ANNUAL REPORT FEBRUARY 29, 2000
Prudential
Government Income Fund, Inc.
Fund Type Government securities
Objective High current return
(GRAPHIC)
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.
(LOGO)
<PAGE>
Build on the Rock
Investment Goals and Style
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. The guarantee on U.S.
government securities applies only to the
underlying securities of the Fund's portfolio and
not to the value of the Fund's shares. 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.
Contents
1 Message From the Fund's President
2 Performance Review
2 Portfolio Composition
3 Performance at a Glance
4 Five Largest Issuers
8 Financial Statements
<PAGE>
www.prudential.com (800) 225-1852
Message From the Fund's President As of April 17, 2000
(PHOTO)
Dear Shareholder
Prudential Government Income Fund's Class A shares
posted a negative return of 0.15% during its fiscal
year that ended February 29, 2000. Its benchmark
Lipper Average returned a negative 0.33%. Both
ended the review period in negative
territory as rising interest rates resulted in
higher yields and lower prices for many U.S. fixed-
income instruments. After the initial sales charge,
the Series' Class A shares posted a negative return
of 4.14%.
Asset allocation for the long run
When an asset class performs poorly, it's easy to
lose sight of why you
invested in it in the first place. There's often a
nagging temptation to jettison lackluster
investments and consolidate your portfolio in an
asset class that is currently doing well. For most
people, however, that would be a mistake. One of
the main reasons for diversifying among different
asset classes is to reduce risk. A pure stock
portfolio, for example, would leave you exposed to
the volatility of the equity market. Adding bond
and money market investments to the mix may help to
reduce the volatility of a pure stock portfolio by
sacrificing higher returns during good times for
potential protection when stocks "head south."
There is no easy method to help you decide on the
right level of diversification. The key is to
understand your overall investment strategy,
including how you really feel about risk. If
diversification seemed appropriate when you first
designed your portfolio, chances are it still is.
The acid test is what diversification can do for
you over the life of your investment program.
Thank you for your continued confidence in
Prudential mutual funds.
Sincerely,
John R. Strangfeld
President
Prudential Government Income Fund, Inc.
1
<PAGE>
Prudential Government Income Fund, Inc.
Performance Review
(PHOTO)
Michael Lillard, Team Leader of the U.S. Liquidity Sector Team
U.S. bond markets faced difficult year
U.S. bond markets had to contend with two
formidable challenges during our 12-month review
period: a U.S. economy that was growing much faster
than expected and a Federal Reserve committed to
acting preemptively to control inflation. Four
short-term interest-rate increases by the Fed drove
yields higher on bonds of all maturities.
However, yields on longer-dated U.S. Treasury
securities fell considerably (and their prices
rose) during the first two months of 2000. This
occurred primarily in response to the U.S. Treasury
Department's recently announced buyback program.
While the Fund's Treasury holdings were helped by
this turn of events, its Class A, B, and C shares
still posted small negative returns for the full
fiscal year that were roughly in line with its
benchmark Lipper Average.
Fed tried to curb U.S. economic growth
Although the review period began with relatively
modest expectations for U.S. economic growth and
corporate profits, both underwent significant
upward revision as the first half of 1999
progressed. At the same time, Asia began to show
signs of meaningful recovery from its economic
malaise. Furthermore, energy prices began a sharp
advance, fueled by increased demand from Asia and
production cuts by the Organization of Petroleum
Exporting Countries (OPEC). Amid these signs of
accelerating economic
Portfolio Composition
Expressed as a percentage of total investments
as of 2/29/00
31.33% Mortgages
28.33 Treasuries
17.21 Government Agency
5.60 Corporates
0.73 Asset-Backed
0.57 Other
16.23 Cash Equivalents
2
<PAGE>
www.prudential.com (800) 225-1852
Performance at a Glance
<TABLE>
Cumulative Total Returns1 As of 2/29/00
<CAPTION>
One Five Ten Since
Year Years Years Inception2
<S> <C> <C> <C> <C>
Class A -0.15% 35.28% 97.25% 96.11%
Class B -0.83 30.80 83.49 172.77 (170.17)
Class C -0.76 31.31 N/A 34.93
Class Z 0.09 N/A N/A 20.23
Lipper General U.S.
Gov't Fund Avg.3 -0.33 33.24 94.55 ***
</TABLE>
<TABLE>
Average Annual Total Returns1 As of 3/31/00
<CAPTION>
One Five Ten Since
Year Years Years Inception2
<S> <C> <C> <C> <C>
Class A -3.10% 5.55% 7.19% 6.56%
Class B -4.64 5.55 6.42 7.05 (6.97)
Class C -1.57 5.58 N/A 5.50
Class Z 1.18 N/A N/A 4.99
</TABLE>
<TABLE>
Distributions and Yields As of 2/29/00
<CAPTION>
Total Distributions 30-Day
Paid for 12 Months SEC Yield
<S> <C> <C>
Class A $0.55 5.91%
Class B $0.50 5.59
Class C $0.51 5.61
Class Z $0.57 6.41
</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
LLC 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. Class B shares are subject to a declining
contingent deferred sales charge (CDSC) of 5%, 4%,
3%, 2%, 1%, and 1% for six years. 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 Z shares are not subject to a sales charge or
distribution and service (12b-1) fees. Without
waiver of management fees and/or expense
subsidization, the Fund's cumulative and average
annual total returns would have been lower, as
indicated in parentheses ( ).
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 Fund
category. General U.S. Government funds invest at
least 65% of their assets in U.S. government agency
issues.
***Lipper Since Inception returns are 95.12% for
Class A, 192.73% for Class B, 36.67% for Class C,
and 19.66% for Class Z, based on all funds in each
share class.
3
<PAGE>
Prudential Government Income Fund, Inc.
Performance Review
activity, inflation remained under control.
However, Fed officials were still concerned about
tight labor markets and excessive speculation in
the stock market.
At the end of June 1999, the Fed implemented a
0.25% increase in the
federal funds rate (the rate U.S. banks charge each
other for overnight loans). A second 0.25% increase
followed in August 1999 and a third in November
1999, the last two accompanied by 0.25% boosts in
the discount rate (the rate banks pay to borrow
money from the Fed).
On February 2, 2000, the Fed raised the federal
funds rate to 5.75% and the discount rate to
5.25%--both 0.25% increases. As the review period
drew to a close, the question on most investors'
minds was not whether there would be more rate
hikes in the first half of 2000, but how many there
would be.
Buyback plan stirred U.S. Treasury market
Also on February 2, 2000, the U.S. Treasury
Department officially announced its plans to buy
back some of its securities. The program was
prompted by the federal budget surpluses generated
during the past several fiscal years, which have
reduced the need for government borrowing. Treasury
officials indicated that they hoped to buy back up
to $30 billion in Treasury securities by the end of
2000. It was also stated that issuance of new five-
and 10-year Treasury notes would be reduced, as would
issuance of 30-year Treasury bonds. The prospect of decreased
supply and increased demand for Treasuries pushed
yields lower (and prices higher), especially at the
longer end of the market. The 30-year bond yield
declined from 6.74% on January 18, 2000, to 6.14%
at the end of February 2000.
Five Largest Issuers
Expressed as a percentage of net assets
as of 2/29/00
34.88% U.S. Treasury Obligations
30.90 Federal National Mortgage Assoc.
11.84 Gov't National Mortgage Assoc.
9.03 Small Business Administration
4.88 New Jersey Economic Dev Auth.
4
<PAGE>
www.prudential.com (800) 225-1852
The Treasury program had two other effects. In
pushing down long-term Treasury yields at a time
when short-term yields were rising, the buyback
program caused an inversion of the Treasury yield
curve (a yield curve is a graph that depicts yields
on bonds from the shortest to the longest
maturities.) Normally, investments with longer
durations command higher yields. However, during
the period, yields for 30-year bonds dipped below
those of two- and 10-year notes. In addition, the
strong rally in the Treasury sector caused the
spread, or difference in yields, to widen between
Treasuries and various types of non-Treasury
securities. As a result, mortgage-backed securities
and government agency securities--two of the Fund's
largest asset classes--underperformed Treasuries.
We bought mortgage-backed securities and
Treasuries, and sold government agency securities
There were two main parts to our strategy. First,
we increased mortgage-backed securities from 26% of
the Fund's net assets at the beginning of our
fiscal year to 39% at the end. While mortgage-
backed securities underperformed during much of the
period, we felt their prices would be supported by
a diminishing supply of these securities due to the
decrease in mortgage refinancing activity that
typically accompanies higher interest rates. A
decline in the number of newly issued mortgage-
backed securities, combined with ongoing healthy
investor demand, could be expected to help their
performance. We also reasoned that, as securities
with intermediate-term maturities, the relative
performance of mortgage-backed securities should be
less affected by the Treasury buyback plan, which
is expected to be felt most at the longer end of
the market.
Second, we increased Treasuries from 30% of the
Fund's net assets as our fiscal year began to 35%
at the close of the year. The Fund's holdings
consist primarily of two categories of
Treasuries--older, or off-the-run, securities with
maturities of 15 to 23 years, and older higher-
coupon securities that were issued with an option
for the Treasury to retire them prior to maturity.
We believe both types will be targeted by the
Treasury buyback program.
5
<PAGE>
Prudential Government Income Fund, Inc.
Performance Review
We decreased government agency securities to
21% of the Fund's net assets as of February 29,
2000, from 28% on February 28, 1999. These
securities were sold over the period to enable the
increases in Treasuries and mortgage-backed
securities.
Looking ahead
Short rates seen rising, but longer rates could
stabilize
We expect that the Fed will continue its efforts to
moderate U.S. economic growth. At some point very
soon, though, the delayed effects of higher short-
term rates may kick in, and the economic expansion
will begin to slow.
At the intermediate and longer end of the U.S.
government bond market, we expect yields to
stabilize around current levels. The Treasury
buyback program should continue to support prices
of long-term and, to a lesser extent, intermediate-
term Treasuries. All of this adds up to a
relatively flat yield curve, with long- and short-
term rates closer to each another. If the Fed can
achieve its goal of slowing economic growth without
causing a recession, the environment for bonds
should improve.
6
<PAGE>
Prudential Government Income Fund, Inc.
Financial
Statements
<PAGE>
Prudential Government Income Fund, Inc.
Portfolio of Investments as of February 29, 2000
<TABLE>
<CAPTION>
Principal
Amount
(000) Description Value (Note 1)
- -----------------------------------------------------------------------------------------
LONG-TERM INVESTMENTS 103.2%
- -------------------------------------------------------------------------------------
U.S. Government Agency Mortgage Pass-Throughs 38.6%
<C> <S> <C> <C>
Federal Home Loan Mortgage Corp.,
$ 9,703 5.75%, 4/15/10 $ 9,430,180
386(c) 7.50%, 6/01/24 381
4,000 8.00%, 1/01/22 - 5/01/23 4,036,879
1,838 8.50%, 12/01/10 - 3/01/20 1,873,817
4,043 9.00%, 1/01/20 4,164,442
946 11.50%, 10/01/19 1,027,414
Federal National Mortgage Assoc.,
94,500(a) 6.00%, 3/01/15 - 3/01/30 87,999,005
87,427(a) 7.00%, 7/01/03 - 3/01/30 83,983,594
31,059 7.125%, 2/01/07 30,408,331
66,394(a) 7.50%, 12/01/06 - 3/01/30 65,693,260
7(b) 8.00%, 10/01/24 7,270
2,310 8.50%, 6/01/17 - 3/01/25 2,370,307
3,101 9.00%, 8/01/24 - 4/01/25 3,208,802
635 9.50%, 10/01/19 - 3/01/25 668,805
Government National Mortgage Assoc.,
83,187 7.00%, 2/15/09 - 3/01/30 79,991,933
40,868(b) 7.50%, 5/15/02 - 3/01/30 40,341,417
601 8.00%, 7/15/16 - 3/15/24 606,666
7,705 9.50%, 10/15/09 - 12/15/17 8,167,663
Government National Mortgage Assoc. II,
1,275 9.50%, 5/20/18 - 7/20/21 1,337,408
--------------
Total U.S. Government Agency Mortgage
Pass-Throughs
(cost $423,849,686) 425,317,574
- -------------------------------------------------------------------------------------
U.S. Government Obligations 34.9%
United States Treasury Bonds,
10,000 7.125%, 2/15/23 10,857,800
20,000(e) 8.125%, 8/15/19 23,659,400
30,400 8.125%, 8/15/21 36,332,864
20,000(b) 8.75%, 5/15/17 24,634,400
12,000 8.75%, 8/15/20 15,105,000
42,800(b) 10.00%, 5/15/10 48,584,848
3,000(b) 12.00%, 8/15/13 3,986,730
</TABLE>
8 See Notes to Financial Statements
<PAGE>
Prudential Government Income Fund, Inc.
Portfolio of Investments as of February 29, 2000 Cont'd.
<TABLE>
<CAPTION>
Principal
Amount
(000) Description Value (Note 1)
- -----------------------------------------------------------------------------------------
<C> <S> <C> <C>
United States Treasury Bonds,
$ 6,300(b) 12.50%, 8/15/14 $ 8,775,711
68,400(b) 12.75%, 11/15/10 87,124,500
United States Treasury Notes,
29,750(d) 6.50%, 2/15/10 29,926,715
44,000(b) 11.75%, 2/15/10 52,902,960
United States Treasury Strips,
6,100 Zero Coupon, 11/15/09 3,219,092
81,500 Zero Coupon, 11/15/15 30,116,695
27,000 Zero Coupon, 5/15/17 9,148,410
--------------
Total U.S. Government Obligations
(cost $413,860,814) 384,375,125
- -------------------------------------------------------------------------------------
U.S. Government Agency Securities 20.0%
25,000(b) Federal Home Loan Bank,
5.75%, 10/15/07 24,562,500
Federal National Mortgage Assoc., M.T.N.,
13,500 5.875%, 4/23/04 12,841,875
40,000(b) 6.06%, 5/21/03 38,612,400
15,000 6.30%, 9/25/02 14,688,300
Small Business Administration,
15,414 Ser. 1995-20B, 8.15%, 2/01/15 15,775,241
19,707 Ser. 1995-20L, 6.45%, 12/01/15 18,510,416
28,363 Ser. 1996-20H, 7.25%, 8/01/16 27,733,810
17,145 Ser. 1996-20K, 6.95%, 11/01/16 16,507,287
8,648 Ser. 1997-20A, 7.15%, 1/01/17 8,409,588
13,827 Ser. 1998-20I, 6.00%, 9/01/18 12,564,587
Tennessee Valley Authority,
600 Ser. 1993-D, 7.25%, 7/15/43 565,536
30,000(b) Ser. 1995-B, 6.235%, 7/15/45 29,751,000
--------------
Total U.S. Government Agency Securities
(cost $230,427,757) 220,522,540
</TABLE>
See Notes to Financial Statements 9
<PAGE>
Prudential Government Income Fund, Inc.
Portfolio of Investments as of February 29, 2000 Cont'd.
<TABLE>
<CAPTION>
Principal
Amount
(000) Description Value (Note 1)
- -----------------------------------------------------------------------------------------
Corporate Bonds 6.9%
<C> <S> <C> <C>
$ 22,000(b) Merck and Co.,
5.76%, 5/03/37, M.T.N. $ 22,000,000
55,000(d) New Jersey Economic Development Authority,
Ser. A, 7.425%, 2/15/29 53,728,125
--------------
Total Corporate Bonds (cost $79,214,850) 75,728,125
- -------------------------------------------------------------------------------------
Collateralized Mortgage Obligation 0.7%
4,564 Resolution Trust Corp.,
Ser. 1994-1, Class B2,
7.75%, 9/25/29 4,385,390
997 Ryland Mortgage Participation Securities,
Ser. 1993-3, Class A3,
7.061%, 9/25/24, (ARM) 946,701
2,207 Structured Asset Securities Corp.,
Ser. 1995-C1, Class C,
7.375%, 9/25/24 2,200,985
--------------
Total Collateralized Mortgage Obligation
(cost $7,379,232) 7,533,076
- -------------------------------------------------------------------------------------
U.S. Government Agency - Stripped Security 1.2%
5,000 Financing Corp.,
Zero Coupon, 3/07/04 3,767,800
19,543 Israel AID,
Zero Coupon, 8/15/09 10,059,404
--------------
Total U.S. Government Agency-Stripped Security
(cost $13,863,091) 13,827,204
- -------------------------------------------------------------------------------------
Asset Backed Securities 0.9%
10,000 Aesop Funding II LLC,
Ser. 1997-1, Class A2,
6.40%, 10/20/03
(cost $9,998,438) 9,797,118
--------------
Total Long-Term Investments (cost $1,178,593,868) 1,137,100,762
</TABLE>
10 See Notes to Financial Statements
<PAGE>
Prudential Government Income Fund, Inc.
Portfolio of Investments as of February 29, 2000 Cont'd.
<TABLE>
<CAPTION>
Principal
Amount
(000) Description Value (Note 1)
- -----------------------------------------------------------------------------------------
SHORT-TERM INVESTMENTS 20.0%
- -------------------------------------------------------------------------------------
Corporate Bonds 10.2%
<C> <S> <C> <C>
$ 18,000 Invensys PLC,
5.90%, 3/01/00 $ 18,000,000
44,000 SBC Communications, Inc.,
5.80%, 3/13/00 43,914,933
13,700 Transamerica Finance Corp.,
5.80%, 3/08/00 13,684,550
8,931 Triple A One Funding Corp.,
5.82%, 3/09/00 8,919,449
28,200 5.82%, 3/10/00 28,158,969
--------------
Total Corporate Bonds (cost $112,677,901) 112,677,901
- -------------------------------------------------------------------------------------
REPURCHASE AGREEMENT 9.8%
107,913 Joint Repurchase Agreement Account,
5.66%, 3/01/00
(cost $107,913,000; Note 5) 107,913,000
--------------
Total Short-Term Investments (cost $220,590,901) 220,590,901
Total Investments 123.2% (cost $1,399,184,769;
Note 4) 1,357,691,663
Liabilities in excess of other assets (23.2%) (255,780,536)
--------------
Net Assets 100% $1,101,911,127
--------------
--------------
</TABLE>
- ------------------------------
AID--Agency for International Development
ARM--Adjustable Rate Mortgage
M.T.N.--Medium-Term Note
(a) Partial principal amount of $189,745,000 represents a to-be-announced
('TBA') mortgage dollar roll, see Notes 1 and 4.
(b) Partial principal amount pledged as collateral for mortgage dollar roll.
(c) Represents actual principal amount (not rounded to nearest thousand).
(d) Securities, or portion thereof, on loan, see Note 4.
(e) Partial principal amount pledged as collateral for financial future
contracts.
See Notes to Financial Statements 11
<PAGE>
Prudential Government Income Fund, Inc.
Statement of Assets and Liabilities
<TABLE>
<CAPTION>
February 29, 2000
<S> <C> <C>
- ----------------------------------------------------------------------------------------
ASSETS
Investments including repurchase agreement, at value
(cost $1,399,184,769) $ 1,357,691,663
Cash 360,790
Receivable for investments sold 153,155,594
Interest receivable 11,205,976
Receivable for Fund shares sold 659,834
Prepaid expenses and other assets 198,968
-----------------
Total assets 1,523,272,825
-----------------
LIABILITIES
Payable for investments purchased 416,097,146
Payable for Fund shares reacquired 3,120,412
Accrued expenses and other liabilities 952,208
Management fee payable 439,270
Dividends payable 397,495
Distribution fee payable 293,495
Due to broker - variation margin 61,672
-----------------
Total liabilities 421,361,698
-----------------
NET ASSETS $ 1,101,911,127
-----------------
-----------------
Net assets were comprised of:
Common stock, at par $ 1,310,526
Paid-in capital in excess of par 1,284,768,029
-----------------
1,286,078,555
Accumulated net realized loss on investments (142,627,228)
Net unrealized depreciation on investments (41,540,200)
-----------------
Net assets, February 29, 2000 $ 1,101,911,127
-----------------
-----------------
</TABLE>
12 See Notes to Financial Statements
<PAGE>
Prudential Government Income Fund, Inc.
Statement of Assets and Liabilities Cont'd.
<TABLE>
<CAPTION>
February 29, 2000
- ----------------------------------------------------------------------------------------
<S> <C> <C>
Class A:
Net asset value and redemption price per share
($806,619,622 / 95,936,576 shares of common stock
issued and outstanding) $8.41
Maximum sales charge (4% of offering price) .35
-----------------
Maximum offering price to public $8.76
-----------------
-----------------
Class B:
Net asset value, offering price and redemption price per
share
($193,393,517 / 22,985,362 shares of common stock
issued and outstanding) $8.41
-----------------
-----------------
Class C:
Net asset value and redemption price per share
($8,508,350 / 1,011,211 shares of common stock issued
and outstanding) $8.41
Sales charge (1% of offering price) .08
-----------------
Offering price to public $8.49
-----------------
-----------------
Class Z:
Net asset value, offering price and redemption price per
share
($93,389,638 / 11,119,437 shares of common stock
issued and outstanding) $8.40
-----------------
-----------------
</TABLE>
See Notes to Financial Statements 13
<PAGE>
Prudential Government Income Fund, Inc.
Statement of Operations
<TABLE>
<CAPTION>
Year Ended
February 29, 2000
<S> <C> <C>
- ----------------------------------------------------------------------------------------
NET INVESTMENT INCOME
Income
Interest $ 89,843,725
-----------------
Expenses
Management fee 6,136,364
Distribution fee--Class A 2,143,964
Distribution fee--Class B 2,168,616
Distribution fee--Class C 67,605
Transfer agent's fees and expenses 2,024,000
Reports to shareholders 115,000
Custodian's fees and expenses 86,000
Audit fee and expenses 44,000
Directors' fees and expenses 27,000
Registration fees 25,000
Insurance expense 19,000
Legal fees and expenses 10,000
Miscellaneous 678
-----------------
Total expenses 12,867,227
-----------------
Net investment income 76,976,498
-----------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Net realized loss on:
Investment transactions (34,938,279)
Financial futures contracts (1,732,583)
-----------------
(36,670,862)
-----------------
Net change in unrealized appreciation/depreciation on:
Investments (45,313,972)
Financial futures contracts (47,094)
-----------------
(45,361,066)
-----------------
Net loss on investments (82,031,928)
-----------------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $ (5,055,430)
-----------------
-----------------
</TABLE>
14 See Notes to Financial Statements
<PAGE>
Prudential Government Income Fund, Inc.
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
Year Ended
February 28/29,
--------------------------------
<S> <C> <C> <C>
2000 1999
- ---------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
Operations
Net investment income $ 76,976,498 $ 73,602,481
Net realized gain (loss) on investment
transactions (36,670,862) 23,727,086
Net change in unrealized
appreciation/depreciation on investments (45,361,066) (36,161,034)
-------------- --------------
Net increase (decrease) in net assets
resulting from operations (5,055,430) 61,168,533
-------------- --------------
Dividends from net investment income (Note
1)
Class A (54,772,627) (50,553,420)
Class B (15,174,492) (17,378,979)
Class C (531,416) (268,163)
Class Z (6,497,963) (5,401,919)
-------------- --------------
(76,976,498) (73,602,481)
-------------- --------------
Fund share transactions (net of share
conversions) (Note 6):
Net proceeds from shares subscribed 242,255,365 393,970,010
Net asset value of shares issued to
shareholders in reinvestment of
dividends 51,114,813 47,502,780
Cost of shares reacquired (453,755,385) (337,878,336)
-------------- --------------
Net increase (decrease) in net assets from
Fund share transactions (160,385,207) 103,594,454
-------------- --------------
Total increase (decrease) (242,417,135) 91,160,506
NET ASSETS
Beginning of year 1,344,328,262 1,253,167,756
-------------- --------------
End of year $1,101,911,127 $1,344,328,262
-------------- --------------
-------------- --------------
</TABLE>
See Notes to Financial Statements 15
<PAGE>
Prudential Government Income Fund, Inc.
Notes to Financial Statements
Prudential Government Income Fund, Inc., (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 high current income. The Fund will seek
to achieve this objective by investing primarily in U.S. Government Securities,
including U.S. Treasury bills, notes, bonds, strips and other debt securities
issued by the U.S. Treasury, and obligations, including mortgage-related
securities, issued or guaranteed by U.S. Government agencies or
instrumentalities.
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. Financial futures contracts and options thereon are valued
at their last sales prices as of the close of the commodities exchange or board
of trade or, if there was no sale on such day, at the mean between the most
recently quoted bid and asked prices. Should an extraordinary event, which is
likely to affect the value of a security, occur after the close of an exchange
on which a portfolio security is traded, such security will be valued at fair
value considering factors determined in good faith by the investment adviser
under procedures established under the general supervision of the Fund's 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.
16
<PAGE>
Prudential Government Income Fund, Inc.
Notes to Financial Statements Cont'd.
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.
17
<PAGE>
Prudential Government Income Fund, Inc.
Notes to Financial Statements Cont'd.
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.
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 services of PIC,
the cost of 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 has a distribution agreement with Prudential Investment
Management Services LLC ('PIMS'), which acts as the distributor of the Class A,
Class B, Class C and Class Z shares of the Fund. The Fund compensates 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.
18
<PAGE>
Prudential Government Income Fund, Inc.
Notes to Financial Statements Cont'd.
The distribution fees are accrued daily and payable monthly. No distribution or
service fees are paid to 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 .25 of 1% of the average daily net assets
of the Class A shares for the year ended February 29, 2000.
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 29,
2000.
Pursuant to the Class C Plan, the Fund compensates PIMS for its
distribution-related activities at an annual rate of up to 1% 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 29, 2000.
PIMS has advised the Fund that it received approximately $126,500 and
$41,500 in front-end sales charges resulting from sales of Class A and Class C
shares, respectively, during the year ended February 29, 2000. From these fees,
PIMS paid such sales charges to affiliated broker-dealers, which in turn paid
commissions to salespersons and incurred other distribution costs.
PIMS has advised the Fund that for the year ended February 29, 2000 it
received approximately $559,000 and $12,900 in contingent deferred sales charges
imposed upon redemptions by certain Class B and Class C shareholders,
respectively.
PIFM, PIC and PIMS are wholly owned subsidiaries of The Prudential
Insurance Company of America.
As of March 11, 1999, the Fund, along with other affiliated registered
investment companies (the 'Funds'), entered into a syndicated credit agreement
('SCA') with an unaffiliated lender. The maximum commitment under the SCA is $1
billion. Interest on any borrowings will be at market rates. For the period
3/11/99 - 3/9/00, the commitment fee on the unused portion of the credit
facility was .065 of 1%. Subsequent to March 9, 2000, the SCA was renewed with a
maximum commitment of $1 billion at a commitment fee of .080 of 1% of the unused
portion of the facility. The expiration date of the SCA is March 9, 2001. Prior
to March 11, 1999, the Funds had a credit agreement with a maximum commitment of
$200,000,000.
19
<PAGE>
Prudential Government Income Fund, Inc.
Notes to Financial Statements Cont'd.
The commitment fee was .055 of 1% on the unused portion of the credit facility.
The Fund did not borrow any amounts pursuant to either agreement during the year
ended February 29, 2000. The purpose of the credit agreements is to serve as an
alternative source of funding for capital share redemptions.
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 29, 2000,
the Fund incurred fees of approximately $2,023,200 for the services of PMFS. As
of February 29, 2000, approximately $162,400 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 29, 2000, were $823,297,537 and $859,516,205,
respectively.
During the year ended February 29, 2000, the Fund entered into financial
futures contracts. Details of open contracts at February 29, 2000 are as
follows:
<TABLE>
<CAPTION>
Value at Unrealized
Number of Expiration Value at February 29, Appreciation
Contracts Type Date Trade Date 2000 (Depreciation)
- --------- ------------------ ------------ ----------- ------------ --------------
<C> <S> <C> <C> <C> <C>
Short positions: Mar.
271 10 yr. T-Note 2000 $25,829,688 $ 25,952,485 $ (122,797)
Mar.
95 10 yr. T-Note 2000 9,173,437 9,097,734 75,703
--------------
$ (47,094)
--------------
--------------
</TABLE>
The federal income tax basis of the Fund's investments at February 29,
2000 was substantially the same as for financial reporting purposes and,
accordingly, net unrealized depreciation for federal income tax purposes was
$41,493,106 (gross unrealized appreciation-$4,261,440; gross unrealized
depreciation-$45,754,546).
The Fund had a capital loss carryforward as of February 29, 2000 of
approximately $124,629,000 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,
$17,950,000 expires in 2005, and $18,673,000 expires in 2008. Accordingly, no
20
<PAGE>
Prudential Government Income Fund, Inc.
Notes to Financial Statements Cont'd.
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 29, 2000 was approximately $30,121,000. The amount of dollar rolls
outstanding at February 29, 2000 was $179,103,191 (principal $189,745,000),
which was 11.8% of total assets.
As of February 29, 2000, the Fund had securities on loan with an aggregate
market value of $34,811,090. As of this date, the collateral held for securities
on loan was comprised of U.S. government securities with an aggregate market
value of $35,734,609.
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 29, 2000, the
Fund had a 14.18% undivided interest in the repurchase agreements in the joint
account. This undivided interest represented $107,913,000 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., 5.78%, in the principal amount of $130,000,000,
repurchase price $130,020,872, due 3/1/00. The value of the collateral including
accrued interest was $133,586,248.
Credit Suisse First Boston Corp., 5.80%, in the principal amount of
$150,000,000, repurchase price $150,024,167, due 3/1/00. The value of the
collateral including accrued interest was $155,522,342.
Deutsche Bank Securities, Inc., 5.48%, in the principal amount of
$241,170,000, repurchase price $241,206,711, due 3/1/00. The value of the
collateral including accrued interest was $245,993,670.
Warburg Dillon Read LLC, 5.55%, in the principal amount of $80,000,000,
repurchase price $80,012,333, due 3/1/00. The value of the collateral including
accrued interest was $81,604,059.
Warburg Dillon Read LLC, 5.75%, in the principal amount of $160,000,000,
repurchase price $160,025,556, due 3/1/00. The value of the collateral including
accrued interest was $163,202,757.
21
<PAGE>
Prudential Government Income Fund, Inc.
Notes to Financial Statements Cont'd.
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 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. 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 29, 2000:
Shares sold............................................... 16,424,755 $ 141,843,573
Shares issued in reinvestment of dividends................ 4,001,400 34,524,034
Shares reacquired......................................... (28,860,546) (248,688,001)
----------- -------------
Net decrease in shares outstanding before conversion...... (8,434,391) (72,320,394)
Shares issued upon conversion from Class B................ 4,701,032 40,767,586
----------- -------------
Net decrease in shares outstanding........................ (3,733,359) $ (31,552,808)
----------- -------------
----------- -------------
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......................... 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
----------- -------------
----------- -------------
<CAPTION>
Class B
- ----------------------------------------------------------
<S> <C> <C>
Year ended February 29, 2000:
Shares sold............................................... 3,881,043 $ 33,796,581
Shares issued in reinvestment of dividends................ 1,123,997 9,731,345
Shares reacquired......................................... (15,538,651) (134,608,190)
----------- -------------
Net decrease in shares outstanding before conversion...... (10,533,611) (91,080,264)
Shares reacquired upon conversion into Class A............ (4,695,615) (40,767,586)
----------- -------------
Net decrease in shares outstanding........................ (15,229,226) $(131,847,850)
----------- -------------
----------- -------------
</TABLE>
22
<PAGE>
Prudential Government Income Fund, Inc.
Notes to Financial Statements Cont'd.
<TABLE>
<CAPTION>
Class B Shares Amount
- ---------------------------------------------------------- ----------- -------------
Year ended February 28, 1999:
<S> <C> <C>
Shares sold............................................... 8,957,322 $ 82,525,127
Shares issued in connection with the acquisition of
Prudential Mortgage Income Fund......................... 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
----------- -------------
----------- -------------
<CAPTION>
Class C
- ----------------------------------------------------------
<S> <C> <C>
Year ended February 29, 2000:
Shares sold............................................... 824,481 $ 7,159,778
Shares issued in reinvestment of dividends................ 46,492 400,984
Shares reacquired......................................... (776,182) (6,687,075)
----------- -------------
Net increase in shares outstanding........................ 94,791 $ 873,687
----------- -------------
----------- -------------
Year ended February 28, 1999:
Shares sold............................................... 737,124 $ 6,785,510
Shares issued in connection with the acquisition of
Prudential Mortgage Income Fund......................... 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
----------- -------------
----------- -------------
<CAPTION>
Class Z
- ----------------------------------------------------------
<S> <C> <C>
Year ended February 29, 2000:
Shares sold............................................... 6,852,261 $ 59,455,433
Shares issued in reinvestment of dividends................ 749,774 6,458,450
Shares reacquired......................................... (7,365,536) (63,772,119)
----------- -------------
Net increase in shares outstanding........................ 236,499 $ 2,141,764
----------- -------------
----------- -------------
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......................... 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
----------- -------------
----------- -------------
</TABLE>
23
<PAGE>
Prudential Government Income Fund, Inc.
Financial Highlights
<TABLE>
<CAPTION>
Class A
-----------------
Year Ended
February 29, 2000
- ----------------------------------------------------------------------------------------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year $ 8.98
-----------------
Income from investment operations
Net investment income 0.55
Net realized and unrealized gain (loss) on investment
transactions (0.57)
-----------------
Total from investment operations (0.02)
-----------------
Less distributions
Dividends from net investment income (0.55)
-----------------
Net asset value, end of year $ 8.41
-----------------
-----------------
TOTAL RETURN(a): (0.15)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000) $ 806,620
Average net assets (000) $ 857,586
Ratios to average net assets:
Expenses, including distribution fees 0.94%
Expenses, excluding distribution fees 0.69%
Net investment income 6.39%
For Class A, B, C and Z shares:
Portfolio turnover rate 68%
</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.
24 See Notes to Financial Statements
<PAGE>
Prudential Government Income Fund, Inc.
Financial Highlights Cont'd.
<TABLE>
<CAPTION>
Class A
- -------------------------------------------------------------------------------------
Year Ended February 28/29,
- -------------------------------------------------------------------------------------
1999 1998 1997 1996
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$ 9.05 $ 8.76 $ 9.04 $ 8.59
- ---------------- ---------------- ---------------- ----------------
0.55 0.58 0.60 0.60
(0.07) 0.29 (0.28) 0.45
- ---------------- ---------------- ---------------- ----------------
0.48 0.87 0.32 1.05
- ---------------- ---------------- ---------------- ----------------
(0.55) (0.58) (0.60) (0.60)
- ---------------- ---------------- ---------------- ----------------
$ 8.98 $ 9.05 $ 8.76 $ 9.04
- ---------------- ---------------- ---------------- ----------------
- ---------------- ---------------- ---------------- ----------------
5.40% 10.26% 3.70% 12.41%
$895,039 $819,536 $860,319 $945,038
$836,143 $842,431 $884,862 $909,169
0.84% 0.86% 0.90% 0.91%
0.68% 0.71% 0.75% 0.76%
6.05% 6.52% 6.78% 6.65%
106% 88% 107% 123%
</TABLE>
See Notes to Financial Statements 25
<PAGE>
Prudential Government Income Fund, Inc.
Financial Highlights Cont'd.
<TABLE>
<CAPTION>
Class B
-----------------
Year Ended
February 29, 2000
- ----------------------------------------------------------------------------------------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $ 8.99
-----------------
Income from investment operations
Net investment income 0.50
Net realized and unrealized gain (loss) on investment
transactions (0.58)
-----------------
Total from investment operations (0.08)
-----------------
Less distributions
Dividends from net investment income (0.50)
-----------------
Net asset value, end of year $ 8.41
-----------------
-----------------
TOTAL RETURN(a): (0.83)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000) $ 193,394
Average net assets (000) $ 262,863
Ratios to average net assets:
Expenses, including distribution fees 1.52%
Expenses, excluding distribution fees 0.69%
Net investment income 5.77%
</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.
26 See Notes to Financial Statements
<PAGE>
Prudential Government Income Fund, Inc.
Financial Highlights Cont'd.
<TABLE>
<CAPTION>
Class B
- -------------------------------------------------------------------------------------
Year Ended February 28/29,
- -------------------------------------------------------------------------------------
1999 1998 1997 1996
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$ 9.05 $ 8.77 $ 9.04 $ 8.60
- ---------------- ---------------- ---------------- ---------------- ---
0.49 0.52 0.54 0.54
(0.06) 0.28 (0.27) 0.44
- ---------------- ---------------- ---------------- ---------------- ---
0.43 0.80 0.27 0.98
- ---------------- ---------------- ---------------- ---------------- ---
(0.49) (0.52) (0.54) (0.54)
- ---------------- ---------------- ---------------- ---------------- ---
$ 8.99 $ 9.05 $ 8.77 $ 9.04
- ---------------- ---------------- ---------------- ----------------
- ---------------- ---------------- ---------------- ----------------
4.83% 9.40% 3.12% 11.54%
$343,425 $346,059 $461,988 $641,946
$322,626 $385,145 $543,796 $647,515
1.50% 1.53% 1.57% 1.58%
0.68% 0.71% 0.75% 0.76%
5.39% 5.85% 6.11% 5.99%
</TABLE>
See Notes to Financial Statements 27
<PAGE>
Prudential Government Income Fund, Inc.
Financial Highlights Cont'd.
<TABLE>
<CAPTION>
Class C
-----------------
Year Ended
February 29, 2000
- ----------------------------------------------------------------------------------------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year $ 8.99
-----------------
Income from investment operations
Net investment income 0.51
Net realized and unrealized gain (loss) on investment
transactions (0.58)
-----------------
Total from investment operations (0.07)
-----------------
Less distributions
Dividends from net investment income (0.51)
-----------------
Net asset value, end of year $ 8.41
-----------------
-----------------
TOTAL RETURN(a): (0.76)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000) $ 8,508
Average net assets (000) $ 9,014
Ratios to average net assets:
Expenses, including distribution fees 1.44%
Expenses, excluding distribution fees 0.69%
Net investment income 5.90%
</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.
28 See Notes to Financial Statements
<PAGE>
Prudential Government Income Fund, Inc.
Financial Highlights Cont'd.
<TABLE>
<CAPTION>
Class C
- -------------------------------------------------------------------------------------
Year Ended February 28/29,
- -------------------------------------------------------------------------------------
1999 1998 1997 1996
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$ 9.05 $ 8.77 $ 9.04 $ 8.60
- ---------------- ---------------- ---------------- ----------------
0.50 0.53 0.54 0.54
(0.06) 0.28 (0.27) 0.44
- ---------------- ---------------- ---------------- ----------------
0.44 0.81 0.27 0.98
- ---------------- ---------------- ---------------- ----------------
(0.50) (0.53) (0.54) (0.54)
- ---------------- ---------------- ---------------- ----------------
$ 8.99 $ 9.05 $ 8.77 $ 9.04
- ---------------- ---------------- ---------------- ----------------
- ---------------- ---------------- ---------------- ----------------
4.91% 9.48% 3.20% 11.63%
$ 8,236 $ 2,840 $ 2,569 $ 1,799
$ 4,878 $ 2,523 $ 2,440 $ 765
1.43% 1.46% 1.50% 1.51%
0.68% 0.71% 0.75% 0.76%
5.50% 5.92% 6.19% 5.99%
</TABLE>
See Notes to Financial Statements 29
<PAGE>
Prudential Government Income Fund, Inc.
Financial Highlights Cont'd.
<TABLE>
<CAPTION>
Class Z
-----------------
Year Ended
February 29, 2000
- ----------------------------------------------------------------------------------------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $ 8.97
-----------------
Income from investment operations
Net investment income 0.57
Net realized and unrealized gain (loss) on investment
transactions (0.57)
-----------------
Total from investment operations --
-----------------
Less distributions
Dividends from net investment income (0.57)
-----------------
Net asset value, end of period $ 8.40
-----------------
-----------------
TOTAL RETURN(a): 0.09%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000) $ 93,390
Average net assets (000) $ 97,811
Ratios to average net assets:
Expenses, including distribution fees 0.69%
Expenses, excluding distribution fees 0.69%
Net investment income 6.64%
</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.
30 See Notes to Financial Statements
<PAGE>
Prudential Government Income Fund, Inc.
Financial Highlights Cont'd.
<TABLE>
<CAPTION>
Class Z
- ----------------------------------------------------------------------------------------
Year Ended February 28/29, March 4, 1999(c)
- ------------------------------------------ through February 28,
1999 1998 1997
- ----------------------------------------------------------------------------------
<S> <C> <C> <C>
$ 9.04 $ 8.76 $ 9.13
- ---------------- ---------------- ----------
0.57 0.59 0.61
(0.07) 0.28 (0.37)
- ---------------- ---------------- ----------
0.50 0.87 0.24
- ---------------- ---------------- ----------
(0.57) (0.59) (0.61)
- ---------------- ---------------- ----------
$ 8.97 $ 9.04 $ 8.76
- ---------------- ---------------- ----------
- ---------------- ---------------- ----------
5.58% 10.30% 3.16%
$ 97,629 $ 84,733 $ 73,411
$ 86,892 $ 71,425 $ 39,551
0.68% 0.71% 0.75%(b)
0.68% 0.71% 0.75%(b)
6.22% 6.67% 6.76%(b)
</TABLE>
See Notes to Financial Statements 31
<PAGE>
Prudential Government Income Fund, Inc.
Report of Independent Accountants
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 29, 2000, the results of its operations for the
year then ended, the changes in its net assets for each of the two years in the
period then ended, and the financial highlights for each of the three years in
the period then ended, in conformity with accounting principles generally
accepted in the United States. 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 auditing standards
generally accepted in the United States, 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
29, 2000 by correspondence with the custodian and brokers, provide a reasonable
basis for the opinion expressed above. The accompanying highlights for each of
the two periods 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, 2000
32 See Notes to Financial Statements
<PAGE>
Prudential Government Income Fund, Inc.
Important Notice for Certain Shareholders
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 40% 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.
See Notes to Financial Statements 33
<PAGE>
<PAGE>
Prudential Government Income Fund, Inc.
Class A Growth of a $10,000 Investment
(GRAPH)
Average Annual Total Returns as of 2/29/00
Since Inception Ten Years Five Years One Year
With Sales Charge 6.46% 6.59% 5.37% -4.14%
Without Sales Charge 6.89% 7.03% 6.23% -0.15%
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 graph compares a $10,000
investment in Prudential Government Income Fund,
Inc. (Class A shares) with a similar investment in
the Lehman Brothers Government Bond Index (the
Index) by portraying the initial account values at
the beginning of the ten-year period for Class A
shares and at the end of the current fiscal year
(February 29), as measured on a quarterly basis,
beginning in 1990 for Class A shares. For purposes
of the graph, 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 shares; (b)
all recurring fees (including management fees) were
deducted; and (c) all dividends and distributions
were reinvested. The best and worst year
information within the graph is 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 for the past ten years.
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 include the effect of sales charges or
operating expenses of a mutual 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. Investors cannot invest directly in an
index.
This graph is furnished to you in accordance with
SEC regulations.
<PAGE>
www.prudential.com (800) 225-1852
Class B Growth of a $10,000 Investment
(GRAPH)
Average Annual Total Returns as of 2/29/00
Since Inception Ten Years Five Years One Year
With Sales Charge 6.99% (6.92) 6.26% 5.36% -5.83%
Without Sales Charge 6.99% (6.92) 6.26% 5.52% -0.83%
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 graph
compares a $10,000 investment in Prudential
Government Income Fund, Inc. (Class B shares) with
a similar investment in the Lehman Brothers
Government Bond Index (the Index) by portraying the
initial account values at the beginning of the ten-
year period for Class B shares and at the end of
the current fiscal year (February 29), as measured
on a quarterly basis, beginning in 1990 for Class B
shares. For purposes of the graph, and unless
otherwise indicated, it has been assumed that (a)
the maximum applicable contingent deferred sales
charge was deducted from the value of the
investment in Class B shares, assuming full
redemption on February 29, 2000; (b) all recurring
fees (including management fees) were deducted; and
(c) all dividends and distributions were
reinvested. Class B shares will automatically
convert to Class A shares, on a quarterly basis,
beginning approximately seven years after purchase.
This conversion feature is not reflected in the
graph. Without waiver of management fees and/or
expense subsidization, the Class B shares' average annual
total returns would have been lower, as indicated
in parentheses ( ). The best and worst year
information within the graph is 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 for the past ten years.
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 include the effect of sales charges or
operating expenses of a mutual 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. Investors cannot invest
directly in an index.
This graph is furnished to you in accordance with
SEC regulations.
<PAGE>
Prudential Government Income Fund, Inc.
Class C Growth of a $10,000 Investment
(GRAPH)
Average Annual Total Returns as of 2/29/00
Since Inception Ten Years Five Years One Year
With Sales Charge 5.33% N/A 5.39% -2.75%
Without Sales Charge 5.52% N/A 5.60% -0.76%
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 graph compares a $10,000
investment in Prudential Government Income Fund,
Inc. (Class C shares) 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 C shares
and at the end of the current fiscal year (February
29), as measured on a quarterly basis, beginning in
1994 for Class C shares. For purposes of the graph,
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 C shares; (b) the maximum
applicable contingent deferred sales charge was
deducted from the value of the investment in Class
C shares, assuming full redemption on February 29,
2000; (c) all recurring fees (including management
fees) were deducted; and (d) all dividends and
distributions were reinvested. The best and worst
year information within the graft is 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.
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 include the effect of sales charges or
operating expenses of a mutual 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. Investors cannot invest
directly in an index.
This graph is furnished to you in accordance with
SEC regulations.
<PAGE>
www.prudential.com (800) 225-1852
Class Z Growth of a $10,000 Investment
(GRAPH)
Average Annual Total Returns as of 2/29/00
Since Inception Ten Years Five Years One Year
With Sales Charge N/A N/A N/A N/A
Without Sales Charge 4.72% N/A N/A 0.09%
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 graph compares a $10,000
investment in Prudential Government Income Fund,
Inc. (Class Z shares) 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 Z shares
and at the end of the current fiscal year (February
29), as measured on a quarterly basis, beginning in
1996 for Class Z shares. For purposes of the graph,
and unless otherwise indicated, it has been assumed
that (a) all recurring fees (including management
fees) were deducted; and (b) all dividends and
distributions were reinvested. Class Z shares are
not subject to a front-end sales charge or
distribution and service (12b-1) fees. The best and
worst year information within the graft is 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.
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 include the effect of sales charges or
operating expenses of a mutual 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. Investors cannot invest
directly in an index.
This graph is furnished to you in accordance with
SEC regulations.
<PAGE>
For More Information
Prudential Mutual Funds
Gateway Center Three
100 Mulberry Street
Newark, NJ 07102-4077
(800) 225-1852
Visit Prudential's web site at:
http://www.prudential.com
Directors
Eugene C. Dorsey
Delayne D. Gold
Robert F. Gunia
Thomas T. Mooney
Stephen P. Munn
David R. Odenath, Jr.
Richard A. Redeker
John R. Strangfeld
Nancy H. Teeters
Louis A. Weil, III
Officers
John R. Strangfeld, President
Robert F. Gunia, Vice President
David R. Odenath, Jr., Vice President
Grace C. Torres, Treasurer
Stephen M. Ungerman, Assistant Treasurer
Deborah A. Docs, Secretary
William V. Healey, 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
194 Wood Avenue South
Iselin, NJ 08830
Independent Accountants
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, NY 10036
Legal Counsel
Swidler Berlin Shereff Friedman, LLP
The Chrysler Building
405 Lexington Avenue
New York, NY 10174
Fund Symbols NASDAQ CUSIP
Class A PGVAX 744339102
Class B PBGPX 744339201
Class C -- 744339300
Class Z PGVZX 744339409
MF 128E
(LOGO) Printed on Recycled Paper
