<PAGE>
As filed with the Securities and Exchange Commission on December 22, 2000
Securities Act Registration No. _______
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM N-14
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 : /X/
PRE-EFFECTIVE AMENDMENT NO. / /
POST-EFFECTIVE AMENDMENT NO. / /
(Check appropriate box or boxes)
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PRUDENTIAL GOVERNMENT INCOME FUND, INC.
(Exact name of registrant as specified in charter)
(973) 367-7521
(Area Code and Telephone Number)
GATEWAY CENTER THREE
100 MULBERRY STREET, 4TH FLOOR
NEWARK, NEW JERSEY 07102-4077
(Address of Principal Executive Offices) (Number, Street, City, State, Zip Code)
DEBORAH A. DOCS
GATEWAY CENTER THREE
100 MULBERRY STREET, 4TH FLOOR
NEWARK, NEW JERSEY 07102-4077
(Name and Address of Agent for Service)
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING:
AS SOON AS PRACTICABLE AFTER THE EFFECTIVE
DATE OF THE REGISTRATION STATEMENT.
No filing fee is required because of reliance on section 24(f) of the
Investment Company Act of 1940. Pursuant to Rule 429 under the
Securities Act of 1933, the Prospectus and Proxy Statement
relates to shares registered on Form N-1A (File No. 2-82976).
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
TITLE OF SECURITIES BEING REGISTERED . . . .SHARES OF COMMON STOCK, PAR
VALUE $.01 PER SHARE
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PRUDENTIAL GOVERNMENT INCOME FUND, INC.
CONTENTS OF REGISTRATION STATEMENT
This Registration Statement contains the following papers and documents:
Facing Page
Contents of Registration Statement
President's Letter to Shareholders
Notice of Special Meeting
Part A - Proxy Statement and Prospectus (Attachment A - Form of Agreement
and Plan of Reorganization)
Form of Proxy Card
Part B - Statement of Additional Information
Part C - Other Information
Exhibits
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PRUDENTIAL GOVERNMENT SECURITIES TRUST
SHORT-INTERMEDIATE TERM SERIES
GATEWAY CENTER THREE
100 MULBERRY STREET
NEWARK, NEW JERSEY 07102-4077
January __, 2001
Dear Shareholder:
I am writing to ask you to vote on an important proposal that would
effectively merge the Short-Intermediate Term Series (Series) of the Prudential
Government Securities Trust into Prudential Government Income Fund, Inc. A
shareholder meeting of the Series is scheduled for March 22, 2001. This package
contains information about the proposal and includes materials you will need to
vote. The Board of Trustees of Prudential Government Securities Trust has
reviewed the proposal with respect to the Series, and has recommended that it be
presented to shareholders for their consideration. Although the Trustees have
determined that the merger proposal is in the best interest of the shareholders,
the final decision is up to you.
If approved, the merger would give you the opportunity to participate in a
larger fund with similar investment policies. In addition, Class Z shareholders
are expected to realize a reduction in the annual operating expenses paid on
their investment, although Class A shareholders are expected to incur an
increase in annual operating expenses. The merger will, however, give Series
Class A shareholders the opportunity to obtain Class A shares of Prudential
Government Income Fund, Inc. without paying an initial sales charge. To help you
understand the proposal, we are including a "Q and A" that answers common
questions about the proposed transaction. The accompanying proxy statement
includes a detailed description of the proposal. Please read the enclosed
materials carefully and cast your vote. Remember, your vote is extremely
important, no matter how large or small your holdings. By voting now, you can
help avoid additional costs that would be incurred with follow-up letters and
calls.
To vote, you may use any of the following methods:
- BY MAIL. You can vote your shares by completing and signing the
enclosed proxy card, and mailing it in the enclosed postage paid
envelope. If you need any assistance, or have any questions regarding
the proposal or how to vote your shares, please call Prudential at
(800) 225-1852.
- BY INTERNET. You may also vote via the internet. To do so, have your
proxy card available and go to the website: WWW.PROXYVOTE.COM. Follow
the instructions on the website and be prepared to enter your 12 digit
control number from your proxy card to enter your vote.
- BY TELEPHONE. Finally, you may vote by telephone by calling (800)
690-6903 toll free. Enter your 12 digit control number from your proxy
card and follow the instructions given.
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If you have any questions before you vote, please call us at (800) 225-1852. We
are glad to help you understand the proposal and assist you in voting. Thank you
for your participation.
Very truly yours,
David R. Odenath, Jr.
PRESIDENT
IMPORTANT INFORMATION TO HELP YOU UNDERSTAND AND VOTE ON THE PROPOSAL
Please read the enclosed proxy statement for a complete description of the
proposal. As a quick reference, the following provides a brief overview of the
proposal.
WHAT AM I BEING ASKED TO VOTE ON?
These proxy materials relate to the merger of Prudential Government
Securities Trust - Short-Intermediate Term Series into Prudential Government
Income Fund, Inc. (Government Income Fund). When we refer to the "merger," we
mean the transfer of the assets of the Series to, and the assumption of its
liabilities by, Government Income Fund, in exchange for shares of Government
Income Fund. Shareholders of the Series will vote on whether to approve the
merger of the Series into Government Income Fund.
WHAT ARE THE REASONS FOR THIS MERGER?
The proposed merger is intended to combine similarly managed funds, in
order to take advantage of expected economies of scale. The merger is desirable
because of the inability of the Series to attract investors and build an
investment portfolio that can effectively pursue the Series' objective at a
reasonable cost to shareholders. Both the assets and the number of shareholders
of the Series have been declining for a number of years and is expected to
continue.
As of August 31, 2000, the assets and the number of shareholder accounts
has declined to approximately $____ and ____, respectively.
If the Series' outflow trends continue, the small and declining asset base
of the Series may result in higher expense ratios and may prevent the Series
from enjoying the economies of scale of Government Income Fund. Government
Income Fund, which is a substantially larger fund than the Series, should
provide a larger asset base over which fixed expenses can be spread.
DO THE SERIES AND GOVERNMENT INCOME FUND HAVE SIMILAR INVESTMENT POLICIES?
Yes. Each of the Series and Government Income Fund primarily invests in
U.S. Government securities, including U.S. Treasury bills, notes, bonds and
other debt securities issued or guaranteed by the U.S. Government, its agencies
or instrumentalities. One of the primary differences in the investment policies
of the Series and Government Income Fund is that
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the Series generally invests primarily in securities with maturities ranging
from two to five years, while Government Income Fund has no similar limitations
with respect to maturities of its portfolio securities.
Moreover, the investment objective of the Series and Government Income Fund
differ in that the Series seeks to achieve a high level of income consistent
with providing reasonable safety, while Government Income Fund's objective is
high current return.
The Series and Government Income Fund may each invest in mortgage-related
securities issued or guaranteed by the U.S. Government, its agencies or
instrumentalities, as well as privately issued mortgage-related securities and
other instruments.
After the merger, it is expected that the combined fund will be managed
according to the investment objective and policies of Government Income Fund.
WHO ARE THE MANAGERS FOR THE SERIES AND GOVERNMENT INCOME FUND?
Prudential Investments Fund Management LLC currently manages the Series'
and Government Income Fund's investment operations and administers their
business affairs. The Prudential Investment Corporation is the subadviser
managing the Series' and Government Income Fund's respective assets. Prudential
Investments Fund Management LLC and The Prudential Investment Corporation are
expected to serve in these capacities for the combined fund. The U.S. Liquidity
Team, headed by Michael Lillard, is primarily responsible for overseeing the
day-to-day management of both the Series and Government Income Fund.
HOW DO THE EXPENSE STRUCTURES OF THE SERIES AND GOVERNMENT INCOME FUND COMPARE?
Currently, the Series has two classes of stock outstanding: Class A shares
and Class Z shares. Government Income Fund currently has four classes of stock
outstanding: Class A shares, Class B shares, Class C shares and Class Z shares.
The following tables compare the expenses incurred by the classes of stock
offered by the Series with that of Government Income Fund as of November 30,
2000 and February 29, 2000, respectively.
SHORT-INTERMEDIATE SERIES
ANNUAL SERIES OPERATING EXPENSES (DEDUCTED FROM SERIES ASSETS)
<TABLE>
<CAPTION>
CLASS A CLASS Z
<S> <C> <C>
Management fees 0.40% 0.40%
+ Distribution and service (12b-1) fees .18% None
+ Other expenses .36% .36%
= TOTAL ANNUAL SERIES OPERATING EXPENSES .94% .76%
</TABLE>
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GOVERNMENT INCOME FUND
ANNUAL FUND OPERATING EXPENSES (DEDUCTED FROM FUND ASSETS)
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS Z
<S> <C> <C> <C> <C>
Management fees 0.50% 0.50% 0.50% 0.50%
+ Distribution and service (12b-1) fees* 0.30% 1.00% 1.00% None
+ Other expenses 0.19% 0.19% 0.19% 0.19%
= TOTAL ANNUAL FUND OPERATING EXPENSES 0.99% 1.69% 1.69% 0.69%
- Fee waiver or expense reimbursement* 0.05% 0.175% 0.25% None
= NET ANNUAL FUND OPERATING EXPENSES 0.94% 1.52% 1.44% 0.69%
</TABLE>
* For the fiscal year ending February 28, 2001, the Distributor of Government
Income Fund has contractually agreed to reduce its distribution and service
(12b-1) fees for Class A, Class B and Class C shares to .25 of 1%, .825 of
1% and .75 of 1% of the average daily net assets of Class A, Class B and
Class C shares, respectively.
Shareholders should note that unlike Class A shares of the Series, Class A
shares of Government Income Fund are subject to a sales charge of 4%, which is
paid at the time of purchase (Class A shares of Government Income Fund received
in exchange for Class A shares of the Series will not be subject to this sales
charge). Class B shares of Government Income Fund are subject to a sales charge
if the shares are sold within six years of purchase (this contingent deferred
sales charge declines from 5% in the first year to 1% in the fifth and sixth
years). Class C shares of Government Income Fund are subject to a 1% sales
charge which is paid at the time of purchase and a 1% contingent deferred sales
charge if the shares are sold within 18 months of purchase. Class Z shares are
not subject to sales charges but are available only to a limited group of
investors.
IS THE MERGER A TAXABLE EVENT FOR FEDERAL INCOME TAX PURPOSES?
Typically, the exchange of shares pursuant to a merger does not result in a
gain or loss for federal income tax purposes. For more information, see the
proxy statement.
WHAT WILL BE THE SIZE OF GOVERNMENT INCOME FUND AFTER THE MERGER?
If the proposal is approved, based on information available as of August
31, 2000, the combined fund is anticipated to have approximately $1.17 billion
in assets.
HOW WILL WE DETERMINE THE NUMBER AND CLASS OF SHARES OF GOVERNMENT INCOME FUND
THAT YOU WILL RECEIVE?
As of the close of business of the New York Stock Exchange on the date the
merger is consummated, shareholders will receive the number of full and
fractional Class A or Class Z shares of Government Income Fund that are equal in
value to the net asset value of their Class A or Class Z shares, as applicable,
of the Series on that date. The merger is anticipated to occur on March 29,
2001.
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HAS THE BOARD OF TRUSTEES APPROVED THE PROPOSAL?
Yes. The Board of Trustees of Prudential Government Securities Trust, of
which the Series is a part, has approved the proposal and recommends that you
vote to approve the proposal.
WHAT IF THERE ARE NOT ENOUGH VOTES TO REACH QUORUM BY THE SCHEDULED SHAREHOLDER
MEETING DATE?
If we do not receive sufficient votes to hold the meeting, we or
Shareholder Communications Corporation, a proxy solicitation firm, may contact
you by mail or telephone to encourage you to vote. Shareholders should review
the proxy materials and cast their vote to avoid additional mailings or
telephone calls. If there are not sufficient votes to approve the merger
proposal by the time of the meeting (March 22, 2001), the meeting may be
adjourned to permit further solicitation of proxy votes.
WHAT HAPPENS IF THE PROPOSAL IS NOT APPROVED?
If the shareholders do not approve the merger or if it is not completed,
the Series will continue to engage in business as a series of a registered
investment company with its current fee structure, and the Board may consider
other proposals for the Series, including proposals for its reorganization or
liquidation.
HOW MANY VOTES AM I ENTITLED TO CAST?
As a shareholder, you are entitled to one vote for each share you own of
the Series on the record date. The record date is January 19, 2001.
HOW DO I VOTE MY SHARES?
You can vote your shares by completing and signing the enclosed proxy card,
and mailing it in the enclosed postage paid envelope. If you need any
assistance, or have any questions regarding the proposal or how to vote your
shares, please call Prudential at (800) 225-1852.
You may also vote via the internet. To do so, have your proxy card
available and go to the website: www.proxyvote.com. Follow the instructions on
the website and be prepared to enter your 12 digit control number from your
proxy card to enter your vote.
Finally, you can vote by telephone by calling (800) 690-6903 toll free.
Enter your 12 digit control number from your proxy card and follow the
instructions given.
HOW DO I SIGN THE PROXY CARD?
INDIVIDUAL ACCOUNTS: Shareholders should sign exactly as their names appear
on the account registration shown on the card.
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JOINT ACCOUNTS: Both owners must sign and the signatures should conform
exactly to the names shown on the account registration.
ALL OTHER ACCOUNTS: The person signing must indicate his or her capacity.
For example, a trustee for a trust should include his or her title when he
or she signs, such as "Jane Doe, Trustee"; or an authorized officer of a
company should indicate his or her position with the company, such as "John
Smith, President."
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PRUDENTIAL GOVERNMENT SECURITIES TRUST
SHORT-INTERMEDIATE TERM SERIES
100 Mulberry Street
Gateway Center Three, 4th Floor
Newark, New Jersey 07102-4077
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
To our Shareholders:
Notice is hereby given that a Special Meeting of Shareholders (the Meeting)
of the Short-Intermediate Term Series (Series), a series of Prudential
Government Securities Trust, will be held at 100 Mulberry Street, Gateway Center
Three, 14th Floor, Newark, New Jersey 07102, on March 22, 2001, at 10:30 a.m.
Eastern time, for the following purposes:
1. To approve an Agreement and Plan of Reorganization under which the Series
will transfer all of its assets to, and all of its liabilities will be
assumed by, Prudential Government Income Fund, Inc. (Government Income
Fund), Government Income Fund will be the surviving fund, and each whole
and fractional share of Class A or Class Z shares of the Series shall be
exchanged for whole and fractional shares of equal net asset value of Class
A or Class Z shares, respectively, of Government Income Fund.
2. To transact such other business as may properly come before the Meeting or
any adjournments of the Meeting.
The Board of Trustees has fixed the close of business on January 19, 2001
as the record date for the determination of the shareholders of the Series
entitled to notice of, and to vote at, this Meeting and any adjournments.
Deborah A. Docs
SECRETARY
DATED: JANUARY __, 2001
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A PROXY CARD FOR THE SERIES IS ENCLOSED ALONG WITH THE PROXY STATEMENT. PLEASE
VOTE YOUR SHARES TODAY BY SIGNING AND RETURNING THE ENCLOSED PROXY CARD IN THE
POSTAGE PREPAID ENVELOPE PROVIDED. YOU ALSO MAY VOTE BY TELEPHONE OR VIA THE
INTERNET AS DESCRIBED IN THE ENCLOSED MATERIALS. THE BOARD OF GOVERNMENT
SECURITIES TRUST RECOMMENDS THAT YOU VOTE "FOR" THE PROPOSAL RELATING TO THE
SERIES.
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YOUR VOTE IS IMPORTANT.
PLEASE RETURN YOUR PROXY CARD PROMPTLY.
SHAREHOLDERS ARE INVITED TO ATTEND THE MEETING IN PERSON. ANY SHAREHOLDER WHO
DOES NOT EXPECT TO ATTEND THE MEETING IS URGED TO COMPLETE THE ENCLOSED PROXY
CARD, DATE AND SIGN IT, AND RETURN IT IN THE ENVELOPE PROVIDED, WHICH NEEDS NO
POSTAGE IF MAILED IN THE UNITED STATES. IN ORDER TO AVOID UNNECESSARY EXPENSE,
WE ASK YOUR COOPERATION IN MAILING YOUR PROXY CARD PROMPTLY, NO MATTER HOW LARGE
OR SMALL YOUR HOLDINGS MAY BE.
INSTRUCTIONS FOR EXECUTING YOUR PROXY CARD
The following general rules for executing proxy cards may be of assistance to
you and may help avoid the time and expense involved in validating your vote if
you fail to execute your proxy card properly.
1. INDIVIDUAL ACCOUNTS: Your name should be signed exactly as it appears on
the account registration shown on the proxy card.
2. JOINT ACCOUNTS: Both owners must sign and the signatures should conform
exactly to the names shown on the account registration.
3. ALL OTHER ACCOUNTS should show the capacity of the individual signing. This
can be shown either in the form of account registration or by the
individual executing the proxy card. For example:
REGISTRATION VALID SIGNATURE
A. 1. XYZ Corporation John Smith, President
2. XYZ Corporation John Smith, President
c/o John Smith, President
B. 1. ABC Company Profit Sharing Plan Jane Doe, Trustee
2. Jones Family Trust Charles Jones, Trustee
3. Sarah Clark, Trustee Sarah Clark, Trustee
u/t/d 7/1/85
C. 1. Thomas Wilson, Custodian Thomas Wilson, Custodian
f/b/o Jessica Wilson UTMA
New Jersey
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PRELIMINARY COPIES
PRUDENTIAL GOVERNMENT INCOME FUND, INC.
PROSPECTUS
AND
PRUDENTIAL GOVERNMENT SECURITIES TRUST
SHORT-INTERMEDIATE TERM SERIES
PROXY STATEMENT
Gateway Center Three
100 Mulberry Street, 4th Floor
Newark New Jersey 07102-4077
(800) 225-1852
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JANUARY __, 2001
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This Proxy Statement and Prospectus (Proxy Statement) is being furnished
to shareholders of the Short-Intermediate Term Series (Series), a series of
Prudential Government Securities Trust (Government Securities Trust), in
connection with the solicitation of proxies by Government Securities Trust's
Board of Trustees for use at the Special Meeting of Shareholders of the Series
and at any adjournments of the meeting (the Meeting). The Meeting will be held
on March 22, 2001, at 10:30 a.m., Eastern time at 100 Mulberry Street, Gateway
Center Three, 14th Floor, Newark, New Jersey 07102.
The purpose of the Meeting is to vote on an Agreement and Plan of
Reorganization (the Agreement) under which the Series will transfer all of its
assets to, and all of its liabilities will be assumed by, Prudential Government
Income Fund, Inc. (Government Income Fund) in exchange for shares of Government
Income Fund. This transaction is referred to as the Merger. If the Merger is
approved, the Series will be terminated and Government Income Fund will be the
surviving fund, and each whole and fractional share of Class A and Class Z
shares of the Series, the only share classes offered by the Series, shall be
exchanged for whole and fractional shares of equal net asset value of Class A or
Class Z shares, respectively, of Government Income Fund on March 29, 2001, or
such later date as the parties may agree (the Closing Date).
Government Income Fund is an open-end diversified registered management
investment company which is organized as a Maryland corporation. Government
Income Fund's investment
<PAGE>
objective is high current return. Government Income Fund normally invests at
least 65% of its total assets 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. Government Income
Fund may also invest in privately issued mortgage related securities and other
instruments.
Government Securities Trust is an open-end registered management
investment company whose shares of beneficial interest are presently offered in
three series, one of which is the Short-Intermediate Term Series. Government
Securities Trust is organized as a Massachusetts business trust under the laws
of the State of Massachusetts. The Series is diversified. The objective of the
Short-Intermediate Term Series is to achieve a high level of income consistent
with providing reasonable safety. To achieve its objective, the Series invests
at least 65% of its total assets in U.S. Government securities, including U.S.
Treasury bills, notes, bonds, and other debt securities, such as
mortgage-related and asset-backed securities, issued or guaranteed by the U.S.
Government, its agencies or instrumentalities. The Series may also invest in
privately issued mortgaged-related securities and other instruments.
IF SHAREHOLDERS OF THE SERIES APPROVE THE MERGER, THEY WILL BECOME
SHAREHOLDERS OF GOVERNMENT INCOME FUND.
This Proxy Statement should be retained for your future reference. It
sets forth concisely the information about the Merger of the Series and
Government Income Fund that a shareholder of the Series should know before
voting on the proposed Merger. A Statement of Additional Information dated
January __, 2001, which relates to this Proxy Statement, has been filed with the
Securities and Exchange Commission (the Commission) and is incorporated into
this Proxy Statement by reference. This Proxy Statement is accompanied by the
Prospectus, dated May 4, 2000, as supplemented to date, which offers shares of
Government Income Fund. The Statement of Additional Information for Government
Income Fund, dated May 4, 2000, is available upon request. Enclosed with this
Proxy Statement are the Annual and Semi-Annual Reports to shareholders of
Government Income Fund for the fiscal year ended February 29, 2000, and the
six-month period ended August 31, 2000, respectively. The Prospectus and
Statement of Additional Information and supplements thereto for Government
Income Fund have been filed with the Commission and are incorporated into this
Proxy Statement by reference. Enclosed is a Prospectus for the Series dated
January 31, 2001, as supplemented to date. A Prospectus for the Series dated
January 31, 2001, as supplemented to date, and the Statement of Additional
Information for Government Securities Trust, which includes the Series, dated
January 31, 2001, have been filed with the Commission and are incorporated into
this Proxy Statement by reference. Copies of the documents referred to above may
be obtained without charge by contacting Prudential Mutual Fund Services LLC at
Post Office Box 15005, New Brunswick, New Jersey 08906-5005, or by calling (800)
225-1852.
2
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THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED
GOVERNMENT INCOME FUND'S SHARES, NOR HAS THE COMMISSION DETERMINED THAT THIS
PROXY STATEMENT AND PROSPECTUS IS COMPLETE OR ACCURATE. IT IS A CRIMINAL OFFENSE
TO STATE OTHERWISE.
3
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SPECIAL MEETING OF SHAREHOLDERS OF
SHORT-INTERMEDIATE TERM SERIES
A SERIES OF
PRUDENTIAL GOVERNMENT SECURITIES TRUST
TO BE HELD ON MARCH 22, 2001, AT 10:30 A.M.
100 MULBERRY STREET
GATEWAY CENTER THREE, 14TH FLOOR
NEWARK, NEW JERSEY 07102-4077
---------------------------------
PROXY STATEMENT AND PROSPECTUS
---------------------------------
VOTING INFORMATION
This Proxy Statement and Prospectus (Proxy Statement) is furnished in
connection with a solicitation of proxies made by, and on behalf of, the Board
of Trustees of Prudential Government Securities Trust (Government Securities
Trust) to be used at the Special Meeting of Shareholders of the
Short-Intermediate Term Series (Series), a series of Government Securities
Trust, and at any adjournments of the Special Meeting (the Meeting), to be held
on March 22, 2001, at 10:30 a.m., Eastern time, at 100 Mulberry Street, Gateway
Center Three, 14th Floor, Newark, New Jersey 07102-4077, the principal executive
office of The Prudential Investment Corporation (PIC). PIC serves as the
investment adviser to Prudential Government Income Fund, Inc. (Government Income
Fund, and together with Government Securities Trust, the Funds) and the Series.
The purpose of the Meeting is described in the accompanying Notice. The
solicitation is made primarily by the mailing of this Proxy Statement and the
accompanying proxy card on or about January __, 2001. Supplementary
solicitations may be made by mail, telephone, telegraph, facsimile, electronic
means or by personal interview by representatives of Government Securities
Trust, on behalf of the Series. In addition, Shareholder Communications
Corporation, a proxy solicitation firm, may be retained to solicit shareholders
on behalf of Government Securities Trust, on behalf of the Series. The expenses
in connection with preparing this Proxy Statement and its enclosures and of all
solicitations (including the costs of retaining Shareholder Communications
Corporation) will be borne by the Series and Government Income Fund based on
their respective assets and will include reimbursement of brokerage firms and
others for expenses in forwarding proxy solicitation materials to the
shareholders of the Series.
Even if you sign and return the enclosed proxy card, you may revoke your
proxy at any time prior to its use by written notification received by
Government Securities Trust, on behalf of the Series, by submitting a
later-dated proxy card, or by attending the Meeting and voting in person.
4
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All proxy cards solicited by the Board of Trustees that are properly
completed and received by Government Securities Trust, on behalf of the Series,
prior to the Meeting, and that are not revoked, will be voted at the Meeting.
Shares represented by proxies will be voted in accordance with the instructions
you provide. If no instruction is made on a proxy card, it will be voted FOR
Proposal No. 1. With respect to the Series, quorum, (which is the minimum number
of shares necessary to transact business at the Meeting) is established when a
majority of the Series' total shares outstanding and entitled to vote are
present in person at the Meeting or represented by proxy.
If a proxy that is properly signed and returned is accompanied by
instructions to withhold authority to vote (an abstention) or represents a
broker "non-vote" (that is, a proxy from a broker or nominee indicating that
they have not received instructions from the beneficial owner or other person
entitled to vote shares on this matter for which the broker or nominee does not
have discretionary power), the shares represented thereby will be considered
present for purposes of determining the existence of a quorum for the
transaction of business, but because Proposal No. 1 requires approval by the
votes of a majority of shares represented at a meeting at which a quorum is
present, will have the effect of a vote AGAINST Proposal No. 1.
Government Securities Trust, on behalf of the Series, also may arrange to
have votes recorded by telephone. The expenses associated with telephone voting
will be borne by the Series and Government Income Fund based on their respective
assets. If the Series takes votes by telephone, it will use procedures designed
to authenticate shareholders' identities, to allow shareholders to authorize the
voting of their shares in accordance with their instructions, and to confirm
that their instructions have been properly recorded. Proxies given by telephone
may be revoked at any time before they are voted in the same manner that proxies
voted by mail may be revoked.
Shareholders may also cast their vote via the internet. The expenses
associated with internet voting will be borne by the Series and Government
Income Fund based on their respective assets. The internet voting procedures
have been designed to authenticate shareholders' identities to allow
shareholders to authorize the voting of their shares in accordance with their
instructions, and to confirm that shareholders' instructions have been recorded
properly. We have been advised that the internet voting procedures are
consistent with the requirements of applicable law. Shareholders voting via the
internet should understand that there may be costs associated with electronic
access, such as usage charges from an internet access provider and telephone
companies, that must be borne by the shareholder. Proxies given by the internet
may be revoked at any time before they are voted in the same manner that proxies
voted by mail may be revoked.
With respect to the Series, if a quorum is not present at the Meeting,
or if a quorum is present at the Meeting but sufficient votes to approve
Proposal No. 1 are not received, or if other matters arise requiring shareholder
attention, the persons named as proxy agents may propose one or more
adjournments of the Meeting with respect to the Series, to permit the further
solicitation of proxies. An adjournment will require the affirmative vote of a
majority of shares of the Series present in person at the Meeting or represented
by proxy. When voting on a proposed adjournment with respect to the Series, the
persons named as proxy agents will vote FOR the proposed adjournment all shares
that they are entitled to vote with respect to Proposal
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No. 1, unless directed to vote AGAINST Proposal No. 1, in which case such shares
will be voted against the proposed adjournment. A shareholder vote may be taken
on the Merger with respect to the Series described in this Proxy Statement or on
any other business properly presented at the Meeting prior to adjournment if
sufficient votes have been received.
Shareholders of record of each class of the Series at the close of
business on January 19, 2001 (the Record Date), will be entitled to vote at the
Meeting. Each such shareholder will be entitled to one vote for each share held
on that date (fractional shares will be entitled to a proportionate fractional
vote). On the Record Date, there were: _______ Class A shares, and _______ Class
Z shares issued and outstanding of the Series.
As of January 19, 2001, the following shareholders owned beneficially or
of record 5% or more of the outstanding shares of any class of the Series.
NAME SHARES/CLASS % OWNERSHIP
---------- ---------%
On January 19, 2001, there were _________ Class A shares, __________ Class B
shares, ____________ Class C shares and _________ Class Z shares issued and
outstanding of Government Income Fund.
As of January 19, 2001, the following shareholders owned beneficially or
of record 5% or more of the outstanding shares of any class of Government
Income Fund.
NAME SHARES/CLASS % OWNERSHIP
----------------- ---------- ---------%
Shareholders of Government Income Fund are not entitled to vote on the
Merger.
As of January 19, 2001, the Trustees/Directors and officers of Government
Securities Trust and Government Income Fund, owned, in the aggregate, less than
1% of each class of each of the Series' and Government Income Fund's total
outstanding shares, respectively. Prudential Securities Incorporated intends to
vote any shares of the Series for which it has direct voting authority FOR
Proposal No. 1.
VOTE REQUIRED
APPROVAL OF THE MERGER REQUIRES THE AFFIRMATIVE VOTE OF A MAJORITY OF THE
SHARES REPRESENTED IN PERSON OR BY PROXY AND ENTITLED TO VOTE AT THE MEETING, IF
A QUORUM IS PRESENT.
SYNOPSIS
The following is a summary of information contained elsewhere in this
Proxy Statement, in the Agreement and Plan of Reorganization (the Agreement, the
form of which is attached as
6
<PAGE>
Attachment A), and in the Prospectuses of the Series and Government Income Fund,
which are incorporated into this Proxy Statement by reference. Shareholders
should read this Proxy Statement and the Prospectus of Government Income Fund
for more complete information.
The Merger would transfer all of the assets and liabilities of the Series
into Government Income Fund, a larger mutual fund also managed by Prudential
Investments Fund Management LLC (PIFM), for which PIC also acts as investment
adviser. If the Merger is approved, the Series will cease to exist and current
shareholders of the Series will become shareholders of Government Income Fund.
INVESTMENT OBJECTIVES AND POLICIES
The Series and Government Income Fund have similar investment objectives
and policies. The investment objective of the Series is to achieve a high level
of income consistent with providing reasonable safety. This means that the
Series seeks investments that will increase in value, as well as pay the Series
interest and other income. To achieve its objective, the Series generally
invests at least 65% of its total assets in U.S. Government securities,
including U.S. Treasury bills, notes, bonds, and other debt securities issued by
the U.S. Treasury and obligations, including mortgage-backed securities,
asset-backed securities and other securities that are issued or guaranteed by
the U.S. Government, its agencies or instrumentalities.
Government Income Fund's investment objective is high current return.
Government Income Fund seeks to achieve its objective by investing under normal
market conditions at least 65% of its total assets in U.S. Government
securities, which include U.S. Treasury bills, notes, bonds, strips and other
debt securities issued by the U.S. Treasury along with obligations including
mortgage related securities issued or guaranteed by U.S. Government agencies or
instrumentalities.
One of the primary differences between the investment policies of the
Series and Government Income Fund is that the Series seeks to provide reasonable
safety as part of its investment objective while Government Income Fund does
not. Similarly, the Series primarily invests in securities with maturities
ranging from two to five years, while Government Income Fund has no similar
limitations. This means that, in general, Government Income Fund invests in
obligations that are more susceptible to market risk, which is discussed below.
Although the Series and Government Income Fund may invest up to 35% of
its respective total assets in investments other than U.S. Government
securities, the Series may invest up to 35% of its assets in privately-issued
asset-backed securities and privately-issued money market instruments, while
Government Income Fund may invest only up to 20% of its assets in such
securities. Moreover, the Series may invest up to 35% of its total assets in
corporate debt securities, while Government Income Fund may not do so.
The Series and Government Income Fund have the same manager (PIFM), the
same investment adviser (PIC), the same investment team (U.S. Liquidity Team)
and the same team leader (Michael Lillard). The U.S. Liquidity Team, which is
primarily responsible for overseeing the day-to-day management of the Series and
Government Income Fund, utilizes a similar investment approach in selecting
investments for the Series and Government Income Fund.
7
<PAGE>
The address of PIFM is Gateway Center Three, 100 Mulberry Street, 14th Floor,
Newark, New Jersey 07102-4077. PIFM and its predecessors have served as manager
or administrator to investment companies since 1987. As of October 31, 2000
PIFM served as manager to all 48 of the Prudential mutual funds, and as
manager or administrator to 21 closed-end investment companies, with aggregate
assets of approximately $74.7 billion.
The Series and Government Income Fund each use a type of Lehman Brothers
Government Bond index as their respective benchmark index, which is an unmanaged
weighted index comprised of securities issued or backed by the U.S.
Government, its agencies and instrumentalities. The Series, however, uses the
Intermediate Index which is comprised of securities with a remaining maturity of
one to ten years, while Government Income Fund uses the index which is comprised
of securities with between one and thirty years remaining to maturity.
The Series and Government Income Fund also use a type of Lipper U.S.
Government Fund category as a benchmark, although the Series uses the
Short-Intermediate U.S. Government Fund category, while Government Income Fund
uses the General U.S. Government Bond Fund category (each of which is based on
the average return of all mutual funds in the respective category).
While the Series and Government Income Fund make every effort to achieve
their respective investment objective, they can't guarantee success.
PURCHASES, REDEMPTIONS, EXCHANGES AND DISTRIBUTIONS
The purchase, redemption, and exchange policies of the Series and
Government Income Fund are similar and are expected to be those that are
currently in effect with respect to the Government Income Fund. The Series
offers only two classes of shares (Class A and Class Z), while Government Income
Fund offers four classes of shares (Class A, Class B, Class C and Class Z).
Although the Series does not impose an initial sales charge on its Class A
shares, Government Income Fund imposes an initial sales charge of 4% of the
public offering price. The initial sales charge of Class A shares of Government
Income Fund may be reduced or waived in certain circumstances. See the
Government Income Fund Prospectus for more information. Class A shares of
Government Income Fund that Series shareholders will receive for their Class A
shares of the Series will not be subject to an initial sales charge. The minimum
purchase amount and minimum amount for subsequent purchase is the same for the
Series and Government Income Fund, and is $1,000 and $100, respectively.
Class B shares of Government Income Fund are not subject to an initial
sales charge but are subject to a contingent deferred sales charge (CDSC) which
is 5% in the first year after purchase and deceases by 1% each year after
purchase to 1% in the fifth and sixth years. Class B shares of Government Income
Fund convert to Class A shares approximately seven years after purchase. The
minimum purchase amount is $1,000 and the minimum amount for subsequent purchase
is $100.
Class C shares of Government Income Fund are subject to an initial sales
charge of 1% of the public offering price, and are also subject to a CDSC of 1%
on sales made within 18 months
8
<PAGE>
of purchase. Class C's initial sales charge may be waived in certain
circumstances. See the Government Income Fund Prospectus for more information.
Class Z shares of the Series and Government Income Fund are sold without
a front-end sales charge or a CDSC. Class Z shares are available only to a
limited group of investors.
As a shareholder of Government Income Fund, you will be able to choose
among Class A, Class B, Class C and Class Z shares of Government Income Fund,
although Class Z shares are available only to a limited group of investors. The
multiple share classes that Government Income Fund offers let you choose a cost
structure that meets your needs. For more information or how to buy, sell and
exchange shares of the Series and Government Income Fund, refer to their
respective Prospectuses.
The Series distributes dividends out of any net investment income, plus
short-term capital gains, to shareholders typically every month; whereas
Government Income, Fund does so typically every quarter. The Series and
Government Income Fund distribute long-term capital gains to shareholders
typically once a year.
THE PROPOSED MERGER
Shareholders of the Series will be asked at the Meeting to vote upon and
approve the Agreement, under which the Series will transfer all of its assets
to, and all of its liabilities will be assumed by, Government Income Fund
whereupon the separate existence of the Series will cease and Government Income
Fund will be the surviving mutual fund, and each whole and fractional Class A
share of the Series shall be exchanged for a whole and fractional share of equal
net asset value of Class A of Government Income Fund, and each whole and
fractional Class Z share of the Series shall be exchanged for a whole and
fractional share of equal net asset value of Class Z of Government Income Fund,
on or about the Closing Date. Approval of the Merger will be determined solely
by approval of the Series' shareholders. No vote by shareholders of Government
Income Fund is required.
The Agreement provides that it is a condition to the Series' and
Government Income Fund's respective obligation to complete the Merger that the
Funds will have received an opinion of counsel that the Merger will not result
in any gain or loss for U.S. federal income tax purposes to the Series,
Government Income Fund, or the shareholders of the Series.
EXPENSE STRUCTURES
The Series and Government Income Fund each pay a management fee to PIFM
for managing its investment operations and administering its business affairs.
The management fee is calculated daily and paid to PIFM every month. PIFM, in
turn, reimburses PIC, the investment adviser, for its reasonable costs and
expenses in providing advisory services to the Series and Government Income
Fund, respectively. Effective January 1, 2000, PIFM pays PIC .20 of 1% and .25
of 1% of the average daily net assets of the Series and Government Income Fund,
respectively. Government Securities Trust, on behalf of the Series, has agreed
to pay a management fee to PIFM at an annual rate of .40 of 1% of the Series'
average daily net assets, with no breakpoints. Government Income Fund has agreed
to pay a management fee to PIFM
9
<PAGE>
with break points which lower the management fee as fund size increases so that
PIFM's contractual fee is at an annual rate of .50 of 1% of the average daily
net assets of Government Income Fund up to $3 billion and .35 of 1% of the
average daily net assets of Government Income Fund in excess of $3 billion.
The management fee paid by the Series and Government Income Fund covers
PIFM's oversight of the Series' and Government Income Funds' respective
investment portfolios. PIFM also administers Government Securities Trust's,
including the Series', and Government Income Funds' corporate affairs and, in
connection therewith, furnishes the Funds with office facilities, together with
those ordinary clerical and bookkeeping services that are not furnished by the
Funds' custodian or transfer and dividend disbursing agent. Officers and
employees of PIFM serve as officers and Trustees/Directors of the Funds without
compensation.
The Series' and Government Income Fund's distribution expense structures
are similar. Prudential Investment Management Services LLC (the Distributor), a
wholly-owned subsidiary of Prudential, serves as the distributor of the Series'
and Government Income Fund's shares. The Distributor incurs the expenses of
distributing the Series' and Government Income Fund's shares, including
commissions and account servicing fees paid to or on account of brokers or
financial institutions that have entered into agreements with the Distributor,
advertising expenses, the cost of printing and mailing prospectuses to potential
investors and indirect and overhead costs of the Distributor associated with the
sale of shares, including lease, utility, communications and sales promotion
expenses.
Under the Series' Class A Plan, Government Securities Trust pays the
Distributor a distribution and service (12b-1) fee with respect to Class A
shares (including up to .25 of 1% as a service fee, calculated in the same
manner as the distribution fee) at annual rate of the lesser of (i) .25 of 1%
per annum of the aggregate sales of the Series' Class A shares, not including
shares issued in connection with reinvestment of dividends and capital gains
distributions from the Series, issued on or after July 1, 1985 less the
aggregate net asset value of any such shares redeemed, or (ii) .25 of 1% per
annum of the average daily net asset value of the Series' shares issued after
July 1, 1985. As a result, for the fiscal year ending November 30, 2000, the
Series paid distribution and service (12b-1) fees in the amount of 0.18%.
Government Income Fund pays the Distributor a distribution and service (12b-1)
fee at an annual rate of up to .30 of 1%, 1% and 1% of the average daily net
assets of each of the Class A, Class B and Class C shares, respectively. For the
current fiscal year, the Distributor of Government Income Fund has contractually
agreed to reduce its distribution and service (12b-1) fees for Class A, Class B
and Class C shares to .25 of 1%, .825 of 1% and .75 of 1% of the average daily
net assets of Class A, Class B and Class C shares of Government Income Fund,
respectively.
Shareholders should understand that the contractual waiver by the
Distributor with respect to Government Income Fund shares is enforceable for
one-year periods and may be terminated with respect to any subsequent fiscal
year on not less than 30 days' notice prior to the end of a current fiscal year.
The Distributor's contractual waiver with respect to Government Income Fund
extends through February 28, 2001. There is no assurance that the Distributor
will continue the waiver beyond February 28, 2001.
10
<PAGE>
The Series and Government Income Fund also pay certain other expenses in
connection with their operations, including accounting, legal, audit and
registration expenses. Other expenses incurred by both classes of the Series for
the fiscal year ending November 30, 2000 were 0.36%, and by each class of
Government Income Fund for the fiscal year ending February 29, 2000 was 0.19% of
average daily net assets. Annualized other expenses incurred by each class of
Government Income Fund for the period ending August 31, 2000 were 0.27%.
Although the basis for calculating these fees and expenses is the same for
Government Income Fund and the Series, the per share effect on shareholder
returns is affected by their relative size. Combining the Series with
Government Income Fund is expected to reduce certain expenses. For example,
only one annual audit of the combined Fund will be required rather than
separate audits of the Series and Government Income Fund as is
currently required.
The following table shows the annual operating expenses for each class of
shares of the Series as of November 30, 2000, and for each class of shares of
Government Income Fund as of February 29, 2000. The table also shows Government
Income Fund's annualized net operating expenses for the period ended August 31,
2000.
<TABLE>
<CAPTION>
Series (as of Government Income Government Income
11/30/00) Fund (as of 2/29/00) Fund (as of 8/31/00)
<S> <C> <C> <C>
Class A .94% 0.94%* 1.02%*
Class B N/A 1.52%* 1.60%*
Class C N/A 1.44%* 1.52%*
Class Z .76% 0.69% 0.77%
</TABLE>
* These expense ratios are after deduction of fee waivers. As discussed
above, for the fiscal year ending February 28, 2001, the Distributor of
Government Income Fund has contractually agreed to reduce its distribution and
service (12b-1) fees for Class A, Class B and Class C shares to 0.25 of 1%,
0.825 of 1% and 0.75 of 1% of the average daily net assets of Class A, Class B
and Class C shares of Government Income Fund, respectively .
If shareholders approve the Merger, Government Income Fund's expense
structure will apply. Assuming continuation of Government Income Fund's current
expenses, this expense structure would decrease the total operating expenses
currently incurred by Class Z shareholders of the Series by .05 of 1%, but would
increase by .01 of 1% the total operating expenses currently incurred by Class A
shareholders of the Series. It is estimated, however, that if the assets of the
Series continue to decline as projected for the next calendar year, the Series'
Class A shares will likely have the same expense ratio as those of Government
Income Fund. If the proposed Merger is not approved with respect to the Series,
the Series will continue with its current fee structure. For more information
about the Series' and Government Income Fund's current fees, refer to their
respective Prospectuses. See the Pro Forma Capitalization and Ratios below for
estimates of expenses if the Merger is approved.
Overall, the proposed Merger would provide the Series' shareholders with
the following benefits:
11
<PAGE>
- the opportunity to participate in a larger fund with an
investment objective and policies similar to the Series'
investment objective and policies, which may be able to more
effectively pursue its investment objective at a more
reasonable cost to shareholders;
- due to expected greater economies of scale, annual operating
expenses for each class of the Series' shares could be lower
than those currently projected for the present Series in light
of the Series' declining assets and the number of
shareholders; and
- the opportunity to exchange your Class A shares of the Series
for Class A shares of another Prudential mutual fund without
paying an initial sales charge.
THE BOARD OF TRUSTEES OF GOVERNMENT SECURITIES TRUST BELIEVES THAT THE MERGER
WILL BENEFIT THE SERIES' SHAREHOLDERS AND RECOMMENDS THAT SHAREHOLDERS VOTE IN
FAVOR OF THE MERGER.
COMPARATIVE SHAREHOLDER FEES
The following table shows the sales charges and fees that you may pay if
you buy and hold shares of each class of the Series and Government Income Fund.
These charges and fees are paid directly from your investment. The table shows
charges and fees for the Series and Government Income Fund for the fiscal year
ended November 30, 2000 and February 29, 2000, respectively.
<TABLE>
<CAPTION>
SHAREHOLDER FEES* (PAID DIRECTLY FROM YOUR INVESTMENT)
Series Series GIF
Class A Class Z Class A GIF Class B GIF Class C GIF Class Z
<S> <C> <C> <C> <C> <C> <C>
Maximum sales charge (load) None None 4% None 1% None
imposed on purchases (as a
percentage of offering price)
Maximum deferred sales charge
(load) (as a percentage of the None None None 5%(a) 1%(b) None
lower of original purchase price
or sale proceeds)
Maximum sales charge (load) None None None None None None
imposed on reinvested dividends
and other distributions
Redemption fees None None None None None None
Exchange fee None None None None None None
</TABLE>
* Your broker may charge you a separate or additional fee for purchases and
sales of shares.
12
<PAGE>
(a) The Contingent Deferred Sales Charge (CDSC) for Class B shares decreases
by 1% annually to 1% in the fifth and sixth years and 0% in the seventh
year. Class B shares convert to Class A shares approximately seven years
after purchase.
(b) The CDSC for Class C shares is 1% for shares redeemed within 18 months of
purchase.
COMPARATIVE FEE TABLES
The following tables show the fees and expenses of Class A and Class Z
shares of the Series, and of Class A, Class B, Class C and Class Z shares of
Government Income Fund, and pro forma fees for the combined fund after giving
effect to the Merger, including the effect of the Distributor's fee waiver with
respect to Government Income Fund previously described.
Operating expenses for the Series and Government Income Fund are paid out
of their respective assets. Expenses are factored into the Series' and
Government Income Fund's share price or dividends and are not charged directly
to shareholder accounts. The following figures are based on historical expenses
of the Series for the twelve-month period ended November 30, 2000, and of
Government Income Fund for the twelve-month period ended February 29, 2000 and
are calculated as a percentage of average net assets of the Series and
Government Income Fund, respectively. The pro forma combined figures are based
on August 31, 2000 amounts.
<TABLE>
<CAPTION>
CLASS A SHARES
Government Pro Forma
Series Income Fund Combined Fund
Class A Shares Class A Shares Class A Shares
------------------ ------------------ ------------------
<S> <C> <C> <C>
Management fees .40% .50% .50%
+ Distribution and service
(12b-1) fees .18% .30%* .30%*
+ Other expenses .36% .19% .23%
= TOTAL ANNUAL OPERATING
EXPENSES .94% .99% 1.03%
- Fee waiver or expense
reimbursement N/A .05%* .05%*
= NET ANNUAL OPERATING
EXPENSES .94% .94% .98%
</TABLE>
* For the fiscal year ending February 28, 2001, the Distributor of Government
Income Fund has contractually agreed to reduce its distribution and service
(12b-1) fees for Class A shares to .25 of 1% of the average daily net assets
of Class A shares.
CLASS B SHARES
<TABLE>
<CAPTION>
Government Pro Forma
Series Income Fund Combined Fund
Class B Shares Class B Shares Class B Shares
-------------- -------------- --------------
<S> <C> <C> <C>
13
<PAGE>
Management fees N/A .50% .50%
+ Distribution and service N/A 1.00%* 1.00%
(12b-1) fees
+ Other expenses N/A .19% .23%
= TOTAL ANNUAL OPERATING N/A 1.69% 1.73%
EXPENSES
- Fee waiver or expense N/A .175%* .175%
reimbursement
= NET ANNUAL OPERATING N/A 1.52% 1.56%
EXPENSES
</TABLE>
* For the fiscal year ending February 28, 2001, the Distributor of Government
Income Fund has contractually agreed to reduce its distribution and service
(12b-1) fees for Class B shares to .825 of 1% of the average daily net
assets of the Class B shares.
CLASS C SHARES
<TABLE>
<CAPTION>
Government Pro Forma
Series Income Fund Combined Fund
Class C Shares Class C Shares* Class C Shares
-------------- --------------- --------------
<S> <C> <C> <C>
Management fees N/A .50% .50%
+ Distribution and service N/A 1.00%* 1.00%
(12b-1) fees
+ Other expenses N/A .19% .23%
= TOTAL ANNUAL OPERATING N/A 1.69% 1.73%
EXPENSES
- Fee waiver or expense N/A .25%* .25%
reimbursement
= NET ANNUAL OPERATING N/A 1.44% 1.48%
EXPENSES
</TABLE>
* For the fiscal year ending February 28, 2001, the Distributor of
Government Income Fund has contractually agreed to reduce its distribution
and service (12b-1) fees for Class C shares to .75 of 1% of the average
daily net assets of the Class C shares.
CLASS Z SHARES
<TABLE>
<CAPTION>
Government Pro Forma
Series Income Fund Combined Fund
Class Z Shares Class Z Shares Class Z Shares
-------------- -------------- --------------
<S> <C> <C> <C>
Management fees .40% .50% .50%
14
<PAGE>
+ Distribution and service
(12b-1) fees None None None
+ Other expenses .36% .19% .23%
= TOTAL ANNUAL OPERATING
EXPENSES .76% .69% .73%
- Fee waiver or expense
reimbursement N/A None None
= NET ANNUAL OPERATING
EXPENSES .76% .69% .73%
</TABLE>
EXAMPLES OF THE EFFECT OF SERIES AND GOVERNMENT INCOME FUND EXPENSES
The following tables illustrate the expenses on a hypothetical $10,000
investment in the Series and Government Income Fund, respectively, under the
current and pro forma (combined fund) expenses calculated at the rates stated
above for the first year, and thereafter using gross expenses with no fee
waivers or expense reimbursements, if any, assuming a 5% annual return, and
assuming that you sell your shares at the end of each period.
CLASS A SHARES
<TABLE>
<CAPTION>
Government Pro Forma
Series Income Fund Combined Fund
Class A Shares Class A Shares Class A Shares
-------------- -------------- --------------
<S> <C> <C> <C>
1 Year $96 $492 $496
3 Years $300 $698 $710
5 Years $520 $921 $941
10 Years $1,155 $1,560 $1,605
</TABLE>
CLASS B SHARES
<TABLE>
<CAPTION>
Government Pro Forma
Series Income Fund Combined Fund
Class B Shares Class B Shares Class B Shares
-------------- -------------- --------------
<S> <C> <C> <C>
1 Year N/A $654 $659
3 Years N/A $816 $828
5 Years N/A $1,001 $1,023
10 Years N/A $1,713 $1,758
</TABLE>
15
<PAGE>
CLASS C SHARES
<TABLE>
<CAPTION>
Government Pro Forma
Series Income Fund Combined Fund
Class C Shares Class C Shares Class AC Shares
-------------- -------------- --------------
<S> <C> <C> <C>
1 Year N/A $345 $349
3 Years N/A $603 $615
5 Years N/A $985 $1,006
10 Years N/A $2,057 $2,100
</TABLE>
CLASS Z SHARES
<TABLE>
<CAPTION>
Government Pro Forma
Series Income Fund Combined Fund
Class Z Shares Class Z Shares Class Z Shares
-------------- -------------- --------------
<S> <C> <C> <C>
1 Year $78 $70 $75
3 Years $243 $221 $233
5 Years $422 $384 $406
10 Years $942 $859 $906
</TABLE>
These examples assume that all dividends and other distributions are
reinvested and that the percentage amounts listed under total annual operating
expenses remain the same in the years shown, except for the Distributor's
reduction of distribution and service (12b-1) fees for Class A, Class B and
Class C shares of Government Income Fund during the first year. The examples
also assume a stable shareholder base, but in fact the shareholder base of the
Series has been declining in recent years. A continued decline would result in
higher per share expenses going forward. These examples illustrate the effect of
expenses, but are not meant to suggest actual or expected expenses, which may
vary. The assumed return of 5% is not a prediction of, and does not represent,
actual or expected performance of the Series or Government Income Fund.
PRO FORMA CAPITALIZATION AND RATIOS
The following table shows the capitalization of the Series and Government
Income Fund as of August 31, 2000, and the pro forma combined capitalization as
if the Merger had occurred on that date.
<TABLE>
<CAPTION>
Series Government Pro Forma
Class Z Shares Income Fund Combined Fund
-------------- -------------- --------------
<S> <C> <C> <C>
Net Assets (000s)
Class A $109,300,067 $803,228,925 $912,528,992
Class B N/A $144,690,719 $144,690,719
</TABLE>
16
<PAGE>
<TABLE>
<S> <C> <C> <C>
Class C ...... N/A $7,836,984 $7,836,984
Class Z ...... $6,504,624 $97,906,296 $104,410,920
Net Asset Value Per Share
Class A ...... $9.45 $8.57 $8.67
Class B ...... N/A $8.58 $8.58
Class C ...... N/A $8.58 $8.58
Class Z ...... $9.49 $8.56 $8.62
Shares Outstanding (000s)
Class A ...... 11,568,295 93,694,385 105,262,680
Class B ...... N/A 16,865,238 16,865,238
Class C ...... N/A 913,498 913,498
Class Z ...... 685,444 11,433,090 12,118,534
</TABLE>
The following table shows the ratio of expenses to average net assets and
the ratio of net investment income to average net assets (based upon average
weighted shares outstanding during the relevant period) of the Series for the
twelve-month period ended November 30, 2000, and of Government Income Fund for
the twelve-month period ended February 29, 2000. The ratios also are shown on a
pro forma combined basis as of August 31, 2000.
<TABLE>
<CAPTION>
Government Pro Forma
Series Income Combined
(as of Fund (as of Fund (as of
11/30/2000) 2/29/00) 8/31/00)
----------- ----------- -----------
<S> <C> <C> <C>
Ratio of expenses to
average net assets
Class A ............ .94% .94% .98%
Class B ............ N/A 1.52% 1.56%
Class C ............ N/A 1.44% 1.48%
Class Z ............ .76% .69% .73%
Ratio of net investment
income to average net
assets
Class A ............ 5.38% 6.39% 6.32%
Class B ............ N/A 5.77% 5.62%
</TABLE>
17
<PAGE>
<TABLE>
<S> <C> <C> <C>
Class C ............ N/A 5.90% 6.34%
Class Z ............ 5.56% 6.64% 7.03%
</TABLE>
PERFORMANCE COMPARISONS OF THE SERIES AND GOVERNMENT INCOME FUND
The following tables compare the Series' and Government Income Fund's
average annual total returns for the periods set forth below. Average annual
total returns are based on past results and are not an indication of future
performance, and include the deduction of applicable sales charges.
AVERAGE ANNUAL TOTAL RETURNS (CLASS A SHARES)
(PERIODS ENDED AUGUST 31, 2000)
<TABLE>
<CAPTION>
One Year Five Years Ten Years Since Inception
---------- ------------ ----------- ------------------
<S> <C> <C> <C> <C>
Series 5.59% 5.09% 6.31% 7.77%
(since 9-22-82)
Government Income
Fund* 2.68% 4.78% 6.84% 6.65%
(since 1-22-90)
--------------
</TABLE>
* Without the distribution and service (12b-1) fee waiver, the Average Annual
Total Returns would have been lower.
AVERAGE ANNUAL TOTAL RETURNS (CLASS B SHARES)
(PERIODS ENDED AUGUST 31, 2000)
<TABLE>
<CAPTION>
One Year Five Years Ten Years Since Inception
---------- ------------ ----------- ------------------
<S> <C> <C> <C> <C>
Series N/A N/A N/A N/A
Government Income
Fund* 1.47% 4.82% 6.53% 7.09%
(since 4-22-85)
--------------
</TABLE>
* Without the distribution and service (12b-1) fee waiver, the Average Annual
Total Returns would have been lower.
18
<PAGE>
AVERAGE ANNUAL TOTAL RETURNS (CLASS C SHARES)
(PERIODS ENDED AUGUST 31, 2000)
<TABLE>
<CAPTION>
One Year Five Years Ten Years Since Inception
---------- ------------ ----------- ------------------
<S> <C> <C> <C> <C>
Series N/A N/A N/A N/A
Government Income
Fund* 4.48% 4.84% ____% 5.72%
(since 8-1-94)
--------------
</TABLE>
* Without the distribution and service (12b-1) fee waiver, the Average Annual
Total Returns would have been lower.
AVERAGE ANNUAL TOTAL RETURNS (CLASS Z SHARES)
(PERIODS ENDED AUGUST 31, 2000)
<TABLE>
<CAPTION>
One Year Five Years Ten Years Since Inception
---------- ------------ ----------- ------------------
<S> <C> <C> <C> <C>
Series 5.76% N/A N/A 5.04%
(since 2-26-97)
Government Income Fund 7.23% N/A N/A 5.38%
(since 3-4-96)
</TABLE>
FORMS OF ORGANIZATION
The Series is a diversified series of Government Securities Trust, which is
an open-end management investment company organized under the laws of
Massachusetts on September 22, 1981, as a Massachusetts business trust.
Government Income Fund is a diversified, open-end management investment company
organized under the laws of Maryland on April 8, 1983. Government Securities
Trust's Declaration of Trust permits the Trustees to issue an unlimited number
of full and fractional shares of beneficial interest, $.01 par value, in
separate series and classes within such securities, one such series is currently
designated as the Short-Intermediate Term Series. The other two series currently
designated by the Government Securities Trust are the U.S. Treasury Money Market
Series and the Money Market Series. Each Series is authorized to issue an
unlimited number of shares of beneficial interest, $.01 par value, divided into
two classes, designated Class A and Class Z. The Series currently offers both
Class A and Class Z shares of beneficial interest.
Government Income Fund is authorized to issue 2 billion shares of common
stock, $.01 par value per share, divided into four classes, designated Class A,
Class B, Class C and Class Z common stock. Each class is authorized to issue 500
million shares.
Government Income Fund is a Maryland corporation and the rights of its
shareholders are governed by its Charter, By-Laws and the Maryland General
Corporation Law. Government
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<PAGE>
Securities Trust is a Massachusetts business trust and the rights of its
shareholders are governed by its Declaration of Trust, By-Laws and applicable
Massachusetts law.
Generally, neither Fund is required to hold annual meetings of its
shareholders. Each Fund is required to call a meeting of shareholders for the
purpose of voting upon the question of removal of a Director/Trustee when
requested in writing to do so by the holders of at least 10% of the Fund's
outstanding shares. In addition, each Fund is required to call a meeting of
shareholders for the purpose of electing Directors/Trustees to fill any existing
vacancies on the Board of Directors/Trustees if, at any time, less than a
majority of the Directors/Trustees holding office at that time were elected by
the holders of the outstanding voting securities.
Under the Declaration of Trust, Government Securities Trust shareholders
are entitled to vote only with respect to the following matters: (1) for the
election of Trustees if a meeting is called for that purpose; (2) with respect
to any investment advisory or management contract as provided in the
Declaration; (3) with respect to termination of the Trust; (4) with respect to
any amendment of the Declaration as provided in the Declaration; (5) with
respect to any merger, consolidation or sale of assets as provided in the
Declaration, (6) with respect to incorporation of the Trust to the extent and as
provided in the declaration; (7) to the same extent as the stockholders of a
Massachusetts business corporation as to whether or not a court action,
proceeding or claim should or should not be brought or maintained derivatively
or as a class action on behalf of the Trust or the Shareholders, and (8) with
respect to such additional matters relating to the Trust as may be required by
law, the Declaration, the By-Laws or any registration of the Trust with the
Commission (or any successor agency) or any state, or as and when the Trustees
may consider necessary or desirable. Each whole Share shall be entitled to one
vote as to any matter on which it is entitled to vote and each fractional Share
shall be entitled to a proportionate fractional vote, except that Shares held in
the treasury of the Trust as of the record date, as determined in accordance
with the By-Laws, shall not be voted and except that the Trustees may, in
conjunction with the establishment of any series or classes of Shares, establish
conditions under which the Series or classes shall have separate voting rights
or no voting rights. Unless and until otherwise determined by the Trustees, any
vote of Shareholders shall be taken without regard to class.
The Declaration of Trust provides that a "Majority Shareholder Vote" of
Government Securities Trust is required to decide most questions upon which
shareholders vote. "Majority Shareholder Vote" means the vote of the holders of
a majority of Shares, which shall consist of: (i) a majority of Shares
represented in person or by proxy and entitled to vote at a meeting of
Shareholders at which a quorum, as determined in accordance with the By-Laws, is
present; (ii) a majority of Shares issued and outstanding and entitled to vote
when action is taken by written consent of Shareholders; and (iii) a "majority
of the outstanding voting securities", as that phrase is defined in the
Investment Company Act, when action is taken by Shareholders with respect to
approval of an investment advisory or management contract or an underwriting or
distribution agreement or continuance thereof.
Shareholders of Government Income Fund are entitled to one vote for each
share on all matters submitted to a vote of its shareholders under Maryland law.
Approval of certain matters,
20
<PAGE>
such as an amendment to the charter, merger, consolidation or transfer of all
or substantially all assets, dissolution and removal of a Director, requires
the affirmative vote of a majority of the votes entitled to be cast.
A plurality of votes cast is required to elect Directors. Other matters require
the approval of the affirmative vote of a majority of the votes cast at a
meeting at which a quorum is present.
Government Securities Trust's and Government Income Fund's By-Laws provide
that a majority of the outstanding shares shall constitutes a quorum for the
transaction of business at a shareholder's meeting. Matters requiring a larger
vote by law or under the organization documents for either Fund are not affected
by such quorum requirements.
With respect to shareholder liability, under Maryland law, Government
Income Fund's shareholders have no personal liability as such for Government
Income Fund's acts or obligations. Under Massachusetts law, Government Series
Trust's shareholders, under certain circumstances, could be held personally
liable for Government Series Trust's obligations. However, the Declaration of
Trust disclaims shareholder liability for acts or obligations of Government
Series Trust and requires that notice of such disclaimer be given in every
written obligation, contract, instrument, certificate, share, or other security
of Government Securities Trust or undertaking made or issued by the Trustees.
The Declaration of Trust provides for indemnification out of the applicable
series' property for all losses and expenses of any shareholder held personally
liable for Government Securities Trust's obligations solely by reason of his or
her being or having been a Government Securities Trust shareholder and not
because of his or her acts or omissions or some other reason. Thus, Government
Securities Trust considers the risk of a shareholder incurring financial loss on
account of shareholder liability to be remote since it is limited to
circumstances in which a disclaimer is inoperative or Government Securities
Trust itself would be unable to meet its obligations.
With respect to the liability and indemnification of Directors under
Maryland law, a Director or officer of Government Income Fund is not liable to
Government Income Fund or its shareholders for monetary damages for breach of
fiduciary duty as a Director or officer except to the extent of such exemption
from liability or limitation thereof is not permitted by law, including under
the Investment Company Act. With respect to the liability and indemnification of
Government Income Fund's Directors and officers, Government Income Fund's
By-Laws provide that its present and former directors, officers, employees and
agents of Government Income Fund shall be indemnified by Government Income Fund
against judgments, fines, settlements, and expenses to the fullest extent
authorized and in the manner permitted by applicable federal and state law.
With respect to the liability and indemnification of Trustees of Government
Securities Trust, under Government Securities Trust's Declaration of Trust, a
Trustee is entitled to indemnification against all liability and expenses
reasonably incurred or paid by him or her in connection with the defense or
disposition of any threatened or actual proceeding, except a proceeding brought
by or on behalf of the Trust, by reason of his or her being or having been a
Trustee, and against amounts paid or incurred by him in the settlement thereof,
unless such Trustee has acted with bad faith, willful misfeasance, gross
negligence or in reckless disregard of his or her duties, provided such
representative acted in good faith and in a manner he reasonably believed to be
in the best interest of the Trust.
21
<PAGE>
Under the Investment Company Act, a Director of Government Income Fund and a
Trustee of Government Securities Trust may not be protected against liability to
Government Income Fund or Government Securities Trust, respectively, and their
security holders to which he or she would otherwise be subject as a result of
his or her willful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of his or her office. The staff
of the Commission interprets the Investment Company Act to require additional
limits on indemnification of Directors, Trustees and officers.
COMPARISON OF PRINCIPAL RISK FACTORS
The Series and Government Income Fund are each subject to the risks
normally associated with funds that invest in U.S. Government securities.
As described more fully below, the Series and Government Income Fund have
similar investment objectives, policies and permissible investments.
One of the primary differences between the investment policies of the
Series and Government Income Fund is that the Series seeks to provide reasonable
safety as part of its investment objective while Government Income Fund does
not. This difference is partly reflected in that the Series primarily invests in
securities with maturities ranging from two to five years, while Government
Income Fund has no similar limitations. This means that, in general, Government
Income Fund invests in obligations that are more susceptible to market risk.
Because the Series and Government Income Fund normally invest in U.S.
Government securities, the Series and Government Income Fund have similar levels
of risk. As discussed above, since the Series generally invests in securities
with shorter maturities than Government Income Fund, at times the Series' risk
level may be lower than that of Government Income Fund. As of August 31, 2000,
the Series invested 88.7% of its total assets in U.S. Government securities.
As of August 31, 2000, Government Income Fund invested 92.5% of its total
assets in U.S. Government securities. Investments in U.S. Government securities
expose the Series and Government Income Fund to the following risks:
- Market risk -- the risk that obligations will lose value in the
market, sometimes rapidly or unpredictably, because interest rates rise or there
is a lack of confidence in the borrower.
- Credit risk -- the risk that the borrower, credit insurer or
guarantor can't pay back the money borrowed or make interest payments
(relatively low for U.S. Government securities).
- Prepayment risk -- the risk that the underlying mortgage-related or
asset-backed securities may be pre-paid, partially or completely, generally
during periods of falling interest rates, which could adversely affect yield to
maturity and could require reinvestment in lower-yielding securities.
22
<PAGE>
- Not all U.S. Government securities are backed by the full faith and
credit of the United States.Some are supported only by the credit of the issuing
agency.
The Series and Government Income Fund may actively and frequently trade
their respective portfolio securities. High portfolio turnover results in higher
transaction costs and can affect performance and have adverse tax consequences.
Both the Series and Government Income Fund may use various investment strategies
-- such as derivatives -- that involve risk. The Series and Government Income
Fund may use derivative strategies to try to improve returns and may use hedging
techniques to try to protect assets. Derivatives, which involve costs and can be
volatile, may not fully offset the underlying positions which could result in
losses that would not have otherwise occurred.
Like any mutual fund, an investment in the Series or Government Income Fund
could lose value, and you could lose money. An investment in the Series or
Government Income Fund is not a bank deposit and is not insured or guaranteed by
the Federal Deposit Insurance Corporation or by any other government agency. For
a more complete discussion of the risks associated with the Series or Government
Income Fund, please refer to the "Risk/Return Summary" or the section entitled
"Investment Risks" in the Series' and Government Income Fund's respective
Prospectus.
INVESTMENT OBJECTIVES AND POLICIES
If the Merger is approved, the shareholders of the Series will become
shareholders of Government Income Fund. The following information compares the
objectives and policies of the Series and Government Income Fund.
INVESTMENT OBJECTIVES
The Series and Government Income Fund have similar investment objectives
and policies. The investment objective of the Series is to achieve a high level
of income consistent with providing reasonable safety. This means that the
Series seeks investments that will increase in value, as well as pay the Series
interest and other income. The investment objective of Government Income Fund is
high current return. Unlike the Series, Government Income Fund does not seek to
provide reasonable safety as part of its investment objective. Under normal
circumstances, the Series and Government Income Fund each invests at least 65%
of its respective assets 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 the U.S. Government, its agencies or
instrumentalities. One of the primary differences between the investment
policies of the Series and Government Income Fund is that the Series primarily
invests in securities with maturities ranging from two to five years, while
Government Income Fund has no similar limitations. This means that, in general,
Government Income Fund invests in obligations that are more susceptible to
market risk. The Series and Government Income Fund have the same manager (PIFM),
the same investment adviser (PIC), the same investment team (U.S. Liquidity
Team) and the same team leader (Michael Lillard). The U.S. Liquidity Team, which
is primarily responsible for overseeing the day-to-day management of the Series
and Government Income Fund, utilizes a similar investment approach in selecting
investments for the Series and Government Income Fund, consistent with their
respective investment objectives.
23
<PAGE>
The investment objective of each of the Series and Government Income Fund
is a fundamental policy. This means that the objective cannot be changed without
the approval of shareholders of the Series and Government Income Fund,
respectively. With the exception of fundamental policies, investment policies
(other than specified investment restrictions) of the Series and Government
Income Fund can be changed without shareholder approval.
For the purpose of measuring performance, the Series and Government Income
Fund each use a type of Lehman Brothers Government Bond Index as their
respective benchmark index, which is an unmanaged weighted index comprised of
securities issued or backed by the U.S. Government, its agencies and
instrumentalities. The Series, however, uses the Intermediate Index which is
comprised of securities with a remaining maturity of one to ten years, while
Government Income Fund uses the index which is comprised of securities with
between one and thirty years remaining to maturity.
The Series and Government Income Fund also use a type of Lipper U.S.
Government Fund category as a benchmark, although the Series uses the
Short-Intermediate U.S. Government Fund category, while Government Income Fund
uses the General U.S. Government Bond Fund category (each of which is based on
the average return of all mutual funds in the respective category).
PRINCIPAL INVESTMENT STRATEGIES
The Series and Government Income Fund have similar investment strategies,
the main difference being that the Series generally invests in securities with
maturities ranging from two to five years, while Government Income Fund has no
similar limitations. The Series and Government Income Fund each invests at least
65% of its respective assets, under normal circumstances, in U.S. Government
securities, including U.S. Treasury bills, notes, bonds and other debt
securities issued by the U.S. Treasury and obligations, including
mortgage-related securities, asset-backed securities and other securities that
are issued or guaranteed by the U.S. Government, its agencies or
instrumentalities. These guarantees do not extend to the yield or the value of
the securities or the value of the Series or Government Income Fund's shares.
Not all U.S. Government securities are backed by the full faith and credit of
the United States, some are only supported by the credit of the issuing agency.
While the Series may only invest up to 5% of its assets in Treasury strips,
Government Income Fund has no similar limit.
Although the Series and Government Income Fund may each invest up to 35% of
its respective total assets in non-U.S. Government instruments, the Series may
invest up to 35% of its assets in privately-issued asset-backed securities and
privately-issued money market instruments, while Government Income Fund may
invest only up to 20% of its assets in such securities. Moreover, the Series may
invest up to 35% of its total assets in corporate debt securities, while
Government Income Fund may not do so. The Series may invest up to 35% of its
total assets in U.S. dollar-denominated foreign debt securities, which
include securities that are issued by foreign governments and corporations.
Government Income Fund, on the other hand, may invest only less than 10% of
its total assets in obligations of foreign banks and foreign branches of U.S.
banks (including obligations of the International Bank for Reconstruction and
Development), which may be either U.S. dollar or foreign currency denominated
obligations. The Series and Government Income Fund are permitted to invest in
debt securities whose interest rates are fixed as well as debt securities
whose interest rates fluctuate from time to time.
24
<PAGE>
Government Income Fund may invest up to 5% of its total assets in zero
coupon U.S. Government securities, while the Series may not do so. The
Series and Government Income Fund may each invest in repurchase and reverse
repurchase agreements, dollar rolls and when-issued or delayed-delivery
securities.
The Series may make short sales subject to certain limitations, as well as
short sales against-the-box, without limitation. In comparison, Government
Income Fund may only engage in short sales against-the-box to the extent that
not more than 10% of its net assets (as determined at the time of the short
sale) are held as collateral for such sales. In a short sale against-the-box, a
fund owns or has the right to acquire the security at no additional cost through
conversion or exchange of other securities it owns.
The Series and Government Income Fund may each use various derivative
strategies to try to improve their respective performance or use hedging
techniques to try to protect their respective assets.
COMPARISON OF OTHER POLICIES OF THE SERIES AND GOVERNMENT INCOME FUND
DIVERSIFICATION
The Series and Government Income Fund are diversified funds. This means
that, with respect to 75% of the Series' and Government Income Fund's total
assets, they may not invest more than 5% of each of their total assets in the
securities of a single issuer, and they may not hold more than 10% of the
outstanding voting securities of a single issuer. These limitations do not apply
to U.S. Government securities.
BORROWING
The Series and Government Income Fund may each borrow money for temporary,
extraordinary or emergency purposes or for the clearance of transactions. The
Series may also borrow to take advantage of investment opportunities, while
Government Income Fund may not do so. The Series may borrow up to 33 1/3% of its
total assets, while Government Income Fund may only borrow up to 20% of its
total assets. The Series may borrow only from banks, while Government Income
Fund is not similarly limited.
LENDING
Neither the Series nor Government Income Fund can make loans, except
through repurchase agreements and loans of portfolio securities (limited to 30%
of total assets). The Series, however, may only engage in repurchase agreements
covering government securities.
ILLIQUID SECURITIES
The Series and Government Income Fund may invest in illiquid securities,
including securities with legal or contractual restrictions on resale, those
without a readily available market,
25
<PAGE>
and repurchase agreements with maturities longer than seven days. The Series and
Government Income Fund may hold up to 15% of their respective net assets in
illiquid securities.
TEMPORARY DEFENSIVE INVESTMENTS
For temporary defensive purposes, the Series may invest up to 100% of its
assets in cash, U.S. Government securities and high quality money market
instruments. In response to adverse market, economic or political conditions,
Government Income Fund may temporarily invest up to 100% of its assets in
high-quality money market instruments, cash, repurchase agreements or U.S.
Government securities. Investing heavily in these securities limits a fund's
ability to achieve its investment objective, but can help to preserve its
assets.
For more information about the risks and restrictions associated with these
policies, see the Series' and Government Income Fund's respective Prospectuses
and Statements of Additional Information, and for a more detailed discussion of
the Series' and Government Income Fund's investments, see their respective
Statements of Additional Information, all of which are incorporated into this
Proxy Statement by reference.
OPERATIONS OF GOVERNMENT INCOME FUND
FOLLOWING THE MERGER
Neither PIFM nor PIC expect Government Income Fund to revise its
investment policies, management or general investment approach as a result of
the Merger. In addition, because Michael Lillard serves as the investment team
leader for both the Series and Government Income Fund, neither PIFM nor PIC
anticipates any significant changes from the Series' management or general
investment approach. The agents that provide the Series with services, such as
its Custodian and Transfer Agent, who also provide these services to Government
Income Fund, are not expected to change. The Trustees of Government Securities
Trust, of which the Series is a part, are the same individuals who serve as
Directors of Government Income Fund. The officers of Government Securities Trust
and Government Income Fund are also the same.
All of the current investments of the Series are permissible
investments for Government Income Fund. Nevertheless, PIC may sell securities
held by Government Income Fund after the Closing Date of the Merger as may be
necessary or desirable in the ongoing management of Government Income Fund.
Transaction costs associated with such adjustments will be borne by Government
Income Fund.
PURCHASES, REDEMPTIONS AND EXCHANGES
PURCHASING SHARES
Both the Series and Government Income Fund offer Class A and Class Z
shares, while only Government Income Fund offers Class B and Class C shares. The
price to buy one share of a class of the Series or Government Income Fund is
that class's net asset value, or NAV, plus a front-end sales charge in the case
of Class A and Class C shares of Government Income Fund. Although both the
Series and Government Income Fund offer Class A and Class Z shares, Class A
26
<PAGE>
shares of the Series are not subject to a front-end sales charge, while those of
Government Income Fund are subject to a 4% front-end sales charge. Class B
shares of Government Income Fund are not subject to a front-end sales charge,
but are subject to a contingent deferred sales charge (CDSC) which is 5% in the
first year after purchase and decreases by 1% each year after purchase to 1% in
the fifth and sixth years. Class C shares of Government Income Fund are subject
to a 1% front-end sales charge and are also subject to a CDSC of 1% on sales
made within 18 months of purchase. Class Z shares of the Series and Government
Income Fund are sold without a front-end sales charge or a CDSC and are
available only to a limited group of investors. Each Class A shareholder of the
Series will receive Class A shares of Government Income Fund, and each Class Z
shareholder of the Series will receive Class Z shares of Government Income Fund,
in each case, equal in value to his or her shares of the Series immediately
before the Merger, without any dilution. Class A shares of Government Income
Fund that Class A shareholders of the Series will receive in the Merger will not
be subject to a front-end sales charge.
Shares in the Series and Government Income Fund are purchased at the next
NAV, calculated after your investment is received and accepted, plus any initial
sales charge, in the case of Government Income Fund. The Series' and Government
Income Fund's NAV is normally calculated once each business day at 4:15 p.m.,
New York time, on days when the New York Stock Exchange (NYSE) is open for
trading. Because Government Income Fund may invest in foreign securities, its
NAV may change on days when you cannot buy or sell shares. Refer to the Series'
and Government Income Fund's respective Prospectuses for more information
regarding how to buy shares.
REDEEMING SHARES
With respect to Class A and Class Z shares, the redemption policies for the
Series and Government Income Fund are substantially similar. The price you will
receive will be the next NAV after your order to sell is received and accepted.
With respect to Class B and C shares of Government Income Fund, shares will be
sold at the next NAV calculated after your order is received and accepted, less
any applicable CDSC imposed on Class B and Class C shares. Government Income
Fund allows a shareholder that has redeemed shares of Government Income Fund to,
within 90 days of redemption, reinvest back into the shareholder's account any
of the redemption proceeds in shares of Government Income Fund without paying an
initial sales charge and to obtain a credit for any CDSCs paid on the reinvested
portion of the redemption proceeds. The Series does not offer a similar
privilege since neither class of its shares imposes an initial sales charge or a
CDSC. Refer to the Series' and Government Income Fund's respective Prospectuses
for more information regarding how to sell shares.
MINIMUM INVESTMENT REQUIREMENTS
For Class A shares of the Series and Government Income Fund, the minimum
initial purchase amount and minimum additional amount is $1,000 and $100,
respectively. With respect to Class B and Class C shares of Government Income
Fund, the minimum initial purchase amounts are $1,000 and $2,500, respectively.
The minimum additional investment amount is $100 for each such class. There is
no minimum initial or additional amount for Class Z shares of the Series and
Government Income Fund. All minimum investment requirements are waived for
certain retirement and employee savings plans and custodial accounts for the
benefit of minors.
27
<PAGE>
Refer to the Series' and Government Income Fund's respective Prospectuses for
more information regarding minimum investment requirements.
PURCHASES AND REDEMPTIONS OF THE SERIES AND GOVERNMENT INCOME FUND
As of August 24, 2000, Government Securities Trust stopped accepting orders
to purchase or exchange into shares of the Series, except for certain retirement
and employee plans (excluding IRA accounts) that are currently shareholders, and
successor or related programs and plans, investors who have executed a letter of
intent prior to August 24, 2000, reinvestment of dividends and/or distributions,
and participations in automatic investment plans. Shareholders of the Series may
redeem shares through the Closing Date of the Merger. If the Merger is approved,
the purchase and redemption policies of the combined fund will be the same as
the current policies of Government Income Fund.
EXCHANGES OF SERIES AND GOVERNMENT INCOME FUND SHARES
The exchange privilege currently offered by Government Income Fund is
similar to that of the Series and is not expected to change after the Merger.
Shareholders of the Series and Government Income Fund may exchange their shares
for shares of the same class of certain other Prudential mutual funds. However,
Class A shares of the Series that are exchanged for Class A shares of any other
Prudential mutual fund are subject to any sales charge that may be imposed by
such other fund. Class A shares of Government Income Fund, on the other hand,
are not subject to such other initial sales charges. With respect to Government
Income Fund, if you exchange and then sell Class B shares within approximately
six years of your original purchase or Class C shares within 18 months of your
original purchase, you must still pay the applicable CDSC. If you hold Class B
or Class C shares and wish to exchange into a money market fund, you must
exchange into Prudential Special Money Market Fund, Inc. During the time you are
invested in Prudential Special Money Market Fund, Inc., the period of time
during which your CDSC is calculated is frozen. If you own Class B or Class C
shares and qualify to purchase Class A shares without paying an initial sales
charge, we will automatically exchange your Class B or Class C shares which are
not subject to a CDSC for Class A shares. Refer to the Series' and Government
Income Fund's respective Prospectuses for additional information regarding
exchanges.
DIVIDENDS AND OTHER DISTRIBUTIONS
Each of the Series and Government Income Fund distributes substantially all
of its net investment income and capital gains to shareholders each year. Each
of the Series and Government Income Fund declares dividends, if any, daily. The
Series distributes dividends of net investment income, plus short-term capital
gains, typically every month, while Government Income Fund does so typically
every quarter. Long-term capital gains for the Series and Government Income
Fund, if any, are distributed at least annually. At or before the Closing Date,
the Series shall declare additional dividends or other distributions in order to
distribute substantially all of its investment company taxable income and net
realized capital gains.
FEDERAL AND STATE INCOME TAX CONSEQUENCES OF THE MERGER
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<PAGE>
It is a condition to each Fund's obligation to complete the Merger that the
Funds will have received an opinion of outside counsel, Swidler Berlin Shereff
Friedman, LLP, or a ruling from the Internal Revenue Service satisfactory to
each of them, that, among other things, the Merger will constitute a
reorganization within the meaning of Section 368(a)(1) of the Internal Revenue
Code of 1986, as amended (the Code), and that no gain or loss will be recognized
by Government Income Fund or the Series, and no gain or loss will be recognized
by shareholders of the Series as a result of the Merger.
Shareholders of the Series are advised to consult their own tax advisers
regarding specific questions with respect to U.S. federal, state or local taxes,
or foreign taxes. Please see the section entitled "The Proposed Transaction ---
U.S. Federal Income Tax Considerations" for more information.
THE PROPOSED TRANSACTION
AGREEMENT AND PLAN OF REORGANIZATION
The Agreement describes the terms and conditions under which the proposed
transaction may be completed. Significant provisions of the Agreement are
summarized below; however, this summary is qualified in its entirety by
reference to the Agreement, the form of which is attached as Attachment A to
this Proxy Statement.
The Agreement contemplates that at the Closing Date, the Series will
transfer and deliver all of its assets to Government Income Fund, and that
Government Income Fund, will (a) assume all of the liabilities of the Series,
and (b) issue and deliver to the Series the number of Class A and Class Z shares
of Government Income Fund as provided for in the Agreement. The assets of the
Series to be acquired by Government Income Fund include all cash, cash
equivalents, securities, receivables (including interest or dividends
receivable), claims and other property owned by the Series, and any deferred or
prepaid expenses shown as an asset on the books of the Series at the Closing
Date. Government Income Fund will assume from the Series all liabilities, debts
and obligations of whatever kind or nature, whether absolute, accrued,
contingent, or otherwise, whether or not arising in the ordinary course of
business, whether or not determinable at the Closing Date and whether or not
specifically referred to in the Agreement; provided, however, that Government
Securities Trust will use its best efforts to cause the Series to discharge all
of its known liabilities prior to the Closing Date.
Government Income Fund will deliver to the Series the number of full and
fractional Class A and Class Z shares of Government Income Fund, as applicable,
having an aggregate net asset value equal to the value of the assets less the
liabilities of the Series as of the Closing Date. The Series will then
distribute PRO RATA to its Class A and Class Z shareholders of record, the Class
A and Class Z shares of Government Income Fund received by the Series.
29
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The value of the Series' assets to be acquired by Government Income Fund and the
amount of its liabilities to be assumed by Government Income Fund will be
determined as of the close of business on the Closing Date, using the valuation
procedures set forth in the Series' Prospectus and Statement of Additional
Information. The net asset value of a Class A or Class Z share of Government
Income Fund will be determined as of the same time using the valuation
procedures set forth in its Prospectus and Statement of Additional Information.
The valuation procedures are the same for the Series and Government Income Fund.
As of the Closing Date, the Series will distribute to its Class A
shareholders of record, the Class A shares of Government Income Fund it
receives, so that such shareholders will receive the number of full and
fractional Class A shares of Government Income Fund that is equal in value to
the net asset value of their Class A shares of the Series at the Closing Date.
At that time, Class Z shareholders of the Series will receive the number of full
and fractional Class Z shares of Government Income Fund that is equal in value
to the net asset value of their Class Z shares of the Series. The Series will
then be terminated as soon as practicable. The distribution of Class A and Class
Z shares of Government Income Fund will be accomplished by opening accounts on
the books of Government Income Fund in the names of the Series' shareholders and
by transferring to such accounts shares of Government Income Fund. Each
shareholder's account will be credited with the respective PRO RATA number of
full and fractional Class A and/or Class Z shares of Government Income Fund, due
the Series' shareholder. Fractional shares of Government Income Fund shall be
rounded to the third decimal place.
Immediately after the Merger, each former Series shareholder will own Class
A and/or Class Z shares of Government Income Fund equal to the aggregate net
asset value of that shareholder's shares of the Series immediately prior to the
Merger. The net asset value per share of Government Income Fund will not be
affected by the transaction. Thus, the Merger will not result in a dilution of
any shareholder's interest.
Any transfer taxes payable upon issuance of shares of Government Income
Fund in a name other than that of the registered holder of the shares on the
books of the Series as of that time will be payable by the person to whom such
shares are to be issued as a condition of such transfer.
The completion of the Merger is subject to a number of conditions set forth
in the Agreement, some of which may be waived by the Series or Government Income
Fund. In addition, the Agreement may be amended in any mutually agreeable
manner, except that no amendment that may have a materially adverse effect on
the shareholders' interests may be made subsequent to the Meeting.
REASONS FOR THE MERGER
The Boards of Trustees/Directors (the Boards) of Government Securities
Trust, of which the Series is a part, and Government Income Fund have determined
that the Merger is in the best interests of the respective shareholders of the
Series and Government Income Fund and that the Merger will not result in a
dilution of the pecuniary interests of the respective shareholders of the Series
or Government Income Fund.
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In considering the Merger, each Board considered a number of factors,
including the following:
- the compatibility of the investment objective, policies and
restrictions of each of the Series and Government Income Fund;
- the relative past and current growth in assets and investment
performance, and future prospects of the Series and Government Income Fund;
- the effect of the proposed transactions on the expense ratios of
the Series and Government Income Fund, including possible expected economies of
scale;
- the costs of the Merger, which will be paid for by Government
Income Fund and the Series in proportion to their respective assets;
- the tax consequences of the Merger to the Series and its
shareholders including the fact that the Merger will be of a tax-free nature
with respect to the Series, Government Income Fund and their respective
shareholders;
- the potential benefits to the shareholders of the Series and
Government Income Fund, including the fact that Class A shareholders of the
Series will receive Class A shares of Government Income Fund in exchange for
their Class A shares of the Series without paying an initial sales charge;
- other alternatives to the Merger, including a continuance of the
Series in its present form, a change of manager or investment objective, or a
termination of the Series with the distribution of the cash proceeds to the
Series' shareholders.
PIFM and PIC recommended the Merger to the Board of Government Securities
Trust, and of Government Income Fund at meetings of the Boards held on August
23, 2000 and November 15, 2000. In recommending the Merger, PIFM and PIC advised
the Boards that the Series and Government Income Fund have similar investment
objectives, policies and investment portfolios. PIFM and PIC informed the Boards
that one of the primary differences between the Series and Government Income
Fund is that the Series seeks to provide reasonable safety as part of its
investment objective while Government Income Fund does not and that this
difference is partly reflected in the fact that the Series primarily invests in
securities with maturities ranging from two to five years, while Government
Income Fund has no similar limitations.
The Boards considered that if the Merger is approved, shareholders of
the Series, regardless of the class of shares they own, may realize the
potential benefits of economies of scale. The Boards noted that while the
Series Class Z shareholders should realize a reduction in annual operating
expenses paid on their investment, the Series Class A shareholders will
likely realize an increase of .01 of 1% in annual operating expenses paid on
their investment. The Board also noted, however, that it is estimated that if
the assets of the Series continue to decline as projected for the next
calendar year, the Series Class A shares will likely have the same expense
ratios as those of Government Income Fund.
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DESCRIPTION OF THE SECURITIES TO BE ISSUED
Government Income Fund was incorporated in Maryland on April 8, 1983.
It is registered with the Securities and Exchange Commission (the Commission) as
an open-end management investment company. Government Income Fund is authorized
to issue 2 billion shares of common stock, $.01 par value per share, divided
into four classes of shares, designated as Class A, Class B, Class C and Class Z
common stock. Each class consists of 500 million shares of the authorized common
stock of Government Income Fund. Each class of common stock represents an
interest in the same assets of Government Income Fund and is identical in all
respects except that:
- each class is subject to different sales charges and distribution
and service (12b-1) fees, except for Class Z shares, which are not subject to
any sales charges or distribution and service (12b-1) fees;
- each class has exclusive voting rights on any matter submitted to
shareholders that relates solely to its distribution arrangement and has
separate voting rights on any matter submitted to shareholders in which the
interests of one class differ from the interests of any other class;
- each class has a different exchange privilege;
- only Class B shares have a conversion feature whereby Class B
shares held for approximately seven years will automatically convert to Class A
shares, on a quarterly basis; and
- Class Z shares are offered exclusively for sale to a limited group
of investors.
Shares of Government Income Fund, when issued, are fully paid and
nonassessable. Except for the conversion feature applicable to Class B shares,
there are no conversion, preemptive or other subscription rights. The dividend
rights, the right of redemption and the privilege of exchange are described in
Government Income Fund's Prospectus.
Government Income Fund does not intend to hold annual meetings of
shareholders. There will normally be no meetings of shareholders for the purpose
of electing directors unless less than a majority of the directors holding
office have been elected by shareholders, at which time the directors then in
office will call a shareholder meeting for the election of directors.
shareholders of record of at least two-thirds of the outstanding shares of
government income fund may remove a director by votes cast in person or by proxy
at a meeting called for that purpose. The Directors are required to call a
meeting of shareholders for the purpose of voting upon the question of removal
of any Director, or to transact any other business, when requested in writing to
do so by the shareholders of record holding at least 10% of Government Income
Fund's outstanding shares.
U.S. FEDERAL INCOME TAX CONSIDERATIONS
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The Merger is intended to qualify for U.S. federal income tax purposes as
a reorganization under the Code. It is a condition to each Fund's obligation to
complete the Merger that the Funds will have received an opinion from Swidler
Berlin Shereff Friedman, LLP, counsel to the Funds, or a ruling from the
Internal Revenue Service (IRS) satisfactory to each of them, based upon
representations made by each of Government Securities Trust and Government
Income Fund, and upon certain factual assumptions, substantially to the effect
that for federal income tax purposes:
1. The acquisition by Government Income Fund of the assets of the
Series in exchange solely for voting shares of Government Income
Fund and the assumption by Government Income Fund of the Series'
liabilities, if any, followed by the distribution of Government
Income Fund's voting shares acquired by the Series pro rata to the
Series' shareholders, pursuant to its termination and
constructively in exchange for the Series' shares, will constitute
a reorganization within the meaning of Section 368(a)(1)(C) of the
Internal Revenue Code, and each Fund will be "a party to a
reorganization" within the meaning of Section 368(b) of the
Internal Revenue Code;
2. The Series' shareholders will not recognize gain or loss upon the
constructive exchange of all of their shares of the Series solely
for shares of Government Income Fund in complete termination of
the Series, as described above and in the Agreement;
3. No gain or loss will be recognized by the Series upon the transfer
of its assets to Government Income Fund in exchange solely for
Class A and Class Z shares, as applicable, of Government Income
Fund and the assumption by Government Income Fund of the Series'
liabilities, if any, and the subsequent distribution of those
shares to the Series' shareholders in complete termination of the
Series;
4. No gain or loss will be recognized by Government Income Fund upon
the acquisition of the Series' assets in exchange solely for Class
A and Class Z shares, as applicable, of Government Income Fund and
the assumption of the Series' liabilities, if any;
5. Government Income Fund's basis for the assets of the Series
acquired in the reorganization will be the same as the basis of
these assets when held by the Series immediately before the
transfer, and the holding period of such assets acquired by
Government Income Fund will include the holding period of these
assets when held by the Series;
6. The Series shareholders' bases for the shares of Government Income
Fund to be received by them pursuant to the reorganization will be
the same as their basis for the shares of the Series to be
constructively surrendered in exchange therefor; and
7. The holding period of Government Income Fund shares to be received
by the Series' shareholders will include the period during which
the shares of the Series to be constructively surrendered in
exchange therefor were held; provided that the
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Series' shares surrendered were held as capital assets by those
shareholders as defined in Section 1221 of the Internal Revenue
Code, on the date of the exchange.
An opinion of counsel is not binding on the IRS or any court. If the IRS
were to successfully assert that the Merger does not qualify as a reorganization
under the Code, then the Merger would be treated as a taxable sale of the
Series' assets to Government Income Fund followed by liquidation of the Series
that would be taxable to the shareholders of the Series.
Shareholders of the Series should consult their tax advisers regarding
the tax consequences to them, if any, of the Merger in light of their individual
circumstances. Because the foregoing discussion relates only to the U.S. federal
income tax consequences of the Merger, shareholders also should consult their
tax advisers as to U.S. state, local and foreign tax consequences, if any, of
the Merger.
CONCLUSION
The Agreement was approved by the Boards of Trustees/Directors of
Government Securities Trust and Government Income Fund at meetings held on
August 23, 2000 and November 15, 2000. The Boards of each Fund determined that
the Merger is in the best interests of shareholders of the Series and Government
Income Fund, and that the interests of existing shareholders of the Series and
Government Income Fund would not be diluted as a result of the Merger. If the
shareholders of the Series do not approve the Merger, or if the Merger is not
completed, the Series will continue to engage in business as a series of a
registered investment company and the Board of Government Securities Trust may
consider other proposals for the Series, including proposals for the
reorganization or liquidation of the Series.
ADDITIONAL INFORMATION ABOUT GOVERNMENT INCOME FUND
Government Income Fund's Prospectus dated May 4, 2000, as supplemented to
date, is enclosed with this Proxy Statement and is incorporated into this Proxy
Statement by reference. The Prospectus contains additional information about
Government Income Fund, including its investment objective and policies,
Manager, investment adviser, advisory fees and expenses, and procedures for
purchasing and redeeming shares. The Prospectus also contains Government Income
Fund's financial highlights for the fiscal period ended February 29, 2000. The
audited financial statements of Government Income Fund for the fiscal year ended
February 29, 2000 are included in Government Income Fund's Annual Report, which
is also enclosed with this Proxy Statement. Unaudited financial statements of
Government Income Fund for the six months ended August 31, 2000 are included in
Government Income Fund's Semiannual Report, which is also enclosed with this
Proxy Statement.
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<PAGE>
MISCELLANEOUS
LEGAL MATTERS
Certain legal matters in connection with the issuance of Government
Income Fund shares have been passed upon by Piper Marbury Rudnick & Wolfe, LLP.
Certain legal and tax matters in connection with the Merger have been or will be
passed upon by Swidler Berlin Shereff Friedman, LLP, counsel to Government
Income Fund and the Series. Certain matters of Maryland or Massachusetts law,
will be passed upon by Piper Marbury Rudnick & Wolfe, LLP or Sullivan &
Worcester, LLP, respectively.
INDEPENDENT ACCOUNTANTS
The audited financial statements of the Series and Government Income Fund
for the fiscal periods ended November 30, 2000 and February 29, 2000,
respectively, included in the applicable Statements of Additional Information,
have been examined by ________________________, independent accountants, whose
reports thereon are included in the respective Statements of Additional
Information and in the Annual Reports to Shareholders for the fiscal years ended
November 30, 2000 and February 29, 2000, respectively. The financial statements
audited by _________________________ have been incorporated by reference in
reliance on their reports given on their authority as experts in auditing and
accounting.
AVAILABLE INFORMATION
The Series and Government Income Fund are subject to the informational
requirements of the Securities Exchange Act of 1934, as amended, and the
Investment Company Act of 1940, as amended (the 1940 Act), and in accordance
with these laws, they each file reports, proxy material and other information
with the Commission. Such reports, proxy material and other information can be
inspected and copied at the Public Reference Room maintained by the Commission
at 450 Fifth Street, N.W., Washington D.C. 20549 and 7 World Trade Center, New
York, NY 10048. Copies of such material can also be obtained from the Public
Reference Branch, Office of Consumer Affairs and Information Services,
Securities and Exchange Commission, Washington D.C. 20549, at prescribed rates,
or at the Commission's website (http://www.sec.gov).
NOTICE TO BANKS, BROKER-DEALERS AND VOTING TRUSTEES AND THEIR NOMINEES
Please advise Prudential Government Securities Trust, care of Prudential
Investment Management Services LLC, Gateway Center Three, 100 Mulberry Street,
14th Floor, Newark, New Jersey 07102-4077, whether other persons are beneficial
owners of shares for which proxies are being solicited and, if so, the number of
copies of this Proxy Statement you wish to receive in order to supply copies to
the beneficial owners of the shares.
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<PAGE>
SHAREHOLDER PROPOSALS
Any shareholder of the Series who wishes to submit a proposal to be
considered by the Series' shareholders at the next meeting of shareholders
should send the proposal to Prudential Government Securities Trust,
Short-Intermediate Term Series, c/o Deborah A. Docs, Secretary, at Gateway
Center Three, 100 Mulberry Street, 4th Floor, Newark, New Jersey 07102-4077, so
as to be received within a reasonable time before the Board of Trustees of
Government Securities Trust makes the solicitation relating to such meeting.
Shareholder proposals that are submitted in a timely manner will not necessarily
be included in the Series' proxy materials. Including shareholder proposals in
proxy materials is subject to limitations under federal securities laws. If
Proposal No. 1 is approved at the Meeting, there will likely not be any future
shareholder meetings of the Series.
Government Income Fund's By-Laws provide that it will not be required to
hold annual meetings of shareholders if the election of Directors is not
required under the 1940 Act. It is the present intention of the Board of
Directors of Government Income Fund not to hold annual meetings of shareholders
unless required to do so by the 1940 Act.
OTHER BUSINESS
Management of the Series knows of no business to be presented at the
Meeting other than the Proposal described in this Proxy Statement. However, if
any other matter requiring a shareholder vote should arise, the proxies will
vote according to their best judgment in the interest of the Series, taking into
account all relevant circumstances.
By order of the Board of Trustees,
DEBORAH A. DOCS
SECRETARY
JANUARY__, 2001
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IT IS IMPORTANT THAT YOU EXECUTE AND RETURN YOUR PROXY PROMPTLY.
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<PAGE>
ATTACHMENT A
FORM OF AGREEMENT AND PLAN OF REORGANIZATION
Agreement and Plan of Reorganization (Agreement) made as of the ____
day of ___________, 2000, by and between Prudential Government Securities Trust
(Government Securities Trust) -- on behalf of Short-Intermediate Term Series --
and Prudential Government Income Fund, Inc. (Government Income Fund and,
collectively with Government Securities Trust, the Funds and each individually,
a Fund). Government Securities Trust is a business trust organized under the
laws of the Commonwealth of Massachusetts and Government Income Fund is a
corporation organized under the laws of the State of Maryland. Each Fund
maintains its principal place of business at Gateway Center Three, 100 Mulberry
Street, Newark, New Jersey 07102-4077. Shares of Government Income Fund are
divided into four classes, designated Class A, Class B, Class C and Class Z.
Government Securities Trust consists of three series, one of which is the
Short-Intermediate Term Series (the Series). Shares of the Series are divided
into two classes, designated Class A and Class Z.
This Agreement is intended to be, and is adopted as, a plan of
reorganization for the Short-Intermediate Term Series pursuant to Section
368(a)(1)(C) of the Internal Revenue Code of 1986, as amended (Internal Revenue
Code). The reorganization will comprise the transfer of all of the assets of
Short-Intermediate Series in exchange for shares of common stock (Common Stock)
of Government Income Fund, and Government Income Fund's assumption of the
Series' liabilities, if any, and the constructive distribution, after the
Closing Date hereinafter referred to, of such shares of Government Income Fund
to the shareholders of the Series, and the termination of the Series as provided
herein, all upon the terms and conditions as hereinafter set forth.
In consideration of the promises and of the covenants and agreements
set forth herein, the parties covenant and agree as follows:
1. TRANSFER OF ASSETS OF THE SERIES IN EXCHANGE FOR SHARES OF GOVERNMENT
INCOME FUND AND ASSUMPTION OF LIABILITIES, IF ANY, AND TERMINATION OF
THE SERIES.
1.1 Subject to the terms and conditions herein set forth and on the basis
of the representations and warranties contained herein, Government Securities
Trust, on behalf of the Series, agrees to sell, assign, transfer and deliver the
assets of the Series, as set forth in paragraph 1.2, to Government Income Fund,
and Government Income Fund agrees (a) to issue and deliver to the Series in
exchange therefor the number of shares of Class A Common Stock in Government
Income Fund determined by dividing the net asset value of the Series allocable
to Class A shares of beneficial interest (computed in the manner and as of the
time and date set forth in paragraph 2.1) by the net asset value allocable to a
share of Government Income Fund Class A Common Stock (computed in the manner and
as of the time and date set forth in paragraph 2.2), (b) to issue and deliver to
the Series in exchange therefor the number of shares of Class Z Common
<PAGE>
Stock in Government Income Fund determined by dividing the net asset value of
the Series allocable to Class Z shares of beneficial interest (computed in the
manner and as of the time and date set forth in paragraph 2.1) by the net asset
value allocable to a share of Government Income Fund Class Z Common Stock
(computed in the manner and as of the time and date set forth in paragraph 2.2)
and (c) to assume all of the Series' liabilities, if any, as set forth in
paragraph 1.3. Such transactions shall take place at the closing provided for in
paragraph 3 (Closing).
1.2 The assets of the Series to be acquired by Government Income Fund shall
include without limitation all cash, cash equivalents, securities, receivables
(including interest and dividends receivable) and all other property of any kind
owned by the Series and any deferred or prepaid expenses shown as assets on the
books of the Series on the closing date provided in paragraph 3 (Closing Date).
Government Income Fund has no plan or intent to sell or otherwise dispose of any
assets of the Series, other than in the ordinary course of business.
1.3 Except as otherwise provided herein, Government Income Fund will assume
from the Series all debts, liabilities, obligations and duties of the Series of
whatever kind or nature, whether absolute, accrued, contingent or otherwise,
whether or not determinable as of the Closing Date and whether or not
specifically referred to in this Agreement; provided, however, that Government
Securities Trust agrees to utilize its best efforts to cause the Series to
discharge all of the known debts, liabilities, obligations and duties of the
Series prior to the Closing Date.
1.4 On or immediately prior to the Closing Date, the Series will declare
and pay to its shareholders of record, dividends and/or other distributions so
that it will have distributed substantially all (and in any event not less than
ninety-eight percent) of the Series' investment company taxable income (computed
without regard to any deduction for dividends paid), net tax-exempt interest
income, if any, and realized net capital gains, if any, for all taxable years
through the Closing Date.
1.5 On a date (Termination Date), as soon after the Closing Date as is
conveniently practicable, but in any event within 30 days of the Closing Date,
the Series will distribute PRO RATA to its Class A and Class Z shareholders of
record, determined as of the close of business on the Closing Date, the Class A
and Class Z shares of Government Income Fund received by the Series pursuant to
paragraph 1.1 in exchange for their interest in the Series, and Government
Securities Trust will file with the Secretary of State of The Commonwealth of
Massachusetts a Certificate of Termination terminating the Series. Such
distribution will be accomplished by opening accounts on the books of Government
Income Fund in the names of the Series' shareholders and transferring thereto
the shares credited to the account of the Series on the books of Government
Income Fund. Each account opened shall be credited with the respective PRO RATA
number of Government Income Fund Class A and Class Z shares due such Series'
Class A and Class Z shareholders, respectively. Fractional shares of Government
Income Fund shall be rounded to the third decimal place.
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1.6 Government Income Fund shall not issue certificates representing its
shares in connection with such exchange. With respect to any Series shareholder
holding Series receipts for shares of beneficial interest as of the Closing
Date, until Government Income Fund is notified by Government Securities Trust's
transfer agent that such shareholder has surrendered his or her outstanding
Series receipts for shares of beneficial interest or, in the event of lost,
stolen or destroyed receipts for shares of beneficial interest, posted adequate
bond or submitted a lost certificate form, as the case may be, Government Income
Fund will not permit such shareholder to (1) receive dividends or other
distributions on Government Income Fund shares in cash (although such dividends
and distributions shall be credited to the account of such shareholder
established on Government Income Fund's books pursuant to paragraph 1.5, as
provided in the next sentence), (2) exchange Government Income Fund shares
credited to such shareholder's account for shares of other Prudential Mutual
Funds or (3) pledge or redeem such shares. In the event that a shareholder is
not permitted to receive dividends or other distributions on Government Income
Fund shares in cash as provided in the preceding sentence, Government Income
Fund shall pay such dividends or other distributions in additional Government
Income Fund shares, notwithstanding any election such shareholder shall have
made previously with respect to the payment of dividends or other distributions
on shares of the Series. The Series will, at its expense, request its
shareholders to surrender their outstanding Series receipts for shares of
beneficial interest, post adequate bond or submit a lost certificate form, as
the case may be.
1.7 Ownership of Government Income Fund shares will be shown on the books
of Government Income Fund's transfer agent. Shares of Government Income Fund
will be issued in the manner described in Government Income Fund's then-current
prospectus and statement of additional information.
1.8 Any transfer taxes payable upon issuance of shares of Government Income
Fund in exchange for shares of the Series in a name other than that of the
registered holder of the shares being exchanged on the books of the Series as of
that time shall be paid by the person to whom such shares are to be issued as a
condition to the registration of such transfer.
1.9 Any reporting responsibility with the Securities and Exchange
Commission (SEC) or any state securities commission of Government Securities
Trust with respect to the Series is and shall remain, the responsibility of the
Series up to and including the Termination Date.
1.10 All books and records of Government Securities Trust, including all
books and records required to be maintained under the Investment Company Act of
1940, as amended (Investment Company Act) and the rules and regulations
thereunder, shall be available to Government Income Fund from and after the
Closing Date and shall be turned over to Government Income Fund on or prior to
the Termination Date.
2. VALUATION.
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2.1 The value of the Series' assets and liabilities to be acquired and
assumed, respectively, by Government Income Fund shall be the net asset value
computed as of 4:15 p.m., New York City time, on the Closing Date (such time and
date being hereinafter called the Valuation Time), using the valuation
procedures set forth in the Series' then-current prospectus and Government
Securities Trust's statement of additional information.
2.2 The net asset value of Class A and Class Z shares of Government Income
Fund shall be the net asset value for Class A and Class Z shares computed on a
class-by-class basis as of the Valuation Time, using the valuation procedures
set forth in Government Income Fund's then-current prospectus and statement of
additional information.
2.3 The number of Government Income Fund shares to be issued (including
fractional shares, if any) in exchange for the Series' net assets shall be
calculated as set forth in paragraph 1.1.
2.4 All computations of net asset value shall be made by or under the
direction of Prudential Investments Fund Management LLC (PIFM) in accordance
with its regular practice as manager of the Funds.
3. CLOSING AND CLOSING DATE.
3.1 The Closing Date shall be March 29, 2001 or such later date as the
parties may agree in writing. All acts taking place at the Closing shall be
deemed to take place simultaneously as of the close of business on the Closing
Date unless otherwise provided. The Closing shall be at the office of Government
Income Fund or at such other place as the parties may agree.
3.2 State Street Bank and Trust Company (State Street), as custodian for
the Series, shall deliver to Government Income Fund at the Closing, a
certificate of an authorized officer of State Street stating that (a) the
Series' portfolio securities, cash and any other assets have been transferred in
proper form to Government Income Fund on the Closing Date and (b) all necessary
taxes, if any, have been paid, or provision for payment has been made, in
conjunction with the transfer of portfolio securities.
3.3 In the event that immediately prior to the Valuation Time (a) the New
York Stock Exchange (NYSE) or other primary exchange is closed to trading or
trading thereon is restricted or (b) trading or the reporting of trading on the
NYSE or other primary exchange or elsewhere is disrupted so that accurate
appraisal of the value of the net assets of the Series and of the net asset
value per share of Government Income Fund is impracticable, the Closing Date
shall be postponed until the first business day after the date when such trading
shall have been fully resumed and such reporting shall have been restored.
3.4 Government Securities Trust shall deliver to Government Income Fund on
or prior to the Termination Date the names and addresses of each of the
shareholders of the Series and the number of outstanding shares owned by each
such shareholder, all as of the close of business on
A-4
<PAGE>
the Closing Date, certified by the transfer agent of Government Securities
Trust. Government Income Fund shall issue and deliver to Government Securities
Trust at the Closing a confirmation or other evidence satisfactory to Government
Securities Trust that shares of Government Income Fund have been or will be
credited to the Series' account on the books of Government Income Fund. At the
Closing, each party shall deliver to the other such bills of sale, checks,
assignments, share certificates, receipts and other documents as such other
party or its counsel may reasonably request to effect the transactions
contemplated by this Agreement.
4. REPRESENTATIONS AND WARRANTIES.
4.1 Government Securities Trust represents and warrants as follows:
4.1.1 Government Securities Trust is a business trust duly organized
and validly existing under the laws of The Commonwealth of
Massachusetts and the Series has been duly established in accordance
with the terms of Government Securities Trust's Declaration of Trust as
a separate series of Government Securities Trust;
4.1.2 Government Securities Trust is an open-end, management
investment company duly registered under the Investment Company Act,
and such registration is in full force and effect;
4.1.3 Government Securities Trust is not, and the execution,
delivery and performance of this Agreement will not result, in
violation of any provision of the Declaration of Trust or By-Laws of
Government Securities Trust or of any material agreement, indenture,
instrument, contract, lease or other undertaking to which the Series is
a party or by which the Series is bound;
4.1.4 All material contracts or other commitments to which the
Series, or the properties or assets of the Series, is subject, or by
which the Series is bound, except this Agreement, will be terminated on
or prior to the Closing Date without the Series or Government Income
Fund incurring any liability or penalty with respect thereto;
4.1.5 Nomaterial litigation or administrative proceeding or
investigation of or before any court or governmental body is presently
pending or to its knowledge threatened against Government Securities
Trust or any of the properties or assets of the Series, except as
previously disclosed in writing to Government Income Fund. Except as
previously disclosed in writing to Government Income Fund, Government
Securities Trust knows of no facts that might form the basis for the
institution of such proceedings, and, with respect to the Series,
Government Securities Trust is not a party to or subject to the
provisions of any order, decree or judgment of any court or
governmental body that materially and adversely affects its business or
its ability to consummate the transactions herein contemplated;
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4.1.6 The Portfolio of Investments, Statement of Assets and
Liabilities, Statement of Operations, Statement of Changes in Net
Assets, and Financial Highlights of the Series at November 30, 2000 and
for the fiscal year then ended (copies of which have been furnished to
Government Income Fund) have been audited by independent accountants,
in accordance with generally accepted auditing standards. Such
financial statements are prepared in accordance with generally
accepted accounting principles and present fairly, in all material
respects, the financial condition, results of operations, changes in
net assets and financial highlights of the Series as of and for the
period ended on such date, and there are no material known liabilities
of the Series (contingent or otherwise) not disclosed therein;
4.1.7 Since November 30, 2000, there has not been any material
adverse change in the Series' financial condition, assets, liabilities
or business other than changes occurring in the ordinary course of
business, or any incurrence by the Series of indebtedness maturing more
than one year from the date such indebtedness was incurred, except as
otherwise disclosed to and accepted by Government Income Fund. For the
purposes of this paragraph 4.1.7, a decline in net assets, net asset
value per share or a decrease in the number of shares outstanding shall
not constitute a material adverse change;
4.1.8 Atthe date hereof and at the Closing Date, all U.S. federal
and other tax returns and reports of the Series required by law to have
been filed on or before such dates shall have been timely filed, and
all U.S. federal and other taxes shown as due on said returns and
reports shall have been paid insofar as due, or adequate provision
shall have been made for the payment thereof, and, to the best of
Government Securities Trust's knowledge, all U.S. federal or other
taxes required to be shown on any such return or report have been shown
on such return or report, no such return is currently under audit and
no assessment has been asserted with respect to any such returns;
4.1.9 For each past taxable year since it commenced operations, the
Series has elected to be treated as, and has met the requirements of
Subchapter M of the Internal Revenue Code for qualification and
treatment as, a regulated investment company and Government Securities
Trust intends to cause the Series to make such election and meet those
requirements for the current taxable year; and, for each past calendar
year since it commenced operations, the Series has made such
distributions as are necessary to avoid the imposition of federal
excise tax or has paid or provided for the payment of any excise tax
imposed;
4.1.10 All issued and outstanding shares of the Series are, and at
the Closing Date will be, duly and validly authorized, issued and
outstanding, fully paid and non-assessable. All issued and outstanding
shares of the Series will, at the time of the Closing, be held in the
name of the persons and in the amounts set forth in the list of
shareholders submitted to Government Income Fund in accordance with the
provisions of paragraph 3.4. The Series
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has no outstanding options, warrants or other rights to subscribe for
or purchase any of its shares, nor is there outstanding any security
convertible into any of its shares;
4.1.11 At the Closing Date, Government Securities Trust will have
good and marketable title to the assets of the Series to be transferred
to Government Income Fund pursuant to paragraph 1.1, and full right,
power and authority to sell, assign, transfer and deliver such assets
hereunder free of any liens, claims, charges or other encumbrances,
and, upon delivery and payment for such assets, Government Income Fund
will acquire good and marketable title thereto;
4.1.12 The execution, delivery and performance of this Agreement has
been duly authorized by the Trustees of Government Securities Trust and
by all necessary action, other than shareholder approval, on the part
of the Series, and this Agreement constitutes a valid and binding
obligation of Government Securities Trust and of the Series, subject to
shareholder approval;
4.1.13 The information furnished and to be furnished by Government
Securities Trust for use in applications for orders, registration
statements, proxy materials and other documents that may be necessary
in connection with the transactions contemplated hereby is and shall be
accurate and complete in all material respects and is in compliance and
shall comply in all material respects with applicable federal
securities and other laws and regulations; and
4.1.14 On the effective date of the registration statement filed with
the SEC by Government Income Fund on Form N-14 relating to the shares
of Government Income Fund issuable hereunder, and any supplement or
amendment thereto (Registration Statement), at the time of the meeting
of the shareholders of the Series and on the Closing Date, the Proxy
Statement of the Series, the Prospectus of Government Income Fund, and
the Statement of Additional Information of Government Income Fund to be
included in the Registration Statement (collectively, Proxy Statement)
(i) will comply in all material respects with the provisions and
regulations of the Securities Act of 1933, as amended (1933 Act), the
Securities Exchange Act of 1934, as amended (1934 Act) and the
Investment Company Act, and the rules and regulations under each such
Act, and (ii) will not contain any untrue statement of a material fact
or omit to state a material fact required to be stated therein in light
of the circumstances under which they were made or necessary to make
the statements therein not misleading; provided, however, that the
representations and warranties in this paragraph 4.1.14 shall not apply
to statements in or omissions from the Proxy Statement and Registration
Statement made in reliance upon and in conformity with information
furnished by Government Income Fund for use therein.
4.2 GOVERNMENT INCOME FUND REPRESENTS AND WARRANTS AS FOLLOWS:
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4.2.1 Government Income Fund is a corporation duly organized and
validly existing under the laws of the State of Maryland;
4.2.2 Government Income Fund is an open-end, management investment
company duly registered under the Investment Company Act, and such
registration is in full force and effect;
4.2.3 Government Income Fund is not, and the execution, delivery and
performance of this Agreement will not result, in violation of any
provision of the Articles of Incorporation or By-Laws of Government
Income Fund or of any material agreement, indenture, instrument,
contract, lease or other undertaking to which Government Income Fund is
a party or by which Government Income Fund is bound;
4.2.4 Nomaterial litigation or administrative proceeding or
investigation of or before any court or governmental body is presently
pending, or to its knowledge threatened against Government Income Fund
or any of its properties or assets, except as previously disclosed in
writing to Government Securities Trust. Except as previously disclosed
in writing to Government Securities Trust, Government Income Fund knows
of no facts that might form the basis for the institution of such
proceedings, and Government Income Fund is not a party to or subject to
the provisions of any order, decree or judgment of any court or
governmental body that materially and adversely affects its business or
its ability to consummate the transactions herein contemplated;
4.2.5 The Portfolio of Investments, Statement of Assets and
Liabilities, Statement of Operations, Statement of Changes in Net
Assets, and Financial Highlights of Government Income Fund at February
29, 2000 and for the fiscal year then ended (copies of which have been
furnished to Government Securities Trust) have been audited by
_______________________, independent accountants, in accordance with
generally accepted auditing standards. Such financial statements are
prepared in accordance with generally accepted accounting principles
and present fairly, in all material respects, the financial condition,
results of operations, changes in net assets and financial highlights
of Government Income Fund as of and for the period ended on such date,
and there are no material known liabilities of Government Income Fund
(contingent or otherwise) not disclosed therein;
4.2.6 Since February 29, 2000, there has not been any material
adverse change in Government Income Fund's financial condition, assets,
liabilities or business other than changes occurring in the ordinary
course of business, or any incurrence by Government Income Fund of
indebtedness maturing more than one year from the date such
indebtedness was incurred, except as otherwise disclosed to and
accepted by Government Securities Trust. For the purposes of this
paragraph 4.2.6, a decline in net assets, net asset value per share or
a decrease in the number of shares outstanding shall not constitute a
material adverse change;
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4.2.7 At the date hereof and at the Closing Date, all U.S. federal
and other tax returns and reports of Government Income Fund required by
law to have been filed on or before such dates shall have been filed,
and all U.S. federal and other taxes shown as due on said returns and
reports shall have been paid insofar as due, or adequate provision
shall have been made for the payment thereof, and, to the best of
Government Income Fund's knowledge, all U.S. federal or other taxes
required to be shown on any such return or report are shown on such
return or report, no such return is currently under audit and no
assessment has been asserted with respect to such returns;
4.2.8 For each past taxable year since it commenced operations,
Government Income Fund has elected to be treated as, and has met the
requirements of Subchapter M of the Internal Revenue Code for
qualification and treatment as, a regulated investment company and
intends to make such election and meet those requirements for the
current taxable year; and, for each past calendar year since it
commenced operations, Government Income Fund has made such
distributions as are necessary to avoid the imposition of federal
excise tax or has paid or provided for the payment of any excise tax
imposed;
4.2.9 All issued and outstanding shares of Government Income Fund
are, and at the Closing Date will be, duly and validly authorized,
issued and outstanding, fully paid and non-assessable. Except as
contemplated by this Agreement, Government Income Fund does not have
outstanding any options, warrants or other rights to subscribe for or
purchase any of its shares nor is there outstanding any security
convertible into any of its shares, except for Class B shares which
have the conversion feature described in Government Income Fund's
current Prospectus;
4.2.10 The execution, delivery and performance of this Agreement has
been duly authorized by the Board of Directors of Government Income
Fund and by all necessary corporate action on the part of Government
Income Fund, and this Agreement constitutes a valid and binding
obligation of Government Income Fund;
4.2.11 The shares of Government Income Fund to be issued and
delivered to Government Securities Trust for and on behalf of the
Series pursuant to this Agreement will, at the Closing Date, have been
duly authorized and, when issued and delivered as provided in this
Agreement, will be duly and validly issued and outstanding shares of
Government Income Fund, fully paid and non-assessable;
4.2.12 The information furnished and to be furnished by Government
Income Fund for use in applications for orders, registration
statements, proxy materials and other documents which may be necessary
in connection with the transactions contemplated hereby is and shall be
accurate and complete in all material respects and is in compliance and
shall comply in all material respects with applicable federal
securities and other laws and regulations; and
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4.2.13 On the effective date of the Registration Statement, at the
time of the meeting of the shareholders of the Series and on the
Closing Date, the Proxy Statement and the Registration Statement (i)
will comply in all material respects with the provisions of the 1933
Act, the 1934 Act and the Investment Company Act and the rules and
regulations under each such Act, (ii) will not contain any untrue
statement of a material fact or omit to state a material fact required
to be stated therein or necessary to make the statements therein not
misleading and (iii) with respect to the Registration Statement, at the
time it becomes effective, it will not contain an untrue statement of a
material fact or omit to state a material fact necessary to make the
statements therein in light of the circumstances under which they were
made, not misleading; provided, however, that the representations and
warranties in this paragraph 4.2.13 shall not apply to statements in or
omissions from the Proxy Statement and the Registration Statement made
in reliance upon and in conformity with information furnished by the
Series for use therein.
5. COVENANTS OF GOVERNMENT SECURITIES TRUST AND GOVERNMENT INCOME FUND.
5.1 Government Securities Trust, with respect to the Series, and Government
Income Fund each covenants to operate its respective business in the ordinary
course between the date hereof and the Closing Date, it being understood that
the ordinary course of business will include declaring and paying customary
dividends and other distributions and such changes in operations as are
contemplated by the normal operations of the Funds, except as may otherwise be
required by paragraph 1.4 hereof.
5.2 Government Securities Trust covenants to call a meeting of the
shareholders of the Series to consider and act upon this Agreement and to take
all other action necessary to obtain approval of the transactions contemplated
hereby (including the determinations of its Trustees as set forth in Rule
17a-8(a) under the Investment Company Act).
5.3 Government Securities Trust covenants that Government Income Fund
shares to be received for and on behalf of the Series in accordance herewith are
not being acquired for the purpose of making any distribution thereof other than
in accordance with the terms of this Agreement.
5.4 Government Securities Trust covenants that it will assist Government
Income Fund in obtaining such information as Government Income Fund reasonably
requests concerning the beneficial ownership of the Series' shares.
5.5 Subject to the provisions of this Agreement, each Fund will take, or
cause to be taken, all action, and will do, or cause to be done, all things,
reasonably necessary, proper or advisable to consummate and make effective the
transactions contemplated by this Agreement.
5.6 Government Securities Trust covenants to prepare the Proxy Statement in
compliance with the 1934 Act, the Investment Company Act and the rules and
regulations under each such Act.
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5.7 Government Securities Trust covenants that it will, from time to time,
as and when requested by Government Income Fund, execute and deliver or cause to
be executed and delivered all such assignments and other instruments, and will
take or cause to be taken such further action, as Government Income Fund may
deem necessary or desirable in order to vest in and confirm to Government Income
Fund title to and possession of all the assets of the Series to be sold,
assigned, transferred and delivered hereunder and otherwise to carry out the
intent and purpose of this Agreement.
5.8 Government Income Fund covenants to use all reasonable efforts to
obtain the approvals and authorizations required by the 1933 Act, the Investment
Company Act (including the determinations of its Board of Directors as set forth
in Rule 17a-8(a) thereunder) and such of the state Blue Sky or securities laws
as it may deem appropriate in order to continue its operations after the Closing
Date.
5.9 Government Income Fund covenants that it will, from time to time, as
and when requested by Government Securities Trust, execute and deliver or cause
to be executed and delivered all such assignments and other instruments, and
will take and cause to be taken such further action, as Government Securities
Trust may deem necessary or desirable in order to (i) vest in and confirm to
Government Securities Trust title to and possession of all the shares of
Government Income Fund to be transferred to the shareholders of the Series
pursuant to this Agreement and (ii) assume all of the liabilities of the Series
in accordance with this Agreement.
6. CONDITIONS PRECEDENT TO OBLIGATIONS OF GOVERNMENT SECURITIES TRUST.
The obligations of Government Securities Trust to consummate
the transactions provided for herein shall be subject to the performance by
Government Income Fund of all the obligations to be performed by it hereunder on
or before the Closing Date and the following further conditions:
6.1 All representations and warranties of Government Income Fund contained
in this Agreement shall be true and correct in all material respects as of the
date hereof and, except as they may be affected by the transactions contemplated
by this Agreement, as of the Closing Date with the same force and effect as if
made on and as of the Closing Date.
6.2 Government Income Fund shall have delivered to Government Securities
Trust on the Closing Date a certificate executed in its name by the President or
a Vice President of Government Income Fund, in form and substance satisfactory
to Government Securities Trust and dated as of the Closing Date, to the effect
that the representations and warranties of Government Income Fund made in this
Agreement are true and correct at and as of the Closing Date, except as they may
be affected by the transactions contemplated by this Agreement, and as to such
other matters as Government Securities Trust shall reasonably request.
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6.3 Government Securities Trust shall have received on the Closing Date a
favorable opinion from (i) Piper Marbury Rudnick & Wolfe, LLP, special
counsel to Government Income Fund, with respect to items in this section that
relate to matters of Maryland law, and (ii) Swidler Berlin Shereff Friedman,
LLP, counsel to Government Income Fund, with respect to certain other items
in this section, each dated as of the Closing Date, to the effect that:
6.3.1 Government Income Fund is a corporation duly organized and
validly existing under the laws of the State of Maryland with power
under its Articles of Incorporation to own all of its properties and
assets and, to the knowledge of such counsel, to carry on its business
as presently conducted;
6.3.2 This Agreement has been duly authorized, executed and
delivered by Government Income Fund and, assuming due authorization,
execution and delivery of the Agreement by Government Securities Trust
on behalf of the Series, is and constitutes a valid and legally binding
obligation of Government Income Fund enforceable in accordance with its
terms, subject to bankruptcy, insolvency, fraudulent transfer,
reorganization, moratorium and similar laws of general applicability
relating to or affecting creditors' rights and to general equity
principles. Such counsel may state that they express no opinion as to
the validity or enforceability of any provision regarding choice of New
York law to govern this Agreement;
6.3.3 The shares of Government Income Fund to be distributed to the
shareholders of the Series under this Agreement, assuming their due
authorization and delivery as contemplated by this Agreement, will be
validly issued and outstanding and fully paid and non-assessable, and
no shareholder of Government Income Fund has any pre-emptive right to
subscribe therefor or purchase such shares;
6.3.4 The execution and delivery of this Agreement did not, and the
performance by Government Income Fund of its obligations hereunder will
not, (i) violate Government Income Fund's Articles of Restatement or
Amended and Restated By-Laws or (ii) result in a default or a breach of
(a) the Management Agreement, dated July 1, 1988, between
Prudential-Bache Government Income Fund, Inc. and Prudential
Investments Fund Management LLC, as successor to Prudential Mutual Fund
Management, Inc., (b) the Custodian Contract, dated July 31, 1990
between Government Income Fund and State Street Bank and Trust Company,
as amended on February 22, 1999, (c) the Distribution Agreement, dated
June 1, 1998, between Prudential Government Income Fund, Inc. and
Prudential Investment Management Services LLC, and (d) the Transfer
Agency and Service Agreement, dated January 1, 1988, between
Prudential-Bache Government Income Fund, Inc. and Prudential Mutual
Fund Services LLC, as successor to Prudential Mutual Fund Services,
Inc., as amended on August 24, 1999; provided, however, that such
counsel may state that they express no opinion as to bankruptcy,
insolvency, fraudulent transfer, reorganization, moratorium and similar
laws of general applicability relating to or affecting creditors'
rights and to general equity principles;
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6.3.5 To the knowledge of such counsel, no consent, approval,
authorization, filing or order of any court or governmental authority
is required for the consummation by Government Income Fund of the
transactions contemplated herein, except such as have been obtained
under the 1933 Act, the 1934 Act and the Investment Company Act and
such as may be required under state Blue Sky or securities laws;
6.3.6 Government Income Fund has been registered with the SEC as an
investment company, and, to the knowledge of such counsel, no order has
been issued or proceeding instituted to suspend such registration; and
6.3.7 Such counsel knows of no litigation or government proceeding
instituted or threatened against Government Income Fund that could be
required to be disclosed in its registration statement on Form N-1A and
is not so disclosed.
7. CONDITIONS PRECEDENT TO OBLIGATIONS OF GOVERNMENT INCOME FUND.
The obligations of Government Income Fund to complete the transactions
provided for herein shall be subject to the performance by Government Securities
Trust of all the obligations to be performed by it hereunder on or before the
Closing Date and the following further conditions:
7.1 All representations and warranties of Government Securities Trust
contained in this Agreement shall be true and correct in all material respects
as of the date hereof and, except as they may be affected by the transactions
contemplated by this Agreement, as of the Closing Date, with the same force and
effect as if made on and as of the Closing Date.
7.2 Government Securities Trust shall have delivered to Government Income
Fund on the Closing Date a statement of the assets and liabilities of the
Series, which statement shall be prepared in accordance with generally accepted
accounting principles consistently applied, together with a list of the
portfolio securities of the Series showing the adjusted tax basis of such
securities by lot, as of the Closing Date, certified by the Treasurer of
Government Securities Trust.
7.3 Government Securities Trust shall have delivered to Government Income
Fund on the Closing Date a certificate executed in its name by the President or
one of the Vice Presidents of Government Securities Trust, in form and substance
satisfactory to Government Income Fund and dated as of the Closing Date, to the
effect that the representations and warranties of Government Securities Trust
made in this Agreement are true and correct at and as of the Closing Date except
as they may be affected by the transactions contemplated by this Agreement, and
as to such other matters as Government Income Fund shall reasonably request.
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7.4 On or immediately prior to the Closing Date, Government Securities
Trust shall have declared and paid to the shareholders of record of the Series
one or more dividends and/or other distributions so that it will have
distributed substantially all (and in any event not less than ninety-eight
percent) of the Series' investment company taxable income (computed without
regard to any deduction for dividends paid), net tax-exempt interest income, if
any, and realized net capital gain, if any, of the Series for all completed
taxable years from the inception of the Series through November 30, 2000, and
for the period from and after November 30, 2000 through the Closing Date.
7.5 Government Income Fund shall have received on the Closing Date a
favorable opinion from (i) Sullivan & Worcester, LLP, special counsel to
Government Securities Trust, with respect to items in this section that
relate to matters of Massachusetts law, and (ii) Swidler Berlin Shereff
Friedman, LLP, counsel to Government Securities Trust, with respect to
certain other items in this section, each dated as of the Closing Date, to
the effect that:
7.5.1 Government Securities Trust is duly organized and validly
existing under the laws of the Commonwealth of Massachusetts with power
under its Declaration of Trust to own all of its properties and assets
and, to the knowledge of such counsel, to carry on its business as
presently conducted and the Series has been duly established in
accordance with the terms of Government Securities Trust's Declaration
of Trust as a separate series of Government Securities Trust;
7.5.2 This Agreement has been duly authorized, executed and
delivered by Government Securities Trust on behalf of the Series and,
assuming due authorization, execution and delivery of the Agreement by
Government Income Fund is and constitutes a valid and legally binding
obligation of Government Securities Trust enforceable against the
assets of the Series in accordance with its terms, subject to
bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium
and similar laws of general applicability relating to or affecting
creditors' rights and to general equity principles, provided that such
counsel may state that they express no opinion as to the validity or
enforceability of any provision regarding choice of New York law to
govern this Agreement;
7.5.3 The execution and delivery of the Agreement did not, and the
performance by Government Securities Trust of its obligations hereunder
will not, (i) violate Government Securities Trust's Amended and
Restated Declaration of Trust or Amended and Restated By-Laws or (ii)
result in a default or a breach of (a) the Management Agreement, dated
August 9, 1988, as amended on November 19, 1993, between
Prudential-Bache Government Securities Trust and Prudential Investments
Fund Management LLC, as successor to Prudential Mutual Fund Management,
Inc., (b) the Custodian Contract, dated July 26, 1990, as amended on
February 22, 1999, between Prudential-Bache Government Securities Trust
and State Street Bank and Trust Company, (c) the Distribution Agreement
dated June 1, 1998, between Prudential Government Securities Trust and
Prudential Investment Management Services LLC, and (d) the Transfer
Agency and Service Agreement, dated January 1, 1988, between
Prudential-Bache Government Securities Trust and Prudential Mutual Fund
Services LLC, as successor to Prudential Mutual Fund
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Services, Inc., as amended on August 24, 1999; provided, however, that
such counsel may state that they express no opinion as to bankruptcy,
insolvency, fraudulent transfer, reorganization, moratorium and similar
laws of general applicability relating to or affecting creditors'
rights and to general equity principles;
7.5.4 To the knowledge of such counsel, no consent, approval,
authorization, filing or order of any court or governmental authority
is required for the consummation by Government Securities Trust of the
transactions contemplated herein, except such as have been obtained
under the 1933 Act, the 1934 Act and the Investment Company Act and
such as may be required under state Blue Sky or securities laws;
7.5.5 Such counsel knows of no litigation or any governmental
proceeding instituted or threatened against Government Securities
Trust, involving the Series, that would be required to be disclosed in
its Registration Statement on Form N-1A and is not so disclosed; and
7.5.6 Government Securities Trust has been registered with the SEC
as an investment company, and, to the knowledge of such counsel, no
order has been issued or proceeding instituted to suspend such
registration.
8. FURTHER CONDITIONS PRECEDENT TO OBLIGATIONS OF GOVERNMENT INCOME FUND
AND GOVERNMENT SECURITIES TRUST.
The obligations of Government Income Fund and Government Securities
Trust hereunder are subject to the further conditions that on or before the
Closing Date:
8.1 This Agreement and the transactions contemplated herein shall have been
approved by the requisite vote of (a) the Trustees of Government Securities
Trust and the Board of Directors of Government Income Fund, as to the
determinations set forth in Rule 17a-8(a) under the Investment Company Act, (b)
the Board of Directors of Government Income Fund as to the assumption by
Government Income Fund of the liabilities of the Series and (c) the holders of
the outstanding shares of the Series in accordance with the provisions of
Government Securities Trust's Declaration of Trust and By-Laws, and certified
copies of the resolutions or other documents, as applicable, evidencing such
approvals shall have been delivered to Government Income Fund and Government
Securities Trust, as applicable.
8.2 Any proposed change to Government Income Fund's operations that may be
approved by the Board of Directors of Government Income Fund subsequent to the
date of this Agreement but in connection with and as a condition to implementing
the transactions contemplated by this Agreement, for which the approval of
Government Income Fund shareholders is required pursuant
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to the Investment Company Act or otherwise, shall have been approved by the
requisite vote of the holders of the outstanding shares of Government Income
Fund in accordance with the Investment Company Act and General Corporation Law
of the State of Maryland, and certified copies of the resolutions evidencing
such approval shall have been delivered to Government Securities Trust.
8.3 On the Closing Date, no action, suit or other proceeding shall be
pending before any court or governmental agency in which it is sought to
restrain or prohibit, or obtain damages or other relief in connection with, this
Agreement or the transactions contemplated herein.
8.4 All consents of other parties and all consents, orders and permits of
federal, state and local regulatory authorities (including those of the SEC and
of state Blue Sky or securities authorities, including "no-action" positions of
such authorities) deemed necessary by Government Income Fund or Government
Securities Trust to permit consummation, in all material respects, of the
transactions contemplated hereby shall have been obtained, except where failure
to obtain any such consent, order or permit would not involve a risk of a
material adverse effect on the assets or properties of Government Income Fund or
the Series, provided that either party hereto may for itself waive any part of
this condition.
8.5 The Registration Statement shall have become effective under the 1933
Act, and no stop orders suspending the effectiveness thereof shall have been
issued, and to the best knowledge of the parties hereto, no investigation or
proceeding under the 1933 Act for that purpose shall have been instituted or be
pending, threatened or contemplated.
8.6 The Funds shall have received, with respect to the Series, on or before
the Closing Date, an opinion of Swidler Berlin Shereff Friedman, LLP or a ruling
from the Internal Revenue Service satisfactory to each of them, substantially to
the effect that for federal income tax purposes:
8.6.1 The acquisition by Government Income Fund of the assets of the
Series in exchange solely for voting shares of Government Income Fund
and the assumption by Government Income Fund of the Series'
liabilities, if any, followed by the distribution of Government Income
Fund's voting shares acquired by Government Securities Trust pro rata
to the Series' shareholders, pursuant to its termination and
constructively in exchange for the Series' shares, will constitute a
reorganization within the meaning of Section 368(a)(1)(C) of the
Internal Revenue Code, and each Fund will be "a party to a
reorganization" within the meaning of Section 368(b) of the Internal
Revenue Code;
8.6.2 The Series' shareholders will not recognize gain or loss upon
the constructive exchange of all of their shares of the Series solely
for shares of Government Income Fund in complete termination of the
Series, as described above and in the Agreement;
8.6.3 No gain or loss will be recognized by the Series upon the
transfer of its assets to Government Income Fund in exchange solely for
Class A and Class Z shares, as
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applicable, of Government Income Fund and the assumption by Government
Income Fund of the Series' liabilities, if any, and the subsequent
distribution of those shares to the Series' shareholders in complete
termination of the Series;
8.6.4 No gain or loss will be recognized by Government Income Fund
upon the acquisition of the Series' assets in exchange solely for Class
A and Class Z shares, as applicable, of Government Income Fund and the
assumption of the Series' liabilities, if any;
8.6.5 Government Income Fund's basis for the assets of the Series
acquired in the reorganization will be the same as the basis of these
assets when held by the Series immediately before the transfer, and the
holding period of such assets acquired by Government Income Fund will
include the holding period of these assets when held by the Series;
8.6.6 The Series shareholders' bases for the shares of Government
Income Fund to be received by them pursuant to the reorganization will
be the same as their basis for the shares of the Series to be
constructively surrendered in exchange therefor; and
8.6.7 The holding period of Government Income Fund shares to be
received by the Series' shareholders will include the period during
which the shares of the Series to be constructively surrendered in
exchange therefor were held; provided that the Series' shares
surrendered were held as capital assets by those shareholders as
defined in Section 1221 of the Internal Revenue Code, on the date of
the exchange.
9. FINDER'S FEES AND EXPENSES.
9.1 Each Fund represents and warrants to the other that there are no
finder's fees payable in connection with the transactions provided for herein.
9.2 The expenses incurred in connection with the entering into and carrying
out of the provisions of this Agreement shall be allocated to Government Income
Fund and the Series pro rata in a fair and equitable manner in proportion to
their respective assets.
10. ENTIRE AGREEMENT; SURVIVAL OF WARRANTIES.
10.1 This Agreement constitutes the entire agreement between the Funds.
10.2 The representations, warranties and covenants contained in this
Agreement or in any document delivered pursuant hereto or in connection herewith
shall survive the consummation of the transactions contemplated hereunder.
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11. TERMINATION.
Either Government Income Fund or Government Securities Trust, on behalf
of the Series, may at its option terminate this Agreement at or prior to the
Closing Date because of:
11.1 A material breach by the other of any representation, warranty or
covenant contained herein to be performed at or prior to the Closing Date;
11.2 A condition herein expressed to be precedent to the obligations of
either party not having been met and it reasonably appearing that it will not or
cannot be met; or
11.3 A mutual written agreement of Government Securities Trust and
Government Income Fund.
In the event of any such termination, there shall be no liability for
damages on the part of either Fund (other than the liability of Government
Income Fund and the Series to pay their allocated expenses pursuant to paragraph
9.2) or any Director or officer of Government Income Fund or any Trustee or
officer of Government Securities Trust.
12. AMENDMENT.
This Agreement may be amended, modified or supplemented only in writing
by the parties; provided, however, that following the shareholders' meeting
called by Government Securities Trust pursuant to paragraph 5.2, no such
amendment may have the effect of changing the provisions for determining the
number of shares of Government Income Fund to be distributed to the Series'
shareholders under this Agreement to the detriment of such shareholders without
their further approval.
13. NOTICES.
Any notice, report, demand or other communication required or permitted
by any provision of this Agreement shall be in writing and shall be given by
hand delivery, or prepaid certified mail or overnight service addressed to
Prudential Investments Fund Management LLC, Gateway Center Three, Newark, New
Jersey 07102, Attention: Deborah A. Docs.
14. HEADINGS; COUNTERPARTS; GOVERNING LAW; ASSIGNMENT.
14.1 The paragraph headings contained in this Agreement are for reference
purposes only and shall not affect in any way the meaning or interpretation of
this Agreement.
14.2 This Agreement may be executed in any number of counterparts, each of
which will be deemed an original.
A-18
<PAGE>
14.3 This Agreement shall be governed by and construed in accordance with
the laws of the State of New York, provided that, in the case of any conflict
between such laws and the federal securities laws, the latter shall govern.
14.4 This Agreement shall bind and inure to the benefit of the parties and
their respective successors and assigns, and no assignment or transfer hereof or
of any rights or obligations hereunder shall be made by either party without the
written consent of the other party. Nothing herein expressed or implied is
intended or shall be construed to confer upon or give any person, firm or
corporation other than the parties and their respective successors and assigns
any rights or remedies under or by reason of this Agreement.
15. NO LIABILITY OF SHAREHOLDERS OR TRUSTEES OF GOVERNMENT SECURITIES
TRUST; AGREEMENT AN OBLIGATION ONLY OF THE SERIES, AND ENFORCEABLE ONLY
AGAINST ASSETS OF THE SERIES.
The name "Prudential Government Securities Trust" is the designation of
the Trustees from time to time acting under an Amended and Restated Declaration
of Trust dated September 6, 1988, as the same may be from time to time amended,
and the name "Short-Intermediate Term Series" is the designation of a portfolio
of the assets of Government Securities Trust. Government Income Fund
acknowledges that it must look, and agrees that it shall look, solely to the
assets of the Series for the enforcement of any claims arising out of or based
on the obligations of Government Securities Trust hereunder, and with respect to
obligations relating to the Series, only to the assets of the Series, and in
particular that (i) neither the Trustees, officers, employees, agents or
shareholders of Government Securities Trust assume or shall have any personal
liability for obligations of Government Securities Trust hereunder, and (ii)
none of the assets of Government Securities Trust other than the portfolio
assets of the Series may be resorted to for the enforcement of any claim based
on the obligations of Government Securities Trust hereunder.
IN WITNESS WHEREOF, each of the parties has caused this Agreement to be
executed by the Vice President of each Fund.
Prudential Government Securities Trust
By:
---------------------------------------
Name: Robert F. Gunia
Title: Vice President
Prudential Government Income Fund, Inc.
By:
---------------------------------------
Name: Robert F. Gunia
Title: Vice President
A-19
<PAGE>
[PAGE NUMBERS TO COME]
TABLE OF CONTENTS TO THE PROXY STATEMENT AND PROSPECTUS
<TABLE>
<S> <C>
VOTING INFORMATION and Government Income Fund
Vote Required Exchanges of Series and Government
Income Fund Shares
SYNOPSIS
Investment Objectives and Policies Dividends and Other Distributions
Purchases, Redemptions, Exchanges and
Distributions FEDERAL AND STATE INCOME TAX
The Proposed Merger CONSEQUENCES OF THE MERGER
Expense Structures
Comparative Fee Tables THE PROPOSED TRANSACTIONS
Examples of the Effect of Series and Agreement and Plan of Reorganization
Pro Forma Capitalization and Ratios Reasons for the Merger
Performance Comparisons of the Series Description of the Securities to
and Government Income Fund be Issued
Forms of Organization U.S. Federal Income Tax Considerations
Conclusion
COMPARISON OF PRINCIPAL RISK FACTORS
ADDITIONAL INFORMATION ABOUT GOVERNMENT
INVESTMENT OBJECTIVES AND POLICIES INCOME FUND
Investment Objectives
Principal Investment Strategies MISCELLANEOUS
Legal Matters
COMPARISON OF OTHER POLICIES OF THE Independent Accountants
SERIES AND GOVERNMENT INCOME FUND Available Information
Diversification Notice to Banks, Broker-Dealers and
Borrowing Voting Trustees and Their Nominees
Lending
Illiquid Securities SHAREHOLDER PROPOSALS
Temporary Defensive Investments
OTHER BUSINESS
OPERATIONS OF GOVERNMENT INCOME FUND
FOLLOWING THE MERGER ATTACHMENT A: Form of Agreement and
Plan of Reorganization between
PURCHASES, REDEMPTIONS AND EXCHANGES Prudential Government Securities Trust and
Purchasing Shares Prudential Government Income Fund, Inc.
Redeeming Shares
Minimum Investment Requirements
Purchases and Redemptions of the Series
</TABLE>
<PAGE>
PRUDENTIAL INVESTMENTS
GATEWAY CENTER THREE
100 MULBERRY STREET, 9TH FLOOR
NEWARK, NJ 07102 - 4077
PRELIMINARY COPIES
Prudential Government Securities Trust
(Short-Intermediate Term Series)
Gateway Center Three
100 Mulberry Street
Newark, NJ 07102-4077
Proxy
Special Meeting of Shareholders (Meeting)
March 22, 2001, 10:30 a.m.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF TRUSTEES
The undersigned hereby appoints Robert F. Gunia, Deborah A. Docs and
Grace C. Torres as Proxies, each with the power of substitution, and hereby
authorizes each of them to represent and to vote, as designated below, all the
shares of Prudential Government Securities Trust (Short-Intermediate Term
Series), held of record by the undersigned on January 19, 2001, at the Meeting
to be held on March 22, 2001 or any adjournment thereof.
THE SHARES REPRESENTED BY THIS PROXY, WHEN THIS PROXY IS PROPERLY EXECUTED, WILL
BE VOTED IN THE MANNER DIRECTED HEREIN BY THE UNDERSIGNED SHAREHOLDER. THE PROXY
WILL BE VOTED FOR PROPOSAL NO. 1 IF YOU DO NOT SPECIFY OTHERWISE. PLEASE REFER
TO THE PROXY STATEMENT AND PROSPECTUS DATED JANUARY __, 2001 FOR DISCUSSION OF
THE PROPOSAL.
IF VOTING BY MAIL, PLEASE MARK, SIGN AND DATE THIS PROXY CARD WHERE INDICATED
AND RETURN IT PROMPTLY USING THE ENCLOSED ENVELOPE WHICH REQUIRES NO POSTAGE IF
MAILED IN THE UNITED STATES.
In their discretion, the Proxies are authorized to vote upon such other business
as may properly come before the Meeting or any adjournment thereof.
<PAGE>
Note: Please sign exactly as name appears hereon. Joint owners should each sign.
When signing as attorney, executor, administrator, trustee or guardian, please
give full title as such. If a corporation, please sign in full corporate name by
president or other authorized officer. If a partnership, please sign in
partnership name by authorized person.
TO VOTE BY TELEPHONE
1) Read the Proxy Statement and have this Proxy card at hand.
2) Call 1-800-690-6903 toll free.
3) Enter the 12 digit control number set forth on the right side of this Proxy
card and follow the simple instructions.
TO VOTE BY INTERNET
1) Read the Proxy Statement and have this Proxy card at hand.
2) Go to website www.proxyvote.com.
3) Follow the instructions on the website and be prepared to enter the 12
digit control number set forth on the right side of this Proxy card to
enter your vote.
[Shares Control Number]
TO VOTE, MARK BLOCKS BELOW IN BLUE OR BLACK INK AS FOLLOWS: X
KEEP THIS PORTION FOR YOUR RECORDS
--------------------------------------------------------------------------------
DETACH AND RETURN THIS PORTION ONLY
THIS PROXY CARD IS VALID ONLY WHEN SIGNED AND DATED.
PRUDENTIAL GOVERNMENT SECURITIES TRUST (Short-Intermediate Term Series)
For address changes, please check this box / /
and write them on the back.
The Board of Trustees recommends a vote FOR the proposal.
Vote on Proposal For Against Abstain
1) To approve an Agreement and / / / / / /
Plan of Reorganization between
Prudential Government
Securities Trust, on behalf of
Short-Intermediate Term Series
and Prudential Government
Income Fund, Inc.
<PAGE>
Please be sure to sign and date this Proxy.
---------------------------------------
--------------------------------------- ---------------------------
Signature (PLEASE SIGN WITHIN THE BOX) Date
---------------------------------------
--------------------------------------- ---------------------------
Signature (Joint Owners) Date
<PAGE>
PRELIMINARY COPIES
PRUDENTIAL GOVERNMENT INCOME FUND, INC.
GATEWAY CENTER THREE
100 MULBERRY STREET
NEWARK, NEW JERSEY 07102-4077
(800) 225-1852
SHORT-INTERMEDIATE TERM SERIES
OF
PRUDENTIAL GOVERNMENT SECURITIES TRUST
GATEWAY CENTER THREE
100 MULBERRY STREET
NEWARK, NEW JERSEY 07102-4077
(800) 225-1852
STATEMENT OF ADDITIONAL INFORMATION
dated January __, 2001
This Statement of Additional Information specifically relates to the
proposed transaction (Merger) between Short-Intermediate Term Series, a series
of Prudential Government Securities Trust (Government Securities Trust), and
Prudential Government Income Fund, Inc. (Government Income Fund) pursuant to
which Short-Intermediate Term Series will transfer all of its assets to, and all
of its liabilities will be assumed by, Government Income Fund. Government Income
Fund will be the surviving corporation, and each whole and fractional share of
Short-Intermediate Term Series, shall be exchanged for whole and fractional
shares of equal net asset value of Government Income Fund to occur on March __,
2001, or such later date as the parties may agree. This Statement of Additional
Information consists of this cover page and the following described documents,
each of which is attached hereto and incorporated herein by reference:
1. Pro Forma Financial Statements as of August 31, 2000.
2. Statement of Additional Information of Government Income Fund dated
May 4, 2000.
3. Annual Report to Shareholders of Government Income Fund for the fiscal
year ended February 29, 2000.
4. Semi-Annual Report to Shareholders of Government Income Fund for the
six month period ended August 31, 2000.
<PAGE>
5. Annual Report to Shareholders of Short-Intermediate Term Series for
the fiscal year ended November 30, 2000.
This Statement of Additional Information is not a prospectus and should be
read only in conjunction with the Prospectus and Proxy Statement dated January
__, 2001, relating to the above-referenced matter. A copy of the Prospectus and
Proxy Statement may be obtained from Government Income Fund, without charge, by
writing or calling Government Income Fund at the address or phone number listed
above. This Statement of Additional Information has been incorporated by
reference into the Prospectus and Proxy Statement.
<PAGE>
PRO FORMA FINANCIAL STATEMENTS
PRO FORMA PORTFOLIO OF INVESTMENTS
31-AUG-00
(UNAUDITED)
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT (000) VALUE
------------------------------------------ -------------------------------------------------
GST - SHORT GOVERNMENT PRO-FORMA GST - SHORT GOVERNMENT PRO FORMA
INTERMEDIATE INCOME COMBINED DESCRIPTION INTERMEDIATE INCOME COMBINED
-------------------------------------------------------------------------------- -------------- ---------------- --------------
<S> <C> <C> <C> <C> <C> <C>
LONG-TERM INVESTMENTS - 98.9%
U.S. GOVERNMENT AGENCY MORTGAGE PASS -
THROUGHS - 43.6%
Federal Home Loan Mortgage Corp.,
$ 47 $ 47 7.375% 03/01/06 $ 47,476 $ 47,476
$ 382 382 7.50%, 06/01/24 $ 382 382
3,751 3,751 8.00%, 01/01/22 - 05/01/23 3,812,680 3,812,680
1,704 1,704 8.50%, 06/01/07 - 04/01/20 1,733,998 1,733,998
505 3,651 4,156 9.00%, 09/01/05 - 01/01/20 514,233 3,774,698 4,288,931
815 815 11.50%, 10/01/19 892,751 892,751
Federal National Mortgage Assoc.,
6,000 67,000 73,000 6.00%, 09/01/15 - 08/31/30 5,735,580 64,047,310 69,782,890
8,000 53,000 61,000 6.50%, 09/01/15 - 8/31/30 7,790,000 51,608,750 59,398,750
4,183 29,258 33,441 7.00%, 07/01/03 - 06/01/30 4,797,976 28,679,203 33,477,179
30,898 30,898 7.125%, 02/01/07 30,579,736 30,579,736
10,167 53,061 63,228 7.50%, 12/01/06 - 08/31/30 10,202,533 53,287,969 63,490,502
6 6 8.00%, 10/01/24 5,673 5,673
2,137 2,137 8.50%, 06/01/17 - 03/01/25 2,187,123 2,187,123
2,653 2,653 9.00%, 08/01/24 - 04/01/25 2,733,567 2,733,567
579 579 9.50%, 10/01/19 - 03/01/25 603,332 603,332
Government National Mortgage Assoc.,
50,588 50,588 7.00%, 02/15/09 - 02/15/29 49,797,467 49,797,467
95,334 95,334 7.50%, 05/15/02 - 12/15/99 95,394,279 95,394,279
67,940 67,940 8.00%, 07/15/16 - 03/15/24 69,152,513 69,152,513
13,613 13,613 8.50%, 04/15/25 13,972,585 13,972,585
6,980 6,980 9.50%, 10/15/09 - 12/15/17 7,322,915 7,322,915
Government National Mortgage Assoc. II,
1,091 1,091 9.50%, 05/20/18 - 08/20/21 1,130,970 1,130,970
-------------- ---------------- ----------------
TOTAL U.S. GOVERNMENT AGENCY MORTGAGE PASS -
THROUGHS
(COST $28,998,701 AND $476,481,932) 29,087,798 480,717,901 509,805,699
-------------- ---------------- ----------------
U.S. GOVERNMENT OBLIGATIONS - 23.8%
United States Treasury Notes,
9,157 9,157 5.875%, 11/15/04 9,105,446 9,105,446
United States Treasury Bonds,
20,475 20,475 6.125%, 08/15/29 21,447,563 21,447,563
23,035 23,035 7.125%, 02/15/23 26,439,803 26,439,803
39,000 39,000 7.50%, 11/15/24 46,909,590 46,909,590
5,500 5,500 8.00%, 11/15/21 6,856,960 6,856,960
26,470 26,470 8.125%, 08/15/19 32,926,298 32,926,298
30,400 30,400 8.125%, 08/15/21 38,275,424 38,275,424
5,945 5,945 8.75%, 05/15/17 7,682,961 7,682,961
11,000 11,000 8.75%, 05/15/20 14,537,160 14,537,160
12,000 12,000 8.75%, 08/15/20 15,885,000 15,885,000
44,000 44,000 11.75%, 02/15/10 53,267,280 53,267,280
United States Treasury Strips,
6,200 6,200 Zero Coupon, 11/15/09 3,556,692 3,556,692
500 500 Zero Coupon, 11/15/15 204,430 204,430
3,750 3,750 Zero Coupon, 02/15/18 1,347,712 1,347,712
-------------- ---------------- ----------------
TOTAL U.S. GOVERNMENT OBLIGATIONS
(COST $9,047,552 AND $270,327,983) 9,105,446 269,336,873 278,442,319
-------------- ---------------- ----------------
U.S. GOVERNMENT AGENCY SECURITIES - 21.4%
Federal Home Loan Bank,
25,000 25,000 5.75%, 10/15/07 24,591,797 24,591,797
Federal National Mortgage Assoc., M.T.N.,
10,000 10,000 5.50%, 10/12/01 9,832,800 9,832,800
15,600 15,600 5.625%, 05/14/04 15,024,672 15,024,672
13,500 13,500 5.875%, 04/23/04 12,964,185 12,964,185
40,000 40,000 6.06%, 05/21/03 39,006,400 39,006,400
5,000.00 15,000 20,000 6.30%, 09/25/02 4,930,450 14,791,350 19,721,800
Small Business Administration,
15,070 15,070 Ser. 1995-20B, 8.15%, 02/01/15 15,753,255 15,753,255
18,976 18,976 Ser. 1995-20L, 6.45%, 12/01/15 18,240,797 18,240,797
27,197 27,197 Ser. 1996-20H, 7.25%, 08/01/16 27,220,185 27,220,185
16,414 16,414 Ser. 1996-20K, 6.95%, 11/01/16 16,175,162 16,175,162
8,209 8,209 Ser. 1997-20A, 7.15%, 01/01/17 8,172,165 8,172,165
13,245 13,245 Ser. 1998-20I, 6.00%, 09/01/18 12,343,849 12,343,849
Tennessee Valley Authority,
600 600 Ser. 1993-D, 7.25%, 07/15/43 567,084 567,084
30,000 30,000 Ser. 1995-B, 6.235%, 07/15/45 30,073,800 30,073,800
-------------- ---------------- ----------------
TOTAL U.S. GOVERNMENT AGENCY SECURITIES
(COST $30,324,485 AND $226,389,577) 29,787,922 219,900,029 249,687,951
-------------- ---------------- ----------------
CORPORATE BONDS - 2.8%
California Infra & Economic
3,000.00 3,000 6.28%, 09/25/05 2,954,040 2,954,040
New Jersey Economic Development Authority,
Ser. A,
30,000 30,000 7.425%, 02/15/29 29,763,000 29,763,000
-------------- ---------------- ----------------
TOTAL CORPORATE BONDS
(COST $2,952,187 AND $31,091,850) 2,954,040 29,763,000 32,717,040
-------------- ---------------- ----------------
COLLATERALIZED MORTGAGE OBLIGATIONS - 5.6%
Asset Securitization Corp.,
5,255 5,255 Ser. 1997-D4, Class A1A, 7.35%, 04/14/29 5,280,157 5,280,157
Federal Home Loan Mortgage Corp.,
13,090 8,727 21,817 5.75%, 04/15/00 12,775,202 8,516,802 21,292,004
6,500 6,500 6.50% 07/15/10 6,321,250 6,321,250
Federal National Mortgage Assoc., REMIC Trust
1993-76, Class B,
2,104 11,570 13,674 6.00%, 06/25/08 1,990,643 10,948,534 12,939,177
2,190 2,190 6.50%, 05/25/08 2,143,998 2,143,998
11,569 11,569 7.00%, 01/18/24 11,482,547 11,482,547
Resolution Trust Corp.,
4,301 4,301 Ser. 1994-1, Class B2, 7.75%, 09/25/29 4,162,944 4,162,944
Ryland Mortgage Participation Securities,
761 761 Ser. 1993-3, Class A3, 7.232%, 09/25/24,
(ARM) 722,902 722,902
Structured Asset Securities Corp.,
1,042 1,042 Ser. 1995-C1, Class C, 7.375%, 09/25/24 1,037,747 1,037,747
-------------- ---------------- ----------------
TOTAL COLLATERALIZED MORTGAGE OBLIGATIONS
(COST $34,448,959 AND $30,459,697) 34,713,640 30,669,086 65,382,726
-------------- ---------------- ----------------
U.S. GOVERNMENT AGENCY - STRIPPED SECURITY
- 0.3%
</TABLE>
F-1
<PAGE>
PRO FORMA FINANCIAL STATEMENTS
PRO FORMA PORTFOLIO OF INVESTMENTS
31-AUG-00
(UNAUDITED)
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT (000) VALUE
------------------------------------------ -------------------------------------------------
GST - SHORT GOVERNMENT PRO-FORMA GST - SHORT GOVERNMENT PRO FORMA
INTERMEDIATE INCOME COMBINED DESCRIPTION INTERMEDIATE INCOME COMBINED
-------------------------------------------------------------------------------- -------------- ---------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Financing Corp.,
5,000 5,000 Zero Coupon, 03/07/04
(COST $0 AND $4,061,870) - 3,938,500 3,938,500
-------------- ---------------- ----------------
ASSET BACKED SECURITIES - 1.4%
Aesop Funding II LLC,
10,000 10,000 Ser. 1997-1, Class A2, 6.40%, 10/20/03 9,877,309 9,877,309
Capital One Master Trust -
5,000.00 5,000 5.43%, Ser. 98-4 A, 1/15/07 4,786,620 4,786,620
Premier Auto Trust
1,605.00 1,605 5.77%, Ser. 98-2 A3, 1/06/02 1,601,461 1,601,461
-------------- ---------------- ----------------
TOTAL ASSET BACKED SECURITIES
(COST $6,617,031 AND $9,998,437) 6,388,081 9,877,309 16,265,390
-------------- ---------------- ----------------
TOTAL LONG-TERM INVESTMENTS (COST $112,688,915
AND $1,048,811,346) 112,036,927 1,044,202,698 1,156,239,625
------------------------------------------------
SHORT-TERM INVESTMENTS - 21.4%
COMMERCIAL PAPER - 17.7%
American Home Product Corp.,
3,050 29,100 32,150 6.50%, 09/07/00 3,046,696 29,068,475 32,115,171
Barton Capital Corp.,
28,000 28,000 6.51%, 09/08/00 27,964,557 27,964,557
4,650 14,388 19,038 6.53%, 09/08/00 4,644,096 14,369,731 19,013,827
Blue Ridge Asset Funding Corp.,
4,650.00 42,400 47,050 6.52%, 09/13/00 4,639,894 42,307,851 46,947,745
Edison Asset Securitization, LLC,
12,090 12,090 6.51%, 09/14/00 12,061,578 12,061,578
Receivable Capital Corp.,
19,657 19,657 6.50%, 09/14/00 19,610,861 19,610,861
Thunder Bay Funding, Inc.,
3,000 10,772 13,772 6.52%, 09/11/00 2,994,567 10,752,491 13,747,058
Windmill Funding Corp.,
20,559 20,559 6.51%, 09/05/00 20,544,129 20,544,129
10,323 10,323 6.51%, 09/07/00 10,311,799 10,311,799
4,650.00 634 5,284 6.51%, 09/12/00 4,640,750 632,739 5,273,489
-------------- ---------------- ----------------
TOTAL COMMERCIAL PAPER
(COST $19,966,003 AND $187,624,211) 19,966,003 187,624,211 207,590,214
-------------- ---------------- ----------------
REPURCHASE AGREEMENT - 3.7%
Joint Repurchase Agreement Account,
4,595 38,204 42,799 6.59%, 09/01/00
(COST $4,595,000 AND $38,204,000; NOTE 5) 4,595,000 38,204,000 42,799,000
-------------- ---------------- ----------------
TOTAL SHORT-TERM INVESTMENTS (COST $24,561,003
AND $225,828,211) 24,561,003 225,828,211 250,389,214
-------------- ---------------- ----------------
TOTAL INVESTMENTS (COST $136,680,571 AND
$1,274,639,557) - 120.3% 136,597,930 1,270,030,909 1,406,628,839
LIABILITIES IN EXCESS OF OTHER ASSETS - (20.3)% (20,793,869) (216,367,985) (237,161,854)
-------------- ---------------- ----------------
NET ASSETS-- 100% $ 115,804,061 $ 1,053,662,924 $ 1,169,466,985
============== ================ ================
</TABLE>
F-2
<PAGE>
PRO-FORMA STATEMENT OF ASSETS AND LIABILITIES
AUGUST 31, 2000
(UNAUDITED)
<TABLE>
<CAPTION>
SHORT GST PRUDENTIAL
INTERMEDIATE GOVERNMENT PRO FORMA PRO FORMA
TERM SERIES INCOME FUND ADJUSTMENTS COMBINED
-------------- --------------- ----------- -----------------
<S> <C> <C> <C> <C>
ASSETS
Investments, at value (cost $112,688,915
and $1,274,639,557, respectively) ........................... $ 112,036,928 $ 1,231,826,909 $1,343,863,837
Repurchase Agreements, at value (cost
$24,561,003 and $38,204,000, respectively) .................. 24,561,003 38,204,000 62,765,003
Cash .......................................................... 142,570 127,275 269,845
Interest receivable ........................................... 1,144,897 8,401,602 9,546,499
Due from broker - variation margin ............................ 8,203 46,748 54,951
Receivable for investments sold ............................... 3,899,250 45,823,688 49,722,938
Receivable for Fund shares sold ............................... 20,473 879,314 899,787
Securities lending income receivable .......................... 870 - 870
Prepaid expenses and other assets ............................. 3,959 31,176 35,135
-------------- ---------------- ---------------
Total assets .......................................... 141,818,153 1,325,340,712 1,467,158,865
-------------- ---------------- ---------------
LIABILITIES
Payable for investments purchased ............................. 25,422,313 266,663,474 292,085,787
Payable for Fund shares reacquired ............................ 146,425 2,641,675 2,788,100
Accrued expenses .............................................. 238,981 948,495 1,187,476
Management fee payable ........................................ 37,803 449,059 486,862
Dividend payable .............................................. 151,131 696,875 848,006
Distribution fee payable ...................................... 16,809 278,210 295,019
-------------- ---------------- ---------------
Total liabilities ..................................... 26,013,462 271,677,788 297,691,250
-------------- ---------------- ---------------
NET ASSETS .................................................... $ 115,804,691 $1,053,662,924 $1,169,467,615
============== ================ ===============
Net assets were comprised of:
Common stock, at par .................................. $ 122,537 $ 1,229,062 $ 1,351,599
Paid in capital in excess of par ...................... 149,021,607 1,216,079,811 1,365,101,418
-------------- ---------------- ---------------
149,144,144 1,217,308,873 1,366,453,017
Accumulated net realized loss on investments .................. (32,695,669) (159,258,738) (191,954,407)
Net unrealized depreciation on investments .................... (643,784) (4,387,211) (5,030,995)
-------------- ---------------- ---------------
Net assets, August 31, 2000 ................................... $ 115,804,691 $1,053,662,924 $1,169,467,615
============== ================ ===============
Class A:
Net assets ............................................ $ 109,300,067 $ 803,228,925 $ 912,528,992
Shares of beneficial interest and common
stock issued and outstanding, respectively ............ 11,568,295 93,694,385 105,262,680
-------------- ---------------- ---------------
Net asset value and redemption price per
share outstanding ..................................... $ 9.45 $ 8.57 $ 8.67
Maximum sales charge (0% and 4% of offering
price, respectively) .................................. - 0.36 0.36
-------------- ---------------- ---------------
Maximum offering price to public ...................... $ 9.45 $ 8.93 $ 9.03
============== ================ ===============
Class B:
Net assets ............................................ $ - $ 144,690,719 $ 144,690,719
Shares of beneficial interest and common stock issued and
outstanding, respectively ............................. - 16,865,238 16,865,238
-------------- ---------------- ---------------
Net asset value, offering price and redemption price
per share outstanding ................................. $ - $ 8.58 $ 8.58
============== ================ ===============
Class C:
Net assets ............................................ $ - $ 7,836,984 $ 7,836,984
Shares of beneficial interest and common stock issued
and outstanding, respectively ......................... - 913,498 913,498
-------------- ---------------- ---------------
Net asset value and redemption price per share
outstanding .......................................... $ - $ 8.58 $ 8.58
Sales charge (0% and 1% of offering price,
respectively) ........................................ - 0.09 0.09
-------------- ---------------- ---------------
Offering price to public ............................. $ - $ 8.67 $ 8.67
============== ================ ===============
Class Z:
Net assets ............................................ $ 6,504,624 $ 97,906,296 $ 104,410,920
Shares of beneficial interest and common stock issued
and outstanding, respectively ......................... 685,444 11,433,090 12,118,534
-------------- ---------------- ---------------
Net asset value, offering price and redemption price
per share outstanding ................................. $ 9.49 $ 8.56 $ 8.62
============== ================ ===============
</TABLE>
F-3
<PAGE>
YEAR ENDED AUGUST 31, 2000
(UNAUDITED)
<TABLE>
<CAPTION>
GST PRUDENTIAL
SHORT INTERMEDIATE GOVERNMENT PRO FORMA PRO FORMA
TERM SERIES INCOME FUND ADJUSTMENTS COMBINED
---------------------- ----------------- ------------------- ---------------
<S> <C> <C> <C> <C>
Net Investment Income
Income
Interest.............................. $7,860,583 $83,212,222 $91,072,805
Income from securities loaned, net.... 12,716 21,486 34,202
---------------------- ----------------- ------------------- ---------------
Total income 7,873,299 83,233,708 0 91,107,007
---------------------- ----------------- ------------------- ---------------
Expenses
Management fee....................... 508,847 5,586,492 119,395 6,214,734
Distribution Fee- Class A............ 220,457 2,052,740 75,669 2,348,866
Distribution Fee- Class B............ 0 1,585,477 1,585,477
Distribution Fee- Class C............ 0 62,889 62,889
Transfer agent's fees & expenses..... 214,000 2,105,000 2,319,000
Custodian's fees & expenses.......... 65,000 208,000 (50,000) 223,000
Reports to shareholders.............. 59,000 173,000 (30,000) 202,000
Audit fee & expenses................. 35,000 44,000 (35,000) 44,000
Registration fees.................... 23,000 42,000 (23,000) 42,000
Legal fees & expenses................ 31,000 5,000 (15,000) 21,000
Trustees'/ Directors' fees........... 13,000 20,000 (2,000) 31,000
Insurance expense.................... 2,200 20,000 (3,200) 19,000
Miscellaneous........................ 3,268 4,717 (2,985) 5,000
---------------------- ----------------- ------------------- ---------------
Total expenses....... 1,174,772 11,909,315 33,879 13,117,966
---------------------- ----------------- ------------------- ---------------
Net investment income................. 6,698,527 71,324,393 77,989,041
---------------------- ----------------- ------------------- ---------------
REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS
Net realized gain (loss) on:
Investment transactions.............. (2,089,927) (35,178,428) (37,268,355)
Financial futures contracts........... (706) (1,046,124) (1,046,830)
---------------------- ----------------- ------------------- ---------------
(2,090,633) (36,224,552) (38,315,185)
Net change in unrealized appreciation
(depreciation) of:
Investments.......................... 2,073,136 37,539,670 39,612,806
Financial futures contracts.......... 8,203 316,468 324,671
---------------------- ----------------- ------------------- ---------------
2,081,339 37,856,138 39,937,477
Net gain (loss) on investments........... (9,294) 1,631,586 1,622,292
---------------------- ----------------- ------------------- ---------------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS.............. $6,689,233 $72,955,979 79,645,212
====================== ================= =================== ===============
Average Net Assets at August 31, 2000 127,116,716 1,115,829,997 1,242,946,713
---------------------- ----------------- ---------------
Class A 119,556,819 819,989,442 939,546,262
Class B 191,957,885 191,957,885
Class C 8,374,436 8,374,436
Class Z 7,559,897 95,508,234 103,068,131
</TABLE>
F-4
<PAGE>
PRUDENTIAL GOVERNMENT INCOME FUND, INC.
NOTES TO PRO-FORMA FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF COMBINATION - The Pro-Forma Statement of Assets and Liabilities,
including the Portfolio of Investments at August 31, 2000 and the related
Statement of Operations ("Pro Forma Statements") for the twelve months ended
August 31, 2000, reflect the accounts of Prudential Government Income Fund,
Inc. ("Fund") and Prudential Government Securities Trust - Short
Intermediate Term Series ("Series").
The Pro Forma Statements give effect to the proposed transfer of all assets
and liabilities of Prudential Government Securities Trust - Short
Intermediate Term Series in exchange for shares in Prudential Government
Income Fund, Inc. The Pro Forma Statements should be read in conjunction
with the historical financial statements of each Fund included in their
respective Statement of Additional Information.
2. SHARES OF COMMON STOCK - The pro-forma net asset value per share assumes the
issuance of additional Class A and Z shares of Prudential Government Income
Fund, Inc. which would have been issued on August 31, 2000 in connection
with the proposed reorganization. Shareholders of Prudential Government
Securities Trust - Short Intermediate Term Series would become shareholders
of Prudential Government Income Fund, Inc., receiving shares of Prudential
Government Income Fund, Inc. equal to the value of their holdings in
Prudential Government Securities Trust - Short Intermediate Term Series. The
amount of additional shares assumed to be issued has been calculated based
on the August 31, 2000 net assets of Prudential Government Securities Trust
- Short Intermediate Term Series and the net asset value per share of
Prudential Government Income Fund, Inc. as follows:
<TABLE>
<CAPTION>
Net Asset Value
Prudential Government Income Fund, Inc. Net Assets Per Share
Additional Shares Issued 8/31/00 8/31/00
------------------------ ------- -------
<S> <C> <C> <C>
Class A 12,753,800 $109,300,067 $8.57
Class Z 759,886 $6,504,624 $8.56
</TABLE>
3. PRO FORMA OPERATIONS - The Pro Forma Statement of Operations assumes similar
rates of gross investment income for the investments of each fund.
Accordingly, the combined gross investment income is equal to the sum of
each fund's gross investment income. Certain expenses have been adjusted to
reflect the expected expenses of the combined entity. The pro-forma
investment management fees and plan of distribution fees of the combined
Fund are based on the fee schedule in effect for Prudential Government
Income Fund, Inc. at the combined level of average net assets for the twelve
months ended August 31, 2000. The Pro Forma Statement of Operations does not
include the effect of any realized gains or losses, or transaction fees
incurred in connection with the realignment of the portfolio.
F-5
<PAGE>
PRUDENTIAL GOVERNMENT INCOME FUND, INC.
STATEMENT OF ADDITIONAL INFORMATION
DATED MAY 4, 2000
Prudential Government Income Fund, Inc. (the Fund), is an open-end,
diversified management investment company, or mutual fund, which has as its
investment objective the seeking of a high current return. The Fund will seek to
achieve this objective primarily by investing in U.S. Government securities,
including U.S. Treasury Bills, Notes and Bonds and other debt securities issued
by the U.S. Treasury, and obligations issued or guaranteed by U.S. Government
agencies or instrumentalities; writing covered put and call options and
purchasing put and call options. In an effort to hedge against changes in
interest rates and thus preserve its capital, the Fund may also engage in
transactions involving futures contracts on U.S. Government securities and
options on such contracts. There can be no assurance that the Fund's investment
objective will be achieved. See "Description of the Fund, Its Investments and
Risks."
The Fund's address is Gateway Center Three, 100 Mulberry Street, Newark, New
Jersey 07102-4077, and its telephone number is (800) 225-1852.
This Statement of Additional Information is not a prospectus and should be
read in conjunction with the Fund's Prospectus, dated May 4, 2000, a copy of
which may be obtained from the Fund upon request.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Fund History.......................................... B-2
Description of the Fund, Its Investments and Risks.... B-2
Investment Restrictions............................... B-20
Management of the Fund................................ B-21
Control Persons and Principal Holders of Securities... B-25
Investment Advisory and Other Services................ B-25
Brokerage Allocation and Other Practices.............. B-30
Capital Shares, Other Securities and Organization..... B-32
Purchase, Redemption and Pricing of Fund Shares....... B-32
Shareholder Investment Account........................ B-42
Net Asset Value....................................... B-46
Taxes, Dividends and Distributions.................... B-47
Performance Information............................... B-50
Financial Statements.................................. B-53
Report of Independent Accountants..................... B-77
Appendix I -- Historical Performance Data............. I-1
Appendix II -- General Investment Information......... II-1
</TABLE>
--------------------------------------------------------------------------------
MF128B
<PAGE>
FUND HISTORY
The Fund was organized under the laws of Maryland on April 8, 1983.
DESCRIPTION OF THE FUND, ITS INVESTMENTS AND RISKS
(a) CLASSIFICATION. The Fund is a diversified, open-end management investment
company.
(b) AND (c) INVESTMENT STRATEGIES, POLICIES AND RISKS.
The Fund will seek to achieve its investment objective of high current
return primarily by investing 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. These guarantees apply only to the payment of principal and
interest on these securities and do not extend to the securities' yield or
value, which are likely to vary with fluctuations in interest rates, nor do the
guarantees extend to the yield or value of the Fund's shares. The Fund will also
write covered call options and covered put options and purchasing put and call
options. Under normal market conditions, at least 65% of the total assets of the
Fund will be invested in U.S. Government securities. U.S. Government securities
which are purchased pursuant to repurchase agreements or on a when-issued or
delayed-delivery basis will be treated as U.S. Government securities for
purposes of this calculation.
High current return means the return received from interest income from U.S.
Government and other debt securities and from net gains realized from sales of
portfolio securities. The Fund may also realize income from premiums from
covered put and call options written by the Fund on U.S. Government securities
as well as options on futures contracts on U.S. Government securities and net
gains from closing purchase and sales transactions with respect to these
options. The writing of options on U.S. Government securities and options on
futures contracts on U.S. Government securities may limit the Fund's potential
for capital gains on its portfolio. While the principal investment policies and
strategies for seeking to achieve this objective are described in the Fund's
Prospectus, the Fund may from time to time also use the securities, instruments,
policies and principal and non-principal strategies described below in seeking
to achieve its objective. There can be no assurance that the Fund's investment
objective will be achieved. See "How the Fund Invests--Investment Objective and
Policies" in the Prospectus.
U.S. GOVERNMENT SECURITIES
U.S. TREASURY SECURITIES. The Fund may invest in U.S. Treasury securities,
including bills, notes, bonds and other debt securities issued by the U.S.
Treasury. These instruments are direct obligations of the U.S. Government and,
as such, are backed by the full faith and credit of the United States. They
differ primarily in their interest rates, the lengths of their maturities and
the dates of their issuances. U.S. Government guarantees do not extend to the
yield or value of the securities or the Fund's shares.
SECURITIES ISSUED OR GUARANTEED BY U.S. GOVERNMENT AGENCIES AND
INSTRUMENTALITIES. The Fund may invest in securities issued by the
U.S. Government, its agencies of the U.S. Government or instrumentalities of the
U.S. Government. These obligations, including those which are guaranteed by
Federal agencies or instrumentalities, may or may not be backed by the full
faith and credit of the United States. Securities in which the Fund may invest,
include, among others, obligations of the Government National Mortgage
Association (GNMA), the Farmers Home Administration, the Export-Import Bank and
the Small Business Administration are backed by the full faith and credit of the
United States. In the case of securities not backed by the full faith and credit
of the United States, the Fund must look principally to the agency issuing or
guaranteeing the obligation for ultimate repayment and may not be able to assert
a claim against the United States if the agency or instrumentality does not meet
its commitments. Securities in which the Fund may invest that are not backed by
the full faith and credit of the United States include obligations such as those
issued by the Federal Home Loan Bank, the Federal Home Loan Mortgage Corporation
(FHLMC), the Federal National Mortgage Association (FNMA), the Student Loan
Marketing Association, the Resolution Funding Corporation, the Tennessee Valley
Authority, and the United States Postal Service, each of which has the right to
borrow from the U.S. Treasury to meet its obligations, and obligations of the
Farm Credit System, the obligations of which may be satisfied only by the
individual credit of the issuing agency.
MORTGAGE-RELATED SECURITIES ISSUED BY U.S. GOVERNMENT AGENCIES AND
INSTRUMENTALITIES. The Fund may invest in mortgage-backed securities, including
those which represent undivided ownership interests in pools of mortgages. The
B-2
<PAGE>
U.S. Government or the issuing agency or instrumentality guarantees the payment
of interest on and principal of these securities. However, the guarantees do not
extend to the yield or value of the securities nor do the guarantees extend to
the yield or value of the Fund's shares. Mortgages backing the securities
purchased by the Fund include conventional thirty-year fixed rate mortgages,
graduated payment mortgages, fifteen-year mortgages and adjustable rate
mortgages. The Fund may also invest in balloon payment mortgage-backed
securities. A balloon payment mortgage-backed security is an amortizing mortgage
security with installments of principal and interest, the last installment of
which is predominantly principal. All of these mortgages can be used to create
pass-through securities. A pass-through security is formed when mortgages are
pooled together and undivided interests in the pool or pools are sold. The cash
flow from the mortgages is passed through to the holders of the securities in
the form of periodic payments of interest, principal and prepayments (net of a
service fee). Prepayments occur when the holder of an undivided mortgage prepays
the remaining principal before the mortgage's scheduled maturity date. As a
result of the pass-through of prepayments of principal on the underlying
securities, mortgage-backed securities are often subject to more rapid
prepayment of principal than their stated maturity would indicate. The remaining
expected average life of a pool of mortgage loans underlying a mortgage-backed
security is a prediction of when the mortgage loans will be repaid and is based
upon a variety of factors, such as the demographic and geographic
characteristics of the borrowers and the mortgaged properties, the length of
time that each of the mortgage loans has been outstanding, the interest rates
payable on the mortgage loans and the current interest rate environment. Because
the prepayment characteristics of the underlying mortgages vary, it is not
possible to predict accurately the realized yield or average life of a
particular issue of pass-through certificates. Prepayment rates are important
because of their effect on the yield and price of the securities. Accelerated
prepayments adversely impact yields for pass-throughs purchased at a premium.
The opposite is true for pass-throughs purchased at a discount.
CHARACTERISTICS OF MORTGAGE-BACKED SECURITIES. The market value of mortgage
securities, like other U.S. Government securities, will generally vary inversely
with changes in market interest rates, declining when interest rates rise and
rising when interest rates decline. However, mortgage securities, while having
comparable risk of decline during periods of rising rates, usually have less
potential for capital appreciation than other investments of comparable
maturities due to the likelihood of increased prepayments of mortgages as
interest rates decline. In addition, to the extent such mortgage securities are
purchased at a premium, mortgage foreclosures and unscheduled principal
prepayments generally will result in some loss of the holders' principal to the
extent of the premium paid. On the other hand, if such mortgage securities are
purchased at a discount, an unscheduled prepayment of principal will increase
current and total returns and accelerate the recognition of income which when
distributed to shareholders will be taxable as ordinary income.
When mortgage obligations are prepaid, the Fund reinvests the prepaid
amounts in securities, the yields of which reflect interest rates prevailing at
that time. Therefore, the Fund's ability to maintain a portfolio of
high-yielding mortgage-backed securities will be adversely affected to the
extent that prepayments of mortgages are reinvested in securities which have
lower yields than the prepaid mortgages. Moreover, prepayments of mortgages
which underlie securities purchased at a premium generally will result in
capital losses. For further information about mortgage-backed securities see
"Mortgage--Related Securities" and Asset-Backed Securities below.
STRIPS. The Fund may invest in component parts of U.S. Government
Securities, namely, either the corpus (principal) of such obligations or one of
the interest payments scheduled to be paid on such obligations. These
obligations may take the form of (i) obligations from which the interest coupons
have been stripped, (ii) the interest coupons that are stripped, (iii) book
entries at the Federal Reserve member bank representing ownership of obligation
components or (iv) receipts evidencing the component parts (corpus or coupons)
of U.S. Government obligations that have not actually been stripped. Such
receipts evidence ownership of component parts of U.S. Government obligations
(corpus or coupons) purchased by a third party (typically an investment banking
firm) and held on behalf of the third party in physical or book-entry form by a
major commercial bank or trust company pursuant to a custody agreement with the
third party. U.S. Government obligations, including those underlying such
receipts, are backed by the full faith and credit of the U.S. Government.
The Fund may also invest in mortgage pass-through securities where all
interest payments go to one class of holders (Interest Only Securities or IOs)
and all principal payments go to a second class of holders (Principal Only
Securities or POs). These securities are commonly referred to as mortgage-backed
securities strips or MBS strips. The yields to maturity on IOs are very
sensitive to the rate of principal payments (including prepayments) on the
related underlying mortgage assets, and a rapid rate of principal payments may
have a material adverse effect on yield to maturity. If the
B-3
<PAGE>
underlying mortgage assets experience greater than anticipated prepayments of
principal, the Fund may not fully recoup its initial investment in these
securities. Conversely, if the underlying mortgage assets experience less than
anticipated prepayments of principal, the yield on POs could be materially
adversely affected. Derivative mortgage-backed securities such as MBS strips are
highly sensitive to changes in prepayment and interest rates.
GNMA CERTIFICATES. Certificates of the Government National Mortgage
Association (GNMA Certificates) are mortgage-backed securities, which evidence
an undivided interest in a pool of mortgage loans. GNMA Certificates differ from
bonds in that principal is paid back monthly by the borrower over the term of
the loan rather than returned in a lump sum at maturity. GNMA Certificates that
the Fund purchases are the modified pass-through type. Modified pass-through
GNMA Certificates entitle the holder to receive timely payment of all interest
and principal payments paid and owed on the mortgage pool, net of fees paid to
the issuer and GNMA, regardless of whether or not the mortgagor actually makes
the payment. The GNMA Certificates will represent a PRO RATA interest in one or
more pools of the following types of mortgage loans: (1) fixed-rate level
payment mortgage loans; (2) fixed-rate graduated payment mortgage loans;
(3) fixed-rate growing equity mortgage loans; (4) fixed-rate mortgage loans
secured by manufactured (mobile) homes; (5) mortgage loans on multifamily
residential properties under construction; (6) mortgage loans on completed
multifamily projects; (7) fixed-rate mortgage loans as to which escrowed funds
are used to reduce the borrower's monthly payments during the early years of the
mortgage loans (buydown mortgage loans); (8) mortgage loans that provide for
adjustments in payments based on periodic changes in interest rates or in other
payment terms of the mortgage loans; and (9) mortgage-backed serial notes. All
of these mortgage loans will be FHA Loans or VA Loans and, except as otherwise
specified above, will be fully-amortizing loans secured by first liens on
one-to-four-family housing units. Legislative changes may be proposed from time
to time in relation to the Department of Housing and Urban Development which, if
adopted, could alter the viability of investing in GNMAs. The Fund's investment
adviser may re-evaluate the Fund's investment objectives and policies if any
such legislative proposals are adopted.
GNMA GUARANTEE. GNMA is a wholly-owned corporate instrumentality of the
United States with the Department of Housing and Urban Development. The National
Housing Act of 1934, as amended (the Housing Act), authorizes GNMA to guarantee
the timely payment of the principal of and interest on certificates that are
based on and backed by a pool of mortgage loans issued by the Federal Housing
Administration (FHA) under the Housing Act, or Title V of the Housing Act of
1949 (FHA Loans) or the Farmers' Home Administration (FMHA), or guaranteed by
the Veterans' Administration (VA) under the Servicemen's Readjustment Act of
1944, as amended (VA Loans) or by pools of other eligible mortgage loans. The
Housing Act provides that the GNMA guarantee is backed by the full faith and
credit of the United States. The GNMA is also empowered to borrow without
limitation from the U.S. Treasury if necessary to make any payments required
under its guarantee.
LIFE OF GNMA CERTIFICATES. The average life of a GNMA Certificate is likely
to be substantially shorter than the original maturity of the mortgages
underlying the securities. Prepayments of principal by mortgagors and mortgage
foreclosures will usually result in the return of the greater part of principal
investment long before the maturity of the mortgages in the pool. Foreclosures
impose no risk to principal investment because of the GNMA guarantee, except to
the extent that the Fund has purchased the certificates above par in the
secondary market.
FHLMC SECURITIES. The Federal Home Loan Mortgage Corporation was created in
1970 through enactment of Title III of the Emergency Home Finance Act of 1970
(FHLMC Act). Its purpose is to promote development of a nationwide secondary
market in conventional residential mortgages.
The FHLMC issues two types of mortgage pass-through securities, mortgage
participation certificates (PCs) and guaranteed mortgage certificates (GMCs).
PCs resemble GNMA Certificates in that each PC represents a PRO RATA share of
all interest and principal payments made and owed on the underlying pool. The
FHLMC guarantees timely monthly payment of interest on PCs and the ultimate
payment of principal.
GMCs also represent a PRO RATA interest in a pool of mortgages. However,
these instruments pay interest semi-annually and return principal once a year in
guaranteed minimum payments. The expected average life of these securities is
approximately ten years.
FNMA SECURITIES. The Federal National Mortgage Association was established
in 1938 to create a secondary market in mortgages insured by the FHA. FNMA
issues guaranteed mortgage pass-through certificates (FNMA Certificates). FNMA
Certificates resemble GNMA Certificates in that each FNMA Certificate represents
a PRO RATA share of all
B-4
<PAGE>
interest and principal payments made and owed on the underlying pool. FNMA
guarantees timely payment of interest on FNMA Certificates and the full return
of principal. Like GNMA Certificates, FNMA Certificates are assumed to be
prepaid fully in their twelfth year.
MORTGAGE-RELATED SECURITIES AND ASSET-BACKED SECURITIES
MORTGAGE-RELATED SECURITIES ARE SECURITIES THAT DIRECTLY OR INDIRECTLY
REPRESENT A PARTICIPATION IN, OR ARE SECURED BY AND PAYABLE FROM, MORTGAGE LOANS
SECURED BY REAL PROPERTY. THERE ARE CURRENTLY TWO BASIC TYPES OF MORTGAGE-
RELATED SECURITIES: (1) THOSE ISSUED OR GUARANTEED, DIRECTLY OR INDIRECTLY, BY
THE U.S. GOVERNMENT OR ONE OF ITS AGENCIES OR INSTRUMENTALITIES, (SEE, U.S.
GOVERNMENT SECURITIES ABOVE) AND (2) THOSE ISSUED OR GUARANTEED PRIVATELY.
MORTGAGE-RELATED SECURITIES THAT ARE ISSUED BY PRIVATE ISSUERS WITHOUT A
GOVERNMENT GUARANTEE USUALLY HAVE SOME FORM OF PRIVATE CREDIT ENHANCEMENT TO
ENSURE TIMELY RECEIPT OF PAYMENTS AND TO PROTECT AGAINST DEFAULT.
The Fund may invest in mortgage-related securities and other derivative
mortgage products, including those representing an undivided ownership interest
in a pool of mortgages, for example, GNMA, FNMA and FHLMC certificates, where
the U.S. Government or its agencies or instrumentalities guarantees the payment
of interest and principal of these securities. These guarantees do not extend to
the yield or value of the securities of the Fund's shares. See "U.S. Government
Securities" above.
Mortgage-related securities are subject to the risk that the principal on
the underlying mortgage loans may be prepaid at any time. Although the extent of
prepayments on a pool of mortgage loans depends on various economic and other
factors, as a general rule, prepayments on fixed rate mortgage loans will
increase during a period of falling interest rates and decrease during a period
of rising interest rates. Accordingly, amounts available for reinvestment by the
Fund are likely to be greater during a period of declining interest rates and,
as a result, likely to be reinvested at lower interest rates than during a
period of rising interest rates. Mortgage-related securities may decrease in
value as a result of increases in interest rates and may benefit less than other
fixed-income securities from declining interest rates because of the risk of
prepayment
COLLATERALIZED MORTGAGE OBLIGATIONS. A collateralized mortgage obligation
(CMO) is a security issued by a corporation or U.S. Government agency or
instrumentality which is backed by a portfolio of mortgages or mortgage-backed
securities. The issuer's obligation to make interest and principal payments is
secured by the underlying portfolio of mortgages or mortgage-backed securities.
Multiclass pass-through securities are equity interests in a trust composed of
mortgages or mortgage-backed securities. Payments of principal of and interest
on the underlying mortgage assets, and any reinvestment income thereon, provide
the funds to pay debt service on the CMOs or make scheduled distributions on the
multiclass pass-through securities. CMOs may be issued by agencies or
instrumentalities of the U.S. Government, or by private originators of, or
investors in, mortgage loans, including depository institutions, mortgage banks,
investment banks and special purpose subsidiaries of the foregoing. The issuer
of a series of CMOs may elect to be treated as a Real Estate Mortgage Investment
Conduit (REMIC). All future references to CMOs shall also be deemed to include
REMICs and Multiclass Pass-Through Securities.
In a CMO, a series of bonds or certificates is issued in multiple classes.
Each class of CMOs, often referred to as a tranche, is issued at a specific
fixed or floating coupon rate and has a stated maturity or final distribution
date. Principal prepayments on the underlying mortgage assets may cause the CMOs
to be retired substantially earlier than their stated maturities or final
distribution dates. Interest is paid or accrues on all classes of the CMOs on a
monthly, quarterly or semi-annual basis. The principal of and interest on the
underlying mortgage assets may be allocated among the several classes of a CMO
series in a number of different ways. Generally, the purpose of the allocation
of the cash flow of a CMO to the various classes is to obtain more predictable
cash flow to the individual tranches than exists with the underlying collateral
of the CMO. As a general rule, the more predictable the cash flow is on a CMO
tranche, the lower the anticipated yield will be on that tranche at the time of
issuance relative to prevailing market yields on mortgage-backed securities.
Certain issuers of CMOs, including certain CMOs that have elected to be
treated as REMICs, are not considered investment companies pursuant to a rule
adopted by the Securities and Exchange Commission (Commission), and the Fund may
invest in the securities of such issuers without the limitations imposed by the
Investment Company Act of 1940, as amended (the Investment Company Act) on
investments by the Fund in other investment companies. In addition, in reliance
on an earlier Commission interpretation, the Fund's investments in certain other
qualifying CMOs, which cannot or do not rely on the rule, are also not subject
to the limitation of the Investment Company Act on acquiring interests in
B-5
<PAGE>
other investment companies. In order to be able to rely on the Commission's
interpretation, these CMOs must be unmanaged, fixed asset issuers, that
(a) invest primarily in mortgage-backed securities, (b) do not issue redeemable
securities, (c) operate under general exemptive orders exempting them from all
provisions of the Investment Company Act and (d) are not registered or regulated
under the Investment Company Act as investment companies. To the extent that the
Fund selects CMOs or REMICs that cannot rely on the rule or do not meet the
above requirements, the Fund may not invest more than 10% of its assets in all
such entities and may not acquire more than 3% of the voting securities of any
single such entity.
The underlying mortgages which collateralize the CMOs and REMICs in which
the Fund invests may have caps and floors which limit the maximum amount by
which the loan rate to the residential borrower may change up or down (1) per
reset or adjustment interval and (2) over the life of the loan. Some residential
mortgage loans restrict periodic adjustments by limiting changes in the
borrower's monthly principal and interest payments rather than limiting interest
rate changes. These payment caps may result in negative amortization.
STRIPPED MORTGAGE-BACKED SECURITIES (PRIVATELY ISSUED). In addition to MBS
strips issued by agencies or instrumentalities of the U.S. Government, the Fund
may purchase MBS strips issued by private originators of, or investors in,
mortgage loans, including depository institutions, mortgage banks, investment
banks and special purpose subsidiaries of the foregoing. Privately issued MBS
strips are subject to similar risks of MBS strips issued by agencies or
instrumentalities of the U.S. Government. See "Strips" above.
ASSET-BACKED SECURITIES. The Fund may also invest up to 20% of its total
assets in privately-issued asset-backed securities. Through the use of trusts
and special purpose subsidiaries, various types of assets, primarily home equity
loans, automobile and credit card receivables, have been securitized in
pass-through structures similar to mortgage pass-through structures or in a
pay-through structure similar to the collateralized mortgage structure. The Fund
may invest in these and other types of asset-backed securities which may be
developed in the future. Asset-backed securities present certain risks that are
not presented by mortgage-backed securities. Primarily, these securities do not
have the benefit of the same security interest in the related collateral. Credit
card receivables are generally unsecured. In connection with automobile
receivables, the security interests in the underlying automobiles are often not
transferred when the pool is created, with the resulting possibility that the
collateral could be resold. In general, these types of loans are of shorter
average life than mortgage loans and are less likely to have substantial
prepayments. In many instances, asset-backed securities are over-collateralized
to ensure relative stability of their credit quality. The Fund will only invest
in asset-backed securities rated at least A by S&P or Moody's or, if unrated, of
equivalent quality in the judgment of the Fund's investment adviser.
RISK FACTORS RELATING TO INVESTING IN MORTGAGE-BACKED AND ASSET-BACKED
SECURITIES. Mortgage-backed securities, including those issued or guaranteed
privately or by the U.S. Government or one of its agencies or instrumentalities,
and asset-backed securities differ from traditional debt securities. Among the
major differences are that interest and principal payments are made more
frequently, usually monthly, and principal may be prepaid at any time because
the underlying mortgage loans or other assets generally may be prepaid at any
time. As a result, if the Fund purchases such a security at a premium, a
prepayment rate that is faster than expected will reduce yield to maturity,
while a prepayment rate that is slower than expected will have the opposite
effect of increasing yield to maturity. Alternatively, if the Fund purchases
these securities at a discount, faster than expected prepayments will increase,
while slower than expected prepayments will reduce yield to maturity.
In addition, mortgage-backed securities which are secured by manufactured
(mobile) homes and multi-family residential properties, such as GNMA and FNMA
certificates, are subject to a higher risk of default than are other types of
mortgage-backed securities. See "U.S. Government Securities" above.
Although the extent of prepayments on a pool of mortgage loans depends on
various economic and other factors, as a general rule prepayments on fixed rate
mortgage loans will increase during a period of falling interest rates and
decrease during a period of rising interest rates. Accordingly, amounts
available for reinvestment by the Fund are likely to be greater during a period
of declining interest rates and, as a result, likely to be reinvested at lower
interest rates than during a period of rising interest rates. Asset-backed
securities, although less likely to experience the same prepayment rate as
mortgage-backed securities, may respond to certain of the same factors
influencing prepayments, while at other times different factors may predominate.
Mortgage-backed securities and asset-backed securities generally decrease in
value as a result of increases in interest rates and usually have less potential
for capital appreciation during periods of declining interest
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rates than other fixed-income securities with comparable maturities because of
the risk of prepayment. In addition, to the extent such mortgage securities are
purchased at a premium mortgage foreclosures and unscheduled principal
prepayments generally will result in some loss of the holders' principal to the
extent of the premium paid. On the other hand, if such mortgage securities are
purchased at a discount, an unscheduled prepayment of principal will increase
current and total returns and accelerate the recognition of income which when
distributed to shareholders will be taxable as ordinary income.
During periods of rising interest rates, the rate of prepayment of mortgages
underlying mortgage-backed securities can be expected to decline, extending the
projected average maturity of the mortgage-backed securities. The maturity
extension risk may effectively change a security which was considered short-or
intermediate-term at the time of purchase into a long-term security. Long-term
securities generally fluctuate more widely in response to changes in interest
rates than short-or intermediate-term securities.
Asset-backed securities involve certain risks that are not posed by
mortgage-backed securities, resulting mainly from the fact that asset-backed
securities do not usually contain the complete benefit of a security interest in
the related collateral. For example, credit card receivables generally are
unsecured and the debtors are entitled to the protection of a number of state
and federal consumer credit card laws, some of which may reduce the ability to
obtain full payment. In the case of automobile receivables, due to various legal
and economic factors, proceeds from repossessed collateral may not always be
sufficient to support payments on these securities.
OTHER INVESTMENTS AND POLICIES
Up to 35% of the total assets of the Fund may be committed to investments
other than U.S. Government securities. These investments would include the
securities described in this subsection as well as purchased put and call
options and purchased put options on futures contracts. See "Options
Transactions" and "Futures Contracts on U.S. Government Securities below." The
Fund may invest in debt obligations rated at least A by Standard & Poor's
Ratings Group (S&P) or Moody's Investors Service (Moody's) or, if unrated,
deemed to be of comparable credit quality by the Fund's investment adviser.
These debt securities may have adjustable or fixed rates of interest and in
certain instances may be secured by assets of the issuer. Fixed rate debt
securities may also be subject to call provisions.
MONEY MARKET INSTRUMENTS
The Fund may, under normal circumstances, invest up to 20% of its total
assets in high-quality money market instruments, including commercial paper of
domestic companies, certificates of deposit, bankers' acceptances and other
obligations of domestic and foreign banks. Investments in money market
instruments for "coverage purposes" (as described herein) will be excluded in
calculating the 20% limitation. Such obligations will, at the time of purchase,
be rated within the two highest quality grades as determined by a nationally
recognized statistical rating organization (NRSRO) (such as Moody's or S&P) or,
if unrated, will be of equivalent quality in the judgment of the Fund's
investment adviser. Money market instruments typically have a maturity of one
year or less as measured from the date of purchase.
FOREIGN BANK OBLIGATIONS
The Fund may invest in obligations of foreign banks and foreign branches of
U.S. banks only if after giving effect to such investment all such investments
would constitute less than 10% of the Fund's total assets (determined at the
time of investment). These investments may be subject to certain risks,
including future political and economic developments, the possible imposition of
withholding taxes on interest income, the seizure or nationalization of foreign
deposits and foreign exchange controls or other restrictions. In addition, there
may be less publicly available information about a foreign bank or foreign
branch of a U.S. bank than about a domestic bank and such entities may not be
subject to the same accounting, auditing and financial recordkeeping standards
and requirements as domestic banks.
If the security is denominated in a foreign currency, it will be affected by
changes in currency exchange rates and in exchange control regulations, and
costs will be incurred in connection with conversions between currencies. A
change in the value of any such currency against the U.S. dollar will result in
a corresponding change in the U.S. dollar value of the Fund's securities
denominated in that currency. Such changes also will affect the Fund's income
and distributions to shareholders. In addition, although the Fund will receive
income in such currencies, the Fund will be required to compute
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and distribute its income in U.S. dollars. Therefore, if the exchange rate for
any such currency declines after the Fund's income has been accrued and
translated into U.S. dollars, the Fund could be required to liquidate portfolio
securities to make such distributions, particularly in instances in which the
amount of income the Fund is required to distribute is not immediately reduced
by the decline in such currency. Similarly, if an exchange rate declines between
the time the Fund incurs expenses in U.S. dollars and the time such expenses are
paid, the amount of such currency required to be converted into U.S. dollars in
order to pay such expenses in U.S. dollars will be greater than the equivalent
amount in any such currency of such expenses at the time they were incurred.
RISK FACTORS AND SPECIAL CONSIDERATIONS OF INVESTING IN FOREIGN BANK
OBLIGATIONS. Foreign securities involve certain risks, which should be
considered carefully by an investor in the Fund. These risks include political
or economic instability in the country of the issuer, the difficulty of
predicting international trade patterns, the possibility of imposition of
exchange controls and the risk of currency fluctuations. Such securities may be
subject to greater fluctuations in price than securities issued by
U.S. corporations or issued or guaranteed by the U.S. Government, its
instrumentalities or agencies. In addition, there may be less publicly available
information about a foreign issuer than about a domestic company. Foreign
issuers generally are not subject to uniform accounting, auditing and financial
reporting standards comparable to those applicable to domestic companies. There
is generally less government regulation of securities exchanges, brokers and
listed companies abroad than in the United States and there is a possibility of
expropriation, confiscatory taxation and diplomatic developments which could
affect investment.
Additional costs could be incurred in connection with the Fund's
international investment activities. Foreign brokerage commissions are generally
higher than U.S. brokerage commissions. Increased custodian costs as well as
administrative difficulties (such as the applicability of foreign laws to
foreign custodians in various circumstances) may be associated with the
maintenance of assets in foreign jurisdictions.
If a security is denominated in a foreign currency, it will be affected by
changes in currency exchange rates and in exchange control regulations, and
costs will be incurred in connection with conversions between currencies. A
change in the value of any such currency against the U.S. dollar will result in
a corresponding change in the U.S. dollar value of the Fund's securities
denominated in that currency. Such changes also will affect the Fund's income
and distributions to shareholders.
Shareholders should be aware that investing in the equity markets of
developing countries involves exposure to economies that are generally less
diverse and mature, and to political systems which can be expected to have less
stability than those of developed countries. Historical experience indicates
that the markets of developing countries have been more volatile than the
markets of developed countries. The risks associated with investments in foreign
securities, described above, may be greater with respect to investments in
developing countries.
SPECIAL CONSIDERATIONS OF INVESTING IN EURO-DENOMINATED SECURITIES. On
January 1, 1999, 11 of the 15 member states of the European Monetary Union
introduced the "euro" as a common currency. During a three-year transitional
period, the euro will coexist with each participating state's currency and, on
July 1, 2002, the euro is expected to become the sole currency of the
participating states. During the transition period, the Fund will treat the euro
as a separate currency from that of any participating state.
The conversion may adversely affect the Fund if the euro does not take
effect as planned; if a participating state withdraws from the European Monetary
Union; or if the computing, accounting and trading systems used by the Fund's
service providers, or by entities with which the Fund or its service providers
do business, are not capable of recognizing the euro as a distinct currency at
the time of, and following, euro conversion. In addition, the conversion could
cause markets to become more volatile.
The overall effect of the transition of member states' currencies to the
euro is not known at this time. It is likely that more general short- and
long-term ramifications can be expected, such as changes in the economic
environment and change in the behavior of investors, which would affect the
Fund's investments and its net asset value. In addition, although U.S. Treasury
regulations generally provide that the euro conversion will not, in itself,
cause a U.S. taxpayer to realize gain or loss, other changes that occur at the
time of the conversion, such as accrual periods, holiday conventions, indexes,
and other features may require the realization of a gain or loss by the Fund as
determined under existing tax law.
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WORLD BANK OBLIGATIONS
The Fund may also purchase obligations of the International Bank for
Reconstruction and Development (the World Bank). Obligations of the World Bank
are supported by appropriated but unpaid commitments of its member countries,
including the U.S., and there is no assurance these commitments will be
undertaken or met in the future.
ADJUSTABLE RATE DEBT SECURITIES
The Fund is permitted to invest in adjustable rate debt securities,
including corporate securities and securities issued by U.S. Government
agencies, whose interest rate is calculated by reference to a specified index
such as the constant maturity Treasury rate, the T-bill rate or LIBOR (London
Interbank Offered Rate) and is reset periodically. Adjustable rate securities
allow the Fund to participate in increases in interest rates through these
periodic adjustments. The value of adjustable rate securities will, like other
debt securities, generally vary inversely with changes in prevailing interest
rates. The value of adjustable rate securities is unlikely to rise in periods of
declining interest rates to the same extent as fixed rate instruments of similar
maturities. In periods of rising interest rates, changes in the coupon will lag
behind changes in the market rate resulting in a lower NAV until the coupon
resets to market rates.
RISK MANAGEMENT AND RETURN ENHANCEMENT STRATEGIES
The Fund may engage in various portfolio strategies, including using
derivatives to seek and to reduce certain risks of its investments and to
enhance return. The Fund, and thus its investors, may lose money through any
unsuccessful use of these strategies. These strategies currently include the use
of options, including straddles, interest rate swaps, futures contracts,
including Eurodollar instruments, and options on futures contracts. The Fund's
ability to use these strategies may be limited by various factors, such as
market conditions, regulatory limits and tax considerations, and there can be no
assurance that any of these strategies will succeed. If new financial products
and risk management techniques are developed, the Fund may use them to the
extent consistent with its investment objective and policies.
OPTION WRITING AND RELATED RISKS. The Fund may write (that is, sell) covered
call or put options which are traded on registered securities exchanges (the
Exchanges) and may also write such options with primary U.S. Government
securities dealers recognized by the Federal Reserve Bank of New York (OTC
options). A call option gives the purchaser of the option the right to buy, and
the writer the obligation to sell, the underlying security at the exercise price
during the option period. Conversely, a put option gives the purchaser the right
to sell, and the writer the obligation to buy, the underlying security at the
exercise price during the option period.
OPTIONS TRANSACTIONS. The Fund may write and purchase put and call options
only on U.S. Government securities and financial futures contracts.
Exchange-traded options are issued by the Options Clearing Corporation (OCC)
which, in effect, gives its guarantee to every exchange-traded option
transaction. In contrast, OTC options represent a contract between a U.S.
Government securities dealer and the Fund with no guarantee of the OCC. Thus,
when the Fund purchases an OTC option, it relies on the dealer from which it has
purchased the OTC option to make or take delivery of the U.S. Government
securities underlying the OTC option. Failure by the dealer to do so would
result in the loss of premium paid by the Fund as well as loss of the expected
benefit of the transaction.
Exchange-traded options generally have a continuous liquid market while OTC
options do not. Consequently, the Fund will generally be able to realize the
value of an OTC option it has purchased only by exercising it or reselling it to
the issuing dealer. Similarly, when the Fund writes an OTC option, it generally
will be able to close out the OTC option prior to its expiration only by
entering into a closing purchase transaction with the dealer to which the Fund
originally wrote the OTC option. While the Fund will enter into OTC option
transactions only with dealers who will agree to and which are expected to be
capable of entering into closing transactions with the Fund, there can be no
assurance that the Fund will be able to liquidate an OTC option at a favorable
price at any time prior to expiration. Until the Fund, as a covered OTC call
option writer, is able to effect a closing purchase transaction, it will not be
able to liquidate securities used as cover until the option expires, is
exercised or the Fund provides substitute cover. In the event of insolvency of
the counterparty, the Fund may be unable to liquidate an OTC option. With
respect to options written by the Fund, the inability to enter into a closing
transaction may result in material losses to the Fund. This requirement may
impair the Fund's ability to sell a portfolio security at a time when such a
sale might be advantageous.
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The principal reason for writing options on a securities portfolio is to
attempt to realize, through the receipt of premiums, a greater return than would
be realized on the underlying securities alone. In return for the premium, the
covered call option writer has given up the opportunity for profit from a price
increase in the underlying security above the exercise price so long as the
option remains open, but retains the risk of loss should the price of the
security decline. Conversely, the put option writer gains a profit, in the form
of the premium, so long as the price of the underlying security remains above
the exercise price, but assumes an obligation to purchase the underlying
security from the buyer of the put option at the exercise price, even though the
security may fall below the exercise price, at any time during the option
period. If an option expires, the writer realizes a gain in the amount of the
premium. Such a gain may, in the case of a covered call option, be offset by a
decline in the market value of the underlying security during the option period.
If a call option is exercised, the writer realizes a gain or loss from the sale
of the underlying security. If a put option is exercised, the writer must
fulfill its obligation to purchase the underlying security at the exercise
price, which will usually exceed the market value of the underlying security at
that time.
So long as the obligation of the writer continues, the writer may be
assigned an exercise notice by the broker-dealer through whom the option was
sold. The exercise notice would require the writer to deliver, in the case of a
call, or take delivery of, in the case of a put, the underlying security against
payment of the exercise price. This obligation terminates upon expiration of the
option, or at such earlier time that the writer effects a closing purchase
transaction by purchasing an option covering the same underlying security and
having the same exercise price and expiration date (of the same series) as the
one previously sold. Once an option has been exercised, the writer may not
execute a closing purchase transaction. To secure the obligation to deliver the
underlying security in the case of a call option, the writer of the option is
required to pledge for the benefit of the broker the underlying security or
other assets in accordance with the rules of the OCC, an institution created to
interpose itself between buyers and sellers of options. Technically, the OCC
assumes the other side of every purchase and sale transaction on an Exchange
and, by doing so, guarantees the transaction.
The Fund writes only "covered" options. This means that, so long as the Fund
is obligated as the writer of a call option, it will (a) own the underlying
securities subject to the option, except that, in the case of call options on
U.S. Treasury Bills, the Fund might own U.S. Treasury Bills of a different
series from those underlying the call option, but with a principal amount and
value corresponding to the option contract amount and a maturity date no later
than that of the securities deliverable under the call option or (b) deposit and
maintain in a segregated account cash or other liquid assets having a value at
least equal to the fluctuating market value of the securities underlying the
call. The Fund will be considered "covered" with respect to a put option it
writes if, so long as it is obligated as the writer of a put option, it will
(a) deposit and maintain in a segregated account cash or other liquid assets
having a value equal to or greater than the exercise price of the option, or
(b) own a put option on the same security with an exercise price the same or
higher than the exercise price of the put option sold or, if lower, deposit and
maintain the differential in cash or other liquid assets in a segregated
account.
To the extent that a secondary market is available on the Exchanges, the
covered option writer may close out options it has written prior to the
assignment of an exercise notice by purchasing, in a closing purchase
transaction, an option of the same series as the option previously written. If
the cost of such a closing purchase, plus transaction costs, is greater than the
premium received upon writing the original option, the writer will incur a loss
in the transaction.
Because the Fund can write only covered options, it may at times be unable
to write additional options unless it sells a portion of its portfolio holdings
to obtain new debt securities or other cover against which it can write options.
If the Fund writes a substantial number of options, its portfolio turnover will
be higher than if it did not do so. Portfolio turnover will increase to the
extent that options written by the Fund are exercised. Because the exercise of
such options depends on changes in the price of the underlying securities, the
Fund's portfolio turnover rate cannot be accurately predicted. See "Portfolio
Turnover" below.
SPECIAL CONSIDERATIONS APPLICABLE TO OPTIONS
ON TREASURY BONDS AND NOTES. Because trading interest in Treasury Bonds and
Notes tends to center on the most recently auctioned issues, the Exchanges will
not indefinitely continue to introduce new series of options with expirations to
replace expiring options on particular issues. Instead, the expirations
introduced at the commencement of options trading on a particular issue will be
allowed to run their course, with the possible addition of a limited number of
new
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expirations as the original ones expire. Options trading on each series of Bonds
or Notes will thus be phased out as new options are listed on the more recent
issues, and a full range of expiration dates will not ordinarily be available
for every series on which options are traded.
ON TREASURY BILLS. Because the availability of deliverable Treasury Bills
changes from week to week, writers of Treasury Bill call options cannot provide
in advance for their potential exercise settlement obligations by acquiring and
holding the underlying security. However, if the Fund holds a long position in
Treasury Bills with a principal amount corresponding to the option contract
size, the Fund may be hedged from a risk standpoint. In addition, the Fund will
maintain in a segregated account Treasury Bills maturing no later than those
which would be deliverable in the event of an assignment of an exercise notice
to ensure that it can meet its open option obligations.
ON GNMA CERTIFICATES. Options on GNMA Certificates are not currently traded
on any Exchange. However, the Fund intends to purchase and write such options
should they commence trading on any Exchange.
Since the remaining principal balance of GNMA Certificates declines each
month as a result of mortgage payments, the Fund, as a writer of a covered GNMA
call holding GNMA Certificates as "cover" to satisfy its delivery obligation in
the event of assignment of an exercise notice, may find that its GNMA
Certificates no longer have a sufficient remaining principal balance for this
purpose. Should this occur, the Fund will enter into a closing purchase
transaction or will purchase additional GNMA Certificates from the same pool (if
obtainable) or replacement GNMA Certificates in the cash market in order to
remain covered.
A GNMA Certificate held by the Fund to cover an option position in any but
the nearest expiration month may cease to represent cover for the option in the
event of a decline in the GNMA coupon rate at which new pools are originated
under the FHA/VA loan ceiling in effect at any given time. Should this occur,
the Fund will no longer be covered, and the Fund will either enter into a
closing purchase transaction or replace the GNMA Certificate with a GNMA
Certificate which represents cover. When the Fund closes its position or
replaces the GNMA Certificate, it may realize an unanticipated loss and incur
transaction costs.
INTEREST RATE SWAP TRANSACTIONS. The Fund may enter into interest rate
swaps, on either an asset-based or liability-based basis, depending on whether
it is hedging its assets or its liabilities. Under normal circumstances, the
Fund will enter into interest rate swaps on a net basis, that is, the two
payment streams netted out, with the Fund receiving or paying, as the case may
be, only the net amount of the two payments. The net amount of the excess, if
any, of the Fund's obligations over its entitlements with respect to each
interest rate swap will be accrued on a daily basis and an amount of cash or
other liquid assets having an aggregate net asset value per share (NAV) at least
equal to the accrued excess will be maintained in a segregated account by a
custodian that satisfies the requirements of the Investment Company Act. To the
extent that the Fund enters into interest rate swaps on other than a net basis,
the amount maintained in a segregated account will be the full amount of the
Fund's obligations, if any, with respect to such interest rate swaps, accrued on
a daily basis. Inasmuch as segregated accounts are established for these hedging
transactions, the investment adviser and the Fund believe such obligations do
not constitute senior securities. If there is a default by the other party to
such a transaction, the Fund will have contractual remedies pursuant to the
agreement related to the transaction. The swap market has grown substantially in
recent years with a large number of banks and investment banking firms acting
both as principals and as agents utilizing standardized swap documentation. As a
result, the swap market has become relatively liquid. The Fund will enter into
interest rate swaps only with parties meeting creditworthiness standards
approved by the Fund's Board of Directors. The investment adviser will monitor
the creditworthiness of such parties under the supervision of the Board of
Directors.
If the Fund purchases an interest rate swap to hedge against a change in an
interest rate of a security the Fund anticipates buying, and such interest rate
changes unfavorably for the Fund, then the Fund may detemine not to invest in
the securities as planned and will realize a loss on the interest rate swap that
is not offset by a change in the interest rates or the price of the securities.
The use of interest rate swaps is a highly speculative activity which
involves investment techniques and risks different from those associated with
ordinary portfolio securities transactions. If the investment adviser is
incorrect in its forecast of market values, interest rates and other applicable
factors, the investment performance of the Fund would diminish compared to what
it would have been if this investment technique was never used.
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The Fund may enter into interest rate swaps traded on an exchange or in the
over-the-counter market. The Fund may only enter into interest rate swaps to
hedge its portfolio. Interest rate swaps do not involve the delivery of
securities or other underlying assets or principal. Accordingly, the risk of
loss with respect to interest rate swaps is limited to the net amount of
interest payments that the Fund is contractually obligated to make. If the other
party to an interest rate swap defaults, the Fund's risk of loss consists of the
net amount of interest payments that the Fund is contractually entitled to
receive. Since interest rate swaps are individually negotiated, the Fund expects
to achieve an acceptable degree of correlation between its rights to receive
interest on its portfolio securities and its rights and obligations to receive
and pay interest pursuant to interest rate swaps.
FUTURES CONTRACTS. A futures contract obligates the seller of a contract to
deliver to the purchaser of a contract cash equal to a specific dollar amount
times the difference between the value of a specific fixed-income security or
index at the close of the last trading day of the contract and the price at
which the agreement is made. As a purchaser of a futures contract, the Fund
incurs an obligation to acquire a specified amount of the obligations underlying
the futures contract at a specified time in the future for a specified price. As
a seller of a futures contract, the Fund incurs an obligation to deliver the
specified amount of the underlying obligation at a specified time in return for
an agreed upon price. The Fund may purchase futures contracts on debt
securities, aggregates of debt securities, and U.S. Government securities,
including futures contracts or options linked to the London Interbank Offered
Rate (LIBOR). Eurodollar futures contracts are currently traded on the Chicago
Mercantile Exchange. They enable purchasers to obtain a fixed rate for the
lending of funds and sellers to obtain a fixed rate for borrowings. The Fund
would use Eurodollar futures contracts and options thereon to hedge against
changes in LIBOR, to which many interest rate swaps are linked. See "Risks of
Transactions in Options and Financial Futures."
The Fund will purchase or sell futures contracts for the purpose of hedging
its portfolio (or anticipated portfolio) securities against changes in
prevailing interest rates. If the investment adviser anticipates that interest
rates may rise and, concomitantly, that the price of the Fund's portfolio
securities may fall, then the Fund may sell a futures contract. If declining
interest rates are anticipated, the Fund may purchase a futures contract to
protect against a potential increase in the price of securities the Fund intends
to purchase. Subsequently, appropriate securities may be purchased by the Fund
in an orderly fashion; as securities are purchased, corresponding futures
positions would be terminated by offsetting sales of contracts.
The Fund will purchase or sell futures contracts also to attempt to enhance
return. In addition, futures contracts will be bought or sold in order to close
out a short or long position in a corresponding futures contract.
Although most futures contracts call for actual delivery or acceptance of
securities or cash, the contracts usually are closed out before the settlement
date without the making or taking of delivery. A futures contract sale is closed
out by effecting a futures contract purchase for the same aggregate amount of
the specific type of security and the same delivery date. If the sale price
exceeds the offsetting purchase price, the seller would be paid the difference
and would realize a gain. If the offsetting purchase price exceeds the sale
price, the seller would pay the difference and would realize a loss. Similarly,
a futures contract purchase is closed out by effecting a futures contract sale
for the same aggregate amount of the specific type of security (or currency) and
the same delivery date. If the offsetting sale price exceeds the purchase price,
the purchaser would realize a gain, whereas if the purchase price exceeds the
offsetting sale price, the purchaser would realize a loss. There is no assurance
that the Fund will be able to enter into a closing transaction.
The Fund neither pays nor receives money upon the purchase or sale of a
futures contract. Instead, when the Fund enters into a futures contract, it will
initially be required to deposit in a segregated account for the benefit of the
broker (the futures commission merchant) an amount of "initial margin" of cash
or U.S. Treasury Bills, currently equal to approximately 1 1/2 to 2% of the
contract amount for futures on Treasury Bonds and Notes and approximately
1/10 of 1% of the contract amount for futures on Treasury Bills. Initial margin
in futures transactions is different from margin in securities transactions in
that futures contract initial margin does not involve the borrowing of funds by
the customer to finance the transactions. Rather, initial margin is in the
nature of a good faith deposit on the contract which is returned to the Fund
upon termination of the futures contract, assuming all contractual obligations
have been satisfied. Subsequent payments, called variation margin, to and from
the futures commission merchant are made on a daily basis as the market price of
the futures contract fluctuates. This process is known as "marking to market."
At any time prior to expiration of the futures
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contract, the Fund may elect to close the position by taking an offsetting
position which will operate to terminate the Fund's position in the futures
contract. While interest rate futures contracts provide for the delivery and
acceptance of securities, most futures contracts are terminated by entering into
offsetting transactions.
Successful use of futures contracts by the Fund is also subject to the
ability of the Fund's investment adviser to predict correctly movements in the
direction of interest rates and other factors affecting markets for securities.
For example, if the Fund has hedged against the possibility of an increase in
interest rates which would adversely affect the price of securities in its
portfolio and the price of such securities increases instead, the Fund will lose
part or all of the benefit of the increased value of its securities because it
will have offsetting losses in its futures positions. In addition, in such
situations, if the Fund has insufficient cash to meet daily variation margin
requirements, it may have to sell securities to meet such requirements. Such
sales of securities may be, but will not necessarily be, at increased prices
which reflect the rising market. The Fund may have to sell securities at a time
when it is disadvantageous to do so.
The hours of trading futures contracts on U.S. Government securities may not
conform to the hours during which the Fund may trade such securities. To the
extent that the futures markets close before or after the U.S. Government
securities markets, significant variations can occur in one market that cannot
be reflected in the other market. See "Risks of Hedging and Return Enhancement
Strategies" below.
FUTURES CONTRACTS ON U.S. GOVERNMENT SECURITIES
CHARACTERISTICS AND PURPOSE OF INTEREST RATE FUTURES. The Fund may purchase
and sell U.S. Exchange-traded interest-rate futures. Currently, there are
futures contracts based on U.S. Treasury Bonds, U.S. Treasury Notes, three-
month U.S. Treasury Bills and GNMA certificates. A clearing corporation
associated with the commodities exchange on which a futures contract trades
assumes responsibility for the completion of transactions and guarantees that
futures contracts will be performed. Although futures contracts call for actual
delivery or acceptance of debt securities, in most cases the contracts are
closed out before the settlement date without the making or taking of delivery.
OPTIONS ON FUTURES CONTRACTS. An option on a futures contract gives the
purchaser the right, but not the obligation, in return for the premium paid to
assume a position in a futures contract (a long position if the option is a call
and a short position if the option is a put) at a specified exercise price at
any time during the option exercise period. The writer of the option is required
upon exercise to assume an offsetting futures position (a short position if the
option is a call and a long position if the option is a put). Upon exercise of
the option, the assumption of offsetting futures positions by the writer and
holder of the option will be accompanied by delivery of the accumulated cash
balance in the writer's futures margin account which represents the amount by
which the market price of the futures contract, at exercise, exceeds, in the
case of a call, or is less than, in the case of a put, the exercise price of the
option on the futures contract. Currently, options can be purchased or written
with respect to futures contracts on GNMAs, U.S. Treasury Bonds and
U.S. Treasury Notes on The Chicago Board of Trade and U.S. Treasury Bills on the
International Monetary Market at the Chicago Mercantile Exchange.
The holder or writer of an option may terminate its position by selling or
purchasing an option of the same series. There is no guarantee that such closing
transactions can be effected.
The Fund may only write covered call or put options. The Fund will be
considered covered with respect to a call option it writes on a futures contract
if it (a) owns a long position in the underlying futures contract or the
security underlying the futures contract, (b) owns a security which is
deliverable under the futures contract or (c) owns a separate call option to
purchase the same futures contract at a price no higher than the exercise price
of the call option written by the Fund or, if higher, the Fund deposits and
maintains the differential in cash or other liquid assets in a segregated
account. The Fund is considered covered with respect to a put option it writes
on a futures contract if it (a) segregates and maintains in a segregated account
cash or other liquid assets at all times equal in value to the exercise price of
the put (less any related margin deposited), or (b) owns a put option on the
same futures contract with an exercise price as high or higher than the price of
the contract held by the Fund or, if lower, the Fund deposits and maintains the
differential in cash or other liquid assets in a segregated account. There is no
limitation on the amount of the Fund's assets which can be placed in the
segregated account.
The Fund will be required to deposit initial and maintenance margin with
respect to put and call options on futures contracts written by it pursuant to
the Fund's futures commissions merchants' requirements similar to those
applicable to futures contracts, described above.
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The skills needed to trade futures contracts and options thereon are
different than those needed to select U.S. Government securities. The Fund's
investment adviser has experience in managing other securities portfolios which
uses similar options and futures strategies as the Fund.
RISKS OF HEDGING AND RETURN ENHANCEMENT STRATEGIES. Participation in the
options or futures markets involves investment risks and transaction costs to
which the Fund would not be subject absent the use of these strategies. The
Fund, and thus its investors, may lose money through the unsuccessful use of
these strategies. If the investment adviser's predictions of movements in the
direction of the securities, foreign currency and interest rate markets are
inaccurate, the adverse consequences to the Fund may leave the Fund in a worse
position than if such strategies were not used. Risks inherent in the use of
options, futures contracts and options on futures contracts include
(1) dependence on the investment adviser's ability to predict correctly
movements in the direction of interest rates, securities prices and currency
markets; (2) imperfect correlation between the price of options and futures
contracts and options thereon and movements in the prices of the securities or
currencies being hedged; (3) the fact that skills needed to use these strategies
are different from those needed to select portfolio securities; (4) the possible
absence of a liquid secondary market for any particular instrument at any time;
and (5) the possible inability of the Fund to purchase or sell a portfolio
security at a time that otherwise would be favorable for it to do so, or the
possible need for the Fund to sell a portfolio security at a disadvantageous
time, due to the need for the Fund to maintain cover or to segregate securities
in connection with hedging transactions.
There may exist an imperfect correlation between the price movements of
futures contracts purchased by the Fund and the movements in the prices of the
securities (or currencies) which are the subject of the hedge. If participants
in the futures market elect to close out their contracts through offsetting
transactions rather than meet margin deposit requirements, distortions in the
normal relationships between the debt securities (or currencies) and futures
market could result. Price distortions could also result if investors in futures
contracts elect to make or take delivery of underlying securities (or
currencies) rather than engage in closing transactions due to the resultant
reduction in the liquidity of the futures market. In addition, due to the fact
that, from the point of view of speculators, the deposit requirements in the
futures markets are less onerous than margin requirements in the cash market,
increased participation by speculators in the futures markets could cause
temporary price distortions. Due to the possibility of price distortions in the
futures market and because of the imperfect correlation between movements in the
prices of securities (or currencies) and movements in the prices of futures
contracts, a correct forecast of interest rate trends by the investment adviser
may still not result in a successful hedging transaction.
The risk of imperfect correlation increases as the composition of the Fund's
securities portfolio diverges from the securities that are the subject of the
futures contract, for example, those included in the municipal index. Because
the change in price of the futures contract may be more or less than the change
in prices of the underlying securities, even a correct forecast of interest rate
changes may not result in a successful hedging transaction.
The Fund may sell a futures contract to protect against the decline in the
value of securities held by the Fund. However, it is possible that the futures
market may advance and the value of securities held in the Fund's portfolio may
decline. If this were to occur, the Fund would lose money on the futures
contracts and also experience a decline in value in its portfolio securities.
If the Fund purchases a futures contract to hedge against the increase in
value of securities it intends to buy, and the value of such securities
decreases, then the Fund may determine not to invest in the securities as
planned and will realize a loss on the futures contract that is not offset by a
reduction in the price of the securities.
There is a risk that the prices of securities subject to futures contracts
(and thereby the futures contract prices) may correlate imperfectly with the
behavior of the cash prices of the Fund's portfolio securities. Another such
risk is that prices of futures contracts may not move in tandem with the changes
in prevailing interest rates against which the Fund seeks a hedge. A correlation
may also be distorted by the fact that the futures market is dominated by
short-term traders seeking to profit from the difference between a contract or
security price objective and their cost of borrowed funds. Such distortions are
generally minor and would diminish as the contract approached maturity.
Pursuant to the requirements of the Commodity Exchange Act, as amended (the
Commodity Exchange Act), all futures contracts and options thereon must be
traded on an exchange. The Fund intends to purchase and sell futures contracts
only on exchanges where there appears to be a market in such futures
sufficiently active to accommodate the
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volume of its trading activity. The Fund's ability to establish and close out
positions in futures contracts and options on futures contracts would be
impacted by the liquidity of these exchanges. Although the Fund generally would
purchase or sell only those futures contracts and options thereon for which
there appeared to be a liquid market, there is no assurance that a liquid market
on an exchange will exist for any particular futures contract or option at any
particular time. In the event no liquid market exists for a particular futures
contract or option thereon in which the Fund maintains a position, it would not
be possible to effect a closing transaction in that contract or to do so at a
satisfactory price and the Fund would have to either make or take delivery under
the futures contract or, in the case of a written call option, wait to sell the
underlying securities until the option expired or was exercised, or, in the case
of a purchased option, exercise the option and comply with the margin
requirements for the underlying futures contract to realize any profit. In the
case of a futures contract or an option on a futures contract which the Fund had
written and which the Fund was unable to close, the Fund would be required to
maintain margin deposits on the futures contract or option and to make variation
margin payments until the contract was closed. In the event futures contracts
have been sold to hedge portfolio securities, such securities will not be sold
until the offsetting futures contracts can be executed. Similarly, in the event
futures have been bought to hedge anticipated securities purchases such
purchases will not be executed until the offsetting futures contracts can be
sold.
Exchanges on which futures and related options trade may impose limits on
the positions that the Fund may take in certain circumstances. In addition, the
hours of trading of financial futures contracts and options thereon may not
conform to the hours during which the Fund may trade the underlying securities.
To the extent the futures markets close before the securities markets,
significant price and rate movements can take place in the securities markets
that cannot be reflected in the futures markets.
Under regulations of the Commodity Exchange Act, investment companies
registered under the Investment Company Act are exempt from the definition of
commodity pool operator, subject to compliance with certain conditions. The Fund
may enter into futures or related options contracts for return enhancement
purposes if the aggregate initial margin and option premiums do not exceed 5% of
the liquidation value of the Fund's total assets, after taking into account
unrealized profits and unrealized losses on any such contracts, provided,
however, that in the case of an option that is in-the-money, the in-the-money
amount may be excluded in computing such 5%. The above restriction does not
apply to the purchase and sale of futures and related options contracts for BONA
FIDE hedging purchases within the meaning of the regulations of the CFTC.
In order to determine that the Fund is entering into transactions in futures
contracts for hedging purposes as such term is defined by the CFTC, either: (1)
a substantial majority (THAT IS, approximately 75%) of all anticipatory hedge
transactions (transactions in which the Fund does not own at the time of the
transaction, but expects to acquire, the securities underlying the relevant
futures contract) involving the purchase of futures contracts will be completed
by the purchase of securities which are the subject of the hedge, or (2) the
underlying value of all long positions in futures contracts will not exceed the
total value of (a) all short-term debt obligations held by the Fund; (b) cash
held by the Fund; (c) cash proceeds due to the Fund on investments within thirty
days; (d) the margin deposited on the contracts; and (e) any unrealized
appreciation in the value of the contracts.
If the Fund maintains a short position in a futures contract, it will cover
this position by holding, in a segregated account, cash or liquid assets equal
in value (when added to any initial or variation margin on deposit) to the
market value of the securities underlying the futures contracts. Such a position
may also be covered by owning the securities underlying the futures contract, or
by holding a call option permitting the Fund to purchase the same contract at a
price no higher than the price at which the short position was established.
In addition, the Fund holds a long position in a futures contract, it will
hold cash or liquid assets equal to the purchase price of the contract (less the
amount of initial or variation margin on deposit) in a segregated account.
Alternatively, the Fund could cover its long position by purchasing a put option
on the same futures contract with an exercise as high or higher than the price
of the contract held by the Fund.
Exchanges limit the amount by which the price of a futures contract may move
on any day. If the price moves equal the daily limit on successive days, than it
may prove impossible to liquidate a futures position until the daily limit moves
have ceased. In the event of adverse price movements, the Fund would continue to
be required to make daily cash payments of variation margin on open futures
positions. In such situations, if the Fund has insufficient cash, it may be
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disadvantageous to do so. In addition, the Fund may be required to take or make
delivery of the instruments underlying futures contracts it holds at a time when
it is disadvantageous to do so. The ability to close out options and futures
positions could also have an adverse impact on the Fund's ability to hedge
effectively its portfolio.
In the event of the bankruptcy of a broker through which the Fund engages in
transactions in futures or options thereon, the Fund could experience delays
and/or losses in liquidating open positions purchased or sold through the broker
and/or incur a loss of all or part of its margin deposits with the broker.
Transactions are entered into by the Fund only with brokers or financial
institutions deemed creditworthy by the investment adviser.
RISKS OF TRANSACTIONS IN OPTIONS AND FINANCIAL FUTURES. Compared to the
purchase or sale of futures contracts, the purchase and sale of call or put
options on futures contracts involves less potential risk to the Fund because
the maximum amount at risk is the premium paid for the options (plus transaction
costs). However, there may be circumstances when the purchase of a call or put
option on a futures contract would result in a loss to the Fund notwithstanding
that the purchase or sale of a futures contract would not result in a loss, as
in the instance where there is no movement in the prices of the futures
contracts or underlying securities (or currencies).
An option position may be closed out only on an exchange which provides a
secondary market for an option of the same series. As described above, although
the Fund generally will purchase only those options for which there appears to
be an active secondary market, there is no assurance that a liquid secondary
market on an exchange will exist for any particular option, or at any particular
time, and for some options, no secondary market on an exchange may exist. In
such event it might not be possible to effect closing transactions in particular
options with the result that the Fund would have to exercise its options in
order to realize any profit and would incur transaction costs upon the sale of
underlying securities pursuant to the exercise of put options.
Reasons for the absence of a liquid secondary market on an exchange include
the following: (1) there may be insufficient trading interest in certain
options; (2) restrictions may be imposed by an exchange on opening transactions
or closing transactions or both; (3) trading halts, suspensions or other
restrictions may be imposed with respect to particular classes or series of
options or underlying securities; (4) unusual or unforseen circumstances may
interrupt normal operations on an exchange; (5) the facilities of an exchange or
the Options Clearing Corporation may not at all times be adequate to handle
current trading volume; or (6) one or more exchanges could, for economic or
other reasons, decide to be compelled at some future date to discontinue the
trading of options (or a particular class or series of options), in which event
the secondary market on that exchange (or in that class or series of options)
would cease to exist, although outstanding options on that exchange that had
been issued by the Options Clearing Corporation as a result of trades on that
exchange could continue to be exercisable in accordance with their terms.
There is no assurance that higher than anticipated trading activity or other
unforseen events might not, at times, render certain of the facilities of the
Options Clearing Corporation inadequate, and thereby result in the institution
by an exchange of special procedures which may interfere with the timely
execution of customers' orders.
REPURCHASE AGREEMENTS
The Fund may on occasion enter into repurchase agreements, whereby the
seller of a security agrees to repurchase that security from the Fund at a
mutually agreed-upon time and price. The period of maturity is usually quite
short, possibly overnight or a few days, although it may extend over a number of
months. The resale price is in excess of the purchase price, reflecting an
agreed-upon rate of return effective for the period of time the Fund's money is
invested in the repurchase agreement. The instruments held as collateral are
valued daily, and if the value of the instruments declines, the Fund will
require additional collateral. If the seller defaults and the value of the
collateral securing the repurchase agreement declines, the Fund may incur a
loss.
The Fund will enter into repurchase transactions only with parties meeting
creditworthiness standards approved by the Fund's investment adviser. The Fund's
repurchase agreements will at all times be fully collateralized by U.S.
Government obligations in an amount at least equal to the resale price. The
Fund's investment adviser will monitor the creditworthiness of such parties,
under the general supervision of the Board of Directors. In the event of a
default or bankruptcy by a seller, the Fund will promptly seek to liquidate the
collateral. To the extent that the proceeds from any sale of such collateral
upon a default in the obligation to repurchase are less than the repurchase
price, the Fund will suffer a loss.
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<PAGE>
The Fund participates in a joint repurchase account with other investment
companies managed by Prudential Investments Fund Management LLC (PIFM) pursuant
to an order of the Commission. On a daily basis, any uninvested cash balances of
the Fund may be aggregated with such of other investment companies and invested
in one or more repurchase agreements. Each fund participates in the income
earned or accrued in the joint account based on the percentage of its
investment.
SECURITIES LENDING
The Fund may lend its portfolio securities to brokers or dealers, banks or
other recognized institutional borrowers of securities, provided that the
borrower at all times maintains cash or equivalent collateral or secures a
letter of credit in favor of the Fund in an amount equal to at least 100% of the
market value determined daily of the securities loaned. During the time
portfolio securities are on loan, the borrower will pay the Fund an amount
equivalent to any dividend or interest paid on such securities and the Fund may
invest the cash collateral and earn additional income, or it may receive an
agreed-upon amount of interest income from the borrower. As a matter of
fundamental policy, the Fund cannot lend more than 30% of the value of its total
assets. As with any extensions of credit, there are risks of delay in recovery
and in some cases loss of rights in the collateral should the borrower of the
securities fail financially. However, these loans of portfolio securities will
only be made to firms determined to be creditworthy pursuant to procedures
approved by the Board of Directors of the Fund. The advantage of such loans is
that the Fund continues to receive payments in lieu of the interest and
dividends of the loaned securities, while at the same time earning interest
either directly from the borrower or on the collateral which will be invested in
short-term obligations. On termination of the loan, the borrower is required to
return the securities to the Fund, and any gain or loss in the market price
during the loan would inure to the Fund.
The Fund will pay reasonable finders', administrative and custodial fees in
connection with a loan of its securities or may share the interest earned on
collateral with the borrower.
WHEN-ISSUED AND DELAYED-DELIVERY SECURITIES
From time to time, in the ordinary course of business, the Fund may purchase
or sell U.S. Government securities on a when-issued or delayed-delivery basis.
When-issued or delayed-delivery transactions arise when securities are purchased
or sold by the Fund with payment and delivery taking place as much as a month or
more in the future in order to secure what is considered to be an advantageous
price and yield to the Fund at the time of entering into the transaction. The
purchase price and the interest rate payable on the securities are fixed on the
transaction date. The Fund will maintain in a segregated account cash or other
liquid assets, marked-to-market daily, having a value equal to or greater than
the Fund's purchase commitments. The securities so purchased are subject to
market fluctuation and no interest accrues to the purchaser during the period
between purchase and settlement. At the time the Fund makes the commitment to
purchase securities on a when-issued or delayed-delivery basis, it will record
the transaction and thereafter reflect the value of such securities in
determining its NAV each day. At the time of delivery of the securities the
value may be more or less than the purchase price and an increase in the
percentage of the Fund's assets committed to the purchase of securities on a
when-issued or delayed-delivery basis may increase the volatility of the Fund's
NAV. If the Fund chooses to dispose of the right to acquire a when-issued
security prior to this acquisition, it could, as with the disposition of any
other portfolio security, incur a gain or loss due to market fluctuations.
ZERO COUPON BONDS
The Fund may invest up to 5% of its total assets in zero coupon
U.S. Government securities. Zero coupon bonds are purchased at a discount from
the face amount because the buyer receives only the right to receive a fixed
payment on a certain date in the future and does not receive any periodic
interest payments. The discount approximates the total amount of interest the
security will accrue and compound over the period until maturity or the
particular interest payment date at a rate of interest reflecting the market
rate of the security at the time of issuance. The effect of owning instruments
which do not make current interest payments is that a fixed yield is earned not
only on the original investment but also, in effect, on all discount accretion
during the life of the obligations. This implicit reinvestment of earnings at
the same rate eliminates the risk of being unable to invest distributions at a
rate as high as the implicit yield on the zero coupon bond, but at the same time
eliminates the holder's ability to reinvest at higher rates in the future. For
this reason, zero coupon bonds are subject to substantially greater price
fluctuations during periods of changing market interest rates than are
comparable securities which pay interest currently, which fluctuation increases
the longer the period to maturity. These investments
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benefit the issuer by mitigating its need for cash to meet debt service, but
also require a higher rate of return to attract investors who are willing to
defer receipt of cash. Because the Fund accrues income which may not be
represented by cash, the Fund may be required to sell other securities in order
to satisfy the distribution requirements applicable to the Fund. Zero coupon
bonds may be subject to greater fluctuation in value and lesser liquidity in the
event of adverse market conditions than comparably rated securities paying cash
interest at regular interest payment periods.
SHORT SALES AGAINST-THE-BOX
The Fund may, under certain circumstances, make short sales against-the-box.
A short sale against-the-box is a short sale in which the Fund owns an equal
amount of the securities sold short or securities, convertible into or
exchangeable for, without payment of any further consideration, securities of
the same issue as, and equal in amount to, the securities sold short. The Fund
may engage in such short sales only to the extent that not more than 10% of the
Fund's net assets (determined at the time of the short sale) are held as
collateral for such sales.
REVERSE REPURCHASE AGREEMENTS AND DOLLAR ROLLS
Reverse repurchase agreements involve sales by the Fund of portfolio assets
concurrently with an agreement by the Fund to repurchase the same assets at a
later date at a fixed price. During the reverse repurchase agreement period, the
Fund continues to receive principal and interest payments on these securities.
The Fund may enter into dollar rolls in which the Fund sells securities to
be issued and delivered in the current month and simultaneously contracts to
repurchase substantially similar (same type and coupon) securities on a
specified future date from the same party. During the roll period, the Fund
forgoes principal and interest paid on the securities. The Fund is compensated
by the difference between the current sales price and the forward price for the
future purchase (often referred to as the drop) as well as by the interest
earned on the cash proceeds of the initial sale. A covered roll is a specific
type of dollar roll for which there is an offsetting cash position or a cash
equivalent security position which matures on or before the forward settlement
date of the dollar roll transaction. Reverse repurchase agreements and dollar
rolls (other than covered dollar rolls) are considered borrowings by the Fund
for purposes of the percentage limitations applicable to borrowings. Covered
dollar rolls, however, are not treated as borrowings or other senior securities
and will be excluded from the calculation of the Fund's borrowings and other
senior securities.
The Fund will establish a segregated account with its custodian in which it
will maintain cash or other liquid assets, equal in value to its obligations in
respect of reverse repurchase agreements and dollar rolls. Reverse repurchase
agreements and dollar rolls involve the risk that the market value of the
securities retained by the Fund may decline below the price of the securities
the Fund has sold but is obligated to repurchase under the agreement. In the
event the buyer of securities under a dollar roll or reverse repurchase
agreement files for bankruptcy or becomes insolvent, the Fund's use of the
proceeds of the agreement may be restricted pending a determination by the other
party, or its trustee or receiver, whether to enforce the Fund's obligation to
repurchase the securities.
ILLIQUID SECURITIES
The Fund may hold up to 15% of its net assets in illiquid securities. If the
Fund were to exceed this limit, the investment adviser would take prompt action
to reduce the Fund's holdings in illiquid securities to no more than 15% of its
net assets as required by applicable law. Illiquid securities include repurchase
agreements which have a maturity of longer than seven days, or other illiquid
securities including certain securities with legal or contractual restrictions
on resale (restricted securities) either within or outside of the United States
and securities that are illiquid by virtue of the absence of a readily available
market (either within or outside of the United States).
Historically, illiquid securities have included securities subject to
contractual or legal restrictions on resale because they have not been
registered under the Securities Act of 1933, as amended (Securities Act),
securities which are otherwise not readily marketable and repurchase agreements
having a maturity of longer than seven days. Securities which have not been
registered under the Securities Act are referred to as private placements or
restricted securities and are purchased directly from the issuer or in the
secondary market. Mutual funds do not typically hold a significant amount of
these restricted or other illiquid securities because of the potential for
delays on resale and uncertainty in valuation. Limitations on resale may have an
adverse effect on the marketability of portfolio securities and a mutual fund
might be unable to dispose of restricted or other illiquid securities promptly
or at reasonable prices and might thereby experience
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difficulty satisfying redemptions within seven days. A mutual fund might also
have to register such restricted securities in order to dispose of them
resulting in additional expense and delay. Adverse market conditions could
impede such a public offering of securities.
In recent years, however, a large institutional market has developed for
certain securities that are not registered under the Securities Act including
repurchase agreements, commercial paper, foreign securities, municipal
securities and corporate bonds and notes. Institutional investors depend on an
efficient institutional market in which the unregistered security can be readily
resold or on an issuer's ability to honor a demand for repayment. The fact that
there are contractual or legal restrictions on resale to the general public or
to certain institutions may not be indicative of the liquidity of such
investments.
Rule 144A of the Securities Act allows for a broader institutional trading
market for securities otherwise subject to restriction on resale to the general
public. Rule 144A establishes a "safe harbor" from the registration requirements
of the Securities Act for resales of certain securities to qualified
institutional buyers. The investment adviser anticipates that the market for
certain restricted securities such as institutional commercial paper,
convertible securities and foreign securities will expand further as a result of
this regulation and the development of automated systems for the trading,
clearance and settlement of unregistered securities of domestic and foreign
issuers, such as the PORTAL System sponsored by the National Association of
Securities Dealers, Inc. (NASD).
Restricted securities, including securities eligible for resale pursuant to
Rule 144A under the Securities Act, securities with contractual restrictions and
commercial paper that have a readily available market, will not be deemed to be
illiquid. The investment adviser will monitor the liquidity of such restricted
securities subject to the supervision of the Board of Directors. In reaching
liquidity decisions, the investment adviser will consider, INTER ALIA, the
following factors: (1) the frequency of trades and quotes for the security;
(2) the number of dealers wishing to purchase or sell the security and the
number of other potential purchasers; (3) dealer undertakings to make a market
in the security and (4) the nature of the security and the nature of the
marketplace trades (for example, the time needed to dispose of the security, the
method of soliciting offers and the mechanics of the transfer). In addition, in
order for commercial paper that is issued in reliance on Section 4(2) of the
Securities Act to be considered liquid, (a) it must be rated in one of the two
highest rating categories by at least two nationally recognized statistical
rating organizations (NRSRO), or if only one NRSRO rates the securities, by that
NRSRO, or, if unrated, be of comparable quality in the view of the investment
adviser; and (b) it must not be "traded flat" (that is, without accrued
interest) or in default as to principal or interest. Repurchase agreements
subject to demand are deemed to have a maturity equal to the notice period.
The staff of the Commission has taken the position, which the Fund will
follow, that purchased OTC options and the assets used as "cover" for written
OTC options are illiquid securities unless the Fund and the counterparty have
provided for the Fund, at the Fund's election, to unwind the OTC option. The
exercise of such an option would ordinarily involve the payment by the Fund of
an amount designed to reflect the counterparty's economic loss from an early
termination, but does allow the Fund to treat the assets used as cover as
liquid.
BORROWING
The Fund may borrow up to 20% of the value of its total assets (calculated
when the loan is made) for temporary, extraordinary or emergency purposes or for
the clearance of transactions. The Fund may pledge up to 20% of the value of its
total assets to secure such borrowings. If the Fund's asset coverage for
borrowings falls below 300%, the Fund will take prompt action to reduce its
borrowings as required by law. If the 300% asset coverage should decline as a
result of market fluctuations or other reasons, the Fund may be required to sell
portfolio securities to reduce the debt and restore the 300% asset coverage,
even though it may be disadvantageous from an investment standpoint to sell
securities at that time. The Fund will not purchase securities when borrowings
exceed 5% of the value of the Fund's total assets.
SEGREGATED ASSETS
When the Fund is required to segregate assets in connection with certain
hedging transactions, it will maintain cash or liquid assets in a segregated
account. "Liquid assets" means cash, U.S. Government securities, foreign
securities,
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equity securities, debt obligations or other liquid, unencumbered assets
marked-to-market daily. Such hedging transactions may involve when-issued and
delayed delivery securities, futures contracts, options and options on futures
contracts (unless otherwise covered). If collateralized or otherwise covered, in
accordance with Commission guidelines, these will not be deemed to be senior
securities.
SECURITIES OF OTHER INVESTMENT COMPANIES
The Fund may invest up to 10% of its total assets in securities of other
investment companies. To the extent that the Fund does invest in securities of
other investment companies, shareholders of the Fund may be subject to duplicate
management and advisory fees. See "Investment Restrictions" below.
(d) TEMPORARY DEFENSIVE STRATEGY AND SHORT-TERM INVESTMENTS
In response to adverse market, economic or political conditions, the Fund
may temporarily invest up to 100% of the Fund's assets in high-quality money
market instruments, cash, repurchase agreements or U.S. Government Securities.
Investing heavily in these securities limits our ability to achieve our
investment objective, but can help to preserve the Fund's assets.
(e) PORTFOLIO TURNOVER
The Fund's portfolio turnover rate for the fiscal years ended February 28,
1999 and February 29, 2000 was 106% and 68%, respectively. The investment
adviser expects that, under normal circumstances, if the Fund writes a
substantial number of options, and those options are exercised, the Fund's
portfolio turnover rate may be as high as 250% or higher. The portfolio turnover
rate is generally the percentage computed by dividing the lesser of portfolio
purchases or sales (excluding all securities, including options, whose
maturities or expiration date at acquisition were one year or less) by the
monthly average value of the portfolio. High portfolio turnover (over 100%)
involves correspondingly greater brokerage commissions and other transaction
costs, which are borne directly by the Fund. In addition, high portfolio
turnover may also mean that a proportionately greater amount of distributions to
shareholders will be taxed as ordinary income rather than long-term capital
gains compared to investment companies with lower portfolio turnover. See
"Brokerage Allocation and Other Practices" and "Taxes, Dividends and
Distributions" below.
INVESTMENT RESTRICTIONS
The following restrictions are fundamental policies. Fundamental policies
are those which cannot be changed without the approval of the holders of a
majority of the Fund's outstanding voting securities. A "majority of the Fund's
outstanding voting securities," when used in this Statement of Additional
Information, means the lesser of (i) 67% of the voting shares represented at a
meeting at which more than 50% of the outstanding voting shares are present in
person or represented by proxy or (ii) more than 50% of the outstanding voting
shares.
The Fund may not:
1. Purchase securities on margin (but the Fund may obtain such short-term
credits as may be necessary for the clearance of transactions); the deposit or
payment by the Fund of initial or variation margin in connection with interest
rate futures contracts or related options transactions is not considered the
purchase of a security on margin.
2. Make short sales of securities or maintain a short position, except
short sales "against the box."
3. Issue senior securities, borrow money or pledge its assets except that
the Fund may borrow up to 20% of the value of its total assets (calculated when
the loan is made) for temporary, extraordinary or emergency purposes or for the
clearance of transactions. The Fund may pledge up to 20% of the value of its
total assets to secure such borrowings. For purposes of this restriction, the
purchase or sale of securities on a when-issued or delayed delivery basis,
collateral arrangements with respect to interest rate swap transactions, reverse
repurchase agreements or dollar roll transactions or the writing of options on
debt securities or on interest rate futures contracts or other financial futures
contracts are not deemed to be a pledge of assets and neither such arrangements,
nor the purchase or sale of interest rate futures contracts or other financial
futures contracts or the purchase or sale of related options, nor obligations of
the Fund to Directors pursuant to deferred compensation arrangements are deemed
to be the issuance of a senior security.
B-20
<PAGE>
4. Purchase any security (other than obligations of the U.S. Government,
its agencies, or instrumentalities) if as a result: (i) with respect to 75% of
the Fund's total assets, more than 5% of the Fund's total assets (determined at
the time of investment) would then be invested in securities of a single issuer,
or (ii) 25% or more of the Fund's total assets (determined at the time of
investment) would be invested in a single industry.
5. Purchase any security if as a result the Fund would then hold more than
10% of the outstanding voting securities of an issuer.
6. Buy or sell commodities or commodity contracts or real estate or
interests in real estate, except it may purchase and sell securities which are
secured by real estate, securities of companies which invest or deal in real
estate, interest rate futures contracts and other financial futures contracts
and options thereon.
7. Act as underwriter except to the extent that, in connection with the
disposition of portfolio securities, it may be deemed to be an underwriter under
certain federal securities laws.
8. Make investments for the purpose of exercising control or management.
9. Invest in securities of other registered investment companies, except by
purchases in the open market involving only customary brokerage commissions and
as a result of which not more than 10% of its total assets (determined at the
time of investment) would be invested in such securities, or except as part of a
merger, consolidation or other acquisition.
10. Invest in interests in oil, gas or other mineral exploration or
development programs.
11. Make loans, except through (i) repurchase agreements and (ii) loans of
portfolio securities (limited to 30% of the Fund's total assets).
12. Purchase warrants if as a result the Fund would then have more than 5%
of its total assets (determined at the time of investment) invested in warrants.
13. Write, purchase or sell puts, calls or combinations thereof, or purchase
or sell futures contracts or related options, except that the Fund may write put
and call options on U.S. Government securities, purchase put and call options on
U.S. Government securities and purchase or sell interest rate futures contracts
and other financial futures contracts and related options.
Whenever any fundamental investment policy or investment restriction states
a maximum percentage of the Fund's assets, it is intended that if the percentage
limitation is met at the time the investment is made, a later change in
percentage resulting from changing total or net asset values will not be
considered a violation of such policy. However, in the event that the Fund's
asset coverage for borrowings falls below 300%, the Fund will take prompt action
to reduce its borrowings, as required by applicable law.
MANAGEMENT OF THE FUND
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS
NAME, ADDRESS(1) AND AGE POSITION WITH FUND DURING PAST FIVE YEARS
------------------------ ------------------ ----------------------
<S> <C> <C>
Eugene C. Dorsey (72) Director Retired President, Chief Executive Officer and
Trustee of the Gannett Foundation (now Freedom
Forum); former Publisher of four Gannett
newspapers and Vice President of Gannett
Company; past Chairman of Independent Sector
(national coalition of philanthropic
organizations); former Chairman of the
American Council for the Arts; former Director
of the Advisory Board of Chase Manhattan Bank
of Rochester.
Delayne Dedrick Gold (61) Director Marketing and Management Consultant.
</TABLE>
B-21
<PAGE>
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS
NAME, ADDRESS(1) AND AGE POSITION WITH FUND DURING PAST FIVE YEARS
------------------------ ------------------ ----------------------
<S> <C> <C>
*Robert F. Gunia (53) Vice President and Executive Vice President and Chief
Director Administrative Officer (since June 1999) of
Prudential Investments; Corporate Vice
President (September 1997-March 1999) of The
Prudential Insurance Company of America
(Prudential); Executive Vice President and
Treasurer (since December 1996) of Prudential
Investments Fund Management LLC (PIFM);
President (since April 1999) of Prudential
Investment Management Services LLC (PIMS);
former Senior Vice President (March 1987-May
1999) and former Chief Administrative Officer
(July 1989-September 1996) of Prudential
Securities Incorporated (Prudential
Securities); Director (January 1989-September
1996), Executive Vice President, Treasurer and
Chief Financial Officer (June 1987-December
1996) of Prudential Mutual Fund Management,
Inc. (PMF); Vice President and Director (since
May 1989) of The Asia Pacific Fund, Inc.
Thomas T. Mooney (58) Director President of the Greater Rochester Metro
Chamber of Commerce; former Rochester City
Manager; former Deputy Monroe County Executive
Trustee of Center for Governmental
Research, Inc.; Director of Blue Cross of
Rochester, Monroe County Water Authority,
Executive Service Corps of Rochester.
Stephen P. Munn (57) Director Chairman (since January 1994), Director and
President (since 1988) and Chief Executive
Officer (since 1988) of Carlisle Companies
Incorporated (manufacturer of industrial
products).
*David R. Odenath, Jr. Vice President and Officer in Charge, President, Chief Executive
(42) Director Officer and Chief Operating Officer (since
June 1999) of PIFM; Senior Vice President
(June 1999) of Prudential; Senior Vice
President (August 1993-May 1999) of
PaineWebber Group, Inc.
Richard A. Redeker (56) Director Former employee of Prudential Investments
(October 1996-December 1998); prior thereto,
President, Chief Executive Officer and
Director (October 1993-September 1996) of PMF;
Executive Vice President, Director and Member
of the Operating Committee (October
1993-September 1996) of Prudential Securities;
Director (October 1993-September 1996) of
Prudential Securities Group, Inc.; Executive
Vice President, The Prudential Investment
Corporation (January 1994-September 1996);
Director (January 1994-September 1996) of
Prudential Mutual Fund Distributors, Inc. and
Prudential Mutual Fund Services, Inc.; former
Senior Executive Vice President and Director
of Kemper Financial Services, Inc. (September
1978-September 1993).
</TABLE>
B-22
<PAGE>
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS
NAME, ADDRESS(1) AND AGE POSITION WITH FUND DURING PAST FIVE YEARS
------------------------ ------------------ ----------------------
<S> <C> <C>
*John R. Strangfeld, Jr. President and Director Chief Executive Officer, Chairman, President
(45) and Director (since January 1990) of The
Prudential Investment Corporation, Executive
Vice President (since February 1998) of
Prudential Global Asset Management Group of
Prudential, and Chairman (since August 1989)
of Pricoa Capital Group; formerly various
positions to Chief Executive Officer (November
1994-December 1998) of Private Asset
Management Group of Prudential and Senior Vice
President (January 1986-August 1989) of
Prudential Capital Group, a unit of
Prudential.
Nancy H. Teeters (69) Director Economist; former Vice President and Chief
Economist (July 1984-July 1990) of
International Business Machines Corporation;
former Governor of Federal Reserve System
(1978-1984); former Director of Inland Steel
Industries (July 1991-1999).
Louis A. Weil, III (59) Director Chairman (since January 1999), President and
Chief Executive Officer (since January 1996)
and Director (since September 1991) of Central
Newspapers, Inc.; Chairman of the Board (since
January 1996), Publisher and Chief Executive
Officer (August 1991-December 1995) of Phoenix
Newspapers, Inc.; former Publisher of Time
Magazine (May 1989-March 1991); former
President, Publisher and Chief Executive
Officer of the Detroit News (February
1986-August 1989); member of the Advisory
Board, Chase Manhattan Bank-Westchester.
Grace C. Torres (40) Treasurer and Principal First Vice President (since December 1996) of
Financial and PIFM; former First Vice President (March
Accounting Officer 1993-May 1999) of Prudential Securities; First
Vice President (March 1994-September 1996) of
Prudential Mutual Fund Management, Inc.
Stephen M. Ungerman (46) Assistant Treasurer Tax Director (since March 1996) of Prudential
Investments and the Private Asset Group of The
Prudential Insurance Company of America
(Prudential); former First Vice President
(February 1993-September 1996) of Prudential
Mutual Fund Management, Inc.
Deborah A. Docs (42) Secretary Vice President (since December 1996) of PIFM;
former Vice President and Associate General
Counsel (June 1991-May 1996) of Prudential
Securities; Vice President and Associate
General Counsel (June 1991-September 1996) of
PMF.
William V. Healey (46) Assistant Secretary Vice President and Associate General Counsel
(since 1998) of Prudential; Chief Legal
Officer (since August 1998) of Prudential
Investments; Director (since June 1999) of ICI
Mutual Insurance Company; prior to August
1998, Associate General Counsel of The Dreyfus
Corporation ("Dreyfus"), a subsidiary of
Mellon Bank, N.A. ("Mellon Bank"), and an
officer and/or director of various affiliates
of Mellon Bank.
</TABLE>
------------------------
* "Interested" director, as defined in the Investment Company Act, by reason of
his or her affiliation with Prudential, Prudential Securities Incorporated
(Prudential Securities), or PIFM.
B-23
<PAGE>
(1) The address of the Directors and officers is c/o Prudential Investments Fund
Management LLC, Gateway Center Three, 100 Mulberry Street, Newark, New
Jersey 07102-4077.
Directors and officers of the Fund are also trustees, directors and officers
of some or all of the other investment companies distributed by Prudential
Investment Management Services LLC.
The Fund has Directors who, in addition to overseeing the actions of the
Fund's Manager, investment adviser and Distributor, decide upon matters of
general policy. The Directors also review the actions of the Fund's officers and
supervise the daily business operations of the Fund.
The Fund pays each of its Directors who is not an affiliated person of the
Manager annual compensation of $5,500, in addition to certain out-of-pocket
expenses. The amount of annual compensation paid to each Director may change as
a result of the introduction of additional funds upon which the Director may be
asked to serve.
Directors may receive their Directors' fees pursuant to a deferred fee
arrangement with the Fund. Under the terms of such agreement, the Fund accrues
daily the amount of Directors' fees which accrue interest at a rate equivalent
to the prevailing rate applicable to 90-day U.S. Treasury bills at the beginning
of each calendar quarter or, pursuant to a Commission exemptive order at the
daily rate of return of any Prudential mutual fund. Payment of the interest so
accrued is also deferred and accruals become payable at the option of the
Director. The Fund's obligation to make payments of deferred Directors' fees,
together with interest thereon, is a general obligation of the Fund.
The Directors have adopted a retirement policy which calls for the
retirement of Directors on December 31 of the year in which they reach the age
of 75.
Pursuant to the terms of the Management Agreement with the Fund, the Manager
pays all compensation of officers and employees of the Fund as well as the fees
and expenses of all Directors of the Fund who are affiliated persons of the
Manager. The Fund pays each of its Directors who is not an affiliated person of
PIFM, the Prudential Investment Corporation (PIC) or the Subadviser annual
compensation of $5,800, in addition to certain out-of-pocket expenses. The
amount of annual compensation paid to each Director may change as a result of
the introduction of additional funds on whose Boards the Directors may be asked
to serve.
The following table sets forth the aggregate compensation paid by the Fund
for the fiscal year ended February 29, 2000 to the Directors who are not
affiliated with the Manager and the aggregate compensation paid to such
Directors for service on the Fund's Board and the Board of any other investment
companies managed by Prudential Mutual Fund Management, Inc. (Fund Complex) for
the calendar year ended December 31, 1999.
COMPENSATION TABLE
<TABLE>
<CAPTION>
PENSION OR TOTAL 1999
RETIREMENT COMPENSATION FROM
AGGREGATE BENEFITS ACCRUED ESTIMATED ANNUAL FUND AND FUND
COMPENSATION AS PART OF FUND BENEFITS UPON COMPLEX PAID TO
NAME AND POSITION FROM FUND EXPENSES RETIREMENT DIRECTORS
----------------- ------------- ---------------- ---------------- -----------------
<S> <C> <C> <C> <C>
Edward D. Beach, Director (a) $ 5,200 None N/A $142,500(43/70)*
Eugene C. Dorsey, Director** $ 5,200 None N/A $ 81,000(17/48)*
Delayne Dedrick Gold, Director $ 5,400 None N/A $144,500(43/70)*
Robert F. Gunia, Vice President and
Director (1) -- -- -- --
Thomas T. Mooney, Director** $ 5,200 None N/A $129,500(35/75)*
Stephen P. Munn, Director $ 5,200 None N/A $ 62,250(29/53)
Thomas H. O'Brien, Director (a) $ 5,200 None N/A $ 47,500(11/26)
David R. Odenath, Jr., Vice
President and Director (1) -- None -- --
Richard A. Redeker, Director $ 5,200 None N/A $ 95,000(29/53)
John R. Strangfeld, Jr., President
and Director (1) -- -- -- --
Nancy H. Teeters, Director $ 5,200 None N/A $ 97,000(25/43)*
Louis A. Weil, III, Director $ 5,400 None N/A $ 96,000(29/53)*
</TABLE>
(a) Former Director, retired on December 31, 1999.
* Indicates number of funds/portfolios in Fund Complex (including the Fund) to
which aggregate compensation relates.
B-24
<PAGE>
** Total aggregate compensation from all of the funds in the Fund Complex for
the calendar year ended December 31, 1999, includes amounts deferred at the
election of Directors. Including accrued interest, total compensation
amounted to $103,574, and $135,102 for Eugene C. Dorsey and Thomas T.
Mooney, respectively.
(1) Directors who are "interested" do not receive compensation from the Fund or
any fund in the Fund complex.
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
Directors of the Fund are eligible to purchase Class Z shares of the Fund,
which are sold without either an initial sales charge or CDSC to a limited group
of investors.
As of April 14, 2000, the Directors and officers of the Fund, as a group,
owned less than 1% of the outstanding shares of the Fund.
As of April 14, 2000, the only beneficial owners, directly or indirectly of
more than 5% of any class of shares of the Fund were: Prudential Trust Company,
FBO PRU-DC Trust Accounts, Attn: John Surdy, 30 Scranton Office Park, Moosic PA
18507-1796 who held 2,044,523 Class Z shares of the Fund (or 18.6% of the
outstanding Class Z shares); and Pru Defined Contribution Services, FBO
PRU-NON-Trust Accounts, Attn: John Surdy, 30 Scranton Office Park, Moosic PA
18507-1755 who held 4,908,110 Class Z shares of the Fund (or 44.7% of the
outstanding Class Z shares).
As of April 14, 2000, Prudential Securities was the record holder for other
beneficial owners of 50,610,092 Class A shares (or 52.4% of the outstanding
Class A shares), 9,220,325 Class B shares (or 45.9% of the outstanding Class B
shares), 641,967 Class C shares (or 68.2% of the outstanding Class C shares) and
744,619 Class Z shares (or 6.5% of the outstanding Class Z shares) of the Fund.
In the event of any meetings of shareholders, Prudential Securities will
forward, or cause the forwarding of, proxy materials to the beneficial owners
for which it is the record holder.
INVESTMENT ADVISORY AND OTHER SERVICES
(a) MANAGER AND INVESTMENT ADVISER
The manager of the Fund is Prudential Investments Fund Management LLC (PIFM
or the Manager), Gateway Center Three, 100 Mulberry Street, Newark, New Jersey
07102-4077. The Manager serves as manager to all of the other investment
companies that, together with the Fund, comprise the "Prudential mutual funds."
See "How the Fund is Managed--Manager" in the Prospectus. As of January 31,
2000, PIFM managed and/or administered open-end and closed-end management
investment companies with assets of approximately $74.9 billion. According to
the Investment Company Institute, as of September 30, 1999, the Prudential
mutual funds were the 20th largest family of mutual funds in the United States.
The Manager is a subsidiary of Prudential Securities and Prudential.
Prudential Mutual Fund Services LLC (PMFS or the Transfer Agent), a wholly-owned
subsidiary of the Manager, serves as the Transfer Agent and dividend
distribution agent for the Prudential mutual funds and, in addition, provides
customer service, record keeping and management and administration services to
qualified plans.
Pursuant to the Management Agreement with the Fund (the Management
Agreement), the Manager, subject to the supervision of the Fund's Board of
Directors and in conformity with the stated policies of the Fund, manages both
the investment operations of the Fund and the composition of the Fund's
portfolio, including the purchase, retention, disposition and loan of
securities. In connection therewith, the Manager is obligated to keep certain
books and records of the Fund. The Manager has hired The Prudential Investment
Corporation, doing business as Prudential Investments (PI, the investment
adviser or the Subadviser) to provide subadvisory services to the Fund. The
Manager also administers the Fund's corporate affairs and, in connection
therewith, furnishes the Fund with office facilities, together with those
ordinary clerical and bookkeeping services which are not being furnished by
State Street Bank and Trust Company (the Custodian) and the Fund's transfer and
dividend disbursing agent. The services of the Manager for the Fund are not
exclusive under the terms of the Management Agreement and the Manager is free
to, and does, render management services to others.
For its services, the Manager receives, pursuant to the Management
Agreement, a fee at an annual rate of 0.50 of 1% of the average daily net assets
of the Fund up to $3 billion and .35 of 1% of the average daily net assets of
the Fund in excess of $3 billion. The fee is computed daily and payable monthly.
The Management Agreement also provides that, in
B-25
<PAGE>
the event the expenses of the Fund (including the fees of the Manager, but
excluding interest, taxes, brokerage commissions, distribution fees and
litigation and indemnification expenses and other extraordinary expenses not
incurred in the ordinary course of the Fund's business) for any fiscal year
exceed the lowest applicable annual expense limitation established and enforced
pursuant to the statutes or regulations of any jurisdiction in which the Fund's
shares are qualified for offer and sale, the compensation due to the Manager
will be reduced by the amount of such excess. Currently, the Fund believes there
are no such expense limitations.
In connection with its management of the corporate affairs of the Fund, the
Manager bears the following expenses:
(a) the salaries and expenses of all of its and the Fund's personnel except
the fees and expenses of Directors who are not affiliated persons of PIFM or the
Fund's Subadviser;
(b) all expenses incurred by the Manager or by the Fund in connection with
managing the ordinary course of the Fund's business, other than those assumed by
the Fund as described below; and
(c) the costs and expenses payable to the Subadviser pursuant to the
subadvisory agreement between the Manager and the Subadviser (the Subadvisory
Agreement).
Under the terms of the Management Agreement, the Fund is responsible for the
payment of the following expenses: (a) the fees payable to the Manager; (b) the
fees and expenses of Directors who are not affiliated persons of the Manager or
the Fund's Subadviser; (c) the fees and certain expenses of the Custodian and
Transfer Agent, including the cost of providing records to the Manager in
connection with its obligation of maintaining required records of the Fund and
of pricing the Fund's shares; (d) the charges and expenses of legal counsel and
independent accountants for the Fund; (e) brokerage commissions and any issue or
transfer taxes chargeable to the Fund in connection with its securities
transactions; (f) all taxes and corporate fees payable by the Fund to
governmental agencies; (g) the fees of any trade associations of which the Fund
may be a member; (h) the cost of stock certificates representing shares of the
Fund; (i) the cost of fidelity and liability insurance; (j) the fees and
expenses involved in registering and maintaining registration of the Fund and of
its shares with the Commission, including the preparation and printing of the
Fund's registration statements and prospectuses for such purposes and paying the
fees and expenses of notice filings made in accordance with state securities
laws; (k) allocable communications expenses with respect to investor services
and all expenses of shareholders' and Directors' meetings and of preparing,
printing and mailing reports, proxy statements and prospectuses to shareholders
in the amount necessary for distribution to the shareholders; (l) litigation and
indemnification expenses and other extraordinary expenses not incurred in the
ordinary course of the Fund's business and (m) distribution fees.
The Management Agreement provides that the Manager will not be liable for
any error of judgment or for any loss suffered by the Fund in connection with
the matters to which the Management Agreement relates, except a loss resulting
from willful misfeasance, bad faith, gross negligence or reckless disregard of
duty. The Management Agreement provides that it will terminate automatically if
assigned, and that it may be terminated without penalty by either party upon not
more than 60 days' nor less than 30 days' written notice. The Management
Agreement will continue in effect for a period of more than two years from the
date of execution only so long as such continuance is specifically approved at
least annually in conformity with the Investment Company Act.
For the fiscal years ended February 29, 2000, February 28, 1999 and
February 28, 1998, the Fund paid management fees to the Manager or its
predecessors of $6,136,364, $6,252,699, and $6,507,621, respectively.
The Manager has entered into the Subadvisory Agreement with the Subadviser,
a wholly-owned subsidiary of Prudential. The Subadvisory Agreement provides that
the Subadviser will furnish investment advisory services in connection with the
management of the Fund. In connection therewith, the Subadviser is obligated to
keep certain books and records of the Fund. The Manager continues to have
responsibility for all investment advisory services pursuant to the Management
Agreement and supervises the Subadviser's performance of such services. The
Subadviser was reimbursed by the Manager for the reasonable costs and expenses
incurred by the Subadviser in furnishing those services. Effective January 1,
2000, the Subadviser is paid by the Manager at an annual rate of .25 of 1% up to
and including $3 billion, and .166 of 1% of over $3 billion of the Fund's
average daily net assets. Investment advisory services are provided to the Fund
by a unit of the Subadviser, known as Prudential Mutual Fund Investment
Management.
The Subadvisory Agreement provides that it will terminate in the event of
its assignment (as defined in the Investment Company Act) or upon the
termination of the Management Agreement. The Subadvisory Agreement may be
terminated by
B-26
<PAGE>
the Fund, the Manager or the Subadviser upon not more than 60 days', nor less
than 30 days', written notice. The Subadvisory Agreement provides that it will
continue in effect for a period of more than two years from its execution only
so long as such continuance is specifically approved at least annually in
accordance with the requirements of the Investment Company Act.
Prudential Investment's Fixed Income Group includes the following sector
teams which may contribute towards security selection in addition to the sector
team described in the prospectus (assets under management are as of
December 31, 1999).
CORPORATE
ASSETS UNDER MANAGEMENT: $47.3 billion.
TEAM LEADER: Steven Kellner. GENERAL INVESTMENT EXPERIENCE: 13 years.
PORTFOLIO MANAGERS: 8. AVERAGE GENERAL INVESTMENT EXPERIENCE: 13 years, which
includes team members with significant mutual fund experience.
SECTOR: U.S. investment-grade corporate securities.
INVESTMENT STRATEGY: Focus is on identifying spread, credit quality and
liquidity trends to capitalize on changing opportunities in the market.
Ultimately, they seek the highest expected return with the least risk.
GLOBAL BOND
ASSETS UNDER MANAGEMENT: $3.9 billion.
TEAM LEADERS: Steven Koomar and David Bessey. GENERAL INVESTMENT EXPERIENCE: 13
years and 10 years, respectively.
PORTFOLIO MANAGERS: 5. AVERAGE GENERAL INVESTMENT EXPERIENCE: 9 years, which
includes team members with significant mutual fund experience.
SECTOR: Corporate and government securities of foreign issuers.
INVESTMENT STRATEGY: Focus is on higher quality sovereign debt and on high-grade
and high yield foreign corporate and emerging market issues.
MONEY MARKETS
ASSETS UNDER MANAGEMENT: $36.0 billion.
TEAM LEADER: Joseph Tully. GENERAL INVESTMENT EXPERIENCE: 16 years.
PORTFOLIO MANAGERS: 9. AVERAGE GENERAL INVESTMENT EXPERIENCE: 10 years, which
includes team members with significant mutual fund experience.
SECTOR: High-quality short-term securities, including both taxable and
tax-exempt instruments.
INVESTMENT STRATEGY: Focus is on safety of principal, liquidity and controlled
risk.
CODE OF ETHICS
The Board of Directors of the Fund has adopted a Code of Ethics. In
addition, the Manager, Subadviser and Distributor have each adopted a Code of
Ethics (the "Codes"). The Codes permit personnel subject to the Codes to invest
in securities, including securities that may be purchased or held by the Fund.
However, the protective provisions of the Codes prohibit certain investments and
limit such personnel from making investments during periods when the Fund is
making such investments. The Codes are on public file with, and are available
from, the Commission.
(b) PRINCIPAL UNDERWRITER, DISTRIBUTOR AND RULE 12b-1 PLANS
Prudential Investment Management Services LLC (PIMS or the Distributor),
Gateway Center Three, 100 Mulberry Street, Newark, New Jersey 07102-4077, acts
as the distributor of the shares of the Fund. The Distributor is a subsidiary of
Prudential.
Pursuant to separate Plans of Distribution (the Class A Plan, the Class B
Plan and the Class C Plan, collectively, the Plans) adopted by the Fund under
Rule 12b-1 under the Investment Company Act and a distribution agreement (the
Distribution Agreement), the Distributor incurs the expenses of distributing the
Fund's Class A, Class B and Class C
B-27
<PAGE>
shares. The Distributor also incurs the expenses of distributing the Fund's
Class Z shares under the Distribution Agreement, none of which are reimbursed by
or paid for by the Fund. See "How the Fund is Managed--Distributor" in the
Prospectus.
The expenses incurred under the Plans include commissions and account
servicing fees paid to or on account of brokers or financial institutions which
have entered into agreements with the Distributor, advertising expenses, the
cost of printing and mailing prospectuses to potential investors and indirect
and overhead costs of the Distributor associated with the sale of Fund shares,
including lease, utility communications and sales promotion expenses.
Under the Plans, the Fund is obligated to pay distribution and/or service
fees to the Distributor as compensation for its distribution and services
activities, not as reimbursement for specific expenses incurred. If the
Distributor's expenses exceed its distribution and service fees, the Fund will
not be obligated to pay any additional expenses. If the Distributor's expenses
are less than such distribution and service fees, it will retain its full fees
and realize a profit.
The distribution and/or service fees may also be used by the Distributor to
compensate on a continuing basis brokers in consideration for the distribution,
marketing, administrative and other services and activities provided by brokers
with respect to the promotion of the sale of the Fund's shares and the
maintenance of related shareholder accounts.
CLASS A PLAN. Under the Class A Plan, the Fund may pay the Distributor for
its distribution-related activities 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.
The Class A Plan provides that (1) up to .25 of 1% of the average daily net
assets of the Class A shares may be used to pay for personal service and/or the
maintenance of shareholder accounts (service fee) and (2) total distribution
fees (including the service fee of .25 of 1%) may not exceed .30 of 1%. The
Distributor has contractually agreed to limit its distribution-related fees
payable under the Class A Plan to .25 of 1% of the average daily net assets of
the Class A shares for the fiscal year ending February 28, 2001. Fee waivers
will increase the Fund's total return.
For the fiscal year ended February 29, 2000, the Distributor received
payments of $2,143,964 under the Class A Plan. The amount was primarily expended
for payment of account servicing fees to financial advisers and other persons
who sell Class A shares. The Distributor also received approximately $126,500 in
initial sales charges attributable to Class A shares.
CLASS B AND CLASS C PLANS. Under the Class B and Class C Plans, the Fund
pays the Distributor for its distribution-related activities with respect to
Class B and Class C shares at an annual rate of up to 1% of the average daily
net assets of each of the Class B and Class C shares. The Class B Plan provides
that (1) up to .25% of 1% of the average daily net assets of the Class B shares
may be paid as a service fee and (2) up to 1% (not including the service fee) of
the average daily net assets of the Class B shares up to $3 billion, .80 of 1%
of the next $1 billion of such assets and .50 of 1% of such assets in excess of
$4 billion (asset-based sales charge), may be paid for distribution-related
expenses with respect to the Class B shares. The Class C Plan provides that (1)
up to .25 of 1% of the average daily net assets of the Class C shares may be
paid as a service fee for providing personal service and/or maintaining
shareholder accounts and (2) up to .75 of 1% of the average daily net assets of
the Class C shares (asset-based sales charge) may be paid for
distribution-related expenses with respect to Class C shares. The service fee
(.25 of 1% of average daily net assets) is used to pay for personal service
and/or the maintenance of shareholder accounts. The Distributor also receives
contingent deferred sales charges from certain redeeming shareholders and, with
respect to Class C shares, initial sales charges. The Distributor has
contractually agreed to limit its distribution-related fees payable under the
Class B and Class C plans to .825 of 1% and .75 of 1%, of the average daily net
assets of the Class B and Class C shares, respectively, for the fiscal year
ending February 28, 2001. Fee waivers will increase the Fund's total return.
CLASS B PLAN. For the fiscal year ended February 29, 2000, the Distributor
received $2,168,616 from the Fund under the Class B Plan and collectively spent
approximately $1,514,900 in distributing the Class B shares of the Fund. It is
estimated that of the latter amount, approximately .1% ($700) was spent on
printing and mailing of prospectuses to other than current shareholders, 22.0%
($333,700) on compensation to Pruco Securities Corporation, an affiliated
broker-dealer, for commissions to its representatives and other expenses,
including an allocation on account of overhead and other branch office
distribution-related expenses incurred by it for distribution of Fund shares;
and 77.9% ($1,180,500) on the aggregate of (i) payment of commissions and
account servicing fees to financial advisers (50.4% or $763,700), and (ii) an
allocation on account of overhead and other branch office distribution-related
expenses (27.5% or $416,800). The term "overhead and other branch office
distribution-related expenses" represents (a) the expenses of operating branch
B-28
<PAGE>
offices of Prusec and the Distributor in connection with the sale of Fund
shares, including lease costs, the salaries and employee benefits of operations
and sales support personnel, utility costs, communications costs and the costs
of stationery and supplies, (b) the costs of client sales seminars,
(c) expenses of mutual fund sales coordinators to promote the sale of Fund
shares and (d) other incidental expenses relating to branch promotion of Fund
sales.
The Distributor also receives the proceeds of contingent deferred sales
charges paid by holders of Class B shares upon certain redemptions of Class B
shares. See "How to Buy, Sell and Exchange Shares of the Fund--How to Sell Your
Shares--Contingent Deferred Sales Charge (CDSC)" in the Prospectus. For the
fiscal year ended February 29, 2000, the Distributor received approximately
$559,000 in contingent deferred sales charges attributable to the Class B
shares.
CLASS C PLAN. For the fiscal year ended February 29, 2000, the Distributor
received $67,605 from the Fund under the Class C Plan and spent approximately
$85,300 in distributing the Fund's Class C shares. It is estimated that of the
latter amount approximately 0% ($0) was spent on printing and mailing of
prospectuses to other than current shareholders; 11.3% ($9,700) on compensation
to Pruco Securities Corporation, an affiliated broker-dealer, for commissions to
its representatives and other expenses, including an allocation of overhead and
other branch office distribution-related expenses, incurred by it for
distribution of Fund shares; and 88.7% ($75,600) on the aggregate of
(i) payments of commission and account servicing fees to financial advisors
(61.8% or $52,700) and (ii) an allocation of overhead and other branch office
distribution-related expenses (26.9% or $22,900). The term "overhead and other
branch office distribution-related expenses" represents (a) the expenses of
operating Prudential Securities' branch offices in connection with the sale of
Fund shares, including lease costs, the salaries and employee benefits of
operations and sales support personnel, utility costs, communications costs and
the costs of stationery and supplies, (b) the costs of client sales seminars,
(c) expenses of mutual fund sales coordinators to promote the sale of Fund
shares and (d) other incidental expenses relating to branch promotion of Fund
sales.
The Distributor also receives an initial sales charge and the proceeds of
contingent deferred sales charges paid by holders of Class C shares upon certain
redemptions of Class C shares. For the fiscal year ended February 29, 2000, the
Distributor received approximately $12,900 in contingent deferred sales charges
attributable to Class C shares. For the fiscal year ended February 29, 2000, the
Distributor also received approximately $41,500 in initial sales charges with
respect to Class C shares.
Distribution expenses attributable to the sale of Class A, Class B and
Class C shares of the Fund are allocated to each such class based upon the ratio
of sales of each such class to the sales of Class A, Class B and Class C shares
of the Fund other than expenses allocable to a particular class. The
distribution fee and sales charge of one class will not be used to subsidize the
sale of another class.
The Plans continue in effect from year to year, provided that each such
continuance is approved at least annually by a vote of the Board of Directors,
including a majority vote of the directors who are not interested persons of the
Fund and have no direct or indirect financial interest in the Class A, B or C
Plans or in any agreement related to the Plans (Rule 12b-1 Directors), cast in
person at a meeting called for the purpose of voting on such continuance. The
Plans may each be terminated at any time, without penalty, by the vote of a
majority of the Rule 12b-1 Directors or by the vote of the holders of a majority
of the outstanding shares of the applicable class on not more than 30 days'
written notice to any other party to the Plans. The Plans may not be amended to
increase materially the amounts to be spent for the services described therein
without approval by the shareholders of the applicable class (by both Class A
and Class B shareholders, voting separately, in the case of material amendments
to the Class A Plan), and all material amendments are required to be approved by
the Board of Directors in the manner described above. Each Plan will
automatically terminate in the event of its assignment. The Fund will not be
contractually obligated to pay expenses incurred under any Plan if it is
terminated or not continued.
Pursuant to each Plan, the Board of Directors will review at least quarterly
a written report of the distribution expenses incurred on behalf of each class
of shares of Fund by the Distributor. The report will include an itemization of
the distribution expenses and the purposes of such expenditures. In addition, as
long as the Plans remain in effect, the selection and nomination of the
Rule 12b-1 Directors shall be committed to the Rule 12b-1 Directors.
Pursuant to the Distribution Agreement, the Fund has agreed to indemnify the
Distributor to the extent permitted by applicable law against certain
liabilities under federal securities law.
B-29
<PAGE>
FEE WAIVERS/SUBSIDIES
PIFM may from time to time waive all or a portion of its management fee and
subsidize all or a portion of the operating expenses of the Fund. In addition,
the Distributor has contractually agreed to waive a portion of its distribution
fees for Class A, B, and C shares as described above. Fee waivers and subsidies
will increase the Fund's total return.
NASD MAXIMUM SALES CHARGE RULE
Pursuant to rules of the NASD, the Distributor is required to limit
aggregate initial sales charges, deferred sales charges and asset-based sales
charges to 6.25% of total gross sales of each class of shares. Interest charges
on unreimbursed distribution expenses equal to the prime rate plus one percent
per annum may be added to the 6.25% limitation. Sales from the reimbursement of
dividends and distributions are not included in the calculation of the 6.25%
limitation. The annual asset-based sales charge on shares of the Fund may not
exceed .75 of 1% per class. The 6.25% limitation applies to each class of the
Fund rather than on a per shareholder basis. If aggregate sales charges were to
exceed 6.25% of total gross sales of any class, all sales charges on shares of
that class would be suspended.
(c) OTHER SERVICE PROVIDERS
State Street Bank and Trust Company, One Heritage Drive, North Quincy,
Massachusetts 02171, serves as Custodian for the Fund's portfolio securities and
cash and, in that capacity, maintains certain financial and accounting books and
records pursuant to an agreement with the Fund. Subcustodians provide custodial
services for the Fund's foreign assets held outside the United States.
Prudential Mutual Fund Services LLC (PMFS), 194 Wood Avenue South, Iselin,
New Jersey 08830, serves as the transfer and dividend disbursing agent of the
Fund. PMFS is a wholly-owned subsidiary of PIFM. PMFS provides customary
transfer agency services to the Fund, including the handling of shareholder
communications, the processing of shareholder transactions, the maintenance of
shareholder account records, the payment of dividends and distributions and
related functions. For these services, PMFS receives an annual fee of $10.00 per
shareholder account and a new account set-up fee of $2.00 for each manually
established shareholder account. PMFS is also reimbursed for its out-of-pocket
expenses, including but not limited to postage, stationery, printing, allocable
communication expenses and other costs.
For the fiscal year ended February 29, 2000, the Fund incurred expenses of
approximately $2,024,000 for the services of PMFS.
PricewaterhouseCoopers LLP, 1177 Avenue of the Americas, New York, New York
10036, serves as the Fund's independent accountants and in that capacity audits
the Fund's annual financial statements.
BROKERAGE ALLOCATION AND OTHER PRACTICES
The Manager is responsible for decisions to buy and sell securities, futures
contracts and options on such securities and futures for the Fund, the selection
of brokers, dealers and futures commission merchants to effect the transactions
and the negotiation of brokerage commissions, if any. For purposes of this
section, the term "Manager" includes the Subadviser. Broker-dealers may receive
brokerage commissions on Fund portfolio transactions, including options, futures
and options on futures transactions and the purchase and sale of underlying
securities upon the exercise of options. Orders may be directed to any broker or
futures commission merchant including, to the extent and in the manner permitted
by applicable law, Prudential Securities and its affiliates.
In the U.S. Government securities market, securities are generally traded on
a "net" basis with dealers acting as principal for their own accounts without a
stated commission, although the price of the security usually includes a profit
to the dealer. In underwritten offerings, securities are purchased at a fixed
price which includes an amount of compensation to the underwriter, generally
referred to as the underwriter's concession or discount. On occasion, certain
money market instruments and agency securities may be purchased directly from
the issuer, in which case no commissions or discounts are paid. The Fund will
not deal with Prudential Securities or its affiliates in any transaction in
which Prudential Securities or its affiliates act as principal. Thus, it will
not deal in U.S. Government securities with Prudential Securities or its
affiliates acting as market maker, and it will not execute a negotiated trade
with Prudential or its affiliates if execution involves Prudential Securities or
its affiliates acting as principal with respect to any part of the Fund's order.
B-30
<PAGE>
Portfolio securities may not be purchased from any underwriting or selling
syndicate of which Prudential Securities or its affiliates, during the existence
of the syndicate, is a principal underwriter (as defined in the Investment
Company Act), except in accordance with rules of the Commission. This
limitation, in the opinion of the Fund, will not significantly affect the Fund's
ability to pursue its present investment objective. However, in the future in
other circumstances, the Fund may be at a disadvantage because of this
limitation in comparison to other funds with similar objectives but not subject
to such limitations.
In placing orders for portfolio securities of the Fund, the Manager is
required to give primary consideration to obtaining the best possible
combination of favorable price and efficient execution. Within the framework of
this policy, the Manager will consider the research and investment services
provided by brokers, dealers or futures commission merchants who effect or are
parties to portfolio transactions of the Fund, the Manager or the Manager's
other clients. Such research and investment services are those which brokerage
houses customarily provide to institutional investors and include statistical
and economic data and research reports on particular companies and industries.
Such services are used by the Manager in connection with all of its investment
activities, and some of such services obtained in connection with the execution
of transactions for the Fund may be used in managing other investment accounts.
Conversely, brokers, dealers or futures commission merchants furnishing such
services may be selected for the execution of transactions of such other
accounts, whose aggregate assets are far larger than the Fund's, and the
services furnished by such brokers, dealers or futures commission merchants may
be used by the Manager in providing investment management for the Fund.
Commission rates are established pursuant to negotiations with the broker,
dealer or futures commission merchant based on the quality and quantity of
execution services provided by the broker or futures commission merchant in the
light of generally prevailing rates. The Manager's policy is to pay higher
commissions to brokers and futures commission merchants, other than Prudential
Securities, for particular transactions than might be charged if a different
broker had been selected, on occasions when, in the Manager's opinion, this
policy furthers the objective of obtaining best price and execution. In
addition, the Manager is authorized to pay higher commissions on brokerage
transactions for the Fund to brokers and futures commission merchants other than
Prudential Securities in order to secure research and investment services
described above, subject to review by the Fund's Board of Directors from time to
time as to the extent and continuation of this practice. The allocation of
orders among brokers and futures commission merchants and the commission rates
paid are reviewed periodically by the Fund's Board of Directors.
Subject to the above considerations, Prudential Securities may act as a
broker or futures commission merchant for the Fund. In order for Prudential
Securities (or any affiliate) to effect any portfolio transactions for the Fund,
the commissions, fees or other remuneration received by Prudential Securities
(or any affiliate) must be reasonable and fair compared to the commissions, fees
or other remuneration paid to other such brokers or futures commission merchants
in connection with comparable transactions involving similar securities or
futures contracts being purchased or sold on an exchange or board of trade
during a comparable period of time. This standard would allow Prudential
Securities (or any affiliate) to receive no more than the remuneration which
would be expected to be received by an unaffiliated broker or futures commission
merchant in a commensurate arms-length transaction. Furthermore, the Board of
Directors of the Fund, including a majority of the non-interested Directors, has
adopted procedures which are reasonably designed to provide that any
commissions, fees or other remuneration paid to Prudential Securities (or any
affiliate) are consistent with the foregoing standard. In accordance with
Section 11(a) of the Securities Exchange Act of 1934, Prudential Securities may
not retain compensation for effecting transactions on a national securities
exchange for the Fund unless the Fund has expressly authorized the retention of
such compensation. Prudential Securities must furnish to the Fund at least
annually a statement setting forth the total amount of all compensation retained
by Prudential Securities from transactions effected for the Fund during the
applicable period. Brokerage and futures transactions with Prudential Securities
(or any affiliate) are also subject to such fiduciary standards as may be
imposed upon Prudential Securities (or such affiliate) by applicable law.
For the fiscal years ended February 29, 2000, February 28, 1999 and
February 28, 1998, the Fund paid no brokerage commissions to Prudential
Securities.
The Fund is required to disclose its holdings of securities of its regular
brokers and dealers (as defined under Rule 10b-1 of the Investment Company Act)
and their parents at February 29, 2000. As of February 29, 2000, the Fund did
not hold debt securities of any of its regular brokers and dealers.
B-31
<PAGE>
CAPITAL SHARES, OTHER SECURITIES AND ORGANIZATION
The Fund is authorized to issue 2 billion shares of common stock, $.01 par
value per share, divided into four classes, designated Class A, Class B,
Class C and Class Z common stock. Of the authorized shares of common stock of
the Fund, 500 million shares consist of Class A common stock, 500 million shares
consist of Class B common stock, 500 million shares consist of Class C common
stock and 500 million shares consist of Class Z common stock. Each class of
common stock of the Fund represents an interest in the same assets of the Fund
and is identical in all respects except that (1) each class is subject to
different sales charges and distribution and/or service fees (except Class Z
shares, which are not subject to any sales charges and distribution and/or
service fees), which may affect performance, (2) each class has exclusive voting
rights on any matter submitted to shareholders that relates solely to its
distribution arrangement and has separate voting rights on any matter submitted
to shareholders in which the interests of one class differ from the interests of
any other class, (3) each class has a different exchange privilege, and
(4) only Class B shares have a conversion feature. Class Z shares are offered
exclusively for sale to a limited group of investors. In accordance with the
Fund's Articles of Incorporation, the Board of Directors may authorize the
creation of additional series of common stock and classes within such series,
with such preferences, privileges, limitations and voting and dividend rights as
the Board may determine.
The Board of Directors may increase or decrease the number of authorized
shares without the approval of shareholders. Shares of the Fund, when issued,
are fully paid, nonassessable, fully transferable and redeemable at the option
of the holder. Shares are also redeemable at the option of the Fund under
certain circumstances. Each share of each class of common stock is equal as to
earnings, assets and voting privileges, except as noted above, and each class
bears the expenses related to the distribution of its shares (with the exception
of Class Z shares, which are not subject to any distribution and/or service
fees). Except for the conversion feature applicable to the Class B shares, there
are no conversion, preemptive or other subscription rights. In the event of
liquidation, each share of common stock of the Fund is entitled to its portion
of all of the Fund's assets after all debts and expenses of the Fund have been
paid. Since Class B and Class C shares generally bear higher distribution
expenses than Class A shares, the liquidation proceeds to shareholders of those
classes are likely to be lower than to Class A shareholders and to Class Z
shareholders, whose shares are not subject to any distribution and/or service
fees. The Fund's shares do not have cumulative voting rights for the election of
Directors.
The Fund does not intend to hold annual meetings of shareholders unless
otherwise required by law. The Fund will not be required to hold meetings of
shareholders unless, for example, the election of Directors is required to be
acted on by shareholders under the Investment Company Act. Shareholders have
certain rights, including the right to call a meeting upon a vote of 10% or more
of the Fund's outstanding shares for the purpose of voting on the removal of one
or more Directors or to transact any other business.
PURCHASE, REDEMPTION AND PRICING OF FUND SHARES
Shares of the Fund may be purchased at a price equal to the next determined
net asset value (NAV) per share plus a sales charge which, at the election of
the investor, may be imposed either (1) at the time of purchase (Class A shares
or Class C shares), or (2) on a deferred basis (Class B or Class C shares).
Class Z shares of the Fund are offered to a limited group of investors at net
asset value without any sales charges. See "How to Buy, Sell and Exchange Shares
of the Fund--How to Buy Shares" in the Prospectus.
Each class represents an interest in the same assets of the Fund and is
identical in all respects except that (1) each class is subject to different
sales charges and distribution and/or service fees (except for Class Z shares
which are not subject to any sales charge or distribution and/or service fees)
which may affect performance, (2) each class has exclusive voting rights with
respect to any matter submitted to shareholders that relates solely to its
arrangement and has separate voting rights on any matter submitted to
shareholders in which the interests of one class differ from the interests of
any other class, (3) each class has a different exchange privilege, (4) only
Class B shares have a conversion feature and (5) Class Z shares are offered
exclusively for sale to a limited group of investors. See "Investment Advisory
and Other Services--Principal Underwriter, Distributor and Rule 12b-1 Plans"
above and "Shareholder Investment Account--Exchange Privilege" below.
PURCHASE BY WIRE. For an initial purchase of shares of the Fund by wire, you
must complete an application and telephone PMFS at (800) 225-1852 (toll-free) to
receive an account number. The following information will be requested:
B-32
<PAGE>
your name, address, tax identification number, fund and class election, dividend
distribution election, amount being wired and wiring bank. Instructions should
then be given by you to your bank to transfer funds by wire to State Street Bank
and Trust Company (State Street), Boston, Massachusetts, Custody and Shareholder
Services Division, Attention: Prudential Government Income Fund, specifying on
the wire the account number assigned by PMFS and your name and identifying the
class in which you are investing (Class A, Class B, Class C or Class Z shares).
If you arrange for receipt by State Street of federal funds prior to the
calculation of NAV (4:15 p.m., New York time), on a business day, you may
purchase shares of the Fund as of that day.
In making a subsequent purchase order by wire, you should wire State Street
directly and should be sure that the wire specifies Prudential Government Income
Fund, Class A, Class B, Class C or Class Z shares and your name and individual
account number. It is not necessary to call PMFS to make subsequent purchase
orders using federal funds. The minimum amount which may be invested by wire is
$1,000.
ISSUANCE OF FUND SHARES FOR SECURITIES
Transactions involving the issuance of Fund shares for securities (rather
than cash) will be limited to (1) reorganizations, (2) statutory mergers, or
(3) other acquisitions of portfolio securities that: (a) meet the investment
objectives and policies of the Fund, (b) are liquid and not subject to
restrictions on resale, (c) have a value that is readily ascertainable via
listing on or trading in a recognized United States or international exchange or
market, and (d) are approved by the Fund's investment adviser.
SPECIMEN PRICE MAKE-UP
Under the current distribution arrangements between the Fund and the
Distributor, Class A shares are sold at a maximum sales charge of 4%, Class C*
shares are sold with a 1% sales charge, and Class B* and Class Z shares are sold
at NAV. Using the Fund's NAV at February 29, 2000, the maximum offering price of
the Fund's shares is as follows:
<TABLE>
<S> <C>
CLASS A
Net asset value and redemption price per Class A share.... $8.41
Maximum sales charge (4% of offering price)............... .35
-----
Offering price to public.................................. $8.76
=====
CLASS B
Net asset value, offering price and redemption price per
Class B share*.......................................... $8.41
=====
CLASS C
Net asset value and redemption price per Class C share*... $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
Class Z share........................................... $8.40
=====
</TABLE>
------------------------
* Class B and Class C shares are subject to a contingent deferred sales charge
on certain redemptions. See "How to Buy, Sell and Exchange Shares of the
Fund--How to Sell Your Shares" in the Prospectus.
SELECTING A PURCHASE ALTERNATIVE
If you intend to hold your investment in the Fund for less than 4 years and
do not qualify for a reduced sales charge on Class A shares, since Class A
shares are subject to a maximum initial sales charge of 4% and Class B shares
are subject to a CDSC of 5% which declines to zero over a 6 year period, you
should consider purchasing Class C shares over either Class A or Class B shares.
If you intend to hold your investments for more than 4 years, but less than
5 years, you may consider purchasing Class A shares or Class C shares
because: (i) the maximum 4% initial sales charge plus the cumulative annual
B-33
<PAGE>
distribution-related fee on Class A shares; and (ii) the maximum 1% initial
sales charge plus the cumulative annual distribution-related fee on Class C
shares would be lower than the contingent-deferred sales charge plus the
cumulative annual distribution-related fee on Class B shares.
If you intend to hold your investment for longer than 5 years, you should
consider purchasing Class A shares over either Class B or Class C shares. This
is because the maximum sales charge plus the cumulative annual distribution-
related fee on Class A shares would be less than those of the Class B and
Class C shares.
If you qualify for a reduced sales charge on Class A shares, it may be more
advantageous for you to purchase Class A shares over either Class B or Class C
shares regardless of how long you intend to hold your investment. However,
unlike Class B shares, you would not have all of your money invested initially
because the sales charge on Class A shares is deducted at the time of purchase.
If you do not qualify for a reduced sales charge of Class A shares and you
purchase Class B or Class C shares, you would have to hold your investment for
more than 5 years for the higher cumulative annual distribution-related fee on
those shares plus, in the case of Class C shares, the 1% initial sales charge to
exceed the initial sales charge plus cumulative annual distribution-related fee
on Class A shares. This does not take into account the time value of money,
which further reduces the impact of the higher Class B or Class C
distribution-related fee on the investment, fluctuations in NAV, the effect of
the return on the investment over this period of time or redemptions when the
CDSC is applicable.
REDUCTION AND WAIVER OF INITIAL SALES CHARGE--CLASS A SHARES
BENEFIT PLANS. Certain group retirement and savings plans may purchase
Class A shares without the initial sales charge, if they meet the required
minimum for amount of assets, average account balance or number of eligible
employees. For more information about these requirements, call Prudential at
(800) 353-2847.
OTHER WAIVERS. In addition, Class A shares may be purchased at NAV, through
the Distributor or the Transfer Agent, by:
- officers of the Prudential mutual funds (including the Fund)
- employees of the Distributor, Prudential Securities, PIFM and their
subsidiaries and members of the families of such persons who maintain an
"employee related" account at Prudential Securities or the Transfer Agent
- employees of subadvisers of the Prudential mutual funds provided that
purchases at NAV are permitted by such person's employer
- Prudential, employees and special agents of Prudential and its
subsidiaries and all persons who have retired directly from active service
with Prudential or one of its subsidiaries
- members of the Board of Directors of Prudential
- real estate brokers, agents and employees of real estate brokerage
companies affiliated with The Prudential Real Estate Affiliates who
maintain an account at Prudential Securities, Prusec or with the Transfer
Agent
- registered representatives and employees of brokers who have entered into
a selected dealer agreement with the Distributor provided that purchases
at NAV are permitted by such person's employer
- investors who have a business relationship with a financial adviser who
joined Prudential Securities from another investment firm, provided that
(1) the purchase is made within 180 days of the commencement of the
financial adviser's employment at Prudential Securities, or within one
year in the case of Benefit Plans, (2) the purchase is made with proceeds
of a redemption of shares of any open-end non-money market fund sponsored
by the financial adviser's previous employer (other than a fund which
imposes a distribution or service fee of .25 of 1% or less) and (3) the
financial adviser served as the client's broker on the previous purchase
- investors in Individual Retirement Accounts, provided the purchase is made
with the proceeds of a tax-free rollover of assets from a Benefit Plan for
which Prudential provides administrative or recordkeeping services and
further provided that such purchase is made within 60 days of receipt of
the Benefit Plan distribution
B-34
<PAGE>
- orders placed by broker-dealers, investment advisers or financial planners
who have entered into an agreement with the Distributor, who place trades
for their own accounts for the accounts of their clients and who charge a
management consulting or other fee for their services (for example, mutual
fund "wrap" or asset allocation programs)
- orders placed by clients of broker-dealers, investment advisers or
financial planners who place trades for customer accounts if the accounts
are linked to the master account of such broker-dealer, investment adviser
or financial planner and the broker-dealer, investment adviser or
financial planner charges its clients a separate fee for its services (for
example, mutual fund "supermarket programs").
Broker-dealers, investment advisers or financial planners sponsoring
fee-based programs (such as mutual fund "wrap" or asset allocation programs and
mutual fund "supermarket" programs) may offer their clients more than one class
of shares in the Fund in connection with different pricing options for their
programs. Investors should consider carefully any separate transaction and other
fees charged by these programs in connection with investing in each available
share class before selecting a share class.
For an investor to obtain any reduction or waiver of the initial sales
charges, at the time of the sale either the Transfer Agent must be notified
directly by the investor or the Distributor must be notified by the broker
facilitating the transaction that the sale qualifies for the reduced or waived
sales charge. The reduction or waiver will be granted subject to confirmation of
your entitlement. No initial sales charges are imposed upon Class A shares
acquired upon the reinvestment of dividends and distributions.
COMBINED PURCHASE AND CUMULATIVE PURCHASE PRIVILEGE. If an investor or
eligible group of related investors purchases Class A shares of the Fund
concurrently with Class A shares of other Prudential Mutual Funds, the purchases
may be combined to take advantage of the reduced sales charges applicable to
larger purchases. See "How to Buy, Sell and Exchange Shares of the Fund--How to
Buy Shares--Step 2: Choose a Share Class--Reducing or Waiving Class A's Initial
Sales Charge" in the Prospectus.
An eligible group of related Fund investors includes any combination of the
following:
- an individual
- the individual's spouse, their children and their parents
- the individual's and spouse's Individual Retirement Account (IRA)
- any company controlled by the individual (a person, entity or group that
holds 25% or more of the outstanding voting securities of a corporation
will be deemed to control the corporation, and a partnership will be
deemed to be controlled by each of its general partners)
- a trust created by the individual, the beneficiaries of which are the
individual, his or her spouse, parents or children
- a Uniform Gifts to Minors Act/Uniform Transfers to Minors Act account
created by the individual or the individual's spouse
- one or more employee benefit plans of a company controlled by an
individual.
In addition, an eligible group of related Fund investors may include an
employer (or group of related employers) and one or more qualified retirement
plans of such employer or employers (an employer controlling, controlled by or
under common control with another employer is deemed related to that employer).
The Transfer Agent, Distributor or your broker must be notified at the time
of purchase that the investor is entitled to a reduced sales charge. The reduced
sales charge will be granted subject to confirmation of the investors holdings.
The Combined Purchase and Cumulative Purchase Privilege does not apply to
individual participants in any retirement or group plans.
LETTERS OF INTENT. Reduced sales charges are also available to investors (or
an eligible group of related investors), who enter into a written Letter of
Intent providing for the purchase, within a thirteen-month period, of shares of
the Fund and shares of other Prudential mutual funds (Letter of Intent).
Retirement and group plans no longer qualify to purchase Class A shares at NAV
by entering into a Letter of Intent.
B-35
<PAGE>
For purposes of the Letter of Intent, all shares of the Fund and shares of
other Prudential mutual funds (excluding money market funds other than those
acquired pursuant to the exchange privilege) which were previously purchased and
are still owned are also included in determining the applicable reduction.
However, the value of shares held directly with the Transfer Agent or its
affiliates, and through your broker, will not be aggregated to determine the
reduced sales charge.
A Letter of Intent permits an investor to establish a total investment goal
to be achieved by any number of investments over a thirteen-month period. Each
investment made during the period will receive the reduced sales charge
applicable to the amount represented by the goal, as if it were a single
investment. Escrowed Class A shares totaling 5% of the dollar amount of the
Letter of Intent will be held by the Transfer Agent in the name of the investor.
The effective date of a Letter of Intent may be back-dated up to 90 days, in
order that any investments made during this 90-day period, valued at the
investor's cost, can be applied to the fulfillment of the Letter of Intent goal.
The Letter of Intent does not obligate the investor to purchase, nor the
Fund to sell, the indicated amount. In the event the Letter of Intent goal is
not achieved within the thirteen-month period, the investor is required to pay
the difference between the sales charge otherwise applicable to the purchases
made during this period and sales charges actually paid. Such payment may be
made directly to the Distributor or, if not paid, the Distributor will liquidate
sufficient escrowed shares to obtain such difference. Investors electing to
purchase Class A shares of the Fund pursuant to a Letter of Intent should
carefully read such Letter of Intent.
The Distributor must be notified at the time of purchase that the investor
is entitled to a reduced sales charge. The reduced sales charge will be granted
subject to confirmation of the investor's holdings. Letters of Intent are not
available to individual participants in any retirement or group plans.
CLASS B SHARES
The offering price of Class B shares for investors choosing one of the
deferred sales charge alternatives is the NAV next determined following receipt
of an order in proper form by the Transfer Agent, your broker or the Distributor
plus in the case of Class C shares, an initial sales charge of 1%. Redemptions
of Class B shares may be subject to a CDSC. See "Contingent Deferred Sales
Charge" below. In connection with these waivers, the Transfer Agent will require
you to submit the supporting documentation set forth below.
The Distributor will pay, from its own resources, sales commissions of up to
5% of the purchase price of Class B shares to brokers, financial advisers and
other persons who sell Class B shares at the time of sale. This facilitates the
ability of the Fund to sell the Class B shares without an initial sales charge
being deducted at the time of purchase. The Distributor anticipates that it will
recoup its advancement of sales commissions from the combination of the CDSC and
the distribution fee.
CLASS C SHARES
The offering price of Class C shares is the next determined NAV plus a 1%
sales charge. In connection with the sale of Class C shares, the Distributor
will pay, from its own resources, brokers, financial advisers and other persons
which distribute Class C shares a sales commission of up to 2% of the purchase
price at the time of the sale.
WAIVER OF INITIAL SALES CHARGE--CLASS C SHARES
BENEFIT PLANS. Certain group retirement plans may purchase Class C shares
without the initial sales charge. For more information, call Prudential at (800)
353-2847.
INVESTMENTS OF REDEMPTION PROCEEDS FROM OTHER INVESTMENT
COMPANIES. Investors may purchase Class C shares at NAV, without the initial
sales charge, with the proceeds from the redemption of shares of any
unaffiliated registered investment company which were not held through an
account with any Prudential affiliate. Such purchases must be made within 60
days of the redemption. Investors eligible for this waiver include: (i)
investors purchasing shares through an account at Prudential Securities; (ii)
investors purchasing shares through an ADVANTAGE Account or an Investor Account
with Pruco Securities Corporation (Prusec); and (iii) investors purchasing
shares through other brokers. This waiver is not available to investors who
purchase shares directly from the Transfer Agent. You must notify the Transfer
Agent directly or through your broker if you are entitled to this waiver and
provide the Transfer Agent with such supporting documents as it may deem
appropriate.
B-36
<PAGE>
CLASS Z SHARES
BENEFIT PLANS. Certain group retirement plans may purchase Class Z shares if
they meet the required minimum for amount of assets, average account balance or
number of eligible employees. For more information about these requirements,
call Prudential at (800) 353-2847.
MUTUAL FUND PROGRAMS. Class Z shares also can be purchased by participants
in any fee-based program or trust program sponsored by Prudential or an
affiliate that includes mutual funds as investment options and the Fund as an
available option. Class Z shares also can be purchased by investors in certain
programs sponsored by broker-dealers, investment advisers and financial planners
who have agreements with Prudential Investments Advisory Group relating to:
- Mutual fund "wrap" or asset allocation programs, where the sponsor places
Fund trades, links its clients' accounts to a master account in the
sponsor's name and charges its clients a management, consulting or other
fee for its services
- Mutual fund "supermarket" programs, where the sponsor links its clients'
accounts to a master account in the sponsor's name and the sponsor charges
a fee for its services.
Broker-dealers, investment advisers or financial planners sponsoring these
mutual fund programs may offer their clients more than one class of shares in
the Fund in connection with different pricing options for their programs.
Investors should consider carefully any separate transaction and other fees
charged by these programs in connection with investing in each available share
class before selecting a share class.
OTHER TYPES OF INVESTORS. Class Z shares also are available for purchase by
the following categories of investors:
- Certain participants in the MEDLEY Program (group variable annuity
contracts) sponsored by Prudential for whom Class Z shares of the
Prudential mutual funds are an available investment option
- Current and former Directors/Trustees of the Prudential mutual funds
(including the Fund)
- Prudential, with an investment of $10 million or more.
In connection with the sale of Class Z shares, the Manager, the Distributor
or one of their affiliates may pay dealers, financial advisers and other persons
which distribute shares a finders' fee from its own resources based on a
percentage of the net asset value of shares sold by such persons.
PRUARRAY ASSOCIATION BENEFIT PLANS. Class Z shares are also offered to
Benefit Plans or non-qualified plans sponsored by employers which are members of
a common trade, professional or membership association (Association) that
participate in a PruArray Plan, provided that the Association enters into a
written agreement with Prudential. Such Benefit Plans or non-qualified plans may
purchase Class Z shares without regard to the assets or number of participants
in the individual employer's qualified plans or non-qualified plans so long as
the employers in the Association have retirement plan assets in the aggregate of
at least $250 million for which Prudential Retirement Services provides
participant-level recordkeeping services.
RIGHTS OF ACCUMULATION. Reduced sales charges are also available through
Rights of Accumulation, under which an investor or an eligible group of related
investors as described above under "Combined Purchase and Cumulative Purchase
Privilege," may aggregate the value of their existing holdings of shares of the
Fund and shares of other Prudential mutual funds (excluding money market funds
other than those acquired pursuant to the exchange privilege) to determine the
reduced sales charge. Rights of Accumulation may be applied across the classes
of the Prudential mutual funds. However, the value of shares held directly with
the Transfer Agent and through your broker will not be aggregated to determine
the reduced sales charge. The value of existing holdings for purposes of
determining the reduced sales charge is calculated using the maximum offering
price (net asset value plus maximum sales charge) as of the previous business
day.
The Distributor or the Transfer Agent must be notified at the time of
purchase that the shareholder is entitled to a reduced sales charge. The reduced
sales charges will be granted subject to confirmation of the investor's
holdings. Rights of accumulation are not available to individual participants in
any retirement or group plans.
SALE OF SHARES
You can redeem your shares at any time for cash at the NAV next determined
after the redemption request is received in proper form (in accordance with
procedures established by the Transfer Agent in connection with investors'
accounts)
B-37
<PAGE>
by the Transfer Agent, the Distributor or your broker. In certain cases,
however, redemption proceeds will be reduced by the amount of any applicable
CDSC, as described below. See "Contingent Deferred Sales Charge" below. If you
are redeeming your shares through a broker, your broker must receive your sell
order before the Fund computes its NAV for that day (that is, 4:15 p.m., New
York time) in order to receive that day's NAV. Your broker will be responsible
for furnishing all necessary documentation to the Distributor and may charge you
for its services in connection with redeeming shares of the Fund.
If you hold shares of the Fund through Prudential Securities, you must
redeem your shares through Prudential Securities. Please contact your Prudential
Securities financial adviser.
In order to redeem shares, a written request for redemption signed by you
exactly as the account is registered is required. If you hold certificates, the
certificates must be received by the Transfer Agent, the Distributor or your
broker in order for the redemption request to be processed. If redemption is
requested by a corporation, partnership, trust or fiduciary, written evidence of
authority acceptable to the Transfer Agent must be submitted before such request
will be accepted. All correspondence and documents concerning redemptions should
be sent to the Fund in care of its Transfer Agent, Prudential Mutual Fund
Services LLC, Attention: Redemption Services, P.O. Box 15010, New Brunswick, New
Jersey 08906-5010, the Distributor, or to your broker.
SIGNATURE GUARANTEE. If the proceeds of the redemption (1) exceed $100,000,
(2) are to be paid to a person other than the record owner, (3) are to be sent
to an address other than the address on the Transfer Agent's records, or (4) are
to be paid to a corporation, partnership, trust or fiduciary, the signature(s)
on the redemption request or stock power must be signature guaranteed by an
"eligible guarantor institution." An "eligible guarantor institution" includes
any bank, broker, dealer or credit union. The Transfer Agent reserves the right
to request additional information from, and make reasonable inquiries of, any
eligible guarantor institution. In the case of redemptions from a PruArray Plan,
if the proceeds of the redemption are invested in another investment option of
the plan in the name of the record holder and at the same address as reflected
in the Transfer Agent's records, a signature guarantee is not required.
Payment for shares presented for redemption will be made by check within
seven days after receipt by the Transfer Agent, the Distributor or your broker
of the written request, and certificates, if issued, except as indicated below.
If you hold shares through a broker payment for shares presented for redemption
will be credited to your account at your broker, unless you indicate otherwise.
Such payment may be postponed or the right of redemption suspended at times
(1) when the New York Stock Exchange is closed for other than customary weekends
and holidays, (2) when trading on such Exchange is restricted, (3) when an
emergency exists as a result of which disposal by the Fund of securities owned
by it is not reasonably practicable or it is not reasonably practicable for the
Fund fairly to determine the value of its net assets, or (4) during any other
period when the Commission, by order, so permits; provided that applicable rules
and regulations of the Commission shall govern as to whether the conditions
prescribed in (2), (3) or (4) exist.
Payment for redemption of recently purchased shares will be delayed until
the Fund or its Transfer Agent has been advised that the purchase check has been
honored, which may take up to 10 calendar days from the time of receipt of the
purchase check by the Transfer Agent. Such delay may be avoided by purchasing
shares by wire or by certified or cashier's check.
REDEMPTION IN KIND. If the Board of Directors determines that it would be
detrimental to the best interests of the remaining shareholders of the Fund to
make payment wholly or partly in cash, the Fund may pay the redemption price in
whole or in party by a distribution in kind of securities from the investment
portfolio of the Fund, in lieu of cash, in conformity with applicable rules of
the Commission. Securities will be readily marketable and will be valued in the
same manner as in a regular redemption. If your shares are redeemed in kind, you
would incur transaction costs in converting the assets into cash. The Fund,
however, has elected to be governed by Rule 18f-1 under the Investment Company
Act, under which the Fund is obligated to redeem shares solely in cash up to the
lesser of $250,000 or 1% of the NAV of the Fund during any 90-day period for any
one shareholder.
INVOLUNTARY REDEMPTION. In order to reduce expenses of the Fund, the Board
of Directors may redeem all of the shares of any shareholder, other than a
shareholder which is an IRA or other tax-deferred retirement plan, whose account
has a net asset value of less than $500 due to a redemption. The Fund will give
such shareholders 60 days' prior written notice in which to purchase sufficient
additional shares to avoid such redemption. No CDSC will be imposed on any such
involuntary redemption.
B-38
<PAGE>
90-DAY REPURCHASE PRIVILEGE. If you redeem your shares and have not
previously exercised the repurchase privilege, you may reinvest back into your
account any portion or all of the proceeds of such redemption in shares of the
same fund at the NAV next determined after the order is received, which must be
within 90 days after the date of the redemption. Any CDSC paid in connection
with such redemption will be credited (in shares) to your account. (If less than
a full repurchase is made, the credit will be on a PRO RATA basis.) You must
notify the Transfer Agent, either directly or through the Distributor or your
broker, at the time the repurchase privilege is exercised, to adjust your
account for the CDSC you previously paid. Thereafter, any redemptions will be
subject to the CDSC applicable at the time of the redemption. See "Contingent
Deferred Sales Charge" below. Exercise of the repurchase privilege may affect
federal tax treatment of the redemption.
CONTINGENT DEFERRED SALES CHARGE
Redemptions of Class B shares will be subject to a contingent deferred sales
charge or CDSC declining from 5% to zero over a six-year period. Class C shares
redeemed within 18 months of purchase (or one year in the case of shares
purchased prior to November 2, 1998), will be subject to a 1% CDSC. The CDSC
will be deducted from the redemption proceeds and reduce the amount paid to you.
The CDSC will be imposed on any redemption by you which reduces the current
value of your Class B or Class C shares to an amount which is lower than the
amount of all payments by you for shares during the preceding six years, in the
case of Class B shares, and 18 months, in the case of Class C shares (one year
for Class C shares purchased before November 2, 1998). A CDSC will be applied on
the lesser of the original purchase price or the current value of the shares
being redeemed. Increases in the value of your shares or shares acquired through
reinvestment of dividends or distributions are not subject to a CDSC. The amount
of any CDSC will be paid to and retained by the Distributor.
The amount of the CDSC, if any, will vary depending on the number of years
from the time of payment for the purchase of shares until the time of redemption
of such shares. Solely for purposes of determining the number of years from the
time of any payment for the purchase of shares, all payments during a month will
be aggregated and deemed to have been made on the last day of the month. The
CDSC will be calculated from the first day of the month after the initial
purchase, excluding the time shares were held in a money market fund. See
"Shareholder Investment Account--Exchange Privilege" below.
The following table sets forth the rate of the CDSC applicable to
redemptions of Class B shares:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED SALES
CHARGE AS A PERCENTAGE
YEAR SINCE PURCHASE OF DOLLARS INVESTED OR
PAYMENT MADE REDEMPTION PROCEEDS
-------------------------------------------------------- -------------------------
<S> <C>
First................................................... 5.0%
Second.................................................. 4.0%
Third................................................... 3.0%
Fourth.................................................. 2.0%
Fifth................................................... 1.0%
Sixth................................................... 1.0%
Seventh................................................. None
</TABLE>
In determining whether a CDSC is applicable to a redemption, the calculation
will be made in a manner that results in the lowest possible rate. It will be
assumed that the redemption is made first of amounts representing shares
acquired pursuant to the reinvestment of dividends and distributions; then of
amounts representing the increase in NAV above the total amount of payments for
the purchase of Fund shares made during the preceding six years (five years for
Class B shares purchased prior to January 22, 1990); then of amounts
representing the cost of shares held beyond the applicable CDSC period; and
finally, of amounts representing the cost of shares held for the longest period
of time within the applicable CDSC period.
For example, assume you purchased 100 Class B shares at $10 per share for a
cost of $1,000. Subsequently, you acquired 5 additional Class B shares through
dividend reinvestment. During the second year after the purchase you decided to
redeem $500 of your investment. Assuming at the time of the redemption the NAV
had appreciated to $12 per share, the value of your Class B shares would be
$1,260 (105 shares at $12 per share). The CDSC would not be applied to
B-39
<PAGE>
the value of the reinvested dividend shares and the amount which represents
appreciation ($260). Therefore, $240 of the $500 redemption proceeds ($500 minus
$260) would be charged at a rate of 4% (the applicable rate in the second year
after purchase) for a total CDSC of $9.60.
For federal income tax purposes, the amount of the CDSC will reduce the gain
or increase the loss, as the case may be, on the amount recognized on the
redemption of shares.
WAIVER OF CONTINGENT DEFERRED SALES CHARGE--CLASS B SHARES. The CDSC will be
waived in the case of a redemption following the death or disability of a
shareholder or, in the case of a trust account following the death or disability
of the grantor. The waiver is available for total or partial redemptions of
shares owned by a person, either individually or in joint tenancy at the time of
death or initial determination of disability, provided that the shares were
purchased prior to death or disability.
The CDSC will also be waived in the case of a total or partial redemption in
connection with certain distributions made without penalty under the Internal
Revenue Code from a tax-deferred retirement plan, an IRA or Section 403(b)
custodial account. For more information, call Prudential at (800) 353-2847.
Finally, the CDSC will be waived to the extent that the proceeds from shares
redeemed are invested in Prudential mutual funds, The Guaranteed Investment
Account, the Guaranteed Insulated Separate Account, or units of The Stable Value
Fund.
SYSTEMATIC WITHDRAWAL PLAN. The CDSC will be waived (or reduced) on certain
redemptions effected through the Systematic Withdrawal Plan. On an annual basis,
up to 12% of the total dollar amount subject to the CDSC may be redeemed without
charge. The Transfer Agent will calculate the total amount available for this
waiver annually on the anniversary date of your purchase or, for shares
purchased prior to March 1, 1997, on March 1 of the current year. The CDSC will
be waived (or reduced) on redemptions until this threshold 12% is reached.
In addition, the CDSC will be waived on redemptions of shares held by
Directors of the Fund.
You must notify the Fund's Transfer Agent either directly or through your
broker, at the time of redemption, that you are entitled to waiver of the CDSC
and provide the Transfer Agent with such supporting documentation as it may deem
appropriate. The waiver will be granted subject to confirmation of your
entitlement.
In connection with these waivers, the Transfer Agent will require you to
submit the supporting documentation set forth below.
<TABLE>
<CAPTION>
CATEGORY OF WAIVER REQUIRED DOCUMENTATION
<S> <C>
Death A copy of the shareholder's death certificate
or, in the case of a trust, a copy of the
grantor's death certificate, plus a copy of
the trust agreement identifying the grantor.
Disability--An individual will be considered A copy of the Social Security Administration
disabled if he or she is unable to engage in award letter or a letter from a physician on
any substantial gainful activity by reason of the physician's letterhead stating that the
any medically determinable physical or mental shareholder (or, in the case of a trust, the
impairment which can be expected to result in grantor (a copy of the trust agreement
death or to be of long-continued and identifying the grantor will be required as
indefinite duration. well)) is permanently disabled. The letter
must also indicate the date of disability.
Distribution from an IRA or 403(b) Custodial A copy of the distribution form from the
Account custodial firm indicating (i) the date of
birth of the shareholder and (ii) that the
shareholder is over age 59 1/2 and is taking
a normal distribution--signed by the
shareholder.
Distribution from Retirement Plan A letter signed by the plan
administrator/trustee indicating the reason
for the distribution.
Excess Contributions A letter from the shareholder (for an IRA) or
the plan administrator/trustee on company
letterhead indicating the amount of the
excess and whether or not taxes have been
paid.
</TABLE>
The Transfer Agent reserves the right to request such additional documents
as it may deem appropriate.
B-40
<PAGE>
QUANTITY DISCOUNT--CLASS B SHARES PURCHASED PRIOR TO AUGUST 1, 1994
The CDSC is reduced on redemptions of Class B shares of the Fund purchased
prior to August 1, 1994 if immediately after a purchase of such shares, the
aggregate cost of all Class B shares of the Fund owned by you in a single
account exceeded $500,000. For example, if you purchased $100,000 of Class B
shares of the Fund and the following year purchased an additional $450,000 of
Class B shares with the result that the aggregate cost of your Class B shares of
the Fund following the second purchase was $550,000, the quantity discount would
be available for the second purchase of $450,000 but not for the first purchase
of $100,000. The quantity discount will be imposed at the following rates
depending on whether the aggregate value exceeded $500,000 or $1 million:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED SALES CHARGE
AS A PERCENTAGE OF DOLLARS INVESTED
OR REDEMPTION PROCEEDS
YEAR SINCE PURCHASE ----------------------------------------------
PAYMENT MADE $500,001 TO $1 MILLION OVER $1 MILLION
----------------------------------- ------------------------ ----------------
<S> <C> <C>
First.............................. 3.0% 2.0%
Second............................. 2.0% 1.0%
Third.............................. 1.0% 0 %
Fourth and thereafter.............. 0 % 0 %
</TABLE>
You must notify the Fund's Transfer Agent either directly or through
Prudential Securities or Prusec, at the time of redemption, that you are
entitled to the reduced CDSC. The reduced CDSC will be granted subject to
confirmation of your holdings.
WAIVER OF CONTINGENT DEFERRED SALES CHARGE--CLASS C SHARES
BENEFIT PLANS. The CDSC will be waived for redemptions by certain group
retirement plans for which Prudential or brokers not affiliated with Prudential
provide administrative or recordkeeping services. The CDSC also will be waived
for certain redemptions by benefit plans sponsored by Prudential and its
affiliates. For more information, call Prudential at (800) 353-2847.
CONVERSION FEATURE--CLASS B SHARES
Class B shares will automatically convert to Class A shares on a quarterly
basis approximately seven years after purchase. Conversions will be effected at
relative net asset value without the imposition of any additional sales charge.
Since the Fund tracks amounts paid rather than the number of shares bought
on each purchase of Class B shares, the number of Class B shares eligible to
convert to Class A shares (excluding shares acquired through the automatic
reinvestment of dividends and other distributions) (the Eligible Shares) will be
determined on each conversion date in accordance with the following formula: (i)
the ratio of (a) the amounts paid for Class B shares purchased at least seven
years prior to the conversion date to (b) the total amount paid for all Class B
shares purchased and then held in your account (ii) multiplied by the total
number of Class B shares purchased and then held in your account. Each time any
Eligible Shares in your account convert to Class A shares, all shares or amounts
representing Class B shares then in your account that were acquired through the
automatic reinvestment of dividends and other distributions will convert to
Class A shares.
For purposes of determining the number of Eligible Shares, if the Class B
shares in your account on any conversion date are the result of multiple
purchases at different net asset values per share, the number of Eligible Shares
calculated as described above will generally be either more or less than the
number of shares actually purchased approximately seven years before such
conversion date. For example, if 100 shares were initially purchased at $10 per
share (for a total of $1,000) and a second purchase of 100 shares was
subsequently made at $11 per share (for a total of $1,100), 95.24 shares would
convert approximately seven years from the initial purchase (that is, $1,000
divided by $2,100 (47.62%), multiplied by 200 shares equals 95.24 shares). The
Manager reserves the right to modify the formula for determining the number of
Eligible Shares in the future as it deems appropriate on notice to shareholders.
Since annual distribution-related fees are lower for Class A shares than
Class B shares, the per share NAV of the Class A shares may be higher than that
of the Class B shares at the time of conversion. Thus, although the aggregate
dollar value will be the same, you may receive fewer Class A shares than Class B
shares converted.
B-41
<PAGE>
For purposes of calculating the applicable holding period for conversions,
all payments for Class B shares during a month will be deemed to have been made
on the last day of the month, or for Class B shares acquired through exchange,
or a series of exchanges, on the last day of the month in which the original
payment for purchase of such Class B shares was made. For Class B shares
previously exchanged for shares of a money market fund, the time period during
which such shares were held in the money market fund will be excluded. For
example, Class B shares held in a money market fund for one year would not
convert to Class A shares until approximately eight years from purchase. For
purposes of measuring the time period during which shares are held in a money
market fund, exchanges will be deemed to have been made on the last day of the
month. Class B shares acquired through exchange will convert to Class A shares
after expiration of the conversion period applicable to the original purchase of
such shares.
The conversion feature may be subject to the continuing availability of
opinions of counsel or rulings of the Internal Revenue Service (1) that the
dividends and other distributions paid on Class A, Class B, Class C and Class Z
shares will not constitute "preferential dividends" under the Internal Revenue
Code and (2) that the conversion of shares does not constitute a taxable event.
The conversion of Class B shares into Class A shares may be suspended if such
opinions or rulings are no longer available. If conversions are suspended, Class
B shares of the Fund will continue to be subject, possibly indefinitely, to
their higher annual distribution and service fee.
SHAREHOLDER INVESTMENT ACCOUNT
Upon the initial purchase of Fund shares, a Shareholder Investment Account
is established for each investor under which the shares are held for the
investor by the Transfer Agent. If a stock certificate is desired, it must be
requested in writing for each transaction. Certificates are issued only for full
shares and may be redeposited in the Account at any time. There is no charge to
the investor for issuance of a certificate. The Fund makes available to the
shareholders the following privileges and plans.
AUTOMATIC REINVESTMENT OF DIVIDENDS AND/OR DISTRIBUTIONS
For the convenience of investors, all dividends and distributions are
automatically reinvested in full and fractional shares of the Fund at net asset
value per share. An investor may direct the Transfer Agent in writing not less
than 5 full business days prior to the payment date to have subsequent dividends
and/or distributions sent in cash rather than reinvested. In the case of
recently purchased shares for which registration instructions have not been
received by the record date, cash payment will be made directly to the broker.
Any shareholder who receives dividends or distributions in cash may subsequently
reinvest any such dividend or distribution at NAV by returning the check to the
Transfer Agent within 30 days after the payment date. Such reinvestment will be
made at the NAV next determined after receipt of the check by the Transfer
Agent. Shares purchased with reinvested dividends and/or distributions will not
be subject to CDSC upon redemption.
EXCHANGE PRIVILEGE
The Fund makes available to its shareholders the privilege of exchanging
their shares of the Fund for shares of certain other Prudential mutual funds,
including one or more specified money market funds, subject in each case to the
minimum investment requirements of such funds. Shares of such other Prudential
mutual funds may also be exchanged for shares of the Fund. All exchanges are
made on the basis of the relative NAV next determined after receipt of an order
in proper form. An exchange will be treated as a redemption and purchase for tax
purposes. Shares may be exchanged for shares of another fund only if shares of
such fund may legally be sold under applicable state laws. For retirement and
group plans having a limited menu of Prudential mutual funds, the exchange
privilege is available for those funds eligible for investment in the particular
program.
It is contemplated that the exchange privilege may be applicable to new
mutual funds whose shares may be distributed by the Distributor.
In order to exchange shares by telephone, you must authorize telephone
exchanges on your initial application form or by written notice to the Transfer
Agent and hold shares in non-certificate form. Thereafter, you may call the Fund
at (800) 225-1852 to execute a telephone exchange of shares, on weekdays, except
holidays, between the hours of 8:00 a.m. and 8:00 p.m., New York time. For your
protection and to prevent fraudulent exchanges, your telephone call will be
recorded and you will be asked to provide your personal identification number. A
written confirmation of the exchange
B-42
<PAGE>
transaction will be sent to you. Neither the Fund nor its agents will be liable
for any loss, liability or cost which results from acting upon instructions
reasonably believed to be genuine under the foregoing procedures. All exchanges
will be made on the basis of the relative NAV of the two funds next determined
after the request is received in good order.
If you hold shares through Prudential Securities, you must exchange your
shares by contacting your Prudential Securities financial adviser.
If you hold certificates, the certificates must be returned in order for the
shares to be exchanged.
You may also exchange shares by mail by writing to Prudential Mutual Fund
Services LLC, Attention: Exchange Processing, P.O. Box 15010, New Brunswick, New
Jersey 08906-5010.
In periods of severe market or economic conditions the telephone exchange of
shares may be difficult to implement and you should make exchanges by mail by
writing to Prudential Mutual Fund Services LLC, at the address noted above.
CLASS A. Shareholders of the Fund may exchange their Class A shares for
Class A shares of certain other Prudential mutual funds, shares of Prudential
Government Securities Trust (Short-Intermediate Term Series) and shares of the
money market funds specified below. No fee or sales load will be imposed upon
the exchange. Shareholders of money market funds who acquired such shares upon
exchange of Class A shares may use the exchange privilege only to acquire Class
A shares of the Prudential mutual funds participating in the exchange privilege.
The following money market funds participate in the Class A exchange
privilege:
Prudential California Municipal Fund
(California Money Market Series)
Prudential Government Securities Trust
(Money Market Series)
(U.S. Treasury Money Market Series)
Prudential Municipal Series Fund
(Connecticut Money Market Series)
(Massachusetts Money Market Series)
(New Jersey Money Market Series)
(New York Money Market Series)
Prudential MoneyMart Assets, Inc.
Prudential Tax-Free Money Fund, Inc.
CLASS B AND CLASS C. Shareholders of the Fund may exchange their Class B and
Class C shares for Class B and Class C shares, respectively, of certain other
Prudential mutual funds and shares of Prudential Special Money Market Fund,
Inc., a money market mutual fund. No CDSC will be payable upon such exchange,
but a CDSC may be payable upon the redemption of Class B and Class C shares
acquired as a result of the exchange. The applicable sales charge will be that
imposed by the fund in which shares were initially purchased and the purchase
date will be deemed to be the first day of the month after the initial purchase,
rather than the date of the exchange.
Class B and Class C shares of the Fund may also be exchanged for shares of
an eligible money market fund without imposition of any CDSC at the time of
exchange. Upon subsequent redemption from such money market fund or after re-
exchange into the Fund, such shares will be subject to the CDSC calculated
excluding the time such shares were held in the money market fund. In order to
minimize the period of time in which shares are subject to a CDSC, shares
exchanged out of the money market fund will be exchanged on the basis of their
remaining holding periods, with the longest remaining holding periods being
transferred first. In measuring the time period shares are held in a money
market fund and "tolled" for purposes of calculating the CDSC holding period,
exchanges are deemed to have been made on the last day of the month. Thus, if
shares are exchanged into the Fund from a money market fund during the month
(and are held in the Fund at the end of the month), the entire month will be
included in the CDSC holding period. Conversely, if shares are exchanged into a
money market fund prior to the last day of the month (and are held in the money
market fund on the last day of the month), the entire month will be excluded
from the CDSC holding period. For purposes of calculating the seven year holding
period applicable to the Class B conversion feature, the time period during
which Class B shares were held in a money market fund will be excluded.
At any time after acquiring shares of other funds participating in the
Class B or Class C exchange privilege, a shareholder may again exchange those
shares (and any reinvested dividends and distributions) for Class B or Class C
B-43
<PAGE>
shares of the Fund, respectively, without subjecting such shares to any CDSC.
Shares of any fund participating in the Class B or Class C exchange privilege
that were acquired through reinvestment of dividends or distributions may be
exchanged for Class B or Class C, respectively, shares of other funds without
being subject to any CDSC.
CLASS Z. Class Z shares may be exchanged for Class Z shares of other
Prudential mutual funds.
Additional details about the exchange privilege for each of the Prudential
mutual funds are available from the Fund's Transfer Agent, Prudential Securities
or Prusec. The exchange privilege may be modified, terminated or suspended on
sixty (60) days' notice, and any fund, including the Fund, or Prudential
Securities, has the right to reject any exchange application relating to such
Fund's shares.
SPECIAL EXCHANGE PRIVILEGES. A special exchange privilege is available for
shareholders who qualify to purchase Class A shares at NAV and for shareholders
who qualify to purchase Class Z shares. Under this exchange privilege, amounts
representing any Class B and Class C shares which are not subject to a CDSC held
in such a shareholder's account will be automatically exchanged for Class A
shares for shareholders who qualify to purchase Class A shares at NAV on a
quarterly basis, unless the shareholder elects otherwise. Similarly,
shareholders who qualify to purchase Class Z shares will have their Class B and
Class C shares which are not subject to a CDSC and their Class A shares
exchanged for Class Z shares on a quarterly basis. Eligibility for this exchange
privilege will be calculated on the business day prior to the date of the
exchange. Amounts representing Class B or Class C shares which are not subject
to a CDSC include the following: (1) amounts representing Class B or Class C
shares acquired pursuant to the automatic reinvestment of dividends and
distributions, (2) amounts representing the increase in the net asset value
above the total amount of payments for the purchase of Class B or Class C shares
and (3) amounts representing Class B or Class C shares held beyond the
applicable CDSC period. Class B and Class C shareholders must notify the
Transfer Agent either directly or through Prudential Securities, Prusec or
another broker that they are eligible for this special exchange privilege.
Participants in any fee-based program for which the Fund is an available
option will have their Class A shares, if any, exchanged for Class Z shares when
they elect to have those assets become a part of the fee-based program. Upon
leaving the program (whether voluntarily or not), such Class Z shares (and, to
the extent provided for in the program, Class Z shares acquired through
participation in the program) will be exchanged for Class A shares at net asset
value. Similarly, participants in Prudential Securities' 401(k) Plan for which
the Fund's Class Z shares is an available option and who wish to transfer their
Class Z shares out of the Prudential Securities 401(k) Plan following separation
from service (that is, voluntary or involuntary termination of employment or
retirement) will have their Class Z shares exchanged for Class A shares at NAV.
The Prudential Securities Cash Balance Pension Plan may only exchange its
Class Z shares for Class Z shares of those Prudential mutual funds which permit
investment by the Prudential Securities Cash Balance Pension Plan.
Additional details about the exchange privilege and prospectuses for each of
the Prudential mutual funds are available from the Fund's Transfer Agent, the
Distributor or your broker. The exchange privilege may be modified, terminated
or suspended on sixty days' notice, and any fund, including the Fund, or the
Distributor, has the right to reject any exchange application relating to such
fund's shares. See "How to Buy, Sell and Exchange Shares of the Fund--Frequent
Trading" in the Prospectus.
DOLLAR COST AVERAGING
Dollar cost averaging is a method of accumulating shares by investing a
fixed amount of dollars in shares at set intervals. An investor buys more shares
when the price is low and fewer shares when the price is high. The average cost
per share is lower than it would be if a constant number of shares were bought
at set intervals.
Dollar cost averaging may be used, for example, to plan for retirement to
save for a major expenditure, such as the purchase of a home, or to finance a
college education. The cost of a year's education at a four-year college today
averages around $14,000 at a private college and around $6,000 at a public
university. Assuming these costs increase at a rate of 7% a year, as has been
projected, for the freshman class of 2011, the cost of four years at a private
college could reach $210,000 and over $90,000 at a public university.(1)
------------------------
(1) Source information concerning the costs of education at public and private
universities is available from The College Board Annual Survey of Colleges,
1993. Average costs for private institutions include tuition, fees, room and
board for its 1993-1994 academic year.
B-44
<PAGE>
The following chart shows how much you would need in monthly investments to
achieve specified lump sums to finance your investment goals.(2)
<TABLE>
<CAPTION>
PERIOD OF
MONTHLY INVESTMENTS: $100,000 $150,000 $200,000 $250,000
------------------------------------------------ -------- -------- -------- --------
<S> <C> <C> <C> <C>
25 Years........................................ $ 105 $ 158 $ 210 $ 263
20 Years........................................ 170 255 340 424
15 Years........................................ 289 433 578 722
10 Years........................................ 547 820 1,093 1,366
5 Years........................................ 1,361 2,041 2,721 3,402
See "Automatic Investment Plan (AIP)" below.
</TABLE>
------------------------
(2) The chart assumes an effective rate of return of 8% (assuming monthly
compounding). This example is for illustrative purposes only and is not intended
to reflect the performance of an investment in shares of the Fund. The
investment return and principal value of an investment will fluctuate so that an
investor's shares when redeemed may be worth more or less than their original
cost.
AUTOMATIC INVESTMENT PLAN (AIP)
Under AIP, an investor may arrange to have a fixed amount automatically
invested in shares of the Fund monthly by authorizing his or her bank account or
Prudential Securities account (including a Prudential Securities COMMAND
Account) to be debited to invest specified dollar amounts for subsequent
investment into the Fund. The investor's bank must be a member of the Automatic
Clearing House System. Stock certificates are not issued to AIP participants.
Further information about this program and an application form can be
obtained from the Transfer Agent, the Distributor or your broker.
SYSTEMATIC WITHDRAWAL PLAN
A systematic withdrawal plan is available to shareholders through Prudential
Securities or the Transfer Agent. Such withdrawal plan provides for monthly,
quarterly, semi-annual or annual redemption checks in any amount, except as
provided below, up to the value of the shares in the shareholder's account.
Systematic withdrawals of Class B or Class C shares may be subject to a CDSC.
See "How to Buy, Sell and Exchange Shares of the Fund--How to Sell Your Shares--
Contingent Deferred Sales Charge" in the Prospectus.
In the case of shares held through the Transfer Agent (1) a $10,000 minimum
account values applies, (2) systematic withdrawals may not be for less than $100
and (3) all dividends and/or distributions must be automatically reinvested in
additional full and fractional shares of the Fund in order for the shareholder
to participate in the plan. See "Automatic Reinvestment of Dividends and/or
Distributions" above.
The Transfer Agent, the Distributor or your broker acts as an agent for the
shareholder in redeeming sufficient full and fractional shares to provide the
amount of the systematic withdrawal payment. The systematic withdrawal plan may
be terminated at any time, and the Distributor reserves the right to initiate a
fee of up to $5 per withdrawal, upon 30 days' written notice to the shareholder.
Systematic withdrawal payments should not be considered as dividends, yield
or income. If systematic withdrawals continuously exceed reinvested dividends
and distributions, the shareholder's original investment will be correspondingly
reduced and ultimately exhausted.
Furthermore, each systematic withdrawal constitutes a redemption of shares,
and any gain or loss realized must be recognized for federal income tax
purposes. In addition, systematic withdrawals made concurrently with purchases
of additional shares are inadvisable because of the sales charges applicable to
(1) the purchase of Class A and Class C shares and (2) the withdrawal of
Class B and Class C shares. Each shareholder should consult his or her own tax
adviser with regard to the tax consequences of the systematic withdrawal plan,
particularly if used in connection with a retirement plan.
B-45
<PAGE>
TAX-DEFERRED RETIREMENT PLANS
Various tax-deferred retirement plans, including 401(k) plans, self-directed
individual retirement accounts and "tax-sheltered accounts" under Section
403(b)(7) of the Internal Revenue Code are available through Prudential
Securities. These plans are for use by both self-employed individuals and
corporate employers. These plans permit either self-direction of accounts by
participants, or a pooled account arrangement. Information regarding the
establishment, administration and custodial fees as well as other plan details
are available from Prudential Securities or the Transfer Agent.
Investors who are considering the adoption of such a plan should consult
with their own legal counsel or tax adviser with respect to the establishment
and maintenance of any such plan.
TAX-DEFERRED RETIREMENT ACCOUNTS
INDIVIDUAL RETIREMENT ACCOUNTS. An Individual Retirement Account (IRA)
permits the deferral of federal income tax on income earned in the account until
the earnings are withdrawn (or, in the case of a Roth IRA, the avoidance of
federal income tax on such income). The following chart represents a comparison
of the earnings in a personal savings account with those in an IRA, assuming a
$2,000 annual contribution, an 8% rate of return and a 39.6% federal income tax
bracket and shows how much more retirement income can accumulate within an IRA
as opposed to a taxable individual savings account.
<TABLE>
<CAPTION>
TAX-DEFERRED COMPOUNDING(1)
CONTRIBUTIONS PERSONAL
MADE OVER: SAVINGS IRA
------------- -------- --------
<S> <C> <C>
10 years............ $ 26,165 $ 31,291
15 years............ 44,675 58,649
20 years............ 68,109 98,846
25 years............ 97,780 157,909
30 years............ 135,346 244,692
</TABLE>
------------------------
(1) The chart is for illustrative purposes only and does not represent the
performance of the Fund or any specific investment. It shows taxable versus
tax-deferred compounding for the periods and on the terms indicated. Earnings in
a traditional IRA account will be subject to tax when withdrawn from the
account. Distributions from a Roth IRA which meet the conditions under the
Internal Revenue Code will not be subject to tax withdrawal from the account.
MUTUAL FUND PROGRAMS
From time to time, the Fund may be included in a mutual fund program with
other Prudential mutual funds. Under such a program, a group of portfolios will
be selected and thereafter marketed collectively. Typically, these programs are
created with an investment theme, such as, pursuit of greater diversification,
protection from interest rate movements or access to different management
styles. In the event such a program is instituted, there may be a minimum
investment requirement for the program as a whole. The Fund may waive or reduce
the minimum initial investment requirements in connection with such a program.
The mutual funds in the program may be purchased individually or as a part
of a program. Since the allocation of portfolios included in a program may not
be appropriate for all investors, investors should consult their Prudential
Securities Financial Adviser or Prudential/Pruco Securities Representative
concerning the appropriate blends of portfolios for them. If investors elect to
purchase the individual mutual funds that constitute a program in an investment
ratio different from that offered by the program, the standard minimum
investment requirements for the individual mutual funds will apply.
NET ASSET VALUE
The price an investor pays for each share is based on the share value. The
Fund's share value--known as the net asset value per share or NAV--is determined
by subtracting its liabilities from the value of its assets and dividing the
remainder by the number of outstanding shares. NAV is calculated separately for
each class. The Directors have fixed the specific time of day for the
computation of the Fund's net asset value to be as of 4:15 p.m., New York time.
B-46
<PAGE>
Under the Investment Company Act, the Board of Directors is responsible for
determining in good faith the fair value of securities of the Fund. In
accordance with procedures adopted by the Board of Directors, the value of each
U.S. Government security for which quotations are available will be based on the
valuations provided by a pricing service which uses information with respect to
transactions in bonds, quotations from bond dealers, agency ratings, market
transactions in comparable securities and various relationships between
securities in determining value. Options on U.S. Government securities traded on
an exchange are valued at the mean between the most recently quoted bid and
asked prices on the respective exchange. 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, the mean
between the most recently quoted bid and asked prices on such exchange or board
of trade or, if there was no sale on the applicable commodities exchange or
board of trade on such day; at the mean between the most recently quoted bid and
asked prices on such exchange or board of trade. Should an extraordinary event,
which is likely to affect the value of the 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 by and under the general supervision of the
Fund's Board of Directors. Quotations of foreign securities in a foreign
currency are converted to U.S. dollar equivalents at the current rate obtained
from a recognized bank or dealer, and foreign currency forward contracts are
valued at the current cost of covering or offsetting such contracts. Should an
extraordinary event, which is likely to affect the value of the 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 by and under the
general supervision of the Fund's Board of Directors.
The Fund will compute its NAV at 4:15 p.m., New York time, on each day the
New York Stock Exchange is open for trading except on days on which no orders to
purchase, sell or redeem Fund shares have been received or days on which changes
in the value of the Fund's portfolio securities do not affect NAV. In the event
the New York Stock Exchange closes early on any business day, the net asset
value of the Fund's shares shall be determined at a time between such closing
and 4:15 p.m., New York time.
TAXES, DIVIDENDS AND DISTRIBUTIONS
The Fund is qualified as, intends to remain qualified as, and has elected to
be treated as a regulated investment company under Subchapter M of the Internal
Revenue Code for each taxable year. Qualification of the Fund as a regulated
investment company under the Internal Revenue Code requires the Fund to, among
other things, (a) derive at least 90% of its gross income (without offset for
losses from the sale or other disposition of stock, securities or foreign
currencies) from dividends, interest, proceeds from loans of securities and
gains from the sale or other disposition of securities or foreign currencies or
other income related to its business of investing in such stock or securities
and currencies, including, but not limited to, gains derived from options and
futures on such securities or foreign currencies; and (b) diversify its holdings
so that, at the end of each fiscal quarter, (i) 50% of the market value of the
Fund's assets is represented by cash, U.S. Government securities and other stock
or securities limited, in respect of any one issuer, to an amount not greater
than 5% of the Fund's assets and no more than 10% of the outstanding voting
securities of any such issuer, and (ii) not more than 25% of the value of its
assets is invested in the securities of any one issuer (other than U.S.
Government securities). These requirements may limit the Fund's ability to
engage in or close out transactions involving options on securities, interest
rate futures and options thereon.
The Fund has received a private letter ruling from the Internal Revenue
Service (IRS) to the effect that the Fund's investments in options on U.S.
Government securities, in interest rate futures contracts and in options thereon
will be treated as "securities" for purposes of the foregoing requirements for
qualification under Subchapter M of the Internal Revenue Code.
As a regulated investment company, the Fund will not be subject to federal
income tax on its net investment income and capital gains, if any, that it
distributes to its shareholders, provided that it distributes at least 90% of
its net investment income and short-term capital gains earned in each year. A 4%
nondeductible excise tax will be imposed on the Fund to the extent the Fund does
not meet certain distribution requirements by the end of each calendar year. The
Fund intends to make sufficient distributions to avoid imposition of excise tax.
B-47
<PAGE>
Distributions of net investment income and net short-term capital gains will
be taxable to the shareholder at ordinary income rates regardless of whether the
shareholder receives such distributions in additional shares or in cash.
Distributions of net capital gains (the excess of net capital gains from the
sale of assets held for more than 12 months over net short-term capital loss),
if any, are taxable as capital gains regardless of how long the investor has
held his or her Fund shares. The maximum capital gains rate for individuals is
20%. The maximum capital gains rate for corporate shareholders is currently the
same as the maximum tax rate for ordinary income. Shareholders will be notified
annually by the Fund as to the federal tax status of distributions made by the
Fund. Dividends paid by the Fund will not be subject to the dividends received
deduction available to corporations. Distributions and gains from the sale,
redemption or exchange of shares of the Fund may be subject to additional state,
local and foreign taxes. Shareholders are urged to consult their tax advisers
regarding specific questions as to federal, state, local or foreign taxes.
Shareholders electing to receive dividends and distributions in the form of
additional shares will have a cost basis for federal income tax purposes in each
share so received equal to the NAV of a share of the Fund on the reinvestment
date.
Dividends and distributions generally are taxable to shareholders in the
year in which they are received; however, dividends declared in October,
November and December and paid on the following January will be treated as
having been paid on December 31 of such prior year. Under this rule, a
shareholder may be taxed in one year on dividends received in the following
January.
Any dividends or capital gains distributions paid shortly after a purchase
by an investor may have the effect of reducing the per share net asset value of
the investor's shares by the per share amount of the dividends or capital gains
distributions. Furthermore, such dividends or capital gains distributions,
although in effect a return of capital, are subject to federal income taxes.
Therefore, prior to purchasing shares of the Fund, the investor should carefully
consider the impact of dividends or capital gains distributions, which are
expected to be or have been announced.
Dividends of net investment income and distributions of net short-term
capital gains paid to a shareholder (including a shareholder acting as a nominee
or fiduciary) who is a nonresident alien individual, a foreign corporation or a
foreign partnership (foreign shareholder) are subject to a 30% (or lower treaty
rate) withholding tax upon the gross amount of the dividends or distributions
unless the dividends or distributions are effectively connected with a U.S.
trade or business conducted by the foreign shareholder. Capital gain
distributions paid to a foreign shareholder are generally not subject to
withholding tax. A foreign shareholder will, however, be required to pay U.S.
income tax on any dividends and capital gain distributions which are effectively
connected with a U.S. trade or business of the foreign shareholder.
Upon a sale or exchange of its shares, a shareholder will realize a taxable
gain or loss depending on its basis in the shares. Such gain or loss will be
treated as capital gain or loss if the shares are capital assets in the
shareholder's hands. In the case of an individual, any such capital gain will be
treated as short-term capital gain, taxable at the same rates as ordinary income
if the shares were held for not more than 12 months and capital gain taxable at
the maximum rate of 20% if such shares were held for more than 12 months. In the
case of a corporation, any such capital gain will be treated as long-term
capital gain, taxable at the same rates as ordinary income, if such shares were
held for more than 12 months. Any such loss will be treated as long-term capital
loss if such shares were held for more than 12 months. A loss recognized on the
sale or exchange of shares held for six months or less, however, will be treated
as long-term capital loss to the extent of any long-term capital gains
distribution with respect to such shares.
Any loss realized on a sale, redemption or exchange of shares of the Fund by
a shareholder will be disallowed to the extent the shares are replaced within a
61-day period beginning 30 days before the disposition of shares. Shares
purchased pursuant to the reinvestment of a dividend or distribution will
constitute a replacement of shares. Under certain circumstances, a shareholder
who acquires shares of the Fund and sells, exchanges or otherwise disposes of
such shares within 90 days of acquisition may not be allowed to include sales
charges incurred in acquiring such shares for purposes of calculating gain or
loss realized upon a sale or exchange of shares of the Fund.
Although the Fund does not receive interest payments on zero-coupon bonds in
cash, it is required to accrue interest on such bonds for tax purposes.
Accordingly, in order to meet the distribution requirements discussed above, the
Fund may have to liquidate securities or borrow money. To date, the Fund has not
engaged in borrowing or liquidated securities solely or primarily for the
purpose of meeting income distribution requirements attributable to investments
in zero coupon bonds.
B-48
<PAGE>
Income received by the Fund from sources within foreign countries may be
subject to withholding and other taxes imposed by such countries. Income tax
treaties between certain countries and the United States may reduce or eliminate
such taxes. It is impossible to determine in advance the effective rate of
foreign tax to which the Fund will be subject since the amount of the Fund's
assets to be invested in various countries will vary.
The Fund has a capital loss carryforward for federal income tax purposes 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.
The per share dividends on Class B and Class C shares will be lower than the
per share dividends on Class A shares as a result of the higher
distribution-related fee applicable to the Class B and Class C shares. The per
share dividends on Class A shares will be lower than the per share dividends on
Class Z shares. The per share distributions of net capital gains, if any, will
be paid in the same amount for Class A, Class B, Class C and Class Z shares. See
"Net Asset Value."
LISTED OPTIONS AND FUTURES. Exchange-traded futures contracts, listed
options on futures contracts and listed options on U.S. Government securities
constitute "Section 1256 contracts" under the Internal Revenue Code.
Section 1256 contracts are required to be "marked-to-market" at the end of the
Fund's tax year; that is, treated as having been sold at their fair market value
on the last day of the Fund's taxable year. Sixty percent of any gain or loss
recognized as a result of such "deemed sales" will be treated as long-term
capital gain or loss and the remainder will be treated as short-term capital
gain or loss.
If the Fund holds a U.S. Government security which is offset by a Section
1256 contract, the Fund is considered to hold a "mixed straddle". The Fund may
elect whether to make a straddle-by-straddle identification of mixed straddles.
By electing to identify its mixed straddles, the Fund can avoid the application
of certain rules which could, in some circumstances, cause deferral or
disallowance of losses, the change of long-term capital gains into short-term
capital gains, or the change of short-term capital losses into long-term capital
losses. Nevertheless, the Fund would be subject to the following rules.
If the Fund owns a U.S. Government security and acquires an offsetting
Section 1256 contract in a transaction which the Fund elects to identify as a
mixed straddle, the acquisition of the offsetting position will result in
recognition of the unrealized gain or loss on the U.S. Government security. This
gain or loss will be long-term or short-term depending on the holding period of
the security at the time the mixed straddle is entered into. This recognition of
unrealized gain or loss will be taken into account in determining the amount of
income available for the Fund's quarterly distributions, and can result in an
amount which is greater or less than the Fund's net realized gains being
available for such distributions. If an amount which is less than the Fund's net
realized gains is available for distribution, the Fund may elect to distribute
more than such available amount, up to the full amount of such net realized
gains.
The rules for determining whether gain or loss upon exercise, expiration or
termination of an identified mixed straddle will be treated as long-term,
short-term, or sixty percent long-term and forty percent short-term are complex.
In general, which treatment applies will depend upon the order of disposition of
the Section 1256 and the non-Section 1256 positions of a straddle and whether
all or fewer than all of such positions are disposed of on any day.
If the Fund does not elect to identify a mixed straddle, no recognition of
gain or loss on the U.S. Government securities in the Fund's portfolio will
result when the mixed straddle is entered into. However, any gains or losses
realized on the straddle will be governed by a number of tax rules which might,
under certain circumstances, defer or disallow the losses in whole or in part,
change long-term gains into short-term gains, change short-term losses into
long-term losses, or change capital gains into ordinary income. A deferral or
disallowance of recognition of a realized loss may result in the Fund being
required to distribute an amount greater than the Fund's net realized gains.
The Fund may also elect under Section 1256(d) of the Internal Revenue Code
that the provisions of Section 1256 will not apply to Section 1256 contracts
which are part of a mixed straddle. In the case of such an election, the
taxation of options on U.S. Government securities and the taxation of futures
will be governed by provisions of the Internal Revenue Code dealing with
taxation of capital assets generally.
OTC OPTIONS. Non-listed options on U.S. Government securities (OTC options)
are not Section 1256 contracts. If an OTC option written by the Fund on U.S.
Government securities expires, the amount of the premium will be treated as
short-term capital gain. If the option is terminated through a closing purchase
transaction, the Fund will generally recognize a
B-49
<PAGE>
short-term capital gain or loss, depending on whether the premium income is
greater or less than the amount paid by the Fund in the closing transaction. If
U.S. Government securities are delivered by the Fund upon exercise of a written
call option, or sold to the Fund upon exercise of a written put option, the
premium received when the option was written will be treated as an addition to
the proceeds received in the case of the call option, or a decrease in the cost
basis of the security received in the case of a put option. The gain or loss
realized on the exercise of a written call option will be long-term or
short-term depending upon the holding period of the U.S. Government security
delivered.
The premium paid for a purchased put or call option is a capital
expenditure, and loss will be realized on the expiration, and gain or loss will
be realized upon the sale of, a put or call option. The characterization of the
gain or loss as short-term or long-term will depend upon the holding period of
the option. If U.S. Government securities are purchased by the Fund upon
exercise of a purchased call option, or delivered by the Fund upon exercise of a
purchased put option, the premium paid when the option was purchased will be
treated as an addition to the basis of the securities purchased in the case of a
call option, or as a decrease in the proceeds received for the securities
delivered in the case of a put option.
Losses realized on straddles which include a purchased put option, can,
under certain circumstances, be subject to a number of tax rules which might
defer or disallow the losses in whole or in part, change long-term gains into
short-term gains, change short-term losses into long-term losses, or change
capital gains into ordinary income. As noted above, a deferral or disallowance
of recognition of realized loss can result in the Fund being required to
distribute an amount greater than the Fund's net realized gains.
PENNSYLVANIA PERSONAL PROPERTY TAX. The Fund has obtained a written letter
of determination from the Pennsylvania Department of Revenue that the Fund is
subject to the Pennsylvania foreign franchise and corporate net income tax.
Accordingly, it is expected that Fund shares will be exempt from Pennsylvania
personal property taxes. The Fund anticipates that it will continue such
business activities but reserves the right to suspend them at any time,
resulting in the termination of the exemption.
PERFORMANCE INFORMATION
YIELD. The Fund may from time to time advertise its yield as calculated over
a 30-day period. Yield is calculated separately for Class A, Class B, Class C
and Class Z shares. The yield will be computed by dividing the Fund's net
investment income per share earned during this 30-day period by the net asset
value per share on the last day of this period.
Yield is calculated according to the following formula:
a - b
YIELD = 2[( ------- +1)TO THE POWER OF 6 - 1]
cd
Where: a = dividends and interest earned during the period.
b = expenses accrued for the period (net of reimbursements).
c = the average daily number of shares outstanding during the
period that were entitled to receive dividends.
d = the maximum offering price per share on the last day of the
period.
The yield for the 30-day period ended February 29, 2000 with the waiver of
distribution and service (12b-1) fees and/ or expense subsidization for the
Fund's Class A, Class B, Class C and Class Z shares was 5.91%, 5.59%, 5.61% and
6.41%, respectively. The yield for the 30-day period ended February 29, 2000
without waiver of distribution and service (12b-1) fees and/or expense
subsidization for the Fund's Class A, Class B, Class C and Class Z shares was
5.91%, 5.59%, 5.61%, and 6.41%, respectively.
Yield fluctuates and an annualized yield quotation is not a representation
by the Fund as to what an investment in the Fund will actually yield for any
given period. Actual yields will depend upon not only changes in interest rates
generally during the period in which the investment in the Fund is held, but
also on any realized or unrealized gains and losses and changes in the Fund's
expenses.
B-50
<PAGE>
AVERAGE ANNUAL TOTAL RETURN. The Fund may from time to time also advertise
its average annual total return. Average annual total return is determined
separately for Class A, Class B and Class C shares. See "Risk/Return
Summary--Evaluating Performance" in the Prospectus.
Average annual total return is computed according to the following formula:
P(1+T)TO THE POWER OF n = ERV
Where: P = a hypothetical initial payment of $1000.
T = average annual total return.
n = number of years.
ERV = ending redeemable value of a hypothetical $1000 investment made at
the beginning of the 1, 5 or 10 year periods at the end of the 1, 5
or 10 year periods (or fractional portion thereof).
Average annual return takes into account any applicable initial or
contingent deferred sales charges but does not take into account any federal or
state income taxes that may be payable upon redemption.
Below are the average annual total returns for the Fund's share classes for
the periods ended February 29, 2000.
<TABLE>
<CAPTION>
WITH WAIVER AND/OR
EXPENSE SUBSIDY 1 YEAR 5 YEARS 10 YEARS SINCE INCEPTION
---------------------- -------------- -------------- --------------- -----------------
<S> <C> <C> <C> <C>
Class A............... -4.14% 5.37% 6.59% 6.46%(1-22-90)
Class B............... -5.83% 5.36% 6.26% 6.99%(4-22-85)
Class C............... -2.75% 5.39% N/A 5.33%(8-1-94)
Class Z............... 0.09% N/A N/A 4.72%(3-4-96)
</TABLE>
<TABLE>
<CAPTION>
WITHOUT WAIVER AND/OR
EXPENSE SUBSIDY* 1 YEAR 5 YEARS 10 YEARS SINCE INCEPTION
---------------------- -------------- -------------- --------------- -----------------
<S> <C> <C> <C> <C>
Class A............... -4.14% 5.37% 6.59% 6.46%(1-22-90)
Class B............... -5.83% 5.36% 6.26% 6.92%(4-22-85)
Class C............... -2.75% 5.39% N/A 5.33%(8-1-94)
Class Z............... 0.09% N/A N/A 4.72%(3-4-96)
</TABLE>
AGGREGATE TOTAL RETURN. The Fund may also advertise its aggregate total
return. Aggregate total return is determined separately for Class A, Class B,
Class C and Class Z shares. See "Risk/Return Summary--Evaluating Performance" in
the Prospectus.
Aggregate total return represents the cumulative change in the value of an
investment in the Fund and is computed by the following formula:
ERV - P
-------
P
Where: P = a hypothetical initial payment of $1000.
ERV = ending redeemable value of a hypothetical $1000 payment made at
the beginning of the 1, 5 or 10 year periods at the end of the
1, 5 or 10 year periods (or fractional portion thereof).
Aggregate total return does not take into account any federal or state
income taxes that may be payable upon redemption or any applicable initial or
contingent deferred sales charges.
B-51
<PAGE>
Below are the aggregate total returns for the Fund's share classes for the
periods ended February 29, 2000.
<TABLE>
<CAPTION>
WITH WAIVER AND/OR
EXPENSE SUBSIDY 1 YEAR 5 YEARS 10 YEARS SINCE INCEPTION
---------------------- --------------- --------------- --------------- -----------------
<S> <C> <C> <C> <C>
Class A............... -0.15% 35.28% 97.25% 96.11%(1-22-90)
Class B............... -0.83% 30.80% 83.49% 172.77%(4-22-85)
Class C............... -0.76% 31.31% N/A 34.93%(8-1-94)
Class Z............... 0.09% N/A N/A 20.23%(3-4-96)
</TABLE>
<TABLE>
<CAPTION>
WITHOUT WAIVER AND/OR
EXPENSE SUBSIDY* 1 YEAR 5 YEARS 10 YEARS SINCE INCEPTION
---------------------- -------------- -------------- --------------- -----------------
<S> <C> <C> <C> <C>
Class A............... -0.15% 35.28% 97.25% 96.11%(1-22-90)
Class B............... -0.83% 30.80% 83.49% 170.17%(4-22-85)
Class C............... -0.76% 31.31% N/A 34.93%(8-1-94)
Class Z............... 0.09% N/A N/A 20.23%(3-4-96)
</TABLE>
ADVERTISING. Advertising materials for the Fund may include biographical
information relating to its portfolio manager(s), and may include or refer to
commentary by the Fund's manager(s) concerning investment style, investment
discipline, asset growth, current or past business experience, business
capabilities, political, economic or financial conditions and other matters of
general interest to investors. Advertising materials for the Fund also may
include mention of The Prudential Insurance Company of America, its affiliates
and subsidiaries, and reference the assets, products and services of those
entities.
From time to time, advertising materials for the Fund may include
information concerning retirement and investing for retirement, may refer to the
approximate number of Fund interest holders and may refer to Lipper rankings or
Morningstar ratings, other related analyses supporting those ratings, other
industry publications, business periodicals and market indices. In addition,
advertising materials may reference studies or analyses performed by the Manager
or its affiliates. Advertising materials for sector funds, funds that focus on
market capitalizations, index funds and international/global funds may discuss
the potential benefits and risks of that investment style. Advertising materials
for fixed income funds may discuss the benefits and risks of investing in the
bond market including discussions of credit quality, duration and maturity.
Set forth below is a chart which compares the performance of different types
of investments over the long-term and the rate of inflation.(1)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
A LOOK AT PERFORMANCE
OVER THE LONG-TERM
AVERAGE ANNUAL RETURNS
12/31/25 - 12/31/99
COMMON STOCKS LONG-TERM GOVT. BONDS INFLATION
<S> <C> <C>
11.4% 5.1% 3.1%
</TABLE>
(1)Source: Ibbotson Associates. Used with permission. All rights reserved.
Common stock returns are based on the Standard & Poor's 500 Composite Stock
Price Index, a market-weighted, unmanaged index of 500 common stocks in a
variety of industry sectors. It is a commonly used indicator of broad stock
price movements. This chart is for illustrative purposes only, and is not
intended to represent the performance of any particular investment or fund.
Investors cannot invest directly in an index. Past performance is not a
guarantee of future results.
B-52
<PAGE>
Prudential Government Income Fund, Inc.
Portfolio of Investments as of February 29, 2000
<TABLE>
<CAPTION>
Principal
Amount
(000) Description Value (Note 1)
<C> <S> <C>
-----------------------------------------------------------------------------------------
LONG-TERM INVESTMENTS 103.2%
<CAPTION>
-------------------------------------------------------------------------------------
U.S. Government Agency Mortgage Pass-Throughs 38.6%
<C> <S> <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
<CAPTION>
-------------------------------------------------------------------------------------
U.S. Government Obligations 34.9%
<C> <S> <C>
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>
B-53 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>
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
<CAPTION>
-------------------------------------------------------------------------------------
U.S. Government Agency Securities 20.0%
<C> <S> <C>
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 B-54
<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>
$ 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
<CAPTION>
-------------------------------------------------------------------------------------
Collateralized Mortgage Obligation 0.7%
<C> <S> <C>
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
<CAPTION>
-------------------------------------------------------------------------------------
U.S. Government Agency - Stripped Security 1.2%
<C> <S> <C>
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
<CAPTION>
-------------------------------------------------------------------------------------
Asset Backed Securities 0.9%
<C> <S> <C>
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>
B-55 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>
SHORT-TERM INVESTMENTS 20.0%
<CAPTION>
-------------------------------------------------------------------------------------
Corporate Bonds 10.2%
<C> <S> <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
<CAPTION>
-------------------------------------------------------------------------------------
REPURCHASE AGREEMENT 9.8%
<C> <S> <C>
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 B-56
<PAGE>
Prudential Government Income Fund, Inc.
Statement of Assets and Liabilities
<TABLE>
<CAPTION>
February 29, 2000
<S> <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>
B-57 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>
Class A:
Net asset value and redemption price per share
($806,619,622 DIVIDED BY 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 DIVIDED BY 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 DIVIDED BY 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 DIVIDED BY 11,119,437 shares of common stock
issued and outstanding) $8.40
-----------------
-----------------
</TABLE>
See Notes to Financial Statements B-58
<PAGE>
Prudential Government Income Fund, Inc.
Statement of Operations
<TABLE>
<CAPTION>
Year Ended
February 29, 2000
<S> <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>
B-59 See Notes to Financial Statements
<PAGE>
Prudential Government Income Fund, Inc.
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
Year Ended
February 28/29,
--------------------------------
2000 1999
---------------------------------------------------------------------------------
<S> <C> <C>
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 B-60
<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.
B-61
<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.
B-62
<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.
B-63
<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.
B-64
<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
B-65
<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.
B-66
<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
----------- -------------
----------- -------------
Class B
----------------------------------------------------------
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>
B-67
<PAGE>
Prudential Government Income Fund, Inc.
Notes to Financial Statements Cont'd.
<TABLE>
<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......................... 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
----------- -------------
----------- -------------
Class 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
----------- -------------
----------- -------------
Class Z
----------------------------------------------------------
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>
B-68
<PAGE>
Prudential Government Income Fund, Inc.
Financial Highlights
<TABLE>
<CAPTION>
Class A
-----------------
Year Ended
February 29, 2000
----------------------------------------------------------------------------------------
<S> <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.
B-69 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>
$ 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 B-70
<PAGE>
Prudential Government Income Fund, Inc.
Financial Highlights Cont'd.
<TABLE>
<CAPTION>
Class B
-----------------
Year Ended
February 29, 2000
----------------------------------------------------------------------------------------
<S> <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.
B-71 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>
$ 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 B-72
<PAGE>
Prudential Government Income Fund, Inc.
Financial Highlights Cont'd.
<TABLE>
<CAPTION>
Class C
-----------------
Year Ended
February 29, 2000
----------------------------------------------------------------------------------------
<S> <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.
B-73 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>
$ 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 B-74
<PAGE>
Prudential Government Income Fund, Inc.
Financial Highlights Cont'd.
<TABLE>
<CAPTION>
Class Z
-----------------
Year Ended
February 29, 2000
----------------------------------------------------------------------------------------
<S> <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.
B-75 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>
$ 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 B-76
<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
B-77 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 B-78
<PAGE>
APPENDIX I--HISTORICAL PERFORMANCE DATA
The historical performance data contained in this Appendix relies on data
obtained from statistical services, reports and other services believed by the
Manager to be reliable. The information has not been independently verified by
the Manager.
This chart shows the long-term performance of various asset classes and the
rate of inflation.
EACH INVESTMENT PROVIDES A DIFFERENT OPPORTUNITY
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
VALUE OF $1.00 INVESTED ON
1/1/1926 THROUGH 12/31/1999 SMALL STOCKS COMMON STOCKS LONG-TERM BONDS TREASURY BILLS INFLATION
<S> <C> <C> <C> <C> <C>
1926
1936
1946
1956
1966
1976
1986
1999 $6,640.79 $2,845.63 $40.22 $15.64 $9.40
</TABLE>
Source: Ibbotson Associates. Used with permission. All rights reserved. This
chart is for illustrative purposes only and is not indicative of the past,
present, or future performance of any asset class or any Prudential mutual fund.
Generally, stock returns are attributable to capital appreciation and the
reinvestment of distributions. Bond returns are attributable mainly to the
reinvestment of distributions. Also, stock prices are usually more volatile than
bond prices over the long-term.
Small stock returns for 1926-1989 are those of stocks comprising the 5th
quintile of the New York Stock Exchange. Thereafter, returns are those of the
Dimensional Fund Advisors (DFA) Small Company Fund. Common stock returns are
based on the S&P Composite Index, a market-weighted, unmanaged index of 500
stocks (currently) in a variety of industries. It is often used as a broad
measure of stock market performance.
Long-term government bond returns are represented by a portfolio that
contains only one bond with a maturity of roughly 20 years. At the beginning of
each year a new bond with a then-current coupon replaces the old bond. Treasury
bill returns are for a one-month bill. Treasuries are guaranteed by the
government as to the timely payment of principal and interest; equities are not.
Inflation is measured by the consumer price index (CPI).
IMPACT OF INFLATION. The "real" rate of investment return is that which
exceeds the rate of inflation, the percentage change in the value of consumer
goods and the general cost of living. A common goal of long-term investors is to
outpace the erosive impact of inflation on investment returns.
I-1
<PAGE>
Set forth below is historical performance data relating to various sectors
of the fixed-income securities markets. The chart shows the historical total
returns of U.S. Treasury bonds, U.S. mortgage securities, U.S. corporate bonds,
U.S. high yield bonds and world government bonds on an annual basis from 1989
through 1999. The total returns of the indices include accrued interest, plus
the price changes (gains or losses) of the underlying securities during the
period mentioned. The data is provided to illustrate the varying historical
total returns and investors should not consider this performance data as an
indication of the future performance of the Fund or of any sector in which the
Fund invests.
All information relies on data obtained from statistical services, reports
and other services believed by the Manager to be reliable. Such information has
not been verified. The figures do not reflect the operating expenses and fees of
a mutual fund. See "Risk/Return Summary--Fees and Expenses" in the Prospectus.
The net effect of the deduction of the operating expenses of a mutual fund on
these historical total returns, including the compounded effect over time, could
be substantial.
HISTORICAL TOTAL RETURNS OF DIFFERENT BOND MARKET SECTORS
<TABLE>
YEAR 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. GOVERNMENT
TREASURY
BONDS(1) 14.4% 8.5% 15.3% 7.2% 10.7% (3.4)% 18.4% 2.7% 9.6% 10.0% (2.56)%
-----------------------------------------------------------------------------------------------------------------
U. S. GOVERNMENT
MORTGAGE
SECURITIES(2) 15.4% 10.7% 15.7% 7.0% 6.8% (1.6)% 16.8% 5.4% 9.5% 7.0% 1.86%
-----------------------------------------------------------------------------------------------------------------
U.S. INVESTMENT GRADE
CORPORATE
BONDS(3) 14.1% 7.1% 18.5% 8.7% 12.2% (3.9)% 22.3% 3.3% 10.2% 8.6% (1.96)%
-----------------------------------------------------------------------------------------------------------------
U.S.
HIGH YIELD
CORPORATE
BONDS(4) 0.8% (9.6)% 46.2% 15.8% 17.1% (1.0)% 19.2% 11.4% 12.8% 1.6% 2.39%
-----------------------------------------------------------------------------------------------------------------
WORLD
GOVERNMENT
BONDS(5) (3.4)% 15.3% 16.2% 4.8% 15.1% 6.0% 19.6% 4.1% (4.3)% 5.3% (5.07)%
-----------------------------------------------------------------------------------------------------------------
DIFFERENCE BETWEEN HIGHEST
AND LOWEST RETURN PERCENT 18.8% 24.9% 30.9% 11.0% 10.3% 9.9% 5.5% 8.7% 17.1% 8.4% 7.46%
</TABLE>
(1)LEHMAN BROTHERS TREASURY BOND INDEX is an unmanaged index made up of over 150
public issues of the U.S. Treasury having maturities of at least one year.
(2)LEHMAN BROTHERS MORTGAGE-BACKED SECURITIES INDEX is an unmanaged index that
includes over 600 15- and 30-year fixed-rate mortgage-backed securities of the
Government National Mortgage Association (GNMA), Federal National Mortgage
Association (FNMA), and the Federal Home Loan Mortgage Corporation (FHLMC).
(3)LEHMAN BROTHERS CORPORATE BOND INDEX includes over 3,000 public fixed-rate,
nonconvertible investment-grade bonds. All bonds are U.S. dollar-denominated
issues and include debt issued or guaranteed by foreign sovereign governments,
municipalities, governmental agencies or international agencies. All bonds in
the index have maturities of at least one year. Source: Lipper Inc.
(4)LEHMAN BROTHERS HIGH YIELD BOND INDEX is an unmanaged index comprising over
750 public, fixed-rate, nonconvertible bonds that are rated Ba1 or lower by
Moody's Investors Service (or rated BB+ or lower by Standard & Poor's or Fitch
Investors Service). All bonds in the index have maturities of at least one year.
(5)SALOMON SMITH BARNEY WORLD GOVERNMENT INDEX (NON U.S.) includes over 800
bonds issued by various foreign governments or agencies, excluding those in the
U.S., but including those in Japan, Germany, France, the U.K., Canada, Italy,
Australia, Belgium, Denmark, the Netherlands, Spain, Sweden, and Austria. All
bonds in the index have maturities of at least one year.
I-2
<PAGE>
This chart below shows the historical volatility of general interest rates
as measured by the long U.S. Treasury Bond.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
LONG TERM U.S. TREASURY BOND YIELD IN PERCENT (1926-1999)
1926
1936
1946
1956
1966
1976
1986
1996
1999
YEAR-END
-------
Source: Ibbotson Associates. Used with permission. All rights reserved. The
chart illustrates the historical yield of the long-term U.S. Treasury Bond from
1926-1999. Yields represent that of an annually renewed one-bond portfolio with
a remaining maturity of approximately 20 years. This chart is for illustrative
purposes and should not be construed to represent the yields of any Prudential
mutual fund.
This chart illustrates the performance of major world stock markets for the
period from December 31, 1985 through December 31,1999. It does not represent
the performance of any Prudential mutual fund.
AVERAGE ANNUAL TOTAL RETURNS OF MAJOR WORLD STOCK MARKETS
(12/31/1985 - 12/31/1999) (IN U.S. DOLLARS)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Sweden 22.70%
Hong Kong 20.37%
Spain 20.11%
Netherland 18.63%
Belgium 18.41%
France 17.69%
USA 17.39%
UK 16.41%
Europe 16.28%
Switzerland 15.58%
Sing/Mlysia 15.07%
Denmark 14.72%
Germany 13.29%
Australia 11.68%
Italy 11.39%
Canada 11.10%
Japan 9.59%
Norway 8.91%
Austria 7.09%
</TABLE>
-------
Source: Morgan Stanley Capital International (MSCI) and Lipper Inc. as of
12/31/99. Used with permission. Morgan Stanley Country indexes are unmanaged
indexes which include those stocks making up the largest two-thirds of each
country's total stock market capitalization. Returns reflect the reinvestment of
all distributions. This chart is for illustrative purposes only and is not
indicative of the past, present or future performance of any specific
investment. Investors cannot invest directly in stock indexes.
I-3
<PAGE>
This chart shows the growth of a hypothetical $10,000 investment made in the
stocks representing the S&P 500 Stock Index with and without reinvested
dividends.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
CAPITAL APPRECIATION CAPITAL APPRECIATION ONLY
AND REINVESTING DIVIDENDS
<S> <C> <C>
1969
1973
1977
1981
1985
1989
1993
1997
1999 $474,094 $159,597
</TABLE>
-------
Source: Lipper Inc. Used with permission. All rights reserved. The chart is used
for illustrative purposes only and is not intended to represent the past,
present or future performance of any Prudential mutual fund. Common stock total
return is based on the Standard & Poor's 500 Composite Stock Price Index, a
market-value-weighted index made up of 500 of the largest stocks in the U.S.
based upon their stock market value. Investors cannot invest directly in
indexes.
WORLD STOCK MARKET CAPITALIZATION BY REGION
WORLD TOTAL: 20.7 TRILLION
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<S> <C>
Canada 2.1%
Europe 32.5%
U.S. 49.0%
Pacific Basin 16.4%
</TABLE>
-------
Source: Morgan Stanley Capital International, December 31, 1999. Used with
permission. This chart represents the capitalization of major world stock
markets as measured by the Morgan Stanley Capital International (MSCI) World
Index. The total market capitalization is based on the value of approximately
1577 companies in 22 countries (representing approximately 60% of the aggregate
market value of the stock exchanges). This chart is for illustrative purposes
and does not represent the allocation of any Prudential mutual fund.
I-4
<PAGE>
APPENDIX II--GENERAL INVESTMENT INFORMATION
The following terms are used in mutual fund investing.
ASSET ALLOCATION
Asset allocation is a technique for reducing risk and providing balance.
Asset allocation among different types of securities within an overall
investment portfolio helps to reduce risk and to potentially provide stable
returns, while enabling investors to work toward their financial goal(s). Asset
allocation is also a strategy to gain exposure to better performing asset
classes while maintaining investment in other asset classes.
DIVERSIFICATION
Diversification is a time-honored technique for reducing risk, providing
"balance" to an overall portfolio and potentially achieving more stable returns.
Owning a portfolio of securities mitigates the individual risks (and returns) of
any one security. Additionally, diversification among types of securities
reduces the risks (and general returns) of any one type of security.
DURATION
Debt securities have varying levels of sensitivity to interest rates. As
interest rates fluctuate, the value of a bond (or a bond portfolio) will
increase or decrease. Longer-term bonds are generally more sensitive to changes
in interest rates. When interest rates fall, bond prices generally rise.
Conversely, when interest rates rise, bond prices generally fall.
Duration is an approximation of the price sensitivity of a bond (or a bond
portfolio) to interest rate changes. It measures the weighted average maturity
of a bond's (or a bond portfolio's) cash flows, I.E., principal and interest
rate payments. Duration is expressed as a measure of time in years--the longer
the duration of a bond (or a bond portfolio), the greater the impact of interest
rate changes on the bond's (or the bond portfolio's) price. Duration differs
from effective maturity in that duration takes into account call provisions,
coupon rates and other factors. Duration measures interest rate risk only and
not other risks such as credit risk and, in the case of non-U.S. dollar
denominated securities, currency risk. Effective maturity measures the final
maturity dates of a bond (or a bond portfolio).
MARKET TIMING
Market timing--buying securities when prices are low and selling them when
prices are relatively higher may not work for many investors because it is
impossible to predict with certainty how the price of a security will fluctuate.
However, owning a security for a long period of time may help investors offset
short-term price volatility and realize positive returns.
POWER OF COMPOUNDING
Over time, the compounding of returns can significantly impact investment
returns. Compounding is the effect of continuous investment on long-term
investment results, by which the proceeds of capital appreciation (and income
distributions, if elected) are reinvested to contribute to the overall growth of
assets. The long-term investment results of compounding may be greater than that
of an equivalent initial investment in which the proceeds of capital
appreciation and income distributions are taken in cash.
STANDARD DEVIATION
Standard deviation is an absolute (non-relative) measure of volatility
which, for a mutual fund, depicts how widely the returns varied over a certain
period of time. When a fund has a high standard deviation, its range of
performance has been very wide, implying greater volatility potential. Standard
deviation is only one of several measures of a fund's volatility.
II-1
<PAGE>
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>
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
<PAGE>
(ICON)
SEMIANNUAL REPORT AUGUST 31, 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
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. 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.
Portfolio Composition
Expressed as a percentage of
total investments as of 8/31/00
40.3% Mortgages
21.2 Treasuries
17.6 Government Agency
2.3 Corporates
0.8 Asset-Backed
17.8 Cash Equivalents
Ten Largest Issuers
Expressed as a percentage of
net assets as of 8/31/00
29.6% Federal National Mortgage Assoc.
25.6 U.S. Treasury Obligations
22.5 Gov't National Mortgage Assoc.
9.3 Small Business Administration
4.0 Barton Capital Corp.*
4.0 Blue Ridge Asset Funding Corp.*
3.0 Windmill Funding Corp.*
2.9 Tennessee Valley Auth.
2.8 New Jersey Economic Dev. Auth.
2.8 American Home Products Corp.*
*Short-term securities that matured in September 2000.
<PAGE>
www.prudential.com (800) 225-1852
Performance at a Glance
Cumulative Total Returns1 As of 8/31/00
<TABLE>
<CAPTION>
Six One Five Ten Since
Months Year Years Years Inception2
<S> <C> <C> <C> <C> <C>
Class A 5.17% 6.96% 31.58% 101.89% 106.25%
Class B 4.99 6.47 27.45 88.24 186.37 (182.70)
Class C 5.03 6.55 27.94 N/A 41.71
Class Z 5.30 7.23 N/A N/A 26.60
Lipper General U.S.
Gov't Fund Avg.3 5.36 6.85 30.73 98.54 ***
</TABLE>
Average Annual Total Returns1 As of 9/30/00
<TABLE>
<CAPTION>
One Five Ten Since
Year Years Years Inception2
<S> <C> <C> <C> <C>
Class A 2.01% 4.66% 6.80% 6.64%
Class B 0.65 4.68 6.49 7.07 (6.98)
Class C 3.67 4.72 N/A 5.70
Class Z 6.52 N/A N/A 5.37
</TABLE>
Distributions and Yields As of 8/31/00
<TABLE>
<CAPTION>
Total Distributions 30-Day
Paid for Six Months SEC-Yield
<S> <C> <C>
Class A $0.27 5.85%
Class B $0.25 5.52
Class C $0.25 5.54
Class Z $0.28 6.35
</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 six-month, 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 105.20% for
Class A, 207.87% for Class B, 44.06% for
Class C, and 26.07% for Class Z, based on all funds
in each share class.
1
<PAGE>
(LOGO) October 18, 2000
DEAR SHAREHOLER,
Despite a difficult period in the fixed-income
markets, the Prudential Government Income Fund
produced solid results for shareholders. During the
reporting period that covers the six months ended
August 31, 2000, the Fund's Class A shares returned
5.17%, -- 0.96% to those paying the Class A shares'
initial sales charge. This was relatively
consistent with the 5.36% return for the Lipper
General U.S. Government Fund Average.
Gaining momentum
The economy continued to grow at an extremely fast
pace, leading to concerns of an increase in
inflation. As a result, the Federal Reserve Board
(the Fed) maintained its policy of raising short-
term interest rates to slow economic growth. This
led to a decline in the price of most fixed-income
securities. However, in June and August, the Fed
chose not to raise rates further, as data indicated
that economic growth was beginning to moderate. The
fixed-income market subsequently rebounded, helping
the Fund to register strong gains. A further
discussion of the economic environment and your
Fund's investments follows.
Focusing on the big picture
We believe the last six months exemplify the
importance of maintaining a disciplined investment
approach. As we've recently seen, investment
classes will move in and out of favor over time. As
a result, investors who attempt to "chase" the best
performance are typically not rewarded. We believe
a more effective strategy is to maintain a well-
diversified portfolio, and to focus on your long-
term financial objectives.
Sincerely,
John R. Strangfeld, President
Prudential Government Income Fund, Inc.
2
<PAGE>
Prudential Government Income Fund, Inc.
Semiannual Report August 31, 2000
Investment Adviser's Report
An accurate crystal ball
In our last report to shareholders at the end of
February 2000, we described a fairly bleak
environment in the fixed-income markets. The Fed's
policy of raising interest rates to ward off
inflation had taken its toll on bond prices, and
virtually every sector of the bond market was
posting negative total returns.
However, in the report's Fund Outlook section, we
pointed out that relief was in sight. We believed
that the Fed would continue its efforts to
moderate U.S. economic growth. Yet, at some point
in the near future, we expected that the delayed
effect of higher short-term rates would kick in,
and that the lengthy economic expansion would begin
to slow. In summary, we pointed out that "if the
Fed can achieve its goal of slowing economic growth
without causing a recession, the environment for
bonds should improve." In hindsight, the scenario
we described has largely come to pass.
A tale of two markets
Early in the reporting period, the bond market's
performance mirrored that of 1999. As it did in
1999, the Fed increased its federal funds rate (the
rate U.S. banks charge each other for overnight
loans) three times. This led to falling prices in
most fixed-income sectors, as bond prices move in
the opposite direction of interest rates.
Then in June, signs of a slowdown began to appear.
Rising interest rates had caused mortgage rates to
rise substantially, which, in turn, took some steam
out of the housing market. Consumer spending also
appeared to be moderating, while employee
productivity levels remained strong and inflation
(aside from energy prices) was not an issue. The
Fed then chose to hold interest rates steady during
the summer months. Investors took this as a sign
that interest rate hikes would end sooner rather
than later, and bond prices rallied.
3
<PAGE>
Prudential Government Income Fund, Inc.
Semiannual Report August 31, 2000
Treasury buyback continues to affect the market
While most fixed-income securities demonstrated
lackluster performance during the first half of the
reporting period, there was a notable exception--
long-term Treasuries. As a result of strong demand
and dwindling supply, these issues outperformed
other types of fixed-income securities throughout
the reporting period.
Investors have aggressively purchased 30-year
securities, as the U.S. Treasury Department has
moved to limit their supply. By repurchasing these
bonds with higher relative yields, the Treasury is
seeking to lower the government's borrowing costs.
This supply/demand trend helped long-term Treasury
prices rally sharply and resulted in an inverted yield
curve (where interest rates for short-term securities
are higher than their longer-term counterparts).
Normally, investments with longer maturities
command higher yields due to their heightened price
sensitivity to rising interest rates.
Drawn to the positive fundamentals of GNMAs
During the period, we substantially increased our
exposure of Government National Mortgage
Association securities (GNMAs, also known as
"Ginnie Maes"), raising our position in GNMAs from
11.8% at the end of February to 22.5% of the Fund's
net assets at the end of August. To accomplish
this, we decreased our holdings in both Treasuries
and Federal National Mortgage Association
securities (FNMAs, also known as "Fannie Maes").
There were several factors that contributed to this
strategic shifting of assets. First, GNMAs are
guaranteed by the full faith and credit of the U.S.
government. With the buyback of Treasuries, the
supply of "full faith and credit" securities has
diminished, and we believed this would lead to an
increased demand for GNMAs.
Second, we felt that the political uncertainty
surrounding Government Sponsored Enterprises (GSEs)
could favor GNMAs. GSEs are privately owned
entities established by Congress to provide
liquidity for various borrowing sectors of the
economy. Examples include FNMA and Federal Home
4
<PAGE>
www.prudential.com (800) 225-1852
Loan Mortgage Corporation securities (FHLMC, also
known as "Freddie Mac"). While the U.S. government
does not directly back these securities, it seemed
unlikely that it would ever allow GSEs to default
on their debt obligations. However, for a short
time, some members of Congress questioned this
"implied guarantee." Again, we believed this could
lead to strong interest in GNMAs.
Despite these very positive fundamentals for GNMAs,
our efforts were not rewarded, as they
underperformed Treasuries during the period. The
combination of an increase in the supply of GNMAs,
coupled with Congress backing off its stance for
GSEs, led to relative lackluster results for these
securities.
Strong performance from our selective Treasury Holdings
Fortunately, the Fund's exposure to two categories
of Treasuries continued to enhance returns. Our
older, or "off-the-run," Treasuries with maturities
of 15 to 23 years, and our "callable" issues that
were issued with the option for the Treasury to
retire them prior to maturity, both performed well.
The Treasury buyback program aided both of these
securities, as it was believed they would be
candidates for repurchase. As a result, their
incremental yields and rising prices aided the
Fund.
Looking ahead--Signs for optimism
As we look ahead, we believe the signs are largely
positive for the fixed-income market and the Fund.
The economy appears to be slowing, and we expect
the Fed to switch to a more neutral bias toward
interest rates in the coming months. Should a "soft
landing" be orchestrated--where growth falls to a
more moderate and acceptable level--it would be a
positive outcome for bonds.
Given this outlook, we anticipate emphasizing non-
Treasury spread products with shorter durations and
longer-term Treasuries, both of which could perform
well in this environment.
Prudential Government Income Fund Management Team
5
<PAGE>
Prudential Government Income Fund, Inc.
Portfolio of Investments as of August 31, 2000 (Unaudited)
<TABLE>
<CAPTION>
Principal
Amount
(000) Description Value (Note 1)
<C> <S> <C>
- -------------------------------------------------------------------------------------
LONG-TERM INVESTMENTS 99.1%
- -------------------------------------------------------------------------------------
U.S. Government Agency Mortgage Pass - Throughs 45.6%
Federal Home Loan Mortgage Corp.,
$ 382(c) 7.50%, 6/01/24 $ 382
3,751 8.00%, 1/01/22 - 5/01/23 3,812,680
1,704 8.50%, 6/01/07 - 4/01/20 1,733,998
3,651 9.00%, 1/01/20 3,774,698
815 11.50%, 10/01/19 892,751
Federal National Mortgage Assoc.,
67,000(a) 6.00%, 9/01/15 64,047,310
53,000(a) 6.50%, 9/01/15 51,608,750
29,258 7.00%, 7/01/03 - 9/01/26 28,679,203
30,898 7.125%, 2/01/07 30,579,736
53,061(a) 7.50%, 12/01/06 - 10/01/26 53,287,969
6(b)(e) 8.00%, 10/01/24 5,673
2,137 8.50%, 6/01/17 - 3/01/25 2,187,123
2,653 9.00%, 8/01/24 - 4/01/25 2,733,567
579 9.50%, 10/01/19 - 3/01/25 603,332
Government National Mortgage Assoc.,
50,588 7.00%, 2/15/09 - 2/15/29 49,797,467
95,334(a)(b)(e) 7.50%, 5/15/02 - 12/15/99 95,394,279
67,940 8.00%, 7/15/16 - 3/15/24 69,152,513
13,613 8.50%, 4/15/25 13,972,585
6,980 9.50%, 10/15/09 - 12/15/17 7,322,915
Government National Mortgage Assoc. II,
1,091 9.50%, 5/20/18 - 8/20/21 1,130,970
--------------
Total U.S. Government Agency Mortgage Pass -
Throughs
(cost $476,481,932) 480,717,901
- -------------------------------------------------------------------------------------
U.S. Government Obligations 25.6%
United States Treasury Bonds,
20,475 6.125%, 8/15/29 21,447,563
23,035(b)(e) 7.125%, 2/15/23 26,439,803
39,000(d) 7.50%, 11/15/24 46,909,590
</TABLE>
6 See Notes to Financial Statements
<PAGE>
Prudential Government Income Fund, Inc.
Portfolio of Investments as of August 31, 2000 (Unaudited) Cont'd.
<TABLE>
<CAPTION>
Principal
Amount
(000) Description Value (Note 1)
- ----------------------------------------------------------------------------------------
<C> <S> <C>
$ 5,500(b)(e) 8.00%, 11/15/21 $ 6,856,960
26,470(b)(e) 8.125%, 8/15/19 32,926,298
30,400(b)(e) 8.125%, 8/15/21 38,275,424
5,945(b)(e) 8.75%, 5/15/17 7,682,961
11,000(b) 8.75%, 5/15/20 14,537,160
12,000(e) 8.75%, 8/15/20 15,885,000
44,000(b)(e) 11.75%, 2/15/10 53,267,280
United States Treasury Strips,
6,200 Zero Coupon, 11/15/09 3,556,692
500 Zero Coupon, 11/15/15 204,430
3,750 Zero Coupon, 2/15/18 1,347,712
--------------
Total U.S. Government Obligations (cost
$270,327,983) 269,336,873
- -------------------------------------------------------------------------------------
U.S. Government Agency Securities 20.9%
Federal Home Loan Bank,
25,000(b)(e) 5.75%, 10/15/07 24,591,797
Federal National Mortgage Assoc., M.T.N.,
13,500 5.875%, 4/23/04 12,964,185
40,000(b)(e) 6.06%, 5/21/03 39,006,400
15,000 6.30%, 9/25/02 14,791,350
Small Business Administration,
15,070(b)(e) Ser. 1995-20B, 8.15%, 2/01/15 15,753,255
18,976 Ser. 1995-20L, 6.45%, 12/01/15 18,240,797
27,197(b)(e) Ser. 1996-20H, 7.25%, 8/01/16 27,220,185
16,414 Ser. 1996-20K, 6.95%, 11/01/16 16,175,162
8,209 Ser. 1997-20A, 7.15%, 1/01/17 8,172,165
13,245 Ser. 1998-20I, 6.00%, 9/01/18 12,343,849
Tennessee Valley Authority,
600 Ser. 1993-D, 7.25%, 7/15/43 567,084
30,000(b)(e) Ser. 1995-B, 6.235%, 7/15/45 30,073,800
--------------
Total U.S. Government Agency Securities
(cost $226,389,577) 219,900,029
--------------
<CAPTION>
- -------------------------------------------------------------------------------------
Corporate Bonds 2.8%
New Jersey Economic Development Authority, Ser. A,
30,000(b)(e) 7.425%, 2/15/29
(cost $31,091,850) 29,763,000
--------------
</TABLE>
See Notes to Financial Statements 7
<PAGE>
Prudential Government Income Fund, Inc.
Portfolio of Investments as of August 31, 2000 (Unaudited) Cont'd.
<TABLE>
<CAPTION>
Principal
Amount
(000) Description Value (Note 1)
- ----------------------------------------------------------------------------------------
Collateralized Mortgage Obligations 2.9%
<C> <S> <C>
Asset Securitization Corp.,
$ 5,255 Ser. 1997-D4, Class A1A,
7.35%, 4/14/29 $ 5,280,157
Federal Home Loan Mortgage Corp.,
8,727 5.75%, 4/15/00 8,516,802
Federal National Mortgage Assoc.,
11,570 REMIC Trust 1993-76, Class B,
6.00%, 6/25/08 10,948,534
Resolution Trust Corp.,
4,301 Ser. 1994-1, Class B2, 7.75%, 9/25/29 4,162,944
Ryland Mortgage Participation Securities,
761 Ser. 1993-3, Class A3, 7.232%, 9/25/24, (ARM) 722,902
Structured Asset Securities Corp.,
1,042 Ser. 1995-C1, Class C,
7.375%, 9/25/24 1,037,747
--------------
Total Collateralized Mortgage Obligation
(cost $30,459,697) 30,669,086
--------------
- -------------------------------------------------------------------------------------
U.S. Government Agency - Stripped Security 0.4%
Financing Corp.,
5,000 Zero Coupon, 3/07/04
(cost $4,061,870) 3,938,500
--------------
- -------------------------------------------------------------------------------------
Asset Backed Security 0.9%
Aesop Funding II LLC,
10,000 Ser. 1997-1, Class A2,
6.40%, 10/20/03
(cost $9,998,437) 9,877,309
--------------
Total Long-Term Investments (cost
$1,048,811,346) 1,044,202,698
--------------
SHORT-TERM INVESTMENTS 21.4%
- -------------------------------------------------------------------------------------
Commerical Paper 17.8%
American Home Products Corp.,
29,100 6.50%, 9/07/00 29,068,475
</TABLE>
8 See Notes to Financial Statements
<PAGE>
Prudential Government Income Fund, Inc.
Portfolio of Investments as of August 31, 2000 (Unaudited) Cont'd.
<TABLE>
<CAPTION>
Principal
Amount
(000) Description Value (Note 1)
- ----------------------------------------------------------------------------------------
<C> <S> <C>
Barton Capital Corp.,
$ 28,000 6.51%, 9/08/00 $ 27,964,557
14,388 6.53%, 9/08/00 14,369,731
Blue Ridge Asset Funding Corp.,
42,400 6.52%, 9/13/00 42,307,851
Edison Asset Securitization, LLC,
12,090 6.51%, 9/14/00 12,061,578
Receivable Capital Corp.,
19,657 6.50%, 9/14/00 19,610,861
Thunder Bay Funding, Inc.,
10,772 6.52%, 9/11/00 10,752,491
Windmill Funding Corp.,
20,559 6.51%, 9/05/00 20,544,129
10,323 6.51%, 9/07/00 10,311,799
634 6.51%, 9/12/00 632,739
--------------
Total Commercial Paper (cost $187,624,211) 187,624,211
--------------
- -------------------------------------------------------------------------------------
Repurchase Agreement 3.6%
Joint Repurchase Agreement Account,
38,204 6.59%, 9/01/00
(cost $38,204,000; Note 5) 38,204,000
--------------
Total Short-Term Investments (cost $225,828,211) 225,828,211
--------------
Total Investments 120.5% (cost $1,274,639,557;
Note 4) 1,270,030,909
Liabilities in excess of other assets (20.5%) (216,367,985)
--------------
Net Assets 100% $1,053,662,924
--------------
--------------
</TABLE>
- ------------------------------
ARM--Adjustable Rate Mortgage
LLC--Limited Liability Company
M.T.N.--Medium-Term Note
REMIC--Real Estate Mortgage Investment Conduit
(a) Partial principal amount of $205,000,000 represents a to-be-announced
('TBA') mortgaged 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 9
<PAGE>
Prudential Government Income Fund, Inc.
Statement of Assets and Liabilities (Unaudited)
<TABLE>
<CAPTION>
August 31, 2000
<S> <C>
- ----------------------------------------------------------------------------------------
ASSETS
Investments, at value
(cost $1,274,639,557) $ 1,270,030,909
Cash 127,275
Receivable for investments sold 45,823,688
Interest receivable 8,401,602
Receivable for Fund shares sold 879,314
Due from broker - variation margin 46,748
Prepaid expenses and other assets 31,176
-----------------
Total assets 1,325,340,712
-----------------
LIABILITIES
Payable for investments purchased 266,663,474
Payable for Fund shares reacquired 2,641,675
Accrued expenses 948,495
Dividends payable 696,875
Management fee payable 449,059
Distribution fee payable 278,210
-----------------
Total liabilities 271,677,788
-----------------
NET ASSETS $ 1,053,662,924
-----------------
-----------------
Net assets were comprised of:
Common stock, at par $ 1,229,062
Paid-in capital in excess of par 1,216,079,811
-----------------
1,217,308,873
Accumulated net realized loss on investments (159,258,738)
Net unrealized depreciation on investments (4,387,211)
-----------------
Net assets, August 31, 2000 $ 1,053,662,924
-----------------
-----------------
</TABLE>
10 See Notes to Financial Statements
<PAGE>
Prudential Government Income Fund, Inc.
Statement of Assets and Liabilities (Unaudited) Cont'd.
<TABLE>
<CAPTION>
August 31, 2000
- ----------------------------------------------------------------------------------------
<S> <C>
Class A:
Net asset value and redemption price per share
($803,228,925 / 93,694,385 shares of common stock
issued and outstanding) $8.57
Maximum sales charge (4% of offering price) .36
-----------------
Maximum offering price to public $8.93
-----------------
-----------------
Class B:
Net asset value, offering price and redemption price per
share
($144,690,719 / 16,865,238 shares of common stock
issued and outstanding) $8.58
-----------------
-----------------
Class C:
Net asset value and redemption price per share
($7,836,984 / 913,498 shares of common stock issued
and outstanding) $8.58
Sales charge (1% of offering price) .09
-----------------
Offering price to public $8.67
-----------------
-----------------
Class Z:
Net asset value, offering price and redemption price per
share
($97,906,296 / 11,433,090 shares of common stock
issued and outstanding) $8.56
-----------------
-----------------
</TABLE>
See Notes to Financial Statements 11
<PAGE>
Prudential Government Income Fund, Inc.
Statement of Operations (Unaudited)
<TABLE>
<CAPTION>
Six Months
Ended
August 31, 2000
<S> <C>
- ----------------------------------------------------------------------------------------
NET INVESTMENT INCOME
Income
Interest $ 39,499,267
Income from securities loan, net 21,486
-----------------
Total income 39,520,753
-----------------
Expenses
Management fee 2,687,323
Distribution fee--Class A 1,012,690
Distribution fee--Class B 667,687
Distribution fee--Class C 29,498
Transfer agent's fees and expenses 1,112,000
Custodian's fees and expenses 158,000
Reports to shareholders 98,000
Registration fees 32,000
Audit fee 22,000
Directors' fees 13,000
Insurance expense 9,000
Legal fees and expenses 8,000
Miscellaneous 5,033
-----------------
Total expenses 5,854,231
-----------------
Net investment income 33,666,522
-----------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Net realized gain (loss) on:
Investment transactions (16,929,587)
Financial futures contracts 298,077
-----------------
(16,631,510)
-----------------
Net change in unrealized depreciation on:
Investment transactions 36,884,458
Financial futures contracts 268,531
-----------------
37,152,989
-----------------
Net gain on investments 20,521,479
-----------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 54,188,001
-----------------
-----------------
</TABLE>
12 See Notes to Financial Statements
<PAGE>
Prudential Government Income Fund, Inc.
Statement of Changes in Net Assets (Unaudited)
<TABLE>
<CAPTION>
Six Months
Ended Year
August 31, Ended
2000 February 29, 2000
<S> <C> <C>
- -----------------------------------------------------------------------------------
INCREASE (DECREASE) IN NET ASSETS
Operations
Net investment income $ 33,666,522 $ 76,976,498
Net realized loss on investment
transactions (16,631,510) (36,670,862)
Net change in unrealized appreciation
(depreciation) on investments 37,152,989 (45,361,066)
-------------- -----------------
Net increase (decrease) in net assets
resulting from operations 54,188,001 (5,055,430)
-------------- -----------------
Dividends from net investment income (Note
1)
Class A (25,651,275) (54,772,627)
Class B (4,657,479) (15,174,492)
Class C (229,288) (531,416)
Class Z (3,128,480) (6,497,963)
-------------- -----------------
(33,666,522) (76,976,498)
-------------- -----------------
Fund share transactions (net of share
conversions) (Note 6):
Net proceeds from shares subscribed 119,136,323 242,255,365
Net asset value of shares issued to
shareholders in reinvestment of
dividends 22,211,125 51,114,813
Cost of shares reacquired (210,117,130) (453,755,385)
-------------- -----------------
Net decrease in net assets from Fund share
transactions (68,769,682) (160,385,207)
-------------- -----------------
Total decrease (48,248,203) (242,417,135)
NET ASSETS
Beginning of period 1,101,911,127 1,344,328,262
-------------- -----------------
End of period $1,053,662,924 $ 1,101,911,127
-------------- -----------------
-------------- -----------------
</TABLE>
See Notes to Financial Statements 13
<PAGE>
Prudential Government Income Fund, Inc.
Notes to Financial Statements (Unaudited)
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.
14
<PAGE>
Prudential Government Income Fund, Inc.
Notes to Financial Statements (Unaudited) 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.
15
<PAGE>
Prudential Government Income Fund, Inc.
Notes to Financial Statements (Unaudited) 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'). The subadvisory agreement provides that PIC will
furnish investment advisory services in connection with the management of the
Fund. In connection therewith, PIC is obligated to keep certain books and
records of the Fund. PIFM continues to have responsibility for all investment
advisory services pursuant to the management agreement and supervises PIC's
performance of such services. 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 the Fund's average daily net assets up to and including
$3 billion and .035% of 1% of the average daily net assets of the Fund in excess
of $3 billion.
16
<PAGE>
Prudential Government Income Fund, Inc.
Notes to Financial Statements (Unaudited) Cont'd.
Effective January 1, 2000, the subadvisory fee paid to PIC by PIFM is
computed daily and payable monthly at an annual rate of .250 of 1% of the
average daily net assets of the Fund up to and including $3 billion and .166 of
1% of the average daily net assets of the Fund in excess of $3 billion. Prior to
January 1, 2000, PIC was reimbursed by PIFM for reasonable costs and expenses
incurred in furnishing investment advisory services. The change in the
subadvisory fee structure has no impact on the management fee charged to the
Fund or its shareholders.
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. 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 six months ended August 31, 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 six months ended August
31, 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 six
months ended August 31, 2000.
PIMS has advised the Fund that it received approximately $42,100 and
$2,900 in front-end sales charges resulting from sales of Class A and Class C
shares, respectively, during the six months ended August 31, 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.
17
<PAGE>
Prudential Government Income Fund, Inc.
Notes to Financial Statements (Unaudited) Cont'd.
PIMS has advised the Fund that for the six months ended August 31, 2000 it
received approximately $176,200 and $4,800 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 ('The Prudential').
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 such borrowings will be at market rates. The purpose of the
agreement is to serve as an alternative source of funding for capital share
redemptions. The Funds pay a commitment fee of .080 of 1% of the unused portion
of the credit facility. The commitment fee is accrued and paid quarterly on a
pro rata basis by the Funds. The expiration date of the SCA is March 9, 2001.
Prior to March 9, 2000, the commitment fee was .065 of 1% of the unused portion
of the credit facility. The Fund did not borrow any amounts pursuant to the SCA
during the six months ended August 31, 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 six months ended August 31,
2000, the Fund incurred fees of approximately $941,138 for the services of PMFS.
As of August 31, 2000, approximately $150,866 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 six months ended August 31 2000, were $751,024,819 and $848,436,607,
respectively.
During the six months ended August 31, 2000, the Fund entered into
financial futures contracts. Details of open contracts at August 31, 2000 are as
follows:
<TABLE>
<CAPTION>
Value at Unrealized
Number of Expiration Value at August 31, Appreciation
Contracts Type Date Trade Date 2000 (Depreciation)
- --------- ----------------- ------------- ---------- ------------ --------------
<C> <S> <C> <C> <C> <C>
Long positions:
37 30 yr. T-Note Sept. 2000 $3,602,875 $3,713,875 $111,000
31 30 yr. T-Note Sept. 2000 3,001,188 3,111,625 110,437
--------------
$221,437
--------------
--------------
</TABLE>
18
<PAGE>
Prudential Government Income Fund, Inc.
Notes to Financial Statements (Unaudited) Cont'd.
The federal income tax basis of the Fund's investments at August 31, 2000
was substantially the same as for financial reporting purposes and, accordingly,
net unrealized depreciation for federal income tax purposes was $4,608,648
(gross unrealized appreciation-$9,858,295; gross unrealized
depreciation-$14,466,943).
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
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 six months
ended August 31, 2000 was approximately $36,128,000. The amount of dollar rolls
outstanding at August 31, 2000 was $201,774,380 (principal $205,000,000), which
was 15.2% of total assets.
As of August 31, 2000, the Fund had securities on loan with an aggregate
market value of $46,909,590. As of this date, the collateral held for securities
on loan was comprised of U.S. government securities with an aggregate market
value of $48,939,196.
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 August 31, 2000, the Fund
had a 5.69% undivided interest in the repurchase agreements in the joint
account. This undivided interest represented $38,204,000 in principal amount. As
of such date, the repurchase agreements in the joint account and the value of
the collateral therefor were as follows:
ABN AMRO Incorporated, 6.61%, in the principal amount of $180,000,000,
repurchase price $180,033,050, due 9/1/00. The value of the collateral including
accrued interest was $183,600,295.
Bear, Stearns & Co., Inc., 6.62%, in the principal amount of $100,000,000,
repurchase price $100,018,389, due 9/1/00. The value of the collateral including
accrued interest was $102,294,995.
Salomon Smith Barney, Inc., 6.62%, in the principal amount of
$190,000,000, repurchase price $190,034,939, due 9/1/00. The value of the
collateral including accrued interest was $193,916,346.
19
<PAGE>
Prudential Government Income Fund, Inc.
Notes to Financial Statements (Unaudited) Cont'd.
UBS Warburg, 6.61%, in the principal amount of $100,000,000, repurchase
price $100,018,361, due 9/1/00. The value of the collateral including accrued
interest was $102,002,880.
UBS Warburg, 6.45%, in the principal amount of $101,386,000, repurchase
price $101,404,165, due 9/1/00. The value of the collateral including accrued
interest was $103,414,456.
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>
Six months ended August 31, 2000:
Shares sold 10,320,921 $ 87,438,812
Shares issued in reinvestment of dividends 1,892,560 15,993,614
Shares reacquired (18,876,168) (159,616,899)
----------- -------------
Net decrease in shares outstanding before conversion (6,662,687) (56,184,473)
Shares issued upon conversion from Class B 4,420,496 37,237,119
----------- -------------
Net increase (decrease) in shares outstanding (2,242,191) $ (18,947,354)
----------- -------------
----------- -------------
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 increase (decrease) in shares outstanding (3,733,359) $ (31,552,808)
----------- -------------
----------- -------------
</TABLE>
20
<PAGE>
Prudential Government Income Fund, Inc.
Notes to Financial Statements (Unaudited) Cont'd.
<TABLE>
<CAPTION>
Class B Shares Amount
- ---------------------------------------------------------- ----------- -------------
Six months ended August 31, 2000:
<S> <C> <C>
Shares sold 1,145,138 $ 9,670,308
Shares issued in reinvestment of dividends 351,810 2,974,643
Shares reacquired (3,196,576) (27,006,386)
----------- -------------
Net decrease in shares outstanding before conversion (1,699,628) (14,361,435)
Shares reacquired upon conversion into Class A (4,420,496) (37,237,119)
----------- -------------
Net increase (decrease) in shares outstanding (6,120,124) $ (51,598,554)
----------- -------------
----------- -------------
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 increase (decrease) in shares outstanding (15,229,226) $(131,847,850)
----------- -------------
----------- -------------
<CAPTION>
Class C
- ----------------------------------------------------------
<S> <C> <C>
Six months ended August 31, 2000:
Shares sold 153,423 $ 1,299,865
Shares issued in reinvestment of dividends 20,360 172,191
Shares reacquired (271,496) (2,297,090)
----------- -------------
Net increase (decrease) in shares outstanding (97,713) $ (825,034)
----------- -------------
----------- -------------
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 (decrease) in shares outstanding 94,791 $ 873,687
----------- -------------
----------- -------------
<CAPTION>
Class Z
- ----------------------------------------------------------
<S> <C> <C>
Six months ended August 31, 2000:
Shares sold 2,459,687 $ 20,727,338
Shares issued in reinvestment of dividends 363,763 3,070,677
Shares reacquired (2,509,797) (21,196,755)
----------- -------------
Net increase (decrease) in shares outstanding 313,653 $ 2,601,260
----------- -------------
----------- -------------
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 (decrease) in shares outstanding 236,499 $ 2,141,764
----------- -------------
----------- -------------
</TABLE>
21
<PAGE>
Prudential Government Income Fund, Inc.
Financial Highlights (Unaudited)
<TABLE>
<CAPTION>
Class A
----------------
Six Months Ended
August 31, 2000
- ----------------------------------------------------------------------------------------
<S> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $ 8.41
----------------
Income from investment operations
Net investment income 0.27
Net realized and unrealized gain (loss) on investment
transactions 0.16
----------------
Total from investment operations 0.43
----------------
Less distributions
Dividends from net investment income 0.27
----------------
Net asset value, end of period $ 8.57
----------------
----------------
TOTAL RETURN(a): 5.17%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000) $803,229
Average net assets (000) $803,546
Ratios to average net assets:
Expenses, including distribution and service (12b-1) fees 1.02%(b)
Expenses, excluding distribution and service (12b-1) fees 0.77%(b)
Net investment income 6.33%(b)
For Class A, B, C and Z shares:
Portfolio turnover rate 70%
</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 period of less than a full year are not
annualized.
(b) Annualized.
22 See Notes to Financial Statements
<PAGE>
Prudential Government Income Fund, Inc.
Financial Highlights (Unaudited) Cont'd.
<TABLE>
<CAPTION>
Class A
- ---------------------------------------------------------------------------------------------------------
Year Ended February 28/29,
- ---------------------------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$ 8.98 $ 9.05 $ 8.76 $ 9.04 $ 8.59
- ---------------- ---------------- ---------------- ---------------- ----------------
0.55 0.55 0.58 0.60 0.60
(0.57) (0.07) 0.29 (0.28) 0.45
- ---------------- ---------------- ---------------- ---------------- ----------------
(0.02) 0.48 0.87 0.32 1.05
- ---------------- ---------------- ---------------- ---------------- ----------------
(0.55) (0.55) (0.58) (0.60) (0.60)
- ---------------- ---------------- ---------------- ---------------- ----------------
$ 8.41 $ 8.98 $ 9.05 $ 8.76 $ 9.04
- ---------------- ---------------- ---------------- ---------------- ----------------
- ---------------- ---------------- ---------------- ---------------- ----------------
(0.15)% 5.40% 10.26% 3.70% 12.41%
$806,620 $895,039 $819,536 $860,319 $945,038
$857,586 $836,143 $842,431 $884,862 $909,169
0.94% 0.84% 0.86% 0.90% 0.91%
0.69% 0.68% 0.71% 0.75% 0.76%
6.39% 6.05% 6.52% 6.78% 6.65%
68% 106% 88% 107% 123%
</TABLE>
See Notes to Financial Statements 23
<PAGE>
Prudential Government Income Fund, Inc.
Financial Highlights (Unaudited) Cont'd.
<TABLE>
<CAPTION>
Class B
----------------
Six Months Ended
August 31, 2000
- ----------------------------------------------------------------------------------------
<S> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $ 8.41
----------------
Income from investment operations
Net investment income 0.25
Net realized and unrealized gain (loss) on investment
transactions 0.17
----------------
Total from investment operations 0.42
----------------
Less distributions
Dividends from net investment income (0.25)
----------------
Net asset value, end of period $ 8.58
----------------
----------------
TOTAL RETURN(a): 4.99%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000) $144,691
Average net assets (000) $160,544
Ratios to average net assets:
Expenses, including distribution and service (12b-1) fees 1.60%(b)
Expenses, excluding distribution and service (12b-1) fees 0.77%(b)
Net investment income 5.76%(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 period of less than a full year are not
annualized.
(b) Annualized.
24 See Notes to Financial Statements
<PAGE>
Prudential Government Income Fund, Inc.
Financial Highlights (Unaudited) Cont'd.
<TABLE>
<CAPTION>
Class B
- ---------------------------------------------------------------------------------------------------------
Year Ended February 28/29,
- ---------------------------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$ 8.99 $ 9.05 $ 8.77 $ 9.04 $ 8.60
- ---------------- ---------------- ---------------- ---------------- ----------------
0.50 0.49 0.52 0.54 0.54
(0.58) (0.06) 0.28 (0.27) 0.44
- ---------------- ---------------- ---------------- ---------------- ----------------
(0.08) 0.43 0.80 0.27 0.98
- ---------------- ---------------- ---------------- ---------------- ----------------
(0.50) (0.49) (0.52) (0.54) (0.54)
- ---------------- ---------------- ---------------- ---------------- ----------------
$ 8.41 $ 8.99 $ 9.05 $ 8.77 $ 9.04
- ---------------- ---------------- ---------------- ---------------- ----------------
- ---------------- ---------------- ---------------- ---------------- ----------------
(0.83)% 4.83% 9.40% 3.12% 11.54%
$193,394 $343,425 $346,059 $461,988 $641,946
$262,863 $322,626 $385,145 $543,796 $647,515
1.52% 1.50% 1.53% 1.57% 1.58%
0.69% 0.68% 0.71% 0.75% 0.76%
5.77% 5.39% 5.85% 6.11% 5.99%
</TABLE>
See Notes to Financial Statements 25
<PAGE>
Prudential Government Income Fund, Inc.
Financial Highlights (Unaudited) Cont'd.
<TABLE>
<CAPTION>
Class C
----------------
Six Months Ended
August 31, 2000
- ----------------------------------------------------------------------------------------
<S> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $ 8.41
----------------
Income from investment operations
Net investment income 0.25
Net realized and unrealized gain (loss) on investment
transactions 0.17
----------------
Total from investment operations 0.42
----------------
Less distributions
Dividends from net investment income (0.25)
----------------
Net asset value, end of period $ 8.58
----------------
----------------
TOTAL RETURN(a): 5.03%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000) $ 7,837
Average net assets (000) $ 7,802
Ratios to average net assets:
Expenses, including distribution and service (12b-1) fees 1.52%(b)
Expenses, excluding distribution and service (12b-1) fees 0.77%(b)
Net investment income 5.83%(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 period of less than a full year are not
annualized.
(b) Annualized.
26 See Notes to Financial Statements
<PAGE>
Prudential Government Income Fund, Inc.
Financial Highlights (Unaudited) Cont'd.
<TABLE>
<CAPTION>
Class C
- ----------------------------------------------------------------------------------------------------------
Year Ended February 28/29,
- ----------------------------------------------------------------------------------------------------------
2000 1999 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$ 8.99 $ 9.05 $ 8.77 $ 9.04 $ 8.60
- ---------------- ---------------- ---------------- ---------------- ----------------
0.51 0.50 0.53 0.54 0.54
(0.58) (0.06) 0.28 (0.27) 0.44
- ---------------- ---------------- ---------------- ---------------- ----------------
(0.07) 0.44 0.81 0.27 0.98
- ---------------- ---------------- ---------------- ---------------- ----------------
(0.51) (0.50) (0.53) (0.54) (0.54)
- ---------------- ---------------- ---------------- ---------------- ----------------
$ 8.41 $ 8.99 $ 9.05 $ 8.77 $ 9.04
- ---------------- ---------------- ---------------- ---------------- ----------------
- ---------------- ---------------- ---------------- ---------------- ----------------
(0.76)% 4.91% 9.48% 3.20% 11.63%
$ 8,508 $ 8,236 $ 2,840 $ 2,569 $ 1,799
$ 9,014 $ 4,878 $ 2,523 $ 2,440 $ 765
1.44% 1.43% 1.46% 1.50% 1.51%
0.69% 0.68% 0.71% 0.75% 0.76%
5.90% 5.50% 5.92% 6.19% 5.99%
</TABLE>
See Notes to Financial Statements 27
<PAGE>
Prudential Government Income Fund, Inc.
Financial Highlights (Unaudited) Cont'd.
<TABLE>
<CAPTION>
Class Z
----------------
Six Months Ended
August 31, 2000
- ----------------------------------------------------------------------------------------
<S> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $ 8.40
----------------
Income from investment operations
Net investment income 0.28
Net realized and unrealized gain (loss) on investment
transactions 0.16
----------------
Total from investment operations 0.44
----------------
Less distributions
Dividends from net investment income (0.28)
----------------
Net asset value, end of period $ 8.56
----------------
----------------
TOTAL RETURN(a): 5.30%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000) $ 97,906
Average net assets (000) $ 94,273
Ratios to average net assets:
Expenses, including distribution and service (12b-1) fees 0.77%(b)
Expenses, excluding distribution and service (12b-1) fees 0.77%(b)
Net investment income 6.58%(b)
</TABLE>
- ------------------------------
(a) 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.
28 See Notes to Financial Statements
<PAGE>
Prudential Government Income Fund, Inc.
Financial Highlights (Unaudited) Cont'd.
<TABLE>
<CAPTION>
Class Z
- ---------------------------------------------------------------------------------------
Year Ended February 28/29, March 4, 1999(c)
- -------------------------------------------------------------- through February 28,
2000 1999 1998 1997
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
$ 8.97 $ 9.04 $ 8.76 $ 9.13
- ---------------- ---------------- ---------------- ----------
0.57 0.57 0.59 0.61
(0.57) (0.07) 0.28 (0.37)
- ---------------- ---------------- ---------------- ----------
-- 0.50 0.87 0.24
- ---------------- ---------------- ---------------- ----------
(0.57) (0.57) (0.59) (0.61)
- ---------------- ---------------- ---------------- ----------
$ 8.40 $ 8.97 $ 9.04 $ 8.76
- ---------------- ---------------- ---------------- ----------
- ---------------- ---------------- ---------------- ----------
0.09% 5.58% 10.30% 3.16%
$ 93,390 $ 97,629 $ 84,733 $ 73,411
$ 97,811 $ 86,892 $ 71,425 $ 39,551
0.69% 0.68% 0.71% 0.75%(b)
0.69% 0.68% 0.71% 0.75%(b)
6.64% 6.22% 6.67% 6.76%(b)
</TABLE>
See Notes to Financial Statements 29
<PAGE>
Prudential Government Income Fund, Inc.
Prudential Mutual Funds
Prudential offers a broad range of mutual funds
designed to meet your individual needs. For
information about these funds, contact your
financial adviser or call us at (800) 225-1852.
Read the prospectus carefully before you invest or
send money.
STOCK FUNDS
Large Capitalization Stock Funds
Prudential 20/20 Focus Fund
Prudential Equity Fund, Inc.
Prudential Stock Index Fund
Prudential Tax-Managed Funds
Prudential Tax-Managed Equity Fund
Strategic Partners Focused Growth Fund
Target Funds
Large Capitalization Growth Fund
Large Capitalization Value Fund
The Prudential Investment Portfolios, Inc.
Prudential Jennison Growth Fund
Prudential Value Fund
Small- to Mid-Capitalization Stock Funds
Nicholas-Applegate Fund, Inc.
Nicholas-Applegate Growth Equity Fund
Prudential Small Company Fund, Inc.
Prudential Tax-Managed Small-Cap Fund, Inc.
Prudential U.S. Emerging Growth Fund, Inc.
Target Funds
Small Capitalization Growth Fund
Small Capitalization Value Fund
The Prudential Investment Portfolios, Inc.
Prudential Jennison Equity Opportunity Fund
Sector Stock Funds
Prudential Natural Resources Fund, Inc.
Prudential Real Estate Securities Fund
Prudential Sector Funds, Inc.
Prudential Financial Services Fund
Prudential Health Sciences Fund
Prudential Technology Fund
Prudential Utility Fund
Global/International Stock Funds
Global Utility Fund, Inc.
Prudential Europe Growth Fund, Inc.
Prudential Pacific Growth Fund, Inc.
Prudential World Fund, Inc.
Prudential Global Growth Fund
Prudential International Value Fund
Prudential Jennison International Growth Fund
Target Funds
International Equity Fund
BALANCED/ALLOCATION FUNDS
Prudential Diversified Funds
Conservative Growth Fund
Moderate Growth Fund
High Growth Fund
The Prudential Investment Portfolios, Inc.
Prudential Active Balanced Fund
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www.prudential.com (800) 225-1852
BOND FUNDS
Taxable Bond Funds
Prudential Government Income Fund, Inc.
Prudential Government Securities Trust
Short-Intermediate Term Series
Prudential High Yield Fund, Inc.
Prudential High Yield Total Return Fund, Inc.
Prudential Short-Term Corporate Bond Fund, Inc.
Income Portfolio
Prudential Total Return Bond Fund, Inc.
Target Funds
Total Return Bond Fund
Tax-Free Bond Funds
Prudential California Municipal Fund
California Series
California Income Series
Prudential Municipal Bond Fund
High Income Series
Insured Series
Prudential Municipal Series Fund
Florida Series
Massachusetts Series
New Jersey Series
New York Series
North Carolina Series
Ohio Series
Pennsylvania Series
Prudential National Municipals Fund, Inc.
Global/International Bond Funds
Prudential Global Total Return Fund, Inc.
Prudential International Bond Fund, Inc.
MONEY MARKET FUNDS
Taxable Money Market Funds
Cash Accumulation Trust
Liquid Assets Fund
National Money Market Fund
Prudential Government Securities Trust
Money Market Series
U.S. Treasury Money Market Series
Prudential Institutional Liquidity Portfolio, Inc.
Institutional Money Market Series
Prudential MoneyMart Assets, Inc.
Prudential Special Money Market Fund, Inc.
Money Market Series
Tax-Free Money Market Funds
Prudential California Municipal Fund
California Money Market Series
Prudential Municipal Series Fund
Connecticut Money Market Series
Massachusetts Money Market Series
New Jersey Money Market Series
New York Money Market Series
Prudential Tax-Free Money Fund, Inc.
Other Money Market Funds
Command Government Fund
Command Money Fund
Command Tax-Free Fund
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Prudential Government Income Fund, Inc.
Getting the Most from Your Prudential Mutual Fund
Some mutual fund shareholders won't ever read this--
they don't read annual and semiannual reports. It's
quite understandable. These annual and semiannual
reports are prepared to comply with federal
regulations, and 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. We hope you'll find it
profitable to spend a few minutes familiarizing
yourself with your investment. Here's what you'll
find in the report:
Performance 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 "Performance at a
Glance" page where we compare the Fund and the
comparable average calculated by Lipper, Inc., a
nationally recognized mutual fund rating agency. We
report both the cumulative total returns and the
average annual total returns. The cumulative total
return is the total amount of income and
appreciation the Fund has achieved in various time
periods. The average annual total return is an
annualized representation of the Fund's
performance. It gives you an idea of 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.
Please keep in mind that past performance is not
indicative of future results.
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www.prudential.com (800) 225-1852
INVESTMENT ADVISER'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 appear
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 "Investment Adviser's Report"
section that doesn't appear in this listing because
it was sold before the close of the reporting
period.
Statement of Assets and Liabilities
The balance sheet shows the assets (the value of
the Fund's holdings),
liabilities (how much the Fund owes), and net
assets (the Fund's
equity, or holdings after the Fund pays its debts)
as of the end of the reporting period. It also
shows how we calculate the net asset value per
share for each class of shares. The net asset value
is reduced by payment of your
dividend, capital gain, or other distribution, but
remember that the money or new shares are being
paid or issued to you. The net asset value
fluctuates daily, along with the value of every
security in the portfolio.
Statement of Operations
This is the income statement, which details income
(mostly interest and
dividends earned) and expenses (including what you
pay us to manage your money). You'll also see
capital gains here--both realized and unrealized.
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Prudential Government Income Fund, Inc.
Getting the Most from Your Prudential Mutual Fund
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 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 accountant's Report
Once a year, an outside auditor looks over our
books and certifies that
the financial statements are fairly presented and
comply with generally accepted accounting
principles.
Tax Information
This is information that we report annually about
how much of your total return is taxable. Should
you have any questions, you may want to consult a
tax adviser.
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www.prudential.com (800) 225-1852
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 broad-based
reference point commonly used by investors to
measure how well they are doing. A definition of
the selected index is also provided. Investors
cannot invest directly in an index.
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Prudential Government Income Fund, Inc.
Getting the Most from Your Prudential Mutual Fund
When you invest through Prudential Mutual Funds,
you receive financial advice from a Prudential
Securities Financial Advisor or Pruco Securities
registered representative. Your advisor or
representative can provide you with the following
services:
There's No Reward Without Risk; but Is This Risk
Worth It?
Your financial advisor or registered representative
can help you match the reward you seek with the
risk you can tolerate. Risk can be difficult to
gauge--sometimes even the simplest investments bear
surprising risks. The educated investor knows that
markets seldom move in just one direction. There
are times when a market sector or asset class will
lose value or provide little in the way of total
return. Managing your own expectations is easier
with help from someone who understands the markets
and who knows you!
Keeping Up With the Joneses
A financial advisor or registered representative
can help you wade through the numerous available
mutual funds to find the ones that fit your
individual investment profile and risk tolerance.
While the newspapers and popular magazines are full
of advice about investing, they are aimed at
generic groups of people or representative
individuals--not at you personally. Your financial
advisor or registered representative will review
your investment objectives with you. This means you
can make financial decisions based on the assets
and liabilities in your current portfolio and your
risk tolerance--not just based on the current
investment fad.
Buy Low, Sell High
Buying at the top of a market cycle and selling at
the bottom are among the most common investor
mistakes. But sometimes it's difficult to hold on
to an investment when it's losing value every
month. Your financial advisor or registered
representative can answer questions when you're
confused or worried about your investment, and
should remind you that you're investing for the
long haul.
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www.prudential.com (800) 225-1852
FOR MORE INFORMATION
Prudential Mutual Funds
Gateway Center Three
100 Mulberry Street
Newark, NJ 07102-4077
(800) 225-1852
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
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
P.O. Box 8098
Philadelphia, PA 19101
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 PRICX 744339300
Class Z PGVZX 744339409
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.
The accompanying financial statements as
of August 31, 2000, were not audited and,
accordingly, no opinion is expressed on them.
<PAGE>
BULK RATE
U.S. POSTAGE
PAID
Permit 6807
New York, NY
(LOGO)
Prudential Mutual Funds
Gateway Center Three
100 Mulberry Street
Newark, NJ 07102-4077
(800) 225-1852
MF128E2 744339102 744339201 744339300 744339409
(ICON) Printed on Recycled Paper
Annual Report to Shareholders of
Short-Intermediate Term Series for the
fiscal year ended November 30, 2000
[to come]
<PAGE>
PART C
OTHER INFORMATION
ITEM 15. INDEMNIFICATION.
As permitted by Section 17(h) and (i) of the Investment Company Act of
1940, as amended (the 1940 Act) and pursuant to Article VII of the Fund's
By-Laws (Exhibit (2) to the Registration Statement), present and former
officers, directors, employees and agents of the Registrant shall be
indemnified by the Registrant against judgments, fines, settlements and
expenses to the fullest extent authorized and in the manner permitted, by
applicable federal and state law. Section 2-418 of Maryland General
Corporation Law permits indemnification of directors who acted in good faith
and reasonably believed that the conduct was in the best interests of the
Registrant. As permitted by Section 17(i) of the 1940 Act, pursuant to
Section 10 of the Distribution Agreement (Exhibit 7(a) to the Registration
Statement), in certain cases the Distributor of the Registrant may be
indemnified against liabilities which it may incur, except liabilities
arising from bad faith, gross negligence in the performance of its duties,
wilful misfeasance or reckless disregard of duties.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933, as amended (Securities Act) may be permitted to directors,
officers and controlling persons of the Registrant pursuant to the foregoing
provisions or otherwise, the Registrant has been advised that in the opinion
of the Securities and Exchange Commission (Commission) such indemnification
is against public policy as expressed in the 1940 Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer, or controlling person of the Registrant in
connection with the successful defense of any action, suit or proceeding) is
asserted against the Registrant by such director, officer or controlling
person in connection with the shares being registered, the Registrant will,
unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the 1940 Act and will be governed by the final adjudication of
such issue.
The Registrant has purchased an insurance policy insuring its officers
and directors against liabilities, and certain costs of defending claims
against such officers and directors, to the extent such officers and
directors are not found to have committed conduct constituting willful
misfeasance, bad faith, gross negligence or reckless disregard in the
performance of their duties. The insurance policy also insures the Registrant
against the cost of indemnification payments to officers and directors under
certain circumstances. Pursuant and subject to the provisions of Article VII
of the Registrant's By-Laws, the Registrant shall indemnify each present and
former director, officer, employee, and agent of the Registrant against, or
advance the expenses of any such person for, the amount of any deductible
provided in any liability insurance policy maintained by the Registrant.
Section 10 of the Management Agreement (Exhibit 6(a) to the Registration
Statement) and Section 4 of the Subadvisory Agreement (Exhibit 6(b) to the
Registration Statement) limit
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the liability of Prudential Investment Fund Management, LLC (PIFM) (formerly
known as Prudential Mutual Fund Management, Inc.) and The Prudential
Investment Corporation (PIC), respectively, to liabilities arising from
willful misfeasance, bad faith or gross negligence in the performance of
their respective duties or from reckless disregard by them of their
respective obligations and duties under the agreements. Section 10 of the
Management Agreement also holds PIFM liable for losses resulting from a
breach of fiduciary duty with respect to the receipt of compensation for
services.
The Registrant hereby undertakes that it will apply the indemnification
provisions of its By-Laws and the Distribution Agreement in a manner consistent
with Release No. 11330 of the Commission under the 1940 Act so long
as the interpretation of Sections 17(h) and 17(i) of such Act
remains in effect and is consistently applied.
ITEM 16. EXHIBITS
1. (a) Articles of Restatement. Incorporated by reference to Exhibit 1 to
Post-Effective Amendment No. 22 to Registration Statement on Form N-1A
filed via EDGAR on April 30, 1996 (File No. 2-82976).
(b) Articles Supplementary. Incorporated by reference to Exhibit (a)(3) to
Post-Effective Amendment No. 27 to Registration Statement on Form N-1A
filed via EDGAR on May 14, 1999. (File No. 2-82976).
2. Amended and Restated By-Laws. Incorporated by reference to Exhibit (b) to
Post-Effective Amendment No. 28 to Registration Statement filed on Form
N-1A via EDGAR on May 4, 2000 (File No. 2-82976).
3. Not Applicable.
4. Form of Agreement and Plan of Reorganization filed herewith as Attachment A
to the Prospectus and Proxy Statement.*
5. Instruments defining rights of holders of the securities being offered.
Incorporated by reference to Exhibits Nos. 1 and 2 above.
6. (a) Management Agreement dated as of July 1, 1988 between the Registrant
and Prudential Mutual Fund Management, Inc. Incorporated by reference to
Exhibit 5(a) to Post-Effective Amendment No. 24 to Registration Statement
on Form N-1A filed via EDGAR on May 2, 1997 (File No. 2-82976).
(b) Subadvisory Agreement dated as of July 1, 1988 between Prudential
Mutual Fund Management, Inc. And The Prudential Investment Corporation.
Incorporated by reference to Exhibit 5(b) to Post-Effective Amendment No.
24 to Registration Statement on Form N-1a filed via EDGAR on May 2, 1997
(File No. 2-66407).
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<PAGE>
(c) Amendment to Subadvisory Agreement dated as of November 18, 1999,
between Prudential Investments Fund Management LLC and The Prudential
Investment Corporation. Incorporated by reference to Exhibit (d)(3) to
Post-Effective Amendment No. 28 to Registration Statement on Form N-1A
(File No. 2-82976) filed via EDGAR on May 4, 2000.
7. (a) Distribution Agreement dated as of June 1, 1998 with Prudential
Investment Management Services LLC. Incorporated by reference to Exhibit
7(b) to the Registration Statement on Form N-14 (File No. 333-64907) filed
via EDGAR on September 30, 1998.
(b) Selected Dealer Agreement. Incorporated by reference to Exhibit 7(a) to
the Registration Statement on Form N-14 (File No. 333-64907) filed via
EDGAR on October 30, 1998.
8. Not Applicable.
9. (a) Revised Custodian Agreement between the Registrant and State Street
Bank and Trust Company. Incorporated by reference to Exhibit 8(a) to
Post-Effective Amendment No. 24 to the Registration Statement on Form N-1A
(File No. 2-82976) filed via EDGAR on May 2, 1997.
(b) Special Custody Agreement among the Registrant, State Street Bank and
Trust Company, and Goldman, Sachs & Co. Incorporated by reference to
Exhibit 8(b) to Post-Effective Amendment No. 24 to the Registration
Statement on Form N-1A (File No. 2-82976) filed via EDGAR on May 2, 1997.
(c) Customer Agreement between the Registrant and Goldman, Sachs & Co.
Incorporated by reference to Exhibit 8(c) to Post-Effective Amendment No.
24 to the Registration Statement on Form N-1A (File No. 2-82976) filed via
EDGAR on May 2, 1997.
(d) Form of Amendment to Revised Custodian Agreement. Incorporated by
reference to Exhibit 8(d) to Post-Effective Amendment No. 19 to the
Registration Statement on Form N-1A (File No. 2-82976) filed via EDGAR on
November 3, 1995.
(e) Amendment to Custodian Contract/Agreement dated as of February 22, 1999
by and between the Registrant and State Street Bank and Trust Company.
Incorporated by reference to Exhibit (g)(5) to Post-Effective Amendment No.
28 to Registration Statement on Form N-1A (File No. 2-8297) filed via EDGAR
on May 4, 2000.
10. (a) Amended and Restated Distribution and Service Plan for Class A shares.
Incorporated by reference to Exhibit 15(a) to Registration Statement on
Form N-14 filed via EDGAR on October 30, 1998 (File No. 333-82976).
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(b) Amended and Restated Distribution and Service Plan for Class B shares.
Incorporated by reference to Exhibit 15(b) to Registration Statement on
Form N-14 filed via EDGAR on October 30, 1998 (File No. 333-82976).
(c) Amended and Restated Distribution and Service Plan for Class C shares.
Incorporated by reference to Exhibit 15(c) to Registration Statement on
Form N-14 filed via EDGAR on October 30, 1998 (File No. 333-82976).
(d) Amended Rule 18f-3 Plan. Incorporated by reference to Exhibit (o) to
Post-Effective Amendment No. 27 to the Registration Statement on Form N-1A
(File No. 2-82976) filed via EDGAR on May 14, 1999.
11. Opinion and Consents of Counsel.**
12. Tax Opinion and Consent of Counsel.**
13. (a) Transfer Agency Agreement dated as of January 1, 1988 between the
Registrant and Prudential Mutual Fund Services, Inc. Incorporated by
reference to Exhibit 9 to Post-Effective Amendment No. 24 to the
Registration Statement on Form N-1A (File No. 2-82976) filed via EDGAR on
May 2, 1997.
(b) Amendment to Transfer Agency and Service Agreement dated as of
August 24, 1999 by and between the Registrant and Prudential Mutual Fund
Services LLC (successor to Prudential Mutual Fund Services, Inc.).
Incorporated by reference to Exhibits (h)(2) to Post-Effective Amendment
No. 28 to the Registration Statement on Form N-1A (File No. 2-82976) filed
via EDGAR on May 4, 2000.
14. Consent of Independent Accountants to Prudential Government Income Fund,
Inc. and Prudential Government Securities Trust.**
15. Not Applicable.
16. Not Applicable.
17. (a) Proxy, filed immediately after Prospectus and Proxy Statement.*
(b) Prospectus of the Registrant dated May 4, 2000.*
(c) Supplement dated September 13, 2000 to Prospectus of the Registrant.*
(d) Supplement dated May 23, 2000 to Prospectus of the Registrant.*
(e) Prospectus of Prudential Government Securities Trust
(Short-Intermediate Term Series) dated January __, 2001.**
(f) President's Letter, filed immediately preceding Prospectus and Proxy
Statement.*
(g) Statement of Additional Information of Prudential Government
Securities Trust dated January __, 2001.**
(h) Amended and Restated By-Laws of Prudential Government Securities
Trust.**
--------------------------------
*Filed herewith.
**To be filed by amendment.
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ITEM 17. UNDERTAKINGS.
1. The undersigned registrant agrees that prior to any public reoffering of
the securities registered through the use of a prospectus which is a part
of this registration statement by any person or party who is deemed to be
an underwriter within the meaning of Rule 145(c) of the Securities Act, the
reoffering prospectus will contain the information called for by the
applicable registration form for reofferings by persons who may be deemed
underwriters, in addition to the information called for by the other items
of the applicable form.
2. The undersigned registrant agrees that every prospectus that is filed under
paragraph (1) above will be filed as a part of an amendment to the
registration statement and will not be used until the amendment is
effective, and that, in determining any liability under the 1933 Act, each
post-effective amendment shall be deemed to be a new registration statement
for the securities offered therein, and the offering of the securities at
that time shall be deemed to be the initial bona fide offering of them.
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SIGNATURES
As required by the Securities Act of 1933, this Registration Statement has
been signed on behalf of the Registrant, in the City of Newark, and State of New
Jersey, on the 21st day of December, 2000.
PRUDENTIAL GOVERNMENT INCOME FUND, INC.
/s/ David R. Odenath, JR.
-----------------------------------------
(David R. Odenath, Jr., President)
As required by the Securities Act of 1933, this Registration Statement has
been signed by the following persons in the capacities and on the dates
indicated.
<TABLE>
<S> <C> <C>
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Eugene C. Dorsey Director December 21, 2000
------------------------------------
Eugene C. Dorsey
/s/ Delayne D. Gold Director December 21, 2000
------------------------------------
Delayne D. Gold
/s/ Robert F. Gunia Vice President and Director December 21, 2000
------------------------------------
Robert F. Gunia
/s/ Thomas T. Mooney Director December 21, 2000
------------------------------------
Thomas T. Mooney
/s/ Stephen P. Munn Director December 21, 2000
------------------------------------
Stephen P. Munn
/s/ David R. Odenath, Jr. President and Director December 21, 2000
------------------------------------
David R. Odenath, Jr.
/s/ Richard A. Redeker Director December 21, 2000
------------------------------------
Richard A. Redeker
/s/ Judy A. Rice Director December 21, 2000
------------------------------------
Judy A. Rice
/s/ Nancy Hays Teeters Director December 21, 2000
------------------------------------
Nancy Hays Teeters
/s/ Louis A. Weil, III, Director December 21, 2000
------------------------------------
Louis A. Weil, III
/s/ Grace C. Torres Principal Financial and
------------------------------------ Accounting Officer
Grace C. Torres December 21, 2000
</TABLE>
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<PAGE>
EXHIBIT INDEX
4. Form of Agreement and Plan of Reorganization filed herewith as Attachment A
to the Prospectus and Proxy Statement.
17. (a) Proxy, filed immediately after Prospectus and Proxy Statement.
(b) Prospectus of the Registrant dated May 4, 2000.
(c) Supplement dated September 13, 2000 to Prospectus of the Registrant.
(d) Supplement dated May 23, 2000 to Prospectus of the Registrant.
(f) President's Letter, filed immediately preceding Prospectus and Proxy
Statement.
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