(ICON)
Prudential
Government
Income
Fund, Inc.
ANNUAL
REPORT
Feb. 28, 1999
<PAGE>
Prudential Government Income Fund, Inc.
Performance At A Glance.
U.S. Treasuries initially rallied during the fiscal year
ended February 28,
1999, as a global financial crisis boosted demand for these
securities.
However, global financial markets calmed down in the autumn
after the Federal
Reserve repeatedly eased U.S. monetary policy, and investors
sold Treasuries
and bought riskier assets. Your Prudential Government
Income Fund Class A
and Z shares beat the return on the average comparable
portfolio tracked by
Lipper, Inc. because the Fund benefited from the rally in
Treasuries that
occurred earlier in the fiscal year.
<TABLE>
Cumulative Total Returns1 As of 2/28/98
<CAPTION>
One Five Ten
Since
Year Years Years
Inception2
<S> <C> <C> <C> <C>
Class A 5.40% 36.61% N/A
96.41%
Class B 4.83 32.22 102.34%
175.06
Class C 4.91 N/A N/A
35.95
Class Z 5.58 N/A N/A
20.12
Lipper General U.S.
Gov't Bond Fd. Avg.3 5.08 33.38 115.21
***
</TABLE>
<TABLE>
Average Annual Total Returns1 As
of 3/31/98
<CAPTION>
One Five Ten
Since
Year Years Years
Inception2
<S> <C> <C> <C> <C>
Class A 1.41% 6.22% N/A
7.19%
Class B -0.05 6.22 7.27%
7.54
Class C 2.98 N/A N/A
6.63
Class Z 5.82 N/A N/A
6.26
</TABLE>
<TABLE>
Distributions & Yields As of
2/28/98
<CAPTION>
Total Distributions 30-
Day
Paid for 12 Mos. SEC
Yield
<S> <C> <C>
Class A $0.55
5.84%
Class B $0.49
5.49
Class C $0.50
5.51
Class Z $0.57
6.34
</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.
1 Source: Prudential Investments Fund Management and Lipper,
Inc. The
cumulative total returns do not take into account sales
charges. The average
annual total returns do take into account applicable sales
charges. The Fund
charges a maximum front-end sales charge 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 B shares will
automatically convert
to Class A shares, on a quarterly basis, approximately seven
years after
purchase. Class C shares are subject to a front-end sales
charge of 1% and a
CDSC of 1% for 18 months. Class C shares bought before
November 2, 1998 have
a 1% CDSC if sold within one year. Class Z shares are not
subject to a sales
charge or distribution fee.
2 Inception dates: Class A, 1/22/90; Class B, 4/22/85; Class
C, 8/1/94; and
Class Z, 3/4/96.
3 Lipper average returns are for all funds in each share
class for the one-,
five-, and ten-year periods in the General U.S. Government
Bond Fund category.
***Lipper Since Inception returns are 95.20% for Class A;
193.30% for Class B;
36.92% for Class C; and 19.73% for Class Z based on all
funds in each share
class.
How Investments Compared.
(As of 2/28/99)
(GRAPH)
Source: Lipper, Inc. 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 returns 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.
U.S. Taxable Money 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
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 investment objective.
Strategy Session.
Changing Our Asset Mix.
Early in our fiscal year, we began purchasing U.S.
Treasuries and federal
government agency securities and selling mortgage-backed
securities. In
changing our asset mix, we also lengthened the Fund's
duration, a measure of
its sensitivity to fluctuations in bond yields (or interest
rates). Extending
the duration helped Fund shares gain more rapidly as we
correctly believed
bond yields would continue to fall and prices rise.
Our outlook for lower bond yields was largely based on the
view that inflation
would remain subdued as supply gluts from oil producers and
others helped keep
a lid on prices. Because the level of bond yields typically
reflects the
anticipated inflation rate, we believed bond yields would
decline amid
continued tame inflation. Furthermore, strong U.S. economic
growth increased
tax revenues, allowing the U.S. Treasury Department to issue
fewer Treasuries.
If this shrinking supply met with strong demand, it would
boost prices of
Treasuries and their yields would tumble.
Indeed, demand for "safe haven" securities such as
Treasuries soared in
August after the global financial crisis worsened. Expecting
this "flight-to-
quality" trend to continue, we bought even more Treasuries,
which rose to a
maximum of 34% of the Fund's total investments as of October
31, 1998 from
21% as of February 28, 1998. This change helped extend the
Fund's duration
to 5.75 years from 5.59 years. For the remainder of the
fiscal year, we
shifted our strategy by shortening the duration after long-
term interest
rates unexpectedly began to move higher in the autumn.
Portfolio Composition.
Expressed as a percentage of
total investments as of 2/28/99.
(GRAPH)
Merger Completed.
On January 14, 1999, shareholders voted to approve the
merger of the
Prudential Mortgage Income Fund into the Prudential
Government Income Fund.
The merger became effective on January 22, 1999.
<PAGE>
What Went Well.
Treasuries Rallied.
Prices of U.S. Treasuries soared until the 30-year Treasury
bond yield fell
to 4.71% by early October, its lowest level since April
1967. Lengthening the
Fund's duration by increasing its Treasuries helped the Fund
derive more
benefit from this powerful rally.
When the global financial crisis worsened from August
through October, we
favored the most recently auctioned Treasuries, known as "on-
the-run"
Treasuries, because they were the easiest to convert to
cash. We later
focused on older, less frequently traded "off-the-run"
Treasuries, which
provided higher yields.
The Merger Helped Us.
The Government Income Fund's exposure to mortgage-backed
securities rose after
it merged with the Mortgage Income Fund in January 1999.
Having a larger
exposure worked well during this time because mortgage-
backed securities
performed better than Treasuries as bond yields (or interest
rates) had
climbed. Investors were attracted to mortgage-backed
securities because they
provide higher yields than Treasuries. In addition, mortgage-
backed securities
were more appealing because there was less risk of
prepayments on the
securities. Prepayments on mortgage-backed securities
generally occur when
falling interest rates prompt homeowners to refinance their
mortgages.
And Not So Well.
"Flight to Quality" Ended.
While having a sizable exposure to Treasuries helped the
Fund earlier in the
fiscal year, it made sense to sell some of these securities
later as the
"flight-to-quality" trend reversed. This shift in market
sentiment occurred in
the autumn as the Federal Reserve repeatedly lowered short-
term rates to calm
financial markets and restore faith in the U.S. economy. As
a result,
investors primarily sold Treasuries and bought riskier
assets with renewed
confidence.
We also sold some Treasuries and federal government agency
securities as the
Fund's exposure to mortgage-backed securities increased.
These moves cut the
Fund's duration to 5.54 years as of February 28, 1999 from
5.75 years as of
October 31, 1998. In hindsight, we should have reduced the
duration further
because the Fund would have been even less sensitive to the
sell-off in
Treasuries and federal government agency securities.
Five Largest Issuers.
30.0% U.S. Treasury
Obligations
27.1% Federal National
Mortgage Association
8.4% Small Business
Administration
6.8% Government National
Mortgage Association
5.0% New Jersey Economic
Development Authority
Expressed as a percentage of net assets as of 2/28/99.
Looking Ahead.
We believe U.S. economic growth will moderate somewhat in
1999 while inflation
hovers at slightly higher levels than in 1998. If the
economy behaves as
expected, the 30-year Treasury bond yield could hover in a
range of 5.25% to
6.25% in coming months. Under these market conditions, debt
securities that
offer incremental yield over Treasuries, such as mortgage-
backed securities
and corporate bonds, would stand a good chance of performing
better than
Treasuries.
- ------------------------------------------------------------
- -------------------
1
<PAGE>
A Message to Our Shareholders.
April 19, 1999
(PHOTO)
Dear Shareholder,
For the last several months, major index advances have been
driven by the
stocks of a handful of very large companies. These stocks
are getting more
and more expensive, out of proportion to their earnings
expectations. As a
result, a substantial disparity in value has grown between
large and small
companies and between growth and value stocks.
Since not all stocks are benefiting from the highly
publicized euphoria
surrounding each record-breaking milestone, it is unlikely
that these trends
will continue. In fact, signs that the tide is turning are
starting to emerge.
Moreover, history shows that markets generally bring prices
in line with
earnings performance sooner or later.
Many sectors of the bond market, on the other hand, have
already begun to
rebound from last year's global financial crisis.
Furthermore, while bonds
have not generated higher returns than stocks in recent
years, they have
demonstrated that they hold up better during market
downturns. That's a
thought to keep in mind going forward.
Diversification Is Critical.
What does this suggest? Instead of chasing recent market
winners, investors
should have a well-diversified asset allocation strategy in
place and keep to
it. It is also a good practice to rebalance your holdings,
when necessary, to
keep your asset allocation consistent with your long-term
objectives and risk
tolerance. A properly diversified portfolio of value- and
growth-oriented
mutual funds, bond funds and money market funds could help
you weather
inevitable market turbulence and receive more consistent
returns over time.
Prudential offers a wide range of mutual funds to help our
shareholders
diversify. We have also designed several balanced and
diversified funds to
allow one-decision diversification.
Thank you for your continued confidence in Prudential mutual
funds.
Sincerely,
John R. Strangfeld
Chief Investment Officer
Prudential Investments
- ------------------------------------------------------------
- -------------------
2
<PAGE>
PRUDENTIAL
GOVERNMENT INCOME
Portfolio of Investments as of February 28, 1999
FUND, INC.
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Amount
(000) Description Value (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
LONG-TERM INVESTMENTS--95.8%
- ------------------------------------------------------------
U.S. Government Agency Mortgage Pass-Throughs--26.2%
Federal Home Loan Mortgage Corp.,
$ 392(c) 7.50%, 6/01/24 $
403
5,045 8.00%, 1/01/22 - 5/01/23
5,262,872
2,518 8.50%, 6/01/07 - 4/01/20
2,669,288
5,979 9.00%, 1/01/20
6,356,411
1,360 11.50%, 10/01/19
1,541,470
Federal National Mortgage Assoc.,
26,221 6.00%, 1/01/29
25,409,443
105,996(a) 6.50%, 12/31/99 - 11/01/13
105,387,061
37,867 7.00%, 12/31/99 - 9/01/26
38,344,233
31,360 7.125%, 2/01/07
32,016,723
32,512 7.50%, 12/01/06 - 10/01/26
33,522,271
13(b) 8.00%, 10/01/24
13,587
3,542 8.50%, 6/01/17 - 3/01/25
3,727,860
4,770 9.00%, 8/01/24 - 4/01/25
5,055,660
947 9.50%, 10/01/19 - 3/01/25
1,007,979
Government National Mortgage
Assoc.,
47,575 7.00%, 2/15/09 - 1/15/28
48,309,268
28,265(b) 7.50%, 5/15/02 - 11/15/24
29,127,237
734 8.00%, 7/15/16 - 3/15/24
767,818
10,686 9.50%, 10/15/09 - 12/15/17
11,497,486
Government National Mortgage Assoc. II,
1,661 9.50%, 5/20/18 - 8/20/21
1,769,036
----------
- ----
Total U.S. Government Agency
Mortgage Pass-Throughs
(cost $343,411,148)
351,786,106
- ------------------------------------------------------------
U.S. Government Obligations--30.0%
United States Treasury Bonds,
20,000 7.25%, 8/15/22
23,506,200
20,000(b) 8.125%, 8/15/19
25,350,000
20,000 8.125%, 8/15/21
25,606,200
22,325 8.75%, 5/15/17
29,524,812
77,000 11.75%, 2/15/10
100,930,060
3,000(b) 12.00%, 8/15/13
4,376,250
68,400(b) 12.75%, 11/15/10
95,642,352
United States Treasury Notes,
$ 7,100(b) 5.25%, 8/15/03 $
7,083,386
6,000(b) 5.50%, 1/31/03
6,039,360
3,000(b) 5.50%, 5/31/03
3,018,750
3,280(b) 6.50%, 5/31/01
3,368,134
16,000 7.875%, 11/15/04
17,922,560
23,000(b) 12.375%, 5/15/04
30,191,180
United States Treasury Strips,
81,500 Zero Coupon, 11/15/15
30,476,925
----------
- ----
Total U.S. Government Obligations
(cost $412,903,139)
403,036,169
- ------------------------------------------------------------
U.S. Government Agency Securities--25.9%
Federal Home Loan Bank,
25,000 5.75%, 10/15/07
25,562,500
20,000 5.88%, 11/25/08
19,525,000
Federal National Mortgage Assoc.,
20,000 5.25%, 1/15/09
19,153,200
20,000 5.70%, 1/22/03, M.T.N.
19,778,200
21,000 5.86%, 8/20/03, M.T.N.
20,835,990
40,000 6.06%, 5/21/03, M.T.N.
39,912,400
20,000 6.30%, 9/25/02
20,078,200
Financing Corp.,
13,505 9.40%, 2/08/18
18,324,529
Small Business Administration,
17,186 Ser. 1995-20B, 8.15%, 2/01/15
18,302,933
21,258 Ser. 1995-20L, 6.45%, 12/01/15
21,630,046
30,868 Ser. 1996-20H, 7.25%, 8/01/16
32,102,939
18,224 Ser. 1996-20K, 6.95%, 11/01/16
19,157,813
9,398 Ser. 1997-20A, 7.15%, 1/01/17
9,773,575
14,349 Ser. 1998-20I, 6.00%, 9/01/18
14,241,383
Tennessee Valley Authority,
20,297 3.375%, 1/15/07, I.I.S.
18,942,865
600 Ser. 1993-D, 7.25%, 7/15/43
639,078
30,000(b) Ser. 1995-B, 6.235%, 7/15/45
29,991,900
----------
- ----
Total U.S. Government Agency
Securities
(cost $348,838,937)
347,952,551
</TABLE>
- ------------------------------------------------------------
- --------------------
See Notes to Financial Statements. 3
<PAGE>
PRUDENTIAL
GOVERNMENT INCOME
Portfolio of Investments as of February 28, 1999
FUND, INC.
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Amount
(000) Description Value (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
Corporate Bonds--7.8%
Associates Corp. of North America,
$ 15,000(b) 5.96%, 5/15/37 $
15,300,000
Merck and Co.,
22,000(b) 5.76%, 5/03/37
22,770,000
New Jersey Economic Development
Authority,
60,000(b) Ser. A, 7.425%, 2/15/29
66,965,400
----------
- ----
Total Corporate Bonds
(cost $99,561,550)
105,035,400
- ------------------------------------------------------------
Collateralized Mortgage Obligations--1.2%
Bayview Financial Acquisition
Trust,
4,166 Ser. 1998-1, Class A-I,
7.01%, 5/25/29
4,129,777
Resolution Trust Corp.,
4,868 Ser. 1994-1, Class B2,
7.75%, 9/25/29
4,867,876
Ryland Mortgage Participation Securities,
1,696 Ser. 1993-3, Class A3,
7.094%, 9/25/24, (ARM)
1,689,542
Structured Asset Securities Corp.,
5,000 Ser. 1995-C1, Class C,
7.375%, 9/25/24
4,992,188
----------
- ----
Total Collateralized Mortgage Obligations
(cost $15,099,540)
15,679,383
- ------------------------------------------------------------
U.S. Government Agency - Stripped Securities--2.0%
Federal National Mortgage Assoc.,
30,000 Zero Coupon, 6/01/17
9,759,300
Financing Corp.,
5,000 Zero Coupon, 3/07/04
3,777,350
Israel AID,
25,584 Zero Coupon, 8/15/09
13,923,325
----------
- ----
Total U.S. Government Agency -
Stripped Securities
(cost $26,305,428)
27,459,975
- ------------------------------------------------------------
Supranational Bond--0.9%
International Bank for
Reconstruction & Development,
8.625%, 10/15/16
10,000(b) (cost $12,400,900)
12,532,300
Asset Backed Securities--1.8%
Aesop Funding II LLC,
$ 10,000 Ser. 1997-1, Class A2,
6.40%, 10/20/03 $
10,103,125
Franchise Mortgage Acceptance Co.
Loan Receivables Trust,
33,058 Ser. 97-A, Class AX,
2.795%, 4/15/19, (I/O)
3,906,276
4,000 Ser. 97-B, Class C,
7.40%, 9/15/19
3,770,469
The Money Store Home Improvement
Trust,
6,125(b) Ser. 1997-1, Class M2,
8.07%, 5/15/23
6,147,434
----------
- ----
Total Asset Backed Securities
(cost $25,067,680)
23,927,304
----------
- ----
Total Long-Term Investments
(cost $1,283,588,322)
1,287,409,188
SHORT-TERM INVESTMENT--10.6%
- ------------------------------------------------------------
Repurchase Agreement
Joint Repurchase Agreement
Account,
4.76%, 3/01/99
142,353 (cost $142,353,000; Note 5)
142,353,000
- ------------------------------------------------------------
Total Investments--106.4%
(cost $1,425,941,322; Note 4)
1,429,762,188
Liabilities in excess of other
assets--(6.4%)
(85,433,926)
----------
- ----
Net Assets--100%
$1,344,328,262
----------
- ----
----------
- ----
</TABLE>
- ---------------
AID--Agency for International Development
ARM--Adjusted Rate Mortgage
I.I.S.--Inflation Indexed Security
I/O--Interest Only
M.T.N.--Medium-Term Note
(a) Partial principal amount of $51,700,000 represents a to-
be-
announced ('TBA') mortgage dollar roll, see Note 1 and
Note 4.
(b) Partial principal amount pledged as collateral for
mortgage dollar roll.
(c) Represents actual amount.
- ------------------------------------------------------------
- --------------------
See Notes to Financial Statements. 4
<PAGE>
Statement of Assets and Liabilities PRUDENTIAL
GOVERNMENT INCOME FUND, INC.
- ------------------------------------------------------------
- --------------------
<TABLE>
Assets
February 28, 1999
<S>
<C>
Investments excluding repurchase agreement, at value (cost
$1,283,588,322)............................... $
1,287,409,188
Repurchase agreement, at value (cost
$142,353,000)...............................................
........ 142,353,000
Cash........................................................
.............................................
43,767
Receivable for investments
sold........................................................
.................. 91,789,192
Interest
receivable..................................................
.................................... 12,673,824
Receivable for Fund shares
sold........................................................
.................. 2,523,005
Prepaid expenses and other
assets......................................................
.................. 30,570
- -----------------
Total
assets......................................................
.................................... 1,536,822,546
- -----------------
Liabilities
Payable for investments
purchased...................................................
..................... 186,860,418
Payable for Fund shares
reacquired..................................................
..................... 2,303,895
Accrued
expenses....................................................
..................................... 1,695,295
Dividends
payable.....................................................
................................... 714,034
Management fee
payable.....................................................
.............................. 521,518
Distribution fee
payable.....................................................
............................ 399,124
- -----------------
Total
liabilities.................................................
.................................... 192,494,284
- -----------------
Net
Assets......................................................
......................................... $
1,344,328,262
- -----------------
- -----------------
Net assets were comprised of:
Common stock, at
par.........................................................
......................... $ 1,496,839
Paid-in capital in excess of
par.........................................................
............. 1,444,966,923
- -----------------
1,446,463,762
Accumulated net realized loss on
investments.................................................
......... (105,956,366)
Net unrealized appreciation on
investments.................................................
........... 3,820,866
- -----------------
Net assets, February 28,
1999........................................................
.................... $ 1,344,328,262
- -----------------
- -----------------
Class A:
Net asset value and redemption price per share
($895,038,825 / 99,669,935 shares of common stock
issued and outstanding)..........................
$8.98
Maximum sales charge (4% of offering
price)......................................................
..... .37
- -----------------
Maximum offering price to
public......................................................
................ $9.35
- -----------------
- -----------------
Class B:
Net asset value, offering price and redemption price per
share
($343,425,119 / 38,214,588 shares of common stock
issued and outstanding)..........................
$8.99
- -----------------
- -----------------
Class C:
Net asset value and redemption price per share
($8,235,502 / 916,420 shares of common stock issued
and outstanding)...............................
$8.99
Sales charge (1% of offering
price)......................................................
............. .09
- -----------------
Offering price to
public......................................................
........................ $9.08
- -----------------
- -----------------
Class Z:
Net asset value, offering price and redemption price per
share
($97,628,816 / 10,882,938 shares of common stock
issued and outstanding)...........................
$8.97
- -----------------
- -----------------
</TABLE>
- ------------------------------------------------------------
- --------------------
See Notes to Financial Statements. 5
<PAGE>
PRUDENTIAL GOVERNMENT INCOME FUND, INC.
GOVERNMENT INCOME FUND, INC.
Statement of Operations
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended
Net Investment Income February 28,
1999
<S> <C>
Income
Interest................................. $
86,171,292
--------------
- ---
Expenses
Management fee...........................
6,252,699
Distribution fee--Class A................
1,396,191
Distribution fee--Class B................
2,661,668
Distribution fee--Class C................
36,587
Transfer agent's fees and expenses.......
1,840,000
Reports to shareholders..................
135,000
Custodian's fees and expenses............
100,000
Audit fee and expenses...................
44,000
Directors' fees..........................
36,000
Registration fees........................
27,000
Legal fees and expenses..................
20,000
Insurance expense........................
19,000
Miscellaneous............................
666
--------------
- ---
Total expenses........................
12,568,811
--------------
- ---
Net investment income......................
73,602,481
--------------
- ---
Realized and Unrealized
Gain (Loss) on Investments
Net realized gain (loss) on:
Investment transactions..................
25,752,963
Financial futures contracts..............
(2,025,877)
--------------
- ---
23,727,086
--------------
- ---
Net change in unrealized appreciation on:
Investments..............................
(36,149,706)
Financial futures contracts..............
(11,328)
--------------
- ---
(36,161,034)
--------------
- ---
Net loss on investments....................
(12,433,948)
--------------
- ---
Net Increase in Net Assets
Resulting from Operations.................. $
61,168,533
--------------
- ---
--------------
- ---
</TABLE>
PRUDENTIAL GOVERNMENT INCOME FUND, INC.
GOVERNMENT INCOME FUND, INC.
Statement of Changes in Net Assets
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Increase (Decrease) Year Ended February
28
in Net Assets 1999
1998
<S> <C> <C>
Operations
Net investment income........ $ 73,602,481 $
82,317,930
Net realized gain on
investment transactions... 23,727,086
7,575,256
Net change in unrealized
appreciation
(depreciation) on
investments............... (36,161,034)
32,415,923
----------------- ------
- --------
Net increase in net assets
resulting from
operations................ 61,168,533
122,309,109
----------------- ------
- --------
Dividends from net investment
income (Note 1)
Class A................... (50,553,420)
(54,904,893)
Class B................... (17,378,979)
(22,493,247)
Class C................... (268,163)
(149,286)
Class Z................... (5,401,919)
(4,770,504)
----------------- ------
- --------
(73,602,481)
(82,317,930)
----------------- ------
- --------
Fund share transactions (net of share
conversions) (Notes 6 & 7):
Net proceeds from shares
subscribed................ 393,970,010
236,235,904
Net asset value of shares
issued in reinvestment of
dividends................. 47,502,780
51,329,375
Cost of shares reacquired.... (337,878,336)
(472,675,912)
----------------- ------
- --------
Net increase (decrease) in
net assets from Fund share
transactions.............. 103,594,454
(185,110,633)
----------------- ------
- --------
Total increase (decrease)...... 91,160,506
(145,119,454)
Net Assets
Beginning of year.............. 1,253,167,756
1,398,287,210
----------------- ------
- --------
End of year.................... $ 1,344,328,262
$1,253,167,756
----------------- ------
- --------
----------------- ------
- --------
</TABLE>
- ------------------------------------------------------------
- --------------------
See Notes to Financial Statements. 6
<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 Securities,
including U.S. Treasury Bills, Notes, Bonds and other debt
securities issued by
the U.S. Treasury, and obligations issued or guaranteed by
U.S. Government
agencies or instrumentalities, and by engaging in various
derivative
transactions such as the purchase and sale of put and call
options.
- ------------------------------------------------------------
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
(including commitments
to purchase such securities on a 'when-issued' basis) 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.
Repurchase Agreements: In connection with repurchase
agreements with U.S.
financial institutions, it is the Fund's policy that its
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
agreement transaction,
including accrued interest. To the extent that any
repurchase agreement
transaction exceeds one business day, the value of the
collateral is
marked-to-market on a daily basis to ensure the adequacy of
the collateral. If
the seller defaults and the value of the collateral declines
or if bankruptcy
proceedings are commenced with respect to the seller of the
security,
realization of the collateral by the Fund may be delayed or
limited.
Financial Futures Contracts: A financial futures contract is
an agreement to
purchase (long) or sell (short) an agreed amount of
securities at a set price
for delivery on a future date. Upon entering into a
financial futures contract,
the Fund is required to pledge to the broker an amount of
cash and/or other
assets equal to a certain percentage of the contract amount.
This amount is
known as the 'initial margin.' Subsequent payments, known as
'variation margin,'
are made or received by the Fund each day, depending on the
daily fluctuation in
the value of the underlying security. Such variation margin
is recorded for
financial statement purposes on a daily basis as unrealized
gain or loss. When
the contract expires or is closed, the gain or loss is
realized and is presented
in the statement of operations as net realized gain (loss)
on financial futures
contracts.
The Fund invests in financial futures contracts in order to
hedge its existing
portfolio securities, or securities the Fund intends to
purchase, against
fluctuations in value caused by changes in prevailing
interest rates. Should
interest rates move unexpectedly, the Fund may not achieve
the anticipated
benefits of the financial futures contracts and may realize
a loss. The use of
futures transactions involves the risk of imperfect
correlation in movements in
the price of futures contracts, interest rates and the
underlying hedged assets.
Dollar Rolls: The Fund enters into mortgage dollar rolls in
which the Fund sells
mortgage securities for delivery in the current month,
realizing a gain or loss
and simultaneously contracts to repurchase somewhat similar
(same type, coupon
and maturity) securities on a specified future date. During
the roll period, the
Fund forgoes principal and interest paid on the securities.
The Fund is
compensated by the interest earned on the cash proceeds of
the initial sale and
by the lower repurchase price at the future date. The
difference between the
sales proceeds and the lower repurchase price is recorded as
interest income.
The Fund maintains a segregated account, the dollar value of
which is at least
equal to its obligations, in respect of dollar rolls.
Securities Lending: The Fund may lend its U.S. Government
securities to
broker-dealers or government securities dealers. The loans
are secured by
collateral at least equal at all times to the market value
of the securities
loaned. The Fund may bear the risk of delay in recovery of,
or even loss of
rights in, the securities loaned should the borrower of the
securities fail
financially. The Fund receives compensation for lending its
securities in the
form of fees or it retains a portion of interest on the
investment of any cash
received as collateral. The Fund also continues to receive
interest on the
securities loaned and any gain or loss in the market price
of the securities
loaned that may occur during the term of the loan will be
for the account of the
Fund. There were no loans outstanding as of February 28,
1999.
- ------------------------------------------------------------
- --------------------
7
<PAGE>
Notes to Financial Statements PRUDENTIAL
GOVERNMENT INCOME FUND, INC.
- ------------------------------------------------------------
- --------------------
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. The Fund accretes discount on portfolio
securities as adjustments
to interest income. 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.
Reclassification of Capital Accounts: The Fund accounts for
and reports
distributions to shareholders in accordance with the
American Institute of
Certified Public Accountants Statement of Position 93-2:
Determination,
Disclosure and Financial Statement Presentation of Income,
Capital Gain and
Return of Capital Distributions by Investment Companies. The
effect of applying
this statement was to decrease paid-in capital in excess of
par by $1,357,129
and decrease accumulated net realized losses on investments
by $1,357,129 due to
the expiration of capital loss carryforwards. Net investment
income, net
realized gains and net assets were not affected by this
change.
- ------------------------------------------------------------
Note 2. Agreements
The Fund has a management agreement with Prudential
Investments Fund Management,
LLC ('PIFM'). Pursuant to this agreement, PIFM has
responsibility for all
investment advisory services and supervises the subadviser's
performance of such
services. PIFM 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. PIFM 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 PIFM 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
Securities Incorporated
('PSI'), which acted as the distributor of the Class A,
Class B, Class C and
Class Z shares of the Fund through May 31, 1998. Prudential
Investment
Management Services LLC ('PIMS') became the distributor of
the Fund effective
June 1, 1998 and is serving the Fund under the same terms
and conditions as
under the arrangement with PSI. The Fund compensated PSI and
PIMS 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. No distribution or service fees are paid to
PSI or PIMS as
distributor of the Class Z shares of the Fund.
Pursuant to the Class A Plan, the Fund compensates PIMS 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 March 1, 1998 through
December 31, 1998.
Effective January 1, 1999, such expenses under the Class A
Plan were .25 of 1%
of the average daily net assets of the Class A shares.
Pursuant to the Class B Plan, the Fund compensates PIMS for
its
distribution-related activities 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
.825 of 1% of the
average daily net assets of the Class B shares for the year
ended February 28,
1999.
Pursuant to the Class C Plan, the Fund compensates PIMS for
its
distribution-related activities 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 the Class C Plan
were .75 of 1% of the
average daily net assets of the Class C shares for the year
ended February 28,
1999.
PSI and PIMS have advised the Fund that they received
approximately $364,600 and
$7,900 in front-end sales charges resulting from sales of
- ------------------------------------------------------------
- --------------------
8
<PAGE>
Notes to Financial Statements PRUDENTIAL
GOVERNMENT INCOME FUND, INC.
- ------------------------------------------------------------
- --------------------
Class A and Class C shares, respectively, during the year
ended February 28,
1999. From these fees, PSI and PIMS paid such sales charges
to affiliated
broker-dealers, which in turn paid commissions to
salespersons and incurred
other distribution costs.
PSI and PIMS have advised the Fund that for the year ended
February 28, 1999
they received approximately $481,500 and $6,600 in
contingent deferred sales
charges imposed upon redemptions by certain Class B and
Class C shareholders,
respectively.
PSI, PIFM, PIC and PIMS are indirect, wholly owned
subsidiaries of The
Prudential Insurance Company of America.
The Fund, along with other affiliated registered investment
companies (the
'Funds'), has a credit agreement (the 'Agreement') with an
unaffiliated lender.
The maximum commitment under the Agreement is $200,000,000.
Interest on any such
borrowings outstanding will be at market rates. The purpose
of the Agreement is
to serve as an alternative source of funding for capital
share redemptions. The
Fund did not borrow any amounts pursuant to the Agreement
during the year ended
February 28, 1999. 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. The
Agreement expired on
February 28, 1999 and has been extended through March 12,
1999 under the same
terms.
As of March 11, 1999, the Funds entered into a syndicated
credit agreement (SCA)
with an unaffiliated lender. The maximum commitment under
the SCA is $1 billion.
A commitment fee is paid quarterly at an annual rate of .065
of 1% on the unused
portion of the credit facility. The SCA expires on March 10,
2000.
- ------------------------------------------------------------
Note 3. Other Transactions With Affiliates
Prudential Mutual Fund Services LLC ('PMFS'), a wholly owned
subsidiary of PIFM,
serves as the Fund's transfer agent. During the year ended
February 28, 1999,
the Fund incurred fees of approximately $1,835,200 for the
services of PMFS. As
of February 28, 1999, approximately $188,200 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 nonaffiliates.
- ------------------------------------------------------------
Note 4. Portfolio Securities
Purchases and sales of investment securities, other than
short-term investments,
for the year ended February 28, 1999, were $1,337,638,544
and $1,301,197,911,
respectively.
The federal income tax basis of the Fund's investments at
February 28, 1999 was
substantially the same as for financial reporting purposes
and, accordingly, net
unrealized appreciation for federal income tax purposes was
$3,820,866 (gross
unrealized appreciation-$20,833,847; gross unrealized
depreciation-$17,012,981).
The Fund had a capital loss carryforward as of February 28,
1999 of
approximately $105,956,000 of which $17,809,000 expires in
2001, $2,920,000
expires in 2002, $66,560,000 expires in 2003, $717,000
expires in 2004 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.
The average balance of dollar rolls outstanding during the
year ended February
28, 1999 was approximately $11,957,000. The amount of dollar
rolls outstanding
at February 28, 1998 was $51,862,674 (principal
$51,700,000), which was 3.4% of
total assets.
- ------------------------------------------------------------
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, 1999, the
Fund had a 19.61% undivided interest in the repurchase
agreements in the joint
account. This undivided interest represented $142,353,000 in
principal amount.
As of such date, the repurchase agreements in the joint
account and the value of
the collateral therefor were as follows:
Bear, Stearns & Co., Inc., 4.76%, in the principal amount of
$210,000,000,
repurchase price $210,083,300, due 3/1/99. The value of the
collateral including
accrued interest was $215,525,470.
CIBC Oppenheimer Corp., 4.72%, in the principal amount of
$95,815,000,
repurchase price $95,852,687, due 3/1/99. The value of the
collateral including
accrued interest was $98,136,799.
Salomon Smith Barney Inc., 4.77%, in the principal amount of
$210,000,000,
repurchase price $210,083,475, due 3/1/99. The value of the
collateral including
accrued interest was $214,279,055.
Warburg Dillon Read LLC, 4.76%, in the principal amount of
$210,000,000,
repurchase price $210,083,300, due 3/1/99. The value of the
collateral including
accrued interest was $214,322,383.
- ------------------------------------------------------------
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%. Class B
shares
- ------------------------------------------------------------
- --------------------
9
<PAGE>
Notes to Financial Statements PRUDENTIAL
GOVERNMENT INCOME FUND, INC.
- ------------------------------------------------------------
- --------------------
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 front-end sales charge of 1% and a contingent
deferred sales charge of 1%
during the first 18 months. Prior to November 2, 1998, Class
C shares were 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. 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, 1999:
Shares sold........................ 11,337,948 $
103,420,990
Shares issued in connection with
the acquisition of Prudential
Mortgage Income Fund (Note 7).... 9,218,999
85,302,295
Shares issued in reinvestment of
dividends........................ 3,393,079
30,992,330
Shares reacquired.................. (18,175,930)
(166,229,454)
----------- ---------
- ----
Net increase in shares outstanding
before conversion................ 5,774,096
53,486,161
Shares issued upon conversion from
Class B.......................... 3,289,549
30,222,531
----------- ---------
- ----
Net increase in shares
outstanding...................... 9,063,645 $
83,708,692
----------- ---------
- ----
----------- ---------
- ----
Year ended February 28, 1998:
Shares sold........................ 15,454,541 $
136,602,902
Shares issued in reinvestment of
dividends........................ 3,691,357
32,742,038
Shares reacquired.................. (33,350,895)
(294,958,733)
----------- ---------
- ----
Net decrease in shares outstanding
before conversion................ (14,204,997)
(125,613,793)
Shares issued upon conversion from
Class B.......................... 6,652,848
58,526,575
----------- ---------
- ----
Net decrease in shares
outstanding...................... (7,552,149) $
(67,087,218)
----------- ---------
- ----
----------- ---------
- ----
<CAPTION>
Class B Shares Amount
- ----------------------------------- ----------- ---------
- ----
<S> <C> <C>
Year ended February 28, 1999:
Shares sold........................ 8,957,322 $
82,525,127
Shares issued in connection with
the acquisition of Prudential
Mortgage Income Fund (Note 7).... 5,348,280
49,472,834
Shares issued in reinvestment of
dividends........................ 1,197,788
10,945,704
Shares reacquired.................. (12,229,393)
(112,158,657)
----------- ---------
- ----
Net increase in shares outstanding
before conversion................ 3,273,997
30,785,008
Shares reacquired upon conversion
into Class A..................... (3,285,972)
(30,222,531)
----------- ---------
- ----
Net decrease in shares
outstanding...................... (11,975) $
562,477
----------- ---------
- ----
----------- ---------
- ----
Year ended February 28, 1998:
Shares sold........................ 3,258,103 $
29,057,734
Shares issued in reinvestment of
dividends........................ 1,549,463
13,738,189
Shares reacquired.................. (12,601,925)
(111,722,746)
----------- ---------
- ----
Net decrease in shares outstanding
before conversion................ (7,794,359)
(68,926,823)
Shares reacquired upon conversion
into Class A..................... (6,647,245)
(58,526,575)
----------- ---------
- ----
Net decrease in shares
outstanding...................... (14,441,604)
$(127,453,398)
----------- ---------
- ----
----------- ---------
- ----
<CAPTION>
Class C
- -----------------------------------
<S> <C> <C>
Year ended February 28, 1999:
Shares sold........................ 737,124 $
6,785,510
Shares issued in connection with
the acquisition of Prudential
Mortgage Income Fund (Note 7).... 157,565
1,457,390
Shares issued in reinvestment of
dividends........................ 24,242
221,821
Shares reacquired.................. (316,198)
(2,907,003)
----------- ---------
- ----
Net increase in shares
outstanding...................... 602,733 $
5,557,718
----------- ---------
- ----
----------- ---------
- ----
Year ended February 28, 1998:
Shares sold........................ 178,009 $
1,593,648
Shares issued in reinvestment of
dividends........................ 13,542
120,330
Shares reacquired.................. (170,795)
(1,515,242)
----------- ---------
- ----
Net increase in shares
outstanding...................... 20,756 $
198,736
----------- ---------
- ----
----------- ---------
- ----
</TABLE>
- ------------------------------------------------------------
- --------------------
10
<PAGE>
Notes to Financial Statements PRUDENTIAL
GOVERNMENT INCOME FUND, INC.
- ------------------------------------------------------------
- --------------------
<TABLE>
<CAPTION>
Class Z Shares Amount
- ----------------------------------- ----------- ---------
- ----
<S> <C> <C>
Year ended February 28, 1999:
Shares sold........................ 7,074,770 $
64,867,892
Shares issued in connection with
the acquisition of Prudential
Mortgage Income Fund (Note 7).... 14,932
137,972
Shares issued in reinvestment of
dividends........................ 585,585
5,342,925
Shares reacquired.................. (6,169,039)
(56,583,222)
----------- ---------
- ----
Net increase in shares
outstanding...................... 1,506,248 $
13,765,567
----------- ---------
- ----
----------- ---------
- ----
Year ended February 28, 1998:
Shares sold........................ 7,680,888 $
68,981,620
Shares issued in reinvestment of
dividends........................ 533,884
4,728,818
Shares reacquired.................. (7,221,547)
(64,479,191)
----------- ---------
- ----
Net increase in shares
outstanding...................... 993,225 $
9,231,247
----------- ---------
- ----
----------- ---------
- ----
</TABLE>
Note 7. Acquisition of Prudential Mortgage Income Fund, Inc.
On January 22, 1999, the Fund acquired all the net assets of
Prudential Mortgage
Income Fund, Inc. ('Mortgage Income') pursuant to a plan of
reorganization
approved by Mortgage Income shareholders on January 14,
1999. The acquisition
was accomplished by a tax-free exchange of the following
shares:
<TABLE>
<CAPTION>
Mortgage
Income Fund Government
Shares Income Fund
Redeemed Shares Issued Value
----------- ------------- --------
- ---
<S> <C> <C> <C>
Class A............. 5,988,465 9,218,999
$85,302,295
Class B............. 3,471,691 5,348,280
49,472,834
Class C............. 102,279 157,565
1,457,390
Class Z............. 9,669 14,932
137,972
</TABLE>
Mortgage Income net assets at that date ($136,370,491),
including $522,334 of
unrealized appreciation, were combined with those of the
Fund. The aggregate net
assets of the Fund and Mortgage Income immediately before
the acquisition were
$1,377,922,240 and $136,370,491, respectively.
- ------------------------------------------------------------
- --------------------
11
<PAGE>
Financial Highlights PRUDENTIAL
GOVERNMENT INCOME FUND, INC.
- ------------------------------------------------------------
- --------------------
<TABLE>
<CAPTION>
Class A
- ------------------------------------------------------------
Year Ended February 28/29,
- ------------------------------------------------------------
1999 1998 1997 1996 1995
- -------- -------- -------- -------- --------
<S>
<C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of
year........................... $ 9.05 $ 8.76
$ 9.04 $ 8.59 $ 9.13
- -------- -------- -------- -------- --------
Income from investment operations
Net investment
income........................................ 0.55
0.58 0.60 0.60 0.59
Net realized and unrealized gain (loss) on investment
transactions..............................................
(0.07) 0.29 (0.28) 0.45 (0.54)
- -------- -------- -------- -------- --------
Total from investment
operations.......................... 0.48 0.87
0.32 1.05 0.05
- -------- -------- -------- -------- --------
Less distributions
Dividends from net investment
income......................... (0.55) (0.58)
(0.60) (0.60) (0.59)
- -------- -------- -------- -------- --------
Net asset value, end of
year................................. $ 8.98 $
9.05 $ 8.76 $ 9.04 $ 8.59
- -------- -------- -------- -------- --------
- -------- -------- -------- -------- --------
TOTAL
RETURN(a):.............................................
5.40% 10.26% 3.70% 12.41% .83%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year
(000)................................ $895,039
$819,536 $860,319 $945,038 $871,145
Average net assets
(000)..................................... $836,143
$842,431 $884,862 $909,169 $ 95,560
Ratios to average net assets:
Expenses, including distribution
fees..................... 0.84% 0.86%
0.90% 0.91% 0.98%
Expenses, excluding distribution
fees..................... 0.68% 0.71%
0.75% 0.76% 0.83%
Net investment
income..................................... 6.05%
6.52% 6.78% 6.65% 7.45%
For Class A, B, C and Z shares:
Portfolio turnover
rate................................... 106%
88% 107% 123% 206%
</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.
- ------------------------------------------------------------
- --------------------
See Notes to Financial Statements. 12
<PAGE>
Financial Highlights PRUDENTIAL
GOVERNMENT INCOME FUND, INC.
- ------------------------------------------------------------
- --------------------
<TABLE>
<CAPTION>
Class B
- ------------------------------------------------------------
- --
Year Ended February 28/29,
- ------------------------------------------------------------
- --
1999 1998 1997 1996 1995
- -------- -------- -------- -------- --------
- --
<S>
<C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of
year........................... $ 9.05 $ 8.77
$ 9.04 $ 8.60 $ 9.13
- -------- -------- -------- -------- --------
- --
Income from investment operations
Net investment
income........................................ 0.49
0.52 0.54 0.54 0.53
Net realized and unrealized gain (loss) on investment
transactions..............................................
(0.06) 0.28 (0.27) 0.44 (0.53)
- -------- -------- -------- -------- --------
- --
Total from investment
operations.......................... 0.43 0.80
0.27 0.98 --
- -------- -------- -------- -------- --------
- --
Less distributions
Dividends from net investment
income......................... (0.49) (0.52)
(0.54) (0.54) (0.53)
- -------- -------- -------- -------- --------
- --
Net asset value, end of
year................................. $ 8.99 $
9.05 $ 8.77 $ 9.04 $ 8.60
- -------- -------- -------- -------- --------
- --
- -------- -------- -------- -------- --------
- --
TOTAL
RETURN(a):.............................................
4.83% 9.40% 3.12% 11.54% .24%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year
(000)................................ $343,425
$346,059 $461,988 $641,946 $ 705,732
Average net assets
(000)..................................... $322,626
$385,145 $543,796 $647,515 $1,735,413
Ratios to average net assets:
Expenses, including distribution
fees..................... 1.50% 1.53%
1.57% 1.58% 1.66%
Expenses, excluding distribution
fees..................... 0.68% 0.71%
0.75% 0.76% 0.80%
Net investment
income..................................... 5.39%
5.85% 6.11% 5.99% 6.17%
</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.
- ------------------------------------------------------------
- --------------------
See Notes to Financial Statements. 13
<PAGE>
Financial Highlights PRUDENTIAL
GOVERNMENT INCOME FUND, INC.
- ------------------------------------------------------------
- --------------------
<TABLE>
<CAPTION>
Class C
- --------------------------------------------------------
August 1,
Year Ended 1994(c)
February 28/29, Through
- --------------------------------------- February 28,
1999 1998 1997 1996 1995
- ------ ------ ------ ------ ------------
<S>
<C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of
period......................... $ 9.05 $ 8.77 $
9.04 $ 8.60 $ 8.69
- ------ ------ ------ ------ -----
Income from investment operations
Net investment
income........................................ 0.50
0.53 0.54 0.54 0.31
Net realized and unrealized gain (loss) on investment
transactions..............................................
(0.06) 0.28 (0.27) 0.44 (0.09)
- ------ ------ ------ ------ -----
Total from investment
operations.......................... 0.44 0.81
0.27 0.98 0.22
- ------ ------ ------ ------ -----
Less distributions
Dividends from net investment
income......................... (0.50) (0.53)
(0.54) (0.54) (0.31)
- ------ ------ ------ ------ -----
Net asset value, end of
period............................... $ 8.99 $ 9.05
$ 8.77 $ 9.04 $ 8.60
- ------ ------ ------ ------ -----
- ------ ------ ------ ------ -----
TOTAL
RETURN(a):.............................................
4.91% 9.48% 3.20% 11.63% 2.75%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(000).............................. $8,236 $2,840
$2,569 $1,799 $ 204
Average net assets
(000)..................................... $4,878
$2,523 $2,440 $ 765 $ 111
Ratios to average net assets:
Expenses, including distribution
fees..................... 1.43% 1.46% 1.50%
1.51% 1.63%(b)
Expenses, excluding distribution
fees..................... 0.68% 0.71% 0.75%
0.76% 0.88%(b)
Net investment
income..................................... 5.50%
5.92% 6.19% 5.99% 6.69%(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.
- ------------------------------------------------------------
- --------------------
See Notes to Financial Statements. 14
<PAGE>
Financial Highlights PRUDENTIAL
GOVERNMENT INCOME FUND, INC.
- ------------------------------------------------------------
- --------------------
<TABLE>
<CAPTION>
Class Z
- ------------------------------------
March 4,
Year Ended February 1996(c)
28, Through
- ------------------- February 28,
1999 1998 1997
- ------- ------- ------------
<S>
<C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of
period......................... $ 9.04 $ 8.76
$ 9.13
- ------- ------- ------
Income from investment operations
Net investment
income........................................ 0.57
0.59 0.61
Net realized and unrealized gain (loss) on investment
transactions..............................................
(0.07) 0.28 (0.37)
- ------- ------- ------
Total from investment
operations.......................... 0.50 0.87
0.24
- ------- ------- ------
Less distributions
Dividends from net investment
income......................... (0.57) (0.59)
(0.61)
- ------- ------- ------
Net asset value, end of
period............................... $ 8.97 $ 9.04
$ 8.76
- ------- ------- ------
- ------- ------- ------
TOTAL
RETURN(a):.............................................
5.58% 10.30% 3.16%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(000).............................. $97,629 $84,733
$ 73,411
Average net assets
(000)..................................... $86,892
$71,425 $ 39,551
Ratios to average net assets:
Expenses, including distribution
fees..................... 0.68% 0.71%
0.75%(b)
Expenses, excluding distribution
fees..................... 0.68% 0.71%
0.75%(b)
Net investment
income..................................... 6.22%
6.67% 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 Z shares.
- ------------------------------------------------------------
- --------------------
See Notes to Financial Statements. 15
<PAGE>
Report of Independent Accountants PRUDENTIAL
GOVERNMENT INCOME FUND, INC.
- ------------------------------------------------------------
- --------------------
To the Shareholders and Board of Directors of
Prudential Government Income Fund, Inc.
In our opinion, the accompanying statement of assets and
liabilities, including
the portfolio of investments, and the related statements of
operations and of
changes in net assets and the financial highlights present
fairly, in all
material respects, the financial position of Prudential
Government Income Fund,
Inc. (the 'Fund') at February 28, 1999, the results of its
operations for the
year then ended and the changes in its net assets and the
financial highlights
for each of the two years in the period then ended, in
conformity with generally
accepted accounting principles. These financial statements
and financial
highlights (hereafter referred to as 'financial statements')
are the
responsibility of the Fund's management; our responsibility
is to express an
opinion on these financial statements based on our audits.
We conducted our
audits of these financial statements in accordance with
generally accepted
auditing standards which require that we plan and perform
the audit to obtain
reasonable assurance about whether the financial statements
are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting
the amounts and disclosures in the financial statements,
assessing the
accounting principles used and significant estimates made by
management, and
evaluating the overall financial statement presentation. We
believe that our
audits, which included confirmation of securities at
February 28, 1999 by
correspondence with the custodian and brokers, provide a
reasonable basis for
the opinion expressed above. The accompanying financial
highlights for each of
the three periods in the period ended February 28, 1997 were
audited by other
independent accountants, whose opinion dated April 11, 1997
was unqualified.
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, New York
April 14, 1999
- ------------------------------------------------------------
- --------------------
16
<PAGE>
Important Notice for Certain Shareholders PRUDENTIAL
GOVERNMENT INCOME 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 34% 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.
- ------------------------------------------------------------
- --------------------
17
<PAGE>
Getting The Most From Your Prudential Mutual Fund.
Some mutual fund shareholders won't 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, 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 perfor-mance 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.
<PAGE>
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.
<PAGE>
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 don't
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: 1/100th of 1%. For example, one-half of one
percent
is 50 basis points.
Collateralized Mortgage Obligations (CMOs): Mortgage-backed
bonds
that separate mortgage pools into different maturity
classes,
called tranches. 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 other
securities. The rate of return of these financial
instruments
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 member banks.
Federal Funds Rate: The interest rate charged by one bank to
another on overnight loans.
Futures Contract: An agreement to purchase or sell a
specific
amount of a commodity or financial instrument at a set price
at a specified date in the future.
Leverage: The use of borrowed assets to enhance return. The
expectation is that the interest rate charged on borrowed
funds 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
product) can be bought or sold (converted into cash) in the
financial markets.
Price/Earnings Ratio: The price of a share of stock divided
by
the earnings per share for a 12-month period.
Option: An agreement to purchase or sell something, such as
shares of stock, by a certain time for a specified price. An
option need not be exercised.
Spread: The difference between two values; often used to
describe
the difference between "bid" and "asked" prices of a
security,
or between the yields of two similar maturity bonds.
Yankee Bond: A bond sold by a foreign company or government
in
the U.S. market and denominated in U.S. dollars.
<PAGE>
Prudential Government Income Fund, Inc.
Lehman Brothers Government Bond Index
Comparing A $10,000 Investment.
Prudential Government Income Fund, Inc. vs.
the Lehman Brothers Government Bond Index.
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. The boxes on
top of the graphs
are designed to give you an idea of how much the Fund's
returns can fluctuate
from year to year by measuring the best and worst calendar
years in terms of
total annual return since inception of each share class.
These graphs compare a $10,000 investment in the Prudential
Government Income
Fund, Inc. (Class A, B, C, and Z shares) with a similar
investment in the
Lehman Brothers Government Bond Index (the Index) by
portraying the account
values at the commencement of operations of Class A, C, and
Z shares, and at
the beginning of 10 years for Class B shares, and at the end
of the fiscal
year (February 28), as measured on a quarterly basis,
beginning in 1990 for
Class A shares, 1989 for Class B shares, 1994 for Class C
shares, and 1996 for
Class Z shares. For purposes of the graphs, and unless
otherwise indicated, it
has been assumed that (a) the maximum applicable front-end
sales charge was
deducted from the initial $10,000 investment in Class A and
Class C shares;
(b) the maximum applicable contingent deferred sales charges
were deducted
from the value of the investment in Class B and Class C
shares, assuming full
redemption on February 28, 1999; (c) all recurring fees
(including management
fees) were deducted; and (d) all dividends and distributions
were reinvested.
Class B shares will automatically convert to Class A shares,
on a quarterly
basis, approximately seven years after purchase. This
conversion feature is
not reflected in the graphs. Class Z shares are not subject
to a sales charge
or distribution fee.
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 an unmanaged index. The
total return includes
the reinvestment of all dividends, but does not reflect the
payment of
transaction costs and advisory fees associated with an
investment in the Fund.
The Index is not the only index that may be used to
characterize performance
f U.S. government bond funds. Other indexes may portray
different comparative
performance. Investors cannot invest directly in an index.
These graphs are furnished to you in accordance with SEC
regulations.
Class A
Best Year: 1995 19.81%
Worst Year: 1994 -4.17%
Average Annual Total
Returns - Class A
With Sales Load
7.22% Since Inception
5.57% for 5 Years
1.19% for 1 Year
Without Sales Load
7.70% Since Inception
6.44% for 5 Years
5.40% for 1 Year
Class B
Best Year: 1995 19.10%
Worst Year: 1990 -4.76%
Average Annual Total
Returns - Class B
With Sales Load
7.58% Since Inception
7.30% for 10 Years
5.58% for 5 Years
- -0.17% for 1 Year
Without Sales Load
7.58% Since Inception
7.30% for 10 Years
5.74% for 5 Years
4.83% for 1 Year
Class C
Best Year: 1995 19.11%
Worst Year: 1998 0.89%
Average Annual Total
Returns - Class C
With Sales Load
6.71% Since Inception
2.86% for 1 Year
Without Sales Load
6.94% Since Inception
4.91% for 1 Year
Class Z
Average Annual Total
Returns - Class Z
6.31% Since Inception
5.58% for 1 Year
<PAGE>
Prudential Mutual Funds
Gateway Center Three
100 Mulberry Street
Newark, NJ 07102-4077
(800) 225-1852
http://www.prudential.com
Directors
Edward D. Beach
Eugene C. Dorsey
Delayne Dedrick Gold
Robert F. Gunia
Thomas T. Mooney
Thomas H. O'Brien
Richard A. Redeker
Nancy H. Teeters
Louis A. Weil, III
Officers
Robert F. Gunia, President
Grace C. Torres, Treasurer
Stephen M. Ungerman, Assistant Treasurer
Deborah A. Docs, Secretary
David F. Connor, Assistant Secretary
Manager
Prudential Investments Fund Management LLC
Gateway Center Three
100 Mulberry Street
Newark, NJ 07102-4077
Investment Adviser
The Prudential Investment Corporation
Prudential Plaza
Newark, NJ 07102-3777
Distributor
Prudential Investment Management Services LLC
Gateway Center Three
100 Mulberry Street
Newark, NJ 07102-4077
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 Accountants
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, NY 10036
Legal Counsel
Swidler Berlin Shereff Friedman, 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
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