[LOGO] Prudential PROSPECTUS MARCH 3, 2000
Prudential
National Municipals Fund, Inc.
FUND TYPE Tax-exempt bond
OBJECTIVE High level of current income exempt from federal income taxes
Build [GRAPHIC]
As with all mutual funds, the Securities and
Exchange Commission has not approved or
disapproved the Fund's shares nor has the on the Rock
SEC determined that this prospectus is
complete or accurate. It is a criminal offense
to state otherwise.
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Table of Contents
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1 Risk/Return Summary
1 Investment Objective and Principal Strategies
1 Principal Risks
2 Evaluating Performance
3 Fees and Expenses
5 How the Fund Invests
5 Investment Objective and Policies
7 Other Investments and Strategies
10 Investment Risks
14 How the Fund is Managed
14 Board of Directors
14 Manager
14 Investment Adviser
16 Distributor
17 Fund Distributions and Tax Issues
17 Distributions
18 Tax Issues
19 If You Sell or Exchange Your Shares
21 How to Buy, Sell and Exchange Shares of the Fund
21 How to Buy Shares
28 How to Sell Your Shares
31 How to Exchange Your Shares
33 Telephone Redemptions and Exchanges
34 Financial Highlights
34 Class A Shares
35 Class B Shares
36 Class C Shares
37 Class Z Shares
38 The Prudential Mutual Fund Family
For More Information (Back Cover)
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PRUDENTIAL NATIONAL MUNICIPALS FUND, INC. (800) 225-1852
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Risk/Return Summary
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This section highlights key information about the PRUDENTIAL NATIONAL
MUNICIPALS FUND, INC., which we refer to as "the Fund." Additional information
follows this summary.
INVESTMENT OBJECTIVE AND PRINCIPAL STRATEGIES
Our investment objective is to seek A HIGH LEVEL OF CURRENT INCOME EXEMPT FROM
FEDERAL INCOME TAXES. This means we normally invest at least 80% of the Fund's
total assets in municipal bonds. The Fund's portfolio consists primarily of
long-term municipal bonds of medium quality. While we make every effort to
achieve our objective, we can't guarantee success.
PRINCIPAL RISKS
Although we try to invest wisely, all investments involve risk. Since the Fund
invests primarily in long-term municipal bonds of medium quality, there is the
risk that the bonds may lose value because interest rates change or because
there is a lack of confidence in the borrower. Bonds with longer maturity dates
typically produce higher yields and are subject to greater price fluctuations
as a result of changes in interest rates than bonds with shorter maturity
dates.
Bond prices and the Fund's net asset value generally move in opposite
directions from interest rates--if interest rates go up, the prices of the
bonds in the Fund's portfolio may fall because the bonds the Fund holds won't,
as a rule, pay as well as the newer bonds issued. Bonds that are issued when
interest rates are high generally increase in value when interest rates fall.
In addition to interest rate changes, municipal bonds of medium quality have
speculative characteristics and are subject to a greater degree of market
fluctuation and greater risk that the issuer may be unable to make principal
and interest payments when they are due than higher-quality securities.
Municipal bonds and, in particular, municipal leases may be subject to the
risk that the municipality may not set aside funds in future budgets to make
the bond or lease payments.
Like any mutual fund, an investment in the Fund could lose value, and you
could lose money. For more detailed information about the risks associated with
the Fund, see "How the Fund Invests--Investment Risks."
An investment in the Fund is not a bank deposit and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or by any other
government agency.
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Risk/Return Summary
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EVALUATING PERFORMANCE
A number of factors--including risk--can affect how the Fund performs. The
following bar chart shows the Fund's performance for each full calendar year of
operation for the last 10 years. The bar chart and table below demonstrate the
risk of investing in the Fund by showing how returns can change from year to
year and by showing how the Fund's average annual total returns compare with
those of a broad measure of market performance and a group of similar mutual
funds. Past performance does not mean that the Fund will achieve similar
results in the future.
[GRAPH]
Annual Returns* (Class B shares)
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
- ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
5.95% 12.41% 8.49% 12.15% -6.39% 16.49% 2.26% 9.35% 4.99% -3.98%
BEST QUARTER: 6.26% (3rd quarter of 1995)
WORST QUARTER: -5.99% (1st quarter of 1994)
* These annual returns do not include sales charges. If the sales charges were
included, the annual returns would be lower than those shown.
AVERAGE ANNUAL RETURNS/1/ (AS OF 12-31-99)
1 YR 5 YRS 10 YRS SINCE INCEPTION
Class A shares (3.69)% 5.99% N/A 6.44%(since 1-22-90)
Class B shares (3.98)% 5.60% 5.94% 7.89%(since 4-25-80)
Class C shares (4.22)% 5.34% N/A 4.41%(since 8-1-94)
Class Z shares N/A N/A N/A N/A(since 1-22-99)
Lehman Muni Bond Index/2/ (2.06)% 6.91% 6.89% N/A
Lipper Average/3/ (4.63)% 5.76% 6.18% N/A
1 The Fund's returns are after deduction of sales charges and expenses. Without
the distribution and service (12b-1) fee waiver for Class A and Class C
shares, the returns would have been lower.
2 The Lehman Brothers Municipal Bond Index--an unmanaged index of over 21,000
long-term investment grade municipal bonds--gives a broad look at how long-
term investment-grade municipal bonds have performed. These returns do not
include the effect of any sales charges or operating expenses of a mutual
fund. These returns would be lower if they included the effect of sales
charges and operating expenses. The Lehman Muni Bond Index returns since the
inception of each class are 7.00% for Class A, 8.36% for Class B, 5.86% for
Class C and (3.48)% for Class Z shares. Source: Lehman Brothers.
3 The Lipper Municipal Debt Funds Category is based on the average return of
all mutual funds in this category. These returns do not include the effect of
any sales charges. These returns would be lower if they included the effect
of sales charges. The Lipper returns since the inception of each class are
6.36% for Class A, 8.26% for Class B, 4.74% for Class C and (5.68)% for Class
Z shares. Source: Lipper Inc.
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PRUDENTIAL NATIONAL MUNICIPALS FUND, INC. (800) 225-1852
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Risk/Return Summary
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FEES AND EXPENSES
These tables show the sales charges, fees and expenses that you may pay if you
buy and hold shares of each class of the Fund--Class A, B, C and Z. Each share
class has different sales charges--known as loads--and expenses, but represents
an investment in the same fund. Class Z shares are available only to a limited
group of investors. For more information about which share class is right for
you, see "How to Buy, Sell and Exchange Shares of the Fund."
SHAREHOLDER FEES/1/ (PAID DIRECTLY FROM YOUR INVESTMENT)
CLASS A CLASS B CLASS C CLASS Z
Maximum sales charge (load) imposed on 3% None 1% None
purchases (as a percentage of offering
price)
Maximum deferred sales charge (load) None 5%/2/ 1%/3/ None
(as a percentage of the lower of original
purchase price or sale proceeds)
Maximum sales charge (load) imposed on None None None None
reinvested dividends and other
distributions
Redemption fees None None None None
Exchange fee None None None None
ANNUAL FUND OPERATING EXPENSES (DEDUCTED FROM FUND ASSETS)
CLASS A CLASS B CLASS C CLASS Z
Management fees .48% .48% .48% .48%
+ Distribution and service (12b-1) fees/4/ .30% .50% 1.00% None
+ Other expenses .13% .13% .13% .13%
= TOTAL ANNUAL FUND OPERATING EXPENSES .91% 1.11% 1.61% .61%
- Fee waiver or expense reimbursement/4/ .05% None .25% None
= NET ANNUAL FUND OPERATING EXPENSES .86% 1.11% 1.36% .61%
1 Your broker may charge you a separate or additional fee for purchases and
sales of shares.
2 The Contingent Deferred Sales Charge (CDSC) for Class B shares decreases by
1% annually to 1% in the fifth and sixth years and 0% in the seventh year.
Class B shares convert to Class A shares approximately seven years after
purchase.
3 The CDSC for Class C shares is 1% for shares redeemed within 18 months of
purchase.
4 For the fiscal year ending December 31, 2000, the Distributor of the Fund has
contractually agreed to reduce its distribution and service (12b-1) fees for
Class A and Class C shares to .25 of 1% and .75 of 1% of the average daily
net assets of Class A and Class C shares, respectively.
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Risk/Return Summary
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EXAMPLE
This example will help you compare the fees and expenses of the Fund's
different share classes and the cost of investing in the Fund with the cost of
investing in other mutual funds.
The example assumes that you invest $10,000 in the Fund for the time periods
indicated and then sell all of your shares at the end of those periods. The
example also assumes that your investment has a 5% return each year and that
the Fund's operating expenses remain the same, except for the Distributor's
reduction of distribution and service (12b-1) fees for Class A and Class C
shares during the first year. Although your actual costs may be higher or
lower, based on these assumptions, your costs would be:
1 YR 3 YRS 5 YRS 10 YRS
Class A shares $385 $577 $784 $1,382
Class B shares $613 $653 $712 $1,221
Class C shares $337 $579 $944 $1,971
Class Z shares $ 62 $195 $340 $ 762
You would pay the following expenses on the same investment if you did not sell
your shares:
1 YR 3 YRS 5 YRS 10 YRS
Class A shares $385 $577 $784 $1,382
Class B shares $113 $353 $612 $1,221
Class C shares $237 $579 $944 $1,971
Class Z shares $ 62 $195 $340 $ 762
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PRUDENTIAL NATIONAL MUNICIPALS FUND, INC. (800) 225-1852
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How the Fund Invests
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INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is to SEEK A HIGH LEVEL OF CURRENT INCOME
EXEMPT FROM FEDERAL INCOME TAXES. This means we invest substantially all, and,
in any event, at least 80% of the value of the Fund's total assets in MUNICIPAL
BONDS, which include MUNICIPAL NOTES. Municipal notes, like municipal bonds,
are fixed-income securities issued by states and municipalities, except that
municipal notes mature in one year or less. While we make every effort to
achieve our objective, we can't guarantee success.
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MUNICIPAL BONDS
States and municipalities issue bonds in order to borrow money to finance a
project. You can think of bonds as loans that investors make to the state,
local government or other issuer. The government gets the cash needed to
complete the project and investors earn income on their investment.
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Municipal bonds include GENERAL OBLIGATION BONDS and REVENUE BONDS. General
obligation bonds are obligations supported by the credit of an issuer that has
the power to tax and are payable from such issuer's general revenues and not
from any particular source. Revenue bonds, on the other hand, are payable from
revenues derived from a particular source.
The Fund's portfolio will consist primarily of long-term municipal bonds
of medium quality. Although we will not be limited by ratings assigned by
rating services, this means that the Fund's portfolio will be principally
invested in medium-quality investment-grade municipal bonds; that is, bonds
rated A and Baa by Moody's Investors Service (Moody's) and A and BBB by
Standard & Poor's Ratings Group (S&P), or comparably rated by another major
rating service. A rating is an assessment of the likelihood of timely repayment
of interest and principal and can be useful when comparing different debt
obligations. These ratings are not a guarantee of quality. The opinions of the
rating agencies do not reflect market risk and they may at times lag behind the
current financial conditions of the company. An investor can evaluate the
expected likelihood of debt repayment by an issuer by looking at its ratings as
compared to another similar issuer. Bonds rated Baa by Moody's or BBB by S&P
have speculative characteristics.
Although the investment adviser will consider ratings assigned to a
security, it will perform its own investment analysis. The Fund, for example,
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How the Fund Invests
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may acquire municipal bonds rated below investment-grade, that is, HIGH- YIELD
or "JUNK BONDS", if, in the opinion of the investment adviser, the bonds have
the characteristics of medium-rated securities. High-yield securities offer
higher yields, but also offer greater price volatility and risk of loss of
principal and income. In addition to investing in rated securities, the Fund
may invest in unrated securities that we determine are of comparable quality to
medium-rated securities.
In recent years, there has been a narrowing of the yield spreads between
higher- and lower-quality municipal bonds and a reduction in the supply of
medium-quality municipal bonds. As a result of these changing conditions in the
municipal securities markets, the investment adviser has invested a substantial
portion of the Fund's assets in higher-quality municipal bonds.
The Fund may purchase secondary market insurance on municipal bonds it
acquires. Although the insurance premium will reduce the yield on the insured
bonds, the insurance will reduce the Fund's credit risk and may increase the
insured bond's market value.
The interest on municipal bonds generally is exempt from federal income
taxes. The Fund, however, may hold certain private activity bonds, which are
municipal bonds the interest on which is subject to the federal alternative
minimum tax (AMT). See "Fund Distributions and Tax Issues-- Distributions."
In seeking to achieve the Fund's investment objective, the investment
adviser will purchase securities that it believes represent the best values
based on yield, maturity, issue and quality characteristics and expectations
regarding economic and political developments, including movements in interest
rates and demand for municipal bonds. The investment adviser will seek to
anticipate interest rate movements and adjust the Fund's portfolio holdings
accordingly. The investment adviser will also seek to take advantage of
differentials in yields with respect to securities with similar credit ratings
and maturities, but which vary according to the purpose for which they were
issued, as well as securities issued for similar purposes with similar
maturities, but which vary according to ratings.
For more information, see "Investment Risks" below and the Statement of
Additional Information, "Description of the Fund, Its Investments and Risks."
The Statement of Additional Information--which we refer to as the SAI--contains
additional information about the Fund. To obtain a copy, see the back cover
page of this prospectus.
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PRUDENTIAL NATIONAL MUNICIPALS FUND, INC. (800) 225-1852
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How the Fund Invests
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The Fund's investment objective is a fundamental policy that cannot be
changed without shareholder approval. The Board of the Fund can change
investment policies of the Fund that are not fundamental.
OTHER INVESTMENTS AND STRATEGIES
In addition to the principal strategies, we also may use the following
investment strategies to increase the Fund's returns or protect its assets if
market conditions warrant.
FLOATING RATE BONDS, VARIABLE RATE BONDS, INVERSE FLOATERS, SECONDARY INVERSE
FLOATERS AND ZERO COUPON MUNICIPAL BONDS
The Fund may invest in floating rate bonds, variable rate bonds, inverse
floaters, secondary inverse floaters and zero coupon municipal bonds. FLOATING
RATE BONDS are municipal bonds that have an interest rate that is set as a
specific percentage of a designated rate, such as the rate on Treasury bonds or
the prime rate at major commercial banks. The interest rate on floating rate
bonds changes when there is a change in the designated rate. VARIABLE RATE
BONDS are municipal bonds that have an interest rate that is adjusted based on
the market rate at a specified period. They generally allow the Fund to demand
payment of the bond on short notice for an amount that may be more or less than
the amount paid. INVERSE FLOATERS are municipal bonds with a floating or
variable interest rate that moves in the opposite direction of the interest
rate on another security or the value of an index. SECONDARY INVERSE FLOATERS
are municipal asset-backed securities with a floating or variable interest rate
that moves in the opposite direction of the interest rate on another security
or the value of an index. ZERO COUPON MUNICIPAL BONDS do not pay interest
during the life of the bond. An investor makes money by purchasing the bond at
a price that is less than the money the investor will receive when the
municipality repays the amount borrowed (face value).
MUNICIPAL LEASE OBLIGATIONS
The Fund may invest in municipal lease obligations. MUNICIPAL LEASE OBLIGATIONS
are obligations where the interest and principal are paid out of lease payments
made by the party leasing the facilities that were built with the bonds.
Typically, municipal lease obligations are issued by states or financing
authorities to provide money for construction projects such as
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How the Fund Invests
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schools, offices or stadiums. The entity that leases the building or facility
would be responsible for paying the interest and principal on the obligation.
MUNICIPAL ASSET-BACKED SECURITIES
The Fund may invest in MUNICIPAL ASSET-BACKED SECURITIES. A municipal asset-
backed security is a type of pass-through instrument that pays interest which
is eligible for exclusion from federal income taxation based upon the income
from an underlying pool of municipal bonds.
WHEN-ISSUED AND DELAYED-DELIVERY SECURITIES
The Fund may purchase municipal obligations on a WHEN-ISSUED or DELAYED-
DELIVERY basis, without limit. When the Fund makes this type of purchase, the
price and interest rate are fixed at the time of purchase, but delivery and
payment for the obligations take place at a later time. The Fund does not earn
interest income until the date the obligations are delivered.
TEMPORARY DEFENSIVE STRATEGY AND SHORT-TERM INVESTMENTS
In response to adverse market, economic or political conditions, or for
liquidity purposes, pending investment in municipal bonds, we may take a
temporary defensive position and invest up to 100% of the Fund's assets in
municipal notes. Investing heavily in these securities can limit our ability to
achieve our investment objective of a high level of current income exempt from
federal income taxes, but can help to preserve the Fund's assets.
DERIVATIVE STRATEGIES
We may use various DERIVATIVE strategies to try to improve the Fund's returns
or protect its assets. We cannot guarantee that these strategies will work,
that the instruments necessary to implement these strategies will be available,
or that the Fund will not lose money. Derivatives--such as financial futures,
including interest rate futures contracts, options on futures and interest rate
swaps--involve costs and can be volatile. With derivatives, the investment
adviser tries to predict if the underlying investment, whether a security,
market index, interest rate, or some other investment, will go up or down at
some future date. We may use derivatives to try to reduce risk or to increase
return consistent with the Fund's overall investment objective. The investment
adviser will consider other factors (such as cost) in deciding
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PRUDENTIAL NATIONAL MUNICIPALS FUND, INC. (800) 225-1852
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How the Fund Invests
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whether to employ any particular strategy or use any particular instrument. Any
derivatives we may use may not match the Fund's underlying holdings.
Financial Futures Contracts and Related Options
The Fund may purchase and sell financial futures contracts and related options
on financial futures. A FUTURES CONTRACT is an agreement to buy or sell a set
quantity of an underlying product at a future date, or to make or receive a
cash payment based on the value of a securities index. An OPTION is the right
to buy or sell a security, or in the case of an option on a futures contract,
the right to buy or sell a futures contract, in exchange for a premium.
Interest Rate Swap Transactions
The Fund may enter into INTEREST RATE SWAP TRANSACTIONS. In a swap transaction
the Fund and another party "trade" income streams. The swap is done to preserve
a return or spread on a particular investment or portion of a portfolio or to
protect against any increase in the price of securities the Fund anticipates
purchasing at a later date.
For more information about these strategies, see the SAI, "Description of the
Fund, Its Investments and Risks."
ADDITIONAL STRATEGIES
The Fund also follows certain policies when it PURCHASES SHARES OF OTHER
INVESTMENT COMPANIES (the Fund may hold up to 10% of its total assets in such
securities, which entail duplicate management and advisory fees to
shareholders); BORROWS MONEY (the Fund can borrow up to 33 1/3% of the value of
its total assets); and HOLDS ILLIQUID SECURITIES (the Fund may hold up to 15%
of its net assets in illiquid securities, including securities with legal or
contractual restrictions on resale, those without a readily available market,
and repurchase agreements with maturities longer than seven days). The Fund is
subject to certain investment restrictions that are fundamental policies which
means they cannot be changed without shareholder approval. For more information
about these restrictions, see the SAI.
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How the Fund Invests
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INVESTMENT RISKS
As noted, all investments involve risk, and investing in the Fund is no
exception. Since the Fund's holdings can vary significantly from broad market
indexes, performance of the Fund can deviate from performance of the indexes.
This chart outlines the key risks and potential rewards of the Fund's principal
investments and certain other non-principal investments the Fund may make. See,
too, "Description of the Fund, Its Investments and Risks" in the SAI.
INVESTMENT TYPE
% OF FUND'S TOTAL RISKS POTENTIAL REWARDS
ASSETS
MUNICIPAL BONDS
. Credit risk--the . Tax-exempt inter-
At least 80% un- risk that the est income, ex-
der normal condi- borrower can't cept with respect
tions pay back the to certain bonds,
money borrowed or such as private
make interest activity bonds,
payments (lower which are subject
for insured and to the federal
higher rated alternative mini-
bonds) mum tax (AMT)
. If interest rates
. Market risk--the decline, long-
risk that bonds term yields
will lose value should be higher
in the market be- than money market
cause interest yields
rates rise or
there is a lack
of confidence in
the borrower
. Concentration
risk--the risk
that bonds may
lose value be-
cause of politi-
cal, economic or
other events in
the geographic
region where the
Fund's invest-
ments are focused
. Tax risk--the
risk that federal
income tax rates
may decrease,
which could de-
crease demand for
municipal bonds
or that a change
in law may limit
or eliminate ex-
emption of inter-
est on municipal
bonds from such
taxes
. Illiquidity
risk--the risk
that bonds may be
difficult to
value precisely
and sell at time
or price desired
. Nonappropriation
risk--the risk
that the
municipality may
not include the
bond obligations
in future budgets
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PRUDENTIAL NATIONAL MUNICIPALS FUND, INC. (800) 225-1852
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How the Fund Invests
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INVESTMENT TYPE (CONT'D)
% OF FUND'S TOTAL RISKS POTENTIAL REWARDS
ASSETS
HIGH-YIELD DEBT . Higher market . May offer higher
SECURITIES (JUNK risk than higher- interest income
BONDS) grade debt secu- and higher poten-
rities tial gains than
higher- grade
debt securities
Percentage varies
. Higher credit
risk than higher- . Most bonds rise
grade debt secu- in value when in-
rities terest rates fall
. Higher illiquid-
ity risk than
higher-grade debt
securities, in
which case valua-
tion would depend
more on invest-
ment adviser's
judgment than is
generally the
case with higher-
rated securities
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ZERO COUPON . See credit risk, . Tax-exempt inter-
MUNICIPAL BONDS market risk con- est income, ex-
centration risk cept with respect
and tax risk to certain bonds,
such as private
activity bonds,
which are subject
to the AMT
Percentage varies . Typically subject
to greater vola-
tility and less
liquidity in ad-
verse markets
than other munic-
ipal bonds . Value rises
faster when in-
terest rates fall
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VARIABLE/FLOATING . Value lags value . May offer protec-
RATE BONDS of fixed-rate se- tion against in-
curities when in- terest rate
terest rates changes
change
Percentage varies
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INVERSE FLOATERS/ . High market . Income generally
SECONDARY INVERSE risk--risk that will increase
FLOATERS inverse floaters when interest
will fluctuate in rates decrease
value more dra-
matically than
other debt secu-
rities when in-
terest rates
change
Percentage varies
. See credit risk
and illiquidity
risk
. Secondary inverse
floaters are sub-
ject to addi-
tional risks of
municipal asset-
backed securities
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How the Fund Invests
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INVESTMENT TYPE (CONT'D)
% OF FUND'S TOTAL RISKS POTENTIAL REWARDS
ASSETS
WHEN-ISSUED AND . May magnify un- . May magnify un-
DELAYED-DELIVERY derlying invest- derlying invest-
SECURITIES ment losses ment gains
. Investment costs
may exceed poten-
tial underlying
investment gains
Percentage varies
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DERIVATIVES . Derivatives such . The Fund could
as futures, make money and
options on protect against
futures and losses if the
interest rate investment
swaps that are analysis proves
used for hedging correct
purposes may not
fully offset the
underlying
positions and
this could result
in losses to the
Fund that would
not have
otherwise
occurred
Percentage varies
. One way to manage
the Fund's
risk/return
balance is to
lock in the value
of an investment
ahead of time
. Derivatives used
for risk
management may
not have the
intended effects
and may result in
losses or missed
opportunities
. The other party
to a derivatives
contract could
default
. Certain types of
derivatives
involve costs to
the Fund that can
reduce returns
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MUNICIPAL LEASE . See credit risk, . Tax-exempt
OBLIGATIONS market risk, interest income,
concentration except with
risk, respect to
nonappropriation certain bonds,
risk, illiquidity such as private
risk and tax risk activity bonds,
which are subject
to the AMT
Percentage varies
. If interest rates
decline, long-
term yields
should be higher
than money market
yields
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PRUDENTIAL NATIONAL MUNICIPALS FUND, INC. (800) 225-1852
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How the Fund Invests
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INVESTMENT TYPE (CONT'D)
% OF FUND'S TOTAL RISKS POTENTIAL REWARDS
ASSETS
MUNICIPAL ASSET- . Prepayment risk-- . Regular interest
BACKED SECURITIES the risk that the income
underlying bonds . Pass-through
may be prepaid, instruments
partially or provide greater
completely, diversification
generally during than direct
periods of ownership of
falling interest municipal bonds
rates, which
could adversely
affect yield to
maturity and
could require the
Fund to reinvest
in lower yielding
bonds
Percentage varies
. Credit risk--the
risk that the
underlying
municipal bonds
will not be paid
by issuers or by
credit insurers
or guarantors of
such instruments.
Some municipal
asset-backed
securities are
unsecured or
secured by lower-
rated insurers or
guarantors and
thus may involve
greater risk
. See market risk
and tax risk
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ILLIQUID . See illiquidity . May offer a more
SECURITIES risk attractive yield
or potential for
growth than more
widely traded
securities
Up to 15% of net
assets
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How the Fund is Managed
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BOARD OF DIRECTORS
The Fund's Board of Directors oversees the actions of the Manager, investment
adviser and Distributor and decides on general policies. The Board also
oversees the Fund's officers, who conduct and supervise the daily business
operations of the Fund.
MANAGER
PRUDENTIAL INVESTMENTS FUND MANAGEMENT LLC (PIFM)
GATEWAY CENTER THREE, 100 MULBERRY STREET
NEWARK, NJ 07102-4077
Under a management agreement with the Fund, PIFM manages the Fund's
investment operations and administers its business affairs. PIFM also is
responsible for supervising the Fund's investment adviser. For the fiscal year
ended December 31, 1999, the Fund paid PIFM management fees of .48% of the
Fund's average daily net assets.
PIFM and its predecessors have served as manager or administrator to
investment companies since 1987. As of December 31, 1999, PIFM served as the
manager to all 42 of the Prudential mutual funds, and as manager or
administrator to 22 closed-end investment companies, with aggregate assets of
approximately $75.6 billion.
INVESTMENT ADVISER
The Prudential Investment Corporation, called Prudential Investments, is the
Fund's investment adviser and has served as an investment adviser to investment
companies since 1984. Its address is Prudential Plaza, 751 Broad Street,
Newark, NJ 07102. PIFM has responsibility for all investment advisory services,
supervises Prudential Investments and pays Prudential Investments for its
services.
Prudential Investments' Fixed Income Group manages more than $135 billion
for Prudential's retail investors, institutional investors, and policyholders.
Senior Managing Directors James J. Sullivan and Jack W. Gaston head the Group,
which is organized into teams specializing in different market sectors. Top-
down, broad investment decisions are made by the Fixed Income Policy Committee,
whereas bottom-up security selection is made by the sector teams.
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How the Fund is Managed
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Mr. Sullivan has overall responsibility for overseeing portfolio management
and credit research. Prior to joining Prudential Investments in 1998, he was a
managing director in Prudential's Capital Management Group, where he oversaw
portfolio management and credit research for Prudential's General Account and
subsidiary fixed-income portfolios. He has more than 16 years of experience in
risk management, arbitrage trading, and corporate bond investing.
Mr. Gaston has overall responsibility for overseeing quantitative research
and risk management. Prior to this appointment in 1999, he was senior managing
director of the Capital Management Group where he was responsible for the
investment performance and risk management for Prudential's General Account and
subsidiary fixed-income portfolios. He has more than 20 years of experience in
investment management, including extensive experience applying quantitative
techniques to portfolio management.
The Fixed Income Investment Policy Committee is comprised of key senior
investment managers. Members include seven sector team leaders, the chief
investment strategist, and the head of risk management. The Committee uses a
top-down approach to investment strategy, asset allocation, and general risk
management, identifying sectors in which to invest.
The Municipal Bond Team, headed by Evan Lamp, is primarily responsible for
overseeing the day-to-day management of the Fund.
This Team uses a bottom-up approach, which focuses on individual securities,
while staying within the guidelines of the Investment Policy Committee and the
Fund's investment restrictions and policies. In addition, the Credit Research
team of analysts supports the sector teams using bottom-up fundamentals, as
well as economic and industry trends. Other sector teams may contribute to
securities selection when appropriate.
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How the Fund is Managed
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MUNICIPAL BONDS
ASSETS UNDER MANAGEMENT: $5.4 billion (as of December 31, 1999).
TEAM LEADER: Evan Lamp. GENERAL INVESTMENT EXPERIENCE: 7 years.
PORTFOLIO MANAGERS: 5. AVERAGE GENERAL INVESTMENT EXPERIENCE: 8 years, which
includes team members with significant mutual fund experience.
SECTOR: City, state and local government securities.
INVESTMENT APPROACH: Focus is on identifying spread, credit quality and
liquidity trends to capitalize on changing opportunities in the municipal
market. Ultimately, they seek the highest expected return with the least risk.
DISTRIBUTOR
Prudential Investment Management Services LLC (PIMS) distributes the Fund's
shares under a Distribution Agreement with the Fund. The Fund has Distribution
and Service Plans under Rule 12b-1 of the Investment Company Act. Under the
Plans and the Distribution Agreement, PIMS pays the expenses of distributing
the Fund's Class A, B, C and Z shares, and provides certain shareholder support
services. The Fund pays distribution and other fees to PIMS as compensation for
its services for each class of shares other than Class Z. These fees--known as
12b-1 fees--are shown in the "Fees and Expenses" tables.
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Fund Distributions and Tax Issues
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Investors who buy shares of the Fund should be aware of some important tax
issues. For example, the Fund distributes DIVIDENDS of net investment income
monthly and distributes CAPITAL GAINS, if any, at least annually. Dividends
generally will be exempt from federal income taxes. If, however, the Fund
invests in taxable obligations, it will pay dividends that are not exempt from
federal income taxes. Dividends and distributions from the Fund also may be
subject to state and local income tax in the state where you live.
Also, if you sell shares of the Fund for a profit, you may have to pay
capital gains taxes on the amount of your profit.
The following briefly discusses some of the important tax issues you should
be aware of, but is not meant to be tax advice. For tax advice, please speak
with your tax adviser.
DISTRIBUTIONS
The Fund distributes DIVIDENDS out of any net investment income to shareholders
typically every month. For example, if the Fund owns a City XYZ bond and the
bond pays interest, the Fund will pay out a portion of this interest as a
dividend to its shareholders, assuming the Fund's income is more than its costs
and expenses. These dividends generally will be EXEMPT FROM FEDERAL INCOME
TAXES, as long as 50% or more of the value of the Fund's assets at the end of
each quarter is invested in state, municipal, and other obligations, the
interest on which is excluded from gross income for federal income tax
purposes. As mentioned, at least 80% of the Fund's assets will be invested in
such obligations during normal market conditions. Dividends attributable to the
interest on taxable bonds held by the Fund, market discount on taxable and tax-
exempt obligations and short-term capital gains, however, will be subject to
federal, state and local income tax at ordinary income tax rates. Corporate
shareholders are not eligible for the 70% dividends-received deduction on
dividends paid by the Fund.
Some shareholders may be subject to federal alternative minimum tax
liability. Tax-exempt interest from certain bonds is treated as an item of tax
preference, and may be attributed to shareholders. A portion of all tax-exempt
interest is includable as an upward adjustment in determining a corporation's
alternative minimum taxable income. These rules could make you liable for the
alternative minimum tax (AMT).
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Fund Distributions and Tax Issues
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The Fund also distributes LONG-TERM CAPITAL GAINS to shareholders--
typically once a year. Long-term capital gains are generated when the Fund
sells assets that it held for more than 12 months for a profit. For an
individual, the maximum long-term capital gains rate is 20%.
For your convenience, Fund distributions of dividends and capital gains are
AUTOMATICALLY REINVESTED in the Fund, without any sales charge. If you ask us
to pay the distributions in cash, we will send you a check if your account is
with the Transfer Agent. Otherwise, if your account is with a broker you will
receive a credit to your account. Either way, the distributions may be subject
to taxes. For more information about Automatic Reinvestment and other
shareholder services, see "Step 4: Additional Shareholder Services," in the
next section.
TAX ISSUES
FORM 1099
Every year you will receive a Form 1099, which reports the amount of taxable
dividends and long-term capital gains we distributed to you during the prior
year.
Fund distributions are generally taxable to you in the calendar year they
are received, except when we declare certain dividends in the fourth quarter,
and actually pay them in January of the following year. In such cases, the
dividends are treated as if they were paid on December 31 of the prior year.
WITHHOLDING TAXES
If federal law requires you to provide the Fund with your taxpayer
identification number and certifications as to your tax status, and you fail to
do this, or if you are otherwise subject to backup withholding, we will
withhold and pay to the U.S. Treasury 31% of your taxable distributions and
gross sale proceeds. Dividends of net investment income and short-term capital
gains paid to a nonresident foreign shareholder generally will be subject to a
U.S. withholding tax of 30%. This rate may be lower, depending on any tax
treaty the U.S. may have with the shareholder's country.
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Fund Distributions and Tax Issues
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IF YOU PURCHASE JUST BEFORE RECORD DATE
If you buy shares of the Fund just before the record date for a distribution
(the date that determines who receives the distribution), that distribution
will be paid to you. As explained above, the distribution may be subject to
income or capital gains taxes. You may think you've done well, since you bought
shares one day and soon thereafter received a distribution. That is not so
because when dividends are paid out, the value of each share of the Fund
decreases by the amount of the dividend to reflect the payout although this may
not be apparent because the value of each share of the Fund will also be
affected by market changes, if any. The distribution you receive makes up for
the decrease in share value. However, if the distribution is taxable, the
timing of your purchase does mean that part of your investment came back to you
as taxable income.
IF YOU SELL OR EXCHANGE YOUR SHARES
If you sell any shares of the Fund for a profit, you have REALIZED A CAPITAL
GAIN which is subject to tax. For individuals, the maximum capital gains tax
rate is 20% for shares held more than twelve months. If you sell shares of the
Fund for a loss, you may have a capital loss, which you may use to offset any
capital gains you have.
If you sell shares and realize a loss, you will not be permitted to use the
loss to the extent you replace the shares (including pursuant to the
reinvestment of a dividend) within a 61-day period (beginning 30 days before
the sale of the shares.) If you acquire shares of the Fund and sell your shares
within 90 days, you may not be allowed to include certain charges incurred in
acquiring the shares for purposes of calculating gain or loss realized upon the
sale of the shares.
Exchanging your shares of the Fund for the shares of another Prudential
mutual fund is considered a sale for tax purposes. In other words, it's a
"taxable event." Therefore, if the shares you exchanged have increased in value
since you purchased them, you have capital gains, which are subject to the
taxes described above.
- ----------------------------------------
+$ CAPITAL GAIN
(taxes owed)
RECEIPTS FROM SALE $ OR
-$ CAPITAL LOSS
(offset against gain)
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Fund Distributions and Tax Issues
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Any gains you may have from selling or exchanging Fund shares will not be
reported on Form 1099; however, proceeds from the sale or exchange will be
reported on Form 1099-B. Therefore, you or your financial adviser should keep
track of the dates on which you buy and sell--or exchange-- Fund shares, as
well as the amount of any gain or loss on each transaction. For tax advice,
please see your tax adviser.
AUTOMATIC CONVERSION OF CLASS B SHARES
We have obtained a legal opinion that the conversion of Class B shares into
Class A shares--which happens automatically approximately seven years after
purchase--is not a "taxable event" because it does not involve an actual sale
of your Class B shares. This opinion, however, is not binding on the Internal
Revenue Service. For more information about the automatic conversion of Class B
shares, see "Class B Shares Convert to Class A Shares After Approximately Seven
Years" in the next section.
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HOW TO BUY SHARES
STEP 1: OPEN AN ACCOUNT
If you don't have an account with us or a securities firm that is permitted to
buy or sell shares of the Fund for you, call Prudential Mutual Fund Services
LLC (PMFS) at (800) 225-1852 or contact:
PRUDENTIAL MUTUAL FUND SERVICES LLC
ATTN: INVESTMENT SERVICES
P.O. BOX 15020
NEW BRUNSWICK, NJ 08906-5020
To purchase by wire, call the number above to obtain an application. After
PMFS receives your completed application, you will receive an account number.
For additional information about purchasing shares of the Fund, see the back
cover page of this prospectus. We have the right to reject any purchase order
(including an exchange into the Fund) or suspend or modify the Fund's sale of
its shares.
STEP 2: CHOOSE A SHARE CLASS
Individual investors can choose among Class A, Class B, Class C and Class Z
shares of the Fund, although Class Z shares are available only to a limited
group of investors.
Multiple share classes let you choose a cost structure that better meets
your needs. With Class A shares, you pay the sales charge at the time of
purchase, but the operating expenses each year are lower than the expenses of
Class B and Class C shares. With Class B shares, you only pay a sales charge if
you sell your shares within six years (that is why they call it a Contingent
Deferred Sales Charge, or CDSC), but the operating expenses each year generally
are higher than Class A share expenses. With Class C shares, you pay a 1%
front-end sales charge and a 1% CDSC if you sell within 18 months of purchase,
but the operating expenses are also higher than the expenses for Class A
shares.
When choosing a share class, you should consider the following:
. The amount of your investment
. The length of time you expect to hold the shares and the impact of the
varying distribution fees
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. The different sales charges that apply to each share class--Class A's
front-end sales charge vs. Class B's CDSC vs. Class C's low front-end
sales charge and low CDSC
. Whether you qualify for any reduction or waiver of sales charges
. The fact that Class B shares automatically convert to Class A shares
approximately seven years after purchase
. Whether you qualify to purchase Class Z shares.
See "How to Sell Your Shares" for a description of the impact of CDSCs.
Share Class Comparison. Use this chart to help you compare the Fund's different
share classes. The discussion following this chart will tell you whether you
are entitled to a reduction or waiver of any sales charges.
CLASS A CLASS B CLASS C CLASS Z
Minimum purchase $1,000 $1,000 $5,000 None
amount/1/
Minimum amount for $100 $100 $100 None
subsequent purchases/1/
Maximum initial sales 3% of the public None 1% of the public None
charge offering price offering price
Contingent Deferred None If sold during: 1% on sales None
Sales Charge (CDSC)/2/ Year 1 5% made within
Year 2 4% 18 months of
Year 3 3% purchase/2/
Year 4 2%
Years 5/6 1%
Year 7 0%
Annual distribution and .30 of 1% .50 of 1% 1% None
service (12b-1) fees (.25 of 1% (.75 of 1%
(shown as a percentage currently) currently)
of average net
assets)/3/
1 The minimum investment requirements do not apply to certain custodial
accounts for minors. The minimum initial and subsequent investment for
purchases made through the Automatic Investment Plan is $50. For more
information, see "Step 4: Additional Shareholder Services-Automatic
Investment Plan."
2 For more information about the CDSC and how it is calculated, see "How to
Sell Your Shares- Contingent Deferred Sales Charge (CDSC)." Class C shares
bought before November 2, 1998 have a 1% CDSC if sold within one year.
3 These distribution and service (12b-1) fees are paid from the Fund's assets
on a continuous basis. Over time, the fees will increase the cost of your
investment and may cost you more than paying other types of sales charges.
Class A shares may pay a service fee of up to .25 of 1%. Class B and Class C
shares will pay a service fee of .25 of 1%. The distribution fee for Class A
shares is limited to .30 of 1% (including up to .25 of 1% as a service fee),
is .25 of 1% for Class B shares and is .75 of 1% for Class C shares. For the
fiscal year ending December 31, 2000, the Distributor of the Fund has
contractually agreed to reduce its distribution and service (12b-1) fees for
Class A and Class C shares to .25 of 1% and .75 of 1% of the average daily
net assets of Class A and Class C shares, respectively.
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REDUCING OR WAIVING CLASS A'S INITIAL SALES CHARGE
The following describes the different ways investors can reduce or avoid paying
Class A's initial sales charge.
Increase the Amount of Your Investment. You can reduce Class A's initial sales
charge by increasing the amount of your investment. This table shows how the
sales charge decreases as the amount of your investment increases.
SALES CHARGE AS % SALES CHARGE AS % DEALER
AMOUNT OF PURCHASE OF OFFERING PRICE OF AMOUNT INVESTED REALLOWANCE
Less than $99,999 3.00% 3.09% 3.00%
$100,000 to $249,999 2.50% 2.56% 2.50%
$250,000 to $499,999 1.50% 1.52% 1.50%
$500,000 to $999,999 1.00% 1.01% 1.00%
$1 million and above/1/ None None None
1 If you invest $1 million or more, you can buy only Class A shares, unless you
qualify to buy Class Z shares.
To satisfy the purchase amounts above, you can:
. Invest with an eligible group of related investors
. Buy Class A shares of two or more Prudential mutual funds at the same
time
. Use your RIGHTS OF ACCUMULATION, which allow you to combine the current
value of Prudential mutual fund shares you already own with the value of
the shares you are purchasing for purposes of determining the applicable
sales charge (note: you must notify the Transfer Agent if you qualify for
Rights of Accumulation)
. Sign a LETTER OF INTENT, stating in writing that you or an eligible group
of related investors will purchase a certain amount of shares in the Fund
and other Prudential mutual funds within 13 months.
The Distributor may reallow Class A's sales charge to dealers.
Mutual Fund Programs. The initial sales charge will be waived for investors in
certain programs sponsored by broker-dealers, investment advisers and financial
planners who have agreements with Prudential Investments Advisory Group
relating to:
. Mutual fund "wrap" or asset allocation programs, where the sponsor places
Fund trades and charges its clients a management, consulting or other fee
for its services
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. Mutual fund "supermarket" programs, where the sponsor links its clients'
accounts to a master account in the sponsor's name and the sponsor
charges a fee for its services.
Broker-dealers, investment advisers or financial planners sponsoring these
mutual fund programs may offer their clients more than one class of shares in
the Fund in connection with different pricing options for their programs.
Investors should consider carefully any separate transaction and other fees
charged by these programs in connection with investing in each available share
class before selecting a share class.
Other Types of Investors. Other investors may pay no sales charges, including
certain officers, employees or agents of Prudential and its affiliates, the
Prudential mutual funds, the subadvisers of the Prudential mutual funds and
registered representatives and employees of brokers that have entered into a
selected dealer agreement with the Distributor. To qualify for a reduction or
waiver of the sales charge, you must notify the Transfer Agent or your broker
at the time of purchase. For more information about reducing or eliminating
Class A's sales charge, see the SAI, "Purchase, Redemption and Pricing of Fund
Shares--Reduction and Waiver of Initial Sales Charge--Class A Shares."
WAIVING CLASS C'S INITIAL SALES CHARGE
Investment of Redemption Proceeds from Other Investment Companies. The initial
sales charge will be waived for purchases of Class C shares if the purchase is
made with money from the redemption of shares of any unaffiliated investment
company, as long as the shares were not held in an account at Prudential
Securities Incorporated (Prudential Securities) or one of its affiliates. These
purchases must be made within 60 days of the redemption. To qualify for this
waiver, you must do one of the following:
. Purchase your shares through an account at Prudential Securities
. Purchase your shares through an ADVANTAGE Account or an Investor Account
with Pruco Securities Corporation
. Purchase your shares through another broker.
This waiver is not available to investors who purchase shares directly from
the Transfer Agent. If you are entitled to the waiver, you must notify either
the Transfer Agent or your broker. The Transfer Agent may require any
supporting documents it considers appropriate.
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QUALIFYING FOR CLASS Z SHARES
Mutual Fund Programs. Class Z shares also can be purchased by participants in
any fee-based program or trust program sponsored by Prudential or an affiliate
that includes the Fund as an available option. Class Z shares also can be
purchased by investors in certain programs sponsored by broker-dealers,
investment advisers and financial planners who have agreements with Prudential
Investments Advisory Group relating to:
. Mutual fund "wrap" or asset allocation programs, where the sponsor
places Fund trades, links its clients' accounts to a master account in
the sponsor's name and charges its clients a management, consulting or
other fee for its services
. Mutual fund "supermarket" programs, where the sponsor links its clients'
accounts to a master account in the sponsor's name and the sponsor
charges a fee for its services.
Broker-dealers, investment advisers or financial planners sponsoring these
mutual fund programs may offer their clients more than one class of shares in
the Fund in connection with different pricing options for their programs.
Investors should consider carefully any separate transaction and other fees
charged by these programs in connection with investing in each available share
class before selecting a share class.
Other Types of Investors. Class Z shares also can be purchased by any of the
following:
. Certain participants in the MEDLEY Program (group variable annuity
contracts) sponsored by Prudential for whom Class Z shares of the
Prudential mutual funds are an available option
. Current and former Directors/Trustees of the Prudential mutual funds
(including the Fund)
. Prudential, with an investment of $10 million or more.
In connection with the sale of shares, the Manager, the Distributor or one
of their affiliates may pay brokers, financial advisers and other persons a
commission of up to 4% of the purchase price for Class B shares, up to 2% of
the purchase price for Class C shares and a finder's fee for Class A or Class Z
shares from their own resources based on a percentage of the net asset value of
shares sold or otherwise.
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CLASS B SHARES CONVERT TO CLASS A SHARES AFTER APPROXIMATELY SEVEN YEARS
If you buy Class B shares and hold them for approximately seven years, we will
automatically convert them into Class A shares without charge. At that time, we
will also convert any Class B shares that you purchased with reinvested
dividends and other distributions. Since the 12b-1 fees for Class A shares are
lower than for Class B shares, converting to Class A shares lowers your Fund
expenses.
When we do the conversion, you will get fewer Class A shares than the number
of converted Class B shares if the price of the Class A shares is higher than
the price of Class B shares. The total dollar value will be the same, so you
will not have lost any money by getting fewer Class A shares. We do the
conversions quarterly, not on the anniversary date of your purchase. For more
information, see the SAI, "Purchase, Redemption and Pricing of Fund Shares--
Conversion Feature--Class B Shares."
STEP 3: UNDERSTANDING THE PRICE YOU'LL PAY
The price you pay for each share of the Fund is based on the share value. The
share value of a mutual fund--known as the NET ASSET VALUE or NAV --is
determined by a simple calculation: it's the total value of the Fund (assets
minus liabilities) divided by the total number of shares outstanding. For
example, if the value of the investments held by Fund XYZ (minus its
liabilities) is $1,000 and there are 100 shares of Fund XYZ owned by
shareholders, the price of one share of the fund--or the NAV--is $10 ($1,000
divided by 100). Portfolio securities are valued based upon market quotations
or, if not readily available, at fair value as determined in good faith under
procedures established by the Fund's Board. Most national newspapers report the
NAVs of most mutual funds, which allows investors to check the price of mutual
funds daily.
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MUTUAL FUND SHARES
The NAV of mutual fund shares changes every day because the value of a fund's
portfolio changes constantly. For example, if Fund XYZ holds City ABC bonds in
its portfolio and the price of City ABC bonds goes up, while the value of the
fund's other holdings remains the same and expenses don't change, the NAV of
Fund XYZ will increase.
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We determine the NAV of our shares once each business day at 4:15 p.m., New
York time, on days that the New York Stock Exchange (NYSE) is open for trading.
The NYSE is closed on national holidays and Good Friday. We do not determine
the NAV on days when we have not received any orders to purchase, sell or
exchange Fund shares, or when changes in the value of the Fund's portfolio do
not materially affect the NAV.
WHAT PRICE WILL YOU PAY FOR SHARES OF THE FUND?
For Class A and Class C shares, you'll pay the public offering price, which is
the NAV next determined after we receive your order to purchase, plus an
initial sales charge (unless you're entitled to a waiver). For Class B and
Class Z shares, you will pay the NAV next determined after we receive your
order to purchase (remember, there are no up-front sales charges for these
share classes). Your broker may charge you a separate or additional fee for
purchases of shares.
STEP 4: ADDITIONAL SHAREHOLDER SERVICES
As a Fund shareholder, you can take advantage of the following services and
privileges:
Automatic Reinvestment. As we explained in the "Fund Distributions and Tax
Issues" section, the Fund pays out--or distributes--any dividends and capital
gains to all shareholders. For your convenience, we will automatically reinvest
your distributions in the Fund at NAV, without any sales charge. If you want
your distributions paid in cash, you can indicate this preference on your
application, notify your broker or notify the Transfer Agent in writing (at the
address below) at least five business days before the date we determine who
receives dividends.
PRUDENTIAL MUTUAL FUND SERVICES LLC
ATTN: ACCOUNT MAINTENANCE
P.O. BOX 15015
NEW BRUNSWICK, NJ 08906-5015
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Automatic Investment Plan. You can make regular purchases of the Fund for as
little as $50 by having the funds automatically withdrawn from your bank or
brokerage account at specified intervals.
The PruTector Program. Optional group term life insurance--which protects the
value of your Prudential mutual fund investment for your beneficiaries against
market declines--is available to investors who purchase their shares through
Prudential. Eligible investors who apply for PruTector coverage after the
initial 6-month enrollment period will need to provide satisfactory evidence of
insurability. This insurance is subject to other restrictions and is not
available in all states.
Systematic Withdrawal Plan. A systematic withdrawal plan is available that will
provide you with monthly, quarterly, semi-annual or annual redemption checks.
Remember, the sale of Class B and Class C shares may be subject to a CDSC.
Reports to Shareholders. Every year we will send you an annual report (along
with an updated prospectus) and a semi-annual report, which contain important
financial information about the Fund. To reduce Fund expenses, we will send one
annual shareholder report, one semi-annual shareholder report and one annual
prospectus per household, unless you instruct us or your broker otherwise.
HOW TO SELL YOUR SHARES
You can sell your shares of the Fund for cash (in the form of a check) at any
time, subject to certain restrictions.
When you sell shares of the Fund--also known as redeeming your shares--the
price you will receive will be the NAV next determined after the Transfer
Agent, the Distributor or your broker receives your order to sell (less any
applicable CDSC). If your broker holds your shares, your broker must receive
your order to sell by 4:15 p.m., New York time, to process the sale on that
day. Otherwise, contact:
PRUDENTIAL MUTUAL FUND SERVICES LLC
ATTN: REDEMPTION SERVICES
P.O. BOX 15010
NEW BRUNSWICK, NJ 08906-5010
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Generally, we will pay you for the shares that you sell within seven days
after the Transfer Agent, the Distributor or your broker receives your sell
order. If you hold shares through a broker, payment will be credited to your
account. If you are selling shares you recently purchased with a check, we may
delay sending you the proceeds until your check clears, which can take up to 10
days from the purchase date. You can avoid delay if you purchase shares by
wire, certified check or cashier's check. Your broker may charge you a separate
or additional fee for purchases and sales of shares.
RESTRICTIONS ON SALES
There are certain times when you may not be able to sell shares of the Fund, or
when we may delay paying you the proceeds from a sale. This may happen during
unusual market conditions or emergencies when the Fund can't determine the
value of its assets or sell its holdings. For more information, see the SAI,
"Purchase, Redemption and Pricing of Fund Shares--Sale of Shares."
If you are selling more than $100,000 of shares, if you want the check
payable or sent to someone or some place that is not in our records, or you are
a business or a trust and if you hold your shares directly with the Transfer
Agent, you will need to have the signature on your sell order signature
guaranteed by an "eligible guarantor institution." An "eligible guarantor
institution" includes any bank, broker-dealer or credit union. For more
information, see the SAI, "Purchase, Redemption and Pricing of Fund Shares--
Sale of Shares--Signature Guarantee."
CONTINGENT DEFERRED SALES CHARGE (CDSC)
If you sell Class B shares within six years of purchase, or Class C shares
within 18 months of purchase (one year for Class C shares purchased before
November 2, 1998), you will have to pay a CDSC. To keep the CDSC as low as
possible, we will sell amounts representing shares in the following order:
. Amounts representing shares you purchased with reinvested dividends and
distributions
. Amounts representing the increase in NAV above the total amount of
payments for shares made during the past six years for Class B shares and
18 months for Class C shares (one year for Class C shares purchased
before November 2, 1998)
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How to Buy, Sell and
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Exchange Shares of the Fund
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. Amounts representing the cost of shares held beyond the CDSC period (six
years for Class B shares and 18 months for Class C shares).
Since shares that fall into any of the categories listed above are not
subject to the CDSC, selling them first helps you to avoid--or at least
minimize--the CDSC.
Having sold the exempt shares first, if there are any remaining shares that
are subject to a CDSC, we will apply the CDSC to amounts representing the cost
of shares held for the longest period of time within the applicable CDSC
period.
As we noted before in the "Share Class Comparison" chart, the CDSC for
Class B shares is 5% in the first year, 4% in the second, 3% in the third, 2%
in the fourth and 1% in the fifth and sixth years. The rate decreases on the
first day of the month following the anniversary date of your purchase, not on
the anniversary date itself. The CDSC is 1% for Class C shares--which is
applied to shares sold within 18 months of purchase (one year for Class C
shares purchased before November 2, 1998). For both Class B and Class C shares,
the CDSC is calculated based on the lesser of the original purchase price or
the redemption proceeds. For purposes of determining how long you've held your
shares, all purchases during the month are grouped together and considered to
have been made on the last day of the month.
The holding period for purposes of determining the applicable CDSC will be
calculated from the first day of the month after purchase, excluding any time
shares were held in a money market fund.
WAIVER OF THE CDSC--CLASS B SHARES
The CDSC will be waived if the Class B shares are sold:
. After a shareholder is deceased or disabled (or, in the case of a trust
account, the death or disability of the grantor). This waiver applies to
individual shareholders, as well as shares owned in joint tenancy,
provided the shares were purchased before the death or disability
. On certain sales from a Systematic Withdrawal Plan.
For more information on the above and other waivers, see the SAI, "Purchase,
Redemption and Pricing of Fund Shares--Contingent Deferred Sales Charge--Waiver
of Contingent Deferred Sales Charge--Class B Shares."
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How to Buy, Sell and
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REDEMPTION IN KIND
If the sales of Fund shares you make during any 90-day period reach the lesser
of $250,000 or 1% of the value of the Fund's net assets, we can then give you
securities from the Fund's portfolio instead of cash. If you want to sell the
securities for cash, you would have to pay the costs charged by a broker.
SMALL ACCOUNTS
If you make a sale that reduces your account value to less than $500, we may
sell the rest of your shares (without charging any CDSC) and close your
account. We would do this to minimize the Fund's expenses paid by other
shareholders. We will give you 60 days' notice, during which time you can
purchase additional shares to avoid this action.
90-DAY REPURCHASE PRIVILEGE
After you redeem your shares, you have a 90-day period during which you may
reinvest back into your account any of the redemption proceeds in shares of the
same Fund without paying an initial sales charge. Also, if you paid a CDSC when
you redeemed your shares, we will credit your account with the appropriate
number of shares to reflect the amount of the CDSC you paid on that reinvested
portion of your redemption proceeds. In order to take advantage of this one-
time privilege, you must notify the Transfer Agent or your broker at the time
of the repurchase. See the SAI, "Purchase, Redemption and Pricing of Fund
Shares--Sale of Shares."
HOW TO EXCHANGE YOUR SHARES
You can exchange your shares of the Fund for shares of the same class in
certain other Prudential mutual funds--including certain money market funds--if
you satisfy the minimum investment requirements. For example, you can exchange
Class A shares of the Fund for Class A shares of another Prudential mutual
fund, but you can't exchange Class A shares for Class B, Class C or Class Z
shares. Class B and Class C shares may not be exchanged into money market funds
other than Prudential Special Money Market Fund, Inc. After an exchange, at
redemption the CDSC will be calculated from the first day of the month after
initial purchase, excluding any time shares were held in a money market fund.
We may change the terms of the exchange privilege after giving you 60 days'
notice.
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How to Buy, Sell and
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Exchange Shares of the Fund
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If you hold shares through a broker, you must exchange shares through your
broker. Otherwise contact:
PRUDENTIAL MUTUAL FUND SERVICES LLC
ATTN: EXCHANGE PROCESSING
P.O. BOX 15010
NEW BRUNSWICK, NJ 08906-5010
There is no sales charge for exchanges. If, however, you exchange--and then
sell--Class B shares within approximately six years of your original purchase
or Class C shares within 18 months of your original purchase, you must still
pay the applicable CDSC. If you have exchanged Class B or Class C shares into a
money market fund, the time you hold the shares in the money market account
will not be counted in calculating the required holding period for CDSC
liability.
Remember, as we explained in the section entitled "Fund Distributions and
Tax Issues--If You Sell or Exchange Your Shares," exchanging shares is
considered a sale for tax purposes. Therefore, if the shares you exchange are
worth more than you paid for them, you may have to pay capital gains tax. For
additional information about exchanging shares, see the SAI, "Shareholder
Investment Account--Exchange Privilege."
If you own Class B or Class C shares and qualify to purchase Class A shares
without paying an initial sales charge, we will automatically exchange your
Class B and Class C shares which are not subject to a CDSC for Class A shares.
We make such exchanges on a quarterly basis if you qualify for this exchange
privilege. We have obtained a legal opinion that this exchange is not a
"taxable event" for federal income tax purposes. This opinion is not binding on
the IRS.
FREQUENT TRADING
Frequent trading of Fund shares in response to short-term fluctuations in the
market--also known as "market timing"--may make it very difficult to manage the
Fund's investments. When market timing occurs, the Fund may have to sell
portfolio securities to have the cash necessary to redeem the market timer's
shares. This can happen at a time when it is not advantageous to sell any
securities, so the Fund's performance may be hurt. When large dollar amounts
are involved, market timing can also
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make it difficult to use long-term investment strategies because we cannot
predict how much cash the Fund will have to invest. When, in our opinion, such
activity would have a disruptive effect on portfolio management, the Fund
reserves the right to refuse purchase orders and exchanges into the Fund by any
person, group or commonly controlled account. The decision may be based upon
dollar amount, volume and frequency of trading. The Fund may notify a market
timer of rejection of an exchange or purchase order after the day the order is
placed. If the Fund allows a market timer to trade Fund shares, it may require
the market timer to enter into a written agreement to follow certain procedures
and limitations.
TELEPHONE REDEMPTIONS AND EXCHANGES
You may redeem or exchange your shares in any amount by calling the Fund at
(800) 225-1852. In order to redeem or exchange your shares by telephone, you
must complete an authorization form for telephone transactions. If you have
elected telephone redemption and exchange privileges and you call the Fund
before 4:15 p.m., New York time, you will receive a redemption amount based on
that day's NAV.
The Fund's Transfer Agent will record your telephone instructions and request
specific account information before redeeming or exchanging shares. The Fund
will not be liable if it follows instructions that it reasonably believes are
made by the shareholder. If the Fund does not follow reasonable procedures, it
may be liable for losses due to unauthorized or fraudulent telephone
instructions.
In the event of drastic economic or market changes, you may have difficulty
in redeeming or exchanging your shares by telephone. If this occurs, you should
consider redeeming or exchanging your shares by mail.
The telephone redemption and exchange privileges may be modified or
terminated at any time. If this occurs, you will receive a written notice from
the Fund.
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Financial Highlights
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The financial highlights will help you evaluate the Fund's financial
performance. The TOTAL RETURN in each chart represents the rate that a
shareholder earned on an investment in that share class of the Fund, assuming
reinvestment of all dividends and other distributions. The information is for
each share class for the periods indicated.
Review each chart with the financial statements and the report of
independent accountants, which appear in the annual report and the SAI and are
available upon request. Additional performance information for each share class
is contained in the annual report, which you can receive at no charge.
CLASS A SHARES
The financial highlights were audited by PricewaterhouseCoopers LLP,
independent accountants, whose report was unqualified.
CLASS A SHARES (FISCAL YEARS ENDED 12-31)
PER SHARE OPERATING
PERFORMANCE 1999 1998 1997 1996 1995
NET ASSET VALUE,
BEGINNING OF YEAR $16.06 $16.12 $15.56 $15.98 $14.42
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income/3/ .76 .79 .81 .82 .81
Net realized and
unrealized gain (loss)
on investment
transactions (1.34) .06 .67 (.42) 1.57
TOTAL FROM INVESTMENT
OPERATIONS (.58) .85 1.48 .40 2.38
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LESS DISTRIBUTIONS:
Dividends from net
investment income (.76) (.79) (.81) (.82) (.81)
Distributions in excess
of net investment
income --/1/ --/1/ (.01) --/1/ (.01)
Distributions from net
realized gains -- (.12) (.10) --
TOTAL DISTRIBUTIONS (.76) (.91) (92) (.82) (.82)
NET ASSET VALUE, END OF
YEAR $14.72 $16.06 $16.12 $15.56 $15.98
TOTAL RETURN/2/ (3.69)% 5.41% 9.80% 2.66% 16.91%
- ---------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA 1999 1998 1997 1996 1995
NET ASSETS, END OF YEAR
(000) $498,428 $481,926 $493,178 $502,739 $538,145
Average net assets (000) $531,603 $483,759 $491,279 $508,159 $446,350
RATIOS TO AVERAGE NET
ASSETS:/3/
Expenses, including
distribution and
service (12b-1) fees .86% .73% .70% .68% .75%
Expenses, excluding
distribution and
service (12b-1) fees .61% .63% .60% .58% .65%
Net investment income 4.88% 4.89% 5.15% 5.31% 5.34%
Portfolio turnover 30% 23% 38% 46% 98%
1 Less than $.005 per share.
2 Total return assumes reinvestment of dividends and any other distributions,
but does not include the effect of sales charges. It is calculated assuming
shares are purchased on the first day and sold on the last day of each year
reported.
3 Net of expense subsidy and/or fee waiver.
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Financial Highlights
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CLASS B SHARES
The financial highlights were audited by PricewaterhouseCoopers LLP,
independent accountants, whose report was unqualified.
CLASS B SHARES (FISCAL YEARS ENDED 12-31)
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PER SHARE OPERATING
PERFORMANCE 1999 1998 1997 1996 1995
NET ASSET VALUE,
BEGINNING OF YEAR: $16.10 $16.16 $15.60 $16.02 $14.45
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income/3/ .73 .73 .75 .76 .76
Net realized and
unrealized gain (loss)
on investment
transactions (1.35) .06 .67 (.42) 1.58
TOTAL FROM INVESTMENT
OPERATIONS (.62) .79 1.42 .34 2.34
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LESS DISTRIBUTIONS:
Dividends from net
investment income (.73) (.73) (.75) (.76) (.76)
Distributions in excess
of net investment income --/1/ --/1/ (.01) --/1/ (.01)
Distributions from net
realized gains -- (.12) (.10) -- --
TOTAL DISTRIBUTIONS (.73) (.85) (.86) (.76) (.77)
NET ASSET VALUE, END OF
YEAR $14.75 $16.10 $16.16 $15.60 $16.02
TOTAL RETURN/2/ (3.97)% 4.99% 9.35% 2.26% 16.49%
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RATIOS/SUPPLEMENTAL DATA 1999 1998 1997 1996 1995
NET ASSETS, END OF YEAR
(000) $92,265 $119,698 $141,528 $168,185 $222,865
Average net assets (000) $118,044 $131,195 $151,938 $193,312 $252,313
RATIOS TO AVERAGE NET
ASSETS:/3/
Expenses, including
distribution and service
(12b-1) fees 1.11% 1.13% 1.10% 1.08% 1.15%
Expenses, excluding
distribution and service
(12b-1) fees .61% .63% .60% .58% .65%
Net investment income 4.62% 4.49% 4.75% 4.91% 4.96%
Portfolio turnover 30% 23% 38% 46% 98%
1 Less than $.005 per share.
2 Total return assumes reinvestment of dividends and any other distributions,
but does not include the effect of sales charges. It is calculated assuming
shares are purchased on the first day and sold on the last day of each year
reported.
3 Net of expense subsidy and/or fee waiver.
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Financial Highlights
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CLASS C SHARES
The financial highlights were audited by PricewaterhouseCoopers LLP,
independent accountants, whose report was unqualified.
CLASS C SHARES (FISCAL YEARS ENDED 12-
31)
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PER SHARE OPERATING PERFORMANCE 1999 1998 1997 1996 1995
NET ASSET VALUE, BEGINNING OF
YEAR $16.10 $16.16 $15.60 $16.02 $14.44
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income/3/ .69 .69 .71 .72 .72
Net realized and unrealized
gain (loss) on investment
transactions (1.35) .06 .67 (.42) 1.59
TOTAL FROM INVESTMENT
OPERATIONS (.66) .75 1.38 .30 2.31
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LESS DISTRIBUTIONS:
Dividends from net investment
income (.69) (.69) (.71) (.72) (.72)
Distributions in excess of net
investment income --/1/ --/1/ (.01) --/1/ (.01)
Distributions from net realized
gains -- (.12) (.10) -- --
TOTAL DISTRIBUTIONS (.69) (.81) (.82) (.72) (.73)
NET ASSET VALUE, END OF YEAR $14.75 $16.10 $16.16 $15.60 $16.02
TOTAL RETURN/2/ (4.22%) 4.73% 9.08% 2.01% 16.22%
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RATIOS/SUPPLEMENTAL DATA 1999 1998 1997 1996 1995
NET ASSETS, END OF YEAR (000) $3,060 $2,296 $825 $772 $403
Average net assets (000) $2,643 $1,555 $758 $674 $247
RATIOS TO AVERAGE NET
ASSETS:/3/
Expenses, including
distribution and service (12b-
1) fees 1.36% 1.38% 1.35% 1.33% 1.40%
Expenses, excluding
distribution and service (12b-
1) fees .61% .63% .60% .58% .65%
Net investment income 4.39% 4.23% 4.50% 4.67% 4.66%
Portfolio turnover 30% 23% 38% 46% 98%
1 Less than $.005 per share.
2 Total return assumes reinvestment of dividends and any other distributions,
but does not include the effect of sales charges. It is calculated assuming
shares are purchased on the first day and are sold on the last day of each
year reported.
3 Net of expense subsidy and/or fee waiver.
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Financial Highlights
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CLASS Z SHARES
The financial highlights were audited by PricewaterhouseCoopers LLP,
independent accountants, whose report was unqualified.
CLASS Z SHARES (FISCAL PERIOD
ENDED 12-31)
- --------------------------------------
PER SHARE OPERATING
PERFORMANCE 1999/1/
NET ASSET VALUE,
BEGINNING OF PERIOD $ 16.11
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income .73
Net realized and
unrealized gain (loss)
on investment
transactions (1.40)
TOTAL FROM INVESTMENT
OPERATIONS (.67)
- --------------------------------------
LESS DISTRIBUTIONS:
Dividends from net
investment income (.73)
Distributions in excess
of net investment income --/2/
Distributions from net
realized gains --
TOTAL DISTRIBUTIONS (.73)
NET ASSET VALUE, END OF
PERIOD $ 14.71
TOTAL RETURN/3/ (4.22%)
- --------------------------------------
RATIOS/SUPPLEMENTAL DATA 1999
NET ASSETS, END OF
PERIOD (000) $ 797
Average net assets (000) $1,391
RATIOS TO AVERAGE NET
ASSETS:
Expenses, including
distribution and service
(12b-1) fees .64%/4/
Expenses, excluding
distribution and service
(12b-1) fees .64%/4/
Net investment income 5.45%/4/
Portfolio turnover 30%
1 Information shown is for the period 1-22-99 (when Class Z shares were first
offered) through 12-31-99.
2 Less than $.005 per share.
3 Total return assumes reinvestment of dividends and any other distributions.
It is calculated assuming shares are purchased on the first day and are sold
on the last day of each period reported. Total return for period of less than
a full year is not annualized.
4 Annualized.
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The Prudential Mutual Fund Family
- --------------------------------------------------------------------------------
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Prudential offers a broad range of mutual funds designed to meet your
individual needs. For information about these funds, contact your financial
adviser or call us at (800) 225-1852. Read the prospectus carefully before you
invest or send money.
STOCK FUNDS
Prudential Emerging Growth Fund, Inc.
Prudential Equity Fund, Inc.
Prudential Equity Income Fund
Prudential Index Series Fund
Prudential Small-Cap Index Fund
Prudential Stock Index Fund
The Prudential Investment Portfolios, Inc.
Prudential Jennison Growth Fund
Prudential Jennison Growth & Income Fund
Prudential Mid-Cap Value Fund
Prudential Real Estate Securities Fund
Prudential Sector Funds, Inc.
Prudential Financial Services Fund
Prudential Health Sciences Fund
Prudential Technology Fund
Prudential Utility Fund
Prudential Small-Cap Quantum Fund, Inc.
Prudential Small Company Value Fund, Inc.
Prudential Tax-Managed Funds
Prudential Tax-Managed Equity Fund
Prudential 20/20 Focus Fund
Nicholas-Applegate Fund, Inc.
Nicholas-Applegate Growth Equity Fund
Target Funds
Large Capitalization Growth Fund
Large Capitalization Value Fund
Small Capitalization Growth Fund
Small Capitalization Value Fund
ASSET ALLOCATION/BALANCED FUNDS
Prudential Balanced Fund
Prudential Diversified Funds
Conservative Growth Fund
Moderate Growth Fund
High Growth Fund
The Prudential Investment Portfolios, Inc.
Prudential Active Balanced Fund
GLOBAL FUNDS
GLOBAL STOCK FUNDS
Prudential Developing Markets Fund
Prudential Developing Markets Equity Fund
Prudential Latin America Equity Fund
Prudential Europe Growth Fund, Inc.
Prudential Global Genesis Fund, Inc.
Prudential Index Series Fund
Prudential Europe Index Fund
Prudential Pacific Index Fund
Prudential Natural Resources Fund, Inc.
Prudential Pacific Growth Fund, Inc.
Prudential World Fund, Inc.
Prudential Global Growth Fund
Prudential International Value Fund
Prudential Jennison International Growth Fund
Global Utility Fund, Inc.
Target Funds
International Equity Fund
GLOBAL BOND FUNDS
Prudential Global Total Return Fund, Inc.
Prudential International Bond Fund, Inc.
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BOND FUNDS
TAXABLE BOND FUNDS
Prudential Diversified Bond Fund, Inc.
Prudential Government Income Fund, Inc.
Prudential Government Securities Trust
Short-Intermediate Term Series
Prudential High Yield Fund, Inc.
Prudential High Yield Total Return Fund, Inc.
Prudential Index Series Fund
Prudential Bond Market Index Fund
Prudential Structured Maturity Fund, Inc.
Income Portfolio
Target Funds
Total Return Bond Fund
TAX-EXEMPT BOND FUNDS
Prudential California Municipal Fund
California Series
California Income Series
Prudential Municipal Bond Fund
High Income Series
Insured Series
Prudential Municipal Series Fund
Florida Series
Massachusetts Series
New Jersey Series
New York Series
North Carolina Series
Ohio Series
Pennsylvania Series
Prudential National Municipals Fund, Inc.
MONEY MARKET FUNDS
TAXABLE MONEY MARKET FUNDS
Cash Accumulation Trust
Liquid Assets Fund
National Money Market Fund
Prudential Government Securities Trust
Money Market Series
U.S. Treasury Money Market Series
Prudential Special Money Market Fund, Inc.
Money Market Series
Prudential MoneyMart Assets, Inc.
TAX-FREE MONEY MARKET FUNDS
Prudential Tax-Free Money Fund, Inc.
Prudential California Municipal Fund
California Money Market Series
Prudential Municipal Series Fund
Connecticut Money Market Series
Massachusetts Money Market Series
New Jersey Money Market Series
New York Money Market Series
COMMAND FUNDS
COMMAND Money Fund
COMMAND Government Fund
COMMAND Tax-Free Fund
INSTITUTIONAL MONEY MARKET FUNDS
Prudential Institutional Liquidity Portfolio, Inc.
Institutional Money Market Series
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FOR MORE INFORMATION
Please read this prospectus before you You can also obtain copies of Fund
invest in the Fund and keep it for future documents from the Securities and
reference. For information or shareholder Exchange Commission as follows
questions contact BY MAIL
Prudential Mutual Fund Services LLC Securities and Exchange Commission
P.O. Box 15005 Public Reference Section
New Brunswick, NJ 08906-5005 Washington, DC 20549-0102
(800) 225-1852 BY ELECTRONIC REQUEST
(732) 482-7555 (Calling from outside the U.S.) publicinfo@sec.gov
(The SEC charges a fee to copy
Outside Brokers should contact documents.)
Prudential Investment Management IN PERSON
Services LLC Public Reference Room in Washington, DC
P.O. Box 15035 (For hours of operation, call
New Brunswick, NJ 08906-5035 1-202-942-8090)
(800) 778-8769 VIA THE INTERNET
on the EDGAR Database at
Visit Prudential's website at http://www.sec.gov
http://www.prudential.com
CUSIP Numbers Nasdaq Symbols
Additional information about the Fund can Class A Shares--743918-20-3 PRNMX
be obtained without charge and can be Class B Shares--743918-10-4 PBHMX
found in the following documents Class C Shares--743918-30-2 --
Statement of Additional Information (SAI) Class Z Shares--743918-40-1 --
(incorporated by reference into this Investment Company Act File No. 811-2992
prospectus)
Annual Report
(contains a discussion of the market
conditions and investment strategies that
significantly affected the Fund's
performance)
Semi-Annual Report
MF104A [LOGO] Printed on Recycled Paper