-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, KnrGnk/htZLfUEMokboyKOtavxRKCiN224y8a1Q1iW6J60RoePzhXmZwsgxtV47r 6cJ/mPKUJcuTfq26cqyaJw== 0000717819-94-000004.txt : 19940512 0000717819-94-000004.hdr.sgml : 19940512 ACCESSION NUMBER: 0000717819-94-000004 CONFORMED SUBMISSION TYPE: N-30D PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19940228 FILED AS OF DATE: 19940511 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PRUDENTIAL BACHE GOVERNMENT PLUS FUND INC CENTRAL INDEX KEY: 0000717819 STANDARD INDUSTRIAL CLASSIFICATION: 0000 IRS NUMBER: 133165671 STATE OF INCORPORATION: MD FISCAL YEAR END: 0228 FILING VALUES: FORM TYPE: N-30D SEC ACT: 1940 Act SEC FILE NUMBER: 811-03712 FILM NUMBER: 94527129 BUSINESS ADDRESS: STREET 1: ONE SEAPORT PLZ CITY: NEW YORK STATE: NY ZIP: 10292 BUSINESS PHONE: 2122141250 MAIL ADDRESS: STREET 1: ONE SEAPORT PLAZA CITY: NEW YORK STATE: NY ZIP: 10292 FORMER COMPANY: FORMER CONFORMED NAME: PRUDENTIAL BACHE TELECOMMUNICATIONS FUND INC DATE OF NAME CHANGE: 19850127 N-30D 1 GOV'T PLUS FUND N-30D FILING (2/94) ANNUAL REPORT February 28, 1994 Prudential Government Plus Fund ------------------------------------------------ Prudential Mutual Funds BUILDING YOUR FUTURE (LOGO) ON OUR STRENGTH 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. FUND PERFORMANCE As of February 28, 1994
12-Month 30-Day NAV per share Total Return Sec Yield 2/28/94 Class A 3.90% 5.45% $9.13 Class B 3.03% 4.94% $9.13
AVERAGE ANNUAL TOTAL RETURNS As of February 28, 19941
One Year Five Year Since Inception2 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.
As of February 28, 1994, the Fund had a effective maturity of 7.6 years, which is subject to change. -1- 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- 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- PRUDENTIAL GOVERNMENT PLUS FUND Portfolio of Investments February 28, 1994
Principal Amount Value (000) Description (Note 1) 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 --------------
-4- See Notes to Financial Statements. PRUDENTIAL GOVERNMENT PLUS FUND
Principal Amount Value (000) Description (Note 1) 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 -------------- --------------
- --------------- 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. PRUDENTIAL GOVERNMENT PLUS FUND Statement of Assets and Liabilities
February 28, Assets 1994 -------------- 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 -------------- --------------
See Notes to Financial Statements. -6- PRUDENTIAL GOVERNMENT PLUS FUND Statement of Operations
Year Ended February 28, Net Investment Income 1994 ------------- 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 ------------- -------------
PRUDENTIAL GOVERNMENT PLUS FUND Statement of Changes in Net Assets
Increase (Decrease) Year Ended February 28, in Net Assets 1994 1993 -------------- -------------- 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 -------------- -------------- -------------- --------------
See Notes to Financial Statements. See Notes to Financial Statements. -7- 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- 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- 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- and B common stock, each of which consists of one billion authorized shares. Transactions in shares of common stock were as follows:
Class A Shares Amount ----------- ------------- 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 ----------- ------------- ----------- ------------- Class B Shares Amount ----------- ------------- 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) ----------- ------------- ----------- -------------
-11- PRUDENTIAL GOVERNMENT PLUS FUND Financial Highlights
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 ------- ------- ------- ------- ------------ ---------- ---------- ---------- ---------- --------- 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%
- --------------- @ 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- 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- 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- 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 -----END PRIVACY-ENHANCED MESSAGE-----