PROSPECTUS NOVEMBER 3, 2000
PRUDENTIAL
MUNICIPAL SERIES FUND
NORTH CAROLINA SERIES
FUND TYPE Municipal bond
OBJECTIVE Maximize current income that is exempt from North Carolina state
and federal income taxes consistent with the preservation of capital
BUILD ON THE ROCK
As with all mutual funds, the Securities and Exchange Commission has not
approved or disapproved the Series' shares nor has the SEC determined that this
prospectus is complete or accurate. It is a criminal offense to state otherwise.
[PRUDENTIAL LOGO]
TABLE OF CONTENTS
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1 RISK/RETURN SUMMARY
1 Investment Objective and Principal Strategies
1 Principal Risks
3 Evaluating Performance
5 Fees and Expenses
7 HOW THE SERIES INVESTS
7 Investment Objective and Policies
9 Other Investments and Strategies
11 Investment Risks
17 HOW THE SERIES IS MANAGED
17 Board of Trustees
17 Manager
17 Investment Adviser
19 Distributor
20 SERIES DISTRIBUTIONS AND TAX ISSUES
20 Distributions
21 Tax Issues
22 If You Sell or Exchange Your Shares
24 HOW TO BUY, SELL AND EXCHANGE SHARES OF THE SERIES
24 How to Buy Shares
31 How to Sell Your Shares
34 How to Exchange Your Shares
35 Telephone Redemptions or Exchanges
37 FINANCIAL HIGHLIGHTS
38 Class A Shares
39 Class B Shares
40 Class C Shares
42 THE PRUDENTIAL MUTUAL FUND FAMILY
A-1 DESCRIPTION OF SECURITY RATINGS
FOR MORE INFORMATION (Back Cover)
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NORTH CAROLINA SERIES [ICON] (800) 225-1852
RISK/RETURN SUMMARY
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This section highlights key information about the NORTH CAROLINA SERIES (the
Series) of the PRUDENTIAL MUNICIPAL SERIES FUND (the Fund). Additional
information follows this summary.
INVESTMENT OBJECTIVE AND PRINCIPAL STRATEGIES
Our investment objective is to maximize CURRENT INCOME that is EXEMPT FROM NORTH
CAROLINA STATE AND FEDERAL INCOME TAXES, consistent with the PRESERVATION OF
CAPITAL. This means we invest primarily in North Carolina state and local
municipal bonds, which are debt obligations or fixed income securities,
including notes, commercial paper and other securities, as well as obligations
of other issuers (such as issuers located in Puerto Rico, the Virgin Islands and
Guam) that pay interest income that is exempt from those taxes (collectively
called "North Carolina obligations"). In conjunction with our investment
objective, we may invest in debt obligations with the potential for capital
gain.
In pursuing our objective, we normally invest so that at least 80% of the
income from the Series' investments will be exempt from North Carolina state and
federal income taxes or the Series will invest at least 80% of its total assets
in North Carolina obligations. We normally invest at least 70% of the Series'
total assets in "investment grade" debt obligations, which are debt obligations
rated at least BBB by Standard & Poor's Ratings Group (S&P), Baa by Moody's
Investors Service (Moody's), or comparably rated by another major rating
service, and unrated debt obligations that we believe are comparable in quality.
Debt obligations rated in the lowest of the "investment grade" quality grades
(BBB/Baa) have certain speculative characteristics. We may invest up to 30% of
the Series' assets in "non-investment grade" or HIGH-YIELD MUNICIPAL DEBT
OBLIGATIONS, commonly known as JUNK BONDS. The Series may invest in North
Carolina obligations, the interest and/or principal payments on which are
insured by the bond issuers or other parties. The Series may also invest in
certain municipal bonds, the interest on which is subject to the federal
alternative minimum tax (AMT). The dollar-weighted average maturity of the
Series will normally be between 10 and 20 years.
While we make every effort to achieve our objective, we can't guarantee
success.
PRINCIPAL RISKS
Although we try to invest wisely, all investments involve risk. The securities
in which the Series invests are generally subject to the risk that the issuer
may be unable to make principal and interest payments when they are due, as well
as the risk that the securities may lose value because interest rates rise or
because there is a lack of confidence in the issuer or in the bond's insurer.
Bonds with longer maturity dates typically produce higher yields and are subject
to greater price fluctuations as a result of changes in interest
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1
RISK/RETURN SUMMARY
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rates than bonds with shorter maturity dates. The Series invests in non-
investment grade securities--also known as junk bonds--which have a higher risk
of default of payment of principal and interest and tend to be less liquid than
higher-rated securities. Therefore, an investment in the Series may not be
appropriate for short-term investing.
The Series may purchase insured municipal bonds to reduce credit risks.
Although insurance coverage reduces credit risks by providing that the insurer
will make timely payment of interest and/or principal, it does not provide
protection against the market fluctuations of insured bonds or fluctuations in
the price of the shares of the Series. An insured municipal bond fluctuates in
value largely based on factors relating to the insurer's creditworthiness or
ability to satisfy its obligations.
Bond prices and the Series' net asset value generally move in opposite
directions from interest rates--if interest rates go up, the prices of the bonds
in the Series' portfolio may fall because the bonds the Series holds won't, as a
rule, pay as well as the newer bonds issued. Bonds that are issued when interest
rates are high generally increase in value when interest rates fall.
Municipal bonds and, in particular, municipal leases may be subject to the
risk that the state or municipality may not set aside funds in future budgets to
make the bond or lease payments.
Because the Series will concentrate its investments in North Carolina
obligations, the Series is more susceptible to economic, political and other
developments that may adversely affect issuers of North Carolina obligations
than a municipal bond fund that is not as geographically concentrated. These
developments may include state or local legislation or policy changes,
voter-passed initiatives, erosion of the tax base or reduction in revenues of
the State or one or more local governments, the effects of possible natural
disasters, or other economic or credit problems affecting the State generally or
any individual locality (which may directly or indirectly affect the State as a
whole). By way of illustration, North Carolina has concentrations in the
manufacturing and agricultural (including tobacco) industries. The Series,
therefore, may be more susceptible to developments affecting those industries
than a municipal bond fund that invests in obligations of several states. This
example illustrates just one of the risks of investing in North Carolina
obligations. For more detailed information on the risks of investing in North
Carolina obligations, see "Description of the Fund, Its Investments and Risks"
in the Statement of Additional Information.
Like any mutual fund, an investment in the Series could lose value, and you
could lose money. For more detailed information about the risks associated with
the Series, see "How the Series Invests--Investment Risks."
An investment in the Series is not a bank deposit and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other government
agency.
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2 NORTH CAROLINA SERIES [ICON] (800) 225-1852
RISK/RETURN SUMMARY
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EVALUATING PERFORMANCE
A number of factors--including risk--can affect how the Series performs. The
following bar chart shows the Series' 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 Series by showing how returns can change from year to
year and by showing how the Series' 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 Series will achieve similar
results in the future.
ANNUAL RETURNS* (CLASS B SHARES)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
1990 5.10%
1991 10.84%
1992 8.49%
1993 11.30%
1994 -6.88%
1995 16.55%
1996 1.99%
1997 8.43%
1998 5.47%
1999 -4.83%
BEST QUARTER: 6.99% ( 1st quarter of 1995 ) WORST QUARTER: -6.02% ( 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. WITHOUT THE
MANAGEMENT FEE WAIVER, THE ANNUAL RETURNS WOULD HAVE BEEN LOWER, TOO. THE
RETURN OF THE CLASS B SHARES FROM 1-1-00 TO 9-30-00 WAS 6.75%.
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3
RISK/RETURN SUMMARY
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AVERAGE ANNUAL RETURNS(1) (AS OF 12-31-99)
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1 YR 5 YRS 10 YRS SINCE INCEPTION
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Class A shares -7.53% 5.01% N/A 5.58% (since 1-22-90)
Class B shares -9.83% 5.12% 5.42% 6.50% (since 2-13-85)
Class C shares -7.01% 4.82% N/A 3.79% (since 8-1-94)
Muni Bond Index(2) -2.06% 6.91% 6.89% (**)(2)
Lipper Average(3) -4.55% 5.77% 5.71% (**)(3)
1 THE SERIES' RETURNS ARE AFTER DEDUCTION OF SALES CHARGES AND EXPENSES.
WITHOUT THE MANAGEMENT FEE WAIVER FOR EACH CLASS AND 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 (MUNI BOND INDEX) AN UNMANAGED
INDEX OF OVER 39,000 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 MUNI BOND
INDEX RETURNS SINCE THE INCEPTION OF EACH CLASS ARE 7.00% FOR CLASS A,
8.26% FOR CLASS B AND 5.86% FOR CLASS C SHARES. SOURCE: LEHMAN BROTHERS.
3 THE LIPPER AVERAGE IS BASED ON THE AVERAGE RETURN OF ALL MUTUAL FUNDS IN
THE LIPPER NORTH CAROLINA MUNICIPAL DEBT FUNDS 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. LIPPER RETURNS SINCE THE
INCEPTION OF EACH CLASS ARE 6.49% FOR CLASS A, 7.18% FOR CLASS B AND 4.70%
FOR CLASS C SHARES. SOURCE: LIPPER INC.
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4 NORTH CAROLINA SERIES [ICON] (800) 225-1852
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 Series--Class A, B and C. Each share
class has different sales charges--known as loads--and expenses, but represents
an investment in the same fund. For more information about which share class may
be right for you, see "How to Buy, Sell and Exchange Shares of the Series."
SHAREHOLDER FEES(1) (PAID DIRECTLY FROM YOUR INVESTMENT)
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CLASS A CLASS B CLASS C
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Maximum sales charge (load)
imposed on purchases (as a
percentage of offering price) 3% None 1%
Maximum deferred sales charge
(load) (as a percentage of the
lower of original purchase price
or sale proceeds) None 5%(2) 1%(3)
Maximum sales charge (load)
imposed on reinvested dividends
and other distributions None None None
Redemption fees None None None
Exchange fee None None None
ANNUAL SERIES OPERATING EXPENSES (DEDUCTED FROM SERIES ASSETS)
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CLASS A CLASS B CLASS C
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Management fees .50% .50% .50%
+ Distribution and service
(12b-1) fees(4) .30% .50% 1.00%
+ Other expenses .40% .40% .40%
= Total annual Series operating
expenses 1.20% 1.40% 1.90%
- Fee waiver or expense
reimbursement(4) .05% None .25%
= NET ANNUAL SERIES OPERATING
EXPENSES(5) 1.15% 1.40% 1.65%
1 YOUR BROKER MAY CHARGE YOU A SEPARATE OR ADDITIONAL FEE FOR PURCHASES AND
SALES OF SHARES.
2 THE CONTINGENT DEFERRED SALES CHARGE (CDSC) FOR CLASS B SHARES DECREASES BY
1% ANNUALLY TO 1% IN THE FIFTH AND SIXTH YEARS AND 0% IN THE SEVENTH YEAR.
CLASS B SHARES CONVERT TO CLASS A SHARES APPROXIMATELY SEVEN YEARS AFTER
PURCHASE.
3 THE CDSC FOR CLASS C SHARES IS 1% FOR SHARES REDEEMED WITHIN 18 MONTHS OF
PURCHASE.
4 FOR THE FISCAL YEAR ENDING AUGUST 31, 2001, THE DISTRIBUTOR OF THE SERIES
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.
5 ON AUGUST 23, 2000, THE BOARD OF TRUSTEES APPROVED THE PROPOSAL TO MERGE
NORTH CAROLINA SERIES. EFFECTIVE AUGUST 23, 2000, THE DISTRIBUTION AND
SERVICE (12b-1) FEES FOR CLASS A, CLASS B AND CLASS C SHARES WERE LIMITED
TO .25 OF 1% OF THE AVERAGE DAILY NET ASSETS OF CLASS A, CLASS B AND
CLASS C SHARES, RESPECTIVELY. AS A RESULT OF THIS LIMITATION, THE TOTAL NET
OPERATING EXPENSES AT AUGUST 31, 2000, WERE 1.15%, 1.39% AND 1.64% FOR
CLASS A, CLASS B AND CLASS C SHARES, RESPECTIVELY.
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5
RISK/RETURN SUMMARY
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EXAMPLE
This example will help you compare the fees and expenses of the Series'
different share classes and compare the cost of investing in the Series with the
cost of investing in other mutual funds.
The example assumes that you invest $10,000 in the Series for the time
periods indicated and then sell all of your shares at the end of those periods.
The example also assumes that your investment has a 5% return each year and that
the Series' operating expenses remain the same, 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:
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1 YR 3 YRS 5 YRS 10 YRS
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Class A shares $414 $665 $ 935 $1,707
Class B shares $643 $743 $ 866 $1,600
Class C shares $366 $667 $1,093 $2,280
You would pay the following expenses on the same investment if you did not sell
your shares:
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1 YR 3 YRS 5 YRS 10 YRS
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Class A shares $414 $665 $ 935 $1,707
Class B shares $143 $443 $ 766 $1,600
Class C shares $266 $667 $1,093 $2,280
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6 NORTH CAROLINA SERIES [ICON] (800) 225-1852
HOW THE SERIES INVESTS
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INVESTMENT OBJECTIVE AND POLICIES
The Series' investment objective is to maximize CURRENT INCOME that is EXEMPT
FROM NORTH CAROLINA STATE AND FEDERAL INCOME TAXES, consistent with the
PRESERVATION OF CAPITAL. In conjunction with its investment objective, the
Series may invest in debt obligations with the potential for capital gain. While
we make every effort to achieve our objective, we can't guarantee success.
In pursuing the Series' objective, we invest primarily in NORTH CAROLINA
OBLIGATIONS, including North Carolina state and local municipal bonds as well as
obligations of other issuers (such as issuers located in Puerto Rico, the Virgin
Islands and Guam) that pay interest income that is exempt from North Carolina
state and federal income taxes. We normally invest so that at least 80% of the
income from the Series' investments will be exempt from those taxes or the
Series will have at least 80% of its total assets invested in North Carolina
obligations. The Series, 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 "Series Distributions and Tax-Issues--Distributions."
Municipal bonds include GENERAL OBLIGATION BONDS and REVENUE BONDS. General
obligation bonds are obligations supported by the credit of an issuer that has
the power to tax and are payable from that issuer's general revenues and not
from any specific source. Revenue bonds, on the other hand, are payable from
revenues derived from a particular source or project.
We normally invest at least 70% of the Series' total assets in "investment
grade" debt obligations, which are obligations rated at least BBB by S&P, Baa by
Moody's, or comparably rated by another major rating service, and unrated debt
obligations that we believe are comparable in quality. Debt obligations rated in
the lowest of the "investment grade" quality grades (BBB/Baa) have certain
speculative characteristics. We may also invest in insured municipal bonds.
Generally, the yields on insured bonds are lower than the yields on uninsured
bonds of comparable quality. Insurance reduces the insured bond's credit risk
and may increase the
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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 ISSUER GETS THE CASH NEEDED TO COMPLETE THE
PROJECT AND INVESTORS EARN INCOME ON THEIR INVESTMENT.
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7
HOW THE SERIES INVESTS
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bond's value. We may also invest up to 30% of the Series' assets in HIGH-YIELD
MUNICIPAL DEBT OBLIGATIONS or JUNK BONDS. Lower-rated bonds tend to offer higher
yields, but also offer greater risks, than higher-rated bonds. If the rating of
a debt obligation is downgraded after the Series purchases it (or if the debt
obligation is no longer rated), the Series will not have to sell the obligation,
but we will take this into consideration in deciding whether the Series should
continue to hold the obligation.
A rating is an assessment of the likelihood of the timely payment of debt
(with respect to a municipal bond) or claims (with respect to an insurer of a
municipal bond), and can be useful when comparing different municipal bonds.
These ratings are not a guarantee of quality. The opinions of the rating
agencies do not reflect market risk and they may, at times, lag behind the
current financial condition of an issuer or insurer. An investor can evaluate
the expected likelihood of default by an issuer or an insurer by looking at its
ratings as compared to another similar issuer or insurer. A description of bond
ratings is contained in Appendix A.
During the fiscal year ended August 31, 2000, the monthly dollar-weighted
average ratings of the debt obligations held by the Series, expressed as a
percentage of the Series' total investments, were as follows:
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PERCENTAGES OF
RATINGS TOTAL INVESTMENTS
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AAA/Aaa 62.28%
AA/Aa 10.79%
A/A 4.19%
BBB/Baa 20.23%
Unrated
Other 2.51%
In determining which securities to buy and sell, the investment adviser will
consider, among other things, yield, maturity, issue, quality characteristics
and expectations regarding economic and political developments, including
movements in interest rates and demand for municipal bonds. The investment
adviser will attempt to anticipate interest rate movements and will purchase and
sell municipal bonds accordingly. The investment adviser will also consider the
claims-paying ability with respect to insurers of municipal bonds. The
investment adviser will also seek to take advantage of differentials in yields
with respect to securities with similar credit ratings and maturities, but which
vary according to the purpose for which they were issued, as well as securities
issued for similar purposes with similar maturities, but which vary according to
ratings.
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8 NORTH CAROLINA SERIES [ICON] (800) 225-1852
HOW THE SERIES INVESTS
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The dollar-weighted average maturity of the obligations held by the Series
generally ranges between 10 and 20 years.
For more information, see "Investment Risks" 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 Series. To obtain a copy, see the back cover
page of this prospectus.
The Series' investment objective is a fundamental policy that cannot be
changed without shareholder approval. The Board of the Fund can change
investment policies of the Series 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 Series' returns or protect its assets if
market conditions warrant.
MUNICIPAL LEASE OBLIGATIONS
The Series 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 equipment or facilities that were
acquired or built with the bonds. Typically, municipal lease obligations are
issued by states or financing authorities to provide money for construction
projects such as schools, offices or stadiums. The entity that leases the
building or facility would be responsible for paying the interest and principal
on the obligation.
MUNICIPAL ASSET-BACKED SECURITIES
The Series may invest in municipal asset-backed securities. A MUNICIPAL
ASSET-BACKED SECURITY is a type of pass-through instrument that pays interest
which is eligible for exclusion from federal and state income taxation based
upon the income from an underlying municipal bond or pool of municipal bonds.
FLOATING RATE BONDS, VARIABLE RATE BONDS, INVERSE FLOATERS,
SECONDARY INVERSE FLOATERS AND ZERO COUPON MUNICIPAL BONDS
The Series 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
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9
HOW THE SERIES INVESTS
- ------------------------------------------------
interest rate that is adjusted periodically based on the market rate at a
specified time. They generally allow the Series to demand full payment of the
bond on short notice. At times the Series may receive an amount that may be more
or less than the amount paid for the bond. 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).
WHEN-ISSUED AND DELAYED-DELIVERY SECURITIES
The Series may purchase municipal bonds on a WHEN-ISSUED or DELAYED-DELIVERY
basis, without limit. When the Series makes this type of purchase, the price and
interest rate are fixed at the time of purchase, but delivery and payment for
the bonds take place at a later time. The Series does not earn interest income
until the date the bonds are delivered.
DERIVATIVE STRATEGIES
We may use various DERIVATIVE STRATEGIES to try to improve the Series' returns.
We may use hedging techniques to try to protect the Series' assets. We cannot
guarantee that these strategies and techniques will work, that the instruments
necessary to implement these strategies and techniques will be available, or
that the Series will not lose money. Derivatives--such as 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 Series' overall
investment objective. The investment adviser will consider other factors (such
as cost) in deciding whether to employ any particular strategy or technique, or
use any particular instrument. Any derivatives we may use may not match the
Series' underlying holdings.
FUTURES CONTRACTS AND RELATED OPTIONS
The Series may purchase and sell 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
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10 NORTH CAROLINA SERIES [ICON] (800) 225-1852
HOW THE SERIES INVESTS
- ------------------------------------------------
right to buy or sell securities or, in the case of an option on a futures
contract, the right to buy or sell a futures contract, in exchange for a
premium.
INTEREST RATE SWAP TRANSACTIONS
The Series may enter into INTEREST RATE SWAP TRANSACTIONS. In a swap
transaction, the Series and another party "trade" income streams. The swap is
done to preserve a return or spread on a particular investment or portion of a
portfolio or to protect against any increase in the price of securities the
Series anticipates purchasing at a later date.
TEMPORARY DEFENSIVE INVESTMENTS
In response to adverse market, economic or political conditions, the Series may
hold up to 100% of its assets in cash, cash equivalent or investment-grade
bonds, including bonds that are not exempt from state, local and federal income
taxation. Investing heavily in these securities limits our ability to achieve
the Series' investment objective, but can help to preserve the Series' assets.
For more information about these strategies, see the SAI, "Description of
the Fund, Its Investments and Risks."
ADDITIONAL STRATEGIES
The Series also follows certain policies when it BORROWS MONEY (the Series can
borrow up to 33 1/3% of the value of its total assets) and HOLDS ILLIQUID
SECURITIES (the Series may hold up to 15% of its net assets in illiquid
securities, including securities with legal or contractual restrictions on
resale, those without a readily available market and repurchase agreements with
maturities longer than seven days). The Series 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.
INVESTMENT RISKS
As noted, all investments involve risk, and investing in the Series is no
exception. Since the Series' holdings can vary significantly from broad market
indexes, performance of the Series can deviate from performance of the indexes.
This chart outlines the key risks and potential rewards of the Series' principal
investments and certain other non-principal investments the Series may make.
See, too, "Description of the Fund, Its Investments and Risks" in the SAI.
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11
HOW THE SERIES INVESTS
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INVESTMENT TYPE
- ----------------------------------------------------------------------------------
% OF SERIES' TOTAL ASSETS RISKS POTENTIAL REWARDS
- ----------------------------------------------------------------------------------
MUNICIPAL BONDS -- Concentration -- Tax-exempt interest
risk--the risk that income, except with
PROVIDE AT LEAST 80% OF bonds may lose value respect to certain
SERIES' INCOME OR because of bonds, such as
COMPRISE AT LEAST 80% OF political, economic private activity
ITS TOTAL ASSETS or other events bonds, which are
affecting issuers of subject to the
North Carolina federal alternative
obligations minimum tax (AMT)
-- Credit risk--the risk -- If interest rates
that the borrower decline, long-term
can't pay back the yields should be
money borrowed or higher than money
make interest market yields
payments (lower for -- Bonds have generally
insured and higher outperformed money
rated bonds). The market instruments
lower a bond's over the long term
quality, the higher -- Most bonds rise in
its potential value when interest
volatility rates fall
-- Market risk--the risk
that bonds will lose
value in the market,
sometimes rapidly or
unpredictably,
because interest
rates rise or there
is a lack of
confidence in the
borrower or the
bond's insurer
-- Illiquidity risk--the
risk that bonds may
be difficult to
value precisely and
sell at time or
price desired, in
which case valuation
would depend more on
investment adviser's
judgment than is
generally the case
with other types of
municipal bonds
-- Nonappropriation
risk--the risk that
the state or
municipality may not
include the bond
obligations in
future budgets
-- Tax risk--the risk
that federal, state
or local income tax
rates may decrease,
which could decrease
demand for municipal
bonds or that a
change in law may
limit or eliminate
exemption of
interest on
municipal bonds from
such taxes
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12 NORTH CAROLINA SERIES [ICON] (800) 225-1852
HOW THE SERIES INVESTS
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INVESTMENT TYPE (CONT'D)
- ----------------------------------------------------------------------------------
% OF SERIES' TOTAL ASSETS RISKS POTENTIAL REWARDS
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HIGH-YIELD MUNICIPAL -- See market risk -- May offer higher
DEBT OBLIGATIONS (particularly high), interest income and
(JUNK BONDS) credit risk higher potential
(particularly high), gains than
UP TO 30% illiquidity risk higher-grade
(particularly high) municipal bonds
and tax risk -- Most bonds rise in
value when interest
rates fall
- ----------------------------------------------------------------------------------
MUNICIPAL LEASE -- See concentration -- Tax-exempt interest
OBLIGATIONS risk, credit risk, income, except with
market risk, respect to certain
PERCENTAGE VARIES; illiquidity risk, bonds, such as
USUALLY LESS THAN 25% nonappropriation private activity
risk and tax risk bonds, which are
-- Abatement risk--the subject to the AMT
risk that the entity -- If interest rates
leasing the decline, long-term
equipment or yields should be
facility will not be higher than money
required to make market yields
lease payments
because it does not
have full use of the
equipment or
facility
- ----------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
13
HOW THE SERIES INVESTS
- ------------------------------------------------
INVESTMENT TYPE (CONT'D)
- ----------------------------------------------------------------------------------
% OF SERIES' TOTAL ASSETS RISKS POTENTIAL REWARDS
- ----------------------------------------------------------------------------------
MUNICIPAL ASSET-BACKED -- Prepayment risk--the -- Regular interest
SECURITIES risk that the income
underlying bonds may -- Pass-through
PERCENTAGE VARIES; be prepaid, instruments provide
USUALLY LESS THAN 15% partially or greater
completely, diversification than
generally during direct ownership of
periods of falling municipal bonds
interest rates, -- May offer higher
which could yield due to their
adversely affect structure
yield to maturity
and could require
the Series to
reinvest in lower
yielding bonds
-- Credit risk--the risk
that the underlying
municipal bonds will
not be paid by
issuers or by credit
insurers or
guarantors of such
instruments. Some
municipal
asset-backed
securities are
unsecured or secured
by lower-rated
insurers or
guarantors and thus
may involve greater
risk
-- See market risk and
tax risk
- ----------------------------------------------------------------------------------
ZERO COUPON MUNICIPAL -- See credit risk, -- Tax-exempt interest
BONDS market risk, income, except with
concentration risk respect to certain
PERCENTAGE VARIES; and tax risk bonds, such as
USUALLY LESS THAN 40% -- Typically subject to private activity
greater volatility bonds, which are
and less liquidity subject to the AMT
in adverse markets -- Value rises faster
than other municipal when interest rates
bonds fall
- ----------------------------------------------------------------------------------
- -------------------------------------------------------------------
14 NORTH CAROLINA SERIES [ICON] (800) 225-1852
HOW THE SERIES INVESTS
- ------------------------------------------------
INVESTMENT TYPE (CONT'D)
- ----------------------------------------------------------------------------------
% OF SERIES' TOTAL ASSETS RISKS POTENTIAL REWARDS
- ----------------------------------------------------------------------------------
VARIABLE/FLOATING RATE -- Value lags value of -- May offer protection
BONDS fixed-rate against interest
securities when rate increases
PERCENTAGE VARIES; interest rates
USUALLY LESS THAN 10% change
-- See tax risk
- ----------------------------------------------------------------------------------
INVERSE FLOATERS/ -- High market -- Income generally will
SECONDARY INVERSE risk--risk that increase when
FLOATERS inverse floaters interest rates
will fluctuate in decrease
PERCENTAGE VARIES; value more
USUALLY LESS THAN 15% dramatically than
other debt
securities when
interest rates
change
-- See credit risk,
illiquidity risk
and tax risk
-- Secondary inverse
floaters are subject
to additional risks
of municipal
asset-backed
securities
- ----------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
15
HOW THE SERIES INVESTS
- ------------------------------------------------
INVESTMENT TYPE (CONT'D)
- ----------------------------------------------------------------------------------
% OF SERIES' TOTAL ASSETS RISKS POTENTIAL REWARDS
- ----------------------------------------------------------------------------------
DERIVATIVES -- Derivatives such as -- The Series could make
futures, options on money and protect
PERCENTAGE VARIES; futures and interest against losses if
USUALLY LESS THAN 20% rate swaps that are the investment
used for hedging analysis proves
purposes may not correct
fully offset the -- One way to manage the
underlying positions Series' risk/return
and this could balance is to lock
result in losses to in the value of an
the Series that investment ahead of
would not have time
otherwise occurred -- Derivatives used for
-- Derivatives used for return enhancement
risk management may purposes involve a
not have the type of leverage and
intended effects and could generate
may result in losses substantial gains at
or missed low cost
opportunities
-- The other party to a
derivatives contract
could default
-- Derivatives used for
return enhancement
purposes involve a
type of leverage
(borrowing for
investment) and
could magnify losses
-- Certain types of
derivatives involve
costs to the Series
that can reduce
returns
- ----------------------------------------------------------------------------------
WHEN-ISSUED AND -- May magnify -- May magnify
DELAYED-DELIVERY underlying underlying
SECURITIES investment losses investment gains
-- Investment costs may
PERCENTAGE VARIES; exceed potential
USUALLY LESS THAN 20% underlying
investment gains
-- See tax risk
- ----------------------------------------------------------------------------------
ILLIQUID SECURITIES -- See illiquidity risk -- May offer a more
attractive yield or
UP TO 15% OF NET ASSETS potential for growth
than more widely
traded securities
- ----------------------------------------------------------------------------------
- -------------------------------------------------------------------
16 NORTH CAROLINA SERIES [ICON] (800) 225-1852
HOW THE SERIES IS MANAGED
- -------------------------------------
BOARD OF TRUSTEES
The Fund's Board of Trustees oversees the actions of the Manager, investment
adviser and Distributor and decides on general policies. The Board also oversees
the Fund's officers, who conduct and supervise the daily business operations of
the Fund.
MANAGER
PRUDENTIAL INVESTMENTS FUND MANAGEMENT LLC (PIFM)
GATEWAY CENTER THREE, 100 MULBERRY STREET
NEWARK, NJ 07102-4077
Under a Management Agreement with the Fund, PIFM manages the Series'
investment operations and administers its business affairs. PIFM also is
responsible for supervising the Fund's investment adviser. For the fiscal year
ended August 31, 2000, the Series paid PIFM management fees of .50 of 1% of the
Series' average daily net assets.
PIFM and its predecessors have served as manager or administrator to
investment companies since 1987. As of September 30, 2000, PIFM served as the
manager to all 49 of the Prudential mutual funds, and as manager or
administrator to 21 closed-end investment companies, with aggregate assets of
approximately $75.1 billion.
INVESTMENT ADVISER
The Prudential Investment Corporation, called Prudential Investments, is the
Series' 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.
- --------------------------------------------------------------------------------
17
HOW THE SERIES IS MANAGED
- ------------------------------------------------
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 Series. This Team uses a bottom-up
approach, which focuses on individual securities, while staying within the
guidelines of the Investment Policy Committee and the Series' investment
restrictions and policies. In addition, the Credit Research team of analysts
supports the sector teams using bottom-up fundamentals, as well as economic and
industry trends. Other sector teams may contribute to securities selection when
appropriate.
MUNICIPAL BONDS
ASSETS UNDER MANAGEMENT: $5 billion (as of June 30, 2000).
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.
- -------------------------------------------------------------------
18 NORTH CAROLINA SERIES [ICON] (800) 225-1852
HOW THE SERIES IS MANAGED
- ------------------------------------------------
INVESTMENT STRATEGY: 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 Series'
shares under a Distribution Agreement with the Fund. The Fund has Distribution
and Service Plans under Rule 12b-1 of the Investment Company Act. Under the
Plans and the Distribution Agreement, PIMS pays the expenses of distributing the
Series' Class A, B, and C 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. These fees--known as 12b-1 fees--are
shown in the "Fees and Expenses" tables.
- --------------------------------------------------------------------------------
19
SERIES DISTRIBUTIONS AND TAX ISSUES
- -------------------------------------
Investors who buy shares of the Series should be aware of some important tax
issues. For example, the Series distributes DIVIDENDS of net investment income
monthly and CAPITAL GAINS, if any, at least annually to shareholders. Dividends
generally will be exempt from federal and North Carolina state income taxes. If,
however, the Series invests in taxable obligations, it will pay dividends that
are not exempt from these income taxes. Also, if you sell shares of the Series
for a profit, you may have to pay capital gains taxes on the amount of your
profit.
The following briefly discusses some of the important state and federal tax
issues you should be aware of, but is not meant to be tax advice. For tax
advice, please speak with your tax adviser.
DISTRIBUTIONS
The Series distributes DIVIDENDS out of any net investment income, plus
short-term capital gains, to shareholders, typically every month. For example,
if the Series owns a City XYZ bond and the bond pays interest, the Series will
pay out a portion of this interest as a dividend to its shareholders, assuming
the Series' income is more than its costs and expenses. These dividends
generally will be EXEMPT FROM FEDERAL INCOME TAXES, as long as 50% or more of
the value of the Series' assets at the end of each quarter is invested in state,
municipal and other obligations, the interest on which is excluded from gross
income for federal income tax purposes. Corporate shareholders are not eligible
for the 70% dividends-received deduction on dividends paid by the Series.
As we mentioned before, the Series will concentrate its investments in North
Carolina obligations. In addition to being exempt from federal income taxes,
Series' dividends are EXEMPT FROM NORTH CAROLINA INDIVIDUAL, TRUST AND ESTATE
INCOME TAXES FOR NORTH CAROLINA RESIDENTS if the dividends are excluded from
federal income taxes and are derived from interest payments on North Carolina
obligations. Dividends attributable to the interest on taxable bonds held by the
Series, market discount on taxable and tax-exempt obligations and short-term
capital gains, however, will be subject to federal, state and local income tax
at ordinary income tax rates.
Some shareholders may be subject to federal alternative minimum tax (AMT)
liability. Tax-exempt interest from certain bonds is treated as an item of tax
preference, and may be attributed to shareholders. A portion of all tax-exempt
interest is includable as an upward adjustment in determining a corporation's
alternative minimum taxable income. These rules could make you liable for the
AMT.
- -------------------------------------------------------------------
20 NORTH CAROLINA SERIES [ICON] (800) 225-1852
SERIES DISTRIBUTIONS AND TAX ISSUES
- ------------------------------------------------
The Series also distributes LONG-TERM CAPITAL GAINS to shareholders--
typically once a year. Long-term capital gains are generated when the Series
sells assets that it held for more than 12 months for a profit. For an
individual, the maximum long-term capital gains rate is 20% for federal income
tax purposes. The maximum capital gains rate for corporate shareholders
currently is the same as the maximum tax rate for ordinary income.
For your convenience, distributions of dividends and capital gains are
AUTOMATICALLY REINVESTED in the Series without any sales charge. If you ask us
to pay the distributions in cash, we will send you a check if your account is
with the Transfer Agent. Otherwise, if your account is with a broker you will
receive a credit to your account. Either way, the distributions may be subject
to taxes. For more information about automatic reinvestment and other
shareholder services, see "Step 4: Additional Shareholder Services" in the next
section.
TAX ISSUES
FORM 1099
Every year, you will receive a Form 1099, which reports the amount of dividends
and capital gains we distributed to you during the prior year.
Series distributions are generally taxable to you in the 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 Series 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 generally
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.
- --------------------------------------------------------------------------------
21
SERIES DISTRIBUTIONS AND TAX ISSUES
- ------------------------------------------------
IF YOU PURCHASE JUST BEFORE RECORD DATE
If you buy shares of the Series 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 Series decreases by the
amount of the dividend to reflect the payout although this may not be apparent
because the value of each share of the Series also will 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 Series 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 for more than twelve months. If you sell shares of
the Series for a loss, you may have a capital loss, which you may use to offset
certain capital gains you have.
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). Under certain circumstances, if you acquire shares of the
Series and sell or exchange 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 Series for the shares of another Prudential
mutual fund is considered a sale for tax purposes. In other words, it's a
"taxable event." Therefore, if the shares you exchanged have increased in value
since you purchased them, you have capital gains, which are subject to the taxes
described above.
RECEIPTS FROM SALE $ --> +$ CAPITAL GAIN
(taxes owed)
OR
RECEIPTS FROM SALE $ --> -$ CAPITAL LOSS
(offset against gain)
[GRAPH]
Any gain or loss you may have from selling or exchanging Series shares will
not be reported on Form 1099; however, proceeds from the sale or
- -------------------------------------------------------------------
22 NORTH CAROLINA SERIES [ICON] (800) 225-1852
SERIES DISTRIBUTIONS AND TAX ISSUES
- ------------------------------------------------
exchange will be reported on Form 1099-B. Therefore, you or your financial
adviser should keep track of the dates on which you buy and sell--or
exchange--Series shares, as well as the amount of any gain or loss on each
transaction. For tax advice, please see your tax adviser.
AUTOMATIC CONVERSION OF CLASS B SHARES
We have obtained a legal opinion that the conversion of Class B shares into
Class A shares--which happens automatically approximately seven years after
purchase--is not a "taxable event." This opinion, however, is not binding on the
Internal Revenue Service. For more information about the automatic conversion of
Class B shares, see "Class B Shares Convert to Class A Shares After
Approximately Seven Years," in the next section.
- --------------------------------------------------------------------------------
23
HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE SERIES
- -------------------------------------
HOW TO BUY SHARES
STEP 1: OPEN AN ACCOUNT
If you don't have an account with us or a securities firm that is permitted to
buy or sell shares of the Series for you, call Prudential Mutual Fund Services
LLC (PMFS) at (800) 225-1852 or contact:
PRUDENTIAL MUTUAL FUND SERVICES LLC
ATTN: INVESTMENT SERVICES
P.O. BOX 15020
NEW BRUNSWICK, NJ 08906-5020
You may purchase shares by check or wire. We do not accept cash or money
orders. To purchase by wire, call the number above to obtain an application.
After PMFS receives your completed application, you will receive an account
number. For additional information about purchasing shares of the Series, see
the back cover page of this prospectus. We have the right to reject any purchase
order (including an exchange into the Series) or suspend or modify the Series'
sale of its shares.
STEP 2: CHOOSE A SHARE CLASS
Individual investors can choose among Class A, Class B, and Class C shares of
the Series.
Multiple share classes let you choose a cost structure that meets your
needs. With Class A shares, you pay the sales charge at the time of purchase,
but the operating expenses each year are lower than the expenses of Class B and
Class C shares. With Class B shares, you only pay a sales charge if you sell
your shares within six years (that is why they call it a Contingent Deferred
Sales Charge or CDSC), but the operating expenses each year are higher than
Class A share expenses. With Class C shares, you pay a 1% front end sales charge
and a 1% CDSC if you sell within 18 months of purchase, but the operating
expenses are also higher than the expenses for Class A shares.
When choosing a share class, you should consider the following:
-- The amount of your investment
-- The length of time you expect to hold the shares and the impact of
varying distribution fees
- -------------------------------------------------------------------
24 NORTH CAROLINA SERIES [ICON] (800) 225-1852
HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE SERIES
- ------------------------------------------------
-- The different sales charges that apply to each share class--
Class A's front-end sales charge vs. Class B's CDSC vs. Class C's
lower 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.
See "How to Sell Your Shares" for a description of the impact of CDSCs.
SHARE CLASS COMPARISON. Use this chart to help you compare the Series' different
share classes. The discussion following this chart will tell you whether you are
entitled to a reduction or waiver of any sales charges.
- ----------------------------------------------------------------------------
CLASS A CLASS B CLASS C
- ----------------------------------------------------------------------------
Minimum purchase $1,000 $1,000 $2,500
amount(1)
Minimum amount for $100 $100 $100
subsequent
purchases(1)
Maximum initial 3% of the None 1% of the
sales charge public offering public offering
price price
Contingent Deferred None If sold during: 1% on sales
Sales Charge Year 1 5% made within 18
(CDSC)(2) Year 2 4% months of
Year 3 3% purchase
Year 4 2%
Year 5 1%
Year 6 1%
Year 7 0%
Annual distribution .30 of 1% .50 of 1% 1% (.75 of 1%
and service (12b-1) (.25 of 1% currently)
fees (shown as currently)
a percentage 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)."
3 THESE DISTRIBUTION AND SERVICE (12b-1) FEES ARE PAID FROM THE SERIES'
ASSETS ON A CONTINUOUS BASIS. OVER TIME, THE FEES WILL INCREASE THE COST OF
YOUR INVESTMENT AND MAY COST YOU MORE THAN PAYING OTHER TYPES OF SALES
CHARGES. CLASS A AND CLASS B SHARES MAY PAY A SERVICE FEE OF UP TO .25 OF
1%. 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 LIMITED TO .50 OF 1% (INCLUDING UP TO .25 OF 1% AS A
SERVICE FEE) FOR CLASS B SHARES, AND IS .75 OF 1% FOR CLASS C SHARES. FOR
THE FISCAL YEAR ENDING AUGUST 31, 2001, THE DISTRIBUTOR OF THE FUND HAS
CONTRACTUALLY AGREED TO REDUCE ITS DISTRIBUTION AND SERVICE (12b-1) FEES
FOR CLASS A AND CLASS C SHARES TO .25 OF 1% AND .75 OF 1% OF THE AVERAGE
DAILY NET ASSETS OF CLASS A SHARES AND CLASS C SHARES, RESPECTIVELY.
- --------------------------------------------------------------------------------
25
HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE SERIES
- ------------------------------------------------
REDUCING OR WAIVING CLASS A'S INITIAL SALES CHARGE
The following describes the different ways investors can reduce or avoid
paying Class A's initial sales charge.
INCREASE THE AMOUNT OF YOUR INVESTMENT. You can reduce Class A's initial
sales charge by increasing the amount of your investment. This table shows
how the sales charge decreases as the amount of your investment
increases.
- ----------------------------------------------------------------------------------------
SALES CHARGE AS % OF SALES CHARGE AS % OF DEALER
AMOUNT OF PURCHASE OFFERING PRICE 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.
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
(excluding money market fund shares other than those acquired through
the exchange privilege) with the value of the shares you are
purchasing for purposes of determining the applicable sales charge
(note: you must notify the Transfer Agent at the time of purchase 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 invest a specific dollar amount in
the Series and other Prudential mutual funds within 13 months.
The Distributor may reallow Class A's sales charge to dealers.
MUTUAL FUND PROGRAMS. The initial sales charge will be waived for investors in
certain programs sponsored by broker-dealers, investment advisers and
- -------------------------------------------------------------------
26 NORTH CAROLINA SERIES [ICON] (800) 225-1852
HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE SERIES
- ------------------------------------------------
financial planners who have agreements with Prudential Investments Advisory
Group relating to:
-- Mutual fund "wrap" or asset allocation programs, where the sponsor
places Series trades 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 Series in connection with different pricing options for their programs.
Investors should consider carefully any separate transaction and other fees
charged by these programs in connection with investing in each available share
class before selecting a share class.
OTHER TYPES OF INVESTORS. Other investors 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 initial 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
- --------------------------------------------------------------------------------
27
HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE SERIES
- ------------------------------------------------
-- 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 your
broker, who may require any supporting documents it considers to be appropriate.
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 shares from
their own resources based on a percentage of the net asset value of shares sold
or otherwise.
CLASS B SHARES CONVERT TO CLASS A SHARES AFTER APPROXIMATELY SEVEN YEARS
If you buy Class B shares and hold them for approximately seven years, we will
automatically convert them into Class A shares without charge. At that time, we
will also convert any Class B 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, switching to Class A shares lowers your Series
expenses.
When we do the conversion, you will get fewer Class A shares than the number
of Class B shares converted if the price of the Class A shares is higher than
the price of Class B shares. The total dollar value will be the same, so you
will not have lost any money by getting fewer Class A shares. We do the
conversions quarterly, not on the anniversary date of your purchase. For more
information, see the SAI, "Purchase, Redemption and Pricing of Fund
Shares--Conversion Feature--Class B Shares."
- -------------------------------------------------------------------
28 NORTH CAROLINA SERIES [ICON] (800) 225-1852
HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE SERIES
- ------------------------------------------------
STEP 3: UNDERSTANDING THE PRICE YOU'LL PAY
The price you pay for each share of the Series is based on the share value. The
share value of a mutual fund--known as the NET ASSET VALUE or NAV--is determined
by a simple calculation: it's the total value of the Series (assets minus
liabilities) divided by the total number of shares outstanding. For example, if
the value of the investments held by Fund XYZ (minus its liabilities) is $1,000
and there are 100 shares of Fund XYZ owned by shareholders, the price of one
share of the fund--or the NAV--is $10 ($1,000 divided by 100). Portfolio
securities are valued based upon market quotations or, if not readily available,
at fair value as determined in good faith under procedures established by the
Fund's Board. Most national newspapers report the NAVs of most mutual funds,
which allows investors to check the price of mutual funds daily.
We determine the NAV of our shares once each business day at 4:15 p.m., New
York time, on days that the New York Stock Exchange (NYSE) is open for trading.
The NYSE is closed on most 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 the Series' shares, or when changes in the value of the
Series' portfolio do not materially affect the NAV.
WHAT PRICE WILL YOU PAY FOR SHARES OF THE SERIES?
For Class A and Class C shares, you'll pay the public offering price, which is
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 shares, you will
pay the NAV next determined after we receive your order to purchase (remember,
there are no up-front sales charges for these share classes). Your broker may
charge you a separate or additional fee for purchases of shares.
- -------------------------------------------------------------------
MUTUAL FUND SHARES
The NAV of mutual fund shares changes every day because the value of a fund's
portfolio changes constantly. For example, if Fund XYZ holds City ABC bonds in
its portfolio and the price of City ABC bonds goes up while the value of the
fund's other holdings remains the same and expenses don't change, the NAV of
Fund XYZ will increase.
- -------------------------------------------------------------------
- --------------------------------------------------------------------------------
29
HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE SERIES
- ------------------------------------------------
STEP 4: ADDITIONAL SHAREHOLDER SERVICES
As a Series shareholder, you can take advantage of the following services and
privileges:
AUTOMATIC REINVESTMENT. As we explained in the "Series Distributions and Tax
Issues" section, the Series pays out--or distributes--its net investment income
and capital gains to all shareholders. For your convenience, we will
automatically reinvest your distributions in the Series at NAV, without any
sales charge. If you want your distributions paid in cash, you can indicate this
preference on your application, notify your broker or notify the Transfer Agent
in writing (at the address below) at least five business days before the date we
determine who receives dividends.
PRUDENTIAL MUTUAL FUND SERVICES LLC
ATTN: ACCOUNT MAINTENANCE
P.O. BOX 8159
PHILADELPHIA, PA 19101
AUTOMATIC INVESTMENT PLAN. You can make regular purchases of the Series for as
little as $50 by having the money 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 your Series. To reduce the
- -------------------------------------------------------------------
30 NORTH CAROLINA SERIES [ICON] (800) 225-1852
HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE SERIES
- ------------------------------------------------
Series' expenses, we will send one annual shareholder report, one semi-annual
shareholder report and one annual prospectus per household, unless you instruct
us or your broker otherwise.
HOW TO SELL YOUR SHARES
You can sell your shares of the Series for cash (in the form of a check) at any
time, subject to certain restrictions.
When you sell shares of the Series--also known as redeeming your shares--the
price you will receive will be the NAV next determined after the Transfer Agent,
the Distributor or your broker receives your order to sell. If your broker holds
your shares, 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 8149
PHILADELPHIA, PA 19101
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 by wire,
certified check or cashier's check. Your broker may charge a separate or
additional fee for sales of shares.
RESTRICTIONS ON SALES
There are certain times when you may not be able to sell shares of the Series,
or when we may delay paying you the proceeds from a sale. As permitted by the
Securities and Exchange Commission, this may happen only during unusual market
conditions or emergencies when the Series can't determine the value of its
assets or sell its holdings. For more information, see the SAI, "Purchase,
Redemption and Pricing of Fund Shares--Sale of Shares."
- --------------------------------------------------------------------------------
31
HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE SERIES
- ------------------------------------------------
If you are selling more than $100,000 of shares, if you want the redemption
proceeds payable to 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, you will have to pay a CDSC. To keep the CDSC as low as
possible, we will sell your shares in the following order:
-- Amounts representing shares you purchased with reinvested dividends
and distributions
-- Amounts representing the increase in NAV above the total amount of
payments for shares made during the past six years for Class B shares
and 18 months for Class C shares
-- Amounts representing the cost of shares held beyond the CDSC period
(six years for Class B shares and 18 months for Class C shares).
Since shares that fall into any of the categories listed above are not
subject to the CDSC, selling them first helps you to avoid--or at least
minimize--the CDSC.
Having sold the exempt shares first, if there are any remaining shares that
are subject to the CDSC, we will apply the CDSC to amounts representing the cost
of shares held for the longest period of time within the applicable CDSC period.
As we noted in the "Share Class Comparison" chart, the CDSC for Class B
shares is 5% in the first year, 4% in the second, 3% in the third, 2% in the
fourth, and 1% in the fifth and sixth years. The rate decreases on the first day
of the month following the anniversary date of your purchase, not on the
anniversary date itself. The CDSC is 1% for Class C shares--which is applied to
shares sold within 18 months of purchase. For both Class B and Class C shares,
the CDSC is calculated based on the lesser of the original
- -------------------------------------------------------------------
32 NORTH CAROLINA SERIES [ICON] (800) 225-1852
HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE SERIES
- ------------------------------------------------
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 held in joint
tenancy, provided the shares were purchased before the death or
disability
-- On certain sales effected through the 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."
REDEMPTION IN KIND
If the sales of Series shares you make during any 90-day period reach the lesser
of $250,000 or 1% of the value of the Series' net assets, we can then give you
securities from the Series' portfolio instead of cash. If you want to sell the
securities for cash, you would have to pay the costs charged by a broker.
SMALL ACCOUNTS
If you make a sale that reduces your account value to less than $500, we may
sell the rest of your shares (without charging any CDSC) and close your account.
We would do this to minimize the Series' expenses paid by other shareholders. We
will give you 60 days' notice, during which time you can purchase additional
shares to avoid this action.
- --------------------------------------------------------------------------------
33
HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE SERIES
- ------------------------------------------------
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 Series 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 Series for shares of the same class in
certain other Prudential mutual funds--including certain money market funds--if
you satisfy the minimum investment requirements. For example, you can exchange
Class A shares of the Series for Class A shares of another Prudential mutual
fund, but you can't exchange Class A shares for Class B or Class C 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.
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 8157
PHILADELPHIA, PA 19101
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
- -------------------------------------------------------------------
34 NORTH CAROLINA SERIES [ICON] (800) 225-1852
HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE SERIES
- ------------------------------------------------
holding periods for CDSC liability.
Remember, as we explained in the section entitled "Series Distributions and
Tax Issues--If You Sell or Exchange Your Shares," exchanging shares is
considered a sale for tax purposes. Therefore, if the shares you exchange are
worth more than you paid for them, you may have to pay capital gains tax. For
additional information about exchanging shares, see the SAI, "Shareholder
Investment Account--Exchange Privilege."
If you own Class B or Class C shares and qualify to purchase Class A shares
without paying an initial sales charge, we will automatically exchange your
Class B or Class C shares which are not subject to a CDSC for Class A shares. We
make such exchanges on a quarterly basis if you qualify for this exchange
privilege. We have obtained a legal opinion that this exchange is not a "taxable
event" for federal income tax purposes. This opinion is not binding on the IRS.
FREQUENT TRADING
Frequent trading of the Series' shares in response to short-term fluctuations in
the market--also known as "market timing"--may make it very difficult to manage
the Series' investments. When market timing occurs, the Series may have to sell
portfolio securities to have the cash necessary to redeem the market timer's
shares. This can happen at a time when it is not advantageous to sell any
securities, so the Series' performance may be hurt. When large dollar amounts
are involved, market timing can also make it difficult to use long-term
investment strategies because we cannot predict how much cash the Series will
have to invest. When, in our opinion, such activity would have a disruptive
effect on portfolio management, the Fund reserves the right to refuse purchase
orders and exchanges into the Series by any person, group or commonly controlled
account. The 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 Series shares, it may require the market timer to enter into a
written agreement to follow certain procedures and limitations.
TELEPHONE REDEMPTIONS OR 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
- --------------------------------------------------------------------------------
35
HOW TO BUY, SELL AND
EXCHANGE SHARES OF THE SERIES
- ------------------------------------------------
telephone, you must call the Fund before 4:15 p.m., New York time. You will
receive a redemption or exchange 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 or through your broker.
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.
- -------------------------------------------------------------------
36 NORTH CAROLINA SERIES [ICON] (800) 225-1852
FINANCIAL HIGHLIGHTS
- -------------------------------------
The financial highlights will help you evaluate the financial performance of the
Series. The TOTAL RETURN in each chart represents the rate that a shareholder
earned on an investment in that share class of the Series, assuming reinvestment
of all dividends and other distributions. The information is for each share
class for the periods indicated.
Review each chart with the financial statements and 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.
- --------------------------------------------------------------------------------
37
FINANCIAL HIGHLIGHTS
- ------------------------------------------------
CLASS A SHARES
The financial highlights for the four fiscal years ended August 31, 2000, were
audited by PricewaterhouseCoopers LLP, independent accountants, and the
financial highlights for the fiscal year ended August 31, 1996, were audited by
other independent auditors, whose reports were unqualified.
CLASS A SHARES (FISCAL YEARS ENDED 8-31)
- --------------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE 2000 1999 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF YEAR $10.92 $11.69 $11.28 $11.06 $11.19
INCOME FROM INVESTMENT OPERATIONS:
Net investment income .52 .53 .55 .54(3) .53(3)
Net realized and unrealized gain
(loss) on investment transactions .08 (.71) .41 .38 (.01)
TOTAL FROM INVESTMENT OPERATIONS .60 (.18) .96 .92 .52
- --------------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS:
Dividends from net investment
income (.52) (.53) (.55) (.54) (.53)
Distributions in excess of net
investment income -- -- --(1) -- --
Distributions from net realized
gains (.01) (.06) -- (.16) (.12)
TOTAL DISTRIBUTIONS (.53) (.59) (.55) (.70) (.65)
NET ASSET VALUE, END OF YEAR $10.99 $10.92 $11.69 $11.28 $11.06
TOTAL RETURN(2) 5.67% (1.72)% 8.72% 8.58% 4.70%
- ---------------------------------
- --------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA 2000 1999 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------
- -----------------------------------
NET ASSETS, END OF YEAR (000) $29,822 $29,400 $30,149 $29,350 $28,089
AVERAGE NET ASSETS (000) $28,635 $30,621 $29,617 $29,055 $27,628
RATIOS TO AVERAGE NET ASSETS:
Expenses, including distribution
and service (12b-1) fees 1.15% 1.03% .84% .93%(3) 1.03%(3)
Expenses, excluding distribution
and service (12b-1) fees .90% .83% .74% .83%(3) .93%(3)
Net investment income 4.81% 4.57% 4.79% 4.87%(3) 4.78%(3)
Portfolio turnover 22% 15% 27% 35% 23%
- ---------------------------------
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 MANAGEMENT FEE WAIVER.
- -------------------------------------------------------------------
38 NORTH CAROLINA SERIES [ICON] (800) 225-1852
FINANCIAL HIGHLIGHTS
- ------------------------------------------------
CLASS B SHARES
The financial highlights for the four fiscal years ended August 31, 2000, were
audited by PricewaterhouseCoopers LLP, independent accountants, and the
financial highlights for the fiscal year ended August 31, 1996, were audited by
other independent auditors, whose reports were unqualified.
CLASS B SHARES (FISCAL YEARS ENDED 8-31)
- --------------------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE 2000 1999 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF YEAR $10.93 $11.69 $11.29 $11.06 $11.19
INCOME FROM INVESTMENT OPERATIONS:
Net investment income .49 .49 .51 .50(3) .49(3)
Net realized and unrealized gain
(loss) on investment transactions .07 (.70) .40 .39 (.01)
TOTAL FROM INVESTMENT OPERATIONS .56 (.21) .91 .89 .48
- --------------------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS:
Dividends from net investment
income (.49) (.49) (.51) (.50) (.49)
Distributions in excess of net
investment income -- -- --(1) -- --
Distributions from net realized
gains (.01) (.06) -- (.16) (.12)
TOTAL DISTRIBUTIONS (.50) (.55) (.51) (.66) (.61)
NET ASSET VALUE, END OF YEAR $10.99 $10.93 $11.69 $11.29 $11.06
TOTAL RETURN(2) 5.31% (1.93)% 8.19% 8.25% 4.28%
- ---------------------------------
- --------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA 2000 1999 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------
- -----------------------------------
NET ASSETS, END OF YEAR (000) $10,133 $16,560 $21,726 $24,952 $31,029
AVERAGE NET ASSETS (000) $12,495 $19,695 $23,460 $27,703 $35,605
RATIOS TO AVERAGE NET ASSETS:
Expenses, including distribution
and service (12b-1) fees 1.39% 1.33% 1.24% 1.33%(3) 1.43%(3)
Expenses, excluding distribution
and service (12b-1) fees .90% .83% .74% .83%(3) .93%(3)
Net investment income 4.55% 4.26% 4.39% 4.47%(3) 4.37%(3)
Portfolio turnover 22% 15% 27% 35% 23%
- ---------------------------------
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 MANAGEMENT FEE WAIVER.
- --------------------------------------------------------------------------------
39
FINANCIAL HIGHLIGHTS
- ------------------------------------------------
CLASS C SHARES
The financial highlights for the four fiscal years ended August 31, 2000, were
audited by PricewaterhouseCoopers LLP, independent accountants, and the
financial highlights for the fiscal year ended August 31, 1996, were audited by
other independent auditors, whose reports were unqualified.
CLASS C SHARES (FISCAL YEARS ENDED 8-31)
- ----------------------------------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE 2000 1999 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF YEAR $10.93 $11.69 $11.29 $11.06 $11.19
INCOME FROM INVESTMENT OPERATIONS:
Net investment income .47 .46 .48 .47(3) .46(3)
Net realized and unrealized gain
(loss) on investment transactions .07 (.70) .40 .39 (.01)
TOTAL FROM INVESTMENT OPERATIONS .54 (.24) .88 .86 .45
- ----------------------------------------------------------------------------------------------------------
LESS DISTRIBUTIONS:
Dividends from net investment
income (.47) (.46) (.48) (.47) (.46)
Distributions in excess of net
investment income -- -- --(1) -- --
Distributions from net realized
gains (.01) (.06) -- (.16) (.12)
TOTAL DISTRIBUTIONS (.48) (.52) (.48) (.63) (.58)
NET ASSET VALUE, END OF YEAR $10.99 $10.93 $11.69 $11.29 $11.06
TOTAL RETURN(2) 5.05% (2.18)% 7.92% 7.98% 4.03%
- -----------------------------------
- ----------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA 2000 1999 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------
- -----------------------------------
NET ASSETS, END OF YEAR (000) $30 $29 $30 $62 $72
AVERAGE NET ASSETS (000) $29 $30 $31 $68 $69
RATIOS TO AVERAGE NET ASSETS:
Expenses, including distribution
and service (12b-1) fees 1.64% 1.58% 1.49% 1.58%(3) 1.68%(3)
Expenses, excluding distribution
and service (12b-1) fees .90% .83% .74% .83%(3) .93%(3)
Net investment income 4.33% 4.02% 4.14% 4.22%(3) 4.14%(3)
Portfolio turnover 22% 15% 27% 35% 23%
- -----------------------------------
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 MANAGEMENT FEE WAIVER.
- -------------------------------------------------------------------
40 NORTH CAROLINA SERIES [ICON] (800) 225-1852
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- --------------------------------------------------------------------------------
41
THE PRUDENTIAL MUTUAL FUND FAMILY
- --------------------------------------------------------------------------------
Prudential offers a broad range of mutual funds designed to meet your individual
needs. For information about these funds, contact your financial adviser or
dealer or call us at (800) 225-1852. Read the prospectus carefully before you
invest or send money.
STOCK FUNDS
PRUDENTIAL EQUITY FUND, INC.
PRUDENTIAL INDEX SERIES FUND
PRUDENTIAL SMALL-CAP INDEX FUND
PRUDENTIAL STOCK INDEX FUND
THE PRUDENTIAL INVESTMENT PORTFOLIOS, INC.
PRUDENTIAL JENNISON EQUITY OPPORTUNITY FUND
PRUDENTIAL JENNISON GROWTH 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 COMPANY FUND, INC.
PRUDENTIAL TAX-MANAGED FUNDS
PRUDENTIAL TAX-MANAGED EQUITY FUND
PRUDENTIAL TAX-MANAGED SMALL-CAP FUND, INC.
PRUDENTIAL U.S. EMERGING GROWTH FUND, INC.
PRUDENTIAL VALUE 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
- -------------------------------------------------------------------
42 NORTH CAROLINA SERIES [ICON] (800) 225-1852
- --------------------------------------------------------------------------------
GLOBAL BOND FUNDS
PRUDENTIAL GLOBAL TOTAL RETURN FUND, INC.
PRUDENTIAL INTERNATIONAL BOND FUND, INC.
BOND FUNDS
TAXABLE BOND FUNDS
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 SHORT-TERM CORPORATE BOND FUND, INC.
INCOME PORTFOLIO
PRUDENTIAL TOTAL RETURN BOND FUND, INC.
TARGET FUNDS
TOTAL RETURN BOND FUND
TAX-EXEMPT BOND FUNDS
PRUDENTIAL CALIFORNIA MUNICIPAL FUND
CALIFORNIA SERIES
CALIFORNIA INCOME SERIES
PRUDENTIAL MUNICIPAL BOND FUND
HIGH INCOME SERIES
INSURED SERIES
PRUDENTIAL MUNICIPAL SERIES FUND
FLORIDA SERIES
MASSACHUSETTS SERIES
NEW JERSEY SERIES
NEW YORK SERIES
NORTH CAROLINA SERIES
OHIO SERIES
PENNSYLVANIA SERIES
PRUDENTIAL NATIONAL MUNICIPALS FUND, INC.
MONEY MARKET FUNDS
TAXABLE MONEY MARKET FUNDS
CASH ACCUMULATION TRUST
LIQUID ASSETS FUND
NATIONAL MONEY MARKET FUND
PRUDENTIAL GOVERNMENT SECURITIES TRUST
MONEY MARKET SERIES
U.S. TREASURY MONEY MARKET SERIES
PRUDENTIAL SPECIAL MONEY MARKET FUND, INC.
MONEY MARKET SERIES
PRUDENTIAL MONEYMART ASSETS, INC.
TAX-FREE MONEY MARKET FUNDS
PRUDENTIAL TAX-FREE MONEY FUND, INC.
PRUDENTIAL CALIFORNIA MUNICIPAL FUND
CALIFORNIA MONEY MARKET SERIES
PRUDENTIAL MUNICIPAL SERIES FUND
CONNECTICUT MONEY MARKET SERIES
MASSACHUSETTS MONEY MARKET SERIES
NEW JERSEY MONEY MARKET SERIES
NEW YORK MONEY MARKET SERIES
COMMAND FUNDS
COMMAND MONEY FUND
COMMAND GOVERNMENT FUND
COMMAND TAX-FREE FUND
INSTITUTIONAL MONEY MARKET FUNDS
PRUDENTIAL INSTITUTIONAL LIQUIDITY PORTFOLIO, INC.
INSTITUTIONAL MONEY MARKET SERIES
- --------------------------------------------------------------------------------
43
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- -------------------------------------------------------------------
44 NORTH CAROLINA SERIES [ICON] (800) 225-1852
APPENDIX A
- -------------------------------------
DESCRIPTION OF SECURITY RATINGS
MOODY'S INVESTORS SERVICE
BOND RATINGS
Aaa: Bonds that are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa: Bonds that are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group, they comprise what are generally known
as high-grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than the Aaa securities.
A: Bonds that are rated A possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving security
to principal and interest are considered adequate, but elements may be present
that suggest a susceptibility to impairment sometime in the future.
Baa: Bonds that are rated Baa are considered as medium grade obligations
I.E., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba: Bonds that are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate, and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B: Bonds that are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
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A-1
APPENDIX A
- ------------------------------------------------
Bonds rated within the Aa, A, Baa, Ba and B categories that Moody's believes
possess the strongest credit attributes within those categories are designated
by the symbols Aa1, A1, Baa1, Ba1 and B1.
Caa: Bonds that are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca: Bonds that are rated Ca represent obligations that are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
C: Bonds that are rated C are the lowest rated class of bonds, and issues
so rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.
SHORT-TERM DEBT RATINGS
Moody's short-term debt ratings are opinions of the ability of issuers to honor
senior financial obligations and contracts. These obligations have an original
maturity not exceeding one year, unless explicitly noted.
P-1: Issuers rated "Prime-1" or "P-1" (or supporting institutions) have a
superior ability for repayment of senior short-term debt obligations.
P-2: Issuers rated "Prime-2" or "P-2" (or supporting institutions) have a
strong ability for repayment of senior short-term debt obligations.
P-3: Issuers rated "Prime-3" or "P-3" (or supporting institutions) have an
acceptable ability for repayment of senior short-term debt obligations.
SHORT-TERM RATINGS
Moody's ratings for tax-exempt notes and other short-term loans are designated
Moody's Investment Grade (MIG). This distinction is in recognition of the
differences between short-term and long-term credit risk.
MIG 1: Loans bearing the designation MIG 1 are of the best quality. There
is present strong protection by established cash flows, superior liquidity
support or demonstrated broad-based access to the market for refinancing.
MIG 2: Loans bearing the designation MIG 2 are of high quality. Margins of
protection are ample although not so large as in the preceding group.
MIG 3: Loans bearing the designation MIG 3 are of favorable quality. All
security elements are accounted for but there is lacking the undeniable
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A-2 NORTH CAROLINA SERIES [ICON] (800) 225-1852
APPENDIX A
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strength of the preceding grades.
MIG 4: Loans bearing the designation MIG 4 are of adequate quality.
Protection commonly regarded as required of an investment security is present
and although not distinctly or predominantly speculative, there is specific
risk.
STANDARD & POOR'S RATINGS GROUP
DEBT RATINGS
AAA: Debt rated AAA has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.
AA: Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the highest rated obligations only in small degree.
A: Debt rated A has a strong capacity to pay interest and repay principal,
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher-rated categories.
BBB: Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher-rated categories.
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.
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A-3
APPENDIX A
- ------------------------------------------------
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
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A-4 NORTH CAROLINA SERIES [ICON] (800) 225-1852
APPENDIX A
- ------------------------------------------------
designations.
MUNICIPAL NOTES
A municipal note rating reflects the liquidity factors and market access risks
unique to notes. Notes maturing in three years or less will likely receive a
note rating. Notes maturing beyond three years will most likely receive a
long-term debt rating. Municipal notes are SP-1, SP-2 or SP-3. The designation
SP-1 indicates a very strong capacity to pay principal 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.
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A-5
Notes
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A-6 NORTH CAROLINA SERIES [ICON] (800) 225-1852
Notes
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A-7
Notes
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A-8 NORTH CAROLINA SERIES [ICON] (800) 225-1852
Notes
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A-9
FOR MORE INFORMATION
PLEASE READ THIS PROSPECTUS BEFORE YOU INVEST IN THE SERIES AND KEEP IT FOR
FUTURE REFERENCE. FOR INFORMATION OR SHAREHOLDER QUESTIONS CONTACT
PRUDENTIAL MUTUAL FUND SERVICES LLC
P.O. BOX 8098
PHILADELPHIA, PA 19101
(800) 225-1852
(732) 482-7555 (Calling from outside the U.S.)
Outside Brokers should contact
PRUDENTIAL INVESTMENT MANAGEMENT
SERVICES LLC
P.O. BOX 8310
PHILADELPHIA, PA 19101
(800) 778-8769
Visit Prudential's website at
http://www.prudential.com
Additional information about the Series can
be obtained without charge and can be
found in the following documents
STATEMENT OF ADDITIONAL INFORMATION (SAI)
(incorporated by reference into this prospectus)
ANNUAL REPORT
(contains a discussion of the market conditions and investment strategies that
significantly affected the Series' performance)
SEMI-ANNUAL REPORT
You can also obtain copies of Fund documents from the Securities and Exchange
Commission as follows
BY MAIL
Securities and Exchange Commission
Public Reference Section
Washington, DC 20549-0102
BY ELECTRONIC REQUEST
publicinfo@sec.gov
(The SEC charges a fee to copy
documents.)
IN PERSON
Public Reference Room in Washington, DC
(For hours of operation, call
1-202-942-8090)
VIA THE INTERNET
on the EDGAR Database at
http://www.sec.gov
CUSIP Numbers NASDAQ Symbols
Class A Shares--74435M-81-2 PRNAX
Class B Shares--74435M-82-0 PNCSX
Class C Shares--74435M-51-5 PCNCX
Investment Company Act File No. 811-4023
MF126A
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