0000898733-01-500430.txt : 20011030 0000898733-01-500430.hdr.sgml : 20011030 ACCESSION NUMBER: 0000898733-01-500430 CONFORMED SUBMISSION TYPE: N-30D PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20010831 FILED AS OF DATE: 20011025 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PRUDENTIAL CALIFORNIA MUNICIPAL FUND CENTRAL INDEX KEY: 0000746518 STANDARD INDUSTRIAL CLASSIFICATION: [] STATE OF INCORPORATION: MA FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: N-30D SEC ACT: 1940 Act SEC FILE NUMBER: 811-04024 FILM NUMBER: 1766702 BUSINESS ADDRESS: STREET 1: 199 WATER ST CITY: NEW YORK STATE: NY ZIP: 10292 BUSINESS PHONE: 2122141250 MAIL ADDRESS: STREET 2: ONE SEAPORT PLZ CITY: NEW YORK STATE: NY ZIP: 10292 FORMER COMPANY: FORMER CONFORMED NAME: PRUDENTIAL BACHE CALIFORNIA MUNICIPAL FUND DATE OF NAME CHANGE: 19910527 N-30D 1 ca83101.txt CALIFORNIA MUNICIPAL FUNDS -- PROSPECTUS -- 10/25/01 ANNUAL REPORT AUGUST 31, 2001 PRUDENTIAL California Municipal Fund/ California Income Series FUND TYPE Municipal bond OBJECTIVE Maximize current income that is exempt from California State and federal income taxes, consistent with the preservation of capital 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 Series' portfolio holdings are for the period covered by this report and are subject to change thereafter. Prudential Financial is a service mark of The Prudential Insurance Company of America, Newark, NJ, and its affiliates. (LOGO) Prudential California Municipal Fund California Income Series Performance at a Glance INVESTMENT GOALS AND STYLE The investment objective of the Prudential California Municipal Fund/ California Income Series (the Series) is to maximize current income that is exempt from California State and federal income taxes, consistent with the preservation of capital. However, certain shareholders may be subject to the alternative minimum tax (AMT) because some of the Series' bonds are subject to the AMT. There can be no assurance that the Series will achieve its investment objective. Portfolio Composition Expressed as a percentage of total investments as of 8/31/01 55.8% General Obligation Bonds 29.9 Revenue Bonds 10.5 Prerefunded 2.5 Miscellaneous 1.3 Cash Equivalents Credit Quality Expressed as a percentage of total investments as of 8/31/01 8.1% AAA 36.1 AAA Insured 0.8 AA 6.6 A 11.5 BBB 2.0 BB 34.9 Not Rated* (Prudential ratings used): 5.9 AAA 0.2 A 6.9 BBB 6.2 BB 13.9 B 0.4 CCC and below 1.4 Other *Unrated bonds are believed to be of comparable quality to permissible investments by the Series. Ten Largest Issuers Expressed as a percentage of net assets as of 8/31/01 5.9% Foothill/Eastern Transportation Corridor Agency* 5.0 Orange County Local Transportation Authority* 4.5 San Joaquin Hills Transportation Corridor Agency 3.6 Southern California Public Power Authority 2.9 Long Beach Harbor Revenue 2.2 Chula Vista Community Redevelopment Agency 2.1 Sacramento City Finance Authority 2.0 San Bernardino County 1.8 Folsom Special Tax 1.8 Puerto Rico Commonwealth *Some issues are prerefunded, which means they are secured by escrowed cash and/or direct U.S. guaranteed obligations. For details, see the Portfolio of Investments. Holdings are subject to change. www.prudential.com (800) 225-1852 Annual Report August 31, 2001 Cumulative Total Returns1 As of 8/31/01 One Five Ten Since Year Years Years Inception2 Class A 9.35% 39.80% (39.67) 107.95% (103.64) 123.79% (118.76) Class B 8.98 37.59 (37.47) N/A 57.15 (55.74) Class C 8.71 35.89 (35.76) N/A 54.80 (53.82) Class Z 9.72 N/A N/A 39.80 (39.68) Lipper CA Muni Debt Fund Avg.3 9.19 35.46 91.48 ***
Average Annual Total Returns1 As of 9/30/01
One Five Ten Since Year Years Years Inception2 Class A 9.77% 6.52% (6.50) 7.37% (7.16) 7.68% (7.45) Class B 9.40 6.19 (6.17) N/A 5.89 (5.77) Class C 9.14 5.92 (5.90) N/A 6.21 (6.12) Class Z 10.14 6.71 (6.69) N/A 6.79 (6.77)
Distributions and Yields As of 8/31/01
Total Distributions 30-Day Taxable Equivalent Yield4 at Tax Rates of Paid for 12 Months SEC Yield 36% 39.1% Class A $0.52 3.95% 6.80% 7.15% Class B $0.49 3.83 6.60 6.93 Class C $0.47 3.55 6.12 6.43 Class Z $0.55 4.32 7.44 7.82
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 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 Series charges a maximum front-end sales charge of 3% for Class A shares and a declining contingent deferred sales charge (CDSC) of 5%, 4%, 3%, 2%, 1%, and 1% for six years for Class B shares. Approximately seven years after purchase, Class B shares will automatically convert to Class A shares on a quarterly basis. 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 Series' cumulative and average annual total returns would have been lower, as indicated in parentheses. 2 Inception dates: Class A, 12/3/90; Class B, 12/7/93; Class C, 8/1/94; and Class Z, 9/18/96. 3 The Lipper Average is unmanaged, and is based on the average return for all funds in each share class for the one-, five-, and ten-year periods in the Lipper California Municipal Debt Fund category. Single-state municipal debt funds limit their securities that are exempt from taxation in a specified state (double tax exempt) or city (triple tax exempt). 4 Taxable equivalent yields reflect federal and applicable state tax rates. ***Lipper Since Inception returns are 104.41% for Class A, 52.58% for Class B, 54.56% for Class C, and 33.61% for Class Z, based on all funds in each share class. 1 (LOGO) October 15, 2001 DEAR SHAREHOLDER, The horrific events that took place on September 11, 2001, will remain forever ingrained in our nation's consciousness. In their aftermath, our thoughts and our prayers remain with the victims of this senseless tragedy, their families, and friends. It is also with deep gratitude that we acknowledge the heroic efforts of the men and women involved in the rescue operations. We at Prudential Financial would like to take the opportunity during this difficult time to reassure our shareholders of our unwavering commitment to their investment needs. Under normal circumstances, the investment landscape is a difficult one to navigate, and during this extremely tragic period in our nation's history, even more so. We're here to provide the expertise and resources that may help make the journey ahead less daunting. For now, investors should try to maintain a patient focus on their long-term investment strategies, and avoid making investment decisions based on emotional reactions. Those strategies should, where appropriate, include some allocation to debt securities as bonds can provide an income stream and may help to smooth portfolio volatility. Above all, investors should continue to seek guidance from their financial professionals. Sincerely, David R. Odenath, Jr., President Prudential California Municipal Fund 2 Prudential California Municipal Fund California Income Series Annual Report August 31, 2001 INVESTMENT ADVISER'S REPORT Investors flocked to the municipal bond market during our fiscal year that began September 1, 2000, drawn by its solid total returns and the relative safety of tax-exempt securities compared with the heightened volatility in the stock market. This strong investor demand ultimately enabled the municipal debt market to absorb a flood of new tax-exempt bonds issued in the second half of our reporting period. Prices of municipal bonds began to rally in the autumn of 2000 because investors expected the Federal Reserve (the Fed) to reduce short-term rates in order to revitalize a lackluster U.S. economy. (Bond prices move in the opposite direction of interest rates.) In anticipation of the lower interest-rate scenario that began to unfold in the autumn, we sold some of the Series' bonds maturing in 10 to 15 years and purchased deep-discount bonds maturing in 30 years. The 30- year bonds, due to their greater sensitivity to changes in the level of interest rates, experienced stronger price appreciation as the municipal market rallied. Furthermore, demand for 30-year bonds increased as investors reinvested proceeds received from maturing bonds and from bonds that were "called" or prematurely retired by state and local governments in December 2000 and January 2001. SHIFTING FOCUS TO INTERMEDIATE-TERM MUNICIPAL BONDS The long-awaited interest-rate cuts began in January 2001 when the Fed eased monetary policy twice and hinted that its lower-rate campaign was not over. As a result, our longer-term outlook for municipal bonds became less bullish. We reasoned that if the Fed continued to reduce rates, investors would eventually begin to anticipate stronger economic growth and demand higher yields on municipal bonds. Meanwhile, slower economic growth could also exert upward pressure on municipal bond yields if a weakened economy and lower tax revenues led state and local governments to issue significantly more bonds. 3 Prudential California Municipal Fund California Income Series Annual Report August 31, 2001 In light of our concerns about the potential for higher municipal bond yields, we reversed our strategy. We took profits on the Series' deep-discount bonds maturing in 30 years and purchased debt securities maturing in 10 to 20 years. This approach worked well, particularly in the spring of 2001, as hope for improved economic conditions and a burgeoning supply of municipal securities temporarily forced municipal bond yields higher, causing their prices to fall. The municipal market rally resumed in the summer of 2001, however, because economic conditions worsened even though the Fed cut rates again in March, April, May, June, and August. Altogether, the Fed eased monetary policy seven times during our fiscal year, which lowered the federal funds rate (what banks charge each other for overnight loans) by a total of three percentage points to 3.50%. FLIGHT-TO-QUALITY TREND BOOSTS MUNICIPAL BONDS With the economy stumbling along and the stock market sinking, investors increasingly sought refuge in safer assets such as municipal bonds during the summer of 2001. Evidence of solid demand for tax-exempt securities emerged in a report from the Investment Company Institute that showed $2.33 billion flowed into municipal bond funds in July, the largest monthly inflow in more than three years. This strong appetite for tax-exempt bonds helped the market digest the huge supply of municipal securities that was issued in the second half of our fiscal year. As the rally continued in July and August, we maintained our emphasis on intermediate-term municipal bonds because these securities provided a solid rate of return with less interest-rate risk than longer-term bonds. Indeed, making timely shifts in this aspect of our strategy helped the Series' Class A shares post a 9.35% annual return that exceeded the 9.19% of their benchmark Lipper Average. For shareholders paying the initial Class A sales charge, the Series' return was 6.07% 4 www.prudential.com (800) 225-1852 LESS EXPOSURE TO THE MOST TROUBLED CALIFORNIA BONDS The Series' relative performance also benefited from our more conservative approach to sector and security selection. In general, California bonds did not perform as well as the general municipal market because the Golden State's utility crisis hurt the financial health of many of its issuers. For example, California's general obligation (GO) bond rating was downgraded to A-plus from AA by Standard & Poor's Ratings Group (S&P) and to Aa3 from Aa2 by Moody's Investors Service because of the utility crisis and the state's weakened economic condition. We avoided municipal bonds of investor- owned California utility companies, which were hardest hit by the crisis, and we only held California GO bonds that were insured and rated AAA. We also took steps to improve the Series' credit-quality profile by reducing its exposure to non-rated California bonds. We took profits on some of the Series' non-rated bonds, which stood at 34.9% of its total investments as of August 31, 2001, down from 40% at the beginning of our fiscal year. We invested some of the proceeds into AAA-rated insured bonds, which rose to 36% from 28%. LOOKING AHEAD After our fiscal year ended, the Fed lowered short-term rates by one- half of a percentage point on September 17, and again on October 2, partially in response to the terrorist attacks that occurred in the United States on September 11. The central bank expressed concern that weak economic conditions might continue for the foreseeable future. We believe the Fed may ease monetary policy further before year-end. However, we also expect that its aggressive rate cuts, the tax rebates, and government spending to help certain businesses get back on their feet should spark an economic rebound in 2002. A recovering economy is bound to fuel fears of higher inflation that could exert pressure on the bond market, particularly the 30-year sector. Under these economic conditions, we expect intermediate-term bonds to be one of 5 Prudential California Municipal Fund California Income Series Annual Report August 31, 2001 the best performing maturity segments of the municipal market because their prices are less sensitive to swings in interest rates than prices of longer-term bonds. In other words, we believe intermediate- term bonds offer the most attractive risk/reward ratio in the municipal bond market. Therefore, we plan to continue emphasizing these securities in our asset allocation strategy. Prudential California Municipal Fund Management Team 6 ANNUAL REPORT AUGUST 31, 2001 PRUDENTIAL California Municipal Fund/ California Income Series FINANCIAL STATEMENTS Prudential California Municipal Fund California Income Series Portfolio of Investments as of August 31, 2001
Moody's Principal Rating Interest Maturity Amount Value Description (a) (Unaudited) Rate Date (000) (Note 1) ---------------------------------------------------------------------------------------------------------- LONG-TERM INVESTMENTS 99.1% ---------------------------------------------------------------------------------------- Brea Pub. Fin. Auth. Rev., Tax Alloc. Redev. Proj., Ser. C NR 8.10% 3/01/21 $ 3,000 $ 3,060,000 Brea Redev. Agcy., Ref., Tax Alloc., Ser. A Aaa 5.50 8/01/19 3,350 3,665,201 Buena Park Cmnty. Redev. Agcy., Cent. Bus. Dist. Proj., Ser. B NR 7.80 9/01/14 3,325(g) 3,472,697 California Cmnty. Dev. Comm., Ref., Merged Redev. Proj., Ser. A NR 5.70 8/01/28 2,250 2,248,650 California Infrastructure & Econ. Dev. Bk. Rev., Scripps Research Inst., Ser. A A1 5.75 7/01/30 1,500 1,606,500 California Pollution Control Fin. Auth., Solid Waste Disposal Rev., Keller Canyon Landfill Co. Proj. B1 6.875 11/01/27 2,500 2,537,525 California Rural Home Mtg. Fin. Auth., Single Family Mtg. Rev., Mtg. Bkd. Secs., Ser. D, F.N.M.A., G.N.M.A., A.M.T. AAA(c) 6.00 12/01/31 1,890 2,006,745 California St. Cmnty. Cap. Apprec. Cmnty. Facs., Dist. No. 97-1 NR Zero 9/01/22 4,440 1,219,268 California St., Gen. Oblig., A.M.B.A.C. Aaa 5.50 3/01/16 2,000 2,195,380 California St. Pub. Wks. Brd. Lease Rev., Dept. Of Corrections, Ser. A Aaa 5.50 1/01/15 3,000 3,205,680 California Statewide Cmntys. Dev. Auth., Cert. of Part. Aaa 5.30 12/01/15 1,900 2,021,847 Capistrano Unif. Sch. Dist., Spec. Tax, No. 98-2 NR 5.70 9/01/20 1,000 1,006,510 Carson City Ltd. Oblig. Impvt. Rev., Assmt. Dist. No. 92-1 NR 7.375 9/02/22 2,270 2,383,114 Central California Joint Pwrs. Hlth. Fin. Auth., Cert. of Part., Cmnty. Hosps. Baa1 6.00 2/01/30 2,000 2,111,020 Cert. of Part., Cmnty. Hosps. Baa1 5.75 2/01/31 2,000 2,053,500
8 See Notes to Financial Statements Prudential California Municipal Fund California Income Series Portfolio of Investments as of August 31, 2001 Cont'd.
Moody's Principal Rating Interest Maturity Amount Value Description (a) (Unaudited) Rate Date (000) (Note 1) ---------------------------------------------------------------------------------------------------------- Chula Vista Cmnty. Redev. Agcy., Ref. Tax Alloc. Sr. Bayfront, Ser. A BBB+(c) 7.625% 9/01/24 $ 2,500 $ 2,861,600 Ref. Tax Alloc. Sub. Bayfront, Ser. C NR 8.25 5/01/24 2,500 2,787,375 Chula Vista Spec. Tax, Cmnty. Facs., Dist. No. 97-3 NR 6.05 9/01/29 2,765 2,865,729 Corona Cert. of Part., Vista Hosp. Sys., Inc., Ser. C NR 8.375 7/01/11 2,000(e)(g) 740,000 Davis Pub. Facs. Fin. Auth., Mace Ranch, Ser. A NR 6.60 9/01/25 1,375 1,455,974 Delano Cert. of Part., Ser. A Ser. 92-A AAA(c) 9.25 1/01/22 2,765(f)(g) 3,069,620 East Bay Muni. Utility Dist. Wastewater, Treatment Sys. Rev., A.M.B.A.C. Aaa 5.55 6/01/20 2,000 2,108,740 El Dorado Cnty., Spec. Tax, Cmnty. Facs., Dist. No. 92-1 NR 6.125 9/01/16 1,000 1,041,220 Cmnty. Facs., Dist. No. 92-1 NR 8.25 9/01/24 1,945(f)(g) 2,291,210 Cmnty. Facs., Dist. No. 92-1 NR 6.25 9/01/29 485 502,504 Folsom Spec. Tax, Cmnty. Facs., Dist. No. 10 NR 6.875 9/01/19 2,000 2,179,140 Cmnty. Facs., Dist. No. 7 NR 6.00 9/01/24 2,500 2,568,075 Fontana Pub. Fin. Auth., Tax Alloc. Rev., Sub Lien, N. Fontana Redev. Proj., Ser. A NR 7.65 12/01/09 1,575(f) 1,626,471 Foothill/Eastern Trans. Corr. Agcy., Toll Rd. Rev., Cap Apprec., Sr. Lien, Ser. A Aaa Zero 1/01/20 10,000 4,094,800 Conv. Cap. Apprec., Sr. Lien, Ser. A, Zero Coupon (until 1/01/05) Aaa 7.15 1/01/13 4,750(f) 4,853,265 Conv. Cap. Apprec. Baa3 Zero 1/15/26 4,800 3,092,160 Conv. Cap. Apprec. Baa3 Zero 1/15/28 4,890 3,150,138 Gateway Impvt. Auth. Rev., Marin City Cmnty. Facs. Dist., Ser. A NR 7.75 9/01/25 2,100(f) 2,533,713
See Notes to Financial Statements 9 Prudential California Municipal Fund California Income Series Portfolio of Investments as of August 31, 2001 Cont'd.
Moody's Principal Rating Interest Maturity Amount Value Description (a) (Unaudited) Rate Date (000) (Note 1) ---------------------------------------------------------------------------------------------------------- Golden West Sch. Fin. Auth., California Rev., Cap. Apprec., Ref. Ser. A, M.B.I.A. Aaa Zero 2/01/19 $ 2,110 $ 892,762 Irvine Impvt. Bond Act of 1915, Assmt., Dist. No. 87-8, Grp. One NR 6.00% 9/02/24 3,000 3,088,230 Kings Cnty. Wst. Mgmt. Auth., Solid Wst. Rev., A.M.T. BBB(c) 7.20 10/01/14 1,200 1,298,268 La Mesa Impvt. Bond Act of 1915, Ltd. Oblig., Dist. No. 98-1 NR 5.75 9/02/23 1,000 1,006,800 La Mirada Redev. Agcy. Spec. Tax, Ref. Cmnty. Facs., Dist. No. 89-1 NR 5.70 10/01/20 1,000 998,330 La Quinta Redev. Agcy., Tax Alloc. Ref. Proj. Area No. 1, M.B.I.A. Aaa 7.30 9/01/10 1,000 1,269,930 Ref. Proj. Area No. 1, M.B.I.A. Aaa 7.30 9/01/11 1,000 1,269,040 Lincoln Impvt. Bond Act of 1915, Pub. Fin. Auth., Twelve Bridges NR 6.20 9/02/25 2,930 3,004,598 Long Beach Hbr. Rev., Ref. Ser. A., A.M.T., F.G.I.C. Aaa 6.00 5/15/17 3,500(g) 4,090,730 Ref. Ser. A., A.M.T., F.G.I.C. Aaa 6.00 5/15/19 3,000 3,480,810 Los Angeles Cmnty. Facs., Dist. No. 5, Rowland Heights, Ser. A NR 7.25 9/01/19 1,500(f) 1,725,930 Lynwood Pub. Fin. Auth. Rev., Wtr. Sys. Impvt. Proj. BBB(c) 6.50 6/01/21 1,500(g) 1,579,215 Met. Wtr. Dist. of Southern California, Waterworks Rev., Linked S.A.V.R.S. & R.I.B.S. Aa2 5.75 8/10/18 1,000(g) 1,129,230 Mojave Desert & Mtn. Solid Waste Joint Pwrs. Auth. Proj., Victor Valley Nat'l. Recov. Facs., A.M.T. Baa1 7.875 6/01/20 1,175 1,281,960 Norco Spec. Tax Cmnty. Facs., Dist. No. 97-1 NR 7.10 10/01/30 1,320 1,432,886
10 See Notes to Financial Statements Prudential California Municipal Fund California Income Series Portfolio of Investments as of August 31, 2001 Cont'd.
Moody's Principal Rating Interest Maturity Amount Value Description (a) (Unaudited) Rate Date (000) (Note 1) ---------------------------------------------------------------------------------------------------------- Ontario California Impvt. Bond Act of 1915, Assmt. Dist. 100C, Com. Ctr. III NR 8.00% 9/02/11 $ 535 $ 558,909 Orange Cnty. Cmnty. Facs. Dist., Spec. Tax Rev., No. 88-1, Aliso Viejo, Ser. A AAA(c) 7.15 8/15/06 805(f) 857,019 Spec. Tax, No. 1, Ladera Ranch, Ser. A NR 6.25 8/15/30 1,590 1,640,499 Orange Cnty. Loc. Trans. Auth., Sales Tax Rev., Linked S.A.V.R.S. & R.I.B.S., A.M.B.A.C., T.C.R.S. Aaa 6.20 2/14/11 10,000(g) 11,803,300 Spec. Tax Rev., Linked R.I.B.S. Aa2 9.454(d) 2/14/11 750 1,019,062 Pico Rivera California Wtr. Auth. Rev., Wtr. Sys. Proj., Ser. A, M.B.I.A Aaa 5.50 5/01/29 1,500(g) 1,659,750 Pittsburg California Redev. Agcy. Tax Alloc., Ext. Spec. Redem., Los Medanos, Ser. B, F.S.A Aaa 5.80 8/01/34 2,700 3,041,172 Los Medanos Cmnty. Dev. Proj., A.M.B.A.C. Aaa Zero 8/01/26 1,375 377,108 Los Medanos Cmnty. Dev. Proj., A.M.B.A.C. Aaa Zero 8/01/30 4,145 918,449 Placentia Pub. Fin. Auth., Spec. Tax Rev., Jr. Lien, Ser. B NR 6.60 9/01/15 1,500 1,530,000 Poway Cmnty. Facs., Dist. No. 88-1, Parkway Bus. Ctr. NR 6.75 8/15/15 1,000 1,097,610 Puerto Rico Commonwealth, Gen. Oblig., F.G.I.C. Aaa 5.50 7/01/13 3,000(h) 3,310,080 Rites, PA 642A, M.B.I.A. NR 9.325(d) 7/01/10 1,000 1,296,680 Puerto Rico Indl. Tourist Edl. Med. & Environmental Clt. Fas., Cogen Fac., AES Puerto Rico Proj., A.M.T. Baa2 6.625 6/01/26 3,750 4,103,850
See Notes to Financial Statements 11 Prudential California Municipal Fund California Income Series Portfolio of Investments as of August 31, 2001 Cont'd.
Moody's Principal Rating Interest Maturity Amount Value Description (a) (Unaudited) Rate Date (000) (Note 1) ---------------------------------------------------------------------------------------------------------- Puerto Rico Pub. Bldgs. Auth., Gtd. Pub. Ed. & Hlth. Facs., Cap. Apprec., Ser. J Baa1 Zero 7/01/06 $ 1,605 $ 1,353,336 Redding Elec. Sys. Rev., Cert. of Part., Linked S.A.V.R.S. & R.I.B.S., M.B.I.A. Aaa 6.368% 7/01/22 50(g) 58,219 M.B.I.A., R.I.B.S. Aaa 10.231(d) 7/01/22 1,850 2,458,188 Richmond Redev. Agcy. Tax Alloc., Cap. Apprec. Ref. Harbor, Ser. A., M.B.I.A. Aaa Zero 7/01/20 1,150 446,258 Cap. Apprec. Ref. Harbor, Ser. A., M.B.I.A. Aaa Zero 7/01/21 1,150 420,302 Richmond Redev. Agcy., Multifamily Hsg., Bridge Affordable Hsg. NR 7.50 9/01/23 2,470 2,540,691 Rio Vista Impvt. Bond Act of 1915, Assmt. Dist. No. 96-1, River View Pt. NR 7.50 9/02/22 1,905 2,085,308 Riverside Cnty. Cert. of Part., Air Force Village West, Inc., Ser. A NR 8.125 6/15/20 3,000(f)(g) 3,189,660 Riverside Unified Sch. Dist. Spec. Tax, Cmnty. Facs. Dist. No. 7, Ser. A NR 6.90 9/01/20 1,320 1,435,896 Cmnty. Facs. Dist. No. 7, Ser. A NR 7.00 9/01/30 1,000 1,086,350 Rocklin Unified Sch. Dist., Cap. Apprec., Ser. C, M.B.I.A. Aaa Zero 8/01/12 1,110 696,869 Cap. Apprec., Ser. C, M.B.I.A. Aaa Zero 8/01/13 1,165 690,321 Cap. Apprec., Ser. C, M.B.I.A. Aaa Zero 8/01/14 1,220(g) 683,176 Cap. Apprec., Ser. C, M.B.I.A. Aaa Zero 8/01/15 1,285 677,760 Cap. Apprec., Ser. C, M.B.I.A. Aaa Zero 8/01/16 1,400 695,044 Roseville California Spec. Tax, Highland Cmnty. Fac., Dist. No. 1 NR 6.30 9/01/25 1,900 1,976,874
12 See Notes to Financial Statements Prudential California Municipal Fund California Income Series Portfolio of Investments as of August 31, 2001 Cont'd.
Moody's Principal Rating Interest Maturity Amount Value Description (a) (Unaudited) Rate Date (000) (Note 1) ---------------------------------------------------------------------------------------------------------- Woodcreek Cmnty. Facs., Dist. No. 1 NR 6.375% 9/01/27 $ 1,000 $ 1,040,090 Sacramento City. Fin. Auth., Cap. Apprec., Tax Alloc. Comb. Proj., Ser. B, M.B.I.A. Aaa Zero 11/01/16 5,700 2,796,762 Cap. Apprec., Tax Alloc. Comb. Proj., Ser. B, M.B.I.A. Aaa Zero 11/01/17 5,695 2,620,269 Sacramento Impvt. Bond Act of 1915, Willowcreek II, Assmt. Dist. No. 96-1 NR 6.70 9/02/22 2,420(g) 2,505,620 Sacramento Spec. Purpose Facs., Y.M.C.A. of Sacramento NR 7.25 12/01/18 2,005 2,104,669 San Bernardino Cnty., Cert. of Part., Med. Ctr. Fin. Proj., M.B.I.A. Aaa 5.50 8/01/22 4,540 5,045,938 San Bruno Park Sch. Dist., Cap. Apprec., F.S.A. Aaa Zero 8/01/20 1,275 492,698 Cap. Apprec., F.S.A. Aaa Zero 8/01/21 1,220 443,994 Cap. Apprec., F.S.A. Aaa Zero 8/01/22 1,080 369,814 San Diego California Redev. Agcy., Tax Alloc., North Bay Redev. Baa1 5.875 9/01/29 2,000 2,069,180 San Diego Spec. Tax, Cmnty. Facs., Dist. No. 1, Ser. B NR 7.10 9/01/20 2,000(f) 2,364,620 San Francisco City & Cnty., Redev. Agcy., Lease Rev., Cap. Apprec. A1 Zero 7/01/06 1,500 1,273,845 Cap. Apprec. A1 Zero 7/01/07 2,250 1,825,133 San Francisco City & Cnty. Arprt., Comm. Int'l. Arprt. Rev., Second Ser. Issue 8A, A.M.T., F.G.I.C. Aaa 6.25 5/01/20 2,000 2,142,160 San Joaquin Hills Trans. Corridor Agcy., Toll Rd. Rev., Cap. Apprec., Ref., Ser. A, M.B.I.A. Aaa Zero 1/15/32 10,000 2,047,800 Cap. Apprec., Ref., Ser. A, M.B.I.A. Aaa Zero 1/15/36 5,000 825,350
See Notes to Financial Statements 13 Prudential California Municipal Fund California Income Series Portfolio of Investments as of August 31, 2001 Cont'd.
Moody's Principal Rating Interest Maturity Amount Value Description (a) (Unaudited) Rate Date (000) (Note 1) ---------------------------------------------------------------------------------------------------------- Cap. Apprec., Ref., Ser. A, M.B.I.A. Aaa Zero 1/15/26 $ 7,000 $ 1,970,150 Jr. Lien, C.A.B.S. Aaa Zero 1/01/11 2,000 1,374,380 Sr. Lien, C.A.B.S. Aaa Zero 1/01/22 15,000 5,462,700 San Jose Unified Sch. Dist., Santa Clara, Cap. Apprec., Ser. A., F.G.I.C. Aaa Zero 8/01/16 2,630 1,303,770 Cap. Apprec., Ser. A., F.G.I.C. Aaa Zero 8/01/18 2,765 1,211,070 Cap. Apprec., Ser. A., F.G.I.C. Aaa Zero 8/01/19 2,835 1,168,218 San Leandro Cmnty. Facs., Spec. Tax, Dist. No. 1 NR 6.50% 9/01/25 2,160 2,238,818 San Luis Obispo, Certs. of Part., Vista Hosp. Sys., Inc. NR 8.375 7/01/29 1,000(e)(g) 370,000 Santa Margarita, Dana Point Auth., Impvt. Dists. 1, 2, 2A, 8, Ser. A, M.B.I.A. Aaa 7.25 8/01/09 905 1,130,046 Impvt. Dists. 3, 3A, 4, 4A, Ser. B, M.B.I.A. Aaa 7.25 8/01/14 1,000 1,298,130 Santa Margarita Wtr. Dist. Spec. Tax, Cmnty Facs., Dist. No. 99-1 NR 6.20 9/01/20 2,000 2,094,060 Cmnty Facs., Dist. No. 99-1 NR 6.25 9/01/29 2,000 2,087,620 South Orange Cnty., Pub. Fin. Auth., Sr. Lien, Ser. A, M.B.I.A. Aaa 7.00 9/01/10 2,535(g) 3,161,627 South San Francisco Redev. Agcy., Tax Alloc., Gateway Redev. Proj. NR 7.60 9/01/18 2,375(f) 2,543,198 South Tahoe Joint Pwrs. Fin. Auth. Rev., Ref. Redev. Proj. Area No. 1, Ser. B BBB-(c) 6.00 10/01/28 3,000 3,065,610 Southern California Pub. Pwr. Auth., Pwr. Proj. Rev. A2 6.75 7/01/10 4,250(g) 5,126,307 Pwr. Proj. Rev., Ref., Palo Verde Proj., Ser. C, A.M.B.A.C. Aaa Zero 7/01/16 8,400 4,247,712
14 See Notes to Financial Statements Prudential California Municipal Fund California Income Series Portfolio of Investments as of August 31, 2001 Cont'd.
Moody's Principal Rating Interest Maturity Amount Value Description (a) (Unaudited) Rate Date (000) (Note 1) ---------------------------------------------------------------------------------------------------------- Stockton Cmnty. Facs. Dist., Sepc. Tax, No. 90-2, Brookside Estates NR 6.20% 8/01/15 $ 1,050 $ 1,105,020 Sulphur Springs Unified Sch. Dist., Int. Accrual, Ser. A, M.B.I.A. Aaa Zero 9/01/11 3,000 1,987,500 Temecula Valley Unified Sch. Dist., Cmnty. Facs., Spec. Tax, Dist. No. 89-1, NR 8.60 9/01/17 2,600(g) 2,666,014 Tobacco Securitization Auth., N. Ca. Settlement Rev., Asset Bkd. Bds., Ser. A A1 5.375 6/01/41 2,500 2,519,600 Tustin California Unified Sch. Dist., Bond Anticipation Nts., Cmnty. Facs., Dist. No. 97-1 NR 6.10 9/01/02 1,000 1,026,530 Spec. Tax, Cmnty Facs., Dist. No. 97-1 NR 6.375 9/01/35 1,500 1,560,345 Vacaville Cmnty. Redev. Agcy., Multifamily Rev., Cmnty Hsg. Fin., Issue A A-(c) 7.375 11/01/14 1,110(f) 1,289,032 Vallejo Cert. of Part., Touro Univ. Ba2 7.375 6/01/29 2,500(g) 2,615,375 Ventura California Port Dist., Cert. of Part. NR 6.375 8/01/28 3,500 3,559,220 Victor Valley, Union H.S. Dist., Cap. Apprec., M.B.I.A. Aaa Zero 9/01/17 4,500 2,119,950 Union H.S. Dist., Cap. Apprec., M.B.I.A. Aaa Zero 9/01/19 5,450 2,280,171 Union H.S. Dist., Cap. Apprec., M.B.I.A. Aaa Zero 9/01/20 5,850 2,297,529 Virgin Islands Territory, Hugo Ins. Claims Fund Proj., Ser. 91 NR 7.75 10/01/06 695(f) 708,601 West Contra Costa Unified Sch. Dist., Cert. of Part. Baa3 6.875 1/01/09 925 1,009,684 ------------ Total long-term investments (cost $231,941,557) 256,437,759 ------------
See Notes to Financial Statements 15 Prudential California Municipal Fund California Income Series Portfolio of Investments as of August 31, 2001 Cont'd.
Moody's Principal Rating Interest Maturity Amount Value Description (a) (Unaudited) Rate Date (000) (Note 1) ---------------------------------------------------------------------------------------------------------- SHORT-TERM INVESTMENTS 1.4% ---------------------------------------------------------------------------------------- Mun. Secs. Trust Rcpts., SGA 119, F.G.I.C., F.R.D.D. NR 2.45% 9/04/01 $ 1,100 $ 1,100,000 Mun. Secs. Trust Certs., Ser. 2001, 136 Trust Certs. Class A, F.G.I.C., F.R.D.D. NR 2.45 9/04/01 500 500,000 San Jose Redev. Agcy., Tax Alloc., Fltr Certificates Ser. 149, M.B.I.A., F.R.W.D. VMIG1 1.90 9/06/01 2,000 2,000,000 ------------ Total short-term instruments (cost $3,600,000) 3,600,000 ------------ Contracts ---------- OUTSTANDING PUT OPTIONS PURCHASED United States Treasury Bonds Futures, Sept. 01 @ 104 (cost $38,452) 50 16,405 ------------ Total Investments 100.5% (cost $ 235,580,009; Note 4) 260,054,164 Liabilities in excess of other assets (0.5)% (1,362,065) ------------ Net Assets 100% $258,692,099 ------------ ------------
16 See Notes to Financial Statements Prudential California Municipal Fund California Income Series Portfolio of Investments as of August 31, 2001 Cont'd. (a) The following abbreviations are used in portfolio descriptions: A.M.B.A.C.--American Municipal Bond Assurance Corporation. A.M.T.--Alternative Minimum Tax. C.A.B.S.--Capital Appreciation Bonds. F.G.I.C.--Financial Guaranty Insurance Company. F.N.M.A.--Federal National Mortgage Association. F.R.D.D.--Floating Rate (Daily) Demand Notes (b). F.R.W.D.--Floating Rate (Weekly) Demand Note (b). F.S.A.--Financial Security Assurance. G.N.M.A.--Government National Mortgage Association. M.B.I.A.--Municipal Bond Insurance Association. R.I.B.S.--Residual Interest Bearing Securities. S.A.V.R.S.--Select Auction Variable Rate Securities. T.C.R.S.--Transferable Custodial Receipts. (b) For purposes of amortized cost valuation, the maturity date of Floating Rate Demand Notes is considered to be the later of the next date on which the security can be redeemed at par, or the next date on which the rate of interest is adjusted. (c) Standard & Poor's Rating. (d) Inverse floating rate bond. The coupon is inversely indexed to a floating interest rate. The rate shown is the rate at year end. (e) Issue in default on interest payment, non-income producing security. (f) Prerefunded issues are secured by escrowed cash and/or direct U.S. guaranteed obligations. (g) All or partial principal amount segregated as collateral for futures contracts or when-issued securities. (h) Represents a when-issued security. NR--Not Rated by Moody's or Standard & Poor's. The Fund's current Statement of Additional Information contains a description of Moody's and Standard & Poor's ratings. See Notes to Financial Statements 17 Prudential California Municipal Fund California Income Series Statement of Assets and Liabilities
August 31, 2001 ---------------------------------------------------------------------------------------- ASSETS Investments, at value (cost $235,580,009) $ 260,054,164 Cash 52,707 Interest receivable 3,683,239 Receivable for Series shares sold 412,440 Unrealized appreciation on interest rate swaps 47,502 Other assets 4,105 --------------- Total assets 264,254,157 --------------- LIABILITIES Payable for investments purchased 3,169,860 Payable for Series shares reacquired 1,558,704 Due to broker - termination fee on interest rate swaps 438,683 Dividends payable 148,093 Management fee payable 108,411 Distribution fee payable 73,334 Accrued expenses 49,219 Deferred trustee's fees 14,035 Due to broker-variation margin 1,719 --------------- Total liabilities 5,562,058 --------------- NET ASSETS $ 258,692,099 --------------- --------------- Net assets were comprised of: Shares of beneficial interest, at par $ 232,806 Paid-in capital in excess of par 238,479,102 --------------- 238,711,908 Undistributed net investment income 293,733 Accumulated net realized loss on investments (4,897,387) Net unrealized appreciation on investments 24,583,845 --------------- Net assets, August 31, 2001 $ 258,692,099 --------------- ---------------
18 See Notes to Financial Statements Prudential California Municipal Fund California Income Series Statement of Assets and Liabilities Cont'd.
August 31, 2001 ---------------------------------------------------------------------------------------- Class A: Net asset value and redemption price per share ($167,008,968 / 15,030,051 shares of beneficial interest issued and outstanding) $11.11 Maximum sales charge (3% of offering price) .34 --------------- Maximum offering price to public $11.45 --------------- --------------- Class B: Net asset value, offering price and redemption price per share ($78,236,866 / 7,040,519 shares of beneficial interest issued and outstanding) $11.11 --------------- --------------- Class C: Net asset value and redemption price per share ($9,394,058 / 845,342 shares of beneficial interest issued and outstanding) $11.11 Sales charge (1% of offering price) .11 --------------- Offering price to public $11.22 --------------- --------------- Class Z: Net asset value, offering price and redemption price per share ($4,052,207 / 364,638 shares of beneficial interest issued and outstanding) $11.11 --------------- ---------------
See Notes to Financial Statements 19 Prudential California Municipal Fund California Income Series Statement of Operations
Year Ended August 31, 2001 ---------------------------------------------------------------------------------------- NET INVESTMENT INCOME Income Interest $14,588,059 --------------- Expenses Management fee 1,280,539 Distribution fee--Class A 411,060 Distribution fee--Class B 395,228 Distribution fee--Class C 62,596 Custodian's fees and expenses 97,000 Transfer agent's fees and expenses 53,000 Reports to shareholders 51,000 Legal fees and expenses 36,000 Registration fees 35,000 Audit fee 13,000 Trustees' fees and expenses 13,000 Miscellaneous 7,008 --------------- Total expenses 2,454,431 Custodian fee credit (Note 1) (296) --------------- Net expenses 2,454,135 --------------- Net investment income 12,133,924 --------------- REALIZED AND UNREALIZED GAIN ON INVESTMENTS Net realized gain (loss) on: Investment transactions 51,958 Interest rate swaps (288,733) Financial futures transactions 122,064 --------------- (114,711) --------------- Net change in unrealized appreciation on: Investments 10,382,631 Interest rate swaps 47,502 Financial futures contracts 62,188 --------------- 10,492,321 --------------- Net gain on investments 10,377,610 --------------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $22,511,534 --------------- ---------------
20 See Notes to Financial Statements Prudential California Municipal Fund California Income Series Statement of Changes in Net Assets
Year Ended August 31, ---------------------------------- 2001 2000 ------------------------------------------------------------------------------------ INCREASE (DECREASE) IN NET ASSETS Operations Net investment income $ 12,133,924 $ 13,502,262 Net realized gain (loss) on investment transactions (114,711) (698,026) Net change in unrealized appreciation on investments 10,492,321 4,355,308 --------------- --------------- Net increase in net assets resulting from operations 22,511,534 17,159,544 --------------- --------------- Dividends and distributions (Note 1): Dividends from net investment income Class A (7,935,176) (8,940,906) Class B (3,619,215) (3,903,458) Class C (361,242) (424,644) Class Z (218,291) (233,254) --------------- --------------- (12,133,924) (13,502,262) --------------- --------------- Distributions in excess of net investment income Class A (2,442) (29,079) Class B (1,183) (12,950) Class C (123) (1,428) Class Z (60) (623) --------------- --------------- (3,808) (44,080) --------------- --------------- Series share transactions (net of share conversions) (Note 5): Net proceeds from shares sold 31,072,904 64,974,467 Net asset value of shares issued to shareholders in reinvestment of dividends and distributions 5,414,668 6,255,584 Cost of shares reacquired (48,547,384) (98,900,936) --------------- --------------- Net decrease in net assets from Series share transactions (12,059,812) (27,670,885) --------------- --------------- Total decrease (1,686,010) (24,057,683) NET ASSETS Beginning of year 260,378,109 284,435,792 --------------- --------------- End of year(a) $ 258,692,099 $ 260,378,109 --------------- --------------- --------------- --------------- (a) Includes undistributed net investment income of $ 293,733 $ -- --------------- ---------------
See Notes to Financial Statements 21 Prudential California Municipal Fund California Income Series Notes to Financial Statements Prudential California Municipal Fund (the 'Fund') is registered under the Investment Company Act of 1940, as an open-end management investment company. The Fund was organized as a Massachusetts business trust on May 18, 1984 and consists of three series: California Income Series (the 'Series'), California Series and California Money Market Series. These financial statements relate to California Income Series. The Financial statements of the other series are not presented herein. The Series commenced investment operations on December 3, 1990. The Series is diversified and seeks to achieve its investment objective of obtaining the maximum amount of income exempt from federal and California state income taxes with the minimum of risk. The Series will invest primarily in investment grade municipal obligations but may also invest a portion of its assets in lower-quality municipal obligations or in nonrated securities which are of comparable quality. The ability of the issuers of the securities held by the Series to meet their obligations may be affected by economic developments in a specific state, industry or region. Note 1. Accounting Policies The following is a summary of significant accounting policies followed by the Fund and the Series in preparation of its financial statements. Security Valuations: The Series values municipal securities (including commitments to purchase such securities on a 'when-issued' basis) on the basis of prices provided by a pricing service which uses information with respect to transactions in bonds, quotations from bond dealers, market transactions in comparable securities and various relationships between securities in determining values. If market quotations are not readily available from such pricing service, a security is valued at its fair value as determined under procedures established by the Trustees. Short-term securities which mature in more than 60 days are valued at current market quotations. Short-term securities which mature in 60 days or less are valued at amortized cost. All securities are valued as of 4:15 p.m., New York time. Financial Futures Contracts: A financial futures contract is an agreement to purchase (long) or sell (short) an agreed amount of securities at a set price for delivery on a future date. Upon entering into a financial futures contract, the Series is required to pledge to the broker an amount of cash and/or other assets equal to a certain percentage of the contract amount. This amount is known as the 'initial margin.' Subsequent payments, known as 'variation margin,' are made or received by the Series each day, depending on the daily fluctuations in the value of the underlying security. Such variation margin is recorded for financial statement purposes on a daily basis as unrealized gain (loss). When the contract expires or is closed, the gain (loss) 22 Prudential California Municipal Fund California Income Series Notes to Financial Statements Cont'd. is realized and is presented in the statement of operations as net realized gain (loss) on financial futures transactions. The Series invests in financial futures contracts in order to hedge its existing portfolio securities or securities the Series intends to purchase, against fluctuations in value caused by changes in prevailing interest rates. Should interest rates move unexpectedly, the Series may not achieve the anticipated benefits of the financial futures contracts and may realize a loss. The use of futures transactions involves the risk of imperfect correlation in movements in the price of futures contracts, interest rates and the underlying hedged assets. Inverse Floaters: The Series invests in variable rate securities commonly called 'inverse floaters'. The interest rates on these securities have an inverse relationship to the interest rate of other securities or the value of an index. Changes in interest rates on the other security or index inversely affect the rate paid on the inverse floater, and the inverse floater's price will be more volatile than that of a fixed-rate bond. Additionally, some of these securities contain a 'leverage factor' whereby the interest rate moves inversely by a 'factor' to the benchmark rate. Certain interest rate movements and other market factors can substantially affect the liquidity of inverse floating rate notes. Options: The Series may either purchase or write options in order to hedge against adverse market movements or fluctuations in value caused by changes in prevailing interest rates with respect to securities which the Fund currently owns or intends to purchase. The Series' principal reason for writing options is to realize, through receipt of premiums, a greater current return than would be realized on the underlying security alone. When the Series purchases an option, it pays a premium and an amount equal to that premium is recorded as an asset. When the Series writes an option, it receives a premium and an amount equal to that premium is recorded as a liability. The asset or liability is adjusted daily to reflect the current market value of the option. If an option expires unexercised, the Series realizes a gain or loss to the extent of the premium received or paid. If an option is exercised, the premium received or paid is recorded as an adjustment to the proceeds from the sale or the cost of the purchase in determining whether the Series has realized a gain or loss. The difference between the premium and the amount received or paid on effecting a closing purchase or sale transaction is also treated as a realized gain or loss. Gain or loss on purchased options is included in net realized gain (loss) on investment transactions. Gain or loss on written options is presented separately as net realized gain (loss) on written option transactions. The Series, as writer of an option, may have no control over whether the underlying securities may be sold (called) or purchased (put). As a result, the Series 23 Prudential California Municipal Fund California Income Series Notes to Financial Statements Cont'd. bears the market risk of an unfavorable change in the price of the security underlying the written option. The Series, as purchaser of an option, bears the risk of the potential inability of the counterparties to meet the terms of their contracts. Securities Transactions and Net Investment Income: Securities transactions are recorded on the trade date. Realized gains (losses) on sales of investments are calculated on the identified cost basis. Interest income is recorded on the accrual basis. The Series amortizes premiums and original issue discounts on purchases of debt 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 American Institute of Certified Public Accountants ('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 Series to amortize market discount on all fixed-income securities. Upon initial adoption, the Series 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 Series' net asset value, but will change the classification of certain amounts between interest income and realized and unrealized gain (loss) in the Statement of Operations. The Series expects that the impact of the adoption of this principle will not be material to the financial statements. Net investment income (loss) (other than distribution fees) and unrealized and realized gains (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. Interest Rate Swaps: The Series may enter into interest rate swaps. In a simple interest rate swap, one investor pays a floating rate of interest on a notional principal amount and receives a fixed rate of interest on the same notional principal amount for a specified period of time. Alternatively, an investor may pay a fixed rate and receive a floating rate. Interest rate swaps were conceived as asset/liability management tools. In more complex swaps, the notional principal amount may decline (or amortize) over time. During the term of the swap, changes in the value of the swap are recognized as unrealized gains or losses by 'marking-to-market' to reflect the market value of the swap. When the swap is terminated, the Series will record a realized gain or loss equal to the difference between the proceeds from (or cost of) the closing transaction and the Series' basis in the contract, if any. 24 Prudential California Municipal Fund California Income Series Notes to Financial Statements Cont'd. The Series is exposed to credit loss in the event of non-performance by the other party to the interest rate swap. However, the Series does not anticipate non-performance by any counterparty. Federal Income Taxes: For federal income tax purposes, each series in the Fund is treated as a separate taxpaying entity. It is the Series' policy to meet the requirements of the Internal Revenue Code applicable to regulated investment companies and to distribute all of its net income and capital gains, if any, to shareholders. Therefore, no federal income tax provision is required. Dividends and Distributions: The Series declares daily dividends from net investment income. Payment of dividends is made monthly. Distributions of net capital gains, if any, are made annually. Income distributions and capital gain distributions are determined in accordance with income tax regulations which may differ from generally accepted accounting principles. Custody Fee Credits: The Fund has an arrangement with its custodian bank, whereby uninvested monies earn credits which reduce the fees charged by the custodian. Reclassification of Capital Accounts: The Series accounts for and reports distributions to shareholders in accordance with the AICPA Statement of Position 93-2: Determination, Disclosure, and Financial Statement Presentation of Income, Capital Gains and Return of Capital Distributions by Investment Companies. The effect of applying this statement was to decrease paid in capital by $126,390, increase accumulated net realized loss by $171,151, and increase undistributed net investment income by $297,541. Net investment income, net realized gains and net assets were not affected by this change. Note 2. Agreements The Fund has a management agreement with Prudential Investments Fund Management LLC ('PIFM'). Pursuant to this agreement, PIFM has responsibility for all investment advisory services and supervises the subadviser's performance of such services. Effective November 1, 2001, PIFM's name will change to Prudential Investments LLC. PIFM has entered into a subadvisory agreement with Prudential Investment Management, Inc. ('PIM'), formerly known as The Prudential Investment Corporation. PIM furnishes investment advisory services in connection with the management of the Fund. In connection therewith, PIM 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 PIM's 25 Prudential California Municipal Fund California Income Series Notes to Financial Statements Cont'd. performance of such services. PIFM pays for the services of PIM, the cost of compensation of officers of the Fund, occupancy and certain clerical and bookkeeping costs of the Fund. The Fund bears all other costs and expenses. The management fee paid to PIFM is computed daily and payable monthly, at an annual rate of .50 of 1% of the average daily net assets of the Series. The Series has a distribution agreement with Prudential Investment Management Services LLC ('PIMS') which acts as the distributor of the Series. The Series compensates PIMS for distributing and servicing the Series' 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 Series. Pursuant to the Class A, B and C Plans, the Series compensates PIMS for distribution-related activities at an annual rate of up to .30 of 1%, .50 of 1% and 1% of the average daily net assets of the Class A, B and C shares, respectively. Such expenses under the Plans were .25 of 1%, .50 of 1% and .75 of 1% of the average daily net assets of the Class A, B and C shares, respectively, for the year ended August 31, 2001. PIMS has advised the Series that it received approximately $131,900 and $25,400 in front-end sales charges resulting from sales of Class A and Class C shares, respectively, during the year ended August 31, 2001. From these fees, PIMS paid such sales charges to affiliated broker-dealers, which in turn paid commissions to sales persons and incurred other distribution costs. PIMS has advised the Series that for the year ended August 31, 2001, they received approximately $232,700 and $6,800 in contingent deferred sales charges imposed upon certain redemptions by Class B and Class C shareholders, respectively. PIFM, PIMS and PIM are indirect, wholly-owned subsidiaries of The Prudential Insurance Company of America ('Prudential'). The Series, along with other affiliated registered investment companies (the 'Funds'), entered into a syndicated credit agreement ('SCA') with an unaffiliated lender. The maximum commitment under the SCA is $500 million. Interest on any such borrowings will be at market rates. The Funds pay a commitment fee at an annual rate of .080 of 1% of the unused portion of the credit facility. The commitment fee is accrued and paid quarterly on a pro rata basis by the Funds. The expiration date of the SCA is March 7, 2002. Prior to March 9, 2001, the maximum commitment was $1 billion and the commitment fee was .080 of 1% of the unused portion of the credit facility. Effective September 14, 2001, the commitment under the SCA was 26 Prudential California Municipal Fund California Income Series Notes to Financial Statements Cont'd. increased to $930 million through December 31, 2001. Effective January 1, 2002, the commitment will be reduced to $500 million. All other terms and conditions are unchanged. The purpose of the agreement is to serve as an alternative source of funding for capital share redemptions. The Fund did not borrow any amounts pursuant to the SCA during the year ended August 31, 2001. 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 August 31, 2001, the Series incurred fees of approximately $47,000 for the services of PMFS. As of August 31, 2001 approximately $4,000 of such fees were due to PMFS. Transfer agent fees and expenses in the Statement of Operations include certain out-of-pocket expenses paid to nonaffiliates. Note 4. Portfolio Securities Purchases and sales of portfolio securities of the Series, excluding short-term investments, for the year ended August 31, 2001 were $80,680,765 and $90,166,527, respectively. The United States federal income tax basis of the Fund's investments at August 31, 2001 was substantially the same as for financial reporting purposes and, accordingly, net unrealized appreciation of investments for federal income tax purposes was $24,474,155 (gross unrealized appreciation--$26,389,222; gross unrealized depreciation--$1,915,067). For federal income tax purposes, the Series has a capital loss carryforward at August 31, 2001 of approximately $4,657,823 of which $1,520,883 expires in 2003, $975,713 expires in 2004, $911,447 expires in 2008 and $1,249,780 expires in 2009. Accordingly, no capital gains distributions are expected to be paid to shareholders until net gains have been realized in excess of such amount. For federal income tax purposes, the Series will elect to treat net capital losses of $177,376 incurred in the ten month period ended August 31, 2001 as being incurred in the next year. 27 Prudential California Municipal Fund California Income Series Notes to Financial Statements Cont'd. During the year ended August 31, 2001, the Series entered into financial futures contracts and interest rate swap agreements. Details of financial futures contracts open at year end are as follows:
Value at Value at Number of Expiration August 31, Trade Unrealized Contracts Type Date 2001 Date Appreciation --------- ---------------- ----------- ------------ ---------- --------------- Long: U.S. Treasury Bonds 55 Futures 9/19/2001 $5,938,281 $5,876,093 $62,188 --------------- ---------------
For the interest rate swap agreement, the Series receives a floating rate and pays a respective fixed rate of interest. Details of the swap agreement open at year end are as follows:
Termination Notional Fixed Floating Unrealized Counterparty Date Amount Rate Rate Appreciation -------------- ----------- ----------- ------ ------------ ------------- Morgan Stanley 6/5/2021 $10,650,000 4.49% BMA* LIBOR $47,502 ------------- -------------
* Bond Market Association(TM) Note 5. Capital The Series offers Class A, Class B, Class C and Class Z shares. Class A shares are sold with a front-end sales charge of up to 3%. Class B shares are sold with a contingent deferred sales charge which declines from 5% to zero depending on the period of time the shares are held. Class C shares are sold with front-end sales charge of 1% and a contingent deferred sales charge of 1% during the first 18 months. Class B shares will automatically convert to Class A shares on a quarterly basis approximately seven years after purchase. Special exchange privileges are also available for shareholders who qualify to purchase Class A shares at net asset value. Class Z shares are not subject to any sales or redemption charge and are offered exclusively for sale to a limited group of investors. The Fund has authorized an unlimited number of shares of beneficial interest for each class at $.01 par value per share. 28 Prudential California Municipal Fund California Income Series Notes to Financial Statements Cont'd. Transactions in shares of beneficial interest were as follows:
Class A Shares Amount ------------------------------------------------------------ ---------- ------------ Year ended August 31, 2001: Shares sold 1,078,740 $ 11,675,231 Shares issued in reinvestment of dividends 323,033 3,478,024 Shares reacquired (2,576,118) (27,751,465) ---------- ------------ Net increase (decrease) in shares outstanding before conversion (1,174,345) (12,598,210) Shares issued upon conversion from Class B 530,937 5,743,134 ---------- ------------ Net increase (decrease) in shares outstanding (643,408) $ (6,855,076) ---------- ------------ ---------- ------------ Year ended August 31, 2000: Shares sold 4,664,081 $ 47,656,875 Shares issued in reinvestment of dividends 398,989 4,096,741 Shares reacquired (7,048,893) (72,195,003) ---------- ------------ Net increase (decrease) in shares outstanding before conversion (1,985,823) (20,441,387) Shares issued upon conversion from Class B 158,801 1,630,903 ---------- ------------ Net increase (decrease) in shares outstanding (1,827,022) $(18,810,484) ---------- ------------ ---------- ------------ Class B ------------------------------------------------------------ Year ended August 31, 2001: Shares sold 1,235,008 $ 13,323,356 Shares issued in reinvestment of dividends 144,373 1,554,643 Shares reacquired (1,363,098) (14,654,227) ---------- ------------ Net increase (decrease) in shares outstanding before conversion 16,283 223,772 Shares reacquired upon conversion into Class A (530,937) (5,743,134) ---------- ------------ Net increase (decrease) in shares outstanding (514,654) $ (5,519,362) ---------- ------------ ---------- ------------ Year ended August 31, 2000: Shares sold 1,303,211 $ 13,414,428 Shares issued in reinvestment of dividends 167,619 1,720,710 Shares reacquired (1,815,491) (18,615,231) ---------- ------------ Net increase (decrease) in shares outstanding before conversion (344,661) (3,480,093) Shares reacquired upon conversion into Class A (158,801) (1,630,903) ---------- ------------ Net increase (decrease) in shares outstanding (503,462) $ (5,110,996) ---------- ------------ ---------- ------------
29 Prudential California Municipal Fund California Income Series Notes to Financial Statements Cont'd.
Class C Shares Amount ------------------------------------------------------------ ---------- ------------ Year ended August 31, 2001: Shares sold 373,310 $ 4,043,564 Shares issued in reinvestment of dividends 23,263 250,589 Shares reacquired (330,321) (3,552,286) ---------- ------------ Net increase (decrease) in shares outstanding 66,252 $ 741,867 ---------- ------------ ---------- ------------ Year ended August 31, 2000: Shares sold 151,693 $ 1,563,439 Shares issued in reinvestment of dividends 28,025 287,690 Shares reacquired (434,581) (4,447,901) ---------- ------------ Net increase (decrease) in shares outstanding (254,683) $ (2,596,772) ---------- ------------ ---------- ------------ Class Z ------------------------------------------------------------ Year ended August 31, 2001: Shares sold 187,414 $ 2,030,753 Shares issued in reinvestment of dividends 12,216 131,412 Shares reacquired (242,197) (2,589,406) ---------- ------------ Net increase (decrease) in shares outstanding (42,567) $ (427,241) ---------- ------------ ---------- ------------ Year ended August 31, 2000: Shares sold 230,133 $ 2,339,725 Shares issued in reinvestment of dividends 14,647 150,443 Shares reacquired (357,044) (3,642,801) ---------- ------------ Net increase (decrease) in shares outstanding (112,264) $ (1,152,633) ---------- ------------ ---------- ------------
30 Prudential California Municipal Fund California Income Series Financial Highlights ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' Prudential California Municipal Fund California Income Series Financial Highlights
Class A --------------- Year Ended August 31, 2001 ---------------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE: Net asset value, beginning of year $ 10.66 --------------- Income from investment operations Net investment income .52 Net realized and unrealized gain (loss) on investment transactions .45 --------------- Total from investment operations .97 --------------- Less distributions Dividends from net investment income (.52) Distributions in excess of net investment income --(c) --------------- Total distributions (.52) --------------- Net asset value, end of year $ 11.11 --------------- --------------- TOTAL RETURN(b): 9.35% RATIOS/SUPPLEMENTAL DATA: Net assets, end of year (000) $ 167,009 Average net assets (000) $ 164,424 Ratios to average net assets: Expenses, including distribution and service (12b-1) fees .87% Expenses, excluding distribution and service (12b-1) fees .62% Net investment income 4.83% For Class A, B, C and Z shares: Portfolio turnover rate 32%
------------------------------ (a) Net of management fee waiver. (b) Total return does not consider the effects of sales loads. Total return is calculated assuming a purchase of shares on the first day and a sale on the last day of each year reported and includes reinvestment of dividends and distributions. (c) Less than $.005 per share. 32 See Notes to Financial Statements Prudential California Municipal Fund California Income Series Financial Highlights Cont'd.
Class A ------------------------------------------------------------------------------------- Year Ended August 31, ------------------------------------------------------------------------------------- 2000 1999 1998 1997 ------------------------------------------------------------------------------------- $ 10.49 $ 11.19 $ 10.71 $ 10.33 ---------------- ---------------- ---------------- ---------------- .54 .56(a) .59(a) .60(a) .17 (.70) .49 .38 ---------------- ---------------- ---------------- ---------------- .71 (.14) 1.08 .98 ---------------- ---------------- ---------------- ---------------- (.54) (.56) (.59) (.60) --(c) -- (.01) --(c) ---------------- ---------------- ---------------- ---------------- (.54) (.56) (.60) (.60) ---------------- ---------------- ---------------- ---------------- $ 10.66 $ 10.49 $ 11.19 $ 10.71 ---------------- ---------------- ---------------- ---------------- ---------------- ---------------- ---------------- ---------------- 7.10% (1.37)% 10.31% 9.72% $167,153 $183,593 $181,512 $156,684 $171,688 $187,106 $165,771 $153,019 .86% .76%(a) .68%(a) .73%(a) .61% .56%(a) .58%(a) .63%(a) 5.21% 5.03%(a) 5.39%(a) 5.66%(a) 34% 23% 10% 16%
See Notes to Financial Statements 33 Prudential California Municipal Fund California Income Series Financial Highlights Cont'd.
Class B --------------- Year Ended August 31, 2001 ---------------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE: Net asset value, beginning of year $ 10.67 --------------- Income from investment operations Net investment income .49 Net realized and unrealized gain (loss) on investment transactions .44 --------------- Total from investment operations .93 --------------- Less distributions Dividends from net investment income (.49) Distributions in excess of net investment income --(c) --------------- Total distributions (.49) --------------- Net asset value, end of year $ 11.11 --------------- --------------- TOTAL RETURN(b): 8.98% RATIOS/SUPPLEMENTAL DATA: Net assets, end of year (000) $78,237 Average net assets (000) $79,046 Ratios to average net assets: Expenses, including distribution and service (12b-1) fees 1.12% Expenses, excluding distribution and service (12b-1) fees .62% Net investment income 4.58%
------------------------------ (a) Net of management fee waiver. (b) Total return does not consider the effects of sales loads. Total return is calculated assuming a purchase of shares on the first day and a sale on the last day of each year reported and includes reinvestment of dividends and distributions. (c) Less than $.005 per share. 34 See Notes to Financial Statements Prudential California Municipal Fund California Income Series Financial Highlights Cont'd.
Class B ------------------------------------------------------------------------------------- Year Ended August 31, ------------------------------------------------------------------------------------- 2000 1999 1998 1997 ------------------------------------------------------------------------------------- $ 10.49 $ 11.19 $ 10.71 $ 10.33 -------- -------- -------- -------- .51 .53(a) .55(a) .55(a) .18 (.70) .49 .38 -------- -------- -------- -------- .69 (.17) 1.04 .93 -------- -------- -------- -------- (.51) (.53) (.55) (.55) --(c) -- (.01) --(c) -------- -------- -------- -------- (.51) (.53) (.56) (.55) -------- -------- -------- -------- $ 10.67 $ 10.49 $ 11.19 $ 10.71 -------- -------- -------- -------- -------- -------- -------- -------- 6.93% (1.67)% 9.87% 9.28% $ 80,580 $ 84,546 $ 70,535 $ 47,436 $ 78,743 $ 81,163 $ 56,011 $ 40,983 1.11% 1.06%(a) 1.08%(a) 1.13%(a) .61% .56%(a) .58%(a) .63%(a) 4.96% 4.78%(a) 4.99%(a) 5.26%(a)
See Notes to Financial Statements 35 Prudential California Municipal Fund California Income Series Financial Highlights Cont'd.
Class C --------------- Year Ended August 31, 2001 ---------------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE: Net asset value, beginning of year $ 10.67 ------- Income from investment operations Net investment income .47 Net realized and unrealized gain (loss) on investment transactions .44 ------- Total from investment operations .91 ------- Less distributions Dividends from net investment income (.47) Distributions in excess of net investment income --(c) ------- Total distributions (.47) ------- Net asset value, end of year $ 11.11 ------- ------- TOTAL RETURN(b): 8.71% RATIOS/SUPPLEMENTAL DATA: Net assets, end of year (000) $ 9,394 Average net assets (000) $ 8,346 Ratios to average net assets: Expenses, including distribution and service (12b-1) fees 1.37% Expenses, excluding distribution and service (12b-1) fees .62% Net investment income 4.33%
------------------------------ (a) Net of management fee waiver. (b) Total return does not consider the effects of sales loads. Total return is calculated assuming a purchase of shares on the first day and a sale on the last day of each year reported and includes reinvestment of dividends and distributions. (c) Less than $.005 per share. 36 See Notes to Financial Statements Prudential California Municipal Fund California Income Series Financial Highlights Cont'd.
Class C ------------------------------------------------------------------------------------- Year Ended August 31, ------------------------------------------------------------------------------------- 2000 1999 1998 1997 ------------------------------------------------------------------------------------- $ 10.49 $ 11.19 $10.71 $10.33 -------- -------- ------- ------- .49 .50(a) .52(a) .53(a) .18 (.70) .49 .38 -------- -------- ------- ------- .67 (.20) 1.01 .91 -------- -------- ------- ------- (.49) (.50) (.52) (.53) --(c) -- (.01) --(c) -------- -------- ------- ------- (.49) (.50) (.53) (.53) -------- -------- ------- ------- $ 10.67 $ 10.49 $11.19 $10.71 -------- -------- ------- ------- -------- -------- ------- ------- 6.66% (1.91)% 9.60% 9.01% $ 8,309 $ 10,847 $5,960 $3,611 $ 9,021 $ 9,088 $4,491 $3,135 1.36% 1.31%(a) 1.33%(a) 1.38%(a) .61% .56%(a) .58%(a) .63%(a) 4.71% 4.53%(a) 4.74%(a) 5.01%(a)
See Notes to Financial Statements 37 Prudential California Municipal Fund California Income Series Financial Highlights Cont'd.
Class Z --------------- Year Ended August 31, 2001 ---------------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE: Net asset value, beginning of period $ 10.65 ------- Income from investment operations Net investment income .55 Net realized and unrealized gain (loss) on investment transactions .46 ------- Total from investment operations 1.01 ------- Less distributions Dividends from net investment income (.55) Distributions in excess of net investment income --(c) ------- Total distributions (.55) ------- Net asset value, end of period $ 11.11 ------- ------- TOTAL RETURN(b): 9.72% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000) $ 4,052 Average net assets (000) $ 4,292 Ratios to average net assets: Expenses, including distribution and service (12b-1) fees .62% Expenses, excluding distribution and service (12b-1) fees .62% Net investment income 5.09%
------------------------------ (a) Net of management fee waiver. (b) Total return does not consider the effects of sales loads. Total return is calculated assuming a purchase of shares on the first day and a sale on the last day of each period reported and includes reinvestment of dividends and distributions. Total returns for periods of less than a full year are not annualized. (c) Less than $.005 per share. (d) Commencement of offering of Class Z shares. (e) Annualized. 38 See Notes to Financial Statements Prudential California Municipal Fund California Income Series Financial Highlights Cont'd.
Class Z ------------------------------------------------------------------------------------------ Year Ended August 31, September 18, 1996(d) -------------------------------------------------------------- through August 31, 2000 1999 1998 1997 ------------------------------------------------------------------------------------------ $10.49 $11.19 $10.71 $ 10.38 ------- ------- ------- ------- .56 .58(a) .61(a) .57(a) .16 (.70) .49 .33 ------- ------- ------- ------- .72 (.12) 1.10 .90 ------- ------- ------- (.56) (.58) (.61) (.57) --(c) -- (.01) --(c) ------- ------- ------- ------- (.56) (.58) (.62) (.57) ------- ------- ------- ------- $10.65 $10.49 $11.19 $ 10.71 ------- ------- ------- ------- ------- ------- ------- ------- 7.26% (1.18)% 10.42% 8.86% $4.336 $5,449 $4,507 $ 1,963 $4,281 $4,725 $3,312 $ 970 .61% .56%(a) .58%(a) .63%(a)(e) .61% .56%(a) .58%(a) .63%(a)(e) 5.45% 5.28%(a) 5.49%(a) 5.76%(a)(e)
See Notes to Financial Statements 39 Prudential California Municipal Fund California Income Series Report of Independent Accountants To the Shareholders and Board of Trustees of Prudential California Municipal Fund, California Income Series In our opinion, the accompanying statement of assets and liabilities, including the portfolio of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of Prudential California Municipal Fund, California Income Series (the 'Fund', one of the portfolios constituting Prudential California Municipal Fund) at August 31, 2001, 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 August 31, 2001 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP New York, New York October 19, 2001 40 Prudential California Municipal Fund California Income Series Federal Income Tax Information (Unaudited) We are required by the Internal Revenue Code to advise you within 60 days of the Series' fiscal year end (August 31, 2001) as to the federal tax status of dividends paid by the Series during such fiscal year. Accordingly, we are advising you that in the fiscal year ended August 31, 2001, dividends paid from net investment income of $.52 per share for Class A shares, $.49 per Class B share, $.47 per Class C share and $.55 per Class Z share were all federally tax-exempt interest dividends. We wish to advise you that the corporate dividends received deduction for the Series is zero. Only funds that invest in U.S. equity securities are entitled to pass-through a corporate dividends received deduction. In January 2002, you will be advised on IRS Form 1099 DIV or substitute 1099 DIV as to federal tax status of the distributions received by you in calendar 2001. 41 Prudential California Municipal Fund California Income Series Class A Growth of a $10,000 Investment (GRAPH) Average Annual Total Returns as of 8/31/01
One Year Five Years Ten Years Since Inception With Sales Charge 6.07% 6.28% (6.26) 7.27% (7.04) 7.48% (7.25) Without Sales Charge 9.35% 6.93% (6.91) 7.60% (7.37) 7.78% (7.56)
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 Series' returns can fluctuate from year to year by measuring the best and worst calendar years in terms of total annual return for the past 10 years. The graph compares a $10,000 investment in Prudential California Municipal Fund/California Income Series (Class A shares) with a similar investment in the Lehman Brothers Municipal Bond Index (the Muni Bond Index) by portraying the initial account values at the beginning of the 10-year period for Class A shares (August 31, 1991) and the account values at the end of the current fiscal year (August 31, 2001), as measured on a quarterly basis. 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; (b) all recurring fees (including management fees) were deducted; and (c) all dividends and distributions were reinvested. The numbers in parentheses show the Series' average annual total return without waiver of management fees and/or expense subsidization. The Muni Bond Index is an unmanaged index of over 39,000 long-term investment-grade municipal bonds. It gives a broad look at how long- term investment-grade municipal bonds have performed. The Muni Bond Index 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 Muni Bond Index may differ substantially from the securities in the Series. The Muni Bond 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 8/31/01
One Year Five Years Ten Years Since Inception With Sales Charge 3.98% 6.43% (6.42) N/A 6.02% (5.90) Without Sales Charge 8.98% 6.59% (6.57) N/A 6.02% (5.90)
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 Series' 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 California Municipal Fund/California Income Series (Class B shares) with a similar investment in the Lehman Brothers Municipal Bond Index (the Mini Bond Index) by portraying the initial account values at the commencement of operations of Class B shares (December 7, 1993) and the account values at the end of the current fiscal year (August 31, 2001), as measured on a quarterly basis. 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 August 31, 2001; (b) all recurring fees (including management fees) were deducted; and (c) all dividends and distributions were reinvested. Approximately seven years after purchase, Class B shares will automatically convert to Class A shares on a quarterly basis. This conversion feature is not reflected in the graph. The numbers in parentheses show the Series' average annual total return without waiver of management fees and/or expense subsidization. The Muni Bond Index is an unmanaged index of over 39,000 long-term investment-grade municipal bonds. It gives a broad look at how long- term investment-grade municipal bonds have performed. The Muni Bond Index 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 Muni Bond Index may differ substantially from the securities in the Series. The Muni Bond 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 California Municipal Fund California Income Series Class C Growth of a $10,000 Investment (GRAPH) Average Annual Total Returns as of 8/31/01
One Year Five Years Ten Years Since Inception With Sales Charge 6.63% 6.11% (6.09) N/A 6.21% (6.12) Without Sales Charge 8.71% 6.32% (6.31) N/A 6.36% (6.27)
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 Series' 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 California Municipal Fund/California Income Series (Class C shares) with a similar investment in the Lehman Brothers Municipal Bond Index (the Mini Bond Index) by portraying the initial account values at the commencement of operations of Class C shares (August 1, 1994) and the account values at the end of the current fiscal year (August 31, 2001), as measured on a quarterly basis. 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 August 31, 2001; (c) all recurring fees (including management fees) were deducted; and (d) all dividends and distributions were reinvested. The numbers in parentheses show the Series' average annual total return without waiver of management fees and/or expense subsidization. The Muni Bond Index is an unmanaged index of over 39,000 long-term investment-grade municipal bonds. It gives a broad look at how long- term investment-grade municipal bonds have performed. The Muni Bond Index 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 Muni Bond Index may differ substantially from the securities in the Series. The Muni Bond 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 8/31/01
One Year Five Years Ten Years Since Inception 9.72% N/A N/A 7.00% (6.98)
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 Series' 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 California Municipal Fund/California Income Series (Class Z shares) with a similar investment in the Lehman Brothers Municipal Bond Index (the Mini Bond Index) by portraying the initial account values at the commencement of operations of Class Z shares (September 18, 1996) and the account values at the end of the current fiscal year (August 31, 2001), as measured on a quarterly basis. 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 numbers in parentheses show the Series' average annual total return without waiver of management fees and/or expense subsidization. The Muni Bond Index is an unmanaged index of over 39,000 long-term investment-grade municipal bonds. It gives a broad look at how long- term investment-grade municipal bonds have performed. The Muni Bond Index 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 Muni Bond Index may differ substantially from the securities in the Series. The Muni Bond 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: www.prudential.com TRUSTEES 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 Judy A. Rice, Vice President Grace C. Torres, Treasurer Deborah A. Docs, Secretary William V. Healey, Assistant Secretary MANAGER Prudential Investments LLC Gateway Center Three 100 Mulberry Street Newark, NJ 07102-4077 INVESTMENT ADVISER Prudential Investment Management, Inc. Prudential Plaza Newark, NJ 07102-3777 DISTRIBUTOR Prudential Investment Management Services LLC Gateway Center Three, 14th Floor 100 Mulberry Street 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 Shearman & Sterling 599 Lexington Avenue New York, NY 10022 Fund Symbols NASDAQ CUSIP Class A PBCAX 744313305 Class B PCAIX 744313404 Class C PCICX 744313800 Class Z PCIZX 744313875 MF146E ANNUAL REPORT AUGUST 31, 2001 PRUDENTIAL California Municipal Fund/ California Series FUND TYPE Municipal bond OBJECTIVE Maximize current income that is exempt from California State and federal income taxes, consistent with the preservation of capital 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 Series' portfolio holdings are for the period covered by this report and are subject to change thereafter. Prudential Financial is a service mark of The Prudential Insurance Company of America, Newark, NJ, and its affiliates. (LOGO) Prudential California Municipal Fund California Series Performance at a Glance INVESTMENT GOALS AND STYLE The Prudential California Municipal Fund/California Series (the Series) seeks to maximize current income that is exempt from California State and federal income taxes, consistent with the preservation of capital. However, certain shareholders may be subject to the alternative minimum tax (AMT) because some of the Series' bonds are subject to AMT. There can be no assurance that the Series will achieve its investment objective. Portfolio Composition Expressed as a percentage of total investments as of 8/31/01 56.0% General Obligation Bonds 40.3 Revenue Bonds 2.5 Prerefunded 1.2 Miscellaneous Credit Quality Expressed as a percentage of total investments as of 8/31/01 6.4% AAA 48.5 AAA Insured 7.0 AA 9.6 A 17.7 BBB 10.8 Not Rated* (Prudential ratings used): 1.4 AAA 5.2 BBB 2.3 B 1.9 CCC and below Ten Largest Issuers Expressed as a percentage of net assets as of 8/31/01 10.3% Southern California Public Power Authority 10.2 Santa Margarita/Dana Point Authority 7.8 Orange County Local Transportation Authority 5.4 Foothill/Eastern Transportation Corridor Agency 4.8 Long Beach Harbor Revenue 4.2 Metro Water District of Southern California 3.8 Chula Vista 3.8 Brea Public Finance 3.6 San Bernardino County 3.3 South Orange County Public Finance Authority Holdings are subject to change. www.prudential.com (800) 225-1852 Annual Report August 31, 2001 Cumulative Total Returns1 As of 8/31/01
One Five Ten Since Year Years Years Inception2 Class A 9.91% 39.46% (39.35) 95.72% (95.40) 121.21% (120.85) Class B 9.63 37.38 (37.27) 88.83 (88.53) 242.15 (233.56) Class C 9.36 35.69 (35.58) N/A 52.15 (51.91) Class Z 10.17 N/A N/A 39.72 (39.61) Lipper CA Muni Debt Fund Avg.3 9.19 35.46 91.48 ***
Average Annual Total Returns1 As of 9/30/01
One Five Ten Since Year Years Years Inception2 Class A 7.05% 5.88% (5.86) 6.42% (6.41) 6.72% (6.71) Class B 5.10 6.03 (6.02) 6.37 (6.35) 7.46 (7.30) Class C 7.75 5.72 (5.70) N/A 5.82 (5.80) Class Z 10.53 6.73 (6.72) N/A 6.79 (6.77)
Distributions and Yields As of 8/31/01
Total Distributions 30-Day Taxable Equivalent Yield4 at Tax Rates of Paid for 12 Months SEC Yield 36% 39.1% Class A $0.56 3.37% 5.81% 6.10% Class B $0.53 3.22 5.55 5.83 Class C $0.50 2.95 5.08 5.34 Class Z $0.59 3.72 6.41 6.73
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 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 Series charges a maximum front-end sales charge of 3% for Class A shares and a declining contingent deferred sales charge (CDSC) of 5%, 4%, 3%, 2%, 1%, and 1% for six years for Class B shares. Approximately seven years after purchase, Class B shares will automatically convert to Class A shares on a quarterly basis. 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 Series' cumulative and average annual total returns would have been lower, as indicated in parentheses. 2 Inception dates: Class A, 1/22/90; Class B, 9/19/84; Class C, 8/1/94; and Class Z, 9/18/96. 3 The Lipper Average is unmanaged, and is based on the average return for all funds in each share class for the one-, five-, and ten-year periods in the Lipper California Municipal Debt Fund category. Single-state municipal debt funds limit their securities that are exempt from taxation in a specified state (double tax exempt) or city (triple tax exempt). 4 Taxable equivalent yields reflect federal and applicable state tax rates. ***Lipper Since Inception returns are 119.03% for Class A, 272.77% for Class B, 54.56% for Class C, and 33.61% for Class Z, based on all funds in each share class. 1 (LOGO) October 15, 2001 DEAR SHAREHOLDER, The horrific events that took place on September 11, 2001, will remain forever ingrained in our nation's consciousness. In their aftermath, our thoughts and our prayers remain with the victims of this senseless tragedy, their families, and friends. It is also with deep gratitude that we acknowledge the heroic efforts of the men and women involved in the rescue operations. We at Prudential Financial would like to take the opportunity during this difficult time to reassure our shareholders of our unwavering commitment to their investment needs. Under normal circumstances, the investment landscape is a difficult one to navigate, and during this extremely tragic period in our nation's history, even more so. We're here to provide the expertise and resources that may help make the journey ahead less daunting. For now, investors should try to maintain a patient focus on their long-term investment strategies, and avoid making investment decisions based on emotional reactions. Those strategies should, where appropriate, include some allocation to debt securities as bonds can provide an income stream and may help to smooth portfolio volatility. Above all, investors should continue to seek guidance from their financial professionals. Sincerely, David R. Odenath, Jr., President Prudential California Municipal Fund 2 Prudential California Municipal Fund California Series Annual Report August 31, 2001 INVESTMENT ADVISER'S REPORT Investors flocked to the municipal bond market during our fiscal year that began September 1, 2000, drawn by its solid total returns and the relative safety of tax-exempt securities compared with the heightened volatility in the stock market. This strong investor demand ultimately enabled the municipal debt market to absorb a flood of new tax-exempt bonds issued in the second half of our reporting period. Prices of municipal bonds began to rally in the autumn of 2000 because investors expected the Federal Reserve (the Fed) to reduce short-term interest rates in order to revitalize a lackluster U.S. economy. (Bond prices move in the opposite direction of interest rates.) In anticipation of the lower interest-rate scenario that began to unfold in the autumn, we sold some of the Series' bonds maturing in 10 to 15 years and purchased deep-discount bonds maturing in 30 years. The 30-year bonds, due to their greater sensitivity to changes in the level of interest rates, experienced stronger price appreciation as the municipal market rallied. Furthermore, demand for 30-year bonds increased as investors reinvested proceeds received from maturing bonds and from bonds that were "called" or prematurely retired by state and local governments in December 2000 and January 2001. SHIFTING FOCUS TO INTERMEDIATE-TERM MUNICIPAL BONDS The long-awaited Fed rate cuts began in January 2001 when the central bank eased monetary policy twice and hinted that its lower-rate campaign was not over. As a result, our longer-term outlook for municipal bonds became less bullish. We reasoned that if the Fed continued to reduce interest rates, investors would eventually begin to anticipate stronger economic growth and demand higher yields on municipal bonds. Meanwhile, slower economic growth could also exert upward pressure on municipal bond yields if a weakened economy and lower tax revenues led state and local governments to issue significantly more municipal securities. 3 Prudential California Municipal Fund California Series Annual Report August 31, 2001 In light of our concerns about the potential for higher municipal bond yields, we reversed our strategy. We took profits on the Series' deep-discount bonds maturing in 30 years and purchased debt securities maturing in 10 to 20 years. This approach worked well, particularly in the spring of 2001, as hope for improved economic conditions and a burgeoning supply of municipal securities temporarily forced municipal bond yields higher, causing their prices to fall. The municipal market rally resumed in the summer of 2001, however, because economic conditions worsened even though the Fed cut rates again in March, April, May, June, and August. Altogether, the Fed eased monetary policy seven times during our fiscal year, which lowered the federal funds rate (what banks charge each other for overnight loans) by a total of three percentage points to 3.50%. FLIGHT-TO-QUALITY TREND BOOSTS MUNICIPAL BONDS With the economy stumbling along and the stock market sinking, investors increasingly sought refuge in safer assets such as municipal bonds during the summer of 2001. Evidence of solid demand for tax-exempt securities emerged in a report from the Investment Company Institute that showed $2.33 billion flowed into municipal bond funds in July, the largest monthly inflow in more than three years. This strong appetite for tax-exempt bonds helped the market digest the huge supply of municipal securities that was issued in the second half of our fiscal year. As the rally continued in July and August, we maintained our emphasis on intermediate-term municipal bonds because these securities provided a solid total rate of return with less interest-rate risk than longer-term bonds. Indeed, making timely shifts in this aspect of our strategy helped the Series' Class A shares post a 9.91% annual return that exceeded the 9.19% of their benchmark Lipper Average. For shareholders paying the initial Class A sales charge, the Series' return was 6.61%. 4 www.prudential.com (800) 225-1852 Another factor that aided the Series' relative performance was its exposure to California bonds rated BBB, which stood at approximately 17% of its total investments as of August 31, 2001. As yields on municipal securities declined during the summer, bargain hunters increasingly turned to bonds rated BBB, the lowest investment-grade ratings category according to Moody's Investors Service. This pickup in demand boosted prices of BBB-rated bonds so that their yields moved more in line with the yields of higher-rated municipal securities. LESS EXPOSURE TO THE MOST TROUBLED CALIFORNIA BONDS The Series' relative performance also benefited from our more conservative approach to sector selection. In general, California bonds did not perform as well as the general municipal market because the Golden State's utility crisis hurt the financial health of many of its issuers. For example, California's general obligation (GO) bond rating was downgraded to A-plus from AA by Standard & Poor's Ratings Group (S&P) and to Aa3 from Aa2 by Moody's Investors Service because of the utility crisis and the state's weakened economic condition. We avoided municipal bonds of investor-owned California utility companies, which were hardest hit by the crisis, and we only held California GO bonds that were insured and rated AAA. LOOKING AHEAD After our fiscal year ended, the Fed lowered short-term rates by one- half of a percentage point on September 17, and again on October 2, partially in response to the terrorist attacks that occurred in the United States on September 11. The central bank expressed concern that weak economic conditions might continue for the foreseeable future. We believe the Fed may ease monetary policy further before year-end. However, we also expect that its aggressive rate cuts, the tax rebates, and government spending to help certain businesses get back on their feet should spark an economic rebound in 2002. 5 Prudential California Municipal Fund California Series Annual Report August 31, 2001 A recovering economy is bound to fuel fears of higher inflation that could exert pressure on the bond market, particularly the 30-year sector. Under these economic conditions, we expect intermediate-term bonds to be one of the best performing maturity segments of the municipal market because their prices are less sensitive to swings in interest rates than prices of longer-term bonds. In other words, we believe intermediate-term bonds offer the most attractive risk/reward ratio in the municipal bond market. Therefore, we plan to continue emphasizing these securities in our asset allocation strategy. Prudential California Municipal Fund Management Team Prudential California Municipal Fund California Series 6 Prudential California Municipal Fund California Series Portfolio of Investments as of August 31, 2001
Moody's Principal Rating Interest Maturity Amount Value Description (a) (Unaudited) Rate Date (000) (Note 1) ----------------------------------------------------------------------------------------------------------- LONG-TERM INVESTMENTS 97.8% Abag Fin. Auth. Rev., Schools of Sacred Heart, Ser. A Baa3 6.45% 6/01/30 $ 1,500 $ 1,596,555 Baldwin Park Pub. Fin. Auth. Rev., Tax Alloc. BBB(c) 7.05 9/01/14 1,020 1,165,421 Brea Pub. Fin. Auth. Rev., Sub. Tax Alloc. Redev. Proj., Ser. C NR 8.10 3/01/21 5,000 5,100,000 Buena Park Cmnty. Redev. Agcy., Central Bus. Dist. Proj. BBB+(c) 7.10 9/01/14 2,500 2,608,675 California St. Cmntys. Dev. Auth., Cert. Part. Aaa 5.30 12/01/15 2,800 2,979,564 California St. Hsg. Fin. Agcy. Rev., Sngl. Fam. Mtge., Ser. A Aa2 Zero 2/01/15 8,420 2,638,070 California St. Public Wks. Brd. Lease Rev., Dept. of Corrections, Ser. A, A.M.B.A.C. Aaa 5.50 1/01/15 2,000 2,137,120 Central California Joint Pwrs. Health Fin. Auth., Cert. Part. Baa1 6.00 2/01/30 1,000 1,055,510 Chula Vista Redev. Agcy., Bayfront Tax Alloc. BBB+(c) 7.625 9/01/24 4,500 5,150,880 Commerce California Cmnty. Dev. Comm., Rfdg. Merged Redev. Proj., Ser. A NR 5.65 8/01/18 1,175 1,183,284 Foothill/Eastern Trans. Corridor Agcy., Toll Rd. Rev. Aaa Zero 1/01/16 5,000 2,594,450 Toll Rd. Rev. Aaa Zero 1/01/18 2,950 1,363,785 Toll Rd. Rev. Baa3 Zero 1/15/26 5,200 3,349,840 Grass Valley Redev. Agcy., Redev. Proj. BBB(c) 6.40 12/01/34 2,000 2,129,520 Kings Cnty. Wst. Mgmt. Auth., Solid Wst. Rev., A.M.T. BBB(c) 7.20 10/01/14 1,150 1,244,174 Long Beach Harbor Rev., Ser. A, A.M.T., F.G.I.C. Aaa 6.00 5/15/16 5,500 6,438,465
See Notes to Financial Statements 7 Prudential California Municipal Fund California Series Portfolio of Investments as of August 31, 2001 Cont'd.
Moody's Principal Rating Interest Maturity Amount Value Description (a) (Unaudited) Rate Date (000) (Note 1) ----------------------------------------------------------------------------------------------------------- Long Beach Redev. Agcy. Dist. No. 3, Spec. Tax Rev. (Cost $2,950,530; purchased 10/18/93) NR 6.375% 9/01/23 $ 3,000(b) $ 3,167,970 Los Angeles Cnty., Cert. of Part., Correctional Facs. Proj., M.B.I.A. Aaa Zero 9/01/10 3,770 2,651,290 Los Angeles Conv. & Exhib. Ctr. Auth., Cert. of Part. Aaa 9.00 12/01/10 1,250(e) 1,561,825 Met. Wtr. Dist. of Southern California, Rev. Linked S.A.V.R.S. & R.I.B.S. Aa2 5.75 8/10/18 1,000 1,129,230 Waterworks Rev. Rfdg., Ser. A Aa2 5.75 7/01/21 4,000 4,565,720 Mojave Desert Solid Wst. Victor Vally Materials, Recov. Fac., A.M.T. Baa1 7.875 6/01/20 1,175 1,281,960 Orange Cnty. Loc. Trans. Auth., Linked S.A.V.R.S. & R.I.B.S., A.M.B.A.C. Aaa 6.20 2/14/11 8,000 9,442,640 Spec. Tax Rev., R.I.B.S. Aa2 9.454(d) 2/14/11 750 1,019,063 Puerto Rico Comnwlth., Gen. Oblig., Ser. 642A, M.B.I.A. NR 9.508 7/01/10 1,000 1,296,680 Puerto Rico Ind. Tourist Edl., Cogen Fac. AES Proj., A.M.T. Baa2 6.625 6/01/26 2,000 2,188,720 Rancho Cucamonga California Redev., Agcy, Tax Alloc. Aaa 5.375 9/01/25 2,000 2,107,220 Redding Elec. Sys. Rev., Cert. of Part., Linked S.A.V.R.S. & R.I.B.S. Aaa 6.368 7/01/22 50 58,219 R.I.B.S., M.B.I.A. Aaa 10.231(d) 7/01/22 1,750 2,325,313 San Bernardino Cnty., Cert. of Part., Med. Ctr. Fin. Proj., M.B.I.A. Aaa 5.50 8/01/22 4,400 4,890,336 San Diego Redev., Agcy. Tax Alloc. North Bay Redev. Baa1 5.875 9/01/29 1,000 1,034,590 San Diego Unified Sch. Dist. Election of 1998, Ser. B Aaa 6.00 7/01/19 1,000 1,207,350
8 See Notes to Financial Statements Prudential California Municipal Fund California Series Portfolio of Investments as of August 31, 2001 Cont'd.
Moody's Principal Rating Interest Maturity Amount Value Description (a) (Unaudited) Rate Date (000) (Note 1) ----------------------------------------------------------------------------------------------------------- San Francisco City & Cnty., Redev. Agcy., Lease Rev., Cap. Apprec. A1 Zero 7/01/09 $ 2,000 $ 1,464,280 Arpts Commission Int'l. Airport Rev., A.M.T., F.G.I.C. Aaa 6.25% 5/01/20 1,000 1,071,080 San Joaquin Hills Trans. Corridor Agcy., Toll Rd. Rev. Aaa Zero 1/15/32 5,000 1,023,900 Santa Margarita/Dana Point Auth., Impvt. Dists. 3, Ser. B, M.B.I.A Aaa 7.25 8/01/08 2,500 3,078,300 Impvt. Dists. 3, Ser. B, M.B.I.A. Aaa 7.25 8/01/09 1,000 1,248,670 Impvt. Dists. 3, Ser. B, M.B.I.A. Aaa 7.25 8/01/09 1,400 1,748,138 Impvt. Dists. 3, Ser. B, M.B.I.A. Aaa 7.25 8/01/14 1,000 1,298,130 Ser. A, M.B.I.A., Rev. Aaa 7.25(d) 8/01/13 1,990 2,565,249 Ser. B, M.B.I.A., Rev. Aaa 7.25(d) 8/01/12 3,000 3,838,590 So. Orange Cnty. Pub. Fin. Auth., Spec. Tax Rev., M.B.I.A. Aaa 7.00 9/01/11 3,500 4,378,150 So. Tahoe Joint Pwrs. Fin. Auth. Rev., Rfdg. So. Tahoe Redev. Proj., Ser. A BBB-(c) 6.00 10/01/28 2,000 2,043,740 Southern California Pub. Pwr. Auth., Proj. Rev. A3 6.75 7/01/10 2,265 2,732,020 Proj. Rev. A3 6.75 7/01/11 1,195 1,442,616 Proj. Rev. A3 6.75 7/01/13 1,000 1,218,000 Proj. Rev., A.M.B.A.C. Aaa Zero 7/01/16 7,925 4,007,514 Proj. Rev., Ser. A, F.G.I.C. Aaa Zero 7/01/12 7,080 4,537,147 Stockton Cmnty. Facs. Dist. No. 90-2, Brookside Estates NR 6.20 8/01/15 700 736,680 Sulphur Springs Union Sch. Dist., Ser. A, M.B.I.A. Aaa Zero 9/01/09 2,000 1,469,520 Tobacco Securitization Authority Northern California Tobacco Settlement Rev. A1 5.25 6/01/31 1,500 1,513,545
See Notes to Financial Statements 9 Prudential California Municipal Fund California Series Portfolio of Investments as of August 31, 2001 Cont'd.
Moody's Principal Rating Interest Maturity Amount Value Description (a) (Unaudited) Rate Date (000) (Note 1) ----------------------------------------------------------------------------------------------------------- Torrance, California Hosp. Rev., Torrance Memorial Med. Center A A1 6.00% 6/01/22 $ 2,000 $ 2,174,720 Vacaville Cmnty. Redev. Agcy., Cmnty. Hsg. Fin. Multi-fam. A-(c) 7.375 11/01/14 1,110 1,289,032 Victor Valley Union High Sch. Dist., Gen. Oblig., M.B.I.A. Aaa Zero 9/01/09 2,075 1,536,641 Virgin Islands Terr., Hugo Ins. Claims Fund Proj., Ser. 91 NR 7.75 10/01/06 535 545,470 Walnut Valley Unified Sch. Dist., M.B.I.A. Aaa 6.00 8/01/15 1,870 2,185,245 ------------ Total long-term investments (cost $116,546,117) 131,809,816 ------------ SHORT-TERM INVESTMENTS 1.2% California St, F.G.I.C., F.R.D.D. A-1+ 2.45 9/04/01 1,100 1,100,000 Municipal Secs. Trust Cert. Class A., M.B.I.A., F.R.D.D. A-1+ 2.45 9/04/01 500 500,000 ------------ Total short-term investments (cost $1,600,000) 1,600,000 ------------ OUTSTANDING PUT OPTION PURCHASED Contracts ---------- United States Treasury Bonds Futures, Sept. 01 @ $104 (cost $19,226) 25 8,202 ------------ Total Investments 99.0% (cost $118,165,343; Note 4) 133,418,018 Other assets in excess of liabilities 1.0% 1,321,632 ------------ Net Assets 100% $134,739,650 ------------ ------------
10 See Notes to Financial Statements Prudential California Municipal Fund California Series Portfolio of Investments as of August 31, 2001 Cont'd. (a) The following abbreviations are used in portfolio descriptions: A.M.B.A.C.--American Municipal Bond Assurance Corporation. A.M.T.--Alternative Minimum Tax. F.G.I.C.--Financial Guaranty Insurance Company. F.R.D.D.--Floating Rate (Daily) Demand Note. M.B.I.A.--Municipal Bond Insurance Association. R.I.B.S.--Residual Interest Bearing Securities. S.A.V.R.S.--Select Auction Variable Rate Securities. (b) Indicates a restricted security. The aggregate cost of restricted securities is $2,950,530 and the aggregate value is $3,167,970 which represents approximately 2.4% of net assets. (c) Standard & Poor's Rating. (d) Inverse floating rate bond. The coupon is inversely indexed to a floating interest rate. The rate shown is the rate at year end. (e) Pledged as initial margin on financial futures contracts. 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 11 Prudential California Municipal Fund California Series Statement of Assets and Liabilities
August 31, 2001 ---------------------------------------------------------------------------------------- ASSETS Investments, at value (cost $118,165,343) $ 133,418,018 Cash 130,112 Interest receivable 1,489,222 Receivable for Series shares sold 329,265 Unrealized appreciation on interest rate swaps 11,820 Other assets 2,884 --------------- Total assets 135,381,321 --------------- LIABILITIES Payable for Series shares reacquired 273,148 Due to broker--termination fee on interest rate swap 145,975 Dividends payable 75,494 Management fee payable 56,098 Accrued expenses 43,120 Distribution fee payable 33,924 Deferred trustee's fees 13,131 Due to broker - variation margin 781 --------------- Total liabilities 641,671 --------------- NET ASSETS $ 134,739,650 --------------- --------------- Net assets were comprised of: Shares of beneficial interest, at par $ 109,016 Paid-in capital in excess of par 118,552,041 --------------- 118,661,057 Accumulated net realized gain on investments 806,910 Net unrealized appreciation on investments 15,271,683 --------------- Net assets, August 31, 2001 $ 134,739,650 --------------- ---------------
12 See Notes to Financial Statements Prudential California Municipal Fund California Series Statement of Assets and Liabilities Con't.
August 31, 2001 ---------------------------------------------------------------------------------------- Class A: Net asset value and redemption price per share ($103,368,645 / 8,362,833 shares of beneficial interest issued and outstanding) $12.36 Maximum sales charge (3% of offering price) .38 --------------- Maximum offering price to public $12.74 --------------- --------------- Class B: Net asset value, offering price and redemption price per share ($27,553,850 / 2,230,011 shares of beneficial interest issued and outstanding) $12.36 --------------- --------------- Class C: Net asset value and redemption price per share ($1,519,084 / 122,943 shares of beneficial interest issued and outstanding) $12.36 Sales charge (1% of offering price) .12 --------------- Offering price to public $12.48 --------------- --------------- Class Z: Net asset value, offering price and redemption price per share ($2,298,071 / 185,781 shares of beneficial interest issued and outstanding) $12.37 --------------- ---------------
See Notes to Financial Statements 13 Prudential California Municipal Fund California Series Statement of Operations
Year Ended August 31, 2001 ---------------------------------------------------------------------------------------- NET INVESTMENT INCOME Income Interest $ 7,374,855 --------------- Expenses Management fee 653,994 Distribution fee--Class A 248,311 Distribution fee--Class B 142,701 Distribution fee--Class C 9,199 Reports to shareholders 101,000 Custodian's fees and expenses 63,000 Transfer agent's fees and expenses 49,000 Registration fees 39,000 Legal fees and expenses 23,000 Audit fee 13,000 Trustees' fees and expenses 9,000 Miscellaneous 3,850 --------------- Total expenses 1,355,055 Less: Custodian fee credit (Note 1) (176) --------------- Net expenses 1,354,879 --------------- Net investment income 6,019,976 --------------- REALIZED AND UNREALIZED GAIN ON INVESTMENTS Net realized gain (loss) on: Investment transactions 2,574,002 Financial futures transactions 143,775 Interest rate swaps (77,662) --------------- 2,640,115 --------------- Net change in unrealized appreciation (depreciation) on: Investments 3,698,857 Financial futures contracts 7,188 Interest rate swaps 11,820 --------------- 3,717,865 --------------- Net gain on investments 6,357,980 --------------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $12,377,956 --------------- ---------------
14 See Notes to Financial Statements Prudential California Municipal Fund California Series Statement of Changes in Net Assets
Year Ended August 31, ---------------------------------- 2001 2000 ------------------------------------------------------------------------------------ INCREASE (DECREASE) IN NET ASSETS Operations Net investment income $ 6,019,976 $ 6,800,510 Net realized gain on investment transactions 2,640,115 1,061,283 Net change in unrealized appreciation (depreciation) of investments 3,717,865 2,488,165 --------------- --------------- Net increase in net assets resulting from operations 12,377,956 10,349,958 --------------- --------------- Dividends and distributions (Note 1) Dividends from net investment income Class A (4,625,742) (4,800,732) Class B (1,259,841) (1,873,857) Class C (50,782) (59,842) Class Z (83,611) (66,079) --------------- --------------- (6,019,976) (6,800,510) --------------- --------------- Distributions in excess of net investment income Class A -- (28,246) Class B -- (12,173) Class C -- (412) Class Z -- (300) --------------- --------------- -- (41,131) --------------- --------------- Series share transactions (net of share conversions) (Note 5) Net proceeds from shares sold 14,920,057 13,855,044 Net asset value of shares issued in reinvestment of dividends and distributions 3,359,417 3,751,457 Cost of shares reacquired (19,787,375) (34,664,321) --------------- --------------- Net decrease in net assets from Series share transactions (1,507,901) (17,057,820) --------------- --------------- Total increase (decrease) 4,850,079 (13,549,503) NET ASSETS Beginning of year 129,889,571 143,439,074 --------------- --------------- End of year $ 134,739,650 $ 129,889,571 --------------- --------------- --------------- ---------------
See Notes to Financial Statements 15 Prudential California Municipal Fund California Series Notes to Financial Statements Prudential California Municipal Fund (the 'Fund') is registered under the Investment Company Act of 1940 as an open-end management investment company. The Fund was organized as a Massachusetts business trust on May 18, 1984 and consists of three series: California Series (the 'Series'), California Income Series and California Money Market Series. These financial statements relate to California Series. The financial statements of the other series are not presented herein. The Series commenced investment operations on September 19, 1984. The Series is diversified and seeks to achieve its investment objective of obtaining the maximum amount of income exempt from federal and California state income taxes with the minimum of risk by investing in 'investment grade' tax-exempt securities whose ratings are within the four highest ratings categories by a nationally recognized statistical rating organization or, if not rated, are of comparable quality. The ability of the issuers of the securities held by the Series to meet their obligations may be affected by economic developments in a specific state, industry or region. Note 1. Accounting Policies The following is a summary of significant accounting policies followed by the Fund, and the Series, in the preparation of its financial statements. Securities Valuations: The Series values municipal securities (including commitments to purchase such securities on a 'when-issued' basis) on the basis of prices provided by a pricing service which uses information with respect to transactions in bonds, quotations from bond dealers, market transactions in comparable securities and various relationships between securities in determining values. If market quotations are not readily available from such pricing service, a security is valued at its fair value as determined under procedures established by the Board of Trustees. Short-term securities which mature in more than 60 days are valued at current market quotations. Short-term securities which mature in 60 days or less are valued at amortized cost. The Series held illiquid securities, including those which are restricted as to disposition under securities law ('restricted securities'). The restricted security held by the Series at August 31, 2001 includes registration rights under which the Series may demand registration by the issuer. Restricted securities, sometimes referred to as private placements, are valued pursuant to the valuation procedures noted above. All securities are valued as of 4:15 p.m., New York time. Financial Futures Contracts: A financial futures contract is an agreement to purchase (long) or sell (short) an agreed amount of securities at a set price for delivery on a future date. Upon entering into a financial futures contract, the Series is required to pledge to the broker an amount of cash and/or other assets equal to a certain 16 Prudential California Municipal Fund California Series Notes to Financial Statements Cont'd. percentage of the contract amount. This amount is known as the 'initial margin.' Subsequent payments, known as 'variation margin,' are made or received by the Series each day, depending on the daily fluctuations in the value of the underlying security. Such variation margin is recorded for financial statement purposes on a daily basis as unrealized gain (loss). When the contract expires or is closed, the gain (loss) is realized and is presented in the statement of operations as net realized gain (loss) on financial futures transactions. The Series invests in financial futures contracts in order to hedge its existing portfolio securities, or securities the Series intends to purchase, against fluctuations in value caused by changes in prevailing interest rates. Should interest rates move unexpectedly, the Series may not achieve the anticipated benefits of the financial futures contracts and may realize a loss. The use of futures transactions involves the risk of imperfect correlation in movements in the price of futures contracts, interest rates and the underlying hedged assets. Inverse Floaters: The Series invests in variable rate securities commonly called 'inverse floaters'. The interest rates on these securities have an inverse relationship to the interest rate of other securities or the value of an index. Changes in interest rates on the other security or index inversely affect the rate paid on the inverse floater, and the inverse floater's price will be more volatile than that of a fixed-rate bond. Additionally, some of these securities contain a 'leverage factor' whereby the interest rate moves inversely by a 'factor' to the benchmark rate. Certain interest rate movements and other market factors can substantially affect the liquidity of inverse floating rate notes. Securities Transactions and Net Investment Income: Securities transactions are recorded on the trade date. Realized gains (losses) on sales of securities are calculated on the identified cost basis. Interest income is recorded on the accrual basis. The Series amortizes premiums and original issue discount on purchases of portfolio securities as adjustments to interest income. Expenses are recorded on the accrual basis which may require the use of certain estimates by management. In November 2000, a revised American Institute of Certified Public Accountants ('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 Series to amortize market discount on all fixed-income securities. Upon initial adoption, the Series 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 Series' net asset value, but will change the classification of certain amounts between interest income and realized and unrealized 17 Prudential California Municipal Fund California Series Notes to Financial Statements Cont'd. gain (loss) in the Statement of Operations. The Series expects that the impact of the adoption of this principle will not be material to the financial statements. Net investment income (loss) (other than distribution fees) and realized and unrealized gains (losses) are allocated daily to each class of shares based upon the relative proportion of net assets of each class at the beginning of the day. Federal Income Taxes: For federal income tax purposes, each series in the Fund is treated as a separate taxpaying entity. It is the Series' 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 and capital gains, if any, to shareholders. For this reason, no federal income tax provision is required. Dividends and Distributions: The Series declares daily dividends from net investment income. Payment of dividends is made monthly. Distributions of net capital gains, if any, are made annually. Income distributions and capital gain distributions are determined in accordance with income tax regulations which may differ from generally accepted accounting principles. Custody Fee Credits: The Fund has an arrangement with its custodian bank, whereby uninvested monies earn credits which reduce the fees charged by the custodian. Options: The Series may either purchase or write options in order to hedge against adverse market movements or fluctuations in value caused by changes in prevailing interest rates with respect to securities which the Series currently owns or intends to purchase. The Series' principal reason for writing options is to realize, through receipt of premiums, a greater current return than would be realized on the underlying security alone. When the Series purchases an option, it pays a premium and an amount equal to that premium is recorded as an asset. When the Series writes an option, it receives a premium and an amount equal to that premium is recorded as a liability. The asset or liability is adjusted daily to reflect the current market value of the option. If an option expires unexercised, the Series realizes a gain or loss to the extent of the premium received or paid. If an option is exercised, the premium received or paid is recorded as an adjustment to the proceeds from the sale or the cost of the purchase in determining whether the Series has realized a gain or a 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 (loss) on purchased options is included in net realized gain (loss) on investment transactions. Gain (loss) on written options is presented separately as net realized gain (loss) on written option transactions. The Series, as writer of an option, may have no control over whether the underlying securities may be sold (called) or purchased (put). As a result, the Series 18 Prudential California Municipal Fund California Series Notes to Financial Statements Cont'd. bears the market risk of an unfavorable change in the price of the security underlying the written option. The Series, as purchaser of an option, bears the risk of the potential inability of the counterparties to meet the terms of their contracts. Interest Rate Swaps: The Series may enter into interest rate swaps. In a simple interest rate swap, one investor pays a floating rate of interest on a notional principal amount and receives a fixed rate of interest on the same notional principal amount for a specified period of time. Alternatively, an investor may pay a fixed rate and receive a floating rate. Interest rate swaps were conceived as asset/liability management tools. In more complex swaps, the notional principal amount may decline (or amortize) over time. During the term of the swap, changes in the value of the swap are recognized as unrealized gains or losses by 'marking-to-market' to reflect the market value of the swap. When the swap is terminated, the Series will record a realized gain or loss equal to the difference between the proceeds from (or cost of) the closing transaction and the Series' basis in the contract, if any. The Series is exposed to credit loss in the event of non-performance by the other party to the interest rate swap. However, the Series does not anticipate non-performance by any counterparty. Reclassification of Capital Accounts: The Series accounts and reports for distributions to shareholders in accordance with the AICPA Statement of Position 93-2: Determination, Disclosure and Financial Statement Presentation of Income, Capital Gain and Return of Capital Distributions by Investment Companies. The effect of applying this statement was to increase paid in capital in excess of par and decrease accumulated net realized gain by $15,533. Net investment income, net realized gains and net assets were not affected by this change. Note 2. Agreements The Fund has a management agreement with Prudential Investments Fund Management LLC ('PIFM'). Pursuant to this agreement, PIFM has responsibility for all investment advisory services and supervises the subadviser's performance of such services. Effective November 1, 2001, PIFM's name will change to Prudential Investments LLC. PIFM has entered into a subadvisory agreement with Prudential Investment Management, Inc. ('PIM'), formerly known as Prudential Investment Corporation; PIM furnishes investment advisory services in connection with the management of the Fund. PIFM pays for the services of PIM, the cost of compensation of officers of the Fund, occupancy and certain clerical and bookkeeping costs of the Fund. The Fund bears all other costs and expenses. The management fee paid to PIFM is computed daily and payable monthly, at an annual rate of .50 of 1% of the average daily net assets of the Series. 19 Prudential California Municipal Fund California Series Notes to Financial Statements Cont'd. The Series has a distribution agreement with Prudential Investment Management Services LLC ('PIMS') which acts as the distributor of the Series. The Series compensates PIMS for distributing and servicing the Series' 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 Series. Pursuant to the Class A, B and C Plans, the Series 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 Class A, B and C Plans were .25 of 1%, .50 of 1% and .75 of 1% of the average daily net assets of the Class A, B and C shares, respectively, for the year ended August 31, 2001. PIMS has advised the Series that it has received approximately $48,600 and $6,000 in front-end sales charges resulting from sales of Class A and Class C shares, respectively, during the year ended August 31, 2001. From these fees, PIMS paid such sales charges to affiliated broker-dealers, which in turn paid commissions to salespersons and incurred other distribution costs. PIMS has advised the Series that for the year ended August 31, 2001, they received approximately $57,000 and $1,000 in contingent deferred sales charges imposed upon certain redemptions by Class B and Class C shareholders, respectively. PIFM, PIMS and PIM are indirect, wholly-owned subsidiaries of The Prudential Insurance Company of America ('Prudential'). The Series, along with other affiliated registered investment companies (the 'Funds'), entered into a syndicated credit agreement ('SCA') with an unaffiliated lender. The maximum commitment under the SCA is $500 million. Interest on any such borrowings will be at market rates. The Funds pay a commitment fee at an annual rate of .080 of 1% of the unused portion of the credit facility. The commitment fee is accrued and paid quarterly on a pro rata basis by the Funds. The expiration date of the SCA is March 7, 2002. Prior to March 9, 2001, the commitment fee was .080 of 1% of the unused portion of the credit facility. Effective September 14, 2001, the commitment under the SCA was increased to $930 million through December 31, 2001. Effective January 1, 2002, the commitment will be reduced to $500 million. All other terms and conditions are unchanged. The purpose of the agreement is to serve as an alternative source of funding for capital share redemptions. The Series did not borrow any amounts pursuant to the SCA during the year ended August 31, 2001. 20 Prudential California Municipal Fund California Series Notes to Financial Statements Cont'd. 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 August 31, 2001, the Series incurred fees of approximately $39,300 for the services of PMFS. As of August 31, 2001, approximately $3,200 of such fees were due to PMFS. Transfer agent fees and expenses in the Statement of Operations include certain out-of-pocket expenses paid to nonaffiliates. Note 4. Portfolio Securities Purchases and sales of portfolio securities of the Series, excluding short-term investments, for the year ended August 31, 2001 were $61,593,978 and $64,278,700, respectively. The United States federal income tax basis of the Series' investments at August 31, 2001 was substantially the same as for financial reporting purposes and, accordingly, net unrealized appreciation of investments for federal income tax purposes was $15,252,675 (gross unrealized appreciation--$15,263,698; gross unrealized depreciation--$11,023). For federal income tax purposes, the Series utilized approximately $1,826,600 of capital loss carryforward to offset net taxable gains recognized during the year ended August 31, 2001. During the year ended August 31, 2001, the Series entered into financial futures contracts and interest rate swap agreements. Details of financial future contracts open at year end are as follows:
Value at Value at Number of Expiration August 31, Trade Unrealized Contracts Type Date 2001 Date Appreciation --------- --------------------- ----------- ------------ ------------ --------------- 25 Long: U.S. Treasury Bonds Futures 9/19/2001 $ 2,699,219 $2,692,031 $ 7,188 ------- -------
In the interest rate swap agreement, the Series receives a floating rate and pays a respective fixed rate of interest. Details of the swap agreement open at year end are as follows:
Termination Notional Fixed Floating Unrealized Counterparty Date Amount Rate Rate Appreciation ------------------------- ------------ ---------- ----- ------------ --------------- Morgan Stanley 6/5/2021 $2,650,000 4.49% BMA* LIBOR $ 11,820 --------------- ---------------
* Bond Market Association(TM) 21 Prudential California Municipal Fund California Series Notes to Financial Statements Cont'd. Note 5. Capital The Series offers Class A, Class B, Class C and Class Z shares. Class A shares are sold with a front-end sales charge of up to 3%. Class B shares are sold with a contingent deferred sales charge which declines from 5% to zero depending on the period of time the shares are held. Class C shares are sold with a front-end sales charge of 1% and a contingent deferred sales charge of 1% during the first 18 months. Class B shares will automatically convert to Class A shares on a quarterly basis approximately seven years after purchase. Special exchange privileges are also available for shareholders who qualify to purchase Class A shares at net asset value. Class Z shares are not subject to any sales or redemption charge and are offered exclusively for sale to a limited group of investors. The Series has authorized an unlimited number of shares of beneficial interest for each class at $.01 par value per share. Transactions in shares of beneficial interest were as follows:
Class A Shares Amount ------------------------------------------------------------ ---------- ------------ Year ended August 31, 2001: Shares sold 485,433 $ 5,826,618 Shares issued in reinvestment of dividends and distributions 217,035 2,598,310 Shares reacquired (1,154,498) (13,837,772) ---------- ------------ Net increase (decrease) in shares outstanding before conversion (452,030) (5,412,844) Shares issued upon conversion from Class B 769,463 9,164,028 ---------- ------------ Net increase (decrease) in shares outstanding 317,433 $ 3,751,184 ---------- ------------ ---------- ------------ Year ended August 31, 2000: Shares sold 637,977 $ 7,185,783 Shares issued in reinvestment of dividends and distributions 234,288 2,651,560 Shares reacquired (2,028,431) (22,902,100) ---------- ------------ Net increase (decrease) in shares outstanding before conversion (1,156,166) (13,064,757) Shares issued upon conversion from Class B 1,087,815 12,320,095 ---------- ------------ Net increase (decrease) in shares outstanding (68,351) $ (744,662) ---------- ------------ ---------- ------------ Class B ------------------------------------------------------------ Year ended August 31, 2001 Shares sold 563,126 $ 6,724,220 Shares issued in reinvestment of dividends and distributions 55,493 663,537 Shares reacquired (370,612) (4,437,364) ---------- ------------ Net increase (decrease) in shares outstanding before conversion 248,007 2,950,393 Shares reacquired upon conversion into Class A (769,571) (9,164,028) ---------- ------------ Net increase (decrease) in shares outstanding (521,564) $ (6,213,635) ---------- ------------ ---------- ------------ Year ended August 31, 2000: Shares sold 367,823 $ 4,136,928 Shares issued in reinvestment of dividends and distributions 88,653 1,001,612 Shares reacquired (828,681) (9,384,778) ---------- ------------ Net increase (decrease) in shares outstanding before conversion (372,205) (4,246,238) Shares reacquired upon conversion into Class A (1,088,264) (12,320,095) ---------- ------------ Net increase (decrease) in shares outstanding (1,460,469) $(16,566,333) ---------- ------------ ---------- ------------
22 Prudential California Municipal Fund California Series Notes to Financial Statements Cont'd.
Class C Shares Amount ------------------------------------------------------------ ---------- ------------ Year ended August 31, 2001 Shares sold 52,201 $ 620,095 Shares issued in reinvestment of dividends and distributions 3,823 45,785 Shares reacquired (27,502) (325,719) ---------- ------------ Net increase (decrease) in shares outstanding 28,522 $ 340,161 ---------- ------------ ---------- ------------ Year ended August 31, 2000: Shares sold 138,301 $ 1,570,858 Shares issued in reinvestment of dividends and distributions 4,033 45,608 Shares reacquired (174,362) (1,976,318) ---------- ------------ Net increase (decrease) in shares outstanding (32,028) $ (359,852) ---------- ------------ ---------- ------------ Class Z ------------------------------------------------------------ Year ended August 31, 2001 Shares sold 145,110 $ 1,749,124 Shares issued in reinvestment of dividends and distributions 4,327 51,785 Shares reacquired (99,268) (1,186,520) ---------- ------------ Net increase (decrease) in shares outstanding 50,169 $ 614,389 ---------- ------------ ---------- ------------ Year ended August 31, 2000: Shares sold 85,546 $ 961,475 Shares issued in reinvestment of dividends and distributions 4,641 52,677 Shares reacquired (35,603) (401,125) ---------- ------------ Net increase (decrease) in shares outstanding 54,584 $ 613,027 ---------- ------------ ---------- ------------
23 Prudential California Municipal Fund California Series Financial Highlights
Class A --------------- Year Ended August 31, 2001 ---------------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE: Net asset value, beginning of year $ 11.78 --------------- Income from investment operations Net investment income .56 Net realized and unrealized gain (loss) on investment transactions .58 --------------- Total from investment operations 1.14 --------------- Less distributions Dividends from net investment income (.56) Distributions in excess of net investment income -- --------------- Total distributions (.56) --------------- Net asset value, end of year $ 12.36 --------------- --------------- TOTAL RETURN(b): 9.91% RATIOS/SUPPLEMENTAL DATA: Net assets, end of year (000) $ 103,368 Average net assets (000) $ 99,324 Ratios to average net assets: Expenses, including distribution and service (12b-1) fees .98% Expenses, excluding distribution and service (12b-1) fees .73% Net investment income 4.66% For Class A, B, C and Z shares: Portfolio turnover rate 48%
------------------------------ (a) Net of management fee waiver. (b) Total return does not consider the effects of sales loads. Total return is calculated assuming a purchase of shares on the first day and a sale on the last day of each year reported and includes reinvestment of dividends and distributions. (c) Less than $.005 per share. 24 See Notes to Financial Statements Prudential California Municipal Fund California Series Financial Highlights Cont'd.
Class A ------------------------------------------------------------------------------------- Year Ended August 31, ------------------------------------------------------------------------------------- 2000 1999 1998 1997 ------------------------------------------------------------------------------------- $ 11.45 $ 12.22 $ 11.80 $ 11.44 -------- -------- -------- -------- .58 .59 .62 .65(a) .33 (.77) .43 .36 -------- -------- -------- -------- .91 (.18) 1.05 1.01 -------- -------- -------- -------- (.58) (.59) (.62) (.65) --(c) -- (.01) --(c) -------- -------- -------- -------- (.58) (.59) (.63) (.65) -------- -------- -------- -------- $ 11.78 $ 11.45 $ 12.22 $ 11.80 -------- -------- -------- -------- -------- -------- -------- -------- 8.35% (1.56)% 9.13% 9.01% $ 94,776 $ 92,868 $ 91,356 $ 81,535 $ 93,560 $ 94,868 $ 85,624 $ 78,347 .93% .89% .78% .76%(a) .68% .69% .68% .66%(a) 5.13% 4.94% 5.18% 5.53%(a) 25% 13% 11% 14%
See Notes to Financial Statements 25 Prudential California Municipal Fund California Series Financial Highlights Cont'd.
Class B --------------- Year Ended August 31, 2001 ---------------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE: Net asset value, beginning of year $ 11.78 --------------- Income from investment operations Net investment income .53 Net realized and unrealized gain (loss) on investment transactions .58 --------------- Total from investment operations 1.11 --------------- Less distributions Dividends from net investment income (.53) Distributions in excess of net investment income -- --------------- Total distributions (.53) --------------- Net asset value, end of year $ 12.36 --------------- --------------- TOTAL RETURN(b): 9.63% RATIOS/SUPPLEMENTAL DATA: Net assets, end of year (000) $27,554 Average net assets (000) $28,540 Ratios to average net assets: Expenses, including distribution and service (12b-1) fees 1.23% Expenses, excluding distribution and service (12b-1) fees .73% Net investment income 4.41%
------------------------------ (a) Net of management fee waiver. (b) Total return does not consider the effects of sales loads. Total return is calculated assuming a purchase of shares on the first day and a sale on the last day of each year reported and includes reinvestment of dividends and distributions. (c) Less than $.005 per share. 26 See Notes to Financial Statements Prudential California Municipal Fund California Series Financial Highlights Cont'd.
Class B ------------------------------------------------------------------------------------- Year Ended August 31, ------------------------------------------------------------------------------------- 2000 1999 1998 1997 ------------------------------------------------------------------------------------- $ 11.44 $ 12.22 $ 11.80 $ 11.43 -------- -------- -------- -------- .56 .56 .58 .60(a) .34 (.78) .43 .37 -------- -------- -------- -------- .90 (.22) 1.01 .97 -------- -------- -------- -------- (.56) (.56) (.58) (.60) --(c) -- (.01) --(c) -------- -------- -------- -------- (.56) (.56) (.59) (.60) -------- -------- -------- -------- $ 11.78 $ 11.44 $ 12.22 $ 11.80 -------- -------- -------- -------- -------- -------- -------- -------- 8.18% (1.94)% 8.70% 8.67% $ 32,403 $ 48,196 $ 62,043 $ 70,093 $ 38,348 $ 56,041 $ 66,086 $ 75,935 1.18% 1.19% 1.18% 1.16%(a) .68% .69% .68% .66%(a) 4.89% 4.62% 4.78% 5.13%(a)
See Notes to Financial Statements 27 Prudential California Municipal Fund California Series Financial Highlights Cont'd.
Class C --------------- Year Ended August 31, 2001 ---------------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE: Net asset value, beginning of year $ 11.78 ------- Income from investment operations Net investment income .50 Net realized and unrealized gain (loss) on investment transactions .58 ------- Total from investment operations 1.08 ------- Less distributions Dividends from net investment income (.50) Distributions in excess of net investment income -- ------- Total distributions (.50) ------- Net asset value, end of year $ 12.36 ------- ------- TOTAL RETURN(b): 9.36% RATIOS/SUPPLEMENTAL DATA: Net assets, end of year (000) $ 1,519 Average net assets (000) $ 1,226 Ratios to average net assets: Expenses, including distribution and service (12b-1) fees 1.48% Expenses, excluding distribution and service (12b-1) fees .73% Net investment income 4.14%
------------------------------ (a) Net of management fee waiver. (b) Total return does not consider the effects of sales loads. Total return is calculated assuming a purchase of shares on the first day and a sale on the last day of each year reported and includes reinvestment of dividends and distributions. (c) Less than $.005 per share. 28 See Notes to Financial Statements Prudential California Municipal Fund California Series Financial Highlights Cont'd.
Class C ------------------------------------------------------------------------------------- Year Ended August 31, ------------------------------------------------------------------------------------- 2000 1999 1998 1997 ------------------------------------------------------------------------------------- $ 11.44 $ 12.22 $ 11.80 $ 11.43 -------- -------- -------- -------- .53 .53 .55 .57(a) .34 (.78) .43 .37 -------- -------- -------- -------- .87 (.25) .98 .94 -------- -------- -------- -------- (.53) (.53) (.55) (.57) --(c) -- (.01) --(c) -------- -------- -------- -------- (.53) (.53) (.56) (.57) -------- -------- -------- -------- $ 11.78 $ 11.44 $ 12.22 $ 11.80 -------- -------- -------- -------- -------- -------- -------- -------- 7.91% (2.18)% 8.43% 8.40% $ 1,112 $ 1,447 $ 1,257 $ 334 $ 1,290 $ 1,373 $ 689 $ 480 1.43% 1.44% 1.43% 1.41%(a) .68% .69% .68% .66%(a) 4.64% 4.40% 4.53% 4.88%(a)
See Notes to Financial Statements 29 Prudential California Municipal Fund California Series Financial Highlights Cont'd.
Class Z --------------- Year Ended August 31, 2001 ---------------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE: Net asset value, beginning of period $ 11.79 ------- Income from investment operations Net investment income .59 Net realized and unrealized gain (loss) on investment transactions .58 ------- Total from investment operations 1.17 ------- Less distributions Dividends from net investment income (.59) Distributions in excess of net investment income -- ------- Total distributions (.59) ------- Net asset value, end of period $ 12.37 ------- ------- TOTAL RETURN(b): 10.17% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000) $ 2,298 Average net assets (000) $ 1,708 Ratios to average net assets: Expenses, including distribution and service (12b-1) fees .73% Expenses, excluding distribution and service (12b-1) fees .73% Net investment income 4.90%
------------------------------ (a) Net of management fee waiver. (b) Total return does not consider the effects of sales loads. Total return is calculated assuming a purchase of shares on the first day and a sale on the last day of each period reported and includes reinvestment of dividends and distributions. Total returns for periods of less than one full year are not annualized. (c) Less than $.005 per share. (d) Commencement of offering of Class Z shares. (e) Annualized. 30 See Notes to Financial Statements Prudential California Municipal Fund California Series Financial Highlights Cont'd.
Class Z ----------------------------------------------------------------------------------------------- Year Ended August 31, September 18, 1996(d) ---------------------------------------------------------- through August 31, 2000 1999 1998 1997 ----------------------------------------------------------------------------------------------- $11.45 $12.23 $11.81 $11.50 ------- ------- ------- ------- .61 .62 .63 .64(a) .34 (.78) .43 .31 ------- ------- ------- ------- .95 (.16) 1.06 .95 ------- ------- ------- ------- (.61) (.62) (.63) (.64) --(c) -- (.01) --(c) ------- ------- ------- ------- (.61) (.62) (.64) (.64) ------- ------- ------- ------- $11.79 $11.45 $12.23 $11.81 ------- ------- ------- ------- ------- ------- ------- ------- 8.71% (1.44)% 9.24% 8.35% $1,599 $ 928 $1,037 $ 710 $1,231 $1,427 $ 847 $ 458 .68% .69% .68% .66%(a)/(e) .68% .69% .68% .66%(a)/(e) 5.37% 5.15% 5.28% 5.35%(a)/(e)
See Notes to Financial Statements 31 Prudential California Municipal Fund California Series Report of Independent Accountants To the Shareholders and Board of Trustees of Prudential California Municipal Fund, California Series In our opinion, the accompanying statement of assets and liabilities, including the portfolio of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of Prudential California Municipal Fund, California Series (the 'Fund', one of the portfolios constituting Prudential California Municipal Fund) at August 31, 2001, 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 August 31, 2001 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP New York, New York October 19, 2001 32 Prudential California Municipal Fund California Series Federal Income Tax Information (Unaudited) We are required by the Internal Revenue Code to advise you within 60 days of the Series' fiscal year end (August 31, 2001) as to the federal tax status of dividends and distributions paid by the Series during such fiscal year. Accordingly, we are advising you that in the fiscal year ended August 31, 2001, dividends paid from net investment income of $.56 per Class A share, $.53 per Class B share, $.50 per Class C share and $.59 per Class Z share were all federally tax-exempt interest dividends. We wish to advise you that the corporate dividends received deduction for the Series is zero. Only funds that invest in U.S. equity securities are entitled to pass-through a corporate dividends received deduction. 33 Class A Growth of a $10,000 Investment (GRAPH) Average Annual Total Returns as of 8/31/01
One Year Five Years Ten Years Since Inception With Sales Charge 6.61% 6.23% (6.21) 6.62% (6.60) 6.80% (6.78) Without Sales Charge 9.91% 6.88% (6.86) 6.95% (6.93) 7.08% (7.06)
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 Series' returns can fluctuate from year to year by measuring the best and worst calendar years in terms of total annual return for the past 10 years. The graph compares a $10,000 investment in Prudential California Municipal Fund/California Series (Class A shares) with a similar investment in the Lehman Brothers Municipal Bond Index (the Muni Bond Index) by portraying the initial account values at the beginning of the 10-year period for Class A shares (August 31, 1991) and the account values at the end of the current fiscal year (August 31, 2001), as measured on a quarterly basis. 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. The numbers in parentheses show the Series' average annual total return without waiver of management fees and/or expense subsidization. The Muni Bond Index is an unmanaged index of over 39,000 long-term investment-grade municipal bonds. It gives a broad look at how long- term investment-grade municipal bonds have performed. The Muni Bond Index 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 Muni Bond Index may differ substantially from the securities in the Series. The Muni Bond 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 8/31/01
One Year Five Years Ten Years Since Inception With Sales Charge 4.63% 6.40% (6.38) 6.56% (6.55) 7.53% (7.37) Without Sales Charge 9.63% 6.56% (6.54) 6.56% (6.55) 7.53% (7.37)
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 Series' returns can fluctuate from year to year by measuring the best and worst calendar years in terms of total annual return for the past 10 years. The graph compares a $10,000 investment in the Prudential California Municipal Fund/California Series (Class B shares) with a similar investment in the Lehman Brothers Municipal Bond Index (the Muni Bond Index) by portraying the initial account values at the beginning of the 10-year period for Class B shares (August 31, 1991) and the account values at the end of the current fiscal year (August 31, 2001), as measured on a quarterly basis. 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 August 31, 2001; (b) all recurring fees (including management fees) were deducted; and (c) all dividends and distributions were reinvested. Approximately seven years after purchase, Class B shares will automatically convert to Class A shares on a quarterly basis. This conversion feature is not reflected in the graph. The numbers in parentheses show the Series' average annual total return without waiver of management fees and/or expense subsidization. The Muni Bond Index is an unmanaged index of over 39,000 long-term investment-grade municipal bonds. It gives a broad look at how long- term investment-grade municipal bonds have performed. The Muni Bond Index 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 Muni Bond Index may differ substantially from the securities in the Series. The Muni Bond 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 California Municipal Fund California Series Class C Growth of a $10,000 Investment (GRAPH) Average Annual Total Returns as of 8/31/01
One Year Five Years Ten Years Since Inception With Sales Charge 7.28% 6.08% (6.06) N/A 5.95% (5.93) Without Sales Charge 9.36% 6.29% (6.28) N/A 6.10% (6.08)
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 Series' 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 California Municipal Fund/California Series (Class C shares) with a similar investment in the Lehman Brothers Municipal Bond Index (the Muni Bond Index) by portraying the initial account values at the commencement of operations of Class C shares (August 1, 1994) and the account values at the end of the current fiscal year (August 31, 2001), as measured on a quarterly basis. 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 August 31, 2001; (c) all recurring fees (including management fees) were deducted; and (d) all dividends and distributions were reinvested. The numbers in parentheses show the Series' average annual total return without waiver of management fees and/or expense subsidization. The Muni Bond Index is an unmanaged index of over 39,000 long-term investment-grade municipal bonds. It gives a broad look at how long- term investment-grade municipal bonds have performed. The Muni Bond Index 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 Muni Bond Index may differ substantially from the securities in the Series. The Muni Bond 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 8/31/01 One Year Five Years Ten Years Since Inception 10.17% N/A N/A 6.99% (6.97) 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 Series' 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 California Municipal Fund/California Series (Class Z shares) with a similar investment in the Lehman Brothers Municipal Bond Index (the Muni Bond Index) by portraying the initial account values at the commencement of operations of Class Z shares (September 18, 1996) and the account values at the end of the current fiscal year (August 31, 2001), as measured on a quarterly basis. 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 numbers in parentheses show the Series' average annual total return without waiver of management fees and/or expense subsidization. The Muni Bond Index is an unmanaged index of over 39,000 long-term investment-grade municipal bonds. It gives a broad look at how long- term investment-grade municipal bonds have performed. The Muni Bond Index 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 Muni Bond Index may differ substantially from the securities in the Series. The Muni Bond 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: www.prudential.com TRUSTEES 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 Judy A. Rice, Vice President Grace C. Torres, Treasurer Deborah A. Docs, Secretary William V. Healey, Assistant Secretary MANAGER Prudential Investments LLC Gateway Center Three 100 Mulberry Street Newark, NJ 07102-4077 Investment Adviser Prudential Investment Management, Inc. Prudential Plaza Newark, NJ 07102-3777 Distributor Prudential Investment Management Services LLC Gateway Center Three, 14th Floor 100 Mulberry Street 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 Shearman & Sterling 599 Lexington Avenue New York, NY 10022 Fund Symbols NASDAQ CUSIP Class A PRMCX 744313107 Class B PBCMX 744313206 Class C PCCSX 744313701 Class Z PZCSX 744313883 MF116E ANNUAL REPORT AUGUST 31, 2001 Prudential California Municipal Fund/ California Money Market Series Fund Type Money market Objective The highest level of current income that is exempt from California State and federal income taxes, consistent with liquidity and the preservation of capital 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 Series' portfolio holdings are for the period covered by this report and are subject to change thereafter. Prudential Financial is a service mark of The Prudential Insurance Company of America, Newark, NJ, and its affiliates. (LOGO) Prudential California Municipal Fund California Money Market Series Performance at a Glance INVESTMENT GOALS AND STYLE The Prudential California Municipal Fund/California Money Market Series (the Series) seeks to provide the highest level of current income that is exempt from California State and federal income taxes, consistent with liquidity and the preservation of capital. The Series intends to invest primarily in a portfolio of short-term tax-exempt debt securities with effective remaining maturities of 13 months or less from the state of California, its municipalities, local governments, and other qualifying issuers (such as Puerto Rico, Guam, and the U.S. Virgin Islands). There can be no assurance that the Series will achieve its investment objective. State Specific Money Fund Yield Comparison (GRAPH) www.prudential.com (800) 225-1852 Annual Report August 31, 2001 Fund Facts As of 8/31/01
7-Day Net Asset Taxable Equivalent Yield* Weighted Avg. Net Assets Current Yld. Value (NAV) @ 31% @ 36% @ 39.1% Mat. (WAM) (Millions) CA Money Market Series 1.42% $1.00 2.27% 2.45% 2.57% 47 Days $294 iMoneyNet, Inc. Tax-Free State Specific Avg. (SB & GP-CA)** 1.60% $1.00 2.56% 2.76% 2.90% 48 Days N/A
Note: Yields will fluctuate from time to time, and past performance is not indicative of future results. An investment in the Series is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although the Series seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in the Series. *Some investors may be subject to the federal alternative minimum tax and/or state and local taxes. Taxable equivalent yields reflect federal and applicable state tax rates. **iMoneyNet, Inc. reports the 7-Day Current Yield, NAV, and WAM on Mondays. This is the data of all funds in the iMoneyNet, Inc. Tax- Free State Specific Average (Stock Broker (SB) & General Purpose (GP)-California) category as of August 27, 2001. Weighted Average Maturity Comparison (GRAPH) 1 (LOGO) October 15, 2001 DEAR SHAREHOLDER, The terrorist attacks that took place in the United States on September 11, 2001 will remain forever ingrained in our nation's consciousness. In their aftermath, our thoughts and our prayers remain with the victims of this senseless tragedy, their families, and friends. It is also with deep gratitude that we acknowledge the heroic efforts of the men and women involved in the rescue operations. We at Prudential Financial would like to take the opportunity during this difficult time to reassure our shareholders of our unwavering commitment to their investment needs. Under normal circumstances, the investment landscape is a difficult one to navigate, and during this extremely tragic period in our nation's history, even more so. We're here to provide the expertise and resources that may help make the journey ahead less daunting. For now, investors should try to maintain a patient focus on their long-term investment strategies. For individuals with short-term investment objectives, however, money market funds may be a good alternative because they aim to provide current income, preservation of principal, and shares that can be quickly converted into cash without incurring losses. Above all, investors should continue to seek guidance from their financial professionals. Sincerely, David R. Odenath, Jr., President Prudential California Municipal Fund 2 Prudential California Municipal Fund California Money Market Series Annual Report August 31, 2001 INVESTMENT ADVISER'S REPORT During our fiscal year that began September 1, 2000, the U.S. economy barely skirted a recession, which is broadly defined as at least two consecutive quarters of decline in a nation's gross domestic product (GDP). A sharp pullback in business investment caused the economy to stumble, but consumer demand kept GDP in positive territory. The Federal Reserve (the Fed) initially left monetary policy unchanged from September through December 2000. As signs of economic weakness persisted in January 2001, the Fed began one of its most intense rounds of monetary policy easing in recent history. It cut short-term rates seven times, lowering the rate that banks charge each other for overnight loans a total of three percentage points to 3.50%. The reductions were aimed at stimulating economic growth via lower borrowing costs for businesses and consumers. With the Fed aggressively easing monetary policy, yields on municipal money market securities also fell sharply, particularly in the second half of our reporting period. The ideal investment strategy, therefore, was to purchase longer-term municipal money market securities that provided attractive yields before repeated Fed rate cuts drove the general level of yields progressively lower. For example, the corporate tax filing date of September 15, 2000 coincided with the end of the quarter for many dealers, putting selling pressure on the municipal money market. These conditions temporarily drove yields higher and prices lower, creating attractive buying opportunities. We purchased several blocks of tax-exempt commercial paper that matured in 90 to 120 days. We also bought California Statewide Community Development Authority Multifamily Revenue Bonds that allowed us to sell them back for 100% of their face value after seven months. 3 Prudential California Municipal Fund California Money Market Series Annual Report August 31, 2001 Locking in attractive yields on these securities helped the Series weather the "January effect" in 2001. This is a period of lower yields (and higher prices) on securities that typically occurs as investors rush to temporarily reinvest proceeds received from coupon payments, bond calls, and maturing bonds in the municipal money market during early January. Yields also fell because the Fed had begun to ease monetary policy in that month. After the "January effect," tax season was the next major development that affected the municipal money market. Tax season occurs in the municipal money market during late April through early May as securities are sold to meet shareholder redemptions for tax payments. Selling pressure temporarily drives prices of securities lower and yields higher. The Series was well positioned to meet such tax-time redemptions because our strategy enabled us to quickly convert assets into cash. In addition, we had cash to purchase tax-season bargains such as prerefunded bonds maturing in 6 to 10 months that are backed by direct obligations of the U.S. Treasury. CALIFORNIA BOND RATINGS DOWNGRADED Along with the impact of tax season, there was another factor exerting downward pressure on the prices of California money market securities in the spring of 2001. Investors had been anticipating that the ratings of California general obligation (GO) bonds would be lowered due to the state's energy crisis and weak economic condition. In the spring of 2001, the state's long-term GO ratings were downgraded to A-plus from AA by Standard & Poor's, and to Aa3 from Aa2 by Moody's Investors Service. In light of the state's deteriorating financial health and that of certain other California issuers, we were more deliberative than usual concerning the credit quality of securities. For example, early in our reporting period, we sold all of the California utility securities in our portfolio whose interest and principal payments were not insured or backed by enhancements such as letters of credit from major banks. 4 www.prudential.com (800) 225-1852 WEATHERING THE "JULY EFFECT" Late in our fiscal year, we began to prepare the Series for the "July effect," which has a similar impact on the municipal money market as the aforementioned "January effect." To avoid investing in early July, we bought securities in June that mature in one year, such as tax and revenue anticipation notes of Los Angeles County School District. Buying longer-term money market securities in June not only helped the Series weather the "July effect," but it also enabled the Series' yield to remain higher for a longer time as subsequent Fed rate cuts pushed tax-exempt money market yields even lower. LOOKING AHEAD The Fed cut short-term rates by one-half of a percentage point on September 17, and again on October 2, partially in response to the terrorist attacks that occurred in the United States on September 11. It expressed concern that weak economic conditions might continue for the foreseeable future. We believe the Fed may ease monetary policy further before year-end. However, we also expect the Fed's aggressive moves will eventually have their intended effect, and the economy will begin a new growth cycle. Prudential California Municipal Fund Management Team 5 Prudential California Municipal Fund California Money Market Series Portfolio of Investments as of August 31, 2001
Moody's Principal Rating Interest Maturity Amount Value Description (a) (Unaudited) Rate Date (000) (Note 1) ---------------------------------------------------------------------------------------------------------- Alameda Cnty. Ind. Dev. Auth. Rev., Niles Machine & Tool Works, Ser. 00A, F.R.W.D., A.M.T. A-1+(d) 1.95% 9/06/01 $ 475 $ 475,000 Bella Vista Wtr. Dist., Cap. Impvt. Proj., Ser. 1992, C.O.P. NR 7.38 10/01/01 2,035(c) 2,082,782 California Econ. Dev. Fin. Auth. Rev., Mannesmann Dematic Rapistan Corp. Proj., Ser. 98, F.R.W.D., A.M.T. CPS1 2.05 9/06/01 3,200 3,200,000 California Educational Fac. Auth. Rev., Carnegie Institution, Ser. 93B VMIG1 2.70 12/11/01 3,500 3,500,000 Carnegie Institution, Ser. 93B VMIG1 2.55 2/13/02 5,000 5,000,000 California Hlth. Fac. Fin. Auth. Rev., Kaiser Permanente, Ser. 152, F.R.W.D., F.S.A. VMIG1 1.80 9/06/01 1,920 1,920,000 Scripps Health, F.R.W.D., M.B.I.A. VMIG1 1.65 9/05/01 400 400,000 Scripps Health, Ser. 01A, F.R.W.D. VMIG1 1.85 9/05/01 10,000 10,000,000 California Infrastructure & Econ. Dev. Bank, Ind. Dev. Rev., Starter & Alternator Proj., Ser. 99, F.R.W.D., A.M.T. A-1+(d) 2.05 9/05/01 5,000 5,000,000 California Poll. Ctrl. Fin. Auth. Rev., U.S. Borax Inc. Proj., Ser. 95A, F.R.W.D. CPS1 1.95 9/06/01 5,100 5,100,000 Wadham Energy, Ser. B, F.R.W.D., A.M.T. A-1+(d) 2.10 9/05/01 2,750 2,750,000 Wadham Energy, Ser. C, F.R.W.D., A.M.T. A-1+(d) 2.10 9/05/01 10,650 10,650,000 California Sch. Cash Reserve Prog. Auth., Ser. A, A.M.B.A.C. MIG1 4.00 7/03/02 5,000 5,054,942 California St., G.O., T.E.C.P. P-1 2.25 10/23/01 5,000 5,000,000 G.O., Ser. SGA 55, F.R.W.D., F.G.I.C. A-1+(d) 1.85 9/05/01 4,000 4,000,000 G.O., Ser. SGA 119, F.R.D.D., F.G.I.C. A-1+(d) 2.45 9/04/01 12,700 12,700,000
6 See Notes to Financial Statements Prudential California Municipal Fund California Money Market Series Portfolio of Investments as of August 31, 2001 Cont'd.
Moody's Principal Rating Interest Maturity Amount Value Description (a) (Unaudited) Rate Date (000) (Note 1) ---------------------------------------------------------------------------------------------------------- California St., Pub. Wks. Board, Lease Rev., California Cmnty. Colleges, Ser. A Aaa 6.75% 9/01/01 $ 1,200(c) $ 1,224,000 California St., Veterans G.O., Ser. 00A, A.M.B.A.C., A.M.T., M.E.R.L.O.T. VMIG1 2.01 9/05/01 5,000 5,000,000 California Statewide Cmntys. Dev. Auth., Aegis of Aptos Proj., Multi-Family Rev., Ser. 98Y, F.R.W.D., A.M.T. A-2(d) 2.30 9/06/01 7,350 7,350,000 Cedar Springs Apts., Ser. 00Z, A.M.T. NR 3.05 11/15/01 10,650 10,650,000 Dix Metals, Ser. 98B, F.R.W.D., A.M.T. NR 1.95 9/05/01 5,265 5,265,000 Karcher Prop. Inc., Ser. 1994C, F.R.W.D., A.M.T. VMIG1 2.00 9/05/01 2,000 2,000,000 Propak-California Corp., Ser. 94B, F.R.W.D., A.M.T. A-1+(d) 1.95 9/05/01 1,700 1,700,000 Sutter Health, Ser. 176, F.R.W.D., F.S.A., C.O.P. (cost $10,595,000; purchased 7/05/01) A-1+(d) 2.75 6/20/02 10,000(f) 10,595,000 Contra Costa Cnty., Merrithew Mem. Hosp., Ser. 154, F.R.W.D., M.B.I.A. VMIG1 1.75 9/06/01 5,995 5,995,000 East Bay Muni. Util. Dist. Wtr. Sys. Rev., Ser. 1996, F.G.I.C. NR 6.00 6/01/02 600 612,897 Irvine Ranch Wtr. Dist., Cap. Impvt. Proj., Ser. 86, F.R.D.D., C.O.P. VMIG1 2.30 9/04/01 300 300,000 Kern Cnty. Superintendent of Schs., Master Lease, Ser. 96A, F.R.W.D. A-1+(d) 1.90 9/06/01 1,615 1,615,000 Kern High Sch. Dist., G.O., Ser. 14, M.B.I.A., F.R.W.D. VMIG1 1.90 9/06/01 2,500 2,500,000 Lassen Muni. Util. Dist. Rev., Refunding Rev., Ser. 96A, F.R.W.D., F.S.A., A.M.T. VMIG1 2.05 9/06/01 6,100 6,100,000
See Notes to Financial Statements 7 Prudential California Municipal Fund California Money Market Series Portfolio of Investments as of August 31, 2001 Cont'd.
Moody's Principal Rating Interest Maturity Amount Value Description (a) (Unaudited) Rate Date (000) (Note 1) ---------------------------------------------------------------------------------------------------------- Loma Linda Hosp. Rev., Loma Linda Univ. Med. Cntr., Ser. 99A, A.M.B.A.C. NR 3.85% 12/01/01 $ 1,000 $ 1,001,934 Los Angeles Cnty. Sch. Pooled Fin. Prog., G.O., Ser. 1100, F.S.A. SP1+(d) 3.50 7/01/02 2,250 2,264,909 Los Angeles Comm. Redev. Agcy., Multi-Family Hsg. Rev., Ser. 2001A, A.M.T. A-1+(d) 2.50 11/08/01 5,000 5,000,000 Los Angeles Dept. of Wtr. & Pwr., Waterworks Rev., Ser. 01B3, F.R.W.D. VMIG1 1.85 9/06/01 1,700 1,700,000 Ser. 01B4, F.R.W.D. VMIG1 1.70 9/06/01 5,000 5,000,000 Ser. 99L, F.G.I.C. VMIG1 1.96 9/05/01 1,700(c) 1,700,000 Los Angeles Ind. Dev. Auth. Apparel Prod. Svcs., Ser. 00A, F.R.W.D., A.M.T. A-1+(d) 2.00 9/05/01 2,150 2,150,000 Los Angeles Multi-Family Rev., Fountain Park Proj., Ser. 1999P, A.M.T., F.R.W.D., F.N.M.A. A-1+(d) 1.85 9/06/01 4,400 4,400,000 Los Angeles Single Family Home Mortg. Rev., Ser. 2001B, A.M.T. SP-1+(d) 2.75 6/01/02 7,000 7,001,100 Los Angeles Wastewater Sys. Rev., Ser. 1993A, M.B.I.A. NR 9.00 6/01/02 1,000 1,046,537 Metropolitan Wtr. Dist. So. Cal., Waterworks Rev., Ser. 00B-3, F.R.D.D. VMIG1 2.30 9/04/01 5,400 5,400,000 Waterworks Rev., Ser. 99O, M.E.R.L.O.T. VMIG1 1.96 9/05/01 7,500 7,500,000 Millbrae Elem. Sch. Dist., Fin. Proj., Ser, 1992, C.O.P. NR 6.90 3/01/02 1,480(c) 1,536,440 Modesto Wtr. Sys. Improv. Proj., Ser. 1992, A.M.B.A.C., C.O.P. NR 6.25 10/01/01 1,905(c) 1,947,999 Napa Wtr. Rev., Ser. 01, M.B.I.A. NR 3.25 5/01/02 1,020 1,022,973 Newport Beach Rev., Hoag Mem. Hosp., Ser. 99A, F.R.W.D. VMIG1 1.65 9/05/01 1,300 1,300,000 Oakland Rev., Ser. 00M, F.R.W.D.S., A.M.B.A.C., M.E.R.L.O.T. VMIG1 1.96 9/05/01 1,500 1,500,000
8 See Notes to Financial Statements Prudential California Municipal Fund California Money Market Series Portfolio of Investments as of August 31, 2001 Cont'd.
Moody's Principal Rating Interest Maturity Amount Value Description (a) (Unaudited) Rate Date (000) (Note 1) ---------------------------------------------------------------------------------------------------------- Ontario Rev., Hsg. Fin., Ser. 97A, F.R.W.D., A.M.T. A-1+(d) 2.00% 9/06/01 $ 2,900 $ 2,900,000 Orange Cnty. Hsg. Auth., Apart. Dev. Rev., Oasis Martinique - I, Ser. 981, F.R.W.D., F.N.M.A. A-1+(d) 1.80 9/06/01 1,900 1,900,000 Orange Cnty. Local Trans. Auth., Sales Tax Rev., Ser. 92, F.G.I.C., R.I.B.S. NR 6.10 2/15/02 1,000(c) 1,033,264 Palm Springs, Muni. Golf Course Expansion Proj., Ser. 91, C.O.P. NR 7.40 11/01/01 1,155(c) 1,186,213 Puerto Rico Elec. Pwr. Auth., Muni. Sec. Trust Recpts., Ser. SGA 43, F.R.W.D., M.B.I.A. A-1+(d) 1.75 9/05/01 6,100 6,100,000 Puerto Rico Gov. Dev. Bank, T.E.C.P. A-1+(d) 2.25 9/20/01 1,000 1,000,000 T.E.C.P. A-1+(d) 2.25 9/28/01 6,000 6,000,000 Ser. 95, T.E.C.P. A-1+(d) 2.30 9/26/01 7,690 7,690,000 Puerto Rico Highway & Tran. Auth., Muni. Secs. Trust Certif., Ser. 2000-91, F.R.D.D., M.B.I.A. A-1+(d) 2.45 9/04/01 3,700 3,700,000 Puerto Rico Highway & Tran. Auth., Transportation Rev., Ser. FFF, M.B.I.A., M.E.R.L.O.T. VMIG1 1.91 9/05/01 2,500 2,500,000 Puerto Rico Ind. Tourist Ed. Med. & Environmental Ctrl. Facs., Bristol-Myers Squibb Proj., Ser. 2000, F.R.W.D., A.M.T. P-1 1.90 9/06/01 4,400 4,400,000 Roaring Fork Muni. Prods. LLC, Rural Home Mtg. Fin. Auth., Ser. 01-2, F.R.W.D., A.M.T., F.N.M.A. A-1+(d) 2.01 9/06/01 12,160 12,160,000 Sacramento Hsg. Auth., Ser. 22, F.R.W.D., A.M.T., F.N.M.A. A-1+(d) 2.01 9/06/01 7,245 7,245,000 Sacramento Cnty. Fin. Auth. Rev., Ser. 91 NR 6.80 11/01/01 1,000(c) 1,026,115 Sacramento Cnty. Sanit. Dist., Ser. SSS, F.R.W.D., M.E.R.L.O.T. VMIG1 1.96 9/05/01 2,300(c) 2,300,000
See Notes to Financial Statements 9 Prudential California Municipal Fund California Money Market Series Portfolio of Investments as of August 31, 2001 Cont'd.
Moody's Principal Rating Interest Maturity Amount Value Description (a) (Unaudited) Rate Date (000) (Note 1) ---------------------------------------------------------------------------------------------------------- Sacramento Cnty., Ser. 2000, T.R.A.N. MIG1 5.25% 10/04/01 $ 2,500 $ 2,504,618 San Diego Cnty. Sch. Dist., Ser. SGA 120, F.R.W.D., M.B.I.A. A-1+(d) 1.80 9/05/01 5,000 5,000,000 San Diego Cnty. Unified Port Dist., Lindbergh Field, Ser. 1311 A-1+(d) 2.25 10/09/01 3,450 3,450,000 San Francisco City & Cnty. Redev. Agency, Multi-Family Rev., Bayside Village Proj., Ser. 1985B, F.R.W.D. VMIG1 1.84 9/06/01 5,000 5,000,000 San Jose Fin. Auth. Rev., Convention Ctr. Ref. Proj., Ser. C Aa3 6.40 9/01/01 5,000 5,100,000 San Jose Redev. Agency Rev., Merged Area Redev. Proj., Ser. 1996A, F.R.W.D. A-1+(d) 1.70 9/05/01 8,600 8,600,000 Tax Alloc., Ser. 149, F.R.W.D., A.M.T., M.B.I.A. VMIG1 1.90 9/06/01 645 645,000 San Leandro Multi-Family Hsg. Rev., Carlton Plaza of San Leandro., Ser. A, F.R.W.D., A.M.T. A-1+(d) 2.30 9/06/01 4,000 4,000,000 San Mateo Cnty., Multi-Family Hsg. Rev., Pacific Oaks Apts. Proj., Ser. 87A, F.R.W.D., A.M.T. VMIG1 2.10 9/05/01 2,600 2,600,000 Santa Ana Hsg. Auth., Cornerstone Village Apts., Ser. 2001B, A.M.T. A-1+(d) 2.60 12/31/01 5,000 5,000,000 Torrance, Hosp. Rev., Little Company of Mary Hospital, Ser. 92, F.R.W.D. A-1+(d) 1.85 9/06/01 5,000 5,000,000 Tri City Hosp. Dist. Rev., Ser. 1991, M.B.I.A. NR 7.50 2/01/02 3,000(c) 3,114,294 Walnut Valley Unified Sch. Dist., Sch. Fac. Bridge Fdg. Prog., Ser. 1998, F.R.W.D., F.S.A., C.O.P. VMIG1 2.25 9/06/01 6,235 6,235,000 ------------
10 See Notes to Financial Statements Prudential California Municipal Fund California Money Market Series Portfolio of Investments as of August 31, 2001 Cont'd.
Moody's Principal Rating Interest Maturity Amount Value Description (a) (Unaudited) Rate Date (000) (Note 1) ---------------------------------------------------------------------------------------------------------- Total Investments 104.2% (cost $306,601,017;(e)) $306,601,017 Liabilities in excess of other assets (4.2)% (12,415,466) ------------ Net Assets 100% $294,185,551 ------------ ------------
------------------------------ (a) The following abbreviations are used in portfolio descriptions: A.M.B.A.C.--American Municipal Bond Assurance Corporation. A.M.T.--Alternative Minimum Tax. C.O.P.--Certificate of Participation. F.G.I.C.--Financial Guaranty Insurance Company. F.N.M.A.--Federal National Mortgage Association. F.R.D.D.--Floating Rate (Daily) Demand Note (b). F.R.W.D.--Floating Rate (Weekly) Demand Note (b). F.R.W.D.S.--Floating Rate (Weekly) Demand Synthetic Note(b). F.S.A.--Financial Security Assurance. G.O.--General Obligation. LLC--Limited Liability Company. M.B.I.A.--Municipal Bond Insurance Association. M.E.R.L.O.T.--Municipal Exempt Receipt--Liquid Optional Tender. R.I.B.S.--Residual Interest Bonds. T.E.C.P.--Tax-Exempt Commercial Paper. T.R.A.N.--Tax & Revenue Anticipation Note. (b) For purposes of amortized cost valuation, the maturity date of Floating Rate Demand Notes is considered to be the later of the next date on which the security can be redeemed at par, or the next date on which the rate of interest is adjusted. (c) Prerefunded issues are secured by escrowed cash and/or direct U.S. guaranteed obligations. (d) Standard & Poor's Rating. (e) The cost of securities for federal income tax purposes is substantially the same as for financial reporting purposes. (f) Indicates a security restricted as to resale. The aggregate cost of such securities was $10,595,000. The aggregate value of $10,595,000 was approximately 3.6% of net assets. 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 11 Prudential California Municipal Fund California Money Market Series Statement of Assets and Liabilities
August 31, 2001 ---------------------------------------------------------------------------------------- ASSETS Investments, at amortized cost which approximates market value $ 306,601,017 Cash 66,644 Receivable for Series shares sold 2,884,667 Interest receivable 1,470,571 Other assets 5,206 --------------- Total assets 311,028,105 --------------- LIABILITIES Payable for Series shares reacquired 10,341,637 Payable for investments purchased 6,236,153 Management fee payable 125,794 Dividends payable 60,431 Accrued expenses 33,205 Distribution fee payable 31,448 Deferred trustee's fees 13,886 --------------- Total liabilities 16,842,554 --------------- NET ASSETS $ 294,185,551 --------------- --------------- Net assets were comprised of: Shares of beneficial interest, at $.01 par value $ 2,941,856 Paid-in capital in excess of par 291,243,695 --------------- Net assets, August 31, 2001 $ 294,185,551 --------------- --------------- Net asset value, offering price and redemption price per share ($294,185,551 / 294,185,551 shares of beneficial interest issued and outstanding; unlimited number of shares authorized) $1.00 --------------- ---------------
12 See Notes to Financial Statements Prudential California Municipal Fund California Money Market Series Statement of Operations
Year Ended August 31, 2001 ---------------------------------------------------------------------------------------- NET INVESTMENT INCOME Income Interest and discount earned $ 9,344,112 --------------- Expenses Management fee 1,407,374 Distribution fee 351,843 Custodian's fees and expenses 73,000 Transfer agent's fees and expenses 65,000 Reports to shareholders 50,000 Legal fees and expenses 38,000 Registration fees 36,000 Trustees' fees and expenses 14,000 Audit fee 13,000 Miscellaneous 5,461 --------------- Total expenses 2,053,678 Less: Custodian fee credit (Note 1) (2,518) --------------- Net expenses 2,051,160 --------------- Net investment income 7,292,952 REALIZED LOSS ON INVESTMENTS Net realized loss on investment transactions (3,350) --------------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 7,289,602 --------------- ---------------
See Notes to Financial Statements 13 Prudential California Municipal Fund California Money Market Series Statement of Changes in Net Assets
Year Ended August 31, ---------------------------------- 2001 2000 ---------------------------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS Operations Net investment income $ 7,292,952 $ 8,313,848 Net realized loss on investment transactions (3,350) (24,550) --------------- --------------- Net increase in net assets resulting from operations 7,289,602 8,289,298 --------------- --------------- Dividends and distributions (Note 1) (7,289,602) (8,289,298) --------------- --------------- Series share transactions (at $1 per share) Net proceeds from shares sold 1,339,520,004 1,616,264,808 Net asset value of shares issued in reinvestment of dividends and distributions 7,060,745 8,005,325 Cost of shares reacquired (1,327,962,334) (1,614,175,628) --------------- --------------- Net increase in net assets from Series share transactions 18,618,415 10,094,505 --------------- --------------- Total increase 18,618,415 10,094,505 NET ASSETS Beginning of year 275,567,136 265,472,631 --------------- --------------- End of year $ 294,185,551 $ 275,567,136 --------------- --------------- --------------- ---------------
14 See Notes to Financial Statements Prudential California Municipal Fund California Money Market Series Notes to Financial Statements Prudential California Municipal Fund (the 'Fund') is registered under the Investment Company Act of 1940, as an open-end management investment company. The Fund was organized as a Massachusetts business trust on May 18, 1984 and consists of three series: California Series, California Income Series and California Money Market Series (the 'Series'). These financial statements relate to California Money Market Series. The financial statements of the other series are not presented herein. The Series commenced investment operations on March 3, 1989. The Series is diversified and seeks to achieve its investment objective of obtaining the maximum amount of income exempt from California state and federal income taxes with the minimum risk by investing in 'investment grade' tax-exempt securities having a maturity of 13 months or less and whose ratings are within the two highest ratings categories by a nationally recognized statistical rating organization or, if not rated, are of comparable quality. The ability of the issuers of the securities held by the Series to meet their obligations may be affected by economic developments in a specific state, industry or region. Note 1. Accounting Policies The following is a summary of significant accounting policies followed by the Fund, and the Series, in the preparation of its financial statements. Securities Valuations: Portfolio securities of the Series are valued at amortized cost, which approximates market value. The amortized cost method of valuation involves valuing a security at its cost on the date of purchase and thereafter assuming a constant amortization to maturity of any discount or premium. The Series held illiquid securities, including those which are restricted as to disposition under securities law ('restricted securities'). The restricted security held by the Series at August 31, 2001 includes registration rights under which the Series may demand registration by the issuer. Restricted securities, sometimes referred to as private placements, are valued pursuant to the valuation procedures noted above. All securities are valued as of 4:30 p.m., New York time. Securities Transactions and Net Investment Income: Securities transactions are recorded on the trade date. Realized gains (losses) on sales of securities are calculated on the identified cost basis. Interest income is recorded on the accrual basis. The Series amortizes premiums and accretes original issue discount on purchases of portfolio securities as adjustments to interest income. Expenses are recorded on the accrual basis which may require the use of certain estimates by management. Federal Income Taxes: For federal income tax purposes, each Series in the Fund is treated as a separate taxpaying entity. It is the Series' policy to meet the 15 Prudential California Municipal Fund California Money Market Series Notes to Financial Statements Cont'd. requirements of the Internal Revenue Code applicable to regulated investment companies and to distribute all of its net income and capital gains, if any, to shareholders. Therefore, no federal income tax provision is required. Dividends: The Series declares daily dividends from net investment income and net realized short-term capital gains or losses. Payment of dividends is made monthly. Income distributions and capital gain distributions are determined in accordance with income tax regulations which may differ from generally accepted accounting principles. Custody Fee Credits: The Fund has an arrangement with its custodian bank, whereby uninvested monies earn credits which reduce the fees charged by the custodian. Note 2. Agreements The Fund has a management agreement with Prudential Investments Fund Management LLC ('PIFM'). Pursuant to this agreement, PIFM has responsibility for all investment advisory services and supervises the subadviser's performance of such services. Effective November 1, 2001, PIFM's name will change to Prudential Investments LLC. PIFM has entered into a subadvisory agreement with Prudential Investment Management, Inc. ('PIM'), formerly known as Prudential Investment Corporation. The subadvisory agreement provides that PIM will furnish investment advisory services in connection with the management of the Fund. In connection therewith, PIM 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 PIM's performance of such services. PIFM pays for the services of PIM, the cost of compensation of officers of the Fund, occupancy and certain clerical and bookkeeping costs of the Fund. The Fund bears all other costs and expenses. The management fee paid PIFM is computed daily and payable monthly, at an annual rate of .50 of 1% of the average daily net assets of the Series. The Series has a distribution agreement with Prudential Investment Management Services LLC ('PIMS') which acts as the distributor of the Series. The Series compensates PIMS for distributing and servicing the Series' shares pursuant to a plan of distribution regardless of expenses actually incurred by PIMS. The Series pays PIMS for distributing and servicing the Series' shares pursuant to the plan of distribution at an annual rate of .125 of 1% of the Series' average daily net assets. The distribution fee is accrued daily and payable monthly. PIM, PIMS and PIFM are indirect, wholly-owned subsidiaries of The Prudential Insurance Company of America ('Prudential'). 16 Prudential California Municipal Fund California Money Market Series Notes to Financial Statements Cont'd. 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 August 31, 2001, the Series incurred fees of approximately $61,900 for the services of PMFS. As of August 31, 2001, approximately $5,300 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. 17 Prudential California Municipal Fund California Money Market Series Financial Highlights
Year Ended August 31, 2001 ---------------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE: Net asset value, beginning of year $ 1.00 Net investment income and net realized gains .03 Dividends and distributions (.03) --------------- Net asset value, end of year $ 1.00 --------------- --------------- TOTAL RETURN(a): 2.65% RATIOS/SUPPLEMENTAL DATA: Net assets, end of year (000) $ 294,186 Average net assets (000) $ 281,475 Ratios to average net assets: Expenses, including distribution and service (12b-1) fees .73% Expenses, excluding distribution and service (12b-1) fees .60% Net investment income 2.59%
------------------------------ (a) Total return includes reinvestment of dividends and distributions. 18 See Notes to Financial Statements Prudential California Municipal Fund California Money Market Series Financial Highlights Cont'd.
Year Ended August 31, ------------------------------------------------------------------------------------- 2000 1999 1998 1997 ------------------------------------------------------------------------------------- $ 1.00 $ 1.00 $ 1.00 $ 1.00 .03 .02 .03 .03 (.03) (.02) (.03) (.03) ---------------- ---------------- ---------------- ---------------- $ 1.00 $ 1.00 $ 1.00 $ 1.00 ---------------- ---------------- ---------------- ---------------- ---------------- ---------------- ---------------- ---------------- 2.83% 2.34% 2.81% 2.85% $275,567 $265,473 $301,278 $285,280 $299,602 $289,155 $287,250 $277,720 .70% .71% .72% .73% .58% .59% .60% .61% 2.77% 2.30% 2.77% 2.80%
See Notes to Financial Statements 19 Prudential California Municipal Fund California Money Market Series Report of Independent Accountants To the Shareholders and Board of Trustees of Prudential California Municipal Fund, California Money Market Series In our opinion, the accompanying statement of assets and liabilities, including the portfolio of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of Prudential California Municipal Fund, California Money Market Series (the 'Fund', one of the portfolios constituting Prudential California Municipal Fund) at August 31, 2001, 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 five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as 'financial statements') are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at August 31, 2001 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP New York, New York October 19, 2001 20 Prudential California Municipal Fund California Money Market Series Federal Income Tax Information (Unaudited) We are required by the Internal Revenue Code to advise you within 60 days of the Series' fiscal year end (August 31, 2001) as to the federal tax status of dividends and distributions paid by the Series during such fiscal year. Accordingly, we are advising you that for the year ended August 31, 2001, dividends paid from net investment income totaling $.03 per share were all federally tax-exempt interest dividends. 21 FOR MORE INFORMATION Prudential Mutual Funds Gateway Center Three 100 Mulberry Street Newark, NJ 07102-4077 (800) 225-1852 Visit Prudential's website at: www.prudential.com TRUSTEES 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 Judy A. Rice, Vice President Grace C. Torres, Treasurer Deborah A. Docs, Secretary William V. Healey, Assistant Secretary MANAGER Prudential Investments LLC Gateway Center Three 100 Mulberry Street Newark, NJ 07102-4077 INVESTMENT ADVISER Prudential Investment Management, Inc. Prudential Plaza Newark, NJ 07102-3777 DISTRIBUTOR Prudential Investment Management Services LLC Gateway Center Three, 14th Floor 100 Mulberry Street 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 Shearman & Sterling 599 Lexington Avenue New York, NY 10022 Fund Symbols NASDAQ CUSIP PCLXX 744313503 MF139E (LOGO) Printed on Recycled Paper