation and as
to dividends over all other series of the Fund with respect to assets
specifically allocated to that series, the purchase and sale of futures
contracts and related options, collateral arrangements with respect to
margin for futures contracts, the writing of related options (except with
respect to the Connecticut Money Market Series, the Massachusetts Money
Market Series, the New York Money Market Series and the New Jersey Money
Market Series) and obligations of the Fund to Trustees pursuant to deferred
compensation arrangements, are not deemed to be a pledge of assets or the
issuance of a senior security.
4. Purchase any security if as a result, with respect to 75% of a
series' total assets (except with respect to the Connecticut Money Market
Series, the Florida Series, the Massachusetts Money Market Series and the
New Jersey Money Market Series), more than 5% of the total assets of any
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 either by the U.S. government or its agencies or
instrumentalities).
5. Buy or sell commodities or commodity contracts, or real estate or
interests in real estate, although it may purchase and sell financial
futures contracts and related options (except with respect to the
Connecticut Money Market Series, the Massachusetts Money Market Series, the
New York Money Market Series and the New Jersey Money Market Series),
securities which are secured by real estate and securities of companies
which invest or deal in real estate.
6. Act as underwriter except to the extent that, in connection with the
disposition of portfolio securities, it may be deemed to be an underwriter
under certain federal securities laws.
7. Invest in interests in oil, gas or other mineral exploration or
development programs.
8. Make loans, except through repurchase agreements.
For purposes of investment limitation number 4, the New York Money Market
Series' compliance with Investment Company Act Rule 2a-7's diversification
requirements is deemed to constitute compliance with the stated diversification
restriction, which reflects the requirements of Section 5(b)(1) of the
Investment Company Act.
Whenever any fundamental investment policy or investment restriction states
a maximum percentage of the Fund's assets, it is intended that if the percentage
limitation is met at the time the investment is made, a later change in
percentage resulting from changing total or net asset values will not be
considered a violation of such policy. However, in the event that the Fund's
asset coverage for borrowings falls below 300%, the Fund will take prompt action
to reduce its borrowings, as required by applicable law.
B-34
MANAGEMENT OF THE FUND
PRINCIPAL OCCUPATION
NAME AND ADDRESS** (AGE) POSITION WITH FUND DURING PAST FIVE YEARS
------------------------ ------------------- ----------------------
Eugene C. Dorsey (73)............... Trustee Retired President, Chief Executive Officer and
Trustee of the Gannett Foundation (now Freedom
Forum); former Publisher of four Gannett
newspapers and Vice President of Gannett Co.,
Inc.; past Chairman of Independent Sector,
Washington, D.C. (largest national coalition
of philanthropic organizations); formerly
Chairman of the American Council for the
Arts; former Director of the Advisory Board
of Chase Manhattan Bank of Rochester and
Trustee of several funds within the
Prudential Mutual Funds complex.
Delayne Dedrick Gold (62)........... Trustee Marketing and Management Consultant and Trustee
of several funds within the Prudential Mutual
Funds complex.
*Robert F. Gunia (53)................ Vice President and Executive Vice President and Chief
Trustee Administrative Officer (since June 1999) of
Prudential Investments; Executive Vice
President and Treasurer (since December 1996)
of PIFM; President (since April 1999) of
Prudential Investment Management Services LLC
(PIMS); Corporate Vice President (since
September 1997) of the Prudential Insurance
Company of America (Prudential); formerly
Senior Vice President (March 1987-May 1999)
of Prudential Securities Incorporated;
formerly Chief Administrative Officer (July
1989-September 1996), Director (January
1989-September 1996) and Executive Vice
President, Treasurer and Chief Financial
Officer (June 1987-December 1996) of
Prudential Mutual Fund Management, Inc.
(PMF); Vice President and Director (since May
1989) of the Asia Pacific Fund, Inc. and
Director or Trustee of substantially all
funds within the Prudential Mutual Funds
complex.
Thomas T. Mooney (58)............... Trustee President of the Greater Rochester Metro
Chamber of Commerce; former Rochester City
Manager; former Deputy Monroe County
Executive; Trustee of Center for Governmental
Research, Inc.; Director of Blue Cross of
Rochester, Monroe County Water Authority,
Executive Service Corps of Rochester and
Trustee of several funds within the
Prudential Mutual Funds complex.
Stephen P. Munn (58)................ Trustee Chairman, Director and President and former
Chief Executive Officer of Carlisle Companies
Incorporated (manufacturer of industrial
products) and Trustee of several funds within
the Prudential Mutual Funds complex.
B-35
PRINCIPAL OCCUPATION
NAME AND ADDRESS** (AGE) POSITION WITH FUND DURING PAST FIVE YEARS
------------------------ ------------------- ----------------------
*David R. Odenath, Jr. (43).......... Vice President and Officer in Charge, President, Chief Executive
Trustee Officer and Chief Operating Officer (since June
1999) of PIFM; Senior Vice President (since
June 1999) of Prudential; formerly Senior
Vice President (August 1993-May 1999) of
PaineWebber Group, Inc. and Trustee of
substantially all funds within the Prudential
Mutual Funds complex.
Richard A. Redeker (57)............. Trustee Former employee of Prudential Investments
(October 1996-December 1998); prior thereto,
President, Chief Executive Officer and
Director (October 1993-September 1996) of
PMF; Executive Vice President, Director and
Member of the Operating Committee (October
1993-September 1996) of Prudential
Securities; Director (October 1993-September
1996) of Prudential Securities Group, Inc.;
Executive Vice President of The Prudential
Investment Corporation (January
1994-September 1996); Director (January
1994-September 1996) of Prudential Mutual
Fund Distributors, Inc. and Prudential Mutual
Fund Services, Inc. and Trustee of several
funds within the Prudential Mutual Funds
complex.
*John R. Strangfeld, Jr. (46)........ President and Chief Executive Officer of Prudential
Trustee Securities Incorporated (since October 2000);
formerly, Chief Executive Officer, Chairman,
President and Director (January
1990-September 2000) of The Prudential
Investment Corporation; Executive Vice
President (since February 1998) of Prudential
Global Asset Management; various positions to
Chief Executive Officer (November
1994-December 1998) of the Private Asset
Management Group of Prudential (PAMG) and
Director or Trustee of all funds within the
Prudential Mutual Funds complex.
Nancy H. Teeters (70)............... Trustee Economist; former Vice President and Chief
Economist, International Business Machines
Corporation; former Director of Inland Steel
Industries (July 1991-1999) and Trustee of
several funds within the Prudential Mutual
Funds complex.
Louis A. Weil, III (59)............. Trustee Former Chairman (January 1999-July 2000),
President and Chief Executive Officer (January
1996-July 2000) and Director (since September
1991) of Central Newspapers, Inc; former
Chairman of the Board (January 1996-July
2000), Publisher and Chief Executive Officer
(August 1991-December 1995) of Phoenix
Newspapers, Inc. and Trustee of several funds
within the Prudential Mutual Funds complex.
B-36
PRINCIPAL OCCUPATION
NAME AND ADDRESS** (AGE) POSITION WITH FUND DURING PAST FIVE YEARS
------------------------ ------------------- ----------------------
Grace C. Torres (40)................ Treasurer and First Vice President (since December 1996) of
Principal PIFM; former First Vice President (March
Financial and 1993-May 1999) of Prudential Securities;
Accounting First Vice President (March 1994-September
Officer 1996) of Prudential Mutual Fund Management,
Inc.
Deborah A. Docs (42)................ Secretary Vice President (since December 1996) of PIFM;
former Vice President and Associate General
Counsel (June 1991-September 1996) of
Prudential Securities; Vice President and
Associate General Counsel (June
1991-September 1996) of PMF.
William V. Healey (46).............. Assistant Vice President and Associate General Counsel
Secretary (since 1998) of Prudential; Chief Legal Officer
(since August 1998) of Prudential
Investments; Director (since June 1999) of
ICI Mutual Insurance Company; prior to August
1998, Associate General Counsel of The
Dreyfus Corporation ("Dreyfus"), a subsidiary
of Mellon Bank, N.A. ("Mellon Bank"), and an
officer and/or director of various affiliates
of Mellon Bank and Dreyfus.
- ------------------------
*"Interested" Trustee, as defined in the Investment Company Act, by reason of
his or her affiliation with Prudential Securities, Incorporated (Prudential
Securities), Prudential or PIFM.
**The address for each of the above persons is c/o: Prudential Investments Fund
Management LLC, Gateway Center Three, 100 Mulberry Street, 9th Floor, Newark,
New Jersey 07102-4077.
Trustees and officers of the Fund are also Trustees, directors and officers
of some or all of the other investment companies distributed by Prudential
Securities or Prudential Investment Management Services LLC.
The officers conduct and supervise the daily business operations of the
Fund, while the Trustees, in addition to their functions set forth under
"Investment Advisory and Other Services-Manager and Investment Adviser" and
"Principal Underwriter, Distributor and Rule 12b-1 Plans," review such actions
and decide on general policy.
The Trustees have adopted a retirement policy which calls for the retirement
of Trustees on December 31 of the year in which they reach the age of 75.
The Fund pays each of its Trustees who is not an affiliated person of the
Manager or the Fund's investment adviser annual compensation of $6,800, in
addition to certain out-of-pocket expenses. The amount of annual compensation
paid to each Trustee may change as a result of the introduction of additional
funds upon which the Trustees will be asked to serve.
Trustees may receive their Trustees' fees pursuant to a deferred fee
agreement with the Fund. Under the terms of such agreement, the Fund accrues
daily the amount of Trustees' fees which accrue interest at a rate equivalent to
the prevailing rate applicable to 90-day U.S. Treasury Bills at the beginning of
each calendar quarter or, pursuant to a Commission exemptive order, at the daily
rate of return of any Prudential mutual fund. Payment of the interest so accrued
is also deferred and accruals become payable at the option of the Trustee. The
Fund's obligation to make payments of deferred Trustees' fees, together with
interest thereon, is a general obligation of the Fund.
Pursuant to the terms of the Management Agreement with the Fund, the Manager
pays all compensation of officers and employees of the Fund as well as the fees
and expenses of all Trustees of the Fund who are affiliated persons of the
Manager.
B-37
The following table sets forth the aggregate compensation paid by the Fund
to the Trustees who are not affiliated with the Manager for the fiscal year
ended August 31, 2000 and the aggregate compensation paid to such Trustees for
service on the Fund's Board and the Boards of all other investment companies
managed by PIFM (Fund Complex) for the calendar year ended December 31, 1999.
COMPENSATION TABLE
PENSION OR
RETIREMENT TOTAL COMPENSATION
AGGREGATE BENEFITS ACCRUED ESTIMATED ANNUAL FROM FUND AND FUND
COMPENSATION AS PART OF FUND BENEFITS UPON COMPLEX PAID TO
NAME AND POSITION FROM FUND EXPENSES RETIREMENT TRUSTEES
- ----------------- ------------ ---------------- ---------------- ------------------
Edward D. Beach, Trustee (a) $6,800 None N/A $142,500(43/70)*
Eugene C. Dorsey, Trustee** $6,800 None N/A $ 81,000(17/48)*
Delayne Dedrick Gold, Trustee $7,025 None N/A $144,500(43/70)*
Robert F. Gunia, Trustee and Vice
President+ -- -- -- --
Thomas T. Mooney, Trustee** $6,800 None N/A $129,500(35/75)*
Stephen P. Munn, Trustee $1,925 None N/A $ 62,250(29/53)*
Thomas H. O'Brien, Trustee (a) $6,800 None N/A $ 47,500(11/26)*
David R. Odenath, Jr., Trustee and
Vice President+ -- -- -- --
Richard A. Redeker, Trustee $6,800 None N/A $ 95,000(19/53)*
John R. Strangfeld, Jr., Trustee and
President+ -- -- -- --
Nancy H. Teeters, Trustee $6,800 None N/A $ 97,000(25/43)*
Louis A. Weil, III, Trustee $6,800 None N/A $ 96,000(29/53)*
- ------------------------
* Indicates number of funds/portfolios in Fund Complex (including the Fund) to
which aggregate compensation relates.
** Total aggregate compensation from all of the Funds in the Fund Complex for
the calendar year ended December 31, 1999, includes amounts deferred at the
election of Trustees under the Fund's deferred compensation plans. Including
accrued interest, total compensation amounted to $103,573 and $135,101 for
Eugene C. Dorsey and Thomas T. Mooney, respectively.
+ Trustees who are interested do not receive compensation from the Fund or any
fund in the Fund Complex.
(a) Former Trustee, retired on December 31, 1999.
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
Trustees of the Fund are eligible to purchase Class Z shares of each series,
if any, which are sold without an initial sales charge or contingent deferred
sales charge.
As of October 6, 2000, the Trustees and officers of the Fund, as a group,
owned beneficially less than 1% of the outstanding shares of beneficial interest
of each class of each series of the Fund.
As of October 6, 2000, the beneficial owners, directly or indirectly, of
more than 5% of the outstanding shares of any class of beneficial interest of a
series were those listed in Appendix III.
B-38
As of October 6, 2000, Prudential Securities was the record holder for other
beneficial owners of the following shares of the series, representing the
percentage shown of the outstanding shares of each such series:
SERIES CLASS A CLASS B CLASS C CLASS Z
- ------ -------------------- -------------------- ------------------- -------------------
Florida.............. 4,712,578 (69.84)% 1,662,693 (75.42)% 443,153 (85.46)% 45,673 (99.94)%
Massachusetts........ 1,231,134 (49.86)% 366,618 (54.29)% 21,303 (76.97)% 6,658 (99.81)%
New Jersey........... 8,433,161 (70.90)% 3,120,103 (74.16)% 181,019 (89.16)% 12,123 (99.86)%
New York............. 9,532,487 (59.36)% 2,566,283 (64.56)% 143,568 (86.67)% 35,166 (89.87)%
North Carolina....... 1,799,485 (67.32)% 585,561 (74.71)% 2,529 (91.97)% N/A
Ohio................. 1,932,884 (48.16)% 545,463 (46.57)% 12,933 (81.68)% N/A
Pennsylvania......... 4,815,585 (42.57)% 2,335,309 (47.83)% 36,284 (77.11)% N/A
As of October 6, 2000, Prudential Securities was the record holder for other
beneficial owners of 83,779,082 shares (or 99.65% of those outstanding) of the
Connecticut Money Market Series, 104,241,586 shares (or 99.87% of those
outstanding) of the Massachusetts Money Market Series, 188,715,192 shares (or
98.93% of those outstanding) of the New Jersey Money Market Series and
359,617,920 shares (or 99.69% of those outstanding) of the New York Money Market
Series. In the event of any meetings of shareholders, Prudential Securities will
forward, or cause the forwarding of, proxy materials to the beneficial owners
for which it is the record holder.
INVESTMENT ADVISORY AND OTHER SERVICES
(a) MANAGER AND INVESTMENT ADVISER
The manager of the Fund is Prudential Investments Fund Management LLC (PIFM
or the Manager), Gateway Center Three, 100 Mulberry Street, Newark, New Jersey
07102-4077. PIFM serves as manager to all of the other open-end management
investment companies that, together with the Fund, comprise the Prudential
mutual funds. See "How the Series is Managed--Manager" in the Prospectus of each
series. As of September 30, 2000, PIFM managed and/or administered open-end and
closed-end management investment companies with assets of approximately $75.1.
According to the Investment Company Institute, as of June 30, 2000, the
Prudential mutual funds were the 22nd largest family of mutual funds in the
United States.
PIFM is a subsidiary of Prudential Securities and The Prudential Insurance
Company of America (Prudential). Prudential Mutual Fund Services LLC (PMFS or
the Transfer Agent), a wholly-owned subsidiary of PIFM, serves as the Transfer
Agent and dividend distribution agent for the Prudential mutual funds and, in
addition, provides customer service, recordkeeping and management and
administration services to qualified plans.
Pursuant to the Management Agreement with the Fund (the Management
Agreement), PIFM, subject to the supervision of the Fund's Trustees and in
conformity with the stated policies of the Fund, manages both the investment
operations of each series and the composition of each series' portfolio,
including the purchase, retention, disposition and loan of securities. In
connection therewith, PIFM is obligated to keep certain books and records of the
Fund. PIFM has hired the Subadviser to provide subadvisory services to the Fund.
PIFM also administers the Fund's business affairs and, in connection therewith,
furnishes the Fund with office facilities, together with those ordinary clerical
and bookkeeping services which are not being furnished by State Street Bank and
Trust Company (the Custodian), the Fund's custodian, and PMFS, the Fund's
transfer and dividend disbursing agent. The management services of PIFM for the
Fund are not exclusive under the terms of the Management Agreement and PIFM is
free to, and does, render management services to others.
For its services, PIFM receives, pursuant to the Management Agreement, a fee
at an annual rate of .50 of 1% of the average daily net assets of each series.
The fee is computed daily and payable monthly. The Management Agreement also
provides that, in the event the expenses of the Fund (including the fees of
PIFM, but excluding interest, taxes, brokerage commissions, distribution fees
and litigation and indemnification expenses and other extraordinary expenses not
incurred in the ordinary course of the Fund's business) for any fiscal year
exceed
B-39
the lowest applicable annual expense limitation established and enforced
pursuant to the statutes or regulations of any jurisdiction in which the Fund's
shares are qualified for offer and sale, the compensation due to PIFM will be
reduced by the amount of such excess. Reductions in excess of the total
compensation payable to PIFM will be paid by PIFM to the Fund. Currently, the
Fund believes there are no such expense limitations.
In connection with its management of the business affairs of the Fund, PIFM
bears the following expenses:
(a) the salaries and expenses of all of its and the Fund's personnel except
the fees and expenses of Trustees who are not affiliated persons of PIFM or the
Fund's investment adviser;
(b) all expenses incurred by PIFM or by the Fund in connection with managing
the ordinary course of the Fund's business, other than those assumed by the Fund
as described below; and
(c) the costs and expenses payable to The Prudential Investment Corporation
(PIC, the Subadviser or the investment adviser), pursuant to the subadvisory
agreement between PIFM and PIC (the Subadvisory Agreement).
Under the terms of the Management Agreement, the Fund is responsible for the
payment of the following expenses: (a) the fees payable to the Manager; (b) the
fees and expenses of Trustees who are not affiliated persons of the Manager or
the Fund's investment adviser; (c) the fees and certain expenses of the Fund's
Custodian and Transfer and Dividend Disbursing Agent, including the cost of
providing records to the Manager in connection with its obligation of
maintaining required records of the Fund and of pricing the Fund's shares;
(d) the charges and expenses of 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 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 communication 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 also provides that PIFM will not be liable for any
error of judgment or for any loss suffered by the Fund in connection with the
matters to which the Management Agreement relates, except a loss resulting from
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.
B-40
The amount of the management fee paid by each series of the Fund to PIFM for
the fiscal years ended August 31, 1998, 1999 and 2000 was as follows:
1998 1999 2000
----------------- ----------------- -----------------
MANAGEMENT FEES MANAGEMENT FEES MANAGEMENT FEES
----------------- ----------------- -----------------
PAID PAID PAID
----------------- ----------------- -----------------
Municipal Series Fund:
Connecticut Money Market Series........................... $ 423,998 $ 438,720 $ 410,257
Florida Series............................................ 596,439 586,541 502,329
Massachusetts Series...................................... 231,959 228,953 185,314
Massachusetts Money Market Series......................... 277,698 293,272 339,393
New Jersey Series......................................... 1,184,566 1,118,938 931,841
New Jersey Money Market Series............................ 993,236 1,047,394 1,023,487
New York Series........................................... 1,401,539 1,363,196 1,201,617
New York Money Market Series.............................. 1,867,472 1,878,249 1,845,085
North Carolina Series..................................... 265,541 251,728 205,793
Ohio Series............................................... 445,394 407,892 329,819
Pennsylvania Series....................................... 1,110,102 1,051,974 875,729
PIFM has entered into the Subadvisory Agreement with the Subadviser, a
wholly-owned subsidiary of Prudential. The Subadvisory Agreement provides that
the Subadviser will furnish investment advisory services in connection with the
management of the Fund. In connection therewith, the Subadviser is obligated to
keep certain books and records of the Fund. Under the Subadvisory Agreement, the
Subadviser, subject to the supervision of PIFM, is responsible for managing the
assets of each series in accordance with its investment objectives and policies.
The Subadviser determines what securities and other instruments are purchased
and sold for the series and is responsible for obtaining and evaluating
financial data relevant to the series. PIFM continues to have responsibility for
all investment advisory services pursuant to the Management Agreement and
supervises the Subadviser's performance of such services. The Subadviser was
reimbursed by PIFM for the reasonable costs and expenses it incurred in
furnishing those services. Effective January 1, 2000, the Subadviser is paid by
PIFM at an annual rate of .250 of 1.00% of the average daily net assets of each
series.
The Subadvisory Agreement provides that it will terminate in the event of
its assignment (as defined in the Investment Company Act) or upon the
termination of the Management Agreement. The Subadvisory Agreement may be
terminated by the Fund, PIFM or the Subadviser upon not more than 60 days', nor
less than 30 days', written notice. The Subadvisory Agreement provides that it
will continue in effect for a period of more than two years from its execution
only so long as such continuance is specifically approved at least annually in
accordance with the requirements of the Investment Company Act.
The Subadviser maintains a credit unit which provides credit analysis and
research on both tax-exempt and taxable fixed-income securities. The portfolio
managers routinely consult with the credit unit in managing the Fund's
portfolios. The credit unit reviews on an ongoing basis issuers of tax-exempt
and taxable fixed-income obligations, including prospective purchases and
portfolio holdings of the Fund. Credit analysts have broad access to research
and financial reports, data retrieval services and industry analysts.
With respect to tax-exempt issuers, credit analysts review financial and
operating statements supplied by state and local governments and other issuers
of municipal securities to evaluate revenue projections and the financial
soundness of municipal issuers. They study the impact of economic and political
developments on state and local governments, evaluate industry sectors and meet
periodically with public officials and other representatives of state and local
governments and other tax-exempt issuers to discuss such matters as budget
projections, debt policy, the strength of the regional economy and, in the case
of revenue bonds, the demand for facilities. They also make site inspections to
review specified projects and to evaluate the progress of construction or the
operation of a facility.
With respect to the non-money market series, Prudential Investment's Fixed
Income Group includes the following sector team which may contribute towards
security selection in addition to the sector team described in the relevant
prospectus (assets under management are as of June 30, 2000).
B-41
MONEY MARKETS
ASSETS UNDER MANAGEMENT: $33.9 billion.
TEAM LEADER: Joseph Tully. GENERAL INVESTMENT EXPERIENCE: 16 years.
PORTFOLIO MANAGERS: 9. AVERAGE GENERAL INVESTMENT EXPERIENCE: 10 years,
which includes team members with significant mutual fund experience.
SECTOR: High-quality, short-term securities, including both taxable and
tax-exempt instruments.
INVESTMENT STRATEGY: Focus is on safety of principal, liquidity and
controlled risk.
CODE OF ETHICS
The Board of Trustees of the Fund has adopted a Code of Ethics. In addition,
the Manager, Subadviser and Distributor have each adopted a Code of Ethics (the
"Codes"). The Codes permit personnel subject to the Codes to invest in
securities, including securities that may be purchased or held by the Fund.
However, the protective provisions of the Codes prohibit certain investments and
limit such personnel from making investments during periods when the Fund is
making such investments. The Codes are on public file with, and are available
from, the Commission.
(b) PRINCIPAL UNDERWRITER, DISTRIBUTOR AND RULE 12b-1 PLANS
Prudential Investment Management Services LLC (PIMS or the Distributor),
Gateway Center Three, 100 Mulberry Street, Newark, New Jersey 07102-4077, acts
as the distributor of the shares of the Fund. The Distributor is a subsidiary of
Prudential.
Pursuant to separate Distribution and Service Plans (the Class A Plan, the
Class B Plan and the Class C Plan, collectively, the Plans) adopted by the Fund
under Rule 12b-1 under the Investment Company Act and separate distribution
agreements for the money market series and the other series (the Distribution
Agreements), the Distributor incurs the expenses of distributing shares of the
money market series and the Fund's Class A, Class B and Class C shares. The
Distributor also incurs the expenses of distributing the Fund's Class Z shares
under the Distribution Agreement, none of these expenses of distribution are
reimbursed by or paid for by the Fund. See "How the Series is
Managed--Distributor" in each series' Prospectus.
The expenses incurred under the Plans include commissions and account
servicing fees paid to or on account of brokers or financial institutions that
have entered into agreements with the Distributor, advertising expenses, the
cost of printing and mailing prospectuses to potential investors and indirect
and overhead costs of the Distributor associated with the sale of Fund shares
including lease, utility, communications and sales promotion expenses.
Under the Plans, the Fund is obligated to pay distribution and/or service
fees to the Distributor as compensation for its distribution and service
activities, not as reimbursement for specific expenses incurred. If the
Distributor's expenses exceed its distribution and service fees, the Fund will
not be obligated to pay any additional expenses. If the Distributor's expenses
are less than such distribution and service fees, it will retain its full fees
and realize a profit.
The distribution and/or service fees may also be used by the Distributor to
compensate on a continuing basis brokers in consideration for the distribution,
marketing, administrative and other services and activities provided by brokers
with respect to the promotion of the sale of the Fund's shares and the
maintenance of related shareholder accounts.
CLASS A PLAN. Under the Class A Plan, the Fund may pay the Distributor for
its distribution-related activities with respect to Class A shares at an annual
rate of up to .30 of 1% of the average daily net assets of the Class A shares of
each series. The Class A Plan provides that (1) up to .25 of 1% of the average
daily net assets of the Class A shares of each series may be used to pay for
personal service and/or the maintenance of shareholder accounts (service fee)
and (2) total distribution fees (including the service fee of .25 of 1%) may not
exceed .30 of 1% of each series. The Distributor has contractually agreed to
limit its distribution-related fees payable under the Class A Plan to .25 of 1%
of the average daily net assets of the Class A shares of the series for the
fiscal year ending August 31, 2001. [CONFIRM] Fee waivers will increase the
Series' total return.
B-42
CLASS A PLAN. For the fiscal year ended August 31, 2000, the Distributor
received the following payments from the Fund on behalf of the applicable series
under the Class A Plan:
SERIES
- ------
Florida..................................................... $177,706
Massachusetts............................................... 66,378
New Jersey.................................................. 306,432
New York.................................................... 445,757
North Carolina.............................................. 71,587
Ohio........................................................ 114,178
Pennsylvania................................................ 265,453
These amounts were primarily expended for payments of account servicing fees
to financial advisers and other persons who sell Class A shares. [CONFIRM] For
the fiscal year ended August 31, 2000, the Distributor spent the following
approximate amounts in distributing the respective series' Class A shares:
SERIES
- ------
Florida..................................................... $169,200
Massachusetts............................................... 64,500
New Jersey.................................................. 297,200
New York.................................................... 419,096
North Carolina.............................................. 69,700
Ohio........................................................ 111,800
Pennsylvania................................................ 257,300
For the fiscal year ended August 31, 2000, the Distributor also received
approximate initial sales charges attributable to Class A shares as follows:
SERIES
- ------
Florida..................................................... $ 16,200
Massachusetts............................................... 1,100
New Jersey.................................................. 9,000
New York.................................................... 9,800
North Carolina.............................................. 1,800
Ohio........................................................ 5,100
Pennsylvania................................................ 10,800
CLASS B AND CLASS C PLANS. Under the Class B and Class C Plans, the Fund
may pay the Distributor for its distribution-related activities with respect to
Class B and Class C shares at an annual rate of up to .50 of 1% and up to 1% of
the average daily net asset of the Class B and Class C shares, respectively, of
each series. The Class B Plan provides for the payment to the Distributor of
(1) an asset-based sales charge of up to .50 of 1% of the average daily net
assets of the Class B shares of each series, and (2) a service fee of up to .25
of 1% of the average daily net assets of the Class B shares of each series,
provided that the total distribution-related fee does not exceed .50 of 1% of
each series. The Class C Plan provides for the payment to the Distributor of (1)
an asset-based sales charge of up to .75 of 1% of the average daily net assets
of the Class C shares of each series, and (2) a service fee of up to .25 of 1%
of the average daily net assets of the Class C shares of each series. The
service fee is used to pay for personal service and/or the maintenance of
shareholder accounts. The Distributor also receives contingent deferred sales
charges from certain redeeming shareholders and, with respect to Class C shares,
initial sales charges. The Distributor has contractually agreed to limit its
distribution-related fees payable under the Class C Plan to .75 of 1% of the
average daily net assets of the series for the fiscal year ending August 31,
2001. [CONFIRM] Fees waivers will increase the series' total return.
B-43
CLASS B PLAN. For the fiscal year ended August 31, 2000, the Distributor
received the distribution fees paid by the following series of the Fund and the
proceeds of contingent deferred sales charges paid by investors of Class B
shares on the redemption of Class B shares as set forth below:
APPROXIMATE
CONTINGENT
AMOUNT OF DEFERRED
SERIES FEE SALES CHARGES
- ------ --------- -------------
Florida............................................. $115,957 $77,200
Massachusetts....................................... 50,534 11,700
New Jersey.......................................... 308,233 96,100
New York............................................ 299,393 95,500
North Carolina...................................... 61,851 15,400
Ohio................................................ 99,475 31,600
Pennsylvania........................................ 341,547 83,000
For fiscal year ended August 31, 2000, it is estimated that the Distributor
spent the following approximate amounts on behalf of the series:
COMPENSATION
PRINTING AND TO PRUSEC*
MAILING COMMISSION FOR COMMISSION
PROSPECTUSES PAYMENTS TO PAYMENTS TO
TO OTHER FINANCIAL REPRESENTATIVES
THAN CURRENT ADVISERS OF OVERHEAD COSTS AND OTHER
SERIES SHAREHOLDERS DISTRIBUTOR OF DISTRIBUTOR** EXPENSES**
- ------ -------------------- -------------------- ----------------------- -------------------------
Florida.............. $ 700 (.53%) $ 77,600 (55.96%) $45,100 (32.57%) $15,200 (10.94%)
Massachusetts........ 700 (1.54%) 28,300 (61.45%) 10,600 (22.99%) 6,500 (14.02%)
New Jersey........... 1,600 (.52%) 195,400 (63.28%) 94,000 (30.44%) 17,800 (5.76%)
New York............. 900 (0%) 193,700 (63.5%) 85,900 (28.1%) 25,500 (84%)
North Carolina....... 700 (1.42%) 47,600 (96.75%) 0 (0%) 900 (1.83%)
Ohio................. 700 (.8%) 7,600 (8.8%) 70,100 (81.1%) 8,000 (9.3%)
Pennsylvania......... 800 (0.23%) 195,800 (59.53%) 85,200 (25.92%) 51,100 (14.32%)
APPROXIMATE
TOTAL
AMOUNT
SPENT BY
DISTRIBUTOR
ON BEHALF OF
SERIES SERIES
- ------ -------------------
Florida.............. $138,600 (100%)
Massachusetts........ 46,100 (100%)
New Jersey........... 308,800 (100%)
New York............. 306,000 (--%)
North Carolina....... 49,200 (100%)
Ohio................. 86,400 (100%)
Pennsylvania......... 332,900 (--%)
- ------------------------------
*Pruco Securities Corporation, an affiliated broker-dealer.
**Including lease, utility and sales promotional expenses.
The term "overhead costs" represents (a) the expenses of operating the
branch offices of Prudential Securities and Prusec in connection with the sale
of Fund shares, including lease costs, the salaries and employee benefits of
operations and sales support personnel, utility costs, communication costs and
the costs of stationery and supplies, (b) the cost of client sales seminars,
(c) expenses of mutual fund sales coordinators to promote the sale of Fund
shares and (d) other incidental expenses relating to branch promotion of Fund
sales.
The amount of distribution expenses reimbursable by the Fund with respect to
Class B shares is reduced by the amount of such contingent deferred sales
charges with respect to redemptions of such shares.
B-44
CLASS C PLAN. For the fiscal year ended August 31, 2000, the Distributor
received the distribution fees paid by the following series of the Fund under
the Class C Plan and the proceeds of initial sales charges attributable to
Class C shares and the proceeds of contingent deferred sales charges paid by
investors of Class C Shares on the redemption of Class C shares as set forth
below:
APPROXIMATE
APPROXIMATE CONTINGENT
AMOUNT INITIAL SALES DEFERRED
SERIES OF FEE CHARGES SALES CHARGES
- ------ -------- ------------- -------------
Florida................................. $44,140 $ 100 $ 300
Massachusetts........................... 1,610 1,100 0
New Jersey.............................. 15,579 7,600 400
New York................................ 13,590 5,000 2,000
North Carolina.......................... 213 0 0
Ohio.................................... 1,463 0 500
Pennsylvania............................ 4,915 700 2,800
Distribution fees were expended primarily for payment of account servicing
fees.[CONFIRM]
For the fiscal year ended August 31, 2000, the Distributor spent
approximately the following amounts on behalf of the series:
COMPENSATION
PRINTING AND TO PRUSEC*
MAILING COMMISSION FOR COMMISSION
PROSPECTUSES PAYMENTS TO PAYMENTS TO
TO OTHER FINANCIAL REPRESENTATIVES
THAN CURRENT ADVISERS OF OVERHEAD COSTS AND OTHER
SERIES SHAREHOLDERS DISTRIBUTOR OF DISTRIBUTOR** EXPENSES**
- ------ -------------------- -------------------- ----------------------- ------------------------
Florida.............. $200 (.51%) $38,700 (99.23%) $ 100 (.26%) $ -- (--%)
Massachusetts........ -- (--%) 4,800 (87.27%) 600 (10.91%) 100 (1.82%)
New Jersey........... 100 (.57%) 12,200 (70.12%) 5,100 (29.31%) 0 (0%)
New York............. 0 (0%) 10,300 (73.5%) 3,600 (25.8%) 100 (0.7%)
North Carolina....... 0 (0%) 200 (100%) 0 (0%) 0 (0%)
Ohio................. (--%) (--%) 900 (100%) (--%)
Pennsylvania......... 0 (--%) 3,500 (85.17%) 600 (14.58%) 0 (--)%
APPROXIMATE
TOTAL
AMOUNT
SPENT BY
DISTRIBUTOR
ON BEHALF OF
SERIES SERIES
- ------ -------------------
Florida.............. $39,000 (100%)
Massachusetts........ 5,500 (100%)
New Jersey........... 17,400 (100%)
New York............. 14,000 (--%)
North Carolina....... 200 (100%)
Ohio................. 900 (100%)
Pennsylvania......... 4,100 (--)%
- ------------------------------
*Pruco Securities Corporation, an affiliated broker-dealer.
**Including lease, utility and sales promotional expenses.
Distribution expenses attributable to the sale of Class A, Class B and Class
C shares of each series are allocated to each such class based upon the ratio of
each such class to the sales of Class A, Class B and Class C shares of the
series other than expenses allocable to a particular class. The distribution fee
and sales charge of one class will not be used to subsidize the sale of another
class.
The Plans provide that they shall continue in effect from year to year with
respect to each series, provided 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. Each Plan may be terminated at any time, without penalty, by vote
of a majority of the Rule 12b-1 Trustees or by a vote of the holders of a
majority of the outstanding shares of the applicable class on not more than 60
days' nor less than 30 days' written notice to any other party to the Plans. The
Plans may not be amended to increase materially the amount to be spent for the
services described therein without approval of the shareholders of the
applicable class (by both Class A and Class B shareholders, voting separately,
in the case of material amendments to the Class A Plan), and all material
amendments are required to be approved by the Trustees in the manner described
above. Each Plan will automatically terminate in the event of its assignment.
The Fund will not be contractually obligated to pay expenses incurred under any
Plan if it is terminated or not continued.
Pursuant to each Plan, the Trustees will review at least quarterly a written
report of the distribution expenses incurred on behalf of each class of shares
of the Fund by the Distributor. The report will include an
B-45
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 the Rule 12b-1 Trustees shall be committed to the Rule 12b-1 Trustees.
Pursuant to each Distribution Agreement, the Fund has agreed to indemnify
the Distributor to the extent permitted by applicable law against certain
liabilities under federal securities laws.
MONEY MARKET SERIES PLANS OF DISTRIBUTION. Under each Plan of Distribution
for each money market series, each such series reimburses the Distributor for
its distribution-related expenses at the annual rate of up to .125 of 1% of the
average daily net assets of the series. For the fiscal year ended August 31,
2000, the Distributor incurred distribution expenses with respect to the money
market series, all of which were recovered by the Distributor through the
distribution fee paid by the series, as follows:
SERIES
- ------
Connecticut Money Market................................... $102,564
Massachusetts Money Market................................. 84,848
New Jersey Money Market.................................... 255,872
New York Money Market...................................... 461,271
FEE WAIVERS/SUBSIDIES
PIFM may from time to time waive all or a portion of its management fee and
subsidize all or a portion of the operating expenses of the Fund. In addition,
the Distributor has contractually agreed to waive a portion of its distribution
fees for Class A and Class C shares, as described above. Fee waivers and
subsidies will increase a Series' total return.
NASD MAXIMUM SALES CHARGE RULE. Pursuant to rules of the NASD, the
Distributor is required to limit aggregate initial sales charges, deferred sales
charges and asset-based sales charges to 6.25% of total gross sales of each
class of shares. Interest charges on unreimbursed distribution expenses equal to
the prime rate plus one percent per annum may be added to the 6.25% limitation.
Sales from the reinvestment of dividends and distributions are not included in
the calculation of the 6.25% limitation. The annual asset-based sales charge on
shares of a series may not exceed .75 of 1% per class. The 6.25% limitation
applies to each class of a series of the Fund rather than on a per shareholder
basis. If aggregate sales charges were to exceed 6.25% of total gross sales of
any class of any series, all sales charges on shares of that class would be
suspended.
(c) OTHER SERVICE PROVIDERS
State Street Bank and Trust Company, One Heritage Drive, North Quincy,
Massachusetts 02171, serves as Custodian for the Fund's portfolio securities and
cash and, in that capacity, maintains certain financial and accounting books and
records pursuant to an agreement with the Fund. Subcustodians provide custodial
services for the Fund's foreign assets held outside the United States.
Prudential Mutual Fund Services LLC (PMFS), 194 Wood Avenue South, Iselin,
New Jersey 08830, serves as the transfer and dividend disbursing agent of the
Fund. PMFS is a wholly-owned subsidiary of PIFM. PMFS provides customary
transfer agency services to the Fund, including the handling of shareholder
communications, the processing of shareholder transactions, the maintenance of
shareholder account records, the payment of dividends and distributions and
related functions. For these services, PMFS receives an annual fee of $13.00 per
shareholder account, a new account set-up fee of $2.00 for each manually
established shareholder account and a monthly inactive zero balance account fee
of $20.00 per shareholder account. PMFS is also reimbursed for its out-of-pocket
expenses, including but not limited to postage, stationery, printing, allocable
communication expenses and other costs.
B-46
For the fiscal year ended August 31, 2000, the Fund incurred approximately
the following expenses for the services of PMFS on behalf of each Series:
SERIES
- ------
Connecticut Money Market................................... $ 19,900
Florida.................................................... 25,000
Massachusetts.............................................. 14,100
Massachusetts Money Market................................. 13,700
New Jersey................................................. 64,100
New Jersey Money Market.................................... 52,600
New York................................................... 87,600
New York Money Market...................................... 88,000
North Carolina............................................. 14,100
Ohio....................................................... 30,700
Pennsylvania............................................... 85,600
PricewaterhouseCoopers LLP serves as the Fund's independent accountants and
in that capacity audits the Fund's annual financial statements.
BROKERAGE ALLOCATION AND OTHER PRACTICES
The Manager is responsible for decisions to buy and sell securities and
futures and options thereon for each series of the Fund, the selection of
brokers, dealers and futures commission merchants to effect the transactions and
the negotiation of brokerage commissions. The term "Manager" as used in this
section includes the Subadviser. Purchases and sales of securities on a
securities exchange, which are not expected to be a significant portion of the
portfolio securities of any series, are effected through brokers who charge a
commission for their services. Broker-dealers may also receive commissions in
connection with options and futures transactions, including the purchase and
sale of underlying securities upon the exercise of options. Orders may be
directed to any broker or futures commission merchant including, to the extent
and in the manner permitted by applicable law, the Distributor and its
affiliates. Brokerage commissions on United States securities, options and
futures exchanges or boards of trade are subject to negotiation between the
Manager and the broker or futures commission merchant.
In the over-the-counter market, securities are generally traded on a "net"
basis with dealers acting as principal for their own accounts without a stated
commission, although the price of the security usually includes a profit to the
dealer. In underwritten offerings, securities are purchased at a fixed price
which includes an amount of compensation to the underwriter, generally referred
to as the underwriter's concession or discount. On occasion, certain money
market instruments may be purchased directly from an issuer, in which case no
commissions or discounts are paid. The Fund will not deal with the Distributor
or an affiliate in any transaction in which the Distributor or an affiliate acts
as principal except in accordance with rules of the Commission. Thus it will not
deal in the over-the-counter 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 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 each series of the Fund, the
Manager is required to give primary consideration to obtaining the best possible
combination of favorable price and efficient execution. The Manager seeks to
effect each transaction at a price and commission, if any, that provides the
most favorable total cost or proceeds reasonably attainable in the
circumstances. Within the framework of this policy, the Manager will consider
the research and investment services provided by brokers, dealers or futures
commission merchants who effect or are parties to portfolio transactions of the
Fund, the Manager or the Manager's other clients. 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
B-47
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 are far larger
than the Fund, and the services furnished by such brokers, dealers or futures
commission merchants may be used by the Manager in providing investment
management for the Fund. Commission rates are established pursuant to
negotiations with the broker, dealer or futures commission merchant based on the
quality and quantity of execution services provided by the broker in the light
of generally prevailing rates. The 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 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, Prudential Securities may act as a
broker or futures commission merchant for the Fund. In order for Prudential
Securities (or any affiliate) to effect any portfolio transactions for the Fund,
the commissions, fees or other remuneration received by Prudential Securities
(or any affiliate) must be reasonable and fair compared to the commissions, fees
or other remuneration paid to other brokers or futures commission merchants in
connection with comparable transactions involving similar securities or futures
contracts being purchased or sold on an exchange or board of trade during a
comparable period of time. This standard would allow Prudential Securities (or
any affiliate) to receive no more than the remuneration which would be expected
to be received by an unaffiliated broker or futures commission merchant in a
commensurate 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 Prudential Securities (or any affiliate) are consistent
with the foregoing standard. In accordance with Section 11(a) of the Securities
Exchange Act of 1934, as amended, Prudential Securities may not retain
compensation for effecting transactions on a national securities exchange for
the Fund unless the Fund has expressly authorized the retention of such
compensation. Prudential Securities must furnish to the Fund at least annually a
statement setting forth the total amount of all compensation retained by
Prudential Securities from transactions effected for the Fund during the
applicable period. Brokerage and futures transactions with Prudential Securities
(or any affiliate) are also subject to such fiduciary standards as may be
imposed upon Prudential Securities (or such affiliate) by applicable law.
B-48
During the fiscal years ended August 31, 2000, 1999 and 1998, the series
paid brokerage commissions on certain options and futures transactions as set
forth below.[ANY OTHER TRANSACTIONS?] During these periods, the series paid no
brokerage commissions to any of the Fund's affiliates, including Prudential
Securities.[CONFIRM]
BROKERAGE COMMISSIONS
------------------------------
SERIES 2000 1999 1998
- ------ -------- -------- --------
Connecticut Money Market.................................... $ 0 $ 0 $ 0
Florida..................................................... $ 0 1,400 7,000
Massachusetts............................................... $ 0 0 2,625
Massachusetts Money Market.................................. $ 0 0 0
New Jersey.................................................. $ 4,051 2,975 3,675
New Jersey Money Market..................................... $ 0 0 0
New York.................................................... $10,596 7,315 19,968
New York Money Market....................................... $ 0 0 0
North Carolina.............................................. $ 1,628 560 2,599
Ohio........................................................ $ 5,329 5,767 7,333
Pennsylvania................................................ $ 2,450 10,990 18,445
The Fund is required to disclose its holdings of securities of its regular
brokers and dealers (as defined under Rule 10b-1 of the Investment Company Act)
and their parents at August 31, 2000. As of August 31, 2000, no series held any
securities of its regular brokers and dealers.[CONFIRM]
CAPITAL SHARES, OTHER SECURITIES AND ORGANIZATION
The Fund is permitted to issue an unlimited number of full and fractional
shares in separate series, currently designated as the Connecticut Money Market
Series, Florida Series, Massachusetts Series, Massachusetts Money Market Series,
New Jersey Series, New Jersey Money Market Series, New York Series, New York
Money Market Series, North Carolina Series, Ohio Series and Pennsylvania Series.
The Florida Series, Massachussetts Series, New Jersey Series and New York Series
each is authorized to issue an unlimited number of shares, divided into four
classes, designated Class A, Class B, Class C and Class Z. The North Carolina
Series, Ohio Series and Pennsylvania Series each is authorized to issue an
unlimited number of shares, divided into three classes, designated Class A,
Class B and Class C. Each class of shares represents an interest in the same
assets of such series and is identical in all respects except that (1) each
class is subject to different sales charges and distribution and/or service fees
(except for Class Z shares, which are not subject to any sales charges and
distribution and/or service fees), which may affect performance, (2) each class
has exclusive voting rights on any matter submitted to shareholders that relates
solely to its arrangement and has separate voting rights on any matter submitted
to shareholders in which the interests of one class differ from the interests of
any other class, (3) each class has a different exchange privilege, and
(4) only Class B shares have a conversion feature. Class Z shares are offered
exclusively for sale to a limited group of investors. The Connecticut Money
Market Series, the Massachusetts Money Market Series, the New Jersey Money
Market Series and the New York Money Market Series offer only one class of
shares. In accordance with the Fund's Declaration of Trust, the Trustees may
authorize the creation of additional series and classes within a series, with
such preferences, privileges, limitations and voting and dividend rights as the
Trustees may determine.
Shares of the Fund, when issued, are fully paid, nonassessable, fully
transferable and redeemable at the option of the holder. Shares are also
redeemable at the option of the Fund under certain circumstances. Each share of
each class of a series is equal as to earnings, assets and voting privileges,
except as noted above, and each class (with the exception of Class Z shares,
which are not subject to any distribution or service fees) bears the expenses
related to the distribution of its shares. Except for the conversion feature
applicable to Class B shares with respect to the non-money market series, there
are no conversion, preemptive or other subscription rights. In the event of
liquidation, each share of beneficial interest of each series is entitled to its
portion of all of the Fund's assets after all debt and expenses of the Fund have
been paid. Since Class B and Class C shares generally bear higher distribution
expenses than Class A shares, the liquidation proceeds to shareholders of
B-49
those classes are likely to be lower than to Class A shareholders and to
Class Z shareholders, whose shares are not subject to any distribution and/or
service fees. The Fund's shares do not have cumulative voting rights for the
election of Trustees.
The Fund does not intend to hold annual meetings of shareholders unless
otherwise required by law. The Fund will not be required to hold meetings of
shareholders unless, for example, the election of Trustees is required to be
acted upon by shareholders under the Investment Company Act. Shareholders have
certain rights, including the right to call a meeting upon a vote of 10% of the
Fund's outstanding shares for the purpose of voting on the removal of one or
more Trustees or to transact any other business.
The Declaration of Trust and the By-Laws of the Fund are designed to make
the Fund similar in certain respects to a Massachusetts business corporation.
The principal distinction between a Massachusetts business 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.
PURCHASE, REDEMPTION AND PRICING OF FUND SHARES
Shares of each series of the Fund, other than the money market series, may
be purchased at a price equal to the next determined net asset value per share
(NAV) plus a sales charge which, at the election of the investor, may be imposed
either at the time of purchase, on a deferred basis or both. Class A shares are
sold with a front-end sales charge. Class B shares are subject to a contingent
deferred sales charge. Class C shares are sold with a low front-end sales
charge, but are also subject to a contingent deferred sales charge. Class Z
shares of the Florida Series, the Massachusetts Series, the New Jersey Series
and the New York Series are offered to a limited group of investors at NAV
without any sales charges. See "How to Buy, Sell and Exchange Shares of the
Series--How to Buy Shares" in each series' Prospectus.
For a description of the methods of purchasing shares of the Connecticut
Money Market Series, the Massachusetts Money Market Series, the New Jersey Money
Market Series or the New York Money Market Series, see "How to Buy, Sell and
Exchange Shares of the Series--How to Buy Shares" in the money market series'
Prospectuses.
PURCHASE BY WIRE. For an initial purchase of shares of the Fund by wire,
you must complete an application and telephone PMFS at (800) 225-1852
(toll-free) to receive an account number. The following information will be
requested: your name, address, tax identification number, fund, series and class
election, dividend distribution election, amount being wired and wiring bank.
Instructions should then be given by you to your bank to transfer funds by wire
to State Street Bank and Trust Company (State Street), Boston, Massachusetts,
Custody and Shareholder Services Division. Attention: Prudential Municipal
Series Fund, specifying on the wire the account number assigned by PMFS and your
name and identifying the series and the class in which you are investing
(Class A, Class B, Class C or Class Z shares for the non-money market series).
If you arrange for receipt by State Street of federal funds prior to the
calculation of NAV (4:15 p.m., New York time) on a business day, 4:30 p.m. with
respect to the money market series, you may purchase shares of the Fund as of
that day.
In making a subsequent purchase by wire, you should wire State Street
directly and should be sure that the wire specifies Prudential Municipal Series
Fund, the series, the class in which you are eligible to invest (Class A,
Class B, Class C or Class Z shares for the non-money market series), your name
and individual account number. It is not necessary to call PMFS to make
subsequent purchase orders using federal funds. The minimum amount which may be
invested by wire is $1,000.
B-50
ISSUANCE OF FUND SHARES FOR SECURITIES
Transactions involving the issuance of Fund shares for securities (rather
than cash) will be limited to (1) reorganizations, (2) statutory mergers, or
(3) other acquisitions of portfolio securities that: (a) meet the investment
objectives and policies of the Fund, (b) are liquid and not subject to
restrictions on resale, (c) have a value that is readily ascertainable via
listing on or trading in a recognized United States or international exchange or
market, and (d) are approved by the Fund's investment adviser.
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%, Class C
shares* are sold with a front-end sales charge of 1%, and Class B* and Class Z
shares are sold at NAV. Using the NAV at August 31, 2000 of each series
currently in existence (other than the Connecticut Money Market Series, the
Massachusetts Money Market Series, the New Jersey Money Market Series and the
New York Money Market Series), the maximum offering prices of the series' shares
are as follows:
CLASS A FL MA NJ NY NC OH PA
- ------- -------- -------- -------- -------- -------- -------- --------
Net asset value and redemption price per Class A
share............................................... $10.23 $11.07 $10.65 $11.60 $10.99 $11.28 $10.05
Maximum initial sales charge (3% of offering
price).............................................. .32 .34 .33 .36 .34 .35 .31
------ ------ ------ ------ ------ ------ ------
Maximum offering price to public..................... $10.55 $11.41 $10.98 $11.96 $11.33 $11.63 $10.36
====== ====== ====== ====== ====== ====== ======
CLASS B FL MA NJ NY NC OH PA
- ------- -------- -------- -------- -------- -------- -------- --------
Net asset value, redemption price and offering price
per Class B share*.................................. $10.23 $11.07 $10.66 $11.61 $10.99 $11.29 $10.05
====== ====== ====== ====== ====== ====== ======
CLASS C FL MA NJ NY NC OH PA
- ------- -------- -------- -------- -------- -------- -------- --------
Net asset value and redemption price per Class C
share*.............................................. $10.23 $11.07 $10.66 $11.61 $10.99 $11.29 $10.05
Maximum initial sales charge (1% of offering
price).............................................. .10 .11 .11 .12 .11 .11 .10
------ ------ ------ ------ ------ ------ ------
Offering price to public............................. $10.33 $11.18 $10.77 $11.73 $11.10 $11.40 $10.15
====== ====== ====== ====== ====== ====== ======
CLASS Z FL MA NJ NY
- ------- -------- -------- -------- --------
Net asset value, redemption price and offering price
per Class Z share................................... $10.22 $11.06 $10.73 $11.62
====== ====== ====== ======
- ------------------------
*Class B and Class C shares are subject to a contingent deferred sales charge
on certain redemptions. See "How to Buy, Sell and Exchange Shares of the
Series--How to Sell Your Shares--Contingent Deferred Sales Charge (CDSC)" in
the Prospectus of each applicable series.
SELECTING A PURCHASE ALTERNATIVE (NON-MONEY MARKET SERIES ONLY)
The following is provided to assist you in determining which method of
purchase best suits your individual circumstances and is based on current fees
and expenses being charged to each series (other than the money market series):
If you intend to hold your investment in a series for less than 3 years and
do not qualify for a reduced sales charge on Class A shares, since Class A
shares are subject to a maximum initial sales charge of 3% and Class B shares
are subject to a CDSC of 5% which declines to zero over a 6 year period, you
should consider purchasing Class C shares over either Class A or Class B shares.
If you intend to hold your investment for more than 4 years and do not
qualify for a reduced sales charge on Class A shares, since Class B shares
convert to Class A shares approximately 7 years after purchase and because all
of your money would be invested initially in the case of Class B shares, you
should consider purchasing Class B shares over either Class A or Class C shares.
If you qualify for a reduced sales charge on Class A shares, it may be more
advantages for you to purchase Class A shares over either Class B or Class C
shares regardless of how long you intend to hold your investment. However,
unlike Class B shares, you would not have all of your money invested initially
because the sales charge on Class A shares is deducted at the time of purchase.
B-51
If you do not qualify for a reduced sales charge on Class A shares and you
purchase Class C shares, you would have to hold your investment for more than 4
years for the 1% initial sales charge plus the higher cumulative annual
distribution-related fee on the Class C shares to exceed the initial sales
charge plus cumulative annual distribution-related fees on Class A shares. This
does not take into account the time value of money, which further reduces the
impact of the higher Class C distribution-related fee on the investment,
fluctuations in NAV, the effect of the return on the investment over this period
of time or redemptions when the CDSC is applicable.
REDUCTION AND WAIVER OF INITIAL SALES CHARGE--CLASS A SHARES
Class A shares may be purchased at NAV, through the Distributor or the
Transfer Agent by:
- officers of the Prudential mutual funds (including the Fund)
- employees of the Distributor, Prudential Securities, PIFM and their
subsidiaries and members of the families of such persons who maintain an
"employee related" account at Prudential Securities or the Transfer Agent
- employees of subadvisers of the Prudential mutual funds provided that
purchases at NAV are permitted by such person's employer
- Prudential, employees and special agents of Prudential and its
subsidiaries and all persons who have retired directly from active service
with Prudential or one of its subsidiaries
- members of the Board of Directors of Prudential
- real estate brokers, agents and employees of real estate brokerage
companies affiliated with The Prudential Real Estate Affiliates who
maintain an account at Prudential Securities, Prusec or with the Transfer
Agent
- registered representatives and employees of brokers who have entered into
a selected dealer agreement with the Distributor provided that purchases
at NAV are permitted by such person's employer
- investors who have a business relationship with a financial adviser who
joined Prudential Securities from another investment firm, provided that
(1) the purchase is made within 180 days of the commencement of the
financial adviser's employment at Prudential Securities, (2) the purchase
is made with proceeds of a redemption of shares of any open-end non-money
market fund sponsored by the financial adviser's previous employer (other
than a fund which imposes a distribution or service fee of .25 of 1% or
less) and (3) the financial adviser served as the client's broker on the
previous purchase
- orders placed by broker-dealers, investment advisers or financial planners
who have entered into an agreement with the Distributor, who place trades
for their own accounts or the accounts of their clients and who charge a
management, consulting or other fee for the services (for example, mutual
fund "wrap" or asset allocation programs)
- orders placed by clients of broker-dealers, investment advisers or
financial planners who place trades for customer accounts if the accounts
are linked to the master account of such broker-dealer, investment adviser
or financial planner and the broker-dealer, investment adviser or
financial planner charges its clients a separate fee for its services (for
example, mutual fund "supermarket" programs).
In addition, current and former Directors/Trustees of the Prudential mutual
funds (including the Fund) may purchase Class A shares of the North Carolina,
Ohio and Pennsylvania Series at NAV. Broker-dealers, investment advisers or
financial planners sponsoring fee-based programs (such as mutual fund "wrap" or
asset allocation programs and mutual fund "supermarket" programs) may offer
their clients more than one class of shares in the Fund in connection with
different pricing options for their programs. Investors should consider
carefully any separate transaction and other fees charged by these programs in
connection with investing in each available share class before selecting a share
class.
For an investor to obtain any reduction or waiver of the initial sales
charges, at the time of the sale either the Transfer Agent must be notified
directly by the investor or the Distributor must be notified by the broker
B-52
facilitating the transaction that the sale qualifies for the reduced or waived
sales charge. The reduction or waiver will be granted subject to confirmation of
your entitlement. No initial sales charge is imposed upon Class A shares
acquired upon the reinvestment of dividends and distributions.
COMBINED PURCHASE AND CUMULATIVE PURCHASE PRIVILEGE. If an investor or
eligible group of related investors purchases Class A shares of the Fund
concurrently with Class A shares of other series of the Fund or other Prudential
mutual funds, the purchases may be combined to take advantage of the reduced
sales charges applicable to larger purchases. See "How to Buy, Sell and Exchange
Shares of the Series--How to Buy Shares--Step 2: Choose a Share Class--Reducing
or Waiving Class A's Initial Sales Charge" in the applicable Prospectus.
An eligible group of related Fund investors includes any combination of the
following:
- an individual
- the individual's spouse, their children and their parents
- the individual's and spouse's Individual Retirement Account (IRA)
- any company controlled by the individual (a person, entity or group that
holds 25% or more of the outstanding voting securities of a company will
be deemed to control the company, and a partnership will be deemed to be
controlled by each of its general partners)
- a trust created by the individual, the beneficiaries of which are the
individual, his or her spouse, parents or children
- a Uniform Gifts to Minors Act/Uniform Transfers to Minors Act account
created by the individual or the individual's spouse
- one or more employee benefit plans of a company controlled by an
individual.
In addition, an eligible group of related Fund investors may include an
employer (or group of related employers) and one or more qualified retirement
plans of such employer or employers (an employer controlling, controlled by or
under common control with another employer is deemed related to that employer).
The Transfer Agent, the Distributor or your broker must be notified at the
time of purchase that the investor is entitled to a reduced sales charge. The
reduced sales charge will be granted subject to confirmation of the investor's
holdings. The Combined Purchase and Cumulative Purchase Privilege does not apply
to individual participants in any retirement or group plans.
LETTERS OF INTENT. Reduced sales charges are also available to investors
(or an eligible group of related investors) who enter into a written Letter of
Intent providing for the investment, within a thirteen-month period, of a
specific dollar amount in the Fund and other Prudential mutual funds (Letter of
Intent).
For purposes of the Letter of Intent, the value of all shares of the Fund
and shares of other Prudential mutual funds (excluding money market funds other
than those acquired pursuant to the exchange privilege) which were previously
purchased and are still owned are also included in determining the applicable
reduction. However, the value of shares held directly with the Transfer Agent or
its affiliates, and through your broker, will not be aggregated to determine the
reduced sales charge.
A Letter of Intent permits an investor to establish a total investment goal
to be achieved by any number of investments over a thirteen-month period. Each
investment made during the period will receive the reduced sales charge
applicable to the amount represented by the goal as if it were a single
investment. Escrowed Class A shares totaling 5% of the dollar amount of the
Letter of Intent will be held by the Transfer Agent in the name of the investor.
The effective date of a Letter of Intent may be back-dated up to 90 days, in
order that any investments made during this 90-day period, valued at the
investor's cost, can be applied to the fulfillment of the Letter of Intent goal.
The Letter of Intent does not obligate the investor to purchase, nor the
Fund to sell, the indicated amount. In the event the Letter of Intent goal is
not satisfied within the thirteen-month period, the investor is required to pay
the difference between the sales charge otherwise applicable to the purchases
made during this period and
B-53
the sales charges actually paid. Such payment may be made directly to the
Distributor or, if not paid, the Distributor will liquidate sufficient escrowed
shares to obtain such difference. Investors electing to purchase Class A shares
of the 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 be granted
subject to confirmation of the investor's holdings. Letters of intent are not
available to individual participants in any retirement or group plans.
CLASS B SHARES
The offering price of Class B shares for investors choosing one of the
deferred sales charge alternatives is the NAV next determined following receipt
of an order in proper form by the Transfer Agent, your broker or the
Distributor. Redemptions of Class B shares may be subject to a CDSC. See
"Contingent Deferred Sales Charge" below.
The Distributor will pay, from its own resources, sales commissions of up to
4% of the purchase price of Class B shares to brokers, financial advisers and
other persons who sell Class B shares at the time of sale. This facilitates the
ability of the Fund to sell the Class B shares without an initial sales charge
being deducted at the time of purchase. The Distributor anticipates that it will
recoup its advancement of sales commissions from the combination of the CDSC and
the distribution fee.
CLASS C SHARES
The offering price of Class C shares is the next determined NAV plus a 1%
sales charge. In connection with the sale of Class C shares, the Distributor
will pay, from its own resources, brokers, financial advisers and other persons
which distribute Class C shares a sales commission of up to 2% of the purchase
price at the time of the sale.
WAIVER OF INITIAL SALES CHARGE--CLASS C SHARES
INVESTMENT OF REDEMPTION PROCEEDS FROM OTHER INVESTMENT
COMPANIES. Investors may purchase Class C shares at NAV, without the initial
sales charge, with the proceeds from the redemption of shares of any
unaffiliated registered investment company which were not held through an
account with any Prudential affiliate. Such purchases must be made within 60
days of the redemption. Investors eligible for this waiver include:
(1) investors purchasing shares through an account at Prudential Securities;
(2) investors purchasing shares through an ADVANTAGE Account or an Investor
Account with Prusec; and (3) investors purchasing shares through other brokers.
This waiver is not available to investors who purchase shares directly from the
Transfer Agent. You must notify your broker if you are entitled to this waiver
and provide it with such supporting documents as it may deem appropriate.
CLASS Z SHARES
MUTUAL FUND PROGRAMS. Class Z shares of the Florida, Massachusetts, New
Jersey and New York Series also can be purchased by participants in any
fee-based program or trust program sponsored by Prudential or an affiliate that
includes mutual funds as investment options and the Fund as an available option.
Class Z shares also can be purchased by investors in certain programs sponsored
by broker-dealers, investment advisers and financial planners who have
agreements with Prudential Investments Advisory Group relating to:
- Mutual fund "wrap" or asset allocation programs, where the sponsor places
Fund trades, links its clients' accounts to a master account in the
sponsor's name and charges its clients a management, consulting or other
fee for its services
- Mutual fund "supermarket" programs, where the sponsor links its clients'
accounts to a master account in the sponsor's name and the sponsor charges
a fee for its services.
Broker-dealers, investment advisers or financial planners sponsoring these
mutual fund programs may offer their clients more than one class of shares in
the Fund in connection with different pricing options for their programs.
Investors should consider carefully any separate transaction and other fees
charged by these programs in connection with investing in each available share
class before selecting a share class.
B-54
OTHER TYPES OF INVESTORS. Class Z shares of the Florida, Massachusetts, New
Jersey and New York Series currently also are available for purchase by the
following categories of investors:
- Certain participants in the MEDLEY Program (group variable annuity
contracts) sponsored by Prudential for whom Class Z shares of the
Prudential mutual funds are an available investment option
- Current and former Directors/Trustees of the Prudential mutual funds
(including the Fund)
- Prudential, with an investment of $10 million or more.
In connection with the sale of Class Z shares,the Manager, the Distributor
or one of their affiliates may pay dealers, financial advisers and other persons
which distribute shares a finders' fee from its own resources based on a
percentage of the net asset value of shares sold by such persons.
RIGHTS OF ACCUMULATION
Reduced sales charges also are available through Rights of Accumulation,
under which an investor or an eligible group of related investors, as described
above under "Combined Purchase and Cumulative Purchase Privilege," may aggregate
the value of their existing holdings of shares of the Fund and shares of other
Prudential mutual funds (excluding money market funds other than those acquired
pursuant to the exchange privilege) to determine the reduced sales charge.
Rights of Accumulation may be applied across the classes of the Prudential
mutual funds. The value of shares held directly with the Transfer Agent and
through your broker will not be aggregated to determine the reduced sales
charge. The value of existing holdings for purposes of determining the reduced
sales charge is calculated using the maximum offering price (net asset value
plus maximum sales charge) as of the previous business day. See "Risk/Return
Summary--Evaluating Performance" in the Prospectus.
The Distributor or the Transfer Agent must be notified at the time of
purchase that the shareholder is entitled to a reduced sales charge. The reduced
sales charge will be granted subject to confirmation of the investors' holdings.
SALE OF SHARES
You can redeem your shares at any time for cash at the NAV next determined
after the redemption request is received in proper form (in accordance with
procedures established by the Transfer Agent in connection with investors'
accounts) by the Transfer Agent, the Distributor or your broker. In certain
cases, however, redemption proceeds will be reduced by the amount of any
applicable CDSC, as described below. See "Contingent Deferred Sales Charge"
below. If you are redeeming your shares through a broker, your broker must
receive your sell order before the Fund computes its NAV for the day (that is,
4:15 p.m., New York time (with respect to the non-money market series of the
Fund), 4:30 p.m., New York time; (with respect to the money market series of the
Fund) in order to receive that day's NAV. Your broker will be responsible for
furnishing all necessary documentation to the Distributor and may charge you for
its services in connection with redeeming shares of the Fund.
If you hold shares of the Fund through Prudential Securities, you must
redeem your shares through Prudential Securities. Please contact your Prudential
Securities financial adviser.
In order to redeem shares, a written request for redemption signed by you
exactly as the account is registered is required. If you hold certificates, the
certificates must be received by the Transfer Agent, the Distributor or your
broker in order for the redemption request to be processed. If redemption is
requested by a corporation, partnership, trust or fiduciary, written evidence of
authority acceptable to the Transfer Agent must be submitted before such request
will be accepted. All correspondence and documents concerning redemptions should
be sent to the Fund in care of its Transfer Agent, Prudential Mutual Fund
Services LLC, Attention: Redemption Services, P.O. Box 8149, Philadelphia, PA
19101, to the Distributor, or to your broker.
SIGNATURE GUARANTEE. If the proceeds of the redemption (1) exceed $100,000,
(2) are to be paid to a person other than the record owner, (3) are to be sent
to an address other than the address on the Transfer Agent's records, or
(4) are to be paid to a corporation, partnership, trust or fiduciary, and your
shares are held directly with the Transfer Agent the signature(s) on the
redemption request, or stock power must be signature
B-55
guaranteed by an "eligible guarantor institution." An "eligible guarantor
institution" includes any bank, broker, dealer or credit union. The Transfer
Agent reserves the right to request additional information from, and make
reasonable inquires of, any eligible guarantor institution. In the case of
redemptions from a PruArray Plan, if the proceeds of the redemption are invested
in another investment option of the plan in the name of the record holder and at
the same address as reflected in the Transfer Agent's records, a signature
guarantee is not required.
Payment for shares presented for redemption will be made by check within
seven days after receipt by the Transfer Agent, the Distributor or your broker
of the written request and certificates, if issued, except as indicated below.
If you hold shares through a broker, payment for shares presented for redemption
will be credited to your account at your broker, unless you indicate otherwise.
Such payment may be postponed or the right of redemption suspended at times
(1) when the New York Stock Exchange is closed for other than customary weekends
and holidays, (2) when trading on such Exchange is restricted, (3) when an
emergency exists as a result of which disposal by the Fund of securities owned
by it is not reasonably practicable or it is not reasonably practicable for the
Fund fairly to determine the value of its net assets, or (4) during any other
period when the Securities and Exchange Commission (the Commission), by order,
so permits; provided that applicable rules and regulations of the Commission
shall govern as to whether the conditions prescribed in (2), (3) or (4) exist.
Payment for redemption of recently purchased shares will be delayed until
the Fund or its Transfer Agent has been advised that the purchase check has been
honored, which may take up to 10 calendar days from the time of receipt of the
purchase check by the Transfer Agent. Such delay may be avoided by purchasing
shares by wire or by certified or cashier's check.
REDEMPTION IN KIND. If the Board of Trustees determines that it would be
detrimental to the best interests of the remaining shareholders of the Fund to
make payment wholly or partly in cash, the Fund may pay the redemption price in
whole or in part by a distribution in kind of securities from the investment
portfolio of the Fund, in lieu of cash, in conformity with applicable rules of
the Commission. Securities will be readily marketable and will be valued in the
same manner as in a regular redemption. If your shares are redeemed in kind, you
would incur transaction costs in converting the assets into cash. The Fund,
however, has elected to be governed by Rule 18f-1 under the Investment Company
Act, under which the Fund is obligated to redeem shares solely in cash up to the
lesser of $250,000 or 1% of the NAV of the Fund during any 90-day period for any
one shareholder.
INVOLUNTARY REDEMPTION. In order to reduce expenses of the Fund, the Board
of Trustees may redeem all of the shares of any shareholder whose account has a
net asset value of less than $500 due to a redemption. The Fund will give such
shareholders 60 days' prior written notice in which to purchase sufficient
additional shares to avoid such redemption. No CDSC will be imposed on any such
involuntary redemption.
90-DAY REPURCHASE PRIVILEGE. If you redeem your shares and have not
previously exercised the repurchase privilege, you may reinvest back into your
account any portion or all of the proceeds of such redemption in shares of the
same Series at the NAV next determined after the order is received, which must
be within 90 days after the date of the redemption. Any CDSC paid in connection
with such redemption will be credited (in shares) to your account. (If less than
a full repurchase is made, the credit will on a PRO RATA basis). You must notify
the Transfer Agent, either directly or through the Distributor or your broker,
at the time the repurchase privilege is exercised, to adjust your account for
the CDSC you previously paid. Thereafter, any redemptions will be subject to the
CDSC applicable at the time of the redemption. See "Contingent Deferred Sales
Charge" below.
CONTINGENT DEFERRED SALES CHARGE
Redemptions of Class B shares will be subject to a contingent deferred sales
charge or CDSC declining from 5% to zero over a six-year period. Class C shares
redeemed within 18 months of purchase will be subject to a 1% CDSC. The CDSC
will be deducted from the redemption proceeds and reduce the amount paid to you.
The CDSC will be imposed on any redemption by you which reduces the current
value of your Class B or Class C shares to an amount which is lower than the
amount of all payments by you for shares during the preceding six
B-56
years, in the case of Class B shares, and 18 months, in the case of Class C
shares. A CDSC will be applied on the lesser of the original purchase price or
the current value of the shares being redeemed. Increases in the value of your
shares or shares acquired through reinvestment of dividends or distributions are
not subject to a CDSC. The amount of any CDSC will be paid to and retained by
the Distributor.
The amount of the CDSC, if any, will vary depending on the number of years
from the time of payment for the purchase of shares until the time of redemption
of such shares. Solely for purposes of determining the number of years from the
time of any payment for the purchase of shares, all payments during a month will
be aggregated and deemed to have been made on the last day of the month. The
CDSC will be calculated from the first day of the month after the initial
purchase, excluding the time shares were held in a money market fund. See
"Shareholder Investment Account--Exchange Privilege" below.
The following table sets forth the rates of the CDSC applicable to
redemption of Class B shares:
CONTINGENT DEFERRED SALES
CHARGE AS A PERCENTAGE
YEAR SINCE PURCHASE OF DOLLARS INVESTED OR
PAYMENT MADE REDEMPTION PROCEEDS
- ------------------------------------------------ -------------------------
First........................................... 5.0%
Second.......................................... 4.0%
Third........................................... 3.0%
Fourth.......................................... 2.0%
Fifth........................................... 1.0%
Sixth........................................... 1.0%
Seventh......................................... None
In determining whether a CDSC is applicable to redemption, the calculation
will be made in a manner that results in the lowest possible rate. It will be
assumed that the redemption is made first of amounts representing shares
acquired pursuant to the reinvestment of dividends and distributions; then of
amounts representing the increase in NAV above the total amount of payments for
the purchase of Class B shares made during the preceding six years and
18 months for Class C shares then of amounts representing the cost of shares
held beyond the applicable CDSC period; and finally, of amounts representing the
cost of shares held for the longest period of time within the applicable CDSC
period.
For example, assume you purchased 100 Class B shares at $10 per share for a
cost of $1,000. Subsequently, you acquired 5 additional Class B shares through
dividend reinvestment. During the second year after the purchase you decided to
redeem $500 of your investment. Assuming at the time of the redemption the NAV
had appreciated to $12 per share, the value of your Class B shares would be
$1,260 (105 shares at $12 per share). The CDSC would not be applied to the value
of the reinvested dividend shares and the amount which represent appreciation
($260). Therefore, $240 of the $500 redemption proceeds ($500 minus $260) would
be charged at a rate of 4% (the applicable rate in the second year after
purchase) for a total CDSC of $9.60.
For federal income tax purposes, the amount of the CDSC will reduce the gain
or increase the loss, as the case may be, on the amount recognized on the
redemption of shares.
WAIVER OF CONTINGENT DEFERRED SALES CHARGE--CLASS B SHARES
The CDSC will be waived in the case of a redemption following the death or
disability of a shareholder or, in the case of a trust account, following the
death or disability of the grantor. The waiver is available for total or partial
redemptions of shares owned by a person, either individually or in joint
tenancy, at the time of death or initial determination of disability, provided
that the shares were purchased prior to death or disability.
The CDSC also will be waived in the case of a total or partial redemption in
connection with certain distributions made without penalty under the Internal
Revenue Code from a tax-deferred retirement plan, an IRA or Section 403(b)
custodial account. For more information, call Prudential at (800) 353-2847.
Finally, the CDSC will be waived to the extent that the proceeds from shares
redeemed are invested in Prudential mutual funds, The Guaranteed Investment
Account, the Guaranteed Insulated Separate Account or units of The Stable Value
Fund.
B-57
SYSTEMATIC WITHDRAWAL PLAN. The CDSC will be waived (or reduced) on certain
redemptions effected through the Systematic Withdrawal Plan. On an annual basis,
up to 12% of the total dollar amount subject to the CDSC may be redeemed without
charge. The Transfer Agent will calculate the total amount available for this
waiver annually on the anniversary date of your purchase. The CDSC will be
waived (or reduced) on redemptions until this threshold 12% is reached.
In addition, the CDSC will be waived on redemptions of shares held by
Trustees of the Fund.
You must notify the Fund's Transfer Agent either directly or through your
broker, at the time of redemption, that you are entitled to waiver of the CDSC
and provide the Transfer Agent with such supporting documentation as it may deem
appropriate. The waiver will be granted subject to confirmation of your
entitlement. In connection with these waivers, the Transfer Agent will require
you to submit the supporting documentation set forth below.
CATEGORY OF WAIVER REQUIRED DOCUMENTATION
Death A copy of the shareholder's death certificate
or, in the case of a trust, a copy of the
grantor's death certificate, plus a copy of the
trust agreement identifying the grantor.
Disability-An individual will be considered A copy of the Social Security Administration
disabled if he or she is unable to engage in any award letter or a letter from a physician on the
substantial gainful activity by reason of any physician's letterhead stating that the
medically determinable physical or mental shareholder (or, in the case of a trust, the
impairment which can be expected to result in grantor (a copy of the trust agreement
death or to be of long-continued and indefinite identifying the grantor will be required as
duration. well)) is permanently disabled. The letter must
also indicate the date of disability.
The Transfer Agent reserves the right to request such additional documents
as it may deem appropriate.
QUANTITY DISCOUNT--CLASS B SHARES PURCHASED PRIOR TO AUGUST 1, 1994
The CDSC is reduced on redemptions of Class B shares of a series of the Fund
purchased prior to August 1, 1994 if immediately after a purchase of such
shares, the aggregate cost of all Class B shares of a series of the Fund owned
by you in a single account exceeded $500,000. For example, if you purchased
$100,000 of Class B shares of a series of the Fund and the following year
purchased an additional $450,000 of Class B shares with the result that the
aggregate cost of your Class B shares of a series of the Fund following the
second purchase was $550,000, the quantity discount would be available for the
second purchase of $450,000 but not for the first purchase of $100,000. The
quantity discount will be imposed at the following rates depending on whether
the aggregate value exceeded $500,000 or $1 million:
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
- ------------------------------------------------- ---------------------- ---------------
First............................................ 3.0% 2.0 %
Second........................................... 2.0% 1.0 %
Third............................................ 1.0% 0 %
Fourth and thereafter............................ 0 % 0 %
You must notify the Transfer Agent, the Distributor, or your Dealer, at the
time of redemption, that you are entitled to the reduced CDSC. The reduced CDSC
will be granted subject to confirmation of your holdings.
CONVERSION FEATURE--CLASS B SHARES
Class B shares will automatically convert to Class A shares on a quarterly
basis approximately seven years after purchase. Conversions will be effected at
relative net asset value without the imposition of any additional sales charge.
B-58
Since the Fund tracks amounts paid rather than the number of shares bought
on each purchase of Class B shares, the number of Class B shares eligible to
convert to Class A shares (excluding shares acquired through the automatic
reinvestment of dividends and other distributions) (the Eligible Shares) will be
determined on each conversion date in accordance with the following formula:
(1) the ratio of (a) the amounts paid for Class B shares purchased at least
seven years prior to the conversion date to (b) the total amount paid for all
Class B shares purchased and then held in your account (2) multiplied by the
total number of Class B shares purchased and then held in your account. Each
time any Eligible Shares in your account convert to Class A shares, all shares
or amounts representing Class B shares then in your account that were acquired
through the automatic reinvestment of dividends and other distributions will
convert to Class A shares.
For purposes of determining the number of Eligible Shares, if the Class B
shares in your account on any conversion date are the result of multiple
purchases at different net asset values per share, the number of Eligible Shares
calculated as described above will generally be either more or less than the
number of shares actually purchased approximately seven years before such
conversion date. For example, if 100 shares were initially purchased at $10 per
share (for a total of $1,000) and a second purchase of 100 shares was
subsequently made at $11 per share (for a total of $1,100), 95.24 shares would
convert approximately seven years from the initial purchase (that is, $1,000
divided by $2,100 (47.62%), multiplied by 200 shares equals 95.24 shares). The
Manager reserves the right to modify the formula for determining the number of
Eligible Shares in the future as it deems appropriate on notice to shareholders.
Since annual distribution-related fees are lower for Class A shares than
Class B shares, the per share NAV of the Class A shares may be higher than that
of the Class B shares at the time of conversion. Thus, although the aggregate
dollar value will be the same, you may receive fewer Class A shares than
Class B shares converted.
For purposes of calculating the applicable holding period for conversions,
all payments for Class B shares during a month will be deemed to have been made
on the last day of the month, or for Class B shares acquired through exchange,
or a series of exchanges, on the last day of the month in which the original
payment for purchases of such Class B shares was made. For Class B shares
previously exchanged for shares of a money market fund, the time period during
which such shares were held in the money market fund will be excluded. For
example, Class B shares held in a money market fund for one year would not
convert to Class A shares until approximately eight years from purchase. For
purposes of measuring the time period during which shares are held in a money
market fund, exchanges will be deemed to have been made on the last day of the
month. Class B shares acquired through exchange will convert to Class A shares
after expiration of the conversion period applicable to the original purchase of
such shares.
The conversion feature may be subject to the continuing availability of
opinions of counsel or rulings of the Internal Revenue Service (1) that the
dividends and other distributions paid on Class A, Class B, Class C and Class Z
shares will not constitute "preferential dividends" under the Internal Revenue
Service Code and (2) that the conversion of shares does not constitute a taxable
event. The conversion of Class B shares into Class A shares may be suspended if
such opinions or rulings are no longer available. If conversions are suspended,
Class B shares of the Fund will continue to be subject, possibly indefinitely,
to their higher annual distribution and service fee. Shareholders should consult
their tax advisers regarding the state and local tax consequences of the
conversion or exchange of shares.
SHAREHOLDER INVESTMENT ACCOUNT
Upon the initial purchase of shares of the Fund, a Shareholder Investment
Account is established for each investor under which the shares are held for the
investor by the Transfer Agent. If a share certificate is desired, it must be
requested in writing for each transaction. Certificates are issued only for full
shares and may be redeposited in the Account at any time. There is no charge to
the investor for issuance of a certificate. The Fund makes available to its
shareholders the following privileges and plans.
AUTOMATIC REINVESTMENT OF DIVIDENDS AND/OR DISTRIBUTIONS
For the convenience of investors, all dividends and distributions are
automatically reinvested in full and fractional shares of a series at net asset
value per share. An investor may direct the Transfer Agent in writing not
B-59
less than five full business days prior to the record date to have subsequent
dividends and/or distributions sent in cash rather than reinvested. In the case
of recently purchased shares for which registration instructions have not been
received by the record date, cash payment will be made directly to the broker.
Any shareholder who receives dividends or distributions in cash may subsequently
reinvest any such dividends or distributions at NAV by returning the check to
the Transfer Agent within 30 days after the payment date. The reinvestment will
be made at the NAV per share next determined after receipt of the check by the
Transfer Agent. Shares purchased with reinvested dividends and/or distributions
will not be subject to CDSC upon redemption.
EXCHANGE PRIVILEGE
Each series makes available to its shareholders the privilege of exchanging
their shares of a series for shares of other series of the Fund and certain
other Prudential mutual funds, including one or more specified money market
funds, subject in each case to the minimum investment requirements of such
funds. Shares of such other Prudential mutual funds may also be exchanged for
shares of the series 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.
In order to exchange shares by telephone, you must authorize telephone
exchanges on your initial application form or by written notice to the Transfer
Agent and hold shares in non-certificate form. Thereafter, you may call the Fund
at (800) 225-1852 to execute a telephone exchange of shares, on weekdays, except
holidays, between the hours of 8:00 a.m. and 8:00 p.m., New York time. For your
protection and to prevent fraudulent exchanges, your telephone call will be
recorded and you will be asked to provide your personal identification number. A
written confirmation of the exchange transaction will be sent to you. Neither
the Fund nor its agents will be liable for any loss, liability or cost which
results from acting upon instructions reasonably believed to be genuine under
the foregoing procedures. All exchanges will be made on the basis of the
relative NAV of the two funds next determined after the request is received in
good order.
If you hold shares through Prudential Securities, you must exchange your
shares by contacting your Prudential Securities financial adviser.
If you hold certificates, the certificates must be returned in order for the
shares to be exchanged.
You may also exchange shares by mail by writing to Prudential Mutual Fund
Services LLC, Attention: Exchange Processing, P.O. Box 8157, Philadelphia, PA
19101.
In periods of severe market or economic conditions the telephone exchange of
shares may be difficult to implement and you should make exchanges by mail by
writing to Prudential Mutual Fund Services LLC, at the address noted above.
CLASS A. Shareholders of the Fund may exchange their Class A shares for
Class A shares of other series of the Fund or certain other Prudential mutual
funds and shares of the money market funds specified below. No fee or sales load
will be imposed upon the exchange. Shareholders of money market funds who
acquired such shares upon exchange of Class A shares may use the exchange
privilege only to acquire Class A shares of the Prudential mutual funds
participating in the exchange privilege.
The following money market funds participate in the Class A exchange
privilege:
Prudential California Municipal Fund
(California Money Market Series)
Prudential Government Securities Trust
(Money Market Series)
(U.S. Treasury Money Market Series)
B-60
Prudential Municipal Series Fund
(New Jersey Money Market Series)
(New York Money Market Series)
Prudential MoneyMart Assets, Inc.
Prudential Tax-Free Money Fund, Inc.
CLASS B AND CLASS C. Shareholders of each non-money market series may
exchange their Class B and Class C shares for Class B and Class C shares,
respectively, of other series of the Fund or certain other Prudential mutual
funds and shares of Prudential Special Money Market Fund, Inc., a money market
mutual fund. No CDSC will be payable upon such exchange, but a CDSC may be
payable upon the redemption of the Class B and Class C shares acquired as a
result of the exchange. The applicable sales charge will be that imposed by the
fund in which shares were initially purchased and the purchase date will be
deemed to be the first day of the month after the initial purchase, rather than
the date of the exchange.
Class B and Class C shares of the Fund may also be exchanged for shares of
an eligible money market fund without imposition of any CDSC at the time of
exchange. Upon subsequent redemption from such money market fund or after
re-exchange into the 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
exchanged first. In measuring the time period shares are held in a money market
fund and "tolled" for purposes of calculating the CDSC holding period, exchanges
are deemed to have been made on the last day of the month.Thus, if shares are
exchanged into the Fund from a money market fund during the month (and are held
in the Fund at the end of the month), the entire month will be included in the
CDSC holding period. Conversely, if shares are exchanged into a money market
fund prior to the last day of the month (and are held in the money market fund
on the last day of the month), the entire month will be excluded from the CDSC
holding period. For purposes of calculating the seven year holding period
applicable to the Class B conversion feature, the time period during which
Class B shares were held in a money market fund will be excluded.
At any time after acquiring shares of other funds participating in the Class
B or Class C Exchange Privilege, a shareholder may again exchange those shares
(and any reinvested dividends and distributions) for Class B or Class C shares
of a series, 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.
SPECIAL EXCHANGE PRIVILEGES. A special exchange privilege is available for
shareholders who qualify to purchase Class A shares at NAV and for shareholders
who qualify to purchase Class Z shares. Under this exchange privilege, amounts
representing any Class B and Class C shares which are not subject to a CDSC held
in such a shareholder's account will be automatically exchanged for Class A
shares for shareholders who qualify to purchase Class A shares at NAV on a
quarterly basis, unless the shareholder elects otherwise.
Shareholders who qualify to purchase Class Z shares will have their Class B
and Class C shares which are not subject to a CDSC and their Class A shares
exchanged for Class Z shares on a quarterly basis. Eligibility for this exchange
privilege will be calculated on the business day prior to the date of the
exchange. Amounts representing Class B and Class C shares which are not subject
to a CDSC include the following: (1) amounts representing Class B or Class C
shares acquired pursuant to the automatic reinvestment of dividends and
distributions, (2) amounts representing the increase in the net asset value
above the total amount of payments for the purchase of Class B or Class C shares
and (3) amounts representing Class B and Class C shares held beyond the
applicable CDSC period. Class B and Class C shareholders must notify the
Transfer Agent either directly or through Prudential Securities, Prusec or
another broker that they are eligible for this special exchange privilege.
B-61
Participants in any fee-based program for which a series is an available
option will have their Class A shares, if any, exchanged for Class Z shares when
they elect to have those assets become a part of the fee-based program. Upon
leaving the program (whether voluntarily or not), such Class Z shares (and, to
the extent provided for in the program, Class Z shares acquired through
participation in the program) will be exchanged for Class A shares at net asset
value.
Additional details about the exchange privilege and prospectuses for each of
the Prudential mutual funds are available from the Fund's Transfer Agent, the
Distributor or your broker. The exchange privilege may be modified, terminated
or suspended on sixty days' notice, and any fund, including the Fund, or the
Distributor, has the right to reject any exchange application relating to such
fund's shares. See "How to Buy, Sell and Exchange Shares of the Series--How to
Exchange Your Shares--Frequent Trading" in the Prospectus.
DOLLAR COST AVERAGING (NOT APPLICABLE TO THE MONEY MARKET SERIES)
Dollar cost averaging is a method of accumulating shares by investing a
fixed amount of dollars in shares at set intervals. An investor buys more shares
when the price is low and fewer shares when the price is high. The average cost
per share is lower than it would be if a constant number of shares were bought
at set intervals.
Dollar cost averaging may be used, for example, to plan for retirement, to
save for a major expenditure, such as the purchase of a home, or to finance a
college education. The cost of a year's education at a four-year college today
averages around $14,000 at a private college and around $6,000 at a public
university. Assuming these costs increase at a rate of 7% a year, as has been
projected, for the freshman class beginning in 2011, the cost of four years at a
private college could reach $210,000 and over $90,000 at a public university.(1)
The following chart shows how much you would need in monthly investments to
achieve specified lump sums to finance your investment goals.(2)
PERIOD OF
MONTHLY INVESTMENTS: $100,000 $150,000 $200,000 $250,000
-------------------- -------- -------- -------- --------
25 Years........................................ $ 105 $ 158 $ 210 $ 263
20 Years........................................ 170 255 340 424
15 Years........................................ 289 438 578 722
10 Years........................................ 547 820 1,093 1,366
5 Years........................................ 1,361 2,041 2,721 3,402
See "Automatic Investment Plan (AIP)" below.
- ------------------------
(1)Source information concerning the costs of education at public and private
universities is available from The College Board Annual Survey of Colleges,
1993. Average costs for private institutions include tuition, fees, room and
board for the 1993-1994 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.
AUTOMATIC INVESTMENT PLAN (AIP)
Under AIP, an investor may arrange to have a fixed amount automatically
invested in shares of a series by authorizing his or her bank account or
Prudential Securities account (including a Prudential Securities COMMAND
Account) to be debited to invest specified dollar amounts for subsequent
investment into the series. The investor's bank must be a member of the
Automatic Clearing House System.
Further information about this program and an application form can be
obtained from the Transfer Agent, the Distributor or your broker.
SYSTEMATIC WITHDRAWAL PLAN
A systematic withdrawal plan is available to shareholders through Prudential
Securities or the Transfer Agent. Such withdrawal plan provides for monthly,
quarterly, semi-annual or annual redemption checks in any amount, except as
provided below, up to the value of the shares in the shareholder's account.
Systematic
B-62
withdrawals of Class B or Class C shares may be subject to a CDSC. See "How to
Buy, Sell and Exchange Shares of the Series--How to Sell Your Shares--Contingent
Deferred Sales Charge (CDSC)" in the Prospectus of each applicable series.
In the case of shares held through the Transfer Agent, (1) a $10,000 minimum
account value applies, (2) systematic withdrawals may not be for less than $100
and (3) all dividends and/or distributions must be automatically reinvested in
additional full and fractional shares of the Fund in order for the shareholder
to participate in the plan. See "Automatic Reinvestment of Dividends and/or
Distributions" above.
The Distributor, the Transfer Agent or your broker act as agents for the
shareholder in redeeming sufficient full and fractional shares to provide the
amount of the systematic withdrawal payment. The systematic withdrawal plan may
be terminated at any time, and the Distributor reserves the right to initiate a
fee of up to $5 per withdrawal, upon 30 days' written notice to the
shareholders.
Systematic withdrawal payments should not be considered as dividends, yield
or income. If systematic withdrawals continuously exceed reinvested dividends
and distributions, the shareholder's original investment will be correspondingly
reduced and ultimately exhausted.
Furthermore, each systematic withdrawal constitutes a redemption of shares,
and any gain or loss realized must be recognized for federal income tax
purposes. In addition, systematic withdrawals made concurrently with purchases
of additional shares are inadvisable because of the sales charges applicable to
(1) the purchase of Class A and Class C shares and (2) the redemption of
Class B and Class C shares. Each shareholder should consult his or her own tax
adviser with regard to the tax consequences of the systematic withdrawal plan.
HOW TO REDEEM SHARES OF THE MONEY MARKET SERIES
Redemption orders submitted to and received by Prudential Mutual Fund
Services LLC (PMFS) will be effected at the net asset value next determined
after receipt of the order. Shareholders of the Connecticut Money Market Series,
the Massachusetts Money Market Series, the New Jersey Money Market Series and
the New York Money Market Series (other than Prudential Securities clients for
whom Prudential Securities has purchased shares of such money market series) may
use Check Redemption, Expedited Redemption or Regular Redemption.
CHECKWRITING REDEMPTION
Shareholders are subject to the Custodian's rules and regulations governing
checkwriting redemption privileges, including the right of the Custodian not to
honor checks in amounts exceeding the value of the shareholder's account at the
time the check is presented for payment.
Shares for which certificates have been issued are not available for
redemption to cover checks. A shareholder should be certain that adequate shares
for which certificates have not been issued are in his or her account to cover
the amount of the check. Also, shares purchased by check are not available for
check redemptions until 10 days after receipt of the purchase check by PMFS
unless the Fund or PMFS has been advised that the purchase check has been
honored. Such delay may be avoided by purchasing shares by certified check or by
wire. If insufficient shares are in the account, or if the purchase was made by
check within 10 days, the check is returned marked "insufficient funds." Since
the dollar value of an account is constantly changing, it is not possible for a
shareholder to determine in advance the total value of his or her account so as
to write a check for the redemption of the entire account.
There is a service charge of $5.00 payable to PMFS to establish the
checkwriting redemption privilege and to order checks. The Custodian and the
Fund have reserved the right to modify this checkwriting privilege or to impose
a charge for each check presented for payment for any individual account or for
all accounts in the future.
The Fund or PMFS may terminate Checkwriting Redemption Privilege at any time
upon 30 days' notice to participating shareholders. To receive further
information, contact Prudential Mutual Fund Services LLC, Redemption Services,
P.O. Box 15010, New Brunswick, New Jersey 08906-5010.
B-63
EXPEDITED REDEMPTION
To request an Expedited Redemption by telephone, a shareholder should call
PMFS at (800) 225-1852. Calls must be received by PMFS before 4:30 P.M., New
York time. Requests by letter should be addressed to Prudential Mutual Fund
Services LLC, Attention: Redemption Services, P.O. Box 15010, New Brunswick, New
Jersey 08906-5015.
In order to change the name of the commercial bank or account designated to
receive redemption proceeds, it is necessary to execute a new Expedited
Redemption Authorization Form and submit it to PMFS at the address set forth
above. Requests to change a bank or account must be signed by each shareholder
and each signature must be guaranteed by an "eligible guarantor institution" as
defined below. PMFS may request further documentation from corporations,
executors, administrators, trustees or guardians.
To receive further information, investors should contact PMFS at
(800) 225-1852.
REGULAR REDEMPTION
Shareholders may redeem their shares by sending to PMFS, at the address set
forth above, a written request, accompanied by share certificates, if issued. If
the proceeds of the redemption (a) exceed $100,000, (b) are to be paid to a
person other than the record owner, (c) are to be sent to an address other than
the address on the Transfer Agent's records or (d) are to be paid to a
corporation, partnership, trust or fiduciary, the signature(s) on the redemption
request or stock power must be signature guaranteed by an "eligible guarantor
institution." An "eligible guarantor institution" includes any bank, broker,
dealer or credit union. For clients of Prusec, a signature guarantee may be
obtained from the agency or office manager of most Prudential District or
Ordinary offices. The Fund may change the signature guarantee requirements from
time to time on notice to shareholders, which may be given by means of a new
Prospectus. All correspondence concerning redemptions should be sent to the Fund
in care of its Transfer Agent, Prudential Mutual Fund Services LLC, Attention:
Redemption Services, P.O. Box 15010, New Brunswick, New Jersey 08906-5010.
Regular redemption is made by check sent to the shareholder's address of record.
MUTUAL FUND PROGRAMS
From time to time, the Fund (or a series of the Fund) may be included in a
mutual fund program with other Prudential mutual funds. Under such a program, a
group of portfolios will be selected and thereafter promoted collectively.
Typically, these programs are created with an investment theme, such as pursuit
of greater diversification, protection from interest rate movements or access to
different management styles. In the event such a program is instituted, there
may be a minimum investment requirement for the program as a whole. The Fund may
waive or reduce the minimum initial investment requirements in connection with
such a program.
The mutual funds in the program may be purchased individually or as part of
the program. Since the allocation of portfolios included in the program may not
be appropriate for all investors, investors should consult their Prudential
Securities Financial Advisor, Prudential/Pruco Securities Representative, or
other broker concerning the appropriate blend of portfolios for them. If
investors elect to purchase the individual mutual funds that constitute the
program in an investment ratio different from that offered by the program, the
standard minimum investment requirements for the individual mutual funds will
apply.
NET ASSET VALUE
The net asset value per share (NAV) of a series is the net worth of such
series (assets, including securities at value, minus liabilities) divided by the
number of shares of such series outstanding. NAV is calculated separately for
each class. The Fund will compute the NAV of each such series (except the money
market series) once daily at 4:15 p.m., New York time, on days the New York
Stock Exchange is open for trading, except on days on which no orders to
purchase, sell or redeem shares of the series have been received or on days on
which changes in the value of the series' portfolio securities do not affect
NAV. The Fund will compute the NAV of the money market series at 4:30 p.m., New
York time, on days the New York Stock Exchange is open for trading, except on
days on which no orders to purchase, sell or redeem shares of the money market
series have been received or on days on which changes in the value of the money
market series' portfolio securities do not affect NAV. In the event the New York
Stock Exchange closes early on any business day, the NAV of the Fund's shares
B-64
shall be determined at a time between such closing and 4:15 p.m., New York time
(with respect to shares of the non-money market series of the Fund) and between
such closing and 4:30 p.m., New York time (with respect to the money market
series of the Fund). The New York Stock Exchange is closed on the following
holidays: New Year's Day, Martin Luther King, Jr. Day, President's Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day, and
Christmas Day.
Portfolio securities for which market quotations are readily available are
valued at their bid quotations. When market quotations are not readily
available, such securities and other assets are valued at fair value in
accordance with procedures adopted by the Trustees. Under these procedures the
Fund values municipal securities on the basis of valuations provided by a
pricing service which uses information with respect to transactions in bonds,
quotations from bond dealers, market transactions in comparable securities and
various relationships between securities in determining value. The Trustees
believe that reliable market quotations are generally not readily available for
purposes of valuing tax-exempt securities. As a result, depending on the
particular tax-exempt securities owned by the Fund, it is likely that most of
the valuations for such securities will be based upon fair value determined
under the foregoing procedures. Short-term investments which mature in less than
60 days are valued at amortized cost, if their original term to maturity was
less than 60 days, or are valued at amortized cost on the 60th day prior to
maturity if their original term to maturity when acquired by the Fund was more
than 60 days, unless this is determined not to represent fair value by the
Trustees.
The money market series use the amortized cost method to determine the value
of their portfolio securities in accordance with regulations of the Commission.
The amortized cost method involves valuing a security at its cost and amortizing
any discount or premium over the period until maturity. The method does not take
into account unrealized capital gains and losses which may result from the
effect of fluctuating interest rates on the market value of the security.
With respect to the money market series, the Trustees have determined to
maintain a dollar-weighted average portfolio maturity of 90 days or less, to
purchase instruments having remaining maturities of thirteen months or less and
to invest only in securities determined by the investment adviser under the
supervision of the Trustees to present minimal credit risks and to be of
eligible quality in accordance with regulations of the Commission. The Trustees
have adopted procedures designed to stabilize, to the extent reasonably
possible, the money market series' price per share as computed for the purpose
of sales and redemptions at $1.00. Such procedures will include review of the
money market series' portfolio holdings by the Trustees, at such intervals as
they may deem appropriate, to determine whether the money market series' net
asset value calculated by using available market quotations deviates from $1.00
per share based on amortized cost. The extent of any deviation will be examined
by the Trustees. If such deviation exceeds 1/2 of 1%, the Trustees will promptly
consider what action, if any, will be initiated. In the event the Trustees
determine that a deviation exists which may result in material dilution or other
unfair results to prospective investors or existing shareholders, the Trustees
will take such corrective action as they consider necessary and appropriate,
including the sale of portfolio instruments prior to maturity to realize capital
gains or losses or to shorten average portfolio maturity, the withholding of
dividends, redemptions of shares in kind, or the use of available market
quotations to establish a NAV.
PERFORMANCE INFORMATION
ALL SERIES (EXCEPT THE MONEY MARKET SERIES)
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. The yield will be computed by dividing the series'
net investment income per share earned during this 30-day period by the NAV on
the last day of this period. The average number of shares used in determining
the net investment income per share will be the average daily number of shares
outstanding during the 30-day period that were eligible to receive dividends. In
accordance with Commission regulations, income will be computed by totaling the
interest earned on all debt obligations during the 30-day period and subtracting
from that amount the total of all recurring expenses incurred during the period,
which includes management and distribution fees. The 30-day yield is then
B-65
annualized on a bond-equivalent basis assuming semi-annual reinvestment and
compounding of net investment income, as described in the Prospectus of each
series. The yields for the 30 days ended August 31, 2000 were as follows:
CLASS A CLASS B CLASS C CLASS Z
-------- -------- -------- --------
SERIES YIELD YIELD YIELD YIELD
- ------ -------- -------- -------- --------
Florida.................................................... 4.61% 4.50% 4.22% 5.01%
Massachusetts.............................................. 4.28 4.22 3.99 4.67
New Jersey................................................. 4.48 4.37 4.08 4.87
New York................................................... 4.45 4.33 4.05 4.83
North Carolina............................................. 4.37 4.32 4.09 N/A
Ohio....................................................... 4.26 4.20 3.97 N/A
Pennsylvania............................................... 4.73 4.63 4.34 N/A
The series' yield is computed 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 (net of reimbursements).
c = the average daily number of shares outstanding during the
period that were entitled to receive dividends.
d = the maximum offering price per share on the last day of the
period.
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 on which is exempt for federal income tax
purposes. This portion of the yield will then be divided by one minus the state
tax rate times one minus the federal tax rate and then added to the portion of
the yield that is attributable to other securities. For the 30 days ended
August 31, 2000, the tax equivalent yields (assuming a federal tax rate of 36%)
were as follows:
CLASS A CLASS B CLASS C CLASS Z
-------- -------- -------- --------
TAX TAX TAX TAX
EQUIVALENT EQUIVALENT EQUIVALENT EQUIVALENT
SERIES YIELD YIELD YIELD YIELD
- ------------------------------------------------------------ -------- -------- -------- --------
Florida..................................................... 7.20% 7.03% 6.59% 7.83%
Massachusetts............................................... 7.11 7.01 6.63 7.76
New Jersey.................................................. 7.48 7.29 6.81 8.13%
New York.................................................... 7.46 7.26 6.79 8.10%
North Carolina.............................................. 7.40 7.32 6.93 N/A
Ohio........................................................ 7.17 7.07 6.68 N/A
Pennsylvania................................................ 7.60 7.44 6.98 N/A
AVERAGE ANNUAL TOTAL RETURN. Each series of the Fund 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.
B-66
Average annual total return is computed according to the following formula:
P(1+T)to the power of n = ERV
Where: P = a hypothetical initial payment of $1000.
T = average annual total return.
n = number of years.
ERV = Ending Redeemable Value at the end of the 1, 5 or 10 year
periods (or fractional portion thereof) of a hypothetical
$1000 payment made at the beginning of the 1, 5 or 10 year
periods.
Average annual total return assumes reinvestment of all dividends and
distribution and takes into account any applicable initial or contingent
deferred sales charges but does not take into account any federal or state
income taxes that may be payable upon redemption.
The average annual total return (with and without management subsidies and
waivers), for the Class A, Class B, Class C and Class Z shares of the series
(other than the money market series) for the periods ended August 31, 2000 are
set forth below. The average annual total return for the since inception period
is provided for each class the inception date of which is after September 1,
1990. The average annual total return for the ten year period is provided for
each class the inception date of which was on or before September 1, 1990.
CLASS A
-----------------------------------------------------------
WITH WITHOUT
SUBSIDY/WAIVER SUBSIDY/WAIVER
----------------------- -----------------------
TEN YEARS TEN YEARS
ONE FIVE OR SINCE ONE FIVE OR SINCE INCEPTION
SERIES YEAR* YEARS INCEPTION YEAR* YEARS INCEPTION DATE
- ------ ----- ----- --------- ----- ----- --------- ---------
Florida........ 2.56% 4.97% 6.53% 2.56% 4.80% 5.94% 12/28/90
Massachusetts... 1.68 4.21 6.37 1.68 4.17 6.35 1/22/90
New Jersey..... 2.23 4.52 6.49 2.23 4.48 6.28 1/22/90
New York....... 2.99 1.80 6.49 5.91 4.16 6.4 1/22/90
North
Carolina...... 2.50 4.48 6.09 2.50 4.44 6.07 1/22/90
Ohio........... 2.01 4.17 6.22 2.01 4.14 6.19 1/22/90
Pennsylvania... 1.83 4.36 6.37 1.83 4.34 6.34 N/A
CLASS B
-----------------------------------------------------------
WITH WITHOUT
SUBSIDY/WAIVER SUBSIDY/WAIVER
----------------------- -----------------------
TEN YEARS TEN YEARS
ONE FIVE OR SINCE ONE FIVE OR SINCE INCEPTION
SERIES YEAR* YEARS INCEPTION YEAR* YEARS INCEPTION DATE
- ------ ----- ----- --------- ----- ----- --------- ---------
Florida........ .46% 5.08% 5.51% .46% 4.91% 5.20% 8/1/94
Massachusetts.. (.35) 4.32 6.29 (.35) 4.29 6.27 9/25/84
New Jersey..... .23 4.64 6.42 .23 4.60 6.21 3/4/88
New York....... .29 4.43 7.45 .44 4.89 7.43 9/13/84
North
Carolina...... .31 4.59 6.02 .31 4.55 6.00 2/13/85
Ohio........... -.10 4.28 6.16 -.10 4.24 6.13 9/20/84
Pennsylvania... (0.28) 4.46 6.29 (0.28) 4.44 6.27 N/A
* Effective September 1, 1997, the Manager discontinued its voluntary waiver of
its management fee of % of the applicable series' average daily net assets.
CLASS C
-----------------------------------------------------------
WITH WITHOUT
SUBSIDY/WAIVER SUBSIDY/WAIVER
----------------------- -----------------------
ONE FIVE SINCE ONE FIVE SINCE INCEPTION
SERIES YEAR* YEARS INCEPTION YEAR* YEARS INCEPTION DATE
- ------ ----- ----- --------- ----- ----- --------- ---------
Florida........ 3.15% 4.77% 4.44% 3.15% 4.60% 4.00% 7/26/93
Massachusetts... 2.35 4.03 4.53 2.35 3.99 4.50 8/1/94
New Jersey..... 2.91 4.34 4.71 2.91 4.30 4.63 8/1/94
New York....... 3.64 4.62 4.95 3.64 4.58 4.92 8/1/94
North
Carolina...... 3.00 4.29 4.54 3.00 4.25 4.51 8/1/94
Ohio........... 2.59 3.98 4.43 2.59 3.94 4.38 8/1/94
Pennsylvania... 2.41 4.16 4.53 2.41 4.14 4.49 8/1/94
CLASS Z
---------------------------------------------
WITH WITHOUT
SUBSIDY/WAIVER SUBSIDY/WAIVER
---------------- ----------------
ONE SINCE ONE SINCE INCEPTION
SERIES YEAR* INCEPTION YEAR* INCEPTION DATE
- ------ ----- --------- ----- --------- ---------
Florida........ 5.99% 4.91% 5.99% 4.85% 12/6/96
Massachusetts.. 5.08 4.41 5.08 4.38 12/6/96
New Jersey..... 5.66 5.08 5.66 5.08 12/6/96
New York....... 6.51 5.42 6.53 5.14 12/6/96
North
Carolina......
Ohio........... -- -- -- -- N/A
Pennsylvania... -- -- -- -- 12/6/96
* Effective September 1, 1997, the Manager discontinued its voluntary waiver of
its management fee of % of the applicable series' average daily net assets.
AGGREGATE TOTAL RETURN. Each series of the Fund may also advertise its
aggregate total return. Aggregate total return is determined separately for
Class A, Class B, Class C and Class Z shares.
B-67
Aggregate total return represents the cumulative change in the value of an
investment in a series of the Fund 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 of a hypothetical $1,000 payment made at the beginning
of the 1, 5 or 10 year periods (or fractional portion thereof).
Aggregate total return does not take into account any federal or state
income taxes that may be payable upon redemption or any applicable initial or
contingent deferred sales charges.
The aggregate total return for the Class A, Class B, Class C and Class Z
shares of each series for the periods ended August 31, 2000 are set forth below.
The aggregate total return for the since inception period is provided for each
class the inception date of which is after September 1, 1990. The aggregate
total return for the ten year period is provided for each class the inception
date of which was on or before September 1, 1990.
CLASS A CLASS B
--------------------------------------- ---------------------------------------
AGGREGATE AGGREGATE
TOTAL TOTAL
RETURN RETURN
--------------------------------------- ---------------------------------------
10 YR. OR 10 YR. OR
SINCE INCEPTION SINCE INCEPTION
SERIES 1 YR.* 5 YR. INCEPTION DATE 1 YR.* 5 YR. INCEPTION DATE
- ------ ------ ----- --------- ------------- ------ ----- --------- -------------
Florida............. 5.73% 31.36% 90.17% 12/28/90 5.46% 29.09% 38.57% 8/1/94
Massachusetts....... 4.82 26.67 91.13 1/22/90 4.65 24.58 83.96 9/25/84
New Jersey.......... 5.39 28.57 93.29 1/22/90 5.23 26.46 86.39 3/4/88
New York............ 6.17 30.10 100.76 1/22/90 5.99 28.17 214.77 9/13/84
North Carolina...... 5.67 28.36 86.27 1/22/90 5.31 26.14 79.41 2/13/85
Ohio................ 5.17 26.47 88.49 1/22/90 4.90 24.29 81.75 4/20/84
Pennsylvania........ 4.98 27.60 91.08 N/A 4.73 25.39 84.09 N/A
CLASS C CLASS Z
--------------------------------------- --------------------------------
AGGREGATE AGGREGATE
TOTAL TOTAL
RETURN RETURN
--------------------------------------- --------------------------------
SINCE INCEPTION SINCE INCEPTION
SERIES 1 YR.* 5 YR. INCEPTION DATE 1 YR.* INCEPTION DATE
- ------ ------ ----- --------- ------------- ------ --------- -------------
Florida............. 5.20% 27.49% 37.46% 7/26/93 5.99% 19.59% 12/6/96
Massachusetts....... 4.40 23.05 32.25 8/1/94 5.08 17.48 12/6/96
New Jersey.......... 4.96 24.90 33.66 8/1/94 5.66 20.33 12/6/96
New York............ 5.73 26.59 35.54 8/1/94 -- 20.67 12/6/96
North Carolina...... 5.05 24.36 32.07 8/1/94
Ohio................ 4.64 22.77 31.46 8/1/94
Pennsylvania........ 4.46 23.82 32.25 8/1/94
* Effective September 1, 1997, the Manager discontinued its voluntary waiver of
its management fee of % of the applicable series' average daily net assets.
The aggregate total return for the Class A, Class B, Class C and Class Z
shares of each series for the periods ended August 31, 2000, without the
management subsidies and waivers are set forth below. The aggregate total return
for the since inception period is provided for each class the inception date of
which is after September 1, 1990. The aggregate total return for the ten year
period is provided for each class the inception date of which was on or before
September 1, 1990.
CLASS A CLASS B
------------------------------------ -----------------------------------
AGGREGATE TOTAL AGGREGATE TOTAL
RETURN RETURN
WITHOUT WITHOUT
SUBSIDY/WAIVER SUBSIDY/WAIVER
------------------------------------ -----------------------------------
10 YR. OR 10 YR. OR
SINCE INCEPTION SINCE INCEPTION
SERIES 1 YR.* 5 YR. INCEPTION DATE 1 YR.* 5 YR. INCEPTION DATE
- ------ ------ ------ --------- --------- ------ ----- --------- ---------
Florida............. 5.73% 30.33% 80.13% 12/28/90 5.46% 28.08% 36.13% 8/1/94
Massachusetts....... 4.82 26.64 90.79 1/22/90 4.65 24.35 83.63 9/25/84
New Jersey.......... 5.39 28.33 89.48 1/22/90 5.23 26.22 82.72 3/4/88
New York............ 6.17 30.10 108.11 1/22/90 5.99 27.95 213.95 9/13/84
North Carolina...... 6.59 28.13 85.93 1/22/90 5.31 25.91 79.09 3/4/88
Ohio................ 5.17 26.25 87.99 1/22/90 4.90 24.07 81.27 9/20/84
Pennsylvania........ 4.98 27.48 90.70 N/A 4.73 25.26 83.72 N/A
CLASS C CLASS Z
----------------------------------- --------------------------------
AGGREGATE TOTAL AGGREGATE TOTAL
RETURN RETURN
WITHOUT WITHOUT
SUBSIDY/WAIVER SUBSIDY/WAIVER
----------------------------------- --------------------------------
SINCE INCEPTION SINCE INCEPTION
SERIES 1 YR.* 5 YR. INCEPTION DATE 1 YR.* INCEPTION DATE
- ------ ------ ----- --------- --------- ------ --------- -------------
Florida............. 5.20% 26.49% 33.43% 7/26/93 5.99% 19.36% 12/6/96
Massachusetts....... 4.40 22.83 32.01 8/1/94 5.08 17.37 12/6/96
New Jersey.......... 4.96 24.66 33.03 8/1/94 5.66 20.22 12/6/96
New York............ 5.73 26.37 35.31 8/1/94 6.53 20.57 12/6/96
North Carolina...... 5.05 24.36 32.07 8/1/94
Ohio................ 4.64 22.55 31.11 8/1/94
Pennsylvania........ 4.46 23.70 31.98 8/1/94
* Effective September 1, 1997, the Manager discontinued its voluntary waiver of
its management fee of % of the applicable series' average daily net assets.
B-68
THE CONNECTICUT MONEY MARKET SERIES, THE MASSACHUSETTS MONEY MARKET SERIES, THE
NEW JERSEY MONEY MARKET SERIES AND THE NEW YORK MONEY MARKET SERIES
The money market series will prepare a current quotation of yield from time
to time. The yield quoted will be the simple annualized yield for an identified
seven calendar day period. The yield calculation will be based on a hypothetical
account having a balance of exactly one share at the beginning of the seven-day
period. The base period return will be the change in the value of the
hypothetical account during the seven-day period, including dividends declared
on any shares purchased with dividends on the shares but excluding any capital
changes. The yield will vary as interest rates and other conditions affecting
money market instruments change. Yield also depends on the quality, length of
maturity and type of instruments in the money market series' portfolio and its
operating expenses. The money market series may also prepare an effective annual
yield computed by compounding the unannualized seven-day period return as
follows: by adding 1 to the unannualized seven-day period return, raising the
sum to a power equal to 365 divided by 7, and subtracting 1 from the result. The
Connecticut Money Market Series, Massachusetts Money Market Series, New Jersey
Money Market Series and New York Money Market Series' annualized seven-day
current yield as of August 31, 2000 was 3.21%, 3.29%, 3.42%, and 3.43%,
respectively. The Connecticut Money Market Series, Massachusetts Money Market
Series, New Jersey Money Market Series and New York Money Market Series'
effective annual yield as of August 31, 2000 was 3.21%, 3.34%, 3.47% and 3.47%,
respectively.
The money market series may also calculate the tax equivalent yield over a
7-day period. The tax equivalent yield will be determined by first computing the
current yield as discussed above. The series will then determine what portion of
that yield is attributable to securities, the income on which is exempt for
federal income tax purposes. This portion of the yield will then be divided by
one minus the state tax rate times one minus the federal tax rate and then added
to the portion of the yield that is attributable to other securities. The
Connecticut Money Market Series, Massachusetts Money Market Series, New Jersey
Money Market Series and New York Money Market Series' 7-day tax equivalent yield
(assuming a federal tax rate of 39.6%) as of August 31, 2000 was 5.74%, 6.19%,
6.05% and 6.10%, respectively.
Comparative performance information may be used from time to time in
advertising or marketing the money market series' shares, including data from
Lipper Analytical Services, Inc., IBC/Donoghue's Money Fund Report or other
industry publications.
The money market series' yield fluctuates, and an annualized yield quotation
is not a representation by the money market series as to what an investment in
the money market series will actually yield for any given period. Actual yields
will depend upon not only changes in interest rates generally during the period
in which the investment in the money market series is held, but also on any
realized or unrealized gains and losses and changes in the money market series'
expenses.
ADVERTISING. Advertising materials for each Series may include biographical
information relating to its portfolio manager(s), and may include or refer to
commentary by the Series manager(s) concerning investment style, investment
discipline, asset growth, current or past business experience, business
capabilities, political, economic or financial conditions and other matters of
general interest to investors. Advertising materials for each Series' also may
include mention of The Prudential Insurance Company of America, its affiliates
and subsidiaries, and reference the assets, products and services of those
entities.
From time to time, advertising materials for each Series' may include
information concerning retirement and investing for retirement, may refer to the
approximate number of Series' shareholders and may refer to Lipper rankings or
Morningstar ratings, other related analyses supporting those ratings, other
industry publications, business periodicals and market indicies. In addition,
advertising materials may reference studies or analyses performed by the Manager
or its affiliates. Advertising materials for sector funds, funds that focus on
market capitalizations, index funds and international/global funds may discuss
the potential benefits and risk of that investment style. Advertising materials
for fixed income funds may discuss the benefits and risks of investing in the
bond market including discussions of credit quality, duration and maturity.
B-69
From time to time, the performance of the series may be measured against
various indexes. Set forth below is a chart which compares the performance of
different types of investments over the long-term and the rate of inflation.(1)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
Performance
Comparison of Different
Types of Investments
Over the Long Term
(12/31/25-12/31/99)
Common Stocks Long-Term Govt. Bonds Inflation
11.2% 5.3% 3.1%
(1)Source: Ibbotson Associates, "Stocks, Bonds, Bills and Inflation--1999
Yearbook" (annually updates the work of Roger G. Ibbotson and Rex A.
Sinquefield). All rights reserved. Common stock returns are based on the
Standard & Poor's 500 Composite Stock Index, a market-weighted, unmanaged index
of 500 common stocks in a variety of industry sectors. It is a commonly used
indicator of broad stock price movements. This chart is for illustrative
purposes only, and is not intended to represent the performance of any
particular investment or fund. Investors cannot invest directly in an index.
Past performance is not a guarantee of future results.
TAXES, DIVIDENDS AND DISTRIBUTIONS
DISTRIBUTIONS
All of the Fund's net investment income is declared as a dividend each
business day. Shares will begin earning dividends on the day following the date
on which the shares are issued, the date of issuance customarily being the
"settlement" date. Shares continue to earn dividends until they are redeemed.
Unless the shareholder elects (by notice to the Dividend Disbursing Agent by the
first business day of the month) to receive monthly cash payments of dividends,
such dividends will be automatically received in additional series shares
monthly at net asset value on the payable date. In the event an investor redeems
all the shares in his or her account at any time during the month, all dividends
declared to the date of redemption will be paid to him or her at the time of the
redemption. The Fund's net investment income on weekends, holidays and other
days on which the Fund is closed for business will be declared as a dividend on
shares outstanding on the close of the last business day on which the Fund was
open for business. Accordingly, a shareholder who redeems his or her shares
effective as of 4:15 p.m. (4:30 p.m. for the money market series), New York
time, on a Friday earns a dividend which reflects the income earned by the Fund
on the following Saturday and Sunday. On the other hand, an investor whose
purchase order is effective as of 4:15 p.m. (4:30 p.m. for the money market
series), New York time, on a Friday does not begin earning dividends until the
following business day. Net investment income consists of interest income
accrued on portfolio securities less all expenses, calculated daily.
Net realized capital gains, if any, will be distributed annually and, unless
the shareholder elects to receive them in cash, will be automatically received
in additional shares of a series.
The per share dividends on Class B shares and Class C shares of a series
will be lower than the per share dividends on Class A shares of the series as a
result of the higher distribution-related fee applicable to the
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Class B and Class C shares. The per share dividends on Class A shares will be
lower than the per share dividends on Class Z shares, since Class Z shares bear
no distribution-related fee. The per share distributions of net capital gains,
if any, will be paid in the same amount for Class A, Class B, Class C and
Class Z shares. See "Net Asset Value" above.
Annually, the Fund will mail to shareholders information regarding the tax
status of dividends and distributions made by the Fund in the calendar year. The
Fund intends to report the proportion of all distributions that were tax-exempt
for that calendar year. The percentage of income designated as tax-exempt for
the calendar year may be substantially different from the percentage of the
Fund's income that was tax-exempt for a particular period.
FEDERAL TAXATION
Under the Internal Revenue Code, each series of the Fund is treated as a
separate entity for federal income tax purposes.
Each series of the Fund is qualified as, intends to remain qualified as, and
has elected to be treated as a regulated investment company under the
requirements of Subchapter M of the Internal Revenue Code for each taxable year.
If so qualified, each series will not be subject to federal income taxes on any
net investment income and capital gains, if any, realized during the taxable
year which are distributed to shareholders. In addition, each series intends to
make distributions in accordance with the provisions of the Internal Revenue
Code so as to avoid the 4% excise tax on certain amounts remaining undistributed
at the end of each calendar year. In order to qualify as a regulated investment
company under the Internal Revenue Code each series of the Fund generally must,
among other things, (a) derive at least 90% of its annual gross income (without
offset for losses from the sale or other disposition of stock, securities, or
foreign currency) from dividends, interest, payments with respect to securities
loans and gains from the sale or other disposition of stock or securities or
options thereon or other income (including but not limited to gains from
options, futures, or forward contracts) derived with respect to its business of
investing in such stock or securities or currencies; (b) diversify its holdings
so that, at the end of each quarter of the taxable year (i) at least 50% of the
value of the assets of the series is represented by cash, U.S. government
securities and other stock or securities limited, in respect of any one issuer,
to an amount not greater than 5% of the value of the assets of the series and
10% of the outstanding voting securities of such issuer, and (ii) not more than
25% of the value of the assets of the series is invested in the securities of
any one issuer (other than U.S. government securities); and (c) distribute to
its shareholders at least 90% of its net investment income, including net
short-term capital gains (I.E., the excess of net short-term capital gains over
net long-term capital losses), and 90% of its net tax-exempt interest income in
each year.
Qualification of the Fund as a regulated investment company under the
Internal Revenue Code will be determined at the level of each series and not at
the level of the Fund. Accordingly, the determination of whether any particular
series qualifies as a regulated investment company will be based on the
activities of that series, including the purchases and sales of securities and
the income received and expenses incurred in that series. Net capital gains of a
series which are available for distribution to shareholders will be computed by
taking into account any capital loss carryforward of that series.
Subchapter M permits the character of tax-exempt interest distributed by a
regulated investment company to flow through as tax-exempt interest to its
shareholders provided that 50% or more of the value of its assets at the end of
each quarter of its taxable year is invested in state, municipal or other
obligations the interest on which is exempt for federal income tax purposes.
Distributions to shareholders of tax-exempt interest earned by any series of the
Fund for the taxable year are not subject to federal income tax (except for
possible application of the alternative minimum tax). Interest from certain
private activity and other bonds is treated as an item of tax preference for
purposes of the alternative minimum tax on individuals and the alternative
minimum tax on corporations. To the extent interest on such bonds is distributed
to shareholders of any series of the Fund, shareholders may be subject to the
alternative minimum tax on such distributions. Moreover, exempt-interest
dividends, whether or not on private activity bonds, that are held by
corporations will be taken into account (i) in determining the alternative
minimum tax imposed on 75% of the excess of adjusted current
B-71
earnings over alternative minimum taxable income and (ii) in determining the
foreign branch profits tax imposed on the effectively connected earnings and
profits (with adjustments) of United States branches of foreign corporations.
AMT is imposed in addition to, but only to the extent it exceeds, the
regular tax and is computed at a maximum marginal rate of 28% for noncorporate
taxpayers and 20% for corporate taxpayers on the excess of the taxpayer's
alternative minimum taxable income ("AMTI") over an exemption amount.
Exempt-interest dividends derived from certain "private activity" municipal
obligations issued after August 7, 1986 will generally constitute an item of tax
preference includable in AMTI for both corporate and noncorporate taxpayers.
Corporate investors should note that 75% of the amount by which adjusted current
earnings (which includes all tax-exempt interest) exceeds the AMTI of the
corporation constitutes an upward adjustment for purposes of the corporate AMT.
Shareholders are advised to consult their tax advisers with respect to
alternative minimum tax consequences of an investment in the Portfolio.
Distributions of taxable net investment income and of the excess of net
short-term capital gains over net long-term capital losses are taxable to
shareholders as ordinary income. None of the income distributions of the Fund
will be eligible for the deduction for dividends received by corporations.
Since each series is treated as a separate entity for federal income tax
purposes, the determination of the amount of net capital gains, the
identification of these gains as short term or long term and the determination
of the amount of income dividends of a particular series will be based on the
purchases and sales of securities and the income received and expenses incurred
in that series.
Gain or loss realized by a series from the sale of securities generally will
be treated as capital gain or loss; however, gain from the sale of certain
securities (including municipal obligations) will be treated as taxable 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 a series at
its original issue. Original issue discount that accrues in a taxable year is
treated as income earned by a series and therefore is subject to the
distribution requirements of the Internal Revenue Code. Because the original
issue discount income earned by the series in a taxable year may not be
represented by cash income, the series may have to dispose of other securities
and use the proceeds to make distributions to satisfy the Internal Revenue
Code's distribution requirements.
The purchase of a put option may be subject to the short sale rules or
straddle rules (including the modified short sale rule) for federal income tax
purposes. Absent a tax election to the contrary, gain or loss attributable to
the lapse, exercise or closing out of any such put option (or any other
Section 1256 contract under the Internal Revenue Code) will be treated as 60%
long-term and 40% short-term capital gain or loss. On the last trading day of
the fiscal year of a series, all outstanding put options as well as certain
futures contracts will be treated as if such positions were closed out at their
closing price on such day, with any resulting gain or loss recognized as 60%
long-term and 40% short-term capital gain or loss. In addition, positions held
by a series which consist of at least one debt security and at least one put
option which substantially reduces the risk of loss of the series with respect
to that debt security constitute a "mixed straddle" which is governed by certain
provisions of the Internal Revenue Code that may cause deferral of losses,
adjustments in the holding periods of debt securities and conversion of
short-term capital losses into long-term capital losses. Each series may
consider making certain tax elections applicable to mixed straddles. In
addition, the conversion transaction rules may apply to recharacterize certain
capital gains as ordinary income. Code Section 1259 may require the recognition
of gain (but not loss) if a series makes a "constructive sale" of an appreciated
financial position.
Each series' gains and losses on the sale, lapse, or other termination of
call options it holds on financial futures contracts will generally be treated
as gains and losses from the sale of financial futures contracts. If call
options written by a series expire unexercised, the premiums received by the
series give rise to short-term capital gains at the time of expiration. Each
series may also have short-term gains and losses associated with closing
transactions with respect to call options written by them. If call options
written by a series are
B-72
exercised, the selling price of the financial futures contract is increased by
the amount of the premium received by the series, and the character of the
capital gain or loss on the sale of the futures contract depending on the
contract's holding period.
Upon the exercise of a put held by a series, the premium initially paid for
the put is offset against the amount received for the futures contract, bond or
note sold pursuant to the put thereby decreasing any gain (or increasing any
loss) realized on the sale. Generally, such gain or loss is capital gain or
loss, the character of which depends on the holding period of the futures
contract, bond or note. However, in certain cases in which the put is not
acquired on the same day as the underlying securities identified to be used in
the put's exercise, gain on the exercise, sale or disposition of the put is
short-term capital gain. If a put is sold prior to exercise, any gain or loss
recognized by a series would be capital gain or loss, depending on the holding
period of the put. If a put expires unexercised, a series would realize
short-term or long-term capital loss, the character of which depends on the
holding period of the put, in an amount equal to the premium paid for the put.
In certain cases in which the put and securities identified to be used in its
exercise are acquired on the same day, however, the premium paid for the
unexercised put is added to the basis of the identified securities.
Any net capital gains (I.E., the excess of capital gains from the sale of
assets held for more than 12 months over net short-term capital losses)
distributed to shareholders will be taxable as capital gains to the
shareholders, whether or not reinvested and regardless of the length of time a
shareholder has owned his or her shares. The maximum capital gains rate for
individuals with respect to capital gains recognized by a series is 20%. The
maximum capital gains rate for corporate shareholders currently is the same as
the maximum tax rate for ordinary income.
If any net capital gains are retained by a series for investment, requiring
federal income taxes to be paid thereon by the series, the series will elect to
treat such capital gains as having been distributed to shareholders. As a
result, shareholders will be taxed on such amounts as capital gains, will be
able to claim their proportionate share of the federal income taxes paid by the
series on such gains as a credit against their own federal income tax
liabilities, and will be entitled to increase the adjusted tax basis of their
shares in such series by the differences between their PRO RATA share of such
gains and their tax credit.
Any gain or loss realized upon a sale, redemption or exchange of shares of a
series by a shareholder who is not a dealer in securities will be treated as
capital gain or loss. Any such capital gain or loss will be treated as a
long-term capital gain or loss if the shares were held for more than 12 months.
Any short-term capital loss realized upon sale, redemption or exchange 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 six
months from the date of purchase of such shares and following receipt of a
capital gains distribution will be treated as long-term capital loss to the
extent of such capital gains distribution.
Any loss realized on a sale, redemption or exchange of shares of a series of
the Fund by a shareholder will be disallowed to the extent the shares are
replaced within a 61-day period (beginning 30 days before the disposition of
shares). Shares purchased pursuant to the reinvestment of a dividend will
constitute a replacement of shares.
Under certain circumstances, a shareholder who acquires shares of a series
of the Fund and sells or otherwise disposes of such shares within 90 days of
acquisition may not be allowed to include certain sales charges incurred in
acquiring such shares for purposes of calculating gain or loss realized upon a
sale or exchange of shares of the Fund.
Interest on indebtedness incurred or continued by shareholders to purchase
or carry shares of the Fund will not be deductible for federal income tax
purposes. In addition, under rules used by the Internal Revenue Service for
determining when borrowed funds are considered to be used for the purpose of
purchasing or carrying particular assets, the purchase of shares may be
considered to have been made with borrowed funds even though the borrowed funds
are not directly traceable to the purchase of shares.
B-73
Persons holding certain municipal obligations who also are "substantial
users" (or persons related thereto) of facilities financed by such obligations
may not exclude interest on such obligations from their gross income. No
investigation as to the users of the facilities financed by bonds in the
portfolios of the Fund's series has been made by the Fund. Potential investors
should consult their tax advisers with respect to this matter before purchasing
shares of the Fund.
From time to time, proposals have been introduced before Congress for the
purpose of restricting or eliminating the federal income tax exemption for
interest on certain state and municipal obligations. It can be expected that
similar proposals may be introduced in the future. Such proposals, if enacted,
may further limit the availability of state or municipal obligations for
investment by the Fund and the value of portfolio securities held by the series
may be adversely affected. In such case, 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. Shareholders electing to receive distributions
in the form of additional shares will have a cost basis for federal income tax
purposes in each share so received equal to the net asset value of a share of
the applicable series of the Fund on the reinvestment date. Distributions of
tax-exempt interest must also be reported. Under federal income tax law, each
series of the Fund will be required to report to the Internal Revenue Service
all distributions of taxable income and capital gains as well as gross proceeds
from the redemption or exchange of shares of such series, except in the case of
certain exempt shareholders. Under the backup withholding provisions of the
Internal Revenue Code, all proceeds from the redemption or exchange of shares
are subject to withholding of federal income tax at the rate of 31% in the case
of nonexempt shareholders who fail to furnish the appropriate series of the Fund
with their taxpayer identification numbers on IRS Form W-9 and with required
certifications regarding their status under the federal income tax law. Such
withholding is also required on taxable dividends and capital gains
distributions unless it is reasonably expected that at least 95% of the
distributions of the series are comprised of tax-exempt dividends. If the
withholding provisions are applicable, any 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. Distributions of taxable
investment income, including short-term capital gains, to foreign shareholders
generally will be subject to a withholding tax at the rate of 30% (or lower
treaty rate).
STATE TAXATION
The following discussion assumes that each series of the Fund qualified for
each taxable year as a regulated investment company for federal tax purposes.
CONNECTICUT. Distributions from the Connecticut Money Market Series (the
Connecticut Series) to individual shareholders of the Connecticut Series
resident in Connecticut and Connecticut resident trusts and estates are not
subject to taxation pursuant to the Connecticut Personal Income Tax to the
extent that such distributions constitute exempt-interest dividends under
section 852(b)(5) of the Internal Revenue Code and are derived from income
received by the Connecticut Series as interest from obligations of the State of
Connecticut or its political subdivisions (Connecticut Municipal Obligations) or
on obligations the interest on which is exempt from state taxation under the
laws of the United States (including obligations issued by Puerto Rico, the
Virgin Islands and Guam). It is likely that capital gain dividends derived from
the sale of Connecticut Municipal Obligations also are not subject to the
Connecticut Personal Income Tax. Other distributions to individual shareholders
resident in Connecticut and to resident trusts and estates from the Connecticut
Series, including capital gains dividends derived from sales of obligations
other than Connecticut Municipal Obligations, exempt-interest dividends derived
from sources other than Connecticut Obligations, and distributions that are
taxable as dividends for federal income tax purposes are not exempt from the
Connecticut Personal Income Tax. Individual shareholders and estates and trusts
subject to alternative minimum tax for federal tax purposes may also be subject
to alternative minimum tax for Connecticut Tax purposes. Exempt interest-
dividends other than those derived from Connecticut Obligations and any loss
from the sale or exchange of Connecticut Obligations will be added to the
alternative minimum tax base, while exempt dividends paid by a regulated
investment company, exempt interest-dividends derived from interest payments on
Connecticut
B-74
Municipal Obligations and capital gain dividends derived from the sale of
Connecticut obligations are subtracted from the alternative minimum tax base for
Connecticut Tax purposes to the extent they are includable in federal
alternative taxable income.
Distributions that constitute exempt-interest dividends under section
852(b)(5) of the Internal Revenue Code from the Connecticut Series to corporate
shareholders (other than shareholders that are S Corporations) that are
apportioned to Connecticut are subject to taxation pursuant to the Connecticut
Corporation Business Tax, whether or not derived from Connecticut Municipal
Obligations. Distributions to corporate shareholders (other than shareholders
that are S Corporations) from the Connecticut Series that constitute capital
gains for federal income tax purposes are also subject to taxation pursuant to
the Connecticut Corporation Business Tax. Thirty percent of distributions (other
than exempt-interest dividends and capital gains dividends, which are fully
taxable for purposes of the Connecticut Corporation Business Tax) to corporate
shareholders (other than shareholders that are S Corporations) that are taxable
as dividends for federal income tax purposes generally is subject to taxation
pursuant to the Corporation Business Tax and the remaining seventy percent, less
related expenses, is not.
Distributions to shareholders of the Connecticut Series that are
S Corporations that constitute either exempt-interest dividends, whether or not
derived from Connecticut Municipal Obligations, capital gain dividends or
taxable dividends for federal income tax purposes which are required to be
separately taken into account by shareholders of S Corporations for federal
income tax purposes are not subject to taxation pursuant to the Connecticut
Corporation Business Tax. For purposes of the Connecticut Personal Income Tax,
Connecticut resident individual, trust and estate shareholders of
S Corporations are taxed on their PRO RATA share of such separately stated items
in the same manner and to the same extent as if received by them directly from
the Connecticut Series.
Shares of the Connecticut Series will not be subject to the personal
property tax in the State of Connecticut.
Shareholders of the Connecticut Series should consult their tax advisers
about other state and local tax consequences of their investment in the
Connecticut Series including the tax consequences of ceasing to be a resident of
Connecticut.
FLORIDA. Florida does not impose an income tax on individuals. Thus,
individual shareholders of the Florida Series will not be subject to any Florida
state or local income taxes on distributions received from the Florida Series.
Florida does impose a State income tax on the income of corporations,
limited liability companies (that are subject to federal income taxation) and
certain trusts (excluding probate and testamentary trusts) that is allocated or
apportioned to Florida. For those shareholders, in determining income subject to
Florida corporate income tax, Florida generally "piggy-backs" federal taxable
income concepts, subject to adjustments that are applicable to all corporations
and some adjustments that are applicable to certain classes of corporations. In
regard to the Florida Series, the most significant adjustment is for interest
income from state and local bonds that is exempt from tax under Section 103 of
the Internal Revenue Code. Provided that the Florida Series qualifies as a
regulated investment company and complies with the requirements of the Internal
Revenue Code necessary to pay exempt-interest dividends, including the
requirement that at least 50% of the value of its assets at the close of each
quarter of its taxable year be invested in state, municipal or other obligations
the interest on which is exempt from tax under Section 103, the corporate
shareholders of such series may incur Section 103 interest income from Florida
Series distributions. While Section 103 interest income is generally excluded
from taxable income for federal income tax purposes, it is added back to taxable
income for Florida corporate income tax purposes (only 40% of such income is
added back for corporate taxpayers subject to Florida alternative minimum tax).
Consequently, the portion of the Section 103 interest income (or 40% of that
amount for corporate taxpayers subject to the Florida alternative minimum tax)
allocated or apportioned to Florida of a corporate Florida Series shareholder
arising from Florida Series distributions is subject to Florida corporate income
taxes. Other distributions from the Florida Series to corporate shareholders, to
the extent allocated or apportioned to Florida, may also be subject to Florida
income tax.
B-75
Provided that on and throughout January 1 of a given year at least 90
percent of the net assets of the portfolio of assets of the Florida Series will
be comprised exclusively of notes, bonds, and other obligations issued by the
State of Florida or its municipalities, counties and other taxing districts, the
United States Government and its agencies, Puerto Rico, Guam and the Virgin
Islands, and other investments exempt from Florida intangible personal property
tax, in the opinion of Florida counsel shares of the Florida Series will not be
subject to Florida intangible personal property taxes for that year. If the
Florida Series fails to satisfy the 90 percent test, then the entire value of
the Florida Series shares (except for that portion of the value attributable to
U.S. government obligations) will be subject to the intangible personal property
tax.
Shareholders of the Florida Series should consult their tax advisers about
other state and local tax consequences of their investments in the Florida
Series.
MASSACHUSETTS. In the opinion of Massachusetts tax counsel, if the
Massachusetts Series and the Massachusetts Money Market Series each qualify as
regulated investment companies, (1) individual and other noncorporate
shareholders of each such series resident in Massachusetts will not be subject
to Massachusetts personal income tax on distributions received from such series
to the extent such distributions are attributable to interest on tax-exempt
obligations of the Commonwealth of Massachusetts and its political subdivisions
and instrumentalities provided that such series complies with the requirement
that at least 50% of the value of its assets at the close of each quarter of its
taxable year be invested in state, municipal or other obligations, the interest
on which is excluded from gross income for federal income tax purposes under
Section 103(a) of the Internal Revenue Code; (2) such shareholders will not be
subject to Massachusetts personal income tax on distributions received from
either of such series to the extent such distributions are attributable to
interest on obligations issued by the Governments of Puerto Rico, the Virgin
Islands or Guam; and (3) such shareholders will not be subject to Massachusetts
personal income tax on capital gain dividends received from either of such
series to the extent such capital gain dividends are attributable to long-term
capital gains realized on the sale or exchange of Massachusetts obligations
issued pursuant to legislation which specifically exempts capital gains from the
disposition of such obligations from Massachusetts personal income tax; in each
case subject to the requirement that such series notify its shareholders in
writing within sixty days following the close of its taxable year of the portion
of any distribution qualifying for any such exemption.
Other distributions from the Massachusetts Series and the Massachusetts
Money Market Series will generally not be exempt from Massachusetts personal
income tax.
Massachusetts Series and the Massachusetts Money Market Series distributions
will not be excluded from net income of corporations and shares of the
Massachusetts Series and the Massachusetts Money Market Series will not be
excluded from the net worth of intangible property corporations in determining
the Massachusetts excise tax on corporations.
Shares of the Massachusetts Series and the Massachusetts Money Market Series
will not be subject to Massachusetts local property taxes.
Shareholders of the Massachusetts Series and the Massachusetts Money Market
Series should consult their tax advisers about other state and local tax
consequences of their investments in the Massachusetts Series and the
Massachusetts Money Market Series.
NEW JERSEY. In the opinion of New Jersey tax counsel, individual
shareholders of the New Jersey Series and the New Jersey Money Market Series
resident in New Jersey and shareholders of the New Jersey Series and the New
Jersey Money Market Series that are trusts or estates will not be subject to New
Jersey income tax on distributions received from either series to the extent
that such distributions are attributable to interest on tax-exempt obligations
of the State of New Jersey or its political subdivisions and authorities, or
obligations issued by the Governments of Puerto Rico, the Virgin Islands and
Guam, provided that the relevant series complies with the requirement of the New
Jersey Gross Income Tax Act that (1) 80% of the aggregate principal amount of
all its investments (excluding cash, cash items and receivables, and financial
options, futures, forward contracts, or other similar financial instruments
related to interest-bearing obligations, obligations issued at a discount or
bond indexes related thereto that are related to such series' business of
investing in securities (Related Financial Instruments)) are invested in
obligations issued by the State of New Jersey or any of its agencies or
political
B-76
subdivisions, or other obligations exempt from state or local taxation under the
laws of New Jersey and the United States and (2) it has no investments other
than interest bearing obligations, obligations issued at a discount, and cash
and cash items, including receivables, and Related Financial Instruments.
Distributions received by shareholders who are resident individuals, trusts
or estates from the New Jersey Series and the New Jersey Money Market Series
which are attributable to gains realized on the sale or exchange of New Jersey
obligations are exempt from New Jersey income tax.
Other distributions from the New Jersey Series and the New Jersey Money
Market Series, including those related to long-term and short-term capital gains
from other bonds, will generally not be exempt from New Jersey income tax.
Corporate shareholders resident in New Jersey are taxed under the provisions
of the Corporation Business Tax Act or the Corporation Income Tax Act. Neither
Act contains a provision that exempts from tax distributions from a qualified
investment fund that are attributable to interest or gain from Exempt
Obligations. All distributions from the New Jersey Series and the New Jersey
Money Market Series to corporations subject to tax in New Jersey will be subject
to New Jersey taxation whether or not the distributions are attributable to
interest or gain from New Jersey obligations.
Shareholders of the New Jersey Series and the New Jersey Money Market Series
should consult their tax advisers about other state and local tax consequences
of their investments in these series.
NEW YORK. Individual shareholders of the New York Series and the New York
Money Market Series resident in New York State will not be subject to State
income tax on distributions received from either such series to the extent such
distributions are attributable to interest on tax-exempt obligations of the
State of New York and its political subdivisions, and obligations of the
Governments of Puerto Rico, the Virgin Islands and Guam (New York Obligations),
provided that such interest is exempt from federal income tax pursuant to
Section 103(a) of the Internal Revenue Code, and that the relevant series
qualifies as a regulated investment company and satisfies the requirements of
the Internal Revenue Code necessary to pay exempt-interest dividends, including
the requirement that at least 50% of the value of its assets at the close of
each quarter of its taxable year be invested in state, municipal or other
obligations the interest on which is excluded from gross income for federal
income tax purposes under Section 103(a) of the Internal Revenue Code.
Individual shareholders who reside in New York City will be able to exclude such
distributions for City income tax purposes.
Other distributions from the New York Series and the New York Money Market
Series, including those related to market discount and capital gains, will
generally not be exempt from State or City income tax.
Distributions from these series will not be excluded from net income and
shares of these series will not be excluded from investment capital in
determining State or City franchise and corporation taxes for corporate
shareholders.
Shares of these series will not be subject to any State or City property
tax.
The Fund has obtained the opinion of its New York tax counsel to confirm
these State and City tax consequences for New York resident individuals and
corporations who are shareholders of the New York Series and the New York Money
Market Series. Shareholders of the New York Series and the New York Money Market
Series should consult their advisers about other state and local tax
consequences of their investments in these series.
NORTH CAROLINA. In the opinion of North Carolina tax counsel, individual
shareholders resident in North Carolina and shareholders that are trusts or
estates will not be subject to North Carolina income tax on distributions
received from the North Carolina Series to the extent such distributions are
either (i) exempt from federal income tax and attributable to interest on
obligations of North Carolina or its political subdivisions; nonprofit
educational institutions organized or chartered under the laws of North
Carolina; or Guam, Puerto Rico or the Virgin Islands including the governments
thereof and their agencies, instrumentalities and authorities or
(ii) attributable to interest on direct obligations of the United States. These
North Carolina income tax exemptions will be available only if the North
Carolina Series complies with the requirement of the Internal
B-77
Revenue Code that at least 50% of the value of its assets at the close of each
quarter of its taxable year is invested in state, municipal or other obligations
the interest on which is exempt from federal income tax under Section 103(a) of
the Internal Revenue Code.
Other distributions from the North Carolina Series (except distributions of
capital gains attributable to the sale by the North Carolina Series of an
obligation the profit from which is exempt by a North Carolina statute) will
generally not be exempt from North Carolina income tax.
Shares of the North Carolina Series will not be subject to an intangibles
tax in North Carolina.
The North Carolina Series has obtained a ruling signed by the Director of
and an Information Release issued by the Individual Income Tax Division of the
North Carolina Department of Revenue which form the basis of the opinion of
North Carolina tax counsel regarding the North Carolina income tax consequences
of investments in the North Carolina Series for individuals, trusts and estates.
The general practice in North Carolina is for taxpayers to rely on rulings
signed by a Division Director and Information Releases issued by a Division.
Shareholders of the North Carolina Series should consult their tax advisers
about other state and local tax consequences of their investments in the North
Carolina Series.
OHIO. In the opinion of Ohio tax counsel, distributions with respect to
shares of the Ohio Series ("Distributions") that are properly attributable to
interest on, or profit made on the sale, exchange, or other disposition of, Ohio
Obligations are exempt from the Ohio personal income tax and municipal and
school district income taxes in Ohio, provided that the Ohio Series continues to
qualify as a regulated investment company for federal income tax purposes and
that at all times at least 50% of the value of the total assets of the Ohio
Series consists of Ohio Obligations, or similar obligations of other states or
their subdivisions (but not including, for this purpose, obligations of United
States territories or possessions). For purposes of this discussion of Ohio
taxes, (i) "Ohio Obligations" means only obligations issued by or on behalf of
the State of Ohio, political subdivisions thereof and agencies and
instrumentalities of the State or its political subdivisions and (ii) it is
assumed that the regulated investment company and 50% requirements described
above are satisfied.
Distributions are excluded from the net income base of the Ohio corporation
franchise tax to the extent that such Distributions are either excluded from
gross income for federal income tax purposes or are properly attributable to
interest on, or profit made on the sale, exchange or other disposition of, Ohio
Obligations. However, shares of the Ohio Series will be includable in the
computation of net worth for purposes of such tax.
Distributions that are properly attributable to interest on obligations of
the United States or its territories or possessions or of any authority,
commission or instrumentality of the United States the interest on which is
exempt from state income taxes under the laws of the United States (including
the obligations of the Governments of Puerto Rico, the Virgin Islands and Guam
("Territorial Obligations")) are exempt from the Ohio personal income tax and
municipal and school district income taxes in Ohio, and, provided, in the case
of Territorial Obligations, such interest is excluded from gross income for
federal income tax purposes, are excluded from the net income base of the Ohio
corporation franchise tax.
Other Distributions will generally not be exempt from Ohio income tax.
Shareholders of the Ohio Series should consult their tax advisers about
other state and local tax consequences of their investments in the Ohio Series.
PENNSYLVANIA. Under Pennsylvania law, individual shareholders of the
Pennsylvania Series who are residents of Pennsylvania will not be subject to
Pennsylvania personal income tax on distributions received from the Pennsylvania
Series to the extent such distributions are attributable to interest on
tax-exempt obligations of the Commonwealth and its political subdivisions and
authorities or of qualifying issuers in Puerto Rico, the Virgin Islands and
Guam. Other distributions from the Pennsylvania Series (including without
limitation, capital gains dividends) will generally not be exempt from
Pennsylvania personal income tax. Distributions paid by the Pennsylvania Series
will also be exempt from the Philadelphia School District investment net income
tax for individuals who are residents of the City of Philadelphia to the extent
such
B-78
distributions are derived from interest on tax-exempt obligations of the
Commonwealth and its political subdivisions and authorities or of qualifying
obligations of the Governments of Puerto Rico, the Virgin Islands and Guam, or
to the extent such distributions are designated as capital gain dividends for
federal income tax purposes.
It is unclear whether the conversion of Class B shares into Class A shares
(or any other exchange of shares that may be exempt from federal income taxes)
is taxable for Pennsylvania state and local tax purposes. In addition, it is
unclear whether income derived from some or all of the derivatives and hedging
transactions in which the Pennsylvania Series may invest or engage will be
exempt for Pennsylvania state and local tax purposes.
Corporations that are subject to the Pennsylvania corporate net income tax
will not be subject to tax on distributions received from the Pennsylvania
Series provided that such distributions are not included in federal taxable
income determined before net operating loss deductions and special deductions.
As a result of a pronouncement by the Pennsylvania Department of Revenue, an
investment in the Pennsylvania Series by a corporate shareholder will apparently
qualify as an exempt asset for purposes of the single asset apportionment
fraction available in computing the Pennsylvania capital stock/foreign franchise
tax to the extent that the portfolio securities of the Pennsylvania Series
comprise investments in Pennsylvania and/or United States Government Securities
that would be exempt assets if owned directly by the corporation.
The Pennsylvania Series will not be treated as a taxable entity and
therefore will not be subject to the Pennsylvania personal income tax or
corporate net income tax.
In addition, shares of the Pennsylvania Series will not be subject to
personal property taxation in Pennsylvania to the extent that the portfolio
securities owned by the Pennsylvania Series on the annual assessment date would
not be subject to such taxation if owned by a resident of Pennsylvania. It
should be noted, however, that at present, Pennsylvania counties generally have
stopped assessing personal property taxes. This is due, in part, to ongoing
litigation challenging the validity of the tax.
Shareholders of the Pennsylvania Series should consult their tax advisers
about other state and local tax consequences of their investments in the
Pennsylvania Series.
DESCRIPTION OF TAX-EXEMPT SECURITY RATINGS
MOODY'S INVESTORS SERVICE
BOND RATINGS
Aaa: Bonds that are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa: Bonds that are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group, they comprise what are generally known
as high-grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than the Aaa securities.
A: Bonds that are rated A possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving security
to principal and interest are considered adequate, but elements may be present
that suggest a susceptibility to impairment sometime in the future.
Baa: Bonds that are rated Baa are considered as medium grade obligations
I.E., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
B-79
Ba: Bonds that are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate, and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B: Bonds that are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Bonds rated within the Aa, A, Baa, Ba and B categories that Moody's believes
possess the strongest credit attributes within those categories are designated
by the symbols Aa1, A1, Baa1, Ba1 and B1.
Caa: Bonds that are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca: Bonds that are rated Ca represent obligations that are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
C: Bonds that are rated C are the lowest rated class of bonds, and issues
so rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.
SHORT-TERM DEBT RATINGS
Moody's short-term debt ratings are opinions of the ability of issuers to
honor senior financial obligations and contracts. Those obligations have an
original maturity not exceeding one year, unless explicitly noted.
P-1: Issuers rated "Prime-1" or "P-1" (or supporting institutions) have a
superior ability for repayment of senior short-term debt obligations.
P-2: Issuers rated "Prime-2" or "P-2" (or supporting institutions) have a
strong ability for repayment of senior short-term debt obligations.
P-3: Issuers rated "Prime-3" or "P-3" (or supporting institutions) have an
acceptable ability for repayment of senior short-term debt obligations.
SHORT-TERM RATINGS
Moody's ratings for tax-exempt notes and other short-term loans are
designated Moody's Investment Grade (MIG). This distinction is in recognition of
the differences between short-term and long-term credit risk.
MIG 1: Loans bearing the designation MIG 1 are of the best quality. There
is present strong protection by established cash flows, superior liquidity
support or demonstrated broad-based access to the market for refinancing.
MIG 2: Loans bearing the designation MIG 2 are of high quality. Margins of
protection are ample although not so large as in the preceding group.
MIG 3: Loans bearing the designation MIG 3 are of favorable quality. All
security elements are accounted for but there is lacking the undeniable strength
of the preceding grades.
MIG 4: Loans bearing the designation MIG 4 are of adequate quality.
Protection commonly regarded as required of an investment security is present
and although not distinctly or predominantly speculative, there is specific
risk.
STANDARD & POOR'S RATINGS GROUP
DEBT RATINGS
AAA: Debt rated AAA has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.
AA: Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the highest rated obligations only in small degree.
B-80
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.
Debt rated BB, B, CCC and C is regarded as having predominantly speculative
characteristics with respect to capacity to pay interest and repay principal. BB
indicates the least degree of speculation and C the highest degree of
speculation. While such debt will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
BB: Debt rated BB has less near-term vulnerability to default than other
speculative grade debt. However, it faces major ongoing uncertainties or
exposure to adverse business, financial or economic conditions that could lead
to inadequate capacity to meet timely interest and principal payment. The BB
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied BBB- rating.
B: Debt rated B has a greater vulnerability to default but presently has
the capacity to meet interest payments and principal repayments. Adverse
business, financial or economic conditions would likely impair capacity or
willingness to pay interest or repay principal. The B rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
BB or BB- rating.
CCC: Debt rated CCC has a current identifiable vulnerability to default,
and is dependent upon favorable business, financial and economic conditions to
meet timely payments of interest and repayments of principal. In the event of
adverse business, financial or economic conditions, it is not likely to have the
capacity to pay interest and repay principal. The CCC rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
B or B- rating.
CC: The rating CC is typically applied to debt subordinated to senior debt
that is assigned an actual or implied CCC rating.
C: The rating C is typically applied to debt subordinated to senior debt
that is assigned an actual or implied CCC- debt rating. The C rating may be used
to cover a situation where a bankruptcy petition has been filed but debt service
payments are continued.
CI: The rating CI is reserved for income bonds on which no interest is
being paid.
D: Debt rated D is in payment default. This rating is used when interest
payments or principal payments are not made on the date due, even if the
applicable grace period has not expired, unless S&P believes that such payments
will be made during such grace period.
COMMERCIAL PAPER RATINGS
S&P's commercial paper ratings are current assessments of the likelihood of
timely payment of debt considered short-term in the relevant market.
A-1: The A-1 designation indicates that the degree of safety regarding
timely payment is strong. Those issues determined to possess extremely strong
safety characteristics are denoted with a plus sign (+) designation.
A-2: Capacity for timely payment on issues with the designation A-2 is
satisfactory. However, the relative degree of safety is not as high as for
issues designated A-1.
A-3: Issues with the A-3 designation have adequate capacity for timely
payment. They are, however, more vulnerable to the adverse effects of changes in
circumstances than obligations carrying the higher designations.
B-81
MUNICIPAL NOTES
A municipal note rating reflects the liquidity factors and market access
risks unique to notes. Notes maturing in three years or less will likely receive
a note rating. Notes maturing beyond three years will most likely receive a
long-term debt rating. Municipal notes are SP-1, SP-2 or SP-3. The designation
SP-1 indicates a very strong capacity to pay principal an interest. Those issues
determined to possess extremely strong characteristics are given a plus (+)
designation. An SP-2 designation indicates a satisfactory capacity to pay
principal and interest. An SP-3 designation indicates speculative capacity to
pay principal and interest.
B-82
PRUDENTIAL MUNICIPAL SERIES FUND Connecticut Money Market Series
Portfolio of Investments as of August 31, 2000
MOODY'S PRINCIPAL
RATING INTEREST MATURITY AMOUNT VALUE
DESCRIPTION (a) (UNAUDITED) RATE DATE (000) (NOTE 1)
- -----------------------------------------------------------------------------------------------------------
Brazos River Harbor Nav. Dist.
Rev.,
BASF, Corp. Proj.,
Ser. 96, F.R.D.D. P-1 4.45% 9/01/00 $ 3,450 $ 3,450,000
Dow Chemical Co.,
Ser. 93, F.R.D.D., A.M.T. P-1 4.50 9/01/00 1,000 1,000,000
Ser. 97, F.R.D.D., A.M.T. P-1 4.50 9/01/00 600 600,000
Connecticut St. Clean Water Fund
Rev., Ser. 91 NR 6.70 1/01/01 2,010(c) 2,067,566
Connecticut St. Dev. Auth.,
Bradley Airport Hotel,
Ser. 97A F.R.W.D. VMIG1 4.10 9/07/00 800 800,000
Ser. 97B, F.R.W.D. VMIG1 4.10 9/07/00 3,000 3,000,000
Ser. 97C, F.R.W.D. VMIG1 4.10 9/07/00 1,200 1,200,000
Corp. for Independ. Living Proj.,
Ser. 99, F.R.W.D. VMIG1 3.95 9/06/00 2,475 2,475,000
Pierce Baptist Home,
Ser. 99, F.R.W.D. A-1+(d) 3.95 9/06/00 3,125 3,125,000
SHW, Inc., Proj., Ser. 90,
F.R.W.D., A.M.T. N/R 4.15 9/06/00 5,150 5,150,000
Connecticut St. Gen. Oblig.,
Ser. 90C NR 6.90 9/15/00 1,000 1,001,209
Ser. 91A NR 6.60 3/01/01 1,000(c) 1,031,732
Ser. 92D NR 5.80 11/15/00 1,750(c) 1,755,436
Ser. 95A NR 5.00 3/15/01 1,200 1,205,585
Ser. 97B, F.R.W.D. VMIG 4.00 9/07/00 2,700 2,700,000
Connecticut St. Hlth. & Edl. Facs.
Auth. Rev.,
Conn. St. University, S.6.A. 95,
A.M.B.A.C., F.R.D.D. A-1+(d) 3.90 9/01/00 1,000 1,000,000
Convenant Ret., Ser. 1999A,
F.R.W.D. A-1+(d) 3.95 9/07/00 2,640 2,640,000
Gaylord Hosp. Issue, Ser. A,
F.R.W.D. A-1+(d) 4.10 9/06/00 3,000 3,000,000
Hartfort Hosp. Issue,
Ser. B, F.R.W.D. A-1+(d) 4.10 9/06/00 2,000 2,000,000
See Notes to Financial Statements
B-83
PRUDENTIAL MUNICIPAL SERIES FUND Connecticut Money Market Series
Portfolio of Investments as of August 31, 2000 Cont'd.
MOODY'S PRINCIPAL
RATING INTEREST MATURITY AMOUNT VALUE
DESCRIPTION (a) (UNAUDITED) RATE DATE (000) (NOTE 1)
- -----------------------------------------------------------------------------------------------------------
Hotchkiss School Issue,
Ser. A, F.R.W.D. VMIG1 4.00% 9/07/00 $ 2,000 $ 2,000,000
Pomfret School Issue,
Ser. A, F.R.W.D. VMIG1 4.20 9/07/00 900 900,000
Sharon Hosp. Issue,
Ser. A, F.R.W.D. VMIG1 4.10 9/07/00 1,670 1,670,000
Woodbury & Bethlehem School,
B.A.N. VMIG1 5.00 5/15/01 4,000 4,010,730
Yale University, Ser. S, T.E.C.P. VMIG1 4.15 12/11/00 5,000 5,000,000
Yale University, Ser. T, F.R.W.D. VMIG1 3.90 9/07/00 2,500 2,500,000
Connecticut St. Hsg. Fin. Auth.,
Ser. B, F.R.W.D., A.M.T. VMIG1 4.37 9/06/00 2,000 2,000,000
Ser. P, F.R.W.D., A.M.T. VMIG1 4.32 9/06/00 1,000 1,000,000
Connecticut St. Spec. Assmt.,
Unemployment Comp. Rev.,
Ser. 93C, A.N.N.M.T., F.G.I.C. VMIG1 4.35 7/01/01 1,800 1,800,000
Ser. 96A, A.M.B.A.C. NR 5.50 11/15/00 2,500 2,507,443
Ser. 96A, A.M.B.A.C. NR 5.50 5/15/01 1,000 1,009,146
Connecticut St. Special Tax Oblig.
Transp. Infrastructure Rev.,
Ser. 90A, Bond NR 8.00 6/01/01 1,500 1,538,364
Ser. 90A, Bond NR 7.125 6/01/01 500(c) 515,024
Ser. 90I, F.R.W.D. VMIG1 3.95 9/06/00 2,025 2,025,000
Hartford Connecticut, Redev.
Agcy., Multi-family Mtge. Rev.,
Underwood Twrs. Proj.,
Ser. 90, F.R.W.D., F.S.A. A-1+(d) 4.10 9/07/00 600 600,000
New Haven Connecticut,
Ser. 99A, F.G.I.C. NR 4.25 2/01/01 2,025 2,026,604
North Branford, Connecticut,
B.A.N. NR 5.00 2/15/01 2,375 2,379,154
Monroe Connecticut, Ser. A NR 4.75 1/25/01 1,025 1,026,990
Old Saybrook, Connecticut, B.A.N. NR 4.25 9/06/00 1,850 1,850,055
Puerto Rico Commwlth. & Electric
Power Auth., Ser. 98-20,
F.R.W.D., M.B.I.A. VMIG1 3.93 9/07/00 2,400 2,400,000
See Notes to Financial Statements
B-84
PRUDENTIAL MUNICIPAL SERIES FUND Connecticut Money Market Series
Portfolio of Investments as of August 31, 2000 Cont'd.
MOODY'S PRINCIPAL
RATING INTEREST MATURITY AMOUNT VALUE
DESCRIPTION (a) (UNAUDITED) RATE DATE (000) (NOTE 1)
- -----------------------------------------------------------------------------------------------------------
Puerto Rico Commwlth. Highway &
Transp. Auth., Ser. FFF,
F.R.W.D., M.B.I.A. VMIG1 4.35% 9/06/00 $ 2,500 $ 2,500,000
South Windsor Connecticut,
Gen. Oblig., Ser. 99 NR 3.50 9/01/00 585 585,000
------------
TOTAL INVESTMENTS 99.8%
(AMORTIZED COST $81,045,038(e)) 81,045,038
Other assets in excess of
liabilities 0.2% 179,615
------------
NET ASSETS 100% $ 81,224,653
============
- ------------------------------
(a) The following abbreviations are used in portfolio descriptions:
A.M.B.A.C.--American Municipal Bond Assurance Corporation.
A.M.T.--Alternative Minimum Tax.
A.N.N.M.T.--Annual Mandatory Tender.
B.A.N.--Bond Anticipation Note.
F.G.I.C.--Financial Guaranty Insurance Company.
F.R.D.D.--Floating Rate (Daily) Demand Note (b).
F.R.W.D.--Floating Rate (Weekly) Demand Note (b).
F.S.A.--Financial Security Assurance.
M.B.I.A.--Municipal Bond Insurance Association.
T.E.C.P.--Tax Exempt Commercial Paper.
(b) For purposes of amortized cost valuation, the maturity date of Floating Rate
Demand Notes is considered to be the later of the next date on which the
security can be redeemed at par, or the next date on which the rate of
interest is adjusted.
(c) Prerefunded issues are secured by escrowed cash and/or direct U.S.
guaranteed obligations.
(d) Standard & Poor's rating.
(e) The cost of securities for federal income tax purposes is substantially the
same as for financial reporting purposes.
NR--Not Rated by Moody's or Standard & Poor's.
The Fund's current Statement of Additional Information contains a description of
Moody's and Standard & Poor's ratings.
See Notes to Financial Statements
B-85
PRUDENTIAL MUNICIPAL SERIES FUND Connecticut Money Market Series
Statement of Assets and Liabilities
AUGUST 31, 2000
- ----------------------------------------------------------------------------------------
ASSETS
Investments, at amortized cost which approximates market value $81,045,038
Cash 34,469
Interest receivable 636,125
Receivable for Series shares sold 327,941
Other assets 1,620
---------------
TOTAL ASSETS 82,045,193
---------------
LIABILITIES
Payable for Series shares reacquired 678,140
Accrued expenses 66,944
Management fee payable 35,505
Dividends payable 29,208
Deferred trustee's fees 6,218
Distribution fee payable 4,525
---------------
TOTAL LIABILITIES 820,540
---------------
NET ASSETS $81,224,653
===============
Net assets were comprised of:
Shares of beneficial interest, at $.01 par value $ 812,246
Paid-in capital in excess of par 80,412,407
---------------
Net assets, August 31, 2000 $81,224,653
===============
Net asset value, offering price and redemption price per share
($81,224,653 / 81,224,653 shares of beneficial interest
issued and outstanding; unlimited number of shares
authorized) $1.00
See Notes to Financial Statements
B-86
PRUDENTIAL MUNICIPAL SERIES FUND Connecticut Money Market Series
Statement of Operations
YEAR
ENDED
AUGUST 31, 2000
- ----------------------------------------------------------------------------------------
NET INVESTMENT INCOME
Income
Interest $ 3,049,551
---------------
Expenses
Management fee 410,257
Distribution fee 102,564
Custodian's fees and expenses 58,000
Reports to shareholders 33,000
Registration fees 24,000
Transfer agent's fees and expenses 21,000
Legal fees and expenses 9,700
Audit fees 8,000
Trustees' fees and expenses 4,500
Miscellaneous 3,964
---------------
TOTAL EXPENSES 674,985
Less: Custodian fee credit (Note 1) (4,296)
---------------
Net expenses 670,689
---------------
NET INVESTMENT INCOME 2,378,862
---------------
REALIZED LOSS ON INVESTMENTS
Net realized loss on investment transactions (94)
---------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 2,378,768
===============
See Notes to Financial Statements
B-87
PRUDENTIAL MUNICIPAL SERIES FUND Connecticut Money Market Series
Statement of Changes in Net Assets
YEAR ENDED AUGUST 31,
------------------------------
2000 1999
- ---------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net investment income $ 2,378,862 $ 2,014,902
Net realized gain (loss) on investment
transactions (94) 5,471
------------- -------------
Net increase in net assets resulting from
operations 2,378,768 2,020,373
------------- -------------
DIVIDENDS AND DISTRIBUTIONS (NOTE 1) (2,378,768) (2,020,373)
------------- -------------
SERIES SHARE TRANSACTIONS (AT $1 PER SHARE)
Net proceeds from shares sold 283,078,236 311,218,175
Net asset value of shares issued in
reinvestment of dividends and
distributions 2,336,383 1,968,000
Cost of shares reacquired (287,264,699) (325,228,890)
------------- -------------
Net decrease in net assets from Series share
transactions (1,850,080) (12,042,715)
------------- -------------
Total decrease (1,850,080) (12,042,715)
NET ASSETS
Beginning of year 83,074,733 95,117,448
------------- -------------
End of year $ 81,224,653 $ 83,074,733
============= =============
See Notes to Financial Statements
B-88
PRUDENTIAL MUNICIPAL SERIES FUND Connecticut Money Market Series
Notes to Financial Statements
Prudential Municipal Series Fund (the 'Fund') is registered under the
Investment Company Act of 1940, as an open-end investment company. The Fund was
organized as a Massachusetts business trust on May 18, 1984 and consists of 11
series. The monies of each series are invested in separate, independently
managed portfolios. The Connecticut Money Market Series (the 'Series') commenced
investment operations on August 5, 1991. The Series is nondiversified and seeks
to provide the highest level of income that is exempt from Connecticut state and
federal income taxes with the minimum of risk by investing in 'investment grade'
tax-exempt securities having a maturity of thirteen months or less and whose
ratings are within the two highest ratings categories by a nationally recognized
statistical rating organization, or if not rated, are of comparable quality. The
ability of the issuers of the securities held by the Series to meet their
obligations may be affected by economic developments in a specific state,
industry or region.
NOTE 1. ACCOUNTING POLICIES
The following is a summary of significant accounting policies followed by the
Fund, and the Series, in the preparation of its financial statements.
SECURITIES VALUATIONS: Portfolio securities of the Series are valued at
amortized cost, which approximates market value. The amortized cost method of
valuation involves valuing a security at its cost on the date of purchase and
thereafter assuming a constant amortization to maturity of any discount or
premium.
All securities are valued as of 4:30 p.m., New York time.
Securities Transactions and Net Investment Income: Securities
transactions are recorded on the trade date. Realized gains and losses on sales
of investments are calculated on the identified cost basis. Interest income is
recorded on the accrual basis. The Series amortizes premiums and accretes
original issue discount on portfolio securities as adjustments to interest
income. Expenses are recorded on the accrual basis which may require the use of
certain estimates by management.
FEDERAL INCOME TAXES: For federal income tax purposes, each series in
the Fund is treated as a separate taxpaying entity. It is the intent of the
Series to continue to meet the requirements of the Internal Revenue Code
applicable to regulated investment companies and to distribute all of its net
income to shareholders. For this reason, no federal income tax provision is
required.
DIVIDENDS: The Series declares daily dividends from net investment
income and net realized short-term capital gains or losses. Payment of dividends
is made monthly. Income distributions and capital gain distributions are
determined in accordance with income tax regulations which may differ from
generally accepted accounting principles.
CUSTODY FEE CREDITS: The Series 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
B-89
PRUDENTIAL MUNICIPAL SERIES FUND Connecticut Money Market Series
Notes to Financial Statements Cont'd.
performance of such services. PIFM has entered into a subadvisory agreement with
The Prudential Investment Corporation ('PIC'). The subadvisory agreement
provides that PIC will furnish investment advisory services in connection with
the management of the Fund. PIFM continues to have responsibility for all
investment advisory services pursuant to the management agreement and supervises
PIC's performance of such services. PIFM pays for the services of PIC, the
compensation of officers of the Fund, occupancy and certain clerical and
bookkeeping costs of the Fund. The Fund bears all other costs and expenses.
The management fee paid PIFM is computed daily and payable monthly, at an
annual rate of .50 of 1% of the average daily net assets of the Series.
Effective January 1, 2000, the subadvisory fee paid to PIC by PIFM is
computed daily and payable monthly at an annual rate of .250 of 1% of the
average daily net assets of the Fund. Prior to January 1, 2000, PIC was
reimbursed by PIFM for reasonable costs and expenses incurred in furnishing
investment advisory services. The change in the subadvisory fee structure has no
impact on the management fee charged to the Fund or its shareholders.
The Series has a distribution agreement with Prudential Investment
Management Services LLC ('PIMS'), which acts as the distributor of the Series'
shares. The Series compensates PIMS for distributing and servicing the Series'
shares pursuant to the plan of distributing at an annual rate of .125 of 1% of
the Series' average daily net assets. The distribution fee is accrued daily and
payable monthly.
PIFM, PIC and PIMS are indirect, wholly owned subsidiaries of The
Prudential Insurance Company of America.
NOTE 3. OTHER TRANSACTIONS WITH AFFILIATES Prudential Mutual Fund Services
LLC ('PMFS'), a wholly owned subsidiary of PIFM, serves as the Fund's transfer
agent. During the year ended August 31, 2000, the Series incurred fees of
approximately $19,900 for the services of PMFS. As of August 31, 2000,
approximately $1,500 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. PROPOSED REORGANIZATION
On August 23, 2000, the Trustees approved an Agreement and Plan of
Reorganization and Liquidation of the Series (the 'Plan of Reorganization')
which provides for the transfer of substantially all of the assets and
liabilities of the Prudential Municipal Series Fund, Connecticut Money Market
Series to Prudential Tax-Free Money Fund, Inc. Class A shares of the Series will
be exchanged at net asset value for Class A shares of the equivalent value of
Prudential Tax-Free Money Fund, Inc. The Fund will then cease operations. The
Plan of Reorganization is subject to approval by the shareholders of the
Connecticut Money Market Series.
B-90
PRUDENTIAL MUNICIPAL SERIES FUND Connecticut Money Market Series
Financial Highlights
YEAR
ENDED
AUGUST 31, 2000
- ----------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE:
NET ASSET VALUE, BEGINNING OF YEAR $ 1.00
NET INVESTMENT INCOME AND REALIZED GAINS 0.03
Dividends and distributions to shareholders (0.03)
---------------
Net asset value, end of year $ 1.00
===============
TOTAL RETURN(b): 2.97%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000) $81,225
Average net assets (000) $82,051
Ratios to average net assets:
Expenses, including distribution and service (12b-1) 0.82%
Expenses, excluding distribution and service (12b-1) 0.69%
Net investment income 2.90%
- ------------------------------
(a) Net of management fee waiver.
(b) Total return includes reinvestment of dividends and distributions.
See Notes to Financial Statements
B-91
PRUDENTIAL MUNICIPAL SERIES FUND Connecticut Money Market Series
Financial Highlights Cont'd.
YEAR ENDED AUGUST 31,
- -------------------------------------------------------------------------------------
1999 1998 1997 1996
- -------------------------------------------------------------------------------------
$ 1.00 $ 1.00 $ 1.00 $ 1.00
.02 .03 .03(a) .03(a)
(.02) (.03) (.03) (.03)
-------- -------- -------- --------
$ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== ========
2.34% 2.72% 3.10% 3.17%
$ 83,075 $ 95,117 $ 75,927 $ 77,683
$ 87,744 $ 84,800 $ 77,500 $ 74,576
.82% .86% .46%(a) .47%(a)
.69% .74% .34%(a) .35%(a)
2.30% 2.68% 3.06%(a) 3.12%(a)
See Notes to Financial Statements
B-92
PRUDENTIAL MUNICIPAL SERIES FUND Connecticut Money Market Series
Report of Independent Accountants
To the Shareholders and Board of Trustees of
Prudential Municipal Series Fund, Connecticut Money Market Series
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Prudential Municipal Series Fund,
Connecticut Money Market Series (the 'Fund', one of the portfolios constituting
Prudential Municipal Series Fund) at August 31, 2000, the results of its
operations for the year then ended, the changes in its net assets for each of
the two years in the period then ended and the financial highlights for each of
the four years in the period then ended, in conformity with accounting
principles generally accepted in the United States of America. These financial
statements and financial highlights (hereafter referred to as 'financial
statements') are the responsibility of the Fund's management; our responsibility
is to express an opinion on these financial statements based on our audits. We
conducted our audits of these financial statements in accordance with auditing
standards generally accepted in the United States of America, which require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits, which included confirmation
of securities at August 31, 2000 by correspondence with the custodian, provide a
reasonable basis for our opinion. The accompanying financial highlights for the
two year period ended August 31, 1996 were audited by other independent
accountants, whose opinion dated October 14, 1996 was unqualified.
As described in Note 4 to the financial statements, on August 23, 2000, the
Board of Trustees of the Series approved an Agreement and Plan of
Reorganization, subject to shareholder approval, whereby the Series would be
merged into Tax-Free Money Fund, Inc.
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York
October 20, 2000
B-93
PRUDENTIAL MUNICIPAL SERIES FUND Connecticut Money Market Series
Federal Income Tax Information (Unaudited)
We are required by the Internal Revenue Code to advise you within 60 days
of the Series' fiscal year end (August 31, 2000) as to the federal tax status of
dividends and distributions paid by the Fund during such fiscal year.
Accordingly, during its fiscal year ended August 31, 2000, dividends paid from
net investment income of $.03 per share were all federally tax-exempt interest
dividends.
B-94
PRUDENTIAL MUNICIPAL SERIES FUND Florida Series
Portfolio of Investments as of August 31, 2000
MOODY'S PRINCIPAL
RATING INTEREST MATURITY AMOUNT VALUE
DESCRIPTION (a) (UNAUDITED) RATE DATE (000) (NOTE 1)
- ------------------------------------------------------------------------------------------------------------
LONG-TERM INVESTMENTS 98.3%
Alachua Cnty. Ind. Dev. Auth. Rev.,
H.B. Fuller Co. Proj., A.M.T. NR 7.75% 11/01/16 $ 3,000 $ 3,064,890
Arbor Greene Cmnty. Dev. Dist.,
Florida Assmt. Rev. NR 5.75 05/01/06 330 325,278
Florida Assmt. Rev. NR 6.50 05/01/07 500 502,355
Florida Assmt. Rev. NR 6.30 05/01/19 340 322,480
Bayside Impvt. Cmnty. Dev. Dist.,
Florida Cap. Impvt. Rev., Ser. A NR 6.30 05/01/18 1,000 945,000
Brevard Cnty. Edl. Facs. Auth. Rev.
Ref., Florida Inst. of Tech. BBB-(c) 6.875 11/01/22 1,500 1,553,445
Brevard Cnty. Sch. Brd. Ctfs. of
Part., Ser. A, A.M.B.A.C. Aaa 6.50 07/01/12 3,500(b) 3,697,575
Broward Cnty. Edl. Facs. Auth. Rev.,
Nova Univ. Dorm. Proj., Ser. A NR 7.50 04/01/17 1,500(b) 1,556,190
Broward Cnty. Hlth. Facs. Auth.,
North Beach Hosp., M.B.I.A. Aaa 6.75 08/15/06 1,000 1,040,530
Clay Cnty. Hsg. Fin. Auth. Rev.,
Sngl. Fam. Mtge., Ser. A, A.M.T.,
G.N.M.A. Aa1 7.45 09/01/23 375 385,035
Cocoa Wtr. & Swr. Rev. Ref.,
F.G.I.C. Aaa 5.25 10/01/17 1,230 1,232,694
Dade Cnty. Aviation Dept. Rev.,
Ser. B, A.M.T., M.B.I.A. Aaa 6.00 10/01/24 1,500 1,561,260
Dade Cnty. Hlth. Facs. Auth. Rev.,
Baptist Hosp. of Miami Proj.,
Ser. A, E.T.M., M.B.I.A. Aaa 6.75 05/01/08 500 545,775
Dade Cnty. Hsg. Fin. Auth. Rev.,
Multi. Fam. Mtge., Golden Lakes
Apts. Proj., Ser. A, A.M.T. NR 6.05 11/01/39 1,000 960,910
Sngl. Fam. Mtge., Ser. B, A.M.T.,
G.N.M.A Aaa 7.25 09/01/23 285 291,438
Sngl. Fam. Mtge., Ser. C, A.M.T.,
G.N.M.A. Aaa 7.75 09/01/22 540 550,800
Dade Cnty. Prof. Sports Franchise
Facs. Tax Rev., E.T.M., M.B.I.A. Aaa 5.25 10/01/30 4,300 4,142,534
Duval Cnty. Hsg. Fin. Auth. Rev.,
Sngl. Fam. Mtge., A.M.T., G.N.M.A. AAA(c) 8.375 12/01/14 160 162,968
See Notes to Financial Statements
B-95
PRUDENTIAL MUNICIPAL SERIES FUND Florida Series
Portfolio of Investments as of August 31, 2000 Cont'd.
MOODY'S PRINCIPAL
RATING INTEREST MATURITY AMOUNT VALUE
DESCRIPTION (a) (UNAUDITED) RATE DATE (000) (NOTE 1)
- ------------------------------------------------------------------------------------------------------------
Escambia Cnty. Hlth. Facs. Rev.,
Florida Hlth. Care Facs. Loan,
A.M.B.A.C. Aaa 5.95% 07/01/20 $ 2,000 $ 2,090,380
Florida Hsg. Fin. Corp. Rev.,
Cypress Trace Apts., Ser. G, A.M.T. NR 6.60 07/01/38 1,220 1,157,548
Westchase Apts., Ser. B, A.M.T. NR 6.61 07/01/38 1,510 1,452,348
Florida St. Mun. Loan Council Rev.
Cap. Apprec. Ser. A, M.B.I.A.,
Gen. Oblig. AAA-(c) Zero 04/01/22 1,520 447,169
Cap. Apprec. Ser. A, M.B.I.A.,
Gen. Oblig. AAA-(c) Zero 04/01/23 1,520 421,602
Cap. Apprec. Ser. A, M.B.I.A.,
Gen. Oblig. AAA-(c) Zero 04/01/24 1,520 397,404
Greater Orlando Aviation Rev. Auth.
Facs., Orlando Arpt., A.M.T.,
F.G.I.C. Aaa 5.25 10/01/23 2,000 1,902,380
Hillsborough Cnty. Ind. Dev. Auth.
Poll. Ctrl. Rev., Tampa Elec.
Proj.,
Ser. 92 Aa3 8.00 05/01/22 1,750 1,877,890
Indigo Cmty. Dev. Dist. Cap. Impvt.
Rev. Ser. B NR 6.40 05/01/06 1,500 1,500,540
Jacksonville Elec. Auth. Rev.,
Elec. Sys. Ser. A Aa2 6.00 10/01/30 1,000 1,030,480
St. Johns Rvr. Pwr. Park Issue 2,
Ser. 7 Aa2 Zero 10/01/10 3,000 1,826,880
Jacksonville Hlth. Facs. Auth.
Hosp. Rev., Nat'l. Ben. Assoc. Baa1 7.00 12/01/22 1,825 1,842,027
St. Lukes Hosp. Assoc. Proj. AA+(c) 7.125 11/15/20 1,000 1,047,150
Jacksonville Swr. & Sld. Wste. Disp.
Facs. Rev., Anheuser Busch Proj.,
A.M.T. A1 5.875 02/01/36 1,000 1,011,970
Jacksonville Wtr. & Swr. Dev. Rev.,
Suburban Utils., A.M.T. A3 6.75 06/01/22 1,000 1,037,060
United Wtr. Proj., A.M.T.,
A.M.B.A.C. Aaa 6.35 08/01/25 1,500 1,588,710
Lakeland Elec. & Wtr. Rev. A1 5.625 10/01/36 3,000(b) 3,223,500
Lee Cnty. Ind. Dev. Auth. Hlth.
Care,
Facs. Rev., Shell Point Proj., Ser.
A BBB-(c) 5.50 11/15/29 1,500 1,215,195
Leon Cnty. Hsg. Fin. Auth. Rev.,
Sngl.
Fam. Mtge., Ser. A, A.M.T.,
G.N.M.A. Aaa 7.30 04/01/21 230 234,839
See Notes to Financial Statements
B-96
PRUDENTIAL MUNICIPAL SERIES FUND Florida Series
Portfolio of Investments as of August 31, 2000 Cont'd.
MOODY'S PRINCIPAL
RATING INTEREST MATURITY AMOUNT VALUE
DESCRIPTION (a) (UNAUDITED) RATE DATE (000) (NOTE 1)
- ------------------------------------------------------------------------------------------------------------
Lexington Oaks Cmnty. Dev. Dist.
Rev., Ser. B NR 6.70% 05/01/07 $ 1,000 $ 1,012,180
Lynn Haven Cap. Impvt. Rev.,
M.B.I.A. AAA-(c) 5.50 12/01/26 1,295 1,285,987
Martin Cnty. Ind. Dev. Auth. Rev.,
Indiantown Cogen. Proj., Ser. A,
A.M.T. Baa3 7.875 12/15/25 1,200 1,218,012
Maryland St. Hlth. and Higher Educ.
Facs., Auth. Rev. Baa1 6.75 07/01/30 500 511,115
Massachusetts St. Turnpike Auth.
Metropolitan Highway Sys., Rev. Aaa 6.05 01/01/28 2,000 428,100
Miami Spec. Oblig., Admn. Bldg.
Acquis. Proj., F.G.I.C. Aaa 6.00 02/01/16 1,000 1,049,480
Miami-Dade Cnty. Ind. Dev. Auth.
Rev., Facs., United Air Lines Inc.
Proj. Baa3 6.05 03/01/35 1,000 1,008,620
Miami-Dade Cnty. Prof. Sports Fac.
Tax Cap. Apprec. Ref., M.B.I.A. Aaa Zero 10/01/16 2,650 1,107,303
Minnesota Ag. & Econ. Dev., Fairview
Hlth. Care Sys., Ser. A A2 6.375 11/15/22 1,380 1,416,529
Mirimar Wste. Wtr. Impvt. Assmt.
Rev., F.G.I.C. Aaa 6.75 10/01/16 1,590(b) 1,740,875
Oakstead Cmnty. Dev. Dist. Cap.
Impvt., Ser. B NR 6.50 05/01/07 1,000 995,090
Okaloosa Cnty. Cap. Impvt. Rev.,
M.B.I.A. Aaa Zero 12/01/06 450 332,721
Orange Cnty. Hlth. Facs. Auth. Rev.,
Adventist Hlth. Sys., Baa1 6.375 11/15/20 1,000 992,030
Orange Cnty. Hsg. Fin. Auth. Mtge.
Rev., Ser. A, A.M.T., G.N.M.A. AAA(c) 7.375 09/01/24 420 433,852
Orange Cnty. Hsg. Fin. Auth. Rev.,
Multi. Fam. Ashley Point Apts.,
Ser. A, A.M.T. BBB+(c) 6.85 10/01/16 1,200 1,209,588
Multi. Fam. Ashley Point Apts.,
Ser. A, A.M.T. BBB+(c) 7.10 10/01/24 855 861,643
Orlando Util. Comm., Wtr. & Elec.
Rev., Ser. D Aa2 6.75 10/01/17 2,200 2,546,412
See Notes to Financial Statements
B-97
PRUDENTIAL MUNICIPAL SERIES FUND Florida Series
Portfolio of Investments as of August 31, 2000 Cont'd.
MOODY'S PRINCIPAL
RATING INTEREST MATURITY AMOUNT VALUE
DESCRIPTION (a) (UNAUDITED) RATE DATE (000) (NOTE 1)
- ------------------------------------------------------------------------------------------------------------
Palm Beach Cnty. Hlth. Facs. Auth.
Rev.,
Abbey Delray South Proj. BBB(c) 5.50% 10/01/11 $ 750 $ 706,087
Good Samaritan Hlth. Sys. Aaa 6.30 10/01/22 1,000(b) 1,070,170
Palm Beach Cnty. Hsg. Fin. Multi.
Fam. Auth. Rev., Windsor Pk. Apts.,
Ser. A, A.M.T., M.B.I.A. AAA-(c) 5.80 12/01/28 1,000 994,390
Pensacola Hlth. Facs. Auth. Rev.,
Daughters of Charity, M.B.I.A. Aaa 5.25 01/01/11 1,600(b) 1,646,672
Polk Cnty. Ind. Dev. Auth., Sld.
Wste. Disp. Fac. Rev.,
Tampa Elec. Co. Proj., A.M.T. Aa2 5.85 12/01/31 1,000 1,017,100
Puerto Rico Comnwlth.,
Cap. Apprec. Ref. Pub. Impvt., Gen.
Oblig. Baa1 Zero 07/01/15 1,955 901,138
Cap. Apprec. Ref. Pub. Impvt., Gen.
Oblig. Baa1 Zero 07/01/16 2,500 1,081,975
Cap. Apprec. Ref. Pub. Impvt., Gen.
Oblig. Baa1 Zero 07/01/17 5,300 2,154,344
Rites-Pennsylvania 642B, M.B.I.A.,
Gen. Oblig. NR 7.496 07/01/12 1,500 1,760,505
Puerto Rico Ind. Tourist Educ.,
Cogen Facs. Proj., A.M.T. Baa2 6.625 06/01/26 1,500 1,563,645
Puerto Rico Pub. Bldgs. Auth. Rev.
Gtd., Gov. Fac. Ser. B, F.S.A. AAA-(c) 5.25 07/01/21 1,915 1,893,341
Puerto Rico Tel. Auth. Rev., Ser. I,
M.B.I.A., R.I.B.S. Aaa 6.763 01/16/15 2,250(d)(b) 2,387,812
Seacoast Util. Auth. Wtr. & Swr.
Util., Sys. Rev., F.G.I.C. Aaa 5.50 03/01/16 2,000 2,067,620
St. Petersburg Hlth. Facs. Auth.
Rev., Allegheny Hlth. Proj.,
M.B.I.A. Aaa 7.00 12/01/15 1,000(b) 1,048,000
Sunrise Pub. Facs. Rev. Cap.
Apprec., Ser. B, M.B.I.A. Aaa Zero 10/01/20 1,120 365,232
Sunrise Util. Sys. Rev., Ref.,
A.M.B.A.C. Aaa 5.50 10/01/18 2,000 2,055,460
Tampa Gtd. Entitlement Rev.,
A.M.B.A.C. Aaa 7.05 10/01/07 2,000 2,092,660
See Notes to Financial Statements
B-98
PRUDENTIAL MUNICIPAL SERIES FUND Florida Series
Portfolio of Investments as of August 31, 2000 Cont'd.
MOODY'S PRINCIPAL
RATING INTEREST MATURITY AMOUNT VALUE
DESCRIPTION (a) (UNAUDITED) RATE DATE (000) (NOTE 1)
- ------------------------------------------------------------------------------------------------------------
Tampa Sports Auth. Rev.,
Tampa Bay Arena Proj., M.B.I.A. Aaa 5.75% 10/01/25 $ 1,000 $ 1,051,980
Tampa Bay Arena Proj., M.B.I.A. Aaa 5.75 10/01/20 1,000 1,053,890
Virgin Islands Pub. Fin. Auth. Rev.,
Gross Rcpts. Taxes Loan, Ser. A BBB-(c) 6.50 10/01/24 500 517,945
Vista Lakes Cmnty. Dev. Dist. Cap.
Impvt., Rev. NR 6.35 05/01/05 1,000 1,001,890
Volusia Cnty. Edl. Fac. Auth. Rev.,
Embry Riddle Univ., Aero. A AAA(c) 6.625 10/15/22 1,000(b) 1,064,470
-----------
TOTAL INVESTMENTS 98.3%
(COST $92,909,044; NOTE 4) 95,792,092
-----------
Other assets in excess of
liabilities 1.7% 1,703,023
-----------
NET ASSETS 100% $97,495,115
===========
- ------------------------------
(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.
E.T.M.--Escrowed to Maturity.
F.G.I.C.--Financial Guaranty Insurance Company.
F.S.A.--Financial Security Assurance.
G.N.M.A.--Government National Mortgage Association.
M.B.I.A.--Municipal Bond Insurance Corporation.
R.I.B.S.--Residual Interest Bonds.
(b) Prerefunded issues are secured by escrowed cash and/or direct U.S.
guaranteed obligations.
(c) Standard & Poor's Rating.
(d) Inverse floating rate bond. The coupon is inversely indexed to a floating
interest rate. The rate shown is the rate at year end.
NR--Not Rated by Moody's or Standard & Poor's.
The Fund's current Statement of Additional Information contains a description of
Moody's and Standard & Poor's ratings.
See Notes to Financial Statements
B-99
PRUDENTIAL MUNICIPAL SERIES FUND Florida Series
Statement of Assets and Liabilities
AUGUST 31, 2000
- ----------------------------------------------------------------------------------------
ASSETS
Investments, at value (cost $92,909,044) $95,792,092
Interest receivable 1,644,312
Receivable for investment sold 1,050,021
Receivable for Series shares sold 105,315
Unrealized appreciation on swap 28,779
Other assets 2,420
---------------
TOTAL ASSETS 98,622,939
---------------
LIABILITIES
Bank overdraft 652,786
Payable for Series shares reacquired 297,340
Dividends payable 52,002
Accrued expenses 50,421
Management fee payable 41,319
Distribution fee payable 27,702
Deferred trustees' fees 6,254
---------------
TOTAL LIABILITIES 1,127,824
---------------
NET ASSETS $97,495,115
===============
Net assets were comprised of:
Shares of beneficial interest, at par $ 95,335
Paid-in capital in excess of par 95,443,949
---------------
95,539,284
Accumulated net realized loss on investments (955,996)
Net unrealized appreciation on investments 2,911,827
---------------
Net assets, August 31, 2000 $97,495,115
===============
See Notes to Financial Statements
B-100
Prudential Municipal Series Fund Florida Series
Statement of Assets and Liabilities Cont'd.
AUGUST 31, 2000
- ----------------------------------------------------------------------------------------
Class A:
Net asset value and redemption price per share
($68,701,116 / 6,718,054 shares of beneficial interest
issued and outstanding) $10.23
Maximum sales charge (3% of offering price) .32
---------------
Maximum offering price to public $10.55
===============
Class B:
Net asset value, offering price and redemption price per
share ($22,875,029 / 2,236,700 shares of beneficial
interest issued and outstanding) $10.23
===============
Class C:
Net asset value and redemption price per share
($5,456,222 / 533,506 shares of beneficial interest issued
and outstanding) $10.23
Sales charge (1% of offering price) .10
---------------
Offering price to public $10.33
===============
Class Z:
Net asset value, offering price and redemption price per
share
($462,748 / 45,267 shares of beneficial interest issued
and outstanding) $10.22
===============
See Notes to Financial Statements
B-101
PRUDENTIAL MUNICIPAL SERIES FUND Florida Series
Statement of Operations
YEAR
ENDED
AUGUST 31, 2000
- ----------------------------------------------------------------------------------------
NET INVESTMENT INCOME
Income
Interest $ 6,065,696
---------------
Expenses
Management fee 502,329
Distribution fee--Class A 177,706
Distribution fee--Class B 115,957
Distribution fee--Class C 44,140
Custodian's fees and expenses 80,000
Reports to shareholders 46,000
Transfer agent's fees and expenses 28,000
Registration fees 37,000
Legal fees and expenses 14,000
Audit fees 10,000
Trustees' fees and expenses 8,000
Miscellaneous 4,280
---------------
TOTAL EXPENSES 1,067,412
Custodian fee credit (636)
---------------
Net expenses 1,066,776
---------------
NET INVESTMENT INCOME 4,998,920
---------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Net realized gain (loss) on:
Investment transactions (936,600)
Financial futures transactions 81,614
---------------
(854,986)
---------------
Net change in unrealized appreciation on:
Investments 1,034,298
Swaps 28,779
---------------
Net change in unrealized appreciation 1,063,077
---------------
Net gain on investments 208,091
---------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 5,207,011
===============
See Notes to Financial Statements
B-102
PRUDENTIAL MUNICIPAL SERIES FUND Florida Series
Statement of Changes in Net Assets
YEAR ENDED AUGUST 31,
-----------------------------
2000 1999
- ---------------------------------------------------------------------------------
DECREASE IN NET ASSETS
OPERATIONS
Net investment income $ 4,998,920 $ 5,424,084
Net realized gain (loss) on investment
transactions (854,986) 447,190
Net change in unrealized appreciation
(depreciation) of investments 1,063,077 (6,574,512)
------------- ------------
Net increase (decrease) in net assets
resulting from operations 5,207,011 (703,238)
------------- ------------
DIVIDENDS AND DISTRIBUTIONS (NOTE 1):
Dividends from net investment income
Class A (3,597,698) (4,002,478)
Class B (1,116,649) (1,091,852)
Class C (268,305) (309,399)
Class Z (16,268) (20,355)
------------- ------------
(4,998,920) (5,424,084)
------------- ------------
Distributions in excess of net investment
income
Class A -- (8,316)
Class B -- (2,283)
Class C -- (710)
Class Z -- (45)
------------- ------------
-- (11,354)
------------- ------------
Distributions from net realized gains
Class A -- (8,316)
Class B -- (2,283)
Class C -- (710)
Class Z -- (46)
------------- ------------
-- (11,355)
------------- ------------
SERIES SHARE TRANSACTIONS (NET OF SHARE
CONVERSIONS)
(NOTE 5):
Net proceeds from shares sold 11,228,470 13,296,170
Net asset value of shares issued in
reinvestment of dividends and distributions 2,239,613 2,387,979
Cost of shares reacquired (25,414,666) (19,003,105)
------------- ------------
Net decrease in net assets from Series share
transactions (11,946,583) (3,318,956)
------------- ------------
Total decrease (11,738,492) (9,468,987)
NET ASSETS
Beginning of year 109,233,607 118,702,594
------------- ------------
End of year $ 97,495,115 $109,233,607
============= ============
See Notes to Financial Statements
B-103
PRUDENTIAL MUNICIPAL SERIES FUND Florida Series
Notes to Financial Statements
Prudential Municipal Series Fund, (the "Fund") is registered under the
Investment Company Act of 1940, as an open-end investment company. The Fund was
organized as a Massachusetts business trust on May 18, 1984 and consists of 11
series. The monies of each series are invested in separate, independently
managed portfolios. The Florida Series (the "Series") commenced investment
operations on December 28, 1990. The Series is nondiversified and seeks to
achieve its investment objective of providing the maximum amount of income that
is exempt from federal income taxes with the minimum of risk, and investing in
securities which will enable its shares to be exempt from the Florida
intangibles tax by investing in "investment grade" tax-exempt securities whose
ratings are within the four highest ratings categories by a nationally
recognized statistical rating organization or, if not rated, are of comparable
quality. The ability of the issuers of the securities held by the Series to meet
their obligations may be affected by economic developments in a specific state,
industry or region.
NOTE 1. ACCOUNTING POLICIES
The following is a summary of significant accounting policies followed by the
Fund, and the Series, in the preparation of its financial statements.
SECURITIES VALUATIONS: The Series values municipal securities
(including commitments to purchase such securities on a "when-issued" basis) on
the basis of prices provided by a pricing service which uses information with
respect to transactions in bonds, quotations from bond dealers, market
transactions in comparable securities and various relationships between
securities in determining values. If market quotations are not readily available
from such pricing service, a security is valued at its fair value as determined
under procedures established by the Trustees.
Short-term securities which mature in more than 60 days are valued at
current market quotations. Short-term securities which mature in 60 days or less
are valued at amortized cost.
All securities are valued as of 4:15 p.m., New York time.
FINANCIAL FUTURES CONTRACTS: A financial futures contract is an
agreement to purchase (long) or sell (short) an agreed amount of securities at a
set price for delivery on a future date. Upon entering into a financial futures
contract, the Series is required to pledge to the broker an amount of cash
and/or other assets equal to a certain percentage of the contract amount. This
amount is known as the "initial margin." Subsequent payments, known as
"variation margin," are made or received by the Series each day, depending on
the daily fluctuations in the value of the underlying security. Such variation
margin is recorded for financial statement purposes on a daily basis as
unrealized gain or loss. When the contract expires or is closed, the gain or
B-104
PRUDENTIAL MUNICIPAL SERIES FUND Florida Series
Notes to Financial Statements Cont'd.
loss is realized and is presented in the statement of operations as net realized
gain (loss) on financial futures contracts.
The Series invests in financial futures contracts in order to hedge its
existing portfolio securities, or securities the Series intends to purchase,
against fluctuations in value caused by changes in prevailing interest rates.
Should interest rates move unexpectedly, the Series may not achieve the
anticipated benefits of the financial futures contracts and may realize a loss.
The use of futures transactions involves the risk of imperfect correlation in
movements in the price of futures contracts, interest rates and the underlying
hedged assets.
OPTIONS: The Series 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 or foreign currency exchange rates with
respect to securities or currencies which the Series currently owns or intends
to purchase. When a Series purchases an option, it pays a premium and an amount
equal to that premium is recorded as an investment. When a Series 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 Series
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
a Series has realized a gain or loss. The difference between the premium and the
amount received or paid on effecting a closing purchase or sale transaction is
also treated as a realized gain or loss. Gain or loss on purchased options is
included in net realized gain (loss) on investment transactions. Gain or loss on
written options is presented separately as net realized gain (loss) on written
option transactions.
The Series, as writer of an option, has no control over whether the
underlying securities or currencies may be sold (called) or purchased (put). As
a result a Series bears the market risk of an unfavorable change in the price of
the security or currency underlying the written option. The Series, as purchaser
of an option, bears the risk of the potential inability of the counterparties to
meet the terms of their contracts.
INTEREST RATE SWAPS: The Series may enter into interest rate swaps. In
a simple interest rate swap, one investor pays a floating rate of interest on a
notional principal amount and receives a fixed rate of interest on the same
notional principal amount for a specified period of time. Alternatively, an
investor may pay a fixed rate and receive a floating rate. Interest rate swaps
were conceived as asset/liability management tools. In more complex swaps, the
notional principal amount may decline (or amortize) over time.
B-105
PRUDENTIAL MUNICIPAL SERIES FUND Florida Series
Notes to Financial Statements Cont'd.
During the term of the swap, changes in the value of the swap are
recognized as unrealized gains or losses by "marking-to-market" to reflect the
market value of the swap. When the swap is terminated, the Series will record a
realized gain or loss equal to the difference between the proceeds from (or cost
of) the closing transaction and the Series basis in the contract, if any.
The Fund is exposed to credit loss in the event of non-performance by the
other party to the interest rate swap. However, the Fund does not anticipate
non-performance by any counterparty.
INVERSE FLOATERS: The Series invests in variable rate securities
commonly called "inverse floaters". The interest rates on these securities have
an inverse relationship to the interest rate of other securities or the value of
an index. Changes in interest rate on the other security or index inversely
affect the rate paid on the inverse floater, and the inverse floater's price
will be more volatile than that of a fixed-rate bond. Additionally, some of
these securities contain a "leverage factor" whereby the interest rate moves
inversely by a "factor" to the benchmark rate. Certain interest rate movements
and other market factors can substantially affect the liquidity of inverse
floating rate notes.
SECURITIES TRANSACTIONS AND NET INVESTMENT INCOME: Securities
transactions are recorded on the trade date. Realized gains and losses on sales
of securities are calculated on the identified cost basis. Interest income is
recorded on the accrual basis. The Series amortizes premiums and accretes
original issue discount on portfolio securities as adjustments to interest
income. Expenses are recorded on the accrual basis which may require the use of
certain estimates by management.
Net investment income (other than distribution fees) and unrealized and
realized gains or losses are allocated daily to each class of shares based upon
the relative proportion of net assets of each class at the beginning of the day.
Federal Income Taxes: For federal income tax purposes, each series in
the Fund is treated as a separate taxpaying entity. It is the intent of the
Series to meet the requirements of the Internal Revenue Code applicable to
regulated investment companies and to distribute all of its net income to
shareholders. For this reason no federal income tax provision is required.
DIVIDENDS AND DISTRIBUTIONS: The Series declares daily dividends from
net investment income. Payment of dividends is made monthly. Distributions of
net capital gains, if any, are made annually.
Income distributions and capital gain distributions are determined in
accordance with income tax regulations which may differ from generally accepted
accounting principles.
B-106
PRUDENTIAL MUNICIPAL SERIES FUND Florida Series
Notes to Financial Statements Cont'd.
CUSTODY FEE CREDITS: The Fund has an arrangement with its custodian
bank, whereby uninvested monies earn credits which reduce the fees charged by
the custodian.
NOTE 2. AGREEMENTS
The Fund has a management agreement with Prudential Investments Fund Management
LLC ("PIFM"). Pursuant to this agreement, PIFM has responsibility for all
investment advisory services and supervises the subadviser's performance of such
services. PIFM has entered into a subadvisory agreement with The Prudential
Investment Corporation ("PIC"). The subadvisory agreement provides that PIC will
furnish investment advisory services in connection with the management of the
Fund. In connection therewith, PIC is obligated to keep certain books and
records of the Fund. PIFM continues to have responsibility for all investment
advisory services pursuant to the management agreement and supervises PIC's
performance of such services. PIFM pays for the services of PIC, 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 to PIFM is computed daily and payable monthly, at
an annual rate of .50 of 1% of the average daily net assets of the Series.
Effective January 1, 2000, the subadvisory fee paid to PIC by PIFM is
computed daily and payable monthly at an annual rate of .250 of 1% of the
average daily net assets of the Fund. Prior to January 1, 2000, PIC was
reimbursed by PIFM for reasonable costs and expenses incurred in furnishing
investment advisory services. The change in the subadvisory fee structure has no
impact on the management fee charged to the Fund or its shareholders.
The Fund has a distribution agreement with Prudential Investment
Management Services LLC ("PIMS"), which acts as the distributor of the Class A,
Class B, Class C and Class Z shares of the Fund. The Fund compensates PIMS for
distributing and servicing the Fund's Class A, Class B and Class C shares,
pursuant to plans of distribution (the "Class A, B and C Plans") regardless of
expenses actually incurred. The distribution fees were accrued daily and payable
monthly. No distribution or service fees were paid to PIMS as distributor for
Class Z shares of the Fund.
Pursuant to the Class A, B and C Plans, the Fund compensates PIMS for
distribution-related activities at an annual rate of up to .30 of 1%, .50 of 1%
and .75 of 1% of the average daily net assets of the Class A, B and C shares,
respectively. Such expenses under the Plans were .25 of 1%, .50 of 1% and .75 of
1% of the average daily net assets of the Class A, B and C shares, respectively,
for the year ended August 31, 2000.
B-107
PRUDENTIAL MUNICIPAL SERIES FUND Florida Series
Notes to Financial Statements Cont'd.
PIMS has advised the Series that they have received approximately $16,200
and $100 in front-end sales charges resulting from sales of Class A and C
shares, respectively during the year ended August 31, 2000. From these fees,
PIMS paid such sales charges to affiliated broker-dealers, which in turn paid
commissions to salespersons and incurred other distribution costs.
PIMS has advised the Series that for the year ended August 31, 2000, they
received approximately $77,200 and $300 in contingent deferred sales charges
imposed upon certain redemptions by Class B and Class C shareholders,
respectively.
PIFM, PIMS and PIC are wholly owned subsidiaries of The Prudential
Insurance Company of America ("Prudential").
The Fund, along with other affiliated registered investment companies (the
"Funds"), entered into a syndicated credit agreement ("SCA") with an
unaffiliated lender. The maximum commitment under the SCA is $1 billion.
Interest on any borrowings will be at market rates. The purpose of the agreement
is to serve as an alternative source of funding for capital share redemptions.
The Funds pay a commitment fee at an annual rate of .080 of 1% of the unused
portion of the credit facility. The commitment fee is accrued and paid quarterly
on a pro rata basis by the Funds. The expiration date of the SCA is March 9,
2001. Prior to March 9, 2000, the commitment fee was .065 of 1% of the unused
portion of the credit facility. The Fund did not borrow any amounts pursuant to
the SCA during the year ended August 31, 2000.
NOTE 3. OTHER TRANSACTIONS WITH AFFILIATES
Prudential Mutual Fund Services LLC ("PMFS"), a wholly owned subsidiary of PIFM,
serves as the Fund's transfer agent. During the year ended August 31, 2000, the
Series incurred fees of approximately $25,000 for the services of PMFS. As of
August 31, 2000, approximately $1,900 of such fees were due to PMFS. Transfer
agent fees and expenses in the Statement of Operations include certain
out-of-pocket expenses paid to nonaffiliates.
NOTE 4. PORTFOLIO SECURITIES
Purchases and sales of portfolio securities of the Series, excluding short-term
investments, for the year ended August 31, 2000 were $40,921,468 and
$52,871,191, respectively.
The cost basis of investments for federal income tax purposes at August
31, 2000 was $92,910,295 and accordingly, net unrealized appreciation of
investments for federal income tax purposes was $2,881,797 (gross unrealized
appreciation--$4,081,136 gross unrealized depreciation--$1,199,339).
B-108
PRUDENTIAL MUNICIPAL SERIES FUND Florida Series
Notes to Financial Statements Cont'd.
The Series elected, for United States federal income tax purposes, to
treat capital losses of $821,000 incurred in the ten months ended August 31,
2000 as having been incurred in the current fiscal year.
For federal income tax purposes, the Series had a capital loss
carryforward as of August 31, 2000 of approximately $135,000 which expires in
2008. Accordingly, no capital gains distributions are expected to be paid to
shareholders until future net gains have been realized in excess of such capital
loss carryforward.
The Fund entered into interest rate swap agreements. Under the agreements
the Fund receives the excess, if any, of a floating rate over a fixed rate. The
Fund paid a transaction fee for the agreements. Details of the swaps at August
31, 2000 are as follows:
NOTIONAL UNREALIZED
AMOUNT FIXED FLOATING OPEN TERMINATION APPRECIATION
TYPE COUNTERPARTY (000) RATE RATE DATE DATE (DEPRECIATION)
- --------- --------------- --------- --------- -------- -------- ----------- ---------------
Interest 3 month
rate Morgan Stanley $ 2,000 5.25% LIBOR 6/27/00 12/29/10 $ 28,779
NOTE 5. CAPITAL
The Series offers Class A, Class B, Class C and Class Z shares. Class A shares
are sold with a front-end sales charge of up to 3%. Class B shares are sold with
a contingent deferred sales charge which declines from 5% to zero depending on
the period of time the shares are held. Class C shares are sold with a front-end
sales charge of 1% during the first 18 months. Class B shares will automatically
convert to Class A shares on a quarterly basis approximately seven years after
purchase. Special exchange privileges are 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. The Fund has authorized an unlimited number of
shares of beneficial interest of each class at $.01 par value per share.
B-109
PRUDENTIAL MUNICIPAL SERIES FUND Florida Series
Notes to Financial Statements Cont'd.
Transactions in shares of beneficial interest for the year ended August
31, 2000 and August 31, 1999 were as follows:
CLASS A SHARES AMOUNT
- ------- ---------- ------------
Year ended August 31, 2000:
Shares sold 703,618 $ 7,017,315
Shares issued in reinvestment of dividends 162,746 1,622,887
Shares reacquired (1,861,628) (18,551,269)
---------- ------------
Net increase (decrease) in shares outstanding before
conversion (995,264) (9,911,067)
Shares issued upon conversion from Class B 107,510 1,075,123
---------- ------------
Net increase (decrease) in shares outstanding (887,754) $ (8,835,944)
========== ============
Year ended August 31, 1999:
Shares sold 459,241 $ 4,897,168
Shares issued in reinvestment of dividends 166,808 1,765,475
Shares reacquired (1,315,210) (13,931,649)
---------- ------------
Net decrease in shares outstanding before conversion (689,161) (7,269,006)
Shares issued upon conversion from
Class B 94,743 1,008,731
---------- ------------
Net decrease in shares outstanding (594,418) $ (6,260,275)
========== ============
CLASS B
- -------
Year ended August 31, 2000:
Shares sold 380,094 $ 3,773,316
Shares issued in reinvestment of dividends 44,997 448,789
Shares reacquired (500,627) (4,967,810)
---------- ------------
Net increase (decrease) in shares outstanding before
conversion (75,536) (745,705)
Shares reacquired upon conversion into Class A (107,510) (1,075,123)
---------- ------------
Net increase (decrease) in shares outstanding (183,046) $ (1,820,828)
========== ============
Year ended August 31, 1999:
Shares sold 665,024 $ 7,087,108
Shares issued in reinvestment of dividends 41,768 441,754
Shares reacquired (311,472) (3,295,872)
---------- ------------
Net increase in shares outstanding before conversion 395,320 4,232,990
Shares reacquired upon conversion into Class A (94,763) (1,008,731)
---------- ------------
Net increase in shares outstanding 300,557 $ 3,224,259
========== ============
B-110
Prudential Municipal Series Fund Florida Series
Notes to Financial Statements Cont'd.
CLASS C SHARES AMOUNT
- ------- ---------- ------------
Year ended August 31, 2000:
Shares sold 12,865 $ 126,949
Shares issued in reinvestment of dividends 15,441 153,989
Shares reacquired (166,189) (1,652,877)
---------- ------------
Net increase (decrease) in shares outstanding (137,883) $ (1,371,939)
========== ============
Year ended August 31, 1999:
Shares sold 57,676 $ 610,380
Shares issued in reinvestment of dividends 15,461 163,559
Shares reacquired (102,072) (1,072,067)
---------- ------------
Net decrease in shares outstanding (28,935) $ (298,128)
========== ============
CLASS Z
- -------
Year ended August 31, 2000:
Shares sold 30,977 $ 310,890
Shares issued in reinvestment of dividends 1,396 13,948
Shares reacquired (24,170) (242,710)
---------- ------------
Net increase (decrease) in shares outstanding 8,203 $ 82,128
========== ============
Year ended August 31, 1999:
Shares sold 66,050 $ 701,514
Shares issued in reinvestment of dividends 1,623 17,191
Shares reacquired (66,254) (703,517)
---------- ------------
Net increase in shares outstanding 1,419 $ 15,188
========== ============
B-111
PRUDENTIAL MUNICIPAL SERIES FUND Florida Series
Financial Highlights
CLASS A
---------------
YEAR ENDED
AUGUST 31, 2000
- ----------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE:
NET ASSET VALUE, BEGINNING OF YEAR $ 10.18
---------------
Income from investment operations
Net investment income .51
Net realized and unrealized gain (loss) on investment
transactions .05
---------------
Total from investment operations .56
---------------
LESS DISTRIBUTIONS
Dividends from net investment income (.51)
Distributions in excess of net investment income --
Distributions from net realized gains --
---------------
Total distributions (.51)
---------------
Net asset value, end of year $ 10.23
===============
TOTAL RETURN(b): 5.73%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000) $68,701
Average net assets (000) $71,083
Ratios to average net assets:
Expenses, including distribution fees and service (12b-1)
fees .98%
Expenses, excluding distribution fees and service (12b-1)
fees .73%
Net investment income 5.06%
For Class A, B, C and Z shares:
Portfolio turnover rate 41%
- ------------------------------
(a) Net of expense subsidy and fee waiver.
(b) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each year reported and includes reinvestment of dividends and
distributions.
(c) Less than $.005 per share.
See Notes to Financial Statements
B-112
PRUDENTIAL MUNICIPAL SERIES FUND Florida Series
Financial Highlights Cont'd.
CLASS A
- -------------------------------------------------------------------------------------
YEAR ENDED AUGUST 31,
- -------------------------------------------------------------------------------------
1999 1998 1997 1996
- -------------------------------------------------------------------------------------
$ 10.74 $ 10.41 $ 10.11 $ 10.06
-------- -------- -------- ----------------
.50 .52 .54(a) .57(a)
(.56) .33 .31 .05
-------- -------- -------- ----------------
(.06) .85 .85 .62
-------- -------- -------- ----------------
(.50) (.52) (.54) (.57)
--(c) -- (.01) --
--(c) -- -- --
-------- -------- -------- ----------------
(.50) (.52) (.55) (.57)
-------- -------- -------- ----------------
$ 10.18 $ 10.74 $ 10.41 $ 10.11
======== ======== ======== ================
(.61)% 8.34% 8.65% 6.20%
$ 77,398 $ 88,045 $ 92,579 $101,999
$ 84,810 $ 90,437 $ 97,700 $112,266
.89% .80% .57%(a) .37%(a)
.69% .70% .47%(a) .27%(a)
4.72% 4.89% 5.32%(a) 5.56%(a)
13% 35% 22% 68%
See Notes to Financial Statements
B-113
PRUDENTIAL MUNICIPAL SERIES FUND Florida Series
Financial Highlights Cont'd.
CLASS B
---------------
YEAR ENDED
AUGUST 31, 2000
- ----------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE:
NET ASSET VALUE, BEGINNING OF YEAR $ 10.18
---------------
Income from investment operations
Net investment income .48
Net realized and unrealized gain (loss) on investment
transactions .05
---------------
Total from investment operations .53
---------------
LESS DISTRIBUTIONS
Dividends from net investment income (.48)
Distributions in excess of net investment income --
Distributions from net realized gains --
---------------
Total distributions (.48)
---------------
Net asset value, end of year $ 10.23
===============
TOTAL RETURN(b): 5.46%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000) $22,875
Average net assets (000) $23,191
Ratios to average net assets:
Expenses, including distribution fees and service (12b-1)
fees 1.23%
Expenses, excluding distribution fees and service (12b-1)
fees .73%
Net investment income 4.81%
- ------------------------------
(a) Net of expense subsidy and fee waiver.
(b) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each year reported and includes reinvestment of dividends and
distributions.
(c) Less than $.005 per share.
See Notes to Financial Statements
B-114
PRUDENTIAL MUNICIPAL SERIES FUND Florida Series
Financial Highlights Cont'd.
CLASS B
- -------------------------------------------------------------------------------------
YEAR ENDED AUGUST 31,
- -------------------------------------------------------------------------------------
1999 1998 1997 1996
- -------------------------------------------------------------------------------------
$ 10.74 $ 10.41 $ 10.11 $ 10.06
-------- -------- -------- --------
.47 .48 .50(a) .53(a)
(.56) .33 .31 .05
-------- -------- -------- --------
(.09) .81 .81 .58
-------- -------- -------- --------
(.47) (.48) (.50) (.53)
--(c) -- (.01) --
--(c) -- -- --
-------- -------- -------- --------
(.47) (.48) (.51) (.53)
-------- -------- -------- --------
$ 10.18 $ 10.74 $ 10.41 $ 10.11
======== ======== ======== ========
(.91)% 7.91% 8.22% 5.79%
$ 24,626 $ 22,755 $ 18,820 $ 14,699
$ 24,665 $ 21,154 $ 17,565 $ 12,570
1.19% 1.20% .97%(a) .77%(a)
.69% .70% .47%(a) .27%(a)
4.43% 4.49% 4.92%(a) 5.16%(a)
See Notes to Financial Statements
B-115
PRUDENTIAL MUNICIPAL SERIES FUND Florida Series
Financial Highlights Cont'd.
CLASS C
---------------
YEAR ENDED
AUGUST 31, 2000
- ----------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE:
NET ASSET VALUE, BEGINNING OF YEAR $ 10.18
-------
Income from investment operations
Net investment income .46
Net realized and unrealized gain (loss) on investment
transactions .05
-------
Total from investment operations .51
-------
LESS DISTRIBUTIONS
Dividends from net investment income (.46)
Distributions in excess of net investment income --
Distributions from net realized gains --
-------
Total distributions (.46)
-------
Net asset value, end of year $ 10.23
=======
TOTAL RETURN(b): 5.20%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000) $ 5,456
Average net assets (000) $ 5,885
Ratios to average net assets:
Expenses, including distribution fees and service (12b-1)
fees 1.48%
Expenses, excluding distribution fees and service (12b-1)
fees .73%
Net investment income 4.56%
- ------------------------------
(a) Net of expense subsidy and fee waiver.
(b) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each year reported and includes reinvestment of dividends and
distributions.
(c) Less than $.005 per share.
See Notes to Financial Statements
B-116
PRUDENTIAL MUNICIPAL SERIES FUND Florida Series
Financial Highlights Cont'd.
CLASS C
- -------------------------------------------------------------------------------------
YEAR ENDED AUGUST 31,
- -------------------------------------------------------------------------------------
1999 1998 1997 1996
- -------------------------------------------------------------------------------------
$10.74 $10.41 $10.11 $10.06
------- ------- ------- -------
.44 .45 .48(a) .50(a)
(.56) .33 .31 .05
------- ------- ------- -------
(.12) .78 .79 .55
------- ------- ------- -------
(.44) (.45) (.48) (.50)
--(c) -- (.01) --
--(c) -- -- --
------- ------- ------- -------
(.44) (.45) (.49) (.50)
------- ------- ------- -------
$10.18 $10.74 $10.41 $10.11
======= ======= ======= =======
(1.16)% 7.64% 7.95% 5.52%
$6,833 $7,520 $7,336 $7,792
$7,420 $7,325 $7,575 $8,293
1.44% 1.45% 1.22%(a) 1.02%(a)
.69% .70% .47%(a) .27%(a)
4.17% 4.24% 4.67%(a) 4.91%(a)
See Notes to Financial Statements
B-117
PRUDENTIAL MUNICIPAL SERIES FUND Florida Series
Financial Highlights Cont'd.
CLASS Z
---------------
YEAR ENDED
AUGUST 31, 2000
- ----------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE:
NET ASSET VALUE, BEGINNING OF PERIOD $ 10.17
-------
Income from investment operations
Net investment income .53
Net realized and unrealized gain (loss) on investment
transactions .05
-------
Total from investment operations .58
-------
LESS DISTRIBUTIONS
Dividends from net investment income (.53)
Distributions in excess of net investment income --
Distributions from net realized gains --
-------
Total distributions (.53)
-------
Net asset value, end of period $ 10.22
=======
TOTAL RETURN(b): 5.99%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000) $ 463
Average net assets (000) $ 307
Ratios to average net assets:
Expenses, including distribution fees and service (12b-1)
fees .73%
Expenses, excluding distribution fees and service (12b-1)
fees .73%
Net investment income 5.31%
- ------------------------------
(a) Net of expense subsidy and fee waiver.
(b) Total return is calculated assuming a purchase of shares on the first day
and a sale on the last day of each period reported and includes reinvestment
of dividends and distributions. Total returns for periods of less than a
full year are not annualized.
(c) Annualized.
(d) Commencement of offering of Class Z shares.
(e) Less than $.005 per share.
See Notes to Financial Statements
B-118
PRUDENTIAL MUNICIPAL SERIES FUND Florida Series
Financial Highlights Cont'd.
CLASS Z
- ---------------------------------------------------------------------------------------
YEAR ENDED AUGUST 31, SEPTEMBER 18, 1996(D)
- ------------------------------------------ THROUGH AUGUST 31,
1999 1998 1997
- ---------------------------------------------------------------------------------------
$10.73 $10.41 $10.36
------- ------- -------
.52 .53 .41(a)
(.56) .32 .06
------- ------- -------
(.04) .85 .47
------- ------- -------
(.52) (.53) (.41)
--(e) -- (.01)
--(e) -- --
------- ------- -------
(.52) (.53) (.42)
------- ------- -------
$10.17 $10.73 $10.41
======= ======= =======
(.42)% 8.34% 4.57%
$ 377 $ 383 $ 94
$ 413 $ 373 $ 36
.69% .70% .47%(a)(c)
.69% .70% .47%(a)(c)
4.93% 4.99% 5.48%(a)(c)
See Notes to Financial Statements
B-119
PRUDENTIAL MUNICIPAL SERIES FUND Florida Series
Report of Independent Accountants
To the Shareholders and Trustees of
Prudential Municipal Series Fund, Florida Series
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Prudential Municipal Series Fund,
Florida Series (the "Fund", one of the portfolios constituting Prudential
Municipal Series Fund) at August 31, 2000, the results of its operations for the
year then ended, the changes in its net assets for each of the two years in the
period then ended and the financial highlights for each of the four years in the
period then ended, in conformity with accounting principles generally accepted
in the United States of America. These financial statements and financial
highlights (hereafter referred to as "financial statements") are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with auditing standards
generally accepted in the United States of America, which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits, which included confirmation of securities at August
31, 2000 by correspondence with the custodian, provide a reasonable basis for
our opinion. The accompanying financial highlights for the year ended August 31,
1996 were audited by other independent accountants, whose opinion dated October
14, 1996 was unqualified.
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York
October 20, 2000
B-120
PRUDENTIAL MUNICIPAL SERIES FUND Florida Series
Federal Income Tax Information (Unaudited)
We are required by the Internal Revenue Code to advise you within 60 days
of the Series' fiscal year end (August 31, 2000) as to the federal tax status of
dividends paid by the Series during such fiscal year. Accordingly, we are
advising you that in the fiscal year ended August 31, 2000, dividends paid from
net investment income of $.51 per Class A share, $.48 per Class B share, $.46
per Class C share and $.53 per Class Z share were all federally tax-exempt
interest dividends.
We wish to advise you that the corporate dividends received deduction for
the Series is zero. Only funds that invest in U.S. equity securities are
entitled to pass-through a corporate dividends received deduction.
B-121
PRUDENTIAL MUNICIPAL SERIES FUND Massachusetts Series
Portfolio of Investments as of August 31, 2000
PRINCIPAL
MOODY'S RATING INTEREST MATURITY AMOUNT VALUE
DESCRIPTION (A) (UNAUDITED) RATE DATE (000) (NOTE 1)
- -------------------------------------------------------------------------------------------------------------
LONG-TERM INVESTMENTS 98.4%
Boston Massachusetts Ind. Dev.
Fin. Auth., Swr. Fac. Rev.,
Harbor Elec. Energy Co. Proj.,
A.M.T. Baa1 7.375% 05/15/15 $ 1,500 $ 1,541,565
Brockton Massachusetts, Gen. Oblig. Aa3 6.125 06/15/18 1,030 1,057,985
Holyoke Massachusetts, Gen. Oblig.,
School Proj., M.B.I.A. Aaa 8.10 06/15/05 700(e) 764,820
Lowell Massachusetts, Gen. Oblig. Aaa 7.625 02/15/10 750(e) 783,457
Lynn Mass. Wtr. & Swr. Comn.,
Gen. Rev., Ser. A, M.B.I.A. Aaa 7.25 12/01/10 850(e) 872,967
Mass. Bay Trans. Auth. Rev.,
Assmnt., Ser. A Aa1 5.25 07/01/30 750 712,088
Mass. Bay Trans. Auth., Gen.
Trans. Sys., Ser. A. M.B.I.A. Aaa 5.50 03/01/15 700 722,645
Mass. St. College Bldg. Auth. Proj.
Rev., Ser. A, M.B.I.A. Aaa Zero 05/01/22 2,250 667,193
Mass. St. Dev. Fin. Agy. Rev.,
Concord-Assabet Family Svcs. Ba2 6.00 11/01/28 750(f) 550,477
Higher Ed. Smith College, Aa1 5.75 07/01/29 500 508,425
Mass. St. Gen. Oblig.,
Ser. A, A.M.B.A.C. Aaa 5.00 07/01/12 1,000 1,006,150
Ser. C, F.G.I.C. Aaa 6.00 08/01/09 1,250 1,371,975
Mass. St. Hlth. & Edl. Facs. Auth.
Harvard University, Ser. W Aaa 6.00 07/01/35 500 529,920
Ser. A, F.G.I.C. Aaa 5.875 10/01/29 500 513,290
Beth Israel Hospital, A.M.B.A.C. Aaa 7.437(d) 07/01/25 1,500 1,518,750
Dana Farber Cancer Proj.,
Ser. G-1 A1 6.25 12/01/22 625 626,369
Faulkner Hospital, Ser. C Baa1 6.00 07/01/23 1,500(e) 1,582,680
Holyoke Hospital, Ser. B Baa3 6.50 07/01/15 550 510,934
Jordan Hospital, Ser. C BBB+(c) 6.875 10/01/22 1,350(e) 1,436,926
Med. Academic & Scientific
Co., Ser. A BBB-(c) 6.625 01/01/15 1,000 1,014,880
Simmons College Ser. D, A.M.B.A.C. Aaa 6.05 10/01/20 1,000 1,059,620
Valley Regional Hlth. Sys.,
Ser. C AAA(c) 7.00 07/01/10 825 957,437
Winchester Hospital, Ser. D AAA(c) 5.75 07/01/24 1,000 999,910
See Notes to Financial Statements
B-122
PRUDENTIAL MUNICIPAL SERIES FUND Massachusetts Series
Portfolio of Investments as of August 31, 2000 Cont'd.
PRINCIPAL
MOODY'S RATING INTEREST MATURITY AMOUNT VALUE
DESCRIPTION (A) (UNAUDITED) RATE DATE (000) (NOTE 1)
- -------------------------------------------------------------------------------------------------------------
Mass. St. Ind. Fin. Agcy. Rev.,
Bradford College CCC(c) 5.625% 11/01/28 $ 1,000 $ 819,700
Cambridge Friends School BBB(c) 5.80 09/01/28 700 651,280
Phillips Academy Aaa 5.375 09/01/23 1,000 976,150
Mass. St. Port Auth. Rev.,
Ser. 1999A Baa3 5.75 10/01/29 600 597,210
Ser. B, A.M.T. Aa3 5.00 07/01/18 1,000 932,790
Ser. D, A.M.T. Aa3 6.25 07/01/17 1,000 1,069,820
Mass. St. Tpk. Auth., Met. Hwy.
Sys. Rev.,
Ser. C, M.B.I.A. Aaa Zero 01/01/17 2,000 820,520
Ser. A, A.M.B.A.C. Aaa 5.00 01/01/39 750 671,708
Ser. A, M.B.I.A. Aaa Zero 01/01/28 2,000 428,100
Mass. St. Water Poll. Abatement
Trust Rev., Ser. 5 Aaa 5.50 08/01/29 500 492,855
Trust Rev., Ser. A Aa3 6.375 02/01/15 1,000 1,066,370
Mass. St. Water Res. Auth. Rev.,
Ser. B, M.B.I.A. Aaa 6.25 12/01/11 500 560,100
Ser. D, M.B.I.A. Aaa 6.00 08/01/13 500 546,135
Plymouth County Mass Corr. Facs.
Cert. of Part., Ser.A Aaa 7.00 04/01/22 500(e) 535,755
Puerto Rico Commonwealth
Gen. Oblig., A.M.B.A.C. NR 9.977 07/01/10 500 695,095
Gen. Oblig. Pub. Impt., M.B.I.A. Aaa Zero 07/01/19 2,000 733,180
Puerto Rico Electric Pwr. Auth.
Rev., Ser. T Baa1 6.375 07/01/24 1,000(e) 1,097,740
Rail Connections Inc. Mass.
Rev., Ser. B A(c) Zero 07/01/21 2,500 675,075
Virgin Islands Public Fin. Auth.
Rev., Gross Rcpts. Taxes Ln.,
Ser. A BBB-(c) 6.50 10/01/24 500 517,945
-----------
Total long-term investments
(cost $33,357,650) $35,197,991
-----------
See Notes to Financial Statements
B-123
PRUDENTIAL MUNICIPAL SERIES FUND Massachusetts Series
Portfolio of Investments as of August 31, 2000 Cont'd.
Principal
Moody's Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
- -------------------------------------------------------------------------------------------------------------
SHORT-TERM INVESTMENTS 0.8%
Mass. St. Hlth. & Edl. Facs. Auth.
Rev., Ser. SGA 65, F.R.D.D. A1+(c) 4.35% 09/01/00 $ 300 $ 300,000
-----------
Total short-term investments
(cost $300,000) 300,000
-----------
TOTAL INVESTMENTS 99.2%
(COST $33,657,650; NOTE 4) 35,497,991
-----------
Other assets in excess of
liabilities 0.8% 272,320
-----------
NET ASSETS 100% $35,770,311
-----------
-----------
- ------------------------------
(a) The following abbreviations are used in portfolio descriptions:
A.M.B.A.C.--American Municipal Bond Assurance Corporation.
A.M.T.--Alternative Minimum Tax.
F.G.I.C.--Financial Guaranty Insurance Company.
F.R.D.D.--Floating Rate (Daily) Demand Note (b).
M.B.I.A.--Municipal Bond Insurance Corporation.
(b) For purposes of amortized cost valuation, the maturity date of Floating Rate
Demand Notes is considered to be the later of the next date on which the
security can be redeemed at par, or the next date on which the rate of
interest is adjusted.
(c) Standard & Poor's Rating.
(d) Inverse floating rate bond. The coupon is inversely indexed to a floating
interest rate. The rate shown is the rate at year end.
(e) Prerefunded issues are secured by escrowed cash and/or direct U.S.
guaranteed obligations.
(f) Fair valued security.
The Fund's current Statement of Additional Information contains a description of
Moody's and Standard & Poor's ratings.
See Notes to Financial Statements
B-124
PRUDENTIAL MUNICIPAL SERIES FUND Massachusetts Series
Statement of Assets and Liabilities
AUGUST 31, 2000
- ----------------------------------------------------------------------------------------
ASSETS
Investments, at value (cost $33,657,650) $35,497,991
Cash 56,886
Interest receivable 461,669
Deferred expenses 906
---------------
Total assets 36,017,452
---------------
LIABILITIES
Payable for Series shares reacquired 119,442
Accrued expenses 81,263
Dividends payable 16,168
Management fee payable 15,157
Distribution fee payable 8,965
Deferred trustees' fees 6,146
---------------
TOTAL LIABILITIES 247,141
---------------
NET ASSETS $35,770,311
---------------
---------------
Net assets were comprised of:
Shares of beneficial interest, at par $ 32,311
Paid-in capital in excess of par 34,351,578
---------------
34,383,889
Accumulated net realized loss on investments (453,919)
Net unrealized appreciation on investments 1,840,341
---------------
Net assets, August 31, 2000 $35,770,311
---------------
---------------
See Notes to Financial Statements
B-125
PRUDENTIAL MUNICIPAL SERIES FUND Massachusetts Series
Statement of Assets and Liabilities Con't.
AUGUST 31, 2000
- ----------------------------------------------------------------------------------------
Class A:
Net asset value and redemption price per share
($26,657,318 / 2,407,579 shares of beneficial interest
issued and outstanding) $11.07
Maximum sales charge (3% of offering price) .34
---------------
Maximum offering price to public $11.41
---------------
---------------
Class B:
Net asset value, offering price and redemption price per
share ($8,734,206 / 789,262 shares of beneficial interest
issued and outstanding) $11.07
---------------
---------------
Class C:
Net asset value, and redemption price per share
($305,273 / 27,586 shares of beneficial interest issued
and outstanding) $11.07
Sales charge (1% of offering price) .11
---------------
Offering price to public $11.18
---------------
---------------
Class Z:
Netasset value, offering price and redemption price per share ($73,514 /
6,644 shares of beneficial interest issued and
outstanding) $11.06
---------------
---------------
See Notes to Financial Statements
B-126
PRUDENTIAL MUNICIPAL SERIES FUND Massachusetts Series
Statement of Operations
YEAR
ENDED
AUGUST 31, 2000
- ----------------------------------------------------------------------------------------
NET INVESTMENT INCOME
Income
Interest $ 2,277,530
---------------
Expenses
Management fee 185,314
Distribution fee--Class A 66,378
Distribution fee--Class B 50,534
Distribution fee--Class C 1,610
Custodian's fees and expenses 75,000
Report to shareholders 40,000
Registration fees 30,000
Transfer agent's fees and expenses 18,000
Audit fee 10,000
Trustees' fees and expenses 10,000
Legal fees and expenses 8,000
Miscellaneous 4,653
---------------
TOTAL EXPENSES 499,489
Less: Custodian fee credit (339)
---------------
Net expenses 499,150
---------------
NET INVESTMENT INCOME 1,778,380
---------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Net realized gain (loss) on:
Investment transactions (250,743)
Financial futures transactions (4,742)
---------------
(255,485)
Net change in unrealized appreciation of investments 69,319
---------------
Net loss on investments (186,166)
---------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 1,592,214
---------------
---------------
See Notes to Financial Statements
B-127
PRUDENTIAL MUNICIPAL SERIES FUND Massachusetts Series
Statement of Changes in Net Assets
YEAR ENDED AUGUST 31,
----------------------------------
2000 1999
- ------------------------------------------------------------------------------------
DECREASE IN NET ASSETS
OPERATIONS
Net investment income $ 1,778,380 $ 2,069,644
Net realized loss on investment transactions (255,485) (12,605)
Net change in unrealized appreciation
(depreciation) of investments 69,319 (2,713,045)
--------------- ---------------
Net increase (decrease) in net assets
resulting from operations 1,592,214 (656,006)
--------------- ---------------
DIVIDENDS AND DISTRIBUTIONS (NOTE 1):
Dividends from net investment income
Class A (1,292,367) (1,418,190)
Class B (472,416) (640,864)
Class C (9,612) (8,016)
Class Z (3,985) (2,574)
--------------- ---------------
(1,778,380) (2,069,644)
--------------- ---------------
Distributions in excess of net investment
income
Class A -- (9,090)
Class B -- (4,519)
Class C -- (55)
Class Z -- (20)
--------------- ---------------
-- (13,684)
--------------- ---------------
Distributions from net realized gains
Class A -- (284,387)
Class B -- (141,295)
Class C -- (1,712)
Class Z -- (626)
--------------- ---------------
-- (428,020)
--------------- ---------------
SERIES SHARE TRANSACTIONS (NET OF SHARE
CONVERSIONS)
(NOTE 5):
Net proceeds from shares sold 1,277,060 7,872,665
Net asset value of shares issued in
reinvestment of dividends 991,084 1,388,189
Cost of shares reacquired (7,028,093) (10,782,045)
--------------- ---------------
Net decrease in net assets from Series share
transactions (4,759,949) (1,521,191)
--------------- ---------------
Total decrease (4,946,115) (4,688,545)
NET ASSETS
Beginning of year 40,716,426 45,404,971
--------------- ---------------
End of year $ 35,770,311 $ 40,716,426
--------------- ---------------
--------------- ---------------
See Notes to Financial Statements
B-128
PRUDENTIAL MUNICIPAL SERIES FUND Masschusetts Series
Notes to Financial Statements
Prudential Municipal Series Fund (the "Fund") is registered under the
Investment Company Act of 1940, as an open-end investment company. The Fund
was organized as a Massachusetts business trust on May 18, 1984 and consists
of 11 series. The monies of each series are invested in separate,
independently managed portfolios. The Massachusetts Series (the "Series")
commenced investment operations in September, 1984. The Series is diversified
and seeks to achieve its investment objective of obtaining the maximum amount
of income exempt from federal and applicable state income taxes with a
minimum of risk by investing in "investment grade" tax-exempt securities
whose ratings are within the four highest ratings categories by a nationally
recognized statistical rating organization or, if not rated, are of
comparable quality. The ability of the issuers of the securities held by the
Series to meet their obligations may be affected by economic developments in
a specific state, industry or region.
NOTE 1. ACCOUNTING POLICIES
The following is a summary of significant accounting policies followed by the
Fund, and the Series, in the preparation of its financial statements.
SECURITIES VALUATIONS: The Series values municipal securities
(including commitments to purchase such securities on a "when-issued" basis)
on the basis of prices provided by a pricing service which uses information
with respect to transactions in bonds, quotations from bond dealers, market
transactions in comparable securities and various relationships between
securities in determining values. If market quotations are not readily
available from such pricing service, a security is valued at its fair value
as determined under procedures established by the Trustees.
Short-term securities which mature in more than 60 days are valued at
current market quotations. Short-term securities which mature in 60 days or less
are valued at amortized cost which approximates market value.
All securities are valued as of 4:15 p.m., New York time.
FINANCIAL FUTURES CONTRACTS: A financial futures contract is an
agreement to purchase (long) or sell (short) an agreed amount of debt
securities at a set price for delivery on a future date. Upon entering into a
financial futures contract, the Series is required to pledge to the broker an
amount of cash and/or other assets equal to a certain percentage of the
contract amount. This amount is known as the "initial margin." Subsequent
payments, known as "variation margin," are made or received by the Series
each day, depending on the daily fluctuations in the value of the underlying
security. Such variation margin is recorded for financial statement purposes
on a daily basis as unrealized gain or loss. The Series invests in financial
futures contracts solely for the purpose of hedging its existing portfolio
securities or securities the Series intends to purchase against fluctuations
in value caused by changes in prevailing
B-129
PRUDENTIAL MUNICIPAL SERIES FUND Massachusetts Series
Notes to Financial Statements Cont'd.
market interest rates. Should interest rates move unexpectedly, the Series may
not achieve the anticipated benefits of the financial futures contracts and may
realize a loss. The use of futures transactions involves the risk of imperfect
correlation in movements in the price of futures contracts, interest rates and
the underlying hedged assets.
INVERSE FLOATERS: The Series invests in variable rate securities
commonly called "inverse floaters". The interest rates on these securities
have an inverse relationship to the interest rate of other securities or the
value of an index. Changes in interest rate on the other security or index
inversely affect the rate paid on the inverse floater, and the inverse
floater's price will be more volatile than that of a fixed-rate bond.
Additionally, some of these securities contain a "leverage factor" whereby
the interest rate moves inversely by a "factor" to the benchmark rate.
Certain interest rate movements and other market factors can substantially
affect the liquidity of inverse floating rate notes.
SECURITIES TRANSACTIONS AND NET INVESTMENT INCOME: Securities
transactions are recorded on the trade date. Realized gains and losses on
sales of securities are calculated on the identified cost basis. Interest
income is recorded on the accrual basis. The Series amortizes premiums and
original issue discount paid on purchases of portfolio securities as
adjustments to interest income. Expenses are recorded on the accrual basis
which may require the use of certain estimates by management.
Net investment income (other than distribution fees) and unrealized and
realized gains or losses are allocated daily to each class of shares based upon
the relative proportion of net assets of each class at the beginning of the day.
FEDERAL INCOME TAXES: For federal income tax purposes, each series in
the Fund is treated as a separate taxpaying entity. It is the intent of the
Series to continue to meet the requirements of the Internal Revenue Code
applicable to regulated investment companies and to distribute all of its net
income to shareholders. For this reason no federal income tax provision is
required.
DIVIDENDS AND DISTRIBUTIONS: The Series declares daily dividends from
net investment income. Payment of dividends is made monthly. Distributions of
net capital gains, if any, are made annually.
Income distributions and capital gain distributions are determined in
accordance with income tax regulations which may differ from generally accepted
accounting principles.
CUSTODY FEE CREDITS: The Series has an arrangement with its custodian
bank, whereby uninvested monies earn credits which reduce the fees charged by
the custodian.
B-130
PRUDENTIAL MUNICIPAL SERIES FUND Massachusetts Series
Notes to Financial Statements Cont'd.
NOTE 2. AGREEMENTS
The Fund has a management agreement with Prudential Investments Fund Management
LLC ("PIFM"). Pursuant to this agreement, PIFM has responsibility for all
investment advisory services and supervises the subadviser's performance of such
services. PIFM has entered into a Subadvisory Agreement with The Prudential
Investment Corporation ("PIC"). The subadvisory agreement provides that PIC will
furnish investment advisory services in connection with the management of the
Fund. In connection therewith, PIC is obligated to keep certain books and
records of the Fund. PIFM continues to have responsibility for all investment
advisory services pursuant to the management agreement and supervises PIC's
performance of such services. PIFM pays for the services of PIC, the cost of
compensation of officers of the Fund, occupancy and certain clerical and
bookkeeping costs of the Fund. The Fund bears all other costs and expenses.
The management fee paid PIFM is computed daily and payable monthly, at an
annual rate of .50 of 1% of the Fund's average daily net assets.
Effective January 1, 2000, the subadvisory fee paid to PIC by PIFM is
computed daily and payable monthly at an annual rate of .250 of 1% of the
average daily net assets of the Fund. Prior to January 1, 2000, PIC was
reimbursed by PIFM for reasonable costs and expenses incurred in furnishing
investment advisory services. The change in the subadvisory fee structure has no
impact on the management fee charged to the Fund or its shareholders.
The Fund has a distribution agreement with Prudential Investment
Management Services LLC ("PIMS"), which acts as the distributor of the Class A,
Class B, Class C and Class Z shares. The Fund compensates PIMS for distributing
and servicing the Fund's Class A, Class B and Class C shares, pursuant to plans
of distribution (the "Class A, B and C Plans"), regardless of expenses actually
incurred. The distribution fees are accrued daily and payable monthly. No
distribution or service fees were paid to PIMS as distributor of the Class Z
shares of the Fund.
Pursuant to the Class A, B and C Plans, the Fund compensates PIMS for
distribution-related activities at an annual rate of up to .30 of 1%, .50 of 1%
and 1% of the average daily net assets of the Class A, B and C shares,
respectively. Such expenses under the plans were .25 of 1%, .50 of 1% and .75 of
1% of the average daily net assets of the Class A, B and C shares, respectively,
for the period September 1, 1999 through August 22, 2000. Effective August 23,
2000 such expenses under the plans were .25 of 1%, .25 of 1% and .25 of 1% of
the average daily net assets of Class A, B and C shares, respectively.
PIMS has advised the Series that it has received approximately $1,100 and
$1,100 in front-end sales charges resulting from sales of Class A and C shares,
B-131
PRUDENTIAL MUNICIPAL SERIES FUND Massachusetts Series
Notes to Financial Statements Cont'd.
respectively, during the year ended August 31, 2000. From these fees PIMS paid
such sales charges to an affiliated broker-dealers, which in turn paid
commissions to salespersons and incurred other distribution costs.
PIMS has advised the Series that for the year ended August 31, 2000, it
received approximately $11,700 in contingent deferred sales charges imposed upon
certain redemptions by Class B and C shareholders.
PIFM, PIMS and PIC are wholly owned subsidiaries of The Prudential
Insurance Company of America ("Prudential").
The Fund, along with other affiliated registered investment companies (the
"Funds"), entered into a syndicated credit agreement ("SCA") with an
unaffiliated lender. The maximum commitment under the SCA is $1 billion.
Interest on any such borrowings will be at market rates. The purpose of the
agreement is to serve as an alternative source of funding for capital share
redemptions. The Funds pay a commitment fee of .080 of 1% of the unused portion
of the credit facility. The commitment fee is accrued and paid quarterly on a
pro rata basis by the Funds. The expiration date of the SCA is March 9, 2001.
Prior to March 9, 2000, the commitment fee was .065 of 1% of the unused portion
of the credit facility. The Fund did not borrow any amounts pursuant to the SCA
during the year ended August 31, 2000.
NOTE 3. OTHER TRANSACTIONS WITH
Affiliates Prudential Mutual Fund Services LLC ("PMFS"), a wholly owned
subsidiary of PIFM, serves as the Fund's transfer agent. During the year ended
August 31, 2000, the Series incurred fees of approximately $14,100 for the
services of PMFS. As of August 31, 2000, approximately $1,000 of such fees were
due to PMFS. Transfer agent fees and expenses in the Statement of Operations
include certain out-of-pocket expenses paid to nonaffiliates.
NOTE 4. PORTFOLIO
Securities Purchases and sales of portfolio securities of the Series, excluding
short-term investments, for the year ended August 31, 2000, were $16,518,232 and
$12,215,755, respectively.
The cost basis of investments for federal income tax purposes at August
31, 2000 was $33,718,451 and accordingly, net unrealized appreciation of
investments
B-132
PRUDENTIAL MUNICIPAL SERIES FUND Massachusetts Series
Notes to Financial Statements Cont'd.
for federal income tax purposes was $1,779,540 (gross unrealized
appreciation--$2,207,265, gross unrealized depreciation--$427,725).
The Series elected, for United States Federal income tax purposes, to
treat capital losses of approximately $129,000 incurred in the ten month period
ended August 31, 2000 as having been incurred in the following fiscal year.
For federal income tax purposes, the Portfolio had a capital loss
carryforward as of August 31, 2000 of approximately $242,000 of which $8,000
expires in 2007 and $234,000 expires in 2008 respectively. Accordingly, no
capital gains distributions are expected to be paid to shareholders until future
net gains have been realized in excess of such capital loss carryforward.
NOTE 5. CAPITAL
The Series offers Class A, Class B, Class C and Class Z shares. Class A
shares are sold with a front-end sales charge of up to 3%. Class B shares are
sold with a contingent deferred sales charge which declines from 5% to zero
depending upon the period of time the shares are held. Class C shares are
sold with a front-end sales charge of 1% and a contingent deferred sales
charge of 1% during the first 18 months. Class B shares will automatically
convert to Class A shares on a quarterly basis approximately seven years
after purchase. A special exchange privilege is also available for
shareholders who qualified 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. 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 for the years ended August
31, 2000 and August 31, 1999 were as follows:
CLASS A SHARES AMOUNT
- ------------------------------------------------------------ ---------- ------------
Year ended August 31, 2000:
Shares sold 19,201 $ 207,810
Shares issued in reinvestment of dividends 69,229 748,726
Shares reacquired (443,521) (4,784,158)
---------- ------------
Net increase (decrease) in shares outstanding before
conversion (355,091) (3,827,622)
Shares issued upon conversion from Class B 280,516 3,045,106
---------- ------------
Net increase (decrease) in shares outstanding (74,575) $ (782,516)
========== ============
Year ended August 31, 1999:
Shares sold 478,960 $ 5,646,776
Shares issued in reinvestment of dividends and distributions 84,266 981,877
Shares reacquired (589,103) (6,781,033)
---------- ------------
Net increase (decrease) in shares outstanding before
conversion (25,877) (152,380)
Shares issued upon conversion from Class B 69,112 806,972
---------- ------------
Net increase (decrease) in shares outstanding 43,235 $ 654,592
========== ============
B-133
PRUDENTIAL MUNICIPAL SERIES FUND Massachusetts Series
Notes to Financial Statements Cont'd.
CLASS B SHARES AMOUNT
- ------- ---------- ------------
Year ended August 31, 2000:
Shares sold 65,659 $ 709,733
Shares issued in reinvestment of dividends 21,644 233,926
Shares reacquired (184,115) (1,992,731)
---------- ------------
Net increase (decrease) in shares outstanding before
conversion (96,812) (1,049,072)
Shares reacquired upon conversion into Class A (280,709) (3,045,106)
---------- ------------
Net increase (decrease) in shares outstanding (377,521) $ (4,094,178)
========== ============
Year ended August 31, 1999:
Shares sold 170,635 $ 1,982,178
Shares issued in reinvestment of dividends and distributions 34,077 397,292
Shares reacquired (335,629) (3,901,106)
---------- ------------
Net increase (decrease) in shares outstanding before
conversion (130,917) (1,521,636)
Shares reacquired upon conversion into Class A (69,125) (806,972)
---------- ------------
Net increase (decrease) in shares outstanding (200,042) $ (2,328,608)
========== ============
CLASS C
- -------
Year ended August 31, 2000:
Shares sold 12,528 $ 134,833
Shares issued in reinvestment of dividends 422 4,568
Shares reacquired (2,271) (24,766)
---------- ------------
Net increase (decrease) in shares outstanding 10,679 $ 114,635
========== ============
Year ended August 31, 1999:
Shares sold 13,079 $ 154,281
Shares issued in reinvestment of dividends and distributions 504 5,854
Shares reacquired (6,438) (74,609)
---------- ------------
Net increase (decrease) in shares outstanding 7,145 $ 85,526
========== ============
CLASS Z
- -------
Year ended August 31, 2000:
Shares sold 20,993 $ 224,684
Shares issued in reinvestment of dividends 357 3,864
Shares reacquired (21,121) (226,438)
---------- ------------
Net increase (decrease) in shares outstanding 229 $ 2,110
========== ============
Year ended August 31, 1999:
Shares sold 7,626 $ 89,430
Shares issued in reinvestment of dividends and distributions 273 3,166
Shares reacquired (2,210) (25,297)
---------- ------------
Net increase (decrease) in shares outstanding 5,689 $ 67,299
========== ============
B-134
PRUDENTIAL MUNICIPAL SERIES FUND Massachusetts Series
Notes to Financial Statements Cont'd.
NOTE 6. PROPOSED REORGANIZATION On August 23, 2000, the Trustees of the
Series approved an Agreement and Plan of Reorganization (the "Plan of
Reorganization"), which provides for the transfer of all of the assets and
liabilities of the Series to Prudential National Municipals Funds, Inc.
("National Municipals"). Class A, Class B and Class C shares of the Series
would be exchanged at net asset value for Class A shares of equivalent value
of National Municipals. The Class Z shares of the Series would be exchanged
at net asset value for Class Z shares of equivalent value of National
Municipals. The Series would then cease operations.
The Plan of Reorganization requires approval by the shareholders of the
Series to become effective and a proxy/prospectus will be mailed to
shareholders in October 2000. If the Plan is approved, it is expected that
the reorganization will take place in December 2000. The Series and National
Municipals will each bear their pro rata share of the costs of the
reorganization, including cost of proxy solicitation.
B-135
PRUDENTIAL MUNICIPAL SERIES FUND Massachusetts Series
Financial Highlights
CLASS A
---------------
YEAR ENDED
AUGUST 31, 2000
- ----------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE:
NET ASSET VALUE, BEGINNING OF YEAR $ 11.09
---------------
Income from investment operations
Net investment income .53
Net realized and unrealized gain (loss) on investment
transactions (.02)
---------------
Total from investment operations .51
---------------
LESS DISTRIBUTIONS
Dividends from net investment income (.53)
Distributions in excess of net investment income --
Distributions from net realized gains --
---------------
Total distributions (.53)
---------------
Net asset value, end of year $ 11.07
---------------
---------------
TOTAL RETURN(b): 4.82%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000) $ 26,657
Average net assets (000) $ 26,551
Ratios to average net assets:
Expenses, including distribution fees and service (12b-1)
fees 1.28%
Expenses, excluding distribution fees and service (12b-1)
fees 1.03%
Net investment income 4.87%
For Class A, B, C and Z shares:
Portfolio turnover rate 34%
- ------------------------------
(a) Net of management fee waiver.
(b) Total return is calculated assuming a purchase of shares on the first day
and a sale on the last day of each year reported and includes reinvestment
of dividends and distributions.
(c) Less than .005 per share.
See Notes to Financial Statements
B-136
PRUDENTIAL MUNICIPAL SERIES FUND Massachusetts Series
Financial Highlights Cont'd.
CLASS A
- -------------------------------------------------------------------------------------
YEAR ENDED AUGUST 31,
- -------------------------------------------------------------------------------------
1999 1998 1997 1996
- -------------------------------------------------------------------------------------
$ 11.90 $ 11.69 $ 11.54 $ 11.63
- ---------------- ---------------- ---------------- ----------------
.53 .55 .58(a) .59(a)
(.70) .37 .33 (.02)
- ---------------- ---------------- ---------------- ----------------
(.17) .92 .91 .57
- ---------------- ---------------- ---------------- ----------------
(.53) (.55) (.58) (.59)
--(c) (.01) --(c) --(c)
(.11) (.15) (.18) (.07)
- ---------------- ---------------- ---------------- ----------------
(.64) (.71) (.76) (.66)
- ---------------- ---------------- ---------------- ----------------
$ 11.09 $ 11.90 $ 11.69 $ 11.54
- ---------------- ---------------- ---------------- ----------------
- ---------------- ---------------- ---------------- ----------------
(1.44)% 8.10% 8.10% 4.93%
$ 27,527 $ 29,024 $ 28,890 $ 28,058
$ 30,705 $ 29,031 $ 29,096 $ 28,091
1.11% 1.04% 1.00%(a) 1.06%(a)
.91% .94% .90%(a) .96%(a)
4.62% 4.75% 5.00%(a) 5.06%(a)
24% 33% 22% 18%
See Notes to Financial Statements
B-137
PRUDENTIAL MUNICIPAL SERIES FUND Massachusetts Series
Financial Highlights Cont'd.
CLASS B
---------------
YEAR ENDED
AUGUST 31, 2000
- ----------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE:
NET ASSET VALUE, BEGINNING OF YEAR $ 11.08
---------------
Income from investment operations
Net investment income .50
Net realized and unrealized gain (loss) on investment
transactions (.01)
---------------
Total from investment operations .49
---------------
LESS DISTRIBUTIONS
Dividends from net investment income (.50)
Distributions in excess of net investment income --
Distributions from net realized gains --
---------------
Total distributions (.50)
---------------
Net asset value, end of year $ 11.07
---------------
---------------
TOTAL RETURN(b): 4.65%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000) $ 8,734
Average net assets (000) $ 10,214
Ratios to average net assets:
Expenses, including distribution fees and service (12b-1)
fees 1.52%
Expenses, excluding distribution fees and service (12b-1)
fees 1.03%
Net investment income 4.62%
- ------------------------------
(a) Net of management fee waiver.
(b) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each year reported and includes reinvestment of dividends and
distributions.
(c) Less than .005 per share.
See Notes to Financial Statements
B-138
PRUDENTIAL MUNICIPAL SERIES FUND Massachusetts Series
Financial Highlights Cont'd.
Class B
- -------------------------------------------------------------------------------------
Year Ended August 31,
- -------------------------------------------------------------------------------------
1999 1998 1997 1996
- -------------------------------------------------------------------------------------
$ 11.89 $ 11.68 $ 11.53 $ 11.62
- ---------------- ---------------- ---------------- ----------------
.50 .51 .53(a) .54(a)
(.70) .37 .33 (.02)
- ---------------- ---------------- ---------------- ----------------
(.20) .88 .86 .52
- ---------------- ---------------- ---------------- ----------------
(.50) (.51) (.53) (.54)
--(c) (.01) --(c) --(c)
(.11) (.15) (.18) (.07)
- ---------------- ---------------- ---------------- ----------------
(.61) (.67) (.71) (.61)
- ---------------- ---------------- ---------------- ----------------
$ 11.08 $ 11.89 $ 11.68 $ 11.53
- ---------------- ---------------- ---------------- ----------------
- ---------------- ---------------- ---------------- ----------------
(1.76)% 7.67% 7.67% 4.51%
$ 12,931 $ 16,256 $ 18,247 $ 22,758
$ 14,837 $ 17,253 $ 20,301 $ 25,751
1.41% 1.44% 1.40%(a) 1.46%(a)
.91% .94% .90%(a) .96%(a)
4.32% 4.35% 4.60%(a) 4.66%(a)
See Notes to Financial Statements
B-139
PRUDENTIAL MUNICIPAL SERIES FUND Massachusetts Series
Financial Highlights Cont'd.
CLASS C
---------------
YEAR ENDED
AUGUST 31, 2000
- ----------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE:
NET ASSET VALUE, BEGINNING OF YEAR $ 11.08
---------------
Income from investment operations
Net investment income .48
Net realized and unrealized gain (loss) on investment
transactions (.01)
---------------
Total from investment operations .47
---------------
LESS DISTRIBUTIONS
Dividends from net investment income (.48)
Distributions in excess of net investment income --
Distributions from net realized gains --
---------------
Total distributions (0.48)
---------------
Net asset value, end of year $ 11.07
---------------
---------------
TOTAL RETURN(b): 4.40%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000) $ 305
Average net assets (000) $ 220
Ratios to average net assets:
Expenses, including distribution fees and service (12b-1)
fees 1.76%
Expenses, excluding distribution fees and service (12b-1)
fees 1.03%
Net investment income 4.38%
- ------------------------------
(a) Net of management fee waiver.
(b) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each year reported and includes reinvestment of dividends and
distributions.
(c) Less than .005 per share.
See Notes to Financial Statements
B-140
PRUDENTIAL MUNICIPAL SERIES FUND Massachusetts Series
Financial Highlights Cont'd.
CLASS C
- -------------------------------------------------------------------------------------
YEAR ENDED AUGUST 31,
- -------------------------------------------------------------------------------------
1999 1998 1997 1996
- -------------------------------------------------------------------------------------
$ 11.89 $ 11.68 $ 11.53 $ 11.62
- ---------------- ---------------- ---------------- ----------------
.47 .48 .50(a) .51(a)
(.70) .37 .33 (.02)
- ---------------- ---------------- ---------------- ----------------
(.23) .85 .83 .49
- ---------------- ---------------- ---------------- ----------------
(.47) (.48) (.50) (.51)
--(c) (.01) --(c) --(c)
(.11) (.15) (.18) (.07)
- ---------------- ---------------- ---------------- ----------------
(.58) (.64) (.68) (.58)
- ---------------- ---------------- ---------------- ----------------
$ 11.08 $ 11.89 $ 11.68 $ 11.53
- ---------------- ---------------- ---------------- ----------------
- ---------------- ---------------- ---------------- ----------------
(2.00)% 7.41% 7.41% 4.26%
$ 187 $ 116 $ 78 $ 45
$ 196 $ 101 $ 48 $ 41
1.66% 1.69% 1.65%(a) 1.72%(a)
.91% .94% .90%(a) .97%(a)
4.08% 4.08% 4.36%(a) 4.39%(a)
See Notes to Financial Statements
B-141
PRUDENTIAL MUNICIPAL SERIES FUND Massachusetts Series
Financial Highlights Cont'd.
CLASS Z
---------------
YEAR ENDED
AUGUST 31, 2000
- ----------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE:
NET ASSET VALUE, BEGINNING OF PERIOD $ 11.08
---------------
Income from investment operations
Net investment income .56
Net realized and unrealized gain (loss) on investment
transactions (.02)
---------------
Total from investment operations .54
---------------
LESS DISTRIBUTIONS
Dividends from net investment income (.56)
Distributions in excess of net investment income --
Distributions from net realized gains --
---------------
Total distributions (.56)
---------------
Net asset value, end of period $ 11.06
---------------
TOTAL RETURN(b): 5.08%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000) $ 74
Average net assets (000) $ 78
Ratios to average net assets:
Expenses, including distribution fees and service (12b-1)
fees 1.03%
Expenses, excluding distribution fees and service (12b-1)
fees 1.03%
Net investment income 5.13%
- ------------------------------
(a) Net of management fee waiver.
(b) 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 return for periods of less than a full
year is not annualized.
(c) Annualized.
(d) Commencement of offering of Class Z shares. (e) Amounts are actual and not
rounded to the nearest thousand.
(f) Less than .005 per share.
See Notes to Financial Statements
B-142
PRUDENTIAL MUNICIPAL SERIES FUND Massachusetts Series
Financial Highlights Cont'd.
CLASS Z
- -----------------------------------------------------------------------------
YEAR ENDED AUGUST 31, DECEMBER 6, 1996(D)
- ------------------------------------------ THROUGH AUGUST 31,
1999 1998 1997
- -----------------------------------------------------------------------------
$ 11.89 $ 11.68 $ 11.80
- ---------------- ---------------- ----------
.56 .58 .47(a)
(.70) .37 .06
- ---------------- ---------------- ----------
(.14) .95 .53
- ---------------- ---------------- ----------
(.56) (.58) (.47)
--(f) (.01) --(f)
(.11) (.15) (.18)
- ---------------- ---------------- ----------
(.67) (.74) (.65)
- ---------------- ---------------- ----------
$ 11.08 $ 11.89 $ 11.68
- ---------------- ---------------- ----------
(1.26)% 8.31% 4.54%
$ 71 $ 9 $ 204(e)
$ 53 $ 7 $ 200(e)
.91% .94% .90%(a)(c)
.91% .94% .90%(a)(c)
4.86% 4.91% 5.55%(a)(c)
See Notes to Financial Statements
B-143
PRUDENTIAL MUNICIPAL SERIES FUND Massachusetts Series
Report of Independent Accountants
To the Shareholders and Board of Trustees of
Prudential Municipal Series Fund, Massachusetts Series
In our opinion, the accompanying statement of assets and liabilities,
including the portfolio of investments, and the related statements of
operations and of changes in net assets and the financial highlights present
fairly, in all material respects, the financial position of Prudential
Municipal Series Fund, Massachusetts Series (the "Fund", one of the
portfolios constituting Prudential Municipal Series Fund) at August 31, 2000,
the results of its operations for the year then ended, the changes in its net
assets for each of the two years in the period then ended and the financial
highlights for each of the four years in the period then ended, in conformity
with accounting principles generally accepted in the United States of
America. These financial statements and financial highlights (hereafter
referred to as "financial statements") are the responsibility of the Fund's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these financial
statements in accordance with auditing standards generally accepted in the
United States of America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits, which included confirmation of securities at August
31, 2000 by correspondence with the custodian, provide a reasonable basis for
our opinion. The accompanying financial highlights for the year ended August
31, 1996 were audited by other independent accountants, whose opinion dated
October 14, 1996 was unqualified.
As described in Note 6 to the financial statements, on August 23, 2000, the
Board of Trustees of the Fund approved an agreement and Plan of Reorganization,
subject to shareholder approval, whereby the Fund would be merged into
Prudential National Municipals Fund, Inc.
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York
October 20, 2000
B-144
PRUDENTIAL MUNICIPAL SERIES FUND Massachusetts Series
Federal Income Tax Information (Unaudited)
We are required by the Internal Revenue Code to advise you within 60
days of the Series' fiscal year end (August 31, 2000) as to the federal tax
status of dividends paid by the Series during such fiscal year. Accordingly,
we are advising you that in the fiscal year ended August 31, 2000, dividends
paid from net investment income of $.53 per Class A share, $.50 per Class B
share, $.48 per Class C share and $.56 per Class Z share were all federally
tax-exempt interest dividends.
We wish to advise you that the corporate dividends received deduction for
the Series is zero. Only funds that invest in U.S. equity securities are
entitled to pass-through a corporate dividends received deduction.
In January 2001 you will be advised on IRS Form 1099 DIV or substitute
1099 DIV as to federal tax status of the distributions received by you in
calendar year 2000.
B-145
PRUDENTIAL MUNICIPAL SERIES FUND Massachusetts Money Market Series
Portfolio of Investments as of August 31, 2000
PRINCIPAL
MOODY'S RATING INTEREST MATURITY AMOUNT
DESCRIPTION (A) (UNAUDITED) RATE DATE (000) VALUE (NOTE 1)
- --------------------------------------------------------------------------------------------------
Bedford, Gen. Oblig., B.A.N. NR 4.25% 12/04/00 $ 2,000 $ 2,001,634
Brockton, Gen. Oblig.,
B.A.N. NR 5.125 6/21/01 1,500 1,504,877
Holden, Gen. Oblig.,
F.G.I.C. Aaa 7.50 3/01/01 1,070 1,070,000
Ipswich, Gen. Oblig.,
F.G.I.C. Aaa 5.00 11/15/00 1,169 1,171,676
Lowell, Gen. Oblig. Aaa 8.30 2/15/01 1,000(c) 1,047,265
Mass. St. Certificates, Ser.
240, F.R.W.D. VMIG1 3.83 9/07/00 6,000 6,000,000
Mass. St. Dev. Fin. Agcy.
Rev.,
Carleton-Willard Village,
Ser. 2000 F.R.W.D. A-1(d) 4.22 9/07/00 1,000 1,000,000
Lassell Village Proj., Ser.
98C, F.R.W.D. VMIG1 4.25 9/07/00 1,200 1,200,000
Newton Country Day School,
F.R.W.D. VMIG1 4.15 9/07/00 1,800 1,800,000
Notre Dame Hlth. Care
Center, Ser. 99, F.R.W.D. VMIG1 4.25 9/07/00 3,485 3,485,000
Semass Proj., Ser. A,
F.R.W.D., A.M.T. A-1(d) 4.35 9/06/00 4,800 4,800,000
Semass Proj., Ser. B,
F.R.W.D., A.M.T. A-1(d) 4.35 9/06/00 2,400 2,400,000
Waste Mgmt., Inc., Ser. 99,
F.R.W.D., A.M.T. VMIG1 4.35 9/06/00 2,500 2,500,000
Wentworth Inst. of Tech.,
Ser. 2000, F.R.W.D.,
A.M.B.A.C. VMIG1 4.20 9/07/00 1,000 1,000,000
Mass. St. Hlth. & Edl. Facs.
Auth. Rev.,
Ser. 275, F.R.W.D.,
M.B.I.A. A-1+(d) 4.33 9/07/00 500 500,000
Falmouth Assisted Living,
Ser. A, F.R.W.D. VMIG1 4.10 9/07/00 1,000 1,000,000
Hallmark Hlth. Sys., Ser.
B, F.R.W.D. VMIG1 4.25 9/07/00 2,000 2,000,000
Harvard Univ., Ser. SGA 97,
F.R.D.D. A-1+(d) 4.35 9/01/00 1,600 1,600,000
See Notes to Financial Statements
B-146
PRUDENTIAL MUNICIPAL SERIES FUND Massachusetts Money Market Series
Portfolio of Investments as of August 31, 2000 Cont'd.
PRINCIPAL
MOODY'S RATING INTEREST MATURITY AMOUNT
DESCRIPTION (A) (UNAUDITED) RATE DATE (000) VALUE (NOTE 1)
- --------------------------------------------------------------------------------------------------
Northeastern Univ., Ser. G,
M.B.I.A. Aaa 4.50% 10/01/00 $ 465 $ 465,090
Partners Hlth. Care Sys.,
Ser. P-1, F.R.W.D., F.S.A. VMIG1 4.10 9/06/00 1,000 1,000,000
Partners Hlth. Care Sys.,
Ser. P-2, F.R.W.D., F.S.A. VMIG1 4.05 9/06/00 2,600 2,600,000
Simmons College Merlots,
Ser. T, F.R.W.D.,
A.M.B.A.C. VMIG1 4.32 9/05/00 3,395 3,395,000
Williams College, Ser.
SG65, F.R.D.D.S. A-1+(d) 4.35 9/01/00 3,500 3,500,000
Mass. St. Hsg. Fin. Agcy.
Rev.,
Multi-Family Rev., Harbor
Port, Ser. 95A, F.R.W.D.,
G.N.M.A. A-1+(d) 4.10 9/06/00 4,100 4,100,000
Single Family Housing
Notes, Ser. C-1, A.M.T. A-1+(d) 4.90 6/01/01 2,000 2,000,000
Mass. St. Ind. Fin. Agcy.
Ind. Rev.,
Hazen Paper Co., Ser. 95,
F.R.W.D., A.M.T. A-1(d) 4.35 9/07/00 1,200 1,200,000
Heritage at Hingham, Ser.
97, F.R.W.D. VMIG1 4.20 9/07/00 1,500 1,500,000
New England College, Ser.
97, F.R.W.D. A-1+(d) 4.15 9/07/00 3,800 3,800,000
Peterson American Corp.
Proj., Ser. 96, F.R.W.D.,
A.M.T. NR 4.50 9/06/00 300 300,000
Riverdale Mills Corp., Ser.
95, F.R.W.D., A.M.T. A-1(d) 4.35 9/07/00 900 900,000
Mass. St. Ind. Fin. Agcy.
Polltn. Ctrl. Rev.,
New England Power Co.
Proj.,
Ser. 92B, Commercial Paper VMIG1 4.05 10/18/00 2,500 2,500,000
Ser. 92B, Commercial Paper VMIG1 4.15 10/23/00 2,000 2,000,000
Mass. St. Muni. Elec. Co.,
Power Supply Sys. Rev.,
Ser. 94C, F.R.W.D.,
M.B.I.A. VMIG1 4.10 9/06/00 1,000 1,000,000
Mass. St. Port Auth. Rev.
Merlots, Ser. Q, F.R.W.D.S. VMIG1 4.37 9/05/00 3,000 3,000,000
See Notes to Financial Statements
B-147
PRUDENTIAL MUNICIPAL SERIES FUND Massachusetts Money Market Series
Portfolio of Investments as of August 31, 2000 Cont'd.
PRINCIPAL
MOODY'S RATING INTEREST MATURITY AMOUNT
DESCRIPTION (A) (UNAUDITED) RATE DATE (000) VALUE (NOTE 1)
- --------------------------------------------------------------------------------------------------
Mass. St. Wtr. Res. Auth.,
T.E.C.P. P-1 4.10% 9/29/00 $ 1,000 $ 1,000,000
T.E.C.P. P-1 4.05 10/17/00 1,500 1,500,000
T.E.C.P. P-1 4.10 10/19/00 1,500 1,500,000
T.E.C.P. P-1 4.20 12/08/00 1,500 1,500,000
Mass. St., Gen. Oblig.,
Ser. 90C Aaa 7.00 12/01/00 1,000(c) 1,006,400
Ser. 90C Aaa 7.50 12/01/00 1,425(c) 1,464,038
Ser. 98A, F.R.W.D. VMIG1 4.15 9/07/00 2,500 2,500,000
Methuen, State Aid, B.A.N. NR 4.75 10/20/00 1,400 1,400,881
Monson, Gen. Oblig., Sch.
Proj.,
Ser. 90, M.B.I.A. Aaa 7.70 10/15/00 500(c) 512,057
Nantucket, Gen. Oblig.,
B.A.N. MIG1 5.25 5/25/01 1,550 1,554,304
Palmer, Gen. Oblig., Sch.
Proj.,
Ser. B, A.M.B.A.C. Aaa 7.70 10/01/00 500(c) 511,403
Stoughton, Gen. Oblig.,
F.S.A. Aaa 7.50 5/15/01 1,597 1,625,067
Sutton, Gen. Oblig.,
M.B.I.A. Aaa 7.00 4/01/01 1,267 1,286,234
Waltham, Gen. Oblig., B.A.N. NR 4.75 9/08/00 1,290 1,290,111
------------
TOTAL INVESTMENTS 99.6%
(AMORTIZED COST
$87,991,037(e)) 87,991,037
Other assets in excess of
liabilities 0.4% 377,188
------------
NET ASSETS 100% $ 88,368,225
============
See Notes to Financial Statements
B-148
PRUDENTIAL MUNICIPAL SERIES FUND Massachusetts Money Market Series
Portfolio of Investments as of August 31, 2000 Cont'd.
(a) The following abbreviations are used in portfolio descriptions:
A.M.B.A.C.--American Municipal Bond Assurance Corporation.
A.M.T.--Alternative Minimum Tax.
B.A.N.--Bond Anticipation Note.
F.G.I.C.--Financial Guaranty Insurance Company.
F.R.D.D.--Floating Rate (Daily) Demand Note(b).
F.R.D.D.S.--Floating Rate (Daily) Demand Note Synthetic(b).
F.R.W.D.--Floating Rate (Weekly) Demand Note(b).
F.R.W.D.S.--Floating Rate (Weekly) Demand Note Synthetic(b).
F.S.A.--Financial Security Assurance.
G.N.M.A.--Government National Mortgage Association.
M.B.I.A.--Municipal Bond Insurance Association.
T.E.C.P.--Tax-Exempt Commercial Paper.
(b) For purposes of amortized cost valuation, the maturity date of Floating Rate
Demand Notes is considered to be the later of the next date on which the
security can be redeemed at par, or the next date on which the rate of
interest is adjusted.
(c) Prerefunded issues are secured by escrowed cash and/or direct U.S.
guaranteed obligations.
(d) Standard & Poor's Rating.
(e) The cost of securities for federal income tax purposes is substantially the
same as for financial reporting purposes.
NR--Not Rated by Moody's or Standard & Poor's.
The Fund's current Statement of Additional Information contains a description of
Moody's and Standard & Poor's ratings.
See Notes to Financial Statements
B-149
PRUDENTIAL MUNICIPAL SERIES FUND Massachusetts Money Market Series
Statement of Assets and Liabilities
AUGUST 31, 2000
- ----------------------------------------------------------------------------------------
ASSETS
Investments, at amortized cost which approximates market value $ 87,991,037
Cash 62,429
Receivable for investments sold 2,000,000
Interest receivable 707,475
Receivable for Series shares sold 347,691
Other assets 1,188
-----------------
TOTAL ASSETS 91,109,820
-----------------
LIABILITIES
Payable for Series shares reacquired 2,625,523
Management fee payable 38,133
Accrued expenses 33,836
Dividends payable 32,673
Deferred trustee's fees 6,182
Distribution fee payable 5,248
-----------------
TOTAL LIABILITIES 2,741,595
-----------------
NET ASSETS $ 88,368,225
=================
Net assets were comprised of:
Shares of beneficial interest, at $.01 par value $ 883,682
Paid-in capital in excess of par 87,484,543
-----------------
Net assets, August 31, 2000 $ 88,368,225
=================
Net asset value, offering price and redemption price per share
($88,368,225 / 88,368,225 shares of beneficial interest
issued
and outstanding; unlimited number of shares authorized) $1.00
=================
See Notes to Financial Statements
B-150
PRUDENTIAL MUNICIPAL SERIES FUND Massachusetts Money Market Series
Statement of Operations
YEAR
ENDED
AUGUST 31, 2000
- ----------------------------------------------------------------------------------------
NET INVESTMENT INCOME
Income
Interest $ 2,643,490
-----------------
Expenses
Management fee 339,393
Distribution fee 84,848
Custodian's fees and expenses 64,000
Reports to shareholders 25,000
Registration fees 16,000
Transfer agent's fees and expenses 14,000
Legal fees and expenses 10,000
Trustees' fees and expenses 8,000
Audit fee 8,000
Miscellaneous 2,560
-----------------
Total expenses 571,801
Less: Custodian fee credit (Note 1) (362)
-----------------
NET EXPENSES 571,439
-----------------
NET INVESTMENT INCOME 2,072,051
-----------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 2,072,051
=================
See Notes to Financial Statements
B-151
PRUDENTIAL MUNICIPAL SERIES FUND Massachusetts Money Market Series
Statement of Changes in Net Assets
YEAR ENDED AUGUST 31,
---------------------------------
2000 1999
- ----------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net investment income $ 2,072,051 $ 1,364,638
--------------- --------------
DIVIDENDS (NOTE 1) (2,072,051) (1,364,638)
--------------- --------------
SERIES SHARE TRANSACTIONS (AT $1 PER SHARE)
Net proceeds from shares sold 224,336,862 174,293,713
Net asset value of shares issued to
shareholders in reinvestment of
dividends 2,028,747 1,330,047
Cost of shares reacquired (193,500,915) (182,580,621)
--------------- --------------
Net increase (decrease) in net assets from
Series share transactions 32,864,694 (6,956,861)
--------------- --------------
Total increase (decrease) 32,864,694 (6,956,861)
NET ASSETS
Beginning of year 55,503,531 62,460,392
--------------- --------------
End of year $ 88,368,225 $ 55,503,531
=============== ==============
See Notes to Financial Statements
B-152
PRUDENTIAL MUNICIPAL SERIES FUND Massachusetts Money Market Series
Notes to Financial Statements
Prudential Municipal Series Fund (the 'Fund') is registered under the
Investment Company Act of 1940, as an open-end investment company. The Fund was
organized as a Massachusetts business trust on May 18, 1984 and consists of
eleven series. The monies of each series are invested in separate, independently
managed portfolios. The Massachusetts Money Market Series (the 'Series')
commenced investment operations on August 5, 1991. The Series is nondiversified
and seeks to provide the highest level of income that is exempt from
Massachusetts State and federal income taxes with minimum risk by investing in
'investment grade' tax-exempt securities having a maturity of 13 months or less
and whose ratings are within the 2 highest ratings categories by a nationally
recognized statistical rating organization, or if not rated, are of comparable
quality. The ability of the issuers of the securities held by the Series to meet
their obligations may be affected by economic developments in a specific state,
industry or region.
NOTE 1. ACCOUNTING POLICIES
The following is a summary of significant accounting policies followed by the
Fund, and the Series, in the preparation of its financial statements.
SECURITIES VALUATIONS: Portfolio securities of the Series are valued at
amortized cost, which approximates market value. The amortized cost method of
valuation involves valuing a security at its cost on the date of purchase and
thereafter assuming a constant amortization to maturity of any discount or
premium.
All securities are valued as of 4:30 p.m., New York time.
SECURITIES TRANSACTIONS AND NET INVESTMENT INCOME: Securities
transactions are recorded on the trade date. Realized gains and losses on sales
of investments are calculated on the identified cost basis. Interest income is
recorded on the accrual basis. The Series amortizes premiums and accretes
original issue discount on portfolio securities as adjustments to interest
income. Expenses are recorded on the accrual basis which may require the use of
certain estimates by management.
FEDERAL INCOME TAXES: For federal income tax purposes, each series in
the Fund is treated as a separate taxpaying entity. It is the intent of the
Series to continue to meet the requirements of the Internal Revenue Code
applicable to regulated investment companies and to distribute all of its net
income to shareholders. For this reason, no federal income tax provision is
required.
DIVIDENDS: The Series declares all of its net investment income and net
realized short-term capital gains or losses, if any, as dividends daily to its
shareholders of record at the time of such declaration. Payment of dividends is
made monthly. Income distributions and capital gain distributions are determined
in accordance with
B-153
PRUDENTIAL MUNICIPAL SERIES FUND Massachusetts Money Market Series
Notes to Financial Statements Cont'd.
income tax regulations which may differ from generally accepted accounting
principles.
CUSTODY FEE CREDITS: The Fund has an arrangement with its custodian
bank, whereby uninvested monies earn credits which reduce the fees charged by
the custodian.
NOTE 2. AGREEMENTS
The Fund has a management agreement with Prudential Investments Fund Management
LLC ('PIFM'). Pursuant to this agreement, PIFM has responsibility for all
investment advisory services and supervises the subadviser's performance of such
services. PIFM has entered into a subadvisory agreement with The Prudential
Investment Corporation ('PIC'); PIC furnishes investment advisory services in
connection with the management of the Fund. PIFM pays for the services of PIC,
the cost of compensation of officers of the Fund, occupancy and certain clerical
and bookkeeping costs of the Fund. The Fund bears all other costs and expenses.
The management fee paid PIFM is computed daily and payable monthly, at an
annual rate of .50 of 1% of the average daily net assets of the Series.
Effective January 1, 2000, the subadvisory fee paid to PIC by PIFM is
computed daily and payable monthly at an annual rate of .250 of 1% of the
average daily net assets of the Fund. Prior to January 1, 2000, PIC was
reimbursed by PIFM for reasonable costs and expenses incurred in furnishing
investment advisory services. The change in the subadvisory fee structure has no
impact on the management fee charged to the Fund or its shareholders.
The Series has a distribution agreement with Prudential Investment
Management Services LLC ('PIMS'), which acts as the distributor of the Series.
The Fund compensates PIMS for distributing and servicing the Series' shares
pursuant to the plans of distribution regardless of expenses actually incurred
by PIMS. The Series reimbursed PIMS for distributing and servicing the Series'
shares pursuant to the plan of distribution at an annual rate of .125 of 1% of
the Series average daily net assets. The distribution fees are accrued daily and
payable monthly.
PIMS, PIFM and PIC are indirect wholly owned subsidiaries of The
Prudential Insurance Company of America.
NOTE 3. OTHER TRANSACTIONS WITH AFFILIATES
Prudential Mutual Fund Services LLC ('PMFS'), a wholly owned subsidiary of PIFM,
serves as the Fund's transfer agent. During the year ended August 31, 2000, the
Series incurred fees of approximately $13,700 for the services of PMFS. As of
August 31, 2000, approximately $1,200 of such fees were due to PMFS. Transfer
B-154
PRUDENTIAL MUNICIPAL SERIES FUND Massachusetts Money Market Series
Notes to Financial Statements Cont'd.
agent fees and expenses in the Statement of Operations include certain
out-of-pocket expenses paid to nonaffiliates.
NOTE 4. PROPOSED REORGANIZATION
On August 23, 2000, the Trustees approved an Agreement and Plan of
Reorganization and Liquidation of the Series (the 'Plan of Reorganization')
which provides for the transfer of substantially all of the assets and
liabilities of the Prudential Municipal Series Fund, Massachusetts Money Market
Series to Prudential Tax-Free Money Fund, Inc. Class A shares of the Series will
be exchanged at net asset value for Class A shares of the equivalent value of
Prudential Tax-Free Money Fund, Inc. The Fund will then cease operations. The
Plan of Reorganziation is subject to approval by the shareholders of the
Massachusetts Money Market Series.
B-155
PRUDENTIAL MUNICIPAL SERIES FUND Massachusetts Money Market Series
Financial Highlights
YEAR ENDED
AUGUST 31, 2000
- ----------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE:
NET ASSET VALUE, BEGINNING OF YEAR $ 1.00
Net investment income and realized gains .03
Dividends and distributions to shareholders (.03)
--------
Net asset value, end of year $ 1.00
========
--------
TOTAL RETURN(b): 3.05%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000) $88,368
Average net assets (000) $67,879
Ratios to average net assets:
Expenses, including distribution and service (12b-1) fees .84%
Expenses, excluding distribution and service (12b-1) fees .72%
Net investment income 3.05%
- ------------------------------
(a) Net of management fee waiver.
(b) Total return includes reinvestment of dividends and distributions.
See Notes to Financial Statements
B-156
PRUDENTIAL MUNICIPAL SERIES FUND Massachusetts Money Market Series
Financial Highlights Cont'd.
YEAR ENDED AUGUST 31,
- -------------------------------------------------------------------------------------
1999 1998 1997 1996
- -------------------------------------------------------------------------------------
$ 1.00 $ 1.00 $ 1.00 $ 1.00
.02 .03 .03(a) .03(a)
(.02) (.03) (.03) (.03)
-------- -------- -------- --------
$ 1.00 $ 1.00 $ 1.00 $ 1.00
======== ======== ======== ========
2.35% 2.77% 3.08% 3.12%
$ 55,504 $ 62,460 $ 53,441 $ 50,511
$ 58,654 $ 55,540 $ 53,078 $ 54,689
.88% .84% .54%(a) .55%(a)
.76% .71% .42%(a) .43%(a)
2.33% 2.73% 3.04%(a) 3.08%(a)
See Notes to Financial Statements
B-157
PRUDENTIAL MUNICIPAL SERIES FUND Massachusetts Money Market Series
Report of Independent Accountants
To the Shareholders and Board of Trustees of
Prudential Municipal Series Fund, Massachusetts Money Market Series
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Prudential Municipal Series Fund,
Massachusetts Money Market Series (the 'Fund', one of the portfolios
constituting Prudential Municipal Series Fund) at August 31, 2000, the results
of its operations for the year then ended, the changes in its net assets for
each of the two years in the period then ended and the financial highlights for
each of the four years in the period then ended, in conformity with accounting
principles generally accepted in the United States of America. These financial
statements and financial highlights (hereafter referred to as 'financial
statements') are the responsibility of the Fund's management; our responsibility
is to express an opinion on these financial statements based on our audits. We
conducted our audits of these financial statements in accordance with auditing
standards generally accepted in the United States of America, which require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits, which included confirmation
of securities at August 31, 2000 by correspondence with the custodian, provide a
reasonable basis for our opinion. The accompanying financial highlights for the
year ended August 31, 1996 were audited by other independent accountants, whose
opinion dated October 14, 1996 was unqualified.
As described in Note 4 to the financial statements, on August 23, 2000, the
Board of Trustees of the Series approved an Agreement and Plan of
Reorganization, subject to shareholder approval, whereby the Series would be
merged into Tax-Free Money Fund, Inc.
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York
October 20, 2000
B-158
PRUDENTIAL MUNICIPAL SERIES FUND Massachusetts Money Market Series
Federal Income Tax Information (Unaudited)
We are required by the Internal Revenue Code to advise you within 60 days
of the Series' fiscal year end (August 31, 2000) as to the federal tax status of
dividends paid by the Series during such fiscal year. Accordingly, we are
advising you that in the fiscal year ended August 31, 2000, dividends paid from
net investment income of $.03 per share were all federally tax-exempt interest
dividends.
B-159
PRUDENTIAL MUNICIPAL SERIES FUND New Jersey Series
Portfolio of Investments as of August 31, 2000
MOODY'S PRINCIPAL
RATING INTEREST MATURITY AMOUNT VALUE
DESCRIPTION (a) (UNAUDITED) RATE DATE (000) (NOTE 1)
- -----------------------------------------------------------------------------------------------------------
LONG-TERM INVESTMENTS 98.2%
Bergen Cnty., Utils. Auth., Wtr.
Poll. Ctrl. Rev., Ser. B,
F.G.I.C. Aaa 5.75% 12/15/05 $ 1,000 $ 1,060,590
Cape May Cnty. Ind. Poll. Ctrl.,
Fin. Auth. Rev., Atlantic Cnty.
Elec. Co., Ser. A, M.B.I.A. Aaa 6.80 3/01/21 2,615 3,082,170
Carteret Bd. of Ed.,
Cert. Part., M.B.I.A. Aaa 6.00 1/15/24 430 451,999
Cert. Part., M.B.I.A. Aaa 5.75 1/15/30 1,155 1,182,096
East Orange Bd. of Ed., Cert.
Part.,
Cap. Apprec., F.S.A. Aaa Zero 8/01/18 1,420 528,794
Cap. Apprec., F.S.A. Aaa Zero 2/01/22 2,845 851,964
Cap. Apprec., F.S.A. Aaa Zero 2/01/24 1,845 491,434
Gloucester Cnty. Impvt. Auth.,
Solid Waste Rec. Rev., Waste
Mgmt. Inc. Proj., Ser. A BBB(c) 6.85 12/01/29 3,000 3,116,730
Hudson Cnty. Impvt. Auth.,
Solid Waste Sys. Rev. AAA(c) 7.10 1/01/20 1,960(e) 2,098,768
Solid Waste Sys. Rev., Ser. 2 BBB-(c) 6.125 1/01/29 1,000 920,230
Solid Waste Sys. Rev., Ser. A AAA(c) 6.10 7/01/20 1,500(e) 1,614,330
Solid Waste Sys. Rev., Kopper's
Site Proj., Ser. A, A.M.T. BBB-(c) 6.125 1/01/29 1,250 1,150,288
Jackson Twnshp.,
Sch. Dist., F.G.I.C. Aaa 6.60 6/01/04 1,020 1,096,122
Sch. Dist., F.G.I.C. Aaa 6.60 6/01/05 940 1,025,841
Sch. Dist., F.G.I.C. Aaa 6.60 6/01/10 1,600 1,840,848
Sch. Dist., F.G.I.C. Aaa 6.60 6/01/11 1,600 1,838,928
Jersey City, Gen. Oblig., Ser.
A, F.S.A. Aaa 9.25 5/15/04 4,310 4,992,316
Lenape Regl. High Sch. Dist.,
Gen. Oblig., M.B.I.A. Aaa 7.625 1/01/12 400 493,104
Middle Twnshp. Sch. Dist., Gen.
Oblig., F.G.I.C. Aaa 7.00 7/15/05 1,200 1,331,520
See Notes to Financial Statements
B-160
PRUDENTIAL MUNICIPAL SERIES FUND New Jersey Series
Portfolio of Investments as of August 31, 2000 Cont'd.
MOODY'S PRINCIPAL
RATING INTEREST MATURITY AMOUNT VALUE
DESCRIPTION (a) (UNAUDITED) RATE DATE (000) (NOTE 1)
- -----------------------------------------------------------------------------------------------------------
Middlesex Cnty.,
Cert. Part., Cap. Apprec.,
M.B.I.A. Aaa Zero 6/15/25 $ 1,250 $ 308,850
Impvt. Auth., Utils. Sys. Rev.,
Cap. Apprec., Perth Amboy
Proj., Ser. B, A.M.B.A.C. Aaa Zero 9/01/19 5,000 1,754,000
Millburn Twnshp.,
Sch. Dist., Bd. of Ed. Aaa 5.35% 7/15/13 1,140 1,186,273
Sch. Dist., Bd. of Ed. Aaa 5.35 7/15/14 1,135 1,172,035
Sch. Dist., Bd. of Ed. Aaa 5.35 7/15/16 1,150 1,173,402
Sch. Dist., Bd. of Ed. Aaa 5.35 7/15/17 1,150 1,167,848
Monmouth Cnty., Impvt. Auth.
Rev., Howell Twnshp.
Bd. of Ed. Proj. AA(c) 6.55 7/01/12 3,465(e) 3,663,614
New Jersey Econ. Dev. Auth.
Rev.,
Cap. Apprec., St. Barnabas Med.
Ctr., Ser. A, M.B.I.A. Aaa Zero 7/01/25 6,795 1,666,678
Ed. Testing Serv., Ser. A,
M.B.I.A. Aaa 5.90 5/15/15 2,000(e) 2,155,160
First Mtg. - Keswick Pines NR 5.75 1/01/24 2,250 1,800,180
First Mtg. - The Evergreens NR 5.875 10/01/12 1,200 1,145,040
First Mtg. - The Evergreens NR 6.00 10/01/17 1,425 1,234,449
First Mtg. - The Evergreens NR 6.00 10/01/22 1,400 1,176,294
Marriott Corp., Leisure Park
Proj., Ser. A NR 5.875 12/01/27 1,100 908,325
Trans. Proj. Sublease, Ser. A,
F.S.A. Aaa 6.00 5/01/16 1,350 1,435,117
New Jersey Econ. Dev. Auth.,
Dist. Heating & Cooling Rev.,
Trigen-Trenton Proj., Ser. A BBB-(c) 6.20 12/01/10 600 591,894
New Jersey Econ. Dev. Auth.,
Econ. Dev. Rev.,
Cap. Apprec., Kapkowski Rd.
Landfill, Ser. A NR Zero 4/01/08 1,020 616,090
Kapkowski Rd. Landfill, Ser. A NR 6.375 4/01/31 2,000 1,951,280
Nat'l. Assoc. of Accountants NR 7.50 7/01/01 240 242,059
Nat'l. Assoc. of Accountants NR 7.65 7/01/09 950 976,125
See Notes to Financial Statements
B-161
PRUDENTIAL MUNICIPAL SERIES FUND New Jersey Series
Portfolio of Investments as of August 31, 2000 Cont'd.
MOODY'S PRINCIPAL
RATING INTEREST MATURITY AMOUNT VALUE
DESCRIPTION (a) (UNAUDITED) RATE DATE (000) (NOTE 1)
- -----------------------------------------------------------------------------------------------------------
New Jersey Econ. Dev. Auth.,
Nat. Gas Facs. Rev., NUI Corp.
Projs., Ser. A, M.B.I.A.,
A.M.T. Aaa 5.70% 6/01/32 $ 2,000 $ 2,003,620
New Jersey Econ. Dev. Auth.,
Spec. Fac. Rev., Continental
Airlines Proj., A.M.T. Ba2 6.25 9/15/29 5,000 4,671,300
New Jersey Econ. Dev. Auth.,
Wtr. Facs. Rev.,
New Jersey American Wtr. Co.,
Ser. B, F.G.I.C., A.M.T. Aaa 5.375 5/01/32 2,000 1,915,480
Gen. Rev., F.G.I.C., A.M.T. NR 6.725(d) 11/01/29 5,000 5,266,350
New Jersey Ed. Facs. Auth. Rev.,
Cap. Impvt. Fund, Ser. A,
F.S.A. Aaa 5.00 9/01/20 2,545 2,424,418
Fairleigh Dickinson Univ., Ser.
G NR 5.70 7/01/28 2,750 2,531,045
Felician College of Lodi, Ser.
D NR 7.375 11/01/22 1,275 1,352,061
Princeton Theological, Ser. B Aaa 5.90 7/01/26 2,500 2,592,900
New Jersey Hlth. Care Facs. Fin.
Auth. Rev.,
Atlantic City Med. Ctr., Ser. C A3 6.80 7/01/11 2,500 2,621,550
Jersey Shore Med. Ctr.,
A.M.B.A.C. AAA(c) 6.00 7/01/09 835(e) 893,584
Jersey Shore Med. Ctr.,
A.M.B.A.C. Aaa 6.00 7/01/09 630 668,008
Jersey Shore Med. Ctr.,
A.M.B.A.C. AAA(c) 6.25 7/01/21 850(e) 917,048
Jersey Shore Med. Ctr.,
A.M.B.A.C. Aaa 6.25 7/01/21 650 684,762
Robert Wood Johnson Univ. Hosp. A1 5.75 7/01/31 2,000 1,961,600
St. Joseph's Hosp. & Med. Ctr.,
Ser. A, Connie Lee AAA(c) 5.70 7/01/11 4,375 4,593,137
New Jersey St. Hsg. & Mtge. Fin.
Agcy., Rental Hsg. Rev., Ser.
B, A.M.T. AA-(c) 6.75 11/01/11 2,190 2,258,897
See Notes to Financial Statements
B-162
PRUDENTIAL MUNICIPAL SERIES FUND New Jersey Series
Portfolio of Investments as of August 31, 2000 Cont'd.
MOODY'S PRINCIPAL
RATING INTEREST MATURITY AMOUNT VALUE
DESCRIPTION (a) (UNAUDITED) RATE DATE (000) (NOTE 1)
- -----------------------------------------------------------------------------------------------------------
New Jersey St. Hwy. Auth.,
Garden St. Pkwy.,
Gen. Rev. A1 6.20% 1/01/10 $ 3,035 $ 3,373,129
Gen. Rev. A1 5.75 1/01/14 2,500 2,650,225
Gen. Rev. A1 5.625 1/01/30 1,650 1,664,306
New Jersey St. Tpke. Auth.,
Tpke. Rev.,
Ser. A, M.B.I.A. Aaa 5.75 1/01/18 7,500 7,784,475
Ser. C, M.B.I.A. Aaa 6.50 1/01/09 1,000 1,123,590
New Jersey St. Trans. Trust Fund
Auth.,
Gen. Rev., M.B.I.A. NR 11.185(d) 6/15/11 2,475 3,524,895
Trans. Sys., Ser. A Aa2 5.75 6/15/20 4,150 4,361,152
Trans. Sys., Ser. B, M.B.I.A. Aaa 5.75 6/15/14 3,500 3,649,240
North Brunswick Twnshp.,
Bd. of Ed., Gen. Oblig. A3 6.80 6/15/06 350 389,050
Bd. of Ed., Gen. Oblig. A3 6.80 6/15/07 350 393,911
Gen. Oblig. A1 6.40 5/15/10 545 571,601
Pohatcong Twnshp. Sch. Dist.,
F.S.A. AAA(c) 5.20 7/15/22 1,960 1,888,009
Port Auth. New York & New
Jersey, Ser. 96, F.G.I.C.,
A.M.T. Aaa 6.60 10/01/23 2,750 2,949,870
Puerto Rico Commonwealth,
Cap. Apprec., Gen. Oblig. Baa1 Zero 7/01/16 2,500 1,081,975
Cap. Apprec., Gen. Oblig. Baa1 Zero 7/01/17 3,000 1,219,440
Cap. Apprec., Pub. Improv.,
M.B.I.A. Aaa Zero 7/01/19 3,500 1,283,065
Puerto Rico Commonwealth Hwy. &
Trans. Auth., Trans. Rev.,
Ser. A, M.B.I.A. Aaa 5.00 7/01/38 2,250 2,084,963
Puerto Rico St. Infrastr.,
M.B.I.A. Aaa 5.00 7/01/28 2,000 1,878,480
Puerto Rico Elec. Pwr. Auth.,
Pwr. Rev., Ser. 95-X, M.B.I.A. Aaa 6.00 7/01/12 3,295 3,530,691
See Notes to Financial Statements
B-163
PRUDENTIAL MUNICIPAL SERIES FUND New Jersey Series
Portfolio of Investments as of August 31, 2000 Cont'd.
MOODY'S PRINCIPAL
RATING INTEREST MATURITY AMOUNT VALUE
DESCRIPTION (A) (UNAUDITED) RATE DATE (000) (NOTE 1)
- -----------------------------------------------------------------------------------------------------------
Puerto Rico Ind. Tourist Ed.,
Med. & Envir. Ctr. Facs., Cogen
Fac., AES Puerto Rico Proj.,
A.M.T. Baa2 6.625% 6/01/26 $ 2,675 $ 2,788,500
Puerto Rico Pub. Bldgs. Auth.
Rev. Gtd., Gov't. Fac., Ser. B,
F.S.A. AAA(c) 5.25 7/01/21 2,250 2,224,553
Puerto Rico Tel. Auth. Rev.,
Ser. I, M.B.I.A., R.I.B.S. Aaa 6.42(d) 1/25/07 7,875(e) 8,288,437
Rutgers - The St. Univ. of New
Jersey, Ser. A A1 6.40 5/01/13 2,000 2,248,780
South River Sch. Dist., F.G.I.C. Aaa 5.00 12/01/15 1,000 985,240
Sparta Twnshp. Sch. Dist.,
M.B.I.A. Aaa 5.75 9/01/14 1,000(e) 1,065,630
Union City Sch. Impvt., F.S.A. Aaa 6.375 11/01/08 1,545 1,733,521
Union Cnty. Impvt. Auth. Rev.,
Plainfield Bd. of Ed. Proj.,
F.G.I.C. Aaa 6.25 8/01/14 1,175(e) 1,300,948
Plainfield Bd. of Ed. Proj.,
F.G.I.C. Aaa 6.25 8/01/15 1,250(e) 1,383,987
Plainfield Bd. of Ed. Proj.,
F.G.I.C. Aaa 6.25 8/01/16 1,330(e) 1,472,563
Plainfield Bd. of Ed. Proj.,
F.G.I.C. Aaa 6.25 8/01/17 1,415(e) 1,566,674
Union Cnty. Util. Auth.,
A.M.B.A.C., A.M.T. Aaa 5.00 6/15/28 2,000 1,817,360
Virgin Islands Pub. Fin. Auth.
Rev., Ser. A BBB-(c) 6.50 10/01/24 750 776,918
Washington Twnshp. Mun. Utils.
Auth., Water & Sewer Rev.,
Cap. Apprec., Ser. A, F.G.I.C. Aaa Zero 12/15/22 1,055 300,147
Cap. Apprec., Ser. A, F.G.I.C. Aaa Zero 12/15/25 1,055 251,565
West Windsor Plainsboro Regl.
Sch. Dist.,
Gen. Oblig., F.G.I.C. Aaa 5.50 12/01/13 2,600 2,689,206
Gen. Oblig., F.G.I.C. Aaa 5.50 12/01/14 2,700 2,777,733
------------
Total long-term investments
(cost $166,466,061) $171,922,374
------------
See Notes to Financial Statements
B-164
PRUDENTIAL MUNICIPAL SERIES FUND New Jersey Series
Portfolio of Investments as of August 31, 2000 Cont'd.
MOODY'S PRINCIPAL
RATING INTEREST MATURITY AMOUNT VALUE
DESCRIPTION (a) (UNAUDITED) RATE DATE (000) (NOTE 1)
- --------------------------------------------------------------------------------------------------------
SHORT-TERM INVESTMENTS 0.9%
Delaware Riv. Port Auth., PA &
NJ Rev., Muni. Secs. Trust
Rcpts., Ser. SGA-89, F.S.A.,
F.R.D.D. A-1+(c) 4.35% 9/01/00 $ 400 $ 400,000
Port Auth. New York & New
Jersey, Spec. Oblig. Rev.,
Ser. 4, F.R.D.D. VMIG1 4.15 9/01/00 600 600,000
Ser. 6, F.R.D.D. VMIG1 4.15 9/01/00 600 600,000
------------
Total short-term investments
(cost $1,600,000) 1,600,000
------------
TOTAL INVESTMENTS 99.1%
(COST $168,066,061; NOTE 4) 173,522,374
------------
Other assets in excess of
liabilities 0.9% 1,632,153
------------
NET ASSETS 100% $175,154,527
============
- ------------------------------
(a) The following abbreviations are used in portfolio descriptions:
A.M.B.A.C.--American Municipal Bond Assurance Corporation.
Connie Lee--College Construction Loan Insurance Association.
A.M.T.--Alternative Minimum Tax.
F.G.I.C.--Financial Guaranty Insurance Company.
F.R.D.D.--Floating Rate (Daily) Demand Note (b).
F.S.A.--Financial Security Assurance.
M.B.I.A.--Municipal Bond Insurance Association.
R.I.B.S.--Residual Interest Bonds.
(b) For purposes of amortized cost valuation, the maturity date of Floating Rate
Demand Notes is considered to be the later of the next date on which the
security can be redeemed at par, or the next date on which the rate of
interest is adjusted.
(c) Standard & Poor's Rating.
(d) Inverse floating rate bond. The coupon is inversely indexed to a floating
interest rate. The rate shown is the rate at August 31, 2000.
(e) Prerefunded issues are secured by escrowed cash and/or direct U.S.
guaranteed obligations.
NR--Not Rated by Moody's or Standard & Poor's.
The Fund's current Statement of Additional Information contains a description of
Moody's and Standard & Poor's ratings.
See Notes to Financial Statements
B-165
PRUDENTIAL MUNICIPAL SERIES FUND New Jersey Series
Statement of Assets and Liabilities
AUGUST 31, 2000
- ----------------------------------------------------------------------------------------
ASSETS
Investments, at value (cost $168,066,061) $ 173,522,374
Cash 31,575
Interest receivable 2,225,976
Receivable for Series shares sold 175,825
Other assets 4,983
-----------------
TOTAL ASSETS 175,960,733
-----------------
LIABILITIES
Payable for Series shares reacquired 502,594
Dividends payable 90,358
Accrued expenses 84,072
Management fee payable 74,163
Distribution fee payable 48,586
Deferred trustees' fees 6,433
-----------------
TOTAL LIABILITIES 806,206
-----------------
NET ASSETS $ 175,154,527
=================
Net assets were comprised of:
Shares of beneficial interest, at par $ 164,408
Paid-in capital in excess of par 169,725,098
-----------------
169,889,506
Accumulated net realized loss on investments (191,292)
Net unrealized appreciation on investments 5,456,313
-----------------
Net assets, August 31, 2000 $ 175,154,527
=================
See Notes to Financial Statements
B-166
PRUDENTIAL MUNICIPAL SERIES FUND New Jersey Series
Statement of Assets and Liabilities Cont'd.
AUGUST 31, 2000
- ----------------------------------------------------------------------------------------
Class A:
Net asset value and redemption price per share
($122,663,520 / 11,514,785 shares of beneficial interest
issued and outstanding) $10.65
Maximum sales charge (3% of offering price) 0.33
-----------------
Maximum offering price to public $10.98
=================
Class B:
Net asset value, offering price and redemption price per
share ($49,994,883 / 4,691,815 shares of beneficial
interest issued and outstanding) $10.66
=================
Class C:
Net asset value and redemption price per share ($2,385,227
/ 223,848 shares of beneficial interest issued and
outstanding) $10.66
Sales charge (1% of offering price) 0.11
-----------------
Offering price to public $10.77
=================
Class Z:
Net asset value, offering price and redemption price per
share ($110,897 / 10,336 shares of beneficial interest
issued and outstanding) $10.73
=================
See Notes to Financial Statements
B-167
PRUDENTIAL MUNICIPAL SERIES FUND New Jersey Series
Statement of Operations
YEAR
ENDED
AUGUST 31, 2000
- ----------------------------------------------------------------------------------------
NET INVESTMENT INCOME
Income
Interest $ 10,931,727
-----------------
Expenses
Management fee 931,841
Distribution fee--Class A 306,432
Distribution fee--Class B 308,233
Distribution fee--Class C 15,579
Custodian's fees and expenses 87,000
Transfer agent's fees and expenses 75,000
Registration fees 59,000
Reports to shareholders 49,000
Legal fees and expenses 21,000
Trustees' fees and expenses 11,500
Audit fees 10,000
Miscellaneous expenses 11,474
-----------------
Total expenses 1,886,059
Less: Custodian fee credit (3,256)
-----------------
Net expenses 1,882,803
-----------------
NET INVESTMENT INCOME 9,048,924
-----------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Net realized gain (loss) on:
Investment transactions (222,972)
Financial futures transactions 43,830
-----------------
(179,142)
Net decrease in unrealized appreciation on investments (52,835)
-----------------
Net loss on investments (231,977)
-----------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 8,816,947
=================
See Notes to Financial Statements
B-168
PRUDENTIAL MUNICIPAL SERIES FUND New Jersey Series
Statement of Changes in Net Assets
YEAR YEAR
ENDED ENDED
AUGUST 31, 2000 AUGUST 31, 1999
- -------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net investment income $ 9,048,924 $ 10,122,921
Net realized gain (loss) on investment
transactions (179,142) 1,234,336
Net decrease in unrealized appreciation
on investments (52,835) (12,090,901)
----------------- -----------------
Net increase (decrease) in net assets
resulting from operations 8,816,947 (733,644)
----------------- -----------------
DIVIDENDS AND DISTRIBUTIONS (NOTE 1):
Dividends from net investment income
Class A (6,061,898) (5,851,852)
Class B (2,890,776) (4,200,420)
Class C (92,509) (66,932)
Class Z (3,741) (3,717)
----------------- -----------------
(9,048,924) (10,122,921)
----------------- -----------------
Distributions in excess of net investment
income
Class A -- (7,898)
Class B -- (6,230)
Class C -- (97)
Class Z -- (6)
----------------- -----------------
-- (14,231)
----------------- -----------------
Tax return of capital distributions
Class A (3,066) --
Class B (1,607) --
Class C (51) --
Class Z (2) --
----------------- -----------------
(4,726) --
----------------- -----------------
Distributions from net realized gains
Class A (584,921) (958,970)
Class B (306,493) (756,555)
Class C (9,779) (11,815)
Class Z (312) (714)
----------------- -----------------
(901,505) (1,728,054)
----------------- -----------------
See Notes to Financial Statements
B-169
PRUDENTIAL MUNICIPAL SERIES FUND New Jersey Series
Statement of Changes in Net Assets Cont'd.
YEAR YEAR
ENDED ENDED
AUGUST 31, 2000 AUGUST 31, 1999
- -------------------------------------------------------------------------------------
SERIES SHARE TRANSACTIONS (NET OF SHARE
CONVERSIONS)
(NOTE 5):
Net proceeds from shares sold $ 9,732,263 $ 20,755,452
Net asset value of shares issued in
reinvestment of dividends and
distributions 5,857,005 7,062,891
Cost of shares reacquired (44,474,004) (42,677,795)
----------------- -----------------
Net decrease in net assets from Series
share transactions (28,884,736) (14,859,452)
----------------- -----------------
Total decrease (30,022,944) (27,458,302)
NET ASSETS
Beginning of year 205,177,471 232,635,773
----------------- -----------------
End of year $ 175,154,527 $ 205,177,471
================= =================
See Notes to Financial Statements
B-170
PRUDENTIAL MUNICIPAL SERIES FUND New Jersey Series
Notes to Financial Statements
Prudential Municipal Series Fund (the 'Fund') is registered under the
Investment Company Act of 1940, as an open-end management investment company.
The Fund was organized as a Massachusetts business trust on May 18, 1984, and
consists of 11 series. The monies of each series are invested in separate,
independently managed portfolios. The New Jersey Series (the 'Series') commenced
investment operations in March 1988. The Series is diversified and seeks to
achieve its investment objective of obtaining the maximum amount of income
exempt from federal and applicable state income taxes with the minimum of risk
by investing in 'investment grade' tax-exempt securities whose ratings are
within the four highest ratings categories by a nationally recognized
statistical rating organization or, if not rated, are of comparable quality. The
ability of the issuers of the securities held by the Series to meet their
obligations may be affected by economic or political developments in a specific
state, industry or region.
NOTE 1. ACCOUNTING POLICIES
The following is a summary of significant accounting policies followed by the
Fund, and the Series, in the preparation of its financial statements.
SECURITIES VALUATIONS: The Fund values municipal securities (including
commitments to purchase such securities on a 'when-issued' basis) on the basis
of prices provided by a pricing service which uses information with respect to
transactions in bonds, quotations from bond dealers, market transactions in
comparable securities and various relationships between securities in
determining values. If market quotations are not readily available from such
pricing service, a security is valued at its fair value as determined under
procedures established by the Trustees.
Short-term securities which mature in more than 60 days are valued at
current market quotations. Short-term securities which mature in 60 days or less
are valued at amortized cost which approximates market value.
All securities are valued as of 4:15 p.m., New York time.
FINANCIAL FUTURES CONTRACTS: A financial futures contract is an
agreement to purchase (long) or sell (short) an agreed amount of securities at a
set price for delivery on a future date. Upon entering into a financial futures
contract, the Series is required to pledge to the broker an amount of cash
and/or other assets equal to a certain percentage of the contract amount. This
amount is known as the 'initial margin.' Subsequent payments, known as
'variation margin,' are made or received by the Series each day, depending on
the daily fluctuations in the value of the underlying security. Such variation
margin is recorded for financial statement purposes on a daily basis as
unrealized gain or loss. When the contract expires or is closed, the gain or
B-171
PRUDENTIAL MUNICIPAL SERIES FUND New Jersey Series
Notes to Financial Statements Cont'd.
loss is realized and is presented in the statement of operations as net realized
gain (loss) on financial futures contracts.
The Series invests in financial futures contracts in order to hedge its
existing portfolio securities or securities the Series intends to purchase,
against fluctuations in value caused by changes in prevailing interest rates.
Should interest rates move unexpectedly, the Series may not achieve the
anticipated benefits of the financial futures contracts and may realize a loss.
The use of futures transactions involves the risk of imperfect correlation in
movements in the price of futures contracts, interest rates and the underlying
hedged assets.
OPTIONS: The Series 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 Series
currently owns or intends to purchase. When the Series purchases an option, it
pays a premium and an amount equal to that premium is recorded as an investment.
When the Series 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 Series 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 Series has realized a gain or loss. The difference
between the premium and the amount received or paid on effecting a closing
purchase or sale transaction is also treated as a realized gain or loss. Gain or
loss on purchased options is included in net realized gain (loss) on investment
transactions. Gain or loss on written options is presented separately as net
realized gain (loss) on written option transactions.
SECURITIES TRANSACTIONS AND NET INVESTMENT INCOME: Securities
transactions are recorded on the trade date. Realized gains and losses on sales
of securities are calculated on the identified cost basis. Interest income is
recorded on the accrual basis. The Series amortizes premiums and original issue
discount paid on purchases of portfolio securities as adjustments to interest
income. Expenses are recorded on the accrual basis which may require the use of
certain estimates by management.
Net investment income (other than distribution fees) and realized and
unrealized gains or losses are allocated daily to each class of shares based
upon the relative proportion of net assets of each class at the beginning of the
day.
FEDERAL INCOME TAXES: For federal income tax purposes, each series in
the Fund is treated as a separate taxpaying entity. It is the intent of the
Series to continue
B-172
PRUDENTIAL MUNICIPAL SERIES FUND New Jersey Series
Notes to Financial Statements Cont'd.
to meet the requirements of the Internal Revenue Code applicable to regulated
investment companies and to distribute all of its net income to shareholders.
For this reason no federal income tax provision is required.
DIVIDENDS AND DISTRIBUTIONS: The Series declares daily dividends from
net investment income. Payment of dividends is made monthly. Distributions of
net capital gains, if any, are made annually.
Income distributions and capital gain distributions are determined in
accordance with income tax regulations which may differ from generally accepted
accounting principles.
CUSTODY FEE CREDITS: The Series has an arrangement with its custodian
bank, whereby uninvested monies earn credits which reduce the fees charged by
the custodian.
RECLASSIFICATION OF CAPITAL ACCOUNTS: The Fund accounts and reports for
distributions to shareholders in accordance with the American Institute of
Certified Public Accountants, Statement of Position 93-2: Determination,
Disclosure, and Financial Statement Presentation of Income; Capital Gain, and
Return of Capital Distributions by Investment Companies. The effect of applying
this statement was to increase accumulated net realized loss on investments by
$2,537, and increase paid-in capital by $2,537, due to the sale of securities
purchased with market discount during the year ended August 31, 2000. Net
investment income, net realized gains and net assets were not affected by this
change.
NOTE 2. AGREEMENTS
The Fund has a management agreement with Prudential Investments Fund Management
LLC ('PIFM'). Pursuant to this agreement, PIFM has responsibility for all
investment advisory services and supervises the subadviser's performance of such
services. PIFM has entered into a subadvisory agreement with The Prudential
Investment Corporation ('PIC'). The subadvisory agreement provides that PIC will
furnish investment advisory services in connection with the management of the
Fund. In connection therewith, PIC is obligated to keep certain books and
records of the Fund. PIFM continues to have reponsibility for all investment
advisory services pursuant to the Management Agreement and supervises PIC's
performance of such services. PIFM pays for the services of PIC, the cost of
compensation of officers of the Fund, occupancy and certain clerical and
bookkeeping costs of the Fund. The Fund bears all other costs and expenses.
The management fee paid PIFM is computed daily and payable monthly, at an
annual rate of .50 of 1% of the average daily net assets of the Series.
B-173
PRUDENTIAL MUNICIPAL SERIES FUND New Jersey Series
Notes to Financial Statements Cont'd.
Effective January 1, 2000, the subadvisory fee paid to PIC by PIFM is
computed daily and payable monthly at an annual rate of .250 of 1% of the
average daily net assets of the Series. Prior to January 1, 2000, PIC was
reimbursed by PIFM for reasonable costs and expenses incurred in furnishing
investment advisory services. The change in the subadvisory fee structure has no
impact on the management fee charged to the Fund or its shareholders.
The Fund has a distribution agreement with Prudential Investment
Management Services LLC ('PIMS') which acts as distributor of the Class A, Class
B, Class C and Class Z shares of the Fund. The Fund compensates PIMS for
distributing and servicing the Fund's Class A, Class B and Class C shares
pursuant to plans of distribution, (the 'Class A, B and C Plans'), regardless of
expenses actually incurred by them. The distribution fees are accrued daily and
payable monthly. No distribution or service fees are paid to PIMS as distributor
of the Class Z shares of the Fund.
Pursuant to the Class A, B and C Plans, the Fund compensates PIMS for
distribution-related activities at an annual rate of up to .30 of 1%, .50% of 1%
and 1% of the average daily net assets of the Class A, B and C shares,
respectively. Such expenses under the Plans were .25 of 1%, .50 of 1% and .75 of
1% of the average daily net assets of the Class A, B and C shares, respectively,
for the year ended August 31, 2000.
PIMS advised the Series that it has received approximately $9,000 and
$7,600 in front-end sales charges resulting from sales of Class A and Class C
shares, respectively, during the year ended August 31, 2000. From these fees,
PIMS paid such sales charges to affiliated broker-dealers, which in turn paid
commissions to salespersons and incurred other distribution costs.
PIMS has advised the Series that during the year ended August 31, 2000, it
received approximately $96,100 and $400 in contingent deferred sales charges
imposed upon certain redemptions by Class B and Class C shareholders,
respectively.
PIFM, PIMS and PIC are wholly owned subsidiaries of The Prudential
Insurance Company of America.
The Series, along with other affiliated registered investment companies
(the 'Funds'), entered into a syndicated credit agreement ('SCA') with an
unaffiliated lender. The maximum commitment under the SCA is $1 billion.
Interest on any such borrowings will be at market rates. The purpose of the
agreement is to serve as an alternative source of funding for capital share
redemptions. The Funds pay a commitment fee of .080 of 1% of the unused portion
of the credit facility. The commitment fee is accrued and paid quarterly on a
pro rata basis by the Funds. The expiration date of the SCA is March 9, 2001.
Prior to March 9, 2000, the commitment fee was
B-174
PRUDENTIAL MUNICIPAL SERIES FUND New Jersey Series
Notes to Financial Statements Cont'd.
.065 of 1% of the unused portion of the credit facility. The Series did not
borrow any amounts pursuant to the SCA during the year ended August 31, 2000.
NOTE 3. OTHER TRANSACTIONS WITH AFFILIATES
Prudential Mutual Fund Services LLC ('PMFS'), a wholly owned subsidiary of PIFM,
serves as the Fund's transfer agent. During the year ended August 31, 2000, the
Series incurred fees of approximately $64,100 for the services of PMFS. As of
August 31, 2000, approximately $4,800 of such fees were due to PMFS. Transfer
agent fees and expenses in the Statement of Operations include certain
out-of-pocket expenses paid to nonaffiliates.
NOTE 4. PORTFOLIO SECURITIES
Purchases and sales of portfolio securities of the Series, excluding short-term
investments, for the year ended August 31, 2000, were $50,968,508 and
$80,298,730, respectively.
The cost basis of investments for federal income tax purposes at August
31, 2000 was substantially the same as for financial reporting purposes and
accordingly, net unrealized appreciation of investments for federal income tax
purposes was $5,456,313 (gross unrealized appreciation--$7,716,279; gross
unrealized depreciation--$2,259,966).
For federal income tax purposes, the Fund had a capital loss carryforward
as of August 31, 2000 of approximately $191,292 which will expire in 2008.
Accordingly, no capital gain distribution is expected to be paid to shareholders
until net capital gains have been realized in excess of such amount.
NOTE 5. CAPITAL
The Series offers Class A, Class B, Class C and Class Z shares. Class A shares
are sold with a front-end sales charge of up to 3%. Class B shares are sold with
a contingent deferred sales charge which declines from 5% to zero depending on
the period of time the shares are held. Class C shares are sold with a front-end
sales charge of 1% and a contingent deferred sales charge of 1% during the first
18 months. Class B shares will automatically convert to Class A shares on a
quarterly basis approximately seven years after purchase. A special exchange
privilege is also available for shareholders who qualify to purchase Class A
shares at net asset value. Class Z shares are not subject to any sales or
redemption charge and are offered exclusively for sale to a limited group of
investors.
The Fund has authorized an unlimited number of shares of beneficial
interest of each class at $.01 par value per share.
B-175
PRUDENTIAL MUNICIPAL SERIES FUND New Jersey Series
Notes to Financial Statements Cont'd.
Transactions in shares of beneficial interest were as follows:
CLASS A SHARES AMOUNT
- ------- ---------- ------------
Year ended August 31, 2000:
Shares sold 385,474 $ 3,979,994
Shares issued in reinvestment of dividends and distributions 370,205 3,843,455
Shares reacquired (2,862,853) (29,693,117)
---------- ------------
Net increase (decrease) in shares outstanding before
conversion (2,107,174) (21,869,668)
Shares issued upon conversion from Class B 2,030,267 21,173,413
---------- ------------
Net increase (decrease) in shares outstanding (76,907) $ (696,255)
========== ============
Year ended August 31, 1999:
Shares sold 985,448 $ 10,991,945
Shares issued in reinvestment of dividends and distributions 362,139 4,029,788
Shares reacquired (1,612,166) (17,882,857)
---------- ------------
Net increase (decrease) in shares outstanding before
conversion (264,579) (2,861,124)
Shares issued upon conversion from Class B 1,766,984 19,823,070
---------- ------------
Net increase (decrease) in shares outstanding 1,502,405 $ 16,961,946
========== ============
CLASS B
- -------
Year ended August 31, 2000:
Shares sold 463,235 $ 4,832,767
Shares issued in reinvestment of dividends and distributions 185,299 1,924,201
Shares reacquired (1,384,128) (14,372,587)
---------- ------------
Net increase (decrease) in shares outstanding before
conversion (735,594) (7,615,619)
Shares reacquired upon conversion into Class A (2,030,267) (21,173,413)
---------- ------------
Net increase (decrease) in shares outstanding (2,765,861) $(28,789,032)
========== ============
Year ended August 31, 1999:
Shares sold 801,429 $ 8,959,095
Shares issued in reinvestment of dividends and distributions 265,518 2,960,115
Shares reacquired (2,195,958) (24,462,541)
---------- ------------
Net increase (decrease) in shares outstanding before
conversion (1,129,011) (12,543,331)
Shares reacquired upon conversion into Class A (1,766,556) (19,823,070)
---------- ------------
Net increase (decrease) in shares outstanding (2,895,567) $(32,366,401)
========== ============
B-176
PRUDENTIAL MUNICIPAL SERIES FUND New Jersey Series
Notes to Financial Statements Cont'd.
CLASS C SHARES AMOUNT
- ------- ---------- ------------
Year ended August 31, 2000:
Shares sold 78,161 $ 815,601
Shares issued in reinvestment of dividends and distributions 8,328 86,473
Shares reacquired (33,618) (350,403)
---------- ------------
Net increase (decrease) in shares outstanding 52,871 $ 551,671
========== ============
Year ended August 31, 1999:
Shares sold 67,242 $ 749,066
Shares issued in reinvestment of dividends and distributions 6,176 68,659
Shares reacquired (22,179) (245,690)
---------- ------------
Net increase (decrease) in shares outstanding 51,239 $ 572,035
========== ============
CLASS Z
- -------
Year ended August 31, 2000:
Shares sold 9,775 $ 103,901
Shares issued in reinvestment of dividends and distributions 275 2,876
Shares reacquired (5,490) (57,897)
---------- ------------
Net increase (decrease) in shares outstanding 4,560 $ 48,880
========== ============
Year ended August 31, 1999:
Shares sold 5,027 $ 55,346
Shares issued in reinvestment of dividends and distributions 386 4,329
Shares reacquired (7,771) (86,707)
---------- ------------
Net increase (decrease) in shares outstanding (2,358) $ (27,032)
========== ============
B-177
PRUDENTIAL MUNICIPAL SERIES FUND New Jersey Series
Financial Highlights
CLASS A
-----------------
YEAR ENDED
AUGUST 31, 2000
- ----------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE:
NET ASSET VALUE, BEGINNING OF YEAR $ 10.67
-----------------
INCOME FROM INVESTMENT OPERATIONS
Net investment income .52
Net realized and unrealized gain (loss) on investment
transactions .03
-----------------
Total from investment operations .55
-----------------
LESS DISTRIBUTIONS
Dividends from net investment income (.52)
Distributions in excess of net investment income --
Tax return of capital distributions --(c)
Distributions from net realized gains on investment
transactions (.05)
-----------------
Total distributions (.57)
-----------------
Net asset value, end of year $ 10.65
=================
TOTAL RETURN(b): 5.39%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000) $ 122,664
Average net assets (000) $ 122,573
Ratios to average net assets:
Expenses, including distribution fees .92%
Expenses, excluding distribution fees .67%
Net investment income 4.95%
For Class A, B, C and Z shares:
Portfolio turnover rate 28%
- ------------------------------
(a) Net of management fee waiver.
(b) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each year reported and includes reinvestment of dividends and
distributions.
(c) Less than $.005 per share.
See Notes to Financial Statements
B-178
PRUDENTIAL MUNICIPAL SERIES FUND New Jersey Series
Financial Highlights Cont'd.
CLASS A
- -------------------------------------------------------------------------------------
YEAR ENDED AUGUST 31,
- -------------------------------------------------------------------------------------
1999 1998 1997 1996
- -------------------------------------------------------------------------------------
$ 11.31 $ 10.97 $ 10.87 $ 10.98
- ---------------- ---------------- -------- --------
.52 .53 .55(a) .57(a)
(.55) .36 .29 (.07)
- ---------------- ---------------- -------- --------
(.03) .89 .84 .50
- ---------------- ---------------- -------- --------
(.52) (.53) (.55) (.57)
--(c) -- --(c) --
-- -- -- --
(.09) (.02) (.19) (.04)
- ---------------- ---------------- -------- --------
(.61) (.55) (.74) (.61)
- ---------------- ---------------- -------- --------
$ 10.67 $ 11.31 $ 10.97 $ 10.87
================ ================ ======== ========
(.40)% 8.40% 7.97% 4.63%
$123,692 $114,090 $ 95,729 $ 74,492
$125,547 $107,206 $ 89,280 $ 61,837
.84% .71% .70%(a) .67%(a)
.64% .61% .60%(a) .57%(a)
4.66% 4.85% 5.03%(a) 5.19%(a)
15% 18% 25% 62%
See Notes to Financial Statements
B-179
PRUDENTIAL MUNICIPAL SERIES FUND New Jersey Series
Financial Highlights Cont'd.
CLASS B
-----------------
YEAR ENDED
AUGUST 31, 2000
- ----------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE:
NET ASSET VALUE, BEGINNING OF YEAR $ 10.67
--------
INCOME FROM INVESTMENT OPERATIONS
Net investment income .49
Net realized and unrealized gain (loss) on investment
transactions .04
--------
Total from investment operations .53
--------
LESS DISTRIBUTIONS
Dividends from net investment income (.49)
Distributions in excess of net investment income --
Tax return of capital distributions --(c)
Distributions from net realized gains on investment
transactions (.05)
--------
Total distributions (.54)
--------
Net asset value, end of year $ 10.66
========
TOTAL RETURN(b): 5.23%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000) $49,995
Average net assets (000) $61,647
Ratios to average net assets:
Expenses, including distribution fees 1.17%
Expenses, excluding distribution fees .67%
Net investment income 4.69%
- ------------------------------
(a) Net of management fee waiver.
(b) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each year reported and includes reinvestment of dividends and
distributions.
(c) Less than $.005 per share.
See Notes to Financial Statements
B-180
PRUDENTIAL MUNICIPAL SERIES FUND New Jersey Series
Financial Highlights Cont'd.
CLASS B
- -------------------------------------------------------------------------------------
YEAR ENDED AUGUST 31,
- -------------------------------------------------------------------------------------
1999 1998 1997 1996
- -------------------------------------------------------------------------------------
$ 11.31 $ 10.97 $ 10.87 $ 10.98
-------- ---------------- ---------------- ----------------
.49 .50 .50(a) .53(a)
(.55) .36 .29 (.07)
-------- ---------------- ---------------- ----------------
(.06) .86 .79 .46
-------- ---------------- ---------------- ----------------
(.49) (.50) (.50) (.53)
--(c) -- --(c) --
-- -- -- --
(.09) (.02) (.19) (.04)
-------- ---------------- ---------------- ----------------
(.58) (.52) (.69) (.57)
-------- ---------------- ---------------- ----------------
$ 10.67 $ 11.31 $ 10.97 $ 10.87
======== ================ ================ ================
(.71)% 7.97% 7.54% 4.22%
$ 79,598 $117,099 $144,992 $188,315
$ 96,542 $128,382 $162,330 $222,235
1.14% 1.11% 1.10%(a) 1.07%(a)
.64% .61% .60%(a) .57%(a)
4.35% 4.46% 4.63%(a) 4.80%(a)
See Notes to Financial Statements
B-181
PRUDENTIAL MUNICIPAL SERIES FUND New Jersey Series
Financial Highlights Cont'd.
CLASS C
-----------------
YEAR ENDED
AUGUST 31, 2000
- ----------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE:
NET ASSET VALUE, BEGINNING OF YEAR $ 10.67
--------
INCOME FROM INVESTMENT OPERATIONS
Net investment income .47
Net realized and unrealized gain (loss) on investment
transactions .04
--------
Total from investment operations .51
--------
LESS DISTRIBUTIONS
Dividends from net investment income (.47)
Distributions in excess of net investment income --
Tax return of capital distributions --(c)
Distributions from net realized gains on investment
transactions (.05)
--------
Total distributions (.52)
--------
Net asset value, end of year $ 10.66
========
TOTAL RETURN(b): 4.96%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000) $ 2,385
Average net assets (000) $ 2,077
Ratios to average net assets:
Expenses, including distribution fees 1.42%
Expenses, excluding distribution fees .67%
Net investment income 4.45%
- ------------------------------
(a) Net of management fee waiver.
(b) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each year reported and includes reinvestment of dividends and
distributions.
(c) Less than $.005 per share.
See Notes to Financial Statements
B-182
PRUDENTIAL MUNICIPAL SERIES FUND New Jersey Series
Financial Highlights Cont'd.
CLASS C
- -------------------------------------------------------------------------------------
YEAR ENDED AUGUST 31,
- -------------------------------------------------------------------------------------
1999 1998 1997 1996
- -------------------------------------------------------------------------------------
$11.31 $10.97 $10.87 $10.98
------- ------- ------- -------
.46 .47 .48(a) .50(a)
(.55) .36 .29 (.07)
------- ------- ------- -------
(.09) .83 .77 .43
------- ------- ------- -------
(.46) (.47) (.48) (.50)
--(c) -- --(c) --
-- -- -- --
(.09) (.02) (.19) (.04)
------- ------- ------- -------
(.55) (.49) (.67) (.54)
------- ------- ------- -------
$10.67 $11.31 $10.97 $10.87
======= ======= ======= =======
(.95)% 7.70% 7.27% 3.96%
$1,825 $1,354 $1,637 $1,961
$1,622 $1,274 $1,894 $1,735
1.39% 1.36% 1.35%(a) 1.32%(a)
.64% .61% .60%(a) .57%(a)
4.13% 4.21% 4.38%(a) 4.54%(a)
See Notes to Financial Statements
B-183
PRUDENTIAL MUNICIPAL SERIES FUND New Jersey Series
Financial Highlights Cont'd.
CLASS Z
----------------
YEAR ENDED
AUGUST 31, 2000
- ----------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE:
NET ASSET VALUE, BEGINNING OF PERIOD $10.75
-------
INCOME FROM INVESTMENT OPERATIONS
Net investment income .55
Net realized and unrealized gain (loss) on investment
transactions .03
-------
Total from investment operations .58
-------
LESS DISTRIBUTIONS
Dividends from net investment income (.55)
Distributions in excess of net investment income --
Tax return of capital distributions --(d)
Distributions from net realized gains on investment
transactions (.05)
-------
Total distributions (.60)
-------
Net asset value, end of period $10.73
-------
-------
TOTAL RETURN(c): 5.66%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000) $ 111
Average net assets (000) $ 72
Ratios to average net assets:
Expenses, including distribution fees .67%
Expenses, excluding distribution fees .67%
Net investment income 5.22%
- ------------------------------
(a) Annualized.
(b) Net of management fee waiver.
(c) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each period reported and includes reinvestment of dividends and
distributions. Total returns for periods of less than one full year are not
annualized.
(d) Less than $.005 per share.
(e) Commencement of offering of Class Z shares.
See Notes to Financial Statements
B-184
PRUDENTIAL MUNICIPAL SERIES FUND New Jersey Series
Financial Highlights Cont'd.
CLASS Z
- ---------------------------------------------------------------------------------------
YEAR ENDED AUGUST 31, DECEMBER 6, 1996(E)
- ------------------------------------------ THROUGH AUGUST 31,
1999 1998 1997
- ---------------------------------------------------------------------------------------
$11.32 $10.98 $11.10
------- ------- -------
.54 .55 .41(b)
(.48) .36 .07
------- ------- -------
.06 .91 .48
------- ------- -------
(.54) (.55) (.41)
--(d) -- --(d)
-- -- --
(.09) (.02) (.19)
------- ------- -------
(.63) (.57) (.60)
------- ------- -------
$10.75 $11.32 $10.98
------- ------- -------
------- ------- -------
.45% 8.51% 4.49%
$ 62 $ 92 $ 15
$ 77 $ 30 $ 10
.64% .61% .60%(a)(b)
.64% .61% .60%(a)(b)
4.86% 4.96% 5.13%(a)(b)
See Notes to Financial Statements
B-185
PRUDENTIAL MUNICIPAL SERIES FUND New Jersey Series
Report of Independent Accountants
To the Shareholders and Board of Trustees of
Prudential Municipal Series Fund, New Jersey Series
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Prudential Municipal Series Fund,
New Jersey Series (the 'Fund', one of the portfolios constituting Prudential
Municipal Series Fund) at August 31, 2000, the results of its operations for the
year then ended, the changes in its net assets for each of the two years in the
period then ended and the financial highlights for each of the four years in the
period then ended, in conformity with accounting principles generally accepted
in the United States of America. These financial statements and financial
highlights (hereafter referred to as 'financial statements') are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with auditing standards
generally accepted in the United States of America, which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits, which included confirmation of securities at August
31, 2000 by correspondence with the custodian, provide a reasonable basis for
the opinion expressed above. The accompanying financial highlights for the year
ended August 31, 1996 were audited by other independent accountants, whose
opinion dated October 14, 1996 was unqualified.
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York
October 20, 2000
B-186
PRUDENTIAL MUNICIPAL SERIES FUND New Jersey Series
Tax Information (Unaudited)
We are required by the Internal Revenue Code to advise you within 60 days
of the Series' fiscal year end (August 31, 2000) as to the federal income tax
status of dividends paid during such fiscal year. Accordingly, we are advising
you that during its fiscal year ended August 31, 2000, dividends paid from net
investment income of $.52 per Class A share, $.49 per Class B share, $.47 per
Class C share and $.55 per Class Z shares were all federally tax-exempt interest
dividends. In addition, the Series paid distributions for Class A, B, C and Z
shares totaling $.049 per share comprised of long-term capital gains, which were
taxable as 20% rate gains. Further, we wish to advise you that 0% of the
ordinary income dividend paid in the fiscal year ended August 31, 2000 qualified
for the corporate dividends received deduction available to corporate taxpayers.
Only funds that invest in U.S. equity securities are entitled to pass-through a
corporate dividends received deduction.
In January 2001, you will be advised on IRS Form 1099 DIV or substitute
Form 1099, as to the federal tax status of the distributions received by you in
calendar 2000. The amounts that will be reported on such form 1099 DIV will be
the amounts to use on your federal income tax return and will differ from the
amounts which we must report for the Fund's fiscal year ended August 31, 2000.
B-187
PRUDENTIAL MUNICIPAL SERIES FUND New Jersey Money Market Series
Portfolio of Investments as of August 31, 2000
MOODY'S PRINCIPAL
RATING INTEREST MATURITY AMOUNT VALUE
DESCRIPTION (a) (UNAUDITED) RATE DATE (000) (NOTE 1)
- -----------------------------------------------------------------------------------------------------------
Brazos River Tex. Hbr. Nav.
Dist., BASF Corp. Proj.,
F.R.D.D., Ser. 96, A.M.T. P-1 4.45% 09/01/00 $ 1,250 $ 1,250,000
Brick Twnshp.,
B.A.N., Ser. 2000 MIG1 4.75 05/11/01 4,912 4,924,989
Impvt., Ser. 2000, F.S.A. NR 5.25 05/01/01 712 715,645
Burlington Cnty.,
B.A.N., Ser. 2000C NR 4.625 04/20/01 3,000 3,007,160
G.O., Ser. 96 NR 5.20 10/01/00 1,700 1,701,567
Camden Cnty. Impvt. Auth. Rev.,
Senior Redev., Harvest Village
Proj., Ser. 99A, F.R.D.D. A-1+(c) 4.00 09/01/00 3,000 3,000,000
Cranford Twnshp., B.A.N. NR 4.35 03/16/01 2,000 2,001,540
Delaware River Port Auth.,
Merlots, Ser. OO-K, F.R.W.D.,
F.S.A. VMIG1 4.27 09/05/00 4,000 4,000,000
Ser. A89, F.R.D.D., F.S.A. A-1+(c) 4.35 09/01/00 1,300 1,300,000
Essex Cnty. Impvt. Auth. Rev.,
Cnty. Correctional Fac., Ser.
SSP37, F.R.W.D., F.G.I.C. VMIG1 4.03 09/06/00 5,000 5,000,000
Fairfield Twnshp., G.O., Ser. OO,
F.G.I.C. NR 5.375 01/15/01 330 331,454
Gloucester Cnty., Ind. Poll.
Ctrl. Fin. Auth. Rev., Monsanto
Co. Proj., Ser.92, F.R.W.D. P-1 4.05 09/06/00 2,500 2,500,000
Hackensack Twnshp., G.O., B.A.N. NR 5.25 06/01/01 3,568 3,578,675
Hudson Cnty. Impvt. Auth. Rev.,
Pooled Gov't. Loan Prog.,
Ser. 86, F.R.W.D. A-1(c) 4.10 09/07/00 1,245 1,245,000
Hudson Cnty., Correctional Fac.,
Ser. 99-A9, Reg. D, F.R.W.D.,
M.B.I.A. VMIG1 4.55 09/06/00 8,000 8,000,000
Irvington Twnshp., G.O., B.A.N. MIG1 4.875 03/23/01 659 661,220
Jersey City,
B.A.N. SP-1+(c) 4.25 09/15/00 1,000 1,000,000
See Notes to Financial Statements
B-188
PRUDENTIAL MUNICIPAL SERIES FUND New Jersey Money Market Series
Portfolio of Investments as of August 31, 2000 Cont'd.
MOODY'S PRINCIPAL
RATING INTEREST MATURITY AMOUNT VALUE
DESCRIPTION (a) (UNAUDITED) RATE DATE (000) (NOTE 1)
- -----------------------------------------------------------------------------------------------------------
G.O., B.A.N. SP-1+(c) 4.75% 01/12/01 $ 7,000 $ 7,013,914
Qual. Public Impvt., Ser. B,
M.B.I.A. Aaa 5.125 09/01/00 1,050 1,050,000
Qual. Sch., Ser. A, F.S.A. Aaa 5.25 09/01/00 550 550,000
Linden, G.O., B.A.N., Ser. 2000 NR 5.25 06/12/01 2,790 2,801,385
Manalapan Twnshp., B.A.N., Ser.
1999A NR 4.25 10/13/00 2,424 2,425,321
Monmouth Cnty. Impvt. Auth.,
Sewage Fac., Ser. 91 NR 6.75 02/01/01 2,000(e) 2,059,813
Monroe Twnshp., Mun. Util. Auth.
Rev., Ser. 93B, M.B.I.A. NR 4.40 02/01/01 380 380,148
Montclair Twnshp.,
B.A.N. NR 5.35 05/18/01 1,900 1,905,770
Temporary Nts. NR 5.25 05/18/01 4,900 4,913,247
Morris Twnshp., B.A.N. NR 4.25 09/20/00 4,801 4,802,249
New Brunswick, Temporary Nts. NR 4.80 08/31/01 4,000 4,019,160
New Jersey Health Care Fac. Fin.
Auth. Rev., Hackettstown, Ser.
OO, F.R.W.D. VMIG1 3.90 09/06/00 1,000 1,000,000
New Jersey Hsg. & Mtg. Fin. Agy.,
Eagle Tax Exempt, Trust 92A,
Ser. 3001, F.R.W.D. A-1+(c) 4.18 09/07/00 3,080 3,080,000
New Jersey Sports & Expo. Auth.,
Ser. OOA NR 4.75 03/01/01 1,545 1,549,073
New Jersey St. Transit Corp.,
Capital Grant Anticipation Nts.,
Ser. A, F.S.A. Aaa 4.25 09/01/00 2,500 2,500,000
New Jersey St. Econ. Dev. Auth.,
865 Centennial Ave. Proj., Ser.
85, F.R.W.D., A.M.T. A-1+(c) 4.38 09/07/00 1,900 1,900,000
AFL Qual. Inc. Proj., F.R.W.D.,
A.M.T. A-1(c) 4.25 09/06/00 4,000 4,000,000
AIRIS Newark, Ser. 1998,
F.R.W.D., A.M.B.A.C. A-1+(c) 4.15 09/07/00 10,900 10,900,000
Alpha Assoc. & Avallone, Ser.
98, F.R.W.D. A-1(c) 4.25 09/06/00 2,560 2,560,000
See Notes to Financial Statements
B-189
PRUDENTIAL MUNICIPAL SERIES FUND New Jersey Money Market Series
Portfolio of Investments as of August 31, 2000 Cont'd.
MOODY'S PRINCIPAL
RATING INTEREST MATURITY AMOUNT VALUE
DESCRIPTION (a) (UNAUDITED) RATE DATE (000) (NOTE 1)
- -----------------------------------------------------------------------------------------------------------
Bayshore Hlth. Care, Ser. 98A,
F.R.W.D. VMIG1 4.25% 09/07/00 $ 3,800 $ 3,800,000
Davidson Ave. Assoc. Ltd.,
Ser. 84, F.R.W.D., A.M.T. A-1+(c) 4.38 09/07/00 2,500 2,500,000
Dock Fac. Rev., Bayonne I.M.T.T.
Proj., 93C, F.R.D.D. VMIG1 4.05 09/01/00 1,000 1,000,000
Elizabeth Twn. Wtr. Co.,
Ser. B, F.R.W.D., A.M.B.A.C.,
A.M.T. A-1+(c) 4.20 09/06/00 7,400 7,400,000
Fin. Assoc. L.P., Ser. 97,
F.R.W.D. A-1+(c) 4.33 09/07/00 3,952 3,952,000
GSA Bldg. Assoc. Ltd., Ser. 85,
F.R.W.D., A.M.T. A-1+(c) 4.38 09/07/00 4,200 4,200,000
Jewish Home At Rockliegh, Ser.
98A, F.R.W.D. VMIG1 4.15 09/01/00 10,000 10,000,000
Kent Place, Ser. 92L, F.R.W.D. VMIG1 4.25 09/07/00 1,600 1,600,000
Michael Shalit Proj., Ser. 93,
F.R.D.D. NR 4.10 09/01/00 915 915,000
National Refridgerants, Ser.
94A, F.R.W.D., A.M.T. P-1 4.35 09/06/00 200 200,000
New Jersey Natural Gas Co.
Proj., Ser 98B, F.R.W.D.,
A.M.B.A.C., A.M.T. P-1 3.85 09/06/00 800 800,000
NUI Corp. Proj., Natural Gas
Facs. Rev., Ser. 96A, F.R.D.D.,
A.M.B.A.C., A.M.T., VMIG1 4.15 09/01/00 200 200,000
Office Court Assoc. Proj., Ser.
89, F.R.W.D., A.M.T. A-1(c) 4.30 09/06/00 2,950 2,950,000
Owens Drive Bldg. Ltd., Ser. 84,
F.R.W.D., A.M.T. A-1+(c) 4.38 09/07/00 1,200 1,200,000
Owens Drive Bldg. Ltd., Ser. 90,
F.R.W.D., A.M.T. A-1+(c) 4.38 09/07/00 1,450 1,450,000
Peddie Sch. Proj., Ser. 94B,
F.R.W.D. A-1(c) 4.15 09/07/00 3,000 3,000,000
Raritan Bldg. Assoc. Ltd., Ser.
85, F.R.W.D. A-1+(c) 4.33 09/07/00 3,500 3,500,000
See Notes to Financial Statements
B-190
PRUDENTIAL MUNICIPAL SERIES FUND New Jersey Money Market Series
Portfolio of Investments as of August 31, 2000 Cont'd.
MOODY'S PRINCIPAL
RATING INTEREST MATURITY AMOUNT VALUE
DESCRIPTION (a) (UNAUDITED) RATE DATE (000) (NOTE 1)
- -----------------------------------------------------------------------------------------------------------
V.P.R. Commerce Ctr., Ser. 89,
F.R.W.D. A-1(c) 4.15% 09/07/00 $ 6,300 $ 6,300,000
Volvo America Corp., Ser. 84,
F.R.W.D. NR 4.62 09/06/00 1,500 1,500,000
West Essex Assoc. Ltd., Ser. 84,
F.R.W.D. A-1+(c) 4.33 09/07/00 1,300 1,300,000
New Jersey St. Tpke. Auth. Rev.,
Merlots, Ser. OO-EEE, F.R.W.D.,
M.B.I.A. VMIG1 4.27 09/05/00 5,000 5,000,000
Ser. 91D, F.R.W.D., F.G.I.C. VMIG1 4.10 09/06/00 4,600 4,600,000
Ocean Cnty. Util. Auth.,
Wastewater Rev., G.O., Ser. 1997 NR 5.00 01/01/01 500 501,286
Parish of Ascension, BASF Corp.
Proj., Ser. 1998, F.R.D.D.,
A.M.T. P-1 4.45 09/01/00 2,200 2,200,000
Port Auth. of New York & New
Jersey,
Merlots, Ser. OOZ, M.B.I.A.,
A.M.T. VMIG1 4.32 09/05/00 4,995 4,995,000
Ser. 93-2, F.R.W.D. NR 4.179 09/05/00 8,000 8,000,000
Spec. Oblig. Rev., Ser. 6,
F.R.D.D., A.M.T. VMIG1 4.15 09/01/00 5,800 5,800,000
Ridgewood Village, G.O. NR 4.90 10/01/00 720 720,659
Rutgers St. Univ., Univ. Rev.,
Ser. P NR 6.85 05/01/01 3,050 3,161,591
Trenton Sch. Dist., G.O., F.S.A. NR 5.25 03/01/01 175 175,882
Union Cnty., G.O. NR 6.50 02/01/01 1,000 1,029,150
------------
TOTAL INVESTMENTS 101.1%
(AMORTIZED COST $197,577,898;
(d)) 197,577,898
Liabilities in excess of other
assets (1.1%) (2,117,463)
------------
NET ASSETS 100% $195,460,435
============
See Notes to Financial Statements
B-191
PRUDENTIAL MUNICIPAL SERIES FUND New Jersey Money Market Series
Portfolio of Investments as of August 31, 2000 Cont'd.
(a) The following abbreviations are used in portfolio descriptions:
A.M.B.A.C.--American Municipal Bond Assurance Corporation.
A.M.T.--Alternative Minimum Tax.
B.A.N.--Bond Anticipation Note.
F.G.I.C.--Financial Guaranty Insurance Company.
F.R.D.D.--Floating Rate (Daily) Demand Note (b).
F.R.W.D.--Floating Rate (Weekly) Demand Note (b).
F.S.A.--Financial Security Assurance.
G.O.--General Obligation.
M.B.I.A.--Municipal Bond Insurance Corporation.
(b) For purposes of amortized cost valuation, the maturity date of Floating Rate
Demand Notes is considered to be the later of the next date on which the
security can be redeemed at par, or the next date on which the rate of
interest is adjusted.
(c) Standard & Poor's Rating.
(d) The cost of securities for federal income tax purposes is substantially the
same as for financial statement purposes.
(e) Pre-refunded security.
NR--Not Rated by Moody's or Standard & Poor's.
The Fund's current Statement of Additional Information contains a description of
Moody's and Standard & Poor's ratings.
See Notes to Financial Statements
B-192
PRUDENTIAL MUNICIPAL SERIES FUND New Jersey Money Market Series
Statement of Assets and Liabilities
AUGUST 31,
2000
- ----------------------------------------------------------------------------------------
ASSETS
Investments, at amortized cost which approximates market value $ 197,577,898
Cash 42,542
Interest receivable 1,935,732
Receivable for Series shares sold 1,521,670
Deferred expenses and other assets 3,862
-----------------
TOTAL ASSETS 201,081,704
-----------------
LIABILITIES
Payable for investments purchased 4,019,160
Payable for Series shares reacquired 1,422,652
Management fee payable 85,887
Dividends payable 75,145
Distribution fee payable 11,640
Deferred trustee's fee 6,434
Accrued expenses and other liabilities 351
-----------------
TOTAL LIABILITIES 5,621,269
-----------------
NET ASSETS $ 195,460,435
=================
Net assets were comprised of:
Shares of beneficial interest, at $.01 par value $ 1,954,604
Paid-in capital in excess of par 193,505,831
-----------------
Net assets, August 31, 2000 $ 195,460,435
=================
Net asset value, offering price and redemption price per share
($195,460,435 / 195,460,435 shares of beneficial interest
issued and outstanding; unlimited number of shares
authorized) $1.00
=================
See Notes to Financial Statements
B-193
PRUDENTIAL MUNICIPAL SERIES FUND New Jersey Money Market Series
Statement of Operations
YEAR
ENDED
AUGUST 31, 2000
- ----------------------------------------------------------------------------------------
NET INVESTMENT INCOME
Income
Interest $ 7,748,826
-----------------
Expenses
Management fee 1,023,487
Distribution fee 255,872
Custodian's fees and expenses 70,000
Transfer agent's fees and expenses 55,000
Reports to shareholders 36,000
Registration fees 14,000
Legal fees and expenses 14,000
Trustees' fees and expenses 9,000
Audit fee 8,000
Miscellaneous 8,308
-----------------
TOTAL EXPENSES 1,493,667
Less: Custodian fee credit (Note 1) (20,274)
-----------------
Net expenses 1,473,393
-----------------
Net investment income 6,275,433
-----------------
REALIZED GAIN ON INVESTMENTS
Net realized gain on investment transactions 4,796
-----------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 6,280,229
=================
See Notes to Financial Statements
B-194
PRUDENTIAL MUNICIPAL SERIES FUND New Jersey Money Market Series
Statement of Changes in Net Assets
YEAR YEAR ENDED
ENDED AUGUST 31,
AUGUST 31, 2000 1999
- -----------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net investment income $ 6,275,433 $ 5,209,801
Net realized gain on investment
transactions 4,796 --
----------------- --------------
Net increase in net assets resulting from
operations 6,280,229 5,209,801
----------------- --------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS
(NOTE 1) (6,280,229) (5,209,801)
----------------- --------------
SERIES SHARE TRANSACTIONS (AT $1 PER SHARE)
Net proceeds from shares subscribed 868,442,991 772,444,020
Net asset value of shares issued in
reinvestment of dividends 6,087,872 5,083,846
Cost of shares reacquired (886,074,658) (771,438,504)
----------------- --------------
Net increase (decrease) in net assets from
Series share transactions (11,543,795) 6,089,362
----------------- --------------
Total increase (decrease) (11,543,795) 6,089,362
NET ASSETS
Beginning of year 207,004,230 200,914,868
----------------- --------------
End of year $ 195,460,435 $ 207,004,230
================= ==============
See Notes to Financial Statements
B-195
PRUDENTIAL MUNICIPAL SERIES FUND New Jersey Money Market Series
Notes to Financial Statements
Prudential Municipal Series Fund (the 'Fund') is registered under the
Investment Company Act of 1940 as an open-end management investment company. The
Fund was organized as a Massachusetts business trust on May 18, 1984 and
consists of 13 series. The monies of each series are invested in separate,
independently managed portfolios. The New Jersey Money Market Series (the
'Series') commenced investment operations on December 3, 1990. The Series is
nondiversified and seeks to achieve its investment objective of providing the
highest level of income that is exempt from New Jersey state and federal income
taxes with a minimum of risk by investing in 'investment grade' tax-exempt
securities maturing within 13 months or less and whose ratings are within the
two highest ratings categories by a nationally recognized statistical rating
organization, or if not rated, are of comparable quality. The ability of the
issuers of the securities held by the Series to meet their obligations may be
affected by economic developments in a specific state, industry or region.
NOTE 1. ACCOUNTING POLICIES
The following is a summary of significant accounting policies followed by the
Fund, and the Series, in the preparation of its financial statements.
SECURITIES VALUATIONS: Portfolio securities of the Series are valued at
amortized cost, which approximates market value. The amortized cost method of
valuation involves valuing a security at its cost on the date of purchase and
thereafter assuming a constant amortization to maturity of any discount or
premium.
All securities are valued as of 4:30 p.m., New York time.
Securities Transactions and Net Investment Income: Securities
transactions are recorded on the trade date. Realized gains and losses on sales
of investments are calculated on the identified cost basis. The Series amortizes
premiums and accretes original issue discount on portfolio securities as
adjustments to interest income. Interest income is recorded on the accrual
basis. Expenses are recorded on the accrual basis which may require the use of
certain estimates by management.
FEDERAL INCOME TAXES: For federal income tax purposes, each series in
the Fund is treated as a separate taxpaying entity. It is the intent of the
Series to continue to meet the requirements of the Internal Revenue Code
applicable to regulated investment companies and to distribute all of its net
income to shareholders. For this reason, no federal income tax provision is
required.
DIVIDENDS: The Series declares daily dividends from net investment
income and net realized short-term capital gains or losses. Payment of dividends
is made monthly.
Income distributions and capital gain distributions are determined in
accordance with income tax regulations which may differ from generally accepted
accounting principles.
B-196
PRUDENTIAL MUNICIPAL SERIES FUND New Jersey Money Market Series
Notes to Financial Statements Cont'd.
CUSTODY FEE CREDITS: The Fund has an arrangement with its custodian
bank, whereby uninvested monies earn credits which reduce the fees charged by
the custodian.
NOTE 2. AGREEMENTS
The Fund has a management agreement with Prudential Investments Fund Management
LLC ('PIFM'). Pursuant to this agreement, PIFM has responsibility for all
investment advisory services and supervises the subadviser's performance of such
services. PIFM has entered into a subadvisory agreement with The Prudential
Investment Corporation ('PIC'). The subadvisory agreement provides that PIC will
furnish investment advisory services in connection with the management of the
Fund. In connection therewith, PIC is obligated to keep certain books and
records of the Fund. PIFM continues to have responsibility for all investment
advisory services pursuant to the management agreement and supervises PIC's
performance of such services. PIFM pays for the services of PIC, 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 to PIFM is computed daily and payable monthly, at
an annual rate of .50 of 1% of the average daily net assets of the Series.
Effective January 1, 2000, the subadvisory fee paid to PIC by PIFM is
computed daily and payable monthly at an annual rate of .250 of 1% of the
average daily net assets of the Fund. Prior to January 1, 2000, PIC was
reimbursed by PIFM for reasonable costs and expenses incurred in furnishing
investment advisory services. The change in the subadvisors fee structure has no
impact on the management fee charged to the Fund or its shareholders.
The Series has a distribution agreement with Prudential Investment
Management Services LLC ('PIMS') which acts as the distributor of the Series
shares. The Series compensates PIMS for distributing and servicing the Series'
shares pursuant to the plan of distribution at an annual rate of .125 of 1% of
the Series' average daily net assets. The distribution fee is accrued daily and
payable monthly.
PIFM, PIMS and PIC are wholly owned subsidiaries of The Prudential
Insurance Company of America ('Prudential').
NOTE 3. OTHER TRANSACTIONS WITH AFFILIATES
Prudential Mutual Fund Services LLC ('PMFS'), a wholly owned subsidiary of PIFM,
serves as the Fund's transfer agent. During the year ended August 31, 2000, the
Series incurred fees of approximately $52,600 for the services of PMFS. As of
August 31, 2000, approximately $4,100 of such fees were due to PMFS. Transfer
B-197
PRUDENTIAL MUNICIPAL SERIES FUND New Jersey Money Market Series
Notes to Financial Statements Cont'd.
agent fees and expenses in the Statement of Operations include certain
out-of-pocket expenses paid to nonaffiliates.
B-198
PRUDENTIAL MUNICIPAL SERIES FUND New Jersey Money Market Series
Financial Highlights
YEAR
ENDED
AUGUST 31, 2000
- ----------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE:
NET ASSET VALUE, BEGINNING OF YEAR $ 1.00
Net investment income and net realized gains .03
Dividends and distributions (.03)
-----------------
Net asset value, end of year $ 1.00
-----------------
-----------------
TOTAL RETURN(a): 3.12%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000) $ 195,460
Average net assets (000) $ 204,697
Ratios to average net assets:
Expenses, including distribution fee and service (12b-1)
fees .72%
Expenses, excluding distribution fee and service (12b-1)
fees .59%
Net investment income 3.07%
- ------------------------------
(a) Total return includes reinvestment of dividends and distributions.
See Notes to Financial Statements
B-199
PRUDENTIAL MUNICIPAL SERIES FUND New Jersey Money Market Series
Financial Highlights Cont'd.
YEAR ENDED AUGUST 31,
- -------------------------------------------------------------------------------------
1999 1998 1997 1996
- -------------------------------------------------------------------------------------
$ 1.00 $ 1.00 $ 1.00 $ 1.00
.03 .03 .03 .03
(.03) (.03) (.03) (.03)
- ---------------- ---------------- ---------------- ----------------
$ 1.00 $ 1.00 $ 1.00 $ 1.00
================ ================ ================ ================
2.52% 2.87% 2.82% 2.92%
$207,004 $200,915 $199,472 $181,396
$209,479 $198,647 $196,223 $192,617
.72% .73% .73% .70%
.59% .60% .60% .57%
2.49% 2.82% 2.78% 2.89%
See Notes to Financial Statements
B-200
PRUDENTIAL MUNICIPAL SERIES FUND New Jersey Money Market Series
Report of Independent Accountants
To the Shareholders and Board of Trustees of
Prudential Municipal Series Fund, New Jersey Money Market Series
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Prudential Municipal Series Fund,
New Jersey Money Market Series (the 'Fund', one of the portfolios constituting
Prudential Municipal Series Fund) at August 31, 2000, the results of its
operations for the year then ended, the changes in its net assets for each of
the two years in the period then ended and the financial highlights for each of
the four years in the period then ended, in conformity with accounting
principles generally accepted in the United States of America. These financial
statements and financial highlights (hereafter referred to as 'financial
statements') are the responsibility of the Fund's management; our responsibility
is to express an opinion on these financial statements based on our audits. We
conducted our audits of these financial statements in accordance with auditing
standards generally accepted in the United States of America, which require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits, which included confirmation
of securities at August 31, 2000 by correspondence with the custodian and
brokers, provide a reasonable basis for the opinion expressed above. The
accompanying financial highlights for the year ended August 31, 1996 were
audited by other independent accountants, whose opinion dated October 14, 1996
was unqualified.
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York
October 20, 2000
B-201
PRUDENTIAL MUNICIPAL SERIES FUND New Jersey Money Market Series
Federal Income Tax Information (Unaudited)
We are required by the Internal Revenue Code to advise you within 60 days
of the Series' fiscal year end (August 31, 2000) as to the federal tax status of
dividends paid by the Series during such fiscal year. Accordingly, we are
advising you that in the fiscal year ended August 31, 2000, dividends paid from
net investment income of $.03 per share were federally tax-exempt interest
dividends.
B-202
PRUDENTIAL MUNICIPAL SERIES FUND New York Series
Portfolio of Investments as of August 31, 2000
MOODY'S PRINCIPAL
RATING INTEREST MATURITY AMOUNT VALUE
DESCRIPTION (a) (UNAUDITED) RATE DATE (000) (NOTE 1)
- -----------------------------------------------------------------------------------------------------------
LONG-TERM INVESTMENTS 97.7%
- -----------------------------------------------------------------------------------------------------------
Albany Mun. Wtr. Fin. Auth. Wtr. &
Swr. Sys. Rev.,
Cap. Apprec., Ser. A, F.G.I.C. Aaa Zero 12/01/20 $ 2,165 $ 708,907
Cap. Apprec., Ser. A, F.G.I.C. Aaa Zero 12/01/21 1,160 357,234
Cap. Apprec., Ser. A, F.G.I.C. Aaa Zero 12/01/22 560 162,456
City of Buffalo, School, Gen.
Oblig., Ser. E, F.S.A. Aaa 6.00% 12/01/16 1,100 1,174,888
City of Elmira, Wtr. Impvt., Ser.
96 B, A.M.B.A.C. Aaa 5.95 03/01/16 5,395 5,640,580
City of New Rochelle Ind. Dev.
Agcy.,
Coll. of New Rochelle Baa2 6.63 07/01/12 500(c) 528,950
Coll. of New Rochelle Baa2 6.75 07/01/22 2,000(c) 2,120,160
Dutchess Cnty. Agcy. Civic Fac.
Rev. A3 5.75 08/01/30 4,000 3,982,800
Greece Central School District,
F.G.I.C. Aaa 6.00 06/15/16 950 1,032,156
F.G.I.C. Aaa 6.00 06/15/17 950 1,030,987
F.G.I.C. Aaa 6.00 06/15/18 950 1,030,494
Islip Res. Rec., Ser. B,
A.M.B.A.C., A.M.T. Aaa 7.20 07/01/10 1,745 2,042,557
Jefferson Cnty. Ind. Dev. Agcy.,
Solid Waste Disp. Rev., A.M.T. Baa1 7.20 12/01/20 1,500 1,564,155
Long Island Pwr. Auth., Elect.
Sys. Rev.,
Cap. Apprec., F.S.A. Aaa Zero 06/01/20 4,000 1,328,400
Cap. Apprec., F.S.A. Aaa Zero 06/01/24 6,335 1,655,906
Cap. Apprec., F.S.A. Aaa Zero 06/01/27 7,955 1,744,293
Cap. Apprec., F.S.A. Aaa Zero 06/01/29 5,000 974,400
See Notes to Financial Statements
B-203
PRUDENTIAL MUNICIPAL SERIES FUND New York Series
Portfolio of Investments as of August 31, 2000 Cont'd.
MOODY'S PRINCIPAL
RATING INTEREST MATURITY AMOUNT VALUE
DESCRIPTION (a) (UNAUDITED) RATE DATE (000) (NOTE 1)
- -----------------------------------------------------------------------------------------------------------
Met. Trans. Auth. Facs. Rev.,
Cap. Apprec., Ser. N, F.G.I.C. Aaa Zero 07/01/13 $ 4,000 $ 2,082,880
Commuter Facs., Ser. A, F.G.I.C. Aaa 5.60% 07/01/09 500 528,835
Commuter Facs., Ser. A, F.G.I.C. Aaa 5.70 07/01/10 1,000 1,060,790
Trans. Facs. Rev., Ser. A, F.S.A. Aaa 5.60 07/01/09 2,900 3,067,243
Trans. Facs. Rev., Ser. A, F.S.A. Aaa 5.70 07/01/10 4,600 4,879,634
Trans. Facs. Rev., Ser. N,
F.G.I.C. Aaa Zero 07/01/12 5,575 3,089,888
Met. Trans. Auth., New York Svc.
Contract,
Cap. Apprec., Ser. 7, M.B.I.A. Aaa Zero 07/01/08 6,935 4,797,425
Commuter Facs., Ser. O Baa1 5.50 07/01/17 2,500 2,524,450
Trans. Facs. Rev., Ser. O Baa1 5.75 07/01/13 1,975 2,079,418
Mount Vernon Ind. Dev. Agcy.,
Wartburg Senior Hsg. Inc. NR 6.15 06/01/19 800 696,440
New York City Ind. Dev. Agcy.,
Civic Touro College Proj., Ser. A Ba2 6.35 06/01/29 3,700 3,569,057
Laguardia Assoc., Ltd.
Partnership Proj. NR 6.00 11/01/28 2,000 1,714,020
New York City Ind. Dev. Agcy.,
Spec. Fac. Rev.,
Brooklyn Navy Yard Part., A.M.T. Baa3 5.65 10/01/28 1,900 1,733,560
Brooklyn Navy Yard Part.,
Cogen Proj. Baa3 5.75 10/01/36 4,000 3,661,400
U.S.T.A. National Tennis Center
Proj., F.S.A. Aaa 6.38 11/15/14 1,000 1,076,430
Y.M.C.A. Of Greater N.Y. Proj. Aaa 8.00 08/01/16 1,305(c) 1,371,150
New York City, Gen. Oblig.,
Ser. A A2 6.00 05/15/30 1,000 1,031,130
Ser. B A2 7.50 02/01/01 4,000 4,051,520
Ser. C, M.B.I.A. Aaa 5.38 11/15/27 5,170 5,008,748
Ser. D Aaa 8.00 08/01/03 2,450(c) 2,567,649
Ser. D A2 8.00 08/01/03 50 52,230
Ser. D Aaa 7.70 02/01/09 2,995(c) 3,177,905
Ser. D A2 7.70 02/01/09 45 47,476
Ser. F Aaa 8.20 11/15/03 2,760(c) 2,926,594
Ser. F A2 8.20 11/15/03 240 253,430
See Notes to Financial Statements
B-204
PRUDENTIAL MUNICIPAL SERIES FUND New York Series
Portfolio of Investments as of August 31, 2000 Cont'd.
MOODY'S PRINCIPAL
RATING INTEREST MATURITY AMOUNT VALUE
DESCRIPTION (a) (UNAUDITED) RATE DATE (000) (NOTE 1)
- -----------------------------------------------------------------------------------------------------------
New York City, Gen. Oblig.,
Ser. G A2 5.88% 10/15/14 $ 2,500 $ 2,613,500
Ser. I A2 6.10 04/15/10 565(c) 619,087
Ser. I A2 6.10 04/15/10 1,435 1,540,860
Ser. I A2 6.25 04/15/27 3,475(c) 3,837,199
Ser. I A2 6.25 04/15/27 2,525 2,633,095
New York City Mun. Fin. Auth.,
Wtr. & Swr. Sys. Rev., Ser. B Aa3 6.00 06/15/33 2,600 2,700,178
New York City Transitional Fin.
Auth. Rev.,
Ser. C Aa3 5.00 05/01/29 5,000 4,547,450
Ser. B Aa3 6.00 11/15/29 1,000 1,044,400
New York St. Dorm. Auth. Rev.,
Albany Cnty. Airport Baa1 5.25 04/01/17 3,760 3,622,760
Cap. Apprec. Court Facs.,
A.M.B.A.C. Aa1 Zero 08/01/23 4,500 1,232,955
City Univ. Refunding Bonds Baa1 6.00 07/01/14 6,500 6,959,290
City Univ. Sys. Cons., Ser. D Baa1 7.00 07/01/09 1,880 2,078,585
Coll. & Univ. Ed., M.B.I.A.,
A.M.T. Aaa Zero 07/01/04 2,255 1,895,643
Ins. Marymount Manhattan College AA(b) 6.38 07/01/15 1,875 2,031,506
Ins. Marymount Manhattan College AA(b) 6.38 07/01/16 1,975 2,135,489
Ins. Marymount Manhattan College AA(b) 6.38 07/01/17 2,080 2,244,445
Ins. New York Univ., Ser. A,
M.B.I.A. Aaa 5.75 07/01/27 5,000 5,242,450
Mental Hlth. Svcs. Facs. Impvt.,
Ser. B A3 6.50 08/15/11 3,000 3,384,090
Mount Sinai Health, Ser. A Baa1 6.50 07/01/25 2,000 2,109,600
St. Univ. Edl. Facs., Ser. A A3 5.25 05/15/15 8,600 8,669,574
New York St. Energy Resch. & Dev.
Auth. Rev.,
Brooklyn Union Gas Co., Ser. B,
M.B.I.A., A.M.T. Aaa 6.75 02/01/24 2,000 2,101,500
Con. Edison Co., Ser. A, A.M.T. A1 7.50 01/01/26 4,775 4,833,542
New York St. Environ. Facs. Corp.,
Poll. Ctrl. Rev., Ser. E Aaa 6.50 06/15/14 35 36,243
See Notes to Financial Statements
B-205
PRUDENTIAL MUNICIPAL SERIES FUND New York Series
Portfolio of Investments as of August 31, 2000 Cont'd.
MOODY'S PRINCIPAL
RATING INTEREST MATURITY AMOUNT VALUE
DESCRIPTION (a) (UNAUDITED) RATE DATE (000) (NOTE 1)
- -----------------------------------------------------------------------------------------------------------
New York St. Hsg. Fin. Agcy. Rev.,
Ser. A,
Multifamily Hsg. Aa1 7.05% 08/15/24 $ 1,000 $ 1,042,150
St. Univ. Constr., E.T.M. Aaa 8.00 05/01/11 3,600 4,432,932
New York St. Local Gov't. Assist.
Corp.,
Ser. C A3 Zero 04/01/14 8,882 4,370,211
Ser. E A3 6.00 04/01/14 5,385 5,855,541
New York St. Med. Care Facs. Fin.
Agcy. Rev.,
Mental Hlth. Svcs., Ser. A A3 7.50 08/15/07 310(d) 319,892
New York Hosp., Ser. A,
A.M.B.A.C., F.H.A. Aaa 6.50 08/15/29 3,000(d) 3,301,740
New York St. Mun. Bond Bank Agcy.,
Spec. Proj. Rev., Ser. A AAA 6.75 03/15/11 3,000(d) 3,134,040
New York St. Thrwy. Auth.,
Highway & Bridge Trust Fund,
Ser. B, F.G.I.C. Aaa 6.00 04/01/14 2,220(c) 2,377,531
Svc. Contract Rev., Local Highway
& Bridge Baa1 6.45 04/01/15 1,000(c) 1,098,400
New York St. Urban Dev. Corp.
Rev.,
Correctional Cap. Facs.,
A.M.B.A.C. Aaa Zero 01/01/08 10,000 7,057,000
St. Facs. Baa1 5.75 04/01/12 5,750 6,058,142
St. Facs. Baa1 5.60 04/01/15 2,000 2,052,120
Subordinated Lien Corp. A2 5.50 07/01/22 5,000 4,827,150
Otsego Cnty. Ind. Dev. Agcy.,
Civic Facs. Rev. Baa1 5.50 07/01/19 2,520 2,433,841
Port Auth. of New York & New
Jersey, Ser. 70, A.M.T. A1 7.25 08/01/25 1,000 1,012,100
Puerto Rico Commonwealth,
Hwy. & Transn. Auth. Rev.,
M.B.I.A. Aaa 5.00 07/01/28 3,660 3,437,618
Pub. Impvt., M.B.I.A. Aaa Zero 07/01/19 3,745 1,372,880
Pub. Impvt. Rfdg., M.B.I.A. Aaa 7.00 07/01/10 1,250 1,500,425
Rites Pennsylvania 625,
A.M.B.A.C. NR 9.98 07/01/10 3,250(e) 4,518,117
See Notes to Financial Statements
B-206
PRUDENTIAL MUNICIPAL SERIES FUND New York Series
Portfolio of Investments as of August 31, 2000 Cont'd.
MOODY'S PRINCIPAL
RATING INTEREST MATURITY AMOUNT VALUE
DESCRIPTION (a) (UNAUDITED) RATE DATE (000) (NOTE 1)
- -----------------------------------------------------------------------------------------------------------
Puerto Rico Indl. Tourist Edl.
Med. & Envr. Ctl. Facs. Cogen
Facility Proj. Baa2 6.63% 06/01/26 $ 3,500 $ 3,648,505
Puerto Rico Pub. Bldgs. Auth.
Rev., Gtd. Gov't. Facs., Ser. A,
A.M.B.A.C. Aaa 6.25 07/01/15 2,050 2,318,284
Rockland Cnty. Solid Waste Mgmt.
Auth., Ser. B, A.M.B.A.C., A.M.T. Aaa 5.63 12/15/14 375(c) 403,099
Scotia Hsg. Auth. Rev., Coburg
Village Inc. Proj., Ser. A NR 6.20 07/01/38 4,000 3,366,200
Suffolk Cnty. Ind. Dev. Agcy. Rev.
Cogen Partners, Facs., A.M.T NR 5.50 01/01/23 2,000 1,712,500
Continuing Care Retirement
Cmnty., Ser. A NR 7.25 11/01/28 2,250 2,251,553
Virgin Islands Pub. Fin. Auth.
Rev., Ser. A BBB 6.50 10/01/24 1,000 1,035,890
Watervliet Hsg. Auth., Sen. Res.
Beltrone Lvng. Ctr. Proj., Ser. A NR 6.13 06/01/38 4,000 3,407,520
------------
Total long-term investments (cost
$219,949,931) $230,587,447
------------
SHORT-TERM INVESTMENTS 0.8%
- -----------------------------------------------------------------------------------------------------------
New York St. Energy Res. & Dev.
Auth., Poll. Ctrl. Rev., F.R.D.D. VMIG1 4.20 09/01/00 600 600,000
New York St. Local Gvrnmnt.
Assist. Corp. Mun., Secs.,
F.R.D.D. A1+ 4.35 09/01/00 1,300 1,300,000
------------
Total short-term investments (cost
$1,900,000) 1,900,000
------------
TOTAL INVESTMENTS 98.5%
(COST $221,849,931; NOTE 4) 232,487,447
Other assets in excess of
liabilities 1.5% 3,449,890
------------
NET ASSETS 100% $235,937,337
============
See Notes to Financial Statements
B-207
PRUDENTIAL MUNICIPAL SERIES FUND New York Series
Portfolio of Investments as of August 31, 2000 Cont'd.
(a) The following abbreviations are used in portfolio descriptions:
A.M.B.A.C.--American Municipal Bond Assurance Corporation.
A.M.T.--Alternative Minimum Tax.
E.T.M.--Escrowed to Maturity.
F.G.I.C.--Financial Guaranty Insurance Company.
F.H.A.--Federal Housing Administration.
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/or direct U.S.
guaranteed obligations.
(d) For purposes of amortized cost valuation, the maturity date of Floating Rate
Demand Notes is considered to be the later of the next date on which the
security can be redeemed at par, or the next date on which the rate of
interest is adjusted.
(e) Inverse floating rate bond. The coupon is inversely indexed to a floating
interest rate. The rate shown is the rate at August 31, 2000.
NR--Not Rated by Moody's or Standard & Poor's.
The Fund's current Statement of Additional Information contains a description of
Moody's and Standard & Poor's ratings.
See Notes to Financial Statements
B-208
PRUDENTIAL MUNICIPAL SERIES FUND New York Series
Statement of Assets and Liabilities
AUGUST 31,
2000
- ----------------------------------------------------------------------------------------
ASSETS
Investments, at value (cost $221,849,931) $ 232,487,447
Cash 101,116
Interest receivable 2,984,468
Receivable for investments sold 928,493
Unrealized appreciation on interest rate swap 71,948
Receivable for Series shares sold 10,418
Other assets 5,853
-----------------
TOTAL ASSETS 236,589,743
-----------------
LIABILITIES
Payable for Series shares reacquired 225,049
Accrued expenses and other liabilities 137,282
Dividends payable 122,728
Management fee payable 99,582
Distribution fee payable 61,260
Deferred trustees' fees 6,505
-----------------
TOTAL LIABILITIES 652,406
-----------------
NET ASSETS $ 235,937,337
=================
Net assets were comprised of:
Shares of beneficial interest, at par $ 203,333
Paid-in capital in excess of par 225,151,955
-----------------
225,355,288
Accumulated net realized loss on investments (127,415)
Net unrealized appreciation on investments 10,709,464
-----------------
Net assets, August 31, 2000 $ 235,937,337
=================
See Notes to Financial Statements
B-209
PRUDENTIAL MUNICIPAL SERIES FUND New York Series
Statement of Assets and Liabilities Cont'd.
AUGUST 31, 2000
- ----------------------------------------------------------------------------------------
Class A:
Net asset value and redemption price per share
($182,602,283 / 15,737,960 shares of beneficial interest
issued and outstanding) $11.60
Maximum sales charge (3% of offering price) .36
-----------------
Maximum offering price to public $11.96
=================
Class B:
Net asset value, offering price and redemption price per
share ($51,050,612 / 4,398,551 shares of beneficial
interest issued and outstanding) $11.61
=================
Class C:
Net asset value and redemption price per share ($1,883,994
/ 162,330 shares of beneficial interest issued and
outstanding) $11.61
Sales charge (1% of offering price) .12
-----------------
Offering price to public $11.73
=================
Class Z:
Net asset value, offering price and redemption price per
share ($400,448 / 34,473 shares of beneficial interest
issued and outstanding) $11.62
=================
See Notes to Financial Statements
B-210
PRUDENTIAL MUNICIPAL SERIES FUND New York Series
Statement of Operations
YEAR
ENDED
AUGUST 31, 2000
- ----------------------------------------------------------------------------------------
NET INVESTMENT INCOME
Income
Interest $ 14,415,027
-----------------
Expenses
Management fee 1,201,617
Distribution fee--Class A 445,757
Distribution fee--Class B 299,393
Distribution fee--Class C 13,590
Transfer agent's fees and expenses 112,000
Custodian's fees and expenses 90,000
Reports to shareholders 59,000
Registration fees 35,000
Legal fees and expenses 25,000
Audit fees 10,000
Trustees' fees and expenses 9,000
Miscellaneous expense 11,688
-----------------
TOTAL EXPENSES 2,312,045
Less: Custodian fee credit (1,308)
-----------------
Net expenses 2,310,737
-----------------
NET INVESTMENT INCOME 12,104,290
-----------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Net realized gain on:
Investment transactions 56,812
Financial futures transactions 212,254
-----------------
269,066
-----------------
Net change in unrealized appreciation (depreciation) on:
Investments 1,349,163
Financial futures (68,250)
Interest rate swaps 71,948
-----------------
1,352,861
-----------------
Net gain on investments 1,621,927
-----------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 13,726,217
=================
See Notes to Financial Statements
B-211
PRUDENTIAL MUNICIPAL SERIES FUND New York Series
Statement of Changes in Net Assets
YEAR ENDED AUGUST 31,
----------------------------------
2000 1999
- ------------------------------------------------------------------------------------
INCREASE/(DECREASE) IN NET ASSETS
OPERATIONS
Net investment income $ 12,104,290 $ 12,698,298
Net realized gain on investment transactions 269,066 39,076
Net change in unrealized appreciation
(depreciation) on investments 1,352,861 (15,675,222)
----------------- -------------
Net increase (decrease) in net assets
resulting from operations 13,726,217 (2,937,848)
----------------- -------------
DIVIDENDS AND DISTRIBUTIONS (NOTE 1):
Dividends from net investment income
Class A (9,099,163) (8,660,657)
Class B (2,904,075) (3,946,857)
Class C (83,410) (66,182)
Class Z (17,642) (24,602)
----------------- -------------
(12,104,290) (12,698,298)
----------------- -------------
Distributions from net realized gains
Class A -- (1,374,194)
Class B -- (688,548)
Class C -- (10,565)
Class Z -- (4,126)
----------------- -------------
-- (2,077,433)
----------------- -------------
Distributions in excess of net realized
gains
Class A -- (234,342)
Class B -- (117,417)
Class C -- (1,803)
Class Z -- (702)
----------------- -------------
-- (354,264)
----------------- -------------
SERIES SHARE TRANSACTIONS (NET OF SHARE
CONVERSIONS) (NOTE 5):
Net proceeds from shares sold 16,110,059 25,657,665
Net asset value of shares issued in
reinvestment of dividends and
distributions 7,577,034 9,398,834
Cost of shares reacquired (43,901,999) (40,612,658)
----------------- -------------
Net decrease in net assets from Series share
transactions (20,214,906) (5,556,159)
----------------- -------------
Total decrease (18,592,979) (23,624,002)
NET ASSETS
Beginning of year 254,530,316 278,154,318
----------------- -------------
End of year $ 235,937,337 $ 254,530,316
================= =============
See Notes to Financial Statements
B-212
PRUDENTIAL MUNICIPAL SERIES FUND New York Series
Notes to Financial Statements
Prudential Municipal Series Fund (the 'Fund') is registered under the
Investment Company Act of 1940 as an open-end investment company. The Fund was
organized as a Massachusetts business trust on May 18, 1984 and consists of 11
series. The monies of each series are invested in separate, independently
managed portfolios. The New York Series (the 'Series') commenced investment
operations in September 1984. The Series is diversified and its investment
objective is to maximize current income that is exempt from New York State, New
York City and federal income taxes consistent with the preservation of capital,
and in conjunction therewith, the Series may invest in debt securities with the
potential for capital gain. The Series seeks to achieve the objective by
investing primarily in New York State, municipal and local government
obligations and obligations of other qualifying issuers. The ability of the
issuers of the securities held by the Series to meet their obligations may be
affected by economic developments in a specific state, industry or region.
NOTE 1. ACCOUNTING POLICIES
The following is a summary of significant accounting policies followed by the
Fund, and the Series, in the preparation of its financial statements.
SECURITIES VALUATIONS: The Series values municipal securities
(including commitments to purchase such securities on a 'when-issued' basis) on
the basis of prices provided by a pricing service which uses information with
respect to transactions in bonds, quotations from bond dealers, market
transactions in comparable securities and various relationships between
securities in determining values. If market quotations are not readily available
from such pricing service, a security is valued at its fair value as determined
under procedures established by the Trustees.
Short-term securities which mature in more than 60 days are valued at
current market quotations. Short-term securities which mature in 60 days or less
are valued at amortized cost.
All securities are valued as of 4:15 p.m., New York time.
FINANCIAL FUTURES CONTRACTS: A financial futures contract is an
agreement to purchase (long) or sell (short) an agreed amount of securities at a
set price for delivery on a future date. Upon entering into a financial futures
contract, the Series is required to pledge to the broker an amount of cash
and/or other assets equal to a certain percentage of the contract amount. This
amount is known as the 'initial margin.' Subsequent payments, known as
'variation margin,' are made or received by the Series each day, depending on
the daily fluctuations in the value of the underlying security. Such variation
margin is recorded for financial statement purposes on a daily basis as
unrealized gain or loss. When the contract expires or is closed, the gain or
B-213
PRUDENTIAL MUNICIPAL SERIES FUND New York Series
Notes to Financial Statements Cont'd.
loss is realized and is presented in the statement of operations as net realized
gain (loss) on financial futures contracts.
The Series invests in financial futures contracts in order to hedge its
existing portfolio securities or securities the Series intends to purchase,
against fluctuations in value caused by changes in prevailing interest rates.
Should interest rates move unexpectedly, the Series may not achieve the
anticipated benefits of the financial futures contracts and may realize a loss.
The use of futures transactions involves the risk of imperfect correlation in
movements in the price of futures contracts, interest rates and the underlying
hedged assets.
OPTIONS: The Series 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 Series
currently owns or intends to purchase. The Series' principal reason for writing
options is to realize, through receipt of premiums, a greater current return
than would be realized on the underlying security alone. When the Series
purchases an option, it pays a premium and an amount equal to that premium is
recorded as an investment. When the Series 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 Series realizes a gain or loss
to the extent of the premium received or paid. If an option is exercised, the
premium received or paid is an adjustment to the proceeds from the sale or the
cost of the purchase in determining whether the Series has realized a gain or
loss. The difference between the premium and the amount received or paid on
effecting a closing purchase or sale transaction is also treated as a realized
gain or loss. Gain or loss on purchased options is included in net realized gain
(loss) on investment transactions. Gain or loss on written options is presented
separately as net realized gain (loss) on written option transactions.
The Series, as writer of an option, may have no control over whether the
underlying securities may be sold (called) or purchased (put). As a result, the
Series bears the market risk of an unfavorable change in the price of the
security underlying the written option. The Series, as purchaser of an option,
bears the risk of the potential inability of the counterparties to meet the
terms of their contracts.
INTEREST RATE SWAPS: In a simple interest rate swap, one investor pays
a floating rate of interest on a notional principal amount and receives a fixed
rate of interest on the same notional principal amount for a specified period of
time. Alternatively, an investor may pay a fixed rate and receive a floating
rate. Interest rate swaps were conceived as asset/liability management tools. In
more complex swaps, the notional principal amount may decline (or amortize) over
time.
During the term of the swap, changes in the value of the swap are
recognized as unrealized gains or losses by 'marking-to-market' to reflect the
market value of the
B-214
PRUDENTIAL MUNICIPAL SERIES FUND New York Series
Notes to Financial Statements Cont'd.
swap. When the swap is terminated, the Series will record a realized gain on
loss equal to the difference between the proceeds from (or cost of) the closing
transaction and the Series' basis in the contract, if any.
The Series is exposed to credit loss in the event of non-performance by
the other party to the interest rate swap. However, the Series does not
anticipate non-performance by any counterparty.
SECURITIES TRANSACTIONS AND NET INVESTMENT INCOME: Securities
transactions are recorded on the trade date. Realized gains and losses on sales
of securities are calculated on the identified cost basis. Interest income is
recorded on the accrual basis. The Series amortizes premiums and accretes
original issue discount paid on purchases of portfolio securities as adjustments
to interest income. Expenses are recorded on the accrual basis which may require
the use of certain estimates by management.
Net investment income (other than distribution fees), and unrealized and
realized gains or losses are allocated daily to each class of shares based upon
the relative proportion of net assets of each class at the beginning of the day.
FEDERAL INCOME TAXES: For federal income tax purposes, each series in
the Fund is treated as a separate taxpaying entity. It is the intent of the
Series to continue to meet the requirements of the Internal Revenue Code
applicable to regulated investment companies and to distribute all of its net
income to shareholders. For this reason, no federal income tax provision is
required.
DIVIDENDS AND DISTRIBUTIONS: The Series declares daily dividends from
net investment income. Payment of dividends is made monthly. Distributions of
net capital gains, if any, are made annually.
Income distributions and capital gain distributions are determined in
accordance with income tax regulations which may differ from generally accepted
accounting principles.
CUSTODY FEE CREDITS: The Fund has an arrangement with its custodian
bank, whereby uninvested monies earn credits which reduce the fees charged by
the custodian.
RECLASSIFICATION OF CAPITAL ACCOUNTS: The Fund accounts and reports for
distributions to shareholders in accordance with the American Institute of
Certified Public Accountants, Statement of Position 93-2: Determination,
Disclosure, and Financial Statement Presentation of Income; Capital Gain, and
Return of Capital Distributions by Investment Companies. The effect of applying
this statement was to increase accumulated net realized loss on investments by
$42,217, and increase paid-in capital by $42,217, due to the sale of securities
purchased with market discount during the year ended August 31, 2000. Net
investment income, net realized gains and net assets were not affected by this
change.
B-215
PRUDENTIAL MUNICIPAL SERIES FUND New York Series
Notes to Financial Statements Cont'd.
NOTE 2. AGREEMENTS
The Fund has a management agreement with Prudential Investments Fund Management
LLC ('PIFM'). Pursuant to this agreement, PIFM has responsibility for all
investment advisory services and supervises the subadviser's performance of such
services. PIFM has entered into a subadvisory agreement with The Prudential
Investment Corporation ('PIC'). The subadvisory agreement provides that PIC will
furnish investment advisory services in connection with the management of the
Fund. In connection therewith, PIC is obligated to keep certain books and
records of the Fund. PIFM continues to have responsibility for all investment
advisory services pursuant to the Management Agreement and supervises PIC's
performance of such services. PIFM pays for the services of PIC, the cost of
compensation of officers of the Fund, occupancy and certain clerical and
bookkeeping costs of the Fund. The Fund bears all other costs and expenses.
The management fee paid PIFM is computed daily and payable monthly, at an
annual rate of .50 of 1% of the average daily net assets of the Series.
Effective January 1, 2000, the subadvisory fee paid to PIC by PIFM is
computed daily and payable monthly at an annual rate of .250 of 1% of the
average daily net assets of the Fund. Prior to January 1, 2000, PIC was
reimbursed by PIFM for reasonable costs and expenses incurred in furnishing
investment advisory services. The change in the subadvisory fee structure has no
impact on the management fee charged to the Fund or its shareholders.
The Fund has a distribution agreement with Prudential Investment
Management Services LLC ('PIMS'), which acts as the distributor of the Class A,
Class B, Class C and Class Z shares of the Fund. The Fund compensates PIMS for
distributing and servicing the Fund's Class A, Class B and Class C shares,
pursuant to a plan of distribution, (the 'Class A, B and C Plans'), regardless
of expenses actually incurred by them. The distribution fees are accrued daily
and payable monthly. No distribution or service fees are paid to PIMS as
distributor of the Class Z shares of the Fund.
Pursuant to the Class A, B and C Plans, the Fund compensates PIMS for
distribution-related activities at an annual rate of up to .30 of 1%, .50 of 1%
and 1% of the average daily net assets of the Class A, B and C shares,
respectively. Such expenses under the Plans were .25 of 1%, .50 of 1% and .75 of
1% of the average daily net assets of the Class A, B and C shares, respectively,
for the year ended August 31, 2000.
PIMS has advised the Series that it received approximately $9,800 and
$5,000 in front-end sales charges resulting from sales of Class A and Class C
shares, respectively during the year ended August 31, 2000. From these fees,
PIMS paid such sales
B-216
PRUDENTIAL MUNICIPAL SERIES FUND New York Series
Notes to Financial Statements Cont'd.
charges to affiliated broker-dealers, which in turn paid commissions to
salespersons and incurred other distribution costs.
PIMS has advised the Series that for the year ended August 31, 2000, it
received approximately $95,500 and $2,000 in contingent deferred sales charges
imposed upon certain redemptions by Class B and C shareholders, respectively.
PIFM, PIMS and PIC are wholly owned subsidiaries of The Prudential
Insurance Company of America.
The Series, along with other affiliated registered investment companies
(the 'Funds'), entered into a syndicated credit agreement ('SCA') with an
unaffiliated lender. The maximum commitment under the SCA is $1 billion.
Interest on any such borrowings will be at market rates. For the period March
11, 1999 through March 9, 2000, the commitment fee was .065 of 1%. Subsequent to
March 9, 2000 the SCA was renewed with a maximum commitment of $1 billion at a
commitment fee of .080 of 1% of the unused portion of the facility. The
expiration date of the SCA is March 9, 2001. The fund did not borrow any amounts
pursuant to either agreement during the year ended August 31, 2000. The purpose
of the credit agreement is to serve as an alternative source of funding for
capital share redemptions.
NOTE 3. OTHER TRANSACTIONS WITH AFFILIATES
Prudential Mutual Fund Services LLC ('PMFS'), a wholly owned subsidiary of PIFM,
serves as the Fund's transfer agent. During the year ended August 31, 2000, the
Series incurred fees of approximately $87,600 for the services of PMFS. As of
August 31, 2000, approximately $6,600 of such fees were due to PMFS. Transfer
agent fees and expenses in the Statement of Operations include certain
out-of-pocket expenses paid to nonaffiliates.
NOTE 4. PORTFOLIO SECURITIES
Purchases and sales of portfolio securities of the Series, excluding short-term
investments, for the year ended August 31, 2000 were $76,423,959 and
$101,264,584, respectively.
The cost basis of investments for federal income tax purposes at August
31, 2000 was substantially the same as for financial reporting purposes and
accordingly, net unrealized appreciation on investments for federal income tax
purposes was $10,637,516 (gross unrealized appreciation--$13,293,654, gross
unrealized depreciation--$2,656,138).
For federal tax purposes, the Series has a capital loss carryforward at
August 31, 2000 of approximately $112,000 that expires in 2008. Accordingly, no
capital gains distributions are expected to be paid to shareholders until net
gains have been realized in excess of such amount.
The Series entered into an interest rate swap agreement with Morgan
Stanley Capital Services, Inc. The Series receives the fixed rate each June 29
and December
B-217
PRUDENTIAL MUNICIPAL SERIES FUND New York Series
Notes to Financial Statements Cont'd.
29 up to and including December 29, 2010 (the 'Termination Date') and the Series
pays the Bond Market AssociationE Municipal Swap Index announced by Municipal
Market Data each Wednesday, or if such day is not a New York Business Day, then
the next New York Business Day during the Calculation Period (the 'Determination
Date').
Details of the open interest rate swap at August 31, 2000 is as follows:
NOTIONAL
AMOUNT FIXED FLOATING TERMINATION UNREALIZED
(000) TYPE RATE RATE DATE APPRECIATION
- -------- ----------------- -------------- ------------ ------------- -------------
$5,000 Forward Rate 5.2525% B.M.A. 12/29/10 $71,948
NOTE 5. CAPITAL
The Series offers Class A, Class B, Class C and Class Z shares. Class A shares
are sold with a front-end sales charge of up to 3%. Class B shares are sold with
a contingent deferred sales charge which declines from 5% to zero depending on
the period of time the shares are held. Class C shares are sold with a front-end
sales charge of 1% and a contingent deferred sales charge of 1% during the first
18 months. Class B shares 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.
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:
CLASS A SHARES AMOUNT
- ------- ---------- ------------
Year ended August 31, 2000:
Shares sold 952,290 $ 10,817,733
Shares issued in reinvestment of dividends and distributions 513,570 5,791,161
Shares reacquired (2,605,186) (29,357,261)
---------- ------------
Net increase (decrease) in shares outstanding before
conversion (1,139,326) (12,748,367)
Shares issued upon conversion from Class B 1,627,269 18,432,187
---------- ------------
Net increase (decrease) in shares outstanding 487,943 $ 5,683,820
========== ============
Year ended August 31, 1999:
Shares sold 1,261,310 $ 15,319,992
Shares issued in reinvestment of dividends and distributions 538,733 6,502,373
Shares reacquired (1,697,677) (20,438,469)
---------- ------------
Net increase (decrease) in shares outstanding before
conversion 102,366 1,383,896
Shares issued upon conversion from Class B 792,273 9,621,083
---------- ------------
Net increase (decrease) in shares outstanding 894,639 $ 11,004,979
========== ============
B-218
PRUDENTIAL MUNICIPAL SERIES FUND New York Series
Notes to Financial Statements Cont'd.
CLASS B SHARES AMOUNT
- ------- ---------- ------------
Year ended August 31, 2000:
Shares sold 387,267 $ 4,378,314
Shares issued in reinvestment of dividends and distributions 150,965 1,702,833
Shares reacquired (1,202,447) (13,523,038)
---------- ------------
Net increase (decrease) in shares outstanding before
conversion (664,215) (7,441,891)
Shares reacquired upon conversion into Class A (1,627,269) (18,432,187)
---------- ------------
Net increase (decrease) in shares outstanding (2,291,484) $(25,874,078)
========== ============
Year ended August 31, 1999:
Shares sold 756,576 $ 9,175,430
Shares issued in reinvestment of dividends and distributions 232,603 2,811,896
Shares reacquired (1,620,967) (19,593,950)
---------- ------------
Net increase (decrease) in shares outstanding before
conversion (631,788) (7,606,624)
Shares reacquired upon conversion into Class A (792,127) (9,621,083)
---------- ------------
Net increase (decrease) in shares outstanding (1,423,915) $(17,227,707)
========== ============
CLASS C
- -------
Year ended August 31, 2000:
Shares sold 52,983 $ 599,596
Shares issued in reinvestment of dividends and distributions 5,890 66,447
Shares reacquired (55,679) (625,824)
---------- ------------
Net increase (decrease) in shares outstanding 3,194 $ 40,219
========== ============
Year ended August 31, 1999:
Shares sold 75,388 $ 909,212
Shares issued in reinvestment of dividends and distributions 5,423 65,391
Shares reacquired (25,670) (306,468)
---------- ------------
Net increase (decrease) in shares outstanding 55,141 $ 668,135
========== ============
CLASS Z
- -------
Year ended August 31, 2000:
Shares sold 27,568 $ 314,416
Shares issued in reinvestment of dividends and distributions 1,468 16,593
Shares reacquired (34,866) (395,876)
---------- ------------
Net increase (decrease) in shares outstanding (5,830) $ (64,867)
v
Year ended August 31, 1999:
Shares sold 20,888 $ 253,031
Shares issued in reinvestment of dividends and distributions 1,592 19,174
Shares reacquired (22,527) (273,771)
---------- ------------
Net increase (decrease) in shares outstanding (47) $ (1,566)
========== ============
B-219
PRUDENTIAL MUNICIPAL SERIES FUND New York Series
Financial Highlights
CLASS A
-----------------
YEAR ENDED
AUGUST 31, 2000
- ----------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE:
NET ASSET VALUE, BEGINNING OF YEAR $ 11.50
-----------------
Income from investment operations
Net investment income .58
Net realized and unrealized gain (loss) on investment
transactions .10
-----------------
Total from investment operations .68
-----------------
LESS DISTRIBUTIONS
Dividends from net investment income (.58)
Distributions in excess of net investment income --
Distributions from net realized gains --
Distributions in excess of capital gains --
-----------------
Total distributions (.58)
-----------------
Net asset value, end of year $ 11.60
=================
TOTAL RETURN(b): 6.17%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000) $ 182,602
Average net assets (000) $ 178,303
Ratios to average net assets:
Expenses, including distribution fees .90%
Expenses, excluding distribution fees .65%
Net investment income 5.10%
For Class A, B, C and Z shares:
Portfolio turnover rate 32%
- ------------------------------
(a) Net of management fee waiver.
(b) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each year reported and includes reinvestment of dividends and
distributions.
(c) Less than $.005 per share.
See Notes to Financial Statements
B-220
PRUDENTIAL MUNICIPAL SERIES FUND New York Series
Financial Highlights Cont'd.
CLASS A
- -------------------------------------------------------------------------------------
YEAR ENDED AUGUST 31,
- -------------------------------------------------------------------------------------
1999 1998 1997 1996
- -------------------------------------------------------------------------------------
$ 12.30 $ 11.94 $ 11.77 $ 11.91
- ---------------- ---------------- ---------------- ----------------
.57 .60 .61(a) .63(a)
(.69) .42 .43 (.09)
- ---------------- ---------------- ---------------- ----------------
(.12) 1.02 1.04 .54
- ---------------- ---------------- ---------------- ----------------
(.57) (.60) (.61) (.63)
-- (.01) --(c) --
(.09) (.05) (.26) (.05)
(.02) -- -- --
- ---------------- ---------------- ---------------- ----------------
(.68) (.66) (.87) (.68)
- ---------------- ---------------- ---------------- ----------------
$ 11.50 $ 12.30 $ 11.94 $ 11.77
================ ================ ================ ================
(1.07)% 8.71% 9.19% 4.53%
$175,307 $176,555 $172,471 $168,037
$181,951 $174,485 $173,963 $168,291
.84% .73% .68%(a) .68%(a)
.64% .63% .58%(a) .58%(a)
4.76% 4.93% 5.15%(a) 5.24%(a)
11% 33% 43% 92%
See Notes to Financial Statements
B-221
PRUDENTIAL MUNICIPAL SERIES FUND New York Series
Financial Highlights Cont'd.
CLASS B
-----------------
YEAR ENDED
AUGUST 31, 2000
- ----------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE:
NET ASSET VALUE, BEGINNING OF YEAR $ 11.50
--------
Income from investment operations
Net investment income .55
Net realized and unrealized gain (loss) on investment
transactions .11
--------
Total from investment operations .66
--------
LESS DISTRIBUTIONS
Dividends from net investment income (.55)
Distributions in excess of net investment income --
Distributions from net realized gains --
Distributions in excess of capital gains --
--------
Total distributions (.55)
--------
Net asset value, end of year $ 11.61
========
TOTAL RETURN(b): 5.99%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000) $51,051
Average net assets (000) $59,879
Ratios to average net assets:
Expenses, including distribution fees 1.15%
Expenses, excluding distribution fees .65%
Net investment income 4.85%
- ------------------------------
(a) Net of management fee waiver.
(b) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each year reported and includes reinvestment of dividends and
distributions.
(c) Less than $.005 per share.
See Notes to Financial Statements
B-222
PRUDENTIAL MUNICIPAL SERIES FUND New York Series
Financial Highlights Cont'd.
CLASS B
- -------------------------------------------------------------------------------------
YEAR ENDED AUGUST 31,
- -------------------------------------------------------------------------------------
1999 1998 1997 1996
- -------------------------------------------------------------------------------------
$ 12.30 $ 11.94 $ 11.77 $ 11.91
-------- ---------------- ---------------- ----------------
.54 .55 .56(a) .58(a)
(.69) .42 .43 (.09)
-------- ---------------- ---------------- ----------------
(.15) .97 .99 .49
-------- ---------------- ---------------- ----------------
(.54) (.55) (.56) (.58)
-- (.01) --(c) --
(.09) (.05) (.26) (.05)
(.02) -- -- --
-------- ---------------- ---------------- ----------------
(.65) (.61) (.82) (.63)
-------- ---------------- ---------------- ----------------
$ 11.50 $ 12.30 $ 11.94 $ 11.77
======== ================ ================ ================
(1.37)% 8.28% 8.76% 4.12%
$ 76,929 $ 99,823 $112,658 $135,764
$ 88,626 $104,653 $122,744 $152,656
1.13% 1.13% 1.08%(a) 1.08%(a)
.63% .63% .58%(a) .58%(a)
4.45% 4.53% 4.75%(a) 4.84%(a)
See Notes to Financial Statements
B-223
PRUDENTIAL MUNICIPAL SERIES FUND New York Series
Financial Highlights Cont'd.
CLASS C
-----------------
YEAR ENDED
AUGUST 31, 2000
- ----------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE:
NET ASSET VALUE, BEGINNING OF YEAR $ 11.50
-------
Income from investment operations
Net investment income .52
Net realized and unrealized gain (loss) on investment
transactions .11
-------
Total from investment operations .63
-------
LESS DISTRIBUTIONS
Dividends from net investment income (.52)
Distributions in excess of net investment income --
Distributions from net realized gains --
Distributions in excess of capital gains --
-------
Total distributions (.52)
-------
Net asset value, end of year $ 11.61
=======
TOTAL RETURN(b): 5.73%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000) $ 1,884
Average net assets (000) $ 1,812
Ratios to average net assets:
Expenses, including distribution fees 1.40%
Expenses, excluding distribution fees .65%
Net investment income 4.60%
- ------------------------------
(a) Net of management fee waiver.
(b) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each year reported and includes reinvestment of dividends and
distributions.
(c) Less than $.005 per share.
See Notes to Financial Statements
B-224
PRUDENTIAL MUNICIPAL SERIES FUND New York Series
Financial Highlights Cont'd.
CLASS C
- -------------------------------------------------------------------------------------
YEAR ENDED AUGUST 31,
- -------------------------------------------------------------------------------------
1999 1998 1997 1996
- -------------------------------------------------------------------------------------
$12.30 $11.94 $11.77 $11.91
------- ------- ------- -------
.51 .52 .53(a) .55(a)
(.69) .42 .43 (.09)
------- ------- ------- -------
(.18) .94 .96 .46
------- ------- ------- -------
(.51) (.52) (.53) (.55)
-- (.01) --(c) --
(.09) (.05) (.26) (.05)
(.02) -- -- --
------- ------- ------- -------
(.62) (.58) (.79) (.60)
------- ------- ------- -------
$11.50 $12.30 $11.94 $11.77
======== ======= ======= =======
(1.62)% 8.01% 8.49% 3.86%
$1,830 $1,279 $ 780 $ 876
$1,566 $ 969 $ 798 $ 659
1.39% 1.38% 1.33%(a) 1.33%(a)
.64% .63% .58%(a) .58%(a)
4.23% 4.28% 4.50%(a) 4.59%(a)
See Notes to Financial Statements
B-225
PRUDENTIAL MUNICIPAL SERIES FUND New York Series
Financial Highlights Cont'd.
CLASS Z
-----------------
YEAR ENDED
AUGUST 31, 2000
- ----------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE:
NET ASSET VALUE, BEGINNING OF PERIOD $ 11.51
-------
Income from investment operations
Net investment income .61
Net realized and unrealized gain (loss) on investment
transactions .11
-------
Total from investment operations .72
-------
LESS DISTRIBUTIONS
Dividends from net investment income (.61)
Distributions in excess of net investment income --
Distributions from net realized gains --
Distributions in excess of capital gains --
-------
Total distributions (.61)
-------
Net asset value, end of period $ 11.62
=======
TOTAL RETURN(b): 6.53%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000) $ 400
Average net assets (000) $ 330
Ratios to average net assets:
Expenses, including distribution fees .65%
Expenses, excluding distribution fees .65%
Net investment income 5.35%
- ------------------------------
(a) Net of management fee waiver.
(b) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each period reported and includes reinvestment of dividends and
distributions. Total returns for periods of less than a full year are not
annualized.
(c) Less than $.005 per share.
(d) Commencement of offering of Class Z shares.
(e) Annualized.
See Notes to Financial Statements
B-226
PRUDENTIAL MUNICIPAL SERIES FUND New York Series
Financial Highlights Cont'd.
CLASS Z
- ---------------------------------------------------------------------------------------
YEAR ENDED AUGUST 31, SEPTEMBER 18, 1996(D)
- ------------------------------------------ THROUGH AUGUST 31,
1999 1998 1997
- ---------------------------------------------------------------------------------------
$12.31 $11.95 $12.09
------- ------- -------
.60 .62 .46(a)
(.69) .42 .12
------- ------- -------
(.09) 1.04 .58
------- ------- -------
(.60) (.62) (.46)
-- (.01) --(c)
(.09) (.05) (.26)
(.02) -- --
------- ------- -------
(.71) (.68) (.72)
------- ------- -------
$11.51 $12.31 $11.95
------- ------- -------
------- ------- -------
(0.87)% 8.81% 5.02%
$ 464 $ 497 $ 28
$ 496 $ 116 $ 11
.63% .63% .58%(a)/(e)
.63% .63% .58%(a)/(e)
4.96% 5.03% 5.25%(a)/(e)
See Notes to Financial Statements
B-227
PRUDENTIAL MUNICIPAL SERIES FUND New York Series
Report of Independent Accountants
To the Shareholders and Board of Trustees of
Prudential Municipal Series Fund, New York Series
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Prudential Municipal Series Fund,
New York Series (the 'Fund', one of the portfolios constituting Prudential
Municipal Series Fund) at August 31, 2000, the results of its operations for the
year then ended, the changes in its net assets for each of the two years in the
period then ended and the financial highlights for each of the four years in the
period then ended, in conformity with accounting principles generally accepted
in the United States of America. These financial statements and financial
highlights (hereafter referred to as 'financial statements') are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with auditing standards
generally accepted in the United States of America, which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits, which included confirmation of securities at August
31, 2000 by correspondence with the custodian and brokers, provide a reasonable
basis for the opinion expressed above. The accompanying financial highlights for
the year ended August 31, 1996 were audited by other independent accountants,
whose opinion dated October 14, 1996 was unqualified.
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York
October 20, 2000
B-228
PRUDENTIAL MUNICIPAL SERIES FUND New York Series
Federal Income Tax Information (Unaudited)
We are required by the Internal Revenue Code to advise you within 60 days
of the Series' fiscal year end (August 31, 2000) as to the federal income tax
status of dividends paid during such fiscal year. Accordingly, we are advising
you that during its fiscal year ended August 31, 2000, dividends paid from net
investment income of $.58 per Class A share, $.55 per Class B share, $.52 per
Class C share and $.61 per Class Z shares were all federally tax-exempt interest
dividends.
We wish to advise you that the corporate dividends received deduction for
the Series is zero. Only funds that invest in U.S. equity securities are
entitled to pass-through a corporate dividends received deduction.
In January 2001, you will be advised on IRS Form 1099 DIV or substitute
1099 DIV as to the federal tax status of the distributions received by you in
calendar 2000.
B-229
PRUDENTIAL MUNICIPAL SERIES FUND New York Money Market Series
Portfolio of Investments as of August 31, 2000
PRINCIPAL
MOODY'S RATING INTEREST MATURITY AMOUNT VALUE
DESCRIPTION (a) (UNAUDITED) RATE DATE (000) (NOTE 1)
- ------------------------------------------------------------------------------------------------------------
Albany Cnty. Arpt. Auth. Rev.,
Class F, Ser. 8, F.R.W.D., A.M.T. VMIG1 4.36% 9/07/00 $ 7,200 $ 7,200,000
Allegany Cnty. Ind. Dev. Agcy.,
Alfred Univ., Civic Fac. Rev.,
Ser. 91 NR 7.50 9/01/01 5,070(e) 5,320,809
Brewster Central Sch. Dist.,
Ser. 00, T.A.N. NR 4.90 6/29/01 640 642,024
Burnt Hills-Ballston Lake Central
Sch. Dist., Gen. Oblig, NR 5.20 7/15/01 659 663,115
Clinton Cnty. Ind. Dev. Agcy.,
Champlain Plastics Proj., Ser.
98A, F.R.W.D., A.M.T. NR 4.45 9/06/00 4,520 4,520,000
Edgemont Union Free Sch. Dist.,
Greenburgh, Ser. 01, T.A.N. NR 4.75 2/15/01 2,900 2,904,405
Hastings-On-Hudson Union Free Sch.
Dist., Ser. 01, T.A.N. NR 4.75 10/12/00 2,000 2,000,908
Hempstead Ind. Dev. Agcy. Res.
Recvy. Rev., Duke Cap. Corp.,
Ser. 99, F.R.W.D. A-1(d) 4.30 9/06/00 7,055 7,055,000
Hendrick Hudson Central Sch. Dist.,
Ser. 01, T.A.N. NR 4.75 11/22/00 3,000 3,003,102
Long Island Power Auth., Elec. Sys.
Rev., Ser. 4, T.E.C.P. VMIG1 4.30 10/10/00 2,800 2,800,000
Longwood Central Sch. Dist.,
Ser. 01, T.A.N. NR 5.00 6/29/01 3,500 3,509,660
Metropolitan Trans. Auth.,
Commuter Fac. Rev., Ser. 1313,
T.E.C.P. P-1 4.25 12/06/00 5,000 5,000,000
Commuter Fac. Rev., Ser. SGA82,
F.R.W.D. A-1(d) 4.20 9/06/00 5,000 5,000,000
Transit Fac., Ser. A, T.E.C.P. P-1 4.20 12/07/00 5,000 5,000,000
Transit Fac., Ser. A, T.E.C.P. P-1 4.25 12/20/00 5,000 5,000,000
Transit Fac., Ser. F, F.R.W.D. VMIG1 4.32 9/05/00 6,000 6,000,000
Monroe Cnty. Ind. Dev. Agcy. Rev.,
Genesee Valley, Ser. 97, F.R.W.D.,
A.M.T. VMIG1 4.55 9/07/00 2,800 2,800,000
Municipal Secs. Trust Certificates,
Class A, Ser. 89, F.R.D.D., A.M.T. VMIG1 4.35 9/01/00 800 800,000
See Notes to Financial Statements
B-230
PRUDENTIAL MUNICIPAL SERIES FUND New York Money Market Series
Portfolio of Investments as of August 31, 2000 Cont'd.
PRINCIPAL
MOODY'S RATING INTEREST MATURITY AMOUNT VALUE
DESCRIPTION (a) (UNAUDITED) RATE DATE (000) (NOTE 1)
- ------------------------------------------------------------------------------------------------------------
Nassau Cnty. Gen. Improv.,
Ser. D, R.A.N. MIG1 6.00% 4/12/01 $ 12,000 $ 12,107,599
Ser. 99C, T.A.N. MIG1 4.75 12/21/00 7,500 7,515,282
Nassau Cnty. Ind. Dev. Agcy. Rev.,
J.C. Solution Inc. Proj., Ser. 97,
F.R.W.D., A.M.T. NR 4.45 9/06/00 2,840 2,840,000
New York City Hsg. Dev. Corp.,
One Columbus Pl., Ser. 98A,
F.R.W.D., A.M.T. A-1(d) 4.10 9/06/00 22,400 22,400,000
Westmont Apts., Ser. A, F.R.W.D. VMIG1 4.10 9/05/00 3,000 3,000,000
New York City Ind. Dev. Agcy.,
Civic Fac. Rev.,
Ser. 206, F.R.W.D. VMIG1 4.26 9/07/00 5,745 5,745,000
Ser. 00, F.R.W.D. VMIG1 4.10 9/07/00 4,400 4,400,000
New York City Mun. Water Fin. Auth.,
Ser. 3, T.E.C.P. P-1 4.20 9/14/00 6,800 6,800,000
Ser. 4, T.E.C.P. P-1 4.20 10/12/00 3,000 3,000,000
New York City Muni. Secs., Ser.
SGA63, F.R.D.D. A-1(d) 4.35 9/01/00 5,100 5,100,000
New York City Transitional Fin.
Auth.,
Future Tax Sec'd. Bonds, Ser.
SG74, F.R.D.D.S. A1(d) 4.35 9/01/00 2,400 2,400,000
Future Tax, Ser. 283, F.R.W.D. VMIG1 4.26 9/07/00 3,700 3,700,000
New York City Trust Cult. Res.
Rev., Ser. SGA91, F.R.D.D.S. A-1(d) 4.35 9/01/00 4,185 4,185,000
New York City, Gen. Oblig.,
Ser. 94H-3, T.E.C.P. VMIG1 4.35 9/13/00 1,300 1,300,000
Ser. 94H-5, T.E.C.P. VMIG1 4.30 9/08/00 2,500 2,500,000
Ser. 94H-3, T.E.C.P. VMIG1 4.25 12/08/00 3,100 3,100,000
Ser. H4, T.E.C.P. VMIG1 4.35 9/13/00 5,000(e) 5,000,000
Ser. B NR 7.00 6/01/01 3,185(e) 3,290,889
New York St. Dorm. Auth. Rev.,
City Univ. Sys., Class F, Ser. 2,
F.R.W.D. VMIG1 4.31 9/07/00 6,250 6,250,000
See Notes to Financial Statements
B-231
PRUDENTIAL MUNICIPAL SERIES FUND New York Money Market Series
Portfolio of Investments as of August 31, 2000 Cont'd.
PRINCIPAL
MOODY'S RATING INTEREST MATURITY AMOUNT VALUE
DESCRIPTION (a) (UNAUDITED) RATE DATE (000) (NOTE 1)
- ------------------------------------------------------------------------------------------------------------
Dept. of Hlth., Ser. 341, F.R.W.D. VMIG1 4.28% 9/07/00 $ 4,495 $ 4,495,000
Mem. Sloan Kettering, Ser. X,
F.R.W.D. VMIG1 4.32 9/05/00 2,065 2,065,000
Mental Hlth. Serv., Ser. 310,
F.R.W.D. VMIG1 4.26 9/07/00 6,745 6,745,000
Mt. Sinai Sch. of Medicine,
Ser.00, T.E.C.P. P-1 4.10 9/08/00 3,200 3,200,000
Rockefeller Univ., Ser. 97,
F.R.W.D.S. A-1(d) 4.30 9/07/00 8,850 8,850,000
State Univ. Educ. Facs., Ser. G,
F.R.W.D. VMIG1 4.32 9/05/00 10,000 10,000,000
State Univ. Educ. Facs., Ser. 107,
F.R.W.D.S. VMIG1 4.20 9/07/00 3,000 3,000,000
New York St. Energy Res. & Dev.
Auth.,
Con Edison Proj., Ser. 99A-2,
F.R.W.D., A.M.T. A-1(d) 4.10 9/07/00 4,200 4,200,000
Con Edison, Class F, Ser. 12,
F.R.W.D. VMIG1 4.33 9/07/00 7,495 7,495,000
New York St. Elec. & Gas, Ser.
85A, A.N.N.O.T. A1(d) 4.20 3/15/01 7,500 7,500,000
New York St. Elec. & Gas, Ser.
85B, A.N.N.O.T. NR 3.70 10/15/00 4,500 4,500,000
Niagara Mohawk Pwr. Corp., Ser.
85A, F.R.D.D. A-1(d) 4.35 9/01/00 1,000 1,000,000
Niagara Mohawk Pwr. Corp., Ser.
88A, F.R.D.D. A-1(d) 4.40 9/01/00 700 700,000
New York St. Hsg. Fin. Agcy. Rev.,
Ser. A NR 7.80 9/15/00 5,000 5,106,479
New York St. Job Dev. Auth.,
Rev., Ser. A1-25, F.R.W.D., A.M.T. VMIG1 4.40 9/01/00 1,050 1,050,000
New York St. Local Govt. Assist.
Corp.,
Ser. 91A NR 7.00 4/01/01 3,050(e) 3,157,310
Ser. 91A NR 7.13 4/01/01 830(e) 859,720
Ser. 91A NR 7.25 4/01/01 1,000(e) 1,036,341
Ser. 91A NR 7.25 4/01/01 1,000(e) 1,036,341
Ser. SGA59, F.R.D.D. A-1(d) 4.35 9/01/00 5,500 5,500,000
See Notes to Financial Statements
B-232
PRUDENTIAL MUNICIPAL SERIES FUND New York Money Market Series
Portfolio of Investments as of August 31, 2000 Cont'd.
PRINCIPAL
MOODY'S RATING INTEREST MATURITY AMOUNT VALUE
DESCRIPTION (a) (UNAUDITED) RATE DATE (000) (NOTE 1)
- ------------------------------------------------------------------------------------------------------------
New York St. Mtg. Agcy. Rev.,
Ser. B, F.R.W.D., A.M.T. VMIG1 4.37% 9/05/00 $ 5,515 $ 5,515,000
Ser. 302, F.R.W.D. VMIG1 4.28 9/07/00 1,495 1,495,000
Ser. 303, F.R.W.D. VMIG1 4.28 9/07/00 2,445 2,445,000
Ser. PP, F.R.W.D., A.M.T. VMIG1 4.37 9/05/00 5,000 5,000,000
New York St. Power Auth. Rev. &
Gen. Purp.,
Ser. W NR 6.50 1/01/01 1,000(e) 1,007,894
Ser. Y NR 6.75 1/01/01 9,990(e) 10,273,402
New York St. Power Auth., Ser. 2,
T.E.C.P. P-1 4.30 9/07/00 5,415 5,415,000
New York St. Thruway Auth. Rev.,
Highway & Bridge Trust Fund, Ser.
267, F.R.W.D. VMIG1 4.26 9/07/00 2,200 2,200,000
Highway & Bridge Trust Fund, Ser.
368, F.R.W.D. VMIG1 4.28 9/07/00 3,000 3,000,000
Muni Trust, Ser. SGA 66,
F.R.W.D.S. A-1(d) 4.20 9/06/00 7,855 7,855,000
Niagara Cnty., Gen. Oblig., Ser.
00, B.A.N. NR 5.00 6/29/01 2,320 2,327,590
North Hempstead, Gen. Oblig.,
Ser. A NR 4.50 1/15/01 1,145 1,145,170
Ossining Village, Ser. 00, B.A.N. NR 4.75 8/03/01 3,100 3,109,560
Oswego Cnty. Ind. Dev. Agcy. Rev.,
Phillip Morris Co., Ser. 92,
F.R.W.D. P-1 4.25 9/06/00 10,000 10,000,000
Penfield, Ser. 00, B.A.N. NR 4.70 4/19/01 1,100 1,102,322
Port Auth. New York & New Jersey,
Ser. 93-1, F.R.W.D. NR 4.18 9/05/00 12,000 12,000,000
Ramapo Hsg. Auth. Rev.,
Fountainview Proj., Ser. 98,
F.R.W.D., A.M.T. VMIG1 4.39 9/07/00 11,485 11,485,000
Rockland Cnty. Ind. Dev. Agcy.,
Asstd. Living, Northern River,
Ser. 99, F.R.W.D. VMIG1 4.39 9/07/00 5,500 5,500,000
Syracuse, Hancock Arpt., Ser. 207,
F.R.W.D., A.M.T. VMIG1 4.33 9/07/00 1,420 1,420,000
See Notes to Financial Statements
B-233
PRUDENTIAL MUNICIPAL SERIES FUND New York Money Market Series
Portfolio of Investments as of August 31, 2000 Cont'd.
PRINCIPAL
MOODY'S RATING INTEREST MATURITY AMOUNT VALUE
DESCRIPTION (a) (UNAUDITED) RATE DATE (000) (NOTE 1)
- ------------------------------------------------------------------------------------------------------------
Triboro. Bridge & Tunnel Auth.
Rev.,
Ser. 262, F.R.W.D. VMIG1 4.26% 9/07/00 $ 4,995 $ 4,995,000
Ser. C, F.R.W.D. VMIG1 4.00 9/07/00 5,000 5,000,000
Ser. T NR 7.00 1/01/01 600(e) 617,247
West Seneca, Ser. 00, B.A.N. NR 4.75 4/05/01 4,990 5,001,257
------------
TOTAL INVESTMENTS 100.4%
(COST $363,258,426; (b)) 363,258,426
Liabilities in excess of other
assets (0.4)% (1,383,680)
------------
NET ASSETS 100% $361,874,746
============
- ------------------------------
(a) The following abbreviations are used in portfolio descriptions:
A.M.T.--Alternative Minimum Tax.
A.N.N.O.T.--Annual Optional Tender.
B.A.N.--Bond Anticipation Note.
F.R.D.D.--Floating Rate (Daily) Demand Note (c).
F.R.D.D.S.--Floating Rate (Daily) Demand Note Synthetic (c).
F.R.W.D.--Floating Rate (Weekly) Demand Note (c).
F.R.W.D.S.--Floating Rate (Weekly) Demand Note Synthetic (c).
R.A.N.--Revenue Anticipation Note.
T.A.N.--Tax Anticipation Note.
T.E.C.P.--Tax-Exempt Commercial Paper.
(b) The cost of securities for federal income tax purposes is substantially the
same as for financial reporting purposes.
(c) For purposes of amortized cost valuation, the maturity date of Floating Rate
Demand Notes is considered to be the later of the next date on which the
security can be redeemed at par, or the next date on which the rate of
interest is adjusted.
(d) Standard & Poor's Rating.
(e) Prerefunded issues are secured by escrowed cash and direct U.S. guaranteed
obligations.
NR--Not Rated by Moody's or Standard & Poor's.
The Fund's current Statement of Additional Information contains a description of
Moody's and Standard & Poor's ratings.
See Notes to Financial Statements
B-234
PRUDENTIAL MUNICIPAL SERIES FUND New York Money Market Series
Statement of Assets and Liabilities
AUGUST 31, 2000
- ----------------------------------------------------------------------------------------
ASSETS
Investments, at amortized cost which approximates market value $ 363,258,426
Cash 74,601
Receivable for Series shares sold 4,295,778
Interest receivable 3,215,753
Other assets 7,518
---------------
TOTAL ASSETS 370,852,076
---------------
LIABILITIES
Payable for Series shares reacquired 8,601,533
Management fee payable 157,486
Dividends payable 139,665
Accrued expenses 50,573
Distribution fee payable 21,388
Deferred trustees' fee 6,685
---------------
TOTAL LIABILITIES 8,977,330
---------------
NET ASSETS $ 361,874,746
===============
Net assets were comprised of:
Shares of beneficial interest, at $.01 par value $ 3,618,747
Paid-in capital in excess of par 358,255,999
---------------
Net assets, August 31, 2000 $ 361,874,746
===============
Net asset value, offering price and redemption price per share
($361,874,746 3 361,874,746 shares of beneficial interest
issued and outstanding; unlimited number of shares
authorized) $1.00
===============
See Notes to Financial Statements
B-235
PRUDENTIAL MUNICIPAL SERIES FUND New York Money Market Series
Statement of Operations
YEAR
ENDED
AUGUST 31, 2000
- ----------------------------------------------------------------------------------------
NET INVESTMENT INCOME
Income
Interest $14,199,375
---------------
Expenses
Management fee 1,845,085
Distribution fee 461,271
Transfer agent's fees and expenses 92,000
Custodian's fees and expenses 65,000
Reports to shareholders 45,000
Registration fees 24,000
Legal fees and expenses 13,000
Trustees' fees and expenses 11,000
Audit fee 8,000
Miscellaneous 10,084
---------------
TOTAL EXPENSES 2,574,440
Less: Custodian fee credit (7,498)
---------------
Net expenses 2,566,942
---------------
Net investment income 11,632,433
---------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $11,632,433
===============
See Notes to Financial Statements
B-236
PRUDENTIAL MUNICIPAL SERIES FUND New York Money Market Series
Statement of Changes in Net Assets
YEAR ENDED AUGUST 31,
----------------------------------
2000 1999
- ----------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net investment income $ 11,632,433 $ 9,234,844
--------------- ---------------
Net increase in net assets resulting from
operations 11,632,433 9,234,844
--------------- ---------------
DIVIDENDS AND DISTRIBUTIONS PAID TO
SHAREHOLDERS
(NOTE 1) (11,632,433) (9,234,844)
--------------- ---------------
SERIES SHARE TRANSACTIONS (AT $1 PER SHARE)
Net proceeds from shares sold 1,308,822,886 1,191,546,021
Net asset value of shares issued in
reinvestment of dividends and
distributions 11,342,243 9,050,815
Cost of shares reacquired (1,316,846,351) (1,254,393,321)
--------------- ---------------
Net increase (decrease) in net assets from
Series share transactions 3,318,778 (53,796,485)
--------------- ---------------
Total increase (decrease) 3,318,778 (53,796,485)
NET ASSETS
Beginning of year 358,555,968 412,352,453
--------------- ---------------
End of year $ 361,874,746 $ 358,555,968
=============== ===============
See Notes to Financial Statements
B-237
PRUDENTIAL MUNICIPAL SERIES FUND New York Money Market Series
Notes to Financial Statements
Prudential Municipal Series Fund (the 'Fund') is registered under the
Investment Company Act of 1940 as an open-end investment company. The Fund was
organized as a Massachusetts business trust on May 18, 1984 and consists of
eleven series. The monies of each series are invested in separate, independently
managed portfolios. The New York Money Market Series (the 'Series') commenced
investment operations in April, 1985. The Series is diversified and seeks to
achieve its investment objective of providing the highest level of income that
is exempt from New York State, New York City and federal income taxes with a
minimum of risk by investing in 'investment grade' tax-exempt securities having
a maturity of 13 months or less whose ratings are within the two highest ratings
categories by two nationally recognized statistical rating organizations, or if
not rated, are of comparable quality. The ability of the issuers of the
securities held by the Series to meet their obligations may be affected by
economic developments in a specific state, industry or region.
NOTE 1. Accounting Policies
The following is a summary of significant accounting policies followed by the
Fund, and the Series, in the preparation of its financial statements.
SECURITIES VALUATIONS: Portfolio securities of the Series are valued at
amortized cost, which approximates market value. The amortized cost method of
valuation involves valuing a security at its cost on the date of purchase and
thereafter assuming a constant amortization to maturity of any discount or
premium.
All securities are valued as of 4:30 p.m., New York time.
SECURITIES TRANSACTIONS AND NET INVESTMENT INCOME: Securities
transactions are recorded on the trade date. Realized gains and losses on sales
of investments are calculated on the identified cost basis. Interest income is
recorded on the accrual basis. Expenses are recorded on the accrual basis which
may require the use of certain estimates by management.
FEDERAL INCOME TAXES: For federal income tax purposes, each series in
the Fund is treated as a separate taxpaying entity. It is the intent of the
Series to continue to meet the requirements of the Internal Revenue Code
applicable to regulated investment companies and to distribute all of its net
income to shareholders. For this reason, no federal income tax provision is
required.
DIVIDENDS: The Series declares daily dividends from net investment
income. Payment of dividends is made monthly. Income distributions and capital
gain distributions are determined in accordance with income tax regulations
which may differ from generally accepted accounting principles.
CUSTODY FEE CREDITS: The Fund has an arrangement with its custodian
bank, whereby uninvested monies earn credits which reduce the fees charged by
the custodian.
B-238
PRUDENTIAL MUNICIPAL SERIES FUND New York Money Market Series
Notes to Financial Statements Cont'd.
NOTE 2. AGREEMENTS
The Fund has a management agreement with Prudential Investments Fund Management
LLC ('PIFM'). Pursuant to this agreement, PIFM has responsibility for all
investment advisory services and supervises the subadviser's performance of such
services. PIFM has entered into a subadvisory agreement with The Prudential
Investment Corporation ('PIC'). The subadvisory agreement provides that PIC will
furnish investment advisory services in connection with the management of the
Fund. In connection therewith, PIC is obligated to keep certain books and
records of the Fund. PIFM continues to have responsibility for all investment
advisory services pursuant to the management agreement and supervises PIC's
performance of such services. PIFM pays for the services of PIC, the cost of
compensation of officers of the Fund, occupancy and certain clerical and
bookkeeping costs of the Fund. The Fund bears all other costs and expenses.
The management fee paid to PIFM is computed daily and payable monthly, at
an annual rate of .50 of 1% of the average daily net assets of the Fund.
Effective January 1, 2000, the subadvisory fee paid to PIC by PIFM is
computed daily and payable monthly at an annual rate of .250 of 1% of the
average daily net assets of the Fund. Prior to January 1, 2000, PIC was
reimbursed by PIFM for reasonable costs and expenses incurred in furnishing
investment advisory services. The change in the subadvisory fee structure has no
impact on the management fee charged to the Fund or its shareholders.
The Fund has a distribution agreement with Prudential Investment
Management Services LLC ('PIMS') which acts as the distributor of the Fund. The
Fund compensated PIMS for distributing and servicing the Fund's shares pursuant
to the plans of distribution regardless of expenses actually incurred by them.
The Series reimburses PIMS for distributing and servicing the Series' shares
pursuant to the plan of distribution at an annual rate of .125 of 1% of the
Series' average daily net assets. The distribution fees are accrued daily and
payable monthly.
PIFM, PIC and PIMS are wholly owned subsidiaries of The Prudential
Insurance Company of America ('The Prudential').
NOTE 3. OTHER TRANSACTIONS WITH AFFILIATES
Prudential Mutual Fund Services LLC ('PMFS'), a wholly owned subsidiary of PIFM,
serves as the Fund's transfer agent. During the year ended August 31, 2000, the
Series incurred fees of approximately $88,000 for the services of PMFS. As of
August 31, 2000, approximately $6,800 of such fees were due to PMFS. Transfer
agent fees and expenses in the Statement of Operations include certain
out-of-pocket expenses paid to nonaffiliates.
B-239
PRUDENTIAL MUNICIPAL SERIES FUND New York Money Market Series
Financial Highlights
YEAR
ENDED
AUGUST 31, 2000
- ----------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE:
NET ASSET VALUE, BEGINNING OF YEAR $ 1.00
Net investment income and net realized gains .03
Dividends and distributions to shareholders (.03)
---------------
Net asset value, end of year $ 1.00
---------------
---------------
TOTAL RETURN(a): 3.18%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000) $ 361,875
Average net assets (000) $ 369,017
Ratios to average net assets:
Expenses, including distribution and service (12b-1) fees .70%
Expenses, excluding distribution and service (12b-1) fees .57%
Net investment income 3.15%
- ------------------------------
(a) Total return includes reinvestment of dividends and distributions.
See Notes to Financial Statements
B-240
PRUDENTIAL MUNICIPAL SERIES FUND New York Money Market Series
Financial Highlights Cont'd.
YEAR ENDED AUGUST 31,
- -------------------------------------------------------------------------------------
1999 1998 1997 1996
- -------------------------------------------------------------------------------------
$ 1.00 $ 1.00 $ 1.00 $ 1.00
.02 .03 .03 .03
(.02) (.03) (.03) (.03)
- ---------------- ---------------- ---------------- ----------------
$ 1.00 $ 1.00 $ 1.00 $ 1.00
- ---------------- ---------------- ---------------- ----------------
- ---------------- ---------------- ---------------- ----------------
2.49% 2.94% 2.91% 2.97%
$358,556 $412,352 $358,291 $349,470
$375,650 $373,494 $326,092 $336,427
.70% .69% .71% .72%
.57% .57% .58% .60%
2.46% 2.90% 2.87% 2.91%
See Notes to Financial Statements
B-241
PRUDENTIAL MUNICIPAL SERIES FUND New York Money Market Series
Report of Independent Accountants
To the Shareholders and Board of Trustees of
Prudential Municipal Series Fund, New York Money Market Series
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Prudential Municipal Series Fund,
New York Money Market Series (the 'Fund', one of the portfolios constituting
Prudential Municipal Series Fund) at August 31, 2000, the results of its
operations for the year then ended, the changes in its net assets for each of
the two years in the period then ended and the financial highlights for each of
the four years in the period then ended, in conformity with accounting
principles generally accepted in the United States of America. These financial
statements and financial highlights (hereafter referred to as 'financial
statements') are the responsibility of the Fund's management; our responsibility
is to express an opinion on these financial statements based on our audits. We
conducted our audits of these financial statements in accordance with auditing
standards generally accepted in the United States of America, which require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits, which included confirmation
of securities at August 31, 2000 by correspondence with the custodian, provide a
reasonable basis for our opinion. The accompanying financial highlights for the
year ended August 31, 1996 were audited by other independent accountants, whose
opinion dated October 14, 1996 was unqualified.
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York
October 20, 2000
B-242
PRUDENTIAL MUNICIPAL SERIES FUND New York Money Market Series
Federal Income Tax Information (Unaudited)
We are required by the Internal Revenue Code to advise you within 60 days
of the Series' fiscal year end (August 31, 2000) as to the federal tax status of
dividends paid by the Series during such fiscal year. Accordingly, we are
advising you that in the fiscal year ended August 31, 2000, dividends paid from
net investment income totaling $.03 per share were federally tax-exempt interest
dividends.
B-243
PRUDENTIAL MUNICIPAL SERIES FUND North Carolina Series
Portfolio of Investments as of August 31, 2000
MOODY'S PRINCIPAL
RATING INTEREST MATURITY AMOUNT VALUE
DESCRIPTION (a) (UNAUDITED) RATE DATE (000) (NOTE 1)
- -----------------------------------------------------------------------------------------------------------
LONG-TERM INVESTMENTS 96.4%
Charlotte Mecklenberg Hosp. Auth.,
Hlth. Care Sys. Rev. AA(c) 6.25% 1/01/20 $ 430(e) $ 448,735
Hlth. Care Sys. Rev. Aa3 6.25 1/01/20 320 326,800
Hlth. Care Sys. Rev. Aa3 5.875 1/15/26 500 504,870
Charlotte Arpt. Rev.,
Ser. B, M.B.I.A., A.M.T. Aaa 6.00 7/01/24 1,000 1,028,800
Ser. B, M.B.I.A., A.M.T. Aaa 6.00 7/01/28 500 513,785
Charlotte Storm Wtr. Fee Rev. Aa2 6.00 6/01/25 500 524,590
Charlotte No. Carolina Wtr. &
Swr. Sys. Rev. Aa2 5.25 6/01/24 500 482,210
Gen. Oblig. Aaa 6.20 6/01/17 1,500(e) 1,574,760
Gen. Oblig. Aaa 5.90 2/01/19 1,000(e) 1,064,630
Columbus Cnty. Ind. Fac. & Poll.
Ctrl. Fin. Auth. Rev., Int'l.
Paper Co. Proj., A.M.T. Baa1 6.15 4/01/21 1,000 1,005,960
Concord Util. Sys. Rev., M.B.I.A. Aaa 5.50 12/01/14 1,000 1,023,300
Cumberland Cnty. Hosp. Fac. Rev.,
Cumberland Cnty. Hosp. Sys. Inc. A3 5.25 10/01/29 500 430,950
Guam Arpt. Auth. Rev.,
Ser. B, A.M.T. BBB(c) 6.60 10/01/10 1,000 1,057,400
Guam Pwr. Auth. Rev.,
Ser. A BBB(c) 6.625 10/01/14 250(e) 276,640
Ser. A AAA(c) 6.75 10/01/24 525(e) 583,385
Halifax Cnty. Ind. Fac. & Poll.
Ctrl. Fin. Auth. Rev., Champion
Int'l. Corp. Proj., Ser. A,
A.M.T. Baa1 5.45 11/01/33 1,000 868,610
Lincoln Cnty., Gen. Oblig.,
F.G.I.C. Aaa 5.10 6/01/09 500 515,625
No. Carolina Eastn. Mun. Pwr. Agcy.,
Pwr. Sys. Rev., Ser. A, E.T.M. Baa3 6.40 1/01/21 1,000 1,113,250
Pwr. Sys. Rev., Ser. A Aaa 6.00 1/01/26 650(e) 697,274
Pwr. Sys. Rev., Ser. A, E.T.M. Aaa 6.50 1/01/18 1,995 2,261,652
Pwr. Sys. Rev., Ser. A, M.B.I.A. Aaa 6.50 1/01/18 1,005 1,131,982
Pwr. Sys. Rev., A.M.B.A.C. Aaa 6.00 1/01/18 1,000 1,070,410
See Notes to Financial Statements
B-244
PRUDENTIAL MUNICIPAL SERIES FUND North Carolina Series
Portfolio of Investments as of August 31, 2000 Cont'd.
MOODY'S PRINCIPAL
RATING INTEREST MATURITY AMOUNT VALUE
DESCRIPTION (a) (UNAUDITED) RATE DATE (000) (NOTE 1)
- -----------------------------------------------------------------------------------------------------------
No. Carolina Hsg. Fin. Agcy. Home
Ownership Ser. 6A, A.M.T. Aa2 6.20% 1/01/29 $ 1,000 $ 1,023,090
No. Carolina Med. Care Comm.,
Hosp. Rev.,
Annie Pen Mem. Hosp. Proj. Baa3 7.50 8/15/21 1,000(e) 1,060,670
Rex Hosp. Proj. Aaa 6.25 6/01/17 1,750(e) 1,865,307
No. Carolina Mun. Pwr. Agcy.,
No. 1 Catawba Elec. Rev.,
M.B.I.A. Aaa 6.00 1/01/10 1,250 1,356,787
No. 1 Catawba Elec. Rev.,
M.B.I.A. Aaa 6.22 1/01/12 2,000(d) 2,042,500
Northern Hosp. Dist., Surry Cnty.
Hlth. Care Fac. Rev. Ba1 7.875 10/01/21 1,500 1,503,885
Piedmont Triad Arpt. Auth., Arpt.
Rev., Ser. B, F.S.A., A.M.T. Aaa 6.00 7/01/21 1,000 1,028,800
Pitt Cnty. Pub. Fac., Cert. of
Part.,
Ser. A, M.B.I.A. Aaa 5.55 4/01/12 1,000 1,041,070
Ser. B, M.B.I.A. Aaa 5.40 4/01/08 700 732,291
Pitt Cnty. Rev., Pitt Cnty. Mem.
Hosp., E.T.M. Aaa 5.25 12/01/21 1,000 976,150
Puerto Rico Commonwlth.,
Gen. Oblig., Ser. A, M.B.I.A. Aaa 6.25 7/01/10 1,240 1,292,601
Pub. Impt., Gen. Oblig. Baa1 Zero 7/01/15 2,150 991,021
Puerto Rico Ind. Tourist Ed.
Cogen Fac., AES Puerto Rico
Proj., A.M.T. Baa2 6.625 6/01/26 575 599,397
Puerto Rico Tel. Auth. Rev.,
M.B.I.A., R.I.B.S. Aaa 6.42 1/25/07 1,000(e)(d) 1,052,500
Randolph Cnty., Cert. of Part.,
F.S.A. Aaa 5.75 6/01/22 500 509,290
University of No. Carolina, Util.
Sys. Rev. Aa2 Zero 8/01/19 2,715 960,350
Virgin Islands Pub. Fin. Auth.
Rev., Gross Rcpts. Taxes Loan
Note,
Ser. A BBB(c) 6.50 10/01/24 500 517,945
Virgin Islands Terr., Spl. Tax,
Ser. 91 AAA(c) 7.75 10/01/06 305(e) 319,061
Wake Cnty. Hosp. Rev., E.T.M.,
M.B.I.A. Aaa 5.125 10/01/26 1,000 960,950
Winston Salem, Sngl. Fam. Mtge.
Rev., A.M.T. A1 8.00 9/01/07 205 209,627
------------
Total long-term investments
(cost $36,830,475) $ 38,548,910
------------
See Notes to Financial Statements
B-245
PRUDENTIAL MUNICIPAL SERIES FUND North Carolina Series
Portfolio of Investments as of August 31, 2000 Cont'd.
MOODY'S PRINCIPAL
RATING INTEREST MATURITY AMOUNT VALUE
DESCRIPTION (a) (UNAUDITED) RATE DATE (000) (NOTE 1)
- -----------------------------------------------------------------------------------------------------------
SHORT-TERM INVESTMENTS 1.3%
Halifax Cnty. Ind. Facs. & Poll.
Fin. Auth., Westmoreland-Hadson
Roanoke Valley, Ser. 91,
F.R.D.D., A.M.T. CPS1 4.40% 9/01/00 $ 400 $ 400,000
No. Carolina Med. Care Comm.
Hlth. Care Fac. Rev., The Givens
Estates Inc. Proj., Ser. 97,
F.R.D.D. VMIG1 4.35 9/01/00 100 100,000
------------
Total short-term investments
(cost $500,000) $ 500,000
------------
TOTAL INVESTMENTS 97.7%
(COST $37,330,475; NOTE 4) 39,048,910
------------
Other assets in excess of
liabilities 2.3% 936,581
------------
NET ASSETS 100% $ 39,985,491
============
- ------------------------------
(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.
E.T.M--Escrowed to Maturity.
F.G.I.C.--Financial Guaranty Insurance Company.
F.R.D.D.--Floating Rate (Daily) Demand Note (b).
F.S.A.--Financial Security Assurance.
M.B.I.A.--Municipal Bond Insurance Corporation.
R.I.B.S.--Residual Interest Bonds.
(b) For purposes of amortized cost valuation, the maturity date of Floating Rate
Demand Notes is considered to be the later of the next date on which the
security can be redeemed at par, or the next date on which the rate of
interest is adjusted.
(c) Standard & Poor's Rating.
(d) Inverse floating rate bond. The coupon is inversely indexed to a floating
interest rate. The rate shown is the rate at August 31, 2000.
(e) Prerefunded issues are secured by escrowed cash and/or direct U.S.
guaranteed obligations.
The Fund's current Statement of Additional Information contains a description of
Moody's and Standard & Poor's ratings.
See Notes to Financial Statements
B-246
PRUDENTIAL MUNICIPAL SERIES FUND North Carolina Series
Statement of Assets and Liabilities
AUGUST 31, 2000
- ----------------------------------------------------------------------------------------
ASSETS
Investments, at value (cost $37,330,475) $39,048,910
Cash 35,416
Receivable for investments sold 543,475
Interest receivable 531,412
Other assets 1,151
---------------
TOTAL ASSETS 40,160,364
---------------
LIABILITIES
Payable for Series shares reacquired 63,259
Accrued expenses 56,128
Dividends payable 22,518
Management fee payable 16,871
Distribution fee payable 9,951
Deferred trustee's fee 6,146
---------------
TOTAL LIABILITIES 174,873
---------------
NET ASSETS $39,985,491
===============
Net assets were comprised of:
Shares of beneficial interest, at par $ 36,379
Paid-in capital in excess of par 38,695,310
---------------
38,731,689
Accumulated net realized loss on investments (464,633)
Net unrealized appreciation on investments 1,718,435
---------------
Net assets, August 31, 2000 $39,985,491
===============
See Notes to Financial Statements
B-247
PRUDENTIAL MUNICIPAL SERIES FUND North Carolina Series
Statement of Assets and Liabilities Cont'd.
AUGUST 31, 2000
- ----------------------------------------------------------------------------------------
Class A:
Net asset value and redemption price per share
($29,821,562 / 2,713,441 shares of beneficial interest
issued and outstanding) $10.99
Maximum sales charge (3% of offering price) .34
---------------
Maximum offering price to public $11.33
===============
Class B:
Net asset value, offering price and redemption price per
share ($10,133,543 / 921,699 shares of beneficial interest
issued and outstanding) $10.99
===============
Class C:
Net asset value and redemption price per share
($30,386 / 2,763 shares of beneficial interest issued and
outstanding) $10.99
Sales charge (1% of offering price) .11
---------------
Offering price to public $11.10
===============
See Notes to Financial Statements
B-248
PRUDENTIAL MUNICIPAL SERIES FUND North Carolina Series
Statement of Operations
YEAR
ENDED
AUGUST 31, 2000
1--------------------------------------------------------------------------------------
NET INVESTMENT INCOME
Income
Interest $ 2,451,879
---------------
Expenses
Management fee 205,793
Distribution fee--Class A 71,587
Distribution fee--Class B 61,851
Distribution fee--Class C 213
Custodian's fees and expenses 72,000
Reports to shareholders 32,000
Registration fees 20,000
Transfer agent's fees and expenses 17,000
Audit fee 10,000
Trustees' fees and expenses 9,000
Legal fees and expenses 4,000
Miscellaneous 2,345
---------------
TOTAL EXPENSES 505,789
Less: Custodian fee credit (272)
---------------
NET EXPENSES 505,517
---------------
NET INVESTMENT INCOME 1,946,362
---------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Net realized gain (loss) on:
Investment transactions (476,170)
Financial futures transactions 12,974
---------------
(463,196)
Net change in unrealized appreciation on Investments 572,593
---------------
Net gain on investments 109,397
---------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 2,055,759
===============
See Notes to Financial Statements
B-249
PRUDENTIAL MUNICIPAL SERIES FUND North Carolina Series
Statement of Changes in Net Assets
YEAR ENDED AUGUST 31,
------------------------------
2000 1999
- ----------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net investment income $ 1,946,362 $ 2,241,676
Net realized gain (loss) on investment
transactions (463,196) 58,888
Net change in unrealized appreciation of
investments 572,593 (3,120,844)
--------------- -----------
Net increase (decrease) in net assets
resulting from operations 2,055,759 (820,280)
--------------- -----------
DIVIDENDS AND DISTRIBUTIONS (NOTE 1):
Dividends from net investment income
Class A (1,376,420) (1,400,647)
Class B (568,691) (839,833)
Class C (1,251) (1,196)
--------------- -----------
(1,946,362) (2,241,676)
--------------- -----------
Distributions from net realized gains
Class A (13,336) (152,983)
Class B (6,298) (100,812)
Class C (13) (148)
--------------- -----------
(19,647) (253,943)
--------------- -----------
SERIES SHARE TRANSACTIONS (NET OF SHARE
CONVERSIONS)
(NOTE 5):
Net proceeds from shares sold 971,027 3,818,192
Net asset value of shares issued in
reinvestment of dividends and distributions 1,005,340 1,320,522
Cost of shares reacquired (8,068,943) (7,739,135)
--------------- -----------
Net decrease in net assets from Series share
transactions (6,092,576) (2,600,421)
--------------- -----------
Total decrease (6,002,826) (5,916,320)
NET ASSETS
Beginning of year 45,988,317 51,904,637
--------------- -----------
End of year $39,985,491 $45,988,317
=============== ===========
See Notes to Financial Statements
B-250
PRUDENTIAL MUNICIPAL SERIES FUND North Carolina Series
Notes to Financial Statements
Prudential Municipal Series Fund (the 'Fund') is registered under the
Investment Company Act of 1940, as an open-end investment company. The Fund was
organized as a Massachusetts business trust on May 18, 1984 and consists of 11
series. The monies of each series are invested in separate, independently
managed portfolios. The North Carolina Series (the 'Series') commenced
investment operations in February 1985. The Series is diversified and its
investment objective is to maximize current income that is exempt from North
Carolina State and federal income taxes consistent with the preservation of
capital and, in conjunction therewith, the Series may invest in debt securities
with the potential for capital gain. The Series seeks to achieve this objective
by investing primarily in North Carolina State, municipal and local government
obligations and obligations of other qualifying issuers. The ability of the
issuers of the securities held by the Series to meet their obligations may be
affected by economic or political developments in a specific state, industry or
region.
NOTE 1. ACCOUNTING POLICIES
The following is a summary of significant accounting policies followed by the
Fund, and the Series, in the preparation of its financial statements.
SECURITIES VALUATIONS: The Fund values municipal securities (including
commitments to purchase such securities on a 'when-issued' basis) on the basis
of prices provided by a pricing service which uses information with respect to
transactions in bonds, quotations from bond dealers, market transactions in
comparable securities and various relationships between securities in
determining values. If market quotations are not readily available from such
pricing service, a security is valued at its fair value as determined under
procedures established by the Trustees.
Short-term securities which mature in more than 60 days are valued at
current market quotations. Short-term securities which mature in 60 days or less
are valued at amortized cost which approximates market value.
All securities are valued as of 4:15 p.m., New York time.
FINANCIAL FUTURES CONTRACTS: A financial futures contract is an
agreement to purchase (long) or sell (short) an agreed amount of securities at a
set price for delivery on a future date. Upon entering into a financial futures
contract, the Series is required to pledge to the broker an amount of cash
and/or other assets equal to a certain percentage of the contract amount. This
amount is known as the 'initial margin.' Subsequent payments, known as
'variation margin,' are made or received by the Series each day, depending on
the daily fluctuation in the value of the underlying security. Such variation
margin is recorded for financial statement purposes on a daily basis as
unrealized gain or loss. When the contract expires or is closed, the gain or
B-251
PRUDENTIAL MUNICIPAL SERIES FUND North Carolina Series
Notes to Financial Statements Cont'd.
loss is realized and is presented in the statement of operations as net realized
gain (loss) on financial futures contracts.
The Series invests in financial futures contracts in order to hedge its
existing portfolio securities, or securities the Series intends to purchase,
against fluctuations in value caused by changes in prevailing interest rates.
Should interest rates move unexpectedly, the Series may not achieve the
anticipated benefits of the financial futures contracts and may realize a loss.
The use of futures transactions involves the risk of imperfect correlation in
movements in the price of futures contracts, interest rates and the underlying
hedged assets.
OPTIONS: The Series 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 Series currently
owns or intends to purchase. When the Series purchases an option, it pays a
premium and an amount equal to that premium is recorded as an investment. When
the Series 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 Series 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 Series has realized a gain or loss. The difference
between the premium and the amount received or paid on effecting a closing
purchase or sale transaction is also treated as a realized gain or loss. Gain or
loss on purchased options is included in net realized gain (loss) on investment
transactions. Gain or loss on written options is presented separately as net
realized gain (loss) on written option transactions.
Securities Transactions and Net Investment Income: Securities transactions
are recorded on the trade date. Realized gains and losses on sales of securities
are calculated on the identified cost basis. Interest income is recorded on the
accrual basis. The Series amortizes premiums and accretes original issue
discount on portfolio securities as adjustments to interest income. Expenses are
recorded on the accrual basis which may require the use of certain estimates by
management.
Net investment income (other than distribution fees) and unrealized and
realized gains or losses are allocated daily to each class of shares based upon
the relative proportion of net assets of each class at the beginning of the day.
FEDERAL INCOME TAXES: For federal income tax purposes, each series in
the Fund is treated as a separate taxpaying entity. It is the intent of the
Series to continue
B-252
PRUDENTIAL MUNICIPAL SERIES FUND North Carolina Series
Notes to Financial Statements Cont'd.
to meet the requirements of the Internal Revenue Code applicable to regulated
investment companies and to distribute all of its net income to shareholders.
For this reason no federal income tax provision is required.
DIVIDENDS AND DISTRIBUTIONS: The Series declares daily dividends from
net investment income. Payment of dividends is made monthly. Distributions of
net capital gains, if any, are made annually.
Income distributions and capital gain distributions are determined in
accordance with income tax regulations which may differ from generally accepted
accounting principles.
CUSTODIAN FEE CREDITS: The Fund has an arrangement with its custodian
bank, whereby uninvested monies earn credits which reduce the fees charged by
the custodian. Note 2. Agreements The Fund has a management agreement with
Prudential Investments Fund Management LLC ('PIFM'). Pursuant to this agreement,
PIFM has responsibility for all investment advisory services and supervises the
subadviser's performance of such services. PIFM has entered into a subadvisory
agreement with The Prudential Investment Corporation ('PIC'); PIC furnishes
investment advisory services in connection with the management of the Fund. In
connection therewith, PIC is obligated to keep certain books and records of the
Fund. PIFM pays for the services of PIC, the cost of compensation of officers of
the Fund, occupancy and certain clerical and bookkeeping costs of the Fund. The
Fund bears all other costs and expenses.
The management fee paid PIFM is computed daily and payable monthly, at an
annual rate of .50 of 1% of the average daily net assets of the Series.
Effective January 1, 2000, the subadvisory fee paid to PIC by PIFM is
computed daily and payable monthly at an annual rate of .250 of 1% of the
average daily net assets of the Fund. Prior to January 1, 2000, PIC was
reimbursed by PIFM for reasonable costs and expenses incurred in furnishing
investment advisory services. The change in the subadvisory fee structure has no
impact on the management fee charged to the Fund or its shareholders.
The Fund has a distribution agreement with Prudential Investment
Management Services LLC ('PIMS'), which acts as the distributor of the Class A,
Class B and Class C shares of the Fund. The Fund compensates PIMS for
distributing and servicing the Fund's Class A, Class B and Class C shares,
pursuant to plans of distribution (the 'Class A, B and C Plans'), regardless of
expenses actually incurred by them. The distribution fees are accrued daily and
payable monthly.
B-253
PRUDENTIAL MUNICIPAL SERIES FUND North Carolina Series
Notes to Financial Statements Cont'd.
Pursuant to the Class A, B and C Plans, the Fund compensates PIMS for
distribution-related activities at an annual rate of up to .30 of 1%, .50 of 1%
and 1%, of the average daily net assets of the Class A, B and C shares,
respectively. Such expenses under the Plans were .25 of 1%, .50 of 1% and .75 of
1% of the average daily net assets of the Class A, B and C shares, respectively,
for the period September 1, 1999 through August 22, 2000. Effective August 23,
2000, such expenses under the plans were .25 of 1% of the average daily net
assets of the Class A, B and C shares.
PIMS has advised the Series that it received approximately $1,800 in
front-end sales charges resulting from sales of Class A shares during the year
ended August 31, 2000. From these fees, PIMS paid such sales charges to
affiliated broker-dealers, which in turn paid commissions to salespersons and
incurred other distribution costs.
PIMS has advised the Series that during the year ended August 31, 2000, it
received approximately $15,400 in contingent deferred sales charges imposed upon
certain redemptions by Class B shareholders.
PIFM, PIC and PIMS are wholly owned subsidiaries of The Prudential
Insurance Company of America.
The Series, along with other affiliated registered investment companies
(the 'Funds'), entered into a syndicated credit agreement ('SCA') with an
unaffiliated lender. The maximum commitment under the SCA is $1 billion.
Interest on any such borrowings will be at market rates. The purpose of the
agreement is to serve as an alternative source of funding for capital share
redemptions. The Funds pay a commitment fee at an annual rate of .080 of 1% of
the unused portion of the credit facility. The commitment fee is accrued and
paid quarterly on a pro rata basis by the Funds. The expiration date of the SCA
is March 9, 2001. Prior to March 9, 2000, the commitment fee was .065 of 1% of
the unused portion of the credit facility. The Series did not borrow any amounts
pursuant to the SCA during the year ended August 31, 2000. Note 3. Other
Transactions with Affiliates Prudential Mutual Fund Services LLC ('PMFS'), a
wholly owned subsidiary of PIFM, serves as the Fund's transfer agent. During the
year ended August 31, 2000, the Series incurred fees of approximately $14,100
for the services of PMFS. As of August 31, 2000, approximately $1,100 of such
fees were due to PMFS. Transfer agent fees and expenses in the Statement of
Operations include certain out-of-pocket expenses paid to nonaffiliates.
B-254
PRUDENTIAL MUNICIPAL SERIES FUND North Carolina Series
Notes to Financial Statements Cont'd.
NOTE 4. PORTFOLIO SECURITIES
Purchases and sales of portfolio securities of the Series, excluding short-term
investments, for the year ended August 31, 2000 were $8,805,438 and $15,796,356,
respectively.
The cost basis of investments for federal income tax purposes at August
31, 2000, was substantially the same as for financial reporting purposes and
accordingly, net unrealized appreciation of investments for federal income tax
purposes was $1,718,435 (gross unrealized appreciation-$1,931,114; gross
unrealized depreciation-$212,679).
For federal income tax purposes, the Series has a capital loss
carryforward as of August 31, 2000 of approximately $220,500 which expires in
2008. Accordingly, no capital gains distribution is expected to be paid to
shareholders until net gains have been realized in excess of this amount. In
addition, the Series will elect to treat net capital losses of approximately
$242,700, incurred in the ten month period ended August 31, 2000 as having
occurred in the following fiscal year. Note 5. Capital The Series offers Class
A, Class B and Class C shares. Class A shares are sold with a front-end sales
charge of up to 3%. Class B shares are sold with a contingent deferred sales
charge which declines from 5% to zero depending on the period of time the shares
are held. Class C shares are sold with a front-end sales charge of 1% and a
contingent deferred sales charge of 1% during the first 18 months. Class B
shares will automatically convert to Class A shares on a quarterly basis
approximately seven years after purchase. A special exchange privilege is also
available for shareholders who qualify to purchase Class A shares at net asset
value.
The Fund has authorized an unlimited number of shares of beneficial
interest of each class at $.01 par value per share.
Transactions in shares of beneficial interest were as follows:
CLASS A SHARES AMOUNT
- ------------------------------------------------------------- ---------- -----------
Year ended August 31, 2000:
Shares sold 40,432 $ 432,926
Shares issued in reinvestment of dividends and distributions 64,170 685,642
Shares reacquired (535,132) (5,709,136)
---------- -----------
Net increase (decrease) in shares outstanding before
conversion (430,530) (4,590,568)
Shares issued upon conversion from Class B 452,915 4,847,220
---------- -----------
Net increase (decrease) in shares outstanding 22,385 $ 256,652
========== ===========
Year ended August 31, 1999:
Shares sold 160,409 $ 1,841,063
Shares issued in reinvestment of dividends and distributions 70,495 808,498
Shares reacquired (371,069) (4,230,540)
---------- -----------
Net increase (decrease) in shares outstanding before
conversion (140,165) (1,580,979)
Shares issued upon conversion from Class B 251,666 2,895,820
---------- -----------
Net increase (decrease) in shares outstanding 111,501 $ 1,314,841
========== ===========-
B-255
PRUDENTIAL MUNICIPAL SERIES FUND North Carolina Series
Notes to Financial Statements Cont'd.
CLASS B SHARES AMOUNT
- ------------------------------------------------------------- ---------- -----------
Year ended August 31, 2000:
Shares sold 50,141 $ 537,507
Shares issued in reinvestment of dividends and distributions 29,876 319,061
Shares reacquired (220,782) (2,359,807)
---------- -----------
Net increase (decrease) in shares outstanding before
conversion (140,765) (1,503,239)
Shares reacquired upon conversion into Class A (452,626) (4,847,220)
---------- -----------
Net increase (decrease) in shares outstanding (593,391) $(6,350,459)
========== ===========
Year ended August 31, 1999:
Shares sold 170,364 $ 1,976,534
Shares issued in reinvestment of dividends and distributions 44,516 511,315
Shares reacquired (306,345) (3,508,595)
---------- -----------
Net increase (decrease) in shares outstanding before
conversion (91,465) (1,020,746)
Shares reacquired upon conversion into Class A (251,607) (2,895,820)
---------- -----------
Net increase (decrease) in shares outstanding (343,072) $(3,916,566)
========== ===========
CLASS C
- -------------------------------------------------------------
Year ended August 31, 2000:
Shares sold 55 $ 594
Shares issued in reinvestment of dividends and distributions 60 637
---------- -----------
Net increase (decrease) in shares outstanding 115 $ 1,231
========== ===========
Year ended August 31, 1999:
Shares sold 52 $ 595
Shares issued in reinvestment of dividends and distributions 61 709
---------- -----------
Net increase (decrease) in shares outstanding 113 $ 1,304
========== ===========
NOTE 6. PROPOSED REORGANIZATION
On August 23, 2000, the Trustees of the Series approved an Agreement and Plan of
Reorganization (the 'Plan of Reorganization') which provides for the transfer of
all of the assets and liabilities of the Series to Prudential National
Municipals Fund, Inc. ('National Municipals'). Class A, Class B and Class C
shares of the Series would be exchanged at net asset value for Class A shares of
equivalent value of National Municipals. The Series would then cease operations.
The Plan of Reorganization requires approval by the shareholders of the
Series to become effective and a proxy/prospectus will be mailed to shareholders
in October 2000. If the Plan is approved, it is expected that the reorganization
will take place in December 2000. The Series and National Municipals will each
bear their pro rata share of the costs of the reorganization, including cost of
proxy solicitation.
B-256
PRUDENTIAL MUNICIPAL SERIES FUND North Carolina Series
Financial Highlights
CLASS A
-----------------
YEAR ENDED
AUGUST 31, 2000
- ----------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year $ 10.92
--------
INCOME FROM INVESTMENT OPERATIONS
Net investment income .52
Net realized and unrealized gain (loss) on investment
transactions .08
--------
Total from investment operations .60
--------
LESS DISTRIBUTIONS
Dividends from net investment income (.52)
Distributions in excess of net investment income --
Distributions from net realized gains (.01)
--------
Total distributions (.53)
--------
Net asset value, end of year $ 10.99
========
TOTAL RETURN(b): 5.67%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000) $29,822
Average net assets (000) $28,635
Ratios to average net assets:
Expenses, including distribution and service (12b-1) fees 1.15%
Expenses, excluding distribution and service (12b-1) fees .90%
Net investment income 4.81%
For Class A, B and C shares:
Portfolio turnover rate 22%
- ------------------------------
(a) Net of management fee waiver.
(b) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each year reported and includes reinvestment of dividends and
distributions.
(c) Less than $.005 per share.
See Notes to Financial Statements
B-257
PRUDENTIAL MUNICIPAL SERIES FUND North Carolina Series
Financial Highlights Cont'd.
CLASS A
- -------------------------------------------------------------------------------------
YEAR ENDED AUGUST 31,
- -------------------------------------------------------------------------------------
1999 1998 1997 1996
- -------------------------------------------------------------------------------------
$ 11.69 $ 11.28 $ 11.06 $ 11.19
-------- -------- -------- --------
.53 .55 .54(a) .53(a)
(.71) .41 .38 (.01)
-------- -------- -------- --------
(.18) .96 .92 .52
-------- -------- -------- --------
(.53) (.55) (.54) (.53)
-- --(c) -- --
(.06) -- (.16) (.12)
-------- -------- -------- --------
(.59) (.55) (.70) (.65)
-------- -------- -------- --------
$ 10.92 $ 11.69 $ 11.28 $ 11.06
======== ======== ======== ========
(1.72)% 8.72% 8.58% 4.70%
$ 29,400 $ 30,149 $ 29,350 $ 28,089
$ 30,621 $ 29,617 $ 29,055 $ 27,628
1.03% .84% .93%(a) 1.03%(a)
.83% .74% .83%(a) .93%(a)
4.57% 4.79% 4.87%(a) 4.78%(a)
15% 27% 35% 23%
See Notes to Financial Statements
B-258
PRUDENTIAL MUNICIPAL SERIES FUND North Carolina Series
Financial Highlights Cont'd.
CLASS B
---------------
YEAR ENDED
AUGUST 31, 2000
- ----------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year $ 10.93
---------------
INCOME FROM INVESTMENT OPERATIONS
Net investment income .49
Net realized and unrealized gain (loss) on investment
transactions .07
---------------
Total from investment operations .56
---------------
LESS DISTRIBUTIONS
Dividends from net investment income (.49)
Distributions in excess of net investment income --
Distributions from net realized gains (.01)
---------------
Total distributions (.50)
---------------
Net asset value, end of year $ 10.99
===============
TOTAL RETURN(b): 5.31%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000) $10,133
Average net assets (000) $12,495
Ratios to average net assets:
Expenses, including distribution and service (12b-1) fees 1.39%
Expenses, excluding distribution and service (12b-1) fees .90%
Net investment income 4.55%
- ------------------------------
(a) Net of management fee waiver.
(b) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each year reported and includes reinvestment of dividends and
distributions.
(c) Less than $.005 per share.
See Notes to Financial Statements
B-259
PRUDENTIAL MUNICIPAL SERIES FUND North Carolina Series
Financial Highlights Cont'd.
CLASS B
- -------------------------------------------------------------------------------------
YEAR ENDED AUGUST 31,
- -------------------------------------------------------------------------------------
1999 1998 1997 1996
- -------------------------------------------------------------------------------------
$ 11.69 $ 11.29 $ 11.06 $ 11.19
-------- -------- -------- --------
.49 .51 .50(a) .49(a)
(.70) .40 .39 (.01)
-------- -------- -------- --------
(.21) .91 .89 .48
-------- -------- -------- --------
(.49) (.51) (.50) (.49)
-- --(c) -- --
(.06) -- (.16) (.12)
-------- -------- -------- --------
(.55) (.51) (.66) (.61)
-------- -------- -------- --------
$ 10.93 $ 11.69 $ 11.29 $ 11.06
======== ======== ======== ========
(1.93)% 8.19% 8.25% 4.28%
$ 16,560 $ 21,726 $524,952 $ 31,029
$ 19,695 $ 23,460 $ 27,703 $ 35,605
1.33% 1.24% 1.33%(a) 1.43%(a)
.83% .74% .83%(a) .93%(a)
4.26% 4.39% 4.47%(a) 4.37%(a)
See Notes to Financial Statements
B-260
PRUDENTIAL MUNICIPAL SERIES FUND North Carolina Series
Financial Highlights Cont'd.
CLASS C
---------------
YEAR ENDED
AUGUST 31, 2000
- ----------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year $ 10.93
---------------
INCOME FROM INVESTMENT OPERATIONS
Net investment income .47
Net realized and unrealized gain (loss) on investment
transactions .07
---------------
Total from investment operations .54
---------------
LESS DISTRIBUTIONS
Dividends from net investment income (.47)
Distributions in excess of net investment income --
Distributions from net realized gains (.01)
---------------
Total distributions (.48)
---------------
Net asset value, end of year $ 10.99
===============
TOTAL RETURN(b): 5.05%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000) $ 30
Average net assets (000) $ 29
Ratios to average net assets:
Expenses, including distribution and service (12b-1) fees 1.64%
Expenses, excluding distribution and service (12b-1) fees .90%
Net investment income 4.33%
- ------------------------------
(a) Net of management fee waiver.
(b) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each year reported and includes reinvestment of dividends and
distributions.
(c) Less than $.005 per share.
See Notes to Financial Statements
B-261
PRUDENTIAL MUNICIPAL SERIES FUND North Carolina Series
Financial Highlights Cont'd.
CLASS C
- -------------------------------------------------------------------------------------
YEAR ENDED AUGUST 31,
- -------------------------------------------------------------------------------------
1999 1998 1997 1996
- -------------------------------------------------------------------------------------
$11.69 $11.29 $11.06 $11.19
------- ------- ------- -------
.46 .48 .47(a) .46(a)
(.70) .40 .39 (.01)
------- ------- ------- -------
(.24) .88 .86 .45
------- ------- ------- -------
(.46) (.48) (.47) (.46)
-- --(c) -- --
(.06) -- (.16) (.12)
------- ------- ------- -------
(.52) (.48) (.63) (.58)
------- ------- ------- -------
$10.93 $11.69 $11.29 $11.06
======= ======= ======= =======
(2.18)% 7.92% 7.98% 4.03%
$ 29 $ 30 $ 62 $ 72
$ 30 $ 31 $ 68 $ 69
1.58% 1.49% 1.58%(a) 1.68%(a)
.83% .74% .83%(a) .93%(a)
4.02% 4.14% 4.22%(a) 4.14%(a)
See Notes to Financial Statements
B-262
PRUDENTIAL MUNICIPAL SERIES FUND North Carolina Series
Report of Independent Accountants
To the Shareholders and Board of Trustees of
Prudential Municipal Series Fund, North Carolina Series
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Prudential Municipal Series Fund,
North Carolina Series (the 'Fund', one of the portfolios constituting Prudential
Municipal Series Fund) at August 31, 2000, the results of its operations for the
year then ended, the changes in its net assets for each of the two years in the
period then ended and the financial highlights for each of the four years in the
period then ended, in conformity with accounting principles generally accepted
in the United States of America. These financial statements and financial
highlights (hereafter referred to as 'financial statements') are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with auditing standards
generally accepted in the United States of America, which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits, which included confirmation of securities at August
31, 2000 by correspondence with the custodian, provide a reasonable basis for
our opinion. The accompanying financial highlights for the year ended August 31,
1996 were audited by other independent accountants, whose opinion dated October
14, 1996 was unqualified.
As described in Note 6 to the financial statements, on August 23, 2000, the
Board of Trustees of the Fund approved an Agreement and Plan of Reorganization,
subject to shareholder approval, whereby the Fund would be merged into
Prudential National Municipals Fund, Inc.
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York
October 20, 2000
B-263
PRUDENTIAL MUNICIPAL SERIES FUND North Carolina Series
Federal Tax Information (Unaudited)
We are required by the Internal Revenue Code to advise you within 60 days
of the Series' fiscal year end (August 31, 2000) as to the federal tax status of
dividends and distributions paid by the Series during such fiscal year.
Accordingly, we are advising you that in the fiscal year ended August 31, 2000,
dividends paid from net investment income of $0.52 per Class A share, $0.49 per
Class B share, and $0.47 per Class C share were all federally tax-exempt
interest dividends. In addition, the Series paid to Class A, B and C shares a
long-term capital gain distribution of $0.005 which is taxable as such.
We wish to advise you that the corporate dividends received deduction for
the Series is zero. Only funds that invest in U.S. equity securities are
entitled to pass-through a corporate dividends received deduction.
In January 2001, you will be advised on IRS Form 1099 DIV or Substitute
1099 DIV as to the federal tax status of the distributions received by you in
calendar year 2000.
B-264
PRUDENTIAL MUNICIPAL SERIES FUND Ohio Series
Portfolio of Investments as of August 31, 2000
PRINCIPAL
MOODY'S RATING INTEREST MATURITY AMOUNT VALUE
DESCRIPTION (a) (UNAUDITED) RATE DATE (000) (NOTE 1)
- -------------------------------------------------------------------------------------------------------------
LONG-TERM INVESTMENTS 98.7%
Akron, Gen. Oblig. A1 10.50% 12/01/04 $ 200 $ 245,358
Brecksville Broadview Heights City
Sch. Dist., F.G.I.C. Aaa 6.50 12/01/16 1,000 1,103,350
Canton Water Works Sys., Gen.
Oblig., A.M.B.A.C. Aaa 5.85 12/01/15 700 729,960
Clear Fork Valley Loc. Sch. Dist.,
Richland Cnty. AA-(c) Zero 12/01/24 845 206,290
Cleveland Arpt. Spl. Rev. Ref.,
Continental Airlines, Inc., A.M.T. Ba2 5.70 12/01/19 650 565,636
Cleveland Cuyahoga Cnty. Port Auth.
Rev., Dev. Cap. Impvt. proj. Ser.
A NR 5.375 5/15/19 980 871,249
Cleveland, Gen. Oblig., M.B.I.A. Aaa 5.75 8/01/15 1,000 1,059,740
Cleveland, Gen. Oblig., M.B.I.A. Aaa 5.75 8/01/14 1,000 1,063,140
Columbus Citation Hsg. Dev. Corp.,
Mtge. Rev., F.H.A. AA(c) 7.625 1/01/22 1,850(e) 2,236,520
Columbus, Gen. Oblig., Mun. Arpt.
No. 32, A.M.T. Aaa 7.15 7/15/06 435 444,531
Cuyahoga Cnty. Hosp. Rev., Meridia
Health Sys. A1 6.25 8/15/24 1,500(e) 1,642,275
Dayton, Gen. Oblig., M.B.I.A. Aaa 7.00 12/01/07 480 549,658
Dover Mun. Elec. Sys. Rev.,
F.G.I.C. Aaa 5.95 12/01/14 1,000 1,047,200
Franklin Cnty. Hosp. Rev., Senior
Doctors Hlth. Corp., Ser. A Baa3 5.60 12/01/28 900 655,038
Greene Cnty. Cap. Apprec., Wtr.
Sys. Rev., Ser. A, F.G.I.C. Aaa 6.125 12/01/21 1,000 1,056,620
Guam Pwr. Auth. Rev., Ser. A AAA(c) 6.75 10/01/24 2,500(e) 2,778,025
Hilliard City Sch. Dist.,
Cap. Apprec.-Sch. Impvt., F.G.I.C. Aaa Zero 12/01/09 2,000 1,276,920
Cap. Apprec.-Sch. Impvt., F.G.I.C. Aaa Zero 12/01/18 1,720 624,412
Cap. Apprec.-Sch. Impvt., F.G.I.C. Aaa Zero 12/01/19 1,720 586,279
Huber Heights Water Sys. Rev., Cap.
Apprec., M.B.I.A. Aaa Zero 12/01/23 1,000 270,100
Hudson City, Park Impvt. Aa2 6.125 12/01/19 555 589,638
Lorain Cnty. Hosp. Rev., Ref.
Mtge., Elyria United Methodist
Village BBB+(c) 6.875 6/01/22 2,000 1,996,360
See Notes to Financial Statements
B-265
PRUDENTIAL MUNICIPAL SERIES FUND Ohio Series
Portfolio of Investments as of August 31, 2000 Cont'd.
PRINCIPAL
MOODY'S RATING INTEREST MATURITY AMOUNT VALUE
DESCRIPTION (a) (UNAUDITED) RATE DATE (000) (NOTE 1)
- -------------------------------------------------------------------------------------------------------------
Lucas Cnty. Hlth. Fac. Rev., Ref.,
Ohio Presbyterian Retirement Svcs. NR 6.625% 7/01/14 $ 1,750 $ 1,711,132
Lucas Cnty. Hosp. Rev., Promedica
Healthcare Oblig., Ser. 96,
M.B.I.A. Aaa 5.75 11/15/09 2,000(d) 2,130,240
Marysville Village Sch. Dist., Gen.
Oblig., Sch. Impvt., M.B.I.A. Aaa Zero 12/01/15 865 374,804
Miami Cnty. Hosp. Fac. Rev., Ref. &
Impvt., Upper Valley Med. Ctr. Baa2 6.375 5/15/26 750 679,117
Montgomery Cnty. Hlth. Sys. Rev.,
Ref., Franciscan Med. Ctr., Dayton NR 5.50 7/01/18 1,750(e) 1,806,315
Montgomery Cnty. Swr. Sys. Rev.,
Greater Moraine, Beaver Creek,
F.G.I.C. Aaa Zero 9/01/05 1,000 793,110
Morgan, Loc. Sch. Dist. F.S.A. Aaa 5.75 12/01/22 1,000 1,018,150
Mount Vernon City Sch. Dist., Gen.
Oblig., F.G.I.C. Aaa 7.50 12/01/14 500 556,600
Newark, Ltd. Tax Gen. Oblig., Wtr.
Impvt., Cap. Apprec., A.M.B.A.C. Aaa Zero 12/01/06 805 600,305
Ohio Hsg. Fin. Agy. Mtg. Rev., Res.
Conv. Opt C1, G.N.M.A., A.M.T. Aaa 6.05 3/01/32 1,000 1,011,380
Ser. A, G.N.M.A., A.M.T. Aaa 6.35 9/01/31 1,000 1,034,250
Ohio St. Air Quality Dev. Auth.
Rev., Poll. Ctrl.,
Cleveland Elec. Co. Proj., Ref.,
A.M.T. Ba1 6.10 8/01/20 1,000 950,260
Cleveland Elec. Co. Proj., Ref.,
F.G.I.C. Aaa 8.00 12/01/13 2,500 2,704,800
Ohio St. Bldg. Auth., Das Data Ctr.
Proj., Aa2 6.00 10/01/08 615 670,381
Ohio St. Environ. Impvt. Rev.,
Ref., USX Corp. Proj. Baa2 5.625 5/01/29 1,000 907,190
Ohio St. Higher Edl. Fac. Comn.
Rev., Case Western Resv. Univ.,
Ser. B Aa3 6.50 10/01/20 750 848,775
See Notes to Financial Statements
B-266
PRUDENTIAL MUNICIPAL SERIES FUND Ohio Series
Portfolio of Investments as of August 31, 2000 Cont'd.
PRINCIPAL
MOODY'S RATING INTEREST MATURITY AMOUNT VALUE
DESCRIPTION (a) (UNAUDITED) RATE DATE (000) (NOTE 1)
- -------------------------------------------------------------------------------------------------------------
Ohio St. Solid Waste Disposal Rev.,
USG Corp. Proj. A.M.T. Baa1 6.05% 8/01/34 $ 1,000 $ 954,360
Ohio St. Solid Waste Rev., A.M.T. NR 8.50 8/01/22 500(f) 147,500
Ohio St. Tpk. Comm., Tpk. Rev.,
Ref., Series A, F.G.I.C. Aaa 5.50 2/15/24 4,000 4,063,400
Ohio St. Univ., Gen. Rcpts., Ser. A Aa2 6.00 12/01/16 1,000 1,065,800
Ohio St. Water Dev. Auth., Poll.
Cntrl. Fac. Rev. Ba3 5.25 9/01/33 1,250 1,232,575
Pickerington Local Sch. Dist.,
Gen. Oblig., A.M.B.A.C. Aaa Zero 12/01/08 890 598,881
Gen. Oblig., A.M.B.A.C. Aaa Zero 12/01/13 525 263,529
Puerto Rico Comwlth.
Gen. Oblig., M.B.I.A. NR 7.497 7/01/12 1,000 1,173,670
Hwy. & Transn. Auth. Rev., Ser. A,
M.B.I.A. Aaa 5.00 7/01/38 750 694,987
Puerto Rico Indl. Tourist Edu.,
Med. & Env. Catl. Facs., Rev. Baa2 6.625 6/01/26 1,000 1,042,430
Puerto Rico Pub. Bldgs. Auth. Rev.,
Gtd. Pub. Ed. & Hlth. Facs., Ser.
J Baa1 Zero 7/01/06 3,000 2,299,620
Richland Cnty. Ohio Hosp. Facs.
Rev. Ser. B A-(c) 6.375 11/15/22 1,000 997,520
Trumbull Cnty., Gen. Oblig.
Cap. Apprec., A.M.B.A.C. Aaa Zero 12/01/09 1,250 798,075
Univ. of Puerto Rico Rev., Cap.
Apprec. Ref., Ser. N, M.B.I.A. Aaa Zero 6/01/13 4,245 2,261,609
Virgin Islands Pub. Fin. Auth.
Rev.,
Gross Rcpts. Taxes, Loan Notes,
Ser. A BBB-(c) 6.50 10/01/24 500 517,945
Ref., Matching Loan Notes, Ser. A AAA(c) 7.25 10/01/18 1,000(e) 1,079,990
Virgin Islands Terr., Hugo Ins.
Claims Fund Proj., Ser. 91 NR 7.75 10/01/06 305(e) 319,061
Virgin Islands Wtr. & Pwr. Auth.,
Elec. Sys. Rev., Ser. A NR 7.40 7/01/11 830(e) 858,901
-----------
Total long-term investments
(cost $57,188,566) 59,764,961
-----------
See Notes to Financial Statements
B-267
PRUDENTIAL MUNICIPAL SERIES FUND Ohio Series
Portfolio of Investments as of August 31, 2000 Cont'd.
PRINCIPAL
MOODY'S RATING INTEREST MATURITY AMOUNT VALUE
DESCRIPTION (a) (UNAUDITED) RATE DATE (000) (NOTE 1)
- -------------------------------------------------------------------------------------------------------------
SHORT-TERM INVESTMENTS 1.3%
Ohio St. Air Quality Dev. Auth.
Rev. Adj. Ref., Cincinnati Gas &
Elec., Ser. B, F.R.D.D. VMIG1 4.30% 9/01/00 $ 100 $ 100,000
Ohio St. Solid Waste Rev.,
BP Explr. & Oil Proj., F.R.D.D. VMIG1 4.45 9/01/00 600 600,000
BP Explr. & Oil Proj., F.R.D.D VMIG1 4.45 9/01/00 100 100,000
-----------
Total short-term investments
(cost $800,000) 800,000
-----------
TOTAL INVESTMENTS 100.0%
(COST $57,988,566; NOTE 4) 60,564,961
Other assets in excess of
liabilities 28,591
-----------
NET ASSETS 100% $60,593,552
===========
- ------------------------------
(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 (b).
F.S.A.--Financial Security Assurance.
G.N.M.A.--Government National Mortgage Association.
M.B.I.A.--Municipal Bond Insurance Corporation.
(b) For purposes of amortized cost valuation, the maturity date of Floating Rate
Demand Notes is considered to be the later of the next date on which the
security can be redeemed at par, or the next date on which the rate of
interest is adjusted.
(c) Standard & Poor's Rating.
(d) Represents when-issued security.
(e) Prerefunded issues are secured by escrowed cash and/or direct U.S.
guaranteed obligations.
(f) Security in default.
NR--Not Rated by Moody's or Standard & Poor's.
The Fund's current Statement of Additional Information contains a description of
Moody's and Standard & Poor's ratings.
See Notes to Financial Statements
B-268
PRUDENTIAL MUNICIPAL SERIES FUND Ohio Series
Statement of Assets and Liabilities
AUGUST 31, 2000
- ----------------------------------------------------------------------------------------
ASSETS
Investments, at value (cost $57,988,566) $ 60,564,961
Cash 98,237
Interest receivable 706,111
Other assets 1,847
-----------------
TOTAL ASSETS 61,371,156
-----------------
LIABILITIES
Payable for investments purchased 622,274
Accrued expenses 76,485
Dividends payable 31,082
Management fee payable 26,063
Distribution fee payable 15,518
Deferred trustee's fees 6,182
-----------------
TOTAL LIABILITIES 777,604
-----------------
NET ASSETS $ 60,593,552
=================
Net assets were comprised of:
Shares of beneficial interest, at par $ 53,717
Paid-in capital in excess of par 58,084,547
-----------------
58,138,264
Accumulated net realized loss on investments (121,107)
Net unrealized appreciation on investments 2,576,395
-----------------
Net assets, August 31, 2000 $ 60,593,552
=================
See Notes to Financial Statements
B-269
PRUDENTIAL MUNICIPAL SERIES FUND Ohio Series
Statement of Assets and Liabilities Cont'd.
August 31, 2000
- ----------------------------------------------------------------------------------------
Class A:
Net asset value and redemption price per share
($44,267,072 / 3,925,073 shares of beneficial interest
issued and outstanding) $11.28
Maximum sales charge (3% of offering price) 0.35
-----------------
Maximum offering price to public $11.63
=================
Class B:
Net asset value, offering price and redemption price per
share
($16,148,328 / 1,430,872 shares of beneficial interest
issued and outstanding) $11.29
=================
Class C:
Net asset value and redemption price per share
($178,152 / 15,786 shares of beneficial interest issued
and outstanding) $11.29
Sales charge (1% of offering price) 0.11
-----------------
Offering price to public $11.40
=================
See Notes to Financial Statements
B-270
PRUDENTIAL MUNICIPAL SERIES FUND Ohio Series
Statement of Operations
YEAR
ENDED
AUGUST 31, 2000
- ----------------------------------------------------------------------------------------
NET INVESTMENT INCOME
Income
Interest $ 3,948,930
-----------------
Expenses
Management fee 329,819
Distribution fee--Class A 114,178
Distribution fee--Class B 99,475
Distribution fee--Class C 1,463
Custodian's fees and expenses 84,000
Reports to shareholders 53,000
Transfer agent's fees & expenses 40,000
Registration fees 28,000
Legal fees and expenses 16,000
Audit fees 10,000
Trustees' fees and expenses 8,000
Miscellaneous 8,289
-----------------
TOTAL EXPENSES 792,224
Custodian fee credit (1,371)
-----------------
Net expenses 790,853
-----------------
NET INVESTMENT INCOME 3,158,077
-----------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Net realized gain (loss) on:
Investment transactions (199,137)
Financial futures transactions 186,509
-----------------
(12,628)
-----------------
Net change in unrealized appreciation on:
Investments (99,889)
Financial futures contracts (65,563)
-----------------
(165,452)
-----------------
Net loss on investments (178,080)
-----------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 2,979,997
=================
See Notes to Financial Statements
B-271
PRUDENTIAL MUNICIPAL SERIES FUND Ohio Series
Statement of Changes in Net Assets
Year Ended August 31,
-----------------------------------
2000 1999
- -----------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net investment income $ 3,158,077 $ 3,603,673
Net realized gain (loss) on investment
transactions (12,628) 769,806
Net change in unrealized appreciation on
investments (165,452) (5,472,852)
----------------- --------------
Net increase (decrease) in net assets
resulting from operations 2,979,997 (1,099,373)
----------------- --------------
DIVIDENDS AND DISTRIBUTIONS (NOTE 1):
Dividends to shareholders from net
investment income
Class A (2,221,407) (2,304,508)
Class B (928,047) (1,287,519)
Class C (8,623) (11,646)
----------------- --------------
(3,158,077) (3,603,673)
----------------- --------------
Distributions in excess of net investment
income
Class A (21,138) (38,470)
Class B (9,767) (23,367)
Class C (95) (164)
----------------- --------------
(31,000) (62,001)
----------------- --------------
Distributions from net realized gains
Class A (257,882) (1,111,350)
Class B (119,154) (675,050)
Class C (1,168) (4,744)
----------------- --------------
(378,204) (1,791,144)
----------------- --------------
SERIES SHARE TRANSACTIONS (NET OF SHARE
CONVERSIONS) (NOTE 5):
Net proceeds from shares sold 1,352,379 6,020,350
Net asset value of shares issued in
reinvestment of dividends and
distributions 2,139,011 3,287,977
Cost of shares reacquired (15,195,098) (16,660,880)
----------------- --------------
Net decrease in net assets from Series
share transactions (11,703,708) (7,352,553)
----------------- --------------
Total decrease (12,290,992) (13,908,744)
NET ASSETS
Beginning of year 72,884,544 86,793,288
----------------- --------------
End of year $ 60,593,552 $ 72,884,544
================= ==============
See Notes to Financial Statements
B-272
PRUDENTIAL MUNICIPAL SERIES FUND Ohio Series
Notes to Financial Statements
Prudential Municipal Series Fund (the 'Fund') is registered under the
Investment Company Act of 1940, as an open-end investment company. The Fund was
organized as a Massachusetts business trust on May 18, 1984 and consists of
eleven series. The monies of each series are invested in separate, independently
managed portfolios. The Ohio Series (the 'Series') commenced investment
operations in September, 1984. The Series is diversified and its investment
objective is to maximize current income that is exempt from Ohio state and
federal income taxes consistent with the preservation of capital and, in
conjunction therewith, the Series may invest in debt securities with the
potential for capital gains. The Series seeks to achieve this objective by
investing primarily in Ohio state, municipal and local government obligations
and obligations of other qualifying issuers. The ability of the issuers of the
securities held by the Series to meet their obligations may be affected by
economic developments in a specific state, industry or region.
NOTE 1. Accounting Policies
The following is a summary of significant accounting policies followed by the
Fund, and the Series, in preparation of its financial statements.
SECURITIES VALUATION: The Series values municipal securities (including
commitments to purchase such securities on a 'when-issued' basis) on the basis
of prices provided by a pricing service which uses information with respect to
transactions in bonds, quotations from bond dealers, market transactions in
comparable securities and various relationships between securities in
determining values. If market quotations are not readily available from such
pricing services, a security is valued at its fair value as determined under
procedures established by the Trustees.
Short-term securities which mature in more than 60 days are valued at
current market quotations. Short-term securities which mature in 60 days or less
are valued at amortized cost.
All securities are valued as of 4:15 p.m., New York time.
FINANCIAL FUTURES CONTRACTS: A financial futures contract is an
agreement to purchase (long) or sell (short) an agreed amount of securities at a
set price for delivery on a future date. Upon entering into a financial futures
contract, the Series is required to pledge to the broker an amount of cash
and/or other assets equal to a certain percentage of the contract amount. This
amount is known as the 'initial margin.' Subsequent payments, known as
'variation margin,' are made or received by the Series each day, depending on
the daily fluctuations in the value of the underlying security. Such variation
margin is recorded for financial statement purposes on a daily basis as
unrealized gain or loss. When the contract expires or is closed, the gain or
loss is realized and is presented in the statement of operations as net realized
gain (loss) on financial futures contracts.
B-273
PRUDENTIAL MUNICIPAL SERIES FUND Ohio Series
Notes to Financial Statements Cont'd.
The Series invests in financial futures contracts in order to hedge its
existing portfolio securities or securities the Series intends to purchase,
against fluctuations in value caused by changes in prevailing interest rates.
Should interest rates move unexpectedly, the Series may not achieve the
anticipated benefits of the financial futures contracts and may realize a loss.
The use of futures transactions involves the risk of imperfect correlation in
movements in the price of futures contracts, interest rates and the underlying
hedged assets.
SECURITIES TRANSACTIONS AND NET INVESTMENT INCOME: Securities
transactions are recorded on the trade date. Realized gains and losses on sales
of securities are calculated on the identified cost basis. Interest income is
recorded on the accrual basis. The Series amortizes premiums and accretes
original issue discount paid on purchases of portfolio securities as adjustments
to interest income. Expenses are recorded on the accrual basis which may require
the use of certain estimates by management.
Net investment income (other than distribution fees) and unrealized and
realized gains or losses are allocated daily to each class of shares based upon
the relative proportion of net assets of each class at the beginning of the day.
FEDERAL INCOME TAXES: For federal income tax purposes, each series in
the Fund is treated as a separate taxpaying entity. It is the intent of the
Series to continue to meet the requirements of the Internal Revenue Code
applicable to regulated investment companies and to distribute all of its net
income to shareholders. For this reason, no federal income tax provision is
required.
DIVIDENDS AND DISTRIBUTIONS: The Series declares daily dividends from
net investment income. Payment of dividends are made monthly. Distributions of
net capital gains, if any, are made annually.
Income distributions and capital gain distributions are determined in
accordance with income tax regulations which may differ from generally accepted
accounting principles.
CUSTODY FEE CREDITS: The Fund has an arrangement with its custodian
bank, whereby uninvested monies earn credits which reduce the fees charged by
the custodian.
RECLASSIFICATION OF CAPITAL ACCOUNTS: The Fund accounts for and reports
distributions to shareholders in accordance with the American Institute of
Certified Public Accountants' Statement of Position 93-2: Determination,
Disclosure, and Financial Statement Presentation of Income, Capital Gain, and
Return of Capital Distributions by Investment Companies. The effect of applying
this statement was to decrease distribution in excess of net investment income
and increase accumulated net realized loss on investments by $31,000, due to the
sale of securities purchased with market discount during the year ended August
31, 2000. Net investment income, net realized gains and net assets were not
affected by this change.
B-274
PRUDENTIAL MUNICIPAL SERIES FUND Ohio Series
Notes to Financial Statements Cont'd.
NOTE 2. AGREEMENTS
The Fund has a management agreement with Prudential Investments Fund Management
LLC ('PIFM'). Pursuant to this agreement, PIFM has responsibility for all
investment advisory services and supervises the subadviser's performance of such
services. PIFM has entered into a subadvisory agreement with The Prudential
Investment Corporation ('PIC'). The subadvisory agreement provides that PIC will
furnish investment advisory services in connection with the management of the
Fund. In connection therewith, PIC is obligated to keep certain books and
records of the Fund. PIFM continues to have responsibility for all investment
advisory services pursuant to the management agreement and supervises PIC's
performance of such services. PIFM pays for the services of PIC, the cost of
compensation of officers of the Fund, occupancy and certain clerical and
bookkeeping costs of the Fund. The Fund bears all other costs and expenses.
The management fee paid PIFM is computed daily and payable monthly, at an
annual rate of .50 of 1% of the average daily net assets of the Series.
Effective January 1, 2000, the subadvisory fee paid to PIC by PIFM is
computed daily and payable monthly at an annual rate of .250 of 1% of the
average daily net assets of the Fund. Prior to January 1, 2000, PIC was
reimbursed by PIFM for reasonable costs and expenses incurred in furnishing
investment advisory services. The change in the subadvisory fee structure has no
impact on the management fee charged to the Fund or its shareholders.
The Fund has a distribution agreement with Prudential Investment
Management Services LLC ('PIMS'), which acts as the distributor of the Class A,
Class B and Class C shares of the Fund. The Fund compensated PIMS for
distributing and servicing the Fund's Class A, Class B and Class C shares
pursuant to plans of distribution, (the 'Class A, B and C Plans'), regardless of
expenses actually incurred by them. The distribution fees are accrued daily and
payable monthly.
Pursuant to the Class A, B and C Plans, the Fund compensates PIMS for
distribution-related activities at an annual rate of up to .30 of 1%, .50 of 1%
and 1% of the average daily net assets of the Class A, B and C shares,
respectively. Such expenses under the Plans were .25 of 1%, .50 of 1% and .75 of
1% of the average daily net assets of the Class A, B and C shares, respectively.
Effective August 23, 2000, such expenses under the Plans were .25 of 1% of
average daily net assets of Class A, B and C shares.
PIMS has advised the Series that they received approximately $5,100 in
front-end sales charges resulting from sales of Class A shares during the year
ended August 31, 2000. From these fees, PIMS paid such sales charges to
affiliated broker-dealers, which in turn paid commissions to salespersons and
incurred other distribution costs.
B-275
PRUDENTIAL MUNICIPAL SERIES FUND Ohio Series
Notes to Financial Statements Cont'd.
PIMS has advised the Series that for the year ended August 31, 2000, they
received approximately $31,600 and $500 in contingent deferred sales charges
imposed upon certain redemptions by Class B and Class C shareholders,
respectively.
PIFM, PIC and PIMS are wholly owned subsidiaries of The Prudential
Insurance Company of America ('Prudential').
The Series, along with other affiliated registered investment companies
(the 'Funds'), entered into a syndicated credit agreement ('SCA') with an
unaffiliated lender. The maximum commitment under the SCA is $1 billion.
Interest on any borrowings will be at market rates. The purpose of the credit
agreement is to serve as an alternative source of funding for capital share
redemptions. The Funds pay a commitment fee of .080 of 1% of the unused portion
of the credit facility. The commitment fee is accrued and paid quarterly on a
pro rata basis by the Funds. The expiration date of the SCA is March 9, 2001.
Prior to March 9, 2000 the commitment fee was .065 of 1% of the unused portion
of the credit facility. The Fund did not borrow any amounts during the year
ended August 31, 2000.
NOTE 3. OTHER TRANSACTIONS WITH AFFILIATES
Prudential Mutual Fund Services LLC ('PMFS'), a wholly owned subsidiary of PIFM,
serves as the Fund's transfer agent. During the year ended August 31, 2000, the
Series incurred fees of approximately $30,700 for the services of PMFS. As of
August 31, 2000, approximately $3,500 of such fees were due to PMFS. Transfer
agent fees and expenses in the Statement of Operations include certain
out-of-pocket expenses paid to nonaffiliates.
NOTE 4. PORTFOLIO SECURITIES
Purchases and sales of portfolio securities of the Series, excluding short-term
investments, for the year ended August 31, 2000 were $16,892,810 and
$29,457,232, respectively.
The cost basis of investments for federal income tax purposes at August
31, 2000 was substantially the same as for financial reporting purposes and
accordingly, net unrealized appreciation of investments for federal income tax
purposes was $2,576,395 (gross unrealized appreciation--$3,647,355; gross
unrealized depreciation--$1,070,960).
The Series will elect, for United States Federal income tax purposes, to
treat net capital losses of $141,150 incurred in the ten-month period ended
August 31, 2000 as having been incurred in the following fiscal year.
NOTE 5. CAPITAL
The Series offers Class A, Class B and Class C shares. Class A shares are sold
with a front-end sales charge of up to 3%. Class B shares are sold with a
contingent deferred sales charge which declines from 5% to zero depending on the
period of time the
B-276
PRUDENTIAL MUNICIPAL SERIES FUND Ohio Series
Notes to Financial Statements Cont'd.
shares are held. Class C shares are sold with a front-end sales charge of 1% and
a contingent deferred sales charge of 1% during the first 18 months. Class B
shares automatically convert to Class A shares on a quarterly basis
approximately seven years after purchase. A special exchange privilege is also
available for shareholders who qualify to purchase Class A shares at net asset
value.
The Fund has authorized an unlimited number of shares of beneficial
interest of each class at $.01 par value per share.
Transactions in shares of beneficial interest for the year ended August
31, 2000 and the year ended August 31, 1999 were as follows:
CLASS A SHARES AMOUNT
- --------------------------------------------------------------- -------- -----------
Year ended August 31, 2000:
Shares sold.................................................... 35,347 $ 392,038
Shares issued in reinvestment of dividends and distributions... 140,612 1,551,607
Shares reacquired.............................................. (949,391) (10,496,063)
-------- -----------
Net decrease in shares outstanding before conversion........... (773,432) (8,552,418)
Shares issued upon conversion from Class B..................... 570,794 6,334,941
-------- -----------
Net increase (decrease) in shares outstanding.................. (202,638) $(2,217,477)
-------- -----------
-------- -----------
Year ended August 31, 1999:
Shares sold.................................................... 275,877 $ 3,318,064
Shares issued in reinvestment of dividends and distributions... 177,578 2,124,198
Shares reacquired.............................................. (695,495) (8,255,801)
-------- -----------
Net decrease in shares outstanding before conversion........... (242,040) (2,813,539)
Shares issued upon conversion from Class B..................... 181,742 2,187,166
-------- -----------
Net increase (decrease) in shares outstanding.................. (60,298) $ (626,373)
-------- -----------
-------- -----------
CLASS B
- ---------------------------------------------------------------
Year ended August 31, 2000:
Shares sold.................................................... 86,605 $ 960,143
Shares issued in reinvestment of dividends and distributions... 52,484 579,499
Shares reacquired.............................................. (410,380) (4,534,774)
-------- -----------
Net decrease in shares outstanding before conversion........... (271,291) (2,995,132)
Shares reacquired upon conversion into Class A................. (570,548) (6,334,941)
-------- -----------
Net increase (decrease) in shares outstanding.................. (841,839) $(9,330,073)
-------- -----------
-------- -----------
B-277
PRUDENTIAL MUNICIPAL SERIES FUND Ohio Series
Notes to Financial Statements Cont'd.
CLASS B SHARES AMOUNT
- --------------------------------------------------------------- -------- -----------
Year ended August 31, 1999:
Shares sold.................................................... 209,044 $ 2,517,815
Shares issued in reinvestment of dividends and distributions... 96,304 1,154,072
Shares reacquired.............................................. (698,008) (8,392,171)
-------- -----------
Net decrease in shares outstanding before conversion........... (392,660) (4,720,284)
Shares reacquired upon conversion into Class A................. (181,591) (2,187,166)
-------- -----------
Net increase (decrease) in shares outstanding.................. (574,251) $(6,907,450)
-------- -----------
-------- -----------
CLASS C
- ---------------------------------------------------------------
Year ended August 31, 2000:
Shares sold.................................................... 18 $ 198
Shares issued in reinvestment of dividends and distributions... 716 7,905
Shares reacquired.............................................. (14,664) (164,261)
-------- -----------
Net increase (decrease) in shares outstanding.................. (13,930) $ (156,158)
-------- -----------
-------- -----------
Year ended August 31, 1999:
Shares sold.................................................... 15,141 $ 184,471
Shares issued in reinvestment of dividends and distributions... 816 9,707
Shares reacquired.............................................. (1,115) (12,908)
-------- -----------
Net increase (decrease) in shares outstanding.................. 14,842 $ 181,270
-------- -----------
-------- -----------
NOTE 6. PROPOSED REORGANIZATION
On August 23, 2000, the Trustees of the Series approved an Agreement and Plan of
Reorganization (the 'Plan of Reorganization') which provides for the transfer of
all of the assets and liabilities of the Series to Prudential National
Municipals Fund, Inc. ('National Municipals'). Class A, Class B and Class C
shares of the Series would be exchanged at net asset value for Class A shares of
equivalent value of National Municipals. The Series would then cease operations.
The Plan of Reorganization requires approval of the shareholders of the
Series to become effective and a proxy/prospectus will be mailed to shareholders
in October 2000. If the Plan is approved, it is expected that the reorganization
will take place in December 2000. The Series and National Municipals will each
bear their pro rata share of the costs of the reorganization, including cost of
proxy solicitation.
B-278
PRUDENTIAL MUNICIPAL SERIES FUND Ohio Series
Financial Highlights
CLASS A
-----------------
YEAR ENDED
AUGUST 31, 2000
- ----------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE:
NET ASSET VALUE, BEGINNING OF YEAR $ 11.33
--------
Income from investment operations
Net investment income .54
Net realized and unrealized gain (loss) on investment
transactions .02
--------
Total from investment operations .56
--------
LESS DISTRIBUTIONS
Dividends from net investment income (.54)
Distributions in excess of net investment income (.01)
Distributions from net realized gains (.06)
--------
Total distributions (.61)
--------
Net asset value, end of year $ 11.28
--------
--------
TOTAL RETURN(b): 5.17%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000) $44,267
Average net assets (000) $45,671
Ratios to average net assets:
Expenses, including distribution and service (12b-1) fees 1.12%
Expenses, excluding distribution and service (12b-1) fees .87%
Net investment income 4.86%
For Class A, B and C shares:
Portfolio turnover rate 26%
- ------------------------------
(a) Net of management fee waiver.
(b) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each year reported and includes reinvestment of dividends and
distributions.
(c) Less than $.005 per share.
See Notes to Financial Statements
B-279
PRUDENTIAL MUNICIPAL SERIES FUND Ohio Series
Financial Highlights Cont'd.
CLASS A
- -------------------------------------------------------------------------------------
YEAR ENDED AUGUST 31,
- -------------------------------------------------------------------------------------
1999 1998 1997 1996
- -------------------------------------------------------------------------------------
$ 12.31 $ 11.95 $ 11.70 $ 11.92
-------- -------- -------- --------
.54 .60 .63(a) .63(a)
(.71) .42 .27 (.15)
-------- -------- -------- --------
(.17) 1.02 .90 .48
-------- -------- -------- --------
(.54) (.60) (.63) (.63)
(.01) --(c) --(c) --
(.26) (.06) (.02) (.07)
-------- -------- -------- --------
(.81) (.66) (.65) (.70)
-------- -------- -------- --------
$ 11.33 $ 12.31 $ 11.95 $ 11.70
-------- -------- -------- --------
-------- -------- -------- --------
(1.53)% 8.80% 7.92% 4.02%
$ 46,775 $ 51,546 $ 50,977 $ 49,851
$ 50,833 $ 51,082 $ 51,641 $ 51,205
.97% .83% .80%(a) .80%(a)
.77% .73% .70%(a) .70%(a)
4.53% 4.93% 5.37%(a) 5.27%(a)
45% 30% 22% 35%
See Notes to Financial Statements
B-280
PRUDENTIAL MUNICIPAL SERIES FUND Ohio Series
Financial Highlights Cont'd.
CLASS B
-----------------
YEAR ENDED
AUGUST 31, 2000
- ----------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE:
NET ASSET VALUE, BEGINNING OF YEAR $ 11.34
--------
Income from investment operations
Net investment income .51
Net realized and unrealized gain (loss) on investment
transactions .02
--------
Total from investment operations .53
--------
Less distributions
Dividends from net investment income (.51)
Distributions in excess of net investment income (.01)
Distributions from net realized gains (.06)
--------
Total distributions (.58)
--------
Net asset value, end of year $ 11.29
--------
--------
TOTAL RETURN(b): 4.90%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000) $16,148
Average net assets (000) $20,094
Ratios to average net assets:
Expenses, including distribution and service (12b-1) fees 1.36%
Expenses, excluding distribution and service (12b-1) fees .87%
Net investment income 4.62%
- ------------------------------
(a) Net of management fee waiver.
(b) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each year reported and includes reinvestment of dividends and
distributions.
(c) Less than $.005 per share.
See Notes to Financial Statements
B-281
PRUDENTIAL MUNICIPAL SERIES FUND Ohio Series
Financial Highlights Cont'd.
Class B
- -------------------------------------------------------------------------------------
Year Ended August 31,
- -------------------------------------------------------------------------------------
1999 1998 1997 1996
- -------------------------------------------------------------------------------------
$ 12.32 $ 11.96 $ 11.71 $ 11.93
-------- -------- -------- --------
.51 .55 .59(a) .58(a)
(.71) .42 .27 (.15)
-------- -------- -------- --------
(.20) .97 .86 .43
-------- -------- -------- --------
(.51) (.55) (.59) (.58)
(.01) --(c) --(c) --
(.26) (.06) (.02) (.07)
-------- -------- -------- --------
(.78) (.61) (.61) (.65)
-------- -------- -------- --------
$ 11.34 $ 12.32 $ 11.96 $ 11.71
-------- -------- -------- --------
-------- -------- -------- --------
(1.82)% 8.36% 7.49% 3.61%
$ 25,773 $ 35,064 $ 40,770 $ 50,998
$ 30,456 $ 37,848 $ 45,503 $ 57,909
1.27% 1.23% 1.20%(a) 1.20%(a)
.77% .73% .70%(a) .70%(a)
4.23% 4.54% 4.97%(a) 4.87%(a)
See Notes to Financial Statements
B-282
PRUDENTIAL MUNICIPAL SERIES FUND Ohio Series
Financial Highlights Cont'd.
CLASS C
-----------------
YEAR ENDED
AUGUST 31, 2000
- ----------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE:
NET ASSET VALUE, BEGINNING OF YEAR $ 11.34
--------
Income from investment operations
Net investment income .48
Net realized and unrealized gain (loss) on investment
transactions .02
--------
Total from investment operations .50
--------
LESS DISTRIBUTIONS
Dividends from net investment income (.48)
Distributions in excess of net investment income (.01)
Distributions from net realized gains (.06)
--------
Total distributions (.55)
--------
Net asset value, end of year $ 11.29
--------
--------
TOTAL RETURN(b): 4.64%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000) $ 178
Average net assets (000) $ 198
Ratios to average net assets:
Expenses, including distribution and service (12b-1) fees 1.61%
Expenses, excluding distribution and service (12b-1) fees .87%
Net investment income 4.36%
- ------------------------------
(a) Net of management fee waiver.
(b) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each year reported and includes reinvestment of dividends and
distributions.
(c) Less than $.005 per share.
See Notes to Financial Statements
B-283
PRUDENTIAL MUNICIPAL SERIES FUND Ohio Series
Financial Highlights Cont'd.
CLASS C
- -------------------------------------------------------------------------------------
YEAR ENDED AUGUST 31,
- -------------------------------------------------------------------------------------
1999 1998 1997 1996
- -------------------------------------------------------------------------------------
$12.32 $11.96 $11.71 $11.93
------- ------- ------- -------
.48 .52 .56(a) .55(a)
(.71) .42 .27 (.15)
------- ------- ------- -------
(.23) .94 .83 .40
------- ------- ------- -------
(.48) (.52) (.56) (.55)
(.01) --(c) --(c) --
(.26) (.06) (.02) (.07)
------- ------- ------- -------
(.75) (.58) (.58) (.62)
------- ------- ------- -------
$11.34 $12.32 $11.96 $11.71
------- ------- ------- -------
------- ------- ------- -------
(2.06)% 8.09% 7.22% 3.36%
$ 337 $ 183 $ 71 $ 44
$ 289 $ 149 $ 57 $ 97
1.52% 1.48% 1.45%(a) 1.45%(a)
.77% .73% .70%(a) .70%(a)
4.03% 4.26% 4.72%(a) 4.62%(a)
See Notes to Financial Statements
B-284
PRUDENTIAL MUNICIPAL SERIES FUND Ohio Series
Report of Independent Accountants
To the Shareholders and Board of Trustees of
Prudential Municipal Series Fund, Ohio Series
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Prudential Municipal Series Fund,
Ohio Series (the 'Fund', one of the portfolios constituting Prudential Municipal
Series Fund) at August 31, 2000, the results of its operations for the year then
ended, the changes in its net assets for each of the two years in the period
then ended and the financial highlights for each of the four years in the period
then ended, in conformity with accounting principles generally accepted in the
United States of America. These financial statements and financial highlights
(hereafter referred to as 'financial statements') are the responsibility of the
Fund's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
financial statements in accordance with auditing standards generally accepted in
the United States of America, which require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at August 31, 2000 by
correspondence with the custodian and brokers, provide a reasonable basis for
the opinion expressed above. The accompanying financial highlights for the year
ended August 31, 1996 were audited by other independent accountants, whose
opinion dated October 14, 1996 was unqualified.
As described in Note 6 to the financial statements, on August 23, 2000 the
Trustees approved an Agreement and Plan of Reorganization, subject to
shareholder approval, whereby the Fund would be merged into Prudential National
Municipals Fund, Inc.
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York
October 20, 2000
B-285
PRUDENTIAL MUNICIPAL SERIES FUND Ohio Series
Federal Income Tax Information (Unaudited)
We are required by the Internal Revenue Code to advise you within 60 days
of the Series' fiscal year end (August 31, 2000) as to the federal tax status of
dividends and distributions paid by the Series during such fiscal year.
Accordingly, we are advising you that in the fiscal year ended August 31, 2000,
dividends paid from net investment income of $.54 per Class A share, $.51 per
Class B share and $.48 per Class C share were all federally tax-exempt interest
dividends. In addition, the Series paid to Class A, B and C shares $.005
(special taxable income and short-term capital gains) which is taxable as
ordinary income and a long-term capital gain distribution of $.06 per Class A, B
and C shares which is taxable as such.
We wish to advise you that the corporate dividends received deduction for
the Series is zero. Only funds that invest in U.S. equity securities are
entitled to pass-through a corporate dividends received deduction.
In January 2001, you will be advised on IRS Form 1099 DIV or substitute
1099 DIV as to the federal tax status of the dividends and distributions
received by you in calendar year 2000.
B-286
PRUDENTIAL MUNICIPAL SERIES FUND Pennsylvania Series
Portfolio of Investments as of August 31, 2000
MOODY'S PRINCIPAL
RATING INTEREST MATURITY AMOUNT VALUE
DESCRIPTION (a) (UNAUDITED) RATE DATE (000) (NOTE 1)
- -----------------------------------------------------------------------------------------------------------
LONG-TERM INVESTMENTS 98.8%
- -----------------------------------------------------------------------------------------------------------
Allegheny Cnty. Arpt. Rev.,
Greater Pittsburgh Int'l.
Arpt., Ser. A, A.M.T., F.S.A. Aaa 6.60% 1/1/04 $ 1,000 $ 1,042,990
Allegheny Cnty. Hosp. Dev. Auth.
Rev.,
Allegheny Gen. Hosp. Proj.,
Ser. A, M.B.I.A. Aaa 6.25 9/1/20 1,750(d) 1,922,252
Magee-Womens Hosp., F.G.I.C. Aaa Zero 10/1/14 2,000 940,460
Magee-Womens Hosp., F.G.I.C. Aaa Zero 10/1/16 2,000 824,000
Magee-Womens Hosp., F.G.I.C. Aaa Zero 10/1/18 2,000 725,120
Magee-Womens Hosp., F.G.I.C. Aaa Zero 10/1/19 4,000 1,360,960
West Penn. Hosp. Hlth. Ctr. NR 8.50 1/1/20 2,000 2,061,660
Allegheny Cnty. Ind. Dev. Auth.
Rev., USX Proj., Ser. A Baa2 6.70 12/1/20 4,500 4,589,460
Allegheny Cnty. Residential Fin.
Auth., Mtge. Rev., G.N.M.A.,
Ser. Q, A.M.T. Aaa 7.40 12/1/22 590 607,440
Beaver Cnty. Indl. Dev. Auth.,
Pollution Ctl. Rev.,
Toledo Edison Co. Proj. A Ba3 4.85 6/1/30 1,500 1,455,405
Ohio Edison Co. Proj. A Baa3 4.65 6/1/33 1,000 965,240
Berks Cnty. Gen. Oblig., Cap.
Appreciation, F.G.I.C. Aaa Zero 5/15/16 2,900 1,219,943
Berks Cnty. Ind. Rev., Lutheran
Home Proj., A.M.B.A.C. Aaa 6.875 1/1/23 1,500 1,561,410
Berks Cnty. Mun. Auth. Hosp.
Rev., Reading Hosp. Med. Ctr.
Proj., M.B.I.A. Aaa 5.70 10/1/14 1,250 1,B-305,700
Bethlehem Auth. Wtr. Rev., Cap.
Appreciation, F.S.A. Aaa Zero 11/15/22 3,080 863,447
Bucks Cnty. Wtr. & Swr. Auth.
Rev., Neshaminy Interceptor
Swr. Sys., Ser. A, F.G.I.C. Aaa Zero 12/1/15 2,175 949,453
See Notes to Financial Statements
B-287
PRUDENTIAL MUNICIPAL SERIES FUND Pennsylvania Series
Portfolio of Investments as of August 31, 2000 Cont'd.
MOODY'S PRINCIPAL
RATING INTEREST MATURITY AMOUNT VALUE
DESCRIPTION (a) (UNAUDITED) RATE DATE (000) (NOTE 1)
- -----------------------------------------------------------------------------------------------------------
Butler Cnty. Hosp. Auth. Rev.,
North Hills Passavant Hosp.,
Ser. A, F.S.A. Aaa 7.00% 6/1/22 $ 1,000(d) $ 1,039,320
Carbon Cnty. PA Indl. Dev. Auth.
Ref., Panther Creek Partners
Proj. BBB-(b) 6.65 5/1/10 2,500 2,532,925
Chartiers Valley Ind. Rev.,
Friendship Vlg./South Hills NR 6.75 8/15/18 2,225 2,124,875
Clarion Cnty. Hosp. Auth. Rev.,
Clarion Hosp. Proj. BBB-(b) 5.625 7/1/21 1,000 804,700
Delaware Cnty. Ind. Dev. Auth.
Rev.,
Res. Rec. Facs., Ser. A B2 6.00 1/1/09 500 469,375
Res. Rec. Facs., Ser. A B2 6.10 7/1/13 2,500 2,B-294,350
Delaware Valley PA Reg. Fin.
Auth., Lo. Gov. Rev., Ser. A Aaa 5.50 8/1/28 5,000 4,981,350
Doylestown Hosp. Auth. Rev.,
Pine Run Retirement, Ser. A Baa1 7.20 7/1/23 3,180 3,451,159
Greencastle Antrim Sch. Dist.,
Rev., M.B.I.A.,
Cap. Appreciation, Ser. B Aaa Zero 1/1/12 1,000 555,810
Cap. Appreciation, Ser. B Aaa Zero 1/1/13 1,000 521,440
Harrisburg Auth. Rev., Pooled
Bond Prog., Ser. I, M.B.I.A. Aaa 5.625 4/1/15 B-299 B-305,948
Harrisburg, Gen. Oblig.,
A.M.B.A.C.
Cap. Appreciation, Ser. D Aaa Zero 3/15/15 2,380 1,079,877
Cap. Appreciation, Ser. F Aaa Zero 9/15/21 2,000 601,880
Cap. Appreciation, Ser. F Aaa Zero 9/15/22 2,000 566,060
Hopewell Area School District,
Gen. Oblig., F.S.A
Cap. Appreciation Aaa Zero 9/1/23 2,000 534,540
Cap. Appreciation Aaa Zero 9/1/24 2,025 509,855
Lancaster PA Indl. Dev. Auth.
Rev. Garden Spot Village Proj.,
Ser. A NR 7.625 5/1/31 1,650 1,663,134
See Notes to Financial Statements
B-288
PRUDENTIAL MUNICIPAL SERIES FUND Pennsylvania Series
Portfolio of Investments as of August 31, 2000 Cont'd.
MOODY'S PRINCIPAL
RATING INTEREST MATURITY AMOUNT VALUE
DESCRIPTION (a) (UNAUDITED) RATE DATE (000) (NOTE 1)
- -----------------------------------------------------------------------------------------------------------
Lower Pottsgrove Twnshp. Auth.,
Swr. Rev., Montgomery Cnty.,
A.M.B.A.C.,
Ser. A Aaa Zero 11/1/13 $ 1,155 $ 577,824
Ser. A Aaa Zero 11/1/15 1,185 519,634
Luzerne Cnty. Ind. Dev. Auth.
Rev., Gas & Water, Ser. B,
A.M.T. A3 7.125% 12/1/22 6,000 6,355,080
McKeesport Area School District,
M.B.I.A.
Cap. Appreciation Aaa Zero 10/1/20 3,555 1,136,427
Cap. Appreciation Aaa Zero 10/1/21 2,555 766,960
Montgomery Cnty. Ind. Dev. Auth.
Rev., Retirement Comm. A-(b) 5.25 11/15/28 1,000 829,330
Montgomery Cnty. Redev. Auth.
Rev., Multifamily Hsg., Ser. A NR 6.50 7/1/25 1,400 1,396,416
Northampton Cnty. Higher Ed.
Auth. Rev.,
Moravian Coll. AAA(b) 8.20 6/1/11 2,095 2,195,979
Moravian Coll., A.M.B.A.C. Aaa 6.25 7/1/11 2,195 2,451,420
Northeastern Hosp. & Ed. Auth.
Coll. Rev., Kings Coll. Proj.,
Ser. B BBB(b) 6.00 7/15/18 3,235 3,210,220
Northumberland Cnty. Ind. Dev.
Auth. Rev., Roaring Creek Wtr.,
A.M.T. NR 6.375 10/15/23 1,000 952,390
Penn Hills Twnshp., Gen. Oblig.,
Ser A, A.M.B.A.C. Aaa Zero 6/1/10 1,535 945,698
Penn Hills, Gen. Oblig., Ser. B,
A.M.B.A.C. Aaa Zero 12/1/18 1,360 485,887
Pennsylvania Convention Ctr.
Auth. Rev., Ser. A, F.G.I.C. Aaa 6.00 9/1/19 5,445 5,823,427
Pennsylvania Econ. Dev. Auth.,
Wst. Wtr. Treatment Rev., Sun
Co., R & M Proj., Ser. A,
A.M.T. Baa2 7.60 12/1/24 4,500 4,733,775
See Notes to Financial Statements
B-289
PRUDENTIAL MUNICIPAL SERIES FUND Pennsylvania Series
Portfolio of Investments as of August 31, 2000 Cont'd.
MOODY'S PRINCIPAL
RATING INTEREST MATURITY AMOUNT VALUE
DESCRIPTION (a) (UNAUDITED) RATE DATE (000) (NOTE 1)
- -----------------------------------------------------------------------------------------------------------
Pennylvania Econ. Dev. Fin. Wst.
Disp. Rev. Usg Corp., A.M.T. Baa1 6.00% 6/1/31 $ 3,000 $ 2,839,170
Pennsylvania Hsg. Fin. Agcy.
Sngl. Fam. Mtge., A.M.T. Aa2 7.614(c) 4/1/25 2,100 2,131,500
Sngl. Fam. Mtge., A.M.T.,
R.I.B.S., S.F.M.R. Aa2 4.75 4/1/11 1,895 1,850,278
Pennsylvania St. Cert. of Part.,
Ser. A, F.S.A. Aaa 6.25 11/1/06 1,900 1,971,763
Pennsylvania St. Higher Ed.
Facs. Auth. Rev.,
Ursinus College Ser. A BBB+(b) 5.90 1/1/27 1,925 1,837,855
Drexel University A-(b) 6.00 5/1/29 2,500 2,523,275
Philadelphia Univ. AA(b) 6.00 6/1/29 2,100 2,122,932
Philadelphia Univ. AA(b) 6.10 6/1/30 750 762,922
Philadelphia Gas Wks. Rev.,
13th Ser. Baa1 7.70 6/15/11 215(d) 224,664
13th Ser. Aaa 7.70 6/15/21 3,430(d) 3,587,197
Philadelphia Hosps. & Higher Ed.
Facs. Auth. Rev.,
Childrens' Seashore House,
Ser. B A+(b) 7.00 8/15/12 500 523,175
Childrens' Seashore House,
Ser. A A+(b) 7.00 8/15/12 1,000 1,048,250
Childrens' Seashore House,
Ser. A A+(b) 7.00 8/15/17 1,000 1,048,250
Grad. Hlth. Sys. Ca 7.25 7/1/18 2,730 941,850
Philadelphia Ind. Dev. Auth.
Rev.,
Baptist Home of Phil., Ser. A NR 5.60 11/15/28 2,750 2,183,088
Inst. For Cancer Res. Proj.,
Ser. B A+(b) 7.25 7/1/10 5,770 5,919,212
Nat'l. Brd. of Med. Examiners
Proj. A+(b) 6.75 5/1/12 5,000(d) 5,266,150
Philadelphia Auth. Ind. Dev.
Rev., A.M.T. NR 5.50 1/1/24 2,500 1,991,925
Philadelphia PA,
Gen. Oblig. Aaa 5.00 3/15/28 2,500 2,276,925
Gen. Oblig., M.B.I.A. Aaa 5.00 5/15/25 1,190 1,093,491
See Notes to Financial Statements
B-290
PRUDENTIAL MUNICIPAL SERIES FUND Pennsylvania Series
Portfolio of Investments as of August 31, 2000 Cont'd.
MOODY'S PRINCIPAL
RATING INTEREST MATURITY AMOUNT VALUE
DESCRIPTION (a) (UNAUDITED) RATE DATE (000) (NOTE 1)
- -----------------------------------------------------------------------------------------------------------
Pittsburgh and Allegheny
Auditorium Asset Dist. Sales
Tax Rev., A.M.B.A.C. Aaa 5.00% 2/1/29 $ 3,000 $ 2,741,370
Pittsburgh Urban Redev. Auth.,
Mtge. Rev., Ser. A, A.M.T. Aa2 6.25 10/1/28 940 962,485
Pittsburgh Wtr. & Swr. Auth.,
F.G.I.C.,
First Lien, Ser. B Aaa Zero 9/1/19 2,B-299 786,255
First Lien, Ser. B Aaa Zero 9/1/20 2,B-299 738,737
Wtr. & Swr. Sys. Rev. Aaa 6.50 9/1/13 5,000 5,690,050
Puerto Rico Comnwlth.,
Hwy. & Trans. Auth. Rev.,
Ser. Y Baa1 6.25 7/1/14 1,000 1,120,460
Pub. Impvt. Rfdg., M.B.I.A. Aaa 7.00 7/1/10 720 864,245
Rites PA 625, A.M.B.A.C. NR 9.977(c) 7/1/10 2,015 2,801,233
Rites PA 642A, M.B.I.A. NR 7.497(c) 7/1/10 1,500 1,792,695
Puerto Rico Indl. Tourist Edl.
Cogen Fac. AES Puerto Rico
Proj. Baa2 6.625 6/1/26 2,500 2,606,075
Schuylkill Cnty. Ind. Dev.
Auth., Rev.,
Pine Grove Landfill Inc.,
A.M.T. BBB(d) 5.10 10/1/19 1,500 1,338,165
Schuykill Engy., A.M.T. NR 6.50 1/1/10 3,230 3,167,822
Scranton-Lackawanna Hlth. &
Welfare Auth. Rev., Univ. of
Scranton Proj., Ser. C NR 6.50 3/1/15 2,250 2,360,250
Unity Twnshp. Mun. Auth., Gtd.
Swr. Rev., A.M.B.A.C.,
Cap. Appreciation Aaa Zero 11/1/11 1,035 586,607
Cap. Appreciation Aaa Zero 11/1/12 1,035 550,951
Cap. Appreciation Aaa Zero 11/1/13 1,035 516,455
Upper St. Clair Twp., PA Sch.
Dist. Rev. Aa3 5.20 7/15/27 3,000 2,840,070
Virgin Islands Pub. Fin. Auth.
Rev., Ref. Matching Loan Notes,
Ser. A AAA(b) 7.25 10/1/18 1,950 2,105,981
See Notes to Financial Statements
B-291
PRUDENTIAL MUNICIPAL SERIES FUND Pennsylvania Series
Portfolio of Investments as of August 31, 2000 Cont'd.
MOODY'S PRINCIPAL
RATING INTEREST MATURITY AMOUNT VALUE
DESCRIPTION (a) (UNAUDITED) RATE DATE (000) (NOTE 1)
- -----------------------------------------------------------------------------------------------------------
Virgin Islands Terr., Hugo Ins.
Claims Fund Proj., Ser. 91 NR 7.75% 10/1/06 $ 730 $ 763,653
Washington Cnty. Hosp. Auth.
Rev., Monongahela Valley Hosp. A2 6.75 12/1/08 2,750 2,873,777
Westmoreland Cnty., Rev. Cap.
Appreciation, F.G.I.C. Aaa(b) Zero 12/1/19 5,750 1,938,038
Westmoreland Cnty. Ind. Rev.
Gtd., Valley Landfill Proj.,
A.M.T. BBB(b) 5.10 5/1/18 1,000 892,360
Westmoreland Cnty. Mun. Auth.
Rev. Cap Appreciation, Ser. A AAA Zero 8/15/23 5,000 1,339,750
------------
Total long-term investments
(cost $158,973,326) $162,336,361
------------
SHORT-TERM INVESTMENTS 0.5%
- -----------------------------------------------------------------------------------------------------------
Beaver Cnty. PA Indl. Dev. Auth.
Environmental Imp. Rec., BASF
Corp. Proj., F.R.D.D. P1 4.45 9/1/00 400 400,000
Delaware Riv. Port Auth. PA & NJ
Rev. Mun. Secs. Trust Rcpts.,
Ser. 89 A(b) 4.35 9/1/00 B-299 B-299,000
Philadelphia PA Auth., Indl.
Dev. Rev., Inst. Cancer Resh.,
Ser. A, F.R.D.D. A1+(b) 4.30 9/1/00 100 100,000
------------
Total short-term investments
(cost $800,000) $ 800,000
------------
TOTAL INVESTMENTS 99.3 %
(COST $159,773,326; NOTE 4) 163,136,361
Other assets in excess of liabilities 0.7% 1,076,714
------------
NET ASSETS 100% $164,213,075
============
See Notes to Financial Statements
B-292
PRUDENTIAL MUNICIPAL SERIES FUND Pennsylvania Series
Portfolio of Investments as of August 31, 2000 Cont'd.
(a) The following abbreviations are used in portfolio descriptions:
A.M.B.A.C.--American Municipal Bond Assurance Corporation.
A.M.T.--Alternative Minimum Tax.
F.G.I.C.--Financial Guaranty Insurance Company.
F.R.D.D.--Floating Rate (Daily) Demand Notes(e).
F.S.A.--Financial Security Assurance.
G.N.M.A.--Government National Mortgage Association.
M.B.I.A.--Municipal Bond Insurance Association.
R.I.B.S.--Residual Interest Bonds.
S.F.M.R.--Single Family Mortgage Revenue.
(b) Standard & Poor's Rating.
(c) Inverse floating rate bond. The coupon is inversely indexed to a floating
interest rate. The rate shown is the rate at year end.
(d) Prerefunded issues are secured by escrowed cash and/or direct U.S.
guaranteed obligations.
(e) For purposes of amortizing cost valuation, the maturity date of Floating
Rate Demand Notes is considered to be the later of the next date on which
the security can be redeemed at par, or the next date on which the rate of
interest is adjusted.
NR--Not Rated by Moody's or Standard & Poor's.
The Fund's current Statement of Additional Information contains a description of
Moody's and Standard & Poor's ratings.
See Notes to Financial Statements
B-293
PRUDENTIAL MUNICIPAL SERIES FUND Pennsylvania Series
Statement of Assets and Liabilities
AUGUST 31, 2000
- -------------------------------------------------------------------------------------
ASSETS
Investments, at value (cost $159,773,326) $ 163,136,361
Cash 69,655
Interest receivable 2,284,B-292
Unrealized appreciation on interest rate swap 43,169
Receivable for Series shares sold 15,802
Deferred expenses and other assets 4,401
---------------
TOTAL ASSETS 165,553,681
---------------
LIABILITIES
Payable for Series shares reacquired 1,052,790
Dividends payable 86,007
Accrued expenses 78,596
Management fee payable 69,926
Distribution fee payable 46,889
Deferred trustee's fees 6,398
---------------
TOTAL LIABILITIES 1,340,606
---------------
NET ASSETS $ 164,213,075
===============
Net assets were comprised of:
Shares of beneficial interest, at par $ 163,345
Paid-in capital in excess of par 161,041,268
---------------
161,204,613
Accumulated net realized loss on investments (397,742)
Net unrealized appreciation on investments 3,406,204
---------------
Net assets, August 31, 2000 $ 164,213,075
===============
See Notes to Financial Statements
B-294
Prudential Municipal Series Fund Pennsylvania Series
Statement of Assets and Liabilities Cont'd.
AUGUST 31, 2000
- ----------------------------------------------------------------------------------------
Class A:
Net asset value and redemption price per share ($109,068,247
/ 10,848,515 shares of beneficial interest issued and
outstanding) $10.05
Maximum sales charge (3% of offering price) .31
---------------
Maximum offering price to public $10.36
===============
Class B:
Net asset value, offering price and redemption price per
share ($54,665,453 / 5,438,B-289 shares of beneficial
interest issued and outstanding) $10.05
===============
Class C:
Net asset value and redemption price per share ($479,375 /
47,689 shares of beneficial interest issued and
outstanding) $10.05
Sales charge (1% of offering price) .10
---------------
Offering price to public $10.15
===============
See Notes to Financial Statements
B-295
PRUDENTIAL MUNICIPAL SERIES FUND Pennsylvania Series
Statement of Operations
YEAR
ENDED
AUGUST 31, 2000
- ----------------------------------------------------------------------------------------
NET INVESTMENT INCOME
Income
Interest $ 10,885,210
---------------
Expenses
Management fee 875,729
Distribution fee--Class A 265,453
Distribution fee--Class B 341,547
Distribution fee--Class C 4,915
Transfer agent's fees and expenses 96,000
Custodians's fees and expenses 82,000
Reports to shareholders 40,000
Registration fees 24,000
Legal fees and expenses 12,000
Audit fees 10,000
Trustees' fees and expenses 7,000
Miscellaneous 5,994
---------------
TOTAL EXPENSES 1,764,638
Less: Custodian fee credit (7,449)
---------------
NET EXPENSES 1,757,189
---------------
Net investment income 9,128,021
===============
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Net realized loss on investment transactions (346,914) Net change in unrealized
appreciation (depreciation) on:
Investments (1,330,781)
Swaps 43,169
---------------
(1,B-286,612)
Net loss on investments (1,634,526)
---------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 7,493,495
===============
See Notes to Financial Statements
B-296
PRUDENTIAL MUNICIPAL SERIES FUND Pennsylvania Series
Statement of Changes in Net Assets
YEAR YEAR
ENDED ENDED
AUGUST 31, 2000 AUGUST 31, 1999
- -------------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS
Net investment income $ 9,128,021 $ 10,198,665
Net realized gain (loss) investment
transactions (346,914) 2,064,650
Net change in unrealized depreciation of
investments (1,B-286,612) (15,124,349)
----------------- -----------------
Net increase (decrease) in net assets
resulting from operations 7,493,495 (2,861,034)
----------------- -----------------
DIVIDENDS AND DISTRIBUTIONS (NOTE 1):
Dividends to shareholders from net
investment income
Class A (5,642,502) (5,224,812)
Class B (3,454,102) (4,925,961)
Class C (31,417) (47,892)
----------------- -----------------
(9,128,021) (10,198,665)
----------------- -----------------
Distributions from net realized gains
Class A (350,166) (1,164,135)
Class B (234,220) (1,223,B-296)
Class C (2,549) (13,254)
----------------- -----------------
(586,935) (2,400,686)
----------------- -----------------
SERIES SHARE TRANSACTIONS (NET OF SHARE CONVERSIONS) (NOTE 5):
Net proceeds from shares sold 5,600,166 26,494,078
Net asset value of shares issued in
reinvestment of dividends and
distributions 5,405,137 7,127,006
Cost of shares reacquired (38,181,577) (41,134,998)
----------------- -----------------
Net decrease in net assets from Series
share transactions (27,176,274) (7,513,914)
----------------- -----------------
Total decrease (29,397,735) (22,974,B-298)
NET ASSETS
Beginning of year 193,610,810 216,585,109
----------------- -----------------
End of year $ 164,213,075 $ 193,610,810
================= =================
See Notes to Financial Statements
B-297
PRUDENTIAL MUNICIPAL SERIES FUND Pennsylvania Series
Notes to Financial Statements
Prudential Municipal Series Fund (the 'Fund') is registered under the
Investment Company Act of 1940 as an open-end investment company. The Fund was
organized as a Massachusetts business trust on May 18, 1984 and consists of 11
series. The monies of each series are invested in separate, independently
managed portfolios. The Pennsylvania Series (the 'Series') commenced investment
operations on April 3, 1987. The Series is diversified and seeks to achieve its
investment objective of obtaining the maximum amount of income exempt from
federal and applicable state income taxes with a minimum of risk by investing in
'investment grade' tax-exempt securities whose ratings are within the four
highest ratings categories by a nationally recognized statistical rating
organization or, if not rated, are of comparable quality. The ability of the
issuers of the securities held by the Series to meet their obligations may be
affected by economic or political developments in a specific state, industry or
region.
NOTE 1. ACCOUNTING POLICIES
The following is a summary of significant accounting policies followed by the
Fund, and the Series, in the preparation of its financial statements.
SECURITIES VALUATIONS: The Series values municipal securities (including
commitments to purchase such securities on a 'when-issued' basis) on the basis
of prices provided by a pricing service which uses information with respect to
transactions in bonds, quotations from bond dealers, market transactions in
comparable securities and various relationships between securities in
determining values. If market quotations are not readily available from such
pricing service, a security is valued at its fair value as determined under
procedures established by the Trustees.
Short-term securities which mature in more than 60 days are valued at
current market quotations. Short-term securities which mature in 60 days or less
are valued at amortized cost.
All securities are valued as of 4:15 p.m., New York time.
INTEREST RATE SWAPS: In a simple interest rate swap, one investor pays
a floating rate of interest on a notional principal amount and receives a fixed
rate of interest on the same notional principal amount for a specified period of
time. Alternatively, an investor may pay a fixed rate and receive a floating
rate. Interest rate swaps were conceived as asset/liabilty management tools. In
more complex swaps, the notional principal amount may decline (or amortize) over
time.
During the term of the swap, changes in the value of the swap are
recognized as unrealized gains or losses by 'marking-to-market' to reflect the
market value of the swap. When the swap is terminated, the Series will record a
realized gain or loss
B-298
PRUDENTIAL MUNICIPAL SERIES FUND Pennsylvania Series
Notes to Financial Statements Cont'd.
equal to the difference between the proceeds from (or cost of) the closing
transaction and the Series' basis in the contract, if any.
The Series is exposed to credit loss in the event of non-performance by
the other party to the interest rate swap. However, the Series does not
anticipate non-performance by any counterparty.
Securities Transactions and Net Investment Income: Securities transactions
are recorded on the trade date. Realized gains and losses on sales of securities
are calculated on the identified cost basis. Interest income is recorded on the
accrual basis. The Series amortizes premiums and original issue discount paid on
purchases of portfolio securities as adjustments to interest income. Expenses
are recorded on the accrual basis which may require the use of certain estimates
by management.
Net investment income (other than distribution fees) and unrealized and
realized gains or losses are allocated daily to each class of shares based upon
the relative proportion of net assets of each class at the beginning of the day.
FEDERAL INCOME TAXES: For federal income tax purposes, each series in the
Fund is treated as a separate taxpaying entity. It is the intent of the Series
to continue to meet the requirements of the Internal Revenue Code applicable to
regulated investment companies and to distribute all of its net income to
shareholders. For this reason no federal income tax provision is required.
DIVIDENDS AND DISTRIBUTIONS: The Series declares daily dividends from net
investment income. Payment of dividends are made monthly. Distributions of net
capital gains, if any, are made annually. Income distributions and capital gain
distributions are determined in accordance with income tax regulations which may
differ from generally accepted accounting principles.
CUSTODY FEE CREDITS: The Series has an arrangement with its custodian
bank, whereby uninvested monies earn credits which reduce the fees charged by
the custodian.
RECLASSIFICATION OF CAPITAL ACCOUNTS: The Fund accounts and reports for
distributions to shareholders in accordance with AICPA, Statement of Position
93-2: Determination, Disclosure, and Financial Statement Presentation of Income,
Capital Gain, and Return of Capital Distributions by Investment Companies. The
effect of applying this statement was to increase accumulated net realized loss
on investments and increase paid-in capital in excess of par by $1,628. This was
done for redemptions utilized as distributions for Federal income tax purposes.
Net investment income, net realized losses and net assets were not affected by
this change.
B-299
PRUDENTIAL MUNICIPAL SERIES FUND Pennsylvania Series
Notes to Financial Statements Cont'd.
NOTE 2. AGREEMENTS
The Fund has a management agreement with Prudential Investments Fund Management
LLC ('PIFM'). Pursuant to this agreement, PIFM has responsibility for all
investment advisory services and supervises the subadviser's performance of such
services. PIFM has entered into a subadvisory agreement with The Prudential
Investment Corporation ('PIC'); PIC furnishes investment advisory services in
connection with the management of the Fund. PIFM pays for the services of PIC,
the compensation of officers of the Fund, occupancy and certain clerical and
bookkeeping costs of the Fund. The Fund bears all other costs and expenses.
The management fee paid PIFM is computed daily and payable monthly, at an
annual rate of .50 of 1% of the average daily net assets of the Series.
Effective January 1, 2000, the subadvisory fee paid to PIC by PIFM is
computed daily and payable monthly at an annual rate of .250 of 1% of the
average daily net assets of the Fund. Prior to January 1, 2000, PIC was
reimbursed by PIFM for reasonable costs and expenses incurred in furnishing
investment advisory services. The change in the subadvisory fee structure has no
impact on the management fee charged to the Fund or its shareholders.
The Fund had a distribution agreement with Prudential Investment
Management Services LLC ('PIMS'), which acts as the distributor of the Class A,
Class B and Class C shares of the Fund. The Fund compensated PIMS for
distributing and servicing the Fund's Class A, Class B and Class C shares,
pursuant to plans of distribution, (the 'Class A, B and C Plans'), regardless of
expenses actually incurred by them. The distribution fees are accrued daily and
payable monthly.
Pursuant to the Class A, B and C Plans, the Fund compensates PIMS for
distribution-related activities at an annual rate of up to .30 of 1%, .50 of 1%
and 1%, of the average daily net assets of the Class A, B and C shares,
respectively. Such expenses under the Plan were .25 of 1%, .50 of 1% and .75 of
1% of the average daily net assets of the Class A, B and C shares, respectively.
PIMS has advised the Series that they have received approximately $10,800
and $700 in front-end sales charges resulting from sales of Class A and Class C
shares, respectively during the year ended August 31, 2000. From these fees,
PIMS paid such sales charges to affiliated broker-dealers, which in turn paid
commissions to salespersons and incurred other distribution costs.
PIMS has advised the Series that for the year ended August 31, 2000, they
received approximately $83,000 and $2,800 in contingent deferred sales charges
imposed upon certain redemptions by Class B and Class C shareholders,
respectively.
B-300
PRUDENTIAL MUNICIPAL SERIES FUND Pennsylvania Series
Notes to Financial Statements Cont'd.
PIFM, PIC and PIMS are wholly owned subsidiaries of The Prudential
Insurance Company of America.
The Series, along with other affiliated registered investment companies
(the 'Funds'), entered into a syndicated credit agreement ('SCA') with an
unaffiliated lender. The maximum commitment under the SCA is $1 billion.
Interest on any borrowings will be at market rates. For the period March 11,
1999 through March 9, 2000, the commitment fee was .065 of 1%. Subsequent to
March 9, 2000, the SCA was renewed with a maximum commitment of $1 billion at a
commitment fee of .080 of 1% of the unused portion of the facility. The
expiration date of the SCA is March 9, 2001. The Fund did not borrow any amounts
pursuant to either agreement during the year ended August 31, 2000. The purpose
of the credit agreements is to serve as an alternative source of funding for
capital share redemptions.
NOTE 3. OTHER TRANSACTIONS WITH AFFILIATES
Prudential Mutual Fund Services LLC ('PMFS'), a wholly owned subsidiary of
PIFM, serves as the Fund's transfer agent. During the year ended August 31,
2000, the Series incurred fees of approximately $85,600 for the services of
PMFS. As of August 31, 2000, approximately $6,200 of such fees were due to
PMFS. Transfer agent fees and expenses in the Statement of Operations
includes certain out-of-pocket expenses paid to nonaffiliates.
NOTE 4. PORTFOLIO SECURITIES
Purchases and sales of portfolio securities of the Series, excluding
short-term investments, for the year ended August 31, 2000 were $36,805,174
and $63,182,448, respectively.
The Series entered into an interest rate swap agreement with Morgan
Stanley Capital Services, Inc. The Series receives the fixed rate each June 29
and December 29 up to and including December 29, 2010 (the 'Termination Date')
and the Series pays the Bond Market AssociationE Municipal Swap Index announced
by Municipal Market Data each Wednesday, or if such day is not a New York
Business Day, then the next New York Business Day during the Calculation Period
(the 'Determination Date'). Details of the open interest rate swap at August 31,
2000 is as follows:
NOTIONAL
AMOUNT FIXED FLOATING TERMINATION UNREALIZED
(000) TYPE RATE RATE DATE APPRECIATION
- -------- ------------ ------ -------- ----------- ------------
$3,000 Forward Rate 5.2525% B.M.A. 12/29/10 43,169
B-301
PRUDENTIAL MUNICIPAL SERIES FUND Pennsylvania Series
Notes to Financial Statements Cont'd.
The Fund has elected to treat approximately $406,100 of net capital losses
incurred in the ten months ended August 31, 2000 as having been incurred in the
following Fiscal year.
The cost basis of investments for federal income tax purposes at August
31, 2000 was substantially the same as for financial reporting purposes and
accordingly, net unrealized appreciation of investments for federal income tax
purposes was $3,363,035 (gross unrealized appreciation--$7,736,786; gross
unrealized depreciation--$4,373,751). Note 5. Capital The Series offers Class A,
Class B and Class C shares. Class A shares are sold with a front-end sales
charge of up to 3%. Class B shares are sold with a contingent deferred sales
charge which declines from 5% to zero depending on the period of time the shares
are held. Class C shares are sold with a front-end sales charge of 1% and a
contingent deferred sales charge of 1% during the first 18 months. Class B
shares will automatically convert to Class A shares on a quarterly basis
approximately seven years after purchase. A special exchange privilege is also
available for shareholders who qualify to purchase Class A shares at net asset
value. The Fund has authorized an unlimited number of shares of beneficial
interest of each class at $.01 par value per share.
Transactions in shares of beneficial interest for the fiscal years ended
August 31, 2000 and August 31, 1999 were as follows:
CLASS A SHARES AMOUNT
- ------------------------------------------------------------ ---------- ------------
Year ended August 31, 2000:
Shares sold 98,324 $ 971,032
Shares issued in reinvestment of dividends and distributions 344,021 3,381,248
Shares reacquired (2,270,008) (22,258,195)
---------- ------------
Net decrease in shares outstanding before conversion (1,827,663) (17,905,915)
Shares issued upon conversion from Class B 2,393,378 23,623,093
---------- ------------
Net increase in shares outstanding 565,715 $ 5,717,178
========== ============
Year ended August 31, 1999:
Shares sold 1,560,443 $ 16,614,598
Shares issued in reinvestment of dividends and distributions 345,509 3,672,564
Shares reacquired (1,240,715) (13,105,874)
---------- ------------
Net increase in shares outstanding before conversion 665,237 7,181,B-287
Shares issued upon conversion from Class B 663,116 7,103,569
---------- ------------
Net increase in shares outstanding 1,328,353 $ 14,284,857
========== ============
B-302
PRUDENTIAL MUNICIPAL SERIES FUND Pennsylvania Series
Notes to Financial Statements Cont'd.
CLASS B SHARES AMOUNT
- ------- ---------- ------------
Year ended August 31, 2000:
Shares sold 458,537 $ 4,515,404
Shares issued in reinvestment of dividends and distributions 203,354 1,998,091
Shares reacquired (1,566,708) (15,401,490)
---------- ------------
Net decrease in shares outstanding before conversion (904,817) (8,887,995)
Shares reacquired upon conversion from Class B (2,393,377) (23,623,093)
---------- ------------
Net decrease in shares outstanding (3,B-297,194) $(32,511,088)
========== ============
Year ended August 31, 1999:
Shares sold 889,808 $ 9,514,214
Shares issued in reinvestment of
dividends and distributions 320,265 3,411,048
Shares reacquired (2,587,525) (27,465,851)
---------- ------------
Net decrease in shares outstanding before conversion (1,377,452) (14,540,589)
Shares reacquired upon conversion from Class B (663,B-287) (7,103,569)
---------- ------------
Net decrease in shares outstanding (2,040,740) $(21,644,158)
========== ============
CLASS C
- -------
Year ended August 31, 2000:
Shares sold 11,521 $ 113,730
Shares issued in reinvestment of dividends and distributions 2,626 25,798
Shares reacquired (53,481) (521,892)
---------- ------------
Net decrease in shares outstanding (39,334) $ (382,364)
========== ============
Year ended August 31, 1999:
Shares sold 34,335 $ 365,266
Shares issued in reinvestment of
dividends and distributions 4,074 43,394
Shares reacquired (53,B-303) (563,273)
---------- ------------
Net decrease in shares outstanding (14,895) $ (154,613)
========== ============
B-303
PRUDENTIAL MUNICIPAL SERIES FUND Pennsylvania Series
Financial Highlights
CLASS A
-----------------
YEAR ENDED
AUGUST 31, 2000
- ----------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE:
NET ASSET VALUE, BEGINNING OF YEAR $ 10.13
-----------------
INCOME FROM INVESTMENT OPERATIONS
Net investment income .53
Net realized and unrealized gain (loss) on investment
transactions (.05)
-----------------
Total from investment operations .48
-----------------
LESS DISTRIBUTIONS
Dividends from net investment income (.53)
Distributions in excess of net investment income --
Distributions from net realized gains (.03)
-----------------
Total distributions (.56)
-----------------
Net asset value, end of year $ 10.05
=================
TOTAL RETURN(b): 4.98%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000) $ 109,068
Average net assets (000) $ 106,181
Ratios to average net assets:
Expenses, including distribution fees .90%
Expenses, excluding distribution fees .65%
Net investment income 5.31%
For Class A, B and C shares:
Portfolio turnover rate 21%
- ------------------------------
(a) Net of management fee waiver.
(b) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each period reported and includes reinvestment of dividends and
distributions.
(c) Less than $.005 per share.
See Notes to Financial Statements
B-304
PRUDENTIAL MUNICIPAL SERIES FUND Pennsylvania Series
Financial Highlights Cont'd.
CLASS A
- -------------------------------------------------------------------------------------
YEAR ENDED AUGUST 31,
- -------------------------------------------------------------------------------------
1999 1998 1997 1996
- -------------------------------------------------------------------------------------
$ 10.92 $ 10.73 $ 10.49 $ 10.55
- ---------------- -------- -------- --------
.53 .57 .59(a) .59(a)
(.67) .21 .33 (.06)
- ---------------- -------- -------- --------
(.14) .78 .92 .53
- ---------------- -------- -------- --------
(.53) (.57) (.59) (.59)
-- --(c) --(c) --
(.12) (.02) (.09) --
- ---------------- -------- -------- --------
(.65) (.59) (.68) (.59)
- ---------------- -------- -------- --------
$ 10.13 $ 10.92 $ 10.73 $ 10.49
================ ======== ======== ========
(1.35)% 7.55% 9.01% 5.08%
$104,210 $ 97,794 $ 89,604 $ 69,659
$104,460 $ 96,053 $ 83,552 $ 59,995
.84% .77% .72%(a) .75%(a)
.64% .67% .62%(a) .65%(a)
5.00% 5.26% 5.60%(a) 5.56%(a)
23% 13% 21% 26%
See Notes to Financial Statements
B-305
PRUDENTIAL MUNICIPAL SERIES FUND Pennsylvania Series
Financial Highlights Cont'd.
CLASS B
-----------------
YEAR ENDED
AUGUST 31, 2000
- ----------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE:
NET ASSET VALUE, BEGINNING OF YEAR $ 10.13
--------
INCOME FROM INVESTMENT OPERATIONS
Net investment income .50
Net realized and unrealized gain (loss) on investment
transactions (.05)
--------
Total from investment operations .45
--------
LESS DISTRIBUTIONS
Dividends from net investment income (.50)
Distributions in excess of net investment income --
Distributions from net realized gains (.03)
--------
Total distributions (.53)
--------
Net asset value, end of year $ 10.05
========
TOTAL RETURN(b): 4.72%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000) $54,665
Average net assets (000) $68,B-308
Ratios to average net assets:
Expenses, including distribution fees 1.15%
Expenses, excluding distribution fees .65%
Net investment income 5.06%
- ------------------------------
(a) Net of management fee waiver.
(b) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each period reported and includes reinvestment of dividends and
distributions.
(c) Less than $.005 per share.
See Notes to Financial Statements
B-306
PRUDENTIAL MUNICIPAL SERIES FUND Pennsylvania Series
Financial Highlights Cont'd.
CLASS B
- -------------------------------------------------------------------------------------
YEAR ENDED AUGUST 31,
- -------------------------------------------------------------------------------------
1999 1998 1997 1996
- -------------------------------------------------------------------------------------
$ 10.92 $ 10.72 $ 10.49 $ 10.55
- ---------------- ---------------- ---------------- ----------------
.50 .53 .55(a) .55(a)
(.67) .22 .32 (.06)
- ---------------- ---------------- ---------------- ----------------
(.17) .75 .87 .49
- ---------------- ---------------- ---------------- ----------------
(.50) (.53) (.55) (.55)
-- --(c) --(c) --
(.12) (.02) (.09) --
- ---------------- ---------------- ---------------- ----------------
(.62) (.55) (.64) (.55)
- ---------------- ---------------- ---------------- ----------------
$ 10.13 $ 10.92 $ 10.72 $ 10.49
================ ================ ================ ================
(1.65)% 7.13% 8.58% 4.66%
$ 88,519 $117,678 $135,275 $167,809
$104,860 $125,B-305 $148,394 $189,902
1.14% 1.17% 1.12%(a) 1.15%(a)
.64% .67% .62%(a) .65%(a)
4.70% 4.87% 5.20%(a) 5.16%(a)
See Notes to Financial Statements
B-307
PRUDENTIAL MUNICIPAL SERIES FUND Pennsylvania Series
Financial Highlights Cont'd.
CLASS C
-----------------
YEAR ENDED
AUGUST 31, 2000
- ----------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE:
NET ASSET VALUE, BEGINNING OF YEAR $ 10.13
-------
INCOME FROM INVESTMENT OPERATIONS
Net investment income .48
Net realized and unrealized gain (loss) on investment
transactions (.05)
-------
Total from investment operations .43
-------
LESS DISTRIBUTIONS
Dividends from net investment income (.48)
Distributions in excess of net investment income --
Distributions from net realized gains (.03)
-------
Total distributions (.51)
-------
Net asset value, end of year $ 10.05
=======
TOTAL RETURN(b): 4.46%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000) $ 479
Average net assets (000) $ 655
Ratios to average net assets:
Expenses, including distribution fees 1.40%
Expenses, excluding distribution fees .65%
Net investment income 4.79%
- ------------------------------
(a) Net of management fee waiver.
(b) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each period reported and includes reinvestment of dividends and
distributions.
(c) Less than $.005 per share.
See Notes to Financial Statements
B-308
PRUDENTIAL MUNICIPAL SERIES FUND Pennsylvania Series
Financial Highlights Cont'd.
CLASS C
- -------------------------------------------------------------------------------------
YEAR ENDED AUGUST 31,
- -------------------------------------------------------------------------------------
1999 1998 1997 1996
- -------------------------------------------------------------------------------------
$10.92 $10.72 $10.49 $10.55
------- ------- ------- -------
.47 .50 .52(a) .52(a)
(.67) .22 .32 (.06)
------- ------- ------- -------
(.20) .72 .84 .46
------- ------- ------- -------
(.47) (.50) (.52) (.52)
-- --(c) --(c) --
(.12) (.02) (.09) --
------- ------- ------- -------
(.59) (.52) (.61) (.52)
------- ------- ------- -------
$10.13 $10.92 $10.72 $10.49
======= ======= ======= =======
(1.91)% 6.86% 8.31% 4.41%
$ 882 $1,113 $ 471 $ 829
$1,075 $ 661 $ 678 $ 704
1.39% 1.42% 1.37%(a) 1.40%(a)
.64% .67% .62%(a) .65%(a)
4.46% 4.60% 4.95%(a) 4.91%(a)
See Notes to Financial Statements
B-309
PRUDENTIAL MUNICIPAL SERIES FUND Pennsylvania Series
Report of Independent Accountants
To the Shareholders and Trustees of
Prudential Municipal Series Fund, Pennsylvania Series
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Prudential Municipal Series Fund,
Pennsylvania Series (the 'Fund', one of the portfolios constituting Prudential
Municipal Series Fund) at August 31, 2000, the results of its operations for the
year then ended, the changes in its net assets for each of the two years in the
period then ended and the financial highlights for each of the four years in the
period then ended, in conformity with accounting principles generally accepted
in the United States of America. These financial statements and financial
highlights (hereafter referred to as 'financial statements') are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with auditing standards
generally accepted in the United States of America, which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits, which included confirmation of securities at August
31, 2000 by correspondence with the custodian, provide a reasonable basis for
the opinion expressed above. The accompanying financial highlights for the year
ended August 31, 1996 were audited by other independent accountants, whose
opinion dated October 14, 1996 was unqualified.
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York
October 20, 2000
B-310
PRUDENTIAL MUNICIPAL SERIES FUND Pennsylvania Series
Federal Income Tax Information (Unaudited)
We are required by the Internal Revenue Code to advise you within 60 days
of the Series' fiscal year end (August 31, 2000) as to the federal tax status of
dividends paid by the Series during such fiscal year. Accordingly, we are
advising you that in the fiscal year ended August 31, 2000, dividends paid from
net investment income of $.53 per share for Class A shares, $.50 per Class B
share and $.48 per Class C share were all federally tax-exempt interest
dividends. In addition, the Series paid to Class A, B, and C shares a long-term
capital gain distribution of $.03, which is taxable as such. The Series utilized
redemptions as distributions in the amount of $1,628 of long-term capital gains.
We wish to advise you that the corporate dividends received deduction for
the Series is zero. Only funds that invest in U.S. equity securities are
entitled to pass-through a corporate dividends received deduction.
In January 2001, you will be advised on IRS Form 1099 DIV or substitute
1099 DIV as to the federal tax status of the dividends and distributions
received by you in calendar year 2000.
B-311
APPENDIX I--GENERAL INVESTMENT INFORMATION
The following terms are used in mutual fund investing.
ASSET ALLOCATION
Asset allocation is a technique for reducing risk and providing balance.
Asset allocation among different types of securities within an overall
investment portfolio helps to reduce risk and to potentially provide stable
returns, while enabling investors to work toward their financial goal(s). Asset
allocation is also a 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
rate payments. Duration is expressed as a measure of time in years--the longer
the duration of a bond (or a bond portfolio), the greater the impact of interest
rate changes on the bond's (or the bond portfolio's) price. Duration differs
from effective maturity in that duration takes into account call provisions,
coupon rates and other factors. Duration measures interest rate risk only and
not other risks, such as credit risk and, in the case of non-U.S. dollar
denominated securities, currency risk. Effective maturity measures the final
maturity dates of a bond (or a bond portfolio).
MARKET TIMING
Market timing--buying securities when prices are low and selling them when
prices are relatively higher--may not work for many investors because it is
impossible to predict with certainty how the price of a security will fluctuate.
However, owning a security for a long period of time may help investors offset
short-term price volatility and realize positive returns.
POWER OF COMPOUNDING
Over time, the compounding of returns can significantly impact investment
returns. Compounding is the effect of continuous investment on long-term
investment results, by which the proceeds of capital appreciation (and income
distributions, if elected) are reinvested to contribute to the overall growth of
assets. The long-term investment results of compounding may be greater than that
of an equivalent initial investment in which the proceeds of capital
appreciation and income distributions are taken in cash.
STANDARD DEVIATION
Standard Deviation is an absolute (non-relative) measure of volatility
which, for a mutual fund, depicts how widely the returns varied over a certain
period of time. When a fund has a high standard deviation, its range of
performance has been very wide, implying greater volatility potential. Standard
deviation is only one of several measures of a fund's volatility.
I-1
APPENDIX II--HISTORICAL PERFORMANCE DATA
The historical performance data contained in this Appendix relies on data
obtained from statistical services, reports and other services believed by the
Manager to be reliable. The information has not been independently verified by
the Manager.
This chart show the long-term performance of various asset classes and the
rate of inflation.
EACH INVESTMENT PROVIDES A DIFFERENT OPPORTUNITY.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
Value of $1.00 invested on
1/1/1926 through 12/31/1999
SMALL STOCKS COMMON LONG-TERM BONDS TREASURY BILLS INFLATION
STOCKS
1926
1936
1946
1956
1966
1976
1986
1999 $6,640.79 $2,845.63 $40.22 $15.64 $9.40
Source: Stocks, Bonds, Bills and Inflation 1999 Yearbook, Ibbotson Associates,
Chicago, Illinois (annually updates work by Roger G. Ibbotson and Rex A.
Sinquefield. Used with permission. This chart is for illustrative purposes only
and is not indicative of the past, present, or future performance of any asset
class or any Prudential mutual fund.
Generally, stock returns are due to capital appreciation and the reinvestment of
any gains. Bond returns are due to reinvesting interest. Also, stock prices are
usually more volatile than bond prices over the long-term.
Small stock returns for 1926-1989 are those of stocks comprising the 5th
quintile of the New York Stock Exchange. Thereafter, returns are those of the
Dimensional Fund Advisors (DFA) Small Company Fund. Common stock returns are
based on the S&P Composite Index, a market-weighted, unmanaged index of 500
stocks (currently) in a variety of industries. It is often used as a broad
measure of stock market performance.
Long-term government bond returns are measured using a constant one-bond
portfolio with a maturity of roughly 20 years. Treasury bill returns are for a
one-month bill. Treasuries are guaranteed by the government as to the timely
payment of principal and interest; equities are not. Inflation is measured by
the consumer price index (CPI).
IMPACT OF INFLATION. The "real" rate of investment return is that which exceeds
the rate of inflation, the percentage change in the value of consumer goods and
the general cost of living. A common goal of long-term investors is to outpace
the erosive impact of inflation on investment returns.
II-1
Set forth below is historical performance data relating to various sectors of
the fixed-income securities markets. The chart shows the historical total
returns of U.S. Treasury bonds, U.S. mortgage securities, U.S. corporate bonds,
U.S. high yield bonds and world government bonds on an annual basis from 1989
through 1999. The total returns of the indices include accrued interest, plus
the price changes (gains or losses) of the underlying securities during the
period mentioned. The data is provided to illustrate the varying historical
total returns and investors should not consider this performance data as an
indication of the future performance of the Fund or of any sector in which the
Fund invests.
All information relies on data obtained from statistical services, reports
and other services believed by the Manager to be reliable. Such information has
not been verified. The figures do not reflect the operating expenses and fees of
a mutual fund. See "Risk/Return Summary--Fees and Expenses" in each prospectus.
The net effect of the deduction of the operating expenses of a mutual fund on
these historical total returns, including the compounded effect over time, could
be substantial.
HISTORICAL TOTAL RETURNS OF DIFFERENT BOND MARKET SECTORS
'89 '90 '91 '92 '93 '94 '95 '96 '97 '98 '99
- -------------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT
TREASURY
BONDS(1) 14.4% 8.5% 15.3% 7.2% 10.7% (3.4)% 18.4% 2.7% 9.6% 10.0% (2.56)%
- -------------------------------------------------------------------------------------------------------------------
U.S. GOVERNMENT
MORTGAGE
SECURITIES(2) 15.4% 10.7% 15.7% 7.0% 6.8% (1.6)% 16.8% 5.4% 9.5% 7.0% 1.86%
- -------------------------------------------------------------------------------------------------------------------
U.S. INVESTMENT GRADE
CORPORATE
BONDS(3) 14.1% 7.1% 18.5% 8.7% 12.2% (3.9)% 22.3% 3.3% 10.2% 8.6% (1.96)%
- -------------------------------------------------------------------------------------------------------------------
U.S.
HIGH YIELD
CORPORATE
BONDS(4) 0.8% (9.6)% 46.2% 15.8% 17.1% (1.0)% 19.2% 11.4% 12.8% 1.6% 2.39%
- -------------------------------------------------------------------------------------------------------------------
WORLD
GOVERNMENT
BONDS(5) (3.4)% 15.3% 16.2% 4.8% 15.1% 6.0% 19.6% 4.1% (4.3)% 5.3% (5.07)%
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
DIFFERENCE BETWEEN HIGHEST
AND LOWEST RETURNS PERCENT 18.8 24.9 30.9 11.0 10.3 9.9 5.5 8.7% 17.1% 8.4% 7.46%
(1) LEHMAN BROTHERS TREASURY BOND INDEX is an unmanaged index made up of over
150 public issues of the U.S. Treasury having maturities of at least one year.
(2) LEHMAN BROTHERS MORTGAGE-BACKED SECURITIES INDEX is an unmanaged index that
includes over 600 15- and 30-year fixed-rate mortgage-backed securities of the
Government National Mortgage Association (GNMA), Federal National Mortgage
Association (FNMA), and the Federal Home Loan Mortgage Corporation (FHLMC).
(3) LEHMAN BROTHERS CORPORATE BOND INDEX includes over 3,000 public fixed-rate,
nonconvertible investment-grade bonds. All bonds are U.S. dollar-denominated
issues and include debt issued or guaranteed by foreign sovereign governments,
municipalities, governmental agencies or international agencies. All bonds in
the index have maturities of at least one year. Source Lipper Inc.
(4) LEHMAN BROTHERS HIGH YIELD BOND INDEX is an unmanaged index comprising over
750 public, fixed-rate, nonconvertible bonds that are rated Ba1 or lower by
Moody's Investors Service (or rated BB+ or lower by Standard & Poor's or Fitch
Investors Service). All bonds in the index have maturities of at least one
year.
(5) SALOMON SMITH BARNEY WORLD GOVERNMENT INDEX (NON U.S.) includes over 800
bonds issued by various foreign governments or agencies, excluding those in
the U.S., but including Japan, Germany, France, the U.K., Canada, Italy,
Australia, Belgium, Denmark, the Netherlands, Spain, Sweden, and Austria. All
bonds in the index have maturities of at least one year.
II-2
The chart below shows the historical volatility of general interest rates as
measured by the long U.S. Treasury Bond.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
LONG TERM U.S. TREASURY BOND YIELD IN PERCENT (1926-1999)
1926 1936 1946 1956 1966 1976 1986 1996 1999 YEAR-END
- ------------------------
Source: Stocks, Bonds, Bills, and Inflation 1999 Yearbook, Ibbotson Associates,
Chicago (annually updates work by Roger G. Ibbotson and Rex A. Sinquefield).
Used with permission. All rights reserved. The chart illustrates the historical
yield of a long-term U.S. Treasury Bond from 1926-1999. Yield represents that of
an annually renewed one-bond portfolio with a remaining maturity of
approximately 20 years. This chart is for illustrative purposes and should not
be construed to represent the yields of any Prudential mutual fund.
WORLD STOCK MARKET CAPITALIZATION BY REGION
WORLD TOTAL: 20.7 TRILLION
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
CANADA 2.1%
PACIFIC BASIN 16.4%
EUROPE 32.5%
U.S. 49.0%
- ------------------------
Source: Morgan Stanley Capital International, December 31, 1999. Used with
permission. This chart represents the capitalization of major world stock
markets as measured by the Morgan Stanley Capital International (MSCI) World
Index. The total market capitalization is based on the value of approximately
1,577 companies in 22 countries (representing approximately 60% of the aggregate
market value of the stock exchanges). This chart is for illustrative purposes
only and does not represent the allocation of any Prudential mutual fund.
II-3
This chart illustrates the performance of major world stock markets for the
period from December 31, 1985 through December 31, 1999. It does not represent
the performance of any Prudential mutual fund.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
Sweden 22.70%
Hong Kong 20.37%
Spain 20.11%
Netherland 18.63%
Belgium 18.41%
France 17.69%
USA 17.39%
UK 16.41%
Europe 16.28%
Switzerland 15.58%
Sing/Mlysia 15.07%
Denmark 14.72%
Germany 13.29%
Australia 11.68%
Italy 11.39%
Canada 11.10%
Japan 9.59%
Norway 8.91%
Austria 7.09%
- ------------------------
Source: Morgan Stanley Capital International (MSCI) and Lipper Inc. as of
12/31/99. Used with permission. Morgan Stanley Country indexes are unmanaged
indexes which include those stocks making up the largest two-thirds of each
country's total stock market capitalization. Returns reflect the reinvestment of
all distributions. This chart is for illustrative purposes only and is not
indicative of the past, present or future performance of any specific
investment. Investors cannot invest directly in stock indexes.
This chart shows the growth of a hypothetical $10,000 investment made in the
stocks representing the S&P 500 Stock Index with and without reinvested
dividends.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
CAPITAL APPRECIATION CAPITAL APPRECIATION ON-
AND REINVESTING DIVIDENDS LY
1969
1973
1977
1981
1985
1989
1993
1997
1999 $474,094 $159,957
- ------------------------
Source: Lipper Inc. Used with permission. All rights reserved. This chart is for
illustrative purposes only and is not intended to represent the past, present or
future performance of any Prudential mutual fund. Common stock total return is
based on the Standard & Poor's 500 Composite Stock Price index, a market-value-
weighted index made up of 500 of the largest stocks in the U.S. based upon their
stock market value. Investors cannot invest directly in indexes.
II-4
APPENDIX III--FIVE PERCENT SHAREHOLDER REPORT
As of October 6, 2000, the beneficial owners, directly or indirectly, of
more than 5% of the outstanding shares of any class of beneficial interest of a
Series were:
SERIES AND CLASS NAME REGISTRATION SHARES % OWNERSHIP
- ----------------------------------- ------------------------------------------- ---------- -----------
Florida Series (Class C) Randell E L Falck TTEE 63,817 (12.30%)
Randell E L Falck
REV TR UA DTD 12/03/91
FBO Randell E L Falck
8049 Whisper Lake Ln. W
Ponte Vedra, FL 32082-3112
Betty Louise Sikes TTEE 32,104 (6.19%)
Betty Louise Sikes
REV TRUST UA DTD 06/23/83
FBO Betty Louise Sikes
4011 NE 25th Ave.
Fort Lauderdale, FL 33308-5726
Florida Series (Class Z) Ms. Marie K. Rosato 4,898 (10.72%)
201 Plantation Club Dr.
#1503
Melbourne, FL 32940-1971
Mr. Robert J. Kowall & 2,617 (5.73%)
Mrs. Maureen A. Kowall JT TEN
2942 Wilderness Blvd. E.
Parrish, FL 34219-9269
Mrs. Eleanor C. Larochelle 2,969 (6.50%)
TTEE, Eleanor C. Larochelle Trust
UA DTD 11/21/96
FBO Eleanor C. Larochelle ET. AL.
35 Redbay CT
Homosassa, FL 34446-5121
Janet Rosenthal Pronch 5,722 (12.52%)
2480 Whispering Oaks Ln.
Delray Beach, FL 33445-7163
Guy D. Hoagland 6,739 (14.75%)
& Melissa H. Hoagland JT TEN
1021 Stratford Pl.
Melbourne, Fl 32940-7814
Gerald W. Bobo 11,014 (24.10%)
& Susan O Bobo JT TEN
8089 SE Country Estates Way
Jupiter, FL 33458-1045
Mrs. Carolyn M. Price 3,119 (6.82%)
6315 NW 71st Ave.
Tamarac, FL 33321-5504
III-1
SERIES AND CLASS NAME REGISTRATION SHARES % OWNERSHIP
- ----------------------------------- ------------------------------------------- ---------- -----------
Olivia L. McLean TTEE 5,100 (11.16%)
Olivia L. McLean Living Trust
UA DTD 11/29/99
909 Lake Shore Drive
Apt. 308
Lake Park, FL 33403-2846
Massachusetts Series (Class A) Eunice M. Varriano 35,505 (1.44%)
298 Jarvis Ave.
Apt. 127
Holyoke, MA 01040-1282
Massachusetts Series (Class C) Henry P. Hall 2,895 (10.46%)
35 River St.
Concord, MA 01742-2223
Richard M. Osgood 2,262 (8.17%)
& Mary R. Osgood JT TEN
P.O. Box 12
Winchester, MA 01890-0012
Mr. Mark W. Lightbody 4,558 (16.47%)
& Mrs. Arlyn F. Lightbody JT TEN
31 Edge St.
Ipswich, MA 01938-1109
Stanley F. Wisniewski Jr. & 5,416 (19.57%)
Eleanor A. Wisniewski JT TEN
173 Fales Rd.
No. Attleboro, MA 02760-4461
Legg Mason Wood Walker Inc. 4,162 (15.04%)
425-00072-10
P.O. Box 1476
Baltimore, MD 21203
Ms. Bertha S. Sacco 4,657 (16.83%)
70 Gaslight Ln.
North Easton, MS 02356-2731
Massachusetts Series (Class Z) James A. Meagher 651 (9.76%)
Mrs. Loriann R. Meagher JT TEN
85 Westland Rd.
Weston, MA 02193-1327
Mr. Jerome S. Narolewski 346 (5.19%)
31 Lamplighter Dr.
Shrewsbury, MA 01545-5453
Dr. Suzanne Keller 1,408 (21.10%)
P.O. Box 85
Deerfield, MA 01342-0085
III-2
SERIES AND CLASS NAME REGISTRATION SHARES % OWNERSHIP
- ----------------------------------- ------------------------------------------- ---------- -----------
Dr. Joseph Lash Jr. TTEE 4,251 (63.73%)
Joseph Lash Jr. Revocable Trust
DTD 10/21/96
UA DTD 11/03/98
649 Main Street
P.O. Box 649
Chester, VT 05143
New Jersey Series (Class C) Mrs. Stella Godleski & 13,061 (6.43%)
Mr. William Godleski JT TEN
277 Midwood Rd.
Paramus, NJ 07652-1647
George M. Keso 14,851 (7.31%)
4 Shelby Ave.
Paramus, NJ 07652-2708
New Jersey Series (Class Z) William A. Nyborg 1,926 (15.86%)
113 Elm Ave.
Haddonfield, NJ 08033-1712
Mrs. Virginia Brandmaier 691 (5.69%)
63 Florence Road
Harrington Park, NJ 07640-1737
Glen E. Albright 1,980 (16.31%)
20 Dale Dr.
Chatham, NJ 07928-1638
Yoshiko Kojima & 1,315 (10.83%)
Akira Kojima JT TEN
9800 SW 158th Ave.
Beaverton, OR 97007-8476
Mr. Timothy Crowley & 3,513 (28.94%)
Mrs. Jennifer Crowley JT TEN
61 Southfield Rd.
West Windsor, NJ 08550-3300
Angela Tolleris 1,423 (11.72%)
1090 Kennedy Blvd.
Bayonne, NJ 07002-2008
New York Series (Class C) Ellen L. Berger 12,167 (7.34%)
P.O. Box 1257
104 Morningside Ave.
Jamesport, NY 11947-1257
Julia Pasqualino 8,487 (5.12%)
Charles Pasqualino
Frank C. Pasqualino
Charles J. Pasqualino JT TEN
995 Thomas Ave.
Baldwin, NY 11510
Mr. Jonathan A. Lonner 8,929 (5.39%)
357 W. 55th St. Apt. 6E
New York, NY 10019-4530
III-3
SERIES AND CLASS NAME REGISTRATION SHARES % OWNERSHIP
- ----------------------------------- ------------------------------------------- ---------- -----------
Henry Hocker & 18,536 (11.19%)
Gloria Hocker JT TEN
15 West Suffolk Ave.
Central Islip, NY 11722-2142
Lawrence R. Caponegro 11,406 (6.89%)
Lawrence R. Caponegro REV TR
UA DTD 03/02/98
100 Patriots Rd. RM 308-38
LI ST Veterans Home
Stony Brook, NY 11790-3318
Mrs. Lee Glazer & 9,769 (7.20%)
Ms. Myra Eisner JT TEN
9541 Sunrise Lakes Blvd.
Bldg. 130 Apt. 101
Sunrise, FL 33322-6124
Mr. Salvatore Tomassi 9,923 (7.31%)
& Mrs. Arcangela Tomassi JT TEN
59 Bedford Rd.
Katonah, NY 10536-2118
New York Series (Class Z) Municipal New York Series 3,937 (10.06%)
For The A of Thomas T. Mooney
Deferred Compensation
Attn: Peter Fortner
100 Mulberry
Newark, NJ 07102
Mr. Neil Presser & 3,628 (9.27%)
Mrs. Rosemarie Presser JT TEN
9 Fieldcrest Dr.
New City, NY 10956-5439
Michael Talaska & 2,426 (6.20%)
Yvonne Talaska JT TEN
P.O. Box 663
Herriman, NY 10926-0663
Mrs. Rose Caristo & 5,606 (14.33%)
Mrs. Delores Finnizzia JT TEN
400 Terrace Blvd.
New Hyde Park, NY 11040-4341
The Shore Press 2,283 (5.83%)
Attn: Micheal Angelastro Pres.
22 Bethesda Ln.
Sayville, NY 11782-1502
Mr. Ira Friedman 1,963 (5.02%)
8718 Chevy Chase St.
Jamaica Estates, NY 11432-2440
Alida J. Morales 3,433 (8.77%)
7032 175th St.
Fresh Meadows, NY 11365-3417
III-4
SERIES AND CLASS NAME REGISTRATION SHARES % OWNERSHIP
- ----------------------------------- ------------------------------------------- ---------- -----------
Mrs. Marie Delmato 4,478 (11.44%)
335 Unqua Rd.
Massapequa, NY 11758-5319
Mr. Kenneth P. White 5,144 (13.15%)
102 Bedford St. #17
New York, NY 10014-5330
North Carolina Series (Class C) Mrs. Melba S. Jones 1,298 (46.79%)
200 W. Cornwall Rd. #107
Cary, NC 27511-3865
Melvin K. Morgan 200 (7.21%)
1135 Gold Knob Rd.
Salisbury, NC 28145-8167
S. J. Black And Son Inc. 1,031 (37.17%)
P.O. Box 1105
Monroe, NC 28111-1105
David M. Heathcoat Jr. 222 (8.00%)
Mary Grace Heathcoat JT TEN
100 Honeysuckle Ln.
Cary, NC 27513
Ohio Series (Class C) Orvilla J. Wangler 2,435 (15.38%)
Subject To STA TOD RULES -NJ
182 St. Francis Ave.
Room 108
Tiffin, OH 44883-3456
Mrs Mary C. Leon 2,687 (16.97%)
1003 Lakeville Dr.
Cincinnati, OH 45233-4527
Bobby G. Gresham 994 (6.28%)
Mildred V. Gresham JT TEN
1309 Fowles Dr.
Columbus, OH 43224
Charles E. Cartwright 806 (5.09%)
Janet L. Cartwright JT TEN
700 Swayne Dr.
Coshocton, OH 43812
Larry A. Smith & 1,779 (11.24%)
Peggy S. Smith JT TEN
500 Coover Rd.
Delaware, OH 43015
Mr. Frederick L. Bookout 3,327 (21.01%)
TTEE G. Naomi Bookout Trust
UA DTD 01/21/98
2571 Little Dry Run Rd.
Cincinnati, OH 45244-2849
III-5
SERIES AND CLASS NAME REGISTRATION SHARES % OWNERSHIP
- ----------------------------------- ------------------------------------------- ---------- -----------
Ms. Karen A. Noe 2,221 (14.03%)
Zenobia C. Nhare Revocable Trust
UA DTD 03/30/95
5630 Main St.
Sylvania, OH 43560-1928
Pennsylvania Series (Class C) Mr. Edward Dress & 10,525 (22.37%)
Mrs. Marion M. Dress JT TEN
151 Forest Rd
Mountain Top, PA 18707-1316
Snober V. Ketty Cust 2,690 (5.72%)
Anita V. Ketty
UNIF Gift Min Act PA
135 Red Fox Ln.
Harrisburg, PA 17112-8855
Mr. Irwin Roth 2,628 (5.58%)
5537 Jackson St.
Pittsburg, PA 15206-1414
Ms. Doris J. Zentmeyer 2,861 (6.08%)
1455 Erney Rd.
Dover, PA 17315-1613
Mr. Randolph J. Peischler 4,965 (10.55%)
3243 Old Post Road
Slatington, PA 18080-3209
Mrs. Marion M. Dress & 2,647 (5.63%)
Mr. Edward S. Dress JT TEN
151 Forest Rd.
Mountain Top, PA 18707-1316
Legg Mason Wood Walker Inc. 4,030 (8.56%)
424-00022-14
PO Box 1476
Baltimore, MD 21203
III-6