-----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, JSl+oEYjiWjm/LgQR/aCDBHTv9FnKoRDOdbmQ1MzE52ku761J6MZ24oCEWUrdjUE fqtM6Du79nXX7X9cqpU7VA== 0000898733-99-000952.txt : 19991110 0000898733-99-000952.hdr.sgml : 19991110 ACCESSION NUMBER: 0000898733-99-000952 CONFORMED SUBMISSION TYPE: N-30D PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19990831 FILED AS OF DATE: 19991109 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PRUDENTIAL CALIFORNIA MUNICIPAL FUND CENTRAL INDEX KEY: 0000746518 STANDARD INDUSTRIAL CLASSIFICATION: UNKNOWN SIC - 0000 [0000] STATE OF INCORPORATION: MA FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: N-30D SEC ACT: SEC FILE NUMBER: 811-04024 FILM NUMBER: 99744499 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 PRUDENTIAL CALIFORNIA MUNICIPAL FUND (ICON) Prudential California Municipal Fund - ------------------------- California Series ANNUAL REPORT Aug. 31, 1999 (LOGO) A Message from the Fund's President October 5, 1999 (PHOTO) Dear Shareholder, Prudential California Municipal Fund--California Series' Class A shares posted a negative return of 1.56% during our 12-month reporting period that ended August 31, 1999. Its benchmark Lipper Average also generated a negative return as inflation fears caused a broad sell-off in the U.S. bond markets. The following report takes a closer look at recent bond market events and explains how the Series was positioned. While municipal bond prices gained early in our reporting period, the rally was short-lived. Signs that the U.S. economy was continuing to grow at a rapid pace fueled concerns about higher inflation. Since a rise in inflation would reduce the value of bonds' fixed-income payments, investors demanded higher yields on debt securities as compensation. This, in turn, caused bond prices to fall during most of our reporting period. One integrated and expanded team I would like to take this opportunity to tell you about some changes we've made to our Fixed Income Group. Earlier in the year, we combined our fixed- income areas into one integrated group that will manage money for Prudential's investors and policyholders. This group now manages approximately $135 billion in assets, making it one of the three largest fixed-income money managers in the country. Our expanded depth, breadth, and scale now also allow us to tap the best talent and share investment ideas, proprietary research, and analytical tools. To utilize these resources effectively, we recently organized the group into teams, each specializing in a different sector of the fixed-income market. The Municipal Bonds Sector team, headed by Evan Lamp, is now responsible for the day-to-day management of your Prudential California Municipal Fund--California Series. Many of the investment professionals who supported the management of the Series in the past are part of this new team. Thank you for your continued confidence in Prudential mutual funds. Sincerely, John R. Strangfeld President Prudential California Municipal Fund Performance Review (PHOTO) Evan Lamp, team leader of the Municipal Bonds Sector team Investment Goals and Style The Series seeks to invest primarily in carefully selected, long-term municipal bonds that provide the maximum amount of income that is exempt from California State and federal income taxes, consistent with the preservation of capital. Certain shareholders, however, may be subject to the federal alternative minimum tax. There can be no assurance the Series will achieve its investment objective. Inflation fears battered the municipal bond market Our fiscal year that ended on August 31, 1999, will be remembered as a challenging period in the history of the municipal debt securities market. For the first several weeks, prices of tax-exempt bonds rallied in sympathy with U.S. Treasury securities. Many investors purchased Treasuries for their relative safety after a global financial crisis spread beyond Asia to Russia and Latin America in the summer of 1998. But concern about the global financial crisis gave way to fears that a surprisingly strong U.S. economy and soaring oil prices might boost inflation, which eats into the value of bonds' fixed-interest payments. To compensate for this risk, investors demanded higher yields on municipal bonds and many other types of debt securities, causing their prices to tumble. Long-term municipal bonds sold off the most since their prices fall more rapidly than prices of shorter-term bonds for a given rise in yield. The Series posted negative annual returns, as did its benchmark Lipper Average, amid this bearish trend. Positioning duration for interest rate views We began the reporting period with a longer-than-average duration stance compared to our competitive universe. (Duration is a measure of the Series' sensitivity to interest-rate fluctuations.) A longer duration enables the Series' shares to gain more rapidly if interest rates should fall and municipal bond prices, which move in the opposite direction of their yields, rise. We expected long-term interest rates to continue to fall because the U.S. economic expansion was poised to slow and inflation to remain tame after the global financial crisis of last year. Our strategy benefited the Series during the autumn of 1998 when interest rates fell and the Federal Reserve cut the Federal funds rate three times. Furthermore, investors sought safety and liquidity for their investments in this uncertain market environment and purchased a multitude of fixed-income debt securities, especially U.S. Treasuries and municipal bonds. This trend was referred to as a "flight to quality." We maintained our longer duration stance into the first quarter of 1999 since we expected the ever-resilient U.S. economy to slow moderately. However, a slowdown did not occur as the Fed's accommodative monetary policy in late 1998 bolstered U.S. economic growth. As a result, long-term interest rates rose, and the prices of municipal bonds fell throughout the first eight months of 1999, hurting the Series' performance. In addition, a "flight from quality" was taking place as investors felt they no longer needed the safety of Treasury securities. Therefore we shortened the Series' duration to a more neutral stance in the late spring of 1999, as it was apparent that the U.S. economy would not slow enough to alleviate inflation fears. A shorter duration helped performance when the Fed stepped in and raised rates in June and August 1999. Lower-rated bonds enhanced the Series' performance In order to increase the Series' yield, we selectively bought lower-rated bonds. When the tax-exempt bond market sold off, prices of lower-rated debt securities tended to decline less than prices of more highly-rated ones. This was particularly true of lower-rated debt securities in economically sensitive sectors such as transportation and industrial development. The Series still held noncallable zero coupon bonds, mostly intermediate term in length. Just as prices of these bonds tend to Performance at a Glance
Cumulative Total Returns1 As of 8/31/99 One Five Ten Since Year Years Years Inception2 Class A -1.56% 32.99% (32.75) N/A 85.77% (85.77) Class B -1.94 30.49 (30.26) 83.38% (83.05) 188.50 (184.21) Class C -2.18 28.87 (28.65) N/A 28.93 (28.71) Class Z -1.44 N/A N/A 16.66 (16.55) Lipper CA Muni Debt Fund Avg.3 -1.49 32.05 90.77 ***
Class A -6.23% 5.50% (5.46) N/A 6.27% (6.25) Class B -8.61 5.60 (5.57) 6.30% (6.28) 7.31 (7.20) Class C -5.81 5.29 (5.25) N/A 4.85 (4.82) Class Z -3.12 N/A N/A 5.26 (5.23)
Distributions & Yields As of 8/31/99 Total Taxable Equivalent Yield4 Distributions 30-Day At Tax Rates Of Paid for 12 Mos. SEC Yield 36% 39.6% Class A $0.59 4.12% 7.10% 7.52% Class B $0.56 4.00 6.89 7.30 Class C $0.53 3.71 6.39 6.77 Class Z $0.62 4.50 7.75 8.21
Past performance is not indicative of future results. Principal and investment return will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. 1 Source: Prudential Investments Fund Management LLC and Lipper, Inc. The cumulative total returns do not take into account sales charges. The average annual total returns do take into account applicable sales charges. The Series charges a maximum front-end sales charge of 3% for Class A shares and a declining contingent deferred sales charge (CDSC) of 5%, 4%, 3%, 2%, 1%, and 1% for six years for Class B shares. Class B shares will automatically convert to Class A shares, on a quarterly basis, approximately seven years after purchase. Class C shares are subject to a front-end sales charge of 1% and a CDSC of 1% for 18 months. Class C shares bought before November 2, 1998, have a 1% CDSC if sold within one year. Class Z shares are not subject to a sales charge or distribution and service (12b-1) fees. Without waiver of management fees and/or expense subsidization, the Series' cumulative and average annual total returns would have been lower, as indicated in parentheses ( ). 2 Inception dates: Class A, 1/22/90; Class B, 9/19/84; Class C, 8/1/94; and Class Z, 9/18/96. 3 Lipper average returns are for all funds in each share class for the one-, five-, and ten-year periods in the California Municipal Debt Fund category. 4 Taxable equivalent yields reflect federal and applicable state tax rates. ***Lipper Since Inception returns are 87.32% for Class A; 222.28% for Class B; 32.38% for Class C; and 14.78% for Class Z, based on all funds in each share class. - ------------------------------------------------------------------------------- 1 Review Cont'd. climb rapidly when interest rates fall, they tumble when the municipal bond market sells off and interest rates head higher. Furthermore, we were overweighted--held more than our competitive universe averages--in these types of bonds when the Fed raised interest rates and municipal bond markets sold off further. The declines in the prices of our noncallable zero coupon bonds detracted from the Series' performance. Looking Ahead Fed poised to act again, if necessary If the U.S. economy does not lose steam quickly enough, we believe the Federal Reserve will continue to increase short-term interest rates to slow the economic expansion to a more sustainable pace. After their latest meeting in early October 1999, Fed policy makers released a statement saying they were considering hiking rates again and would be "especially alert" to trends that could boost inflationary pressures. Should the Fed act and bond yields continue to rise, the supply of newly issued municipal bonds could decline. State and local governments would have fewer opportunities to refinance their higher-rate debt securities. Moreover, if interest rates climbed sharply, some cost-conscious state and local governments may postpone issuing bonds in order to raise money for new projects. Retail investors, on the other hand, are attracted to tax-exempt debt securities in higher-interest-rate environments. This combination of shrinking supply and growing demand could allow municipal bonds to perform better than comparable Treasuries. But what if the Fed left monetary policy unchanged and bond yields failed to move sharply higher? We believe municipal bonds are still a good buy on a relative basis. In early October 1999, an insured, 30-year municipal bond rated AAA yielded roughly 95% as much as comparable Treasuries. This is well above the historical average of approximately 87%. Five Largest Issuers Expressed as a percentage of net assets as of 8/31/99 Southern California 8.2% Public Power Authority Orange County Local 6.7 Transportation Authority Santa Margarita 4.9 Dana Point Authority Long Beach Harbor 4.1 Revenue Brea Public Finance 3.6 Authority Revenue Portfolio Composition Expressed as a percentage of total investments as of 8/31/99 General Obligations 47% Revenue Bonds 34 Prerefunded Bonds 19 Credit Breakdown Expressed as a percentage of total investments as of 8/31/99 AAA 7% AA 6 A 12 BBB 14 Insured 41 Not Rated 19 Cash Equivalents 1 - ------------------------------------------------------------------------------- 2 PRUDENTIAL CALIFORNIA MUNICIPAL FUND Portfolio of Investments as of August 31, 1999 CALIFORNIA SERIES - --------------------------------------------------------------------------------
Moody's Principal Rating Interest Maturity Amount Value Description (a) (Unaudited) Rate Date (000) (Note 1) - ------------------------------------------------------------------------------------------------------------------------------ LONG-TERM INVESTMENTS--98.9% - ------------------------------------------------------------------------------------------------------------------------------ Alisal Union Sch. Dist., Capital Apprec., Ser C, F.G.I.C. Aaa Zero 8/01/12 $ 1,025 $ 516,959 Capital Apprec., Ser C, F.G.I.C. Aaa Zero 8/01/14 1,030 456,516 Capital Apprec., Ser C, F.G.I.C. Aaa Zero 8/01/16 1,005 390,945 Arcadia Unified Sch. Dist., Gen. Oblig. 1993, Ser. A, M.B.I.A. Aaa Zero 9/01/10 1,765 1,008,856 Baldwin Park Pub. Fin. Auth. Rev., Tax Alloc. BBB(d) 7.05% 9/01/14 1,020 1,105,721 Berkeley Hosp. Rev., Alta Bates Hosp. Corp. Aaa 7.65 12/01/15 1,420(c) 1,488,174 Brea Pub. Fin. Auth. Rev., Sub. Tax Alloc. Redev. Proj., Ser. C NR 8.10 3/01/21 5,000 5,219,950 Buena Park Cmnty. Redev. Agcy., Central Bus. Dist. Proj. BBB+(d) 7.10 9/01/14 2,500 2,648,175 California Infrastructure & Econ. Dev., Bank Rev., American Ctr. for Wine Food Arts A(d) 5.70 12/01/19 2,500 2,444,000 California St. Hlth. Facs. Fin. Auth. Rev., Eskaton Properties NR 7.50 5/01/20 4,500(c)(f) 4,700,835 Valleycare Hosp. Corp. AA-(d) 5.50 5/01/20 2,250 2,158,672 California St. Hsg. Fin. Agcy. Rev., Sngl. Fam. Mtge., Ser. A Aa2 Zero 2/01/15 8,420 1,821,835 Chula Vista Redev. Agcy., Bayfront Tax Alloc. BBB+(d) 7.625 9/01/24 4,500 5,021,145 Commerce California Cmnty. Dev. Comm., Rfdg. Merged Redev. Proj., Ser. A NR 5.65 8/01/18 1,175 1,109,153 Contra Costa Cnty., Spec. Tax Cmnty. Facs. Dist. Pleasant Hill NR 8.125 8/01/16 1,300(c) 1,376,453 Desert Hosp. Dist., Cert. of Part. AAA(d) 8.10 7/01/20 5,000(c)(f) 5,281,450 East Palo Alto Sanit. Dist., Cert. of Part. NR 8.25 10/01/15 1,295 1,349,027 Fairfield Pub. Fin. Auth. Rev., Fairfield Redev. Projs., Ser. A NR 7.90 8/01/21 4,200(c) 4,579,260 Foothill/Eastern Trans. Corridor Agcy., Toll Rd. Rev. Baa3 Zero 1/01/16 5,000 2,022,150 Toll Rd. Rev. Baa3 Zero 1/01/18 2,950 1,056,513 Toll Rd. Rev. Baa3 Zero 1/15/26 5,200 2,768,636 Kings Cnty. Wst. Mgmt. Auth., Solid Wst. Rev., A.M.T. BBB(d) 7.20 10/01/14 1,150 1,242,414 La Canada Unified Sch. Dist., Capital Apprec., F.G.I.C. Aaa Zero 8/01/12 1,600 806,960 Unltd. Tax Gen. Oblig., F.G.I.C. Aaa Zero 8/01/13 1,680 793,850 Long Beach Harbor Rev., Ser. A, A.M.T., F.G.I.C. Aaa 6.00 5/15/16 5,500 5,816,030 Long Beach Redev. Agcy. Dist. No. 3, Spec. Tax Rev. (cost $2,950,530; purchased 10/18/93) NR 6.375 9/01/23 3,000(h) 3,057,960 Los Angeles Cnty., Cert. of Part., Correctional Facs. Proj., M.B.I.A. Aaa Zero 9/01/10 3,770 2,141,096 Los Angeles Cnty., Hsg. Auth., Multi-fam. Mtge. Rev., Mayflower Gardens Proj., Ser. K, G.N.M.A. NR 8.875 12/20/10 2,100(c)(f) 2,292,885 Los Angeles Conv. & Exhib. Ctr. Auth., Cert. of Part. Aaa 9.00 12/01/10 1,250(c)(e) 1,558,750 Madera Redev. Agcy Tax Rev. Tax Alloc. Redev. Proj., F.S.A. Aaa 4.75 9/01/28 1,000 848,880 Met. Wtr. Dist. of Southern California, Rev. Linked S.A.V.R.S. & R.I.B.S. Aa2 5.75 8/10/18 1,000 1,027,950 Waterworks Rev. Rfdg., Ser. A Aa2 5.75 7/01/21 4,000 4,115,560
- -------------------------------------------------------------------------------- See Notes to Financial Statements. 3 PRUDENTIAL CALIFORNIA MUNICIPAL FUND Portfolio of Investments as of August 31, 1999 CALIFORNIA SERIES - --------------------------------------------------------------------------------
Moody's Principal Rating Interest Maturity Amount Value Description (a) (Unaudited) Rate Date (000) (Note 1) - ------------------------------------------------------------------------------------------------------------------------------ Midpeninsula Regional Open Space Dist. Fin. Auth. Rev., 1996, A.M.B.A.C. Aaa Zero 9/01/15 $ 3,000 $ 1,230,150 Mojave Desert Solid Wst. Victor Vally Materials, Recov. Fac., A.M.T. Baa1 7.875% 6/01/20 1,175 1,290,303 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 8,675,440 Linked R.I.B.S. Aa3 8.668 2/14/11 750(g) 870,000 Petaluma City Joint Union High Sch. Dist., Capital Apprec., M.B.I.A. Aaa Zero 8/01/14 1,170 518,567 Capital Apprec., M.B.I.A. Aaa Zero 8/01/15 1,600 664,256 Capital Apprec., M.B.I.A. Aaa Zero 8/01/16 1,455 565,995 Capital Apprec., M.B.I.A. Aaa Zero 8/01/17 3,015 1,101,440 Port Redwood City Rev., A.M.T. BBB(d) 5.40 6/01/19 500 459,545 Redding Elec. Sys. Rev., Cert. of Part. Linked R.I.B.S., M.B.I.A. Aaa 9.015 7/01/22 1,750(g) 2,067,188 Linked S.A.V.R.S. & R.I.B.S., M.B.I.A. Aaa 6.368 7/01/22 50 54,555 Roseville City Sch. Dist., Cap. Apprec. Ser. A, F.G.I.C. Aaa Zero 8/01/10 1,230 706,045 San Bernardino Cnty., Cert. of Part., Med. Ctr. Fin. Proj., M.B.I.A. Aaa 5.50 8/01/22 4,400 4,365,812 Fin. Auth. Ref. Impt., Granada Hills, Ser. A B-(d) 6.90 5/01/27 645 619,007 San Francisco City & Cnty., Redev. Agcy., Lease Rev., Cap. Apprec. A1 Zero 7/01/09 2,000 1,198,040 San Jose, Unified Sch. Dist., Santa Clara, Gen. Oblig., Ser. A, F.G.I.C. Aaa Zero 8/01/17 1,350 493,182 Santa Cruz Cnty. Pub. Fin. Auth. Rev., Tax Alloc. Sub. Ln., Ser. B AAA(d) 7.625 9/01/21 2,350(c) 2,408,750 Santa Margarita, Dana Point Auth., Impvt. Dists. 3, Ser. B, M.B.I.A. Aaa 7.25 8/01/08 2,500 2,937,350 Impvt. Dists. 3, Ser. A, M.B.I.A. Aaa 7.25 8/01/09 1,400 1,658,930 Impvt. Dists. 3, Ser. B, M.B.I A. Aaa 7.25 8/01/09 1,000 1,184,950 Impvt. Dists. 3, Ser. B, M.B.I.A. Aaa 7.25 8/01/14 1,000 1,199,020 So. Orange Cnty. Pub. Fin. Auth., Foothill Area Proj., F.G.I.C. Aaa 6.50 8/15/10 750 846,698 Spec. Tax Rev., M.B.I.A. Aaa 7.00 9/01/11 3,500(f) 4,101,720 So. Tahoe Joint Pwrs. Fin. Auth. Rev., Rfdg. So. Tahoe Redev. Proj., Ser. A BBB-(d) 5.375 10/01/30 1,250 1,129,925 Southern California Pub. Pwr. Auth., Proj. Rev. A3 6.75 7/01/10 2,265 2,572,926 Proj. Rev. A3 6.75 7/01/11 1,195 1,352,525 Proj. Rev. A3 6.75 7/01/12 2,935 3,330,286 Proj. Rev. A3 6.75 7/01/13 4,000 4,508,560
- -------------------------------------------------------------------------------- See Notes to Financial Statements. 4 PRUDENTIAL CALIFORNIA MUNICIPAL FUND Portfolio of Investments as of August 31, 1999 CALIFORNIA SERIES - --------------------------------------------------------------------------------
Moody's Principal Rating Interest Maturity Amount Value Description (a) (Unaudited) Rate Date (000) (Note 1) - ------------------------------------------------------------------------------------------------------------------------------ Southern California Pub. Pwr. Auth., Proj. Rev., A.M.B.A.C. Aaa Zero 7/01/16 $ 7,925(f) $ 3,117,537 Transmission Proj. Rev. Rfdg., Ser. A, F.G.I.C. Aaa Zero 7/01/12 7,080 3,573,205 Stockton Cmnty. Facs. Dist. No. 90-2, Brookside Estates NR 6.20% 8/01/15 700 702,989 Sulphur Springs Union Sch. Dist., Ser. A, M.B.I.A. Aaa Zero 9/01/09 2,000 1,215,780 Torrance Redev. Agcy., Rfdg. Tax. Alloc., Downtown Redev. Baa2 7.125 9/01/21 1,580(c) 1,704,472 Vacaville Cmnty. Redev. Agcy., Cmnty. Hsg. Fin. Multi-fam. NR 7.375 11/01/14 1,110 1,151,947 Victor Valley Union High Sch. Dist., Gen. Oblig., M.B.I.A. Aaa Zero 9/01/09 2,075 1,254,026 Gen. Oblig., M.B.I.A. Aaa Zero 9/01/15 5,070 2,105,014 Virgin Islands Terr., Hugo Ins. Claims Fund Proj., Ser. 91 NR 7.75 10/01/06 670(c) 715,493 Walnut Valley Unified Sch. Dist., M.B.I.A. Aaa 6.00 8/01/15 1,870 2,015,748 ------------ Total long-term investments (cost $132,916,421) 141,894,136 SHORT-TERM INVESTMENTS--0.1% California Poll. Ctrl. Fin. Auth., Solid Waste Disposal Rev., Shell Oil Martinez Refining Co., Ser. 96B, F.R.D.D. (cost $100,000) Aa1 2.65 9/01/99 100 100,000 ------------ Total Investments--99.0% (cost $133,016,421; Note 4) 141,994,136 Other assets in excess of liabilities--1.0% 1,444,938 ------------ Net Assets--100% $143,439,074 ------------ ------------
- --------------- (a) The following abbreviations are used in portfolio descriptions: A.M.B.A.C.--American Municipal Bond Assurance Corporation. A.M.T.--Alternative Minimum Tax F.G.I.C.--Financial Guaranty Insurance Company. F.R.D.D.--Floating Rate (Daily) Demand Note (b). F.S.A.--Financial Security Assurance. G.N.M.A.--Government National Mortgage Association. M.B.I.A.--Municipal Bond Insurance Association. R.I.B.S.--Residual Interest Bearing Securities. S.A.V.R.S.--Select Auction Variable Rate Securities. (b) For purposes of amortized cost valuation, the maturity date of Floating Rate Demand Notes is considered to be the later of the next date on which the security can be redeemed at par, or the next date on which the rate of interest is adjusted. (c) Prerefunded issues are secured by escrowed cash and/or direct U.S. guaranteed obligations. (d) Standard & Poor's Rating. (e) Segregated as collateral for financial futures contracts. (f) When-issued security. (g) Inverse floating rate bond. The coupon is inversely indexed to a floating interest rate. The rate shown is the rate at year end. (h) Indicates a restricted security. The aggregate cost of restricted securities is $2,950,530 and the aggregate value is $3,057,960 which represents approximately 2.1% of net assets. NR--Not Rated by Moody's or Standard & Poor's. The Fund's current Statement of Additional Information contains a description of Moody's and Standard & Poor's ratings. - -------------------------------------------------------------------------------- See Notes to Financial Statements. 5 PRUDENTIAL CALIFORNIA MUNICIPAL FUND Statement of Assets and Liabilities CALIFORNIA SERIES - --------------------------------------------------------------------------------
Assets August 31, 1999 Investments, at value (cost $133,016,421).................................................................. $ 141,994,136 Cash....................................................................................................... 200,358 Interest receivable........................................................................................ 1,826,126 Due from broker - variation margin......................................................................... 37,688 Receivable for Series shares sold.......................................................................... 35,668 Other assets............................................................................................... 3,718 --------------- Total assets............................................................................................ 144,097,694 --------------- Liabilities Payable for Series shares reacquired....................................................................... 350,122 Dividends payable.......................................................................................... 117,324 Accrued expenses........................................................................................... 79,500 Management fee payable..................................................................................... 61,151 Distribution fee payable................................................................................... 41,139 Deferred trustee's fees.................................................................................... 9,384 --------------- Total liabilities....................................................................................... 658,620 --------------- Net Assets................................................................................................. $ 143,439,074 --------------- --------------- Net assets were comprised of: Shares of beneficial interest, at par................................................................... $ 125,332 Paid-in capital in excess of par........................................................................ 137,085,913 --------------- 137,211,245 Accumulated net realized loss on investments............................................................ (2,837,824) Net unrealized appreciation on investments.............................................................. 9,065,653 --------------- Net assets, August 31, 1999................................................................................ $ 143,439,074 --------------- --------------- Class A: Net asset value and redemption price per share ($92,868,075 / 8,113,751 shares of beneficial interest issued and outstanding)....................... $11.45 Maximum sales charge (3% of offering price)............................................................. .35 --------------- Maximum offering price to public........................................................................ $11.80 --------------- --------------- Class B: Net asset value, offering price and redemption price per share ($48,196,168 / 4,212,044 shares of beneficial interest issued and outstanding)....................... $11.44 --------------- --------------- Class C: Net asset value and redemption price per share ($1,446,924 / 126,449 shares of beneficial interest issued and outstanding).......................... $11.44 Sales charge (1% of offering price)..................................................................... .12 --------------- Offering price to public................................................................................ $11.56 --------------- --------------- Class Z: Net asset value, offering price and redemption price per share ($927,907 / 81,028 shares of beneficial interest issued and outstanding)............................. $11.45 --------------- ---------------
- -------------------------------------------------------------------------------- See Notes to Financial Statements. 6 PRUDENTIAL MUNICIPAL SERIES FUND CALIFORNIA SERIES Statement of Operations - ------------------------------------------------------------
Year Ended Net Investment Income August 31, 1999 Income Interest................................... $ 8,950,165 --------------- Expenses Management fee............................. 768,543 Distribution fee--Class A.................. 189,848 Distribution fee--Class B.................. 280,207 Distribution fee--Class C.................. 10,294 Custodian's fees and expenses.............. 93,000 Transfer agent's fees and expenses......... 75,000 Reports to shareholders.................... 43,000 Registration fees.......................... 42,000 Legal fees and expenses.................... 15,000 Audit fees and expenses.................... 13,000 Trustees' fees and expenses................ 7,000 Miscellaneous.............................. 4,703 --------------- Total expenses.......................... 1,541,595 Less: Custodian fee credit (Note 1)........ (444) --------------- Net expenses............................ 1,541,151 --------------- Net investment income......................... 7,409,014 --------------- Realized and Unrealized Gain (Loss) on Investments Net realized gain on: Investment transactions.................... 149,312 Financial futures transactions............. 175,401 --------------- 324,713 --------------- Net change in unrealized appreciation (depreciation) on: Investments................................ (10,126,674) Financial futures contracts................ (59,562) --------------- (10,186,236) --------------- Net loss on investments....................... (9,861,523) --------------- Net Decrease in Net Assets Resulting from Operations..................... $(2,452,509) --------------- ---------------
PRUDENTIAL MUNICIPAL SERIES FUND CALIFORNIA SERIES Statement of Changes in Net Assets - ------------------------------------------------------------
Increase (Decrease) Year Ended August 31, in Net Assets 1999 1998 Operations Net investment income.......... $ 7,409,014 $ 7,678,092 Net realized gain (loss) on investment transactions..... 324,713 (274,855) Net change in unrealized appreciation (depreciation) of investments.............. (10,186,236) 5,747,426 --------------- ------------ Net increase (decrease) in net assets resulting from operations.................. (2,452,509) 13,150,663 --------------- ------------ Dividends and distributions (Note 1) Dividends from net investment income Class A..................... (4,684,010) (4,438,300) Class B..................... (2,591,035) (3,163,906) Class C..................... (60,435) (31,174) Class Z..................... (73,534) (44,712) --------------- ------------ (7,409,014) (7,678,092) --------------- ------------ Distributions in excess of net investment income Class A..................... -- (53,531) Class B..................... -- (42,305) Class C..................... -- (231) Class Z..................... -- (526) --------------- ------------ -- (96,593) --------------- ------------ Series share transactions (net of share conversions) (Note 5) Net proceeds from shares sold........................ 18,346,773 13,997,164 Net asset value of shares issued in reinvestment of dividends and distributions............... 4,059,444 4,324,099 Cost of shares reacquired...... (24,798,715) (20,676,442) --------------- ------------ Net decrease in net assets from Series share transactions... (2,392,498) (2,355,179) --------------- ------------ Total increase (decrease)......... (12,254,021) 3,020,799 Net Assets Beginning of year................. 155,693,095 152,672,296 --------------- ------------ End of year....................... $ 143,439,074 $155,693,095 --------------- ------------ --------------- ------------
- -------------------------------------------------------------------------------- See Notes to Financial Statements. 7 PRUDENTIAL MUNICIPAL SERIES FUND Notes to Financial Statements CALIFORNIA SERIES - -------------------------------------------------------------------------------- Prudential California Municipal Fund (the 'Fund') is registered under the Investment Company Act of 1940 as an open-end investment company. The Fund was organized as a Massachusetts business trust on May 18, 1984 and consists of three series. The monies of each series are invested in separate, independently managed portfolios. The California Series (the 'Series') commenced investment operations on September 19, 1984. The Series is diversified and seeks to achieve its investment objective of obtaining the maximum amount of income exempt from federal and California state income taxes with the minimum of risk by investing in 'investment grade' tax-exempt securities whose ratings are within the four highest ratings categories by a nationally recognized statistical rating organization or, if not rated, are of comparable quality. The ability of the issuers of the securities held by the Series to meet their obligations may be affected by economic developments in a specific state, industry or region. - ------------------------------------------------------------ Note 1. Accounting Policies The following is a summary of significant accounting policies followed by the Fund, and the Series, in the preparation of its financial statements. Securities Valuations: The Series values municipal securities (including commitments to purchase such securities on a 'when-issued' basis) on the basis of prices provided by a pricing service which uses information with respect to transactions in bonds, quotations from bond dealers, market transactions in comparable securities and various relationships between securities in determining values. If market quotations are not readily available from such pricing service, a security is valued at its fair value as determined under procedures established by the Trustees. Short-term securities which mature in more than 60 days are valued at current market quotations. Short-term securities which mature in 60 days or less are valued at amortized cost. The Series held illiquid securities, including those which are restricted as to disposition under securities law ('restricted securities'). None of the issues of restricted securities held by the Series at August 31, 1999 include registration rights under which the Series may demand registration by the issuer. Restricted securities, sometimes referred to as private placements, are valued pursuant to the valuation procedures noted above. All securities are valued as of 4:15 p.m., New York time. Financial Futures Contracts: A financial futures contract is an agreement to purchase (long) or sell (short) an agreed amount of securities at a set price for delivery on a future date. Upon entering into a financial futures contract, the Series is required to pledge to the broker an amount of cash and/or other assets equal to a certain percentage of the contract amount. This amount is known as the 'initial margin.' Subsequent payments, known as 'variation margin,' are made or received by the Series each day, depending on the daily fluctuations in the value of the underlying security. Such variation margin is recorded for financial statement purposes on a daily basis as unrealized gain or loss. When the contract expires or is closed, the gain or loss is realized and is presented in the statement of operations as net realized gain(loss) on financial futures contracts. The Series invests in financial futures contracts in order to hedge its existing portfolio of securities or securities the Series intends to purchase, against fluctuations in value caused by changes in prevailing interest rates. 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. Securities Transactions and Net Investment Income: Securities transactions are recorded on the trade date. Realized gains and losses on sales of securities are calculated on the identified cost basis. Interest income is recorded on the accrual basis. The Series amortizes premiums and original issue discount paid on purchases of portfolio securities as adjustments to interest income. Expenses are recorded on the accrual basis which may require the use of certain estimates by management. Net investment income (other than distribution fees) and realized and unrealized gains or losses are allocated daily to each class of shares based upon the relative proportion of net assets of each class at the beginning of the day. Federal Income Taxes: For federal income tax purposes, each series in the Fund is treated as a separate taxpaying entity. It is the intent of the Series to continue to meet the requirements of the Internal Revenue Code applicable to regulated investment companies and to distribute all of its net income to shareholders. For this reason, no federal income tax provision is required. Dividends and Distributions: The Series declares daily dividends from net investment income. Payment of dividends is made monthly. Distributions of net capital gains, if any, are made annually. Income distributions and capital gain distributions are determined in accordance with income tax regulations which may differ from generally accepted accounting principles. Custody Fee Credits: The Fund has an arrangement with its custodian bank, whereby uninvested monies earn credits which reduce the fees charged by the custodian. - -------------------------------------------------------------------------------- 8 PRUDENTIAL MUNICIPAL SERIES FUND Notes to Financial Statements CALIFORNIA SERIES - -------------------------------------------------------------------------------- Note 2. Agreements The Fund has a management agreement with Prudential Investments Fund Management LLC ('PIFM'). Pursuant to this agreement, PIFM has responsibility for all investment advisory services and supervises the subadviser's performance of such services. PIFM has entered into a subadvisory agreement with The Prudential Investment Corporation ('PIC'); PIC furnishes investment advisory services in connection with the management of the Fund. PIFM pays for the cost of the subadviser's services, compensation of officers of the Fund, occupancy and certain clerical and bookkeeping costs of the Fund. The Fund bears all other costs and expenses. The management fee paid PIFM is computed daily and payable monthly, at an annual rate of .50 of 1% of the average daily net assets of the Series. The Fund has a distribution agreement with Prudential Investment Management Services LLC ('PIMS') which acts as the distributor of the Fund. The Fund compensates PIMS for distributing and servicing the Fund's Class A, Class B and Class C shares, pursuant to plans of distribution (the 'Class A, B and C Plans'), regardless of expenses actually incurred by it. The distribution fees are accrued daily and payable monthly. No distribution or service fees are paid to PIMS as distributor of the Class Z shares of the Fund. Pursuant to the Class A, B and C Plans, the Fund compensates PIMS for distribution-related activities at an annual rate of up to .30 of 1%, .50 of 1% and 1% of the average daily net assets of the Class A, B and C shares, respectively. Such expenses under the Plans were .10 of 1%, .50 of 1% and .75 of 1% of the average daily net assets of the Class A, B and C shares, respectively, for the period September 1, 1998 through December 31, 1998. Effective January 1, 1999, such expenses under the plans were .25 of 1%, .50 of 1% and .75 of 1% of the average daily net assets of the Class A, B and C shares, respectively. PIMS has advised the Series that they have received approximately $47,400 and $4,900 in front-end sales charges resulting from sales of Class A and Class C shares during the year ended August 31, 1999. From these fees, PIMS paid such sales charges to affiliated broker-dealers, which in turn paid commissions to salespersons and incurred other distribution costs. PIMS has advised the Series that for the year ended August 31, 1999, they received approximately $46,900 and $5,000 in contingent deferred sales charges imposed upon certain redemptions by Class B and Class C shareholders, respectively. PIFM, PIMS and PIC are indirect, wholly owned subsidiaries of The Prudential Insurance Company of America. As of March 11, 1999, the Fund, along with other affiliated registered investment companies (the 'Funds'), entered into a syndicated credit agreement ('SCA') with an unaffiliated lender. The maximum commitment under the SCA is $1 billion. Interest on any borrowings will be at market rates. The Funds pay a commitment fee at an annual rate of .065 of 1% on the unused portion of the credit facility, which is accrued and paid quarterly on a pro rata basis by the Funds. The SCA expires on March 9, 2000. Prior to March 11, 1999, the Funds had a credit agreement with a maximum commitment of $200,000,000. The commitment fee was .055 of 1% on the unused portion of the credit facility. The Fund did not borrow any amounts pursuant to either agreement during the year ended August 31, 1999. The purpose of the agreements is to serve as an alternative source of funding for capital share redemptions. - ------------------------------------------------------------ Note 3. Other Transactions with Affiliates Prudential Mutual Fund Services LLC ('PMFS'), a wholly owned subsidiary of PIFM, serves as the Fund's transfer agent. During the year ended August 31, 1999, the Series incurred fees of approximately $47,100 for the services of PMFS. As of August 31, 1999, approximately $3,800 of such fees were due to PMFS. Transfer agent fees and expenses in the Statement of Operations include certain out-of-pocket expenses paid to nonaffiliates. - ------------------------------------------------------------ Note 4. Portfolio Securities Purchases and sales of portfolio securities of the Series, excluding short-term investments, for the year ended August 31, 1999 were $19,604,632 and $22,779,752, respectively. During the year ended August 31, 1999, the Fund entered into financial futures contracts. Details of open contracts at August 31, 1999 are as follows:
Value at Value at Number of Expiration August 31, Trade Unrealized Contracts Type Date 1999 Date Appreciation - ----------- ---------------- ----------- ----------- ----------- -------------- Short position: 134 Muni Bond Sept. 1999 $15,322,062 $15,410,000 $ 87,938
The cost basis of investments for federal income tax purposes at August 31, 1999 was substantially the same as for financial reporting purposes and, accordingly, net unrealized appreciation of investments for federal income tax purposes was $8,977,715 (gross unrealized appreciation--$10,038,715; gross unrealized depreciation--$1,061,000). For federal income tax purposes, the Series has a capital loss carryforward as of August 31, 1999 of approximately $2,749,900, of which, $2,747,000 expires in 2003 and $2,900 expires in 2006. Accordingly, no capital gains - -------------------------------------------------------------------------------- 9 PRUDENTIAL MUNICIPAL SERIES FUND Notes to Financial Statements CALIFORNIA SERIES - -------------------------------------------------------------------------------- distribution is expected to be paid to shareholders until net gains have been realized in excess of such carryforward. - ------------------------------------------------------------ Note 5. Capital The Series offers Class A, Class B, Class C and Class Z shares. Class A shares are sold with a front-end sales charge of up to 3%. Class B shares are sold with a contingent deferred sales charge which declines from 5% to zero depending on the period of time the shares are held. Class C shares are sold with a front-end sales charge of 1% and a contingent deferred sales charge of 1% during the first 18 months. Prior to November 2, 1998, Class C shares were sold with a contingent deferred sales charge of 1% during the first year. 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 fiscal years ended August 31, 1999 and August 31, 1998 were as follows:
Class A Shares Amount - ------------------------------------ ---------- ------------ Year ended August 31, 1999: Shares sold......................... 795,762 $ 9,586,464 Shares issued in reinvestment of dividends......................... 216,108 2,593,281 Shares reacquired................... (914,438) (10,998,324) ---------- ------------ Net increase in shares outstanding before conversion................. 97,432 1,181,421 Shares issued upon conversion from Class B........................... 541,419 6,534,806 ---------- ------------ Net increase in shares outstanding....................... 638,851 $ 7,716,227 ---------- ------------ ---------- ------------ Year ended August 31, 1998: Shares sold......................... 551,486 $ 6,650,320 Shares issued in reinvestment of dividends and distributions....... 210,942 2,535,590 Shares reacquired................... (767,076) (9,222,647) ---------- ------------ Net decrease in shares outstanding before conversion................. (4,648) (36,737) Shares issued upon conversion from Class B........................... 571,041 6,863,328 ---------- ------------ Net increase in shares outstanding....................... 566,393 $ 6,826,591 ---------- ------------ ---------- ------------ Class B Shares Amount - ------------------------------------ ---------- ------------ Year ended August 31, 1999: Shares sold......................... 514,171 $ 6,183,598 Shares issued in reinvestment of dividends......................... 114,358 1,373,595 Shares reacquired................... (952,947) (11,419,751) ---------- ------------ Net decrease in shares outstanding before conversion................. (324,418) (3,862,558) Shares reacquired upon conversion into Class A........................... (541,523) (6,534,806) ---------- ------------ Net decrease in shares outstanding....................... (865,941) $(10,397,364) ---------- ------------ ---------- ------------ Year ended August 31, 1998: Shares sold......................... 493,897 $ 5,944,373 Shares issued in reinvestment of dividends and distributions....... 143,690 1,726,117 Shares reacquired................... (929,330) (11,183,208) ---------- ------------ Net decrease in shares outstanding before conversion................. (291,743) (3,512,718) Shares reacquired upon conversion into Class A........................... (571,041) (6,863,328) ---------- ------------ Net decrease in shares outstanding....................... (862,784) $(10,376,046) ---------- ------------ ---------- ------------ Class C - ------------------------------------ Year ended August 31, 1999: Shares sold......................... 53,745 $ 647,299 Shares issued in reinvestment of dividends......................... 3,582 42,860 Shares reacquired................... (33,739) (402,855) ---------- ------------ Net increase in shares outstanding....................... 23,588 $ 287,304 ---------- ------------ ---------- ------------ Year ended August 31, 1998: Shares sold......................... 87,614 $ 1,056,749 Shares issued in reinvestment of dividends and distributions....... 2,094 25,178 Shares reacquired................... (15,196) (183,128) ---------- ------------ Net increase in shares outstanding....................... 74,512 $ 898,799 ---------- ------------ ---------- ------------ Class Z - ------------------------------------ Year ended August 31, 1999: Shares sold......................... 161,138 $ 1,929,412 Shares issued in reinvestment of dividends......................... 4,138 49,708 Shares reacquired................... (169,051) (1,977,785) ---------- ------------ Net decrease in shares outstanding....................... (3,775) $ 1,335 ---------- ------------ ---------- ------------ Year ended August 31, 1998: Shares sold......................... 28,803 $ 345,722 Shares issued in reinvestment of dividends and distributions....... 3,094 37,214 Shares reacquired................... (7,224) (87,459) ---------- ------------ Net increase in shares outstanding....................... 24,673 $ 295,477 ---------- ------------ ---------- ------------
- -------------------------------------------------------------------------------- 10 PRUDENTIAL MUNICIPAL SERIES FUND Financial Highlights CALIFORNIA SERIES - --------------------------------------------------------------------------------
Class A ------------------------------------------------------- Year Ended August 31, ------------------------------------------------------- 1999 1998 1997 1996 1995 ------- ------- ------- ------- ------- PER SHARE OPERATING PERFORMANCE: Net asset value, beginning of year......... $ 12.22 $ 11.80 $ 11.44 $ 11.49 $ 11.30 ------- ------- ------- ------- ------- Income from investment operations Net investment income...................... .59 .62 .65(a) .65(a) .66(a) Net realized and unrealized gain (loss) on investment transactions................. (.77) .43 .36 (.05) .19 ------- ------- ------- ------- ------- Total from investment operations........ (.18) 1.05 1.01 .60 .85 ------- ------- ------- ------- ------- Less distributions Dividends from net investment income....... (.59) (.62) (.65) (.65) (.66) Distributions in excess of net investment income.................................. -- (.01) --(c) -- -- ------- ------- ------- ------- ------- Total distributions..................... (.59) (.63) (.65) (.65) (.66) ------- ------- ------- ------- ------- Net asset value, end of year............... $ 11.45 $ 12.22 $ 11.80 $ 11.44 $ 11.49 ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- TOTAL RETURN(b):........................... (1.56)% 9.13% 9.01% 5.23% 7.90% RATIOS/SUPPLEMENTAL DATA: Net assets, end of year (000).............. $92,868 $91,356 $81,535 $72,876 $68,403 Average net assets (000)................... $94,868 $85,624 $78,347 $71,119 $42,617 Ratios to average net assets: Expenses, including distribution fees... .89% .78% .76%(a) .81%(a) .73(a) Expenses, excluding distribution fees... .69% .68% .66%(a) .71%(a) .63(a) Net investment income................... 4.94% 5.18% 5.53%(a) 5.58%(a) 5.90(a) For Class A, B, C and Z shares: Portfolio turnover rate................. 13% 11% 14% 26% 44%
- --------------- (a) Net of management fee waiver. (b) Total return does not consider the effects of sales loads. Total return is calculated assuming a purchase of shares on the first day and a sale on the last day of each year reported and includes reinvestment of dividends and distributions. (c) Less than $.005 per share. - -------------------------------------------------------------------------------- See Notes to Financial Statements. 11 PRUDENTIAL MUNICIPAL SERIES FUND Financial Highlights CALIFORNIA SERIES - --------------------------------------------------------------------------------
Class B -------------------------------------------------------- Year Ended August 31, -------------------------------------------------------- 1999 1998 1997 1996 1995 ------- ------- ------- ------- -------- PER SHARE OPERATING PERFORMANCE: Net asset value, beginning of year......... $ 12.22 $ 11.80 $ 11.43 $ 11.49 $ 11.29 ------- ------- ------- ------- -------- Income from investment operations Net investment income...................... .56 .58 .60(a) .60(a) .62(a) Net realized and unrealized gain (loss) on investment transactions................. (.78) .43 .37 (.06) .20 ------- ------- ------- ------- -------- Total from investment operations........ (.22) 1.01 .97 .54 .82 ------- ------- ------- ------- -------- Less distributions Dividends from net investment income....... (.56) (.58) (.60) (.60) (.62) Distributions in excess of net investment income.................................. -- (.01) --(c) -- -- ------- ------- ------- ------- -------- Total distributions..................... (.56) (.59) (.60) (.60) (.62) ------- ------- ------- ------- -------- Net asset value, end of year............... $ 11.44 $ 12.22 $ 11.80 $ 11.43 $ 11.49 ------- ------- ------- ------- -------- ------- ------- ------- ------- -------- TOTAL RETURN(b):........................... (1.94)% 8.70% 8.67% 4.73% 7.56% RATIOS/SUPPLEMENTAL DATA: Net assets, end of year (000).............. $48,196 $62,043 $70,093 $85,190 $103,891 Average net assets (000)................... $56,041 $66,086 $75,935 $96,525 $136,275 Ratios to average net assets: Expenses, including distribution fees... 1.19% 1.18% 1.16%(a) 1.21%(a) 1.13(a) Expenses, excluding distribution fees... .69% .68% .66%(a) .71%(a) .63(a) Net investment income................... 4.62% 4.78% 5.13%(a) 5.18%(a) 5.50(a)
- --------------- (a) Net of management fee waiver. (b) Total return does not consider the effects of sales loads. Total return is calculated assuming a purchase of shares on the first day and a sale on the last day of each year reported and includes reinvestment of dividends and distributions. (c) Less than $.005 per share. - -------------------------------------------------------------------------------- See Notes to Financial Statements. 12 PRUDENTIAL MUNICIPAL SERIES FUND Financial Highlights CALIFORNIA SERIES - --------------------------------------------------------------------------------
Class C Class Z -------------------------------------------------- ------------------ Year Ended Year Ended August 31, August 31, -------------------------------------------------- ------------------ 1999 1998 1997 1996 1995 1999 1998 ------ ------ ------ ------ ------ ------- ------ PER SHARE OPERATING PERFORMANCE: Net asset value, beginning of period....... $12.22 $11.80 $11.43 $11.49 $11.29 $ 12.23 $11.81 ------ ------ ------ ------ ------ ------- ------ Income from investment operations Net investment income...................... .53 .55 .57(a) .57(a) .59(a) .62 .63 Net realized and unrealized gain (loss) on investment transactions................. (.78) .43 .37 (.06) .20 (.78) .43 ------ ------ ------ ------ ------ ------- ------ Total from investment operations........ (.25) .98 .94 .51 .79 (.16) 1.06 ------ ------ ------ ------ ------ ------- ------ Less distributions Dividends from net investment income....... (.53) (.55) (.57) (.57) (.59) (.62) (.63) Distributions in excess of net investment income.................................. -- (.01) --(c) -- -- -- (.01) ------ ------ ------ ------ ------ ------- ------ Total distributions..................... (.53) (.56) (.57) (.57) (.59) (.62) (.64) ------ ------ ------ ------ ------ ------- ------ Net asset value, end of period............. $11.44 $12.22 $11.80 $11.43 $11.49 $ 11.45 $12.23 ------ ------ ------ ------ ------ ------- ------ ------ ------ ------ ------ ------ ------- ------ TOTAL RETURN(b):........................... (2.18)% 8.43% 8.40% 4.47% 7.29% (1.44)% 9.24% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000)............ $1,447 $1,257 $ 334 $ 543 $ 129 $ 928 $1,037 Average net assets (000)................... $1,373 $ 689 $ 480 $ 286 $ 76 $ 1,427 $ 847 Ratios to average net assets: Expenses, including distribution fees... 1.44% 1.43% 1.41%(a) 1.46%(a) 1.38%(a) .69% .68% Expenses, excluding distribution fees... .69% .68% .66%(a) .71%(a) .63%(a) .69% .68% Net investment income................... 4.40% 4.53% 4.88%(a) 4.93%(a) 5.25%(a) 5.15% 5.28% September 18, 1996(d) through August 31, 1997 ------------- PER SHARE OPERATING PERFORMANCE: Net asset value, beginning of period....... $ 11.50 ----- Income from investment operations Net investment income...................... .64(a) Net realized and unrealized gain (loss) on investment transactions................. .31 ----- Total from investment operations........ .95 ----- Less distributions Dividends from net investment income....... (.64) Distributions in excess of net investment income.................................. --(c) ----- Total distributions..................... (.64) ----- Net asset value, end of period............. $ 11.81 ----- ----- TOTAL RETURN(b):........................... 8.35% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000)............ $ 710 Average net assets (000)................... $ 458 Ratios to average net assets: Expenses, including distribution fees... .66%(a)(e) Expenses, excluding distribution fees... .66%(a)(e) Net investment income................... 5.35%(a)(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 of less than a full year are not annualized. (c) Less than $.005 per share. (d) Commencement of offering of Class Z shares. (e) Annualized. - -------------------------------------------------------------------------------- See Notes to Financial Statements. 13 PRUDENTIAL CALIFORNIA MUNICIPAL FUND Report of Independent Accountants CALIFORNIA SERIES - -------------------------------------------------------------------------------- To the Shareholders and Board of Trustees of Prudential California Municipal Fund, California Series In our opinion, the accompanying statement of assets and liabilities, including the portfolio of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of Prudential California Municipal Fund, California Series (the 'Fund', one of the portfolios constituting Prudential California Municipal Fund) at August 31, 1999, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended, and the financial highlights for each of the three years in the period then ended, in conformity with generally accepted accounting principles. These financial statements and financial highlights (hereafter referred to as 'financial statements') are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at August 31, 1999 by correspondence with the custodian and brokers, provide a reasonable basis for the opinion expressed above. The accompanying financial highlights for each of the two years in the period ended August 31, 1996 were audited by other independent accountants, whose opinion dated October 14, 1996 was unqualified. PricewaterhouseCoopers LLP 1177 Avenue of the Americas New York, New York October 15, 1999 - -------------------------------------------------------------------------------- 14 PRUDENTIAL CALIFORNIA MUNICIPAL FUND Federal Income Tax Information (Unaudited) CALIFORNIA SERIES - -------------------------------------------------------------------------------- We are required by the Internal Revenue Code to advise you within 60 days of the Series' fiscal year end (August 31, 1999) as to the federal tax status of dividends and distributions paid by the Series during such fiscal year. Accordingly, we are advising you that in the fiscal year ended August 31, 1999, dividends paid from net investment income of $.59 per Class A share, $.56 per Class B share, $.53 per Class C share and $.62 per Class Z share were all federally tax-exempt interest dividends. We wish to advise you that the corporate dividends received deduction for the Series is zero. Only funds that invest in U.S. equity securities are entitled to pass-through a corporate dividends received deduction. In January 2000, you will be advised on IRS Form 1099 DIV or substitute 1099 DIV as to the federal tax status of the dividends and distributions received by you in calendar year 1999. - -------------------------------------------------------------------------------- 15 Comparing a $10,000 Investment Prudential California Municipal Fund--California Series vs. the Lehman Brothers Municipal Bond Index Class A (GRAPH) Average Annual Total Returns - ---------------------- With Sales Load Since Inception 6.32% (6.30%) Five Years 5.22% (5.19%) One Year -4.51% Without Sales Load Since Inception 6.66% (6.64%) Five Years 5.87% (5.83%) One Year -1.56% Class B (GRAPH) Average Annual Total Returns - ----------------------------- With Sales Load Since Inception 7.35% (7.24%) Ten Years 6.25% (6.23%) Five Years 5.30% (5.27%) One Year -6.94% Without Sales Load Since Inception 7.35% (7.24%) Ten Years 6.25% (6.23%) Five Years 5.47% (5.43%) One Year -1.94% Past performance is not indicative of future results. Principal and investment return will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. The lines beneath the graphs are designed to give you an idea of how much the Series' returns can fluctuate from year to year by measuring the best and worst calendar years in terms of total annual return since the inception of each share class (or for the past ten years for Class B shares). These graphs compare a $10,000 investment in the Prudential California Municipal Fund--California Series (Class A, B, C, and Z shares) with a similar investment in the Lehman Brothers Municipal Bond Index (the Index) by portraying the account values at the commencement of operations of Class A, C, and Z shares, at the beginning of the ten-year period for Class B shares, and at the end of the fiscal year (August 31), as measured on a quarterly basis, beginning in 1990 for Class A, 1989 for Class B, 1994 for Class C, and 1996 for Class Z shares. For purposes of the graphs, and unless otherwise indicated, it has been assumed that (a) the maximum applicable front-end sales charge was deducted from the initial $10,000 investment in Class A and Class C shares; (b) the maximum applicable contingent deferred sales charges were deducted from the value of the investment in Class B and Class C shares, assuming full redemption on August 31, 1999; (c) all recurring fees (including management fees) were deducted; and (d) all dividends and distributions Class C (GRAPH) Average Annual Total Returns - ----------------------------- With Sales Load Since Inception 4.92% (4.88%) Five Years 4.99% (4.96%) One Year -4.16% Without Sales Load Since Inception 5.13% (5.09%) Five Years 5.20% (5.17%) One Year -2.18% Class Z (GRAPH) Average Annual Total Returns - ----------------------------- Since Inception 5.36% (5.33%) One Year -1.44% were reinvested. Class B shares will automatically convert to Class A shares, on a quarterly basis, approximately seven years after purchase. This conversion feature is not reflected in the graphs. Class Z shares are not subject to a sales charge or distribution and service (12b-1) fees. The graphs and accompanying tables reflect the past subsidy and/or waiver of expenses and/or management fees. Without waiver of management fees and/or expense subsidization, the Series' average annual total returns would have been lower, as indicated in parentheses ( ). The Index is a market value-weighted index comprising approximately 47,000 municipal bonds (state and local general obligation bonds, revenue bonds, insured bonds, and prerefunded bonds) selected by Lehman Brothers as representative of the long-term investment-grade municipal bond market. The Index is unmanaged, and the total return of the Index includes the reinvestment of all dividends, but does not reflect the payment of transaction costs and advisory fees associated with an investment in the Series. The securities in the Index may differ substantially from the securities in the Series. The Index is not the only index that may be used to characterize performance of municipal bond funds. Other indexes may portray different comparative performance. Investors cannot invest directly in an index. These graphs are furnished to you in accordance with SEC regulations. Prudential Mutual Funds Gateway Center Three 100 Mulberry Street Newark, NJ 07102-4077 (800) 225-1852 http://www.prudential.com Class NASDAQ Cusip A PRMCX 744313107 B PBCMX 744313206 C -- 744313701 Z -- 744313883 Trustees Edward D. Beach Eugene C. Dorsey Delayne Dedrick Gold Robert F. Gunia Thomas T. Mooney Stephen P. Munn Thomas H. O'Brien David R. Odenath, Jr. Richard A. Redeker John R. Strangfeld Nancy H. Teeters Louis A. Weil, III Officers John R. Strangfeld, President Robert F. Gunia, Vice President Grace C. Torres, Treasurer Stephen M. Ungerman, Assistant Treasurer Deborah A. Docs, Secretary David F. Connor, Assistant Secretary Manager Prudential Investments Fund Management LLC Gateway Center Three 100 Mulberry Street, Newark, NJ 07102-4077 Investment Adviser The Prudential Investment Corporation Prudential Plaza, Newark, NJ 07102-3777 Distributor Prudential Investment Management Services LLC Gateway Center Three 100 Mulberry Street, Newark, NJ 07102-4077 Custodian State Street Bank and Trust Company One Heritage Drive, North Quincy, MA 02171 Transfer Agent Prudential Mutual Fund Services LLC P.O. Box 15005, New Brunswick, NJ 08906 Independent Accountants PricewaterhouseCoopers LLP 1177 Avenue of the Americas, New York, NY 10036 Legal Counsel Swidler Berlin Shereff Friedman, LLP 919 Third Avenue, New York, NY 10022 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. This report is not authorized for distribution to prospective investors unless preceded or accompanied by a current prospectus. MF116E (ICON) Prudential California Municipal Fund - ------------------- California Income Series ANNUAL REPORT Aug. 31, 1999 (LOGO) A Message from the Fund's President October 5, 1999 (LOGO) Dear Shareholder, Prudential California Municipal Fund--California Income Series' Class A shares posted a negative return of 1.37% during our 12-month reporting period that ended August 31, 1999. Its benchmark Lipper Average also generated a negative return as inflation fears caused a broad sell-off in the U.S. bond markets. The following report takes a closer look at recent bond market events and explains how the Series was positioned. While municipal bond prices gained early in our reporting period, the rally was short-lived. Signs that the U.S. economy was continuing to grow at a rapid pace fueled concerns about higher inflation. Since a rise in inflation would reduce the value of bonds' fixed-income payments, investors demanded higher yields on debt securities as compensation. This, in turn, caused bond prices to fall during most of our reporting period. One integrated and expanded team I would like to take this opportunity to tell you about some changes we've made to our Fixed Income Group. Earlier in the year, we combined our fixed- income areas into one integrated group that will manage money for Prudential's investors and policyholders. This group now manages approximately $135 billion in assets, making it one of the three largest fixed-income money managers in the country. Our expanded depth, breadth, and scale now also allow us to tap the best talent and share investment ideas, proprietary research, and analytical tools. To utilize these resources effectively, we recently organized the group into teams, each specializing in a different sector of the fixed-income market. The Municipal Bonds Sector team, headed by Evan Lamp, is now responsible for the day-to-day management of your Prudential California Municipal Fund--California Income Series. Many of the investment professionals who supported the management of the Series in the past are part of this new team. Thank you for your continued confidence in Prudential mutual funds. Sincerely, John R. Strangfeld President Prudential California Municipal Fund Performance Review (PHOTO) Evan Lamp, team leader of the Municipal Bonds Sector team Investment Goals and Style The Series' investment objective is to maximize current income that is exempt from California State and federal income taxes, consistent with the preservation of capital. However, certain shareholders may be subject to the alternative minimum tax (AMT) because some of the Series' bonds are AMT eligible. There can be no assurance the Series will achieve its investment objective. Inflation fears battered the municipal bond market Our fiscal year that ended on August 31, 1999, will be remembered as a challenging period in the history of the municipal debt securities market. For the first several weeks, prices of tax-exempt bonds rallied in sympathy with U.S. Treasury securities. Many investors purchased Treasuries for their relative safety after a global financial crisis spread beyond Asia to Russia and Latin America in the summer of 1998. But concern about the global financial crisis gave way to fears that a surprisingly strong U.S. economy and soaring oil prices might boost inflation, which eats into the value of bonds' fixed-interest payments. To compensate for this risk, investors demanded higher yields on municipal bonds and many other types of debt securities, causing their prices to tumble. Long-term municipal bonds sold off the most since their prices fall more rapidly than prices of shorter-term bonds for a given rise in yield. The Series posted negative annual returns, as did its benchmark Lipper Average, amid this bearish trend. Positioning duration for interest rate views We began the reporting period with a longer-than-average duration stance compared to our competitive universe. (Duration is a measure of the Series' sensitivity to interest-rate fluctuations.) A longer duration enables the Series' shares to gain more rapidly if interest rates should fall and municipal bond prices, which move in the opposite direction of their yields, rise. We expected long-term interest rates to continue to fall because the U.S. economic expansion was poised to slow and inflation to remain tame after the global financial crisis of last year. Our strategy benefited the Series during the autumn of 1998 when interest rates fell and the Federal Reserve cut the Federal funds rate three times. Furthermore, investors sought safety and liquidity for their investments in this uncertain market environment and purchased a multitude of fixed-income debt securities, especially U.S. Treasuries and municipal bonds. This trend was referred to as a "flight to quality." We maintained our longer duration stance into the first quarter of 1999 since we expected the ever-resilient U.S. economy to slow moderately. However, a slowdown did not occur as the Fed's accommodative monetary policy in late 1998 bolstered U.S. economic growth. As a result, long-term interest rates rose, and the prices of municipal bonds fell throughout the first eight months of 1999, hurting the Series' performance. In addition, a "flight from quality" was taking place as investors felt that they no longer needed the safety of Treasury securities. Therefore we shortened the Series' duration to a more neutral stance in the late spring of 1999, as it was apparent that the U.S. economy would not slow enough to alleviate inflation fears. A shorter duration helped performance when the Fed stepped in and raised rates in June and August. Lower-rated bonds enhanced the Series' performance In order to increase the Series' yield, we selectively bought lower-rated bonds. When the tax-exempt bond market sold off, prices of lower-rated debt securities tended to decline less than prices of more highly-rated ones. This was particularly true of lower-rated debt securities in economically sensitive sectors such as transportation and industrial development. In California, the housing and commercial real estate markets were "very hot". We purchased attractively priced, higher-yielding bonds from both of these real estate sectors. Performance at a Glance
Cumulative Total Returns1 As of 8/31/99 One Five Since Year Years Inception2 Class A -1.37% 37.11% (36.32) 91.10% (87.09) Class B -1.67 34.54 (33.77) 34.86 (33.71) Class C -1.91 32.87 (32.11) 33.50 (32.74) Class Z -1.18 N/A 18.79 (18.67) Lipper CA Muni Debt Fund Avg.3 -1.49 32.05 ***
Average Annual Total Returns1 As of 9/30/99 One Five Since Year Years Inception2 Class A -5.70% 6.14% (6.02) 7.28% (7.02) Class B -8.06 6.24 (6.11) 5.19 (5.05) Class C -5.27 5.92 (5.79) 5.60 (5.48) Class Z -2.58 N/A 5.95 (5.91)
Distributions & Yields As of 8/31/99 Total Taxable Equivalent Yield4 Distributions 30-Day At Tax Rates Of Paid for 12 Mos. SEC Yield 36% 39.6% Class A $0.56 4.38% 7.55% 8.00% Class B $0.53 4.26 7.34 7.78 Class C $0.50 3.97 6.84 7.25 Class Z $0.58 4.76 8.20 8.69
Past performance is not indicative of future results. Principal and investment return will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. 1 Source: Prudential Investments Fund Management LLC and Lipper, Inc. The cumulative total returns do not take into account sales charges. The average annual total returns do take into account applicable sales charges. The Series charges a maximum front-end sales charge of 3% for Class A shares and a declining contingent deferred sales charge (CDSC) of 5%, 4%, 3%, 2%, 1%, and 1% for six years for Class B shares. Class B shares will automatically convert to Class A shares, on a quarterly basis, approximately seven years after purchase. Class C shares are subject to a front-end sales charge of 1% and a CDSC of 1% for 18 months. Class C shares bought before November 2, 1998, have a 1% CDSC if sold within one year. Class Z shares are not subject to a sales charge or distribution and service (12b-1) fees. Without waiver of management fees and/or expense subsidization, the Series' cumulative and average annual total returns would have been lower, as indicated in parentheses ( ). 2 Inception dates: Class A, 12/3/90; Class B, 12/7/93; Class C, 8/1/94; and Class Z, 9/18/96. 3 Lipper average returns are for all funds in each share class for the one- and five-year periods in the California Municipal Debt Fund category. 4 Taxable equivalent yields reflect federal and applicable state tax rates. *** Lipper Since Inception returns are 75.02% for Class A; 30.58% for Class B; 32.38% for Class C; and 14.78% for Class Z, based on all funds in each share class. - ------------------------------------------------------------------------------- 1 Review Cont'd. Looking Ahead Fed poised to act again, if necessary If the U.S. economy does not lose steam quickly enough, we believe the Federal Reserve will continue to increase short-term interest rates to slow the economic expansion to a more sustainable pace. After their latest meeting in early October 1999, Fed policy makers released a statement saying they were considering hiking rates again and would be "especially alert" to trends that could boost inflationary pressures. Should the Fed act and bond yields continue to rise, the supply of newly issued municipal bonds could decline. State and local governments would have fewer opportunities to refinance their higher-rate debt securities. Moreover, if interest rates climbed sharply, some cost-conscious state and local governments may postpone issuing bonds in order to raise money for new projects. Retail investors, on the other hand, are attracted to tax-exempt debt securities in higher-interest-rate environments. This combination of shrinking supply and growing demand could allow municipal bonds to perform better than comparable Treasuries. But what if the Fed left monetary policy unchanged and bond yields failed to move sharply higher? We believe municipal bonds are still a good buy on a relative basis. In early October 1999, an insured, 30-year municipal bond rated AAA yielded roughly 95% as much as comparable Treasuries. This is well above the historical average of approximately 87%. Five Largest Issuers Expressed as a percentage of net assets as of 8/31/99 Southern California 4.8% Public Power Authority Orange County 4.1 Local Transportation Authority Long Beach Harbor 3.0 Revenue Foothill/Eastern 2.9 Transit Corridor Agency El Dorado County 2.2 Special Tax Portfolio Composition Expressed as a percentage of total investments as of 8/31/99 General Obligations 53% Revenue Bonds 25 Prerefunded Bonds 19 Miscellaneous 2 Cash Equivalents 1 Credit Breakdown Expressed as a percentage of total investments as of 8/31/99 AAA 19% AA 3 A 9 BBB 15 BB 9 B 14 Insured 29 Other 2 - ------------------------------------------------------------------------------- 2 PRUDENTIAL CALIFORNIA MUNICIPAL FUND Portfolio of Investments as of August 31, 1999 CALIFORNIA INCOME SERIES - --------------------------------------------------------------------------------
Moody's Principal Rating Interest Maturity Amount Value Description (a) (Unaudited) Rate Date (000) (Note 1) - ------------------------------------------------------------------------------------------------------------------------------ LONG-TERM INVESTMENTS--99.0% - ------------------------------------------------------------------------------------------------------------------------------ Alisal Union Sch. Dist., Cap. Apprec., Ser. C., F.G.I.C. Aaa Zero 8/01/13 $ 1,090 $ 515,058 Cap. Apprec., Ser. C., F.G.I.C. Aaa Zero 8/01/15 1,075 446,297 Cap. Apprec., Ser. C., F.G.I.C. Aaa Zero 8/01/19 1,615 520,175 Cap. Apprec., Ser. C., F.G.I.C. Aaa Zero 8/01/22 1,175 315,617 Arcadia Unif. Sch. Dist., Gen. Oblig., Ser. A, M.B.I.A. Aaa Zero 9/01/09 1,200 729,468 Gen. Oblig., Ser. A, M.B.I.A. Aaa Zero 9/01/11 1,875 1,006,762 Gen. Oblig., Ser. A, M.B.I.A. Aaa Zero 9/01/12 2,045 1,026,856 Assoc. of Bay Area Govt's. Fin. Auth., Cert. of Part., Channing House, Ser. A NR 7.125% 1/01/21 1,500(e) 1,588,410 Ref. Amer. Baptist Homes, Ser. A BBB(d) 6.20 10/01/27 2,000 1,984,100 Brea Pub. Fin. Auth. Rev., Tax Alloc. Redev. Proj., Ser. C NR 8.10 3/01/21 3,000 3,131,970 Brentwood Infrastructure Fin. Auth. Rev. NR 5.60 9/02/19 1,990 1,862,839 Buena Park Cmnty. Redev. Agcy. Cent. Bus. Dist. Proj. NR 7.80 9/01/14 3,325 3,533,278 Calabasas Spec. Tax Ref. Cmnty. Facs. Dist. No. 98-1 NR 5.75 9/01/28 1,000 932,170 California Hsg. Fin. Agcy., Single Fam. Mtge., Ser. A., A.M.T., M.B.I.A. Aaa 6.00 8/01/20 3,730(f) 3,767,151 California Infrastructure & Econ. Dev., Amer. Ctr. for Wine, Food & Arts A(d) 5.75 12/01/24 4,000 3,911,040 Amer. Ctr. for Wine, Food & Arts A(d) 5.80 12/01/29 1,000 980,340 California St. Dept. Wtr. Res. Rev., Central Valley Proj., Ser. J-3 Aa2 7.00 12/01/12 1,000 1,175,980 California St. Edl. Facs. Auth. Rev., Chapman College Baa2 7.50 1/01/18 600(e) 638,826 California St. Gen. Oblig., A.M.B.A.C. Aaa 6.50 9/01/10 1,250 1,415,100 California St. Hlth. Facs. Fin. Auth. Rev., Valleycare Hosp. Corp. AA-(d) 5.50 5/01/20 1,500 1,439,115 California Statewide Cmnty. Cap. Apprec., Cmnty. Facs. Dist. No. 97-1 NR Zero 9/01/22 4,440 935,464 Capistrano Unif. Sch. Dist. No. 98-2-Ladera NR 5.75 9/01/29 2,500 2,350,825 Capistrano Unif. Sch. Dist. No. 98-2 NR 5.70 9/01/20 2,000 1,885,700 Carson City Ltd. Oblig. Impvt. Rev., Assmt. Dist. NR 7.375 9/02/22 2,310 2,453,336 Cerritos Pub. Fin. Auth. Rev., Los Coyotes Redev. Proj., Loan A, A.M.B.A.C. Aaa 6.50 11/01/23 3,000 3,380,760 Chula Vista Cmnty. Redev. Agcy., Ref. Tax Alloc. Sr. Bayfront, Ser. A BBB+(d) 7.625 9/01/24 2,500 2,789,525 Ref. Tax Alloc. Sub. Bayfront, Ser. C NR 8.25 5/01/24 2,500 2,793,350 Chula Vista Spec. Tax Cmnty. Facs. Dist. No. 97-3 NR 6.05 9/01/29 2,770 2,691,692 Commerce Cmnty. Dev., Merged Redev. Proj., Ser. A NR 5.70 8/01/28 2,250 2,126,835 Contra Costa Cnty., Spec. Tax Cmnty. Facs. Dist. No. 91-1 NR 8.125 8/01/16 1,520(e) 1,609,391 Corona Cert. of Part., Vista Hosp. Sys. Inc., Ser. C NR 8.375 7/01/11 2,000 1,927,660 Davis Ca. Pub. Facs. Fin. Auth., Mace Ranch, Ser. A NR 6.60 9/01/25 2,000 2,042,540
- -------------------------------------------------------------------------------- See Notes to Financial Statements. 3 PRUDENTIAL CALIFORNIA MUNICIPAL FUND Portfolio of Investments as of August 31, 1999 CALIFORNIA INCOME SERIES - --------------------------------------------------------------------------------
Moody's Principal Rating Interest Maturity Amount Value Description (a) (Unaudited) Rate Date (000) (Note 1) - ------------------------------------------------------------------------------------------------------------------------------ Delano Cert. of Part., Regl. Med. Ctr., Ser. 92-A NR 9.25% 1/01/22 $ 2,850(e) $ 3,326,862 Desert Hosp. Dist., Cert. of Part. AAA 8.10 7/01/20 2,000(e) 2,112,580 East Palo Alto San. Dist., Cert. of Part. NR 8.25 10/01/15 500 520,860 El Dorado Cnty., Spec. Tax, Cmnty. Facs. Dist. No. 92-1 NR 6.125 9/01/16 1,000(i) 996,340 Cmnty. Facs. Dist. No. 92-1 NR 6.25 9/01/29 3,000(i) 2,995,950 El Dorado Hills Dev., Cmnty. Facs. Dist. No. 92-1 NR 8.25 9/01/24 1,945(e) 2,143,740 Fairfield Pub. Fin. Auth. Rev., Fairfield Redev. Proj., Ser. A NR 7.90 8/01/21 2,500(e) 2,725,750 Folsom Spec. Tax, Cmnty. Facs. Dist. No. 7 NR 6.00 9/01/24 2,500 2,424,550 Cmnty. Facs. Dist. No. 2 NR 7.70 12/01/19 3,130(e) 3,224,182 Fontana Pub. Fin. Auth., N. Fontana Tax Alloc. Rev. NR 7.65 12/01/09 1,575(e) 1,726,547 Fontana Redev. Agcy. Tax Alloc., Ref. Jurupa Hills Redev. Proj. A BBB+(d) 5.50 10/01/17 2,150 2,057,356 Ref. Jurupa Hills Redev. Proj. A BBB+(d) 5.60 10/01/27 1,595 1,510,848 Foothill/Eastern Trans. Corr. Agcy., Conv. Cap. Apprec. Baa3 Zero 1/15/26 4,800 2,555,664 Conv. Cap. Apprec. Baa3 Zero 1/15/28 4,890 2,582,164 Toll Rd., Ser. A Baa3 Zero 1/01/20 10,000 3,170,400 Gateway Impvt. Auth. Rev., Marin City Cmnty. Facs. Dist. & Redev. NR 7.75 9/01/25 2,100(e) 2,496,123 Glendale Unif. Sch. Dist., Ser. B, F.S.A. Aaa 5.125 9/01/23 1,250 1,158,163 Irvine Impvt. Bond Act of 1915, Assmt. Dist. No. 87-8 Grp. NR 6.00 9/02/24 3,000 2,872,890 Assmt. Dist. No. 94-13 NR 6.00 9/02/22 1,000 968,520 Kings Cnty. Wst. Mgmt. Auth., Solid Wst. Rev., A.M.T. BBB(d) 7.20 10/01/14 1,200 1,296,432 La Mesa Impvt. Bond Act of 1915 Ltd. Oblig., Dist. No. 98-1 NR 5.75 9/02/23 1,000 952,560 La Mirada Redev. Agcy. Spec. Tax, Ref. Cmnty. Facs. Dist. No. 89-1 NR 5.70 10/01/20 1,000 938,650 La Quinta Redev. Agcy., Proj. Area No. 1, M.B.I.A. Aaa 7.30 9/01/10 1,000 1,194,400 Tax Alloc. Ref. Proj. No. 1, M.B.I.A. Aaa 7.30 9/01/11 1,000 1,198,350 Lincoln Impvt. Bond Act of 1915 Pub. Fin. Auth., Twelve Bridges NR 6.20 9/02/25 3,000 2,884,140 Long Beach Hbr. Rev., Ref. Ser. A., A.M.T., F.G.I.C. Aaa 6.00 5/15/17 5,000(f) 5,274,300 Ref. Ser. A., A.M.T., F.G.I.C. Aaa 6.00 5/15/19 3,000 3,156,540 Long Beach Redev. Agcy. Hsg., Multifamily Hsg. Rev., Pacific Ct. Apts., Ser. B (cost $1,490,475; purchased 10/18/93) NR 6.80 9/01/13 1,000(c)(g) 620,000 Multifamily Hsg. Rev., Pacific Ct. Apts., Ser. B (cost $991,820; purchased 10/18/93) NR 6.95 9/01/23 1,500(c)(g) 930,000 Los Angeles Cmnty. Facs. Dist., No. 5, Rowland Heights Area NR 7.25 9/01/19 1,500(e) 1,718,520
- -------------------------------------------------------------------------------- See Notes to Financial Statements. 4 PRUDENTIAL CALIFORNIA MUNICIPAL FUND Portfolio of Investments as of August 31, 1999 CALIFORNIA INCOME SERIES - --------------------------------------------------------------------------------
Moody's Principal Rating Interest Maturity Amount Value Description (a) (Unaudited) Rate Date (000) (Note 1) - ------------------------------------------------------------------------------------------------------------------------------ Los Angeles Dept. of Wtr. & Pwr., Waterworks Rev. Aa3 4.50% 5/15/23 $ 1,900 $ 1,596,703 Lynwood Pub. Fin. Auth. Rev., Wtr. Sys. Impvt. Proj. BBB-(d) 6.50 6/01/21 1,500 1,575,120 Madera Redev. Agcy. Tax Rev. Tax Alloc. Redev. Proj., F.S.A. Aaa 4.75 9/01/28 1,205 1,022,900 Met. Wtr. Dist. of Southern California, Waterworks Rev., Linked S.A.V.R.S. & R.I.B.S. Aa2 5.75 8/10/18 1,000 1,027,950 Mojave Desert & Mtn. Solid Waste, Victor Valley Nat'l. Recov. Facs., A.M.T. Baa1 7.875 6/01/20 1,175 1,290,303 Montebello Unified Sch. Dist., Cap. Apprec., F.G.I.C. Aaa Zero 8/01/18 2,195 753,895 Cap. Apprec., F.G.I.C. Aaa Zero 8/01/19 2,250 724,702 Cap. Apprec., F.G.I.C. Aaa Zero 8/01/20 2,300 696,992 Ontario California Impvt. Bond Act of 1915, Assmt. Dist. No. 100C, Com. Ctr. III NR 8.00 9/02/11 1,050 1,090,614 Orange Cnty. Cmnty. Facs. Dist., Spec. Tax Rev., No. 87-4, Foothill Ranch, Ser. A AAA(d) 7.375 8/15/18 3,500(e) 3,886,085 No. 87-5B, Rancho Santa Margarita NR 7.50 8/15/17 1,750(e) 1,946,997 No. 88-1, Aliso Viejo, Ser. A AAA(d) 7.15 8/15/06 805(e) 888,801 Orange Cnty. Loc. Trans. Auth., Sales Tax Rev., Linked S.A.V.R.S. & R.I.B.S., A.M.B.A.C. Aaa 6.20 2/14/11 10,000 10,844,300 Sales Tax Rev., Linked S.A.V.R.S. & R.I.B.S. Aa3 8.668(h) 2/14/11 750 870,000 Paramount Unif. Sch. Dist., Ser. A, F.S.A. Aaa 5.125 9/01/19 2,500 2,369,725 Perris Sch. Dist., Cert. of Part., Cap. Proj. NR 7.75 3/01/21 1,500(e) 1,610,595 Pico Rivera California Wtr. Auth. Rev., Wtr. Sys. Proj., Ser. A, M.B.I.A. Aaa 5.50 5/01/29 2,500 2,452,125 Placentia Pub. Fin. Auth., Spec. Tax Rev., Ser. B NR 6.60 9/01/15 1,500 1,527,060 Port Redwood Cty. Rev., A.M.T. BBB(d) 5.125 6/01/30 1,600 1,389,360 Poway Cmnty. Fac. Dist., No. 88-1, Parkway Bus. Ctr. NR 6.75 8/15/15 1,000 1,054,620 Puerto Rico Hwy. & Trans. Auth. Rev., Ser. Q AAA(d) 7.75 7/01/10 2,100(e)(f) 2,211,174 Puerto Rico Pub. Bldgs. Auth., Gtd. Pub. Ed. & Hlth. Facs., Ser. J Baa1 Zero 7/01/06 1,605 1,152,952 Redding Elec. Sys. Rev., Linked S.A.V.R.S. & R.I.B.S., M.B.I.A. Aaa 6.368 7/01/22 50 54,555 Cert. of Part., M.B.I.A. Aaa 9.015 7/01/22 1,850 2,185,312 Richmond Redev. Agcy. Tax Alloc., Cap. Apprec. Ref. Harbor, Ser. B., M.B.I.A. Aaa Zero 7/01/20 1,150 347,334 Cap. Apprec. Ref. Harbor, Ser. B., M.B.I.A. Aaa Zero 7/01/21 1,150 326,347 Multifamily Hsg., Bridge Affordable Hsg. NR 7.50 9/01/23 2,500 2,579,375 Rio Vista Impvt. Bond Act of 1915, Assmt. Dist. No. 96-1, River View Pt. NR 7.50 9/02/22 1,940 1,962,174 Riverside Cnty. Cert. of Part., Air Force Village West NR 8.125 6/15/20 3,000(e)(f) 3,363,210 Riverside Cnty. Impvt. Bond Act of 1915, Assmt. Dist. No. 159, Ser. A NR 7.625 9/02/14 2,465 2,539,196 Rocklin Stanford Ranch Cmnty., Spec. Tax Facs. Dist. No. 3 NR 8.10 11/01/15 1,000(e) 1,068,690
- -------------------------------------------------------------------------------- See Notes to Financial Statements. 5 PRUDENTIAL CALIFORNIA MUNICIPAL FUND Portfolio of Investments as of August 31, 1999 CALIFORNIA INCOME SERIES - --------------------------------------------------------------------------------
Moody's Principal Rating Interest Maturity Amount Value Description (a) (Unaudited) Rate Date (000) (Note 1) - ------------------------------------------------------------------------------------------------------------------------------ Rocklin Unif. Sch. Dist., Gen. Oblig., Cap. Apprec., Ser. C, M.B.I.A. Aaa Zero 8/01/12 $ 1,110 $ 559,829 Cap. Apprec., Ser. C, M.B.I.A. Aaa Zero 8/01/13 1,165 550,497 Cap. Apprec., Ser. C, M.B.I.A. Aaa Zero 8/01/14 1,220 540,728 Cap. Apprec., Ser. C, M.B.I.A. Aaa Zero 8/01/15 1,285 533,481 Cap. Apprec., Ser. C, M.B.I.A. Aaa Zero 8/01/16 1,400 544,600 Roseville California Spec. Tax, N. Roseville Cmnty. Facs. Dist. No. 1 NR 5.75% 9/01/23 1,500 1,409,160 Ref. N. Central Cmnty. Dist. No. 1 NR 5.80 9/01/17 2,500 2,402,925 Sacramento City. Fin. Auth., Cap. Apprec., Tax Alloc. Comb. Proj., Ser. B, M.B.I.A. Aaa Zero 11/01/16 5,700 2,186,577 Cap. Apprec., Tax Alloc. Comb. Proj., Ser. B, M.B.I.A. Aaa Zero 11/01/17 5,695 2,051,510 Sacramento Cnty. Spec. Tax Rev., Dist. No. 1, Laguna Creek Ranch NR 5.70 12/01/20 2,000 1,887,960 Dist. No. 1, Laguna Creek Ranch NR 8.25 12/01/20 1,000(e) 1,072,620 Sacramento Impvt. Bond Act of 1915, Willowcreek II Assmt. Dist. No. 96-1 NR 6.70 9/02/22 2,500 2,576,800 Sacramento Spec. Purpose Fac., Y.M.C.A. of Sacramento NR 7.25 12/01/18 2,110 2,191,784 San Bernardino Cnty., Cert. of Part, Med. Ctr. Fin. Proj., M.B.I.A. Aaa 5.50 8/01/22 4,540 4,504,724 Fin. Auth. Ref. Impt., Granada Hills B-(d) 6.90 5/01/27 855 820,544 San Bruno Park Sch. Dist., Cap. Apprec., F.S.A. Aaa Zero 8/01/20 1,275 386,376 Cap. Apprec., F.S.A. Aaa Zero 8/01/21 1,220 347,492 Cap. Apprec., F.S.A. Aaa Zero 8/01/22 1,080 290,099 San Clemente Impvt. Bond Act of 1915, Assmt. Dist. No. 98-1 NR 6.05 9/02/28 2,000 1,928,620 San Diego Spec. Tax, Cmnty. Facs. Dist. No. 1, Ser. B NR 7.10 9/01/20 2,000(e) 2,310,800 San Francisco City & Cnty., Redev. Agcy., Lease Rev. A1 Zero 7/01/06 1,500 1,074,660 Redev. Agcy., Lease Rev. A1 Zero 7/01/07 2,250 1,521,202 San Joaquin Hills Trans. Corridor Agcy., Toll Rd. Rev. Aaa Zero 1/01/11 2,000 1,104,280 Toll Rd. Rev. Aaa Zero 1/01/22 15,000 4,210,800 San Jose Redev. Proj., M.B.I.A. Aaa 6.00 8/01/15 3,000 3,213,690 San Jose Unif. Sch. Dist., Santa Clara, Gen. Oblig., Ser. A., F.G.I.C. Aaa Zero 8/01/16 2,630 1,023,070 Gen. Oblig., Ser. A., F.G.I.C. Aaa Zero 8/01/18 2,765 949,667 Gen. Oblig., Ser. A., F.G.I.C. Aaa Zero 8/01/19 2,835 913,125 San Luis Obispo, Certs. of Part., Vista Hosp. Sys. NR 8.375 7/01/29 1,000 947,880
- -------------------------------------------------------------------------------- See Notes to Financial Statements. 6 PRUDENTIAL CALIFORNIA MUNICIPAL FUND Portfolio of Investments as of August 31, 1999 CALIFORNIA INCOME SERIES - --------------------------------------------------------------------------------
Moody's Principal Rating Interest Maturity Amount Value Description (a) (Unaudited) Rate Date (000) (Note 1) - ------------------------------------------------------------------------------------------------------------------------------ San Marcos Pub. Fac. Auth. Rev., Ref., Ser. 1998 NR 5.80% 9/01/18 $ 1,000 $ 967,070 San Marino Unif. Sch. Dist., Gen. Oblig., Ser. A AA(d) 5.25 7/01/19 1,840 1,784,726 Gen. Oblig., Ser. A AA(d) 5.00 6/01/23 1,500 1,375,080 Santa Margarita Wtr. Dist. Spec. Tax, Cmnty Fac. Dist. No. 99-1 NR 6.20 9/01/20 2,000 1,997,680 Cmnty Fac. Dist. No. 99-1 NR 6.25 9/01/29 2,000 2,006,700 Santa Margarita, Dana Point Auth., Impvt. Dists., Ser. A, M.B.I.A. Aaa 7.25 8/01/09 905 1,072,380 Impvt. Dists., Ser. B, M.B.I.A. Aaa 7.25 8/01/14 1,000 1,199,020 Santa Rosa Impvt. Bond Act of 1915, Ref. Fountaingrove Parkway NR 5.70 9/02/19 1,000 958,590 South Orange Cnty., Pub. Fin. Auth., Foothill Area Proj., Ser. C, F.G.I.C. Aaa 6.50 8/15/10 750 846,698 Spec. Tax Rev., M.B.I.A. Aaa 7.00 9/01/10 2,535 2,964,682 South San Francisco Redev. Agcy., Tax Alloc., Gateway Redev. Proj. NR 7.60 9/01/18 2,375(e) 2,652,115 South Tahoe Joint Pwrs. Fin. Ref., Redev. Proj., Ser. A BBB-(d) 5.375 10/01/30 2,500 2,259,850 Southern California Pub. Pwr. Auth., Proj. Rev. A3 6.75 7/01/10 6,250 7,099,687 Proj. Rev. A3 6.75 7/01/13 3,000 3,381,420 Proj. Rev., A.M.B.A.C. Aaa Zero 7/01/16 8,400 3,304,392 Stockton Cmnty. Facs. Dist. No. 90-2, Brookside Estates NR 6.20 8/01/15 1,050 1,054,484 Sulphur Springs Unif. Sch. Dist., Ser. A, M.B.I.A. Aaa Zero 9/01/11 3,000 1,610,820 Temecula Valley Unif. Sch. Dist., Cmnty. Facs., Spec. Tax Dist., No. 89-1 NR 8.60 9/01/17 2,600 2,707,354 Torrance Redev. Agcy., Ref. Tax Alloc. Sub. Lien NR 5.625 9/01/28 1,000 921,410 Tax Alloc. Downtown Redev. Baa2 7.125 9/01/22 2,105(e) 2,270,832 Tax Alloc. Ind. Redev. Proj. NR 7.75 9/01/13 2,500(e) 2,550,000 Vacaville Cmnty. Redev. Agcy., Multifamily Hsg. Rev. NR 7.375 11/01/14 1,110 1,151,947 Ventura California Port Dist. Cert. of Part. NR 6.375 8/01/28 4,000 3,783,440 Victor Valley, Union H.S. Dist., M.B.I.A. Aaa Zero 9/01/17 4,500 1,647,765 Union H.S. Dist., M.B.I.A. Aaa Zero 9/01/19 5,450 1,771,032 Union H.S. Dist., M.B.I.A. Aaa Zero 9/01/20 5,850 1,786,122 Virgin Islands Pub. Fin. Auth. Rev., Hwy. Trans. Trust Fund AAA(d) 7.70 10/01/04 1,000(e) 1,023,250 Virgin Islands Territory, Hugo Ins. Claims Fund Proj., Ser. 91 NR 7.75 10/01/06 870(e) 929,073 West Contra Costa Unif. Sch. Dist., Cert. of Part. Baa3 6.875 1/01/09 1,100 1,188,528 Westminster Redev. Agcy., Tax Alloc. Rev., Orange Cnty., Proj. No. 1, Ser. A AAA(d) 7.30 8/01/21 3,000(e) 3,241,020 ------------ Total long-term investments (cost $272,033,253) 281,612,844 ------------
- -------------------------------------------------------------------------------- See Notes to Financial Statements. 7 PRUDENTIAL CALIFORNIA MUNICIPAL FUND Portfolio of Investments as of August 31, 1999 CALIFORNIA INCOME SERIES - --------------------------------------------------------------------------------
Moody's Principal Rating Interest Maturity Amount Value Description (a) (Unaudited) Rate Date (000) (Note 1) - ------------------------------------------------------------------------------------------------------------------------------ SHORT-TERM INVESTMENTS--1.0% California Poll. Ctrl. Fin. Auth. Ref., Pacific Gas & Elec. Co., Ser. 96C, F.R.D.D. A1+(d) 2.65% 9/01/99 $ 400 $ 400,000 Ser. 96D, F.R.D.D. A1+(d) 2.65 9/01/99 900 900,000 California Poll. Ctrl. Fin. Auth., Solid Wst. Disp. Rev., Shell Oil Martinez Refining Co., Ser. 96A, F.R.D.D., A.M.T. VMIG1 2.55 9/01/99 1,100 1,100,000 Shell Oil Martinez Refining Co., Ser. 96B, F.R.D.D. NR 2.65 9/01/99 500 500,000 ------------ Total short-term investments (cost $2,900,000) 2,900,000 ------------ Total Investments--100.0 % (cost $274,933,253; Note 4) 284,512,844 Liabilities in excess of other assets (77,052) ------------ Net Assets--100% $284,435,792 ------------ ------------
- --------------- (a) The following abbreviations are used in portfolio descriptions: A.M.B.A.C.--American Municipal Bond Assurance Corporation. A.M.T.--Alternative Minimum Tax. F.G.I.C.--Financial Guaranty Insurance Company. F.R.D.D.--Floating Rate (Daily) Demand Notes (b). F.S.A.--Financial Security Assurance. M.B.I.A.--Municipal Bond Insurance Association. R.I.B.S.--Residual Interest Bearing Securities. S.A.V.R.S.--Select Auction Variable Rate Securities. Y.M.C.A.--Young Mens Christian Association. (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) Issue in default on interest payment, non-income producing security. (d) Standard & Poor's Rating. (e) Prerefunded issues secured by escrowed cash and/or direct U.S. guaranteed obligations. (f) All or a portion of the securities are segregated as collateral for financial futures contracts. (g) Indicates a restricted security. The aggregate cost of restricted securities is $2,482,295 and the aggregate value is ($1,550,000) which represents approximately 0.5% of net assets. (h) Inverse floating rate bond. The coupon is inversely indexed to a floating interest rate. The rate shown is the rate at year end. (i) When-issued securities. 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. 8 PRUDENTIAL CALIFORNIA MUNICIPAL FUND Statement of Assets and Liabilities CALIFORNIA INCOME SERIES - --------------------------------------------------------------------------------
Assets August 31, 1999 Investments, at value (cost $274,933,253)................................................................. $ 284,512,844 Cash...................................................................................................... 58,909 Interest receivable....................................................................................... 4,188,542 Receivable for Series shares sold......................................................................... 503,399 Due from broker - variation margin........................................................................ 87,750 Receivable for investments sold........................................................................... 80,450 Other assets.............................................................................................. 5,766 --------------- Total assets........................................................................................... 289,437,660 --------------- Liabilities Payable for investments purchased......................................................................... 3,993,470 Payable for Series shares reacquired...................................................................... 456,360 Dividends payable......................................................................................... 236,931 Management fee payable.................................................................................... 120,586 Accrued expenses.......................................................................................... 103,490 Distribution fee payable.................................................................................. 81,647 Deferred trustee's fees................................................................................... 9,384 --------------- Total liabilities...................................................................................... 5,001,868 --------------- Net Assets................................................................................................ $ 284,435,792 --------------- --------------- Net assets were comprised of: Shares of beneficial interest, at par.................................................................. $ 271,125 Paid-in capital in excess of par....................................................................... 278,297,870 --------------- 278,568,995 Accumulated net realized loss on investments........................................................... (3,869,419) Net unrealized appreciation on investments............................................................. 9,736,216 --------------- Net assets, August 31, 1999............................................................................... $ 284,435,792 --------------- --------------- Class A: Net asset value and redemption price per share ($183,593,374 / 17,500,481 shares of beneficial interest issued and outstanding).................... $10.49 Maximum sales charge (3% of offering price)............................................................ .32 --------------- Maximum offering price to public....................................................................... $10.81 --------------- --------------- Class B: Net asset value, offering price and redemption price per share ($84,545,838 / 8,058,635 shares of beneficial interest issued and outstanding)...................... $10.49 --------------- --------------- Class C: Net asset value and redemption price per share ($10,847,351 / 1,033,953 shares of beneficial interest issued and outstanding)...................... $10.49 Sales charge (1% of offering price).................................................................... .11 --------------- Offering price to public............................................................................... $10.60 --------------- --------------- Class Z: Net asset value, offering price and redemption price per share ($5,449,229 / 519,469 shares of beneficial interest issued and outstanding)......................... $10.49 --------------- ---------------
- -------------------------------------------------------------------------------- See Notes to Financial Statements. 9 PRUDENTIAL CALIFORNIA MUNICIPAL FUND CALIFORNIA INCOME SERIES Statement of Operations - ------------------------------------------------------------
Year Ended Net Investment Income August 31, 1999 Income Interest................................... $16,463,562 --------------- Expenses Management fee............................. 1,410,411 Distribution fee--Class A.................. 375,487 Distribution fee--Class B.................. 405,815 Distribution fee--Class C.................. 68,161 Custodian's fees and expenses.............. 95,000 Transfer agent's fees and expenses......... 58,000 Reports to shareholders.................... 43,000 Registration fees.......................... 36,000 Audit fees and expenses.................... 13,000 Legal fees and expenses.................... 10,000 Trustees' fees and expenses................ 7,000 Miscellaneous.............................. 7,656 --------------- Total expenses.......................... 2,529,530 Less: Management fee waiver (Note 2)....... (104,983) Custodian fee credit (Note 1)........... (2,406) --------------- Net expenses............................ 2,422,141 --------------- Net investment income......................... 14,041,421 --------------- Realized and Unrealized Gain (Loss) on Investments Net realized gain (loss) on: Investment transactions.................... (1,136,923) Financial futures transactions............. 310,965 --------------- (825,958) --------------- Net change in unrealized appreciation/depreciation on: Investments................................ (17,823,742) Financial futures contracts................ 13,719 --------------- (17,810,023) --------------- Net loss on investments....................... (18,635,981) --------------- Net Decrease in Net Assets Resulting from Operations..................... $(4,594,560) --------------- ---------------
PRUDENTIAL CALIFORNIA MUNICIPAL FUND CALIFORNIA INCOME SERIES Statement of Changes in Net Assets - ------------------------------------------------------------
Increase (Decrease) Year Ended August 31, in Net Assets 1999 1998 Operations Net investment income........ $ 14,041,421 $ 12,132,906 Net realized loss on investment transactions... (825,958) (88,023) Net change in unrealized appreciation/depreciation on investments............ (17,810,023) 10,200,239 ------------ ------------ Net increase (decrease) in net assets resulting from operations................ (4,594,560) 22,245,122 ------------ ------------ Dividends and distributions (Note 1): Dividends from net investment income Class A................... (9,496,580) (8,943,420) Class B................... (3,882,376) (2,795,615) Class C................... (413,457) (211,960) Class Z................... (249,008) (181,911) ------------ ------------ (14,041,421) (12,132,906) ------------ ------------ Distributions in excess of net investment income Class A................... -- (77,784) Class B................... -- (24,826) Class C................... -- (1,879) Class Z................... -- (1,255) ------------ ------------ -- (105,744) ------------ ------------ Series share transactions (net of share conversions) (Note 5): Net proceeds from shares sold...................... 92,907,502 72,607,907 Net asset value of shares issued to shareholders in reinvestment of dividends and distributions......... 6,830,426 6,072,757 Cost of shares reacquired.... (59,179,182) (35,867,889) ------------ ------------ Net increase in net assets from Series share transactions.............. 40,558,746 42,812,775 ------------ ------------ Total increase.................. 21,922,765 52,819,247 Net Assets Beginning of year............... 262,513,027 209,693,780 ------------ ------------ End of year..................... $284,435,792 $262,513,027 ------------ ------------ ------------ ------------
- -------------------------------------------------------------------------------- See Notes to Financial Statements. 10 PRUDENTIAL CALIFORNIA MUNICIPAL FUND Notes to Financial Statements CALIFORNIA INCOME SERIES - -------------------------------------------------------------------------------- Prudential California Municipal Fund (the 'Fund') is registered under the Investment Company Act of 1940, as an open-end investment company. The Fund was organized as a Massachusetts business trust on May 18, 1984 and consists of three series. The monies of each series are invested in separate, independently managed portfolios. The California Income Series (the 'Series') commenced investment operations on December 3, 1990. The Series is diversified and seeks to achieve its investment objective of obtaining the maximum amount of income exempt from federal and California state income taxes with the minimum of risk. The Series will invest primarily in investment grade municipal obligations but may also invest a portion of its assets in lower-quality municipal obligations or in nonrated securities which are of comparable quality. The ability of the issuers of the securities held by the Series to meet their obligations may be affected by economic developments in a specific state, industry or region. - ------------------------------------------------------------ Note 1. Accounting Policies The following is a summary of significant accounting policies followed by the Fund and the Series in preparation of its financial statements. Security Valuations: The Series values municipal securities (including commitments to purchase such securities on a 'when-issued' basis) on the basis of prices provided by a pricing service which uses information with respect to transactions in bonds, quotations from bond dealers, market transactions in comparable securities and various relationships between securities in determining values. If market quotations are not readily available from such pricing service, a security is valued at its fair value as determined under procedures established by the Trustees. Short-term securities which mature in more than 60 days are valued at current market quotations. Short-term securities which mature in 60 days or less are valued at amortized cost. The Series held illiquid securities, including those which are restricted as to disposition under securities law ('restricted securities'). None of the issues of restricted securities held by the Series at August 31, 1999 include registration rights under which the Series may demand registration by the issuer. Restricted securities, sometimes referred to as private placements, are valued pursuant to the valuation procedures noted above. All securities are valued as of 4:15 p.m., New York time. Financial Futures Contracts: A financial futures contract is an agreement to purchase (long) or sell (short) an agreed amount of securities at a set price for delivery on a future date. Upon entering into a financial futures contract, the Series is required to pledge to the broker an amount of cash and/or other assets equal to a certain percentage of the contract amount. This amount is known as the 'initial margin.' Subsequent payments, known as 'variation margin,' are made or received by the Series each day, depending on the daily fluctuations in the value of the underlying security. Such variation margin is recorded for financial statement purposes on a daily basis as unrealized gain or loss. When the contract expires or is closed, the gain or loss is realized and is presented in the statement of operations as net realized gain (loss) on financial futures 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. Securities Transactions and Net Investment Income: Securities transactions are recorded on the trade date. Realized gains and losses on sales of securities are calculated on the identified cost basis. Interest income is recorded on the accrual basis. The Series amortizes premiums and original issue discount paid on purchases of portfolio securities as adjustments to interest income. Expenses are recorded on the accrual basis which may require the use of certain estimates by management. Net investment income (other than distribution fees) and unrealized and realized gains or losses are allocated daily to each class of shares based upon the relative proportion of net assets of each class at the beginning of the day. Federal Income Taxes: For federal income tax purposes, each series in the Fund is treated as a separate taxpaying entity. It is the intent of the Series to continue to meet the requirements of the Internal Revenue Code applicable to regulated investment companies and to distribute all of its net income to shareholders. For this reason, no federal income tax provision is required. Dividends and Distributions: The Series declares daily dividends from net investment income. Payment of dividends is made monthly. Distributions of net capital gains, if any, are made annually. Income distributions and capital gain distributions are determined in accordance with income tax regulations which may differ from generally accepted accounting principles. Custody Fee Credits: The Fund has an arrangement with its custodian bank, whereby uninvested monies earn credits which reduce the fees charged by the custodian. - -------------------------------------------------------------------------------- 11 PRUDENTIAL CALIFORNIA MUNICIPAL FUND Notes to Financial Statements CALIFORNIA INCOME SERIES - -------------------------------------------------------------------------------- Note 2. Agreements The Fund has a management agreement with Prudential Investments Fund Management LLC ('PIFM'). Pursuant to this agreement, PIFM has responsibility for all investment advisory services and supervises the subadviser's performance of such services. PIFM has entered into a subadvisory agreement with The Prudential Investment Corporation ('PIC'); PIC furnishes investment advisory services in connection with the management of the Fund. PIFM pays for the cost of the subadviser's services, the compensation of officers of the Fund, occupancy and certain clerical and bookkeeping costs of the Fund. The Fund bears all other costs and expenses. The management fee paid PIFM is computed daily and payable monthly, at an annual rate of .50 of 1% of the average daily net assets of the Series. Prior to June 1, 1999, PIFM has agreed to voluntarily waived a portion (.05 of 1% of the Series' average daily net assets) of its management fee, which amounted to $104,983 ($.004 per share). Effective June 1, 1999, PIFM eliminated such waiver. The Series is not required to reimburse PIFM for such waiver. The Fund has a distribution agreement with Prudential Investment Management Services LLC ('PIMS') which acts as the distributor of the Fund. The Fund compensates PIMS for distributing and servicing the Fund's Class A, Class B and Class C shares, pursuant to plans of distribution (the 'Class A, B and C Plans'), regardless of expenses actually incurred by it. The distribution fees are accrued daily and payable monthly. No distribution or service fees are paid to PIMS as distributor of the Class Z shares of the Fund. Pursuant to the Class A, B and C Plans, the Fund compensates PIMS for distribution-related activities at an annual rate of up to .30 of 1%, .50 of 1% and 1% of the average daily net assets of the Class A, B and C shares, respectively. Such expenses under the Plans were .10 of 1%, .50 of 1% and .75 of 1% of the average daily net assets of the Class A, B and C shares, respectively, for the period September 1, 1998 through December 31, 1998. Effective January 1, 1999, such expenses under the Plans were .25 of 1%, .50 of 1% and .75 of 1% of the average daily net assets of the Class A, B and C shares, respectively. PIMS has advised the Series that it received approximately $371,300 and $40,800 in front-end sales charges resulting from sales of Class A and Class C shares, respectively, during the year ended August 31, 1999. From these fees, PIMS paid such sales charges to affiliated broker-dealers which in turn paid commissions to sales persons and incurred other distribution costs. PIMS has advised the Series that for the year ended August 31, 1999, it received approximately $203,900 and $8,800 in contingent deferred sales charges imposed upon certain redemptions by Class B and Class C shareholders, respectively. PIFM, PIMS and PIC are indirect, wholly owned subsidiaries of The Prudential Insurance Company of America. As of March 11, 1999, the Fund, along with other affiliated registered investment companies (the 'Funds'), entered into a syndicated credit agreement ('SCA') with an unaffiliated lender. The maximum commitment under the SCA is $1 billion. Interest on any borrowings will be at market rates. The Funds pay a commitment fee at an annual rate of .065 of 1% on the unused portion of the credit facility, which is accrued and paid quarterly on a pro rata basis by the Funds. The SCA expires on March 9, 2000. Prior to March 11, 1999, the Funds had a credit agreement with a maximum commitment of $200,000,000. The commitment fee was .055 of 1% on the unused portion of the credit facility. The Fund did not borrow any amounts pursuant to either agreement during the year ended August 31, 1999. The purpose of the agreements is to serve as an alternative source of funding for capital share redemptions. - ------------------------------------------------------------ Note 3. Other Transactions with Affiliates Prudential Mutual Fund Services LLC ('PMFS'), a wholly owned subsidiary of PIFM, serves as the Fund's transfer agent. During the year ended August 31, 1999, the Series incurred fees of approximately $50,700 for the services of PMFS. As of August 31, 1999 approximately $4,200 of such fees were due to PMFS. Transfer agent fees and expenses in the Statement of Operations include certain out-of-pocket expenses paid to nonaffiliates. - ------------------------------------------------------------ Note 4. Portfolio Securities Purchases and sales of portfolio securities of the Series, excluding short-term investments, for the year ended August 31, 1999 were $102,971,773 and $64,755,427, respectively. The United States federal income tax cost basis of the Fund's investments as of August 31, 1999 was substantially the same as for financial reporting purposes and, accordingly, net unrealized appreciation on investments for federal income tax purposes was $9,579,591 (gross unrealized appreciation--$15,398,831; gross unrealized depreciation--$5,819,240). - -------------------------------------------------------------------------------- 12 PRUDENTIAL CALIFORNIA MUNICIPAL FUND Notes to Financial Statements CALIFORNIA INCOME SERIES - -------------------------------------------------------------------------------- During the year ended August 31, 1999, the Fund entered into financial futures contracts. Details of open contracts at August 31, 1999 are as follows:
Value at Value at Unrealized Number of Expiration February 28, Trade Appreciation Contracts Type Date 1999 Date (Depreciation) - --------- ---------------- ---------- ------------ ----------- -------------- Short Position: 312 Muni Bond Sept. 1999 $ 35,675,250 $35,831,875 $156,625
For federal income tax purposes, the Series has a capital loss carryforward at August 31, 1999 of approximately $2,496,600 of which $1,520,900 expires in 2003 and $975,700 expires in 2004. Accordingly, no capital gains distributions are expected to be paid to shareholders until net gains have been realized in excess of such amount. For federal income tax purposes, the Series will elect to treat net capital losses of $1,104,800 incurred in the ten month period ending August 31, 1999 as having been incurred in the following fiscal year. - ------------------------------------------------------------ Note 5. Capital The Series offers Class A, Class B, Class C and Class Z shares. Class A shares are sold with a front-end sales charge of up to 3%. Class B shares are sold with a contingent deferred sales charge which declines from 5% to zero depending on the period of time the shares are held. Class C shares are sold with front-end sales charge of 1% and a contingent deferred sales charge of 1% during the first 18 months. Prior to November 2, 1998, Class C shares were sold with a contingent deferred sales charge of 1% during the first year. 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 fiscal years ended August 31, 1999 and 1998 were as follows:
Class A Shares Amount - ----------------------------------- ---------- ------------ Year ended August 31, 1999: Shares sold........................ 4,622,707 $ 50,892,275 Shares issued in reinvestment of dividends........................ 417,857 4,593,136 Shares reacquired.................. (3,868,964) (42,458,852) ---------- ------------ Net increase in shares outstanding before conversion................ 1,171,600 13,026,559 Shares issued upon conversion from Class B.......................... 109,917 1,217,865 ---------- ------------ Net increase in shares outstanding...................... 1,281,517 $ 14,244,424 ---------- ------------ ---------- ------------ Year ended August 31, 1998: Shares sold........................ 3,414,327 $ 37,583,169 Shares issued in reinvestment of dividends and distributions...... 412,571 4,525,799 Shares reacquired.................. (2,333,125) (25,610,559) ---------- ------------ Net increase in shares outstanding before conversion................ 1,493,773 16,498,409 Shares issued upon conversion from Class B.......................... 101,309 1,102,989 ---------- ------------ Net increase in shares outstanding...................... 1,595,082 $ 17,601,398 ---------- ------------ ---------- ------------ Class B - ----------------------------------- Year ended August 31, 1999: Shares sold........................ 2,701,343 $ 29,886,200 Shares issued in reinvestment of dividends........................ 160,200 1,758,724 Shares reacquired.................. (995,244) (10,928,291) ---------- ------------ Net increase in shares outstanding before conversion................ 1,866,299 20,716,633 Shares reacquired upon conversion into Class A..................... (109,917) (1,217,865) ---------- ------------ Net increase in shares outstanding...................... 1,756,382 $ 19,498,768 ---------- ------------ ---------- ------------ Year ended August 31, 1998: Shares sold........................ 2,527,906 $ 27,786,255 Shares issued in reinvestment of dividends and distributions...... 111,980 1,228,995 Shares reacquired.................. (663,467) (7,259,153) ---------- ------------ Net increase in shares outstanding before conversion................ 1,976,419 21,756,097 Shares reacquired upon conversion into Class A..................... (101,309) (1,102,989) ---------- ------------ Net increase in shares outstanding...................... 1,875,110 $ 20,653,108 ---------- ------------ ---------- ------------
- -------------------------------------------------------------------------------- 13 PRUDENTIAL CALIFORNIA MUNICIPAL FUND Notes to Financial Statements CALIFORNIA INCOME SERIES - --------------------------------------------------------------------------------
Class C Shares Amount - ----------------------------------- ---------- ------------ Year ended August 31, 1999: Shares sold........................ 696,989 $ 7,705,871 Shares issued in reinvestment of dividends........................ 26,026 285,305 Shares reacquired.................. (221,550) (2,436,064) ---------- ------------ Net increase in shares outstanding...................... 501,465 $ 5,555,112 ---------- ------------ ---------- ------------ Year ended August 31, 1998: Shares sold........................ 384,457 $ 4,221,764 Shares issued in reinvestment of dividends and distributions...... 13,751 150,931 Shares reacquired.................. (202,715) (2,225,783) ---------- ------------ Net increase in shares outstanding...................... 195,493 $ 2,146,912 ---------- ------------ ---------- ------------ Class Z - ----------------------------------- Year ended August 31, 1999: Shares sold........................ 405,701 $ 4,423,156 Shares issued in reinvestment of dividends........................ 17,560 193,261 Shares reacquired.................. (306,708) (3,355,975) ---------- ------------ Net increase in shares outstanding...................... 116,553 $ 1,260,442 ---------- ------------ ---------- ------------ Year ended August 31, 1998: Shares sold........................ 274,705 $ 3,016,719 Shares issued in reinvestment of dividends and distributions...... 15,212 167,032 Shares reacquired.................. (70,320) (772,394) ---------- ------------ Net increase in shares outstanding...................... 219,597 $ 2,411,357 ---------- ------------ ---------- ------------
- -------------------------------------------------------------------------------- 14 PRUDENTIAL CALIFORNIA MUNICIPAL FUND Financial Highlights CALIFORNIA INCOME SERIES - --------------------------------------------------------------------------------
Class A ------------------------------------------------------------ Year Ended August 31, ------------------------------------------------------------ 1999 1998 1997 1996 1995 -------- -------- -------- -------- -------- PER SHARE OPERATING PERFORMANCE: Net asset value, beginning of year........ $ 11.19 $ 10.71 $ 10.33 $ 10.28 $ 10.19 -------- -------- -------- -------- -------- Income from investment operations Net investment income(a).................. .56 .59 .60 .63 .65 Net realized and unrealized gain (loss) on investment transactions................ (.70) .49 .38 .05 .09 -------- -------- -------- -------- -------- Total from investment operations....... (.14) 1.08 .98 .68 .74 -------- -------- -------- -------- -------- Less distributions Dividends from net investment income...... (.56) (.59) (.60) (.63) (.65) Distributions in excess of net investment income................................. -- (.01) --(c) -- -- -------- -------- -------- -------- -------- Total distributions.................... (.56) (.60) (.60) (.63) (.65) -------- -------- -------- -------- -------- Net asset value, end of year.............. $ 10.49 $ 11.19 $ 10.71 $ 10.33 $ 10.28 -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- TOTAL RETURN(b):.......................... (1.37)% 10.31% 9.72% 6.67% 7.67% RATIOS/SUPPLEMENTAL DATA: Net assets, end of year (000)............. $183,593 $181,512 $156,684 $153,236 $163,538 Average net assets (000).................. $187,106 $165,771 $153,019 $161,420 $165,500 Ratios to average net assets(a): Expenses, including distribution fees................................ .76% .68% .73% .50% .40% Expenses, excluding distribution fees................................ .56% .58% .63% .40% .30% Net investment income.................. 5.03% 5.39% 5.66% 6.01% 6.49% For Class A, B, C and Z shares: Portfolio turnover rate................ 23% 10% 16% 22% 39%
- --------------- (a) Net of management fee waiver. (b) Total return does not consider the effects of sales loads. Total return is calculated assuming a purchase of shares on the first day and a sale on the last day of each year reported and includes reinvestment of dividends and distributions. (c) Less than $.005 per share. - -------------------------------------------------------------------------------- See Notes to Financial Statements. 15 PRUDENTIAL CALIFORNIA MUNICIPAL FUND Financial Highlights CALIFORNIA INCOME SERIES - --------------------------------------------------------------------------------
Class B ------------------------------------------------------- Year Ended August 31, ------------------------------------------------------- 1999 1998 1997 1996 1995 ------- ------- ------- ------- ------- PER SHARE OPERATING PERFORMANCE: Net asset value, beginning of year........ $ 11.19 $ 10.71 $ 10.33 $ 10.28 $ 10.19 ------- ------- ------- ------- ------- Income from investment operations Net investment income(a).................. .53 .55 .55 .59 .61 Net realized and unrealized gain (loss) on investment transactions................ (.70) .49 .38 .05 .09 ------- ------- ------- ------- ------- Total from investment operations....... (.17) 1.04 .93 .64 .70 ------- ------- ------- ------- ------- Less distributions Dividends from net investment income...... (.53) (.55) (.55) (.59) (.61) Distributions in excess of net investment income................................. -- (.01) --(c) -- -- ------- ------- ------- ------- ------- Total distributions.................... (.53) (.56) (.55) (.59) (.61) ------- ------- ------- ------- ------- Net asset value, end of year.............. $ 10.49 $ 11.19 $ 10.71 $ 10.33 $ 10.28 ------- ------- ------- ------- ------- ------- ------- ------- ------- ------- TOTAL RETURN(b):.......................... (1.67)% 9.87% 9.28% 6.25% 7.24% RATIOS/SUPPLEMENTAL DATA: Net assets, end of year (000)............. $84,546 $70,535 $47,436 $35,983 $28,609 Average net assets (000).................. $81,163 $56,011 $40,983 $32,555 $23,722 Ratios to average net assets(a): Expenses, including distribution fees................................ 1.06% 1.08% 1.13% .90% .80% Expenses, excluding distribution fees................................ .56% .58% .63% .40% .30% Net investment income.................. 4.78% 4.99% 5.26% 5.61% 6.09%
- --------------- (a) Net of management fee waiver. (b) Total return does not consider the effects of sales loads. Total return is calculated assuming a purchase of shares on the first day and a sale on the last day of each year reported and includes reinvestment of dividends and distributions. (c) Less than $.005 per share. - -------------------------------------------------------------------------------- See Notes to Financial Statements. 16 PRUDENTIAL CALIFORNIA MUNICIPAL FUND Financial Highlights CALIFORNIA INCOME SERIES - --------------------------------------------------------------------------------
Class C Class Z --------------------------------------------------- ----------------- Year Ended Year Ended August 31, August 31, --------------------------------------------------- ----------------- 1999 1998 1997 1996 1995 1999 1998 ------- ------ ------ ------ ------ ------ ------ PER SHARE OPERATING PERFORMANCE: Net asset value, beginning of period...... $ 11.19 $10.71 $10.33 $10.28 $10.19 $11.19 $10.71 ------- ------ ------ ------ ------ ------ ------ Income from investment operations Net investment income(a).................. .50 .52 .53 .56 .58 .58 .61 Net realized and unrealized gain (loss) on investment transactions................ (.70) .49 .38 .05 .09 (.70) .49 ------- ------ ------ ------ ------ ------ ------ Total from investment operations....... (.20) 1.01 .91 .61 .67 (.12) 1.10 ------- ------ ------ ------ ------ ------ ------ Less distributions Dividends from net investment income...... (.50) (.52) (.53) (.56) (.58) (.58) (.61) Distributions in excess of net investment income................................. -- (.01) --(e) -- -- -- (.01) ------- ------ ------ ------ ------ ------ ------ Total distributions.................... (.50) (.53) (.53) (.56) (.58) (.58) (.62) ------- ------ ------ ------ ------ ------ ------ Net asset value, end of period............ $ 10.49 $11.19 $10.71 $10.33 $10.28 $10.49 $11.19 ------- ------ ------ ------ ------ ------ ------ ------- ------ ------ ------ ------ ------ ------ TOTAL RETURN(b):.......................... (1.91)% 9.60% 9.01% 5.99% 6.98% (1.18)% 10.42% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000)........... $10,847 $5,960 $3,611 $3,269 $2,762 $5,449 $4,507 Average net assets (000).................. $ 9,088 $4,491 $3,135 $3,300 $1,751 $4,725 $3,312 Ratios to average net assets(a): Expenses, including distribution fees................................ 1.31% 1.33% 1.38% 1.15% 1.05% .56% .58% Expenses, excluding distribution fees................................ .56% .58% .63% .40% .30% .56% .58% Net investment income.................. 4.53% 4.74% 5.01% 5.36% 5.84% 5.28% 5.49% September 18, 1996(d) Through August 31, 1997 ------------- PER SHARE OPERATING PERFORMANCE: Net asset value, beginning of period...... $ 10.38 ----- Income from investment operations Net investment income(a).................. .57 Net realized and unrealized gain (loss) on investment transactions................ .33 ----- Total from investment operations....... .90 ----- Less distributions Dividends from net investment income...... (.57) Distributions in excess of net investment income................................. --(e) ----- Total distributions.................... (.57) ----- Net asset value, end of period............ $ 10.71 ----- ----- TOTAL RETURN(b):.......................... 8.86% RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (000)........... $ 1,963 Average net assets (000).................. $ 970 Ratios to average net assets(a): Expenses, including distribution fees................................ .63%(c) Expenses, excluding distribution fees................................ .63%(c) Net investment income.................. 5.76%(c)
- --------------- (a) Net of management fee waiver. (b) Total return does not consider the effects of sales loads. Total return is calculated assuming a purchase of shares on the first day and a sale on the last day of each period reported and includes reinvestment of dividends and distributions. Total returns for periods of less than a full year are not annualized. (c) Annualized. (d) Commencement of offering of Class Z shares. (e) Less than $.005 per share. - -------------------------------------------------------------------------------- See Notes to Financial Statements. 17 PRUDENTIAL CALIFORNIA MUNICIPAL FUND Report of Independent Accountants CALIFORNIA INCOME SERIES - -------------------------------------------------------------------------------- To the Shareholders and Board of Trustees of Prudential California Municipal Fund, California Income Series: In our opinion, the accompanying statement of assets and liabilities, including the portfolio of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of Prudential California Municipal Fund, California Income Series (the 'Fund', one of the portfolios constituting Prudential California Municipal Fund) at August 31, 1999, the results of its operations for the year then ended and the changes in its net assets for each of the two years in the period then ended and the financial highlights for each of the three years in the period then ended, in conformity with generally accepted accounting principles. These financial statements and financial highlights (hereafter referred to as 'financial statements') are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit, which included confirmation of securities at August 31, 1999 by correspondence with the custodian and brokers, provide a reasonable basis for the opinion expressed above. The accompanying financial highlights for each of the two years in the period ended August 31, 1996 were audited by other independent accountants, whose opinion dated October 14, 1996 was unqualified. PricewaterhouseCoopers LLP 1177 Avenue of the Americas New York, New York October 15, 1999 - -------------------------------------------------------------------------------- 18 PRUDENTIAL MUNICIPAL SERIES FUND Federal Income Tax Information (Unaudited) CALIFORNIA INCOME SERIES - -------------------------------------------------------------------------------- We are required by the Internal Revenue Code to advise you within 60 days of the Series' fiscal year end (August 31, 1999) as to the federal tax status of dividends paid by the Series during such fiscal year. Accordingly, we are advising you that in the fiscal year ended August 31, 1999, dividends paid from net investment income of $.56 per share for Class A shares, $.53 per Class B share, $.50 per Class C share and $.58 per Class Z share were all federally tax-exempt interest dividends. We wish to advise you that the corporate dividends received deduction for the Series is zero. Only funds that invest in U.S. equity securities are entitled to pass-through a corporate dividends received deduction. In January 2000 you will be advised on IRS Form 1099 DIV or substitute 1099 DIV as to federal tax status of the distributions received by you in calendar year 1999. - -------------------------------------------------------------------------------- 19 Comparing a $10,000 Investment - ------------------------------------------------------------------- Prudential California Municipal Fund--California Income Series vs. the Lehman Brothers Municipal Bond Index Class A (GRAPH) Average Annual Total Returns - ---------------------- With Sales Load Since Inception 7.31% (7.06%) Five Years 5.87% (5.75%) One Year -4.33% Without Sales Load Since Inception 7.69% (7.43%) Five Years 6.52% (6.39%) One Year -1.37% Class B (GRAPH) Average Annual Total Returns - ----------------------------- With Sales Load Since Inception 5.22% (5.06%) Five Years 5.95% (5.83%) One Year -6.67% Without Sales Load Since Inception 5.36% (5.20%) Five Years 6.11% (5.99%) One Year -1.67% Past performance is not indicative of future results. Principal and investment return will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. The lines beneath the graphs are designed to give you an idea of how much the Series' returns can fluctuate from year to year by measuring the best and worst calendar years in terms of total annual return since the inception of each share class. These graphs compare a $10,000 investment in the Prudential California Municipal Fund--California Income Series (Class A, B, C, and Z shares) with a similar investment in the Lehman Brothers Municipal Bond Index (the Index) by portraying the account values at the commencement of operations of Class A, B, C, and Z shares; and at the end of the fiscal year (August 31), as measured on a quarterly basis, beginning in 1990 for Class A, 1993 for Class B, 1994 for Class C, and 1996 for Class Z shares. For purposes of the graphs, and unless otherwise indicated, it has been assumed that (a) the maximum applicable front- end sales charge was deducted from the initial $10,000 investment in Class A and Class C shares; (b) the maximum applicable contingent deferred sales charges were deducted from the value of the investment in Class B and Class C shares, assuming full redemption on August 31, 1999; (c) all recurring fees (including management fees) were deducted; and (d) all dividends and distributions were reinvested. Class B shares will automatically convert to Class A shares, on a Class C (GRAPH) Average Annual Total Returns - ----------------------------- With Sales Load Since Inception 5.64% (5.52%) Five Years 5.64% (5.52%) One Year -3.89% Without Sales Load Since Inception 5.85% (5.73%) Five Years 5.85% (5.73%) One Year -1.91% Class Z (GRAPH) Average Annual Total Returns - ----------------------------- Since Inception 6.01% (5.98%) One Year -1.18% quarterly basis, approximately seven years after purchase. This conversion feature is not reflected in the graphs. Class Z shares are not subject to a sales charge or distribution and service (12b-1) fees. The graphs and accompanying tables reflect the past subsidy and/or waiver of expenses and/or management fees. Without waiver of management fees and/or expense subsidization, the Series' average annual total returns would have been lower, as indicated in parentheses ( ). The Index is a market value-weighted index comprising approximately 47,000 municipal bonds (state and local general obligation bonds, revenue bonds, insured bonds, and prerefunded bonds) selected by Lehman Brothers as representative of the long-term investment-grade municipal bond market. The Index is unmanaged, and the total return of the Index includes the reinvestment of all dividends, but does not reflect the payment of transaction costs and advisory fees associated with an investment in the Series. The securities in the Index may differ substantially from the securities in the Series. The Index is not the only index that may be used to characterize performance of municipal bond funds. Other indexes may portray different comparative performance. Investors cannot invest directly in an index. These graphs are furnished to you in accordance with SEC regulations. Prudential Mutual Funds Gateway Center Three 100 Mulberry Street Newark, NJ 07102-4077 (800) 225-1852 http://www.prudential.com Class NASDAQ Cusip A PBCAX 744313305 B PCAIX 744313404 C -- 744313800 Z -- 744313875 Trustees Edward D. Beach Eugene C. Dorsey Delayne Dedrick Gold Robert F. Gunia Thomas T. Mooney Stephen P. Munn Thomas H. O'Brien David R. Odenath, Jr. Richard A. Redeker John R. Strangfeld Nancy H. Teeters Louis A. Weil, III Officers John R. Strangfeld, President Robert F. Gunia, Vice President Grace C. Torres, Treasurer Stephen M. Ungerman, Assistant Treasurer Deborah A. Docs, Secretary David F. Connor, Assistant Secretary Manager Prudential Investments Fund Management LLC Gateway Center Three 100 Mulberry Street, Newark, NJ 07102-4077 Investment Adviser The Prudential Investment Corporation Prudential Plaza, Newark, NJ 07102-3777 Distributor Prudential Investment Management Services LLC Gateway Center Three 100 Mulberry Street, Newark, NJ 07102-4077 Custodian State Street Bank and Trust Company One Heritage Drive, North Quincy, MA 02171 Transfer Agent Prudential Mutual Fund Services LLC P.O. Box 15005, New Brunswick, NJ 08906 Independent Accountants PricewaterhouseCoopers LLP 1177 Avenue of the Americas, New York, NY 10036 Legal Counsel Swidler Berlin Shereff Friedman, LLP 919 Third Avenue, New York, NY 10022 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. This report is not authorized for distribution to prospective investors unless preceded or accompanied by a current prospectus. MF146E (ICON) Prudential California Municipal Fund - ------------------------ California Money Market Series ANNUAL REPORT Aug. 31, 1999 (LOGO) A Message from the Fund's President October 5, 1999 (PHOTO) Dear Shareholder, Prudential California Municipal Fund--California Money Market Series provided a competitive yield and a stable $1.00 net asset value during the 12-month reporting period that ended on August 31, 1999. On that date, its seven-day current yield was 2.26%, below the 2.40% for the average municipal money market fund tracked by IBC Financial Data. The following report takes a closer look at the developments in the money markets during our fiscal year, and explains how the Series was positioned accordingly. One integrated and expanded team I would like to take this opportunity to tell you about some changes we've made to our Fixed Income Group. Earlier in the year, we combined our fixed- income areas into one integrated group that will manage money for Prudential's investors and policyholders. This group now manages approximately $135 billion in assets, making it one of the three largest fixed-income money managers in the country. Our expanded depth, breadth, and scale now also allow us to tap the best talent and share investment ideas, proprietary research, and analytical tools. To utilize these resources effectively, we recently organized the group into teams, each specializing in a different sector of the fixed-income market. The one team that was already in place is the Money Markets Sector team, which has been headed by Joseph Tully since 1995. This team will continue to be responsible for the day-to-day management of your Prudential California Municipal Fund--California Money Market Series. Many of the investment professionals who supported the management of the Series in the past, including Portfolio Manager Richard Lynes, will work together to share their knowledge and strive to enhance performance. Thank you for your continued confidence in Prudential mutual funds. I firmly believe that the group's combined resources and our new team approach will make us a powerhouse in the world of fixed-income investing across all sectors. Sincerely, John R. Strangfeld President Prudential California Municipal Fund Performance Review (PHOTO) (PHOTO) Joseph Tully, Team Leader of the Money Markets Sector team, and Portfolio Manager Richard S. Lynes Investment Goals and Style Prudential California Municipal Fund--California Money Market Series seeks to provide the highest level of current income that is exempt from federal and California State income taxes, consistent with liquidity and the preservation of capital. The Series intends to invest in a portfolio of short-term municipal debt securities with maturities of 13 months or less from the state of California, its municipalities, local governments, and other qualifying issuers (such as Puerto Rico, Guam, and the U.S. Virgin Islands). There can be no assurance that the Series will achieve its investment objective. Volatile year for tax-exempt money market yields During our fiscal year that ended on August 31, 1999, tax-exempt money market yields generally trended lower in the first six months, then turned higher for the remainder of the period. This change in the direction of yields largely reflected a shift in U.S. monetary policy. The Federal Reserve had reduced the Federal funds rate (the rate U.S. banks charge each other to borrow money overnight) three times in the autumn of 1998, but reversed course in the summer of 1999 by increasing that rate twice. A global financial crisis that spread beyond Asia was the catalyst that prompted the Fed to lower the Federal funds rate by a quarter of a percentage point three times, leaving it at 4.75% in November 1998. In reducing this rate, the Fed intended to stabilize fixed-income markets by cutting borrowing costs. Furthermore, the lower borrowing costs would help bolster U.S. economic growth. The U.S. economy seemed to need a boost because Asian nations, weakened by the global financial crisis, were expected to purchase far fewer exports from the United States. Stiff competition Besides the short-term rate cuts, tax-exempt money market yields slid in the first half of our fiscal year as demand for newly issued securities outstripped the supply. The supply was also constrained because short-term borrowing Tracking Municipal Money Market Fund Yields (GRAPH) needs of some state and local governments normally decline amid favorable economic conditions. Some local governments also preferred to issue longer- term debt securities instead of money market eligible securities in order to lock in low yields for a longer period of time. In June 1999, local governments in California chose to issue notes maturing in 15 months instead of tax-exempt money market securities, which come due in 13 months or less. Not surprisingly, the supply-demand imbalance was particularly pronounced in California, where many residents in higher federal income tax brackets seek the tax advantage afforded by municipal debt securities. We faced stiff competition for high-quality, longer-term California money market securities. As a result, we could not purchase enough longer-term California money market securities to dramatically lengthen the Series' weighted average maturity (WAM). WAM is a measurement tool that determines a fund's sensitivity to changes in interest rates. It takes into account the maturity level of each security held by a fund. Significantly extending the WAM would have helped the Series' yield to remain higher for a longer period of time as municipal money market yields declined. Unfortunately, the Series' WAM remained shorter than that of its competition from the beginning of our fiscal year well into 1999, which hurt our performance. Spring brought attractive buying opportunities We were finally able to begin lengthening the Series' WAM substantially in April 1999. By this time, investors were worried that the surprisingly powerful U.S. economy would overheat and spark higher inflation, which erodes the value of bonds. To compensate for this risk, investors demanded higher yields on debt securities. We purchased various AAA-rated, insured California bonds maturing in one year or less, which were a good alternative to the more conventional municipal money market securities These short-term bonds provided attractive yields to compensate for the fact that they come in small- to moderate-sized blocks. Many portfolio managers prefer to buy larger blocks of bonds because they can be easier to sell. However, the one-year California bonds suited us because we plan to hold them to maturity. The rise in municipal money market yields accelerated in June as it became clear the Fed would boost short-term rates to slow U.S. economic growth and avoid higher inflation. On June 30, 1999, the Federal funds rate was increased by a quarter of a percentage point to Fund Facts As of 8/31/99
7-Day Net Asset Taxable Equivalent Yield* Weighted Avg. Net Assets Current Yld. Value (NAV) @31% @36% @39.6% Mat. (WAM) (Millions) CA Money Market Series 2.26% $1.00 3.61% 3.89% 4.12% 65 Days $265 IBC Financial Data Tax-Free State Specific (SB & GP-CA) Avg.** 2.40% $1.00 3.83% 4.13% 4.38% 58 Days N/Ax
Note: Yields will fluctuate from time to time, and past performance is not indicative of future results. An investment in the Series is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although the Series seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in the Series. *Some investors may be subject to the federal alternative minimum tax and/or state and local taxes. Taxable equivalent yields reflect federal and applicable state tax rates. **International Business Communications (IBC) Financial Data reports the 7-Day Current Yield, NAV, and WAM on Mondays. This is the data of all funds in the IBC Financial Data Tax-Free State Specific Average (Stock Broker (SB) & General Purpose (GP)--California) category as of August 30, 1999. - ------------------------------------------------------------------------------- 1 Review Cont'd. 5.00%. That move was followed by a second of the same magnitude on August 24, 1999, which left the rate at 5.25%. This time the Fed also hiked the discount rate (the rate it charges member banks to borrow at the discount window) to 4.75% from 4.50%. Looking back, the Series would have derived greater benefit had we invested less money in April and more after the Fed rate hikes when tax- exempt money market yields were significantly higher. Looking Ahead We're eyeing seasoned California notes As mentioned earlier, some local governments in California issued 15-month notes in June 1999 instead of eligible tax-exempt money market securities. This included the counties of San Bernardino, Contra Costa, Santa Clara, and San Diego. Because the Series is restricted to owning debt securities that mature in 13 months or less, we could not purchase any of the roughly $1 billion of newly issued 15-month notes. However, the notes have been outstanding for more than two months, so we can begin to purchase them when they provide an opportunity to enhance the Series' yield. Turning to U.S. monetary policy, the Fed released a statement after its most recent meeting in early October 1999, indicating it may consider hiking short- term rates in the near future and will be "especially alert" to trends that could boost inflationary pressures. Therefore, market participants will pay close attention to data on employment and consumer spending for goods and services, which is the main engine of the U.S. economy. If this data indicates that the U.S. economy is continuing to expand at a rapid pace, we believe there is a chance the Fed will hike rates in November 1999 to reverse the last of three rate cuts from the autumn of 1998. Weighted Average Maturity Compared to the Average Municipal Money Fund (GRAPH) - ------------------------------------------------------------------------------- 2 PRUDENTIAL CALIFORNIA MUNICIPAL FUND Portfolio of Investments as of August 31, 1999 CALIFORNIA MONEY MARKET SERIES - --------------------------------------------------------------------------------
Moody's Principal Rating Interest Maturity Amount Value Description (a) (Unaudited) Rate Date (000) (Note 1) - ------------------------------------------------------------------------------------------------------------------------------ Abag Fin. Auth., Harken School Foundation, Ser. 98, F.R.W.D. NR 2.90% 9/01/99 $ 3,870 $ 3,870,000 Alameda-Contra Costa Schs. Fin. Auth., Capital Improvements Fin. Proj., Ser. G, F.R.W.D., A.M.B.A.C. A-1+(d) 2.90 9/02/99 4,700 4,700,000 California Econ. Dev. Fin. Auth. Rev., Mannesmann Dematic Rapistan Corp., Ser. 98, F.R.W.D., A.M.T. NR 3.25 9/02/99 3,200 3,200,000 California Hsg. Fin. Agcy., Home Mtg. Rev., Ser. 99D, A.O.T. MIG1 3.02 4/30/00 3,635 3,635,000 Single Family Mtg. Rev., Ser. 99B, F.G.I.C., A.O.T., A.M.T. MIG1 3.00 2/01/00 450 450,000 California Poll. Ctrl. Fin. Auth. Rev., Arco Proj., Ser. 97A, F.R.W.D., A.M.T. A-1(d) 2.80 9/01/99 2,900 2,900,000 Greenwaste Recovery Proj., Ser. 99B, F.R.W.D., A.M.T. NR 3.05 9/02/99 3,625 3,625,000 Shell Oil Martinez Refining Co., Ser. 96B, F.R.D.D. NR 2.65 9/01/99 1,300 1,300,000 U.S. Borax Inc. Proj., Ser. 95A, F.R.W.D. NR 3.15 9/02/99 5,100 5,100,000 California Sch. Cash Reserve Prog. Auth., Ser. A, A.M.B.A.C. MIG1 4.00 7/03/00 6,000 6,043,774 California St., Gen. Oblig. Aa3 6.90 3/01/00 1,100 1,121,058 Gen. Oblig. Aa3 6.70 5/01/00 1,425 1,457,662 Gen. Oblig., F.G.I.C. Aaa 6.00 11/01/99 2,200 2,211,651 Gen. Oblig., T.E.C.P. P-1 3.20 10/08/99 3,700 3,700,000 California St., Tend. Option Cert., Ser. 98A, F.R.W.D.S., M.B.I.A. VMIG1 3.20 9/01/99 13,675 13,675,000 California Statewide Cmntys. Dev. Auth., Chevron Proj., Ser. 94, F.R.D.D., A.M.T. P-1 2.70 9/01/99 5,500 5,500,000 Kimberly Woods Apts., Ser. 95B, F.R.W.D., F.N.M.A., A.M.T. A-1+(d) 2.90 9/01/99 2,000 2,000,000 Villa Paseo Senior Res., Multi-family Rev., Ser. 98MM, F.R.W.D., A.M.T. A-1+(d) 2.90 9/02/99 4,000 4,000,000 Camarillo Multi-family Hsg. Rev., Hacienda De Camarillo Proj., Ser. 96, F.R.W.D., A.M.T. A-1+(d) 2.90 9/02/99 3,000 3,000,000 City of Fowler Ind. Dev. Auth., Bee Sweet Citrus, Ser. 95, F.R.W.D., A.M.T. NR 2.95 9/02/99 1,600 1,600,000 City of Westminster, 1998 Civic Center Proj., Ser. A, F.R.W.D., A.M.B.A.C. A-1(d) 2.90 9/02/99 4,200 4,200,000 Fresno Multi-family Hsg. Rev., Heron Pointe Apt. Proj., Ser. 96A, F.R.W.D. VMIG1 2.85 9/01/99 4,900 4,900,000 Sunrise of Fresno Proj., Ser. 96A, F.R.W.D., A.M.T. A-1+(d) 3.44 9/02/99 5,500 5,500,000 Kern Cnty. Superintendent of Schs., Master Lease, Ser. 96A, F.R.W.D. A-1+(d) 2.95 9/02/99 12,890 12,890,000 Kern Cnty., Ser. 90, T.R.A.N. SP-1+(d) 4.00 6/30/00 4,000 4,027,262
- -------------------------------------------------------------------------------- See Notes to Financial Statements. 3 PRUDENTIAL CALIFORNIA MUNICIPAL FUND Portfolio of Investments as of August 31, 1999 CALIFORNIA MONEY MARKET SERIES - --------------------------------------------------------------------------------
Moody's Principal Rating Interest Maturity Amount Value Description (a) (Unaudited) Rate Date (000) (Note 1) - ------------------------------------------------------------------------------------------------------------------------------ Lassen Muni. Util. Dist. Rev., Refunding Rev., Ser. 96A, F.R.W.D., F.S.A., A.M.T. VMIG1 3.20% 9/02/99 $ 5,800 $ 5,800,000 Los Angeles Cnty. Metropolitan Trans. Auth., Sales Tax Rev., Ser. SG55, F.R.W.D.S., M.B.I.A. A-1+(d) 3.04 9/02/99 3,000 3,000,000 Los Angeles Cnty., T.R.A.N. MIG1 4.00 6/30/00 6,100 6,133,219 Los Angeles Comm. Redev. Agcy., Multi-family Rev., Lanewood Apts. Proj., Ser. 85, F.R.W.D. VMIG1 2.80 9/01/99 7,800 7,800,000 Los Angeles Convention & Exhibition Center Auth., Lease Rev., Ser. 98-21, F.R.W.D.S., M.B.I.A. VMIG1 3.10 9/01/99 3,900 3,900,000 Los Rios Comm. Coll. Dist., Ser. 98-99, T.R.A.N. SP-1+(d) 3.50 1/21/00 1,000 1,001,714 Metropolitan Wtr. Dist. So. Cal., Waterworks Rev., Ser. 97B, F.R.W.D. VMIG1 2.75 9/02/99 4,000 4,000,000 Modesto Irrigation Dist. Fin. Auth. Rev., Refunding Geysers, Ser. A, M.B.I.A. Aaa 4.50 10/01/99 3,775 3,779,763 North City West Sch. Facilities Fin. Auth., Ser. 89A Aaa 7.85 9/01/99 3,800 (c) 3,876,000 Northern Cal. Transmission Agcy., California-Oregon Trans. Proj., Ser. 90A Aaa 7.00 5/01/00 8,770 (c) 9,127,614 Oakland Unified Sch. Dist., Alameda Cnty., Ser. 98-99, T.R.A.N. SP-1+(d) 3.25 11/09/99 7,000 7,005,785 Ontario Rev. Hsg. Fin., Ser. 97A, F.R.W.D. A-1+(d) 3.10 9/02/99 2,900 2,900,000 Palmdale Cmnty. Redev. Agcy., Multi-family Rev., Manzania Village Apts., Ser. 99A, F.R.W.D. VMIG1 2.85 9/02/99 3,400 3,400,000 Port of Oakland, Port Rev., Ser. 99-A1, F.R.W.D.S., M.B.I.A., A.M.T. VMIG1 3.15 9/01/99 1,775 1,775,000 Puerto Rico Comnwlth., Govt. Dev. Bank., Ser. 95, T.E.C.P. A-1+(d) 3.10 9/07/99 5,000 5,000,000 Puerto Rico Ind. Ed. Medical & Environmental Ctrl. Fac. Fin. Auth., Higher Ed. Rev., Ana G. Mendez Univ. Sys., Ser. 98, F.R.W.D. A-1(d) 2.90 9/01/99 2,500 2,500,000 Sacramento Cnty. Hsg. Auth., Multi-family Rev., Chesapeake Apts., Ser. A, F.R.W.D., A.M.T. A-1+(d) 2.95 9/02/99 5,000 5,000,000 Salinas Multi-family Hsg. Rev., Brentwood Garden Apts., Ser. 97A, F.R.W.D. A-1+(d) 2.75 9/02/99 8,480 8,480,000 San Bernardino Cnty. Multi-family Hsg. Rev., Evergreen Apts., Ser. 99A, F.R.W.D., F.N.M.A. A-1+(d) 2.75 9/02/99 2,700 2,700,000 San Bernardino Cnty. Redev. Agcy., Silverwood Apt. Proj., Ser. 86, F.R.W.D., A.M.T. A-1+(d) 2.95 9/02/99 7,000 7,000,000 San Francisco Airport, Ser. SSP32, F.R.W.D.S., F.G.I.C., A.M.T. VMIG1 3.30 9/08/99 13,500 13,500,000 San Jose Multi-family Hsg. Rev., Sienna At Rennaissance Square, Ser. 96A, F.R.W.D., A.M.T. VMIG1 2.95 9/01/99 7,500 7,500,000
- -------------------------------------------------------------------------------- See Notes to Financial Statements. 4 PRUDENTIAL CALIFORNIA MUNICIPAL FUND Portfolio of Investments as of August 31, 1999 CALIFORNIA MONEY MARKET SERIES - --------------------------------------------------------------------------------
Moody's Principal Rating Interest Maturity Amount Value Description (a) (Unaudited) Rate Date (000) (Note 1) - ------------------------------------------------------------------------------------------------------------------------------ San Mateo Cnty. Multi-family Hsg. Rev., Pacific Oaks Apt. Proj., Ser. 87A, F.R.W.D., A.M.T. VMIG1 3.00% 9/01/99 $ 2,600 $ 2,600,000 Santa Paula CA, Sch. Dist., T.R.A.N. SP-1+(d) 3.50 6/30/00 2,000 2,005,777 Southern Cal. Pub. Pwr. Auth., Pwr. Proj. Rev., Ser. 89 Aaa 6.00 7/01/00 6,235 (c) 6,382,124 Stockton East Wtr. Dist., Proj., Ser. 90A AAA(d) 7.30 4/01/00 9,680 (c) 10,113,412 Torrance CA, Hosp. Rev., Little Company of Mary Hospital, Ser. 92, F.R.W.D. A-1+(d) 2.95 9/02/99 10,800 10,800,000 Ventura Cnty., Ser. 99, T.R.A.N. MIG1 4.00 7/06/00 5,000 5,032,691 Westminster Redev. Agcy., Westminster Commercial Proj. Pound1, Ser. 97, F.R.W.D., A.M.B.A.C. A-1+(d) 2.90 9/02/99 7,630 7,630,000 ------------ Total Investments--99.6% (cost $264,349,506(e)) 264,349,506 Other assets in excess of liabilities--0.4% 1,123,125 ------------ Net Assets--100% $265,472,631 ------------ ------------
- --------------- (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.O.T.--Annual Optional Tender. F.G.I.C.--Financial Guaranty Insurance Company. F.N.M.A.--Federal National Mortgage Association. F.R.D.D.--Floating Rate (Daily) Demand Note (b). F.R.W.D.--Floating Rate (Weekly) Demand Note (b). F.R.W.D.S.--Floating Rate (Weekly) Demand Synthetic Note (b). F.S.A.--Financial Security Assurance. M.B.I.A.--Municipal Bond Insurance Association. T.E.C.P.--Tax-Exempt Commercial Paper. T.R.A.N.--Tax & Revenue Anticipation Note. (b) For purposes of amortized cost valuation, the maturity date of Floating Rate Demand Notes is considered to be the later of the next date on which the security can be redeemed at par, or the next date on which the rate of interest is adjusted. (c) Prerefunded issues are secured by escrowed cash and/or direct U.S. guaranteed obligations. (d) Standard & Poor's Rating. (e) The cost of securities for federal income tax purposes is substantially the same as for financial reporting purposes. 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. 5 PRUDENTIAL CALIFORNIA MUNICIPAL FUND Statement of Assets and Liabilities CALIFORNIA MONEY MARKET SERIES - --------------------------------------------------------------------------------
Assets August 31, 1999 Investments, at amortized cost which approximates market value............................................ $ 264,349,506 Cash...................................................................................................... 31,710 Receivable for Series shares sold......................................................................... 2,883,711 Interest receivable....................................................................................... 2,053,767 Other assets.............................................................................................. 6,530 --------------- Total assets........................................................................................... 269,325,224 --------------- Liabilities Payable for Series shares reacquired...................................................................... 3,555,044 Management fee payable.................................................................................... 116,376 Dividends payable......................................................................................... 101,716 Accrued expenses.......................................................................................... 54,110 Distribution fee payable.................................................................................. 15,963 Deferred trustee's fees................................................................................... 9,384 --------------- Total liabilities...................................................................................... 3,852,593 --------------- Net Assets................................................................................................ $ 265,472,631 --------------- --------------- Net assets were comprised of: Shares of beneficial interest, at $.01 par value....................................................... $ 2,654,726 Paid-in capital in excess of par....................................................................... 262,817,905 --------------- Net assets, August 31, 1999............................................................................... $ 265,472,631 --------------- --------------- Net asset value, offering price and redemption price per share ($265,472,631 / 265,472,631 shares of beneficial interest issued and outstanding; unlimited number of shares authorized)..................................................................................... $1.00 --------------- ---------------
- -------------------------------------------------------------------------------- See Notes to Financial Statements. 6 PRUDENTIAL CALIFORNIA MUNICIPAL FUND CALIFORNIA MONEY MARKET SERIES Statement of Operations - ------------------------------------------------------------
Year Ended Net Investment Income August 31, 1999 Income Interest earned.......................... $ 8,719,132 --------------- Expenses Management fee........................... 1,445,776 Distribution fee......................... 361,444 Transfer agent's fees and expenses....... 82,000 Custodian's fees and expenses............ 71,000 Reports to shareholders.................. 40,000 Registration fees........................ 26,000 Legal fees and expenses.................. 14,000 Audit fees and expenses.................. 13,000 Trustees' fees and expenses.............. 7,000 Miscellaneous............................ 6,946 --------------- Total expenses........................ 2,067,166 Less: Custodian fee credit (Note 1)...... (8,962) --------------- Net expenses.......................... 2,058,204 --------------- Net investment income....................... 6,660,928 Realized Gain on Investments Net realized gain on investment transactions............................. 18,632 --------------- Net Increase in Net Assets Resulting from Operations................... $ 6,679,560 --------------- ---------------
PRUDENTIAL CALIFORNIA MUNICIPAL FUND CALIFORNIA MONEY MARKET SERIES Statement of Changes in Net Assets - ------------------------------------------------------------
Increase (Decrease) Year Ended August 31, in Net Assets 1999 1998 Operations Net investment income..... $ 6,660,928 $ 7,948,963 Net realized gain on investment transactions........... 18,632 -- --------------- --------------- Net increase in net assets resulting from operations............. 6,679,560 7,948,963 --------------- --------------- Dividends and distributions (Note 1).................. (6,679,560) (7,948,963) --------------- --------------- Series share transactions (at $1 per share) Net proceeds from shares sold................... 1,284,076,534 1,442,499,792 Net asset value of shares issued to shareholders in reinvestment of dividends and distributions.......... 6,453,709 7,729,112 Cost of shares reacquired............. (1,326,335,873) (1,434,231,046) --------------- --------------- Net increase (decrease) in net assets from Series share transactions..... (35,805,630) 15,997,858 --------------- --------------- Total increase (decrease).... (35,805,630) 15,997,858 Net Assets Beginning of year............ 301,278,261 285,280,403 --------------- --------------- End of year.................. $ 265,472,631 $ 301,278,261 --------------- --------------- --------------- ---------------
- -------------------------------------------------------------------------------- See Notes to Financial Statements. 7 PRUDENTIAL CALIFORNIA MUNICIPAL FUND Notes to Financial Statements CALIFORNIA MONEY MARKET SERIES - -------------------------------------------------------------------------------- Prudential California Municipal Fund (the 'Fund') is registered under the Investment Company Act of 1940, as an open-end investment company. The Fund was organized as a Massachusetts business trust on May 18, 1984 and consists of three series. The monies of each series are invested in separate, independently managed portfolios. The California Money Market Series (the 'Series') commenced investment operations on March 3, 1989. The Series is diversified and seeks to achieve its investment objective of obtaining the maximum amount of income exempt from California state and federal income taxes with the minimum risk by investing in 'investment grade' tax-exempt securities having a maturity of 13 months or less and whose ratings are within the two highest ratings categories by a nationally recognized statistical rating organization or, if not rated, are of comparable quality. The ability of the issuers of the securities held by the Series to meet their obligations may be affected by economic developments in a specific state, industry or region. - ------------------------------------------------------------ Note 1. Accounting Policies The following is a summary of significant accounting policies followed by the Fund, and the Series, in the preparation of its financial statements. Securities Valuations: Portfolio securities of the Series are valued at amortized cost, which approximates market value. The amortized cost method of valuation involves valuing a security at its cost on the date of purchase and thereafter assuming a constant amortization to maturity of any discount or premium. All securities are valued as of 4:30 p.m., New York time. Securities Transactions and Net Investment Income: Securities transactions are recorded on the trade date. Realized gains and losses on sales of investments are calculated on the identified cost basis. Interest income is recorded on the accrual basis. The Series amortizes premiums and accretes original issue discount on portfolio securities as adjustments to interest income. Expenses are recorded on the accrual basis which may require the use of certain estimates by management. Federal Income Taxes: For federal income tax purposes, each series in the Fund is treated as a separate taxpaying entity. It is the intent of the Series to continue to meet the requirements of the Internal Revenue Code applicable to regulated investment companies and to distribute all of its net income to shareholders. For this reason, no federal income tax provision is required. Dividends: The Series declares daily dividends from net investment income and net realized short-term capital gains or losses. Payment of dividends is made monthly. Income distributions and capital gain distributions are determined in accordance with income tax regulations which may differ from generally accepted accounting principles. Custody Fee Credits: The Fund has an arrangement with its custodian bank, whereby uninvested monies earn credits which reduce the fees charged by the custodian. - ------------------------------------------------------------ Note 2. Agreements The Fund has a management agreement with Prudential Investments Fund Management LLC ('PIFM'). Pursuant to this agreement, PIFM has responsibility for all investment advisory services and supervises the subadviser's performance of such services. PIFM has entered into a subadvisory agreement with The Prudential Investment Corporation ('PIC'); PIC furnishes investment advisory services in connection with the management of the Fund. PIFM pays for the cost of the subadviser's services, the compensation of officers of the Fund, occupancy and certain clerical and bookkeeping costs of the Fund. The Fund bears all other costs and expenses. The management fee paid PIFM is computed daily and payable monthly, at an annual rate of .50 of 1% of the average daily net assets of the Series. The Fund has a distribution agreement with Prudential Investment Management Services LLC ('PIMS') which acts as the distributor of the Fund. The Fund compensates PIMS for distributing and servicing the Fund's shares pursuant to the plan of distribution regardless of expenses actually incurred by them. The Series reimburses 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. PIC, PIMS and PIFM are indirect, wholly owned subsidiaries of The Prudential Insurance Company of America. - ------------------------------------------------------------ Note 3. Other Transactions with Affiliates Prudential Mutual Fund Services LLC ('PMFS'), a wholly owned subsidiary of PIFM, serves as the Fund's transfer agent. During the year ended August 31, 1999, the Series incurred fees of approximately $67,800 for the services of PMFS. As of August 31, 1999, approximately $5,200 of such fees were due to PMFS. Transfer agent fees and expenses in the Statement of Operations include certain out-of-pocket expenses paid to nonaffiliates. - -------------------------------------------------------------------------------- 8 PRUDENTIAL CALIFORNIA MUNICIPAL FUND Financial Highlights CALIFORNIA MONEY MARKET SERIES - --------------------------------------------------------------------------------
Year Ended August 31, ------------------------------------------------------------ 1999 1998 1997 1996 1995 -------- -------- -------- -------- -------- PER SHARE OPERATING PERFORMANCE: Net asset value, beginning of year................................ $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 Net investment income and net realized gains/losses............... .02 .03 .03 .03 .02(b) Dividends and distributions....................................... (.02) (.03) (.03) (.03) (.03) Capital contribution by affiliate................................. -- -- -- -- .01 -------- -------- -------- -------- -------- Net asset value, end of year...................................... $ 1.00 $ 1.00 $ 1.00 $ 1.00 $ 1.00 -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- TOTAL RETURN(a):.................................................. 2.34% 2.81% 2.85% 2.88% 3.01%(b) RATIOS/SUPPLEMENTAL DATA: Net assets, end of year (000)..................................... $265,473 $301,278 $285,280 $249,833 $229,380 Average net assets (000).......................................... $289,155 $287,250 $277,720 $256,175 $243,130 Ratios to average net assets: Expenses, including distribution fee........................... .71% .72% .73% .74% .78% Expenses, excluding distribution fee........................... .59% .60% .61% .62% .65% Net investment income.......................................... 2.30% 2.77% 2.80% 2.83% 2.93%
- --------------- (a) Total return includes reinvestment of dividends and distributions. (b) Includes $.01 of net realized loss on investment transactions that was offset by a capital contribution by affiliate. Without the effect of the capital contribution, the Series' total return would have been 1.88%. - -------------------------------------------------------------------------------- See Notes to Financial Statements. 9 PRUDENTIAL CALIFORNIA MUNICIPAL FUND Report of Independent Accountants CALIFORNIA MONEY MARKET SERIES - -------------------------------------------------------------------------------- To the Shareholders and Board of Trustees of Prudential California Municipal Fund, California Money Market Series: In our opinion, the accompanying statement of assets and liabilities, including the portfolio of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of Prudential California Municipal Fund, California Money Market Series (the 'Fund', one of the portfolios constituting Prudential California Municipal Fund) at August 31, 1999, the results of its operations for the year then ended and the changes in its net assets for each of the two years in the period then ended and the financial highlights for each of the three years in the period then ended, in conformity with generally accepted accounting principles. These financial statements and financial highlights (hereafter referred to as 'financial statements') are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at August 31, 1999 by correspondence with the custodian, provide a reasonable basis for the opinion expressed above. The accompanying financial highlights for each of the two years in the period ended August 31, 1996 were audited by other independent accountants, whose opinion dated October 14, 1996 was unqualified. PricewaterhouseCoopers LLP 1177 Avenue of the Americas New York, New York October 15, 1999 - -------------------------------------------------------------------------------- 10 PRUDENTIAL CALIFORNIA MUNICIPAL FUND Federal Income Tax Information (Unaudited) CALIFORNIA MONEY MARKET SERIES - -------------------------------------------------------------------------------- We are required by the Internal Revenue Code to advise you within 60 days of the Series' fiscal year end (August 31, 1999) as to the federal tax status of dividends and distributions paid by the Series during such fiscal year. Accordingly, we are advising you that for the year ended August 31, 1999, dividends paid from net investment income totalling $.02 per share were all federally tax-exempt interest dividends. - -------------------------------------------------------------------------------- 11 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. 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 in the U.S. market and denominated in U.S. dollars. 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 Prudential/Pruco Securities registered representative. Your advisor or representative can provide you with the following services: There's No Reward Without Risk; but Is This Risk Worth It? Your financial advisor or registered representative 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 under-stands the markets and who knows you! Keeping Up With the Joneses A financial advisor or registered representative can help you wade through the numerous available mutual funds to find the ones that fit your own 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 advisor or registered representative 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 advisor or registered representative can answer questions when you're confused or worried about your investment, and should remind you that you're investing for the long haul. Prudential Mutual Funds Gateway Center Three 100 Mulberry Street Newark, NJ 07102-4077 (800) 225-1852 http://www.prudential.com Cusip 744313503 Trustees Edward D. Beach Eugene C. Dorsey Delayne Dedrick Gold Robert F. Gunia Thomas T. Mooney Stephen P. Munn Thomas H. O'Brien David R. Odenath, Jr. Richard A. Redeker John R. Strangfeld Nancy H. Teeters Louis A. Weil, III Officers John R. Strangfeld, President Robert F. Gunia, Vice President Grace C. Torres, Treasurer Stephen M. Ungerman, Assistant Treasurer Deborah A. Docs, Secretary David F. Connor, Assistant Secretary Manager Prudential Investments Fund Management LLC Gateway Center Three 100 Mulberry Street, Newark, NJ 07102-4077 Investment Adviser The Prudential Investment Corporation Prudential Plaza, Newark, NJ 07102-3777 Distributor Prudential Investment Management Services LLC Gateway Center Three 100 Mulberry Street, Newark, NJ 07102-4077 Custodian State Street Bank and Trust Company One Heritage Drive, North Quincy, MA 02171 Transfer Agent Prudential Mutual Fund Services LLC P.O. Box 15005, New Brunswick, NJ 08906 Independent Accountants PricewaterhouseCoopers LLP 1177 Avenue of the Americas, New York, NY 10036 Legal Counsel Swidler Berlin Shereff Friedman, LLP 919 Third Avenue, New York, NY 10022 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. This report is not authorized for distribution to prospective investors unless preceded or accompanied by a current prospectus. MF139E -----END PRIVACY-ENHANCED MESSAGE-----