-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, EL3BQe6vxi5Ki/18HHXMVGIivk9QlXkowehUwR3lDNvF7ZYWVFiMTTHz84zYyjiH z+DuOQ47RHZdo+JFYcrn5g== 0000898733-01-000114.txt : 20010312 0000898733-01-000114.hdr.sgml : 20010312 ACCESSION NUMBER: 0000898733-01-000114 CONFORMED SUBMISSION TYPE: N-30D PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010309 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PRUDENTIAL NATIONAL MUNICIPALS FUND INC CENTRAL INDEX KEY: 0000314612 STANDARD INDUSTRIAL CLASSIFICATION: UNKNOWN SIC - 0000 [0000] IRS NUMBER: 133021492 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: N-30D SEC ACT: SEC FILE NUMBER: 811-02992 FILM NUMBER: 1564687 BUSINESS ADDRESS: STREET 1: 199 WATER ST CITY: NEW YORK STATE: NY ZIP: 10292 BUSINESS PHONE: 2122142189 MAIL ADDRESS: STREET 1: ONE SEAPORT PLZ STREET 2: ONE SEAPORT PLZ CITY: NEW YORK STATE: NY ZIP: 10292 FORMER COMPANY: FORMER CONFORMED NAME: PRUDENTIAL BACHE NATIONAL MUNICIPALS FUND INC DATE OF NAME CHANGE: 19920602 FORMER COMPANY: FORMER CONFORMED NAME: PRUDENTIAL BACHE HIGH YIELD MUNICIPALS INC DATE OF NAME CHANGE: 19870507 FORMER COMPANY: FORMER CONFORMED NAME: CHANCELLOR HIGH YIELD MUNICIPALS INC DATE OF NAME CHANGE: 19830516 N-30D 1 0001.txt PRUDENTIAL NATIONAL MUNICIPALS FUND, INC. ANNUAL REPORT DECEMBER 31, 2000 Prudential National Municipals Fund, Inc. Fund Type Tax-exempt bond Objective High level of current income exempt from federal income taxes (GRAPHIC) This report is not authorized for distribution to prospective investors unless preceded or accompanied by a current prospectus. The views expressed in this report and information about the Fund's portfolio holdings are for the period covered by this report and are subject to change thereafter. (LOGO) Build on the Rock Investment Goals and Style The Prudential National Municipals Fund's investment objective is to seek a high level of current income exempt from federal income taxes. This means that the Fund invests in long-term municipal bonds. These bonds are varied among the states, maturities, and types of activity they support. There can be no assurance that the Fund will achieve its investment objective. Portfolio Composition Expressed as a percentage of total investments as of 12/31/00 26.1% General Obligation Bonds 15.6 Utility 13.5 Healthcare 13.3 Industrial Development 11.1 Transportation 9.5 Other Revenue 7.4 Prerefunded 3.1 Miscellaneous 0.4 Cash Equivalents Credit Quality Expressed as a percentage of total investments as of 12/31/00 43.7% AAA Insured 8.7 AAA 14.3 AA 8.2 A 19.3 BBB 2.2 BB 3.6 Not Rated* (Prudential ratings used): 1.9 AAA 1.6 BBB 0.1 BB * Unrated bonds are believed to be of comparable quality to the Fund's permissible investments. Ten Largest Issuers Expressed as a percentage of net assets as of 12/31/00 3.3% TX Harris Cnty. Toll Rd. Rev. 2.4 IL Metro Pier & Expo. Authority 2.1 AR Salt River Project 1.9 OH State Water Dev. Authority 1.6 ND Mercer Cnty., Pollution Cntrl. Rev. 1.6 WA King Cnty. Washington 1.6 NY City Muni. Water Fin. Authority 1.6 WA Washington State 1.6 TX San Benito Consolidated Sch. District 1.6 NY City Transitional Holdings are subject to change. www.prudential.com (800) 225-1852 Performance at a Glance Cumulative Total Returns1 As of 12/31/00 One Five Ten Since Year Years Years Inception2 Class A 11.45% 27.54% (27.46) 93.96% (93.71) 107.32% (107.05) Class B 11.23 25.40 (25.32) 87.03 (86.79) 396.13 (395.50) Class C 10.96 23.85 (23.77) N/A 40.16 (39.98) Class Z 11.73 N/A N/A 7.02 Lipper General Muni Debt Fund Avg.3 10.83 25.58 90.94 *** Average Annual Total Returns1 As of 12/31/00 One Five Ten Since Year Years Years Inception2 Class A 8.11% 4.35% (4.33) 6.52% (6.51) 6.59% (6.58) Class B 6.23 4.46 (4.45) 6.46 (6.45) 8.05 (8.04) Class C 8.85 4.16 (4.15) N/A 5.24 (5.22) Class Z 11.73 N/A N/A 3.57 Distributions and Yields As of 12/31/00 Taxable Equivalent 30-Day Yield4 Total Distributions 30-Day at Tax Rates of Paid for Six Months SEC Yield 36% 39.6% Class A $0.76 4.46% 6.97% 7.38% Class B $0.73 4.36 6.81 7.22 Class C $0.69 4.07 6.36 6.74 Class Z $0.80 4.85 7.58 8.03 Past performance is not indicative of future results. Principal and investment return will fluctuate, so that an investor's shares, when redeemed, may be worth more or less than their original cost. 1 Source: Prudential Investments Fund Management LLC and Lipper Inc. The cumulative total returns do not take into account sales charges. The average annual total returns do take into account applicable sales charges. The Fund charges a maximum front-end sales charge of 3% for Class A shares. Class B shares are subject to a declining contingent deferred sales charge (CDSC) of 5%, 4%, 3%, 2%, 1%, and 1% for six years. Class B shares will automatically convert to Class A shares, on a quarterly basis, approximately seven years after purchase. Class C shares are subject to a front-end sales charge of 1% and a CDSC of 1% for 18 months. Class Z shares are not subject to a sales charge or distribution and service (12b-1) fees. Without waiver of management fees and/or expense subsidization, the Fund's cumulative and average annual total returns would have been lower, as indicated in parentheses ( ). 2 Inception dates: Class A, 1/22/90; Class B, 4/25/80; Class C, 8/1/94; and Class Z, 1/22/99. 3 Lipper average returns are for all funds in each share class for the one-, five-, and ten-year periods in the General Municipal Debt Fund category. The Lipper average is unmanaged. Funds in the General Municipal Debt category invest at least 65% of their assets in municipal debt issues in the top four credit ratings. 4 Some investors may be subject to the federal alternative minimum tax (AMT) and/or state and local taxes. Taxable equivalent yields reflect federal taxes only. ***Lipper Since Inception returns are 105.09% for Class A, 439.06% for Class B, 42.64% for Class C, and 4.66% for Class Z, based on all funds in each share class. 1 (LOGO) February 15, 2001 Dear Shareholder, After a discouraging year in 1999, the municipal bond market bounced back with solid returns in 2000. For the 12 months ended December 31, 2000, the Prudential National Municipals Fund's Class A shares returned 11.45%, which is 8.11% to those subject to the initial Class A share sales charge. In comparison, the Lipper General Municipal Debt Fund Average finished the period with a 10.83% return. The first half of the year saw robust economic growth and a Federal Reserve Board (the Fed) in inflation-fighting mode as it raised short-term interest rates three times. Despite the surge in short-term rates, municipal bonds did well in the first quarter, partly due to a drop in long-term rates that was accelerated by the U.S. Treasury's buyback program. Over the second and third quarters, municipal rates drifted without a clear trend, as investors attempted to assess what the Fed would do next. Although the Fed left short-term interest rates unchanged for the balance of the year, yields fell (and prices rose) sharply for most debt securities in the fourth quarter, as it became clear that the economy was rapidly slowing. Municipal bonds benefited not only from the positive interest-rate environment but also from investors' concern about the equity markets. Also, the supply of municipal securities declined for the year as a whole, primarily because of lower refunding activity. Lower supply and healthy demand helped raise the prices of munis. For a more in-depth look at the factors affecting the municipal market and your Fund, please refer to the discussion that follows. Sincerely, David R. Odenath, Jr., President Prudential National Municipals Fund, Inc. 2 Prudential National Municipals Fund, Inc. Annual Report December 31, 2000 Investment Adviser's Report ECONOMY WEAKENS, MUNIS SOAR As the first six months of 2000 came to a close, investors faced many uncertainties. The Fed had raised short-term interest rates three times in the first six months of the year for a total of six rate hikes since June 1999. Despite aggressively tighter monetary policy and unprecedented volatility in the equity markets in the spring, the economy appeared to move along at a rapid pace for most of the summer. As the time drew near for the Fed's Open Market Committee meeting in August, one more increase in rates seemed a distinct possibility. The Fed left rates unchanged, however. The municipal market reflected this uncertainty as yields rose and fell with no real direction during the third quarter. October witnessed a change in sentiment. Companies across a broad range of sectors warned that fourth- quarter earnings would be substantially below previous estimates. As the fourth quarter progressed, data on industrial production, retail sales, employment, and consumer confidence suggested rapidly slowing economic growth. As a result, yields across the fixed-income maturity spectrum dropped substantially. Bond prices, which move inversely to yields, enjoyed a strong rally and finished the year near their highs. Plunging equity markets added to investors' interest in the relative safety of municipal bonds. As the economic data deteriorated, there was hope that the Fed would reduce interest rates at its December 19 meeting, but this did not happen. Nevertheless, investors were somewhat encouraged that the Fed moved to an easing bias from its previous bias toward raising rates. ENHANCING RETURNS We attempted to enhance the Fund's returns in several ways. As it became clear that a definite slowing trend in the economy was unfolding, we sold some 10-year bonds and replaced them with 20- and 30-year securities. This adjustment increased the Fund's duration. (Duration is a measure of a portfolio's sensitivity to changes in interest rates.) Our plan was to lengthen 3 Prudential National Municipals Fund, Inc. Annual Report December 31, 2000 duration, and thereby enable the Fund to participate more fully in an environment of falling yields and rising prices. The rally materialized as anticipated, and our decision to increase duration worked very well. Another reason why we chose to keep duration relatively long had to do with the "January effect." The period between December 1 and the middle of January is usually marked by reduced supply, as issuers wait until the new year to bring securities to market. In addition, demand is normally healthy at that time of year because investors are flush with cash from coupon payments and maturing bonds. Robust demand and limited supply usually mean higher bond prices, an environment that rewards a longer duration. In addition, we tried to maintain the Fund's "coupon barbell" structure with respect to callable securities. If a 30-year bond is callable in 10 years, it means that the issuer can choose to redeem it after 10 years have elapsed. Without getting overly technical, it is beneficial to hold callable securities above and below par, but not right at par--hence, the comparison with a barbell. Par is the current market yield for a particular type of security. A third strategy was to increase the Fund's holdings of A-rated hospital bonds. Credit-quality spreads were relatively wide in the second half of the year, and we thought that these securities provided ample compensation for the credit risk involved. LOOKING AHEAD On January 3, 2001, the Fed surprised investors by lowering its federal funds target rate (the rate U.S. banks charge each other for overnight loans) by 0.50%. In a related action, the discount rate (the rate the Fed charges member banks for loans) was lowered by 0.25%. The next day, the discount rate was cut a further 0.25%. These moves were unusual because they came between meetings of the Fed's Open Market Committee, which met again on January 31, 2001. At that time, both the Fed funds rate and the discount rate were lowered an additional 0.50%. Many investors expect more cuts later in the year. 4 www.prudential.com (800) 225-1852 The municipal market has already factored in a slowing economy to a large extent, so bargains are not as easy to come by as one might think. However, with the stock market struggling and concerns about the safety of corporate paper increasing, we expect overall demand for municipal bonds to be strong during the coming months. Since the Fed is in an interest-rate easing mode, we will look at the possibility of acquiring more single-family housing bonds. This sector usually is sold down to attractive levels when rates are declining, because holders of these securities fear that prepayments of mortgages will result in the bonds being called away from them. In addition, we think A-rated hospital bonds still look attractive, as do lower investment-grade utility bonds. Furthermore, as we approach the end of January, supply should begin to build again as issuance heats up once more. When this happens, we expect more opportunities to enhance the returns of the portfolio, because there should be many more bonds trading in the marketplace. Prudential National Municipals Fund Management Team 5 Prudential National Municipals Fund, Inc. Annual Report December 31, 2000 Financial Statements Prudential National Municipals Fund, Inc. Portfolio of Investments as of December 31, 2000
Moody's Principal Rating Interest Maturity Amount Value Description (a) (Unaudited) Rate Date (000) (Note 1) - ------------------------------------------------------------------------------------------------------------ LONG-TERM INVESTMENTS 101.1% - ---------------------------------------------------------------------------------------- Alabama 2.1% Jefferson Cnty. Sewer Rev., Cap. Impvt. Wts Ser. A Aaa 5.00% 2/01/33 $ 11,150 $ 10,702,439 Cap. Impvt. Wts Ser. A Aaa 5.75 2/01/38 3,000 3,149,760 ------------- 13,852,199 - ---------------------------------------------------------------------------------------- Alaska 0.1% Alaska Ind. Dev. & Expt. Auth. Rev., Revolving Fd. A2 5.40 4/01/01 775 776,922 - ---------------------------------------------------------------------------------------- Arizona 4.4% Arizona Agril. Impvt. & Pwr. Dist. Elect. Sys. Rev., Salt River Proj. Aa2 5.00 1/01/25 14,530 14,134,057 Arizona Hlth. Facs. Auth., Hosp. Sys. Rev. John C Lincoln Health Network BBB(d) 6.875 12/01/20 4,100 4,062,444 Arizona St. Mun. Fin. Proj., Cert. of Part., Ser. 25, B.I.G. Aaa 7.875 8/01/14 2,250 2,935,463 Pima Cnty. Ind. Dev. Auth. Rev., F.S.A. Aaa 7.25 7/15/10 1,790 1,883,689 Pima Cnty. Uni. Sch. Dist., Gen. Oblig., F.G.I.C. Aaa 7.50 7/01/10 3,000(f) 3,712,140 Tucson Cnty. Gen. Oblig., Ser. A Aa2 7.375 7/01/11 1,000 1,242,380 Ser. A Aa2 7.375 7/01/12 1,100 1,375,968 ------------- 29,346,141 - ---------------------------------------------------------------------------------------- California 3.8% Anaheim Pub. Fin. Auth. Lease Rev., F.S.A. PA 641A, R.I.T.E.S. NR 9.487(c) 9/01/16 2,210(g) 3,345,785 PA 641B, R.I.T.E.S. NR 9.487(c) 9/01/24 1,815(g) 2,673,677 Encinitas Union Sch. Dist., Gen. Oblig., M.B.I.A Aaa Zero 8/01/21 3,810 1,289,952
See Notes to Financial Statements 7 Prudential National Municipals Fund, Inc. Portfolio of Investments as of December 31, 2000 Cont'd.
Moody's Principal Rating Interest Maturity Amount Value Description (a) (Unaudited) Rate Date (000) (Note 1) - ------------------------------------------------------------------------------------------------------------ Foothill / Eastern Corridor Agcy., Toll Rd. Rev., Ser. A Aaa Zero 1/01/23 $ 5,000 $ 1,578,050 Long Beach Aquarium of the Pacific Rev., Ser. A, A.M.T., M.B.I.A. Aaa 6.125% 7/01/23 7,920 8,425,375 Los Angeles Uni. Sch. Distr., Ser. A, F.G.I.C. Aaa 6.00 7/01/15 1,000 1,169,040 Pittsburg Redev. Agy., Tax Alloc., Los Medanos Comm. Dev. Proj. Aaa Zero 8/01/25 2,000 533,120 Los Medanos Comm. Dev. Proj. Aaa Zero 8/01/30 5,000 1,012,750 Santa Margarita Dana Point Auth. Rev., M.B.I.A., Ser. 644C, R.I.T.E.S. NR 13.251(c) 8/01/09 665(g) 1,103,062 Ser. 644D, R.I.T.E.S. NR 13.251(c) 8/01/10 810(g) 1,392,082 Ser. 644G, R.I.T.E.S. NR 13.251(c) 8/01/14 660(g) 1,238,259 West Contra Costa Sch. Dist., Cert. of Part., Ref. Baa3 7.125 1/01/24 1,600 1,697,168 ------------- 25,458,320 - ---------------------------------------------------------------------------------------- Colorado 7.5% Arapahoe Cnty. Cap. Impvt. Trust Fund, Hwy. Rev., Ser. E-470 Aaa 7.00 8/31/26 3,000(b) 3,429,480 Arapahoe Wtr. & Santn. Dist., Ref., Ser. A, M.B.I.A. Aaa 6.15 12/01/19 7,500 7,816,500 Boulder Cnty., Sales & Use Tax Rev., Ser. A, F.G.I.C. Aaa(d) 6.00 12/15/17 3,970 4,336,471 Colorado Hsg. Fin. Auth., A.M.T., Singl. Fam. Proj. Aa2 8.00 6/01/25 1,845 1,963,633 Singl. Fam. Proj., Ser. A-2 Aa2 7.25 5/01/27 1,570 1,741,287 Singl. Fam. Proj., Ser. B-1 Aa2 7.90 12/01/25 1,140 1,183,548 Singl. Fam. Proj., Ser. C-1, M.B.I.A. Aaa 7.65 12/01/25 2,515 2,661,373
8 See Notes to Financial Statements Prudential National Municipals Fund, Inc. Portfolio of Investments as of December 31, 2000 Cont'd.
Moody's Principal Rating Interest Maturity Amount Value Description (a) (Unaudited) Rate Date (000) (Note 1) - ------------------------------------------------------------------------------------------------------------ Singl. Fam. Proj., Ser. C-2 Aa2 6.875% 11/01/28 $ 3,275 $ 3,528,911 Singl. Fam. Proj., Ser. C-2 Aa2 7.05 4/01/31 4,000 4,660,120 Colorado Springs Arpt. Rev., Ser. A., A.M.T. BBB+(d) 7.00 1/01/22 7,960(f) 8,346,697 Colorado Springs Hosp. Rev. A3 6.375 12/15/30 2,500 2,526,425 Denver City/Cnty. Airport Rev., Ser. A, M.B.I.A. Aaa 5.75 11/15/16 5,000 5,265,150 Denver Hlth. & Hosp. Auth., Healthcare Rev., Ser. A Baa2 5.375 12/01/28 4,000 3,194,880 ------------- 50,654,475 - ---------------------------------------------------------------------------------------- Connecticut 1.0% Connecticut St. Hlth. & Edu. Facs. Auth. Rev., Univ. of Hartford, Ser. D Ba1 6.75 7/01/12 5,725 5,898,926 Connecticut St. Spec. Tax Oblig. Rev., Trans. Infrastructure, Ser. A Aaa 7.125 6/01/10 1,000 1,189,380 ------------- 7,088,306 - ---------------------------------------------------------------------------------------- District of Columbia 0.2% Dist. of Columbia, Gen. Oblig., Ser. B, M.B.I.A. Aaa 6.00 6/01/13 1,000 1,116,230 - ---------------------------------------------------------------------------------------- Florida 3.0% Broward Cnty. Res. Rec. Rev., Broward Co. L.P. South Proj. A3 7.95 12/01/08 6,940 7,144,730 Florida St. Brd. of Ed., Gen. Oblig. Aa2 9.125 6/01/14 1,260 1,737,288 Hillsborough Cnty. Ind. Dev. Auth. Poll. Ctrl. Rev., Tampa Elec. Proj. Aa3 8.00 5/01/22 5,000 5,324,400 Orange Cnty. Hlth. Facs. Auth. Rev. Hosp. Adventist Hlth Sys. Baa1 6.375 11/15/20 3,000 3,022,080 Tallahasse Hlth. Facs. Rev. Tallahasse Memorial Hlthcare Proj. A3 6.25 12/01/20 1,000 1,016,940
See Notes to Financial Statements 9 Prudential National Municipals Fund, Inc. Portfolio of Investments as of December 31, 2000 Cont'd.
Moody's Principal Rating Interest Maturity Amount Value Description (a) (Unaudited) Rate Date (000) (Note 1) - ------------------------------------------------------------------------------------------------------------ Tallahassee Memorial Hlth. Proj. A3 6.375% 12/01/30 $ 2,000 $ 2,044,840 ------------- 20,290,278 - ---------------------------------------------------------------------------------------- Georgia 1.2% Burke Cnty. Dev. Auth., Poll. Cntrl. Rev., M.B.I.A., Oglethorpe Pwr. Co., E.T.M. Aaa 7.50 1/01/03 557 574,217 Forsyth Cnty. Sch. Dist. Dev. Rev. Aa2 6.75 7/01/16 500 598,390 Fulton Cnty. Sch. Dist. Rev. Aa2 6.375 5/01/17 750 881,715 Georgia Mun. Elec. Auth. Pwr. Rev., Ser. B, M.B.I.A. Aaa 6.375 1/01/16 5,000 5,844,200 Green Cnty. Dev. Auth. Indl. Park Rev. NR 6.875 2/01/04 325 337,935 ------------- 8,236,457 - ---------------------------------------------------------------------------------------- Guam 0.7% Guam Airport Auth. Rev., Ser. B, A.M.T. BBB(d) 6.60 10/01/10 1,000 1,055,040 Guam Pwr. Auth. Rev., Ser. A AAA(d) 6.625 10/01/14 1,000(b) 1,112,310 Ser. A AAA(d) 6.75 10/01/24 2,000(b) 2,233,280 ------------- 4,400,630 - ---------------------------------------------------------------------------------------- Hawaii 0.1% Hawaii St. Dept. Budget & Fin. Spl. Purp. Mtg. Rev., Hawaiian Elec. Co., Ser. C, M.B.I.A., A.M.T. Aaa 7.375 12/01/20 90 91,985 Hawaii St. Harbor Cap. Impvt. Rev., A.M.T. F.G.I.C. Aaa 6.25 7/01/15 500 527,120 ------------- 619,105 - ---------------------------------------------------------------------------------------- Illinois 7.0% Chicago Brd. of Ed., Gen. Oblig., F.G.I.C. Aaa Zero 12/01/19 2,000 729,180 Gen. Oblig., F.G.I.C., Ser. B-1 Aaa Zero 12/01/12 1,500 834,825
10 See Notes to Financial Statements Prudential National Municipals Fund, Inc. Portfolio of Investments as of December 31, 2000 Cont'd.
Moody's Principal Rating Interest Maturity Amount Value Description (a) (Unaudited) Rate Date (000) (Note 1) - ------------------------------------------------------------------------------------------------------------ Chicago City Colleges, Gen. Oblig., F.G.I.C. Aaa Zero 1/01/24 $ 5,000 $ 1,441,500 Gen. Oblig., F.G.I.C. Aaa Zero 1/01/25 5,000 1,365,650 Chicago Singl. Fam. Mtge Rev., Ser. A, F.N.M.A. AAA(d) 7.15% 9/01/31 3,500 4,081,140 Chicago, Gen. Oblig., Cap. Apprec. City Colleges, F.G.I.C. Aaa Zero 1/01/16 13,500 6,230,385 Ser. A, F.G.I.C. Aaa 6.75 1/01/35 5,000(b) 5,920,650 Cook and Du Page Cntys., High Sch. Dist No. 210, Gen. Oblig., F.S.A. Aaa Zero 12/01/11 3,035 1,800,149 Illinois Dev. Fin. Auth. Rev., Cmnty. Rehab. Providers, Ser. A BBB(d) 6.00 7/01/15 2,000 1,859,120 Metropolitan Pier & Expo. Auth., Hosptlty. Fac. Rev., McCormick Pl. Conv. Aaa 7.00 7/01/26 12,910 16,323,017 University Illinois Rev. Auxiliary Facs. Sys. Ser. A, M.B.I.A. Aaa 6.00 4/01/30 6,000 6,500,880 ------------- 47,086,496 - ---------------------------------------------------------------------------------------- Indiana 0.3% Gary Ind. Mtge. Rev., Lakeshore Dunes Apts., Ser. A, G.N.M.A. AAA(d) 6.00 8/20/34 2,000 2,032,600 - ---------------------------------------------------------------------------------------- Kentucky 1.6% Henderson Cnty. Solid Waste Disp. Rev., Macmillan Bloedel Proj., A.M.T. A3 7.00 3/01/25 6,000 6,168,180 Kentucky Eco. Dev. Fin. Auth. Norton Hlthcare, Ser. A NR 6.625 10/01/28 2,000 1,988,420 Ser. A NR 6.50 10/01/20 2,500 2,499,675 ------------- 10,656,275
See Notes to Financial Statements 11 Prudential National Municipals Fund, Inc. Portfolio of Investments as of December 31, 2000 Cont'd.
Moody's Principal Rating Interest Maturity Amount Value Description (a) (Unaudited) Rate Date (000) (Note 1) - ------------------------------------------------------------------------------------------------------------ Louisiana 3.2% New Orleans, Gen. Oblig., A.M.B.A.C. Aaa Zero 9/01/09 $ 13,500 $ 9,061,605 Orleans Parish Sch. Brd., E.T.M., M.B.I.A. Aaa 8.90% 2/01/07 5,780 7,197,372 St. Charles Parish, Env. Impt. Rev., Louisiana Pwr. & Lt. Co. Proj., Ser. A, A.M.T. Baa2 6.875 7/01/24 5,000 5,064,900 ------------- 21,323,877 - ---------------------------------------------------------------------------------------- Maryland 2.0% Baltimore, Econ. Dev. Lease Rev., Armistead Partnership, Ser. A BBB+(d) 7.00 8/01/11 1,000 1,032,780 Maryland St. Hlth. & Higher Edu. Facs. Auth. Rev., Univ. Maryland Med. Sys. Baa1 6.75 7/01/30 5,000 5,198,250 Maryland St. Ind. Dev. Fin. Auth. Rev., Amer. Ctr. Physics Headqrtrs. BBB(d) 6.625 1/01/17 1,000 1,008,010 Montgomery Cnty., Gen. Oblig. Aaa 9.75 6/01/01 450 460,642 Northeast Waste Disp. Auth. Rev., Baltimore City Sludge Corp. Proj. NR 7.25 7/01/07 3,446 3,551,069 Montgomery Cnty. Res. Rec. Proj., Ser. A A2 6.00 7/01/07 1,000 1,076,200 Takoma Park Hosp. Facs. Rev., Washington Adventist Hosp., F.S.A. Aaa 6.50 9/01/12 1,000 1,172,020 ------------- 13,498,971 - ---------------------------------------------------------------------------------------- Massachusetts 5.2% Boston Ind. Dev. Fin. Auth., Swr. Fac. Rev., Harbor Elec. Energy Co. Proj. Aa3 7.375 5/15/15 1,500 1,535,820 Brockton Gen. Oblig. Aa3 6.125 6/15/18 1,030 1,074,733
12 See Notes to Financial Statements Prudential National Municipals Fund, Inc. Portfolio of Investments as of December 31, 2000 Cont'd.
Moody's Principal Rating Interest Maturity Amount Value Description (a) (Unaudited) Rate Date (000) (Note 1) - ------------------------------------------------------------------------------------------------------------ Holyoke Gen. Oblig., School Proj., M.B.I.A. Aaa 8.10% 6/15/05 $ 700(b) $ 759,290 Lowell Gen. Oblig. Aaa 7.625 2/15/10 750(b) 775,785 Mass. Bay Trans. Auth. Rev. Assmnt., Ser. A Aa1 5.25 7/01/30 750 750,000 Mass. St. College Bldg. Auth. Proj. Rev., Ser. A, M.B.I.A. Aaa Zero 5/01/22 2,250 730,800 Mass. St. Gen. Oblig., Ser. A, A.M.B.A.C. Aaa 5.00 7/01/12 1,000 1,041,780 Ser. C, F.G.I.C. Aaa 6.00 8/01/09 1,250 1,397,400 Mass. St. Hlth. & Edl. Facs. Auth. Rev., Beth Israel Hospital, A.M.B.A.C. Aaa 6.646(c) 7/01/25 1,500 1,565,625 Dana Farber Cancer Proj., Ser. G-1 A1 6.25 12/01/22 625 644,400 Faulkner Hospital, Ser. C Baa1 6.00 7/01/23 1,500(b) 1,585,815 Holyoke Hospital, Ser. B Baa3 6.50 7/01/15 550 506,418 Jordan Hospital, Ser. C BBB+(d) 6.875 10/01/22 1,350(b) 1,433,228 Mass. Inst. of Tech. Ser. I-1 Aaa 5.20 1/01/28 1,500(f) 1,531,845 Med. Academic & Scientific Co., Ser. A BBB-(d) 6.625 1/01/15 1,000 1,012,110 Valley Regional Hlth. Sys., Ser. C AAA(d) 7.00 7/01/10 825 976,775 Winchester Hospital, Ser. D AAA(d) 5.75 7/01/24 1,000 1,020,760 Mass. St. Ind. Fin. Agcy. Rev., Phillips Academy Aaa 5.375 9/01/23 1,000(f) 1,016,130 Mass. St. Port Auth. Rev., Ser. B, A.M.T. Aa3 5.00 7/01/18 1,000 970,490 Mass. St. Water Poll. Abatement Trust Rev., Ser. A Aa3 6.375 2/01/15 1,000 1,069,990 Mass. St. Water Res. Auth. Rev., Ser. D, M.B.I.A. Aaa 6.00 8/01/13 500 566,310 Ser. B, M.B.I.A. Aaa 6.25 12/01/11 500 577,635
See Notes to Financial Statements 13 Prudential National Municipals Fund, Inc. Portfolio of Investments as of December 31, 2000 Cont'd.
Moody's Principal Rating Interest Maturity Amount Value Description (a) (Unaudited) Rate Date (000) (Note 1) - ------------------------------------------------------------------------------------------------------------ Mass. St. Dev. Fin. Agy. Rev. Concord-Assabet Family Svcs. Ba2 6.00% 11/01/28 $ 750 $ 558,562 Mass. St. Hlth. & Edl. Facs. Auth. Rev. Simmons College, Ser. D, A.M.B.A.C. Aaa 6.05 10/01/20 1,000 1,097,750 Univ. Mass. Proj., Ser. A, F.G.I.C. Aaa 5.875 10/01/29 500 533,865 Youville Hosp., Ser. B, F.H.A. Aa2 6.00 2/15/34 4,195 4,426,480 Harvard Univ., Ser. W Aaa 6.00 7/01/35 500 546,945 Mass. St. Port Auth. Rev., Ser. 1999A, A.M.T. Baa3 5.75 10/01/29 600 596,298 Mass. St. Tpk. Auth., Met. Hwy. Sys. Rev., Ser. A, M.B.I.A. Aaa Zero 1/01/28 2,000 471,860 Ser. A, A.M.B.A.C Aaa 5.00 1/01/39 750 715,710 Ser. C, M.B.I.A. Aaa Zero 1/01/17 2,000 879,400 Mass. St. Ind. Fin. Agy. Rev., Bradford College CCC(d) 5.625 11/01/28 1,000 500,000 Cambridge Friends School BBB(d) 5.80 9/01/28 700 676,746 Plymouth County Mass. Corr. Facs., Cert. of Part., Ser. A Aaa 7.00 4/01/22 500(b) 533,855 Rail Connections Inc. Mass. Rev., Ser. B A(d) Zero 7/01/21 2,500 700,850 ------------- 34,781,460 - ---------------------------------------------------------------------------------------- Michigan 3.9% Detroit Econ. Dev. Corp., Res. Rec. Rev., Ser. A, F.S.A., A.M.T. Aaa 6.875 5/01/09 920 945,171 Detroit Sewage. Disp. Rev., Prerefunded Inflos Aaa(d) 6.55 7/01/23 800(b) 882,000 Unrefunded Balance Inflos Aaa 6.55 7/01/23 200 207,250 Detroit Wtr. Supply Sys. Rev., Ser. B, M.B.I.A. Aaa 5.55 7/01/12 1,000 1,088,240 Dickinson Cnty. Mem. Hosp. Sys. Rev. Ba1 8.00 11/01/14 1,000(b) 1,140,430
14 See Notes to Financial Statements Prudential National Municipals Fund, Inc. Portfolio of Investments as of December 31, 2000 Cont'd.
Moody's Principal Rating Interest Maturity Amount Value Description (a) (Unaudited) Rate Date (000) (Note 1) - ------------------------------------------------------------------------------------------------------------ Kalamazoo Econ. Dev. Corp. Rev., Friendship Vlg., Ser. A BBB(d) 6.125% 5/15/17 $ 1,000 $ 904,590 Michigan Higher Ed. Rev., Ser. XIII-A, M.B.I.A., A.M.T. Aaa 7.55 10/01/08 85 86,874 Michigan Mun. Bd. Auth. Rev., Wayne Cnty. Proj., M.B.I.A., E.T.M. Aaa 7.40 12/01/02 345 359,932 Michigan St. Hosp. Fin. Auth. Rev., Genesys Hlth. Sys., Ser. A AAA(d) 8.125 10/01/21 1,000(b) 1,182,540 Genesys Hlth. Sys., Ser. A AAA(d) 7.50 10/01/27 500(b) 569,720 Presbyterian Vlg. Oblig. NR 6.375 1/01/25 800 725,952 Michigan St. Hsg. Dev. Auth. Rev., Rental Hsg., Ser. B AA-(d) 7.55 4/01/23 1,000 1,024,840 Rental Hsg., Ser. A, A.M.T. AA-(d) 7.70 4/01/23 500 512,595 Michigan St. Strategic Fd., Ltd. Oblig. Rev., Waste Mgmt. Inc. Proj., A.M.T. Ba1 6.625 12/01/12 1,500 1,511,190 Oak Park, A.M.B.A.C., Gen. Oblig. Aaa 7.00 5/01/12 400(b) 420,884 Gen. Oblig. Aaa 7.00 5/01/11 375(b) 394,579 Okemos Pub. Sch. Dist., M.B.I.A. Aaa Zero 5/01/12 1,100 635,338 M.B.I.A. Aaa Zero 5/01/13 1,000 543,700 Wayne Cnty. Airport Rev. Ser. A., A.M.T. Aaa 5.00 12/01/28 10,000 9,345,600 Wayne Cnty. Bldg. Auth., Ser. A A3 8.00 3/01/17 1,250(b) 1,328,487 Wyandotte Elec. Rev., Gen. Oblig., M.B.I.A. Aaa 6.25 10/01/08 2,000 2,192,400 ------------- 26,002,312 - ---------------------------------------------------------------------------------------- Minnesota 1.9% Minneapolis Special School Dist. No. 1 Cert. Participation, Ser. A Aaa 5.90 2/01/17 5,000 5,243,200
See Notes to Financial Statements 15 Prudential National Municipals Fund, Inc. Portfolio of Investments as of December 31, 2000 Cont'd.
Moody's Principal Rating Interest Maturity Amount Value Description (a) (Unaudited) Rate Date (000) (Note 1) - ------------------------------------------------------------------------------------------------------------ Minneapolis St. Paul Hsg. Fin. Brd. Rev., Sngl. Fam. Mtge., G.N.M.A., A.M.T. AAA(d) 7.30% 8/01/31 $ 535 $ 548,600 Minnesota Agric. & Econ. Dev. Brd. Rev., Fairview Hlth. Care Sys., Ser. A A2 6.375 11/15/22 7,000 7,198,450 ------------- 12,990,250 - ---------------------------------------------------------------------------------------- Mississipi 0.8% Mississippi Business Fin. Corp. Poll. Cntl. Rev., Sys. Energy Res. Inc. Proj. Ba1 5.90 5/01/22 5,700 5,215,728 - ---------------------------------------------------------------------------------------- Missouri 0.7% Missouri St Hlth. & Edl. Facs. Auth. Hlth. Facs. Rev. St. Anthony's Med. Ctr. A2 6.125 12/01/19 1,250 1,274,862 Missouri St. Hsg. Dev. Comn. Mtge Rev., Sngl Fam. Homeowner Ln., Ser. A, G.N.M.A., A.M.T. AAA(d) 7.20 9/01/26 3,435 3,651,852 ------------- 4,926,714 - ---------------------------------------------------------------------------------------- Nevada 1.4% Clark Cnty. Indl. Dev. Rev., Southwest Gas Corp., Ser. A, A.M.T. Baa2 6.50 12/01/33 10,000 9,728,400 - ---------------------------------------------------------------------------------------- New Hampshire 1.7% Manchester Hsg. & Redev. Auth. Rev., Cap. Apprec., Ser. B, A.C.A. A(d) Zero 1/01/24 4,740 1,130,158 Cap. Apprec., Ser. B, A.C.A. A(d) Zero 1/01/27 4,140 816,698 Cap. Apprec., Ser. B, A.C.A. A(d) Zero 1/01/30 4,640 754,789
16 See Notes to Financial Statements Prudential National Municipals Fund, Inc. Portfolio of Investments as of December 31, 2000 Cont'd.
Moody's Principal Rating Interest Maturity Amount Value Description (a) (Unaudited) Rate Date (000) (Note 1) - ------------------------------------------------------------------------------------------------------------ New Hampshire Higher Ed. & Hlth. Facs. Auth. Rev., New Hampshire College BBB-(d) 6.30% 1/01/16 $ 500 $ 476,710 New Hampshire College BBB-(d) 6.375 1/01/27 2,000 1,840,100 New Hampshire Hlth. & Ed. Facs. Auth. Rev., College Issue BBB-(d) 7.50 1/01/31 3,000 3,125,400 New Hampshire St. Ind. Dev. Auth., Poll. Ctrl. Rev., Proj. A Ba3 7.65 5/01/21 3,420 3,493,564 ------------- 11,637,419 - ---------------------------------------------------------------------------------------- New Jersey 2.0% New Jersey Eco. Dev. Auth. Continental Airlines Proj. Ba2 6.25 9/15/19 4,645 4,293,141 Continental Airlines Proj. Ba2 6.25 9/15/29 1,000 895,180 New Jersey Hlthcare Facs. Fin. Auth. Dev., Englewood Hosp. Med. & Ctr. Baa3 6.70 7/01/15 1,200 1,129,080 St. Peter's Univ. Hosp., Ser. A Baa2 6.875 7/01/30 2,000 1,966,520 New Jersey Hlth. Care Facs. Fin. Auth. Rev., Hackensack Univ. Med. Ctr. A3 6.00 1/01/34 5,000 5,198,200 ------------- 13,482,121 - ---------------------------------------------------------------------------------------- New York 5.6% Metropolitan Trans. Auth., Trans. Facs. Rev., Ser. A, F.S.A. Aaa 6.00 7/01/16 2,500 2,690,975 New York City Ind. Dev. Agcy., Rev., Brooklyn Navy Yard Cogen Partners, A.M.T. Baa3 5.65 10/01/28 2,000 1,823,040 New York City Mun. Wtr. Fin. Auth., Wtr.& Swr. Sys. Rev., F.G.I.C. Aaa 6.75 6/15/16 10,565(f) 10,783,167
See Notes to Financial Statements 17 Prudential National Municipals Fund, Inc. Portfolio of Investments as of December 31, 2000 Cont'd.
Moody's Principal Rating Interest Maturity Amount Value Description (a) (Unaudited) Rate Date (000) (Note 1) - ------------------------------------------------------------------------------------------------------------ New York City, Gen. Oblig., Ser. A A2 7.75% 8/15/04 $ 15 $ 15,540 Ser. B A2 8.25 6/01/06 1,500 1,778,040 Ser. B A2 7.25 8/15/07 3,500 4,068,925 Ser. D A2 8.00 8/01/03 70 72,549 Ser. D A2 8.00 8/01/04 30 31,092 Ser. D A2 7.65 2/01/07 45 47,224 Ser. F A2 8.25 11/15/02 815 855,082 New York City, Transitional Fin. Auth. Rev., Future Tax Secured, Ser. A Aa2 5.75 2/15/17 10,000 10,706,100 New York St. Env. Facs. Corp., Poll. Ctrl. Rev. Aaa 5.80 1/15/14 1,280 1,367,936 New York St. Urban Dev. Corp. Rev. Ref., F.S.A., Correctional Facs. Aaa 6.50 1/01/09 3,000 3,416,880 ------------- 37,656,550 - ---------------------------------------------------------------------------------------- North Carolina 4.0% Charlotte Mecklenberg Hosp., Auth. Hlth. Care Sys. Rev. AA(d) 6.25 1/01/20 430(b) 447,621 Charlotte Arpt. Rev., Ser. B, M.B.I.A. Aaa 6.00 7/01/24 1,000 1,063,720 Charlotte Storm Wtr. Fee Rev. Aa2 6.00 6/01/25 500 544,650 Charlotte Wtr. & Swr. Gen. Oblig. Aaa 6.20 6/01/17 1,500(b) 1,571,985 Sys. Rev. Aa2 5.25 6/01/24 500 503,570 Sys. Rev. Aa1 5.25 6/01/25 500(f) 503,170 Columbus Cnty. Ind. Fac. & Poll. Ctrl. Fin. Auth. Rev., Intl. Paper Co. Proj., A.M.T. Baa1 6.15 4/01/21 1,000 1,001,680
18 See Notes to Financial Statements Prudential National Municipals Fund, Inc. Portfolio of Investments as of December 31, 2000 Cont'd.
Moody's Principal Rating Interest Maturity Amount Value Description (a) (Unaudited) Rate Date (000) (Note 1) - ------------------------------------------------------------------------------------------------------------ Halifax Cnty. Ind. Fac. & Poll. Ctrl. Fin. Auth. Rev. Champion Int'l Corp. Proj., Ser. A, A.M.T. Baa1 5.45% 11/01/33 $ 1,000 $ 871,450 No. Carolina Eastn. Mun. Pwr. Agcy., Pwr. Sys. Rev., Ser. A, E.T.M. Aaa 6.50 1/01/18 1,995 2,355,337 Pwr. Sys. Rev., Ser. A Aaa 6.00 1/01/26 650(b) 730,288 Pwr. Sys. Rev., A.M.B.A.C. Aaa 6.00 1/01/18 1,000 1,122,230 Pwr. Sys. Rev., Ser. A, M.B.I.A. Aaa 6.50 1/01/18 1,005 1,185,237 Pwr. Sys. Rev., Ser. A, E.M.T. Baa3 6.40 1/01/21 1,000 1,157,960 No. Carolina Med. Care Comn., Hosp. Rev., Annie Pen Mem. Hosp. Proj. Baa3 7.50 8/15/21 1,000(b) 1,054,880 Rex Hosp. Proj. Aaa 6.25 6/01/17 1,750(b) 1,866,322 No. Carolina Mun. Pwr. Agcy., No. 1 Catawba Elec. Rev., M.B.I.A. Aaa 6.00 1/01/10 1,250 1,388,550 No. 1 Catawba Elec. Rev., M.B.I.A. Aaa 6.22 1/01/12 2,000 2,097,500 No. Carolina Hsg. Fin. Agcy. Home Ownership Ser. 6A, A.M.T. Aa2 6.20 1/01/29 1,000 1,040,160 No. Carolina University Revs. Corp. Utils. Sys. Aa2 Zero 8/01/19 5,215(f) 1,979,353 Northern Hosp. Dist. Surry Cnty., Hlth. Care Facs. Rev. Ba1 7.875 10/01/21 1,500 1,503,375 Piedmont Triad Arpt. Auth., Rev., Ser. B, F.S.A., A.M.T. Aaa 6.00 7/01/21 1,000 1,065,860 Pitt Cnty. Rev., Pitt Cnty. Mem. Hosp., E.T.M. Aaa 5.25 12/01/21 1,000 1,010,940 Wake Cnty. Hosp. Rev., E.T.M., M.B.I.A. Aaa 5.125 10/01/26 1,000 1,001,890 Winston Salem, Sngl. Fam. Mtge. Rev., A.M.T. A1 8.00 9/01/07 205 209,293 ------------- 27,277,021
See Notes to Financial Statements 19 Prudential National Municipals Fund, Inc. Portfolio of Investments as of December 31, 2000 Cont'd.
Moody's Principal Rating Interest Maturity Amount Value Description (a) (Unaudited) Rate Date (000) (Note 1) - ------------------------------------------------------------------------------------------------------------ North Dakota 1.6% Mercer Cnty. Poll. Ctrl. Rev., Antelope Valley Station, A.M.B.A.C. Aaa 7.20% 6/30/13 $ 9,000 $ 10,914,570 - ---------------------------------------------------------------------------------------- Ohio 8.8% Akron, Gen. Oblig., A1 10.5 12/01/04 200 244,426 Brecksville Broadview Heights City Sch. Dist., F.G.I.C. Aaa 6.50 12/01/16 1,000 1,116,070 Canton Water Works Sys., Gen. Oblig., A.M.B.A.C. Aaa 5.85 12/01/15 700 744,401 Cleveland Arpt. Spl. Rev., Ref. Continental Airlines, Inc. Ba2 5.70 12/01/19 650 549,465 Cleveland Gen. Oblig., M.B.I.A. Aaa 5.75 8/01/15 1,000 1,109,920 Cleveland Gen. Oblig., M.B.I.A. Aaa 5.75 8/01/14 1,000 1,109,850 Cleveland Arpt. Sys. Rev., Series A, A.M.T. Aaa 6.25 1/01/20 3,500 3,673,005 Columbus Citation Hsg. Dev. Corp., Mtge. Rev., F.H.A. AA(d) 7.625 1/01/22 1,850(b) 2,288,709 Columbus, Gen. Oblig., Mun. Arpt. No. 32, A.M.T. Aaa 7.15 7/15/06 435 441,651 Cuyahoga Cnty. Hosp. Rev., Meridia Health Sys. A1 6.25 8/15/24 1,500(b) 1,653,435 Dayton, Gen. Oblig., M.B.I.A. Aaa 7.00 12/01/07 480(f) 555,926 Dover Mun. Elec. Sys. Rev., F.G.I.C. Aaa 5.95 12/01/14 1,000 1,063,540 Franklin Cnty. Hosp. Rev., Senior Doctors Hlth. Corp., Ser. A Baa3 5.60 12/01/28 1,800 1,161,450 Greene Cnty. Cap. Apprec., Wtr. Sys. Rev.,Ser. A, F.G.I.C. Aaa 6.125 12/01/21 1,000 1,087,290 Hamilton Cnty. Sales Tax, Sub. Cap. Apprec., Series B Aaa Zero 12/01/20 2,000 698,600 Sub. Cap. Apprec., Series B Aaa Zero 12/01/24 1,000 277,580 Hilliard City Sch. Dist., Cap. Apprec. Sch. Impvt., F.G.I.C. Aaa Zero 12/01/18 1,720 677,095
20 See Notes to Financial Statements Prudential National Municipals Fund, Inc. Portfolio of Investments as of December 31, 2000 Cont'd.
Moody's Principal Rating Interest Maturity Amount Value Description (a) (Unaudited) Rate Date (000) (Note 1) - ------------------------------------------------------------------------------------------------------------ Cap. Apprec. Sch. Impvt., F.G.I.C. Aaa Zero 12/01/19 $ 1,720 $ 636,882 Hudson City, Park Impvt. Aa2 6.125% 12/01/19 555 614,296 Lorain Cnty. Hosp. Rev. Ref. Mtge., Elyria Methodist Village BBB+(d) 6.875 6/01/22 2,000(f) 2,000,420 Lucas Cnty. Hosp. Rev., Promedica Hlthcare Oblig., Ser. 96, M.B.I.A. Aaa 5.75 11/15/09 2,000 2,162,860 Lucas Cnty. Hlth. Fac. Rev., Ref., Ohio Presbyterian Svcs. NR 6.625 7/01/14 1,750(f) 1,700,527 Ref. & Impvt. Sunset Retirement Svcs., Ser. A NR 6.625 8/15/30 1,000 992,580 Miami Cnty. Hosp. Fac. Rev., Ref. & Impvt., Upper Valley Med. Ctr. Baa2 6.375 5/15/26 750 681,083 Montgomery Cnty. Swr. Sys. Rev., Greater Moraine, Beaver Creek, F.G.I.C. Aaa Zero 9/01/05 1,000 813,760 Montgomery Cnty. Hlth. Sys., Rev., Ref., Franciscan Med. Ctr., Dayton NR 5.50 7/01/18 1,750(b) 1,847,352 Mount Vernon City Sch. Dist., Gen. Oblig., F.G.I.C. Aaa 7.50 12/01/14 500 558,130 Newark, Ltd. Tax Gen. Oblig., Wtr. Impvt., Cap. Apprec., A.M.B.A.C. Aaa Zero 12/01/06 805 618,498 Ohio Hsg. Fin. Agy. Mtg. Rev., Res. Con. Opt C1, G.N.M.A., A.M.T Aaa 6.05 3/01/32 1,000 1,029,240 Ser. A., G.N.M.A., A.M.T. Aaa 6.35 9/01/31 1,000 1,050,870 Ohio St. Air Quality Dev. Auth. Rev., Poll. Ctrl., Cleveland Elec. Co. Proj., Ref., A.M.T. Baa3 6.10 8/01/20 1,000 950,140 Cleveland Elec. Co., Proj. Ref., F.G.I.C. Aaa 8.00 12/01/13 2,500 2,686,625
See Notes to Financial Statements 21 Prudential National Municipals Fund, Inc. Portfolio of Investments as of December 31, 2000 Cont'd.
Moody's Principal Rating Interest Maturity Amount Value Description (a) (Unaudited) Rate Date (000) (Note 1) - ------------------------------------------------------------------------------------------------------------ Ohio St. Bldg. Auth., Das Data Ctr. Proj. Aa2 6.00% 10/01/08 $ 615 $ 682,429 Ohio St. Higher Edl. Fac. Comn. Rev., Case Western Resv. Univ., Ser. B Aa3 6.50 10/01/20 750 896,452 Ohio St. Solid Wste. Rev., A.M.T. NR 8.50 8/01/22 500 75,000 Ohio St. Tpk. Comm., Tpk. Rev., Ref., Ser. A, F.G.I.C. Aaa 5.50 2/15/24 4,000 4,266,400 Ohio St Univ. Gen. Rcpts., Ser. A Aa2 6.00 12/01/16 1,000 1,095,060 Ohio St. Water Dev. Auth. Poll. Cntrl. Fac. Rev. Ba2 5.25 9/01/33 1,250 1,237,137 Ohio St. Wtr. Dev. Auth. Poll. Ctrl. Facs. Rev., Buckeye Pwr. Inc. Proj., A.M.B.A.C. Aaa 7.80 11/01/14 11,395 12,872,362 Richland Cnty. Ohio Hosp. Facs. Rev., Ser. B A-(d) 6.375 11/15/22 1,000 1,002,380 ------------- 58,922,896 - ---------------------------------------------------------------------------------------- Oregon 0.0% Oregon St Hsg & Cnty. Svcs. Dept. Mtg. Rev., Single Family Mortgage Program, Ser. M Aa2 6.20 7/01/28 45 46,869 - ---------------------------------------------------------------------------------------- Pennsylvania 2.7% Clarion Cnty. Hosp. Auth. Rev., Clarion Hosp. Proj. BBB-(d) 5.60 7/01/10 685 637,468 Delaware Cnty. Ind. Dev. Auth. Rev., Res. Rec. Fac., Ser. A B2 6.20 7/01/19 3,000 2,717,130 Delaware Valley Regl. Fin. Auth. Loc. Govt. Rev., Ser. A, A.M.B.A.C. Aaa 5.50 8/01/28 3,000 3,154,500 Philadelphia Hosp. & Higher Edl. Facs. Auth. Rev., Children's Seashore House, Ser. A A+(d) 7.00 8/15/03 775 805,124
22 See Notes to Financial Statements Prudential National Municipals Fund, Inc. Portfolio of Investments as of December 31, 2000 Cont'd.
Moody's Principal Rating Interest Maturity Amount Value Description (a) (Unaudited) Rate Date (000) (Note 1) - ------------------------------------------------------------------------------------------------------------ Philadelphia, Gen. Oblig., F.S.A. Aaa 5.00% 3/15/28 $ 1,500 $ 1,453,920 M.B.I.A. Aaa 5.00 5/15/25 3,000 2,905,380 Westmoreland Cnty., Pennsylvania Ind. Dev. Auth. Rev., Valley Landfill Proj. BBB(d) 5.10 5/01/18 7,000 6,424,740 ------------- 18,098,262 - ---------------------------------------------------------------------------------------- Puerto Rico 3.7% Puerto Rico Comwlth., Pub. Impvt., Pub. Impvt., M.B.I.A. Aaa Zero 7/01/19 2,000 797,580 PA 625, R.I.T.E.S., A.M.B.A.C. NR 9.691(c) 7/01/10 500(g) 719,345 PA 642B, R.I.T.E.S., M.B.I.A. NR 7.211(c) 7/01/12 1,000(g) 1,251,350 Puerto Rico Comwlth. Hwy. & Trans. Auth. Rev., Ser. A, M.B.I.A. Aaa 5.00 7/01/38 750 739,988 Puerto Rico Comnwlth., Gen. Oblig. Baa1 Zero 7/01/15 1,400 695,660 Hwy. & Trans. Auth. Rev., Ser. A, A.M.B.A.C. Aaa Zero 7/01/18 2,500 1,054,575 Puerto Rico Industrial Tourist Indl. Tourist Edl. Med. & Envir. Cntl. Facs. Cogen Facs., Aes Puerto Rico Proj. Baa2 6.625 6/01/26 1,575 1,665,373 Puerto Rico Pub. Bldgs. Auth., Gtd. Pub. Ed. & Hlth. Facs., Ser. J Baa1 Zero 7/01/06 3,000 2,374,170 Puerto Rico Tel. Auth. Rev., M.B.I.A. Aaa 5.957(c) 1/25/07 5,100(f) 5,425,125 M.B.I.A. Aaa 6.256(c) 1/16/15 7,150(b) 7,704,125 Univ. of Puerto Rico Revs., Cap. Apprec. Ref. Ser. N, M.B.I.A. Aaa Zero 6/01/13 4,245 2,380,808 ------------- 24,808,099 - ---------------------------------------------------------------------------------------- South Carolina 1.4% Charleston Wtrwks. & Swr. Rev., E.T.M. Aaa 10.375 1/01/10 7,415 9,628,081
See Notes to Financial Statements 23 Prudential National Municipals Fund, Inc. Portfolio of Investments as of December 31, 2000 Cont'd.
Moody's Principal Rating Interest Maturity Amount Value Description (a) (Unaudited) Rate Date (000) (Note 1) - ------------------------------------------------------------------------------------------------------------ Tennessee 2.4% Bristol Hlth. & Edl. Fac. Rev., Bristol Memorial Hosp., F.G.I.C. Aaa 6.75% 9/01/10 $ 5,000(f) $ 5,839,800 McMinn Cnty. Ind. Dev. Brd. Solid Waste Rev., Recycling Fac., A.M.T. Baa3 7.40 12/01/22 5,000 5,157,600 Shelby Cnty. Hlth. Edu. & Hsg. Facs. Brd. Rev., St. Judes Children's Research AA 5.375 7/01/29 5,000 4,903,500 ------------- 15,900,900 - ---------------------------------------------------------------------------------------- Texas 10.5% Bexar Cnty. Hlth. Facs. Dev. Corp. Rev., Baptist Hlth. Sys., Ser. A, M.B.I.A. Aaa 6.00 11/15/14 5,695 6,344,458 Dallas Cnty. Util. & Reclamation Dist. Ser. B Aaa 5.875 2/15/29 5,000 5,149,750 Dallas Ft. Worth, Regl. Arpt. Rev., F.G.I.C., Ser. A Aaa 7.375 11/01/08 3,500 3,890,705 Ser. A Aaa 7.375 11/01/09 3,500 3,890,705 Frisco Texas Indpt. Schl. Dist. Aaa 5.00 8/15/30 4,945 4,752,738 Harris Cnty., Toll Rd. Rev.,Sub. Lien, F.G.I.C. Aaa 6.00 8/01/13 20,000 22,312,800 Houston Arpt. Sys. Rev., Spl. Facs. Continental Airline, Ser. B Ba1 6.125 7/15/27 1,000 867,170 Ser. C Ba1 6.125 7/15/27 3,000 2,601,510 Lakeway Mun. Util. Dist., Gen. Oblig., Ser. A, F.G.I.C. Aaa Zero 9/01/11 1,425 857,166 Matagorda Cnty. Nav. Dist. No. 1 Rev., Houston Ltg. Pwr. Co., A.M.B.A.C. Aaa 5.125 11/01/28 2,340 2,287,561
24 See Notes to Financial Statements Prudential National Municipals Fund, Inc. Portfolio of Investments as of December 31, 2000 Cont'd.
Moody's Principal Rating Interest Maturity Amount Value Description (a) (Unaudited) Rate Date (000) (Note 1) - ------------------------------------------------------------------------------------------------------------ Panhandle Regl. Hsg. Fin. Corp. Rev., Mult. Fam. Hsg., Ser. A A3 6.625% 3/01/20 $ 1,000 $ 1,006,540 Mult. Fam. Hsg., Ser. A A3 6.75 3/01/31 4,000 4,033,840 Port Corpus Christi Auth. Rev. Baa2 7.50 8/01/12 2,000 2,061,820 San Benito Cons. Indpt. Schl. Dist. Aaa 6.00 2/15/25 10,000 10,761,700 ------------- 70,818,463 - ---------------------------------------------------------------------------------------- U.S. Virgin Islands 0.4% Virgin Islands Pub. Fin. Auth. Rev., Ref. Matching Loan Notes, Ser. A AAA(d) 7.25 10/01/18 1,000(b) 1,075,980 Gross Rcpts. Taxes, Loan Note, Ser. A BBB-(d) 6.50 10/01/24 1,500 1,578,075 Virgin Islands Terr., Hugo Ins. Claims Fund Proj., Ser. 91 NR 7.75 10/01/06 270(b) 281,135 ------------- 2,935,190 - ---------------------------------------------------------------------------------------- Washington 3.9% King Cnty., Ser. B Aa1 5.85 12/01/13 10,000 10,822,400 Washington St., Ser. B Aa1 6.00 1/01/25 10,000 10,770,600 Washington St. Pub. Pwr. Supply Sys. Rev., Nuclear Proj. No. 1, Ser. A, F.S.A. Aaa 7.00 7/01/08 4,000 4,642,040 ------------- 26,235,040 - ---------------------------------------------------------------------------------------- West Virginia 0.3% West Virginia St. Hosp. Fin. Auth., Oak Hill Hosp. Rev., Ser. B A2 6.75 9/01/30 2,000 2,070,500 ------------- Total long-term investments (cost $638,988,192) 680,514,127 -------------
See Notes to Financial Statements 25 Prudential National Municipals Fund, Inc. Portfolio of Investments as of December 31, 2000 Cont'd.
Moody's Principal Rating Interest Maturity Amount Value Description (a) (Unaudited) Rate Date (000) (Note 1) - ------------------------------------------------------------------------------------------------------------ SHORT-TERM INVESTMENTS 0.5% - ---------------------------------------------------------------------------------------- Kentucky 0.4% Carroll County, Solid Wste. Disp. Facs. Rev., Ser. 94A, F.R.D.D., A.M.T. VMIG1 5.40% 1/02/01 $ 3,000 $ 3,000,000 - ---------------------------------------------------------------------------------------- Minnesota 0.1% St. Paul Science Museum, Cert. of Part., E.T.M. AAA(d) 7.50 12/15/01 315 325,768 Total short-term investments (cost $3,315,522) 3,325,768 ------------- Total Investments 101.6% (cost $ 642,303,714) 683,839,895 ------------- Liabilities in excess of other assets (1.6%) (10,938,477) ------------- Net Assets 100% $ 672,901,418 ------------- -------------
26 See Notes to Financial Statements Prudential National Municipals Fund, Inc. Portfolio of Investments as of December 31, 2000 Cont'd. (a) The following abbreviations are used in portfolio descriptions: A.C.A.--American Capital Access A.M.B.A.C.--American Municipal Bond Assurance Corporation A.M.T.--Alternative Minimum Tax B.I.G.--Bond Investors Guaranty Insurance Company E.T.M.--Escrowed to Maturity F.G.I.C.--Financial Guaranty Insurance Company F.H.A.--Federal Housing Administration F.N.M.A.--Federal National Mortgage Association F.R.D.D.--Floating Rate Daily Demand(e) F.S.A.--Financial Security Assurance G.N.M.A.--Government National Mortgage Association M.B.I.A.--Municipal Bond Insurance Association R.I.T.E.S.--Residual Interest Tax Exempt Securities Receipts (b) Prerefunded issues are secured by escrowed cash and direct U.S. guaranteed obligations. (c) Inverse floating rate bond. The coupon is inversely indexed to a floating interest rate. The rate shown is the rate at year-end. (d) Standard and Poor's Rating. (e) For purposes of amortized cost valuation, the maturity date of Floating Rate Demand Notes is considered to be the later of the next date on which the security can be redeemed at par or the next date on which the rate of interest is adjusted. (f) All or portion of security pledged as initial margin on financial futures contracts. (g) Private placement. NR--Not Rated by Moody's or Standard & Poor's. The Fund's current Statement of Additional Information contains a description of Moody's and Standard & Poor's ratings. See Notes to Financial Statements 27 Prudential National Municipals Fund, Inc. Statement of Assets and Liabilities
December 31, 2000 - --------------------------------------------------------------------------------------- ASSETS Investments, at value (cost $642,303,714) $ 683,839,895 Cash 1,108,253 Interest receivable 11,386,697 Receivable for Fund shares sold 485,182 Deferred expenses and other assets 32,572 Due from broker-variation margin 7,812 ----------------- Total assets 696,860,411 ----------------- LIABILITIES Payable for investments purchased 20,670,867 Payable for Fund shares reacquired 1,826,288 Accrued expenses 540,840 Dividends payable 530,162 Management fee payable 248,116 Distribution fee payable 142,720 ----------------- Total liabilities 23,958,993 ----------------- NET ASSETS $ 672,901,418 ----------------- ----------------- Net assets were comprised of: Common stock, at par $ 431,589 Paid-in capital in excess of par 631,750,632 ----------------- 632,182,221 Undistributed net investment income 998 Accumulated net realized loss on investments (808,607) Net unrealized appreciation on investments 41,526,806 ----------------- Net assets, December 31, 2000 $ 672,901,418 ----------------- -----------------
28 See Notes to Financial Statements Prudential National Municipals Fund, Inc. Statement of Assets and Liabilities Cont'd.
December 31, 2000 - --------------------------------------------------------------------------------------- Class A: Net asset value and redemption price per share ($609,245,224 / 39,085,441 shares of common stock issued and outstanding) $15.59 Maximum sales charge (3% of offering price) .48 ----------------- Maximum offering price to public $16.07 ----------------- ----------------- Class B: Net asset value, offering price and redemption price per share ($59,260,075 / 3,791,897 shares of common stock issued and outstanding) $15.63 ----------------- ----------------- Class C: Net asset value and redemption price per share ($3,213,007 / 205,590 shares of common stock issued and outstanding) $15.63 Sales charge (1% of offering price) .16 ----------------- Offering price to public $15.79 ----------------- ----------------- Class Z: Net asset value, offering price and redemption price per share ($1,183,112 / 75,927 shares of common stock issued and outstanding) $15.58 ----------------- -----------------
See Notes to Financial Statements 29 Prudential National Municipals Fund, Inc. Statement of Operations
Year Ended December 31, 2000 - --------------------------------------------------------------------------------------- NET INVESTMENT INCOME Income Interest $33,709,559 ----------------- Expenses Management fee 2,728,114 Distribution fee--Class A 1,219,528 Distribution fee--Class B 367,655 Distribution fee--Class C 18,550 Transfer agent's fees and expenses 442,000 Custodian's fees and expenses 139,500 Reports to shareholders 80,000 Registration fees 40,500 Audit fee 39,000 Legal fees and expenses 25,000 Directors' fees and expenses 16,000 Miscellaneous 37,033 ----------------- Total expenses 5,152,880 Less: Custodian fee credit (6,734) ----------------- Net expenses 5,146,146 ----------------- Net investment income 28,563,413 ----------------- REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS Net realized gain (loss) on: Investment transactions 2,350,504 Financial futures contracts (960,906) Interest rate swaps 228,923 ----------------- 1,618,521 ----------------- Net change in unrealized appreciation (depreciation) on: Investments 38,460,756 Financial futures contracts (68,750) ----------------- 38,392,006 ----------------- Net gain on investment transactions 40,010,527 ----------------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $68,573,940 ----------------- -----------------
30 See Notes to Financial Statements Prudential National Municipals Fund, Inc. Statement of Changes in Net Assets
Year Ended December 31, -------------------------------------- 2000 1999 - ----------------------------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS Operations Net investment income $ 28,563,413 $ 31,601,128 Net realized gain (loss) on investment transactions 1,618,521 (373,416) Net change in unrealized appreciation (depreciation) on investments 38,392,006 (47,339,939) ----------------- ----------------- Net increase (decrease) in net assets resulting from operations 68,573,940 (16,112,227) ----------------- ----------------- Dividends and distributions (Note 1) Dividends from net investment income Class A (24,844,002) (25,956,731) Class B (3,564,845) (5,456,913) Class C (113,666) (116,079) Class Z (40,900) (71,405) ----------------- ----------------- (28,563,413) (31,601,128) ----------------- ----------------- Distributions in excess of net investment income Class A (218,972) (100,946) Class B (20,991) (18,963) Class C (1,096) (619) Class Z (351) (176) ----------------- ----------------- (241,410) (120,704) ----------------- ----------------- Fund share transactions (net of share conversions) (Note 5 & 6): Net proceeds from shares sold 214,060,219 280,554,937 Net asset value of shares issued in reinvestment of dividends and distributions 17,395,494 19,573,958 Cost of shares reacquired (192,873,469) (261,665,210) ----------------- ----------------- Increase (decrease) in net assets from Fund share transactions 38,582,244 38,463,685 ----------------- ----------------- Total increase (decrease) 78,351,361 (9,370,374) NET ASSETS Beginning of year 594,550,057 603,920,431 ----------------- ----------------- End of year(a) $ 672,901,418 $ 594,550,057 ----------------- ----------------- ----------------- ----------------- (a) Including undistributed net investment income $ 998 -- ----------------- -----------------
See Notes to Financial Statements 31 Prudential National Municipals Fund, Inc. Notes to Financial Statements Prudential National Municipals Fund, Inc. (the 'Fund') is registered under the Investment Company Act of 1940 as a diversified, open-end management investment company. The investment objective of the Fund is to seek a high level of current income exempt from federal income taxes by investing substantially all of its total assets in carefully selected long-term municipal bonds of medium quality. The ability of the issuers of debt securities held by the Fund to meet their obligations may be affected by economic or political developments in a specific state, industry or region. Note 1. Accounting Policies The following is a summary of significant accounting policies followed by the Fund in the preparation of its financial statements. Securities Valuations: The Fund values municipal securities (including commitments to purchase such securities on a 'when-issued' basis) on the basis of prices provided by a pricing service which uses information with respect to transactions in bonds, quotations from bond dealers, market transactions in comparable securities and various relationships between securities in determining values. If market quotations are not readily available from such pricing service, a security is valued at its fair value as determined under procedures established by the Board of Directors. All Securities are valued as of 4:15 p.m., New York time. Short-term securities which mature in more than 60 days are valued at current market quotations. Short-term securities which mature in 60 days or less are valued at amortized cost. Options: The Fund may either purchase or write options in order to hedge against adverse market movements or fluctuations in value caused by changes in prevailing interest rates with respect to securities which the Fund currently owns or intends to purchase. The Fund's principal reason for writing options is to realize, through receipt of premiums, a greater current return than would be realized on the underlying security alone. When the Fund purchases an option, it pays a premium and an amount equal to that premium is recorded as an investment. When the Fund writes an option, it receives a premium and an amount equal to that premium is recorded as a liability. The investment or liability is adjusted daily to reflect the current market value of the option. If an option expires unexercised, the Fund realizes a gain or loss to the extent of the premium received or paid. If an option is exercised, the premium received or paid is an adjustment to the proceeds from the sale or the cost of the purchase in determining whether the Fund has realized a gain or loss. The difference between the premium and the amount received or paid on effecting a closing purchase or sale transaction is also treated as a realized gain or loss. Gain or 32 Prudential National Municipals Fund, Inc. Notes to Financial Statements Cont'd. loss on purchased options is included in net realized gain (loss) on investment transactions. Gain or loss on written options is presented separately as net realized gain (loss) on written option transactions. The Fund, as writer of an option, may have no control over whether the underlying securities may be sold (called) or purchased (put). As a result, the Fund bears the market risk of an unfavorable change in the price of the security underlying the written option. The Fund, as purchaser of an option, bears the risk of the potential inability of the counterparties to meet the terms of their contracts. Interest Rate Swaps: In a simple interest rate swap, one investor pays a floating rate of interest on a notional principal amount and receives a fixed rate of interest on the same notional principal amount for a specified period of time. Alternatively, an investor may pay a fixed rate and receive a floating rate. Interest rate swaps were conceived as asset/liability management tools. In more complex swaps, the notional principal amount may decline (or amortize) over time. During the term of the swap, changes in the value of the swap are recognized as unrealized gains or losses by 'marking-to-market' to reflect the market value of the swap. When the swap is terminated, the Fund will record a realized gain or loss equal to the difference between the proceeds from (or cost of) the closing transaction and the Fund's basis in the contract, if any. The Fund is exposed to credit loss in the event of non-performance by the other party to the interest rate swap. However, the Fund does not anticipate non-performance by any counterparty. Financial Futures Contracts: A financial futures contract is an agreement to purchase (long) or sell (short) an agreed amount of securities at a set price for delivery on a future date. Upon entering into a financial futures contract, the Fund is required to pledge to the broker an amount of cash and/or other assets equal to a certain percentage of the contract amount. This amount is known as the 'initial margin.' Subsequent payments, known as 'variation margin,' are made or received by the Fund each day, depending on the daily fluctuations in the value of the underlying security. Such variation margin is recorded for financial statement purposes on a daily basis as unrealized gain or loss. When the contract expires or is closed, the gain or loss is realized and is presented in the statement of operations as net realized gain (loss) on financial futures contracts. The Fund invests in financial futures contracts in order to hedge existing portfolio securities, or securities the Fund intends to purchase, against fluctuations in value 33 Prudential National Municipals Fund, Inc. Notes to Financial Statements Cont'd. caused by changes in prevailing interest rates. Should interest rates move unexpectedly, the Fund may not achieve the anticipated benefits of the financial futures contracts and may realize a loss. The use of futures transactions involves the risk of imperfect correlation in movements in the price of futures contracts, interest rates and the underlying hedged assets. Securities Transactions and Net Investment Income: Securities transactions are recorded on the trade date. Realized gains and losses on sales of portfolio securities are calculated on the identified cost basis. Interest income is recorded on an accrual basis. The Fund amortizes premiums and accretes original issue discount on portfolio securities as adjustments to interest income. Expenses are recorded on the accrual basis which may require the use of certain estimates by management. In November 2000, a revised AICPA Audit and Accounting Guide, Audits of Investment Companies (the 'Guide'), was issued, and is effective for fiscal years beginning after December 15, 2000. The revised Guide will require the Fund to amortize premium on all fixed-income securities. Upon initial adoption, the Fund will be required to adjust the cost of its fixed-income securities by the cumulative amount that would have been recognized had the amortization been in effect from the purchase date of each holding. Adopting this accounting principle will not affect the Fund's net assets value, but will change the classification of certain amounts between interest income and realized and unrealized gain/loss in the Statement of Operations. The Fund expects that the impact of the adoption of this principle will not be material to the financial statements. Net investment income (other than distribution fees) and unrealized and realized gains or losses are allocated daily to each class of shares based upon the relative proportion of net assets of each class at the beginning of the day. Federal Income Taxes: It is the Fund's policy to continue to meet the requirements of the Internal Revenue Code applicable to regulated investment companies and to distribute all of its net income to its shareholders. Therefore, no federal income tax provision is required. Dividends and Distributions: Dividends from net investment income are declared daily and paid monthly. The Fund will distribute at least annually any net capital gains. Dividends and distributions are recorded on the ex-dividend date. Income distributions and capital gain distributions are determined in accordance with income tax regulations which may differ from generally accepted accounting principles. Custody Fee Credits: The Fund has an arrangement with its custodian bank, whereby uninvested monies earn credits which reduce the fees charged by the custodian. 34 Prudential National Municipals Fund, Inc. Notes to Financial Statements Cont'd. Reclassification of Capital Accounts: The Fund accounts for and reports distributions to shareholders in accordance with the American Institute of Certified Public Accountants' Statement of Position 93-2: Determination, Disclosure, and Financial Statement Presentation of Income, Capital Gain, and Return of Capital Distributions by Investment Companies. The effect of applying this statement was to increase undistributed net investment income by $242,408, decrease accumulated net realized gain on investments by $1,174,959 and increase paid-in capital by $932,551, due to the sale of securities purchased with market discount and capital loss carryforward utilized due to the merger during the year ended December 31, 2000. Net investment income, net realized gains and net assets were not affected by this change. Note 2. Agreements The Fund has a management agreement with Prudential Investments Fund Management LLC ('PIFM'). Pursuant to this agreement, PIFM has responsibility for all investment advisory services and supervises the subadvisor's performance of such services. PIFM has entered into a subadvisory agreement with the Prudential Investment Corporation ('PIC'), a wholly owned subsidiary of Prudential. The subadvisory agreement provides that the subadvisor will furnish investment advisory services in connection with the management of the Fund. In connection therewith, the subadvisor is obligated to keep certain books and records of the Fund. PIFM continues to have responsibility for all investment advisory services pursuant to the management agreement and supervises the subadvisor's performance of such services. PIFM pays for the services of PIC, the cost of compensation of officers of the Fund, occupancy and certain clerical and bookkeeping costs of the Fund. The Fund bears all other costs and expenses. The management fee paid to PIFM is computed daily and payable monthly at an annual rate of .50% of the Fund's average daily net assets up to and including $250 million, .475% of the next $250 million, .45% of the next $500 million, .425% of the next $250 million, .40% of the next $250 million and .375% of the Fund's average daily net assets in excess of $1.5 billion. The subadvisory fee paid to PIC by PIFM is computed daily and payable monthly at an annual rate of .250 of 1% of the average daily net assets of the Fund up to and including $250 million, .226% of 1% of the next $250 million, .203 of 1% of the next $500 million, .181% of the next $250 million, .160% of 1% of the next $250 million and .141% of 1% over 1.5 billion. Prior to January 1, 2000, PIC was reimbursed by PIFM for reasonable costs and expenses incurred in furnishing investment advisory services. 35 Prudential National Municipals Fund, Inc. Notes to Financial Statements Cont'd. The Fund has a distribution agreement with Prudential Investment Management Services LLC ('PIMS'), which acts as the distributor of the Class A, B, C and Z shares of the Fund. The Fund compensates PIMS for distributing and servicing the Fund's Class A, Class B and Class C shares, pursuant to plans of distribution (the 'Class A, B and C Plans'), regardless of expenses actually incurred by it. The distribution fees are accrued daily and payable monthly. No distribution or service fees are paid to PIMS as distributor of the Class Z shares of the Fund. Pursuant to the Class A, B and C Plans, the Fund compensates PIMS for distribution-related activities at an annual rate of up to .30 of 1%, .50 of 1% and 1%, of the average daily net assets of the Class A, B and C shares, respectively. Such expenses under the Plans were .25 of 1%, .50 of 1% and .75 of 1% of the average daily net assets of the Class A, B and C shares, respectively, for the year ended December 31, 2000. PIMS has advised the Fund that it received approximately $39,500 and $4,300 in front-end sales charges resulting from sales of Class A and Class C shares, respectively, during the year ended December 31, 2000. From these fees, PIMS paid a substantial part of such sales charges to dealers, which in turn paid commissions to salespersons and incurred other distribution costs. PIMS has advised the Fund that for the year ended December 31, 2000, it received approximately $111,500 and $920 in contingent deferred sales charges imposed upon certain redemptions by Class B and Class C shareholders, respectively. PIFM, PIC and PIMS are indirect wholly owned subsidiaries of The Prudential Insurance Company of America ('Prudential'). The Fund, along with other affiliated registered investment companies (the 'Funds'), entered into a syndicated credit agreement ('SCA') with an unaffiliated lender. The maximum commitment under the SCA is $1 billion. Interest on any such borrowings will be at market rates. The purpose of the agreement is to serve as an alternative source of funding for capital share redemptions. The Funds pay a commitment fee of .080 of 1% of the unused portion of the credit facility. The commitment fee is accrued and paid quarterly on a pro rata basis by the Funds. The expiration date of the SCA is March 9, 2001. Prior to March 9, 2000, the commitment fee was .065 of 1% of the unused portion of the credit facility. The Fund did not borrow any amounts pursuant to the SCA during the year ended December 31, 2000. Note 3. Other Transactions with Affiliates Prudential Mutual Fund Services LLC ('PMFS'), an affiliate of PIFM and an indirect wholly owned subsidiary of Prudential, serves as the Fund's transfer agent. During the year ended December 31, 2000, the Fund incurred fees of approximately $360,200 36 Prudential National Municipals Fund, Inc. Notes to Financial Statements Cont'd. for the services of PMFS. As of December 31, 2000, approximately $34,600 of such fees were due to PMFS. Transfer agent fees and expenses in the Statement of Operations include certain out-of-pocket expenses paid to nonaffiliates. The Fund invests in the Taxable Money Market Series (the 'Series'), a portfolio of Prudential Core Investment Fund, pursuant to an exemptive order received from the Securities and Exchange Commission. The Series is a money market mutual fund registered under the Investment Company Act of 1940, as amended, and managed by PIFM. During the year ended December 31, 2000, the Fund earned income of approximately $820,000 from the Series by investing their excess cash. Note 4. Portfolio Securities Purchases and sales of investment securities, other than short-term investments, for the year ended December 31, 2000, aggregated $768,860,705 and $695,337,777, respectively. During the year ended December 31, 2000, the Fund entered into financial futures contracts. Details of open contracts at December 31, 2000 are as follows:
Value at Value at Unrealized Number of Expiration Trade December 31, Appreciation/ Contracts Type Date Date 2000 (Depreciation) - --------- ----------------- ----------- ---------- ------------ -------------- Short Position: 30 yr. U.S. 50 Treasury Bond Jan. 2001 $5,221,875 $5,231,250 $ (9,375) -------------- --------------
The federal income tax basis of the Fund's investments at December 31, 2000 was $642,431,911 and accordingly, net unrealized appreciation of investments for federal income tax purposes was $41,407,984 (gross unrealized appreciation--$44,634,546; gross unrealized depreciation--$3,226,562). For federal income tax purposes, the Fund has a capital loss carryforward as of December 31, 2000 of approximately $792,157 of which $381,722 expires in 2005 and $410,435 expires in 2006. Accordingly, no capital gains distribution is expected to be paid until net gains have been realized in excess of the carryforward. Note 5. Capital The Fund offers Class A, Class B, Class C and Class Z shares. Class A shares are sold with a front-end sales charge of up to 3%. Class B shares are sold with a contingent deferred sales charge which declines from 5% to zero depending on the period of time the shares are held. Class C shares are sold with a front-end sales charge of 1% and a contingent deferred sales charge of 1% during the first 18 months. Class B shares 37 Prudential National Municipals Fund, Inc. Notes to Financial Statements Cont'd. will automatically convert to Class A shares on a quarterly basis approximately seven years after purchase. A special exchange privilege is also available for shareholders who qualify to purchase Class A shares at net asset value. Class Z shares are not subject to any sales or redemption charge and are offered exclusively for sale to a limited group of investors. There are 1 billion shares of common stock, $.01 par value per share, authorized divided into four classes, designated Class A, Class B, Class C and Class Z common stock, each of which consists of 250 million authorized shares. Transactions in shares of common stock were as follows:
Class A Shares Amount - ---------------------------------------------------- ---------------- -------------- Year ended December 31, 2000: Shares sold 6,294,069 $ 86,680,313 Shares issued in connection with reorganization (Note 6) 7,529,395 116,780,922 Shares issued in reinvestment of dividends and distributions 1,022,371 15,258,713 Shares reacquired (11,603,661) (173,414,758) ---------------- -------------- Net increase (decrease) in shares outstanding before conversion 3,242,174 45,305,190 Shares issued upon conversion from Class B 1,978,024 29,649,281 ---------------- -------------- Net increase (decrease) in shares outstanding 5,220,198 $ 74,954,471 ---------------- -------------- ---------------- -------------- Year ended December 31, 1999: Shares sold 10,154,359 $ 150,151,142 Shares issued in connection with reorganization in 1999 (Note 6) 5,719,568 92,139,437 Shares issued in reinvestment of dividends and distributions 1,049,415 16,182,668 Shares reacquired (13,662,479) (212,057,236) ---------------- -------------- Net increase (decrease) in shares outstanding before conversion 3,260,863 46,416,011 Shares issued upon conversion from Class B 595,834 9,168,416 ---------------- -------------- Net increase (decrease) in shares outstanding 3,856,697 $ 55,584,427 ---------------- -------------- ---------------- -------------- Class B - ---------------------------------------------------- Year ended December 31, 2000: Shares sold 523,486 $ 7,914,558 Shares issued in reinvestment of dividends and distributions 136,126 2,030,727 Shares reacquired (1,148,098) (17,021,990) ---------------- -------------- Net increase (decrease) in shares outstanding before conversion (488,486) (7,076,705) Shares reacquired upon conversion into Class A (1,973,675) (29,649,281) ---------------- -------------- Net increase (decrease) in shares outstanding (2,462,161) $ (36,725,986) ---------------- -------------- ---------------- --------------
38 Prudential National Municipals Fund, Inc. Notes to Financial Statements Cont'd.
Class B Shares Amount - ---------------------------------------------------- ---------------- -------------- Year ended December 31, 1999: Shares sold 826,622 $ 10,991,293 Shares issued in connection with reorganization in 1999 (Note 6) 1,236,086 19,953,535 Shares issued in reinvestment of dividends and distributions 209,350 3,243,633 Shares reacquired (2,859,392) (44,047,247) ---------------- -------------- Net increase (decrease) in shares outstanding before conversion (587,334) (9,858,786) Shares reacquired upon conversion into Class A (594,471) (9,168,416) ---------------- -------------- Net increase (decrease) in shares outstanding (1,181,805) $ (19,027,202) ---------------- -------------- ---------------- -------------- Class C - ---------------------------------------------------- Year ended December 31, 2000: Shares sold 110,587 $ 1,687,743 Shares issued in reinvestment of dividends and distributions 4,644 69,451 Shares reacquired (117,012) (1,744,576) ---------------- -------------- Net increase (decrease) in shares outstanding (1,781) $ 12,618 ---------------- -------------- ---------------- -------------- Year ended December 31, 1999: Shares sold 91,530 $ 1,390,702 Shares issued in connection with reorganization in 1999 (Note 6) 29,355 473,862 Shares issued in reinvestment of dividends and distributions 5,874 90,815 Shares reacquired (62,002) (958,956) ---------------- -------------- Net increase (decrease) in shares outstanding 64,757 $ 996,423 ---------------- -------------- ---------------- -------------- Class Z - ---------------------------------------------------- Year ended December 31, 2000: Shares sold 61,156 $ 922,187 Shares issued in connection with reorganization (Note 6) 4,806 74,496 Shares issued in reinvestment of dividends and distributions 2,451 36,603 Shares reacquired (46,695) (692,145) ---------------- -------------- Net increase (decrease) decrease in shares outstanding 21,718 $ 341,141 ---------------- -------------- ---------------- -------------- January 22, 1999(a) through December 31, 1999: Shares sold 210,908 $ 3,262,799 Shares issued in connection with reorganization in 1999 (Note 6) 136,091 2,192,167 Shares issued in reinvestment of dividends and distributions 3,661 56,842 Shares reacquired (296,451) (4,601,771) ---------------- -------------- Net increase (decrease) in shares outstanding 54,209 $ 910,037 ---------------- -------------- ---------------- --------------
- --------------- (a) Commencement of offering of Class Z shares. 39 Prudential National Municipals Fund, Inc. Notes to Financial Statements Cont'd. Note 6. Reorganization On August 23, 2000, the Board of Directors of the Fund approved an Agreement and Plan of Reorganization (the 'Plan') which provided for the transfer of all of the assets of the Prudential Municipal Series Fund Massachusetts Series ('Massachusetts Series'), Prudential Municipal Series Fund North Carolina Series ('North Carolina Series) and the Prudential Municipal Series Fund Ohio Series ('Ohio Series') in exchange for Class A shares of the Fund and the Fund's assumption of the liabilities of the Massachusetts, North Carolina and Ohio Series. The Plan was approved by the shareholders of the Massachusetts, North Carolina and Ohio Series at a shareholder meeting held on December 7, 2000. The reorganization took place on December 15, 2000. The Massachusetts, North Carolina and Ohio Series and the Fund incurred their pro rata share of the costs of the reorganization, including the cost of proxy solicitation. The acquisition was accomplished by a tax-free exchange of the following shares:
National Municipals Massachusetts Series: Fund Value Class A 2,177,820 Class A 1,567,020 $24,304,474 B 609,217 A 437,960 6,792,765 C 25,218 A 18,129 281,177 Z 6,681 Z 4,806 74,496 North Carolina Series: Class A 2,211,609 A 1,595,609 24,747,903 B 621,878 A 448,667 6,958,820 C 445 A 328 5,094 Ohio Series: Class A 3,663,247 A 2,697,246 41,834,282 B 1,021,343 B 752,672 11,673,945 C 15,963 C 11,764 182,462
The aggregate net assets and unrealized appreciation of the funds immediately before the acquisition were:
Unrealized Net Assets Appreciation ----------- ------------- Massachusetts Series $31,662,235 $ 1,930,390 North Carolina Series 31,717,080 1,979,098 Ohio Series 53,723,199 3,483,164
40 Prudential National Municipals Fund, Inc. Notes to Financial Statements Cont'd. The aggregate net assets of the National Municipals Fund immediately before the acquisition was $558,073,114. Acquisition of Prudential Municipal Series Fund Maryland Series, Prudential Municipal Series Fund, Michigan Series and Prudential Municipal Bond Fund--Intermediate Series On August 25, 1998, the Board of Directors of the Fund approved an Agreement and Plan of Reorganization (the 'Plan') which provided for the transfer of all of the assets of the Prudential Municipal Series Fund Maryland Series ('Maryland Series') and the Prudential Municipal Series Fund Michigan Series ('Michigan Series') in exchange for Class A shares of the Fund and the Fund's assumption of the liabilities of the Maryland and Michigan Series. The Plan also provided for the transfer of all of the assets of the Class A, B, C and Z shares of the Prudential Municipal Bond Fund--Intermediate Series ('Intermediate Series') in exchange for like shares of the Fund and the Fund's assumption of the liabilities of the Intermediate Series. The Plan was approved by the shareholders of the Maryland, Michigan and Intermediate Series at a shareholder meeting held on January 14, 1999. The reorganization took place on January 22, 1999. The Maryland, Michigan and Intermediate Series and the Fund incurred their pro rata share of the costs of the reorganization, including the cost of proxy solicitation. The acquisition was accomplished by a tax-free exchange of the following shares:
National Municipals Maryland Series: Fund Value Class A 1,545,436 Class A 1,074,419 $17,304,069 B 930,543 A 647,510 10,432,984 C 11,019 A 7,667 123,541 Michigan Series: Class A 2,459,122 A 1,845,487 29,729,243 B 1,640,985 A 1,230,484 19,826,554 C 43,799 A 32,842 529,193 Intermediate Series: Class A 1,302,336 A 881,159 14,193,853 B 1,830,315 B 1,236,086 19,953,535 C 43,467 C 29,355 473,862 Z 201,141 Z 136,091 2,192,167
41 Prudential National Municipals Fund, Inc. Notes to Financial Statements Cont'd. The aggregate net assets and unrealized appreciation of the funds immediately before the acquisition were:
Unrealized Net Assets Appreciation ----------- ------------- Maryland Series $27,860,594 $ 2,342,040 Michigan Series 50,084,990 4,856,230 Intermediate Series 36,813,417 1,858,582
The aggregate net assets of the National Municipals Fund immediately before the acquisition was $607,552,044. 42 Prudential National Municipals Fund, Inc. Financial Highlights ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' Prudential National Municipals Fund, Inc. Financial Highlights
Class A ----------------- Year Ended December 31, 2000 - --------------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE: Net asset value, beginning of year $ 14.72 ----------------- Income from investment operations Net investment income .76 Net realized and unrealized gain (loss) on investment transactions .88 ----------------- Total from investment operations 1.64 ----------------- Less distributions Dividends from net investment income (.76) Distributions in excess of net investment income (.01) Distributions from net realized gains -- ----------------- Total distributions (.77) ----------------- Net asset value, end of year $ 15.59 ----------------- ----------------- TOTAL RETURN(a): 11.45% RATIOS/SUPPLEMENTAL DATA: Net assets, end of year (000) $ 609,245 Average net assets (000) $ 487,811 Ratios to average net assets: Expenses, including distribution and service (12b-1) fees .88% Expenses, excluding distribution and service (12b-1) fees .63% Net investment income 5.09% For Class A, B, C and Z shares: Portfolio turnover rate 122%
- ------------------------------ (a) Total return does not consider the effects of sales loads. Total return is calculated assuming a purchase of shares on the first day and a sale on the last day of each year reported and includes reinvestment of dividends and distributions. (b) Net of management fee waiver. (c) Less than $.005 per share. 44 See Notes to Financial Statements Prudential National Municipals Fund, Inc. Financial Highlights Cont'd.
Class A - ------------------------------------------------------------------------------------ Year Ended December 31, - ------------------------------------------------------------------------------------ 1999 1998 1997 1996 - ------------------------------------------------------------------------------------ $ 16.06 $ 16.12 $ 15.56 $ 15.98 - ---------------- ---------------- ---------------- ---------------- .76 .79 .81(b) .82(b) (1.34) .06 .67 (.42) - ---------------- ---------------- ---------------- ---------------- (.58) .85 1.48 .40 - ---------------- ---------------- ---------------- ---------------- (.76) (.79) (.81) (.82) --(c) --(c) (.01) --(c) -- (.12) (.10) -- - ---------------- ---------------- ---------------- ---------------- (.76) (.91) (.92) (.82) - ---------------- ---------------- ---------------- ---------------- $ 14.72 $ 16.06 $ 16.12 $ 15.56 - ---------------- ---------------- ---------------- ---------------- - ---------------- ---------------- ---------------- ---------------- (3.69)% 5.41% 9.80% 2.66% $498,428 $481,926 $493,178 $502,739 $531,603 $483,759 $491,279 $508,159 .86% .73% .70%(b) .68%(b) .61% .63% .60%(b) .58%(b) 4.88% 4.89% 5.15%(b) 5.31%(b) 30% 23% 38% 46%
See Notes to Financial Statements 45 Prudential National Municipals Fund, Inc. Financial Highlights
Class B ----------------- Year Ended December 31, 2000 - --------------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE: Net asset value, beginning of year $ 14.75 -------- Income from investment operations Net investment income .73 Net realized and unrealized gain (loss) on investment transactions .89 -------- Total from investment operations 1.62 -------- Less distributions Dividends from net investment income (.73) Distributions in excess of net investment income (.01) Distributions from net realized gains -- -------- Total distributions (.74) -------- Net asset value, end of year $ 15.63 -------- -------- TOTAL RETURN(a): 11.23% RATIOS/SUPPLEMENTAL DATA: Net assets, end of year (000) $59,260 Average net assets (000) $73,531 Ratios to average net assets: Expenses, including distribution and service (12b-1) fees 1.13% Expenses, excluding distribution and service (12b-1) fees .63% Net investment income 4.85%
- ------------------------------ (a) Total return does not consider the effects of sales loads. Total return is calculated assuming a purchase of shares on the first day and a sale on the last day of each year reported and includes reinvestment of dividends and distributions. Total returns for periods of less than a full year are not annualized. (b) Net of management fee waiver. (c) Less than $.005 per share. 46 See Notes to Financial Statements Prudential National Municipals Fund, Inc. Financial Highlights Cont'd.
Class B - ------------------------------------------------------------------------------------- Year Ended December 31, - ------------------------------------------------------------------------------------- 1999 1998 1997 1996 - ------------------------------------------------------------------------------------- $ 16.10 $ 16.16 $ 15.60 $ 16.02 - ---------------- ---------------- ---------------- ---------------- .73 .73 .75(b) .76(b) (1.35) .06 .67 (.42) - ---------------- ---------------- ---------------- ---------------- (.62) .79 1.42 .34 - ---------------- ---------------- ---------------- ---------------- (.73) (.73) (.75) (.76) --(c) --(c) (.01) --(c) -- (.12) (.10) -- - ---------------- ---------------- ---------------- ---------------- (.73) (.85) (.86) (.76) - ---------------- ---------------- ---------------- ---------------- $ 14.75 $ 16.10 $ 16.16 $ 15.60 - ---------------- ---------------- ---------------- ---------------- - ---------------- ---------------- ---------------- ---------------- (3.98)% 4.99% 9.35% 2.26% $ 92,265 $119,698 $141,528 $168,185 $118,044 $131,195 $151,938 $193,312 1.11% 1.13% 1.10%(b) 1.08%(b) .61% .63% .60%(b) .58%(b) 4.62% 4.49% 4.75%(b) 4.91%(b)
See Notes to Financial Statements 47 Prudential National Municipals Fund, Inc. Financial Highlights Cont'd.
Class C ----------------- Year Ended December 31, 2000 - --------------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE: Net asset value, beginning of year $ 14.75 ------- Income from investment operations Net investment income .69 Net realized and unrealized gain (loss) on investment transactions .89 ------- Total from investment operations 1.58 ------- Less distributions Dividends from net investment income (.69) Distributions in excess of net investment income (.01) Distributions from net realized gains -- ------- Total distributions (.70) ------- Net asset value, end of year $ 15.63 ------- ------- TOTAL RETURN(a): 10.96% RATIOS/SUPPLEMENTAL DATA: Net assets, end of year (000) $ 3,213 Average net assets (000) $ 2,473 Ratios to average net assets: Expenses, including distribution and service (12b-1) fees 1.38% Expenses, excluding distribution and service (12b-1) fees .63% Net investment income 4.60%
- ------------------------------ (a) Total return does not consider the effects of sales loads. Total return is calculated assuming a purchase of shares on the first day and a sale on the last day of each year reported and includes reinvestment of dividends and distributions. (b) Net of management fee waiver. (c) Less than $.005 per share. 48 See Notes to Financial Statements Prudential National Municipals Fund, Inc. Financial Highlights Cont'd.
Class C - ------------------------------------------------------------------------------------- Year Ended December 31, - ------------------------------------------------------------------------------------- 1999 1998 1997 1996 - ------------------------------------------------------------------------------------- $16.10 $16.16 $15.60 $16.02 ------- ------- ------- ------- .69 .69 .71(b) .72(b) (1.35) .06 .67 (.42) ------- ------- ------- ------- (.66) .75 1.38 .30 ------- ------- ------- ------- (.69) (.69) (.71) (.72) --(c) --(c) (.01) --(c) -- (.12) (.10) -- ------- ------- ------- ------- (.69) (.81) (.82) (.72) ------- ------- ------- ------- $14.75 $16.10 $16.16 $15.60 ------- ------- ------- ------- ------- ------- ------- ------- (4.22)% 4.73% 9.08% 2.01% $3,060 $2,296 $ 825 $ 772 $2,643 $1,555 $ 758 $ 674 1.36% 1.38% 1.35%(b) 1.33%(b) .61% .63% .60%(b) .58%(b) 4.39% 4.23% 4.50%(b) 4.67%(b)
See Notes to Financial Statements 49 Prudential National Municipals Fund, Inc. Financial Highlights Cont'd.
Class Z ---------------------------------------- January 22, Year 1999(c) Ended Through December 31, 2000 December 31, 1999 - ------------------------------------------------------------------------------------------ PER SHARE OPERATING PERFORMANCE: Net asset value, beginning of year $ 14.71 $ 16.11 ------- ------- Income from investment operations Net investment income .80 .73 Net realized and unrealized gain (loss) on investment transactions .88 (1.40) ------- ------- Total from investment operations 1.68 (.67) ------- ------- Less distributions Dividends from net investment income (.80) (.73) Distributions in excess of net investment income (.01) --(b) ------- ------- Total distributions (.81) (.73) ------- ------- Net asset value, end of year $ 15.58 $ 14.71 ------- ------- ------- ------- TOTAL RETURN(a): 11.73% (4.22)% RATIOS/SUPPLEMENTAL DATA: Net assets, end of year (000) $ 1,183 $ 797 Average net assets (000) $ 765 $ 1,391 Ratios to average net assets: Expenses, including distribution fees .63% .64%(d) Expenses, excluding distribution fees .63% .64%(d) Net investment income 5.34% 5.45%(d)
- ------------------------------ (a) Total return is calculated assuming a purchase of shares on the first day and a sale on the last day of each year reported and includes reinvestment of dividends and distributions. Total returns for periods of less than a full year are not annualized. (b) Less than $.005 per share. (c) Commencement of offering of Class Z shares. (d) Annualized. 50 See Notes to Financial Statements Prudential National Municipals Fund, Inc. Report of Independent Accountants To the Shareholders and Board of Directors of Prudential National Municipals Fund, Inc. In our opinion, the accompanying statement of assets and liabilities, including the portfolio of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of Prudential National Municipals Fund, Inc. (the 'Fund') at December 31, 2000, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended and the financial highlights for each of the periods presented, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as 'financial statements') are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at December 31, 2000 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP 1177 Avenue of the Americas New York, New York February 26, 2001 51 Prudential National Municipals Fund, Inc. Tax Information (Unaudited) We are required by the Internal Revenue Code to advise you within 60 days of the Fund's fiscal year end (December 31, 2000) as to the federal tax status of dividends paid by the Fund during such fiscal year. Accordingly, we are advising you that in the fiscal year ended December 31, 2000, dividends paid from net investment income totalling $.76 per Class A share, $.73 per Class B share, $.69 per Class C shares and $.80 per Class Z were all federally tax-exempt interest dividends. In addition, the Fund paid distributions of $.0056 per share (special taxable income) which is taxable as ordinary income. The portion of your dividends which may be subject to the Alternative Minimum Tax (AMT) as well as information with respect to the state taxability of your investment in the Fund was sent to you under separate cover. For the purpose of preparing your annual federal income tax return, however, you should report the amounts as reflected on the appropriate Form 1099-DIV or substitute 1099-DIV. 52 Prudential National Municipals Fund, Inc. Getting the Most from Your Prudential Mutual Fund When you invest through Prudential Mutual Funds, you receive financial advice from a Prudential Securities Financial Advisor or Pruco Securities registered representative. Your financial professional can provide you with the following services: There's No Reward Without Risk; but Is This Risk Worth It? Your financial professional can help you match the reward you seek with the risk you can tolerate. Risk can be difficult to gauge--sometimes even the simplest investments bear surprising risks. The educated investor knows that markets seldom move in just one direction. There are times when a market sector or asset class will lose value or provide little in the way of total return. Managing your own expectations is easier with help from someone who understands the markets, and who knows you! Keeping Up With the Joneses A financial professional can help you wade through the numerous available mutual funds to find the ones that fit your individual investment profile and risk tolerance. While the newspapers and popular magazines are full of advice about investing, they are aimed at generic groups of people or representative individuals--not at you personally. Your financial professional will review your investment objectives with you. This means you can make financial decisions based on the assets and liabilities in your current portfolio and your risk tolerance--not just based on the current investment fad. Buy Low, Sell High Buying at the top of a market cycle and selling at the bottom are among the most common investor mistakes. But sometimes it's difficult to hold on to an investment when it's losing value every month. Your financial professional can answer questions when you're confused or worried about your investment, and should remind you that you're investing for the long haul Prudential National Municipals Fund, Inc. Prudential Mutual Funds Prudential offers a broad range of mutual funds designed to meet your individual needs. For information about these funds, contact your financial professional or call us at (800) 225-1852. Read the prospectus carefully before you invest or send money. STOCK FUNDS Large Capitalization Stock Funds Prudential 20/20 Focus Fund Prudential Equity Fund, Inc. Prudential Stock Index Fund Prudential Tax-Managed Funds Prudential Tax-Managed Equity Fund Prudential Value Fund Target Funds Large Capitalization Growth Fund Large Capitalization Value Fund The Prudential Investment Portfolios, Inc. Prudential Jennison Growth Fund Small- to Mid-Capitalization Stock Funds Nicholas-Applegate Fund, Inc. Nicholas-Applegate Growth Equity Fund Prudential Small Company Fund, Inc. Prudential Tax-Managed Small-Cap Fund, Inc. Prudential U.S. Emerging Growth Fund, Inc. Target Funds Small Capitalization Growth Fund Small Capitalization Value Fund The Prudential Investment Portfolios, Inc. Prudential Jennison Equity Opportunity Fund Sector Stock Funds Prudential Natural Resources Fund, Inc. Prudential Real Estate Securities Fund Prudential Sector Funds, Inc. Prudential Financial Services Fund Prudential Health Sciences Fund Prudential Technology Fund Prudential Utility Fund Global/International Stock Funds Global Utility Fund, Inc. Prudential Europe Growth Fund, Inc. Prudential Pacific Growth Fund, Inc. Prudential World Fund, Inc. Prudential Global Growth Fund Prudential International Value Fund Prudential Jennison International Growth Fund Target Funds International Equity Fund Strategic Partners Series Strategic Partners Focused Growth Fund Strategic Partners New Era Growth Fund balanced/allocation funds Prudential Diversified Funds Conservative Growth Fund Moderate Growth Fund High Growth Fund The Prudential Investment Portfolios, Inc. Prudential Active Balanced Fund www.prudential.com (800) 225-1852 BOND FUNDS Taxable Bond Funds Prudential Government Income Fund, Inc. Prudential High Yield Fund, Inc. Prudential High Yield Total Return Fund, Inc. Prudential Short-Term Corporate Bond Fund, Inc. Income Portfolio Prudential Total Return Bond Fund, Inc. Target Funds Total Return Bond Fund Tax-Free Bond Funds Prudential California Municipal Fund California Series California Income Series Prudential Municipal Bond Fund High Income Series Insured Series Prudential Municipal Series Fund Florida Series New Jersey Series New York Series Pennsylvania Series Prudential National Municipals Fund, Inc. Global/International Bond Funds Prudential Global Total Return Fund, Inc. MONEY MARKET FUNDS Taxable Money Market Funds Cash Accumulation Trust Liquid Assets Fund National Money Market Fund Prudential Government Securities Trust Money Market Series U.S. Treasury Money Market Series Prudential Institutional Liquidity Portfolio, Inc. Institutional Money Market Series Prudential MoneyMart Assets, Inc. Prudential Special Money Market Fund, Inc. Money Market Series Tax-Free Money Market Funds Prudential California Municipal Fund California Money Market Series Prudential Municipal Series Fund New Jersey Money Market Series New York Money Market Series Prudential Tax-Free Money Fund, Inc. Other Money Market Funds Command Government Fund Command Money Fund Command Tax-Free Fund Prudential National Municipals Fund, Inc. Getting the Most from Your Prudential Mutual Fund How many times have you read these reports--or other financial materials--and stumbled across a word that you don't understand? Many shareholders have run into the same problem. We'd like to help. So we'll use this space from time to time to explain some of the words you might have read, but not understood. And if you have a favorite word that no one can explain to your satisfaction, please write to us. Basis Point: 1/100th of 1%. For example, one-half of one percent is 50 basis points. Collateralized Mortgage Obligations (CMOs): Mortgage-backed bonds that separate mortgage pools into different maturity classes called tranches. These instruments are sensitive to changes in interest rates and homeowner refinancing activity. They are subject to prepayment and maturity extension risk. Derivatives: Securities that derive their value from other securities. The rate of return of these financial instruments rises and falls--sometimes very suddenly--in response to changes in some specific interest rate, currency, stock, or other variable. Discount Rate: The interest rate charged by the Federal Reserve on loans to member banks. Federal Funds Rate: The interest rate charged by one bank to another on overnight loans. Futures Contract: An agreement to purchase or sell a specific amount of a commodity or financial instrument at a set price at a specified date in the future. www.prudential.com (800) 225-1852 Leverage: The use of borrowed assets to enhance return. The expectation is that the interest rate charged on borrowed funds will be lower than the return on the investment. While leverage can increase profits, it can also magnify losses. Liquidity: The ease with which a financial instrument (or product) can be bought or sold (converted into cash) in the financial markets. Price/Earnings Ratio: The price of a share of stock divided by the earnings per share for a 12-month period. Option: An agreement to purchase or sell something, such as shares of stock, by a certain time for a specified price. An option need not be exercised. Spread: The difference between two values; often used to describe the difference between "bid" and "asked" prices of a security, or between the yields of two similar maturity bonds. Yankee Bond: A bond sold by a foreign company or government on the U.S. market and denominated in U.S. dollars. Prudential National Municipals Fund, Inc. Class A Growth of a $10,000 Investment (GRAPH) Average Annual Total Returns as of 12/31/00 One Year Five Years Ten Years Since Inception With Sales Charge 8.11% 4.35% (4.33) 6.52% (6.51) 6.59% (6.58) Without Sales Charge 11.45% 4.99% (4.97) 6.85% (6.84) 6.89% (6.88) Past performance is not indicative of future results. Principal and investment return will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. The best- and worst-year information within the graph is designed to give you an idea of how much the Fund's returns can fluctuate from year to year by measuring the best and worst calendar years in terms of total annual return for the ten- year period. The graph compares a $10,000 investment in the Prudential National Municipals Fund, Inc. (Class A shares) with a similar investment in the Lehman Brothers Municipal Bond Index (the Index) by portraying the initial account values at the beginning of the ten-year period for Class A shares, and the account values at the end of the current fiscal year (December 31, 2000), as measured on a quarterly basis, beginning in 1990 for Class A shares. For purposes of the graph, and unless otherwise indicated, it has been assumed that (a) the maximum applicable front-end sales charge was deducted from the initial $10,000 investment in Class A shares; (b) all recurring fees (including management fees) were deducted; and (c) all dividends and distributions were reinvested. Without waiver of management fees and/or expense subsidization, the Fund's average annual total returns would have been lower, as indicated in parentheses ( ). The Index is an unmanaged index of over 21,000 long-term investment-grade municipal bonds. The Index gives a broad look at how long-term investment-grade municipal bonds have performed. The Index's total returns include the reinvestment of all dividends, but do not include the effect of sales charges or operating expenses of a mutual fund. The securities that comprise the Index may differ substantially from the securities in the Fund's portfolio. The Index is not the only one that may be used to characterize performance of municipal bond funds. Other indexes may portray different comparative performance. Investors cannot invest directly in an index. This graph is furnished to you in accordance with SEC regulations. www.prudential.com (800) 225-1852 Class B Growth of a $10,000 Investment (GRAPH) Average Annual Total Returns as of 12/31/00 One Year Five Years Ten Years Since Inception With Sales Charge 6.23% 4.46% (4.45) 6.46% (6.45) 8.05% (8.04) Without Sales Charge 11.23% 4.63% (4.62) 6.46% (6.45) 8.05% (8.04) Past performance is not indicative of future results. Principal and investment return will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. The best- and worst-year information within the graph is designed to give you an idea of how much the Fund's returns can fluctuate from year to year by measuring the best and worst calendar years in terms of total annual return for the ten- year period. The graph compares a $10,000 investment in the Prudential National Municipals Fund, Inc. (Class B shares) with a similar investment in the Lehman Brothers Municipal Bond Index (the Index) by portraying the initial account values at the beginning of the ten-year period for Class B shares, and the account values at the end of the current fiscal year (December 31, 2000), as measured on a quarterly basis, beginning in 1990 for Class B shares. For purposes of the graph, and unless otherwise indicated, it has been assumed that (a) the maximum applicable contingent deferred sales charge was deducted from the value of the investment in Class B shares, assuming full redemption on December 31, 2000; (b) all recurring fees (including management fees) were deducted; and (c) all dividends and distri-butions were reinvested. Class B shares will automatically convert to Class A shares, on a quarterly basis, beginning approximately seven years after purchase. This conversion feature is not reflected in the graph. Without waiver of management fees and/or expense subsidization, the Fund's average annual total returns would have been lower, as indicated in parentheses ( ). The Index is an unmanaged index of over 21,000 long-term investment-grade municipal bonds. The Index gives a broad look at how long-term investment-grade municipal bonds have performed. The Index's total returns include the reinvestment of all dividends, but do not include the effect of sales charges or operating expenses of a mutual fund. The securities that comprise the Index may differ substantially from the securities in the Fund's portfolio. The Index is not the only one that may be used to characterize performance of municipal bond funds. Other indexes may portray different comparative performance. Investors cannot invest directly in an index. This graph is furnished to you in accordance with SEC regulations. Prudential National Municipals Fund, Inc. Class C Growth of a $10,000 Investment (GRAPH) Average Annual Total Returns as of 12/31/00 One Year Five Years Ten Years Since Inception With Sales Charge 8.85% 4.16% (4.15) N/A 5.24% (5.22) Without Sales Charge 10.96% 4.37% (4.36) N/A 5.40% (5.38) Past performance is not indicative of future results. Principal and investment return will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. The best- and worst-year information within the graph is designed to give you an idea of how much the Fund's returns can fluctuate from year to year by measuring the best and worst calendar years in terms of total annual return since inception of the share class. The graph compares a $10,000 investment in the Prudential National Municipals Fund, Inc. (Class C shares) with a similar investment in the Lehman Brothers Municipal Bond Index (the Index) by portraying the initial account values at the commencement of operations of Class C shares, and the account values at the end of the current fiscal year (December 31, 2000), as measured on a quarterly basis, beginning in 1994 for Class C shares. For purposes of the graph, and unless otherwise indicated, it has been assumed that (a) the maximum applicable front-end sales charge was deducted from the initial $10,000 investment in Class C shares; (b) the maximum applicable contingent deferred sales charge was deducted from the value of the investment in Class C shares, assuming full redemption on December 31, 2000; (c) all recurring fees (including management fees) were deducted; and (d) all dividends and distributions were reinvested. Without waiver of management fees and/or expense subsidization, the Fund's average annual total returns would have been lower, as indicated in parentheses ( ). The Index is an unmanaged index of over 21,000 long-term investment-grade municipal bonds. The Index gives a broad look at how long-term investment-grade municipal bonds have performed. The Index's total returns include the reinvestment of all dividends, but do not include the effect of sales charges or operating expenses of a mutual fund. The securities that comprise the Index may differ substantially from the securities in the Fund's portfolio. The Index is not the only one that may be used to characterize performance of municipal bond funds. Other indexes may portray different comparative performance. Investors cannot invest directly in an index. This graph is furnished to you in accordance with SEC regulations. www.prudential.com (800) 225-1852 Class Z Growth of a $10,000 Investment (GRAPH) Average Annual Total Returns as of 12/31/00 One Year Five Years Ten Years Since Inception With Sales Charge 11.73% N/A N/A 3.57% Without Sales Charge 11.73% N/A N/A 3.57% Past performance is not indicative of future results. Principal and investment return will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. The best- and worst-year information within the graph is designed to give you an idea of how much the Fund's returns can fluctuate from year to year by measuring the best and worst calendar years in terms of total annual return since inception of the share class. The graph compares a $10,000 investment in the Prudential National Municipals Fund, Inc. (Class Z shares) with a similar investment in the Lehman Brothers Municipal Bond Index (the Index) by portraying the initial account values at the commencement of operations of Class Z shares, and the account values at the end of the current fiscal year (December 31, 2000), as measured on a quarterly basis, beginning in 1999 for Class Z shares. For purposes of the graph, and unless otherwise indicated, it has been assumed that (a) all recurring fees (including management fees) were deducted, and (b) all dividends and distributions were reinvested. Class Z shares are not subject to a sales charge or distribution and service (12b-1) fees. The Index is an unmanaged index of over 21,000 long-term investment-grade municipal bonds. The Index gives a broad look at how long-term investment-grade municipal bonds have performed. The Index's total returns include the reinvestment of all dividends, but do not include the effect of sales charges or operating expenses of a mutual fund. The securities that comprise the Index may differ substantially from the securities in the Fund's portfolio. The Index is not the only one that may be used to characterize performance of municipal bond funds. Other indexes may portray different comparative performance. Investors cannot invest directly in an index. This graph is furnished to you in accordance with SEC regulations. For More Information Prudential Mutual Funds Gateway Center Three 100 Mulberry Street Newark, NJ 07102-4077 (800) 225-1852 Visit Prudential's website at: http://www.prudential.com Directors Eugene C. Dorsey Delayne Dedrick Gold Robert F. Gunia Thomas T. Mooney Stephen P. Munn David R. Odenath, Jr. Richard A. Redeker Judy A. Rice Nancy H. Teeters Louis A. Weil, III Officers David R. Odenath, Jr., President Robert F. Gunia, Vice President Grace C. Torres, Treasurer Deborah A. Docs, Secretary William V. Healey, Assistant Secretary Manager Prudential Investments Fund Management LLC Gateway Center Three 100 Mulberry Street Newark, NJ 07102-4077 Investment Adviser The Prudential Investment Corporation Prudential Plaza Newark, NJ 07102-3777 Distributor Prudential Investment Management Services LLC Three Gateway Center, 14th Floor Newark, NJ 07102-4077 Custodian State Street Bank and Trust Company One Heritage Drive North Quincy, MA 02171 Transfer Agent Prudential Mutual Fund Services LLC P.O. Box 8098 Philadelphia, PA 19101 Independent Accountants PricewaterhouseCoopers LLP 1177 Avenue of the Americas New York, NY 10036 Legal Counsel Swidler Berlin Shereff Friedman, LLP The Chrysler Building 405 Lexington Avenue New York, NY 10174 Fund Symbols NASDAQ CUSIP Class A PRNMX 743918203 Class B PBHMX 743918104 Class C PNMCX 743918302 Class Z N/A 743918401 MF104E (ICON) Printed on Recycled Paper -----END PRIVACY-ENHANCED MESSAGE-----