SEMI ANNUAL REPORT August 31, 1994
Prudential
Government
Income Fund, Inc.
(formerly
Prudential Government
Plus Fund)
(ICON)
<PAGE>
Letter to Shareholders
October 18, 1994
Dear Shareholder:
In the past six months, U.S. government bond and mortgage-backed security
yields have climbed steadily as the Federal Reserve boosted short-term
interest rates in an attempt to slow the U.S. economy and head off inflation.
When interest rates rise, bond prices fall because older bonds with lower
coupons are not considered as attractive. Under these conditions, the
Prudential Government Income Fund (formerly, the Prudential Government
Plus Fund) provided moderate total returns and a yield almost one
percentage point higher than six months ago.
Our Objective
The Prudential Government Income Fund seeks to provide high current
return by investing in U.S. Treasury securities and obligations issued
or guaranteed by U.S. agencies or instrumentalities. The Fund may also
invest in derivative securities like put and call options. As of August
31, 1994, the Fund had an average maturity of 12 years, which is naturally
subject to change.
<TABLE>
FUND PERFORMANCE
Historical Total Returns1
As of August 31, 1994
<CAPTION>
Six Months One Five Since 30-Day NAV
Year Year Incep. SEC Yield 8/31/94
<S> <C> <C> <C> <C> <C> <C>
Class A -2.1% -3.2% N/A +40.8% +6.25% $8.64
Class B -2.4% -4.0% +39.2% +103.0% +5.83% $8.64
Class C N/A N/A N/A -0.1% N/A $8.64
</TABLE>
<TABLE>
Average Annual Total Returns2
As of September 30, 1994
<CAPTION>
One Year Five Years Since Incep.*
<S> <C> <C> <C>
Class A -8.9% N/A +6.2%
Class B -11.0% +6.1% +7.6%
Class C N/A N/A -3.0%
</TABLE>
An investment in the Fund is neither insured nor guaranteed by the U.S.
government. Past performance is no guarantee of future results. Investment
return and principal value will fluctuate so an investor's shares, when
redeemed, may be worth more or less than their original cost.
N/A - Performance data with respect to Class A and Class C is not available,
since Class A commenced operations 1/22/90 and Class C 8/1/94.
1 Lipper Analytical Services, Inc. These figures do not take into account
sales charges.
-1-
<PAGE>
2 Source: Prudential Mutual Fund Management. These figures take into
account applicable sales charges. The Fund charges a sales load of 4%
for Class A shares. Class B shares are subject to a contingent deferred
sales charge (CDSC) of 5%, 4%, 3%, 2%, 1% and 1%, respectively, for six
years. Class B shares will automatically convert to Class A shares after
the CDSC has expired. Class C shares are sold with a CDSC of 1% during
the first year.
* Inception dates: Class A 1/22/90, Class B 4/22/85, Class C 8/1/94.
For the six-month period ending August 31, 1994, the Fund paid per share
dividends totaling $0.29 for Class A, $0.25 for Class B and $0.05 (for
one month) for Class C.
The Fed Pushes Rates Higher
Since the Federal Reserve began raising short-term interest rates in
early February, bond investors have had a rough ride. The central bank
increased the federal funds rate (the overnight interbank lending rate)
175 basis points; the theory is that as borrowing rates rise, consumers
and businesses become more reluctant to use credit to finance purchases.
This puts a damper on growth and helps reduce inflationary pressures in
the economy. Despite the magnitude of the rate increase, there are concerns
in the market that interest rates may still move higher. This uncertainty
has left market yields in a fairly tight trading range.
Mortgage-backed security prices have also fallen this year, though not
quite as much as those of Treasury bonds with similar maturities. In
addition, the prepayment fears that racked this market last year, when
rates were tumbling, have largely evaporated. Actual prepayments are down
about 70% in 1994, because higher rates have made homeowner mortgage
refinancing less attractive.
The good news, of course, is that Treasury yields have really taken off
in 1994, reaching levels not seen for two and a half years. For instance,
the 10-year Treasury note's yield is up to 7.3% from 6.1% six months ago
and 5.4% on August 31, 1993.
Searching For Yield
As the market began to anticipate more Fed rate hikes, we sold short-term
securities, since these are most volatile when short-term rates are on the
move. The Fed's later actions actually lent some stability to the long-term
end of the yield curve because bond holders are more comfortable with
today's coupon levels if they believe higher rates will choke off growth
and forestall inflation. Another factor supporting long-term bond prices
is the Clinton administration's decision to reduce long-term borrowing in
favor of short-term notes.
Mortgage Prepayment Risk Dips
When prepayments first began to drop, premium-coupon government issued
mortgage-backed securities produced better returns than other mortgages;
as their maturities extended, however, that situation changed. Uncertainty
remained a factor in this market and mortgage backed security yields hovered
in a fairly tight trading range. As the opportunity arose to shift
-2-
<PAGE>
money out of highly-priced mortgages into lower-priced securities in August,
however, we increased that weighting slightly. Finally, in the last few
months, we purchased some discounted mortgages because prices were at
extremely attractive levels after months of prepayment, fear induced
selling.
Looking Forward
Looking at the remainder of 1994, we don't expect any further Fed action
until after the November elections, or early 1995. In fact, long-term
securities might produce some gains in coming months if investors venture
back into the market as the yield curve flattens out. In the longer term,
however, inflationary fears may continue to rise. Our plan is to keep the
Fund's maturities in the intermediate- to long-term range to pick up yield
and possible price gains. Later this year or next, we may shift to shorter
maturities if rates begin creeping upwards again, or we may use options and
futures to help protect our net asset value.
We appreciate having you as a Prudential Government Income Fund shareholder
and remain committed to managing the portfolio for your benefit.
Sincerely,
Lawrence C. McQuade
President
Barbara Kenworthy
Portfolio Manager
-3-
<PAGE>
PORTFOLIO Q&A
(PICTURE)
Barbara Kenworthy
Barbara Kenworthy has been named senior portfolio manager for the
Prudential Government Income Fund. She was formerly the president and
manager of several Dreyfus bond funds. We talked to Barbara about her
investment philosophy:
Q. Do you focus on any area of the government bond market?
A. I like to have the flexibility to explore all the sectors in the
government bond market and I think you'd call me an active trader. In
a typical day, I'll evaluate market conditions and look for opportunities
at what I consider a fair risk level. For instance, before the Fed's last
rate hike I shifted as much money out of short-term Treasuries as possible
because they were losing value fast in the face of higher expected
short-term rates. I found value then in some discounted mortgages and in
longer maturity Treasury bonds.
Q. How about maturities? Will you stay in the intermediate range?
A. I certainly believe intermediate-term bonds offer good value, but
I also like longer-term securities because they'll appreciate the most
in a rally. I know investors don't want to see their net asset value fall,
so I'm cautious. I might consider moving the portfolio's effective maturity
out as far as 10 years, for instance. On the other hand, I won't hesitate
to pull those maturities in if the market turns more bearish. You might see
an effective maturity as low as six years if bond prices start falling again.
Q. Do you plan to invest in derivatives?
A. Derivatives can be a good way to defend a portfolio's net asset value
against extreme price swings, but I would only consider using traditional
derivatives, like put and call options, which can help me improve total
return without too much risk to principal. These products have been around
long enough to be tested in many different market environments; they shouldn't
result in unpleasant surprises. I'm cautious about the more exotic securities
that are largely untested and could lead to big price swings if the markets
become more turbulent. I'd put both IOs and POs (interest only and principal
only mortgage-backed securities) in this category. But I never say never.
When used prudently as part of an overall portfolio strategy, even these
securities can add value.
-4-
<PAGE>
PRUDENTIAL GOVERNMENT INCOME FUND Portfolio of Investments
August 31, 1994 (Unaudited)
<TABLE>
<CAPTION>
Principal
Amount Value
(000) Description (Note 1)
<C> <S> <C>
LONG-TERM INVESTMENTS--99.3%
U. S. Government Agency
Securities--49.0%
Federal Home Loan Mortgage
Corp.,
$ 12,700 7.00%, 4/15/17, (CMO)...... $ 12,664,186
103,435 7.50%, 1/01/23 - 8/01/24... 100,556,783
83,080 8.00%, 1/01/22 - 9/01/24... 82,794,180
8,542 8.50%, 6/01/07 - 4/01/20... 8,688,714
4,612 11.50%, 10/01/19........... 5,064,415
Federal National Mortgage
Assoc.,
50,000 4.99%, 1/25/96............. 49,987,000
1,512 6.00%, 9/01/08............. 1,406,865
50,748 6.50%, 6/01/23 - 6/01/24... 46,512,999
128,870 7.00%, 12/01/07 -
5/01/24.................. 121,832,005
95,645 7.50%, 12/01/07 -
7/01/09.................. 95,196,480
434 8.50%, 8/01/21............. 441,343
5,610 Trust 1991 G-37 Class C,
(I/O*),.................. 356,255
Government National
Mortgage Assoc.,
27,185 6.00%, 12/15/23, (ARM)..... 23,540,038
44,439 6.50%, 5/15/23 - 5/15/24... 40,008,594
3,737 7.25%, 7/15/23............. 3,469,127
90,508 8.00%, 7/15/16 - 7/15/24... 89,917,980
102,879 9.00%, 7/15/16 - 2/15/20... 107,121,440
15,200 9.50%, 10/15/09 -
9/15/24.................. 16,098,267
22,867 11.50%, 1/15/13 -
5/15/19.................. 25,838,845
Government National Mortgage Assoc. II,
50,000 6.00%, 12/20/99............ 49,187,500
9,203 9.00%, 8/20/17 - 8/20/21... 9,450,040
7,477 9.50%, 5/20/18 - 8/20/21... 7,805,921
--------------
Total U.S. Government
Agency
Securities (cost
$904,445,004)............ 897,938,977
--------------
U. S. Government Obligations--48.5%
United States Treasury
Bonds,
$ 25,000 7.50%, 11/15/24............ $ 25,148,500
80,500 8.00%, 11/15/21............ 84,071,785
80,000# 11.25%, 2/15/15............ 110,049,600
90,000 12.00%, 8/15/13............ 124,579,800
50,000 12.50%, 8/15/14............ 72,156,000
136,500 14.00%, 11/15/11........... 208,140,660
United States Treasury
Notes,
25,000 3.875%, 9/30/95............ 24,554,750
100,000# 6.00%, 11/30/97............ 98,500,000
25,000# 7.25%, 8/15/04............. 25,121,000
20,000 7.375%, 5/15/96............ 20,434,400
75,000# 8.25%, 7/15/98............. 79,031,250
United States Treasury
Strip,
140,000 Zero Coupon, 2/15/21....... 18,400,200
--------------
Total U. S. Government
Obligations
(cost $905,614,828)........ 890,187,945
--------------
Asset-Backed Securities--1.4%
Ford Credit Auto Loan
Master Trust,
Series 1994-1A, 4.98%,
7/15/01 (cost
25,000 $25,000,000)............. 24,984,250
--------------
Adjustable Rate Mortgage
Pass-Throughs--0.4%
Ryland Mortgage Securities Corporation,
Mortgage Participation
Securities,
Series 1993-3 Class A-3,
7.8394%, 9/25/24
6,971 (cost $7,110,828)........ 7,021,518
--------------
Total long-term investments
(cost $1,842,170,660).... 1,820,132,690
--------------
</TABLE>
-5- See Notes to Financial Statements.
<PAGE>
PRUDENTIAL GOVERNMENT INCOME FUND
<TABLE>
<CAPTION>
Principal
Amount Value
(000) Description (Note 1)
<C> <S> <C>
SHORT-TERM INVESTMENTS
Commercial Paper--6.4%
Fuji Bank Chicago,
$ 72,480 4.875%, 9/01/94............ $ 72,480,000
Sumitomo Bank Ltd.,
45,000 4.75%, 9/19/94............. 45,000,000
--------------
Total Commercial Paper
(cost $117,480,000)...... 117,480,000
--------------
Total Investments, Before
Outstanding Options
Written--105.7%
(cost $1,959,650,660;
Note 4).................. 1,937,612,690
--------------
<CAPTION>
Contracts(D) OUTSTANDING OPTIONS WRITTEN
- --------
<C> <S> <C>
Call Option
United States Treasury
Notes,
25 expiring November '94 @
$103.56.................. (85,938)
--------------
Put Options
United States Treasury
Bond,
50 expiring November '94 @
$94.33................... (171,875)
United States Treasury
Notes,
25 expiring November '94 @
$96.56................... (109,375)
--------------
(281,250)
--------------
Total outstanding options
written
(premiums received
$628,906)................ (367,188)
--------------
Total Investments, Net of
Outstanding Options
Written--105.7%.......... 1,937,245,502
Other liabilities in excess
of
other assets--(5.7%)..... (103,962,641)
--------------
Net Assets--100%........... $1,833,282,861
--------------
--------------
</TABLE>
- ---------------
ARM--Adjustable Rate Mortgage.
CMO--Collateralized Mortgage Obligation.
I/O--Interest Only.
# Principal amount segregated as collateral for options written. Approximate
aggregate value of segregated securities-$211,801,000.
* REMIC--Real Estate Mortgage Conduit.
(D) One contract equals $10,000 of par value.
-6- See Notes to Financial Statements.
<PAGE>
<PAGE>
PRUDENTIAL GOVERNMENT INCOME FUND
Statement of Assets and Liabilities
(Unaudited)
<TABLE>
<CAPTION>
August 31,
Assets 1994
--------------
<S> <C>
Investments, at value (cost $1,959,650,660)................................................... $1,937,612,690
Receivable for investments sold............................................................... 94,034,866
Interest receivable........................................................................... 18,296,482
Receivable for Fund shares sold............................................................... 796,213
Deferred expenses and other assets............................................................ 250,322
--------------
Total assets................................................................................ 2,050,990,573
--------------
Liabilities
Payable for investments purchased............................................................. 203,850,781
Payable for Fund shares reacquired............................................................ 7,763,996
Accrued expenses & other liabilities.......................................................... 1,704,586
Dividends payable............................................................................. 1,963,975
Distribution fee payable...................................................................... 1,268,680
Management fee payable........................................................................ 788,506
Outstanding call options written, at value (premiums received $628,906)....................... 367,188
--------------
Total liabilities........................................................................... 217,707,712
--------------
Net Assets.................................................................................... $1,833,282,861
--------------
--------------
Net assets were comprised of:
Common stock, at par........................................................................ $ 2,121,117
Paid-in capital in excess of par............................................................ 1,988,404,422
--------------
1,990,525,539
Accumulated net realized losses on investments.............................................. (135,466,426)
Net unrealized depreciation on investments.................................................. (21,776,252)
--------------
Net assets at August 31, 1994............................................................. $1,833,282,861
--------------
--------------
Class A:
Net asset value and redemption price per share
($45,965,021 / 5,317,363 shares of common stock issued and outstanding)................... $8.64
Maximum sales charge (4.0% of offering price)............................................... .36
--------------
Maximum offering price to public............................................................ $9.00
--------------
--------------
Class B:
Net asset value, offering price and redemption price per share
($1,787,297,665 / 206,791,978 shares of common stock issued and outstanding).............. $8.64
--------------
--------------
Class C:
Net asset value, offering price and redemption price per share
($20,175 / 2,334 shares of common stock issued and outstanding)........................... $8.64
--------------
--------------
</TABLE>
See Notes to Financial Statements.
-7-
<PAGE>
<PAGE>
PRUDENTIAL GOVERNMENT INCOME FUND
Statement of Operations
(Unaudited)
<TABLE>
<CAPTION>
Six Months
Ended
August 31,
Net Investment Income 1994
------------
<S> <C>
Income
Interest (net of swap interest expense
of $173,142)........................ $ 76,571,197
Income from securities loaned-net..... 6,336
------------
76,577,533
------------
Expenses
Distribution fee--Class A............. 35,811
Distribution fee--Class B............. 8,758,185
Distribution fee--Class C............. 5
Management fee........................ 5,049,117
Transfer agent's fees and expenses.... 1,612,000
Custodian's fees and expenses......... 473,000
Franchise taxes....................... 290,000
Reports to shareholders............... 138,000
Registration fees..................... 50,000
Insurance expense..................... 36,000
Audit fee............................. 32,000
Directors' fees....................... 24,000
Legal fees............................ 15,000
Miscellaneous......................... 16,753
------------
Total expenses...................... 16,529,871
------------
Net investment income................... 60,047,662
------------
Realized and Unrealized
Gain (Loss) on Investments
Net realized gain (loss):
Investment transactions............... (56,789,539)
Interest rate swap transaction........ 761,247
------------
(56,028,292)
------------
Net change in unrealized
appreciation/depreciation:
Investments........................... (61,421,831)
Written options....................... 261,718
Interest rate swap.................... 709,355
------------
(60,450,758)
------------
Net loss on investments................. (116,479,050)
------------
Net Decrease in Net Assets
Resulting from Operations............... $(56,431,388)
------------
------------
</TABLE>
PRUDENTIAL GOVERNMENT INCOME FUND
Statement of Changes in Net Assets
(Unaudited)
<TABLE>
<CAPTION>
Six Months
Ended Year Ended
Increase (Decrease) August 31, February 28,
in Net Assets 1994 1994
-------------- --------------
<S> <C> <C>
Operations
Net investment income... $ 60,047,662 $ 143,951,352
Net realized gain (loss)
on investment
transactions.......... (56,028,292) 73,862,182
Net change in unrealized
appreciation on
investments........... (60,450,758) (137,565,425)
-------------- --------------
Net increase (decrease)
in net assets
resulting from
operations............ (56,431,388) 80,248,109
-------------- --------------
Dividends and distributions (Note 1)
Dividends to shareholders from
net investment income
Class A............... (1,595,075) (3,625,302)
Class B............... (58,452,550) (140,326,050)
Class C............... (37) --
-------------- --------------
(60,047,662) (143,951,352)
-------------- --------------
Distributions to shareholders in
excess of capital gains
Class A............... -- (132,529)
Class B............... -- (5,651,138)
-------------- --------------
-- (5,783,667)
-------------- --------------
Fund share transactions
(Note 5)
Net proceeds from shares
subscribed............ 51,070,456 238,679,715
Net asset value of
shares issued to
shareholders in
reinvestment of
dividends and
distributions......... 33,043,747 83,988,251
Cost of shares
reacquired............ (388,580,151) (740,509,270)
-------------- --------------
Decrease in net assets
from Fund share
transactions.......... (304,465,948) (417,841,304)
-------------- --------------
Total decrease............ (420,944,998) (487,328,214)
Net Assets
Beginning of period....... 2,254,227,859 2,741,556,073
-------------- --------------
End of period............. $1,833,282,861 $2,254,227,859
-------------- --------------
-------------- --------------
</TABLE>
See Notes to Financial Statements. See Notes to Financial Statements.
-8-
<PAGE>
<PAGE>
PRUDENTIAL GOVERNMENT INCOME FUND
Notes to Financial Statements
(Unaudited)
Prudential Government Income Fund, formerly known as 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 Fund's investment objective is to seek a high current return. The Fund
will seek to achieve this objective by investing primarily in U.S. Government
and agency securities; writing and purchasing put and call options and net gains
from closing purchase and sale transactions.
Note 1. Accounting The following is a summary
Policies of significant accounting poli-
cies followed by the Fund in the preparation of
its financial statements.
Security Valuation: The Fund values portfolio securities on the basis of 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,
or designated subcustodians as the case may be under triparty repurchase
agreements, 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.
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. 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.
During the term of a 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 a 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. There were no interest
rate swaps outstanding as of August 31, 1994.
Option Writing: When the Fund writes an option, an amount equal to the premium
received by the Fund is recorded as a liability and is subsequently adjusted to
the current market value of the option written. Premiums received from writing
options which expire unexercised are treated by the Fund on the expiration date
as realized gains from written options transactions. The difference between the
premium and the amount paid on effecting a closing purchase transaction,
including brokerage commissions, is also treated as a realized gain, or if the
premium is less than the amount paid for the closing purchase transaction, as a
realized loss. If a call option is exercised, the premium is added to the
proceeds from the sale of the underlying security or currency in determining
whether the Fund has realized a gain or loss. If a put option is exercised, the
premium reduces the cost basis of the securities or currencies purchased by the
Fund. The Fund as writer of an option has no control over whether the underlying
securities or currency may be sold (called) or purchased (put) and as a result
bears the market risk of an unfavorable change in the price of the security or
currency underlying the written option.
Dollar Rolls: The Fund enters into mortgage dollar rolls in which the Fund sells
mortgage securities for delivery in the current month, realizing a gain or loss
and simultaneously
-9-
<PAGE>
<PAGE>
contracts to repurchase somewhat similar (same type, coupon and maturity)
securities on a specified future date. During the roll period the Fund forgoes
principal and interest paid on the securities. The Fund is compensated by the
interest earned on the cash proceeds of the initial sale and by the lower
repurchase price at the future date. The difference between the sale proceeds
and the lower repurchase price is taken into income. The Fund maintains a
segregated account, the dollar value of which is equal to its obligations, in
respect of dollar rolls.
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 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. There were no loans outstanding as of August 31, 1994.
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.
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.
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 and Class C shares of the Fund (collectively the
``Distributors''). The Fund compensates the Distributors for distributing and
servicing the Fund's Class A, Class B and Class C shares, pursuant to plans of
distribution (the ``Class A, B and C Plans'') regardless of expenses actually
incurred by them. The distribution fees are accrued daily and payable monthly.
On July 19, 1994, shareholders of the Fund approved amendments to the Class A
and Class B 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 or contingent deferred sales charges
received by the Distributors). The rate of the distribution fees charged to
Class A and Class B shares of the Fund did not change under the amended plan of
distribution. The Fund began offering Class C shares on August 1, 1994.
Pursuant to the Class A Plan, the Fund compensates 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 six
months ended August 31, 1994.
Pursuant to the Class B Plan, the Fund compensates 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
-10-
<PAGE>
<PAGE>
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.
Prior to August 1, 1994, such expenses under Class B Plan were charged at an
effective rate of .90 of 1% of average daily net assets. Beginning August 1,
1994, the effective rate was reduced to .825 of 1% of the average daily net
assets of Class B shares.
Pursuant to the Class C Plan, the Fund reimburses PSI for its
distribution-related expenses with respect to Class C shares at an annual rate
of up to .825 of 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 C shares. Such expenses under Class C Plan
were charged at an effective rate of .75 of 1% of average daily net assets.
PMFD has advised the Fund that it has received approximately $128,800 in
front-end sales charges resulting from sales of Class A shares during the six
months ended August 31, 1994. From these fees, PMFD paid such sales charges to
dealers which in turn paid commissions to salespersons.
PSI has advised the Fund that for the six months ended August 31, 1994 it
received approximately $1,721,000 in contingent deferred sales charges imposed
upon redemptions by certain 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 six months ended August 31, 1994, the Fund incurred fees of approximately
$1,079,000 for the services of PMFS. As of August 31, 1994, approximately
$170,000 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 invest-
Securities ment securities, other than
short-term investments, for the six months ended
August 31, 1994, were $2,356,262,041 and $2,612,657,310, respectively.
The federal income tax cost basis of the Fund's investments, at August 31,
1994 was $1,959,650,660 and, accordingly, net unrealized depreciation for
federal income tax purposes was $22,037,970 (gross unrealized
appreciation-$4,381,774; gross unrealized depreciation-
$26,419,744).
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. Accordingly, no capital gains distribution is expected to be
paid to shareholders until net gains have been realized in excess of such
amounts.
One hundred option contracts valued at $628,906 were written and remained
outstanding during the period ended August 31, 1994.
Note 5. Capital The Fund offers both 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 February 1995.
There are 2 billion shares of common stock, $.01 par value per share, divided
into three classes, designated Class A, B and Class C common stock, each of
which consists of 666,666,666.67 authorized shares.
Transactions in shares of common stock were as follows:
<TABLE>
<CAPTION>
Class A Shares Amount
<S> <C> <C>
----------- -------------
Six months ended August 31,
1994:
Shares sold.................... 940,310 $ 8,195,238
Shares issued in reinvestment
of dividends................. 131,150 1,141,915
Shares reacquired.............. (1,414,045) (12,388,446)
----------- -------------
Net decrease in shares
outstanding.................. (342,585) $ (3,051,293)
----------- -------------
----------- -------------
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)
----------- -------------
----------- -------------
</TABLE>
-11-
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
Class B Shares Amount
----------- -------------
<S> <C> <C>
Six months ended August 31,
1994:
Shares sold.................... 4,889,774 $ 42,855,122
Shares issued in reinvestment
of dividends................. 3,663,432 31,901,808
Shares reacquired.............. (43,071,568) (376,191,705)
----------- -------------
Net decrease in shares
outstanding.................. (34,518,362) $(301,434,775)
----------- -------------
----------- -------------
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)
----------- -------------
----------- -------------
<CAPTION>
Class C
<S> <C> <C>
August 1, 1994*
through August 31, 1994:
Shares sold.................... 2,331 $ 20,096
Shares issued in reinvestment
of dividends................. 3 24
----------- -------------
Net increase in shares
outstanding.................. 2,334 $ 20,120
----------- -------------
----------- -------------
</TABLE>
- ---------------
* Commencement of offering of Class C shares.
-12-
<PAGE>
<PAGE>
PRUDENTIAL GOVERNMENT INCOME FUND
Financial Highlights
(Unaudited)
<TABLE>
<CAPTION>
Class A
----------------------------------------------------------------- Class B
January 22, ------------------------------------
Six Months 1990@ Six Months Years Ended February
Ended Years Ended February 28/29, Through Ended 28/29,
August 31, ------------------------------------- February 28, August 31, -----------------------
1994 1994 1993 1992 1991 1990 1994 1994 1993
---------- ------- ------- ------- ------- ------------ ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of
period........... $ 9.13 $ 9.40 $ 9.17 $ 9.02 $ 9.00 $ 9.17 $ 9.13 $ 9.40 $ 9.17
---------- ------- ------- ------- ------- ----- ---------- ---------- ----------
Income from investment
operations
Net investment
income........... 0.29 0.61 0.66 0.68 0.69 0.06 0.25 0.53 0.58
Net realized and
unrealized gain
(loss) on
investment
transactions..... (0.49) (0.25) 0.35 0.37 0.26 (0.11) (0.49) (0.25) 0.35
---------- ------- ------- ------- ------- ----- ---------- ---------- ----------
Total from
investment
operations..... (0.20) 0.36 1.01 1.05 0.95 (0.05) (0.24) 0.28 0.93
---------- ------- ------- ------- ------- ----- ---------- ---------- ----------
Less distributions
Dividends from net
investment
income........... (0.29) (0.61) (0.66) (0.68) (0.69) (0.06) (0.25) (0.53) (0.58)
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)
---------- ------- ------- ------- ------- ----- ---------- ---------- ----------
Total
distributions.. (0.29) (0.63) (0.78) (0.90) (0.93) (0.12) (0.25) (0.55) (0.70)
---------- ------- ------- ------- ------- ----- ---------- ---------- ----------
Net asset value,
end of period.... $ 8.64 $ 9.13 $ 9.40 $ 9.17 $ 9.02 $ 9.00 $ 8.64 $ 9.13 $ 9.40
---------- ------- ------- ------- ------- ----- ---------- ---------- ----------
---------- ------- ------- ------- ------- ----- ---------- ---------- ----------
TOTAL RETURN#:.... (2.07)% 3.90% 11.55% 12.18% 11.21% (0.54)% (2.40)% 3.03% 10.61%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of
period (000)..... $ 45,965 $51,673 $61,297 $33,181 $28,971 $1,961 $1,787,298 $2,202,555 $2,680,259
Average net assets
(000)............ $ 47,363 $55,921 $46,812 $29,534 $23,428 $ 501 $1,955,818 $2,487,990 $2,670,924
Ratios to average
net assets:##
Expenses,
including
distribution
fees........... 0.92%* 0.84% 0.84% 0.86% 0.85% 0.92%* 1.65%* 1.68% 1.69%
Expenses,
excluding
distribution
fees........... 0.77%* 0.69% 0.69% 0.71% 0.70% 0.76%* 0.77%* 0.69% 0.69%
Net investment
income......... 6.66%* 6.48% 7.17% 7.51% 7.76% 9.11%* 5.93%* 5.64% 6.32%
Portfolio turnover
rate............. 123% 80% 36% 187% 213% 329% 123% 80% 36%
<CAPTION>
Class C
----------
August 1,
1994(D)
Through
August 31,
1992 1991 1990 1994
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of
period........... $ 9.02 $ 9.00 $ 9.09 $ 8.69
---------- ---------- ---------- ----------
Income from investment
operations
Net investment
income........... 0.60 0.62 0.68 0.05
Net realized and
unrealized gain
(loss) on
investment
transactions..... 0.37 0.26 0.15 (0.05)
---------- ---------- ---------- ----------
Total from
investment
operations..... 0.97 0.88 0.83 0.00
---------- ---------- ---------- ----------
Less distributions
Dividends from net
investment
income........... (0.60) (0.62) (0.68) (0.05)
Distributions in
excess of
accumulated
gains............ -- -- -- --
Distributions from
paid-in capital
in excess of
par.............. (0.22) (0.24) (0.24) --
---------- ---------- ---------- ----------
Total
distributions.. (0.82) (0.86) (0.92) (0.05)
---------- ---------- ---------- ----------
Net asset value,
end of period.... $ 9.17 $ 9.02 $ 9.00 $ 8.64
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
TOTAL RETURN#:.... 11.27% 10.35% 10.49% (0.14)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of
period (000)..... $2,724,428 $3,127,587 $3,760,003 $ 20
Average net assets
(000)............ $2,903,704 $3,432,948 $3,814,455 $ 7
Ratios to average
net assets:##
Expenses,
including
distribution
fees........... 1.71% 1.67% 1.49% 1.54%*
Expenses,
excluding
distribution
fees........... 0.71% 0.70% 0.64% .79%*
Net investment
income......... 6.66% 6.94% 7.46% 6.74%*
Portfolio turnover
rate............. 187% 213% 329% 123%
</TABLE>
- ---------------
@ Commencement of offering of Class A shares.
(D) Commencement of offering of Class C 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.
## Because of the events referred to in (D) and the timing of such, the
ratios for the Class C shares are not necessarily comparable to that
of Class A or B shares and are not necessarily indicative of future ratios.
See Notes to Financial Statements.
-13-
<PAGE>
<PAGE>
Directors
Edward D. Beach
Delayne Dedrick 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 LLP
1633 Broadway
New York, NY 10019
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
The accompanying financial statements as of August 31, 1994 were not
audited and, accordingly, no opinion is expressed on them.
This report is not authorized for distribution to prospective investors
unless preceded or accompanied by a current prospectus.
744339102
744339201 MF128E2
744339300 (LOGO) Cat.#6421462
