(ICON)
Prudential
Government
Income
Fund, Inc.
ANNUAL
REPORT
Feb. 29, 1996
(LOGO)
<PAGE>
Performance At A Glance.
It was a good year for the bond market. Slow economic growth contained
inflation, pushing interest rates down and bond prices up. We're pleased to
report that for the 12 months ended February 29, 1996, the Prudential
Government Income Fund performed much better than the average U.S. government
bond fund tracked by Lipper Analytical Services. That's because your Fund held
a longer average maturity than its peers.
Cumulative Total Returns1 As of 2/29/96
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
One Five Ten
Since
Year Years Years
Inception2
Class A 12.4% 47.4% N/A
63.0%
Class B 11.5 41.8 99.6%
132.6
Class C 11.6 N/A N/A
14.7
Lipper Gen. U.S. Gov't Fund Avg.3 10.8 44.3 107.9
147.7
</TABLE>
Average Annual Total Returns1 As of 3/31/96
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
One Five Ten
Since
Year Years Years
Inception2
Class A 6.2% 6.9% N/A
7.3%
Class B 4.9 6.8 6.8%
7.9
Class C 9.0 N/A N/A
8.0
</TABLE>
<TABLE>
<CAPTION>
Dividends
& Yields Total Dividends 30-Day
As of Paid for Six Mos. SEC Yield
2/29/96
<S> <C> <C>
Class A $0.60 5.16%
Class B $0.54 4.70
Class C $0.54 4.77
</TABLE>
Past performance is not a guarantee of future results. Principal and investment
return will fluctuate so that an investor's shares, when redeemed, may be worth
more or less than their original cost.
1Source: Prudential Mutual Fund Management, Inc. and Lipper Analytical
Services, Inc. The cumulative total returns do not take into account sales
charges. The average annual returns do take into account applicable sales
charges. The Fund charges a maximum front-end sales load of 4% for Class
A shares and a declining contingent deferred sales charge (CDSC) of 5%, 4%,
3%, 2%, 1% and 1% for six years, for Class B shares. Class C shares have a 1%
CDSC for one year. Class B shares automatically convert to Class A shares on a
quarterly basis, after approximately seven years after purchase.
2Inception dates: 1/22/90 Class A; 4/22/85, Class B; 8/1/94 Class C.
3The Lipper category includes 175 funds for one year, 71 funds for five years,
33 funds for 10 years, and 21 funds since inception of the Class B shares on
4/22/85.
How Investments Compared.
(As of 2/29/96)
(GRAPH)
Source: Lipper Analytical Services. Financial markets change, so a mutual
fund's past performance should never be used to predict future results. The
risks to each of the investments listed above are different -- we provide
12-month total returns for several Lipper mutual fund categories to show you
that reaching for higher yields means tolerating more risk. The greater the
risk, the larger the potential reward or loss. In addition, we've added
historical 20-year average annual returns. The returns assume the reinvestment
of dividends.
U.S. Growth Funds will fluctuate a great deal. Investors have received higher
historical total returns from stocks than from most other investments. Smaller
capitalization stocks offer greater potential for long-term growth but may be
more volatile than larger capitalization stocks.
General Bond Funds provide more income than stock funds, which can help smooth
out their total returns year by year. But their prices still fluctuate
(sometimes significantly) and their returns have been historically lower than
those of stock funds.
General Municipal Debt Funds invest in bonds issued by state governments, state
agencies and/or municipalities. This investment provides income that is usually
exempt from federal and state income taxes.
Money Market Funds attempt to preserve a constant share value; they don't
fluctuate much in price but historically their returns have been generally
among the lowest of the major investment categories.
*19 years for General Muni Debt Fund
<PAGE>
Barbara L. Kenworthy, Fund Manager (PICTURE)
Portfolio
Manager's Report
The Prudential Government Income Fund is designed for investors who want high
current return, primarily from bonds issued or guaranteed by the U.S.
government or its agencies. At least 65% of the Fund's total assets are
invested in U.S. government securities. There can be no assurance that the
Fund will achieve its objective.
Strategy Session.
A Very Good Year
For Bond Investors.
1995 was an exceptional year for investors in government bonds. Economic growth
was the slowest since 1991. Inflation was the lowest in a decade -- a paltry
2.5%, as measured by the Consumer Price Index. Additionally, the Federal
Reserve twice lowered short-term interest rates. Bond investors couldn't have
asked for much more. As a result, interest rates fell for much of the year.
We are pleased to report that we performed better than the average government
bond fund. We believe we did so because of two strategies we followed to take
advantage of falling interest rates: we reduced our mortgage holdings and
extended our duration (a measure of the fund's sensitivity to interest rate
changes).
As interest rates began falling early in the year, we sold mortgage backed
securities because their prices suffer on fears that homeowners might be
tempted to pay off their mortgages early. In addition, we extended our duration
significantly in the summer by buying longer-term bonds, which rise in price
much faster than shorter-term bonds as interest rates fall.
By the end of 1995, we feared that bond prices were too high. Yields had
already fallen substantially and we doubted they would fall much further soon,
especially since Congress and the president had failed to reach an agreement to
balance the budget. So we sold some of our longer maturities at a profit and
lowered our duration. When bond prices suddenly fell in February, as investors
feared that a renewed spurt of economic growth could prevent the Federal
Reserve from lowering short-term interest rates any further, we were glad we
had reduced our duration earlier -- it helped protect some of last year's price
gains.
We believe we can add value by monitoring the bond markets closely to determine
which sectors and maturities are more valuable than others at any given time.
And we believe our performance shows that we did the right thing at the right
time for much of this year.
Overview.
Barbara Kenworthy actively trades between the different government bond
sectors and maturities, seeking attractive yields and capital appreciation
potential wherever those opportunities may exist.
<PAGE>
What Went Well.
We Thought 8% & 9%
Mortgages Were High.
We typically hold close to half of our Fund in mortgage backed securities. They
provide higher income than comparable maturity U.S. Treasurys, and that helps
pay the Fund's monthly dividend to you.
But when interest rates fall, homeowners refinance their mortgages, so the
prices of these mortgage securities can fall quite rapidly. Since rates were
declining over the past 12 months, we protected the Fund by reducing our
premium mortgages -- those carrying 8% and 9% coupons -- which were most likely
to be refinanced first.
Indeed, mortgage backed securities appreciated more slowly than the bond market
in general over the last 12 months. In fact, some types of mortgages produced
only half of the total return of long-term U.S. Treasurys.
In Maturities, We
Preferred To Be Long.
For most of 1995, we were interested in U.S. Treasury bonds with longer
maturities, because they appreciate more when interest rates fall. Long-term
U.S. Treasury bonds returned nearly twice as much as shorter-term notes over
the last 12 months, as measured by Lehman Brothers.
Nearly 50% of our total net assets were in maturities of 21 to 30 years, during
the year, which helped our performance. But late in 1995, when it appeared that
interest rates had fallen as far as they could for the time being, we reduced
our holdings in this maturity range. We sold 30-year bonds and bought 10-year
notes. Our largest holding during much of the year was a U.S. Treasury bond
maturing in 19 years, which is callable in 14 years, carrying a 12.5% coupon.
And Not So Well.
In the End, We Could
Have Shortened More.
Duration is a measure of a fund's sensitivity to interest rate changes. Your
Funds duration generally varies from 5.5 to 6 years, and we kept it at its
upper limit for much of the year to gain as much as possible as rates fell. We
did reduce duration late in 1995, when it looked like the market was
overextended. We wish we had done so by a larger margin. Our duration was 5.9
years as of February 29, 1996, and that hurt our performance in the final month
of the reporting period.
Five Largest Holdings.
9.7% U.S. Treasury Bondx
6.9% GNMA Pass Through
6.0% U.S. Treasury Note
4.9% FHLMC 30-Year Bond
4.6% U.S. Treasury Bond
Expressed as a percentage of total net assets as of 2/29/96.
Looking Ahead.
The mood of the country has shifted. While fiscal responsibility was one of
the rallying cries of the Republican revolution in Washington last year, the
issue was missing in action from the Republican presidential primary debates
this year.
In 1995 government bonds were helped by talk of fiscal restraint in Washington.
This year, that "outside help" will have to come primarily from slow economic
growth, which we expect will continue.
Nevertheless, we see a volatile market ahead. Bond prices tumbled in February
and early March. At this writing, we think prices may fall more before they
head higher. Still, we expect bonds can produce price gains in 1996, as yields
generally edge lower in a slow-growth, subdued-inflation economy.
1
President's Letter April 5, 1996
(PICTURE)
Dear Shareholder:
For many investors, 1995 was a profitable year -- most stock and bond funds
enjoyed healthy returns from the U.S. markets. While climbing returns can tempt
even the most skittish investors to start buying again, it is important to
remember that the stock and bond markets go down just as they go up. At times
like these, remember the importance of working with your Financial Advisor or
Registered Representative to help you find investments that are consistent with
your risk tolerance and time horizon. Your Financial Advisor or Registered
Representative can help you maintain realistic expectations about both the
potential performance and risks associated with your investments.
Shareholder Legislative Action Program.
From time to time we've been informing you about significant legislation
before Congress, such as the American Dream Savings Account, that may
potentially impact mutual fund investors. We want to make it easier for you to
share your views with your Congressional member. So, beginning in 1996,
whenever Congress is considering legislation that would affect you, we'll send
you postage-paid message cards that you simply drop in the mail if you want to
let your senator or representative know how you want him or her to vote.
Fund Profiles.
Over the past year, we've worked to make your shareholder reports more
interesting, informative and easy to read. This year, we'll be considering
"fund profiles." Some mutual fund companies now offer one to shareholders
along with a full prospectus. The purpose of a fund profile is to provide a
very brief, reader-friendly summary of a fund's objective, investments, risks
and expenses. Would you like to see fund profiles from us? Please call your
Financial Advisor or Registered Representative to share your views.
As always, thank you for your confidence in Prudential Mutual Funds.
Sincerely,
Richard A. Redeker
President
2
<PAGE>
Portfolio of Investments
as of February 29, 1996 PRUDENTIAL GOVERNMENT INCOME FUND
- ------------------------------------------------------------
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Amount
(000) Description Value (Note 1)
<C> <S> <C>
------------------------------------------------------------
LONG-TERM INVESTMENTS--97.1%
------------------------------------------------------------
U.S. Government Obligations--42.2%
United States Treasury Bonds,
$25,000 7.125%, 2/15/23 $ 26,511,750
3,000 7.625%, 2/15/25 3,396,090
25,000 8.75%, 8/15/20 31,300,750
11,500 9.875%, 11/15/15 15,656,215
45,000 10.75%, 2/15/03 57,058,650
32,000 11.25%, 2/15/15 48,289,920
50,000 12.00%, 8/15/13 73,679,500
100,500 12.50%, 8/15/14 154,753,920
25,000 13.25%, 5/15/14 40,000,000
28,000 14.00%, 11/15/11 44,668,680
United States Treasury Notes,
87,000 7.50%, 2/15/05 94,952,670
40,000 7.875%, 11/15/04 44,618,800
5,000 8.875%, 5/15/00 5,593,750
United States Treasury Strip,
70,200 Zero Coupon, 2/15/09 30,375,540
--------------
Total U. S. Government Obligations
(cost $666,655,379) 670,856,235
- ------------------------------------------------------------
U.S. Government Agency Mortgage Pass-Throughs--38.8%
Federal Home Loan Mortgage Corp.,
42,623 7.50%, 2/01/22 - 4/01/25 43,077,793
75,401 8.00%, 1/01/22 - 9/01/24 77,388,981
6,776 8.50%, 6/01/07 - 4/01/20 7,085,394
3,042 11.50%, 10/01/19 3,418,862
Federal National Mortgage Assoc.,
24,535 6.50%, 10/01/23 - 6/01/24 23,674,643
52,864 7.00%, 2/01/24 - 5/01/24 52,271,090
38,359 7.50%, 4/01/07 - 5/01/10 39,149,837
52,763 8.50%, 6/01/17 - 3/01/25 54,837,685
13,708 9.00%, 8/01/24 - 4/01/25 14,417,557
Government National Mortgage
Assoc.,
$56,446 6.50%, 5/15/23 - 10/15/24 $ 54,581,792
110,353 7.00%, 12/15/22 - 11/15/24 109,489,490
27,813 7.50%, 5/15/02 - 6/15/25 28,173,404
43,508 8.00%, 7/15/16 - 3/15/24 45,048,487
27,964 9.00%, 4/15/01 - 12/15/09 29,743,648
25,670 9.50%, 10/15/09 - 12/15/17 28,069,121
Government National Mortgage
Assoc. II,
5,254 9.50%, 5/20/18 - 8/20/21 5,587,842
--------------
Total U.S. Government Agency
Mortgage Pass-Throughs
(cost $590,619,241) 616,015,626
- ------------------------------------------------------------
U.S. Government Agency Securities--14.5%
Federal Home Loan Bank,
1,000 6.78%, 7/24/02 1,007,500
Federal Home Loan Mortgage Corp.,
39,000 6.71%, 6/11/02 39,548,340
24,810 6.99%, 5/24/02 25,383,607
8,000 7.215%, 7/27/05 8,206,240
25,000 8.20%, 1/16/98 25,613,250
Federal National Mortgage Assoc.,
55,000 Zero Coupon, 7/05/14 15,391,200
25,000 6.85%, 9/12/05 24,968,750
Financing Corp. Strip,
5,000 Zero Coupon, 3/07/04 3,002,050
Israel AID,
37,600 Zero Coupon, 5/15/15 9,945,200
37,600 Zero Coupon, 5/15/16 9,223,280
Small Business Administration
Participation Certificate,
25,504 6.45%, 12/01/15 24,898,280
Tennessee Valley Authority,
41,800 6.235%, 7/15/45 42,474,234
--------------
Total U. S. Government Agency
Securities (cost $220,720,123) 229,661,931
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 3 -----
<PAGE>
Portfolio of Investments
as of February 29, 1996 PRUDENTIAL GOVERNMENT INCOME FUND
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Amount
(000) Description Value (Note 1)
<C> <S> <C>
------------------------------------------------------------
Collateralized Mortgage Obligations--0.3%
Federal National Mortgage Assoc.,
$ 12 Trust 1991 G-37 Class C I/O(a) $ 30,941
Resolution Trust Corp.,
5,713 7.75%, 9/25/29 5,416,288
--------------
Total Collateralized Mortgage
Obligations (cost $9,636,886) 5,447,229
- ------------------------------------------------------------
Supranational Bond--0.7%
International Bank for
Reconstruction & Development,
10,000 8.625%, 10/15/16
(cost $12,400,900) 11,793,700
- ------------------------------------------------------------
Asset-Backed Security--0.3%
Structured Asset Securities Corp.,
5,000 7.375%, 9/25/24
(cost $4,568,150) 4,900,000
- ------------------------------------------------------------
Adjustable Rate Mortgage Pass-Through--0.3%
Ryland Mortgage Securities
Corporation,
4,879 Mortgage Participation Securities,
Series 1993-3 Class A-3,
7.61%, 9/25/24
(cost $4,976,551) 4,782,930
- ------------------------------------------------------------
Total long-term investments
(cost $1,509,577,230) 1,543,457,651
--------------
SHORT-TERM INVESTMENTS--2.5%
- ------------------------------------------------------------
Commercial Paper--2.5%
Associates Corp. of North America,
$39,005 5.55%, 3/01/96
(cost $39,005,000) $ 39,005,000
------------------------------------------------------------
Total Investments--99.6%
(cost $1,548,582,230; Note 4) 1,582,462,651
Other assets in excess of
liabilities--0.4% 6,319,866
--------------
Net Assets--100% $1,588,782,517
--------------
--------------
</TABLE>
- ---------------
AID--Agency for International Development
I/O--Interest Only
(a) REMIC--Real Estate Mortgage Investment Conduit
- --------------------------------------------------------------------------------
- ----- 4 See Notes to Financial Statements.
<PAGE>
Statement of Assets and Liabilities PRUDENTIAL GOVERNMENT INCOME FUND
- --------------------------------------------------------------------------------
<TABLE>
<S>
<C>
Assets
February 29, 1996
Investments, at value (cost
$1,548,582,230)..............................................................
$ 1,582,462,651
Receivable for investments
sold..........................................................................
26,065,590
Interest
receivable...................................................................
................... 12,340,252
Receivable for Fund shares
sold..........................................................................
3,010,368
Deferred expenses and other
assets.......................................................................
68,606
-----------------
Total
assets.......................................................................
................... 1,623,947,467
-----------------
Liabilities
Payable for investments
purchased....................................................................
.... 27,393,673
Payable for Fund shares
reacquired...................................................................
.... 2,942,271
Accrued expenses and other
liabilities...................................................................
2,496,445
Dividends
payable......................................................................
.................. 1,142,438
Management fee
payable......................................................................
............. 643,966
Distribution fee
payable......................................................................
........... 546,157
-----------------
Total
liabilities..................................................................
................... 35,164,950
-----------------
Net
Assets.......................................................................
........................ $ 1,588,782,517
-----------------
-----------------
Net assets were comprised of:
Common stock, at
par..........................................................................
........ $ 1,757,735
Paid-in capital in excess of
par......................................................................
1,672,990,495
-----------------
1,674,748,230
Accumulated net realized losses on
investments........................................................
(119,846,134)
Net unrealized appreciation on
investments............................................................
33,880,421
-----------------
Net assets at February 29,
1996..........................................................................
$ 1,588,782,517
-----------------
-----------------
Class A:
Net asset value and redemption price per share
($945,037,722 / 104,588,322 shares of common stock issued and
outstanding)......................... $9.04
Maximum sales charge (4.0% of offering
price).........................................................
.38
-----------------
Maximum offering price to
public......................................................................
$9.42
-----------------
-----------------
Class B:
Net asset value, offering price and redemption price per share
($641,945,812 / 70,986,190 shares of common stock issued and
outstanding).......................... $9.04
-----------------
-----------------
Class C:
Net asset value, offering price and redemption price per share
($1,798,983 / 198,916 shares of common stock issued and
outstanding)............................... $9.04
-----------------
-----------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 5 -----
<PAGE>
PRUDENTIAL GOVERNMENT INCOME FUND
Statement of Operations
<TABLE>
<CAPTION>
Year Ended
Net Investment Income February 29, 1996
<S> <C>
Income
Interest................................... $ 117,578,274
Income from securities loaned-net.......... 280,669
-----------------
117,858,943
-----------------
Expenses
Management fee............................. 7,787,246
Distribution fee--Class A.................. 1,363,753
Distribution fee--Class B.................. 5,342,002
Distribution fee--Class C.................. 5,740
Transfer agent's fees and expenses......... 2,250,000
Custodian's fees and expenses.............. 690,000
Franchise taxes............................ 314,000
Reports to shareholders.................... 406,000
Registration fees.......................... 100,000
Audit fee.................................. 65,000
Legal fees................................. 58,000
Insurance expense.......................... 49,000
Directors` fees............................ 48,000
Miscellaneous.............................. 31,373
-----------------
Total expenses.......................... 18,510,114
-----------------
Net investment income........................ 99,348,829
-----------------
Realized and Unrealized
Gain (Loss) on Investments
Net realized gain (loss):
Investment transactions.................... 53,598,710
Written option transactions................ (113,281)
-----------------
53,485,429
Net change in unrealized appreciation on
investments................................ 34,676,738
-----------------
Net gain on investments...................... 88,162,167
-----------------
Net Increase in Net Assets
Resulting from Operations.................... $ 187,510,996
-----------------
-----------------
</TABLE>
PRUDENTIAL GOVERNMENT INCOME FUND
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
Increase (Decrease) Year Ended February 29/28,
<S> <C> <C>
in Net Assets 1996 1995
Operations
Net investment income........ $ 99,348,829 $ 114,223,550
Net realized gain (loss) on
investment transactions... 53,485,429 (93,893,429)
Net change in unrealized
appreciation/depreciation
on investments............ 34,676,738 (39,470,823)
-------------- --------------
Net increase (decrease) in
net assets resulting from
operations................ 187,510,996 (19,140,702)
-------------- --------------
Dividends to shareholders from
net investment income
(Note 1)
Class A................... (60,495,599) (7,117,500)
Class B................... (38,807,245) (107,101,716)
Class C................... (45,985) (4,334)
-------------- --------------
(99,348,829) (114,223,550)
-------------- --------------
Fund share transactions (net of
share conversions) (Note 5)
Net proceeds from shares
subscribed................ 226,050,700 79,769,541
Net asset value of shares
issued to shareholders in
reinvestment of dividends
and distributions......... 57,501,726 64,092,911
Cost of shares reacquired.... (360,013,003) (687,645,132)
-------------- --------------
Decrease in net assets from
Fund share transactions... (76,460,577) (543,782,680)
-------------- --------------
Total increase (decrease)...... 11,701,590 (677,146,932)
Net Assets
Beginning of year.............. 1,577,080,927 2,254,227,859
-------------- --------------
End of year.................... $1,588,782,517 $1,577,080,927
-------------- --------------
-------------- --------------
</TABLE>
- --------------------------------------------------------------------------------
- ----- 6 See Notes to Financial Statements.
<PAGE>
Notes to Financial Statements PRUDENTIAL GOVERNMENT INCOME FUND
- --------------------------------------------------------------------------------
Prudential Government Income 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 Policies
The following is a summary of significant accounting policies followed by the
Fund in the preparation of its financial statements.
Security Valuation: The Fund values portfolio securities on the basis of current
market quotations provided by dealers or by a pricing service approved by the
Board of Directors, which uses information such as quotations from dealers,
market transactions in comparable securities, various relationships between
securities and calculations on yield to maturity in determining values. Options
and financial futures contracts listed on exchanges are valued at their closing
price on the applicable exchange. When market quotations are not readily
available, a security is valued at fair value as determined in good faith by or
under the direction of the Board of Directors.
Short-term securities which mature in more than 60 days are valued at current
market quotations. Short-term securities which mature in 60 days or less are
valued at amortized cost.
In connection with repurchase agreement transactions, the Fund's custodian, 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.
Options: 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 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 29, 1996, 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. There were no dollar rolls
outstanding as of February 29, 1996.
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
- --------------------------------------------------------------------------------
7 -----
<PAGE>
Notes to Financial Statements PRUDENTIAL GOVERNMENT INCOME FUND
- --------------------------------------------------------------------------------
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 29, 1996.
Securities Transactions and Net 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. Expenses are recorded on the accrual basis which may
require the use of certain estimates by management.
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 had a distribution agreement with Prudential Mutual Fund Distributors,
Inc. (``PMFD''), which acted as the distributor of the Class A shares of the
Fund through January 1, 1996. Prudential Securities Incorporated (``PSI''),
became the distributor of the Class A shares of the Fund effective January 2,
1996 and is serving the Fund under the same terms and conditions as under the
arrangement with PMFD and continues as the distributor of the Class B and Class
C shares of the Fund. The Fund compensates PMFD and PSI 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.
Pursuant to the Class A Plan, the Fund compensates PSI for its
distribution-related expenses with respect to Class A shares, at an annual rate
of up to .30 of 1% of the average daily net assets of the Class A shares. Such
expenses under the Class A Plan were .15 of 1% of the average daily net assets
of the Class A shares for the year ended February 29, 1996.
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. Such expenses under the Class B Plan
were charged at an effective rate of .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 and PSI advised the Fund that they have received approximately $180,000 in
front-end sales charges resulting from sales of Class A shares during the year
ended February 29, 1996. 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 29, 1996 it received
approximately $1,358,000 in contingent deferred sales charges imposed upon
redemptions by certain Class B and Class C shareholders.
- --------------------------------------------------------------------------------
- ----- 8
<PAGE>
Notes to Financial Statements PRUDENTIAL GOVERNMENT INCOME FUND
- --------------------------------------------------------------------------------
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 Transactions With Affiliates
Prudential Mutual Fund Services, Inc. (``PMFS''), a wholly-owned subsidiary of
PMF, serves as the Fund's transfer agent. During the year ended February 29,
1996, the Fund incurred fees of approximately $2,246,000 for the services of
PMFS. As of February 29, 1996, approximately $184,000 of such fees were due to
PMFS. Transfer agent fees and expenses in the Statement of Operations also
include certain out of pocket expenses paid to non-affiliates.
- ------------------------------------------------------------
Note 4. Portfolio Securities
Purchases and sales of investment securities, other than short-term investments,
for the year ended February 29, 1996, were $1,859,915,930 and $1,873,106,042,
respectively.
The federal income tax cost basis of the Fund's investments, at February 29,
1996 was the same as for book purposes and, accordingly, net unrealized
appreciation for federal income tax purposes was $33,880,421 (gross unrealized
appreciation-$46,282,078; gross unrealized depreciation-$12,401,657).
The Fund had a capital loss carryforward as of February 29, 1996 of
approximately $119,847,000 of which $11,970,000 expires in 1998, $41,965,000
expires in 1999 and $65,912,000 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 29, 1996 were as
follows:
<TABLE>
<CAPTION>
Number of Premiums
Contracts Received
--------- ----------
<S> <C> <C>
Options written...................... 260 $1,257,811
Options terminated in closing
purchase transactions.............. (150) (840,624)
Options expired...................... (110) (417,187)
--------- ----------
Options outstanding at February 29,
1996............................... 0 0
--------- ----------
--------- ----------
</TABLE>
The average balance of dollar rolls outstanding during the year ended February
29, 1996 was approximately $7,400,000.
Note 5. Capital
The Fund offers Class A, Class B and Class C shares. Class A shares are sold
with a front-end sales charge of up to 4.0%. Class B shares are sold with a
contingent deferred sales charge which declines from 5% to zero depending on the
period of time the shares are held. Class C shares are sold with a contingent
deferred sales charge of 1% during the first year. Class B shares 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.
Transactions in shares of common stock were as follows:
<TABLE>
<CAPTION>
Class A Shares Amount
- -------------------------------- ------------ ---------------
<S> <C> <C>
Year ended February 29, 1996:
Shares sold..................... 11,604,764 $ 103,313,788
Shares issued in reinvestment of
dividends..................... 3,905,262 35,174,408
Shares reacquired............... (23,885,431) (215,512,733)
------------ ---------------
Net decrease in shares
outstanding before
conversion.................... (8,375,405) (77,024,537)
Shares sold upon conversion from
Class B....................... 11,556,901 103,626,580
------------ ---------------
Net increase in shares
outstanding................... 3,181,496 $ 26,602,043
------------ ---------------
------------ ---------------
Year end 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
outstanding 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
------------ ---------------
------------ ---------------
</TABLE>
- --------------------------------------------------------------------------------
9 -----
<PAGE>
Notes to Financial Statements PRUDENTIAL GOVERNMENT INCOME FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class B Shares Amount
- -------------------------------- ------------ ---------------
Year ended February 29, 1996:
<S> <C> <C>
Shares sold..................... 14,021,663 $ 120,993,355
Shares issued in reinvestment of
dividends..................... 2,476,368 22,291,045
Shares reacquired............... (16,054,530) (144,301,708)
------------ ---------------
Net increase in shares
outstanding before
conversion.................... 443,501 (1,017,308)
Shares reacquired upon
conversion into Class A....... (11,547,682) (103,626,580)
------------ ---------------
Net decrease in shares
outstanding................... (11,104,181) $ (104,643,888)
------------ ---------------
------------ ---------------
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
outstanding before
conversion.................... (61,770,017) (529,381,104)
Shares reacquired upon
conversion into Class A....... (97,449,952) (825,401,064)
------------ ---------------
Net decrease in shares
outstanding................... (159,219,969) $(1,354,782,168)
------------ ---------------
------------ ---------------
<CAPTION>
Class C
- --------------------------------
<S> <C> <C>
Year ended February 29, 1996:
Shares sold..................... 192,911 $ 1,743,557
Shares issued in reinvestment of
dividends..................... 3,991 36,273
Shares reacquired............... (21,707) (198,562)
------------ ---------------
Net increase in shares
outstanding................... 175,195 $ 1,581,268
------------ ---------------
------------ ---------------
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.
Note 6. Acquisition of Prudential U.S.
Government Fund
On January 19, 1996, the Fund acquired all the net assets of Prudential U.S.
Government Fund (``U.S. Government'') pursuant to a plan of reorganization
approved by U.S. Government shareholders on January 12, 1996. The acquisition
was accomplished by a tax-free exchange of 13,428,984 shares of the Fund
(consisting of 5,313,064 Class A shares of the Fund for 4,730,048 Class A shares
of U.S. Government, 8,091,414, Class B shares of the Fund for 7,209,020 Class
B
shares of U.S. Government and 24,506 Class C shares of the Fund for 21,833 Class
C shares of U.S. Government) valued at $125,507,871 in the aggregate on January
19, 1996. The aggregate net assets of the Fund and U.S. Government immediately
before the acquisition were $1,528,998,838 and $125,507,871 (including
$11,995,410 of net unrealized depreciation), respectively.
- --------------------------------------------------------------------------------
- ----- 10
<PAGE>
Financial Highlights PRUDENTIAL GOVERNMENT INCOME FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class
A
- ---------------------------------------------------------
Year Ended
February 29/28,
- ---------------------------------------------------------
1996 1995 1994
1993 1992
-------- --------
- ------- ------- -------
<S> <C> <C> <C>
<C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year............ $ 8.59 $ 9.13 $
9.40 $ 9.17 $ 9.02
-------- --------
- ------- ------- -------
Income from investment operations
Net investment income......................... 0.60 0.59
0.61 0.66 0.68
Net realized and unrealized gain (loss) on
investment transactions.................... 0.45 (0.54)
(0.25) 0.35 0.37
-------- --------
- ------- ------- -------
Total from investment operations............ 1.05 0.05
0.36 1.01 1.05
-------- --------
- ------- ------- -------
Less distributions
Dividends from net investment income.......... (0.60) (0.59)
(0.61) (0.66) (0.68)
Distributions in excess of accumulated
gains...................................... -- --
(0.02) -- --
Distributions from paid-in capital in excess
of par..................................... -- --
-- (0.12) (0.22)
-------- --------
- ------- ------- -------
Total distributions......................... (0.60) (0.59)
(0.63) (0.78) (0.90)
-------- --------
- ------- ------- -------
Net asset value, end of year.................. $ 9.04 $ 8.59 $
9.13 $ 9.40 $ 9.17
-------- --------
- ------- ------- -------
-------- --------
- ------- ------- -------
TOTAL RETURN(c):.............................. 12.41% .83%
3.90% 11.55% 12.18%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)................. $945,038 $871,145
$51,673 $61,297 $33,181
Average net assets (000)...................... 909,169 $ 95,560
$55,921 $46,812 $29,534
Ratios to average net assets:
Expenses, including distribution fees....... 0.91% 0.98%
0.84% 0.84% 0.86%
Expenses, excluding distribution fees....... 0.76% 0.83%
0.69% 0.69% 0.71%
Net investment income....................... 6.65% 7.45%
6.48% 7.17% 7.51%
For Class A, B and C shares:
Portfolio turnover rate..................... 123% 206%
80% 36% 187%
</TABLE>
- ---------------
(a) Commencement of offering of Class C shares.
(b) Annualized.
(c) Total return does not consider the effects of sales loads. Total return
is calculated assuming a purchase of shares on the first day and a
sale on the last day of each period reported and includes reinvestment
of dividends and distributions. Total returns for periods of less than
a full year are not annualized.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 11 -----
<PAGE>
Financial Highlights PRUDENTIAL GOVERNMENT INCOME FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class B
- --------------------------------------------------------------------
Year
Ended February 29/28,
- --------------------------------------------------------------------
1996 1995
1994 1993 1992
-------- ----------
- ---------- ---------- ----------
<S> <C> <C>
<C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.......... $ 8.60 $ 9.13
$ 9.40 $ 9.17 $ 9.02
-------- ----------
- ---------- ---------- ----------
Income from investment operations
Net investment income......................... 0.54 0.53
0.53 0.58 0.60
Net realized and unrealized gain (loss) on
investment transactions.................... 0.44 (0.53)
(0.25) 0.35 0.37
-------- ----------
- ---------- ---------- ----------
Total from investment operations............ 0.98 --
0.28 0.93 0.97
-------- ----------
- ---------- ---------- ----------
Less distributions
Dividends from net investment income.......... (0.54) (0.53)
(0.53) (0.58) (0.60)
Distributions in excess of accumulated
gains...................................... -- --
(0.02) -- --
Distributions from paid-in capital in excess
of par..................................... -- --
-- (0.12) (0.22)
-------- ----------
- ---------- ---------- ----------
Total distributions......................... (0.54) (0.53)
(0.55) (0.70) (0.82)
-------- ----------
- ---------- ---------- ----------
Net asset value, end of period................ $ 9.04 $ 8.60
$ 9.13 $ 9.40 $ 9.17
-------- ----------
- ---------- ---------- ----------
-------- ----------
- ---------- ---------- ----------
TOTAL RETURN(c):.............................. 11.54% .24%
3.03% 10.61% 11.27%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)............... $641,946 $ 705,732
$2,202,555 $2,680,259 $2,724,428
Average net assets (000)...................... $647,515 $1,735,413
$2,487,990 $2,670,924 $2,903,704
Ratios to average net assets:
Expenses, including distribution fees....... 1.58% 1.66%
1.68% 1.69% 1.71%
Expenses, excluding distribution fees....... 0.76% 0.80%
0.69% 0.69% 0.71%
Net investment income....................... 5.99% 6.17%
5.64% 6.32% 6.66%
<CAPTION>
Class C August 1,
Year Ended through
February 29, February 28,
1996 1995
------------ ------------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.......... $ 8.60 $ 8.69
----- -----
Income from investment operations
Net investment income......................... 0.54 0.31
Net realized and unrealized gain (loss) on
investment transactions.................... 0.44 (0.09)
----- -----
Total from investment operations............ 0.98 0.22
----- -----
Less distributions
Dividends from net investment income.......... (0.54) (0.31)
Distributions in excess of accumulated
gains...................................... -- --
Distributions from paid-in capital in excess
of par..................................... -- --
----- -----
Total distributions......................... (0.54) (0.31)
----- -----
Net asset value, end of period................ $ 9.04 $ 8.60
----- -----
----- -----
TOTAL RETURN(c):.............................. 11.63% 2.75%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)............... $1,799 $ 204
Average net assets (000)...................... $ 765 $ 111
Ratios to average net assets:
Expenses, including distribution fees....... 1.51% 1.63%(b)
Expenses, excluding distribution fees....... 0.76% 0.88%(b)
Net investment income....................... 5.99% 6.69%(b)
</TABLE>
- ---------------
(a) Commencement of offering of Class C shares.
(b) Annualized.
(c) 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.
- --------------------------------------------------------------------------------
- ----- 12 See Notes to Financial Statements.
<PAGE>
Independent Auditors' Report PRUDENTIAL GOVERNMENT INCOME FUND
- --------------------------------------------------------------------------------
The Shareholders and Board of Directors
Prudential Government Income Fund, Inc.:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of Prudential Government Income Fund, Inc. as of
February 29, 1996, 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 29, 1996 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 29, 1996, 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 10, 1996
Important Notice for Certain Shareholders PRUDENTIAL GOVERNMENT INCOME FUND
- --------------------------------------------------------------------------------
We are required by Massachusetts, Missouri and Oregon to inform you that
dividends which have been derived from interest on federal obligations are not
taxable to shareholders providing the mutual fund meets certain requirements
mandated by the respective state's taxing authorities. We are pleased to report
that 43% 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.
- --------------------------------------------------------------------------------
13 -----
Getting The Most From Your Prudential Mutual Fundx
Some mutual fund shareholders wont ever read this -- they don't read annual
and semi-annual reports. It's quite understandable. These annual and
semi-annual reports are prepared to comply with Federal regulations. They are
often written in language that is difficult to understand. So when most people
run into those particularly daunting sections of these reports, they don't
read them.
We think that's a mistake.
At Prudential Mutual Funds, we've made some changes to our report to make it
easier to understand and more pleasant to read, in hopes you'll find it
profitable to spend a few minutes familiarizing yourself with your investment.
Here's what you'll find in the report:
At A Glance
Since an investment's performance is often a shareholder's primary concern, we
present performance information in two different formats. You'll find it first
on the "At A Glance" page where we compare the Fund and the comparable average
calculated by Lipper Analytical Services, Inc., a nationally recognized mutual
fund rating agency. We report both the cumulative total returns and the average
annual total returns. The cumulative total return is the total amount of income
and appreciation the Fund has achieved in various time periods. The average
annual total return is an annualized representation of the Fund's
performance -- it generally smoothes out returns and gives you an idea how
much the Fund has earned in an average year, for a given time period. Under
the performance box, you'll see legends that explain the performance
information, whether fees and sales charges have been included in returns, and
the inception dates for the Fund's share classes.
See the performance comparison charts at the back of the report for more
performance information. And keep in mind that past performance is not
indicative of future results.
Portfolio
Manager's Report
The portfolio manager who invests your money for you reports on
successful -- and not-so-successful -- strategies in this section
of your report. Look for recent purchases and sales here, as well as
information about the sectors the portfolio manager favors and any
changes that are on the drawing board.
Portfolio Of
Investments
This is where the report begins to look technical, but it's really just a
listing of each security held at the end of the reporting period, along with
valuations and other information. Please note that sometimes we discuss a
security in the Portfolio Manager's Report that doesn't appear in this listing
because it was sold before the close of the reporting period.
Statement Of Assets
And Liabilities
The balance sheet shows the assets (the value of the Fund's holdings),
liabilities (how much the Fund owes) and net assets (the Fund's equity, or
holdings after the Fund pays its debts) as of the end of the reporting period.
It also shows how we calculate the net asset value per share for each class of
shares. The net asset value is reduced by payment of your dividend, capital
gain, or other distribution, but remember that the money or new shares are
being paid or issued to you. The net asset value fluctuates daily along with
the value of every security in the portfolio.
Statement Of
Operations
This is the income statement, which details income (mostly interest and
dividends earned) and expenses (including what you pay us to manage your
money). You'll also see capital gains here -- both realized and unrealized.
Statement Of Changes
In Net Assets
This schedule shows how income and expenses translate into changes in net
assets. The Fund is required to pay out the bulk of its income to shareholders
every year, and this statement shows you how we do it -- through dividends
and distributions -- and how that affects the net assets. This statement also
shows how money from investors flowed into and out of the Fund.
Notes To Financial
Statements
This is the kind of technical material that can intimidate readers, but it
does contain useful information. The Notes provide a brief history and
explanation of your Fund's objectives. In addition, they also outline how
Prudential Mutual Funds prices securities. The Notes also explain who manages
and distributes the Fund's shares, and more importantly, how much they are paid
for doing so. Finally, the Notes explain how many shares are outstanding and
the number issued and redeemed over the period.
Financial Highlights
This information contains many elements from prior pages, but on a per share
basis. It is designed to help you understand how the Fund performed and to
compare this year's performance and expenses to those of prior years.
Independent
Auditor's Report
Once a year, an outside auditor looks over our books and certifies that the
information is fairly presented and complies with generally accepted accounting
principles.
Tax Information
This is information which we report annually about how much of your total
return is taxable. Should you have any questions, you may want to consult a
tax advisor.
Performance
Comparison
These charts are included in the annual report and are required by the
Securities Exchange Commission. Performance is presented here as a hypothetical
$10,000 investment in the Fund since its inception or for 10 years (whichever
is shorter). To help you put that return in context, we are required to include
the performance of an unmanaged, broad based securities index, as well. The
index does not reflect the cost of buying the securities it contains or the
cost of managing a mutual fund. Of course, the index holdings do not mirror
those of the fund -- the index is a broadly based reference point commonly
used by investors to measure how well they are doing. A definition of the
selected index is also provided. Investors generally cannot invest directly in
an index.
Getting The Most From Your Prudential Mutual Fund
How many times have you read these letters -- or other financial
materials -- and stumbled across a word that you dont understand?
Many shareholders have run into the same problem. We'd like to help. So we'll
use this space from time to time to explain some of the words you might have
read, but not understood. And if you have a favorite word that no one can
explain to your satisfaction, please write to us.
Basis Point: One 1/100th of 1%. For example, one half of one percentage point
is 50 basis points.
Call Option: A contract giving the holder a right to buy stocks or bonds at a
predetermined price (called the strike price) before a predetermined expiration
date. A buyer of a call option generally expects to benefit from a rise in the
price of the stock or bond.
Capital Gain/Capital Loss: The difference between the cost of a capital asset
(for example, a stock, bond or mutual fund share) and its selling price. Under
current law the federal income tax rate for individuals on a long-term capital
gain is 28%.
Collateralized Mortgage Obligations (CMOs): Pools of mortgage-backed securities
sliced in maturity ranges that bear differing interest rates. These instruments
are sensitive to changes in interest rates and homeowner refinancing activity.
They are subject to prepayment and maturity extension risk.
Derivatives: Securities that derive their value from another security. The rate
of return of these financial products rises and falls -- sometimes very
suddenly -- in response to changes in some specific interest rate, currency,
stock or other variable.
Discount Rate: The interest rate charged by the Federal Reserve on loans to
banks and other depository institutions.
Federal Funds Rate: The interest rate charged by one bank to another on
overnight loans.
Futures Contract: An agreement to deliver a specific amount of a commodity or
financial instruments at a set price at a stipulated time in the future.
Leverage: The use of borrowed assets to enhance return on equity. The
expectation is that the interest rate charged will be lower than the return on
the investment. While leverage can increase profits, it can also magnify
losses.
Liquidity: The ease with which a financial instrument (or mutual fund) can be
bought or sold (converted into cash) in the financial markets.
Option: An agreement to buy or sell something, such as shares of stock, by a
certain time for a specified price. An option need not be exercised. In fact,
most expire unexercised.
Price/Earnings Ratio: The price of a share of stock divided by the earnings
per share for a 12-month period.
Spread: The difference between two values; most often used to describe the
difference between prices bid and asked for a security.
Yankee Bond: A bond denominated in U.S. dollars but sold by a foreign company
or government in the U.S. market.
<PAGE>
Prudential Government Income Fund, Inc. Lehman Bros. Government Bond Index
The Prudential Government Income Fund, Inc. and
the Lehman Bros. Index: Comparing a $10,000 Investment.
(CHART>
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. The charts on the right are
designed to give you an idea how much the Fund's returns can fluctuate from
year to year by measuring the best and worst calendar years in total annual
return since inception of each share class.
These graphs are furnished to you in accordance with SEC regulations. They
compare a $10,000 investment in the Prudential Government Income Fund with a
similar investment in the Lehman Brothers Government Bond Index (the "Index")
by portraying the initial account values at the commencement of operations of
Class A and Class C shares and for 10 years for the Class B shares, and
subsequent account values at the end of this reporting period (February 29),
as measured on a quarterly basis, beginning in 1985 for Class B shares, 1990
for Class A 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 front-end 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 February 29, 1996;
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 is not reflected in the graphs.
The 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 30 years. The Index is unmanaged and includes the reinvestment of
all dividends, but does not reflect the payment of transactions costs and
advisory fees associated with an investment in the Fund. The securities that
comprise the Index may differ substantially from the securities in the Fund''s
portfolio. The Index is not the only one that may be used to characterize
performance of U.S. government bond funds and other indexes may portray
different comparative performance.
<PAGE>
Prudential Mutual Funds
One Seaport Plaza
New York, NY 10292
Toll Free (800) 225-1852
Internet Address:
http:\\www.prudential.com
Directors
Edward D. Beach
Delayne Dedrick Gold
Harry A. Jacobs, Jr.
Thomas T. Mooney
Thomas H. O'Brien
Thomas A. Owens, Jr.
Richard A. Redeker
Stanley E. Shirk
Officers
Richard A. Redeker, President
David W. Drasnin, Vice President
Robert F. Gunia, Vice President
Eugene S. Stark, Treasurer
Stephen M. Ungerman, Assistant Treasurer
S. Jane Rose, Secretary
Ellyn C. Acker, 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
Distributor
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 Auditor
Deloitte & Touche LLP
Two World Financial Center
New York, NY 10281
Legal Counsel
Shereff, Freidman, Hoffman & Goodman, LLP
919 Third Avenue
New York, NY 10022
The views expressed in this report and information about the Fund's portfolio
holdings are for the period covered by this report and are subject to change
thereafter.
This report is not authorized for distribution to prospective investors unless
preceded or accompanied by a current prospectus.
744339102 MF128E
744339201 Cat. #642157Z
744339300
