-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WqhrY2B/koqw1Jw9NpiMqT/1bG+cTdLeTwMkIM1r0xex7ttT3Zkbun/JUvyrkPkM StOE+4+uSs28zwp3D1NIdQ== 0000898733-02-000252.txt : 20020426 0000898733-02-000252.hdr.sgml : 20020426 ACCESSION NUMBER: 0000898733-02-000252 CONFORMED SUBMISSION TYPE: N-30D PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20020228 FILED AS OF DATE: 20020426 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PRUDENTIAL CALIFORNIA MUNICIPAL FUND CENTRAL INDEX KEY: 0000746518 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: 02621809 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 mf15480.txt PRU CALIFORNIA MUNICIPAL FUND -- 4/26/02 SEMIANNUAL REPORT FEBRUARY 28, 2002 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 federal 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 2/28/02 44.0% Revenue Bonds 52.9 General Obligation Bonds 2.2 Prerefunded 0.9 Miscellaneous Credit Quality Expressed as a percentage of total investments as of 2/28/02 4.1% AAA 53.6 AAA Insured 9.6 AA 12.2 A 15.8 BBB 4.7 Not Rated* (Prudential ratings used): 1.0 AAA 1.4 BBB 2.3 B *Not rated bonds are believed to be of comparable quality to rated investments. Ten Largest Issuers Expressed as a percentage of net assets as of 2/28/02 10.4% Santa Margarita/Dana Point Authority 7.7 Orange County Local Transportation Authority 4.9 Long Beach Harbor Revenue 4.3 Metro Water District of Southern California 4.1 Southern California Public 4.0 Chula Vista 3.7 San Bernardino County 3.4 South Orange County Public Finance Authority 2.9 California Infrastructure & Economic Development 2.4 Long Beach Redevelopment Agency Holdings are subject to change. www.PruFN.com (800) 225-1852 Semiannual Report February 28, 2002 Cumulative Total Returns1 As of 2/28/02
Six Months One Year Five Years Ten Years Since Inception2 Class A 1.14% 5.58% 34.54% 89.18% (88.87) 123.73% (123.36) Class B 1.02 5.32 32.52 82.84 (82.53) 245.63 (236.79) Class C 0.90 5.07 30.89 N/A 53.52 (53.26) Class Z 1.26 5.83 35.83 N/A 41.48 (41.37) Lipper CA Muni Debt Funds Avg.3 0.80 5.49 31.05 86.75 *** Lehman Brothers Muni Bond Index4 1.99 6.84 36.15 95.13 ****
Average Annual Total Returns1 As of 3/31/02 One Year Five Years Ten Years Since Inception2 Class A -0.82% 5.14% 5.94% (5.92) 6.33% (6.31) Class B -2.76 5.32 5.90 (5.89) 7.17 (7.00) Class C -0.14 5.02 N/A 5.24 (5.22) Class Z 2.42 5.99 N/A 5.95 (5.93) Distributions and Yields As of 2/28/02
Total Dividends and Distributions 30-Day Taxable Equivalent Yield5 at Tax Rates of Paid for Six Months SEC Yield 36% 38.6% Class A $0.37 3.60% 6.20% 6.46% Class B $0.36 3.46 5.96 6.21 Class C $0.34 3.18 5.48 5.71 Class Z $0.39 3.95 6.80 7.09
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 shares redeemed within 18 months of purchase. Class Z shares are not subject to a sales charge or distribution and service (12b- 1) fees. Without waiver of fees and/or expense subsidization, the Series' cumulative and average annual total returns would have been lower, as indicated in parentheses. The cumulative and average annual total returns in the tables above do not reflect the deduction of taxes that a shareholder would pay on fund distributions or following the redemption of fund shares. 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 six-month, one-year, five- year, ten-year, and since inception periods in the Lipper California Municipal Debt Funds category. Single-State Municipal Debt Funds limit their assets to those securities that are exempt from taxation in a specified state (double tax-exempt) or city (triple tax- exempt). 4 The Lehman Brothers Municipal 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. 5 Taxable equivalent yields reflect federal and applicable state tax rates. Investors cannot invest directly in an index. The returns for the Lipper Average and the Lehman Brothers Municipal Bond Index would be lower if they included the effect of sales charges or taxes. ***Lipper Since Inception returns are 123.47% for Class A, 289.59% for Class B, 56.91% for Class C, and 35.30% for Class Z, based on all funds in each share class. ****Lehman Brothers Municipal Bond Index Since Inception returns are 136.50% for Class A, 337.12% for Class B, 343% for Class C, and 29.49% for Class Z, based on all funds in each share class. 1 (LOGO) April 17, 2002 DEAR SHAREHOLDER, Our fiscal half-year ended February 28, 2002, was a noteworthy time in the municipal bond market. The U.S. economy slid into a recession for the first time in a decade even as the Federal Reserve (the Fed) continued to cut short-term interest rates in order to stimulate economic growth. In turn, state and local governments took advantage of the lower rate environment by issuing a huge volume of bonds that at times hurt prices of outstanding bonds. Despite these obstacles, municipal bonds managed to return 1.99% over the period, outpacing the -1.67% return of the stock market as measured by the Lehman Brothers Municipal Bond and S&P 500 Composite index averages, respectively. These numbers reflect a historic precedent concerning the behaviors of the equity and bond markets. Over time, these markets have moved counter to one another--that is, when one moves up, the other moves down, and vice versa. This underscores the importance of diversifying your investments among the different asset classes of fixed-income, equities, and cash. Your financial professional can help determine the suitability of these investments, given your risk profile and long-term goals, as well as the appropriate mix to help you meet your investment needs. The Series' investment adviser discusses developments in the municipal market and explains the Series' investments on the following pages. Sincerely, David R. Odenath, Jr., President Prudential California Municipal Fund 2 Prudential California Municipal Fund California Series Semiannual Report February 28, 2002 INVESTMENT ADVISER'S REPORT PERFORMANCE California Series' Class A shares returned 1.14% (without considering sales charges) for our six-month reporting period ended February 28, 2002, which exceeded the 0.80% return of its benchmark Lipper California Municipal Debt Fund Average. For investors subject to the Class A shares' one-time initial sales charge, the Class A shares returned -1.90 % for the same period. A CHALLENGING SIX MONTHS FOR MUNICIPAL BONDS The returns of the Series and its benchmark Lipper Average largely reflect the challenging conditions in the municipal bond market. Tax- exempt bonds faced two hurdles early in our reporting period. First, investors worried that declining short-term interest rates and lower taxes would eventually reinvigorate the U.S. economy and lead to higher interest rates. This belief caused them to demand higher yields on municipal bonds in the final two months of 2001, which drove bond prices lower. Second, state and local governments hurriedly issued bonds in the final two months of 2001 because they also feared that short-term rates would rise in 2002. This burgeoning supply of debt securities often outpaced investor demand, thereby weighing on municipal bond prices. OUR COUPON "BARBELL STRATEGY" Faced with this challenging market environment, we employed a barbell strategy in which the Series' assets were concentrated primarily in two types of municipal bond coupons. One side of our barbell consisted of intermediate-term bonds whose high coupon rates provided the Series with considerable interest income. Prices of these bonds tend to hold up relatively well when the municipal bond market sells off because investors want the solid income that they provide. The other side of the barbell consisted of zero coupon bonds. Zero coupon bonds are so named because they pay no interest and are sold at discounted prices to make up for their lack of periodic interest payments. Zero coupon bonds are the most interest-rate sensitive of all bonds, and perform better than other types of debt securities when interest rates decline and bond prices move higher. Thus, we held zero coupon bonds for their potential price appreciation. 3 Prudential California Municipal Fund California Series Semiannual Report February 28, 2002 As it turned out, both sides of our coupon barbell suffered in November and December 2001, though not to the same extent. Municipalities issued a barrage of bonds with high-coupon rates in late 2001 knowing that there was strong investor demand for them. However, the heavy supply temporarily hurt the prices of these bonds. Meanwhile, zero coupon bonds were hit hard by fears that an imminent economic recovery would drive interest rates higher. The Series' heavy exposure to zero coupon bonds, such as those of San Diego Unified School District due in 2019, hurt its performance on an absolute basis and in relation to its benchmark Lipper Average during our reporting period. REBALANCING OUR COUPON BARBELL In response to the bearish market conditions in late 2001, we sold some of the Series' zero coupon bonds in early 2002. We used the proceeds to purchase more bonds with high coupon rates. Prices of high coupon bonds began to improve in early 2002 as the "January effect" took hold. The January effect refers to an annual occurrence that drives municipal bond prices higher (and their yields lower) as investors reinvest cash from coupon payments, bond calls, and maturing bonds. During this time, municipal bond issuance slowed to a trickle as most state and local governments had not initiated borrowing for the new calendar year. Increased exposure to high coupon bonds helped the Series' Class A shares outperform their Lipper Average for our reporting period, without taking into account their one-time initial sales charge. HOSPITAL BONDS WERE HEALTHY As for sector selection, the Series' relative performance also benefited from its exposure to hospital bonds (primarily A-rated) that grew to approximately 9.0% of its total investments by the end of our reporting period. The hospital sector posted one of the highest returns in the tax-exempt market for the six months ended February 28, 2002, according to the Lehman Brothers Municipal Bond Index. The solid relative performance reflected improving business fundamentals and investor demand for higher-yielding assets. The "spread" or difference between yields on hospital bonds rated single-A and municipal bonds rated AAA compressed, indicating greater demand for A- rated hospital bonds. 4 www.PruFN.com (800) 225-1852 BUT CALIFORNIA GENERAL OBLIGATION BONDS WEAKENED Throughout our reporting period, we remained more deliberative than usual concerning the credit quality of the California securities that we purchased. California's financial health weakened amid the state's energy crisis that required the California Department of Water Resources to spend billions of dollars purchasing electricity for the state's investor-owned utilities. California's long- term general obligation (GO) bond rating had already been downgraded earlier in 2001 to A- plus from AA by Standard & Poor's, and to Aa3 from Aa2 by Moody's Investors Service. Moody's lowered California's GO bond rating again during our fiscal half-year to A1 from Aa3, noting that, among other factors, the economic slump hurt the state's revenue projections. LOOKING AHEAD We expect more California securities to be issued in 2002 than were issued in 2001. Plagued by revenue shortfalls, the Golden State and some of its municipalities will be inclined to borrow money, especially while interest rates are still at relatively low levels. Most notably, the state's Department of Water Resources hopes to sell approximately $11 billion of bonds. The majority of the bond proceeds will be used to repay the state's general fund for electricity purchased during the power shortage. The increased bond issuance may provide an opportunity to purchase debt securities issued in California at very attractive levels. Given our belief that the economy will continue to rebound during 2002, we will look to increase exposure to the single-family housing bond sector. These securities afford higher relative current yields and should benefit as the economy recovers and the risk of significant mortgage prepayments subsides. Prudential California Municipal Fund Management Team 5 SEMIANNUAL REPORT FEBRUARY 28, 2002 PRUDENTIAL CALIFORNIA MUNICIPAL FUND/ CALIFORNIA SERIES - -------------------------------------------------------- FINANCIAL STATEMENTS Prudential California Municipal Fund California Series Portfolio of Investments as of February 28, 2002 (Unaudited)
Principal Moody's Interest Maturity Amount Value Description (a) Rating Rate Date (000) (Note 1) - --------------------------------------------------------------------------------------------------------- LONG-TERM INVESTMENTS 96.8% Abag Fin. Auth. Rev., Schools of Sacred Heart, Ser. A Baa3 6.45% 6/01/30 $ 1,500 $ 1,576,875 Baldwin Park Pub. Fin. Auth. Rev., Tax Alloc. BBB(c) 7.05 9/01/14 1,020 1,163,993 Buena Park Cmnty. Redev. Agcy., Central Bus. Dist. Proj. BBB+(c) 7.10 9/01/14 2,500 2,579,275 California Health Facs. Fin. Auth. Rev., Kaiser Permanente, Ser. B A3 5.25 10/01/13 1,620 1,688,413 California Infrastructure & Economic Dev. Bank Rev., Kaiser Hosp. Asst. I-LLC, Ser. A A(c) 5.55 8/01/31 3,735 3,794,237 California St. G.O. A1 5.75 5/01/30 1,000 1,060,620 California St. Cmntys. Dev. Auth., C.O.P. Aaa 5.30 12/01/15 2,800 2,958,704 California St. Dept. Vet. Affairs Home Pur. Rev., Ser. C, A.M.T. Aa2 5.50 12/01/19 2,000 2,042,040 California St. Hsg. Fin. Agcy. Rev., Sngl. Fam. Mtge., Ser. A Aa2 Zero 2/01/15 8,420 2,698,694 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 2,121,080 Central California Joint Pwrs. Health Fin. Auth., C.O.P. Baa1 6.00 2/01/30 1,000 1,019,410 Chula Vista Redev. Agcy., Bayfront Tax Alloc. BBB+(c) 7.625 9/01/24 4,500 5,131,215 Commerce California Cmnty. Dev. Comm., Rfdg. Merged Redev. Proj., Ser. A NR 5.65 8/01/18 1,175 1,179,312 East Bay Mun. Util. Wtr. Sys. Rev., Rfdg. Sub., F.G.I.C. Aaa 5.00 6/01/15 1,000 1,035,770 Foothill/Eastern Trans. Corridor Agcy., Toll Rd. Rev. AAA Zero 1/01/16 5,000 2,589,700 Toll Rd. Rev. AAA Zero 1/01/18 2,950 1,344,964 Grass Valley Redev. Agcy., Redev. Proj. BBB(c) 6.40 12/01/34 2,000 2,101,300
See Notes to Financial Statements 7 Prudential California Municipal Fund California Series Portfolio of Investments as of February 28, 2002 (Unaudited) Cont'd.
Principal Moody's Interest Maturity Amount Value Description (a) Rating Rate Date (000) (Note 1) - --------------------------------------------------------------------------------------------------------- Kings Cnty. Wst. Mgmt. Auth., Solid Wst. Rev., A.M.T. BBB(c) 7.20% 10/01/14 $ 1,150 $ 1,228,856 Long Beach Harbor Rev., Ser. A, A.M.T., F.G.I.C. Aaa 6.00 5/15/16 5,500 6,358,935 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) 3,131,400 Los Angeles Cnty., C.O.P., Correctional Facs. Proj., M.B.I.A. Aaa Zero 9/01/10 3,770 2,698,264 Los Angeles Conv. & Exhib. Ctr. Auth., C.O.P. Aaa 9.00 12/01/10 1,250(e) 1,545,375 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 1,098,780 Waterworks Rev. Rfdg., Ser. A Aa2 5.75 7/01/21 4,000 4,529,480 Mojave Desert Solid Wst. Victor Vally Materials, Recov. Fac., A.M.T. Baa1 7.875 6/01/20 1,175 1,264,946 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 9,216,160 Spec. Tax Rev., R.I.B.S. Aa2 9.454 2/14/11 750 975,937 Puerto Rico Comnwlth., Ser. 642A, G.O., M.B.I.A. NR 10.138 7/01/10 1,000 1,276,460 Puerto Rico Ind. Tourist Edl., Cogen. Fac. AES Proj., A.M.T. Baa2 6.625 6/01/26 2,000 2,079,940 Rancho Cucamonga California Redev., Agcy, Tax Alloc. Aaa 5.375 9/01/25 2,000 2,076,140 Redding Elec. Sys. Rev., C.O.P., Linked S.A.V.R.S. & R.I.B.S. Aaa 11.235 7/01/22 1,750 2,248,750 R.I.B.S., M.B.I.A. Aaa 6.368(d) 7/01/22 50 57,152 San Bernardino Cnty., Med. Ctr. Fin. Proj., C.O.P., M.B.I.A. Aaa 5.50 8/01/22 4,400 4,846,556 San Diego Redev., Agcy. Tax Alloc. North Bay Redev. Baa1 5.875 9/01/29 1,000 1,022,140
8 See Notes to Financial Statements Prudential California Municipal Fund California Series Portfolio of Investments as of February 28, 2002 (Unaudited) Cont'd.
Principal Moody's Interest Maturity Amount Value Description (a) Rating Rate Date (000) (Note 1) - --------------------------------------------------------------------------------------------------------- San Diego Unified Sch. Dist. Election of 1998, Ser. B Aaa 6.00% 7/01/19 $ 1,000 $ 1,160,730 San Francisco City & Cnty., Arpts. Commission Int'l. Airport Rev., A.M.T., F.G.I.C. Aaa 6.25 5/01/20 1,000 1,075,720 Redev. Agcy., Lease Rev., Cap. Apprec. A1 Zero 7/01/09 2,000 1,485,720 San Joaquin Hills Trans. Corridor Agcy., Toll Rd. Rev. Aaa Zero 1/15/32 5,000 957,150 Santa Margarita/Dana Point Auth., Impvt. Dists. 3, Ser. B, M.B.I.A. Aaa 7.25 8/01/08 2,500 3,059,325 Impvt. Dists. 3, Ser. A, M.B.I.A Aaa 7.25 8/01/09 1,000 1,237,400 Impvt. Dists. 3, Ser. B, M.B.I.A. Aaa 7.25 8/01/09 1,400 1,732,360 Impvt. Dists. 3, Ser. B, M.B.I.A. Aaa 7.25 8/01/14 1,000 1,286,110 Ser. B, M.B.I.A., Rev. Aaa 7.25(d) 8/01/12 3,000 3,818,490 Ser. A, M.B.I.A., Rev. Aaa 7.25(d) 8/01/13 1,990 2,542,484 So. Orange Cnty. Pub. Fin. Auth., Spec. Tax Rev., M.B.I.A. Aaa 7.00 9/01/11 3,500 4,386,760 So. Tahoe Joint Pwrs. Fin. Auth. Rev., Rfdg. So. Tahoe Redev. Proj., Ser. A BBB-(c) 6.00 10/01/28 2,000 2,025,400 Southern California Pub. Pwr. Auth., Proj. Rev. A2 6.75 7/01/10 2,265 2,711,839 Proj. Rev. A2 6.75 7/01/11 1,195 1,443,799 Proj. Rev. A2 6.75 7/01/13 1,000 1,217,010 Proj. Rev., A.M.B.A.C. Aaa Zero 7/01/16 7,925 4,008,228 Proj. Rev., Ser. A, F.G.I.C. Aaa Zero 7/01/12 7,080 4,639,099 Stockton Cmnty. Facs. Dist. No. 90-2, Brookside Estates NR 6.20 8/01/15 700 729,267 Sulphur Springs Union Sch. Dist., Ser. A, M.B.I.A. Aaa Zero 9/01/09 2,000 1,489,920 Tobacco Settlement Fin. Corp. Virgin Islands, Tob. Settlement Asset-Bkd. A3 5.00 5/15/31 1,000 967,130 Torrance, California Hosp. Rev., Torrance Memorial Med. Center A A1 6.00 6/01/22 2,000 2,114,360
See Notes to Financial Statements 9 Prudential California Municipal Fund California Series Portfolio of Investments as of February 28, 2002 (Unaudited) Cont'd.
Principal Moody's Interest Maturity Amount Value Description (a) Rating Rate Date (000) (Note 1) - --------------------------------------------------------------------------------------------------------- Vacaville Cmnty. Redev. Agcy., Cmnty. Hsg. Fin. Multi-fam. A-(c) 7.375% 11/01/14 $ 1,110 $ 1,287,245 Victor Valley Union High Sch. Dist., G.O., M.B.I.A. Aaa Zero 9/01/09 2,075 1,564,114 Walnut Valley Unified Sch. Dist., M.B.I.A. Aaa 6.00 8/01/15 1,870 2,181,187 ------------ Total long-term investments (cost $117,525,281) 130,861,720 ------------ SHORT-TERM INVESTMENTS 2.2% California Poll. Ctrl. Fin. Auth. Res. Recov. Rev., OMS Equity Stanislaus Proj. A-1+(c) 1.45 3/01/02 1,500 1,500,000 Mun. Secs. Tr. Cert., Class A, F.G.I.C. A-1(c) 1.30 3/01/02 200 200,000 Roaring Fork Mun. Prods. LLC, Class A NR 1.14 3/07/02 1,300 1,300,000 ------------ Total short-term investments (cost $3,000,000) 3,000,000 ------------ Total Investments 99.0% (cost $120,525,281; Note 5) 133,861,720 Other assets in excess of liabilities 1.0% 1,291,589 ------------ Net Assets 100% $135,153,309 ------------ ------------
10 See Notes to Financial Statements Prudential California Municipal Fund California Series Portfolio of Investments as of February 28, 2002 (Unaudited) 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.O.P.--Certificates of Participation. F.G.I.C.--Financial Guaranty Insurance Company. G.O.--General Obligation. 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 $3,131,400 which represents approximately 2.3% of net assets. (c) Standard & Poor's Rating. (d) Inverse floating rate bond. The coupon is inversely indexed to a floating rate. The rate shown is the rate at year end. (e) Partial principal amount pledged as collateral for financial future 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 (Unaudited) February 28, 2002 - ------------------------------------------------------------------------------ ASSETS Investments, at value (cost $120,525,281) $ 133,861,720 Interest receivable 1,720,316 Receivable for Series shares sold 114,671 Other assets 2,646 ----------------- Total assets 135,699,353 ----------------- LIABILITIES Payable to custodian 198,100 Payable for Series shares reacquired 118,717 Accrued expenses 79,450 Dividends payable 51,675 Management fee payable 51,481 Distribution fee payable 30,873 Deferred trustee's fees 14,077 Due to broker-variation margin 1,671 ----------------- Total liabilities 546,044 ----------------- NET ASSETS $ 135,153,309 ----------------- ----------------- Net assets were comprised of: Shares of beneficial interest, at par $ 111,480 Paid-in capital in excess of par 121,488,004 ----------------- 121,599,484 Overdistribution of net investment income (5,470) Accumulated net realized gain on investments 223,389 Net unrealized appreciation on investments 13,335,906 ----------------- Net assets, February 28, 2002 $ 135,153,309 ----------------- ----------------- 12 See Notes to Financial Statements Prudential California Municipal Fund California Series Statement of Assets and Liabilities (Unaudited) Con't.
February 28, 2002 - ---------------------------------------------------------------------------------------- Class A: Net asset value and redemption price per share ($103,665,559 / 8,550,400 shares of beneficial interest issued and outstanding) $12.12 Maximum sales charge (3% of offering price) .37 ----------------- Maximum offering price to public $12.49 ----------------- ----------------- Class B: Net asset value, offering price and redemption price per share ($26,536,813 / 2,189,335 shares of beneficial interest issued and outstanding) $12.12 ----------------- ----------------- Class C: Net asset value and redemption price per share ($1,812,417 / 149,528 shares of beneficial interest issued and outstanding) $12.12 Sales charge (1% of offering price) .12 ----------------- Offering price to public $12.24 ----------------- ----------------- Class Z: Net asset value, offering price and redemption price per share ($3,138,520 / 258,781 shares of beneficial interest issued and outstanding) $12.13 ----------------- -----------------
See Notes to Financial Statements 13 Prudential California Municipal Fund California Series Statement of Operations (Unaudited)
Six Months Ended February 28, 2002 - ---------------------------------------------------------------------------------------- NET INVESTMENT INCOME Income Interest $ 3,532,181 ----------------- Expenses Management fee 331,859 Distribution fee--Class A 127,839 Distribution fee--Class B 66,103 Distribution fee--Class C 6,400 Reports to shareholders 63,000 Custodian's fees and expenses 41,000 Transfer agent's fees and expenses 22,000 Registration fees 19,000 Legal fees and expenses 10,000 Audit fee 7,000 Trustees' fees and expenses 5,000 Miscellaneous 4,053 ----------------- Total expenses 703,254 ----------------- Net investment income 2,828,927 ----------------- REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS Net realized gain on: Investment transactions 451,372 Financial futures transactions 132,814 Interest rate swaps 42,276 ----------------- 626,462 ----------------- Net change in unrealized appreciation on: Investment transactions (1,916,236) Financial futures transactions (7,721) Interest rate swaps (11,820) ----------------- (1,935,777) ----------------- Net loss on investments (1,309,315) ----------------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 1,519,612 ----------------- -----------------
14 See Notes to Financial Statements Prudential California Municipal Fund California Series Statement of Changes in Net Assets (Unaudited)
Six Months Year Ended Ended February 28, 2002 August 31, 2001 - ------------------------------------------------------------------------------------- INCREASE IN NET ASSETS Operations Net investment income $ 2,828,927 $ 6,019,976 Net realized gain on investment transactions 626,462 2,640,115 Net change in unrealized appreciation (depreciation) of investments (1,935,777) 3,717,865 ----------------- --------------- Net increase in net assets resulting from operations 1,519,612 12,377,956 ----------------- --------------- Dividends and distributions (Note 1) Dividends from net investment income Class A (2,209,212) (4,625,742) Class B (539,028) (1,259,841) Class C (32,830) (50,782) Class Z (53,327) (83,611) ----------------- --------------- (2,834,397) (6,019,976) ----------------- --------------- Distributions from realized gains Class A (937,192) -- Class B (235,883) -- Class C (16,710) -- Class Z (20,198) -- ----------------- --------------- (1,209,983) -- ----------------- --------------- Series share transactions (net of share conversions) (Note 6) Net proceeds from shares sold 9,047,058 14,920,057 Net asset value of shares issued in reinvestment of dividends and distributions 2,435,648 3,359,417 Cost of shares reacquired (8,544,279) (19,787,375) ----------------- --------------- Net increase (decrease) in net assets from Series share transactions 2,938,427 (1,507,901) ----------------- --------------- Total increase 413,659 4,850,079 NET ASSETS Beginning of period 134,739,650 129,889,571 ----------------- --------------- End of period $ 135,153,309 $ 134,739,650 ----------------- --------------- ----------------- ---------------
See Notes to Financial Statements 15 Prudential California Municipal Fund California Series Notes to Financial Statements (Unaudited) Prudential California Municipal Fund (the 'Fund') is registered under the Investment Company Act of 1940 as an open-end investment company. The Fund was organized as a Massachusetts business trust on May 18, 1984 and consists of three series. The monies of each series are invested in separate, independently managed portfolios. The California Series (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 February 28, 2002 include 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. 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 16 Prudential California Municipal Fund California Series Notes to Financial Statements (Unaudited) Cont'd. 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 contracts. The Series invests in financial futures contracts in order to hedge its existing portfolio of securities, or securities the Series intends to purchase, against fluctuations in value caused by changes in prevailing interest rates or market conditions. 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. Dividend income is recorded on the ex-dividend date and interest income is recorded on the accrual basis. The Series amortizes premiums and accretes 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. 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. Federal Income Taxes: For federal income tax purposes, each series in the Series 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 taxable net income and capital gains, if any, to its shareholders. Therefore, no federal income tax provision is required. 17 Prudential California Municipal Fund California Series Notes to Financial Statements (Unaudited) Cont'd. Dividends and Distributions: The Series expects to pay dividends of net investment income monthly and distributions of net realized capital and currency gains, if any, annually. Custody Fee Credits: The Series 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 LLC ('PI'), formerly known as Prudential Investments Fund Management LLC. Pursuant to this agreement, PI has responsibility for all investment advisory services and supervises the subadviser's performance of such services. PI has entered into a subadvisory agreement with Prudential Investment Management, Inc. ('PIM'), formerly known as The Prudential Investment Corporation. The subadvisory agreement provides that PIM will furnish investment advisory services in connection with the management of the Fund. PI 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 PI is accrued 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 Class A, Class B, Class C and Class Z shares 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 for 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 for the six months ended February 28, 2002. PIMS has advised the Series that it has received approximately $34,700 and $4,500 in front-end sales charges resulting from sales of Class A and Class C shares, respectively, during the six months ended February 28, 2002. From these fees, PIMS paid a substantial part of such sales charges to affiliated broker-dealers, which in turn paid commissions to salespersons and incurred other distribution costs. 18 Prudential California Municipal Fund California Series Notes to Financial Statements (Unaudited) Cont'd. PIMS has advised the Series that for the six months ended February 28, 2002, it received approximately $21,800 and $2,100 in contingent deferred sales charges imposed upon redemptions by Class B and Class C shareholders, respectively. PI, PIMS and PIM are indirect, wholly-owned subsidiaries of Prudential Financial, Inc. ('Prudential'). The Series, along with other affiliated registered investment companies (the 'Funds'), entered into a syndicated credit agreement ('SCA') with an unaffiliated lender. Effective September 14, 2001, the maximum commitment under the SCA was increased from $500 million to $930 million through December 31, 2001. Effective January 1, 2002, the commitment was reduced to $500 million. Interest on any such borrowings will be at market rates. The Funds pay a commitment fee of .080 of 1% of the unused portion of the credit facility. The commitment fee is accrued and paid quarterly on a pro rata basis by the Funds. The expiration date of the SCA is May 3, 2002. Prior to March 7, 2001, the maximum commitment was 1 billion and the commitment fee was .080 of 1% of the unused portion of the credit facility. The purpose of the SCA is to serve as an alternative source of funding for capital share redemption. The Series did not borrow any amounts pursuant to the SCA during the six month period ended February 28, 2002. Note 3. Other Transactions with Affiliates Prudential Mutual Fund Services LLC ('PMFS'), an affiliate of PI and an indirect, wholly-owned subsidiary of Prudential, serves as the Fund's transfer agent. During the six months ended February 28, 2002, the Series incurred fees of approximately $18,200 for the services of PMFS. As of February 28, 2002, approximately $3,100 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. Effective November 1, 2001, the Series pays networking fees to Prudential Securities, Inc. ('PSI'), an affiliate and an indirect, wholly-owned subsidiary of Prudential. These networking fees are payments made to broker/dealers that clear mutual fund transactions through a national mutual fund clearing system. The total amount paid PSI during the period was approximately $1,400 and is included in transfer agent's fees and expenses in the Statement of Operations. Note 4. Portfolio Securities Purchases and sales of portfolio securities, other than short-term investments for the six months ended February 28, 2002 were $20,477,341 and $20,438,221, respectively. 19 Prudential California Municipal Fund California Series Notes to Financial Statements (Unaudited) Cont'd. During the period ending February 28, 2002, the Series entered into financial futures contracts. Details of open contracts at February 28, 2002 are as follows:
Value at Value at Number of Expiration February 28, Trade Unrealized Contracts Type Date 2001 Date Depreciation - --------- --------------------- ----------- ------------ ------------ --------------- Long: U.S. Treasury 10 Bonds Futures Mar. 2002 $ 1,029,595 $1,029,062 $(533) ------ ------
Note 5. Tax Information The United States federal income tax basis of the Series' investments and the net unrealized appreciation as of February 28, 2002 were as follows: Total Net Unrealized Tax Basis Appreciation Depreciation Appreciation - -------------- --------------- --------------- --------------- $120,525,281 $13,412,843 $(76,404) $13,336,439 Note 6. 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 4%. 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 automatically convert to Class A shares on a quarterly basis approximately seven years after purchase. A special exchange privilege is also available for shareholders who qualified 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. 20 Prudential California Municipal Fund California Series Notes to Financial Statements (Unaudited) Cont'd. Transactions in shares of beneficial interest were as follows:
Class A Shares Amount - ------------------------------------------------------------ ---------- ------------ Six months ended February 28, 2002: Shares sold 345,329 $ 4,165,039 Shares issued in reinvestment of dividends and distributions 158,883 1,910,418 Shares reacquired (451,495) (5,485,792) ---------- ------------ Net increase (decrease) in shares outstanding before conversion 52,717 589,665 Shares issued upon conversion from Class B 134,850 1,635,147 ---------- ------------ Net increase (decrease) in shares outstanding 187,567 $ 2,224,812 ---------- ------------ ---------- ------------ 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 ---------- ------------ ---------- ------------ Class B - ------------------------------------------------------------ Six months ended February 28, 2002: Shares sold 233,037 $ 2,837,969 Shares issued in reinvestment of dividends and distributions 36,058 433,469 Shares reacquired (174,876) (2,123,069) ---------- ------------ Net increase (decrease) in shares outstanding before conversion 94,219 1,148,369 Shares reacquired upon conversion into Class A (134,895) (1,635,147) ---------- ------------ Net increase (decrease) in shares outstanding (40,676) $ (486,778) ---------- ------------ ---------- ------------ 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) ---------- ------------ ---------- ------------ Class C - ------------------------------------------------------------ Six months ended February 28, 2002: Shares sold 45,689 $ 558,132 Shares issued in reinvestment of dividends and distributions 3,517 42,239 Shares reacquired (22,621) (271,019) ---------- ------------ Net increase (decrease) in shares outstanding 26,585 $ 329,352 ---------- ------------ ---------- ------------
21 Prudential California Municipal Fund California Series Notes to Financial Statements (Unaudited) 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 ---------- ------------ ---------- ------------ Class Z - ------------------------------------------------------------ Six months ended February 28, 2002: Shares sold 123,065 $ 1,485,918 Shares issued in reinvestment of dividends and distributions 4,116 49,522 Shares reacquired (54,181) (664,399) ---------- ------------ Net increase (decrease) in shares outstanding 73,000 $ 871,041 ---------- ------------ ---------- ------------ 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 ---------- ------------ ---------- ------------
22 SEMI ANNUAL REPORT FEBRUARY 28, 2002 PRUDENTIAL CALIFORNIA MUNICIPAL FUND - -------------------------------------------------------------------------------- FINANCIAL HIGHLIGHTS Prudential California Municipal Fund California Series Financial Highlights (Unaudited)
Class A -------------------------------------- Six Months Ended Year Ended February 28, 2002 August 31, 2001 - -------------------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE: Net asset value, beginning of period $ 12.36 $ 11.78 ----------------- --------------- Income from investment operations Net investment income .26 .56 Net realized and unrealized gain (loss) on investment transactions (.13) .58 ----------------- --------------- Total from investment operations .13 1.14 ----------------- --------------- Less distributions Dividends from net investment income (.26) (.56) Distributions in excess of net investment income -- -- Distributions from net realized gains (.11) -- ----------------- --------------- Total distributions (.37) (.56) ----------------- --------------- Net asset value, end of period $ 12.12 $ 12.36 ----------------- --------------- ----------------- --------------- TOTAL INVESTMENT RETURN(b): 1.14% 9.91% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000) $ 103,666 $ 103,368 Average net assets (000) $ 103,119 $ 99,324 Ratios to average net assets: Expenses, including distribution and service (12b-1) fees 1.01%(c) .98% Expenses, excluding distribution and service (12b-1) fees .76%(c) .73% Net investment income 4.31%(c) 4.66% For Class A, B, C and Z shares: Portfolio turnover rate 16% 48%
- ------------------------------ (a) Less than $.005 per share. (b) Total investment return does not consider the effects of sales loads. Total investment 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) Annualized. (d) Net of management fee waiver. 24 See Notes to Financial Statements Prudential California Municipal Fund California Series Financial Highlights (Unaudited) Cont'd.
Class A - ------------------------------------------------------------------------------------- Year Ended August 31, - ------------------------------------------------------------------------------------- 2000 1999 1998 1997 - ------------------------------------------------------------------------------------- $ 11.45 $ 12.22 $ 11.80 $ 11.44 -------- -------- -------- -------- .58 .59 .62 .65(d) .33 (.77) .43 .36 -------- -------- -------- -------- .91 (.18) 1.05 1.01 -------- -------- -------- -------- (.58) (.59) (.62) (.65) --(a) -- (.01) --(a) -- -- -- -- -------- -------- -------- -------- (.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%(d) .68% .69% .68% .66%(d) 5.13% 4.94% 5.18% 5.53%(d) 25% 13% 11% 14%
See Notes to Financial Statements 25 Prudential California Municipal Fund California Series Financial Highlights (Unaudited) Cont'd.
Class B -------------------------------------- Six Months Ended Year Ended February 28, 2002 August 31, 2001 - -------------------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE: Net asset value, beginning of period $ 12.36 $ 11.78 -------- --------------- Income from investment operations Net investment income .25 .53 Net realized and unrealized gain (loss) on investment transactions (.13) .58 -------- --------------- Total from investment operations .12 1.11 -------- --------------- Less distributions Dividends from net investment income (.25) (.53) Distributions in excess of net investment income -- -- Distributions from net realized gains (.11) -- -------- --------------- Total distributions (.36) (.53) -------- --------------- Net asset value, end of period $ 12.12 $ 12.36 -------- --------------- -------- --------------- TOTAL INVESTMENT RETURN(b): 1.02% 9.63% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000) $26,537 $27,554 Average net assets (000) $26,660 $28,540 Ratios to average net assets: Expenses, including distribution and service (12b-1) fees 1.26%(c) 1.23% Expenses, excluding distribution and service (12b-1) fees .76%(c) .73% Net investment income 4.07%(c) 4.41%
- ------------------------------ (a) Less than $.005 per share. (b) Total investment return does not consider the effects of sales loads. Total investment 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) Annualized. (d) Net of management fee waiver. 26 See Notes to Financial Statements Prudential California Municipal Fund California Series Financial Highlights (Unaudited) Cont'd.
Class B - ------------------------------------------------------------------------------------- Year Ended August 31, - ------------------------------------------------------------------------------------- 2000 1999 1998 1997 - ------------------------------------------------------------------------------------- $ 11.44 $ 12.22 $ 11.80 $ 11.43 -------- -------- -------- -------- .56 .56 .58 .60(d) .34 (.78) .43 .37 -------- -------- -------- -------- .90 (.22) 1.01 .97 -------- -------- -------- -------- (.56) (.56) (.58) (.60) --(a) -- (.01) --(a) -- -- -- -- -------- -------- -------- -------- (.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%(d) .68% .69% .68% .66%(d) 4.89% 4.62% 4.78% 5.13%(d)
See Notes to Financial Statements 27 Prudential California Municipal Fund California Series Financial Highlights (Unaudited) Cont'd.
Class C -------------------------------------- Six Months Ended Year Ended February 28, 2002 August 31, 2001 - -------------------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE: Net asset value, beginning of period $ 12.36 $ 11.78 ------- ------- Income from investment operations Net investment income .23 .50 Net realized and unrealized gain (loss) on investment transactions (.13) .58 ------- ------- Total from investment operations .10 1.08 ------- ------- Less distributions Dividends from net investment income (.23) (.50) Distributions in excess of net investment income -- -- Distributions from net realized gains (.11) -- ------- ------- Total distributions (.34) (.50) ------- ------- Net asset value, end of period $ 12.12 $ 12.36 ------- ------- ------- ------- TOTAL INVESTMENT RETURN(b): .90% 9.36% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000) $ 1,812 $ 1,519 Average net assets (000) $ 1,721 $ 1,226 Ratios to average net assets: Expenses, including distribution and service (12b-1) fees 1.51%(c) 1.48% Expenses, excluding distribution and service (12b-1) fees .76%(c) .73% Net investment income 3.84%(c) 4.14%
- ------------------------------ (a) Less than $.005 per share. (b) Total investment return does not consider the effects of sales loads. Total investment 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) Annualized. (d) Net of management fee waiver. 28 See Notes to Financial Statements Prudential California Municipal Fund California Series Financial Highlights (Unaudited) Cont'd.
Class C - ------------------------------------------------------------------------------------- Year Ended August 31, - ------------------------------------------------------------------------------------- 2000 1999 1998 1997 - ------------------------------------------------------------------------------------- $11.44 $12.22 $11.80 $11.43 ------- ------- ------- ------- .53 .53 .55 .57(d) .34 (.78) .43 .37 ------- ------- ------- ------- .87 (.25) .98 .94 ------- ------- ------- ------- (.53) (.53) (.55) (.57) --(a) -- (.01) --(a) -- -- -- -- ------- ------- ------- ------- (.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%(d) .68% .69% .68% .66%(d) 4.64% 4.40% 4.53% 4.88%(d)
See Notes to Financial Statements 29 Prudential California Municipal Fund California Series Financial Highlights (Unaudited) Cont'd.
Class Z -------------------------------------- Six Months Ended Year Ended February 28, 2002 August 31, 2001 - -------------------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE: Net asset value, beginning of period $ 12.37 $ 11.79 ------- ------- Income from investment operations Net investment income .28 .59 Net realized and unrealized gain (loss) on investment transactions (.13) .58 ------- ------- Total from investment operations .15 1.17 ------- ------- Less distributions Dividends from net investment income (.28) (.59) Distributions in excess of net investment income -- -- Distributions from net realized gains (.11) -- ------- ------- Total distributions (.39) (.59) ------- ------- Net asset value, end of period $ 12.13 $ 12.37 ------- ------- ------- ------- TOTAL INVESTMENT RETURN(b): 1.26% 10.17% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000) $ 3,139 $ 2,298 Average net assets (000) $ 2,344 $ 1,708 Ratios to average net assets: Expenses, including distribution and service (12b-1) fees .76%(c) .73% Expenses, excluding distribution and service (12b-1) fees .76%(c) .73% Net investment income 4.58%(c) 4.90%
- ------------------------------ (a) Less than $.005 per share. (b) Total investment return does not consider the effects of sales loads. Total investment 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) Annualized. (d) Commencement of offering of Class Z shares. (e) Net of management fee waiver. 30 See Notes to Financial Statements Prudential California Municipal Fund California Series Financial Highlights (Unaudited) 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(e) .34 (.78) .43 .31 ------- ------- ------- ------- .95 (.16) 1.06 .95 ------- ------- ------- ------- (.61) (.62) (.63) (.64) --(a) -- (.01) --(a) -- -- -- -- ------- ------- ------- ------- (.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%(e) .68% .69% .68% .66%(e) 5.37% 5.15% 5.28% 5.35%(e)
See Notes to Financial Statements 31 Prudential California Municipal Fund California Series Prudential Mutual Funds Prudential offers a broad range of mutual funds designed to meet your individual needs. For information about these funds, contact your financial professional or call us at (800) 225-1852. Read the prospectus carefully before you invest or send money. PRUDENTIAL MUTUAL FUNDS - --------------------------------------------- Stock Funds Large Capitalization Stock Funds Prudential 20/20 Focus Fund Prudential Equity Fund, Inc. Prudential Index Series Fund Prudential Stock Index Fund Prudential Tax-Managed Funds Prudential Tax-Managed Equity Fund Prudential Value Fund The Prudential Investment Portfolios, Inc. Prudential Jennison Growth Fund Small- to Mid-Capitalization Stock Funds Nicholas-Applegate Fund, Inc. Nicholas-Applegate Growth Equity Fund Prudential Small Company Fund, Inc. Prudential Tax-Managed Small-Cap Fund, Inc. Prudential U.S. Emerging Growth Fund, Inc. 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Other Money Market Funds Command Government Fund Command Money Fund Special Money Market Fund, Inc.* Money Market Series STRATEGIC PARTNERS MUTUAL FUNDS** - ------------------------------------------------- Strategic Partners Asset Allocation Funds Strategic Partners Conservative Growth Fund Strategic Partners Moderate Growth Fund Strategic Partners High Growth Fund Strategic Partners Style Specific Funds Strategic Partners Large Capitalization Growth Fund Strategic Partners Large Capitalization Value Fund Strategic Partners Small Capitalization Growth Fund Strategic Partners Small Capitalization Value Fund Strategic Partners International Equity Fund Strategic Partners Total Return Bond Fund Strategic Partners Opportunity Funds Strategic Partners Focused Growth Fund Strategic Partners New Era Growth Fund Strategic Partners Focused Value Fund Special Money Market Fund, Inc.* Money Market Series * This Fund is not a direct purchase money fund and is only an exchangeable money fund. **Not exchangeable with the Prudential mutual funds. Prudential California Municipal Fund California Series Getting the Most from Your Prudential Mutual Fund How many times have you read these reports--or other financial materials--and stumbled across a word that you don't understand? Many shareholders have run into the same problem. We'd like to help. So we'll use this space from time to time to explain some of the words you might have read, but not understood. And if you have a favorite word that no one can explain to your satisfaction, please write to us. Basis Point: 1/100th of 1%. For example, one- half of one percent is 50 basis points. Collateralized Mortgage Obligations (CMOs): Mortgage-backed bonds that separate mortgage pools into different maturity classes called tranches. These instruments are sensitive to changes in interest rates and homeowner refinancing activity. They are subject to prepayment and maturity extension risk. Derivatives: Securities that derive their value from other securities. The rate of return of these financial instruments rises and falls-- sometimes very suddenly--in response to changes in some specific interest rate, currency, stock, or other variable. Discount Rate: The interest rate charged by the Federal Reserve on loans to member banks. Federal Funds Rate: The interest rate charged by one bank to another on overnight loans. Futures Contract: An agreement to purchase or sell a specific amount of a commodity or financial instrument at a set price at a specified date in the future. www.PruFN.com (800) 225-1852 Leverage: The use of borrowed assets to enhance return. The expectation is that the interest rate charged on borrowed funds will be lower than the return on the investment. While leverage can increase profits, it can also magnify losses. Liquidity: The ease with which a financial instrument (or product) can be bought or sold (converted into cash) in the financial markets. Price/Earnings Ratio: The price of a share of stock divided by the earnings per share for a 12-month period. Option: An agreement to purchase or sell something, such as shares of stock, by a certain time for a specified price. An option need not be exercised. Spread: The difference between two values; often used to describe the difference between "bid" and "asked" prices of a security, or between the yields of two similar maturity bonds. Yankee Bond: A bond sold by a foreign company or government on the U.S. market and denominated in U.S. dollars. Prudential California Municipal Fund California Series Getting the Most from Your Prudential Mutual Fund When you invest through Prudential Mutual Funds, you receive financial advice from a Prudential Securities Financial Advisor or Pruco Securities registered representative. Your financial professional can provide you with the following services: THERE'S NO REWARD WITHOUT RISK; BUT IS THIS RISK WORTH IT? Your financial professional can help you match the reward you seek with the risk you can tolerate. Risk can be difficult to gauge-- sometimes even the simplest investments bear surprising risks. The educated investor knows that markets seldom move in just one direction. There are times when a market sector or asset class will lose value or provide little in the way of total return. Managing your own expectations is easier with help from someone who understands the markets, and who knows you! KEEPING UP WITH THE JONESES A financial professional can help you wade through the numerous available mutual funds to find the ones that fit your individual investment profile and risk tolerance. While the newspapers and popular magazines are full of advice about investing, they are aimed at generic groups of people or representative individuals--not at you personally. Your financial professional will review your investment objectives with you. This means you can make financial decisions based on the assets and liabilities in your current portfolio and your risk tolerance--not just based on the current investment fad. BUY LOW, SELL HIGH Buying at the top of a market cycle and selling at the bottom are among the most common investor mistakes. But sometimes it's difficult to hold on to an investment when it's losing value every month. Your financial professional can answer questions when you're confused or worried about your investment, and should remind you that you're investing for the long haul. www.PruFN.com (800) 225-1852 FOR MORE INFORMATION Prudential Mutual Funds Gateway Center Three 100 Mulberry Street Newark, NJ 07102-4077 (800) 225-1852 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. Gateway Center Two Newark, NJ 07102 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 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. The accompanying financial statements as of February 28, 2002, were not audited and, accordingly, no opinion is expressed on them. (LOGO) Fund Symbols Nasdaq CUSIP Class A PRMCX 744313107 Class B PBCMX 744313206 Class C PCCSX 744313701 Class Z PZCSX 744313883 MF116E2 IFS-A070371 Mutual funds are not bank guaranteed or FDIC insured, and may lose value. SEMIANNUAL REPORT FEBRUARY 28, 2002 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 federal 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 2/28/02 54.1% General Obligation Bonds 30.8 Revenue Bonds 9.6 Prerefunded 1.9 Miscellaneous 3.6 Cash Equivalents Credit Quality Expressed as a percentage of total investments as of 2/28/02 8.9% AAA 36.8 AAA Insured 3.9 AA 5.5 A 8.7 BBB 2.0 BB 3.6 Cash Equivalents 30.6 Not Rated* (Prudential ratings used): 5.0 AAA 0.2 A 5.2 BBB 6.2 BB 13.2 B 0.4 CCC and below 0.4 Other *Not rated bonds are believed to be of comparable quality to rated investments. Ten Largest Issuers Expressed as a percentage of net assets as of 2/28/02 4.8% Orange County Local Transportation Authority 4.7 Foothill Eastern Transportation Corridor Agency* 3.6 Southern California Public Power Authority 3.4 California Pollution Control Financing Authority 2.9 Long Beach Harbor Revenue 2.8 San Bernardino County 2.6 San Joaquin Hills Transportation Corridor Agency 2.6 Victor Valley 2.2 Chula Vista Community Redevelopment Agency 2.1 Sacramento City Finance Authority *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.PruFN.com (800) 225-1852 Semiannual Report February 28, 2002 Cumulative Total Returns1 As of 2/28/02
Six Months One Year Five Years Ten Years Since Inception2 Class A 0.68% 5.45% 34.10% (33.98) 101.14% (97.46) 125.31% (120.15) Class B 0.56 5.19 32.09 (31.97) N/A 58.03 (56.58) Class C 0.42 4.93 30.45 (30.33) N/A 55.45 (54.46) Class Z 0.80 5.71 35.40 (35.27) N/A 40.92 (40.79) Lipper CA Muni Debt Funds Avg.3 0.80 5.49 31.05 86.75 *** Lehman Brothers Muni Bond Index4 1.99 6.84 36.15 95.13 ****
Average Annual Total Returns1 As of 3/31/02 One Year Five Years Ten Years Since Inception2 Class A 2.45% 5.80% (5.78) 6.94% (6.75) 7.22% (7.00) Class B 2.20 5.49 (5.47) N/A 5.37 (5.25) Class C 1.94 5.22 (5.20) N/A 5.61 (5.52) Class Z 2.71 6.01 (5.99) N/A 5.97 (5.95) Distributions and Yields As of 2/28/02
Total Distributions 30-Day Taxable Equivalent Yield5 at Tax Rates of Paid for Six Months SEC Yield 36% 38.6% Class A $0.26 3.71% 6.39% 6.66% Class B $0.25 3.58 6.17 6.43 Class C $0.23 3.30 5.68 5.93 Class Z $0.27 4.08 7.03 7.33
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 shares redeemed within 18 months of purchase. Class Z shares are not subject to a sales charge or distribution and service (12b-1) fees. Without waiver of fees and/or expense subsidization, the Series' cumulative and average annual total returns would have been lower, as indicated in parentheses. The cumulative and average annual total returns in the tables above do not reflect the deduction of taxes that a shareholder would pay on fund distributions or following the redemption of fund shares. 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 six-month, one-year, five- year, ten-year, and since inception periods in the Lipper California Municipal Debt Funds category. Single-State Municipal Debt Funds limit their assets to those securities that are exempt from taxation in a specified state (double tax-exempt) or city (triple tax- exempt). 4 The Lehman Brothers Municipal 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. 5 Taxable equivalent yields reflect federal and applicable state tax rates. Investors cannot invest directly in an index. The returns for the Lipper Average and the Lehman Brothers Municipal Bond Index would be lower if they included the effect of sales charges or taxes. ***Lipper Since Inception returns are 108.49% for Class A, 55.03% for Class B, 56.91% for Class C, and 35.30% for Class Z, based on all funds in each share class. ****Lehman Brothers Municipal Bond Index Since Inception returns are 120.34% for Class A, 63.50% for Class B, 64.56% for Class C, and 41.17% for Class Z, based on all funds in each share class. 1 (LOGO) April 17, 2002 DEAR SHAREHOLDER, Our fiscal half-year ended February 28, 2002, was a noteworthy time in the municipal bond market. The U.S. economy slid into a recession for the first time in a decade even as the Federal Reserve (the Fed) continued to cut short-term interest rates in order to stimulate economic growth. In turn, state and local governments took advantage of the lower rate environment by issuing a huge volume of bonds that at times hurt prices of outstanding bonds. Despite these obstacles, municipal bonds managed to return 1.99% over the period, outpacing the -1.67% return of the stock market as measured by the Lehman Brothers Municipal Bond and S&P 500 Composite index averages, respectively. These numbers reflect a historic precedent concerning the behaviors of the equity and bond markets. Over time, these markets have moved counter to each other--that is, when one moves up, the other moves down, and vice versa. This underscores the importance of diversifying your investments among the different asset classes of fixed-income, equities, and cash. Your financial professional can help determine the suitability of these investments, given your risk profile and long-term goals, as well as the appropriate mix to meet your investment needs. The Series' investment adviser discusses developments in the municipal market and explains the Series' investments on the following pages. Sincerely, David R. Odenath, Jr., President Prudential California Municipal Fund 2 Prudential California Municipal Fund California Income Series Semiannual Report February 28, 2002 INVESTMENT ADVISER'S REPORT PERFORMANCE California Income Series' Class A shares returned 0.68% (without considering sales charges) for our six-month reporting period ended February 28, 2002, which lagged the 0.80% return of its benchmark Lipper California Municipal Debt Fund Average. For investors subject to the Class A shares' one-time initial sales charge, the Class A shares returned -2.34 % for the same period. A CHALLENGING SIX MONTHS FOR MUNICIPAL BONDS The returns of the Series and its benchmark Lipper Average largely reflect the challenging conditions in the municipal bond market. Tax- exempt bonds faced two hurdles early in our reporting period. First, investors worried that declining short-term interest rates and lower taxes would eventually reinvigorate the U.S. economy and lead to higher interest rates. This belief caused them to demand higher yields on municipal bonds in the final two months of 2001, which drove bond prices lower. Second, state and local governments hurriedly issued bonds in the final two months of 2001 because they also feared that short-term rates would rise in 2002. This burgeoning supply of debt securities often outpaced investor demand, thereby weighing on municipal bond prices. OUR COUPON "BARBELL" STRATEGY Faced with this challenging market environment, we employed a barbell strategy in which the Series' assets were concentrated primarily in two types of municipal bond coupons. One side of our barbell consisted of intermediate-term bonds with high coupon rates that provided the Series with considerable interest income. Prices of these bonds tend to hold up relatively well when the municipal bond market sells off because investors want the solid income that they provide. The other side of the barbell consisted of zero coupon bonds. Zero coupon bonds are so named because they provide no interest income and are sold at discounted prices to make up for their lack of periodic interest payments. Zero coupon bonds are the most interest-rate sensitive of all bonds, and perform better than other types of debt securities when interest rates decline and bond prices move higher. Thus, we held zero coupon bonds for their potential price appreciation. 3 Prudential California Municipal Fund California Income Series Semiannual Report February 28, 2002 As it turned out, both sides of our barbell suffered in November and December 2001, though not to the same extent. Municipalities issued a barrage of bonds with high coupon rates in late 2001 knowing that there was strong investor demand for them. The heavy supply temporarily hurt the prices of these bonds. Meanwhile, zero coupon bonds were hard hit by fears that an imminent economic recovery would drive interest rates higher. The Series' heavy exposure to zero coupon bonds, such as those of San Bruno Park School District that mature in 2022, not only hurt its performance on an absolute basis, but was one of the key reasons why the Series underperformed its benchmark Lipper Average for our reporting period. Another drag on the Series' relative performance was its exposure to non-rated municipal bonds, which comprised 31% of its total investments at the end of our reporting period. When the municipal bond market began to rebound in early 2002, non-rated bonds did not improve as much as bonds in the investment- grade ratings categories. REBALANCING OUR COUPON BARBELL We sold some of the Series' zero coupon bonds in early 2002 and bought more bonds with high coupon rates. Prices of high coupon bonds began to improve in early 2002 as the "January effect" took hold. The January effect refers to an annual occurrence that drives municipal bond prices higher (and their yields lower) as investors reinvest cash from coupon payments, bond calls, and maturing bonds. During this time, municipal bond issuance slowed to a trickle as most state and local governments had not initiated borrowing for the new calendar year. HOSPITAL BONDS WERE HEALTHY As for sector selection, the Series benefited from an exposure to hospital bonds (primarily A-rated) that comprised as much as 6.0% of the Series' total investments during its fiscal half-year. The hospital bond sector posted one of the highest returns in the tax-exempt market for the six-month period, according to the Lehman Brothers Municipal Bond Index. The strong relative performance reflected improving business fundamentals and investor 4 www.PruFN.com (800) 225-1852 demand for higher-yielding assets. The "spread" or difference between yields on hospital bonds rated single-A and tax-exempt bonds rated AAA compressed, indicating greater demand for single-A-rated hospital bonds. BUT CALIFORNIA GENERAL OBLIGATION BONDS WEAKENED Throughout our reporting period, we remained more deliberative than usual concerning the credit quality of the California securities that we purchased. California's financial health weakened amid the state's energy crisis that required the California Department of Water Resources to spend billions of dollars purchasing electricity for the state's investor-owned utilities. California's long- term general obligation (GO) bond rating had already been downgraded earlier in 2001 to A- plus from AA by Standard & Poor's, and to Aa3 from Aa2 by Moody's Investors Service. Moody's lowered California's GO bond rating again during our fiscal half year to A1 from Aa3, noting that, among other factors, the economic slump hurt the state's revenue projections. LOOKING AHEAD We expect more California securities to be issued in 2002 than were issued in 2001. Plagued by revenue shortfalls, the Golden State and some of its municipalities will be inclined to borrow money, especially while interest rates are still at relatively low levels. Most notably, the state's Department of Water Resources hopes to sell approximately $11 billion of bonds. The majority of the bond proceeds will be used to repay the state's general fund for electricity purchased during the power shortage. The increased bond issuance may provide an opportunity to purchase debt securities issued in California at very attractive levels. Given our belief that the economy will continue to rebound during 2002, we will look to increase exposure to the single-family housing bond sector. These securities afford higher relative current yields and should benefit as the economy recovers and the risk of significant mortgage prepayments subsides. Prudential California Municipal Fund Management Team SEMIANNUAL REPORT FEBRUARY 28, 2002 PRUDENTIAL CALIFORNIA MUNICIPAL FUND/ CALIFORNIA INCOME SERIES FINANCIAL STATEMENTS Prudential California Municipal Fund California Income Series Portfolio of Investments as of February 28, 2002 (Unaudited)
Principal Moody's Interest Maturity Amount Value Description (a) Rating Rate Date (000) (Note 1) - ---------------------------------------------------------------------------------------------------------- LONG-TERM INVESTMENTS 95.2% - ---------------------------------------------------------------------------------------- Brea Redev. Agcy., Rfdg., Tax Alloc., Ser. A Aaa 5.50% 8/01/19 $ 3,350 $ 3,594,450 Buena Park Cmnty. Redev. Agcy., Cent. Bus. Dist. Proj., Ser. B NR 7.80 9/01/14 3,325(g) 3,430,536 California Cmnty. Dev. Comn., Rfdg., Merged Redev. Proj., Ser. A NR 5.70 8/01/28 2,250 2,230,470 California Hlth. Facs. Fin. Auth. Rev., Kaiser Permanente, Ser. B A3 5.25 10/01/13 5,000(g) 5,211,150 California Infrastructure & Econ. Dev. Bk. Rev., Scripps Research Inst., Ser. A Aa3 5.75 7/01/30 1,500 1,581,390 California Poll. Ctrl. Fin. Auth., Solid Waste Disp. Rev., Keller Canyon Landfill Co. Proj. B1 6.875 11/01/27 2,500 2,448,075 California Rural Home Mtge. Fin. Auth., Single Family Mtge. Rev., Mtge. Bkd. Secs., Ser. D, F.N.M.A., G.N.M.A., A.M.T. AAA(c) 6.00 12/01/31 1,790 1,889,452 California St. Cmnty. Cap. Apprec. Cmnty. Facs., Dist. No. 97-1 NR Zero 9/01/22 4,440 1,212,564 California St. Dept. Vet. Affairs, Home Pur. Rev., Ser. C, A.M.T. Aa2 5.50 12/01/19 3,000 3,063,060 California St. Pub. Wks. Brd. Lease Rev., Dept. Of Corrections, Ser. A Aaa 5.50 1/01/15 3,000 3,181,620 California St., G.O. A1 5.75 5/01/30 1,000 1,060,620 G.O., A.M.B.A.C. Aaa 5.50 3/01/16 2,000 2,166,800 California Statewide Cmntys. Dev. Auth., C.O.P. Aaa 5.30 12/01/15 1,900 2,007,692 Capistrano Unif. Sch. Dist., Spec. Tax, No. 90-2 NR 5.875 9/01/31 1,000 987,430 Spec. Tax, No. 98-2 NR 5.70 9/01/20 1,000 994,120 Carson City Ltd. Oblig. Impvt. Rev., Assmt. Dist. No. 92-1 NR 7.375 9/02/22 595 617,551
See Notes to Financial Statements 7 Prudential California Municipal Fund California Income Series Portfolio of Investments as of February 28, 2002 (Unaudited) Cont'd.
Principal Moody's Interest Maturity Amount Value Description (a) Rating Rate Date (000) (Note 1) - ---------------------------------------------------------------------------------------------------------- Central California Joint Pwrs. Hlth. Fin. Auth., C.O.P., Cmnty. Hosps. Baa1 6.00% 2/01/30 $ 2,000 $ 2,038,820 Chula Vista Cmnty. Redev. Agcy., Refdg. Tax Alloc. Sr. Bayfront, Ser. A BBB+(c) 7.625 9/01/24 2,500 2,850,675 Refdg. Tax Alloc. Sub. Bayfront, Ser. C NR 8.25 5/01/24 2,500 2,746,500 Chula Vista Spec. Tax, Cmnty. Facs., Dist. No. 97-3 NR 6.05 9/01/29 2,765 2,829,563 Corona C.O.P., Vista Hosp. Sys., Inc., Ser. C NR 8.375 7/01/11 2,000(e)(g) 745,000 Davis Pub. Facs. Fin. Auth., Mace Ranch, Ser. A NR 6.60 9/01/25 1,330 1,393,521 Delano C.O.P., Ser. 92-A AAA(c) 9.25 1/01/22 2,690(f)(g) 2,925,725 East Bay Mun. Util. Dist. Wastewater, Treatment Sys. Rev., A.M.B.A.C. Aaa 5.55 6/01/20 2,000 2,083,160 East Bay Mun. Util. Dist. Wtr. Sys. Rev., Rfdg. Sub., F.G.I.C. Aaa 5.00 6/01/15 4,000 4,143,080 El Dorado Cnty., Spec. Tax, Cmnty. Facs., Dist. No. 92-1 NR 6.125 9/01/16 1,000 1,030,490 Cmnty. Facs., Dist. No. 92-1 NR 8.25 9/01/24 1,945(f)(g) 2,277,965 Cmnty. Facs., Dist. No. 92-1 NR 6.25 9/01/29 485 492,983 Folsom Spec. Tax, Cmnty. Facs., Dist. No. 10 NR 6.875 9/01/19 2,000 2,138,400 Cmnty. Facs., Dist. No. 7 NR 6.00 9/01/24 2,500 2,539,775 Foothill/Eastern Trans. Corr. Agcy., Toll Rd. Rev., C.A.B.S., Sr. Lien, Ser. A Aaa Zero 1/01/20 10,000(f)(g) 4,001,500 Conv. C.A.B.S. Baa3 Zero 1/15/28 4,890(g) 3,111,458 Conv. C.A.B.S., Sr. Lien, Ser. A, Zero Coupon (until 1/01/05) Aaa 7.15 1/01/13 4,750(f) 4,963,323 Gateway Impvt. Auth. Rev., Marin City Cmnty. Facs. Dist., Ser. A NR 7.75 9/01/25 2,100(f) 2,518,677 Golden West Sch. Fin. Auth., California Rev., C.A.B.S., Rfdg. Ser. A, M.B.I.A. Aaa Zero 2/01/19 2,110 869,088
8 See Notes to Financial Statements Prudential California Municipal Fund California Income Series Portfolio of Investments as of February 28, 2002 (Unaudited) Cont'd.
Principal Moody's Interest Maturity Amount Value Description (a) Rating Rate Date (000) (Note 1) - ---------------------------------------------------------------------------------------------------------- Irvine Impvt. Bond Act of 1915, Assmt., Dist. No. 87-8, Grp. One NR 6.00% 9/02/24 $ 3,000 $ 3,091,440 Kings Cnty. Waste Mgmt. Auth., Solid Waste Rev., A.M.T. BBB(c) 7.20 10/01/14 1,200 1,282,284 La Mesa Impvt. Bond Act of 1915, Ltd. Oblig., Dist. No. 98-1 NR 5.75 9/02/23 1,000 992,680 La Mirada Redev. Agcy. Spec. Tax, Rfdg. Cmnty. Facs., Dist. No. 89-1 NR 5.70 10/01/20 1,000 982,850 La Quinta Redev. Agcy., Tax Alloc., Rfdg. Proj. Area No. 1, M.B.I.A. Aaa 7.30 9/01/10 1,000 1,258,220 Rfdg. Proj. Area No. 1, M.B.I.A. Aaa 7.30 9/01/11 1,000 1,277,120 Lincoln Impvt. Bond Act of 1915, Pub. Fin. Auth., Twelve Bridges NR 6.20 9/02/25 2,895 2,940,249 Long Beach Hbr. Rev., Rfdg. Ser. A, A.M.T., F.G.I.C. Aaa 6.00 5/15/17 3,500(g) 4,015,060 Rfdg. Ser. A, A.M.T., F.G.I.C. Aaa 6.00 5/15/19 3,000 3,422,070 Los Angeles Cmnty. Facs., Dist. No. 5, Rowland Heights, Ser. A NR 7.25 9/01/19 1,500(f) 1,722,660 Lynwood Pub. Fin. Auth. Rev., Wtr. Sys. Impvt. Proj. BBB(c) 6.50 6/01/21 1,500(g) 1,564,050 Metro. 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) 1,098,780 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 1,264,946 Norco Spec. Tax Cmnty. Facs., Dist. No. 97-1 NR 7.10 10/01/30 1,320 1,411,146 Ontario California Impvt. Bond Act of 1915, Assmt. Dist. 100C, Cmnty. Ctr. III NR 8.00 9/02/11 535 558,535 Orange Cnty. Cmnty. Facs. Dist., Spec. Tax Rev., No. 88-1, Aliso Viejo, Ser. A AAA(c) 7.15 8/15/06 805 842,585
See Notes to Financial Statements 9 Prudential California Municipal Fund California Income Series Portfolio of Investments as of February 28, 2002 (Unaudited) Cont'd.
Principal Moody's Interest Maturity Amount Value Description (a) Rating Rate Date (000) (Note 1) - ---------------------------------------------------------------------------------------------------------- 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) $ 11,520,200 Spec. Tax Rev., Linked R.I.B.S. Aa2 10.493(d) 2/14/11 750 975,937 Perris Cmnty. Facs. Dist., Spec. Tax No. 01-2, Ser. A NR 6.25 9/01/23 2,000 1,965,200 Pico Rivera California Wtr. Auth. Rev., Wtr. Sys. Proj., Ser. A, M.B.I.A. Aaa 5.50 5/01/29 1,500(g) 1,651,080 Pittsburg California Redev. Agcy. Tax Alloc., Ext. Spec. Redem., Los Medanos, Ser. B, F.S.A. Aaa 5.80 8/01/34 2,700 2,970,162 Los Medanos Cmnty. Dev. Proj., A.M.B.A.C. Aaa Zero 8/01/26 1,375 362,794 Los Medanos Cmnty. Dev. Proj., A.M.B.A.C. Aaa Zero 8/01/30 4,145 869,579 Poway Cmnty., Facs., Dist. No. 88-1, Pkwy. Bus. Ctr. NR 6.75 8/15/15 1,000 1,084,410 Puerto Rico Comnwlth., G.O., F.G.I.C. Aaa 5.50 7/01/13 3,000(h) 3,343,530 Rites, PA 642A, M.B.I.A. NR 10.139(d) 7/01/10 1,000 1,276,460 Puerto Rico Ind. Tourist Edl. Med. & Environ. Ctrl. Facs., Cogen Fac., AES Puerto Rico Proj., A.M.T. Baa2 6.625 6/01/26 3,750 3,899,887 Puerto Rico Pub. Bldgs. Auth., Gtd. Pub. Ed. & Hlth. Facs., C.A.B.S., Ser. J Baa1 Zero 7/01/06 1,605 1,389,416 Redding Elec. Sys. Rev., C.O.P., M.B.I.A., R.I.B.S. Aaa 11.235(d) 7/01/22 1,850 2,377,250 Linked S.A.V.R.S. & R.I.B.S., M.B.I.A. Aaa 6.368 7/01/22 50(g) 57,152
10 See Notes to Financial Statements Prudential California Municipal Fund California Income Series Portfolio of Investments as of February 28, 2002 (Unaudited) Cont'd.
Principal Moody's Interest Maturity Amount Value Description (a) Rating Rate Date (000) (Note 1) - ---------------------------------------------------------------------------------------------------------- Richmond Redev. Agcy. Tax Alloc., C.A.B.S. Rfdg. Harbor, Ser. A, M.B.I.A. Aaa Zero 7/01/20 $ 1,150 $ 433,539 C.A.B.S. Rfdg. Harbor, Ser. A, M.B.I.A. Aaa Zero 7/01/21 1,150 407,238 Richmond Redev. Agcy., Multi-family Hsg., Bridge Affordable Hsg. NR 7.50% 9/01/23 2,435 2,487,474 Rio Vista Impvt. Bond Act of 1915, Assmt. Dist No. 96-1, River View Pt. NR 7.50 9/02/22 1,870 2,024,836 Riverside Cnty. C.O.P., Air Force Village West, Inc., Ser. A NR 8.125 6/15/20 3,000(f)(g) 3,118,770 Riverside Unified Sch. Dist. Spec. Tax, Cmnty. Facs. Dist. No. 7, Ser. A NR 6.90 9/01/20 1,320 1,417,574 Cmnty. Facs. Dist. No. 7, Ser. A NR 7.00 9/01/30 1,000 1,069,870 Rocklin Unified Sch. Dist., C.A.B.S., Ser. C, M.B.I.A. Aaa Zero 8/01/12 1,110 705,849 C.A.B.S., Ser. C, M.B.I.A. Aaa Zero 8/01/13 1,165 694,445 C.A.B.S., Ser. C, M.B.I.A. Aaa Zero 8/01/14 1,220(g) 683,322 C.A.B.S., Ser. C, M.B.I.A. Aaa Zero 8/01/15 1,285 674,419 C.A.B.S., Ser. C, M.B.I.A. Aaa Zero 8/01/16 1,400 688,604 Roseville California Spec. Tax, Highland Cmnty. Fac., Dist. No. 1 NR 6.30 9/01/25 1,890 1,946,624 Woodcreek Cmnty. Facs., Dist. No. 1 NR 6.375 9/01/27 1,000 1,027,340 Sacramento City. Fin. Auth., C.A.B.S., Tax Alloc. Comb. Proj., Ser. B, M.B.I.A. Aaa Zero 11/01/16 5,700 2,769,345 C.A.B.S., Tax Alloc. Comb. Proj., Ser. B, M.B.I.A. Aaa Zero 11/01/17 5,695 2,594,129 Sacramento Impvt. Bond Act of 1915, Willowcreek II, Assmt. Dist. No. 96-1 NR 6.70 9/02/22 2,420(g) 2,503,998 Sacramento Spec. Purpose Facs., Y.M.C.A. of Sacramento NR 7.25 12/01/18 1,945 2,024,375 San Bernardino Cnty., C.O.P., Med. Ctr. Fin. Proj., M.B.I.A. Aaa 5.50 8/01/22 4,540 5,000,765
See Notes to Financial Statements 11 Prudential California Municipal Fund California Income Series Portfolio of Investments as of February 28, 2002 (Unaudited) Cont'd.
Principal Moody's Interest Maturity Amount Value Description (a) Rating Rate Date (000) (Note 1) - ---------------------------------------------------------------------------------------------------------- C.O.P., West VY Detention Ctr. Refing., Ser. A, M.B.I.A. Aaa 5.25% 11/01/14 $ 2,100 $ 2,204,097 San Bruno Park Sch. Dist., C.A.B.S., F.S.A. Aaa Zero 8/01/20 1,275 479,400 C.A.B.S., F.S.A. Aaa Zero 8/01/21 1,220 430,904 C.A.B.S., F.S.A. Aaa Zero 8/01/22 1,080 357,988 San Diego California Redev. Agcy., Tax Alloc., North Bay Redev. Baa1 5.875 9/01/29 2,000 2,044,280 San Diego Spec. Tax, Cmnty. Facs., Dist. No. 1, Ser. B NR 7.10 9/01/20 2,000(f) 2,356,700 San Francisco City & Cnty. Arpt., Comm. Int'l. Arpt. Rev., Second Ser. Issue 8A, A.M.T., F.G.I.C. Aaa 6.25 5/01/20 2,000 2,151,440 San Francisco City & Cnty., Redev. Agcy., Lease Rev., C.A.B.S. A1 Zero 7/01/06 1,500 1,307,985 C.A.B.S. A1 Zero 7/01/07 2,250 1,868,355 San Joaquin Hills Trans. Corridor Agcy., Toll Rd. Rev., Jr. Lien, C.A.B.S. Aaa Zero 1/01/11 2,000(f) 1,396,960 Sr. Lien, C.A.B.S. Aaa Zero 1/01/22 15,000(f) 5,312,850 San Leandro Cmnty. Facs., Spec. Tax, Dist. No. 1 NR 6.50 9/01/25 2,160 2,216,678 San Luis Obispo, C.O.P., Vista Hosp. Sys., Inc. NR 8.375 7/01/29 1,000(e)(g) 372,500 Santa Margarita Wtr. Dist. Spec. Tax, Cmnty. Facs., Dist. No. 99-1 NR 6.20 9/01/20 2,000 2,072,320 Cmnty. Facs., Dist. No. 99-1 NR 6.25 9/01/29 2,000 2,062,120 Santa Margarita, Dana Point Auth., Impvt. Dists. 1, 2, 2A, 8, Ser. A, M.B.I.A. Aaa 7.25 8/01/09 905 1,119,847 Impvt. Dists. 3, 3A, 4, 4A, Ser. B, M.B.I.A. Aaa 7.25 8/01/14 1,000 1,286,110 South Orange Cnty., Pub. Fin. Auth., Sr. Lien, Ser. A, M.B.I.A. Aaa 7.00 9/01/10 2,535(g) 3,134,578
12 See Notes to Financial Statements Prudential California Municipal Fund California Income Series Portfolio of Investments as of February 28, 2002 (Unaudited) Cont'd.
Principal Moody's Interest Maturity Amount Value Description (a) Rating Rate Date (000) (Note 1) - ---------------------------------------------------------------------------------------------------------- South San Francisco Redev. Agcy., Tax Alloc., Gateway Redev. Proj. NR 7.60% 9/01/18 $ 2,375(f) $ 2,497,194 South Tahoe Joint Pwrs. Fin. Auth. Rev., Rfdg. Redev. Proj. Area No. 1, Ser. B BBB-(c) 6.00 10/01/28 3,000 3,038,100 Southern California Pub. Pwr. Auth., Pwr. Proj. Rev. A2 6.75 7/01/10 4,250(g) 5,088,440 Pwr. Proj. Rev., Rfdg., Palo Verde Proj., Ser. C, A.M.B.A.C. Aaa Zero 7/01/16 8,400(g) 4,248,468 Stockton Cmnty. Facs. Dist., Spec. Tax, No. 90-2, Brookside Estates NR 6.20 8/01/15 1,050 1,093,901 Sulphur Springs Unified Sch. Dist., Int. Accrual, Ser. A, M.B.I.A. Aaa Zero 9/01/11 3,000 2,009,340 Temecula Valley Unified Sch. Dist., Cmnty. Facs., Spec. Tax, Dist. No. 89-1 NR 8.60 9/01/17 2,600(g) 2,639,234 Tustin California Unified Sch. Dist., B.A.N., Cmnty. Facs., Dist. No. 97-1 NR 6.10 9/01/02 1,000 1,018,400 Spec. Tax, Cmnty. Facs., Dist. No. 97-1 NR 6.375 9/01/35 1,500 1,541,475 Vacaville Cmnty. Redev. Agcy., Multi-family Rev., Cmnty. Hsg. Fin., Issue A A-(c) 7.375 11/01/14 1,110(f) 1,287,245 Vallejo C.O.P., Touro Univ. Ba3 7.375 6/01/29 2,500(g) 2,567,825 Ventura California Port Dist., C.O.P. NR 6.375 8/01/28 3,500 3,521,280 Victor Valley, Union H.S. Dist., C.A.B.S., M.B.I.A. Aaa Zero 9/01/17 4,500 2,120,850 Union H.S. Dist., C.A.B.S., M.B.I.A. Aaa Zero 9/01/19 5,450 2,245,128 Union H.S. Dist., C.A.B.S., M.B.I.A. Aaa Zero 9/01/20 5,850 2,262,136 West Contra Costa Unified Sch. Dist., C.O.P. Baa3 6.875 1/01/09 875 944,536 ------------ Total long-term investments (cost $226,184,255) 245,415,595 ------------ SHORT-TERM INVESTMENTS 6.4% - ---------------------------------------------------------------------------------------- California Poll. Ctrl. Fin. Auth. Res. Recov. Rev., Burney Forest Products Proj., Ser. A, F.R.D.D. P-1 1.35(d) 3/01/02 2,000 2,000,000
See Notes to Financial Statements 13 Prudential California Municipal Fund California Income Series Portfolio of Investments as of February 28, 2002 (Unaudited) Cont'd.
Principal Moody's Interest Maturity Amount Value Description (a) Rating Rate Date (000) (Note 1) - ---------------------------------------------------------------------------------------------------------- California Poll. Ctrl. Fin. Auth., Res. Recov. Rev., OMS Equity Stanislaus Proj., F.R.D.D. VMIG1 1.45%(d) 3/01/02 $ 6,800 $ 6,800,000 California St., G.O., Mun. Secs. Trust Rcpts., SGA 119, F.G.I.C., F.R.D.D. A-1+(c) 1.30(d) 3/01/02 1,600 1,600,000 California Statewide Cmntys. Dev. Auth., Solid Waste Facs. Rev., Chevron USA, Inc. Proj., A.M.T., F.R.D.D. Aa2 1.30(d) 3/01/02 900 900,000 Indio Multi-family Rev., Refdg., Hsg. Mtge., Carreon, Ser. A A1+(c) 1.08(d) 3/07/02 1,650 1,650,000 Mun. Secs. Trust Cert., F.R.W.D. Ser. 2000, 91 Trust Cert. Class A, 144A, M.B.I.A. A-1(c) 1.30 3/01/02 1,200 1,200,000 Ser. 2001, 136 Trust Cert. Class A, 144A, F.G.I.C. A-1(c) 1.30 3/01/02 300 300,000 San Jose Redev. Agcy., Tax Alloc., Fltr. Cert. Ser. 149, M.B.I.A., F.R.W.D. VMIG1 1.14 3/07/02 2,000 2,000,000 ------------ Total short-term investments (cost $16,450,000) 16,450,000 ------------ Total Investments 101.6% (cost $242,634,255; Note 5) 261,865,595 Liabilities in excess of other assets (1.6)% (4,136,922) ------------ Net Assets 100% $257,728,673 ------------ ------------
14 See Notes to Financial Statements Prudential California Municipal Fund California Income Series Portfolio of Investments as of February 28, 2002 (Unaudited) 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. B.A.N.--Bond Anticipation Note. C.A.B.S.--Capital Appreciation Bonds. C.O.P.--Certificates 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.S.A.--Financial Security Assurance. G.N.M.A.--Government National Mortgage Association. G.O.--General Obligation. M.B.I.A.--Municipal Bond Insurance Association. R.I.B.S.--Residual Interest Bonds. 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 period end. (e) Issuer 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 15 Prudential California Municipal Fund California Income Series Statement of Assets and Liabilities (Unaudited)
February 28, 2002 - ---------------------------------------------------------------------------------------- ASSETS Investments, at value (cost $242,634,255) $ 261,865,595 Cash 69,543 Interest receivable 3,682,193 Receivable for Series shares sold 277,342 Other assets 3,647 ----------------- Total assets 265,898,320 ----------------- LIABILITIES Payable for investments purchased 7,353,626 Payable for Fund shares reacquired 432,074 Dividend payable 137,566 Management fee payable 98,177 Distribution fee payable 65,751 Accrued expenses 43,703 Due to broker-variation margin 23,655 Deferred trustee's fees 15,095 ----------------- Total liabilities 8,169,647 ----------------- NET ASSETS $ 257,728,673 ----------------- ----------------- Net assets were comprised of: Shares of beneficial interest, at par $ 236,088 Paid-in capital in excess of par 242,084,444 ----------------- 242,320,532 Undistributed net investment income 69,414 Accumulated net realized loss on investments (3,880,824) Net unrealized appreciation on investments 19,219,551 ----------------- Net assets, February 28, 2002 $ 257,728,673 ----------------- -----------------
16 See Notes to Financial Statements Prudential California Municipal Fund California Income Series Statement of Assets and Liabilities (Unaudited) Cont'd.
February 28, 2002 - ---------------------------------------------------------------------------------------- Class A: Net asset value and redemption price per share ($171,207,271 / 15,683,447 shares of beneficial interest issued and outstanding) $10.92 Maximum sales charge (3% of offering price) .34 ----------------- Maximum offering price to public $11.26 ----------------- ----------------- Class B: Net asset value, offering price and redemption price per share ($73,415,263 / 6,724,893 shares of beneficial interest issued and outstanding) $10.92 ----------------- ----------------- Class C: Net asset value and redemption price per share ($8,889,634 / 814,284 shares of beneficial interest issued and outstanding) $10.92 Sales charge (1% of offering price) .11 ----------------- Offering price to public $11.03 ----------------- ----------------- Class Z: Net asset value, offering price and redemption price per share ($4,216,505 / 386,196 shares of beneficial interest issued and outstanding) $10.92 ----------------- -----------------
See Notes to Financial Statements 17 Prudential California Municipal Fund California Income Series Statement of Operations (Unaudited)
Six Months Ended February 28, 2002 - ---------------------------------------------------------------------------------------- NET INVESTMENT INCOME Income Interest $ 7,041,151 ----------------- Expenses Management fee 639,187 Distribution fee--Class A 210,320 Distribution fee--Class B 185,393 Distribution fee--Class C 34,098 Custodian's fees and expenses 48,000 Reports to shareholders 25,000 Transfer agent's fees and expenses 24,000 Registration fees 18,000 Legal fees and expenses 14,000 Audit fee 7,000 Trustees' fees 6,000 Miscellaneous 6,739 ----------------- Total expenses 1,217,737 Custodian fee credit (Note 1) (452) ----------------- Net expenses 1,217,285 ----------------- Net investment income 5,823,866 ----------------- REALIZED AND UNREALIZED (LOSS) GAIN ON INVESTMENTS Net realized gain on: Investment transactions 536,998 Interest rate swaps 144,890 Financial futures transactions 334,675 ----------------- 1,016,563 ----------------- Net change in unrealized appreciation (depreciation) on: Investments (5,242,815) Interest rate swaps (47,502) Financial futures contracts (73,977) ----------------- (5,364,294) ----------------- Net loss on investments (4,347,731) ----------------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 1,476,135 ----------------- -----------------
18 See Notes to Financial Statements Prudential California Municipal Fund California Income Series Statement of Changes in Net Assets (Unaudited)
Six Months Year Ended Ended February 28, 2002 August 31, 2001 - ------------------------------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS Operations Net investment income $ 5,823,866 $ 12,133,924 Net realized gain (loss) on investment transactions 1,016,563 (114,711) Net change in unrealized appreciation on investments (5,364,294) 10,492,321 ----------------- --------------- Net increase in net assets resulting from operations 1,476,135 22,511,534 ----------------- --------------- Dividends and distributions (Note 1): Dividends from net investment income Class A (4,052,771) (7,935,176) Class B (1,692,971) (3,619,215) Class C (197,378) (361,242) Class Z (105,065) (218,291) ----------------- --------------- (6,048,185) (12,133,924) ----------------- --------------- Distributions in excess of net investment income Class A -- (2,442) Class B -- (1,183) Class C -- (123) Class Z -- (60) ----------------- --------------- -- (3,808) ----------------- --------------- Series share transactions (net of share conversions) (Note 6): Net proceeds from shares sold 19,290,975 31,072,904 Net asset value of shares issued to shareholders in reinvestment of dividends and distributions 2,698,805 5,414,668 Cost of shares reacquired (18,381,156) (48,547,384) ----------------- --------------- Net increase (decrease) in net assets from Series share transactions 3,608,624 (12,059,812) ----------------- --------------- Total decrease (963,426) (1,686,010) NET ASSETS Beginning of period 258,692,099 260,378,109 ----------------- --------------- End of period(a) $ 257,728,673 $ 258,692,099 ----------------- --------------- ----------------- --------------- (a) Includes undistributed net investment income of $ 69,414 $ 293,733 ----------------- ---------------
See Notes to Financial Statements 19 Prudential California Municipal Fund California Income Series Notes to Financial Statements (Unaudited) 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. 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) is realized and is presented in the statement of operations as net realized gain (loss) on financial futures transactions. 20 Prudential California Municipal Fund California Income Series Notes to Financial Statements (Unaudited) Cont'd. 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 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 investment. When the Series writes an option, it receives a premium and an amount equal to that premium is recorded as a liability. The investment or liability is adjusted daily to reflect the current market value of the option. If an option expires unexercised, the 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 bears the market risk of an unfavorable change in the price of the security underlying 21 Prudential California Municipal Fund California Income Series Notes to Financial Statements (Unaudited) Cont'd. 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 securities 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. 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. 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 federal income tax regulations which may differ from generally accepted accounting principles. 22 Prudential California Municipal Fund California Income Series Notes to Financial Statements (Unaudited) Cont'd. 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 LLC ('PI'), formerly known as Prudential Investments Fund Management LLC. Pursuant to this agreement, PI has responsibility for all investment advisory services and supervises the subadviser's performance of such services. PI has entered into a subadvisory agreement with The 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. PI continues to have reponsibility for all investment advisory services pursuant to the management agreement and supervises PIM's performance of such services. PI 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 PI 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 Fund compensates PIMS for distribution-related activities at an annual rate of up to .30 of 1%, .50 of 1% and 1% of the average daily net assets of the Class A, B and C shares, respectively. Such expenses under the Plans were .25 of 1%, .50 of 1% and .75 of 1% of the average daily net assets of the Class A, B and C shares, respectively, for the six months ended February 28, 2002. PIMS has advised the Series that it received approximately $85,700 and $7,900 in front-end sales charges resulting from sales of Class A and Class C shares, respectively, during the six months ended February 28, 2002. From these fees, PIMS paid a substantial part of such sales charges to affiliated broker-dealers which in turn paid commissions to sales persons and incurred other distribution costs. 23 Prudential California Municipal Fund California Income Series Notes to Financial Statements (Unaudited) Cont'd. PIMS has advised the Series that for the six months ended February 28, 2002, it received approximately $76,100 and $3,400 in contingent deferred sales charges imposed upon certain redemptions by Class B and Class C shareholders, respectively. PI, PIMS and PIM are indirect wholly owned subsidiaries of Prudential Financial, Inc. ('Prudential'). The Series, along with other affiliated registered investment companies (the 'Funds'), entered into a syndicated credit agreement ('SCA') with an unaffiliated lender. Effective September 14, 2001, the maximum commitment under the SCA was increased from $500 million to $930 million through December 31, 2001. Effective January 1, 2002, the commitment was reduced to $500 million. Interest on any such borrowings will be at market rates. The Funds pay a commitment fee of .080 of 1% of the unused portion of the credit facility. The commitment fee is accrued and paid quarterly on a pro rata basis by the Funds. The expiration date of the SCA is May 3, 2002. Prior to March 7, 2001, the maximum commitment was $1 billion. All other terms and conditions are unchanged. The purpose of the SCA 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 six months ended February 28, 2002. Note 3. Other Transactions with Affiliates Prudential Mutual Fund Services LLC ('PMFS'), an affiliate of PI and an indirect wholly owned subsidiary of Prudential, serves as the Fund's transfer agent. During the six months ended February 28, 2002, the Series incurred fees of approximately $21,700 for the services of PMFS. As of February 28, 2002 approximately $3,700 of such fees were due to PMFS. Effective November 1, 2001, the Fund pays networking fees to Prudential Securities, Inc. ('PSI'), an affiliate of PI and an indirect, wholly-owned subsidiary of Prudential. These networking fees are payments made to broker/dealers that clear mutual fund transactions through a national mutual fund clearing system. The total amount paid to PSI during the period was $2,468 and is included in transfer agent's fees and expenses in the statement of operations. Note 4. Portfolio Securities Purchases and sales of portfolio securities of the Series, excluding short-term investments, for the six months ended February 28, 2002 were $26,700,421 and $34,183,024, respectively. During the six months ended February 28, 2002, the Fund entered into financial futures contracts. Details of open contracts at February 28, 2002 are as follows: 24 Prudential California Municipal Fund California Income Series Notes to Financial Statements (Unaudited) Cont'd.
Value at Value at Number of Expiration February 28, Trade Unrealized Contracts Type Date 2002 Date Depreciation - --------- ---------------- ----------- ------------ ---------- -------------- Long Position: 50 U.S. Treasury Bond Future March 2002 $5,204,688 $5,215,411 $(10,723) 20 U.S. Treasury Bond Future June 2002 2,058,125 2,059,191 (1,066) -------------- $(11,789) -------------- --------------
Note 5. Tax Information For federal income tax purposes, the Series has a capital loss carryforward at August 31, 2001 of approximately $4,658,000 of which $1,521,000 expires in 2003, $976,000 expires in 2004, $911,000 expires in 2008 and $1,250,000 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 current fiscal year. The United States federal income tax basis of the Series' investments and the net unrealized appreciation as of February 28, 2002 were as follows: Total Net Unrealized Tax Basis Appreciation Depreciation Appreciation - ------------ ------------ ------------ ------------ $242,634,255 $ 21,400,541 $ 2,169,201 $ 19,231,340 Note 6. 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. A special exchange privilege is also available for shareholders who qualify to purchase Class A shares at net asset value. The Fund has authorized an unlimited number of shares of beneficial interest for each class at $.01 par value per share. 25 Prudential California Municipal Fund California Income Series Notes to Financial Statements (Unaudited) Cont'd. Transactions in shares of beneficial interest for the six months ended February 28, 2002 and the fiscal year ended August 31, 2001 were as follows:
Class A Shares Amount - ------------------------------------------------------------ ---------- ------------ Six months ended February 28, 2002: Shares sold 1,181,534 $ 12,943,135 Shares issued in reinvestment of dividends 161,353 1,757,409 Shares reacquired (1,006,546) (11,021,764) ---------- ------------ Net increase (decrease) in shares outstanding before conversion 336,341 3,678,780 Shares issued upon conversion from Class B 317,055 3,451,200 ---------- ------------ Net increase (decrease) in shares outstanding 653,396 $ 7,129,980 ---------- ------------ ---------- ------------ 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) ---------- ------------ ---------- ------------ Class B - ------------------------------------------------------------ Six months ended February 28, 2002: Shares sold 401,124 $ 4,393,794 Shares issued in reinvestment of dividends 67,290 733,054 Shares reacquired (466,985) (5,103,723) ---------- ------------ Net increase (decrease) in shares outstanding before conversion 1,429 23,125 Shares issued upon conversion into Class A (317,055) (3,451,200) ---------- ------------ Net increase (decrease) in shares outstanding (315,626) $ (3,428,075) ---------- ------------ ---------- ------------ 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) ---------- ------------ ---------- ------------
26 Prudential California Municipal Fund California Income Series Notes to Financial Statements (Unaudited) Cont'd.
Class C Shares Amount - ------------------------------------------------------------ ---------- ------------ Six months ended February 28, 2002: Shares sold 89,081 $ 981,184 Shares issued in reinvestment of dividends 14,367 156,475 Shares reacquired (134,506) (1,472,309) ---------- ------------ Net increase (decrease) in shares outstanding (31,058) $ (334,650) ---------- ------------ ---------- ------------ 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 ---------- ------------ ---------- ------------ Class Z - ------------------------------------------------------------ Six months ended February 28, 2002: Shares sold 88,878 $ 972,862 Shares issued in reinvestment of dividends 4,760 51,867 Shares reacquired (72,080) (783,360) ---------- ------------ Net increase (decrease) in shares outstanding 21,558 $ 241,369 ---------- ------------ 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) ---------- ------------ ---------- ------------
27 Prudential California Municipal Fund California Income Series Financial Highlights (Unaudited)
Class A ----------------- Six Months Ended February 28, 2002 - ---------------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE: Net asset value, beginning of period $ 11.11 ----------------- Income from investment operations Net investment income .25 Net realized and unrealized gain (loss) on investment transactions (.18) ----------------- Total from investment operations .07 ----------------- Less distributions Dividends from net investment income (.26) Distributions in excess of net investment income -- ----------------- Total distributions (.26) ----------------- Net asset value, end of period $ 10.92 ----------------- ----------------- TOTAL RETURN(b): .68% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000) $ 171,207 Average net assets (000) $ 169,651 Ratios to average net assets: Expenses, including distribution and service (12b-1) fees .87%(d) Expenses, excluding distribution and service (12b-1) fees .62%(d) Net investment income 4.64%(d) For Class A, B, C and Z shares: Portfolio turnover rate 11%
- ------------------------------ (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 less than one full year are not annualized. (c) Less than $.005 per share. (d) Annualized. 28 See Notes to Financial Statements Prudential California Municipal Fund California Income Series Financial Highlights (Unaudited) Cont'd.
Class A - ---------------------------------------------------------------------------------------------------------- Year Ended August 31, - ---------------------------------------------------------------------------------------------------------- 2001 2000 1999 1998 1997 - ---------------------------------------------------------------------------------------------------------- $ 10.66 $ 10.49 $ 11.19 $ 10.71 $ 10.33 - ---------------- ---------------- ---------------- ---------------- ---------------- .52 .54 .56(a) .59(a) .60(a) .45 .17 (.70) .49 .38 - ---------------- ---------------- ---------------- ---------------- ---------------- .97 .71 (.14) 1.08 .98 - ---------------- ---------------- ---------------- ---------------- ---------------- (.52) (.54) (.56) (.59) (.60) --(c) --(c) -- (.01) --(c) - ---------------- ---------------- ---------------- ---------------- ---------------- (.52) (.54) (.56) (.60) (.60) - ---------------- ---------------- ---------------- ---------------- ---------------- $ 11.11 $ 10.66 $ 10.49 $ 11.19 $ 10.71 - ---------------- ---------------- ---------------- ---------------- ---------------- - ---------------- ---------------- ---------------- ---------------- ---------------- 9.35% 7.10% (1.37)% 10.31% 9.72% $167,009 $167,153 $183,593 $181,512 $156,684 $164,424 $171,688 $187,106 $165,771 $153,019 .87% .86% .76%(a) .68%(a) .73%(a) .62% .61% .56%(a) .58%(a) .63%(a) 4.83% 5.21% 5.03%(a) 5.39%(a) 5.66%(a) 32% 34% 23% 10% 16%
See Notes to Financial Statements 29 Prudential California Municipal Fund California Income Series Financial Highlights (Unaudited) Cont'd.
Class B ----------------- Six Months Ended February 28, 2002 - ---------------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE: Net asset value, beginning of period $ 11.11 -------- Income from investment operations Net investment income .24 Net realized and unrealized gain (loss) on investment transactions (.18) -------- Total from investment operations .06 -------- Less distributions Dividends from net investment income (.25) Distributions in excess of net investment income -- -------- Total distributions (.25) -------- Net asset value, end of period $ 10.92 -------- -------- TOTAL RETURN(b): .56% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000) $73,415 Average net assets (000) $74,772 Ratios to average net assets: Expenses, including distribution and service (12b-1) fees 1.12%(d) Expenses, excluding distribution and service (12b-1) fees .62%(d) Net investment income 4.39%(d)
- ------------------------------ (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 less than one full year are not annualized. (c) Less than $.005 per share. (d) Annualized. 30 See Notes to Financial Statements Prudential California Municipal Fund California Income Series Financial Highlights (Unaudited) Cont'd.
Class B - ---------------------------------------------------------------------------------------------------------- Year Ended August 31, - ---------------------------------------------------------------------------------------------------------- 2001 2000 1999 1998 1997 - ---------------------------------------------------------------------------------------------------------- $ 10.67 $ 10.49 $ 11.19 $ 10.71 $ 10.33 -------- -------- -------- -------- -------- .49 .51 .53(a) .55(a) .55(a) .44 .18 (.70) .49 .38 -------- -------- -------- -------- -------- .93 .69 (.17) 1.04 .93 -------- -------- -------- -------- -------- (.49) (.51) (.53) (.55) (.55) --(c) --(c) -- (.01) --(c) -------- -------- -------- -------- -------- (.49) (.51) (.53) (.56) (.55) -------- -------- -------- -------- -------- $ 11.11 $ 10.67 $ 10.49 $ 11.19 $ 10.71 -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- 8.98% 6.93% (1.67)% 9.87% 9.28% $ 78,237 $ 80,580 $ 84,546 $ 70,535 $ 47,436 $ 79,046 $ 78,743 $ 81,163 $ 56,011 $ 40,983 1.12% 1.11% 1.06%(a) 1.08%(a) 1.13%(a) .62% .61% .56%(a) .58%(a) .63%(a) 4.58% 4.96% 4.78%(a) 4.99%(a) 5.26%(a)
See Notes to Financial Statements 31 Prudential California Municipal Fund California Income Series Financial Highlights (Unaudited) Cont'd.
Class C ----------------- Six Months Ended February 28, 2002 - ---------------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE: Net asset value, beginning of period $ 11.11 ------- Income from investment operations Net investment income .22 Net realized and unrealized gain (loss) on investment transactions (.18) ------- Total from investment operations .04 ------- Less distributions Dividends from net investment income (.23) Distributions in excess of net investment income -- ------- Total distributions (.23) ------- Net asset value, end of period $ 10.92 ------- ------- TOTAL RETURN(b): .42% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000) $ 8,890 Average net assets (000) $ 9,168 Ratios to average net assets: Expenses, including distribution and service (12b-1) fees 1.37%(d) Expenses, excluding distribution and service (12b-1) fees .62%(d) Net investment income 4.17%(d)
- ------------------------------ (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 less than one full year are not annualized. (c) Less than $.005 per share. (d) Annualized. 32 See Notes to Financial Statements Prudential California Municipal Fund California Income Series Financial Highlights (Unaudited) Cont'd.
Class C - ---------------------------------------------------------------------------------------------------------- Year Ended August 31, - ---------------------------------------------------------------------------------------------------------- 2001 2000 1999 1998 1997 - ---------------------------------------------------------------------------------------------------------- $10.67 $10.49 $ 11.19 $10.71 $10.33 ------- ------- -------- ------- ------- .47 .49 .50(a) .52(a) .53(a) .44 .18 (.70) .49 .38 ------- ------- -------- ------- ------- .91 .67 (.20) 1.01 .91 ------- ------- -------- ------- ------- (.47) (.49) (.50) (.52) (.53) --(c) --(c) -- (.01) --(c) ------- ------- -------- ------- ------- (.47) (.49) (.50) (.53) (.53) ------- ------- -------- ------- ------- $11.11 $10.67 $ 10.49 $11.19 $10.71 ------- ------- -------- ------- ------- ------- ------- -------- ------- ------- 8.71% 6.66% (1.91)% 9.60% 9.01% $9,394 $8,309 $ 10,847 $5,960 $3,611 $8,346 $9,021 $ 9,088 $4,491 $3,135 1.37% 1.36% 1.31%(a) 1.33%(a) 1.38%(a) .62% .61% .56%(a) .58%(a) .63%(a) 4.33% 4.71% 4.53%(a) 4.74%(a) 5.01%(a)
See Notes to Financial Statements 33 Prudential California Municipal Fund California Income Series Financial Highlights (Unaudited) Cont'd.
Class Z ----------------- Six Months Ended February 28, 2002 - ---------------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE: Net asset value, beginning of period $ 11.11 ------- Income from investment operations Net investment income .26 Net realized and unrealized gain (loss) on investment transactions (.18) ------- Total from investment operations .08 ------- Less distributions Dividends from net investment income (.27) Distributions in excess of net investment income -- ------- Total distributions (.27) ------- Net asset value, end of period $ 10.92 ------- ------- TOTAL RETURN(b): .80% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000) $ 4,217 Average net assets (000) $ 4,203 Ratios to average net assets: Expenses, including distribution and service (12b-1) fees .62%(e) Expenses, excluding distribution and service (12b-1) fees .62%(e) Net investment income 4.87%(e)
- ------------------------------ (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 less than one full year are not annualized. (c) Less than $.005 per share. (d) Commencement of offering of Class Z shares. (e) Annualized. 34 See Notes to Financial Statements Prudential California Municipal Fund California Income Series Financial Highlights (Unaudited) Cont'd.
Class Z - --------------------------------------------------------------------------------- Year Ended August 31, September 18, 1996(d) - ------------------------------------------------------- through August 31, 2001 2000 1999 1998 1997 - --------------------------------------------------------------------------------- $10.65 $10.49 $11.19 $10.71 $ 10.38 - ---------- ---------- ---------- ---------- ------- .55 .56 .58(a) .61(a) .57(a) .46 .16 (.70) .49 .33 - ---------- ---------- ---------- ---------- ------- 1.01 .72 (.12) 1.10 .90 - ---------- ---------- ---------- ---------- ------- (.55) (.56) (.58) (.61) (.57) --(c) --(c) -- (.01) --(c) - ---------- ---------- ---------- ---------- ------- (.55) (.56) (.58) (.62) (.57) - ---------- ---------- ---------- ---------- ------- $11.11 $10.65 $10.49 $11.19 $ 10.71 - ---------- ---------- ---------- ---------- ------- - ---------- ---------- ---------- ---------- ------- 9.72% 7.26% (1.18)% 10.42% 8.86% $4,052 $4,336 $5,449 $4,507 $ 1,963 $4,292 $4,281 $4,725 $3,312 $ 970 .62% .61% .56%(a) .58%(a) .63%(a)(e) .62% .61% .56%(a) .58%(a) .63%(a)(e) 5.09% 5.45% 5.28%(a) 5.49%(a) 5.76%(a)(e)
See Notes to Financial Statements 35 Prudential California Municipal Fund California Income Series Getting the Most from Your Prudential Mutual Fund When you invest through Prudential Mutual Funds, you receive financial advice from a Prudential Securities Financial Advisor or Pruco Securities registered representative. Your financial professional can provide you with the following services: THERE'S NO REWARD WITHOUT RISK; BUT IS THIS RISK WORTH IT? Your financial professional can help you match the reward you seek with the risk you can tolerate. Risk can be difficult to gauge-- sometimes even the simplest investments bear surprising risks. The educated investor knows that markets seldom move in just one direction. There are times when a market sector or asset class will lose value or provide little in the way of total return. Managing your own expectations is easier with help from someone who understands the markets, and who knows you! KEEPING UP WITH THE JONESES A financial professional can help you wade through the numerous available mutual funds to find the ones that fit your individual investment profile and risk tolerance. While the newspapers and popular magazines are full of advice about investing, they are aimed at generic groups of people or representative individuals--not at you personally. Your financial professional will review your investment objectives with you. This means you can make financial decisions based on the assets and liabilities in your current portfolio and your risk tolerance--not just based on the current investment fad. BUY LOW, SELL HIGH Buying at the top of a market cycle and selling at the bottom are among the most common investor mistakes. But sometimes it's difficult to hold on to an investment when it's losing value every month. Your financial professional can answer questions when you're confused or worried about your investment, and should remind you that you're investing for the long haul. www.PruFN.com (800) 225-1852 FOR MORE INFORMATION Prudential Mutual Funds Gateway Center Three 100 Mulberry Street Newark, NJ 07102-4077 (800) 225-1852 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. Gateway Center Two Newark, NJ 07102 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 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. The accompanying financial statements as of February 28, 2002, were not audited and, accordingly, no opinion is expressed on them. Fund Symbols Nasdaq CUSIP Class A PBCAX 744313305 Class B PCAIX 744313404 Class C PCICX 744313800 Class Z PCIZX 744313875 MF146E2 IFS-A070378 Mutual funds are not bank guaranteed or FDIC insured, and may lose value. SEMIANNUAL REPORT FEBRUARY 28, 2002 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. PRUDENTIAL (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 issuers located in Puerto Rico, Guam, and the U.S. Virgin Islands). There can be no assurance that the Series will achieve its investment objective. Money Fund Yield Comparison (CHART) www.PruFN.com (800) 225-1852 Semiannual Report February 28, 2002 Fund Facts As of 2/28/02
7-Day Net Asset Taxable Equivalent Yield* Weighted Avg. Net Assets Current Yld. Value (NAV) @ 31% @ 36% @ 38.6% Mat. (WAM) (Millions) CA Money Market Series 0.83% $1.00 1.33% 1.43% 1.49% 52 Days $278 iMoneyNet, Inc.'s State Specific Retail California Avg.** 0.80% $1.00 1.28% 1.38% 1.44% 36 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 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.'s State Specific Retail California Average category as of February 25, 2002, the closest date to the end of our reporting period. Weighted Average Maturity Comparison (CHART) 1 PRUDENTIAL (LOGO) April 17, 2002 DEAR SHAREHOLDER, Our reporting period ended February 28, 2002, was a noteworthy time in the money markets. The National Bureau of Economic Research announced that the U.S. economy had slid into a recession for the first time in a decade. As the Federal Reserve (the Fed) continued cutting short-term interest rates to revitalize the economy, the financial markets became increasingly volatile. This uncertain economic environment prompted many investors to seek the comparative safety provided by money market funds that invest in taxable or municipal securities. Money market funds can play an important role in a well-diversified portfolio of investments that should also include longer-term debt securities and stocks. Consulting your financial professional can help determine the suitability of these investments, given your risk profile and long-term goals, as well as the appropriate mix to help you meet your investment needs. We explain conditions in the municipal money market and the Series' investment strategy on the following pages. As always, thank you for your continued confidence in Prudential mutual funds. Sincerely, David R. Odenath, Jr., President Prudential California Municipal Fund 2 Prudential California Municipal Fund California Money Market Series Semiannual Report February 28, 2002 INVESTMENT ADVISER'S REPORT PERFORMANCE California Money Market Series provided a competitive yield during our fiscal half-year ended February 28, 2002. On that date, the Series' seven-day current yield was 0.83% versus 0.80% for the average California money fund tracked by iMoneyNet. The Series' net asset value remained at $1 per share. INVESTING AS SHORT-TERM RATES DECLINED We faced three key challenges during our fiscal half-year. First, we needed to lock in yields on attractively priced California money market securities before the Fed's campaign to ease monetary policy drove yields progressively lower. Second, we had to prepare the Series to meet additional shareholder liquidity needs that typically occur at the end of a calendar year. Third, we had to maintain our conservative approach to selecting investments amid a national recession, and more specifically, deterioration in the state of California's financial health. Fed policymakers had already cut short-term rates seven times in 2001 before our reporting period began. They eased monetary policy four more times during our fiscal half-year. Thus, the rate banks charge each other for overnight loans fell a total of 4.75 percentage points to 1.75%. The rate member banks pay to borrow from the Fed's discount window slid by the same amount to 1.25%. This was the first time in 40 years that rates declined below 2%. In this falling interest-rate environment, we met our first challenge by positioning the Series' weighted average maturity (WAM) longer than that of the average comparable fund as tracked by iMoneyNet. (WAM measures a fund's sensitivity to changes in the level of interest rates. It considers the maturity and quantity of each security held by a fund.) Having a longer than average WAM helped the Series provide a competitive yield during our reporting period. 3 Prudential California Municipal Fund California Money Market Series Semiannual Report February 28, 2002 We initially lengthened the Series' WAM in September 2001 by investing in tax-exempt commercial paper that matured in two months. In addition, we bought tax- exempt commercial paper that matured around the close of 2001 in order to have enough funds available to meet the Series' anticipated fund outflows at the end of the calendar year. RIDING OUT THE "JANUARY EFFECT" Increasing the Series' liquidity also provided us with buying power to take advantage of investment opportunities that arose in December as year-end selling pressure briefly pushed municipal money market yields higher. We bought tax and revenue anticipation notes that mature in one year. These purchases allowed the Series to avoid locking in yields at unattractive levels when the "January effect" temporarily pushed yields lower. The January effect refers to an annual occurrence that drives yields down as investors reinvest cash from coupon payments, bond calls, and maturing bonds. After the January effect faded, we avoided locking in yields on one-year California securities out of concern that yields would soon head higher if the Fed completed its campaign to ease monetary policy. As it turned out, the Fed did just that. Its assessment of risk to the economy changed from weakness to an even balance between weakness and inflation, suggesting that the Fed might soon start to increase short-term rates. Thus, money market yields rose. CALIFORNIA BOND RATING LOWERED Throughout our reporting period, we remained more deliberative than usual concerning the credit quality of the California securities that we purchased. California's financial health weakened amid the state's energy crisis that has required the California Department of Water Resources to spend billions of dollars purchasing electricity for the state's investor-owned utilities. California's long- term general obligation (GO) bond rating had already been downgraded earlier in 2001 to A-plus from AA by Standard & Poor's, and to 4 www.PruFN.com (800) 225-1852 Aa3 from Aa2 by Moody's Investors Service. Moody's lowered California's GO bond rating again during our fiscal half-year to A1 from Aa3, noting that, among other factors, the economic slump cut the state's revenue projections. LOOKING AHEAD We expect more California securities to be issued in 2002 than were issued in 2001. Plagued by revenue shortfalls, municipalities in the Golden State will be inclined to borrow money while interest rates are still at relatively low levels. Most notably, the state's Department of Water Resources hopes to sell approximately $11 billion of electric-revenue bonds. The majority of the bond proceeds will be used to repay the state's general fund for electricity purchased during the power shortage. This issue may include short-term bonds that can be purchased by municipal money market funds. The next major development in our market is tax season, during which shareholders withdraw monies from municipal money market funds to pay their taxes. We are building up liquidity in the portfolio to prepare the Series to satisfy its tax-time outflows. Prudential California Municipal Fund Management Team 5 Prudential California Municipal Fund California Money Market Series Portfolio of Investments as of February 28, 2002 (Unaudited)
Principal Moody's Interest Maturity Amount Value Description (a) Rating Rate Date (000) (Note 1) - ---------------------------------------------------------------------------------------------------------- ABC Uni. Sch. Dist., Ser. 2001, T.R.A.N. SP-1+(d) 2.00% 12/19/02 $ 10,000 $ 10,029,944 Alameda Cnty. Ind. Dev. Auth. Rev., Niles Machine & Tool Wks., Ser. 00A, F.R.W.D., A.M.T. A-1+(d) 1.20 3/07/02 475 475,000 Pacific Paper Tube Proj., Ser. 2001, F.R.W.D., A.M.T. A-1+(d) 1.20 3/07/02 2,700 2,700,000 Berkeley G.O., Ser. 2001, T.R.A.N. MIG1 3.00 12/05/02 3,000 3,024,742 California Econ. Dev. Fin. Auth. Rev., Mannesmann Dematic Rapistan Corp. Proj., Ser. 98, F.R.W.D., A.M.T. NR 1.10 3/07/02 3,200 3,200,000 California Edl. Fac. Auth. Rev., Carnegie Institution, Ser. 93B VMIG1 1.20 3/19/02 5,000 5,000,000 Carnegie Institution, Ser. 93B VMIG1 1.25 4/05/02 5,000 5,000,000 California Infrastructure & Econ. Dev. Bank, Ind. Dev. Rev., Starter & Alternator Proj., Ser. 99, F.R.W.D., A.M.T. A-1+(d) 1.15 3/06/02 5,000 5,000,000 California Poll. Ctrl. Rev. Fin. Auth., Burney Forest Prod. Proj., Ser. 88A, F.R.D.D. P-1 1.35 3/01/02 900 900,000 OMS Equity Stanislaus Proj., Ser. 87, F.R.D.D., A.M.T. A-1+(d) 1.45 3/01/02 3,600 3,600,000 Wadham Energy, Ser. B, F.R.W.D., A.M.T. A-1+(d) 1.25 3/06/02 2,750 2,750,000 Wadham Energy, Ser. C, F.R.W.D., A.M.T. A-1+(d) 1.25 3/06/02 10,650 10,650,000 Western Sky Dairy Proj., Ser. 2001A, F.R.W.D., A.M.T. NR 1.05 3/07/02 5,000 5,000,000 California Sch. Cash Reserve Prog. Auth., Ser. A, A.M.B.A.C. MIG1 4.00 7/03/02 5,000 5,022,337 California St. Dept. of Wtr. Res. Central Valley Proj. Rev., Wtr. Sys., Ser. M Aa2 8.50 12/01/02 1,000 1,048,002
6 See Notes to Financial Statements Prudential California Municipal Fund California Money Market Series Portfolio of Investments as of February 28, 2002 (Unaudited) Cont'd.
Principal Moody's Interest Maturity Amount Value Description (a) Rating Rate Date (000) (Note 1) - ---------------------------------------------------------------------------------------------------------- California St. Pub. Wks. Brd. Lease Rev., Various Univ. Cal. Projs., Ser. 92A NR 6.60% 12/01/02 $ 500(c) $ 528,570 California St., Veterans G.O., Ser. 00A, M.E.R.L.O.T., A.M.B.A.C., A.M.T. VMIG1 1.15 3/06/02 5,000 5,000,000 G.O., Mun. Secs. Trust Rcpts., Ser. SGA 55, F.R.W.D., F.G.I.C. A-1+(d) 1.08 3/06/02 4,000 4,000,000 G.O., Mun. Secs. Trust Rcpts., SGA 135, A.M.B.A.C., F.R.D.D. A-1+(d) 1.30 3/01/02 1,970 1,970,000 Putters G.O., Ser. 142, F.G.I.C., F.R.W.D. A-1+(d) 1.10 3/07/02 7,000 7,000,000 Putters G.O., Ser. 239, A.M.B.A.C., F.R.W.D. A-1+(d) 1.13 3/07/02 5,445 5,445,000 California Statewide Cmntys. Dev. Auth., Aegis of Aptos Proj., Multi-Fam. Rev., Ser. 98Y, F.R.W.D., A.M.T. A-1+(d) 1.20 3/07/02 7,350 7,350,000 Dix Metals, Ser. 98B, F.R.W.D., A.M.T. NR 1.10 3/06/02 5,045 5,045,000 Karcher Prop. Inc., Ser. 1994C, F.R.W.D., A.M.T. VMIG1 1.15 3/06/02 2,000 2,000,000 Porpak-California Corp., Ser. 94B, F.R.W.D., A.M.T. A-1+(d) 1.10 3/06/02 1,600 1,600,000 Solid Waste Facs. Rev., Chevron USA Inc. Proj., F.R.D.D., A.M.T. NR 1.30 3/01/02 3,500 3,500,000 Sutter Hlth., 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 10,595(f) 10,595,000 Clipper T.E.C.P., California Rural Home Mtge. Fin. Auth., Ser. 2002-3, C.O.P., A.M.B.A.C., A.M.T., F.R.W.D. VMIG1 1.09 3/07/02 6,795 6,795,000
See Notes to Financial Statements 7 Prudential California Municipal Fund California Money Market Series Portfolio of Investments as of February 28, 2002 (Unaudited) Cont'd.
Principal Moody's Interest Maturity Amount Value Description (a) Rating Rate Date (000) (Note 1) - ---------------------------------------------------------------------------------------------------------- Contra Costa Cnty., Merrithew Mem. Hosp., Ser. 154, F.R.W.D., M.B.I.A., C.O.P. VMIG1 1.10% 3/07/02 $ 5,995 $ 5,995,000 East Bay Mun. Util. Dist., Wtr. Sys. Rev., Ser. 1996, F.G.I.C. Aaa 6.00 6/01/02 600 604,346 Irvine Cal. Impvt. Bond Act of 1915, Assmt. Dist. 87-8, F.R.D.D. VMIG1 1.30 3/01/02 500 500,000 Assmt. Dist. 97-17, F.R.D.D. VMIG1 1.30 3/01/02 900 900,000 Irvine Ranch Cal. Wtr. Dist. Cap. Impvt. Proj., Ser. 86, F.R.D.D., C.O.P. VMIG1 1.30 3/01/02 1,600 1,600,000 Kern Cnty. Superintendent of Schs., Master Lease, Ser. 96A, F.R.W.D. A-1+(d) 1.05 3/07/02 1,495 1,495,000 Kern High Sch. Dist., G.O., Ser. 14, M.B.I.A., F.R.W.D. VMIG1 1.10 3/07/02 2,500 2,500,000 Lassen Mun. Util. Dist. Rev., Rfdg. Rev., Ser. 96A, F.R.W.D., F.S.A., A.M.T. VMIG1 1.20 3/07/02 6,100 6,100,000 Long Beach Hbr. Rev., M.B.I.A., A.M.T. Aaa 9.00 5/15/02 860 873,141 Los Angeles Cnty. Met. Trans. Auth. Sales Tax Rev., Ser. A A1 7.00 7/01/02 1,140 1,158,171 Los Angeles Cnty. Schs. Pooled Fin. Prog., G.O., Ser. A, F.S.A. SP-1+(d) 3.50 7/01/02 2,250 2,256,003 Los Angeles Dept. of Wtr. & Pwr., Elec. Plant Rev., Ser. 1993 NR 6.125 1/15/03 1,000(c) 1,058,367 Waterworks Rev., Ser. 99L, F.R.W.D., F.G.I.C. VMIG1 1.10 3/06/02 1,700 1,700,000 Los Angeles Multi-Fam. Rev., Fountain Park Proj., Ser. 1999P, A.M.T., F.R.W.D., F.N.M.A. A-1+(d) 1.05 3/07/02 4,400 4,400,000 Los Angeles Single Family Home Mtge. Rev., Ser. 2001B, A.M.T. SP-1+(d) 2.75 6/01/02 7,000 7,000,467
8 See Notes to Financial Statements Prudential California Municipal Fund California Money Market Series Portfolio of Investments as of February 28, 2002 (Unaudited) Cont'd.
Principal Moody's Interest Maturity Amount Value Description (a) Rating Rate Date (000) (Note 1) - ---------------------------------------------------------------------------------------------------------- Los Angeles Uni. Sch. Dist., Ser. B, C.O.P., M.B.I.A. Aaa 5.00% 10/01/02 $ 1,450 $ 1,473,413 Los Angeles Waste Wtr. Sys. Rev., Ser. 1993A, M.B.I.A. Aaa 9.00 6/01/02 1,000 1,015,683 Metropolitan Wtr. Dist. So. Cal., Waterworks Rev., Ser. 990, F.R.W.D., M.E.R.L.O.T. VMIG1 1.10 3/06/02 7,500 7,500,000 Waterworks Rev., Ser. 00B-3, F.R.D.D. VMIG1 1.30 3/01/02 1,900 1,900,000 Waterworks Rev., Ser. C, F.R.W.D. VMIG1 1.15 3/07/02 9,100 9,100,000 Millbrae Elem. Sch. Dist., Fin. Proj., Ser. 1992, C.O.P. NR 6.90 3/01/02 1,480(c) 1,509,600 Municipal Secs. Trust Certs. Los Angeles Uni. Sch. Dist., Ser. 2001-135, Cl. A, F.G.I.C., F.R.D.D. A-1(d) 1.30 3/01/02 11,495 11,495,000 San Francisco Airport Comm., Ser. 2001-136, Cl. A, F.G.I.C., F.R.D.D. A-1(d) 1.30 3/01/02 800 800,000 Napa Wtr. Rev. Rfdg., Ser. 01, M.B.I.A. Aaa 3.25 5/01/02 1,020 1,020,749 Oakland Rev., Ser. 00M, F.R.W.D.S., A.M.B.A.C., M.E.R.L.O.T. VMIG1 1.10 3/06/02 1,500 1,500,000 Ontario Rev., Hsg. Fin., Ser. 97A, F.R.W.D., A.M.T. A-1+(d) 1.10 3/07/02 2,900 2,900,000 Puerto Rico Highway & Trans. Auth., Trans. Rev., Ser. FFF, M.B.I.A., M.E.R.L.O.T. VMIG1 1.05 3/06/02 2,500 2,500,000 Roaring Fork Mun. Prods. LLC, Cedar Springs Apt., Ser. 01-12, F.R.W.D., A.M.T., F.N.M.A. NR 1.14 3/07/02 9,560 9,560,000 Rural Home Mtge. Fin. Auth., Ser. 01-2, F.R.W.D., A.M.T., F.N.M.A. NR 1.14 3/07/02 5,945 5,945,000
See Notes to Financial Statements 9 Prudential California Municipal Fund California Money Market Series Portfolio of Investments as of February 28, 2002 (Unaudited) Cont'd.
Principal Moody's Interest Maturity Amount Value Description (a) Rating Rate Date (000) (Note 1) - ---------------------------------------------------------------------------------------------------------- Sacramento Hsg. Auth., Ser. 00-22, F.R.W.D., A.M.T., F.N.M.A., G.N.M.A. NR 1.14% 3/07/02 $ 12,160 $ 12,160,000 Rubidoux Cmnty. Svcs. Dist. Wtr. Sys. Impvt. Proj., A.M.B.A.C., C.O.P. NR 6.20 12/01/02 2,510(c) 2,645,099 Sacramento Cnty. Sanit. Dist., Ser. SSS, F.R.W.D., M.E.R.L.O.T. VMIG1 1.10 3/06/02 2,300(c) 2,300,000 San Diego Cnty. Uni. Port Dist., Lindbergh Field, Ser. 1311 NR 1.10 3/18/02 1,500 1,500,000 San Diego Uni. Sch. Dist., Mun. Secs. Tr. Rcpts., SGA 120, M.B.I.A., F.R.W.D. A-1+(d) 1.08 3/06/02 5,000 5,000,000 San Francisco City & Cnty. Uni. Sch. Dist., G.O., T.R.A.N. MIG1 2.50 12/10/02 5,500 5,533,656 San Joaquin Hills Trans. Corridor Agy. Toll Rd. Rev., Sr. Lien NR 7.00 1/01/03 1,000(c) 1,061,721 San Jose Redev. Agcy. Rev., Tax Alloc., Ser. 149, F.R.W.D., A.M.T., M.B.I.A. VMIG1 1.14 3/07/02 645 645,000 San Leandro Multi-Fam. Hsg. Rev., Carlton Plaza of San Leandro., Ser. A, F.R.W.D., A.M.T. A-1+(d) 1.55 3/07/02 4,000 4,000,000 San Mateo Cnty., Multi-Fam. Hsg. Rev., Pacific Oaks Apts. Proj., Ser. 87A, F.R.W.D., A.M.T. VMIG1 1.20 3/06/02 2,600 2,600,000 Santa Rosa Hsg. Auth. Multi-Fam. Hsg. Rev., Apple Creek Apts., Ser. E, F.R.W.D. A-1+(d) 2.55 3/06/02 10,000 10,000,000 Southern California Home Fin. Auth. Single Family Mtge. Rev., Ser. A-3, A.M.T., G.N.M.A., F.N.M.A., F.H.L.M.C. NR 2.55 7/15/02 2,500 2,500,000 Univ. Rev., Mulitple Purp. Proj., Ser. A NR 6.875 9/01/02 750(c) 784,374 Multiple Purp. Proj., Ser. D NR 6.00 9/01/02 1,100(c) 1,145,914 Val Verde Uni. Sch. Dist., Ser. A, F.S.A., C.O.P. VMIG1 1.10 3/07/02 3,745 3,745,000
10 See Notes to Financial Statements Prudential California Municipal Fund California Money Market Series Portfolio of Investments as of February 28, 2002 (Unaudited) Cont'd.
Principal Moody's Interest Maturity Amount Value Description (a) Rating Rate Date (000) (Note 1) - ---------------------------------------------------------------------------------------------------------- Walnut Valley Uni. Sch. Dist., Sch. Fac. Bridge Fdg. Prog., Ser. 1998, F.R.W.D., F.S.A., C.O.P. VMIG1 1.15% 3/07/02 $ 3,000 $ 3,000,000 ------------ Total Investments 100.4% (cost $279,209,299(e)) 279,209,299 Liabilities in excess of other assets (0.4)% (1,013,642) ------------ Net Assets 100% $278,195,657 ------------ ------------
- ------------------------------ (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.H.L.M.C.--Federal Home Loan Mortgage Corporation. 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.N.M.A.--Government National Mortgage Corporation. 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. 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 3.8% 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 (Unaudited)
February 28, 2002 - ---------------------------------------------------------------------------------------- ASSETS Investments, at amortized cost which approximates market value $ 279,209,299 Cash 31,811 Receivable for Series shares sold 2,259,073 Interest receivable 1,217,003 Prepaid expenses 4,780 ----------------- Total assets 282,721,966 ----------------- LIABILITIES Payable for Series shares reacquired 4,284,268 Management fee payable 106,577 Accrued expenses 71,511 Distribution fee payable 26,644 Dividends payable 22,316 Deferred trustee's fees 14,993 ----------------- Total liabilities 4,526,309 ----------------- NET ASSETS $ 278,195,657 ----------------- ----------------- Net assets were comprised of: Shares of beneficial interest, at $.01 par value $ 2,781,957 Paid-in capital in excess of par 275,413,700 ----------------- Net assets, February 28, 2002 $ 278,195,657 ----------------- ----------------- Net asset value, offering price and redemption price per share ($278,195,657 / 278,195,657 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 (Unaudited)
Six Months Ended February 28, 2002 - ---------------------------------------------------------------------------------------- NET INVESTMENT INCOME Income Interest and discount earned $ 2,679,343 ----------------- Expenses Management fee 721,924 Distribution fee 180,481 Custodian's fees and expenses 38,000 Reports to shareholders 33,000 Transfer agent's fees and expenses 30,000 Registration fees 21,000 Legal fees and expenses 19,000 Trustees' fees 8,000 Audit fee 7,000 Miscellaneous 3,567 ----------------- Total expenses 1,061,972 Less: Custodian fee credit (Note 1) (697) ----------------- Net expenses 1,061,275 ----------------- Net investment income 1,618,068 REALIZED GAIN ON INVESTMENTS Net realized gain on investment transactions 8,663 ----------------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 1,626,731 ----------------- -----------------
See Notes to Financial Statements 13 Prudential California Municipal Fund California Money Market Series Statement of Changes in Net Assets (Unaudited)
Six Months Year Ended Ended February 28, 2002 August 31, 2001 - ----------------------------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS Operations Net investment income $ 1,618,068 $ 7,292,952 Net realized gain (loss) on investment transactions 8,663 (3,350) ----------------- --------------- Net increase in net assets resulting from operations 1,626,731 7,289,602 ----------------- --------------- Dividends and distributions (Note 1) (1,626,731) (7,289,602) ----------------- --------------- Series share transactions (at $1 per share) Net proceeds from shares sold 547,591,129 1,339,520,004 Net asset value of shares issued in reinvestment of dividends and distributions 1,614,688 7,060,745 Cost of shares reacquired (565,195,711) (1,327,962,334) ----------------- --------------- Net increase (decrease) in net assets from Series share transactions (15,989,894) 18,618,415 ----------------- --------------- Total increase (decrease) (15,989,894) 18,618,415 NET ASSETS Beginning of period 294,185,551 275,567,136 ----------------- --------------- End of period $ 278,195,657 $ 294,185,551 ----------------- --------------- ----------------- ---------------
14 See Notes to Financial Statements Prudential California Municipal Fund California Money Market Series Notes to Financial Statements (Unaudited) 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 February 28, 2002 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. 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 continue to 15 Prudential California Municipal Fund California Money Market Series Notes to Financial Statements (Unaudited) Cont'd. meet the requirements of the Internal Revenue Code applicable to regulated investment companies and to distribute all of its taxable net income and capital gains, if any, to its 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 LLC ('PI'), formerly Prudential Investments Fund Management LLC. Pursuant to this agreement, PI has responsibility for all investment advisory services and supervises the subadviser's performance of such services. PI has entered into a subadvisory agreement with Prudential Investment Management, Inc. ('PIM'). 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. PI continues to have responsibility for all investment advisory services pursuant to the management agreement and supervises PIM's performance of such services. PI 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 PI 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. PI, PIM and PIMS are indirect, wholly-owned subsidiaries of Prudential Financial, Inc. ('Prudential'). 16 Prudential California Municipal Fund California Money Market Series Notes to Financial Statements (Unaudited) Cont'd. Note 3. Other Transactions with Affiliates Prudential Mutual Fund Services LLC ('PMFS'), an affiliate of PI and an indirect, wholly-owned subsidiary of Prudential, serves as the Fund's transfer agent. During the six months ended February 28, 2002, the Series incurred fees of approximately $28,700 for the services of PMFS. As of February 28, 2002, approximately $4,900 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 (Unaudited)
Six Months Ended February 28, 2002 - ---------------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE: Net asset value, beginning of period $ 1.00 Net investment income and net realized gains .01 Dividends and distributions (.01) ----------------- Net asset value, end of period $ 1.00 ----------------- ----------------- TOTAL INVESTMENT RETURN(a): .57% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000) $ 278,196 Average net assets (000) $ 291,163 Ratios to average net assets: Expenses, including distribution and service (12b-1) fees .74%(b) Expenses, excluding distribution and service (12b-1) fees .61%(b) Net investment income 1.12%(b)
- ------------------------------ (a) Total investment return is calculated assuming a purchase of shares on the first day and a sale on the last day of each period reported. Total investment returns for periods of less than one full year are not annualized. (b) Annualized. 18 See Notes to Financial Statements Prudential California Municipal Fund California Money Market Series Financial Highlights (Unaudited) Cont'd.
Year Ended August 31, - ---------------------------------------------------------------------------------------------------------- 2001 2000 1999 1998 1997 - ---------------------------------------------------------------------------------------------------------- $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 .03 .03 .02 .03 .03 (.03) (.03) (.02) (.03) (.03) - ---------------- ---------------- ---------------- ---------------- ---------------- $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 - ---------------- ---------------- ---------------- ---------------- ---------------- - ---------------- ---------------- ---------------- ---------------- ---------------- 2.65% 2.83% 2.34% 2.81% 2.85% $294,186 $275,567 $265,473 $301,278 $285,280 $281,475 $299,602 $289,155 $287,250 $277,720 .73% .70% .71% .72% .73% .60% .58% .59% .60% .61% 2.59% 2.77% 2.30% 2.77% 2.80%
See Notes to Financial Statements 19 Prudential California Municipal Fund California Money Market Series Getting the Most from Your Prudential Mutual Fund When you invest through Prudential Mutual Funds, you receive financial advice from a Prudential Securities Financial Advisor or Pruco Securities registered representative. Your financial professional can provide you with the following services: THERE'S NO REWARD WITHOUT RISK; BUT IS THIS RISK WORTH IT? Your financial professional can help you match the reward you seek with the risk you can tolerate. Risk can be difficult to gauge--sometimes even the simplest investments bear surprising risks. The educated investor knows that markets seldom move in just one direction. There are times when a market sector or asset class will lose value or provide little in the way of total return. Managing your own expectations is easier with help from someone who understands the markets, and who knows you! KEEPING UP WITH THE JONESES A financial professional can help you wade through the numerous available mutual funds to find the ones that fit your individual investment profile and risk tolerance. While the newspapers and popular magazines are full of advice about investing, they are aimed at generic groups of people or representative individuals--not at you personally. Your financial professional will review your investment objectives with you. This means you can make financial decisions based on the assets and liabilities in your current portfolio and your risk tolerance--not just based on the current investment fad. BUY LOW, SELL HIGH Buying at the top of a market cycle and selling at the bottom are among the most common investor mistakes. But sometimes it's difficult to hold on to an investment when it's losing value every month. Your financial professional can answer questions when you're confused or worried about your investment, and should remind you that you're investing for the long haul. www.PruFN.com (800) 225-1852 FOR MORE INFORMATION Prudential Mutual Funds Gateway Center Three 100 Mulberry Street Newark, NJ 07102-4077 (800) 225-1852 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. Gateway Center Two Newark, NJ 07102 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 Nasdaq CUSIP - ------ ---- PCLXX 744313503 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. The accompanying financial statements as of February 28, 2002, were not audited and, accordingly, no opinion is expressed on them. PRUDENTIAL (LOGO) Nasdaq CUSIP - ------ ----- PCLXX 744313503 MF139E2 IFS-A070342 Mutual funds are not bank guaranteed or FDIC insured, and may lose value. -----END PRIVACY-ENHANCED MESSAGE-----