<PAGE>
As filed with the Securities and Exchange Commission on December 11, 1997
Registration No. 333-40059
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------
FORM N-14
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 / /
PRE-EFFECTIVE AMENDMENT NO. 1 /X/
POST-EFFECTIVE AMENDMENT NO. / /
(Check appropriate box or boxes)
--------------
PRUDENTIAL GOVERNMENT SECURITIES TRUST
(Exact name of registrant as specified in charter)
GATEWAY CENTER THREE
100 MULBERRY STREET
NEWARK, NEW JERSEY 07102-4077
(Address of Principal Executive Offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (973) 367-7530
S. JANE ROSE, ESQ.
GATEWAY CENTER THREE
100 MULBERRY STREET
NEWARK, NEW JERSEY 07102-4077
(NAME AND ADDRESS OF AGENT FOR SERVICE)
IT IS PROPOSED THAT THIS FILING WILL BECOME EFFECTIVE ON
JANUARY 10, 1998
PURSUANT TO RULE 488 OF THE SECURITIES ACT OF 1933, AS AMENDED
NO FILING FEE IS REQUIRED BECAUSE, PURSUANT TO RULE 24f-2 UNDER THE
INVESTMENT COMPANY ACT OF 1940, REGISTRANT HAS PREVIOUSLY REGISTERED AN
INDEFINITE NUMBER OF SHARES OF BENEFICIAL INTEREST, PAR VALUE $.01 PER SHARE,
PURSUANT TO A REGISTRATION STATEMENT ON FORM N-1A (FILE NO. 2-74139). PURSUANT
TO RULE 429 UNDER THE SECURITIES ACT OF 1933, THE PROSPECTUS AND PROXY STATEMENT
RELATES TO SHARES PREVIOUSLY REGISTERED ON FORM N-1A (FILE NO. 33-41224).
- --------------------------------------------------------------------------------
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<PAGE>
CROSS REFERENCE SHEET
(AS REQUIRED BY RULE 481(a)UNDER THE SECURITIES ACT OF 1933)
<TABLE>
<CAPTION>
N-14 ITEM NO. PROSPECTUS/PROXY
AND CAPTION STATEMENT CAPTION
- ---------------------------------------------------- ----------------------------------------
<S> <C> <C> <C>
PART A
Item 1. Beginning of Registration Statement and
Outside Front Cover Page of
Prospectus.............................. Cover Page
Item 2. Beginning and Outside Back Cover Page of
Prospectus.............................. Table of Contents
Item 3. Synopsis and Risk Factors............... Synopsis; Principal Risk Factors
Item 4. Information about the Transaction....... Synopsis; The Proposed Transaction
Item 5. Information about the Registrant........ Information about Short-Intermediate
Term Series; Appendix A
Item 6. Information about the Company Being
Acquired................................ Information about The BlackRock
Government Income Trust; Appendix A
Item 7. Voting Information...................... Voting Information
Item 8. Interest of Certain Persons and
Experts................................. Not Applicable
Item 9. Additional Information Required for
Reoffering by Persons Deemed to be
Underwriters............................ Not Applicable
PART B
STATEMENT OF ADDITIONAL
INFORMATION CAPTION
----------------------------------------
Item 10. Cover Page.............................. Cover Page
Item 11. Table of Contents....................... Cover Page
Item 12. Additional Information about the
Registrant.............................. Statement of Additional Information of
Prudential Government Securities Trust
dated February 3, 1997.
Item 13. Additional Information about the Company
Being Acquired.......................... Not Applicable
Item 14. Financial Statements.................... Statement of Additional Information of
Prudential Government Securities Trust
dated February 3, 1997; Annual Report to
Shareholders of Prudential Government
Securities Trust for the fiscal year
ended November 30, 1996; Semi-Annual
Report to Shareholders of Prudential
Government Securities Trust for the
six-months ended May 31, 1997; Annual
Report to Shareholders of The BlackRock
Government Income Trust for the fiscal
year ended June 30, 1997.
PART C
Information required to be included in Part C is set forth under the appropriate item,
so numbered, in Part C of this Registration Statement.
</TABLE>
<PAGE>
[LOGO]
THE BLACKROCK GOVERNMENT INCOME TRUST
December 15, 1997
Dear Shareholder:
You may be aware that the Board of Trustees of The BlackRock Government Income
Trust ("BlackRock Trust") have approved a proposal to exchange the assets and
liabilities of BlackRock Trust for Class A shares of Prudential Government
Securities Trust's Short-Intermediate Term Series ("Short-Intermediate Series,"
and collectively with BlackRock Trust, the "Funds"). The enclosed Prospectus and
Proxy Statement describe this proposal in detail. If the proposal is approved by
the shareholders and implemented, you will automatically receive shares of
Short-Intermediate Series in exchange for your shares of BlackRock Trust.
The Trustees and I strongly recommend that you vote FOR the proposal. We believe
that this transaction serves your interests in the following ways:
- - SIMILAR STRATEGIES. The Funds' investment objectives and strategies, while
not identical, are very similar. Both Funds invest primarily in U.S.
Government Securities, including U.S. Treasury Bills, Notes, Bonds and other
debt securities issued by the U.S. Treasury, and obligations issued or
guaranteed by the U.S. Government, its agencies and instrumentalities. While
BlackRock Trust seeks to provide low volatility of net asset value and high
monthly income, Short-Intermediate Series seeks to achieve a high level of
income consistent with providing reasonable safety.
- - EXPENSE LEVELS. BlackRock Trust has relatively few assets and has
experienced a steady decrease in assets. Additionally, it has operated with
relatively high expense ratios before a voluntary distribution fee limitation
by Prudential Securities Incorporated ("PSI"), which serves as the
distributor for each of the Funds. Because PSI's fee limitation is voluntary
and is not specified as to duration, it can be eliminated at any time.
- - POTENTIAL FOR HIGHER RETURNS. Short-Intermediate Series has historically had
higher average annual total returns than BlackRock Trust. Furthermore,
Short-Intermediate Series has lower expense ratios than BlackRock Trust due,
in part, to its appreciably larger size. Past performance is no guarantee of
future results.
Please read the enclosed materials carefully for more complete information. Your
vote is important, no matter how many shares you own. Voting your shares early
may permit BlackRock Trust to avoid costly follow-up mail and telephone
solicitation. After you have reviewed the enclosed materials, please complete,
date and sign your proxy card and mail it in the enclosed postage-paid return
envelope today.
We value your investment and thank you for the confidence you've placed in
Prudential Mutual Funds.
Sincerely,
Brian M. Storms
Brian M. Storms
PRESIDENT, Prudential Mutual Funds and Annuities
The BlackRock Government Income Trust, Gateway Center Three, 100 Mulberry
Street, Newark, New Jersey 07102-4077
<PAGE>
THE BLACKROCK GOVERNMENT INCOME TRUST
GATEWAY CENTER THREE
100 MULBERRY STREET
NEWARK, NEW JERSEY 07102-4077
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NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
--------------
To our Shareholders:
Notice is hereby given that a Special Meeting of Shareholders of The
BlackRock Government Income Trust (BlackRock Trust) will be held at 9:00 A.M.,
Eastern time, on January 23, 1998, at The Prudential Insurance Company of
America, Plaza Building, 751 Broad Street, Newark, New Jersey 07102, for the
following purposes:
1. To approve an Agreement and Plan of Reorganization whereby all of the
assets of BlackRock Trust will be transferred to the Short-Intermediate Term
Series (Short-Intermediate Series) of Prudential Government Securities Trust in
exchange for Class A shares of the Short-Intermediate Series and the assumption
by Short-Intermediate Series of all of the liabilities, if any, of BlackRock
Trust.
2. To consider and act upon any other business as may properly come before
the Meeting or any adjournment thereof.
Only shares of beneficial interest of BlackRock Trust of record at the close
of business on December 5, 1997, are entitled to notice of and to vote at this
Meeting or any adjournment thereof.
S. JANE ROSE
SECRETARY
Dated: December 15, 1997
WHETHER OR NOT YOU EXPECT TO ATTEND THE MEETING, PLEASE SIGN AND PROMPTLY
RETURN THE ENCLOSED PROXY IN THE ENCLOSED SELF-ADDRESSED STAMPED ENVELOPE.
IN ORDER TO AVOID THE ADDITIONAL EXPENSE OF FURTHER SOLICITATION, WE ASK
YOUR COOPERATION IN MAILING IN YOUR PROXY PROMPTLY.
<PAGE>
PRUDENTIAL GOVERNMENT SECURITIES TRUST--
SHORT-INTERMEDIATE TERM SERIES
PROSPECTUS
AND
THE BLACKROCK GOVERNMENT INCOME TRUST
PROXY STATEMENT
GATEWAY CENTER THREE
100 MULBERRY STREET
NEWARK, NEW JERSEY 07102-4077
(800) 225-1852
--------------
The BlackRock Government Income Trust (BlackRock Trust) is an open-end,
diversified, management investment company. Prudential Government Securities
Trust (Government Securities Trust) is an open-end, diversified, management
investment company, comprised of three separate series, one of which is the
Short-Intermediate Term Series (Short-Intermediate Series). Both BlackRock Trust
and Government Securities Trust (collectively, the Funds) are managed by
Prudential Investments Fund Management LLC (PIFM or the Manager), formerly known
as Prudential Mutual Fund Management LLC, and have the same office address. The
investment objective of BlackRock Trust is to provide low volatility of net
asset value and high monthly income. The investment objective of
Short-Intermediate Series is to achieve a high level of income consistent with
providing reasonable safety.
This Prospectus and Proxy Statement is being furnished to shareholders of
BlackRock Trust in connection with an Agreement and Plan of Reorganization (the
Plan), whereby Short-Intermediate Series will acquire all of the assets of
BlackRock Trust and assume the liabilities, if any, of BlackRock Trust. If the
Plan is approved by BlackRock Trust's shareholders, all shareholders of
BlackRock Trust will receive Class A shares of Short-Intermediate Series equal
in value to the Class A or Class C shares of BlackRock Trust held by them, and
BlackRock Trust will be terminated. Shareholders of Short-Intermediate Series
are not being asked to vote on the Plan.
This Prospectus and Proxy Statement sets forth concisely information about
Government Securities Trust and Short-Intermediate Series that prospective
investors should know before investing. This Prospectus and Proxy Statement is
accompanied by the Prospectus of Government Securities Trust (Short-Intermediate
Series), dated February 3, 1997, as supplemented on March 17 and September 8,
1997, which Prospectus is incorporated by reference herein. The Prospectus of
BlackRock Trust, dated August 29, 1997, as supplemented on September 8, 1997 and
October 27, 1997, which Prospectus is incorporated by reference herein, the
Annual Report to Shareholders of BlackRock Trust for the fiscal year ended June
30, 1997, the Annual Report to Shareholders of Government Securities Trust for
the fiscal year ended November 30, 1996, the Semi-Annual Report to Shareholders
of Government Securities Trust for the six months ended May 31, 1997, and the
Statement of Additional Information of Government Securities Trust, dated
February 3, 1997, have been filed with the Securities and Exchange Commission
(SEC), and are available without charge upon written request to Prudential
Mutual Fund Services LLC, Raritan Plaza One, Edison, New Jersey 08837 or by
calling the toll-free number shown above. Additional information contained in a
Statement of Additional Information dated December 15, 1997, forming a part of
Government Securities Trust's Registration Statement on Form N-14, has been
filed with the SEC, is incorporated herein by reference and is available without
charge upon request to the address or telephone number shown above.
This Prospectus and Proxy Statement will first be mailed to shareholders on
or about December 17, 1997.
Investors are advised to read and retain this Prospectus and Proxy Statement
for future reference.
--------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus and Proxy Statement is December 15, 1997.
<PAGE>
PRUDENTIAL GOVERNMENT SECURITIES TRUST--
SHORT-INTERMEDIATE TERM SERIES
THE BLACKROCK GOVERNMENT INCOME TRUST
GATEWAY CENTER THREE
100 MULBERRY STREET
NEWARK, NEW JERSEY 07102-4077
--------------
PROSPECTUS AND PROXY STATEMENT DATED DECEMBER 15, 1997
--------------
SYNOPSIS
The following synopsis is a summary of certain information contained
elsewhere in this Prospectus and Proxy Statement and the Agreement and Plan of
Reorganization (the Plan) and is qualified by reference to the more complete
information contained herein as well as in the Prospectus of The BlackRock
Government Income Trust (BlackRock Trust) and the enclosed Prospectus of the
Short-Intermediate Term Series (Short-Intermediate Series) of Prudential
Government Securities Trust (Government Securities Trust). Shareholders should
read the entire Prospectus and Proxy Statement carefully.
GENERAL
This Prospectus and Proxy Statement is furnished by the Trustees of
BlackRock Trust in connection with the solicitation of Proxies for use at a
Special Meeting of Shareholders of BlackRock Trust (the Meeting) to be held at
9:00 A.M. on January 23, 1998 at The Prudential Insurance Company of America,
Plaza Building, 751 Broad Street, Newark, New Jersey 07102. The purpose of the
Meeting is to approve the Plan whereby all of the assets of BlackRock Trust will
be acquired by, and the liabilities, if any, of BlackRock Trust will be assumed
by Short-Intermediate Series, in exchange solely for Class A shares of
beneficial interest of Short-Intermediate Series, and such other business as may
properly come before the Meeting or any adjournment thereof. The Plan is
attached to this Prospectus and Proxy Statement as Appendix B.
Approval of the Plan requires the affirmative vote of a majority of shares
of BlackRock Trust outstanding and entitled to vote. Shareholders vote in the
aggregate and not by separate class within BlackRock Trust. Approval of the Plan
by the shareholders of Short-Intermediate Series is not required and the Plan is
not being submitted for their approval.
THE PROPOSED REORGANIZATION
The Boards of Trustees of Government Securities Trust and of BlackRock Trust
have approved the Plan, which provides for the transfer of all of the assets of
BlackRock Trust in exchange solely for Class A shares of Short-Intermediate
Series and the assumption by Short-Intermediate Series of the liabilities, if
any, of BlackRock Trust. Following approval by BlackRock Trust's shareholders,
if obtained, Class A shares of Short-Intermediate Series will be distributed to
Class A and Class C shareholders of BlackRock Trust, and BlackRock Trust will be
terminated. The reorganization will become effective as soon as practicable
after the Meeting. BlackRock Trust's Class A and Class C shareholders will
receive the number of full and fractional Class A shares of Short-Intermediate
Series equal in value (rounded to the third decimal place) to such shareholder's
Class A and Class C shares of BlackRock Trust as of the closing date.
2
<PAGE>
REASONS FOR THE REORGANIZATION
There are a number of similarities between BlackRock Trust and
Short-Intermediate Series that led to consideration of the Plan. The following
are among the reasons for the reorganization, which was proposed by PIFM, the
Manager of each Fund:
BLACKROCK TRUST HAS BEEN UNABLE TO ATTRACT AND RETAIN SIGNIFICANT
ASSETS. Since commencement of operations in 1991, BlackRock Trust has been
unable to attract and retain significant assets. Since the end of its first
fiscal period that ended June 30, 1992, the assets of BlackRock Trust have
continuously declined. As of August 31, 1997, BlackRock Trust's assets were
approximately $27,817,000, with 2,423 shareholders. As a result, BlackRock Trust
has been operating with relatively higher expense ratios. The Distributor of
BlackRock Trust has agreed to limit distribution fees with respect to the Class
A and Class C shares, respectively, to no more than .15 of 1% and .75 of 1% of
the average daily net assets of such Class A shares and Class C shares for
BlackRock Trust's current fiscal year. Because of its size, BlackRock Trust does
not enjoy the economies of scale of Short-Intermediate Series. The Manager
believes BlackRock Trust's situation is not likely to improve and although the
Distributor's current fee waiver has been in place for some time for BlackRock
Trust, the waiver is voluntary, is not specified as to duration and could
therefore be eliminated at any time.
SHORT-INTERMEDIATE SERIES AND BLACKROCK TRUST HAVE SIMILAR INVESTMENT
POLICIES. Government Securities Trust and BlackRock Trust are open-end,
diversified, management investment companies. Short-Intermediate Series and
BlackRock Trust invest primarily in U.S. Government securities, including U.S.
Treasury Bills, Notes, Bonds and other debt securities issued by the U.S.
Treasury, and obligations issued or guaranteed by the U.S. Government, its
agencies and instrumentalities. Furthermore, each Fund may invest in fixed rate
and adjustable rate mortgage-backed securities, asset-backed securities and
corporate debt securities (although the rating requirements for investing in any
such instruments are not the same for the two Funds). See "Certain Differences
Between BlackRock Trust and Short-Intermediate Series" and "Investment
Objectives and Policies" below.
AFTER IMPLEMENTATION OF THE PLAN, THE FORMER SHAREHOLDERS OF BLACKROCK TRUST
AND SHORT-INTERMEDIATE SERIES MAY BENEFIT FROM REDUCED EXPENSES RESULTING FROM
GREATER ECONOMIES OF SCALE. The Boards of Trustees of BlackRock Trust and
Government Securities Trust believe that the reorganization may achieve certain
economies of scale that BlackRock Trust alone cannot realize because of its
small size, and that Short-Intermediate Series would realize the benefits of a
larger asset base in exchange for its shares. The combination of BlackRock Trust
and Short-Intermediate Series would eliminate certain duplicate expenses, such
as those incurred in connection with separate audits and the preparation of
separate financial statements for BlackRock Trust and Short-Intermediate Series,
and reduce other expenses, because their expenses would be spread across a
larger asset base.
3
<PAGE>
The ratios of total operating expenses to average net assets for Class A
shares of Short-Intermediate Series and Class A and Class C shares of BlackRock
Trust for the periods indicated below were as follows:
<TABLE>
<CAPTION>
CLASS A CLASS C
------- -------
<S> <C> <C>
SHORT INTERMEDIATE SERIES:
Fiscal Year Ended November 30, 1996....................... 1.01% N/A
Six Months Ended May 31, 1997 (1)......................... 0.93% N/A
BLACKROCK TRUST (AFTER FEE WAIVER):
Fiscal Year Ended June 30, 1997 (without interest expense)
(2)(3)................................................... 1.56% 2.16%
Fiscal Year Ended June 30, 1997 (with interest
expense)(3).............................................. 3.45% 4.05%
</TABLE>
- ------------
(1) Figures are annualized and unaudited.
(2) After consideration of distribution fee waiver. Without the voluntary
distribution fee waiver by the Distributor, total operating expenses would
have been 1.71% for Class A shares and 2.41% for Class C shares. See "Fees
and Expenses--Distribution Fees" below.
(3) Total fund expenses are shown above both including and not including
interest expenses which vary from year to year based on the level of
borrowings BlackRock Trust incurs.
AFTER IMPLEMENTATION OF THE PLAN, SHAREHOLDERS OF BLACKROCK TRUST SHOULD
BENEFIT FROM REDUCED FEES AND SALES LOADS. If the Plan is implemented, each
shareholder of BlackRock Trust will receive the number of full and fractional
Class A shares of Short-Intermediate Series equal to the net asset value
(rounded to the third decimal place) of such shareholder's Class A and Class C
shares as of the closing date. PIFM serves as manager for each of the Funds.
However, the management fee paid by Short-Intermediate Series is lower than the
management fee paid by BlackRock Trust. Short-Intermediate Series pays a fee at
an annual rate of .40 of 1% of its average daily net assets, while BlackRock
Trust pays a fee of .50 of 1% of its average daily net assets. Therefore, if the
Plan is implemented, shareholders of BlackRock Trust will benefit from lower
management fees.
Furthermore, Class C shares of BlackRock Trust currently are subject to
maximum contingent deferred sales loads of up to 1% during the first year after
purchase and Class A shares currently are subject to an initial sales charge of
3% of the public offering price. If the Plan is implemented, BlackRock Trust's
shareholders will receive Class A shares of Short-Intermediate Series, which are
not subject to a contingent deferred sales load or an initial sales charge on
purchases. Therefore, Class A and Class C shareholders of BlackRock Trust should
benefit from the elimination of sales loads if the reorganization is approved
(Class A shareholders would benefit to the extent they would make additional
purchases of shares).
Class C shares of BlackRock Trust currently are subject to a distribution
fee of .75 of 1% after the fee waiver and 1% if no fee waiver. Class A shares of
BlackRock Trust currently are subject to a distribution fee of .15 of 1% after
the fee waiver and .30 of 1% if no fee waiver. Class A shares of
Short-Intermediate Series currently are subject to a maximum distribution fee of
.25 of 1%. Accordingly, Class C shareholders of BlackRock Trust should benefit
from reduced distribution fees. With respect to Class A shareholders of
BlackRock Trust, there can be no assurance that the Distributor would continue
to limit its fee.
SHORT-INTERMEDIATE SERIES HAS A YIELD COMPARABLE TO BLACKROCK
TRUST. Short-Intermediate Series has historically provided a comparable yield
to BlackRock Trust and Short-Intermediate Series has lower expense ratios than
BlackRock Trust due to its appreciably larger size. The following table presents
the 30 day yield for BlackRock Trust and Short-Intermediate Series for the
thirty-day period ended October 31, 1997.
4
<PAGE>
<TABLE>
<CAPTION>
BLACKROCK TRUST SHORT-INTERMEDIATE SERIES
30 DAY 30 DAY
CLASS SEC YIELD SEC YIELD
----- --------------------- -------------------------
<S> <C> <C>
A 4.79% 6.06%
C 4.41% N/A
</TABLE>
- ------------
Past performance is not a guarantee of future results.
SHORT-INTERMEDIATE SERIES HAS ACHIEVED AVERAGE ANNUAL TOTAL RETURNS HIGHER
THAN BLACKROCK TRUST. The following table reflects each Fund's respective
average annual total returns after application of the distribution fee waivers+
as of October 31, 1997.
<TABLE>
<CAPTION>
CLASS A CLASS C
----------- -----------
<S> <C> <C>
SHORT-INTERMEDIATE SERIES:
One Year Ended........................................................................... 7.14% N/A
Three Years Ended........................................................................ 7.61% N/A
Five Years Ended......................................................................... 5.67% N/A
Ten Years Ended.......................................................................... 7.31% N/A
BLACKROCK TRUST:*
One Year Ended........................................................................... 2.64% 4.14%
Three Years Ended........................................................................ 5.17% 5.56%
Five Years Ended......................................................................... 4.06% N/A
Since Inception*......................................................................... 4.38% 5.56%
</TABLE>
- ------------
+ See "Fees and Expenses--Distribution Fees" below for information on the
Distributor's voluntary fee waiver.
* The inception period is September 9, 1991 for Class A shares and November 1,
1994 for Class C shares.
Average annual total 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.
OTHER SIMILARITIES. As previously explained, PIFM serves as the manager for
both BlackRock Trust and Short-Intermediate Series. In addition, the Funds have
the same distributor, Prudential Securities Incorporated (PSI or the
Distributor) and the same transfer agent, Prudential Mutual Fund Services LLC
(PMFS or the Transfer Agent). PMFS has an identical fee structure in place for
BlackRock Trust and for Short-Intermediate Series, including the same annual fee
per shareholder account, the same new account set-up fee for each
manually-established account and the same monthly income zero balance account
fee per shareholder account. Finally, BlackRock Trust and Short-Intermediate
Series each declares daily and pays monthly dividends of net investment income,
if any, and makes distributions of any net capital gains at least annually.
For the reasons set forth below under "The Proposed Transaction--Reasons for
the Reorganization Considered by the Trustees," the Trustees of BlackRock Trust
and Government Securities Trust, including those Trustees who are not
"interested persons" (Independent Trustees), as that term is defined in the
Investment Company Act of 1940, as amended (Investment Company Act), have
concluded that the reorganization would be in the best interests of the
shareholders of BlackRock Trust and Short-Intermediate Series and that the
interests of shareholders of BlackRock Trust and Short-Intermediate Series will
not be diluted as a result of the proposed transaction. Accordingly, the Board
of Trustees of BlackRock Trust and Short-Intermediate Series each recommends
approval of the Plan.
5
<PAGE>
CERTAIN DIFFERENCES BETWEEN BLACKROCK TRUST AND SHORT-INTERMEDIATE SERIES
There are a number of differences between BlackRock Trust and
Short-Intermediate Series. First, although the investment objectives of the
Funds are very similar, they do differ in some respects. The investment
objective of BlackRock Trust is to provide low volatility of net asset value and
high monthly income. The investment objective of Short-Intermediate Series is to
achieve a high level of income consistent with providing reasonable safety. Both
Funds seek to achieve their respective investment objective by investing, under
normal circumstances, at least 65% of their 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 issued or guaranteed by
the U.S. Government, its agencies and instrumentalities. In addition, each Fund
may invest the remaining 35% (35% basket) of its assets in fixed rate and
adjustable rate mortgage-backed securities, asset-backed securities and
corporate debt securities. Also, BlackRock Trust, but not Short-Intermediate
Series, may invest its 35% basket in high quality money market securities.
However, each Fund has different rating standards with respect to its 35%
basket. BlackRock Trust may only invest in instruments rated AAA by Standard &
Poor's Rating Group (S&P) or Aaa by Moody's Investors Service, Inc. (Moody's).
Short-Intermediate Series may invest in instruments rated A or better by S&P or
Moody's. In addition, BlackRock Trust may invest in any high quality debt
securities meeting the ratings standards, while Short-Intermediate Series is
limited to those kinds of securities listed above. Also, BlackRock Trust may
invest only 20% of its total assets in unrated securities deemed of comparable
quality to the rated securities by the investment adviser, while
Short-Intermediate Series may invest up to 35% of its total assets in unrated
securities deemed of comparable quality to the rated securities by the
investment adviser. Finally, BlackRock Trust may invest up to 10% of its total
assets in foreign securities, including mortgage-backed securities and
asset-backed securities issued by foreign entities. Although there is no limit
on the amount that Short-Intermediate Series may invest in foreign securities,
Short-Intermediate Series does not invest a substantial portion of its assets in
foreign securities.
Another important difference is that although both Short-Intermediate Series
and BlackRock Trust have similar abilities to borrow money (see "Investment
Objectives and Policies" below) only BlackRock Trust has historically used
borrowings for investment purposes. Short-Intermediate Series does not currently
intend to borrow money for investment purposes.
In addition, the Funds' management fees are different. The management fee
for BlackRock Trust is at an annual rate of .50 of 1% of BlackRock Trust's
average daily net assets. The management fee for Short-Intermediate Series is at
an annual rate of .40 of 1% of Short-Intermediate Series' average daily net
assets. If the Plan is approved, the management fee rate of the combined fund
will be lower than that currently being paid by BlackRock Trust. See "Fees and
Expenses--Management Fees" below.
The Funds' distribution fees also are different. As distributor for
BlackRock Trust, PSI may be reimbursed for its distribution-related expenses at
an annual rate of up to .30 of 1% of the average daily net assets of the Class A
shares of BlackRock Trust. For distributing Class C shares of BlackRock Trust,
PSI may be paid at an annual rate of up to 1% of the Class C shares' average
daily net assets. Currently, PSI is limiting its distribution-related fees to
.15 of 1% and .75 of 1% of the average daily net assets of the Class A and Class
C shares, respectively, of BlackRock Trust.
Short-Intermediate Series pays PSI for distributing Class A shares an annual
distribution and service fee at the annual rate of the lesser of (a) .25 of 1%
per annum of the aggregate sales of Short-Intermediate Series' Class A shares,
not including shares issued in connection with reinvestment of dividends and
capital gains distributions, issued on or after July 1, 1985 (the effective date
of the Class A Plan) less the aggregate
6
<PAGE>
net asset value of any such shares redeemed, or (b) .25 of 1% of the average
daily net assets of Short-Intermediate Series' Class A shares issued after July
1, 1985. If the Plan is approved, former Class A shareholders of BlackRock Trust
will be subject to a distribution fee that is higher (without the limitation
agreed to by PSI) than that currently paid by BlackRock Trust for distributing
its Class A shares. On the other hand, former Class C shareholders of BlackRock
Trust will be subject to a distribution fee that is less than the distribution
fee paid by BlackRock Trust for distributing Class C shares. See "Fees and
Expenses-- Distribution Fees" below.
Finally, although PIFM serves as the investment manager to each Fund, the
Funds' subadvisers (also called investment adviser) are not the same. BlackRock
Trust's subadviser is BlackRock Financial Management, Inc. (BFM). Under a
subadvisory agreement among BlackRock Trust, PIFM and BFM, BFM furnishes
investment advisory services in connection with the management of BlackRock
Trust's portfolio and is compensated by PIFM for its services at the annual rate
of .25 of 1% of BlackRock Trust's average daily net assets. Government
Securities Trust's subadviser is The Prudential Investment Corporation, doing
business as Prudential Investments (PI). Under a subadvisory agreement with
PIFM, PI furnishes investment advisory services in connection with the
management of Government Securities Trust and is reimbursed by PIFM for its
reasonable costs and expenses incurred in providing such services.
STRUCTURE OF BLACKROCK TRUST AND GOVERNMENT SECURITIES TRUST--SHORT-INTERMEDIATE
SERIES
BlackRock Trust and Government Securities Trust are each authorized to issue
an unlimited number of shares of beneficial interest, $.01 par value per share.
Government Securities Trust offers two series in addition to the
Short-Intermediate Series. BlackRock Trust has divided its shares into three
classes, designated Class A, Class B and Class C. Short-Intermediate Series is
divided into two classes, designated Class A and Class Z. Except for Class B
shares of BlackRock Trust, each class of shares is currently being offered by
the respective Funds. Each class of shares represents an interest in the same
assets of the respective Fund, as the case may be, and is identical in all
respects except that (i) each class is subject to different expenses which may
affect performance, (ii) 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, (iii)
each class has a different exchange privilege and (iv) Class Z shares are
offered exclusively for sale by Short-Intermediate Series to a limited group of
investors. (For more information on Class Z shares of Short-Intermediate Series,
please see the Prospectus of Government Securities Trust (Short-Intermediate
Series), dated February 3, 1997.) The distribution systems for Class A and Class
C shares, as applicable, of each Fund are identical.
Pursuant to each Fund's Declaration of Trust, each Fund's Board of Trustees
may authorize the creation of additional series of shares, and classes within
such series, with such preferences, privileges, limitations and voting and
dividend rights as that Fund's Board of Trustees may determine.
Shares of each 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 each Fund under certain circumstances. There are no
conversion, preemptive or other subscription rights. In the event of
liquidation, each share of each Fund is entitled to its portion of all of that
Fund's assets after all debt and expenses of that Fund have been paid. Since
BlackRock Trust's Class C shares generally bear higher distribution expenses
than Class A shares, the liquidation proceeds to shareholders of Class C are
likely to be lower than to Class A shareholders. Neither Fund's shares have
cumulative voting rights for the election of Trustees. BlackRock Trust's Class A
and Class C shareholders will receive the number of full and fractional Class A
shares of Short-Intermediate Series equal in value (rounded to the third decimal
place) to such shareholders' Class A and Class C shares of BlackRock Trust as of
the closing date.
7
<PAGE>
If a stock certificate is desired by a shareholder of Short-Intermediate
Series or BlackRock Trust, it must be requested in writing for each purchase of
shares. Certificates will not be issued in connection with the reorganization.
Certificates are issued only for full shares. Shareholders who hold their shares
through Prudential Securities will not receive stock certificates.
It is the present intent of the Board of Trustees of each Fund not to hold
annual meetings of shareholders. Special meetings of shareholders will be called
if required under the Investment Company Act, a Fund's Declaration of Trust or
state law.
INVESTMENT OBJECTIVES AND POLICIES
Short-Intermediate Series' investment objective is to achieve a high level
of income consistent with providing reasonable safety. Short-Intermediate Series
seeks to achieve its objective by investing, under normal circumstances, 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 issued or guaranteed by the U.S. Government, its
agencies or instrumentalities, including, but not limited to, Government
National Mortgage Association (GNMA), Federal National Mortgage Association
(FNMA) and Federal Home Loan Mortgage Corporation (FHLMC) securities. Neither
the value nor the yield of Short-Intermediate Series' shares or of the U.S.
Government securities which may be invested in by Short-Intermediate Series is
guaranteed by the U.S. Government. It is currently anticipated that
Short-Intermediate Series will invest primarily in securities with maturities
ranging from 2 to 5 years, but depending on market conditions and changing
economic conditions, the Series may invest in securities of any maturity of 10
years or less. The dollar-weighted average maturity of the Short-Intermediate
Series' investments will be more than 2 but less than 5 years.
With respect to its 35% basket, Short-Intermediate Series may invest in
fixed rate and adjustable rate mortgage-backed securities, asset-backed
securities and corporate debt securities (among other privately issued
instruments) rated A or better by S&P or Moody's or comparably rated by a
Nationally Recognized Statistical Rating Organization (NRSRO) or, if unrated,
determined to be of comparable quality by the subadviser. For temporary
defensive purposes, Short-Intermediate Series may invest up to 100% of its
assets in cash, U.S. Government securities and high quality money market
instruments. Short-Intermediate Series may also engage in various strategies
using derivatives, including the use of put and call options on securities and
financial indices, transactions involving futures contracts and related options,
short selling and use of leverage, including reverse repurchase agreements and
dollar rolls, to attempt to increase return and/or protect against interest rate
changes. See "Principal Risk Factors--Hedging and Return Enhancement
Activities," below. Short-Intermediate Series may invest up to 15% of its net
assets in illiquid securities and may borrow an amount equal to no more than
33- 1/3% of the value of its total assets from banks or through dollar rolls or
reverse repurchase agreements to take advantage of investment opportunities, for
temporary, extraordinary or emergency purposes, or for the clearance of
transactions.
The investment objective of BlackRock Trust is to provide low volatility of
net asset value and high monthly income. BlackRock Trust seeks to achieve this
objective by investing under normal circumstances at least 65% of its total
assets in fixed-income 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 and
instrumentalities, including, but not limited to, GNMA, FNMA and FHLMC
securities. Neither the value nor the yield of BlackRock Trust's shares or of
the U.S. Government securities which may be invested in by BlackRock Trust is
guaranteed by the U.S. Government.
8
<PAGE>
With respect to its 35% basket, BlackRock Trust may invest in, among other
privately issued instruments, fixed rate and adjustable rate mortgage-backed
securities, asset-backed securities and corporate debt securities rated AAA by
S&P or Aaa by Moody's and money market instruments of a comparable short-term
rating. Up to 20% of BlackRock Trust's total assets may be invested in
securities which are unrated but deemed by BlackRock Trust's subadviser to be of
comparable credit quality to securities rated AAA by S&P or Aaa by Moody's and
up to 10% of BlackRock Trust's total assets may be invested in foreign
securities, including mortgage-backed securities and asset-backed securities
issued by foreign entities which are of comparable credit quality. BlackRock
Trust may also engage in various hedging and return enhancement strategies,
including short-selling and leverage and use derivatives and reverse repurchase
agreements and dollar rolls to increase investment return and/or protect against
interest rate changes and thus maintain the stability of its net asset value.
These strategies also include the purchase and sale of put and call options,
entering into interest rate futures contracts and related options, purchasing
Eurodollar instruments, interest rate transactions and lending portfolio
securities. See "Principal Risk Factors--Hedging and Return Enhancement
Activities," below. BlackRock Trust may invest up to 15% of its net assets in
illiquid securities and may borrow from banks and enter into reverse repurchase
agreements or dollar rolls of up to 33- 1/3% of the value of its total assets to
take advantage of investment opportunities and for temporary, extraordinary or
emergency purposes.
FEES AND EXPENSES
MANAGEMENT FEES. PIFM, the manager of each Fund and an indirect,
wholly-owned subsidiary of The Prudential Insurance Company of America
(Prudential), is compensated, pursuant to a management agreement with Government
Securities Trust, at an annual rate of .40 of 1% of the average daily net assets
of Short-Intermediate Series, and, pursuant to a management agreement with
BlackRock Trust, at an annual rate of .50 of 1% of the average daily net assets
of BlackRock Trust.
Under a subadvisory agreement among BlackRock Trust, PIFM and BFM, BFM
furnishes investment advisory services in connection with the management of
BlackRock Trust and is compensated by PIFM at the rate of .25 of 1% of BlackRock
Trust's average daily net assets.
Under a subadvisory agreement between PIFM and PI, PI furnishes investment
advisory services in connection with the management of Short-Intermediate Series
and is reimbursed by PIFM for its reasonable costs and expenses in providing
such investment advisory services. PIFM continues to have responsibility for all
investment advisory services pursuant to the management agreements for both
Funds and supervises PI's and BFM's performance of its services on behalf of
each Fund.
DISTRIBUTION FEES. PSI, a wholly-owned subsidiary of Prudential, serves as
the distributor of the Class A shares of Short-Intermediate Series and the Class
A and Class C shares of BlackRock Trust.
Under separate Distribution and Service Plans adopted by BlackRock Trust
(the Class A Plan and Class C Plan) pursuant to Rule 12b-1 under the Investment
Company Act, and approved by the shareholders of the applicable class of
BlackRock Trust, and under separate distribution agreements, PSI incurs the
expenses of distributing the Class A and Class C shares of BlackRock Trust.
Under a Distribution and Service Plan (the Class A Plan) adopted by
Short-Intermediate Series pursuant to Rule 12b-1 under the Investment Company
Act and approved by the Class A shareholders of Short-Intermediate Series, PSI
incurs the expenses of distributing the Class A shares of Short-Intermediate
Series. The distribution expenses incurred by PSI include (i) commissions and
account servicing fees, (ii) advertising expenses, (iii) the cost of printing
and mailing prospectuses, and (iv) indirect and overhead costs associated with
the sale of shares of each of Short-Intermediate Series and BlackRock Trust.
9
<PAGE>
Under BlackRock Trust's Class A Plan, BlackRock Trust may reimburse PSI for
distribution expenses at an annual rate of up to .30 of 1% of the average daily
net assets of BlackRock Trust's Class A shares. Under BlackRock Trust's Class C
Plan, BlackRock Trust may pay PSI for distribution expenses at an annual rate of
up to 1% of the average daily net assets of BlackRock Trust's Class C shares.
For the fiscal year ended June 30, 1997, PSI agreed, and for the fiscal year
ending June 30, 1998 PSI has agreed, to limit its distribution expenses to .15
of 1% of the average daily net assets for Class A shares, and, to .75 of 1% of
the average daily net assets for Class C shares.
Under Short-Intermediate Series' Class A Plan, Short-Intermediate Series
pays PSI for its distribution-related activities at the annual rate of the
lesser of (a) .25 of 1% per annum of the aggregate sales of Short-Intermediate
Series' Class A shares, not including shares issued in connection with
reinvestment of dividends and capital gains distributions, issued on or after
July 1, 1985 (the effective date of the Class A Plan) less the aggregate net
asset value of any such shares redeemed, or (b) .25 of 1% of the average daily
net assets of Short-Intermediate Series' Class A shares issued after July 1,
1985.
For the fiscal year ended November 30, 1996, and the six-month period ended
May 31, 1997, Short-Intermediate Series paid distribution expenses of .22% and
.20%, respectively, of the average daily net assets of the Class A shares. For
the fiscal year ended June 30, 1997, BlackRock Trust paid distribution expenses
of .15% and .75% of the average daily net assets of Class A and Class C shares,
respectively. The Funds record all payments made under the Plans as expenses in
the calculation of net investment income.
Under the Short-Intermediate Series' Class A Plan and BlackRock Trust's
Class C Plan, each class of shares, as applicable, is obligated to pay
distribution and/or service fees to PSI as compensation for distribution and
service activities, not as reimbursement for specific expenses incurred. If the
Distributor's expenses exceed its distribution and service fees, that 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.
OTHER EXPENSES. The Funds also pay certain other expenses in connection
with their operation, including transfer agency, accounting, legal, audit and
registration expenses. Although the basis for calculating these fees and
expenses is the same for Short-Intermediate Series and BlackRock Trust, the per
share effect on shareholder returns is affected by their relative size.
Combining BlackRock Trust with Short-Intermediate Series will reduce certain
expenses. For example, only one annual audit of the combined fund will be
required rather than separate audits of each Fund as currently required.
Furthermore, the distribution fee limitation, with respect to BlackRock Trust is
voluntary and may be discontinued. For a discussion of the level of distribution
fee waivers, see the notes to the chart "Expense Ratios--Annual Fund Operating
Expenses (as a percentage of average net assets)" below.
SHAREHOLDER TRANSACTION EXPENSES. The following tables show the fees that
an investor would be subject to in connection with a purchase, redemption or
exchange of shares of both Short-Intermediate Series and BlackRock Trust and on
a pro forma basis, giving effect to the reorganization. If the Plan is
implemented, shareholders of BlackRock Trust will receive Class A shares of
Short-Intermediate Series, regardless of the class of shares of BlackRock Trust
held prior to the reorganization.
10
<PAGE>
BLACKROCK TRUST
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES CLASS A SHARES CLASS C SHARES
-------------- -------------------------------
<S> <C> <C>
Maximum Sales Load Imposed on Purchases (as a percentage of offering
price)............................................................. 3% None
Maximum Deferred Sales Load (as a percentage of original purchase
price or redemption proceeds, whichever is lower).................. None 1% during the first year and 0%
thereafter
Maximum Sales Load Imposed on Reinvested Dividends.................. None None
Redemption Fees..................................................... None None
Exchange Fees....................................................... None None
</TABLE>
SHORT-INTERMEDIATE SERIES
AND PRO FORMA
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES CLASS A SHARES
---------------
<S> <C>
Maximum Sales Load Imposed on Purchases........................................................... None
Maximum Deferred Sales Load....................................................................... None
Maximum Sales Load Imposed on Reinvested Dividends................................................ None
Redemption Fees................................................................................... None
Exchange Fees..................................................................................... None
</TABLE>
EXPENSE RATIOS. For the fiscal year ended November 30, 1996 and the six
month period ended May 31, 1997, total expenses as a percentage of average net
assets of Short-Intermediate Series were 1.01% and .93% (annualized),
respectively, for Class A shares. For the fiscal year ended June 30, 1997, total
expenses as a percentage of average net assets of BlackRock Trust were 1.56% and
2.16% for Class A and Class C shares, respectively. Without the distribution fee
limitation, such ratios would have been 1.71% and 2.41% for the Class A and
Class C shares, respectively. Total fund operating expenses for BlackRock Trust
do not include interest expenses which vary from year to year based on the level
of borrowings BlackRock Trust incurs. Total fund expenses including interest
expense for the fiscal year ended June 30, 1997 were 3.45% and 4.05% for Class A
and Class C shares, respectively.
11
<PAGE>
Following the reorganization, the actual expense ratios of the combined fund
are expected to be lower than those of BlackRock Trust for the fiscal year ended
June 30, 1997 (taking into account the distribution fee limitation). Set forth
below is a comparison of Short-Intermediate Series' and BlackRock Trust's
operating expenses for, in the case of Short-Intermediate Series, the fiscal
year ended November 30, 1996 and, in the case of BlackRock Trust, the fiscal
year ended June 30, 1997. The ratios are also shown on a pro forma (estimated)
combined basis, giving effect to the reorganization.
<TABLE>
<CAPTION>
PRO FORMA
COMBINED (BLACKROCK TRUST
ANNUAL FUND SHORT-INTERMEDIATE AND SHORT-INTERMEDIATE
OPERATING EXPENSES (AS A SERIES* BLACKROCK TRUST** SERIES)
PERCENTAGE OF ----------------- -------------------- -------------------------
AVERAGE NET ASSETS) CLASS A CLASS A CLASS C CLASS A
<S> <C> <C> <C> <C>
Management Fees................................ .40% .50% .50% .40%
12b-1 Fees (After Waiver)+..................... .22% .15% .75% .20%
Other Expenses................................. .39% .91% .91% .33%
--- --- --- ---
Total Fund Operating Expenses++
(After Waiver)................................ 1.01% 1.56% 2.16% .93%
--- --- --- ---
--- --- --- ---
</TABLE>
- ---------------
* Based on expenses incurred during the fiscal year ended November 30, 1996.
** Based on expenses incurred during the fiscal year ended June 30, 1997.
+ Although the Class A and Class C Distribution and Service Plans provide that
BlackRock Trust may pay a distribution fee of up to .30 of 1% and 1% per
annum of the average daily net assets of the Class A and Class C shares,
respectively, the Distributor has agreed to limit its distribution fees with
respect to the Class A and Class C shares of BlackRock Trust to .15 of 1%
and .75 of 1% of the average daily net assets of the Class A shares and
Class C shares, respectively, for BlackRock Trust's fiscal year ending June
30, 1998. Total Fund Operating Expenses without such limitations would be
1.71% and 2.41% for Class A and Class C shares, respectively, for BlackRock
Trust. There has been no distribution fee limitation or waiver for
Short-Intermediate Series.
++ BlackRock Trust's total fund operating expenses do not include interest
expenses which vary from year to year based on the level of borrowings that
BlackRock Trust incurs. BlackRock Trust's total fund expenses including
interest expense for the fiscal year ended June 30, 1997 were 3.45% and
4.05% for Class A and Class C shares, respectively. Likewise, the Pro Forma
total fund expenses including interest expense would be 1.20%.
The example set forth below shows the expenses that an investor in the
combined fund (assuming approval by shareholders of BlackRock Trust) would pay
on a $1,000 investment, based upon the pro forma ratios set forth above.
<TABLE>
<CAPTION>
EXAMPLE 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ----------------------------------------------------------------------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000 investment,
assuming (1) 5% annual return and (2) redemption at the end of
each time period
Class A.................................................................. $ 9 $ 30 $ 51 $ 114
</TABLE>
THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
PURCHASES AND REDEMPTIONS
Purchases of shares of BlackRock Trust and Short-Intermediate Series are
made through Prudential Securities, Pruco Securities Corporation (Prusec) or
directly from the respective Fund, through its Transfer Agent, PMFS, at the net
asset value per share next determined after receipt of a purchase order by the
Transfer Agent or Prudential Securities plus, for BlackRock Trust, a sales
charge which may be imposed either at the time of purchase (Class A shares) or
on a deferred basis (Class C shares).
12
<PAGE>
The minimum initial investment for Class A and Class C shares of BlackRock
Trust is $2,500 and $5,000, respectively, and the minimum subsequent investment
is $100 for both classes. Class A shares of BlackRock Trust are sold with an
initial sales charge of up to 3% of the public offering price. Class C shares of
BlackRock Trust are sold without an initial sales charge and, for one year after
purchase, are subject to a contingent deferred sales charge of 1% on the lower
of the amount invested or the redemption proceeds on redemptions within one year
of purchase. Class C shares of BlackRock Trust are subject to higher
distribution-related expenses than Class A shares.
The minimum initial investment for Class A shares of Short-Intermediate
Series is $1,000 and the minimum subsequent investment is $100. Class A shares
of Short-Intermediate Series are sold without a sales charge.
Shares of each Fund may be redeemed at any time at the net asset value next
determined after Prudential Securities or the Transfer Agent receives the sell
order. As indicated above, the proceeds of redemptions of Class C shares of
BlackRock Trust may be subject to a contingent deferred sales charge. However,
Class C shareholders of BlackRock Trust will receive the number of full and
fractional Class A shares of Short-Intermediate Series equal to the net asset
value (rounded to the third decimal place) of such shareholders' Class C shares
as of the closing date. NO CONTINGENT DEFERRED SALES CHARGE WILL BE IMPOSED IN
CONNECTION WITH THE REORGANIZATION. FOLLOWING THE REORGANIZATION, SUCH
SHAREHOLDERS' CLASS A SHARES OF SHORT-INTERMEDIATE SERIES WILL NOT BE SUBJECT TO
ANY CONTINGENT DEFERRED SALES CHARGES.
EXCHANGE PRIVILEGES
The exchange privileges available to shareholders of Short-Intermediate
Series are substantially similar to the exchange privileges of shareholders of
BlackRock Trust. Shareholders of both Short-Intermediate Series and BlackRock
Trust have an exchange privilege with certain other Prudential Mutual Funds,
including one or more specified money market funds, subject to the minimum
investment requirements of such funds. Class A shares of each Fund may be
exchanged for Class A shares of another fund on the basis of relative net asset
value. Class C shares may be exchanged only for Class C shares of another fund.
Therefore, assuming that the reorganization takes place, former Class C
shareholders of BlackRock Trust who become Class A shareholders of
Short-Intermediate Series will only be able to exchange their Class A shares for
Class A shares of other Prudential Mutual Funds. No sales charge will be imposed
at the time of the exchange. Class C shares of BlackRock Trust may not be
exchanged into money market funds other than Prudential Special Money Market
Fund, Inc. An exchange will be treated as a redemption and purchase for tax
purposes.
DIVIDENDS AND DISTRIBUTIONS
Each Fund expects to declare daily and to pay dividends of net investment
income, if any, monthly and make distributions at least annually of any net
capital gains. Shareholders of Short-Intermediate Series and BlackRock Trust
receive dividends and other distributions in additional shares of
Short-Intermediate Series and BlackRock Trust, respectively, unless they elect
to receive them in cash. A BlackRock Trust shareholder's election with respect
to reinvestment of dividends and distributions in BlackRock Trust will be
automatically applied with respect to the shares of Short-Intermediate Series he
or she receives.
FEDERAL TAX CONSEQUENCES OF PROPOSED REORGANIZATION
The Funds have received an opinion of Gardner, Carton & Douglas to the
effect that the proposed reorganization will constitute a tax-free
reorganization within the meaning of Section 368(a)(1)(C) of the Internal
Revenue Code of 1986, as amended (the Internal Revenue Code). Accordingly, no
gain or loss will be recognized to Short-Intermediate Series or BlackRock Trust
upon the transfer of assets solely in return
13
<PAGE>
for shares of Short-Intermediate Series and Short-Intermediate Series'
assumption of liabilities, if any, or to shareholders of BlackRock Trust upon
their receipt of shares of Short-Intermediate Series in return for their shares
of BlackRock Trust. The tax basis for the shares of Short-Intermediate Series
received by BlackRock Trust's shareholders will be the same as their tax basis
for the shares of BlackRock Trust to be constructively surrendered in exchange
therefor. In addition, the holding period of the shares of Short-Intermediate
Series to be received pursuant to the reorganization will include the period
during which the shares of BlackRock Trust to be constructively surrendered in
exchange therefor were held, provided the latter shares were held as capital
assets by the shareholders on the date of the exchange. See "The Proposed
Transaction--Tax Considerations."
PRINCIPAL RISK FACTORS
As the investment policies of both Funds are similar, the risks associated
with investments in either Fund also are similar. Below is a summary of such
risks. For a more complete discussion of the risks attendant to an investment in
Short-Intermediate Series, please see Short-Intermediate Series' Prospectus,
which accompanies this Prospectus and Proxy Statement and is incorporated herein
by reference.
RATINGS
As described earlier, up to 35% of the assets of each of Short-Intermediate
Series and BlackRock Trust may be invested in fixed rate and adjustable rate
mortgage-backed securities, asset-backed securities and corporate debt
securities meeting certain rating standards and money market instruments meeting
the particular rating standards. The minimum rating for securities in
Short-Intermediate Series' portfolio are securities rated A or better by Moody's
or S&P or comparably rated by any other NRSRO, or, if unrated, determined to be
of comparable quality by the investment adviser. The minimum rating standard for
securities in BlackRock Trust's portfolio is higher, that is, securities must be
rated AAA by S&P or Aaa by Moody's, and only up to 20% of total assets may be
invested in securities that are unrated but deemed of comparable quality by the
investment adviser.
Bonds that are rated A by Moody's are judged to possess many favorable
investment attributes and are considered as upper medium grade obligations.
Factors giving security to principal and interest are considered adequate, but
elements may be present that suggest a susceptibility to impairment some time in
the future. Debt rated A by S&P has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than bonds in higher rated
categories. Securities that are rated Aaa by Moody's or AAA by S&P are judged to
be of high quality. They carry the smallest degree of investment risk and their
capacity to pay interest and repay principal is extremely strong.
HEDGING AND RETURN ENHANCEMENT ACTIVITIES
Short-Intermediate Series may engage in various portfolio strategies,
including using derivatives, to reduce certain risks of its investments and to
attempt to enhance return. These strategies include the purchase of and sale of
put and call options on securities and indices and the purchase and sale of
futures contracts and related options (including futures contracts on U.S.
Government securities and indices and options thereon), enter into repurchase
agreements, enter into reverse repurchase agreements and dollar rolls, lend its
securities, make short sales, purchase and sell securities on a when-issued and
delayed delivery basis, engage in interest rate swap transactions and borrow
money in all instances subject to certain
14
<PAGE>
limitations. Short-Intermediate Series' ability to use these strategies may be
limited by market conditions, regulatory limits and tax considerations, and
there can be no assurance that any of these strategies will succeed.
Participation in the options and futures markets involves investment risks
and transaction costs to which Short-Intermediate Series would not be subject
absent the use of these strategies. Short-Intermediate Series, and thus its
investors, may lose money through the unsuccessful use of these strategies. If
the investment adviser's prediction of movements in the direction of the
securities and interest rate markets is inaccurate, the adverse consequences to
the Short-Intermediate Series may leave the Short-Intermediate Series in a worse
position than if such strategies were not used. Risks inherent in the use of
options and 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 and securities prices; (2) imperfect correlation
between the price of options and futures contracts and options thereon and
movements in the prices of the securities 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; (5) the possible need to defer closing
out certain hedged positions to avoid adverse tax consequences; and (6) the
possible inability of Short-Intermediate Series 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 Short-Intermediate Series to sell the security at a
disadvantageous time, due to the requirement that Short-Intermediate Series
maintain "cover" or segregate securities in connection with hedging
transactions.
BlackRock Trust may also engage in various portfolio strategies, including
utilizing derivatives, reverse repurchase agreements, dollar rolls, purchasing
and selling call and put options, entering into interest rate futures contracts
and related options, engaging in short-selling, purchasing Eurodollar
instruments, interest rate transactions and lending portfolio securities.
BlackRock Trust's participation in the options and futures markets subjects
BlackRock Trust to similar types of risks as described above for
Short-Intermediate Series.
FOREIGN SECURITIES
BlackRock Trust may invest up to 10% of its total assets in foreign
securities, including mortgage-backed securities and asset-backed securities
issued by foreign entities. Short-Intermediate Series may invest in high quality
money market instruments issued by a foreign company, foreign government or
foreign bank.
Investments in foreign securities involve certain risks not ordinarily
associated with investments in securities of domestic issuers. Such risks
include fluctuations in foreign exchange rates, future political and economic
developments, and the possible imposition of exchange controls or other foreign
governmental laws or restrictions.
TAX CONSIDERATIONS
Each Fund has elected to qualify and intends to remain qualified as a
regulated investment company under the Internal Revenue Code. Accordingly,
neither Fund will be subject to federal income taxes on its net investment
income and net capital gains, if any, that it distributes to its shareholders.
With regard to the Government Securities Trust, the performance and tax
qualification of one of its series will have no effect on the federal income tax
liability of shareholders of the other series.
Any dividends out of net investment income, together with distributions of
net short-term gains distributed to shareholders of each Fund, will be taxable
as ordinary income to those shareholders whether or not reinvested. Any net
capital gains (i.e., the excess of net capital gains from the sale of assets
held for
15
<PAGE>
more than twelve months over net short-term capital losses) distributed to
shareholders of each Fund will be taxable as capital gains to those
shareholders, whether or not reinvested and regardless of the length of time a
shareholder has owned his or her shares.
"Regulated Future Contracts" and certain listed options which are not
"equity options" constitute "Section 1256 contracts" and will be required to be
"marked to market" for federal income tax purposes at the end of each Fund's
taxable year; that is, treated as having been sold at market value. Sixty
percent of any gain or loss recognized on such "deemed sales" and on actual
dispositions will be treated as a long-term capital gain or loss, and the
remainder will be treated as a short-term capital gain or loss.
For federal income tax purposes, BlackRock Trust had a capital loss
carryforward at June 30, 1997 of approximately $3,793,000 of which $559,000
expires in 2001, $2,044,000 expires in 2002, $742,000 expires in 2003, and
$448,000 expires in 2004. If the reorganization occurs, these losses will carry
forward to Short-Intermediate Series, subject to limitations under Section 382
of the Code. Additionally, the reorganization will cause such losses to expire
earlier than set forth above if not otherwise used. As of November 30, 1996,
Short-Intermediate Series had a capital loss carryforward for federal income tax
purposes of approximately $52,844,000. Accordingly, no capital gains
distributions are expected to be paid to shareholders of Short-Intermediate
Series until net gains have been realized in excess of such carryforward.
Shareholders are advised to consult their own tax advisors regarding
specific questions as to federal, state or local taxes.
REALIGNMENT OF INVESTMENT PORTFOLIO
The portfolio managers of Short-Intermediate Series anticipate selling
certain securities in the investment portfolio of the combined Fund, but not
more than 33- 1/3% of BlackRock Trust's assets acquired in the reorganization,
following the consummation of such transaction. The investment adviser of
Short-Intermediate Series expects that the sale of not more than 33- 1/3% of the
assets acquired from BlackRock Trust and the purchase of other securities may
affect the aggregate amount of taxable gains and losses generated by
Short-Intermediate Series.
THE PROPOSED TRANSACTION
AGREEMENT AND PLAN OF REORGANIZATION
The terms and conditions under which the proposed transaction may be
consummated are set forth in the Plan. Significant provisions of the Plan are
summarized below; however, this summary is qualified in its entirety by
reference to the Plan, a copy of which is attached as Appendix B to this
Prospectus and Proxy Statement.
The Plan contemplates (i) Short-Intermediate Series acquiring all of the
assets of BlackRock Trust in exchange solely for Class A shares of
Short-Intermediate Series and the assumption by Short-Intermediate Series of
BlackRock Trust's liabilities, if any, as of the Closing Date (anticipated to be
January 30, 1998) and (ii) the constructive distribution on the date of the
exchange, expected to occur on or about the Closing Date, of such Class A shares
of Short-Intermediate Series to the Class A and Class C shareholders of
BlackRock Trust, as provided for by the Plan.
The assets of BlackRock Trust to be acquired by Short-Intermediate Series
shall include, without limitation, all cash, cash equivalents, securities,
receivables (including interest and dividends receivable) and other property of
any kind owned by BlackRock Trust and any deferred or prepaid assets shown as
assets on the books of BlackRock Trust. Short-Intermediate Series will assume
from BlackRock Trust all debts,
16
<PAGE>
liabilities, obligations and duties of BlackRock Trust of whatever kind or
nature, if any; provided, however, that BlackRock Trust will utilize its best
efforts, to the extent practicable, to discharge all of its known debts,
liabilities, obligations and duties prior to the Closing Date.
Short-Intermediate Series will deliver to BlackRock Trust Class A shares of
Short-Intermediate Series, which BlackRock Trust will then distribute to its
Class A and Class C shareholders, respectively. Share certificates in
Short-Intermediate Series will only be issued upon written request to the
Transfer Agent. See "Shareholder Guide" in Short-Intermediate Series'
Prospectus.
The value of BlackRock Trust's assets to be acquired and liabilities to be
assumed by Short-Intermediate Series and the net asset value of Class A shares
of Short-Intermediate Series will be determined as of 4:15 P.M., New York time,
on the Closing Date in accordance with the valuation procedures of the
respective Fund's then current Prospectus and Statement of Additional
Information.
As soon as practicable after the Closing Date, BlackRock Trust will
distribute PRO RATA to its shareholders of record the Class A shares of
Short-Intermediate Series received by BlackRock Trust in exchange for such
shareholders' interest in BlackRock Trust evidenced by their shares of
beneficial interest of BlackRock Trust. Such distribution will be accomplished
by opening accounts on the books of Short-Intermediate Series in the names of
BlackRock Trust's shareholders and by transferring thereto the shares of
Short-Intermediate Series previously credited to the account of BlackRock Trust
on those books. Each shareholder account shall represent the respective PRO RATA
number of Short-Intermediate Series shares due to such shareholder. Fractional
shares of Short-Intermediate Series will be rounded to the third decimal place.
Accordingly, every shareholder of BlackRock Trust will own Class A shares of
Short-Intermediate Series immediately after the reorganization that, except for
rounding, will be equal to the value of that shareholder's Class A or Class C
shares of BlackRock Trust immediately prior to the reorganization. Moreover,
because Class A shares of Short-Intermediate Series will be issued at net asset
value in exchange for net assets of BlackRock Trust that, except for rounding,
will equal the aggregate value of those shares, the net asset value per Class A
share of Short-Intermediate Series will be unchanged. Thus, the reorganization
will not result in a dilution of the value of any shareholder account. However,
in general, the reorganization will substantially reduce the percentage of
ownership of a BlackRock Trust's shareholder below such shareholder's current
percentage of ownership in BlackRock Trust because, while such shareholder will
have the same dollar amount invested initially in Short-Intermediate Series that
he or she had invested in BlackRock Trust, his or her investment will represent
a smaller percentage of the combined net assets of Short-Intermediate Series and
BlackRock Trust.
Any transfer taxes payable upon issuance of Class A shares of
Short-Intermediate Series in a name other than that of the registered holder of
the shares on the books of BlackRock Trust as of that time shall be paid by the
person to whom such shares are to be issued as a condition of such transfer. Any
reporting responsibility of BlackRock Trust will continue to be the
responsibility of BlackRock Trust up to and including the Closing Date and such
later date on which BlackRock Trust is terminated.
On the effective date of the reorganization, the name of Short-Intermediate
Series will be unchanged.
The consummation of the proposed transaction is subject to a number of
conditions set forth in the Plan, some of which may be waived by the Boards of
Trustees of BlackRock Trust and Government Securities Trust. The Plan may be
terminated and the proposed transaction abandoned at any time, before or after
approval by the shareholders of BlackRock Trust, prior to the Closing Date. In
addition, the Plan may be
17
<PAGE>
amended in any mutually agreeable manner, except that no amendment may be made
subsequent to the Meeting of shareholders of BlackRock Trust that would
detrimentally affect the value of Short-Intermediate Series' shares to be
distributed to BlackRock Trust's shareholders.
REASONS FOR THE REORGANIZATION CONSIDERED BY THE TRUSTEES
The Board of Trustees of BlackRock Trust, including a majority of the
Independent Trustees, have determined that the interests of BlackRock Trust's
shareholders will not be diluted as a result of the proposed transaction and
that the proposed transaction is in the best interests of the shareholders of
BlackRock Trust. In addition, the Board of Trustees of Government Securities
Trust, including a majority of the Independent Trustees, has determined that the
interests of Short-Intermediate Series' shareholders will not be diluted as a
result of the proposed transaction and that the proposed transaction is in the
best interests of the shareholders of Short-Intermediate Series.
The reasons that the reorganization was proposed by PIFM are described above
under "Synopsis-- Reasons for the Reorganization." The Boards of Trustees of
Government Securities Trust and BlackRock Trust based their decisions to approve
the Plan on an inquiry into a number of factors, including the following:
(1) the relative past decrease in assets, historical investment
performance and perceived future prospects of BlackRock Trust;
(2) the effect of the proposed transaction on the expense ratios of
Short-Intermediate Series and BlackRock Trust;
(3) the costs of the reorganization, which will be paid for by
Short-Intermediate Series and BlackRock Trust in proportion to their
respective asset levels;
(4) the tax-free nature of the reorganization to Short-Intermediate
Series, BlackRock Trust and their shareholders;
(5) the compatibility of the investment objectives, policies and
restrictions of Short-Intermediate Series and BlackRock Trust;
(6) the potential benefits to the shareholders of BlackRock Trust and
Short-Intermediate Series; and
(7) other options to the reorganization, including a continuance of
BlackRock Trust in its present form, a change of investment adviser or
investment objective or a termination of BlackRock Trust with the
distribution of the cash proceeds to BlackRock Trust shareholders (which
would be a taxable event).
If the Plan is not approved by shareholders of BlackRock Trust, BlackRock
Trust's Board of Trustees may consider other appropriate action, such as the
termination of BlackRock Trust or a merger or other business combination with an
investment company other than Short-Intermediate Series.
DESCRIPTION OF SECURITIES TO BE ISSUED
Short-Intermediate Series' shares represent shares of beneficial interest
with $.01 par value per share. Class A shares of Short-Intermediate Series will
be issued to BlackRock Trust's shareholders on the Closing Date. Each Class A
share represents an equal and proportionate interest in Short-Intermediate
Series with each other share of the same class. Shares entitle their holders to
one vote per full share and fractional votes for fractional shares held. Each
share of Short-Intermediate Series has equal voting, dividend and liquidation
rights with other shares, except that Class A shares have exclusive voting
rights with respect to their
18
<PAGE>
distribution plan. Dividends paid by Short-Intermediate Series with respect to
each class of shares, to the extent any are paid, will be calculated in the same
manner, at the same time, on the same day, and will be in the same amount,
except that each class will bear its own distribution expenses, generally
resulting in lower dividends for Class A shares of Short-Intermediate Series
compared to its Class Z shares.
TAX CONSIDERATIONS
The Funds have received an opinion from Gardner, Carton & Douglas, which
opinion is based on representations made by each Fund, to the effect that (1)
the proposed transaction described above will constitute a reorganization within
the meaning of Section 368(a)(1)(C) of the Internal Revenue Code; (2) no gain or
loss will be recognized by shareholders of BlackRock Trust upon receipt of
shares of Short-Intermediate Series solely in exchange for their shares of
BlackRock Trust and the termination of BlackRock Trust pursuant to the Plan
(Internal Revenue Code Section 354(a)(1)) and the termination of BlackRock Trust
pursuant to the Plan; (3) no gain or loss will be recognized by BlackRock Trust
upon the transfer of BlackRock Trust's assets to Short-Intermediate Series
solely in exchange for shares of Short-Intermediate Series and the assumption by
Short-Intermediate Series of BlackRock Trust's liabilities, if any, and the
subsequent distribution of those shares to BlackRock Trust's shareholders in
liquidation of BlackRock Trust (Internal Revenue Code Sections 361(a), 361(c)(1)
and 357(a)); (4) no gain or loss will be recognized by Short-Intermediate Series
upon the acquisition of such assets solely in exchange for Short-Intermediate
Series' shares and its assumption of BlackRock Trust's liabilities, if any
(Internal Revenue Code Section 1032(a)); (5) Short-Intermediate Series' basis
for the assets received pursuant to the reorganization will be the same as the
basis thereof in the hands of BlackRock Trust immediately before the
reorganization, and the holding period of those assets in the hands of
Short-Intermediate Series will include the holding period thereof in BlackRock
Trust's hands (Internal Revenue Code Sections 362(b) and 1223(2)); (6) BlackRock
Trust's shareholders' basis for the shares of Short-Intermediate Series to be
received by them pursuant to the reorganization will be the same as their basis
for the shares of BlackRock Trust and canceled in the reorganization (Internal
Revenue Code Section 358(a)(1)); and (7) the holding period of the shares of
Short-Intermediate Series to be received by the shareholders of BlackRock Trust
pursuant to the reorganization will include the period during which the shares
of BlackRock Trust canceled in the reorganization were held, provided the latter
shares were held as capital assets by the shareholders on the date of the
reorganization (Internal Revenue Code Section 1223(1)). It should be noted that
no ruling has been sought by the IRS and that an opinion of counsel is not
binding on the IRS or any court. If the IRS were to successfully assert that the
proposed transaction is taxable, then the proposed transaction would be treated
as a taxable sale of BlackRock Trust's assets to Short-Intermediate Series
followed by the taxable liquidation of BlackRock Trust, and shareholders of
BlackRock Trust would recognize gain or loss as a result of such transaction.
CERTAIN COMPARATIVE INFORMATION ABOUT THE FUNDS
Government Securities Trust and BlackRock Trust are each a Massachusetts
business trust and the rights of their respective shareholders are governed by
each Fund's Declaration of Trust and By-Laws and by applicable Massachusetts
law. Certain similarities, due in part to the form of organization of each Fund,
are summarized below.
CAPITALIZATION. Each Fund has issued shares of beneficial interest, par
value $.01 per share. Government Securities Trust is currently divided into
three series of which Short-Intermediate Series is one. Each Fund's Declaration
of Trust authorizes the Funds to issue an unlimited number of shares of
beneficial interest, that may be divided into separate classes, designated by
the Board of Trustees of each Fund. BlackRock Trust currently offers only Class
A and Class C shares and Short-Intermediate Series currently
19
<PAGE>
offers only Class A and Class Z shares. The Board of Trustees of each Fund may
reclassify unissued shares to authorize additional classes of shares having
terms and rights determined by its Board of Trustees, all without shareholder
approval.
SHAREHOLDER MEETINGS AND VOTING RIGHTS. It is the present intent of the
Board of Trustees of each Fund not to hold annual meetings of shareholders.
Special meetings of shareholders will be called if required under the Investment
Company Act, the Declaration of Trust or state law.
Under each Fund's Declaration of Trust and the Investment Company Act,
shareholders are entitled to vote only with respect to the following matters:
(1) the election of Trustees if a meeting is called for such purpose; (2) any
amendment of the Declaration of Trust, other than amendments to change the
Fund's name, authorize additional series of shares, supply any omission or cure,
correct or supplement any ambiguity or defective or inconsistent provision
contained therein; (3) any termination or reorganization of the Fund to the
extent and as provided in the Declaration of Trust; (4) the adoption of any
contract for which shareholder approval is required by the Investment Company
Act; (5) any plan of distribution adopted pursuant to Rule 12b-1 under the
Investment Company Act; and (6) such additional matters relating to the Fund as
may be required by law, the Declaration of Trust, the Fund's By-Laws, the
Investment Company Act, or any registration of the Fund with the SEC, or as the
Trustees may consider necessary or desirable. Upon the written request of
shareholders owning 10% of a Fund, a meeting will be called to vote upon the
removal of any Trustee or Trustees. In addition to the previous matters,
shareholders of Short-Intermediate Series also may vote on a determination as to
whether a court action, proceeding or claim should or should not be brought or
maintained derivatively or as a class action on behalf of the Fund or its
shareholders, to the same extent as the shareholders of a Massachusetts business
corporation would be entitled to vote on such a determination. Each Fund's
shareholders also vote upon changes in fundamental investment policies or
restrictions.
The Declaration of Trust of each Fund provides that a "Majority Shareholder
Vote" of the Fund is required to decide certain questions, such as the election
of Trustees and approval of investment advisory contracts. "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; or
(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.
Each Fund's By-Laws provide that a majority of the outstanding shares shall
constitute a quorum for the transaction of business at a shareholders' meeting.
Matters requiring a larger vote by law or under the organization documents for
either Fund are not affected by such quorum requirements.
SHAREHOLDER LIABILITY. Under Massachusetts law, under certain
circumstances, the shareholders of each Fund could be held personally liable for
their respective Fund's obligations. However, each Fund's Declaration of Trust
disclaims shareholder liability for acts or obligations of the Fund and requires
that notice of such disclaimer be given in each note, bond, contract, order,
agreement, obligation or instrument entered into or executed by the Fund or its
Trustees. Each Fund's Declaration of Trust provides for indemnification out of
the Fund's property for all losses and expenses of any shareholder held
personally liable for the Fund's obligations solely by reason of his or her
being or having been a shareholder of the Fund and not because of his or her
acts or omissions or some other reason. Thus, the Funds consider the risk of a
20
<PAGE>
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 the Funds themselves would be unable to meet their obligations.
LIABILITY AND INDEMNIFICATION OF TRUSTEES. Each Fund's Declaration of Trust
provides that no Trustee or officer of the Fund shall be liable to the Fund or
its shareholders for any action or failure to act, except for bad faith, willful
misfeasance, gross negligence or reckless disregard of duties. Under each Fund's
Declaration of Trust, a Trustee is entitled to indemnification against all
liability and expenses reasonably incurred by him or her in connection with the
defense or disposition of any threatened or actual proceeding by reason of his
or her being or having been a Trustee provided, generally, such Trustee acted in
good faith and in a manner he or she reasonably believed to be in or not opposed
to the best interests of the Fund.
Under the Investment Company Act, a Trustee of the Funds may not be
protected against liability to his or her respective Fund, and the Fund's
security holders to which he or she would otherwise be subject as a result of
his or her willful misfeasance, bad faith or gross negligence in the performance
of his or her duties, or by reason of reckless disregard of his or her
obligations and duties. The staff of the SEC interprets the Investment Company
Act to require additional limits on indemnification of Trustees and officers.
PRO FORMA CAPITALIZATION AND RATIOS
The following table shows the capitalization of Short-Intermediate Series
and BlackRock Trust as of May 31, 1997 and the pro forma combined capitalization
as if the reorganization had occurred on that date. These figures are unaudited.
<TABLE>
<CAPTION>
SHORT-
INTERMEDIATE PRO FORMA
SERIES BLACKROCK TRUST COMBINED
------------ --------------------- -----------
CLASS A CLASS A CLASS C CLASS A
<S> <C> <C> <C> <C>
Net Assets................................................... 1$69,055,497 $29,662,039 $ 17,286 $198,734,822
Net Asset Value per share.................................... $ 9.59 $ 9.31 $ 9.30 $ 9.59
Shares Outstanding........................................... 17,620,724 3,187,626 1,859 20,715,544
</TABLE>
The following table shows the ratios of total expenses and of operating
expenses to average net assets and the ratio of net investment income to average
net assets (based upon weighted average shares outstanding during the relevant
period) of Short-Intermediate Series for the six-month period ended May 31, 1997
(annualized) and of BlackRock Trust for the fiscal year ended June 30, 1997. The
ratios are also shown on a pro forma combined basis.
<TABLE>
<CAPTION>
SHORT-
INTERMEDIATE PRO FORMA
SERIES* BLACKROCK TRUST** COMBINED
------------ -------------------- -----------
CLASS A CLASS A CLASS C CLASS A
<S> <C> <C> <C> <C>
Ratio of total expenses to average net assets.................... .93% 3.45% 4.05% 1.20%
Ratio of operating expenses to average net assets................ .93% 1.56% 2.16% .93%
Ratio of net investment income to average net assets............. 5.74% 5.23% 4.63% 6.01%
</TABLE>
- ---------------
* Based on annualized expenses incurred during the six-month period ended May
31, 1997.
** Based on operating expenses for BlackRock Trust incurred during the fiscal
year ended June 30, 1997, after taking into account the current distribution
fee limitation. Total operating expenses without such limitation would be
1.71% for the Class A shares and 2.41% for the Class C shares. Total
expenses do, and operating expenses do not, include interest expenses which
vary from year to year based on the level of borrowings BlackRock Trust
incurs.
21
<PAGE>
INFORMATION ABOUT SHORT-INTERMEDIATE SERIES
FINANCIAL INFORMATION
For additional financial information for Short-Intermediate Series, see
"Financial Highlights" in Short-Intermediate Series' Prospectus, which
accompanies this Prospectus and Proxy Statement. The financial information for
the year ended November 30, 1996 has been audited by Price Waterhouse LLP,
independent auditors, whose report thereon was unqualified. The following
financial highlights contain selected data for a Class A share outstanding,
total return, ratios to average net assets and other supplemental data for the
periods presented.
<TABLE>
<CAPTION>
CLASS A
-------------------------------
YEAR ENDED SIX-MONTH PERIOD
NOVEMBER 30, ENDED
1996 MAY 31,1997 (b)
------------ ----------------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.... $ 9.74 $ 9.70
------------ --------
------------ --------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income................... .51 .28
Net realized and unrealized gain (loss)
on investment transactions............. (.01) (.13)
------------ --------
Total from investment operations.... .50 .15
------------ --------
LESS DISTRIBUTIONS:
Dividends from net investment income.... (.54) (.26)
------------ --------
Net asset value, end of period.......... $ 9.70 $ 9.59
------------ --------
------------ --------
TOTAL RETURN (a):....................... 5.34% 1.53%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)......... $185,235 $ 169,055
Average net assets (000)................ $186,567 $ 175,249
Ratios to average net assets:
Expenses, including distribution
fees................................. 1.01% .93%(c)
Expenses, excluding distribution
fees................................. .79% .74%(c)
Net investment income................. 5.99% 5.74%(c)
Portfolio turnover rate................. 132% 98%
</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.
(b) Figures are unaudited.
(c) Figures are annualized.
22
<PAGE>
GENERAL
For a discussion of the organization, classification and sub-classification
of Short-Intermediate Series, see "General Information" and "Trust Highlights"
in Short-Intermediate Series' Prospectus.
INVESTMENT OBJECTIVE AND POLICIES
For a discussion of Short-Intermediate Series' investment objective and
policies and risk factors associated with an investment in Short-Intermediate
Series, see "How the Trust Invests" in Short-Intermediate Series' Prospectus.
TRUSTEES
For a discussion of the responsibilities of Government Securities Trust's
Board of Trustees, see "How the Trust is Managed" in Short-Intermediate Series'
Prospectus.
MANAGER AND PORTFOLIO MANAGER
For a discussion of Short-Intermediate Series' Manager, investment adviser
and portfolio manager, Distributor and Transfer Agent, see "How the Trust is
Managed" in Short-Intermediate Series' Prospectus.
PERFORMANCE
For a discussion of Short-Intermediate Series' performance during the fiscal
year ended November 30, 1996 and the six-month period ended May 31, 1997, see
Appendix A hereto.
SHORT-INTERMEDIATE SERIES' SHARES
For a discussion of Short-Intermediate Series' Class A shares, including
voting rights and the exchange privilege, and how the shares may be purchased
and redeemed, see "Shareholder Guide" and "General Information" in
Short-Intermediate Series' Prospectus.
NET ASSET VALUE
For a discussion of how the offering price of Short-Intermediate Series'
Class A shares is determined, see "How the Trust Values its Shares" in
Short-Intermediate Series' Prospectus.
TAXES, DIVIDENDS AND DISTRIBUTIONS
For a discussion of Short-Intermediate Series' policy with respect to
dividends and distributions and the tax consequences of an investment in Class A
shares, see "Taxes, Dividends and Distributions" in Short-Intermediate Series'
Prospectus.
ADDITIONAL INFORMATION
Government Securities Trust is subject to the informational requirements of
the Securities Exchange Act of 1934, as amended, and the Investment Company Act
and in accordance therewith files reports and other information with the SEC.
Proxy materials, reports and other information filed by Government Securities
Trust can be inspected and copied at the public reference facilities maintained
by the SEC at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549 and at
the SEC's regional offices in New York (7 World Trade Center, Suite 1300, New
York, New York 10048) and Chicago (Citicorp Center, Suite 1400, 500 West Madison
Street, Chicago, Illinois 60661-2511). Copies of such material can be obtained
at prescribed rates from the Public Reference Branch, Office of Consumer Affairs
and Information Services, Securities and Exchange Commission, 450 Fifth Street,
N.W., Washington, D.C. 20549. Shareholder inquiries should be addressed to
Government Securities Trust at Gateway Center Three, 100 Mulberry Street,
Newark, New Jersey 07102, or by telephone, at (800) 225-1852 (toll-free) or,
from outside the U.S.A., at (908) 417-7555 (collect).
23
<PAGE>
INFORMATION ABOUT BLACKROCK TRUST
FINANCIAL INFORMATION
For financial information for BlackRock Trust, see "Financial Highlights" in
BlackRock Trust's Prospectus and its Annual Report to Shareholders for the
fiscal year ended June 30, 1997 which is available without charge upon request
to BlackRock Trust. See "Additional Information" below.
GENERAL
For a discussion of the organization, classification and sub-classification
of BlackRock Trust, see "General Information" and "Fund Highlights" in BlackRock
Trust's Prospectus.
INVESTMENT OBJECTIVE AND POLICIES
For a discussion of BlackRock Trust's investment objective and policies and
risk factors associated with an investment in BlackRock Trust, see "How the Fund
Invests" in BlackRock Trust's Prospectus.
TRUSTEES
For a discussion of the responsibilities of BlackRock Trust's Board of
Trustees, see "How the Fund is Managed" in BlackRock Trust's Prospectus.
MANAGER AND PORTFOLIO MANAGER
For a discussion of BlackRock Trust's Manager, investment adviser and
portfolio manager, Distributor and Transfer Agent, see "How the Fund is Managed"
in BlackRock Trust's Prospectus.
PERFORMANCE
For a discussion of BlackRock Trust's performance during the fiscal year
ended June 30, 1997, see Appendix A hereto and the Annual Report to Shareholders
for the fiscal year ended June 30, 1997, which is available without charge upon
request to BlackRock Trust. See "Additional Information" below.
BLACKROCK TRUST'S SHARES
For a discussion of BlackRock Trust's Class A and Class C shares, including
voting rights and the exchange privilege, and how the shares may be purchased
and redeemed, see "Shareholder Guide" and "General Information" in BlackRock
Trust's Prospectus.
NET ASSET VALUE
For a discussion of how the offering price of BlackRock Trust's Class A and
Class C shares is determined, see "How the Fund Values its Shares" in BlackRock
Trust's Prospectus.
TAXES, DIVIDENDS AND DISTRIBUTIONS
For a discussion of BlackRock Trust's policy with respect to dividends and
distributions and the tax consequences of an investment in Class A and Class C
shares, see "Taxes, Dividends and Distributions" in BlackRock Trust's
Prospectus.
ADDITIONAL INFORMATION
Additional information concerning BlackRock Trust is incorporated herein by
reference from BlackRock Trust's current Prospectus dated August 29, 1997, as
supplemented September 8, 1997 and October 27, 1997. Copies of BlackRock Trust's
Prospectus and BlackRock Trust's Annual Report to Shareholders for the fiscal
year ended June 30, 1997 are available without charge upon oral or written
request to BlackRock Trust. To obtain BlackRock Trust's Prospectus or Annual
Report, call (800) 225-1852 or write to Prudential Mutual
24
<PAGE>
Fund Services LLC, Raritan Plaza One, Edison, New Jersey 08837. Shareholder
inquiries should be addressed to BlackRock Trust at Gateway Center Three, 100
Mulberry Street, Newark, New Jersey 07102, or by telephone, at (800) 225-1852
(toll-free) or, from outside the U.S.A., at (908) 417-7555 (collect).
BlackRock Trust is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended, and the Investment Company Act and
in accordance therewith files reports and other information with the SEC.
Reports and other information filed by BlackRock Trust can be inspected and
copied at the public reference facilities maintained by the SEC at Room 1024,
450 Fifth Street, N.W., Washington, D.C. 20549 and at the SEC's regional offices
in New York (7 World Trade Center, Suite 1300, New York, New York 10048) and
Chicago (Citicorp Center, Suite 1400, 500 West Madison Street, Chicago, Illinois
60661-2511). Copies of such material can also be obtained at prescribed rates
from the Public Reference Branch, Office of Consumer Affairs and Information
Services, Securities and Exchange Commission, 450 Fifth Street, N.W.,
Washington, D.C. 20549.
VOTING INFORMATION
If the accompanying form of Proxy is executed properly and returned, shares
represented by it will be voted at the Meeting in accordance with the
instructions on the Proxy. However, if no instructions are specified, shares
will be voted for the proposal. A Proxy may be revoked at any time prior to the
time it is voted by written notice to the Secretary of BlackRock Trust or by
attendance at the Meeting. If sufficient votes to approve the proposal are not
received, the persons named as proxies may propose one or more adjournments of
the Meeting to permit further solicitation of Proxies. Any such adjournment will
require the affirmative vote of a majority of those shares present at the
Meeting or represented by proxy. Any questions as to an adjournment of the
Meeting will be voted on by the persons named in the enclosed Proxy in the same
manner that the Proxies are instructed to be voted. In the event that the
Meeting is adjourned, the same procedures will apply at a later Meeting date.
If a Proxy that is properly executed 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
such person has not received instructions from the beneficial owner or other
person entitled to vote shares on a particular matter with respect to 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. Because approval of the proposed
reorganization requires the affirmative vote of a majority of the total shares
outstanding, an abstention or broker non-vote will have the effect of a vote
against such proposed matters.
The close of business on December 5, 1997 has been fixed as the record date
for the determination of shareholders entitled to notice of, and to vote at,
BlackRock Trust's Meeting. On that date, BlackRock Trust had 2,779,986 Class A
shares and 1,850 Class C shares outstanding and entitled to vote.
Each share of BlackRock Trust will be entitled to one vote at BlackRock
Trust's Meeting. It is expected that the Notice of Special Meeting, Prospectus
and Proxy Statement and form of Proxy will be mailed to BlackRock Trust's
shareholders on or about December 17, 1997.
25
<PAGE>
As of December 5, 1997, the following shareholders owned beneficially or of
record 5% or more of the outstanding shares of any class of BlackRock Trust:
<TABLE>
<CAPTION>
%
NAME SHARES CLASS OWNERSHIP
- ---------------------------------------- -------- -------- ------
<S> <C> <C> <C>
Prudential Bank and Trust Co., 108 C 5.8%
C/F the IRA of Anne C. Landolfi
508 23rd St.
Ocean City, MD 08226-2518
Sidney H. Willuweit, Lila Willuweit, Jt. 826 C 44.7%
Ten.
14812 Berry Valley Rd.
Yelm, WA 98597-9703
Donovan D. Allen, Ingrid F. Allen, Jt. 265 C 14.3%
Ten.
11512 Chesapeake Dr.
Reno, NV 89506-9492
Chin-Lin Fu Sun and Wei S Fu, Ten. Com. 601 C 32.5%
243 W. Wedgewood Ave.
San Gabriel, CA 91776-1321
</TABLE>
As of December 5, 1997, the Trustees and officers of BlackRock Trust, as a
group, owned less than 1% of the outstanding shares of any class of BlackRock
Trust.
As of December 5, 1997, the following shareholder owned beneficially or of
record 5% or more of the outstanding shares of Class A of Short-Intermediate
Series:
<TABLE>
<CAPTION>
%
NAME SHARES OWNERSHIP
- ---------------------------------------- -------- ------
<S> <C> <C>
South Bergan Savings and Loan 633,072 5.4%
Attn. Mr. Albert Gossweiler
Woodridge, NJ 07075-1295
</TABLE>
As of December 5, 1997, the Trustees and officers of Short-Intermediate
Series, as a group, owned less than 1% of the outstanding shares of Class A
shares of Short-Intermediate Series.
The expenses of reorganization and solicitation will be borne by BlackRock
Trust and Short-Intermediate Series in proportion to their respective assets and
will include reimbursement to brokerage firms and others for expenses in
forwarding proxy solicitation material to shareholders. Shareholder
Communications Corporation, a proxy solicitation firm, has been retained to
assist in the solicitation of Proxies for the Meeting. The fees and expenses of
Shareholder Communications Corporation are not expected to exceed $45,000,
excluding mailing and printing costs. The solicitation of Proxies will be
largely by mail but may include telephonic, telegraphic or oral communication by
regular employees of Prudential Securities and its affiliates, including PIFM.
This cost, including specified expenses, also will be borne by BlackRock Trust
and Short-Intermediate Series in proportion to their respective assets.
26
<PAGE>
OTHER MATTERS
No business other than as set forth herein is expected to come before the
Meeting, but should any other matter requiring a vote of shareholders of
BlackRock Trust arise, including any question as to an adjournment of the
Meeting, the persons named in the enclosed Proxy will vote thereon according to
their best judgment in the interests of BlackRock Trust, taking into account all
relevant circumstances.
SHAREHOLDERS' PROPOSALS
A shareholder proposal intended to be presented at any subsequent meeting of
the shareholders of BlackRock Trust must be received by BlackRock Trust a
reasonable time before the Trustees' solicitation relating to such meeting is
made in order to be included in BlackRock Trust's Proxy Statement and form of
Proxy relating to that meeting. The mere submission of a proposal by a
shareholder does not guarantee that such proposal will be included in the proxy
statement because certain rules under the federal securities laws must be
complied with before inclusion of the proposal is required. In the event that
the Plan is approved at this Meeting with respect to BlackRock Trust, it is not
expected that there will be any future shareholder meetings of BlackRock Trust.
It is the present intent of the Board of Trustees of each Fund not to hold
annual meetings of shareholders unless the election of Trustees is required
under the Investment Company Act nor to hold special meetings of shareholders
unless required by the Investment Company Act or state law.
S. JANE ROSE
SECRETARY
Dated: December 15, 1997
27
<PAGE>
(This page has been left blank intentionally.)
<PAGE>
APPENDIX A
PERFORMANCE OVERVIEW
YEAR ENDED NOVEMBER 30, 1996
GOVERNMENT SECURITIES TRUST --
SHORT-INTERMEDIATE TERM SERIES
PORTFOLIO MANAGERS' REPORT
Short-term interest rates -- and therefore intermediate-term bond returns --
seesawed over much of the past 12 months as financial markets were buffeted by
conflicting news which alternately showed the U.S. economy strengthening or
weakening. When all was said and done, money market funds and short- to
intermediate-term bond funds ended the reporting period posting attractive, if
somewhat lower, returns than a year earlier.
Part of the reason for this fluctuation was that market opinion about the
course of interest rates changed over the past six months. When we reported to
you in May, investors were speculating that the Federal Reserve would soon
raise the Federal Funds rate (what banks charge each other for overnight loans)
to head-off inflation. Analysts now expect the Federal Funds rate to remain at
5.25% for most of the first quarter of 1997. Money market yields, which rose
earlier in the summer, began declining in the fall, reflecting this change in
market sentiment.
Bonds, which had posted near-record returns in 1995, lost some of their gains
from February through April as investors started to anticipate rising inflation
and higher interest rates and sold their positions. Since late May, however,
bond prices rebounded.
Why the turnaround? Higher inflation never materialized. The Consumer Price
Index (CPI), excluding volatile food and energy prices, remained fairly benign
throughout the period. October's CPI, for example, rose only 0.2% for an
inflation rate of less than 3% a year. The economy also slowed. Gross Domestic
Product (GDP), the total value of goods and services produced by the nation and
a widely used barometer for economic growth, fell to 2.1% in the third quarter,
which was less than half of what it was in the second quarter. With inflation
behaving itself, and the economy slowing, there was no reason for the Federal
Reserve to raise interest rates.
MONEY MARKET SERIES
The Money Market Series' seven-day current yield on November 30, 1996 was
4.62%, which compares to 4.45% last May and 5.13% of a year ago. The Series'
yield was lower than the 4.67% returned by the average government money fund
tracked by IBC Financial Data.
U.S. TREASURY MONEY MARKET SERIES
The U.S. Treasury Money Market Series' seven-day current yield was 4.57% on
November 30, 1996 compared to 4.45% last May and 4.99% of a year ago. The
Series' yield was lower when compared to 4.62% for similar U.S. Treasury money
funds measured by IBC Financial Data.
SHORT-INTERMEDIATE TERM SERIES
The Short-Intermediate Term Series' 30-day yield on November 30, 1996 was
5.60%, which finished the reporting period ahead of the average of 5.28% for
similar funds in the Lipper Analytical Services short/intermediate U.S.
government fund average.
How Investments Compared.
(As of 11/30/96)
(CHART)
U.S. General General U.S.
Growth Bond Muni Debt Taxable
Funds Funds Funds Money Funds
12 Month Total Returns 21.11% 5.11% 4.91% 4.87%
20 Year Average Annual
Total Returns 14.96% 7.69% 7.12% 7.5%
SOURCE: LIPPER ANALYTICAL SERVICES. Financial markets change, so a mutual
fund's past performance should never be used to predict future results. The
risks to each of the investments listed above are different -- we provide
12-month total returns for several Lipper mutual fund categories to show you
that reaching for higher yields means tolerating more risk. The greater the
risk, the larger the potential reward or loss. In addition, we've included
historical 20-year average annual returns. These returns assume the
reinvestment of dividends.
U.S. GROWTH FUNDS will fluctuate a great deal. Investors have received higher
historical total returns from stocks than from most other investments. Smaller
capitalization stocks offer greater potential for long-term growth but may be
more volatile than larger capitalization stocks.
GENERAL BOND FUNDS provide more income than stock funds, which can help smooth
out their total returns year by year. But their prices still fluctuate
(sometimes significantly) and their returns have been historically lower than
those of stock funds.
GENERAL MUNICIPAL DEBT FUNDS invest in bonds issued by state governments, state
agencies and/or municipalities. This investment provides income that is usually
exempt from federal and state income taxes.
MONEY MARKET FUNDS attempt to preserve a constant share value; they don't
fluctuate much in price but, historically, their returns have been generally
among the lowest of the major investment categories.
A-1
<PAGE>
SHORT-INTERMEDIATE TERM SERIES
The Short-Intermediate Term Series invests at least 65% of assets in securities
issued or guaranteed by the U.S. government, its agencies or instrumentalities.
As much as 35% of Series' assets may be invested in mortgage backed or asset
backed securities as well as corporate debt. The dollar-weighted average
maturity of the Series will be more than two, but less than five years. There
can be no assurance that the Series will achieve its investment objective.
<TABLE>
<CAPTION>
One Five Ten Since
Year Years Years Inception**
<S> <C> <C> <C> <C>
Cumulative
Total Returns*
As of
11/30/96
Short-Intermediate
Term Series 5.3% 34.1% 93.5% 223.1%
Lipper Short/Intermediate
U.S. Government
Fund Average*** 4.9 33.6 98.9 222.9
</TABLE>
<TABLE>
<CAPTION>
One Five Ten Since
Year Years Years Inception**
<S> <C> <C> <C> <C>
Average
Annual
Total Returns*
As of
12/31/96
Short-Intermediate
Term Series 4.0% 5.5% 6.9% 8.5%
</TABLE>
<TABLE>
<CAPTION>
Dividends & Yields
As of 11/30/96
Total Dividends 30-Day
Paid for 12 Mos. SEC Yield
<S> <C>
$0.54 5.60%
</TABLE>
Past performance is not indicative of future returns. Investment return and
principal will fluctuate so that an investor's shares, when redeemed, may be
worth more less than their original cost.
* Source: Prudential Mutual Fund Management and Lipper Analytical Services.
Shares of this Series are sold without an initial or contingent deferred sales
charge.
** Inception date: 9/13/82.
*** These are the average returns of 89 funds in the Lipper Short/
Intermediate U.S. Government Fund category for one year, 34 funds for five
years, eight funds for 10 years and two funds since inception as determined by
Lipper Analytical Services.
BEARS RETREAT, FOR NOW.
When we last reported to you six months ago, bears were on a rampage. These
worried investors read signs of a strengthening economy as a warning of bad
inflationary pressures to come (not to mention higher short-term interest
rates), and sold their securities, driving prices down and yields up. The yield
on a five-year Treasury note, for example, rose 130 basis points (a basis point
is 1/100th of a percentage point) to 6.4% on May 21, 1996 from 5.1% on February
13, 1996. All investors lost some of the capital appreciation realized from
1995 as yields rose and bond prices fell.
But then the short- to intermediate-term bond market started to rebound --
thanks to moderating economic growth and continued low inflation -- forcing the
bears to grudgingly give ground. A flurry of good news fueled the comeback
including:
- - MODERATING GROWTH. GDP moderated in the third quarter to 2.2% -- down from
the worrisome 3.4% growth rate for the first six months of the year, which
economists believed could generate higher inflation.
- - SHRINKING FEDERAL DEFICIT. The federal deficit was lower than projected.
This meant fewer Treasury bonds were sold, increasing demand for existing
supply and pushing prices up.
- - MORE SAVINGS. Personal savings, which bottomed at 3.6% of disposal income in
April, grew to 5.3% by the end of June. This meant consumers were spending
less, braking the economy.
Thus inflation, a bond investor's worst enemy, remained fairly benign rising at
an annual rate of about 3%. In addition, the Federal Reserve kept the Federal
Funds rate at 5.25%, where it has stood since January. Bottom line: Bond prices
have stabilized and recovered with the yield on a 5-year Treasury declining 50
basis points to 5.9% on November 19, 1996 compared to 6.4% on May 21.
As you may recall, we maintained a higher cash position earlier this year
because we did not believe the returns offered in the two- to five-year bond
range were attractive enough to offset their interest rate risk. This tactic
helped us weather the price declines of February through April. Since May,
however, we actively reinvested our cash position in attractive issues at the
longer end of the yield curve. Our duration was 2.8 years on November 30, 1996.
To increase yield we bought federal agencies debt, asset backed securities, and
mortgage backed securities with higher coupons.
- -------------------------------------------------------------------------------
A-2
<PAGE>
LOOKING AHEAD.
The seesawing rates in the money market and short- to intermediate-term bond
markets appear to have steadied for now. We believe the U.S. economy is on
track for slow, steady and non-inflationary growth into the first quarter of
1997. If we're right, then the Federal Reserve will have little reason to raise
- -- or lower -- short-term interest rates. Given this scenario, our money market
and bond funds will continue to pursue their present strategies of investing in
attractive securities while maintaining the flexibility to respond should
interest rates begin to move.
(PHOTO) (PHOTO)
/s/ Bernard D. Whitsett, II /s/ Barbara L. Kenworthy
Bernard D. Whitsett, II Barbara L. Kenworthy
Portfolio Manager Portfolio Manager
Money Market Series & Short-Intermediate Term Series
U.S. Treasury Money Market Series
- -------------------------------------------------------------------------------
A-3
<PAGE>
COMPARING A $10,000 INVESTMENT.
PRUDENTIAL GOVERNMENT SECURITIES TRUST:
SHORT-INTERMEDIATE TERM SERIES VS. THE LEHMAN
BROTHERS INTERMEDIATE GOV'T BOND INDEX.
// Prudential Gov't Sec Trust: Short-Intermediate Term Series
- - Lehman Bros. Inter. Gov't Bond Index
AVERAGE ANNUAL
TOTAL RETURNS
WITHOUT SALES LOAD
8.6% Since Inception
6.8% for 10 Years
6.0% for 5 Years
5.3% for 1 Year
Best Year: 1986 (13.5%)
(CHART)
Worst Year: 1994 (-2.5%)
11/30/86=$10,000
11/30/96--Lehman
Brothers Intermediate
Government Bond
Index=$21,011
Intermediate Term
Series=$19,350
Past performance is not indicative of future results. Investment return and
principal value will fluctuate so an investor's shares, when redeemed, may be
worth more or less than their original cost. The chart above the graph is
designed to give you an idea how much the Series' returns can fluctuate from
year to year by measuring the best and worst years in terms of total annual
return since inception of the Series.
This graph is furnished to you in accordance with SEC regulations. It compares
a $10,000 investment in the Prudential Government Securities Trust:
Short-Intermediate Term Series with a similar investment in the Lehman Brothers
Intermediate Government Bond Index by portraying the account value for 10
years, and subsequent account value at the end of this reporting period
(November 30), as measured on a quarterly basis, beginning in 1986. For
purposes of the graph, and unless otherwise indicated, in the accompanying
table it has been assumed all recurring fees (including management fees) were
deducted; and all dividends and distributions were reinvested.
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 10 years. The index is unmanaged and includes the reinvestment of all
dividends, but does not reflect the payment of transactions costs and advisory
fees associated with an investment in the Series. The securities that comprise
the Index may differ substantially from the securities in the Series'
portfolio. The Index is not the only one that may be used to characterize
performance of short-intermediate U.S. government bond funds and other indexes
may portray different comparative performance.
A-4
<PAGE>
SIX MONTHS ENDED MAY 31, 1997
GOVERNMENT SECURITIES TRUST -- SHORT-INTERMEDIATE TERM SERIES
PORTFOLIO MANAGERS' REPORT
U.S. interest rates fluctuated over the past six months as
investors first worried that a vigorous economy could spark
higher inflation then cheered when signs of moderating economic
growth and subdued inflation surfaced later in the period.
It all started because the U.S. economy expanded at its fastest
pace in more than nine years during the first quarter of 1997.
By mid-February, investors began to push up interest rates
anticipating that the Federal Reserve would increase the
overnight bank lending rate, which it did by a quarter percentage
point to 5.5% on March 25, 1997. Yields on money market funds edged
higher only to slide in April and May because government reports
pointed to slower economic growth and benign inflation in the
second quarter. Not surprisingly, the central bank voted to
leave short-term interest rates unchanged when monetary
policymakers met again in May.
Short- to intermediate-term bond prices were also whipsawed
over the past six months as inflation concerns waxed and waned.
Inflation is the archenemy of the bond market because it erodes
the value of the fixed stream of interest payments and principal
received by bondholders. As inflation wary investors pushed up
interest rates, prices on older bonds fell because newly issued
ones would generally carry higher coupons. Prices began to
recover when interest rates tumbled in late April. Needless
to say, predicting the direction of interest rates proved
very difficult so we refrained from doing so. Instead, we
kept the Short-Intermediate Term Series' duration (a measure
of sensitivity to interest rate changes) in line with our
competition.
MONEY MARKET SERIES
The Money Market Series' seven-day current yield was 4.82% on
May 27, 1997 compared to 4.84% for the average U.S. government
money market fund tracked by IBC Financial Data. We performed
competitively because we sold Treasurys and purchased securities
issued by government agencies in order to lock in higher yields
as interest rates declined in April and May.
U.S. TREASURY MONEY
MARKET SERIES
The U.S. Treasury Money Market Series' seven-day current yield
was 4.97% on May 27,1997, well above the 4.73% for comparable
funds as measured by IBC. We took profits on three- and
six-month Treasurys then purchased one-month cash management
bills (CMBs) for their unusually generous yields along with
one-year Treasurys, which increased the Series' weighted
average maturity (WAM) and its yield.
SHORT-INTERMEDIATE
TERM SERIES
The Short-Intermediate Term Series' 30-day yield was 5.82% for
the period ended May 31, 1997 compared to 5.78% for similar
funds tracked by Lipper Analytical Services.
HOW INVESTMENTS COMPARED.
(As of 5/31/97)
(GRAPH)
U.S. General General U.S.
Growth Bond Muni Debt Taxable
Funds Funds Funds Money Funds
12-Month Total Returns 17.72% 9.93% 7.60% 4.79%
20-Year Average Annual
Total Returns 15.47% 9.94% 7.17% 7.68%
SOURCE: LIPPER ANALYTICAL SERVICES. Financial markets change, so
a mutual fund's past performance should never be used to predict
future results. The risks to each of the investments listed above
are different -- we provide 12-month total returns for several
Lipper mutual fund categories to show you that reaching for
higher returns means tolerating more risk. The greater the
risk, the larger the potential reward or loss. In addition,
we've included historical 20-year average annual returns.
These returns assume the reinvestment of dividends.
U.S. GROWTH FUNDS will fluctuate a great deal. Investors have
received higher historical total returns from stocks than from
most other investments. Smaller capitalization stocks offer
greater potential for long-term growth but may be more volatile
than larger capitalization stocks.
GENERAL BOND FUNDS provide more income than stock funds, which
can help smooth out their total returns year by year. But their
prices still fluctuate (sometimes significantly) and their returns
have been historically lower than those of stock funds.
GENERAL MUNICIPAL DEBT FUNDS invest in bonds issued by state
governments, state agencies and/or municipalities. This
investment provides income that is usually exempt from
federal and state income taxes.
MONEY MARKET FUNDS attempt to preserve a constant share
value; they don't fluctuate much in price but, historically,
their returns have been generally among the lowest of the
major investment categories.
A-5
<PAGE>
SHORT-INTERMEDIATE
TERM SERIES
The Short-Intermediate Term Series invests at least 65% of assets
in securities issued or guaranteed by the U.S. government, its
agencies or instrumentalities. As much as 35% of Series' assets
may be invested in mortgage backed or asset backed
securities as well as corporate debt. The dollar-weighted average
maturity of the Series will be more than two, but less than five
years. There can be no assurance that the Series will achieve
its investment objective.
<TABLE>
<CAPTION>
SIX ONE FIVE TEN SINCE
MONTHS YEAR YEARS YEARS INCEPTION**
<C> <S> <C> <C> <C> <C> <C>
CUMULATIVE CLASS A 1.5% 6.8% 31.6% 99.9% 228.0%
TOTAL CLASS Z N/A N/A N/A N/A 1.1%
RETURNS* LIPPER SHORT/INTERMEDIATE
AS OF U.S. GOVERNMENT
5/31/97 FUND AVERAGE*** 1.4 6.4 30.4 103.1 231.3
</TABLE>
<TABLE>
<CAPTION>
ONE FIVE TEN SINCE
YEAR YEARS YEARS INCEPTION**
<C> <S> <C> <C> <C> <C>
AVERAGE
ANNUAL TOTAL SHORT-INTERMEDIATE
RETURNS* TERM SERIES 6.8% 5.6% 7.2% 8.4%
AS OF
6/30/97
</TABLE>
Past performance is not indicative of future results. Investment
return and principal will fluctuate so that an investor's shares,
when redeemed, may be worth more less than their original cost.
* Source: Prudential Investments Fund Management and Lipper
Analytical Services. Shares of this Series are sold without
an initial or contingent deferred sales charge.
** Inception date: Class A, 9/22/92; Class Z, 2/25/97.
*** These are the average returns of all funds in the Short-Term
U.S. Government Bond Fund category.
<TABLE>
DIVIDENDS AND YIELDS
AS OF 5/31/97
<CAPTION>
TOTAL DIVIDENDS 30-DAY
PAID FOR SIX MOS. SEC YIELD
<S> <C> <C>
Class A $0.255 5.82%
Class Z $0.15 7.06%
</TABLE>
YIELD, YIELD AND YIELD.
The U.S. economy sped along at a 5.9% annualized rate in the
first quarter of 1997 as a solid jobs market, mild winter, an
early Easter and an automobile price war encouraged consumer
spending. Investors assumed the Federal Reserve would have to
tighten credit in March to keep the economy from overheating.
Yet once the central bankers moved, the situation changed rather
abruptly. Gross Domestic Product, a measure of the value of all
goods and services produced by the country, is now
expected to have expanded much more slowly in the second quarter
than in the first. Amid such rapidly changing outlooks,
interest rates were on a roller coaster. Yet the Short-Intermediate
Series prospered during this period by seeking securities
that offered higher yields than Treasurys.
Although interest rates were unsettled, U.S. Treasury prices
remained in a trading range with the yield on the average five-year
note swinging a full percentage point between 5.8% and 6.8%. Under
these market conditions, investors typically focus on
purchasing securities that offer higher yields than Treasurys.
We stuck with this strategy -- and it worked nicely. We reduced
Treasurys to 19% of total assets as of May 31, 1997 from 28% as
of November 30, 1996. Specifically, we sold U.S.
government debt and purchased securities backed by a variety of
assets such as farm equipment loans and home equity loans. On
the other hand, the amount of asset backed securities we owned
rose to 25% of total assets as of May 31, 1997 from 13%
as of November 30, 1996.
Careful credit evaluation to identify and purchase undervalued
securities continued to benefit the Fund. For example, we had
bought a security backed by loans on corporate credit cards that
our analysis indicated was attractively priced. We sold
them in 1997 to buy securities backed by automobile leases that
our analysis showed were priced too cheaply.
Mortgage backed securities, which are issued by government-sponsored
corporations such as Fannie Mae or private companies, also benefit
when Treasury prices trade in a predictable range. Investors are
less concerned that mortgage backed securities
could be paid off early because consumers are less likely
to refinance the underlying home loans if interest rates do
not fall significantly. Similarly, investors worry less about
holding mortgage backed securities for longer than expected because
there is less chance that consumers will indefinitely postpone
refinancing since interest rates will only fall so far. With
market conditions nearly ideal, mortgage backed securities,
which also offer higher yields than Treasurys, performed well.
A-6
<PAGE>
LOOKING
AHEAD.
We don't like predicting Federal Reserve Board policy, although
with moderating economic growth and inflation remaining benign,
we see little reason for additional rate moves by the central
bank over the near term. However, 1997 has been a year of
increased volatility and we must remain vigilant. Accordingly,
our money market funds and bond fund will continue their present
strategies while retaining their flexibility to respond to changing
market conditions.
CO-MANAGER
NAMED.
Sharon Fera was recently named as co-manager of the
Short-Intermediate Term Series. She is responsible for
day-to-day Fund operations while Barbara Kenworthy provides
overall portfolio direction. Sharon most recently was a
fixed-income portfolio manager at Aetna Life & Casualty
and brings more than 10 years of fixed-income investment
experience to your Fund.
(PICTURE)
/s/ Bernard D. Whitsett, II
Bernard D. Whitsett, II
Portfolio Manager
Money Market Series
& U.S. Treasury Money
Market Series
(PICTURE)
/s/ Barbara L. Kenworthy
Barbara L. Kenworthy
Portfolio Manager
Short-Intermediate Term Series
(PICTURE)
/s/ Sharon A. Fera
Sharon A. Fera
Portfolio Manager
Short-Intermediate Term Series
A-7
<PAGE>
YEAR ENDED JUNE 30, 1997
THE BLACKROCK GOVERNMENT INCOME TRUST
PERFORMANCE AT A GLANCE.
Treasury yields fluctuated during the twelve months ended June 30, 1997. After
declining for much of the second half of 1996, interest rates rose in the face
of a resilient stock market and stronger economic growth for the first few
months of 1997. However, bond investors were comforted by more moderate
economic data released during the second quarter which allowed the bond market
to recapture some of its losses. Mortgage-backed securities and asset-backed
securities outperformed Treasuries over the year as investors sought higher
yielding securities.
<TABLE>
<CAPTION>
HISTORICAL
INVESTMENT
RESULTS(1)
AS OF 6/30/97
ONE FIVE SINCE
YEAR YEARS INCEPTION(2)
<S> <C> <C> <C>
CLASS A 6.2% 22.9% 31.2%
CLASS C 5.6 N/A 15.2
LIPPER ADJUSTABLE RATE
MORTGAGE FUND AVG.(3) 6.5 18.0 ***
</TABLE>
<TABLE>
<CAPTION>
AVERAGE
ANNUAL TOTAL
RETURNS(1)
AS OF 6/30/97
ONE FIVE SINCE
YEAR YEARS INCEPTION(2)
<S> <C> <C> <C>
Class A 3.0% 3.6% 4.2%
Class C 4.6 N/A 5.5
</TABLE>
<TABLE>
<CAPTION>
DIVIDENDS]
& YIELDS
AS OF 6/30/97
TOTAL DIVIDENDS 30-DAY
PAID FOR 12 MOS. SEC YIELD
<S> <C> <C>
Class A $0.50 7.96%
Class C $0.45 7.41
</TABLE>
An investment in the Fund is neither insured nor guaranteed by the U.S.
government. Past performance is not indicative of future results. Investment
return and principal value 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. Historical investment
results do not take into account sales charges. Average annual returns do take
into account applicable sales charges. The Fund charges a maximum sales load
of 3% for Class A shares. Class C shares are subject to a contingent deferred
sales charge of 1% over a period of one year.
(2)Inception dates: Class A, 9/9/91 and Class C, 11/1/94.
(3)These are the average returns of all funds for one year, five years and since
inception of each share class as determined by Lipper Analytical Services.
***Lipper Since Inception returns are: Class A, 29.5% and Class C, 12.0% for
all funds in each Lipper share class.
HOW INVESTMENTS COMPARED.
(AS OF 6/30/97)
(GRAPH)
U.S. General General U.S.
Growth Bond Muni Debt Taxable
Funds Funds Funds Money Funds
12-Month Total Returns 23.96% 10.77% 7.81% 4.80%
20-Year Average Annual
Total Returns 15.39% 9.89% 7.14% 7.68%
SOURCE: LIPPER ANALYTICAL SERVICES. Financial markets change, so a mutual
fund's past performance should never be used to predict future results. The
risks to each of the investments listed above are different -- we provide 12-
month total returns for several Lipper mutual fund categories to show you that
reaching for higher returns means tolerating more risk. The greater the risk,
the larger the potential reward or loss. In addition, we've included historical
20-year average annual returns. These returns assume the reinvestment of
dividends.
U.S. GROWTH FUNDS will fluctuate a great deal. Investors have received higher
historical total returns from stocks than from most other investments. Smaller
capitalization stocks offer greater potential for long-term growth but may be
more volatile than larger capitalization stocks.
GENERAL BOND FUNDS provide more income than stock funds, which can help smooth
out their total returns year by year. But their prices still fluctuate
(sometimes significantly) and their returns have been historically lower than
those of stock funds.
GENERAL MUNICIPAL DEBT FUNDS invest in bonds issued by state governments,
state agencies and/or municipalities. This investment provides income that is
usually exempt from federal and state income taxes.
MONEY MARKET FUNDS attempt to preserve a constant share value; they don't
fluctuate much in price but, historically, their returns have been generally
among the lowest of the major investment categories.
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SCOTT AMERO, FUND MANAGER
(PHOTO)
/s/ Scott Amero
PORTFOLIO MANAGER'S REPORT
The BlackRock Government Income Trust is an open-end bond fund whose investment
objective is to provide low volatility of net asset value and high monthly
income. The Trust invests primarily in adjustable rate mortgage-backed
securities (ARMs), U.S. Government securities, asset-backed securities (ABS)
and short duration mortgage-backed securities (MBS). The Fund is part of the
Prudential family of mutual funds and is managed by its investment sub-adviser,
BlackRock Financial Management, Inc.
OUR STYLE.
We seek low volatility of net asset value while producing high monthly income.
In pursuing this objective, the Trust's assets are actively managed and reflect
the adviser's relative value analysis of individual securities and sectors.
There can be no assurance that the Fund will achieve its investment objective.
STRATEGY SESSION.
LOW VOLATILITY BUOYS MARKETS.
Over the year, investor demand for bonds that offer higher yields allowed
adjustable rate mortgages (ARMs) and asset-backed securities (ABS) to post
excellent relative performance primarily due to low interest rate volatility
and subdued refinancing concerns.
Over the period, the ARM market, as measured by the Lehman Brothers ARM Index,
returned 8.08% versus the Treasury market's return (measured by the Lehman
Brothers 1-3 year Treasury Index) of 6.55%. ARMs benefited from improving
fundamental conditions over the past two years, as interest rate volatility
has generally remained at historically low levels. As a result, older ARMs
traded at or near all-time tight yield spreads versus comparable maturity
Treasuries.
The ABS market has also benefited from low volatility, as the best performing
ABS of 1996 were those securities backed by home equity loans. ABS' positive
performance carried into 1997, as a pause in the pace of issuance caused yield
spreads to tighten even further.
In searching for relative value, we targeted securities and market sectors
that have underperformed and have strong potential, we believe, for price
appreciation. During the reporting period, the Fund substantially increased
its holdings in floating- and fixed-rate ABS and collateralized mortgage
obligations (CMOs). The move towards floating-rate ABS was prompted by an
increase in floating-rate supply over the past year. ABS issuers, particularly
credit cards, have chosen to issue floating-rate securities, which has led to
wider yield spreads versus Treasuries than offered by fixed-rate ABS.
The increased weightings to these sectors was primarily financed by selling
Treasury securities and reducing the Fund's ARM holdings, which had performed
well.
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WHAT WENT WELL.
Over the past six months we have sought to enhance return by carefully
balancing our exposure to Treasuries, asset-backed securities (fixed and
floating rate), adjustable rate mortgages (ARMs), collateralized mortgage
obligations (CMOs), and other mortgage-backed securities (MBS).
During the second quarter of 1997 this meant reducing our ARM exposure to 19%
of total investments as of June 30, 1997, from 26% at year-end 1996. We did so
because we believed that the combination of lower interest rates, which could
result in a higher rate of prepayments, and potentially higher interest rate
volatility that could hurt ARM performance over the short term. As it turned
out, ARMs did slightly underperform short-duration Treasuries during the
second quarter.
Conversely, we added to our CMO holdings because we believe they would enhance
yield and total return, given the Federal Reserve's current neutral monetary
policy. CMO holdings comprised 13% of total investments as of June 30, 1997
compared to 8% on December 31, 1996.
FIVE LARGEST HOLDINGS.
10.4% U.S. TREASURY NOTE
6.375%, 5/15/00
6.4% FHLMC
9.00%, 9/01/05-11/01/05
6.1% FNMA
8.50%, 6/01/08-1/01/16
5.8% GNMA II
7.25%, 4/15/06
4.1% GNMA II
7.125%, 9/20/23
Expressed as a percentage of total investments as of 6/30/97.
PORTFOLIO BREAKDOWN.
EXPRESSED AS A PERCENTAGE OF TOTAL INVESTMENTS.
AS OF 6/30/97 AS OF 12/31/96
Treasuries--12% CMOs--8%
Short Duration MBS--27% Asset Backed--23%
ARMs--19% ARMS--26%
Fixed-Rate ABS--15% Short Duration MBS--32%
Floating-Rate ABS--14% U.S. Treasuries/
CMOs--13% Agencies--11%
LOOKING AHEAD.
Our outlook for the bond market is cautiously optimistic. Over the short term,
we believe that the recent rally may continue, since inflation news has been
positive and U.S. securities appear cheap relative to their global
counterparts. Additionally, Federal Reserve Chairman Greenspan appears to be
comfortable allowing the economy to expand in the absence of rising
inflationary pressures. Thus, we do not foresee another tightening in the
immediate future in the absence of a visible inflation shock. However, recent
wage increases, the buoyant stock market and record levels of consumer
confidence could lead to stronger consumer spending and overall economic
growth. Therefore, an uninterrupted decline in yields is by no means a
certainty.
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COMPARING A $10,000 INVESTMENT.
THE BLACKROCK GOVERNMENT INCOME TRUST VS.
THE LEHMAN BROTHERS 1-3 YEAR GOVERNMENT INDEX.
[]The BlackRock Government Income Trust
- --Lehman Bros. 1-3 Year Government Index
AVERAGE ANNUAL
TOTAL RETURNS
WITH SALES LOAD
4.2% Since Inception
3.6% for 5 Years
3.0% for 1 Year
Class A
WITHOUT SALES LOAD 9/9/91=$10,000
4.8% Since Inception 6/30/97--Lehman Government
4.2% for 5 Years Index=$14,128
6.2% for 1 Year 6/30/97--BlackRock=$12,721
Best Year 1995--8.4%
Worst Year 1994--1.6%
AVERAGE ANNUAL
TOTAL RETURNS
WITH SALES LOAD
5.5% Since Inception
4.6% for 1 Year
Class C
WITHOUT SALES LOAD 11/1/94=$10,000
5.5% Since Inception 6/30/97--Lehman Government
5.6% for 1 Year Index=$11,955
6/30/97--BlackRock=$11,521
Best Year 1995--7.7%
Worst Year 1996--4.3%
Past performance is not indicative of future results. Investment return and
principal value will fluctuate so an investor's shares, when redeemed, may be
worth more or less than their original cost. The charts on the right are
designed to give you an idea how much the Fund's returns can fluctuate from
year to year by measuring the best and worst calendar years in terms of total
annual return since inception of each share class.
These graphs are furnished to you in accordance with SEC regulations. They
compare a $10,000 investment in the BlackRock Government Income Trust (Class A
and Class C) with a similar investment in the Lehman Brothers 1-3 Year
Government Index (Lehman Government Index) by portraying the initial account
values on September 9, 1991 for Class A and November 1, 1994 for Class C
shares and subsequent account values at the end of each fiscal year (June 30),
as measured on a quarterly basis, beginning in 1991 for Class A and in 1994 for
Class C shares. For purposes of the graphs, and unless otherwise indicated, in
the accompanying tables it has been assumed (a) that the maximum applicable
front-end sales charge was deducted from the initial $10,000 investment in
Class A shares; (b) the maximum applicable contingent deferred sales charge
was deducted from the value of the investment in Class C shares, assuming full
redemption on June 30, 1997; (c) all recurring fees (including management fees)
were deducted; and (d) all dividends and distributions were reinvested.
The Lehman Government Index is a weighted Index comprised of securities issued
or backed by the U.S. Government and its agencies with a remaining maturity of
one to three years. The Lehman Government Index is an unmanaged Index and
includes the reinvestment of all dividends, but does not reflect the payment
of transaction costs and advisory fees associated with an investment in the
Fund. The securities which comprise the Lehman Government Index may differ
substantially from the securities in the Fund's portfolio. The Lehman
Government Index is not the only index that may be used to characterize
performance of government security funds and other indices may portray
different comparative performance.
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Appendix B
AGREEMENT AND PLAN OF REORGANIZATION
Agreement and Plan of Reorganization (Agreement) made as of the 15th day of
December, 1997, by and between, The BlackRock Government Income Trust (BlackRock
Trust) and Prudential Government Securities Trust (Government Securities
Trust)--Short-Intermediate Term Series (Short-Intermediate Term Series)
(BlackRock Trust and Government Securities Trust, collectively, the Trusts and
each individually, a Trust). BlackRock Trust and Government Securities Trust are
both business trusts organized under the laws of the Commonwealth of
Massachusetts. Each Trust maintains its principal place of business at Gateway
Center Three, 100 Mulberry Street, Newark, New Jersey 07102-4077. Shares of
BlackRock Trust are divided into three classes, designated as Class A, Class B
and Class C. Shares of Short-Intermediate Term Series are divided into two
classes, designated as Class A and Class Z. The Class B shares of BlackRock
Trust are not currently being offered. Government Securities Trust consists of
three series, one of which is Short-Intermediate Term Series.
This Agreement is intended to be, and is adopted as, a plan of
reorganization pursuant to Section 368(a)(1)(C) of the Internal Revenue Code of
1986, as amended (Internal Revenue Code). Upon receipt of such representations
from each of the Trusts as Gardner, Carton & Douglas may require, Gardner,
Carton & Douglas will deliver the opinion referenced in paragraph 8.6 herein.
The reorganization will comprise the transfer of the assets of BlackRock Trust
in exchange solely for Class A shares of Short-Intermediate Term Series, and
Short-Intermediate Term Series' assumption of BlackRock Trust's liabilities, if
any, and the constructive distribution, after the Closing Date hereinafter
referred to, as a liquidating distribution of such shares of Short-Intermediate
Term Series to the shareholders of BlackRock Trust, and the termination of
BlackRock Trust as provided herein, all upon the terms and conditions as
hereinafter set forth.
In consideration of the premises and of the covenants and agreements set
forth herein, the parties covenant and agree as follows:
1. TRANSFER OF ASSETS OF BLACKROCK TRUST IN EXCHANGE FOR SHARES OF
SHORT-INTERMEDIATE TERM SERIES AND ASSUMPTION OF LIABILITIES, IF ANY, AND
TERMINATION OF BLACKROCK TRUST
1.1 Subject to the terms and conditions herein set forth and on the basis of
the representations and warranties contained herein, BlackRock Trust agrees to
sell, assign, transfer and deliver all its assets, as set forth in paragraph
1.2, to Short-Intermediate Term Series, and Short-Intermediate Term Series
agrees (a) to issue and deliver to BlackRock Trust in exchange therefor the
number of Class A shares in Short-Intermediate Term Series determined by
dividing the net asset value of the BlackRock Trust allocable to Class A and
Class C 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 Class
A share of Short-Intermediate Term Series (rounded to the third decimal
place)(computed in the manner and as of the time and date set forth in paragraph
2.2) and (b) to assume all of BlackRock Trust's 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 BlackRock Trust to be acquired by Short-Intermediate Term
Series shall include without limitation all cash, cash equivalents, securities,
receivables (including interest and dividends receivable) and other property of
any kind owned by BlackRock Trust and any deferred or prepaid expenses shown as
assets
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on the books of BlackRock Trust on the closing date provided in paragraph 3
(Closing Date). Short-Intermediate Term Series has no plan or intent to sell or
otherwise dispose of significant assets of BlackRock Trust, other than in the
ordinary course of business.
1.3 Except as otherwise provided herein, Short-Intermediate Term Series will
assume all debts, liabilities, obligations and duties of BlackRock Trust 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 BlackRock
Trust agrees to utilize its best efforts, to the extent practicable, to cause
such Trust to discharge all of its known debts, liabilities, obligations and
duties prior to the Closing Date.
1.4 On or immediately prior to the Closing Date, BlackRock Trust will declare
and pay to its shareholders of record dividends and/or other distributions so
that it will have distributed all of such Trust's 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 its termination.
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,
BlackRock Trust will distribute PRO RATA to its Class A and Class C shareholders
of record, determined as of the close of business on the Closing Date, the Class
A shares of Short-Intermediate Term Series received by BlackRock Trust pursuant
to paragraph 1.1 in exchange for their interest in BlackRock Trust. Such
distribution will be accomplished by opening accounts on the books of
Short-Intermediate Term Series in the names of BlackRock Trust's shareholders
and transferring thereto the shares credited to the account of BlackRock Trust
on the books of Short-Intermediate Term Series. Each account opened shall be
credited with the respective PRO RATA number of Short-Intermediate Term Series
Class A shares due BlackRock Trust's Class A and Class C shareholders,
respectively. Fractional shares of Short-Intermediate Term Series shall be
rounded to the third decimal place. Upon the receipt of an order from the
Securities and Exchange Commission (SEC) indicating acceptance of the Form N-8F
that BlackRock Trust must file pursuant to the Investment Company Act of 1940,
as amended (Investment Company Act) to deregister as an investment company,
BlackRock Trust will file with the Secretary of State of The Commonwealth of
Massachusetts a Certificate of Termination terminating BlackRock Trust, but in
any event such termination will be completed within twelve months following the
Closing Date.
1.6 Short-Intermediate Term Series shall not issue certificates representing
its shares in connection with such exchange. With respect to any BlackRock Trust
shareholder holding BlackRock Trust certificates for shares of beneficial
interest as of the Closing Date, until Short-Intermediate Term Series is
notified by BlackRock Trust's transfer agent that such shareholder has
surrendered his or her outstanding Trust certificates for shares of beneficial
interest or, in the event of lost, stolen or destroyed certificates for shares
of beneficial interest, posted adequate bond or submitted a lost certificate
form, as the case may be, Short-Intermediate Term Series will not permit such
shareholder to (1) receive dividends or other distributions on
Short-Intermediate Term Series shares in cash (although such dividends and
distributions shall be credited to the account of such shareholder established
on Short-Intermediate Term Series' books pursuant to paragraph 1.5, as provided
in the next sentence), (2) exchange Short-Intermediate Term Series 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 Short-Intermediate
Term Series shares in cash as provided in the preceding sentence,
Short-Intermediate Term Series shall pay such dividends or other distributions
in additional Short-Intermediate Term Series shares, notwithstanding any
election such shareholder shall have made previously with respect to the
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payment of dividends or other distributions on shares of BlackRock Trust.
BlackRock Trust will, at its expense, request its shareholders to surrender
their outstanding BlackRock Trust certificates for shares of beneficial
interest, post adequate bond or submit a lost certificate form, as the case may
be.
1.7 Ownership of Short-Intermediate Term Series shares will be shown on the
books of the Short-Intermediate Term Series' transfer agent. Shares of
Short-Intermediate Term Series will be issued in the manner described in
Short-Intermediate Term Series' then current prospectus and statement of
additional information.
1.8 Any transfer taxes payable upon issuance of shares of Short-Intermediate
Term Series in exchange for shares of BlackRock Trust in a name other than that
of the registered holder of the shares being exchanged on the books of BlackRock
Trust 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 or
any state securities commission of BlackRock Trust is, and shall remain, the
responsibility of BlackRock Trust up to and including the Termination Date.
1.10 All books and records of BlackRock Trust, including all books and records
required to be maintained under the Investment Company Act and the rules and
regulations thereunder, shall be available to Short-Intermediate Term Series
from and after the Closing Date and shall be turned over to Short-Intermediate
Term Series on or prior to the Termination Date.
2. VALUATION
2.1 The value of BlackRock Trust's assets and liabilities to be acquired and
assumed, respectively, by Short-Intermediate Term Series shall be the net asset
value computed as of 4:15 p.m., New York time, on the Closing Date (such time
and date being hereinafter called the Valuation Time), using the valuation
procedures set forth in BlackRock Trust's then current prospectus and statement
of additional information.
2.2 The net asset value of a Class A share of Short-Intermediate Term Series
shall be the net asset value for Class A shares as of the Valuation Time, using
the valuation procedures set forth in Short-Intermediate Term Series' then
current prospectus and Government Securities Trust's statement of additional
information.
2.3 The number of Short-Intermediate Term Series shares to be issued (including
fractional shares, if any) in exchange for BlackRock Trust's 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 January 30, 1998 or such later date as the
parties may agree. 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 Short-Intermediate
Term Series or at such other place as the parties may agree.
3.2 State Street Bank and Trust Company (State Street), as custodian for
BlackRock Trust, shall deliver to Short-Intermediate Term Series at the Closing
a certificate of an authorized officer of State Street stating that (a)
BlackRock Trust's portfolio securities, cash and any other assets have been
transferred in proper form to Short-Intermediate Term Series 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.
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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 BlackRock Trust and of the net asset value per
share of Short-Intermediate Term Series 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 BlackRock Trust shall deliver to Short-Intermediate Term Series on or prior
to the Termination Date the names and addresses of each of the shareholders of
BlackRock Trust and the number of outstanding shares owned by each such
shareholder, all as of the close of business on the Closing Date, certified by
the Secretary or Assistant Secretary of BlackRock Trust. Short-Intermediate Term
Series shall issue and deliver to BlackRock Trust at the Closing a confirmation
or other evidence satisfactory to BlackRock Trust that shares of
Short-Intermediate Term Series have been or will be credited to BlackRock
Trust's account on the books of Short-Intermediate Term Series. 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 BlackRock Trust represents and warrants as follows:
4.1.1 BlackRock Trust is a business trust duly organized and validly existing
under the laws of The Commonwealth of Massachusetts.
4.1.2 BlackRock 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 BlackRock 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 BlackRock Trust or of any material agreement, indenture,
instrument, contract, lease or other undertaking to which BlackRock Trust is a
party or by which BlackRock Trust is bound;
4.1.4 All material contracts or other commitments to which BlackRock Trust, or
the properties or assets of BlackRock Trust, is subject, or by which BlackRock
Trust is bound except this Agreement will be terminated on or prior to the
Closing Date without BlackRock Trust or Short-Intermediate Term Series incurring
any liability or penalty with respect thereto;
4.1.5 No material litigation or administrative proceeding or investigation of
or before any court or governmental body is presently pending or to its
knowledge threatened against BlackRock Trust or any of its properties or assets.
BlackRock Trust knows of no facts that might form the basis for the institution
of such proceedings, and 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;
4.1.6 The Portfolio of Investments, Statement of Assets and Liabilities,
Statement of Operations, Statement of Cash Flows, Statement of Changes in Net
Assets, and Financial Highlights of BlackRock Trust at June 30, 1997 and for the
year then ended and the Notes thereto (copies of which have been furnished to
Short-Intermediate Term Series) have been audited by Price Waterhouse LLP,
independent auditors, 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
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condition, results of operations, changes in net assets and financial highlights
of BlackRock Trust as of and for the period ended on such date, and there are no
material known liabilities of BlackRock Trust (contingent or otherwise) not
disclosed therein;
4.1.7 Since June 30, 1997, there has not been any material adverse change in
BlackRock Trust's financial condition, assets, liabilities or business other
than changes occurring in the ordinary course of business, or any incurrence by
BlackRock Trust of indebtedness maturing more than one year from the date such
indebtedness was incurred, except as otherwise disclosed to and accepted by
Short-Intermediate Term Series. For the purposes of this paragraph 4.1.7, a
decline in net assets or change in the number of shares outstanding shall not
constitute a material adverse change;
4.1.8 At the date hereof and at the Closing Date, all federal and other tax
returns and reports of BlackRock Trust required by law to have been filed on or
before such dates shall have been timely filed, and all federal and other taxes
shown as due on said returns and reports shall have been paid insofar as due, or
provision shall have been made for the payment thereof, and, to the best of
BlackRock Trust's knowledge, all 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 such returns;
4.1.9 For each past taxable year since it commenced operations, BlackRock Trust
has met the requirements of Subchapter M of the Internal Revenue Code for
qualification and treatment as a regulated investment company and has elected to
be treated as such and BlackRock Trust intends to meet those requirements for
the current taxable year; and, for each past calendar year since it commenced
operations, BlackRock Trust 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 BlackRock Trust 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 BlackRock Trust
will, at the Closing Date, be held in the name of the persons and in the amounts
set forth in the list of shareholders submitted to Short-Intermediate Term
Series in accordance with the provisions of paragraph 3.4. BlackRock Trust does
not have outstanding any options, warrants or other rights to subscribe for or
purchase any shares, nor is there outstanding any security convertible into any
of its shares.
4.1.11 At the Closing Date, the BlackRock Trust will have good and marketable
title to the assets to be transferred to Short-Intermediate Term Series 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, Short-Intermediate
Term Series will acquire good and marketable title thereto;
4.1.12 The execution, delivery and performance of this Agreement has been duly
authorized by the Board of Trustees of BlackRock Trust and by all necessary
action, other than shareholder approval, on the part of BlackRock Trust, and
this Agreement constitutes a valid and binding obligation, subject to
shareholder approval, of BlackRock Trust;
4.1.13 The information furnished and to be furnished by BlackRock 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
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4.1.14 On the effective date of the registration statement filed with the SEC
by Government Securities Trust on Form N-14 relating to the shares of
Short-Intermediate Term Series issuable hereunder, and any supplement or
amendment thereto (Registration Statement), at the time of the meeting of the
shareholders of BlackRock Trust and on the Closing Date, the Proxy Statement of
BlackRock Trust, the Prospectus of Short-Intermediate Term Series, and the
Statement of Additional Information of Government Securities Trust 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 such Acts 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 Securities Trust
for use therein.
4.2 Government Securities Trust represents and warrants as follows:
4.2.1 Government Securities Trust is a business trust duly organized and
validly existing under the laws of the Commonwealth of Massachusetts and
Short-Intermediate Term 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;
4.2.2 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;
4.2.3 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 Government Securities Trust with respect to Short-Intermediate Term
Series is a party or by which Government Securities Trust with respect to
Short-Intermediate Term Series is bound;
4.2.4 No material litigation or administrative proceeding or investigation of
or before any court or governmental body is presently pending or threatened
against Government Securities Trust or any of the properties or assets of
Short-Intermediate Term Series except as previously disclosed in writing to
BlackRock Trust. Except as previously disclosed in writing to BlackRock Trust,
Government Securities Trust knows of no facts that might form the basis for the
institution of such proceedings, and, with respect to Short-Intermediate Term
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;
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 Short-Intermediate Term Series at November 30, 1996, and for the
fiscal year then ended and the Notes thereto (copies of which have been
furnished to BlackRock Trust) have been audited by Price Waterhouse LLP,
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 Short-Intermediate Term Series as of and for the period ended on
such date, and there are no material known liabilities of Short-Intermediate
Term Series (contingent or otherwise) not disclosed therein;
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4.2.6 Since November 30, 1996, there has not been any material adverse change
in Short-Intermediate Term Series' financial condition, assets, liabilities or
business other than changes occurring in the ordinary course of business, or any
incurrence by Short-Intermediate Term Series of indebtedness maturing more than
one year from the date such indebtedness was incurred, except as otherwise
disclosed to and accepted by BlackRock Trust. For the purposes of this
paragraph, a decline in net asset value per share or a decrease in the number of
shares outstanding shall not constitute a material adverse change;
4.2.7 At the date hereof and at the Closing Date, all federal and other tax
returns and reports of Short-Intermediate Term Series required by law to have
been filed on or before such dates shall have been filed, and all federal and
other taxes shown as due on said returns and reports shall have been paid
insofar as due, or provision shall have been made for the payment thereof, and,
to the best of Short-Intermediate Term Series' knowledge, all 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,
Short-Intermediate Term Series has met the requirements of Subchapter M of the
Internal Revenue Code for qualification and treatment as a regulated investment
company and has elected to be treated as such and Government Securities Trust
intends to cause Short-Intermediate Term Series to meet those requirements for
the current taxable year; and, for each past calendar year since it commenced
operations, Short-Intermediate Term 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;
4.2.9 All issued and outstanding shares of Short-Intermediate Term Series 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, Short-Intermediate Term Series 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;
4.2.10 The execution, delivery and performance of this Agreement has been duly
authorized by the Board of Trustees of Government Securities Trust and by all
necessary corporate action on the part of Government Securities Trust, and this
Agreement constitutes a valid and binding obligation of Government Securities
Trust;
4.2.11 The shares of Short-Intermediate Term Series to be issued and delivered
to BlackRock Trust 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 Short-
Intermediate Term Series, fully paid and non-assessable;
4.2.12 The information furnished and to be furnished by Government Securities
Trust 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 and shall comply in all material respects with
applicable federal securities and other laws and regulations; and
4.2.13 On the effective date of the Registration Statement, at the time of the
meeting of the shareholders of BlackRock Trust 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 such Acts, (ii) will not contain
any untrue statement of a
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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 the 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
BlackRock Trust for use therein.
5. COVENANTS OF GOVERNMENT SECURITIES TRUST AND BLACKROCK TRUST
5.1 BlackRock Trust and Government Securities Trust with respect to
Short-Intermediate Term Series 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 allowed by paragraph 1.2 hereof or required by paragraph 1.4
hereof.
5.2 BlackRock Trust covenants to call a meeting of its shareholders 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 BlackRock Trust covenants that Short-Intermediate Term Series shares to be
received for and on behalf of BlackRock Trust 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 BlackRock Trust covenants that it will assist Short-Intermediate Term
Series in obtaining such information as Short-Intermediate Term Series
reasonably requests concerning the beneficial ownership of BlackRock Trust's
shares.
5.5 Subject to the provisions of this Agreement, each Trust 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 BlackRock Trust covenants to prepare the Proxy Statement in compliance with
the 1934 Act, the Investment Company Act and the rules and regulations under
each Act.
5.7 BlackRock Trust covenants that it will, from time to time, as and when
requested by Short-Intermediate Term Series, 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 Short-Intermediate Term Series may
deem necessary or desirable in order to vest in and confirm to
Short-Intermediate Term Series title to and possession of all the assets of
BlackRock Trust to be sold, assigned, transferred and delivered hereunder and
otherwise to carry out the intent and purpose of this Agreement.
5.8 Government Securities Trust 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 Trustees 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 Securities Trust covenants that it will, from time to time, as
and when requested by BlackRock Trust, execute and deliver or cause to be
executed and delivered all such assignments and other
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<PAGE>
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 the BlackRock Trust title to and possession of all the shares
of Short-Intermediate Term Series to be transferred to the shareholders of
BlackRock Trust pursuant to this Agreement and (ii) assume all of the
liabilities of BlackRock Trust in accordance with this Agreement.
6. CONDITIONS PRECEDENT TO OBLIGATIONS OF BLACKROCK TRUST
The obligations of BlackRock Trust to consummate the transactions provided
for herein shall be subject to the performance by Government Securities Trust
and Short-Intermediate Series of all the obligations to be performed by them
hereunder on or before the Closing Date and the following further conditions:
6.1 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 transaction 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 Securities Trust shall have delivered to BlackRock Trust on the
Closing Date a certificate executed in its name by the President or a Vice
President of Government Securities Trust, in form and substance satisfactory to
BlackRock Trust and dated as of the Closing Date, to the effect that the
representations and warranties of Government Securities Trust in this Agreement
are true and correct at and as of the Closing Date, except as they may be
affected by the transaction contemplated by this Agreement, and as to such other
matters as BlackRock Trust shall reasonably request.
6.3 BlackRock Trust shall have received on the Closing Date a favorable opinion
from Shereff, Friedman, Hoffman & Goodman, LLP, counsel to Government Securities
Trust, dated as of the Closing Date, to the effect that:
6.3.1 Government Securities Trust is a business trust 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 Short-Intermediate Term 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;
6.3.2 This Agreement has been duly authorized, executed and delivered by
Government Securities Trust and, assuming due authorization, execution and
delivery of the Agreement by BlackRock Trust, is a valid and binding
obligation of Government Securities Trust 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;
6.3.3 The shares of the Government Securities Trust to be distributed to
the shareholders of BlackRock Trust under this Agreement, assuming their due
authorization, execution and delivery as contemplated by this Agreement,
will be validly issued and outstanding and fully paid and non-assessable,
and no shareholder of Short-Intermediate Term Series of Government
Securities Trust 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
consummation of the transactions contemplated hereby will not, (i) conflict
with Government Securities Trust's Declaration of Trust or By-Laws or (ii)
result in a default or a breach of (a) the Management Agreement dated August
9, 1988
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<PAGE>
as amended on November 19, 1993, between 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
between Government Securities Trust and State Street Bank and Trust Company,
(c) the Distribution Agreement dated May 8, 1996 between Government
Securities Trust and Prudential Securities Incorporated and (d) the Transfer
Agency and Service Agreement dated January 1, 1988 between Government
Securities Trust and Prudential Mutual Fund Services LLC, as successor to
Prudential Mutual Fund Services, Inc.; 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;
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 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;
6.3.6 Government Securities Trust is 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 Securities Trust that could be
required to be disclosed in its registration statement on Form N-1A and is
not so disclosed.
Such opinion may rely on an opinion of Massachusetts Counsel to the extent
it addresses Massachusetts law.
7. CONDITIONS PRECEDENT TO OBLIGATIONS OF GOVERNMENT SECURITIES TRUST
The obligations of Government Securities Trust to complete the transactions
provided for herein shall be subject to the performance by BlackRock 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 BlackRock 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 transaction 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 BlackRock Trust shall have delivered to Government Securities Trust on the
Closing Date a statement of the assets and liabilities, which shall be prepared
in accordance with generally accepted accounting principles consistently
applied, together with a list of the portfolio securities of BlackRock Trust
showing the adjusted tax base of such securities by lot, as of the Closing Date,
certified by the Treasurer of BlackRock Trust.
7.3 BlackRock Trust shall have delivered to Government Securities Trust on the
Closing Date a certificate executed in its name by its President or one of its
Vice Presidents, in form and substance satisfactory to Government Securities
Trust and dated as of the Closing Date, to the effect that the representations
and
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<PAGE>
warranties of BlackRock Trust made in this Agreement are true and correct at and
as of the Closing Date except as they may be affected by the transaction
contemplated by this Agreement, and as to such other matters as Government
Securities Trust shall reasonably request.
7.4 On or immediately prior to the Closing Date, BlackRock Trust shall have
declared and paid to its shareholders of record 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 such Trust's 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 BlackRock Trust for all completed taxable years from the inception of such
Trust through June 30, 1997, and for the period from and after June 30, 1997
through the Closing Date.
7.5 Government Securities Trust shall have received on the Closing Date a
favorable opinion from Gardner, Carton & Douglas, counsel to BlackRock Trust,
dated as of the Closing Date, to the effect that:
7.5.1 BlackRock 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;
7.5.2 This Agreement has been duly authorized, executed and delivered by
BlackRock Trust and constitutes a valid and legally binding obligation of
BlackRock Trust enforceable against the assets of such Trust 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;
7.5.3 The execution and delivery of the Agreement did not, and the
performance by BlackRock Trust of its obligations hereunder will not, (i)
violate BlackRock Trust's Declaration of Trust or By-Laws or (ii) result in
a default or a breach of (a) the Management Agreement, dated August 30, 1991
and amended February 28, 1995, between BlackRock Trust and Prudential
Investments Fund Management LLC, as successor to Prudential Mutual Fund
Management, Inc., (b) the Custodian Contract dated August 30, 1991, as
amended, between BlackRock Trust and State Street Bank and Trust Company,
(c) the Distribution Agreement dated April 10, 1996 between BlackRock Trust
and Prudential Securities Incorporated and (d) the Transfer Agency and
Service Agreement dated August 30, 1991 between BlackRock Trust and
Prudential Mutual Fund Services LLC, as successor to Prudential Mutual Fund
Services, Inc.; provided, however, that such counsel may state that insofar
as performance by BlackRock Trust of its obligations under this Agreement is
concerned 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 All regulatory consents, authorizations and approvals required to be
obtained by BlackRock Trust under the federal laws of the United States and
the laws of The Commonwealth of Massachusetts for the consummation of the
transactions contemplated by this Agreement have been obtained;
7.5.5 Such counsel knows of no litigation or any governmental proceeding
instituted or threatened against BlackRock Trust that would be required to
be disclosed in its Registration Statement on Form N-1A and is not so
disclosed; and
7.5.6 BlackRock Trust is 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.
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<PAGE>
Such opinion may rely on an opinion of Massachusetts counsel to the extent
it addresses Massachusetts law, and may assume for purposes of the opinion given
pursuant to paragraph 7.5.2 that New York law is the same as Illinois law.
8. FURTHER CONDITIONS PRECEDENT TO OBLIGATIONS OF GOVERNMENT SECURITIES TRUST
AND SHORT-INTERMEDIATE TERM SERIES
The obligations of Government Securities Trust and BlackRock 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 Boards of Trustees of Government
Securities Trust and BlackRock Trust, as to the determinations set forth in Rule
17a-8(a) under the Investment Company Act, (b) the Board of Trustees of
Government Securities Trust as to the assumption by Short-Intermediate Term
Series of the liabilities of BlackRock Trust and (c) the holders of the
outstanding shares of BlackRock Trust in accordance with the provisions of
BlackRock Trust's Declaration of Trust and By-Laws, and certified copies of the
resolutions evidencing such approvals shall have been delivered to Government
Securities Trust and BlackRock Trust, as applicable.
8.2 Any proposed change to Government Securities Trust's operations that may be
approved by the Board of Trustees of Government Securities Trust 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 Securities Trust shareholders is required pursuant to the
Investment Company Act or otherwise, shall have been approved by the requisite
vote of the holders of the outstanding shares of Government Securities Trust in
accordance with the Investment Company Act and the provisions of Massachusetts
law, and certified copies of the resolution evidencing such approval shall have
been delivered to BlackRock 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 Securities Trust or BlackRock
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 Securities Trust or BlackRock
Trust, 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 order 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 on or before the Closing Date an opinion of
Gardner, Carton & Douglas with respect to BlackRock Trust satisfactory to each
of them, substantially to the effect that for federal income tax purposes:
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<PAGE>
8.6.1 The acquisition by Short-Intermediate Term Series of the assets of
BlackRock Trust solely in exchange for voting shares of Short-Intermediate
Term Series and the assumption by Short-Intermediate Term Series of
BlackRock Trust's liabilities, if any, followed by the distribution of
Short-Intermediate Term Series's voting shares as a liquidating distribution
pro rata to BlackRock Trust's shareholders and the termination of BlackRock
Trust pursuant to the Plan and constructively in exchange for BlackRock
Trust's shares, will constitute a reorganization within the meaning of
Section 368(a)(1)(C) of the Internal Revenue Code, and each Trust will be "a
party to a reorganization" within the meaning of Section 368(b) of the
Internal Revenue Code;
8.6.2 No gain or loss will be recognized by the shareholders of the
BlackRock Trust upon receipt of the Short-Intermediate Term Series Class A
shares solely in exchange for and in cancellation of the BlackRock Trust
shares of beneficial interest, as described above and in the Agreement;
8.6.3 No gain or loss will be recognized to the BlackRock Trust upon the
transfer of all of its assets to the Short-Intermediate Term Series solely
in exchange for Class A shares of the Short-Intermediate Term Series and the
assumption by the Short-Intermediate Term Series of the liabilities, if any,
of the BlackRock Trust. In addition, no gain or loss will be recognized to
the BlackRock Trust on the distribution of such shares to the BlackRock
Trust's shareholders in liquidation by terminating the BlackRock Trust;
8.6.4 No gain or loss will be recognized to Short-Intermediate Term Series
upon the acquisition of the assets of the BlackRock Trust solely in exchange
for Class A shares of the Short-Intermediate Series and the assumption of
the BlackRock Trust's liabilities, if any;
8.6.5 The basis of the BlackRock Trust assets in the hands of the
Short-Intermediate Term Series will be the same as the basis of such assets
in the hands of the BlackRock Trust immediately prior to the Reorganization;
8.6.6 The holding period of the BlackRock Trust assets in the hands of the
Short-Intermediate Term Series will include the period during which such
assets were held by the BlackRock Trust immediately prior to the
Reorganization;
8.6.7 The basis of the Short-Intermediate Term Series Class A shares to be
received by shareholders of the BlackRock Trust will, in each instance, be
the same as the basis of the Class A and Class C shares of beneficial
interest of the BlackRock Trust held by such shareholders and canceled in
the Reorganization; and
8.6.8 The holding period of the Short-Intermediate Term Series shares to be
received by the shareholders of the BlackRock Trust will include the holding
period of the shares of beneficial interest of the BlackRock Trust canceled
pursuant to the Reorganization, provided that the Short-Intermediate Term
Series shares were held as capital assets on the date of the Reorganization.
9. FINDER'S FEES AND EXPENSES
9.1 Each Trust 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 Short-Intermediate
Term Series and BlackRock Trust pro rata in a fair and equitable manner in
proportion to its assets.
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10. ENTIRE AGREEMENT; SURVIVAL OF WARRANTIES
10.1 This Agreement constitutes the entire agreement between the Trusts.
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.
11. TERMINATION
Government Securities Trust or BlackRock Trust 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; or
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 BlackRock Trust and Government Securities
Trust.
In the event of any such termination, there shall be no liability for
damages on the part of either Trust (other than the liability of the Trusts to
pay their allocated expenses pursuant to paragraph 9.2) or any Trustee or
officer of either Government Securities Trust or BlackRock 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 BlackRock Trust pursuant to paragraph 5.2, no such amendment may have the
effect of changing the provisions for determining the number of shares of
Short-Intermediate Term Series to be distributed to BlackRock Trust's
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, 100 Mulberry Street,
Newark, New Jersey 07102, Attention: S. Jane Rose.
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.
14.3 This Agreement shall be governed by and construed in accordance with the
laws of the State of New York.
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
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<PAGE>
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 PERSONAL LIABILITY
Each Trust's Declaration of Trust provides that no shareholder of the Trust
shall be subject to any personal liability whatsoever to any person in
connection with the Trust's property, or the acts, obligations or affairs of the
Trust. No Trustee, officer, employee or agent of the Trust shall be subject to
any personal liability whatsoever to any person, other than the the Trust or its
shareholders, in connection with the Trust's property or the affairs of the
Trust, save only that arising from bad faith, willful misfeasance, gross
negligence or reckless disregard of his or its duty to such person; and all
persons shall look solely to the Trust's property for satisfaction of claims of
any nature arising in connection with the affairs of the Trust. If any
shareholder, Trustee, officer, employee or agent, as such, of the Trust is made
a party to any suit or proceeding to enforce any such liability, he or it shall
not, on account thereof, be held to any personal liability.
IN WITNESS WHEREOF, each of the parties has caused this Agreement to be
executed by the President or Vice President of each Trust.
The BlackRock Government Income Trust
By /s/ Richard A. Redeker
---------------------------------
PRESIDENT
Prudential Government Securities Trust
By /s/ Thomas A. Early
---------------------------------
VICE PRESIDENT
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
SYNOPSIS................................................................................................... 2
General................................................................................................ 2
The Proposed Reorganization............................................................................ 2
Reasons for the Reorganization......................................................................... 3
Certain Differences Between BlackRock Trust and Short-Intermediate Series.............................. 6
Structure of BlackRock Trust and Government Securities Trust--Short-Intermediate Series................ 7
Investment Objectives and Policies..................................................................... 8
Fees and Expenses...................................................................................... 9
Management Fees.................................................................................... 9
Distribution Fees.................................................................................. 9
Other Expenses..................................................................................... 10
Shareholder Transaction Expenses................................................................... 10
Expense Ratios..................................................................................... 11
Purchases and Redemptions.............................................................................. 12
Exchange Privileges.................................................................................... 13
Dividends and Distributions............................................................................ 13
Federal Tax Consequences of Proposed Reorganization.................................................... 13
PRINCIPAL RISK FACTORS..................................................................................... 14
Ratings................................................................................................ 14
Hedging and Return Enhancement Activities.............................................................. 14
Foreign Securities..................................................................................... 15
Tax Considerations..................................................................................... 15
Realignment of Investment Portfolio.................................................................... 16
THE PROPOSED TRANSACTION................................................................................... 16
Agreement and Plan of Reorganization................................................................... 16
Reasons for the Reorganization Considered by the Trustees.............................................. 18
Description of Securities to be Issued................................................................. 18
Tax Considerations..................................................................................... 19
Certain Comparative Information About the Funds........................................................ 19
Capitalization..................................................................................... 19
Shareholder Meetings and Voting Rights............................................................. 20
Shareholder Liability.............................................................................. 20
Liability and Indemnification of Trustees.......................................................... 21
Pro Forma Capitalization and Ratios.................................................................... 21
INFORMATION ABOUT SHORT-INTERMEDIATE SERIES................................................................ 22
INFORMATION ABOUT BLACKROCK TRUST.......................................................................... 24
VOTING INFORMATION......................................................................................... 25
OTHER MATTERS.............................................................................................. 27
SHAREHOLDERS' PROPOSALS.................................................................................... 27
APPENDIX B--Agreement and Plan of Reorganization........................................................... B-1
TABLE OF CONTENTS
ENCLOSURES
Prospectus of Short-Intermediate Series dated February 3, 1997, as supplemented on March 17, 1997 and
September 8, 1997.
</TABLE>
<PAGE>
PRUDENTIAL GOVERNMENT SECURITIES TRUST
STATEMENT OF ADDITIONAL INFORMATION
DATED DECEMBER 15, 1997
ACQUISITION OF ASSETS OF
THE BLACKROCK GOVERNMENT INCOME TRUST
GATEWAY CENTER THREE
100 MULBERRY STREET
NEWARK, NEW JERSEY 07102-4077
(800) 225-1852
------------------------
BY AND IN EXCHANGE FOR THE SHARES OF
SHORT-INTERMEDIATE TERM SERIES
OF PRUDENTIAL GOVERNMENT SECURITIES TRUST
GATEWAY CENTER THREE
100 MULBERRY STREET
NEWARK, NEW JERSEY 07102-4077
(800) 225-1852
This Statement of Additional Information, relating specifically to the
proposed transfer of all the assets and the assumption of all of the
liabilities, if any, of The BlackRock Government Income Trust (the Acquired
Fund) by Prudential Government Securities Trust's Short-Intermediate Term Series
(the Acquiring Fund) consists of this cover page and the following described
documents, each of which is attached hereto and incorporated by reference.
1. Pro Forma Financial Statements as of and at May 31, 1997.
2. The Statement of Additional Information of the Acquiring Fund dated
February 3, 1997.
3. The Annual Report to Shareholders of the Acquiring Fund for the
fiscal year ended November 30, 1996.
4. The Semi-Annual Report to Shareholders of the Acquiring Fund for the
six-months ended May 31, 1997.
5. The Annual Report to Shareholders of the Acquired Fund for the
fiscal year ended June 30, 1997.
The Statement of Additional Information is not a prospectus. A Prospectus
and Proxy Statement dated December 15, 1997 relating to the above referenced
matter may be obtained from the Acquiring Fund without charge by writing or
calling Prudential Government Securities Trust at the address or telephone
number listed above. This Statement of Additional Information relates to, and
should be read in conjunction with, the Prospectus and Proxy Statement.
<PAGE>
FINANCIAL STATEMENTS
The following are pro forma financial statements which give effect to the
proposed transaction whereby all the assets of The BlackRock Government Income
Trust will be exchanged for Class A shares of Prudential Government Securities
Trust's Short-Intermediate Term Series and Prudential Government Securities
Trust's Short-Intermediate Term Series will assume the liabilities, if any, of
The BlackRock Government Income Trust. Immediately thereafter, the Class A
shares of Prudential Government Securities Trust's Short-Intermediate Term
Series will be distributed to the shareholders of The BlackRock Government
Income Trust in a total liquidation of The BlackRock Government Income Trust,
which will subsequently be dissolved. The following pro forma financial
statements include a pro forma Portfolio of Investments at May 31, 1997, a pro
forma Statement of Assets and Liabilities at May 31, 1997, and a pro forma
Statement of Operations for the twelve months ended May 31, 1997.
PRO-FORMA FINANCIAL STATEMENTS
PRO-FORMA PORTFOLIO OF INVESTMENTS
MAY 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT (000) VALUE
- ------------------------------------------- ----------------------------------------------
GOVERNMENT GOVERNMENT
SECURITIES SECURITIES
TRUST TRUST
BLACKROCK (SHORT- PRO BLACKROCK (SHORT- PRO
GOVERNMENT INTERMEDIATE FORMA GOVERNMENT INTERMEDIATE FORMA
INCOME TRUST SERIES) TOTAL DESCRIPTION INCOME TRUST SERIES) TOTAL
- ------------- ----------------- ------------------------------------------------------------ ------------
<C> <C> <C> <S> <C> <C> <C>
LONG-TERM INVESTMENTS--98.0%
ASSET-BACKED SECURITIES--27.0%
AFC Mortgage Loan
Trust,
Series 1997, Class
A, 5.9075%,
$ 777 $ 777 3/25/27........... $ 777,038 $ 777,038
Case Equipment Loan
Trust
$ 3,000 3,000 6.70%, 3/15/04.... $ 2,998,125 2,998,125
Chase Manhattan
Grantor Trust,
Series 2002-96B,
Class A, Auto Loan
Pass-Through
Certificates
779 779 6.61%, 9/15/02.... 782,017 782,017
Chevy Chase Auto
Receivable Trust,
Series 1996-2,
Class A, 5.90%,
391 391 7/15/03........... 387,838 387,838
Discover Card Master
Trust,
Series 1994-2,
Class A,
6.0375%,
1,000 1,000 10/16/04.......... 1,008,438 1,008,438
Series 1996-4,
Class A,
6.0625%,
500 500 10/16/13.......... 504,844 504,844
EQCC Home Equity
Loan Trust,
Series 1994-1,
526 526 5.80%, 3/15/09.... 514,139 514,139
First USA Credit
Card Master Trust,
Series 1994-6,
Class A,
6.0375%,
500 500 10/15/03.......... 504,063 504,063
Ford Credit Auto
Lease Trust
10,000 10,000 5.80%, 5/15/99.... 9,956,250 9,956,250
Ford Credit Auto
Lease Trust,
Series 1996-1,
Class A2, 5.80%,
700 700 5/15/99........... 697,594 697,594
GMAC Grantor Trust
8,500 8,500 6.50%, 4/15/02.... 8,517,266 8,517,266
</TABLE>
See Notes to Pro-Forma Financial Statements
2
<PAGE>
PRO-FORMA FINANCIAL STATEMENTS
PRO-FORMA PORTFOLIO OF INVESTMENTS
MAY 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT (000) VALUE
- ------------------------------------------- ----------------------------------------------
GOVERNMENT GOVERNMENT
SECURITIES SECURITIES
TRUST TRUST
BLACKROCK (SHORT- PRO BLACKROCK (SHORT- PRO
GOVERNMENT INTERMEDIATE FORMA GOVERNMENT INTERMEDIATE FORMA
INCOME TRUST SERIES) TOTAL DESCRIPTION INCOME TRUST SERIES) TOTAL
- ------------- ----------------- ------------------------------------------------------------ ------------
<C> <C> <C> <S> <C> <C> <C>
ASSET-BACKED SECURITIES
(CONTINUED)
GMAC Grantor Trust,
Series 1997-A,
Class A, 6.50%,
$ 863 $ 863 4/15/02........... $ 865,355 $ 865,355
Green Tree Financial
Corporation
$ 10,000 10,000 7.65%, 4/15/27.... $ 10,006,250 10,006,250
Merrill Lynch Credit
Corporation,
Series 1996-A,
Class A,
6.0875%,
1,279 1,279 5/15/21........... 1,285,617 1,285,617
Mortgage Loan,
Series 1996-B,
Class A,
6.0875%,
883 883 7/15/21........... 886,838 886,838
Olympic Automobile
Receivables,
Series 1997-A,
Class A2,
900 900 6.125%, 1/01/99... 900,282 900,282
Peoples Bank Credit
Card Master Trust,
Series 1996-1,
Class A,
5.8375%,
500 500 11/15/04.......... 500,547 500,547
Salomon Brothers
Mortgage Secs,
Series 1996-6B,
Class A1,
428 428 6.10%, 6/30/26.... 427,260 427,260
Series 1996-6G,
Class A1,
415 415 6.00%, 9/30/27.... 414,450 414,450
SLM Student Loan
Trust,
Series 96-A, Class
A1,
5.71102%,
887 887 7/25/04........... 886,866 886,866
Series 97-1, Class
A2,
200 200 5.84%, 1/25/10.... 199,906 199,906
SMS Student Loan
Trust,
Zero Coupon,
600 600 10/27/25.......... 598,875 598,875
Student Loan Market
Association
5,000 5,000 5.73%, 10/25/05... 5,012,500 5,012,500
Team Fleet Financing
Corporation
5,000 5,000 7.35%, 5/15/03.... 5,055,469 5,055,469
------------------------------- ------------
12,141,967 41,545,860 53,687,827
------------------------------- ------------
COLLATERIZED MORTGAGE
OBLIGATIONS--6.4%
First Union-Lehman
Brothers Com. Mtg.
Trust
7.30%, 4/18/29,
CMO, Series
5,000 $ 5,000 1997.............. 5,051,563 5,051,563
ICI Funding
Corporation
5,000 5,000 7.60%, 11/25/01... 5,008,594 5,008,594
</TABLE>
See Notes to Pro-Forma Financial Statements
3
<PAGE>
PRO-FORMA FINANCIAL STATEMENTS
PRO-FORMA PORTFOLIO OF INVESTMENTS
MAY 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT (000) VALUE
- ------------------------------------------- ----------------------------------------------
GOVERNMENT GOVERNMENT
SECURITIES SECURITIES
TRUST TRUST
BLACKROCK (SHORT- PRO BLACKROCK (SHORT- PRO
GOVERNMENT INTERMEDIATE FORMA GOVERNMENT INTERMEDIATE FORMA
INCOME TRUST SERIES) TOTAL DESCRIPTION INCOME TRUST SERIES) TOTAL
- ------------- ----------------- ------------------------------------------------------------ ------------
<C> <C> <C> <S> <C> <C> <C>
COLLATERIZED MORTGAGE OBLIGATIONS
(CONTINUED)
Residential Asset
Security Trust
Series 1997-A1,
Class A,
$ 376 $ 376 3/25/27........... $ 373,581 $ 373,581
Series 96-L, Class
426 426 A1, 12/25/26...... 432,382 432,382
Resolution Trust
Corporation
6.78%, 12/25/20,
CMO, Series
$ 1,843 1,843 1992.............. $ 1,847,765 1,847,765
------------------------------- ------------
805,963 11,907,922 12,713,885
------------------------------- ------------
CORPORATE OBLIGATIONS--1.3%
Merck and Company
2,500 2,500 5.76%, 5/3/37..... 2,510,000 2,510,000
----------------- ------------
FEDERAL HOME LOAN MORTGAGE
CORPORATION-- 14.4%
5.9695%,
600 600 2/15/02........... 589,875 589,875
1,019 1,019 6.071%, 2/01/30... 1,003,779 1,003,779
6.093%, 11/01/20,
1,397 1,397 1 year CMT, ARM... 1,376,335 1,376,335
15,000 15,000 6.45%, 6/4/99..... 14,983,650 14,983,650
969 969 6.57%, 6/1/28..... 977,110 977,110
7.375%, 3/01/06,
537 537 Multi-family...... 537,749 537,749
5,554 5,554 7.835%, 8/01/24... 5,793,397 5,793,397
9.00%, 9/01/05 -
11/01/05, 15
2,488 2,488 Year.............. 2,557,568 2,557,568
Series 1561, Class
901 901 ZB, 8/15/06....... 885,107 885,107
------------------------------- ------------
7,927,523 20,777,047 28,704,570
------------------------------- ------------
FEDERAL NATIONAL MORTGAGE
ASSOCIATION-- 14.3%
500 500 5.75%, 4/25/07.... 488,461 488,461
4,238 4,238 6.765%, 1/01/07... 4,123,921 4,123,921
902 902 7.182%, 9/01/28... 925,414 925,414
1,437 1,437 8.00%, 3/01/08.... 1,464,856 1,464,856
8.00%, 5/01/25 -
14,349 14,349 12/01/99.......... 14,655,645 14,655,645
716 716 8.50%, 12/01/10... 741,938 741,938
8.50%, 6/01/08 -
2,327 2,327 1/01/16........... 2,405,761 2,405,761
Series 1993 - 192,
Class Z,
860 860 5.75%, 8/25/06.... 842,048 842,048
REMIC Pass-Through
Certificates,
1994-39, Class PB,
733 733 6/25/12........... 729,097 729,097
1996-T6, Class C,
957 957 2/26/01........... 938,116 938,116
</TABLE>
See Notes to Pro-Forma Financial Statements
4
<PAGE>
PRO-FORMA FINANCIAL STATEMENTS
PRO-FORMA PORTFOLIO OF INVESTMENTS
MAY 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT (000) VALUE
- ------------------------------------------- ----------------------------------------------
GOVERNMENT GOVERNMENT
SECURITIES SECURITIES
TRUST TRUST
BLACKROCK (SHORT- PRO BLACKROCK (SHORT- PRO
GOVERNMENT INTERMEDIATE FORMA GOVERNMENT INTERMEDIATE FORMA
INCOME TRUST SERIES) TOTAL DESCRIPTION INCOME TRUST SERIES) TOTAL
- ------------- ----------------- ------------------------------------------------------------ ------------
<C> <C> <C> <S> <C> <C> <C>
FEDERAL NATIONAL MORTGAGE
ASSOCIATION (CONTINUED)
Series I, Class-2,
$ 1,055 $ 1,055 4/01/09........... $ 1,187,224 $ 1,187,224
------------------------------- ------------
9,722,915 $ 18,779,566 28,502,481
------------------------------- ------------
GOVERNMENT NATIONAL MORTGAGE
ASSOCIATION--17.9%
7.00%, 1/20/25, 1
941 941 year CMT, ARM..... 959,173 959,173
1,561 1,561 7.12%, 9/20/23.... 1,600,657 1,600,657
2,272 2,272 7.25%, 4/15/06.... 2,291,991 2,291,991
7.50%, 10/15/25 -
$ 14,079 14,079 1/15/26........... 14,034,677 14,034,677
8.00%, 6/15/23 -
9,082 8/15/25........... 9,339,162 9,339,162
9.00%, 6/15/98 -
6,953 6,953 9/15/09........... 7,337,446 7,337,446
------------------------------- ------------
4,851,821 30,711,285 35,563,106
------------------------------- ------------
UNITED STATES TREASURY
NOTES--16.7%
600 600 6.50%, 8/31/01.... 600,188 600,188
680 680 6.625%, 7/31/01... 683,506 683,506
2,250 2,250 6.625%, 4/30/02... 2,259,832 2,259,832
3,000 3,000 6.625%, 5/15/07... 2,991,090 2,991,090
7.375%,
6,000 6,000 11/15/97.......... 6,045,000 6,045,000
20,000 20,000 8.25%, 7/15/98.... 20,493,800 20,493,800
------------------------------- ------------
1,283,694 31,789,722 33,073,416
------------------------------- ------------
TOTAL LONG-TERM INVESTMENTS--98.0%
(cost
$194,489,567)..... 36,733,883 158,021,402 194,755,285
------------------------------- ------------
SHORT-TERM INVESTMENTS--14.5%
REPURCHASE
AGREEMENT--14.5
Joint Repurchase
Agreement Account
5.42%, 6/2/97
(cost
28,843 28,843 $28,843,000)...... 0 28,843,000 28,843,000
------------------------------- ------------
TOTAL INVESTMENTS--112.5%
(cost
$223,332,567)..... 36,733,883 186,864,402 223,598,285
LIABILITIES IN
EXCESS OF OTHER
ASSETS............ (7,054,558) (17,808,704) (24,863,262)
--------------
NET ASSETS--100%.... $ 29,679,325 $169,055,698 $198,735,023
------------------------------- ------------
------------------------------- ------------
</TABLE>
See Notes to Pro-Forma Financial Statements
5
<PAGE>
PRO-FORMA FINANCIAL STATEMENTS
PRO-FORMA STATEMENT OF ASSETS AND LIABILITIES
MAY 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
GOVERNMENT
SECURITIES BLACKROCK
TRUST: SHORT- GOVERNMENT
INTERMEDIATE INCOME PRO FORMA PRO FORMA
SERIES TRUST ADJUSTMENTS COMBINED
--------------- ------------ ----------- -------------
<S> <C> <C> <C> <C>
ASSETS
Investments, at value (cost $186,302,321 $37,030,246,
respectively)............................................. $ 186,864,402 $ 36,733,883 $ 223,598,285
Interest receivable........................................ 1,742,544 328,788 2,071,332
Receivable for investments sold............................ 21,837 544,503 566,340
Receivable for Series and Fund shares sold, respectively... 12,599 20,588 33,187
Other assets............................................... 3,661 -- 3,661
--------------- ------------ ----------- -------------
Total assets........................................... 188,645,043 37,627,762 -- 226,272,805
--------------- ------------ ----------- -------------
LIABILITIES
Bank overdraft/(Cash)...................................... 561,457 (65,792) 495,665
Reverse repurchase agreements.............................. -- 6,006,438 6,006,438
Payable for investments purchased.......................... 18,400,080 1,608,072 20,008,152
Payable for Series and Fund shares reacquired,
respectively.............................................. 174,093 168,052 342,145
Accrued expenses and other liabilities..................... 134,040 163,276 297,316
Dividends payable.......................................... 233,498 40,335 273,833
Management fee payable..................................... 57,552 12,696 70,248
Due to broker variation margin............................. 11,625 2,748 14,373
Interest payable........................................... -- 8,794 8,794
Distribution fee payable................................... 17,000 3,818 20,818
--------------- ------------ ----------- -------------
Total liabilities...................................... 19,589,345 7,948,437 -- 27,537,782
--------------- ------------ ----------- -------------
NET ASSETS................................................. $ 169,055,698 $ 29,679,325 -- $ 198,735,023
--------------- ------------ ----------- -------------
--------------- ------------ ----------- -------------
Net assets were comprised of:
Shares of beneficial interest at par................... $ 176,207 $ 31,895 (947)* $ 207,155
Paid in capital in excess of par....................... 221,514,664 37,221,160 947* 258,736,771
--------------- ------------ ----------- -------------
221,690,871 37,253,055 -- 258,943,926
Undistributed net investment income (Distributions in
excess of net investment income).......................... 260,512 (237,726) 22,786
Accumulated net realized loss on investments............... (53,443,235) (7,037,124) (60,480,359)
Net unrealized appreciation (depreciation) on
investments............................................... 547,550 (298,880) 248,670
--------------- ------------ ----------- -------------
Net assets, May 31, 1997................................... $ 169,055,698 $ 29,679,325 -- $ 198,735,023
--------------- ------------ ----------- -------------
--------------- ------------ ----------- -------------
Class A:
Net asset value and redemption price per share......... $ 9.59 $ 9.31 $ 9.59
Maximum sales charge (0.00%/3.00% of offering price)... -- 0.28 --
--------------- ------------ -------------
Maximum offering price................................. $ 9.59 $ 9.59 $ 9.59
--------------- ------------ -------------
--------------- ------------ -------------
Class C
Net asset value, offering price and
redemption price per share............................. $ 9.30
------------
------------
Class Z
Net asset value, offering price and
redemption price per share............................. $ 9.60 $ 9.60
--------------- -------------
--------------- -------------
</TABLE>
- ------------------------
* Adjustment to reflect the exchange of shares of beneficial interest from The
BlackRock Government Income Trust to Prudential Government Securities
Trust--Short-Intermediate Term Series.
See Notes to Pro-Forma Financial Statements
6
<PAGE>
PRO-FORMA FINANCIAL STATEMENTS
PRO-FORMA STATEMENT OF OPERATIONS
YEAR ENDED MAY 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
GOVERNMENT
SECURITIES
TRUST: BLACKROCK
SHORT- GOVERNMENT
INTERMEDIATE INCOME PRO-FORMA PRO-FORMA
SERIES TRUST ADJUSTMENTS COMBINED
------------ ----------- ----------- -------------
<S> <C> <C> <C> <C>
NET INVESTMENT INCOME
Income
Interest.............................. $12,980,937 $ 2,819,994 -- $ 15,800,931
------------ ----------- ----------- -------------
Expenses
Distribution fee- Class A............. 370,329 50,871 $ 16,928(a) 438,128
Distribution fee- Class C............. 0 736 (736)(b) 0
Managmement fee....................... 739,140 170,060 (34,012)(c) 875,188
Transfer agent's fees & expenses...... 199,000 31,848 230,848
Reports to shareholders............... 162,000 51,082 (23,082)(d) 190,000
Custodian's fees & expenses........... 45,000 66,739 (21,739)(d) 90,000
Registration fees..................... 91,000 43,315 (34,315)(d) 100,000
Trustees' fees & expenses............. 12,500 30,209 (30,209)(d) 12,500
Legal fees & expenses................. 27,000 24,568 (16,568)(d) 35,000
Audit fee............................. 38,500 37,425 (24,925)(d) 51,000
Amortization of deferred organization
expense............................... 0 6,959 (6,959)(e) 0
Miscellaneous......................... 15,812 18,923 (14,735)(d) 20,000
------------ ----------- ----------- -------------
Total Operating Expenses............ 1,700,281 532,735 (190,352) 2,042,664
Interest expenses..................... 0 582,791 582,791
------------ ----------- ----------- -------------
Total Expenses...................... 1,700,281 1,115,526 (190,352) 2,625,455
------------ ----------- ----------- -------------
Net investment income................... 11,280,656 1,704,468 190,352 13,175,476
------------ ----------- ----------- -------------
REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS
Net realized gain (loss) on:
Investment transactions............... (2,163,693) (3,244,247) (5,407,940)
Financial futures transactions........ (24,277) (17,317) (41,594)
Short sales transactions.............. 0 83,633 83,633
------------ ----------- ----------- -------------
(2,187,970) (3,177,931) -- (5,365,901)
------------ ----------- ----------- -------------
Net change in unrealized
appreciation/depreciation of:
Investments........................... 3,176,123 3,671,481 6,847,604
Financial futures contracts........... (14,531) (195,315) (209,846)
------------ ----------- ----------- -------------
3,161,592 3,476,166 -- 6,637,758
------------ ----------- ----------- -------------
Net gain on investments............... 973,622 298,235 -- 1,271,857
------------ ----------- ----------- -------------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS............... $12,254,278 $ 2,002,703 $ 190,352 $ 14,447,333
------------ ----------- ----------- -------------
------------ ----------- ----------- -------------
</TABLE>
- ------------------------
(a) Adjustment to reflect increase in Class A distribution fees.
(b) Adjustment to reflect elimination of Class C distribution fees.
(c) Adjustment to reflect reduction in management fees.
(d) Adjustment to reflect elimination of duplicative expenses.
(e) Adjustment to reflect elimination of organization expense accrual.
See Notes to Pro-Forma Financial Statements
7
<PAGE>
NOTES TO PRO-FORMA FINANCIAL STATEMENTS
(UNAUDITED)
Prudential Government Securities Trust ("Fund") is registered under the
Investment Company Act of 1940 as a diversified, open-end management investment
company. The Fund consists of three series--the Money Market Series, the
Short-Intermediate Term Series ("Series") and the U.S. Treasury Money Market
Series; the monies of each series are invested in separate, independently
managed portfolios.
The accompanying pro forma financial statements give effect to the proposed
transaction whereby all the assets of The BlackRock Government Income Trust
("BlackRock") will be exchanged for Class A shares of the Series and the Series
will assume the liabilities, if any, of BlackRock. Immediately thereafter, the
Class A shares of the Series will be distributed to the shareholders of
BlackRock in a total liquidation of BlackRock which will subsequently be
dissolved. The pro forma financial statements include a pro forma Portfolio of
Investments at May 31, 1997, a pro forma Statement of Assets and Liabilities at
May 31, 1997 and a pro forma Statement of Operations for the twelve months ended
May 31, 1997. These statements are intended to present the financial information
and the related results of operations as if the proposed transaction had been
consummated as of May 31, 1997.
The unaudited pro-forma financial statements should be read in conjunction
with the separate annual audited financial statements for the year ended
November 30, 1996 and the unaudited semiannual financial statements as of May
31, 1997 for Prudential Government Securities Trust and the seperate annual
audited financial statements for the year ended June 30, 1997 for BlackRock
which are incorporated by refernce in the Statement of Additional Information to
this prospectus and proxy statement.
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies followed by the
Series in the preparation of its financial statements.
SECURITIES VALUATIONS: For the Series, the Trustees have authorized the use
of an independent pricing service to determine valuations. The pricing service
considers such factors as security prices, yields, maturities, call features,
ratings and developments relating to specific securities in arriving at
securities valuations. When market quotations are not readily available, a
security is valued by appraisal at its fair value as determined in good faith
under procedures established under the general supervision and responsibility of
the Trustees. Short-term securities which mature in more than 60 days are valued
at current market quotations. Short-term securities which mature in 60 days or
less are valued at amortized cost.
In connection with transactions in repurchase agreements, the Series'
custodian or designated subcustodians, as the case may be under triparty
repurchase agreements, takes possession of the underlying collateral securities,
the value of which exceeds the principal amount of the repurchase transaction,
including accrued interest. 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 Series may be
delayed or limited.
SECURITIES TRANSACTIONS AND INVESTMENT INCOME: Securities transactions are
recorded on the trade date. Realized gains and losses on sales of portfolio
securities are calculated on the identified cost basis. Interest income is
recorded on the accrual basis. The Fund amortizes discounts and premiums on
purchases of portfolio securities as adjustments to income.
FEDERAL INCOME TAXES: For federal income tax purposes, each series of the
Fund is treated as a separate taxable entity. It is the Series' 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.
DIVIDENDS AND DISTRIBUTIONS: The Series declares dividends from net
investment income daily; payment of dividends is made monthly. Distributions of
net capital gains, if any, are made annually. Income distributions and capital
gain distributions are determined in accordance with income tax regulations
which may differ from generally accepted accounting principles.
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 reimburses the subadviser for
its reasonable costs and expenses, the compensation of officers of the Fund,
occupancy and certain clerical and bookkeeping costs of the Fund. The Fund bears
8
<PAGE>
all other costs and expenses. The management fee paid to PIFM is computed daily
and payable monthly at an annual rate of .40 of 1% of the average daily net
assets of the Series.
The Fund has a distribution agreement with Prudential Securities
Incorporated ("PSI"), which acts as the distributor of the shares of the Series.
The Series compensates PSI for its expenses as distributor. The Series entered
into a distribution agreement and a plan of distribution pursuant to which it
pays PSI a fee, accrued daily and payable monthly, at an annual rate of .25 of
1% of the lesser of (a) the aggregate sales of shares issued (not including
reinvestment of dividends and distributions) on or after July 1, 1985 (the
effective date of the plan) less the aggregate net asset value of any such
shares redeemed, or (b) the average net asset value of the shares issued after
the effective date of the plan. Distribution expenses include commission credits
to PSI branch offices for payments of commissions and account servicing fees to
financial advisers and an allocation on account of overhead and other
distribution-related expenses, the cost of printing and mailing prospectuses to
potential investors and of advertising incurred in connection with the
distribution of Series shares. In addition, PSI pays other broker-dealers,
including Pruco, an affiliated broker-dealer, for account servicing fees and
other expenses incurred by such broker-dealers in distributing these shares.
PSI, PIFM and PIC are (indirect) wholly-owned subsidiaries of The Prudential
Insurance Company of America.
The Series, along with other affiliated registered investment companies (the
"Funds"), entered into a credit agreement (the "Agreement") on December 31, 1996
with an unaffiliated lender. The maximum commitment under the Agreement is
$200,000,000. The Agreement expires on December 30, 1997. Interest on any such
borrowings outstanding will be at market rates. The purpose of the Agreement is
to serve as an alternative source of funding for capital share redemptions. The
Series had not borrowed any amounts pursuant to the Agreement as of May 31,
1997. The Funds pay a commitment fee at an annual rate of .055 of 1% on the
unused portion of the credit facility. The commitment fee is accrued and paid
quarterly on a pro-rata basis by the Funds.
NOTE 3. SALES OF PORTFOLIO HOLDINGS
In connection with the proposed transaction, the portfolio managers of the
Series anticipate selling certain of the portfolio holdings of BlackRock. The
particular securities to be liquidated have not yet been determined.
9
<PAGE>
PRUDENTIAL GOVERNMENT SECURITIES TRUST
Statement of Additional Information
dated February 3, 1997
Prudential Government Securities Trust (the Trust) is offered in three
series: the Money Market Series, the U.S. Treasury Money Market Series and the
Short-Intermediate Term Series. Each series operates as a separate fund with its
own investment objectives and policies designed to meet its specific investment
goals. The investment objectives of the Money Market Series and the U.S.
Treasury Money Market Series are to obtain high current income, preserve capital
and maintain liquidity. The investment objective of the Short-Intermediate Term
Series is to achieve a high level of income consistent with providing reasonable
safety. There can be no assurance that any series' investment objective will be
achieved.
The Trust's address is Gateway Center Three, Newark, NJ 07102-4077, and its
telephone number is (800) 225-1852.
This Statement of Additional Information sets forth information about each
of the series. This Statement of Additional Information is not a prospectus and
should be read in conjunction with the Trust's Money Market Series Prospectus,
U.S. Treasury Money Market Series Prospectus or Short-Intermediate Term Series
Prospectus, each dated February 3, 1997, copies of which may be obtained from
the Trust upon request.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
CROSS-REFERENCE CROSS-REFERENCE
CROSS-REFERENCE TO PAGE IN U.S. TO PAGE IN
TO PAGE IN TREASURY MONEY SHORT-INTERMEDIATE
MONEY MARKET MARKET SERIES TERM
PAGE SERIES PROSPECTUS PROSPECTUS SERIES PROSPECTUS
---- ----------------- --------------- ------------------
<S> <C> <C> <C> <C>
General Information ............................. B-2 3 12 22
Investment Objective(s) and Policies ............ B-3
Money Market Series ......................... B-4 7 -
U.S. Treasury Money Market Series ........... B-6 - 6 -
Short-Intermediate Term Series .............. B-6 - - 6
Portfolio Turnover .............................. B-15 - - -
Investment Restrictions ......................... B-16 9 8 16
Trustees and Officers ........................... B-18 9 8 16
Manager ......................................... B-21 9 8 17
Distributor ..................................... B-23 10 9 18
Portfolio Transactions and Brokerage ............ B-25 11 10 19
Shareholder Investment Account .................. B-25 20 20 27
Net Asset Value ................................. B-28 11 10 19
Performance Information ......................... B-29
Money Market Series and U.S. Treasury
Money Market Series-Calculation of Yield .. B-29 7 6 -
Short-Intermediate Term Series-Calculation
of Yield and Total Return ................. B-29 - - 20
Taxes ........................................... B-30 12 11 20
Custodian and Transfer and Dividend Disbursing
Agent and Independent Accountants ........... B-30 11 10 19
Financial Statements ............................ B-32 - - -
Report of Independent Accountants ............... B-45 - - -
Appendix I-General Investment Information ....... I-1 - - -
Appendix II-Historical Performance Data ......... II-1 - - -
Appendix III-Information Relating to
The Prudential ................................ III-1
<FN>
- ----------------------------------------------------------------------------------------------------------------
111B 430145A
</FN>
</TABLE>
<PAGE>
GENERAL INFORMATION
The Trust is a trust fund of the type commonly known as a "Massachusetts
business trust." The Declaration of Trust and the By-Laws of the Trust are
designed to make the Trust similar in most respects to a Massachusetts business
corporation. The principal distinction between the two forms relates to
shareholder liability: under Massachusetts law, shareholders of a business trust
may, in certain circumstances, be held personally liable as partners for the
obligations of the Trust, which is not the case with a corporation. The
Declaration of Trust of the Trust provides that shareholders shall not be
subject to any personal liability for the acts or obligations of the Trust and
that every written obligation, contract, instrument or undertaking made by the
Trust shall contain a provision to the effect that the shareholders are not
individually bound thereunder.
Massachusetts counsel for the Trust are of the opinion that no personal
liability will attach to the shareholders under any undertaking containing such
provision when adequate notice of such provision is given, except possibly in a
few jurisdictions. With respect to all types of claims in the latter
jurisdictions and with respect to tort claims, contract claims where the
provision referred to is omitted from the undertaking, claims for taxes and
certain statutory liabilities in other jurisdictions, a shareholder may be held
personally liable to the extent that claims are not satisfied by the Trust.
However, upon payment of any such liability the shareholder will be entitled to
reimbursement from the general assets of the Trust. The Trustees intend to
conduct the operations of the Trust, with the advice of counsel, in such a way
so as to avoid, as far as possible, ultimate liability of the shareholders for
liabilities of the Trust.
The Declaration of Trust further provides that no trustee, officer, employee
or agent of the Trust is liable to the Trust or to a shareholder, nor is any
trustee, officer, employee or agent liable to any third persons in connection
with the affairs of the Trust, except as such liability may arise from his or
its own bad faith, wilful misfeasance, gross negligence, or reckless disregard
of his or its duties. It also provides that all third persons shall look solely
to the Trust property for satisfaction of claims arising in connection with the
affairs of the Trust. With the exceptions stated, the Declaration of Trust
permits the Trustees to provide for the indemnification of trustees, officers,
employees or agents of the Trust against all liability in connection with the
affairs of the Trust.
Other distinctions between a corporation and a Massachusetts business trust
include the absence of a requirement that business trusts issue share
certificates.
The Trust shall continue without limitation of time subject to the
provisions in the Declaration of Trust concerning termination by action of the
shareholders or by the Trustees by written notice to the shareholders.
Pursuant to the Declaration of Trust, the Trustees initially authorized the
issuance of an unlimited number of full and fractional shares of a single class.
In connection with the establishment of the Short-Intermediate Term Series
(formerly the Intermediate Term Series) on July 1, 1982, the Trustees designated
the outstanding shares and shares that may thereafter be issued under previous
authority as the shares of the Money Market Series. On November 1, 1991, the
Trustees established the U.S. Treasury Money Market Series by designating it out
of the unissued shares of beneficial interest of the Trust. In so designating,
the Trustees did not change any of the existing shareholders' preferences,
privileges, limitations or voting rights. Each share of the Money Market Series,
the U.S. Treasury Money Market Series and the Short-Intermediate Term Series
represents an equal proportionate interest in the assets of the Trust
attributable to the respective series with each other share of the respective
series. The Declaration of Trust permits the Trustees to divide or combine the
shares of any series into a greater or lesser number of shares without thereby
changing the proportionate beneficial interests of the shares of any series in
the assets of the Trust attributable to such series. If the assets attributable
to one series of shares are insufficient to satisfy its liabilities, the assets
of other series could be subjected to such liabilities. Upon liquidation of the
Trust, shareholders are entitled to share pro rata in the net assets of the
Trust attributable to the series of which shares are held and available for
distribution to shareholders. Shares have no preemptive, appraisal or conversion
rights and, except as may be otherwise indicated hereby, no preference rights.
Shares are fully paid and nonassessable by the Trust.
Pursuant to the Declaration of Trust, the Trustees may authorize the
creation of additional series of shares and classes within such series (the
proceeds of which would be invested in separate, independently managed
portfolios with distinct investment objectives and policies and share purchase,
redemption and net asset valuation procedures) and additional classes of shares
within any series (which would be used to distinguish among the rights of
different categories of shareholders, as might be required by future regulations
or other unforeseen circumstances) with such preferences, privileges,
limitations and voting and dividend rights as the Trustees may determine. All
consideration received by the Trust for shares of any additional series or
class, and all assets in which such consideration is invested, would belong to
that series or class (subject only to the rights of creditors of the Trust) and
would be subject to the liabilities related thereto. Pursuant to the Investment
Company Act of 1940, as amended (the Investment Company Act), shareholders of
any additional series or class of shares would normally have to approve any
changes in the management contract relating to such series or class and of any
changes in the investment policies related thereto.
The Trustees themselves have the power to alter the number and the terms of
office of the Trustees, and they may at any time lengthen their own terms or
make their terms of unlimited duration (subject to certain removal procedures)
and appoint their own
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successors, provided that always at least a majority of the Trustees have been
elected by the shareholders of the Trust. The voting rights of shareholders are
not cumulative, so that holders of more than 50 percent of the shares voting
can, if they choose, elect all trustees being selected, while the holders of the
remaining shares would be unable to elect any trustees.
On April 22, 1983, the Trustees at a meeting of the Board of Trustees
approved an amendment to the Declaration of Trust to effect a name change from
Chancellor Government Securities Trust to Prudential-Bache Government Securities
Trust. On February 28, 1991, the Trustees approved an amendment to the Fund's
Declaration of Trust to change the Trust's name from Prudential-Bache Government
Securities Trust to Prudential Government Securities Trust. On May 2, 1995, the
Trustees approved a change in the name of the Intermediate Term Series to the
Short-Intermediate Term Series.
INVESTMENT OBJECTIVES AND POLICIES
The Money Market Series, the U.S. Treasury Money Market Series and the
Short-Intermediate Term Series operate as separate funds with their own
investment objectives and policies. The investment objectives of the Money
Market Series and the U.S. Treasury Money Market Series are to obtain high
current income, preserve capital and maintain liquidity. The investment
objective of the Short-Intermediate Term Series is to achieve a high level of
income consistent with providing reasonable safety. For a further description of
the investment objectives and policies for each series see "How the Trust
Invests-Investment Objective and Policies" in their respective Prospectuses.
There can be no assurance that any series' investment objective will be
achieved.
The investment adviser maintains a credit unit which provides credit
analysis and research on taxable fixed-income securities. The portfolio manager
routinely consults with the credit unit in managing the Fund's portfolio. The
credit unit reviews on an ongoing basis issuers of tax-exempt and taxable
fixed-income obligations, including prospective purchases and portfolio holdings
of the Fund. Credit analysts have broad access to research and financial
reports, data retrieval services and industry analysts. They review financial
statements supplied by corporate (and governmental) issuers to evaluate sales,
earnings, projected growth and seek to achieve an allocation among different
sectors, coupons and maturities to achieve each Series' investment goals. The
portfolio manager also seeks bonds with a high level of call protection.
In order to achieve their objectives, the Money Market Series, the U.S.
Treasury Money Market Series and the Short-Intermediate Term Series
(collectively referred to as the Series), each acting independently of the
other, may, when appropriate, invest in the types of instruments and use certain
strategies described below:
REPURCHASE AGREEMENTS. The Trust's repurchase agreements will be
collateralized by U.S. Government obligations. The Trust will enter into
repurchase transactions only with parties meeting creditworthiness standards
approved by the Trustees. The Trust's investment adviser will monitor the
creditworthiness of such parties, under the general supervision of the Trustees.
In the event of a default or bankruptcy by a seller, the Trust 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 Trust will suffer a loss.
The Trust participates in a joint repurchase account with other investment
companies managed by Prudential Mutual Fund Management LLC (PMF or the Manager)
pursuant to an order of the Securities and Exchange Commission (SEC). On a daily
basis, any uninvested cash balances of the Trust may be aggregated with those of
such 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.
ILLIQUID SECURITIES. The Trust may not hold more than 10% of the net assets
of any Series (15% in the case of the Short-Intermediate Term Series) in
repurchase agreements which have a maturity of longer than seven days or in
other illiquid securities, including securities that are illiquid by virtue of
the absence of a readily available market or legal or contractual restrictions
on resale. 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 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, convertible and
B-3
<PAGE>
corporate bonds and notes. Institutional investors depend on an efficient
institutional market in which the unregistered security can be readily resold 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 under 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
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 eligible for resale pursuant to Rule 144A under the
Securities Act, commercial paper and municipal lease obligations for which there
is 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 Trustees. 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 (e.g., the time needed to dispose of
the security, the method of soliciting offers and the mechanics of the
transfer). With respect to municipal lease obligations, the investment adviser
will also consider: (1) the willingness of the municipality to continue,
annually or biannually, to appropriate funds for payment of the lease; (2) the
general credit quality of the municipality and the essentiality to the
municipality of the property covered by the lease; (3) in the case of unrated
municipal lease obligations, an analysis of factors similar to that performed by
nationally recognized statistical rating organizations in evaluating the credit
quality of a municipal lease obligation, including (i) whether the lease can be
cancelled; (ii) if applicable, what assurance there is that the assets
represented by the lease can be sold; (iii) the strength of the lessee's general
credit (e.g., its debt, administrative, economic and financial characteristics);
(iv) the likelihood that the municipality will discontinue appropriating funding
for the leased property because the property is no longer deemed essential to
the operations of the municipality (e.g., the potential for an event of
nonappropriation); (v) the legal recourse in the event of failure to
appropriate; and (4) any other factors unique to municipal lease obligations as
determined by the investment adviser. With respect to commercial paper that is
issued in reliance on Section 4(2) of the Securities Act, (i) 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 (ii) it must not be "traded flat" (i.e.,
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.
MONEY MARKET SERIES
The Money Market Series seeks to achieve its objectives by investing in
United States Government securities that mature within thirteen months from date
of purchase, including a variety of securities which are issued or guaranteed by
the United States Treasury, by various agencies of the United States Government
or by various instrumentalities which have been established or sponsored by the
United States 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" Obligations of the Government
National Mortgage Association (GNMA), the Farmers Home Administration 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 Trust 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 itself in the event the agency or
instrumentality does not meet its commitments. Securities in which the Money
Market Series may invest which are not backed by the full faith and credit of
the United States include, but are not limited to, obligations of the Tennessee
Valley Authority, the Federal National Mortgage Association (FNMA) and the
United States Postal Service, each of which has the right to borrow from the
United States Treasury to meet its obligations, and obligations of the Federal
Farm Credit System and the Federal Home Loan Banks, whose obligations may only
be satisfied by the individual credits of each issuing agency. Treasury
securities include Treasury bills, Treasury notes and Treasury bonds, all of
which are backed by the full faith and credit of the United States, as are
obligations of the Government National Mortgage Association, the Farmers Home
Administration and the Export-Import Bank. The Money Market Series will invest
at least 80% of its assets in such types of government securities.
The Series may also invest in component parts of U.S. Treasury notes or
bonds, namely, either the corpus (principal) of such Treasury obligations or one
of the interest payments scheduled to be paid on such obligations. These
obligations may take the form of (i) Treasury obligations from which the
interest coupons have been stripped, (ii) the interest coupons that are
stripped, (iii) book-entries at a Federal Reserve member bank representing
ownership of Treasury obligation components, or (iv) receipts evidencing the
component parts (corpus or coupons) of Treasury obligations that have not
actually been stripped. Such receipts
B-4
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evidence ownership of component parts of Treasury 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. Treasury obligations, including those underlying such receipts, are
backed by the full faith and credit of the U.S. Government.
The Money Market Series may also invest in fully insured certificates of
deposit. The Federal Deposit Insurance Corporation and the Federal Savings and
Loan Insurance Corporation, which are agencies of the United States Government,
insure the deposits of insured banks and savings and loan associations,
respectively, up to $100,000 per depositor. Current federal regulations also
permit such institutions to issue insured negotiable certificates of deposit
(CDs) in amounts of $100,000 or more without regard to the interest rate
ceilings on other deposits. To remain fully insured as to principal, such CDs
must currently be limited to $100,000 per bank or savings and loan association.
Interest on such CDs is not insured. The Money Market Series may invest in such
CDs, limited to the insured amount of principal ($100,000) in each case and to
10% or less of the gross assets of the Money Market Series in all such CDs in
the aggregate. Such CDs may or may not have a readily available market, and the
investment of the Money Market Series in CDs which do not have a readily
available market is further limited by the restriction on investment by the
Money Market Series of not more than 10% of assets in securities for which there
is no readily available market. See "Investment Restrictions."
The Money Market Series will attempt to balance its objectives of high
income, capital preservation and liquidity by investing in securities of varying
maturities and risks. As a result, the Money Market Series may not necessarily
invest in securities with the highest available yield. The Money Market Series
will not, however, invest in securities with remaining maturities of more than
thirteen months or maintain a dollar-weighted average maturity which exceeds 90
days. The amounts invested in obligations of various maturities of thirteen
months or less will depend on management's evaluation of the risks involved.
Longer-term issues, while frequently paying higher interest rates, are subject
to greater fluctuations in value resulting from general changes in interest
rates than are shorter-term issues. Thus, when rates on new securities increase,
the value of outstanding longer-term securities may decline and vice versa. Such
changes may also occur, but to a lesser degree, with short-term issues. These
changes, if realized, may cause fluctuations in the amount of daily dividends
and, in extreme cases, could cause the net asset value per share to decline. See
"Net Asset Value." In the event of unusually large redemption demands,
securities may have to be sold at a loss prior to maturity or the Money Market
Series may have to borrow money and incur interest expense. Either occurrence
would adversely affect the amount of daily dividends and could result in a
decline in daily net asset value per share or the reduction by the Money Market
Series of the number of shares held in a shareholder's account. The Money Market
Series will attempt to minimize these risks by investing in longer-term
securities, subject to the foregoing limitations, when it appears to management
that yields on such securities are not likely to increase substantially during
the period of expected holding, and then only in securities which are readily
marketable. However, there can be no assurance that the Money Market Series will
be successful in achieving this objective.
Liquidity Puts. The Money Market Series may also purchase instruments of the
types described in this section together with the right to resell the
instruments at an agreed-upon price or yield within a specified period prior to
the maturity date of the instruments. Such a right to resell is commonly known
as a "put," and the aggregate price which the Money Market Series pays for
instruments with puts may be higher than the price which otherwise would be paid
for the instruments. Consistent with the Money Market Series' investment
objective and applicable rules issued by the SEC and subject to the supervision
of the Trustees, the purpose of this practice is to permit the Money Market
Series to be fully invested while preserving the necessary liquidity to meet
unusually large redemptions and to purchase at a later date securities other
than those subject to the put. The Money Market Series may choose to exercise
puts during periods in which proceeds from sales of its shares and from recent
sales of portfolio securities are insufficient to meet redemption requests or
when the funds available are otherwise allocated for investment. In determining
whether to exercise puts prior to their expiration date and in selecting which
puts to exercise in such circumstances, the Money Market Series' investment
adviser considers, among other things, the amount of cash available to the Money
Market Series, the expiration dates of the available puts, any future
commitments for securities purchases, the yield, quality and maturity dates of
the underlying securities, alternative investment opportunities and the
desirability of retaining the underlying securities in the Money Market Series'
portfolio.
Since the value of the put is dependent on the ability of the put writer to
meet its obligation to repurchase, the Money Market Series' policy is to enter
into put transactions only with such brokers, dealers or financial institutions
which present minimal credit risks. There is a credit risk associated with the
purchase of puts in that the broker, dealer or financial institution might
default on its obligation to repurchase an underlying security. In the event
such a default should occur, the Money Market Series is unable to predict
whether all or any portion of any loss sustained could subsequently be recovered
from the broker, dealer or financial institution.
The Money Market Series values instruments which are subject to puts at
amortized cost; no value is assigned to the put. The cost of the put, if any, is
carried as an unrealized loss from the time of purchase until it is exercised or
expires.
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U.S. TREASURY MONEY MARKET SERIES
The U.S. Treasury Money Market Series seeks to achieve its objective by
investing in U.S. Treasury securities, including bills,notes and bonds. 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 and the lengths of their maturities.
The U.S. Treasury Money Market Series may also invest in component parts of
U.S. Treasury notes or bonds, namely, either the corpus (principal) of such
Treasury obligations or one of the interest payments scheduled to be paid on
such obligations. These obligations may take the form of (i) Treasury
obligations from which the interest coupons have been stripped, (ii) the
interest coupons that are stripped, or (iii) book-entries at a Federal Reserve
member bank representing ownership of Treasury obligation components.
The U.S. Treasury Money Market Series does not engage in repurchase
agreements or lend its portfolio securities because the income from such
activities is generally not exempt from state and local income taxes, but may
purchase or sell securities on a when-issued or delayed delivery basis.
When-issued or delayed delivery transactions arise when securities are purchased
or sold by the Series with payment and delivery taking place in the future in
order to secure what is considered to be an advantageous price and yield to the
Series at the time of entering into the transaction. The Trust's Custodian will
maintain, in a segregated account of the Series, cash or U.S. Treasury
obligations having a value equal to or greater than the Series' purchase
commitments.
SHORT-INTERMEDIATE TERM SERIES
The Series' investment objective is to achieve a high level of income
consistent with providing reasonable safety. In seeking to achieve its
objective, the Series will under normal circumstances invest 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 issued or guaranteed by the U.S. Government, its agencies or
instrumentalities. The Series may also invest up to 35% of its assets in
fixed-rate and adjustable rate mortgage-backed securities, asset-backed
securities, corporate debt securities (among other privately issued
instruments), rated A or better by Standard & Poor's Ratings Group or Moody's
Investors Service, Inc. or comparably rated by any other Nationally Recognized
Statistical Rating Organization (NRSRO) or, if unrated, determined to be of
comparable quality by the Series' investment adviser, and money market
instruments of a comparable short-term rating. The Series may also engage in
various strategies using derivatives, including the use of put and call options
on securities and financial indices, transactions involving futures contracts
and related options, short selling and use of leverage, including reverse
repurchase agreements and dollar rolls, which entail additional risks to the
Series. See "How the Trust Invests-Investment Objective and Policies" in the
Prospectus.
The Short-Intermediate Term Series intends to vary the proportion of its
holdings of longer and shorter-term debt securities in order to reflect its
assessment of prospective changes in interest rates even if such action may
adversely affect current income. For example, if, in the opinion of the
Short-Intermediate Term Series' investment adviser, interest rates generally are
expected to decline, the Short-Intermediate Term Series may sell its
shorter-term securities and purchase longer-term securities in order to benefit
from greater expected relative price appreciation; the securities sold may have
a higher current yield than those being purchased. The success of this strategy
will depend on the investment adviser's ability to forecast changes in interest
rates. Moreover, the Short-Intermediate Term Series intends to manage its
portfolio actively by taking advantage of trading opportunities such as sales of
portfolio securities and purchases of higher yielding securities of similar
quality due to distortions in normal yield differentials. In addition, if, in
the opinion of the investment adviser market conditions warrant, the
Short-Intermediate Term Series may purchase U. S. Government securities at a
discount or trade securities in response to fluctuations in interest rates to
provide for the prospect of modest capital appreciation at maturity.
U.S. GOVERNMENT SECURITIES
MORTGAGE-RELATED SECURITIES ISSUED OR GUARANTEED BY U.S. GOVERNMENT AGENCIES
AND INSTRUMENTALITIES. The Short-Intermediate Term Series may purchase
mortgage-related securities issued or guaranteed by the U.S. Government, its
agencies or instrumentalities, including GNMA, FNMA and FHLMC certificates. See
"Mortgage-Backed Securities" below. Mortgages backing the securities which may
be purchased by the Short-Intermediate Term Series include conventional
thirty-year fixed rate mortgages, graduated payment mortgages, fifteen-year
mortgages, adjustable rate mortgages and balloon payment mortgages. A balloon
payment mortgage-backed security is an amortized mortgage security with
installments of principal and interest, the last installment of which is
predominately 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
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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.
During periods of declining interest rates, prepayment of mortgages
underlying mortgage-backed securities can be expected to accelerate. When
mortgage obligations are prepaid, the Short-Intermediate Term Series reinvests
the prepaid amounts in securities, the yields of which reflect interest rates
prevailing at that time. Therefore, the Short-Intermediate Term Series' 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. During periods of rising interest
rates, the rate of prepayment of mortgages underlying mortgaged-backed
securities can be expected to decline, extending the projected average maturity
of the mortgage-backed securities. This 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. The value of long-term securities
generally fluctuate more widely in response to changes in interest rates than
short- or intermediate-term securities.
SPECIAL CONSIDERATIONS. Fixed income U.S. Government securities are
considered among the most creditworthy of fixed income investments. The yields
available from U.S. Government securities are generally lower than the yields
available from corporate debt securities. The values of U.S. Government
securities will change as interest rates fluctuate. To the extent U.S.
Government securities are not adjustable rate securities, these changes in value
in response to changes in interest rates generally will be more pronounced.
During periods of falling interest rates, the values of outstanding long-term
fixed rate U.S. Government securities generally rise. Conversely, during periods
of rising interest rates, the values of such securities generally decline. The
magnitude of these fluctuations will generally be greater for securities with
longer maturities. Although changes in the value of U.S. Government securities
will not affect investment income from those securities, they may affect the net
asset value of the Short-Intermediate Term Series.
At a time when the Short-Intermediate Term Series has written call options
on a portion of its U.S. Government securities, its ability to profit from
declining interest rates will be limited. Any appreciation in the value of the
securities held in the portfolio above the strike price would likely be
partially or wholly offset by unrealized losses on call options written by the
Short-Intermediate Term Series. The termination of option positions under these
conditions would generally result in the realization of capital losses, which
would reduce the Short-Intermediate Term Series' capital gains distribution.
Accordingly, the Short-Intermediate Term Series would generally seek to realize
capital gains to offset realized losses by selling portfolio securities. In such
circumstances, however, it is likely that the proceeds of such sales would be
reinvested in lower yielding securities. See "Additional Risks-Options
Transactions and Related Risks."
MORTGAGE-BACKED SECURITIES
As discussed in the Prospectus, the mortgage-backed securities purchased by
the Short-Intermediate Term Series evidence an interest in a specific pool of
mortgages. Such securities may be issued by GNMA, FNMA and FHLMC.
GNMA CERTIFICATES. GNMA is a wholly-owned corporate instrumentality of the
United States within 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 under the Housing Act, or Title V of the Housing Act of
1949 (FHA Loans), or guaranteed by the Veterans' Administration 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 full faith and
credit of the U.S. Government is pledged to the payment of all amounts that may
be required to be paid under the guarantee. In order to meet its obligations
under such guarantee, GNMA is authorized to borrow from the U.S. Treasury with
no limitations as to amount.
The GNMA CERTIFICATES will represent a pro rata interest in one or more
pools of the following types of mortgage loans: (i) fixed rate level payment
mortgage loans; (ii) fixed rate graduated payment mortgage loans; (iii) fixed
rate growing equity mortgage loans; (iv) fixed rate mortgage loans secured by
manufactured (mobile) homes; (v) mortgage loans on multifamily residential
properties under construction; (vi) mortgage loans on completed multifamily
projects; (vii) 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); (viii) 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 (ix) 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.
FNMA CERTIFICATES. FNMA is a federally chartered and privately owned
corporation organized and existing under the Federal National Mortgage
Association Charter Act. FNMA provides funds to the mortgage market primarily by
purchasing home mortgage loans from local lenders, thereby replenishing their
funds for additional lending. FNMA acquires funds to purchase home mortgage
loans from many capital market investors that may not ordinarily invest in
mortgage loans directly.
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Each FNMA Certificate will entitle the registered holder thereof to receive
amounts, representing such holder's pro rata interest in scheduled principal
payments and interest payments (at such FNMA Certificate's pass-through rate,
which is net of any servicing and guarantee fees on the underlying mortgage
loans), and any principal prepayments on the mortgage loans in the pool
represented by such FNMA Certificate and such holder's proportionate interest in
the full principal amount of any foreclosed or otherwise finally liquidated
mortgage loan. The full and timely payment of principal and interest on each
FNMA Certificate will be guaranteed by FNMA, which guarantee is not backed by
the full faith and credit of the U.S. Government.
Each FNMA Certificate will represent a pro rata interest in one or more
pools of FHA Loans, VA Loans or conventional mortgage loans (i.e., mortgage
loans that are not insured or guaranteed by any governmental agency) of the
following types: (i) fixed rate level payment mortgage loans; (ii) fixed rate
growing equity mortgage loans; (iii) fixed rate graduated payment mortgage
loans; (iv) variable rate California mortgage loans; (v) other adjustable rate
mortgage loans; and (vi) fixed rate mortgage loans secured by multifamily
projects.
FHLMC CERTIFICATES. FHLMC is a corporate instrumentality of the United
States created pursuant to the Emergency Home Finance Act of 1970, as amended
(the FHLMC Act). The principal activity of FHLMC consists of the purchase of
first lien, conventional, residential mortgage loans and participation interests
in such mortgage loans and the resale of the mortgage loans so purchased in the
form of mortgage securities, primarily FHLMC Certificates.
FHLMC guarantees to each registered holder of the FHLMC Certificate the
timely payment of interest at the rate provided for by such FHLMC Certificate,
whether or not received. FHLMC also guarantees to each registered holder of a
FHLMC Certificate ultimate collection of all principal on the related mortgage
loans, without any offset or deduction, but does not, generally, guarantee the
timely payment of scheduled principal. FHLMC may remit the amount due on account
of its guarantee of collection of principal at any time after default on an
underlying mortgage loan, but not later than 30 days following (i) foreclosure
sale, (ii) payment of a claim by any mortgage insurer or (iii) the expiration of
any right of redemption, whichever occurs later, but in any event no later than
one year after demand has been made upon the mortgagor for accelerated payment
of principal. The obligations of FHLMC under its guarantee are obligations
solely of FHLMC and are not backed by the full faith and credit of the U.S.
Government.
FHLMC Certificates represent a pro rata interest in a group of mortgage
loans (a FHLMC Certificate group) purchased by FHLMC. The mortgage loans
underlying the FHLMC Certificates will consist of fixed rate or adjustable rate
mortgage loans with original terms to maturity of between ten and thirty years,
substantially all of which are secured by first liens on one to four-family
residential properties or multifamily projects. Each mortgage loan must meet the
applicable standards set forth in the FHLMC Act. An FHLMC Certificate group may
include whole loans, participation interests in whole loans and undivided
interests in whole loans and participations comprising another FHLMC Certificate
group.
The market value of mortgage securities, like other 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 will accelerate the
recognition of income which when distributed to shareholders will be taxable as
ordinary income.
ADJUSTABLE RATE MORTGAGE SECURITIES. The Short-Intermediate Term Series may
invest in adjustable rate mortgage securities (ARMs), which are pass-through
mortgage securities collateralized by mortgages with adjustable rather than
fixed rates. Generally, ARMs have a specified maturity date and amortize
principal over their life. In periods of declining interest rates, there is a
reasonable likelihood that ARMs will experience increased rates of prepayment of
principal. However, the major difference between ARMs and fixed rate mortgage
securities is that the interest rate and the rate of amortization of principal
of ARMs can and do change in accordance with movements in a particular,
pre-specified, published interest rate index.
The amount of interest on an ARM is calculated by adding a specified amount,
the "margin," to the index, subject to limitations on the maximum and minimum
interest that can be charged to the mortgagor during the life of the mortgage or
to maximum and minimum changes to that interest rate during a given period.
Because the interest rate on ARMs generally moves in the same direction as
market interest rates, the market value of ARMs tends to be more stable than
that of long-term fixed rate securities.
There are two main categories of indices which serve as benchmarks for
periodic adjustments to coupon rates on ARMs; those based on U.S. Treasury
securities and those derived from a calculated measure such as a cost of funds
index or a moving average of mortgage rates. Commonly utilized indices include
the one-year and five-year constant maturity Treasury Note rates, the
three-month Treasury Bill rate, the 180-day Treasury Bill rate, rates on
longer-term Treasury securities, the 11th District
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Federal Home Loan Bank Cost of Funds, the National Median Cost of Funds, the
one-month or three-month London Interbank Offered Rate (LIBOR), the prime rate
of a specific bank, or commercial paper rates. Some indices, such as the
one-year constant maturity Treasury Note rate, closely mirror changes in market
interest rate levels. Others, such as the 11th District Home Loan Bank Cost of
Funds index (often related to ARMs issued by FNMA), tend to lag changes in
market rate levels and tend to be somewhat less volatile.
COLLATERALIZED MORTGAGE OBLIGATIONS. Certain issuers of mortgage-backed
obligations (CMOs), including certain CMOs that have elected to be treated as
Real Estate Mortgage Investment Conduits (REMICs), are not considered investment
companies pursuant to a rule recently adopted by the Securities and Exchange
Commission (SEC), and the Short-Intermediate Term Series may invest in the
securities of such issuers without the limitations imposed by the Investment
Company Act on investments by the Short-Intermediate Term Series in other
investment companies. In addition, in reliance on an earlier SEC interpretation,
the Short-Intermediate Term Series' 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 other
investment companies. In order to be able to rely on the SEC'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.
OTHER INVESTMENTS. Obligations issued or guaranteed as to principal and
interest by the United States Government may be acquired by the
Short-Intermediate Term Series in the form of custodial receipts that evidence
ownership of future interest payments, principal payments or both on certain
United States Treasury notes or bonds. Such notes and bonds are held in custody
by a bank on behalf of the owners. These custodial receipts are known by various
names, including "Treasury Receipts," "Treasury Investment Growth Receipts"
(TIGRs) and "Certificates of Accrual on Treasury Securities" (CATS). The
Short-Intermediate Term Series will not invest more than 5% of its assets in
such custodial receipts.
OPTIONS TRANSACTIONS AND RELATED RISKS
The Short-Intermediate Term Series may purchase put and call options and
sell covered put and call options which are traded on national securities
exchanges and may also engage in over-the-counter options transactions with
recognized United States securities dealers (OTC Options).
OPTIONS ON SECURITIES. The purchaser of a call option has the right, for a
specified period of time, to purchase the securities subject to the option at a
specified price (the "exercise price" or "strike price"). By writing a call
option, the Short-Intermediate Term Series becomes obligated during the term of
the option, upon exercise of the option, to deliver the underlying securities or
a specified amount of cash to the purchaser against receipt of the exercise
price. When the Short-Intermediate Term Series writes a call option, the
Short-Intermediate Term Series loses the potential for gain on the underlying
securities in excess of the exercise price of the option during the period that
the option is open.
The purchaser of a put option has the right, for a specified period of time,
to sell the securities subject to the option to the writer of the put at the
specified exercise price. By writing a put option, the Short-Intermediate Term
Series becomes obligated during the term of the option, upon exercise of the
option, to purchase the securities underlying the option at the exercise price.
The Short-Intermediate Term Series might, therefore, be obligated to purchase
the underlying securities for more than their current market price.
The writer of an option retains the amount of any premium paid for the
writing of the option. The Series' maximum gain with respect to an option
written is the premium. In the case of a covered call option that is not
exercised, the amount of any premium may be offset or exceeded by a decline in
the value of the securities underlying the call option that the Series must
retain in order to maintain the "cover" on such option and, with respect to put
options written, the amount of any premium may be offset or exceeded by the
difference between the then current market price of the underlying security and
the strike price of the put option (the price at which the Series must purchase
the underlying security).
The Short-Intermediate Term Series may wish to protect certain portfolio
securities against a decline in market value at a time when put options on those
particular securities are not available for purchase. The Short-Intermediate
Term Series may therefore purchase a put option on other carefully selected
securities, the values of which the investment adviser expects will have a high
degree of positive correlation to the values of such portfolio securities. If
the investment adviser's judgment is correct, changes in the value of the put
options should generally offset changes in the value of the portfolio securities
being hedged. If the investment adviser's judgment is not correct, the value of
the securities underlying the put option may decrease less than the value of the
Short-Intermediate Term Series' investments and therefore the put option may not
provide complete protection against a decline in the value of the
Short-Intermediate Term Series' investments below the level sought to be
protected by the put option.
The Short-Intermediate Term Series may similarly wish to hedge against
appreciation in the value of debt securities that it intends to acquire at a
time when call options on such securities are not available. The
Short-Intermediate Term Series may,
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therefore, purchase call options on other carefully selected debt securities the
values of which the investment adviser expects will have a high degree of
positive correlation to the values of the debt securities that the
Short-Intermediate Term Series intends to acquire. In such circumstances the
Short-Intermediate Term Series will be subject to risks analogous to those
summarized above in the event that the correlation between the value of call
options so purchased and the value of the securities intended to be acquired by
the Short-Intermediate Term Series is not as close as anticipated and the value
of the securities underlying the call options increases less than the value of
the securities to be acquired by the Short-Intermediate Term Series.
The Short-Intermediate Term Series may write options on securities in
connection with buy-and-write transactions; that is, the Short-Intermediate Term
Series may purchase a security and concurrently write a call option against that
security.
The exercise price of a call option may be below ("in-the-money"), equal to
("at-the-money") or above ("out-of-the-money") the current value of the
underlying security at the time the option is written. Buy-and-write
transactions using in-the-money call options may be used when it is expected
that the price of the underlying security will remain flat or decline moderately
during the option period. Buy-and-write transactions using at-the-money call
options may be used when it is expected that the price of the underlying
security will remain fixed or advance moderately during the option period. A
buy-and-write transaction using an out-of-the-money call option may be used when
it is expected that the premium received from writing the call option plus the
appreciation in the market price of the underlying security up to the exercise
price will be greater than the appreciation in the price of the underlying
security alone. If the call option is exercised in such a transaction, the
Short-Intermediate Term Series' maximum gain will be the premium received by it
for writing the option, adjusted upwards or downwards by the difference between
the Short-Intermediate Term Series' purchase price of the security and the
exercise price of the option. If the option is not exercised and the price of
the underlying security declines, the amount of the decline will be offset in
part, or entirely, by the premium received.
Prior to being notified of exercise of the option, the writer of an
exchange-traded option that wishes to terminate its obligation may effect a
"closing purchase transaction" by buying an option of the same series as the
option previously written. (Options of the same series are options with respect
to the same underlying security, having the same expiration date and the same
strike price.) The effect of the purchase is that the writer's position will be
cancelled by the exchange's affiliated clearing organization. Likewise, an
investor who is the holder of an exchange-traded option may liquidate a position
by effecting a "closing sale transaction" by selling an option of the same
series as the option previously purchased. There is no guarantee that either a
closing purchase or a closing sale transaction can be effected.
Exchange-traded options are issued by a clearing organization affiliated
with the exchange on which the option is listed which, in effect, gives its
guarantee to every exchange-traded option transaction. In contrast, OTC options
are contracts between the Short-Intermediate Term Series and its contra-party
with no clearing organization guarantee. Thus, when the Short-Intermediate Term
Series purchases an OTC option, it relies on the dealer from which it has
purchased the OTC option to make or take delivery of the securities underlying
the option. Failure by the dealer to do so would result in the loss of the
premium paid by the Short-Intermediate Term Series as well as the loss of the
expected benefit of the transaction. The Board of Trustees of the Trust will
approve a list of dealers with which the Short-Intermediate Term Series may
engage in OTC options.
When the Short-Intermediate Term Series writes an OTC option, it generally
will be able to close out the OTC options prior to its expiration only by
entering into a closing purchase transaction with the dealer to which the
Short-Intermediate Term Series originally wrote the OTC option. While the
Short-Intermediate Term Series will enter into OTC options only with dealers
which agree to, and which are expected to be capable of, entering into closing
transactions with the Short-Intermediate Term Series, there can be no assurance
that the Short-Intermediate Term Series will be able to liquidate an OTC option
at a favorable price at any time prior to expiration. Until the
Short-Intermediate Term Series is able to effect a closing purchase transaction
in a covered OTC call option the Short-Intermediate Term Series has written, it
will not be able to liquidate securities used as cover until the option expires
or is exercised or different cover is substituted. In the event of insolvency of
the contra-party, the Short-Intermediate Term Series may be unable to liquidate
an OTC option.
OTC options purchased by the Short-Intermediate Term Series will be treated
as illiquid securities subject to any applicable limitation on such securities.
Similarly, the assets used to "cover" OTC options written by the
Short-Intermediate Term Series will be treated as illiquid unless the OTC
options are sold to qualified dealers who agree that the Short-Intermediate Term
Series may repurchase any OTC options it writes for a maximum price to be
calculated by a formula set forth in the option agreement. The "cover" for an
OTC option written subject to this procedure would be considered illiquid only
to the extent that the maximum repurchase price under the formula exceeds the
intrinsic value of the option.
The Short-Intermediate Term Series may write only "covered" options. This
means that so long as the Short-Intermediate Term Series is obligated as the
writer of a call option, it will own the underlying securities subject to the
option or an option to purchase the same underlying securities, having an
exercise price equal to or less than the exercise price of the "covered" option,
or will establish and maintain with the Trust's Custodian for the term of the
option a segregated account consisting of cash or other liquid assets having a
value equal to or greater than the fluctuating market value of the optioned
securities (the exercise price of the
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option). In the case of a straddle written by the Short-Intermediate Term
Series, the amount maintained in the segregated account will equal the amount,
if any, by which the put is "in-the-money." "Liquid assets" as used in the each
Series' Prospectus and the Statement of Additional Information include cash,
U.S. Government Securities, equity securities, or other liquid unencumbered
assets.
OPTIONS ON SECURITIES INDICES. The Short-Intermediate Term Series also may
purchase and write put and call options on securities indices in an attempt to
hedge against market conditions affecting the value of securities that the
Short-Intermediate Term Series owns or intends to purchase, and not for
speculation. Through the writing or purchase of index options, the
Short-Intermediate Term Series can achieve many of the same objectives as
through the use of options on individual securities. Options on securities
indices are similar to options on a security except that, rather than the right
to take or make delivery of a security at a specified price, an option on a
securities index gives the holder the right to receive, upon exercise of the
option, an amount of cash if the closing level of the securities index upon
which the option is based is greater than, in the case of a call, or less than,
in the case of a put, the exercise price of the option. This amount of cash is
equal to such difference between the closing price of the index and the exercise
price of the option. The writer of the option is obligated, in return for the
premium received, to make delivery of this amount. Unlike security options, all
settlements are in cash and gain or loss depends upon price movements in the
market generally (or in a particular industry or segment of the market), rather
than upon price movements in individual securities. Price movements in
securities that the Short-Intermediate Term Series owns or intends to purchase
will probably not correlate perfectly with movements in the level of an index
and, therefore, the Short-Intermediate Term Series bears the risk that a loss on
an index option would not be completely offset by movements in the price of such
securities.
When the Short-Intermediate Term Series writes an option on a securities
index, it will be required to deposit with the Trust's Custodian, and
mark-to-market, eligible securities equal in value to 100% of the exercise price
in the case of a put, or the contract value in the case of a call. In addition,
where the Short-Intermediate Term Series writes a call option on a securities
index at a time when the contract value exceeds the exercise price, the
Short-Intermediate Term Series will segregate and mark-to-market, until the
option expires or is closed out, cash or cash equivalents equal in value to such
excess.
Options on a securities index involve risks similar to those risks relating
to transactions in financial futures contracts described below. Also, an option
purchased by the Short-Intermediate Term Series may expire worthless, in which
case the Short-Intermediate Term Series would lose the premium paid therefor.
OPTIONS ON GNMA CERTIFICATES. Options on GNMA Certificates are not currently
traded on any Exchange. However, the Short-Intermediate Term Series may purchase
and write such options should they commence trading on any Exchange and may
purchase or write OTC Options on GNMA Certificates.
Since the remaining principal balance of GNMA Certificates declines each
month as a result of mortgage payments, the Short-Intermediate Term Series 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 Short-Intermediate Term Series
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 Short-Intermediate Term Series 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 Short-Intermediate Term Series will no longer be
covered, and the Short-Intermediate Term Series will either enter into a closing
purchase transaction or replace the GNMA Certificate with a GNMA Certificate
which represents cover. When the Short-Intermediate Term Series closes its
position or replaces the GNMA Certificate, it may realize an unanticipated loss
and incur transaction costs.
RISKS OF OPTIONS TRANSACTIONS. An exchange-traded option position may be
closed out only on an Exchange which provides a secondary market for an option
of the same series. Although the Short-Intermediate Term Series will generally
purchase or write 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 at any particular time, and for
some exchange-traded 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 Short-Intermediate Term Series
would have to exercise its exchange-traded options in order to realize any
profit and may incur transaction costs in connection therewith. If the
Short-Intermediate Term Series as a covered call option writer is unable to
effect a closing purchase transaction in a secondary market, it will not be able
to sell the underlying security until the option expires or it delivers the
underlying security upon exercise.
Reasons for the absence of a liquid secondary market on an Exchange include
the following: (a) insufficient trading interest in certain options; (b)
restrictions on transactions imposed by an Exchange; (c) trading halts,
suspensions or other restrictions imposed with respect to particular classes or
series of options or underlying securities; (d) interruption of the normal
operations on an Exchange; (e) inadequacy of the facilities of an Exchange or
The Options Clearing Corporation (the OCC) to handle current trading volume; or
(f) a decision by one or more Exchanges to discontinue the trading of options
(or a particular class or series of
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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 OCC as a result of trades on that Exchange
would generally continue to be exercisable in accordance with their terms.
In the event of the bankruptcy of a broker through which the
Short-Intermediate Term Series engages in options transactions, the
Short-Intermediate Term Series 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. Similarly, in the
event of the bankruptcy of the writer of an OTC option purchased by the
Short-Intermediate Term Series, the Short-Intermediate Term Series could
experience a loss of all or part of the value of the option. Transactions are
entered into by the Short-Intermediate Term Series only with brokers or
financial institutions deemed creditworthy by the investment adviser.
The hours of trading for options may not conform to the hours during which
the underlying securities are traded. To the extent that the option markets
close before the markets for the underlying securities, significant price and
rate movements can take place in the underlying markets that cannot be reflected
in the option markets.
FUTURES CONTRACTS. As a purchaser of a futures contract (futures contract),
the Short-Intermediate Term Series incurs an obligation to take delivery of a
specified amount of the obligation underlying the futures contract at a
specified time in the future for a specified price. As a seller of a futures
contract, the Short-Intermediate Term Series incurs an obligation to deliver the
specified amount of the underlying obligation at a specified time in return for
an agreed upon price. The Short-Intermediate Term Series may purchase futures
contracts on debt securities, aggregates of debt securities, financial indices
and U.S. Government securities including futures contracts or options linked to
the London Interbank Offered Rate (LIBOR).
The Short-Intermediate Term Series 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, the price of the
Short-Intermediate Term Series' portfolio securities may fall, the
Short-Intermediate Term Series may sell a futures contract. If declining
interest rates are anticipated, the Short-Intermediate Term Series may purchase
a futures contract to protect against a potential increase in the price of
securities the Short-Intermediate Term Series intends to purchase. Subsequently,
appropriate securities may be purchased by the Short-Intermediate Term Series in
an orderly fashion; as securities are purchased, corresponding futures positions
would be terminated by offsetting sales of contracts. 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, 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 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
Short-Intermediate Term Series will be able to enter into a closing transaction.
When the Short-Intermediate Term Series enters into a futures contract it is
initially required to deposit with the Trust's Custodian, in a segregated
account in the name of the broker performing the transaction, an "initial
margin" of cash or U.S. Government securities equal to approximately 2-3% of the
contract amount. Initial margin requirements are established by the Exchanges on
which futures contracts trade and may, from time to time, change. In addition,
brokers may establish margin deposit requirements in excess of those required by
the Exchanges. Under a recently adopted SEC rule, Short-Intermediate Term Series
may place and maintain cash, securities and similar investments with a futures
commissions merchant in amounts necessary to effect such Series' transactions
in exchange-traded futures contracts and options thereon, provided certain
conditions are satisfied.
Initial margin in futures transactions is different from margin in
securities transactions in that initial margin does not involve the borrowing of
funds by a broker's client but is, rather, a good faith deposit on a futures
contract which will be returned to the Short-Intermediate Term Series upon the
proper termination of the futures contract. The margin deposits made are
marked-to-market daily and the Short-Intermediate Term Series may be required to
make subsequent deposits into the segregated account, maintained at the Trust's
Custodian for that purpose, of cash or U.S. Government securities, called
"variation margin", in the name of the broker, which are reflective of price
fluctuations in the futures contract.
OPTIONS ON FUTURES CONTRACTS. The Short-Intermediate Term Series may
purchase and sell call and put options on futures contracts which are traded on
an Exchange and enter into closing transactions with respect to such options to
terminate an existing position. An option on a futures contract gives the
purchaser the right (in return for the premium paid), and the writer the
obligation, 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 term of the option. Upon exercise of the
option, the assumption of an offsetting futures position by the writer and
holder of the option will be accompanied by delivery of the accumulated cash
balance in the
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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.
The Short-Intermediate Term Series may only write "covered" put and call
options on futures contracts. The Short-Intermediate Term Series will be
considered "covered" with respect to a call option it writes on a futures
contract if the Short-Intermediate Term Series owns the assets which are
deliverable under the futures contract or an option to purchase that futures
contract having a strike price equal to or less than the strike price of the
"covered" option and having an expiration date not earlier than the expiration
date of the "covered" option, or if it segregates and maintains with the
Custodian for the term of the option cash, U.S. Government securities or other
liquid high-grade debt obligations equal to the fluctuating value of the
optioned future. The Short-Intermediate Term Series will be considered "covered"
with respect to a put option it writes on a futures contract if it owns an
option to sell that futures contract having a strike price equal to or greater
than the strike price of the "covered" option, or if it segregates and maintains
with the Custodian for the term of the option cash, or liquid assets at all
times equal in value to the exercise price of the put (less any initial margin
deposited by the Short-Intermediate Term Series with the Trust's Custodian with
respect to such option). There is no limitation on the amount of the
Short-Intermediate Term Series' assets which can be placed in the segregated
account.
The Short-Intermediate Term Series may purchase options on futures contracts
for identical purposes to those set forth above for the purchase of a futures
contract (purchase of a call option or sale of a put option) and the sale of a
futures contract (purchase of a put option or sale of a call option), or to
close out a long or short position in futures contracts. If, for example, the
investment adviser wished to protect against an increase in interest rates and
the resulting negative impact on the value of a portion of its U.S. Government
securities portfolio, it might purchase a put option on an interest rate futures
contract, the underlying security of which correlates with the portion of the
portfolio the investment adviser seeks to hedge.
RISKS OF TRANSACTIONS IN FUTURES CONTRACTS AND RELATED OPTIONS. The
Short-Intermediate Term Series may sell a futures contract to protect against
the decline in the value of securities held by the Short-Intermediate Term
Series. However, it is possible that the futures market may advance and the
value of securities held in the Short-Intermediate Term Series' portfolio may
decline. If this were to occur, the Short-Intermediate Term Series would lose
money on the futures contracts and also experience a decline in value in its
portfolio securities.
If the Short-Intermediate Term Series 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 Short-Intermediate Term Series 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.
In order to assure that the Short-Intermediate Term Series is entering into
transactions in futures contracts for hedging purposes as such term is defined
by the Commodities Futures Trading Commission, either: (1) a substantial
majority (i.e., approximately 75%) of all anticipatory hedge transactions
(transactions in which the Short-Intermediate Term Series 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
Short-Intermediate Term Series; (b) cash held by the Short-Intermediate Term
Series; (c) cash proceeds due to the Short-Intermediate Term Series 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 Short-Intermediate Term Series maintains a short position in a
futures contract, it will cover this position by holding, in a segregated
account maintained at the Custodian, cash, U.S. Government securities, equity
securities or other liquid, unencumbered assets, marked-to-market daily equal in
value (when added to any initial or variation margin on deposit) to the market
value of the securities underlying the futures contract. Such a position may
also be covered by owning the securities underlying the futures contract, or by
holding a call option permitting the Short-Intermediate Term Series to purchase
the same contract at a price no higher than the price at which the short
position was established.
In addition, if the Short-Intermediate Term Series holds a long position in
a futures contract, it will hold cash, U.S. Government securities, equity
securities or other liquid, unencumbered assets, marked-to-market daily equal to
the purchase price of the contract (less the amount of initial or variation
margin on deposit) in a segregated account maintained for the Short-Intermediate
Term Series by the Trust's Custodian or a futures commissions merchant.
Alternatively, the Short-Intermediate Term Series could cover its long position
by purchasing 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 Short-Intermediate
Term Series.
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, then it
may prove impossible to liquidate a futures position until the daily limit moves
have ceased. In the event of adverse price movements, the Short-Intermediate
Term Series would continue to be required to make daily cash payments of
variation margin on open futures positions. In such situations, if the
Short-Intermediate Term Series has insufficient
B-13
<PAGE>
cash, it may be disadvantageous to do so. In addition, the Short-Intermediate
Term Series 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 Short-Intermediate Term Series' ability to effectively
hedge its portfolio.
In the event of the bankruptcy of a broker through which the
Short-Intermediate Term Series engages in transactions in futures or options
thereon, the Short-Intermediate Term Series 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 Short-Intermediate Term Series only with brokers or
financial institutions deemed creditworthy by the investment adviser.
There are risks inherent in the use of futures contracts and options
transactions for the purpose of hedging the Short-Intermediate Term Series'
portfolio securities. One such risk which may arise in employing futures
contracts to protect against the price volatility of portfolio securities is
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 Short-Intermediate Term Series' 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 Short-Intermediate Term Series
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.
There may exist an imperfect correlation between the price movements of
futures contracts purchased by the Short-Intermediate Term Series and the
movements in the prices of the securities 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 and futures
market could result. Price distortions could also result if investors in futures
contracts elect to make or take delivery of underlying securities 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 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.
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
Short-Intermediate Term Series 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 Short-Intermediate Term Series 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 U.S. Government securities.
SECURITIES LENDING
Consistent with applicable regulatory requirements, the Short-Intermediate
Term Series may lend its portfolio securities to brokers, dealers and other
financial institutions, provided that such loans are callable at any time by the
Short-Intermediate Term Series and are at all times secured by cash or cash
equivalents, which are maintained in a segregated account pursuant to applicable
regulations that are equal to at least the market value, determined daily, of
the loaned securities. The advantage of such loans is that the
Short-Intermediate Term Series continues to receive the income on the loaned
securities while at the same time earning interest on the cash amounts deposited
as collateral, which will be invested in short-term obligations.
A loan may be terminated by the borrower on one business day's notice, or by
the Short-Intermediate Term Series on two business days' notice. If the borrower
fails to deliver the loaned securities within two days after receipt of notice,
the Short-Intermediate Term Series could use the collateral to replace the
securities while holding the borrower liable for any excess of replacement cost
over collateral. As with any extensions of credit, there are risks of delay in
recovery and in some cases even 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 deemed by the Short-Intermediate Term
Series' investment adviser to be creditworthy and when the income which can be
earned from such loans justifies the attendant risks. Upon termination of the
loan, the borrower is required to return the securities to the
Short-Intermediate Term Series. Any gain or loss in the market price during the
loan period would inure to the Short-Intermediate Term Series. The
creditworthiness of firms to which the Short-Intermediate Term Series lends its
portfolio securities will be monitored on an ongoing basis by the investment
adviser pursuant to procedures adopted and reviewed, on an ongoing basis, by the
Board of Trustees of the Trust.
When voting or consent rights which accompany loaned securities pass to the
borrower, the Short-Intermediate Term Series will follow the policy of calling
the loaned securities, to be delivered within one day after notice, to permit
the exercise of such
B-14
<PAGE>
rights if the matters involved would have a material effect on the
Short-Intermediate Term Series' investment in such loaned securities. The
Short-Intermediate Term Series may pay reasonable finders', administrative and
custodial fees in connection with a loan of its securities and may share the
interest earned on collateral with the borrower.
INTEREST RATE SWAP TRANSACTIONS
The Short-Intermediate Term Series may enter into either asset-based
interest rate swaps or liability-based interest rate swaps, depending on whether
it is hedging its assets or its liabilities. The Short-Intermediate Term Series
will usually enter into interest rate swaps on a net basis, i.e., the two
payment streams are netted out, with the Short-Intermediate Term Series
receiving or paying, as the case may be, only the net amount of the two
payments. Inasmuch as these hedging transactions are entered into for good faith
hedging purposes, the investment adviser and the Short-Intermediate Term Series
believe such obligations do not constitute senior securities and, accordingly,
will not treat them as being subject to its borrowing restrictions. The net
amount of the excess, if any, of the Short-Intermediate Term Series' obligations
over its entitlements with respect to each interest rate swap will be accrued on
a daily basis and an amount of cash, U.S. Government securities, equity
securities or other liquid, unencumbered assets, marked-to-market daily having
an aggregate net asset value at least equal to the accrued excess will be
maintained in a segregated account by the Trust's Custodian. To the extent that
the Short-Intermediate Term Series enters into interest rate swaps on other than
a net basis, the amount maintained in the segregated account will be the full
amount of the Short-Intermediate Term Series' obligations, if any, with respect
to such interest rate swaps, accrued on a daily basis. If there is a default by
the other party to such a transaction, the Short-Intermediate Term Series 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 use of interest rate swaps is 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 Short-Intermediate Term Series would diminish
compared to what it would have been if this investment technique was never used.
The Short-Intermediate Term Series 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 Short-Intermediate Term Series is contractually
obligated to make. If the other party to an interest rate swap defaults, the
Short-Intermediate Term Series' risk of loss consists of the net amount of
interest payments, if any, that the Short-Intermediate Term Series is
contractually entitled to receive. Since interest rate swaps are individually
negotiated, the Short-Intermediate Term Series 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. The Short-Intermediate Term Series will enter into
interest rate swaps only with parties meeting creditworthiness standards
approved by the Trust's Board of Trustees. The investment adviser will monitor
the creditworthiness of such parties under the supervision of the Trust's Board
of Trustees.
PORTFOLIO TURNOVER
The Money Market Series and the U.S. Treasury Money Market Series intend
normally to hold their portfolio securities to maturity. The Money Market Series
and the U.S. Treasury Money Market Series do not normally expect to trade
portfolio securities although they may do so to take advantage of short-term
market movements. The Money Market Series and the U.S. Treasury Money Market
Series will make purchases and sales of portfolio securities with a government
securities dealer on a net price basis; brokerage commissions are not normally
charged on the purchase or sale of U.S. Treasury Securities. See "Portfolio
Transactions and Brokerage."
Although the Short-Intermediate Term Series has no fixed policy with respect
to portfolio turnover, it may sell portfolio securities without regard to the
length of time that they have been held in order to take advantage of new
investment opportunities or yield differentials, or because the
Short-Intermediate Term Series desires to preserve gains or limit losses due to
changing economic conditions. Accordingly, it is possible that the portfolio
turnover rate of the Short-Intermediate Term Series may reach, or even exceed,
250%. The portfolio turnover rate is computed by dividing the lesser of the
amount of the securities purchased or securities sold (excluding all securities
whose maturities at acquisition were one year or less) by the average monthly
value of such securities owned during the year. A 100% turnover rate would
occur, for example, if all of the securities held in the portfolio of the
Short-Intermediate Term Series were sold and replaced within one year. However,
when portfolio changes are deemed appropriate due to market or other conditions,
such turnover rate may be greater than anticipated. A higher rate of turnover
results in increased transaction costs to the Short-Intermediate Term Series.
The portfolio turnover rate for the Short-Intermediate Term Series for the
fiscal years ended November 30, 1995 and 1996 was 217% and 132%, respectively.
B-15
<PAGE>
INVESTMENT RESTRICTIONS
The Trust's fundamental policies as they affect a particular Series cannot
be changed without the approval of the outstanding shares of such Series by a
vote which is the lesser of (i) 67% or more of the voting securities of such
Series represented at a meeting at which more than 50% of the outstanding voting
securities of such Series are present in person or represented by proxy or (ii)
more than 50% of the outstanding voting securities of such Series. With respect
to the submission of a change in fundamental policy or investment objective to a
particular Series, such matters shall be deemed to have been effectively acted
upon with respect to all Series of the Trust if a majority of the outstanding
voting securities of the particular Series votes for the approval of such
matters as provided above, notwithstanding (1) that such matter has not been
approved by a majority of the outstanding voting securities of any other Series
affected by such matter and (2) that such matter has not been approved by a
majority of the outstanding voting securities of the Trust.
MONEY MARKET SERIES
The following investment restrictions are fundamental policies of the Trust
with respect to the Money Market Series of the Trust and may not be changed
except as described above.
The Trust may not:
1. Borrow money, except from banks for temporary or emergency purposes,
including the meeting of redemption requests which might otherwise require the
untimely disposition of securities; borrowing in the aggregate may not exceed
20%, and borrowing for purposes other than meeting redemptions may not exceed
5%, of the value of the Trust's total assets (including the amount borrowed),
less liabilities (not including the amount borrowed) at the time the borrowing
is made; investment securities will not be purchased while borrowings are
outstanding.
2. Pledge, hypothecate, mortgage or otherwise encumber its assets, except
in an amount up to 10% of the value of its net assets but only to secure
permitted borrowings of money.
3. Make loans to others, except through the purchase of the debt
obligations and the repurchase agreements covering government securities and the
lending of portfolio securities (limited to thirty percent of the Series' total
assets).
4. Purchase or sell real estate or real estate mortgage loans.
5. Purchase securities on margin or sell short.
6. Purchase or sell commodities or commodity futures contracts, or oil,
gas, or mineral exploration or development programs.
7. Underwrite securities of other issuers.
8. Purchase the securities of any other investment company, except in
connection with a merger, consolidation, reorganization or acquisition of
assets.
9. Issue senior securities as defined in the Investment Company Act except
insofar as the Trust may be deemed to have issued a senior security by reason
of: (a) entering into any repurchase agreement; (b) permitted borrowings of
money; or (c) purchasing securities on a when-issued or delayed delivery basis.
10. Purchase securities on a when-issued basis if, as a result, more than
15% of the Trust's net assets would be committed.
SHORT-INTERMEDIATE TERM SERIES
The following investment restrictions are fundamental policies of the Trust
with respect to the Short-Intermediate Term Series of the Trust and may not be
changed except as described above.
The Trust may not:
1. Issue senior securities, borrow money or pledge its assets, except that
the Series may borrow from banks or through dollar rolls or reverse repurchase
agreements up to 33-1/3% of the value of its total assets (calculated when the
loan is made) for temporary, extraordinary or emergency purposes, to take
advantage of investment opportunities or for the clearance of transactions and
may pledge up to 33-1/3% of the value of its total assets to secure such
borrowings. For purposes
B-16
<PAGE>
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 rolls or the purchase
and sale of futures contracts are not deemed to be a pledge of assets and
neither such arrangements nor the purchase or sale of futures contracts nor the
purchase and sale of related options, nor obligations of the Series to the
Trustees of the Trust pursuant to deferred compensation arrangements are deemed
to be the issuance of a senior security.
2. Make loans to others, except through the purchase of the debt obligations
and the repurchase agreements covering government securities and the lending of
portfolio securities (limited to 30% of the Series' total assets).
3. Purchase or sell real estate or real estate mortgage loans, except that
the Series may purchase and sell mortgaged-backed securities, securities
collateralized by mortgages, securities which are secured by real estate,
securities of companies which invest or deal in real estate and publicly traded
securities of real estate investment trusts. The Series may not purchase
interests in real estate limited partnerships which are not readily marketable.
4. Purchase securities on margin (but the Series may obtain such short-term
credits as may be necessary for the clearance of transactions); provided that
the deposit or payment by the Series of initial or variation margin in
connection with options or futures contracts is not considered the purchase of a
security on margin.
5. Make short sales of securities, or maintain a short position if, when
added together, more than 25% of the value of the Series' net assets would be
(i) deposited as collateral for the obligation to replace securities borrowed to
effect short sales and (ii) allocated to segregated accounts in connection with
short sales. Short sales "against-the-box" are not subject to this limitation.
6. Purchase or sell commodities or commodity futures contracts, or oil, gas,
or mineral exploration or development programs, except that the Fund may
purchase and sell financial futures contracts and options thereon.
7. Purchase the securities of any other investment company, except in
connection with a merger, consolidation, reorganization or acquisition of
assets.
8. Purchase securities on a when-issued basis if, as a result, more than 15%
of the Series' net assets would be committed.
U.S. TREASURY MONEY MARKET SERIES
In connection with its investment objective and policies as set forth in the
Prospectus, the U.S. Treasury Money Market Series has adopted the following
investment restrictions.
The U.S. Treasury Money Market Series may not:
1. Invest in any securities other than U.S. Treasury obligations.
2. Purchase securities on margin (but the Series may obtain such short-term
credits as may be necessary for the clearance of transactions).
3. Make short sales of securities or maintain a short position.
4. Issue senior securities, borrow money or pledge its assets, except that
the Series may borrow up to 20% of the value of its total assets (calculated
when the loan is made) from banks and from entities other than banks if so
permitted pursuant to an order of the Securities and Exchange Commission for
temporary, extraordinary or emergency purposes. The Series may pledge up to 20%
of the value of its total assets to secure such borrowings.
5. Buy or sell real estate or interests in real estate.
6. 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 laws.
7. Make investments for the purpose of exercising control or management.
8. Invest in interests in oil, gas or other mineral exploration or
development programs.
9. Buy or sell commodities or commodity contracts (including futures
contracts and options thereon).
Whenever any fundamental investment policy or investment restriction states
a maximum percentage of any Series' 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 a Series'
asset coverage for borrowings falls below 300%, the Series will take prompt
action to reduce its borrowings, as required by applicable law.
B-17
<PAGE>
<TABLE>
<CAPTION>
TRUSTEES AND OFFICERS
POSITION WITH PRINCIPAL OCCUPATIONS
NAME, ADDRESS AND AGE(1) TRUST DURING PAST 5 YEARS
- ------------------------ ------------- ---------------------
<S> <C> <C>
Edward D. Beach (72) Trustee President and Director of BMC Fund, Inc., a closed-end investment
company; previously, Vice Chairman of Broyhill Furniture Industries,
Inc.; Certified Public Accountant; Secretary and Treasurer of Broyhill
Family Foundation, Inc.; Member of the Board of Trustees of Mars Hill
College; President, Treasurer and Director of The High Yield Plus Fund,
Inc. and First Financial Fund. Inc.; President and Director of Global
Utility Fund, Inc.
Eugene C. Dorsey (69) Trustee 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; Director of the
Advisory Board of Chase Manhattan Bank of Rochester and The High
Yield Income Fund Inc.
Delayne Dedrick Gold (58) Trustee Marketing and Management Consultant.
*Robert F. Gunia (50) Vice President Chief Administrative Officer (July 1990-September 1996), Director
and Trustee (January 1989-September 1996), Executive Vice President, Treasurer
and Chief Financial Officer (June 1987-September 1996) of Prudential
Mutual Fund Management, Inc.; Comptroller of Prudential Investments
(since May 1996); Senior Vice President (since March 1987) of
Prudential Securities Incorporated (Prudential Securities); Vice
President and Director of The Asia Pacific Fund, Inc. (since May 1989).
*Harry A. Jacobs, Jr. (75) Trustee Senior Director (since January 1986) of Prudential Securities; formerly
One New York Plaza Interim Chairman and Chief Executive Officer of Prudential Mutual
New York, NY Fund Management, Inc. (June-September 1993); formerly Chairman of
the Board of Prudential Securities (1982-1985) and Chairman of the
Board and Chief Executive Officer of Bache Group, Inc. (1977-1982);
Director of the Center for National Policy, The First Australia Fund, Inc.
and The First Australia Prime Income Fund, Inc.; Trustee of the Trudeau
Institute.
<FN>
- -------------------
*"Interested" Trustee, as defined in the Investment Company Act, by reason of his affiliation with The Prudential Insurance
Company of America (Prudential) or Prudential Securities.
</FN>
</TABLE>
B-18
<PAGE>
<TABLE>
<CAPTION>
POSITION WITH PRINCIPAL OCCUPATIONS
NAME, ADDRESS AND AGE(1) TRUST DURING PAST 5 YEARS
- ------------------------ ------------- ---------------------
<S> <C> <C>
Donald D. Lennox (78) Trustee Chairman (since February 1990) and Director (since April 1989) of
International Imaging Materials, Inc.; Retired Chairman, Chief
Executive Officer and Director of Shlegel Corporation (industrial
manufacturing) (March 1987-February 1989); Director of Gleason
Corporation, Personal Sound Technologies, Inc. and The High Yleld
Income Fund, Inc.
*Mendel A. Melzer (35) Trustee Chief Investment Officer (since October 1996) of Prudential Mutual
751 Broad Street Funds; formerly Chief Financial Officer of Prudential Investments
Newark, NJ (November 1995-September 1996), Senior Vice President and Chief
Financial Officer of Prudential Preferred Financial Services (April 1993-
November 1995), Managing Director of Prudential Investment
Advisors (April 1991-April 1993) and Senior Vice President of
Prudential Capital Corporation (July 1989-April 1991).
Thomas T. Mooney (55) Trustee President of the Greater Rochester Metro Chamber of Commerce;
formerly Rochester City Manager; Trustee of Center for Governmental
Research, Inc.; Director of Monroe County Water Authority, Rochester
Jobs, Inc., Blue Cross of Rochester, Executive Service Corps of
Rochester, Monroe County Industrial Development Corporation,
Northeast Midwest Institute, First Financial Fund. Inc., The Global
Government Plus Fund, Inc. and The High Yield Plus Fund, Inc.
Thomas H. O'Brien (72) Trustee President of O'Brien Associates (Financial and Management
Consultants) (since April 1984); formerly President of Jamaica Water
Securities Corp. (holding company) (February 1989-August 1990);
Chairman of the Board and Chief Executive Officer (September 1987-
February 1989) of Jamaica Water Supply Company and Director
(September 1987-April 1991); Director of Ridgewood Savings Bank;
Trustee of Hofstra University.
*Richard A. Redeker (53) President Employee of Prudential Investments; formerly President, Chief
and Trustee Executive Officer and Director (October 1993-September 1996) of
Prudential Mutual Fund Management, Inc.; Executive Vice President,
Director and Member of Operating Committee (October 1993-
September 1996), Prudential Securities; Director (since October 1993-
September 1996), Prudential Securities Group, Inc.; Executive Vice
President, The Prudential Investment Corporation (since January
1994); previously Senior Executive Vice President and Director of
Kemper Financial Services, Inc. (September 1978-September 1993);
President and Director of The High Yield Income Fund, Inc.
<FN>
- -------------------
*"Interested" Trustee, as defined in the Investment Company Act, by reason of his affiliation with Prudential or Prudential
Securities.
</FN>
</TABLE>
B-19
<PAGE>
<TABLE>
<CAPTION>
POSITION WITH PRINCIPAL OCCUPATIONS
NAME, ADDRESS AND AGE (1) TRUST DURING PAST 5 YEARS
- --------------------- ------------- ---------------------
<S> <C> <C>
Nancy H. Teeters (66) Trustee Economist; formerly Vice President and Chief Economist (March 1986-
June 1990) of International Business Machines Corporation; Director
of Inland Steel Industries (since July 1991) and First Financial Fund,
Inc.
Louis A. Weil, III (55) Trustee Publisher 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.; prior thereto, Publisher of Time Magazine (May
1989-March 1991); formerly President, Publisher and Chief Executive
Officer of The Detroit News (February 1986-August 1989); formerly
member of the Advisory Board, Chase Manhattan Bank-Westchester.
S. Jane Rose (50) Secretary Senior Vice President (January 1991-September 1996) and Senior
Counsel (June 1987-September 1996) of Prudential Mutual Fund
Management, Inc.; Senior Vice President and Senior Counsel (since
June 1992) of Prudential Securities; formerly Vice President and
Associate General Counsel of Prudential Securities.
Eugene S. Stark (38) Treasurer First Vice President (January 1990-September 1996) of Prudential
and Mutual Fund Management, Inc.
Principal
Financial
and
Accounting
Officer
Stephen M. Ungerman (43) Assistant First Vice President of Prudential Mutual Fund Management, Inc.
Treasurer (February 1993-September 1996); Tax Director of Prudential
Investments and the Private Asset Group of Prudential (since March
1996); prior thereto, Senior Tax Manager of Price Waterhouse (1981-
January 1993).
<FN>
- ---------------
(1)Unless otherwise noted the address for each of the above persons is c/o: Prudential Mutual Fund Management LLC, Gateway
Center Three, 100 Mulberry Street, 9th Floor, Newark, New Jersey 07102-4077.
*"Interested" Trustee, as defined in the Investment Company Act, by reason of his affiliation with Prudential Securities or PMF.
</FN>
</TABLE>
Trustees of the Trust are elected by the holders of the shares of all Series
of the Trust, and not separately by holders of each Series voting as a class.
Trustees and officers of the Trust are also trustees, directors and officers
of some or all of the other investment companies distributed by Prudential
Securities or Prudential Mutual Fund Distributors, Inc.
The officers conduct and supervise the daily business operations of the
Trust, while the Trustees, in addition to their functions set forth under
"Manager," and "Distributor," review such actions and decide on general policy.
The Trust pays each of its directors who is not an affiliated person of PMF
or The Prudential Investment Corporation (PIC) annual compensation of $9,000, in
addition to certain out-of-pocket expenses. The Chairman of the Audit Committee
receives an additional $200 per year.
Trustees may receive their Trustee's fee pursuant to a deferred fee
agreement with the Trust. Under the terms of the agreement, the Trust accrues
daily the amount of such Trustee's fee which accrues 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 an SEC exemptive order,
at the daily rate of return of the Trust (the Trust Rate). Payment of the
interest so accrued is also deferred and accruals become
B-20
<PAGE>
payable at the option of the Trustee. The Trust's obligation to make payments of
deferred Trustees' fees, together with interest thereon, is a general obligation
of the Trust.
The Trustees have adopted a retirement policy which calls for the retirement
of Trustees on December 31 of the year in which they reach the age of 72, except
that retirement is being phased in for Trustees who were age 68 or older as of
December 31, 1993. Under this phase-in provision, Mr. Lennox is scheduled to
retire on December 31, 1997, Mr. Jacobs is scheduled to retire on December 31,
1998, and Messrs. Beach and O'Brien are scheduled to retire on December 31,
1999.
Pursuant to the terms of the Management Agreement with the Trust, the
Manager pays all compensation of officers and employees of the Trust as well as
the fees and expenses of all Trustees of the Trust who are affiliated persons of
the Manager.
On October 30, 1996, at an annual meeting of shareholders, shareholders of
record on August 9, 1996, voted to elect new Trustees of the Trust and to
continue the services of Ms. Gold and Messrs. Redeker and Weil as Trustees of
the Trust. The following table sets forth the aggregate compensation paid by the
Portfolio for the fiscal year ended November 30, 1996 to current Trustees of the
Trust, as well as to Trustees of the Trust who served during the Trust's 1996
fiscal year. The table also shows aggregate compensation paid to those Trustees
for service on Boards of all funds managed by Prudential Mutual Fund Management
LLC, including the Trust, for the calendar year ended December 31, 1995.
<TABLE>
<CAPTION>
COMPENSATION TABLE
TOTAL
PENSION OR COMPENSATION
RETIREMENT FROM TRUST
AGGREGATE BENEFITS ACCRUED ESTIMATED ANNUAL AND FUND
COMPENSATION AS PART OF TRUST BENEFITS UPON COMPLEX PAID
NAME AND POSITION FROM TRUST EXPENSES RETIREMENT TO TRUSTEES
----------------- ------------ ---------------- ---------------- ------------
<S> <C> <C> <C> <C>
Edward D. Beach-Trustee ...................... $ - None N/A $183,500(22/43)**
Eugene C. Dorsey-Trustee ..................... $ - None N/A $ 85,783*(10/34)**
Delayne Dedrick Gold-Trustee ................. $9,200 None N/A $183,250(24/45)**
Robert F. Gunia-Trustee and Vice President ... - None N/A $ -
Arthur Hauspurg-Former Trustee ............... $9,000 None N/A $ -
Harry A. Jacobs, Jr.-Trustee ................. $ - None N/A $ -
Donald D. Lennox-Trustee ..................... - None N/A $ 86,250(10/22)**
Mendel A. Melzer-Trustee ..................... - None N/A $ -
Thomas T. Mooney-Trustee ..................... $ - None N/A $125,625(14/19)**
Stephen P. Munn-Former Trustee ............... $9,000 None N/A $ -
Thomas H. O'Brien-Trustee .................... $ - None N/A $ 44,000(6/24)**
Richard A. Redeker-Trustee and President...... $ - None N/A $ -
Nancy H. Teeters-Trustee ..................... $9,000 None N/A $107,500(13/31)**
Louis A. Weil, III-Trustee ................... $9,000 None N/A $ 93,750(11/16)**
<FN>
- --------------
*Indicates number of funds/portfolios in Fund Complex (including the Trust) to which aggregate compensation relates.
(1) Directors who are "interested" do not receive compensation from the Fund complex (including the Trust).
</FN>
</TABLE>
As of January 10, 1997, the Trustees and officers of the Trust, as a group,
owned less than 1% of the outstanding shares of beneficial interest of each of
the Money Market Series, U.S. Treasury Money Market Series and the
Short-Intermediate Term Series of the Trust.
As of January 10, 1997, Prudential Securities was the record holder for
other beneficial owners of 10,527,990 Short-Intermediate Term Series Shares (or
55% of such shares outstanding), 419,317,775 Money Market Series Class A Shares
(or 69% of such shares outstanding), 0 Class Z Shares (or 0% of such shares
outstanding) and 442,626,745 U.S. Treasury Money Market Series Shares (or 72% of
such shares outstanding). 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.
MANAGER
The Manager of the Trust is Prudential Mutual Fund Management LLC (PMF or
the Manager), Gateway Center Three, Newark, New Jersey 07102-4077. PMF serves as
manager of all of the investment companies that, together with the Trust,
comprise the Prudential Mutual Funds. See "How the Trust is Managed-Manager" in
the Prospectus of each Series. As of December 31, 1996, PMF managed and/or
administered open-end and closed-end management investment companies with assets
of approximately $55.2 billion. According to the Investment Company Institute,
as of August 31, 1996, the Prudential Mutual Funds were the 17th largest family
of mutual funds in the United States.
PMF is a subsidiary of Prudential Securities Incorporated and Prudential.
PMF has three wholly-owned subsidiaries: Prudential Mutual Fund Distributors,
Inc., Prudential Mutual Fund Services LLC (PMFS or the Transfer Agent) and
Prudential
B-21
<PAGE>
Mutual Fund Investment Management. PMFS serves as the transfer agent for the
Prudential Mutual Funds and, in addition, provides customer service,
recordkeeping and management and administration services to qualified plans.
Pursuant to a management agreement with the Trust (the Management
Agreement), PMF, subject to the supervision of the Trustees and in conformity
with the stated policies of the Trust, manages both the investment operations of
the Trust and the composition of the Trust's portfolio, including the purchase,
retention, disposition and loan of securities and other investments. PMF is
obligated to keep certain books and records of the Trust in connection
therewith. PMF is also obligated to provide research and statistical analysis
and to pay costs of certain clerical and administrative services involved in the
portfolio management. The management services of PMF to the Trust are not
exclusive under the terms of the Management Agreement and PMF is free to, and
does, render management services to others.
PMF has authorized any of its directors, officers and employees who have
been elected as trustees or officers of the Trust to serve in the capacities in
which they have been elected. Services furnished by PMF under the Management
Agreement may be furnished by any such directors, officers or employees of PMF.
In connection with the services it renders, PMF bears the following expenses:
(a) the salaries and expenses of all personnel of the Trust and the Manager,
except the fees and expenses of Trustees who are not affiliated persons of the
Manager;
(b) all expenses incurred by the Manager or by the Trust in connection with
managing the ordinary course of the Trust's business, other than those assumed
by the Trust, as described below; and
(c) the costs and expenses payable to The Prudential Investment Corporation
(PIC) pursuant to a subadvisory agreement between PMF and PIC (the Subadvisory
Agreement).
Under the terms of the Management Agreement, the Trust is responsible for
the payment of the following expenses, including (a) the fee payable to the
Manager, (b) the fees and expenses of Trustees who are not affiliated with PMF
or PIC, (c) the fees and certain expenses of the Trust's Custodian and Transfer
and Dividend Disbursing Agent, including the cost of providing records to the
Manager in connection with its obligation of maintaining required records of the
Trust and of pricing the Trust's shares, (d) the fees and expenses of the
Trust's legal counsel and independent accountants, (e) brokerage commissions and
any issue or transfer taxes chargeable to the Trust in connection with its
securities transactions, (f) all taxes and corporate fees payable by the Trust
to governmental agencies, (g) the fees of any trade association of which the
Trust is a member, (h) the cost of share certificates representing shares of the
Trust, (i) the cost of fidelity, directors and officers and errors and omissions
insurance, (j) the fees and expenses involved in registering and maintaining
registration of the Trust and of its shares with the SEC and registering the
Trust as a broker or dealer and qualifying its shares under state securities
laws, including the preparation and printing of the Trust's registration
statements and prospectuses for such purposes, (k) allocable communications
expenses with respect to investor services and all expenses of shareholders' and
Trustees' meetings and of preparing, printing and mailing reports to
shareholders, (l) litigation and indemnification expenses and other
extraordinary expenses not incurred in the ordinary course of the Trust's
business and (m) distribution fees.
The Trust pays a fee to PMF for the services performed and the facilities
furnished by PMF, computed daily and payable monthly, at an annual rate of .40
of 1% of the Short-Intermediate Term Series' and the U.S. Treasury Money Market
Series' average daily net assets and at an annual rate of .40 of 1% of the
average daily net assets up to $1 billion, .375 of 1% on assets between $1
billion and $1.5 billion and .35 of 1% on assets in excess of $1.5 billion of
the average daily net assets of the Money Market Series. The Management
Agreement also provides that in the event the expenses of a Series (including
the fees of the Manager but excluding interest, taxes, brokerage commissions,
distribution fees, litigation and indemnification expenses and other
extraordinary expenses) for any fiscal year exceed the lowest applicable annual
expense limitation established and enforced pursuant to the statute or
regulations of any jurisdictions in which shares of the Series are then
qualified for offer and sale, PMF will reduce its fee by the amount of such
excess. Reductions in excess of the total compensation payable to PMF will be
paid by PMF to the Series. Any such reductions are subject to readjustment
during the year. Currently, the Trust believes that the most restrictive expense
limitation of state securities commissions is 2 1/2% of the average daily net
assets of each Series up to $30 million, 2% of the average daily net assets of
each Series from $30 million to $100 million and 1 1/2% of any excess over $100
million. The Management Agreement provides that the Manager shall not be liable
to the Trust for any error of judgment by the Manager or for any loss sustained
by the Trust except in the case of a breach of fiduciary duty with respect to
the receipt of compensation for services (in which case any award of damages
will be limited as provided in the Investment Company Act) or of wilful
misfeasance, bad faith, gross negligence or reckless disregard of duty.
The Management Agreement provides that it shall 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 was last approved by the Trustees, including all of the Trustees who
are not interested persons as defined in the Investment Company Act, on May 8,
1996 and by a majority of the outstanding shares of the Money Market Series and
the Short-Intermediate Term Series on April 28, 1988 and a majority of the
outstanding shares of the U.S. Treasury Money Market Series on November 26,
1991.
B-22
<PAGE>
For the fiscal year ended November 30, 1996, the Trust paid management fees
to PMF of $2,362,419, $810,455 and $1,572,239 relating to the Money Market
Series, Short-Intermediate Term Series and U.S. Treasury Money Market Series,
respectively. For the fiscal year ended November 30, 1995, the Trust paid
management fees to PMF of $2,390,395, $838,085 and $1,381,478 relating to the
Money Market Series, Short-Intermediate Term Series and U.S. Treasury Money
Market Series, respectively. For the fiscal year ended November 30, 1994 the
Trust paid management fees to PMF of $2,931,469, $1,229,526 and $1,233,814
relating to the Money Market Series, Short-Intermediate Term Series and U.S.
Treasury Money Market Series, respectively.
PMF has entered into the Subadvisory Agreement with PIC (the Subadviser).
The Subadvisory Agreement provides that PIC furnish investment advisory services
in connection with the management of the Trust. In connection therewith, PIC is
obligated to keep certain books and records of the Trust. PMF continues to have
responsibility for all investment advisory services pursuant to the Management
Agreement and supervises PIC's performance of those services. PIC is reimbursed
by PMF for the reasonable costs and expenses incurred by PIC in furnishing those
services. Investment advisory services are provided to the Trust by a unit of
the Subadviser known as Prudential Mutual Fund Investment Management.
The Subadvisory Agreement was last approved by the Trustees, including all
of the Trustees who are not interested persons as defined in the Investment
Company Act, on May 8, 1996, and by the shareholders of each of the Money Market
Series and the Short-Intermediate Term Series on April 28, 1988 and the
shareholders of the U.S. Treasury Money Market Series on November 26, 1991.
The Subadvisory Agreement provides that it will terminate in the event of
its assignment or upon the termination of the Management Agreement. The
Subadvisory Agreement may be terminated by the Trust, PMF or PIC upon not less
than 30 days' nor more than 60 days' written notice. The Subadvisory Agreement
provides that it will continue in effect for a period of more than two years
only so long as such continuance is specifically approved at least annually in
accordance with the requirements of the Investment Company Act applicable to
continuance of investment advisory contracts.
DISTRIBUTOR
Prudential Securities Incorporated (Prudential Securities or PSI), One
Seaport Plaza, New York, New York 10292, has entered into an agreement with the
Trust under which Prudential Securities acts as distributor for the Trust's
shares. Prudential Securities is engaged in the securities underwriting and
securities and commodities brokerage business and is a member of the New York
Stock Exchange, other major securities and commodities exchanges and the NASD.
Prudential Securities is also engaged in the investment advisory business.
Prudential Securities is a wholly-owned subsidiary of Prudential Securities
Group Inc., which is an indirect, wholly-owned subsidiary of Prudential. The
services it provides to the Trust are discussed in each Series' Prospectus. See
"How the Trust is Managed-Distributor."
DISTRIBUTION AND SERVICE PLANS. See "How the Trust is Managed-Distributor" in
the Prospectus of each Series.
During the fiscal year ended November 30, 1996 PMFD and PSI incurred
distribution expenses in the aggregate of $736,434 and $491,325 with respect to
the Money Market Series and the U.S. Treasury Money Market Series, respectively,
all of which was recovered through the distribution fee paid by each Series to
PMFD and PSI. It is estimated that of these amounts approximately $578,100
(78.5%) and $388,147 (78.0%) was spent on payment of account servicing fees to
financial advisers for the Money Market Series and U.S. Treasury Money Market
Series, respectively, and $158,334 (21.5%) and $103,178 (22.0%) on allocation of
overhead and other branch office distribution-related expenses for the Money
Market Series and U.S. Treasury Money Market Series, respectively. 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 shares of the series, 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) travel expenses of mutual fund sales coordinators to
promote the sale of shares of the series, and (d) other incidental expenses
relating to branch promotion of sales of the series. Reimbursable distribution
expenses do not include any direct interest or carrying charges.
For the fiscal year ended November 30, 1996, Prudential Securities received
$409,005 from the Short-Intermediate Term Series under the Plan all of which was
spent on behalf of the Short-Intermediate Term Series or the payment of account
servicing fees to financial advisers.
On May 2, 1995, the Trustees, including a majority of the Trustees who are
not interested persons of the Trust and have no direct or indirect financial
interest in the operating of the Plans (Rule 12b-1 Trustees) at a meeting called
for the purpose of voting on each Plan, approved amendments to the plans
changing them from reimbursement type plans to compensation type plans. The
Plans were last approved by the Trustees, including a majority of the Rule 12b-1
Trustees, on May 8, 1996. The Plans were last approved by the Trustees,
including a majority of the Trustees who are not interested persons of the Trust
and who have no direct or indirect financial interest in the operation of the
Plans or in any agreements related to the Plans (the Rule 12b-1 Trustees), cast
in person at a meeting called for the purpose of voting on such Plans on May 8,
1996 and, as amended, were approved by the shareholders of each Series on July
19, 1995.
B-23
<PAGE>
In each Distribution and Service Agreement, the Trust has agreed to
indemnify Prudential Securities or PMFD to the extent permitted by applicable
law against certain liabilities under the Securities Act.
Pursuant to the Plans, the Trustees are provided at least quarterly with
written reports of the amounts expended under the Plans and the purposes for
which such expenditures were made. The Trustees review such reports on a
quarterly basis.
The Plans provide that they will continue in effect from year to year,
provided each such continuance is approved annually by a vote of the Trustees in
the manner described above. The Plans may not be amended to increase materially
the amount to be spent for the services described therein without approval of
the shareholders of the applicable Series, and all material amendments of the
Plans must also be approved by the Trustees in the manner described above. Each
Plan may be terminated at any time, without payment of any penalty, by vote of a
majority of the Rule 12b-1 Trustees, or by a vote of a majority of the
outstanding voting securities of the applicable Series (as defined in the
Investment Company Act). Each Plan will automatically terminate in the event of
its assignment (as defined in the Investment Company Act).
So long as the Plans are in effect, the selection and nomination of Trustees
who are not interested persons of the Trust shall be committed to the discretion
of the Trustees who are not interested persons. The Trustees have determined
that, in their judgment, there is a reasonable likelihood that the Plans will
benefit the Trust and its shareholders. In the Trustees' quarterly review of the
Plans, they consider the continued appropriateness and the level of payments
provided therein.
The Distribution Agreements provide that each shall terminate automatically
if assigned and that each may be terminated without penalty by either party upon
not more than 60 days' nor less than 30 days' written notice. Each Distribution
Agreement was last approved by the Trustees, including all of the 12b-1 Trustees
on May 8, 1996. On November 3, 1995, the Trustees approved the transfer of the
Distribution Agreements for the Money Market Series and U.S. Treasury Money
Market Series with PMFD to Prudential Securities.
On October 21, 1993, PSI entered into an omnibus settlement with the SEC,
state securities regulators in 51 jurisdictions and the NASD to resolve
allegations that PSI sold interests in more than 700 limited partnerships (and a
limited number of other types of securities) from January 1, 1980 through
December 31, 1990, in violation of securities laws to persons for whom such
securities were not suitable in light of the individuals' financial condition or
investment objectives. It was also alleged that the safety, potential returns
and liquidity of the investments had been misrepresented. The limited
partnerships principally involved real estate, oil and gas producing properties
and aircraft leasing ventures. The SEC Order (i) included findings that PSI's
conduct violated the federal securities laws and that an order issued by the SEC
in 1986 requiring PSI to adopt, implement and maintain certain supervisory
procedures had not been complied with; (ii) directed PSI to cease and desist
from violating the federal securities laws and imposed a $10 million civil
penalty; and (iii) required PSI to adopt certain remedial measures including the
establishment of a Compliance Committee of its Board of Directors. Pursuant to
the terms of the SEC settlement, PSI established a settlement fund in the amount
of $330,000,000 and procedures, overseen by a court approved Claims
Administrator, to resolve legitimate claims for compensatory damages by
purchasers of the partnership interests. PSI has agreed to provide additional
funds, if necessary, for that purpose. PSI's settlement with the state
securities regulators included an agreement to pay a penalty of $500,000 per
jurisdiction. PSI consented to a censure and to the payment of a $5,000,000 fine
in settling the NASD action. In settling the above referenced matters, PSI
neither admitted nor denied the allegations asserted against it.
On January 18, 1994, PSI agreed to the entry of a Final Consent Order and a
Parallel Consent Order by the Texas Securities Commissioner. The firm also
entered into a related agreement with the Texas Securities Commissioner. The
allegations were that the firm had engaged in improper sales practices and other
improper conduct resulting in pecuniary losses and other harm to investors
residing in Texas with respect to purchases and sales of limited partnership
interests during the period of January 1, 1980 through December 31, 1990.
Without admitting or denying the allegations, PSI consented to a reprimand,
agreed to cease and desist from future violations, and to provide voluntary
donations to the State of Texas in the aggregate amount of $1,500,000. The firm
agreed to suspend the creation of new customer accounts, the general
solicitation of new accounts, and the offer for sale of securities in or from
PSI's North Dallas office to new customers during a period of twenty consecutive
business days, and agreed that its other Texas offices would be subject to the
same restrictions for a period of five consecutive business days. PSI also
agreed to institute training programs for its securities salesmen in Texas.
On October 27, 1994, Prudential Securities Group, Inc. and PSI entered into
agreements with the United States Attorney deferring prosecution (provided PSI
complies with the terms of the agreement for three years) for any alleged
criminal activity related to the sale of certain limited partnership programs
from 1983 to 1990. In connection with these agreements, PSI agreed to add the
sum of $330,000,000 to the fund established by the SEC and executed a
stipulation providing for a reversion of such funds to the United States Postal
Inspection Service. PSI further agreed to obtain a mutually acceptable outside
director to sit on the Board of Directors of PSG and the Compliance Committee of
PSI. The new director will also serve as an independent "ombudsman" whom PSI
employees can call anonymously with complaints about ethics and compliance.
Prudential Securities shall report any allegations or instances of criminal
conduct and material improprieties to the new director. The new director will
submit compliance reports which shall identify all such allegations or instances
of criminal conduct and material improprieties every three months for a
three-year period.
B-24
<PAGE>
PORTFOLIO TRANSACTIONS AND BROKERAGE
The Manager and PIC are responsible for decisions to buy and sell securities
for the Money Market Series, Short-Intermediate Term Series and U.S. Treasury
Money Market Series, arranging the execution of portfolio security transactions
on each Series' behalf, and the selection of brokers and dealers to effect the
transactions. Purchases of portfolio securities are made from dealers,
underwriters and issuers; sales, if any, prior to maturity, are made to dealers
and issuers. Each Series does not normally incur any brokerage commission
expense on such transactions. The instruments purchased by the Series 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. Securities purchased in underwritten offerings
include a fixed amount of compensation to the underwriter, generally referred to
as the underwriter's concession or discount. When securities are purchased or
sold directly from or to an issuer, no commissions or discounts are paid.
The policy of each of the Series regarding purchases and sales of securities
is that primary consideration will be given to obtaining the most favorable
price and efficient execution of transactions.
The Trust paid no brokerage commissions for the fiscal years ended November
30, 1994, 1995 and 1996.
SHAREHOLDER INVESTMENT ACCOUNT
Upon the initial purchase of shares of the Trust, a Shareholder Investment
Account is established for each investor under which a record of the shares held
is maintained by the Transfer Agent. If a share 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. Whenever a transaction
takes place in the Shareholder Investment Account, the shareholder will be
mailed a statement showing the transaction and the status of such account.
PROCEDURE FOR MULTIPLE ACCOUNTS
Special procedures have been designed for banks and other institutions that
wish to open multiple accounts. An institution may open a single master account
by filing an Application Form with Prudential Mutual Fund Services LLC (PMFS
or the Transfer Agent), Attention: Customer Service, P.O. Box 15005, New
Brunswick, New Jersey 08906, signed by personnel authorized to act for the
institution. Individual sub-accounts may be opened at the time the master
account is opened by listing them, or they may be added at a later date by
written advice or by filing forms supplied by the Trust. Procedures are
available to identify sub-accounts by name and number within the master account
name. The investment minimums set forth above are applicable to the aggregate
amounts invested by a group and not to the amount credited to each sub-account.
PMFS provides each institution with a written confirmation for each
transaction in sub-accounts. Further, PMFS provides, to each institution on a
monthly basis, a statement which sets forth for each master account its share
balance and income earned for the month. In addition, each institution receives
a statement for each individual account setting forth transactions in the
sub-account for the year-to-date, the total number of shares owned as of the
dividend payment date and the dividends paid for the current month, as well as
for the year-to-date.
Further information on the sub-accounting system and procedures is available
from the Transfer Agent, Prudential Securities or Prusec.
AUTOMATIC REINVESTMENT OF DIVIDENDS AND DISTRIBUTIONS
For the convenience of investors, all dividends and distributions are
automatically invested in full and fractional shares of the applicable Series at
net asset value. An investor may direct the Transfer Agent in writing not less
than 5 full business days prior to the payable date to have subsequent dividends
and/or distributions sent in cash rather than invested. In the case of recently
purchased shares for which registration instructions have not been received on
the record date, cash payment will be made directly to the dealer. Any
shareholder who receives a cash payment representing a dividend or distribution
may reinvest such dividend or distribution at net asset value by returning the
check or the proceeds to the Transfer Agent within 30 days after the payment
date. Such investment will be made at the net asset value per share next
determined after receipt of the check or proceeds by the Transfer Agent.
EXCHANGE PRIVILEGE
The Trust makes available to its Money Market Series, Short-Intermediate
Term Series and U.S. Treasury Money Market Series shareholders the privilege of
exchanging their shares for shares of either of the other Series and 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. Class A shares of such other Prudential Mutual Funds may also be
exchanged for Class A shares of the Money Market Series and for shares of the
Short-Intermediate Term Series and U.S. Treasury Money Market Series. All
exchanges are made on the basis of relative net asset value next determined
after receipt of an order in proper form. An exchange
B-25
<PAGE>
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.
It is contemplated that the exchange privilege may be applicable to new
mutual funds whose shares may be distributed by the Distributor.
CLASS A.
Shareholders of the Trust may exchange their Class A shares for Class A
shares of the Prudential Mutual Funds, and shares of the money market funds
specified below. No fee or sales load will be imposed upon the exchange.
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 York Money Market Series)
(New Jersey Money Market Series)
Prudential MoneyMart Assets
Prudential Tax-Free Money Fund, Inc.
Shareholders of the Trust may not exchange their shares for Class B or Class
C shares of the Prudential Mutual Funds or shares of Prudential Special Money
Market Fund, a money market fund, except that shares acquired prior to January
22, 1990 subject to a contingent deferred sales charge can be exchanged for
Class B shares.
CLASS Z.
Class Z shares may be exchanged for Class Z shares of other Prudential
Mutual Funds.
Additional details about the Exchange Privilege and prospectuses for each of
the Prudential Mutual Funds are available from the Trust's Transfer Agent,
Prudential Securities or Prusec. The Exchange Privilege may be modified,
terminated or suspended on sixty days' notice, and any fund, including the
Trust, or the Distributor, has the right to reject any exchange application
relating to such fund's shares.
DOLLAR COST AVERAGING--SHORT-INTERMEDIATE TERM SERIES
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 overall cost
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 beginning in 2011, the cost of four years at a
private college could reach $210,000 and over $90,000 at a public university.1
The following chart shows how much you would need in monthly investments to
achieve specified lump sums to finance your investment goals.2
PERIOD OF
MONTHLY INVESTMENTS: $100,000 $150,000 $200,000 $250,000
-------------------- -------- -------- -------- --------
25 Years $ 110 $ 165 $ 220 $ 275
20 Years 176 264 352 440
15 Years 296 444 592 740
10 Years 555 833 1,110 1,388
5 Years 1,371 2,057 2,742 3,428
See "Automatic Savings Accumulation Plan."
- --------------
1Source 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 the 1993-94 academic year.
B-26
<PAGE>
2The 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 SAVINGS ACCUMULATION PLAN (ASAP)
Under ASAP, an investor may arrange to have a fixed amount automatically
invested in any Series' shares each month by authorizing his or her bank account
or Prudential Securities Account (including a Command Account) to be debited to
invest specified dollar amounts in shares of that Series. The investor's bank
must be a member of the Automatic Clearing House System. Share certificates are
not issued to ASAP participants.
Further information about this program and an application form can be
obtained from the Transfer Agent, Prudential Securities or Prusec.
SYSTEMATIC WITHDRAWAL PLAN
A systematic withdrawal plan is available for shareholders having shares of
the Trust held through Prudential Securities or the Transfer Agent. Such
withdrawal plan provides for monthly or quarterly checks in any amount, except
as provided below, up to the value of the shares in the shareholder's account.
In the case of shares held through the Transfer Agent (i) a $10,000 minimum
account value applies, (ii) withdrawals may not be for less than $100 and (iii)
the shareholder must elect to have all dividends and/or distributions
automatically reinvested in additional full and fractional shares of the
applicable series at net asset value on shares held under this plan. See
"Shareholder Investment Account-Automatic Reinvestment of Dividends and
Distributions."
Prudential Securities and the Transfer Agent act as agents for the
shareholder in redeeming sufficient full and fractional shares to provide the
amount of the periodic 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.
Withdrawal payments should not generally be considered as dividends, yield
or income. If periodic withdrawals continuously exceed reinvested dividends and
distributions, the shareholder's original investment will be correspondingly
reduced and ultimately exhausted. Furthermore, each withdrawal constitutes a
redemption of shares, and any gain or loss realized must generally be recognized
for federal income tax purposes. Each shareholder should consult his or her own
tax adviser with regard to the tax consequences of the plan, particularly if
used in connection with a retirement plan.
TAX-DEFERRED RETIREMENT PLANS
Various tax-deferred retirement plans, including a 401(k) Plan,
self-directed individual retirement accounts and "tax-sheltered accounts" under
Section 403(b)(7) of the Internal Revenue Code are available through the
Distributor. 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 of these plans, the administration, custodial fees and other
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.
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. 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.
TAX-DEFERRED COMPOUNDING1
CONTRIBUTIONS PERSONAL
MADE OVER: SAVINGS IRA
---------- ------- ---
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
- --------------
1The 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
the IRA account will be subject to tax when withdrawn from the account.
B-27
<PAGE>
MUTUAL FUND PROGRAMS
From time to time, a Series of 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 promoted collectively. Typically,
these programs are created with an investment theme, e.g., to seek 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. A Series 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 the program. Since the allocation of portfolios included in the program may
not be appropriate for all investors, investors should consult their Prudential
Securities Financial Adviser or Prudential/Pruco Securities Representative
concerning the appropriate blend of portfolios for them. If investors elect to
purchase the individual mutual funds that constitute the 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
MONEY MARKET SERIES AND U.S. TREASURY MONEY MARKET SERIES
Amortized Cost Valuation. The Money Market Series and the U.S. Treasury
Money Market Series use the amortized cost method to determine the value of
their portfolio securities in accordance with regulations of the Securities and
Exchange Commission. The amortized cost method involves valuing a security at
its cost and amortizing any discount or premium over the period until maturity.
The method does not take into account unrealized capital gains and losses which
may result from the effect of fluctuating interest rates on the market value of
the security.
With respect to the Money Market Series and the U.S. Treasury Money Market
Series, the Trustees have determined to maintain a dollar-weighted average
maturity of 90 days or less, to purchase instruments having remaining maturities
of thirteen months or less and to invest only in securities determined by the
investment adviser under the supervision of the Trustees to present minimal
credit risks and to be of eligible quality in accordance with the provisions of
Rule 2a-7 of the Investment Company Act. The Trustees have adopted procedures
designed to stabilize, to the extent reasonably possible, both Series' price per
share as computed for the purpose of sales and redemptions at $1.00. Such
procedures will include review of the Series' portfolio holdings by the
Trustees, at such intervals as they may deem appropriate, to determine whether
the Series' net asset value calculated by using available market quotations
deviates from $1.00 per share based on amortized cost. The extent of any
deviation will be examined by the Trustees. If such deviation exceeds 1/2 of 1%,
the Trustees will promptly consider what action, if any, will be initiated. In
the event the Trustees determine that a deviation exists which may result in
material dilution or other unfair results to prospective investors or existing
shareholders, the Trustees will take such corrective action as they consider
necessary and appropriate, including the sale of portfolio instruments prior to
maturity to realize capital gains or losses or to shorten average portfolio
maturity, the withholding of dividends, redemptions of shares in kind, or the
use of available market quotations to establish a net asset value per share.
SHORT-INTERMEDIATE TERM SERIES
Under the Investment Company Act, the Trustees are responsible for
determining in good faith the fair value of the Short-Intermediate Term Series'
securities. In accordance with procedures adopted by the Trustees, the value of
each U.S. Government security for which quotations are available will be based
on the valuation provided by an independent pricing service. Pricing services
consider such factors as security prices, yields, maturities, call features,
ratings and developments relating to specific securities in arriving at
securities valuations. Securities for which market quotations are not readily
available are valued by appraisal at their fair value as determined in good
faith by the Manager under procedures established under the general supervision
and responsibility of the Trustees.
Short-term investments which mature in 60 days or less are valued at
amortized cost, if their term to maturity from date of purchase was 60 days or
less, or by amortizing their value on the 61st day prior to maturity if their
term to maturity when acquired by the Intermediate Series was more than 60 days,
unless this is determined not to represent fair value by the Trustees.
TIME NET ASSET VALUE IS CALCULATED
The Trust will calculate its net asset value at 4:15 P.M., New York time,
for the Short-Intermediate Term Series and at 4:30 P.M. for the Money Market
Series and U.S. Treasury Money Market Series, on each day the New York Stock
Exchange is open for trading except on days on which no orders to purchase, sell
or redeem series shares have been received or days on which changes in the value
of a series' securities do not affect net asset value. In the event the New York
Stock Exchange closes early on any business day, the net asset value of the
Short-Intermediate Term Series' shares shall be determined at a time between
such closing and 4:15 P.M. New York time and at a time between such closing and
4:30 PM for the Money Market Series' and US Treasury Money Market Series'
shares.
B-28
<PAGE>
PERFORMANCE INFORMATION
MONEY MARKET SERIES AND U.S. TREASURY MONEY MARKET SERIES-CALCULATION OF YIELD
The Money Market Series and U.S. Treasury Money Market Series will each
prepare a current quotation of yield from time to time. The yield quoted will be
the simple annualized yield for an identified seven calendar day period. The
yield calculation will be based on a hypothetical account having a balance of
exactly one share at the beginning of the seven-day period. The base period
return will be the change in the value of the hypothetical account during the
seven-day period, including dividends declared on any shares purchased with
dividends on the shares but excluding any capital changes. The yield will vary
as interest rates and other conditions affecting money market instruments
change. Yield also depends on the quality, length of maturity and type of
instruments in the Money Market Series and U.S. Treasury Money Market Series'
portfolios and their operating expenses. The Money Market Series and U.S.
Treasury Money Market Series may also each prepare an effective annual yield
computed by compounding the unannualized seven-day period return as follows: by
adding 1 to the unannualized seven-day period return, raising the sum to a power
equal to 365 divided by 7, and subtracting 1 from the result.
Effective yield = [(base period return + 1)365/7] -1
The U.S. Treasury Money Market Series may also calculate the tax equivalent
yield over a 7-day period. The tax equivalent yield will be determined by first
computing the current yield as discussed above. The Series will then determine
what portion of the yield is attributable to securities, the income of which is
exempt for state and local income tax purposes. This portion of the yield will
then be divided by one minus the maximum state tax rate of individual taxpayers
and then added to the portion of the yield that is attributable to other
securities.
Comparative performance information may be used from time to time in
advertising or marketing the Money Market Series' and U.S. Treasury Money Market
Series' shares, including data from Lipper Analytical Services, Inc., Donoghue's
Money Fund Report, The Bank Rate Monitor, other industry publications, business
periodicals, rating services and market indices.
The Money Market Series' and U.S. Treasury Money Market Series' yields
fluctuate, and annualized yield quotations are not a representation by the Money
Market Series or U.S. Treasury Money Market Series as to what an investment in
the Money Market Series and U.S. Treasury Money Market Series will actually
yield for any given period. Yield for the Money Market Series and U.S. Treasury
Money Market Series will vary based on a number of factors including changes in
market conditions, the level of interest rates and the level of each series'
income and expenses.
SHORT-INTERMEDIATE TERM SERIES-CALCULATION OF YIELD AND TOTAL RETURN
YIELD. The Short-Intermediate Term Series may from time to time advertise
its yield as calculated over a 30-day period. Yield will be computed by dividing
the Short-Intermediate Term Series' 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) 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 net asset value per share on the last day of the period.
Yield fluctuates and an annualized yield quotation is not a representation
by the Trust as to what an investment in the Intermediate Term Series will
actually yield for any given period.
The Short-Intermediate Term Series' 30-day yield for the period ended
November 30, 1996 was 5.60%.
AVERAGE ANNUAL TOTAL RETURN. The Short-Intermediate Term Series may from
time to time advertise its average annual total return. See "How the Trust
Calculates Performance" in the Prospectus.
Average annual total return is computed according to the following formula:
P (1 + T)n = ERV
Where: P = a hypothetical initial payment of $1,000.
T = average annual total return.
B-29
<PAGE>
n = number of years.
ERV = Ending Redeemable Value at the end of the 1, 5 or 10 year
periods (or fractional portion thereof) of a hypothetical
$1,000 payment made at the beginning of the 1, 5 or 10 year
periods.
Average annual total return does not take into account any federal or state
income taxes that may be payable upon redemption.
The Short-Intermediate Term Series' average annual total return for the one,
five and ten year periods ended November 30, 1996 was 5.34%, 6.04% and 6.82%,
respectively.
AGGREGATE TOTAL RETURN. The Short-Intermediate Term Series may also
advertise its aggregate total return. See "How the Trust Calculates Performance"
in the Prospectus.
Aggregate total return represents the cumulative change in the value of an
investment in the Fund and is computed according to the following formula:
ERV - P
-------
P
Where: P = a hypothetical initial payment of $1,000.
ERV = Ending Redeemable Value at the end of the 1, 5 or 10 year
periods (or fractional portion thereof) of a hypothetical
$1,000 investment made at the beginning of the 1, 5 or 10
year periods.
Aggregate total return does not take into account any federal or state
income taxes that may be payable upon redemption.
The Short-Intermediate Term Series' aggregate total return for the one, five
and ten year periods ended November 30, 1996 was 5.34%, 34.09% and 93.50%,
respectively.
TAXES
Each series of the Trust is treated as a separate entity for federal income
tax purposes and each has elected to qualify and intends to remain qualified as
a regulated investment company under the Internal Revenue Code of 1986, as
amended (the Internal Revenue Code). If each series qualifies as a regulated
investment company, it will not be subject to federal income taxes on the
taxable income it distributes to shareholders, provided at least 90% of its net
investment income and net short-term capital gains earned in the taxable year is
so distributed. To qualify for this treatment, each series must, among other
things, (a) derive at least 90% of its gross income (without offset for losses
from the sale or other disposition of securities or foreign currencies) from
dividends, interest, payments with respect to securities loans, gains from the
sale or other disposition of securities or foreign currencies and certain
financial futures, options and forward contracts; (b) derive less than 30% of
its gross income (without offset for losses from the sale or other disposition
of securities or foreign currencies) from the gains on the sale or other
disposition of securities held for less than three months; and (c) diversify its
holdings so that, at the end of each quarter of the taxable year, (i) at least
50% of the value of its assets is represented by cash, U.S. Government
securities and other securities limited in respect of any one issuer to an
amount no greater than 5% of its assets and 10% of the outstanding voting
securities of 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). The performance and tax qualification of one series will have no
effect on the federal income tax liability of shareholders of the other series.
The Internal Revenue Code imposes a 4% nondeductible excise tax to the
extent any series fails to meet certain minimum distribution requirements by the
end of each calendar year. For this purpose, dividends declared in October,
November and December payable to shareholders of record on a specified date in
October, November and December and paid in the following January will be treated
as having been paid by the Trust and received by shareholders in such prior
year. Under this rule, a shareholder may be taxed in one year on dividends or
distributions actually received in January of the following year.
See "Taxes, Dividends and Distributions" in the Prospectus of each series.
CUSTODIAN AND TRANSFER AND DIVIDEND DISBURSING AGENT AND
INDEPENDENT ACCOUNTANTS
State Street Bank and Trust Company, One Heritage Drive, North Quincy,
Massachusetts 02171, has been retained to act as Custodian of the Trust's
investments and in such capacity maintains certain financial and accounting
books and records pursuant to an agreement with the Trust.
B-30
<PAGE>
Prudential Mutual Fund Services LLC (PMFS), Raritan Plaza One, Edison, New
Jersey 08837, serves as Transfer and Dividend Disbursing Agent and in those
capacities maintains certain books and records for the Trust. PMFS is a
wholly-owned subsidiary of PMF. PMFS provides customary transfer agency services
to the Trust, including the handling of shareholder communications, the
processing of shareholder transactions, the maintenance of shareholder account
records, payment of dividends and distributions and related functions. For these
services, PMFS receives an annual fee per shareholder account, a new account
set-up fee for each manually established account and a monthly inactive zero
balance account fee per shareholder account. PMFS is also reimbursed for its
out-of-pocket expenses, including but not limited to postage, stationery,
printing, allocable communications and other costs. For the fiscal year ended
November 30, 1996, the Short-Intermediate Term Series, Money Market Series and
U.S. Treasury Money Market Series incurred fees of $200,000, $1,060,000 and
$128,000, respectively, for the services of PMFS.
Price Waterhouse LLP, 1177 Avenue of the Americas, New York, New York,
serves as the Trust's independent auditors and in that capacity audits the
Trust's annual financial statements.
B-31
<PAGE>
PORTFOLIO OF INVESTMENTS AS PRUDENTIAL GOVERNMENT SECURITIES
OF NOVEMBER 30, 1996 TRUST MONEY MARKET SERIES
- ------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
(000) DESCRIPTION VALUE (NOTE 1)
<C> <S> <C>
------------------------------------------------------------
FEDERAL FARM CREDIT BANK--1.9%
$10,000 5.235%, 3/7/97 $ 9,860,400
500 5.40%, 4/1/97 499,601
------------
10,360,001
- ------------------------------------------------------------
FEDERAL HOME LOAN BANK--4.6%
8,500 5.02%, 2/5/97 8,498,467
1,000 5.235%, 3/4/97 986,477
6,000 5.325%, 3/18/97 5,999,458
10,000 5.89%, 7/29/97 9,993,065
------------
25,477,467
- ------------------------------------------------------------
FEDERAL HOME LOAN MORTGAGE CORPORATION--1.7%
9,500 5.33%, 12/2/96 9,498,593
- ------------------------------------------------------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION--30.4%
2,000 8.20%, 12/23/96 2,003,266
6,000 5.23%, 1/28/97 5,949,443
6,500 5.23%, 3/27/97 6,390,461
18,000 5.30%, 4/4/97 17,671,400
8,000 5.48%, 4/24/97 7,997,979
15,000 5.205%, 4/29/97, F.R.N. 14,993,679
19,750 5.71%, 5/20/97 19,740,642
49,000 5.36%, 8/1/97, F.R.N. 48,985,773
9,805 5.36%, 8/22/97, F.R.N. 9,800,850
5,000 5.64%, 9/3/97 4,983,665
29,425 5.36%, 11/14/97, F.R.N. 29,410,973
------------
167,928,131
- ------------------------------------------------------------
STUDENT LOAN MARKETING ASSOCIATION--3.3%
18,000 7.56%, 12/9/96 18,007,705
- ------------------------------------------------------------
TENNESSEE VALLEY AUTHORITY--0.2%
1,000 6.00%, 1/15/97 1,000,000
UNITED STATES TREASURY NOTES--10.1%
$10,000 6.875%, 2/28/97 $ 10,040,747
29,500 6.50%, 5/15/97 29,636,433
2,000 6.125%, 5/31/97 2,002,979
13,910 6.50%, 8/15/97 13,967,985
------------
55,648,144
- ------------------------------------------------------------
REPURCHASE AGREEMENTS(a)--47.9%
54,367 Bear Stearns & Co., 5.37%, dated
11/26/96, due 12/03/96 in the
amount of $54,423,768 (cost
$54,367,000; the value of the
collateral including accrued
interest is $55,659,688) 54,367,000
25,000 Merrill Lynch, 5.37%, dated
11/26/96, due 12/03/96 in the
amount of $25,026,104 (cost
$25,000,000; the value of the
collateral including accrued
interest is $25,502,384) 25,000,000
8,118 Morgan Stanley & Co., 5.32%, dated
11/25/96, due 12/02/96 in the
amount of $8,126,398 (cost
$8,118,000; the value of the
collateral including accrued
interest is $8,392,804) 8,118,000
26,500 Morgan Stanley & Co., 5.38%, dated
11/27/96, due 12/04/96 in the
amount of $26,527,722 (cost
$26,500,000; the value of the
collateral including accrued
interest is $27,397,057) 26,500,000
500 Morgan Stanley & Co., 5.29%, dated
11/07/96, due 12/06/96 in the
amount of $502,131 (cost
$500,000; the value of the
collateral including accrued
interest is $516,926) 500,000
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-32
<PAGE>
PORTFOLIO OF INVESTMENTS AS PRUDENTIAL GOVERNMENT SECURITIES
OF NOVEMBER 30, 1996 TRUST MONEY MARKET SERIES
- ------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
(000) DESCRIPTION VALUE (NOTE 1)
<C> <S> <C>
------------------------------------------------------------
REPURCHASE AGREEMENTS(a) (CONT'D.)
$21,000 Morgan Stanley & Co., 5.32%, dated
11/19/96, due 12/12/96 in the
amount of $21,071,377 (cost
$21,000,000; the value of the
collateral including accrued
interest is $21,710,875) $ 21,000,000
56,000 Nomura Securities International
Inc., 5.43%, dated 11/27/96, due
12/02/96 in the amount of
$56,042,233 (cost $56,000,000;
the value of the collateral
including accrued interest is
$57,121,929) 56,000,000
5,764 Smith Barney Inc., 5.40%, dated
11/27/96, due 12/04/96 in the
amount of $5,783,021 (cost
$5,764,000; the value of the
collateral including accrued
interest is $5,879,280) 5,764,000
9,000 Smith Barney Inc., 5.32%, dated
11/04/96, due 12/05/96 in the
amount of $9,041,230 (cost
$9,000,000; the value of the
collateral including accrued
interest is $9,180,000) 9,000,000
11,000 Smith Barney Inc., 5.31%, dated
11/12/96, due 12/16/96 in the
amount of $11,055,165 (cost
$11,000,000; the value of the
collateral including accrued
interest is $11,220,000) 11,000,000
13,000 Smith Barney Inc., 5.33%, dated
11/27/96, due 12/30/96 in the
amount of $13,063,516 (cost
$13,000,000; the value of the
collateral including accrued
interest is $13,260,000) 13,000,000
$34,522 UBS Securities Inc., 5.75%, dated
11/29/96, due 12/03/96 in the
amount of $34,544,056 (cost
$34,522,000; the value of the
collateral including accrued
interest is $35,212,622) $ 34,522,000
------------
264,771,000
- ------------------------------------------------------------
TOTAL INVESTMENTS--100.1%
(amortized cost $552,691,041(b)) 552,691,041
Liabilities in excess of other
assets--(0.1%) (568,298)
------------
Net Assets--100% $552,122,743
------------
------------
</TABLE>
- ---------------
F.R.N.--Floating Rate Note. The interest rate reflected is the rate in effect
at November 30, 1996.
(a) Repurchase Agreements are collateralized by U.S. Treasury or Federal agency
obligations.
(b) Federal income tax basis of portfolio securities is the same as for
financial reporting purposes.
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-33
<PAGE>
PORTFOLIO OF INVESTMENTS AS PRUDENTIAL GOVERNMENT SECURITIES TRUST
OF NOVEMBER 30, 1996 SHORT-INTERMEDIATE TERM SERIES
- ------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
(000) DESCRIPTION VALUE (NOTE 1)
<C> <S> <C>
- ------------------------------------------------------------
LONG-TERM INVESTMENTS--100.7%
- ------------------------------------------------------------
ASSET-BACKED--13.5%
Daimler Benz Vehicle Trust
$10,000 5.85%, 7/20/03 $ 10,003,125
Ford Credit Auto Lease Trust
10,000 5.80%, 5/15/99 10,000,000
Main Place Funding Corporation
5,000 5.585%, 7/17/98, F.R.N. 5,000,000
------------
25,003,125
- ------------------------------------------------------------
COLLATERALIZED MORTGAGE OBLIGATIONS--10.2%
GMAC Commercial Mortgage Security
10,088 6.79%, 9/15/03, Series 96 10,138,671
Resolution Trust Corporation
3,732 6.593%, 12/25/20, CMO, Series 1992 3,749,691
Structured Asset Securities Corp.
5,000 6.759%, 2/25/28, CMO, Series 1996 5,040,625
------------
18,928,987
- ------------------------------------------------------------
FEDERAL HOME LOAN MORTGAGE CORPORATION--11.4%
15,000 6.45%, 6/4/99 15,133,650
5,787 7.831%, 8/1/24, ARMS 5,984,238
------------
21,117,888
- ------------------------------------------------------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION--20.3%
4,242 7.435%, 8/1/06 4,493,627
8,471 7.445%, 8/1/06 8,979,414
8,648 7.50%, 10/1/06 9,185,877
14,500 8.00%, 1/1/99 - 12/01/99 14,949,775
------------
37,608,693
- ------------------------------------------------------------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION--17.5%
7,422 9.00%, 6/15/98 - 9/15/09 7,775,759
9,541 8.00%, 6/15/23 - 12/15/24 9,916,273
14,493 7.50%, 10/15/25 - 1/15/26 14,712,536
------------
32,404,568
UNITED STATES TREASURY NOTES--27.8%
$11,000(a) 7.375%, 11/15/97 $ 11,190,740
20,000(a) 8.25%, 7/15/98 20,828,200
1,000(a) 6.00%, 8/15/99 1,008,280
15,000(a) 6.375%, 9/30/01 15,330,450
3,000(a) 6.50%, 8/15/05 3,091,410
------------
51,449,080
------------
Total long-term investments
(cost $184,182,201) 186,512,341
SHORT-TERM INVESTMENTS--6.7%
- ------------------------------------------------------------
COMMERCIAL PAPER--5.1%
Kerr-McGee Credit Corporation
2,008 5.40%, 12/12/96 2,004,687
Tyson Foods
7,420 5.37%, 12/16/96 7,403,398
------------
(cost $9,408,085) 9,408,085
------------
REPURCHASE AGREEMENT--1.6%
3,030 Joint Repurchase Agreement Account,
5.68%, 12/2/96
(cost $3,030,000; Note 5) 3,030,000
------------
Total short-term investments
(cost $12,438,085) 12,438,085
------------
- ------------------------------------------------------------
Total Investments--107.4%
(cost $196,620,286; Note 4) 198,950,426
Liabilities in excess of other
assets--(7.4%) (13,715,761)
------------
Net Assets--100% $185,234,665
------------
------------
</TABLE>
- ---------------
(a) Asset segregated for dollar rolls.
ARMS--Adjustable Rate Mortgage Security. The interest rate reflected is the rate
in effect at November 30, 1996.
CMO--Collateralized Mortgage Obligation.
F.R.N.--Floating Rate Note. The interest rate reflected is the rate in effect at
November 30, 1996.
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-34
<PAGE>
PRUDENTIAL GOVERNMENT SECURITIES TRUST
U.S. TREASURY MONEY MARKET SERIES
PORTFOLIO OF INVESTMENTS AS OF NOVEMBER 30, 1996
- ------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
(000) DESCRIPTION VALUE (NOTE 1)
<C> <S> <C>
- ------------------------------------------------------------
UNITED STATES TREASURY BILLS--13.6%
$4,570 5.10%, 12/19/96 $ 4,558,347
9,945 5.105%, 12/19/96 9,919,616
6,814 5.11%, 12/19/96 6,796,590
1,755 5.125%, 12/19/96 1,750,503
7,005 5.15%, 12/19/96 6,986,962
2,200 5.19882%, 12/19/96 2,194,281
9,500 5.20%, 12/19/96 9,475,300
------------
41,681,599
- ------------------------------------------------------------
UNITED STATES TREASURY NOTES--96.6%
23,243 7.25%, 11/30/96 23,243,000
193,268 7.50%, 1/31/97 193,946,983
25,000 6.75%, 2/28/97 25,087,742
16,842 6.875%, 2/28/97 16,905,317
33,000 6.625%, 3/31/97 33,144,142
2,510 6.50%, 8/15/97 2,518,131
------------
294,845,315
- ------------------------------------------------------------
TOTAL INVESTMENTS--110.2%
(amortized cost $336,526,914(a)) 336,526,914
Liabilities in excess of other
assets--(10.2%) (31,197,337)
------------
Net Assets--100% $305,329,577
------------
------------
</TABLE>
- ---------------
(a) Federal income tax basis of portfolio securities is the same as for
financial reporting purposes.
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-35
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES
NOVEMBER 30, 1996 PRUDENTIAL GOVERNMENT SECURITIES TRUST
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
U.S.
TREASURY
MONEY SHORT- MONEY
MARKET INTERMEDIATE MARKET
ASSETS SERIES TERM SERIES SERIES
------------ ------------ ------------
<S> <C> <C> <C>
Investments, at value (cost $552,691,041, $196,620,286 and $336,526,914,
respectively)............................................................. $552,691,041 $198,950,426 $336,526,914
Cash........................................................................ 1,017,178 -- 2,698
Interest receivable......................................................... 2,436,225 1,952,188 6,834,430
Receivable for Series shares sold........................................... 534,588 11,927 3,117,887
Deferred expenses and other assets.......................................... 13,524 5,011 8,294
------------ ------------ ------------
Total assets............................................................. 556,692,556 200,919,552 346,490,223
------------ ------------ ------------
LIABILITIES
Payable for investments purchased........................................... -- 14,904,930 20,316,827
Payable for Series shares reacquired........................................ 3,470,713 259,836 20,282,576
Dividends payable........................................................... 435,875 237,163 240,640
Due to Manager.............................................................. 182,117 60,970 101,699
Due to Distributors......................................................... 30,542 18,400 16,851
Accrued expenses and other liabilities...................................... 450,566 203,588 202,053
------------ ------------ ------------
Total liabilities........................................................ 4,569,813 15,684,887 41,160,646
------------ ------------ ------------
NET ASSETS.................................................................. $552,122,743 $185,234,665 $305,329,577
------------ ------------ ------------
------------ ------------ ------------
Net assets were comprised of:
Shares of beneficial interest, at par ($.01 per share)................... $ 5,521,227 $ 190,951 $ 3,053,296
Paid-in capital in excess of par......................................... 546,601,516 235,650,778 302,276,281
------------ ------------ ------------
552,122,743 235,841,729 305,329,577
Distributions in excess of net investment income......................... -- (86,689) --
Accumulated net realized losses.......................................... -- (52,850,515) --
Net unrealized appreciation of investments............................... -- 2,330,140 --
------------ ------------ ------------
Net assets, November 30, 1996............................................... $552,122,743 $185,234,665 $305,329,577
------------ ------------ ------------
------------ ------------ ------------
Shares of beneficial interest issued and outstanding........................ 552,122,743 19,095,120 305,329,577
------------ ------------ ------------
------------ ------------ ------------
Net asset value............................................................. $9.70 $1.00
------------ ------------
------------ ------------
Class A:
Net asset value, offering price and redemption price per share
($552,122,539 / 552,122,539 shares of common stock issued and
outstanding).......................................................... $1.00
------------
------------
Class Z:
Net asset value, offering price and redemption price per share
($204 / 204 shares of common stock issued and outstanding)............ $1.00
------------
------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-36
<PAGE>
STATEMENT OF OPERATIONS
YEAR ENDED NOVEMBER 30, 1996 PRUDENTIAL GOVERNMENT SECURITIES TRUST
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MONEY SHORT- U.S. TREASURY
MARKET INTERMEDIATE MONEY
NET INVESTMENT INCOME SERIES TERM SERIES MARKET SERIES
----------- ------------ -------------
<S> <C> <C> <C>
Income
Interest................................................................. $32,326,163 $ 13,065,952 $ 20,531,847
----------- ------------ -------------
Expenses
Management fee........................................................... 2,362,419 810,455 1,572,239
Distribution fee......................................................... 736,434 409,005 491,325
Transfer agent's fees and expenses....................................... 1,220,000 240,000 151,000
Custodian's fees and expenses............................................ 97,000 22,000 69,000
Registration fees........................................................ 129,000 119,000 35,000
Reports to shareholders.................................................. 445,000 200,000 145,000
Audit fee................................................................ 44,000 39,000 40,000
Trustees' fees........................................................... 12,000 12,500 12,000
Insurance expense........................................................ 15,300 6,000 5,000
Legal fees............................................................... 8,000 21,000 7,000
Amortization of deferred organization expenses........................... -- -- 300
Miscellaneous............................................................ 5,027 9,915 7,717
----------- ------------ -------------
Total expenses........................................................ 5,074,180 1,888,875 2,535,581
----------- ------------ -------------
Net investment income....................................................... 27,251,983 11,177,077 17,996,266
----------- ------------ -------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Net realized gain (loss) on investment transactions......................... 82,865 (1,939,815) 231,117
Net change in unrealized appreciation of investments........................ -- 699,817 --
----------- ------------ -------------
Net gain (loss) on investments.............................................. 82,865 (1,239,998) 231,117
----------- ------------ -------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS........................ $27,334,848 $ 9,937,079 $ 18,227,383
----------- ------------ -------------
----------- ------------ -------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-37
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS PRUDENTIAL GOVERNMENT SECURITIES TRUST
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHORT- U.S. TREASURY
MONEY MARKET INTERMEDIATE MONEY MARKET
SERIES TERM SERIES SERIES
------------------------------- --------------------------- -------------------------------
YEAR ENDED NOVEMBER 30,
INCREASE (DECREASE) ------------------------------------------------------------------------------------------------
IN NET ASSETS 1996 1995 1996 1995 1996 1995
-------------- -------------- ------------ ------------ -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Operations
Net investment income....... $ 27,251,983 $ 30,759,256 $ 11,177,077 $ 12,199,911 $ 17,996,266 $ 17,294,732
Net realized gain (loss) on
investment
transactions............. 82,865 39,057 (1,939,815) 7,255,112 231,117 251,743
Net change in unrealized
appreciation/depreciation
of investments........... -- -- 699,817 5,231,521 -- --
-------------- -------------- ------------ ------------ -------------- --------------
Net increase in net assets
resulting from
operations............... 27,334,848 30,798,313 9,937,079 24,686,544 18,227,383 17,546,475
-------------- -------------- ------------ ------------ -------------- --------------
Net equalization debits........ -- -- -- (413,787) -- --
-------------- -------------- ------------ ------------ -------------- --------------
Dividends and distributions to
shareholders:
Dividends to shareholders... (27,334,848) (30,798,313) (11,380,459) (11,844,750) (18,227,383) (17,546,475)
-------------- -------------- ------------ ------------ -------------- --------------
Series share transactions(a)
Net proceeds from shares
subscribed............... 1,688,126,619 1,668,939,755 38,324,541 40,102,462(b) 3,788,052,358 2,801,540,919
Net asset value of shares
issued to shareholders in
reinvestment of dividends
and distributions........ 26,320,285 29,404,107 7,194,984 7,611,953 16,677,439 15,973,007
Cost of shares reacquired... (1,760,517,744) (1,737,493,726) (71,837,916) (89,126,093) (3,838,734,554) (2,772,163,839)
-------------- -------------- ------------ ------------ -------------- --------------
Net increase (decrease) in
net assets from Series
share transactions....... (46,070,840) (39,149,864) (26,318,391) (41,411,678) (34,004,757) 45,350,087
-------------- -------------- ------------ ------------ -------------- --------------
Total increase (decrease)...... (46,070,840) (39,149,864) (27,761,771) (28,983,671) (34,004,757) 45,350,087
NET ASSETS
Beginning of year.............. 598,193,583 637,343,447 212,996,436 241,980,107 339,334,334 293,984,247
-------------- -------------- ------------ ------------ -------------- --------------
End of year.................... $ 552,122,743 $ 598,193,583 $185,234,665 $212,996,436 $ 305,329,577 $ 339,334,334
-------------- -------------- ------------ ------------ -------------- --------------
-------------- -------------- ------------ ------------ -------------- --------------
</TABLE>
- ---------------
(a) At $1.00 per share for the Money Market Series and the U.S. Treasury Money
Market Series.
(b) Includes proceeds of $28,023,926 from the acquisition of the Prudential
Adjustable Rate Securities Fund, Inc.
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-38
<PAGE>
NOTES TO FINANCIAL STATEMENTS PRUDENTIAL GOVERNMENT SECURITIES TRUST
- --------------------------------------------------------------------------------
Prudential Government Securities Trust (the ``Fund'') is registered under the
Investment Company Act of 1940 as a diversified, open-end management investment
company. The Fund consists of three series--the Money Market Series, the
Short-Intermediate Term Series and the U.S. Treasury Money Market Series; the
monies of each series are invested in separate, independently managed
portfolios.
- ------------------------------------------------------------
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies followed by the
Fund in the preparation of its financial statements.
Securities Valuations: The Money Market Series and U.S. Treasury Money Market
Series value portfolio securities at amortized cost, which approximates market
value. The amortized cost method of valuation involves valuing a security at its
cost on the date of purchase and thereafter assuming a constant amortization to
maturity of any discount or premium.
For the Short-Intermediate Term Series, the Trustees have authorized the use of
an independent pricing service to determine valuations. The pricing service
considers such factors as security prices, yields, maturities, call features,
ratings and developments relating to specific securities in arriving at
securities valuations. When market quotations are not readily available, a
security is valued by appraisal at its fair value as determined in good faith
under procedures established under the general supervision and responsibility of
the Trustees. Short-term securities which mature in more than 60 days are valued
at current market quotations. Short-term securities which mature in 60 days or
less are valued at amortized cost.
In connection with transactions in repurchase agreements, the Fund's custodian
or designated subcustodians, as the case may be under triparty repurchase
agreements, takes possession of the underlying collateral securities, the value
of which exceeds the principal amount of the repurchase transaction, including
accrued interest. 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.
Securities Transactions and Investment Income: Securities transactions are
recorded on the trade date. Realized gains and losses on sales of portfolio
securities are calculated on the identified cost basis. Interest income is
recorded on the accrual basis. The Fund amortizes discounts and premiums on
purchases of portfolio securities as adjustments to income.
Effective December 1, 1995, the Short-Intermediate Term Series began accruing
income using the effective interest method which includes amortizing discounts
and premiums on purchases of portfolio securities as adjustments to income. This
method of recording income more closely reflects the economics of holding and
disposing of debt instruments. Prior to December 1, 1995 the Short-Intermediate
Term Series accrued coupon interest income and original issue discount and
accounted for purchased discounts and premiums as capital gains or losses when
realized upon disposition of the associated security. The cumulative effect of
applying this accounting change was to decrease undistributed net investment
income and increase net unrealized appreciation of investments by $797,340. Such
accounting change had no effect on net assets or net asset value per share.
Dollar Rolls: The Short-Intermediate Term Series enters into dollar roll
transactions in which the Series sells 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 Short-Intermediate Term Series forgoes
principal and interest paid on the securities. The Series 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 sale proceeds
and the lower repurchase price is taken into income. The Short-Intermediate Term
Series maintains a segregated account, the dollar value of which is equal to its
obligations in respect of dollar rolls. There were no dollar rolls outstanding
as of November 30, 1996.
Federal Income Taxes: For federal income tax purposes, each series of the Fund
is treated as a separate taxable entity. It is each Series' 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.
Equalization: Effective December 1, 1995, the Short-Intermediate Term Series
discontinued the accounting practice of equalization. Equalization is a practice
whereby a portion of the proceeds from sales and costs of repurchases of capital
shares, equivalent on a per share basis to the amount of distributable net
investment income on the date of the transaction, is credited or charged to
undistributed net investment income. The balance of $1,277,251 of undistributed
net investment income at November 30, 1995, resulting from equalization was
transferred to paid-in capital in excess of par. Such reclassification had no
effect on net assets, results of operations, or net asset value per share.
Reclassification of Capital Accounts: The Fund accounts and reports for
distributions to shareholders in accordance with A.I.C.P.A. Statement of
Position 93-2: Determination, Disclosure, and Financial Statement Presentation
of Income, Capital Gain, and Return of Capital Distributions by Investment
Companies. For the Short-Intermediate Term Series, the
- --------------------------------------------------------------------------------
B-39
<PAGE>
NOTES TO FINANCIAL STATEMENTS PRUDENTIAL GOVERNMENT SECURITIES TRUST
- --------------------------------------------------------------------------------
effect of applying this statement (including the effect of accounting changes)
was to decrease undistributed net investment income by $2,074,591, ($1,277,251
representing discontinuation of the accounting practice of equalization and
$797,340 representing a cumulative adjustment for amortizing discounts and
premiums on purchases of portfolio securities as adjustments to income),
decrease accumulated net realized losses by $2,923,464 ($11,425,628 of which
represents expiration of a portion of the capital loss carryforward offset by
$8,502,164 of additional accumulated net realized capital losses resulting from
the acquisition of Prudential Adjustable Rate Securities Fund, Inc.), decrease
paid-in capital in excess of par by $1,646,213 and increase unrealized
appreciation by $797,340.
Deferred Organization Expenses: Approximately $49,000 of expenses were incurred
in connection with the organization and initial registration of the U.S.
Treasury Series and such amount was deferred and amortized over a period of 60
months ended December, 1995.
Dividends and Distributions: The Money Market Series and U.S. Treasury Money
Market Series declare daily dividends from net investment income and net
short-term capital gains and losses. Dividends are paid monthly.
The Short-Intermediate Term Series declares dividends from net investment income
daily; payment of dividends is made monthly. Distributions of net capital gains,
if any, are made annually.
Income distributions and capital gain distributions are determined in accordance
with income tax regulations which may differ from generally accepted accounting
principles.
- ------------------------------------------------------------
NOTE 2. AGREEMENTS
The Fund has a management agreement with Prudential Mutual Fund Management LLC
(``PMF''). Pursuant to this agreement, PMF has responsibility for all investment
advisory services and supervises the subadviser's performance of such services.
PMF has entered into a subadvisory agreement with The Prudential Investment
Corporation (``PIC''); PIC furnishes investment advisory services in connection
with the management of the Fund. PMF pays for the cost of the subadviser's
services, the compensation of officers of the Fund, occupancy and certain
clerical and bookkeeping costs of the Fund. The Fund bears all other costs and
expenses.
The management fee paid to PMF is computed daily and payable monthly at an
annual rate of .40 of 1% of the average daily net assets of the
Short-Intermediate Term Series and the U.S. Treasury Money Market Series. With
respect to the Money Market Series, the management fee is payable as follows:
.40 of 1% of average daily net assets up to $1 billion, .375 of 1% of average
daily net assets between $1 billion and $1.5 billion and .35 of 1% in excess of
$1.5 billion.
The Fund had a distribution agreement with Prudential Mutual Fund Distributors,
Inc. (``PMFD''), which acted as the distributor of the shares of the Money
Market Series and the U.S. Treasury Money Market Series through January 1, 1996.
Effective January 2, 1996, Prudential Securities Incorporated (``PSI'') assumed
these responsibilities. The Fund compensates the distributors for distributing
and servicing each of the Series' shares, pursuant to plans of distribution,
regardless of expenses actually incurred by them. The distribution fees are
accrued daily and payable monthly at an annual rate of .125% of each of the
Series' average daily net assets. The distributors pay various broker-dealers
for account servicing fees and for the expenses incurred by such broker-dealers.
The Fund also compensates PSI for its expenses as distributor of the
Short-Intermediate Term Series. The Short-Intermediate Term Series entered into
a distribution agreement and a plan of distribution pursuant to which it pays
PSI a fee, accrued daily and payable monthly, at an annual rate of .25 of 1% of
the lesser of (a) the aggregate sales of shares issued (not including
reinvestment of dividends and distributions) on or after July 1, 1985 (the
effective date of the plan) less the aggregate net asset value of any such
shares redeemed, or (b) the average net asset value of the shares issued after
the effective date of the plan. Distribution expenses include commission credits
to PSI branch offices for payments of commissions and account servicing fees to
financial advisers and an allocation on account of overhead and other
distribution-related expenses, the cost of printing and mailing prospectuses to
potential investors and of advertising incurred in connection with the
distribution of Series shares. In addition, PSI pays other broker-dealers,
including Pruco, an affiliated broker-dealer, for account servicing fees and
other expenses incurred by such broker-dealers in distributing these shares.
PMFD is a wholly-owned subsidiary of PMF; PSI, PMF and PIC are (indirect)
wholly-owned subsidiaries of The Prudential Insurance Company of America.
- ------------------------------------------------------------
NOTE 3. OTHER TRANSACTIONS WITH AFFILIATES
Prudential Mutual Fund Services, Inc. (``PMFS''), a wholly-owned subsidiary of
PMF, serves as the Fund's transfer agent. During the year ended November 30,
1996, the Fund incurred fees of approximately $1,060,000, $200,000, and
$128,000, respectively, for the Money Market Series, Short-Intermediate Term
Series, and U.S. Treasury Money Market Series. Transfer agent fees and expenses
in the Statement of Operations includes certain out-of-pocket expenses paid to
non-affiliates.
- --------------------------------------------------------------------------------
B-40
<PAGE>
NOTES TO FINANCIAL STATEMENTS PRUDENTIAL GOVERNMENT SECURITIES TRUST
- --------------------------------------------------------------------------------
NOTE 4. PORTFOLIO SECURITIES
Purchases and sales of portfolio securities other than short-term investments,
for the Short-Intermediate Term Series for the year ended November 30, 1996 were
$260,921,363 and $267,876,070, respectively.
For the Short-Intermediate Term Series, the cost basis of investments for
federal income tax purposes was 196,626,252 and, accordingly, as of November 30,
1996, net unrealized appreciation of investments for federal income tax purposes
was $2,324,174 (gross unrealized appreciation $2,510,363; gross unrealized
depreciation--$186,189).
For federal income tax purposes, the Short-Intermediate Term Series has a
capital loss carryforward as of November 30, 1996 of approximately $52,844,000
of which $19,180,000 expires in 1997, $6,864,000 expires in 1998, $4,746,000
expires in 1999, $3,422,000 expires in 2001, $16,699,000 expires in 2002 and
$1,933,000 expires in 2003. Accordingly, no capital gains distribution is
expected to be paid to shareholders until net gains have been realized in excess
of such carryforward. During the fiscal year ended November 30, 1996,
approximately $11,426,000 of the capital loss carryforward expired unused.
- ------------------------------------------------------------
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 November 30, 1996, the
Short-Intermediate Term Series had a 0.35% undivided interest in the repurchase
agreements in the joint account. This undivided interest represented $3,030,000
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., 5.68%, in the principal amount of $280,000,000, repurchase
price $280,132,533, due 12/2/96. The value of the collateral including accrued
interest was $285,853,687.
CS First Boston Corp., 5.68%, in the principal amount of $280,000,000,
repurchase price $280,132,533, due 12/2/96. The value of the collateral
including accrued interest was $290,562,688.
J.P. Morgan Securities, Inc., 5.65%, in the principal amount of $34,809,000,
repurchase price $34,825,389, due 12/2/96. The value of the collateral including
accrued interest was $35,526,121.
Smith Barney, Inc., 5.68%, in the principal amount of $280,000,000, repurchase
price $280,132,533, due 12/2/96. The value of the collateral including accrued
interest was $286,599,817.
- ------------------------------------------------------------
NOTE 6. CAPITAL
Each series has authorized an unlimited number of shares of beneficial interest
at $.01 par value. Transactions in shares of beneficial interest for the
Short-Intermediate Term Series for the fiscal years ended November 30, 1995 and
1996 were as follows:
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30,
---------------------------
1996 1995
----------- ------------
<S> <C> <C>
Shares sold.................. 3,978,671 4,167,583*
Shares issued in reinvestment
of dividends and
distributions.............. 749,149 809,302
Shares reacquired............ (7,501,561 ) (9,498,358)
----------- ------------
Net decrease................. (2,773,741 ) (4,521,473)
----------- ------------
----------- ------------
</TABLE>
* Includes 2,889,065 shares issued for the acquisition of the Prudential
Adjustable Rate Securities Fund, Inc.
Effective March 1, 1996 the Money Market Series commenced offering Class Z
shares. Class Z shares are not subject to any sales or redemption charge and are
offered exclusively for sale to a limited group of investors.
Transactions in shares of beneficial interest for the Money Market Series for
the period ended November 30, 1996 were as follows:
<TABLE>
<CAPTION>
YEAR ENDED
NOVEMBER 30,
1996
---------------
<S> <C>
Class A
- ----------------------------------------------
Shares sold................................... 1,686,769,968
Shares issued in reinvestment of dividends and
distributions............................... 26,286,366
Shares reacquired............................. (1,746,670,530)
---------------
Net decrease in shares outstanding before
conversion.................................. (33,614,196)
Shares reacquired upon conversion into
Class Z..................................... (12,456,848)
---------------
Net decrease in shares outstanding............ (46,071,044)
---------------
---------------
</TABLE>
- --------------------------------------------------------------------------------
B-41
<PAGE>
NOTES TO FINANCIAL STATEMENTS PRUDENTIAL GOVERNMENT SECURITIES TRUST
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MARCH 1, 1996
THROUGH
NOVEMBER 30,
1996
---------------
Class Z
- ----------------------------------------------
<S> <C>
Shares sold................................... 1,356,651
Shares issued in reinvestment of dividends and
distributions............................... 33,919
Shares reacquired............................. (13,847,214)
---------------
Net decrease in shares outstanding before
conversion.................................. (12,456,644)
Shares issued upon conversion from Class A.... 12,456,848
---------------
Net increase in shares outstanding............ 204
---------------
---------------
</TABLE>
- --------------------------------------------------------------------------------
B-42
<PAGE>
PRUDENTIAL GOVERNMENT SECURITIES TRUST
FINANCIAL HIGHLIGHTS MONEY MARKET SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS Z
CLASS A ---------------
-------------------------------------------------------------- MARCH 1,
1996(B)
YEAR ENDED NOVEMBER 30, THROUGH
-------------------------------------------------------------- NOVEMBER 30,
1996 1995 1994 1993 1992 1996
<S> <C> <C> <C> <C> <C> <C>
-------- -------- -------- -------- ---------- ---------------
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning of
period....................... $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
Net investment income.......... 0.046 0.052 0.033 0.026 0.035 0.038
Dividends from net investment
income....................... (0.046) (0.052) (0.033) (0.026) (0.035) (0.038)
-------- -------- -------- -------- ---------- ---------------
Net asset value, end of
period....................... $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
-------- -------- -------- -------- ---------- ---------------
-------- -------- -------- -------- ---------- ---------------
TOTAL RETURN(a):............... 4.74% 5.20% 3.29% 2.62% 3.57% 3.87%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(000)........................ $552,123 $598,194 $637,343 $919,503 $1,026,187 $ 204(c)
Average net assets (000)....... $589,147 $597,599 $732,867 $950,988 $1,113,759 $ 1,962
Ratios to average net assets:
Expenses, including
distribution fees........ 0.86% 0.78% 0.77% 0.72% 0.72% 0.68%(d)
Expenses, excluding
distribution fees........ 0.73% 0.65% 0.64% 0.59% 0.60% 0.68%(d)
Net investment income....... 4.63% 5.15% 3.19% 2.56% 3.42% 4.68%(d)
</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 return for a period of less than one
year is not annualized.
(b) Commencement of offering of Class Z shares.
(c) Figure is actual and not rounded to nearest thousand.
(d) Annualized.
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-43
<PAGE>
PRUDENTIAL GOVERNMENT SECURITIES TRUST
FINANCIAL HIGHLIGHTS SHORT-INTERMEDIATE TERM SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30,
--------------------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- ----------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning of
year........................ $ 9.74 $ 9.17 $ 10.06 $ 9.97 $ 10.00
-------- -------- -------- -------- ----------
INCOME FROM INVESTMENT
OPERATIONS
Net investment income.......... 0.51 0.56 0.64 0.69 0.75
Net realized and unrealized
gain (loss) on investment
transactions................ (0.01) 0.55 (0.89) 0.11 (0.03)
-------- -------- -------- -------- ----------
Total from investment
operations............... 0.50 1.11 (0.25) 0.80 0.72
-------- -------- -------- -------- ----------
LESS DISTRIBUTIONS
Dividends from net investment
income...................... (0.54) (0.54) (0.52) (0.69) (0.75)
Tax return of capital
distribution................ -- -- (0.12) (0.02) --
-------- -------- -------- -------- ----------
Total distributions............ (0.54) (0.54) (0.64) (0.71) (0.75)
-------- -------- -------- -------- ----------
Net asset value, end of year... $ 9.70 $ 9.74 $ 9.17 $ 10.06 $ 9.97
-------- -------- -------- -------- ----------
-------- -------- -------- -------- ----------
TOTAL RETURN(a):............... 5.34% 12.37% (2.58)% 8.26% 7.40%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year
(000)....................... $185,235 $212,996 $241,980 $347,944 $ 303,451
Average net assets (000)....... $186,567 $209,521 $307,382 $321,538 $ 294,388
Ratios to average net assets:
Expenses, including
distribution fees........ 1.01% 0.95% 0.84% 0.80% 0.79%
Expenses, excluding
distribution fees........ 0.79% 0.75% 0.63% 0.59% 0.58%
Net investment income....... 5.99% 5.82% 5.48% 6.80% 7.47%
Portfolio turnover rate........ 132% 217% 431% 44% 60%
</TABLE>
- ---------------
(a) Total return is calculated assuming a purchase of shares on the first day
and a sale on the last day of each year reported and includes reinvestment
of dividends and distributions.
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-44
<PAGE>
PRUDENTIAL GOVERNMENT SECURITIES TRUST
FINANCIAL HIGHLIGHTS U.S. TREASURY MONEY MARKET SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30,
------------------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning of
year......................... $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
Net investment income.......... 0.046 0.050 0.033 0.025 0.034
Dividends from net investment
income....................... (0.046) (0.050) (0.033) (0.025) (0.034)
-------- -------- -------- -------- --------
Net asset value, end of year... $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
TOTAL RETURN(a)................ 4.75% 5.08% 3.31% 2.54% 3.46%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year
(000)........................ $305,330 $339,334 $293,984 $284,978 $233,600
Average net assets (000)....... $393,060 $345,369 $308,454 $273,313 $263,459
Ratios to average net assets:
Expenses, including
distribution fees........ 0.63% 0.62% 0.62% 0.66% 0.66%
Expenses, excluding
distribution fees........ 0.51% 0.50% 0.50% 0.53% 0.54%
Net investment income....... 4.57% 5.01% 3.21% 2.49% 3.29%
</TABLE>
- ---------------
(a) Total return is calculated assuming a purchase of shares on the first day
and a sale on the last day of each year reported and includes reinvestment
of dividends and distributions.
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-45
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS PRUDENTIAL GOVERNMENT SECURITIES TRUST
- --------------------------------------------------------------------------------
To the Shareholders and Trustees of
Prudential Government Securities Trust:
In our opinion, the accompanying statement of assets and liabilities, including
the portfolios 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 Money Market Series,
Short-Intermediate Term Series and U.S. Treasury Money Market Series
(constituting Prudential Government Securities Trust, hereafter referred to as
the ``Fund'') at November 30, 1996, the results of each of their operations for
the year then ended, the changes in each of their net assets for each of the two
years in the period then ended and the financial highlights for each of the five
years in the period then ended, in conformity with generally accepted accounting
principles. These financial statements and financial highlights (hereafter
referred to as ``financial statements'') are the responsibility of the Fund's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these financial
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of securities at November 30, 1996 by correspondence with the
custodian and brokers, provide a reasonable basis for the opinion expressed
above.
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York
January 24, 1997
- --------------------------------------------------------------------------------
B-46
<PAGE>
SUPPLEMENTAL PROXY INFORMATION PRUDENTIAL GOVERNMENT SECURITIES TRUST
- --------------------------------------------------------------------------------
The Annual Meeting of Shareholders of the Prudential Government Securities
Trust was held on October 30, 1996 at the offices of Prudential Securities
Incorporated, One Seaport Plaza, New York, New York. The meeting was held for
the following purposes:
(1) To elect the following twelve Trustees:
* Edward D. Beach
* Eugene C. Dorsey
* Delayne Dedrick Gold
* Rober F. Gunia
* Harry A. Jacobs, Jr.
* Donald D. Lennox
* Mendel A. Melzer
* Thomas T. Mooney
* Thomas H. O'Brien
* Richard A. Redeker
* Nancy H. Teeters
* Louis A. Weil, III
(2) To ratify the selection by the Trustees of Price Waterhouse LLP as
independent accountants for the fiscal year ending November 30, 1996.
(3) To consider and act upon any other business as may properly come
before the Annual Meeting or any adjournment thereof.
The results of the proxy solicitation on the above matters were as
follows:
<TABLE>
<CAPTION>
TRUSTEE/AUDITOR VOTES FOR VOTES AGAINST VOTES WITHHELD ABSTENTIONS
----------------- --------- ------------- -------------- ------------
<S> <C> <C> <C> <C>
(1) Edward D. Beach 819,618,690 - 10,910,309 -
Eugene C. Dorsey 819,857,069 - 10,671,930 -
Delayne Dedrick Gold 819,850,177 - 10,678,822 -
Rober F. Gunia 820,076,407 - 10,452,592 -
Harry A. Jacobs, Jr. 819,644,345 - 10,844,654 -
Donald D. Lennox 819,099,608 - 11,429,391 -
Mendel A. Melzer 819,898,513 - 10,630,486 -
Thomas T. Mooney 820,018,906 - 10,510,093 -
Thomas H. O'Brien 819,616,848 - 10,912,151 -
Richard A. Redeker 819,918,621 - 10,610,378 -
Nancy H. Teeters 819,997,034 - 10,531,965 -
Louis A. Weil, III 819,872,026 - 10,656,973 -
(2) Price Waterhouse LLP 818,409,971 3,492,806 - 8,626,222
(3) There was no other business voted upon at the Annual Meeting of
Shareholders.
</TABLE>
B-47
<PAGE>
APPENDIX I
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 off-set
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.
I-1
<PAGE>
APPENDIX II 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.
The following chart shows the long-term performance of various asset classes
and the rate of inflation.
EACH INVESTMENT PROVIDES A DIFFERENT OPPORTUNITY
Value of $1.00 invested on 1/1/26
through 12/31/96.
Small Stocks--$4,495.99
Common Stocks--$1,370.95
Long-Term Bonds--$33.73
Treasury Bills--$13.54
Inflation--$8.87
Source: Stocks, Bonds, Bills and Inflation 1996 Yearbook, Ibbotson Associates,
Chicago (annually updates work by Roger G. Ibbotson and Rex A. Sinquefield).
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
reinvesting any gains. Bond returns are due mainly to reinvesting interest.
Also, stock prices usually are 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 measured using a constant one-bond
portfolio with a maturity of roughly 20 years. 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 inoex (CPI).
II-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 corporate bonds and world government bonds on an annual basis
from 1987 through 1995. 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 "Trust Expenses" in each Series' 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>
<CAPTION>
Year '87 '88 '89 '90 '91 '92 '93 '94 '95
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury
Bonds 2.0% 7.0% 14.4% 8.5% 15.3% 7.2% 10.7% -3.4% 18.4%
Mortgage Securities 4.3% 8.7% 15.4% 10.7% 15.7% 7.0% 6.8% -1.6% 16.8%
U.S. Corporate Bonds 2.6% 9.2% 14.1% 7.1% 18.5% 8.7% 12.2% -3.9% 22.3%
U.S. High Yield
Corporate Bonds 5.0% 12.5% 0.8% -9.6% 46.2% 15.8% 17.1% -1.0% 19.2%
World Government
Bonds 35.2% 2.3% -3.4% 15.3% 16.2% 4.8% 15.1% 6.0% 19.6%
Difference Between
highest and lowest
return in percent 33.2 10.2 18.8 24.9 30.9 11.0 10.3 9.9 5.5
</TABLE>
1LEHMAN 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.
2LEHMAN BROTHERS MORTGAGE-BACKED SECURITIES INDEX is an unmanaged index that
includes over 600 15 and 30-year fixed-rate mortgaged-backed securities of the
Government National Mortgage Association (GNMA), Federal National Mortgage
Association (FNMA), and the Federal Home Loan Mortgage Corporation (FHLMC).
3LEHMAN 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.
4LEHMAN 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.
5SALOMON BROTHERS WORLD GOVERNMENT INDEX (NON U.S.) includes 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.
II-2
<PAGE>
(left column)
This chart illustrates the performance of major world stock markets for the
period from 1986 through 1995. It does not represent the performance of any
Prudential Mutual Fund.
Hong Kong--23.8%
Belgium--20.7%
Sweden--19.4%
Netherland--19.3%
Spain--17.9%
Switzerland--17.1%
France--15.3%
U.K.--15.0%
U.S.--14.8%
Japan--12.8%
Austria--10.9%
Germany--18.7%
Source: Morgan Stanley Capital International (MSCI). Used with permission.
Morgan Stanley Country indices are unmanaged indices 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 indices.
(right column)
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.
Capital Appreciation and
Reinvesting Dividends--$186,208
Capital Appreciation Only --$66,913
Source: Stocks, Bonds, Bills, and Inflation 1996 Yearbook, Ibbotson Associates,
Chicago (annually updates work by Roger G. Ibbotson and Rex A. Sinquefield).
Used with permission. All rights reserved. This chart is used for illustrative
purposes only and is not intended to represent the past, present or future
perfomnance of any Prudential Mutual Fund. Common stock total return is based on
the Standard & Poor's 500 Stock 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 indices.
II-3
<PAGE>
WORLD STOCK MARKET
CAPITALIZATION BY REGION
World Total: $9.2 Trillion
Canada 2.2%
U.S. 40.8%
Pacific Basin 28.7%
Europe 28.3%
Source: Morgan Stanley Capital Intemational, December 1995. 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 1579 companies
in 22 countries (representing approximately 60% of the aggregate market value of
the stock exchanges). This chart is for illustrative purposes only and does not
represent the allocation of any Prudenbal Mutual Fund.
This chart below shows the historical volatility of general interest rates as
measured by the long U.S. Treasury Bond.
LONG U.S. TREASURY
BOND YIELD IN
PERCENT (1926-1995)
[GRAPH]
1925 -- 3.74%
1935 -- 2.76%
1945 -- 1.99%
1955 -- 2.95%
1965 -- 4.50%
1975 -- 8.05%
1985 -- 9.56%
1995 -- 6.03%
- -------------------
Source: Stocks, Bonds, Bills, and Inflation 1996 Yearbook, Ibbotson Associates,
Chicago (annually updates work by Roger G. Ibbotson and Rex A. Sinquefield).
Used with permission. All rights reserved. The chart illustrates the historical
yield of the long-term U.S. Treasury Bond from 1926-1995. 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 constnued to represent the yields of any Prudential Mutual Fund.
II-4
<PAGE>
The following chart, although not relevant to share ownership in the Trust,
may provide useful information about the effects of a hypothetical investment
diversified over different assets portfolios. The chart shows the range of
annual total returns for major stock and bond indices for the period from
December 31, 1975 through December 31, 1995. The horizontal "Best Returns Zone"
band shows that a hypothetical blended portfolio constructed one-third U.S.
stock (S&P 500), one-third foreign stock (EAFE Index), and one-third U.S. bonds
(Lehman Index) would have eliminated the "highest highs" and "lowest lows" of
any single asset class.
The Range of Annual Total Returns for
Major Stock & Bond Indices Over the
Past 20 Years (12/31/75-12/31/95)*
"Best Return Zone"
With a Diversified Blend
1/3 S&P 500 Index
1/3 EAFE Index
1/3 Lehman Aggregate Index= 0%-30%
S&P 500 = -7.2% - 37.6%
EAFE = -23.2% - 69.9%
Lehman = - 2.9% - 32.6%
Aggregate
- --------------------
*Source: Prudential Investment Corporation based on data from Lipper Analytical
New Application (UNA). Past perfomance is not indicative of future results. The
S&P 500 Index is a weighted, unmanaged index comprised of 500 stocks which
provides a broad indication of stock price movements. The Morgan Stanley EAFE
Index is an unmanaged index comprised of 20 overseas stock markets in Europe,
Australia, New Zealand and the Far East. The Lehman Aggregate Index includes all
publicly-issued investment grade debt with maturities over one year, including
U.S. government and agency issues, 15 and 30 year fixed-rate government agency
mortgage securites, dollar denominated SEC registered corporate and government
securities, as well as asset-backed securities. Investors cannot invest directly
in stock or bond market indices.
II-5
<PAGE>
APPENDIX III-INFORMATION RELATING TO THE PRUDENTIAL
Set forth below is information relating to The Prudential Insurance Company
of America (Prudential) and its subsidiaries as well as information relating to
the Prudential Mutual Funds. See "Management of the Trust-Manager" in the
Prospectus. The data will be used in sales materials relating to the Prudential
Mutual Funds. Unless otherwise indicated, the information is as of December 31,
1995 and is subject to change thereafter. All information relies on data
provided by The Prudential Investment Corporation (PIC) or from other sources
believed by the Manager to be reliable. Such information has not been verified
by the Trust.
INFORMATION ABOUT PRUDENTIAL
The Manager and PIC1 are subsidiaries of Prudential, which is one of the
largest diversified financial services institutions in the world and, based on
total assets, the largest insurance company in North America as of December 31,
1995. Its primary business is to offer a full range of products and services in
three areas: insurance, investments and home ownership for individuals and
families; health-care management and other benefit programs for employees of
companies and members of groups; and asset management for institutional clients
and their associates. Prudential (together with its subsidiaries) employs more
than 92,000 persons worldwide, and maintains a sales force of approximately
13,000 agents and 5,600 financial advisors. Prudential is a major issuer of
annuities, including variable annuities. Prudential seeks to develop innovative
products and services to meet consumer needs in each of its business areas.
Prudential uses the rock of Gibraltar as its symbol. The Prudential rock is a
recognized brand name throughout the world.
Insurance. Prudential has been engaged in the insurance business since 1875.
It insures or provides financial services to more than 50 million people
worldwide-one of every five people in the United States. Long one of the largest
issuers of individual life insurance, the Prudential has 19 million life
insurance policies in force today with a face value of $1 trillion. Prudential
has the largest capital base ($11.4 billion) of any life insurance company in
the United States. The Prudential provides auto insurance for more than 1.7
million cars and insures more than 1.4 million homes.
Money Management. The Prudential is one of the largest pension fund managers
in the country, providing pension services to 1 in 3 Fortune 500 firms. It
manages $36 billion of individual retirement plan assets, such as 401(k) plans.
In July 1995, Institutional Investor ranked Prudential the third largest
institutional money manager of the 300 largest money management organizations in
the United States as of December 31, 1994. As of December 31,1995, Prudential
had more than $314 billion in assets under management. Prudential Investments, a
business group of Prudential (of which Prudential Mutual Funds is a key part)
manages over $190 billion in assets of institutions and individuals.
Real Estate. The Prudential Real Estate Affiliates, the fourth largest real
estate brokerage network in the United States, has more than 34,000 brokers and
agents and more than 1,100 offices in the United States.2
Healthcare. Over two decades ago, the Prudential introduced the first
federally-funded, for-profit HMO in the country. Today, almost 5 million
Americans receive healthcare from a Prudential managed care membership.
Financial Services. The Prudential Bank, a wholly-owned subsidiary of the
Prudential, has nearly $3 billion in assets and serves nearly 1.5 million
customers across 50 states.
INFORMATION ABOUT THE PRUDENTIAL MUTUAL FUNDS
Prudential Mutual Fund Management is one of the sixteen largest mutual fund
companies in the country, with over 2.5 million shareholders invested in more
than 50 mutual fund portfolios and variable annuities with more than 3.7 million
shareholder accounts.
The Prudential Mutual Funds have over 30 portfolio managers wno manage over
$55 billion in mutual fund and variable annuity assets. Some of Prudential's
portfolio managers have over 20 years of experience managing investment
portfolios.
- --------------------
1Prudential Investment, a business group of PIC, serves as the Subadviser to
substantially all of the Prudential Mutual Funds. Wellington Management Company
serves as the subadviser to Global Utility Fund, Inc., Nicholas-Applegate
Capital Management as subadviser to Nicholas-Applegate Fund, Inc., Jennison
Associates Capital Corp. as the subadviser to Prudential Jennison Series Fund,
Inc. and Prudential Active Balanced Fund, a portfolio of Prudential Dryden Fund,
Mercator Asset Management LP as the Subadviser to International Stock Series, a
portfolio of Prudential World Fund, Inc. and BlackRock Financial Management Inc.
as subadviser to The BlackRock Government Income Trust. There are multiple
subadvisers for The Target Portfolio Trust.
2As of December 31, 1994.
III-1
<PAGE>
From time to time, there may be media coverage of portfolio managers and
other investment professionals associated with the Manager and the Subadviser in
national and regional publications, on television and in other media.
Additionally, individual mutual fund portfolios are frequently cited in surveys
conducted by national and regional publications and media organizations such as
The Wall Street Journal, The New York Times, Warrants and USA Today.
Equity Funds. Forbes magazine listed Prudential Equity Fund among twenty
mutual funds on its Honor Roll in its mutual fund issue of August 28, 1995.
Honorees are chosen annually among mutual funds (excluding sector funds) which
are open to new investors and have had the same management for at least five
years. Forbes considers, among other criteria, the total return of a mutual fund
in both bull and bear markets as well as a fund's risk profile. Prudential
Equity Fund is managed with a "value" investment style by PIC. In 1995,
Prudential Securities introduced Prudential Jennison Fund, a growth-style equity
fund managed by Jennison Associates Capital Corp., a premier institutional
equity manager and a subsidiary of Prudential.
High Yield Funds. Investing in high yield bonds is a complex and research
intensive pursuit. A separate team of high yield bond analysts monitor the 167
issues held in the Prudential High Yield Fund (currently the largest fund of its
kind in the country) along with 100 or so other high yield bonds, which may be
considered for purchased.3 Non-investment grade bonds, also known as junk bonds
or high yield bonds, are subject to a greater risk of loss of principal and
interest including default risk than higher-rated bonds. Prudential high yield
portfolio managers and analysts meet face-to-face with almost every bond issuer
in the High Yield Fund's portfolio annually, and have additional telephone
contact throughout the year.
Prudential's portfolio managers are supported by a large and sophisticated
research organization. Fourteen investment grade bond analysts monitor the
financial viability of approximately 1,750 different bond issuers in the
investment grade corporate and municipal bond markets-from IBM to small
municipalities, such as Rockaway Township, New Jersey. These analysts consider
among other things sinking fund provisions and interest coverage ratios.
Prudential's portfolio managers and analysts receive research services from
almost 200 brokers and market service vendors. They also receive nearly 100
trade publications and newspapers-from Pulp and Paper Forecaster to Women's Wear
Daily-to keep them informed of the industries they follow.
Prudential Mutual Funds' traders scan over 100 computer monitors to collect
detailed information on which to trade. From natural gas prices in the Rocky
Mountains to the results of local municipal elections, a Prudential portfolio
manager or trader is able to monitor it if it's important to a Prudential mutual
fund.
Prudential Mutual Funds trade approximately $31 billion in U.S. and foreign
government securities a year. PIC seeks information from government policy
makers. In 1995, Prudential's portfolio managers met with several senior U.S.
and foreign government officials, on issues ranging from economic conditions in
foreign countries to the viability of index-linked securities in the United
States.
Prudential Mutual Funds' portfolio managers and analysts met with over 1,200
companies in 1995, often with the Chief Executive Officer (CEO) or Chief
Financial Officer (CFO). They also attended over 250 industry conferences.
Prudential Mutual Fund global equity managers conducted many of their visits
overseas, often holding private meetings with a company in a foreign language
(our global equity managers speak 7 different languages, including Mandarin
Chinese).
Trading Data4 On an average day, Prudential Mutual Funds' U.S. and foreign
equity trading desks traded $77 million in securities representing over 3.8
million shares with nearly 200 different firms. Prudential Mutual Funds' bond
trading desks traded $157 million in government and corporate bonds on an
average day. That represents more in daily trading than most bond funds tracked
by Lipper even have in assets.5 Prudential Mutual Funds' money market desk
traded $3.2 billion in money market securities on an average day, or over $800
billion a year. They made a trade every 3 minutes of every trading day. In 1994,
the Prudential Mutual Funds effected more than 40,000 trades in money market
securities and held on average $20 billion of money market securities.6
Based on complex-wide data, on an average day, over 7,250 shareholders
telephoned Prudential Mutual Fund Services LLC the Transfer Agent of the
Prudential Mutual Funds, on the Prudential Mutual Funds' toll-free number. On an
annual basis, that represents approximately 1.8 million telephone calls
answered.
- ------------------
3As of December 31, 1995. The number of bonds and the size of the Fund are
subject to change.
4Trading data represents average daily transactions for portfolios of the
Prudenbal Mutual Funds for which PIC serves as the subadviser, portfolios of the
Prudential Series Fund and institutional and non-US accounts managed by
Prudential Mutual Fund Investment Management, a division of PIC, for the year
ended December 31, 1995.
5Based on 669 funds in Lipper Analytical Services categories of Short U.S.
Treasury, Short U.S. Government, Intermediate U.S. Treasury, Intermediate U.S.
Govemment, Short Investment Grade Debt, Intermediate Investment Grade Debt,
General U.S. Treasury, General U.S. Govemment and Mortgage Funds.
6As of December 31. 1994.
III-2
<PAGE>
INFORMATION ABOUT PRUDENTIAL SECURITIES
Prudential Securities is the fifth largest retail brokerage firm in the
United States with approximately 5,600 financial advisors. It offers to its
clients a wide range of products, including Prudential Mutual Funds and
annuities. As of December 31, 1995, assets held by Prudential Securities for its
clients approximated $168 billion. During 1994, over 28,000 new customer
accounts were opened each month at PSI.7
Prudential Securities has a two-year Financial Advisor training program plus
advanced education programs, including Prudential Securities "university," which
provides advanced education in a wide array of investment areas. Prudential
Securities is the only Wall Street firm to have its own in-house Certified
Financial Planner (CFP) program. In the December 1995 issue of Registered Rep,
an industry publication, Prudential Securities' Financial Advisor training
programs received a grade of A- (compared to an industry average of B+).
In 1995, Prudential Securities' equity research team ranked 8th in
Institutional Investor magazine's 1995 "All America Research Team" survey. Five
Prudential Securities, analysts were ranked as first-team finishers.8
In addition to training, Prudential Securities provides its financial
advisors with access to firm economists and market analysts. It has also
developed proprietary tools for use by financial advisors, including the
Financial ArchitectsSFinancial Advisors to evaluate a client's objectives and
overall financial plan, and a comprehensive mutual fund information and analysis
system that compares different mutual funds.
For more complete information about any of the Prudential Mutual Funds,
including charges and expenses, call your Prudential Securities financial
adviser or Pruco/Prudential representative for a free prospectus. Read it
carefully before you invest or send money.
- ------------------
7As of December 31, 1994.
8On an annual basis, Institutional Investor magazine surveys, more than 700
institutional money managers, chief investment officers and research directors,
asking them to evaluate analysts in 76 industry sectors. Scores are produced by
taxing the number of votes awarded to an individual analyst and weighting them
based on the size of the voting institution. In total, the magazine sends its
survey to approximately 2.000 institutions and a group of European and Asian
institutions.
III-3
<PAGE>
Portfolio Managers' Report
Short-term interest rates -- and therefore intermediate-term bond returns --
seesawed over much of the past 12 months as financial markets were buffeted by
conflicting news which alternately showed the U.S. economy strengthening or
weakening. When all was said and done, money market funds and short- to
intermediate-term bond funds ended the reporting period posting attractive, if
somewhat lower, returns than a year earlier.
Part of the reason for this fluctuation was that market opinion about the
course of interest rates changed over the past six months. When we reported to
you in May, investors were speculating that the Federal Reserve would soon
raise the Federal Funds rate (what banks charge each other for overnight loans)
to head-off inflation. Analysts now expect the Federal Funds rate to remain at
5.25% for most of the first quarter of 1997. Money market yields, which rose
earlier in the summer, began declining in the fall, reflecting this change in
market sentiment.
Bonds, which had posted near-record returns in 1995, lost some of their gains
from February through April as investors started to anticipate rising inflation
and higher interest rates and sold their positions. Since late May, however,
bond prices rebounded.
Why the turnaround? Higher inflation never materialized. The Consumer Price
Index (CPI), excluding volatile food and energy prices, remained fairly benign
throughout the period. October's CPI, for example, rose only 0.2% for an
inflation rate of less than 3% a year. The economy also slowed. Gross Domestic
Product (GDP), the total value of goods and services produced by the nation and
a widely used barometer for economic growth, fell to 2.1% in the third quarter,
which was less than half of what it was in the second quarter. With inflation
behaving itself, and the economy slowing, there was no reason for the Federal
Reserve to raise interest rates.
Money Market Series
The Money Market Series' seven-day current yield on November 30, 1996 was
4.62%, which compares to 4.45% last May and 5.13% of a year ago. The Series'
yield was lower than the 4.67% returned by the average government money fund
tracked by IBC Financial Data.
U.S. Treasury Money Market Series
The U.S. Treasury Money Market Series' seven-day current yield was 4.57% on
November 30, 1996 compared to 4.45% last May and 4.99% of a year ago. The
Series' yield was lower when compared to 4.62% for similar U.S. Treasury money
funds measured by IBC Financial Data.
Short-Intermediate Term Series
The Short-Intermediate Term Series' 30-day yield on November 30, 1996 was
5.60%, which finished the reporting period ahead of the average of 5.28% for
similar funds in the Lipper Analytical Services short/intermediate U.S.
government fund average.
How Investments Compared.
(As of 11/30/96)
(CHART)
U.S. General General U.S.
Growth Bond Muni Debt Taxable
Funds Funds Funds Money Funds
12-Month Total Returns 21.11% 5.11% 4.91% 4.87%
20-Year Average Annual
Total Returns 14.96% 7.69% 7.12% 7.51%
Source: Lipper Analytical Services. Financial markets change, so a mutual
fund's past performance should never be used to predict future results. The
risks to each of the investments listed above are different -- we provide
12-month total returns for several Lipper mutual fund categories to show you
that reaching for higher yields means tolerating more risk. The greater the
risk, the larger the potential reward or loss. In addition, we've included
historical 20-year average annual returns. These returns assume the
reinvestment of dividends.
U.S. Growth Funds will fluctuate a great deal. Investors have received higher
historical total returns from stocks than from most other investments. Smaller
capitalization stocks offer greater potential for long-term growth but may be
more volatile than larger capitalization stocks.
General Bond Funds provide more income than stock funds, which can help smooth
out their total returns year by year. But their prices still fluctuate
(sometimes significantly) and their returns have been historically lower than
those of stock funds.
General Municipal Debt Funds invest in bonds issued by state governments, state
agencies and/or municipalities. This investment provides income that is usually
exempt from federal and state income taxes.
Money Market Funds attempt to preserve a constant share value; they don't
fluctuate much in price but, historically, their returns have been generally
among the lowest of the major investment categories.
<PAGE>
Money Market Series
The Money Market Series seeks high current income, preservation of capital and
maintenance of liquidity from a portfolio of money market securities issued or
guaranteed by the U.S. government, its agencies or instrumentalities. There can
be no assurance that the Fund will achieve its investment objective.
<TABLE>
<CAPTION>
7-Day Weighted Net Asset
Current Avg.Maturity Value Total Net
Yield* (WAM) (NAV) Assets
<S> <C> <C> <C> <C>
Performance
As of
11/30/96
Money Market Series 4.62% 48 days $1 $552.1 million
IBC Financial Data
Money Fund Average** 4.67 47 days $1 N/A
</TABLE>
* Yields will fluctuate from time to time and past performance is not
indicative of future results.
** This is the average 7-day current yield, WAM and NAV of 113 funds in IBC's
Money Fund Average/U.S. Government Category for the week ended November 26,
1996.
An investment in the Series is neither insured nor guaranteed by the U.S.
government and there can be no assurance the Series will be able to maintain a
stable net asset value of $1 per share.
A Steady Course.
Our strategy changed in tandem with overall market sentiment since our last
report in May. We've moved from investing in a mixture of short- (one month
and less) and long-term (12- to 13-month) securities to investing the majority
of our new assets in shorter term securities.
We favored shorter term securities because longer term securities no longer
offered much more in the way of yield. As the reporting period ended, we held
57.9% of your Series in securities of three months or less. Our weighted
average maturity (WAM) was 48 days on November 30, 1996 compared to 47 days for
the average money fund.
The days of seesawing market opinion appear to be over. We believe that the
Federal Reserve will probably leave interest rates alone into early 1997.
Accordingly, we will keep the Series in a neutral position until it becomes
apparent that the central bank will have to move.
U.S. Treasury Money Market Series
The U.S. Treasury Money Market Series seeks high current income consistent with
the preservation of capital and maintenance of liquidity from a portfolio of
U.S. Treasury obligations with maturities of 13 months or less. There can be no
assurance that the Series will achieve its investment objective.
<TABLE>
<CAPTION>
7-Day Weighted Net Asset
Current Avg.Maturity Value Total Net
Yield* (WAM) (NAV) Assets
<S> <C> <C> <C> <C>
Performance
As of
11/30/96
U.S. Treasury Series 4.57% 64 days $1 $305.3 million
IBC Financial Data
100% U.S. Treasury
Money Fund Average** 4.62 61 days $1 N/A
</TABLE>
* Yields will fluctuate from time to time and past performance is not
indicative of future results.
** This is the average 7-day current yield, WAM and NAV of 35 funds in the IBC
100% U.S. Treasury Money Fund Average for the week ended November 26, 1996.
An investment in the Series is neither insured nor guaranteed by the U.S.
government and there can be no assurance the Series will be able to maintain a
stable net asset value of $1 per share.
We Were Flexible.
Yields for the U.S. Treasury Series are usually lower than other money market
funds because all of the securities we hold are backed by the full faith and
credit of the U.S. government and thus carry less credit risk.
Like the Money Market Series, our strategy changed over the past six months.
And we've adopted a more active investment strategy by investing new assets in
shorter term (three months or less) securities. Overall, the Series was
considered relatively neutral to slightly long when compared to the weighted
average maturity (WAM) of the average U.S. Treasury money market tracked by
IBC. On November 30, 1996, for example, our WAM was 64 days, compared to 61
days for the average U.S. Treasury money fund.
While we do not believe the Federal Reserve will move rates anytime soon, we
are positioned to respond quickly should market sentiment change.
<PAGE>
Short-Intermediate Term Series
The Short-Intermediate Term Series invests at least 65% of assets in securities
issued or guaranteed by the U.S. government, its agencies or instrumentalities.
As much as 35% of Series' assets may be invested in mortgage backed or asset
backed securities as well as corporate debt. The dollar-weighted average
maturity of the Series will be more than two, but less than five years. There
can be no assurance that the Series will achieve its investment objective.
<TABLE>
<CAPTION>
One Five Ten Since
Year Years Years Inception**
<S> <C> <C> <C> <C>
Cumulative
Total Returns*
As of
11/30/96
Short-Intermediate
Term Series 5.3% 34.1% 93.5% 223.1%
Lipper Short/Intermediate
U.S. Government
Fund Average*** 4.9 33.6 98.9 222.9
</TABLE>
<TABLE>
<CAPTION>
One Five Ten Since
Year Years Years Inception**
<S> <C> <C> <C> <C>
Average
Annual
Total Returns*
As of
12/31/96
Short-Intermediate
Term Series 4.0% 5.5% 6.9% 8.5%
</TABLE>
<TABLE>
<CAPTION>
Dividends & Yields
As of 11/30/96
Total Dividends 30-Day
Paid for 12 Mos. SEC Yield
<S> <C>
$0.54 5.60%
</TABLE>
Past performance is not indicative of future returns. Investment return and
principal will fluctuate so that an investor's shares, when redeemed, may be
worth more less than their original cost.
* Source: Prudential Mutual Fund Management and Lipper Analytical Services.
Shares of this Series are sold without an initial or contingent deferred sales
charge.
** Inception date: 9/13/82.
*** These are the average returns of 89 funds in the Lipper Short/
Intermediate U.S. Government Fund category for one year, 34 funds for five
years, eight funds for 10 years and two funds since inception as determined by
Lipper Analytical Services.
Bears Retreat, For Now.
When we last reported to you six months ago, bears were on a rampage. These
worried investors read signs of a strengthening economy as a warning of bad
inflationary pressures to come (not to mention higher short-term interest
rates), and sold their securities, driving prices down and yields up. The yield
on a five-year Treasury note, for example, rose 130 basis points (a basis point
is 1/100th of a percentage point) to 6.4% on May 21, 1996 from 5.1% on February
13, 1996. All investors lost some of the capital appreciation realized from
1995 as yields rose and bond prices fell.
But then the short- to intermediate-term bond market started to rebound --
thanks to moderating economic growth and continued low inflation -- forcing the
bears to grudgingly give ground. A flurry of good news fueled the comeback
including:
- - Moderating Growth. GDP moderated in the third quarter to 2.2% -- down from
the worrisome 3.4% growth rate for the first six months of the year, which
economists believed could generate higher inflation.
- - Shrinking Federal Deficit. The federal deficit was lower than projected.
This meant fewer Treasury bonds were sold, increasing demand for existing
supply and pushing prices up.
- - More Savings. Personal savings, which bottomed at 3.6% of disposal income in
April, grew to 5.3% by the end of June. This meant consumers were spending
less, braking the economy.
Thus inflation, a bond investor's worst enemy, remained fairly benign rising at
an annual rate of about 3%. In addition, the Federal Reserve kept the Federal
Funds rate at 5.25%, where it has stood since January. Bottom line: Bond prices
have stabilized and recovered with the yield on a 5-year Treasury declining 50
basis points to 5.9% on November 19, 1996 compared to 6.4% on May 21.
As you may recall, we maintained a higher cash position earlier this year
because we did not believe the returns offered in the two- to five-year bond
range were attractive enough to offset their interest rate risk. This tactic
helped us weather the price declines of February through April. Since May,
however, we actively reinvested our cash position in attractive issues at the
longer end of the yield curve. Our duration was 2.8 years on November 30, 1996.
To increase yield we bought federal agencies debt, asset backed securities, and
mortgage backed securities with higher coupons.
- -------------------------------------------------------------------------------
1
<PAGE>
Looking Ahead.
The seesawing rates in the money market and short- to intermediate-term bond
markets appear to have steadied for now. We believe the U.S. economy is on
track for slow, steady and non-inflationary growth into the first quarter of
1997. If we're right, then the Federal Reserve will have little reason to raise
- -- or lower -- short-term interest rates. Given this scenario, our money market
and bond funds will continue to pursue their present strategies of investing in
attractive securities while maintaining the flexibility to respond should
interest rates begin to move.
(PHOTO) (PHOTO)
/s/ Bernard D. Whitsett, II /s/ Barbara L. Kenworthy
Bernard D. Whitsett, II Barbars L. Kenworthy
Portfolio Manager Portfolio Manager
Money Market Series & Short-Intermediate Term Series
U.S. Treasury Money Market Series
- -------------------------------------------------------------------------------
2
<PAGE>
President's Letter January 1, 1997
(PHOTO)
Dear Shareholder:
For many investors, 1996 may well be the second year of back-to-back,
double-digit stock market returns. In late November, the Dow Jones Industrial
Average passed 6500 -- only weeks after breaking the 6000 mark in mid-October.
America's economic expansion is entering its sixth year and there seems little
evidence of an end to the continued modest growth and low inflation we've
enjoyed for the last several years.
This is good news. For most investors it's meant an increase in their share
values for college funds, retirement nest eggs or other long-term financial
goals. However, as you read your year-end account statements and make plans for
1997, it's important to remember that there never is a "sure thing" when it
comes to investment returns. Stock and bond markets go down just as they go up.
(Did you notice the brief period of decline this past summer?) No one likes to
see the value of their investments fall but such periods remind us we must keep
our expectations realistic.
Regardless of the market's direction, a wise investor plans for tomorrow's
needs today. Your Financial Advisor or Registered Representative can help
you:
- - Review your portfolio and suggest strategies for 1997, such as diversifying
across different types of investments. Financial markets seldom move in
lockstep. By investing in a mix of stock and bond funds (foreign & domestic)
and money market funds you may be in a better position to achieve your
long-term goals and to weather periods of uncertainty.
- - See why annuities have become popular retirement planning tools. The choices
are broader than ever. Our new Discovery SelectSM Variable Annuity offers you
many of the keys to successful retirement planning, including a personalized
asset allocation program and a choice of 21 variable- or fixed-rate
investment options offering a broad array of investment objectives and
styles.
- - Explain new retirement savings developments. For example, Congress has
expanded the contribution limit on spousal IRAs. And don't forget, it's not
too late for you to make a contribution to your IRA or open one for 1996. The
IRS deadline is April 15, 1997, but it's best to act sooner.
Why not contact your Financial Advisor or Registered Representative today? If
you are interested in Discovery SelectSM call for a prospectus, which contains
more complete information. Read it carefully before you invest.
Sincerely,
/s/ Richard A. Redeker
Richard A. Redeker
President
P.S. Your 1997 Prudential IRA contribution may qualify you for a waiver of the
annual custodial fee. Ask your financial representative for details.
- -------------------------------------------------------------------------------
3
<PAGE>
Portfolio of Investments as PRUDENTIAL GOVERNMENT SECURITIES
of November 30, 1996 TRUST MONEY MARKET SERIES
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Amount
(000) Description Value (Note 1)
<C> <S> <C>
------------------------------------------------------------
Federal Farm Credit Bank--1.9%
$10,000 5.235%, 3/7/97 $ 9,860,400
500 5.40%, 4/1/97 499,601
------------
10,360,001
- ------------------------------------------------------------
Federal Home Loan Bank--4.6%
8,500 5.02%, 2/5/97 8,498,467
1,000 5.235%, 3/4/97 986,477
6,000 5.325%, 3/18/97 5,999,458
10,000 5.89%, 7/29/97 9,993,065
------------
25,477,467
- ------------------------------------------------------------
Federal Home Loan Mortgage Corporation--1.7%
9,500 5.33%, 12/2/96 9,498,593
- ------------------------------------------------------------
Federal National Mortgage Association--30.4%
2,000 8.20%, 12/23/96 2,003,266
6,000 5.23%, 1/28/97 5,949,443
6,500 5.23%, 3/27/97 6,390,461
18,000 5.30%, 4/4/97 17,671,400
8,000 5.48%, 4/24/97 7,997,979
15,000 5.205%, 4/29/97, F.R.N. 14,993,679
19,750 5.71%, 5/20/97 19,740,642
49,000 5.36%, 8/1/97, F.R.N. 48,985,773
9,805 5.36%, 8/22/97, F.R.N. 9,800,850
5,000 5.64%, 9/3/97 4,983,665
29,425 5.36%, 11/14/97, F.R.N. 29,410,973
------------
167,928,131
- ------------------------------------------------------------
Student Loan Marketing Association--3.3%
18,000 7.56%, 12/9/96 18,007,705
- ------------------------------------------------------------
Tennessee Valley Authority--0.2%
1,000 6.00%, 1/15/97 1,000,000
United States Treasury Notes--10.1%
$10,000 6.875%, 2/28/97 $ 10,040,747
29,500 6.50%, 5/15/97 29,636,433
2,000 6.125%, 5/31/97 2,002,979
13,910 6.50%, 8/15/97 13,967,985
------------
55,648,144
- ------------------------------------------------------------
Repurchase Agreements(a)--47.9%
54,367 Bear Stearns & Co., 5.37%, dated
11/26/96, due 12/03/96 in the
amount of $54,423,768 (cost
$54,367,000; the value of the
collateral including accrued
interest is $55,659,688) 54,367,000
25,000 Merrill Lynch, 5.37%, dated
11/26/96, due 12/03/96 in the
amount of $25,026,104 (cost
$25,000,000; the value of the
collateral including accrued
interest is $25,502,384) 25,000,000
8,118 Morgan Stanley & Co., 5.32%, dated
11/25/96, due 12/02/96 in the
amount of $8,126,398 (cost
$8,118,000; the value of the
collateral including accrued
interest is $8,392,804) 8,118,000
26,500 Morgan Stanley & Co., 5.38%, dated
11/27/96, due 12/04/96 in the
amount of $26,527,722 (cost
$26,500,000; the value of the
collateral including accrued
interest is $27,397,057) 26,500,000
500 Morgan Stanley & Co., 5.29%, dated
11/07/96, due 12/06/96 in the
amount of $502,131 (cost
$500,000; the value of the
collateral including accrued
interest is $516,926) 500,000
</TABLE>
- --------------------------------------------------------------------------------
4 See Notes to Financial Statements.
<PAGE>
Portfolio of Investments as PRUDENTIAL GOVERNMENT SECURITIES
of November 30, 1996 TRUST MONEY MARKET SERIES
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Amount
(000) Description Value (Note 1)
<C> <S> <C>
------------------------------------------------------------
Repurchase Agreements(a) (cont'd.)
$21,000 Morgan Stanley & Co., 5.32%, dated
11/19/96, due 12/12/96 in the
amount of $21,071,377 (cost
$21,000,000; the value of the
collateral including accrued
interest is $21,710,875) $ 21,000,000
56,000 Nomura Securities International
Inc., 5.43%, dated 11/27/96, due
12/02/96 in the amount of
$56,042,233 (cost $56,000,000;
the value of the collateral
including accrued interest is
$57,121,929) 56,000,000
5,764 Smith Barney Inc., 5.40%, dated
11/27/96, due 12/04/96 in the
amount of $5,783,021 (cost
$5,764,000; the value of the
collateral including accrued
interest is $5,879,280) 5,764,000
9,000 Smith Barney Inc., 5.32%, dated
11/04/96, due 12/05/96 in the
amount of $9,041,230 (cost
$9,000,000; the value of the
collateral including accrued
interest is $9,180,000) 9,000,000
11,000 Smith Barney Inc., 5.31%, dated
11/12/96, due 12/16/96 in the
amount of $11,055,165 (cost
$11,000,000; the value of the
collateral including accrued
interest is $11,220,000) 11,000,000
13,000 Smith Barney Inc., 5.33%, dated
11/27/96, due 12/30/96 in the
amount of $13,063,516 (cost
$13,000,000; the value of the
collateral including accrued
interest is $13,260,000) 13,000,000
$34,522 UBS Securities Inc., 5.75%, dated
11/29/96, due 12/03/96 in the
amount of $34,544,056 (cost
$34,522,000; the value of the
collateral including accrued
interest is $35,212,622) $ 34,522,000
------------
264,771,000
- ------------------------------------------------------------
Total Investments--100.1%
(amortized cost $552,691,041(b)) 552,691,041
Liabilities in excess of other
assets--(0.1%) (568,298)
------------
Net Assets--100% $552,122,743
------------
------------
</TABLE>
- ---------------
F.R.N.--Floating Rate Note. The interest rate reflected is the rate in effect
at November 30, 1996.
(a) Repurchase Agreements are collateralized by U.S. Treasury or Federal agency
obligations.
(b) Federal income tax basis of portfolio securities is the same as for
financial reporting purposes.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 5 -----
<PAGE>
Portfolio of Investments as PRUDENTIAL GOVERNMENT SECURITIES TRUST
of November 30, 1996 SHORT-INTERMEDIATE TERM SERIES
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Amount
(000) Description Value (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
LONG-TERM INVESTMENTS--100.7%
- ------------------------------------------------------------
Asset-Backed--13.5%
Daimler Benz Vehicle Trust
$10,000 5.85%, 7/20/03 $ 10,003,125
Ford Credit Auto Lease Trust
10,000 5.80%, 5/15/99 10,000,000
Main Place Funding Corporation
5,000 5.585%, 7/17/98, F.R.N. 5,000,000
------------
25,003,125
- ------------------------------------------------------------
Collateralized Mortgage Obligations--10.2%
GMAC Commercial Mortgage Security
10,088 6.79%, 9/15/03, Series 96 10,138,671
Resolution Trust Corporation
3,732 6.593%, 12/25/20, CMO, Series 1992 3,749,691
Structured Asset Securities Corp.
5,000 6.759%, 2/25/28, CMO, Series 1996 5,040,625
------------
18,928,987
- ------------------------------------------------------------
Federal Home Loan Mortgage Corporation--11.4%
15,000 6.45%, 6/4/99 15,133,650
5,787 7.831%, 8/1/24, ARMS 5,984,238
------------
21,117,888
- ------------------------------------------------------------
Federal National Mortgage Association--20.3%
4,242 7.435%, 8/1/06 4,493,627
8,471 7.445%, 8/1/06 8,979,414
8,648 7.50%, 10/1/06 9,185,877
14,500 8.00%, 1/1/99 - 12/01/99 14,949,775
------------
37,608,693
- ------------------------------------------------------------
Government National Mortgage Association--17.5%
7,422 9.00%, 6/15/98 - 9/15/09 7,775,759
9,541 8.00%, 6/15/23 - 12/15/24 9,916,273
14,493 7.50%, 10/15/25 - 1/15/26 14,712,536
------------
32,404,568
United States Treasury Notes--27.8%
$11,000(a) 7.375%, 11/15/97 $ 11,190,740
20,000(a) 8.25%, 7/15/98 20,828,200
1,000(a) 6.00%, 8/15/99 1,008,280
15,000(a) 6.375%, 9/30/01 15,330,450
3,000(a) 6.50%, 8/15/05 3,091,410
------------
51,449,080
------------
Total long-term investments
(cost $184,182,201) 186,512,341
SHORT-TERM INVESTMENTS--6.7%
- ------------------------------------------------------------
Commercial Paper--5.1%
Kerr-McGee Credit Corporation
2,008 5.40%, 12/12/96 2,004,687
Tyson Foods
7,420 5.37%, 12/16/96 7,403,398
------------
(cost $9,408,085) 9,408,085
------------
Repurchase Agreement--1.6%
3,030 Joint Repurchase Agreement Account,
5.68%, 12/2/96
(cost $3,030,000; Note 5) 3,030,000
------------
Total short-term investments
(cost $12,438,085) 12,438,085
------------
- ------------------------------------------------------------
Total Investments--107.4%
(cost $196,620,286; Note 4) 198,950,426
Liabilities in excess of other
assets--(7.4%) (13,715,761)
------------
Net Assets--100% $185,234,665
------------
------------
</TABLE>
- ---------------
(a) Asset segregated for dollar rolls.
ARMS--Adjustable Rate Mortgage Security. The interest rate reflected is the rate
in effect at November 30, 1996.
CMO--Collateralized Mortgage Obligation.
F.R.N.--Floating Rate Note. The interest rate reflected is the rate in effect at
November 30, 1996.
- --------------------------------------------------------------------------------
6 See Notes to Financial Statements.
<PAGE>
PRUDENTIAL GOVERNMENT SECURITIES TRUST
U.S. TREASURY MONEY MARKET SERIES
Portfolio of Investments as of November 30, 1996
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Amount
(000) Description Value (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
United States Treasury Bills--13.6%
$4,570 5.10%, 12/19/96 $ 4,558,347
9,945 5.105%, 12/19/96 9,919,616
6,814 5.11%, 12/19/96 6,796,590
1,755 5.125%, 12/19/96 1,750,503
7,005 5.15%, 12/19/96 6,986,962
2,200 5.19882%, 12/19/96 2,194,281
9,500 5.20%, 12/19/96 9,475,300
------------
41,681,599
- ------------------------------------------------------------
United States Treasury Notes--96.6%
23,243 7.25%, 11/30/96 23,243,000
193,268 7.50%, 1/31/97 193,946,983
25,000 6.75%, 2/28/97 25,087,742
16,842 6.875%, 2/28/97 16,905,317
33,000 6.625%, 3/31/97 33,144,142
2,510 6.50%, 8/15/97 2,518,131
------------
294,845,315
- ------------------------------------------------------------
Total Investments--110.2%
(amortized cost $336,526,914(a)) 336,526,914
Liabilities in excess of other
assets--(10.2%) (31,197,337)
------------
Net Assets--100% $305,329,577
------------
------------
</TABLE>
- ---------------
(a) Federal income tax basis of portfolio securities is the same as for
financial reporting purposes.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 7 -----
<PAGE>
Statement of Assets and Liabilities
November 30, 1996 PRUDENTIAL GOVERNMENT SECURITIES TRUST
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
U.S.
Treasury
Money Short- Money
Market Intermediate Market
Assets Series Term Series Series
------------ ------------ ------------
<S> <C> <C> <C>
Investments, at value (cost $552,691,041, $196,620,286 and $336,526,914,
respectively)............................................................. $552,691,041 $198,950,426 $336,526,914
Cash........................................................................ 1,017,178 -- 2,698
Interest receivable......................................................... 2,436,225 1,952,188 6,834,430
Receivable for Series shares sold........................................... 534,588 11,927 3,117,887
Deferred expenses and other assets.......................................... 13,524 5,011 8,294
------------ ------------ ------------
Total assets............................................................. 556,692,556 200,919,552 346,490,223
------------ ------------ ------------
Liabilities
Payable for investments purchased........................................... -- 14,904,930 20,316,827
Payable for Series shares reacquired........................................ 3,470,713 259,836 20,282,576
Dividends payable........................................................... 435,875 237,163 240,640
Due to Manager.............................................................. 182,117 60,970 101,699
Due to Distributors......................................................... 30,542 18,400 16,851
Accrued expenses and other liabilities...................................... 450,566 203,588 202,053
------------ ------------ ------------
Total liabilities........................................................ 4,569,813 15,684,887 41,160,646
------------ ------------ ------------
Net Assets.................................................................. $552,122,743 $185,234,665 $305,329,577
------------ ------------ ------------
------------ ------------ ------------
Net assets were comprised of:
Shares of beneficial interest, at par ($.01 per share)................... $ 5,521,227 $ 190,951 $ 3,053,296
Paid-in capital in excess of par......................................... 546,601,516 235,650,778 302,276,281
------------ ------------ ------------
552,122,743 235,841,729 305,329,577
Distributions in excess of net investment income......................... -- (86,689) --
Accumulated net realized losses.......................................... -- (52,850,515) --
Net unrealized appreciation of investments............................... -- 2,330,140 --
------------ ------------ ------------
Net assets, November 30, 1996............................................... $552,122,743 $185,234,665 $305,329,577
------------ ------------ ------------
------------ ------------ ------------
Shares of beneficial interest issued and outstanding........................ 552,122,743 19,095,120 305,329,577
------------ ------------ ------------
------------ ------------ ------------
Net asset value............................................................. $9.70 $1.00
------------ ------------
------------ ------------
Class A:
Net asset value, offering price and redemption price per share
($552,122,539 / 552,122,539 shares of common stock issued and
outstanding).......................................................... $1.00
------------
------------
Class Z:
Net asset value, offering price and redemption price per share
($204 / 204 shares of common stock issued and outstanding)............ $1.00
------------
------------
</TABLE>
- --------------------------------------------------------------------------------
8 See Notes to Financial Statements.
<PAGE>
Statement of Operations
Year Ended November 30, 1996 PRUDENTIAL GOVERNMENT SECURITIES TRUST
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Money Short- U.S. Treasury
Market Intermediate Money
Net Investment Income Series Term Series Market Series
----------- ------------ -------------
<S> <C> <C> <C>
Income
Interest................................................................. $32,326,163 $ 13,065,952 $ 20,531,847
----------- ------------ -------------
Expenses
Management fee........................................................... 2,362,419 810,455 1,572,239
Distribution fee......................................................... 736,434 409,005 491,325
Transfer agent's fees and expenses....................................... 1,220,000 240,000 151,000
Custodian's fees and expenses............................................ 97,000 22,000 69,000
Registration fees........................................................ 129,000 119,000 35,000
Reports to shareholders.................................................. 445,000 200,000 145,000
Audit fee................................................................ 44,000 39,000 40,000
Trustees' fees........................................................... 12,000 12,500 12,000
Insurance expense........................................................ 15,300 6,000 5,000
Legal fees............................................................... 8,000 21,000 7,000
Amortization of deferred organization expenses........................... -- -- 300
Miscellaneous............................................................ 5,027 9,915 7,717
----------- ------------ -------------
Total expenses........................................................ 5,074,180 1,888,875 2,535,581
----------- ------------ -------------
Net investment income....................................................... 27,251,983 11,177,077 17,996,266
----------- ------------ -------------
Realized and Unrealized Gain (Loss) on Investments
Net realized gain (loss) on investment transactions......................... 82,865 (1,939,815) 231,117
Net change in unrealized appreciation of investments........................ -- 699,817 --
----------- ------------ -------------
Net gain (loss) on investments.............................................. 82,865 (1,239,998) 231,117
----------- ------------ -------------
Net Increase in Net Assets Resulting from Operations........................ $27,334,848 $ 9,937,079 $ 18,227,383
----------- ------------ -------------
----------- ------------ -------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 9 -----
<PAGE>
Statement of Changes in Net Assets PRUDENTIAL GOVERNMENT SECURITIES TRUST
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Short- U.S. Treasury
Money Market Intermediate Money Market
Series Term Series Series
------------------------------- --------------------------- -------------------------------
Year ended November 30,
Increase (Decrease) ------------------------------------------------------------------------------------------------
in Net Assets 1996 1995 1996 1995 1996 1995
-------------- -------------- ------------ ------------ -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Operations
Net investment income....... $ 27,251,983 $ 30,759,256 $ 11,177,077 $ 12,199,911 $ 17,996,266 $ 17,294,732
Net realized gain (loss) on
investment
transactions............. 82,865 39,057 (1,939,815) 7,255,112 231,117 251,743
Net change in unrealized
appreciation/depreciation
of investments........... -- -- 699,817 5,231,521 -- --
-------------- -------------- ------------ ------------ -------------- --------------
Net increase in net assets
resulting from
operations............... 27,334,848 30,798,313 9,937,079 24,686,544 18,227,383 17,546,475
-------------- -------------- ------------ ------------ -------------- --------------
Net equalization debits........ -- -- -- (413,787) -- --
-------------- -------------- ------------ ------------ -------------- --------------
Dividends and distributions to
shareholders:
Dividends to shareholders... (27,334,848) (30,798,313) (11,380,459) (11,844,750) (18,227,383) (17,546,475)
-------------- -------------- ------------ ------------ -------------- --------------
Series share transactions(a)
Net proceeds from shares
subscribed............... 1,688,126,619 1,668,939,755 38,324,541 40,102,462(b) 3,788,052,358 2,801,540,919
Net asset value of shares
issued to shareholders in
reinvestment of dividends
and distributions........ 26,320,285 29,404,107 7,194,984 7,611,953 16,677,439 15,973,007
Cost of shares reacquired... (1,760,517,744) (1,737,493,726) (71,837,916) (89,126,093) (3,838,734,554) (2,772,163,839)
-------------- -------------- ------------ ------------ -------------- --------------
Net increase (decrease) in
net assets from Series
share transactions....... (46,070,840) (39,149,864) (26,318,391) (41,411,678) (34,004,757) 45,350,087
-------------- -------------- ------------ ------------ -------------- --------------
Total increase (decrease)...... (46,070,840) (39,149,864) (27,761,771) (28,983,671) (34,004,757) 45,350,087
Net Assets
Beginning of year.............. 598,193,583 637,343,447 212,996,436 241,980,107 339,334,334 293,984,247
-------------- -------------- ------------ ------------ -------------- --------------
End of year.................... $ 552,122,743 $ 598,193,583 $185,234,665 $212,996,436 $ 305,329,577 $ 339,334,334
-------------- -------------- ------------ ------------ -------------- --------------
-------------- -------------- ------------ ------------ -------------- --------------
</TABLE>
- ---------------
(a) At $1.00 per share for the Money Market Series and the U.S. Treasury Money
Market Series.
(b) Includes proceeds of $28,023,926 from the acquisition of the Prudential
Adjustable Rate Securities Fund, Inc.
- --------------------------------------------------------------------------------
10 See Notes to Financial Statements.
<PAGE>
NOTES TO FINANCIAL STATEMENTS PRUDENTIAL GOVERNMENT SECURITIES TRUST
- --------------------------------------------------------------------------------
Prudential Government Securities Trust (the "Fund") is registered under the
Investment Company Act of 1940 as a diversified, open-end management investment
company. The Fund consists of three series--the Money Market Series, the
Short-Intermediate Term Series and the U.S. Treasury Money Market Series; the
monies of each series are invested in separate, independently managed
portfolios.
- ------------------------------------------------------------
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies followed by the
Fund in the preparation of its financial statements.
Securities Valuations: The Money Market Series and U.S. Treasury Money Market
Series value portfolio securities at amortized cost, which approximates market
value. The amortized cost method of valuation involves valuing a security at its
cost on the date of purchase and thereafter assuming a constant amortization to
maturity of any discount or premium.
For the Short-Intermediate Term Series, the Trustees have authorized the use of
an independent pricing service to determine valuations. The pricing service
considers such factors as security prices, yields, maturities, call features,
ratings and developments relating to specific securities in arriving at
securities valuations. When market quotations are not readily available, a
security is valued by appraisal at its fair value as determined in good faith
under procedures established under the general supervision and responsibility of
the Trustees. Short-term securities which mature in more than 60 days are valued
at current market quotations. Short-term securities which mature in 60 days or
less are valued at amortized cost.
In connection with transactions in repurchase agreements, the Fund's custodian
or designated subcustodians, as the case may be under triparty repurchase
agreements, takes possession of the underlying collateral securities, the value
of which exceeds the principal amount of the repurchase transaction, including
accrued interest. 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.
Securities Transactions and Investment Income: Securities transactions are
recorded on the trade date. Realized gains and losses on sales of portfolio
securities are calculated on the identified cost basis. Interest income is
recorded on the accrual basis. The Fund amortizes discounts and premiums on
purchases of portfolio securities as adjustments to income.
Effective December 1, 1995, the Short-Intermediate Term Series began accruing
income using the effective interest method which includes amortizing discounts
and premiums on purchases of portfolio securities as adjustments to income. This
method of recording income more closely reflects the economics of holding and
disposing of debt instruments. Prior to December 1, 1995 the Short-Intermediate
Term Series accrued coupon interest income and original issue discount and
accounted for purchased discounts and premiums as capital gains or losses when
realized upon disposition of the associated security. The cumulative effect of
applying this accounting change was to decrease undistributed net investment
income and increase net unrealized appreciation of investments by $797,340. Such
accounting change had no effect on net assets or net asset value per share.
Dollar Rolls: The Short-Intermediate Term Series enters into dollar roll
transactions in which the Series sells 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 Short-Intermediate Term Series forgoes
principal and interest paid on the securities. The Series 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 sale proceeds
and the lower repurchase price is taken into income. The Short-Intermediate Term
Series maintains a segregated account, the dollar value of which is equal to its
obligations in respect of dollar rolls. There were no dollar rolls outstanding
as of November 30, 1996.
Federal Income Taxes: For federal income tax purposes, each series of the Fund
is treated as a separate taxable entity. It is each Series' 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.
Equalization: Effective December 1, 1995, the Short-Intermediate Term Series
discontinued the accounting practice of equalization. Equalization is a practice
whereby a portion of the proceeds from sales and costs of repurchases of capital
shares, equivalent on a per share basis to the amount of distributable net
investment income on the date of the transaction, is credited or charged to
undistributed net investment income. The balance of $1,277,251 of undistributed
net investment income at November 30, 1995, resulting from equalization was
transferred to paid-in capital in excess of par. Such reclassification had no
effect on net assets, results of operations, or net asset value per share.
Reclassification of Capital Accounts: The Fund accounts and reports for
distributions to shareholders in accordance with A.I.C.P.A. Statement of
Position 93-2: Determination, Disclosure, and Financial Statement Presentation
of Income, Capital Gain, and Return of Capital Distributions by Investment
Companies. For the Short-Intermediate Term Series, the
- --------------------------------------------------------------------------------
11 -----
<PAGE>
NOTES TO FINANCIAL STATEMENTS PRUDENTIAL GOVERNMENT SECURITIES TRUST
- --------------------------------------------------------------------------------
effect of applying this statement (including the effect of accounting changes)
was to decrease undistributed net investment income by $2,074,591, ($1,277,251
representing discontinuation of the accounting practice of equalization and
$797,340 representing a cumulative adjustment for amortizing discounts and
premiums on purchases of portfolio securities as adjustments to income),
decrease accumulated net realized losses by $2,923,464 ($11,425,628 of which
represents expiration of a portion of the capital loss carryforward offset by
$8,502,164 of additional accumulated net realized capital losses resulting from
the acquisition of Prudential Adjustable Rate Securities Fund, Inc.), decrease
paid-in capital in excess of par by $1,646,213 and increase unrealized
appreciation by $797,340.
Deferred Organization Expenses: Approximately $49,000 of expenses were incurred
in connection with the organization and initial registration of the U.S.
Treasury Series and such amount was deferred and amortized over a period of 60
months ended December, 1995.
Dividends and Distributions: The Money Market Series and U.S. Treasury Money
Market Series declare daily dividends from net investment income and net
short-term capital gains and losses. Dividends are paid monthly.
The Short-Intermediate Term Series declares dividends from net investment income
daily; payment of dividends is made monthly. Distributions of net capital gains,
if any, are made annually.
Income distributions and capital gain distributions are determined in accordance
with income tax regulations which may differ from generally accepted accounting
principles.
- ------------------------------------------------------------
NOTE 2. AGREEMENTS
The Fund has a management agreement with Prudential Mutual Fund Management LLC
("PMF"). Pursuant to this agreement, PMF has responsibility for all investment
advisory services and supervises the subadviser's performance of such services.
PMF has entered into a subadvisory agreement with The Prudential Investment
Corporation ("PIC"); PIC furnishes investment advisory services in connection
with the management of the Fund. PMF pays for the cost of the subadviser's
services, the compensation of officers of the Fund, occupancy and certain
clerical and bookkeeping costs of the Fund. The Fund bears all other costs and
expenses.
The management fee paid to PMF is computed daily and payable monthly at an
annual rate of .40 of 1% of the average daily net assets of the
Short-Intermediate Term Series and the U.S. Treasury Money Market Series. With
respect to the Money Market Series, the management fee is payable as follows:
.40 of 1% of average daily net assets up to $1 billion, .375 of 1% of average
daily net assets between $1 billion and $1.5 billion and .35 of 1% in excess of
$1.5 billion.
The Fund had a distribution agreement with Prudential Mutual Fund Distributors,
Inc. ("PMFD"), which acted as the distributor of the shares of the Money
Market Series and the U.S. Treasury Money Market Series through January 1, 1996.
Effective January 2, 1996, Prudential Securities Incorporated ("PSI") assumed
these responsibilities. The Fund compensates the distributors for distributing
and servicing each of the Series' shares, pursuant to plans of distribution,
regardless of expenses actually incurred by them. The distribution fees are
accrued daily and payable monthly at an annual rate of .125% of each of the
Series' average daily net assets. The distributors pay various broker-dealers
for account servicing fees and for the expenses incurred by such broker-dealers.
The Fund also compensates PSI for its expenses as distributor of the
Short-Intermediate Term Series. The Short-Intermediate Term Series entered into
a distribution agreement and a plan of distribution pursuant to which it pays
PSI a fee, accrued daily and payable monthly, at an annual rate of .25 of 1% of
the lesser of (a) the aggregate sales of shares issued (not including
reinvestment of dividends and distributions) on or after July 1, 1985 (the
effective date of the plan) less the aggregate net asset value of any such
shares redeemed, or (b) the average net asset value of the shares issued after
the effective date of the plan. Distribution expenses include commission credits
to PSI branch offices for payments of commissions and account servicing fees to
financial advisers and an allocation on account of overhead and other
distribution-related expenses, the cost of printing and mailing prospectuses to
potential investors and of advertising incurred in connection with the
distribution of Series shares. In addition, PSI pays other broker-dealers,
including Pruco, an affiliated broker-dealer, for account servicing fees and
other expenses incurred by such broker-dealers in distributing these shares.
PMFD is a wholly-owned subsidiary of PMF; PSI, PMF and PIC are (indirect)
wholly-owned subsidiaries of The Prudential Insurance Company of America.
- ------------------------------------------------------------
NOTE 3. OTHER TRANSACTIONS WITH AFFILIATES
Prudential Mutual Fund Services, Inc. ("PMFS"), a wholly-owned subsidiary of
PMF, serves as the Fund's transfer agent. During the year ended November 30,
1996, the Fund incurred fees of approximately $1,060,000, $200,000, and
$128,000, respectively, for the Money Market Series, Short-Intermediate Term
Series, and U.S. Treasury Money Market Series. Transfer agent fees and expenses
in the Statement of Operations includes certain out-of-pocket expenses paid to
non-affiliates.
- --------------------------------------------------------------------------------
12
<PAGE>
NOTES TO FINANCIAL STATEMENTS PRUDENTIAL GOVERNMENT SECURITIES TRUST
- --------------------------------------------------------------------------------
NOTE 4. PORTFOLIO SECURITIES
Purchases and sales of portfolio securities other than short-term investments,
for the Short-Intermediate Term Series for the year ended November 30, 1996 were
$260,921,363 and $267,876,070, respectively.
For the Short-Intermediate Term Series, the cost basis of investments for
federal income tax purposes was 196,626,252 and, accordingly, as of November 30,
1996, net unrealized appreciation of investments for federal income tax purposes
was $2,324,174 (gross unrealized appreciation $2,510,363; gross unrealized
depreciation--$186,189).
For federal income tax purposes, the Short-Intermediate Term Series has a
capital loss carryforward as of November 30, 1996 of approximately $52,844,000
of which $19,180,000 expires in 1997, $6,864,000 expires in 1998, $4,746,000
expires in 1999, $3,422,000 expires in 2001, $16,699,000 expires in 2002 and
$1,933,000 expires in 2003. Accordingly, no capital gains distribution is
expected to be paid to shareholders until net gains have been realized in excess
of such carryforward. During the fiscal year ended November 30, 1996,
approximately $11,426,000 of the capital loss carryforward expired unused.
- ------------------------------------------------------------
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 November 30, 1996, the
Short-Intermediate Term Series had a 0.35% undivided interest in the repurchase
agreements in the joint account. This undivided interest represented $3,030,000
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., 5.68%, in the principal amount of $280,000,000, repurchase
price $280,132,533, due 12/2/96. The value of the collateral including accrued
interest was $285,853,687.
CS First Boston Corp., 5.68%, in the principal amount of $280,000,000,
repurchase price $280,132,533, due 12/2/96. The value of the collateral
including accrued interest was $290,562,688.
J.P. Morgan Securities, Inc., 5.65%, in the principal amount of $34,809,000,
repurchase price $34,825,389, due 12/2/96. The value of the collateral including
accrued interest was $35,526,121.
Smith Barney, Inc., 5.68%, in the principal amount of $280,000,000, repurchase
price $280,132,533, due 12/2/96. The value of the collateral including accrued
interest was $286,599,817.
- ------------------------------------------------------------
NOTE 6. CAPITAL
Each series has authorized an unlimited number of shares of beneficial interest
at $.01 par value. Transactions in shares of beneficial interest for the
Short-Intermediate Term Series for the fiscal years ended November 30, 1995 and
1996 were as follows:
<TABLE>
<CAPTION>
Year ended November 30,
---------------------------
1996 1995
----------- ------------
<S> <C> <C>
Shares sold.................. 3,978,671 4,167,583*
Shares issued in reinvestment
of dividends and
distributions.............. 749,149 809,302
Shares reacquired............ (7,501,561 ) (9,498,358)
----------- ------------
Net decrease................. (2,773,741 ) (4,521,473)
----------- ------------
----------- ------------
</TABLE>
* Includes 2,889,065 shares issued for the acquisition of the Prudential
Adjustable Rate Securities Fund, Inc.
Effective March 1, 1996 the Money Market Series commenced offering Class Z
shares. Class Z shares are not subject to any sales or redemption charge and are
offered exclusively for sale to a limited group of investors.
Transactions in shares of beneficial interest for the Money Market Series for
the period ended November 30, 1996 were as follows:
<TABLE>
<CAPTION>
Year ended
November 30,
1996
---------------
<S> <C>
Class A
- ----------------------------------------------
Shares sold................................... 1,686,769,968
Shares issued in reinvestment of dividends and
distributions............................... 26,286,366
Shares reacquired............................. (1,746,670,530)
---------------
Net decrease in shares outstanding before
conversion.................................. (33,614,196)
Shares reacquired upon conversion into
Class Z..................................... (12,456,848)
---------------
Net decrease in shares outstanding............ (46,071,044)
---------------
---------------
</TABLE>
- --------------------------------------------------------------------------------
13 -----
<PAGE>
NOTES TO FINANCIAL STATEMENTS PRUDENTIAL GOVERNMENT SECURITIES TRUST
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
March 1, 1996
through
November 30,
1996
---------------
Class Z
- ----------------------------------------------
<S> <C>
Shares sold................................... 1,356,651
Shares issued in reinvestment of dividends and
distributions............................... 33,919
Shares reacquired............................. (13,847,214)
---------------
Net decrease in shares outstanding before
conversion.................................. (12,456,644)
Shares issued upon conversion from Class A.... 12,456,848
---------------
Net increase in shares outstanding............ 204
---------------
---------------
</TABLE>
- --------------------------------------------------------------------------------
14
<PAGE>
PRUDENTIAL GOVERNMENT SECURITIES TRUST
FINANCIAL HIGHLIGHTS MONEY MARKET SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class Z
Class A ---------------
-------------------------------------------------------------- March 1,
1996(b)
Year Ended November 30, Through
-------------------------------------------------------------- November 30,
1996 1995 1994 1993 1992 1996
<S> <C> <C> <C> <C> <C> <C>
-------- -------- -------- -------- ---------- ---------------
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning of
period....................... $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
Net investment income.......... 0.046 0.052 0.033 0.026 0.035 0.038
Dividends from net investment
income....................... (0.046) (0.052) (0.033) (0.026) (0.035) (0.038)
-------- -------- -------- -------- ---------- ---------------
Net asset value, end of
period....................... $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
-------- -------- -------- -------- ---------- ---------------
-------- -------- -------- -------- ---------- ---------------
TOTAL RETURN(a):............... 4.74% 5.20% 3.29% 2.62% 3.57% 3.87%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(000)........................ $552,123 $598,194 $637,343 $919,503 $1,026,187 $ 204(c)
Average net assets (000)....... $589,147 $597,599 $732,867 $950,988 $1,113,759 $ 1,962
Ratios to average net assets:
Expenses, including
distribution fees........ 0.86% 0.78% 0.77% 0.72% 0.72% 0.68%(d)
Expenses, excluding
distribution fees........ 0.73% 0.65% 0.64% 0.59% 0.60% 0.68%(d)
Net investment income....... 4.63% 5.15% 3.19% 2.56% 3.42% 4.68%(d)
</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 return for a period of less than one
year is not annualized.
(b) Commencement of offering of Class Z shares.
(c) Figure is actual and not rounded to nearest thousand.
(d) Annualized.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 15 -----
<PAGE>
PRUDENTIAL GOVERNMENT SECURITIES TRUST
FINANCIAL HIGHLIGHTS SHORT-INTERMEDIATE TERM SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended November 30,
--------------------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- ----------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning of
year........................ $ 9.74 $ 9.17 $ 10.06 $ 9.97 $ 10.00
-------- -------- -------- -------- ----------
INCOME FROM INVESTMENT
OPERATIONS
Net investment income.......... 0.51 0.56 0.64 0.69 0.75
Net realized and unrealized
gain (loss) on investment
transactions................ (0.01) 0.55 (0.89) 0.11 (0.03)
-------- -------- -------- -------- ----------
Total from investment
operations............... 0.50 1.11 (0.25) 0.80 0.72
-------- -------- -------- -------- ----------
LESS DISTRIBUTIONS
Dividends from net investment
income...................... (0.54) (0.54) (0.52) (0.69) (0.75)
Tax return of capital
distribution................ -- -- (0.12) (0.02) --
-------- -------- -------- -------- ----------
Total distributions............ (0.54) (0.54) (0.64) (0.71) (0.75)
-------- -------- -------- -------- ----------
Net asset value, end of year... $ 9.70 $ 9.74 $ 9.17 $ 10.06 $ 9.97
-------- -------- -------- -------- ----------
-------- -------- -------- -------- ----------
TOTAL RETURN(a):............... 5.34% 12.37% (2.58)% 8.26% 7.40%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year
(000)....................... $185,235 $212,996 $241,980 $347,944 $ 303,451
Average net assets (000)....... $186,567 $209,521 $307,382 $321,538 $ 294,388
Ratios to average net assets:
Expenses, including
distribution fees........ 1.01% 0.95% 0.84% 0.80% 0.79%
Expenses, excluding
distribution fees........ 0.79% 0.75% 0.63% 0.59% 0.58%
Net investment income....... 5.99% 5.82% 5.48% 6.80% 7.47%
Portfolio turnover rate........ 132% 217% 431% 44% 60%
</TABLE>
- ---------------
(a) 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.
- --------------------------------------------------------------------------------
16 See Notes to Financial Statements.
<PAGE>
PRUDENTIAL GOVERNMENT SECURITIES TRUST
FINANCIAL HIGHLIGHTS U.S. TREASURY MONEY MARKET SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended November 30,
------------------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning of
year......................... $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
Net investment income.......... 0.046 0.050 0.033 0.025 0.034
Dividends from net investment
income....................... (0.046) (0.050) (0.033) (0.025) (0.034)
-------- -------- -------- -------- --------
Net asset value, end of year... $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
TOTAL RETURN(a)................ 4.75% 5.08% 3.31% 2.54% 3.46%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year
(000)........................ $305,330 $339,334 $293,984 $284,978 $233,600
Average net assets (000)....... $393,060 $345,369 $308,454 $273,313 $263,459
Ratios to average net assets:
Expenses, including
distribution fees........ 0.63% 0.62% 0.62% 0.66% 0.66%
Expenses, excluding
distribution fees........ 0.51% 0.50% 0.50% 0.53% 0.54%
Net investment income....... 4.57% 5.01% 3.21% 2.49% 3.29%
</TABLE>
- ---------------
(a) Total return is calculated assuming a purchase of shares on the first day
and a sale on the last day of each year reported and includes reinvestment
of dividends and distributions.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 17 -----
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS PRUDENTIAL GOVERNMENT SECURITIES TRUST
- --------------------------------------------------------------------------------
To the Shareholders and Trustees of
Prudential Government Securities Trust:
In our opinion, the accompanying statement of assets and liabilities, including
the portfolios 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 Money Market Series,
Short-Intermediate Term Series and U.S. Treasury Money Market Series
(constituting Prudential Government Securities Trust, hereafter referred to as
the "Fund") at November 30, 1996, the results of each of their operations for
the year then ended, the changes in each of their net assets for each of the two
years in the period then ended and the financial highlights for each of the five
years in the period then ended, in conformity with generally accepted accounting
principles. These financial statements and financial highlights (hereafter
referred to as "financial statements") are the responsibility of the Fund's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these financial
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of securities at November 30, 1996 by correspondence with the
custodian and brokers, provide a reasonable basis for the opinion expressed
above.
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York
January 24, 1997
- --------------------------------------------------------------------------------
18
<PAGE>
IMPORTANT NOTICE FOR
CERTAIN SHAREHOLDERS PRUDENTIAL GOVERNMENT SECURITIES TRUST
- --------------------------------------------------------------------------------
We are required by New York, California, 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 states' taxing authorities. We
are pleased to report that 25% of the dividends paid by the Money Market
Series*, 39% of the dividends paid by the Short-Intermediate Term Series* and
100% of the dividends paid by the U.S. Treasury Money Market Series qualify for
such deduction.
Shortly after the close of the calendar year ended December 31, 1996, you will
be advised as to the federal tax status of the dividends you received in
calendar 1996.
For more detailed information regarding your state and local taxes, you should
contact your tax adviser or the state/local taxing authorities.
* Due to certain minimum portfolio holding requirements in California,
Connecticut, New Jersey and New York, residents of those states will not be able
to exclude interest on federal obligations from state and local tax.
- --------------------------------------------------------------------------------
19 -----
<PAGE>
SUPPLEMENTAL PROXY INFORMATION PRUDENTIAL GOVERNMENT SECURITIES TRUST
- --------------------------------------------------------------------------------
The Annual Meeting of Shareholders of the Prudential Government Securities
Trust was held on October 30, 1996 at the offices of Prudential Securities
Incorporated, One Seaport Plaza, New York, New York. The meeting was held for
the following purposes:
<TABLE>
<S> <C>
(1) To elect the following twelve Trustees:
- Edward D. Beach
- Eugene C. Dorsey
- Delayne Dedrick Gold
- Robert F. Gunia
- Harry A. Jacobs, Jr.
- Donald D. Lennox
- Mendel A. Melzer
- Thomas T. Mooney
- Thomas H. O'Brien
- Richard A. Redeker
- Nancy H. Teeters
- Louis A. Weil, III
(2) To ratify the selection by the Trustees of Price Waterhouse LLP as independent accountants
for the fiscal year ending November 30, 1996.
(3) To consider and act upon any other business as may properly come before the Annual Meeting
or any adjournment thereof.
</TABLE>
The results of the proxy solicitation on the above matters were as follows:
<TABLE>
<CAPTION>
Trustee/Auditor Votes for Votes against Votes withheld Abstentions
--------------------- ------------ -------------- --------------- ------------
<S> <C> <C> <C> <C> <C>
(1) Edward D. Beach 819,618,690 -- 10,910,309 --
Eugene C. Dorsey 819,857,069 -- 10,671,930 --
Delayne Dedrick Gold 819,850,177 -- 10,678,822 --
Robert F. Gunia 820,076,407 -- 10,452,592 --
Harry A. Jacobs, Jr. 819,644,345 -- 10,884,654 --
Donald D. Lennox 819,099,608 -- 11,429,391 --
Mendel A. Melzer 819,898,513 -- 10,630,486 --
Thomas T. Mooney 820,018,906 -- 10,510,093 --
Thomas H. O'Brien 819,616,848 -- 10,912,151 --
Richard A. Redeker 819,918,621 -- 10,610,378 --
Nancy H. Teeters 819,997,034 -- 10,531,965 --
Louis A. Weil, III 819,872,026 -- 10,656,973 --
(2) Price Waterhouse LLP 818,409,971 3,492,806 -- 8,626,222
(3) There was no other business voted upon at the Annual Meeting of Shareholders.
</TABLE>
- --------------------------------------------------------------------------------
20 -----
<PAGE>
Comparing A $10,000 Investment.
Prudential Government Securities Trust:
Short-Intermediate Term Series vs. the Lehman
Brothers Intermediate Gov't Bond Index.
// Prudential Gov't Sec Trust: Short-Intermediate Term Series
- - Lehman Bros. Inter. Gov't Bond Index
Average Annual
Total Returns
Without Sales Load
8.6% Since Inception
6.8% for 10 Years
6.0% for 5 Years
5.3% for 1 Year
Best Year: 1986 -- 13.5%
(CHART)
Worst Year: 1994 -- (-2.5%)
(GRAPH)
11-30-86 $10,000
11-30-96 $12,011 Lehman Bros. Inter-Gov't Bond Index
$19,350 Prudential Gov't Sec. Trust:
Short-Intermediate Term Series
Past performance is not indicative of future results. Investment return and
principal value will fluctuate so an investor's shares, when redeemed, may be
worth more or less than their original cost. The chart above the graph is
designed to give you an idea how much the Series' returns can fluctuate from
year to year by measuring the best and worst years in terms of total annual
return since inception of the Series.
This graph is furnished to you in accordance with SEC regulations. It compares
a $10,000 investment in the Prudential Government Securities Trust:
Short-Intermediate Term Series with a similar investment in the Lehman Brothers
Intermediate Government Bond Index by portraying the account value for 10
years, and subsequent account value at the end of this reporting period
(November 30), as measured on a quarterly basis, beginning in 1986. For
purposes of the graph, and unless otherwise indicated, in the accompanying
table it has been assumed all recurring fees (including management fees) were
deducted; and all dividends and distributions were reinvested.
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 10 years. The index is unmanaged and includes the reinvestment of all
dividends, but does not reflect the payment of transactions costs and advisory
fees associated with an investment in the Series. The securities that comprise
the Index may differ substantially from the securities in the Series'
portfolio. The Index is not the only one that may be used to characterize
performance of short-intermediate U.S. government bond funds and other indexes
may portray different comparative performance.
<PAGE>
Prudential Mutual Funds
Gateway Center Three
100 Mulberry Street
Newark, NJ 07102-4077
(800) 225-1852
http://www.prudential.com
(LOGO)
Trustees
Edward D. Beach
Eugene C. Dorsey
Delayne Dedrick Gold
Robert F. Gunia
Harry A. Jacobs, Jr.
Donald D. Lennox
Mendel A. Melzer
Thomas T. Mooney
Thomas H. O'Brien
Richard A. Redeker
Nancy H. Teeters
Louis A. Weil, III
Officers
Richard A. Redeker, President
Robert F. Gunia, Vice President
Eugene S. Stark, Treasurer
Stephen M. Ungerman, Assistant Treasurer
S. Jane Rose, Secretary
Deborah Docs, Assistant Secretary
Manager
Prudential Mutual Fund Management LLC
Gateway Center Three
100 Mulberry Street
Newark, NJ 07102-4077
Investment Adviser
The Prudential Investment Corporation
Prudential Plaza
Newark, NJ 07101
Distributor
Prudential Securities Incorporated
One Seaport Plaza
New York, NY 10292
Custodian
State Street Bank and Trust Company
One Heritage Drive
North Quincy, MA 02171
Transfer Agent
Prudential Mutual Fund Services LLC
P.O. Box 15005
New Brunswick, NJ 08906
Independent Auditors
Price Waterhouse LLP
1177 Avenue of the Americas
New York, NY 10036
Legal Counsel
Sullivan & Cromwell
125 Broad Street
New York, NY 10004
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.
744342106 MF100E
744342205 Cat. #444437V
744342304
744342106
<PAGE>
(ICON)
Prudential
Government
Securities
Trust
- ---------------------------------
Money Market Series
Short-Intermediate Term Series
U.S. Treasury Money Market Series
ANNUAL
REPORT
Nov. 30, 1996
(LOGO)
<PAGE>
PORTFOLIO MANAGERS' REPORT
U.S. interest rates fluctuated over the past six months as
investors first worried that a vigorous economy could spark
higher inflation then cheered when signs of moderating economic
growth and subdued inflation surfaced later in the period.
It all started because the U.S. economy expanded at its fastest
pace in more than nine years during the first quarter of 1997.
By mid-February, investors began to push up interest rates
anticipating that the Federal Reserve would increase the
overnight bank lending rate, which it did by a quarter percentage
point to 5.5% on March 25, 1997. Yields on money market funds edged
higher only to slide in April and May because government reports
pointed to slower economic growth and benign inflation in the
second quarter. Not surprisingly, the central bank voted to
leave short-term interest rates unchanged when monetary
policymakers met again in May.
Short- to intermediate-term bond prices were also whipsawed
over the past six months as inflation concerns waxed and waned.
Inflation is the archenemy of the bond market because it erodes
the value of the fixed stream of interest payments and principal
received by bondholders. As inflation wary investors pushed up
interest rates, prices on older bonds fell because newly issued
ones would generally carry higher coupons. Prices began to
recover when interest rates tumbled in late April. Needless
to say, predicting the direction of interest rates proved
very difficult so we refrained from doing so. Instead, we
kept the Short-Intermediate Term Series' duration (a measure
of sensitivity to interest rate changes) in line with our
competition.
MONEY MARKET SERIES
The Money Market Series' seven-day current yield was 4.82% on
May 27, 1997 compared to 4.84% for the average U.S. government
money market fund tracked by IBC Financial Data. We performed
competitively because we sold Treasurys and purchased securities
issued by government agencies in order to lock in higher yields
as interest rates declined in April and May.
U.S. TREASURY MONEY
MARKET SERIES
The U.S. Treasury Money Market Series' seven-day current yield
was 4.97% on May 27,1997, well above the 4.73% for comparable
funds as measured by IBC. We took profits on three- and
six-month Treasurys then purchased one-month cash management
bills (CMBs) for their unusually generous yields along with
one-year Treasurys, which increased the Series' weighted
average maturity (WAM) and its yield.
SHORT-INTERMEDIATE
TERM SERIES
The Short-Intermediate Term Series' 30-day yield was 5.82% for
the period ended May 31, 1997 compared to 5.78% for similar
funds tracked by Lipper Analytical Services.
HOW INVESTMENTS COMPARED.
(As of 5/31/97)
(GRAPH)
U.S. General General U.S.
Growth Bond Muni Debt Taxable
Funds Funds Funds Money Funds
12-Month Total Returns 17.72% 9.93% 7.60% 4.79%
20-Year Average Annual
Total Returns 15.47% 9.94% 7.17% 7.68%
SOURCE: LIPPER ANALYTICAL SERVICES. Financial markets change, so
a mutual fund's past performance should never be used to predict
future results. The risks to each of the investments listed above
are different -- we provide 12-month total returns for several
Lipper mutual fund categories to show you that reaching for
higher returns means tolerating more risk. The greater the
risk, the larger the potential reward or loss. In addition,
we've included historical 20-year average annual returns.
These returns assume the reinvestment of dividends.
U.S. GROWTH FUNDS will fluctuate a great deal. Investors have
received higher historical total returns from stocks than from
most other investments. Smaller capitalization stocks offer
greater potential for long-term growth but may be more volatile
than larger capitalization stocks.
GENERAL BOND FUNDS provide more income than stock funds, which
can help smooth out their total returns year by year. But their
prices still fluctuate (sometimes significantly) and their returns
have been historically lower than those of stock funds.
GENERAL MUNICIPAL DEBT FUNDS invest in bonds issued by state
governments, state agencies and/or municipalities. This
investment provides income that is usually exempt from
federal and state income taxes.
MONEY MARKET FUNDS attempt to preserve a constant share
value; they don't fluctuate much in price but, historically,
their returns have been generally among the lowest of the
major investment categories.
<PAGE>
MONEY
MARKET SERIES
The Money Market Series seeks high current income, preservation of
capital and maintenance of liquidity from a portfolio of money
market securities issued or guaranteed by the U.S. government,
its agencies or instrumentalities. There can be no assurance
that the Fund will achieve its investment objective.
<TABLE>
<CAPTION>
PERFORMANCE
AS OF
5/31/97
7-DAY WEIGHTED NET ASSET
CURRENT AVG. MATURITY VALUE TOTAL NET
YIELD* (WAM) (NAV) ASSETS
<S> <C> <C> <C> <C>
MONEY MARKET SERIES 4.82% 52 days $1 $582.9 million
IBC FINANCIAL DATA
MONEY FUND AVERAGE** 4.84 40 days $1 N/A
</TABLE>
* Yields will fluctuate from time to time and past performance
is not indicative of future results.
** This is the average 7-day current yield, WAM and NAV of all
funds in IBC's Money Fund Average/U.S. Government Category for
the week ended May 27, 1997.
An investment in the Series is neither insured nor guaranteed
by the U.S. government and there can be no assurance the Series
will be able to maintain a stable net asset value of $1 per share.
RATE EXPECTATIONS.
We expected the Federal Reserve to embark on a series of
interest rate increases, with the first in March. We also
thought that investors would push interest rates higher in
anticipation of that move. Therefore, we held the bulk of our
assets in securities that matured in one month or less in order
to have funds ready to invest in higher yielding securities as
they became available. We also kept a small amount in nine-month
to one-year securities. At that time, the Series WAM ranged between
43 days to 48 days, which was in line with that of our competition.
After the Federal Reserve increased the overnight bank lending
rate in March, yields on short-term Treasurys continued to rise,
at least initially. Then investors, wary of a major stock market
retreat, began to shift funds into short-term Treasurys
as did foreign central banks. This demand and the fact that
increased tax revenues allowed the U.S. government to issue
fewer Treasury bills began to push short-term Treasury prices
higher and yields lower. On top of that, data showing slower
economic growth and tame inflation put further downward pressure
on interest rates in late April and May. Realizing the Federal
Reserve was not poised to raise the interest rates again, we
sold Treasurys and bought federal agency securities to lock
in higher yields as interest rates tumbled. This also helped
lengthen the Series' WAM to as much as 62 days in May, which
was longer than that of our competition.
U.S. TREASURY
MONEY MARKET
SERIES
The U.S. Treasury Money Market Series seeks high current income
consistent with the preservation of capital and maintenance of
liquidity from a portfolio of U.S. Treasury obligations with
maturities of 13 months or less. There can be no assurance
that the Series will achieve its investment objective.
<TABLE>
<CAPTION>
PERFORMANCE
AS OF 5/31/97
7-DAY WEIGHTED NET ASSET
CURRENT AVG. MATURITY VALUE TOTAL NET
YIELD* (WAM) (NAV) ASSETS
<S> <C> <C> <C> <C>
U.S. TREASURY SERIES 4.97% 59 days $1 $305 million
IBC FINANCIAL DATA
100% U.S. TREASURY
MONEY FUND AVERAGE** 4.73 59 days $1 N/A
</TABLE>
* Yields will fluctuate from time to time and past performance is
not indicative of future results.
** This is the average 7-day current yield, WAM and NAV of all
funds in the IBC 100% U.S. Treasury Money Fund Average for the
week ended May 27, 1997. An investment in the Series is neither
insured nor guaranteed by the U.S. government and there can
be no assurance the Series will be able to maintain a stable
net asset value of $1 per share.
BARGAIN HUNTING
Although the U.S. government sold fewer Treasury bills, it
significantly increased the amount of newly issued cash
management bills from February through May in order to cope
with temporary cash shortages. We took profits on three- and six-month
Treasurys and purchased one-month cash management bills, which provided
higher yields. We also bought one-year Treasurys for their attractive
yield levels. This worked well because we extended the Series' WAM to
as much as 67 days in May as interest rates continued to decline.
In early April, the WAM was considerably shorter at about 48 days
as we believed another interest rate increase was imminent.
<PAGE>
SHORT-INTERMEDIATE
TERM SERIES
The Short-Intermediate Term Series invests at least 65% of assets
in securities issued or guaranteed by the U.S. government, its
agencies or instrumentalities. As much as 35% of Series' assets
may be invested in mortgage backed or asset backed
securities as well as corporate debt. The dollar-weighted average
maturity of the Series will be more than two, but less than five
years. There can be no assurance that the Series will achieve
its investment objective.
<TABLE>
<CAPTION>
SIX ONE FIVE TEN SINCE
MONTHS YEAR YEARS YEARS INCEPTION**
<C> <S> <C> <C> <C> <C> <C>
CUMULATIVE CLASS B 1.5% 6.8% 31.6% 99.9% 228.0%
TOTAL CLASS Z N/A N/A N/A N/A 1.1%
RETURNS* LIPPER SHORT/INTERMEDIATE
AS OF U.S. GOVERNMENT
5/31/97 FUND AVERAGE*** 1.4 6.4 30.4 103.1 231.3
</TABLE>
<TABLE>
<CAPTION>
ONE FIVE TEN SINCE
YEAR YEARS YEARS INCEPTION**
<C> <S> <C> <C> <C> <C>
AVERAGE
ANNUAL TOTAL SHORT-INTERMEDIATE
RETURNS* TERM SERIES 6.8% 5.6% 7.2% 8.4%
AS OF
6/30/97
</TABLE>
Past performance is not indicative of future results. Investment
return and principal will fluctuate so that an investor's shares,
when redeemed, may be worth more less than their original cost.
* Source: Prudential Investments Fund Management and Lipper
Analytical Services. Shares of this Series are sold without
an initial or contingent deferred sales charge.
** Inception date: Class A, 9/22/92; Class Z, 2/25/97.
*** These are the average returns of all funds in the Short-Term
U.S. Government Bond Fund category.
<TABLE>
DIVIDENDS AND YIELDS
AS OF 5/31/97
<CAPTION>
TOTAL DIVIDENDS 30-DAY
PAID FOR SIX MOS. SEC YIELD
<S> <C> <C>
Class B $0.255 5.82%
Class Z $0.15 7.06%
</TABLE>
YIELD, YIELD AND YIELD.
The U.S. economy sped along at a 5.9% annualized rate in the
first quarter of 1997 as a solid jobs market, mild winter, an
early Easter and an automobile price war encouraged consumer
spending. Investors assumed the Federal Reserve would have to
tighten credit in March to keep the economy from overheating.
Yet once the central bankers moved, the situation changed rather
abruptly. Gross Domestic Product, a measure of the value of all
goods and services produced by the country, is now
expected to have expanded much more slowly in the second quarter
than in the first. Amid such rapidly changing outlooks,
interest rates were on a roller coaster. Yet the Short-Intermediate
Series prospered during this period by seeking securities
that offered higher yields than Treasurys.
Although interest rates were unsettled, U.S. Treasury prices
remained in a trading range with the yield on the average five-year
note swinging a full percentage point between 5.8% and 6.8%. Under
these market conditions, investors typically focus on
purchasing securities that offer higher yields than Treasurys.
We stuck with this strategy -- and it worked nicely. We reduced
Treasurys to 19% of total assets as of May 31, 1997 from 28% as
of November 30, 1996. Specifically, we sold U.S.
government debt and purchased securities backed by a variety of
assets such as farm equipment loans and home equity loans. On
the other hand, the amount of asset backed securities we owned
rose to 25% of total assets as of May 31, 1997 from 13%
as of November 30, 1996.
Careful credit evaluation to identify and purchase undervalued
securities continued to benefit the Fund. For example, we had
bought a security backed by loans on corporate credit cards that
our analysis indicated was attractively priced. We sold
them in 1997 to buy securities backed by automobile leases that
our analysis showed were priced too cheaply.
Mortgage backed securities, which are issued by government-sponsored
corporations such as Fannie Mae or private companies, also benefit
when Treasury prices trade in a predictable range. Investors are
less concerned that mortgage backed securities
could be paid off early because consumers are less likely
to refinance the underlying home loans if interest rates do
not fall significantly. Similarly, investors worry less about
holding mortgage backed securities for longer than expected because
there is less chance that consumers will indefinitely postpone
refinancing since interest rates will only fall so far. With
market conditions nearly ideal, mortgage backed securities,
which also offer higher yields than Treasurys, performed well.
1
<PAGE>
LOOKING
AHEAD.
We don't like predicting Federal Reserve Board policy, although
with moderating economic growth and inflation remaining benign,
we see little reason for additional rate moves by the central
bank over the near term. However, 1997 has been a year of
increased volatility and we must remain vigilant. Accordingly,
our money market funds and bond fund will continue their present
strategies while retaining their flexibility to respond to changing
market conditions.
CO-MANAGER
NAMED.
Sharon Fera was recently named as co-manager of the
Short-Intermediate Term Series. She is responsible for
day-to-day Fund operations while Barbara Kenworthy provides
overall portfolio direction. Sharon most recently was a
fixed-income portfolio manager at Aetna Life & Casualty
and brings more than 10 years of fixed-income investment
experience to your Fund.
(PICTURE)
/s/ Bernard D. Whitsett, II
Bernard D. Whitsett, II
Portfolio Manager
Money Market Series
& U.S. Treasury Money
Market Series
(PICTURE)
/s/ Barbara L. Kenworthy
Barbara L. Kenworthy
Portfolio Manager
Short-Intermediate Term Series
(PICTURE)
/s/ Sharon A. Fera
Sharon A. Fera
Portfolio Manager
Short-Intermediate Term Series
2
<PAGE>
PRESIDENT'S LETTER JULY 22, 1997
(PICTURE)
DEAR SHAREHOLDER:
With the midpoint of 1997 behind us, I'm pleased to report that
the recent news from the financial markets has been decidedly
upbeat. The Dow Jones Industrial Average has gained more than
20% through the end of June, while lower long-term interest
rates have made bonds an attractive investment.
This stands in contrast to April when the Dow fell 10% from a
record high on fears of higher interest rates and surging
inflation. Interest rates have since fallen as the economy
slowed and the Dow has reached several new highs.
The market swings we've seen this year illustrate the importance
of "staying the course" to your financial goal. We realize that
maintaining investment discipline when faced with market uncertainty
isn't easy. Here are some thoughts that may help:
- -- KEEP YOUR EXPECTATIONS REALISTIC. The best investors know
that financial markets rise and fall -- and so too, will the
value of their investments. Over time, however, stocks have
been shown to produce very attractive returns that were well ahead
of inflation. And where income is the primary goal, bonds have
also provided attractive returns.
- -- REMEMBER YOUR TIME HORIZON. If your investment goals are
long term (several years or more), so should your time horizon.
During this period, it's not unusual for stocks and bonds to
experience several periods of market uncertainty.
- -- WE'RE ON YOUR SIDE. Your Prudential Securities Financial
Advisor or Pruco Securities Registered Representative can help
you understand what's happening in the financial markets. They
can assist you in making informed decisions based upon a
thorough knowledge of your financial needs and long-term goals.
Call him or her today.
Thank you for your continued confidence in Prudential mutual funds.
We'll do everything we can to keep you informed and to earn your trust.
Sincerely,
/s/ Brian M. Storms
Brian M. Storms
President, Prudential Mutual Funds & Annuities
3
<PAGE>
PORTFOLIO OF INVESTMENTS AS PRUDENTIAL GOVERNMENT SECURITIES TRUST
OF MAY 31, 1997 (UNAUDITED) MONEY MARKET SERIES
- ------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
(000) DESCRIPTION VALUE (NOTE 1)
<C> <S> <C>
------------------------------------------------------------
FEDERAL FARM CREDIT BANK--2.0%
$3,500 5.60%, 6/3/97 $ 3,500,045
5,000 5.55%, 8/1/97 4,998,157
2,850 5.60%, 11/3/97 2,848,960
------------
11,347,162
- ------------------------------------------------------------
FEDERAL HOME LOAN BANK--1.8%
3,255 5.19%, 7/23/97 3,230,598
4,400 5.99%, 2/9/98 4,406,197
2,710 6.04%, 5/6/98 2,710,814
------------
10,347,609
- ------------------------------------------------------------
FEDERAL HOME LOAN MORTGAGE CORPORATION--7.9%
44,000 5.36%, 6/2/97 43,993,400
1,080 5.28%, 6/4/97 1,079,525
------------
45,072,925
- ------------------------------------------------------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION--39.2%
1,000 6.20%, 6/17/97 1,000,174
7,220 5.19%, 7/28/97 7,160,670
49,000 5.36%, 8/1/97, F.R.N. 48,995,186
28,395 5.54%, 8/5/97 28,110,971
9,805 5.36%, 8/22/97, F.R.N. 9,803,711
4,965 5.55%, 8/22/97 4,902,234
5,000 5.64%, 9/3/97 4,994,437
20,800 9.55%, 9/10/97 21,005,865
1,520 5.57%, 10/9/97 1,489,427
1,100 7.09%, 10/14/97 1,105,938
29,425 5.36%, 11/14/97, F.R.N. 29,418,309
6,000 5.6325%, 11/19/97, F.R.N. 5,997,898
30,000 5.5275%, 12/3/97, F.R.N. 29,989,463
30,000 5.89%, 5/21/98 29,968,677
------------
223,942,960
- ------------------------------------------------------------
STUDENT LOAN MARKETING ASSOCIATION--2.6%
$15,000 5.615%, 10/29/97 $ 14,998,404
- ------------------------------------------------------------
UNITED STATES TREASURY NOTES--6.4%
11,010 7.25%, 2/15/98 11,122,137
6,000 6.125%, 3/31/98 6,016,805
19,000 6.125%, 5/15/98 19,040,289
------------
36,179,231
- ------------------------------------------------------------
REPURCHASE AGREEMENTS(a)--36.5%
23,547 Bear Stearns & Co., 5.53%, dated
5/29/97, due 6/5/97 in the amount
of $23,572,320 (cost $23,547,000;
the value of the collateral
including accrued interest is
$24,255,342) 23,547,000
7,827 Bear Stearns & Co., 5.62%, dated
5/30/97, due 6/3/97 in the amount
of $7,831,888 (cost $7,827,000;
the value of the collateral
including accrued interest is
$8,039,788) 7,827,000
36,086 Deutsche Morgan Grenfell, 5.47%,
dated 5/27/97, due 6/3/97 in the
amount of $36,124,381 (cost
$36,000,000; the value of the
collateral including accrued
interest is $36,807,720) 36,086,000
23,000 Goldman, Sachs & Co., 5.57%, dated
5/9/97, due 6/9/97 in the amount
of $23,110,317 (cost $23,000,000;
the value of the collateral
including accrued interest is
$23,460,001) 23,000,000
36,000 Merrill Lynch, Pierce, Fenner &
Smith Inc., 5.46%, dated 5/27/97,
due 6/3/97 in the amount of
$36,038,220 (cost $36,000,000;
the value of the collateral
including accrued interest is
$36,723,505) 36,000,000
</TABLE>
- --------------------------------------------------------------------------------
-----
See Notes to Financial Statements. 4
<PAGE>
PRUDENTIAL GOVERNMENT SECURITIES TRUST
MONEY MARKET SERIES
PORTFOLIO OF INVESTMENTS AS OF MAY 31, 1997 (UNAUDITED)
- ------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
(000) DESCRIPTION VALUE (NOTE 1)
<C> <S> <C>
------------------------------------------------------------
REPURCHASE AGREEMENTS(a) (CONT'D.)
$48,122 Morgan Stanley & Co., 5.49%, dated
5/28/97, due 6/4/97 in the amount
of $48,173,370 (cost $48,122,000;
the value of the collateral
including accrued interest is
$49,433,682) $ 48,122,000
8,000 Morgan Stanley & Co., 5.53%, dated
5/29/97, due 6/5/97 in the amount
of $8,008,602 (cost $8,000,000;
the value of the collateral
including accrued interest is
$8,232,450) 8,000,000
26,000 Smith Barney Inc., 5.57%, dated
4/30/97, due 6/4/97 in the amount
of $26,140,797 (cost $26,000,000;
the value of the collateral
including accrued interest is
$26,520,000) 26,000,000
------------
208,582,000
- ------------------------------------------------------------
TOTAL INVESTMENTS(a)--96.4%
(amortized cost $550,470,291 (b)) 550,470,291
Other assets in excess of
liabilities--3.6% 20,618,433
------------
Net Assets--100% $571,088,724
------------
------------
</TABLE>
- ---------------
F.R.N.--Floating Rate Note. The interest rate reflected is the rate in effect at
May 31, 1997.
(a) Repurchase Agreements are collateralized by U.S. Treasury or Federal agency
obligations.
(b) Federal income tax basis of portfolio securities is the same as for
financial reporting purposes.
- --------------------------------------------------------------------------------
-----
See Notes to Financial Statements. 5
<PAGE>
PORTFOLIO OF INVESTMENTS AS PRUDENTIAL GOVERNMENT SECURITIES TRUST
OF MAY 31, 1997 (UNAUDITED) SHORT-INTERMEDIATE TERM SERIES
- ------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
(000) DESCRIPTION VALUE (NOTE 1)
<C> <S> <C>
------------------------------------------------------------
LONG-TERM INVESTMENTS--93.5%
ASSET-BACKED--24.6%
$5,000(a) Student Loan Market Association
5.73%, 10/25/05 $ 5,012,500
10,000(a) Ford Credit Auto Lease Trust
5.80%, 5/15/99 9,956,250
8,500 GMAC Grantor Trust
6.50%, 4/15/02 8,517,266
3,000 Case Equipment Loan Trust
6.70%, 3/15/04 2,998,125
5,000 Team Fleet Financing Corporation
7.35%, 5/15/03 5,055,469
10,000 Green Tree Financial Corporation
7.65%, 4/15/27 10,006,250
------------
41,545,860
- ------------------------------------------------------------
COLLATERALIZED MORTGAGE OBLIGATIONS--4.1%
1,843 Resolution Trust Corporation
6.78%, 12/25/20, CMO, Series
1992 1,847,765
5,000 First Union-Lehman Brothers Com.
Mtg Trust
7.30%, 4/18/29, CMO, Series 1997 5,051,563
5,000 ICI Funding Corporation
7.60%, 11/25/01, CMO, Series
1997 5,008,594
------------
11,907,922
- ------------------------------------------------------------
CORPORATE OBLIGATIONS--4.4%
2,500 Merck and Company
5.76%, 5/3/37 2,510,000
- ------------------------------------------------------------
FEDERAL HOME LOAN MORTGAGE CORPORATION--12.3%
15,000(a) 6.45%, 6/4/99 14,983,650
5,554 7.835%, 8/1/24, ARMS 5,793,397
------------
20,777,047
- ------------------------------------------------------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION--11.1%
$4,238 6.765%, 1/1/07 $ 4,123,921
14,349 8.00%, 5/1/25 - 12/01/99 14,655,645
------------
18,779,566
- ------------------------------------------------------------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION--18.2%
14,079 7.50%, 10/15/25 - 1/15/26 14,034,677
9,082 8.00%, 6/15/23 - 8/15/25 9,339,162
6,953 9.00%, 6/15/98 - 9/15/09 7,337,446
------------
30,711,285
- ------------------------------------------------------------
UNITED STATES TREASURY NOTES--18.8%
2,250 6.625%, 4/30/02 2,259,832
3,000 6.625%, 5/15/07 2,991,090
6,000(a) 7.375%, 11/15/97 6,045,000
20,000(a) 8.25%, 7/15/98 20,493,800
------------
31,789,722
------------
Total long-term investments
(cost $157,459,321) 158,021,402
------------
SHORT-TERM INVESTMENTS--17.0%
- ------------------------------------------------------------
REPURCHASE AGREEMENT--17.0%
28,843 Joint Repurchase Agreement Account,
5.42%, 6/2/97
(cost $28,843,000; Note 5) 28,843,000
------------
- ------------------------------------------------------------
TOTAL INVESTMENTS--110.5%
(cost $186,324,158; Note 4) 186,864,402
Liabilities in excess of other
assets--(10.5%) (17,808,704)
------------
Net Assets--100% $169,055,698
------------
------------
</TABLE>
- ---------------
(a) Asset segregated for dollar rolls.
ARMS--Adjustable Rate Mortgage Security. The interest rate reflected is the rate
in effect at May 31, 1997.
CMO--Collateralized Mortgage Obligation.
- --------------------------------------------------------------------------------
-----
See Notes to Financial Statements. 6
<PAGE>
PRUDENTIAL GOVERNMENT SECURITIES TRUST
U.S. TREASURY MONEY MARKET SERIES
PORTFOLIO OF INVESTMENTS AS OF MAY 31, 1997 (UNAUDITED)
- ------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
(000) DESCRIPTION VALUE (NOTE 1)
<C> <S> <C>
------------------------------------------------------------
UNITED STATES TREASURY NOTES--63.6%
$37,955 5.625%, 6/30/97 $ 37,983,028
7,782 5.875%, 7/31/97 7,787,068
18,909 8.625%, 8/15/97 19,025,335
67,642 5.625%, 8/31/97 67,686,206
1,155 5.75%, 9/30/97 1,155,416
2,780 5.625%, 10/31/97 2,778,058
10,000 5.375%, 11/30/97 9,988,375
45,005 7.875%, 1/15/98 45,587,359
2,270 5.875%, 4/30/98 2,264,156
------------
194,255,001
- ------------------------------------------------------------
TOTAL INVESTMENTS--63.6%
(amortized cost $194,255,001(a)) 194,255,001
Other assets in excess of
liabilities--36.4% 110,999,127
------------
Net Assets--100% $305,254,128
------------
------------
</TABLE>
- ---------------
(a) Federal income tax basis of portfolio securities is the same as for
financial reporting purposes.
- --------------------------------------------------------------------------------
-----
See Notes to Financial Statements. 7
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES
MAY 31, 1997 (UNAUDITED) PRUDENTIAL GOVERNMENT SECURITIES TRUST
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
U.S.
TREASURY
MONEY SHORT- MONEY
MARKET INTERMEDIATE MARKET
ASSETS SERIES TERM SERIES SERIES
------------ ------------ ------------
<S> <C> <C> <C>
Investments, at value (cost $550,470,291, $186,302,321 and $194,255,001,
respectively)............................................................. $550,470,291 $186,864,402 $194,255,001
Cash........................................................................ 360,835 -- --
Receivable for investments sold............................................. 25,010,270 21,837 249,913,299
Interest receivable......................................................... 2,030,157 1,742,544 9,340,479
Receivable for Series shares sold........................................... 6,977,798 12,599 3,080,726
Deferred expenses and other assets.......................................... 9,687 3,661 5,871
------------ ------------ ------------
Total assets............................................................. 584,859,038 188,645,043 456,595,376
------------ ------------ ------------
LIABILITIES
Bank overdraft.............................................................. -- 561,457 --
Payable for investments purchased........................................... -- 18,400,080 138,339,801
Payable for Series shares reacquired........................................ 12,900,876 174,093 12,492,088
Dividends payable........................................................... 388,498 233,498 235,953
Due to Manager.............................................................. 204,396 57,552 106,252
Due to Distributor.......................................................... 34,339 17,000 18,132
Due to broker - variation margin............................................ -- 11,625 --
Accrued expenses and other liabilities...................................... 242,205 134,040 149,022
------------ ------------ ------------
Total liabilities........................................................ 13,770,314 19,589,345 151,341,248
------------ ------------ ------------
NET ASSETS.................................................................. $571,088,724 $169,055,698 $305,254,128
------------ ------------ ------------
------------ ------------ ------------
Net assets were comprised of:
Shares of beneficial interest, at par ($.01 per share)................... $ 5,710,887 $ 176,207 $ 3,052,541
Paid-in capital in excess of par......................................... 565,377,837 221,514,664 302,201,587
------------ ------------ ------------
571,088,724 221,690,871 305,254,128
Undistributed net investment income...................................... -- 260,512 --
Accumulated net realized losses.......................................... -- (53,443,235) --
Net unrealized appreciation of investments............................... -- 547,550 --
------------ ------------ ------------
Net assets, May 31, 1997.................................................... $571,088,724 $169,055,698 $305,254,128
------------ ------------ ------------
------------ ------------ ------------
Net asset value
Class A:
Net asset value, offering price and redemption price per share
($570,370,089 / 570,370,089 shares of common stock issued and
outstanding).......................................................... $1.00
------------
------------
($305,253,926 / 305,253,926 shares of common stock issued and
outstanding).......................................................... $1.00
------------
------------
Class B:
Net asset value, offering price and redemption price per share
($169,055,497 / 17,620,724 shares of common stock issued and
outstanding).......................................................... $9.59
------------
------------
Class Z:
Net asset value, offering price and redemption price per share
($718,635 / 718,635 shares of common stock issued and outstanding).... $1.00
------------
------------
($200 / 21 shares of common stock issued and outstanding)............. $9.60
------------
------------
($202 / 202 shares of common stock issued and outstanding)............ $1.00
------------
------------
</TABLE>
- --------------------------------------------------------------------------------
-----
See Notes to Financial Statements. 8
<PAGE>
STATEMENT OF OPERATIONS
SIX MONTHS ENDED MAY 31, 1997
(UNAUDITED) PRUDENTIAL GOVERNMENT SECURITIES TRUST
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MONEY SHORT- U.S. TREASURY
MARKET INTERMEDIATE MONEY
NET INVESTMENT INCOME SERIES TERM SERIES MARKET SERIES
<S> <C> <C> <C>
----------- ------------ -------------
Income
Interest................................................................. $16,071,121 $ 5,830,735 $ 11,760,039
----------- ------------ -------------
Expenses
Management fee........................................................... 1,173,989 349,539 893,851
Distribution fee......................................................... 366,441 171,038 279,328
Transfer agent's fees and expenses....................................... 556,000 121,000 70,000
Custodian's fees and expenses............................................ 38,000 48,000 40,000
Registration fees........................................................ 16,000 13,000 25,000
Reports to shareholders.................................................. 58,000 55,000 62,000
Audit fee................................................................ 21,000 18,500 20,000
Trustees' fees........................................................... 6,000 6,000 6,000
Insurance expense........................................................ 7,000 2,500 1,000
Legal fees............................................................... 5,000 24,000 5,000
Miscellaneous............................................................ 3,838 5,017 6,251
----------- ------------ -------------
Total expenses........................................................ 2,251,268 813,594 1,408,430
----------- ------------ -------------
Net investment income....................................................... 13,819,853 5,017,141 10,351,609
----------- ------------ -------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
Net realized gain (loss) on:
Investment transactions.................................................. 62,462 (568,443) 32,852
Financial future contracts............................................... -- (24,277) --
----------- ------------ -------------
62,462 (592,720) 32,852
----------- ------------ -------------
Net change in unrealized depreciation on:
Investment transactions.................................................. -- (1,768,059) --
Financial future contracts............................................... -- (14,531) --
----------- ------------ -------------
-- (1,782,590) --
----------- ------------ -------------
Net gain (loss) on investments.............................................. 62,462 (2,375,310) 32,852
----------- ------------ -------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS........................ $13,882,315 $ 2,641,831 $ 10,384,461
----------- ------------ -------------
----------- ------------ -------------
</TABLE>
- --------------------------------------------------------------------------------
-----
See Notes to Financial Statements. 9
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS
(UNAUDITED) PRUDENTIAL GOVERNMENT SECURITIES TRUST
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHORT- U.S. TREASURY
MONEY MARKET INTERMEDIATE MONEY MARKET
SERIES TERM SERIES SERIES
------------------------------- --------------------------- -------------------------------
SIX MONTHS SIX MONTHS SIX MONTHS
ENDED YEAR ENDED ENDED YEAR ENDED ENDED YEAR ENDED
INCREASE (DECREASE) MAY 31, NOVEMBER 30, MAY 31, NOVEMBER 30, MAY 31, NOVEMBER 30,
IN NET ASSETS 1997 1996 1997 1996 1997 1996
-------------- -------------- ------------ ------------ -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Operations
Net investment income....... $ 13,819,853 $ 27,251,983 $ 5,017,141 $ 11,177,077 $ 10,351,609 $ 17,996,266
Net realized gain (loss) on
investment
transactions............. 62,462 82,865 (592,720) (1,939,815) 32,852 231,117
Net change in unrealized
appreciation/depreciation
of investments........... -- -- (1,782,590) 699,817 -- --
-------------- -------------- ------------ ------------ -------------- --------------
Net increase in net assets
resulting from
operations............... 13,882,315 27,334,848 2,641,831 9,937,079 10,384,461 18,227,383
-------------- -------------- ------------ ------------ -------------- --------------
Dividends and distributions to
shareholders:
Dividends to shareholders... (13,882,315) (27,334,848) (4,669,940) (11,380,459) (10,384,461) (18,227,383)
-------------- -------------- ------------ ------------ -------------- --------------
Series share transactions(a)
Net proceeds from shares
subscribed............... 1,067,159,073 1,688,126,618 4,361,448 38,324,541 2,839,217,624 3,788,052,358
Net asset value of shares
issued to shareholders in
reinvestment of dividends
and distributions........ 13,155,983 26,320,286 3,033,409 7,194,984 9,081,335 16,677,439
Cost of shares reacquired... (1,061,349,075) (1,760,517,744) (21,545,715) (71,837,916) (2,848,374,408) (3,838,734,554)
-------------- -------------- ------------ ------------ -------------- --------------
Net increase (decrease) in
net assets from Series
share transactions....... 18,965,981 (46,070,840) (14,150,858) (26,318,391) (75,449) (34,004,757)
-------------- -------------- ------------ ------------ -------------- --------------
Total increase (decrease)...... 18,965,981 (46,070,840) (16,178,967) (27,761,771) (75,449) (34,004,757)
NET ASSETS
Beginning of period............ 552,122,743 598,193,583 185,234,665 212,996,436 305,329,577 339,334,334
-------------- -------------- ------------ ------------ -------------- --------------
End of period.................. $ 571,088,724 $ 552,122,743 $169,055,698 $185,234,665 $ 305,254,128 $ 305,329,577
-------------- -------------- ------------ ------------ -------------- --------------
-------------- -------------- ------------ ------------ -------------- --------------
</TABLE>
- ---------------
(a) At $1.00 per share for the Money Market Series and the U.S. Treasury Money
Market Series.
- --------------------------------------------------------------------------------
-----
See Notes to Financial Statements. 10
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED) PRUDENTIAL GOVERNMENT SECURITIES TRUST
- --------------------------------------------------------------------------------
Prudential Government Securities Trust (the "Fund") is registered under the
Investment Company Act of 1940 as a diversified, open-end management investment
company. The Fund consists of three series--the Money Market Series, the
Short-Intermediate Term Series and the U.S. Treasury Money Market Series; the
monies of each series are invested in separate, independently managed
portfolios.
- ------------------------------------------------------------
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies followed by the
Fund in the preparation of its financial statements.
Securities Valuations: The Money Market Series and U.S. Treasury Money Market
Series value portfolio securities at amortized cost, which approximates market
value. The amortized cost method of valuation involves valuing a security at its
cost on the date of purchase and thereafter assuming a constant amortization to
maturity of any discount or premium.
For the Short-Intermediate Term Series, the Trustees have authorized the use of
an independent pricing service to determine valuations. The pricing service
considers such factors as security prices, yields, maturities, call features,
ratings and developments relating to specific securities in arriving at
securities valuations. When market quotations are not readily available, a
security is valued by appraisal at its fair value as determined in good faith
under procedures established under the general supervision and responsibility of
the Trustees. Short-term securities which mature in more than 60 days are valued
at current market quotations. Short-term securities which mature in 60 days or
less are valued at amortized cost.
In connection with transactions in repurchase agreements, the Fund's custodian
or designated subcustodians, as the case may be under triparty repurchase
agreements, takes possession of the underlying collateral securities, the value
of which exceeds the principal amount of the repurchase transaction, including
accrued interest. 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.
Securities Transactions and Investment Income: Securities transactions are
recorded on the trade date. Realized gains and losses on sales of portfolio
securities are calculated on the identified cost basis. Interest income is
recorded on the accrual basis. The Fund amortizes discounts and premiums on
purchases of portfolio securities as adjustments to income.
Dollar Rolls: The Short-Intermediate Term Series enters into dollar roll
transactions in which the Series sells 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 Short-Intermediate Term Series forgoes
principal and interest paid on the securities. The Series 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 sale proceeds
and the lower repurchase price is taken into income. The Short-Intermediate Term
Series maintains a segregated account, the dollar value of which is equal to its
obligations in respect of dollar rolls. There were no dollar rolls outstanding
as of May 31, 1997.
Federal Income Taxes: For federal income tax purposes, each series of the Fund
is treated as a separate taxable entity. It is each Series' 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.
Dividends and Distributions: The Money Market Series and U.S. Treasury Money
Market Series declare daily dividends from net investment income and net
short-term capital gains and losses. Dividends are paid monthly.
The Short-Intermediate Term Series declares dividends from net investment income
daily; payment of dividends is made monthly. Distributions of net capital gains,
if any, are made annually.
Income distributions and capital gain distributions are determined in accordance
with income tax regulations which may differ from generally accepted accounting
principles.
- ------------------------------------------------------------
NOTE 2. AGREEMENTS
The Fund has a management agreement with Prudential Investments Fund Management
LLC ("PMF"). Pursuant to this agreement, PMF has responsibility for all
investment advisory services and supervises the subadviser's performance of such
services. PMF has entered into a subadvisory agreement with The Prudential
Investment Corporation ("PIC"); PIC furnishes investment advisory services in
connection with the management of the Fund. PMF pays for the cost of the
subadviser's services, the compensation of officers of the Fund, occupancy and
certain clerical and bookkeeping costs of the Fund. The Fund bears all other
costs and expenses.
The management fee paid to PMF is computed daily and payable monthly at an
annual rate of .40 of 1% of the average daily net assets of the
Short-Intermediate Term Series and the U.S. Treasury Money Market Series. With
respect to the Money Market Series, the management fee is payable as follows:
.40 of 1% of average daily net assets up to $1 billion,
- --------------------------------------------------------------------------------
-----
11
<PAGE>
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) PRUDENTIAL GOVERNMENT SECURITIES TRUST
- --------------------------------------------------------------------------------
.375 of 1% of average daily net assets between $1 billion and $1.5 billion and
.35 of 1% in excess of $1.5 billion.
The Fund has a distribution agreement with Prudential Securities Incorporated
("PSI"), which acts as the distributor of the shares of the Money Market Series
and the U.S. Treasury Money Market Series. The Fund compensates the distributors
for distributing and servicing each of the Series' shares, pursuant to plans of
distribution, regardless of expenses actually incurred by them. The distribution
fees are accrued daily and payable monthly at an annual rate of .125% of each of
the Series' average daily net assets. The distributors pay various
broker-dealers for account servicing fees and for the expenses incurred by such
broker-dealers.
The Fund also compensates PSI for its expenses as distributor of the
Short-Intermediate Term Series. The Short-Intermediate Term Series entered into
a distribution agreement and a plan of distribution pursuant to which it pays
PSI a fee, accrued daily and payable monthly, at an annual rate of .25 of 1% of
the lesser of (a) the aggregate sales of shares issued (not including
reinvestment of dividends and distributions) on or after July 1, 1985 (the
effective date of the plan) less the aggregate net asset value of any such
shares redeemed, or (b) the average net asset value of the shares issued after
the effective date of the plan. Distribution expenses include commission credits
to PSI branch offices for payments of commissions and account servicing fees to
financial advisers and an allocation on account of overhead and other
distribution-related expenses, the cost of printing and mailing prospectuses to
potential investors and of advertising incurred in connection with the
distribution of Series shares. In addition, PSI pays other broker-dealers,
including Pruco, an affiliated broker-dealer, for account servicing fees and
other expenses incurred by such broker-dealers in distributing these shares.
PMFD is a wholly-owned subsidiary of PMF; PSI, PMF and PIC are (indirect)
wholly-owned subsidiaries of The Prudential Insurance Company of America.
The Fund, along with other affiliated registered investment companies (the
"Funds"), entered into a credit agreement (the "Agreement") on December 31, 1996
with an unaffiliated lender. The maximum commitment under the Agreement is
$200,000,000. The Agreement expires on December 30, 1997. Interest on any such
borrowings outstanding will be at market rates. The purpose of the Agreement is
to serve as an alternative source of funding for capital share redemptions. The
Fund has not borrowed any amounts pursuant to the Agreement as of December 31,
1996. The Funds pay a commitment fee at an annual rate of .055 of 1% on the
unused portion of the credit facility. The commitment fee is accrued and paid
quarterly on a pro-rata basis by the Funds.
NOTE 3. OTHER TRANSACTIONS WITH AFFILIATES
Prudential Mutual Fund Services, Inc. ("PMFS"), a wholly-owned subsidiary of
PMF, serves as the Fund's transfer agent. During the six months ended May 31,
1997, the Fund incurred fees of approximately $470,000, $89,000, and $61,000,
respectively, for the Money Market Series, Short-Intermediate Term Series, and
U.S. Treasury Money Market Series. Transfer agent fees and expenses in the
Statement of Operations includes certain out-of-pocket expenses paid to
non-affiliates.
- ------------------------------------------------------------
NOTE 4. PORTFOLIO SECURITIES
Purchases and sales of portfolio securities other than short-term investments,
for the Short-Intermediate Term Series for the six months ended May 31, 1997
were $169,392,048 and $190,152,143, respectively.
On May 31, 1997, the Short-Intermediate Term Series purchased 31 financial
futures contracts on the S&P 500 Index expiring June, 1997. The cost of such
contracts was $3,266,141. The value of such contracts on May 31, 1997 was
$3,251,610, thereby resulting in an unrealized loss of $14,531.
For the Short-Intermediate Term Series, the cost basis of investments for
federal income tax purposes was 186,324,158 and, accordingly, as of May 31,
1997, net unrealized appreciation of investments for federal income tax purposes
was $562,081 (gross unrealized appreciation $768,946; gross unrealized
depreciation--$206,865).
For federal income tax purposes, the Short-Intermediate Term Series has a
capital loss carryforward as of November 30, 1996 of approximately $52,844,000
of which $19,180,000 expires in 1997, $6,864,000 expires in 1998, $4,746,000
expires in 1999, $3,422,000 expires in 2001, $16,699,000 expires in 2002 and
$1,933,000 expires in 2003. Accordingly, no capital gains distribution is
expected to be paid to shareholders until net gains have been realized in excess
of such carryforward. During the fiscal year ended November 30, 1996,
approximately $11,426,000 of the capital loss carryforward expired unused.
- ------------------------------------------------------------
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 May 31, 1997, the
Short-Intermediate Term Series had a 3.56% undivided interest in the repurchase
agreements in the joint account. This undivided interest represented $28,843,000
in principal amount. As of
- --------------------------------------------------------------------------------
-----
12
<PAGE>
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED) PRUDENTIAL GOVERNMENT SECURITIES TRUST
- --------------------------------------------------------------------------------
such date, the repurchase agreements in the joint account and the value of the
collateral therefor were as follows:
Bear, Stearns & Co., 5.53%, in the principal amount of $270,000,000, repurchase
price $270,082,950, due 6/2/97. The value of the collateral including accrued
interest was $275,689,730.
J.P. Morgan Securities, Inc., 5.52%, in the principal amount of $270,000,000,
repurchase price $270,124,200, due 6/2/97. The value of the collateral including
accrued interest was $275,400,031.
Smith Barney, Inc., 5.54%, in the principal amount of $270,000,000, repurchase
price $270,124,650, due 6/2/97. The value of the collateral including accrued
interest was $275,400,376.
- ------------------------------------------------------------
NOTE 6. CAPITAL
Each series has authorized an unlimited number of shares of beneficial interest
at $.01 par value. Transactions in shares of beneficial interest for the
Short-Intermediate Term Series for the fiscal year ended November 30, 1996 and
the six months ended May 31, 1997 were as follows.
Transactions in shares of common stock were as follows:
<TABLE>
<CAPTION>
Class B SHARES AMOUNT
- ------------------------------------ ---------- ------------
<S> <C> <C>
Six months ended May 31, 1997:
Shares sold......................... 455,296 $ 4,361,449
Shares issued in reinvestment of
dividends......................... 316,126 3,033,408
Shares reacquired................... (2,245,797) (21,545,715)
---------- ------------
Net decrease in shares outstanding
before conversion................. (1,474,375) (14,150,858)
Shares reacquired upon conversion
into Class Z...................... (21) (201)
---------- ------------
Net decrease in shares
outstanding....................... (1,474,396) $(14,151,059)
---------- ------------
---------- ------------
<CAPTION>
Class B SHARES AMOUNT
- ------------------------------------ ---------- ------------
<S> <C> <C>
Year ended November 30, 1996:
Shares sold......................... 3,978,671 $ 38,324,541
Shares issued in reinvestment of
dividends......................... 749,149 7,194,984
Shares reacquired................... (7,501,561) (71,837,916)
---------- ------------
Net decrease in shares
outstanding....................... (2,773,741) $(26,318,391)
---------- ------------
---------- ------------
<CAPTION>
Class Z
- ------------------------------------
<S> <C> <C>
February 25, 1997* through
May 31, 1997:
Shares issued upon conversion from
Class B........................... 21 $ 201
---------- ------------
Net increase in shares
outstanding....................... 21 $ 201
---------- ------------
---------- ------------
</TABLE>
- ---------------
* Commencement of offering of Class Z shares.
Effective March 1, 1996 the Money Market Series commenced offering Class Z
shares. Class Z shares are not subject to any sales or redemption charge and are
offered exclusively for sale to a limited group of investors.
Transactions in shares of beneficial interest for the Money Market Series for
the fiscal year ended November 30, 1996 and the six months ended May 31, 1997
were as follows:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED
MAY 31, NOVEMBER 30,
1997 1996
--------------- ---------------
<S> <C> <C>
Class A
- -------------------------------
Shares sold.................... 1,065,536,022 1,686,769,968
Shares issued in reinvestment
of dividends and
distributions................ 13,139,497 26,286,366
Shares reacquired.............. (1,060,427,969) (1,746,670,530)
--------------- ---------------
Net increase/decrease in shares
outstanding before
conversion................... 18,247,550 (33,614,196)
Shares reacquired upon
conversion into Class Z...... -- (12,456,848)
--------------- ---------------
Net increase/decrease in shares
outstanding.................. 18,247,550 (46,071,044)
--------------- ---------------
--------------- ---------------
</TABLE>
- --------------------------------------------------------------------------------
-----
13
<PAGE>
Notes to Financial Statements (Unaudited) PRUDENTIAL GOVERNMENT SECURITIES TRUST
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MARCH 1,
SIX MONTHS 1996
ENDED THROUGH
MAY 31, NOVEMBER 30,
1997 1996
--------------- ---------------
Class Z
- -------------------------------
<S> <C> <C>
Shares sold.................... 1,623,050 1,356,651
Shares issued in reinvestment
of dividends and
distributions................ 16,486 33,919
Shares reacquired.............. (921,105) (13,847,214)
--------------- ---------------
Net increase/decrease in shares
outstanding before
conversion................... 718,431 (12,456,644)
Shares issued upon conversion
from Class A................. -- 12,456,848
--------------- ---------------
Net increase in shares
outstanding.................. 718,431 204
--------------- ---------------
--------------- ---------------
</TABLE>
Effective February 21, 1997 the U.S. Treasury Money Market Series commenced
offering Class Z shares. Class Z shares are not subject to any sales or
redemption charge and are offered exclusively for sale to a limited group of
investors.
Transactions in shares of beneficial interest for the U.S. Treasury Money Market
Series for the six months ended May 31, 1997 were as follows:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
MAY 31,
1997
---------------
<S> <C>
Class A
- ----------------------------------------------
Shares sold................................... 2,839,217,423
Shares issued in reinvestment of dividends and
distributions............................... 9,081,333
Shares reacquired............................. (2,848,374,408)
---------------
Net increase in shares outstanding............ (75,651)
---------------
---------------
<CAPTION>
FEBRUARY 21,
1997
THROUGH
MAY 31,
1997
---------------
Class Z
- ----------------------------------------------
<S> <C>
Shares sold................................... 200
Shares issued in reinvestment of dividends and
distributions............................... 2
---------------
Net increase in shares outstanding............ 202
---------------
---------------
</TABLE>
- --------------------------------------------------------------------------------
-----
14
<PAGE>
PRUDENTIAL GOVERNMENT SECURITIES TRUST
FINANCIAL HIGHLIGHTS (UNAUDITED) MONEY MARKET SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A CLASS Z
----------------------------------------------------------------------------- ----------
SIX MONTHS SIX MONTHS
ENDED YEAR ENDED NOVEMBER 30, ENDED
MAY 31, -------------------------------------------------------------- MAY 31,
1997 1996 1995 1994 1993 1992 1997
---------- -------- -------- -------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning of
period....................... $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
Net investment income.......... 0.023 0.046 0.052 0.033 0.026 0.035 0.024
Dividends from net investment
income....................... (0.023) (0.046) (0.052) (0.033) (0.026) (0.035) (0.024)
---------- -------- -------- -------- -------- ---------- ----------
Net asset value, end of
period....................... $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
---------- -------- -------- -------- -------- ---------- ----------
---------- -------- -------- -------- -------- ---------- ----------
TOTAL RETURN(a):............... 2.37% 4.74% 5.20% 3.29% 2.62% 3.57% 2.45%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(000)........................ $570,371 $552,123 $598,194 $637,343 $919,503 $1,026,187 $ 719
Average net assets (000)....... $587,916 $589,147 $597,599 $732,867 $950,988 $1,113,759 $ 691
Ratios to average net assets:
Expenses, including
distribution fees........ 0.77%(d) 0.86% 0.78% 0.77% 0.72% 0.72% 0.65%(d)
Expenses, excluding
distribution fees........ 0.64%(d) 0.73% 0.65% 0.64% 0.59% 0.60% 0.65%(d)
Net investment income....... 4.71%(d) 4.63% 5.15% 3.19% 2.56% 3.42% 4.87%(d)
<CAPTION>
<S> <C>
MARCH 1,
1996(b)
THROUGH
NOVEMBER 30,
1996
---------------
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning of
period....................... $ 1.000
Net investment income.......... 0.038
Dividends from net investment
income....................... (0.038)
---------------
Net asset value, end of
period....................... $ 1.000
---------------
---------------
TOTAL RETURN(a):............... 3.87%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(000)........................ $ 204(c)
Average net assets (000)....... $ 1,962
Ratios to average net assets:
Expenses, including
distribution fees........ 0.68%(d)
Expenses, excluding
distribution fees........ 0.68%(d)
Net investment income....... 4.68%(d)
</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 return for a period of less than one
year is not annualized.
(b) Commencement of offering of Class Z shares.
(c) Figure is actual and not rounded to nearest thousand.
(d) Annualized.
- --------------------------------------------------------------------------------
-----
See Notes to Financial Statements. 15
<PAGE>
PRUDENTIAL GOVERNMENT SECURITIES TRUST
FINANCIAL HIGHLIGHTS (UNAUDITED) SHORT-INTERMEDIATE TERM SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class B Class Z
----------------------------------------------------------------------------- ------------
February 26,
Six Months 1997(c)
Ended Year Ended November 30, Through
May 31, -------------------------------------------------------------- May 31,
1997 1996 1995 1994 1993 1992 1997
---------- -------- -------- -------- -------- ---------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning of
period...................... $ 9.70 $ 9.74 $ 9.17 $ 10.06 $ 9.97 $ 10.00 $ 9.64
---------- -------- -------- -------- -------- ---------- -----
INCOME FROM INVESTMENT
OPERATIONS
Net investment income.......... 0.28 0.51 0.56 0.64 0.69 0.75 0.16
Net realized and unrealized
gain (loss) on investment
transactions................ (0.13) (0.01) 0.55 (0.89) 0.11 (0.03) (0.05)
---------- -------- -------- -------- -------- ---------- -----
Total from investment
operations............... 0.15 0.50 1.11 (0.25) 0.80 0.72 0.11
---------- -------- -------- -------- -------- ---------- -----
LESS DISTRIBUTIONS
Dividends from net investment
income...................... (0.26) (0.54) (0.54) (0.52) (0.69) (0.75) (0.15)
Tax return of capital
distribution................ -- -- -- (0.12) (0.02) -- --
---------- -------- -------- -------- -------- ---------- -----
Total distributions............ (0.26) (0.54) (0.54) (0.64) (0.71) (0.75) (0.15)
---------- -------- -------- -------- -------- ---------- -----
Net asset value, end of
period...................... $ 9.59 $ 9.70 $ 9.74 $ 9.17 $ 10.06 $ 9.97 $ 9.60
---------- -------- -------- -------- -------- ---------- -----
---------- -------- -------- -------- -------- ---------- -----
TOTAL RETURN(a):............... 1.53% 5.34% 12.37% (2.58)% 8.26% 7.40% 1.13%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(000)....................... $169,055 $185,235 $212,996 $241,980 $347,944 $ 303,451 $ 200(d)
Average net assets (000)....... $175,249 $186,567 $209,521 $307,382 $321,538 $ 294,388 $ 199(d)
Ratios to average net assets:
Expenses, including
distribution fees........ 0.93%(b) 1.01% 0.95% 0.84% 0.80% 0.79% 0.14%(b)
Expenses, excluding
distribution fees........ 0.74%(b) 0.79% 0.75% 0.63% 0.59% 0.58% 0.14%(b)
Net investment income....... 5.74%(b) 5.99% 5.82% 5.48% 6.80% 7.47% 3.20%(b)
Portfolio turnover rate........ 98% 132% 217% 431% 44% 60% 98%
</TABLE>
- ---------------
(a) Total return is calculated assuming a purchase of shares on the first day
and a sale on the last day of each year reported and includes reinvestment
of dividends and distributions. Total return for a period of less than one
year is not annualized.
(b) Annualized.
(c) Commencement of offering of Class Z shares.
(d) Figure is actual and not rounded to nearest thousand.
- --------------------------------------------------------------------------------
-----
See Notes to Financial Statements. 16
<PAGE>
PRUDENTIAL GOVERNMENT SECURITIES TRUST
FINANCIAL HIGHLIGHTS (UNAUDITED) U.S. TREASURY MONEY MARKET SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A Class Z
----------------------------------------------------------------------------- ------------
February 21,
Six Months 1997(b)
Ended Year Ended November 30, Through
May 31, ------------------------------------------------------------ May 31,
1997 1996 1995 1994 1993 1992 1997
------------ -------- -------- -------- -------- -------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning of
year......................... $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $1.000
Net investment income.......... 0.023 0.046 0.050 0.033 0.025 0.034 0.013
Dividends from net investment
income....................... (0.023) (0.046) (0.050) (0.033) (0.025) (0.034) (0.013)
------------ -------- -------- -------- -------- -------- -----
Net asset value, end of year... $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $1.000
------------ -------- -------- -------- -------- -------- -----
------------ -------- -------- -------- -------- -------- -----
TOTAL RETURN(a)................ 2.32% 4.75% 5.08% 3.31% 2.54% 3.46% 3.43%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year
(000)........................ $ 305,254 $305,330 $339,334 $293,984 $284,978 $233,600 $ 200(c)
Average net assets (000)....... $ 448,153 $393,060 $345,369 $308,454 $273,313 $263,459 $ 197(c)
Ratios to average net assets:
Expenses, including
distribution fees........ 0.63%(c) 0.63% 0.62% 0.62% 0.66% 0.66% 0.51%(d)
Expenses, excluding
distribution fees........ 0.51%(c) 0.51% 0.50% 0.50% 0.53% 0.54% 0.51%(d)
Net investment income....... 4.62%(c) 4.57% 5.01% 3.21% 2.49% 3.29% 2.70%(d)
</TABLE>
- ---------------
(a) 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) Commencement of offering of Class Z shares.
(c) Figure is actual and not rounded to nearest thousand.
(d) Annualized.
- --------------------------------------------------------------------------------
-----
See Notes to Financial Statements. 17
<PAGE>
Getting
The Most
From Your
Prudential
Mutual
Fund.
Some mutual fund shareholders won't ever read this -- they don't
read annual and semi-annual reports. It's quite understandable.
These annual and semi-annual reports are prepared to comply with
Federal regulations. They are often written in language
that is difficult to understand. So when most people run into
those particularly daunting sections of these reports, they
don't read them.
We think that's a mistake.
At Prudential Mutual Funds, we've made some changes to our
report to make it easier to understand and more pleasant to
read, in hopes you'll find it profitable to spend a few minutes
familiarizing yourself with your investment. Here's what you'll
find in the report:
AT A GLANCE
Since an investment's performance is often a shareholder's primary
concern, we present performance information in two different formats.
You'll find it first on the "At A Glance" page where we compare the
Fund and the comparable average calculated by Lipper Analytical
Services, a nationally recognized mutual fund rating agency. We
report both the cumulative total returns and the average annual
total returns. The cumulative total return is the total amount
of income and appreciation the Fund has achieved in various
time periods. The average annual total return is an annualized
representation of the Fund's performance -- it generally smoothes
out returns and gives you an idea how much the Fund has earned
in an average year, for a given time period. Under the
performance box, you'll see legends that explain the
performance information, whether fees and sales charges
have been included in returns, and the inception dates for
the Fund's share classes.
See the performance comparison charts at the back of the
report for more performance information. And keep in mind
that past performance is not indicative of future results.
PORTFOLIO MANAGER'S REPORT
The portfolio manager who invests your money for you
reports on successful -- and not-so-successful -- strategies
in this section of your report. Look for recent purchases and
sales here, as well as information about the sectors the portfolio
manager favors and any changes that are on the drawing board.
PORTFOLIO OF INVESTMENTS
This is where the report begins to look technical, but it's really
just a listing of each security held at the end of the reporting
period, along with valuations and other information. Please note
that sometimes we discuss a security in the Portfolio Manager's
Report that doesn't appear in this listing because it was sold
before the close of the reporting period.
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES
The balance sheet shows the assets (the value of the Fund's
holdings), liabilities (how much the Fund owes) and net assets
(the Fund's equity, or holdings after the Fund pays its debts)
as of the end of the reporting period. It also shows how we
calculate the net asset value per share for each class of shares.
The net asset value is reduced by payment of your dividend,
capital gain, or other distribution, but remember that the
money or new shares are being paid or issued to you. The net
asset value fluctuates daily along with the value of every
security in the portfolio.
STATEMENT OF OPERATIONS
This is the income statement, which details income (mostly interest
and dividends earned) and expenses (including what you pay us to
manage your money). You'll also see capital gains here -- both
realized and unrealized.
STATEMENT OF CHANGES IN NET ASSETS
This schedule shows how income and expenses translate into
changes in net assets. The Fund is required to pay out the
bulk of its income to shareholders every year, and this
statement shows you how we do it -- through dividends
and distributions -- and how that affects the net assets.
This statement also shows how money from investors flowed
into and out of the Fund.
NOTES TO FINANCIAL STATEMENTS
This is the kind of technical material that can intimidate
readers, but it does contain useful information. The Notes
provide a brief history and explanation of your Fund's
objectives. In addition, they also outline how Prudential Mutual Funds
prices securities. The Notes also explain who manages and
distributes the Fund's shares, and more importantly, how
much they are paid for doing so. Finally, the Notes explain
how many shares are outstanding and the number issued and
redeemed over the period.
FINANCIAL HIGHLIGHTS
This information contains many elements from prior pages,
but on a per share basis. It is designed to help you
understand how the Fund performed and to compare this
year's performance and expenses to those of prior years.
INDEPENDENT AUDITOR'S REPORT
Once a year, an outside auditor looks over our books and
certifies that the information is fairly presented and
complies with generally accepted accounting principles.
TAX INFORMATION
This is information which we report annually about how much
of your total return is taxable. Should you have any questions,
you may want to consult a tax advisor.
PERFORMANCE COMPARISON
These charts are included in the annual report and are required
by the Securities Exchange Commission. Performance is presented
here as a hypothetical $10,000 investment in the Fund since its
inception or for 10 years (whichever is shorter). To help
you put that return in context, we are required to include the
performance of an unmanaged, broad based securities index, as
well. The index does not reflect the cost of buying the securities
it contains or the cost of managing a mutual fund. Of
course, the index holdings do not mirror those of the fund -- the
index is a broadly based reference point commonly used by investors
to measure how well they are doing. A definition of the selected
index is also provided. Investors generally cannot
invest directly in an index.
<PAGE>
GETTING
THE MOST
FROM YOUR
PRUDENTIAL
MUTUAL
FUND.
CHANGE YOUR MIND.
You can exchange your shares in most Prudential Mutual Funds
for shares in most other Prudential Mutual Funds, without
charges. This may be most helpful if your investment needs change.
REINVEST DIVIDENDS FREE OF CHARGE.
Reinvest your dividends and/or capital gains distributions
automatically -- without charge.
INVEST FOR RETIREMENT.
There is no minimum investment for an IRA. Plus, you defer
taxes on your investment earnings by investing in an IRA.
If you'd like, you can contribute up to $2,000 a year in an IRA.
If you are married, you and your spouse (if not working outside
the home) can contribute up to $2,250 a year. (Withdrawals are
taxed as ordinary income and may be subject to a 10%
penalty prior to age 59 1/2.)
CHANGE YOUR JOB.
You can take your pension with you. Use a rollover IRA to
manage your company-sponsored retirement plan while retaining
the special tax-deferred advantages.
INVEST IN YOUR CHILDREN.
There's no fee to open a custodial account for a child's education
or other needs.
TAKE INCOME.
Would you like to receive monthly or quarterly checks in any
amount from your fund account? Just let us know. We'll take
care of it. Of course, there are minimum amounts. And shares
redeemed may be subject to tax, and Class B and C
shares may be subject to contingent deferred sales charges.
We'll gladly answer your questions.
KEEP INFORMED.
We want to keep you up-to-date. Of course, you receive account
activity statements every quarter. But you also receive annual
and semi-annual fund reports, as well as other important updates
on events that affect your investments, including tax information.
This material is only authorized for distribution when preceded
or accompanied by a current prospectus. Read the prospectus
carefully before you invest or send money.
<PAGE>
Prudential Mutual Funds
Gateway Center Three
100 Mulberry Street
Newark, NJ 07102-4077
(800) 225-1852
http://www.prudential.com
Trustees
Edward D. Beach
Eugene C. Dorsey
Delayne Dedrick Gold
Robert F. Gunia
Harry A. Jacobs, Jr.
Donald D. Lennox
Mendel A. Melzer
Thomas T. Mooney
Thomas H. O'Brien
Richard A. Redeker
Nancy H. Teeters
Louis A. Weil, III
Officers
Richard A. Redeker, President
Susan C. Cote, Vice President
Thomas A. Early, Vice President
Grace C. Torres, Treasurer
Stephen M. Ungerman, Assistant Treasurer
S. Jane Rose, 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 07101
Distributor
Prudential Securities Incorporated
One Seaport Plaza
New York, NY 10292
Custodian
State Street Bank and Trust Company
One Heritage Drive
North Quincy, MA 02171
Transfer Agent
Prudential Mutual Fund Services LLC
P.O. Box 15005
New Brunswick, NJ 08906
Independent Accountants
Price Waterhouse LLP
1177 Avenue of the Americas
New York, NY 10036
Legal Counsel
Sullivan & Cromwell
125 Broad Street
New York, NY 10004
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 May 31, 1997
were not audited and, accordingly, no opinion is expressed
on them.
This report is not authorized for distribution to prospective
investors unless preceded or accompanied by a current prospectus.
<PAGE>
(ICON)
Prudential
Government
Securities
Trust
- -----------------------
Money Market Series
Short-Intermediate
Term Series
U.S. Treasury Money
Market Series
SEMI
ANNUAL
REPORT
May 31, 1997
(LOGO)
<PAGE>
The BlackRock Government Income Trust
Performance At A Glance.
Treasury yields fluctuated during the twelve months ended June 30, 1997. After
declining for much of the second half of 1996, interest rates rose in the face
of a resilient stock market and stronger economic growth for the first few
months of 1997. However, bond investors were comforted by more moderate
economic data released during the second quarter which allowed the bond market
to recapture some of its losses. Mortgage-backed securities and asset-backed
securities outperformed Treasuries over the year as investors sought higher
yielding securities.
<TABLE>
<CAPTION>
Historical
Investment
Results(1)
As of 6/30/97
One Five Since
Year Years Inception(2)
<S> <C> <C> <C>
Class A 6.2% 22.9% 31.2%
Class C 5.6 N/A 15.2
Lipper Adjustable Rate
Mortgage Fund Avg.(3) 6.5 18.0 ***
</TABLE>
<TABLE>
<CAPTION>
Average
Annual Total
Returns(1)
As of 6/30/97
One Five Since
Year Years Inception(2)
<S> <C> <C> <C>
Class A 3.0% 3.6% 4.2%
Class C 4.6 N/A 5.5
</TABLE>
<TABLE>
<CAPTION>
Dividends]
& Yields
As of 6/30/97
Total Dividends 30-Day
Paid for 12 Mos. SEC Yield
<S> <C> <C>
Class A $0.50 7.96%
Class C $0.45 7.41
</TABLE>
An investment in the Fund is neither insured nor guaranteed by the U.S.
government. Past performance is not indicative of future results. Investment
return and principal value 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. Historical investment
results do not take into account sales charges. Average annual returns do take
into account applicable sales charges. The Fund charges a maximum sales load
of 3% for Class A shares. Class C shares are subject to a contingent deferred
sales charge of 1% over a period of one year.
(2)Inception dates: Class A, 9/9/91 and Class C, 11/1/94.
(3)These are the average returns of all funds for one year, five years and since
inception of each share class as determined by Lipper Analytical Services.
***Lipper Since Inception returns are: Class A, 29.5% and Class C, 12.0% for
all funds in each Lipper share class.
How Investments Compared.
(As of 6/30/97)
(GRAPH)
U.S. General General U.S.
Growth Bond Muni Debt Taxable
Funds Funds Funds Money Funds
12-Month Total Returns 23.96% 10.77% 7.81% 4.80%
20-Year Average Annual
Total Returns 15.39% 9.89% 7.14% 7.68%
Source: Lipper Analytical Services. Financial markets change, so a mutual
fund's past performance should never be used to predict future results. The
risks to each of the investments listed above are different -- we provide 12-
month total returns for several Lipper mutual fund categories to show you that
reaching for higher returns means tolerating more risk. The greater the risk,
the larger the potential reward or loss. In addition, we've included historical
20-year average annual returns. These returns assume the reinvestment of
dividends.
U.S. Growth Funds will fluctuate a great deal. Investors have received higher
historical total returns from stocks than from most other investments. Smaller
capitalization stocks offer greater potential for long-term growth but may be
more volatile than larger capitalization stocks.
General Bond Funds provide more income than stock funds, which can help smooth
out their total returns year by year. But their prices still fluctuate
(sometimes significantly) and their returns have been historically lower than
those of stock funds.
General Municipal Debt Funds invest in bonds issued by state governments,
state agencies and/or municipalities. This investment provides income that is
usually exempt from federal and state income taxes.
Money Market Funds attempt to preserve a constant share value; they don't
fluctuate much in price but, historically, their returns have been generally
among the lowest of the major investment categories.
<PAGE>
Scott Amero, Fund Manager
(PHOTO)
Portfolio Manager's Report
The BlackRock Government Income Trust is an open-end bond fund whose investment
objective is to provide low volatility of net asset value and high monthly
income. The Trust invests primarily in adjustable rate mortgage-backed
securities (ARMs), U.S. Government securities, asset-backed securities (ABS)
and short duration mortgage-backed securities (MBS). The Fund is part of the
Prudential family of mutual funds and is managed by its investment sub-adviser,
BlackRock Financial Management, Inc.
Our Style.
We seek low volatility of net asset value while producing high monthly income.
In pursuing this objective, the Trust's assets are actively managed and reflect
the adviser's relative value analysis of individual securities and sectors.
There can be no assurance that the Fund will achieve its investment objective.
Strategy Session.
Low Volatility Buoys Markets.
Over the year, investor demand for bonds that offer higher yields allowed
adjustable rate mortgages (ARMs) and asset-backed securities (ABS) to post
excellent relative performance primarily due to low interest rate volatility
and subdued refinancing concerns.
Over the period, the ARM market, as measured by the Lehman Brothers ARM Index,
returned 8.08% versus the Treasury market's return (measured by the Lehman
Brothers 1-3 year Treasury Index) of 6.55%. ARMs benefited from improving
fundamental conditions over the past two years, as interest rate volatility
has generally remained at historically low levels. As a result, older ARMs
traded at or near all-time tight yield spreads versus comparable maturity
Treasuries.
The ABS market has also benefited from low volatility, as the best performing
ABS of 1996 were those securities backed by home equity loans. ABS' positive
performance carried into 1997, as a pause in the pace of issuance caused yield
spreads to tighten even further.
In searching for relative value, we targeted securities and market sectors
that have underperformed and have strong potential, we believe, for price
appreciation. During the reporting period, the Fund substantially increased
its holdings in floating- and fixed-rate ABS and collateralized mortgage
obligations (CMOs). The move towards floating-rate ABS was prompted by an
increase in floating-rate supply over the past year. ABS issuers, particularly
credit cards, have chosen to issue floating-rate securities, which has led to
wider yield spreads versus Treasuries than offered by fixed-rate ABS.
The increased weightings to these sectors was primarily financed by selling
Treasury securities and reducing the Fund's ARM holdings, which had performed
well.
<PAGE>
What Went Well.
Over the past six months we have sought to enhance return by carefully
balancing our exposure to Treasuries, asset-backed securities (fixed and
floating rate), adjustable rate mortgages (ARMs), collateralized mortgage
obligations (CMOs), and other mortgage-backed securities (MBS).
During the second quarter of 1997 this meant reducing our ARM exposure to 19%
of total investments as of June 30, 1997, from 26% at year-end 1996. We did so
because we believed that the combination of lower interest rates, which could
result in a higher rate of prepayments, and potentially higher interest rate
volatility that could hurt ARM performance over the short term. As it turned
out, ARMs did slightly underperform short-duration Treasuries during the
second quarter.
Conversely, we added to our CMO holdings because we believe they would enhance
yield and total return, given the Federal Reserve's current neutral monetary
policy. CMO holdings comprised 13% of total investments as of June 30, 1997
compared to 8% on December 31, 1996.
Five Largest Holdings.
10.4% U.S. Treasury Note
6.375%, 5/15/00
6.4% FHLMC
9.00%, 9/01/05-11/01/05
6.1% FNMA
8.50%, 6/01/08-1/01/16
5.8% GNMA II
7.25%, 4/15/06
4.1% GNMA II
7.125%, 9/20/23
Expressed as a percentage of total investments as of 6/30/97.
Portfolio Breakdown.
Expressed as a percentage of total investments.
As Of 6/30/97 As Of 12/31/96
(PIE CHART) (PIE CHART)
Treasuries -- 12% CMOs -- 8%
Short Duration MBS -- 27% Asset Backed -- 23%
ARMs -- 19% ARMs -- 26%
Fixed Rate ABS -- 15% Short Duration MBS -- 32%
Floating-Rate ABS -- 14% U.S. Treasuries/Agencies -- 11%
CMOs -- 13%
Looking Ahead.
Our outlook for the bond market is cautiously optimistic. Over the short term,
we believe that the recent rally may continue, since inflation news has been
positive and U.S. securities appear cheap relative to their global
counterparts. Additionally, Federal Reserve Chairman Greenspan appears to be
comfortable allowing the economy to expand in the absence of rising
inflationary pressures. Thus, we do not foresee another tightening in the
immediate future in the absence of a visible inflation shock. However, recent
wage increases, the buoyant stock market and record levels of consumer
confidence could lead to stronger consumer spending and overall economic
growth. Therefore, an uninterrupted decline in yields is by no means a
certainty.
- -------------------------------------------------------------------------------
1
<PAGE>
Portfolio of Investments
as of June 30, 1997 THE BLACKROCK GOVERNMENT INCOME TRUST
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Amount
(000) Description Value (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
LONG-TERM INVESTMENTS--131.7%
- ------------------------------------------------------------
Asset-Backed Securities--38.8%
$ 766 AFC Mortgage Loan Trust,
Series 1997-1, Class A,
5.9075%(c), 3/25/27 $ 765,621
1,000 Chase Credit Card Master Trust,
Series 1996-4, Class A,
5.8175%(c), 7/15/06 998,750
800 Chase Manhattan Auto Owner Trust,
Series 1996-C, Class A3, 5.95%,
11/15/00 796,750
753(b) Chase Manhattan Grantor Trust,
Series 1996-B, Class A, 6.61%,
9/15/02 756,841
Chevy Chase Auto Receivable Trust,
378 Series 1996-2, Class A, 5.90%,
7/15/03 375,232
900 Series 1997-2, Class A, 6.35%,
1/15/04 899,297
500 Discover Card Master Trust,
Series 1996-4, Class A,
6.0625%(c), 10/16/13 505,234
490 EQCC Home Equity Loan Trust,
Series 1994-1, Class A, 5.80%,
3/15/09 476,759
First USA Credit Card Master Trust,
500 Series 1994-6, Class A, 6.0375%(c),
10/15/03 503,985
500 Series 1997-4, Class A, 5.8975%(c),
2/17/10 500,078
700 Ford Credit Auto Lease Trust,
Series 1996-1, Class A2, 5.80%,
5/15/99 699,125
921 GMAC Grantor Trust,
Series 1997-A, Class A, 6.50%,
4/15/02 923,014
874 Merrill Lynch Credit Corporation,
Mortgage Loan,
Series 1996-B, Class A,
6.0875%(c), 7/15/21 877,369
$ 900 Olympic Automobile Receivables
Trust,
Series 1997-A, Class A2, 6.125%,
8/15/00 $ 901,407
500 Peoples Bank Credit Card Master
Trust,
Series 1996-1, Class A,
5.8375%(c), 11/15/04 500,547
Salomon Brothers,
Mortgage Trust Certificate,
417 Series 1996-6B, Class A1, 6.10% (c),
6/30/26 416,306
408 Series 1996-6G, Class A1, 6.00% (c),
9/30/27 407,189
-----------
Total asset-backed securities
(cost $11,302,951) 11,303,504
-----------
- ------------------------------------------------------------
Mortgage Pass-Throughs--53.1%
Federal Home Loan Mortgage Corporation,
2,419(a) 9.00%, 9/01/05 - 11/01/05, 15 Year 2,492,059
519 7.375%, 3/01/06, Multi-family 521,271
743 Federal Housing Administration,
GMAC Commercial Mortgage,
7.465%, 7/25/19 750,929
Federal National Mortgage
Association,
1,414(a) 8.00%, 3/01/08 1,446,392
704 8.50%, 12/01/10 732,475
2,289 8.50%, 6/01/08 - 1/01/16 2,375,130
894 7.179%, 9/01/28, ARM 917,357
Government National Mortgage
Association, II
1,500 5.50%, 12/20/99, 1 year CMT, ARM,
TBA 1,482,975
2,230(a) 7.25%, 4/15/06 2,257,127
1,540 7.125%, 9/20/23, 1 year CMT, ARM 1,577,854
888(a) 7.50%, 1/20/25, 1 year CMT, ARM 914,290
-----------
Total mortgage pass-throughs
(cost $15,596,599) 15,467,859
-----------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 2
<PAGE>
Portfolio of Investments
as of June 30, 1997 THE BLACKROCK GOVERNMENT INCOME TRUST
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Amount
(000) Description Value (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
Multiple Class Mortgage Pass-Throughs--25.9%
Residential Asset Security Trust,
Incorporated,
Mortgage Certificate,
$ 416 Series 1996-A8, Class A1, 8.00%,
12/25/26 $ 422,354
374 Series 1997-A1, Class A1, 7.00%,
3/25/27 375,983
Federal Home Loan Mortgage Corporation,
906 Series 1561, Class ZB, 6.00%,
8/15/06 893,220
969 Series 19, Class F, 6.57%, 6/01/28,
ARM 977,866
Federal National Mortgage
Association,
950 Trust 1996-T6, Class C, 6.20%,
2/26/01 936,409
864 Trust 1993-192, Class 192-Z, 5.75%,
8/25/06 849,246
500 Trust 1994-12, Class 12-PE, 5.75%,
4/25/07 490,480
1,029 Trust I, Class-2, 11.50%, 4/01/09 1,158,182
1,439 Trust 1997-15, Class 15-FA, 6.02%,
4/25/27, ARM 1,437,989
-----------
Total multiple class mortgage
pass-throughs
(cost $7,476,182) 7,541,729
-----------
U.S Government Securities--13.9%
$ 4,040(a) United States Treasury Note,
6.375%, 5/15/00
(cost $4,063,101) $ 4,055,150
-----------
Total long-term investments
(cost $38,438,833) 38,368,242
-----------
SHORT-TERM INVESTMENTS--1.8%
- ------------------------------------------------------------
Repurchase Agreement--1.8%
540 State Street Bank & Trust Company,
5.60%, due 7/1/97 in the amount
of $540,084 (cost $540,000 value
of collateral including accrued
interest is $558,892) 540,000
-----------
- ------------------------------------------------------------
Total Investments--133.5%
(cost $38,978,833; Note 4) 38,908,242
Liabilities in excess of other
assets--(33.5%) (9,776,144)
-----------
Net Assets--100% $29,132,098
-----------
-----------
</TABLE>
- ---------------
ARM--Adjustable Rate Mortgage
CMT--Constant Maturity Treasury
TBA-- Securities purchased on a delayed delivery basis with an approximate
principal amount and maturity date. The actual principal amount and the
maturity date will be determined upon settlement.
(a) All or a portion of principal amount pledged as collateral for reverse
repurchase agreements.
(b) All or a portion of principal amount pledged as collateral for futures
transactions.
(c) Rate shown reflects current rate of variable rate instruments.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 3
<PAGE>
Statement of Assets and Liabilities THE BLACKROCK GOVERNMENT INCOME TRUST
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Assets June 30, 1997
-------------
<S> <C>
Investments, at value (cost $38,978,833).................................................................... $38,908,242
Cash........................................................................................................ 1,652
Receivable for investments sold............................................................................. 1,394,221
Interest receivable......................................................................................... 329,074
Receivable for Fund shares sold............................................................................. 20,527
Due from broker-variation margin............................................................................ 6,628
-------------
Total assets............................................................................................. 40,660,344
-------------
Liabilities
Reverse repurchase agreements............................................................................... 7,624,875
Payable for investments purchased........................................................................... 3,683,488
Payable for Fund shares reacquired.......................................................................... 66,819
Dividends payable........................................................................................... 34,924
Management fee payable...................................................................................... 12,077
Interest payable............................................................................................ 9,343
Distribution fee payable.................................................................................... 3,632
Accrued expenses............................................................................................ 93,088
-------------
Total liabilities........................................................................................ 11,528,246
-------------
Net Assets.................................................................................................. $29,132,098
-------------
-------------
Net assets were comprised of:
Shares of beneficial interest, at par.................................................................... $ 31,168
Paid-in capital in excess of par......................................................................... 36,414,996
-------------
36,446,164
Distributions in excess of net investment income......................................................... (34,924)
Accumulated net realized loss on investments............................................................. (7,213,585)
Net unrealized depreciation on investments............................................................... (65,557)
-------------
Net assets, June 30, 1997................................................................................... $29,132,098
-------------
-------------
Class A:
Net asset value and redemption price per share
($29,115,935 / 3,114,609 shares of beneficial interest issued and outstanding)........................ $9.35
Maximum sales charge (3.0% of offering price)............................................................ .29
Maximum offering price to public......................................................................... $9.64
Class C:
Net asset value, offering price and redemption price per share
($16,163 / 1,730 shares of beneficial interest issued and outstanding)................................ $9.34
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 4
<PAGE>
THE BLACKROCK GOVERNMENT INCOME TRUST
GOVERNMENT INCOME TRUST
Statement of Operations
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Year
Ended
June 30,
Net Investment Income 1997
<S> <C>
Income
Interest and discount earned................. $2,840,963
----------
Expenses
Management fee............................... 166,647
Distribution fee--Class A.................... 49,853
Distribution fee--Class C.................... 707
Custodian's fees and expenses................ 73,000
Transfer agent's fees and expenses........... 52,000
Reports to shareholders...................... 46,000
Registration fees............................ 38,000
Legal fees and expenses...................... 30,000
Audit fee.................................... 27,000
Trustees' fees and expenses.................. 22,000
Miscellaneous................................ 10,897
Amortization of deferred organization
expense................................... 4,961
----------
Total operating expenses................. 521,065
Interest expense............................. 577,603
----------
Total expenses........................... 1,098,668
----------
Net investment income........................... 1,742,295
----------
Realized and Unrealized Gain
(Loss) on Investments
Net realized loss on:
Investment transactions...................... (3,334,709)
Financial futures contracts.................. (77,713)
Short sale transactions...................... (8,468)
----------
(3,420,890)
----------
Net change in unrealized depreciation on:
Investments.................................. 3,617,686
Financial futures contracts.................. 57,225
----------
3,674,911
----------
Net gain on investments......................... 254,021
----------
Net Increase in Net Assets
Resulting from Operations....................... $1,996,316
----------
----------
</TABLE>
THE BLACKROCK GOVERNMENT INCOME TRUST
GOVERNMENT INCOME TRUST
Statement of Cash Flows
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Year
Ended
June 30,
Increase (Decrease) in Cash 1997
<S> <C>
Cash flows provided by operating activities:
Interest received.......................... $ 3,082,273
Operating expenses paid.................... (599,523)
Interest expense paid...................... (577,002)
Purchase of long-term portfolio
investments............................. (98,818,537)
Sale of long-term portfolio investments.... 108,255,166
Sale of short-term portfolio investments,
net..................................... 171,793
Variation margin on futures................ (43,756)
Deferred organization and other assets..... (708)
------------
Net cash provided by operating
activities.............................. 11,469,706
------------
Cash flows used for financing activities:
Net proceeds from shares subscribed........ 1,187,699
Payments on shares reacquired.............. (10,525,565)
Cash dividends paid(a)..................... (748,664)
Net payments for reduction of reverse
repurchase agreements................... (1,382,628)
------------
Net cash used for financing activities..... (11,469,158)
------------
Net increase in cash.......................... 548
Cash at beginning of year..................... 1,104
------------
Cash at end of year........................... $ 1,652
------------
------------
Reconciliation of Net Increase in Net Assets
to Net Cash Provided by Operating Activities
Net increase in net assets resulting from
operations................................. $ 1,996,316
------------
Decrease in investments....................... 7,706,214
Net realized loss on investment
transactions............................... 3,420,890
Decrease in unrealized depreciation........... (3,674,911)
Increase in receivable for investments sold... (282,620)
Decrease in interest receivable............... 223,382
Increase in due from broker-variation
margin..................................... (6,628)
Decrease in other assets...................... 4,253
Increase in payable for investments
purchased.................................. 2,177,337
Increase in interest payable.................. 601
Decrease in accrued expenses and other
liabilities................................... (78,458)
Decrease in variation margin payable.......... (16,670)
------------
Total adjustments.......................... 9,473,390
------------
Net cash provided by operating activities..... $ 11,469,706
------------
------------
</TABLE>
- ---------------
(a) Non-cash financing activity not included herein consists of reinvestment of
dividends and distributions of $1,031,449.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 5
<PAGE>
Statement of Changes in Net Assets THE BLACKROCK GOVERNMENT INCOME TRUST
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Increase (Decrease) Year Ended June 30,
in Net Assets 1997 1996
<S> <C> <C>
Operations:
Net investment income..................................................................... $ 1,742,295 $ 2,449,186
Net realized gain (loss) on investment transactions....................................... (3,420,890) 196,234
Net change in unrealized appreciation (depreciation) on investments....................... 3,674,911 (473,514)
----------- ------------
Net increase in net assets resulting from operations...................................... 1,996,316 2,171,906
----------- ------------
Net equalization debits...................................................................... -- (5,142)
----------- ------------
Dividends and distributions (Note 1):
Dividends from net investment income:
Class A................................................................................ (1,718,151) (2,374,095)
Class B................................................................................ -- (51,187)
Class C................................................................................ (4,281) (1,632)
----------- ------------
(1,722,432) (2,426,914)
----------- ------------
Tax return of capital distributions:
Class A................................................................................ (37,724) (116,602)
Class B................................................................................ -- (2,514)
Class C................................................................................ (94) (80)
----------- ------------
(37,818) (119,196)
----------- ------------
Fund share transactions (net of share conversions) (Note 6):
Net proceeds from shares subscribed....................................................... 1,201,635 795,510
Net asset value of shares issued in reinvestment of dividends and distributions........... 1,031,449 1,488,750
Cost of shares reacquired................................................................. (10,451,900) (13,712,371)
----------- ------------
Net decrease in net assets from Fund share transactions................................... (8,218,816) (11,428,111)
----------- ------------
Total decrease............................................................................... (7,982,750) (11,807,457)
Net Assets
Beginning of year............................................................................ 37,114,848 48,922,305
----------- ------------
End of year.................................................................................. $29,132,098 $ 37,114,848
----------- ------------
----------- ------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 6
<PAGE>
Notes to Financial Statements THE BLACKROCK GOVERNMENT INCOME TRUST
- --------------------------------------------------------------------------------
The BlackRock Government Income Trust (the "Fund"), is registered under the
Investment Company Act of 1940 as a diversified, open-end management investment
company. The Fund was organized as an unincorporated business trust in
Massachusetts on June 13, 1991 and had no operations until the issuance of
10,000 shares of beneficial interest for $100,000 on July 18, 1991 to Prudential
Investments Fund Management LLC ("PIFM"). Investment operations commenced on
September 9, 1991. The Fund's primary objectives are to provide low volatility
of net asset value and high monthly income, primarily through investment in U.S.
Government securities and obligations issued or guaranteed by the U.S.
Government, its agencies or instrumentalities. The ability of issuers of debt
securities, other than those issued or guaranteed by the U.S. Government, to
meet their obligations may be affected by economic developments in a specific
industry or region.
- ------------------------------------------------------------
Note 1. Accounting Policies
The following is a summary of significant accounting policies followed by the
Fund in the preparation of its financial statements.
Securities Valuation: The Fund values mortgage-backed, asset-backed and other
debt securities on the basis of current market quotations provided by dealers or
pricing services approved by the Board of Trustees. In determining the value of
a particular security, pricing services may use certain information with respect
to transactions in such securities, quotations from dealers, market transactions
in comparable securities, various relationships observed in the market between
securities, and calculated yield measures based on valuation technology commonly
employed in the market for such securities. Exchange-traded options are valued
at their last sales price as of the close of options trading on the applicable
exchanges. In the absence of a last sale, options are valued at the average of
the quoted bid and asked prices as of the close of business. Futures contracts
are valued at the last sale price as of the close of the commodities exchange on
which they trade unless the Fund's Board of Trustees determines that such price
does not reflect its fair value, in which case it will be valued at its fair
value as determined by the Fund's Board of Trustees.
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.
Securities for which such current market quotations are not readily available
are valued at fair value as determined in good faith under procedures
established by and under the general supervision and responsibility of the
Fund's Board of Trustees.
In connection with transactions in repurchase agreements, the Fund's custodian
takes possession of the underlying collateral securities, the value of which at
least equals the principal amount of the repurchase transaction, including
accrued interest. To the extent that any repurchase transaction exceeds one
business day, the value of the collateral is marked-to-market on a daily basis
to ensure the adequacy of the collateral. If the seller defaults and the value
of the collateral declines or if bankruptcy proceedings are commenced with
respect to the seller of the security, realization of the collateral by the Fund
may be delayed or limited.
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, known as "initial
margin". Subsequent payments, known as "variation margin", are made or received
by the Fund each day, depending on the daily fluctuations 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.
Options: The Fund may either purchase or write options in order to hedge against
adverse market movements or fluctuations in value caused by changes in
prevailing interest rates with respect to securities which the Fund currently
owns or intends to purchase. When the Fund purchases an option, it pays a
premium and an amount equal to that premium is recorded as an investment. When
the Fund writes an option, it receives a premium and an amount equal to that
premium is recorded as a liability. The investment or liability is adjusted
daily to reflect the current market value of the option. If an option expires
unexercised, the Fund realizes a gain or loss to the extent of the premium
received or paid. If an option is exercised, the premium received or paid is an
adjustment to the proceeds from the sale or the cost of the purchase in
determining whether the Fund
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 7
<PAGE>
Notes to Financial Statements THE BLACKROCK GOVERNMENT INCOME TRUST
- --------------------------------------------------------------------------------
has realized a gain or loss.
The difference between the premium and the amount received or paid on
effecting a closing purchase or sale transaction is also treated as a
realized gain or loss. Gain or loss on purchased options is included in net
realized gain (loss) on investment transactions. Gain or loss on written
options is presented separately as net realized gain (loss) on written option
transactions.
Short Sales: The Fund may sell a security it does not own in anticipation of a
decline in the market value of that security (short sale). When the Fund makes a
short sale, it may borrow the security sold short and deliver it to the
broker-dealer through which it made the short sale as collateral for its
obligation to deliver the security upon conclusion of the sale. The Fund may
have to pay a fee to borrow the particular security and may be obligated to pay
over any payments received on such borrowed securities. A gain, limited to the
price at which the Fund sold the security short, or a loss, unlimited in
magnitude, will be recognized upon the termination of a short sale if the market
price at termination is less than or greater than, respectively, the proceeds
originally received.
Cash Flow Information: The Fund invests in securities and distributes dividends
from net investment income and from net realized gains which are paid in cash or
are reinvested at the discretion of shareholders. These activities are reported
in the Statement of Changes in Net Assets and additional information on cash
receipts and cash payments is presented in the Statement of Cash Flows.
Accounting practices that do not affect reporting activities on a cash basis
include carrying investments at value and amortizing discounts or premiums on
debt obligations.
Securities Transactions and Net Investment Income: Securities transactions are
recorded on the trade date. Realized and unrealized gains and losses on sales of
portfolio securities are calculated on the identified cost basis. Interest
income is recorded on the accrual basis and the Fund accretes discount or
amortizes premium on securities purchased using the effective interest method.
Expenses are recorded on the accrual basis which may require the use of certain
estimates by management.
Net investment income (other than distribution fees), and realized and
unrealized 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.
Taxes: It is the Fund's intention to continue to meet the requirements of the
Internal Revenue Code applicable to regulated investment companies and to
distribute sufficient amounts of its taxable income to shareholders. Therefore,
no federal income tax provision is required.
Dividends and Distributions: The Fund declares daily and pays dividends monthly
first from net investment income then from realized short-term capital gains, if
any, and other sources, if necessary. Net long-term capital gains, if any, are
distributed at least annually. 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.
Equalization: Effective July 1, 1996, the Fund discontinued the accounting
practice of equalization. Equalization is a practice whereby a portion of the
proceeds from sales and costs of repurchases of capital shares, equivalent on a
per share basis to the amount of distributable net investment income on the date
of the transaction, is credited or charged to undistributed net investment
income. A portion ($87,466) of undistributed net investment income at June 30,
1996, resulting from equalization was transferred to paid-in capital in excess
of par. Such reclassification has no effect on net assets, results of
operations, or net asset value per share.
Deferred Organization Expenses: A total of $135,000 was incurred in connection
with the organization of the Fund. Such amount was deferred and amortized over a
period of sixty months ended September, 1996.
- ------------------------------------------------------------
Note 2. Agreements
The Fund has a management agreement with 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 BlackRock Financial Management, Inc. ("BFM"). BFM furnishes
investment advisory services in connection with the management of the Fund. PIFM
pays for the costs of the subadviser's services, the compensation of officers of
the Fund, occupancy and certain clerical and bookkeeping costs of the Fund. The
Fund bears all other costs and expenses.
The management fee paid PIFM is computed daily and payable monthly at an annual
rate of .50 of 1% of the Fund's average daily net assets. PIFM pays BFM, as
compensation for its services pursuant to the subadvisory agreement, a fee at
the annual rate of .25 of 1% of the Fund's average daily net assets.
The Fund has a distribution agreement with Prudential Securities Incorporated
("PSI") which acts as the distributor of the Class A and Class C
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 8
<PAGE>
Notes to Financial Statements THE BLACKROCK GOVERNMENT INCOME TRUST
- --------------------------------------------------------------------------------
shares of the Fund. The Fund compensates PSI for distributing and servicing
the Fund's Class A and Class C shares, pursuant to plans of distribution (the
"Class A and C Plans"), regardless of expenses actually incurred by them. The
distribution fees are accrued daily and payable monthly.
Pursuant to the Class A and C Plans, the Fund compensates PSI for
distribution-related activities at an annual rate of up to .30 of 1% and 1%
of the average daily net assets of the Class A and C shares, respectively.
Such expenses under the Class A and Class C Plans were .15% and .75%,
respectively, of the average daily net assets of Class A and Class C shares
for the year ended June 30, 1997.
PSI has advised the Fund that it has received approximately $3,900 in
front-end sales charges resulting from sales of Class A shares during the
year ended June 30, 1997. From these fees, PSI paid such sales charges to
dealers which in turn paid commissions to salespersons and incurred other
distribution costs.
With respect to the Class C Plan, PSI advised the Fund that for the year ended
June 30, 1997, it received approximately $600 in contingent deferred sales
charges imposed upon certain redemptions by Class C shareholders.
PSI and PIFM are indirect wholly-owned subsidiaries of The Prudential Insurance
Company of America ("Prudential").
The Fund, along with other affiliated registered investment companies (the
"Funds"), entered into a credit agreement (the "Agreement") on December 31, 1996
with an unaffiliated lender. The maximum commitment under the Agreement is
$200,000,000. The Agreement expires on December 30, 1997. Interest on any such
borrowings outstanding will be at market rates. The purposes of the Agreement is
to serve as an alternative source of funding for capital share redemptions. The
Fund has not borrowed any amounts pursuant to the Agreement as of June 30, 1997.
The Funds pay a commitment fee at an annual rate of .055 of 1% on the unused
portion of the credit facility. The commitment fee is accrued and paid quarterly
on a pro-rata basis by the Funds.
- ------------------------------------------------------------
Note 3. Other Transactions with Affiliates
Prudential Mutual Fund Services LLC ("PMFS"), a wholly-owned subsidiary of PIFM,
serves as the Fund's transfer agent. During the year ended June 30, 1997, the
Fund incurred fees of approximately $43,500 for the services of PMFS. As of June
30, 1997, approximately $3,300 of such fees were due to PMFS. Transfer agent
fees and expenses in the Statement of Operations include certain out-of-pocket
expenses paid to non-affiliates.
Note 4. Portfolio Securities
Purchases and sales of investment securities, other than short-term investments
for the year ended June 30, 1997 aggregated $100,995,874 and $95,795,068,
respectively.
The federal income tax basis of the Fund's investments at June 30, 1997 was
$38,984,115 and, accordingly, net unrealized depreciation for federal income tax
purposes was $75,873 (gross unrealized appreciation--$84,905; gross unrealized
depreciation--$160,778).
During the year ended June 30, 1997 the Fund entered into financial futures
contracts. Details of open futures contracts at June 30, 1997 are as follows:
<TABLE>
<CAPTION>
Value at Value at Unrealized
Number of Expiration Trade June 30, Appreciation
Contracts Type Date Date 1997 (Depreciation)
- --------- ---------------- ----------- ---------- ---------- --------------
<S> <C> <C> <C> <C> <C>
Short position:
31 5 yr. T-Note Sept. 1997 $3,282,423 $3,282,609 $ (186)
Long position:
2 30 yr. T-Bond Sept. 1997 216,905 222,125 5,220
-----
$5,034
-----
-----
</TABLE>
For federal income tax purposes, the Fund had a capital loss carryforward at
June 30, 1997 of approximately $3,793,000 of which $559,000 expires in 2001,
$2,044,000 expires in 2002, $742,000 expires in 2003, and $448,000 expires in
2004. The Fund will elect to treat net realized capital losses of approximately
$3,410,400 incurred in the eight months period ended June 30, 1997 as having
been incurred in the following fiscal year. Accordingly, no capital gains
distributions are expected to be paid to shareholders until net gains have been
realized in excess of such amount.
- ------------------------------------------------------------
Note 5. Borrowings
The Fund enters into reverse repurchase agreements with qualified, third party
broker-dealers as determined by and under the direction of the Board of
Trustees. Reverse repurchase agreements are a technique involving leverage and
are considered a borrowing of the Fund thereby causing the Fund's total assets
to exceed its net assets. In a reverse repurchase agreement, the Fund sells
securities and agrees to repurchase them at a mutually agreed date and price.
During this time, the Fund continues to receive the principal and interest
payments from that security. At the end of the term, the Fund receives the same
securities that were sold for the same initial dollar amount plus interest on
the cash proceeds of the initial sale. Interest on the value of reverse
repurchase agreements issued and outstanding is based upon competitive market
rates at the time of issuance.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 9
<PAGE>
Notes to Financial Statements THE BLACKROCK GOVERNMENT INCOME TRUST
- --------------------------------------------------------------------------------
The Fund had outstanding reverse repurchase agreements at June 30, 1997 as
follows:
<TABLE>
<CAPTION>
Amount
Date Maturity Principal Interest Due at
Sold Date Amount Rate Maturity
- --------- --------- ----------- -------- ----------
<S> <C> <C> <C> <C>
06/13/97 07/24/97 $ 862,000 5.63% $ 867,527
06/23/97 07/24/97 2,819,000 5.61 2,832,618
06/25/97 07/01/97 3,943,875 5.38 3,947,408
-----------
$ 7,624,875
-----------
-----------
</TABLE>
The average daily balance of reverse repurchase agreements outstanding during
the year ended June 30, 1997 was approximately $10,695,000 at a weighted average
interest rate of approximately 5.40%. The maximum amount of reverse repurchase
agreements outstanding at any month-end during the year was $15,482,969 as of
October 31, 1996.
- ------------------------------------------------------------
Note 6. Capital
The Fund currently offers only Class A and Class C shares. Class A shares are
sold with a front-end sales charge of up to 3%. Class C shares are sold with a
contingent deferred sales charge of 1% during the first year. Class B shares,
which were discontinued from being offered on November 1, 1994, automatically
converted to Class A shares upon being held longer than one year from the date
of purchase. On November 28, 1995, the remaining Class B shares converted to
Class A shares.
The Fund has authorized an unlimited number of shares of beneficial interest at
$.01 par value per share divided into three classes, of which two classes,
designated Class A and Class C shares, are currently being offered.
Transactions in shares of beneficial interest were as follows:
<TABLE>
<CAPTION>
Class A Shares Amount
- ------------------------------------- ---------- ------------
<S> <C> <C>
Year ended June 30, 1997:
Shares sold.......................... 121,896 $ 1,138,130
Shares issued in reinvestment
of dividends and distributions..... 110,261 1,027,696
Shares reacquired.................... (1,109,126) (10,334,549)
---------- ------------
Net decrease in shares outstanding... (876,969) $ (8,168,723)
---------- ------------
---------- ------------
<CAPTION>
Class A Shares Amount
- ------------------------------------- ---------- ------------
<S> <C> <C>
Year ended June 30, 1996:
Shares sold.......................... 75,957 $ 711,331
Shares issued in reinvestment
of dividends and distributions..... 155,658 1,455,287
Shares reacquired.................... (1,435,603) (13,420,680)
---------- ------------
Net decrease in shares outstanding
before conversion.................. (1,203,988) (11,254,062)
Shares issued upon conversion from
Class B............................ 237,999 2,230,509
---------- ------------
Net decrease in shares outstanding... (965,989) $ (9,023,553)
---------- ------------
---------- ------------
<CAPTION>
Class B
- -------------------------------------
Period ended November 28, 1995(a):
Shares sold.......................... 139 $ 1,297
Shares issued in reinvestment
of dividends and distributions..... 3,471 32,417
Shares reacquired.................... (28,748) (266,771)
---------- ------------
Net decrease in shares outstanding
before conversion.................. (25,138) (233,057)
Shares reacquired upon conversion
into Class A....................... (238,015) (2,230,509)
---------- ------------
Net decrease in shares outstanding... (263,153) $ (2,463,566)
---------- ------------
---------- ------------
<CAPTION>
Class C
- -------------------------------------
Year ended June 30, 1997:
Shares sold.......................... 6,842 $ 63,505
Shares issued in reinvestment
of dividends and distributions..... 403 3,753
Shares reacquired.................... (12,611) (117,351)
---------- ------------
Net decrease in shares outstanding... (5,366) $ (50,093)
---------- ------------
---------- ------------
Year ended June 30, 1996:
Shares sold.......................... 8,898 $ 82,882
Shares issued in reinvestment
of dividends and distributions..... 103 1,046
Shares reacquired.................... (2,665) (24,920)
---------- ------------
Net increase in shares outstanding... 6,336 $ 59,008
---------- ------------
---------- ------------
</TABLE>
- ---------------
(a) On November 28, 1995, all outstanding Class B shares were converted to Class
A shares.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 10
<PAGE>
Financial Highlights THE BLACKROCK GOVERNMENT INCOME TRUST
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended June 30,
--------------------------------------------------------
Class A
--------------------------------------------------------
1997(a) 1996 1995(a) 1994(a) 1993
------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year............ $ 9.28 $ 9.37 $ 9.29 $ 9.67 $ 10.07
------- ------- ------- ------- --------
Income from investment operations
Net investment income......................... .49 .51 .51 .45 .64
Net realized and unrealized gains (losses) on
investments and foreign currency
transactions............................... .08 (.06) .09 (.35) (.41)
------- ------- ------- ------- --------
Total from investment operations........... .57 .45 .60 .10 .23
------- ------- ------- ------- --------
Less distributions
Dividends from net investment income.......... (.49) (.51) (.52) (.40) (.63)
Tax return of capital distributions........... (.01) (.03) -- (.08) --
------- ------- ------- ------- --------
Total distributions........................ (.50) (.54) (.52) (.48) (.63)
------- ------- ------- ------- --------
Net asset value, end of year.................. $ 9.35 $ 9.28 $ 9.37 $ 9.29 $ 9.67
------- ------- ------- ------- --------
------- ------- ------- ------- --------
TOTAL RETURN(b):.............................. 6.22% 4.98% 6.55% 1.02% 2.40%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)................. $29,116 $37,049 $46,450 $69,912 $113,623
Average net assets (000)...................... $33,235 $42,598 $56,395 $91,849 $131,371
Ratios to average net assets:
Total expenses............................. 3.45% 3.74% 2.19% 1.89% 1.94%
Operating expenses, including distribution
fee..................................... 1.56% 1.47% 1.31% 1.17% 1.05%
Operating expenses, excluding distribution
fee..................................... 1.41% 1.32% 1.16% 1.05% .95%
Net investment income...................... 5.23% 5.51% 5.49% 4.94% 6.71%
For class A, B and C shares:
Portfolio turnover rate.................... 225% 173% 254% 209% 228%
</TABLE>
<TABLE>
<CAPTION>
BORROWINGS (for all classes):
Amount of debt Average amount of
outstanding at end debt outstanding
Year ended of year (000) during year (000)
- --------------------------------------------------------------------- ------------------ -------------------
<S> <C> <C>
June 30, 1997........................................................ $ 7,625 $10,695
June 30, 1996........................................................ 9,008 15,626
June 30, 1995........................................................ 19,872 9,130
June 30, 1994........................................................ 8,300 18,840
June 30, 1993........................................................ 24,386 34,892
<CAPTION>
BORROWINGS (for all classes):
Average amount of
debt per share
Average number of outstanding
shares outstanding during
Year ended during year (000) year
- --------------------------------------------------------------------- ------------------- -----------------
<S> <C> <C>
June 30, 1997........................................................ 3,571 $2.99
June 30, 1996........................................................ 4,550 3.43
June 30, 1995........................................................ 6,389 1.43
June 30, 1994........................................................ 10,234 1.84
June 30, 1993........................................................ 13,517 2.58
</TABLE>
- ---------------
(a) Calculated based upon weighted average shares outstanding during the year.
(b) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each year reported and includes reinvestment of dividends and
distributions.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 11
<PAGE>
Financial Highlights THE BLACKROCK GOVERNMENT INCOME TRUST
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class B Class C
------------------------------------------------------- ---------
July 1, September 1, Year
1995 1992(a) Ended
Through Year Ended June 30, Through June 30,
November 27, --------------------- June 30, ---------
1995(f) 1995(c) 1994(c) 1993 1997(c)
------------ -------- -------- ------------ ---------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.......... $ 9.37 $ 9.29 $ 9.68 $ 9.97 $ 9.28
------ -------- -------- ----- ---------
Income from investment operations
Net investment income......................... .22 .48 .37 .47 .43
Net realized and unrealized gains (losses) on
investments and foreign currency
transactions............................... .02 .09 (.37) (.32) .08
------ -------- -------- ----- ---------
Total from investment operations........... .24 .57 -- .15 .51
------ -------- -------- ----- ---------
Less distributions
Dividends from net investment income.......... (.22) (.49) (.32) (.44) (.44)
Tax return of capital distributions........... (.01) -- (.07) -- (.01)
------ -------- -------- ----- ---------
Total distributions........................ (.23) (.49) (.39) (.44) (.45)
------ -------- -------- ----- ---------
Net asset value, end of period................ $ 9.38 $ 9.37 $ 9.29 $ 9.68 $ 9.34
------ -------- -------- ----- ---------
------ -------- -------- ----- ---------
TOTAL RETURN(e):.............................. 2.63% 6.16% (.01)% 1.39% 5.55%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)............... $ 0 $2,466 $3,845 $5,954 $ 16
Average net assets (000)...................... $ 1,820 $2,928 $5,778 $2,740 $ 94
Ratios to average net assets:
Total expenses............................. 3.87%(b) 2.56% 2.76% 2.89%(b) 4.05%
Operating expenses, including distribution
fee..................................... 1.52%(b) 1.68% 2.05% 1.95%(b) 2.16%
Operating expenses, excluding distribution
fee..................................... 1.32%(b) 1.16% 1.05% .95%(b) 1.41%
Net investment income...................... 5.46%(b) 5.12% 4.06% 5.11%(b) 4.63%
Class C
----------------------------
<CAPTION>
November 1,
1994(a)
Through
June 30,
1996 1995(c)
----------- ------------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.......... $ 9.37 $ 9.26
----------- -----
Income from investment operations
Net investment income......................... .45 .23
Net realized and unrealized gains (losses) on
investments and foreign currency
transactions............................... (.06) .21
----------- -----
Total from investment operations........... .39 .44
----------- -----
Less distributions
Dividends from net investment income.......... (.46) (.33)
Tax return of capital distributions........... (.02) --
----------- -----
Total distributions........................ (.48) (.33)
----------- -----
Net asset value, end of period................ $ 9.28 $ 9.37
----------- -----
----------- -----
TOTAL RETURN(e):.............................. 4.31% 4.65%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)............... $ 66 $7,121(d)
Average net assets (000)...................... $ 33 $1,335(d)
Ratios to average net assets:
Total expenses............................. 4.10% 2.24%(b)
Operating expenses, including distribution
fee..................................... 2.07% 1.91%(b)
Operating expenses, excluding distribution
fee..................................... 1.32% 1.16%(b)
Net investment income...................... 4.91% 4.89%(b)
</TABLE>
- ---------------
(a) Commencement of offering of shares.
(b) Annualized.
(c) Calculated based upon weighted average shares outstanding during the period.
(d) Amounts are actual and not rounded to nearest thousand.
(e) 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 return for periods of less than one full year are not
annualized.
(f) Last day of investment operations of Class B shares. On November 28, 1995,
all outstanding Class B shares were converted to Class A shares.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 12
<PAGE>
Report of Independent Accountants THE BLACKROCK GOVERNMENT INCOME TRUST
- --------------------------------------------------------------------------------
To the Shareholders and Board of Trustees of
The BlackRock Government Income Trust:
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statements of operations, of cash
flows and of changes in net assets and the financial highlights present fairly,
in all material respects, the financial position of The BlackRock Government
Income Trust (the "Fund") at June 30, 1997, and the results of its operations,
the changes in its net assets and the financial highlights for the year then
ended, in conformity with generally accepted accounting principles. These
financial statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the Fund's management; our
responsibility is to express an opinion on these financial statements based on
our audit. We conducted our audit of these financial statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audit, which included confirmation of securities at June 30,
1997 by correspondence with the custodian and brokers, provides a reasonable
basis for the opinion expressed above. The accompanying statement of changes in
net assets for the year ended June 30, 1996 and financial highlights for each of
the periods ending prior to the fiscal year ended June 30, 1997 were audited by
other independent accountants, whose opinion dated August 15, 1996 was
unqualified.
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York
August 21, 1997
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 13
<PAGE>
Change of Independent Accountants THE BLACKROCK GOVERNMENT INCOME TRUST
- --------------------------------------------------------------------------------
Effective March 1, 1997, Deloitte & Touche LLP was terminated as the Fund's
independent accountants. For the years ended June 30, 1996, 1995, 1994, 1993 and
the period ended June 30, 1992, Deloitte & Touche LLP expressed an unqualified
opinion on the Fund's financial statements. There were no disagreements between
Fund management and Deloitte & Touche LLP prior to their termination. The Board
of Trustees approved the termination of Deloitte & Touche LLP and the
appointment of Price Waterhouse LLP as the Fund's independent accountants.
Tax Information THE BLACKROCK GOVERNMENT INCOME TRUST
- --------------------------------------------------------------------------------
IMPORTANT NOTICE FOR ALL SHAREHOLDERS
As of the Fund's fiscal and tax year-end (June 30, 1997) total dividends and
distributions to shareholders exceeded taxable income by $37,818 ($.01 per Class
A share and $.01 per Class C share) based on total dividends and distributions
of $1,760,250 ($.50 per Class A share, and $.45 per Class C share). Therefore, a
non-taxable distribution to shareholders, commonly referred to as a return of
capital, resulted.
IMPORTANT NOTICE FOR CERTAIN SHAREHOLDERS (Unaudited)
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 23.3% of the dividends paid by The BlackRock Government Income Trust
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. 14
<PAGE>
Comparing A $10,000 Investment.
The BlackRock Government Income Trust vs.
the Lehman Brothers 1-3 Year Government Index.
[]The BlackRock Government Income Trust
- --Lehman Bros. 1-3 Year Government Index
Average Annual
Total Returns
With Sales Load
4.2% Since Inception
3.6% for 5 Years
3.0% for 1 Year
Class A
Without Sales Load (GRAPH)
4.8% Since Inception 9-9-91 $10,000
4.2% for 5 Years 6-30-97 $14,128 Lehman Bros.
1-3 Year Government Index
$12,721 The BlackRock
Government Income Trust
Best Year 1995--8.4%
Worst Year 1994--1.6%
6.2% for 1 Year
Average Annual
Total Returns
With Sales Load
5.5% Since Inception
4.6% for 1 Year
Class C
Without Sales Load (GRAPH)
5.5% Since Inception 11-1-94 $10,000
5.6% for 1 Year 6-30-97 $11,955 Lehman Bros.
1-3 Year Government Index
$11,521 The BlackRock
Government Income Trust
Best Year 1995--7.7%
Worst Year 1996--4.3%
Past performance is not indicative of future results. Investment return and
principal value will fluctuate so an investor's shares, when redeemed, may be
worth more or less than their original cost. The charts on the right are
designed to give you an idea how much the Fund's returns can fluctuate from
year to year by measuring the best and worst calendar years in terms of total
annual return since inception of each share class.
These graphs are furnished to you in accordance with SEC regulations. They
compare a $10,000 investment in the BlackRock Government Income Trust (Class A
and Class C) with a similar investment in the Lehman Brothers 1-3 Year
Government Index (Lehman Government Index) by portraying the initial account
values on September 9, 1991 for Class A and November 1, 1994 for Class C
shares and subsequent account values at the end of each fiscal year (June 30),
as measured on a quarterly basis, beginning in 1991 for Class A and in 1994 for
Class C shares. For purposes of the graphs, and unless otherwise indicated, in
the accompanying tables it has been assumed (a) that the maximum applicable
front-end sales charge was deducted from the initial $10,000 investment in
Class A shares; (b) the maximum applicable contingent deferred sales charge
was deducted from the value of the investment in Class C shares, assuming full
redemption on June 30, 1997; (c) all recurring fees (including management fees)
were deducted; and (d) all dividends and distributions were reinvested.
The Lehman Government Index is a weighted Index comprised of securities issued
or backed by the U.S. Government and its agencies with a remaining maturity of
one to three years. The Lehman Government Index is an unmanaged Index and
includes the reinvestment of all dividends, but does not reflect the payment
of transaction costs and advisory fees associated with an investment in the
Fund. The securities which comprise the Lehman Government Index may differ
substantially from the securities in the Fund's portfolio. The Lehman
Government Index is not the only index that may be used to characterize
performance of government security funds and other indices may portray
different comparative performance.
<PAGE>
Prudential Mutual Funds
Gateway Center Three
100 Mulberry Street
Newark, NJ 07102-4077
(800) 225-1852
http://www.prudential.com
Trustees
Eugene C. Dorsey
Douglas H. McCorkindale
Thomas T. Mooney
Richard A. Redeker
Officers
Richard A. Redeker, President
Thomas A. Early, Vice President
Grace C. Torres, Treasurer
Stephen M. Ungerman, Assistant Treasurer
S. Jane Rose, Secretary
Deborah A. Garfield, Assistant Secretary
Manager
Prudential Investments Fund Management LLC
Gateway Center Three
100 Mulberry Street
Newark, NJ 07102-4077
Subadviser
BlackRock Financial Management, Inc.
345 Park Avenue
New York, NY 10154
Distributor
Prudential Securities Incorporated
One Seaport Plaza
New York, NY 10292
Custodian
State Street Bank and Trust Company
One Heritage Drive
North Quincy, MA 02171
Transfer Agent
Prudential Mutual Fund Services LLC
P.O. Box 15005
New Brunswick, NJ 08906
Independent Accountants
Price Waterhouse LLP
1177 Avenue of the Americas
New York, NY 10036
Legal Counsel
Gardner, Carton & Douglas
Quaker Tower
321 North Clark Street
Chicago, IL 60610-4795
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.
09247Y208 MF152E
09247Y109 Cat. #4445620
<PAGE>
(ICON)
The
BlackRock
Government
Income Trust
ANNUAL
REPORT
June 30, 1997
(LOGO)
Prudential
Investments
<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), officers, directors, employees and
agents of the Registrant will not be liable to the Registrant, any shareholder,
officer, director, employee, agent or other person for any action or failure to
act, except for bad faith, willful misfeasance, gross negligence or reckless
disregard of duties, and those individuals may be indemnified against
liabilities in connection with the Registrant, subject to the same exceptions.
Section 67 of Massachusetts Business 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 each Distribution Agreement (Exhibit 7 to
the Registration Statement), the Distributor of the Registrant may be
indemnified against liabilities which it may incur, except liabilities arising
from bad faith, gross negligence, willful 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 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 maintains 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.
Section 9 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 the liability of Prudential Investments Fund
Management LLC (PIFM) 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.
The Registrant hereby undertakes that it will apply the indemnification
provisions of its By-Laws and its Agreements in a manner consistent with Release
No. 11330 of the Securities and Exchange Commission under the 1940 Act so long
as the interpretation of Sections 17(h) and 17(i) of such Act remain in effect
and are consistently applied.
ITEM 16. EXHIBITS.
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<S> <C> <C>
1. (a) Declaration of Trust, as amended and restated on September 6, 1988, of the Registrant.
Incorporated by reference to Exhibit 1 to Post-Effective Amendment No. 5 to the
Registration Statement on Form N-1A (File No. 2-74139).
(b) Amendment to Declaration of Trust, dated March 1, 1991. Incorporated by reference to
Exhibit No. 1(b) to Post-Effective Amendment No. 16 to the Registration Statement on
Form N-1A (File No. 2-74139).
(c) Amended Certificate of Designation dated July 27, 1995. Incorporated by reference to
Exhibit No. 1(c) to Post-Effective Amendment No. 25 to the Registration Statement filed
on Form N-1A via EDGAR on January 25, 1996 (File No. 2-74139).
(d) Amended Certificate of Designation dated January 22, 1996. Incorporated by reference to
Exhibit No. 1(d) to Post-Effective Amendment No. 25 to the Registration Statement filed
on Form N-1A via EDGAR on January 25, 1996 (File No. 2-74139).
(e) Form of Amended Certificate of Designation dated February 21, 1997. Incorporated by
reference to Exhibit No. 1(e) to Post-Effective Amendment No. 26 to the Registration
Statement filed on Form N-1A via EDGAR on February 4, 1997
(File No. 2-74139).
</TABLE>
C-1
<PAGE>
<TABLE>
<S> <C> <C>
2. By-Laws of the Registrant. Incorporated by reference to Exhibit No. 2 to Pre-Effective Amendment
No. 1 to the Registration Statement on Form N-1A (File No. 2-74139).
4. Plan of Reorganization filed herewith as Appendix B to the Prospectus and the Proxy Statement.*
5. Instruments defining rights of holders of the securities being offered. Incorporated by reference
to Exhibit Nos. 1 and 2 above.
6. (a) Management Agreement dated August 9, 1988, as amended on November 19, 1993, between the
Registrant and Prudential Mutual Fund Management, Inc. Incorporated by reference to
Exhibit 5(a) to Post-Effective Amendment No. 19 to the Registration Statement filed on
Form N-1A via EDGAR on January 27, 1994 (File No. 2-74139).
(b) Subadvisory Agreement dated August 9, 1988, between Prudential Mutual Fund Management,
Inc. and The Prudential Investment Corporation. Incorporated by reference to Exhibit No.
5(b) to Post-Effective Amendment No. 13 to the Registration Statement on Form N-1A (File
No. 2-74139).
7. (a) Distribution and Service Agreement, dated July 23, 1982, as amended on July 1, 1993
between the Registrant and Prudential Securities Incorporated. Incorporated by reference
to Exhibit 6(a) to Post-Effective Amendment No. 19 to the Registration Statement filed
on Form N-1A via EDGAR on January 27, 1994 (File No. 2-74139).
(b) Distribution and Service Agreement, as amended on July 1, 1993, between the Registrant
(U.S. Treasury Money Market Series and Money Market Series) and Prudential Mutual Fund
Distributors, Inc. Incorporated by reference to Exhibit 6(b) to Post-Effective Amendment
No. 19 to the Registration Statement filed on Form N-1A via EDGAR on January 27, 1994
(File No. 2-74139).
(c) Distribution and Service Agreement between the Registrant and Prudential Securities
Incorporated. Incorporated by reference to Exhibit 6(c) to Post-Effective Amendment No.
21 to the Registration Statement filed on Form N-1A via EDGAR on June 1, 1995.
(d) Distribution and Service Agreement between the Registrant and Prudential Mutual Fund
Distributors, Inc. pursuant to Rule 12b-1 for U.S. Treasury Money Market Series and
Money Market Series. Incorporated by reference to Exhibit 6(d) to Post-Effective
Amendment No. 21 to the Registration Statement filed on Form N-1A via EDGAR on June 1,
1995.
(e) Amended Distribution and Service Agreement between the Registrant and Prudential
Securities Incorporated. Incorporated by reference to Exhibit 6(e) to Post-Effective
Amendment No. 21 to the Registration Statement filed on Form N-1A via EDGAR on June 1,
1995.
(f) Amended Distribution and Service Agreement between the Registrant and Prudential Mutual
Fund Distributors, Inc. Incorporated by reference to Exhibit 6(f) to Post-Effective
Amendment No. 21 to the Registration Statement filed on Form N-1A via EDGAR on June 1,
1995.
(g) Form of Distribution and Service Agreement between Registrant and Prudential Securities
Incorporated for Class Z Shares. Incorporated by reference to Post-Effective Amendment
No. 23 to Registration Statement on Form N-1A filed via EDGAR on October 20, 1995 (File
No. 2-74139).
(h) Restated Distribution Agreement. Incorporated by reference to Post-Effective Amendment
No. 26 to Registration Statement on Form N-1A filed via EDGAR on February 3, 1997 (File
No. 2-74139).
9. Custodian Agreement between the Registrant and State Street Bank and Trust Company. Incorporated by
reference to Exhibit No. 8 to the Registration Statement on Form N-1A (File No. 2-74139).
10. (a) Distribution and Service Plan pursuant to Rule 12b-1 as amended on July 1, 1993 for the
Intermediate Term Series. Incorporated by reference to Exhibit 15(a) to Post-Effective
Amendment No. 19 to the Registration Statement filed on Form
N-1A via EDGAR on January 27, 1994 (File No. 2-74139).
(b) Distribution and Service Plan pursuant to Rule 12b-1 as amended on July 1, 1993 for the
Money Market Series. Incorporated by reference to Exhibit 15(b) to Post-Effective
Amendment No. 19 to the Registration Statement filed on Form N-1A via EDGAR on January
27, 1994 (File No. 2-74139).
(c) Amended Distribution and Service Plan pursuant to Rule 12b-1 for Intermediate Term
Series. Incorporated by reference to Exhibit 15(c) to Post-Effective Amendment No. 21 to
the Registration Statement filed on Form N-1A via EDGAR on June 1, 1995.
</TABLE>
C-2
<PAGE>
<TABLE>
<S> <C> <C>
(d) Amended Distribution and Service Plan pursuant to Rule 12b-1 for U.S. Treasury Money
Market Series and Money Market Series. Incorporated by reference to Exhibit 15(d) to
Post-Effective Amendment No. 21 to the Registration Statement filed on Form N-1A via
EDGAR on June 1, 1995.
11. Opinion and Consent of Counsel. Incorporated herein by reference to Exhibit 11 to the Registration
Statement filed on Form N-14 via EDGAR on November 12, 1997.
12. Tax Opinion of Counsel. Incorporated herein by reference to Exhibit 12 to the Registration
Statement filed on Form N-14 via EDGAR on November 12, 1997.
14. (a) Consent of Independent Accountants to Prudential Government Securities Trust and The
BlackRock Government Securities Trust.*
(b) Consent of Deloitte and Touche LLP. *
17. (a) Proxy. Incorporated herein by reference to Exhibit 17(a) to the Registration Statement
filed on Form N-14 via EDGAR on November 12, 1997.
(b) Prospectus of the Registrant (Short-Intermediate Term Series) dated February 3, 1997, as
supplemented on March 17, 1997 and September 8, 1997. Incorporated herein by reference
to Exhibit 17(b) to the Registration Statement filed on Form N-14 via EDGAR on November
12, 1997.
(c) Prospectus of The BlackRock Government Income Trust dated August 29, 1997, as
supplemented on September 8, 1997 and October 27, 1997. Incorporated herein by reference
to Exhibit 17(c) to the Registration Statement filed on Form N-14 via EDGAR on November
12, 1997.
</TABLE>
- --------------
*Filed herewith.
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.
C-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Newark, and State of New
Jersey, on the 11th day of December, 1997.
PRUDENTIAL GOVERNMENT SECURITIES TRUST
/s/ Richard A. Redeker
------------------------------------------------------
(RICHARD A. REDEKER, PRESIDENT)
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------ ---------------------------------------- ------------------
<S> <C> <C>
/s/ Edward D. Beach Trustee December 11, 1997
- ------------------------------
EDWARD D. BEACH
/s/ Eugene C. Dorsey Trustee December 11, 1997
- ------------------------------
EUGENE C. DORSEY
/s/ Delayne Dedrick Gold Trustee December 11, 1997
- ------------------------------
DELAYNE DEDRICK GOLD
/s/ Robert F. Gunia Trustee December 11, 1997
- ------------------------------
ROBERT F. GUNIA
/s/ Harry A. Jacobs, Jr. Trustee December 11, 1997
- ------------------------------
HARRY A. JACOBS, JR.
/s/ Donald D. Lennox Trustee December 11, 1997
- ------------------------------
DONALD D. LENNOX
/s/ Mendel A. Melzer Trustee December 11, 1997
- ------------------------------
MENDEL A. MELZER
/s/ Thomas T. Mooney Trustee December 11, 1997
- ------------------------------
THOMAS T. MOONEY
/s/ Thomas H. O'Brien Trustee December 11, 1997
- ------------------------------
THOMAS H. O'BRIEN
/s/ Richard A. Redeker President and Trustee December 11, 1997
- ------------------------------
RICHARD A. REDEKER
/s/ Nancy Hays Teeters Trustee December 11, 1997
- ------------------------------
NANCY HAYS TEETERS
/s/ Louis A. Weil, III Trustee December 11, 1997
- ------------------------------
LOUIS A. WEIL, III
/s/ Grace C. Torres Principal Financial and December 11, 1997
- ------------------------------ Accounting Officer
GRACE C. TORRES
</TABLE>
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
- ---------
<C> <S> <C>
1. (a) Declaration of Trust, as amended and restated on September 6, 1988, of the Registrant. Incorporated
by reference to Exhibit 1 to Post-Effective Amendment No. 5 to the Registration Statement on Form N-1A
(File No. 2-74139).
(b) Amendment to Declaration of Trust, dated March 1, 1991. Incorporated by reference to Exhibit No.
1(b) to Post-Effective Amendment No. 16 to the Registration Statement on Form N-1A (File No. 2-74139).
(c) Amended Certificate of Designation dated July 27, 1995. Incorporated by reference to Exhibit No.
1(c) to Post-Effective Amendment No. 25 to the Registration Statement filed on Form N-1A via EDGAR on
January 25, 1996 (File No. 2-74139).
(d) Amended Certificate of Designation dated January 22, 1996. Incorporated by reference to Exhibit No.
1(d) to Post-Effective Amendment No. 25 to the Registration Statement filed on Form N-1A via EDGAR on
January 25, 1996 (File No. 2-74139).
(e) Form of Amended Certificate of Designation dated February 21, 1997. Incorporated by reference to
Exhibit No. 1(e) to Post-Effective Amendment No. 26 to the Registration Statement filed on Form N-1A
via EDGAR on February 4, 1997(File No. 2-74139).
2. By-Laws of the Registrant. Incorporated by reference to Exhibit No. 2 to Pre-Effective Amendment No. 1
to the Registration Statement on Form N-1A (File No. 2-74139).
4. Plan of Reorganization filed herewith as Appendix B to the Prospectus and the Proxy Statement.*
5. Instruments defining rights of holders of the securities being offered. Incorporated by reference to
Exhibit Nos. 1 and 2 above.
6. (a) Management Agreement dated August 9, 1988, as amended on November 19, 1993, between the Registrant
and Prudential Mutual Fund Management, Inc. Incorporated by reference to Exhibit 5(a) to Post-Effective
Amendment No. 19 to the Registration Statement filed on Form N-1A via EDGAR on January 27, 1994 (File
No. 2-74139).
(b) Subadvisory Agreement dated August 9, 1988, between Prudential Mutual Fund Management, Inc. and The
Prudential Investment Corporation. Incorporated by reference to Exhibit No. 5(b) to Post-Effective
Amendment No. 13 to the Registration Statement on Form N-1A (File No. 2-74139).
7. (a) Distribution and Service Agreement, dated July 23, 1982, as amended on July 1, 1993 between the
Registrant and Prudential Securities Incorporated. Incorporated by reference to Exhibit 6(a) to
Post-Effective Amendment No. 19 to the Registration Statement filed on Form N-1A via EDGAR on January
27, 1994 (File No. 2-74139).
(b) Distribution and Service Agreement, as amended on July 1, 1993, between the Registrant (U.S.
Treasury Money Market Series and Money Market Series) and Prudential Mutual Fund Distributors, Inc.
Incorporated by reference to Exhibit 6(b) to Post-Effective Amendment No. 19 to the Registration
Statement filed on Form N-1A via EDGAR on January 27, 1994 (File No. 2-74139).
(c) Distribution and Service Agreement between the Registrant and Prudential Securities Incorporated.
Incorporated by reference to Exhibit 6(c) to Post-Effective Amendment No. 21 to the Registration
Statement filed on Form N-1A via EDGAR on June 1, 1995.
(d) Distribution and Service Agreement between the Registrant and Prudential Mutual Fund Distributors,
Inc. pursuant to Rule 12b-1 for U.S. Treasury Money Market Series and Money Market Series. Incorporated
by reference to Exhibit 6(d) to Post-Effective Amendment No. 21 to the Registration Statement filed on
Form N-1A via EDGAR on June 1, 1995.
(e) Amended Distribution and Service Agreement between the Registrant and Prudential Securities
Incorporated. Incorporated by reference to Exhibit 6(e) to Post-Effective Amendment No. 21 to the
Registration Statement filed on Form N-1A via EDGAR on June 1, 1995.
(f) Amended Distribution and Service Agreement between the Registrant and Prudential Mutual Fund
Distributors, Inc. Incorporated by reference to Exhibit 6(f) to Post-Effective Amendment No. 21 to the
Registration Statement filed on Form N-1A via EDGAR on June 1, 1995.
(g) Form of Distribution and Service Agreement between Registrant and Prudential Securities
Incorporated for Class Z Shares. Incorporated by reference to Post-Effective Amendment No. 23 to
Registration Statement on Form N-1A filed via EDGAR on October 20, 1995 (File No. 2-74139).
(h) Restated Distribution Agreement. Incorporated by reference to Post-Effective Amendment No. 26 to
Registration Statement on Form N-1A filed via EDGAR on February 3, 1997 (File No. 2-74139).
9. Custodian Agreement between the Registrant and State Street Bank and Trust Company. Incorporated by
reference to Exhibit No. 8 to the Registration Statement on Form N-1A (File No. 2-74139).
</TABLE>
<PAGE>
<TABLE>
<C> <S> <C>
10. (a) Distribution and Service Plan pursuant to Rule 12b-1 as amended on July 1, 1993 for the
Intermediate Term Series. Incorporated by reference to Exhibit 15(a) to Post-Effective Amendment No. 19
to the Registration Statement filed on Form N-1A via EDGAR on January 27, 1994 (File No. 2-74139).
(b) Distribution and Service Plan pursuant to Rule 12b-1 as amended on July 1, 1993 for the Money
Market Series. Incorporated by reference to Exhibit 15(b) to Post-Effective Amendment No. 19 to the
Registration Statement filed on Form N-1A via EDGAR on January 27, 1994 (File No. 2-74139).
(c) Amended Distribution and Service Plan pursuant to Rule 12b-1 for Intermediate Term Series.
Incorporated by reference to Exhibit 15(c) to Post-Effective Amendment No. 21 to the Registration
Statement filed on Form N-1A via EDGAR on June 1, 1995.
(d) Amended Distribution and Service Plan pursuant to Rule 12b-1 for U.S. Treasury Money Market Series
and Money Market Series. Incorporated by reference to Exhibit 15(d) to Post-Effective Amendment No. 21
to the Registration Statement filed on Form N-1A via EDGAR on June 1, 1995.
11. Opinion and Consent of Counsel. Incorporated herein by reference to Exhibit 11 to the Registration
Statement filed on Form N-14 via EDGAR on November 12, 1997.
12. Tax Opinion of Counsel. Incorporated herein by reference to Exhibit 12 to the Registration Statement
filed on
Form N-14 via EDGAR on November 12, 1997.
14. (a) Consent of Independent Accountants to Prudential Government Securities Trust and The BlackRock
Government Income Trust.*
(b) Consent of Deloitte and Touche LLP. *
17. (a) Proxy. Incorporated herein by reference to Exhibit 17(a) to the Registration Statement filed on
Form N-14 via EDGAR on November 12, 1997.
(b) Prospectus of the Registrant (Short-Intermediate Term Series) dated February 3, 1997, as
supplemented on March 17, 1997 and September 8, 1997. Incorporated herein by reference to Exhibit 17(b)
to the Registration Statement filed on Form N-14 via EDGAR on November 12, 1997.
(c) Prospectus of The BlackRock Government Income Trust dated August 29, 1997, as supplemented on
September 8, 1997 and October 27, 1997. Incorporated herein by reference to Exhibit 17(c) to the
Registration Statement filed on Form N-14 via EDGAR on November 12, 1997.
</TABLE>
- ------------------------
*Filed herewith.
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Statement of Additional Information and
the incorporation by reference in the Prospectus and Proxy Statement
constituting parts of this registration statement on Form N-14 (the "N-14
Registration Statement") of our report dated January 24, 1997, relating to
the financial statements and financial highlights of Prudential Government
Securities Trust - Short-Intermediate Term Series (the "Fund"), which appears
in its 1996 Annual Report to Shareholders which is included in such Statement
of Additional Information and incorporated by reference in such Prospectus
and Proxy Statement. We also consent to the use of such report and to the
reference to us under the heading "Custodian and Transfer and Dividend
Disbursing Agent and Independent Accountants" in the Statement of Additional
Information of Post-Effective Amendment No. 25 to the registration statement
on Form N-1A of the Fund (the "N-1A Registration Statement"), which is
included in the Statement of Additional Information of such N-14 Registration
Statement and incorporated by reference in the Prospectus and Proxy Statement
constituting part of such N-14 Registration Statement. We also consent to
the reference to us under the heading "Financial Highlights" in the
Prospectus of such N-1A Registration Statement, which is incorporated by
reference in the Prospectus and Proxy Statement of the N-14 Registration
Statement. We also consent to the use of our report dated August 21, 1997,
relating to the financial statements and financial highlights of The
BlackRock Government Income Trust (the "Trust") for the year ended June 30,
1997, which appears in its 1997 Annual Report to Shareholders which is
included in such Statement of Additional Information and incorporated by
reference in such Prospectus and Proxy Statement. We also consent to the use
of such report and the reference to us under the heading "Custodian and
Transfer and Dividend Disbursing Agent and Independent Accountants" in the
Statement of Additional Information of Post-Effective Amendment No. 8 to the
registration statement on Form N-1A of the Trust (the "N-1A Registration
Statement), which is incorporated by reference in the Prospectus constituting
part of such N-1A Registration Statement. We also consent to the reference
to us under the heading "Financial Highlights" in the Prospectus of such N-1A
Registration Statement, which is incorporated by reference in the Prospectus
and Proxy Statement of the N-14 Registration Statement.
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, NY 10036
December 10, 1997
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
We consent to the use in the Registration Statement on Form N-14 of Prudential
Government Securities Trust of our report for The BlackRock Government Income
Trust, which is incorporated by reference and dated August 15, 1996 and to the
reference to us under the heading "Change of Independent Accountants", both
included in the Statement of Additional Information, which is part of such
Registration Statement.
Deloitte & Touche LLP
New York, New York
December 10, 1997
