-----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, CZJY8gA2DRTHXgCo6pp1ln/8XN5eKzINJWZhWT+ZDU6EfmE23W1ZaKPszI0xV1Mm ltbbubP9lJBQOJgpjl0nEw== 0000898733-03-000210.txt : 20030428 0000898733-03-000210.hdr.sgml : 20030428 20030428103619 ACCESSION NUMBER: 0000898733-03-000210 CONFORMED SUBMISSION TYPE: N-30D PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20030228 FILED AS OF DATE: 20030428 EFFECTIVENESS DATE: 20030428 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: 03665841 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 mf15973.txt PRUDENTIAL CALIFORNIA MUNICIPAL FUND -- 2/28/2003 SEMI-ANNUAL SEMIANNUAL REPORT FEBRUARY 28, 2003 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. Prudential Financial (LOGO) Prudential California Municipal Fund California Series Performance at a Glance INVESTMENT GOALS AND STYLE The investment objective of the Prudential California Municipal Fund/California 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 2/28/03. 52.3% General Obligation Bonds 42.4 Revenue Bonds 2.9 Prerefunded 2.4 Cash & Equivalents Portfolio composition is subject to change. Credit Quality Expressed as a percentage of total investments as of 2/28/03. 1.1% AAA 61.0 AAA Insured 9.3 AA 8.2 A 13.3 BBB 2.4 Cash & Equivalents 4.7 Not Rated* (Prudential ratings used): Breakout: 1.0 AAA 1.4 BBB 2.3 B *Not rated bonds are believed to be of comparable quality to rated investments. Credit quality is subject to change. Ten Largest Issuers Expressed as a percentage of total investments as of 2/28/03. 10.9% Southern California Public Power Authority 10.2 Santa Margarita/Dana Point Authority 7.7 Orange County Local Transportation Authority 4.8 Long Beach Harbor Revenue 4.3 Metro Water District of Southern California 3.8 Chula Vista 3.8 Puerto Rico Commonwealth 3.7 San Bernardino County 3.4 California Water & Power Supply 3.3 South Orange County Public Finance Authority Holdings are subject to change. www.prudential.com (800) 225-1852 Semiannual Report February 28, 2003
Cumulative Total Returns1 As of 2/28/03 Six Months One Year Five Years Ten Years Since Inception2 Class A 2.96% 6.81% 31.05% 76.69% (76.40) 138.95% (138.57) Class B 2.83 6.54 29.38 71.14 (70.87) 268.23 (258.06) Class C 2.70 6.28 27.80 N/A 63.15 (62.89) Class Z 3.09 6.98 32.52 N/A 51.36 (51.24) Lehman Bros. Muni Bond Index3 3.36 7.67 34.31 84.67 *** Lipper CA Muni Debt Funds Avg.4 2.31 5.81 26.62 73.18 ****
Average Annual Total Returns1 As of 3/31/03
One Year Five Years Ten Years Since Inception2 Class A 6.57% 4.97% 5.70% (5.68) 6.59% (6.58) Class B 4.50 5.15 5.67 (5.65) 7.29 (7.12) Class C 7.15 4.84 N/A 5.69 (5.67) Class Z 10.14 5.83 N/A 6.58 (6.57) Lehman Bros. Muni Bond Index3 9.89 6.07 6.45 *** Lipper CA Muni Debt Funds Avg.4 8.40 4.82 5.76 ****
Distributions and Yields As of 2/28/03 Taxable Equivalent 30-Day Yield 5 Total Distributions 30-Day at Tax Rates of Paid for Six Months SEC Yield 35.0% 38.6% Class A $0.34 2.76% 4.68% 4.96% Class B $0.32 2.60 4.41 4.67 Class C $0.31 2.34 3.97 4.20 Class Z $0.35 3.09 5.24 5.55 Past performance is not indicative of future results. Principal value and investment return will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. 1Source: Prudential Investments LLC, Lehman Brothers, and Lipper Inc. The cumulative total returns do not take into account applicable sales charges. If reflected, the applicable sales charges would reduce the performance quoted. The average annual total returns do take into account applicable sales charges. Without the distribution and service (12b-1) fee waiver of 0.05% and 0.25% for Class A and C shares respectively, the returns would have been lower. The Series charges a maximum front-end sales charge of 3% for Class A shares, and a 12b-1 fee of up to 0.30% annually. In some circumstances, Class A shares may not be subject to a front-end sales charge, but may be subject to a 1% contingent deferred sales charge (CDSC) for the first year. Class B shares are subject to a declining CDSC of 5%, 4%, 3%, 2%, 1%, and 1% for six years respectively after purchase, and a 12b-1 fee of 0.50% annually. 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, and a 12b-1 fee of up to 1.00% annually. Class Z shares are not subject to a sales charge or 12b-1 fees. Without waiver of management fees and/or expense subsidization, the Series' returns would have been lower, as indicated in parentheses. The 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. 2Inception dates: Class A, 1/22/90; Class B, 9/19/84; Class C, 8/1/94; and Class Z, 9/18/96. 3The Lehman Brothers (Bros.) Municipal (Muni) Bond Index is an unmanaged index of over 39,000 long-term investment-grade municipal bonds. Investors cannot invest directly in an index. 4The Lipper Average represents returns based on an average of all funds in each share class in the Lipper California (CA) Municipal (Muni) Debt Funds category for the periods noted. Funds in the Lipper Single- State Muni Debt Funds Average limit their assets to those securities that are exempt from taxation in a specified state (double tax-exempt) or city (triple tax-exempt). 5Taxable equivalent yields reflect federal and applicable state tax rates. The returns for the Lehman Bros. Muni Bond Index and the Lipper CA Muni Debt Funds Average would be lower if they included the effects of sales charges and taxes, or in the case of the Lehman Bros. Muni Bond Index, operating expenses. *** Lehman Bros. Muni Bond Index Since Inception cumulative returns as of 2/28/03 are 154.63% for Class A, 370.64% for Class B, 77.18% for Class C, and 51.99% for Class Z. Lehman Bros. Muni Bond Index Since Inception average annual returns as of 3/31/03 are 7.36% for Class A, 8.74% for Class B, 6.83% for Class C, and 6.66% for Class Z. **** Lipper Since Inception cumulative returns as of 2/28/03 are 137.82% for Class A, 313.58% for Class B, 66.38% for Class C, and 43.32% for Class Z. Lipper Since Inception average annual returns as of 3/31/03 are 6.79% for Class A, 7.96% for Class B, 6.03% for Class C, and 5.68% for Class Z. 1 Prudential Financial (LOGO) April 15, 2003 DEAR SHAREHOLDER, Conditions in the municipal bond market fluctuated widely during the California Series' six-month reporting period ended February 28, 2003. Nevertheless, a back-to-basics approach to investing that favors bonds and other relatively conservative assets prevailed in the financial markets. Bond funds, including those that invest in municipal debt securities, benefited accordingly. For the reporting period, the Series underperformed the Lehman Brothers Municipal Bond Index (the Index), but the Series returned more than the average comparable fund as measured by the Lipper California Municipal Debt Funds Average (the Lipper Average). On the following pages, the Series' management team describes conditions in the municipal bond market and explains the Series' performance. In March 2003 I was named president of the Fund. I am pleased to lead an organization aimed at offering a high-quality product based on consistent investment disciplines-a point of stability in today's turbulent markets. At Prudential Financial, we recommend that you work closely with a financial professional if you are considering making any changes to your investment strategy. As always, we appreciate your continued confidence in Prudential mutual funds and look forward to serving your future investment needs. Sincerely, Judy A. Rice, President Prudential California Municipal Fund 2 Prudential California Municipal Fund California Series Semiannual Report February 28, 2003 INVESTMENT ADVISER'S REPORT MUNICIPAL BONDS EDGED HIGHER IN VOLATILE PERIOD Our six-month reporting period that began September 1, 2002 was a time of heightened volatility in the municipal bond market. A temporary rebound in the stock market, a large supply of newly issued tax- exempt securities, a change in U.S. monetary policy, and geopolitical developments drove the large swings in municipal bond prices. We maintained an investment strategy that provided the Series with flexibility to respond readily to changing market conditions. Early in our reporting period, municipal bonds gained in value to such an extent that a correction in the market was virtually inevitable. Therefore, when the equity market began to recover in October 2002, demand for municipal bonds faded temporarily and their prices plunged. The tax-exempt market was also pressured by a large amount of newly issued municipal bonds in October. The sell-off in municipal bonds soon turned into a rally. Investors began to pay higher prices (and accept lower yields) for tax-exempt bonds, anticipating that the Federal Reserve (the Fed) would lower borrowing costs to boost economic growth. In November, the Fed cut the rate banks charge each other for overnight loans by half a percentage point to 1.25%, the lowest level in 41 years. Municipal bond prices edged higher in December and for much of the remainder of our reporting period, albeit in an uneven pattern. There was speculation that the Fed would soon cut rates again to help the fragile economy. Data indicated that the threat of war with Iraq, rising oil prices, and a weak job market hurt consumer spending, the main engine of economic growth. Prices of California municipal bonds increased less than municipal bonds of issuers in most other states during our reporting period partly because Golden State investors had to absorb such a huge supply of new securities. For example, in January 2003, we invested in bonds backed by 3 Prudential California Municipal Fund California Series Semiannual Report February 28, 2003 California's share of the national settlement with the tobacco industry. This $3 billion bond issue was priced very attractively because of its large size and to compensate investors concerned about risk within the tobacco business. Overall, the more modest gain in the prices of California municipal bonds compared to those of most other states is the reason that the Series underperformed the Index for the six months under review. STATE OF CALIFORNIA CREDIT RATING DOWNGRADED The ongoing economic malaise in the United States continued to dramatically affect California during our reporting period. Due to substantial reliance upon personal income tax, particularly the capital gains component, California's anticipated revenues declined far more than expected. Its cash position deteriorated, and the Golden State is expected to issue about $11 billion of revenue anticipation warrants during June of 2003 in order to pay previously issued revenue anticipation notes that will mature in June 2003. (We do not invest in either the warrants or notes because they are short-term securities.) Absent corrective action, California faces a combined estimated budget gap of nearly $35 billion through June 30, 2004. The conflict between cutting expenses and/or raising taxes has caused near paralysis among lawmakers. Nevertheless, we believe California will ultimately act to maintain its fiscal integrity. Standard & Poor's (S&P) Ratings Group cut the Golden State's general obligation (GO) bond credit rating to single-A from single-A plus, and Moody's Investors Service lowered its California GO bond rating to A2 from A1. Not surprisingly, the State of California GO bonds performed rather poorly for the six months ended February 28, 2003. We believe our decision to limit the Series' exposure to them enhanced the Series' performance relative to the Lipper Average during our reporting period. INCREASED EXPOSURE TO BONDS RATED AAA Given the fiscal challenges facing California and the frequent changes in the level of interest rates, we continued to work toward achieving the right 4 www.prudential.com (800) 225-1852 balance in the Series with regard to two important characteristics. The first was credit quality, which involves the Series' exposure to high-quality bonds versus low-quality bonds. The second was interest- rate sensitivity, which involves the Series' exposure to bonds with good potential for price appreciation versus bonds that behave defensively during a sell- off in the fixed income market. From the perspective of credit quality, insured and uninsured bonds rated AAA (including not-rated bonds considered AAA by Prudential) accounted for 63% of the Series' total investments as of February 28, 2003, up from 58% as of August 31, 2002. The uncertainty fostered by the threat of war with Iraq and deteriorating economic conditions bolstered the appeal of insured municipal bonds, which performed better than lower-quality municipal bonds for the six months under review, according to the Lehman Brothers Insured Bond Index. Municipal bonds of below- investment-grade quality rated BB or lower (including not-rated bonds considered BB or lower by Prudential) comprised 2% of the Series' total investments at the end of our reporting period, unchanged from six months earlier. WELL-TIMED SHIFTS IN SERIES' ASSET ALLOCATION In the volatile interest-rate environment, we maintained a barbell strategy that focused on two types of bonds. One side of our barbell emphasized AAA-rated, insured zero coupon bonds, which 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, which enables them to perform better than other types of bonds when interest rates decline and bond prices move higher. The other side of our barbell emphasized intermediate-term bonds whose higher coupon rates provided the Series with considerable interest income. These bonds are considered to have defensive characteristics, as their prices tend to hold up relatively well when the municipal bond market sells off. The bonds are attractive to investors who want the solid income that they provide. 5 Prudential California Municipal Fund California Series Semiannual Report February 28, 2003 We periodically adjusted our coupon barbell strategy as needed. When the municipal bond market began to correct in early October as previously discussed, we trimmed the Series' exposure to zero coupon bonds and long-term deeply discounted bonds that pay interest income semiannually. We reinvested the proceeds in additional intermediate-term higher- coupon bonds. Our shift in asset allocation shortened the Series' duration, a measure of its sensitivity to changes in the level of interest rates that is expressed in years. A shorter duration helped to protect the value of the Series as municipal bond prices fell to their lowest level of the reporting period in October. During November, we began to reverse our earlier move. We cut exposure to intermediate-term higher coupon bonds and bought zero coupon bonds, which were priced attractively by that time. This lengthened the Series' duration, which helped it benefit more fully from the municipal bond rally later in our reporting period. We believe our timely asset allocation shifts enhanced the Series' performance relative to its Lipper Average during our reporting period. LOOKING AHEAD We will look for strong investment opportunities among new municipal bonds of California issuers. During 2003, we expect the volume of new tax-exempt securities in the Golden State to exceed the total in 2002 as state and local governments turn increasingly to the bond market to raise money that will help close their budget gaps. We aim to take advantage of temporary pricing discrepancies that emerge when new municipal bonds are issued at what we believe are undervalued levels. This can occur for various reasons, such as when there is a glut of new bonds or when investors overreact to problems confronting an issuer. California Series Management Team 6 Prudential California Municipal Fund California Series Portfolio of Investments as of February 28, 2003 (Unaudited)
Principal Moody's Interest Maturity Amount Value Description (a) Rating Rate Date (000) (Note 1) - ----------------------------------------------------------------------------------------------------------- LONG-TERM INVESTMENTS 96.7% Municipal Bonds - ---------------------------------------------------------------------------------------- Abag Fin. Auth. Rev., Schs. of Sacred Heart, Ser. A Baa3 6.45% 6/01/30 $ 1,500 $ 1,598,190 Baldwin Park Pub. Fin. Auth. Rev., Tax Alloc. NR 7.05 9/01/14 1,020(e) 1,129,864 Bay Area Govt. Assoc. Rev., Bart SFO Extension Arpt. Premium, Ser. A, A.M.B.A.C. Aaa 5.00 8/01/19 1,185 1,252,450 Buena Park Cmnty. Redev. Agcy., Central Bus. Dist. Proj. BBB+(c) 7.10 9/01/14 2,500 2,555,575 California Hlth. Facs. Fin. Auth. Rev., Kaiser Permanente, Ser. B A3 5.25 10/01/13 1,000 1,055,640 California St. G.O. A2 5.75 5/01/30 1,000 1,053,860 California St. Cmntys. Dev. Auth., C.O.P. Aaa 5.30 12/01/15 2,800 3,063,900 California St. Dept. Wtr. Res. Pwr. Sup. Rev., Ser. A, A.M.B.A.C. Aaa 5.50 5/01/14 1,500 1,702,770 Ser. A, A.M.B.A.C. Aaa 5.375 5/01/18 2,665 2,919,428 California St. Hsg. Fin. Agcy. Rev., Sngl. Fam. Mtge., Ser. A Aa2 Zero 2/01/15 8,420 3,039,367 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 2,222,500 Central California Joint Pwrs. Hlth. Fin. Auth., C.O.P. Baa1 6.00 2/01/30 1,000 1,022,110 Chula Vista Redev. Agcy., Bayfront Tax Alloc. BBB+(c) 7.625 9/01/24 4,500 5,159,790 Glendale Redev. Agcy. Tax Alloc. Rev., Central Glendale Redev. Proj., M.B.I.A. Aaa 5.25 12/01/20 1,475 1,595,360 Grass Valley Redev. Agcy., Redev. Proj. BBB(c) 6.40 12/01/34 2,000 2,141,360 Kings Cnty. Wste. Mgmt. Auth., Solid Wste. Rev., A.M.T. BBB(c) 7.20 10/01/14 1,150 1,217,586
See Notes to Financial Statements 7 Prudential California Municipal Fund California Series Portfolio of Investments as of February 28, 2003 (Unaudited) Cont'd.
Principal Moody's Interest Maturity Amount Value Description (a) Rating Rate Date (000) (Note 1) - ----------------------------------------------------------------------------------------------------------- Long Beach Hbr. Rev., Ser. A, A.M.T., F.G.I.C. Aaa 6.00% 5/15/16 $ 5,500 $ 6,551,325 Long Beach Redev. Agcy., Dist. No. 3, Spec. Tax Rev. NR 6.375 9/01/23 3,000 3,142,830 Los Angeles Cnty., C.O.P., Correctional Facs. Proj., M.B.I.A., E.T.M. Aaa Zero 9/01/10 3,770 2,931,213 Los Angeles Conv. & Exhib. Ctr. Auth., C.O.P., E.T.M. Aaa 9.00 12/01/10 1,250(d)(e) 1,514,750 Los Angeles Hbr. Dept. Rev., Ser., B, A.M.T. Aa3 5.375 11/01/23 1,000 1,025,100 Los Angeles Uni. Sch. Dist., Ser. A, G.O., F.S.A. Aaa 5.25 7/01/20 1,250 1,348,225 Metro. Wtr. Dist. of Southern California, Rev. Linked S.A.V.R.S. & R.I.B.S. Aa2 5.75 8/10/18 1,000 1,186,180 Waterworks Rev., Ser. A Aa2 5.75 7/01/21 4,000 4,694,003 Mojave Desert Solid Wste. Victor Valley Materials, Recov. Fac., A.M.T. Baa1 7.875 6/01/20 1,175 1,235,583 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 9,460,000 Spec. Tax Rev., R.I.B.S. Aa2 10.95(b) 2/14/11 750 1,011,720 Puerto Rico Comnwlth., Ser. 642A, G.O., M.B.I.A. NR 10.07 7/01/10 1,000 1,353,440 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 2,446,640 R.I.B.S., M.B.I.A., E.T.M. Aaa 6.368(b) 7/01/22 50 59,952 Riverside Cnty. Asset Leasing Corp. Leasehold Rev., Hosp. Proj., Ser A Aaa 5.00 6/01/09 1,500 1,667,955 Sacramento City Fin. Auth. Rev., City Hall & Redev. Projs., Ser. A, F.S.A. Aaa 5.375 12/01/19 1,000 1,098,250
8 See Notes to Financial Statements Prudential California Municipal Fund California Series Portfolio of Investments as of February 28, 2003 (Unaudited) Cont'd.
Principal Moody's Interest Maturity Amount Value Description (a) Rating Rate Date (000) (Note 1) - ----------------------------------------------------------------------------------------------------------- San Bernardino Cnty. Med. Ctr. Fin. Proj., C.O.P., M.B.I.A. Aaa 5.50% 8/01/22 $ 4,400 $ 4,959,548 San Diego Redev., Agcy. Tax Alloc. North Bay Redev. Baa1 5.875 9/01/29 1,000 1,037,740 San Diego Uni. Sch. Dist., Election of 1998, Ser. B Aaa 6.00 7/01/19 1,000 1,209,890 San Francisco City & Cnty., Arpts. Comn. Int'l. Arpt. Rev., A.M.T., F.G.I.C. Aaa 6.25 5/01/20 1,000 1,061,270 Redev. Agcy., Lease Rev., Cap. Apprec. A1 Zero 7/01/09 2,000 1,600,480 San Mateo Uni. High Sch. Dist., Election of 2000, Ser. B, G.O., C.A.B.S., F.G.I.C. Aaa Zero 9/01/26 1,000 285,100 Santa Margarita/Dana Point Auth., Impvt. Dists. 3, Ser. B, M.B.I.A. Aaa 7.25 8/01/08 2,500 3,102,025 Impvt. Dists. 3, Ser. B, M.B.I.A. Aaa 7.25 8/01/09 2,400 3,007,584 Impvt. Dists. 3, Ser. B, M.B.I.A. Aaa 7.25 8/01/14 1,000 1,314,570 Ser. B, M.B.I.A., Rev. Aaa 7.25 8/01/12 3,000 3,885,240 Ser. A, M.B.I.A., Rev. Aaa 7.25 8/01/13 1,990 2,592,174 Saratoga Uni. Sch. Dist. G.O., F.G.I.C. Aaa Zero 9/01/24 2,000 639,180 G.O., F.G.I.C. Aaa Zero 3/01/28 3,500 910,700 So. Orange Cnty. Pub. Fin. Auth., Spec. Tax Rev., M.B.I.A. Aaa 7.00 9/01/11 3,500(f) 4,415,285 So. Tahoe Joint Pwrs. Fin. Auth. Rev., Rfdg. So. Tahoe Redev. Proj., Ser. A BBB-(c) 6.00 10/01/28 2,000 2,044,840 Southern California Pub. Pwr. Auth., Proj. Rev. A2 6.75 7/01/10 2,265 2,753,379 Proj. Rev. A2 6.75 7/01/11 1,195 1,462,154 Proj. Rev. A2 6.75 7/01/13 1,000 1,240,090 Proj. Rev., A.M.B.A.C., E.T.M. Aaa Zero 7/01/16 7,925(f) 4,399,643 Proj. Rev., Ser. A, F.G.I.C., E.T.M. Aaa Zero 7/01/12 7,080 4,985,524
See Notes to Financial Statements 9 Prudential California Municipal Fund California Series Portfolio of Investments as of February 28, 2003 (Unaudited) Cont'd.
Principal Moody's Interest Maturity Amount Value Description (a) Rating Rate Date (000) (Note 1) - ----------------------------------------------------------------------------------------------------------- Stockton Cmnty. Facs. Dist. No. 90-2, Brookside Estates NR 6.20% 8/01/15 $ 700 $ 737,702 Sulphur Springs Union Sch. Dist., Ser. A, M.B.I.A. Aaa Zero 9/01/09 2,000 1,618,340 Torrance California Hosp. Rev., Torrance Mem. Med. Ctr. A A1 6.00 6/01/22 2,000 2,159,760 Vacaville Cmnty. Redev. Agcy., Cmnty. Hsg. Fin. Multi-fam. A-(c) 7.375 11/01/14 1,110(e) 1,247,973 Victor Elementary Sch. Dist., Ser. A, G.O., F.G.I.C. Aaa 5.375 8/01/19 1,290 1,413,247 Victor Valley Union High Sch. Dist., G.O., M.B.I.A., E.T.M. Aaa Zero 9/01/09 2,075 1,699,819 Walnut Valley Uni. Sch. Dist., M.B.I.A., E.T.M. Aaa 6.00 8/01/15 1,870 2,274,369 ------------ Total long-term investments (cost $116,427,013) 131,514,542 ------------ SHORT-TERM INVESTMENTS 6.9% - ---------------------------------------------------------------------------------------- California St. Hsg. Fin. Agcy. Rev., Home Mtge., Ser. R, F.R.D.D. VMIG1 1.20 3/03/03(g) 2,400 2,400,000 California St. Poll. Ctrl. Fin. Auth. Res. Recovery Rev., Burney Forest Prods. Proj., Ser. A, A.M.T., F.R.D.D. P-1 1.14 3/03/03(g) 200 200,000 California St., Mun. Secs. Tr. Rcpts., SGA 135, G.O., A.M.B.A.C., T.C.R.S., F.R.D.D. A-1+(c) 1.15 3/03/03(g) 1,600 1,600,000 Puerto Rico Commwlth., Ser. EE, M.B.I.A., M.E.R.L.O.T., F.R.W.D. VMIG1 1.02 3/05/03(g) 5,100 5,100,000 ------------ Total short-term investments (cost $9,300,000) 9,300,000 ------------ Total Investments 103.6% (cost $125,727,013) 140,814,542 Liabilities in excess of other assets (3.6%) (4,857,091) ------------ Net Assets 100% $135,957,451 ------------ ------------
10 See Notes to Financial Statements Prudential California Municipal Fund California Series Portfolio of Investments as of February 28, 2003 (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.A.B.S.--Capital Appreciation Bonds. C.O.P.--Certificates of Participation. E.T.M.--Escrowed to Maturity. F.G.I.C.--Financial Guaranty Insurance Company. F.R.D.D.--Floating Rate (Daily) Demand Note. F.R.W.D.--Floating Rate (Weekly) Demand Note. F.S.A.--Financial Security Assurance. G.O.--General Obligation. M.B.I.A.--Municipal Bond Insurance Corporation. M.E.R.L.O.T.--Municipal Exempt Receipt--Liquid Optional Tender. R.I.B.S.--Residual Interest Bearing Securities. S.A.V.R.S.--Select Auction Variable Rate Securities. T.C.R.S.--Transferable Custodial Receipts. (b) Inverse floating rate bond. The coupon is inversely indexed to a floating interest rate. The rate shown is the rate at period end. (c) Standard & Poor's Rating. (d) Partial principal amount pledged as collateral for financial futures contracts. (e) Prerefunded issues are secured by escrowed cash and/or direct U.S. guaranteed obligations. (f) Represents a when-issued security. (g) 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. 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, 2003 - ---------------------------------------------------------------------------------------- ASSETS Investments, at value (cost $125,727,013) $ 140,814,542 Cash 101,364 Receivable for investments sold 1,619,535 Interest receivable 1,422,521 Receivable for Series shares sold 458,205 Other assets 3,065 ----------------- Total assets 144,419,232 ----------------- LIABILITIES Payable for investments purchased 8,090,592 Payable for Series shares reacquired 141,545 Accrued expenses 71,721 Management fee payable 51,476 Dividends payable 47,859 Distribution fee payable 30,473 Deferred trustees' fees 15,927 Due to broker-variation margin 12,188 ----------------- Total liabilities 8,461,781 ----------------- NET ASSETS $ 135,957,451 ----------------- ----------------- Net assets were comprised of: Shares of beneficial interest, at par $ 110,429 Paid-in capital in excess of par 120,348,108 ----------------- 120,458,537 Undistributed net investment income 47,165 Accumulated net realized gain on investments 380,206 Net unrealized appreciation on investments 15,071,543 ----------------- Net assets, February 28, 2003 $ 135,957,451 ----------------- -----------------
12 See Notes to Financial Statements Prudential California Municipal Fund California Series Statement of Assets and Liabilities (Unaudited) Cont'd.
February 28, 2003 - ---------------------------------------------------------------------------------------- Class A: Net asset value and redemption price per share ($104,577,115 / 8,493,711 shares of beneficial interest issued and outstanding) $12.31 Maximum sales charge (3% of offering price) .38 ----------------- Maximum offering price to public $12.69 ----------------- ----------------- Class B: Net asset value, offering price and redemption price per share ($24,722,010 / 2,008,400 shares of beneficial interest issued and outstanding) $12.31 ----------------- ----------------- Class C: Net asset value and redemption price per share ($2,471,365 / 200,764 shares of beneficial interest issued and outstanding) $12.31 Sales charge (1% of offering price) .12 ----------------- Offering price to public $12.43 ----------------- ----------------- Class Z: Net asset value, offering price and redemption price per share ($4,186,961 / 340,057 shares of beneficial interest issued and outstanding) $12.31 ----------------- -----------------
See Notes to Financial Statements 13 Prudential California Municipal Fund California Series Statement of Operations (Unaudited)
Six Months Ended February 28, 2003 - ---------------------------------------------------------------------------------------- NET INVESTMENT INCOME Income Interest $ 3,497,280 ----------------- Expenses Management fee 331,522 Distribution fee--Class A 127,855 Distribution fee--Class B 61,228 Distribution fee--Class C 7,423 Custodian's fees and expenses 37,000 Reports to shareholders 34,000 Transfer agent's fees and expenses 25,000 Registration fees 22,000 Legal fees and expenses 9,000 Audit fee 7,000 Trustees' fees 5,000 Miscellaneous 4,606 ----------------- Total expenses 671,634 ----------------- Net investment income 2,825,646 ----------------- REALIZED AND UNREALIZED GAIN ON INVESTMENTS Net realized gain on: Investment transactions 1,196,100 Financial futures transactions 91,015 ----------------- 1,287,115 ----------------- Net change in unrealized appreciation (depreciation) on: Investment transactions (405,957) Financial futures transactions 45,911 ----------------- (360,046) ----------------- Net gain on investments 927,069 ----------------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 3,752,715 ----------------- -----------------
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, 2003 August 31, 2002 - ------------------------------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS Operations Net investment income $ 2,825,646 $ 5,764,207 Net realized gain on investment transactions 1,287,115 326,535 Net change in unrealized appreciation (depreciation) on investments (360,046) 235,794 ----------------- --------------- Net increase in net assets resulting from operations 3,752,715 6,326,536 ----------------- --------------- Dividends and distributions (Note 1) Dividends from net investment income Class A (2,166,574) (4,484,282) Class B (488,067) (1,078,599) Class C (37,193) (69,241) Class Z (86,647) (129,025) ----------------- --------------- (2,778,481) (5,761,147) ----------------- --------------- Distributions from realized gains Class A (707,585) (937,191) Class B (168,739) (235,882) Class C (12,098) (16,711) Class Z (28,302) (20,198) ----------------- --------------- (916,724) (1,209,982) ----------------- --------------- Series share transactions (net of share conversions) (Note 6) Net proceeds from shares sold 13,610,345 15,441,290 Net asset value of shares issued in reinvestment of dividends and distributions 2,197,532 4,068,922 Cost of shares reacquired (14,354,395) (19,158,810) ----------------- --------------- Net increase in net assets from Series share transactions 1,453,482 351,402 ----------------- --------------- Total increase (decrease) 1,510,992 (293,191) NET ASSETS Beginning of period 134,446,459 134,739,650 ----------------- --------------- End of period(a) $ 135,957,451 $ 134,446,459 ----------------- --------------- ----------------- --------------- - ------------------------------ (a) Includes undistributed net investment income of: $ 47,165 $ -- ----------------- ---------------
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. These financial statements relate only to California Series (the 'Series'). The financial statements of the other series are not presented herein. The assets of each series are invested in separate, independently managed portfolios. 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 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. Securities, including options, futures contracts and options thereon, for which the primary market is on a national securities exchange, commodities exchange or board of trade are valued at the last sale price on such exchange or board of trade, on the date of valuation or, if there was no sale on such day, at the average of readily available closing bid and asked prices on such day or at the bid price in the absence of an asked price. Securities, including options, that are actively traded in the over-the-counter market, including listed securities for which the primary market is believed to be over-the-counter, are valued at the average of the most recently quoted bid and asked prices provided by a principal maker or dealer. Short-term securities which mature in sixty days or less are valued at a amortized cost, which approximates market value. The amortized cost method involves valuing a security at its cost on the date of purchase and thereafter assuming a 16 Prudential California Municipal Fund California Series Notes to Financial Statements (Unaudited) Cont'd. constant amortization to maturity of the difference between the principal amount due at maturity and cost. Short-term securities which mature in more than sixty days are valued at current market quotations. 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 contracts. The Series invests in financial futures contracts in order to hedge its existing portfolio securities, or securities the Series intends to purchase, against fluctuations in value caused by changes in prevailing interest rates. Should interest rates move unexpectedly, the Series may not achieve the anticipated benefits of the financial futures contracts and may realize a loss. The use of futures transactions involves the risk of imperfect correlation in movements in the price of futures contracts, interest rates and the underlying hedged assets. Inverse Floaters: The Series invests in variable rate securities commonly called 'inverse floaters'. The interest rates on these securities have an inverse relationship to the interest rate of other securities or the value of an index. Changes in interest rates on the other security or index inversely affect the rate paid on the inverse floater, and the inverse floater's price will be more volatile than that of a fixed-rate bond. Additionally, some of these securities contain a 'leverage factor' whereby the interest rate moves inversely by a 'factor' to the benchmark rate. Certain interest rate movements and other market factors can substantially affect the liquidity of inverse floating rate notes. Options: The Series may either purchase or write options in order to hedge against adverse market movements or fluctuations in value caused by changes in prevailing interest rates with respect to securities which the Fund currently owns or intends to purchase. The Series' principal reason for writing options is to realize, through receipt of premiums, a greater current return than would be realized on the underlying security alone. When the Series purchases an option, it pays a premium and an amount equal to that premium is recorded as an asset. When the Series writes an option, it receives a premium and an amount equal to that premium is 17 Prudential California Municipal Fund California Series Notes to Financial Statements (Unaudited) Cont'd. recorded as a liability. The asset or liability is adjusted daily to reflect the current market value of the option. If an option expires unexercised, the Series realizes a gain (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 (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 (loss). Gain (loss) on purchased options is included in net realized gain (loss) on investment transactions. Gain (loss) on written options is presented separately as net realized gain (loss) on written option transactions. Future contracts and options involve elements of both market and credit risk in excess of the amounts reflected on the Statement of Assets and Liabilities. Securities Transactions and Net Investment Income: Securities transactions are recorded on the trade date. Realized gains (losses) on sales of investments are calculated on the identified cost basis. Interest income, including amortization of premium and accretion of discount on debt securities, as required is recorded on the accrual basis. Expenses are recorded on the accrual basis which may require the use of certain estimates by management. Net investment income or loss (other than distribution fees, which are charged directly to the respective class) and realized and unrealized gains and losses are allocated daily to each class of shares based upon the relative proportion of net assets of each class at the beginning of the day. Federal Income Taxes: It is the 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. Dividends and Distributions: The Series declares daily dividends from the net investment income. Payment of dividends is made monthly. Distributions of net capital gains, if any, are made annually. Dividends and distributions to shareholders, which are determined in accordance with federal income tax regulation and which may differ from generally accepted accounting principles, are recorded on the ex-dividend date. Permanent book/tax differences relating to income and gains are reclassified to paid in capital when they arise. Custody Fee Credits: The Series has an arrangement with its custodian bank, whereby uninvested assets earn credits which reduce the fees charged by the custodian. The Series could have invested a portion of the assets utilized in connection 18 Prudential California Municipal Fund California Series Notes to Financial Statements (Unaudited) Cont'd. with the expense offset arrangements in an income producing asset if they had not entered into such arrangements. Note 2. Agreements The Fund has a management agreement with Prudential Investments LLC ('PI'). 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. 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. PIMS has contractually agreed to limit such fees to .25% on the average daily net assets of the Class A shares. PIMS has advised the Series that it has received approximately $51,000 and $8,400 in front-end sales charges resulting from sales of Class A and Class C shares, respectively, during the six months ended February 28, 2003. From these fees, PIMS paid such sales charges to affiliated broker-dealers, which in turn paid commissions to salespersons and incurred other distribution costs. PIMS has advised the Series that for the six months ended February 28, 2003, it received approximately $13,500 and $570 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'), is a party to a syndicated credit agreement ('SCA') with a group of banks. 19 Prudential California Municipal Fund California Series Notes to Financial Statements (Unaudited) Cont'd. For the six months ended February 28, 2003 the amount of the commitment was $800 million and the SCA allows the Funds to increase the commitment to $1 billion, if necessary. Interest on any borrowings under the SCA will be incurred at market rates. The Funds pay a commitment fee of .08 of 1% of the unused portion of the SCA. The commitment fee is accrued and paid quarterly on a pro rata basis by the Funds. The purpose of the SCA is to serve as an alternative source of funding for capital share redemptions. The expiration date of the SCA is May 2, 2003. The Fund did not borrow any amounts pursuant to the SCA during the six months ended February 28, 2003. 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, 2003, the Series incurred fees of approximately $18,300 for the services of PMFS. As of February 28, 2003, approximately $3,000 of such fees were due to PMFS. Transfer agent fees and expenses in the Statement of Operations include certain out-of-pocket expenses paid to nonaffiliates. The Fund pays networking fees to affiliated and unaffiliated broker/dealers. These networking fees are payments made to broker/dealers that clear mutual fund transactions through a national clearing system. The Fund incurred approximately $2,100 in total networking fees, of which the amount relating to the services of Prudential Securities, Inc. ('PSI'), an affiliate of PI and an indirect, wholly-owned subsidiary of Prudential was approximately $2,000 for the six months ended February 28, 2003. As of February 28, 2003, approximately $330 of such fees were due to PSI. These amounts are 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, 2003 were $49,447,422 and $48,923,345, respectively. 20 Prudential California Municipal Fund California Series Notes to Financial Statements (Unaudited) Cont'd. During the six months ending February 28, 2003, the Series entered into financial futures contracts. Details of open contracts at February 28, 2003 are as follows:
Value at Value at Number of Expiration February 28, Trade Unrealized Contracts Type Date 2003 Date Depreciation - --------- ---------------------- ---------- ------------- ------------ -------------- Short: U.S. Treasury 15 Bonds Futures Mar. 2003 $ 1,737,188 $1,721,202 $(15,986) -------------- --------------
Note 5. Tax Information The United States federal income tax basis of the Series' investments and the net unrealized appreciation as of February 28, 2003 were as follows:
Total Net Unrealized Tax Basis Appreciation Depreciation Appreciation ------------------ ------------------ ------------------ ------------------ $125,727,013 $15,087,529 $ -- $15,087,529
As of August 31, 2002, the Series elected to defer for federal tax purposes post-October capital losses of approximately $132,400. These deferred losses are deemed as having occurred in the current fiscal year. 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 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. 21 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, 2003: Shares sold 707,026 $ 8,661,624 Shares issued in reinvestment of dividends and distributions 140,764 1,712,235 Shares reacquired (821,127) (9,991,005) ---------- ------------ Net increase (decrease) in shares outstanding before conversion 26,663 383,177 Shares issued upon conversion from Class B 114,794 1,423,137 ---------- ------------ Net increase (decrease) in shares outstanding 141,457 $ 1,806,314 ---------- ------------ ---------- ------------ Year ended August 31, 2002: Shares sold 522,050 $ 6,305,228 Shares issued in reinvestment of dividends and distributions 266,254 3,201,504 Shares reacquired (1,114,068) (13,456,471) ---------- ------------ Net increase (decrease) in shares outstanding before conversion (325,764) (3,949,739) Shares issued upon conversion from Class B 315,185 3,796,443 ---------- ------------ Net increase (decrease) in shares outstanding (10,579) $ (153,296) ---------- ------------ ---------- ------------ Class B - ------------------------------------------------------------ Six months ended February 28, 2003: Shares sold 135,873 $ 1,673,416 Shares issued in reinvestment of dividends and distributions 31,602 384,342 Shares reacquired (141,328) (1,728,371) ---------- ------------ Net increase (decrease) in shares outstanding before conversion 26,147 329,387 Shares reacquired upon conversion into Class A (114,822) (1,423,137) ---------- ------------ Net increase (decrease) in shares outstanding (88,675) $ (1,093,750) ---------- ------------ ---------- ------------ Year ended August 31, 2002: Shares sold 448,015 $ 5,419,106 Shares issued in reinvestment of dividends and distributions 59,390 713,860 Shares reacquired (325,110) (3,932,659) ---------- ------------ Net increase (decrease) in shares outstanding before conversion 182,295 2,200,307 Shares reacquired upon conversion into Class A (315,231) (3,796,443) ---------- ------------ Net increase (decrease) in shares outstanding (132,936) $ (1,596,136) ---------- ------------ ---------- ------------ Class C - ------------------------------------------------------------ Six months ended February 28, 2003: Shares sold 76,351 $ 933,544 Shares issued in reinvestment of dividends and distributions 3,103 37,740 Shares reacquired (49,291) (597,440) ---------- ------------ Net increase (decrease) in shares outstanding 30,163 $ 373,844 ---------- ------------ ---------- ------------
22 Prudential California Municipal Fund California Series Notes to Financial Statements (Unaudited) Cont'd.
Class C Shares Amount - ------------------------------------------------------------ ---------- ------------ Year ended August 31, 2002: Shares sold 73,831 $ 899,706 Shares issued in reinvestment of dividends and distributions 5,692 68,379 Shares reacquired (31,865) (381,422) ---------- ------------ Net increase (decrease) in shares outstanding 47,658 $ 586,663 ---------- ------------ ---------- ------------ Class Z - ------------------------------------------------------------ Six months ended February 28, 2003: Shares sold 190,643 $ 2,341,761 Shares issued in reinvestment of dividends and distributions 5,193 63,215 Shares reacquired (167,323) (2,037,579) ---------- ------------ Net increase (decrease) in shares outstanding 28,513 $ 367,397 ---------- ------------ ---------- ------------ Year ended August 31, 2002: Shares sold 233,181 $ 2,817,250 Shares issued in reinvestment of dividends and distributions 7,079 85,179 Shares reacquired (114,497) (1,388,258) ---------- ------------ Net increase (decrease) in shares outstanding 125,763 $ 1,514,171 ---------- ------------ ---------- ------------
23 Prudential California Municipal Fund California Series Financial Highlights (Unaudited)
Class A ----------------- Six Months Ended February 28, 2003 - ---------------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE: Net asset value, beginning of period $ 12.30 ----------------- Income from investment operations Net investment income .26 Net realized and unrealized gain (loss) on investment transactions .09 ----------------- Total from investment operations .35 ----------------- Less distributions Dividends from net investment income (.26) Distributions in excess of net investment income -- Distributions from net realized gains (.08) ----------------- Total distributions (.34) ----------------- Net asset value, end of period $ 12.31 ----------------- ----------------- TOTAL RETURN(b): 2.96% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000) $ 104,577 Average net assets (000) $ 103,132 Ratios to average net assets: Expenses, including distribution and service (12b-1) fees .97%(d) Expenses, excluding distribution and service (12b-1) fees .72%(d) Net investment income 4.31%(d) For Class A, B, C and Z shares: Portfolio turnover rate 38%
- ------------------------------ (a) Less than $.005 per share. (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 a full year are not annualized. (c) Effective September 1, 2001, the Series has adopted the provisions of the AICPA Audit and Accounting Guide for Investment Companies and began accreting market discount on debt securities. The effect of this change for the year ended August 31, 2002 was to increase net investment income and decrease net realized and unrealized gain (loss) per share by less than $.005 and increase the ratio of net investment income from 4.37% to 4.38%. Per share amounts and ratios for the years ended prior to August 31, 2002 have not been restated to reflect this change in presentation. (d) Annualized. 24 See Notes to Financial Statements Prudential California Municipal Fund California Series Financial Highlights (Unaudited) Cont'd.
Class A - ---------------------------------------------------------------------------------------------------- Year Ended August 31, - ---------------------------------------------------------------------------------------------------- 2002(c) 2001 2000 1999 1998 - ---------------------------------------------------------------------------------------------------- $ 12.36 $ 11.78 $ 11.45 $ 12.22 $ 11.80 - ---------------- ---------------- -------- -------- -------- .53 .56 .58 .59 .62 .05 .58 .33 (.77) .43 - ---------------- ---------------- -------- -------- -------- .58 1.14 .91 (.18) 1.05 - ---------------- ---------------- -------- -------- -------- (.53) (.56) (.58) (.59) (.62) -- -- --(a) -- (.01) (.11) -- -- -- -- - ---------------- ---------------- -------- -------- -------- (.64) (.56) (.58) (.59) (.63) - ---------------- ---------------- -------- -------- -------- $ 12.30 $ 12.36 $ 11.78 $ 11.45 $ 12.22 - ---------------- ---------------- -------- -------- -------- - ---------------- ---------------- -------- -------- -------- 4.92% 9.91% 8.35% (1.56)% 9.13% $102,729 $103,368 $ 94,776 $ 92,868 $ 91,356 $102,429 $ 99,324 $ 93,560 $ 94,868 $ 85,624 .97% .98% .93% .89% .78% .72% .73% .68% .69% .68% 4.38% 4.66% 5.13% 4.94% 5.18% 30% 48% 25% 13% 11%
See Notes to Financial Statements 25 Prudential California Municipal Fund California Series Financial Highlights (Unaudited) Cont'd.
Class B ----------------- Six Months Ended February 28, 2003 - ---------------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE: Net asset value, beginning of period $ 12.30 -------- Income from investment operations Net investment income .25 Net realized and unrealized gain (loss) on investment transactions .08 -------- Total from investment operations .33 -------- Less distributions Dividends from net investment income (.24) Distributions in excess of net investment income -- Distributions from net realized gains (.08) -------- Total distributions (.32) -------- Net asset value, end of period $ 12.31 -------- -------- TOTAL RETURN(b): 2.83% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000) $24,722 Average net assets (000) $24,694 Ratios to average net assets: Expenses, including distribution and service (12b-1) fees 1.22%(d) Expenses, excluding distribution and service (12b-1) fees .72%(d) Net investment income 4.06%(d)
- ------------------------------ (a) Less than $.005 per share. (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 a full year are not annualized. (c) Effective September 1, 2001, the Series has adopted the provisions of the AICPA Audit and Accounting Guide for Investment Companies and began accreting market discount on debt securities. The effect of this change for the year ended August 31, 2002 was to increase net investment income and decrease net realized and unrealized gain (loss) per share by less than $.005 and no effect on the ratio of net investment income. Per share amounts and ratios for the years ended prior to August 31, 2002 have not been restated to reflect this change in presentation. (d) Annualized. 26 See Notes to Financial Statements Prudential California Municipal Fund California Series Financial Highlights (Unaudited) Cont'd.
Class B - ---------------------------------------------------------------------------------------------------- Year Ended August 31, - ---------------------------------------------------------------------------------------------------- 2002(c) 2001 2000 1999 1998 - ---------------------------------------------------------------------------------------------------- $ 12.36 $ 11.78 $ 11.44 $ 12.22 $ 11.80 -------- -------- -------- -------- -------- .50 .53 .56 .56 .58 .05 .58 .34 (.78) .43 -------- -------- -------- -------- -------- .55 1.11 .90 (.22) 1.01 -------- -------- -------- -------- -------- (.50) (.53) (.56) (.56) (.58) -- -- --(a) -- (.01) (.11) -- -- -- -- -------- -------- -------- -------- -------- (.61) (.53) (.56) (.56) (.59) -------- -------- -------- -------- -------- $ 12.30 $ 12.36 $ 11.78 $ 11.44 $ 12.22 -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- 4.67% 9.63% 8.18% (1.94)% 8.70% $ 25,787 $ 27,554 $ 32,403 $ 48,196 $ 62,043 $ 26,110 $ 28,540 $ 38,348 $ 56,041 $ 66,086 1.22% 1.23% 1.18% 1.19% 1.18% .72% .73% .68% .69% .68% 4.13% 4.41% 4.89% 4.62% 4.78%
See Notes to Financial Statements 27 Prudential California Municipal Fund California Series Financial Highlights (Unaudited) Cont'd.
Class C ----------------- Six Months Ended February 28, 2003 - ---------------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE: Net asset value, beginning of period $ 12.30 ------- Income from investment operations Net investment income .23 Net realized and unrealized gain (loss) on investment transactions .09 ------- Total from investment operations .32 ------- Less distributions Dividends from net investment income (.23) Distributions in excess of net investment income -- Distributions from net realized gains (.08) ------- Total distributions (.31) ------- Net asset value, end of period $ 12.31 ------- ------- TOTAL RETURN(b): 2.70% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000) $ 2,471 Average net assets (000) $ 1,996 Ratios to average net assets: Expenses, including distribution and service (12b-1) fees 1.47%(d) Expenses, excluding distribution and service (12b-1) fees .72%(d) Net investment income 3.84%(d)
- ------------------------------ (a) Less than $.005 per share. (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 a full year are not annualized. (c) Effective September 1, 2001, the Series has adopted the provisions of the AICPA Audit and Accounting Guide for Investment Companies and began accreting market discount on debt securities. The effect of this change for the year ended August 31, 2002 was to increase net investment income and decrease net realized and unrealized gain (loss) per share by less than $.005 and had no effect on the ratio of net investment income. Per share amounts and ratios for the years ended prior to August 31, 2002 have not been restated to reflect this change in presentation. (d) Annualized. 28 See Notes to Financial Statements Prudential California Municipal Fund California Series Financial Highlights (Unaudited) Cont'd.
Class C - ---------------------------------------------------------------------------------------------------- Year Ended August 31, - ---------------------------------------------------------------------------------------------------- 2002(c) 2001 2000 1999 1998 - ---------------------------------------------------------------------------------------------------- $12.36 $11.78 $11.44 $12.22 $11.80 ------- ------- ------- ------- ------- .47 .50 .53 .53 .55 .05 .58 .34 (.78) .43 ------- ------- ------- ------- ------- .52 1.08 .87 (.25) .98 ------- ------- ------- ------- ------- (.47) (.50) (.53) (.53) (.55) -- -- --(a) -- (.01) (.11) -- -- -- -- ------- ------- ------- ------- ------- (.58) (.50) (.53) (.53) (.56) ------- ------- ------- ------- ------- $12.30 $12.36 $11.78 $11.44 $12.22 ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- 4.41% 9.36% 7.91% (2.18)% 8.43% $2,098 $1,519 $1,112 $1,447 $1,257 $1,778 $1,226 $1,290 $1,373 $ 689 1.47% 1.48% 1.43% 1.44% 1.43% .72% .73% .68% .69% .68% 3.89% 4.14% 4.64% 4.40% 4.53%
See Notes to Financial Statements 29 Prudential California Municipal Fund California Series Financial Highlights (Unaudited) Cont'd.
Class Z ----------------- Six Months Ended February 28, 2003 - ---------------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE: Net asset value, beginning of period $ 12.30 ------- Income from investment operations Net investment income .28 Net realized and unrealized gain (loss) on investment transactions .08 ------- Total from investment operations .36 ------- Less distributions Dividends from net investment income (.27) Distributions in excess of net investment income -- Distributions from net realized gains (.08) ------- Total distributions (.35) ------- Net asset value, end of period $ 12.31 ------- ------- TOTAL RETURN(b): 3.09% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000) $ 4,187 Average net assets (000) $ 3,886 Ratios to average net assets: Expenses, including distribution and service (12b-1) fees .72%(d) Expenses, excluding distribution and service (12b-1) fees .72%(d) Net investment income 4.57%(d)
- ------------------------------ (a) Less than $.005 per share. (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 a full year are not annualized. (c) Effective September 1, 2001, the Series has adopted the provisions of the AICPA Audit and Accounting Guide for Investment Companies and began accreting market discount on debt securities. The effect of this change for the year ended August 31, 2002 was to increase net investment income and decrease net realized and unrealized gains per share by $.005 and had no effect on the ratio of net investment income. Per share amounts and ratios for the years ended prior to August 31, 2002 have not been restated to reflect this change in presentation. (d) Annualized. 30 See Notes to Financial Statements Prudential California Municipal Fund California Series Financial Highlights (Unaudited) Cont'd.
Class Z - ---------------------------------------------------------------------------------------------------- Year Ended August 31, - ---------------------------------------------------------------------------------------------------- 2002(c) 2001 2000 1999 1998 - ---------------------------------------------------------------------------------------------------- $12.37 $11.79 $11.45 $12.23 $11.81 ------- ------- ------- ------- ------- .56 .59 .61 .62 .63 .04 .58 .34 (.78) .43 ------- ------- ------- ------- ------- .60 1.17 .95 (.16) 1.06 ------- ------- ------- ------- ------- (.56) (.59) (.61) (.62) (.63) -- -- --(a) -- (.01) (.11) -- -- -- -- ------- ------- ------- ------- ------- (.67) (.59) (.61) (.62) (.64) ------- ------- ------- ------- ------- $12.30 $12.37 $11.79 $11.45 $12.23 ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- 5.09% 10.17% 8.71% (1.44)% 9.24% $3,832 $2,298 $1,599 $ 928 $1,037 $2,778 $1,708 $1,231 $1,427 $ 847 .72% .73% .68% .69% .68% .72% .73% .68% .69% .68% 4.64% 4.90% 5.37% 5.15% 5.28%
See Notes to Financial Statements 31 Prudential California Municipal Fund California Series Getting the Most from Your Prudential Mutual Fund Some mutual fund shareholders won't ever read this- they don't read annual and semiannual reports. It's quite understandable. These annual and semiannual reports are prepared to comply with federal regulations, and are often written in language that is difficult to understand. So when most people run into those particularly daunting sections of these reports, they don't read them. WE THINK THAT'S A MISTAKE At Prudential, we've made some changes to our mutual funds report to make it easier to understand and more pleasant to read. We hope you'll find it profitable to spend a few minutes familiarizing yourself with your investment. Here's what you'll find in the report: PERFORMANCE AT A GLANCE Since an investment's performance is often a shareholder's primary concern, we present performance information in two different formats. You'll find it first on the "Performance at a Glance" page where we compare the Fund and the comparable average calculated by Lipper, Inc., a nationally recognized mutual fund rating agency. We report both the cumulative total returns and the average annual total returns. The cumulative total return is the total amount of income and appreciation the Fund has achieved in various time periods. The average annual total return is an annualized representation of the Fund's performance. It gives you an idea of how much the Fund has earned in an average year for a given time period. Under the performance box, you'll see legends that explain the performance information, whether fees and sales charges have been included in the returns, and the inception dates for the Fund's share classes. See the performance comparison charts at the back of the report for more performance information. Please keep in mind that past performance is not indicative of future results. www.prudential.com (800) 225-1852 Getting the Most from Your Prudential Mutual Fund INVESTMENT ADVISER'S REPORT The portfolio manager, who invests your money for you, reports on successful-and not-so-successful-strategies in this section of your report. Look for recent purchases and sales here, as well as information about the sectors the portfolio manager favors, and any changes that are on the drawing board. PORTFOLIO OF INVESTMENTS This is where the report begins to appear technical, but it's really just a listing of each security held at the end of the reporting period, along with valuations and other information. Please note that sometimes we discuss a security in the "Investment Adviser's Report" section that doesn't appear in this listing, because it was sold before the close of the reporting period. STATEMENT OF ASSETS AND LIABILITIES The balance sheet shows the assets (the value of the Fund's holdings), liabilities (how much the Fund owes), and net assets (the Fund's equity or holdings after the Fund pays its debts) as of the end of the reporting period. It also shows how we calculate the net asset value per share for each class of shares. The net asset value is reduced by payment of your dividend, capital gain, or other distribution-but remember that the money or new shares are being paid or issued to you. The net asset value fluctuates daily, along with the value of every security in the portfolio. STATEMENT OF OPERATIONS This is the income statement, which details income (mostly interest and dividends earned) and expenses (including what you pay us to manage your money). You'll also see capital gains here-both realized and unrealized. Prudential California Municipal Fund California Series Getting the Most from Your Prudential Mutual Fund STATEMENT OF CHANGES IN NET ASSETS This schedule shows how income and expenses translate into changes in net assets. The Fund is required to pay out the bulk of its income to shareholders every year, and this statement shows you how we do it (through dividends and distributions) and how that affects the net assets. This statement also shows how money from investors flowed into and out of the Fund. NOTES TO FINANCIAL STATEMENTS This is the kind of technical material that can intimidate readers, but it does contain useful information. The notes provide a brief history and explanation of your Fund's objectives. In addition, they outline how Prudential mutual funds prices securities. The notes also explain who manages and distributes the Fund's shares and, more important, how much they are paid for doing so. Finally, the notes explain how many shares are outstanding and the number issued and redeemed over the period. FINANCIAL HIGHLIGHTS This information contains many elements from prior pages, but on a per-share basis. It is designed to help you understand how the Fund performed, and to compare this year's performance and expenses to those of prior years. INDEPENDENT ACCOUNTANT'S REPORT Once a year, an independent accountant looks over our books and certifies that the financial statements are fairly presented in accordance with generally accepted accounting principles. TAX INFORMATION This is information that we report annually about how much of your total return is taxable. Should you have any questions, you may want to consult a tax adviser. www.prudential.com (800) 225-1852 Getting the Most from Your Prudential Mutual Fund PERFORMANCE COMPARISON These charts are included in the annual report and are required by the Securities Exchange Commission. Performance is presented here as the return on a hypothetical $10,000 investment in the Fund since its inception or for 10 years (whichever is shorter). To help you put that return in context, we are required to include the performance of an unmanaged, broad- based securities index as well. The index does not reflect the cost of buying the securities it contains or the cost of managing a mutual fund. Of course, the index holdings do not mirror those of the Fund-the index is a broad-based reference point commonly used by investors to measure how well they are doing. A definition of the selected index is also provided. Investors cannot invest directly in an index. 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.prudential.com (800) 225-1852 FOR MORE INFORMATION Prudential Mutual Funds Gateway Center Three 100 Mulberry Street Newark, NJ 07102-4077 (800) 225-1852 Trustees 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 Judy A. Rice, President Robert F. Gunia, Vice President Grace C. Torres, Treasurer Deborah A. Docs, Secretary Marguerite E.H. Morrison, Assistant Secretary Maryanne Ryan, Anti-Money Laundering Compliance Officer 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 PO 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, 2003, were not audited and, accordingly, no opinion is expressed on them. Mutual funds are not insured by the FDIC or any federal government agency, are not a deposit of or guaranteed by any bank or any bank affiliate, and may lose value. Prudential Financial (LOGO) Fund Symbols Nasdaq CUSIP - ------------ ------ ----- Class A PRMCX 744313107 Class B PBCMX 744313206 Class C PCCSX 744313701 Class Z PZCSX 744313883 MF116E2 IFS-A079181 SEMIANNUAL REPORT FEBRUARY 28, 2003 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. Prudential Financial (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 2/28/03. 52.4% General Obligation Bonds 36.7 Revenue Bonds 6.8 Prerefunded 2.2 Miscellaneous 1.9 Cash & Equivalents Portfolio composition is subject to change. Credit Quality Expressed as a percentage of total investments as of 2/28/03. 5.8% AAA 45.6 AAA Insured 3.7 AA 6.9 A 7.3 BBB 2.0 BB 2.2 Cash & Equivalents 26.5 Not Rated* (Prudential ratings used): Breakout: 4.0 AAA 0.2 A 5.7 BBB 10.3 BB 4.9 B 1.4 Other *Not-rated bonds are believed to be of comparable quality to rated investments. Credit quality is subject to change. Ten Largest Issuers Expressed as a percentage of total investments as of 2/28/03. 5.2% Foothill Eastern Transportation Corridor Agency** 5.0 Orange County Local Transportation Authority 4.3 California State Department Water Resource Power Supply Revenue 3.9 Southern California Public Power Authority 3.0 Long Beach Harbor Revenue 2.9 San Bernardino County 2.9 Victor Valley 2.3 Sacramento City Finance Authority 2.2 Chula Vista Community Redevelopment Agency 2.1 California Housing Finance Agency Revenue Holdings are subject to change. ** Prerefunded issues are secured by escrowed cash and/or direct U.S. guaranteed obligations. www.prudential.com (800) 225-1852 Semiannual Report February 28, 2003 Cumulative Total Returns1 As of 2/28/03
Six Months One Year Five Years Ten Years Since Inception2 Class A 2.68% 6.63% 29.02% (28.91) 86.41% (83.90) 140.24% (134.85) Class B 2.56 6.36 27.16 (27.05) N/A 68.08 (66.57) Class C 2.43 6.10 25.58 (25.47) N/A 64.93 (63.75) Class Z 2.81 6.89 30.47 (30.35) N/A 50.63 (50.50) Lehman Bros. Muni Bond Index3 3.36 7.67 34.31 84.67 *** Lipper CA Muni Debt Funds Avg.4 2.31 5.81 26.62 73.18 ****
Average Annual Total Returns1 As of 3/31/03
One Year Five Years Ten Years Since Inception2 Class A 5.92% 4.61% (4.59) 6.24% (6.10) 7.12% (6.92) Class B 3.92 4.80 (4.78) N/A 5.75 (5.64) Class C 6.58 4.49 (4.47) N/A 5.83 (5.75) Class Z 9.47 5.49 (5.47) N/A 6.50 (6.48) Lehman Bros. Muni Bond Index3 9.89 6.07 6.45 *** Lipper CA Muni Debt Funds Avg.4 8.40 4.82 5.76 ****
Distributions and Yields As of 2/28/03 Taxable Equivalent 30-Day Yield5 Total Distributions 30-Day at Tax Rates of Paid for Six Months SEC Yield 35.0% 38.6% Class A $0.24 3.40% 5.77% 6.11% Class B $0.23 3.25 5.51 5.84 Class C $0.21 2.98 5.05 5.35 Class Z $0.25 3.75 6.36 6.73 Past performance is not indicative of future results. Principal value and investment return will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. 1Source: Prudential Investments LLC, Lehman Brothers, and Lipper Inc. The cumulative total returns do not take into account applicable sales charges. If reflected, the applicable sales charges would reduce the performance quoted. The average annual total returns do take into account applicable sales charges. Without the distribution and service (12b-1) fee waiver of 0.05% and 0.25% for Class A and C shares respectively, the returns would have been lower. The Series charges a maximum front-end sales charge of 3% for Class A shares, and a 12b-1 fee of up to 0.30% annually. In some limited circumstances, Class A shares may not be subject to a front-end sales charge, but may be subject to a 1% contingent deferred sales charge (CDSC) for the first year. Class B shares are subject to a declining CDSC of 5%, 4%, 3%, 2%, 1%, and 1% for six years respectively after purchase, and a 12b-1 fee of 0.50% annually. 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, and a 12b-1 fee of up to 1.00% annually. Class Z shares are not subject to a sales charge or 12b-1 fees. Without waiver of management fees and/or expense subsidization, the Series' returns would have been lower, as indicated in parentheses. The 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. 2Inception dates: Class A, 12/3/90; Class B, 12/7/93; Class C, 8/1/94; and Class Z, 9/18/96. 3The Lehman Brothers (Bros.) Municipal (Muni) Bond Index is an unmanaged index of over 39,000 long-term investment- grade municipal bonds. Investors cannot invest directly in an index. 4The Lipper Average represents returns based on an average of all funds in each share class in the Lipper California (CA) Municipal (Muni) Debt Funds category for the periods noted. Funds in the Lipper Single-State Muni Debt Funds Average limit their assets to those securities that are exempt from taxation in a specified state (double tax-exempt) or city (triple tax-exempt). 5Taxable equivalent yields reflect federal and applicable state tax rates. The returns for the Lehman Bros. Muni Bond Index and the Lipper CA Muni Debt Funds Average would be lower if they included the effects of sales charges or taxes, and in the case of the Lehman Bros. Muni Bond Index, operating expenses. *** Lehman Bros. Muni Bond Index Since Inception cumulative returns as of 2/28/03 are 136.22% for Class A, 76.04% for Class B, 77.18% for Class C, and 51.99% for Class Z. Lehman Bros. Muni Bond Index Since Inception average annual returns as of 3/31/03 are 7.26% for Class A, 6.25% for Class B, 6.83% for Class C, and 6.66% for Class Z. **** Lipper Since Inception cumulative returns as of 2/28/03 are 121.80% for Class A, 64.55% for Class B, 66.38% for Class C, and 43.32% for Class Z. Lipper Since Inception average annual returns as of 3/31/03 are 6.66% for Class A, 5.46% for Class B, 6.03% for Class C, and 5.68% for Class Z. 1 Prudential Financial (LOGO) April 15, 2003 Dear Shareholder, Conditions in the municipal bond market fluctuated widely during the California Income Series' six-month reporting period ended February 28, 2003. Nevertheless, a back-to-basics approach to investing that favors bonds and other relatively conservative assets prevailed in the financial markets. Bond funds, including those that invest in municipal debt securities, benefited accordingly. For the reporting period, the Series underperformed the Lehman Brothers Municipal Bond Index (the Index), but the Series returned more than the average comparable fund as measured by the Lipper California Municipal Debt Funds Average (the Lipper Average). On the following pages, the Series' management team describes conditions in the municipal bond market and explains the Series' performance. In March 2003 I was named president of the Fund. I am pleased to lead an organization aimed at offering a high-quality product based on consistent investment disciplines-a point of stability in today's turbulent markets. At Prudential Financial, we recommend that you work closely with a financial professional if you are considering making any changes to your investment strategy. As always, we appreciate your continued confidence in Prudential mutual funds and look forward to serving your future investment needs. Sincerely, Judy A. Rice, President Prudential California Municipal Fund 2 Prudential California Municipal Fund California Income Series Semiannual Report February 28, 2003 INVESTMENT ADVISER'S REPORT MUNICIPAL BONDS EDGED HIGHER IN VOLATILE PERIOD Our six-month reporting period that began September 1, 2002 was a time of heightened volatility in the municipal bond market. A temporary rebound in the stock market, a large supply of newly issued tax-exempt securities, a change in U.S. monetary policy, and geopolitical developments drove the large swings in municipal bond prices. We maintained an investment strategy that provided the Series with flexibility to respond readily to the changing market conditions. Early in our reporting period, municipal bonds gained in value to such an extent that a correction in the market was virtually inevitable. Therefore, when the equity market began to recover in October 2002, demand for municipal bonds faded temporarily and their prices plunged. The tax-exempt market was also pressured by a large amount of newly issued municipal bonds in October. The sell-off in municipal bonds soon turned into a rally. Investors began to pay higher prices (and accept lower yields) for tax- exempt bonds, anticipating that the Federal Reserve (the Fed) would lower borrowing costs to boost economic growth. In November, the Fed cut the rate banks charge each other for overnight loans half a percentage point to 1.25%, the lowest level in 41 years. Municipal bond prices edged higher in December and for much of the remainder of our reporting period, albeit in an uneven pattern. There was speculation that the Fed would soon cut rates again to help the fragile economy. Data indicated that the threat of war with Iraq, rising oil prices, and a weak job market hurt consumer spending, the main engine of economic growth. Prices of California municipal bonds increased less than municipal bonds of issuers in most other states during our reporting period partly because Golden State investors had to absorb such a huge supply of new 3 Prudential California Municipal Fund California Income Series Semiannual Report February 28, 2003 securities. In January 2003, we invested in bonds backed by California's share of the national settlement with the tobacco industry. This $3 billion bond issue was priced very attractively because of its large size and to compensate investors concerned about risk within the tobacco business. Overall, the more modest gain in the prices of California municipal bonds compared with those in most other states is the reason that the Series underperformed the Index for the six months under review. STATE OF CALIFORNIA CREDIT RATING DOWNGRADED The ongoing economic malaise in the United States continued to dramatically affect California during our reporting period. Due to substantial reliance upon personal income tax, particularly the capital gains component, California's anticipated revenues declined far more than expected. Its cash position deteriorated, and the Golden State is expected to issue about $11 billion of revenue anticipation warrants during June of 2003 in order to pay previously issued revenue anticipation notes that will mature in June 2003. (We do not invest in either the warrants or notes because they are short-term securities.) Absent corrective action, California faces a combined estimated budget gap of nearly $35 billion through June 30, 2004. The conflict between cutting expenses and/or raising taxes has caused near paralysis among lawmakers. Nevertheless, we believe California will ultimately act to maintain its fiscal integrity. Standard & Poor's (S&P) Ratings Group cut the Golden State's general obligation (GO) bond credit rating to single-A from single-A plus, and Moody's Investors Service lowered its California GO bond rating to A2 from A1. Not surprisingly, the State of California GO bonds performed rather poorly for the six months ended February 28, 2003. We believe our decision to limit the Series' exposure to them enhanced the Series' performance relative to the Lipper Average during our reporting period. 4 www.prudential.com (800) 225-1852 INCREASED EXPOSURE TO BONDS RATED AAA Given the fiscal challenges facing California and the frequent changes in the level of interest rates, we continued to work toward achieving the right balance in the Series with regard to two important characteristics. The first was credit quality, which involves the Series' exposure to high-quality bonds versus low-quality bonds. The second was interest-rate sensitivity, which involves the Series' exposure to bonds with good potential for price appreciation versus bonds that behave defensively during a sell-off in the fixed income market. From the perspective of credit quality, insured and uninsured bonds rated AAA (including not-rated bonds considered AAA by Prudential) accounted for 55% of the Series' total investments as of February 28, 2003, up from 51% as of August 31, 2002. The uncertainty fostered by the threat of war with Iraq and deteriorating economic conditions bolstered the appeal of insured municipal bonds, which performed better than low-quality municipal bonds for the six months under review, according to the Lehman Brothers Insured Bond Index. Municipal bonds of below-investment-grade quality rated BB or lower (including not- rated bonds considered BB or lower by Prudential) comprised 19% of the Series' total investments as of February 28, 2003, barely changed from six months earlier. Low- quality bonds did not perform well in this challenging investment environment. Although the Series' exposure to these bonds hurt its returns during our fiscal half-year, they provided considerable interest income that helped the Series meet its investment objective of maximizing current income exempt from State of California and federal income taxes consistent with the preservation of capital. WELL-TIMED SHIFTS IN SERIES' ASSET ALLOCATION In the volatile interest-rate environment, we maintained a barbell strategy that focused on two types of bonds. One side of our barbell emphasized 5 Prudential California Municipal Fund California Income Series Semiannual Report February 28, 2003 AAA-rated, insured zero coupon bonds, which 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, which enables them to perform better than other types of debt securities when interest rates decline and bond prices move higher. The other side of our barbell emphasized intermediate-term bonds whose higher coupon rates provided the Series with considerable interest income. These bonds are considered to have defensive characteristics, as their prices tend to hold up relatively well when the municipal bond market sells off. The bonds are attractive to investors who want the solid income that they provide. We periodically adjusted our coupon barbell strategy as needed. When the municipal bond market began to correct in early October as previously discussed, we trimmed the Series' exposure to zero coupon bonds and long-term deeply discounted bonds that pay interest income semiannually. We reinvested the proceeds in additional intermediate-term higher-coupon bonds. Our shift in asset allocation shortened the Series' duration, a measure of its sensitivity to changes in the level of interest rates that is expressed in years. A shorter duration helped to protect the value of the Series as municipal bond prices fell to their lowest level of the reporting period in October. During November, we began to reverse our earlier move. We cut exposure to intermediate-term higher coupon bonds and bought zero coupon bonds, which were priced attractively by that time. This lengthened the Series' duration, which helped it benefit more fully from the municipal bond rally later in our reporting period. We believe our timely asset allocation shifts enhanced the Series' performance relative to its Lipper Average during our reporting period. 6 www.prudential.com (800) 225-1852 Semiannual Report February 28, 2003 LOOKING AHEAD We will look for strong investment opportunities among new municipal bonds of California issuers. During 2003, we expect the volume of new tax-exempt securities in the Golden State to exceed the total in 2002 as state and local governments turn increasingly to the bond market to raise money that will help close their budget gaps. We aim to take advantage of temporary pricing discrepancies that emerge when new municipal bonds are issued at what we believe are undervalued levels. This can occur for various reasons, such as when there is a glut of new bonds or when investors overreact to problems confronting an issuer. California Income Series Management Team 7 Prudential California Municipal Fund California Income Series Portfolio of Investments as of February 28, 2003 (Unaudited)
Principal Moody's Interest Maturity Amount Value Description (a) Rating Rate Date (000) (Note 1) - ----------------------------------------------------------------------------------------------------------- LONG-TERM INVESTMENTS 97.6% Municipal Bonds - ---------------------------------------------------------------------------------------- Brea Redev. Agcy., Rfdg., Tax Alloc., Ser. A Aaa 5.50% 8/01/19 $ 3,350 $ 3,704,966 Buena Park Cmnty. Redev. Agcy., Cent. Bus. Dist. Proj., Ser. B NR 7.80 9/01/14 3,325(h) 3,399,181 California Cnty. Tobacco Sec. Agcy., Asset Bkd. Gold Country Fdg. Corp. A1 5.75 6/01/27 2,000 1,863,960 California Hlth. Facs. Fin. Auth. Rev., Kaiser Permanente, Ser. B A3 5.25 10/01/13 3,620(h) 3,821,417 California Infrastructure & Econ. Dev. Bk. Rev., Scripps Research Inst., Ser. A Aa3 5.75 7/01/30 1,500 1,612,665 California Poll. Ctrl. Fin. Auth., Solid Wste. Disp. Rev., Keller Canyon Landfill Co. Proj. B1 6.875 11/01/27 2,500 2,444,550 California Rural Home Mtge. Fin. Auth., Sngl. Fam. 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 1,570 1,676,681 California St. Cmnty. Cap. Apprec. Cmnty. Facs., Dist. No. 97-1 NR Zero 9/01/22 4,440 1,339,015 California St. Dept. Wtr. Res. Pwr. Supply Rev., Ser. A, A.M.B.A.C. Aaa 5.50 5/01/14 3,000 3,405,540 Ser. A, A.M.B.A.C. Aaa 5.375 5/01/18 6,830 7,482,060 California St. Pub. Wks. Brd. Lease Rev., Dept. of Corrections, Ser. A Aaa 5.50 1/01/15 3,000 3,333,750 California St. Univ. Rev. & Coll., Systemwide, Ser. A, A.M.B.A.C. Aaa 5.50 11/01/16 1,350 1,526,107
8 See Notes to Financial Statements Prudential California Municipal Fund California Income Series Portfolio of Investments as of February 28, 2003 (Unaudited) Cont'd.
Principal Moody's Interest Maturity Amount Value Description (a) Rating Rate Date (000) (Note 1) - ----------------------------------------------------------------------------------------------------------- California St., G.O. A2 5.75% 5/01/30 $ 1,000 $ 1,053,860 G.O., A.M.B.A.C. Aaa 5.50 3/01/16 2,000 2,208,160 California Statewide Cmntys. Dev. Auth., C.O.P. Aaa 5.30 12/01/15 1,900 2,079,075 Sutter Hlth., Ser. B A1 5.50 8/15/28 4,000 4,070,760 Carson City Ltd. Oblig. Impvt. Rev., Assmt. Dist., No. 92-1 NR 7.375 9/02/22 415 427,326 Central California Joint Pwrs. Hlth. Fin. Auth., C.O.P., Cmnty. Hosps. Baa1 6.00 2/01/30 2,000 2,044,220 Chula Vista Cmnty. Facs. Dist. Spec. Tax, No. 06-1 Eastlake Woods Area A NR 6.15 9/01/26 1,000 1,010,160 No. 06-1 Eastlake Woods Area A NR 6.20 9/01/33 1,500 1,516,365 Chula Vista Cmnty. Redev. Agcy., Rfdg. Tax Alloc. Sr. Bayfront, Ser. A BBB+(c) 7.625 9/01/24 2,500 2,866,550 Rfdg. Tax Alloc. Sub. Bayfront, Ser. C NR 8.25 5/01/24 2,500 2,702,550 Chula Vista Spec. Tax Cmnty. Facs., Dist. No. 97-3 NR 6.05 9/01/29 2,765 2,860,392 Corona C.O.P., Vista Hosp. Sys., Inc., Ser. C NR 8.375 7/01/11 2,000(e)(h) 737,600 Davis Pub. Facs. Fin. Auth., Mace Ranch, Ser. A NR 6.60 9/01/25 1,330 1,401,554 East Bay Mun. Util. Dist. Wastewater, Treatment Sys. Rev., A.M.B.A.C. Aaa 5.55 6/01/20 2,000(f) 2,059,140 El Dorado Cnty., Spec. Tax, Cmnty. Facs., Dist. No. 92-1 NR 6.125 9/01/16 1,000 1,051,460 Cmnty. Facs., DIst. No. 92-1 NR 8.25 9/01/24 1,945(f)(h) 2,190,304 Cmnty. Facs., Dist. No. 92-1 NR 6.25 9/01/29 480 493,694 Escondido Uni. Sch. Dist., Ser. A, G.O., F.S.A. Aaa 5.25 8/01/22 1,000 1,062,590
See Notes to Financial Statements 9 Prudential California Municipal Fund California Income Series Portfolio of Investments as of February 28, 2003 (Unaudited) Cont'd.
Principal Moody's Interest Maturity Amount Value Description (a) Rating Rate Date (000) (Note 1) - ----------------------------------------------------------------------------------------------------------- Folsom Spec. Tax, Cmnty. Facs., Dist. No. 10 NR 6.875% 9/01/19 $ 2,000 $ 2,141,800 Cmnty. Facs., Dist. No. 7 NR 6.00 9/01/24 2,500 2,566,950 Foothill/Eastern Trans. Corr. Agcy., Toll Rd. Rev., C.A.B.S., Sr. Lien, Ser. A, E.T.M. Aaa Zero 1/01/20 10,000 4,513,300 Conv. C.A.B.S. Baa3 Zero 1/15/28 4,890 3,397,132 Conv. C.A.B.S., Sr. Lien, Ser. A, Zero Coupon (until 1/01/05) Aaa 7.15 1/01/13 4,750(f) 5,348,785 Gateway Impvt. Auth. Rev., Marin City Cmnty. Facs. Dist., Ser. A NR 7.75 9/01/25 2,095(f) 2,478,343 Glendale Redev. Agy. Tax Alloc. Rev., Central Glendale Redev. Proj., M.B.I.A. Aaa 5.25 12/01/19 3,275 3,569,586 Golden West Sch. Fin. Auth., California Rev., C.A.B.S., Rfdg. Ser. A., M.B.I.A. Aaa Zero 2/01/19 2,110 971,528 Kings Cnty. Wste. Mgmt. Auth., Solid Wste. Rev., A.M.T. BBB(c) 7.20 10/01/14 1,200 1,270,524 La Quinta Redev. Agcy., Tax Alloc., Rfdg. Proj. Area No. 1, M.B.I.A. Aaa 7.30 9/01/10 1,000 1,270,500 Rfdg. Proj. Area No. 1, M.B.I.A. Aaa 7.30 9/01/11 1,000 1,284,340 Lincoln Impvt. Bond Act of 1915, Pub. Fin Auth., Twelve Bridges NR 6.20 9/02/25 2,805 2,899,669 Long Beach Hbr. Rev., Rfdg. Ser. A, A.M.T., F.G.I.C. Aaa 6.00 5/15/17 3,500(g) 4,164,755 Rfdg. Ser. A, A.M.T., F.G.I.C. Aaa 6.00 5/15/19 3,000 3,567,450 Los Angeles Cmnty. Facs., Dist. No. 5, Rowland Heights, Ser. A NR 7.25 9/01/19 1,500(f) 1,668,750 Los Angeles Hbr. Dept. Rev., A.M.T., Ser. B Aa3 5.375 11/01/23 2,000 2,050,200 Los Angeles Uni. Sch. Dist., Ser. A, F.S.A. Aaa 5.25 7/01/20 1,950 2,103,231
10 See Notes to Financial Statements Prudential California Municipal Fund California Income Series Portfolio of Investments as of February 28, 2003 (Unaudited) Cont'd.
Principal Moody's Interest Maturity Amount Value Description (a) Rating Rate Date (000) (Note 1) - ----------------------------------------------------------------------------------------------------------- Lynwood Pub. Fin. Auth. Rev., Wtr. Sys. Impvt. Proj. BBB(c) 6.50% 6/01/21 $ 1,500(h) $ 1,570,560 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(h) 1,186,180 Mojave Desert & Mtn. Solid Wste. Joint Pwrs. Auth. Proj., Victor Valley Nat'l. Recov. Facs., A.M.T. Baa1 7.875 6/01/20 1,175 1,235,583 Norco Spec. Tax Cmnty. Facs., Dist. No. 97-1 NR 7.10 10/01/30 1,320 1,425,270 Ontario California Impvt. Bond Act of 1915, Assmt. Dist. 100C, Cmnty. Ctr. III NR 8.00 9/02/11 535 559,733 Orange Cnty. Cmnty. Facs. Dist., Spec. Tax Rev., No. 01-1, Ladera Ranch, Ser. A NR 6.00 8/15/25 1,350 1,366,916 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(h) 11,825,000 Spec. Tax Rev., Linked R.I.B.S. Aa2 10.95(d) 2/14/11 750 1,011,720 Perris Cmnty. Facs. Dist., Spec. Tax No. 01-2, Ser. A NR 6.25 9/01/23 2,000 2,015,160 Pico Rivera California Wtr. Auth. Rev., Wtr. Sys. Proj., Ser. A, M.B.I.A. Aaa 5.50 5/01/29 1,500 1,686,855 Pittsburg California Redev. Agcy. Tax Alloc., Ext. Spec. Redem., Los Medanos, Ser. B, F.S.A. Aaa 5.80 8/01/34 2,700 2,996,109 Los Medanos Cmnty. Dev. Proj., A.M.B.A.C. Aaa Zero 8/01/26 1,375 391,614 Poway Cmnty., Facs., Dist. No. 88-1, Pkwy. Bus. Ctr. NR 6.75 8/15/15 1,000 1,091,980 Puerto Rico Comnwlth., Rites, PA 642A, M.B.I.A. NR 10.549 7/01/10 1,000 1,353,440
See Notes to Financial Statements 11 Prudential California Municipal Fund California Income Series Portfolio of Investments as of February 28, 2003 (Unaudited) Cont'd.
Principal Moody's Interest Maturity Amount Value Description (a) Rating Rate Date (000) (Note 1) - ----------------------------------------------------------------------------------------------------------- Puerto Rico Pub. Bldgs. Auth., Gtd. Pub. Ed. & Hlth. Facs., C.A.B.S., Ser. J, E.T.M. Baa1 Zero 7/01/06 $ 145 $ 136,526 Redding Elec. Sys. Rev., C.O.P., Linked S.A.V.R.S. & R.I.B.S., M.B.I.A., E.T.M. Aaa 6.368% 7/01/22 50(h) 59,952 M.B.I.A., R.I.B.S. Aaa 11.438(d) 7/01/22 1,850(f) 2,586,448 Richmond Redev. Agcy. Tax Alloc., C.A.B.S. Rfdg. Hbr., Ser. A, M.B.I.A. Aaa Zero 7/01/20 1,150 485,910 C.A.B.S. Rfdg. Hbr., Ser. A, M.B.I.A. Aaa Zero 7/01/21 1,150 455,791 Richmond Redev. Agcy., Multi-Fam. Hsg., Bridge Affordable Hsg. NR 7.50 9/01/23 2,425 2,486,255 Rio Vista Impvt. Bond Act of 1915, Assmt. Dist. No. 96-1, River View Pt. NR 7.50 9/02/22 1,815 1,960,127 Riverside Cnty. Asset Leasing Corp. Leasehold Rev., Hosp. Proj., Ser. A Aaa 5.00 6/01/09 3,500 3,891,895 Riverside Uni. Sch. Dist. Spec. Tax, Cmnty. Facs. Dist. No. 7, Ser. A NR 6.90 9/01/20 1,320 1,433,137 Cmnty. Facs. Dist. No. 7, Ser. A NR 7.00 9/01/30 1,000 1,080,770 Rocklin Uni. Sch. Dist., C.A.B.S., Ser. C, M.B.I.A. Aaa Zero 8/01/14 1,220(h) 744,493 C.A.B.S., Ser. C, M.B.I.A. Aaa Zero 8/01/15 1,285 736,523 C.A.B.S., Ser. C, M.B.I.A. Aaa Zero 8/01/16 1,400 754,306 Roseville California Spec. Tax, Highland Cmnty. Facs., Dist. No. 1 NR 6.30 9/01/25 1,890 1,953,769 Woodcreek Cmnty. Facs., Dist. No. 1 NR 6.375 9/01/27 1,000 1,040,460
12 See Notes to Financial Statements Prudential California Municipal Fund California Income Series Portfolio of Investments as of February 28, 2003 (Unaudited) Cont'd.
Principal Moody's Interest Maturity Amount Value Description (a) Rating Rate Date (000) (Note 1) - ----------------------------------------------------------------------------------------------------------- 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 $ 3,011,709 C.A.B.S., Tax Alloc. Comb. Proj., Ser. B, M.B.I.A. Aaa Zero 11/01/17 5,695 2,831,041 Sacramento Impvt. Bond Act of 1915, Willowcreek II, Assmt. Dist. No. 96-1 NR 6.70% 9/02/22 2,420(h) 2,508,112 Sacramento Spec. Purp. Facs., Y.M.C.A. of Sacramento NR 7.25 12/01/18 1,885 1,943,077 San Bernardino Cnty., C.O.P., Med. Ctr. Fin. Proj., M.B.I.A. Aaa 5.50 8/01/22 4,540 5,117,352 C.O.P., West VY Detention Ctr. Refing., Ser. A, M.B.I.A. Aaa 5.25 11/01/14 2,100 2,356,746 San Bruno Park Sch. Dist., C.A.B.S., F.S.A. Aaa Zero 8/01/20 1,275 538,330 C.A.B.S., F.S.A. Aaa Zero 8/01/21 1,220 483,242 C.A.B.S., F.S.A. Aaa Zero 8/01/22 1,080 399,935 San Diego California Redev. Agcy., Tax Alloc., North Bay Redev. Baa1 5.875 9/01/29 2,000 2,075,480 San Diego Spec. Tax, Cmnty. Facs. Dist. No. 1, Ser. B NR 7.10 9/01/20 2,000(f) 2,335,000 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 2,122,540 San Francisco City & Cnty., Redev. Agcy., Lease Rev., C.A.B.S. A1 Zero 7/01/06 1,500 1,395,165 C.A.B.S. A1 Zero 7/01/07 2,250 2,008,710 San Joaquin Hills Trans. Corridor Agcy., Toll Rd. Rev., Jr. Lien, C.A.B.S., E.T.M. Aaa Zero 1/01/11 2,000 1,506,080 Sr. Lien, C.A.B.S., E.T.M. Aaa Zero 1/01/17 2,500 1,341,175 San Leandro Cmnty. Facs., Spec. Tax, Dist. No. 1 NR 6.50 9/01/25 2,160 2,235,859
See Notes to Financial Statements 13 Prudential California Municipal Fund California Income Series Portfolio of Investments as of February 28, 2003 (Unaudited) Cont'd.
Principal Moody's Interest Maturity Amount Value Description (a) Rating Rate Date (000) (Note 1) - ----------------------------------------------------------------------------------------------------------- San Luis Obispo, C.O.P., Vista Hosp. Sys., Inc. NR 8.375% 7/01/29 $ 1,000(e)(h) $ 369,000 Santa Margarita Wtr. Dist. Spec. Tax, Cmnty. Facs., Dist. No. 99-1 NR 6.20 9/01/20 2,000 2,055,280 Cmnty. Facs., Dist. No. 99-1 NR 6.25 9/01/29 2,000 2,043,600 Santa Margarita, Dana Point Auth., Impvt. Dists. 1,2,2A,8, Ser. A, M.B.I.A. Aaa 7.25 8/01/09 905 1,134,110 Impvt. Dists. 3,3A, 4,4A, Ser. B, M.B.I.A. Aaa 7.25 8/01/14 1,000 1,314,570 Saratoga Uni. Sch. Dist., G.O., F.G.I.C. Aaa Zero 9/01/24 2,070 661,552 G.O., F.G.I.C. Aaa Zero 9/01/25 3,145 946,802 G.O., F.G.I.C. Aaa Zero 9/01/26 3,500 994,280 South Orange Cnty., Pub. Fin. Auth., Sr. Lien, Ser. A, M.B.I.A. Aaa 7.00 9/01/10 2,535 3,169,587 South Tahoe Joint Pwrs. Fin. Auth. Rev., Rfdg. Redev. Proj., Area No. 1, Ser. B BBB-(c) 6.00 10/01/28 3,000 3,067,260 Southern California Pub. Pwr. Auth., Pwr. Proj. Rev. A2 6.75 7/01/10 4,250 5,166,385 Pwr. Proj. Rev., Rfdg., Palo Verde Proj., Ser. C, A.M.B.A.C., E.T.M. Aaa Zero 7/01/16 8,400(h) 4,663,344 Stockton Cmnty. Facs. Dist., Spec. Tax, No. 90-2, Brookside Estates NR 6.20 8/01/15 1,050 1,106,553 Sulphur Springs Uni. Sch. Dist., Int. Accrual, Ser. A, M.B.I.A. Aaa Zero 9/01/11 3,000 2,168,760 Temecula Valley Uni. Sch. Dist., Cmnty. Facs., Spec. Tax, Dist. No. 89-1 NR 8.60 9/01/17 2,600 2,601,534
14 See Notes to Financial Statements Prudential California Municipal Fund California Income Series Portfolio of Investments as of February 28, 2003 (Unaudited) Cont'd.
Principal Moody's Interest Maturity Amount Value Description (a) Rating Rate Date (000) (Note 1) - ----------------------------------------------------------------------------------------------------------- Tustin California Uni. Sch. Dist. Spec. Tax, Cmnty. Facs., Dist. No. 97-1 AAA(c) 6.375% 9/01/35 $ 1,500(f) $ 1,844,505 Vacaville Cmnty. Redev. Agcy., Multi-Fam. Rev., Cmnty. Hsg. Fin., Issue A A-(c) 7.375 11/01/14 1,110(f) 1,247,973 Vallejo C.O.P., Touro Univ. Ba3 7.375 6/01/29 2,500(h) 2,549,825 Ventura California Port Dist., C.O.P. NR 6.375 8/01/28 3,445 3,495,573 Victor Elem. Sch. Dist., G.O., F.G.I.C., Ser. A Aaa 5.375 8/01/20 1,455 1,583,346 G.O., F.G.I.C., Ser. A Aaa 5.375 8/01/21 1,635 1,769,969 Victor Valley, Union H.S. Dist., C.A.B.S., M.B.I.A., E.T.M. Aaa Zero 9/01/17 4,500 2,342,790 Union H.S. Dist., C.A.B.S., M.B.I.A., E.T.M. Aaa Zero 9/01/19 5,450 2,514,957 Union H.S. Dist., C.A.B.S., M.B.I.A., E.T.M. Aaa Zero 9/01/20 5,850 2,536,618 West Contra Costa Uni. Sch. Dist., C.O.P. Baa3 6.875 1/01/09 775 824,794 ------------ Total long-term investments (cost $227,102,108) 248,617,497 ------------ SHORT-TERM INVESTMENTS 6.1% - ---------------------------------------------------------------------------------------- California Edl. Facs. Auth. Rev., Rfdg. Art Ctr. Design, Coll., Ser. B, F.R.W.D. VMIG1 1.10 3/06/03 1,000 1,000,000 California Hsg. Fin. Agy. Rev., Home Mtg., Ser. M, A.M.T., F.R.D.D. VMIG1 1.20 3/03/03 2,600 2,600,000 Home Mtg., Ser. R, A.M.T., F.R.D.D. VMIG1 1.20 3/03/03 1,110 1,110,000 Home Mtg., Ser. U, A.M.T., F.R.D.D. VMIG1 1.11 3/03/03 550 550,000 Multi-Fam. Hsg. III, Ser. A, A.M.T., F.R.D.D. VMIG1 1.20 3/03/03 1,100 1,100,000
See Notes to Financial Statements 15 Prudential California Municipal Fund California Income Series Portfolio of Investments as of February 28, 2003 (Unaudited) Cont'd.
Principal Moody's Interest Maturity Amount Value Description (a) Rating Rate Date (000) (Note 1) - ----------------------------------------------------------------------------------------------------------- Mun. Secs. Trust Cert., Ser. 2001,136 Trust Cert. Class A, F.G.I.C., F.R.D.D. A-1(c) 1.15% 3/03/03 $ 900 $ 900,000 Newport Beach California Rev., Hoag Mem. Presbyterian Hosp., F.R.D.D. VMIG1 1.11 3/03/03 3,200 3,200,000 Ontario California Rev., Redev. Agcy. Hsg., Ser. A, A.M.T., F.R.W.D. P-1 1.10 3/06/03 2,900 2,900,000 San Jose Redev. Agcy., Tax Alloc., Fltr. Cert. Ser. 149, M.B.I.A., F.R.W.D.S. VMIG1 1.10 3/06/03 2,000 2,000,000 ------------ Total short-term investments (cost $15,360,000) 15,360,000 ------------ Total Investments 103.7% (cost $242,462,108; Note 5) 263,977,497 Liabilities in excess of other assets (3.7%) (9,305,830) ------------ Net Assets 100% $254,671,667 ------------ ------------
16 See Notes to Financial Statements Prudential California Municipal Fund California Income Series Portfolio of Investments as of February 28, 2003 (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.A.B.S.--Capital Appreciation Bonds. C.O.P.--Certificates of Participation. E.T.M--Escrowed To Maturity. F.G.I.C.--Financial Guaranty Insurance Company. F.N.M.A.--Federal National Mortgage Association. F.R.D.D.--Floating Rate (Daily) Demand Note (b). F.R.W.D.--Floating Rate (Weekly) Demand Note (b). F.R.W.D.S.--Floating Rate (Weekly) Demand Note Synthetic (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 Corporation. R.I.B.S.--Residual Interest Bearing Securities. S.A.V.R.S.--Select Auction Variable Rate Securities. T.C.R.S.--Transferable Custodial Receipts. (b) For purposes of amortized cost valuation, the maturity date of Floating Rate Demand Notes is considered to be the later of the next date on which the security can be redeemed at par, or the next date on which the rate of interest is adjusted. (c) Standard & Poor's Rating. (d) Inverse floating rate bond. The coupon is inversely indexed to a floating interest rate. The rate shown is the rate at period end. (e) Issue in default on interest payment, non-income producing security. (f) Prerefunded issues are secured by escrowed cash and/or direct U.S. guaranteed obligations. (g) All or partial principal amount segregated as collateral for futures contracts or when-issued securities. (h) Represents a when-issued security. NR--Not Rated by Moody's or Standard & Poor's. The Fund's current Statement of Additional Information contains a description of Moody's and Standard & Poor's ratings. See Notes to Financial Statements 17 Prudential California Municipal Fund California Income Series Statement of Assets and Liabilities (Unaudited)
February 28, 2003 - ---------------------------------------------------------------------------------------- ASSETS Investments, at value (cost $242,462,108) $ 263,977,497 Cash 96,541 Interest receivable 3,535,254 Receivable for investments sold 3,131,101 Receivable for Series shares sold 277,219 Other assets 4,448 ----------------- Total assets 271,022,060 ----------------- LIABILITIES Payable for investments purchased 15,265,528 Payable for Series shares reacquired 754,267 Management fee payable 96,848 Dividends payable 93,159 Distribution fee payable 63,766 Accrued expenses 51,412 Deferred trustees' fees 17,288 Due to broker-variation margin 8,125 ----------------- Total liabilities 16,350,393 ----------------- NET ASSETS $ 254,671,667 ----------------- ----------------- Net assets were comprised of: Shares of beneficial interest, at par $ 228,681 Paid-in capital in excess of par 234,009,439 ----------------- 234,238,120 Undistributed net investment income 216,891 Accumulated net realized loss on investments (1,288,076) Net unrealized appreciation on investments 21,504,732 ----------------- Net assets, February 28, 2003 $ 254,671,667 ----------------- -----------------
18 See Notes to Financial Statements Prudential California Municipal Fund California Income Series Statement of Assets and Liabilities (Unaudited) Cont'd.
February 28, 2003 - ---------------------------------------------------------------------------------------- Class A: Net asset value and redemption price per share ($171,331,438 / 15,384,826 shares of beneficial interest issued and outstanding) $11.14 Maximum sales charge (3% of offering price) .34 ----------------- Maximum offering price to public $11.48 ----------------- ----------------- Class B: Net asset value, offering price and redemption price per share ($66,839,870 / 6,001,753 shares of beneficial interest issued and outstanding) $11.14 ----------------- ----------------- Class C: Net asset value and redemption price per share ($9,686,048 / 869,732 shares of beneficial interest issued and outstanding) $11.14 Sales charge (1% of offering price) .11 ----------------- Offering price to public $11.25 ----------------- ----------------- Class Z: Net asset value, offering price and redemption price per share ($6,814,311 / 611,800 shares of beneficial interest issued and outstanding) $11.14 ----------------- -----------------
See Notes to Financial Statements 19 Prudential California Municipal Fund California Income Series Statement of Operations (Unaudited)
Six Months Ended February 28, 2003 - ---------------------------------------------------------------------------------------- NET INVESTMENT INCOME Income Interest $ 6,729,541 ----------------- Expenses Management fee 633,622 Distribution fee--Class A 213,286 Distribution fee--Class B 167,416 Distribution fee--Class C 37,002 Custodian's fees and expenses 46,000 Transfer agent's fees and expenses 24,000 Reports to shareholders 23,000 Registration fees 17,000 Legal fees and expenses 11,000 Audit fee 7,000 Trustees' fees 6,000 Miscellaneous 9,226 ----------------- Total expenses 1,194,552 ----------------- Net investment income 5,534,989 ----------------- REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS Net realized gain (loss) on: Investment transactions 2,035,543 Financial futures transactions (9,115) ----------------- 2,026,428 ----------------- Net change in unrealized appreciation (depreciation) on: Investments (1,166,597) Financial futures contracts 90,273 ----------------- (1,076,324) ----------------- Net gain on investments 950,104 ----------------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 6,485,093 ----------------- -----------------
20 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, 2003 August 31, 2002 - ------------------------------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS Operations Net investment income $ 5,534,989 $ 11,443,622 Net realized gain on investment transactions 2,026,428 1,575,012 Net change in unrealized depreciation on investments (1,076,324) (1,948,367) ----------------- --------------- Net increase in net assets resulting from operations 6,485,093 11,070,267 ----------------- --------------- Dividends and distributions (Note 1): Dividends from net investment income Class A (3,724,979) (7,845,065) Class B (1,377,827) (3,198,683) Class C (190,733) (381,316) Class Z (138,302) (228,685) ----------------- --------------- (5,431,841) (11,653,749) ----------------- --------------- Series share transactions (net of share conversions) (Note 6): Net proceeds from shares sold 11,912,219 34,048,697 Net asset value of shares issued to shareholders in reinvestment of dividends and distributions 2,482,920 5,185,147 Cost of shares reacquired (19,926,276) (38,192,909) ----------------- --------------- Net increase (decrease) in net assets from Series share transactions (5,531,137) 1,040,935 ----------------- --------------- Total increase (decrease) (4,477,885) 457,453 NET ASSETS Beginning of period 259,149,552 258,692,099 ----------------- --------------- End of period(a) $ 254,671,667 $ 259,149,552 ----------------- --------------- ----------------- --------------- (a) Includes undistributed net investment income of: $ 216,891 $ 113,743 ----------------- ---------------
See Notes to Financial Statements 21 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 assets of each series are invested in separate, independently managed portfolios. 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. Securities, including options, futures contracts and options thereon, for which the primary market is on a national securities exchange, commodities exchange or board of trade are valued at the last sale price on such exchange or exchange or board of trade, on the date of valuation or, if there was no sale on such day, at the average of readily available closing bid and asked prices on such day or at the bid price in the absence of an asked price. Securities, including options, that are actively traded in the over-the-counter market, including listed securities for which the primary market is believed to be over-the-counter, are valued at the average of the most recently quoted bid and asked prices provided by a principal market maker or dealer. Short-term securities which mature in sixty days or less are valued at amortized cost, which approximates market value. The amortized cost method involves valuing a 22 Prudential California Municipal Fund California Income Series Notes to Financial Statements (Unaudited) Cont'd. security at its cost on the date of purchase and thereafter assuming a constant amortization to maturity of the difference between the principal amount due at maturity and cost. Short-term securities which mature in more than sixty days are valued at current market quotations. 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. 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. Future contracts involve elements of both market and credit risk in excess of the amounts reflected on the Statement of Assets and Liabilities. Inverse Floaters: The Series invests in variable rate securities commonly called 'inverse floaters'. The interest rates on these securities have an inverse relationship to the interest rate of other securities or the value of an index. Changes in interest rates on the other security or index inversely affect the rate paid on the inverse floater, and the inverse floater's price will be more volatile than that of a fixed-rate bond. Additionally, some of these securities contain a 'leverage factor' whereby the interest rate moves inversely by a 'factor' to the benchmark rate. Certain interest rate movements and other market factors can substantially affect the liquidity of inverse floating rate notes. Securities Transactions and Net Investment Income: Securities transactions are recorded on the trade date. Realized gains (losses) on sales of securities are calculated on the identified cost basis. Interest income, including amortization of premium and accretion of discount on debt securities, as required is recorded on the 23 Prudential California Municipal Fund California Income Series Notes to Financial Statements (Unaudited) Cont'd. accrual basis. Expenses are recorded on the accrual basis which may require the use of certain estimates by management. Net investment income or loss (other than distribution fees, which are charged directly to the respective class) and unrealized and realized gains and losses are allocated daily to each class of shares based upon the relative proportion of net assets of each class at the beginning of the day. Federal Income Taxes: For federal income tax purposes, each Series in the Fund is treated as a separate taxpaying entity. It is the Series' policy to 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. Dividends and distributions to shareholders, which are determined in accordance with federal income tax regulation and which may differ from generally accepted accounting principles, are recorded on the ex-dividend date. Permanent book/tax differences relating to income and gains are reclassified to paid in capital when they arise. Custody Fee Credits: The Fund has an arrangement with its custodian bank, whereby uninvested assets earn credits which reduce the fees charged by the custodian. The Fund could have invested a portion of the assets utilized in connection with the expense offset arrangements in an income producing asset if they had not entered into such arrangements. Note 2. Agreements The Fund has a management agreement with Prudential Investments LLC ('PI'). 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'). The Subadvisory agreement provides that 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 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 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. 24 Prudential California Municipal Fund California Income Series Notes to Financial Statements (Unaudited) Cont'd. The Series has a distribution agreement with Prudential Investment Management Services LLC ('PIMS') which acts as the distributor of the Series. The Series compensates PIMS for distributing and servicing the Series' Class A, Class B and Class C shares, pursuant to plans of distribution (the 'Class A, B and C Plans'), regardless of expenses actually incurred by it. The distribution fees are accrued daily and payable monthly. No distribution or service fees are paid to PIMS as distributor of the Class Z shares of the Series. Pursuant to the Class A, B and C Plans, the 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. PIMS has contractually agreed to limit such fees to .25% on the average daily net assets of the Class A shares. PIMS has advised the Series that it received approximately $72,800 and $7,100 in front-end sales charges resulting from sales of Class A and Class C shares, respectively, during the six months ended February 28, 2003. 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. PIMS has advised the Series that for the six months ended February 28, 2003, it received approximately $72,300 and $600 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'), is a party to a syndicated credit agreement ('SCA') with a group of banks. For the six months ended February 28, 2003 the amount of the commitment was $800 million and the SCA allows the Funds to increase the commitment to $1 billion, if necessary. Interest on any borrowings under the SCA will be incurred at market rates. The Funds pay a commitment fee of .08 of 1% of the unused portion of the SCA. The commitment fee is accrued and paid quarterly on a pro rata basis by the Funds. The purpose of the SCA is to serve as an alternative source of funding for capital share redemptions. The expiration date of the SCA is May 2, 2003. The Fund did not borrow any amounts pursuant to the SCA during the six months ended February 28, 2003. 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, 2003, the Series incurred fees of approximately 25 Prudential California Municipal Fund California Income Series Notes to Financial Statements (Unaudited) Cont'd. $21,500 for the services of PMFS. As of February 28, 2003 approximately $3,500 of such fees were due to PMFS. Transfer agent fees and expenses in the Statement of Operations include certain out-of-pocket expenses paid to nonaffiliates. The Fund pays networking fees to affiliated and unaffiliated broker/dealers. These networking fees are payments made to broker/dealers that clear mutual fund transactions through a national clearing system. The Fund incurred approximately $4,300 in total networking fees, of which the amount relating to the services of Prudential Securities, Inc. ('PSI'), an affiliate of PI and an indirect, wholly-owned subsidiary of Prudential was approximately $3,500 for the six months ended February 28, 2003. As of February 28, 2003, approximately $600 of such fees were due to PSI. These amounts are 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, 2003 were $78,959,351 and $80,522,302, respectively. During the six months ended February 28, 2003, the Fund entered into financial futures contracts. Details of financial futures contracts open at February 28, 2003 are as follows:
Value at Value at Number of Expiration February 28, Trade Unrealized Contracts Type Date 2003 Date (Depreciation) - --------- --------------------- ----------- ------------ ---------- -------------- Short Position: 10 U.S. Treasury Bond Future Mar. 2003 $1,158,125 $1,147,468 $(10,657)
Note 5. Tax Information For federal income tax purposes, the Series has a capital loss carryforward at August 31, 2002 of approximately $3,463,000 of which $326,000 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. 26 Prudential California Municipal Fund California Income Series Notes to Financial Statements (Unaudited) Cont'd. The United States federal income tax basis of the Series' investments and the net unrealized appreciation as of February 28, 2003 were as follows:
Net Unrealized Tax Basis Appreciation Depreciation Appreciation - ------------ ------------ ------------ ---------------- $242,462,108 $ 23,575,406 $ 2,060,017 $ 21,515,389
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. Transactions in shares of beneficial interest for the six months ended February 28, 2003 and the fiscal year ended August 31, 2002 were as follows:
Class A Shares Amount - ------------------------------------------------------------ ---------- ------------ Six months ended February 28, 2003: Shares sold 584,599 $ 6,451,827 Shares issued in reinvestment of dividends 147,972 1,632,404 Shares reacquired (1,203,908) (13,282,886) ---------- ------------ Net increase (decrease) in shares outstanding before conversion (471,337) (5,198,655) Shares issued upon conversion from Class B 288,546 3,210,770 ---------- ------------ Net increase (decrease) in shares outstanding (182,791) $ (1,987,885) ---------- ------------ ---------- ------------ Year ended August 31, 2002: Shares sold 1,682,480 $ 18,393,006 Shares issued in reinvestment of dividends 312,065 3,391,093 Shares reacquired (1,974,803) (21,498,821) ---------- ------------ Net increase (decrease) in shares outstanding before conversion 19,742 285,278 Shares issued upon conversion from Class B 517,824 5,622,935 ---------- ------------ Net increase (decrease) in shares outstanding 537,566 $ 5,908,213 ---------- ------------ ---------- ------------
27 Prudential California Municipal Fund California Income Series Notes to Financial Statements (Unaudited) Cont'd.
Class B Shares Amount - ------------------------------------------------------------ ---------- ------------ Six months ended February 28, 2003: Shares sold 295,587 $ 3,267,968 Shares issued in reinvestment of dividends 57,961 639,457 Shares reacquired (403,614) (4,467,832) ---------- ------------ Net increase (decrease) in shares outstanding before conversion (50,066) (560,407) Shares issued upon conversion into Class A (288,546) (3,210,770) ---------- ------------ Net increase (decrease) in shares outstanding (338,612) $ (3,771,177) ---------- ------------ ---------- ------------ Year ended August 31, 2002: Shares sold 736,577 $ 8,021,395 Shares issued in reinvestment of dividends 127,338 1,383,947 Shares reacquired (1,046,245) (11,384,770) ---------- ------------ Net increase (decrease) in shares outstanding before conversion (182,330) (1,979,428) Shares issued upon conversion into Class A (517,824) (5,622,935) ---------- ------------ Net increase (decrease) in shares outstanding (700,154) $ (7,602,363) ---------- ------------ ---------- ------------ Class C - ------------------------------------------------------------ Six months ended February 28, 2003: Shares sold 70,725 $ 782,505 Shares issued in reinvestment of dividends 13,714 151,283 Shares reacquired (122,850) (1,347,992) ---------- ------------ Net increase (decrease) in shares outstanding (38,411) $ (414,204) ---------- ------------ ---------- ------------ Year ended August 31, 2002: Shares sold 288,071 $ 3,140,575 Shares issued in reinvestment of dividends 28,107 305,460 Shares reacquired (253,377) (2,759,257) ---------- ------------ Net increase (decrease) in shares outstanding 62,801 $ 686,778 ---------- ------------ ---------- ------------ Class Z - ------------------------------------------------------------ Six months ended February 28, 2003: Shares sold 126,984 $ 1,409,919 Shares issued in reinvestment of dividends 5,419 59,776 Shares reacquired (74,954) (827,566) ---------- ------------ Net increase (decrease) in shares outstanding 57,449 $ 642,129 ---------- ------------ ---------- ------------ Year ended August 31, 2002: Shares sold 414,422 $ 4,493,721 Shares issued in reinvestment of dividends 9,626 104,647 Shares reacquired (234,335) (2,550,061) ---------- ------------ Net increase (decrease) in shares outstanding 189,713 $ 2,048,307 ---------- ------------ ---------- ------------
28 SEMI ANNUAL REPORT FEBRUARY 28, 2003 PRUDENTIAL CALIFORNIA MUNICIPAL FUND/ CALIFORNIA INCOME SERIES - -------------------------------------------------------------------------------- FINANCIAL HIGHLIGHTS Prudential California Municipal Fund California Income Series Financial Highlights (Unaudited)
Class A ------------------ Six Months Ended February 28, 2003 - ----------------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE: Net asset value, beginning of period $ 11.09 ---------- Income from investment operations Net investment income .24 Net realized and unrealized gain (loss) on investment transactions .05 ---------- Total from investment operations .29 ---------- Less distributions Dividends from net investment income (.24) Distributions in excess of net investment income -- ---------- Total distributions (.24) ---------- Net asset value, end of period $ 11.14 ---------- ---------- TOTAL RETURN(b): 2.68% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000) $171,331 Average net assets (000) $172,042 Ratios to average net assets: Expenses, including distribution and service (12b-1) fees .86%(e) Expenses, excluding distribution and service (12b-1) fees .61%(e) Net investment income 4.45%(e) For Class A, B, C and Z shares: Portfolio turnover rate 32%
- ------------------------------ (a) Net of management fee waiver. (b) Total return does not consider the effects of sales loads. Total return is calculated assuming a purchase of shares on the first day and a sale on the last day of each 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) Effective September 1, 2001 the Series has adopted the provisions of the AICPA Audit and Accounting Guide for Investment Companies and began accreting market discount on debt securities. There was no effect of this change for the year ended August 31, 2002 on net investment income per share, net realized and unrealized gain/(loss) per share or on the ratio of net investment income. Per share amounts and ratios for the years ended prior to August 31, 2002 have not been restated to reflect this change in presentation. (e) Annualized. 30 See Notes to Financial Statements Prudential California Municipal Fund California Income Series Financial Highlights (Unaudited) Cont'd.
Class A - ---------------------------------------------------------------------------------------------------------- Year Ended August 31, - ---------------------------------------------------------------------------------------------------------- 2002(d) 2001 2000 1999 1998 - ---------------------------------------------------------------------------------------------------------- $ 11.11 $ 10.66 $ 10.49 $ 11.19 $ 10.71 - ---------------- ---------------- ---------------- ---------------- ---------------- .49 .52 .54 .56(a) .59(a) (.01) .45 .17 (.70) .49 - ---------------- ---------------- ---------------- ---------------- ---------------- .48 .97 .71 (.14) 1.08 - ---------------- ---------------- ---------------- ---------------- ---------------- (.50) (.52) (.54) (.56) (.59) -- --(c) --(c) -- (.01) - ---------------- ---------------- ---------------- ---------------- ---------------- (.50) (.52) (.54) (.56) (.60) - ---------------- ---------------- ---------------- ---------------- ---------------- $ 11.09 $ 11.11 $ 10.66 $ 10.49 $ 11.19 - ---------------- ---------------- ---------------- ---------------- ---------------- - ---------------- ---------------- ---------------- ---------------- ---------------- 4.54% 9.35% 7.10% (1.37)% 10.31% $172,623 $167,009 $167,153 $183,593 $181,512 $169,196 $164,424 $171,688 $187,106 $165,771 .87% .87% .86% .76%(a) .68%(a) .62% .62% .61% .56%(a) .58%(a) 4.55% 4.83% 5.21% 5.03%(a) 5.39%(a) 23% 32% 34% 23% 10%
See Notes to Financial Statements 31 Prudential California Municipal Fund California Income Series Financial Highlights (Unaudited) Cont'd.
Class B ------------------ Six Months Ended February 28, 2003 - ----------------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE: Net asset value, beginning of period $ 11.09 -------- Income from investment operations Net investment income .23 Net realized and unrealized gain (loss) on investment transactions .05 -------- Total from investment operations .28 -------- Less distributions Dividends from net investment income (.23) Distributions in excess of net investment income -- -------- Total distributions (.23) -------- Net asset value, end of period $ 11.14 -------- -------- TOTAL RETURN(b): 2.56% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000) $ 66,840 Average net assets (000) $ 67,521 Ratios to average net assets: Expenses, including distribution and service (12b-1) fees 1.11%(e) Expenses, excluding distribution and service (12b-1) fees .61%(e) Net investment income 4.20%(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) Effective September 1, 2001 the Series has adopted the provisions of the AICPA Audit and Accounting Guide for Investment Companies and began accreting market discount on debt securities. There was no effect of this change for the year ended August 31, 2002 on net investment income per share, net realized and unrealized gain/(loss) per share. The effect of this change on the ratio of net investment income was an increase from 4.30% to 4.31%. Per share amounts and ratios for the years ended prior to August 31, 2002 have not been restated to reflect this change in presentation. (e) Annualized. 32 See Notes to Financial Statements Prudential California Municipal Fund California Income Series Financial Highlights (Unaudited) Cont'd.
Class B - ---------------------------------------------------------------------------------------------------------- Year Ended August 31, - ---------------------------------------------------------------------------------------------------------- 2002(d) 2001 2000 1999 1998 - ---------------------------------------------------------------------------------------------------------- $ 11.11 $ 10.67 $ 10.49 $ 11.19 $ 10.71 -------- -------- -------- -------- -------- .47 .49 .51 .53(a) .55(a) (.01) .44 .18 (.70) .49 -------- -------- -------- -------- -------- .46 .93 .69 (.17) 1.04 -------- -------- -------- -------- -------- (.48) (.49) (.51) (.53) (.55) -- --(c) --(c) -- (.01) -------- -------- -------- -------- -------- (.48) (.49) (.51) (.53) (.56) -------- -------- -------- -------- -------- $ 11.09 $ 11.11 $ 10.67 $ 10.49 $ 11.19 -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- 4.29% 8.98% 6.93% (1.67)% 9.87% $ 70,308 $ 78,237 $ 80,580 $ 84,546 $ 70,535 $ 72,864 $ 79,046 $ 78,743 $ 81,163 $ 56,011 1.12% 1.12% 1.11% 1.06%(a) 1.08%(a) .62% .62% .61% .56%(a) .58%(a) 4.31% 4.58% 4.96% 4.78%(a) 4.99%(a)
See Notes to Financial Statements 33 Prudential California Municipal Fund California Income Series Financial Highlights (Unaudited) Cont'd.
Class C ------------------ Six Months Ended February 28, 2003 - ----------------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE: Net asset value, beginning of period $ 11.09 -------- Income from investment operations Net investment income .22 Net realized and unrealized gain (loss) on investment transactions .04 -------- Total from investment operations .26 -------- Less distributions Dividends from net investment income (.21) Distributions in excess of net investment income -- -------- Total distributions (.21) -------- Net asset value, end of period $ 11.14 -------- -------- TOTAL RETURN(b): 2.43% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000) $ 9,686 Average net assets (000) $ 9,949 Ratios to average net assets: Expenses, including distribution and service (12b-1) fees 1.36%(e) Expenses, excluding distribution and service (12b-1) fees .61%(e) Net investment income 3.95%(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) Effective September 1, 2001 the Series has adopted the provisions of the AICPA Audit and Accounting Guide for Investment Companies and began accreting market discount on debt securities. There was no effect of this change for the year ended August 31, 2002 on net investment income per share, net realized and unrealized gain/(loss) per share. The effect of this change on the ratio of net investment income was an increase from 4.06% to 4.07%. Per share amounts and ratios for the years ended prior to August 31, 2002 have not been restated to reflect this change in presentation. (e) Annualized. 34 See Notes to Financial Statements Prudential California Municipal Fund California Income Series Financial Highlights (Unaudited) Cont'd.
Class C - ---------------------------------------------------------------------------------------------------------- Year Ended August 31, - ---------------------------------------------------------------------------------------------------------- 2002(d) 2001 2000 1999 1998 - ---------------------------------------------------------------------------------------------------------- $ 11.11 $10.67 $10.49 $ 11.19 $10.71 -------- ------- ------- -------- ------- .44 .47 .49 .50(a) .52(a) (.01) .44 .18 (.70) .49 -------- ------- ------- -------- ------- .43 .91 .67 (.20) 1.01 -------- ------- ------- -------- ------- (.45) (.47) (.49) (.50) (.52) -- --(c) --(c) -- (.01) -------- ------- ------- -------- ------- (.45) (.47) (.49) (.50) (.53) -------- ------- ------- -------- ------- $ 11.09 $11.11 $10.67 $ 10.49 $11.19 -------- ------- ------- -------- ------- -------- ------- ------- -------- ------- 4.02% 8.71% 6.66% (1.91)% 9.60% $ 10,071 $9,394 $8,309 $ 10,847 $5,960 $ 9,188 $8,346 $9,021 $ 9,088 $4,491 1.37% 1.37% 1.36% 1.31%(a) 1.33%(a) .62% .62% .61% .56%(a) .58%(a) 4.07% 4.33% 4.71% 4.53%(a) 4.74%(a)
See Notes to Financial Statements 35 Prudential California Municipal Fund California Income Series Financial Highlights (Unaudited) Cont'd.
Class Z ------------------ Six Months Ended February 28, 2003 - ----------------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE: Net asset value, beginning of period $11.09 ------- Income from investment operations Net investment income .26 Net realized and unrealized gain (loss) on investment transactions .04 ------- Total from investment operations .30 ------- Less distributions Dividends from net investment income (.25) Distributions in excess of net investment income -- ------- Total distributions (.25) ------- Net asset value, end of period $11.14 ------- ------- TOTAL RETURN(b): 2.81% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000) $6,814 Average net assets (000) $6,036 Ratios to average net assets: Expenses, including distribution and service (12b-1) fees .61%(e) Expenses, excluding distribution and service (12b-1) fees .61%(e) Net investment income 4.71%(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) Effective September 1, 2001 the Series has adopted the provisions of the AICPA Audit and Accounting Guide for Investment Companies and began accreting market discount on debt securities. There was no effect of this change for the year ended August 31, 2002 on net investment income per share, net realized and unrealized gain/(loss) per share or on the ratio of net investment income. Per share amounts and ratios for the years ended prior to August 31, 2002 have not been restated to reflect this change in presentation. (e) Annualized. 36 See Notes to Financial Statements Prudential California Municipal Fund California Income Series Financial Highlights (Unaudited) Cont'd.
Class Z - ---------------------------------------------------------------------------- Year Ended August 31, - ---------------------------------------------------------------------------- 2002(d) 2001 2000 1999 1998 - ---------------------------------------------------------------------------- $11.11 $10.65 $10.49 $11.19 $10.71 - ---------- ---------- ---------- ---------- ---------- .52 .55 .56 .58(a) .61(a) (.01) .46 .16 (.70) .49 - ---------- ---------- ---------- ---------- ---------- .51 1.01 .72 (.12) 1.10 - ---------- ---------- ---------- ---------- ---------- (.53) (.55) (.56) (.58) (.61) -- --(c) --(c) -- (.01) - ---------- ---------- ---------- ---------- ---------- (.53) (.55) (.56) (.58) (.62) - ---------- ---------- ---------- ---------- ---------- $11.09 $11.11 $10.65 $10.49 $11.19 - ---------- ---------- ---------- ---------- ---------- - ---------- ---------- ---------- ---------- ---------- 4.80% 9.72% 7.26% (1.18)% 10.42% $6,148 $4,052 $4,336 $5,449 $4,507 $4,712 $4,292 $4,281 $4,725 $3,312 .62% .62% .61% .56%(a) .58%(a) .62% .62% .61% .56%(a) .58%(a) 4.78% 5.09% 5.45% 5.28%(a) 5.49%(a)
See Notes to Financial Statements 37 Prudential California Municipal Fund California Income Series Getting the Most from Your Prudential Mutual Fund Some mutual fund shareholders won't ever read this-they don't read annual and semiannual reports. It's quite understandable. These annual and semiannual reports are prepared to comply with federal regulations, and are often written in language that is difficult to understand. So when most people run into those particularly daunting sections of these reports, they don't read them. WE THINK THAT'S A MISTAKE At Prudential, we've made some changes to our mutual funds report to make it easier to understand and more pleasant to read. We hope you'll find it profitable to spend a few minutes familiarizing yourself with your investment. Here's what you'll find in the report: PERFORMANCE AT A GLANCE Since an investment's performance is often a shareholder's primary concern, we present performance information in two different formats. You'll find it first on the "Performance at a Glance" page where we compare the Fund and the comparable average calculated by Lipper, Inc., a nationally recognized mutual fund rating agency. We report both the cumulative total returns and the average annual total returns. The cumulative total return is the total amount of income and appreciation the Fund has achieved in various time periods. The average annual total return is an annualized representation of the Fund's performance. It gives you an idea of how much the Fund has earned in an average year for a given time period. Under the performance box, you'll see legends that explain the performance information, whether fees and sales charges have been included in the returns, and the inception dates for the Fund's share classes. See the performance comparison charts at the back of the report for more performance information. Please keep in mind that past performance is not indicative of future results. www.prudential.com (800) 225-1852 INVESTMENT ADVISER'S REPORT The portfolio manager, who invests your money for you, reports on successful-and not-so-successful-strategies in this section of your report. Look for recent purchases and sales here, as well as information about the sectors the portfolio manager favors, and any changes that are on the drawing board. PORTFOLIO OF INVESTMENTS This is where the report begins to appear technical, but it's really just a listing of each security held at the end of the reporting period, along with valuations and other information. Please note that sometimes we discuss a security in the "Investment Adviser's Report" section that doesn't appear in this listing, because it was sold before the close of the reporting period. STATEMENT OF ASSETS AND LIABILITIES The balance sheet shows the assets (the value of the Fund's holdings), liabilities (how much the Fund owes), and net assets (the Fund's equity or holdings after the Fund pays its debts) as of the end of the reporting period. It also shows how we calculate the net asset value per share for each class of shares. The net asset value is reduced by payment of your dividend, capital gain, or other distribution-but remember that the money or new shares are being paid or issued to you. The net asset value fluctuates daily, along with the value of every security in the portfolio. STATEMENT OF OPERATIONS This is the income statement, which details income (mostly interest and dividends earned) and expenses (including what you pay us to manage your money). You'll also see capital gains here-both realized and unrealized. Prudential California Municipal Fund California Income Series Getting the Most from Your Prudential Mutual Fund STATEMENT OF CHANGES IN NET ASSETS This schedule shows how income and expenses translate into changes in net assets. The Fund is required to pay out the bulk of its income to shareholders every year, and this statement shows you how we do it (through dividends and distributions) and how that affects the net assets. This statement also shows how money from investors flowed into and out of the Fund. NOTES TO FINANCIAL STATEMENTS This is the kind of technical material that can intimidate readers, but it does contain useful information. The notes provide a brief history and explanation of your Fund's objectives. In addition, they outline how Prudential mutual funds prices securities. The notes also explain who manages and distributes the Fund's shares and, more important, how much they are paid for doing so. Finally, the notes explain how many shares are outstanding and the number issued and redeemed over the period. FINANCIAL HIGHLIGHTS This information contains many elements from prior pages, but on a per-share basis. It is designed to help you understand how the Fund performed, and to compare this year's performance and expenses to those of prior years. INDEPENDENT ACCOUNTANT'S REPORT Once a year, an independent accountant looks over our books and certifies that the financial statements are fairly presented in accordance with generally accepted accounting principles. TAX INFORMATION This is information that we report annually about how much of your total return is taxable. Should you have any questions, you may want to consult a tax adviser. www.prudential.com (800) 225-1852 PERFORMANCE COMPARISON These charts are included in the annual report and are required by the Securities Exchange Commission. Performance is presented here as the return on a hypothetical $10,000 investment in the Fund since its inception or for 10 years (whichever is shorter). To help you put that return in context, we are required to include the performance of an unmanaged, broad-based securities index as well. The index does not reflect the cost of buying the securities it contains or the cost of managing a mutual fund. Of course, the index holdings do not mirror those of the Fund-the index is a broad-based reference point commonly used by investors to measure how well they are doing. A definition of the selected index is also provided. Investors cannot invest directly in an index. Prudential California Municipal Fund California Income 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.prudential.com (800) 225-1852 Leverage: The use of borrowed assets to enhance return. The expectation is that the interest rate charged on borrowed funds will be lower than the return on the investment. While leverage can increase profits, it can also magnify losses. Liquidity: The ease with which a financial instrument (or product) can be bought or sold (converted into cash) in the financial markets. Price/Earnings Ratio: The price of a share of stock divided by the earnings per share for a 12-month period. Option: An agreement to purchase or sell something, such as shares of stock, by a certain time for a specified price. An option need not be exercised. Spread: The difference between two values; often used to describe the difference between "bid" and "asked" prices of a security, or between the yields of two similar maturity bonds. Yankee Bond: A bond sold by a foreign company or government on the U.S. market and denominated in U.S. dollars. Prudential 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.prudential.com (800) 225-1852 FOR MORE INFORMATION Prudential Mutual Funds Gateway Center Three 100 Mulberry Street Newark, NJ 07102-4077 (800) 225-1852 Trustees 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 Judy A. Rice, President Robert F. Gunia, Vice President Grace C. Torres, Treasurer Deborah A. Docs, Secretary Marguerite E.H. Morrison, Assistant Secretary Maryanne Ryan, Anti-Money Laundering Compliance Officer 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 PO 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, 2003, were not audited and, accordingly, no opinion is expressed on them. Mutual funds are not insured by the FDIC or any federal government agency, are not a deposit of or guaranteed by any bank or any bank affiliate, and may lose value. Prudential Financial (LOGO) Fund Symbols Nasdaq CUSIP - ------------ ------ ----- Class A PBCAX 744313305 Class B PCAIX 744313404 Class C PCICX 744313800 Class Z PCIZX 744313875 MF146E2 IFS-A079180 SEMIANNUAL REPORT FEBRUARY 28, 2003 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 Financial (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. State Specific Money Market Fund Yield Comparison (CHART) www.prudential.com (800) 225-1852 Semiannual Report February 28, 2003 Fund Facts As of 2/28/03
7-Day Net Asset Taxable Equivalent Yield* Weighted Avg. Net Assets Current Yield Value (NAV) @30% @35% @38.6% Mat. (WAM) (Millions) CA Money Market Series 0.61% $1.00 0.96% 1.03% 1.10% 38 Days $245 iMoneyNet, Inc. State Specific Retail California Avg.** 0.52% $1.00 0.82% 0.88% 0.93% 32 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. **The iMoneyNet, Inc. State Specific Retail California Average is based on the average yield of all funds in the iMoneyNet, Inc. State Specific Retail California category. Weighted Average Maturity Comparison (CHART) 1 Prudential Financial (LOGO) April 15, 2003 DEAR SHAREHOLDER, Money market funds and other conservative investment alternatives served as safe havens for investors discouraged by a volatile equity market during California Money Market Series' six-month reporting period ended February 28, 2003. As the economic recovery in the United States struggled to stay on track, stocks began to rebound in late 2002 only to turn sharply lower again in the first two months of 2003. In light of these large swings in stock prices, the conservative market sentiment was not surprising. Doubts about the staying power of the economic recovery, exacerbated at that time by the threat of war with Iraq, encouraged a trend toward lower interest rates. Declining interest rates reduced the level of income earned in all portfolios that invest in municipal money market securities. In this falling-interest-rate environment, the Series' investment strategy helped provide a yield that was competitive with the yield of the average comparable fund as measured by iMoneyNet, Inc. In March 2003 I was named president of the Fund. I am pleased to lead an organization aimed at offering a high-quality product based on consistent investment disciplines, a point of stability in today's turbulent markets. At Prudential Financial, we recommend that you work closely with a financial professional if you are considering making any changes to your investment strategy. As always, we appreciate your continued confidence in Prudential mutual funds and look forward to serving your future investment needs. Sincerely, Judy A. Rice, President Prudential California Municipal Fund 2 Prudential California Municipal Fund California Money Market Series Semiannual Report February 28, 2003 INVESTMENT ADVISER'S REPORT INVESTING AMID HISTORICALLY LOW INTEREST RATES Short-term interest rates declined to their lowest level in more than 40 years during our six-month reporting period that began September 1, 2002. This trend occurred as a growing threat of war with Iraq, higher oil prices, and less vigorous consumer spending dampened the economic recovery in the United States. Moreover, California is expected to face a sizable budget gap through June 30, 2004, as lackluster economic conditions and the declining stock market reduced revenues collected from income and capital gains taxes. In this challenging environment, we maintained an approach to security selection and interest-rate risk that aimed to enhance the Series' yield via conservative investment strategies. Early in our reporting period, financial markets had initially focused on data that indicated economic growth might be stronger than anticipated. This led to speculation that the next move by the Federal Reserve (the Fed) might be an increase in interest rates to prevent the economy from overheating rather than a reduction in rates as previously expected. Consequently, investors demanded higher yields on municipal money market securities in October 2002, which pushed their prices lower. WELL-TIMED OCTOBER PURCHASES HELPED THE SERIES We took advantage of what proved to be a brief rise in yields during October 2002 by purchasing securities that matured through the first quarter of 2003. This strategy enabled us to stagger the maturities of the securities during this time frame. We bought tax-exempt commercial paper of Los Angeles Harbor Authority that matured in December 2002 and Los Angeles Waste Water Authority that matured in mid-January 2003. In addition, we bought bonds of the California Department of Water Resources whose principal and interest are backed by top- tier banks. The bonds initially paid fixed interest rates until certain dates in February and March 2003. 3 Prudential California Municipal Fund California Money Market Series Semiannual Report February 28, 2003 Money market yields reached their peak for the reporting period in October, then turned lower as it became clear the economic recovery was losing steam. When the Fed met in November 2002, concern about the economy led it to cut its target for the rate banks charge each other for overnight loans by half a percentage point to 1.25%, its lowest level in 41 years. During November 2002, we bought bond anticipation notes of Berkeley Unified School District that mature in June 2003. However, for most of that month, we allowed the Series' weighted average maturity (WAM) to shorten by investing in securities that matured on a daily and weekly basis. (WAM measures a fund's sensitivity to changes in interest rates. It considers the maturity and quantity of each security held in a portfolio.) This move allowed us to meet year-end shareholder liquidity needs and to participate in good buying opportunities that usually emerge in late December when issuers come to market to raise money before the end of the year. As a result, we were able to purchase Los Angeles Community Redevelopment Agency bonds and Los Angeles Multifamily revenue bonds that are structured so that investors can "put" or sell them back in six months. RIDING OUT THE "JANUARY EFFECT" IN 2003 As 2003 began, an annual decline in yields occurred when investors hurriedly reinvested cash from coupon payments, bond calls, and maturing debt securities that they received during the first week of January. The Series was able to ride out this period, known as the January effect, because in October 2002, we had invested in securities that matured after early January 2003. Once the January effect was over, we began to buy tax-exempt commercial paper that matured in April 2003. These purchases increased the ability of the Series to meet its shareholder liquidity needs during tax season and to take advantage of any good investment opportunities that emerge as portfolio managers sell securities to provide shareholders with cash to pay their taxes. 4 www.prudential.com (800) 225-1852 GOLDEN STATE'S CREDIT RATINGS DOWNGRADED We remained very selective when purchasing securities of California issuers during our reporting period. Due to substantial reliance upon the personal income tax, particularly the capital gains component, California's anticipated revenues declined more than expected. Its cash position has deteriorated, and the state is expected to issue about $11 billion of revenue anticipation warrants later this year. Absent corrective action, California faces a combined estimated budget gap of nearly $35 billion through June 30, 2004. The conflict of cutting expenses and/or raising taxes has caused near paralysis among lawmakers. Standard & Poor's Ratings Group (S&P) cut the Golden State's general obligation bond rating to single-A from single-A plus, and Moody's Investors Service lowered it to A2 from A1. S&P also downgraded the state's short-term ratings to SP-2 from SP-1 for tax-exempt commercial paper (TECP), and A-2 from A-1 for $12.5 billion of notes. Moody's still rates California's TECP at Prime 1, but Moody's downgraded the notes to MIG 2 from MIG 1 after our reporting period ended. California's finances remain under pressure. Although we emphasize securities of California issuers that carry some form of credit enhancement as an extra measure of protection, we believe the state will ultimately act to maintain its fiscal integrity. LOOKING AHEAD We are looking forward to taking advantage of "note season"-a period of several weeks typically during June when many issuers in California sell new, attractively priced municipal money market securities. The increased supply during this time tends to temporarily drive up the overall level of yields. As such, we will look to position the Series' WAM slightly longer than its competitive average via selective purchases of high-quality securities. California Money Market Series Management Team 5 Prudential California Municipal Fund California Money Market Series Portfolio of Investments as of February 28, 2003 (Unaudited)
Principal Moody's Interest Maturity Amount Value Description (a) Rating Rate Date (000) (Note 1) - ----------------------------------------------------------------------------------------------------------- Alameda Cnty. Ind. Dev. Auth. Rev., Niles Machine & Tool Works, Ser. 00A, F.R.W.D., A.M.T. A-1+(c) 1.10% 3/06/03 $ 475 $ 475,000 Pacific Paper Tube Proj., Ser. 2001, F.R.W.D., A.M.T. A-1+(c) 1.10 3/06/03 2,600 2,600,000 Alameda Cnty., C.O.P., Fltr. Cert., Ser. 521, M.B.I.A., F.R.W.D. A-1(c) 1.05 3/06/03 4,995 4,995,000 Berkeley Uni. Sch. Dist., G.O., B.A.N. NR 2.50 6/01/03 10,000 10,024,318 California Hsg. Fin. Agy. Rev., Multi-Family Hsg. III, Ser. A, A.M.T., F.R.D.D. VMIG1 1.20 3/03/03 1,845 1,845,000 California Infrastructure & Econ. Dev. Bk. Ind. Dev. Rev., G & G Specialty Foods Proj., F.R.W.D. VMIG1 1.20 3/06/03 2,200 2,200,000 California Poll. Ctrl. Fin. Auth. Poll. Ctrl. Rev., Res. Recov., Wadham Engy., Ser. A, F.R.W.D., A.M.T. A-1+(c) 1.10 3/05/03 1,265 1,265,000 California Poll. Ctrl. Fin. Auth. Res. Recov. Rev., Atlantic Richfield Co. Proj., Ser. A, F.R.D.D. VMIG1 1.15 3/03/03 1,900 1,900,000 Burney Forest Prods. Proj., Ser. 88A, F.R.D.D., A.M.T. P-1 1.14 3/03/03 1,000 1,000,000 California Poll. Ctrl. Fin. Auth. Sld. Wste. Disp. Rev., Bos Farms Proj., F.R.W.D., A.M.T. A-1+(c) 1.30 3/06/03 1,550 1,550,000 Marborg Ind. Proj., Ser. A, F.R.W.D., A.M.T. NR 1.15 3/05/03 2,600 2,600,000 Mission Trail Wste. Sys., Ser. A, F.R.W.D., A.M.T. NR 1.25 3/05/03 1,400 1,400,000 Shell Oil Co. Martinez Proj., Ser. 94-A, F.R.D.D., A.M.T. VMIG1 1.15 3/03/03 400 400,000
6 See Notes to Financial Statements Prudential California Municipal Fund California Money Market Series Portfolio of Investments as of February 28, 2003 (Unaudited) Cont'd.
Principal Moody's Interest Maturity Amount Value Description (a) Rating Rate Date (000) (Note 1) - ----------------------------------------------------------------------------------------------------------- South Lake Refuse Co. Proj. Ser. 02A, F.R.W.D., A.M.T. NR 1.25% 3/05/03 $ 3,250 $ 3,250,000 Western Sky Dairy Proj., Ser. 2001A, F.R.W.D., A.M.T. A-1+(c) 1.10 3/06/03 5,000 5,000,000 California St. Dept. Wtr. Res. Pwr. Sup. Rev., Ser. 764, F.S.A., F.R.W.D. A-1(c) 1.08 3/06/03 5,000 5,000,000 Ser. B-2, F.R.D.D. VMIG1 1.20 3/03/03 5,900 5,900,000 Ser. C-4, T.E.C.P. VMIG1 1.80 3/13/03 15,000 15,000,000 California St., G.O., Mun. Secs. Trust Rcpts, Ser. SGA 135, A.M.B.A.C., T.C.R.S., F.R.D.D. A-1+(c) 1.15 3/03/03 5,770 5,770,000 G.O., Ser. 384, F.G.I.C. VMIG1 1.25 10/30/03 6,995 6,995,000 G.O., Ser. A47, M.E.R.L.O.T, M.B.I.A., F.R.W.D. VMIG1 1.07 3/05/03 3,185 3,185,000 Putters G.O., Ser. 239Z, A.M.B.A.C., T.C.R.S., F.R.W.D., A.M.T. A-1+(c) 1.23 3/06/03 3,905 3,905,000 Ser. A, A.M.B.A.C., M.E.R.L.O.T. VMIG1 1.12 3/05/03 5,000 5,000,000 California Statewide Cmntys. Dev. Auth., Biola Univ., Ser. A, F.R.W.D. VMIG1 1.10 3/06/03 8,600 8,600,000 Kaiser Permanente, Ser. 2001A, A.N.N.M.T. VMIG2 1.38 1/02/04 3,000 3,000,000 Kaiser Permanente, Ser. 2001B, A.N.N.M.T. VMIG2 1.70 7/01/03 6,500 6,500,000 California Statewide Cmntys. Dev. Auth. Sld. Wste. Facs. Rev., Chevron USA Inc. Proj., F.R.D.D., A.M.T. P-1 1.15 3/03/03 1,000 1,000,000 California Statewide Cmntys. Dev. Corp. Rev., Ind. Dev. Propak-California, Ser. 94B, F.R.W.D., A.M.T. A-1+(c) 1.15 3/05/03 1,400 1,400,000
See Notes to Financial Statements 7 Prudential California Municipal Fund California Money Market Series Portfolio of Investments as of February 28, 2003 (Unaudited) Cont'd.
Principal Moody's Interest Maturity Amount Value Description (a) Rating Rate Date (000) (Note 1) - ----------------------------------------------------------------------------------------------------------- Ind. Dev. Dix Metals Proj., Ser. 98B, F.R.W.D., A.M.T. NR 1.15% 3/05/03 $ 4,815 $ 4,815,000 Kern Cnty. Superintendent of Sch., Ser. 96A, C.O.P., F.R.W.D. A-1+(c) 1.15 3/06/03 3,750 3,750,000 Lancaster Sch. Dist., Rfdg. Proj., C.O.P., F.S.A. Aaa 4.30 4/01/03 385 386,058 Lassen Mun. Util. Dist. Rev., Rfdg. Rev., Ser. 96A, F.R.W.D., A.M.T. VMIG1 1.19 3/06/03 6,800 6,800,000 Los Angeles Cmnty. Redev. Agy. Multi-Fam. Hsg. Rev., Pico Union Scattered Site Apts., G.N.M.A., A.M.T. VMIG1 1.25 6/16/03 5,630 5,630,000 Los Angeles Multi-Fam. Rev., Colonial Apts. Proj., Ser. N, A.M.T. A-1+(c) 1.32 6/03/03 10,000 10,000,000 Los Angeles Uni. Sch. Dist., G.O., Ser. B12, M.B.I.A., F.R.W.D., M.E.R.L.O.T. VMIG1 1.07 3/05/03 4,600 4,600,000 Los Angeles Wste. Wtr. Sys. Rev. P-1 1.05 5/15/03 7,500 7,500,000 Mun. Secs. Trust Cert., Pr. Hwy., Ser. 2000-91, Cl. A, M.B.I.A., F.R.D.D. A-1+(c) 1.15 3/03/03 1,000 1,000,000 Ser. 2001-136, Trust Cert., Cl. A, F.G.I.C., F.R.D.D., A.M.T. A-1(c) 1.15 3/03/03 600 600,000 Newman Cap. III Trust, Ser. 2002-21., Cl. A NR 1.28 3/06/03 10,000 10,000,000 Orange Cnty. Impvt. Bd. Act. 1915, Assmt. Dist. No. 01-1, Ser. A, F.R.D.D. VMIG1 1.10 3/03/03 2,000 2,000,000 Puerto Rico Comnwlth., Ser. A107, M.E.R.L.O.T. A-1(a) 1.02 3/05/03 3,735 3,735,000 Ser. EE, M.B.I.A., M.E.R.L.O.T. VMIG1 1.02 3/05/03 2,135 2,135,000 Riverside Ind. Dev. Auth. Ind. Dev. Rev., Trademark Plastics Inc. Proj., F.R.W.D., A.M.T. VMIG1 1.20 3/06/03 4,275 4,275,000
8 See Notes to Financial Statements Prudential California Municipal Fund California Money Market Series Portfolio of Investments as of February 28, 2003 (Unaudited) Cont'd.
Principal Moody's Interest Maturity Amount Value Description (a) Rating Rate Date (000) (Note 1) - ----------------------------------------------------------------------------------------------------------- Roaring Fork Mun. Prods. LLC, Ser. 00-22, Cl. A, F.R.W.D., A.M.T. VMIG1 1.19% 3/06/03 $ 5,500 $ 5,500,000 Ser. 01-12, Cl. A, F.R.W.D., A.M.T. A-1+(c) 1.19 3/06/03 6,560 6,560,000 Ser. 01-2, Cl. A, F.R.W.D., A.M.T. A-1+(c) 1.19 3/06/03 6,620 6,620,000 Sacramento Cnty., G.O., Ser. 02A, T.R.A.N. MIG1 3.00 8/01/03 12,500 12,566,744 San Diego Cnty. & Sch. Dist., T.R.A.N., Ser. 02B MIG1 3.00 7/31/03 10,000 10,051,103 San Diego Cnty., Friends of Chabad, C.O.P., F.R.W.D. NR 1.10 3/06/03 1,500 1,500,000 San Francisco City & Cnty. Redev. Agy. Multi-Fam. Rev., Orlando Cepeda Place, Ser. 00D, F.R.W.D., A.M.T. A-1+(c) 1.10 3/06/03 15,800 15,800,000 San Mateo Cnty. Hsg. Auth. Multi-Fam. Hsg. Rev., Pacific Oaks Apts. Proj., Ser. 87A, F.R.W.D., A.M.T. VMIG1 1.20 3/05/03 2,600 2,600,000 University Rev., Multiple Purp. Proj. P-1 1.00 4/07/03 5,000 5,000,000 ------------ Total Investments 100.1% (cost $245,183,223(d)) 245,183,223 Liabilities in excess of other assets (0.1%) (281,250) ------------ Net Assets 100% $244,901,973 ------------ ------------
See Notes to Financial Statements 9 Prudential California Municipal Fund California Money Market Series Portfolio of Investments as of February 28, 2003 (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. A.N.N.M.T.--Annual Mandatory Tender. B.A.N.--Bond Anticipation Note. C.O.P.--Certificates of Participation. F.G.I.C.--Financial Guaranty Insurance Company. 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. M.E.R.L.O.T.--Municipal Exempt Receipt--Liquid Optional Tender. T.C.R.S.--Transferable Custodial Receipts. 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) Standard & Poor's Rating. (d) The cost of securities for federal income tax purposes is substantially the same as for financial reporting purposes. 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. 10 See Notes to Financial Statements Prudential California Municipal Fund California Money Market Series Statement of Assets and Liabilities (Unaudited)
February 28, 2003 - ---------------------------------------------------------------------------------------- ASSETS Investments, at amortized cost which approximates market value $ 245,183,223 Cash 41,254 Interest receivable 959,582 Receivable for Series shares sold 879,455 Other assets 5,591 ----------------- Total assets 247,069,105 ----------------- LIABILITIES Payable for Series shares reacquired 1,941,907 Management fee payable 95,326 Accrued expenses 72,098 Distribution fee payable 23,832 Deferred trustees' fees 17,209 Dividends payable 16,760 ----------------- Total liabilities 2,167,132 ----------------- NET ASSETS $ 244,901,973 ----------------- ----------------- Net assets were comprised of: Shares of beneficial interest, at $.01 par value $ 2,449,020 Paid-in capital in excess of par 242,452,953 ----------------- Net assets, February 28, 2003 $ 244,901,973 ----------------- ----------------- Net asset value, offering price and redemption price per share ($244,901,973 / 244,901,973 shares of beneficial interest issued and outstanding; unlimited number of shares authorized) $1.00 ----------------- -----------------
See Notes to Financial Statements 11 Prudential California Municipal Fund California Money Market Series Statement of Operations (Unaudited)
Six Months Ended February 28, 2003 - ---------------------------------------------------------------------------------------- NET INVESTMENT INCOME Income Interest $ 1,890,288 ----------------- Expenses Management fee 653,103 Distribution fee 163,276 Custodian's fees and expenses 39,000 Transfer agent's fees and expenses 28,000 Reports to shareholders 25,000 Legal fees and expenses 14,000 Registration fees 10,000 Audit fee 7,000 Trustees' fees 6,000 Miscellaneous 5,564 ----------------- Total expenses 950,943 Less: Custodian fee credit (Note 1) (286) ----------------- Net expenses 950,657 ----------------- Net investment income 939,631 ----------------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 939,631 ----------------- -----------------
12 See Notes to Financial Statements Prudential California Municipal Fund California Money Market Series Statement of Changes in Net Assets (Unaudited)
Six Months Year Ended Ended February 28, 2003 August 31, 2002 - ----------------------------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS Operations Net investment income $ 939,631 $ 2,681,034 Net realized gain on investment transactions -- 8,663 ----------------- --------------- Net increase in net assets resulting from operations 939,631 2,689,697 ----------------- --------------- Dividends and distributions (Note 1) (939,631) (2,689,697) ----------------- --------------- Series share transactions (at $1 per share) Net proceeds from shares sold 445,846,526 1,043,084,045 Net asset value of shares issued in reinvestment of dividends and distributions 937,373 2,636,045 Cost of shares reacquired (443,187,310) (1,098,600,257) ----------------- --------------- Net increase (decrease) in net assets from Series share transactions 3,596,589 (52,880,167) ----------------- --------------- Total increase (decrease) 3,596,589 (52,880,167) NET ASSETS Beginning of period 241,305,384 294,185,551 ----------------- --------------- End of period $ 244,901,973 $ 241,305,384 ----------------- --------------- ----------------- ---------------
See Notes to Financial Statements 13 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. These financial statements relate to California Money Market Series (the '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 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. If the amortized cost method is determined not to represent fair value, the value shall be determined by or under the direction of the Board of Directors. 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. The Series amortizes premiums and accretes discounts on purchases of portfolio securities as adjustments to interest income. Interest income is recorded on the accrual basis. 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 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 its shareholders. Therefore, no federal income tax provision is required. Dividends and Distributions: The Series declares daily dividends from net investment income and net realized short-term capital gains or losses. Payment of 14 Prudential California Municipal Fund California Money Market Series Notes to Financial Statements (Unaudited) Cont'd. 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 assets earn credits which reduce the fees charged by the custodian. The Fund could have invested a portion of the assets utilized in connection with the expense offset arrangements in an income producing asset if they had not entered into such arrangements. Note 2. Agreements The Fund has a management agreement with Prudential Investments LLC ('PI' or 'Manager'). Pursuant to a subadvisory agreement between PI and Prudential Investment Management,Inc. ('PIM' or 'Subadviser'), PIM furnishes investment advisory services in connection with the management of the Fund. Under the subadvisory agreement, PIM, subject to the supervision of PI, is responsible for managing the assets of the Fund in accordance with its investment objective and policies. 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'). 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 and during the six months ended February 28, 2003, the Series incurred fees of approximately $27,100 for the services of PMFS. As of February 28, 2003, approximately $4,400 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. 15 Prudential California Municipal Fund California Money Market Series Financial Highlights (Unaudited)
Six Months Ended February 28, 2003 - ---------------------------------------------------------------------------------------- PER SHARE OPERATING PERFORMANCE: Net asset value, beginning of period $ 1.00 Net investment income and net realized gains --(b) Dividends and distributions --(b) ----------------- Net asset value, end of period $ 1.00 ----------------- ----------------- TOTAL RETURN(a): .36% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000) $ 244,902 Average net assets (000) $ 263,406 Ratios to average net assets: Expenses, including distribution and service (12b-1) fees .73%(c) Expenses, excluding distribution and service (12b-1) fees .60%(c) Net investment income .72%(c)
- ------------------------------ (a) Total return is calculated assuming a purchase of shares on the first day and a sale on the last day of each period reported. Total returns for periods of less than one full year are not annualized. (b) Less than $.005 per share. (c) Annualized. 16 See Notes to Financial Statements Prudential California Municipal Fund California Money Market Series Financial Highlights (Unaudited) Cont'd.
Year Ended August 31, - ---------------------------------------------------------------------------- 2002 2001 1999 1998 1997 - ---------------------------------------------------------------------------- $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 .01 .03 .03 .02 .03 (.01) (.03) (.03) (.02) (.03) - ---------- ---------- ---------- ---------- ---------- $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 - ---------- ---------- ---------- ---------- ---------- - ---------- ---------- ---------- ---------- ---------- .97% 2.65% 2.83% 2.34% 2.81% $241,305 $294,186 $275,567 $265,473 $301,278 $277,745 $281,475 $299,602 $289,155 $287,250 .73% .73% .70% .71% .72% .61% .60% .58% .59% .60% .97% 2.59% 2.77% 2.30% 2.77%
See Notes to Financial Statements 17 Prudential California Municipal Fund California Money Market 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.prudential.com (800) 225-1852 Getting the Most from Your Prudential Mutual Fund 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 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.prudential.com (800) 225-1852 FOR MORE INFORMATION Prudential Mutual Funds Gateway Center Three 100 Mulberry Street Newark, NJ 07102-4077 (800) 225-1852 TRUSTEES 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 Judy A. Rice, President Robert F. Gunia, Vice President Grace C. Torres, Treasurer Deborah A. Docs, Secretary Marguerite E.H. Morrison, Assistant Secretary Maryanne Ryan, Anti-Money Laundering Compliance Officer 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 PO 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, 2003, were not audited and, accordingly, no opinion is expressed on them. Mutual funds are not insured by the FDIC or any federal government agency, are not a deposit of or guaranteed by any bank or any bank affiliate, and may lose value. Prudential Financial (LOGO) Nasdaq CUSIP - ------ ----- PCLXX 744313503 MF139E2 IFS-A079178 -----END PRIVACY-ENHANCED MESSAGE-----