(ICON)
Prudential
Government
Income
Fund, Inc.
ANNUAL
REPORT
Feb. 28, 1997
(LOGO)
<PAGE>
Prudential Government Income Fund, Inc.
Performance At A Glance.
Stronger than expected economic growth pushed interest rates
higher and bond
prices lower over the last 12 months, enhancing investors'
income but crimping
their total returns. The Prudential Government Income Fund
produced a positive
return for the year ended February 28, 1997, although it was
below the average
U.S. government bond fund tracked by Lipper Analytical
Services. That's
because we held bonds with slightly longer maturities while
interest rates
were rising.
<TABLE>
<CAPTION>
Cumulative Total Returns1
As of 2/28/97
One Five Ten
Since
Year Years Years
Inception2
<S> <C> <C> <C>
<C>
Class A 3.7% 36.1% N/A
68.9%
Class B 3.1 31.3 86.5%
140.0
Class C 3.2 N/A N/A
18.4
Class Z N/A N/A N/A
1.7
Lipper General U.S.
Government Bond Avg.3 3.9 35.1 92.8
***
</TABLE>
<TABLE>
<CAPTION>
Average Annual Total Returns1
As of 3/31/97
One Five
Ten Since
Year Years
Years Inception2
<S> <C> <C>
<C> <C>
Class A -0.7% 5.4%
N/A 6.8%
Class B -2.4 5.3
6.4% 7.5
Class C 1.7 N/A
N/A 5.9
</TABLE>
<TABLE>
<CAPTION>
Dividends &
Yields
Dividends & Yields
As of 2/28/97
Total Dividends 30-Day
Paid for 12 Mos. SEC Yield
<S> <C> <C>
Class A $0.60 5.92%
Class B $0.54 5.49
Class C $0.54 5.57
Class Z $0.61 6.32
</TABLE>
Past performance is not indicative 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 and Lipper
Analytical Services. 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. Class Z shares have no service or
12b-1 fee. Since
Class Z shares have been in existence less than a year, no
average annual
returns are presented.
2Inception dates: 1/22/90 Class A; 4/22/85 Class B; 8/1/94
Class C; 3/4/96
Class Z.
3The Lipper General U.S. Government Bond Average includes
171 funds for one
year; 73 funds for five years; and 41 funds for 10 years.
***The Lipper Since Inception category return for Class A
shares is 67.8%,
which includes 63 funds; for Class B shares is 156.7% which
includes 20 funds;
for Class C shares is 18.4% for 138 funds and for Class Z
shares is 4.8% for
173 funds.
How Investments Compared.
(As of 2/28/97)
(CHART)
U.S. General General Taxable
Growth Bond Muni Debt Money
Funds Funds Funds Mkt Funds
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
included historical
20-year average annual returns. These 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.
Taxable 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.
<PAGE>
Barbara L. Kenworthy, Fund Manager
Portfolio
Manager's Report
(PHOTO)
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's objective will be achieved.
Overview.
Barbara Kenworthy actively trades between the different
government bond
sectors and maturities, seeking superior yields and capital
appreciation
potential wherever those opportunities may exist.
Strategy Session.
Fast Growth, High Rates.
After delivering remarkable, double-digit returns in 1995,
bonds slipped and
slid in 1996 when interest rates rose and bond prices fell.
The first two
months of 1997 didn't bring any improvement. Bond investors
were troubled by
faster economic growth, which increased the demand for
money, pushing interest
rates higher. The U.S. economy in 1996 grew more than twice
as fast as it did
in 1995, and that continued into early 1997. Many economists
now think that
growth may top 3% for the second consecutive quarter for the
first time since
1994. Underscoring these concerns, the Federal Reserve
raised the overnight
bank lending rate by a quarter of percentage point to 5.5%
on March 25, and
shortly thereafter the yield on the 30-year U.S. government
bond rose above 7%
for the first time in six months.
As interest rates rise, bond prices fall. We sold bonds
generally in the 10-
to 12-year maturity range, which had provided relatively
attractive returns.
The proceeds were left in cash equivalent holdings to
provide a cushion to the
portfolio until market conditions offered better value. We
also bought
mortgages and sold some U. S. Treasurys, looking for higher
yields and better
total return. During the 12 months ended February 28, 1997,
our assets in
mortgages rose to 45% from 39%, while our holdings in U.S.
Treasurys fell to
34% from 41%. Our position in government agency debt climbed
to 19% from 14%.
This Fund is generally managed with an intermediate average
maturity. When
interest rates fall, we tend to hold both shorter- and
longer-term bonds
(because the prices of longer-term bonds rise more rapidly
when interest rates
fall, and can outperform shorter maturities, at times, even
in a rising rate
environment). When interest rates rise, we will generally
hold more
intermediate term bonds. Over the 12 months, our duration
fell to 5.6 years
from 5.9 years (and have since shortened closer to 5.3
years). Duration is a
measure of the Fund's sensitivity to interest rate changes.
Generally, the
lower the duration, the smaller the price change when
interest rates rise.
Portfolio Breakdown.
Expressed as a percentage of
total investments as of 2/28/97.
(PIE CHART)
<PAGE>
What Went Well.
Cashing In On Callables.
Some investors don't like callable bonds because the issuer
can redeem before
maturity, thus depriving the investor of the future streams
of interest
payments on the bond. But callable bonds typically offer
above-market yields
to compensate for this risk that they might mature early,
and that can be
attractive. Over the last 12 months, we noticed that some
bonds sold by the
Federal National Mortgage Association (Fannie Mae) and the
Federal Home Loan
Mortgage Corporation (Freddie Mac) were offering much higher
yields than
similar maturity U.S. Treasurys. So we purchased them.
During times when
interest rates were volatile over the past 12 months, the
higher yields of
these bonds provided a measure of price stability, and, as
other buyers
noticed how attractive these bonds were, their prices rose,
so we sold some.
Boosting Small Business.
We started buying Small Business Administration (SBA)
securities more than a
year ago, and we're glad we did. These securities are called
certificates of
participation, and represent interests in loans guaranteed
by the federal
govern-ment. So what makes these securities such a good
investment? They are
not likely to be prepaid early, like mortgage-backed
securities. (An SBA
borrower who repays early can never borrow again from the
agency. And since
the SBA offers loans at attractive interest rates, that's
not a privilege
taken lightly.) So these securities are more likely than
mortgages to hold
their value even if interest rates rise. Apparently other
investors are
discovering the value of these securities, because they have
appreciated in
comparison with U.S. Treasurys during the time we've owned
them.
And Not So Well.
Duration.
One method we use to manage the risk of sudden changes in
interest rates is to
modify our duration, a measure of our Fund's sensitivity to
interest rate
changes. Our Fund holds an intermediate duration, generally
varying from 5.5
to 6 years. When we are concerned that interest rates might
rise, we lower
duration to better protect your assets.
We had two fairly quick run-ups in interest rates over the
past 12 months, and
in both cases, we wish we had a shorter duration. Last
winter, our duration
was long because it looked like the nation's economy was
teetering on the
verge of a recession. As it turned out, the weakness was
only the result of
abominable weather in the Northeast and several government
shutdowns. This
February, as we were preparing to shorten duration, signs of
economic growth
escalated sooner than we anticipated.
We ended the 12 months with duration lower, at 5.6 years
from 5.9 years, but
would have liked to have been even shorter.
Looking Ahead.
As this report was being prepared, the Federal Reserve voted
in late March to
raise the overnight bank lending rate for the first time in
two years. The
increase was a quarter of a percentage point, bringing the
rate to 5.5%.
We expect short-term interest rates will continue to rise
and intermediate-
and long-term rates should rise less. In this type of an
environment, there
are usually opportunities in certain select maturities that
become undervalued.
We'll be looking for these situations. We'll just have to be
nimble,
maintaining a smaller than normal position in U.S.
Treasurys, and a larger
than usual weighting in securities with higher interest
rates -- mortgages and
agencies.
Five Largest
Issuers.
5.7% U.S. Treasury Note
6.125%, 12/31/01
5.5% U.S. Treasury Bond
10.625%, 8/15/05
5.3% U.S. Treasury Bond
12.50%, 8/15/14
4.7% FHLMC
8%, 1/1/23-9/1/24
4.3% GNMA
7%, 2/15/09-11/15/24
Expressed as a percentage of total net assets as of 2/28/97.
- ------------------------------------------------------------
- -------------------
1
<PAGE>
President's Letter
April 10, 1997
We're On Your Side.
Dear Shareholder:
The first three months of the year were not good ones for
most U.S. stock and
bond investors. The Dow Jones Industrial Average was down
considerably from
its record high set in mid-March, and long-term interest
rates were at their
highest levels in six months. Not surprisingly, in the first
quarter of 1997
the average stock and bond mutual fund had negative returns
(for stock funds,
it was the first time since 1994).
The reasons behind the recent market decline have been well-
publicized --
higher interest rates and inflationary pressures. And while
we are watching
market developments closely, we are also very concerned
about you and how
you're dealing with events. We realize that staying the
course toward your
long-term investment goals isn't easy during such times of
uncertainty. Here
are a few thoughts that may help --
- - Keep Your Expectations Realistic. The best investors know
that financial
markets rise and fall -- and so too, will the value of
their investments.
Over time, however, stocks have been shown to produce
very attractive
returns that were well ahead of inflation.
- - Remember Your Time Horizon. If your investment goals are
long term (several
years or more), so should your time horizon. During this
period, it's not
unusual for stocks and bonds to experience several periods
of market
uncertainty.
- - We're On Your Side. Your Prudential Securities Financial
Advisor or
Prudential Registered Representative can help you understand
what's happening
in the financial markets. They can assist you in making
informed decisions
based upon a thorough knowledge of your financial needs and
long-term goals.
Call him or her today.
Thank you for your continued confidence in Prudential mutual
funds. We'll do
everything we can to keep you informed and to earn your
trust.
Sincerely,
Brian M. Storms
President, Prudential Mutual Funds & Annuities
- ------------------------------------------------------------
- -------------------
2
<PAGE>
Portfolio of Investments as of
February 28, 1997 PRUDENTIAL GOVERNMENT
INCOME FUND, INC.
- ------------------------------------------------------------
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Amount
(000) Description Value (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
LONG-TERM INVESTMENTS--97.8%
- ------------------------------------------------------------
U.S. Government Agency Mortgage Pass-Throughs--42.1%
Federal Home Loan Mortgage Corp.,
$36,702 7.50%, 2/01/22 - 4/01/25 $
36,742,243
64,937 8.00%, 1/01/23 - 9/01/24
66,276,202
5,306 8.50%, 6/01/07 - 4/01/20
5,569,039
2,376 11.50%, 10/01/19
2,685,825
Federal National Mortgage Assoc.,
24,360 6.50%, 5/01/11 - 6/01/24
23,199,612
52,641 7.00%, 7/01/03 - 9/01/26
51,349,346
31,894 7.125%, 2/01/07
32,138,188
33,420 7.50%, 4/01/07 - 10/01/26
33,843,281
44,663 8.00%, 5/01/25 - 4/01/26
45,481,780
42,106 8.50%, 6/01/17 - 3/01/25
44,109,198
10,671 9.00%, 8/01/24 - 4/01/25
11,233,511
2,223 9.50%, 10/01/19 - 3/01/25
2,412,456
Government National Mortgage
Assoc.,
28,012 6.50%, 12/15/23 - 5/15/24
26,851,741
61,784Pound 7.00%, 2/15/09 - 11/15/24
60,518,539
57,924 7.50%, 5/15/02 - 3/15/26
58,004,062
37,762 8.00%, 7/15/16 - 3/15/24
39,041,320
21,729 9.00%, 4/15/01 - 7/15/21
22,781,649
20,458 9.50%, 10/15/09 - 12/15/17
22,274,310
Government National Mortgage Assoc. II,
3,857 9.50%, 5/20/18 - 8/20/21
4,143,448
----------
- ----
Total U.S. Government Agency
Mortgage Pass-Throughs
(cost $572,955,507)
588,655,750
- ------------------------------------------------------------
U.S. Government Obligations--33.6%
United States Treasury Bonds,
26,825 6.00%, 2/15/26
23,807,187
20,000 6.50%, 11/15/26
19,081,200
20,000 6.625%, 2/15/27
19,531,200
3,000D 7.625%, 2/15/25
3,258,270
750 9.00%, 11/15/18
922,028
20,000 10.375%, 11/15/09
24,421,800
1,860 12.00%, 8/15/13
2,623,474
United States Treasury Bonds,
$50,000D 12.50%, 8/15/14 $
73,656,000
20,000D 12.75%, 11/15/10
27,931,200
25,000D 13.25%, 5/15/14
38,230,500
55,000 10.625%, 8/15/15
76,321,300
40,000D 12.375%, 5/15/04
53,262,400
United States Treasury Notes,
80,475DD 6.125%, 12/31/01
79,544,709
15,000 6.50%, 5/31/01
15,065,550
4,100 6.875%, 7/31/99
4,162,771
1,770 7.25%, 8/15/04
1,843,561
5,000 8.875%, 5/15/00
5,378,100
United States Treasury Strips,
800 Zero Coupon, 8/15/08
370,848
700 Zero Coupon, 8/15/11
260,540
500 Zero Coupon, 11/15/11
182,870
----------
- ----
Total U.S. Government Obligations
(cost $479,879,617)
469,855,508
- ------------------------------------------------------------
U.S. Government Agency Securities--11.9%
Federal Home Loan Bank,
1,000 6.78%, 7/24/02
988,280
Federal National Mortgage Assoc.,
15,500 6.15%, 12/14/01
15,160,860
Small Business Administration
Participation Certificate,
20,755 Series 1995-20B, 8.15%, 2/01/15
21,900,372
35,000 Series 1996-20H, 7.25%, 8/01/16
35,304,500
20,000 Series 1996-20K, 6.95%, 11/01/16
19,692,000
24,744 Series 1995-20L, 6.45%, 12/01/15
23,166,376
Tennessee Valley Authority,
600 Series 1993-D, 7.25%, 7/15/43
567,522
30,000 Series 1995-B, 6.235%, 7/15/45
29,787,900
20,000 Series 1996-A, 5.98%, 4/01/36
20,250,000
----------
- ----
Total U.S. Government Agency
Securities (cost $169,125,598)
166,817,810
</TABLE>
- ------------------------------------------------------------
- -------------------
See Notes to Financial Statements. 3
<PAGE>
Portfolio of Investments as of
February 28, 1997 PRUDENTIAL GOVERNMENT
INCOME FUND, INC.
- ------------------------------------------------------------
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Amount
(000) Description Value (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
U.S. Government Agency - Stripped Securities--6.7%
Federal National Mortgage Assoc.,
$17,100 Zero Coupon, 8/07/01 $
12,849,111
50,000 Zero Coupon, 7/24/06
26,258,000
Financing Corp.,
5,000 Zero Coupon, 3/07/04
3,137,250
Israel AID,
46,100 Zero Coupon, 2/15/09
20,173,360
25,584 Zero Coupon, 8/15/09
10,775,981
37,600 Zero Coupon, 5/15/15
10,261,040
37,600 Zero Coupon, 5/15/16
9,546,640
----------
- ----
Total U.S. Government Agency -
Stripped Securities
(cost $88,067,064)
93,001,382
- ------------------------------------------------------------
Collateralized Mortgage Obligations--2.2%
Asset Securitization Corp.,
20,000 Series 96-MD6 Class A-1B,
6.88%, 11/13/26
19,893,750
Resolution Trust Corp.,
5,363 7.75%, 9/25/29
5,292,788
Structured Asset Securities Corp.,
5,000 Series 95-C1 Class C,
7.375%, 9/25/24
5,025,781
----------
- ----
Total Collateralized Mortgage
Obligations
(cost $29,960,953)
30,212,319
- ------------------------------------------------------------
Supranational Bond--0.8%
International Bank For
Reconstruction
& Development,
10,000 8.625%, 10/15/16
(cost $12,400,900)
11,528,400
Asset Backed Securities--0.3%
Chemical Master Credit Card Trust
I,
$500 Series 95-3 Class A,
6.23%, 4/15/05 $
490,465
Circuit City Credit Card Master
Trust,
500 Series 94-2 Class A,
8.00%, 11/15/03
516,660
Discover Card Master Trust 1,
500 Series 94-1 Class A,
6.70%, 2/16/00
502,030
NationsBank Credit Card Master
Trust,
500 Series 95-1 Class A,
6.45%, 4/15/03
499,685
Prime Credit Card Master Trust,
600 Series 95-1 Class A,
6.75%, 11/15/05
598,308
Sears Credit Account Master Trust,
600 Series 96-3 Class A,
7.00%, 7/15/08
608,808
Standard Credit Card Master Trust
I,
500 Series 94-4 Class A,
8.25%, 11/07/03
530,625
500 Series 95-1 Class A,
8.25%, 1/07/07
538,125
----------
- ----
Total Asset Backed Securities
(cost $4,357,407)
4,284,706
- ------------------------------------------------------------
Adjustable Rate Mortgage Pass-Throughs--0.2%
Ryland Mortgage Securities Corp.,
3,610 Mortgage Participation Securities,
Series 1993-3 Class A-3,
7.402%, 9/25/24
(cost $3,681,930)
3,639,078
--------------------------------------------------------
- ----
Total long-term investments
(cost $1,360,428,976)
1,367,994,953
----------
- ----
- ------------------------------------------------------------
- -------------------
See Notes to Financial Statements. 4
<PAGE>
PRUDENTIAL GOVERNMENT INCOME FUND, INC.
Portfolio of Investments as of February 28, 1997
- ------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Principal
Amount
(000) Description Value (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
SHORT-TERM INVESTMENT--2.1%
- ------------------------------------------------------------
Repurchase Agreement--2.1%
$28,987 Joint Repurchase Agreement
Account,
5.369%, 3/03/97
(cost $28,987,000) $
28,987,000
- ------------------------------------------------------------
Total Investments--99.9%
(cost $1,389,415,976; Note 4)
1,396,981,953
Other assets in excess of
liabilities--0.1%
1,305,257
----------
- ----
Net Assets--100%
$1,398,287,210
----------
- ----
----------
- ----
</TABLE>
- ---------------
AID--Agency for International Development
Pound Mortgage dollar roll, see Note 1.
D Partial principal amount pledged as collateral for
mortgage dollar roll.
DDPortion of securities on loan, see Note 4.
- ------------------------------------------------------------
- -------------------
See Notes to Financial Statements. 5
<PAGE>
Statement of Assets and Liabilities PRUDENTIAL
GOVERNMENT INCOME FUND, INC.
- ------------------------------------------------------------
- --------------------
<TABLE>
<CAPTION>
Assets
February 28, 1997
<S>
<C>
Investments, at value (cost
$1,389,415,976).............................................
................. $ 1,396,981,953
Cash........................................................
.............................................
133,199
Receivable for investments
sold........................................................
.................. 40,078,272
Collateral for securities loaned, at
value.......................................................
........ 32,668,125
Interest
receivable..................................................
.................................... 13,561,950
Receivable for Fund shares
sold........................................................
.................. 1,059,547
Deferred expenses and other
assets......................................................
................. 34,005
- -----------------
Total
assets......................................................
.................................... 1,484,517,051
- -----------------
Liabilities
Payable for investments
purchased...................................................
..................... 39,791,648
Payable upon return of securities
loaned......................................................
........... 32,668,125
Payable for dollar
roll........................................................
.......................... 5,752,500
Payable for Fund shares
reacquired..................................................
..................... 3,811,981
Accrued expenses and other
liabilities.................................................
.................. 2,391,661
Dividends
payable.....................................................
................................... 871,091
Management fee
payable.....................................................
.............................. 543,778
Distribution fee
payable.....................................................
............................ 399,057
- -----------------
Total
liabilities.................................................
.................................... 86,229,841
- -----------------
Net
Assets......................................................
......................................... $
1,398,287,210
- -----------------
- -----------------
Net assets were comprised of:
Common stock, at
par.........................................................
......................... $ 1,595,030
Paid-in capital in excess of
par.........................................................
............. 1,529,161,531
- -----------------
1,530,756,561
Accumulated net realized losses on
investments.................................................
....... (140,035,328)
Net unrealized appreciation on
investments.................................................
........... 7,565,977
- -----------------
Net assets at February 28,
1997........................................................
.................. $ 1,398,287,210
- -----------------
- -----------------
Class A:
Net asset value and redemption price per share
($860,318,879 / 98,158,439 shares of common stock
issued and outstanding)..........................
$8.76
Maximum sales charge (4.0% of offering
price)......................................................
... .37
- -----------------
Maximum offering price to
public......................................................
................ $9.13
- -----------------
- -----------------
Class B:
Net asset value, offering price and redemption price per
share
($461,988,063 / 52,668,167 shares of common stock
issued and outstanding)..........................
$8.77
- -----------------
- -----------------
Class C:
Net asset value, offering price and redemption price per
share
($2,569,498 / 292,931 shares of common stock issued
and outstanding)...............................
$8.77
- -----------------
- -----------------
Class Z:
Net asset value, offering price and redemption price per
share
($73,410,770 / 8,383,465 shares of common stock issued
and outstanding)............................
$8.76
- -----------------
- -----------------
</TABLE>
- ------------------------------------------------------------
- -------------------
See Notes to Financial Statements. 6
<PAGE>
PRUDENTIAL GOVERNMENT INCOME FUND, INC.
Statement of Operations
- ------------------------------------------------------------
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended
Net Investment Income February 28,
1997
<S> <C>
Income
Interest................................. $
112,935,435
Income from securities loaned-net........
50,521
--------------
- ---
112,985,956
--------------
- ---
Expenses
Management fee...........................
7,351,081
Distribution fee--Class A................
1,327,293
Distribution fee--Class B................
4,486,320
Distribution fee--Class C................
18,299
Transfer agent's fees and expenses.......
2,150,000
Reports to shareholders..................
735,000
Custodian's fees and expenses............
510,000
Registration fees........................
140,000
Audit fee and expenses...................
70,000
Directors' fees..........................
48,000
Legal fees and expenses..................
40,000
Insurance expense........................
38,000
Miscellaneous............................
6,444
--------------
- ---
Total expenses........................
16,920,437
--------------
- ---
Net investment income......................
96,065,519
--------------
- ---
Realized and Unrealized
Gain (Loss) on Investments
Net realized gain (loss):
Investment transactions..................
(19,648,213)
Financial futures contracts..............
251,988
Written options transactions.............
(792,969)
--------------
- ---
(20,189,194)
Net change in unrealized
appreciation on investments..............
(26,314,444)
--------------
- ---
Net loss on investments....................
(46,503,638)
--------------
- ---
Net Increase in Net Assets
Resulting from Operations.................. $
49,561,881
--------------
- ---
--------------
- ---
</TABLE>
PRUDENTIAL GOVERNMENT INCOME FUND, INC.
Statement of Changes in Net Assets
- ------------------------------------------------------------
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Increase (Decrease) Year Ended February
28/29
in Net Assets 1997
1996
<S> <C> <C>
Operations
Net investment income........ $ 96,065,519 $
99,348,829
Net realized gain (loss) on
investment transactions... (20,189,194)
53,485,429
Net change in unrealized
appreciation on
investments............... (26,314,444)
34,676,738
--------------- --------
- ---------
Net increase in net assets
resulting from
operations................ 49,561,881
187,510,996
--------------- --------
- ---------
Dividends to shareholders from
net investment income (Note
1)
Class A................... (60,005,745)
(60,495,599)
Class B................... (33,204,797)
(38,807,245)
Class C................... (151,010)
(45,985)
Class Z................... (2,703,967)
- --
--------------- --------
- ---------
(96,065,519)
(99,348,829)
--------------- --------
- ---------
Fund share transactions (net of
share conversions) (Note 5)
Net proceeds from shares
subscribed................ 326,332,216
226,050,700
Net asset value of shares
issued to shareholders in
reinvestment of
dividends................. 57,955,409
57,501,726
Cost of shares reacquired.... (528,279,294)
(360,013,003)
--------------- --------
- ---------
Decrease in net assets from
Fund share transactions... (143,991,669)
(76,460,577)
--------------- --------
- ---------
Total increase (decrease)...... (190,495,307)
11,701,590
Net Assets
Beginning of year.............. 1,588,782,517
1,577,080,927
--------------- --------
- ---------
End of year.................... $ 1,398,287,210 $
1,588,782,517
--------------- --------
- ---------
--------------- --------
- ---------
</TABLE>
- ------------------------------------------------------------
- -------------------
See Notes to Financial Statements. 7
<PAGE>
Notes to Financial Statements PRUDENTIAL
GOVERNMENT INCOME FUND, INC.
- ------------------------------------------------------------
- --------------------
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 realizing 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.
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
- ------------------------------------------------------------
- --------------------
8
<PAGE>
Notes to Financial Statements PRUDENTIAL
GOVERNMENT INCOME FUND, INC.
- ------------------------------------------------------------
- --------------------
securities loaned that may occur during the term of the loan
will be for the
account of the Fund.
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, if any.
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, LLC
('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 a distribution agreement with Prudential
Securities Incorporated
('PSI'), which acts as the distributor of the Class A, Class
B, Class C and
Class Z shares of the Fund. The Fund compensates 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 for Class A, B and C
shares are accrued
daily and payable monthly. No distribution or service fees
are paid to PSI as
distributor of the Class Z shares of the Fund.
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 period ended February 28,
1997.
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.
PSI advised the Fund that it received approximately $186,000
in front-end sales
charges resulting from sales of Class A shares during the
year ended February
28, 1997. 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, 1997 it received
approximately $1,203,000 in contingent deferred sales
charges imposed upon
redemptions by certain Class B and Class C shareholders.
PSI, PMF and PIC are indirect, wholly-owned subsidiaries of
The Prudential
Insurance Company of America.
The Fund, along with other affiliated registered investment
companies (the
'Funds'), entered into a credit agreement (the 'Agreement')
on December 31, 1996
with an unaffiliated lender. The maximum commitment under
the Agreement is
$200,000,000. The Agreement expires on December 30, 1997.
Interest on any such
borrowings outstanding will be
- ------------------------------------------------------------
- -------------------
9
<PAGE>
Notes to Financial Statements PRUDENTIAL
GOVERNMENT INCOME FUND, INC.
- ------------------------------------------------------------
- --------------------
at market rates. The purpose of the Agreement is to serve as
an alternative
source of funding for capital share redemptions. The Fund
has not borrowed any
amounts pursuant to the Agreement as of February 28, 1997.
The Funds pay a
commitment fee at an annual rate of .055 of 1% on the unused
portion of the
credit facility. The commitment fee is accrued and paid
quarterly on a pro-rata
basis by the Funds.
- ------------------------------------------------------------
Note 3. Other Transactions With Affiliates
Prudential Mutual Fund Services LLC ('PMFS'), a wholly-owned
subsidiary of PMF,
serves as the Fund's transfer agent. During the year ended
February 28, 1997,
the Fund incurred fees of approximately $1,880,000 for the
services of PMFS. As
of February 28, 1997, approximately $156,000 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 28, 1997, were $1,586,292,136
and $1,721,532,166,
respectively.
The federal income tax cost basis of the Fund's investments
at February 28, 1997
was $1,390,001,050 and, accordingly, net unrealized
appreciation for federal
income tax purposes was $6,980,903 (gross unrealized
appreciation-$23,069,733;
gross unrealized depreciation-$16,088,830).
The Fund had a capital loss carryforward as of February 28,
1997 of
approximately $143,520,000 of which $12,390,000 expires in
1998, $41,964,000
expires in 1999, $1,736,000 expires in 2001, $2,920,000
expires in 2002,
$66,560,000 expires in 2003 and $17,950,000 expires in 2005.
Accordingly, no
capital gains distribution is expected to be paid to
shareholders until net
gains have been realized in excess of such amounts. During
the fiscal year ended
February 28, 1997, approximately $8,302,000 of the capital
loss carryforward
expired unused.
Transactions in written options during the year ended
February 28, 1997 were as
follows:
<TABLE>
<CAPTION>
Number of
Premiums
Contracts
Received
<S> <C> <C>
--------- --------
- --
Options written...................... 1,500
$1,554,688
Options terminated in closing
purchase transactions.............. (1,250)
(949,219)
Options expired...................... (250)
(605,469)
--------- --------
- --
Options outstanding at February 28,
1997............................... 0
0
--------- --------
- --
--------- --------
- --
</TABLE>
The average balance of dollar rolls outstanding during the
year ended February
28, 1997 was approximately $2,625,000. This amount of dollar
rolls outstanding
at February 28, 1997 was $5,752,500, which was .4% of total
assets.
As of February 28, 1997, the Fund had securities on loan
with an aggregate
market value of $31,531,236. As of this date, the collateral
held for securities
on loan was comprised of U.S. government securities with an
aggregate market
value of $32,668,125.
- ------------------------------------------------------------
Note 5. Joint Repurchase Agreement Account
The Fund, along with other affiliated registered investment
companies, transfers
uninvested cash balances into a single joint account, the
daily aggregate
balance of which is invested in one or more repurchase
agreements collateralized
by U.S. Treasury or federal agency obligations. As of
February 28, 1997, the
Fund had a 2.63% undivided interest in the repurchase
agreements in the joint
account. This undivided interest represented $28,987,000 in
principal amount. As
of such date, the repurchase agreements in the joint account
and the value of
the collateral therefore were as follows:
Bear, Stearns & Co., 5.37%, in the principal amount of
$330,000,000, repurchase
price $330,147,812, due 3/3/97. The value of the collateral
including accrued
interest was $336,993,809.
CS First Boston Corp., 5.39%, in the principal amount of
$125,000,000,
repurchase price $125,056,146, due 3/3/97. The value of the
collateral including
accrued interest was $128,134,804.
Dean Witter, Reynolds, Inc., 5.35%, in the principal amount
of $25,000,000,
repurchase price $25,011,145, due 3/3/97. The value of the
collateral including
accrued interest was $25,500,582.
J.P. Morgan Securities, Inc., 5.37% in the principal amount
of $330,000,000,
repurchase price $330,147,812, due 3/3/97. The value of the
collateral including
accrued interest was $336,600,627.
SBC Warburg, 5.30%, in the principal amount of $113,616,000,
repurchase price
$113,666,180, due 3/3/97. The value of the collateral
including accrued interest
was $115,893,997.
UBS Securities, 5.38%, in the principal amount of
$180,000,000, repurchase price
$180,080,700, due 3/3/97. The value of the collateral
including accrued interest
was $183,601,157.
- ------------------------------------------------------------
- -------------------
10
<PAGE>
Notes to Financial Statements PRUDENTIAL
GOVERNMENT INCOME FUND, INC.
- ------------------------------------------------------------
- --------------------
Note 6. Capital
The Fund offers Class A, Class B, Class C and Class Z
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. Effective March 4, 1996 the Fund commenced
offering Class Z shares.
Class Z shares are not subject to any sales charge and are
offered exclusively
for sale to a limited group of investors.
There are 2 billion shares of common stock, $.01 par value
per share, divided
into four classes, designated Class A, B, C and Class Z
common stock, each of
which consists of 500,000,000 authorized shares.
Transactions in shares of common stock were as follows:
<TABLE>
<CAPTION>
Class A Shares Amount
- ----------------------------------- ----------- ---------
- ----
<S> <C> <C>
Year ended February 28, 1997:
Shares sold........................ 23,880,421 $
211,010,343
Shares issued in reinvestment of
dividends........................ 3,985,757
35,069,511
Shares reacquired.................. (41,836,738)
(368,907,729)
----------- ---------
- ----
Net decrease in shares outstanding
before conversion................ (13,970,560)
(122,827,875)
Shares issued upon conversion from
Class B.......................... 9,099,955
79,924,887
Shares reacquired upon conversion
into Class Z..................... (1,559,278)
(14,231,482)
----------- ---------
- ----
Net decrease in shares
outstanding...................... (6,429,883) $
(57,134,470)
----------- ---------
- ----
----------- ---------
- ----
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 issued upon conversion from
Class B.......................... 11,556,901
103,626,580
----------- ---------
- ----
Net increase in shares
outstanding...................... 3,181,496 $
26,602,043
----------- ---------
- ----
----------- ---------
- ----
<CAPTION>
Class B Shares Amount
- ----------------------------------- ----------- ---------
- ----
<S> <C> <C>
Year ended February 28, 1997:
Shares sold........................ 4,648,727 $
40,926,466
Shares issued in reinvestment of
dividends........................ 2,285,644
20,127,506
Shares reacquired.................. (16,152,439)
(142,246,190)
----------- ---------
- ----
Net decrease in shares outstanding
before conversion................ (9,218,068)
(81,192,218)
Shares reacquired upon conversion
into Class A..................... (9,099,955)
(79,924,887)
----------- ---------
- ----
Net decrease in shares
outstanding...................... (18,318,023)
$(161,117,105)
----------- ---------
- ----
----------- ---------
- ----
Year ended February 29, 1996:
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)
----------- ---------
- ----
----------- ---------
- ----
Class C
- -----------------------------------
Year ended February 28, 1997:
Shares sold........................ 165,423 $
1,461,600
Shares issued in reinvestment of
dividends........................ 13,603
119,788
Shares reacquired.................. (85,011)
(747,770)
----------- ---------
- ----
Net increase in shares
outstanding...................... 94,015 $
833,618
----------- ---------
- ----
----------- ---------
- ----
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
----------- ---------
- ----
----------- ---------
- ----
</TABLE>
- ------------------------------------------------------------
- -------------------
11
<PAGE>
Notes to Financial Statements PRUDENTIAL
GOVERNMENT INCOME FUND, INC.
- ------------------------------------------------------------
- --------------------
<TABLE>
<CAPTION>
Class Z Shares Amount
- ----------------------------------- ----------- ---------
- ----
<S> <C> <C>
March 4, 1996* through
February 28, 1997:
Shares sold**...................... 8,380,612 $
72,933,807
Shares issued in reinvestment of
dividends........................ 299,172
2,638,604
Shares reacquired.................. (1,855,597)
(16,377,605)
----------- ---------
- ----
Net increase in shares outstanding
before conversion from Class A... 6,824,187
59,194,806
Shares issued upon conversion from
Class A.......................... 1,559,278
14,231,482
----------- ---------
- ----
Net increase in shares
outstanding...................... 8,383,465 $
73,426,288
----------- ---------
- ----
----------- ---------
- ----
</TABLE>
- ---------------
* Commencement of offering of Class Z shares.
** Includes 6,698,193 shares issued for the acquisition of
The Prudential
Institutional Fund, Income Fund.
- ------------------------------------------------------------
Note 7. Acquisition of The Prudential Institutional Fund,
Income Fund
On September 20, 1996, the Fund acquired all the net assets
of The Prudential
Institutional Fund, Income Fund ('Income Fund') pursuant to
a plan of
reorganization approved by Income Fund shareholders on
September 6, 1996. The
acquisition was accomplished by a tax-free exchange of
6,698,193 Class Z shares
of the Fund for 5,948,930 shares of Income Fund valued at
$58,006,352 in the
aggregate on September 20, 1996. The aggregate net assets of
the Fund and Income
Fund immediately before the acquisition were $1,410,024,195
and $58,006,352
(including $172,817 of net unrealized depreciation),
respectively.
- ------------------------------------------------------------
- -------------------
12
<PAGE>
Financial Highlights PRUDENTIAL
GOVERNMENT INCOME FUND, INC.
- ------------------------------------------------------------
- --------------------
<TABLE>
<CAPTION>
Class A
----------
- ------------------------------------------------
Year Ended February 29/28,
----------
- ------------------------------------------------
1997
1996 1995 1994 1993
--------
- -------- -------- ------- -------
<S> <C>
<C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year............ $ 9.04
$ 8.59 $ 9.13 $ 9.40 $ 9.17
--------
- -------- -------- ------- -------
Income from investment operations
Net investment income......................... 0.60
0.60 0.59 0.61 0.66
Net realized and unrealized gain (loss) on
investment transactions.................... (0.28)
0.45 (0.54) (0.25) 0.35
--------
- -------- -------- ------- -------
Total from investment operations........... 0.32
1.05 0.05 0.36 1.01
--------
- -------- -------- ------- -------
Less distributions
Dividends from net investment income.......... (0.60)
(0.60) (0.59) (0.61) (0.66)
Distributions in excess of accumulated
gains...................................... --
- -- -- (0.02) --
Distributions from paid-in capital in excess
of par..................................... --
- -- -- -- (0.12)
--------
- -------- -------- ------- -------
Total distributions........................ (0.60)
(0.60) (0.59) (0.63) (0.78)
--------
- -------- -------- ------- -------
Net asset value, end of year.................. $ 8.76
$ 9.04 $ 8.59 $ 9.13 $ 9.40
--------
- -------- -------- ------- -------
--------
- -------- -------- ------- -------
TOTAL RETURN(a):.............................. 3.70%
12.41% .83% 3.90% 11.55%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)................. $860,319
$945,038 $871,145 $51,673 $61,297
Average net assets (000)...................... $884,862
$909,169 $ 95,560 $55,921 $46,812
Ratios to average net assets:
Expenses, including distribution fees...... 0.90%
0.91% 0.98% 0.84% 0.84%
Expenses, excluding distribution fees...... 0.75%
0.76% 0.83% 0.69% 0.69%
Net investment income...................... 6.78%
6.65% 7.45% 6.48% 7.17%
For Class A, B, C and Z shares:
Portfolio turnover rate.................... 107%
123% 206% 80% 36%
</TABLE>
- ---------------
(a) 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 year 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. 13
<PAGE>
Financial Highlights PRUDENTIAL
GOVERNMENT INCOME FUND, INC.
- ------------------------------------------------------------
- --------------------
<TABLE>
<CAPTION>
Class B
----------
- --------------------------------------------------------
Year Ended February 29/28,
----------
- --------------------------------------------------------
1997
1996 1995 1994 1993
--------
- -------- ---------- ---------- ----------
<S> <C>
<C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year............ $ 9.04
$ 8.60 $ 9.13 $ 9.40 $ 9.17
--------
- -------- ---------- ---------- ----------
Income from investment operations
Net investment income......................... 0.54
0.54 0.53 0.53 0.58
Net realized and unrealized gain (loss) on
investment transactions.................... (0.27)
0.44 (0.53) (0.25) 0.35
--------
- -------- ---------- ---------- ----------
Total from investment operations........... 0.27
0.98 -- 0.28 0.93
--------
- -------- ---------- ---------- ----------
Less distributions
Dividends from net investment income.......... (0.54)
(0.54) (0.53) (0.53) (0.58)
Distributions in excess of accumulated
gains...................................... --
- -- -- (0.02) --
Distributions from paid-in capital in excess
of par..................................... --
- -- -- -- (0.12)
--------
- -------- ---------- ---------- ----------
Total distributions........................ (0.54)
(0.54) (0.53) (0.55) (0.70)
--------
- -------- ---------- ---------- ----------
Net asset value, end of year.................. $ 8.77
$ 9.04 $ 8.60 $ 9.13 $ 9.40
--------
- -------- ---------- ---------- ----------
--------
- -------- ---------- ---------- ----------
TOTAL RETURN(a):.............................. 3.12%
11.54% .24% 3.03% 10.61%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)................. $461,988
$641,946 $ 705,732 $2,202,555 $2,680,259
Average net assets (000)...................... $543,796
$647,515 $1,735,413 $2,487,990 $2,670,924
Ratios to average net assets:
Expenses, including distribution fees...... 1.57%
1.58% 1.66% 1.68% 1.69%
Expenses, excluding distribution fees...... 0.75%
0.76% 0.80% 0.69% 0.69%
Net investment income...................... 6.11%
5.99% 6.17% 5.64% 6.32%
</TABLE>
- ---------------
(a) 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 year 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. 14
<PAGE>
Financial Highlights PRUDENTIAL
GOVERNMENT INCOME FUND, INC.
- ------------------------------------------------------------
- --------------------
<TABLE>
<CAPTION>
Class C Class Z
----------
- ------------------------ ------------
August 1, March 4,
Year
Ended 1994(c) 1996(d)
February
29/28, Through Through
----------
- ------- February 28, February 28,
1997
1996 1995 1997
------
- ------ ------------ ------------
<S> <C>
<C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year............ $ 9.04
$ 8.60 $ 8.69 $ 9.13
------
- ------ ----- ------
Income from investment operations
Net investment income......................... 0.54
0.54 0.31 0.61
Net realized and unrealized gain (loss) on
investment transactions.................... (0.27)
0.44 (0.09) (0.37)
------
- ------ ----- ------
Total from investment operations........... 0.27
0.98 0.22 0.24
------
- ------ ----- ------
Less distributions
Dividends from net investment income.......... (0.54)
(0.54) (0.31) (0.61)
------
- ------ ----- ------
Net asset value, end of period................ $ 8.77
$ 9.04 $ 8.60 $ 8.76
------
- ------ ----- ------
------
- ------ ----- ------
TOTAL RETURN(a):.............................. 3.20%
11.63% 2.75% 3.16%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)............... $2,569
$1,799 $ 204 $ 73,411
Average net assets (000)...................... $2,440
$ 765 $ 111 $ 39,551
Ratios to average net assets:
Expenses, including distribution fees...... 1.50%
1.51% 1.63%(b) 0.75%(b)
Expenses, excluding distribution fees...... 0.75%
0.76% 0.88%(b) 0.75%(b)
Net investment income...................... 6.19%
5.99% 6.69%(b) 6.76%(b)
</TABLE>
- ---------------
(a) 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.
(b) Annualized.
(c) Commencement of offering of Class C shares.
(d) Commencement of offering of Class Z shares.
- ------------------------------------------------------------
- -------------------
See Notes to Financial Statements. 15
<PAGE>
Independent Auditors' Report PRUDENTIAL
GOVERNMENT INCOME FUND, INC.
- ------------------------------------------------------------
- --------------------
The Shareholders and Board of Directors of
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 28, 1997, 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, 1997 by correspondence with the custodian and
brokers. 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, 1997, the
results of its
operations, the changes in its net assets and its financial
highlights for the
respective stated periods in conformity with generally
accepted accounting
principles.
Deloitte & Touche LLP
New York, New York
April 11, 1997
Important Notice for Certain PRUDENTIAL
GOVERNMENT INCOME
Shareholders FUND, INC.
- ------------------------------------------------------------
- --------------------
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 41% 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.
- ------------------------------------------------------------
- -------------------
16
<PAGE>
Supplemental Proxy Information PRUDENTIAL
GOVERNMENT INCOME FUND, INC.
- ------------------------------------------------------------
- --------------------
The Annual Meeting of Shareholders of Prudential
Government Income Fund was
held on October 30, 1996 at the offices of Prudential
Securities Incorporated,
One Seaport Plaza, New York, New York. The meeting was held
for the following
purposes:
(1) To elect the following twelve Trustees:
- Edward D. Beach
- Eugene C. Dorsey
- Delayne Dedrick Gold
- Robert F. Gunia
- Harry A. Jacobs, Jr.
- Donald D. Lennox
- Mendel A. Melzer
- Thomas T. Mooney
- Thomas H. O'Brien
- Richard A. Redeker
- Nancy H. Teeters
- Louis A. Weil, III
(2a) Approval of amendment of the Fund's fundamental
investment restrictions
regarding investment in shares of other investment
companies.
(2b) Approval of amendment of the Fund's fundamental
investment restrictions
regarding unseasoned issuers.
(3) To ratify the selection of Deloitte & Touche LLP as
independent
accountants for the fiscal year ending February 28,
1997.
The results of the proxy solicitation on the above
matters were as follows:
<TABLE>
<CAPTION>
Trustee/Auditor Votes
for Votes against Votes withheld
Abstentions
----------------------------------- ------
- ----- -------------- --------------- --
- ----------
<S> <C> <C> <C>
<C> <C> <C>
(1) Edward D. Beach
80,214,985 -- 2,591,240
- --
Eugene C. Dorsey
80,277,849 -- 2,528,376
- --
Delayne Dedrick Gold
80,244,757 -- 2,561,468
- --
Robert F. Gunia
80,332,842 -- 2,473,383
- --
Harry A. Jacobs, Jr.
80,114,614 -- 2,691,611
- --
Donald D. Lennox
80,259,236 -- 2,546,989
- --
Mendel A. Melzer
80,316,041 -- 2,490,184
- --
Thomas T. Mooney
80,352,872 -- 2,453,353
- --
Thomas H. O'Brien
80,321,976 -- 2,484,249
- --
Richard A. Redeker
80,301,254 -- 2,504,971
- --
Nancy H. Teeters
80,243,796 -- 2,562,429
- --
Louis A. Weil, III
80,294,185 -- 2,512,040
- --
(2a) Amendment regarding investments in
investment companies.
59,834,598 4,281,771 --
4,049,876
(2b) Amendment regarding unseasoned
issuers.
57,458,300 6,230,643 --
4,477,302
(3) Deloitte & Touche LLP
78,558,520 1,127,936 --
3,119,769
</TABLE>
- ------------------------------------------------------------
- -------------------
17
<PAGE>
Comparing A $10,000 Investment.
Prudential Government Income Fund, Inc. vs.
the Lehman Brothers Government Bond Index.
// Prudential Government Income Fund, Inc.
- -- Lehman Bros. Gov't Bond Index
Best Year: 1995 19.8%
Worst Year: 1994 -4.1%
Class A Average Annual Total
Returns - Class A
(CHART)
With Sales Load
7.1% Since
Inception
5.5% for 5 Years
-0.5% for 1 Year
Without Sales Load
7.7% Since
Inception
6.4% for 5 Years
3.7% for 1 Year
Best Year: 1995 19.0%
Worst Year: 1994 -4.7%
Class B Average Annual Total
Returns - Class B
(CHART)
With Sales Load
7.7% Since Inception
6.4% for 10 Years
5.5% for 5 Years
-1.9% for 1 Year
Without Sales Load
7.7% Since Inception
6.4% for 10 Years
5.6% for 5 Years
3.1% for 1 Year
Class C Average Annual Total
Returns - Class C
(CHART)
With Sales Load
6.8% Since Inception
2.2% for 1 Year
Without Sales Load
6.8% Since Inception
3.2% for 1 Year
Class Z
(CHART)
Past performance is not indicative 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. The chart on
top of the graphs is
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, Inc.
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, Class C and Class Z shares and for 10
years for the
Class B shares, and subsequent account values at the end of
this reporting
period (February 28, 1997), as measured on a quarterly
basis, beginning in
1987 for Class B shares, 1990 for Class A shares, 1994 for
Class C shares and
in 1996 for Class Z 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 eferred
sales charge was deducted from the value of the investment
in Class B and
Class C shares, assuming full redemption on February 28,
1997; all recurring
fees (including management fees) were deducted; and (d) all
dividends and
distributions were reinvested. Class Z shares do not have a
sales charge.
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. Since Class Z shares have been
in existence less
than one year, no average annual returns are presented.
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
Gateway Center Three
100 Mulberry Street
Newark, NJ 07102-4077
(800) 225-1852
http://www.prudential.com
(LOGO)
Directors
Edward D. Beach
Eugene C. Dorsey
Delayne Dedrick Gold
Robert F. Gunia
Harry A. Jacobs, Jr.
Donald D. Lennox
Mendel A. Melzer
Thomas T. Mooney
Thomas H. O'Brien
Richard A. Redeker
Nancy H. Teeters
Louis A. Weil, III
Officers
Richard A. Redeker, President
Susan C. Cote, Vice President
Thomas Early, Vice President
Eugene S. Stark, Treasurer
Stephen M. Ungerman, Assistant Treasurer
S. Jane Rose, Secretary
Deborah A. Docs, Assistant Secretary
Manager
Prudential Mutual Fund Management LLC
Gateway Center Three
100 Mulberry Street
Newark, NJ 07102-4077
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 LLC
P.O. Box 15005
New Brunswick, NJ 08906
Independent Auditors
Deloitte & Touche LLP
Two World Financial Center
New York, NY 10281
Legal Counsel
Shereff, Friedman, 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
744339409
