ANNUAL REPORT February 28, 1995
Prudential
Government
Income Fund, Inc.
(PICTURE)
(LOGO)
<PAGE>
Letter to Shareholders
April 3, 1995
Dear Shareholder:
U.S. government bond investors faced a difficult year in 1994. First,
interest rates rose -- driven by accelerating inflation -- and bond prices
dropped. In the fourth quarter bonds rebounded, however, as investors
began to believe that economic growth was not out-of-control after all.
In the first two months of 1995, however, sentiment reversed course, rates
fell and bond prices recovered some of their losses. In such a turbulent
year, we're pleased to announce that the Prudential Government Income Fund
produced higher total returns than the average U.S. government bond fund,
as reported by Lipper Analytical Services Inc.
<TABLE>
CUMULATIVE TOTAL RETURNS1
As of February 28, 1995
<CAPTION>
One Year Five Years Since Inception2
<S> <C> <C> <C>
Class A 0.8% 45.8% 45.0%
Class B 0.2% 40.3% 108.6%
Class C N/A N/A 2.8%
Lipper
U.S. Government Avg. -0.1% 44.6% 126.9%
</TABLE>
<TABLE>
AVERAGE ANNUAL TOTAL RETURNS1
As of March 31, 1995
<CAPTION>
One Year Five Years Since Inception2
<S> <C> <C> <C>
Class A 0.0% 7.1% 6.7%
Class B -1.4% 7.0% 7.7%
Class C N/A N/A 2.3%
</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.
1 Source: Prudential Mutual Fund Management, Inc. and Lipper Analytical
Services Inc.. The cumulative total returns do not take into account sales
charges. The average annual total returns do take into account sales
charges. The Fund charges a maximum sales load of 4% for Class A shares.
Class B shares are subject to a contingent deferred sales charge of 5%, 4%,
3%, 2%, 1% and 1%, respectively, for six years. Class C shares charge a CDSC
of 1% for one year. Class B shares will automatically convert to Class A
shares on a quarterly basis, approximately seven years after purchase.
2 Inception dates: Class A 1/22/90, Class B 4/22/85; Class C 8/1/94.
The Fund paid dividends totaling $0.59 for Class A shares, $0.53 for Class B
shares and $0.31 forClass C shares, in the year ended February 28, 1995.
-1-
<PAGE>
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. government agencies or instrumentalities. Of course, there is no
assurance the Fund will meet this objective. The Fund may also invest in
derivative securities, like put and call options. See the prospectus for
more information about the range of securities purchased by the Fund.
Inflationary Fears Subside.
Investors have been looking for higher inflation for more than 12 months, but
it appears at this writing that the Federal Reserve has been successful in
slowing the economic engine without sending it into a stall. This may be
the "soft landing" economists have been looking for; economic growth has
slowed to around 4% and inflation remains below 3% with no signs of rising
any time soon. The Consumer Price Index (one measure of inflation) has
remained in a range throughout the year, and wages (another leading
indicator) have stayed flat. We've charted their progress here, and while
they appeared to be on the verge of breaking into the danger zone at several
points in the past year, both indicators remain in a manageable range. With
economic growth slowing, we don't expect wage or price pressures to develop
any time soon.
(CHART)
-2-
<PAGE>
(CHART)
The cost of the Federal Reserve's successful campaign to slow growth and
forestall inflation was steep for government bond investors in 1994. The
early 1995 rally helped recoup all losses, however, and the average U.S.
government bond's total return is up 1.3% for the year, as measured by the
Lehman government average. Mortgages were resilient, gaining 2.8% in 12
months. Long-term bonds did not fare as well: Lehman registers a loss of
0.8% for the average long-term U.S. government bond.
Good Moves:
Assuming A Cautious Stance.
We're glad we shortened the average maturity of the portfolio by raising cash
throughout most of the year. Cash doesn't fluctuate in price the way bonds
do when interest rates are on the move. We earned a little less coupon income
with cash at a 6% level, as it was at midyear, but we also built in a nice
cushion of stability while the Federal Reserve raised interest rates every
month. Late in 1994, we shifted the bulk of that cash back into bonds,
believing that the market was poised for a rally. Cash stood at 7.7% of
total assets on February 28 and the effective maturity was about 8.7 years.
Our maturities, as measured by duration, stood at 5.5 years when we last
wrote (duration measures a bond fund's sensitivity to interest rate changes
by calculating the average weighted time it would take the entire portfolio
to mature) and it rose to 6.0 years at the close of the reporting period.
We anticipate the Fund's duration will continue to fluctuate as we respond
to changing market conditions.
-3-
<PAGE>
Trading Mortgages.
The Fund's mortgage component, at 42% of assets, is also somewhat below
it's normal level -- we like to keep about 50% of total net assets in mortgage
backed securities to take advantage of their coupons. In a bond market rally,
however, mortgages generally don't perform as well as Treasury securities
because their repayment schedules are variable.
Fund Update
Starting in February 1995, Class B shareholders
may have begun to notice a change in their Fund
holdings. That's when Class B shares began to
automatically convert to Class A shares, on a
quarterly basis, approximately seven years after
purchase. As you may know, Class A shares generally
carry lower annual distribution expenses than Class B
shares. Accordingly, after conversion you will
earn higher total returns on your investment than
you would have as a Class B shareholder.
Following the May cycle, conversions of eligible
Class B shares and special exchanges of Class B
and C shares will take place each calendar quarter
(March, June, September and December) starting
in September 1995.
Looking Forward.
In 1995, bond market performance will be heavily impacted by economic
reports -- but we believe bonds are the asset class of choice this year.
Investors will probably "clip coupons," earning at least that rate and
possibly a bit more in price appreciation. Many investors had become too
bearish on bonds at the end of 1994, and buyers spurred a healthy early-1995
rally. But once investor sentiment wanes and the rally slows, prices will
probably become volatile. We will monitor the markets carefully and attempt
to adjust the portfolio to maintain competitive returns.
Thank you for your confidence in us. We are committed to managing the
Prudential Government Income Fund for your long-term benefit.
Sincerely,
Lawrence C. McQuade
President
Barbara Kenworthy
Portfolio Manager
-4-
<PAGE>
PORTFOLIO Q&A
(PICTURE)
Dennis Bushe
Many investors avoided bond funds in the past year, fearing that rising
interest rates would erode their returns and add volatility to their
investment portfolio. If you are contemplating putting cash into the bond
market -- in taxable or tax-exempt securities -- you might want to consider
some of the following points. We talked with Prudential Mutual Funds
chief fixed income strategist Dennis Bushe about why bonds and bond mutual
funds may make sense in today's investment environment.
Q. Why are bonds an attractive buy right now?
A. First, bond prices corrected in 1994, which put interest rates at very
attractive levels in 1995. Second, real rates of return (the interest rate
minus the inflation rate) are still very high historically. According to
Ibbotson Associates, a nationally recognized investment analysis firm, the
annual inflation-adjusted return on bonds from 1926 to 1994 was between 2.5%
and 3.0%. Today's investors receive over 4.5% in total inflation-adjusted,
annualized total return. Of course, these numbers are just for illustration,
but they show how much higher interest rates improve bond total returns when
inflation is only 2.7%, as measured by the Consumer Price Index. And beating
inflation is one primary goal of long-term investing.
Q. Why not buy short-term bonds to reduce price risk?
A. Short-term investing is appropriate for money you believe you will need
to use within the next six to eighteen months. But this may not be the case
for money you don't plan to touch for a while. When investors can receive
virtually the same amount of yield for investing in a two-year note or a
10-year note, it's tempting to buy only the two-year security and avoid
the risk of longer term investing. By doing so, however, you may give up
the opportunity to lock in attractive intermediate- and long-term interest
rates. Why? If rates remain flat, long-term bonds pay higher coupons
and produce higher total returns. If rates fall, long-term bonds will
produce better price gains, as well. And long-term investors avoid the
scramble to reinvest maturing bonds when interest rates are falling. So,
unless you believe interest rates will rise rapidly in the coming year, it
may be time to lengthen maturities.
-5-
<PAGE>
PRUDENTIAL GOVERNMENT INCOME FUND Portfolio of Investments
February 28, 1995
<TABLE>
<CAPTION>
Principal
Amount Value
(000) Description (Note 1)
<C> <S> <C>
LONG-TERM INVESTMENTS--95.2%
U.S. Government Agency
Securities--46.9%
Federal Home Loan Mortgage
Corp.,
$ 81,913 8.00%, 1/01/22 - 9/01/24... $ 81,401,413
50,000 8.20%, 1/16/98............. 51,187,500
7,821 8.50%, 6/01/07 - 4/01/20... 7,888,122
3,993 11.50%, 10/01/19........... 4,302,276
Federal National Mortgage
Assoc.,
6.50%, 10/01/23 -
25,525 6/01/24.................. 23,370,929
7.00%, 11/01/23 -
55,769# 5/01/24.................. 52,631,903
89,285 7.50%, 5/01/07 - 3/01/25... 87,487,955
20,000 7.93%, 2/14/25............. 19,801,600
55,000 8.50%, 6/01/17 - 3/01/25... 55,691,196
Trust 1991 G-37 Class C,
42 (I/O*)................... 379,303
Government National Mortgage Assoc.,
6.50%, 5/15/23 -
58,718 10/15/24................. 53,084,682
7.00%, 2/15/09 -
72,648 11/15/24................. 68,039,509
3,718 7.25%, 7/15/23............. 3,452,263
35,152 7.50%, 5/15/02 - 2/15/25... 34,000,816
48,397 8.00%, 7/15/16 - 3/15/24... 48,485,100
57 8.50%, 5/15/22 - 2/15/25... 58,328
96,512 9.00%, 4/15/01 - 1/15/17... 100,712,486
9.50%, 7/15/16 -
31,392 12/15/17................. 33,256,201
Government National Mortgage Assoc. II,
6,689 9.50%, 5/20/18 - 8/20/21... 6,977,674
Resolution Funding Corp.,
50,000 Zero Coupon, 7/15/20....... 6,932,000
--------------
Total U.S. Government
Agency
Securities (cost
$738,288,900)............ 739,141,256
--------------
U.S. Government Obligations--45.3%
United States Treasury
Bonds,
$ 1,400 7.625%, 2/15/25............ $ 1,427,566
104,500 11.25%, 2/15/15............ 143,834,845
68,000 12.00%, 8/15/13............ 93,542,160
50,000 12.50%, 8/15/14............ 71,765,500
111,500D 14.00%, 11/15/11........... 168,591,345
United States Treasury
Notes,
50,000D 6.00%, 11/30/97............ 48,898,500
20,000 7.375%, 5/15/96............ 20,168,800
45,000 7.50%, 2/15/05............. 45,900,000
75,000D 8.25%, 7/15/98............. 77,883,000
United States Treasury
Strips,
37,600 Zero Coupon, 5/15/15....... 6,780,784
37,600 Zero Coupon, 5/15/16....... 6,235,960
200,000 Zero Coupon, 5/15/20....... 29,384,000
--------------
Total U.S. Government
Obligations
(cost $716,957,042)........ 714,412,460
--------------
Asset-Backed Securities--2.6%
Standard Credit Card Master
Trust I,
Series 1995 -1A, 8.25%,
1/07/07
40,000 (cost $40,312,500)....... 41,381,250
--------------
Adjustable Rate Mortgage
Pass-Throughs--0.4%
Ryland Mortgage Securities Corporation,
Mortgage Participation Securities,
Series 1993-3, Class A-3,
7.199%, 9/25/24
5,948 (cost $6,066,583)........ 5,893,742
--------------
Total long-term investments
(cost $1,501,625,025)...... 1,500,828,708
--------------
</TABLE>
-6- 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--8.5%
Time Deposit--5.0%
Fuji Bank Chicago,
6.125%, 3/01/95
$ 78,465 (cost $78,465,000)....... $ 78,465,000
--------------
Repurchase AgreementDD--1.6%
First Boston Corp.,
6.00%, dated 2/28/95, due
3/07/95 in the amount of
$25,644,640
(cost $25,632,000; the
value of collateral
including accrued
interest is
25,632 $26,242,803)............. 25,632,000
--------------
U.S. Government Obligation--1.3%
United States Treasury
Note,
11.25%, 5/15/95
20,000 (cost $20,209,400)......... 20,209,400
--------------
Commercial Paper--0.6%
Societe General,
6.00%, 3/01/95
10,000 (cost $10,000,000)....... 10,000,000
--------------
Total short-term
investments
(cost $134,306,400)........ 134,306,400
--------------
Total Investments--103.7%
(cost $1,635,931,425; Note
4)....................... 1,635,135,108
Liabilities in excess of
other
assets--(3.7%)........... (58,054,181)
--------------
Net Assets--100%........... $1,577,080,927
--------------
--------------
</TABLE>
- ---------------
I/O--Interest Only.
* REMIC--Real Estate Mortgage Investment Conduit.
# Mortgage dollar roll, see Note 1.
D Partial principal amount pledged as collateral for mortgage dollar roll.
DD Repurchase agreements are collateralized by U.S. Treasury obligations.
-7- See Notes to Financial Statements.
<PAGE>
PRUDENTIAL GOVERNMENT INCOME FUND
Statement of Assets and Liabilities
<TABLE>
<CAPTION>
Assets
February 28, 1995
-----------------
<S>
<C>
Investments, at value (cost
$1,635,931,425)............................................ $ 1,635,135,108
Receivable for investments
sold........................................................ 97,713,112
Interest
receivable....................................................................
13,915,597
Receivable for Fund shares
sold........................................................ 534,129
Deferred expenses and other
assets..................................................... 180,382
-----------------
Total
assets.........................................................................
1,747,478,328
-----------------
Liabilities
Payable for investments
purchased......................................................
114,269,978
Payable for dollar
roll................................................................
45,859,375
Payable for Fund shares
reacquired.....................................................
6,275,706
Accrued expenses and other
liabilities................................................. 2,049,764
Distribution fee
payable...............................................................
654,264
Dividends
payable......................................................................
647,828
Management fee
payable.................................................................
640,486
-----------------
Total
liabilities....................................................................
170,397,401
-----------------
Net
Assets.......................................................................
...... $ 1,577,080,927
-----------------
-----------------
Net assets were comprised of:
Common stock, at
par................................................................. $
1,835,209
Paid-in capital in excess of
par..................................................... 1,749,373,598
-----------------
1,751,208,807
Accumulated net realized losses on
investments....................................... (173,331,563)
Net unrealized depreciation on
investments........................................... (796,317)
-----------------
Net assets at February 28,
1995.................................................... $ 1,577,080,927
-----------------
-----------------
Class A:
Net asset value and redemption price per share
($871,145,036 / 101,406,826 shares of common stock issued and
outstanding)......... $8.59
Maximum sales charge (4.0% of offering
price)........................................ .36
-----------------
Maximum offering price to
public..................................................... $8.95
-----------------
-----------------
Class B:
Net asset value, offering price and redemption price per share
($705,731,938 / 82,090,371 shares of common stock issued and
outstanding).......... $8.60
-----------------
-----------------
Class C:
Net asset value, offering price and redemption price per share
($203,953 / 23,721 shares of common stock issued and
outstanding).................. $8.60
-----------------
-----------------
</TABLE>
See Notes to Financial Statements.
-8-
<PAGE>
PRUDENTIAL GOVERNMENT INCOME FUND
Statement of Operations
<TABLE>
<CAPTION>
Year Ended
February 28,
Net Investment Income 1995
--------------
<S> <C>
Income
Interest (net of swap interest
expense of $150,865)............ $ 143,837,354
Income from securities
loaned-net...................... 71,213
--------------
143,908,567
--------------
Expenses
Distribution fee--Class A......... 143,341
Distribution fee--Class B......... 14,862,736
Distribution fee--Class C......... 484
Management fee.................... 9,155,193
Transfer agent's fees and
expenses........................ 2,492,000
Custodian's fees and expenses..... 1,430,000
Reports to shareholders........... 700,000
Franchise taxes................... 545,000
Registration fees................. 80,000
Legal fees........................ 63,000
Insurance expense................. 60,000
Audit fee......................... 58,000
Directors' fees................... 48,000
Miscellaneous..................... 47,263
--------------
Total expenses.................. 29,685,017
--------------
Net investment income............... 114,223,550
--------------
Realized and Unrealized
Gain (Loss) on Investments
Net realized gain (loss):
Investment transactions........... (95,352,332)
Interest rate swap transaction.... 761,247
Written option transactions....... 697,656
--------------
(93,893,429)
--------------
Net change in unrealized
appreciation/depreciation:
Investments....................... (40,180,178)
Interest rate swap................ 709,355
--------------
(39,470,823)
--------------
Net loss on investments............. (133,364,252)
--------------
Net Decrease in Net Assets
Resulting from Operations........... $ (19,140,702)
--------------
--------------
</TABLE>
PRUDENTIAL GOVERNMENT INCOME FUND
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
Year Ended February 28,
Increase (Decrease) -------------------------------
in Net Assets 1995 1994
-------------- --------------
<S> <C> <C>
Operations
Net investment
income............. $ 114,223,550 $ 143,951,352
Net realized gain
(loss) on
investment
transactions....... (93,893,429) 73,862,182
Net change in
unrealized
appreciation on
investments........ (39,470,823) (137,565,425)
-------------- --------------
Net increase
(decrease) in net
assets resulting
from operations.... (19,140,702) 80,248,109
-------------- --------------
Dividends and distributions (Note 1)
Dividends to shareholders from
net investment income
Class A............ (7,117,500) (3,625,302)
Class B............ (107,101,716) (140,326,050)
Class C............ (4,334) --
-------------- --------------
(114,223,550) (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
(net of share
conversions) (Note 5)
Net proceeds from
shares
subscribed......... 79,769,541 238,679,715
Net asset value of
shares issued to
shareholders in
reinvestment of
dividends and
distributions...... 64,092,911 83,988,251
Cost of shares
reacquired......... (687,645,132) (740,509,270)
-------------- --------------
Decrease in net
assets from Fund
share
transactions....... (543,782,680) (417,841,304)
-------------- --------------
Total decrease......... (677,146,932) (487,328,214)
Net Assets
Beginning of year...... 2,254,227,859 2,741,556,073
-------------- --------------
End of year............ $1,577,080,927 $2,254,227,859
-------------- --------------
-------------- --------------
</TABLE>
See Notes to Financial Statements. See Notes to Financial Statements.
-9-
<PAGE>
PRUDENTIAL GOVERNMENT INCOME FUND
Notes to Financial Statements
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 and 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 were
conceived as asset/liability management tools. 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. Interest income is accrued or charged based upon the prevailing
terms 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 February 28, 1995.
Option Writing: The Fund may either purchase or write options in order to hedge
against adverse market movements or fluctuations in value caused by changes in
prevailing interest rates with respect to securities which the Fund currently
owns or intends to purchase. The Fund's principal reason for writing options is
to realize, through receipt of premiums, a greater current return than would be
realized on the underlying security alone. When the Fund purchases an option,
it
pays a premium and an amount equal to that premium is recorded as an investment.
When the Fund writes an option, it receives a premium and an amount equal to
that premium is recorded as a liability. The investment or liability is adjusted
daily to reflect the current market value of the option. If an option expires
unexercised, the Fund realizes a gain or loss to the extent of the premium
received or paid. If an option is exercised, the premium received or paid is an
adjustment to the proceeds from the sale or the cost of the purchase in
determining whether the Fund has realized a gain or loss. The difference between
the premium and the amount received or paid on effecting a closing purchase or
sale transaction is also treated as a realized gain or loss. Gain or loss on
purchased options is included in net realized gain (loss) on investment
transactions. Gain or loss on written options is presented separately as net
realized gain (loss) on written option transactions.
The Fund, as a writer of an option, may have no control over whether the
underlying securities may be sold (called) or
-10-
<PAGE>
purchased (put). As a result, the Fund bears the market risk of an unfavorable
change in the price of the security underlying the written option. The Fund, as
purchaser of an option, bears the risk of the potential inability of the
counterparties to meet the terms of their contracts. As of February 28, 1995,
the Fund did not have any open written options.
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 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
sales proceeds and the lower repurchase price is recorded as interest income.
The Fund maintains a segregated account, the dollar value of which is at least
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 February 28, 1995.
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 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
-11-
<PAGE>
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, 1995.
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 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 compensates 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 $196,000 in
front-end sales charges resulting from sales of Class A shares during the year
ended February 28, 1995. 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 year ended February 28, 1995 it
received approximately $3,123,000 in contingent deferred sales charges imposed
upon redemptions by certain Class B and Class C 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 February 28, 1995, the Fund incurred fees of approximately
$2,001,000 for the services of PMFS. As of February 28, 1995, approximately
$158,000 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 year ended
February 28, 1995, were $3,607,229,712 and $4,217,994,778, respectively.
The federal income tax cost basis of the Fund's investments, at February 28,
1995 was the same as for book purposes and, accordingly, net unrealized
depreciation for federal income tax purposes was $796,317 (gross unrealized
appreciation-$16,594,213; gross unrealized depreciation-
$17,390,530).
The Fund had a capital loss carryforward as of February 28, 1995 of
approximately $140,517,000 of which $34,965,000 expires in 1998, $41,965,000
expires in 1999 and $63,587,000 expires in 2003. Accordingly, no capital gains
distribution is expected to be paid to shareholders until net gains have been
realized in excess of such amounts.
Transactions in written options during the year ended February 28, 1995 were
as follows:
<TABLE>
<CAPTION>
Number of
Contracts Premiums
(000) Received
<S> <C> <C>
----------- ------------
Options written 2,601 $ 2,222,656
Options terminated in closing
purchase transactions......... (2,601) (2,222,656)
----------- ------------
Options outstanding at February
28, 1995...................... 0 $ 0
----------- ------------
----------- ------------
</TABLE>
The average monthly balance of dollar rolls outstanding during the year ended
February 28, 1995 was approximately $77,787,000. The amount of dollar rolls
outstanding at February 28, 1995 was $45,859,375, which was 2.62% of total
assets.
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. Commencing in February 1995,
Class B shares automatically convert to Class A shares on a quarterly basis
approximately seven years after purchase.
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.
-12-
<PAGE>
Transactions in shares of common stock were as follows:
<TABLE>
<CAPTION>
Class A Shares Amount
<S> <C> <C>
------------ ---------------
Year ended February 28,
1995:
Shares sold................. 1,650,843 $ 14,143,438
Shares issued in
reinvestment of
dividends................. 517,170 4,416,369
Shares reacquired........... (3,871,087) (33,161,047)
------------ ---------------
Net decrease in shares out-
standing before
conversion................ (1,703,074) (14,601,240)
Shares sold upon conversion
from Class B.............. 97,449,952 825,401,064
------------ ---------------
Net increase in shares
outstanding............... 95,746,878 $ 810,799,824
------------ ---------------
------------ ---------------
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)
------------ ---------------
------------ ---------------
<CAPTION>
Class B Shares Amount
<S> <C> <C>
------------ ---------------
Year ended February 28,
1995:
Shares sold................. 7,582,662 $ 65,420,737
Shares issued in
reinvestment of
dividends................. 5,979,498 59,672,362
Shares reacquired........... (75,332,177) (654,474,203)
------------ ---------------
Net decrease in shares out-
standing before
conversion................ (61,770,017) (529,381,104)
Shares reacquired upon con-
version into Class A...... (97,449,952) (825,401,064)
------------ ---------------
Net decrease in shares
outstanding............... (159,219,969) $(1,354,782,168)
------------ ---------------
------------ ---------------
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
February 28, 1995:
Shares sold................. 24,418 $ 205,366
Shares issued in
reinvestment of
dividends................. 498 4,180
Shares reacquired........... (1,195) (9,882)
------------ ---------------
Net increase in shares
outstanding............... 23,721 $ 199,664
------------ ---------------
------------ ---------------
</TABLE>
- ---------------
* Commencement of offering of Class C shares.
-13-
<PAGE>
PRUDENTIAL GOVERNMENT INCOME FUND
Financial Highlights
<TABLE>
<CAPTION>
Class A
Class B
------------------------------------------------
- -------------------------------------------------
Years Ended February 28/29,
Years Ended February 28/29,
------------------------------------------------
- -------------------------------------------------
1995 1994 1993 1992 1991
1995 1994 1993 1992
-------- ------- ------- ------- -------
- ---------- ---------- ---------- ----------
<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 $
9.13 $ 9.40 $ 9.17 $ 9.02
-------- ------- ------- ------- -------
- ---------- ---------- ---------- ----------
Income from investment
operations
Net investment
income............. 0.59 0.61 0.66 0.68 0.69
0.53 0.53 0.58 0.60
Net realized and
unrealized gain
(loss) on
investment
transactions....... (0.54) (0.25) 0.35 0.37 0.26
(0.53) (0.25) 0.35 0.37
-------- ------- ------- ------- -------
- ---------- ---------- ---------- ----------
Total from
investment
operations....... 0.05 0.36 1.01 1.05 0.95
-- 0.28 0.93 0.97
-------- ------- ------- ------- -------
- ---------- ---------- ---------- ----------
Less distributions
Dividends from net
investment
income............. (0.59) (0.61) (0.66) (0.68) (0.69)
(0.53) (0.53) (0.58) (0.60)
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)
-- -- (0.12) (0.22)
-------- ------- ------- ------- -------
- ---------- ---------- ---------- ----------
Total
distributions.... (0.59) (0.63) (0.78) (0.90) (0.93)
(0.53) (0.55) (0.70) (0.82)
-------- ------- ------- ------- -------
- ---------- ---------- ---------- ----------
Net asset value, end
of period.......... $ 8.59 $ 9.13 $ 9.40 $ 9.17 $ 9.02 $
8.60 $ 9.13 $ 9.40 $ 9.17
-------- ------- ------- ------- -------
- ---------- ---------- ---------- ----------
-------- ------- ------- ------- -------
- ---------- ---------- ---------- ----------
TOTAL RETURN#:....... .83% 3.90% 11.55% 12.18% 11.21%
.24% 3.03% 10.61% 11.27%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of
period (000)....... $871,145 $51,673 $61,297 $33,181 $28,971 $
705,732 $2,202,555 $2,680,259 $2,724,428
Average net assets
(000).............. $ 95,560 $55,921 $46,812 $29,534 $23,428
$1,735,413 $2,487,990 $2,670,924 $2,903,704
Ratios to average net
assets:##
Expenses, including
distribution
fees............. 0.98% 0.84% 0.84% 0.86% 0.85%
1.66% 1.68% 1.69% 1.71%
Expenses, excluding
distribution
fees............. 0.83% 0.69% 0.69% 0.71% 0.70%
0.80% 0.69% 0.69% 0.71%
Net investment
income........... 7.45% 6.48% 7.17% 7.51% 7.76%
6.17% 5.64% 6.32% 6.66%
Portfolio turnover
rate............... 206% 80% 36% 187% 213%
206% 80% 36% 187%
<CAPTION>
Class C
------------
August 1,
1994D
Through
February 28,
1991 1995
---------- ------------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value,
beginning of
period............. $ 9.00 $ 8.69
---------- ------
Income from investment
operations
Net investment
income............. 0.62 0.31
Net realized and
unrealized gain
(loss) on
investment
transactions....... 0.26 (0.09)
---------- ------
Total from
investment
operations....... 0.88 0.22
------
----------
Less distributions
Dividends from net
investment
income............. (0.62) (0.31)
Distributions in
excess of
accumulated
gains.............. -- --
Distributions from
paid-in capital in
excess of par...... (0.24) --
---------- ------
Total
distributions.... (0.86) (0.31)
---------- ------
Net asset value, end
of period.......... $ 9.02 $ 8.60
---------- ------
---------- ------
TOTAL RETURN#:....... 10.35% 2.75%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of
period (000)....... $3,127,587 $ 204
Average net assets
(000).............. $3,432,948 $ 111
Ratios to average net
assets:##
Expenses, including
distribution
fees............. 1.67% 1.63%*
Expenses, excluding
distribution
fees............. 0.70% 0.88%*
Net investment
income........... 6.94% 6.69%*
Portfolio turnover
rate............... 213% 206%
</TABLE>
- ---------------
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.
-14-
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Shareholders and Board of Directors
Prudential Government Income Fund Inc.
We have audited the accompanying statement of assets and liabilities of
Prudential Government Income Fund Inc. (formerly Prudential Government Plus Fund
Inc.), including the portfolio of investments, as of February 28, 1995, 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, 1995 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 Income Fund, Inc. as of February 28, 1995, 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
April 13, 1995
IMPORTANCE NOTICE FOR
CERTAIN SHAREHOLDERS
We are required by New York, California, Massachusetts 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's taxing authorities. We are
pleased to report that 52% of the dividends paid by Prudential Government Income
Fund qualify for such deduction.
For more detailed information regarding your state and local taxes, you
should contact your tax adviser or the state/local taxing authorities.
* Due to certain minimum portfolio holding requirements in California and New
York, residents of those states will not be able to exclude interest on Federal
obligations from state and local tax.
-15-
<PAGE>
Prudential Government Income Fund
Comparison of Change in Value of $10,000 Investment in
Prudential Government Income Fund and
The Lehman Bros. Government Bond Index
(GRAPH)
(GRAPH)
(GRAPH)
Past performance is no guarantee of future results. Investment return and
principal value will fluctuate so an investor's shares, when redeemed, will
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 the Prudential Government Income
Fund (Class A, Class B and Class C) with a similar investment in the
Lehman Brothers Government Bond Index (bond index) and the Salomon Bros.
Mortgage Backed Security Index (mortgage 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,
1985 for Class B shares and 1994 for Class C shares. For purposes of the
graphs, and unless otherwise indicated, in the accompanying tables it has
been assumed (a) that the maximum applicable contingent deferred 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 and Class C shares, assuming
full redemption on March 31, 1995; (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, beginning approximately seven years after
purchase. This conversion feature is not reflected in the graph.
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 mortgage index is comprised of mortgage
backed, pass through securities consisting 70% of pass through securities
issued by the Government National Mortgage Association and 23% by the Federal
Home Loan Mortgage Corporation, 5% by the Federal National Mortgage
Association and the balance in a mixture of conventional and Federal
Housing Administration mortgage pools. The bond index and the mortgage
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 that comprise
the bond index and the mortgage index may differ substantially from the
securities in the Fund's portfolio. The bond index and the mortgage 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.
-16-
<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
Deborah A. Docs, Assistant Secretary
Manager
Prudential Mutual Fund Management, Inc.
One Seaport Plaza
New York, NY 10292
Investment Adviser
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.
744339102
744339201 MF128E
744339300 (LOGO) Cat.#642157Z
