<PAGE>
Letter to Shareholders
February 10, 1994
Dear Shareholder:
The mortgage-backed securities market, faced with record high mortgage
prepayments and extremely low interest rates, exhibited moderate returns in
the past 12 months. The Prudential GNMA Fund reflected this general trend and
attained moderate returns in this environment.
Fund Performance
As of 12/31/93
<TABLE>
<CAPTION>
One-Year Net Asset Value
Total Return 12/31/93 12/31/92
<S> <C> <C> <C>
Class A 4.97% $14.75 $15.07
Class B 4.29% $14.71 $15.04
</TABLE>
An investment in the Fund is neither insured nor guaranteed by the U.S.
Government. Past performance is no guarantee of future results, and an
investor's shares when redeemed, may be worth more or less than their original
value.
Average Annual Returns*
As of December 31, 1993
<TABLE>
<CAPTION>
One Year Five Year Ten Year Since Inception**
<S> <C> <C> <C> <C>
Class A 0.24% N/A N/A 7.11%
Class B -0.71% 8.39% 8.93% 9.64%
</TABLE>
*Returns assume payment of applicable sales charges. The Class A figures
assume the imposition of a 4.50% front-end sales load. For Class B shares, the
1, 5, 10 year and since inception returns assume the effect of a contingent
deferred sales charge of 5%, 1%, 0% and 0%, respectively.
**Inception of Class A 1/22/90; Class B 3/25/82.
The Fund paid out $1.06 per Class A share and $0.97 per Class B share in
dividends in 1993.
SHAREHOLDER UPDATE
We are pleased to announce that David Graham recently joined Prudential
Investment Advisors as portfolio manager of the Prudential GNMA Fund. David
has experience in the government and mortgage-backed securities market after
managing over $2.0 billion at Equitable Capital Management and Alliance
Capital Management Group. David began his career with both an M.B.A. and
a B.S. in Finance from Indiana University.
Fund Overview
The Fund seeks high income, consistent with reasonable preservation of
principal by investing in a portfolio of mortgage-backed securities guaranteed
by the Government National Mortgage Association.
While investing primarily in GNMAs, the Fund also invests in other U.S.
government obligations and high-quality asset-backed securities. As of December
31, 1993, 92.7% of the Fund's net assets were invested in mortgages, including
90.2% in GNMAs and FNMAs. As you will note in the year-end Portfolio of
Investments, the Fund's GNMA holdings as a percent of gross assets were
temporarily lower due to trading activities resulting from the portfolio
restructuring (see "Looking to 1994") and the monthly settlement nature of
GNMA securities.
1
<PAGE>
Low Rates Affect Returns
With 1993 interest rates at 30 year lows, mortgage-backed security holders
had little good news. Unlike traditional U.S. Treasury bonds, which usually
appreciate as rates decline, mortgage-backed securities can be adversely
affected by low interest rates. During periods of low rates, homeowners rush
to refinance their older, higher-rate mortgages with new lower-rate mortgages.
Since these securities are backed by the old loans, they are paid down and
called out of the marketplace. As a result, holders of these instruments, such
as your Fund, are forced to search for replacements, usually at lower interest
rates.
Attempts to Protect the Fund
In order to help temper any adverse effects caused by prepayment risk, the
Fund took several actions:
- We reduced the portfolio's average coupon to 8.3% from 8.8%. At year end,
approximately half the portfolio was invested in mortgages with coupons rates
under 8.0%, which tend to be less vulnerable to prepayments.
- We increased the non-GNMA mortgage holdings in the portfolio to 19% from
about 16%. Although GNMAs are traditionally more resistant to prepayment risk
than other federally sponsored mortgages, they could not avoid the effects of
prepayments last year. That led to stiffer than anticipated price discounts
when prepayments spiked upward.
- We raised the level of Treasury holdings from time to time during the
year-to as much as 9% from our normal level of about 6%-to take advantage of
the recent bond rally. Although Treasury bonds typically have lower yields
than mortgage-backed securities, they tend to appreciate faster and greater
than their mortgage counterparts when rates are falling.
Looking to 1994
We have recently begun to restructure the portfolio in anticipation of a
more stable rate environment in 1994. We anticipate that prepayments will
slack off this year if interest rates rise. In that environment, we will
aggressively search for high-coupon, seasoned mortgage-backed securities,
which may help to enhance yield. Seasoned securities are comprised of older
mortgages that have not been called despite several waves of refinancings. At
that point, many are considered relatively free from prepayment risk. Of
course, if renewed growth leads to higher inflation and rising rates, the
prices of the bonds in the Fund's portfolio could fall with most other fixed
income securities. The higher comparative coupons available through mortgages,
however, should help them to be a competitive alternative to Treasurys.
2
<PAGE>
As always, we are pleased to have you as a shareholder of the Prudential
GNMA Fund and remain committed to managing it for your long-term benefit.
Sincerely,
Lawrence C. McQuade
President
David Graham
Portfolio Manager
3
<PAGE>
<TABLE>
<CAPTION>
Principal
Amount Value
(000) Description (Note 1)
<C> <S> <C>
LONG-TERM INVESTMENTS--92.7%
U.S. Government Agency Mortgage
Pass-Through Obligations--90.2%
Federal National Mortgage
Association,
$ 5,022 6.00%, 12/1/99 - 11/25/00... $ 5,072,372
24,214 7.00%, 10/25/23............. 24,562,024
18,500 11.00%, 6/1/23.............. 20,766,250
Government National Mortgage
Association,
35,000+ 5.50%, 6/15/23.............. 35,989,853
50,000+ 6.50%, 6/15/23.............. 49,531,000
9,000 7.00%, 11/15/23............. 9,143,370
50,000+ 7.50%, 6/15/23.............. 51,828,000
25,000+ 8.00%, 6/15/23.............. 26,320,215
31 8.50%, 9/15/21.............. 32,791
50,697 9.50%, 3/15/16 - 3/15/19.... 54,879,058
3,496 11.00%, 3/15/10 - 7/15/20... 3,977,614
12,282 11.50%, 3/15/10 - 8/15/18... 14,124,108
1,354 12.00%, 12/15/12 -
6/15/15................... 1,567,600
------------
Total U.S. Government Agency
Mortgage Pass-Through
Obligations
(cost $297,831,058)....... 297,794,255
------------
Collateralized Mortgage Obligation--2.5%
Greenwich Capital Acceptance, Inc.,
125,000 2.25%, 1/25/24, ARM/IO
(cost $8,916,482)......... 8,281,250
------------
Total long-term investments
(cost $306,747,540)....... 306,075,505
------------
SHORT-TERM INVESTMENTS--64.5%
Commercial Paper--54.2%
Associates Corp. of North
America,
16,581 3.37%, 1/10/94............ 16,567,030
Bankers Trust Corp.,
$ 15,000 3.35%, 1/10/94............ $ 14,987,437
Ciesco, Inc.,
15,000 3.35%, 1/10/94............ 14,987,437
Falcon Asset Securitization
Corp.,
16,581 3.42%, 1/12/94............ 16,563,673
General Electric Capital
Corp.,
16,685 3.18%, 1/14/94............ 16,665,840
Household Finance Corp.,
16,581 3.40%, 1/10/94............ 16,566,906
John Hancock Capital Corp.,
15,735 3.35%, 1/3/94............. 15,732,072
Paccar Financial Corp.,
5,000 3.19%, 1/7/94............. 4,997,341
Sonoco Products Co.,
4,000 3.40%, 1/4/94............. 3,998,867
Transamerica Financial
Corp.,
13,000 3.19%, 1/10/94............ 12,989,633
11,755 3.40%, 1/7/94............. 11,748,339
UBS Finance Delaware, Inc.,
16,600 3.18%, 1/14/94............ 16,580,938
United States Leasing
International,
10,638 3.20%, 1/14/94............ 10,625,707
5,943 3.35%, 1/10/94............ 5,938,023
------------
Total Commercial Paper
(cost $178,949,243)....... 178,949,243
------------
Repurchase Agreement--10.3%
Joint Repurchase Agreement
Account,
34,178 3.15%, 1/3/94 (Note 5)
(cost $34,178,000)........ 34,178,000
------------
Total short-term investments
(cost $213,127,243)....... 213,127,243
------------
</TABLE>
-4- See Notes to Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
Principal
Amount Value
(000) Description (Note 1)
<C> <S> <C>
Total Investments--157.2%
(cost $519,874,783; Note
4)........................ $519,202,748
Liabilities in excess of
other assets--(57.2%)..... (188,939,379)
------------
Net Assets--100%............ $330,263,369
------------
------------
<FN>
- ---------------
ARM/IO--Adjustable Rate Mortgage--Interest Only.
+ Indicates a delayed-delivery security.
</TABLE>
The industry classification breakdown shown as percentages of net assets for
the commercial paper held as of December 31, 1993 was as follows:
<TABLE>
<S> <C>
Personal Credit Institutions.............. 17.5%
Asset-Backed Securities................... 9.6
Short-Term Business Credit................ 6.6
Commercial Banks.......................... 5.0
Computer Rental & Leasing................. 5.0
Life Insurance............................ 4.8
Bank Holding Companies.................... 4.5
Paperboard Mills.......................... 1.2
-----
54.2%
-----
-----
</TABLE>
-5- See Notes to Financial Statements.
<PAGE>
PRUDENTIAL GNMA FUND
Statement of Assets and Liabilities
<TABLE>
<CAPTION>
December 31,
1993
------------
<S> <C>
Assets
Investments, at value (cost $519,874,783)................................................. $519,202,748
Cash...................................................................................... 19,564
Receivable for investments sold........................................................... 4,431,472
Interest receivable....................................................................... 956,496
Receivable for Fund shares sold........................................................... 923,775
Deferred expenses and other assets........................................................ 8,603
------------
Total assets.......................................................................... 525,542,658
------------
Liabilities
Payable for investments purchased......................................................... 193,720,477
Payable for Fund shares reacquired........................................................ 916,946
Accrued expenses.......................................................................... 240,183
Due to Distributors....................................................................... 206,348
Due to Manager............................................................................ 141,261
Dividends payable......................................................................... 54,074
------------
Total liabilities..................................................................... 195,279,289
------------
Net Assets................................................................................ $330,263,369
------------
------------
Net assets were comprised of:
Common stock, at par.................................................................... $ 224,533
Paid-in capital in excess of par........................................................ 340,993,821
------------
341,218,354
Undistributed net investment income..................................................... 1,041,122
Accumulated net realized loss on investments............................................ (11,324,072)
Net unrealized depreciation on investments.............................................. (672,035)
------------
Net assets, December 31, 1993............................................................. $330,263,369
------------
------------
Class A:
Net asset value and redemption price per share ($10,862,748 - 736,618 shares of common
stock issued and outstanding)......................................................... $14.75
Maximum sales charge (4.5% of offering price)........................................... .69
------------
Maximum offering price to public........................................................ $15.44
------------
------------
Class B:
Net asset value, offering price and redemption price per share ($319,400,621 -
21,716,727 shares of common stock issued and outstanding)............................. $14.71
------------
------------
</TABLE>
See Notes to Financial Statements.
-6-
<PAGE>
PRUDENTIAL GNMA FUND
Statement of Operations
<TABLE>
<CAPTION>
Year Ended
December 31,
Investment Income 1993
-----------
<S> <C>
Income
Interest............................. $25,452,568
-----------
Expenses
Distribution fee--Class A............ 15,299
Distribution fee--Class B............ 2,495,486
Management fee....................... 1,714,652
Transfer agent's fees and expenses... 587,000
Custodian's fees and expenses........ 317,000
Registration fees.................... 65,000
Reports to shareholders.............. 51,000
Audit fee............................ 50,000
Franchise taxes...................... 50,000
Directors' fees...................... 45,000
Legal fees........................... 23,000
Miscellaneous........................ 15,244
-----------
Total expenses..................... 5,428,681
-----------
Net investment income.................. 20,023,887
Realized and Unrealized Gain (Loss) on
Investments
Net realized gain on investment
transactions......................... 3,445,442
Net change in unrealized
appreciation/depreciation
of investments....................... (9,007,572)
-----------
Net loss on investments................ (5,562,130)
-----------
Net Increase in Net Assets
Resulting from Operations.............. $14,461,757
-----------
-----------
</TABLE>
See Notes to Financial Statements.
PRUDENTIAL GNMA FUND
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
Year Ended December 31,
Increase (Decrease) in ------------------------------
Net Assets 1993 1992
-------------- ------------
<S> <C> <C>
Operations
Net investment
income............... $ 20,023,887 $ 20,141,176
Net realized gain on
investments.......... 3,445,442 1,322,775
Net change in
unrealized
appreciation/depreciation
of investments....... (9,007,572) (4,131,439)
-------------- ------------
Net increase in net
assets resulting from
operations........... 14,461,757 17,332,512
-------------- ------------
Dividends and
distributions (Note 1)
Dividends to
shareholders from net
investment income
Class A.............. (646,676) (474,172)
Class B.............. (19,377,211) (19,667,004)
-------------- ------------
(20,023,887) (20,141,176)
-------------- ------------
Dividends to
shareholders in
excess of net
investment income
Class A.............. (66,983) (33,981)
Class B.............. (2,007,109) (1,409,434)
-------------- ------------
(2,074,092) (1,443,415)
-------------- ------------
Fund share transactions
(Note 6)
Proceeds from shares
sold................. 67,747,553 111,084,170
Net asset value of
shares issued in
reinvestment of
dividends and
distributions........ 13,613,736 13,509,145
Cost of shares
reacquired........... (78,475,417) (64,257,029)
-------------- ------------
Net increase in net
assets from Fund
share transactions... 2,885,872 60,336,286
-------------- ------------
Total increase
(decrease)............. (4,750,350) 56,084,207
Net Assets
Beginning of year........ 335,013,719 278,929,512
-------------- ------------
End of year.............. $ 330,263,369 $335,013,719
-------------- ------------
-------------- ------------
</TABLE>
See Notes to Financial Statements.
-7-
<PAGE>
PRUDENTIAL GNMA FUND
Notes to Financial Statements
Prudential-Bache GNMA Fund, Inc., doing business as Prudential GNMA Fund (the
``Fund''), is registered under the Investment Company Act of 1940 as a
diversified, open-end management investment company. The investment objective of
the Fund is to achieve a high level of income over the long-term consistent with
providing reasonable safety by investing primarily in mortgage-backed securities
guaranteed as to timely payment of principal and interest by the Government
National Mortgage Association (GNMA) and other readily marketable fixed-income
securities. The ability of issuers of debt securities, other than those issued
or guaranteed by the U.S. Government, held by the Fund to meet their obligations
may be affected by economic developments in a specific industry or region.
Note 1. Accounting The following is a summary
Policies of significant accounting poli
cies followed by the Fund in the preparation of
its financial statements.
Security Valuation: The Fund values portfolio securities on the basis of prices
provided by dealers or by a pricing service which uses information such as
market values, maturities, yields, call features and developments relating to
specific securities in determining values.
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 which approximate market value.
In connection with transactions in repurchase agreements with U.S. financial
institutions, it is the Fund's policy that its custodian takes possession of the
underlying collateral securities, the value of which exceeds the principal
amount of the repurchase transaction, including accrued interest. If the seller
defaults and the value of the collateral declines or if bankruptcy proceedings
are commenced with respect to the seller of the security, realization of the
collateral by the Fund may be delayed or limited.
Securities Transactions and Investment Income: Securities transactions are
recorded on the trade date. Since certain mortgage-backed securities, such as
GNMAs, only settle on one day each month, there can be occasions when, pending
settlement, there may be substantial short-term securities in the portfolio
available to fund the purchases of these mortgage-backed securities. Realized
gains and losses on sales of investments are calculated on the identified cost
basis. Interest income is recorded on the accrual basis. The Fund amortizes
original issue discount paid on purchases of portfolio securities as adjustments
to interest income.
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.
Dollar Rolls: The Fund enters into mortgage dollar rolls in which the Fund sells
mortgage securities for delivery in the current month, realizing a gain or loss,
and simultaneously contracts to repurchase somewhat similar (same type, coupon
and maturity) securities on a specified future date. During the roll period the
Fund forgoes principal and interest paid on the securities. The Fund is
compensated by the interest earned on the cash proceeds of the initial sale and
by the lower repurchase price at the future date. The difference between the
sale proceeds and the lower repurchase price is taken into income. The Fund
maintains a segregated account, the dollar value of which is equal to its
obligations, in respect of dollar rolls.
Federal Income Taxes: It is the Fund's policy to continue to meet the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute all of its taxable net income and net capital gains,
if any, to its shareholders. Therefore, no federal income tax provision is
required.
Equalization: The Fund follows the accounting practice known as equalization by
which a portion of the proceeds from sales and costs of reacquisitions of Fund
shares, equivalent on a per share basis to the amount of distributable net
investment income on the date of the transaction, is credited or charged to
undistributed net investment income. As a result, undistributed net investment
income per share is unaffected by sales or reacquisitions of the Fund's shares.
Dividends and Distributions: Dividends from net investment income are declared
daily and paid monthly. The Fund will distribute at least annually any net
capital gains in excess of loss carryforwards. Dividends and distributions are
recorded on the ex-dividend date.
Income distributions and capital gain distributions are determined in
accordance with income tax regulations which may differ from generally accepted
accounting principles.
Reclassification of Capital Accounts: Effective January 1, 1993, the Fund began
accounting and reporting for distributions to shareholders in accordance with
Statement of Position 93-2: Determination, Disclosure, and Financial
-8-
<PAGE>
Statement Presentation of Income, Capital Gain, and Return of Capital
Distributions by Investment Companies. As a result of this statement, the Fund
changed the classification of distributions to shareholders to better disclose
the differences between financial statement amounts and distributions determined
in accordance with income tax regulations. The effect caused by adopting this
statement was to decrease paid-in capital by $1,931,563 increase undistributed
net investment income by $1,034,987 and decrease accumulated net realized loss
on investments by $896,576 compared to amounts previously reported through
December 31, 1992. During the year ended December 31, 1993, the Fund reclassed
$2,080,227 of dividends in excess of net investment income to paid-in capital
from undistributed net investment income. Net investment income, net realized
gains and net assets were not affected by this change.
Note 2. Agreements The Fund has a management
agreement with Prudential Mutual Fund Management,
Inc. (``PMF''). Pursuant to this agreement, PMF has responsibility for all
investment advisory services and supervises the subadviser's performance of such
services. PMF 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. PMF 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 PMF is computed daily and payable monthly, at an
annual rate of .50 of 1% of the Fund's average daily net assets.
The Fund has distribution agreements with Prudential Mutual Fund
Distributors, Inc. (``PMFD''), which acts as the distributor of the Class A
shares of the Fund, and with Prudential Securities Incorporated (``PSI''), which
acts as distributor of the Class B shares of the Fund (collectively the
``Distributors''). To reimburse the Distributors for their expenses incurred in
distributing the Fund's Class A and Class B shares, the Fund, pursuant to plans
of distribution, pays the Distributors a reimbursement accrued daily and payable
monthly.
Pursuant to the Class A Plan, the Fund reimburses PMFD for its expenses with
respect to Class A shares at an annual rate of up to .30 of 1% of the average
daily net assets of the Class A shares. Such expenses under the Class A Plan
were .15 of 1% of the average daily net assets of the Class A shares for the
year ended December 31, 1993. PMFD pays various broker-dealers, including PSI
and Pruco Securities Corporation (``Prusec''), affiliated broker-dealers, for
account servicing fees and other expenses incurred by such broker-dealers.
Pursuant to the Class B Plan, the Fund reimburses PSI for its
distribution-related expenses with respect to Class B shares at an annual rate
of up to .75 of 1% of the average daily net assets of the Class B shares.
The Class B distribution expenses include commission credits for payments of
commissions and account servicing fees to financial advisers and an allocation
for overhead and other distribution-related expenses, interest and/or carrying
charges, the cost of printing and mailing prospectuses to potential investors
and of advertising incurred in connection with the distribution of shares.
The Distributors recover the distribution expenses and service fees incurred
through the receipt of reimbursement payments from the Fund under the plans and
the receipt of initial sales charges (Class A only) and contingent deferred
sales charges (Class B only) from shareholders.
PMFD has advised the Fund that it has received approximately $131,000 in
front-end sales charges resulting from sales of Class A shares during the year
ended December 31, 1993. From these fees, PMFD paid such sales charges to
dealers (PSI and Prusec) which in turn paid commissions to salespersons.
With respect to the Class B Plan, at any given time, the amount of expenses
incurred by PSI in distributing the Fund's shares and not recovered through the
imposition of contingent deferred sales charges in connection with certain
redemptions of shares may exceed the total reimbursement made by the Fund
pursuant to the Class B Plan. PSI advised the Fund that for the year ended
December 31, 1993, it received approximately $504,000 in contingent deferred
sales charges imposed upon certain redemptions by investors. PSI, as
distributor, has also advised the Fund that at December 31, 1993, the amount of
distribution expenses incurred by PSI and not yet reimbursed by the Fund or
recovered through contingent deferred sales charges approximated $11,763,000.
This amount may be recovered through future payments under the Class B plan or
contingent deferred sales charges.
In the event of termination or noncontinuation of the Class B Plan, the Fund
would not be contractually obligated to pay PSI, as distributor, for any
expenses not previously reimbursed or recovered through contingent deferred
sales charges.
PMFD is a wholly-owned subsidiary of PMF; PSI, PMF and PIC are indirect,
wholly-owned subsidiaries of The Prudential Insurance Company of America.
-9-
<PAGE>
Note 3. Other Prudential Mutual Fund Ser-
Transactions vices, Inc. (``PMFS''), a
with Affiliates wholly-owned subsidiary of
PMF, serves as the Fund's transfer agent and
during the year ended December 31, 1993, the Fund incurred fees of approximately
$409,900 for the services of PMFS. As of December 31, 1993, approximately
$33,100 of such fees were due to PMFS. Transfer agent fees and expenses in the
Statement of Operations include certain out-of-pocket expenses paid to
non-affiliates.
Note 4. Portfolio Purchases and sales of invest-
Securities ment securities, other than
short-term investments and dollar rolls, for the
year ended December 31, 1993 aggregated $528,536,800 and $443,302,625,
respectively.
The cost basis of investments for federal income tax purposes is
substantially the same as the basis for financial reporting purposes and,
accordingly, as of December 31, 1993 net unrealized depreciation of investments
for federal income tax purposes was $672,035 (gross unrealized
appreciation--$453,570; gross unrealized depreciation-- $1,125,605).
The Fund had a capital loss carryforward as of December 31, 1993 of
approximately $11,324,000 of which $5,602,500 expires in 1996, $3,073,700
expires in 1997 and $2,647,800 expires in 1998. Such carryforward is after
utilization of approximately $3,445,500 to offset the Fund's net taxable gains
realized and recognized in the year ended December 31, 1993. No capital gains
distribution is expected to be paid to shareholders until net gains have been
realized in excess of such carryforward.
Note 5. Joint The Fund, along with other
Repurchase affiliated registered invest-
Agreement Account ment companies, transfers
uninvested cash balances into a single joint
account, the daily aggregate balance of which is invested in one or more
repurchase agreements collateralized by U.S. Treasury or Federal agency
obligations. As of December 31, 1993, the Fund has a 2.86% undivided interest in
the joint account. The undivided interest for the Fund represents $34,178,000 in
the principal amount. As of such date, each repurchase agreement in the joint
account and the collateral therefor were as follows:
Bear, Stearns & Co. Inc., 3.18%, in the principal amount of $323,000,000,
repurchase price $323,085,595, due 1/3/94; collateralized by $200,000,000 U.S.
Treasury Notes, 3.875%, due 3/31/95, $5,745,000 U.S. Treasury Notes, 4.25% due,
7/31/95, $85,000 U.S. Treasury Notes, 7.375%, due 5/15/96, $30,000,000 U.S.
Treasury Notes, 5.625%, due 1/31/98 and $80,030,000 U.S. Treasury Notes, 7.50%,
due 11/15/01; approximate aggregate value including accrued
interest--$329,564,341.
Kidder, Peabody & Co. Inc., 3.20%, in the principal amount of $375,000,000,
repurchase price $375,100,000, due 1/3/94; collateralized by $200,000,000 U.S.
Treasury Bonds, 11.625%, due 11/15/04, $38,000,000 U.S. Treasury Bonds, 12.75%,
due 11/15/10, $11,730,000 U.S. Treasury Notes, 7.25%, due 11/15/96, $90,000 U.S.
Treasury Bonds, 9.00%, due 2/15/94 and $15,000,000 U.S. Treasury Notes, 7.375%,
due 5/15/96; approximate aggregate value including accrued
interest--$382,608,562.
Goldman, Sachs & Co., 3.10%, in the principal amount of $399,000,000,
repurchase price $399,103,075, due 1/3/94; collateralized by $363,720,000 U.S.
Treasury Bonds, 7.50%, due 11/15/16; approximate value including accrued
interest--$408,104,889.
Barclays de Zoete Wedd, Inc., 3.10%, in the principal amount of $100,000,000,
repurchase price $100,025,883, due 1/3/94; collateralized by $32,000,000 U.S.
Treasury Notes, 7.50%, due 11/15/01, $7,305,000 U.S. Treasury Notes, $8.50%, due
2/15/00 and $49,000,000 U.S. Treasury Notes, 8.875%, due 11/15/98; approximate
aggregate value including accrued interest--$102,043,014.
Note 6. Capital The Fund offers both Class A
and Class B shares. Class A shares are sold with a
front-end sales charge of up to 4.5%. 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. Both classes of shares have equal rights as to
earnings, assets and voting privileges except that each class bears different
distribution expenses and has exclusive voting rights with respect to its
distribution plan. There are 500 million shares of common stock, $.01 par value
per share, divided into two classes, designated Class A and Class B common
stock, each of which consists of 250 million authorized shares.
-10-
<PAGE>
Transactions in shares of common stock were as follows:
<TABLE>
<CAPTION>
Class A Shares Amount
- ------------------------------- ------------ ------------
<S> <C> <C>
Year ended December 31, 1993:
Shares sold.................... 324,094 $ 4,896,635
Shares issued in reinvestment
of dividends and
distributions................ 24,707 372,441
Shares reacquired.............. (212,210) (3,195,829)
------------ ------------
Net increase in shares
outstanding.................. 136,591 $ 2,073,247
------------ ------------
------------ ------------
Year ended December 31, 1992:
Shares sold.................... 447,396 $ 6,752,448
Shares issued in reinvestment
of dividends and
distributions................ 16,374 246,638
Shares reacquired.............. (273,385) (4,137,123)
------------ ------------
Net increase in shares
outstanding.................. 190,385 $ 2,861,963
------------ ------------
------------ ------------
Class B Shares Amount
- ------------------------------- ------------ ------------
<S> <C> <C>
Year ended December 31, 1993:
Shares sold.................... 4,168,502 $ 62,850,918
Shares issued in reinvestment
of dividends and
distributions................ 880,221 13,241,295
Shares reacquired.............. (5,009,649) (75,279,588)
------------ ------------
Net increase in shares
outstanding.................. 39,074 $ 812,625
------------ ------------
------------ ------------
Year ended December 31, 1992:
Shares sold.................... 6,932,240 $104,331,722
Shares issued in reinvestment
of dividends and
distributions................ 883,250 13,262,507
Shares reacquired.............. (3,997,465) (60,119,906)
------------ ------------
Net increase in shares
outstanding.................. 3,818,025 $ 57,474,323
------------ ------------
------------ ------------
</TABLE>
-11-
<PAGE>
PRUDENTIAL GNMA FUND
Financial Highlights
<TABLE>
<CAPTION>
Class A Class B
----------------------------------------- --------------------------------------------------
January 22,
Year Ended 1990*
December 31, through Year Ended December 31,
-------------------------- December 31, --------------------------------------------------
1993 1992 1991 1990 1993 1992 1991 1990 1989
---------- ------ ------ ------------- ---------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning of
period......................... $ 15.07 $15.30 $14.84 $ 14.75 $ 15.04 $ 15.27 $ 14.81 $ 14.86 $ 14.29
---------- ------ ------ ------ --------- -------- -------- -------- --------
Income from investment
operations
Net investment income............ .95 1.10 1.14 1.17 .87 1.02 1.06 1.15 1.19
Net realized and unrealized gain
(loss) on investment
transactions................... (.21) (.15) .61 .13 (.23) (.16) .60 (.01) .59
---------- ------ ------ ------ ---------- -------- -------- -------- --------
Total from investment
operations................... .74 .95 1.75 1.30 .64 .86 1.66 1.14 1.78
---------- ------ ------ ------ ---------- -------- -------- -------- --------
Less distributions
Dividends to shareholders from
net investment income.......... (.95) (1.10) (1.14) (1.17) (.87) (1.02) (1.06) (1.15) (1.19)
Dividends to shareholders in
excess of net investment
income......................... (.11) (.08) (.15) (.04) (.10) (.07) (.14) (.04) (.02)
---------- ------ ------ ------ ---------- -------- -------- -------- --------
Total distributions............ (1.06) (1.18) (1.29) (1.21) (.97) (1.09) (1.20) (1.19) (1.21)
---------- ------ ------ ------ ---------- -------- -------- -------- --------
Net asset value, end of period... $ 14.75 $15.07 $15.30 $ 14.84 $ 14.71 $ 15.04 $ 15.27 $ 14.81 $ 14.86
---------- ------ ------ ------ ---------- -------- -------- -------- --------
---------- ------ ------ ------ ---------- -------- -------- -------- --------
TOTAL RETURN@:................... 4.97% 6.42% 12.48% 9.27% 4.29% 5.80% 11.82% 8.10% 12.93%
RATIOS TO AVERAGE NET ASSETS:
Net assets, end of period
(000).......................... $10,863 $9,045 $6,268 $1,604 $319,401 $325,969 $272,661 $226,605 $221,938
Average net assets (000)......... $10,199 $6,651 $3,035 $756 $332,731 $295,255 $243,749 $218,749 $223,251
Ratios to average net assets:
Expenses, including
distribution fees............ 1.00% 1.00% 1.11% 1.15%+ 1.60% 1.60% 1.71% 1.74% 1.56%
Expenses, excluding
distribution fees............ .85% .85% .96% .99%+ .85% .85% .96% .99% .98%
Net investment income.......... 6.42% 7.26% 7.81% 9.16%+ 5.82% 6.66% 7.21% 7.96% 8.16%
Portfolio turnover............... 134% 33% 118% 481% 134% 33% 118% 481% 200%
<FN>
- ---------------
* Commencement of offering of Class A shares.
+ Annualized.
@ 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.
</TABLE>
See Notes to Financial Statements.
-12-
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors of
Prudential GNMA Fund
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 GNMA Fund (the ``Fund'')
at December 31, 1993, and the results of its operations for the year then ended,
the changes in its net assets for each of the two years in the period then ended
and the financial highlights for each of the five years in the period then
ended, in conformity with 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
December 31, 1993 by correspondence with the custodian and brokers, and the
application of alternative auditing procedures where confirmations from brokers
were not received, provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE
1177 Avenue of the Americas
New York, New York
February 9, 1994
TAX INFORMATION
We are required by Massachusetts and Oregon to inform you that dividends
which have been derived from interest on federal obligations are not taxable to
shareholders. Please be advised that 10.69% of the dividends paid by the Fund
qualify for each of these states' tax exclusion.
We wish to advise you that the corporate dividends received deduction for the
Fund is zero. Only funds that invest in U.S. equity securities are entitled to
pass-through a corporate dividends received deduction.
-13-
<PAGE>
Past performance is no guarantee of future performance, and an investor's
shares when redeemed, may be worth more or less than their original value.
These graphs are furnished to you in accordance with SEC regulations. They
compare a $10,000 investment in Prudential GNMA Fund (Class A and Class B) with
a similar investment in the Salomon Brothers Mortgage-Backed Securities Index
(MBSI) by portraying the initial account values on January 22, 1990 for Class A
shares and January 1, 1984 for Class B shares and subsequent account values at
the end of each fiscal year (December 31), as measured on a quarterly basis,
beginning in 1990 for Class A shares and in 1984 for Class B shares. For
purposes of the graphs and, unless otherwise indicated, the accompanying tables,
it has been assumed that (a) the maximum sales charge was deducted from the
initial $10,000 investment in Class A shares; (b) the maximum applicable
contingent deferred sales charge was deducted from the value of the investment
in Class B shares assuming full redemption on December 31, 1993; (c) all
recurring fees (including management fees) were deducted; and (d) all dividends
and distributions were reinvested.
The MBSI is a weighted index comprised of fixed-rate mortgage securities
issued or backed by mortgage pools of GNMA, FNMA and FHLMC. The MBSI is an
unmanaged index and includes the reinvestment of all dividends, but does not
reflect the payment of transaction costs and advisory fees associated with an
investment in the Fund. The securities which comprise the MBSI may differ
substantially from the securities in the Fund's portfolio. The MBSI is not the
only index that be used to characterize performance of GNMA funds and other
indexes may portray different comparative performance.
-14-
<PAGE>
Directors
Edward D. Beach
Eugene C. Dorsey
Delayne Dedrick Gold
Harry A. Jacobs, Jr.
Lawrence C. McQuade
Thomas T. Mooney
Thomas H. O'Brien
Richard A. Redeker
Nancy H. Teeters
Officers
Lawrence C. McQuade, President
David W. Drasnin, Vice President
Robert F. Gunia, Vice President
Susan C. Cote, Treasurer
S. Jane Rose, Secretary
Deborah A. Docs, Assistant Secretary
Manager
Prudential Mutual Fund Management, Inc.
One Seaport Plaza
New York, NY 10292
Investment Adviser
The Prudential Investment Corporation
Prudential Plaza
Newark, NJ 07101
Distributors
Prudential Mutual Fund Distributors, Inc.
Prudential Securities Incorporated
One Seaport Plaza
New York, NY 10292
Custodian
State Street Bank and Trust Company
One Heritage Drive
North Quincy, MA 02171
Transfer Agent
Prudential Mutual Fund Services, Inc.
P.O. Box 15005
New Brunswick, NJ 08906
Independent Accountants
Price Waterhouse
1177 Avenue of the Americas
New York, NY 10036
Legal Counsel
Sullivan & Cromwell
125 Broad Street
New York, NY 10004
One Seaport Plaza
New York, NY 10292
Call Collect (908) 417-7555
or Toll free (800) 225-1852
This report is for stockholder information.
This is not a prospectus intended for use in the purchase or
sale of fund shares.
743915209 MF102E
743915100 Cat. #44400Q3
<PAGE>
SEC REQUIRED CHARTS
The following two charts compare a $10,000 investment in Class A shares and
Class B shares, with a similar investment in the Salomon Brothers Mortgaged-
Backed Securities Index. Included in the charts are the average annual total
returns for each Class for the one-year, five-year and since inception periods
with and without sales charges.
