ANNUAL REPORT
October 31, 1994
Prudential
U.S. Government
Fund
- ---------------
(ICON)
(LOGO)
<PAGE>
Letter to
Shareholders
------------------------
December 6, 1994
Dear Shareholder:
In 1994, interest rates have risen sharply, at a pace unseen in decades.
Since bond prices fall as interest rates rise, it has been an unsettling year
for fixed income investors: the total return of both your Fund and the average
U.S. government fund is in negative territory. Looking ahead, prospects seem
brighter. As of this writing, long-term Treasury rates have reached 8% and
appear to be approaching the top of this interest rate cycle.
<TABLE>
PERFORMANCE*
As of October 31, 1994
<CAPTION>
30-day
NAV SEC Yield
10/31/94 10/31/94
<S> <C> <C>
Class A $9.16 6.7%
Class B $9.16 6.2
Class C $9.16 6.1
</TABLE>
<TABLE>
Average Annual Returns
As of September 30, 1994
<CAPTION>
1 Year 5 Year Since Inception**
<S> <C> <C> <C>
Class A -11.0% N/A 6.0%
Class B -12.9 6.0% 5.9
Class C N/A N/A N/A
</TABLE>
An investment in the Fund is neither insured nor guaranteed by the U.S.
government. Investment return and principal value will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than their original
cost. Past performance is no guarantee of future results.
N/A -- Average annual returns for Class C shares are not reported as
operations commenced in August, 1994.
*Source: Prudential Mutual Fund Management and Lipper Analytical Services,
Inc. Returns assume payment of applicable sales charges. Class A shares
assume the imposition of a 4% sales charge. For Class B shares, the returns
assume the effects of a declining sales charge of 5%, 4%, 3%, 2%, 1% and 1%,
respectively, over a six-year period. Class B shares will automatically
convert to Class A shares approximately seven years after purchase. Class C
shares are sold subject to a contingent deferred sales charge of 1% during the
first year.
**Inception of Class A is 1/22/90; Class B is 11/07/86; Class C is 8/1/94.
-1-
<PAGE>
Our Objective
The Prudential U.S. Government Fund seeks to provide high total return
through a combination of capital appreciation plus high current income by
investing primarily in U.S. government securities and obligations issued or
guaranteed by U.S. government agencies or instrumentalities. It also may
invest up to 35% in assets in corporate bonds and other debt securities.
As of October 31, 1994, the Fund held 26% in such assets and had an effective
maturity of about 12 years.
The Fed Moves
The Federal Reserve has increased the federal funds rate (the overnight
bank lending rate) six times this year, to 5.50% from 3%. As short-term
interest rates climbed, the bond market drove long-term rates higher as well.
The yield of the benchmark 30-year U.S. Treasury at this writing is over 8% --
an increase of more than two full percentage points over its low of 5.8% last
October -- an historically rapid rise.
The Fed believed that higher short-term interest rates were necessary to
moderate economic growth and keep inflation in check. Third-quarter gross
domestic product (GDP), the value of goods produced and services delivered,
grew at an annualized rate of 3.4%, faster than expected, and still more than
the 2.5% to 3% the Fed would like. Pessimists have argued that inflation must
surely follow, since materials and labor prices can rise rapidly in an
overheating economy. But inflation to date is within the Fed's target when
measured on an actual basis. Inflation as measured by the Consumer Price Index
has been running at 2.8% this year, versus 2.7% in 1993. So it is the fearof
rising inflation that has spooked the markets -- the prospect, but not the
reality -- of any increase.
Interest Rates: How High Is High?
Interest rates have risen at a dizzying rate. For example, if you had
purchased a 30-year U.S. Treasury bond in October, 1993, you would have
received an annual interest rate approaching 6%. Today, you can get a similar
yield on a six-month Treasury bill. As you know, the prices of bonds move
inversely with changes in interest rates: when interest rates rise, bond
prices fall and vice versa. And longer-maturity bonds are more sensitive to
interest rate movements than shorter-term bonds. To date this year,
intermediate-term U.S. government bonds have dropped nearly 2% while long-term
governments have fallen nearly 9% on a total return basis, as measured by
Lehman Brothers.
Long-term yields may continue to climb, but we believe they are now much
closer to the top than to the bottom of this interest rate cycle. Yields have
now risen to attractive levels. The 10-year U.S. Treasury now yields
-2-
<PAGE>
7.79% and the 30-year is at 7.96%. These levels represent historically high
real rates of return over inflation. In November, demand for bonds rose as
institutional investors rushed to lock in attractive yields, providing support
for the market.
The Fund Is Managed For The Long-Term
The Fund is managed with a long-term focus, which means we maintain a
maturity that is longer than many other funds. Over time, this approach
should provide higher total returns than short-term funds but will exhibit
more price volatility. The Fund's effective maturity is nearly 12 years.
We Stayed the Course
The Fund's sector exposure remained steady over the past six months. Our
position in U.S. governments remained unchanged at about 40% of assets, and
mortgage-backed securities held at about 30%. We trimmed corporates slightly,
from 22% of assets to about 19%, and increased cash to 4% from less than one
percent.
When Profits Became Available, We Seized Opportunities
To protect the Fund's net asset value as interest rates rose, we tried to
aggressively take profits whenever they became available. We did this by
selling positions in GNMA (Ginnie Mae) 9% coupon mortgage-backed securities
and CMOs (Collateralized Mortgage Obligations) which did well over the period.
Mortgages generally performed better than U.S. Treasurys during the period
because they provide higher relative coupons and because mortgage prepayment
levels fell as homeowners with higher-coupon mortgages stopped refinancing
(and prepaying) them so quickly. We reinvested the proceeds in intermediate-
term U.S. Treasury notes.
Tailored Corporate Holdings To The Economy
Corporate bonds performed well early in the year but as rates continued to
rise, we felt that corporate credit quality could become vulnerable to slower
economic growth. Therefore, we lightened up slightly on our corporate
holdings, halving our industrial bonds to 4% from 8%. We maintained our
exposure to financial bonds at around 11%, believing that their corporate
profits would likely continue close to their current pace. We held fast to
our position in yankee bonds (those issued in dollars by foreign entities) at
3% of net assets and utilities at 1%.
Our top corporate holdings as of October 31 were: Chase Manhattan Bank,
Comsat Corp., Australia and New Zealand Banking Group Ltd., NationsBank and
Republic N.Y. Corp.
-3-
<PAGE>
The Outlook
Bond returns will continue to be driven by the strength of the economy and
the Federal Reserve's response, at least until mid 1995. We anticipate at
least one more Fed move before they call it quits and consider their anti-
inflationary campaign of 1994 a success. So look for higher short-term rates
and stable long-term rates.
In that kind of market, the best performing bond sectors can change day to
day. We think most investors, however, should be happy with coupon income and
shouldn't expect much in the way of capital appreciation. Diversification may
help keep returns competitive, while limiting risk.
Thank you for the confidence you have shown in us by retaining your
investment in the Prudential U.S. Government Fund.
Sincerely,
Lawrence C. McQuade
President
Annamarie Carlucci
Portfolio Manager
-4-
<PAGE>
PRUDENTIAL U.S. GOVERNMENT FUND Portfolio of Investments
October 31, 1994
<TABLE>
<CAPTION>
Principal
Amount Value
(000) Description (Note 1)
<C> <S> <C>
LONG-TERM INVESTMENTS--94.9%
U. S. Treasury Securities--20.4%
U.S. Treasury Bonds,
$ 2,500 10.75%, 8/15/05................ $ 3,017,175
6,400 12.00%, 8/15/13................ 8,475,008
6,000 11.25%, 2/15/15................ 7,873,140
U.S. Treasury Notes,
2,000 6.75%, 5/31/97................. 1,986,880
2,400 6.875%, 8/31/99................ 2,342,616
3,000 7.75%, 2/15/01................. 3,024,360
------------
Total U. S. Treasury Securities
(cost $29,002,553)............. 26,719,179
------------
U. S. Government Agencies--19.1%
Federal National Mortgage
Assoc.,
40,000 Zero Coupon, 7/05/14........... 7,662,400
Resolution Funding Corp.,
16,400 Zero coupon, 10/15/15.......... 2,894,600
13,500 8.875%, 7/15/20................ 14,436,495
------------
Total U. S. Government Agencies
(cost $25,067,556)............. 24,993,495
------------
Mortgage-Related Securities--29.7%
Federal Home Loan Mortgage
Corp.,
1,500 7.50%, 9/15/05, (CMO).......... 1,455,465
Federal National Mortgage
Assoc.,
2,132 8.50%, 3/25/09, (CMO).......... 2,143,121
3,000 8.95%, 12/25/18, (CMO)......... 3,040,313
5,000 6.50%, 7/25/20, (CMO).......... 4,529,650
2,831 11.00%, 11/01/20............... 3,099,577
17,453 7.00%, 11/01/23 - 5/01/24...... 15,898,854
Government National Mortgage
Assoc.,
3,000 8.50%, 4/15/21 - 8/15/21....... 2,963,419
Nomura Asset Securities Corp.,
$ 3,000 Ser. 94, Class A,
7.53%, 3/15/18............... $ 2,880,937
Shugard Securities Trust, Ser.
A1,
3,000 8.24%, 6/15/01................. 2,927,813
------------
Total Mortgage-Related
Securities
(cost $40,451,943)............. 38,939,149
------------
Corporate Bonds--19.1%
Domestic--16.1%
Coles Myer Finance,
2,000 6.47%, 2/18/04................. 1,744,100
(Financial services)
Comsat Corp.,
3,000 8.125%, 4/01/04................ 2,926,860
(Telecommunications)
Dean Witter Discover & Co.,
1,500 6.00%, 3/01/98................. 1,424,430
(Financial services)
Ford Motor Credit Co.,,
2,000 6.25%, 2/26/98................. 1,913,920
(Financial services)
Georgia Power Co.,
2,000 4.75%, 3/01/96................. 1,946,160
(Electric utility)
NationsBank Corp.,
2,500 6.625%, 1/15/98................ 2,419,625
(Financial services)
Republic N.Y. Corp.,
2,000 9.70%, 2/01/09................. 2,177,300
(Financial services)
Star Bank,
1,500 6.375%, 3/01/04................ 1,305,540
(Financial services)
USLIFE Corp.,
2,000 6.375%, 6/15/00................ 1,837,640
(Financial services)
</TABLE>
-5- See Notes to Financial Statements.
<PAGE>
<PAGE>
PRUDENTIAL U.S. GOVERNMENT FUND
<TABLE>
<CAPTION>
Principal
Amount Value
(000) Description (Note 1)
<C> <S> <C>
Corporate Bonds (cont'd.)
Zeneca Wilmington, Inc.,
$ 2,000 6.30%, 6/15/03................. $ 1,757,800
(Pharmaceuticals)
Zurich Reinsurance Centre
Holdings, Inc.,
2,000 7.125%, 10/15/23............... 1,588,080
(Financial services)
------------
Total Domestic Corporate Bonds
(cost $23,495,685)............. 21,041,455
------------
Yankee--3.0%
Australia & New Zealand Banking
Group,
3,000* 6.25%, 2/01/04................. 2,563,380
(Financial services)
Svenska Handelsbanken,
1,500* 8.125%, 8/15/07................ 1,422,390
(Financial services)
------------
Total Yankee Corporate Bonds
(cost $4,604,085).............. 3,985,770
------------
Total Corporate Bonds
(cost $28,099,770)............. 25,027,225
------------
Foreign Government Bonds--2.8%
Province of Quebec,
$ 2,000* 9.125%, 3/01/00................ $ 2,079,540
Republic of Italy,
2,000* 6.875%, 9/27/23................ 1,562,560
------------
Total Foreign Government Bonds
(cost $4,185,700).............. 3,642,100
------------
Asset Backed Securities--3.8%
Chase Manhattan Credit Card
Trust,
5,000 7.40%, 5/15/00
(cost $4,993,900).............. 5,001,550
------------
Total Long-Term Investments
(cost $131,801,422)............ 124,322,698
------------
SHORT-TERM INVESTMENT
Time Deposit--1.7%
Mitsubishi Bank, Ltd.,
2,175 4.875%, 11/01/94,
(cost $2,175,000).............. 2,175,000
------------
Total Investments--96.6%
(cost $133,976,422; Note 4).... 126,497,698
Other assets in excess of
liabilities--3.4%.............. 4,418,747
------------
Net Assets--100%............... $130,916,445
------------
------------
</TABLE>
- ---------------
CMO--Collateralized Mortgage Obligations.
* U.S. dollar denominated.
-6- See Notes to Financial Statements.
<PAGE>
PRUDENTIAL U.S. GOVERNMENT FUND
Statement of Assets and Liabilities
<TABLE>
<CAPTION>
Assets October
31, 1994
- ----------------
<S> <C>
Investments, at value (cost $133,976,422)....................................................
$126,497,698
Cash.........................................................................................
68,454
Receivable for investments sold..............................................................
3,539,834
Interest receivable..........................................................................
1,593,897
Receivable for Fund shares sold..............................................................
217,859
Other assets.................................................................................
3,794
- ----------------
Total assets...............................................................................
131,921,536
- ----------------
Liabilities
Payable for Fund shares reacquired...........................................................
551,895
Dividends payable............................................................................
188,990
Accrued expenses.............................................................................
115,755
Distribution fee payable.....................................................................
91,937
Management fee payable.......................................................................
56,514
- ----------------
Total liabilities..........................................................................
1,005,091
- ----------------
Net Assets...................................................................................
$130,916,445
- ----------------
- ----------------
Net assets were comprised of:
Shares of beneficial interest, at par...................................................... $
142,882
Paid-in capital in excess of par...........................................................
149,307,128
- ----------------
149,450,010
Accumulated net realized losses on investments.............................................
(11,054,841)
Net unrealized depreciation on investments.................................................
(7,478,724)
- ----------------
Net Assets at October 31, 1994...............................................................
$130,916,445
- ----------------
- ----------------
Class A:
Net asset value and redemption price per share
($6,776,351 / 739,850 shares of beneficial interest issued and outstanding)..............
$9.16
Maximum sales charge (4.0% of offering price)..............................................
.38
Maximum offering price to public...........................................................
$9.54
- ----------------
- ----------------
Class B:
Net asset value, offering price and redemption price per share
($124,094,356 / 13,543,333 shares of beneficial interest issued and outstanding).........
$9.16
- ----------------
- ----------------
Class C:
Net asset value, offering price and redemption price per share
($45,738 / 4,992 shares of beneficial interest issued and outstanding)...................
$9.16
- ----------------
- ----------------
</TABLE>
See Notes to Financial Statements.
-7-
<PAGE>
<PAGE>
PRUDENTIAL U.S. GOVERNMENT FUND
Statement of Operations
<TABLE>
<CAPTION>
Year Ended
October 31,
Net Investment Income 1994
------------
<S> <C>
Income
Interest and discount earned.......... $ 11,339,097
------------
Expenses
Distribution fee--Class A............. 10,639
Distribution fee--Class B............. 1,155,906
Distribution fee--Class C............. 42
Management fee........................ 766,090
Transfer agent's fees and expenses.... 295,000
Shareholder reports................... 138,000
Custodian's fees and expenses......... 100,000
Trustees' fees........................ 54,000
Registration fees..................... 51,000
Audit fee............................. 30,000
Legal fees............................ 25,000
Miscellaneous......................... 8,182
------------
Total expenses...................... 2,633,859
------------
Net investment income................... 8,705,238
------------
Net Realized and Unrealized Loss
on Investments
Net realized loss on investment
transactions.......................... (1,123,882)
Net change in unrealized
appreciation/depreciation on
investments......................... (21,394,608)
------------
Net loss on investments................. (22,518,490)
------------
Net Decrease in Net Assets Resulting
from Operations......................... $(13,813,252)
------------
------------
</TABLE>
PRUDENTIAL U.S. GOVERNMENT FUND
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
Year Ended October 31,
Increase (Decrease) ----------------------------
in Net Assets 1994 1993
------------ ------------
<S> <C> <C>
Operations
Net investment income..... $ 8,705,238 $ 9,312,413
Net realized gain (loss)
on investments.......... (1,123,882) 6,101,139
Net change in unrealized
appreciation/depreciation
on investments.......... (21,394,608) 8,892,501
------------ ------------
Net increase (decrease) in
net assets
resulting from
operations.............. (13,813,252) 24,306,053
------------ ------------
Dividends to shareholders
from net investment income
(Note1)...................
Class A................. (450,567) (402,303)
Class B................. (8,254,322) (8,910,110)
Class C................. (349) --
------------ ------------
(8,705,238) (9,312,413)
------------ ------------
Fund share transactions
(Note 5)
Net proceeds from shares
subscribed.............. 39,812,693 83,709,350
Net asset value of shares
issued in reinvestment
of dividends............ 5,677,995 6,045,712
Cost of shares
reacquired.............. (65,811,259) (91,160,162)
------------ ------------
Net decrease in net assets
from Fund share
transactions............ (20,320,571) (1,405,100)
------------ ------------
Total increase (decrease)... (42,839,061) 13,588,540
Net Assets
Beginning of year........... 173,755,506 160,166,966
------------ ------------
End of year................. $130,916,445 $173,755,506
------------ ------------
------------ ------------
</TABLE>
See Notes to Financial Statements. See Notes to Financial Statements.
-8-
<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 poli-
cies 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.
In connection with transactions in repurchase agreements, it is the Fund's
policy that its custodian or designated subcustodians, as the case may be under
triparty repurchase agreements, take 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.
Dollar Rolls: The Fund enters into dollar rolls in which the Fund sells
securities for delivery in the current month and simultaneously contracts to
repurchase somewhat similar 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.
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 carryforwards, 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.
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
-9-
<PAGE>
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 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 distribution 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 and 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
distriubution. 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%, 1% and 1%, of the average daily net assets of the Class A, B and C
shares, respectively. Such expenses under the Plans were .15 of 1%, .81 of 1%
and .75 of 1% of the average daily net assets of Class A, B and C shares,
respectively, for the fiscal year ended October 31, 1994. Such expenses under
the Class B Plan were assessed at varying rates ranging from zero to 1% of
average net assets during the year ended, October 31, 1994. Currently, the Class
B Plan distribution expenses are .85 of 1% of the average daily net assets.
PMFD has advised the Fund that it has received approximately $72,400 in
front-end sales charges resulting from sales of Class A shares during the fiscal
year ended October 31, 1994. From these fees, PMFD paid such sales charges to
PSI and Pruco Securities Corporation, affiliated broker-dealers, which in turn
paid commissions to sales persons and incurred other distribution costs.
PSI has advised the Fund that for the fiscal year ended October 31, 1994, it
received approximately $446,200 in contingent deferred sales charges imposed
upon certain redemptions by Class B 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. During
the year ended October 31, 1994, the Fund incurred fees of approximately
$236,000 for the services of PMFS. As of October 31, 1994, approximately $20,000
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, for the year ended October
31, 1994 were $58,601,142 and $70,890,556, respectively.
The federal income tax basis of the Fund's investments at October 31, 1994
was substantially the same as the basis for financial statement reporting
purposes and, accordingly, net unrealized depreciation of investments for
federal income tax purposes was $7,478,724 (gross unrealized
appreciation-$631,041; gross unrealized depreciation-$8,109,765).
For federal income tax purposes, the Fund has a capital loss carryforward as
of October 31, 1994 of approximately $11,054,800 of which $1,017,200 expires in
1997, $8,301,600 expires in 1998 and $1,736,000 expires in 2002. 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 Class A,
Class B and Class C shares.
Class A shares are sold with a front-end sales charge of up to 4.0%. 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 in or about February 1995.
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 years ended October 31, 1994 and 1993 were as follows:
-10-
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
Class A Shares Amount
- -------------------------------- -------------- ------------
<S> <C> <C>
Year ended October 31, 1994:
Shares sold..................... 359,574 $ 3,519,655
Shares issued in reinvestment of
dividends..................... 31,480 306,085
Shares reacquired............... (297,934) (2,879,593)
-------------- ------------
Net increase in shares
outstanding................... 93,120 $ 946,147
-------------- ------------
-------------- ------------
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>
Class B
- --------------------------------
<S> <C> <C>
Year ended October 31, 1994:
Shares sold..................... 3,633,315 $ 36,246,363
Shares issued in reinvestment of
dividends..................... 550,260 5,371,630
Shares reacquired............... (6,392,542) (62,931,666)
-------------- ------------
Net decrease in shares
outstanding................... (2,208,967) $(21,313,673)
-------------- ------------
-------------- ------------
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)
-------------- ------------
-------------- ------------
<CAPTION>
Class C
- --------------------------------
<S> <C> <C>
August 1, 1994* through
October 31, 1994:
Shares sold..................... 4,962 $ 46,675
Shares issued in reinvestment of
dividends..................... 30 280
-------------- ------------
Net increase in shares
outstanding................... 4,992 $ 46,955
-------------- ------------
-------------- ------------
- ---------------
* Commencement of Class C operations.
</TABLE>
-11-
<PAGE>
PRUDENTIAL U.S. GOVERNMENT FUND
Financial Highlights
<TABLE>
<CAPTION>
Class A Class B
Class C
----------------------------------------------------
- ------------------------------------------------------ ----------
January 22,
August 1,
1990@
1994(D)
Year Ended October 31, Through Year Ended October 31,
Through
------------------------------------- October 31,
- ------------------------------------------------------ August 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... $10.59 $ 9.69 $ 9.49 $ 8.97 $ 9.31 $ 10.60 $ 9.70 $ 9.50 $ 8.97
$ 9.54 $ 9.58
------ ------ ----- ------ ------ ------- ------ ------ ------
------ ------
Income
from
investment
operations
Net
investment
income... .61 .64 .68 .66 .55 .53 .55 .59 .59
.62 .15
Net
realized
and
unrealized
gain (loss)
on
investment
trans-
actions... (1.43) .90 .20 .52 (.34) (1.44) .90 .20 .53
(.57) (.42)
------- ------ ------ ------ ------ ------- ------ ------ ------
------ -------
Total
from
investment
opera-
tions... (.82) 1.54 .88 1.18 .21 (.91) 1.45 .79 1.12
.05 (.27)
------ ------ ------ ------ ------ ------- ------ ------ ------
------ -------
Less
distributions
Dividends
from net
investment
income... (.61) (.64) (.68) (.66) (.55) (.53) (.55) (.59) (.59)
(.62) (.15)
------ ------ ------ ------ ------ ------- ------- ------ ------
------ -------
Net
asset
value,
end of
period.. $9.16 $10.59 $ 9.69 $9.49 $8.97 $9.16 $10.60 $ 9.70 $9.50
$ 8.97 $ 9.16
------- ------ ------ ------ ------ ------- ------- ------ -------
------- -------
------- ------ ------ ------ ------ ------- ------- ------ -------
------- -------
TOTAL
RETURN#... (7.80)% 16.43% 9.39% 13.72% 2.16% (8.57)% 15.44% 8.46% 12.86%
.64% (3.03)%
RATIOS/
SUPPLEMENTAL
DATA:
Net assets,
end of
period
(000).. $6,776 $6,849 $5,024 $2,574 $1,617 $ 124,094 $166,907 $155,143 $158,790
$172,521 $ 46
Average
net
assets
(000)... $7,093 $6,339 $3,769 $2,158 $ 918 $ 146,123 $162,107 $154,502 $168,421
$174,276 $ 23
Ratios to
average
net assets:
(D)(D)
Expenses,
including
distribution
fees... 1.09% .96% .94% 1.24% 1.08%* 1.75% 1.81% 1.79% 2.09%
1.99% 1.82%*
Expenses,
excluding
distribution
fees... .94% .81% .79% 1.09% .94%* .94% .81% .79% 1.09%
.99% 1.07%*
Net
investment
income.. 6.35% 6.35% 6.92% 7.24% 7.16%* 5.65% 5.50% 6.07% 6.39%
6.89% 6.25%*
Portfolio
turnover.. 39% 66% 66% 236% 608% 39% 66% 66% 236%
608% 39%
- ---------------
* 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.
(D) Commencement of offering of Class C shares.
(D)(D) Because of the event referred to in (D) and the timing of such, the ratios for the Class A and Class
B
shares are not necessarily comparable to that of Class C shares and are not indicative of future
ratios.
</TABLE>
See Notes to Financial Statements.
-12-
<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, 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
October 31, 1994 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, 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 LLP
New York, New York
December 16, 1994
IMPORTANT NOTICE FOR SHAREHOLDERS
We are required by Massachusetts, Missouri, and Oregon to inform you that
dividends which have been derived from interest on federal obligations are not
taxable to shareholders providing the mutual fund meets certain requirements
mandated by the respective state taxing authorities. We are pleased to report
that 33% of the dividends paid by the Fund qualify for such tax deduction.
-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 U.S. Government Fund (Class A, Class
B, and Class C) 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, in 1986 for Class B shares and 1994 for Class C 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 and Class C shares, assuming full redemption on October 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 approximately five years after purchase.
This conversion feature is expected to be implemented on or about February 1995
and is not reflected in the graph.
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.
-14-
<PAGE>
<PAGE>
Trustees
Stephen C. Eyre
Delayne Dedrick 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 LLP
Two World Financial Center
New York, NY 10281
Legal Counsel
Shereff, Friedman, Hoffman & Goodman
919 Third Avenue
New York, NY 10022
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.
743914202 MF130E-2
743914103 Cat.#4401169
(LOGO)
