ANNUAL REPORT February 28, 1994
Prudential
Government Plus
Fund
------------------------------------------------
Prudential Mutual Funds
BUILDING YOUR FUTURE
(LOGO)
ON OUR STRENGTH
<PAGE>
<PAGE>
LETTER TO
SHAREHOLDERS
April 4, 1994
Dear Shareholder:
During the last 12 months, government bond investors have seen uneven returns
in a market defined first by falling interest rates and, later, by rapidly
rising rates. The Prudential Government Plus Fund provided moderate returns
in this environment.
The Prudential Government Plus Fund seeks to achieve high current return by
investing in U.S. Treasury securities and obligations issued or guaranteed by
U.S. agencies or instrumentalities.
<TABLE>
FUND PERFORMANCE
As of February 28, 1994
<CAPTION>
12-Month 30-Day NAV per share
Total Return Sec Yield 2/28/94
<S> <C> <C> <C>
Class A 3.90% 5.45% $9.13
Class B 3.03% 4.94% $9.13
</TABLE>
<TABLE>
AVERAGE ANNUAL TOTAL RETURNS
As of February 28, 19941
<CAPTION>
One Year Five Year Since Inception2
<S> <C> <C> <C>
Class A -0.78% N/A 8.03%
Class B -1.97% 8.73% 8.62%
1 Source: Prudential Mutual Fund Management. These figures take into account
applicable sales charges. The Fund charges a maximum sales load of 4.50% for
Class A shares. Class B shares are subject to a declining contingent deferred
sales charge of 5%, 4%, 3%, 2%, 1% and 1%, respectively, over a six year period.
2 Inception of Class A 1/22/90, Class B 4/22/85.
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
cost.
</TABLE>
As of February 28, 1994, the Fund had a effective maturity of 7.6 years,
which is subject to change.
-1-
<PAGE>
Interest Rate Roller Coaster
After falling for much of the first half of 1993, interest rates stabilized
near the end of last summer and began to rise in late autumn. Economic growth,
which had rocketed to 7.0% in the final months of 1993, and investor demand for
higher yields in anticipation of higher inflation precipitated the change. When
the Federal Reserve moved to raise short-term interest rates in early
February--the first increase in nearly five years--and again in March of this
year, the market reacted negatively.
At the end of February, the 6.1% yield of the 7-year Treasury note marked a
sharp rise from its 5.6% yield a month earlier, but not much higher than its
6.0% level of a year ago. Most fundamental economic indicators do not point to
a dramatic rise in long-term interest rates this year. Instability may
continue, however, until the bond market is satisfied with the Fed's stance
and market sentiment improves.
Intermediate-Term Bonds Outperform Long-Term Securities
As rates rose, intermediate-term bonds appeared more attractive. In this
environment, we were able to maintain a "maturity barbell" structure with our
Treasury securities. This strategy balances holdings of shorter-term Treasury
notes that mature in five years or less with long-term bonds that mature in 20
years or more.
The barbell approach enabled us to pick up the higher yields of long-term
bonds while taking advantage of the relative stability of shorter-term notes.
At the same time, the portfolio still maintained its overall intermediate-term
maturity, which we believe will offer the most attractive value in the bond
market this year. For income-hungry investors, that means rising rates can
lead to attractive new issues with higher coupon payments. Note, the prices
of existing bonds will fall at the same time and dividend rates can never be
guaranteed.
Mortgages Rebound On Rising Rates
The portfolio generally relies on mortgage-backed securities to deliver
higher yields than comparable maturity Treasuries without any undue credit
risk. While rates were falling last year, however, prepayments of existing
mortgages rose. As a result, the mortgage-backed sector underperformed the
overall bond market last year as older, higher-coupon mortgage-backed
securities were prepaid. This volatility hampered the Fund's performance.
When rates were falling, we gradually reduced our mortgage holdings to about
40% of total assets from their previous level of about 50%. Once interest
rates began to rise, we raised that level approximately 10%, since mortgages
again outperformed other government securities. To help manage prepayment
risk, which still remains a sizeable threat, we purchased mortgages with
coupons below 7.5% and above 9.0% as these tend to be more prepayment
resistant. In February 1994, we found opportunity in middle-coupon mortgages,
which were attractively priced and could offer better value now that long-term
prepayments appeared to have peaked.
-2-
<PAGE>
Looking Forward
We expect volatility to continue in the marketplace through spring, or until
the Fed acts decisively to quell inflationary expectations by raising
short-term rates further. Currently, we do not anticipate more sharp
increases in long-term rates during the year. For instance, the productivity
increases that are driving this recovery seem to be gained as a result of
capital expenditures and not through job creation. In addition, wages have
remained fairly steady, so prices should stay stable. This points to an
environment that should produce modest bond fund returns. Regardless, bond
investors will be ever vigilant for signs of inflation and bond prices may
remain soft until the Fed reassures them.
We appreciate having you as a Prudential Government Plus Fund shareholder
and remain committed to managing the portfolio for your long-term benefit.
Sincerely,
Lawrence C. McQuade
President
Marty Lawlor
Portfolio Manager
-3-
<PAGE>
<PAGE>
PRUDENTIAL GOVERNMENT PLUS FUND Portfolio of Investments
February 28, 1994
<TABLE>
<CAPTION>
Principal
Amount Value
(000) Description (Note 1)
<C> <S> <C>
LONG-TERM INVESTMENTS--99.6%
U. S. Government Agency
Mortgage Pass-Throughs--48.4%
Federal Home Loan Mortgage
Corp.,
$12,700 7.00%, 4/15/17 (CMO)......... $ 13,065,125
14,450 8.50%, 2/1/05 - 4/1/20....... 15,146,730
6,011 11.50%, 10/1/19.............. 6,679,254
Federal National Mortgage
Assoc.,
69,420 6.00%, 2/1/99 - 8/1/13....... 69,029,057
97,147 6.50%, 8/1/98 - 3/1/24....... 96,477,702
163,119 7.00%, 12/1/99 - 3/1/24...... 163,760,147
35,019 7.50%, 2/1/22 - 3/1/24....... 35,939,718
3,630 8.375%, 6/25/06, (CMO*)...... 3,629,535
31,325 11.00%, 11/1/20.............. 35,162,398
Government National Mortgage Assoc.,
20,396 5.00%, 1/20/24 (ARM)......... 20,585,653
24,856 6.50%, 1/15/23 - 3/1/24...... 24,172,523
9,949 7.00%, 3/15/22 - 11/15/23.... 9,964,780
14,335 7.25%, 11/15/04 - 7/15/23.... 14,500,434
72,781 7.50%, 3/15/01 - 1/15/24..... 74,995,416
39,670 8.00%, 2/15/23 - 1/15/24..... 41,602,900
119,522 8.50%, 7/15/08 - 12/15/22.... 126,733,325
170,080 9.00%, 12/15/13 - 2/15/22.... 182,110,019
92,961 9.50%, 5/15/09 - 12/15/21.... 100,917,297
28,572 11.50%, 1/15/13 - 5/15/19.... 32,929,088
Government National Mortgage Assoc. II,
12,333 9.00%, 8/20/17 - 8/20/21..... 13,027,068
9,898 9.50%, 5/20/18 - 8/20/21..... 10,541,275
--------------
Total U.S. Government Agency
Mortgage Pass-Throughs
(cost $1,080,694,100)...... 1,090,969,444
--------------
U.S. Government Obligations--42.6%
United States Treasury Bonds,
10,000 7.125%, 2/15/23.............. 10,437,500
25,000 8.50%, 2/15/20............... 29,996,000
55,000 8.875%, 8/15/17.............. 68,045,450
50,000 9.00%, 11/15/18.............. 62,828,000
25,000 10.375%, 11/15/12............ 33,515,500
United)States Treasury Bonds--(cont'd.
$150,000 10.75%, 8/15/05.............. $ 203,226,000
200,000(dag) 11.25%, 2/15/15.............. 299,594,000
United States Treasury Notes,
32,000# 3.875%, 9/30/95.............. 31,699,840
125,000 6.00%, 11/30/97.............. 127,832,500
40,000 7.00%, 4/15/99............... 42,400,000
13,000 7.875%, 8/15/01.............. 14,434,030
33,250 8.25%, 7/15/98............... 36,767,185
--------------
Total U.S. Government
Obligations
(cost $923,794,449)........ 960,776,005
--------------
Asset-Backed Securities--6.1%
Discover Credit Card Trust,
10,000 Series 1991-F, 7.85%,
11/21/00................... 10,721,800
Sears Credit Card Trust,
50,000 Series 1991-B, 8.60%,
5/15/98.................... 53,468,500
Standard Credit Card Trust,
47,000 Series 1991-1A, 8.50%,
8/7/97..................... 50,333,710
20,000 Series 1991-3A, 8.875%,
7/7/98..................... 22,150,000
--------------
Total Asset-Backed Securities
(cost $130,254,043)........ 136,674,010
--------------
U.S. Government Agency Stripped
Securities--1.3%
Federal Home Loan Mortgage Corp.,
60,000 Zero Coupon, 11/29/19........ 9,150,000
Federal National Mortgage
Assoc.,
30,000 Zero Coupon, 7/5/14.......... 6,759,300
50,000 Zero Coupon, 10/9/19......... 7,672,000
9,512 Strip Trust 137 Class
2,(I/O*)................... 1,938,092
9,620 Strip Trust 142 Class
2,(I/O*)................... 1,911,912
5,702 Trust 1991 139 Class
PS,(I/O*).................. 384,856
14,365 Trust 1991 169 Class
PL,(I/O*).................. 1,436,523
9,155 Trust 1991 G-37 Class
C,(I/O*)................... 640,852
7,367 Trust 1992-70 Class M,
(I/O*)..................... 1,123,407
--------------
Total U.S. Government Agency
Stripped Securities
(cost $45,959,868)......... 31,016,942
--------------
</TABLE>
-4- See Notes to Financial Statements.
<PAGE>
<PAGE>
PRUDENTIAL GOVERNMENT PLUS FUND
<TABLE>
<CAPTION>
Principal
Amount Value
(000) Description (Note 1)
<C> <S> <C>
U.S. Government
Stripped Securities--0.8%
United States Treasury
Strips,
$ 5,000 Zero Coupon, 8/15/10......... $ 1,593,750
15,000 Zero Coupon, 2/15/11......... 4,601,250
50,000 Zero Coupon, 8/15/14......... 11,737,000
--------------
Total U.S. Government
Stripped Securities
(cost $17,393,098)......... 17,932,000
--------------
Adjustable Rate Mortgage
Pass-Throughs--0.4%
Ryland Mortgage Securities Corporation,
8,074 Mortgage Participation
Securities, Series 1993-3
Class A-3, 7.35315%,
3/25/14 (cost
$8,235,018)................ 8,346,036
--------------
Total long-term investments
(cost $2,206,330,576)...... 2,245,714,437
--------------
SHORT-TERM INVESTMENTS--1.2%
Commercial Paper--1.2%
Fuji Bank, Ltd.,
15,400 3.50%, 3/1/94................ 15,400,000
USl Capital Corporation,
11,760 3.55%, 3/1/94................ 11,760,000
--------------
Total Commercial Paper
(cost $27,160,000)......... 27,160,000
--------------
Total Investments--100.8%
(cost $2,233,490,576; Note
4)......................... 2,272,874,437
Liabilities in excess of
other
assets--(0.8%)............. (18,646,578)
--------------
Net Assets--100%............. $2,254,227,859
--------------
--------------
</TABLE>
- ---------------
ARM--Adjustable Rate Mortgage Security.
CMO--Collateralized Mortgage Obligations.
I/O--Interest Only.
* R.E.M.I.C.--Real Estate Mortgage Investment Conduit.
(dag) Portion of securities on loan; see Note 4.
# Includes $24,765,500 of market value segregated for interest rate swap.
-5- See Notes to Financial Statements.
<PAGE>
<PAGE>
PRUDENTIAL GOVERNMENT PLUS FUND
Statement of Assets and Liabilities
<TABLE>
<CAPTION>
February 28,
Assets 1994
--------------
<S> <C>
Investments, at value (cost $2,233,490,576)............................................. $2,272,874,437
Cash.................................................................................... 9,605,382
Collateral for securities loaned, at value (Note 4)..................................... 255,641,000
Receivable for investments sold......................................................... 27,629,173
Interest receivable..................................................................... 19,549,204
Receivable for Fund shares sold......................................................... 2,385,419
Prepaid expenses and other assets....................................................... 72,545
--------------
Total assets........................................................................ 2,587,757,160
--------------
Liabilities
Payable upon return of securities loaned................................................ 255,641,000
Payable for investments purchased....................................................... 59,226,560
Payable for Fund shares reacquired...................................................... 12,558,202
Accrued expenses........................................................................ 2,508,747
Distribution fee payable................................................................ 1,567,069
Management fee payable.................................................................. 912,836
Unrealized depreciation on interest rate swap........................................... 709,355
Dividends payable....................................................................... 405,532
--------------
Total liabilities................................................................... 333,529,301
--------------
Net Assets.............................................................................. $2,254,227,859
--------------
--------------
Net assets were comprised of:
Common stock, at par.................................................................. $ 2,469,703
Paid-in capital in excess of par...................................................... 2,292,521,784
--------------
2,294,991,487
Accumulated net realized losses on investments........................................ (79,438,134)
Net unrealized appreciation on investments............................................ 38,674,506
--------------
Net assets at February 28, 1994..................................................... $2,254,227,859
--------------
--------------
Class A:
Net asset value and redemption price per share
($51,673,180 (div) 5,659,948 shares of common stock issued and outstanding)......... $9.13
Maximum sales charge (4.5% of offering price)......................................... .43
--------------
Maximum offering price to public...................................................... $9.56
--------------
--------------
Class B:
Net asset value, offering price and redemption price per share
($2,202,554,679 (div) 241,310,340 shares of common stock issued and outstanding).... $9.13
--------------
--------------
</TABLE>
See Notes to Financial Statements.
-6-
<PAGE>
<PAGE>
PRUDENTIAL GOVERNMENT PLUS FUND
Statement of Operations
<TABLE>
<CAPTION>
Year Ended
February 28,
Net Investment Income 1994
-------------
<S> <C>
Income
Interest (net of swap interest
expense of
$1,701,085)..................... $ 186,263,429
Income from securities loaned..... 149,782
-------------
186,413,211
-------------
Expenses
Distribution fee--Class A......... 86,160
Distribution fee--Class B......... 24,706,451
Management fee.................... 12,719,555
Transfer agent's fees and
expenses.......................... 3,015,000
Custodian's fees and expenses..... 945,000
Franchise taxes................... 575,000
Reports to shareholders........... 110,000
Insurance expense................. 84,000
Audit fee......................... 65,000
Registration fees................. 60,000
Directors' fees................... 48,000
Legal fees........................ 25,000
Miscellaneous..................... 22,693
-------------
Total expenses.................. 42,461,859
-------------
Net investment income............... 143,951,352
-------------
Realized and Unrealized Gain
(Loss) on Investments
Net realized gain (loss):
Investment transactions........... 75,825,651
Financial futures contract
transactions...................... (1,963,469)
-------------
73,862,182
-------------
Net change in unrealized
appreciation/depreciation:
Investments....................... (139,378,195)
Financial futures contracts....... 1,904,625
Interest rate swap................ (91,855)
-------------
(137,565,425)
-------------
Net loss on investments............. (63,703,243)
-------------
Net Increase in Net Assets
Resulting from Operations........... $ 80,248,109
-------------
-------------
</TABLE>
PRUDENTIAL GOVERNMENT PLUS FUND
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
Increase (Decrease) Year Ended February 28,
in Net Assets 1994 1993
-------------- --------------
<S> <C> <C>
Operations
Net investment
income.............. $ 143,951,352 $ 172,237,474
Net realized gain on
investment
transactions...... 73,862,182 11,549,799
Net change in
unrealized
appreciation on
investments....... (137,565,425) 90,857,686
-------------- --------------
Net increase in net
assets
resulting from
operations 80,248,109 274,644,959
-------------- --------------
Dividends and distributions (Note 1)
Dividends to shareholders from
net investment income
Class A........... (3,625,302) (3,345,358)
Class B........... (140,326,050) (168,892,116)
-------------- --------------
(143,951,352) (172,237,474)
-------------- --------------
Distributions to shareholders in
excess of accumulated gains
Class A........... (132,529) --
Class B........... (5,651,138) --
-------------- --------------
(5,783,667) --
-------------- --------------
Distributions to shareholders
from paid-in capital
in excess of par
Class A........... -- (584,384)
Class B........... -- (34,644,947)
-------------- --------------
-- (35,229,331)
-------------- --------------
Fund share transactions (Note 5)
Net proceeds from
shares
subscribed........ 238,679,715 442,653,683
Net asset value of
shares
issued to
shareholders in
reinvestment of
dividends and
distributions..... 83,988,251 112,659,073
Cost of shares
reacquired.......... (740,509,270) (638,544,074)
-------------- --------------
Decrease in net
assets from Fund
share
transactions...... (417,841,304) (83,231,318)
-------------- --------------
Total decrease........ (487,328,214) (16,053,164)
Net Assets
Beginning of year..... 2,741,556,073 2,757,609,237
-------------- --------------
End of year........... $2,254,227,859 $2,741,556,073
-------------- --------------
-------------- --------------
</TABLE>
See Notes to Financial Statements. See Notes to Financial Statements.
-7-
<PAGE>
<PAGE>
PRUDENTIAL GOVERNMENT PLUS FUND
Notes to Financial Statements
Prudential Government Plus Fund (the ``Fund'') is registered under the
Investment Company Act of 1940 as a diversified, open-end management investment
company. Investment operations commenced on April 22, 1985.
The investment objective of the Fund is to seek a high current return,
primarily through investment in U.S. Government securities and obligations
issued or guaranteed by U.S. Government agencies or instrumentalities. 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 policies followed by
the Fund in the preparation of its financial statements.
Security Valuation: The Fund values portfolio securities on the basis of
current market quotations provided by dealers or by a pricing service approved
by the Board of Directors, which uses information such as quotations from
dealers, market transactions in comparable securities, various relationships
between securities and calculations on yield to maturity in determining values.
Options and financial futures contracts listed on exchanges are valued at
their closing price on the applicable exchange. When market quotations are not
readily available, a security is valued at fair value as determined in good
faith by or under the direction of the Board of Directors.
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.
In connection with repurchase agreement transactions, the Fund's custodian
takes possession of the underlying collateral securities, the value of which
exceeds the principal amount of the repurchase transaction, including accrued
interest. To the extent that any repurchase transaction exceeds one business
day, the value of the collateral is marked-to-market on a daily basis to ensure
the adequacy of the collateral. 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.
Financial Futures Contracts: A financial futures contract is an agreement to
purchase (long) or sell (short) an agreed amount of debt securities at a set
price for delivery on a future date. Upon entering into a financial futures
contract, the Fund 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 Fund 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. The Fund invests in financial futures contracts solely for the purpose of
hedging its existing portfolio securities or securities the Fund intends to
purchase against fluctuations in value caused by changes in prevailing market
interest rates. Should interest rates move unexpectedly, the Fund 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. As of February 28, 1994, the Fund did not have
any open financial futures contracts.
Interest Rate Swap: An interest rate swap is an agreement between two parties
in which each party commits to make periodic interest payments to the other
based on a notional principal amount for a specified time period, e.g., an
exchange of floating rate payments for fixed rate payments. Interest rate
swaps only involve the accrual and exchange of interest payments between the
parties and do not involve the exchange or payment of the contracted notional
principal amount.
During the term of the swap, changes in the value of the swap are recognized
as unrealized gains or losses by ``marking-to-market'' to reflect the market
value of the swap. When the swap is terminated, the Fund will record a realized
gain or loss equal to the difference, if any, between the proceeds from (or
cost of) the closing transaction and the Fund's basis in the contract.
The Fund is exposed to credit loss in the event of non-performance by the
other party to the interest rate swap. However, the Fund does not anticipate
non-performance by any counterparty.
Securities Lending: The Fund may lend its U.S. Government securities to
broker-dealers or government securities dealers. The loans are secured by
collateral at least equal at all times to the market value of the securities
loaned. The Fund may bear the risk of delay in recovery of, or even loss
-8-
<PAGE>
<PAGE>
of rights in, the securities loaned should the borrower of the securities fail
financially. The Fund receives compensation for lending its securities in the
form of fees or it retains a portion of interest on the investment of any cash
received as collateral. The Fund also continues to receive interest on the
securities loaned and any gain or loss in the market price of the securities
loaned that may occur during the term of the loan will be for the account of
the Fund.
Securities Transactions and Investment Income: Securities transactions are
recorded on the trade date. Realized gains or losses on sales of securities are
calculated on the identified cost basis. Interest income is recorded on the
accrual basis. 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.
Dividends and Distributions: The Fund declares daily and pays monthly dividends
from net investment income. 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. These differences were primarily due to distributions in
excess of capital gains.
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 to its shareholders.
Therefore, no federal income tax provision is required.
Reclassification of Capital Accounts: Effective March 1, 1993, the Fund began
accounting and reporting for distributions to shareholders in accordance with
AICPA Statement of Position 93-2: Determination, Disclosure, and Financial
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 of adopting
this statement on amounts previously reported was to increase paid-in capital
by $50,139,714 and increase accumulated net realized losses on investments by
$50,139,714. During the year ended February 28, 1994, the Fund reclassified
$5,783,667 by reducing accumulated net realized losses on investments and
reducing paid-in capital in excess of par. 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 up to $3
billion and .35 of 1% of the average daily net assets of the Fund in excess of
$3 billion.
The Fund has distribution agreements with Prudential Mutual Fund
Distributors, Inc. (``PMFD''), who acts as the distributor of the Class A
shares of the Fund and Prudential Securities Incorporated (``PSI''), who acts
as distributor of the Class B shares of the Fund (collectively the
``Distributors''). To reimburse the Distributors for their expenses incurred
in distributing and servicing the Fund's Class A and 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 February 28, 1994. 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 1% of the average daily net assets up to $3 billion, .80 of 1% of the
next $1 billion of such net assets and .50 of 1% over $4 billion of the average
daily net assets of the Class B shares. Such expenses under Class B Plan were
charged at an effective rate of 1% of average daily net assets through January
31, 1994. Beginning February 1, 1994 the effective rate was reduced to .90 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
-9-
<PAGE>
<PAGE>
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 $405,000 in
front-end sales charges resulting from sales of Class A shares during the year
ended February 28, 1994. From these fees, PMFD paid such sales charges to
dealers 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. For the year ended February 28, 1994, PSI advised
the Fund that it received approximately $2,533,000 in contingent deferred sales
charges imposed upon redemptions by certain shareholders. PSI, as distributor,
has also advised the Fund that at February 28, 1994, the amount of distribution
expenses incurred by PSI and not yet reimbursed by the Fund or recovered
through contingent deferred sales charges approximated $147,003,000. 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.
Note 3. Other Prudential Mutual Fund
Transactions Services, Inc. (``PMFS''), a
With Affiliates wholly-owned subsidiary of
PMF, serves as the Fund's transfer agent. During
the year ended February 28, 1994, the Fund incurred fees of approximately
$2,348,000 for the services of PMFS. As of February 28, 1994, approximately
$184,000 of such fees were due to PMFS. Transfer agent fees and expenses in the
Statement of Operations also include certain out of pocket expenses paid to
non-affiliates.
Note 4. Portfolio Purchases and sales of
Securities investment securities, other than
short-term investments, for the year ended
February 28, 1994, were $2,156,643,118 and $1,985,244,278, respectively.
The Fund entered into an interest rate swap on October 2, 1992 with a
notional principal amount of $25 million. Under the terms of the swap, the Fund
receives interest at a floating rate (6-month LIBOR, currently 3.375%), which
is reset semi-annually, and pays interest at a fixed rate of 6.56%. The
notional principal amount is also reset semi-annually in accordance with a
prescribed formula. The notional principal amount as of February 28, 1994 was
$26,846,855. Net receipts or payments of such amounts are exchanged
semi-annually. The swap is scheduled to terminate on October 2, 2001.
As of February 28, 1994, the Fund had securities on loan with an aggregate
market value of $248,634,096. As of such date, the collateral held for
securities loaned was as follows: U.S. Treasury Notes in the principal amount
of $252,170,000, 3.875% - 6.375%, due 2/28/95 - 8/15/02; aggregate market
value--$255,641,000.
The federal income tax cost basis of the Fund's investments, at February 28,
1994 was approximately $2,233,502,295 and, accordingly, net unrealized
appreciation for federal income tax purposes was $39,372,142 (gross unrealized
appreciation--$75,247,115; gross unrealized depreciation--$35,874,973).
The Fund had a capital loss carryforward as of February 28, 1994 of
approximately $76,930,000 of which $34,965,000 expires in 1998 and $41,965,000
expires in 1999. Such carryforward amount is after realization of approximately
$76,930,000 in net taxable gains recognized during the fiscal year ended
February 28, 1994. Accordingly, no capital gains distribution is expected to be
paid to shareholders until net gains have been realized in excess of such
amounts.
Note 5. 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 2 billion shares of common stock, $.01 par value per share,
divided into two classes, designated Class A
-10-
<PAGE>
<PAGE>
and B common stock, each of which consists of one billion authorized shares.
Transactions in shares of common stock were as follows:
<TABLE>
<CAPTION>
Class A Shares Amount
<S> <C> <C>
----------- -------------
Year ended February 28, 1994:
Shares sold.................... 2,311,175 $ 21,702,798
Shares issued in reinvestment
of dividends and
distributions................ 284,558 2,664,856
Shares reacquired.............. (3,453,736) (32,339,525)
----------- -------------
Net decrease in shares
outstanding.................. (858,003) $ (7,971,871)
----------- -------------
----------- -------------
Year ended February 28, 1993:
Shares sold.................... 6,211,527 $ 57,328,040
Shares issued in reinvestment
of dividends and
distributions................ 307,151 2,831,942
Shares reacquired.............. (3,618,973) (33,157,621)
----------- -------------
Net increase in shares
outstanding.................. 2,899,705 $ 27,002,361
----------- -------------
----------- -------------
<CAPTION>
Class B Shares Amount
<S> <C> <C>
----------- -------------
Year ended February 28, 1994:
Shares sold.................... 23,072,579 $ 216,976,917
Shares issued in reinvestment
of dividends and
distributions................ 8,684,229 81,323,395
Shares reacquired.............. (75,476,876) (708,169,745)
----------- -------------
Net decrease in shares
outstanding.................. (43,720,068) $(409,869,433)
----------- -------------
----------- -------------
Year ended February 28, 1993:
Shares sold.................... 41,708,714 $ 385,325,643
Shares issued in reinvestment
of dividends and
distributions................ 11,918,614 109,827,131
Shares reacquired.............. (65,674,072) (605,386,453)
----------- -------------
Net decrease in shares
outstanding.................. (12,046,744) $(110,233,679)
----------- -------------
----------- -------------
</TABLE>
-11-
<PAGE>
<PAGE>
PRUDENTIAL GOVERNMENT PLUS FUND
Financial Highlights
<TABLE>
<CAPTION>
Class A Class B
---------------------------------------------------- -------------------------------------------------------------
January 22,
1990@
Years Ended February 28/29, Through Years Ended February 28/29,
------------------------------------- February 28, -------------------------------------------------------------
1994 1993 1992 1991 1990 1994 1993 1992 1991 1990
------- ------- ------- ------- ------------ ---------- ---------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset
value,
beginning
of
period... $ 9.40 $ 9.17 $ 9.02 $ 9.00 $ 9.17 $ 9.40 $ 9.17 $ 9.02 $ 9.00 $ 9.09
------- ------- ------- ------- ------ ---------- ---------- ---------- ---------- ---------
Income from
investment
operations
Net
investment
income... 0.61 0.66 0.68 0.69 0.06 0.53 0.58 0.60 0.62 0.68
Net
realized
and
unrealized
gain
(loss)
on
investment
transactions... (0.25) 0.35 0.37 0.26 (0.11) (0.25) 0.35 0.37 0.26 0.15
------- ------ ---- ---- ------ ------ ---- ---- ---- ----
Total
from
investment
operations... 0.36 1.01 1.05 0.95 (0.05) 0.28 0.93 0.97 0.88 0.83
------- ---- ---- ---- ------ ---- ---- ---- ---- ----
Less
distributions
Dividends
from net
investment
income... (0.61) (0.66) (0.68) (0.69) (0.06) (0.53) (0.58) (0.60) (0.62) (0.68)
Distributions
in excess
of
accumulated
gains... (0.02) -- -- -- -- (0.02) -- -- -- --
Distributions
from
paid-in
capital
in
excess
of
par..... -- (0.12) (0.22) (0.24) (0.06) -- (0.12) (0.22) (0.24) (0.24)
------- ------- ------- ------- ------ ----- ---------- ---------- ---------- ----------
Total
distributions... (0.63) (0.78) (0.90) (0.93) (0.12) (0.55) (0.70) (0.82) (0.86) (0.92)
------- ------- ------- ------- ------ ---------- ---------- ---------- ---------- ---------- ----------
Net asset
value,
end of
period... $ 9.13 $ 9.40 $ 9.17 $ 9.02 $ 9.00 $ 9.13 $ 9.40 $ 9.17 $ 9.02 $ 9.00
------- ------- ------- ------- ------ ---------- ---------- ---------- ---------- ----------
------- ------- ------- ------- ------ ---------- ---------- ---------- ---------- ----------
TOTAL
RETURN#:... 3.90% 11.55% 12.18% 11.21% (0.54)% 3.03% 10.61% 11.27% 10.35% 10.49%
RATIOS/SUPPLEMENTAL
DATA:
Net
assets,
end of
period
(000)... $51,673 $61,297 $33,181 $28,971 $1,961 $2,202,555 $2,680,259 $2,724,428 $3,127,587 $3,760,003
Average
net
assets
(000)... $55,921 $46,812 $29,534 $23,428 $ 501 $2,487,990 $2,670,924 $2,903,704 $3,432,948 $3,814,455
Ratios to
average
net
assets:
Expenses,
including
distribution
fees... 0.84% 0.84% 0.86% 0.85% 0.92%* 1.68% 1.69% 1.71% 1.67% 1.49%
Expenses,
excluding
distribution
fees... 0.69% 0.69% 0.71% 0.70% 0.76%* 0.69% 0.69% 0.71% 0.70% 0.64%
Net
investment
income... 6.48% 7.17% 7.51% 7.76% 9.11%* 5.64% 6.32% 6.66% 6.94% 7.46%
Portfolio
turnover
rate.... 80% 36% 187% 213% 329% 80% 36% 187% 213% 329%
</TABLE>
- ---------------
@ 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.
See Notes to Financial Statements.
-12-
<PAGE>
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Shareholders and Board of Directors
Prudential Government Plus Fund
We have audited the accompanying statement of assets and liabilities of
Prudential Government Plus Fund, including the portfolio of investments, as of
February 28, 1994, the related statements of operations for the year then ended
and of changes in 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. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of the securities owned as of
February 28, 1994 by correspondence with the custodian and brokers; where
replies were not received from brokers, we performed other auditing procedures.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Prudential
Government Plus Fund as of February 28, 1994, the results of its operations,
the changes in its net assets and the financial highlights for the respective
stated periods in conformity with generally accepted accounting principles.
Deloitte & Touche
New York, New York
April 14, 1994
-13-
<PAGE>
<PAGE>
Past performance is not predictive of future performance and an investor's
shares 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 Prudential Government Plus Fund (Class A and
Class B) with similar investments in the Lehman Brothers Government Bond Index
(Bond Index) and the Salomon Bros. Mortgage Backed Security Index (MBS 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
(February 28), as measured on a quarterly basis, beginning in 1990 for Class
A shares and in 1985 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 February 28, 1994; (c) all recurring fees (including management
fees) were deducted; and (d) all dividends and distributions were reinvested.
The Bond Index is a weighted index comprised of securities issued or backed
by the U.S. government, its agencies and instrumentalities with a remaining
maturity of one to thirty years. The MBS Index is comprised of mortgage-backed
pass-through securities consisting 70% of pass-through securities issued by the
Government National Mortgage Association, 23% by the Federal Home Loan Mortgage
Corporation, 5% by the Federal National Mortgage Association and the balance a
mixture of conventional and Federal Housing Administration project mortgage
pools. The Bond Index and MBS Index are unmanaged indices and include 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 Bond Index and the MBS Index may differ
substantially from the securities in the Fund's portfolio. The Bond Index and
the MBS Index are not the only indices that may be used to characterize
performance of government bond funds and other indices may portray different
comparative performance.
-14-
<PAGE>
<PAGE>
Directors
Edward D. Beach
Delayne D. Gold
Harry A. Jacobs, Jr.
Lawrence C. McQuade
Thomas T. Mooney
Thomas H. O'Brien
Thomas A. Owens, Jr.
Richard A. Redeker
Stanley E. Shirk
Officers
Lawrence C. McQuade, President
David W. Drasnin, Vice President
Robert F. Gunia, Vice President
Susan C. Cote, Treasurer
S. Jane Rose, Secretary
Domenick Pugliese, 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
Deloitte & Touche
1633 Broadway
New York, NY 10019
Legal Counsel
Shereff, Friedman, Hoffman & Goodman
919 Third Avenue
New York, NY 10022
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.
744339102 MF 128E
744339201 Cat. #642157Z