Prudential National Municipals Fund, Inc.
(Class Z Shares)
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Prospectus dated November 23, 1998
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Prudential National Municipals Fund, Inc. (the Fund), is an open-end,
diversified management investment company whose investment objective is to
seek a high level of current income exempt from federal income taxes. In
attempting to achieve this objective, the Fund intends to invest
substantially all of its total assets in carefully selected long-term
Municipal Bonds of medium quality, i.e., obligations of issuers possessing
adequate but not outstanding capacities to service their debt. Subject to the
limits described herein, the Fund may also buy and sell financial futures for
the purpose of hedging its securities portfolio. There can be no assurance
that the Fund's investment objective will be achieved. See "How the Fund is
Managed-Investment Objective and Policies." The Fund's address is Gateway
Center Three, 100 Mulberry Street, Newark, New Jersey 07102-4077 and its
telephone number is (800) 225- 1852.
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Class Z shares are offered exclusively for sale to a limited group of
investors. Only Class Z shares are offered through this Prospectus. The Fund
also offers Class A, Class B and Class C shares at NAV without any sales
charge through the attached Prospectus (the Retail Class Prospectus) which is
a part hereof.
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This Prospectus sets forth concisely the information about the Fund that a
prospective investor should know before investing and is available at the Web
site of The Prudential Insurance Company of America
(http://www.Prudential.com). Additional information about the Fund has been
filed with the Securities and Exchange Commission (the Commission) in a
Statement of Additional Information, dated November 23, 1998, which
information is incorporated herein by reference (is legally considered a part
of this Prospectus) and is available without charge upon request to the Fund
at the address or telephone number noted above. The Commission maintains a
Web site (http://www.sec.gov) that contains the Statement of Additional
Information, material incorporated by reference, and other information
regarding the Fund.
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Investors are advised to read this Prospectus and retain it for future
reference.
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AN INVESTMENT IN THE FUND IS NOT A DEPOSIT OF ANY BANK AND IS NOT INSURED OR
GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER
GOVERNMENT AGENCY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
Class Z
Shares
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Shareholder Transaction Expenses
Maximum Sales Load Imposed on Purchases
(as a percentage of offering price)............................... None
Maximum Sales Load or Deferred Sales Load
Imposed on Reinvested Dividends................................... None
Maximum Deferred Sales Load (as a
percentage of original purchase price or
redemption proceeds, whichever is lower).......................... None
Redemption Fees..................................................... None
Exchange Fees....................................................... None
Annual Fund Operating Expenses
Class Z
(as a percentage of average net assets) Shares*
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Management Fees..................................................... .48%
12b-1 Fees.......................................................... None
Other Expenses...................................................... .15%
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Total Fund Operating Expenses....................................... .63%
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Example*
1 year 3 years 5 years 10 years
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You would pay the following expenses on a $1,000 investment, assuming (1) 5% annual return,
and (2) redemption at the end of each time period:
Class Z.................................................................................... $6 $20 $35 $79
The example should not be considered a representation of past or future
expenses. Actual expenses may be greater or less than those shown.
The purpose of this table is to assist investors in understanding the various
costs and expenses that an investor in Class Z shares will bear, whether
directly or indirectly. For more complete descriptions of the various costs
and expenses, see "How the Fund Is Managed." "Other Expenses" include
operating expenses of the Fund, such as directors' and professional fees,
registration fees, reports to shareholders, transfer agency and custodian
fees. ------* Estimated based on expenses expected to have been incurred if
Class Z shares had been in existence throughout the fiscal year ended
December 31, 1997.
FUND EXPENSES
2
The following information supplements "How the Fund is Managed-Distributor"
in the Retail Class Prospectus:
Prudential Investment Management Services LLC serves as the Distributor of
Class Z shares and incurs the expenses of distributing the Fund's Class Z
shares under a Distribution Agreement with the Fund, none of which is paid
for or reimbursed by the Fund.
The following information supplements "How the Fund Values its Shares" in
the Retail Class Prospectus:
Although the legal rights of each class of shares are substantially
identical, the different expenses borne by each class will result in
different dividends. As long as the Fund declares dividends daily, the NAV of
the Class A, Class B, Class C and Class Z shares will generally be the same.
It is expected, however, that the Fund's dividends will differ by
approximately the amount of any distribution and/or service fee expense
accrual differential among the classes.
The following information supplements "Taxes, Dividends and
Distributions-Dividends and Distributions" in the Retail Class Prospectus:
The per share dividends on Class Z shares will generally be higher than the
per share dividends on Class A, Class B or Class C shares as a result of the
fact that Class Z shares are not subject to any distribution or service fee.
The following information supplements "Shareholder Guide-How to Buy Shares
of the Fund" and "Shareholder Guide-How to Sell Your Shares" in the Retail
Class Prospectus:
Class Z shares of the Fund are currently available for purchase by the
following categories of investors:
(i) participants in any fee-based program or trust program sponsored by any
affiliate of the Distributor which includes mutual funds as investment
options and for which the Fund is an available option; (ii) current and
former Directors/Trustees of the Prudential Mutual Funds (including the
Fund); and (iii) employees of Prudential or Prudential Securities who
participate in an employer-sponsored employee saving plan.
In connection with the sale of Class Z shares, the Manager, the Distributor
or one of their affiliates may pay brokers or dealers that have entered into
agreements to act as participating or introducing brokers for the Distributor
(Dealers), financial advisers and other persons which distribute shares a
finders' fee, based on a percentage of the NAV of shares sold by such
persons.
The following information supplements "Shareholder Guide-How to Exchange
Your Shares" in the Retail Class Prospectus:
Class Z shareholders of the Fund may exchange their Class Z shares for
Class Z shares of other Prudential Mutual Funds on the basis of relative net
asset value. Shareholders who qualify to purchase Class Z shares (other than
participants in any fee-based program) will have their Class B and Class C
shares which are not subject to contingent deferred sales charges and their
Class A shares exchanged for Class Z shares on a quarterly basis.
Participants in any fee-based program for which the Fund is an available
option will have their Class A shares, if any, exchanged for Class Z shares
when they elect to have those assets become a part of the fee-based program.
Upon leaving the program (whether voluntary or not), such Class Z shares
(and, to the extent provided for in the program, Class Z shares acquired
through participation in the program) will be exchanged for Class A shares at
the net asset value. See "Shareholder Guide-How to Exchange Your
Shares-Special Exchange Privileges."
The information above also supplements the information under "Fund
Highlights" in the Retail Class Prospectus as appropriate.
3
No dealer, sales representative or any other person has been authorized to
give any information or to make any representations, other than those
contained in this Prospectus, in connection with the offer contained herein,
and, if given or made, such other information or representations must not be
relied upon as having been authorized by the Fund or the Distributor. This
Prospectus does not constitute an offer by the Fund or by the Distributor to
sell or a solicitation of any offer to buy any of the securities offered
hereby in any jurisdiction to any person to whom it is unlawful to make such
offer in such jurisdiction.
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TABLE OF CONTENTS
Page
----
FUND HIGHLIGHTS............................. 2
What are the Fund's Risk Factors and Special
Characteristics?............................ 2
FUND EXPENSES............................... 4
FINANCIAL HIGHLIGHTS........................ 5
HOW THE FUND INVESTS........................ 8
Investment Objective and Policies........... 8
Hedging and Return Enhancement Strategies... 10
Other Investments and Policies.............. 16
Portfolio Management Techniques............. 17
Investment Restrictions..................... 18
HOW THE FUND IS MANAGED..................... 18
Manager..................................... 18
Distributor................................. 19
Fee Waivers................................. 21
Portfolio Transactions...................... 21
Custodian and Transfer and
Dividend Disbursing Agent................... 21
Year 2000................................... 21
HOW THE FUND VALUES ITS SHARES.............. 22
HOW THE FUND CALCULATES PERFORMANCE......... 22
TAXES, DIVIDENDS AND DISTRIBUTIONS.......... 23
GENERAL INFORMATION......................... 25
Description of Common Stock................. 25
Additional Information...................... 26
SHAREHOLDER GUIDE........................... 26
How to Buy Shares of the Fund............... 26
Alternative Purchase Plan................... 27
How to Sell Your Shares..................... 30
Conversion Feature-Class B Shares........... 33
How to Exchange Your Shares................. 34
Shareholder Services........................ 36
THE PRUDENTIAL MUTUAL FUND FAMILY........... A-1
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MF104A
CUSIP No.: 743918 40 1
Class Z:
Prudential National Municipals Fund, Inc.
Supplement Dated November 23, 1998 To
Retail Class Prospectus Dated March 4, 1998
The following information should be added to the cover page of the
Prospectus:
The date of the Prospectus is hereby changed to November 23, 1998.
AN INVESTMENT IN THE FUND IS NOT A DEPOSIT OF ANY BANK AND IS NOT INSURED OR
GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT
AGENCY.
The following information supplements "Financial Highlights" in the
Prospectus:
Financial Highlights
(for a share outstanding throughout the period indicated)
(Class A, Class B and Class C shares)
The following financial highlights for Class A, Class B and Class C shares
are unaudited. This information should be read in conjunction with the
financial statements and the notes thereto, which appear in the Statement of
Additional Information. The financial highlights contain selected data for a
Class A, Class B and Class C share of common stock, respectively,
outstanding, total return, ratios to average net assets and other
supplemental data for the period indicated. The information has been
determined based on data contained in the financial statements.
Six-Months Ended
June 30, 1998 (unaudited) (c)
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Class A Class B Class C
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PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period..................................................... $16.12 $16.16 $16.16
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Income from Investment operations
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Net investment income.................................................................... .40 .36 .34
Net realized and unrealized gain (loss) on investment and foreign currency transactions.. (.05) (.05) (.05)
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Total from investment operations......................................................... .35 .31 .29
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Less Distributions
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Dividends from net investment income..................................................... (.40) (.36) (.34)
Distributions in excess of net investment income......................................... - - -
Tax return of capital distributions...................................................... - - -
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Total distributions...................................................................... (.40) (.36) (.34)
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Net asset Value, end of period........................................................... $16.07 $16.11 $ 16.11
========= ========= ========
TOTAL RETURN(a):......................................................................... 2.21% 2.00% 1.88%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000).......................................................... $480,443 $128,212 $1,659
Average net assets (000)................................................................. $485,960 $138,886 $1,168
Ratios to average net assets (b):
Expenses, including distribution fees.................................................... .73% 1.13% 1.38%
Expenses, excluding distribution fees.................................................... .63% .63% .63%
Net investment income.................................................................... 4.96% 4.56% 4.31%
Portfolio turnover rate.................................................................. 14% 14% 14%
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(a) Total return does not consider the effects of sales loads.Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each period reported and includes reinvestment of dividends and
distributions. Total returns for periods of less than a full year are not
annualized.
(b) Annualized.
(c) Class Z shares did not exist at June 30, 1998.
The following information supplements "Fund Expenses" and "Shareholder
Guide":
New Pricing Structure for Class C Shares
Effective on November 2, 1998, Class C shares of the Prudential Mutual
Funds will be sold with a 1% initial sales charge and will be subject to a
contingent deferred sales charge of 1% of the lesser of the amount invested
or the redemption proceeds if redeemed within 18 months of purchase. In
connection with the sale of Class C shares, the Distributor will pay dealers,
financial advisers and other persons who sell Class C shares a sales
commission of up to 2% of the purchase price at the time of sale.
Class C shares issued before November 2, 1998 will not be affected by the
new pricing structure described above and will continue to be subject to a
contingent deferred sales charge of 1% on redemptions within one year of
purchase.
Waiver of Initial Sales Charge-Class A Shares
The paragraph under "Alternative Purchase Plan-Class A Shares-Reduction and
Waiver of Initial Sales Charges-Benefit Plans" is amended to read in its
entirety as follows:
Benefit Plans. Class A shares may be purchased at NAV, without payment of
an initial sales charge, by pension, profit-sharing or other employee benefit
plans qualified under Section 401 of the Internal Revenue Code, deferred
compensation and annuity plans under Sections 457 and 403 (b)(7) of the
Internal Revenue Code and non-qualified deferred compensation plans that are
sponsored by any employer that has a tax qualified benefit plan with
Prudential (collectively, Benefit Plans), provided that the Benefit Plan has
existing assets of at least $1 million invested in shares of Prudential
Mutual Funds (excluding money market funds other than those acquired pursuant
to the exchange privilege) or 250 eligible employees or participants. In the
case of Benefit Plans whose accounts are held directly with the Transfer
Agent or Prudential Securities and for which the Transfer Agent or Prudential
Securities does individual account recordkeeping (Direct Account Benefit
Plans) and Benefit Plans sponsored by Prudential, Prudential Securities or
its subsidiaries (Prudential Securities or Subsidiary Prototype Benefit
Plans), Class A shares may be purchased at NAV by participants who are
repaying loans made from such plans to the participant.
Waiver of Initial Sales Charge-Class C Shares
Benefit Plans. Class C shares may be purchased at NAV, without payment of
an initial sales charge, by Benefit Plans (as defined above). In the case of
Benefit Plans whose accounts are held directly with the Transfer Agent or
Prudential Securities and for which the Transfer Agent or Prudential
Securities does individual account recordkeeping (Direct Account Benefit
Plans) and Benefit Plans sponsored by Prudential, Prudential Securities or
its subsidiaries (Prudential Securities or Subsidiary Prototype Benefit
Plans), Class C shares may be purchased at NAV by participants who are
repaying the loans made from such plans to the participant.
Prudential Retirement Plans. The initial sales charge will be waived with
respect to purchases of Class C shares by qualified and non-qualified
retirement and deferred compensation plans participating in the PruArray Plan
and other plans for which Prudential provides administrative or recordkeeping
services.
Investments of Redemption Proceeds from Other Investment Companies.
Investors may purchase Class C shares at NAV, without the initial sales
charge, with the proceeds from the redemption of shares of any unaffiliated
registered investment company which were not held through an account with any
Prudential affiliate. 2
Such purchases must be made within 60 days of the redemption. Investors
eligible for this waiver include: (i) investors purchasing shares through an
account at Prudential Securities Incorporated; (ii) investors purchasing
shares through an ADVANTAGE Account or an Investor Account with Pruco
Securities Corporation; and (iii) investors purchasing shares through other
Dealers. This waiver is not available to investors who purchase shares
directly from the Transfer Agent. You must notify the Transfer Agent directly
or through your Dealer if you are entitled to this waiver and provide the
Transfer Agent with such supporting documents as it may deem appropriate.
Waiver of Class C Contingent Deferred Sales Charges
Prudential Retirement Plans. The CDSC will be waived on redemptions from
qualified and non-qualified retirement and deferred compensation plans that
participate in the PruArray Program and other plans for which Prudential
provides administrative or recordkeeping services. The CDSC will also be
waived on redemptions from Benefit Plans sponsored by Prudential and its
affiliates to the extent that the redemption proceeds are invested in The
Guaranteed Investment Account, a group annuity insurance product issued by
Prudential, the Guaranteed Insulated Separate Account, a separate account
offered by Prudential, and units of The Stable Value Fund, an unaffiliated
bank collective fund.
Other Benefit Plans. The CDSC will be waived on redemptions from Benefit
Plans holding shares through a Dealer not affiliated with Prudential and for
whom the Dealer provides administrative or recordkeeping services.
Minimum Initial Investment for Class C Shares
The minimum initial investment for Class C shares has been lowered to
$2,500. The minimum initial investment for purchases made through the
Automatic Investment Plan is $50.
Expense Table - Example
The following replaces the information on Class C shares under "Fund
Expenses - Example."
Example
You would pay the following expenses on a $1,000 investment to Class C
shares, assuming (1) 5% annual return and (2) redemption at the end of each
time period:
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
Class C.. $34 $53 $85 $174
You would pay the following expenses on the same investment assuming no
redemption:
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
Class C.. $24 $53 $85 $174
Shareholder Guide
The following replaces information under "Shareholder Guide - Alternative
Purchase Plan".
The following is provided to assist you in determining which method of
purchase best suits your individual circumstances and is based on current
fees and expenses being charged to the Funds.
3
If you intend to hold your investment in a Fund for less than 3 years and
do not qualify for a reduced sales charge on Class A shares, since Class A
shares are subject to a maximum initial sales charge of 3% and Class B shares
are subject to a CDSC of 5% which declines to zero over a 6 year period, you
should consider purchasing Class C shares over either Class A or Class B
shares.
If you intend to hold your investment for more than 3 years, but less than
4 years, or for more than 5 years, but less than 6 years, you should consider
purchasing Class A shares because the maximum 3% initial sales charge plus
the cumulative annual distribution-related fee on Class A shares would be
lower than: (i) the contingent deferred sales charge plus the cumulative
annual distribution-related fee on Class B shares; and (ii) the 1% initial
sales charge plus the cumulative annual distribution-related fee on Class C
shares.
If you intend to hold your investment for more than 4 years, but less than
5 years, you may consider purchasing Class A or Class B shares because: (i)
the maximum 3% initial sales charge plus the cumulative annual
distribution-related fee on Class A shares and (ii) the contingent deferred
sales charge plus the cumulative annual distribution-related fee on Class B
shares would be lower than the 1% initial sales charge plus the cumulative
annual distribution-related fee on Class C shares.
If you intend to hold your investment for more than 6 years and do not
qualify for a reduced sales charge on Class A shares, since Class B shares
convert to Class A shares approximately 7 years after purchase and because
all of your money would be invested initially in the case of Class B shares,
you should consider purchasing Class B shares over either Class A or Class C
shares.
If you qualify for a reduced sales charge on Class A shares, it may be more
advantageous for you to purchase Class A shares over either Class B or Class
C shares regardless of how long you intend to hold your investment. However,
unlike Class B shares, you would not have all of your money invested
initially because the sales charge on Class A shares is deducted at the time
of purchase.
If you do not qualify for a reduced sales charge on Class A shares and you
purchase Class C shares, you would have to hold your investment for more than
3 years for the 1% initial sales charge plus the higher cumulative annual
distribution-related fee on the Class C shares to exceed the initial sales
charge plus cumulative annual distribution-related fees on Class A shares.
This does not take into account the time value of money, which further
reduces the impact of the higher Class C distribution-related fee on the
investment fluctuations in NAV, the effect of the return on the investment
over this period of time or redemptions when the CDSC is applicable.
The following information supplements "How the Fund is Managed-Distributor"
in the Prospectus:
Effective July 1, 1998, Prudential Investment Management Services LLC (PIMS),
Gateway Center Three, 100 Mulberry Street, Newark, New Jersey 07102-4077, was
appointed the exclusive Distributor of Fund shares. Shares continue to be
offered through Prudential Securities Incorporated, Pruco Securities
Corporation and other brokers and dealers. PIMS is a wholly owned subsidiary of
The Prudential Insurance Company of America and an affiliate of Prudential
Securities Incorporated and Pruco Securities Corporation. All other
arrangements with respect to the distribution of Fund shares described in the
Prospectus remain unchanged.
4
The following information supplements "General Information-Description of
Common Stock" in the Prospectus:
The Fund is authorized to offer 1 billion shares of common stock, $.01 par
value per share, divided into four classes of shares, designated Class A, Class
B, Class C and Class Z shares, each of which consists of 250 million authorized
shares. Each class of common stock represents an interest in the same assets of
the Fund and is identical in all respects except that (i) each class is subject
to different sales charges and distribution and/or service fees (except for
Class Z shares, which are not subject to any sales charges or distribution
and/or service fees), which may affect performance, (ii) each class has
exclusive voting rights on any matter submitted to shareholders that relates
solely to its arrangement and has separate voting rights on any matter
submitted to shareholders in which the interests of one class differ from the
interests of any other class, (iii) each class has a different exchange
privilege, (iv) only Class B shares have a conversion feature and (v) Class Z
shares are offered exclusively for sale to a limited group of investors. Since
Class B and Class C shares generally bear higher distribution expenses than
Class A shares, the liquidation proceeds to shareholders of those classes are
likely to be lower than to Class A shareholders and to Class Z shareholders,
whose shares are not subject to any distribution and/or service fee. In
accordance with the Fund's Articles of Incorporation, the Board of Directors
may authorize the creation of additional series and classes within such series,
with such preferences, privileges, limitations and voting and dividend rights
as the Directors may determine. Currently, the Fund is offering four classes,
designated Class A, Class B, Class C and Class Z shares.
The following information supplements "Shareholder Guide-Shareholder
Services" in the Prospectus:
The PruTector Program-Optional Group Term Life Insurance. Prudential makes
available optional group term life insurance coverage to purchasers of shares
of certain Prudential Mutual Funds which are held in an eligible brokerage
account. This insurance protects the value of your mutual fund investment for
your beneficiaries against market downturns. The insurance benefit is based on
the difference at the time of the insured's death between the "protected value"
and the then current market value of the shares. This coverage is not available
in all states and is subject to various restrictions and limitations. For more
complete information about this program, including charges and expenses, please
contact your Prudential Representative.
The information above also supplements the information under "Fund
Highlights" in the Prospectus as appropriate.
5
PRUDENTIAL NATIONAL MUNICIPALS FUND, INC.
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PROSPECTUS DATED MARCH 4, 1998
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Prudential National Municipals Fund, Inc. (the Fund), is an open-end,
diversified management investment company whose investment objective is to seek
a high level of current income exempt from federal income taxes. In attempting
to achieve this objective, the Fund intends to invest substantially all of its
total assets in carefully selected long-term Municipal Bonds of medium quality,
I.E., obligations of issuers possessing adequate but not outstanding capacities
to service their debt. Subject to the limits described herein, the Fund may also
buy and sell financial futures for the purpose of hedging its securities
portfolio. There can be no assurance that the Fund's investment objective will
be achieved. See "How the Fund is Managed--Investment Objective and Policies."
The Fund's address is Gateway Center Three, 100 Mulberry Street, Newark, New
Jersey 07102-4077 and its telephone number is (800) 225- 1852.
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This Prospectus sets forth concisely the information about the Fund that a
prospective investor should know before investing and is available at the Web
site of The Prudential Insurance Company of America (http://www.Prudential.com).
Additional information about the Fund has been filed with the Securities and
Exchange Commission (the Commission) in a Statement of Additional Information,
dated March 4, 1998, which information is incorporated herein by reference (is
legally considered a part of this Prospectus) and is available without charge
upon request to the Fund at the address or telephone number noted above. The
Commission maintains a Web site (http://www.sec.gov) that contains the Statement
of Additional Information, material incorporated by reference, and other
information regarding the Fund.
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INVESTORS ARE ADVISED TO READ THIS PROSPECTUS AND RETAIN IT FOR FUTURE
REFERENCE.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
FUND HIGHLIGHTS
The following summary is intended to highlight certain information
contained in this Prospectus and is qualified in its entirety by the more
detailed information appearing elsewhere herein.
WHAT IS PRUDENTIAL NATIONAL MUNICIPALS FUND, INC.?
Prudential National Municipals Fund, Inc. is a mutual fund. A mutual fund
pools the resources of investors by selling its shares to the public and
investing the proceeds of such sale in a portfolio of securities designed to
achieve its investment objective. Technically, the Fund is an open-end,
diversified management investment company.
WHAT IS THE FUND'S INVESTMENT OBJECTIVE?
The investment objective of the Fund is to seek a high level of current
income exempt from federal income taxes. In attempting to achieve this
objective, under normal circumstances, the Fund intends to invest substantially
all, and in any event at least 80%, of its total assets in Municipal Bonds and
Municipal Notes. There can be no assurance that the Fund's objective will be
achieved. See "How the Fund Invests--Investment Objective and Policies" at
page 8.
WHAT ARE THE FUND'S RISK FACTORS AND SPECIAL CHARACTERISTICS?
The Fund's portfolio will consist primarily of carefully selected long-term
Municipal Bonds of medium quality. While the Fund's investment adviser will not
be limited by the ratings assigned by the rating services, the Municipal Bonds
in which the Fund's portfolio will be principally invested will be rated A and
Baa by Moody's Investors Service (Moody's) and A and BBB by Standard & Poor's
Ratings Group (S&P) or comparably rated by any other Nationally Recognized
Statistical Rating Organization (NRSRO) or, if not rated, will be, in the
judgment of the investment adviser, of substantially comparable quality. See
"How the Fund Invests--Investment Objective and Policies" at page 8. The Fund
may also engage in various hedging and return enhancement strategies, including
using derivatives, which may be considered speculative and may result in higher
risks and costs to the Fund. See "How the Fund Invests--Hedging and Return
Enhancement Strategies" at page 10. As with an investment in any Mutual Fund, an
investment in this Fund can decrease in value and you can lose money.
WHO MANAGES THE FUND?
Prudential Investments Fund Management LLC (PIFM or the Manager) is the
Manager of the Fund and is compensated for its services at an annual rate of .50
of 1% of the Fund's average daily net assets up to and including $250 million,
.475 of 1% of the next $250 million, .45 of 1% of the next $500 million, .425 of
1% of the next $250 million, .40 of 1% of the next $250 million and .375 of 1%
of the Fund's average daily net assets in excess of $1.5 billion. As of January
31, 1998, PIFM served as manager or administrator to 64 investment companies,
including 42 mutual funds, with aggregate assets of approximately $63 billion.
The Prudential Investment Corporation (PIC), which does business under the name
of Prudential Investments (PI, the Subadviser or the investment adviser),
furnishes investment advisory services in connection with the management of the
Fund under a Subadvisory Agreement with PIFM. See "How the Fund is
Managed--Manager" at page 18.
WHO DISTRIBUTES THE FUND'S SHARES?
Prudential Securities Incorporated (Prudential Securities or the
Distributor), a major securities underwriter and securities and commodities
broker, acts as the Distributor of the Fund's shares. The Distributor is paid an
annual distribution and service fee which is currently being charged at the rate
of .10 of 1% of the average daily net assets of the Class A shares, at the rate
of .50 of 1% of the average daily net assets of the Class B shares and which is
currently being charged at the rate of .75 of 1% of the average daily net assets
of the Class C shares. See "How the Fund is Managed--Distributor" at page 19.
WHAT IS THE MINIMUM INVESTMENT?
The minimum initial investment is $1,000 for Class A and Class B shares and
$5,000 for Class C shares. The minimum subsequent investment is $100. There is
no minimum investment requirement for certain employee savings plans or
custodial accounts for the benefit of minors. For purchases made through the
Automatic Savings Accumulation Plan, the minimum initial and subsequent
investment is $50. See "Shareholder Guide--How to Buy Shares of the Fund" at
page 26 and "Shareholder Guide--Shareholder Services" at page 36.
HOW DO I PURCHASE SHARES?
You may purchase shares of the Fund through Prudential Securities, Pruco
Securities Corporation (Prusec) or directly from the Fund, through its transfer
agent, Prudential Mutual Fund Services LLC (PMFS or the Transfer Agent), at the
net asset value per share (NAV) next determined after receipt of your purchase
order by the Transfer Agent or Prudential Securities plus a sales charge which
may be imposed either (i) at the time of purchase (Class A shares) or (ii) on a
deferred basis (Class B or Class C shares). See "How the Fund Values its Shares"
at page 22 and "Shareholder Guide--How to Buy Shares of the Fund" at page 26.
WHAT ARE MY PURCHASE ALTERNATIVES?
The Fund offers three classes of shares:
- - Class A Shares: Sold with an initial sales charge of up to 3% of the
offering price.
- - Class B Shares: Sold without an initial sales charge but are subject to a
contingent deferred sales charge or CDSC (declining from 5%
to zero of the lower of the amount invested or the
redemption proceeds) which will be imposed on certain
redemptions made within six years of purchase. Although
Class B shares are subject to higher ongoing
distribution-related expenses than Class A shares, Class B
shares will automatically convert to Class A shares (which
are subject to lower ongoing distribution-related expenses)
approximately seven years after purchase.
- - Class C Shares: Sold without an initial sales charge and, for one year after
purchase, are subject to a 1% CDSC on redemptions. Like
Class B shares, Class C shares are subject to higher ongoing
distribution-related expenses than Class A shares but,
unlike Class B Shares, Class C Shares do not convert to
another class.
See "Shareholder Guide--Alternative Purchase Plan" at page 27.
HOW DO I SELL MY SHARES?
You may redeem shares of the Fund at any time at the NAV next determined
after Prudential Securities or the Transfer Agent receives your sell order.
However, the proceeds of redemptions of Class B and Class C shares may be
subject to a CDSC. See "Shareholder Guide--How to Sell Your Shares" at page 30.
HOW ARE DIVIDENDS AND DISTRIBUTIONS PAID?
The Fund expects to declare daily and pay monthly dividends of net
investment income and make distributions of net capital gains, if any, at least
annually. Dividends and distributions will be automatically reinvested in
additional shares of the Fund at NAV without a sales charge unless you request
that they be paid to you in cash. See "Taxes, Dividends and Distributions" at
page 23.
2
FUND EXPENSES
CLASS A CLASS B CLASS C
SHARES SHARES SHARES
------ ------ ------
SHAREHOLDER TRANSACTION EXPENSES+
Maximum Sales Load Imposed on Purchases
(as a percentage of offering price) . . . . . . . . 3% None None
Maximum Sales Load or Deferred Sales Load Imposed on
Reinvested Dividends . . . . . . . . . . . . . . . . None None None
Maximum Deferred Sales Load (as a percentage of original
purchase price or redemption proceeds, whichever is
lower) . . . . . . . . . . . . . . . . . . . . . . . None 5% during the first year, 1% on redemptions made
decreasing by 1% annually within one year of
to 1% in the fifth and purchase
sixth years and 0% the
seventh year*
Redemption Fees . . . . . . . . . . . . . . . . . . . . . None None None
Exchange Fees . . . . . . . . . . . . . . . . . . . . . . None None None
ANNUAL FUND OPERATING EXPENSES**
(as a percentage of average net assets) CLASS A CLASS B CLASS C
SHARES SHARES SHARES
------ ------ ------
Management Fees . . . . . . . . . . . . . . . . . . .48% .48% .48%
12b-1 Fees (After Reduction) . . . . . . . . . . . . .10%++ .50% .75++
Other Expenses . . . . . . . . . . . . . . . . . . . .15% .15% .15%
------ ------ ------
Total Fund Operating Expenses (After Reduction). . . .73% 1.13% 1.38%
------ ------ ------
------ ------ ------
EXAMPLE
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
You would pay the following expenses on a $1,000 investment, assuming (1) 5% annual return,
and (2) redemption at the end of each time period:
Class A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $37 $53 $69 $118
Class B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $62 $66 $72 $121
Class C . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $24 $44 $76 $166
You would pay the following expenses on the same investment assuming no redemption:
Class A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $37 $53 $69 $118
Class B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $12 $36 $62 $121
Class C . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $14 $44 $76 $166
The above example is based on data for the Fund's fiscal year ended
December 31, 1997. THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF
PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE
SHOWN.
The purpose of this table is to assist investors in understanding the various
costs and expenses that an investor in the Fund will bear, whether directly or
indirectly. For more complete descriptions of the various costs and expenses,
see "How the Fund Is Managed." "Other Expenses" include operating expenses of
the Fund, such as directors' and professional fees, registration fees, reports
to shareholders, transfer agency and custodian fees.
- ---------------
* Class B shares will automatically convert to Class A shares approximately
seven years after purchase. See "Shareholder Guide--Conversion
Feature--Class B Shares."
** The expense information in the table has been restated to reflect current
fees. Effective September 1, 1997, PIFM eliminated its management fee
waiver (.05 of 1%). See "How the Fund is Managed--Manager--Fee Waivers."
+ Pursuant to rules of the National Association of Securities Dealers, Inc.,
the aggregate initial sales charges, deferred sales charges and asset-based
sales charges on shares of the Fund may not exceed 6.25% of the total gross
sales, subject to certain exclusions. This 6.25% limitation is imposed on
each class of the Fund rather than on a per shareholder basis. Therefore,
long-term shareholders of the Fund may pay more in total sales charges than
the economic equivalent of 6.25% of such shareholders' investment in such
shares. See "How the Fund is Managed--Distributor."
++ Although the Class A and Class C Distribution and Service Plans provide
that the Fund may pay a distribution fee of up to .30 of 1% per annum and
1% per annum of the average daily net assets of the Class A and Class C
shares, respectively, the Distributor has agreed to limit its distribution
fees with respect to Class A and Class C shares of the Fund to no more than
.10 of 1% and .75 of 1% of the average daily net asset value of the Class A
and Class C shares, respectively, for the year ending December 31, 1998.
Total operating expenses (before management fee waiver) and without such
limitations would be .93% and 1.63% for Class A and Class C shares,
respectively. See "How the Fund is Managed--Distributor."
3
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH OF THE PERIODS INDICATED)
(CLASS A SHARES)
The following financial highlights with respect to each of the five years
in the period ended December 31, 1997 have been audited by Price Waterhouse LLP,
independent accountants, whose report thereon was unqualified. This information
should be read in conjunction with the financial statements and notes thereto,
which appear in the Statement of Additional Information. The following financial
highlights contain selected data for a Class A share of common stock
outstanding, total return, ratios to average net assets and other supplemental
data for each of the periods indicated. The information is based on data
contained in the financial statements. Further performance information is
contained in the annual report, which may be obtained without charge. See
"Shareholder Guide--Shareholder Services--Reports to Shareholders."
JANUARY 22,
1990(b)
THROUGH
YEAR ENDED DECEMBER
DECEMBER 31, 31, 1990
------------ --------
1997 1996 1995 1994 1993 1992 1991
---- ---- ---- ---- ---- ---- ----
PER SHARE OPERATING
PERFORMANCE
Net asset value, beginning of period..... $ 15.56 $ 15.98 $ 14.42 $ 16.30 $ 15.94 $ 16.00 $ 15.09 $ 14.98
------- ------- ------- ------- ------- ------- ------- -------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income.................... .81(d) .82(d) .81(d) .81 .90 .94 .97 .90
Net realized and unrealized gain (loss)
on investment transactions............. .67 (.42) 1.57 (1.78) 1.05 .43 .91 .11
------- ------- ------- ------- ------- ------- ------- -------
Total from investment operations....... 1.48 .40 2.38 (.97) 1.95 1.37 1.88 1.01
------- ------- ------- ------- ------- ------- ------- -------
LESS DISTRIBUTIONS:
Dividends from net investment income..... (.81) (.82) (.81) (.81) (.90) (.94) (.97) (.90)
Distributions in excess of net
investment income...................... (.01) --(e) (.01) -- -- 7 -- --
Distributions from net realized gains.... (.10) -- -- (.10) (.69) (.49) -- --
------- ------- ------- ------- ------- ------- ------- -------
Total distributions.................... (.92) (.82) (.82) (.91) (1.59) (1.43) (.97) (.90)
------- ------- ------- ------- ------- ------- ------- -------
Net asset value, end of period........... $ 16.12 $ 15.56 $ 15.98 $ 14.42 $ 16.30 $ 15.94 $ 16.00 $ 15.09
------- ------- ------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- ------- ------- -------
TOTAL RETURN(a).......................... 9.80% 2.66% 16.91% (6.04)% 12.60% 8.88% 12.94% 6.88%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000).......... $ 493,178 $502,739 $ 538,145 $12,721 $ 14,167 $ 7,700 $ 3,819 $ 1,846
Average net assets (000)................. $ 491,279 $508,159 $ 446,350 $14,116 $11,786 $5,401 $ 2,697 $1,161
Ratios to average net assets:
Expenses, including distribution fees.. .70%(d) .68%(d) .75%(d) .77% .69% .72% .75% .75%(c)
Expenses, excluding distribution fees.. .60%(d) .58%(d) .65%(d) .67% .59% .62% .65% .65%(c)
Net investment income.................. 5.15%(d) 5.31%(d) 5.34%(d) 5.38% 5.49% 5.79% 6.27% 6.43%(c)
Portfolio turnover rate.................. 38% 46% 98% 120% 82% 114% 59% 110%
- ---------------
(a) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each period reported and includes reinvestment of dividends and
distributions. Total returns for periods of less than a full year are not
annualized.
(b) Commencement of offering of Class A shares.
(c) Annualized.
(d) Net of management fee waiver.
(e) Less than $.005 per share.
4
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH OF THE YEARS INDICATED)
(CLASS B SHARES)
The following financial highlights with respect to each of the five years
in the period ended December 31, 1997 have been audited by Price Waterhouse LLP,
independent accountants, whose report thereon was unqualified. This information
should be read in conjunction with the financial statements and notes thereto,
which appear in the Statement of Additional Information. The following financial
highlights contain selected data for a Class B share of common stock
outstanding, total return, ratios to average net assets and other supplemental
data for each of the years indicated. The information is based on data contained
in the financial statements. Further performance information is contained in the
annual report, which may be obtained without charge. See "Shareholder
Guide--Shareholder Services--Reports to Shareholders."
YEAR ENDED DECEMBER 31,
-----------------------
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988(b)
---- ---- ---- ---- ---- ---- ---- ---- ---- -------
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning
of year.................. $ 15.60 $ 16.02 $ 14.45 $ 16.33 $ 15.97 $ 16.02 $ 15.11 $ 15.15 $ 15.04 $ 14.57
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
INCOME FROM INVESTMENT
OPERATIONS:
Net investment income...... .75(c) .76(c) .76(c) .75 .84 .88 .91 .90 .96 1.03
Net realized and
unrealized gain
(loss) on investment
transactions........... .67 (.42) 1.58 (1.78) 1.05 .44 .91 (.04) .11 .47
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total from investment
operations............. 1.42 .34 2.34 (1.03) 1.89 1.32 1.82 .86 1.07 1.50
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
LESS DISTRIBUTIONS:
Dividends from net
investment income........ (.75) (.76) (.76) (.75) (.84) (.88) (.91) (.90) (.96) (1.03)
Distributions in excess of
net investment income.... (.01) --(d) (.01) -- -- 7 -- -- -- --
Distributions from net
realized gains........... (.10) -- -- (.10) (.69) (.49) -- -- -- --
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total distributions...... (.86) (.76) (.77) (.85) (1.53) (1.37) (.91) (.90) (.96) (1.03)
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Net asset value,
end of year.............. $ 16.16 $ 15.60 $ 16.02 $ 14.45 $ 16.33 $ 15.97 $ 16.02 $ 15.11 $ 15.15 $ 15.04
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
TOTAL RETURN(a)............ 9.35% 2.26% 16.49% (6.39)% 12.15% 8.50% 12.42% 5.96% 7.43% 10.49%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of
year (000)............... $ 141,528 $ 168,185 $222,865 $672,272 $848,299 $828,702 $874,338 $882,212 $1,033,173 $1,066,159
Average net assets
(000).................... $ 151,938 $ 193,312 $252,313 $751,623 $854,919 $829,830 $862,249 $940,215 $1,027,726 $1,081,122
Ratios to average net
assets:
Expenses, including
distribution fees...... 1.10%(c) 1.08%(c) 1.15%(c) 1.17% 1.09% 1.12% 1.15% 1.13% 1.01% 1.02%
Expenses, excluding
distribution fees...... .60%(c) .58%(c) .65%(c) .67% .59% .62% .65% .64% .66% .66%
Net investment income.... 4.75%(c) 4.91%(c) 4.96%(c) 4.96% 5.09% 5.39% 5.87% 6.03% 6.45% 6.86%
Portfolio turnover rate.... 38% 46% 98% 120% 82% 114% 59% 110% 198% 152%
(a) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each year reported and includes reinvestment of dividends and
distributions.
(b) On May 2, 1988, Prudential Mutual Fund Management, Inc. succeeded The
Prudential Insurance Company of America as investment adviser and since
then has acted as Manager of the Fund. See "Manager" in the Statement of
Additional Information.
(c) Net of management fee waiver.
(d) Less than $.005 per share.
5
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH OF THE PERIODS INDICATED)
(CLASS C SHARES)
The following financial highlights have been audited by Price Waterhouse
LLP, independent accountants, whose report thereon was unqualified. This
information should be read in conjunction with the financial statements and
notes thereto, which appear in the Statement of Additional Information. The
following financial highlights contain selected data for a Class C share of
common stock outstanding, total return, ratios to average net assets and other
supplemental data for the period indicated. The information is based on data
contained in the financial statements. Further performance information is
contained in the annual report, which may be obtained without charge. See
"Shareholder Guide--Shareholder Services--Reports to Shareholders."
AUGUST 1,
1994(b)
THROUGH
DECEMBER 31,
YEAR ENDED DECEMBER 31, 1994
----------------------- ----
1997 1996 1995
---- ---- ----
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period . . . . . . . . . . . . $15.60 $16.02 $14.44 $15.13
------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income . . . . . . . . . . . . . . . . . . . . .71(d) .72(d) .72(d) .29
Net realized and unrealized gain (loss) on
investment transactions . . . . . . . . . . . . . . . . . . .67 (.42) 1.59 (.69)
------ ------ ------ ------
Total from investment operations . . . . . . . . . . . . . 1.38 .30 2.31 (.40)
LESS DISTRIBUTIONS:
Dividends from net investment income . . . . . . . . . . . . (.71) (.72) (.72) (.29)
Distributions in excess of net investment income . . . . . . (.01) -- (e) (.01) --
Distributions from net realized gains . . . . . . . . . . . . (.10) -- -- --
------ ------ ------ ------
Total distributions . . . . . . . . . . . . . . . . . . . . (.82) (.72) (.73) (.29)
------ ------ ------ ------
Net asset value, end of period . . . . . . . . . . . . . . . $16.16 $15.60 $16.02 $14.44
------ ------ ------ ------
------ ------ ------ ------
TOTAL RETURN(a) . . . . . . . . . . . . . . . . . . . . . . . 9.08% 2.01% 16.22% (2.63)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000) . . . . . . . . . . . . . . . $ 825 $ 772 $ 403 $ 141
Average net assets (000) . . . . . . . . . . . . . . . . . . $ 758 $ 674 $ 247 $ 103
Ratios to average net assets:
Expenses, including distribution fees . . . . . . . . . . . 1.35%(d) 1.33%(d) 1.40%(d) 1.51%(c)
Expenses, excluding distribution fees . . . . . . . . . . . .60%(d) .58%(d) .65%(d) .76%(c)
Net investment income . . . . . . . . . . . . . . . . . . . 4.50%(d) 4.67%(d) 4.66%(d) 4.84%(c)
Portfolio turnover rate . . . . . . . . . . . . . . . . . . . 38% 46% 98% 120%
(a) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each period reported and includes reinvestment of dividends and
distributions. Total returns for periods of less than a full year are not
annualized.
(b) Commencement of offering of Class C shares.
(c) Annualized.
(d) Net of management fee waiver.
(e) Less than $.005 per share.
6
HOW THE FUND INVESTS
INVESTMENT OBJECTIVE AND POLICIES
THE INVESTMENT OBJECTIVE OF THE FUND IS TO SEEK A HIGH LEVEL OF CURRENT
INCOME EXEMPT FROM FEDERAL INCOME TAXES. IN ATTEMPTING TO ACHIEVE THIS
OBJECTIVE, UNDER NORMAL CIRCUMSTANCES THE FUND INTENDS TO INVEST SUBSTANTIALLY
ALL, AND IN ANY EVENT AT LEAST 80%, OF ITS TOTAL ASSETS IN MUNICIPAL BONDS AND
MUNICIPAL NOTES. THERE CAN BE NO ASSURANCE THAT SUCH OBJECTIVE WILL BE ACHIEVED.
See "Investment Objective and Policies" in the Statement of Additional
Information.
THE FUND'S INVESTMENT OBJECTIVE IS A FUNDAMENTAL POLICY AND, THEREFORE, MAY
NOT BE CHANGED WITHOUT THE APPROVAL OF THE HOLDERS OF A MAJORITY OF THE FUND'S
OUTSTANDING VOTING SECURITIES AS DEFINED IN THE INVESTMENT COMPANY ACT OF 1940,
AS AMENDED (THE INVESTMENT COMPANY ACT). FUND POLICIES THAT ARE NOT FUNDAMENTAL
MAY BE MODIFIED BY THE BOARD OF DIRECTORS.
THE MUNICIPAL BONDS IN WHICH THE FUND MAY INVEST INCLUDE GENERAL OBLIGATION
AND LIMITED OBLIGATION OR REVENUE BONDS. GENERAL OBLIGATION BONDS ARE SECURED BY
THE ISSUER'S PLEDGE OF ITS FAITH, CREDIT AND TAXING POWER FOR THE PAYMENT OF
PRINCIPAL AND INTEREST, WHEREAS REVENUE BONDS ARE PAYABLE ONLY FROM THE REVENUES
DERIVED FROM A PARTICULAR FACILITY OR CLASS OF FACILITIES OR IN SOME CASES, FROM
THE PROCEEDS OF A SPECIAL EXCISE OR OTHER SPECIFIC REVENUE SOURCE. THE MUNICIPAL
NOTES IN WHICH THE FUND MAY INVEST INCLUDE TAX, REVENUE AND BOND ANTICIPATION
NOTES WHICH ARE ISSUED TO OBTAIN FUNDS FOR VARIOUS PUBLIC PURPOSES.
Interest on certain Municipal Bonds and Municipal Notes may be subject to
the federal alternative minimum tax. From time to time the Fund may purchase
Municipal Bonds and Municipal Notes that are private activity bonds (as defined
in the Internal Revenue Code of 1986, as amended (Internal Revenue Code)), the
interest on which is a tax preference subject to the alternative minimum tax.
See "Taxes, Dividends and Distributions".
THE FUND'S PORTFOLIO WILL CONSIST PRIMARILY OF CAREFULLY SELECTED LONG-TERM
MUNICIPAL BONDS OF MEDIUM QUALITY. WHILE THE FUND'S INVESTMENT ADVISER WILL NOT
BE LIMITED BY THE RATINGS ASSIGNED BY THE RATING SERVICES, THE MUNICIPAL BONDS
IN WHICH THE FUND'S PORTFOLIO WILL BE PRINCIPALLY INVESTED WILL BE RATED A AND
BAA BY MOODY'S INVESTORS SERVICE (MOODY'S) AND A AND BBB BY STANDARD & POOR'S
RATINGS GROUP (S&P) OR COMPARABLY RATED BY ANY OTHER NATIONALLY RECOGNIZED
STATISTICAL RATING ORGANIZATION (NRSRO) OR, IF NOT RATED, WILL BE, IN THE
JUDGMENT OF THE INVESTMENT ADVISER, OF SUBSTANTIALLY COMPARABLE QUALITY. Bonds
rated BBB by S&P normally exhibit adequate payment protection parameters, but in
the event of adverse market conditions are more likely to lead to a weakened
capacity to pay principal and interest than bonds in the A category. Bonds rated
Baa by Moody's are considered medium grade obligations. 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. A more complete description of these and other
Municipal Bond and Note ratings is contained in Appendix A to the Statement of
Additional Information.
BECAUSE ISSUERS OF MEDIUM QUALITY MUNICIPAL BONDS MAY CHOOSE NOT TO HAVE
THEIR OBLIGATIONS RATED, IT IS POSSIBLE THAT A SUBSTANTIAL PORTION OF THE FUND'S
PORTFOLIO MAY CONSIST OF OBLIGATIONS WHICH ARE NOT RATED. The market for rated
bonds is usually broader than that for non-rated bonds, which may result in less
flexibility in disposal of such non-rated bonds.
THE FUND MAY ALSO ACQUIRE MUNICIPAL BONDS WHICH HAVE BEEN RATED BELOW
MEDIUM QUALITY BY THE RATING SERVICES IF, IN THE JUDGMENT OF THE FUND'S
INVESTMENT ADVISER, THE BONDS HAVE THE CHARACTERISTICS OF MEDIUM QUALITY
OBLIGATIONS. In determining whether Municipal Bonds which are not rated or which
have been rated below medium quality by the rating services have the
characteristics of rated Municipal Bonds of medium quality, the investment
adviser will rely upon information from various sources, including, if
available, reports by the rating services, research, analysis and appraisals of
brokers and dealers and the views of the Fund's directors and others regarding
economic developments and the creditworthiness of particular issuers.
7
MUNICIPAL BONDS OF MEDIUM QUALITY ARE SUBJECT TO FLUCTUATION IN VALUE AS A
RESULT OF CHANGING ECONOMIC CIRCUMSTANCES AS WELL AS CHANGES IN INTEREST RATES.
THUS, WHILE MEDIUM QUALITY OBLIGATIONS WILL GENERALLY PROVIDE A HIGHER YIELD
THAN DO HIGH QUALITY MUNICIPAL BONDS OF SIMILAR MATURITIES, THEY ARE SUBJECT TO
A GREATER DEGREE OF MARKET FLUCTUATION WITH LESS CERTAINTY OF THE ISSUER'S
CONTINUING ABILITY TO MEET THE PAYMENTS OF PRINCIPAL AND INTEREST WHEN DUE AND
MAY HAVE SPECULATIVE CHARACTERISTICS NOT PRESENT IN BONDS OF HIGHER QUALITY. IN
ADDITION, OBLIGATIONS WITH LONGER MATURITIES (E.G., 20 YEARS OR MORE) GENERALLY
OFFER BOTH HIGHER YIELDS AND GREATER EXPOSURE TO MARKET FLUCTUATION FROM CHANGES
IN INTEREST RATES THAN DO THOSE WITH SHORTER MATURITIES. CONSEQUENTLY, SHARES OF
THE FUND MAY NOT BE SUITABLE FOR PERSONS WHO CANNOT ASSUME THE SOMEWHAT GREATER
RISKS OF CAPITAL DEPRECIATION INVOLVED IN SEEKING HIGHER TAX-EXEMPT YIELDS.
In recent years, there has been a narrowing of the yield spreads between
higher and lower quality Municipal Bonds and a reduction in the supply of medium
grade Municipal Bonds. As a result of these changing conditions in the municipal
securities markets, the investment adviser has invested a substantial portion of
the Fund's assets in higher quality Municipal Bonds. The investment adviser
intends to invest in medium grade Municipal Bonds to the extent market
conditions warrant.
THE INTEREST RATES PAYABLE ON CERTAIN MUNICIPAL BONDS AND NOTES ARE NOT
FIXED AND MAY FLUCTUATE BASED UPON CHANGES IN MARKET RATES. MUNICIPAL BONDS AND
NOTES OF THIS TYPE ARE CALLED VARIABLE RATE OBLIGATIONS. The interest rate
payable on a variable rate obligation is adjusted either at predesignated
intervals or whenever there is a change in the market rate of interest on which
the interest rate payable is based. Other features may include the right whereby
the Fund may demand prepayment of the principal amount of the obligation prior
to its stated maturity (a demand feature) and the right of the issuer to prepay
the principal amount prior to maturity. The principal benefit of a variable rate
obligation is that the interest rate adjustment minimizes changes in the market
value of the obligation. As a result, the purchase of variable rate obligations
should enhance the ability of the Fund to maintain a stable NAV and to sell an
obligation prior to maturity at a price approximating the full principal amount
of the obligation. The payment of principal and interest by issuers of certain
Municipal Bonds and Notes purchased by the Fund may be guaranteed by letters of
credit or other credit facilities offered by banks or other financial
institutions. Such guarantees will be considered in determining whether a
Municipal Bond or Note meets the Fund's investment quality requirements.
THE FUND MAY ALSO INVEST IN INVERSE FLOATERS. An inverse floater is a debt
instrument with a floating or variable interest rate that moves in the opposite
direction of the interest rate on another security or the value of an index.
Changes in the interest rate on the other security or index inversely affect the
residual interest rate paid on the inverse floater, with the result that the
inverse floater's price will be considerably more volatile than that of a fixed
rate bond. The market for inverse floaters is relatively new.
SOME MUNICIPAL SECURITIES, SUCH AS ZERO COUPON MUNICIPAL SECURITIES, DO NOT
PAY CURRENT INTEREST BUT ARE PURCHASED AT A DISCOUNT FROM THEIR FACE VALUES. The
discount approximates the total amount of interest the security will accrue and
compound over the period until maturity or the particular interest payment date
at a rate of interest reflecting the market rate of the security at the time of
issuance. Zero coupon securities do not require the periodic payment of
interest. These investments benefit the issuer by mitigating its need for cash
to meet debt service, but also require a higher rate of return to attract
investors who are willing to defer receipt of cash. These investments may
experience greater volatility in market value than securities that make regular
payments of interest.
THE FUND MAY BE ABLE TO REDUCE THE RISK OF FLUCTUATIONS IN ASSET VALUE
CAUSED BY CHANGES IN INTEREST RATES BY HEDGING ITS PORTFOLIO THROUGH THE USE OF
FINANCIAL FUTURES. During or in anticipation of a decline in interest rates, the
Fund may purchase futures contracts to hedge against subsequent purchases of
long-term bonds at higher prices. During or in anticipation of an increase in
interest rates, the Fund may hedge its portfolio securities by selling futures
contracts for the purpose of limiting the exposure of its portfolio to the
resulting decrease in value. There are risks associated with hedging
transactions and there can be no assurance that hedges will have the intended
result. See "Hedging and Return Enhancement Strategies" below.
ALSO, THE FUND MAY PURCHASE SECONDARY MARKET INSURANCE ON MUNICIPAL BONDS
AND NOTES WHICH IT HOLDS OR ACQUIRES. Although the fee for secondary market
insurance will reduce the yield of the insured Bonds and Notes, such insurance
would be reflected in the market value of the municipal obligation purchased and
may enable the Fund to dispose of a defaulted obligation at a price similar to
that of comparable municipal obligations which are not in default.
8
Insurance is not a substitute for the basic credit of an issuer, but
supplements the existing credit and provides additional security therefor. While
insurance coverage for the Municipal Bonds and Notes held by the Fund reduces
credit risk by providing that the insurance company will make timely payment of
principal and interest if the issuer defaults on its obligation to make such
payment, it does not afford protection against fluctuation in the price, I.E.,
the market value, of the municipal obligations caused by changes in interest
rates and other factors, nor in turn against fluctuations in the NAV of the
shares of the Fund.
HEDGING AND RETURN ENHANCEMENT STRATEGIES
THE FUND MAY ALSO ENGAGE IN VARIOUS PORTFOLIO STRATEGIES, INCLUDING
DERIVATIVES, TO REDUCE CERTAIN RISKS OF ITS INVESTMENTS AND TO ATTEMPT TO
ENHANCE RETURN, BUT NOT FOR SPECULATION. THE FUND, AND THUS ITS INVESTORS, MAY
LOSE MONEY THROUGH ANY UNSUCCESSFUL USE OF THESE STRATEGIES. These strategies
currently include the purchase of put or tender options on Municipal Bonds and
Notes and the purchase and sale of financial futures contracts and options
thereon and municipal bond index futures contracts. The Fund's ability to use
these strategies may be limited by market conditions, regulatory limits and tax
considerations and there can be no assurance that any of these strategies will
succeed. See "Investment Objective and Policies" in the Statement of Additional
Information. New financial products and risk management techniques continue to
be developed and the Fund may use these new investments and techniques to the
extent consistent with its investment objective and policies. As with an
investment in any mutual fund, an investment in the Fund can decrease in value
and you can lose money.
PUTS
THE FUND MAY PURCHASE AND EXERCISE PUTS OR TENDER OPTIONS ON MUNICIPAL
BONDS AND NOTES. PUTS OR TENDER OPTIONS GIVE THE FUND THE RIGHT TO SELL
SECURITIES HELD IN THE FUND'S PORTFOLIO AT A SPECIFIED EXERCISE PRICE ON A
SPECIFIED DATE. Puts or tender options may be acquired to reduce the volatility
of the market value of securities subject to puts or tender options compared to
the volatility of similar securities not subject to puts. The acquisition of a
put or tender option may involve an additional cost to the Fund compared to the
cost of securities with similar credit ratings, stated maturities and interest
coupons but without applicable puts. Such increased cost may be paid either by
way of an initial or periodic premium for the put or by way of a higher purchase
price for securities to which the put is attached. In addition, there is a
credit risk associated with the purchase of puts or tender options in that the
issuer of the put or tender option may be unable to meet its obligation to
purchase the underlying security. Accordingly, the Fund will acquire puts or
tender options under the following circumstances: (1) the put or tender option
is written by the issuer of the underlying security and such security is rated
within the 4 highest quality grades as determined by Moody's, S&P or other
NRSRO; (2) the put or tender option is written by a person other than the issuer
of the underlying security and such person has securities outstanding which are
rated within such 4 highest quality grades; or (3) the put or tender option is
backed by a letter of credit or similar financial guarantee issued by a person
having securities outstanding which are rated within the 2 highest quality
grades of such rating services.
THE FUND ANTICIPATES BEING AS FULLY INVESTED AS PRACTICABLE IN MUNICIPAL
BONDS AND NOTES; HOWEVER, BECAUSE THE FUND DOES NOT INTEND TO INVEST IN TAXABLE
OBLIGATIONS, THERE MAY BE OCCASIONS WHEN, AS A RESULT OF MATURITIES OF PORTFOLIO
SECURITIES OR SALES OF FUND SHARES OR IN ORDER TO MEET ANTICIPATED REDEMPTION
REQUESTS, THE FUND MAY HOLD CASH WHICH IS NOT EARNING INCOME. IN ADDITION, THERE
MAY BE OCCASIONS WHEN, IN ORDER TO RAISE CASH TO MEET REDEMPTIONS, THE FUND
MIGHT BE REQUIRED TO SELL SECURITIES AT A LOSS.
Unlike many issues of common and preferred stock and corporate bonds which
are traded between brokers acting as agent for their customers on securities
exchanges, Municipal Bonds and Notes are customarily purchased from or sold to
dealers who are selling or buying for their own account. There are no
requirements that most Municipal Bonds and Notes be registered with or qualified
for sale by federal or state securities regulators. Since there are large
numbers of Municipal Bond and Note issues of many different issuers, most issues
do not trade on any single day. On the other hand, most issues are generally
marketable, since a major dealer will normally, on request, bid for any issue,
other than obscure ones. Regional municipal securities dealers are frequently
more willing to bid on issues of municipalities in their geographic area.
9
ALTHOUGH MOST MUNICIPAL BONDS AND NOTES ARE MARKETABLE, THE STRUCTURE OF
THE MARKET INTRODUCES ITS OWN ELEMENT OF RISK; A SELLER MAY FIND, ON OCCASION,
THAT DEALERS ARE UNWILLING TO MAKE BIDS FOR CERTAIN ISSUES THAT THE SELLER
CONSIDERS REASONABLE. IF THE SELLER IS FORCED TO SELL, HE OR SHE MAY REALIZE A
CAPITAL LOSS THAT WOULD NOT HAVE BEEN NECESSARY IN DIFFERENT CIRCUMSTANCES.
BECAUSE THE NAV OF THE FUND'S SHARES REFLECTS THE DEGREE OF WILLINGNESS OF
DEALERS TO BID FOR MUNICIPAL BONDS AND NOTES, THE PRICE OF THE FUND'S SHARES MAY
BE SUBJECT TO GREATER FLUCTUATION THAN SHARES OF OTHER INVESTMENT COMPANIES WITH
DIFFERENT INVESTMENT POLICIES. SEE "NET ASSET VALUE" IN THE STATEMENT OF
ADDITIONAL INFORMATION.
The ratings of Moody's, S&P and other NRSROs represent each service's
opinion as to the quality of the Municipal Bonds or Notes rated. It should be
emphasized that ratings are general and are not absolute standards of quality or
guarantees as to the creditworthiness of an issuer. Subsequent to its purchase
by the Fund, an issue of Municipal Bonds or Notes may cease to be rated, or its
ratings may be reduced. Neither event requires the elimination of that
obligation from the Fund's portfolio, but will be a factor in determining
whether the Fund should continue to hold that issue in its portfolio.
FROM TIME TO TIME, PROPOSALS HAVE BEEN INTRODUCED BEFORE CONGRESS FOR THE
PURPOSE OF RESTRICTING OR ELIMINATING THE FEDERAL INCOME TAX EXEMPTION FOR
INTEREST ON MUNICIPAL BONDS AND NOTES AND FOR PROVIDING STATE AND LOCAL
GOVERNMENTS WITH FEDERAL CREDIT ASSISTANCE. REEVALUATION OF THE FUND'S
INVESTMENT OBJECTIVE AND STRUCTURE MIGHT BE NECESSARY IN THE FUTURE DUE TO
MARKET CONDITIONS WHICH MAY RESULT FROM FUTURE CHANGES IN THE TAX LAWS.
FUTURES CONTRACTS AND OPTIONS THEREON
THE FUND MAY ENGAGE IN TRANSACTIONS IN FUTURES CONTRACTS FOR RETURN
ENHANCEMENT AND RISK MANAGEMENT PURPOSES AS WELL AS TO REDUCE THE RISK OF
FLUCTUATIONS IN THE VALUE OF ITS ASSETS CAUSED BY INTEREST RATE CHANGES BY
HEDGING ITS PORTFOLIO THROUGH THE USE OF FINANCIAL FUTURES AND OPTIONS THEREON
TRADED ON A COMMODITIES EXCHANGE OR BOARD OF TRADE.
FUTURES CONTRACTS
The Fund may enter into futures contracts for the purchase or sale of debt
securities and financial indices (collectively, interest rate futures contracts)
in accordance with the Fund's investment objective. A purchase of a futures
contract (or a long futures position) means the assumption of a contractual
obligation to acquire a specified quantity of the securities underlying the
contract at a specified price at a specified future date. A sale of a futures
contract (or a short futures position) means the assumption of a contractual
obligation to deliver a specified quantity of the securities underlying the
contract at a specified price at a specified future date. At the time a futures
contract is purchased or sold, the Fund is required to deposit cash, or other
liquid assets with a futures commission merchant or in a segregated account
representing between approximately 1 1/2% to 5% of the contract amount, called
initial margin. Thereafter, the futures contract will be valued daily and the
payment in cash of maintenance or variation margin may be required, resulting in
the Fund paying or receiving cash that reflects any decline or increase in the
contract's value, a process known as marking-to-market.
Some futures contracts by their terms may call for the actual delivery or
acquisition of the underlying assets and other futures contracts must be cash
settled. In most cases the contractual obligation is extinguished before the
expiration of the contract by buying (to offset an earlier sale) or selling (to
offset an earlier purchase) an identical futures contract calling for delivery
or acquisition in the same month. The purchase (or sale) of an offsetting
futures contract is referred to as a closing transaction.
LIMITATIONS ON THE PURCHASE AND SALE OF FUTURES CONTRACTS AND RELATED
OPTIONS
CFTC LIMITS. In accordance with Commodity Futures Trading Commission (CFTC)
regulations, the Fund is not permitted to purchase or sell interest rate futures
contracts or options thereon for return enhancement or risk management purposes
if immediately thereafter the sum of the amounts of initial margin deposits on a
Fund's existing futures and premiums paid for options on futures exceed 5% of
the liquidation value of such Fund's total assets (the 5% CFTC limit).
10
This restriction does not apply to the purchase and sale of interest rate
futures contracts and options thereon for bona fide hedging purposes.
SEGREGATION REQUIREMENTS. To the extent the Fund enters into futures
contracts, it is required by the Commission to maintain a segregated asset
account sufficient to cover the Fund's obligations with respect to such futures
contracts, which will consist of cash or other liquid assets from their
portfolios in an amount equal to the difference between the fluctuating market
value of such futures contracts and the aggregate value of the initial margin
deposited by the Fund with respect to such futures contracts. Offsetting the
contract by another identical contract eliminates the segregation requirement.
See "Investment Objective and Policies--Segregated Accounts" in the Statement of
Additional Information.
With respect to options on futures, there are no segregation requirements
for options that are purchased and owned by the Fund. However, written options,
since they involve potential obligations of the Fund, may require segregation of
Fund assets if the options are not covered as described below under "Options on
Futures Contracts." If the Fund writes a call option that is not 'covered,' it
must segregate and maintain for the term of the option cash or other liquid,
unencumbered assets equal to the fluctuating value of the optioned futures. If a
Fund writes a put option that is not covered, the segregated amount would have
to be at all times equal in value to the exercise price of the put (less any
initial margin deposited by the Fund with respect to such option).
USE OF INTEREST RATE FUTURES CONTRACTS
Interest rate futures contracts will be used for bona fide hedging, risk
management and return enhancement purposes.
POSITION HEDGING. The Fund might sell interest rate futures contracts to
protect the Fund against a rise in interest rates which would be expected to
decrease the value of debt securities which the Fund holds. This would be
considered a bona fide hedge and, therefore, is not subject to the 5% CFTC
limit. For example, if interest rates are expected to increase, the Fund might
sell futures contracts on debt securities, the values of which historically have
closely correlated or are expected to closely correlate to the values of the
Fund's portfolio securities. Such a sale would have an effect similar to selling
an equivalent value of the Fund's portfolio securities. If interest rates
increase, the value of the Fund's portfolio securities will decline, but the
value of the futures contracts to the Fund will increase at approximately an
equivalent rate thereby keeping the NAV of the Fund from declining as much as it
otherwise would have. The Fund could accomplish similar results by selling debt
securities with longer maturities and investing in debt securities with shorter
maturities when interest rates are expected to increase. However, since the
futures market may be more liquid than the cash market, the use of futures
contracts as a hedging technique would allow the Fund to maintain a defensive
position without having to sell portfolio securities. If in fact interest rates
decline rather than rise, the value of the futures contract will fall but the
value of the bonds should rise and should offset all or part of the loss. If
futures contracts are used to hedge 100% of the bond position and correlate
precisely with the bond positions, there should be no loss or gain with a rise
(or fall) in interest rates. However, if only 50% of the bond position is hedged
with futures, then the value of the remaining 50% of the bond position would be
subject to change because of interest rate fluctuations. Whether the bond
positions and futures contracts correlate is a significant risk factor.
ANTICIPATORY POSITION HEDGING. Similarly, when it is expected that interest
rates may decline and the Fund intends to acquire debt securities, the Fund
might purchase interest rate futures contracts. The purchase of futures
contracts for this purpose would constitute an anticipatory hedge against
increases in the price of debt securities (caused by declining interest rates)
which the Fund subsequently acquires and would normally qualify as a bona fide
hedge not subject to the 5% CFTC limit. Since fluctuations in the value of
appropriately selected futures contracts should approximate that of the debt
securities that would be purchased, the Fund could take advantage of the
anticipated rise in the cost of the debt securities without actually buying
them. Subsequently, the Fund could make the intended purchases of the debt
securities in the cash market and concurrently liquidate the futures positions.
RISK MANAGEMENT AND RETURN ENHANCEMENT. The Fund might sell interest rate
futures contracts covering bonds. This has the same effect as selling bonds in
the portfolio and holding cash and reduces the duration of the portfolio.
(Duration measures the price sensitivity of the portfolio to interest rates. The
longer the duration, the greater the impact of interest rate changes on the
portfolio's price.) This should lessen the risks associated with a rise in
interest rates. In some
11
circumstances, this may serve as a hedge against a loss of principal, but is
usually referred to as an aspect of risk management.
The Fund might buy interest rate futures contracts covering bonds with a
longer maturity than its portfolio average. This would tend to increase the
duration and should increase the gain in the overall portfolio if interest rates
fall. This is often referred to as risk management rather than hedging but, if
it works as intended, has the effect of increasing principal value. It if does
not work as intended because interest rates rise instead of fall, the loss will
be greater than would otherwise have been the case. Futures contracts used for
these purposes are not considered bona fide hedges and, therefore, are subject
to the 5% CFTC limit.
OPTIONS ON FUTURES CONTRACTS
The Fund may enter into options on futures contracts for certain bona fide
hedging, risk management and return enhancement purposes. This includes the
ability to purchase put and call options and write (I.E., sell) covered put and
call options on futures contracts that are traded on commodity and futures
exchanges.
If the Fund purchased an option on a futures contract, it has the right but
not the obligation, in return for the premium paid, to assume a position in a
futures contract (a long position if the option is a call or a short position if
the option is a put) at a specified exercise price at any time during the option
exercise period.
Unlike purchasing an option, which is similar to purchasing insurance to
protect against a possible rise or fall of security prices or currency values,
the writer or seller of an option undertakes an obligation upon exercise of the
option to either buy or sell the underlying futures contract at the exercise
price. A writer of a call option has the obligation upon exercise to assume a
short futures position and a writer of a put option has the obligation to assume
a long futures position. Upon exercise of the option, the assumption of
offsetting futures positions by the writer and holder of the option will be
accompanied by delivery of the accumulated cash balance in the writer's futures
margin account which represents the amount by which the market price of the
futures contract at exercise exceeds (in the case of a call) or is less than (in
the case of a put) the exercise price of the option on the futures contract. If
there is no balance in the writer's margin account, the option is "out of the
money" and will not be exercised. The Fund, as the writer, has income in the
amount it was paid for the option. If there is a margin balance, the Fund will
have a loss in the amount of the amount of the balance less the premium it was
paid for writing the option.
When the Fund writes a put or call option on futures contracts, the option
must either be covered or, to the extent not covered, will be subject to
segregation requirements. The Fund will be considered covered with respect to a
call option it writes on a futures contract if the Fund owns the securities or
currency which is deliverable under the futures contract or an option to
purchase that futures contract having a strike price equal to or less than the
strike price of the covered option. A Fund will be considered covered with
respect to a put option it writes on a futures contract if it owns an option to
sell that futures contract having a strike price equal to or greater than the
strike price of the covered option.
To the extent the Fund is not covered as described above with respect to
written options, it will segregate and maintain for the term of the option cash
or liquid assets.
USE OF OPTIONS ON FUTURES CONTRACTS
Options on interest rate futures contracts would be used for bona fide
hedging, risk management and return enhancement purposes.
POSITION HEDGING. The Fund may purchase put options on interest rate or
currency futures contracts to hedge its portfolio against the risk of a decline
in the value of the debt securities it owns as a result of rising interest
rates.
ANTICIPATORY HEDGING. The Fund may also purchase call options on futures
contracts as a hedge against an increase in the value of securities the Fund
might intend to acquire as a result of declining interest rates.
12
Writing a put option on a futures contract may serve as a partial
anticipatory hedge against an increase in the value of debt securities the Fund
might intend to acquire. If the futures price at expiration of the option is
above the exercise price, the Fund retains the full amount of the option premium
which provides a partial hedge against any increase that may have occurred in
the price of the debt securities the Fund intended to acquire. If the market
price of the underlying futures contract is below the exercise price when the
option is exercised, the Fund would incur a loss, which may be wholly or
partially offset by the decrease in the value of the securities the Fund might
intend to acquire.
Whether options on interest rate futures contracts are subject to or exempt
from the 5% CFTC limit depends on whether the purpose of the options constitutes
a bona fide hedge.
RISK MANAGEMENT AND RETURN ENHANCEMENT. Writing a put option that does not
relate to securities the Fund intends to acquire would be a return enhancement
strategy which would result in a loss if interest rates rise.
Similarly, writing a covered call option on a futures contract is also a
return enhancement strategy. If the market price of the underlying futures
contract at expiration of a written call option is below the exercise price, the
Fund would retain the full amount of the option premium increasing the income of
the Fund. If the futures price when the option is exercised is above the
exercise price, however, the Fund would sell the underlying securities which was
the cover for the contract and incur a gain or loss depending on the cost basis
for the underlying assets.
Writing a covered call option as in any return enhancement strategy can
also be considered a partial hedge against a decrease in the value of a Fund's
portfolio securities. The amount of the premium received acts as a partial hedge
against any decline that may have occurred in the Fund's debt securities.
RISKS RELATING TO TRANSACTIONS IN FUTURES CONTRACTS AND OPTIONS THEREON
The Fund's ability to establish and close out positions in futures
contracts and options on futures contracts would be impacted by the liquidity of
these markets. Although the Fund generally would purchase or sell only those
futures contracts and options thereon for which there appeared to be a liquid
market, there is no assurance that a liquid market on an exchange will exist for
any particular futures contract or option at any particular time. In the event
no liquid market exists for a particular futures contract or option thereon in
which the Fund maintains a position, it would not be possible to effect a
closing transaction in that contract or to do so at a satisfactory price and the
Fund would have to either make or take delivery under the futures contract or,
in the case of a written call option, wait to sell the underlying securities
until the option expired or was exercised, or, in the case of a purchased
option, exercise the option. In the case of a futures contract or an option on a
futures contract which the Fund had written and which the Fund was unable to
close, the Fund would be required to maintain margin deposits on the futures
contract or option and to make variation margin payments until the contract is
closed.
Risks inherent in the use of these strategies include (1) dependence on the
investment adviser's ability to predict correctly movements in the direction of
interest rates, securities prices and markets; (2) imperfect correlation between
the price of futures contracts and options thereon and movement in the prices of
the securities being hedged; (3) the fact that the skills needed to use these
strategies are different from those needed to select portfolio securities; (4)
the possible absence of a liquid secondary market for any particular instrument
at any time; and (5) the possible inability of the Fund to sell a portfolio
security at a time that otherwise would be favorable for it to do so. In the
event it did sell the security and eliminated its cover, it would have to
replace its cover with an appropriate futures contract or option or segregate
securities with the required value, as described under "Segregation
Requirements."
Although futures prices themselves have the potential to be extremely
volatile, in the case of any strategy involving interest rate futures contracts
and options thereon when the Subadviser's expectations are not met, assuming
proper adherence to the segregation requirement, the volatility of the Fund as a
whole should be no greater than if the same strategy had been pursued in the
cash market.
Exchanges on which futures and related options trade may impose limits on
the positions that the Fund may take in certain circumstances. In addition, the
hours of trading of financial futures contracts and options thereon may not
conform to the hours during which the Fund may trade the underlying securities.
To the extent the futures markets close before the
13
securities markets, significant price and rate movements can take place in the
securities markets that cannot be reflected in the futures markets.
Pursuant to the requirements of the Commodity Exchange Act, as amended (the
Commodity Exchange Act), all futures contracts and options thereon must be
traded on an exchange. Since a clearing corporation effectively acts as the
counterparty on every futures contract and option thereon, the counterparty risk
depends on the strength of the clearing or settlement corporation associated
with the exchange. Additionally, although the exchanges provide a means of
closing out a position previously established, there can be no assurance that a
liquid market will exist for a particular contract at a particular time. In the
case of options on futures, if such a market does not exist, the Fund, as the
holder of an option on futures contracts, would have to exercise the option and
comply with the margin requirements for the underlying futures contract to
realize any profit, and if the Fund were the writer of the option, its
obligation would not terminate until the option expired or the Fund was assigned
an exercise notice.
There can be no assurance that the Fund's use of futures contracts and
related options will be successful and the Fund may incur losses in connection
with its purchase and sale of future contracts and related options.
OTHER INVESTMENTS AND POLICIES
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES
The Fund may purchase municipal obligations on a when-issued or delayed
delivery basis, in each case without limit. When municipal obligations are
offered on a when-issued or delayed delivery basis, the price and coupon rate
are fixed at the time the commitment to purchase is made, but delivery and
payment for such securities take place at a later date. During the period
between purchase and settlement, no interest accrues to the purchaser. In the
case of purchases by the Fund, the price that the Fund is required to pay on the
settlement date may be in excess of the market value of the municipal
obligations on that date. While securities may be sold prior to the settlement
date, the Fund intends to purchase these securities with the purpose of actually
acquiring them unless a sale would be desirable for investment reasons. At the
time the Fund makes the commitment to purchase a municipal obligation on a
when-issued basis, it will record the transaction and reflect the value of the
obligation, each day, in determining its NAV. This value may fluctuate from day
to day in the same manner as values of municipal obligations otherwise held by
the Fund. If the seller defaults in the sale, the Fund could fail to realize the
appreciation, if any, that had occurred. The Fund will establish a segregated
account in which it will maintain cash or other liquid assets equal in value to
its commitments for when-issued or delayed delivery securities.
MUNICIPAL LEASE OBLIGATIONS
THE FUND MAY ALSO INVEST IN MUNICIPAL LEASE OBLIGATIONS. A MUNICIPAL LEASE
OBLIGATION IS A MUNICIPAL SECURITY THE INTEREST ON AND PRINCIPAL OF WHICH IS
PAYABLE OUT OF LEASE PAYMENTS MADE BY THE PARTY LEASING THE FACILITIES FINANCED
BY THE ISSUE. Typically, municipal lease obligations are issued by a state or
municipal financing authority to provide funds for the construction of
facilities (E.G., schools, dormitories, office buildings or prisons). The
facilities are typically used by the state or municipality pursuant to a lease
with a financing authority. Certain municipal lease obligations may trade
infrequently. Accordingly, the investment adviser will monitor the liquidity of
municipal lease obligations under the supervision of the Board of Directors.
Municipal lease obligations will not be considered illiquid for purposes of the
Fund's 15% limitation on illiquid securities provided the investment adviser
determines that there is a readily available market for such securities. See
"Illiquid Securities" below and "Investment Objective and Policies--Illiquid
Securities" in the Statement of Additional Information.
ILLIQUID SECURITIES
The Fund may hold up to 15% of its net assets in illiquid securities,
including repurchase agreements which have a maturity of longer than seven days
or contractual restrictions on resale and securities that are not readily
marketable. Securities, including municipal lease obligations, that have a
readily available market are not considered illiquid for the purposes of this
limitation. The investment adviser will monitor the liquidity of such securities
under the supervision of the
14
Directors. See "Investment Objectives and Policies--Illiquid Securities" in the
Statement of Additional Information. Repurchase agreements subject to demand are
deemed to have a maturity equal to the notice period.
INVESTMENTS IN SECURITIES OF OTHER INVESTMENT COMPANIES
The Fund may invest up to 10% of its total assets in shares of other
investment companies. To the extent that the Fund does invest in securities of
other investment companies, shareholders of the Fund may be subject to duplicate
management and advisory fees.
BORROWING
The Fund may borrow an amount equal to no more than 33 1/3% of the value of
its total assets (calculated when the loan is made) from banks for temporary,
extraordinary or emergency purposes or for the clearance of transactions. The
Fund may pledge up to 33 1//3% of its total assets to secure these borrowings.
However, the Fund will not purchase portfolio securities when borrowings exceed
5% of the value of the Fund's total assets.
PORTFOLIO MANAGEMENT TECHNIQUES
In seeking to achieve the Fund's investment objective, the Fund's
investment adviser will cause the Fund to purchase securities which it believes
represent the best values then currently available in the marketplace. Such
values are a function of yield, maturity, issue classification and quality
characteristics, coupled with expectations regarding the economy, movements in
the general level and term structure of interest rates, political developments
and variations in the supply of funds available for investment in the tax-exempt
market relative to the demand for funds placed upon it. The following are some
of the more important management techniques which will be utilized by the Fund's
investment adviser.
ADJUSTMENT OF MATURITIES
The investment adviser will seek to anticipate movements in interest rates
and will adjust the maturity distribution of the portfolio accordingly. Longer
term securities have ordinarily yielded more than shorter term securities. From
time to time, however, the normal yield relationships between longer and shorter
term securities have been reversed. In addition, longer term securities have
historically been subject to greater and more rapid price fluctuation. The
investment adviser will be free to take advantage of price volatility in order
to attempt to increase the Fund's NAV by making appropriate sales and purchases
of portfolio securities.
ISSUE AND QUALITY CLASSIFICATION
Securities with the same general quality rating and maturity
characteristics, but which vary according to the purpose for which they were
issued, often tend to trade at different yields. Similarly, securities issued
for similar purposes and with the same general maturity characteristics, but
which vary according to the creditworthiness of their respective issuers, tend
to trade at different yields. These yield differentials tend to fluctuate in
response to political and economic developments as well as temporary imbalances
in normal supply and demand relationships. The investment adviser monitors these
fluctuations closely, and will adjust portfolio positions in various issue and
quality classifications according to the value disparities brought about by
these yield relationship fluctuations.
INVESTMENT RESTRICTIONS
The Fund is subject to certain investment restrictions which, like its
investment objective, constitute fundamental policies. Fundamental policies
cannot be changed without the approval of the holders of a majority of the
Fund's
15
outstanding voting securities, as defined in the Investment Company Act of 1940,
as amended (the Investment Company Act). See "Investment Restrictions" in the
Statement of Additional Information.
HOW THE FUND IS MANAGED
THE FUND HAS A BOARD OF DIRECTORS WHICH, IN ADDITION TO OVERSEEING THE
ACTIONS OF THE FUND'S MANAGER, SUBADVISER AND DISTRIBUTOR, AS SET FORTH BELOW,
DECIDES UPON MATTERS OF GENERAL POLICY. THE FUND'S MANAGER CONDUCTS AND
SUPERVISES THE DAILY BUSINESS OPERATIONS OF THE FUND. THE FUND'S SUBADVISER
FURNISHES DAILY INVESTMENT ADVISORY SERVICES.
For the year ended December 31, 1997, the Fund's total expenses as a
percentage of average net assets for the Fund's Class A, Class B and Class C
shares were .70%, 1.10%, and 1.35%, respectively. See "Financial Highlights."
MANAGER
PRUDENTIAL INVESTMENTS FUND MANAGEMENT LLC (PIFM OR THE MANAGER), GATEWAY
CENTER THREE, 100 MULBERRY STREET, NEWARK, NEW JERSEY 07102-4077 IS THE MANAGER
OF THE FUND AND IS COMPENSATED FOR ITS SERVICES AT AN ANNUAL RATE OF .50 OF 1%
OF THE FUND'S AVERAGE DAILY NET ASSETS UP TO AND INCLUDING $250 MILLION, .475 OF
1% OF THE NEXT $250 MILLION, .45 OF 1% OF THE NEXT $500 MILLION, .425 OF 1% OF
THE NEXT $250 MILLION, .40 OF 1% OF THE NEXT $250 MILLION AND .375 OF 1% OF THE
FUND'S AVERAGE DAILY NET ASSETS IN EXCESS OF $1.5 BILLION. PIFM is organized in
New York as a limited liability company. It is the successor to Prudential
Mutual Fund Management, Inc., which transferred its assets to PIFM in September
1996. For the fiscal year ended December 31, 1997, the Fund paid management fees
to PIFM of .48% of the Fund's average daily net assets. See "Fee Waivers" below
and "Manager" in the Statement of Additional Information.
As of January 31, 1998, PIFM served as the manager to 42 open-end
investment companies, constituting all of the Prudential Mutual Funds, and as
manager or administrator to 22 closed-end investment companies, with aggregate
assets of approximately $63 billion.
UNDER THE MANAGEMENT AGREEMENT WITH THE FUND, PIFM MANAGES THE INVESTMENT
OPERATIONS OF THE FUND AND ALSO ADMINISTERS THE FUND'S CORPORATE AFFAIRS. See
"Manager" in the Statement of Additional Information.
UNDER A SUBADVISORY AGREEMENT BETWEEN PIFM AND THE PRUDENTIAL INVESTMENT
CORPORATION (PIC), DOING BUSINESS AS PRUDENTIAL INVESTMENTS (PI, THE SUBADVISER
OR THE INVESTMENT ADVISER), THE SUBADVISER FURNISHES INVESTMENT ADVISORY
SERVICES IN CONNECTION WITH THE MANAGEMENT OF THE FUND AND IS REIMBURSED BY PIFM
FOR ITS REASONABLE COSTS AND EXPENSES INCURRED IN PROVIDING SUCH SERVICES. PIFM
continues to have responsibility pursuant to the Management Agreement for all
investment advisory services and supervises the Subadviser's performance of such
services.
The current portfolio manager of the Fund is Peter J. Allegrini, a Managing
Director of Prudential Investments. Mr. Allegrini is responsible for the
day-to-day management of the Fund's portfolio. Mr. Allegrini has managed the
Fund's portfolio since April 1996. Mr. Allegrini has been employed by PI as a
portfolio manager since July 1994 and serves as the portfolio manager of a
number of other portfolios managed by PI. He was employed by Fidelity
Investments from 1982 to 1985 as a senior bond analyst and from 1985 to 1994 as
a portfolio manager, most recently of Fidelity Adviser High Income Municipal
Fund.
PIFM and PIC are wholly-owned subsidiaries of The Prudential Insurance
Company of America (Prudential), a major diversified insurance and financial
services company.
16
DISTRIBUTOR
PRUDENTIAL SECURITIES INCORPORATED (PRUDENTIAL SECURITIES OR THE
DISTRIBUTOR), ONE SEAPORT PLAZA, NEW YORK, NEW YORK 10292, IS A CORPORATION
ORGANIZED UNDER THE LAWS OF THE STATE OF DELAWARE AND SERVES AS THE DISTRIBUTOR
OF THE SHARES OF THE FUND. IT IS AN INDIRECT, WHOLLY-OWNED SUBSIDIARY OF
PRUDENTIAL.
UNDER SEPARATE DISTRIBUTION AND SERVICE PLANS (THE CLASS A PLAN, THE CLASS
B PLAN AND THE CLASS C PLAN, EACH A PLAN, AND COLLECTIVELY, THE PLANS) ADOPTED
BY THE FUND UNDER RULE 12B-1 UNDER THE INVESTMENT COMPANY ACT AND A DISTRIBUTION
AGREEMENT (THE DISTRIBUTION AGREEMENT), THE DISTRIBUTOR INCURS THE EXPENSES OF
DISTRIBUTING THE FUND'S CLASS A, CLASS B AND CLASS C SHARES. These expenses
include commissions and account servicing fees paid to, or on account of,
financial advisers of the Distributor and representatives of Pruco Securities
Corporation (Prusec), an affiliated broker-dealer, commissions and account
servicing fees paid to, or on account of, other broker-dealers or financial
institutions (other than national banks) which have entered into agreements with
the Distributor, advertising expenses, the cost of printing and mailing
prospectuses to potential investors and indirect and overhead costs of the
Distributor and Prusec associated with the sale of Fund shares, including lease,
utility, communications and sales promotion expenses.
Under the Plans, the Fund is obligated to pay distribution and/or service
fees to the Distributor as compensation for its distribution and service
activities, not as reimbursement for specific expenses incurred. If the
Distributor's expenses exceed its distribution and service fees, the Fund will
not be obligated to pay any additional expenses. If the Distributor's expenses
are less than such distribution and service fees, it will retain its full fees
and realize a profit.
UNDER THE CLASS A PLAN, THE FUND MAY PAY THE DISTRIBUTOR FOR ITS
DISTRIBUTION-RELATED ACTIVITIES WITH RESPECT TO CLASS A SHARES AT AN ANNUAL RATE
OF UP TO .30 OF 1% OF THE AVERAGE DAILY NAV OF THE CLASS A SHARES. The Class A
Plan provides that (i) up to .25 of 1% of the average daily net assets of the
Class A shares may be used to pay for personal service and/or the maintenance of
shareholder accounts (service fee) and (ii) total distribution fees (including
the service fee of .25 of 1%) may not exceed .30 of 1% of the average daily net
assets of the Class A shares. It is expected that in the case of Class A shares,
proceeds from the distribution fee will be used primarily to pay account
servicing fees to financial advisers. The Distributor has agreed to limit its
distribution-related fees payable under the Class A Plan to .10 of 1% of the
average daily net assets of the Class A shares for the fiscal year ending
December 31, 1998.
UNDER THE CLASS B AND CLASS C PLANS, THE FUND MAY PAY THE DISTRIBUTOR FOR
ITS DISTRIBUTION-RELATED ACTIVITIES WITH RESPECT TO CLASS B AND CLASS C SHARES
AT AN ANNUAL RATE OF UP TO .50 OF 1% AND UP TO 1% OF THE AVERAGE DAILY NET
ASSETS OF THE CLASS B AND CLASS C SHARES, RESPECTIVELY. The Class B Plan
provides for the payment to the Distributor of (i) an asset-based sales charge
of up to .50 of 1% of the average daily net assets of the Class B shares, and
(ii) a service fee of up to .25 of 1% of the average daily net assets of the
Class B shares; provided that the total distribution-related fee does not exceed
.50 of 1%. The Class C Plan provides for the payment to the Distributor of (i)
an asset-based sales charge of up to .75 of 1% of the average daily net assets
of the Class C shares, and (ii) a service fee of up to .25 of 1% of the average
daily net assets of the Class C shares. The service fee is used to pay for
personal service and/or the maintenance of shareholder accounts. The Distributor
has agreed to limit its distribution-related fees payable under the Class C Plan
to .75 of 1% of the average daily net assets of the Class C shares for the
fiscal year ending December 31, 1998. The Distributor also receives contingent
deferred sales charges from certain redeeming shareholders. See "Shareholder
Guide--How to Sell Your Shares--Contingent Deferred Sales Charge."
For the fiscal year ended December 31, 1997, the Fund paid distribution
expenses of .10 of 1%, .50 of 1% and .75 of 1% of the average net assets of the
Class A, Class B and Class C shares, respectively. The Fund records all payments
made under the Plans as expenses in the calculation of net investment income.
See "Distributor" in the Statement of Additional Information.
Distribution expenses attributable to the sale of shares of the Fund will
be allocated to each such class based upon the ratio of sales of each such class
to the sales of all shares of the Fund other than expenses allowable to a
particular class. The distribution fee and sales charge of one class will not be
used to subsidize the sale of another class.
Each Plan provides that it shall continue in effect from year to year
provided that a majority of the Board of Directors of the Fund, including a
majority of the Directors who are not interested persons of the Fund (as defined
in the Investment Company Act) and who have no direct or indirect financial
interest in the operation of the Plan or any agreement related to
17
the Plan (the Rule 12b-1 Directors), vote annually to continue the Plan. Each
Plan may be terminated at any time by vote of a majority of the Rule 12b-1
Directors or of a majority of the outstanding shares of the applicable class of
the Fund. The Fund will not be obligated to pay expenses incurred under any plan
if it is terminated or not continued.
In addition to distribution and service fees paid by the Fund under the
Class A, Class B and Class C Plans, the Manager (or one of its affiliates) may
make payments out of its own resources to dealers (including Prudential
Securities) and other persons who distribute shares of the Fund. Such payments
may be calculated by reference to the NAV of shares sold by such persons or
otherwise.
The Distributor is subject to the rules of the National Association of
Securities Dealers, Inc. (NASD) governing maximum sales charges. See
"Distributor" in the Statement of Additional Information.
FEE WAIVERS
PIFM may from time to time waive its management fee or a portion thereof
and subsidize certain operating expenses of the Fund. The Fund is not required
to reimburse PIFM for such management fee waivers. Effective September 1, 1997,
PIFM discontinued its waiver of its management fee of .05% of 1% of the Funds
average daily net assets. See "Fund Expenses."
The Distributor has agreed to limit its distribution fee for the Class A
and Class C shares as described above under "Distributor." Fee waivers will
increase the Fund's yield and total return. See "Performance Information" in the
Statement of Additional Information and "Fund Expenses" above.
PORTFOLIO TRANSACTIONS
The Distributor may also act as a broker or futures commission merchant for
the Fund, provided that the commissions, fees or other remuneration it receives
are fair and reasonable. See "Portfolio Transactions and Brokerage" in the
Statement of Additional Information.
CUSTODIAN AND TRANSFER AND DIVIDEND DISBURSING AGENT
State Street Bank and Trust Company (State Street or the Custodian), One
Heritage Drive, North Quincy, Massachusetts 02171, serves as Custodian for the
Fund's portfolio securities and cash and, in that capacity, maintains certain
financial and accounting books and records pursuant to an agreement with the
Fund. Its mailing address is P.O. Box 1713, Boston, Massachusetts 02105.
Prudential Mutual Fund Services LLC (PMFS or the Transfer Agent), Raritan
Plaza One, Edison, New Jersey 08837, serves as Transfer Agent and Dividend
Disbursing Agent and in those capacities maintains certain books and records for
the Fund. Its mailing address is P.O. Box 15005, New Brunswick, New Jersey
08906-5005. PMFS is a wholly-owned subsidiary of PIFM.
YEAR 2000
The services provided to the Fund and the shareholders by the Manager, the
Distributor, the Transfer Agent and the Custodian depend on the smooth
functioning of their computer systems and those of their outside service
providers. Many computer software systems in use today cannot distinguish the
year 2000 from the year 1900 because of the way dates are encoded and
calculated. Such event could have a negative impact on handling securities
income, payments of interest and dividends, pricing and account services.
Although, at this time, there can be no assurance that there will be no adverse
impact on the Fund. The Manager, the Distributor, the Transfer Agent and the
Custodian have advised the Fund that they have been actively working on
necessary changes to their computer systems to prepare for the year 2000 and
expect that their systems, and those of their outside services, will be adapted
in time for that event.
18
HOW THE FUND VALUES ITS SHARES
THE FUND'S NAV IS DETERMINED BY SUBTRACTING ITS LIABILITIES FROM ITS ASSETS
AND DIVIDING THE REMAINDER BY THE NUMBER OF OUTSTANDING SHARES. NAV IS
CALCULATED SEPARATELY FOR EACH CLASS. THE BOARD OF DIRECTORS HAS FIXED THE
SPECIFIC TIME OF DAY FOR THE COMPUTATION OF THE FUND'S NAV TO BE AS OF 4:15
P.M., NEW YORK TIME.
Portfolio securities are valued based on market quotations or, if not
readily available, at fair value as determined in good faith under procedures
established by the Fund's Board of Directors. See "Net Asset Value" in the
Statement of Additional Information.
The Fund will compute its NAV once daily on days that the New York Stock
Exchange is open for trading except on days on which no orders to purchase, sell
or redeem shares have been received by the Fund or days on which changes in the
value of the Fund's portfolio securities do not materially affect the NAV.
Although the legal rights of each class of shares are substantially
identical, the different expenses borne by each class will result in different
NAVs and dividends. The NAV of Class B and Class C shares will generally be
lower than the NAV of Class A shares as a result of the larger
distribution-related fee to which Class B and Class C shares are subject. It is
expected, however, that the NAV per share of the three classes will tend to
converge immediately after the recording of dividends, if any, which will differ
by approximately the amount of the distribution and/or service fee expense
accrual differential among the classes.
HOW THE FUND CALCULATES PERFORMANCE
FROM TIME TO TIME THE FUND MAY ADVERTISE ITS YIELD, TAX EQUIVALENT YIELD,
AND TOTAL RETURN (INCLUDING AVERAGE ANNUAL TOTAL RETURN AND AGGREGATE TOTAL
RETURN) IN ADVERTISEMENTS OR SALES LITERATURE. YIELD, TAX EQUIVALENT YIELD, AND
TOTAL RETURN ARE CALCULATED SEPARATELY FOR CLASS A, CLASS B AND CLASS C SHARES.
THESE FIGURES ARE BASED ON HISTORICAL EARNINGS AND ARE NOT INTENDED TO INDICATE
FUTURE PERFORMANCE. The yield refers to the income generated by an investment in
the Fund over a 30-day period. This income is then annualized; that is, the
amount of income generated by the investment during that 30-day period is
assumed to be generated each 30-day period for twelve periods and is shown as a
percentage of the investment. The income earned on the investment is also
assumed to be reinvested at the end of the sixth 30-day period. The tax
equivalent yield is calculated similarly to the yield, except that the yield is
increased using a stated income tax rate to demonstrate the taxable yield
necessary to produce an after-tax yield equivalent to the Fund. The total return
shows what an investment in the Fund would have earned over a specified period
of time (I.E., one, five or ten years or since inception of the Fund) assuming
that all distributions and dividends by the Fund were reinvested on the
reinvestment dates during the period and less all recurring fees. The aggregate
total return reflects actual performance over a stated period of time. Average
annual total return is a hypothetical rate of return that, if achieved annually,
would have produced the same aggregate total return if performance had been
constant over the entire period. Average annual total return smooths out
variations in performance and takes into account any applicable initial or
contingent deferred sales charges. Neither average annual total return nor
aggregate total return takes into account any federal or state income taxes
which may be payable upon redemption. The Fund also may include comparative
performance information in advertising or marketing the Fund's shares. Such
performance information may include data from Lipper Analytical Services, Inc.,
Morningstar Publications, Inc., other industry publications, business
periodicals, and market indices. See "Performance Information" in the Statement
of Additional Information. Further performance information is contained in the
Fund's annual and semi-annual reports to shareholders, which may be obtained
without charge. See "Shareholder Guide--Shareholder Services--Reports to
Shareholders."
TAXES, DIVIDENDS AND DISTRIBUTIONS
TAXATION OF THE FUND
THE FUND HAS ELECTED TO QUALIFY AND INTENDS TO REMAIN QUALIFIED AS A
REGULATED INVESTMENT COMPANY UNDER THE INTERNAL REVENUE CODE. ACCORDINGLY, THE
FUND WILL NOT BE SUBJECT TO FEDERAL INCOME TAXES ON ITS NET INVESTMENT
19
INCOME AND NET CAPITAL AND CURRENCY GAINS, IF ANY, THAT IT DISTRIBUTES TO ITS
SHAREHOLDERS. SEE "TAXES, DIVIDENDS AND DISTRIBUTIONS" IN THE STATEMENT OF
ADDITIONAL INFORMATION.
Gain or loss realized by the Fund from the sale of securities generally
will be treated as capital gain or loss; however, gain from the sale of certain
securities (including municipal obligations) will be treated as ordinary income
to the extent of any market discount. Market discount generally is the
difference, if any, between the price paid by the Fund for the security and the
principal amount of the security (or, in the case of a security issued at an
original issue discount, the revised issued price of the security). The market
discount rule does not apply to any security that was acquired by the Fund at
its original issue price.
TAXATION OF SHAREHOLDERS
Distributions out of net investment income, to the extent attributable to
interest received on tax-exempt securities, are exempt from federal income tax
when paid to shareholders. Distributions of other net investment income and net
short-term capital gains in excess of net long-term capital losses will be
taxable as ordinary income to the shareholder whether or not reinvested. Any net
capital gains (I.E., the excess of net capital gains from the sale of assets
held for more than 12 months over net short-term capital losses) distributed to
shareholders will be taxable as capital gains to the shareholders, whether or
not reinvested and regardless of the length of time a shareholder has owned his
or her shares. The maximum capital gains rate for individuals is 28% with
respect to assets held for more than 12 months, but not more than 18 months, and
20% with respect to assets held for more than 18 months. The maximum capital
gains rate for corporate shareholders currently is the same as the maximum tax
rate for ordinary income.
It is not anticipated that corporate shareholders will be entitled to any
dividends received deduction with respect to distributions from the Fund.
Interest on certain private activity tax-exempt obligations issued on or
after August 8, 1986, is a preference item for purposes of the alternative
minimum tax for both individual and corporate shareholders. In the event that
the Fund invests in such obligations, the portion of an exempt-interest dividend
of the Fund that is allocable to such municipal obligations will be treated as a
preference item to shareholders for purposes of the alternative minimum tax. In
addition, a portion of the exempt-interest dividends received by corporate
shareholders with respect to interest on tax-exempt obligations, whether or not
private activity bonds, will be taken into account in computing the alternative
minimum tax. See "Taxes, Dividends and Distributions" in the Statement of
Additional Information.
Any gain or loss realized upon a sale of shares of the Fund by a
shareholder who is not a dealer in securities will be treated as capital gain or
loss. In the case of an individual, any such capital gain will be treated as
short-term capital loss if the shares were held for not more than 12 months,
capital gain taxable at the maximum rate of 28% if such shares were held for
more than 12, but not more than 18 months, and capital gain, taxable at the
maximum rate of 20% if such shares were held for more than 18 months. In the
case of a corporation, any such capital gain will be treated as long-term
capital gain, taxable at the same rates as ordinary income, if such shares were
held for more than 12 months. Any such capital loss will be treated as long-term
capital loss if the shares have been held for more than one year and otherwise
as a short-term capital loss. Any such loss with respect to shares that are held
for six months or less however, will be disallowed to the extent of any exempt
interest dividends received with respect to such shares, or treated as long-term
capital loss to the extent of any capital gain distributions received by the
shareholder with respect to such shares.
The Fund has obtained opinions of counsel to the effect that neither (i)
the conversion of Class B shares into Class A shares nor (ii) the exchange of
any Class of the Fund's shares for any other Class of its shares constitutes a
taxable event for federal income tax purposes. However, such opinions are not
binding on the Internal Revenue Service.
Net tax-exempt interest distributed by the Fund to shareholders may not be
exempt from state or local taxation. Shareholders are advised to consult their
own tax advisers regarding specific questions as to federal, state or local
taxes. See "Taxes, Dividends and Distributions" in the Statement of Additional
Information.
20
WITHHOLDING TAXES
Under the Internal Revenue Code, the Fund is generally required to withhold
and remit to the U.S. Treasury 31% of taxable dividends, capital gain
distributions and redemption proceeds payable to individuals and certain
noncorporate shareholders who fail to furnish correct tax identification numbers
on IRS Form W-9 (or IRS Form W-8 in the case of certain foreign shareholders)
or, generally, who are otherwise subject to backup withholding. Dividends from
taxable net investment income and net short-term capital gains paid to a foreign
shareholder will generally be subject to U.S. withholding tax at the rate of 30%
(or lower treaty rate).
Shareholders are advised to consult their own tax advisers regarding
specific questions as to federal, state or local taxes. See "Taxes, Dividends
and Distributions" in the Statement of Additional Information.
DIVIDENDS AND DISTRIBUTIONS
THE FUND EXPECTS TO DECLARE DAILY AND PAY MONTHLY DIVIDENDS OF NET
INVESTMENT INCOME AND MAKE DISTRIBUTIONS OF NET CAPITAL GAINS, IF ANY, AT LEAST
ANNUALLY. Dividends paid by the Fund with respect to each class of shares, to
the extent any dividends are paid, will be calculated in the same manner, at the
same time, on the same day and will be in the same amount except that each class
will bear its own distribution expenses, generally resulting in lower dividends
for Class B and Class C shares in relation to Class A shares. Distributions of
net capital gains, if any, will be paid in the same amount for each class of
shares. See "How the Fund Values its Shares."
DIVIDENDS AND DISTRIBUTIONS WILL BE PAID IN ADDITIONAL FUND SHARES BASED ON
THE NAV OF EACH CLASS OF FUND SHARES ON THE PAYMENT DATE OR SUCH OTHER DATE AS
THE BOARD OF DIRECTORS MAY DETERMINE, UNLESS THE SHAREHOLDER ELECTS IN WRITING
NOT LESS THAN FIVE BUSINESS DAYS PRIOR TO THE RECORD DATE TO RECEIVE SUCH
DIVIDENDS AND DISTRIBUTIONS IN CASH. Such election should be submitted to
Prudential Mutual Fund Services LLC, Attention: Account Maintenance, P.O. Box
15015, New Brunswick, New Jersey 08906-5015. The Fund will notify each
shareholder after the close of the Fund's taxable year both of the dollar amount
and the taxable status of that year's dividends and distributions on a per share
basis. If you hold shares through the Distributor, you should contact your
financial adviser to elect to receive dividends and distributions in cash.
In determining the amount of capital gains to be distributed, any capital
loss carryovers from prior years will be offset against capital gains. The Fund
intends to invest its assets so that dividends paid from net tax-exempt interest
earned from Municipal Bonds and Notes will qualify as exempt-interest dividends
and be excluded from the shareholder's gross income under the Internal Revenue
Code.
Any dividends or distributions of net capital gains paid shortly after a
purchase by an investor will have the effect of reducing the NAV of the
investor's shares by the per share amount of the distributions. Although in
effect a return of invested principal, capital gain distribution and dividends,
to the extent such distributions are out of taxable net income, are subject to
federal income taxes. Accordingly, prior to purchasing shares of the Fund, an
investor should carefully consider the impact of dividends and distributions
which are expected to be or have been announced.
IF YOU BUY SHARES ON OR IMMEDIATELY BEFORE THE RECORD DATE (THE DATE THAT
DETERMINED WHO RECEIVES THE DIVIDEND), YOU WILL RECEIVE A PORTION OF THE MONEY
YOU INVESTED AS A TAXABLE DIVIDEND. THEREFORE, YOU SHOULD CONSIDER THE TIMING OF
DIVIDENDS WHEN BUYING SHARES OF THE FUND.
GENERAL INFORMATION
DESCRIPTION OF COMMON STOCK
THE FUND WAS INCORPORATED IN MARYLAND ON JANUARY 9, 1980. THE FUND IS
AUTHORIZED TO ISSUE 750 MILLION SHARES OF COMMON STOCK, $.01 PAR VALUE PER
SHARE, DIVIDED INTO THREE CLASSES, DESIGNATED CLASS A, CLASS B AND CLASS C
COMMON STOCK, EACH OF WHICH CONSISTS OF 250 MILLION AUTHORIZED SHARES. Each
class of common stock represents an
21
interest in the same assets of the Fund and is identical in all respects except
that (i) each class is subject to different sales charges and distribution
and/or service fees, (ii) each class has exclusive voting rights on any matter
submitted to shareholders that relates solely to its arrangement and has
separate voting rights on any matter submitted to shareholders in which the
interests of one class differ from the interests of any other class (except that
the Fund has agreed with the Commission in connection with the offering of a
conversion feature on Class B shares to submit any amendment of the Class A Plan
to both Class A and Class B shareholders), (iii) each class has a different
exchange privilege and (iv) only Class B shares have a conversion feature. See
"How the Fund is Managed--Distributor." The Fund has received an order from the
Commission permitting the issuance and sale of multiple classes of common stock.
Currently, the Fund is offering only three classes designated Class A, Class B,
and Class C shares. In accordance with the Fund's Articles of Incorporation, the
Board of Directors may authorize the creation of additional series of common
stock and classes within such series, with such preferences, privileges,
limitations and voting and dividend rights as the Board may determine.
The Board of Directors may increase or decrease the number of authorized
shares without approval by the shareholders. Shares of the Fund, when issued,
are fully paid, nonassessable, fully transferable and redeemable at the option
of the holder. Shares are also redeemable at the option of the Fund under
certain circumstances as described under "Shareholder Guide--How to Sell Your
Shares." Each share of each class of common stock is equal as to earnings,
assets and voting privileges, except as noted above, and each class of shares
bears the expenses related to the distribution of its shares. Except for the
conversion feature applicable to the Class B shares, there are no conversion,
preemptive or other subscription rights. In the event of liquidation, each share
of common stock of the Fund is entitled to its portion of all of the Fund's
assets after all debt and expenses of the Fund have been paid. Since Class B and
Class C shares generally bear higher distribution expenses than Class A shares,
the liquidation proceeds to shareholders of those classes are likely to be lower
than to Class A shareholders. The Fund's shares do not have cumulative voting
rights for the election of Directors, so that holders of more than 50 percent of
the shares voting can, if they choose, elect all Directors being selected, while
the holders of the remaining Shares would be unable to elect any Directors.
THE FUND DOES NOT INTEND TO HOLD ANNUAL MEETINGS OF SHAREHOLDERS UNLESS
OTHERWISE REQUIRED BY LAW. THE FUND WILL NOT BE REQUIRED TO HOLD MEETINGS OF
SHAREHOLDERS UNLESS, FOR EXAMPLE, THE ELECTION OF DIRECTORS IS REQUIRED TO BE
ACTED ON BY SHAREHOLDERS UNDER THE INVESTMENT COMPANY ACT. SHAREHOLDERS HAVE
CERTAIN RIGHTS, INCLUDING THE RIGHT TO CALL A MEETING UPON A VOTE OF 10% OF THE
FUND'S OUTSTANDING SHARES FOR THE PURPOSE OF VOTING ON THE REMOVAL OF ONE OR
MORE DIRECTORS OR TO TRANSACT ANY OTHER BUSINESS.
ADDITIONAL INFORMATION
This Prospectus, including the Statement of Additional Information which
has been incorporated by reference herein, does not contain all the information
set forth in the Registration Statement filed by the Fund with the Commission
under the Securities Act. Copies of the Registration Statement may be obtained
at a reasonable charge from the Commission or may be examined, without charge,
at the office of the Commission in Washington, D.C.
SHAREHOLDER GUIDE
HOW TO BUY SHARES OF THE FUND
YOU MAY PURCHASE SHARES OF THE FUND THROUGH THE DISTRIBUTOR, PRUSEC OR
DIRECTLY FROM THE FUND THROUGH ITS TRANSFER AGENT, PRUDENTIAL MUTUAL FUND
SERVICES LLC (PMFS OR THE TRANSFER AGENT), ATTENTION: INVESTMENT SERVICES, P.O.
BOX 15020, NEW BRUNSWICK, NEW JERSEY 08906-5020. The purchase price is the NAV
next determined following receipt of an order by the Transfer Agent or the
Distributor plus a sales charge which, at your option, may be imposed either (i)
at the time of purchase (Class A shares) or (ii) on a deferred basis (Class B or
Class C shares). See "Alternative Purchase Plan" below. See also, "How the Fund
Values its Shares." Payments may be made by cash, wire, check or through your
brokerage account.
22
AN INVESTMENT IN THE FUND MAY NOT BE APPROPRIATE FOR TAX-EXEMPT OR
TAX-DEFERRED INVESTORS. SUCH INVESTORS SHOULD CONSULT THEIR OWN TAX ADVISERS.
The minimum initial investment is $1,000 for Class A and Class B shares and
$5,000 for Class C shares. The minimum subsequent investment is $100 for all
classes. All minimum investment requirements are waived for certain employee
savings plans. For purchases through the Automatic Savings Accumulation Plan,
the minimum initial and subsequent investment is $50. See "Shareholder Services"
below.
Application forms can be obtained from PMFS, the Distributor or Prusec. If
a stock certificate is desired, it must be requested in writing for each
transaction. Certificates are issued only for full shares. Shareholders who hold
their shares through the Distributor will not receive stock certificates.
The Fund reserves the right to reject any purchase order (including an
exchange into the Fund) or to suspend or modify the continuous offering of its
shares. See "How to Sell Your Shares" below.
Your dealer is responsible for forwarding payment promptly to the Fund. The
Distributor reserves the right to cancel any purchase order for which payment
has not been received by the third business day following the investment.
Transactions in Fund shares may be subject to postage and handling charges
imposed by your dealer.
PURCHASE BY WIRE. For an initial purchase of shares of the Fund by wire,
you must first telephone PMFS to receive an account number at (800) 225 -1852
(toll-free). The following information will be requested: your name, address,
tax identification number, class election, dividend distribution election,
amount being wired and wiring bank. Instructions should then be given by you to
your bank to transfer funds by wire to State Street Bank and Trust Company
(State Street), Boston, Massachusetts, Custody and Shareholder Services
Division, Attention: Prudential National Municipals Fund, Inc., specifying on
the wire the account number assigned by PMFS and your name and identifying the
class in which you are eligible to invest (Class A, Class B, or Class C shares).
If you arrange for receipt by State Street of Federal Funds prior to the
calculation of NAV (4:15 P.M., New York time), on a business day, you may
purchase shares of the Fund as of that day. See "Net Asset Value in the
Statement of Additional Information.
In making a subsequent purchase order by wire, you should wire State Street
directly and should be sure that the wire specifies Prudential National
Municipals Fund, Inc., Class A, Class B, or Class C shares and your name and
individual account number. It is not necessary to call PMFS to make subsequent
purchase orders utilizing Federal Funds. The minimum amount which may be
invested by wire is $1,000.
23
ALTERNATIVE PURCHASE PLAN
THE FUND OFFERS THREE CLASSES OF SHARES (CLASS A, CLASS B AND CLASS C
SHARES) WHICH ALLOWS YOU TO CHOOSE THE MOST BENEFICIAL SALES CHARGE STRUCTURE
FOR YOUR INDIVIDUAL CIRCUMSTANCES GIVEN THE AMOUNT OF THE PURCHASE, THE LENGTH
OF TIME YOU EXPECT TO HOLD THE SHARES AND OTHER RELEVANT CIRCUMSTANCES
(ALTERNATIVE PURCHASE PLAN).
ANNUAL 12b-1 FEES
(AS A % OF AVERAGE
SALES CHARGE DAILY NET ASSETS) OTHER INFORMATION
------------ ------------------ -----------------
Class A Maximum initial sales .30 of 1% (Currently Initial sales charge
charge of 3% of the being charged at a waived or reduced for
public offering price rate of .10 of 1%) certain purchases
.50 of 1%
Class B Maximum CDSC of 5% of Shares convert to
the lesser of the 1% (Currently being Class A shares
amount invested or the charged at a rate of approximately seven
redemption proceeds; .75 of 1%) years after purchase
declines to zero after
six years Shares do not convert
to another class
Class C Maximum CDSC of 1% of
the lesser of the
amount invested or the
redemption proceeds
on redemptions made
within one year of
purchase
The three classes of shares represent an interest in the same portfolio of
investments of the Fund and have the same rights, except that (i) each class is
subject to different sales charges and distribution and/or service fees, which
may affect performance, (ii) each class has exclusive voting rights on any
matter submitted to shareholders that relates solely to its arrangements and has
separate voting rights on any matter submitted to shareholders in which the
interests of one class differ from the interests of any other class (except as
noted under the heading "General Information--Description of Common Stock"),
(iii) each class has a different exchange feature and (iv) only Class B shares
have a conversion feature. See "How to Exchange Your Shares" below. The income
attributable to each class and the dividends payable on the shares of each class
will be reduced by the amount of the distribution fee (if any) of each class.
Class B and Class C shares bear the expenses of a higher distribution fee which
will generally cause them to have higher expense ratios and to pay lower
dividends than Class A shares.
Financial advisers and other sales agents who sell shares of the Fund will
receive different compensation for selling Class A, Class B and Class C shares
and will generally receive more compensation initially for selling Class A and
Class B shares than for selling Class C shares.
IN SELECTING A PURCHASE ALTERNATIVE, YOU SHOULD CONSIDER, AMONG OTHER
THINGS, (1) the length of time you expect to hold your investment, (2) the
amount of any applicable sales charge (whether imposed at the time of purchase
or redemption) and distribution-related fees, as noted above, (3) whether you
qualify for any reduction or waiver of any applicable sales charge, (4) the
various exchange privileges among the different classes of shares (see "How to
Exchange Your Shares" below) and (5) the fact that Class B shares automatically
convert to Class A shares approximately seven years after purchase (see
"Conversion Feature--Class B Shares" below).
The following is provided to assist you in determining which method of
purchase best suits your individual circumstances and is based on current fees
and expenses being charged to the Fund:
If you intend to hold your investment in the Fund for less than 5 years and
do not qualify for a reduced sales charge on Class A shares, since Class A
shares are subject to a maximum initial sales charge of 3% and Class B shares
are subject to a CDSC of 5% which declines to zero over a 6 year period, you
should consider purchasing Class C shares over either Class A or Class B shares.
24
If you intend to hold your investment for more than 5 years and do not
qualify for a reduced sales charge on Class A shares, since Class B shares
convert to Class A shares approximately 7 years after purchase and because all
of your money would be invested initially in the case of Class B shares, you
should consider purchasing Class B shares over either Class A or Class C shares.
If you qualify for a reduced sales charge on Class A shares, it may be more
advantageous for you to purchase Class A shares over either Class B or Class C
shares regardless of how long you intend to hold your investment. However,
unlike Class B and Class C shares, you would not have all of your money invested
initially because the sales charge on Class A shares is deducted at the time of
purchase.
If you do not qualify for a reduced sales charge on Class A shares and you
purchase Class C shares, you would have to hold your investment for more than 4
years for the higher cumulative annual distribution-related fee on Class C
shares to exceed the initial sales charge plus cumulative annual
distribution-related fees on Class A shares. This does not take into account the
time value of money, which further reduces the impact of the higher Class C
distribution-related fee on the investment, fluctuations in NAV, the effect of
the return on the investment over this period of time or redemptions during
which the CDSC is applicable.
ALL PURCHASES OF $1 MILLION OR MORE, EITHER AS PART OF A SINGLE INVESTMENT
OR UNDER RIGHTS OF ACCUMULATION OR LETTERS OF INTENT, MUST BE FOR CLASS A
SHARES. SEE "REDUCTION AND WAIVER OF INITIAL SALES CHARGES" BELOW.
CLASS A SHARES
The offering price of Class A shares for investors choosing the initial
sales charge alternative is the next determined NAV plus a sales charge
(expressed as a percentage of the offering price and of the amount invested) as
shown in the following table:
SALES DEALER
CHARGE AS SALES CHARGE CONCESSION
PERCENTAGE AS AS
OF PERCENTAGE OF PERCENTAGE
OFFERING AMOUNT OF OFFERING
AMOUNT OF PURCHASE PRICE INVESTED PRICE
------------------ ----- -------- -----
Less than $99,999 3.00% 3.09% 3.00%
$100,000 to $249,999 2.50% 2.56% 2.50%
$250,000 to $499,999 1.50% 1.52% 1.50%
$500,000 to $999,999 1.00% 1.01% 1.00%
$1,000,000 and above None None None
The Distributor may reallow the entire initial sales charge to dealers.
Selling dealers may be deemed to be underwriters, as that term is defined in the
Securities Act.
In connection with the sale of Class A shares of NAV (without payment of an
initial sales charge), the Manager, the Distributor or one of their affiliates
will pay dealers, financial advisors and other persons which distribute shares a
finders' fee from its own resources based on a percentage of the NAV of shares
sold by such person.
REDUCTION AND WAIVER OF INITIAL SALES CHARGES. Reduced sales charges are
available through Rights of Accumulation and Letters of Intent. Shares of the
Fund and shares of other Prudential Mutual Funds (excluding money market funds
other than those acquired pursuant to the exchange privilege) may be aggregated
to determine the applicable reduction. See "Purchase and Redemption of Fund
Shares--Reduction and Waiver of Initial Sales Charges--Class A Shares" in the
Statement of Additional Information.
PRUARRAY SAVINGS PLAN. Class A shares are also offered at NAV to employees
of companies that enter into a written agreement with Prudential Retirement
Services to participate in the PruArray Savings Program. Under this Program, a
limited number of Prudential Mutual Funds are available for purchase at NAV by
Savings Accumulation Plans of the company's employees. The Program is available
only to employees who open a Savings Accumulation Plan account with the Transfer
Agent. The program is offered to companies that have at least 250 eligible
employees.
25
SPECIAL RULES APPLICABLE TO RETIREMENT PLANS. After a PruArray Plan
qualifies to purchase Class A shares at NAV, all subsequent purchases will be
made at NAV.
OTHER WAIVERS. Class A shares may be purchased at NAV, through Prudential
Securities or the Transfer Agent, by the following persons: (a) officers and
current and former Directors/Trustees of the Prudential Mutual Funds (including
the Fund), (b) employees of Prudential Securities and PIFM and their
subsidiaries and members of the families of such persons who maintain an
"employee related" account at Prudential Securities or the Transfer Agent, (c)
employees of subadvisers of the Prudential Mutual Funds provided that purchases
at NAV are permitted by such person's employer, (d) Prudential employees and
special agents of Prudential and its subsidiaries and all persons who have
retired directly from active service with Prudential or one of its subsidiaries,
(e) registered representatives and employees of dealers who have entered into a
selected dealer agreement with Prudential Securities provided that purchases at
NAV are permitted by such person's employer, (f) investors who have a business
relationship with a financial adviser who joined Prudential Securities from
another investment firm, provided that (i) the purchase is made within 180 days
of the commencement of the financial adviser's employment at Prudential
Securities, or within one year in the case of Benefit Plans, (ii) the purchase
is made with proceeds of a redemption of shares of any open-end, non-money
market fund sponsored by the financial adviser's previous employer (other than a
fund which imposes a distribution or service fee of .25 of 1% or less) and (iii)
the financial adviser served as the client's broker on the previous purchases.
You must notify the Transfer Agent either directly or through Prudential
Securities or Prusec that you are entitled to the reduction or waiver of the
sales charge. The reduction or waiver will be granted subject to confirmation of
your entitlement. No initial sales charges are imposed upon Class A shares
purchased upon the reinvestment of dividends and distributions. See "Purchase
and Redemption of Fund Shares--Reduction and Waiver of Initial Sales
Charges--Class A Shares" in the Statement of Additional Information.
CLASS B AND CLASS C SHARES
The offering price of Class B and Class C shares for investors choosing one
of the deferred sales charge alternatives is the NAV next determined following
receipt of an order by the Transfer Agent or Prudential Securities. Although
there is no sales charge imposed at the time of purchase, redemptions of Class B
and Class C shares may be subject to a CDSC. See "How to Sell Your
Shares--Contingent Deferred Sales Charges." The Distributor will pay, from its
own resources, sales commissions of up to 4% of the purchase price of Class B
shares to dealers, financial advisors and other persons who sell the Class B
shares at the time of sale. This facilitates the ability of the Fund to sell the
Class B shares without an initial sales charge being deducted at the time of
purchase. The Distributor anticipates that it will recoup its advancement of
sale commissions from the combination of the CDSC and the distribution fee. See
"How the Fund is Managed--Distributor." In connection with the sale of Class C
shares, the Distributor will pay, from its own resources, dealers, financial
advisers and other persons which distribute Class C shares a sales commission of
up to 1% of the purchase price at the time of the sale.
HOW TO SELL YOUR SHARES
YOU CAN REDEEM YOUR SHARES AT ANY TIME FOR CASH AT THE NAV NEXT DETERMINED
AFTER THE REDEMPTION REQUEST IS RECEIVED IN PROPER FORM BY THE TRANSFER AGENT OR
PRUDENTIAL SECURITIES. SEE "HOW THE FUND VALUES ITS SHARES." In certain cases,
however, redemption proceeds from the Class B shares will be reduced by the
amount of any applicable contingent deferred sales charge, as described below.
See "Contingent Deferred Sales Charges" below.
IF YOU HOLD SHARES OF THE FUND THROUGH PRUDENTIAL SECURITIES, YOU MUST
REDEEM YOUR SHARES THROUGH PRUDENTIAL SECURITIES. PLEASE CONTACT YOUR PRUDENTIAL
SECURITIES FINANCIAL ADVISER.
IF YOU HOLD SHARES IN NON-CERTIFICATE FORM, A WRITTEN REQUEST FOR
REDEMPTION SIGNED BY YOU EXACTLY AS THE ACCOUNT IS REGISTERED IS REQUIRED. IF
YOU HOLD CERTIFICATES, THE CERTIFICATES, SIGNED IN THE NAME(s) SHOWN ON THE FACE
OF THE CERTIFICATES, MUST BE RECEIVED BY THE TRANSFER AGENT IN ORDER FOR THE
REDEMPTION REQUEST TO BE PROCESSED. IF REDEMPTION IS REQUESTED BY A CORPORATION,
PARTNERSHIP, TRUST OR FIDUCIARY, WRITTEN EVIDENCE OF AUTHORITY ACCEPTABLE TO THE
TRANSFER AGENT MUST BE SUBMITTED BEFORE SUCH REQUEST WILL BE ACCEPTED. All
correspondence and documents
26
concerning redemptions should be sent to the Fund in care of the Transfer Agent,
Prudential Mutual Fund Services LLC, Attention: Redemption Services, P.O. Box
15010, New Brunswick, New Jersey 08906-5010.
If the proceeds of the redemption (a) exceed $50,000, (b) are to be paid to
a person other than the record owner, (c) are to be sent to an address other
than the address on the Transfer Agent's records, or (d) are to be paid to a
corporation, partnership, trust or fiduciary, the signature(s) on the redemption
request and on the certificates, if any, or stock power, must be guaranteed by
an eligible guarantor institution. An eligible guarantor institution includes
any bank, broker, dealer or credit union. The Transfer Agent reserves the right
to request additional information from, and make reasonable inquiries of, any
eligible guarantor institution. For clients of Prusec, a signature guarantee may
be obtained from the agency or office manager of most Prudential Insurance and
Financial Services or Preferred Services offices.
PAYMENT FOR SHARES PRESENTED FOR REDEMPTION WILL BE MADE BY CHECK WITHIN
SEVEN DAYS AFTER RECEIPT BY THE TRANSFER AGENT OF THE CERTIFICATE AND/OR WRITTEN
REQUEST EXCEPT AS INDICATED BELOW. IF YOU HOLD SHARES THROUGH PRUDENTIAL
SECURITIES, PAYMENT FOR SHARES PRESENTED FOR REDEMPTION WILL BE CREDITED TO YOUR
PRUDENTIAL SECURITIES ACCOUNT, UNLESS YOU INDICATE OTHERWISE. Such payment may
be postponed or the right of redemption suspended at times (a) when the New York
Stock Exchange is closed for other than customary weekends and holidays, (b)
when trading on such Exchange is restricted, (c) when an emergency exists as a
result of which disposal by the Fund of securities owned by it is not reasonably
practicable or it is not reasonably practicable for the Fund fairly to determine
the value of its net assets, or (d) during any other period when the Commission,
by order, so permits; provided that applicable rules and regulations of the
Commission shall govern as to whether the conditions prescribed in (b), (c) or
(d) exist.
PAYMENT FOR REDEMPTION OF RECENTLY PURCHASED SHARES WILL BE DELAYED UNTIL
THE FUND OR ITS TRANSFER AGENT HAS BEEN ADVISED THAT THE PURCHASE CHECK HAS BEEN
HONORED, UP TO 10 CALENDAR DAYS FROM THE TIME OF RECEIPT OF THE PURCHASE CHECK
BY THE TRANSFER AGENT. SUCH DELAY MAY BE AVOIDED BY PURCHASING SHARES BY WIRE OR
BY CERTIFIED OR CASHIER'S CHECK.
REDEMPTION IN KIND. If the Board of Directors determines that it would be
detrimental to the best interests of the remaining shareholders of the Fund to
make payment wholly or partly in cash, the Fund may pay the redemption price in
whole or in part by a distribution in kind of securities from the investment
portfolio of the Fund, in lieu of cash, in conformity with applicable rules of
the Commission. Securities will be readily marketable and will be valued in the
same manner as in regular redemption. See "How the Fund Values its Shares." If
your shares are redeemed in kind, you would incur transaction costs in
converting the assets into cash. The Fund, however, has elected to be governed
by Rule 18f-1 under the Investment Company Act, under which the Fund is
obligated to redeem shares solely in cash up to the lesser of $250,000 or 1% of
the NAV of the Fund during any 90-day period for any one shareholder.
INVOLUNTARY REDEMPTION. In order to reduce expenses of the Fund, the Board
of Directors may redeem all of the shares of any shareholder, other than a
shareholder which is an IRA or other tax-deferred retirement plan, whose account
has a net asset value of less than $500 due to a redemption. The Fund will give
such shareholders 60 days' prior written notice in which to purchase sufficient
additional shares to avoid such redemption. No CDSC will be imposed on any
involuntary redemption.
90-DAY REPURCHASE PRIVILEGE. If you redeem your shares and have not
previously exercised the repurchase privilege, you may reinvest any portion or
all of the proceeds of such redemption in shares of the Fund at the NAV next
determined after the order is received, which must be within 90 days after the
date of the redemption. Any CDSC paid in connection with such redemption will be
credited (in shares) to your account. (If less than a full repurchase is made,
the credit will be on a PRO RATA basis.) You must notify the Fund's Transfer
Agent, either directly or through the Distributor, at the time the repurchase
privilege is exercised to adjust your account for the CDSC you previously paid.
Thereafter, any redemptions will be subject to the CDSC applicable at the time
of the redemption. See "Contingent Deferred Sales Charges" below. Exercise of
the repurchase privilege may not affect federal tax treatment of any gain
realized upon redemption.
CONTINGENT DEFERRED SALES CHARGES
Redemptions of Class B shares will be subject to a CDSC declining from 5%
to zero over a six-year period. Class C shares redeemed within one year of
purchase will be subject to a 1% CDSC. The CDSC will be deducted from the
redemption proceeds and reduce the amount paid to you. The CDSC will be imposed
on any redemption by you which
27
reduces the current value of your Class B or Class C shares to an amount which
is lower than the amount of all payments by you for shares during the preceding
six years, in the case of Class B shares, and one year, in the case of Class C
shares. A CDSC will be applied on the lesser of the original purchase price or
the current value of the shares being redeemed. Increases in the value of your
shares or shares acquired through reinvestment of dividends or distributions are
not subject to a CDSC. The amount of any CDSC will be paid to and retained by
the Distributor. See "How the Fund is Managed--Distributor" and "Waiver of the
Contingent Deferred Sales Charges--Class B Shares" below.
The amount of the CDSC, if any, will vary depending on the number of years
from the time of payment for the purchase of shares until the time of redemption
of such shares. Solely for purposes of determining the number of years from the
time of any payment for the purchase of shares, all payments during a month will
be aggregated and deemed to have been made on the last day of the month. The
CDSC will be calculated from the first day of the month after the initial
purchase, excluding the time shares were held in a money market fund. See "How
to Exchange Your Shares" below. The following table sets forth the rates of the
CDSC applicable to redemptions of Class B shares:
CONTINGENT DEFERRED
SALES
CHARGE AS A
PERCENTAGE
YEAR SINCE OF DOLLARS INVESTED
PURCHASE OR
PAYMENT MADE REDEMPTION PROCEEDS
------------ -------------------
First...................................... 5.0%
Second..................................... 4.0%
Third...................................... 3.0%
Fourth..................................... 2.0%
Fifth...................................... 1.0%
Sixth...................................... 1.0%
Seventh.................................... None
In determining whether a CDSC is applicable to a redemption, the
calculation will be made in a manner that results in the lowest possible rate.
It will be assumed that the redemption is made first of amounts representing
shares acquired pursuant to the reinvestment of dividends and distributions;
then of amounts representing the increase in NAV above the total amount of
payments for the purchase of Fund shares made during the preceding six years
(five years for shares purchased prior to January 22, 1990); then of amounts
representing the cost of shares held beyond the applicable CDSC period; then of
amounts representing the cost of shares acquired prior to July 1, 1985; and
finally, of amounts representing the cost of shares held for the longest period
of time within the applicable CDSC period.
For example, assume you purchased 100 Class B shares at $10 per share for a
cost of $1,000. Subsequently, you acquired 5 additional Class B shares through
dividend reinvestment. During the second year after the purchase you decided to
redeem $500 of your investment. Assuming at the time of the redemption the net
asset value had appreciated to $12 per share, the value of your Class B shares
would be $1,260 (105 shares at $12 per share). The CDSC would not be applied to
the value of the reinvested dividend shares and the amount which represents
appreciation ($260). Therefore, $240 of the $500 redemption proceeds ($500 minus
$260) would be charged at a rate of 4% (the applicable rate in the second year
after purchase) for a total CDSC of $9.60.
For federal income tax purposes, the amount of the CDSC will reduce the
gain or increase the loss, as the case may be, on the amount recognized on the
redemption of shares.
WAIVER OF CONTINGENT DEFERRED SALES CHARGES--CLASS B SHARES. The CDSC will
be waived in the case of a redemption following the death or disability of a
shareholder or, in the case of a trust, following the death or disability of the
grantor. The waiver is available for total or partial redemptions of shares
owned by a person, either individually or in joint tenancy (with rights of
survivorship), at the time of death or initial determination of disability,
provided that the shares were purchased prior to death or disability. In
addition, the CDSC will be waived on redemptions of shares held by a Director of
the Fund.
You must notify the Fund's Transfer Agent either directly or through the
Distributor or Prusec, at the time of redemption, that you are entitled to
waiver of the contingent deferred sales charge and provide the Transfer Agent
with such supporting documentation as it may deem appropriate. The waiver will
be granted subject to confirmation of your
28
entitlement. See "Purchase and Redemption of Fund Shares--Waiver of the
Contingent Deferred Sales Charge--Class B Shares" in the Statement of Additional
Information.
SYSTEMATIC WITHDRAWAL PLAN. The CDSC will be waived (or reduced) on certain
redemptions from a Systematic Withdrawal Plan. On an annual basis, up to 12% of
the total dollar amount subject to the CDSC may be redeemed without charge. The
Transfer Agent will calculate the total amount available for this waiver
annually on the anniversary date of your purchase or, for shares purchased prior
to March 1, 1997, on March 1 of the current year. The CDSC will be waived (or
reduced) on redemptions until this threshold 12% is reached.
A quantity discount may apply to redemptions of Class B shares purchased
prior to August 1, 1994. See "Purchase and Redemption of Fund Shares--Quantity
Discount--Class B Shares Purchased Prior to August 1, 1994," in the Statement of
Additional Information.
CONVERSION FEATURE--CLASS B SHARES
Class B shares will automatically convert to Class A shares on a quarterly
basis approximately seven years after purchase. Conversions will be effected at
relative NAV without the imposition of any additional sales charge.
Since the Fund tracks amounts paid rather than the number of shares bought
on each purchase of Class B shares, the number of Class B shares eligible to
convert to Class A shares (excluding shares acquired through the automatic
reinvestment of dividends and other distributions) (the Eligible Shares) will be
determined on each conversion date in accordance with the following formula: (i)
the ratio of (a) the amounts paid for Class B shares purchased at least seven
years prior to the conversion date to (b) the total amount paid for all Class B
shares purchased and then held in your account (ii) multiplied by the total
number of Class B shares purchased and then held in your account. Each time any
Eligible Shares in your account convert to Class A shares, all shares or amounts
representing Class B shares then in your account that were acquired through the
automatic reinvestment of dividends and other distributions will convert to
Class A shares.
For purposes of determining the number of Eligible Shares, if the Class B
shares in your account on any conversion date are the result of multiple
purchases at different net asset values per share, the number of Eligible Shares
calculated as described above will generally be either more or less than the
number of shares actually purchased approximately seven years before such
conversion date. For example, if 100 shares were initially purchased at $10 per
share (for a total of $1,000) and a second purchase of 100 shares was
subsequently made at $11 per share (for a total of $1,100), 95.24 shares would
convert approximately seven years from the initial purchase (i.e., $1,000
divided by $2,100 (47.62%) multiplied by 200 shares equals 95.24 shares). The
Manager reserves the right to modify the formula for determining the number of
Eligible Shares in the future as it deems appropriate on notice to shareholders.
Since annual distribution-related fees are lower for Class A shares than
Class B shares, the per share NAV of the Class A shares may be higher than that
of the Class B shares at the time of conversion. Thus, although the aggregate
dollar value will be the same, you may receive fewer Class A shares than Class B
shares converted. See "How the Fund Values its Shares."
For purposes of calculating the applicable holding period for conversions,
all payments for Class B shares during a month will be deemed to have been made
on the last day of the month, or for Class B shares acquired through exchange,
or a series of exchanges, on the last day of the month in which the original
payment for purchases of such Class B shares was made. For Class B shares
previously exchanged for shares of a money market fund, the time period during
which such shares were held in the money market fund will be excluded. For
example, Class B shares held in a money market fund for one year will not
convert to Class A shares until approximately eight years from purchase. For
purposes of measuring the time period during which shares are held in a money
market fund, exchanges will be deemed to have been made on the last day of the
month. Class B shares acquired through exchange will convert to Class A shares
after expiration of the conversion period applicable to the original purchase of
such shares.
The conversion feature may be subject to the continuing availability of
opinions of counsel or rulings of the Internal Revenue Service (i) that the
dividends and other distributions paid on Class A, Class B and Class C shares
will not
29
constitute "preferential dividends" under the Internal Revenue Code and (ii)
that the conversion of shares does not constitute a taxable event. The
conversion of Class B shares into Class A shares may be suspended if such
opinions or rulings are no longer available. If conversions are suspended, Class
B shares of the Fund will continue to be subject, possibly indefinitely, to
their higher annual distribution and service fee.
HOW TO EXCHANGE YOUR SHARES
AS A SHAREHOLDER OF THE FUND, YOU HAVE AN EXCHANGE PRIVILEGE WITH CERTAIN
OTHER PRUDENTIAL MUTUAL FUNDS, INCLUDING ONE OR MORE SPECIFIED MONEY MARKET
FUNDS, SUBJECT TO THE MINIMUM INVESTMENT REQUIREMENTS OF SUCH FUNDS. CLASS A,
CLASS B AND CLASS C SHARES MAY BE EXCHANGED FOR CLASS A, CLASS B, AND CLASS C
SHARES, RESPECTIVELY, OF ANOTHER FUND ON THE BASIS OF THE RELATIVE NAV. No sales
charge will be imposed at the time of the exchange. Any applicable CDSC payable
upon the redemption of shares exchanged will be calculated from the first day of
the month after the initial purchase, excluding the time shares were held in a
money market fund. Class B and Class C shares may not be exchanged into money
market funds other than Prudential Special Money Market Fund, Inc. For purposes
of calculating the holding period applicable to the Class B conversion feature,
the time period during which Class B shares were held in a money market fund
will be excluded. See "Conversion Feature--Class B Shares" above. An exchange
will be treated as a redemption and purchase for tax purposes. See "Shareholder
Investment Account--Exchange Privilege" in the Statement of Additional
Information.
IN ORDER TO EXCHANGE SHARES BY TELEPHONE, YOU MUST AUTHORIZE TELEPHONE
EXCHANGES ON YOUR INITIAL APPLICATION FORM OR BY WRITTEN NOTICE TO THE TRANSFER
AGENT AND HOLD SHARES IN NON-CERTIFICATE FORM. Thereafter, you may call the Fund
at (800) 225 -1852 to execute a telephone exchange of shares, on weekdays,
except holidays, between the hours of 8:00 A.M. and 6:00 P.M., New York time.
For your protection and to prevent fraudulent exchanges, your telephone call
will be recorded and you will be asked to provide your personal identification
number. A written confirmation of the exchange transaction will be sent to you.
NEITHER THE FUND NOR ITS AGENTS WILL BE LIABLE FOR ANY LOSS, LIABILITY OR COST
WHICH RESULTS FROM ACTING UPON INSTRUCTIONS REASONABLY BELIEVED TO BE GENUINE
UNDER THE FOREGOING PROCEDURES. All exchanges will be made on the basis of the
relative NAV of the two funds next determined after the request is received in
good order. The exchange privilege is available only in states where the
exchange may legally be made.
IF YOU HOLD SHARES THROUGH THE DISTRIBUTOR, YOU MUST EXCHANGE YOUR SHARES
BY CONTACTING YOUR PRUDENTIAL SECURITIES FINANCIAL ADVISER. IF YOU HOLD
CERTIFICATES, THE CERTIFICATES, SIGNED IN THE NAME(s) SHOWN ON THE FACE OF THE
CERTIFICATES, MUST BE RETURNED IN ORDER FOR THE SHARES TO BE EXCHANGED. SEE "HOW
TO SELL YOUR SHARES" ABOVE.
You may also exchange shares by mail by writing to Prudential Mutual Fund
Services LLC, Attention: Exchange Processing, P.O. Box 15010, New Brunswick, New
Jersey 08906-5010.
IN PERIODS OF SEVERE MARKET OR ECONOMIC CONDITIONS THE TELEPHONE EXCHANGE
OF SHARES MAY BE DIFFICULT TO IMPLEMENT AND YOU SHOULD MAKE EXCHANGES BY MAIL BY
WRITING TO PRUDENTIAL MUTUAL FUND SERVICES LLC, AT THE ADDRESS NOTED ABOVE.
SPECIAL EXCHANGE PRIVILEGES. A special exchange privilege is available for
shareholders who qualify to purchase Class A shares at NAV. See "Alternative
Purchase Plan--Class A Shares--Reduction and Waiver of Initial Sales Charges".
Under this exchange privilege, amounts representing any Class B and Class C
shares (which are not subject to a CDSC) held in such a shareholder's account
will be automatically exchanged for Class A shares for shareholders who qualify
to purchase Class A shares at NAV on a quarterly basis, unless the shareholder
elects otherwise. Eligibility for this exchange privilege will be calculated on
the business day prior to the date of the exchange. Amounts representing Class B
or Class C shares which are not subject to a CDSC include the following: (1)
amounts representing Class B or Class C shares acquired pursuant to the
automatic reinvestment of dividends and distributions, (2) amounts representing
the increase in the NAV above the total amount of payments for the purchase of
Class B or Class C shares and (3) amounts representing Class B or Class C shares
held beyond the applicable CDSC period. Class B and Class C shareholders must
notify the Transfer Agent either directly or through the Distributor or Prusec
that they are eligible for this special exchange privilege.
30
The exchange privilege is not a right and may be suspended, modified or
terminated on 60 days' notice to shareholders.
FREQUENT TRADING. The Fund and other Prudential Mutual Funds are not
intended to serve as vehicles for frequent trading in response to short-term
fluctuations in the market. Due to the disruptive effect that market timing
investment strategies and excessive trading can have on efficient portfolio
management, each Prudential Mutual Fund and the Fund reserves the right to
refuse purchase orders and exchanges by any person, group or commonly controlled
accounts, if, in the Manager's sole judgment, such person, group or accounts
were following a market timing strategy or were otherwise engaging in excessive
trading (Market Timers).
To implement this authority to protect the Fund and its shareholders from
excessive trading, the Fund will reject all exchanges and purchases from a
Market Timer unless the Market Timer has entered into a written agreement with
the Fund or its affiliates pursuant to which the Market Timer has agreed to
abide by certain procedures, which include a daily dollar limit on trading. The
Fund may notify the Market Timer of rejection of an exchange or purchase order
subsequent to the day on which the order was placed.
SHAREHOLDER SERVICES
In addition to the exchange privilege, as a shareholder in the Fund, you
can take advantage of the following additional services and privileges:
- AUTOMATIC REINVESTMENT OF DIVIDENDS AND/OR DISTRIBUTIONS WITHOUT A SALES
CHARGE. For your convenience, all dividends and distributions are automatically
reinvested in full and fractional shares of the Fund at NAV without a sales
charge. You may direct the Transfer Agent in writing not less than 5 full
business days prior to the record date to have subsequent dividends and/or
distributions sent in cash rather than reinvested. If you hold shares through
Prudential Securities, you should contact your financial adviser.
- AUTOMATIC SAVINGS ACCUMULATION PLAN (ASAP). Under ASAP you may make
regular purchases of the Fund's shares in amounts as little as $50 via an
automatic debit to a bank account or Prudential Securities account (including a
Command Account). For additional information about this service, you may contact
your Prudential Securities financial adviser, Prusec representative or the
Transfer Agent directly.
- SYSTEMATIC WITHDRAWAL PLAN. A systematic withdrawal plan is available to
shareholders which provides for monthly or quarterly checks. Withdrawals of
Class B and Class C shares may be subject to a CDSC. See "How to Sell Your
Shares--Contingent Deferred Sales Charges."
- REPORTS TO SHAREHOLDERS. The Fund will send you annual and semi-annual
reports. The financial statements appearing in annual reports are audited by
independent accountants. In order to reduce duplicate mailing and printing
expenses, the Fund will provide one annual and semi-annual shareholder report
and annual prospectus per household. You may request additional copies of such
reports by calling (800) 225-1852 or by writing to the Fund at Gateway Center
Three, 100 Mulberry Street, Newark, New Jersey 07102-4077. In addition, monthly
unaudited financial data are available upon request from the Fund.
- SHAREHOLDER INQUIRIES. Inquiries should be addressed to the Fund at
Gateway Center Three, 100 Mulberry Street, Newark, New Jersey 07102-4077, or by
telephone at (800) 225-1852 (toll-free) or, from outside the U.S.A., at (908)
417-7555 (collect).
For additional information regarding the services and privileges described
above, see "Shareholder Investment Account" in the Statement of Additional
Information.
31
THE PRUDENTIAL MUTUAL FUND FAMILY
Prudential offers a broad range of mutual funds designed to meet your
individual needs. We welcome you to review the investment options available
through our family of funds. For more information on the Prudential Mutual
Funds, including charges and expenses, contact your Prudential Securities
financial adviser or Prusec representative or telephone the Funds at (800)
225-1852 for a free prospectus. Read the prospectus carefully before you invest
or send money.
TAXABLE BOND FUNDS
Prudential Diversified Bond Fund, Inc.
Prudential Government Income Fund, Inc.
Prudential Government Securities Trust
Short-Intermediate Term Series
Prudential High Yield Fund, Inc.
Prudential Mortgage Income Fund, Inc.
Prudential Structured Maturity Fund, Inc.
Income Portfolio
TAX-EXEMPT BOND FUNDS
Prudential California Municipal Fund
California Series
California Income Series
Prudential Municipal Bond Fund
High Yield Series
Insured Series
Intermediate Series
Prudential Municipal Series Fund
Florida Series
Maryland Series
Massachusetts Series
Michigan Series
New Jersey Series
New York Series
North Carolina Series
Ohio Series
Pennsylvania Series
Prudential National Municipals Fund, Inc.
GLOBAL FUNDS
Prudential Europe Growth Fund, Inc.
Prudential Global Genesis Fund, Inc.
Prudential Global Limited Maturity Fund, Inc.
Limited Maturity Portfolio
Prudential Intermediate Global Income Fund, Inc.
Prudential International Bond Fund, Inc.
Prudential Natural Resources Fund, Inc.
Prudential Pacific Growth Fund, Inc.
Prudential World Fund, Inc.
Global Series
International Stock Series
The Global Total Return Fund, Inc.
Global Utility Fund, Inc.
EQUITY FUNDS
Prudential Balanced Fund
Prudential Distressed Securities Fund, Inc.
Prudential Emerging Growth Fund, Inc.
Prudential Equity Fund, Inc.
Prudential Equity Income Fund
Prudential Index Series Fund
Prudential Bond Market Index Fund
Prudential Europe Index Fund
Prudential Pacific Index Fund
Prudential Small-Cap Index Fund
Prudential Stock Index Fund
Prudential Jennison Series Fund, Inc.
Prudential Jennison Active Balanced Fund
Prudential Jennison Growth Fund
Prudential Jennison Growth & Income Fund
Prudential Multi-Sector Fund, Inc.
Prudential Small-Cap Quantum Fund, Inc.
Prudential Small Company Value Fund, Inc.
Prudential Utility Fund, Inc.
Nicholas-Applegate Fund, Inc.
Nicholas-Applegate Growth Equity Fund
MONEY MARKET FUNDS
- - TAXABLE MONEY MARKET FUNDS
Cash Accumulation Trust
National Money Market Fund
Liquid Assets 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
A-1
No dealer, sales representative or any other person has been authorized to give
any information or to make any representations, other than those contained in
this Prospectus, in connection with the offer contained herein, and, if given or
made, such other information or representations must not be relied upon as
having been authorized by the Fund or the Distributor. This Prospectus does not
constitute an offer by the Fund or by the Distributor to sell or a solicitation
of any offer to buy any of the securities offered hereby in any jurisdiction to
any person to whom it is unlawful to make such offer in such jurisdiction.
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
Page
----
FUND HIGHLIGHTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
What are the Fund's Risk Factors and Special
Characteristics? . . . . . . . . . . . . . . . . . . . . . . . . . 2
FUND EXPENSES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
FINANCIAL HIGHLIGHTS . . . . . . . . . . . . . . . . . . . . . . . . . 5
HOW THE FUND INVESTS . . . . . . . . . . . . . . . . . . . . . . . . . 8
Investment Objective and Policies . . . . . . . . . . . . . . . . . . 8
Hedging and Return Enhancement Strategies . . . . . . . . . . . . . . 10
Other Investments and Policies . . . . . . . . . . . . . . . . . . . 16
Portfolio Management Techniques . . . . . . . . . . . . . . . . . . . 17
Investment Restrictions . . . . . . . . . . . . . . . . . . . . . . . 18
HOW THE FUND IS MANAGED . . . . . . . . . . . . . . . . . . . . . . . . 18
Manager . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Distributor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Fee Waivers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Portfolio Transactions . . . . . . . . . . . . . . . . . . . . . . . 21
Custodian and Transfer and
Dividend Disbursing Agent . . . . . . . . . . . . . . . . . . . . . 21
Year 2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
HOW THE FUND VALUES ITS SHARES . . . . . . . . . . . . . . . . . . . . 22
HOW THE FUND CALCULATES PERFORMANCE . . . . . . . . . . . . . . . . . . 22
TAXES, DIVIDENDS AND DISTRIBUTIONS . . . . . . . . . . . . . . . . . . 23
GENERAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Description of Common Stock . . . . . . . . . . . . . . . . . . . . . 25
Additional Information . . . . . . . . . . . . . . . . . . . . . . . 26
SHAREHOLDER GUIDE . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
How to Buy Shares of the Fund . . . . . . . . . . . . . . . . . . . . 26
Alternative Purchase Plan . . . . . . . . . . . . . . . . . . . . . . 27
How to Sell Your Shares . . . . . . . . . . . . . . . . . . . . . . . 30
Conversion Feature--Class B Shares . . . . . . . . . . . . . . . . . 33
How to Exchange Your Shares . . . . . . . . . . . . . . . . . . . . . 34
Shareholder Services . . . . . . . . . . . . . . . . . . . . . . . . 36
THE PRUDENTIAL MUTUAL FUND FAMILY . . . . . . . . . . . . . . . . . . . A-1
- --------------------------------------------------------------------------------
MF104A
CLASS A: 743918 20 3
CUSIP NOS.: CLASS B: 743918 10 4
CLASS C: 743918 30 2
PRUDENTIAL
NATIONAL
MUNICIPALS
FUND, INC.
PROSPECTUS
March 4, 1998
www.prudential.com
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