ANNUAL REPORT December 31, 1994
Prudential
GNMA Fund
(ICON)
(LOGO)
<PAGE>
Letter to Shareholders
February 6, 1995
Dear Shareholder:
Higher interest rates made 1994 a challenging year for the stock and bond
markets. Although mortgage-backed securities fared better than corporate
and government bonds, most finished the year with negative numbers. Given
these conditions, we are pleased to report that your Prudential GNMA Fund
performed better than the average GNMA fund, according to Lipper Analytical
Services, Inc.
Fund Update:
Beginning in February 1995, Class B shareholders should begin to notice a
change in their Fund holdings. That's when Class B shares will begin to
convert to Class A shares, on a quarterly basis, approximately seven years
after purchase. As you may know, Class A shares generally carry lower annual
distribution expenses than Class B shares. Accordingly, after conversion,
you will earn higher total returns on your investment than you would have
as a Class B shareholder. This conversion will be processed automatically
and won't require any further action on your part.
<TABLE>
FUND PERFORMANCE
Cumulative Total Returns1
12/31/94
<CAPTION>
Since
1 Year 5 Years 10 Years Inception2
<S> <C> <C> <C> <C>
Class A -2.0% N/A N/A 34.7%
Class B -2.6 30.7% 102.6% 186.6
Class C N/A N/A N/A -1.3
Lipper GNMA -2.5 38.8 126.4 252.8
Fund Avg.3
</TABLE>
<TABLE>
AVERAGE ANNUAL TOTAL RETURNS
12/31/941
<CAPTION>
Since
1 Year 5 Years 10 Years Inception2
<S> <C> <C> <C> <C>
Class A -6.0% N/A N/A 5.4%
Class B -7.6 5.3% 7.3% 8.6
Class C N/A N/A N/A -5.5
</TABLE>
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.
1Source: Prudential Mutual Fund Management Inc. and Lipper
Analytical Services, Inc. The cumulative total returns do not take
into account sales charges. The average annual returns do take into
account applicable sales charges. The Fund charges a maximum front-end
sales load of 4% for Class A shares and a contingent deferred sales
charge of 5%, 4%, 3%, 2%, 1% and 1% for six years, for Class B shares.
Class C shares have a 1% CDSC for one year. Beginning in February 1995,
Class B shares will automatically convert to Class A shares on a quarterly
basis, after approximately seven years. Class C average annual returns
are not yet available since the share class has been in existence less
than one year.
2Inception dates: 1/22/90 Class A; 3/25/82 Class B; 8/1/94 Class C.
3Lipper average returns are for 36 funds for one year, 32 funds for
five years, 12 funds for 10 years and 6 funds since inception of the
Class B shares on 3/22/82.
-1-
<PAGE>
Fund Overview
The Prudential GNMA Fund seeks a high level of income over the long term,
consistent with the reasonable preservation of principal. The Fund invests
primarily in a portfolio of mortgage-backed securities guaranteed as to
timely payment of principal and interest by the Government National Mortgage
Association (GNMA). The Fund may also invest in other U.S. government
obligations and high quality, asset backed securities.
The Federal Reserve Tightens
The U.S. economy ended 1994 growing at an annual rate of nearly 4%, despite
six short-term interest rate increases by the Federal Reserve that sent the
federal funds rate (the interbank overnight lending rate) to 5.5% from 3%.
Long-term interest rates also rose, climbing from just under 6.5% to end the
year hovering at 8%. Of course, as interest rates rise, bond prices fall (and
vice versa). The bond market responded by building an "inflation premium"
into prices.
The Federal Reserve acted to head off a resurgent round of inflation.
However, the Consumer Price Index grew by only 2.7%, the fourth
straight year that inflation was held to under 3%. But it can be
argued that inflation usually lags behind actual economic growth and
it still may increase in 1995.
Overall, 1994 was a year bond markets would rather forget. As the fourth
quarter ended, however, there were a few positive signs. For example, for
the three-month period ending December 31, 1994, Lehman Brothers reported
that its mortgage-backed securities, and corporate bond indices each rose
a modest 0.43%, while its U.S. government bond index rose 0.35%. For the
year, however, mortgage-backed securities fared better than either U.S.
government or corporate bonds. For the 12-month period ended December 31,
1994, mortgage-backed securities declined 1.6% while U.S. government bonds
fell 3.3% and corporate bonds 3.9%, according to Lehman Brothers.
Mortgage-backed securities did better because they have higher coupons
than similar maturity governments. This cushions their prices somewhat
from interest rate increases. Another factor was that mortgage prepayments
fell by nearly 70% compared to 1993 as higher interest rates discouraged
home mortgage refinancings.
-2-
<PAGE>
Fund Strategy
Throughout the year we followed a strategy that sought to lessen the
effects of rising interest rates while capitalizing on the precipitous
drop in mortgage prepayments. Ours was a defensive game plan where we
varied our mixture of holdings -- GNMAs, adjustable rate mortgages (ARMs),
other mortgage-backed securities and cash -- to respond to changing market
conditions.
According to the Lipper GNMA Fund Average, which compares funds of similar
size, common portfolio and investment objective, your Fund stood at or
above average for the year. On a total return basis, Class A shares
were ranked 16th and Class B shares 25th out of 47 funds ranked by Lipper
as of the 12-month period ending December 31, 1994. Class C rankings are
not available since they have been in existence less than one year. The
Lipper rankings and performance information do not take into account the
Fund's sales charges which affect performance and rankings. Of course,
past performance is not indicative of future results. Our duration (the
average bond maturity held in the portfolio) stood at 4 3/4 years which
was average for GNMA funds, according to Lehman Brothers.
On the Hill:
In 1995, Congress is set to consider an initiative that would restore full
income tax deductibility for individual retirement account
contributions for middle-income wage earners. In addition, Congress will
also debate creation of a new tax-deferred savings account, called "the
American Dream Savings Account." Prudential Mutual Funds supports both
of these proposals, and we urge you to share your opinion with your
Congressional representatives. We will keep you updated on the proposals
as they make their way through the legislative process.
The Outlook
After being beaten down badly in 1994, bonds are beginning to look
attractive again. With long-term Treasury yields approximating 8%,
bonds should be a tough competitor for all domestic asset classes.
We expect bonds will earn their coupon rate and retain value throughout
1995.
Bond returns will be driven, of course, by what the Federal Reserve does
as much as by the strength of the economy. We anticipate at least one,
possibly two, Federal Reserve moves to increase short-term interest rates
before they consider their anti-inflation campaign a success. This may
cause some short-lived uncertainty in the financial markets.
While no one can guarantee the future, it is our opinion that mortgage-backed
securities will continue to perform better than U.S. government bonds and
corporates in 1995, thanks to higher coupon payments, lower prepayments and
strong investor demand.
As always, it is a pleasure to have you as a shareholder. We are committed
to managing the Fund for your benefit.
Sincerely
Lawrence C. McQuade David Graham
President Portfolio Manager
-3-
<PAGE>
PRUDENTIAL GNMA FUND Portfolio of Investments
December 31, 1994
<TABLE>
<CAPTION>
Principal
Amount Value
(000) Description (Note 1)
<C> <S> <C>
LONG-TERM INVESTMENTS--99.5%
U.S. Government Agency Mortgage
Pass-Through Obligations--97.6%
Federal National Mortgage
Association,
$ 12 7.00%, 4/01/08............... $ 10,948
Government National Mortgage
Association,
17,000 6.50%, 12/20/99, ARM......... 16,325,313
62,101 7.00%, 11/15/22 - 8/15/24.... 55,735,439
13,000 7.50%, 6/20/24, ARM.......... 12,918,720
48,606 7.50%, 1/20/99 - 9/15/24..... 45,479,310
46,426 8.00%, 9/15/17 - 11/15/29.... 44,450,972
21,138 8.50%, 6/15/16 - 8/15/24..... 20,847,434
32,612 9.00%, 6/15/16 - 8/15/24..... 32,940,943
18,166 9.50%, 5/15/17 - 7/15/17..... 18,784,756
901 12.00%, 12/15/12 - 6/15/15... 1,001,340
------------
Total U.S. government agency
mortgage pass-through
obligations
(cost $253,307,436)........ 248,495,175
------------
Collateralized Mortgage
Obligation--1.9%
Greenwich Capital Acceptance,
Inc.,
100,637 2.24%, 1/25/24, ARM/IO
(cost $6,926,583).......... 4,780,273
------------
Total long-term investments
(cost $260,234,019)........ 253,275,448
------------
SHORT-TERM INVESTMENTS--18.8%
Repurchase Agreements--18.8%
Joint Repurchase Agreement
Account,
$47,927 5.82%, 1/03/95 (Note 5)
(cost $47,927,000)......... $ 47,927,000
------------
Total Investments--118.3%
(cost $308,161,019; Note
4)......................... 301,202,448
Liabilities in excess of
other
assets--(18.3%)............ (46,488,429)
------------
Net Assets--100%............. $254,714,019
------------
------------
</TABLE>
- ---------------
ARM--Adjustable Rate Mortgage.
IO--Interest Only.
-4- See Notes to Financial Statements.
<PAGE>
PRUDENTIAL GNMA FUND
Statement of Assets and Liabilities
<TABLE>
<CAPTION>
December 31,
Assets 1994
------------
<S> <C>
Investments, at value (cost $308,161,019)................................................. $301,202,448
Receivable for investments sold........................................................... 21,263,035
Interest receivable....................................................................... 1,508,588
Receivable for Fund shares sold........................................................... 34,923
Deferred expenses and other assets........................................................ 4,887
------------
Total assets.......................................................................... 324,013,881
------------
Liabilities
Bank overdraft............................................................................ 9,698
Payable for investments purchased......................................................... 68,306,646
Payable for Fund shares reacquired........................................................ 540,607
Due to distributor........................................................................ 159,512
Accrued expenses.......................................................................... 126,875
Due to manager............................................................................ 109,321
Dividends payable......................................................................... 31,706
Deferred directors fees................................................................... 15,497
------------
Total liabilities..................................................................... 69,299,862
------------
Net Assets................................................................................ $254,714,019
------------
------------
Net assets were comprised of:
Common stock, at par.................................................................... $ 189,100
Paid-in capital in excess of par........................................................ 290,350,233
------------
290,539,333
Undistributed net investment income..................................................... 1,063,490
Accumulated net realized loss on investments............................................ (29,930,233)
Net unrealized depreciation on investments.............................................. (6,958,571)
------------
Net assets, December 31, 1994............................................................. $254,714,019
------------
------------
Class A:
Net asset value and redemption price per share
($8,762,062 / 648,891 shares of common stock issued and outstanding).................. $13.50
Maximum sales charge (4% of offering price)............................................. .56
------------
Maximum offering price to public........................................................ $14.06
------------
------------
Class B:
Net asset value, offering price and redemption price per share
($245,437,265 / 18,222,895 shares of common stock issued and outstanding)............. $13.47
------------
------------
Class C:
Net asset value, offering price and redemption price per share
($514,692 / 38,214 shares of common stock issued and outstanding)..................... $13.47
------------
------------
</TABLE>
See Notes to Financial Statements.
-5-
<PAGE>
PRUDENTIAL GNMA FUND
Statement of Operations
<TABLE>
<CAPTION>
Year Ended
December 31,
Investment Income 1994
------------
<S> <C>
Income
Interest............................ $ 21,882,005
------------
Expenses
Distribution fee--Class A........... 14,811
Distribution fee--Class B........... 2,099,597
Distribution fee--Class C........... 1,428
Management fee...................... 1,450,053
Transfer agent's fees and
expenses............................ 500,000
Custodian's fees and expenses....... 468,000
Reports to shareholders............. 181,000
Audit fee........................... 50,000
Registration fees................... 56,500
Franchise taxes..................... 50,500
Directors' fees..................... 46,000
Legal fees.......................... 25,000
Miscellaneous....................... 12,316
------------
Total expenses.................... 4,955,205
------------
Net investment income................. 16,926,800
------------
Realized and Unrealized Loss on
Investments
Net realized loss on investment
transactions........................ (18,606,161)
Net change in unrealized
appreciation/depreciation
of investments...................... (6,286,536)
------------
Net loss on investments............... (24,892,697)
------------
Net Decrease in Net Assets
Resulting from Operations............. $ (7,965,897)
------------
------------
</TABLE>
PRUDENTIAL GNMA FUND
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
Year Ended December 31,
Increase (Decrease) in ------------------------------
Net Assets 1994 1993
-------------- ------------
<S> <C> <C>
Operations
Net investment
income............... $ 16,926,800 $ 20,023,887
Net realized gain
(loss) on
investments.......... (18,606,161) 3,445,442
Net change in
unrealized
appreciation/depreciation
of investments....... (6,286,536) (9,007,572)
-------------- ------------
Net increase (decrease)
in net assets
resulting from
operations........... (7,965,897) 14,461,757
-------------- ------------
Dividends and
distributions (Note 1)
Dividends to
shareholders from net
investment income
Class A.............. (634,109) (646,676)
Class B.............. (16,282,437) (19,377,211)
Class C.............. (10,254) --
-------------- ------------
(16,926,800) (20,023,887)
-------------- ------------
Dividends to
shareholders in
excess of net
investment income
Class A.............. -- (66,983)
Class B.............. -- (2,007,109)
-------------- ------------
-- (2,074,092)
-------------- ------------
Tax return of capital
distributions
Class A.............. (37,535) --
Class B.............. (1,004,614) --
Class C.............. (1,833) --
-------------- ------------
(1,043,982) --
-------------- ------------
Fund share transactions
(Note 6)
Proceeds from shares
sold................. 27,166,084 67,747,553
Net asset value of
shares issued in
reinvestment of
dividends............ 10,985,801 13,613,736
Cost of shares
reacquired........... (87,764,556) (78,475,417)
-------------- ------------
Net increase (decrease)
in net assets from
Fund share
transactions......... (49,612,671) 2,885,872
-------------- ------------
Total decrease........... (75,549,350) (4,750,350)
Net Assets
Beginning of year........ 330,263,369 335,013,719
-------------- ------------
End of year.............. $ 254,714,019 $330,263,369
-------------- ------------
-------------- ------------
</TABLE>
See Notes to Financial Statements. See Notes to Financial Statements.
-6-
<PAGE>
PRUDENTIAL GNMA FUND
Notes to Financial Statements
The Prudential GNMA Fund Inc. (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 or designated
subcustodians, as the case may be under triparty repurchasement agreements,
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.
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: The Fund accounts and reports for
distributions to shareholders in accordance with Statement of Position 93-2:
Determination, Disclosure, and Financial Statement Presentation of Income,
Capital Gain, and Return of Capital Distributions by Investment Companies. The
effect of applying this statement was to decrease paid-in capital and increase
undistributed net investment income by $1,066,350 for the year ended December
31, 1994. Tax return of capital distributions are charged to paid-in capital.
Net investment income, net realized gains and net assets were not affected by
this change.
-7-
<PAGE>
<PAGE>
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 and Class C shares of the Fund (collectively
the ``Distributors''). The Fund compensates the Distributors 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 them. The distribution fees are accrued daily and payable
monthly.
On July 19, 1994, shareholders of the Fund approved amendments to the Class A
and Class B Plans under which the distribution plans became compensation plans,
effective August 1, 1994. Prior thereto, the distribution plans were
reimbursement plans, under which PMFD and PSI were reimbursed for expenses
actually incurred by them up to the amount permitted under the Class A and Class
B Plans, respectively. The Fund is not obligated to pay any prior or future
excess distribution costs (costs incurred by the Distributors in excess of
distribution fees paid by the Fund or contingent deferred sales charges received
by the Distributors). The rate of the distribution fees charged to Class A and
Class B shares of the Fund did not change under the amended plans of
distribution. The Fund began offering Class C shares on August 1, 1994.
Pursuant to the Class A, B and C Plans, the Fund compensates the Distributors
for distribution-related activities at an annual rate of up to .30 of 1%, .75%
of 1% and 1%, of the average daily net assets of the Class A, B and C shares,
respectively. Such expenses under the Class A Plan were .15 of 1% of the average
daily net assets of Class A shares and .75 of 1% of the average daily net assets
under the Class B and C Plans of, both, the Class B and Class C shares,
respectively for the fiscal year ended December 31, 1994.
PMFD has advised the Fund that it has received approximately $57,000 in
front-end sales charges resulting from sales of Class A shares during the year
ended December 31, 1994. From these fees, PMFD paid such sales charges to
dealers (PSI and Prusec) which in turn paid commissions to salespersons.
PSI advised the Fund that for the fiscal year ended December 31, 1994, it
received approximately $737,000 in contingent deferred sales charges imposed
upon certain redemptions by Class B and C shareholders.
PMFD is a wholly-owned subsidiary of PMF; PSI, PMF and PIC are indirect,
wholly-owned subsidiaries of The Prudential Insurance Company of America.
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, 1994, the Fund incurred fees of approximately
$372,000 for the services of PMFS. As of December 31, 1994, approximately
$28,000 of such fees were due to PMFS. Transfer agent fees and expenses in the
Statement of Operations include certain out-of-pocket expenses paid to
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, 1994 aggregated $1,506,169,540 and $1,501,725,759,
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, 1994 net unrealized depreciation of investments
for federal income tax purposes was $6,958,571 (gross unrealized
appreciation--$18,800; gross unrealized depreciation--$6,977,371).
The Fund had a capital loss carryforward as of December 31, 1994 of
approximately $27,545,000 of which $5,602,500 expires in 1996, $3,073,700
expires in 1997, $2,647,800 expires in 1998 and $16,221,000 expires in 2002. No
capital gains distribution is expected to be paid to shareholders until net
gains have been realized in excess of such carryforward.
The Fund will elect to treat net capital losses of approximately $2,385,000
incurred in the two month period ended
-8-
<PAGE>
<PAGE>
December 31, 1994 as having been incurred in the following fiscal year.
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, 1994, the Fund has a 6.22% undivided interest in
the joint account. The undivided interest for the Fund represents $47,927,000 in
the principal amount. As of such date, each repurchase agreement in the joint
account and the value of the collateral therefor were as follows:
Goldman, Sachs & Co., 5.75%, in the principal amount of $250,000,000,
repurchase price $250,159,722, due 1/3/95. The value of the collateral including
accrued interest is $255,000,108.
Lehman Government Securities Inc., 5.90%, in the principal amount of
$70,000,000, repurchase price $70,045,889, due 1/3/95. The value of the
collateral including accrued interest is $71,379,084.
Morgan Stanley & Co., 5.75%, in the principal amount of $250,000,000,
repurchase price $250,159,722, due 1/3/95. The value of the collateral including
accrued interest is $255,146,220.
Smith Barney Inc., 5.95%, in the principal amount of $200,000,000, repurchase
price $200,132,222, due 1/3/95. The value of the collateral including accrued
interest is $204,036,161.
Note 6. Capital The Fund offers Class A,
Class B and Class C shares. Class A shares are
sold with a front-end sales charge of up to 4%. Class B shares are sold with a
contingent deferred sales charge which declines from 5% to zero depending on the
period of time the shares are held. Class C shares are sold with a 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 commencing on or about February 1995. Each class of shares
has 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. The Fund has authorized 500 million shares of
common stock, $.01 par value per share, equally divided into three classes,
designated Class A, Class B and Class C.
Transactions in shares of common stock were as follows:
<TABLE>
<CAPTION>
Class A Shares Amount
- ------------------------------- ------------ ------------
<S> <C> <C>
Year ended December 31, 1994:
Shares sold.................... 160,285 $ 2,252,534
Shares issued in reinvestment
of dividends and
distributions................ 23,025 322,132
Shares reacquired.............. (271,037) (3,788,946)
------------ ------------
Net decrease in shares
outstanding.................. (87,727) $ (1,214,280)
------------ ------------
------------ ------------
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
------------ ------------
------------ ------------
Class B
- -------------------------------
Year ended December 31, 1994:
Shares sold.................... 1,730,458 $ 24,377,281
Shares issued in reinvestment
of dividends and
distributions................ 764,245 10,662,126
Shares reacquired.............. (5,988,535) (83,970,630)
------------ ------------
Net decrease in shares
outstanding.................. (3,493,832) $(48,931,223)
------------ ------------
------------ ------------
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
<CAPTION>
------------ ------------
------------ ------------
Class C
- -------------------------------
August 1, 1994* through
December 31, 1994:
Shares sold.................... 38,470 $ 536,269
Shares issued in reinvestment
of dividends and
distributions................ 114 1,543
Shares reacquired.............. (370) (4,980)
------------ ------------
Net increase in shares
outstanding.................. 38,214 $ 532,832
------------ ------------
------------ ------------
</TABLE>
- ---------------
* Commencement of offering of Class C shares.
-9-
<PAGE>
PRUDENTIAL GNMA FUND
Financial Highlights
<TABLE>
<CAPTION>
Class A
Class C
--------------------------------------------- Class B
------------
January 22,
- ------------------------------------------------ August
Year Ended 1990*
1994**
December 31, through Year Ended December 31,
through
------------------------------- December 31,
- ------------------------------------------------ December 31,
1994 1993 1992 1991 1990 1994 1993 1992 1991
1990 1994
------ ------- ------ ------ ------------ -------- -------- -------- --------
- -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
<C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of
period........ $14.75 $ 15.07 $15.30 $14.84 $14.73 $ 14.71 $ 15.04 $ 15.27 $ 14.81
$ 14.86 $14.01
------ ------- ------ ------ ------------ -------- -------- -------- --------
- -------- ------------
Income from investment
operations
Net investment
income........ .90 .95 1.10 1.14 1.17 .82 .87 1.02 1.06
1.15 .30
Net realized and
unrealized
gain (loss) on
investment
transactions... (1.19) (.21) (.15) .61 .15 (1.19) (.23) (.16) .60
(.01) (.49)
------ ------- ------ ------ ------------ -------- -------- -------- --------
- -------- ------------
Total from
investment
operations... (.29) .74 .95 1.75 1.32 (.37) .64 .86 1.66
1.14 (.19)
------ ------- ------ ------ ------------ -------- -------- -------- --------
- -------- ------------
Less
distributions
Dividends to
shareholders
from net
investment
income........ (.90) (.95) (1.10) (1.14) (1.17) (.82) (.87) (1.02) (1.06)
(1.15) (.30)
Dividends to
shareholders
in excess of
net investment
income........ -- (.11) (.08) (.15) (.04) -- (.10) (.07) (.14)
(.04) --
Tax return of
capital
distributions... (.06) -- -- -- -- (.05) -- -- --
-- (.05)
------ ------- ------ ------ ------------ -------- -------- -------- --------
- -------- ------------
Total
distributions... (.96) (1.06) (1.18) (1.29) (1.21) (.87) (.97) (1.09) (1.20)
(1.19) (.35)
------ ------- ------ ------ ------------ -------- -------- -------- --------
- -------- ------------
Net asset value,
end of
period........ $13.50 $ 14.75 $15.07 $15.30 $14.84 $ 13.47 $ 14.71 $ 15.04 $ 15.27
$ 14.81 $13.47
------ ------- ------ ------ ------------ -------- -------- -------- --------
- -------- ------------
------ ------- ------ ------ ------------ -------- -------- -------- --------
- -------- ------------
TOTAL
RETURN@:...... (2.01)% 4.97% 6.42% 12.48% 9.41% (2.57)% 4.29% 5.80% 11.82%
8.10% (1.32)%
RATIOS TO
AVERAGE NET
ASSETS:
Net assets, end
of period
(000)......... $8,762 $10,863 $9,045 $6,268 $1,604 $245,437 $319,401 $325,969 $272,661
$226,605 $515
Average net
assets
(000)......... $9,874 $10,199 $6,651 $3,035 $756 $279,946 $332,731 $295,255 $243,749
$218,749 $460
Ratios to
average net
assets:@@
Expenses,
including
distribution
fees........ 1.13% 1.00% 1.00% 1.11% 1.15%(D) 1.73% 1.60% 1.60% 1.71%
1.74% 1.82%(D)
Expenses,
excluding
distribution
fees........ .98% .85% .85% .96% .99%(D) .98% .85% .85% .96%
.99% 1.08%(D)
Net investment
income........ 6.42% 6.42% 7.26% 7.81% 9.16%(D) 5.82% 5.82% 6.66% 7.21%
7.96% 5.32%(D)
Portfolio
turnover...... 560% 134% 33% 118% 481% 560% 134% 33% 118%
481% 560%
</TABLE>
- ---------------
* Commencement of offering of Class A shares.
** Commencement of offering of Class C shares.
(D) 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.
@@ Because of the recent commencement of its offering, the ratios for the
Class C shares are not necessarily comparable to that of Class A or B
shares and are not necessarily indicative of future ratios.
See Notes to Financial Statements.
-10-
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors of
Prudential GNMA Fund, Inc.
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, Inc. (the
``Fund'') at December 31, 1994, 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, 1994 by correspondence with the custodian and brokers, provide a
reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York
February 23, 1995
TAX INFORMATION
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.
-11-
!!!!!!!!!!!!!!!!!!!!!!!!!!
<PAGE>
Prudential GNMA Fund
Comparison of Change in Value of $10,000 Investment in GNMA Fund and
Salomon Mortgage Index
<TABLE>
Average Annual Total Returns
<CAPTION>
With Sales Load
1 Year Since Inception (1/22/90)
<S> <C> <C>
- -6.0% 5.4%
<CAPTION>
Without Sales Load
1 Year Since Inception (1/22/90)
<S> <C> <C>
- -2.0% 6.2%
</TABLE>
Class A
(GRAPH)
<TABLE>
Average Annual Total Returns
<CAPTION>
With Sales Load
1 Year 5 Year 10 Year
<S> <C> <C>
- -7.6% 5.3% 7.32%
<CAPTION>
Without Sales Load
1 Year 5 Year 10 Year
<S> <C> <C>
- -2.6% 5.5% 7.32%
</TABLE>
Class B
(GRAPH)
<TABLE>
Average Annual Total Returns
<CAPTION>
With Sales Load
1 Year Since Inception (8/1/94)
<S> <C> <C>
N/A -5.5%
<CAPTION>
Without Sales Load
1 Year Since Inception (8/1/94)
N/A -3.1%
</TABLE>
Class C
(GRAPH)
Salomon Mortgage Index Prudential GNMA Fund
Past performance is not predictive of future performance and an
investor's shares when redeemed may be worth more or less than their
original cost.
These graphs are furnished to you in accordance with SEC regulations.
They compare a $10,000 investment in the Prudential GNMA Fund (Class A,
Class B and Class C) with a similar investment in the Salomon Brothers
Mortgage-backed Securities Index by portraying the initial account values
at the commencement of operations of each class, 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, in 1984 for Class
B shares and in 1994 for Class C shares. For purposes of the graphs, and
unless otherwise indicated, in the accompanying tables it has been assumed
(a) that the maximum applicable front-end 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 and Class C shares, assuming full redemption on
December 31, 1994; (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 quarterly
basis, beginning approximately seven years after purchase. This conversion
feature is not reflected in the graph.
The Mortgage-backed Securities index is a weighted index comprised of
fixed-rate mortgage securities issued or backed by mortgage pools of GNMA,
FNMA and FHLMC. The index is an un 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 that comprise the index may differ substantially
from the securities in the Fund's portfolio. The Mortgage-backed Securities
Index is not the only index that may be used to characterize performance of
mortgage-backed securities and other indexes may portray different
comparative performance.
-12-
<PAGE>
Trustees
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 LLP
1177 Avenue of the Americas
New York, NY 10036
Legal Counsel
Sullivan & Cromwell
125 Broad Street
New York, NY 10004
Prudential Mutual Funds
One Seaport Plaza
New York, NY 10292
Toll Free (800) 225-1852, Collect (908) 417-7555
This report is not authorized for distribution to prospective investors unless
preceded or accompanied by a current prospectus.
743915209 MF102E
743915100
743915308 (LOGO)
