<PAGE>
Prudential
U.S. Government
Fund
- ------------------------------------------------
Prudential Mutual Funds
BUILDING YOUR FUTURE
(LOGO)
ON OUR STRENGTH
<PAGE>
LETTER TO
SHAREHOLDERS
December 10, 1993
Dear Shareholder
During the past year, U.S. government bond investors enjoyed strong
total returns as interest rates fell to 25-year lows in a slow growth,
low inflation economy. We are pleased to report that the Prudential U.S.
Government Fund benefitted from these trends.
The Fund seeks a high total return through a combination of capital
appreciation plus high current income by investing in U.S.
government securities.
Early in 1993, as the accompanying pie charts show, the Fund reduced
its U.S. government position so that roughly 26% of the portfolio
could be invested in corporate and foreign securities rated A or higher.
The portfolio maintains a long-term effective maturity of approximately
10 years.
<TABLE>
Performance
As of October 31, 1993
<CAPTION>
12-month NAV 30 Day
Total Return 10/31/93 11/01/92 SEC Yield
<S> <C> <C> <C> <C>
U.S. Government Fund
Class A 16.4% $10.59 $9.69 5.02%
Class B 15.4% $10.60 $9.70 4.39%
Lipper U.S. Government Bond
Fund Average 11.9% N/A N/A N/A
</TABLE>
Falling Rates Drive Prices Higher
Long-term interest rates surprised many investors by falling almost
two percentage points (200 basis points) in the past 12 months.
In fact, the 30-year Treasury bond's yield stood at 6.0% on October
31, 1993, down from 7.6% one year ago. Falling interest rates produced
substantial price gains for long-term U.S. government bond holders,
since bond prices generally rise when
interest rates fall, and long-term Treasury securities demonstrate
greater sensitivity to this effect than do shorter-term Treasurys.
-1-
<PAGE>
The Fund performed well in this environment for several reasons. First,
a large part of the portfolio was in
intermediate- and long-term Treasury and U.S. government bonds. Our
Treasury holdings at the end of October were 30% of assets and
government agency debt comprised another 23%. In addition, the
final maturity of over 50% of the bonds in the
portfolio is between 15 and 30 years. The price of the 30 year
Treasury benchmark generally rises about 12% when interest rates
fall one percentage point (of course, prices will also fall if
interest rates rise.)
Corporate and Foreign Bonds Perform
We are especially pleased to note that the Investment
Adviser's decision to invest a modest portion of assets in
investment-grade corporate and foreign bonds was positive
for the Fund. This category includes U.S. companies as well as
international businesses and governments that issue ""yankee'' bonds.
These securities provided slightly higher yields than U.S. government
securities of similar maturity with only a modest increase in credit
risk. Since these bonds are denominated in
U.S. dollars, they usually do not entail currency risk.
Examples of Fund positions offering attractive yields include the
Republic of Italy, U.S. Life Corp. and Zeneca, a U.K.-based
pharmaceutical concern. The Adviser carefully analyzes the market
for issues that fit its high credit quality guidelines: the bonds,
from issuers with good earnings and strong management, must be rated
A or better. The portfolio's average credit quality remains high with
about 76% of the holdings rated AAA, the
safest category, or if unrated, of equivalent quality.
The low returns from traditional bank savings instruments have
also contributed to this year's strong bond performance as investors,
unhappy with low returns, have created an unusually high
demand for bonds.
Mortgage Prepayments Increase
Mortgage backed securities (MBS) had positive, but disappointing
performance this year. As rates fell, homeowners rushed to
refinance their old, higher interest rate mortgages with new lower
interest loans. Despite being good yield producers, this
abnormally high prepayment level led the MBS market to
underperform similar maturity U.S. government bonds by approximately
440 basis points for the 12 months ended October 31, 1993. Since our
MBS holdings are a nominal percentage of total assets, prepayments did
not significantly affect Fund performance. We are, however, monitoring
our mortgage pools to protect against losses.
-2-
<PAGE>
Looking To Next Year
The outlook for long-term bonds is difficult to accurately determine,
but it appears that the yield on the 30-year Treasury has fallen into
a trading range between 6.0% and 6.5%. We believe that rates will
remain in this range in the near term though supply and demand factors may
cause temporary fluctuations in price. But, historically, the long
bond yield should hover about 3% over the rate of growth, which most
economists expect to be about 3.0% in 1994. Until a definite upward
trend in rates materializes, we plan to
maintain our current portfolio weightings. If rates do rise, we will
attempt to shorten the Fund's effective maturity and duration. The
shorter maturities and higher relative corporate yields should help
protect against severe net asset value volatility in the event economic
growth and inflation take off in coming months.
Once again, we appreciate having you as a Prudential U.S. Government
Fund shareholder and are pleased to report our activities to
you.
Sincerely,
Lawrence C. McQuade
President
Annamarie Carlucci
Portfolio Manager
-3-
<PAGE>
<TABLE>
<CAPTION>
Principal
Amount Value
(000) Description (Note 1)
<C> <S> <C>
LONG-TERM INVESTMENTS--96.5%
U.S. Treasury Securities--30.3%
U.S. Treasury Bonds,
$ 4,000 10.75%, 8/15/05.............. $ 5,746,880
6,400 12.00%, 8/15/13.............. 10,206,976
6,000 11.25%, 2/15/15.............. 9,580,320
2,030 8.125%, 8/15/19.............. 2,508,309
4,000 7.875%, 2/15/21.............. 4,836,240
U.S. Treasury Notes,
1,000 3.875%, 9/30/95.............. 998,120
1,000 7.75%, 3/31/96............... 1,081,410
3,000 6.75%, 5/31/97............... 3,220,320
6,000 5.125%, 3/31/98.............. 6,090,960
4,500 5.125%, 4/30/98.............. 4,564,665
Zero Coupon Treasury Bonds,
16,000 Zero Coupon, 11/15/15........ 3,780,319
------------
Total U.S. Treasury
Securities
(cost $48,552,767)........... 52,614,519
------------
U.S. Government Agencies--22.7%
Federal National Mortgage
Assoc.,
5,000 9.80%, 5/10/00............... 5,415,600
40,000 Zero Coupon, 7/05/14......... 9,700,000
Resolution Funding Corp.,
15,000 8.875%, 7/15/20.............. 19,954,650
Tennessee Valley Auth.,
4,000 8.75%, 10/01/19.............. 4,368,440
------------
Total U.S. Government
Agencies
(cost $31,904,386)........... 39,438,690
------------
Mortgage-Related Securities--17.4%
Federal Home Loan Mortgage
Corp.,
1,500 7.50%, 9/15/05, (CMO)........ 1,569,375
2,200 7.50%, 7/15/07, (CMO)........ 2,271,500
Federal National Mortgage
Assoc.,
5,000 8.50%, 3/25/09, (CMO)........ 5,253,100
19 Series 111, Class D, (I/O),
(CMO)...................... 71,009
5,000 6.50%, 7/25/20, (CMO)........ 4,998,400
5,000 8.25%, 3/25/21, (CMO)........ 5,328,100
Government National Mortgage
Assoc.,
$ 6,017 8.50%, 6/15/21............... $ 6,375,168
4,125 9.00%, 11/15/15-8/15/21...... 4,403,404
------------
Total Mortgage-Related
Securities
(cost $29,438,930)......... 30,270,056
------------
Corporate Bonds--19.3%
Domestic--15.9%
Bausch & Lomb, Inc.,
3,500 6.80%, 12/12/96.............. 3,696,315
Communications Satellite
Corp.,
3,000 8.125%, 4/01/04.............. 3,434,700
Dean Witter Discover & Co.,
1,500 6.00%, 3/01/98............... 1,536,810
Ford Motor Credit Co.,
2,000 6.25%, 2/26/98............... 2,061,740
Georgia Power Co.,
2,000 4.75%, 3/01/96............... 2,008,820
Heinz (H.J.) Co.,
1,500 6.875%, 1/15/03.............. 1,606,845
NationsBank Corp.,
2,500 6.625%, 1/15/98.............. 2,629,900
Republic N.Y. Corp.,
2,000 9.70%, 2/01/09............... 2,610,880
Southern California Edison
Co.,
2,000 5.875%, 2/01/98.............. 2,051,800
USLIFE Corp.,
2,000 6.375%, 6/15/00.............. 2,039,240
Zeneca Wilmington, Inc.,
2,000 6.30%, 6/15/03............... 2,034,400
Zurich Reinsurance Centre
Holdings, Inc.,
2,000 7.125%, 10/15/23............. 1,962,060
------------
Total Domestic
(cost $27,188,210)......... 27,673,510
------------
</TABLE>
-2- See Notes to Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
Principal
Amount Value
(000) Description (Note 1)
<C> <S> <C>
Yankee--3.4%
Hanson Plc.,
$ 2,000 7.735%, 1/15/03.............. $ 2,168,360
Pohang Iron & Steel Ltd.,
2,000 6.625%, 7/01/03.............. 2,021,780
Svenska Handelsbanken,
1,500 8.125%, 8/15/07.............. 1,714,950
------------
Total Yankee
(cost $5,586,738).......... 5,905,090
------------
Total Corporate Bonds
(cost $32,774,948)........... 33,578,600
------------
Foreign Government Bonds--3.7%
Province of British Columbia,
2,000 7.00%, 1/15/03............... 2,159,760
Province of Quebec,
2,000 9.125%, 3/01/00.............. 2,355,140
Republic of Italy,
2,000 6.875%, 9/27/23.............. 1,970,820
------------
Total Foreign Government
Bonds
(cost $6,170,820)............ 6,485,720
------------
Asset Backed Securities--3.1%
Chase Manhattan Credit Card
Trust,
$ 5,000 7.40%, 5/15/00
(cost $4,993,900).......... $ 5,364,050
------------
Total Long-Term Investments
(cost $153,835,751)........ 167,751,635
------------
SHORT-TERM INVESTMENT
Time Deposit--1.7%
Fuji Bank, Ltd.,
2,880 3.00%, 11/01/93
(cost $2,880,000).......... 2,880,000
------------
Total Investments--98.2%
(cost $156,715,751; Note
4)......................... 170,631,635
Other assets in excess of
liabilities--1.8%.......... 3,123,871
------------
Net Assets--100%............. $173,755,506
------------
------------
</TABLE>
- ---------------
CMO--Collateralized Mortgage Obligations.
I/O--Interest Only.
-3- See Notes to Financial Statements.
<PAGE>
PRUDENTIAL U.S. GOVERNMENT FUND
Statement of Assets and Liabilities
<TABLE>
<CAPTION>
Assets October 31, 1993
----------------
<S> <C>
Investments, at value (cost $156,715,751).............................................. $170,631,635
Cash................................................................................... 1,539,593
Interest receivable.................................................................... 2,231,697
Receivable for Fund shares sold........................................................ 358,070
Other assets........................................................................... 3,867
----------------
Total assets......................................................................... 174,764,862
----------------
Liabilities
Payable for Fund shares reacquired..................................................... 407,826
Dividends payable...................................................................... 256,858
Accrued expenses....................................................................... 127,049
Due to Distributors.................................................................... 143,443
Due to Manager......................................................................... 74,180
----------------
Total liabilities.................................................................... 1,009,356
----------------
Net Assets............................................................................. $173,755,506
----------------
----------------
Net assets were comprised of:
Shares of beneficial interest, at par................................................ $ 163,990
Paid-in capital in excess of par..................................................... 169,606,591
----------------
169,770,581
Accumulated net realized losses...................................................... (9,930,959)
Net unrealized appreciation.......................................................... 13,915,884
----------------
Net Assets at October 31, 1993......................................................... $173,755,506
----------------
----------------
Class A:
Net asset value and redemption price per share
($6,848,531 / 646,730 shares of beneficial interest issued and outstanding)........ $10.59
Maximum sales charge (4.5% of offering price)........................................ .50
Maximum offering price to public..................................................... $11.09
----------------
----------------
Class B:
Net asset value, offering price and redemption price per share
($166,906,975 / 15,752,300 shares of beneficial interest issued and outstanding)... $10.60
----------------
----------------
</TABLE>
See Notes to Financial Statements.
-4-
<PAGE>
PRUDENTIAL U.S. GOVERNMENT FUND
Statement of Operations
<TABLE>
<CAPTION>
Year Ended
October 31,
Net Investment Income 1993
-----------
<S> <C>
Income
Interest and discount earned....... $12,311,281
-----------
Expenses
Distribution fee--Class A.......... 9,508
Distribution fee--Class B.......... 1,621,067
Management fee..................... 842,229
Transfer agent's fees and
expenses........................... 275,000
Custodian's fees and expenses...... 110,000
Trustees' fees..................... 54,000
Registration fees.................. 39,000
Audit fee.......................... 30,000
Legal fees......................... 5,000
Miscellaneous...................... 13,064
-----------
Total expenses................... 2,998,868
-----------
Net investment income................ 9,312,413
-----------
Realized and Unrealized Gain (Loss)
on Investments
Net realized gain (loss) on:
Investment transactions............ 6,713,276
Financial futures contracts........ (612,137)
-----------
6,101,139
-----------
Net change in unrealized appreciation
of investments..................... 8,892,501
-----------
Net gain on investments.............. 14,993,640
-----------
Net Increase in Net Assets Resulting
from Operations...................... $24,306,053
-----------
-----------
</TABLE>
PRUDENTIAL U.S. GOVERNMENT FUND
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
Year Ended October 31,
Increase (Decrease) ----------------------------
in Net Assets 1993 1992
------------ ------------
<S> <C> <C>
Operations
Net investment income... $ 9,312,413 $ 9,644,784
Net realized gain on
investments........... 6,101,139 3,202,179
Net change in unrealized
appreciation of
investments........... 8,892,501 (23,492)
------------ ------------
Net increase in net
assets resulting from
operations............ 24,306,053 12,823,471
------------ ------------
Dividends to shareholders
from net investment
income (Note1)
Class A................. (402,303) (262,423)
Class B................. (8,910,110) (9,382,361)
------------ ------------
(9,312,413) (9,644,784)
------------ ------------
Fund share transactions
(Note 5)
Net proceeds from shares
subscribed............ 83,709,350 69,673,768
Net asset value of
shares issued in
reinvestment of
dividends............. 6,045,712 6,024,862
Cost of shares
reacquired.............. (91,160,162) (80,074,858)
------------ ------------
Net decrease in net
assets from Fund share
transactions.......... (1,405,100) (4,376,228)
------------ ------------
Total increase
(decrease).............. 13,588,540 (1,197,541)
Net Assets
Beginning of year......... 160,166,966 161,364,507
------------ ------------
End of year............... $173,755,506 $160,166,966
------------ ------------
------------ ------------
</TABLE>
See Notes to Financial Statements. See Notes to Financial Statements.
-5-
<PAGE>
PRUDENTIAL U.S. GOVERNMENT FUND
Notes to Financial Statements
Prudential U.S. Government Fund (the ``Fund'') was organized as a
Massachusetts business trust on October 2, 1986. Investment operations commenced
on November 7, 1986. The Fund's primary investment objective is to seek a high
total return, capital appreciation plus high current income, 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, 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 Board of Trustees has authorized the use of an
independent pricing service to determine valuations for normal institutional
size trading units of securities. The pricing service considers such factors as
security prices, yields, maturities, call features, ratings and developments
relating to specific securities in arriving at securities valuations. 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 Trustees.
Short-term securities which mature in more than 60 days are valued at current
market quotations. Short-term securities which mature in 60 days or less are
valued at amortized cost which approximates market value.
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 Series each day, depending on the daily
fluctuations in the value of the underlying security. Such variation margin is
recorded for financial statement purposes on a daily basis as unrealized gain or
loss. 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.
Securities Transactions and Investment Income: Securities transactions are
recorded on the trade date. Realized gains or losses on sales of investments 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.
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.
Dividends and Distributions: Dividends from net investment income are accrued
daily and payable monthly. The Fund will distribute annually any net realized
capital gains in excess of capital loss carry-forward if any. Dividends and
distributions are recorded on the ex-dividend date.
Income distributions and capital gains distributions are determined in
accordance with income tax regulations which may differ from generally accepted
accounting principles.
Reclassification of Capital Accounts: Effective November 1, 1992, the Fund began
accounting and reporting 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 caused by adopting this statement was to
decrease paid-in-capital and decrease accumulated net realized losses by $6,842
compared to amounts previously reported through October
-6-
<PAGE>
31, 1992. Net investment income, net realized gains, and net assets were not
affected by this change.
Note 2. Agreements The Fund has a manage
ment 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 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 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
distribution-related expenses with respect to Class A shares, accrued daily and
payable monthly, 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 fiscal year
ended October 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 the Class B shares, accrued daily
and paid monthly, at an annual rate of up to 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 $107,100 in
front-end sales charges resulting from sales of Class A shares during the fiscal
year ended October 31, 1993. From these fees, PMFD paid such sales charges to
dealers which in turn paid commissions to sales persons.
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 October 31, 1993, PSI advised
the Fund that it received approximately $423,200 in contingent deferred sales
charges imposed upon redemptions by shareholders. PSI, as distributor, has also
advised the Fund that at October 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 $34,800. 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 fiscal year ended October 31, 1993, the Fund incurred fees of approximately
$215,000 for the services of PMFS. As of October 31, 1993, approximately $18,000
of such fees were due to PMFS. Transfer agent fees and expenses in the Statement
of
-7-
<PAGE>
Operations 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 fiscal year
ended October 31, 1993 were $98,802,525 and $101,424,731, respectively.
The federal income tax basis of the Fund's investments at October 31, 1993
was $156,715,751 and accordingly, net unrealized appreciation of investments for
federal income tax purposes was $13,915,884 (gross unrealized
appreciation-$14,521,731; gross unrealized depreciation-$605,847).
For federal income tax purposes, the Fund has a capital loss carryforward as
of October 31, 1993 of approximately $9,319,000 of which $1,017,000 expires in
1997 and $8,302,000 expires in 1998. Accordingly, no capital gains distribution
is expected to be paid to shareholders until net gains have been realized in
excess of such carryforward.
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 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 an unlimited number of shares of beneficial interest
of each class at $.01 par value. Transactions in shares of beneficial interest
for the fiscal years ended October 31, 1993 and 1992 were as follows:
<TABLE>
<CAPTION>
Class A Shares Amount
- ------------------------------ -------------- ------------
<S> <C> <C>
Year ended October 31, 1993:
Shares sold................... 750,713 $ 7,553,655
Shares issued in reinvestment
of
dividends................... 26,658 272,022
Shares reacquired............. (649,104) (6,560,954)
-------------- ------------
Net increase in shares
outstanding................. 128,267 $ 1,264,723
-------------- ------------
-------------- ------------
<CAPTION>
Year ended October 31, 1992:
<S> <C> <C>
Shares sold................... 585,157 $ 5,686,194
Shares issued in reinvestment
of
dividends................... 17,268 167,246
Shares reacquired............. (355,255) (3,470,324)
-------------- ------------
Net increase in shares
outstanding................. 247,170 $ 2,383,116
<CAPTION>
-------------- ------------
-------------- ------------
Class B
- ------------------------------
<S> <C> <C>
Year ended October 31, 1993:
Shares sold................... 7,467,812 $ 76,155,695
Shares issued in reinvestment
of
dividends................... 565,555 5,773,690
Shares reacquired............. (8,280,106) (84,599,208)
-------------- ------------
Net decrease in shares
outstanding................. (246,739) $ (2,669,823)
-------------- ------------
-------------- ------------
Year ended October 31, 1992:
Shares sold................... 6,589,480 $ 63,987,574
Shares issued in reinvestment
of
dividends................... 605,743 5,857,616
Shares reacquired............. (7,916,199) (76,604,534)
-------------- ------------
Net decrease in shares
outstanding................. (720,976) $ (6,759,344)
-------------- ------------
-------------- ------------
</TABLE>
-8-
<PAGE>
PRUDENTIAL U.S. GOVERNMENT FUND
Financial Highlights
<TABLE>
<CAPTION>
Class A Class B
------------------------------------------ --------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
January 22,
1990@
Year Ended October 31, Through Year Ended October 31,
-------------------------- October 31, --------------------------------------------------------
1993 1992 1991 1990 1993 1992 1991 1990 1989
<CAPTION>
------ ------ ------ ------------ -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of period... $ 9.69 $ 9.49 $ 8.97 $ 9.31 $ 9.70 $ 9.50 $ 8.97 $ 9.54 $ 9.05
------ ------ ------ ------ -------- -------- -------- -------- --------
Income from investment operations
Net investment income... .64 .68 .66 .55 .55 .59 .59 .62 .64
Net realized and
unrealized gain (loss)
on investment
transactions.......... .90 .20 .52 (.34) .90 .20 .53 (.57) .52
------ ------ ------ ------ -------- -------- -------- -------- --------
Total from investment
operations.......... 1.52 .88 1.18 .21 1.46 .79 1.12 .05 1.16
------ ------ ------ ------ -------- -------- -------- -------- --------
Less distributions
Dividends from net
investment income..... (.64) (.68) (.66) (.55) (.55) (.59) (.59) (.62) (.64)
Distributions from
paid-in-capital....... -- -- -- -- -- -- -- -- (.03)
------ ------ ------ ------ -------- -------- -------- -------- --------
Total distributions... (.64) (.68) (.66) (.55) (.55) (.59) (.59) (.62) (.67)
------ ------ ------ ------ -------- -------- -------- -------- --------
Net asset value, end of
period................ $10.59 $ 9.69 $ 9.49 $ 8.97 $ 10.60 $ 9.70 $ 9.50 $ 8.97 $ 9.54
------ ------ ------ ------ -------- -------- -------- -------- --------
------ ------ ------ ------ -------- -------- -------- -------- --------
TOTAL RETURN#........... 16.43% 9.39% 13.72% 2.16% 15.44% 8.46% 12.86% .64% 13.53%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of
period (000).......... $6,849 $5,024 $2,574 $1,617 $166,907 $155,143 $158,790 $172,521 $169,825
Average net assets
(000)................. $6,339 $3,769 $2,158 $ 918 $162,107 $154,502 $168,421 $174,276 $156,322
Ratios to average net
assets:
Expenses, including
distribution fees... .96% .94% 1.24% 1.08%* 1.81% 1.79% 2.09% 1.99% 2.05%
Expenses, excluding
distribution fees... .81% .79% 1.09% .94%* .81% .79% 1.09% .99% 1.06%
Net investment
income.............. 6.35% 6.92% 7.24% 7.16%* 5.50% 6.07% 6.39% 6.89% 6.95%
Portfolio turnover...... 66% 66% 236% 608% 66% 66% 236% 608% 392%
</TABLE>
- ---------------
* Annualized.
@ Commencement of offering of Class A shares.
# 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.
-9-
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Shareholders and Trustees
Prudential U.S. Government Fund
We have audited the accompanying statement of assets and liabilities of
Prudential U.S. Government Fund, including the portfolio of investments, as of
October 31, 1993, 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
October 31, 1993 by correspondence with the custodian. 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 U.S.
Government Fund, as of October 31, 1993 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
December 15, 1993
IMPORTANT NOTICE FOR SHAREHOLDERS
Mutual fund dividends which have been derived from interest on federal
obligations are not taxable to New York, California, Massachusetts and Oregon
shareholders providing the mutual fund meets certain requirements mandated by
the state taxing authorities. We are pleased to report that 50% of the dividends
paid by the Fund qualify for such tax deduction.
For more detailed information regarding your state and local taxes, you
should contact your tax adviser or the state/local taxing authorities.
-10-
<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 U.S. Government Fund (Class A and
Class B) with a similar investment in the Lehman Brothers Government Bond Index
(LGBI) 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 (October 31), as measured on a quarterly basis, beginning in 1990 for Class
A shares and in 1986 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
October 31, 1993; (c) all recurring fees (including management fees) were
deducted; and (d) all dividends and distributions were reinvested.
The LGBI 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 LGBI 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 LGBI may differ substantially from the securities
in the Fund's portfolio. The LGBI is not the only index that may be used to
characterize performance of income funds and other indices may portray different
comparative performance.
-11-
<PAGE>
Trustees
Stephen C. Eyre
Delayne D. Gold
Don G. Hoff
Harry A. Jacobs, Jr.
Sidney R. Knafel
Robert E. La Blanc
Lawrence C. McQuade
Thomas A. Owens, Jr.
Richard A. Redeker
Clay T. Whitehead
Officers
Lawrence C. McQuade, 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.
743914202 MF 130E
743914103 Cat. #4401177
<PAGE>
I. Prudential U.S. Government Fund
Performance Charts
A. Historical Investment Results
The chart shows comparative historical investment results for a one-year
period for the Class A shares of the Fund, the Class B shares of the Fund, and
the Lipper U.S. Government Bond Fund Average without taking into account
front-end or contingent deferred sales charges.
B. Average Annual Total Returns
The chart also shows the average annual total returns for the one-
year, five-year and since inception periods ended September 30,
1993 for Class A and Class B shares taking into account any
applicable sales charges.
<PAGE>
II. Prudential U.S. Government Fund
Two pie charts showing asset allocation by type of investment for the 1993
fiscal year end and the 1992 fiscal year end. The first chart shows the
allocation as of October 31, 1993, which was 3.1% in asset-backed securities,
11.2% in CMOS, 30.3% in U.S. Treasury securities, 3.5% in cash, 6.2% in GNMAs,
22.7% in U.S. agency securities and 3.7% in foreign government bonds.
The second chart shows the allocation as of October 31, 1992, which was 3.9% in
asset-backed securities, 12.4% in CMOS, 54.2% in U.S. Treasury securities, 1.4%
in cash, 9.5% in GNMAs and 18.6% in U.S. agency securities.
<PAGE>
III. Prudential U.S. Government Fund
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
Morgan Stanley Pacific Index. Included in the charts are the
average annual total returns for Class A for the one-year and
since inception periods with and without sales charges and Class B
for the one-year, five year and since inception periods with and
without sales charges.
